ACCOUNTING PRINCIPLES 12TH EDITION BY JERRY WEYGANDT, PAUL KIMMEL, DONALD KIESO SOLUTIONS MANUAL by QuentinAxel

ACCOUNTING PRINCIPLES 12TH EDITION BY JERRY WEYGANDT, PAUL KIMMEL, DONALD KIESO SOLUTIONS MANUAL

CHAPTER 1 Accounting in Action ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Questions

Identify the activities and users associated with accounting.

1, 2, 3, 4, 5

1, 2

2. Explain the building blocks of accounting: ethics, principles, and assumptions.

6, 7, 8, 9, 10

3, 4

State the accounting equation, and define its components.

11, 12, 13, 22

1, 2, 3, 4, 5, 8

3, 5

1A, 2A 4A

Analyze the effects of business transactions on the accounting equation.

14, 15, 16, 18

6, 7, 9

6, 7, 8

1A, 2A, 4A, 5A

Describe the four financial statements and how they are prepared.

17, 19, 20, 21

10, 11

9, 10, 11, 12, 13, 14, 15, 16

2A, 3A, 4A, 5A

Do It!

Exercises

A Problems

Learning Objectives

1-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

1-2

Description

Difficulty Level

Time Allotted (min.)

Analyze transactions and compute net income.

Moderate

40–50

Analyze transactions and prepare income statement, owner’s equity statement, and balance sheet.

Moderate

50–60

Prepare income statement, owner’s equity statement, and balance sheet.

Moderate

50–60

Analyze transactions and prepare financial statements.

Moderate

40–50

Determine financial statement amounts and prepare owner’s equity statement.

Moderate

40–50

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 1 ACCOUNTING IN ACTION Number

Difficulty

Time (min.)

BE1

Simple

2–4

BE2

Simple

3–5

BE3

Moderate

4–6

BE4

Moderate

4–6

BE5

Simple

2–4

BE6

Simple

2–4

BE7

Simple

2–4

BE8

Simple

2–4

BE9

Simple

1–2

BE10

Simple

3–5

BE11

Simple

2–4

DI1

Simple

2–4

DI2

Simple

2–4

DI3

Simple

6–8

DI4

Moderate

8–10

DI5

3, 5

Moderate

10–12

EX1

Moderate

5–7

EX2

Simple

6–8

EX3

Moderate

6–8

EX4

Moderate

6–8

EX5

Simple

4–6

EX6

Simple

6–8

EX7

Simple

4–6

EX8

Moderate

12–15

EX9

Simple

12–15

EX10

Moderate

8–10

EX11

Moderate

6–8

EX12

Simple

8–10

EX13

Simple

8–10

EX14

Simple

10–12

EX15

Simple

6–8

EX16

Moderate

6–8

1-3

ACCOUNTING IN ACTION (Continued) Number

Difficulty

Time (min.)

P1A

3, 4

Moderate

40–50

P2A

3–5

Moderate

50–60

P3A

Moderate

50–60

P4A

3–5

Moderate

40–50

P5A

4, 5

Moderate

40–50

BYP1

Simple

10–15

BYP2

AN, E

Simple

10–15

BYP3

AN, E

Simple

10–15

BYP4

C, AN

Simple

15–20

BYP5

Moderate

15–20

BYP6

Simple

12–15

BYP7

Simple

10–12

BYP8

Moderate

15–20

BYP9

–

Moderate

15–20

BYP10

–

Simple

10–15

1-4

Learning Objective

Knowledge Comprehension

Application

Analysis

1. Identify the activities and users associated with accounting.

DI1-1

Q1-1 Q1-2 Q1-3 Q1-4

3. Explain the building blocks of accounting: ethics, principles, and assumptions.

Q1-7 Q1-8 Q1-9 Q1-10 DI1-1

Q1-6 E1-3 E1-4

3. State the accounting equation, and define its components.

DI1-2 BE1-5

Q1-11 Q1-12 Q1-13 BE1-4 BE1-8

BE1-9 BE1-1 E1-5 BE1-2 BE1-3 DI1-5

P1-1A P1-2A P1-4A

4. Analyze the effects of business transactions on the accounting equation.

Q1-14 Q1-15 Q1-16 Q1-18

BE1-6 DI1-4 BE1-7 E1-8 E1-6 P1-1A E1-7 P1-2A

P1-4A P1-5A

5. Describe the four financial statements and how they are prepared.

Q1-17 Q1-19 BE1-11

Q1-20 Q1-21 BE1-10 DI1-5 E1-8 E1-9 E1-10 E1-11 E1-12

E1-14 E1-15 E1-16 E1-17 P1-2A P1-3A P1-4A P1-5A

Broadening Your Perspective

Real–World Focus FASB Codification Financial Reporting Considering Comparative Analysis People, Planet, and Profit

Synthesis

Evaluation

Q1-5 E1-1 E1-2

E1-13

All About You Comparative Analysis Decision–Making Across the Organization Communication Activity Ethics Case

BLOOM’ S TAXONOMY TABLE

.. . .)

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

1-5

ANSWERS TO QUESTIONS 1.

Yes, this is correct. Virtually every organization and person in our society uses accounting information. Businesses, investors, creditors, government agencies, and not-for-profit organizations must use accounting information to operate effectively.

Accounting is the process of identifying, recording, and communicating the economic events of an organization to interested users of the information. The first step of the accounting process is therefore to identify economic events that are relevant to a particular business. Once identified and measured, the events are recorded to provide a history of the financial activities of the organization. Recording consists of keeping a chronological diary of these measured events in an orderly and systematic manner. The information is communicated through the preparation and distribution of accounting reports, the most common of which are called financial statements. A vital element in the communication process is the accountant’s ability and responsibility to analyze and interpret the reported information.

(a) Internal users are those who plan, organize, and run the business and therefore are officers and other decision makers. (b) To assist management, managerial accounting provides internal reports. Examples include financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year.

(a) Investors (owners) use accounting information to make decisions to buy, hold, or sell ownership shares of a company. (b) Creditors use accounting information to evaluate the risks of granting credit or lending money.

No, this is incorrect. Bookkeeping usually involves only the recording of economic events and therefore is just one part of the entire accounting process. Accounting, on the other hand, involves the entire process of identifying, recording, and communicating economic events.

Trenton Travel Agency should report the land at $90,000 on its December 31, 2017 balance sheet. This is true not only at the time the land is purchased, but also over the time the land is held. In determining which measurement principle to use (cost or fair value) companies weigh the factual nature of cost figures versus the relevance of fair value. In general, companies use cost. Only in situations where assets are actively traded do companies apply the fair value principle. An important concept that accountants follow is the historical cost principle.

The monetary unit assumption requires that only transaction data that can be expressed in terms of money be included in the accounting records. This assumption enables accounting to quantify (measure) economic events.

The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owners and all other economic entities.

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

1-6

Questions Chapter 1 (Continued) 10.

One of the advantages Rachel Hipp would enjoy is that ownership of a corporation is represented by transferable shares of stock. This would allow Rachel to raise money easily by selling a part of her ownership in the company. Another advantage is that because holders of the shares (stockholders) enjoy limited liability; they are not personally liable for the debts of the corporate entity. Also, because ownership can be transferred without dissolving the corporation, the corporation enjoys an unlimited life.

11.

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

12.

(a) Assets are resources owned by a business. Liabilities are claims against assets. Put more simply, liabilities are existing debts and obligations. Owner’s equity is the ownership claim on total assets. (b) Owner’s equity is affected by owner’s investments, drawings, revenues, and expenses.

13.

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

14.

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

15.

Business transactions are the economic events of the enterprise recorded by accountants because they affect the basic accounting equation. (a) The death of the owner of the company is not a business transaction as it does not affect the basic accounting equation. (b) Supplies purchased on account is a business transaction as it affects the basic accounting equation. (c) An employee being fired is not a business transaction as it does not affect the basic accounting equation. (d) A withdrawal of cash from the business is a business transaction as it affects the basic accounting equation.

16.

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

17.

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

18.

No, this treatment is not proper. While the transaction does involve a receipt of cash, it does not represent revenues. Revenues are the gross increase in owner’s equity resulting from business activities entered into for the purpose of earning income. This transaction is simply an additional investment made by the owner in the business.

Decrease assets and decrease owner’s equity. Increase assets and decrease assets. Increase assets and increase owner’s equity. Decrease assets and decrease liabilities. (d) Balance sheet. (e) Balance sheet and owner’s equity statement. (f) Balance sheet.

1-7

Questions Chapter 1 (Continued) 19.

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

20.

(a) Ending capital balance ..................................................................................... Beginning capital balance ................................................................................ Net income.......................................................................................................

$198,000 168,000 $ 30,000

(b) Ending capital balance ..................................................................................... Beginning capital balance ................................................................................ Deduct: Investment ......................................................................................... Net income.......................................................................................................

$198,000 168,000 30,000 13,000 $ 17,000

(a) Total revenues ($20,000 + $70,000) ................................................................

$90,000

(b) Total expenses ($26,000 + $40,000)................................................................

$66,000

(c)

$90,000 66,000 $24,000

21.

22.

1-8

Total revenues ................................................................................................. Total expenses................................................................................................. Net income.......................................................................................................

Apple’s accounting equation at September 28, 2013 was $207,000,000,000 = $83,451,000,000 + $123,549,000,000.

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1-1 (a) $90,000 – $50,000 = $40,000 (Owner’s Equity). (b) $44,000 + $70,000 = $114,000 (Assets). (c) $94,000 – $53,000 = $41,000 (Liabilities). BRIEF EXERCISE 1-2 (a) $120,000 + $232,000 = $352,000 (Total assets). (b) $190,000 – $91,000 = $99,000 (Total liabilities). (c) $800,000 – 0.5($800,000) = $400,000 (Owner’s equity). BRIEF EXERCISE 1-3 (a) ($800,000 + $150,000) – ($300,000 – $60,000) = $710,000 (Owner’s equity). (b) ($300,000 + $100,000) + ($800,000 – $300,000 – $70,000) = $830,000 (Assets). (c) ($800,000 – $80,000) – ($800,000 – $300,000 + $120,000) = $100,000 (Liabilities). BRIEF EXERCISE 1-4 Owner’s Equity +

Owner’s – Drawings + Revenues – Expenses

(a)

X X X

= $90,000 = $90,000 = $330,000

(b)

$57,000 $57,000 X

= X + $25,000 = X + $35,000 = $22,000 ($57,000 – $35,000)

(c)

$600,000 = ($600,000 x 2/3) + X (Owner’s equity) $600,000 = $400,000 + X X = $200,000

Liabilities

Owner’s Capital

Assets

+ $150,000 + $240,000

–

$40,000 + $450,000 – $320,000

– $7,000

$52,000 – $35,000

1-9

BRIEF EXERCISE 1-5 A L A

(a) Accounts receivable (b) Salaries and wages payable (c) Equipment

A (d) Supplies OE (e) Owner’s capital L (f) Notes payable

BRIEF EXERCISE 1-6 Assets + + –

(a) (b) (c)

Liabilities + NE NE

Owner’s Equity NE + –

Liabilities NE NE NE

Owner’s Equity + – NE

BRIEF EXERCISE 1-7 Assets + – NE

(a) (b) (c)

BRIEF EXERCISE 1-8 E R E E

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

Advertising expense Service revenue Insurance expense Salaries and wages expense

D R E

(e) Owner’s drawings (f) Rent revenue (g) Utilities expense

BRIEF EXERCISE 1-9 R NOE E

110

(a) Received cash for services performed (b) Paid cash to purchase equipment (c) Paid employee salaries

BRIEF EXERCISE 1-10 MENDOZA COMPANY Balance Sheet December 31, 2017 Assets Cash ............................................................................................... Accounts receivable ..................................................................... Total assets ............................................................................

$ 49,000 72,500 $121,500

Liabilities and Owner’s Equity Liabilities Accounts payable .................................................................. Owner’s equity Owner’s capital ...................................................................... Total liabilities and owner’s equity ...............................

$ 90,000 31,500 $121,500

BRIEF EXERCISE 1-11 BS IS OE, BS BS IS

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

Notes payable Advertising expense Owner’s capital Cash Service revenue SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 1-1 1. 2. 3. 4. 5.

False. The three steps in the accounting process are identification, recording, and communication. True. False. Financial accounting provides reports to help investors and creditors evaluate a company. True. True.

1-11

DO IT! 1-2 1. 2. 3. 4. 5.

False. Congress passed the Sarbanes-Oxley Act to reduce unethical behavior and decrease the likelihood of future corporate scandals. False. The standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair, are ethics. False. The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (FASB). True. True.

DO IT! 1-3 1. 2. 3. 4.

Drawings is owner’s drawings (D); it decreases owner’s equity. Rent Revenue is revenue (R); it increases owner’s equity. Advertising Expense is an expense (E); it decreases owner’s equity. When the owner puts personal assets into the business, it is investment by owner (I); it increases owner’s equity.

DO IT! 1-4 Assets Cash (1) (2) +$20,000 (3) (4) –$ 3,600

112

Owner’s Equity

= Liabilities +

Accounts Accounts + Receivable = Payable +

Owner’s Capital

–

Owner’s Drawings

+$20,000 –$20,000

+ Revenues – Expenses +$20,000 –$2,300

+$2,300 –$3,600

DO IT! 1-5 (a) The total assets are $49,000, comprised of Cash $6,500, Accounts Receivable $13,500, and Equipment $29,000. (b) Net income is $20,500, computed as follows: Revenues Service revenue.................................................. Expenses Salaries and wages expense ............................. Rent expense...................................................... Advertising expense .......................................... Total expenses ........................................... Net income .................................................................

$53,500 $16,500 10,500 6,000 33,000 $20,500

(c) The ending owner’s equity balance of Kirby Company is $21,000. By rewriting the accounting equation, we can compute Owner’s Equity as Assets minus Liabilities, as follows: Total assets [as computed in (a)] ............................. Less: Liabilities Notes payable..................................................... Accounts payable .............................................. Owner’s equity ...........................................................

$49,000 $25,000 3,000

28,000 $21,000

Note that it is not possible to determine the company’s owner’s equity in any other way, because the beginning balance for owner’s equity is not provided.

1-13

SOLUTIONS TO EXERCISES EXERCISE 1-1 C Analyzing and interpreting information. R Classifying economic events. C Explaining uses, meaning, and limitations of data. R Keeping a systematic chronological diary of events. R Measuring events in dollars and cents. C Preparing accounting reports. C Reporting information in a standard format. I Selecting economic activities relevant to the company. R Summarizing economic events. EXERCISE 1-2 (a)

Internal users Marketing manager Production supervisor Store manager Vice-president of finance External users Customers Internal Revenue Service Labor unions Securities and Exchange Commission Suppliers

(b)

114

I E I E I I E

Can we afford to give our employees a pay raise? Did the company earn a satisfactory income? Do we need to borrow in the near future? How does the company’s profitability compare to other companies? What does it cost us to manufacture each unit produced? Which product should we emphasize? Will the company be able to pay its short-term debts?

EXERCISE 1-3 Angela Duffy, president of Duffy Company, instructed Jana Barth, the head of the accounting department, to report the company’s land in its accounting reports at its fair value of $170,000 instead of its cost of $100,000, in an effort to make the company appear to be a better investment. The historical cost principle requires that assets be recorded and reported at their cost, because cost is faithfully representative and can be objectively measured and verified. In this case, the historical cost principle should be used and Land reported at $100,000, not $170,000. The stakeholders include stockholders and creditors of Duffy Company, potential stockholders and creditors, other users of Duffy’s accounting reports, Angela Duffy, and Jana Barth. All users of Duffy’s accounting reports could be harmed by relying on information that may be unreliable. Angela Duffy could benefit if the company is able to attract more investors, but would be harmed if the inappropriate reporting is discovered. Similarly, Jana Barth could benefit by pleasing her boss, but would be harmed if the inappropriate reporting is discovered. Jana’s alternatives are to report the land at $100,000 or to report it at $170,000. Reporting the land at $170,000 is not appropriate since it may mislead many people who rely on Duffy’s accounting reports to make financial decisions. Jana should report the land at its cost of $100,000. She should try to convince Angela Duffy that this is the appropriate course of action, but be prepared to resign her position if Duffy insists. EXERCISE 1-4 1.

Incorrect. The historical cost principle requires that assets (such as buildings) be recorded and reported at their cost.

Correct. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money.

Incorrect. The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.

1-15

EXERCISE 1-5 Asset Cash Equipment Supplies Accounts receivable

Liability Accounts payable Notes payable Salaries and wages payable

Owner’s Equity Owner’s capital

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

Increase in assets and increase in owner’s equity. Decrease in assets and decrease in owner’s equity. Increase in assets and increase in liabilities. Increase in assets and increase in owner’s equity. Decrease in assets and decrease in owner’s equity. Increase in assets and decrease in assets. Increase in liabilities and decrease in owner’s equity. Increase in assets and decrease in assets. Increase in assets and increase in owner’s equity.

EXERCISE 1-7 1. 2. 3. 4.

5. 6. 7. 8.

(d) (b) (e) (f)

EXERCISE 1-8 (a) 1. 2. 3. 4. 5.

116

Owner invested $15,000 cash in the business. Purchased equipment for $5,000, paying $2,000 in cash and the balance of $3,000 on account. Paid $750 cash for supplies. Performed $8,500 of services, receiving $4,600 cash and $3,900 on account. Paid $1,500 cash on accounts payable.

EXERCISE 1-17 (Continued) 6. 7. 8. 9. 10.

Owner withdrew $2,000 cash for personal use. Paid $650 cash for rent. Collected $450 cash from customers on account. Paid salaries and wages of $4,800. Incurred $400 of utilities expense on account.

(b) Investment............................................................................... Service revenue ...................................................................... Drawings ................................................................................. Rent expense .......................................................................... Salaries and wages expense ................................................. Utilities expense ..................................................................... Increase in owner’s equity .....................................................

$15,000 8,500 (2,000) (650) (4,800) (400) $15,650

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

$8,500 (650) (4,800) (400) $2,650

EXERCISE 1-9 ARTHUR COOPER & CO. Income Statement For the Month Ended August 31, 2017 Revenues Service revenue ......................................................... Expenses Salaries and wages expense .................................... Rent expense ............................................................. Utilities expense ........................................................ Total expenses ................................................... Net income.........................................................................

$8,500 $4,800 650 400 5,850 $2,650

1-17

EXERCISE 1-18 (Continued) ARTHUR COOPER & CO. Owner’s Equity Statement For the Month Ended August 31, 2017 Owner’s capital, August 1............................................ Add: Investments ....................................................... Net income.........................................................

$ $15,000 2,650

Less: Drawings............................................................ Owner’s capital, August 31 ..........................................

17,650 17,650 2,000 $15,650

ARTHUR COOPER & CO. Balance Sheet August 31, 2017 Assets Cash ............................................................................................... Accounts receivable...................................................................... Supplies ......................................................................................... Equipment...................................................................................... Total assets ............................................................................

$ 8,350 3,450 750 5,000 $17,550

$ 1,900 15,650 $17,550

EXERCISE 1-10 (a) Owner’s equity—12/31/16 ($400,000 – $250,000) ................. Owner’s equity—1/1/16.......................................................... Increase in owner’s equity .................................................... Add: Drawings ..................................................................... Net income for 2016 ...............................................................

1-18

$150,000 100,000 50,000 15,000 $ 65,000

EXERCISE 1-19 (Continued) (b) Owner’s equity—12/31/17 ($460,000 – $300,000) ............... Owner’s equity—1/1/17—see (a)......................................... Increase in owner’s equity .................................................. Less: Additional investment .............................................. Net loss for 2017 ..................................................................

$160,000 150,000 10,000 45,000 $ (35,000)

(c) Owner’s equity—12/31/18 ($590,000 – $400,000) ............... Owner’s equity—1/1/18—see (b)......................................... Increase in owner’s equity .................................................. Less: Additional investment ..............................................

$190,000 160,000 30,000 15,000 15,000 25,000 $ 40,000

Add: Drawings ................................................................... Net income for 2018.............................................................

EXERCISE 1-11 (a) Total assets (beginning of year) ......................................... Total liabilities (beginning of year) ..................................... Total owner’s equity (beginning of year) ...........................

$110,000 85,000 $ 25,000

(b) Total owner’s equity (end of year) ...................................... Total owner’s equity (beginning of year) ........................... Increase in owner’s equity ..................................................

$ 40,000 25,000 $ 15,000

Total revenues ..................................................................... Total expenses..................................................................... Net income ...........................................................................

$220,000 175,000 $ 45,000

Increase in owner’s equity ............................. Less: Net income ........................................... Add: Drawings .............................................. Additional investment ....................................

$ 15,000 $(45,000) 37,000

(c) Total assets (beginning of year) ......................................... Total owner’s equity (beginning of year) ........................... Total liabilities (beginning of year) .....................................

(8,000) $ 7,000 $129,000 80,000 $ 49,000

1-19

EXERCISE 1-20 (Continued) (d) Total owner’s equity (end of year) ...................................... Total owner’s equity (beginning of year) ........................... Increase in owner’s equity ..................................................

$130,000 80,000 $ 50,000

Total revenues ..................................................................... Total expenses ..................................................................... Net income ...........................................................................

$100,000 60,000 $ 40,000

Increase in owner’s equity ............................. Less: Net income ........................................... Additional investment ......................... Drawings .........................................................

$ 50,000 $(40,000) (25,000)

(65,000) $ 15,000

EXERCISE 1-12 ARMANDA CO. Income Statement For the Year Ended December 31, 2017 Revenues Service revenue .................................................... Expenses Salaries and wages expense................................ Rent expense ........................................................ Utilities expense ................................................... Advertising expense ............................................. Total expenses .............................................. Net income ....................................................................

$63,600 $29,500 10,400 3,100 1,800 44,800 $18,800

ARMANDA CO. Owner’s Equity Statement For the Year Ended December 31, 2017 Owner’s capital, January 1 ............................................................. Add: Net income............................................................................ Less: Drawings ............................................................................... Owner’s capital, December 31 ........................................................

1-20

$48,000 18,800 66,800 6,000 $60,800

EXERCISE 1-13 CHENG COMPANY Balance Sheet December 31, 2017 Assets Cash ............................................................................................... Accounts receivable ..................................................................... Supplies ......................................................................................... Equipment...................................................................................... Total assets ............................................................................

$15,000 6,500 8,000 46,000 $75,500

Liabilities and Owner’s Equity Liabilities Accounts payable .................................................................. Owner’s equity Owner’s capital ($67,500 – $13,000) ..................................... Total liabilities and owner’s equity ...............................

$21,000 54,500 $75,500

EXERCISE 1-14 (a) Camping fee revenues .......................................................... General store revenues ......................................................... Total revenue.................................................................. Expenses................................................................................ Net income ............................................................................. (b)

CLEAR VIEW PARK Balance Sheet December 31, 2017 Assets Cash........................................................................................ Accounts Receivable............................................................. Equipment .............................................................................. Total assets ....................................................................

$140,000 65,000 205,000 150,000 $ 55,000

$ 23,000 17,500 105,500 $146,000

1-21

EXERCISE 1-14 (Continued) CLEAR VIEW PARK Balance Sheet (Continued) December 31, 2017 Liabilities and Owner’s Equity Liabilities Notes payable ................................................................. Accounts payable........................................................... Total liabilities......................................................... Owner’s equity Owner’s capital ($146,000 – $71,000) ............................ Total liabilities and owner’s equity........................

$ 60,000 11,000 71,000 75,000 $146,000

EXERCISE 1-15 SEA LEGS CRUISE COMPANY Income Statement For the Year Ended December 31, 2017 Revenues Ticket revenue.................................................. Expenses Salaries and wages expense........................... Maintenance and repairs expense .................. Advertising expense ........................................ Utilities expense .............................................. Total expenses ......................................... Net income ...............................................................

$410,000 $142,000 95,000 24,500 13,000 274,500 $135,500

EXERCISE 1-16 ALICE HENNING, ATTORNEY Owner’s Equity Statement For the Year Ended December 31, 2017 Owner’s capital, January 1 .................................................... Add: Net income...................................................................

$ 34,000 (a) 124,000 (b) 158,000 90,000 $ 68,000 (c)

Less: Drawings ...................................................................... Owner’s capital, December 31 ...............................................

1-22

EXERCISE 1-16 (Continued) Supporting Computations (a) Assets, January 1, 2017 ........................................................ Liabilities, January 1, 2017.................................................... Capital, January 1, 2017 ........................................................

$ 96,000 62,000 $ 34,000

(b) Legal service revenue ........................................................... Total expenses....................................................................... Net income .............................................................................

$335,000 211,000 $124,000

(c) Assets, December 31, 2017 ................................................... Liabilities, December 31, 2017 .............................................. Capital, December 31, 2017...................................................

$168,000 100,000 $ 68,000

1-23

1-24

SPENGEL’S TRAVEL AGENCY

(a)

Owner’s Equity Accounts Accounts Cash + Receivable + Supplies + Equipment = Payable + 1. +$15,000 =

–3,000

15,000

–600

3,000 =

15,000

–600

+$3,000

–900

3,000 =

700 +

15,000

–1,300

900 +

3,000 =

700 +

15,000

–1,300

+$900

10,500 13,500+

10.

+$7,000

+$10,000

7,000 +

900 +

3,000 =

700 +

15,000

10,000

–1,300

–$600 7,000 +

900 +

3,000 =

–500 12,400+

–600 12,900+

–700

700 +

15,000

–600

10,000

–1,300

15,000

–600

10,000

–1,300

–500 7,000 +

900 +

3,000 =

200

–2,500

9,900 +

7,000 +

900 +

3,000 =

200

15,000

+4,000 $13,900+

–4,000 $3,000 +

$900 +

$3,000 =

$200 +

$15,000

$20,800

–600 –

$600 $20,800

10,000

–3,800

$10,000 –

$3,800

PROBLEM 1-1A

11,400

15,000

+$700

+3,000

Expenses

Revenues –

–$600

11,400

Drawings +

–600 14,400

Owner’s –

+$15,000

15,000 2.

Owner’s Capital

PROBLEM 1-1A (Continued) (b) Service revenue ...................................................... Expenses Salaries and wages ......................................... Rent.................................................................. Advertising ...................................................... Net income ...............................................

$10,000 $2,500 600 700

3,800 $ 6,200

1-25

1-26 ..

(a)

JUDI SALEM, ATTORNEY AT LAW Owner’s Equity Accounts Notes Accounts Owner’s Owner’s Cash + Receivable + Supplies + Equipment = Payable + Payable + Capital – Drawings + Revenues – Expenses

Bal. $5,000 +

$1,500

–1,200

+1,200 6,200 +

$6,000

$4,200

+ $8,800

500

6,000

4,200

8,800

–2,800 300

+3,000

+4,500

6,400 +

4,800

500

6,000

1,400

+$7,500 +

500

–400 6,000 +

6,000

1,400

+2,000 4,800

500

8,000

8,800

7,500

+1,600 =

3,000

7,500

–3,800

–$2,500 –900 –400

2,200 + 6.

500

8,000

3,000

8,800

–700 1,500 +

4,800

7,500

–3,800

–$700 4,800

500

8,000

+2,000 3,500 +

3,000

8,800

–700

7,500

–3,800

3,000

8,800

–700

7,500

–3,800

+$2,000 4,800

500

8,000

2,000 +

–270

+270

$3,500 +

$4,800

$16,800

$500

$8,000

= $2,000 +

$3,270

+ $8,800

–

$700

$16,800

$7,500

–

$4,070

PROBLEM 1-2A

$500

–2,800 3,400 +

300

PROBLEM 1-2A (Continued) (b)

JUDI SALEM, ATTORNEY AT LAW Income Statement For the Month Ended August 31, 2017 Revenues Service revenue............................................. Expenses Salaries and wages expense ........................ Rent expense................................................. Advertising expense ..................................... Utilities expense............................................ Total expenses....................................... Net income ............................................................

$7,500 $2,500 900 400 270 4,070 $3,430

JUDI SALEM, ATTORNEY AT LAW Owner’s Equity Statement For the Month Ended August 31, 2017 Owner’s capital, August 1 ...................................................... Add: Net income ................................................................... Less: Drawings ...................................................................... Owner’s capital, August 31 ....................................................

$ 8,800 3,430 12,230 700 $11,530

1-27

PROBLEM 1-2A (Continued) JUDI SALEM, ATTORNEY AT LAW Balance Sheet August 31, 2017 Assets Cash ......................................................................................... Accounts receivable ............................................................... Supplies................................................................................... Equipment ............................................................................... Total assets .....................................................................

$ 3,500 4,800 500 8,000 $16,800

Liabilities and Owner’s Equity Liabilities Notes payable .................................................................. Accounts payable............................................................ Total liabilities.......................................................... Owner’s equity Owner’s capital................................................................ Total liabilities and owner’s equity.........................

1-28

$ 2,000 3,270 5,270 11,530 $16,800

PROBLEM 1-3A

(a)

DIVINE DESIGNS CO. Income Statement For the Month Ended June 30, 2017 Revenues Service revenue............................................ Expenses Rent expense................................................ Advertising expense .................................... Gasoline expense......................................... Utilities expense........................................... Total expenses...................................... Net income ...........................................................

$6,500 $1,600 500 200 150 2,450 $4,050

DIVINE DESIGNS CO. Owner’s Equity Statement For the Month Ended June 30, 2017 Owner’s capital, June 1 ....................................... Add: Investments .............................................. Net income ................................................

$ $12,000 4,050

Less: Drawings ................................................... Owner’s capital, June 30 .....................................

16,050 16,050 1,300 $14,750

DIVINE DESIGNS CO. Balance Sheet June 30, 2017 Assets Cash......................................................................................... Accounts receivable ............................................................... Supplies .................................................................................. Equipment ............................................................................... Total assets .....................................................................

$10,150 2,800 2,000 10,000 $24,950

1-29

PROBLEM 1-3A (Continued) DIVINE DESIGNS CO. Balance Sheet (Continued) June 30, 2017 Liabilities and Owner’s Equity Liabilities Notes payable .................................................................. Accounts payable............................................................ Total liabilities.......................................................... Owner’s equity Owner’s capital................................................................ Total liabilities and owner’s equity.........................

(b)

$ 9,000 1,200 10,200 14,750 $24,950

DIVINE DESIGNS CO. Income Statement For the Month Ended June 30, 2017 Revenues Service revenue ($6,500 + $900)................. Expenses Rent expense ............................................... Advertising expense ................................... Gasoline expense ($200 + $150)................. Utilities expense .......................................... Total expenses..................................... Net income ..........................................................

$7,400 $1,600 500 350 150 2,600 $4,800

DIVINE DESIGNS CO. Owner’s Equity Statement For the Month Ended June 30, 2017 Owner’s capital, June 1 ...................................... Add: Investments.............................................. Net income ...............................................

$ $12,000 4,800

Less: Drawings .................................................. Owner’s capital, June 30 ....................................

1-30

16,800 16,800 1,300 $15,500

(a)

MATRIX CONSULTING

Assets Date

Liabilities

Accounts Notes Accounts Cash + Receivable + Supplies + Equipment = Payable + Payable +

Owner’s Capital

–

Owner’s Drawings

+ Revenues – Expenses

$7,000 ($ 900) $600

$ 600 (125) $ 4,000 ($1,000)

$5,400

5,400 (2,500) (600)

(4,000) $5,000

$1,400

$600

$4,200

4,200

$4,200

= $5,000 + $4,200

$7,000

–

$1,000

$9,400

–

(275) $3,800

PROBLEM 1-4A

May 1 $ 7,000 2 (900) 3 5 (125) 9 4,000 12 (1,000) 15 17 (2,500) 20 (600) 23 4,000 26 5,000 29 30 (275) $14,600 +

Owner’s Equity

1-31

PROBLEM 1-4A (Continued) (b)

MATRIX CONSULTING Income Statement For the Month Ended May 31, 2017 Revenues Service revenue ($4,000 + $5,400)................ Expenses Salaries and wages expense ........................ Rent expense ................................................. Utilities expense ............................................ Advertising expense ..................................... Total expenses....................................... Net income ............................................................

(c)

$9,400 $2,500 900 275 125 3,800 $5,600

MATRIX CONSULTING Balance Sheet May 31, 2017 Assets Cash ......................................................................................... Accounts receivable ............................................................... Supplies................................................................................... Equipment ............................................................................... Total assets .....................................................................

$14,600 1,400 600 4,200 $20,800

1-32

$ 5,000 4,200 9,200 11,600* $20,800

PROBLEM 1-5A

(a)

(b)

Alpha Company (a) $ 39,000 (b) 110,000 (c) 9,000

Beta Company (d) $50,000 (e) 40,000 (f) 33,000

Psi Company (g) $129,000 (h) 88,000 (i) 385,000

Omega Company (j) $ 60,000 (k) 251,000 (l) 444,000

ALPHA COMPANY Owner’s Equity Statement For the Year Ended December 31, 2017 Owner’s capital, January 1.................................. Add: Investment ................................................ Net income ................................................

$39,000 $ 9,000 17,000

Less: Drawings ................................................... Owner’s capital, December 31 ............................

26,000 65,000 15,000 $50,000

(c) The sequence of preparing financial statements is income statement, owner’s equity statement, and balance sheet. The interrelationship of the owner’s equity statement to the other financial statements results from the fact that net income from the income statement is reported in the owner’s equity statement and ending capital reported in the owner’s equity statement is the amount reported for owner’s equity on the balance sheet.

1-33

CC1

(a)

CONTINUING COOKIE CHRONICLE

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 would 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 may be costly. 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 has finished college.

(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 her prices. She will need to know revenue and expenses so she can report her net income for personal income tax purposes, on an annual basis. If she borrows money, she will need financial statements so lenders can assess the liquidity, solvency, and profitability of the business. 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 they are more timely, but they are also more work to prepare.

1-34

CC1 (Continued) (c)

Assets: Cash, Accounts Receivable, Supplies, Equipment, Prepaid Insurance Liabilities: Accounts Payable, Unearned Service Revenue, Notes Payable Owner’s Equity: Owner’s Capital, Owner’s Drawings Revenue: Service Revenue Expenses: Advertising Expense, Rent Expense, Utilities Expense

(d) Natalie should have a separate bank account. 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.

1-35

BYP 1-1

FINANCIAL REPORTING PROBLEM

(a) Apple’s total assets at September 28, 2013 were $207,000 million and at September 29, 2012 were $176,064 million. (b) Apple had $14,259 million of cash and cash equivalents at September 28, 2013. (c) Apple had accounts payable totaling $22,367 million on September 28, 2013 and $21,175 million on September 29, 2012. (d) Apple reports net sales for three consecutive years as follows: 2011 2012 2013

$108,249 million $156,508 million $170,910 million

(e) From 2012 to 2013, Apple’s net income decreased $4,696 million from $41,733 million to $37,037 million.

1-36

BYP 1-2

(a)

COMPARATIVE ANALYSIS PROBLEM

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

PepsiCo $77,478 $6,954 $66,415 $6,787

Coca-Cola $90,055 $ 4,873 $46,854 $ 8,626

(b) Coca-Cola’s total assets were approximately 16% greater than PepsiCo’s total assets, but PepsiCo’s net sales were 42% greater than Coca-Cola’s net sales. PepsiCo’s accounts receivable were 42% greater than CocaCola’s and represent 10% of its net sales. Coca-Cola’s accounts receivable amount to 10% of its net sales. Both PepsiCo’s and CocaCola’s accounts receivable are at satisfactory levels. Coca-Cola’s net income is 27% greater than PepsiCo’s. It appears that these two companies’ operations are comparable in some ways, with Coca-Cola’s operations significantly more profitable.

1-37

BYP 1-3

(a)

COMPARATIVE ANALYSIS PROBLEM

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

Amazon $40,159 $4,767 $60,903 $274

Wal-Mart $204,751 $6,677 $473,076 $16,695

(b) Wal-Mart’s total assets were approximately 510% greater than Amazon’s total assets, and Wal-Mart’s net sales were over 7 times greater than Amazon’s net sales. Wal-Mart’s accounts receivable were 140% greater than Amazon’s and represent 1% of its net sales. Amazon’s accounts receivable amount to approximately 8% of its net sales. Both Amazon’s and Wal-Mart’s accounts receivable are at satisfactory levels. It appears that these two companies’ operations are comparable in some ways, but Wal-Mart’s operations are substantially more profitable.

1-38

BYP 1-4

REAL-WORLD FOCUS

(a) The field is normally divided into three broad areas: auditing, financial/ tax, and management accounting. (b) The skills required in these areas: People skills, sales skills, communication skills, analytical skills, ability to synthesize, creative ability, initiative, computer skills. (c) The skills required in these areas differ as follows:

People skills Sales skills Communication skills Analytical skills Ability to synthesize Creative ability Initiative Computer skills

Auditing Medium Medium Medium High Medium Low Medium High

Financial and Tax Medium Medium Medium Very High Low Medium Medium High

Management Accounting Medium Low High High High Medium Medium Very High

(d) Some key job options in accounting: Audit: Work in audit involves checking accounting ledgers and financial statements within corporations and government. This work is becoming increasingly computerized and can rely on sophisticated random sampling methods. Audit is the bread-and-butter work of accounting. This work can involve significant travel and allows you to really understand how money is being made in the company that you are analyzing. It’s great background! Budget Analysis: Budget analysts are responsible for developing and managing an organization’s financial plans. There are plentiful jobs in this area in government and private industry. Besides quantitative skills many budget analyst jobs require good people skills because of negotiations involved in the work.

1-39

BYP 1-4 (Continued) Financial: Financial accountants prepare financial statements based on general ledgers and participate in important financial decisions involving mergers and acquisitions, benefits/ERISA planning, and long-term financial projections. This work can be varied over time. One day you may be running spreadsheets. The next day you may be visiting a customer or supplier to set up a new account and discuss business. This work requires a good understanding of both accounting and finance. Management Accounting: Management accountants work in companies and participate in decisions about capital budgeting and line of business analysis. Major functions include cost analysis, analysis of new contracts, and participation in efforts to control expenses efficiently. This work often involves the analysis of the structure of organizations. Is responsibility to spend money in a company at the right level of our organization? Are goals and objectives to control costs being communicated effectively? Historically, many management accountants have been derided as “bean counters.” This mentality has undergone major change as management accountants now often work side by side with marketing and finance to develop new business. Tax: Tax accountants prepare corporate and personal income tax statements and formulate tax strategies involving issues such as financial choice, how to best treat a merger or acquisition, deferral of taxes, when to expense items and the like. This work requires a thorough understanding of economics and the tax code. Increasingly, large corporations are looking for persons with both an accounting and a legal background in tax. A person, for example, with a JD and a CPA would be especially desirable to many firms. (e) Junior Staff Accountant

1-40

$40,000-$80,000

BYP 1-5

DECISION MAKING ACROSS THE ORGANIZATION

(a) The estimate of the $6,100 loss was based on the difference between the $25,000 invested in the driving range and the bank balance of $18,900 at March 31. This is not a valid basis for determining income because it only shows the change in cash between two points in time. (b) The balance sheet at March 31 is as follows: CHIP-SHOT DRIVING RANGE Balance Sheet March 31, 2017 Assets Cash......................................................................................... Buildings ................................................................................. Equipment ............................................................................... Total assets .....................................................................

$18,900 8,000 800 $27,700

Liabilities and Owner’s Equity Liabilities Accounts payable ($100 + $120) .................................... Owner’s equity Owner’s capital ($27,700 – $220).................................... Total liabilities and owner’s equity ........................

220

27,480 $27,700

As shown in the balance sheet, the owner’s capital at March 31 is $27,480. The estimate of $2,480 of net income is the difference between the initial investment of $25,000 and $27,480. This was not a valid basis for determining net income because changes in owner’s equity between two points in time may have been caused by factors unrelated to net income. For example, there may be drawings and/or additional capital investments by the owner(s).

1-41

BYP 1-5 (Continued) (c) Actual net income for March can be determined by adding owner’s drawings to the change in owner’s capital during the month as shown below: Owner’s capital, March 31, per balance sheet ...................... Owner’s capital, March 1 ........................................................ Increase in owner’s capital .................................................... Add: Drawings ...................................................................... Net income ..............................................................................

$27,480 25,000 2,480 1,000 $ 3,480

Alternatively, net income can be found by determining the revenues earned [described in (d) below] and subtracting expenses. (d) Revenues earned can be determined by adding expenses incurred during the month to net income. March expenses were Rent, $1,000; Wages, $400; Advertising, $750; and Utilities, $120 for a total of $2,270. Revenues earned, therefore, were $5,750 ($2,270 + $3,480). Alternatively, since all revenues are received in cash, revenues earned can be computed from an analysis of the changes in cash as follows: Beginning cash balance ........................................ Less: Cash payments Caddy shack ......................................... Golf balls and clubs.............................. Rent ....................................................... Advertising............................................ Wages.................................................... Drawings ............................................... Cash balance before revenues ............................. Cash balance, March 31 ........................................ Revenues earned ...................................................

1-42

$25,000 $8,000 800 1,000 650 400 1,000

11,850 13,150 18,900 $ 5,750

BYP 1-6

To: From:

COMMUNICATION ACTIVITY

Sandi Alcon Student

I have received the balance sheet of New York Company as of December 31, 2017. A number of items in this balance sheet are not properly reported. They are: 1.

The balance sheet should be dated as of a specific date, not for a period of time. Therefore, it should be dated “December 31, 2017.”

Equipment should be shown as an asset and reported below Supplies on the balance sheet.

Accounts receivable should be shown as an asset, not a liability, and reported between Cash and Supplies on the balance sheet.

Accounts payable should be shown as a liability, not an asset. The note payable is also a liability and should be reported in the liability section.

Liabilities and owner’s equity should be shown on the balance sheet. Owner’s capital and Owner’s drawings are not liabilities.

Owner’s capital and Owner’s drawings are part of owner’s equity. The drawings account is not reported on the balance sheet but is subtracted from Owner’s capital to arrive at owner’s equity at the end of the period.

1-43

BYP 1-6 (Continued) A correct balance sheet is as follows: NEW YORK COMPANY Balance Sheet December 31, 2017 Assets Cash ................................................................................................ Accounts receivable....................................................................... Supplies .......................................................................................... Equipment.......................................................................................

$ 9,000 6,000 2,000 25,500 $42,500

Liabilities and Owner’s Equity Liabilities Notes payable ......................................................................... Accounts payable ................................................................... Total liabilities ................................................................. Owner’s equity Owner’s capital ($26,000 – $2,000) ........................................ Total liabilities and owner’s equity ................................

1-44

$10,500 8,000 18,500 24,000 $42,500

BYP 1-7

ETHICS CASE

(a) The students should identify all of the stakeholders in the case; that is, all the parties that are affected, either beneficially or negatively, by the action or decision described in the case. The list of stakeholders in this case are: ⯈ Travis Chase, interviewee. ⯈ Both Baltimore firms. ⯈ Great Northern College. (b) The students should identify the ethical issues, dilemmas, or other considerations pertinent to the situation described in the case. In this case the ethical issues are: ⯈ Is it proper that Travis charged both firms for the total travel costs rather than split the actual amount of $296 between the two firms? ⯈ Is collecting $592 as reimbursement for total costs of $296 ethical behavior? ⯈ Did Travis deceive both firms or neither firm? (c) Each student must answer the question for himself/herself. Would you want to start your first job having deceived your employer before your first day of work? Would you be embarrassed if either firm found out that you double-charged? Would your school be embarrassed if your act was uncovered? Would you be proud to tell your professor that you collected your expenses twice?

1-45

BYP 1-8

(a)

ALL ABOUT YOU

Answers to the following will vary depending on students’ opinions. (1) This does not represent the hiding of assets, but rather a choice as to the order of use of assets. This would seem to be ethical. (2) This does not represent the hiding of assets, but rather is a change in the nature of assets. Since the expenditure was necessary, although perhaps accelerated, it would seem to be ethical. (3) This represents an intentional attempt to deceive the financial aid office. It would therefore appear to be both unethical and potentially illegal. (4) This is a difficult issue. By taking the leave, actual net income would be reduced. The form asks the applicant to report actual net income. However, it is potentially deceptive since you do not intend on taking unpaid absences in the future, thus future income would be higher than reported income.

(b)

Companies might want to overstate net income in order to potentially increase the stock price by improving investors’ perceptions of the company. Also, a higher net income would make it easier to receive debt financing. Finally, managers would want a higher net income to increase the size of their bonuses.

(c)

Sometimes companies want to report a lower income if they are negotiating with employees. For example, professional sports teams frequently argue that they can not increase salaries because they aren’t making enough money. This also occurs in negotiations with unions. For tax accounting (as opposed to the financial accounting in this course) companies frequently try to minimize the amount of reported taxable income.

(d)

Unfortunately many times people who are otherwise very ethical will make unethical decisions regarding financial reporting. They might be driven to do this because of greed. Frequently it is because their superiors have put pressure on them to take an unethical action, and they are afraid to not follow directions because they might lose their job. Also, in some instances top managers will tell subordinates that they should be a team player, and do the action because it would help the company, and therefore would help fellow employees.

1-46

BYP 1-9

FASB CODIFICATION ACTIVITY

No solution necessary

1-47

BYP1-10

CONSIDERING PEOPLE, PLANET, AND PROFIT

(a)

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

(b)

i. Support sustainable food and agriculture: Purchased 170 million pounds of organic ingredients since the company’s inception. ii. Embrace zero waste business practices: Caddies are 100% shrinkwrap free and made from 100% recycled paperboard. iii. Promote climate action and renewable energy: Installed largest “smart” solar array in North America that provides nearly all of its electrical needs. iv. Conserve natural resources, protect wild places: Planted 40,000 trees in partnership with American Forests.

1-48

IFRS EXERCISES

IFRS1-1 The International Accounting Standards Board, IASB, and the Financial Accounting Standards Board, FASB, are two key players in developing international accounting standards. The IASB releases international standards known as International Financial Reporting Standards (IFRS). The FASB releases U.S. standards, referred to a Generally Accepted Accounting Principles or GAAP. IFRS1-2 A single set of high-quality accounting standards is needed because of increases in multinational corporations, mergers and acquisitions, use of information technology, and international financial markets.

1-49

IFRS1-3

INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) (b) (c)

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

1-50

CHAPTER 2 The Recording Process ASSIGNMENT CLASSIFICATION TABLE Do It!

Exercises

A Problems

1, 2, 5

1, 2, 4, 6, 7, 14

1A, 2A, 3A, 5A

10, 11, 12, 13, 14, 16

3, 4, 6

3, 5, 6, 7, 10, 1A, 2A, 3A, 11, 12 5A

Explain how a ledger and posting help in the recording process.

15, 17

7, 8

8, 9, 12

Prepare a trial balance.

18, 20

9, 10

9, 10, 11, 13, 2A, 3A, 4A, 14 5A

Learning Objectives

Questions

Indicate how accounts, debits, and credits are used to record business transactions.

1, 2, 3, 4, 5, 6, 7, 8, 9, 19, 21

Indicate how a journal is used in the recording process.

Brief Exercises

2A, 3A, 5A

2-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description

2-2

Difficulty Level

Time Allotted (min.)

Journalize a series of transactions.

Simple

20–30

Journalize transactions, post, and prepare a trial balance.

Simple

30–40

Journalize transactions, post, and prepare a trial balance.

Moderate

40–50

Prepare a correct trial balance.

Moderate

30–40

Journalize transactions, post, and prepare a trial balance.

Moderate

40–50

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 2 THE RECORDING PROCESS Number

Difficulty

Time (min.)

BE1

Simple

6–8

BE2

Simple

4–6

BE3

Simple

4–6

BE4

Moderate

4–6

BE5

Simple

6–8

BE6

Simple

4–6

BE7

Simple

4–6

BE8

Simple

4–6

BE9

Simple

4–6

BE10

Moderate

6–8

DI1

Simple

3–5

DI2

Simple

3–5

DI3

Simple

2–4

DI4

Simple

6–8

EX1

Simple

2–4

EX2

Simple

10–15

EX3

Simple

8–10

EX4

Simple

6–8

EX5

Simple

6–8

EX6

1, 2

Simple

6–8

EX7

1, 2

Simple

8–10

EX8

Simple

2–4

EX9

3, 4

Simple

10–12

EX10

2, 4

Moderate

10–12

EX11

2, 4

Moderate

12–15

EX12

2, 3

Moderate

12–15

EX13

Moderate

6–8

EX14

1, 4

Simple

8–10

2-3

THE RECORDING PROCESS (Continued) Number

Difficulty

Time (min.)

P1A

1, 2

Simple

20–30

P2A

1, 2, 3, 4

Simple

30–40

P3A

1, 2, 3, 4

Moderate

40–50

P4A

Moderate

30–40

P5A

1, 2, 3, 4

Moderate

40–50

BYP1

Simple

8–10

BYP2

1, 2

Simple

8–10

BYP3

—

Simple

15–20

BYP4

—

AP, S

Simple

15–20

BYP5

3, 4

AP, S

Moderate

20–30

BYP6

AN, E

Moderate

10–15

BYP7

—

Moderate

10–15

BYP8

—

Moderate

15–20

BYP9

—

Moderate

15–20

BYP10

—

Moderate

20–30

2-4

Learning Objective

Knowledge

Comprehension

Application

Analysis

Describe how accounts, Q2-1 debits, and credits are used to Q2-21 record business transactions. E2-1

Q2-2 Q2-8 DI2-1 E2-6 P2-1A P2-5A Q2-3 Q2-9 E2-2Q2- E2-7 P2-2A 4 Q2-19 E2-4Q2-5 E2-14 P2-3A BE2-1 Q2-6 BE2-2 Q2-7 BE2-5

Indicate how a journal is used Q2-10 in the recording process. Q2-12

Q2-11 Q2-13 Q2-14 BE2-4

Q2-16 E2-5 E2-12 BE2-3 E2-6 P2-1A BE2-6 E2-7 P2-2A DI2-2 E2-10 P2-3A E2-3 E2-11 P2-5A

Explain how a ledger and E2-8 posting help in the recording process.

Q2-15 Q2-17

BE2-7 E2-9 P2-3A BE2-8 E2-12 P2-5A DI2-3 P2-2A

Prepare a trial balance.

Q2-18 Q2-20

BE2-9 E2-10 P2-2A BE2-10 DI2-4 E2-11 P2-3A E2-13 E2-9 E2-14 P2-5A P2-4A

Broadening Your Perspective

Financial Reporting Real-World Focus

Synthesis

Evaluation

Comparative Analysis Communication All About You Ethics Case Decision Making Ethics Case Across the Considering Organization P, P, and P Real-World Focus

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

2-5

ANSWERS TO QUESTIONS 1.

A T account has the following parts: (a) the title, (b) the left or debit side, and (c) the right or credit side.

Disagree. The terms debit and credit mean left and right respectively.

Heath is incorrect. The double-entry system merely records the dual effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once, with a dual effect.

Erica is incorrect. A debit balance only means that debit amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favorable nor unfavorable.

(a) Asset accounts are increased by debits and decreased by credits. (b) Liability accounts are decreased by debits and increased by credits. (c) Revenues and owner’s capital are increased by credits and decreased by debits. Expenses and owner’s drawing are increased by debits and decreased by credits.

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

Accounts Receivable—debit balance. Cash—debit balance. Owner’s Drawings—debit balance. Accounts Payable—credit balance. Service Revenue—credit balance. Salaries and Wages Expense—debit balance. Owner’s Capital—credit balance.

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

Accounts Receivable—asset—debit balance. Accounts Payable—liability—credit balance Equipment—asset—debit balance. Owner’s Drawings—owner’s equity—debit balance. Supplies—asset—debit balance.

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

(1) (2) (3) (4) (5) (6)

10.

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

2-6

Cash—both debit and credit entries. Accounts Receivable—both debit and credit entries. Owner’s Drawings—debit entries only. Accounts Payable—both debit and credit entries. Salaries and Wages Expense—debit entries only. Service Revenue—credit entries only.

Questions Chapter 2 (Continued) 11.

The advantages of using the journal in the recording process are: (1) It discloses in one place the complete effects 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 easily compared.

12.

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

13.

When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. An example of a compound entry is the purchase of equipment, part of which is paid for with cash and the remainder is on account.

14.

(a) No, debits and credits should not be recorded directly in the ledger. (b) The advantages of using the journal are: 1. It discloses in one place the complete effects 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 easily compared.

15.

The advantage of the last step in the posting process is to indicate that the item has been posted.

16.

(a) Cash ............................................................................................ Owner’s Capital ................................................................... (Invested cash in the business)

9,000

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

800

(c)

17.

9,000

800

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

2,000

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

7,500

2,000

7,500

(a) The entire group of accounts maintained by a company, including all the asset, liability, and owner’s equity accounts, is referred to collectively as the ledger. (b) A chart of accounts is a list of accounts and the account numbers that identify their location in the ledger. The chart of accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and define the level of detail that a company desires in its accounting system.

2-7

Questions Chapter 2 (Continued) 18.

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 (check) that the debits equal the credits after posting. A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements.

19.

No, Victor is not correct. The proper sequence is as follows: (b) Business transaction occurs. (c) Information entered in the journal. (a) Debits and credits posted to the ledger. (e) Trial balance is prepared. (d) Financial statements are prepared.

20.

(a) The trial balance would balance. (b) The trial balance would not balance.

21.

The normal balances are Cash debit, Accounts Payable credit, and Interest Expense debit.

2-8

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2-1

1. 2. 3. 4. 5. 6.

Accounts Payable Advertising Expense Service Revenue Accounts Receivable Owner’s Capital Owner’s Drawings

(a) Debit Effect Decrease Increase Decrease Increase Decrease Increase

(b) Credit Effect Increase Decrease Increase Decrease Increase Decrease

BRIEF EXERCISE 2-2

June 1 2 3 12

Account Debited Cash Equipment Rent Expense Accounts Receivable

Account Credited Owner’s Capital Accounts Payable Cash Service Revenue

BRIEF EXERCISE 2-3 June 1 2 3 12

Cash ..................................................................... Owner’s Capital ...........................................

5,000

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

2,400

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

800

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

300

5,000 2,400 800 300

2-9

BRIEF EXERCISE 2-4 The basic steps in the recording process are: 1.

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

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

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

BRIEF EXERCISE 2-5 (a) Aug.

2-10

Effect on Accounting Equation

(b)

Debit-Credit Analysis

The asset Cash is increased; the owner’s equity account Owner’s Capital is increased.

Debits increase assets: debit Cash $8,000. Credits increase owner’s equity: credit Owner’s Capital $8,000.

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

Debits increase assets: debit Prepaid Insurance $1,800. Credits decrease assets: credit Cash $1,800.

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

Debits increase assets: debit Cash $3,600. Credits increase revenues: credit Service Revenue $3,600.

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

Debits increase expenses: debit Salaries and Wages Expense $1,000. Credits decrease assets: credit Cash $1,000.

BRIEF EXERCISE 2-6 Aug. 1 4 16 27

Cash...................................................................... Owner’s Capital ............................................

8,000

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

1,800

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

3,600

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

1,000

8,000 1,800 3,600 1,000

BRIEF EXERCISE 2-7 Cash 5/12 2,400 5/15 3,000 Ending Bal. 5,400

5/5

Service Revenue 5/5 4,400 5/15 3,000 Ending Bal. 7,400

Accounts Receivable 4,400 5/12

2,400

Ending Bal. 2,000

BRIEF EXERCISE 2-8 Cash Date May 12 15

Explanation

Ref. J1 J1

Debit 2,400 3,000

Credit

Balance 2,400 5,400

2-11

BRIEF EXERCISE 2-8 (Continued) Accounts Receivable Date May 5 12

Explanation

Service Revenue Date Explanation May 5 15

Ref. J1 J1

Debit 4,400

Ref. J1 J1

Debit

Credit 2,400

Balance 4,400 2,000

Credit 4,400 3,000

Balance 4,400 7,400

Debit $ 5,800 3,000 17,000

Credit

BRIEF EXERCISE 2-9 AMARO COMPANY Trial Balance June 30, 2017 Cash ........................................................................... Accounts Receivable ................................................ Equipment.................................................................. Accounts Payable...................................................... Owner’s Capital ......................................................... Owner’s Drawings ..................................................... Service Revenue........................................................ Salaries and Wages Expense ................................... Rent Expense.............................................................

2-12

$ 8,100 15,000 1,200 10,000 5,100 1,000 $33,100

$33,100

BRIEF EXERCISE 2-10 CAPPSHAW COMPANY Trial Balance December 31, 2017 Debit Cash ................................................................................ $10,800 Prepaid Insurance ...................................................... 3,500 Accounts Payable ...................................................... Unearned Service Revenue ....................................... Owner’s Capital .......................................................... Owner’s Drawings ...................................................... 4,500 Service Revenue ........................................................ Salaries and Wages Expense .................................... 18,600 Rent Expense ............................................................. 2,400 $39,800

Credit $ 3,000 2,200 9,000 25,600 $39,800

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 2-1 Tom would likely need the following accounts in which to record the transactions necessary to ready his photography studio for opening day: Cash (debit balance) Supplies (debit balance) Notes Payable (credit balance)

Equipment (debit balance) Accounts Payable (credit balance) Owner’s Capital (credit balance)

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

Cash.............................................................. Owner’s Capital...................................

6,300

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

1,100

6,300 400 700

No entry because no transaction has occurred.

2-13

DO IT! 2-3 Cash 4/1 1,600 4/16 700 4/3 3,400 4/20 250 4/30 4,050 DO IT! 2-4 CARLAND COMPANY Trial Balance December 31, 2017 Cash ........................................................................... Accounts Receivable ................................................ Supplies ..................................................................... Equipment.................................................................. Notes Payable ............................................................ Accounts Payable...................................................... Salaries and Wages Payable .................................... Owner’s Capital ......................................................... Owner’s Drawings ..................................................... Service Revenue........................................................ Rent Expense............................................................. Salaries and Wages Expense ...................................

2-14

Debit $ 6,000 8,000 6,000 80,000

Credit

$ 20,000 11,000 3,000 28,000 8,000 88,000 4,000 38,000 $150,000

$150,000

SOLUTIONS TO EXERCISES EXERCISE 2-1 1.

False. An account is an accounting record of a specific asset, liability, or owner’s equity item.

False. An account shows increases and decreases in the item it relates to.

False. Each asset, liability, and owner’s equity item has a separate account.

False. An account has a left, or debit side, and a right, or credit side.

True.

2-15

Transaction

(a) Basic Type

(b) Specific Account

Jan. 2

Asset

(c)

Account Credited

(a) Basic Type

(b) Specific Account

(c)

Effect

(d) Normal Balance

(d) Normal Effect Balance

Cash

Increase

Debit

Owner’s Equity

Owner’s Capital

Increase

Credit

Asset

Equipment

Increase

Debit

Asset

Cash

Decrease

Debit

Asset

Supplies

Increase

Debit

Liability

Accounts Payable

Increase

Credit

Asset

Accounts Receivable

Increase

Debit

Owner’s Equity

Service Revenue

Increase

Credit

Owner’s Equity

Advertising Expense

Increase

Debit

Asset

Cash

Decrease

Debit

Asset

Cash

Increase

Debit

Asset

Accounts Receivable

Decrease

Debit

Liability

Accounts Payable

Decrease

Credit

Asset

Cash

Decrease

Debit

Owner’s Equity

Owner’s Drawings

Increase

Debit

Asset

Cash

Decrease

Debit

EXERCISE 2-2

2-16

Account Debited

EXERCISE 2-3 General Journal

Date

Account Titles and Explanation

Jan. 2

Cash ................................................... Owner’s Capital .........................

10,000

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

3,000

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

500

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

2,400

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

350

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

700

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

300

Owner’s Drawings............................. Cash ...........................................

1,000

3 9 11 16 20 23 28

Ref.

Debit

Credit 10,000

3,000 500 2,400 350 700 300 1,000

EXERCISE 2-4 Oct. 1

Debits increase assets: debit Cash $15,000. Credits increase owner’s equity: credit Owner’s Capital $15,000.

No transaction.

Debits increase assets: debit Equipment $1,900. Credits increase liabilities: credit Accounts Payable $1,900.

2-17

EXERCISE 2-4 (Continued) Oct. 6

Debits increase assets: debit Accounts Receivable $3,800. Credits increase revenues: credit Service Revenue $3,800.

Debits decrease liabilities: debit Accounts Payable $1,100. Credits decrease assets: credit Cash $1,100.

Debits increase expenses: debit Salaries and Wages Expense $2,500. Credits decrease assets: credit Cash $2,500.

EXERCISE 2-5

Date Oct. 1

Debits 15,000

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

1,900

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

3,800

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

1,100

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

2,500

Credit 15,000

No entry.

Ref.

2-18

General Journal Account Titles and Explanation Cash .................................................. Owner’s Capital .......................

1,900 3,800 1,100 2,500

EXERCISE 2-6 (a)

1. 2. 3.

(b)

Increase the asset Cash, increase the liability Notes Payable. Increase the asset Equipment, decrease the asset Cash. Increase the asset Supplies, increase the liability Accounts Payable.

Cash ................................................................. Notes Payable ........................................... 2. Equipment........................................................ Cash .......................................................... 3. Supplies ........................................................... Accounts Payable.....................................

5,000 5,000 3,100 3,100 850 850

EXERCISE 2-7 (a)

Assets = Liabilities + Owner’s Equity 1. + + (Investment) 2. – – (Expense) 3. + + (Revenue) 4. – – (Drawings)

(b)

1. 2. 3. 4.

Cash ................................................................. Owner’s Capital ........................................ Rent Expense .................................................. Cash .......................................................... Accounts Receivable ...................................... Service Revenue....................................... Owner’s Drawings ........................................... Cash ..........................................................

4,000 4,000 840 840 5,200 5,200 750 750

EXERCISE 2-8 1. 2. 3. 4. 5.

False. The general ledger contains all the asset, liability, and owner’s equity accounts. True. False. The accounts in the general ledger are arranged in financial statement order: first the assets, then the liabilities, owner’s capital, owner’s drawings, revenues, and expenses. True. False. The general ledger is not a book of original entry; transactions are first recorded in the general journal, then in the general ledger. .

2-19

EXERCISE 2-9 (a) Aug. 1 10 31 Bal.

Cash 5,000 Aug. 12 2,600 900 6,200

2,300

Accounts Receivable Aug. 25 1,700 Aug. 31 Bal. 800

Aug. 12 (b)

900

Notes Payable Aug. 12

2,700

Owner’s Capital Aug. 1

5,000

Service Revenue Aug. 10 25 Bal.

2,600 1,700 4,300

Equipment 5,000 JUNE FELDMAN, INVESTMENT BROKER Trial Balance August 31, 2017

Cash ........................................................................ Accounts Receivable ............................................. Equipment .............................................................. Notes Payable ........................................................ Owner’s Capital...................................................... Service Revenue ....................................................

Debit $ 6,200 800 5,000

$12,000

2-20

Credit

$ 2,700 5,000 4,300 $12,000

EXERCISE 2-10 (a) Date Apr. 1

General Journal Account Titles and Explanation Cash .................................................... Owner’s Capital .............................. (Owner’s investment of cash in business)

Ref.

Debit 12,000

12,000

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

900

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

1,300

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

1,500

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

400

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

1,000

Credit

900

1,300

1,500

400

1,000

2-21

EXERCISE 2-22 (Continued) (b)

DAGGETT LANDSCAPING COMPANY Trial Balance April 30, 2017 Cash .......................................................................... Accounts Receivable ............................................... Supplies.................................................................... Accounts Payable .................................................... Unearned Service Revenue ..................................... Owner’s Capital........................................................ Service Revenue ...................................................... Salaries and Wages Expense..................................

Debit $11,500 2,800 1,800

Credit

300 1,000 12,000 4,100

1,300 $17,400

$17,400

EXERCISE 2-11 (a) Oct. 1 Cash ............................................................. Owner’s Capital .................................... (Owner’s investment of cash in business)

3,000

10 Cash ............................................................. Service Revenue .................................. (Received cash for services performed)

750

10 Cash ............................................................. Notes Payable....................................... (Obtained loan from bank)

4,000

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

500

20 Accounts Receivable .................................. Service Revenue .................................. (Billed clients for services performed)

940

2-22

3,000

750

4,000

500

940

EXERCISE 2-11 (Continued) (b)

SHUMWAY CO. Trial Balance October 31, 2017 Cash..................................................................... Accounts Receivable.......................................... Supplies .............................................................. Equipment ........................................................... Notes Payable ..................................................... Accounts Payable ............................................... Owner’s Capital .................................................. Owner’s Drawings .............................................. Service Revenue ................................................. Salaries and Wages Expense ............................ Rent Expense .....................................................

Debit $ 7,200 1,240 400 2,000

Credit

$ 4,000 500 5,000 300 2,490 500 350 $11,990

$11,990

EXERCISE 2-12 (a) Date Sept. 1

25 30

General Journal Account Titles and Explanation Cash .................................................. Owner’s Capital ........................

Ref. 101 301

Debit 10,000

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

157 101 201

12,000

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

201 101

3,000

Owner’s Drawings............................ Cash ..........................................

306 101

700

J1 Credit 10,000 4,000 8,000 3,000 700

2-23

EXERCISE 2-12 (Continued) (b) Cash Date Sept. 1 5 25 30

Explanation

Ref. J1 J1 J1 J1

Equipment Date Explanation Sept. 5

Ref. J1

Debit 10,000

No. 101 Balance 10,000 6,000 3,000 2,300

Credit 4,000 3,000 700

Debit 12,000

No. 157 Balance 12,000

Credit

Accounts Payable Date Sept. 5 25

No. 201

Explanation

Ref. J1 J1

Owner’s Capital Date Explanation Sept. 1

Ref. J1

Debit

Credit 8,000

Balance 8,000 5,000

3,000

Debit

No. 301 Balance 10,000

Credit 10,000

Owner’s Drawings Date Sept. 30

2-12

No. 306

Explanation

Ref. J1

Debit 700

Credit

Balance 700

EXERCISE 2-13

Error 1. 2. 3. 4. 5. 6.

(a) In Balance No Yes Yes No Yes No

(b) Difference $525 — — 415 — 27

EXERCISE 2-14 OVERNITE DELIVERY SERVICE Trial Balance July 31, 2017 Cash ($78,821 – Debit total without Cash $66,340) ................................................................... Accounts Receivable ................................................. Prepaid Insurance ...................................................... Equipment................................................................... Notes Payable............................................................. Accounts Payable ...................................................... Salaries and Wages Payable ..................................... Owner’s Capital .......................................................... Owner’s Drawings ...................................................... Service Revenue ........................................................ Salaries and Wages Expense .................................... Maintenance and Repairs Expense........................... Gasoline Expense ...................................................... Utilities Expense ........................................................

Debit

Credit

$12,481 7,642 1,968 49,360 $17,000 8,396 815 42,000 700 10,610 4,428 961 758 523 $78,821

$78,821

2-13

SOLUTIONS TO PROBLEMS PROBLEM 2-1A

Date Account Titles and Explanation Mar. 1 Cash ........................................................ Owner’s Capital .............................. (Owner’s investment of cash in business)

2-26

Ref.

Debit 20,000

20,000

3 Land......................................................... Buildings ................................................. Equipment............................................... Cash ................................................ (Purchased Rainbow’s Golf Land)

12,000 2,000 1,000

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

900

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

600

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

1,050

18 Cash ........................................................ Service Revenue ............................ (Received cash for services performed)

1,100

19 Cash ........................................................ Unearned Service Revenue ........... (Received cash for coupon books sold)

1,500

J1 Credit

15,000

900

600

1,050

1,100

1,500

PROBLEM 2-1A (Continued) Date Mar. 25

Account Titles and Explanation Owner’s Drawings.............................. Cash ............................................ (Withdrew cash for personal use)

Ref.

Debit 800

800

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

250

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

1,050

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

2,700

Credit

250

1,050

2,700

2-27

PROBLEM 2-2A (a) Date

Account Titles and Explanation

Ref.

Debit

Apr. 1

Cash........................................................ Owner’s Capital ............................. (Owner’s investment of cash in business)

101 301

20,000

No entry—not a transaction.

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

729 101

1,100

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

126 201

4,000

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

112 400

5,100

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

101 209

1,000

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

101 400

2,100

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

726 101

2,800

2-28

20,000

J1 Credit

1,100

4,000

5,100

1,000

2,100

2,800

PROBLEM 2-2A (Continued) Date

Account Titles and Explanation

Ref.

Debits

Apr. 30

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

201 101

2,400

Credit 2,400

(b) Cash Date Apr. 1 2 11 20 30 30

Explanation

Ref. J1 J1 J1 J1 J1 J1

Accounts Receivable Date Explanation Apr. 10

Ref. J1

Supplies Date Explanation Apr. 3

Ref. J1

Accounts Payable Date Explanation Apr. 3 30

Ref. J1 J1

Unearned Service Revenue Date Explanation Apr. 11

Ref. J1

Debit 20,000

Credit 1,100

1,000 2,100 2,800 2,400

Debit 5,100

Debit 4,000

Debit

Credit

No. 112 Balance 5,100

Credit

No. 126 Balance 4,000

Credit 4,000

No. 201 Balance 4,000 1,600

2,400

Debit

No. 101 Balance 20,000 18,900 19,900 22,000 19,200 16,800

Credit 1,000

No. 209 Balance 1,000 2-29

PROBLEM 2-2A (Continued) Owner’s Capital Date Apr. 1

No. 301

Explanation

Ref. J1

Debit

Credit 20,000

Balance 20,000

Service Revenue Date Apr. 10 20

No. 400

Explanation

Ref. J1 J1

Debit

Credit 5,100 2,100

Balance 5,100 7,200

Salaries and Wages Expense Date Apr. 30

No. 726

Explanation

Ref. J1

Rent Expense Date Explanation Apr. 2

(c)

Ref. J1

Debit 2,800

Debit 1,100

Balance 2,800

No. 729 Balance 1,100

Credit

EMILY VALLEY, DENTIST Trial Balance April 30, 2017 Cash .................................................................... Accounts Receivable ......................................... Supplies.............................................................. Accounts Payable .............................................. Unearned Service Revenue ............................... Owner’s Capital.................................................. Service Revenue ................................................ Salaries and Wages Expense............................ Rent Expense .....................................................

2-30

Credit

Debit $16,800 5,100 4,000

Credit

$ 1,600 1,000 20,000 7,200 2,800 1,100 $29,800

$29,800

PROBLEM 2-3A (a) Trans. 1.

Debit

Cash .................................................. Owner’s Capital .......................

40,000

No entry—Not a transaction.

Prepaid Rent ..................................... Cash .........................................

24,000

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

30,000

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

1,800

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

420

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

1,500

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

8,000 12,000

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

400

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

3,000

Utilities Expense .............................. Accounts Payable ...................

380

10.

11.

Credit 40,000

Account Titles and Explanation

24,000

10,000 20,000

1,800

420

1,500

20,000

400

3,000

380

2-31

PROBLEM 2-3A (Continued) Trans. 12.

Account Titles and Explanation

Debit

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

6,100

Credit 6,100

(b) Cash 40,000 (3) (4) (5) (6) 8,000 (9) 3,000 (12) 8,280

(1)

(8) (10)

24,000 10,000 1,800 420 400 (9) 6,100

Service Revenue (8)

Supplies 420 1,500 1,920

(6) (7)

(11)

Prepaid Rent 24,000 24,000

(3)

40,000 40,000

20,000 20,000

Salaries and Wages Expense (12) 6,100 6,100

Prepaid Insurance 1,800 1,800

(5)

Accounts Payable (4) 20,000 (7) 1,500 400 (11) 380 21,480 Owner’s Capital (1)

Accounts Receivable 12,000 (10) 3,000 9,000

(8)

2-32

(4)

Equipment 30,000 30,000

Utilities Expense 380 380

PROBLEM 2-3A (Continued) MAQUOKETA SERVICES Trial Balance May 31, 2017

(c)

Cash................................................................. Accounts Receivable...................................... Supplies .......................................................... Prepaid Insurance........................................... Prepaid Rent ................................................... Equipment ....................................................... Accounts Payable ........................................... Owner’s Capital .............................................. Service Revenue ............................................. Salaries and Wages Expense ........................ Utilities Expense .............................................

Debit $ 8,280 9,000 1,920 1,800 24,000 30,000

Credit

$21,480 40,000 20,000 6,100 380 $81,480

$81,480

2-33

PROBLEM 2-4A

AVTAR SANDHU CO. Trial Balance June 30, 2017 Cash ($3,340 + $270) ................................................. Accounts Receivable ($2,812 – $270) ...................... Supplies ($1,200 – $710) ........................................... Equipment ($2,600 + $710)........................................ Accounts Payable ($3,666 – $306 – $360) ................ Unearned Service Revenue ...................................... Owner’s Capital ......................................................... Owner’s Drawings ($800 + $600) .............................. Service Revenue ($2,480 + $882).............................. Salaries and Wages Expense ($3,200 + $700 – $600) ............................................ Utilities Expense........................................................

2-34

Debit $ 3,610 2,542 490 3,310

Credit

$ 3,000 1,100 8,000 1,400 3,362 3,300 810 $15,462

$15,462

PROBLEM 2-5A (a) & (c) Cash Date Mar. 1 2 9 10 12 20 20 31 31 31

Explanation

Ref.

Balance

� J1 J1 J1 J1 J1 J1 J1 J1 J1

Accounts Receivable Date Explanation Mar. 31 Land Date Mar. 1

Ref. J1

Explanation Balance

Ref. �

Buildings Date Explanation Mar. 1 Balance

Ref. �

Equipment Date Explanation Mar. 1 Balance

Ref. �

Debit

Credit

No. 101 Balance

450 9,000

3,000 1,500 5,800 1,700 800 5,800 3,800 700 1,150 10,150

Debit 450

Credit

No. 112 Balance 450

Credit

No. 140 Balance 24,000

Credit

No. 145 Balance 10,000

Credit

No. 157 Balance 10,000

1,500 4,300 4,100 900 5,000 2,000 3,100

Debit

2-35

PROBLEM 2-5A (Continued) Accounts Payable Date Mar. 1 2 10

No. 201

Explanation Balance

Ref. � J1 J1

Owner’s Capital Date Explanation Mar. 1 Balance

Ref. �

Service Revenue Date Explanation Mar. 9 20 31

Ref. J1 J1 J1

Debit

Credit

Balance 7,000 9,000 4,900

2,000 4,100

Debit

No. 301 Balance 40,000

Credit

No. 400 Balance 4,300 9,300 18,300

Credit 4,300 5,000 9,000

Rent Revenue Date Mar.31

No. 429

Explanation

Ref. J1

Debit

Credit 900

Balance 900

Advertising Expense Date Mar.12

No. 610

Explanation

Ref. J1

Debit 900

Credit

Balance 900

Salaries and Wages Expense Date Mar. 31

2-36

No. 726

Explanation

Ref. J1

Debit 3,100

Credit

Balance 3,100

PROBLEM 2-5A (Continued) Rent Expense Date Explanation Mar. 2 20

Ref. J1 J1

Debit 3,500 2,000

Credit

No. 729 Balance 3,500 5,500

(b) Date

Account Titles and Explanation

Ref.

Debit

Mar. 2

Rent Expense ....................................... Accounts Payable ....................... Cash ............................................. (Rented films for cash and on account)

729 201 101

3,500

No entry.

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

101 400

4,300

Accounts Payable ($2,000 + $2,100) ...... Cash ............................................. (Paid creditors on account)

201 101

4,100

4,300

4,100

No entry.

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

610 101

900

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

101 400

5,000

Rent Expense ....................................... Cash ............................................. (Paid film rental)

729 101

2,000

2,000 1,500

J1 Credit

900

5,000

2,000

2-37

PROBLEM 2-5A (Continued) Date

Account Titles and Explanation

Ref.

Debit

Mar. 31

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

726 101

3,100

Cash....................................................... Accounts Receivable ............................ Rent Revenue............................... (15% X $6,000) (Received cash and balance on account for rent revenue)

101 112 429

450 450

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

101 400

9,000

(d)

3,100

900

9,000

STARR THEATER Trial Balance March 31, 2017 Cash ................................................................. Accounts Receivable ...................................... Land.................................................................. Buildings .......................................................... Equipment........................................................ Accounts Payable............................................ Owner’s Capital ............................................... Service Revenue.............................................. Rent Revenue .................................................. Advertising Expense ....................................... Salaries and Wages Expense ......................... Rent Expense..................................................

2-38

Credit

Debit $10,150 450 24,000 10,000 10,000

Credit

$ 4,900 40,000 18,300 900 900 3,100 5,500 $64,100

$64,100

CC2

(a)

Nov.

COOKIE CREATIONS

GENERAL JOURNAL Account Titles and Explanation

Debit

J1 Credit

8 No entry required for cashing U.S. Savings Bonds—this is a personal transaction. 8 Cash ......................................................... Owner’s Capital ..................................

500

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

13 Supplies ................................................... Cash.....................................................

125

14 Equipment ............................................... Owner’s Capital ..................................

300

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

2,000

17 Equipment ............................................... Cash.....................................................

900

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

125

25 Cash ......................................................... Unearned Service Revenue................

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

1,320

500 65 125 300 2,000 900 125 30 1,320

2-39

CC2 (Continued) (b)

Date

Cash Ref. Debits

Explanation

Nov.

8 11 13 16 17 20 25 30

Date

J1 J1 J1 J1 J1 J1 J1 J1

Nov. 13

Date

Explanation

Date

Nov. 14 17

Date

J1 J1

Explanation

2-40

Balance

900 125 30

125

Credits

Balance

1,320

Credits

Balance

300 900

Unearned Service Revenue Ref. Debits

Nov. 25

Credits

2,000

Equipment Ref. Debits

Explanation

1,320

500 435 310 2,310 1,410 1,535 1,565 245

65 125

Prepaid Insurance Ref. Debits

Nov. 30

Balance

500

Supplies Ref. Debits

Explanation

Credits

300 1,200

Credits

Balance

CC2 (Continued) (b) (Continued)

Date

Notes Payable Ref. Debits

Explanation

Nov. 16

Date Nov.

J1 Owner’s Capital Ref. Debits

Explanation 8 14

Date

Balance

2,000

Credits

Balance

500 300

500 800

Credits

Balance

125

J1 J1 Service Revenue Ref. Debits

Explanation

Nov. 20

Date

Advertising Expense Ref. Debits

Explanation

Nov. 11

Credits

Balance 65

2-41

CC2 (Continued) (c) COOKIE CREATIONS Trial Balance November 30, 2016 Cash ........................................................................... Supplies ..................................................................... Prepaid Insurance ..................................................... Equipment.................................................................. Unearned Service Revenue ...................................... Notes Payable............................................................ Owner’s Capital ......................................................... Service Revenue........................................................ Advertising Expense .................................................

Debit $ 245 125 1,320 1,200

Credit

65 $2,955

30 2,000 800 125

$2,955

Note to instructors: Because the notes payable is not due for 24 months, it follows Unearned Service Revenue in the accounts and the trial balance.

2-42

BYP 2-1

FINANCIAL REPORTING PROBLEM

(a) Account Accounts Payable

(1) Increase Side Credit

(1) Decrease Side Debit

(2) Normal Balance Credit

Accounts Receivable

Debit

Credit

Debit

Property, Plant, and Equipment

Debit

Credit

Debit

Cash and Cash Equivalents

Debit

Credit

Debit

Research and Development Expense

Debit

Credit

Debit

Inventories

Debit

Credit

Debit

(b) 1. 2. 3.

Cash is increased. Cash is decreased. Cash is decreased or Accounts Payable is increased.

Cash is decreased. Cash is decreased or Notes or Mortgage Payable is increased.

2-43

BYP 2-2

COMPARATIVE ANALYSIS PROBLEM PepsiCo

(a)

Coca-Cola

Inventory:

Property, Plant & Equipment:

debit

Accounts Payable:

credit

3. Cost of Goods Sold(expense):

debit

Interest Expense:

debit

4. Sales (revenue)

credit

debit

1. Accounts Receivable:

debit

2. Cash and Cash Equivalents: debit

(b)

2-44

Increase in Accounts Receivable: Service Revenue or Sales Revenue is increased (credited).

Decrease in Salaries and Wages Payable: Cash is decreased (credited).

Increase in Property, Plant and Equipment: Cash is decreased (credited) and Accounts Payable or Notes payable is increased (credited).

Increase in Interest Expense: Cash is decreased (credited).

BYP 2-3

COMPARATIVE ANALYSIS PROBLEM Amazon

(a)

Wal-Mart

Interest Expense:

debit

1. Net Product Revenues:

credit

Cash and Cash Equivalents:

debit

2. Inventories:

debit

Accounts Payable:

credit

3. Cost of Sales:

debit

(b) The following other accounts are ordinarily involved:

Increase in Accounts Receivable: Service Revenue or Sales Revenue is increased (credited).

Increase in Interest Expense: Cash is decreased (credited).

Decrease in Salaries and Wages Payable: Cash is decreased (credited).

Increase in Service Revenue: Cash or Accounts Receivable is increased (debited).

2-45

BYP 2-4

REAL-WORLD FOCUS

The answer is dependent upon the company selected by the student.

2-46

BYP 2-5

REAL-WORLD FOCUS

(a) The reason the Green Bay Packers’ issue an annual report is because they are a publicly owned, nonprofit company. They issue the report to the more than 100,000 shareholders who hold shares. None of the other teams are publicly owned, so they have no obligation to make their financial information available except to their small group of owners. (b) At the time that the article was written the owners of the NFL teams and the players’ labor union were negotiating a new contract. Knowing how profitable the NFL teams are would be useful information for the players to know so that they would have a better sense of how much the teams could afford to pay. The Packers are obviously a “small market” team, they are not necessarily representative of teams in general. However, the Packers’ annual report does give the players some sense of the profitability of other teams. (c) Since some of the cost of the stadium that the Packers play in is covered by taxpayers, the county and state government has an interest in the team’s finances. (d) The Packers’ revenues increased during recent years. However, because the cost of players’ salaries increased at a faster rate than revenues, the Packers’ operating profit actually declined.

2-47

BYP 2-6

COMMUNICATION ACTIVITY

Date:

May 25, 2017

To:

Accounting Instructor

From:

Student

In the first transaction, bills totaling $6,000 were sent to customers for services performed. Therefore, the asset Accounts Receivable is increased $6,000 and the revenue Service Revenue is increased $6,000. Debits increase assets and credits increase revenues, so the journal entry is: Accounts Receivable ............................................................ Service Revenue ............................................................ (Billed customers for services performed)

6,000 6,000

The $6,000 amount is then posted to the debit side of the general ledger account Accounts Receivable and to the credit side of the general ledger account Service Revenue. In the second transaction, $2,000 was paid in salaries to employees. Therefore, the expense Salaries and Wages Expense is increased $2,000 and the asset Cash is decreased $2,000. Debits increase expenses and credits decrease assets, so the journal entry is: Salaries and Wages Expense ............................................... Cash ................................................................................ (Salaries and wages paid)

2,000 2,000

The $2,000 amount is then posted to the debit side of the general ledger account Salaries and Wages Expense and to the credit side of the general ledger account Cash.

2-48

BYP 2-7

ETHICS CASE

(a) The stakeholders in this situation are: ⯈ ⯈ ⯈

Ellynn Kole, assistant chief accountant. Users of the company’s financial statements. The Doman Company.

(b) By adding $1,000 to the Equipment account, that account total is intentionally misstated. By not locating the error causing the imbalance, some other account may also be misstated by $1,000. If the amount of $1,000 is determined to be immaterial, and the intent is not to commit fraud (cover up an embezzlement or other misappropriation of assets), Ellynn’s action might not be considered unethical in the preparation of interim financial statements. However, if Ellynn is violating a company accounting policy by her action, then she is acting unethically. (c) Ellynn’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 later, making the adjustment in the next quarter.

2-49

BYP 2-8

ETHICS CASE

The decision whether to fire Mr. Edmondson was the responsibility of Radio Shack’s board of directors, which is elected by the company’s shareholders to oversee management. The board initially announced its support for the CEO. After further investigation, the board encouraged Mr. Edmondson to resign, which he did. In contrast, when Bausch & Lomb’s CEO offered to resign in a similar situation, the company’s board refused to accept his resignation. Board members stated that they felt he was still the best person for the position. Radio Shack says that although it did a reference check at the time of Mr. Edmondson’s hiring, it did not check his educational credentials. Under the Sarbanes-Oxley Act, companies must now perform thorough background checks as part of a check of internal controls. The bottom line: Your résumé must be a fair and accurate depiction of your past.

2-50

BYP 2-9

ALL ABOUT YOU

(a) Students’ responses to this question will vary. It is important that the steps that they identify be as specific as possible, and clearly directed toward achieving their goal. You may wish to ask a follow-up question asking them to explain how each step will assist them in achieving their goal. (b) There are many sites on the Internet that provide information about preparing a résumé. For example, you can find extensive resources at: http://www.rileyguide.com/resprep.html. Many schools also have resources in their placement centers or writing labs. The Writing Center at Rensselaer Polytechnic Institute provides useful, concise information on its website at http://www.ccp.rpi.edu/resources/careersand-graduate-school/resumes. A wide variety of sample résumés can be found. For example, Monster.com provides samples for a wide variety of professions and situations at http://www.careeradvice.monster.com/resumes-cover-letters/careers.aspx. (c)

It is important to provide accurate and complete documentation of all relevant training, education, and employment experiences so as to provide assurance to the potential employer, and also to enable that employer to do follow-up work. If you say you have certain skills, such as computer skills, try to substantiate the claim with recognized proof of proficiency. Make sure that all addresses and phone numbers are accurate and up-to-date. Also, ensure that the people you use as references have a copy of your résumé and cover letter, and that they are informed that you are interviewing so they know to expect a call.

(d) See the sample résumés provided in the websites above for various format options. You might also mention to students that there are electronic résumé templates available on the Internet.

2-51

BYP 2-10

CONSIDERING PEOPLE, PLANET AND PROFIT

(a)

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

(b)

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

(c)

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

2-52

CHAPTER 3 Adjusting the Accounts ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Explain the accrual basis of accounting and the reasons for adjusting entries.

1, 2, 3, 4, 5, 6, 7, 8, 18

Prepare adjusting entries for deferrals.

Brief Exercises

A Problems

Do It!

Exercises

1, 2, 8

1, 2, 3, 4, 6, 10, 11

8, 9, 10, 11, 12, 13, 18, 19, 20

2, 3, 4, 5, 6,8

4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 15

1A, 2A, 3A, 4A, 5A, 6A

Prepare adjusting entries for accruals.

8, 14, 15, 16, 17, 18, 19, 20

2, 7, 8

4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 15

1A, 2A, 3A, 4A, 5A, 6A

Describe the nature and purpose of an adjusted trial balance.

9, 10

10, 11, 13, 14

1A, 2A, 3A, 5A, 6A

*5.

Prepare adjusting entries for the alternative treatment of deferrals.

16, 17

*6.

Discuss financial reporting concepts.

23, 24, 25, 26, 27, 28

12, 13, 14, 15

18, 19, 20, 21, 22

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the chapter.

3-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare adjusting entries, post to ledger accounts, and prepare an adjusted trial balance.

Simple

40–50

Prepare adjusting entries, post, and prepare adjusted trial balance, and financial statements.

Simple

50–60

Prepare adjusting entries and financial statements.

Moderate

40–50

Prepare adjusting entries.

Moderate

30–40

Journalize transactions and follow through accounting cycle to preparation of financial statements.

Moderate

60–70

*6A

Prepare adjusting entries, adjusted trial balance, and financial statements using appendix.

Moderate

40–50

3-2

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 3 ADJUSTING THE ACCOUNTS Number

Difficulty

Time (min.)

BE1

Simple

4–6

BE2

1, 2

Moderate

6–8

BE3

Simple

3–5

BE4

Simple

3–5

BE5

Simple

2–4

BE6

Simple

2–4

BE7

Simple

4–6

BE8

1, 2, 3

Simple

5–7

BE9

Simple

4–6

BE10

Simple

2–4

BE11*

Moderate

3–5

BE12*

Simple

3–5

BE13*

Simple

2–4

BE14*

Simple

2–4

BE15*

Simple

1–2

DI1

Simple

2–4

DI2

Simple

6–8

DI3

Simple

4–6

DI4

Moderate

20–30

EX1

Simple

3–5

EX2

Moderate

10–15

EX3

Simple

6–8

EX4

1, 2, 3

Simple

5–6

EX5

2, 3

Moderate

10–15

EX6

2, 3, 4

Moderate

10–12

EX7

2, 3

Moderate

8–10

EX8

2, 3

Moderate

8–10

EX9

2, 3

Simple

8–10

EX10

1, 2, 3

Moderate

8–10

EX11

1–4

Moderate

12–15

EX12

2, 3

Moderate

8–10

EX13 EX14

2–4 4

AN AP

Simple Simple

8–10 12–15

3-3

ADJUSTING THE ACCOUNTS (Continued) Number

Difficulty

Time (min.)

EX15

2, 3

AN, S

Moderate

8–10

EX16*

Moderate

6–8

EX17*

Moderate

10–12

EX18*

Simple

3–5

EX19*

Simple

3–5

EX20*

Simple

6–8

EX21*

Simple

10–20

EX22*

Simple

10–20

P1A

2–4

Simple

40–50

P2A

2–4

Simple

50–60

P3A

2–4

Moderate

40–50

P4A

2, 3

Moderate

30–40

P5A

2–4

Moderate

60–70

P6A

2–5

Moderate

40–50

BYP1

2, 3, 4

Simple

10–15

BYP2

—

Simple

10–15

BYP3

—

Simple

10–15

BYP4

—

Simple

10–15

BYP5

—

Moderate

15–20

BYP6

1–4

Moderate

15–20

BYP7

1–4

Simple

10–15

BYP8

1–4

Moderate

10–15

BYP9

—

Moderate

10–15

BYP10

—

Moderate

10–15

BYP11

—

Simple

10–15

3-4

Learning Objective

Knowledge

Comprehension

Explain the accrual basis of accounting and DI3-1 the reasons for adjusting entries.

Q3-1 Q3-2 Q3-3 Q3-4 Q3-6

Prepare adjusting entries for deferrals.

Q3-8 Q3-9 Q3-10 Q3-11 Q3-12 Q3-13 Q3-19 Q3-20

Prepare adjusting entries for accruals.

Q3-8 Q3-14 Q3-15 Q3-19 Q3-20

Describe the nature and purpose of an adjusted trial balance.

Q3-21

*5.

Prepare adjusting entries for the alternative treatment of deferrals.

*6.

Discuss financial reporting concepts

Broadening Your Perspective

Application

Q3-7 Q3-5 Q3-8 E3-3 BE3-1 E3-1

Q3-23

BE3-12 BE3-13 BE3-14 BE3-15 E3-18 E3-19

E3-20 Q3-24 Q3-25 Q3-26 Q3-27 Q3-28

FASB Activity

Communication

Analysis

Synthesis

Q3-18 E3-4 BE3-2 E3-10 BE3-8

E3-11

Q3-18 E3-7 BE3-2 E3-8 BE3-3 E3-9 BE3-4 E3-10 BE3-5 E3-11 BE3-6 E3-12 BE3-8 E3-13 DI3-2 E3-15 E3-5 P3-1A E3-6 P3-2A

P3-3A P3-4A P3-5A P3-6A

E3-15

Q3-17

Q3-16 E3-8 P3-3A Q318 E3-9 P3-4A BE3-2 E3-10 P3-5A BE3-7 E3-11 P3-6A BE3-8 E3-12 DI3-3 E3-13 E3-4 E3-15 E3-5 P3-1A E3-6 P3-2A E3-7

E3-15

BE3-9 BE3-10 E3-14

DI3-4 P3-1A E3-6 P3-2A E3-10 P3-3A E3-11 P3-5A E3-13 P3-6A

Q3-22

BE3-11 E3-16

Evaluation E3-2

E3-17 P3-6A

E3-21 E3-22

Financial Reporting Comparative Analysis Real-World Focus

Decision Making All About You Across the Ethics Case Organization Considering P, P & P

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

3-5

ANSWERS TO QUESTIONS 1.

(a) Under the time period assumption, an accountant is required to determine the relevance of each business transaction to specific accounting periods. (b) An accounting time period of one year in length is referred to as a fiscal year. A fiscal year that extends from January 1 to December 31 is referred to as a calendar year. Accounting periods of less than one year are called interim periods.

The two generally accepted accounting principles that relate to adjusting the accounts are: The revenue recognition principle, which states that revenue should be recognized in the accounting period in which services are performed. The expense recognition principle, which states that efforts (expenses) be matched with accomplishments (revenues).

The law firm should recognize the revenue in April. The revenue recognition principle states that revenue should be recognized in the accounting period in which services are performed.

Information presented on an accrual basis is more useful than on a cash basis because it reveals relationships that are likely to be important in predicting future results. To illustrate, under accrual accounting, revenues are recognized when the performance obligation is satisfied so they can be related to the economic environment in which they occur. Trends in revenues are thus more meaningful.

Expenses of $4,500 should be deducted from the revenues in April. Under the expense recognition principle efforts (expenses) should be matched with accomplishments (revenues).

No, adjusting entries are required by the revenue recognition and expense recognition principles.

A trial balance may not contain up-to-date information for financial statements because: (1) Some events are not journalized daily because it is not efficient to do so. (2) The expiration of some costs occurs with the passage of time rather than as a result of daily transactions. (3) Some items may be unrecorded because the transaction data are not yet known.

The two categories of adjusting entries are deferrals and accruals. Deferrals consist of prepaid expenses and unearned revenues. Accruals consist of accrued revenues and accrued expenses.

In the adjusting entry for a prepaid expense, an expense is debited and an asset is credited.

10.

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 book value of the asset, not its fair value.

11.

Depreciation expense is an expense account whose normal balance is a debit. This account shows the cost that has expired during the current accounting period. Accumulated depreciation is a contra asset account whose normal balance is a credit. The balance in this account is the depreciation that has been recognized from the date of acquisition to the balance sheet date.

12.

Equipment ............................................................................................... Less: Accumulated Depreciation—Equipment ........................................

3-6

$18,000 6,000

$12,000

Questions Chapter 3 (Continued) 13.

In the adjusting entry for an unearned revenue, a liability is debited and a revenue is credited.

14.

Asset and revenue. An asset would be debited and a revenue would be credited.

15.

An expense is debited and a liability is credited in the adjusting entry.

16.

Net income was understated $200 because prior to adjustment, revenues are understated by $900 and expenses are understated by $700. The difference in this case is $200 ($900 – $700).

17.

The entry is: Jan. 9 Salaries and Wages Payable ....................................................... Salaries and Wages Expense ...................................................... Cash.....................................................................................

2,000 3,000 5,000

18.

(a) Accrued revenues. (b) Unearned revenues. (c) Accrued expenses.

(d) Accrued expenses or prepaid expenses. (e) Prepaid expenses. (f) Accrued revenues or unearned revenues.

19.

(a) Salaries and Wages Payable. (b) Accumulated Depreciation. (c) Interest Expense. (f)

(d) Supplies Expense. (e) Service Revenue. Service Revenue.

20.

Disagree. An adjusting entry affects only one balance sheet account and one income statement account.

21.

Financial statements can be prepared from an adjusted trial balance because the balances of all accounts have been adjusted to show the effects of all financial events that have occurred during the accounting period.

*22.

For Supplies Expense (prepaid expense): expenses are overstated and assets are understated. The adjusting entry is: Assets (Supplies) ..................................................................................... XX Expenses (Supplies Expense)............................................................ XX For Rent Revenue (unearned revenues): revenues are overstated and liabilities are understated. The adjusting entry is: Revenues (Rent Revenue) ....................................................................... XX Liabilities (Unearned Rent Revenue) .................................................. XX

*23. (a) The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions about providing capital. (b) The fundamental qualitative characteristics are relevance and faithful representation. The enhancing qualities are comparabiIity, consistency, verifiability, timeliness, and understandability. *24. Gross is correct. Consistency means using the same accounting principles and accounting methods from period to period within a company. Without consistency in the application of accounting principles, it is difficult to determine whether a company is better off, worse off, or the same from period to period.

3-7

Questions Chapter 3 (Continued) *25.

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

*26.

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

*27.

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

*28.

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

3-8

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3-1 (a) Prepaid Insurance—to recognize insurance expired during the period. (b) Depreciation Expense—to account for the depreciation that has occurred on the asset during the period. (c) Unearned Service Revenue—to record revenue earned for services performed. (d) Interest Payable—to recognize interest accrued but unpaid on notes payable. BRIEF EXERCISE 3-2 Item

(a) Type of Adjustment

(b) Account Balances before Adjustment

Prepaid Expenses

Assets Overstated Expenses Understated

Accrued Revenues

Assets Understated Revenues Understated

Accrued Expenses

Expenses Understated Liabilities Understated

Unearned Revenues

Liabilities Overstated Revenues Understated

BRIEF EXERCISE 3-3 Dec. 31

Supplies Expense ................................................ Supplies ($6,700 – $2,100) ...........................

Supplies 6,700 12/31 12/31 Bal. 2,100

4,600

12/31

4,600 4,600

Supplies Expense 4,600

3-9

BRIEF EXERCISE 3-4 Dec. 31

Depreciation Expense.......................................... Accumulated Depreciation— Equipment.................................................

4,000 4,000

Accum. Depreciation—Equipment 12/31 4,000

Depreciation Expense 12/31 4,000

Balance Sheet: Equipment ........................................................... Less: Accumulated Depreciation— Equipment ................................................

$30,000 4,000

$26,000

BRIEF EXERCISE 3-5 July 1 Dec. 31

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

15,120

Insurance Expense [($15,120 ÷ 3) X 1/2]........ Prepaid Insurance ...................................

2,520

Prepaid Insurance 7/1 15,120 12/31 12/31 Bal. 12,600

2,520

12/31

15,120

2,520

Insurance Expense 2,520

BRIEF EXERCISE 3-6 July 1

Dec. 31

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

15,120

Unearned Service Revenue ............................ Service Revenue......................................

2,520

Unearned Service Revenue 12/31 2,520 7/1 15,120 12/31 Bal. 12,600

3-10

15,120

2,520

Service Revenue 12/31

2,520

BRIEF EXERCISE 3-7 1. 2. 3.

Dec. 31 31 31

Interest Expense .......................................... Interest Payable ....................................

400

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

2,300

Salaries and Wages Expense ...................... Salaries and Wages Payable................

900

400 2,300 900

BRIEF EXERCISE 3-8 Account

(a) Type of Adjustment

(b) Related Account

Accounts Receivable Prepaid Insurance Accum. Depr.—Equipment Interest Payable Unearned Service Revenue

Accrued Revenues Prepaid Expenses Prepaid Expenses Accrued Expenses Unearned Revenues

Service Revenue Insurance Expense Depreciation Expense Interest Expense Service Revenue

BRIEF EXERCISE 3-9 WILDER COMPANY Income Statement For the Year Ended December 31, 2017 Revenues Service revenue .................................................... Expenses Salaries and wages expense ............................... Rent expense ........................................................ Insurance expense ............................................... Supplies expense ................................................. Depreciation expense........................................... Total expenses .............................................. Net income....................................................................

$39,000 $16,000 4,000 2,000 1,500 1,300 24,800 $14,200

3-11

BRIEF EXERCISE 3-10 WILDER COMPANY Owner’s Equity Statement For the Year Ended December 31, 2017 Owner’s capital, January 1 ............................................................. Add: Net income............................................................................. Less: Drawings ............................................................................... Owner’s capital, December 31 ........................................................

$15,600 14,200 29,800 7,000 $22,800

*BRIEF EXERCISE 3-11 (a) Apr. 30

(b)

Supplies ........................................................ Supplies Expense .................................

400

Service Revenue ........................................... Unearned Service Revenue ..................

3,000

400 3,000

BRIEF EXERCISE 3-12 (a) (b) (c) (d) (e) (f) (g) (h)

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

BRIEF EXERCISE 3-13 (a) Relevant. (b) Faithful representation. (c) Consistency.

3-12

BRIEF EXERCISE 3-14 (a) (b) (c) (d)

1. 2. 3. 4.

Predictive value. Neutral. Verifiable. Timely.

BRIEF EXERCISE 3-15 (c) Financial statements should disclose all events and circumstances that would matter to users of financial statements.

3-13

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 3-1 1. (d) 2. (e) 3. (h) 4. (c)

DO IT! 3-2 1.

Insurance Expense....................................................... Prepaid Insurance ................................................. (To record insurance expired)

300

Supplies Expense ($2,500 – $1,100)............................ Supplies ................................................................. (To record supplies used)

1,400

Depreciation Expense .................................................. Accumulated Depreciation—Equipment.............. (To record monthly depreciation)

480

Unearned Service Revenue ($9,000 x 2/5) .................. Service Revenue.................................................... (To record revenue for services provided)

3,600

300

1,400

480

3,600

DO IT! 3-3 1.

3-14

Salaries and Wages Expense ...................................... Salaries and Wages Payable................................. (To record accrued salaries)

1,300

Interest Expense ($20,000 x .06 x 1/12) ....................... Interest Payable ..................................................... (To record accrued interest)

100

Accounts Receivable ................................................... Service Revenue.................................................... (To record revenue for service provided)

2,400

1,300

100

2,400

DO IT! 3-4 (a) The net income is determined by adding revenues and subtracting expenses. The net income is computed as follows: Revenues Service revenue................................................ Rent revenue .................................................... Total revenues .......................................... Expenses Salaries and wages expense ........................... Rent expense.................................................... Depreciation expense ...................................... Utilities expense............................................... Supplies expense............................................. Interest expense............................................... Total expenses.......................................... Net income ...............................................................

$11,360 1,100 $12,460 7,400 1,200 700 410 160 40 9,910 $ 2,550

(b) Total assets and liabilities are computed as follows: Assets Cash .................................................................. Accounts receivable ........................................ Prepaid rent ...................................................... Supplies ............................................................ Equipment ........................................................ Less: Accumulated depreciation— Equipment .............................................. Total assets...............................................

$ 5,360 480 720 920 $12,000 700

Liabilities Notes payable................................................... Accounts payable ............................................ Unearned rent revenue .................................... Salaries and wages payable ............................ Interest payable................................................ Total liabilities...........................................

11,300 $18,780

$ 4,000 790 400 300 40 $ 5,530

3-15

(c) Owner’s Capital at June 30, 2017, can be computed in one of two ways. Using the basic accounting equation (Assets = Liabilities + Owner’s Equity), we find that total assets are $18,780 and total liabilities are $5,530; therefore, Owner’s Equity (Owner’s Capital) is $13,250 ($18,780 – $5,530). Another way to compute the Owner’s Capital at June 30, 2017, is as follows: Owner’s capital, April 1 ........................................... Add: Investments..................................................... Net income ......................................................

$ $11,200 2,550

Less: Drawings ........................................................ Owner’s capital, June 30 .........................................

3-16

–0–

13,750 13,750 500 $13,250

SOLUTIONS TO EXERCISES EXERCISE 3-1 1.

True.

False. Many business transactions affect more than one of these artificial time periods. For example, the purchase of a building affects expenses for many years.

True.

False. A time period that lasts less than one year, such as monthly or quarterly periods, is called an interim period.

False. All calendar years are fiscal years, but not all fiscal years are calendar years. An accounting time period that is one year in length is referred to as a fiscal year. A fiscal year that starts on January 1 and ends on December 31 is a calendar year.

EXERCISE 3-2 (a) Accrual-basis accounting records the transactions that change a company’s financial statements in the periods in which the events occur rather than in the periods in which the company receives or pays cash. Information presented on an accrual basis is useful because it reveals relationships that are likely to be important in predicting future results. Conversely, under cash-basis accounting, revenue is recorded only when cash is received, and an expense is recognized only when cash is paid. As a result, the cash basis of accounting often leads to misleading financial statements. (b) Politicians might desire a cash-basis accounting system over an accrualbasis system because if an accrual-accounting system is used, it could mean that billions in government liabilities presently unrecorded would have to be reported in the federal budget immediately. The recognition of these additional liabilities would make the deficit even worse. This is not what politicians would like to see and be held responsible for.

3-17

EXERCISE 3-2 (Continued) (c) Dear Senator, It is my understanding, after having taken a beginning course in accounting principles, that the Federal government uses a cash-basis system rather than an accrual-basis accounting system. I am shocked at such a practice! There must be billions of dollars of liabilities hidden in many contracts that have not been recorded yet for the mere reason that they haven’t been paid yet. I realize that the deficit would dramatically increase if we were to implement an accrual system, but in all fairness, we citizens should be given a more accurate picture of what our government is up to. Sincerely, CONCERNED STUDENT EXERCISE 3-3 (a)

Cash received from revenue........................................... Cash paid for expenses .................................................. Cash-basis net income ..........................................

$108,000 (72,000) $ 36,000

(b)

Revenues [($108,000 – $25,000) + $36,000] ................... Expenses [($72,000 – $30,000) + $42,000] ..................... Accrual-basis net income ......................................

$119,000 (84,000) $ 35,000

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

Unearned revenue. Accrued expense. Accrued expense. Accrued revenue. Prepaid expense. Unearned revenue. Accrued revenue. Prepaid expense. Prepaid expense. Prepaid expense. Accrued expense.

3-18

EXERCISE 3-5 1.

2. 3. 4.

6. 7.

Interest Expense .................................................... Interest Payable ($10,000 X 9% X 4/12)...................................

300

Supplies Expense .................................................. Supplies ($2,450 – $900) .................................

1,550

Depreciation Expense ............................................ Accumulated Depreciation—Equipment .......

1,000

Insurance Expense ................................................ Prepaid Insurance ($2,100 X 7/12) ..............................................

1,225

Unearned Service Revenue ................................... Service Revenue ($32,000 X 1/4) ..............................................

8,000

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

4,200

Salaries and Wages Expense ................................ Salaries and Wages Payable ($9,000 X 3/5) ................................................

5,400

300

1,550 1,000

1,225

8,000 4,200

5,400

3-19

EXERCISE 3-6 Item

(a) Type of Adjustment

(b) Accounts before Adjustment

Accrued Revenues

Assets Understated Revenues Understated

Prepaid Expenses

Assets Overstated Expenses Understated

Accrued Expenses

Expenses Understated Liabilities Understated

Unearned Revenues

Liabilities Overstated Revenues Understated

Accrued Expenses

Expenses Understated Liabilities Understated

Prepaid Expenses

Assets Overstated Expenses Understated

EXERCISE 3-7 1.

Mar. 31

3-20

Depreciation Expense ($400 X 3) ................. Accumulated Depreciation— Equipment .........................................

1,200

Unearned Rent Revenue .............................. Rent Revenue ($10,200 X 1/3)...............

3,400

Interest Expense ........................................... Interest Payable.....................................

500

Supplies Expense ......................................... Supplies ($2,800 – $750) .......................

2,050

Insurance Expense ($300 X 3) ..................... Prepaid Insurance .................................

900

1,200

3,400 500 2,050 900

EXERCISE 3-8 1. 2. 3.

Jan. 31 31 31

31 4. 5.

31 31

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

875

Utilities Expense........................................... Utilities Payable ....................................

650

Depreciation Expense .................................. Accumulated Depreciation— Equipment .........................................

400

Interest Expense........................................... Interest Payable ....................................

500

Insurance Expense ($24,000 ÷ 12) ............... Prepaid Insurance .................................

2,000

Supplies Expense ($1,600 – $400) ............... Supplies.................................................

1,200

Supplies Expense......................................... Supplies ($2,500 – $500).......................

2,000

Insurance Expense ....................................... Prepaid Insurance .................................

120

Depreciation Expense .................................. Accumulated Depreciation— Equipment .........................................

Unearned Service Revenue ......................... Service Revenue ...................................

600

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

360

875 650

400 500 2,000 1,200

EXERCISE 3-9 1. 2. 3.

4. 5.

Oct. 31 31 31

31 31

2,000 120

50 600 360

3-21

EXERCISE 3-9 (Continued) 6.

Oct. 31

Interest Expense ..................................... Interest Payable...............................

Salaries and Wages Expense ................ Salaries and Wages Payable ..........

1,625

95 1,625

EXERCISE 3-10 MONTEE CO. Income Statement For the Month Ended July 31, 2017 Revenues Service revenue ($5,500 + $650) ............................. Expenses Salaries and wages expense ($2,300 + $300)......... Supplies expense ($1,200 – $250)........................... Utilities expense ...................................................... Insurance expense................................................... Depreciation expense .............................................. Total expenses ................................................. Net income .......................................................................

$6,150 $2,600 950 600 400 150 4,700 $1,450

EXERCISE 3-11 Answer

Computation

(a) Supplies balance = $800

Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1)

(b) Total premium = $4,800

Total premium = Monthly premium X 12; $400 X 12 = $4,800

Purchase date = Aug. 1, 2016

3-22

$ 950 850 (1,000) $ 800

Purchase date: On Jan. 31, there are 6 months’ coverage remaining ($400 X 6). Thus, the purchase date was 6 months earlier on Aug. 1, 2016.

EXERCISE 3-11 (Continued) (c) Salaries and wages payable = $1,820

Cash paid Salaries and wages payable (1/31/17)

$3,800 920 4,720

Less: Salaries and wages expense Salaries and wages payable (12/31/16)

2,900 $1,820

EXERCISE 3-12 (a) July 10 14 15 20 (b) July 31 31 31 31

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

650

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

2,000

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

1,200

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

1,000

Supplies Expense......................................... Supplies.................................................

800

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

500

Salaries and Wages Expense ...................... Salaries and Wages Payable ................

1,200

Unearned Service Revenue ......................... Service Revenue ...................................

1,150

650 2,000 1,200 1,000 800 500 1,200 1,150

3-23

EXERCISE 3-24 Aug. 31 31 31 31

31 31

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

2,600

Supplies Expense .......................................... Supplies ..................................................

1,400

Insurance Expense ........................................ Prepaid Insurance ..................................

1,500

Depreciation Expense ................................... Accumulated Depreciation— Equipment...........................................

900

Salaries and Wages Expense........................ Salaries and Wages Payable .................

1,100

Unearned Rent Revenue ............................... Rent Revenue .........................................

1,100

2,600 1,400 1,500

900 1,100 1,100

EXERCISE 3-14 TURNQUIST COMPANY Income Statement For the Year Ended August 31, 2017 Revenues Service revenue ....................................................... Rent revenue ............................................................ Total revenues .................................................. Expenses Salaries and wages expense................................... Rent expense ........................................................... Insurance expense................................................... Supplies expense..................................................... Depreciation expense .............................................. Total expenses ................................................. Net income .......................................................................

3-24

$36,600 12,100 $48,700 18,100 15,000 1,500 1,400 900 36,900 $11,800

EXERCISE 3-14 (Continued) TURNQUIST COMPANY Owner’s Equity Statement For the Year Ended August 31, 2017 Owner’s capital, September 1, 2016............................................... Add: Net income............................................................................ Owner’s capital, August 31, 2017 ..................................................

$15,600 11,800 $27,400

TURNQUIST COMPANY Balance Sheet August 31, 2017 Assets Cash ................................................................................. Accounts receivable ....................................................... Supplies ........................................................................... Prepaid insurance ........................................................... Equipment........................................................................ Less: Accum. depreciation—equipment ...................... Total assets ......................................................

$10,400 11,400 900 2,500 $14,000 4,500

9,500 $34,700

Liabilities and Owner’s Equity Liabilities Accounts payable .................................................................... Salaries and wages payable ................................................... Unearned rent revenue............................................................ Total liabilities .................................................................. Owner’s equity Owner’s capital ........................................................................ Total liabilities and owner’s equity .................................

$ 5,800 1,100 400 7,300 27,400 $34,700

3-25

EXERCISE 3-26 (a) 1. 2. 3.

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

8,000

Unearned Service Revenue .............................. Service Revenue........................................

25,000

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

38,000

Unearned Service Revenue ($38,000 – $17,000)............................................ Service Revenue ........................................... 4.

8,000 25,000 38,000 21,000 21,000

Accounts Receivable ........................................ Service Revenue ($161,000 – $25,000 – $21,000)..............

115,000

Cash ................................................................... Accounts Receivable ($115,000 – $16,000) ..............................

99,000

115,000

99,000

(b) Cash received by the club = $8,000 + $99,000 + $38,000 = $145,000

*EXERCISE 3-16 1.

3-26

Prepaid Insurance.................................................. Insurance Expense ($2,700 X 5/12)..............................................

1,125

Service Revenue .................................................... Unearned Service Revenue ($40,000 X 3/4)..............................................

30,000

Supplies.................................................................. Supplies Expense ...........................................

900

1,125

30,000 900

*EXERCISE 3-17 (a) Jan. 2 10 15

1/15

1/2

Insurance Expense ...................................... Cash ......................................................

1,920

Supplies Expense........................................ Cash ......................................................

1,700

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

6,100

Cash 6,100 1/2 1/10

(b) Jan. 31 31 31

1,700 6,100

Service Revenue 1/15

1,920 1,700

Insurance Expense 1,920

1,920

1/10

6,100

Supplies Expense 1,700

Prepaid Insurance ($160 X 11 months) ...... Insurance Expense ..............................

1,760

Supplies ....................................................... Supplies Expense ................................

650

Service Revenue.......................................... Unearned Service Revenue .................

4,000

1,760 650 4,000

Prepaid Insurance 1/31 1,760

1/31

Supplies 650

Unearned Service Revenue 1/31 4,000

Insurance Expense 1/2 1,920 1/31 1,760 Bal. 160

Supplies Expense 1/10 1,700 1/31 650 Bal. 1,050

Service Revenue 1/31 4,000 1/15 6,100 Bal. 2,100

(c) Prepaid insurance...................................................................... Supplies ..................................................................................... Unearned service revenue ........................................................ Service revenue ......................................................................... Insurance expense .................................................................... Supplies expense ......................................................................

$1,760 650 4,000 2,100 160 1,050

3-27

*EXERCISE 3-18 (a) (b) (c) (d) (e) (f)

2 6 3 4 5 1

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

*EXERCISE 3-19 (a) This is a violation of the historical cost principle. The inventory was written up to its fair value when it should have remained at cost. (b) This is a violation of the economic entity assumption. The treatment of the transaction treats Austin Weber and Weber Co. as one entity when they are two separate entities. Salaries and Wages Expense should have been debited for the purchase of the truck. (c) This is a violation of the time period assumption. This assumption states that the economic life of a business can be divided into artificial time periods (months, quarters, or a year). By adding two more weeks to the year, Weber Co. would be misleading financial statement readers. In addition, 2017 results would not be comparable to previous years’ results. The company should use a 52 week year. *EXERCISE 3-20 1. Comparability 2. Going concern assumption 3. Materiality 4. Full disclosure principle 5. Time period assumption 6. Relevance 7. Historical cost principle 8. Consistency 9. Economic entity assumption 10. Faithful representation 11. Monetary unit assumption 12. Expense recognition principle 3-28

SOLUTIONS TO PROBLEMS PROBLEM 3-1A (a) J4 Date Account Titles 2017 May 31 Supplies Expense............................... Supplies .....................................

Ref.

Debit

631 126

900

Utilities Expense................................. Accounts Payable......................

732 201

250

Insurance Expense ............................. Prepaid Insurance ($3,600 ÷ 24 months) .............

722

150

31 Unearned Service Revenue ............... Service Revenue ($2,000 – $400) .......................

209

31 Salaries and Wages Expense ............ Salaries and Wages Payable [(3/5 X $920) X 2 employees]..........................

726

31 31

250

150 1,600

400

1,600 1,104

212 717

112 400

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

900

130

31 Depreciation Expense ........................ Accumulated Depreciation— Equipment..............................

Credit

1,104 190

150

190 1,700 1,700

(b) Cash

No. 101

Date Explanation 2017 May 31 Balance

3-30

Ref.

Debit

Credit

Balance

�

4,500

PROBLEM 3-1A (Continued) Accounts Receivable Date Explanation 2017 May 31 Balance 31 Adjusting

Ref. � J4

Debit

Credit

6,000 7,700

1,700

Supplies

No. 126

Date Explanation 2017 May 31 Balance 31 Adjusting

Ref.

Debit

Credit

Balance

900

1,900 1,000

� J4

Prepaid Insurance

No. 130

Date Explanation 2017 May 31 Balance 31 Adjusting

Ref.

Debit

Credit

Balance

150

3,600 3,450

� J4

Equipment Date 2017 May 31

No. 112 Balance

No. 149

Explanation

Ref.

Balance

�

11,400

Accumulated Depreciation—Equipment

No. 150

Date 2017 May 31

Explanation

Ref.

Adjusting

Debit

Credit

Balance

Credit

Balance

190

3-31

PROBLEM 3-1A (Continued) Accounts Payable Date Explanation 2017 May 31 Balance 31 Adjusting

Ref.

Debit

� J4

Credit

No. 201 Balance

250

4,500 4,750

Unearned Service Revenue

No. 209

Date Explanation 2017 May 31 Balance 31 Adjusting

Ref. � J4

Salaries and Wages Payable Date Explanation 2017 May 31 Adjusting

Ref.

Debit

Credit

Balance

1,600

2,000 400

Debit

Credit

No. 212 Balance

1,104

Owner’s Capital Date 2017 May 31

No. 301

Explanation

Ref.

Balance

�

Debit

Credit

Balance 18,700

Service Revenue Date 2017 May 31 31 31

No. 400

Explanation

Ref.

Balance Adjusting Adjusting

� J4 J4

Debit

Credit

Balance

1,600 1,700

9,500 11,100 12,800

Supplies Expense Date 2017 May 31

3-32

No. 631

Explanation

Ref.

Debit

Adjusting

900

Credit

Balance 900

PROBLEM 3-1A (Continued) Depreciation Expense Date 2017 May 31

No. 717

Explanation

Ref.

Debit

Adjusting

190

Credit

190

Insurance Expense

No. 722

Date Explanation 2017 May 31 Adjusting

Ref.

Debit

150

Credit

Date Explanation 2017 May 31 Balance 31 Adjusting

Balance 150

Salaries and Wages Expense

726 Ref. � J4

Debit

Credit

Balance 6,400 7,504

1,104

Rent Expense

No. 729

Date Explanation 2017 May 31 Balance

Ref.

Debit

Credit

�

Balance 900

Utilities Expense

No. 732

Date Explanation 2017 May 31 Adjusting

Balance

Ref.

Debit

250

Credit

Balance 250

3-33

PROBLEM 3-1A (Continued) (c)

KRAUSE CONSULTING Adjusted Trial Balance May 31, 2017 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Prepaid Insurance .............................................. Equipment ........................................................... Accumulated Depreciation— Equipment ....................................................... Accounts Payable............................................... Unearned Service Revenue ............................... Salaries and Wages Payable.............................. Owner’s Capital .................................................. Service Revenue................................................. Salaries and Wages Expense ............................ Rent Expense...................................................... Depreciation Expense ........................................ Insurance Expense ............................................. Utilities Expense................................................. Supplies Expense ...............................................

3-34

Debit $ 4,500 7,700 1,000 3,450 11,400

Credit

7,504 900 190 150 250 900 $37,944

190 4,750 400 1,104 18,700 12,800

$37,944

PROBLEM 3-2A

(a) Date May 31

31 31

Account Titles Insurance Expense.............................. Prepaid Insurance ($2,400 X 1/12).........................

Ref. 722

Supplies Expense ............................... Supplies ($2,080 – $750) ............

631 126

1,330

619

375

Depreciation Expense ($3,000 X 1/12) + ($1,500 X 1/12) ..... Accumulated Depreciation— Buildings................................. Accumulated Depreciation— Equipment...............................

Debit 200

130

J1 Credit

200

1,330

142

250

150

125

Interest Expense ................................. Interest Payable [($40,000 X 12%) X 1/12]...........

718

Unearned Rent Revenue ..................... Rent Revenue (2/3 X $3,300) .........................

208

Salaries and Wages Expense ............. Salaries and Wages Payable .....

726 212

400

230

400 2,200

429

2,200 750 750

(b) Cash Date Explanation May 31 Balance

Ref. �

Debit

Credit

No. 101 Balance 3,500

3-35

PROBLEM 3-2A (Continued) Supplies Date Explanation May 31 Balance 31 Adjusting

Ref. � J1

Debit

No. 126 Balance 2,080 750

Credit 1,330

Prepaid Insurance

No. 130

Date Explanation May 31 Balance 31 Adjusting

Ref. � J1

Land Date Explanation May 31 Balance

Ref. �

Buildings Date Explanation May 31 Balance

Ref. �

Accumulated Depreciation—Buildings Date Explanation Ref. May 31 Adjusting J1

Equipment Date Explanation May 31 Balance

Ref. �

Accumulated Depreciation—Equipment Date Explanation Ref. May 31 Adjusting J1

3-36

Debit

Credit

Balance 2,400 2,200

200

Debit

Credit

No. 140 Balance 12,000

Credit

No. 141 Balance 60,000

No. 142 Balance 250

Credit 250

No. 149 Balance 15,000

Credit

No. 150 Balance 125

Credit 125

PROBLEM 3-2A (Continued) Accounts Payable

No. 201

Date Explanation May 31 Balance

Ref. �

Debit

Credit

Unearned Rent Revenue Date Explanation May 31 Balance 31 Adjusting

No. 208 Ref. � J1

Debit

Credit

2,200

Salaries and Wages Payable Date Explanation May 31 Adjusting

Ref. J1

Mortgage Payable Date Explanation May 31 Balance

Ref. �

Owner’s Capital Date Explanation May 31 Balance

Ref. �

Debit

Credit 750

Balance 750

Credit 400

No. 230 Balance 400

Credit

No. 275 Balance 40,000

Credit

No. 301 Balance 41,380

Rent Revenue

No. 429

Date Explanation May 31 Balance 31 Adjusting

Balance 3,300 1,100

No. 212 Ref. J1

Interest Payable Date Explanation May 31 Adjusting

Balance 4,800

Ref. � J1

Debit

Credit 2,200

Balance 10,300 12,500

3-37

PROBLEM 3-2A (Continued) Advertising Expense Date May 31

No. 610

Explanation Balance

Ref. �

Debit

Credit

Balance 600

Depreciation Expense Date May 31

No. 619

Explanation Adjusting

Ref. J1

Debit 375

Credit

Balance 375

Supplies Expense Date May 31

No. 631

Explanation Adjusting

Ref. J1

Debit 1,330

Credit

Balance 1,330

Interest Expense Date May 31

No. 718

Explanation Adjusting

Ref. J1

Debit 400

Credit

Balance 400

Insurance Expense Date May 31

No. 722

Explanation Adjusting

Ref. J1

Debit 200

Credit

Balance 200

Salaries and Wages Expense

No. 726

Date Explanation May 31 Balance 31 Adjusting

Ref. � J1

Debit

Credit

Balance 3,300 4,050

750

Utilities Expense Date May 31

3-38

No. 732

Explanation Balance

Ref. �

Debit

Credit

Balance 900

PROBLEM 3-2A (Continued) MAC’S MOTEL Adjusted Trial Balance May 31, 2017

(c)

Cash ................................................................ Supplies .......................................................... Prepaid Insurance .......................................... Land ................................................................ Buildings......................................................... Accumulated Depreciation—Buildings......... Equipment....................................................... Accumulated Depreciation—Equipment ...... Accounts Payable .......................................... Unearned Rent Revenue ................................ Salaries and Wages Payable ......................... Interest Payable.............................................. Mortgage Payable........................................... Owner’s Capital .............................................. Rent Revenue ................................................. Advertising Expense ...................................... Depreciation Expense .................................... Supplies Expense........................................... Interest Expense............................................. Insurance Expense......................................... Salaries and Wages Expense ........................ Utilities Expense.............................................

Debit $ 3,500 750 2,200 12,000 60,000

Credit

250

15,000 125 4,800 1,100 750 400 40,000 41,380 12,500 600 375 1,330 400 200 4,050 900 $101,305

$101,305

3-39

PROBLEM 3-2A (Continued) MAC’S MOTEL Income Statement For the Month Ended May 31, 2017

(d)

Revenues Rent revenue .................................................. Expenses Salaries and wages expense ......................... Supplies expense ........................................... Utilities expense ............................................. Advertising expense ...................................... Interest expense ............................................. Depreciation expense .................................... Insurance expense ......................................... Total expenses........................................ Net income .............................................................

$12,500 $4,050 1,330 900 600 400 375 200 7,855 $ 4,645

MAC’S MOTEL Owner’s Equity Statement For the Month Ended May 31, 2017 Owner’s capital, May 1 ............................................................ Investment by owner ............................................................... Add: Net income .................................................................... Owner’s capital, May 31...........................................................

3-40

0 41,380 41,380 4,645 $46,025

PROBLEM 3-2A (Continued) MAC’S MOTEL Balance Sheet May 31, 2017 Assets Cash.................................................................... Supplies ............................................................. Prepaid insurance.............................................. Land.................................................................... Buildings ............................................................ Less: Accumulated depreciation— buildings ................................................. Equipment .......................................................... Less: Accumulated depreciation— equipment................................................ Total assets.........................................

$ 3,500 750 2,200 12,000 $60,000 250 15,000

59,750

125

14,875 $93,075

Liabilities and Owner’s Equity Liabilities Accounts payable ...................................... Unearned rent revenue .............................. Salaries and wages payable ...................... Interest payable.......................................... Mortgage payable....................................... Total liabilities..................................... Owner’s equity Owner’s capital........................................... Total liabilities and owner’s equity ......

$ 4,800 1,100 750 400 40,000 47,050 46,025 $93,075

3-41

PROBLEM 3-3A (a) Sept. 30 30 30 30 30 30 30

(b)

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

1,100

Rent Expense .......................................... Prepaid Rent ......................................

1,700

Supplies Expense ................................... Supplies .............................................

850

Depreciation Expense ............................. Accum. Depreciation—Equipment .....

700

Interest Expense ..................................... Interest Payable .................................

100

Unearned Rent Revenue ......................... Rent Revenue.....................................

1,450

Salaries and Wages Expense ................. Salaries and Wages Payable.............

725

1,700 850 700 100 1,450 725

ALENA CO. Income Statement For the Quarter Ended September 30, 2017 Revenues Service revenue.................................................. Rent revenue ...................................................... Total revenues ............................................ Expenses Salaries and wages expense ............................. Rent expense ...................................................... Utilities expense ................................................. Supplies expense ............................................... Depreciation expense ........................................ Interest expense ................................................. Total expenses............................................ Net income .................................................................

3-42

1,100

$17,100 2,860 $19,960 8,725 3,600 1,510 850 700 100 15,485 $ 4,475

PROBLEM 3-3A (Continued) ALENA CO. Owner’s Equity Statement For the Quarter Ended September 30, 2017 Owner’s capital, July 1, 2017 ............................... Investment by owner ............................................ Add: Net income .................................................

$ $22,000 4,475

Less: Drawings .................................................... Owner’s capital, September 30, 2017 ..................

26,475 26,475 1,600 $24,875

ALENA CO. Balance Sheet September 30, 2017 Assets Cash....................................................................... Accounts receivable ............................................. Supplies ................................................................ Prepaid rent........................................................... Equipment ............................................................. Less: Accum. depreciation—equipment ............ Total assets............................................

$ 8,700 11,500 650 500 $18,000 700

17,300 $38,650

Liabilities and Owner’s Equity Liabilities Notes payable................................................ Accounts payable ......................................... Salaries and wages payable ......................... Unearned rent revenue ................................. Interest payable............................................. Total liabilities........................................ Owner’s equity Owner’s capital.............................................. Total liabilities and owner’s equity ......

$10,000 2,500 725 450 100 13,775 24,875 $38,650

(c) Interest of 12% per year equals a monthly rate of 1%; monthly interest is $100 ($10,000 X 1%). Since total interest expense is $100, the note has been outstanding one month.

3-43

PROBLEM 3-4A

Dec. 31

Insurance Expense ....................................... Prepaid Insurance ................................. ($7,920 ÷ 3) = $2,640 ($4,500 ÷ 2) = 2,250 $4,890

4,890 4,890

Dec. 31

Unearned Rent Revenue ..................................84,000 Rent Revenue ........................................ 84,000 Nov. 5 X $5,000 X 2 = $50,000 Dec. 4 X $8,500 X 1 = 34,000 $84,000

Dec. 31

Interest Expense ........................................... Interest Payable ($120,000 X 9% X 2/12) ......................

1,800

Salaries and Wages Expense ...................... Salaries and Wages Payable ................ 5 X $700 X 2/5 = $1,400 3 X $500 X 2/5 = 600 $2,000

2,000

3-44

Dec. 31

1,800 2,000

PROBLEM 3-5A

(a), (c) & (e) Cash Date Nov.

No. 101 1 8 10 12 20 22 25 29

Explanation Balance

Ref. � J1 J1 J1 J1 J1 J1 J1

Debit

Credit 1,700

3,620 3,100 2,700 400 1,700 600

Accounts Receivable Date Nov.

1 10 27

No. 112

Explanation Balance

Ref. � J1 J1

Supplies Date Explanation Nov. 1 Balance 17 30 Adjusting

Ref. � J1 J1

Debit

Credit 3,620

2,200

Debit

Credit

700 1,100

Equipment Date Nov.

1 15

Balance 2,400 700 4,320 7,420 4,720 4,320 2,620 3,220

Balance 4,250 630 2,830

No. 126 Balance 1,800 2,500 1,400

No. 153

Explanation Balance

Ref. � J1

Debit

Credit

2,000

Balance 12,000 14,000

3-45

PROBLEM 3-5A (Continued) Accumulated Depreciation—Equipment Date Nov.

1 30

Explanation Balance Adjusting

Ref. � J1

No. 154 Debit

Credit

Balance 2,000 2,200

200

Accounts Payable Date Nov.

1 15 17 20

No. 201

Explanation Balance

Ref. � J1 J1 J1

Debit

Credit

Balance 2,600 4,600 5,300 2,600

2,000 700 2,700

Unearned Service Revenue Date Nov.

1 29 30

No. 209

Explanation Balance

Ref. � J1 J1

Adjusting

Debit

Credit

Balance 1,200 1,800 580

600 1,220

Salaries and Wages Payable Date Nov.

1 8 30

No. 212

Explanation Balance

Ref. � J1 J1

Adjusting

Debit

Credit

Balance 700 0 350

700 350

Owner’s Capital Date Nov.

3-46

No. 301

Explanation Balance

Ref. �

Debit

Credit

Balance 13,950

PROBLEM 3-5A (Continued) Service Revenue Date Nov. 12 27 30

No. 407

Explanation

Ref. J1 J1 J1

Adjusting

Debit

Credit 3,100 2,200 1,220

Depreciation Expense Date Nov. 30

No. 615

Explanation Adjusting

Ref. J1

Debit 200

Credit

Supplies Expense Date Nov. 30

Explanation Adjusting

Ref. J1

Explanation 8 25 30

Debit 1,100

Credit

Ref. J1 J1 J1

Adjusting

Balance 1,100

No. 726 Debit 1,000 1,700 350

Credit

Rent Expense

Balance 1,000 2,700 3,050

No. 729

Date Explanation Nov. 22

Balance 200

No. 631

Salaries and Wages Expense Date Nov.

Balance 3,100 5,300 6,520

Ref. J1

Debit 400

Credit

Balance 400

3-47

PROBLEM 3-5A (Continued) (b)

General Journal J1

Date Nov.

10 12 15 17 20 22 25 27 29

3-48

Account Titles and Explanation Salaries and Wages Payable .............. Salaries and Wages Expense............. Cash .............................................

Ref. 212 726 101

Debit 700 1,000

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

101 112

3,620

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

101 407

3,100

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

153 201

2,000

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

126 201

700

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

201 101

2,700

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

729 101

400

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

726 101

1,700

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

112 407

2,200

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

101 209

600

Credit

1,700 3,620 3,100 2,000 700 2,700 400 1,700 2,200 600

PROBLEM 3-5A (Continued) (d) & (f)

HAMM EQUIPMENT REPAIR Trial Balances November 30, 2017

Cash ........................................... Accounts Receivable ................ Supplies ..................................... Equipment.................................. Accumulated Depreciation— Equipment............................... Accounts Payable ..................... Unearned Service Revenue ...... Salaries and Wages Payable .... Owner’s Capital ......................... Service Revenue........................ Depreciation Expense ............... Supplies Expense...................... Salaries and Wages Expense ... Rent Expense ............................

(e) 1. Nov. 30 2.

Before Adjustment Dr. Cr. $ 3,220 2,830 2,500 14,000

After Adjustment Dr. Cr. $ 3,220 2,830 1,400 14,000

$ 2,000 2,600 1,800 –0– 13,950 5,300

$ 2,200 2,600 580 350 13,950 6,520

200 1,100 2,700 3,050 400 400 $25,650 $25,650 $26,200

$26,200

Supplies Expense ........................ Supplies ($2,500 – $1,400) .....

631 126

1,100

Salaries and Wages Expense ...... Salaries and Wages Payable ................................

726

350

Depreciation Expense .................. Accumulated Depreciation— Equipment ..........................

615

Unearned Service Revenue ......... Service Revenue ....................

209 407

1,100

212

350 200

154

200 1,220 1,220

3-49

PROBLEM 3-5A (Continued) (g)

HAMM EQUIPMENT REPAIR Income Statement For the Month Ended November 30, 2017 Revenues Service revenue.............................................. Expenses Salaries and wages expense ......................... Supplies expense ........................................... Rent expense .................................................. Depreciation expense .................................... Total expenses........................................ Net Income .............................................................

$6,520 $3,050 1,100 400 200 4,750 $1,770

HAMM EQUIPMENT REPAIR Owner’s Equity Statement For the Month Ended November 30, 2017 Owner’s capital, November 1 .................................................. Plus: Net income.................................................................... Owner’s capital, November 30 ................................................

3-50

$13,950 1,770 $15,720

PROBLEM 3-5A (Continued) HAMM EQUIPMENT REPAIR Balance Sheet November 30, 2017 Assets Cash....................................................................... Accounts receivable ............................................. Supplies ................................................................ Equipment ............................................................. Less: Accumulated depreciation— equipment .................................................. Total assets ...................................................

$ 3,220 2,830 1,400 $14,000 2,200

11,800 $19,250

Liabilities and Owner’s Equity Liabilities Accounts payable ............................................................ Unearned service revenue............................................... Salaries and wages payable ............................................ Total liabilities........................................................... Owner’s equity Owner’s capital................................................................. Total liabilities and owner’s equity .................................

$ 2,600 580 350 3,530 15,720 $19,250

3-51

*PROBLEM 3-6A

(a) 1. 2.

4. 5. 6.

3-52

June 30 30

30 30 30

Supplies ................................................ Supplies Expense .........................

1,500 1,500

Interest Expense ($20,000 X 9% X 5/12) ....................... Interest Payable ............................

750

Prepaid Insurance [($2,700 ÷ 12) X 8].............................. Insurance Expense .......................

1,800

750

1,800

Service Revenue ................................... Unearned Service Revenue............

1,300

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

2,000

Depreciation Expense ($2,250 ÷ 2) ........................................ Accumulated Depreciation— Equipment .................................

1,300 2,000 1,125 1,125

*PROBLEM 3-6A (Continued) (b)

JOHNSON GRAPHICS COMPANY Adjusted Trial Balance June 30, 2017 Cash ................................................................ Accounts Receivable ($14,000 + $2,000) ...... Supplies .......................................................... Prepaid Insurance .......................................... Equipment....................................................... Accumulated Depreciation—Equipment ...... Notes Payable................................................. Accounts Payable .......................................... Interest Payable.............................................. Unearned Service Revenue ........................... Owner’s Capital .............................................. Sales Revenue ................................................ Service Revenue ($6,000 – $1,300 + $2,000) . Salaries and Wages Expense ........................ Supplies Expense ($3,700 – $1,500).............. Advertising Expense ...................................... Rent Expense ................................................. Utilities Expense............................................. Depreciation Expense .................................... Insurance Expense ($2,700 – $1,800)............ Interest Expense.............................................

Debit $ 8,600 16,000 1,500 1,800 45,000

Credit

30,000 2,200 1,900 1,500 1,700 1,125 900 750 $112,975

1,125 20,000 9,000 750 1,300 22,000 52,100 6,700

$112,975

3-53

*PROBLEM 3-6A (Continued) (c)

JOHNSON GRAPHICS COMPANY Income Statement For the Six Months Ended June 30, 2017 Revenues Sales revenue ................................................ Service revenue............................................. Total revenues ....................................... Expenses Salaries and wages expense ........................ Supplies expense .......................................... Advertising expense ..................................... Utilities expense ............................................ Rent expense ................................................. Depreciation expense ................................... Insurance expense ........................................ Interest expense ............................................ Total expenses....................................... Net income ............................................................

$52,100 6,700 $58,800 30,000 2,200 1,900 1,700 1,500 1,125 900 750 40,075 $18,725

JOHNSON GRAPHICS COMPANY Owner’s Equity Statement For the Six Months Ended June 30, 2017 Owner’s capital, January 1 ...................................................... Investment by owner ............................................................... Add: Net income ..................................................................... Owner’s capital, June 30 .........................................................

3-54

0 22,000 22,000 18,725 $40,725

*PROBLEM 3-6A (Continued) JOHNSON GRAPHICS COMPANY Balance Sheet June 30, 2017 Assets Cash....................................................................... Accounts receivable ............................................. Supplies ................................................................ Prepaid insurance................................................. Equipment ............................................................. Less: Accumulated depreciation— equipment .................................................. Total assets............................................

$ 8,600 16,000 1,500 1,800 $45,000 1,125

43,875 $71,775

Liabilities and Owner’s Equity Liabilities Notes payable................................................ Accounts payable ......................................... Unearned service revenue............................ Interest payable............................................. Total liabilities........................................ Owner’s equity Owner’s capital.............................................. Total liabilities and owner’s equity ........

$20,000 9,000 1,300 750 31,050 40,725 $71,775

3-55

CCC3

CONTINUING COOKIE CHRONICLE

(a) GENERAL JOURNAL Account Titles and Explanation

Date

Debit

Nov. 30 Supplies Expense ............................................ Supplies .......................................................

30 Depreciation Expense ..................................... Accumulated Depreciation—Equipment [($300 + $900) ÷ 60 months] ...................

30 Interest Expense .............................................. Interest Payable ($2,000 X .06 X 1/12 X .5)..........................

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

300

30 Utilities Expense .............................................. Accounts Payable .......................................

3-56

J2 Credit

300 45

CCC3 (Continued) (a) (Continued)

Date

Cash Ref.

Explanation

Accounts Receivable Ref. Debit

Explanation

Date

Supplies Ref. Debit

Explanation

Nov. 30 Balance 30

Explanation

Date

Explanation

Credit

Balance

 J2

125 90

Prepaid Insurance Ref. Debit

Credit

Balance 1,320

Credit

Balance 1,200

Accumulated Depreciation—Equipment Explanation Ref. Debit Credit 

Balance 300



Nov. 30

300

Equipment Ref. Debit

Nov. 30 Balance

Date

Credit



Nov. 30 Balance

Balance 245

Nov. 30

Date

Credit



Nov. 30 Balance

Date

Debit

Balance 20

3-57

CCC3 (Continued) (a) (Continued)

Date

Explanation

Accounts Payable Ref. Debit

Nov. 30

Date

Explanation

Interest Payable Ref. Debit

Nov. 30

Unearned Service Revenue Explanation Ref. Debit

Date

Explanation

Notes Payable Ref. Debit

Explanation

Owner’s Capital Ref. Debit

Explanation

Service Revenue Ref. Debit  J2

Nov. 30 Balance 30 3-58

Credit

Balance

Credit

Balance 30

Credit

Balance 2,000

Credit

Balance



Nov. 30 Balance

Date



Nov. 30 Balance

Date

Balance



Nov. 30 Balance

Date

Credit

800

Credit

Balance

300

125 425 .

CCC3 (Continued) (a) (Continued)

Date

Utilities Expense Ref. Debit

Explanation

Nov. 30

Date

Nov. 30

Date

Explanation

Nov. 30

Date

Nov. 30

Date

Explanation

Nov. 30

Credit

Balance 35

Credit

Interest Expense Ref. Debit

Balance 65

Depreciation Expense Ref. Debit

Explanation

Credit

Supplies Expense Ref. Debit

Balance 45

Advertising Expense Ref. Debit

Explanation

Credit

Balance 20

Credit

Balance 5

3-59

CCC3 (Continued) (b) COOKIE CREATIONS Adjusted Trial Balance November 30, 2016 Account Cash .............................................................................. Accounts Receivable ................................................... Supplies ........................................................................ Prepaid Insurance ........................................................ Equipment..................................................................... Accumulated Depreciation—Equipment .................... Accounts Payable ........................................................ Interest Payable............................................................ Unearned Service Revenue ......................................... Notes Payable............................................................... Owner’s Capital ............................................................ Service Revenue .......................................................... Utilities Expense .......................................................... Advertising Expense .................................................... Supplies Expense......................................................... Depreciation Expense .................................................. Interest Expense .......................................................... Totals ...............................................................

3-60

Debit $ 245 300 90 1,320 1,200

Credit

20 45 5 30 2,000 800 425

45 65 35 20 5 $3,325

$3,325

CCC3 (Continued) (c) Revenues Service revenue ............................................................ Expenses Advertising expense..................................................... Utilities expense ........................................................... Supplies expense ......................................................... Depreciation expense................................................... Interest expense ........................................................... Net income...........................................................................

$425 $65 45 35 20 5

170 $255

Yes, Cookie Creations has been profitable in November. It has a profit of $255 which is more than one half of the revenue earned in November. [Note: Owner’s Equity Statement is not required—shown for information purposes only.] COOKIE CREATIONS Owner’s Equity Statement For the Month Ended November 30, 2016 Owner’s Capital, November 1, 2016 .................................... Add: Investment .................................................................. Net income .................................................................. Owner’s Capital, November 30, 2016 ..................................

0 800 255 $1,055

3-61

CCC3 (Continued) (c) (Continued) [Note: Balance Sheet is not required—shown for information purposes only.] COOKIE CREATIONS Balance Sheet November 30, 2016 Assets Cash ................................................................................ Accounts receivable....................................................... Supplies .......................................................................... Prepaid insurance .......................................................... Equipment....................................................................... Less: Accumulated depreciation—equipment ............ Total assets ................................................................

$ 245 300 90 1,320 $1,200 20

1,180 $3,135

Liabilities and Owner’s Equity Liabilities Notes payable ............................................................ Accounts payable ...................................................... Unearned service revenue ........................................ Interest payable.......................................................... Total liabilities ....................................................... Owner’s equity Owner’s capital .......................................................... Total liabilities and owner’s equity ......................

3-62

$2,000 45 30 5 2,080 1,055 $3,135

BYP 3-1

FINANCIAL REPORTING PROBLEM

(a) Items that may result in adjusting entries for prepayments are: 1. Other current assets (per balance sheet). 2. Property, plant and equipment, net (per balance sheet). 3. Acquired intangible assets, net (per balance sheet)—amortization is similar to depreciation (explained later in Chapter 10). (b) Accrual adjusting entries were probably made for accounts payable, accrued expenses, and income taxes payable. (c) Apple’s net income increased substantially since 2010. Its net income increased by $11,909 million from 2010 to 2011, and by $15,811 million from 2011 to 2012. However, from 2012 to 2013, it income dropped by $4,696 million. Apple’s net income almost decreased from 2010 to 2012 and dropped 11% from 2012 to 2013.

3-63

BYP 3-2

COMPARATIVE ANALYSIS PROBLEM

PepsiCo

Coca-Cola

(a)

Net increase (decrease) in property, plant, and equipment (net) from 2012 to 2013.

$(561,000,000)

$31,000,000

(b)

Increase (decrease) in selling, general, and administrative expenses from 2012 to 2013.

$387,000,000

($32,000,000)

(c)

Increase (decrease) in long-term debt (obligations) from 2012 to 2013.

$789,000,000

$861,000,000

(d)

Increase (decrease) in net income from 2012 to 2013.

$562,000,000

$(10,000,000)

(e)

Increase (decrease) in cash and cash equivalents from 2012 to 2013.

$(378,000,000)

3-64

3,078,000

BYP 3-3

COMPARATIVE ANALYSIS PROBLEM

1. Amazon

Wal-mart

(a)

Increase (decrease) in interest expense, from 2012 to 2013.

$49,000,000

$(96,000,000)

(b)

Increase (decrease) in net income from 2012 to 2013.

$313,000,000

$1,369,000,000

(c)

Increase (decrease) in cash from operations from 2012 to 2013.

$1,295,000,000

$1,336,000,000

2. Cash flow from operations is the difference between cash receipts from revenues and cash payments for expenses (see chapter 1). Depreciation expense is a major reason why cash flow from operations and net income are different for these two companies. Depreciation expense reduces a company’s net income, but does not affect cash flow from operations since it’s a noncash expense. Other reasons would include changes in accounts receivable, inventory, and accounts payable.

3-65

BYP 3-4

REAL–WORLD FOCUS

Answers will vary depending on the company and article chosen by the student.

3-66

BYP 3-5

(a)

DECISION MAKING ACROSS THE ORGANIZATION

HAPPY CAMPER PARK Income Statement For the Quarter Ended March 31, 2017 Revenues Rent revenue ($90,000 – $15,000) ................ Expenses Salaries and wages expense [$29,800 + ($300 X 2)] ................................. Advertising expense ($5,200 + $110) ........... Supplies expense ($6,200 – $1,700) ............. Maintenance and repairs expense ($4,000 + $260)............................................ Insurance expense ($7,200 X 3/12) .............. Utilities expense ($900 + $180)..................... Depreciation expense ................................... Interest expense ($12,000 X 10% X 3/12) ........ Total expenses....................................... Net income ............................................................

$75,000 $30,400 5,310 4,500 4,260 1,800 1,080 800 300 48,450 $26,550

(b) The generally accepted accounting principles pertaining to the income statement that were not recognized by Erica were the revenue recognition principle and the expense recognition principle. The revenue recognition principle states that revenue is recognized when the performance obligation is satisfied. The $15,000 for summer rentals has not been performed and, therefore, should not be reported in income for the quarter ended March 31. The expense recognition principle dictates that efforts (expenses) be matched with accomplishments (revenues) whenever it is reasonable and practicable to do so. This means that the expenses should include amounts incurred in March but not paid until April. The difference in expenses was $7,750 ($48,450 – $40,700). The overstatement of revenues ($15,000) plus the understatement of expenses ($7,750) equals the difference in reported income of $22,750 ($49,300 – $26,550).

3-67

BYP 3-6

COMMUNICATION ACTIVITY

Dear Ms. Taylor: Upon reviewing the accounts of your company at the end of the year, I discovered that adjusting entries were not made. Adjusting entries are made at the end of the accounting period to ensure that the revenue recognition and expense recognition principles required under generally accepted accounting principles are followed. The use of adjusting entries makes it possible to report on the balance sheet the appropriate assets, liabilities, and owner’s equity at the statement date and to report on the income statement the proper net income (or loss) for the year. Adjusting entries are needed because the trial balance may not contain an up-to-date and complete record of transactions and events for the following reasons: 1.

Some events are not journalized daily because it is not efficient to do so. Examples are the use of supplies and the earning of wages by employees.

The expiration of some costs is not journalized during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions. Examples of such costs are building and equipment depreciation, rent, and insurance.

Some expenses, such as the cost of utility service and property taxes, may be unrecorded because the bills for the costs have not been received.

There are four types of adjusting entries:

3-68

Prepaid expenses—expenses paid in cash and recorded as assets before they are used or consumed.

Unearned revenues—revenues received in cash and recorded as liabilities before they are earned.

BYP 3-6 (Continued) 3.

Accrued revenues—revenues earned but not yet received in cash or recorded.

Accrued expenses—expenses incurred but not yet paid in cash or recorded.

I will be happy to answer any questions you may have on adjusting entries. Signature

3-69

BYP 3-7

ETHICS CASE

(a) The stakeholders in this situation are: � � �

Zoe Baas, controller. The president of Russell Company. Russell Company stockholders.

(b) 1.

It is unethical for the president to place pressure on Zoe to misstate net income by requesting her to prepare incorrect adjusting entries.

2. It is customary for adjusting entries to be dated as of the balance sheet date although the entries are prepared at a later date. Zoe did nothing unethical by dating the adjusting entries December 31. (c) Zoe 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).

3-70

BYP 3-8

ALL ABOUT YOU

We address the issue of contingent liabilities in greater detail in Chapter 11. Our primary interest in this exercise is to engage students in a discussion regarding the general nature of the financial statement elements (assets, liabilities, equity, revenues and expenses). (a)

By taking out the bank loan your friend has incurred a liability. You do not have a liability unless your friend defaults, or unless it becomes clear that he will default. The loan application may, however, require you to disclose any guarantees that you have signed, since they represent potential liabilities.

(b) Accounting standards have specific requirements regarding accounting for situations where there is uncertainty regarding whether a liability has been incurred. Those standards require an evaluation of the probability of an amount being owed. Without going into detail regarding those standards, the basic idea is that if it is probable that you will owe money, then you should accrue a liability. If it is not probable, but it is possible that you will owe money, then you should disclose facts regarding the situation. The most important point is that this event has the potential to materially impact your finances, and therefore you have a responsibility to disclose it to the bank in some form. (c)

Losing your job would not create a financial liability, although it would most certainly reduce your revenues. You are obviously concerned that you might lose your job, but you don’t have specific information that would suggest that it will happen. Therefore, you probably don’t have an obligation to disclose this information to the bank. However, unless you are relatively certain that you would be able to find suitable employment relatively quickly, you might want to wait until your job situation has stabilized before pursuing a loan of this size.

3-71

BYP 3-9

CONSIDERING PEOPLE, PLANET, AND PROFIT

The balance sheet should provide a fair representation of what a company owns and what it owes. If significant obligations of the company are not reported on the balance sheet, the company’s net worth (its equity) will be overstated. While it is true that it is not possible to estimate the exact amount of future environmental cleanup costs, it is becoming clear that companies will be held accountable. Therefore, it doesn’t seem reasonable to not accrue for environmental costs. Recognition of these liabilities provides a more accurate picture of the company’s financial position. It also has the potential to improve the environment. As companies are forced to report these amounts on their financial statements they will start to look for more effective and efficient means to reduce toxic waste, and therefore reduce their costs.

3-72

BYP 3-10

(a)

FASB CODIFICATION ACTIVITY

Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

(b) Compensation is reciprocal transfers of cash or other assets in exchange for services performed.

3-73

IFRS 3-1

INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) Note 3.7 indicates that revenue is measured as the fair value of consideration received or receivable by the Group for goods supplied net of sales rebates and excluding VAT and trade discounts. (b) Note 3.7 states that revenue from the sale of goods is recognized when the Group has transferred to the buyer the significant risks and rewards of ownership of the goods. (c) Louis Vuitton could have adjustments for prepayments such as: Depreciation expense, Amortisation of intangible assets, and Deferred tax assets. (d) Louis Vuitton could have adjustments for accruals such as: Finance costs (interest expense), Tax liabilities, and Trade and other payables.

3-74

CHAPTER 4 Completing the Accounting Cycle ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Questions

Brief Exercises

Do It!

Exercises

A Problems

Prepare a worksheet.

1, 2, 3, 4, 5

1, 2, 3

1, 2, 3, 5, 6

1A, 2A, 3A, 4A, 5A

Prepare closing entries and a post-closing trial balance.

6, 7, 8, 9, 11

4, 5, 6, 7

4, 7, 8, 11, 19

1A, 2A, 3A, 4A, 5A

Explain the steps in the accounting cycle and how to prepare correcting entries.

10, 11, 12, 13

8, 9

10, 12, 13, 19

Identify the sections of a classified balance sheet.

14, 15, 16, 17, 10, 11 18, 19

3, 9, 14, 15, 16, 17

1A, 2A, 3A, 4A, 5A

*5.

Prepare reversing entries.

10, 20, 21

18, 19

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the chapter.

4-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare worksheet, financial statements, and adjusting and closing entries.

Simple

40–50

Complete worksheet; prepare financial statements, closing entries, and post-closing trial balance.

Moderate

50–60

Prepare financial statements, closing entries, and postclosing trial balance.

Moderate

40–50

Complete worksheet; prepare classified balance sheet, entries, and post-closing trial balance.

Moderate

50–60

Complete all steps in accounting cycle.

Complex

70–90

Analyze errors and prepare correcting entries and trial balance.

Moderate

40–50

Comprehensive Problem: Chapters 2 to 4

4-2

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 4 COMPLETING THE ACCOUNTING CYCLE Number

Difficulty

Time (min.)

BE1

Simple

2–4

BE2

Moderate

6–8

BE3

Simple

3–5

BE4

Simple

3–5

BE5

Simple

4–6

BE6

Simple

6–8

BE7

Simple

2–4

BE8

Simple

3–5

BE9

Moderate

4–6

BE10

Simple

4–6

BE11

Simple

3–5

BE12

Moderate

4–6

DI1

Simple

4–6

DI2

Simple

2–4

DI3

Simple

6–8

DI4

Simple

4–6

EX1

Simple

12–15

EX2

Simple

10–12

EX3

1, 4

Simple

12–15

EX4

Simple

12–15

EX5

Simple

10–12

EX6

Moderate

12–15

EX7

Simple

8–10

EX8

Simple

10–12

EX9

Simple

12–15

EX10

Simple

3–5

EX11

Simple

6–8

EX12

Moderate

8–10

EX13

Moderate

4–6

EX14

Moderate

10–12

EX15

Simple

5–8

EX16

Simple

8–10

4-3

COMPLETING THE ACCOUNTING CYCLE (Continued) Number

Difficulty

Time (min.)

EX17

Simple

12–15

EX18

Moderate

5–7

EX19

2, 5

Moderate

10–12

P1A

1, 2, 4

Simple

40–50

P2A

1, 2, 4

Moderate

50–60

P3A

1, 2, 4

Moderate

40–50

P4A

1, 2, 4

Moderate

50–60

P5A

1, 2, 4

Complex

70–90

P6A

Moderate

40–50

BYP1

Simple

10–12

BYP2

Simple

8–10

BYP3

Simple

8–10

BYP4

—

Simple

10–12

BYP5

Moderate

15–20

BYP6

Simple

15–20

BYP7

—

Moderate

10–15

BYP8

Moderate

12–16

BYP9

—

Moderate

10–15

4-4

Learning Objective

Knowledge

Comprehension

BE4-1

Q4-1 Q4-2 Q4-3 Q4-4 Q4-5

2. Prepare closing entries and a post-closing trial balance.

Q4-6 Q4-11

3. Explain the steps in the accounting cycle and how to prepare correcting entries. 4. Identify the sections of a classified balance sheet.

BE4-3 DI4-1

Analysis

E4-1 E4-2 E4-3

P4-2A P4-3A

BE4-2 E4-5 E4-6

Q4-7 Q4-8 Q4-9 BE4-7

BE4-4 BE4-5 BE4-6 DI4-2 E4-4

E4-7 E4-8 E4-11 P4-2A P4-3A

E4-19 P4-1A P4-4A P4-5A

Q4-11 Q4-12 BE4-8

Q4-10 Q4-13 E4-10

DI4-3

Q4-14 Q4-15 Q4-16 Q4-18

Q4-17 Q4-19 BE4-11 DI4-4 E4-15

BE4-10 E4-3 E4-9 E4-14

Synthesis

Evaluation

P4-1A P4-4A P4-5A

1. Prepare a worksheet.

Application

*5. Prepare reversing entries.

Q4-10 Q4-20

Broadening Your Perspective

Communication

BE4-9 E4-12 E4-13

P4-5A P4-6A

E4-16 P4-1A E4-17 P4-4A P4-2A P4-5A P4-3A Q4-21 BE4-12

E4-18 E4-19

All About You Financial Reporting FASB Codification Comparative Analysis Decision Making Across the Organization

Real-World Focus Ethics Case

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

4-5

ANSWERS TO QUESTIONS 1.

No. A worksheet is not a permanent accounting record. The use of a worksheet is an optional step in the accounting cycle.

The worksheet is merely a device used to make it easier to prepare adjusting entries and the financial statements.

The amount shown in the adjusted trial balance column for an account equals the account balance in the ledger after adjusting entries have been journalized and posted.

The net income of $12,000 will appear in the income statement debit column and the balance sheet credit column. A net loss will appear in the income statement credit column and the balance sheet debit column.

Formal financial statements are needed because the columnar data are not properly arranged and classified for statement purposes. For example, a drawing account is listed with assets. 6.

(1) (Dr) Individual revenue accounts and (Cr) Income Summary. (2) (Dr) Income Summary and (Cr) Individual expense accounts. (3) (Dr) Income Summary and (Cr) Owner’s Capital (for net income). (4) (Dr) Owner’s Capital and (Cr) Owner’s Drawings.

Income Summary is a temporary account that is used in the closing process. The account is debited for expenses and credited for revenues. The difference, either net income or net loss, is then closed to the owner’s capital account.

The post-closing trial balance contains only balance sheet accounts. Its purpose is to prove the equality of the permanent account balances that are carried forward into the next accounting period.

The accounts that will not appear in the post-closing trial balance are Depreciation Expense; Owner’s Drawing; and Service Revenue.

10.

A reversing entry is the exact opposite, both in amount and in account titles, of an adjusting entry and is made at the beginning of the new accounting period. Reversing entries are an optional step in the accounting cycle.

11.

The steps that involve journalizing are: (1) journalize the transactions, (2) journalize the adjusting entries, and (3) journalize the closing entries.

12.

The three trial balances are the: (1) trial balance, (2) adjusted trial balance, and (3) post-closing trial balance.

13.

Correcting entries differ from adjusting entries because they: (1) are not a required part of the accounting cycle, (2) may be made at any time, and (3) may affect any combination of accounts.

4-6

Questions Chapter 4 (Continued) 14. The standard classifications in a balance sheet are: Assets Current Assets Long-term Investments Property, Plant, and Equipment Intangible Assets

Liabilities and Owner’s Equity Current Liabilities Long-term Liabilities Owner’s Equity

15. The operating cycle of a company is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers. 16. Current assets are assets that a company expects to convert to cash or use up in one year. Some companies use a period longer than one year to classify assets and liabilities as current because they have an operating cycle longer than one year. Companies usually list current assets in the order in which they expect to convert them into cash. 17. Long-term investments are generally investments in stocks and bonds of other companies that are normally held for many years. Property, plant, and equipment are assets with relatively long useful lives that a company is currently using in operating the business. 18. (a) The owner’s equity section for a corporation is called stockholders’ equity. (b) The two accounts and the purpose of each are: (1) Common stock is used to record investments of assets in the business by the owners (stockholders). (2) Retained earnings is used to record net income retained in the business. 19. Apple’s current liabilities at September 28, 2013 and September 29, 2012 were $43,658 million and $38,542 million respectively. Apple’s current liabilities were significantly lower than its current assets in both years. *20. After reversing entries have been made, the balances will be Interest Payable, zero balance; Interest Expense, a credit balance. *21. (a) Jan. 10 Salaries and Wages Expense ................................................... Cash ................................................................................

8,000 8,000

Because of the January 1 reversing entry that credited Salaries and Wages Expense for $3,500, Salaries and Wages Expense will have a debit balance of $4,500 which equals the expense for the current period. (b) Jan. 10 Salaries and Wages Payable .................................................... Salaries and Wages Expense ................................................... Cash ................................................................................

3,500 4,500 8,000

Note that Salaries and Wages Expense will again have a debit balance of $4,500.

Weygandt, Accounting Principles, 11/e, Solutions Manual

4-7

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 4-1 The steps in using a worksheet are performed in the following sequence: (1) prepare a trial balance on the worksheet, (2) enter adjustment data, (3) enter adjusted balances, (4) extend adjusted balances to appropriate statement columns and (5) total the statement columns, compute net income (loss), and complete the worksheet. Filling in the blanks, the answers are 1, 3, 4, 5, 2. The solution to BRIEF EXERCISE 4-2 is on page 4-7. BRIEF EXERCISE 4-3 Income Statement Dr. Cr.

Account Accumulated Depreciation Depreciation Expense Owner’s Capital Owner’s Drawings Service Revenue Supplies Accounts Payable

Balance Sheet Dr. Cr. X

X X X X X X

BRIEF EXERCISE 4-4 Dec. 31 31

31 31

4-8

Service Revenue ............................................. Income Summary ....................................

50,000

Income Summary ............................................ Salaries and Wages Expense ................. Supplies Expense....................................

36,000

Income Summary ............................................ Owner’s Capital .......................................

14,000

Owner’s Capital ............................................... Owner’s Drawings ...................................

2,000

50,000 29,000 7,000 14,000 2,000 .

BRIEF EXERCISE 4-2

LENTZ COMPANY Worksheet

Account Titles Prepaid Insurance Service Revenue Salaries and Wages Expense Accounts Receivable Salaries and Wages Payable Insurance Expense

Trial Balance

Adjustments

Dr. 3,000

Dr.

Cr. 58,000

25,000

Cr. (a) 1,800 (b) 1,100

Income Statement

Dr. 1,200

Dr.

Cr. 59,100

25,800 1,100 (c)

(a) 1,800

Adjusted Trial Balance

800

Dr. 1,200

Cr.

59,100 25,800 1,100

800 1,800

Cr.

Balance Sheet

800 1,800

4-9

BRIEF EXERCISE 4-5 Salaries and Wages Expense Bal. 29,000 (2) 29,000

Supplies Expense Bal. 7,000 (2) 7,000

Income Summary (2) 36,000 (1) 50,000 (3) 14,000 50,000 50,000

Service Revenue (1) 50,000 Bal. 50,000

Owner’s Capital (4) 2,000 Bal. 30,000 (3) 14,000 Bal. 42,000

Owner’s Drawings Bal. 2,000 (4) 2,000

BRIEF EXERCISE 4-6 July 31 31

Service Revenue .............................................. Income Summary .....................................

16,400

Income Summary ............................................. Salaries and Wages Expense .................. Maintenance and Repairs Expense .........

10,900

16,400 8,400 2,500

Service Revenue Date 7/31 7/31

Explanation Balance Closing entry

Ref.

Debit

Credit 16,400

Balance 16,400 0

Credit

Balance 8,400 0

16,400

Salaries and Wages Expense Date 7/31 7/31

4-10

Explanation Balance Closing entry

Ref.

Debit 8,400

8,400

BRIEF EXERCISE 4-6 (Continued)

Date 7/31 7/31

Maintenance and Repairs Expense Explanation Ref. Debit Credit Balance 2,500 Closing entry 2,500

Balance 2,500 0

BRIEF EXERCISE 4-7 The accounts that will appear in the post-closing trial balance are: Accumulated Depreciation Owner’s Capital Supplies Accounts Payable

BRIEF EXERCISE 4-8 The proper sequencing of the required steps in the accounting cycle is as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Analyze business transactions. Journalize the transactions. Post to ledger accounts. Prepare a trial balance. Journalize and post adjusting entries. Prepare an adjusted trial balance. Prepare financial statements. Journalize and post closing entries. Prepare a post-closing trial balance.

Filling in the blanks, the answers are 4, 2, 8, 7, 5, 3, 9, 6, 1.

4-11

BRIEF EXERCISE 4-9 1. 2.

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

870

Supplies ($1,150 – $1,510) ................................................. Accounts Payable.......................................................

360

870 360

BRIEF EXERCISE 4-10 MROTET COMPANY Partial Balance Sheet Current assets Cash ......................................................................................... Debt investments .................................................................... Accounts receivable ............................................................... Supplies ................................................................................... Prepaid insurance ................................................................... Total current assets.........................................................

$ 4,100 6,700 12,500 5,200 3,600 $32,100

BRIEF EXERCISE 4-11 CL Accounts payable CA Accounts receivable PPE Accum. depreciation—buildings PPE Buildings CA Cash IA Copyrights

CL Income taxes payable LTI Debt investments (long-term) PPE Land CA Inventory IA Patents CA Supplies

*BRIEF EXERCISE 4-12 Nov. 1

Salaries and Wages Payable .........................................2,100 Salaries and Wages Expense ............................ 2,100

The balances after posting the reversing entry are Salaries and Wages Expense (Cr.) $2,100 and Salaries and Wages Payable $0.

4-12

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 4-1 Income statement debit column—Utilities Expense Income statement credit column—Service Revenue Balance sheet debit column—Accounts Receivable Balance sheet credit column—Notes Payable; Accumulated Depreciation; Owner’s Capital DO IT! 4-2 Dec. 31 Dec. 31

Income Summary......................................... Owner’s Capital .....................................

41,000

Owner’s Capital ........................................... Owner’s Drawings .................................

22,000

41,000 22,000

DO IT! 4-3 1.

Supplies ........................................................ Equipment ................................................ Cash..........................................................

650

Cash .............................................................. Owner’s Drawings ........................................ Salaries & Wages Expense .....................

400 500

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

540

210 440

900 540

4-13

DO IT! 4-4 NA CL CL CA LTL IA

4-14

Interest revenue Utilities payable Accounts payable Supplies Bonds payable Goodwill

OE PPE PPE NA LTI CL

Owner’s capital Accumulated depreciation—equipment Equipment Salaries and wages expense Debt investments (long-term) Unearned rent revenue

SOLUTIONS TO EXERCISES EXERCISE 4-1 DIXON COMPANY Worksheet For the Month Ended June 30, 2017 Account Titles

Cash

Trial Balance

Adjustments

Dr.

Cr.

Adj. Trial Balance Dr.

Cr.

Income Statement Dr.

Cr.

Balance Sheet Dr.

2,320

2,440

Cr.

Accounts Receivable Supplies

1,880

Accounts Payable

(a) 1,380

500

1,120

500 1,120

1,120

100

Unearned Service Revenue

240 (b)

Owner’s Capital

3,600

Service Revenue

2,400

140

3,600 (b)

140

3,600

2,540

Salaries and Wages Expense

560

(c)

210

770

160

1,380

Miscellaneous Expense

160

Totals

7,360

Supplies Expense

7,360 (a) 1,380

Salaries and Wages Payable

(c)

Totals

1,730

210 1,730

210 7,570

7,570

210 2,310

Net Income

230

Totals

2,540

5,260

5,030 230

2,540

5,260

4-15

EXERCISE 4-2 SAVAGLIA COMPANY (Partial) Worksheet For the Month Ended April 30, 2017 Adjusted Trial Balance Account Titles Cash Accounts Receivable Prepaid Rent Equipment Accum. Depreciation— Equipment Notes Payable Accounts Payable Owner’s Capital Owner’s Drawings Service Revenue Salaries and Wages Expense Rent Expense Depreciation Expense Interest Expense Interest Payable Totals Net Income Totals

4-16

Dr. 10,000 7,840 2,280 23,050

Cr.

Income Statement Dr.

Cr.

Balance Sheet Dr. 10,000 7,840 2,280 23,050

4,900 5,700 4,920 27,960

3,650

3,650 15,590

10,840 760 650 57 59,127

Cr.

15,590 10,840 760 650 57

57 59,127

12,307 3,283 15,590

15,590

46,820

15,590

46,820

57 43,537 3,283 46,820

EXERCISE 4-3 SAVAGLIA COMPANY Income Statement For the Month Ended April 30, 2017 Revenues Service revenue ....................................................... Expenses Salaries and wages expense .................................. Rent expense ........................................................... Depreciation expense.............................................. Interest expense ...................................................... Total expenses ................................................. Net income.......................................................................

$15,590 $10,840 760 650 57 12,307 $ 3,283

SAVAGLIA COMPANY Owner’s Equity Statement For the Month Ended April 30, 2017 Owner’s Capital, April 1 ........................................................... Add: Net income..................................................................... Less: Drawings........................................................................ Owner’s Capital, April 30 .........................................................

$27,960 3,283 31,243 3,650 $27,593

SAVAGLIA COMPANY Balance Sheet April 30, 2017 Assets Current assets Cash.......................................................................... Accounts receivable ................................................ Prepaid rent.............................................................. Total current assets ......................................... Property, plant, and equipment Equipment ................................................................ Less: Accumulated depreciation—equipment ..... Total assets ......................................................

$10,000 7,840 2,280 $20,120 23,050 4,900 18,150 $38,270

4-17

EXERCISE 4-18 (Continued)

SAVAGLIA COMPANY Balance Sheet (Continued) April 30, 2017 Liabilities and Owner’s Equity

Current liabilities Notes payable........................................................... Accounts payable .................................................... Interest payable ........................................................ Total current liabilities ..................................... Owner’s equity Owner’s capital......................................................... Total liabilities and owner’s equity..................

$5,700 4,920 57 $10,677 27,593 $38,270

EXERCISE 4-4 (a) Apr. 30 30

30 30

Service Revenue ...................................... Income Summary .............................

15,590

Income Summary ..................................... Salaries and Wages Expense .......... Rent Expense.................................... Depreciation Expense ...................... Interest Expense...............................

12,307

Income Summary ..................................... Owner’s Capital ................................

3,283

Owner’s Capital ........................................ Owner’s Drawings ............................

3,650

(b) (2) (3)

4-18

Income Summary 12,307 (1) 15,590 3,283 15,590 15,590

(4)

15,590 10,840 760 650 57 3,283 3,650

Owner’s Capital 3,650 Bal. (3) Bal.

27,960 3,283 27,593

EXERCISE 4-4 (Continued) (c)

SAVAGLIA COMPANY Post-Closing Trial Balance April 30, 2017 Cash..................................................................... Accounts Receivable.......................................... Prepaid Rent ....................................................... Equipment ........................................................... Accumulated Depreciation—Equipment ........... Notes Payable ..................................................... Accounts Payable ............................................... Interest Payable .................................................. Owner’s Capital ..................................................

Debit $10,000 7,840 2,280 23,050

$43,170

Credit

$ 4,900 5,700 4,920 57 27,593 $43,170

EXERCISE 4-5 (a) Accounts Receivable.......................................... Service Revenue .........................................

1,100

Insurance Expense ............................................. Prepaid Insurance .......................................

300

Depreciation Expense ........................................ Accumulated Depreciation—Equipment ...

900

Salaries and Wages Expense ............................ Salaries and Wages Payable ......................

500

1,100 300 900 500

4-19

EXERCISE 4-20 (Continued) (b)

Income Statement Dr. Cr.

Accounts Receivable Prepaid Insurance Accum. Depreciation—Equip. Salaries and Wages Payable Service Revenue Salaries and Wages Expense Insurance Expense Depreciation Expense

Balance Sheet Dr. Cr. X X X X

X X X X

EXERCISE 4-6 (a) Accounts Receivable—$25,000 ($34,000 – $9,000). Supplies—$2,500 ($7,000 – $4,500). Accumulated Depreciation—Equipment—$22,000 ($12,000 + $10,000). Salaries and Wages Payable—$0 No liability recorded until adjustments are made. Insurance Expense—$6,000 ($26,000 – $20,000). Salaries and Wages Expense—$43,400 ($49,000 – $5,600). (b) Accounts Receivable ................................................ Service Revenue ................................................

9,000

Insurance Expense ................................................... Prepaid Insurance .............................................

6,000

Supplies Expense ..................................................... Supplies .............................................................

4,500

Depreciation Expense ............................................... Accumulated Depreciation—Equipment..........

10,000

Salaries and Wages Expense ................................... Salaries and Wages Payable.............................

5,600

4-20

9,000 6,000 4,500

10,000 5,600

EXERCISE 4-7 (a) Service Revenue .................................................... Income Summary.............................................

4,300

Income Summary................................................... Salaries and Wages Expense ......................... Miscellaneous Expense .................................. Supplies Expense ............................................

3,416

Income Summary................................................... Owner’s Capital ...............................................

884

Owner’s Capital ..................................................... Owner’s Drawings ...........................................

550

(b)

4,300 1,260 256 1,900 884 550

VICTORIA LEE COMPANY Post-Closing Trial Balance June 30, 2017 Account Titles Cash........................................................................ Accounts Receivable............................................. Supplies ................................................................. Accounts Payable .................................................. Salaries and Wages Payable................................. Unearned Service Revenue................................... Owner’s Capital .....................................................

Debit $3,712 3,904 480

$8,096

Credit

$1,382 460 160 6,094 $8,096

4-21

EXERCISE 4-8 (a) General Journal Date Account Titles July 31 Service Revenue ................................. Rent Revenue...................................... Income Summary.......................

Ref. 400 429 350

Debit 64,000 6,500

31 Income Summary................................ Salaries and Wages Expense ... Utilities Expense ........................ Depreciation Expense ...............

350 726 732 711

78,600

31 Owner’s Capital .................................. Income Summary.......................

301 350

8,100

31 Owner’s Capital .................................. Owner’s Drawings .....................

301 306

16,000

J15 Credit

70,500 55,700 14,900 8,000 8,100 16,000

(b) Owner’s Capital Explanation Ref. Debit Date ✓ July 31 Balance 31 Close net loss J15 8,100 31 Close drawing J15 16,000

Income Summary Date Explanation Ref. Debit July 31 Close revenue J15 31 Close expenses J15 78,600 31 Close net loss J15

4-22

No. 301 Balance 45,200 37,100 21,100

Credit

No. 350 Balance 70,500 (8,100) 0

Credit 70,500 8,100

EXERCISE 4-8 (Continued) (c)

OKABE COMPANY Post-Closing Trial Balance July 31, 2017 Cash..................................................................... Accounts Receivable.......................................... Equipment ........................................................... Accumulated Depreciation—Equipment ........... Accounts Payable ............................................... Unearned Rent Revenue .................................... Owner’s Capital ..................................................

Debit $9,840 8,780 15,900

$34,520

Credit

$ 7,400 4,220 1,800 21,100 $34,520

EXERCISE 4-9 (a)

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

$64,000 6,500 $70,500 55,700 14,900 8,000 78,600 ($ 8,100)

4-23

EXERCISE 4-9 (Continued) OKABE COMPANY Owner’s Equity Statement For the Year Ended July 31, 2017 Owner’s Capital, August 1, 2016 ....................... Less: Net loss.................................................... Drawings.................................................. Owner’s Capital, July 31, 2017 ..........................

(b)

$45,200 $ 8,100 16,000

24,100 $21,100

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

$9,840 8,780 $18,620 15,900 7,400

8,500 $27,120

Liabilities and Owner’s Equity Current liabilities Accounts payable .......................................... Unearned rent revenue.................................. Total current liabilities ........................... Owner’s equity Owner’s Capital ............................................. Total liabilities and owner’s equity .......

4-24

$4,220 1,800 $ 6,020 21,100 $27,120

EXERCISE 4-10 1.

False “Analyze business transactions” is the first step in the accounting cycle.

False. Reversing entries are an optional step in the accounting cycle.

True.

False. Steps 1–3 may occur daily in the accounting cycle. Steps 4–7 are performed on a periodic basis. Steps 8 and 9 are usually prepared only at the end of a company’s annual accounting period.

False. The step of “journalize the transactions” occurs before the step of “post to the ledger accounts.”

False. Closing entries are prepared after financial statements are prepared.

EXERCISE 4-11 (a) June 30 30

30 30

Service Revenue ................................... Income Summary...........................

18,100

Income Summary .................................. Salaries and Wages Expense ....... Rent Expense ................................. Supplies Expense ..........................

13,100

Income Summary .................................. Owner’s Capital .............................

5,000

Owner’s Capital ..................................... Owner’s Drawings .........................

2,100

18,100 8,800 3,000 1,300 5,000 2,100

(b) Income Summary June 30 13,100 June 30 June 30 5,000 18,100

18,100 18,100

4-25

EXERCISE 4-12 (a) 1.

(b) 1.

4-26

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

700

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

700

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

100

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

1,000

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

670

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

760

Salaries and Wages Expense ......................... Equipment ...............................................

700

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

100 900

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

700

100

1,000

670

760

700

1,000

EXERCISE 4-13 1. 2.

Accounts Payable ($750 – $570)............................. Cash ..................................................................

180

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

560

Owner’s Drawings ................................................... Salaries and Wages Expense ..........................

500

180 56 504 500

EXERCISE 4-14 (a)

MCCOY BOWLING ALLEY Balance Sheet December 31, 2017 Assets Current assets Cash ............................................. Accounts receivable ................... Prepaid insurance ....................... Total current assets ............ Property, plant, and equipment Land ............................................. Buildings...................................... Less: Acc. depr.—buildings ...... Equipment ................................... Less: Acc. depr.—equipment .... Total assets..........................

$18,040 14,520 4,680 $ 37,240 67,000 $128,800 42,600 62,400 18,720

86,200 43,680

196,880 $234,120

4-27

EXERCISE 4-14 (Continued) MCCOY BOWLING ALLEY Balance Sheet (Continued) December 31, 2017 Liabilities and Owner’s Equity Current liabilities Notes payable(due 2018) ..................................... $20,000 Accounts payable ............................................. 12,300 Interest payable .................................................... 3,800 Total current liabilities ............................. Long-term liabilities Notes payable .................................................. Total liabilities .......................................... Owner’s equity Owner’s capital ($115,000 + $5,240*).............. Total liabilities and owner’s equity .........

$ 36,100 77,780 113,880 120,240 $234,120

*Net income = $17,180 – $780 – $7,360 – $3,800 = $5,240 (b) Current assets exceed current liabilities by only $1,140 ($37,240 – $36,100). However, approximately 50% of current assets are in the form of cash. The company’s liquidity appears to be reasonably good, but some caution is needed. EXERCISE 4-15 CL Accounts payable CA Accounts receivable CA Cash OE Owner’s capital IA Patents CL Salaries and wages payable CA Inventory CA Stock investments

4-28

PPE Accumulated depreciation– equipment PPE Buildings PPE Land LTL Notes payable (due in 2 years) CA Supplies PPE Equipment CA Prepaid expenses

EXERCISE 4-16 J. PINEDA COMPANY Balance Sheet December 31, 2017 (in thousands) Assets Current assets Cash ............................................................ Short-term investments ............................. Accounts receivable .................................. Inventory..................................................... Prepaid insurance ...................................... Total current assets ........................... Long-term investments ..................................... Property, plant, and equipment Equipment .................................................. Less: Accumulated depreciation— equipment ........................................ Total assets.........................................

$ 2,668 3,690 1,696 1,256 880 $10,190 264 11,500 (5,655)

5,845 $16,299

Liabilities and Owner’s Equity Current liabilities Notes payable (due in 2018) ...................... Accounts payable ...................................... Total current liabilities ....................... Long-term liabilities Long-term debt........................................... Notes payable............................................. Total long-term liabilities..................... Total liabilities.................................................... Owner’s equity Owner’s capital........................................... Total liabilities and owner’s equity ...

$ 500 1,444 $ 1,944 1,000 400 1,400 3,344 12,955 $16,299

4-29

EXERCISE 4-17 (a) BASTEN COMPANY Income Statement For the Year Ended July 31, 2017 Revenues Service revenue ....................................... Rent revenue............................................ Total revenues.................................. Expenses Salaries and wages expense .................. Utilities expense ...................................... Depreciation expense.............................. Total expense ................................... Net loss ............................................................

$63,000 8,500 $71,500 48,700 22,600 4,000 75,300 $ (3,800)

BASTEN COMPANY Owner’s Equity Statement For the Year Ended July 31, 2017 Owner’s Capital, August 1, 2016 .................... Less: Net loss................................................. Drawings............................................... Owner’s Capital, July 31, 2017 .......................

4-30

$51,200 $3,800 3,000

6,800 $44,400

EXERCISE 4-17 (Continued) (b) BASTEN COMPANY Balance Sheet July 31, 2017 Assets Current assets Cash ................................................................ Accounts receivable ...................................... Total current assets ............................... Property, plant, and equipment Equipment ...................................................... Less: Accumulated depreciation— equipment ............................................ Total assets ............................................

$14,200 9,780 $23,980 34,400 6,000

28,400 $52,380

Liabilities and Owner’s Equity Current liabilities Accounts payable .......................................... Salaries and wages payable .......................... Total current liabilities ........................... Long-term liabilities Notes payable................................................. Total liabilities......................................... Owner’s equity Owner’s capital............................................... Total liabilities and owner’s equity .......

$4,100 2,080 $ 6,180 1,800 7,980 44,400 $52,380

4-31

*EXERCISE 4-18 (a) Dec. 31

Jan. 6

(b) Dec. 31 Jan. 1 Jan. 6

Salaries and Wages Expense ($12,000 X 2/5) ...................................... Salaries and Wages Payable ..........

4,800 4,800

Salaries and Wages Payable .................. Salaries and Wages Expense ($12,000 X 3/5) ...................................... Cash .................................................

4,800

Salaries and Wages Expense................. Salaries and Wages Payable ..........

4,800

Salaries and Wages Payable .................. Salaries and Wages Expense .........

4,800

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

12,000

7,200 12,000 4,800 4,800 12,000

*EXERCISE 4-19 (a) Dec. 31 31 (b) Jan. 1 1

4-32

Service Revenue ..................................... Income Summary ............................

92,500

Income Summary .................................... Interest Expense .............................

7,700

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

5,000

Interest Payable ...................................... Interest Expense .............................

2,200

92,500 7,700 5,000 2,200

*EXERCISE 4-19 (Continued) (c) & (e) Accounts Receivable Dec. 31 Balance *19,500 31 Adjusting 5,000 24,500 Jan. 1 Reversing

5,000

*($24,500 – $5,000) Service Revenue 92,500 Dec. 31 Balance 31 Adjusting 92,500 5,000 Jan. 10

Dec. 31 Closing

Jan. 1

Reversing

87,500* 5,000 92,500 5,000

*($92,500 – $5,000)

Jan. 1

Interest Payable Dec. 31 Adjusting 2,200

Reversing

2,200

Interest Expense *5,500 Dec. 31 Closing 2,200 7,700 3,000 Jan. 1 Reversing

Dec. 31 Balance 31 Adjusting Jan. 15

7,700 7,700 2,200

*($7,700 – $2,200) (d) Jan. 10

(1) Cash .............................................................. Service Revenue ...................................

5,000

(2) Interest Expense .......................................... Cash.......................................................

3,000

5,000

3,000

4-33

4-34 ..

(a)

WARREN ROOFING Worksheet For the Month Ended March 31, 2017 Account Titles

Adjustments Dr. Cr.

4,500 3,200 2,000 11,000

(a) 1,520

1,250 2,500 550 12,900

(c)

(b)

250

(c)

290

Income Statement Dr. Cr.

4,500 3,200 480 11,000

4,500 3,200 480 11,000 1,500 2,500 260 12,900

1,100 6,300 (d)

Balance Sheet Dr. Cr.

1,500 2,500 260 12,900

290

1,100

1,300 400 23,500

Adjusted Trial Balance Dr. Cr.

1,100 6,590

6,590

700

2,000 400

(a) 1,520 (b) 250

1,520 250

23,500

(d) 2,760

700 2,760

24,450

700 24,450

4,170 2,420 6,590

Key: (a) Supplies Used; (b) Depreciation Expensed; (c) Service Revenue Recognized; (d) Salaries Accrued.

6,590

20,280

6,590

20,280

700 17,860 2,420 20,280

PROBLEM 4-1A

Cash Accounts Receivable Supplies Equipment Accumulated Depreciation—Equipment Accounts Payable Unearned Service Revenue Owner’s Capital Owner’s Drawings Service Revenue Salaries and Wages Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries and Wages Payable Totals Net Income Totals

Trial Balance Dr. Cr.

PROBLEM 4-1A (Continued) (b)

WARREN ROOFING Income Statement For the Month Ended March 31, 2017 Revenues Service revenue.................................................. Expenses Salaries and wages expense ............................. Supplies expense............................................... Miscellaneous expense ..................................... Depreciation expense ........................................ Total expenses............................................ Net income .................................................................

$6,590 $2,000 1,520 400 250 4,170 $2,420

WARREN ROOFING Owner’s Equity Statement For the Month Ended March 31, 2017 Owner’s Capital, March 1 ....................................... Investments ................................................. 10,000 Add: Net income ...................................................... 2,420

$ 2,900

12,420 15,320 1,100 $14,220

Less: Drawings ...................................................... Owner’s Capital, March 31 ..................................... WARREN ROOFING Balance Sheet March 31, 2017 Assets

Current assets Cash .................................................................... $4,500 Accounts receivable .......................................... 3,200 Supplies .............................................................. 480 Total current assets ................................... $ 8,180 Property, plant, and equipment Equipment .......................................................... 11,000 Less: Accum. depreciation—equipment ......... 1,500 9,500 Total assets................................................. $17,680 .

4-35

PROBLEM 4-1A (Continued) WARREN ROOFING Balance Sheet (Continued) March 31, 2017 Liabilities and Owner’s Equity Current liabilities Accounts payable................................................. Salaries and wages payable ................................ Unearned service revenue ................................... Total current liabilities.................................. Owner’s equity Owner’s capital..................................................... Total liabilities and owner’s equity.............. (c) Mar. 31 31

31 31 (d) Mar. 31 31

31 31

4-36

$2,500 700 260 $ 3,460 14,220 $17,680

Supplies Expense ....................................... Supplies ...............................................

1,520

Depreciation Expense ................................ Accumulated Depreciation— Equipment ........................................

250

Unearned Service Revenue........................ Service Revenue .................................

290

Salaries and Wages Expense .................... Salaries and Wages Payable ..............

700

Service Revenue ......................................... Income Summary ................................

6,590

Income Summary........................................ Salaries and Wages Expense ............. Supplies Expense ............................... Depreciation Expense......................... Miscellaneous Expense ......................

4,170

Income Summary........................................ Owner’s Capital ...................................

2,420

Owner’s Capital .......................................... Owner’s Drawing .................................

1,100

1,520

250 290 700 6,590 2,000 1,520 250 400 2,420 1,100

PROBLEM 4-2A

(a)

THAO COMPANY Partial Worksheet For the Year Ended December 31, 2017

Account No. 101 112 126 130 157 158 200 201 212 230 301 306 400 610 631 711 722 726 905

Titles Cash Accounts Receivable Supplies Prepaid Insurance Equipment Acc. Depr.—Equip. Notes Payable Accounts Payable Salaries and Wages Payable Interest Payable Owner’s Capital Owner’s Drawings Service Revenue Advertising Expense Supplies Expense Depreciation Expense Insurance Expense Salaries and Wages Expense Interest Expense Totals Net Income Totals

Adjusted Trial Balance

Income Statement

Dr. 5,300 10,800 1,500 2,000 27,000

Dr.

Cr.

Balance Sheet

Cr.

Dr. 5,300 10,800 1,500 2,000 27,000

Cr.

5,600 15,000 6,100

2,400 600 13,000

7,000

7,000 61,000

61,000

8,400 4,000 5,600 3,500

28,000 600 103,700

28,000 600 50,100 10,900 61,000

103,700

61,000

53,600

61,000

53,600

42,700 10,900 53,600

4-37

PROBLEM 4-2A (Continued) (b)

THAO COMPANY Income Statement For the Year Ended December 31, 2017 Revenues Service revenue............................................. Expenses Salaries and wages expense ........................ Advertising expense ..................................... Depreciation expense ................................... Supplies expense .......................................... Insurance expense ........................................ Interest expense ............................................ Total expenses....................................... Net income ............................................................

$61,000 $28,000 8,400 5,600 4,000 3,500 600 50,100 $10,900

THAO COMPANY Owner’s Equity Statement For the Year Ended December 31, 2017 Owner’s Capital, January 1 .................................................... Add: Net income ................................................................... Less: Drawings ...................................................................... Owner’s Capital, December 31...............................................

4-38

$13,000 10,900 23,900 7,000 $16,900

PROBLEM 4-2A (Continued) THAO COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash ............................................................... $ 5,300 Accounts receivable ..................................... 10,800 Supplies ......................................................... 1,500 Prepaid insurance ......................................... 2,000 Total current assets .............................. Property, plant, and equipment Equipment ..................................................... 27,000 Less: Accumulated depreciation— equipment .......................................... 5,600 Total assets............................................

$19,600

21,400 $41,000

Liabilities and Owner’s Equity Current liabilities Notes payable................................................ Accounts payable ......................................... Salaries and wages payable ......................... Interest payable............................................. Total current liabilities .......................... Long-term liabilities Notes payable................................................ Total liabilities........................................ Owner’s equity Owner’s capital.............................................. Total liabilities and owner’s equity ......

$5,000 6,100 2,400 600 $14,100 10,000 24,100 16,900 $41,000

4-39

PROBLEM 4-2A (Continued) (c) General Journal Date Account Titles and Explanation Ref. Dec. 31 Service Revenue ..................................... 400 Income Summary ........................... 350

Debit 61,000

J14 Credit 61,000

31 Income Summary .................................... 350 Advertising Expense ...................... 610 Supplies Expense .......................... 631 Depreciation Expense .................... 711 Insurance Expense ........................ 722 Salaries and Wages Expense ........ 726 Interest Expense ............................ 905

50,100

31 Income Summary .................................... 350 Owner’s Capital ...................................301

10,900

31 Owner’s Capital .............................................301 Owner’s Drawings ..............................306

7,000

8,400 4,000 5,600 3,500 28,000 600 10,900 7,000

(d) Date Jan. 1 Dec. 31 31

Date

Explanation Balance Closing entry Closing entry

Owner’s Capital Ref. Debit � J14 J14 7,000

Explanation

Owner’s Drawings Ref. Debit � J14

Dec. 31 Balance 31 Closing entry

4-40

No. 301 Balance 13,000 23,900 16,900

Credit 13,000 10,900

Credit

No. 306 Balance

7,000

7,000 0

7,000

PROBLEM 4-2A (Continued) Income Summary Date Dec. 31 31 31

Date Dec. 31 31

No. 350

Explanation Closing entry Closing entry Closing entry

Ref. J14 J14 J14

Debit

Credit 61,000

50,100 10,900

Balance 61,000 10,900 0

Explanation Balance Closing entry

Service Revenue Ref. Debit � J14 61,000

No. 400 Balance 61,000 0

Credit 61,000

Advertising Expense Date Dec. 31 31

Explanation Balance Closing entry

Ref. � J14

Debit 8,400

No. 610 Credit 8,400

Supplies Expense Date Dec. 31 31

Explanation Balance Closing entry

Ref. � J14

No. 631 Debit 4,000

Credit 4,000

Depreciation Expense Date Dec. 31 31

Date Dec. 31 31

Explanation Balance Closing entry

Ref. � J14

Explanation Balance Closing entry

Insurance Expense Ref. Debit � 3,500 J14

Balance 8,400 0

Debit 5,600

Balance 4,000 0

No. 711 Credit 5,600

Credit 3,500

Balance 5,600 0

No. 722 Balance 3,500 0

4-41

PROBLEM 4-2A (Continued) Salaries and Wages Expense Date Dec. 31 31

Explanation Balance Closing entry

Ref. � J14

Debit 28,000

No. 726 Credit 28,000

Interest Expense Date Dec. 31 31

(e)

Explanation Balance Closing entry

Ref. � J14

No. 905 Debit 600

Credit 600

Balance 600 0

THAO COMPANY Post-Closing Trial Balance December 31, 2017 Cash .................................................................... Accounts Receivable ......................................... Supplies.............................................................. Prepaid Insurance.............................................. Equipment .......................................................... Accumulated Depreciation— Equipment ...................................................... Notes Payable .................................................... Accounts Payable .............................................. Salaries and Wages Payable ............................. Interest Payable ................................................. Owner’s Capital.................................................. Totals ..........................................................

4-42

Balance 28,000 0

Debit $ 5,300 10,800 1,500 2,000 27,000

Credit

$ 5,600 15,000 6,100 2,400 600 16,900 $46,600

$46,600

PROBLEM 4-3A (a)

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

$60,000 $30,000 2,800 1,800 1,700 1,400 37,700 $22,300

BRAY COMPANY Owner’s Equity Statement For the Year Ended December 31, 2017 Owner’s Capital, January 1 .............................................. Add: Net income ............................................................. Less: Drawings ................................................................ Owner’s Capital, December 31.........................................

$19,500 22,300 41,800 11,000 $30,800

BRAY COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash ............................................................... Accounts receivable ..................................... Prepaid insurance ......................................... Total current assets .............................. Property, plant, and equipment Equipment ..................................................... Less: Accumulated depreciation— equipment .......................................... Total assets............................................

$8,800 10,800 2,800 $22,400 24,000 4,200

19,800 $42,200

4-43

PROBLEM 4-3A (Continued) BRAY COMPANY Balance Sheet (Continued) December 31, 2017 Liabilities and Owner’s Equity Current liabilities Accounts payable ............................................... $9,000 Salaries and wages payable .............................. 2,400 Total current liabilities............................ Owner’s equity Owner’s capital............................................... Total liabilities and owner’s equity ...................................................

$11,400 30,800 $42,200

(b) Date Dec. 31

31 31

4-44

General Journal Account Titles and Explanation Service Revenue.................................. Income Summary........................

Ref. 400 350

Debit 60,000

Income Summary ................................ Maintenance and Repairs Expense.................................... Depreciation Expense ................ Insurance Expense ..................... Salaries and Wages Expense .... Utilities Expense.........................

350

37,700

Income Summary ................................ Owner’s Capital ..........................

350 301

22,300

Owner’s Capital ................................... Owner’s Drawings ......................

301 306

11,000

Credit 60,000

622 711 722 726 732

1,700 2,800 1,800 30,000 1,400 22,300 11,000

PROBLEM 4-3A (Continued) (c) 12/31

Owner’s Capital No. 301 11,000 1/1 Bal. 19,500 12/31 22,300 12/31 Bal. 30,800

Owner’s Drawings 12/31 Bal. 11,000 12/31

12/31 12/31

12/31

No. 306 11,000

Income Summary 37,700 12/31 22,300 60,000

No. 350 60,000 60,000

Maintenance and Repairs Expense No. 622 12/31 Bal. 1,700 12/31 1,700

Depreciation Expense No. 711 12/31 Bal. 2,800 12/31 2,800

Insurance Expense 12/31 Bal. 1,800 12/31

No. 722 1,800

Salaries and Wages Expense 12/31 Bal. 30,000 12/31

No. 726 30,000

Utilities Expense 1,400 12/31

No. 732 1,400

Service Revenue No. 400 60,000 12/31 Bal. 60,000 12/31 Bal.

(d)

BRAY COMPANY Post-Closing Trial Balance December 31, 2017 Cash..................................................................... Accounts Receivable.......................................... Prepaid Insurance............................................... Equipment ........................................................... Accumulated Depreciation—Equipment ........... Accounts Payable ............................................... Salaries and Wages Payable.............................. Owner’s Capital .................................................. Totals ...........................................................

Debit $8,800 10,800 2,800 24,000

$46,400

Credit

$ 4,200 9,000 2,400 30,800 $46,400

4-45

4-46

4 -74

(a)

VANG MANAGEMENT SERVICES Worksheet For the Year Ended December 31, 2017 Account Titles

Adjustments

Adjusted Trial Balance

Dr.

Cr.

13,800 28,300 3,600 67,000 127,000 59,000

Cr.

(a) 1,200

12,500 6,000 120,000 144,000

Dr.

Cr.

13,800 28,300 2,400 67,000 127,000 59,000

Dr.

12,500 1,500 120,000 144,000 22,000

90,700 33,500

Cr.

13,800 28,300 2,400 67,000 127,000 59,000

22,000 90,700 29,000

Balance Sheet

12,500 1,500 120,000 144,000

22,000

42,000 20,500 19,000 402,200

Cr.

Income Statement

90,700 33,500

42,000 20,500 19,000

1,200 6,600

402,200 (a) 1,200 (b) 6,600 (b) 3,000 (b) 3,600 (d) 10,000 22,300

3,000 3,600 10,000

(d) 10,000 22,300

418,800

3,000 3,600 10,000

10,000 418,800

99,300 24,900 124,200

124,200

319,500

124,200

319,500

10,000 294,600 24,900 319,500

Key: (a) Expired Insurance; (b) Depreciation Expense—Building and Equipment; (c) Rent Revenue Recognized; (d) Accrued Interest Payable.

PROBLEM 4-4A

Cash Accounts Receivable Prepaid Insurance Land Buildings Equipment Accounts Payable Unearned Rent Revenue Mortgage Payable Owner’s Capital Owner’s Drawings Service Revenue Rent Revenue Salaries and Wages Expense Advertising Expense Utilities Expense Totals Insurance Expense Depr. Expense Accum. Depr.—Buildings Accum. Depr.—Equipment Interest Expense Interest Payable Totals Net Income Totals

Trial Balance

PROBLEM 4-4A (Continued) (b)

VANG MANAGEMENT SERVICES Balance Sheet December 31, 2017 Assets Current assets Cash ........................................... Accounts receivable ................. Prepaid insurance ..................... Total current assets .......... Property, plant, and equipment Land ........................................... Buildings.................................... Less: Accumulated depreciation—buildings ....... Equipment ................................. Less: Accumulated depreciation—equipment ..... Total assets........................

$13,800 28,300 2,400 $ 44,500 67,000 $127,000 3,000 59,000

124,000

3,600

55,400

246,400 $290,900

Liabilities and Owner’s Equity Current liabilities Mortgage payable (due in 2018) .................. Accounts payable ........................................ Interest payable............................................ Unearned rent revenue ................................ Total current liabilities ......................... Long-term liabilities Mortgage payable......................................... Total liabilities....................................... Owner’s equity Owner’s capital ($144,000 + $24,900 – $22,000).................... Total liabilities and owner’s equity .....

$30,000 12,500 10,000 1,500 $ 54,000 90,000 144,000 146,900 $290,900

4-47

PROBLEM 4-4A (Continued) (c) Dec. 31 31

31 31

(d) Dec. 31

31 31

4-48

Insurance Expense ............................... Prepaid Insurance.........................

1,200

Depreciation Expense .......................... Accumulated Depreciation— Buildings ................................... Accumulated Depreciation— Equipment .................................

6,600

Unearned Rent Revenue ...................... Rent Revenue ................................

4,500

Interest Expense................................... Interest Payable ............................

10,000

Service Revenue................................... Rent Revenue ....................................... Income Summary ..........................

90,700 33,500

Income Summary ................................. Salaries and Wages Expense....... Advertising Expense .................... Utilities Expense ........................... Interest Expense ........................... Depreciation Expense .................. Insurance Expense .......................

99,300

Income Summary ................................. Owner’s Capital.............................

24,900

Owner’s Capital .................................... Owner’s Drawings.........................

22,000

1,200

3,000 3,600 4,500 10,000

124,200 42,000 20,500 19,000 10,000 6,600 1,200 24,900 22,000

PROBLEM 4-4A (Continued) (e)

VANG MANAGEMENT SERVICES Post-Closing Trial Balance December 31, 2017 Cash................................................................. Accounts Receivable...................................... Prepaid Insurance........................................... Land................................................................. Buildings ......................................................... Accumulated Depreciation—Buildings ......... Equipment ....................................................... Accumulated Depreciation—Equipment ....... Accounts Payable ........................................... Interest Payable .............................................. Unearned Rent Revenue ................................ Mortgage Payable ........................................... Owner’s Capital ..............................................

Debit $ 13,800 28,300 2,400 67,000 127,000 $

3,000

59,000

$297,500

Credit

3,600 12,500 10,000 1,500 120,000 146,900 $297,500

4-49

PROBLEM 4-5A

(a) Date July 1 1

3 5 12 18 20 21 25 31 31

4-50

General Journal Account Titles and Explanation Cash .................................................... Owner’s Capital .........................

Ref. 101 301

Debit 20,000

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

157 101 201

12,000

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

126 201

2,100

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

130 101

1,800

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

112 400

4,500

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

201 101

2,900

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

726 101

2,800

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

101 112

3,400

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

112 400

6,000

Gasoline Expense .............................. Cash ...........................................

633 101

350

Owner’s Drawings.............................. Cash ...........................................

306 101

5,600

J1 Credit 20,000 4,000 8,000 2,100 1,800 4,500 2,900 2,800 3,400

6,000 350 5,600

Account Titles Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accounts Payable Owner’s Capital Owner’s Drawings Service Revenue Gasoline Expense Salaries and Wages Expense Totals Depreciation Expense Accum. Depr.—Equipment Insurance Expense Supplies Expense Salaries and Wages Payable Totals Net Income Totals

Trial Balance Dr. Cr. 5,950 7,100 2,100 1,800 12,000

Adjustments Dr. Cr. (a) 2,700 (d) 1,500 (c) 150

Adjusted Trial Balance Dr. Cr. 5,950 9,800 600 1,650 12,000

7,200 20,000

Balance Sheet Dr. Cr. 5,950 9,800 600 1,650 12,000

7,200 20,000

5,600

7,200 20,000

5,600 10,500

350 2,800 37,700

Income Statement Dr. Cr.

(a) 2,700

5,600 13,200

350 3,800

(e) 1,000

13,200 350 3,800

37,700 (b)

500

500 (b)

500

500 500

150 1,500 (e) 1,000 5,850

41,900

500 150 1,500

1,000 41,900

6,300 6,900 13,200

13,200

35,600

13,200

35,600

1,000 28,700 6,900 35,600

Key: (a) Service Revenue Accrued; (b) Depreciation Expense; (c) Insurance Expired; (d) Cleaning Supplies Used; (e) Unpaid Salaries.

PROBLEM 4-5A (Continued)

ANYA’S CLEANING SERVICE Worksheet For the Month Ended July 31, 2017

(b) & (c)

PROBLEM 4-5A (Continued) (a), (e) & (f) Cash Ref. J1 J1 J1 J1 J1 J1 J1 J1

Date Explanation July 1 1 5 18 20 21 31 31

Debit 20,000

No. 101 Balance 20,000 16,000 14,200 11,300 8,500 11,900 11,550 5,950

Credit 4,000 1,800 2,900 2,800

3,400 350 5,600

Accounts Receivable Date Explanation July 12 21 25 31 Adjusting

Ref. J1 J1 J1 J2

Debit 4,500

No. 112 Credit

Balance 4,500 1,100 7,100 9,800

3,400 6,000 2,700

Supplies Date July 3 31

Explanation

Ref. J1 J2

Adjusting

No. 126 Debit 2,100

Credit

Balance 2,100 600

1,500

Prepaid Insurance Date Explanation July 5 31 Adjusting

Date July 1

4-52

Ref. J1 J2

Equipment Ref. J1

Explanation

Debit 1,800

No. 130 Credit

Balance 1,800 1,650

150

Debit 12,000

No. 157 Balance 12,000

Credit

PROBLEM 4-5A (Continued) Accumulated Depreciation—Equipment Date July 31

Explanation Adjusting

Ref. J2

Debit

No. 158

Credit 500

Accounts Payable Date July 1 3 18

Date July 31

Date July 1 31 31

Explanation

Ref. J1 J1 J1

No. 201

2,900

Balance 8,000 10,100 7,200

Salaries and Wages Payable

No. 212

Explanation Adjusting

Ref. J2

Debit

Owner’s Capital Ref. Debit J1 J3 J3 5,600

Explanation Closing Closing

Credit 8,000 2,100

Credit 1,000

Balance 1,000

Credit 20,000 6,900

No. 301 Balance 20,000 26,900 21,300

Owner’s Drawings Date July 31 31

Date July 31 31 31

Balance 500

Explanation

Ref. J1 J3

Closing

Debit 5,600

Income Summary Ref. Debit J3 J3 6,300 J3 6,900

Explanation Closing Closing Closing

No. 306 Credit 5,600

Credit 13,200

Balance 5,600 0

No. 350 Balance 13,200 6,900 0

4-53

PROBLEM 4-5A (Continued) Service Revenue Date July 12 25 31 31

Explanation

Ref. J1 J1 J2 J3

Adjusting Closing

Debit

No. 400 Credit 4,500 6,000 2,700

Balance 4,500 10,500 13,200 0

13,200

Supplies Expense Date July 31 31

Explanation Adjusting Closing

Ref. J2 J3

Debit 1,500

No. 631 Credit

Balance 1,500 0

1,500

Gasoline Expense Date July 31 31

Explanation

Ref. J1 J3

Closing

Debit 350

No. 633 Credit

Balance 350 0

350

Depreciation Expense Date July 31 31

Date July 31 31

Explanation Adjusting Closing

Ref. J2 J3

Debit 500

Explanation Adjusting Closing

Insurance Expense Ref. Debit J2 150 J3

No. 711 Credit

Balance 500 0

500

No. 722 Balance 150 0

Credit 150

Salaries and Wages Expense Date July 20 31 31

4-54

Explanation

Ref. J1 J2 J3

Adjusting Closing

Debit 2,800 1,000

No. 726 Credit

Balance 2,800 3,800 0

3,800

PROBLEM 4-5A (Continued) (d)

ANYA’S CLEANING SERVICE Income Statement For the Month Ended July 31, 2017 Revenues Service revenue.............................................. Expenses Salaries and wages expense ......................... Supplies expense ........................................... Depreciation expense .................................... Gasoline expense........................................... Insurance expense ......................................... Total expenses........................................ Net income .............................................................

$13,200 $3,800 1,500 500 350 150 6,300 $ 6,900

ANYA’S CLEANING SERVICE Owner’s Equity Statement For the Month Ended July 31, 2017 Owner’s Capital, July 1.......................................... Add: Investments ................................................. Net income ..................................................

$ $20,000 6,900

Less: Drawings ..................................................... Owner’s Capital, July 31........................................

26,900 26,900 5,600 $21,300

ANYA’S CLEANING SERVICE Balance Sheet July 31, 2017 Assets Current assets Cash ................................................................ Accounts receivable ...................................... Supplies .......................................................... Prepaid insurance .......................................... Total current assets................................

$5,950 9,800 600 1,650 $18,000

4-55

PROBLEM 4-5A (Continued) ANYA’S CLEANING SERVICE Balance Sheet (Continued) July 31, 2017 Assets (Continued) Property, plant, and equipment Equipment ....................................................... Less: Accumulated depreciation— equipment ............................................ Total assets..............................................

$12,000 500

11,500 $29,500

Liabilities and Owner’s Equity Current liabilities Accounts payable .......................................... Salaries and wages payable .......................... Total current liabilities ........................... Owner’s equity Owner’s capital............................................... Total liabilities and owner’s equity .......

$7,200 1,000 $ 8,200 21,300 $29,500

(e) Date July 31 31

31 31 31

4-56

General Journal Account Titles and Explanation Accounts Receivable ......................... Service Revenue .......................

Ref. 112 400

Debit 2,700

Depreciation Expense ....................... Accumulated Depreciation— Equipment .............................

711

500

Insurance Expense ............................ Prepaid Insurance .....................

722 130

150

Supplies Expense .............................. Supplies .....................................

631 126

1,500

Salaries and Wages Expense............ Salaries and Wages Payable ....

726 212

1,000

J2 Credit 2,700

158

500

150 1,500 1,000

PROBLEM 4-5A (Continued) (f)

General Journal J3

Date July 31

31 31

Account Titles and Explanation Service Revenue................................. Income Summary.......................

Ref. 400 350

Debit 13,200

Income Summary................................ Salaries and Wages Expense ... Supplies Expense...................... Depreciation Expense ............... Gasoline Expense...................... Insurance Expense ....................

350 726 631 711 633 722

6,300

Income Summary................................ Owner’s Capital .........................

350 301

6,900

Owner’s Capital .................................. Owner’s Drawings .....................

301 306

5,600

13,200 3,800 1,500 500 350 150 6,900 5,600

ANYA’S CLEANING SERVICE Post-Closing Trial Balance July 31, 2017

(g)

Cash .................................................................... Accounts Receivable ......................................... Supplies.............................................................. Prepaid Insurance.............................................. Equipment .......................................................... Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Salaries and Wages Payable ............................. Owner’s Capital..................................................

Debit $ 5,950 9,800 600 1,650 12,000

Credit

$30,000

Credit

500 7,200 1,000 21,300 $30,000

4-57

4-58 (a) (1) INCORRECT ENTRY 1.

Cash ................................... Accts. Receivable ........

950

Misc. Expense ................... Cash..............................

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

590

950

Cash ................................... Accts. Receivable ........

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

1,900 1,900

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

310

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

(3) CORRECTING ENTRY

310

Salaries and Wages Expense .......................... Salaries and Wages Payable ........................... Cash .............................. Equipment ......................... Accounts Payable........ Maintenance and Repairs Expense .......................... Cash ..............................

590

Accounts Receivable ......... 360 Cash ...............................

360

Advertising Expense ......... Misc. Expense ...............

1,200 700

Salaries and Wages Payable ............................ 700 Salaries and Wages Expense ......................

700

Equipment .......................... 310 Supplies.........................

310

Maintenance and Repairs Expense ........................... Cash ............................... Equipment .....................

27 69

1,900 310 310

96 96

PROBLEM 4-6A

(2) CORRECT ENTRY

PROBLEM 4-6A (Continued) (b)

GLOBAL CABLE Trial Balance April 30, 2017 Cash ($4,100 – $360 – $27) ................................... Accounts Receivable ($3,200 + $360).................. Supplies ($800 – $310) ......................................... Equipment ($10,600 + $310 – $69) ....................... Accumulated Depreciation—Equip. . .................. Accounts Payable ................................................. Salaries and Wages Payable ($700 – $700)......... Unearned Service Revenue.................................. Owner’s Capital .................................................... Service Revenue ................................................... Salaries and Wages Expense ($3,300 – $700)..... Advertising Expense ($600 + $75) ....................... Miscellaneous Expense ($290 – $75) .................. Depreciation Expense .......................................... Maintenance and Repairs Expense .....................

Debit $ 3,713 3,560 490 10,841

Credit

$ 1,350 2,100 0 890 12,900 5,450 2,600 675 215 500 96 $22,690

$22,690

4-59

COMPREHENSIVE PROBLEM: CHAPTERS 2 TO 4 (a) Date July 1 1

3 5 12 18 20 21 25 31 31

4-60

General Journal Account Titles and Explanation Cash ..................................................... Owner’s Capital .........................

Ref. 101 301

Debit 14,000

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

157 101 201

10,000

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

126 201

800

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

130 101

2,160

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

112 400

3,800

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

201 101

1,400

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

726 101

1,600

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

101 112

1,400

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

112 400

1,900

Gasoline Expense ............................... Cash ...........................................

633 101

400

Owner’s Drawings............................... Cash ...........................................

306 101

700

J1 Credit 14,000 3,000 7,000 800 2,160 3,800 1,400 1,600 1,400 1,900 400 700

Account Titles Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accounts Payable Owner’s Capital Owner’s Drawings Service Revenue Gasoline Expense Salaries and Wages Expense Total Depreciation Expense Accum. Depr.—Equipment Insurance Expense Supplies Expense Salaries and Wages Payable Totals Net Income Totals

Trial Balance

Adjustments

Adjusted Trial Balance

Income Statement

Balance Sheet

Dr.

Cr.

6,140 4,300 800 2,160 10,000

Cr.

(a) 1,300 (d) (c)

700 180

Cr.

6,140 5,600 100 1,980 10,000

6,400 14,000

700 5,700

(a) 1,300 (e)

500

(b)

200

Cr.

6,140 5,600 100 1,980 10,000 6,400 14,000

700 400 1,600 26,100

Cr.

700 7,000

400 2,100

7,000 400 2,100

26,100 200 (b) (c) (d)

200

180 700

180 700 (e)

2,880

200 200

500 2,880

28,100

200 180 700

500 28,100

3,580 3,420 7,000

7,000

24,520

7,000

24,520

Key: (a) Service Revenue; (b) Depreciation Expense; (c) Insurance Expired; (d) Supplies Used; (e) Unpaid Salaries.

500 21,100 3,420 24,520

COMPREHENSIVE PROBLEM (Continued)

ASHLEY’S MAIDS CLEANING SERVICE Worksheet For the Month Ended July 31, 2017

(b) & (c)

4-61

COMPREHENSIVE PROBLEM (Continued) (a), (e) & (f)

Date July 1 1 5 18 20 21 31 31

Cash Ref. J1 J1 J1 J1 J1 J1 J1 J1

Explanation

Debit 14,000

No. 101 Balance 14,000 11,000 8,840 7,440 5,840 7,240 6,840 6,140

Credit 3,000 2,160 1,400 1,600

1,400 400 700

Accounts Receivable Date July 12 21 25 31

Explanation

Ref. J1 J1 J1 J2

Adjusting

Debit 3,800

No. 112 Credit

Balance 3,800 2,400 4,300 5,600

1,400 1,900 1,300

Supplies Date July 3 31

Explanation

Ref. J1 J2

Adjusting

No. 126 Debit 800

Credit

Balance 800 100

700

Prepaid Insurance Date July 5 31

Date July 1

4-62

Explanation

Ref. J1 J2

Adjusting

Debit 2,160

Equipment Ref. Debit J1 10,000

Explanation

No. 130 Credit

Balance 2,160 1,980

180

No. 157 Balance 10,000

Credit

COMPREHENSIVE PROBLEM (Continued) Accumulated Depreciation—Equipment Date July 31

Explanation Adjusting

Ref. J2

Debit

No. 158

Credit 200

Accounts Payable Date July 1 3 18

Explanation

Ref. J1 J1 J1

No. 201

1,400

Balance 7,000 7,800 6,400

Date July 31

Salaries and Wages Payable Explanation Ref. Debit Adjusting J2

No. 212 Balance 500

Date July 1 31 31

Owner’s Capital Ref. Debit J1 J3 J3 700

Explanation Closing Closing

Debit

Balance 200

Credit 7,000 800

Credit 500

Credit 14,000 3,420

Owner’s Drawings Date July 31 31

Date July 31 31 31

Explanation

Ref. J1 J3

Closing

Debit 700

Income Summary Ref. Debit J3 J3 3,580 J3 3,420

Explanation Closing Closing Closing

No. 301 Balance 14,000 17,420 16,720

No. 306 Credit 700

Credit 7,000

Balance 700 0

No. 350 Balance 7,000 3,420 0

4-63

COMPREHENSIVE PROBLEM (Continued) Service Revenue Date July 12 25 31 31

Explanation

Ref. J1 J1 J2 J3

Adjusting Closing

No. 400

Debit

Credit 3,800 1,900 1,300

Balance 3,800 5,700 7,000 0

7,000

Supplies Expense Date July 31 31

Explanation Adjusting Closing

Ref. J2 J3

Debit 700

No. 631 Credit

Balance 700 0

700

Gasoline Expense Date July 31 31

Explanation

Ref. J1 J3

Closing

Debit 400

No. 633 Credit

Balance 400 0

400

Depreciation Expense Date July 31 31

Date July 31 31

Explanation Adjusting Closing

Ref. J2 J3

Debit 200

Explanation Adjusting Closing

Insurance Expense Ref. Debit J2 180 J3

No. 711 Credit

Balance 200 0

200

No. 722 Balance 180 0

Credit 180

Salaries and Wages Expense Date July 20 31 31

4-64

Explanation

Ref. J1 J2 J3

Adjusting Closing

Debit 1,600 500

No. 726 Credit

Balance 1,600 2,100 0

2,100

COMPREHENSIVE PROBLEM (Continued) (d)

ASHLEY’S MAIDS CLEANING SERVICE Income Statement For the Month Ended July 31, 2017 Revenues Service revenue............................................... Expenses Salaries and wages expense .......................... Supplies expense............................................ Gasoline expense............................................ Depreciation expense ..................................... Insurance expense .......................................... Total expenses......................................... Net income ..............................................................

$7,000 $2,100 700 400 200 180 3,580 $3,420

ASHLEY’S MAIDS CLEANING SERVICE Owner’s Equity Statement For the Month Ended July 31, 2017 Owner’s Capital, July 1 .......................................... Add: Investments.................................................. Net income ...................................................

$ $14,000 3,420

Less: Drawings ...................................................... Owner’s Capital, July 31.........................................

17,420 17,420 700 $16,720

4-65

COMPREHENSIVE PROBLEM (Continued) ASHLEY’S MAIDS CLEANING SERVICE Balance Sheet July 31, 2017 Assets Current assets Cash ................................................................ $6,140 Accounts receivable ...................................... 5,600 Supplies .......................................................... 100 Prepaid insurance .......................................... 1,980 Total current assets................................ Property, plant, and equipment Equipment....................................................... 10,000 Less: Accumulated depreciation— equipment ........................................... 200 Total assets .............................................

$13,820

9,800 $23,620

Liabilities and Owner’s Equity Current liabilities Accounts payable........................................... Salaries and wages payable .......................... Total current liabilities............................ Owner’s equity Owner’s capital............................................... Total liabilities and owner’s equity........

4-66

$6,400 500 $ 6,900 16,720 $23,620

COMPREHENSIVE PROBLEM (Continued) (e) Date July 31 31

31 31 31

General Journal Account Titles and Explanation Accounts Receivable ......................... Service Revenue .......................

Ref. 112 400

Debit 1,300

Depreciation Expense ....................... Accumulated Depreciation— Equipment .............................

711

200

Insurance Expense ............................ Prepaid Insurance .....................

722 130

180

Supplies Expense .............................. Supplies .....................................

631 126

700

Salaries and Wages Expense............ Salaries and Wages Payable ....

726 212

500

J2 Credit 1,300

158

200

180 700 500

(f) Date July 31 31

31 31

General Journal Account Titles and Explanation Service Revenue ................................ Income Summary ......................

Ref. 400 350

Debit 7,000

Income Summary ............................... Salaries and Wages Expense ... Supplies Expense ..................... Gasoline Expense ..................... Depreciation Expense............... Insurance Expense ...................

350 726 631 633 711 722

3,580

Income Summary ............................... Owner’s Capital .........................

350 301

3,420

Owner’s Capital.................................. Owner’s Drawings.....................

301 306

700

J3 Credit 7,000 2,100 700 400 200 180 3,420 700

4-67

COMPREHENSIVE PROBLEM (Continued) ASHLEY’S MAIDS CLEANING SERVICE Post-Closing Trial Balance July 31, 2017

(g)

Debit $ 6,140 5,600 100 1,980 10,000 $

200 6,400 500 16,720 $23,820

$23,820

4-68

Credit

CC4

COOKIE CREATIONS

(a) COOKIE CREATIONS Income Statement For the Two Months Ended December 31, 2016 Revenues Service revenue ........................................................ Expenses Supplies expense ..................................................... Salaries and wages expense ................................... Advertising expense................................................. Utilities expense ....................................................... Insurance expense ................................................... Depreciation expense............................................... Interest expense ....................................................... Total expenses ..................................................... Net income ....................................................................

$4,515 $1,025 1,006 165 125 110 40 15 2,486 $2,029

COOKIE CREATIONS Owner’s Equity Statement For the Two Months Ended December 31, 2016 Owner’s Capital, November 1 ...................................... Add: Net income .........................................................

$ 800 2,029 2,829 500 $2,329

Less: Drawings ............................................................ Owner’s Capital, December 31.....................................

4-69

CC4 (Continued) (a) (Continued) COOKIE CREATIONS Balance Sheet December 31, 2016 Assets Current assets Cash ............................................................................ Accounts receivable .................................................. Supplies...................................................................... Prepaid insurance ...................................................... Total current assets .............................................. Property, plant, and equipment Equipment .................................................................. Less: Accumulated depreciation—equipment........ Total assets ...........................................................

$1,180 875 350 1,210 $3,615 1,200 40

1,160 $4,775

Liabilities and Owner’s Equity Current liabilities Accounts payable ...................................................... Salaries and wages payable...................................... Unearned service revenue ........................................ Total current liabilities .......................................... Long-term liabilities Notes payable ............................................................ Interest payable.......................................................... Total long-term liabilities ...................................... Total liabilities.................................................. Owner’s equity Owner’s capital .......................................................... Total liabilities and owner’s equity ......................

4-70

75 56 300 $ 431

2,000 15 2,015 2,446 2,329 $4,775

CC4 (Continued) (b) Date

GENERAL JOURNAL Account Titles and Explanation

2016 Dec. 31 Service Revenue..................................... Income Summary ...............................

Debit

4,515 4,515

31 Income Summary ................................... Supplies Expense .............................. Salaries and Wages Expense............ Advertising Expense ......................... Utilities Expense ................................ Insurance Expense ............................ Depreciation Expense ....................... Interest Expense ................................

2,486

31 Income Summary ................................... Owner’s Capital..................................

2,029

31 Owner’s Capital ...................................... Owner’s Drawings .............................

500

J4 Credit

1,025 1,006 165 125 110 40 15 2,029 500

4-71

CC4 (Continued) (c)

COOKIE CREATIONS Post-Closing Trial Balance December 31, 2016

Account Cash ........................................................................ Accounts Receivable ............................................. Supplies .................................................................. Prepaid Insurance ................................................. Equipment .............................................................. Accumulated Depreciation—Equipment .............. Accounts Payable .................................................. Salaries and Wages Payable ................................. Unearned Service Revenue ................................... Interest Payable ..................................................... Notes Payable ........................................................ Owner’s Capital ......................................................

Debit $1,180 875 350 1,210 1,200

$4,815

4-72

Credit

40 75 56 300 15 2,000 2,329 $4,815

BYP 4-1

FINANCIAL REPORTING PROBLEM

(a)

Total current assets were $73,286 million at September 28, 2013, and $57,653 million at September 29, 2012.

(b)

Current assets are properly listed in the order of liquidity. As you will learn in the next chapter, inventory is considered to be less liquid than accounts receivable. Thus, it is listed below accounts receivable and before prepaid expenses and other current assets.

(c)

The asset classifications are similar to the text: (1) current assets, (2) investments, (3) property, plant, and equipment, and (4) intangible assets.

(d)

Apple reported $14,259 of cash and cash equivalents at September 28, 2013.

(e)

Total current liabilities were $43,658 million at September 28, 2013, and $38,542 million at September 29, 2012.

4-73

BYP 4-2

(a)

COMPARATIVE ANALYSIS PROBLEM

(in millions) 1. 2. 3. 4.

Total current assets Net property, plant & equipment Total current liabilities Total equity

PepsiCo

Coca-Cola

22,203 18,575 17,839 24,389

31,304 14,967 27,811 33,440

(b) PepsiCo’s current assets were 24% greater than its current liabilities, while Coca-Cola’s current assets were 13% greater than its current liabilities. From this information, it appears that PepsiCo is in a better liquidity position than Coca-Cola. Coca-Cola’s equity represents a significantly larger percentage of total     assets 37.1%  $33,440  than PepsiCo’s 31.5%  $24,389  . As a result,  $90,055   $77,478  Coca-Cola has less debt relative to its total assets than PepsiCo. It therefore appears that Coca-Cola is less likely to default on a debt obligation.

4-74

BYP 4-3

(a) 1. 2. 3. 4.

COMPARATIVE ANALYSIS PROBLEM

(in millions)

Amazon

Wal-Mart

Total current assets Net property, plant & equipment Total current liabilities Total stockholders’ (shareholders’) equity

24,625 10,949 22,980 9,746

61,185 115,364 69,345 81,339

(b) Current assets are cash and other resources that are reasonably expected to be realized in cash or sold or consumed within one year or the company’s operating cycle, whichever is longer. Current liabilities are obligations that are reasonably expected to be paid from existing current assets or through the creation of other current liabilities. Amazon’s current assets were 7% greater than its current liabilities, while Wal-Mart’s current assets were 12% less than its current liabilities. From this information, it appears that Amazon is in a better liquidity position than Wal-Mart. Wal-Mart’s stockholders’ equity represents a 63% larger percentage of     total assets 39.7%  $81,339  than Amazon’s 24.3%  $9,746 . As a  $204,751   $40,159  result, Wal-Mart has less debt relative to its total assets than Amazon. It therefore appears that Wal-Mart is less likely to default on a debt obligation.

4-75

BYP 4-4

REAL-WORLD FOCUS

The solution is dependent upon the companies chosen by the student.

4-76

BYP 4-5

(a)

DECISION MAKING ACROSS THE ORGANIZATION

WHITEGLOVES JANITORIAL SERVICE Balance Sheet December 31, 2017 Assets Current assets Cash ................................................ Accounts receivable ($9,000 + $3,700) ......................... Supplies ($5,200 – $2,700) ............. Prepaid insurance ($4,800 X 2/3)....... Total current assets ............... Property, plant, and equipment Equipment ($22,000 + $4,000) ...... $26,000 Less: Accum. depreciation— equipment ($4,000 + $2,000) ................. 6,000 Delivery trucks ($34,000 + $5,000) ....................... 39,000 Less: Accum. depreciation— delivery trucks ($5,000 + $5,000) ................. 10,000 Total assets.............................

$ 6,500 12,700 2,500 3,200 $24,900

$20,000

29,000

49,000 $73,900

Liabilities and Owner’s Equity Current liabilities Notes payable due within one year .................... $10,000 Accounts payable ($2,500 + $500) ................... 3,000 Interest payable ($25,000 X 10% X 6/12) ............. 1,250 Total current liabilities .............................. Long-term liabilities Notes payable, due July 1, 2019....................... Total liabilities............................................ Owner’s equity Owner’s capital.................................................. Total liabilities and owner’s equity ..........

$14,250 15,000 29,250 44,650* $73,900

4-77

BYP 4-5 (Continued) WHITEGLOVES JANITORIAL SERVICE Balance Sheet (Continued) December 31, 2017 *Capital balance as reported ................................. Add: Earned but unbilled fees ........................... Less: Janitorial supplies used............................ Insurance expired ($4,800 X 1/3) .............. Depreciation ($2,000 + $5,000) ................. Expenses incurred but unpaid ................. Interest accrued......................................... Total .................................................... Capital balance as adjusted .................................

$54,000 3,700 57,700 $2,700 1,600 7,000 500 1,250 13,050 $44,650

(b) Whitegloves Janitorial Service met the terms of the bank loan because current assets exceed current liabilities by $10,650 ($24,900 – $14,250) at December 31, 2017.

4-78

BYP 4-6

COMMUNICATION ACTIVITY

MEMO To:

Accounting Instructor

From:

Student

Re:

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.

The optional steps in the accounting cycle include preparing a worksheet and preparing reversing entries. If a worksheet is prepared, it is done after step 3 above, and it includes steps 4 and 6. The worksheet is a form used to make it easier to prepare 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.

4-79

BYP 4-7

ETHICS CASE

(a) The stakeholders in this case are: ⯈ You, as controller. ⯈ Mike Flanary, president. ⯈ Users of the company’s financial statements.

(b) 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 be detected by some user or the SEC (if you are a public company). Also stress upon him that you have a professional obligation to correct the statements or to resign.

4-80

BYP 4-8

ALL ABOUT YOU

The following is a personal balance sheet using the classified presentation. Note that the earnings from the part-time job as well as the tuition costs are not listed since neither of those items is an asset, liability, or equity item. Assets Current assets Cash ................................................................. Money market account ................................... Certificate of deposit ...................................... Accounts receivable from brother .................. Total current assets ................................

$1,200 1,800 3,000 300

Property, plant, and equipment Automobile ...................................................... Video and stereo equipment .......................... Home computer............................................... Total assets..............................................

7,000 1,250 800

$ 6,300

9,050 $15,350

Liabilities and Owner’s Equity Current liabilities Current portion of automobile loan ............... Current portion of credit card payable .......... Total current liabilities ............................

$1,500 150 $ 1,650

Long-term liabilities Automobile loan .............................................. Student loan .................................................... Credit card payable......................................... Total long-term liabilities ........................ Total liabilities ...................................

4,000 5,000 1,650 10,650 12,300

Owner’s equity Owner’s capital ($15,350 – $12,300)............... Total liabilities and owner’s equity .....

3,050 $15,350

4-81

BYP 4-9

(a)

FASB CODIFICATION ACTIVITY

1. Current assets is used to designate cash and other assets or resources commonly identified as those that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. 2. Current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resource properly classified as current assets, or the creation of other current liabilities.

(b)

Access FASB Codification 210-20-45 A right of setoff exists when all of the following conditions are met:

4-82

Each of two parties owes the other determinable amounts.

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

The reporting party intends to set off.

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

IFRS EXERCISES

IFRS 4-1 The statement of financial position required under IFRS and the balance sheet prepared under GAAP usually present the same information regarding a company’s assets, liabilities, and stockholders’ equity at a point in time. IFRS does not dictate a specific order but most companies list noncurrent items before current. Differences in ordering are IFRS

GAAP

Statement of Financial Position presentation Noncurrent assets Current assets Equity Noncurrent liabilities Current liabilities

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

Under IFRS, current assets are usually listed in the reverse order of liquidity. IFRS 4-2 IFRS uses the term statement of financial position rather than balance sheet. IFRS 4-3 WALLBY COMPANY Partial Statement of Financial Position Current assets Prepaid insurance................................................................... Supplies .................................................................................. Accounts receivable ............................................................... Debt investments.................................................................... Cash......................................................................................... Total .................................................................................

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

4-83

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

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

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

$193,880

37,240 $231,120

Equity and Liabilities Equity Owner’s capital ($115,000 + $3,440*) ......... Non-current liabilities Notes payable ............................................. Current liabilities Current portion of notes payable............... Accounts payable ....................................... Interest payable .......................................... Total equity and liabilities..................................

$118,440 83,880 13,900 12,300 2,600

*Net income = $14,180 – $780 – $7,360 – $2,600 = $3,440

4-84

28,800 $231,120

IFRS 4-5 INTERNATIONAL COMPARATIVE ANALYSIS PROBLEM

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

1. 2. 3.

4. 5.

Louis Vuitton Non-current assets listed first Goodwill listed before property, plant and equipment Current assets are shown in reverse order of liquidity with cash being last The equity section uses Share capital and Share premium Reporting currency is € (euros)

Apple Current assets listed first Property, plant, and equipment listed before goodwill Current assets are shown in order of liquidity with cash being first The equity section uses Common stock Reporting currency is $ (dollars)

4-85

CHAPTER 5 Accounting for Merchandising Operations ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief Exercises

Do It!

Exercises

A Problems

Describe merchandising operations and inventory systems.

2, 3, 4

1, 2

Record purchases under a perpetual inventory system.

5, 6, 7, 8

3, 5

2, 3, 4, 11

1A, 2A, 4A

Record sales under a perpetual inventory system.

9, 10, 11

3, 4

3, 4, 5, 11

1A, 2A, 4A

Apply the steps in the accounting cycle to a merchandising company.

1, 12, 13, 14

6, 7

6, 7, 8

3A, 4A, 5A

Compare a multiple-step with a single-step income statement.

15, 16, 17, 18, 19, 20

8, 9, 10

6, 9, 10, 12, 13, 14

2A, 3A, 5A, 6A, 7A

*6.

Prepare a worksheet for a merchandising company

15, 16

*7.

Record purchases and sales under a periodic inventory system.

22, 23

12, 13, 14, 15, 16

17, 18, 19, 20, 21, 22

6A, 7A, 8A

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to the chapter.

5-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Journalize purchase and sales transactions under a perpetual inventory system.

Simple

20–30

Journalize, post, and prepare a partial income statement.

Simple

30–40

Prepare financial statements and adjusting and closing entries.

Moderate

40–50

Journalize, post, and prepare a trial balance.

Simple

30–40

*5A

Complete accounting cycle beginning with a worksheet.

Moderate

50–60

*6A

Determine cost of goods sold and gross profit under periodic approach.

Moderate

40–50

*7A

Calculate missing amounts and assess profitability.

Moderate

20–30

*8A

Journalize, post, and prepare trial balance and partial income statement using periodic approach.

Simple

30–40

5-2

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS Number

Difficulty

Time (min.)

BE1

Simple

4–6

BE2

Simple

4–6

BE3

2, 3

Simple

2–4

BE4

Simple

6–8

BE5

Simple

6–8

BE6

Simple

1–2

BE7

Simple

2–4

BE8

Simple

2–4

BE9

Simple

4–6

BE10

Simple

4–6

*BE11

Simple

2–4

*BE12

Simple

4–6

*BE13

Simple

3–5

*BE14

Simple

6–8

*BE15

Simple

4–6

*BE16

Simple

2–4

DI1

Simple

2–4

DI2

Simple

2–4

DI3

Simple

4–6

DI4

Simple

4–6

DI5

Simple

10–12

EX1

Simple

3–5

EX2

Simple

8–10

EX3

2, 3

Simple

8–10

EX4

2, 3

Simple

8–10

EX5

Simple

8–10

EX6

4, 5

Simple

6–8

EX7

Simple

6–8

EX8

Simple

8–10

EX9

Simple

8–10

EX10

Simple

8–10

EX11

2, 3

Moderate

6–8

EX12

Simple

8–10

5-3

ACCOUNTING FOR MERCHANDISING OPERATIONS (Continued) Number

Difficulty

Time (min.)

EX13

Simple

6–8

EX14

Moderate

8–10

*EX15

Simple

2–4

*EX16

Simple

8–10

*EX17

Simple

6–8

*EX18

Simple

8–10

*EX19

Moderate

10–12

*EX20

Simple

8–10

*EX21

Simple

8–10

*EX22

Simple

6–8

P1A

2, 3

Simple

20–30

P2A

2, 3, 5

Simple

30–40

P3A

4, 5

Moderate

40–50

P4A

2–4

Simple

30–40

P5A

4–6

Moderate

50–60

P6A

5, 7

Moderate

40–50

P7A

5, 7

Moderate

20–30

P8A

Simple

30–40

BYP1

AN, E

Simple

10–15

BYP2

AN, E

Simple

15–20

BYP3

AN, E

Simple

15–20

BYP4

—

Simple

10–15

BYP5

AN, S, E

Moderate

20–30

BYP6

Simple

10–15

BYP7

Simple

10–15

BYP8

—

Simple

5–10

BYP9

—

Moderate

10–15

5-4

Learning Objective

Knowledge

Comprehension

1. Describe merchandising operations and inventory systems.

Q5-2

Q5-3 Q5-4

DI5-1 BE5-1 E5-1 BE5-2

2. Record purchases under a perpetual inventory system.

Q5-5

Q5-6 Q5-7

Q5-8 BE5-3 BE5-5 DI5-2 E5-2

E5-3 E5-4 P5-1A P5-2A P5-4A

E5-11

3. Record sales under a perpetual inventory system.

Q5-10

Q5-11 BE5-3 BE5-4 DI5-3 E5-3

E5-4 E5-5 P5-1A P5-2A P5-4A

Q5-9 E5-11

Q5-1 Q5-12 Q5-14

Q5-13 BE5-6 BE5-7 DI5-4

E5-6 E5-7 E5-8 P5-4A

P5-5A P5-3A

Q5-19 BE5-9 Q5-17

BE5-8 P5-5A BE5-10 P5-6A DI5-5 Q5-15 E5-6 Q5-16 E5-9 Q5-20 E5-10 E5-12 P5-2A

E5-13 E5-14 P5-3A P5-7A

4. Apply the steps in the accounting cycle to a merchandising company.

Application

Analysis

5. Compare a multiple-step with a single-step income statement.

Q5-18

*6. Prepare a worksheet for a merchandising company.

Q5-21 BE5-11

E5-15 E5-16

P5-5A

*7. Record purchases and sales under a periodic inventory system.

Q5-22

Q5-23 BE5-16 BE5-12 BE5-13 BE5-14

BE5-15 E5-22 E5-19 E5-17 P5-6A P5-7A E5-18 P5-8A E5-20 E5-21

Broadening Your Perspective

Communication Real-World Focus FASB Codification

Synthesis

Financial Reporting Decision Making Comparative Analysis Across the Decision Making Across Organization the Organization

Evaluation

All About You Comparative Analysis Financial Reporting Decision Making Across the Organization Ethics Case

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

5-5

ANSWERS TO QUESTIONS 1.

(a) Disagree. The steps in the accounting cycle are the same for both a merchandising company and a service company. (b) The measurement of income is conceptually the same. In both types of companies, net income (or loss) results from the matching of expenses with revenues.

The normal operating cycle for a merchandising company is likely to be longer than in a service company because inventory must first be purchased and sold, and then the receivables must be collected.

The components of revenues and expenses differ as follows: Revenues Expenses

Merchandising Sales Revenue Cost of Goods Sold and Operating

Service Fees, Rents, etc. Operating (only)

Income measurement for a merchandising company differs from a service company as follows: (a) sales are the primary source of revenue and (b) expenses are divided into two main categories: cost of goods sold and operating expenses.

In a perpetual inventory system, cost of goods sold is determined each time a sale occurs.

The letters FOB mean Free on Board. FOB shipping point means that goods are placed free on board the carrier by the seller. The buyer then pays the freight and debits Inventory. FOB destination means that the goods are placed free on board to the buyer’s place of business. Thus, the seller pays the freight and debits Freight-out.

Credit terms of 2/10, n/30 mean that a 2% cash discount may be taken if payment is made within 10 days of the invoice date; otherwise, the invoice price, less any returns, is due 30 days from the invoice date.

July 24

Accounts Payable ($2,000 – $200) ............................................... Inventory ($1,800 X 2%) ........................................................ Cash ($1,800 – $36)..............................................................

1,800 36 1,764

Agree. In accordance with the revenue recognition principle, sales revenues are generally considered to be recognized when the goods are transferred from the seller to the buyer; that is, when the exchange transaction occurs. The recognition of revenue is not dependent on the collection of credit sales.

10.

(a) The primary source documents are: (1) cash sales—cash register tapes and (2) credit sales— sales invoice.

5-6

Questions Chapter 5 (Continued) (b) The entries are: Debit Cash sales—

Credit sales—

11.

July 19

Cash.............................................................. Sales Revenue ...................................... Cost of Goods Sold ....................................... Inventory................................................

Accounts Receivable ..................................... Sales Revenue ...................................... Cost of Goods Sold ....................................... Inventory................................................

Cash ($800 – $16) ............................................................... Sales Discounts ($800 X 2%)................................................ Accounts Receivable ($900 – $100) ..............................

Credit XX

XX XX

XX XX XX

784 16 800

12.

The perpetual inventory records for merchandise inventory may be incorrect due to a variety of causes such as recording errors, theft, or waste.

13.

Two closing entries are required: (1) Sales Revenue .............................................................................. Income Summary ...................................................................

200,000

(2) Income Summary........................................................................... Cost of Goods Sold ................................................................

145,000

200,000

145,000

14.

Of the merchandising accounts, only Inventory will appear in the post-closing trial balance.

15.

Sales revenues...................................................................................................... Cost of goods sold ................................................................................................. Gross profit ............................................................................................................

$105,000 70,000 $ 35,000

Gross profit rate: $35,000 ÷ $105,000 = 33.3% 16.

Gross profit ............................................................................................................ Less: Net income .................................................................................................. Operating expenses...............................................................................................

17.

There are three distinguishing features in the income statement of a merchandising company: (1) a sales revenues section, (2) a cost of goods sold section, and (3) gross profit.

$370,000 240,000 $130,000

5-7

Questions Chapter 5 (Continued) 18.

(a) The operating activities part of the income statement has three sections: sales revenues, cost of goods sold, and operating expenses. (b) The nonoperating activities part consists of two sections: other revenues and gains, and other expenses and losses.

19.

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 net income (or net loss).

20. Apple’s gross profit rate for 2013 was 37.6% [($170,910 – $106,606) ÷ $170,910]. Its gross profit rate in 2012 was 43.9% [($156,508 – $87,846) ÷ $156,508] so the rate decreased from 2012 to 2013. *21.

The columns are: (a) Inventory—Trial Balance (Dr.), Adjusted Trial Balance (Dr.), and Balance Sheet (Dr.). (b) Cost of Goods Sold—Trial Balance (Dr.), Adjusted Trial Balance (Dr.), and Income Statement (Dr.).

*22.

*23.

5-8

Accounts

Added/Deducted

Purchase Returns and Allowances Purchase Discounts Freight-in

Deducted Deducted Added

July 24

Accounts Payable ($3,000 – $200) ................................................... Purchase Discounts ($2,800 X 2%) ........................................... Cash ($2,800 – $56)..................................................................

2,800 56 2,744

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5-1 (a) Cost of goods available for sale = $80,000 + $100,000 = $180,000. Ending inventory = $180,000 – $120,000 = $60,000. (b) Purchases = $115,000 – $50,000 = $65,000. Cost of goods sold = $115,000 – $35,000 = $80,000. (c) Beginning inventory = $160,000 – $110,000 = $50,000. Cost of goods sold = $160,000 – $29,000 = $131,000. BRIEF EXERCISE 5-2 (a) Cost of goods sold = $47,000 ($75,000 – $28,000). Operating expenses = $18,200 ($28,000 – $19,800). (b) Gross profit = $38,000 ($108,000 – $70,000). Operating expenses = $8,500 ($38,000 – $29,500). (c) Sales Revenue = $163,500 ($83,900 + $79,600). Net income = $40,100 ($79,600 – $39,500).

BRIEF EXERCISE 5-3 Cha Company Inventory ............................................................. Accounts Payable .......................................

780 780

Wirtz Company Accounts Receivable.......................................... Sales Revenue............................................. Cost of Goods Sold ............................................ Inventory......................................................

780 780 470 470

5-9

BRIEF EXERCISE 5-4 (a) Accounts Receivable .......................................... Sales Revenue ............................................. Cost of Goods Sold ............................................ Inventory ......................................................

900,000

(b) Sales Returns and Allowances .......................... Accounts Receivable .................................. Inventory ............................................................. Cost of Goods Sold .....................................

90,000

(c) Cash ($810,000 – $16,200) .................................. Sales Discounts ($810,000 X 2%)....................... Accounts Receivable .................................. ($900,000 – $90,000)

793,800 16,200

900,000 590,000 590,000 90,000 62,000 62,000

810,000

BRIEF EXERCISE 5-5 (a) Inventory ............................................................. Accounts Payable .......................................

900,000

(b) Accounts Payable ............................................... Inventory ......................................................

90,000

(c) Accounts Payable ($900,000 – $90,000) ............ Inventory ($810,000 X 2%) ....................................... Cash ($810,000 – $16,200) ..........................

810,000

900,000 90,000

16,200 793,800

BRIEF EXERCISE 5-6 Cost of Goods Sold .................................................... Inventory .............................................................

5-10

1,900 1,900

BRIEF EXERCISE 5-7 Sales Revenue ............................................................ Income Summary................................................

195,000

Income Summary ....................................................... Cost of Goods Sold ............................................ Sales Discounts ..................................................

119,000

195,000 117,000 2,000

BRIEF EXERCISE 5-8 NELSON COMPANY Income Statement (Partial) For the Month Ended October 31, 2017 Sales revenues Sales revenue ($280,000 + $95,000)................... Less: Sales returns and allowances ................ Sales discounts ....................................... Net sales..............................................................

$375,000 $11,000 5,000

16,000 $359,000

BRIEF EXERCISE 5-9 As the name suggests, numerous steps are required in determining net income in a multiple-step income statement. In contrast, only one step is required to compute net income in a single-step income statement. A multiplestep statement has five sections whereas a single-step statement has only two sections. The multiple-step statement provides more detail than a singlestep statement, but net income is the same under both statements. Some of the differences in presentation can be seen from the comparative information presented below. (1) Multiple-Step Income Statement

a. b. c. d. .

Item Gain on sale of equipment Interest expense Casualty loss from vandalism Cost of goods sold

Section Other revenues and gains Other expenses and losses Other expenses and losses Cost of goods sold

5-11

BRIEF EXERCISE 5-9 (Continued) (2) Single-Step Income Statement

a. b. c. d.

Item Gain on sale of equipment Interest expense Casualty loss from vandalism Cost of goods sold

Section Revenues Expenses Expenses Expenses

BRIEF EXERCISE 5-10 (a) Net sales = $510,000 – $15,000 = $495,000. (b) Gross profit = $495,000 – $330,000 = $165,000. (c) Income from operations = $165,000 – $90,000 = $75,000. (d) Gross profit rate = $165,000 ÷ $495,000 = 33.3%.

*BRIEF EXERCISE 5-11 (a) Cash: Trial balance debit column; Adjusted trial balance debit column; Balance sheet debit column. (b) Inventory: Trial balance debit column; Adjusted trial balance debit column; Balance sheet debit column. (c) Sales revenue: Trial balance credit column; Adjusted trial balance credit column, Income statement credit column. (d) Cost of goods sold: Trial balance debit column, Adjusted trial balance debit column, Income statement debit column.

5-12

*BRIEF EXERCISE 5-12 Purchases ...................................................................... Less: Purchase returns and allowances .................... Purchase discounts ........................................... Net purchases ...............................................................

$450,000 $13,000 9,000

Net purchases ............................................................... Add: Freight-in ............................................................. Cost of goods purchased .............................................

22,000 $428,000 $428,000 18,000 $446,000

*BRIEF EXERCISE 5-13 Net sales ........................................................................ Beginning inventory...................................................... Add: Cost of goods purchased*.................................. Cost of goods available for sale................................... Ending inventory ........................................................... Cost of goods sold ........................................................ Gross profit....................................................................

$730,000 $ 60,000 446,000 506,000 90,000 416,000 $314,000

*Information taken from Brief Exercise 5-12. *BRIEF EXERCISE 5-14 (a) (b) (c)

Purchases ............................................................. Accounts Payable .........................................

900,000

Accounts Payable ................................................ Purchase Returns and Allowances ..............

110,000

Accounts Payable ($900,000 – $110,000) ........... Purchase Discounts ($790,000 X 2%) .......... Cash ($790,000 – $15,800) ............................

790,000

900,000 110,000 15,800 774,200

5-13

*BRIEF EXERCISE 5-15 Inventory (ending) ......................................................... Sales Revenue ............................................................... Purchase Returns and Allowances .............................. Income Summary .................................................

30,000 180,000 30,000

Income Summary .......................................................... Purchases ............................................................. Sales Discounts.................................................... Inventory (beginning) ...........................................

162,000

240,000 120,000 2,000 40,000

*BRIEF EXERCISE 5-16 (a)

Cash: Trial balance debit column; Adjusted trial balance debit column; Balance sheet debit column.

(b)

Beginning inventory: Trial balance debit column; Adjusted trial balance debit column; Income statement debit column.

(c)

Accounts payable: Trial balance credit column; Adjusted trial balance credit column; Balance sheet credit column.

(d)

Ending inventory: Income statement credit column; Balance sheet debit column.

5-14

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 5-1 1. 2. 3. 4.

True. False. Under a perpetual inventory system, a company determines the cost of goods sold at each time a sale occurs. False. Both service and merchandising companies are likely to use accounts receivable. True.

DO IT! 5-2 Oct. 5

Oct. 8

Inventory ................................................................ Accounts Payable ........................................... (To record goods purchased on account)

4,800

Accounts Payable.................................................. Inventory .......................................................... (To record return of defective goods)

650

4,800

650

DO IT! 5-3 Oct. 5

Oct. 8

Accounts Receivable ............................................ Sales Revenue ................................................. (To record credit sales)

4,800

Cost of Goods Sold ............................................... Inventory ......................................................... (To record cost of goods sold on account)

3,100

Sales Returns and Allowances ............................ Accounts Receivable ...................................... (To record credit granted for receipt of returned goods)

650

Inventory ................................................................ Cost of Goods Sold ........................................ (To record fair value of goods returned)

100

4,800

3,100

650

100

5-15

DO IT! 5-4 Dec. 31 Sales Revenue ........................................................ 156,000 Interest Revenue ................................................... 5,000 Income Summary ............................................. 161,000 (To close accounts with credit balances) Income Summary .................................................... 128,400 Cost of Goods Sold ......................................... Sales Returns and Allowances ....................... Sales Discounts ............................................... Freight-Out ....................................................... Utilities Expense .............................................. Salaries and Wages Expense.......................... (To close accounts with debit balances)

5-16

92,400 4,000 3,000 1,800 7,700 19,500

DO IT! 5-5 Account

Financial Statement

Classification

Accounts Payable Accounts Receivable Accumulated Depreciation— Buildings Cash Casualty Loss from Vandalism Cost of Goods Sold Depreciation Expense Equipment

Balance sheet Balance sheet Balance sheet

Freight-Out Insurance Expense Interest Payable Inventory Land

Income statement Income statement Balance sheet Balance sheet Balance sheet

Notes Payable (due in 5 years) Owner’s Capital

Balance sheet

Current liabilities Current assets Property, plant, and equipment Current assets Other expenses and losses Cost of goods sold Operating expenses Property, plant, and equipment Operating expenses Operating expenses Current liabilities Current assets Property, plant, and equipment Long-term liabilities

Owner’s Drawings Property Taxes Payable Salaries and Wages Expense Salaries and Wages Payable Sales Returns and Allowances Sales Revenue Unearned Rent Revenue Utilities Expense

Balance sheet Income statement Income statement Income statement Balance sheet

Owner’s equity statement Owner’s equity statement Balance sheet

Current liabilities

Income statement Balance sheet Income statement

Operating expenses Current liabilities Sales revenues

Income statement Balance sheet Income statement

Sales revenues Current liability Operating expenses

Beginning balance Deduction section

5-17

SOLUTIONS TO EXERCISES EXERCISE 5-1 1. 2. 3. 4. 5.

6. 7. 8.

True. False. For a merchandiser, sales less cost of goods sold is called gross profit. True. True. False. The operating cycle of a merchandiser differs from that of a service company. The operating cycle of a merchandiser is ordinarily longer. False. In a periodic inventory system, no detailed inventory records of goods on hand are maintained. True. False. A perpetual inventory system provides better control over inventories than a periodic system.

EXERCISE 5-2 Inventory .......................................... Accounts Payable ....................

23,000

Inventory .......................................... Cash..........................................

900

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

26,000

Accounts Payable ........................... Inventory ..................................

3,000

Accounts Payable ........................... ($23,000 – $3,000) Inventory [($23,000 – $3,000) X 2%]..... Cash ($20,000 – $400)..............

20,000

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

20,000

(a) (1) April 5 (2) April 6 (3) April 7 (4) April 8 (5) April 15

(b) May 4

5-18

23,000 900 26,000 3,000

400 19,600

20,000 .

EXERCISE 5-3 Sept. 6 9 10 12

Inventory (90 X $22) ........................................ Cash .........................................................

1,980

Inventory ......................................................... Cash .........................................................

Accounts Payable ........................................... Inventory ..................................................

Accounts Receivable (26 X $31) .................... Sales Revenue ......................................... Cost of Goods Sold (26 X $23) ....................... Inventory ..................................................

806

Sales Returns and Allowances ..................... Accounts Receivable ............................. Inventory ........................................................ Cost of Goods Sold ................................

Accounts Receivable (30 X $32) ................... Sales Revenue ........................................ Cost of Goods Sold (30 X $23) ...................... Inventory .................................................

960

1,980 90 69 806 598 598 31 23 23 960 690 690

EXERCISE 5-4 (a) June 10 11 12 19

Inventory ................................................. Accounts Payable ...........................

8,000

Inventory ................................................. Cash .................................................

400

Accounts Payable................................... Inventory..........................................

300

Accounts Payable ($8,000 – $300)......... Inventory ($7,700 X 2%) ............................... Cash ($7,700 – $154) .......................

7,700

8,000 400 300

154 7,546 .

5-19

EXERCISE 5-4 (Continued) (b) June 10

Accounts Receivable............................. Sales Revenue................................ Cost of Goods Sold ............................... Inventory.........................................

8,000

Sales Returns and Allowances ............. Accounts Receivable ..................... Inventory ................................................ Cost of Goods Sold........................

300

Cash ($7,700 – $154).............................. Sales Discounts ($7,700 X 2%) ............. Accounts Receivable ($8,000 – $300)............................

7,546 154

8,000 4,800 4,800 300 70 70

7,700

EXERCISE 5-5 (a) 1.

Accounts Receivable ...................... Sales Revenue ......................... Cost of Goods Sold......................... Inventory ..................................

570,000

Sales Returns and Allowances ...... Accounts Receivable ..............

20,000

Cash ($550,000 – $5,500) ................ Sales Discounts [($570,000 – $20,000) X 1%] ........ Accounts Receivable ($570,000 – $20,000) ............

544,500

(b) Cash .......................................................................... Accounts Receivable ($570,000 – $20,000) .....................................

550,000

2. 3.

5-20

Dec. 3

Dec. 8 Dec. 13

570,000 350,000 350,000 20,000

5,500 550,000

550,000

EXERCISE 5-6 (a)

SANG COMPANY Income Statement (Partial) For the Year Ended October 31, 2017 Sales revenues Sales revenue ................................................. Less: Sales returns and allowances ........... Sales discounts.................................. Net sales .........................................................

$820,000 $25,000 13,000

38,000 $782,000

Note: Freight-out is a selling expense. (b) (1) Oct. 31

Sales Revenue ............................. Income Summary .................

820,000

Income Summary ......................... Sales Returns and Allowances ....................... Sales Discounts....................

38,000

(a) Cost of Goods Sold .............................................. Inventory........................................................

1,400

(b) Sales Revenue ...................................................... Income Summary ..........................................

115,000

Income Summary.................................................. Cost of Goods Sold ($60,000 + $1,400)........ Operating Expenses ..................................... Sales Returns and Allowances .................... Sales Discounts ............................................

93,300

Income Summary ($115,000 – $93,300) ............... Owner’s Capital .............................................

21,700

(2)

820,000

25,000 13,000

EXERCISE 5-7

1,400 115,000 61,400 29,000 1,700 1,200 21,700

5-21

EXERCISE 5-8 (a) Cost of Goods Sold .............................................. Inventory ........................................................

600

(b) Sales Revenue ...................................................... Income Summary ..........................................

380,000

Income Summary .................................................. Cost of Goods Sold ($218,000 + $600) ......... Freight-Out..................................................... Insurance Expense........................................ Rent Expense ................................................ Salaries and Wages Expense ....................... Sales Discounts............................................. Sales Returns and Allowances.....................

335,600

Income Summary ($380,000 – $335,600) ............. Owner’s Capital .............................................

44,400

600 380,000 218,600 7,000 12,000 20,000 55,000 10,000 13,000 44,400

EXERCISE 5-9 (a)

KAILA COMPANY Income Statement For the Month Ended March 31, 2017 Sales revenues Sales revenue ................................................... Less: Sales returns and allowances .............. Sales discounts .................................... Net sales ........................................................... Cost of goods sold ............................................... Gross profit ........................................................... Operating expenses Salaries and wages expense ........................... Rent expense.................................................... Freight-out ........................................................ Insurance expense ........................................... Total operating expenses..................... Net income........................................................

$380,000 $13,000 8,000

58,000 30,000 7,000 6,000 101,000 $ 43,000

(b) Gross profit rate = $144,000 ÷ $359,000 = 40.11%. 5-22

21,000 359,000 215,000 144,000

EXERCISE 5-10 (a)

ANHAD COMPANY Income Statement For the Year Ended December 31, 2017 Net sales.............................................. Cost of goods sold ............................. Gross profit ......................................... Operating expenses ........................... Income from operations ..................... Other revenues and gains Interest revenue .......................... Other expenses and losses Interest expense.......................... Loss on disposal of plant assets........................................ Net income ..........................................

(b)

$2,200,000 1,289,000 911,000 725,000 186,000 $28,000 $70,000 17,000

59,000 $ 127,000

ANHAD COMPANY Income Statement For the Year Ended December 31, 2017 Revenues Net sales .............................................. Interest revenue .................................. Total revenues ............................. Expenses Cost of goods sold.............................. Operating expenses ............................ Interest expense.................................. Loss on disposal of plant assets ....... Total expenses............................. Net income ..................................................

87,000

$2,200,000 28,000 2,228,000 $1,289,000 725,000 70,000 17,000 2,101,000 $ 127,000

5-23

EXERCISE 5-11 1. 2.

3. 4.

Sales Returns and Allowances ........................................ Sales Revenue ...........................................................

210

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

180 180

Sales Discounts ................................................................ Sales Revenue ...........................................................

215

Inventory ........................................................................... Cash ................................................................................... Freight-out .................................................................

20 180

210

180 180 215

200

EXERCISE 5-12 (a) $900,000 – $522,000 = $378,000. (b) $378,000/$900,000 = 42%. The gross profit rate is generally considered to be more useful than the gross profit amount. The rate expresses a more meaningful (qualitative) relationship between net sales and gross profit. The gross profit rate tells how many cents of each sales dollar go to gross profit. The trend of the gross profit rate is closely watched by financial statement users, and is compared with rates of competitors and with industry averages. Such comparisons provide information about the effectiveness of a company’s purchasing function and the soundness of its pricing policies. (c) Income from operations is $153,000 ($378,000 – $225,000), and net income is $142,000 ($153,000 – $11,000). (d) The amount shown for net income is the same in a multiple-step income statement and a single-step income statement. Both income statements report the same revenues and expenses, but in different order. Therefore, net income in Laquen’s single-step income statement is also $142,000. (e) Inventory is reported as a current asset immediately below accounts receivable.

5-24

EXERCISE 5-13 (a) (*missing amount) a.

Sales revenue .............................................................. *Sales returns ............................................................... Net sales ......................................................................

$ 92,000 (5,000) $ 87,000

Net sales ...................................................................... Cost of goods sold ...................................................... *Gross profit .................................................................

$ 87,000 (56,000) $ 31,000

Gross profit.................................................................. Operating expenses .................................................... *Net income...................................................................

$ 31,000 (15,000) $ 16,000

*Sales revenue .............................................................. Sales returns ............................................................... Net sales ......................................................................

$107,000 (5,000) $102,000

Net sales ...................................................................... *Cost of goods sold...................................................... Gross profit..................................................................

$102,000 60,500 $ 41,500

Gross profit.................................................................. *Operating expenses .................................................... Net income ...................................................................

$ 41,500 23,500 $ 18,000

(b) Summer Company Gross profit ÷ Net sales = $31,000 ÷ $87,000 = 35.6% Winter Company Gross profit ÷ Net sales = $41,500 ÷ $102,000 = 40.7%

5-25

EXERCISE 5-14 (*Missing amount) (a)

Sales revenue ........................................................ Sales returns and allowances .............................. Net sales ................................................................

$ 90,000 4,000* $ 86,000

(b)

Net sales ................................................................ Cost of goods sold................................................ Gross profit ...........................................................

$ 86,000 56,000 $ 30,000*

(c) and (d) Gross profit ........................................................... Operating expenses .............................................. Income from operations (c) .................................. Other expenses and losses .................................. Net income (d) .......................................................

$ 30,000 15,000 $ 15,000* 4,000 $ 11,000*

(e)

$100,000* 5,000 $ 95,000

(f)

$ 95,000 57,000* $ 38,000

(g) and (h) Gross profit ........................................................... Operating expenses (g) ........................................ Income from operations (h) .................................. Other expenses and losses .................................. Net income.............................................................

$ 38,000 20,000* $ 18,000* 7,000 $ 11,000

(i)

$122,000 12,000 $110,000*

(j)

$110,000 86,000* $ 24,000

5-26

EXERCISE 5-14 (Continued) (k) and (l) Gross profit ........................................................... Operating expenses.............................................. Income from operations (k) .................................. Other expenses and losses (l) ............................. Net income ............................................................

$24,000 18,000 $ 6,000* 1,000* $ 5,000

*EXERCISE 5-15 Accounts Cash Inventory Sales Revenue Sales Returns and Allowances Sales Discounts Cost of Goods Sold

Adjusted Trial Balance

Income Statement

Debit

Credit

Balance Sheet

Credit

11,000 76,000

Debit

Credit

11,000 76,000 480,000

10,000 9,000 300,000

480,000 10,000 9,000 300,000

*EXERCISE 5-16 BALISTRERI COMPANY Worksheet For the Month Ended June 30, 2017 Account Titles Cash Accounts Receivable Inventory Accounts Payable Owner’s Capital Sales Revenue Cost of Goods Sold Operating Expenses Totals Net Income Totals

Trial Balance Dr. Cr. 1,920 2,440 11,640 1,120 3,500 42,500 20,560 10,560 47,120 47,120

Adjustments Dr. Cr.

1,500

1,500 1,500

1,500

Adj. Trial Balance Dr. Cr. 1,920 2,440 11,640 2,620 3,500 42,500 20,560 12,060 48,620 48,620

Income Statement Dr. Cr.

Balance Sheet Dr. Cr. 1,920 2,440 11,640 2,620 3,500

42,500 20,560 12,060 32,620 9,880 42,500

42,500

16,000

42,500

16,000

6,120 9,880 16,000

5-27

*EXERCISE 5-17 Inventory, September 1, 2016 ....................................... Purchases ...................................................................... Less: Purchase returns and allowances..................... Net Purchases ............................................................... Add: Freight-in.............................................................. Cost of goods purchased ............................................. Cost of goods available for sale................................... Inventory, August 31, 2017 ........................................... Cost of goods sold ................................................

$19,500 $149,000 2,000 147,000 5,000 152,000 171,500 23,000 $148,500

*EXERCISE 5-18 (a)

Sales revenue ....................................... Less: Sales returns and allowances .... Sales discounts......................... Net sales ............................................... Cost of goods sold Inventory, January 1 ....................... Purchases ....................................... Less: Purch. rets. and alls. ........... Purch. discounts ................. Net purchases ................................. Add: Freight-in ................................ Cost of goods available for sale .... Inventory, December 31 ................. Cost of goods sold .................. Gross profit .....................................

$840,000 $ 10,000 5,000

15,000 825,000

50,000 $509,000 2,000 6,000 501,000 4,000 555,000 60,000 495,000 $330,000

(b)

Gross profit $330,000 – Operating expenses = Net income $130,000. Operating expenses = $200,000.

5-28

*EXERCISE 5-19 (a) $1,580 (b) $1,690 (c) $1,620 (d) $30 (e) $250 (f) $120

($1,620 – $40) ($1,580 + $110) ($1,870 – $250) ($1,060 – $1,030) ($1,280 – $1,030) ($1,350 – $1,230)

(g) $6,500 ($290 + $6,210) (h) $1,730 ($7,940 – $6,210) (i) $8,940 ($1,000 + $7,940) (j) $6,200 ($49,530 – $43,330 from (I)) (k) $2,500 ($43,590 – $41,090) (l) $43,330 ($41,090 + $2,240)

*EXERCISE 5-20 (a) 1. 2. 3. 4.

(b)

April 5 April 6 April 7 April 8

April 15

May

Purchases ....................................... Accounts Payable.....................

25,000

Freight-in......................................... Cash...........................................

900

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

30,000

Accounts Payable .......................... Purchase Returns and Allowances ............................

2,800

25,000 900 30,000

2,800

Accounts Payable ($25,000 – $2,800) ....................... Purchase Discounts [($25,000 – $2,800) X 2%)]..... Cash ($22,200 – $444)...............

22,200 444 21,756

Accounts Payable ($25,000 – $2,800) ....................... Cash...........................................

22,200 22,200

5-29

*EXERCISE 5-21 (a) 1. 2. 3. 4.

(b)

April 5 April 6 April 7 April 8

April 15

May

Purchases ....................................... Accounts Payable .....................

21,000

Freight-in......................................... Cash...........................................

800

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

26,000

Accounts Payable........................... Purchase Returns and Allowances ............................

4,000

Accounts Payable........................... ($21,000 – $4,000) Purchase Discounts [($21,000 – $4,000) X 2%)] ..... Cash ($17,000 – $340)...............

17,000

21,000 800 26,000

4,000

340 16,660

Accounts Payable ($21,000 – $4,000)........................ Cash...........................................

17,000 17,000

*EXERCISE 5-22 Accounts Cash Inventory Purchases Purchase Returns and Allowances Sales Revenue Sales Returns and Allowances Sales Discounts Rent Expense

5-30

Adjusted Trial Balance

Income Statement

Debit

Credit

9,000 80,000 240,000

80,000 240,000 30,000 450,000

10,000 5,000 42,000

Balance Sheet

Credit

Debit

75,000

9,000 75,000

30,000 450,000 10,000 5,000 42,000

Credit

PROBLEM 5-1A

(a) June 1 3

6 9

15 17

20 24

Inventory...................................................... Accounts Payable ...............................

1,600

Accounts Receivable .................................. Sales Revenue .....................................

2,500

Cost of Goods Sold..................................... Inventory ..............................................

1,440

Accounts Payable ....................................... Inventory ..............................................

100

Accounts Payable ($1,600 – $100) ............. Inventory ($1,500 X .02).................................... Cash .....................................................

1,500

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

2,500

Accounts Receivable .................................. Sales Revenue .....................................

1,800

Cost of Goods Sold..................................... Inventory ..............................................

1,080

Inventory...................................................... Accounts Payable ...............................

1,800

Cash ............................................................. Sales Discounts ($1,800 X .02) ................... Accounts Receivable ..........................

1,764 36

Accounts Payable ....................................... Inventory ($1,800 X .02).................................... Cash .....................................................

1,800

1,600 2,500 1,440 100

30 1,470 2,500 1,800 1,080 1,800

1,800

36 1,764

5-31

PROBLEM 5-1A (Continued) June 28

5-32

Accounts Receivable .................................. Sales Revenue .....................................

1,600

Cost of Goods Sold..................................... Inventory ..............................................

970

Sales Returns and Allowances .................. Accounts Receivable...........................

120

Inventory ...................................................... Cost of Goods Sold .............................

1,600 970 120 72

PROBLEM 5-2A (a) Date May 1

5 9

11 12 15 17 19

General Journal Account Titles and Explanation Inventory .......................................... Accounts Payable ....................

Ref. 120 201

Debit 4,200

Accounts Receivable ....................... Sales Revenue ..........................

112 401

2,100

Cost of Goods Sold ......................... Inventory ...................................

505 120

1,300

Accounts Payable ............................ Inventory ...................................

201 120

300

Cash ($2,100 – $21).......................... Sales Discounts ($2,100 X 1%) ....... Accounts Receivable ...............

101 414 112

2,079 21

Accounts Payable ($4,200 – $300) ...... Inventory ($3,900 X 2%) ........... Cash ..........................................

201 120 101

3,900

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

126 101

400

Inventory .......................................... Cash ..........................................

120 101

1,400

Cash.................................................. Inventory ...................................

101 120

150

Inventory .......................................... Accounts Payable ....................

120 201

1,300

Inventory .......................................... Cash ..........................................

120 101

130

J1 Credit 4,200 2,100 1,300 300

2,100 78 3,822 400 1,400

150 1,300 130

5-33

PROBLEM 5-2A (Continued)

Date May 24

25 27

5-34

General Journal Account Titles and Explanation Cash .................................................... Sales Revenue ............................

Ref. 101 401

Debit 3,200

Cost of Goods Sold ............................ Inventory .....................................

505 120

2,000

Inventory ............................................. Accounts Payable .......................

120 201

620

Accounts Payable .............................. Inventory ($1,300 X 2%)........................... Cash.............................................

201

1,300

Sales Returns and Allowances.......... Cash.............................................

412 101

Inventory ............................................. Cost of Goods Sold ....................

120 505

Accounts Receivable ......................... Sales Revenue ............................

112 401

1,000

Cost of Goods Sold ............................ Inventory .....................................

505 120

560

J1 Credit 3,200 2,000 620

120 101

26 1,274 70 30 1,000 560

PROBLEM 5-2A (Continued) (b) Cash Date May

1 9 10 11 12 15 19 24 27 29

Explanation Balance

Ref. � J1 J1 J1 J1 J1 J1 J1 J1 J1

Debit

Credit

2,079 3,822 400 1,400 150 130 3,200 1,274 70

Accounts Receivable Date May

No. 112

Explanation

Ref. J1 J1 J1

2 9 31

Inventory Date Explanation May 1 2 5 10 12 15 17 19 24 25 27 29 31

No. 101 Balance 5,000 7,079 3,257 2,857 1,457 1,607 1,477 4,677 3,403 3,333

Ref. J1 J1 J1 J1 J1 J1 J1 J1 J1 J1 J1 J1 J1

Debit 2,100

Credit 2,100

1,000

Debit 4,200

Credit 1,300 300 78

1,400 150 1,300 130 2,000 620 26 30 560

Balance 2,100 0 1,000 No. 120 Balance 4,200 2,900 2,600 2,522 3,922 3,772 5,072 5,202 3,202 3,822 3,796 3,826 3,266

5-35

PROBLEM 5-2A (Continued) Supplies Date Explanation May 11

Ref. J1

Debit 400

No. 126 Balance 400

Credit

Accounts Payable Date May

No. 201

Explanation

Ref. J1 J1 J1 J1 J1 J1

1 5 10 17 25 27

Debit

Credit 4,200

Balance 4,200 3,900 0 1,300 1,920 620

300 3,900 1,300 620 1,300

Owner’s Capital Date May

No. 301

Explanation 1 Balance

Ref. �

Debit

Credit

Balance 5,000

Sales Revenue Date May

No. 401

Explanation

Ref. J1 J1 J1

2 24 31

Debit

Credit 2,100 3,200 1,000

Balance 2,100 5,300 6,300

Sales Returns and Allowances Date May 29

Explanation

No. 412 Ref. J1

Debit 70

Credit

Balance 70

Sales Discounts Date May

5-36

No. 414

Explanation

Ref. J1

Debit 21

Credit

Balance 21

PROBLEM 5-2A (Continued) Cost of Goods Sold Date May

(c)

No. 505

Explanation

Ref. J1 J1 J1 J1

2 24 29 31

Debit 1,300 2,000

Credit

30 560

RENNER HARDWARE STORE Income Statement (Partial) For the Month Ended May 31, 2017 Sales revenues Sales revenue ..................................................... Less: Sales returns and allowances ................ Sales discounts....................................... Net sales ............................................................. Cost of goods sold .................................................... Gross profit ................................................................

Balance 1,300 3,300 3,270 3,830

$6,300 $70 21

91 6,209 3,830 $2,379

5-37

PROBLEM 5-3A

(a)

BIG BOX STORE Income Statement For the Year Ended November 30, 2017

Sales revenues Sales revenue .................................... Less: Sales returns & allowances ... Net sales............................................. Cost of goods sold ................................... Gross profit............................................... Operating expenses Salaries and wages expense...... Rent expense .............................. Sales commissions expense ..... Depreciation expense ................. Utilities expense ......................... Insurance expense ..................... Freight-out................................... Property tax expense.................. Total oper. expenses ........... Income from operations........................... Other revenues and gains Interest revenue ................................. Other expenses and losses Interest expense ................................ Net income ................................................

5-38

$720,000 8,000 712,000 518,000 194,000 $96,000 15,000 11,000 11,000 8,500 7,000 6,500 2,500 157,500 36,500 2,000 6,400

(4,400) $ 32,100

PROBLEM 5-3A (Continued) BIG BOX STORE Owner’s Equity Statement For the Year Ended November 30, 2017 Owner’s Capital, December 1, 2016 ............................................... Add: Net income............................................................................ Less: Drawings............................................................................... Owner’s Capital, November 30, 2017 .............................................

$101,700 32,100 133,800 10,000 $123,800

BIG BOX STORE Balance Sheet November 30, 2017 Assets Current assets Cash................................................... Accounts receivable ......................... Inventory ........................................... Prepaid insurance............................. Total current assets .................. Property, plant, and equipment Equipment ......................................... Less: Accumulated depreciation— equipment ..............................

$ 26,000 30,500 32,000 3,500 $ 92,000 $146,000 45,000 101,000 $193,000

Total assets ...............................

5-39

PROBLEM 5-3A (Continued) BIG BOX STORE Balance Sheet (Continued) November 30, 2017 Liabilities and Owner’s Equity Current liabilities Accounts payable ......................................................... $25,200 Sales commissions payable ..................................... 4,500 Property taxes payable ................................................ 2,500 Total current liabilities ....................................... $ 32,200 Long-term liabilities Notes payable ............................................................ 37,000 Total liabilities .................................................... 69,200 Owner’s equity Owner’s capital .......................................................... 123,800 Total liabilities and owner’s equity ................... $193,000

(b) Nov. 30

5-40

Depreciation Expense .............................. Accumulated Depreciation— Equipment .....................................

11,000

Insurance Expense ................................... Prepaid Insurance.............................

7,000

Property Tax Expense .............................. Property Taxes Payable....................

2,500

Sales Commissions Expense .................. Sales Commissions Payable............

4,500

11,000

7,000 2,500 4,500

PROBLEM 5-3A (Continued) (c) Nov. 30

30 30

Sales Revenue ........................................ Interest Revenue .................................... Income Summary............................

720,000 2,000

Income Summary ................................... Sales Returns and Allowances .................................. Cost of Goods Sold ........................ Salaries and Wages Expense ........ Depreciation Expense .................... Freight-Out ...................................... Sales Commissions Expense ........ Insurance Expense ......................... Rent Expense .................................. Property Tax Expense .................... Utilities Expense ............................. Interest Expense .............................

689,900

Income Summary ................................... Owner’s Capital ..............................

32,100

Owner’s Capital ...................................... Owner’s Drawings ..........................

10,000

722,000

8,000 518,000 96,000 11,000 6,500 11,000 7,000 15,000 2,500 8,500 6,400 32,100 10,000

5-41

PROBLEM 5-4A

(a) Date Apr. 5 7 9 10

12 14

17 20

5-42

General Journal Account Titles and Explanation Inventory ............................................. Accounts Payable .......................

Ref. 120 201

Debit 1,200

Inventory ............................................. Cash.............................................

120 101

Accounts Payable .............................. Inventory .....................................

201 120

100

Accounts Receivable ......................... Sales Revenue ............................

112 401

900

Cost of Goods Sold ............................ Inventory .....................................

505 120

540

Inventory ............................................. Accounts Payable .......................

120 201

670

Accounts Payable ($1,200 – $100) .... Inventory ($1,100 X 2%)........................... Cash.............................................

201

1,100

Accounts Payable .............................. Inventory .....................................

201 120

Accounts Receivable ......................... Sales Revenue ............................

112 401

610

Cost of Goods Sold ............................ Inventory .....................................

505 120

370

Accounts Payable ($670 – $70) ......... Inventory ($600 X 1%).............................. Cash.............................................

201

600

J1 Credit 1,200 50 100 900 540 670

120 101

22 1,078 70 610 370

120 101

6 594

PROBLEM 5-4A (Continued)

Date Apr. 27 30

Account Titles and Explanation Sales Returns and Allowances ...... Accounts Receivable ..............

Ref. 412 112

Debit 20

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

101 112

900

J1 Credit 20 900

(b) Cash Date Apr.

No. 101 1 7 14 21 30

Explanation Balance

Ref. � J1 J1 J1 J1

Accounts Receivable Date Explanation Apr. 10 20 27 30

Ref. J1 J1 J1 J1

Debit

Credit 50 1,078 594

900

Debit 900 610

Credit

20 900

Inventory Date Apr.

1 5 7 9 10 12 14 17 20 21

Balance 1,800 1,750 672 78 978 No. 112 Balance 900 1,510 1,490 590 No. 120

Explanation Balance

Ref. � J1 J1 J1 J1 J1 J1 J1 J1 J1

Debit

Credit

1,200 50 100 540 670 22 70 370 6

Balance 2,500 3,700 3,750 3,650 3,110 3,780 3,758 3,688 3,318 3,312

5-43

PROBLEM 5-4A (Continued) Accounts Payable Date Explanation Apr. 5 9 12 14 17 21

Ref. J1 J1 J1 J1 J1 J1

Debit

No. 201 Balance 1,200 1,100 1,770 670 600 0

Credit 1,200

100 670 1,100 70 600

Owner’s Capital Date Apr.

No. 301

Explanation 1 Balance

Ref. �

Sales Revenue Date Explanation Apr. 10 20

Ref. J1 J1

Sales Returns and Allowances Date Explanation Apr. 27

Ref. J1

Debit

Debit 20

Credit

Balance 4,300

No. 401 Balance 900 1,510

Credit 900 610

No. 412 Balance 20

Credit

Cost of Goods Sold

No. 505

Date Explanation Apr. 10 20

5-44

Ref. J1 J1

Debit 540 370

Credit

Balance 540 910

PROBLEM 5-4A (Continued) YOLANDA’S DISCORAMA Trial Balance April 30, 2017

(c)

Cash ....................................................................... Accounts Receivable............................................. Inventory ................................................................ Owner’s Capital ..................................................... Sales Revenue ....................................................... Sales Returns and Allowances ............................. Cost of Goods Sold ...............................................

Debit $ 978 590 3,312

Credit

$4,300 1,510 20 910 $5,810

$5,810

5-45

5-46 ..

(a)

GAOLEE FASHION CENTER Worksheet For the Year Ended November 30, 2017 Account Titles

Trial Balance

Dr.

Cr.

Dr.

Cr.

20,700 30,700 44,700 6,200 133,000

(d) (a)

28,000 60,000 48,500 93,000

Dr.

Cr.

Income Statement

Dr.

Cr.

20,700 30,700 44,400 2,600 133,000

300 3,600

(b) 11,500

Balance Sheet

Dr. 20,700 30,700 44,400 2,600 133,000

39,500 60,000 48,500 93,000

12,000

39,500 60,000 48,500 93,000

12,000 755,200

8,800 497,400

12,000 755,200

755,200

8,800 497,700

140,000 24,400 14,000

12,100 16,700 24,000 984,700

12,100 16,700 24,000

3,600 11,500 3,800

(d)

300

984,700 (a) 3,600 (b) 11,500 (c) 3,800

3,800 19,200

1,000,000

3,800 1,000,000

756,600 756,600

755,200 1,400 756,600

243,400 1,400 244,800

Key: (a) Supplies used, (b) Depreciation expense—equipment, (c) Accrued interest payable, (d) Adjustment of inventory.

Cr.

5-47

3,800 244,800 244,800

*PROBLEM 5-5A

Cash Accounts Receivable Inventory Supplies Equipment Accum. Depreciation— Equipment Notes Payable Accounts Payable Owner’s Capital Owner’s Drawings Sales Revenue Sales Returns and Allowances Cost of Goods Sold Salaries and Wages Expense Advertising Expense Utilities Expense Maintenance and Repairs Expense Freight-Out Rent Expense Totals Supplies Expense Depreciation Expense Interest Expense Interest Payable Totals Net Loss Totals

Adjusted Trial Balance

Adjustments

*PROBLEM 5-5A (Continued) (b)

GAOLEE FASHION CENTER Income Statement For the Year Ended November 30, 2017

Sales revenues Sales revenue ............................................. Less: Sales returns and allowances....................................... Net sales ..................................................... Cost of goods sold ............................................ Gross profit........................................................ Operating expenses Salaries and wages expense .............. Advertising expense............................ Rent expense ....................................... Freight-out ........................................... Utilities expense .................................. Maintenance and repairs expense...... Depreciation expense ......................... Supplies expense ................................ Total operating expenses............. Income from operations.................................... Other expenses and losses Interest expense ......................................... Net loss ..............................................................

$755,200 8,800 746,400 497,700 248,700 $140,000 24,400 24,000 16,700 14,000 12,100 11,500 3,600 246,300 2,400 $

3,800 (1,400)

5-47

*PROBLEM 5-5A (Continued) GAOLEE FASHION CENTER Owner’s Equity Statement For the Year Ended November 30, 2017 Owner’s Capital, December 1, 2016 .......................... Less: Net loss ............................................................ Drawings .......................................................... Owner’s Capital, November 30, 2017 ........................

$93,000 $ 1,400 12,000

13,400 $ 79,600

GAOLEE FASHION CENTER Balance Sheet November 30, 2017 Assets Current assets Cash .................................................. Accounts receivable ........................ Inventory .......................................... Supplies............................................ Total current assets ................. Property, plant, and equipment Equipment ........................................ Accumulated depreciation— equipment..................................... Total assets ..............................

5-48

$ 20,700 30,700 44,400 2,600 $ 98,400 $133,000 39,500

93,500 $191,900

*PROBLEM 5-5A (Continued) GAOLEE FASHION CENTER Balance Sheet (Continued) November 30, 2017 Liabilities and Owner’s Equity Current liabilities Notes payable (due next year) ................................. Accounts payable ..................................................... Interest payable ........................................................ Total current liabilities ...................................... Long-term liabilities Notes payable ........................................................... Total liabilities ................................................... Owner’s equity Owner’s capital ......................................................... Total liabilities and owner’s equity ..................

30 30

$20,000 48,500 3,800 $ 72,300 40,000 112,300 79,600 $191,900

Supplies Expense..................................... Supplies ............................................

3,600

Depreciation Expense .............................. Accumulated Depreciation— Equipment .....................................

11,500

Interest Expense ...................................... Interest Payable ................................

3,800

Cost of Goods Sold .................................. Inventory ...........................................

300

3,600

11,500

3,800 300

5-49

*PROBLEM 5-5A (Continued) (d) Nov. 30

30 30

5-50

Sales Revenue ...................................... Income Summary ..........................

755,200

Income Summary ................................. Sales Returns and Allowances ................................ Cost of Goods Sold ...................... Salaries and Wages Expense....... Advertising Expense .................... Utilities Expense ........................... Maintenance and Repairs Expense ..................................... Freight-Out .................................... Rent Expense ................................ Supplies Expense ......................... Depreciation Expense .................. Interest Expense ...........................

756,600

Owner’s Capital .................................... Income Summary ..........................

1,400

Owner’s Capital .................................... Owner’s Drawings.........................

12,000

755,200

8,800 497,700 140,000 24,400 14,000 12,100 16,700 24,000 3,600 11,500 3,800

1,400 12,000

*PROBLEM 5-5A (Continued) (e)

GAOLEE FASHION CENTER Post-Closing Trial Balance November 30, 2017 Cash ................................................................ Accounts Receivable...................................... Inventory ......................................................... Supplies .......................................................... Equipment ....................................................... Accumulated Depreciation—Equipment....... Notes Payable ................................................. Accounts Payable........................................... Interest Payable .............................................. Owner’s Capital ..............................................

Debit $ 20,700 30,700 44,400 2,600 133,000

$231,400

Credit

$ 39,500 60,000 48,500 3,800 79,600 $231,400

5-51

*PROBLEM 5-6A DONALDSON DEPARTMENT STORE Income Statement (Partial) For the Year Ended November 30, 2017 Sales revenues Sales revenue ........................... Less: Sales returns and allowances ..................... Net sales.................................... Cost of goods sold Inventory, Dec. 1, 2016 ............. Purchases ................................. Less: Purchase returns and allowances ............. Purchase discounts ...... Net purchases ........................... Add: Freight-in ......................... Cost of goods purchased......... Cost of goods available for sale ........................... Inventory, Nov. 30, 2017 ........... Cost of goods sold ....... Gross profit......................................

5-52

$1,000,000 20,000 980,000 $ 40,000 $585,000 $2,700 6,300

9,000 576,000 7,500 583,500 623,500 52,600 570,900 $ 409,100

*PROBLEM 5-7A

(1)

(a)

Cost of goods sold = Sales revenue – Gross profit = $55,000 – $38,300 = $16,700

(b)

Net income = Gross profit – Operating expenses = $38,300 – $34,900 = $3,400

(c)

Inventory = 2014 Inventory + Purchases – CGS = $7,200 + $14,200 – $16,700 = $4,700

(d)

Cash payments to suppliers = 2014 Accounts payable + Purchases – 2015 Accounts payable = $3,200 + $14,200 – $3,600 = $13,800

(e)

Sales revenue = Cost of goods sold + Gross profit = $14,800 + $35,200 = $50,000

(f)

Operating expenses = Gross profit – Net income = $35,200 – $2,500 = $32,700

(g)

2015 Inventory + Purchases – 2016 Inventory = CGS Purchases = CGS – 2015 Inventory + 2016 Inventory = $14,800 – $4,700 [from (c)] + $8,100 = $18,200

(h)

Cash payments to suppliers = 2015 Accounts payable + Purchases – 2016 Accounts Payable = $3,600 + $18,200 [from (g)] – $2,500 = $19,300

(i)

Gross profit = Sales revenue – CGS = $47,000 – $14,300 = $32,700

(j)

Net income = Gross profit – Operating expenses = $32,700 [from (i)] – $28,800 = $3,900

(k)

2016 Inventory + Purchases – 2017 Inventory = CGS Inventory = 2016 Inventory + Purchases – CGS = $8,100 + $13,200 – $14,300 = $7,000

(I)

Accounts payable = 2016 Accounts payable + Purchases – Cash payments = $2,500 + $13,200 – $13,600 = $2,100

5-53

*PROBLEM 5-7A (Continued) (2) A decline in sales does not necessarily mean that profitability declined. Profitability is affected by sales revenue, cost of goods sold, and operating expenses. If cost of goods sold or operating expenses decline more than sales revenue, profitability can increase even when sales decline. In this particular case, the sales revenue decline was offset by cost savings to improve profitability. Therefore, profitability increased for Kayla, Inc. from 2015 to 2017. 2015

2016

2017

Gross profit rate

$38,300 ÷ $55,000 $35,200 ÷ $50,000 = 69.6% = 70.4%

$32,700 ÷ $47,000 = 69.6%

Profit margin

$3,400 ÷ $55,000 = 6.2%

$3,900 ÷ $47,000 = 8.3%

5-54

$2,500 ÷ $50,000 = 5.0%

*PROBLEM 5-8A (a) Date Apr. 5

7 9 10 12 14

17 20 21

27 30

General Journal Account Titles and Explanation Purchases..................................................... Accounts Payable.................................

Debit 1,200

1,200

Freight-In ...................................................... Cash ......................................................

Accounts Payable ........................................ Purchase Returns and Allowances .....

100

Accounts Receivable ................................... Sales Revenue ......................................

600

Purchases..................................................... Accounts Payable.................................

450

Accounts Payable ($1,200 – $100) ............... Purchase Discounts ($1,100 X 2%) ....... Cash ($1,100 – $22) ..............................

1,100

Accounts Payable ........................................ Purchase Returns and Allowances .......

Accounts Receivable ................................... Sales Revenue ......................................

600

Accounts Payable ($450 – $50) ................... Purchase Discounts ($400 X 1%) ...................................... Cash ($400 – $4) ...................................

400

Sales Returns and Allowances ................... Accounts Receivable ...........................

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

600

Credit

50 100 600 450 22 1,078 50 600

4 396 35 600

5-55

*PROBLEM 5-8A (Continued) (b) 4/1 Bal. 4/30 4/30 Bal.

Cash 3,000 4/7 600 4/14 4/21 2,076

50 1,078 396

Accounts Receivable 4/10 600 4/27 4/20 600 4/30 4/30 Bal. 565

4/1 Bal. 4/30 Bal.

4/9 4/14 4/17 4/21

35 600

Owner’s Capital 4/1 Bal. 4/30 Bal.

Sales Returns and Allowances 4/27 35 4/30 Bal. 35

4/5 4/12 4/30 Bal.

Inventory 4,000 4,000

Accounts Payable 100 4/5 1,100 4/12 50 400 4/30 Bal.

Sales Revenue 4/10 600 4/20 600 4/30 Bal. 1,200

1,200 450

7,000 7,000

Purchase Returns and Allowances 4/9 100 4/17 50 4/30 Bal. 150 Purchase Discounts 4/14 4/21 4/30 Bal.

4/7 4/30 Bal.

5-56

Purchases 1,200 450 1,650

Freight-In 50 50

22 4 26

*PROBLEM 5-8A (Continued) (c)

GAGE PRO SHOP Trial Balance April 30, 2017 Cash ..................................................................... Accounts Receivable .......................................... Inventory .............................................................. Owner’s Capital ................................................... Sales Revenue ..................................................... Sales Returns and Allowances........................... Purchases ............................................................ Purchase Returns and Allowances .................... Purchase Discounts ............................................ Freight-In..............................................................

(d)

Credit

$7,000 1,200 35 1,650 150 26 50 $8,376

$8,376

GAGE PRO SHOP Income Statement (Partial) For the Month Ended April 30, 2017

Sales revenues Sales revenue ................................ Less: Sales returns and allowances.......................... Net sales ........................................ Cost of goods sold Inventory, April 1 ........................... Purchases ...................................... Less: Purchase returns and allowances .................. Purchase discounts ........... Net purchases................................ Add: Freight-in.............................. Cost of goods purchased ............... Cost of goods available for sale ........................................ Inventory, April 30 ......................... Cost of goods sold ................. Gross profit...........................................

Debit $2,076 565 4,000

$1,200 35 1,165 $4,000 $1,650 $150 26

176 1,474 50 1,524 5,524 4,824 700 $ 465

5-57

COMPREHENSIVE PROBLEM SOLUTION

(a)

Dec. 6

8 10

13 15 18

20 23

5-58

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

1,000 600

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

2,200

Cash ........................................................... Sales Revenue ...................................

6,300

Cost of Goods Sold................................... Inventory ............................................

4,100

Inventory.................................................... Accounts Payable..............................

9,000

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

2,000

Accounts Receivable ................................ Sales Revenue ...................................

15,000

Cost of Goods Sold................................... Inventory ............................................

10,000

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

1,800

Accounts Payable ..................................... Cash ................................................... Inventory ($9,000 X .02) .....................

9,000

Cash ........................................................... Sales Discounts ($15,000 X .03) ............... Accounts Receivable.........................

14,550 450

1,600 2,200 6,300

4,100 9,000 2,000

15,000 10,000 1,800 8,820 180

Weygandt, Accounting Principles, 11/e, Solutions Manual

15,000

COMPREHENSIVE PROBLEM SOLUTION (Continued) (c)

Dec. 31

Salaries and Wages Expense .................... Salaries and Wages Payable .............

840

Depreciation Expense................................ Accumulated Depreciation— Equipment........................................

200

Supplies Expense ...................................... Supplies ($3,200 – $1,500) .................

1,700

(b) & (c)

General Ledger

Cash 12/1 Bal. 7,200 12/6 12/8 2,200 12/15 12/10 6,300 12/20 12/27 14,550 12/23 12/31 Bal. 16,030

1,600 2,000 1,800 8,820

Accounts Receivable 12/1 Bal. 4,600 12/8 2,200 12/18 15,000 12/27 15,000 12/31 Bal. 2,400

Supplies 12/1 Bal. 1,200 12/31 12/15 2,000 12/31 Bal. 1,500

4,100 10,000 180

200 1,700

Equipment 12/1 Bal. 22,000 12/31 Bal. 22,000 Accumulated Depr.—Equipment 12/1 Bal. 2,200 12/31 200 12/31 Bal. 2,400

12/23 Inventory 12/1 Bal. 12,000 12/10 12/13 9,000 12/18 12/23 12/31 Bal. 6,720

840

Accounts Payable 9,000 12/1 Bal. 4,500 12/13 9,000 12/31 Bal. 4,500

Salaries and Wages Payable 12/6 1,000 12/1 Bal. 1,000 12/31 840 12/31 Bal. 840

1,700

Weygandt, Accounting Principles, 11/e, Solutions Manual

5-59

COMPREHENSIVE PROBLEM SOLUTION (Continued) Owner’s Capital 12/1 Bal. 39,300 12/31 Bal. 39,300

Depreciation Expense 12/31 200 12/31 Bal. 200

Sales Revenue 12/10 6,300 12/18 15,000 12/31 Bal. 21,300

Salaries and Wages Expense 12/6 600 12/20 1,800 12/31 840 12/31 Bal. 3,240

Sales Discounts 12/27 450 12/31 Bal. 450

Supplies Expense 12/31 1,700 12/31 Bal. 1,700

Cost of Goods Sold 12/10 4,100 12/18 10,000 12/31 Bal. 14,100

5-60

Weygandt, Accounting Principles, 11/e, Solutions Manual

COMPREHENSIVE PROBLEM SOLUTION (Continued) (d)

RODRIGUEZ DISTRIBUTING COMPANY Adjusted Trial Balance December 31, 2017 Cash ............................................................... Accounts Receivable .................................... Inventory........................................................ Supplies ......................................................... Equipment ..................................................... Accumulated Depreciation—Equipment ..... Accounts Payable ......................................... Salaries and Wages Payable ........................ Owner’s Capital ............................................. Sales Revenue............................................... Sales Discounts ............................................ Cost of Goods Sold....................................... Depreciation Expense................................... Salaries and Wages Expense ....................... Supplies Expense .........................................

(e)

CR.

$ 2,400 4,500 840 39,300 21,300 450 14,100 200 3,240 1,700 $68,340

$68,340

RODRIGUEZ DISTRIBUTING COMPANY Income Statement For the Month Ending December 31, 2017 Sales revenue................................................ Less: Sales discounts ................................. Net sales ........................................................ Cost of goods sold ....................................... Gross profit ................................................... Operating expenses Salaries and wages expense ................ Supplies expense .................................. Depreciation expense ........................... Net income ....................................................

DR. $16,030 2,400 6,720 1,500 22,000

$21,300 450 20,850 14,100 6,750 $3,240 1,700 200

5,140 $ 1,610

5-61

COMPREHENSIVE PROBLEM SOLUTION (Continued) RODRIGUEZ DISTRIBUTING COMPANY Owner’s Equity Statement For the Month Ended December 31, 2017 Owner’s Capital, Dec. 1 ................................................ Add: Net income.......................................................... Owner’s Capital, Dec. 31 ..............................................

$39,300 1,610 $40,910

RODRIGUEZ DISTRIBUTING COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash.......................................................... Accounts receivable ................................ Inventory .................................................. Supplies ................................................... Total current assets ...........................

$16,030 2,400 6,720 1,500

Property, plant, and equipment Equipment ................................................ Less: Accumulated depreciation ........... Total assets .....................................................

22,000 2,400

$26,650

19,600 $46,250

Liabilities and Owner’s Equity Current liabilities Accounts payable .................................... Salaries and wages payable ................... Total current liabilities .......................

$4,500 840 $ 5,340

Owner’s equity Owner’s capital ........................................ Total liabilities and owner’s equity ................

5-62

40,910 $46,250

BYP 5-1

FINANCIAL REPORTING PROBLEM

2012 (a)

(1)

(2)

Percentage change in sales: ($156,508 – $108,249) ÷ $108,249 ($170,910 – $156,508) ÷ $156,508

44.6% increase

Percentage change in net income: ($41,733 – $25,922) ÷ $25,922 ($37,037 – $41,733) ÷ $41,733

61.0% increase

2013

14.9% increase

11.3% decrease

(b) Gross profit rate: 2011 ($108,249 – $64,431) ÷ $108,249 2012 ($156,508 – $87,846) ÷ $156,508 2013 ($170,910 – $106,606) ÷ $170,910

40.5% 43.9% 37.6%

23.9% 26.7% 21.7%

Comment The percentage of net income to sales increased 11.7% from 2011 to 2012 (23.9% to 26.7%) and decreased 18.7% from 2012 to 2013 (26.7% to 21.7%). The gross profit rate shows a similar pattern during this time.

5-63

BYP 5-2

COMPARATIVE ANALYSIS PROBLEM

PepsiCo

Coca-Cola

2013 Gross profit

$35,1721

$28,4332

(2)

2013 Gross profit rate

53.0%3

60.7%4

(3)

2013 Operating income

$9,705

$10,228

(4)

Percent change in operating income, 2012 to 2013

6.5%5 increase

5.1%6 decrease

(a) (1)

$66,415 – $31,243

($46,854 – $18,421)

$28,433 ÷ $46,854

($9,705 – $9,112) ÷ $9,112

($10,228 – $10,779) ÷ $10,779

$35,172 ÷ $66,415

(b) PepsiCo has a higher gross profit but a lower gross profit rate than Coca-Cola. This can be explained by PepsiCo’s higher sales. Coca-Cola had a larger operating income because its selling, general, and administrative expenses were much smaller than PepsiCo’s.

5-64

BYP 5-3

COMPARATIVE ANALYSIS PROBLEM

Amazon

Wal-Mart

2013 Gross profit

$6,7221

$115,0072

(2)

2013 Gross profit rate

11.0%3

24.3%4

(3)

2013 Operating income

$745

$26,872

(4)

Percent change in operating income, 2012 to 2013

10.2%5 decrease

3.1%6 increase

(a) (1)

$60,903 – $54,181

($473,076 – $358,069)

$115,007 ÷ $473,076

($745 – $676) ÷ $676

($26,872 – $27,725) ÷ $27,725

$6,722 ÷ $60,903

(b) Wal-Mart has a much higher gross profit and gross profit rate than Amazon. This can be explained by Wal-Mart’s higher markup. Wal-Mart’s operating income decreased 3.1% while Amazon’s increased by more than 10%. Amazon’s sales revenue increased 18% during 2013 causing its operating income to increase significantly.

5-65

BYP 5-4

REAL-WORLD FOCUS

The answers to this assignment will be dependent upon the articles selected from the Internet by the student.

5-66

BYP 5-5

(a) (1)

DECISION MAKING ACROSS THE ORGANIZATION

FAMILY DEPARTMENT STORE Income Statement For the Year Ended December 31, 2017 Net sales [$700,000 + ($700,000 X 6%)] ...... Cost of goods sold ($742,000 X 76%)* ........ Gross profit ($742,000 X 24%) ..................... Operating expenses Selling expenses .................................. Administrative expenses ..................... Total operating expenses ............. Net income....................................................

$742,000 563,920 178,080 $100,000 20,000 120,000 $ 58,080

*Alternatively: Net sales, $742,000 – gross profit, $178,080. (2)

FAMILY DEPARTMENT STORE Income Statement For the Year Ended December 31, 2017 Net sales ....................................................... Cost of goods sold....................................... Gross profit .................................................. Operating expenses Selling expenses .................................. Administrative expenses ..................... Net income....................................................

$700,000 553,000 147,000 $72,000* 20,000

92,000 $ 55,000

*$100,000 – $30,000 + ($700,000 X 2%) – ($30,000 X 40%) = $72,000. (b) Amy’s proposed changes will increase net income by $31,080. Jacob’s proposed changes will reduce operating expenses by $28,000 and result in a corresponding increase in net income. Thus, if the choice is between Amy’s plan and Jacob’s plan, Amy’s plan should be adopted. While Jacob’s plan will increase net income, it may also have an adverse effect on sales personnel. Under Jacob’s plan, sales personnel will be taking a cut of $16,000 in compensation [$60,000 – ($30,000 + $14,000)].

5-67

BYP 5-5 (Continued) (c)

FAMILY DEPARTMENT STORE Income Statement For the Year Ended December 31, 2017 Net sales ............................................................. Cost of goods sold ............................................ Gross profit ........................................................ Operating expenses Selling expenses ........................................ Administrative expenses ........................... Total operating expenses................... Net income .........................................................

$742,000 563,920 178,080 $72,840* 20,000 92,840 $ 85,240

*$72,000 + [2% X ($742,000 – $700,000)] = $72,840. If both plans are implemented, net income will be $58,240 ($85,240 – $27,000) higher than the 2016 results. This is an increase of over 200%. Given the size of the increase, Jacob’s plan to compensate sales personnel might be modified so that they would not have to take a pay cut. For example, if sales commissions were 3%, the compensation cut would be reduced to $8,580 [$16,000 (from (b)) – $742,000 X (3% – 2%)].

5-68

BYP 5-6

COMMUNICATION ACTIVITY

(a) , (b)

President Surfing USA Co. Dear Sir: As you know, the financial statements for Surfing USA Co. are prepared in accordance with generally accepted accounting principles. One of these principles is the revenue recognition principle, which provides that revenues should be recognized when they are earned. Typically, sales revenues are earned when the goods are transferred to the buyer from the seller. At this point, the sales transaction is completed and the sales price is established. Thus, in the typical situation, revenue on the surfboard ordered by Parker is earned at event No. 8, when Parker picks up the surfboard. The circumstances pertaining to this sale may seem to you to be atypical because Parker has ordered a specific kind of surfboard. From an accounting standpoint, this would be true only if you could not reasonably expect to sell this surfboard to another customer. In such case, it would be proper under generally accepted accounting principles to recognize sales revenue when you have completed the surfboard for Parker. Whether Parker makes a down payment with the purchase order is irrelevant in recognizing sales revenue because at this time, you have not done anything to earn the revenue. A down payment may be an indication of Parker’s “good faith.” However, its effect on your financial statements is limited entirely to recognizing the down payment as unearned revenue. If you have further questions about the accounting for this sale, please let me know. Sincerely,

5-69

BYP 5-7

ETHICS CASE

(a) Tiffany Lyons, as a new employee, is placed in a position of responsibility and is pressured by her supervisor to continue an unethical practice previously performed by him. The unethical practice is taking undeserved cash discounts. Her dilemma is either follow her boss’s unethical instructions or offend her boss and maybe lose the job she just assumed. (b) The stakeholders (affected parties) are:  Tiffany Lyons, the assistant treasurer.  Jay Barnes, the treasurer.  Key West, the company.  Creditors of Key West Stores (suppliers).  Mail room employees (those assigned the blame). (c) Tiffany’s alternatives: 1. Tell the treasurer (her boss) that she will attempt to take every allowable cash discount by preparing and mailing checks within the discount period—the ethical thing to do. This will offend her boss and may jeopardize her continued employment. 2. Join the team and continue the unethical practice of taking undeserved cash discounts. 3. Go over her boss’s head and take the chance of receiving just and reasonable treatment from an officer superior to Jay. The company may not condone this practice. Tiffany definitely has a choice, but probably not without consequence. To continue the practice is definitely unethical. If Tiffany submits to this request, she may be asked to perform other unethical tasks. If Tiffany 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 Jay’s unethical behavior and his reaction may be one of respect rather than anger and retribution. Being ethically compromised is no way to start a new job.

5-70

BYP 5-8

ALL ABOUT YOU

In order for revenue to be recognized the performance obligation must be satisfied. In this case Impact has an obligation to provide goods with a value equal to the gift card. That obligation is not fulfilled until one of two things happens: either the customer redeems the card for goods, or the card expires. Until either of those events occurs Impact cannot record revenue.

5-71

BYP 5-9 (a) (1)

FASB CODIFICATION ACTIVITY Inventory is the aggregate of those items of tangible personal property that have any of the following characteristics: a. Held for sale in the ordinary course of business b. In process of production for such sale c. To be currently consumed in the production of goods or services to be available for sale. The term inventory embraces goods awaiting sale (the merchandise of a trading concern and the finished goods of a manufacturer), goods in the course of production (work in process), and goods to be consumed directly or indirectly in production (raw materials and supplies). This definition of inventories excludes long-term assets subject to depreciation accounting, or goods which, when put into use, will be so classified. The fact that a depreciable asset is retired from regular use and held for sale does not indicate that the item should be classified as part of the inventory. Raw materials and supplies purchased for production may be used or consumed for the construction of long-term assets or other purposes not related to production, but the fact that inventory items representing a small portion of the total may not be absorbed ultimately in the production process does not require separate classification. By trade practice, operating materials and supplies of certain types of entities such as oil producers are usually treated as inventory.

(2)

5-72

A customer is a reseller or a consumer, either an individual or a business that purchases a vendor’s products or services for end use rather than for resale. This definition is consistent with paragraph 280-10-50-42, which states that a group of entities known to a reporting entity to be under common control shall be considered as a single customer, and the federal government, a state government, a local government (for example, a county or municipality), or a foreign government each shall be considered as a single customer. Customer includes any purchaser of the vendor’s products at any point along the distribution chain, regardless of whether the purchaser acquires the vendor’s products directly or indirectly (for example, from a distributor) from the vendor. For example, a vendor may sell its products to a distributor who in turn resells the products to a retailer. The retailer in that example is a customer of the vendor.

BYP 5-9 (Continued) (b) 330-10-35-15 Only in exceptional cases may inventories properly be stated above cost. For example, precious metals having a fixed monetary value with no substantial cost of marketing may be stated at such monetary value; any other exceptions must be justifiable by inability to determine appropriate approximate costs, immediate marketability at quoted market price, and the characteristic of unit interchangeability.

5-73

IFRS EXERCISES

IFRS5-1 Expenses may be classified by “nature” or by “function”. The “nature-ofexpense” classification organizes expenses by type of expense, such as salaries, depreciation, rent, or supplies. The “function-of-expense” classification presents expenses by type of business activity. Examples would include cost of goods sold, selling, administrative, operating, and non-operating. IFRS5-2 By function By nature By nature By function By nature By nature By function

Cost of goods sold Depreciation expense Salaries and wages expense Selling expenses Utilities expense Delivery expense General and administrative expenses

IFRS5-3 MATILDA COMPANY Comprehensive Income Statement For the Year Ended 2017 (in thousands of euros) Net income ............................................................................... Unrealized gain related to revaluation of buildings .............. Unrealized loss related to investment securities .................. Items not recognized on the income statement .................... Total comprehensive income ........................................

€ 10 (35)

5-74

€150 (25) €125

INTERNATIONAL FINANCIAL REPORTING PROBLEM

IFRS5-4 (a) Vuitton uses a multiple step format. The income statement isolates gross margin, profit from recurring operations and operating profit rather than simply showing total revenues less total expenses to arrive at net income. (b) Vuitton uses Cost of Net Financial Debt rather than Interest Expense on its income statement. (c) Inventory is composed of: Wines and eaux-de-vie in process of aging Other raw materials and work in process Goods purchased for resale Finished products Amount of inventory (gross) before impairment is €9,650M

5-75

CHAPTER 6 Inventories ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Do It!

Exercises

A Problems

1, 2, 3, 4, 5, 6

1, 2

Apply inventory cost flow methods and discuss their financial effects.

7, 8, 9, 10, 11, 12, 19

3, 4, 5

3, 4, 5, 6, 7, 8

2A, 3A, 4A, 5A, 6A, 7A

Indicate the effects of inventory errors on the financial statements.

9, 10

Explain the statement presentation and analysis of inventory.

13, 14, 15, 17, 18

7, 8

11, 12, 13, 14

*5.

Apply the inventory cost flow methods to perpetual inventory records.

20, 21

15, 16, 17

8A, 9A

*6.

Describe the two methods of estimating inventories.

22, 23, 24, 25

10, 11

18, 19, 20

10A, 11A

Learning Objectives

Questions

Discuss how to classify and determine inventory.

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to the chapter.

676

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Determine items and amounts to be recorded in inventory.

Moderate

15–20

Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis.

Simple

30–40

Determine cost of goods sold and ending inventory using FIFO, LIFO, and average-cost with analysis.

Simple

30–40

Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO.

Moderate

30–40

Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results.

Moderate

30–40

Compare specific identification, FIFO, and LIFO under periodic method; use cost flow assumption to justify price increase.

Moderate

20–30

Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO.

Moderate

30–40

*8A

Calculate cost of goods sold and ending inventory under LIFO, FIFO, and moving-average cost, under the perpetual system; compare gross profit under each assumption.

Moderate

30–40

*9A

Determine ending inventory under a perpetual inventory system.

Moderate

40–50

*10A

Compute gross profit rate and inventory loss using gross profit method.

Moderate

30–40

*11A

Compute ending inventory using retail method.

Moderate

20–30

6-2

WEYGANDT ACCOUNTING PRINCIPLES 11E CHAPTER 6 INVENTORIES Number

Difficulty

Time (min.)

BE1

Simple

4–6

BE2

Simple

2–4

BE3

Simple

4–6

BE4

Simple

2–4

BE5

Simple

2–4

BE6

Moderate

6–8

BE7

Simple

4–6

BE8

Simple

4–6

BE9

Simple

4–6

BE10

Simple

8–10

BE11

Simple

4–6

DI1

Simple

4–6

DI2

Simple

6–8

DI3

Simple

6–8

DI4

Simple

4–6

EX1

Simple

4–6

EX2

Simple

6–8

EX3

AN, E

Moderate

6–8

EX4

AN, E

Simple

8–10

EX5

Simple

6–8

EX6

Simple

8–10

EX7

Simple

8–10

EX8

Simple

6–8

EX9

Simple

6–8

EX10

Simple

4–6

EX11

Simple

6–8

EX12

Simple

10–12

EX13

Simple

10–12

EX14

Simple

8–10

EX15

Simple

8–10

EX16

AP, E

Moderate

12–15

6-3

INVENTORIES (Continued) Number

Difficulty

Time (min.)

EX17

AP, E

Moderate

12–15

EX18

Simple

8–10

EX19

Simple

10–12

EX20

Moderate

10–12

P1A

Moderate

15–20

P2A

Simple

30–40

P3A

Simple

30–40

P4A

Moderate

30–40

P5A

AP, E

Moderate

30–40

P6A

AP, E

Moderate

20–30

P7A

Moderate

30–40

P8A

AP, E

Moderate

30–40

P9A

Moderate

40–50

P10A

Moderate

30–40

P11A

Moderate

20–30

BYP1

2, 4

Simple

10–15

BYP2

Simple

10–15

BYP3

Simple

10–15

BYP4

2, 4

Simple

10–15

BYP5

4, 6

Moderate

20–25

BYP6

Simple

10–15

BYP7

Simple

10–15

BYP8 BYP9

3 2, 4

E AP

Simple Simple

10–15 10–15

6-4

Learning Objective

Knowledge Comprehension

Application

Analysis

Discuss how to classify and determine Q6-2 inventory. Q6-6 BE6-2

Q6-1 Q6-3

Apply inventory cost flow methods and discuss their financial effects.

Q6-7 Q6-9 Q6-11 Q6-12

Indicate the effects of inventory errors on the financial statements.

Explain the statement presentation and analysis of inventory.

Q6-13 Q6-17

BE6-7 BE6-8 DI6-4

*5.

Apply the inventory cost flow methods to perpetual inventory records.

Q6-20 Q6-21

BE6-9 E6-15 E6-16

*6.

Describe the two methods of estimating inventories.

Q6-22 Q6-23

Q6-24 E6-18 P6-11A Q6-25 E6-19 BE6-10 E6-20 BE6-11 P6-10A

FASB Codification

Financial Reporting Decision Making Across the Organization FASB Codification

Broadening Your Perspective

Q6-8 Q6-10 Q6-19 BE6-5

Q6-4 Q6-5 BE6-1 E6-1

DI6-1 E6-1 E6-2

BE6-3 E6-6 BE6-4 E6-7 BE6-5 E6-8 DI6-2 P6-2A E6-5

E6-11 E6-12 E6-13

Evaluation

P6-1A

P6-3A E6-3 P6-5A E6-4 P6-6A P6-4A P6-7A Q6-16 BE6-6 DI6-3

Synthesis

E6-3 E6-4 P6-5A

E6-9 E6-10

E6-14 Q6-18 Q6-14 Q6-15 E6-17 BE6-9 P6-8A P6-9A

Real-World Focus Communication

E6-16 E6-17 P6-8A

Comp. Analysis All About You Ethics Case

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

6-5

ANSWERS TO QUESTIONS 1.

Agree. Effective inventory management is frequently the key to successful business operations. Management attempts to maintain sufficient quantities and types of goods to meet expected customer demand. It also seeks to avoid the cost of carrying inventories that are clearly in excess of anticipated sales.

Inventory items for a merchandising company have two common characteristics: (1) they are owned by the company and (2) they are in a form ready for sale in the ordinary course of business.

Taking a physical inventory involves actually counting, weighing or measuring each kind of inventory on hand. Retailers, such as a hardware store, generally have thousands of different items to count. This is normally done when the store is closed.

(a) (1) The goods will be included in Jovad Company’s inventory if the terms of sale are FOB destination. (2) They will be included in Martin Company’s inventory if the terms of sale are FOB shipping point. (b) Jovad Company should include goods shipped to another company on consignment in its inventory. Goods held by Jovad Company on consignment should not be included in inventory.

Inventoriable costs are $3,020 (invoice cost $3,000 + freight charges $50 – purchase discounts $30). The amount paid to negotiate the purchase is a buying cost that normally is not included in the cost of inventory because of the difficulty of allocating these costs. Buying costs are expensed in the year incurred.

FOB shipping point means that ownership of the goods in transit passes to the buyer when the public carrier accepts the goods from the seller. FOB destination means that ownership of the goods in transit remains with the seller until the goods reach the buyer.

Actual physical flow may be impractical because many items are indistinguishable from one another. Actual physical flow may be inappropriate because management may be able to manipulate net income through specific identification of items sold.

The major advantage of the specific identification method is that it tracks the actual physical flow of the goods available for sale. The major disadvantage is that management could manipulate net income.

No. Selection of an inventory costing method is a management decision. However, once a method has been chosen, it should be used consistently from one accounting period to another.

10.

(a) FIFO. (b) Average-cost. (c) LIFO.

11.

Bert Company is using the FIFO method of inventory costing, and Ernie Company is using the LIFO method. Under FIFO, the latest goods purchased remain in inventory. Thus, the inventory on the balance sheet should be close to current costs. The reverse is true of the LIFO method. Bert Company will have the higher gross profit because cost of goods sold will include a higher proportion of goods purchased at earlier (lower) costs.

6-6

Questions Chapter 6 (Continued) 12. Oscar Company may experience severe cash shortages if this policy continues. All of its net income is being paid out as dividends, yet some of the earnings must be reinvested in inventory to maintain inventory levels. Some earnings must be reinvested because net income is computed with cost of goods sold based on older, lower costs while the inventory must be replaced at current, higher costs. Because of this factor, net income under FIFO is sometimes referred to as “phantom profits.” 13. Kyle should know the following: (a) A departure from the cost basis of accounting for inventories is justified when the value of the goods is lower than its cost. The writedown to market should be recognized in the period in which the price decline occurs. (b) Market means current replacement cost, not selling price. For a merchandising company, market is the cost at the present time from the usual suppliers in the usual quantities. 14. Hendrix Music Center should report the televisions at $380 each for a total of $1,900. $380 is the current replacement cost under the lower-of-cost-or-market basis of accounting for inventories. A decline in replacement cost usually leads to a decline in the selling price of the item. Valuation at LCM is conservative. 15. Warnke Stores should report the toasters at $27 each for a total of $540. The $27 is the lower of cost or market. It is used because it is the lower of the inventory’s cost and current replacement cost. 16. (a) Sayaovang Company’s 2016 net income will be understated $7,000; (b) 2017 net income will be overstated $7,000; and (c) the combined net income for the two years will be correct. 17. Dreher Company should disclose: (1) the major inventory classifications, (2) the basis of accounting (cost or lower of cost or market), and (3) the costing method (FIFO, LIFO, or average cost). 18. An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages. Inventory outages may also cause customer ill will and result in lost future sales. 19. Apple uses the first-in, first-out method for its inventories. *20. Disagree. The results under the FIFO method are the same but the results under the LIFO method are different. The reason is that the pool of inventoriable costs (cost of goods available for sale) is not the same. Under a periodic system, the pool of costs is the goods available for sale for the entire period, whereas under a perpetual system, the pool is the goods available for sale up to the date of sale. *21. In a periodic system, the average is a weighted average based on total goods available for sale for the period. In a perpetual system, the average is a moving average of goods available for sale after each purchase. *22. Inventories must be estimated when: (1) management wants monthly or quarterly financial statements but a physical inventory is only taken annually and (2) a fire or other type of casualty makes it impossible to take a physical inventory.

6-7

Questions Chapter 6 (Continued) *23. In the gross profit method, the average is the gross profit rate, which is gross profit divided by net sales. The rate is often based on last year’s actual rate. The gross profit rate is applied to net sales in using the gross profit method. In the retail inventory method, the average is the cost-to-retail ratio, which is the goods available for sale at cost divided by the goods available for sale at retail. The ratio is based on current year data and is applied to the ending inventory at retail. *24. The estimated cost of the ending inventory is $40,000: Net sales ................................................................................................................. Less: Gross profit ($400,000 X 35%) ...................................................................... Estimated cost of goods sold ...................................................................................

$400,000 140,000 $260,000

Cost of goods available for sale ............................................................................... Less: Cost of goods sold......................................................................................... Estimated cost of ending inventory ..........................................................................

$300,000 260,000 $ 40,000

*25. The estimated cost of the ending inventory is $28,000: Ending inventory at retail:

$40,000 = ($120,000 – $80,000)

Cost-to-retail ratio:

70% = 

Ending inventory at cost:

$28,000 = ($40,000 X 70%)

 $84,000    $120,000 



6-8

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 6-1 (a) Ownership of the goods belongs to Peosta. Thus, these goods should be included in Peosta’s inventory. (b) The goods in transit should not be included in the inventory count because ownership by Peosta does not occur until the goods reach the buyer. (c) The goods being held belong to the customer. They should not be included in Peosta’s inventory. (d) Ownership of these goods rests with the other company. Thus, these goods should not be included in the physical inventory.

BRIEF EXERCISE 6-2 Physical inventory Add: Goods purchased from Pelzer Goods sold to Alvarez Stallman ending Inventory

$200,000 25,000 22,000 $247,000

The goods-purchased from Pelzer of $25,000 are included in ending inventory because the terms are f.o.b. shipping point which means Pelzer takes title at the time the goods are shipped, Goods sold to Alvarez f.o.b. destination means that the goods are stiII Stallman's until delivered,

BRIEF EXERCISE 6-3 (a) The ending inventory under FIFO consists of 200 units at $8 + 180 units at $7 for a total allocation of $2,860 or ($1,600 + $1,260). (b) The ending inventory under LIFO consists of 300 units at $6 + 80 units at $7 for a total allocation of $2,360 or ($1,800 + $560).

6-9

BRIEF EXERCISE 6-4 Average unit cost is $6.89 computed as follows: 300 X $6 = $1,800 400 X $7 = 2,800 200 X $8 = 1,600 900 $6,200 $6,200 ÷ 900 = $6.89 (rounded). The cost of the ending inventory is $2,618 or (380 X $6.89). BRIEF EXERCISE 6-5 (a) (b) (c) (d)

FIFO would result in the highest net income. FIFO would result in the highest ending inventory. LIFO would result in the lowest income tax expense (because it would result in the lowest net income). Average-cost would result in the most stable income over a number of years because it averages out any big changes in the cost of inventory.

BRIEF EXERCISE 6-6 The understatement of ending inventory caused cost of goods sold to be overstated $7,000 and net income to be understated $7,000. The correct net income for 2017 is $97,000 or ($90,000 + $7,000). Total assets in the balance sheet will be understated by the amount that ending inventory is understated, $7,000.

6-10

BRIEF EXERCISE 6-7 Inventory Categories Cameras Camcorders Blue-ray players Total valuation

Cost $12,000 9,500 14,000

Market $12,300 9,700 12,900

LCM $12,000 9,500 12,900 $34,400

BRIEF EXERCISE 6-8 Inventory turnover:

Days in inventory:

$270,000 $270,000 = 5.6 =  $56,000 + $40,000  ÷ 2 $48,000

365

= 65.2 days

5.6 *BRIEF EXERCISE 6-9 (a) FIFO Method

Date May 7 June 1 July 28

Purchases (50 @ $10) $500

(26 @ $10)

$260

(30 @ $13) $390

Aug. 27

Product E2-D2 Cost of Goods Sold

(24 @ $10) (16 @ $13) } $448

Balance (50 @ $10) $500 (24 @ $10) $240 (24 @ $10) (30 @ $13) } $630 (14 @ $13)

$182

6-11

*BRIEF EXERCISE 6-9 (Continued) (b) LIFO Method

Date May 7 June 1 July 28

Purchases (50 @ $10) $500

Product E2-D2 Cost of Goods Sold (26 @ $10)

$260

(30 @ $13) (10 @ $10)

} $490

(30 @ $13) $390

Aug. 27

Balance (50 @ $10) $500 (24 @ $10) $240 (24 @ $10) (30 @ $13) } $630 (14 @ $10)

$140

Date May 7 June 1 July 28 Aug. 27

Purchases (50 @ $10) $500

Product E2-D2 Cost of Goods Sold (26 @ $10)

$260

(30 @ $13) $390 (40 @ $11.67) $467

Balance (50 @ $10) $500 (24 @ $10) $240 (54 @ $11.67)* $630 (14 @ $11.67) $163

*($240 + $390) ÷ 54 *BRIEF EXERCISE 6-10 (1) Net sales ............................................................................. Less: Estimated gross profit (35% X $340,000) .............. Estimated cost of goods sold ...........................................

$340,000 119,000 $221,000

(2) Cost of goods available for sale ....................................... Less: Estimated cost of goods sold ................................ Estimated cost of ending inventory .................................

$230,000 221,000 $ 9,000

*BRIEF EXERCISE 6-11 At Cost $38,000

Goods available for sale Less: Net sales Ending inventory at retail

At Retail $50,000 40,000 $10,000

Cost-to-retail ratio = ($38,000 ÷ $50,000) = 76% Estimated cost of ending inventory = ($10,000 X 76%) = $7,600 6-12

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 6-1 Inventory per physical count.................................................... Inventory out on consignment ................................................. Inventory sold, in transit at year-end ....................................... Inventory purchased, in transit at year-end ............................ Correct December 31 inventory ...............................................

$300,000 26,000 –0– 14,000 $340,000

DO IT! 6-2 Cost of goods available for sale = (3,000 X $5) + (8,000 X $7) = $71,000 Ending inventory = 3,000 + 8,000 – 9,400 = 1,600 units (a) FIFO: $71,000 – (1,600 X $7) = $59,800 (b) LIFO: $71,000 – (1,600 X $5) = $63,000 (c) Average-cost: $71,000/11,000 = $6.455 per unit 9,400 X $6.455 = $60,677 DO IT! 6-3 Ending inventory Cost of goods sold Owner’s equity

2016 $27,000 understated $27,000 overstated $27,000 understated

2017 No effect $27,000 understated No effect

6-13

DO IT! 6-4 (a)

The lowest value for each inventory type is: Small $64,000, Medium $260,000 and Large $152,000. The total inventory value is the sum of these figures, $476,000.

(b) 2016 Inventory turnover

$1,200,000 = 6 ($180,000 + $220,000)/2

Days in inventory

365 ÷ 6 = 60.8 days

2017 $1,425,000 = 8.9 ($220,000 + $100,000)/2 365 ÷ 8.9 = 41 days

The company experienced a very significant decline in its ending inventory as a result of the just-in-time inventory. This decline improved its inventory turnover and its days in inventory. It is possible that this increase is the result of a more focused inventory policy. It appears that this change is a win-win situation for Yeng Company.

6-14

SOLUTIONS TO EXERCISES EXERCISE 6-1 Ending inventory—physical count................................................ 1. No effect—title passes to purchaser upon shipment when terms are FOB shipping point .................................. 2. No effect—title does not transfer to Wilfred until goods are received.............................................................. 3. Add to inventory: Title passed to Wilfred when goods were shipped ....................................................................... 4. Add to inventory: Title remains with Wilfred until purchaser receives goods .................................................. 5. The goods did not arrive prior to year-end. The goods, therefore, cannot be included in the inventory ................. Correct inventory ...........................................................................

$297,000 0 0 22,000 35,000 (44,000) $310,000

EXERCISE 6-2 Ending inventory—as reported ...................................................... 1. Subtract from inventory: The goods belong to Kroeger Corporation. Depue is merely holding them as a consignee............................................................ 2. No effect—title does not pass to Depue until goods are received (Jan. 3) ................................................. 3. Subtract from inventory: Office supplies should be carried in a separate account. They are not considered inventory held for resale.................................. 4. Add to inventory: The goods belong to Depue until they are shipped (Jan. 1)............................................. 5. Add to inventory: Macchia Sales ordered goods with a cost of $8,000. Depue should record the corresponding sales revenue of $10,000. Depue’s decision to ship extra “unordered” goods does not constitute a sale. The manager’s statement that Machia could ship the goods back indicates that Depue knows this over-shipment is not a legitimate sale. The manager acted unethically in an attempt to improve Depue’s reported income by over-shipping .....................................

$740,000 (250,000) 0 (14,000) 28,000

52,000

6-15

EXERCISE 6-2 (Continued) 6.

Subtract from inventory: GAAP require that inventory be valued at the lower of cost or market. Obsolete parts should be adjusted from cost to zero if they have no other use. .................................................................................. (40,000) Correct inventory................................................................................. $516,000 EXERCISE 6-3 (a)

FIFO Cost of Goods Sold (#1012) $100 + (#1045) $88 = $188

(b)

It could choose to sell specific units purchased at specific costs if it wished to impact earnings selectively. If it wished to minimize earnings it would choose to sell the units purchased at higher costs—in which case the Cost of Goods Sold would be $188. If it wished to maximize earnings it would choose to sell the units purchased at lower costs—in which case the cost of goods sold would be $168.

(c)

I recommend they use the FIFO method because it produces a more appropriate balance sheet valuation and reduces the opportunity to manipulate earnings. (The answer may vary depending on the method the student chooses.)

EXERCISE 6-4 (a)

FIFO Beginning inventory (26 X $97) ................................... $ 2,522 Purchases Sept. 12 (45 X $102) ............................................... $4,590 Sept. 19 (20 X $104) ............................................... 2,080 Sept. 26 (50 X $105) ............................................... 5,250 11,920 Cost of goods available for sale.................................. 14,442 Less: Ending inventory (20 X $105) ........................... 2,100 Cost of goods sold ....................................................... $12,342

6-16

EXERCISE 6-17 (Continued) Date 9/1 9/12 9/19 9/26

Units 26 45 20 30 121

Proof Unit Cost $ 97 102 104 105

Total Cost $ 2,522 4,590 2,080 3,150 $12,342

LIFO Cost of goods available for sale........................................................... $14,442 Less: Ending inventory (20 X $97) ..................................................... 1,940 Cost of goods sold ................................................................................ $12,502

Date 9/26 9/19 9/12 9/1

Units 50 20 45 6 121

Proof Unit Cost $105 104 102 97

Total Cost $ 5,250 2,080 4,590 582 $12,502

(b) FIFO $2,100 (ending inventory) + $12,342 (COGS) = $14,442 LIFO $1,940 (ending inventory) + $12,502 (COGS) = $14,442

}

Cost of goods available for sale

Under both methods, the sum of the ending inventory and cost of goods sold equals the same amount, $14,442, which is the cost of goods available for sale. EXERCISE 6-5 FIFO Beginning inventory (30 X $8) .............................................. Purchases May 15 (25 X $11) ........................................................... May 24 (35 X $12) ........................................................... Cost of goods available for sale .......................................... Less: Ending inventory (22 X $12) ...................................... Cost of goods sold................................................................

$240 $275 420

695 935 264 $671 6-17

EXERCISE 6-5 (Continued)

Date 5/1 5/15 5/24

Units 30 25 13 68

Proof Unit Cost $8 11 12

Total Cost $240 275 156 $671

LIFO Cost of goods available for sale......................................................... Less: Ending inventory (22 X $8) ...................................................... Cost of goods sold ..............................................................................

Date 5/24 5/15 5/1

Units 35 25 8 68

Proof Unit Cost $12 11 8

$935 176 $759

Total Cost $420 275 64 $759

EXERCISE 6-6 (a)

FIFO Beginning inventory (200 X $5)............................... Purchases June 12 (400 X $6) ............................................ June 23 (300 X $7) ............................................ Cost of goods available for sale ............................. Less: Ending inventory (100 X $7) ......................... Cost of goods sold ..................................................

$1,000 $2,400 2,100

LIFO Cost of goods available for sale ............................. Less: Ending inventory (100 X $5) ......................... Cost of goods sold ..................................................

6-18

4,500 5,500 700 $4,800 $5,500 500 $5,000

EXERCISE 6-19 (Continued) (b) The FIFO method will produce the higher ending inventory because costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold and the latest costs remain in ending inventory. For Moath Company, the ending inventory under FIFO is $700 or (100 X $7) compared to $500 or (100 X $5) under LIFO. (c) The LIFO method will produce the higher cost of goods sold for Moath Company. Under LIFO the most recent costs are charged to cost of goods sold and the earliest costs are included in the ending inventory. The cost of goods sold is $5,000 or [$5,500 – (100 X $5)] compared to $4,800 or ($5,500 – $700) under FIFO. EXERCISE 6-7

(2)

(3)

(a) (1) FIFO Beginning inventory .......................................... Purchases .......................................................... Cost of goods available for sale ....................... Less: ending inventory (75 X $130) ................. Cost of goods sold ............................................

$10,000 26,000 36,000 9,750 $26,250

LIFO Beginning inventory .......................................... Purchases .......................................................... Cost of goods available for sale ....................... Less: ending inventory (75 X $100) ................. Cost of goods sold ............................................

$10,000 26,000 36,000 7,500 $28,500

AVERAGE-COST Beginning inventory .......................................... Purchases .......................................................... Cost of goods available for sale ....................... Less: ending inventory (75 X $120) ................. Cost of goods sold ............................................

$10,000 26,000 36,000 9,000 $27,000

(b) The use of FIFO would result in the highest net income since the earlier lower costs are matched with revenues. (c) The use of FIFO would result in inventories approximating current cost in the balance sheet, since the more recent units are assumed to be on hand. (d) The use of LIFO would result in Shawn paying the least taxes in the first year since income will be lower.

6-19

EXERCISE 6-8 (a)

Total Units Cost of Goods Available for Sale ÷ Available for Sale $5,500 900 Ending inventory (100 X $6.11) Cost of goods sold ($5,500  $611)

Weighted Average = Unit Cost $6.11

$ 611 4,889

(b) Ending inventory is lower than FIFO ($700) and higher than LIFO ($500). In contrast, cost of goods sold is higher than FIFO ($4,800) and lower than LIFO ($5,000). (c) The average-cost method uses a weighted-average unit cost, not a simple average of unit costs. EXERCISE 6-9

Beginning inventory............................................ Cost of goods purchased ................................... Cost of goods available for sale......................... Corrected ending inventory................................ Cost of goods sold.............................................. a

$30,000 – $3,000 = $27,000.

2016 $ 20,000 150,000 170,000 27,000a $143,000

2017 $ 27,000 175,000 202,000 40,000b $162,000

$35,000 + $5,000 = $40,000.

EXERCISE 6-10 (a) Sales................................................................. Cost of goods sold Beginning inventory................................. Cost of goods purchased ........................ Cost of goods available for sale.............. Ending inventory ($44,000 – $6,000) ....... Cost of goods sold ................................... Gross profit......................................................

6-20

2016 $220,000

2017 $250,000

32,000 173,000 205,000 38,000 167,000 $ 53,000

38,000 202,000 240,000 52,000 188,000 $ 62,000

EXERCISE 6-10 (Continued) (b) The cumulative effect on total gross profit for the two years is zero as shown below: Incorrect gross profits: $59,000 + $56,000 = $115,000 Correct gross profits: $53,000 + $62,000 = 115,000 Difference $ 0 (c) Dear Mr./Ms. President: Because your ending inventory of December 31, 2016 was overstated by $6,000, your net income for 2016 was overstated by $6,000. For 2017 net income was understated by $6,000. In a periodic system, the cost of goods sold is calculated by deducting the cost of ending inventory from the total cost of goods you have available for sale in the period. Therefore, if this ending inventory figure is overstated, as it was in December 2016, then the cost of goods sold is understated and therefore net income will be overstated by that amount. Consequently, this overstated ending inventory figure goes on to become the next period’s beginning inventory amount and is a part of the total cost of goods available for sale. Therefore, the mistake repeats itself in the reverse. The error also affects the balance sheet at the end of 2016. The inventory reported in the balance sheet is overstated; therefore, total assets are overstated. The overstatement of the 2016 net income results in the capital account balance being overstated. The balance sheet at the end of 2017 is correct because the overstatement of the capital account at the end of 2016 is offset by the understatement of the 2017 net income and the inventory at the end of 2017 is correct. Thank you for allowing me to bring this to your attention. If you have any questions, please contact me at your convenience. Sincerely,

6-21

EXERCISE 6-11 Lower -of-Cost -or-Market:

Cost

Market

Cameras Minolta Canon Total

$ 850 900 1,750

$ 780 912 1,692

$ 780 900

Light meters Vivitar Kodak Total Total inventory

1,250 1,680 2,930 $4,680

1,150 1,890 3,040 $4,732

1,150 1,680 $4,510

Market $ 7,100 10,050 9,750 $26,900

Lower -of-Costor-Market: $ 6,500 10,050 9,750 $26,300

EXERCISE 6-12

Cameras DVD players Ipods Total inventory

Cost $ 6,500 11,250 10,000 $27,750

EXERCISE 6-13

Inventory turnover

2015

2016

2017

$900,000 ($100,000 + $300,000) ÷ 2

$1,152,000 ($300,000 + $400,000) ÷ 2

$1,300,000 ($400,000 + $480,000) ÷ 2

$900,000 $200,000 Days in inventory Gross profit rate

6-22

365

$1,152,000 = 3.3 $350,000

= 4.5

365

= 81.1 days

4.5

3.3

= 110.6 days

$1,300,000 = 2.95 $440,000 365

= 123.7 days

2.95

$1,200,000 – $900,000 $1,600,000 – $1,152,000 $1,900,000 – $1,300,000 = 25% = 28% = 32% $1,200,000 $1,600,000 $1,900,000

EXERCISE 6-13 (Continued) The inventory turnover decreased by approximately 34% from 2015 to 2017 while the days in inventory increased by almost 53% over the same time period. Both of these changes would be considered negative since it’s better to have a higher inventory turnover with a correspondingly lower days in inventory. However, Abdullah’s Photo gross profit rate increased by 28% from 2015 to 2017, which is a positive sign. EXERCISE 6-14 (a)

(b)

Sooner Company

Later Company

Inventory Turnover

$190,000 ($45,000 + $55,000)/2 = 3.80

$292,000 ($71,000 + $69,000)/2 = 4.17

Days in Inventory

365/3.80 = 96 days

365/4.17 = 88 days

Later Company is moving its inventory more quickly, since its inventory turnover is higher, and its days in inventory is lower.

*EXERCISE 6-15 (1) Date Purchases Jan. 1 8 10 (6 @ $660) $3,960 15

Purchases

Jan. 1 8 10 (6 @ $660) $3,960 15

(2 @ $600) $1,200

(1 @ $600) (4 @ $660) $3,240

(2) Date

FIFO Cost of Goods Sold

(2 @ $660)

LIFO Cost of Goods Sold (2 @ $600) $1,200

(5 @ $660) $3,300

Balance (3 @ $600) $1,800 (1 @ $600) 600 (1 @ $600) 4,560 (6 @ $660) 1,320

Balance (3 @ $600) (1 @ $600) (1 @ $600) (6 @ $660) (1 @ $600) (1 @ $660)

$1,800 600 4,560 1,260

6-23

*EXERCISE 6-15 (Continued) (3)

MOVING-AVERAGE COST Date Purchases Cost of Goods Sold Jan. 1 8 (2 @ $600) $1,200 10 (6 @ $660) $3,960 15 (5 @ $651.43) $3,257

Balance (3 @ $600) $1,800 (1 @ $600) 600 (7 @ $651.43)* 4,560 (2 @ $651.43) 1,303

*Average-cost = ($600 + $3,960) ÷ 7 = $651.43 (rounded) *EXERCISE 6-16 (a)

The cost of goods available for sale is: June 1 Inventory 200 @ $5 June 12 Purchase 400 @ $6 June 23 Purchase 300 @ $7 Total cost of goods available for sale

Date June 1 June 12

FIFO Cost of Goods Sold

Purchases (400 @ $6) $2,400

Balance (200 @ $5) $1,000 (200 @ $5) (400 @ $6) $3,400

}

June 15 June 23

$1,000 2,400 2,100 $5,500

(200 @ $5) (240 @ $6)

$1,000 1,440

(300 @ $7) $2,100

June 27

(160 @ $6) (200 @ $7)

960 1,400 $4,800

(160 @ $6) (160 @ $6) (300 @ $7)

$ 960

} $3,060

(100 @ $7)

$ 700

Ending inventory: $700. Cost of goods sold: $5,500 – $700 = $4,800.

6-24

*EXERCISE 6-16 (Continued)

Date Purchases June 1 June 12 (400 @ $6) $2,400 June 15

LIFO Cost of Goods Sold

}

(400 @ $6) (40 @ $5)

$2,400 $ 200

June 23 (300 @ $7) $2,100 June 27

Balance (200 @ $5) $1,000 (200 @ $5) $3,400 (400 @ $6)

(300 @ $7) (60 @ $5)

(160 @ $5) (160 @ $5) (300 @ $7)

$ 800

} $2,900

$2,100 300 (100 @ $5) $5,000

$ 500

Ending inventory: $500. Cost of goods sold: $5,500 – $500 = $5,000.

Date June 1 June 12 June 15 June 23 June 27

Moving-Average Cost Cost of Goods Sold

Purchases (400 @ $6)

$2,400 (440 @ $5.666)

(300 @ $7)

$2,100 (360 @ $6.537)

Balance (200 @ $5) $1,000 (600 @ $5.666) $3,400 $2,493 (160 @ $5.666) $ 907 (460 @ $6.537) $3,007 $2,353 (100 @ $6.537) $ 654 $4,846

Ending inventory: $654. Cost of goods sold: $5,500 – $654 = $4,846. (b)

FIFO gives the same ending inventory and cost of goods sold values under both the periodic and perpetual inventory system. LIFO and average-cost normally give different ending inventory and cost of goods sold values under the periodic and perpetual inventory systems, but in this case LIFO gives the same results.

(c)

The simple average would be [($5 + $6 + $7) ÷ 3)] or $6. However, the moving-average cost method uses a weighted-average unit cost that changes each time a purchase is made rather than a simple average.

6-25

*EXERCISE 6-17 (a)

Date 9/1 9/5 9/12

FIFO Cost of Goods Sold

Purchases

(12 @ $ 97) $1,164 (45 @ $102)

$4,590

9/16

(14 @ $ 97) (36 @ $102) $5,030

9/19

(20 @ $104)

$2,080

9/26

(50 @ $105)

$5,250

9/29

Date 9/1 9/5 9/12

( 9 @ $102) (20 @ $104) (30 @ $105) $6,148 LIFO Cost of Goods Sold

Purchases

(12 @ $ 97) $1,164 (45 @ $102)

$4,590

9/16

(45 @ $102) ( 5 @ $ 97) $5,075

9/19

(20 @ $104)

$2,080

9/26

(50 @ $105)

$5,250

9/29

6-26

(50 @ $105) ( 9 @ $104) $6,186

Balance (26 @ $ 97) $2,522 (14 @ $ 97) $1,358 (14 @ $ 97) (45 @ $102) $5,948 ( 9 @ $102) $ 918 ( 9 @ $102) (20 @ $104) $2,998 ( 9 @ $102) (20 @ $104) $8,248 (50 @ $105) (20 @ $105) $2,100

Balance (26 @ $ 97) $2,522 (14 @ $ 97) $1,358 (14 @ $ 97) (45 @ $102) $5,948 ( 9 @ $ 97) ( 9 @ $ 97) (20 @ $104) ( 9 @ $ 97) (20 @ $104) (50 @ $105) ( 9 @ $ 97) (11 @ $104)

$ 873 $2,953 $8,203 $2,017

*EXERCISE 6-17 (Continued)

Date 9/1 9/5 9/12 9/16 9/19 9/26 9/29

Moving-Average Cost Cost of Goods Sold

Purchases

(12 @ $97)

$1,164

(50 @ $100.81)

$5,041*

(59 @ $104.27)

$6,152*

(45 @ $102) $4,590 (20 @ $104) $2,080 (50 @ $105) $5,250

Balance (26 @ $97) $2,522 (14 @ $97) $1,358 a (59 @ $100.81) $5,948 ( 9 @ $100.81) $ 907 (29 @ $103.00)b $2,987 (79 @ $104.27)c $8,237 (20 @ $104.27) $2,085

*Rounded a $5,948 ÷ 59 = $100.81 b $2,987 ÷ 29 = $103.00 c $8,237 ÷ 79 = $104.27 (b) Ending Inventory FIFO Ending Inventory LIFO

(c)

Periodic $2,100 $1,940

Perpetual $2,100 $2,017

FIFO yields the same ending inventory value under both the periodic and perpetual inventory system. LIFO usually yields different ending inventory values when using the periodic versus perpetual inventory system.

*EXERCISE 6-18 (a)

Sales ..................................................................... Cost of goods sold Inventory, November 1 ............................... Cost of goods purchased ........................... Cost of goods available for sale ................ Inventory, December 31.............................. Cost of goods sold............................. Gross profit .......................................................... Gross profit rate

$840,000 $130,000 536,000 666,000 120,000 546,000 $294,000

$294,000/$840,000 = 35%

6-27

*EXERCISE 6-18 (Continued) (b) Sales ....................................................................................... $1,000,000 Less: Estimated gross profit (35% X $1,000,000) ............... 350,000 Estimated cost of goods sold ............................................... $ 650,000 Beginning inventory .............................................................. Cost of goods purchased ...................................................... Cost of goods available for sale ........................................... Less: Estimated cost of goods sold .................................... Estimated cost of ending inventory .....................................

$120,000 610,000 730,000 650,000 $ 80,000

*EXERCISE 6-19 (a) Net sales ($51,000 – $1,000) .................................................. Less: Estimated gross profit (30% X $50,000) .................... Estimated cost of goods sold ...............................................

$50,000 15,000 $35,000

Beginning inventory .............................................................. Cost of goods purchased ($31,200 – $1,400 + $1,200) ........ Cost of goods available for sale ........................................... Less: Estimated cost of goods sold .................................... Estimated cost of merchandise lost .....................................

$20,000 31,000 51,000 35,000 $16,000

(b) Net sales ................................................................................. Less: Estimated gross profit (40% X $50,000) .................... Estimated cost of goods sold ...............................................

$50,000 20,000 $30,000

Beginning inventory .............................................................. Cost of goods purchased ...................................................... Cost of goods available for sale ........................................... Less: Estimated cost of goods sold .................................... Estimated cost of merchandise lost .....................................

$30,000 31,000 61,000 30,000 $31,000

6-28

*EXERCISE 6-20

Beginning inventory Goods purchased Goods available for sale Less: Net sales Ending inventory at retail

Women’s Shoes Cost Retail $ 25,000 $ 46,000 110,000 179,000 $135,000 225,000 178,000 $ 47,000 $135,000

Cost-to-retail ratio

= 60%

$225,000 Estimated cost of ending inventory $47,000 X 60% = $28,200

Men’s Shoes Cost Retail $ 45,000 $ 60,000 136,300 185,000 $181,300 245,000 185,000 $ 60,000 $181,300

= 74%

$245,000

$60,000 X 74% = $44,400

6-29

PROBLEM 6-1A

(a)

The sale will be recorded on February 26. The goods (cost, $800) should be excluded from Houghton’s February 28 inventory.

(b)

Houghton owns the goods once they are shipped on February 26. Include inventory of $480.

(c)

Include $720 in inventory.

(d)

Exclude the items from Houghton’s inventory. Title remains with the consignor.

(e)

Title of the goods does not transfer to Houghton until March 2. Exclude this amount from the February 28 inventory.

(f)

Title to the goods does not transfer to the customer until March 2. The $240 cost should be included in ending inventory.

6-30

PROBLEM 6-2A

(a) Date Oct. 1 3 9 19 25

COST OF GOODS AVAILABLE FOR SALE Explanation Units Unit Cost Beginning Inventory 2,000 $7 Purchase 2,500 8 Purchase 3,500 9 Purchase 3,000 10 Purchase 4,000 11 Total 15,000

(b)

Total Cost $ 14,000 20,000 31,500 30,000 44,000 $139,500

FIFO (1)

Ending Inventory Unit Date Units Cost Oct. 25 4,000 $11 19 100 10 4,100*

Total Cost $44,000 1,000 $45,000

(2) Cost of Goods Sold Cost of goods available for sale $139,500 Less: Ending inventory 45,000 Cost of goods sold $ 94,500

*15,000 – 10,900 = 4,100 Date Oct. 1 3 9 19

Proof of Cost of Goods Sold Units Unit Cost Total Cost 2,000 $7 $14,000 2,500 8 20,000 3,500 9 31,500 2,900 10 29,000 10,900 $94,500 LIFO

(1)

Ending Inventory Unit Date Units Cost Oct. 1 2,000 $7 3 2,100 8 4,100

Total Cost $14,000 16,800 $30,800

(2) Cost of Goods Sold Cost of goods available for sale $139,500 Less: Ending inventory 30,800 Cost of goods sold $108,700

6-31

PROBLEM 6-2A (Continued) Proof of Cost of Goods Sold Unit Total Date Units Cost Cost Oct. 25 4,000 $11 $ 44,000 19 3,000 10 30,000 9 3,500 9 31,500 3 400 8 3,200 10,900 $108,700

AVERAGE COST (1) Ending Inventory (2) Cost of Goods Sold $139,500 ÷ 15,000 = $9.30 Cost of goods available for sale $139,500 Units Unit Cost Total Cost Less: Ending inventory 38,130 4,100 $9.30 $38,130 Cost of goods sold $101,370 (c) (1) FIFO results in the highest inventory amount for the balance sheet, $45,000. (2) LIFO results in the highest cost of goods sold, $108,700.

6-32

PROBLEM 6-3A

(a) Date 1/1 3/15 7/20 9/4 12/2

COST OF GOODS AVAILABLE FOR SALE Explanation Units Unit Cost Beginning Inventory 160 $20 Purchase 400 23 Purchase 250 24 Purchase 330 26 Purchase 100 29 Total 1,240

(b)

Total Cost $ 3,200 9,200 6,000 8,580 2,900 $29,880

FIFO (1) Date 12/2 9/4

Ending Inventory Unit Units Cost 100 $29 140 26 240

Total Cost $2,900 3,640 $6,540

(2) Cost of Goods Sold Cost of goods available for sale $29,880 Less: Ending inventory 6,540 Cost of goods sold $23,340

Proof of Cost of Goods Sold Unit Total Date Units Cost Cost 1/1 160 $20 $ 3,200 3/15 400 23 9,200 7/20 250 24 6,000 9/4 190 26 4,940 1,000 $23,340

(1)

Ending Inventory Unit Date Units Cost 1/1 160 $20 3/15 80 23 240

LIFO (2) Cost of Goods Sold Total Cost of goods Cost available for sale $29,880 $3,200 Less: Ending 1,840 inventory 5,040 $5,040 Cost of goods sold $24,840

6-33

PROBLEM 6-3A (Continued) Proof of Cost of Goods Sold Unit Total Cost Date Units Cost 12/2 100 $29 $ 2,900 9/4 330 26 8,580 7/20 250 24 6,000 3/15 320 23 7,360 1,000 $24,840

(1)

AVERAGE COST Ending Inventory (2) Cost of Goods Sold $29,880 ÷ 1,240 = $24.097 Cost of goods available for sale Units Unit Cost Total Cost Less: Ending inventory 240 $24.097 $5,783 Cost of goods sold

$29,880 5,783 $24,097

Proof of Cost of Goods Sold 1,000 units X $24.097 = $24,097 (c) (1) FIFO results in the highest inventory amount, $6,540, as shown in (b) above. (2) LIFO produces the highest cost of goods sold, $24,840 as shown in (b) above.

6-34

PROBLEM 6-4A (a)

GRESA INC. Condensed Income Statements For the Year Ended December 31, 2017

Sales revenue ......................................... Cost of goods sold Beginning inventory ........................ Cost of goods purchased ................ Cost of goods available for sale ..... Ending inventory.............................. Cost of goods sold .......................... Gross profit ............................................. Operating expenses ............................... Income before income taxes.................. Income tax expense (40%) ..................... Net income .............................................. a

FIFO

LIFO

$747,000

14,000 466,000 480,000 45,900a 434,100 312,900 130,000 182,900 73,160 $109,740

14,000 466,000 480,000 36,000b 444,000 303,000 130,000 173,000 69,200 $103,800

17,000 X $2.70 = $45,900. $14,000 + (10,000 X $2.20) = $36,000.

(b) (1) The FIFO method produces the most meaningful inventory amount for the balance sheet because the units are costed at the most recent purchase prices. (2) The LIFO method produces the most meaningful net income because the cost of the most recent purchases are matched against sales. (3) The FIFO method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence. (4) There will be $3,960 additional cash available under LIFO because income taxes are $69,200 under LIFO and $73,160 under FIFO. (5) Gross profit under the average cost method will be: (a) lower than FIFO and (b) higher than LIFO.

6-35

PROBLEM 6-5A

(a) Cost of Goods Available for Sale Date Explanation June 1 Beginning Inventory June 4 Purchase June 18 Purchase June 18 Purchase return June 28 Purchase Total Ending Inventory in Units: Units available for sale Sales (110 – 15 + 65) Units remaining in ending inventory

Units 40 135 55 (10) 35 255

255 160 95

Date June 10 11 25

Unit Cost $40 43 46 46 50

Total Cost $ 1,600 5,805 2,530 (460) 1,750 $11,225

Sales Revenue Unit Units Price Total Sales 110 $70 $ 7,700 (15) 70 (1,050) 65 76 4,940 160 $11,590

(1) LIFO (i) Ending Inventory June 1 40 @ $40 4 55 @ 43 95

(iii) Gross Profit Sales revenue Cost of goods sold Gross profit

6-36

$1,600 2,365 $3,965

$11,590 7,260 $ 4,330

(ii) Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$11,225 3,965 $ 7,260

(iv) Gross Profit Rate Gross profit $ 4,330 = 37.4% Net sales $11,590

PROBLEM 6-5A (Continued) (2) FIFO (i) Ending Inventory June 28 35 @ $50 18 45 @ $46 4 15 @ $43 95

$1,750 2,070 645 $4,465

(iii) Gross Profit Sales revenue Cost of goods sold Gross profit

$11,590 6,760 $ 4,830

(3) Average-Cost Weighted-average cost per unit:

(ii) Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$11,225 4,465 $ 6,760

(iv) Gross Profit Rate Gross profit $ 4,830 = 41.7% Net sales $11,590

Cost of goods available for sale Units available for sale $11,225 = $44.02 255

(i)

Ending Inventory 95 units @$44.02

(iii) Gross Profit Sales revenue Cost of goods sold Gross profit

4,181.90

$11,590.00 7,043.10 $ 4,546.90

(ii) Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$11,225.00 4,181.90 $ 7,043.10

(iv) Gross Profit Rate Gross profit $ 4,546.90 = 39.2% Net sales $11,590.00

(b) In this period of rising prices, LIFO gives the highest cost of goods sold and the lowest gross profit. FIFO gives the lowest cost of goods sold and the highest gross profit.

6-37

PROBLEM 6-6A (a)

GOBLER INC. Income Statement (partial) For the Year Ended December 31, 2017 a

Sales revenue Beginning inventory Purchasesb Cost of goods available for sale Ending inventoryc Cost of goods sold Gross profit

Specific Identification $8,915 1,200 6,505

FIFO $8,915 1,200 6,505

LIFO $8,915 1,200 6,505

7,705 2,505 5,200 $3,715

7,705 2,720 4,985 $3,930

7,705 2,175 5,530 $3,385

(a)

(2,300 @ $1.05) + (5,200 @ $1.25) (2,500 @ $ .65) + (4,000 @ $.72) + (2,500 @ $.80) (c) Specific identification ending inventory consists of: (b)

Beginning inventory (2,000 liters – 1,000 – 450) March 3 purchase (2,500 liters – 1,300 – 550) March 10 purchase (4,000 liters – 2,900) March 20 purchase (2,500 liters – 1,300)

550 @ $.60 650 @ $.65 1,100 @ $.72 1,200 @ $.80 3,500 liters

$ 330.00 422.50 792.00 960.00 $2,504.50

2,500 @ $.80 1,000 @ $.72 3,500 liters

$2,000 720 $2,720

2,000 @ $.60 1,500 @ $.65 3,500 liters

$1,200 975 $2,175

FIFO ending inventory consists of: March 20 purchase March 10 purchase

LIFO ending inventory consists of: Beginning inventory March 3 purchase

(b) Companies can choose a cost flow method that produces the highest possible cost of goods sold and lowest gross profit to justify price increases. In this example, LIFO produces the lowest gross profit and best support to increase selling prices.

6-38

PROBLEM 6-7A (a)

DANICA CO. Condensed Income Statement For the Year Ended December 31, 2017 Sales revenue ............................................ Cost of goods sold Beginning inventory .......................... Cost of goods purchased .................. Cost of goods available for sale ....... Ending inventory ................................ Cost of goods sold............................. Gross profit ................................................ Operating expenses .................................. Income before income taxes..................... Income tax expense (30%) ........................ Net income ................................................. a

FIFO $735,000

LIFO $735,000

47,000 532,000 579,000 145,600a 433,400 301,600 140,000 161,600 48,480 $113,120

47,000 532,000 579,000 128,600b 450,400 284,600 140,000 144,600 43,380 $101,220

(26,000 @ $5.60) = $145,600. (10,000 @ $4.70) + (16,000 @ $5.10) = $128,600.

(b) Answers to questions: (1) The FIFO method produces the most meaningful inventory amount for the balance sheet because the units are costed at the most recent purchase prices. (2) The LIFO method produces the most meaningful net income because the costs of the most recent purchases are matched against sales. (3) The FIFO method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence. (4) There will be $5,100 additional cash available under LIFO because income taxes are $43,380 under LIFO and $48,480 under FIFO. (5) The illusionary gross profit is $17,000 or ($301,600 – $284,600). Under LIFO, Danica Co. has recovered the current replacement cost of the units ($450,400), whereas under FIFO, it has only recovered the earlier costs ($433,400). This means that, under FIFO, the company must reinvest at least $17,000 of the gross profit to replace the units used. .

6-39

*PROBLEM 6-8A (a) Sales: January 8 January 10 (return) January 20 (1) LIFO Date January 1 January 5

$3,080 (280) 2,880 $5,680

110 units @ $28 (10 units @ $28) 90 units @ $32 190 units

Purchases

Cost of Goods Sold

(140 @ $18) $2,520

January 8

(110 @ $18)

$1,980

January 10

(–10 @ $18)

($ 180)

January 15

January 16

( 55 @ $20) $1,100

( –5 @ $20) ($ 100)

( 50 @ $20) ( 40 @ $18)

January 20 January 25

Balance (100 @ $15) (100 @ $15) (140 @ $18) (100 @ $15) ( 30 @ $18) (100 @ $15) ( 40 @ $18) (100 @ $15) ( 40 @ $18) ( 55 @ $20) (100 @ $15) ( 40 @ $18) ( 50 @ $20)

$1,500

} $4,020 } $2,040 } $2,220

} }

$3,320

$3,220

} $1,720

(100 @ $15)

$1,500

$3,520

(100 @ $15) ( 20 @ $22)

} $1,940

( 20 @ $22) $ 440

(i) Cost of goods sold = $3,520. (ii) Ending inventory = $1,940. (iii) Gross profit = $5,680 – $3,520 = $2,160.

6-40

*PROBLEM 6-8A (Continued) (2) FIFO Date

Purchases

Cost of Goods Sold

January 1 January 5

(140 @ $18) $2,520 (100 @ $15) ( 10@ $18) (–10 @ $18)

January 8 January 10 January 15

( 55 @ $20) $1,100

January 16

( –5 @ $20)($ 100)

January 20 January 25

(90 @ $18)

} $1,680 ($ 180)

$1,620

Balance (100 @ $15) (100 @ $15) (140 @ $18)

} $4,020

(130 @ $18)

$2,340

(140 @ $18) (140 @ $18) ( 55 @ $20) (140 @ $18) ( 50 @ $20) ( 50 @ $18) 50 @ @ $20) (( 50 $18)

$2,520

( 50 @ $20) ( 20 @ $22)

( 20 @ $22) $ 440

$1,500

} $3,620 } $3,520 } $1,900

}

$2,340

$3,120

(i) Cost of goods sold = $3,120. (ii) Ending inventory = $2,340. (iii) Gross profit = $5,680 – $3,120 = $2,560. (3) Moving-Average Cost Date January 1 January 5 January 8 January 10 January 15 January 16 January 20 January 25

Purchases

Cost of Goods Sold

(140 @ $18) $2,520 (110 @ $16.75) (–10 @ $16.75)

$1,843 ($ 168)

(90 @ $17.605)

$1,584

( 55 @ $20) $1,100 ( –5 @ $20) ($ 100) ( 20 @ $22)

$ 440

Balance (100 @ $15) (240 @ $16.75)a (130 @ $16.75) (140 @ $16.75) (195 @ $17.667)b (190 @ $17.605)c (100 @ $17.605) (120 @ $18.342)d

$1,500 $4,020 $2,177 $2,345 $3,445 $3,345 $1,761 $2,201

$3,259 *rounded a $4,020 ÷ 240 = $16.75 b $3,445 ÷ 195 = $17.667

$3,345 ÷ 190 = $17.61 $2,201 ÷ 120 = $18.342

(i) Cost of goods sold = $3,259. (ii) Ending inventory = $2,201. (iii) Gross profit = $5,680 – $3,259 = $2,421. .

6-41

*PROBLEM 6-8A (Continued) (b) Gross profit: Sales Cost of goods sold Gross profit Ending inventory

LIFO $5,680 3,520 $2,160 $1,940

FIFO $5,680 3,120 $2,560 $2,340

Moving-Average Cost $5,680 3,259 $2,421 $2,201

In a period of rising costs, the LIFO cost flow assumption results in the highest cost of goods sold and lowest gross profit. FIFO gives the lowest cost of goods sold and highest gross profit. The moving-average cost flow assumption results in amounts between the other two. On the balance sheet, FIFO gives the highest ending inventory (representing the most current costs); LIFO gives the lowest ending inventory (representing the oldest costs); and moving-average cost results in an ending inventory falling between the other two.

6-42

*PROBLEM 6-9A (a) (1)

FIFO Date

Purchases

July 1 6 11

Cost of Goods Sold

(5 @ $122)

$ 610

(7 @ $136)

$ 952

(3 @ $122)

(2 @ $122) (3 @ $136)

14 21

(8 @ $147)

$366

} $652

$1,176

(4 @ $136) (1 @ $147)

(2)

} $691

Balance (5 @ $122) (2 @ $122) (2 @ $122) (7 @ $136)

$ 610 $ 244

} $1,196

(4 @ $136) (4 @ $136) (8 @ $147)

$ 544

} $1,720

(7 @ $147)

$1,029

MOVING-AVERAGE COST Date July 1 6 11 14 21 27

Purchases (5 @ $122)

$ 610

(7 @ $136)

$ 952

(8 @ $147)

$1,176

Cost of Goods Sold

(3 @ $122)

$366

(5 @ $132.89)

$664

(5 @ $142.33)

$712

Balance ( 5 @ $122) ( 2 @ $122) ( 9 @ $132.89)* ( 4 @ $132.89) (12 @ $142.33)** ( 7 @ $142.33)

$ 610 $ 244 $1,196 $ 532 $1,708 $ 996

*$1,196 ÷ 9 = $132.89 **$1,708 ÷ 12 = $142.33 (3)

LIFO Date

Purchases

July 1 6 11

(5 @ $122)

$ 610 (3 @ $122)

(7 @ $136)

(5 @ $136) (8 @ $147)

$366

$ 952

14 21

Cost of Goods Sold

$680

$1,176

(5 @ $147)

$735

Balance (5 @ $122) (2 @ $122) (2 @ $122) (7 @ $136) (2 @ $122) (2 @ $136) (2 @ $122) (2 @ $136) (8 @ $147) (2 @ $122) (2 @ $136) (3 @ $147)

$ 610 $ 244

} $1,196 } $ 516

} }

$1,692 $ 957

(b) The highest ending inventory is $1,029 under the FIFO method. .

6-9

*PROBLEM 6-10A

(a) November Net sales ............................................ $600,000 Cost of goods sold Beginning inventory .................. $ 32,000 Purchases................................... $389,000 Less: Purchase returns and allowances ...................... $13,300 Purchase discounts........ 8,500 21,800 Net purchase .............................. 367,200 Add: Freight-in ......................... 8,800 Cost of goods purchased .......... 376,000 Cost of goods available for sale 408,000 Ending inventory........................ 36,000 Cost of goods sold ............. 372,000 Gross profit........................................ $228,000 Gross profit rate =

$228,000

= 38%

$600,000 (b) Net sales ............................................... Less: Estimated gross profit (38% X $700,000) ....................... Estimated cost of goods sold ..............

$700,000

Beginning inventory ............................. Purchases.............................................. Less: Purchase returns and allowances ................................. Purchase discounts................... Net purchases ....................................... Freight-in ............................................... Cost of goods purchased ..................... Cost of goods available for sale .......... Less: Estimated cost of goods sold............................................. Estimated inventory lost in fire............

$ 36,000

6-10

266,000 $434,000 $420,000 $14,900 9,500

24,400 395,600 9,900 405,500 441,500 434,000 $ 7,500

*PROBLEM 6-45A (a)

Hardcovers Cost Beginning inventory Purchases Freight-in Purchase discounts Goods available for sale Less: Net sales Ending inventory at retail

$ 420,000 2,135,000 24,000 (44,000) $2,535,000

Retail

Paperbacks Cost

Retail

$ 640,000 $ 280,000 $ 360,000 3,200,000 1,155,000 1,540,000 12,000 (22,000) 3,840,000 $1,425,000 1,900,000 3,100,000 1,570,000 $ 740,000 $ 330,000

Cost-to-retail ratio: Hardcovers—$2,535,000 ÷ $3,840,000 = 66%. Paperbacks—$1,425,000 ÷ $1,900,000 = 75%. Estimated ending inventory at cost: $740,000 X 66% = $488,400—Hardcovers. $330,000 X 75% = $247,500—Paperbacks. (b) Hardcovers—$744,000 X 65% = $483,600. Paperbacks—$335,000 X 75% = $251,250.

6-45

COMPREHENSIVE PROBLEM SOLUTION

(a)

Dec. 3 5

17 22

6-46

Inventory (4,000 X $0.74) ........................... Accounts Payable...............................

2,960

Accounts Receivable (4,400 X $0.90) ........ Sales Revenue ....................................

3,960

Cost of Goods Sold.................................... Inventory (3,000 X $0.60) + (1,400 X $0.74)..................................

2,836

Sales Returns and Allowances ................. Accounts Receivable..........................

180

Inventory..................................................... Cost of Goods Sold ............................

120

Inventory (2,200 X $0.80) ........................... Cash ....................................................

1,760

Accounts Receivable (2,100 X $0.95)........ Sales Revenue ....................................

1,995

Cost of Goods Sold (2,100 X $0.74) .......... Inventory .............................................

1,554

Salaries and Wages Expense .................... Salaries and Wages Payable..............

400

Depreciation Expense................................ Accumulated Depreciation— Equipment ........................................

200

2,960 3,960

2,836

180 120 1,760 1,995 1,554 400

200

COMPREHENSIVE PROBLEM SOLUTION (Continued) (b)

General Ledger

Bal. Bal. Bal.

Bal.

Cash 4,800 3,040

1,760

Inventory 1,800 2,960 120 1,760 2,250

2,836 1,554

Accounts Payable Bal. Bal.

3,000 2,960 5,960

Salaries and Wages Payable 400 Bal. 400 Sales Revenue 3,960 1,995 5,955

Bal.

Cost of Goods Sold 2,836 1,554 4,270

Bal.

Depreciation Expense 200 200

120

Bal.

Accounts Receivable 3,900 3,960 1,995 9,675

Bal.

Equipment 21,000

Bal.

180

Accumulated Depreciation—Equipment Bal. 1,500 200 Bal. 1,700 Owner’s Capital Bal.

27,000

Salaries and Wages Expense 400 Bal. 400 Sales Returns & Allowances 180 Bal. 180

6-47

COMPREHENSIVE PROBLEM SOLUTION (Continued) (c)

ANNALISE COMPANY Adjusted Trial Balance December 31, 2017 Cash .............................................................. Accounts Receivable ................................... Inventory ....................................................... Equipment..................................................... Accumulated Depreciation—Equipment .... Accounts Payable ........................................ Salaries and Wages Payable ....................... Owner’s Capital ............................................ Sales Revenue .............................................. Sales Returns & Allowances ....................... Cost of Goods Sold ...................................... Salaries and Wages Expense ...................... Depreciation Expense ..................................

(d)

CR.

$ 1,700 5,960 400 27,000 5,955 180 4,270 400 200 $41,015

$41,015

ANNALISE COMPANY Income Statement For the Month Ending December 31, 2017 Sales revenue ............................................. Less: Sales returns and allowances ........ Net sales ..................................................... Cost of goods sold..................................... Gross profit ................................................ Operating expenses Salaries and wages expense ............. Depreciation expense......................... Net income..................................................

6-48

DR. $ 3,040 9,675 2,250 21,000

$5,955 180 5,775 4,270 1,505 $400 200

600 $ 905

COMPREHENSIVE PROBLEM SOLUTION (Continued) ANNALISE COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash ....................................................... Accounts receivable.............................. Inventory ................................................ Total current assets ......................... Property, plant, and equipment Equipment.............................................. Less: Accumulated depreciation— Equipment .................................. Total assets ...................................................

$ 3,040 9,675 2,250 $14,965

21,000 1,700

19,300 $34,265

Liabilities and Owner’s Equity Current liabilities Accounts payable.................................. Salaries and wages payable ................. Total current liabilities.....................

$5,960 400 $ 6,360

Owner’s equity Owner’s capital ($27,000 + $905) .......... Total liabilities and owner’s equity ..............

27,905 $34,265

6-49

COMPREHENSIVE PROBLEM SOLUTION (Continued) (e) FIFO Method Units 3,000 4,000 2,200 9,200

Beg. Inventory Dec. 3 purchase. Dec. 17 purchase.

Unit Cost $0.60 $0.74 $0.80

Cost of Goods Available for Sales $1,800 2,960 1,760 $6,520

Ending Inventory

Cost of Goods Sold

Dec. 17 2,200 X $0.80 = $1,760 Dec. 3 700* X $0.74 = 518 2,900 $2,278

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$6,520 2,278 $4,242

*(9,200 – 4,400 + 200 – 2,100) – 2,200 (f)

6-50

LIFO Method Ending Inventory

Cost of Goods Sold

Dec. 1

Cost of goods available for sale Less: Ending inventory Cost of goods sold

2,900 X $0.60 = $1,740

$6,520 1,740 $4,780

BYP 6-1

FINANCIAL REPORTING PROBLEM

(a)

September 28, 2013 $1,764 million

Inventories

September 29, 2012 $791 million

(b) Dollar change in inventories between 2012 and 2013: $1,764 – $791 = $973 million increase Percentage change in inventories between 2010 and 2011: $973 ÷ $791 = 123% increase 2013 inventory as a percent of current assets: $1,764 ÷ $73,286 = 2.4% (c) Inventories are valued at lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. (d) Apple (in millions) Cost of Goods Sold

2013 $106,606

2012 $87,846

2011 $64,431

2013 cost of goods sold as a percent of sales: $106,606 ÷ $170,910 = 62.4%

6-51

BYP 6-2

COMPARATIVE ANALYSIS PROBLEM

(a) (1) Inventory turnover: PepsiCo:

$31,243 ÷

$3,581 + 3,409

= 8.94 times

2 Coca-Cola:

$18,421 ÷

$3,264 + 3,277

= 5.63 times

2 (2) Days in inventory: PepsiCo: Coca-Cola:

365 ÷ 8.94 = 40.8 days 365 ÷ 5.63 = 64.8 days

(b) PepsiCo’s turnover of 8.94 times is approximately 59% higher than CocaCola’s 5.63 times, resulting in days in inventory of 40.8 versus 64.8. Thus, PepsiCo’s inventory control is significantly more effective.

6-52

BYP 6-3

COMPARATIVE ANALYSIS PROBLEM

(a) (1) Inventory turnover: Amazon:

$54,181 ÷

$6,031 + $7,411

= 8.06 times

2 Wal-Mart:

$358,069 ÷

$43,803 + $44,858

= 8.08 times

2 (2) Days in inventory: Amazon: Wal-Mart:

365 ÷ 8.06 = 45.3 days 365 ÷ 8.08 = 45.2 days

(b) Amazon and Wal-Mart have nearly identical inventory turnovers.

6-53

BYP 6-4

REAL-WORLD FOCUS

The following responses are based on the 2013 annual report: (a) $1,476,000,000, as of July 27, 2013. (b) $1,476,000,000 – $1,663,000,000 = $187,000,000 decrease. (c) 71.3 percent ($1,052 ÷ $1,476). (d) Lower of cost or market using standard cost, which approximates FIFO.

6-54

BYP 6-5

DECISION MAKING ACROSS THE ORGANIZATION

(a) (1) Sales January 1–March 31.................... Cash sales 4/1–4/10 ($18,500 X 40%) ... Acknowledged credit sales 4/1–4/10.... Sales made but unacknowledged ........ Sales as of April 10 ...............................

$180,000 7,400 37,000 5,600 $230,000

(2) Purchases January 1–March 31 ........... Cash purchases 4/1–4/10...................... Credit purchases 4/1–4/10 .................... Less: Items in transit ........................... Purchases as of April 10.......................

$ 94,000 4,200

*(b)

$12,400 1,600

10,800 $109,000

2016

2015

Net sales........................................................ Cost of goods sold Inventory, January 1 ............................. Cost of goods purchased ..................... Cost of goods available for sale .......... Inventory, December 31........................ Cost of goods sold ............................... Gross profit ...................................................

$600,000

$480,000

60,000 404,000 464,000 80,000 384,000 $216,000

40,000 356,000 396,000 60,000 336,000 $144,000

Gross profit rate ........................................... Average gross profit rate .....................

36%

30% 33%

*(c) Sales .............................................................. Less: Gross profit ($230,000 X 33%) .......... Cost of goods sold .......................................

$230,000 75,900 $154,100

Inventory, January 1 ..................................... Purchases ..................................................... Cost of goods available for sale .................. Cost of goods sold ....................................... Estimated inventory at time of fire .............. Less: Inventory salvaged ............................ Estimated inventory loss .............................

$ 80,000 109,000 189,000 154,100 34,900 17,000 $ 17,900

6-55

BYP 6-6

COMMUNICATION ACTIVITY

MEMO To: From:

Pamela Barnes, President Student

Re:

2016 ending inventory error

As you know, 2016 ending inventory was overstated by $1 million. Of course, this error will cause 2016 net income to be incorrect because the ending inventory is used to compute 2016 cost of goods sold. Since the ending inventory is subtracted in the computation of cost of goods sold, an overstatement of ending inventory results in an understatement of cost of goods sold and therefore an overstatement of net income. Unfortunately, unless corrected, this error will also affect 2017 net income. The 2016 ending inventory is also the 2017 beginning inventory. Therefore, 2017 beginning inventory is also overstated, which causes an overstatement of cost of goods sold and an understatement of 2017 net income.

6-56

BYP 6-7

ETHICS CASE

(a) The higher cost of the items ordered, received, and on hand at yearend will be charged to cost of goods sold, thereby lowering current year’s income and income taxes. If the purchase at year-end had been made in the next year, the next year’s cost of goods sold would have absorbed the higher cost. Next year’s income will be increased if unit purchases (next year) are less than unit sales (next year). This is because the lower costs carried from the earlier year as inventory will be charged to next year’s cost of goods sold. Therefore, next year’s income taxes will increase. (b) No. The president would not have given the same directive because the purchase under FIFO would have had no effect on net income of the current year. (c) The accountant has no grounds for not ordering the goods if the president insists. The purchase is legal and ethical.

6-57

BYP 6-8

ALL ABOUT YOU

Students responses to this question will vary depending on the inventory fraud they choose to investigate. Here are responses for the two examples given in the activity. The fraud at Leslie Fay involved a number of illegal actions, all of which increased net income. The company intentionally overstated ending inventory, which has the effect of understating cost of goods sold. It also understated or completely omitted discounts and allowances that it gave to retailers. In addition, it recorded inventory costs at amounts that differed from the invoice amount. It also reported sales in incorrect periods. McKesson Corporation increased its reported net income through manipulation of inventory and sales records. It back-dated many transactions to increase current period results. It also swapped inventory to increase reported revenue. Many of the transactions that it reported as sales, and which resulted in reductions in inventory, were actually not sales because they had negotiated side agreements which allowed the buyer to return the merchandise.

6-58

BYP 6-9

FASB CODIFICATION ACTIVITY

(a)

The primary basis of accounting for inventories is cost, which has been defined generally as the price paid or consideration given to acquire an asset. As applied to inventories, cost means in principle the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location. It is understood to mean acquisition and production cost, and its determination involves many considerations. Codification reference (330-10-30-1).

(b)

The basis of stating inventories shall be consistently applied and shall be disclosed in the financial statements; whenever a significant change is made therein, there shall be disclosure of the nature of the change and, if material, the effect on income. A change of such basis may have an important effect upon the interpretation of the financial statements both before and after that change, and hence, in the event of a change, a full disclosure of its nature and of its effect, if material, upon income shall be made. Codification reference (330-10-50-1).

6-59

IFRS EXERCISES IFRS6-1 Key Similarities are (1) the definitions for inventory are essentially the same, (2) the guidelines on who owns the goods—goods in transit, consigned goods, and the costs to include in inventory are essentially accounted for the same under IFRS and U.S. GAAP; (3) use of specific identification cost flow assumption, where appropriate. Key differences are related to (1) the LIFO cost flow assumption—U.S. GAAP permits the use of LIFO for inventory valuation, but IFRS prohibits its use. FIFO and average-cost are the only two acceptable cost flow assumptions permitted under IFRS; (2) lower-of-cost-or-market test for inventory valuation—IFRS defines market as net realizable value. U.S. GAAP on the other hand defines market as replacement cost; (3) inventory write-downs—under U.S. GAAP, if inventory is written down under the lower-of-cost-or-market valuation, the new basis is now considered its cost. As a result, the inventory may not be written back up to its original cost in a subsequent period. Under IFRS, the write-down may be reversed in a subsequent period up to the amount of the previous write-down. Both the write-down and any subsequent reversal should be reported on the income statement; (4) The requirements for accounting and reporting for inventories are more principles-based under IFRS. That is, U.S. GAAP provides more detailed guidelines for inventory accounting. IFRS6-2 Under IFRS, LaTour’s inventory turnover is computed as follows: Cost of Goods Sold/Average Inventory €578/ €154 = 3.75 or approximately 97 days (365 ÷ 3.75). Difficulties in comparison to a company using U.S. GAAP could arise if the U.S. company uses the LIFO cost flow assumption, which is prohibited under IFRS. Generally in times of rising prices, LIFO results in a lower inventory balance reported on the balance sheet (assume more recently purchased items are sold first). Thus, the U.S. GAAP company will report higher inventory turnovers. The LIFO reserve can be used to adjust the reported LIFO numbers to FIFO and to permit an “apples to apples” comparison.

6-60

CHAPTER 7 Accounting Information Systems ASSIGNMENT CLASSIFICATION TABLE

Exercises

A Problems

1, 2, 3, 4, 5, 11, 12,13

1A, 2A, 3A, 4A, 5A, 6A

1, 3, 6, 7, 8, 9, 10, 11, 12, 13, 14

1A, 2A, 3A, 4A, 5A, 6A

Learning Objectives

Questions

Brief Exercises

Do It!

Explain the basic concepts of an accounting information system.

1, 2, 3, 4

1, 2, 3

Describe the nature and purpose of a subsidiary ledger.

5, 6, 9, 11, 16

4, 5

Record transactions in special journals.

7, 8, 10, 11, 12, 13, 14, 15, 17

6, 7, 8, 9, 10

7-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

7-2

Description

Difficulty Level

Time Allotted (min.)

Journalize transactions in cash receipts journal; post to control account and subsidiary ledger.

Simple

30–40

Journalize transactions in cash payments journal; post to control account and subsidiary ledgers.

Simple

30–40

Journalize transactions in multi-column purchases journal and sales journal; post to the general and subsidiary ledgers.

Moderate

40–50

Journalize transactions in special journals.

Moderate

50–60

Journalize in sales and cash receipts journals; post; prepare a trial balance; prove control to subsidiary; prepare adjusting entries; prepare an adjusted trial balance.

Moderate

60–70

Journalize in special journals; post; prepare a trial balance.

Complex

60–70

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 7 ACCOUNTING INFORMATION SYSTEMS

Number

Difficulty

Time (min.)

BE1

Simple

1–2

BE2

Simple

2–4

BE3

Simple

2–3

BE4

Simple

6–8

BE5

Simple

2–3

BE6

Simple

2–4

BE7

Simple

2–4

BE8

Simple

2–4

BE9

Simple

3–5

BE10

Simple

3–5

DI1

Simple

3–5

DI2

Simple

6–8

DI3

Simple

2–4

EX1

2, 3

Simple

6–8

EX2

Simple

6–8

EX3

2, 3

Simple

10–12

EX4

Simple

6–8

EX5

Simple

6–8

EX6

Simple

6–8

EX7

Simple

8–10

EX8

Simple

10–12

EX9

Simple

8–10

EX10

Simple

6–8

EX11

2, 3

Moderate

6–8

EX12

2, 3

Simple

8–10

EX13

2, 3

Simple

6–8

EX14

Moderate

8–10

7-3

ACCOUNTING INFORMATION SYSTEMS (Continued) Number

Difficulty

Time (min.)

P1A

2, 3

Simple

30–40

P2A

2, 3

Simple

30–40

P3A

2, 3

Moderate

40–50

P4A

2, 3

Moderate

50–60

P5A

2, 3

Moderate

60–70

P6A

2, 3

Complex

60–70

BYP1

Moderate

80–90

BYP2

2, 3

Simple

10–15

BYP3

2, 3

Moderate

15–20

BYP4

Simple

10–15

BYP5

—

Simple

10–15

7-4

Learning Objective 1.

Knowledge

Explain the basic concepts of an accounting information system.

Comprehension Q7-1 Q7-2 Q7-3 Q7-4

2. Describe the nature and purpose of a subsidiary ledger.

Q7-5

Q7-6 Q7-9 Q7-16 BE7-4 BE7-5 E7-2 E7-11

3. Record transactions in special journals.

DI7-3

Q7-7 Q7-8 Q7-10 Q7-12 Q7-13 Q7-14 Q7-15 Q7-17

Broadening Your Perspective

Application

Analysis

Synthesis

Evaluation

BE7-1 BE7-2 BE7-3 DI7-1 DI7-2 E7-12 P7-6A E7- Q7-11 1 E7-13 E7-3 P7-1A E7-4 P7-2A E7-5 P7-3A P7-4A P7-5A BE7-6 E7-1 BE7-7 E7-3 BE7-8 E7-6 BE7-9 E7-7 BE7-10 E7-9 E7-8 E7-12 E7-10 E7-13 E7-11 E7-14 P7-1A P7-2A P7-3A P7-4A

Real-World Focus

P7-5A Q7-11 P7-6A

Comprehensive Problem (Mini Practice Set)

Decision Making Across the Organization Communication Ethics Case All About You

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

7-5

ANSWERS TO QUESTIONS 1.

(a) An accounting information system collects and processes transaction data and communicates financial information to decision makers. (b) Disagree. An accounting information system applies regardless of whether manual or computerized procedures are used to process the transaction data.

There are three principles for developing an accounting information system: Cost effectiveness. The system must be cost-effective; that is, the benefits obtained from the information must outweigh the cost of providing it. Useful output. To be useful, information must be understandable, relevant, reliable, timely, and accurate. Flexibility. The system should accommodate a variety of users and changing information needs.

Common features of a computerizied accounting package beyond recording transactions and preparing financial statements are: easy data access and report preparation; audit trail, internal controls, customization; and network compatibility.

ERP systems go far beyond the functions of an entry-level general ledger package. They integrate all aspects of the organization, including accounting, sales, human resource management, and manufacturing.

The advantages of using subsidiary ledgers are that they:    

7-6

Show in a single account transactions affecting a single customer or single creditor, thus providing up-to-date information on specific account balances. Free the general ledger of excessive details relating to accounts receivable and accounts payable. As a result, a trial balance of the general ledger does not contain vast numbers of individual account balances. Assist in locating errors in individual accounts by reducing the number of accounts in one ledger and by using control accounts. Permit a division of labor in posting by having one employee post to the general ledger and (a) different employee(s) post to the subsidiary ledgers.

(a) (1) Transactions to subsidiary accounts are generally posted daily. (2) In contrast, postings to the control accounts are usually made in total at the end of the month. (b) A control account is a general ledger account that summarizes subsidiary ledger data. Subsidiary ledger accounts keep track of specific account activity (i.e., specific debtors or creditors). A subsidiary ledger is an addition to, and an expansion of, the general ledger.

Questions Chapter 7 (Continued) 7.

Sales journal. Records entries for all sales of merchandise on account. Cash receipts journal. Records entries for all cash received by the business. Purchases journal. Records entries for all purchases of merchandise on account. Cash payments journal. Records entries for all cash paid. Some advantages of each journal are given below: 



 

Sales journal. (1) Since the sales journal employs only one line to record a Sales transaction, its use reduces recording time; (2) the column totals are only posted to the general ledger once an accounting period; and (3) the journal’s use separates responsibilities between employees. Cash receipts journal. (1) Its use aids in the posting process since the totals for Cash, Sales Discounts, Accounts Receivable, and Sales Revenue are all recorded in the general ledger only at the end of the month; and (2) it allows all accounts receivable credits to be posted to the appropriate subsidiary ledger accounts daily. Purchases journal. The advantages are similar to those of the sales journal except that items involved are Inventory debits and Accounts Payable credits. Cash payments journal. Similar advantages to cash receipts journal except the columns involved are different.

In general, special journals: (1) allow greater division of labor because various individuals can record entries in different journals at the same time; and (2) reduce posting time of journals. 8.

The entry for the sales return should be recorded in the general journal. Since Kensington Company has a single-column sales journal, only credit sales can be recorded there. A purchase by Kensington Company has not taken place, so the use of the purchases journal is inappropriate. Finally, no cash is received or paid, so neither the cash receipts or cash payments journal should be used.

At the end of the month, after all postings to both the general ledger and the subsidiary accounts have been made, the total of the subsidiary account balances should equal the balance of the control account in the general ledger. In this case, the control account balance will be $450 larger than the total of the subsidiary accounts.

10.

The purpose of special journals is to facilitate the recording process of the business entity. Therefore, the columns included in any special journal should correspond to the unique needs of the business. In particular, one type of business which might not require an Accounts Receivable column would be grocery stores. These businesses rarely sell on credit to their customers. The minimum frequency of the transaction implies no need for an Accounts Receivable column in the cash receipts journal.

11.

(a) No, the customers’ ledger will not agree with the Accounts Receivable control account. The customers’ ledger will be posted correctly, but the Accounts Receivable control account will be incorrect. (b) The trial balance will balance, although Cash will be $4,000 too high and Accounts Receivable $4,000 too low.

12.

The special journal is the sales journal. The other account is Sales Revenue. (The cash receipts journal is an incorrect answer because there would be more than two month-end postings to general ledger accounts.)

7-7

Questions Chapter 7 (Continued) 13.

(a) General journal. (b) General journal. (c) Cash receipts journal.

(d) Sales journal. (e) Cash receipts journal. (f) General journal.

14.

(a) Cash receipts journal. (b) Cash receipts journal. (c) General journal.

(d) Purchases journal. (e) General journal. (f) Cash payments journal.

15.

Typically included would be credit purchases of equipment, office supplies, and store supplies. However, any other item purchased on credit could also be included in a special column or the “other” column.

16.

One such example is a purchase return. Here the Accounts Payable control and subsidiary account must be debited for the same amount. The debit/ credit equality is unaffected since the balance sheet equation is computed using general ledger (control) accounts only. The subsidiary accounts should prove to the control account balance.

17.

The general journal may be used to record such transactions as the granting of credit to a customer for a sales return or allowance, the receipt of credit from a supplier for purchases returned, acceptance of a note receivable from a customer, or the purchase of a plant asset by issuing a note payable. In addition, all correcting, adjusting, and closing entries should be made in the general journal.

7-8

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 7-1 1. 2. 3.

True. False. True.

BRIEF EXERCISE 7-2 (a) 3 (b) 4 (c) 5

(d) 2 (e) 1

BRIEF EXERCISE 7-3 1. 2. 3. 4.

True. False. The benefits obtained from information provided by the accounting information system must outweigh the cost of providing that information. True. False. An accounting information system must be cost effective, provide useful output, and be flexible enough to accommodate changing information needs.

BRIEF EXERCISE 7-4 Accounts Receivable Subsidiary Ledger Date Jan. 7 17

Ref.

Austin Co. Debit Credit 10,000 7,000

General Ledger

Accounts Receivable Balance Date Ref. Debit Credit 10,000 Jan. 31 27,000 3,000 31 20,000

Balance 27,000 7,000

Diaz Co. Date Jan. 15 24

Date Jan. 23 29 .

Ref.

Debit 8,000

Credit 4,000

Balance 8,000 4,000

Noble Co. Debit Credit 9,000 9,000

Balance 9,000 0

7-9

BRIEF EXERCISE 7-5 (a) General ledger (b) Subsidiary ledger

BRIEF EXERCISE 7-6 (a) Cash Receipts Journal (b) Cash Payments Journal (c) Cash Payments Journal

(d) Sales Journal (e) Purchases Journal (f) Cash Receipts Journal

BRIEF EXERCISE 7-7 (a) No (b) Yes

BRIEF EXERCISE 7-8 (a) General Journal (if a one-column Purchases Journal) Purchases Journal (if a multi-column Purchases Journal) (b) Purchases Journal (c) Cash Payments Journal (d) Sales Journal BRIEF EXERCISE 7-9 (a) (b) (c) (d) (e)

Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal Sales Journal and Cash Receipts Journal Purchases Journal

BRIEF EXERCISE 7-10 (a) Both in total and daily (b) In total

7-10

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 7-1 1. 2. 3.

False. An off-the-shelf system can meet a company’s needs. True. False. A computerized accounting system provides more timely financial information.

DO IT! 7-2 Subsidiary balances: Gorst Company Tian Company Maddox Company

$4,500 $–0– $2,300

($11,000 – $6,500) ($12,000 – $12,000) ($10,000 – $7,700)

General ledger Accounts Payable balance: $6,800 ($4,500 + $2,300) DO IT! 7-3 1. Sold merchandise on account: Sales journal 2. Purchased merchandise on account: Purchases journal 3. Collected cash from a sale to Renfro Company: Cash receipts Journal 4. Recorded accrued interest on a note payable: General journal 5. Paid $2,000 for supplies: Cash payments journal

7-11

SOLUTIONS TO EXERCISES EXERCISE 7-1 (a) $370,400. Beginning balance of $340,000 plus $161,400 debit from sales journal less $131,000 credit from cash receipts journal. (b) $95,900. Beginning balance of $77,000 plus $66,400 credit from purchases journal less $47,500 debit from cash payments journal. (c) The column total of $161,400 in the sales journal would be posted to the credit side of the Sales Revenue account and the debit side of the Accounts Receivable account in the general ledger. (d) The accounts receivable column total of $131,000 in the cash receipts journal would be posted to the credit side of the Accounts Receivable account in the general ledger.

EXERCISE 7-2 To:

Sara Fogelman, Chief Financial Officer

From:

Student

Subject:

Jill Longley account

The explanation of the three entries in the subsidiary ledger for the Jill Longley account is as follows: Sept. 2

This was a credit sale of merchandise to Longley. The entry was recorded on page 31 of the Sales Journal.

Sept. 9

This was a sales return or allowance granted to Longley. The entry was recorded on page 4 of the General Journal.

Sept. 27

This was a payment by Longley of the balance due. The entry was recorded on page 8 of the Cash Receipts Journal.

If I can be of further help, please let me know. 7-12

EXERCISE 7-3 (a) & (b)

General Ledger

Accounts Receivable Date Sept. 1

Explanation Balance

Ref. � S CR G

Debit

Credit

4,990 8,030 220

Balance 10,960 15,950 7,920 7,700

Accounts Receivable Subsidiary Ledger Fowler Date Sept. 1

Sogard Date Sept. 1

Giambi Date Sept. 1

Andino Date Sept. 1

Explanation Balance

Explanation

Explanation Balance

Ref. � S CR

Debit

Ref. � S CR G

Debit

Ref.

Debit

S CR

1,330

Ref. � CR

Debit

Credit

1,600 1,310

Credit

800 3,300 220

Credit

380

Credit 1,800

Balance 2,060 3,660 2,350

Balance 4,820 5,620 2,320 2,100

Balance 0 1,330 950

Balance 2,640 840 7-13

EXERCISE 7-3 (Continued) Hurley Date Sept. 1

Explanation Balance

(c)

Ref. � S CR

Debit

Credit

Balance 1,440 2,700 1,460

1,260 1,240

MONTGOMERY COMPANY Schedule of Accounts Receivable As of September 30, 2017 Fowler ........................................................................................ Sogard ....................................................................................... Giambi ....................................................................................... Andino ....................................................................................... Hurley ........................................................................................ Total ...................................................................................

$2,350 2,100 950 840 1,460 $7,700

Accounts Receivable ................................................................

$7,700

EXERCISE 7-4 (a) (b) (c)

(d)

$3,500 [$10,000 – ($4,000 + $2,500)]. $12,000 [$10,000 + ($9,000 + $7,000 + $8,500) – ($8,000 + $2,500 + $9,000) – $3,000]. Bixler ($4,000 + $9,000 – $8,000) $ 5,000 Cuddyer ($2,500 + $7,000 – $2,500 – $3,000) 4,000 Freeze ($3,500 + $8,500 – $9,000) 3,000 $12,000 The sales return ($3,000) would be recorded in the general journal instead of special journal.

EXERCISE 7-5 (a) (b) (c)

(d)

7-14

$4,375 [$9,250 – ($3,000 + $1,875)]. $10,750 [$9,250 + ($6,750 + $5,250 + $6,375) – ($6,000 + $1,875 + $6,750) – $2,250]. Hale ($3,000 + $6,750 – $6,000) $3,750 Janish ($1,875 + $5,250 – $1,875 – $2,250) 3,000 Valdez ($4,375 + $6,375 – $6,750) 4,000 $10,750 The purchase return ($2,250) would be recorded in the general journal instead of special journal.

EXERCISE 7-6 (a) & (b) GOMES COMPANY Sales Journal Date

Accounts Receivable Dr. Cost of Goods Sold Dr. Invoice Ref. Sales Revenue Cr. Inventory Cr. No.

Account Debited

2017 Sept. 2 H. Drew 21 G. Holliday

101 102

620 800 1,420

420 480 900

GOMES COMPANY Purchases Journal Date

Account Credited

2017 Sept. 10 25

A. Pagan D. Downs

Terms

Ref.

P1 Inventory Dr. Accounts Payable Cr.

2/10, n/30 n/30

650 860 1,510

EXERCISE 7-7 (a) & (b) R. SANTIAGO CO. Cash Receipts Journal

Date

Account Credited

2017 May 1 Owner’s Cap. 2 22 M. Mangini

Ref.

Cash Dr. 40,000 6,300 9,000 55,300

Sales Accounts Discounts Receivable Dr. Cr.

CR1

Sales Other Revenue Accounts Cr. Cr.

Cost of Goods Sold Dr. Inventory Cr.

40,000 6,300 9,000 9,000

6,300

4,200 40,000

4,200

7-15

EXERCISE 7-7 (Continued) R. SANTIAGO CO. Cash Payments Journal CP1 Other Accounts Ck. Accounts Payable Inventory Cash No. Account Debited Ref. Dr. Dr. Cr. Cr.

Date 2017 May 3 101 Inventory 14 102 Salaries and Wages Expense

7,700

700 8,400

EXERCISE 7-8 (a) Journal 1. Cash Payments 2. Cash Receipts 3. Cash Payments 4. Cash Payments 5. Cash Receipts 6. Cash Payments 7. Cash Payments 8. Cash Receipts 9. Cash Payments 10. Cash Receipts

7-16

(b) Columns in the journal Cash (Cr.), Other Accounts (Dr.). Cash (Dr.), Sales Discounts (Dr.), and Accounts Receivable (Cr.). Cash (Cr.), Other Accounts (Dr.). Cash (Cr.), Inventory (Cr.), and Accounts Payable (Dr.). Cash (Dr.), Accounts Receivable (Cr.). Cash (Cr.), Other Accounts (Dr.). Cash (Cr.), Other Accounts (Dr.). Cash (Dr.), Other Accounts (Cr.). Cash (Cr.), Other Accounts (Dr.). Cash (Dr.), Sales Revenue (Cr.), Cost of Goods Sold (Dr.), and Inventory (Cr.).

EXERCISE 7-9 (a) Mar. 2

(b) To:

Equipment..................................................... Accounts Payable—Bole Company ...........................................

7,400 7,400

Accounts Payable—Carwell Company ................................................... Inventory................................................

410 410

Sales Returns and Allowances .................... Accounts Receivable—Dempsey Company ...........................................

400

Inventory ....................................................... Cost of Goods Sold ..............................

260

400 260

President Hasselback

From:

Chief Accountant

Subject:

Posting of Control and Subsidiary Accounts

The posting of these accounts varies with the journals used in recording the transactions. Sales and purchases journals—the total for the month is posted to the control accounts. The individual entries are posted daily to the subsidiary accounts. Columnar cash receipts and cash payments journals—the total of the control account column for the month is posted to the control account. The individual amounts in the column are posted daily to the subsidiary accounts. General journal—the individual entries are posted daily. Each entry that pertains to a control and a subsidiary account is dual posted. That is, it is posted to both the control account and the subsidiary account. I hope this memo answers your questions about posting. .

7-17

EXERCISE 7-10 1. 2. 3. 4. 5. 6. 7.

Cash Payments Journal General Journal Cash Receipts Journal Cash Receipts Journal Sales Journal Cash Receipts Journal General Journal

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

Cash Receipts Journal Cash Payments Journal General Journal General Journal Cash Payments Journal Purchases Journal

EXERCISE 7-11 (a) The debit posting reference on February 28 should be from the cash payments journal to record the payments made during the month. The general ledger debit amount should be $28,340 to balance. The ending balance must be $3,600. (Accounts Payable control balance of $10,500 less Benton, $4,600, and Dooley, $2,300.) (b) Only the general journal amounts were dual posted. Thus, the amounts were $1,400 (Dr.), $265 (Cr.), and $550 (Cr.).

EXERCISE 7-12 (a) Purchases Journal Date July 3 12 14 17 20 21 29

7-18

Account Credited Marsh Co. Yates Co. Weller Co. Lange Corp. Marsh Co. Yates Co. Lange Corp.

Ref. � � � � � � �

P1 Inventory Dr. Accounts Payable Cr. 2,400 500 1,100 1,400 1,700 600 1,600 9,300 120/201

EXERCISE 7-12 (Continued) (b) Date July 1

General Journal Accounts and Explanations Equipment ....................................... Accounts Payable— Flaherty Equipment Co. .....

Ref. 157

Debit 3,900

201/�

Credit

3,900

Inventory.......................................... 120 400 Accounts Payable— 400 Bernardo Inc. ...................... 201/� (This entry should have been recorded in the Purchases Journal.)

Accounts Payable—Lange Corp. ............................................ Inventory.................................

201/� 120

100

Accounts Payable—Weller Co. ...... Inventory.................................

201/� 120

200

100 200

EXERCISE 7-13 $975 ($200 + $290 + $145 + $190 + $150). All of the debit postings to the subsidiary ledger accounts should be from sales invoices. The total of all these debits should therefore be the total credit sales for the month, which would be the same amount as the end-of-month debit to Accounts Receivable.

EXERCISE 7-14 (a) (b) (c) (d) (e)

$14,000 + $77,000 – $46,000 = $45,000 $22,000 + $110,000 – $45,000 = $87,000 $17,000 + $61,000 – $55,000 = $23,000 $13,500 + $77,000 – $1,000 – $63,600 = $25,900 $110,000 + $6,000 = $116,000

7-19

SOLUTIONS TO PROBLEMS PROBLEM 7-1A

(a) Cash Receipts Journal Account Credited

Date

Owner’s Capital 4 Dent 5 Jennings Co. 8 10 Morrow 11 Inventory 23 Jennings Co. 29 Rose

Ref.

Cash Dr.

Sales Accounts Discounts Receivable Dr. Cr.

CR1

Sales Other Revenue Accounts Cr. Cr.

Cost of Goods Sold Dr. Inventory Cr.

Apr. 1

301 � �

7,200 2,156 920 7,245 � 600 120 740 � 1,000 � 1,200 21,061 (101)

(b)

7,200 44

2,200 920 7,245

4,347

600 740

44 (414)

1,000 1,200 5,920 (112)

7,245 (401)

7,940 (X)

4,347 (505)(120)

General Ledger

Accounts Receivable Date Explanation Apr. 1 Balance 30

Ref. � CR1

Debit

No. 112 Balance 7,850 1,930

Credit 5,920

Accounts Receivable Subsidiary Ledger Morrow Date Apr.

7-20

1 10

Explanation Balance

Ref. � CR1

Debit

Credit

Balance 1,550 950

600

PROBLEM 7-1A (Continued) Rose Date Apr. 1 29

Explanation Balance

Ref. � CR1

Debit

Ref. � CR1 CR1

Debit

Ref. � CR1

Debit

Credit 1,200

Balance 1,200 0

Jennings Co. Date Apr. 1 5 23 Dent Date Apr. 1 4

Explanation Balance

920 1,000

$1,930

Subsidiary account balances: Morrow Jennings Co. Total

$ 950 980 $1,930

Credit 2,200

Credit

Balance 2,900 1,980 980

Balance 2,200 0

7-21

PROBLEM 7-2A

(a) Cash Payments Journal Date

Ck. No. Account Debited

Oct. 1 3 5 10 15 16 19 29

63 64 65 66 67 68 69 70

Other Accounts Accounts Payable Ref. Dr. Dr.

Inventory Equipment Uggla Company Inventory Rosenthal Co. Owner’s Drawings Orr Co. Clevenger Company

120 157

�

120

�

306

� �

Inventory Cr.

300 800 2,700

2,550 1,800 400

4,050 (X)

(b)

CP1

2,000 2,500 9,000 (201)

40 94 (120)

Cash Cr. 300 800 2,646 2,550 1,800 400 1,960 2,500 12,956 (101)

General Ledger

Accounts Payable Date Explanation Oct. 1 Balance 31

Ref. � CP1

Debit

No. 201 Balance 10,700 1,700

Credit

9,000

Accounts Payable Subsidiary Ledger Uggla Company Date Oct.

7-22

1 5

Explanation Balance

Ref. � CP1

Debit

Credit

Balance 2,700 0

2,700

PROBLEM 7-2A (Continued) Orr Co. Date Oct. 1 19

Explanation Balance

Ref. � CP1

Debit

Ref. � CP1

Debit

Ref. � CP1

Debit

Credit

Balance 2,500 500

Credit

Balance 1,800 0

Credit

Balance 3,700 1,200

2,000

Rosenthal Co. Date Oct.

1 15

Explanation Balance

1,800

Clevenger Company Date Oct.

1 29

Explanation Balance

2,500

$1,700 $ 500 1,200 $1,700

7-23

PROBLEM 7-3A

(a) Purchases Journal

Date

Account Credited (Debited)

Ref.

July 1 2 5 13

Eby Company Shaw Shipping Getz Company Dayne Supply (Supplies) Eby Company Bosco Company Welton Advertisements (Advertising Expense) Getz Company Dayne Supply (Equipment) Shaw Shipping

� � �

15 15 18 24 26 28

Accounts Payable Cr.

Inventory Dr.

8,000 400 3,200 720

8,000 400 3,200

3,600 4,300 600

3,600 4,300

3,000 900

3,000

380 25,100 (201)

380 22,880 (120)

126/�

� �

610/�

�

157/�

�

P1 Other Accounts Dr.

720

600

900

2,220 (X)

Sales Journal Date

Account Debited

Ref.

July 3 3 16 16 21 21 30

Fort Company Hefner Bros. Aybar Company Hefner Bros. Fort Company Duncan Company Aybar Company

� � � � � � �

7-24

Accounts Receivable Dr. Sales Revenue Cr.

Cost of Goods Sold Dr. Inventory Cr.

1,300 1,500 3,450 1,870 310 2,800 5,600 16,830 (112)(401)

910 1,050 2,415 1,309 217 1,960 3,920 11,781 (505)(120)

PROBLEM 7-3A (Continued) General Journal Date July

Accounts and Explanations Accounts Payable—Getz Company ...................................... Inventory.................................. Sales Returns and Allowances Accounts Receivable— Fort Company......................

(b) Accounts Receivable Date July 31 22

G1 Ref.

Debit

201/� 120

300

412

300

112/�

General Ledger No. 112

Explanation

Ref. S1 G1

Debit 16,830

Credit 40

Inventory Date July 31 8 31

Balance 16,830 16,790

No. 120 Explanation

Ref. P1 G1 S1

Debit 22,880

Credit 300 11,781

Supplies Date July 13

Credit

Balance 22,880 22,580 10,799

No. 126 Explanation

Ref. P1

Debit 720

Credit

Balance 720

7-25

PROBLEM 7-3A (Continued) Equipment Date July 26

No. 157

Explanation

Ref. P1

Debit 900

Credit

Balance 900

Accounts Payable Date July 31 8

No. 201

Explanation

Ref. P1 G1

Sales Revenue Date Explanation July 31

Ref. S1

Sales Returns and Allowances Date Explanation July 22

Ref. G1

Debit

Credit 25,100

Balance 25,100 24,800

300

Debit

Debit 40

No. 401 Balance 16,830

Credit 16,830

No. 412 Balance 40

Credit

Cost of Goods Sold Date July 31

No. 505

Explanation

Ref. S1

Advertising Expense Date Explanation July 18

7-26

Ref. P1

Debit 11,781

Debit 600

Credit

Balance 11,781

No. 610 Balance 600

Credit

PROBLEM 7-3A (Continued) Accounts Receivable Subsidiary Ledger Hefner Bros. Date July

Explanation 3 16

Ref. S1 S1

Debit 1,500 1,870

Credit

Balance 1,500 3,370

Ref. S1 S1 G1

Debit 1,300 310

Credit

Balance 1,300 1,610 1,570

Ref. S1 S1

Debit 3,450 5,600

Credit

Balance 3,450 9,050

Ref. S1

Debit 2,800

Credit

Balance 2,800

Fort Company Date July

Explanation 3 21 22

Aybar Company Date July 16 30

Explanation

Duncan Company Date July 21

Explanation

7-27

PROBLEM 7-3A (Continued) Accounts Payable Subsidiary Ledger Dayne Supply Date July 13 26

Explanation

Shaw Shipping Date Explanation July 2 28

Ref. P1 P1

Debit

Credit 720 900

Balance 720 1,620

Ref. P1 P1

Debit

Credit 400 380

Balance 400 780

Ref. P1 P1

Debit

Credit 8,000 3,600

Balance 8,000 11,600

Ref. P1 G1 P1

Debit

Credit 3,200 3,000

Balance 3,200 2,900 5,900

Ref. P1

Debit

Credit 600

Balance 600

Ref. P1

Debit

Credit 4,300

Balance 4,300

Eby Company Date July

Explanation 1 15

Getz Company Date July

Explanation 5 8 24

300

Welton Advertisements Date July 18

Explanation

Bosco Company Date Explanation July 15

7-28

PROBLEM 7-3A (Continued) (c) Accounts receivable balance.................................

$16,790

Subsidiary account balances Hefner Bros. .................................................... Fort Company.................................................. Aybar Company............................................... Duncan Company............................................ Total..........................................................

$3,370 1,570 9,050 2,800 $16,790

Accounts payable balance ..................................... Subsidiary account balances Dayne Supply .................................................. Shaw Shipping ................................................ Eby Company .................................................. Getz Company ................................................. Welton Advertisements .................................. Bosco Company.............................................. Total..........................................................

$24,800 $ 1,620 780 11,600 5,900 600 4,300 $24,800

7-29

PROBLEM 7-4A (a), (b) & (c) Sales Journal Account Debited

Date

Jan. 4 Wheeler 9 Linton Corp. 17 Delaney Co. 31 Wheeler

Invoice Accounts Receivable Dr. Cost of Goods Sold Dr. No. Ref. Sales Revenue Cr. Inventory Cr.

� � � �

371 372 373 374

5,250 5,400 1,200 9,330 21,180 (112)(401)

3,150 3,240 720 5,598 12,708 (505)(120)

Purchases Journal Date Jan. 3 8 11 23 24

Account Credited Gallagher Co. Phegley Co. Cora Co. Gallagher Co. Atchison Corp.

Ref. � � � � �

P1 Inventory Dr. Accounts Payable Cr. 9,000 4,500 3,700 7,800 5,100 30,100 (120)(201)

General Journal Date Jan. 5

7-30

Accounts and Explanations Accounts Payable—Gallagher Co. ...... Inventory ...................................

Ref. 201/� 120

Debit 300

Equipment.......................................... Accounts Payable—Dozier Corp. ......................................

157

5,500

Credit 300

201/�

5,500

PROBLEM 7-4A (Continued) Cash Receipts Journal Account Credited

Date

Jan. 6 13 15 Linton Corp. 17 Wheeler 20 27 30 Delaney Co.

Ref.

� � �

Cash Dr. 3,150 6,260 5,346 5,250 3,200 4,230 1,200 28,636 (101)

Sales Accounts Sales Discounts Receivable Revenue Dr. Cr. Cr.

54 (414)

CR1 Other Accounts Cr.

Cost of Goods Sold Dr. Inventory Cr.

3,150 6,260

1,890 3,756

3,200 4,230

1,920 2,538

5,400 5,250

1,200 11,850 (112)

16,840 (401)

10,104 (505)(120)

0 (X)

Cash Payments Journal

Date

Account Debited

Ref.

Jan. 4 13 15

Supplies Gallagher Co. Salaries and Wages Expense Phegley Co. Salaries and Wages Expense

126

20 31

�

726

�

726

Other Accounts Dr.

CP1

Accounts Payable Dr.

Inventory Cr.

Cash Cr.

8,700

174

80 8,526

14,300 4,410

264 (120)

13,200 40,516 (101)

14,300 4,500 13,200 27,580 (X)

13,200 (201)

7-31

PROBLEM 7-5A

(a), (d) & (g) Cash Date July 31 31

General Ledger

Explanation

Ref. CR1 CP1

Accounts Receivable Date Explanation July 31 31

Ref. S1 CR1

Debit 104,025

No. 101 Balance 104,025 64,959

Credit 39,066

Debit 20,700

No. 112 Balance 20,700 5,000

Credit 15,700

Inventory Date July 31 29 31 31 31

No. 120 Explanation

Ref. P1 CR1 CP1 S1 CR1

Supplies Date Explanation July 4 31 Adjusting entry

Ref. CP1 G1

Prepaid Rent Date Explanation July 11 31 Adjusting entry

7-32

Ref. CP1 G1

Debit 44,020

Credit

Balance 44,020 43,600 43,366 29,911 24,711

420 234 13,455 5,200

Debit 600

No. 126 Balance 600 140

Credit 460

Debit 6,000

No. 131 Balance 6,000 5,500

Credit 500

PROBLEM 7-5A (Continued) Accounts Payable Date July 31 31

No. 201

Explanation

Ref. P1 CP1

Debit

Credit 44,020

30,200

Owner’s Capital Date July

No. 301

Explanation

Ref. CR1

Debit

Credit 80,000

Owner’s Drawings Date July 19

Explanation

Ref. CP1

Debit 2,500

Credit

Explanation

Ref. S1 CR1

Ref. CR1

Debit

Debit 95

Credit 20,700 8,000

Balance 20,700 28,700

Credit

No. 414 Balance 95

Cost of Goods Sold

Balance 2,500

No. 401

Sales Discounts Date Explanation July 31

Date July 31 31

Balance 80,000

No. 306

Sales Revenue Date July 31 31

Balance 44,020 13,820

No. 505

Explanation

Ref. S1 CR1

Debit 13,455 5,200

Credit

Balance 13,455 18,655

7-33

PROBLEM 7-5A (Continued) Supplies Expense Date July 31

No. 631

Explanation Adjusting entry

Ref. G1

Debit 460

Credit

Balance 460

Rent Expense Date July 31

No. 729

Explanation Adjusting entry

Ref. G1

Debit 500

Credit

Balance 500

(b) Sales Journal Date

Account Debited

Ref.

July 6 8 10 21

Dow Co. S. Goebel W. Leiss H. Kenney

� � � �

Accounts Receivable Dr. Sales Revenue Cr.

Cost of Goods Sold Dr. Inventory Cr.

6,200 4,600 4,900 5,000 20,700 (112)(401)

4,030 2,990 3,185 3,250 13,455 (505)(120)

Cash Receipts Journal Account Credited

Date

July 1 Owner’s Capital 7 13 S. Goebel 16 W. Leiss 20 Dow Co. 29 Inventory

7-34

Ref.

Cash Dr.

80,000 8,000 � 4,554 � 4,851 � 6,200 120 420 104,025 (101)

CR1

Sales Accounts Sales Other Discounts Receivable Revenue Accounts Dr. Cr. Cr. Cr.

301

Cost of Goods Sold Dr. Inventory Cr.

80,000 8,000 46 49

4,600 4,900 6,200

95 (414)

15,700 (112)

8,000 (401)

5,200

420 80,420 (X)

5,200 (505)(120)

PROBLEM 7-5A (Continued) (c)

Accounts Receivable Subsidiary Ledger

Dow Co. Date July

Explanation

Ref. S1 CR1

Debit 6,200

H. Kenney Date Explanation July 21

Ref. S1

Debit 5,000

Credit

Balance 5,000

W. Leiss Date July 10 16

Ref. S1 CR1

Debit 4,900

Credit

Balance 4,900 0

Ref. S1 CR1

Debit 4,600

6 20

Explanation

S. Goebel Date Explanation July 8 13

Credit 6,200

4,900

Credit 4,600

Balance 6,200 0

Balance 4,600 0

Accounts Payable Subsidiary Ledger C. Werly Date July 13 21

F. Rees Date July 5 10

Explanation

Ref. P1 CP1

Explanation

Ref. P1 CP1

Debit

Credit 15,300

Balance 15,300 0

Credit 8,100

Balance 8,100 0

15,300

Debit 8,100

7-35

PROBLEM 7-5A (Continued) M. Mangus Date July 20

Explanation

Ref. P1

Debit

Credit 7,900

Balance 7,900

Ref. P1 CP1

Debit

Credit 6,800

Balance 6,800 0

Ref. P1

Debit

Credit 5,920

Balance 5,920

Debit $ 64,959 5,000 24,711 600 6,000

Credit

N. Alvarado Date July

Explanation 4 15

J. Gallup Date Explanation July 11

(e)

6,800

FORNELLI CO. Trial Balance July 31, 2017 Cash................................................................. Accounts Receivable...................................... Inventory ......................................................... Supplies .......................................................... Prepaid Rent ................................................... Accounts Payable........................................... Owner’s Capital .............................................. Owner’s Drawings .......................................... Sales Revenue ................................................ Sales Discounts .............................................. Cost of Goods Sold ........................................

7-36

$ 13,820 80,000 2,500 28,700 95 18,655 $122,520

$122,520

PROBLEM 7-5A (Continued) (f)

Accounts receivable balance.................................................

$ 5,000

Subsidiary accounts balance H. Kenney ........................................................................

$ 5,000

Accounts payable balance .....................................................

$13,820

Subsidiary accounts balance M. Mangus ....................................................................... J. Gallup...........................................................................

$ 7,900 5,920 $13,820

(g) General Journal Date July 31 31

Accounts and Explanations Supplies Expense ............................ Supplies ...................................

Ref. 631 126

Debit 460

Rent Expense ................................... Prepaid Rent............................

729 131

500

Credit 460 500

7-37

PROBLEM 7-5A (Continued) FORNELLI CO. Adjusted Trial Balance July 31, 2017

(h)

Cash ................................................................ Accounts Receivable ..................................... Inventory......................................................... Supplies.......................................................... Prepaid Rent................................................... Accounts Payable .......................................... Owner’s Capital .............................................. Owner’s Drawings.......................................... Sales Revenue................................................ Sales Discounts ............................................. Cost of Goods Sold ....................................... Supplies Expense .......................................... Rent Expense .................................................

7-38

Debit $ 64,959 5,000 24,711 140 5,500

Credit

$ 13,820 80,000 2,500 28,700 95 18,655 460 500 $122,520

$122,520

PROBLEM 7-6A

(b) & (c) Cash Receipts Journal

Date

Account Credited

Ref.

Jan. 7 13 23 29

T. Hodges M. Ziesmer

� �

Notes Receivable

115

Cash Dr. 3,500 7,840 9,100 40,000 60,440 (101)

Sales Discounts Dr.

Accounts Receivable Cr.

160

3,500 8,000

CR1

Sales Revenue Cr.

Other Accounts Cr.

Cost of Goods Sold Dr. Inventory Cr.

9,100 160 (414)

11,500 (112)

9,100 (401)

5,460 40,000 40,000 (X)

5,460 (505)(120)

Cash Payments Journal Other Accounts Accounts Payable Dr. Dr.

Date

Account Debited

Ref.

Jan. 11 12 15 18

Inventory Rent Expense K. Thayer Salaries and Wages Expense E. Pheatt

120 729 �

300 1,000

726 �

4,800

CP1 Inventory Cr.

Cash Cr.

130

300 1,000 12,870

130 (120)

4,800 950 19,920 (101)

13,000

6,100 (X)

950 13,950 (201)

Sales Journal Accounts Receivable Dr. Account Date Ref. Sales Revenue Cr. Debited Jan. 3 M. Ziesmer � 8,000 24 I. Kirk � 7,400 15,400 (112)(401)

S1 Cost of Goods Sold Dr. Inventory Cr. 4,800 4,440 9,240 (505)(120)

7-39

PROBLEM 7-6A (Continued) Purchases Journal Date Jan. 5 17

Account Credited E. Pheatt G. Roland

P1 Inventory Dr. Accounts Payable Cr. 2,000 1,600 3,600 (120)(201)

Ref. � �

General Journal Date Jan. 14

20 30

Accounts and Explanations Sales Returns and Allowances ....... Accounts Receivable— B. Hannigan ......................... Inventory........................................... ($300 X .60) Cost of Goods Sold.................

G1 Ref. 412 �/112 120

Debit 300

Credit

300 180

505

180

Accounts Payable—D. Danford........... �/201 Notes Payable.......................... 200

18,000

Accounts Payable—G. Roland ............ �/201 Inventory .................................. 120

300

18,000 300

(a) & (c) General Ledger Cash Date Jan. 1 31 31

7-40

Explanation Balance

Ref. � CR1 CP1

Debit

No. 101 Balance 41,500 101,940 82,020

Credit

60,440 19,920

PROBLEM 7-6A (Continued) Accounts Receivable Date Jan.

1 14 31 31

No. 112

Explanation Balance

Ref. � G1 CR1 S1

Debit

Credit 300 11,500

15,400

Notes Receivable Date Jan. 1 29

No. 115

Explanation Balance

Ref. � CR1

Inventory Date Explanation Jan. 1 Balance 11 14 30 31 31 31 31

Ref. � CP1 G1 G1 P1 CP1 CR1 S1

Debit

Credit 40,000

Debit

Credit

300 180 300 3,600 130 5,460 9,240

Equipment Date Jan.

Balance 45,000 5,000

No. 120 Balance 23,000 23,300 23,480 23,180 26,780 26,650 21,190 11,950

No. 157

Explanation Balance

Ref. �

Debit

Credit

Accumulated Depreciation—Equipment Date Jan.

Balance 15,000 14,700 3,200 18,600

Explanation Balance

Ref. �

Balance 6,450

No. 158 Debit

Credit

Balance 1,500

7-41

PROBLEM 7-6A (Continued) Notes Payable Date Jan. 20

No. 200

Explanation

Ref. G1

Debit

Credit 18,000

Balance 18,000

Accounts Payable Date Jan.

1 20 30 31 31

No. 201

Explanation Balance

Ref. � G1 G1 P1 CP1

Debit

Credit

Balance 43,000 25,000 24,700 28,300 14,350

18,000 300 3,600 13,950

Owner’s Capital Date Jan.

No. 301

Explanation Balance

Ref. �

Debit

Credit

Balance 86,450

Sales Revenue Date Jan. 31 31

No. 401

Explanation

Ref. CR1 S1

Debit

Credit 9,100 15,400

Balance 9,100 24,500

Sales Returns and Allowances Date Jan. 14

Explanation

Ref. G1

Sales Discounts Date Explanation Jan. 31

7-42

No. 412

Ref. CR1

Debit 300

Debit 160

Credit

Balance 300

No. 414 Balance 160

Credit

PROBLEM 7-6A (Continued) Cost of Goods Sold Date Jan. 31 31 14

No. 505

Explanation

Ref. CR1 S1 G1

Debit 5,460 9,240

Credit

180

Salaries and Wages Expense Date Jan. 18

Explanation

No. 726 Ref. CP1

Debit 4,800

Credit

Rent Expense Date Jan. 12

Balance 5,460 14,700 14,520

Balance 4,800

No. 729

Explanation

Ref. CP1

Debit 1,000

Credit

Balance 1,000

Accounts Receivable Subsidiary Ledger B. Hannigan Date Jan.

1 14

Explanation Balance

Ref. � G1

Debit

Ref. � S1

Debit

Credit 300

Balance 2,500 2,200

I. Kirk Date Jan.

1 24

Explanation Balance

Credit

7,400

Balance 7,500 14,900

7-43

PROBLEM 7-6A (Continued) T. Hodges Date Explanation Jan. 1 Balance 7

Ref. � CR1

Debit

Ref. S1 CR1

Debit 8,000

Credit

Balance 5,000 1,500

3,500

M. Ziesmer Date Jan.

Explanation 3 13

Credit

Balance 8,000 0

8,000

Accounts Payable Subsidiary Ledger G. Roland Date Jan. 17 30

Explanation

T. Igawa Date Explanation Jan. 1 Balance

Ref. P1 G1

Debit

Credit 1,600

Balance 1,600 1,300

Ref. �

Debit

Credit

Balance 12,000

Ref. � G1

Debit

Credit

Balance 18,000 0

Credit

Balance 13,000 0

300

D. Danford Date Jan.

1 20

Explanation Balance

K. Thayer Date Explanation Jan. 1 Balance 15

7-44

Ref. � CP1

18,000

Debit 13,000

PROBLEM 7-6A (Continued) E. Pheatt Date Explanation Jan. 5 27

Ref. P1 CP1

(d)

Debit

Credit 2,000

Balance 2,000 1,050

Debit $ 82,020 18,600 5,000 11,950 6,450

Credit

950

HORNER CO. Trial Balance January 31, 2018 Cash ................................................................ Accounts Receivable ..................................... Notes Receivable............................................ Inventory ......................................................... Equipment....................................................... Accumulated Depreciation—Equipment....... Notes Payable ................................................. Accounts Payable........................................... Owner’s Capital .............................................. Sales Revenue ................................................ Sales Returns and Allowances...................... Sales Discounts.............................................. Cost of Goods Sold ........................................ Salaries and Wages Expense ........................ Rent Expense..................................................

300 160 14,520 4,800 1,000 $144,800

(e) Accounts Receivable Subsidiary Ledger B. Hanningan ........................................... I. Kirk ........................................................ T. Hodges.................................................

$144,800

$ 2,200 14,900 1,500 $18,600

Accounts Receivable Control ........................

1,500 18,000 14,350 86,450 24,500

$18,600

7-45

PROBLEM 7-6A (Continued) Accounts Payable Subsidiary Ledger G. Roland ......................................................................... T. Igawa ............................................................................ E. Pheatt........................................................................... Accounts Payable Control .....................................................

7-46

$ 1,300 12,000 1,050 $14,350 $14,350

CP 7-1

FINANCIAL REPORTING PROBLEM—A MINI PRACTICE SET

(a) Sales Journal Date

Account Debited

Jan. 3 3 11 11 22 22 25 25

B. Corpas J. Revere R. Beltre S. Mahay B. Corpas R. Beltre B. Santos J. Revere

Invoice Accounts Receivable Dr. No. Ref. Sales Revenue Cr.

� � � � � � � �

510 511 512 513 514 515 516 517

Cost of Goods Sold Dr. Inventory Cr.

3,600 1,800 1,600 900 2,700 2,300 3,500 6,100 22,500 (112)(401)

2,160 1,080 960 540 1,620 1,380 2,100 3,660 13,500 (505)(120)

Purchases Journal Date Jan. 5 5 16 16 16 27 27 27

Account Credited S. Gamel D. Posey D. Saito S. Meek S. Gamel D. Saito D. Posey S. Gamel

Terms n/30 n/30 1/10, n/30 2/10, n/30 n/30 1/10, n/30 n/30 n/30

Ref. � � � � � � � �

P1 Inventory Dr. Accounts Payable Cr. 5,000 2,200 15,000 14,200 1,500 14,500 3,200 5,400 61,000 (120)(201)

7-47

CP 7-1 (Continued) Cash Receipts Journal

Date Jan. 7 7 10 13 13 20 21 31

Account Credited

Ref.

S. Mahay B. Santos

� �

B. Corpas J. Revere

� �

S. Mahay

�

Cash Dr. 4,000 2,000 15,500 3,528 1,470 20,100 882 21,300 68,780 (101)

Sales Accounts Discounts Receivable Dr. Cr.

CR1

Sales Revenue Cr.

Other Accounts Cr.

Cost of Goods Sold Dr. Inventory Cr.

4,000 2,000 72 30

3,600 1,500

900

120 (414)

12,000 (112)

15,500

9,300

20,100

12,060

21,300 56,900 (401)

12,780 34,140 (505)(120)

Cash Payments Journal Date

Account Debited

Ref.

Other Accounts Dr.

Jan. 8 9 9 12 15 17 23 23 28 31

Inventory S. Meek D. Saito Rent Expense Owner’s Drawings

120

235

D. Saito S. Meek

� �

7-48

� �

Accounts Payable Dr.

CP1

Supplies Dr.

9,000 11,000

729 306

Inventory Cr. 180 110

1,000 800 400 15,000 14,000

150 280 200

Salaries and Wages Expense

627

8,100 10,135 (X)

49,000 (201)

600 (126)

720 (120)

Cash Cr. 235 8,820 10,890 1,000 800 400 14,850 13,720 200 8,100 59,015 (101)

CP 7-1 (Continued) (a) & (e) General Journal Date Jan.

31 31 31

Account Titles and Explanations Sales Returns and Allowances ....... Accounts Receivable— J. Revere .............................. (Issued credit for merchandise returned)

G1 Ref. 412

Debit 300

112/�

300

Inventory........................................... ($300 X .60) Cost of Goods Sold.................

120

Accounts Payable—S. Meek ........... Inventory.................................. (Received credit for returned goods)

201/� 120

200

Accounts Payable—R. Moses ......... Notes Payable ......................... (Payment of balance due)

201/� 200

15,000

Adjusting Entries Supplies Expense ............................ Supplies ...................................

728 126

700

Insurance Expense .......................... Prepaid Insurance ...................

722 130

200

711

125

Depreciation Expense ($1,500 ÷ 12) .................................... Accumulated Depreciation— Equipment ...........................

180

505

180 200

15,000

700 200

158

125

Interest Expense ............................. Interest Payable ......................

718 230

Closing Entries Sales Revenue ................................ Income Summary ....................

401 350

79,400

Credit

79,400 .

7-49

CP 7-1 (Continued) General Journal Date Jan. 31

31 31

Account Titles and Explanations Income Summary ............................. Sales Discounts ...................... Sales Returns and Allowances .......................... Cost of Goods Sold................. Rent Expense .......................... Salaries and Wages Expense ................................ Supplies Expense ................... Insurance Expense ................. Depreciation Expense ............. Interest Expense .....................

Ref. 350 414

Income Summary ............................. Owner’s Capital .......................

350 301

21,345

Owner’s Capital ................................ Owner’s Drawings ...................

301 306

800

(b) & (e) Cash Date Jan. 1 31 31

Debit 58,055

Credit 120

412 505 729

300 47,460 1,000

627 728 722 711 718

8,100 700 200 125 50 21,345 800

General Ledger

Explanation Balance

Ref. � CR1 CP1

Accounts Receivable Date Explanation Jan. 1 Balance 31 31 9

7-50

Ref. � S1 CR1 G1

Debit

No. 101 Balance 35,750 104,530 45,515

Credit

68,780 59,015

Debit

No. 112 Balance 13,000 35,500 23,500 23,200

Credit

22,500 12,000 300

CP 7-1 (Continued) Notes Receivable Date Jan.

No. 115

Explanation Balance

Ref. �

Inventory Date Explanation Jan. 1 Balance 31 31 31 8 31 9 18

Ref. � P1 S1 CR1 CP1 CP1 G1 G1

Supplies Date Explanation Jan. 1 Balance 31 31 Adj. entry

Ref. � CP1 G1

Debit

Credit

61,000 13,500 34,140 235 720 180 200

Debit

Credit

600 700

Prepaid Insurance Date Jan.

1 31

No. 120 Balance 18,000 79,000 65,500 31,360 31,595 30,875 31,055 30,855

No. 126 Balance 1,000 1,600 900

No. 130

Explanation Balance Adj. entry

Ref. � G1

Debit

Credit 200

Equipment Date Jan. 1

Balance 39,000

Balance 2,000 1,800

No. 157

Explanation Balance

Ref. �

Debit

Credit

Balance 6,450

7-51

CP 7-1 (Continued) Accumulated Depreciation—Equipment Date Jan.

1 31

Explanation Balance Adj. entry

Ref. � G1

No. 158 Debit

Credit

Balance 1,500 1,625

125

Notes Payable Date Jan. 21

No. 200

Explanation

Ref. G1

Debit

Credit 15,000

Balance 15,000

Accounts Payable Date Jan.

1 31 31 18 21

No. 201

Explanation Balance

Ref. � P1 CP1 G1 G1

Debit

Credit

Balance 35,000 96,000 47,000 46,800 31,800

61,000 49,000 200 15,000

Interest Payable Date Jan. 31

No. 230

Explanation Adj. entry

Ref. G1

Debit

Credit 50

Balance 50

Owner’s Capital Date Jan.

1 31 31

No. 301

Explanation Balance

Ref. � G1 G1

Clos. entry

Owner’s Drawings Date Explanation Jan. 15 31 Clos. entry

7-52

Ref. CP1 G1

Debit

Credit

Balance 78,700 100,045 99,245

21,345 800

Debit 800

No. 306 Balance 800 0

Credit 800

CP 7-1 (Continued) Income Summary Date Jan. 31 31 31

No. 350

Explanation

Ref. G1 G1 G1

Clos. entry

Debit

Credit 79,400

58,055 21,345

Sales Revenue Date Jan. 31 31 31

No. 401

Explanation

Ref. S1 CR1 G1

Clos. entry

Debit

Credit 22,500 56,900

79,400

Sales Returns and Allowances Date Jan. 9 31

Explanation

Ref. G1 G1

Clos. entry

Debit 300

Credit 300

Balance 300 0

No. 414

Explanation

Ref. CR1 G1

Clos. entry

Cost of Goods Sold Date Explanation Jan. 31 31 9 31 Clos. entry

Balance 22,500 79,400 0

No. 412

Sales Discounts Date Jan. 31 31

Balance 79,400 21,345 0

Ref. S1 CR1 G1 G1

Debit 120

Credit 120

Debit 13,500 34,140

Credit

180 47,460

Balance 120 0 No. 505 Balance 13,500 47,640 47,460 0

7-53

CP 7-1 (Continued) Salaries and Wages Expense Date Jan. 31 31

No. 627

Explanation

Ref. CP1 G1

Clos. entry

Debit 8,100

Credit

Balance 8,100 0

8,100

Depreciation Expense Date Jan. 31 31

No. 711

Explanation

Ref. G1 G1

Clos. entry

Debit 125

Credit

Balance 125 0

125

Interest Expense Date Jan. 31 31

No. 718

Explanation

Ref. G1 G1

Clos. entry

Debit 50

Credit

Balance 50 0

Insurance Expense Date Jan. 31 31

No. 722

Explanation

Ref. G1 G1

Clos. entry

Debit 200

Credit

Balance 200 0

200

Supplies Expense Date Jan. 31 31

No. 728

Explanation

Ref. G1 G1

Clos. entry

Rent Expense Date Explanation Jan. 12 31 Clos. entry

7-54

Ref. CP1 G1

Debit 700

Credit

Balance 700 0

700

Debit 1,000

No. 729 Balance 1,000 0

Credit 1,000

CP 7-1 (Continued) Accounts Receivable Subsidiary Ledger R. Beltre Date Jan.

Ref. � S1 S1

Debit

Ref. S1 G1 CR1 S1

Debit 1,800

Ref. � CR1 S1

Debit

S. Mahey Date Explanation Jan. 1 Balance 7 11 21

Ref. � CR1 S1 CR1

Debit

B. Corpas Date Explanation Jan. 3 13 22

Ref. S1 CR1 S1

Debit 3,600

1 11 22

Explanation Balance

Credit

Balance 1,500 3,100 5,400

Credit

Balance 1,800 1,500 0 6,100

1,600 2,300

J. Revere Date Jan.

Explanation 3 9 13 25

300 1,500 6,100

B. Santos Date Jan.

1 7 25

Explanation Balance

Credit 2,000

3,500

Credit 4,000

900 900

Credit 3,600

2,700

Balance 7,500 5,500 9,000

Balance 4,000 0 900 0

Balance 3,600 0 2,700

7-55

CP 7-1 (Continued) Accounts Payable Subsidiary Ledger D. Posey Date Jan.

Explanation

Ref. P1 P1

Debit

Credit 2,200 3,200

Balance 2,200 5,400

Explanation Balance

Ref. � CP1 P1 G1 CP1

Debit

Credit

Balance 9,000 0 14,200 14,000 0

5 27

S. Meek Date Jan.

1 9 16 18 23

R. Moses Date Explanation Jan. 1 Balance 21

Ref. � G1

9,000 14,200 200 14,000

Debit

Credit

Balance 15,000 0

Credit

14,500

Balance 11,000 0 15,000 0 14,500

Credit 5,000 1,500 5,400

Balance 5,000 6,500 11,900

15,000

D. Saito Date Jan.

1 9 16 23 27

Explanation Balance

Ref. � CP1 P1 CP1 P1

S. Gamel Date Explanation Jan. 5 16 27 7-56

Ref. P1 P1 P1 .

Debit 11,000

15,000 15,000

Debit

JETER COMPANY Worksheet For the Month Ended January 31, 2017 Trial Balance

Adjustments

Adjusted Trial Balance

Income Statement

Account Titles

Dr.

Cash Accounts Receivable Notes Receivable Inventory Supplies Prepaid Insurance Equipment Accum. Depreciation—Equipment Notes Payable Accounts Payable Interest Payable Owner’s Capital Owner’s Drawings Sales Revenue Sales Returns and Allowances Sales Discounts Cost of Goods Sold Salaries and Wages Expense Rent Expense Totals Supplies Expense Insurance Expense Depreciation Expense Interest Expense Totals Net Income Totals

45,515 23,200 39,000 30,855 1,600 2,000 6,450

Cr.

1,500 15,000 31,800

Cr.

(1) (2)

700 200

(3)

125

(4)

Dr.

Cr.

45,515 23,200 39,000 30,855 900 1,800 6,450 1,625 15,000 31,800 50 78,700

1,625 15,000 31,800 50 78,700

800 79,400

300 120 47,460 8,100 1,000 206,400

Cr.

45,515 23,200 39,000 30,855 900 1,800 6,450

78,700 800

Cr.

Balance Sheet

800 79,400

79,400

300 120 47,460 8,100 1,000

700 200 125 50 206,575

700 200 125 50 58,055 21,345 79,400

206,400 (1) (2) (3) (4)

700 200 125 50 1,075

1,075

206,575

79,400

148,520

79,400

148,520

127,175 21,345 148,520

CP 7-1 (Continued)

(c)

7-57

CP 7-1 (Continued) (d)

JETER CO. Income Statement For the Month Ended January 31, 2017 Sales Sales revenue ................................. Less: Sales discounts................... Sales returns and allowances ....................... Net sales revenue ........................... Cost of goods sold ......................... Gross profit..................................... Operating expenses Salaries and wages expense ................................ Rent expense .......................... Supplies expense ................... Insurance expense ................. Depreciation expense............. Total operating expenses....................... Income from operations ........................ Other expenses and losses Interest expense ............................. Net income .............................................

7-58

$79,400 $ 120 300

420 78,980 47,460 31,520

$8,100 1,000 700 200 125 10,125 21,395 50 $21,345

CP 7-1 (Continued) JETER CO. Owner’s Equity Statement For the Month Ended January 31, 2017 Owner’s, Capital, January 1, 2017 ......................................... Add: Net income ................................................................... Less: Drawings ...................................................................... Owner’s, Capital, January 31, 2017 .......................................

$78,700 21,345 100,045 800 $99,245

JETER CO. Balance Sheet January 31, 2017 Assets Current assets Cash ............................................................ Accounts receivable .................................. Notes receivable......................................... Inventory..................................................... Supplies ...................................................... Prepaid insurance ...................................... Total current assets ...........................

$45,515 23,200 39,000 30,855 900 1,800

Property, plant, and equipment Equipment .................................................. Less: Accumulated depreciation ............. Total assets.........................................

6,450 1,625

$141,270

4,825 $146,095

Liabilities and Owner’s Equity Current liabilities Notes payable............................................. Accounts payable ...................................... Interest payable.......................................... Total liabilities.....................................

$15,000 31,800 50 $ 46,850

Owner’s equity Owner’s capital........................................... Total liabilities and owner’s equity............................................... .

99,245 $146,095 .

7-59

CP 7-1 (Continued) (f)

JETER CO. Post-Closing Trial Balance January 31, 2017 Cash................................................................. Accounts Receivable...................................... Notes Receivable ............................................ Inventory ......................................................... Supplies .......................................................... Prepaid Insurance........................................... Equipment ....................................................... Accumulated Depreciation—Equipment ....... Notes Payable ................................................. Accounts Payable........................................... Interest Payable .............................................. Owner’s Capital ..............................................

Debit $ 45,515 23,200 39,000 30,855 900 1,800 6,450

Credit

1,625 15,000 31,800 50 99,245 $147,720

$147,720

Accounts Receivable balance.............................. Subsidiary account balances R. Beltre ......................................................... J. Revere ........................................................ B. Santos........................................................ B. Corpas .......................................................

$23,200 $ 5,400 6,100 9,000 2,700 $23,200

Accounts Payable balance ................................... Subsidiary account balances D. Posey ......................................................... D. Saito........................................................... S. Gamel.........................................................

$31,800 $ 5,400 14,500 11,900 $31,800

7-60

CP 7-2

COMPREHENSIVE PROBLEM: CHAPTERS 3 TO 7

Note: If the working papers that accompany this text are not used in solving this problem, account numbers may differ from those presented in this solution. (a) Sales Journal Date Jan. 3 3 11 11 22 22 25 25

Date Jan. 5 5 16 16 16 27 27 27

Account Debited B. Berg J. Lutz R. Kotsay S. Andrus B. Berg R. Kotsay B. Boxberger J. Lutz

Account Credited S. Colt D. Kahn D. Baroni S. Otero S. Colt D. Baroni D. Kahn S. Colt

Ref. � � � � � � � �

S1 Accounts Receivable Dr. Sales Revenue Cr. 3,600 1,800 2,900 900 3,700 800 3,500 6,100 23,300 (112)(401)

Purchases Journal

Invoice No. 510 511 512 513 514 515 516 517

Terms

Ref. � � � � � � � �

Purchases Dr. Accounts Payable Cr. 5,000 2,700 12,000 13,900 1,500 12,500 1,200 2,800 51,600 (510)(201)

7-61

CP 7-2 (Continued) Cash Receipts Journal Date Jan. 7 7 10 13 13 20 21 31

Account Credited

Ref.

S. Andrus B. Boxberger

� �

B. Berg J. Lutz

� �

Cash Dr. 4,000 2,000 15,500 3,600 1,500 17,500 900 22,920 67,920 (101)

�

S. Andrus

Accounts Receivable Cr.

CR1 Sales Revenue Cr.

Other Accounts Cr.

4,000 2,000 15,500 3,600 1,500 17,500 900 12,000 (112)

22,920 55,920 (401)

Cash Payments Journal Date

Freight In S. Otero D. Baroni Rent Expense Owner’s Drawings

516

180

D. Baroni S. Otero

� �

Account Debited

Jan. 8 9 9 12 15 17 23 23 28 31

7-62

Ref.

Other Accounts Dr.

Salaries and Wages Expense

� �

Accounts Payable Dr.

CP1 Supplies Dr.

Cash Cr.

200

180 9,000 11,000 1,000 800 400 12,000 13,700 200

600 (126)

7,900 56,180 (101)

9,000 11,000

729 306

1,000 800 400 12,000 13,700

627

7,900 9,880 (X)

45,700 (201)

CP 7-2 (Continued) (a) & (e) General Journal Date Jan.

Account Titles and Explanations Sales Returns and Allowances ................................... Accounts Receivable— J. Lutz .................................. (Issued credit for merchandise returned) Accounts Payable—S. Otero........... Purchase Returns and Allowances .......................... (Received credit for returned goods) Accounts Payable— R. Rasmus .................................... Notes Payable ......................... (Issued note for balance due)

G1 Ref.

Debit

412

300

112/�

Credit

300

201/�

200

512

200

201/� 200

15,000

Supplies Expense ............................ Supplies ...................................

728 126

900

Insurance Expense (1/10 X 2,000) ................................ Prepaid Insurance ...................

722 130

200

711

125

15,000

Adjusting Entries 31

Depreciation Expense (1/12 X 1,500) ................................ Accumulated Depreciation— Equipment ........................... Interest Expense .............................. Interest Payable ......................

900

200

158

125

718 230

30 30

7-63

CP 7-2 (Continued)

Date Jan. 31

31 31

General Journal Account Titles and Explanations Inventory (Jan. 31) ........................... Sales Revenue.................................. Purchase Returns and Allowances ................................... Income Summary .................... Income Summary ............................. Inventory (Jan. 1) .................... Sales Returns and Allowances .......................... Purchases ................................ Freight In.................................. Rent Expense .......................... Salaries and Wages Expense ................................ Supplies Expense ................... Insurance Expense ................. Depreciation Expense ............. Interest Expense .....................

7-64

Debit 15,000 79,220

512 350

200

350 120

82,235

94,420 20,000

412 510 516 729

300 51,600 180 1,000

627 728 722 711 718

7,900 900 200 125 30

Income Summary ............................. Owner’s Capital .......................

350 301

12,185

Owner’s Capital ................................ Owner’s Drawings ...................

301 306

800

(b) & (e) Cash Date Jan. 1 31 31

Ref. 120 401

G1 Credit

12,185 800

General Ledger

Explanation Balance

Ref. � CR1 CP1

Debit

No. 101 Balance 33,750 101,670 45,490

Credit

67,920 56,180

CP 7-2 (Continued) Accounts Receivable Date Jan.

1 31 31 9

No. 112

Explanation Balance

Ref. � S1 CR1 G1

Debit

Credit

23,300 12,000 300

Notes Receivable Date Jan.

No. 115

Explanation Balance

Ref. �

Inventory Date Explanation Jan. 1 Balance 31 Adj. entry 31 Adj. entry

Ref. � G1 G1

Supplies Date Explanation Jan. 1 Balance 31 31 Adj. entry

Ref. � CP1 G1

Debit

Credit

15,000 20,000

Debit

Credit

600 900

Prepaid Insurance Date Jan.

1 31

Balance 39,000

No. 120 Balance 20,000 35,000 15,000

No. 126 Balance 1,000 1,600 700

No. 130

Explanation Balance Adj. entry

Ref. � G1

Debit

Credit 200

Equipment Date Jan. 1

Balance 13,000 36,300 24,300 24,000

Balance 2,000 1,800

No. 157

Explanation Balance

Ref. �

Debit

Credit

Balance 6,450

7-65

CP 7-2 (Continued) Accumulated Depreciation—Equipment Date Jan.

1 31

Explanation Balance Adj. entry

Ref. � G1

No. 158 Debit

Credit

Balance 1,500 1,625

125

Notes Payable Date Jan. 21

No. 200

Explanation

Ref. G1

Debit

Credit 15,000

Balance 15,000

Accounts Payable Date Jan. 1 31 31 18 21

No. 201

Explanation Balance

Ref. � P1 CP1 G1 G1

Debit

Credit

Balance 35,000 86,600 40,900 40,700 25,700

51,600 45,700 200 15,000

Interest Payable Date Jan. 31

No. 230

Explanation Adj. entry

Ref. G1

Debit

Credit 30

Balance 30

Owner’s Capital Date Jan.

1 31 31

No. 301

Explanation Balance

Ref. � G1 G1

Owner’s Drawings Date Explanation Jan. 15 31 Clos. entry

7-66

Ref. CP1 G1

Debit

Credit

Balance 78,700 90,885 90,085

12,185 800

Debit 800

No. 306 Balance 800 0

Credit 800

CP 7-2 (Continued) Income Summary Date Jan. 31 31 31

No. 350

Explanation

Ref. G1 G1 G1

Clos. entry

Debit

Credit 94,420

82,235 12,185

Sales Revenue Date Jan. 31 31 31

No. 401

Explanation

Ref. S1 CR1 G1

Clos. entry

Debit

Credit 23,300 55,920

79,220

Sales Returns and Allowances Date Jan.

Explanation 9 31

Ref. G1 G1

Clos. entry

Debit 300

Credit 300

Explanation

Ref. P1 G1

Clos. entry

Debit 51,600

Credit 51,600

Explanation

Ref. G1 G1

Clos. entry

Debit

Credit 200

200

Balance 200 0

No. 516 Explanation

8 31

Balance 51,600 0

No. 512

Freight-In Date Jan.

Balance 300 0

No. 510

Purchase Returns and Allowances Date Jan. 18 31

Balance 23,300 79,220 0

No. 412

Purchases Date Jan. 31 31

Balance 94,420 12,185 0

Ref. CP1 G1

Clos. entry .

Debit 180

Credit 180 .

Balance 180 0 7-67

CP 7-2 (Continued) Salaries and Wages Expense Date Jan. 31 31

No. 627

Explanation

Ref. CP1 G1

Clos. entry

Debit 7,900

Credit

Balance 7,900 0

7,900

Depreciation Expense Date Jan. 31 31

No. 711

Explanation Adj. entry Clos. entry

Ref. G1 G1

Debit 125

Credit

Balance 125 0

125

Interest Expense Date Jan. 31 31

No. 718

Explanation Adj. entry Clos. entry

Ref. G1 G1

Debit 30

Credit

Balance 30 0

Insurance Expense Date Jan. 31 31

No. 722

Explanation Adj. entry Clos. entry

Ref. G1 G1

Debit 200

Credit

Balance 200 0

200

Supplies Expense Date Jan. 31 31

No. 728

Explanation Adj. entry Clos. entry

Ref. G1 G1

Rent Expense Date Explanation Jan. 12 31 Clos. entry

7-68

Ref. CP1 G1

Debit 900

Credit

Balance 900 0

900

Debit 1,000

No. 729 Balance 1,000 0

Credit 1,000

CP 7-2 (Continued) Accounts Receivable Subsidiary Ledger R. Kotsay Date Jan. 1 11 22

Explanation Balance

Ref. � S1 S1

Debit

Ref. S1 G1 CR1 S1

Debit 1,800

Ref. � CR1 S1

Debit

Ref. � CR1 S1 CR1

Debit

Ref. S1 CR1 S1

Debit 3,600

Credit

Balance 1,500 4,400 5,200

Credit

Balance 1,800 1,500 0 6,100

2,900 800

J. Lutz Date Jan.

Explanation 3 9 13 25

B. Boxberger Date Explanation Jan. 1 Balance 7 25

300 1,500 6,100

Credit 2,000

3,500

Balance 7,500 5,500 9,000

S. Andrus Date Jan.

1 7 11 21

B. Berg Date Jan. 3 13 22

Explanation Balance

Explanation

Credit 4,000

900 900

Credit 3,600

3,700

Balance 4,000 0 900 0

Balance 3,600 0 3,700

7-69

CP 7-2 (Continued) Accounts Payable Subsidiary Ledger D. Kahn Date Jan.

Explanation

Ref. P1 P1

Debit

Credit 2,700 1,200

Balance 2,700 3,900

Explanation Balance

Ref. � CP1 P1 G1 CP1

Debit

Credit

Balance 9,000 0 13,900 13,700 0

5 27

S. Otero Date Jan.

1 9 16 18 23

9,000 13,900 200 13,700

R. Rasmus Date Jan.

1 21

Explanation Balance

Ref. � G1

Debit

Credit

Balance 15,000 0

Credit

12,500

Balance 11,000 0 12,000 0 12,500

Credit 5,000 1,500 2,800

Balance 5,000 6,500 9,300

15,000

D. Baroni Date Jan.

1 9 16 23 27

S. Colt Date Jan. 5 16 27

7-70

Explanation Balance

Ref. � CP1 P1 CP1 P1

Explanation

Ref. P1 P1 P1

Debit 11,000

12,000 12,000

Debit

MCBRIDE COMPANY Worksheet For the Month Ended January 31, 2017 Trial Balance

Adjustments

Account Titles

Dr.

Cash Accounts Receivable Notes Receivable Inventory Supplies Prepaid Insurance Equipment Accum. Depreciation—Equipment Notes Payable Accounts Payable Interest Payable Owner’s Capital Owner’s Drawings Sales Revenue Sales Returns and Allowances Purchases Purchase Returns and Allowances Freight—In Salaries and Wages Expense Rent Expense Totals Supplies Expense Insurance Expense Depreciation Expense Interest Expense Totals Net Income Totals

45,490 24,000 39,000 20,000 1,600 2,000 6,450

Cr.

1,500 15,000 25,700

Cr.

(1) (2)

900 200

(3)

125

(4)

Adjusted Trial Balance

Income Statement

Dr.

15,000

300 51,600 200

Cr.

800 79,220

300 51,600

Dr. 45,490 24,000 39,000 15,000 700 1,800 6,450

1,625 15,000 25,700 30 78,700

800 79,220

180 7,900 1,000 200,320

20,000

Cr.

1,625 15,000 25,700 30 78,700

78,700 800

Cr.

45,490 24,000 39,000 20,000 700 1,800 6,450

Balance Sheet

79,220 300 51,600

200

180 7,900 1,000

900 200 125 30 200,475

900 200 125 30 82,235 12,185 94,420

200,320 (1) (2) (3) (4)

900 200 125 30 1,255

1,255

200,475

94,420

133,240

94,420

133,240

121,055 12,185 133,240

CP 7-2 (Continued)

(c)

7-71

CP 7-2 (Continued) (d)

MCBRIDE CO. Income Statement For the Month Ended January 31, 2017 Sales Sales revenue................................. Less: Sales returns and allowances .......................... Net sales revenue .......................... Cost of goods sold Inventory, 1/1/17............................. Purchases ...................................... Less: Purchase returns and allowances .......................... Net purchases ................................ Freight-in ........................................ Cost of goods available for sale ... Less: Inventory, 1/31/17 ............... Cost of goods sold .................. Gross profit .................................... Operating expenses Salaries and wages expense ................................. Rent expense ........................... Supplies expense .................... Insurance expense .................. Depreciation expense.............. Total oper. expenses ......... Income from operations ...................... Other expenses and losses Interest expense ............................ Net income ...........................................

7-72

$79,220 300 78,920 $20,000 $51,600 200 51,400 180

51,580 71,580 15,000 56,580 22,340 7,900 1,000 900 200 125 10,125 12,215 30 $12,185

CP 7-2 (Continued) MCBRIDE CO. Owner’s Equity Statement For the Month Ended January 31, 2017 Owner’s Capital, January 1, 2017 ..................... Add: Net income ..............................................

$78,700 12,185 90,885 800 $90,085

Less: Drawings ................................................. Owner’s Capital, January 31, 2017 ...................

MCBRIDE CO. Balance Sheet January 31, 2017 Assets Current assets Cash ............................................................ Notes receivable......................................... Accounts receivable .................................. Inventory..................................................... Supplies ...................................................... Prepaid insurance ...................................... Total current assets ...........................

$45,490 39,000 24,000 15,000 700 1,800

Property and equipment Equipment .................................................. Less: Accumulated depreciation ............. Total assets.........................................

6,450 1,625

$125,990

4,825 $130,815

$15,000 25,700 30 $ 40,730

Owner’s equity Owner’s capital........................................... Total liabilities and owner’s equity ...

90,085 $130,815

7-73

CP 7-2 (Continued) (f)

MCBRIDE CO. Post-Closing Trial Balance January 31, 2017 Cash................................................................. Accounts Receivable...................................... Notes Receivable ............................................ Inventory ......................................................... Supplies .......................................................... Prepaid Insurance........................................... Equipment ....................................................... Accumulated Depreciation—Equipment ....... Notes Payable ................................................. Accounts Payable........................................... Interest Payable .............................................. Owner’s Capital ..............................................

Debit $ 45,490 24,000 39,000 15,000 700 1,800 6,450

Credit

1,625 15,000 25,700 30 90,085 $132,440

$132,440

Accounts Receivable balance.............................. Subsidiary account balances R. Kotsay........................................................ J. Lutz............................................................. B. Boxberger.................................................. B. Berg ...........................................................

$24,000 $ 5,200 6,100 9,000 3,700 $24,000

Accounts Payable balance ................................... Subsidiary account balances D. Kahn .......................................................... D. Baroni ........................................................ S. Colt.............................................................

$25,700 $ 3,900 12,500 9,300 $25,700

7-74

BYP 7-1

REAL-WORLD FOCUS

Answers will vary.

7-75

BYP 7-2

DECISION MAKING ACROSS THE ORGANIZATION

(a) The special journals for Ermler & Trump should be: (1) sales journal, (2) purchases journal, (3) cash receipts journal, and (4) cash payments journal. (1) Sales Journal columns: Date. Account Debited. Invoice Number. Reference. Accounts Receivable, Dr. and Sales Revenue—Appliances, Cr. Cost of Goods Sold, Dr. and Inventory—Appliances, Cr. (2) Purchases Journal columns: Date. Account Credited. Terms. Reference. Accounts Payable, Cr. Inventory—Appliances, Dr. Inventory—Parts, Dr. Note: Because two different types of merchandise are purchased on credit, a three-column purchases journal might be used. (3) Cash Receipts Journal columns: Date. Account Credited. Reference. Cash, Dr. Accounts Receivable, Cr. Sales Revenue—Appliances, Cr. Sales Revenue—Parts, Cr. Revenue from Repairs, Cr. Other Accounts, Cr. Cost of Goods Sold, Dr. and Inventory— Appliances, Cr. Cost of Goods Sold, Dr. and Inventory—Parts, Cr. Note: A Sales Discounts, Dr. column is not needed because all credit terms are net/30 days. 7-76

BYP 7-2 (Continued) (4) Cash Payments Journal columns: Date. Check Number. Account Debited. Reference. Other Accounts, Dr. Accounts Payable, Dr. Advertising Expense, Dr. Salaries and Wages Expense, Dr. Inventory—Appliances, Cr. Inventory—Parts, Cr. Cash, Cr. (b) Ermler & Trump should have: (1) An accounts receivable control account with individual customers’ accounts in a customers’ subsidiary ledger. (2) An accounts payable control account with individual creditors in a creditors’ subsidiary ledger. The use of control accounts and subsidiary ledgers will: (1) provide necessary up-to-date information on specific customer and creditor balances, (2) free the general ledger of excessive detail, (3) help locate errors in individual accounts, and (4) make possible a division of labor in posting.

7-77

BYP 7-3

COMMUNICATION ACTIVITY

Mr. Ben Newell 2 Main Street Central City, Michigan 48172 Dear Mr. Newell: Thank you for hiring two additional bookkeepers a month ago to help me with the accounting. Unfortunately, the inefficiencies in recording transactions have continued at an even higher rate. The reason is that there are often times when more than one person needs to use the journal. In addition, the daily posting of transactions continues to be very time consuming. I would like to suggest some changes in the accounting system. Because of the increased volume of business, I believe it is time for us to use special journals for journalizing transactions. Special journals would be in addition to the journal that we are using now. There would be four special journals: 1. 2. 3. 4.

Sales journal—for all sales of merchandise on account. Cash receipts journal—for all cash received. Purchases journal—for all purchases of merchandise on account. Cash payments journal—for all cash payments.

To use special journals, we will need columnar journal paper which can be obtained at any office supply store at very low cost. I can also quickly train the new bookkeepers in the use of special journals. Special journals will permit a division of labor so that all three of us can be recording transactions at the same time. Thus, the inefficiencies in journalizing will be eliminated. Special journals also make it possible to do some postings monthly. This will significantly reduce the time required to make daily postings. As a result, it should free up some time for us to do other things! I am confident that the use of special journals will improve the efficiency of the accounting department. If you have any questions on this recommendation, please let me know. Yours sincerely, Jill

7-78

BYP 7-4

ETHICS CASE

(a) The stakeholders in this case are:  Indy Grover, manager of Wiemers’s centralized computer accounting operation.  The employees of Wiemers’s three divisions at Freeport, Rockport, and Bayport. (b) Indy’s instructions to assign the Bayport code to all uncoded and incorrectly coded sales documents overstates the sales of Bayport and understates the sales of Freeport and Rockport, thereby affecting the employee bonus plan. Indy’s intent and action are unethical. He is padding the sales of his wife, relatives, and friends at Bayport division and unfairly aiding them in the bonus competition. (c) Wiemers Products Company should have a written policy covering uncoded and incorrectly coded sales documents. This would prevent the manager from arbitrarily designating the division to be credited for the uncoded sales.

7-79

BYP 7-5

ALL ABOUT YOU

The process begins when journal entries are recorded for transactions in a journal. Once entries are made in the journal, they are posted to the ledger by using the Post function. After entries have been posted, you can click on Reports in the Main Menu and choose from a variety of reports. These include the following: Chart of Accounts, Trial Balance, General Ledger, Subsidiary Ledger, Journals, Balance Sheet, Income Statement, Owner’s Equity Statement.

7-80

CHAPTER 8 Fraud, Internal Control, and Cash ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Do It!

Exercises

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

1, 2, 3, 4

1, 2, 3, 5, 6

1A, 6A

Apply internal control principles to cash.

6, 13, 14, 15, 16, 17, 18, 19, 21

5, 6, 7, 8, 9

2a, 2b

2, 3, 4, 5, 6, 7, 8

1A, 2A, 6A

Identify the control features of a bank account.

20, 22, 23, 24, 25

10, 11, 12 13, 14

9, 10, 11, 12, 13

3A, 4A, 5A

Explain the reporting of cash.

12, 26, 27

Learning Objectives

Questions

Discuss fraud and the principles of internal control.

A Problems

8-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

8-2

Description

Difficulty Level

Time Allotted (min.)

Identify internal control principles over cash disbursements.

Simple

20–30

Journalize and post petty cash fund transactions.

Simple

20–30

Prepare a bank reconciliation and adjusting entries.

Simple

20–30

Prepare a bank reconciliation and adjusting entries from detailed data.

Moderate

40–50

Prepare a bank reconciliation and adjusting entries.

Moderate

30–40

Identify internal control weaknesses in cash receipts and cash disbursements.

Complex

35–45

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 8 FRAUD, INTERNAL CONTROL, AND CASH Number

Difficulty

Time (min.)

BE1

Simple

2–4

BE2

Simple

2–4

BE3

Simple

4–6

BE4

Simple

3–5

BE5

Simple

4–6

BE6

Simple

4–6

BE7

Simple

2–4

BE8

Simple

4–6

BE9

Simple

4–6

BE10

Simple

2–4

BE11

Simple

3–5

BE12

Simple

3–5

BE13

Simple

2–4

BE14

Simple

2–4

BE15

Simple

2–4

DI1

Moderate

6–8

DI2a

Simple

4–6

DI2b

Simple

4–6

DI3

Simple

2–4

DI4

Simple

2–4

EX1

Simple

8–10

EX2

1, 2

Moderate

8–10

EX3

1, 2

Moderate

8–10

EX4

Moderate

12–15

EX5

1, 2

Simple

6–8

EX6

1, 2

Simple

6–8

EX7

Simple

8–10

EX8

Simple

6–8

EX9

Simple

8–10

EX10

Simple

3–5

8-3

FRAUD, INTERNAL CONTROL, AND CASH (Continued) Number

Difficulty

Time (min.)

EX11

Simple

10–12

EX12

Simple

12–15

EX13

Moderate

10–12

EX14

C, AP

Simple

8–10

P1A

1, 2

Simple

20–30

P2A

Simple

20–30

P3A

Simple

20–30

P4A

Moderate

40–50

P5A

Moderate

30–40

P6A

1, 2

Complex

35–45

BYP1

1, 4

Simple

10–15

BYP2

Simple

8–12

BYP3

Simple

8–12

BYP4

1, 3

Simple

10–15

BYP5

Moderate

15–20

BYP6

Simple

10–15

BYP7

Simple

10–15

BYP8

—

Simple

10–15

BYP9

Simple

10–15

8-4

Learning Objective

Knowledge

1. Discuss fraud and the principles of internal control

2. Apply internal control principles Q8-18 to cash. Q8-19

Comprehension

Application

Q8-1 Q8-8 BE8-4 Q8-2 Q8-9 DI8-1 Q8-3 Q8-10 E8-1 Q8-4 Q8-11 E8-5 Q8-5 BE8-1 E8-6 Q8-6 BE8-2 P8-1A Q8-7 BE8-3 Q8-6 BE8-5 BE8-6 Q8-13 DI8-2a BE8-7 Q8-14 E8-5 BE8-9 Q8-15 E8-6 DI8-2b Q8-16 P8-1A E8-7 E8-8 Q8-17 P8-2A Q8-21 BE8-8

3. Identify the control features of a bank account.

Q8-20 Q8-24

Q8-22 Q8-23 Q8-25 BE8-10

BE8-11 BE8-13 BE8-12 BE8-14 DI8-3 E8-10

4. Explain the reporting of cash.

Q8-27 DI8-4

Q8-26 BE8-15

E8-14

Broadening Your Perspective

Analysis

Financial Reporting

Synthesis

Evaluation E8-2 E8-3 P8-6A

E8-2 E8-3 E8-4 P8-6A

E8-9 E8-11 E8-12 E8-13

P8-3A P8-4A P8-5A

Q8-12 E8-14 FASB Codification

Comparative Analysis Decision Making Across the Organization

Real-World Focus Communication Ethics Case All About You

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

8-5

ANSWERS TO QUESTIONS 1.

Fraud is dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. An example of fraud that might occur at a bank would be a computer operator embezzling funds by transferring a customer’s deposits into another account.

The three main factors that contribute to employee fraud are opportunity, financial pressure, and rationalization. Opportunities that an employee can take advantage of occur when the workplace lacks sufficient controls to deter and detect fraud. Financial pressure occurs when employees want to lead a lifestyle that they cannot afford on their current salary. Rationalization involves employees justifying fraud because they believe they are underpaid while their employer is making lots of money.

The five components of a good internal control system are: (1) A control environment, (2) Risk assessment, (3) Control activities, (4) Information and communication, and (5) Monitoring.     

A control environment. Top management must make it clear that the organization values integrity and that unethical activity will not be tolerated. Risk assessment. Companies must identify and analyze the various factors that create risk for the business and must determine how to manage these risks. Control activities. To reduce the occurrence of fraud, management must design policies and procedures to address the specific risks faced by the company. Information and communication. The internal control system must capture and communicate all pertinent information both down and up the organization, as well as communicate information to appropriate external parties. Monitoring. Internal control systems must be monitored periodically for their adequacy. Significant deficiencies need to be reported to top management and/or the board of directors.

Disagree. Internal control is also concerned with the safeguarding of company assets from employee theft, robbery, and unauthorized use.

The principles of internal control are: (a) establishment of responsibility, (b) segregation of duties, (c) documentation procedures, (d) physical controls, (e) independent internal verification, and (f) human resource controls.

This is a violation of the internal control principle of establishing responsibility. In this case, each sales clerk should have a separate cash register or cash register drawer.

The two applications of segregation of duties are: (1) Different individuals should be responsible for related activities. (2) Responsibility for the recordkeeping for an asset should be separate from the physical custody of that asset.

Documentation procedures contribute to good internal control by providing evidence that transactions and events have occurred and, when signatures (or initials) are added, the documents establish responsibility for the transactions. The prompt transmittal of documents to accounting contributes to recording transactions in the proper period, and the prenumbering of documents helps to ensure that a transaction is not recorded more than once or not at all.

8-6

Questions Chapter 8 (Continued) 9.

Safes, vaults, and locked warehouses contribute to the safeguarding of company assets. Cash registers and time clocks contribute to the safeguarding of company assets and accuracy and reliability of the accounting records, and electronic burglary systems and sensors help to safeguard assets.

10.

(a) Independent internal verification involves the review of data prepared by employees. (b) Maximum benefit is obtained from independent internal verification when: (1) The verification is made periodically or on a surprise basis. (2) The verification is done by an employee who is independent of the personnel responsible for the information. (3) Discrepancies and exceptions are reported to a management level that can take appropriate corrective action.

11.

(a) The concept of reasonable assurance rests on the premise that the costs of establishing control procedures should not exceed their expected benefit. (b) The human element is an important factor in a system of internal control. A good system can become ineffective through employee fatigue, carelessness, or indifference. Moreover, internal control may become ineffective as a result of collusion.

12.

Cash should be reported at $22,850 ($8,000 + $850 + $14,000).

13.

Daily cash counts pertain primarily to the principles of segregation of duties, documentation procedures, and independent internal verification. Daily cash counts also involve the establishment of responsibility for performing the counts.

14.

Cash registers are readily visible to the customer. Thus, they prevent the sales clerk from ringing up a lower amount and pocketing the difference. In addition, the customer receives an itemized receipt, and the cash register tape is locked into the register for further verification, providing documentation and enabling independent internal verification.

15.

Two mail clerks contribute to a more accurate listing of mail receipts and to the endorsement of all checks “For Deposit Only.” In addition, two clerks reduce the likelihood of mail receipts being diverted to personal use because they serve as a check on each other.

16.

Payment by check contributes to effective internal control over cash disbursements. However, effective control is also possible when small payments are made from petty cash.

17.

The procedure and related principle are:

18.

Procedure

Principle

(1) Treasurer signs checks. (2) Checks imprinted by a machine in indelible ink. (3) Comparing check with approved invoice before signing.

* Establishment of responsibility. * Physical controls. * Independent internal verification.

Physical controls apply to cash disbursements when: (a) blank checks are stored in a safe, and access to the safe is restricted to authorized personnel, and (b) a checkwriting machine and indelible ink are used to imprint amounts on checks. Documentation procedures apply when the company uses prenumbered checks and account for them in sequence, and stamps invoices “paid”. .

8-7

Questions Chapter 8 (Continued) 19.

(a)

A voucher system is a network of approvals by authorized individuals acting independently to ensure that all disbursements by check are proper. (b) The internal control principles applicable to a voucher system are: (1) establishment of responsibility, (2) segregation of duties, (3) independent internal verification, and (4) documentation procedures.

20.

Electronic funds transfer is a cash disbursement system that uses wire, telephone, or computers to transfer cash balances from one location to another.

21.

The activities in a petty cash system and the related principles are: (a) (1) Establishing the fund. * Establishment of responsibility for custody of fund. (2) Making payments from the fund. * Documentation procedures because the custodian must use a prenumbered petty cash receipt. (3) Replenishing the fund. * Independent internal verification because the request for replenishment must be approved before the check is written. (b) Journal entries are required for a petty cash fund when it is established and replenished. Entries are also required when the size of the fund is increased or decreased, and when financial statements are prepared.

22.

Yes. A bank contributes significantly to internal control over cash because it: (1) safeguards cash on deposit, (2) minimizes the amount of currency that must be kept on hand, and (3) provides a double record of all bank transactions.

23.

The lack of agreement between the balances may be due to either: (1) Time lags—a check written in July does not clear the bank until August. (2) Errors—a check for $110 is recorded by the depositor at $101.

24.

The four steps are: (1) determine deposits in transit, (2) determine outstanding checks, (3) discover any errors made, and (4) trace bank memoranda.

25.

(a) An NSF check occurs when the checkwriter’s bank balance is less than the amount of the check. (b) In a bank reconciliation, a customer’s NSF check is deducted from the balance per books. (c) An NSF check results in an adjusting entry in the company’s books, as a debit to Accounts Receivable and a credit to Cash.

26.

(a) Yes. Cash equivalents are highly liquid investments that can be converted into a specific amount of cash with maturities of three months or less when purchased. Cash equivalents may be reported with cash in the current assets section of the balance sheet. (b) Cash restricted for a special purpose should be reported as a current or noncurrent asset depending on when the cash is expected to be used.

27.

Apple reports cash and cash equivalents of $14,259 million in its 2013 consolidated balance sheet.

8-8

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 8-1 1. 2. 3. 4.

Financial Pressure Rationalization Financial Pressure Opportunity

BRIEF EXERCISE 8-2 1. 2. 3.

True. True. False. The Sarbanes-Oxley Act requires U.S. corporations to maintain an adequate system of internal control.

BRIEF EXERCISE 8-3 The purposes of internal control are to: 1.

Safeguard a company’s assets from employee theft, robbery, and unauthorized use. An application for Penny Parking is the use of a cash register to safeguard assets.

Enhance the accuracy and reliability of a company’s accounting records by reducing the risk of errors (unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the accounting process. An application for Penny Parking is preparation of a bank reconciliation.

Increase efficiency of operations. An application is assignment of responsibility to specific employees.

Ensure compliance with laws and regulations. An application is use of cash register tapes to document sales and applicable sales taxes.

All of these purposes are important to the success of any business endeavor.

8-9

BRIEF EXERCISE 8-4 1. 2. 3.

Segregation of duties. Independent internal verification. Documentation procedures.

BRIEF EXERCISE 8-5 1. 2. 3. 4. 5.

Physical controls. Human resource controls. Independent internal verification. Segregation of duties. Establishment of responsibility.

BRIEF EXERCISE 8-6 (a) Cash ............................................................... Cash Over and Short .................................... Sales Revenue ........................................

6,820.75 50.75

(b) Cash ............................................................... Cash Over and Short .............................. Sales Revenue ........................................

6,899.82

6,871.50 28.32 6,871.50

BRIEF EXERCISE 8-7 Cash ($1,125.74 – $160.00)................................... Cash Over and Short ............................................ Sales Revenue ..............................................

965.74 15.09 980.83

BRIEF EXERCISE 8-8 1. 2. 3. 4. 5. 8-10

Documentation procedures. Independent internal verification. Physical controls. Establishment of responsibility. Segregation of duties. .

BRIEF EXERCISE 8-9 Mar. 20

Postage Expense.......................................................... Freight-Out.................................................................... Travel Expense ............................................................. Cash Over and Short.................................................... Cash.......................................................................

52 26 10 3 91

BRIEF EXERCISE 8-10 1.

A check provides documentary evidence of the payment of a specified sum of money to a designated payee.

A bank statement provides a double record of a depositor’s bank transactions. It also is used in making periodic independent bank reconciliations.

BRIEF EXERCISE 8-11 1. 2. 3. 4.

Outstanding checks—deducted from cash balance per bank. Bank service charge—deducted from cash balance per books. Collection of note by bank—added to cash balance per books. Deposits in transit—added to cash balance per bank.

BRIEF EXERCISE 8-12 1.

The reconciling items per the books, items (2) and (3) above, will require adjustment on the books of the depositor.

The other reconciling items, deposits in transit and outstanding checks, do not require adjustment by the bank. When these items reach the bank, the bank balance will automatically adjust itself. These items have already been recorded by the depositor so they do not need to make an adjustment.

8-11

BRIEF EXERCISE 8-13 Cash balance per bank ..................................................................... Add: Deposits in transit ................................................................... Less: Outstanding checks ............................................................... Adjusted cash balance per bank ......................................................

$7,420 1,620 9,040 762 $8,278

BRIEF EXERCISE 8-14 Cash balance per books ................................................................... Add: Interest earned......................................................................... Less: Charge for printing company checks ................................... Adjusted cash balance per books ....................................................

$9,500 40 9,540 35 $9,505

BRIEF EXERCISE 8-15 Zhang Company should report Cash in Bank and Payroll Bank account as current assets. 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 FOR DO IT! REVIEW EXERCISES DO IT! 8-1 1.

8-12

Violates the control activity of documentation procedures. Source documents should be promptly forwarded to the accounting department so accounting entries can be made. This control activity helps to ensure timely recording of sales transactions and contributes directly to the accuracy and reliability of the accounting records.

DO IT! 8-1 (Continued) 2.

Violates the control activity of segregation of duties. Different individuals should be responsible for related activities, such as these three related purchasing activities. Many abuses could occur: placing orders with friends and getting kickbacks; performing cursory counts and inspections of delivered goods; approving fictitious invoices for payment.

Violates the control activity of establishment of responsibility. Great Foods would be unable to determine who was responsible for a cash shortage; this lapse could even encourage employee theft.

DO IT! 8-2a All mail receipts should be opened in the presence of two mail clerks. Those mail clerks should immediately stamp each check “For Deposit Only.” The mail clerks should prepare, in duplicate, a list of the checks received each day. The checks and list should be sent on to the cashier’s department each day, and the cashier should deposit the checks daily. The duplicate list should be sent to the treasurer’s department and used to confirm that all receipts were deposited and recorded.

DO IT! 8-2b Aug. 1 31

Petty Cash .................................................... Cash .......................................................

100

Postage Expense ......................................... Supplies ........................................................ Miscellaneous Expense ............................... Cash Over and Short ................................... Cash ($100 – $7) ....................................

31 42 16 4

100

8-13

DO IT! 8-3 Roger should treat the reconciling items as follows: 1. 2. 3. 4.

Outstanding checks: Deduct from balance per bank. A deposit in transit: Add to balance per bank. The bank charged to our account a check written by another company: Add to balance per bank. A debit memorandum for a bank service charge: Deduct from balance per books.

DO IT! 8-4 1. 2. 3. 4.

8-14

True. False. False. True.

SOLUTIONS TO EXERCISES EXERCISE 8-1 1. Establishment of responsibility. The counter clerk is responsible for handling cash. Other employees are responsible for making the pizzas. 2. Segregation of duties. Employees who make the pizzas do not handle cash. 3. Documentation procedures. The counter clerk uses your order invoice (ticket) in registering the sale on the cash register. The cash register produces a tape of all sales. 4. Physical controls. A cash register is used to record the sale. 5. Independent internal verification. The counter clerk, in handling the pizza, compares the size of the pizza with the size indicated on the order. 6. Human resource controls. No visible application possible.

EXERCISE 8-2 (a) Procedure

Weakness

Principle

(b) Recommended Change

Cash is not adequately protected from theft.

Physical controls.

Cash should be stored in a safe until it is deposited in bank.

Inability to establish responsibility for cash with a specific clerk.

Establishment of responsibility.

There should be separate cash drawers and register codes for each clerk.

8-15

EXERCISE 8-16 (Continued) (a) Principle

(b) Recommended Change

Procedure

Weakness

The accountant should not handle cash.

Segregation of duties.

The cashier’s department should make the deposits.

Cash is not independently counted.

Independent internal verification.

A cashier office supervisor should count cash.

Cashiers are not bonded.

Human resource controls.

All cashiers should be bonded.

EXERCISE 8-3 (a)

(b) Recommended Change

Procedure

Weakness

Principle

The bank reconciliation is not independently prepared.

Independent internal verification.

Someone with no other cash responsibilities should prepare the bank reconciliation.

The approval and payment of bills is done by the same individual.

Segregation of duties.

The store manager should approve bills for payment and the treasurer should sign and issue checks.

Checks are not stored in a secure area.

Physical controls.

Checks should be stored in a safe or locked file drawer.

8-16

EXERCISE 8-3 (Continued) (a)

(b) Recommended Change

Procedure

Weakness

Principle

After payment, bills are simply filed in a folder.

Documentation procedures.

Bills should be stamped PAID before being placed in the folder.

Checks are not prenumbered.

Documentation procedures.

Checks should be prenumbered and subsequently accounted for.

EXERCISE 8-4 (a) Weaknesses

(b) Suggested Improvement

Checks are not prenumbered.

Use prenumbered checks.

The purchasing agent signs checks.

Only the treasurer’s department personnel should sign checks.

Unissued checks are stored in unlocked file cabinet.

Unissued checks should be stored in a locked file cabinet with access restricted to authorized personnel.

After payment, the invoice is filed.

The invoice should be stamped PAID.

The purchasing agent records payments in cash disbursements journal.

Only accounting department personnel should record cash disbursements.

8-17

EXERCISE 8-18 (Continued) (a) Weaknesses

(b) Suggested Improvement

The treasurer records the checks in cash disbursements journal.

Same as answer to No. 6 above.

The treasurer reconciles the bank statement.

An internal auditor should reconcile the bank statement.

(b) To:

Treasurer, Danner Company

From:

Accounting Student

I have reviewed your cash disbursements system and suggest that you make the following improvements: 1.

Danner Company should use prenumbered checks. These should be stored in a locked file cabinet or safe with access restricted to authorized personnel.

The purchasing department should approve bills for payment. The treasurer’s department should prepare and sign the checks. The invoices should be stamped paid so that they cannot be paid twice.

Only the accounting department personnel should record cash disbursements.

An internal auditor should reconcile the bank statement.

If you have any questions about implementing these suggestions, please contact me.

8-18

EXERCISE 8-5 Procedure 1. 2. 3. 4. 5.

IC good or weak? Weak Good Weak Good Weak

Related internal control principle Establishment of Responsibility Independent Internal Verification Segregation of Duties Segregation of Duties Documentation Procedures

IC good or weak? Good Weak Weak Good Good

Related internal control principle Human Resource Controls Establishment of Responsibility Segregation of Duties Independent Internal Verification Physical Controls

EXERCISE 8-6 Procedure 1. 2. 3. 4. 5.

EXERCISE 8-7 May 1 June 1

July 1

July 10

Petty Cash ...................................................... Cash ..........................................................

100.00

Delivery Expense ........................................... Postage Expense ........................................... Miscellaneous Expense ................................. Cash Over and Short ..................................... Cash ..........................................................

31.25 39.00 25.00 3.00

Delivery Expense ........................................... Entertainment Expense ................................. Miscellaneous Expense ................................. Cash ..........................................................

21.00 51.00 24.75

Petty Cash ...................................................... Cash ..........................................................

30.00

100.00

98.25

96.75

30.00

8-19

EXERCISE 8-8 Mar. 1 15

Petty Cash................................................................. Cash...................................................................

100

Postage Expense....................................................... Freight-Out................................................................. Miscellaneous Expense ............................................ Travel Expense .......................................................... Cash Over and Short................................................. Cash....................................................................

39 21 11 24 3

Petty Cash.................................................................. Cash....................................................................

100

98 75

EXERCISE 8-9 (a) Cash balance per bank statement .................. Add: Deposits in transit.................................

$3,560.20 530.00 4,090.20 730.00 $3,360.20

Less: Outstanding checks ............................. Adjusted cash balance per bank .................... Cash balance per books.................................. Less: NSF check ............................................. Bank service charge ............................. Adjusted cash balance per books ..................

$3,875.20 $490.00 25.00

(b) Accounts Receivable ....................................... Cash ..........................................................

490.00

Miscellaneous Expense................................... Cash ..........................................................

25.00

8-20

515.00 $3,360.20

490.00 25.00

EXERCISE 8-10 The outstanding checks are as follows: No. 255 260 264

Amount $ 620 890 560 Total $2,070

EXERCISE 8-11 (a)

CRANE VIDEO COMPANY Bank Reconciliation July 31 Cash balance per bank statement .................................... Add: Deposits in transit ..................................................

$7,263 1,300 8,563 591 $7,972

Less: Outstanding checks ............................................... Adjusted cash balance per bank ...................................... Cash balance per books.................................................... Add: Collection of note receivable ($700 plus accrued interest $36, less collection fee $20) ..........................................

$7,284 716 8,000 28 $7,972

Less: Bank service charge............................................... Adjusted cash balance per books ....................................

(b) July 31

Cash ....................................................................... 716 Miscellaneous Expense.................................... 20 Notes Receivable ...................................... Interest Revenue .......................................

700 36

Miscellaneous Expense.................................... Cash ...........................................................

8-21

EXERCISE 8-12 (a)

MINTON COMPANY Bank Reconciliation September 30 Cash balance per bank statement .......................... Add: Deposits in transit.........................................

$16,422 5,450 21,872 2,383 $19,489

Less: Outstanding checks ..................................... Adjusted cash balance per bank ............................ Cash balance per books.......................................... Add: Collection of note receivable ($2,500 + $30) .... $ 2,530 Interest earned .............................................. 45 Less: NSF check ..................................................... Safety deposit box rent ................................ Adjusted cash balance per books .......................... (b) Sept. 30

30 30 30

425 65

Cash ....................................................... Notes Receivable ........................... Interest Revenue............................

2,530

Cash ....................................................... Interest Revenue............................

Accounts Receivable—Richard Nance .. Cash ...............................................

425

Miscellaneous Expense ........................ Cash ...............................................

$17,404 2,575 19,979 490 $19,489 2,500 30 45 425 65

EXERCISE 8-13 (a) Deposits in transit: $15,750 Deposits per books in July ..................................... Less: Deposits per bank in July ............................ $15,600 Deposits in transit, June 30.................. (920) July receipts deposited in July ............................... 14,680 Deposits in transit, July 31...................................... $ 1,070 8-22

EXERCISE 8-13 (Continued) (b) Outstanding checks: Checks per books in July ............................... Less: Checks clearing bank in July .................. $16,400 Outstanding checks, June 30 ................. (680) July checks cleared in July ............................ Outstanding checks, July 31 ..........................

$17,200 15,720 $ 1,480

(c) Deposits in transit: Deposits per bank statement in September .................................................... Add: Deposits in transit, September 30 ...... Total deposits to be accounted for ................ Less: Deposits per books.............................. Deposits in transit, August 31 ........................

$26,700 2,100 28,800 26,400 $ 2,400

(d) Outstanding checks: Checks clearing bank in September .............. Add: Outstanding checks, September 30 ... Total checks to be accounted for .................. Less: Cash disbursements per books .......... Outstanding checks, August 31 .....................

$25,000 2,100 27,100 23,700 $ 3,400

EXERCISE 8-14 (a) Cash and cash equivalents should be reported at $88,500. Cash in bank.................................................... Cash on hand .................................................. Petty cash ........................................................ Highly liquid investments ...............................

$42,000 12,000 500 34,000 $88,500

(b) “Cash in plant expansion fund” should be reported as part of long-term investments (a noncurrent asset). “Receivables from customers” should be reported as accounts receivable in the current assets. “Stock investments” should also be reported in the current assets.

8-23

SOLUTIONS TO PROBLEMS PROBLEM 8-1A

Principles

Application to Cash Disbursements

Establishment of responsibility. Only the treasurer and assistant treasurer are authorized to sign checks. Segregation of duties.

Invoices must be approved by both the purchasing agent and the receiving department supervisor. Payment can only be made by the treasurer or assistant treasurer, and the check signers do not record the cash disbursement transactions.

Documentation procedures.

Checks are prenumbered. Following payment, invoices are stamped PAID.

Physical controls.

Blank checks are kept in a safe in the treasurer’s office. Only the treasurer and assistant treasurer have access to the safe. Checks are imprinted by a machine in indelible ink.

Independent internal verification.

The check signer compares the check with the approved invoice prior to issue. Bank and book balances are reconciled monthly by the assistant chief accountant.

Human resource controls.

All employees who handle or record cash are bonded.

8-24

PROBLEM 8-2A

(a) July

1 15

Aug. 15

16 31

Petty Cash .............................................. Cash ................................................

200.00

Freight-Out ............................................. Postage Expense ................................... Entertainment Expense ......................... Miscellaneous Expense ......................... Cash Over and Short ............................. Cash ................................................

92.00 42.40 46.60 11.20 3.80

Freight-Out ............................................. Charitable Contribution Expense.......... Postage Expense ................................... Miscellaneous Expense ......................... Cash ................................................

82.10 45.00 25.50 39.40

Freight-Out ............................................. Entertainment Expense ......................... Postage Expense ................................... Miscellaneous Expense ......................... Cash Over and Short ...................... Cash ................................................

77.60 43.00 33.00 37.00

Petty Cash .............................................. Cash ................................................

100.00

Postage Expense ................................... Travel Expense....................................... Freight-Out ............................................. Cash Over and Short ............................. Cash ................................................

140.00 95.60 47.10 1.30

200.00

196.00

192.00

3.60 187.00 100.00

284.00

(b) Petty Cash Date July 1 Aug. 16 .

Explanation

Ref. CP CP .

Debit 200 100

Credit

Balance 200 300 8-25

PROBLEM 8-2A (Continued) (c) The internal control features of a petty cash fund include: (1) A custodian is responsible for the fund. (2) A prenumbered petty cash receipt signed by the custodian and the individual receiving payment is required for each payment from the fund. (3) The treasurer’s office examines all payments and stamps supporting documents to indicate they were paid when the fund is replenished. (4) Surprise counts can be made at any time to determine whether the fund is intact.

8-26

PROBLEM 827A (a)

REBER COMPANY Bank Reconciliation May 31, 2017 Cash balance per bank statement ................... Add: Deposit in transit ................................... Bank error—Stiner check......................

$6,404.60 $2,416.15 800.00

Less: Outstanding checks .............................. Adjusted cash balance per bank ..................... Cash balance per books................................... Add: Collection of note receivable ($3,000 note plus $80 interest less $20 fee) ........................................... Less: NSF check .............................................. Error in May 12 deposit ($886.15 – $836.15) ............................ Error in recording check No. 1181 ....... Check printing charge........................... Adjusted cash balance per books ...................

3,216.15 9,620.75 576.25 $9,044.50 $6,781.50 3,060.00 9,841.50

$ 680.00 50.00 27.00* 40.00

797.00 $9,044.50

*$685 – $658 (b) May 31

31 31 31 31

Cash.............................................................. Miscellaneous Expense............................... Notes Receivable ................................. Interest Revenue ..................................

3,060 20

Accounts Receivable—Sue Allison ............ Cash ......................................................

680

Sales Revenue ............................................. Cash ......................................................

Accounts Payable—Lynda Carsen ............. Cash ......................................................

Miscellaneous Expense............................... Cash ......................................................

3,000 80 680 50 27 40 .

8-27

PROBLEM 8-4A (a)

LANGER COMPANY Bank Reconciliation December 31, 2017 Cash balance per bank statement ..................... Add: Deposits in transit ...................................

$20,154.30 1,690.40 21,844.70

Less: Outstanding checks No. 3470................................................ $ 720.10 No. 3474................................................ 1,050.00 No. 3478................................................ 621.30 No. 3481................................................ 807.40 No. 3484................................................ 798.00 No. 3486................................................ 889.50 Adjusted cash balance per bank .......................

4,886.30 $16,958.40

Cash balance per books..................................... Add: Note collected by bank ($5,000 note plus $160 interest less $15 fee) .............................................

$12,485.20 5,145.00 17,630.20

Less: NSF check ................................................ $ 572.80 Error in recording check No. 3485.......... 90.00* Error in 12-21 deposit ($2,954 – $2,945) ................................. 671.80 9.00 Adjusted cash balance per books ..................... $16,958.40 *$540.80 – $450.80 (b) Dec. 31

31 31 31 8-28

Cash .................................................... Miscellaneous Expense ..................... Notes Receivable ....................... Interest Revenue ........................

5,145.00 15.00

Accounts Receivable—L. Rees ........... Cash............................................

572.80

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

90.00

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

9.00

5,000.00 160.00 572.80 90.00 9.00 .

PROBLEM 829A (a)

RODRIGUEZ COMPANY Bank Reconciliation July 31, 2017 Cash balance per bank statement .......................... Add: Deposits in transit (1) ................................... Less: Outstanding checks (2) ................................ Bank error ($255 – $155) .............................. Adjusted cash balance per bank ............................ Cash balance per books.......................................... Add: Collection of note receivable by bank ($4,400 note plus $70 interest) .................... Book error ($320 – $230)..............................

$24,514 10,400 34,914 $ 8,460 100

$21,850 $ 4,470 90

Less: Check printing charge.................................. Adjusted cash balance per books .......................... (1) July receipts per books ....................... July deposits per bank ........................ Less: Deposits in transit, June 30 ...................................... Deposits in transit, July 31 .................. (2) Disbursements per books in July................................................ Less: Book error ................................. Total disbursements to be accounted for .............................. Checks clearing bank in July................................................ Add: Bank error.................................. Less: June 30 outstanding checks .................. Outstanding checks, July 31...............................................

8,560 $26,354

4,560 26,410 56 $26,354 $81,400

$79,000 8,000

71,000 $ 10,400 $77,150 90 77,060

$74,700 $ 100 6,200

6,100

68,600 $ 8,460

8-29

PROBLEM 8-5A (Continued) (b) July 31

31 31

8-30

Cash ............................................................... Notes Receivable................................... Interest Revenue ...................................

4,470

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

Miscellaneous Expense ................................ Cash .......................................................

4,400 70 90 56

PROBLEM 8-6A

Matt has created a situation that leaves many opportunities for undetected theft. Here is a list of some of the deficiencies in internal control. You may find others. 1.

Documentation procedures. The tickets were unnumbered. By numbering the tickets, the students could have been held more accountable for the tickets. See number 3 below.

Physical controls and establishment of responsibility. The tickets were left in an unlocked box on his desk. Instead, Matt should have assigned control of the tickets to one individual, in a locked box which that student alone had control over.

Documentation procedures. No record was kept of which students took tickets to sell or how many they took. In combination with items 1 and 2 above, the student assigned control over the tickets should have kept a record of which tickets were issued to each student for resale. (Note: This problem could have been largely avoided if the tickets had only been sold at the door on the day of the dance.)

Documentation procedures. There was no control over unsold tickets. This deficiency made it possible for students to sell the tickets, keep the cash, and tell Matt that they had disposed of the unsold tickets. Instead, students should have been required to return the unsold tickets to the student maintaining control over tickets, and the cash to Matt. In each case, the students should have been issued a receipt for the cash they turned in and the tickets they returned.

Establishment of responsibility. Inadequate control over the cash box. In effect, it was operated like a petty cash fund, but too many people had the key. Instead, Matt should have had the key and dispersed funds when necessary for purchases.

Documentation procedures. Instead of receipts, students simply wrote notes saying how they used the funds. Instead, it should have been required that they provided a valid receipt.

8-31

PROBLEM 8-6A (Continued) 7.

Segregation of duties. Jeff Kenney counted the funds, made out the deposit slip, and took the funds to the bank. This made it possible for Jeff Kenney to take some of the money and deposit the rest since there was no external check on his work. Matt should have counted the funds, with someone observing him. Then he could have made out the deposit slip and had Jeff Kenney deposit the funds.

Documentation procedures. Matt did not receive a receipt from D. J. Sound. Without a receipt, there is no way to verify how much D. J. Sound was actually paid. For example, it is possible that he was only paid $100 and that Matt took the rest.

Segregation of duties. Sam Copper was collecting tickets and receiving cash for additional tickets sold. Instead, there should have been one person selling tickets at the door and a second person collecting tickets.

8-32

COMPREHENSIVE PROBLEM SOLUTION

(a)

Dec. 7 12 17

19 22

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

3,600

Inventory.................................................... Accounts Payable .............................

12,000

Accounts Receivable ................................ Sales Revenue ...................................

16,000

Cost of Goods Sold .................................. Inventory ............................................

10,000

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

2,200

Accounts Payable ..................................... Cash ($12,000 X .99) .......................... Inventory ............................................

12,000

Cash ($16,000 X .98) ................................. Sales Discounts ........................................ Accounts Receivable ........................

15,680 320

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

2,700

3,600 12,000 16,000 10,000 2,200 11,880 120

16,000 2,700

8-33

COMPREHENSIVE PROBLEM SOLUTION (Continued) (b) & (e) Cash 12/1 Bal. 18,200 12/19 12/7 3,600 12/22 12/26 15,680 12/31 12/31 2,700 12/31 2,200 12/31 Bal. 27,620 Notes Receivable 12/1 Bal. 2,200 12/31 12/31 Bal. – 0 –

General Ledger

2,200 11,880 680

Owner’s Capital 12/1 Bal. 64,400 2,200

Accounts Receivable 12/1 Bal. 7,500 12/7 3,600 12/17 16,000 12/26 16,000 12/31 680 12/31 2,700 12/31 Bal. 1,880 Inventory 12/1 Bal. 16,000 12/17 12/12 12,000 12/22 12/31 Bal. 17,880

10,000 120

Sales Discounts 12/26 320 12/31 Bal. 320 Cost of Goods Sold 12/17 10,000 12/31 Bal. 10,000

400 Salaries and Wages Expense 12/19 2,200 12/31 Bal. 2,200

Equipment 12/1 Bal. 28,000 Accumulated Depreciation— Equipment 12/1 Bal. 3,000 12/31 200 12/31 Bal. 3,200

Sales Revenue 12/17 16,000 12/31 Bal. 16,000

Depreciation Expense 12/31 200 12/31 Bal. 200

Prepaid Insurance 12/1 Bal. 1,600 12/31 12/31 Bal. 1,200

8-34

12/22

Accounts Payable 12,000 12/1 Bal. 6,100 12/12 12,000 12/31 Bal. 6,100

Insurance Expense 12/31 400 12/31 Bal. 400

COMPREHENSIVE PROBLEM SOLUTION (Continued) (c)

FULLERTON COMPANY Bank Reconciliation December 31, 2017 Cash balance per bank statement .......................... Add: Deposits in transit ..........................................

$26,130 2,700 28,830 1,210 $27,620

Less: Outstanding checks ...................................... Adjusted cash balance per bank ............................ Cash balance per books ......................................... Add: Collection of note receivable .........................

26,100 2,200 28,300 680 $27,620

Less: NSF check ...................................................... Adjusted cash balance per books .......................... (d) Dec. 31 Cash .......................................................... Notes Receivable ...............................

2,200

31 Accounts Receivable—L. Bryan .............. Cash....................................................

680

31 Depreciation Expense .............................. Accumulated Depreciation— Equipment .......................................

200

31 Insurance Expense ................................... Prepaid Insurance..............................

400

2,200 680

200 400

8-35

COMPREHENSIVE PROBLEM SOLUTION (Continued) (f)

FULLERTON COMPANY Adjusted Trial Balance December 31, 2017 Cash ............................................................. Accounts Receivable .................................. Inventory ...................................................... Prepaid Insurance ....................................... Equipment.................................................... Accumulated Depreciation—Equipment ... Accounts Payable ....................................... Owner’s Capital ........................................... Sales Revenue ............................................. Sales Discounts .......................................... Cost of Goods Sold ..................................... Depreciation Expense ................................. Salaries and Wages Expense ..................... Insurance Expense......................................

(g)

CR.

$ 3,200 6,100 64,400 16,000 320 10,000 200 2,200 400 $89,700

$89,700

FULLERTON COMPANY Income Statement For the Month Ending December 31, 2017 Sales revenue ............................................. Less: Sales discounts .............................. Net sales ..................................................... Cost of goods sold..................................... Gross profit ................................................ Operating expenses Salaries and wages expense ............. Insurance expense ............................. Depreciation expense......................... Net income..................................................

8-36

DR. $27,620 1,880 17,880 1,200 28,000

$16,000 320 15,680 10,000 5,680 $2,200 400 200

2,800 $ 2,880

COMPREHENSIVE PROBLEM SOLUTION (Continued) (g)

FULLERTON COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash ....................................................... Accounts receivable.............................. Inventory ................................................ Prepaid insurance ................................. Total current assets .......................... Property, plant, and equipment Equipment.............................................. Less: Accumulated depreciation—Equipment .......... Total assets ...................................................

$27,620 1,880 17,880 1,200 $48,580 28,000 3,200

24,800 $73,380

Liabilities and Owner’s Equity

Current liabilities Accounts payable..................................

$ 6,100

Owner’s equity Owner’s capital ($64,400 + $2,880) ....... Total liabilities and owner’s equity ..............

67,280 $73,380

8-37

BYP 8-1

FINANCIAL REPORTING PROBLEM

(a) In the Report, it states that “the financial statements referred to above [including the statement of cash flows] present fairly, in all material respects, the financial position of Apple Inc. as of September 28, 2013 and September 29, 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 28, 2013, in conformity with accounting principles generally accepted in the United States of America.” (b) Cash and cash equivalents are reported at $14,259 million for 2013 and $10,746 million for 2012. (c) Cash equivalents are defined as “all highly liquid investments with maturities of three months or less at the date of purchase.” (d) The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the Company’s assessment, management has concluded that its internal control over financial reporting was effective as of September 28, 2013 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the Company’s internal control over financial reporting, which appears in Part II, Item 8 on Form 10-K.

8-38

BYP 8-2

COMPARATIVE ANALYSIS PROBLEM

PepsiCo (a) (1) $9,375 million

Coca-Cola $10,414 million

(2) $3,078 million increase

$1,972 million increase

(3) $9,688 million

$10,542 million

(b) Both companies generated over 8.9 billion dollars from operating activities. This cash is used for investing and financing activities. Both companies use the cash provided by operating activities to purchase land, buildings and equipment, to make acquisitions of other companies, to pay off debt, to buy back their stock, and to pay dividends. Both companies have large cash balances at the end of 2013 and are capable of generating huge amounts of cash.

8-39

BYP 8-3

COMPARATIVE ANALYSIS PROBLEM

Amazon

Wal-Mart

(a) (1) $8,658 million

$7,281 million

(2) $574 million increase

$500 million decrease

(3) $5,475 million

$23,257 million

(b) Both companies generated over 5.4 billion dollars from operating activities. Wal-Mart generated an amazing 23 billion dollars from operating activities. This cash is used for investing and financing activities. Both companies use the cash provided by operating activities to purchase land, buildings and equipment, to make acquisitions of other companies, and to repay debt. Both companies have large cash balances at the end of 2013 and are capable of generating huge amounts of cash.

8-40

BYP 8-4

REAL-WORLD FOCUS

(a)

The system of internal control should be evaluated by: (1) responsible individuals from a particular university unit, (2) internal auditors, and (3) university management.

(b)

Reconciliations ensure accuracy and completeness of transactions. In particular, a reconciliation ensures that all cash received is: (1) properly deposited in university bank accounts and (2) recorded accurately in the financial records. The reconciliation should be reviewed by the department manager.

(c)

Some examples given of physical controls are a safe, vault, locked doors, campus police, computer passwords, and card key systems.

(d)

Two ways to accomplish inventory counts are: (1) annual complete inventory or (2) cycle counting programs.

8-41

BYP 8-5

DECISION MAKING ACROSS THE ORGANIZATION

(a) The weaknesses in internal accounting control over collections are: (1) Each usher could take cash from the collection plates enroute to the basement office. (2) The head usher counts the cash alone. (3) The head usher’s notation of the count is left in the safe. (4) The financial secretary counts the cash alone. (5) The financial secretary withholds $150 to $200 per week. (6) The cash is vulnerable to robbery when kept in the safe overnight. (7) Checks are made payable to “cash.” (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. The transfer should be witnessed by a member of the finance committee. (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. (4) At the end of each month, a member of the finance committee should prepare the bank reconciliation. (c) The policies that should be changed are: (1) Members should make checks payable to the church. (2) A petty cash fund should be established for the financial secretary to be used for weekly cash expenditures and requests for replenishment of the fund should be sent to the chairperson of the finance committee for approval. (3) The financial secretary should be bonded. (4) The financial secretary should be required to take an annual vacation.

8-42

BYP 8-6

COMMUNICATION ACTIVITY

Mr. Danny Peak Pritchard Company Main Street, USA Dear Mr. Peak: During our audit of your financial statements, we reviewed the internal controls over cash receipts. The weaknesses we discovered and our suggested improvements are listed below. Weaknesses

Suggested Improvement

A list of checks received is not prepared by the person who opens the mail.

This list should be prepared so that it can later be compared with the daily cash summary. While this procedure does not assure that all checks will be listed, it does allow the company to verify that all checks on the list did get deposited.

Mail is opened by only one person.

When this occurs, there is no assurance that all incoming checks are forwarded to the cashier’s department.

The cashier is allowed to open the mail.

Under this arrangement, it is possible for the cashier to open the mail, prepare the cash summary and make the bank deposit. This involves no segregation of duties as the cashier controls the cash from the time it is received until it is deposited in the bank.

The accounts receivable clerk is allowed to open the mail.

Again, there is poor segregation of duties. In this case, the clerk could writeoff a customer’s account as uncollectible and then misappropriate the collection when it’s received.

8-43

BYP 8-6 (Continued)

Weaknesses

Suggested Improvement

Mail receipts are deposited weekly.

This makes the receipts vulnerable to robbery and to misappropriation. The receipts should be deposited intact daily.

We would be pleased to discuss the weaknesses and our recommended improvements with you, at your convenience. Yours sincerely,

Eaton, Quayle, and Hale Certified Public Accountants

8-44

BYP 8-7

ETHICS CASE

(a) You, as assistant controller, may suffer some negative effects from Lisa Infante, the financial vice-president, if you don’t follow her instructions. Maybe the insurance company will react the way Lisa suggests, but probably not. If you comply and falsify the June 30 cash balance by holding the cash receipts book open for one day, you will suffer personally by sacrificing your integrity. If you are found out, you could be prosecuted for preparing a fraudulent report. The insurance company, as the lender and creditor, is deceived. (b) Holding the cash receipts book open in order to overstate the cash balance is a fraudulent, deceitful, unethical action. The financial vicepresident should not encourage such behavior and a controller should not follow such instructions. (c) (1) You can follow the vice-president’s instructions and misstate the cash balance—wrong! (2) You can advise the vice-president against holding the books open, prepare an accurate report, and have the vice-president or the president discuss the situation with the insurance company. It can be explained that the low cash balance was only temporary. Honesty is still the best policy.

8-45

BYP 8-8

ALL ABOUT YOU

Answers are provided to students on the government website as they complete the ID Theft Faceoff quiz.

8-46

BYP 8-9

FASB CODIFICATION ACTIVITY

(a) Consistent with common usage, cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a bank’s granting of loan by crediting the proceeds to a customer’s demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made. Codification reference (305-10-20). (b) Cash equivalents are short-term, highly liquid investments that have both of the following characteristics: a. Readily convertible to known amounts of cash b. So near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under that definition. Original maturity means original maturity to the entity holding the investment. For example, both a three-month U.S. Treasury bill and a three-year Treasury note purchased three months from maturity qualify as cash equivalents. However, a Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three months. Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an entity with banking operations). Codification reference (305-10-20).

8-47

BYP 8-9 (Continued) (c) Cash and cash items. Separate disclosure shall be made of the cash and cash items which are restricted as to withdrawal or usage. The provisions of any restrictions shall be described in a note to the financial statements. Restrictions may include legally restricted deposits held as compensating balances against short-term borrowing arrangements, contracts entered into with others, or company statements of intention with regard to particular deposits; however, time deposits and shortterm certificates of deposit are not generally included in legally restricted deposits. In cases where compensating balance arrangements exist but are not agreements which legally restrict the use of cash amounts shown on the balance sheet, describe in the notes to the financial statements these arrangements and the amount involved, if determinable, for the most recent audited balance sheet required and for any subsequent unaudited balance sheet required in the notes to the financial statement. Compensating balances that are maintained under an agreement to assure future credit availability shall be disclosed in the notes to the financial statements along with the amount and terms of such agreement.

8-48

IFRS EXERCISES

IFRS8-1 Companies listed on U.S. stock exchanges must comply with the SarbanesOxley Act. This compliance gives investors greater assurance that these companies have adequate internal controls in place. In addition, the auditors for these publicly traded companies must attest to the effectiveness of such controls. This process can result in discovery of weaknesses that companies had previously overlooked. After correcting these weaknesses to satisfy auditors, investors may find such companies to be less risky and therefore better investments. In order to comply with SOX, a company must document its internal control procedures and have an auditor attest to their effectiveness. Doing so costs money. A recent study indicated that audit fees can double in the first year of a company’s compliance. Since this cost is incurred only if a company lists on U.S. exchanges, many investors see SOX compliance as a costly undertaking.

8-49

IFRS8-3

INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a)

Zetar’s Audit Committee reviews management’s reports on internal control.

(b)

The key control procedures include 1.

2. 3. 4. 5. 6.

A comprehensive system of financial budgeting, forecasting and then reporting and reviewing actual monthly results for the current year against these expectations and against the results of prior years. A system of operational and financial Key Performance Indicators (“KPIs”), which are reviewed on a weekly and monthly basis. Procedures for appraisal, review and authorization of capital expenditures. Properly authorized treasury procedures and banking arrangements. Regular review of materials and services supply commitments. Regular review of tax, insurance, and health and safety matters.

(c)

No, Zetar’s Board does not consider it appropriate to establish an internal audit department.

(d)

Bank overdrafts are reported as the last item in the current liabilities section of its consolidated balance sheet.

8-50

CHAPTER 9 Accounting for Receivables ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Questions

Explain how companies recognize accounts receivable.

1, 2, 3

1, 2

Describe how companies value accounts receivable and record their disposition.

4, 5, 6, 7, 8, 9, 10, 11

3, 4, 5, 6, 7, 8

3, 4, 5, 6, 7, 8, 1A, 2A, 3A, 9 4A, 5A, 6A, 7A

Explain how companies recognize notes receivable.

12, 13, 14, 15, 16

9, 10, 11

10, 11, 12, 13

6A, 7A

Describe how companies value notes receivable, record their disposition, and present and analyze receivables.

17, 18, 19, 20

3, 12

12, 13, 14

1A, 6A, 7A

Do It!

Exercises

A Problems

Learning Objectives

1A, 6A, 7A

9-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description

9-2

Difficulty Time Allotted (min.) Level

Prepare journal entries related to bad debt expense.

Simple

15–20

Compute bad debt amounts.

Moderate

20–25

Journalize entries to record transactions related to bad debts.

Moderate

20–30

Journalize transactions related to bad debts.

Moderate

20–30

Journalize entries to record transactions related to bad debts.

Moderate

20–30

Prepare entries for various notes receivable transactions.

Moderate

40–50

Prepare entries for various receivable transactions.

Complex

50–60

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 9 ACCOUNTING FOR RECEIVABLES Number

Difficulty

Time (min.)

BE1

Simple

1–2

BE2

Simple

5–7

BE3

2, 4

Simple

4–6

BE4

Simple

4–6

BE5

Simple

4–6

BE6

Simple

2–4

BE7

Simple

4–6

BE8

Simple

6–8

BE9

Simple

8–10

BE10

Moderate

8–10

BE11

Simple

2–4

BE12

Simple

4–6

DI1

Simple

2–4

DI2

Simple

4–6

DI3

Simple

6–8

DI4

Simple

4–6

EX1

Simple

8–10

EX2

Simple

8–10

EX3

Simple

8–10

EX4

Simple

6–8

EX5

Simple

6–8

EX6

Simple

6–8

EX7

Simple

4–6

EX8

Simple

6–8

EX9

Simple

6–8

EX10

Simple

8–10

EX11

Simple

6–8

EX12

3, 4

Moderate

10–12

EX13

3, 4

Simple

8–10

EX14

Simple

8–10

9-3

ACCOUNTING FOR RECEIVABLES (Continued) Number

Difficulty

Time (min.)

P1A

1, 2, 4

Simple

15–20

P2A

Moderate

20–25

P3A

Moderate

20–30

P4A

Moderate

20–30

P5A

Moderate

20–30

P6A

1–4

Moderate

40–50

P7A

1–4

Complex

50–60

BYP1

Moderate

20–25

BYP2

AN, E

Simple

10–15

BYP3

AN, E

Simple

10–15

BYP4

Simple

10–15

BYP5

Moderate

20–30

BYP6

Simple

10–15

BYP7

Simple

10–15

BYP8

—

Moderate

10–15

9-10

Learning Objective

Knowledge

Comprehension

Application

Analysis

Explain how companies recognize accounts receivable.

Q9-2

Q9-1

BE9-1 Q9-3 BE9-2 DI9-1 E9-1

Describe how companies value accounts receivable and record their disposition.

Q9-8 Q9-9

Q9-4 Q9-5 Q9-6 Q9-10

Q9-11 BE9-4 BE9-5 BE9-6 BE9-8 DI9-2

E9-5 Q9-7 E9-7 BE9-3 E9-6 BE9-7 E9-8 E9-3 E9-9 E9-4 P9-7A

Explain how companies recognize notes receivable.

Q9-13

Q9-12 Q9-16

Q9-14 Q9-15 BE9-9 BE9-10 BE9-11 DI9-3

E9-12 E9-10 E9-13 E9-11 P9-7A P9-6A

Describe how companies value notes receivable, record their disposition, and present and analyze receivables.

Q9-18

Q9-17

Q9-19 Q9-20 BE9-12 DI9-3

Broadening Your Perspective

Synthesis

Evaluation

E9-2 P9-1A P9-6A P9-7A P9-7B

E9-12 E9-13 E9-14 P9-7A

P9-1A P9-2A P9-3A P9-4A P9-5A P9-6A

BE9-3 DI9-4 P9-1A P9-6A

Real-World Focus Decision Making Across the Organization FASB Codification Comparative Analysis

All About You Financial Reporting Comparative Analysis Ethics Case Communication

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

9-5

ANSWERS TO QUESTIONS 1.

Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services. Notes receivable represent claims that are evidenced by formal instruments of credit.

Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable.

Accounts Receivable ............................................................................................. Interest Revenue............................................................................................

40 40

The essential features of the allowance method of accounting for bad debts are: (1) Uncollectible accounts receivable are estimated and matched against revenue in the same accounting period in which the revenue occurred. (2) 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. (3) Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off.

Roger Holloway should realize that the decrease in cash realizable value occurs when estimated uncollectibles are recognized in an adjusting entry. The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, cash realizable value does not change.

The two bases of estimating uncollectibles are: (1) percentage-of-sales and (2) percentage-ofreceivables. The percentage-of-sales basis establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This method emphasizes the matching of expenses with revenues. Under the percentage-of-receivables basis, the balance in the allowance for doubtful accounts is derived from an analysis of individual customer accounts. This method emphasizes cash realizable value.

The adjusting entry under the percentage-of-sales basis is: Bad Debt Expense ............................................................................... Allowance for Doubtful Accounts ..................................................

4,100

The adjusting entry under the percentage-of-receivables basis is: Bad Debt Expense ............................................................................... Allowance for Doubtful Accounts ($5,800 – $3,000) .....................

2,800

4,100

2,800

Under the direct write-off method, bad debt losses are not estimated and no allowance account is used. When an account is determined to be uncollectible, the loss is debited to Bad Debt Expense. The direct write-off method makes no attempt to match bad debt expense to sales revenues or to show the cash realizable value of the receivables in the balance sheet.

From its own credit cards, the Freida Company may realize financing charges from customers who do not pay the balance due within a specified grace period. National credit cards offer the following advantages: (1) The credit card issuer makes the credit investigation of the customer. (2) The issuer maintains individual customer accounts.

9-6

Questions Chapter 9 (Continued) (3) The issuer undertakes the collection process and absorbs any losses from uncollectible accounts. (4) The retailer receives cash more quickly from the credit card issuer than it would from individual customers. 10.

The reasons companies are selling their receivables are: (1) Receivables may be sold because they may be the only reasonable source of cash. (2) Billing and collection are often time-consuming and costly. It is often easier for a retailer to sell the receivables to another party with expertise in billing and collection matters.

11.

Cash ....................................................................................................... Service Charge Expense (3% X $800,000)............................................. Accounts Receivable ......................................................................

776,000 24,000 800,000

12.

A promissory note gives the holder a stronger legal claim than one on an accounts receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. The holder of a promissory note also can earn interest.

13.

The maturity date of a promissory note may be stated in one of three ways: (1) on demand, (2) on a stated date, and (3) at the end of a stated period of time.

14.

The maturity dates are: (a) March 13 of the next year, (b) August 4, (c) July 20, and (d) August 30.

15.

The missing amounts are: (a) $15,000, (b) $9,000, (c) 6%, and (d) four months.

16.

If a financial institution uses 360 days rather than 365 days, it will receive more interest revenue. The reason is that the denominator is smaller, which makes the fraction larger and, therefore, the interest revenue larger.

17.

When Jana Company has dishonored a note, the ledger can set up a receivable equal to the face amount of the note plus the interest due. It will then try to collect the balance due, or as much as possible. If there is no hope of collection it will write-off the receivable.

18.

Each of the major types of receivables should be identified in the balance sheet or in the notes to the financial statements. Both the gross amount of receivables and the allowance for doubtful accounts should be reported. If collectible within a year or the operating cycle, whichever is longer, these receivables are reported as current assets immediately below short-term investments.

19.

Net credit sales for the period are 8.14 X $400,000 = $3,256,000.

20.

Apple’s 2013 allowance for doubtful accounts of $99 million represents less than 1% of its gross receivables of $13,201 million.

9-7

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9-1 (a) Accounts receivable. (b) Notes receivable. (c) Other receivables. BRIEF EXERCISE 9-2 (a) Accounts Receivable ........................................... Sales Revenue ..............................................

17,200

(b) Sales Returns and Allowances ........................... Accounts Receivable ...................................

3,800

(c) Cash ($13,400 – $268) .......................................... Sales Discounts ($13,400 X 2%).......................... Accounts Receivable ($17,200 – $3,800) .......

13,132 268

17,200 3,800

13,400

BRIEF EXERCISE 9-3 (a) Bad Debt Expense ............................................... Allowance for Doubtful Accounts ...............

31,000 31,000

(b) Current assets Cash .............................................................. Accounts receivable .................................... $600,000 Less: Allowance for doubtful Accounts ........................................... 31,000 Inventory ....................................................... Prepaid insurance ........................................ Total current assets .................................

9-8

$ 90,000 569,000 130,000 7,500 $796,500

BRIEF EXERCISE 9-4 (a) Allowance for Doubtful Accounts ............................ Accounts Receivable—Gray ............................. (b)

(1) Before Write-Off Accounts receivable Allowance for doubtful accounts Cash realizable value

6,200 6,200

(2) After Write-Off

$700,000

$693,800

54,000 $646,000

47,800 $646,000

BRIEF EXERCISE 9-5 Accounts Receivable—Gray............................................. Allowance for Doubtful Accounts ............................

6,200

Cash ................................................................................... Accounts Receivable—Gray .....................................

6,200

6,200 6,200

BRIEF EXERCISE 9-6 Bad Debt Expense [($800,000 – $40,000) X 2%] .............. Allowance for Doubtful Accounts ............................

15,200 15,200

BRIEF EXERCISE 9-7 (a) Bad Debt Expense [($420,000 X 1%) – $1,500]............ Allowance for Doubtful Accounts .....................

2,700 2,700

(b) Bad Debt Expense [($420,000 X 1%) + $800] = $5,000 BRIEF EXERCISE 9-8 (a) Cash ($175 – $7)......................................................... Service Charge Expense ($175 X 4%) ...................... Sales Revenue....................................................

168 7

(b) Cash ($60,000 – $1,800)............................................. Service Charge Expense ($60,000 X 3%) ................. Accounts Receivable .........................................

58,200 1,800

175

60,000 .

9-9

BRIEF EXERCISE 9-9 Interest (a) $800 (b) $1,120 (c) $200

Maturity Date August 9 October 12 July 11

BRIEF EXERCISE 9-10 Maturity Date

Annual Interest Rate

Total Interest

6% 8% 10%

$6,000 $ 600 $6,000

(a) May 31 (b) August 1 (c) September 7

BRIEF EXERCISE 9-11 Jan. 10 Feb. 9

Accounts Receivable ...................................... Sales Revenue .........................................

15,600

Notes Receivable............................................. Accounts Receivable...............................

15,600

15,600 15,600

BRIEF EXERCISE 9-12 Accounts Receivable Turnover Ratio: $20B $20B = = 7.3 times $2.75B ($2.7B + $2.8B) ÷ 2 Average Collection Period for Accounts Receivable: 365 days = 50 days 7.3 times

9-10

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 9-1 March 1

March 6

Accounts Receivable—Amelia ......................... 28,000 Sales Revenue ....................................... (To record sales on account.)

28,000

Sales Returns and Allowances ..................... Accounts Receivable—Amelia .............. (To record merchandise returned.)

1,000

March 11 Cash ($27,000 – $270) ........................................ 26,730 Sales Discounts ($27,000  .01) .................... 270 Accounts Receivable—Amelia .............. (To record collection of accounts receivable.)

27,000

DO IT! 9-2 The following entry should be prepared to increase the balance in the Allowance for Doubtful Accounts from $6,100 credit to $15,500 credit (5% X $310,000): Bad Debt Expense ..................................................... Allowance for Doubtful Accounts ................... (To record estimate of uncollectible accounts)

9,400 9,400

9-11

DO IT! 9-3 (a)

The maturity date is September 30. When the life of a note is expressed in terms of months, you find the date it matures by counting the months from the date of issue. When a note is drawn on the last day of a month, it matures on the last day of a subsequent month.

(b) The interest to be received at maturity is $186: Face X Rate X Time = Interest $6,200 X 9% X 4/12 = $186 The entry recorded by Gentry Wholesalers at the maturity date is: Cash .................................................................... 6,386 Notes Receivable ......................................... 6,200 Interest Revenue .......................................... 186 (To record collection of Benton note) DO IT! 9-4 (a) Net credit sales

Average net

accounts receivable $1,300,000

$101,000 + $107,000

Accounts receivable turnover

12.5 times

2 (b)

9-12

Days in year

365

Accounts receivable = turnover 12.5 times

Average collection period in days 29.2 days

SOLUTIONS TO EXERCISES EXERCISE 9-1 March 1 3

15 31

Accounts Receivable—Dodson Company.. Sales Revenue ......................................

5,000

Sales Returns and Allowances .................... Accounts Receivable—Dodson Company .............................................

500

Cash ($4,500  $90) ...................................... Sales Discounts (2%  $4,500)..................... Accounts Receivable—Dodson Company .............................................

4,410 90

Accounts Receivable ................................... Sales Revenue ......................................

400

Accounts Receivable ($4,000  1.5  1/2).... Interest Revenue ...................................

Accounts Receivable—Pryor....................... Sales Revenue ......................................

7,000

Cash ($7,000 – $140) .................................... Sales Discounts (2% X $7,000) .................... Accounts Receivable—Pryor ...............

6,860 140

Accounts Receivable—Farley...................... Sales Revenue ......................................

9,000

Cash .............................................................. Accounts Receivable—Farley ..............

5,000

Accounts Receivable—Farley...................... Interest Revenue [1% X ($9,000 – $5,000)] ....................

5,000

500

4,500 400 3

EXERCISE 9-2 (a) Jan. 6 16

(b) Jan. 10 Feb. 12 Mar. 10

7,000

9,000 5,000

9-13

EXERCISE 9-3 (a)

Dec. 31

(b) (1) Dec. 31

(2) Dec. 31

Bad Debt Expense .............................. Accounts Receivable—L. Dole....... Bad Debt Expense [($840,000 – $20,000) X 1%] ............ Allowance for Doubtful Accounts .................................. Bad Debt Expense .............................. Allowance for Doubtful Accounts [($110,000 X 10%) – $2,100] ..... Bad Debt Expense [($840,000 – $20,000) X .75%] ......... Allowance for Doubtful Accounts .................................. Bad Debt Expense .............................. Allowance for Doubtful Accounts [($110,000 X 6%) + $200] .........

1,400 1,400

8,200 8,200 8,900 8,900

6,150 6,150 6,800 6,800

EXERCISE 9-4 (a) Accounts Receivable 1–30 days 31–60 days 61–90 days Over 90 days

(b) Mar. 31

9-14

Amount

Estimated Uncollectible

$60,000 17,600 8,500 7,000

2.0 5.0 20.0 50.0

$1,200 880 1,700 3,500 $7,280

Bad Debt Expense ...................................... Allowance for Doubtful Accounts ($7,280 – $1,200) ..............................

6,080 6,080

EXERCISE 9-5 Allowance for Doubtful Accounts ................................... Accounts Receivable................................................

11,000

Accounts Receivable ....................................................... Allowance for Doubtful Accounts ...........................

1,800

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

1,800

Bad Debt Expense............................................................ Allowance for Doubtful Accounts [$19,000 – ($15,000 – $11,000 + $1,800)]..............

13,200

11,000 1,800 1,800

13,200

EXERCISE 9-6 December 31, 2017 Bad Debt Expense (2% X $450,000) ................................ Allowance for Doubtful Accounts ...........................

9,000

May 11, 2018 Allowance for Doubtful Accounts ................................... Accounts Receivable—Shoemaker .........................

1,100

June 12, 2018 Accounts Receivable—Shoemaker................................. Allowance for Doubtful Accounts ...........................

1,100

9,000

1,100

Cash .................................................................................. Accounts Receivable—Shoemaker .........................

1,100 1,100

EXERCISE 9-7 (a) Mar. 3

(b) May 10

Cash ($650,000 – $19,500)....................... Service Charge Expense (3% X $650,000).................................... Accounts Receivable .......................

630,500

Cash ($3,000 – $120) ............................... Service Charge Expense (4% X $3,000) ....................................... Sales Revenue .................................

2,880

19,500 650,000

120 3,000

9-15

EXERCISE 9-8 (a) Apr. 2 May 3

June 1

(b) July 4

Accounts Receivable—J. Elston ............ Sales Revenue..................................

1,500

Cash.......................................................... Accounts Receivable— J. Elston ........................................

500

Accounts Receivable—J. Elston ............ Interest Revenue [($1,500 – $500) X 1%] ..................

Cash.......................................................... Service Charge Expense (2% X $200)........................................... Sales Revenue..................................

196

Accounts Receivable............................... Sales Revenue..................................

18,000

Cash ($4,500 – $90).................................. Service Charge Expense ($4,500 X 2%)........................................ Sales Revenue..................................

4,410

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

10,000

Accounts Receivable ($8,000 X 1.5%) .... Interest Revenue ..............................

120

1,500

500

4 200

EXERCISE 9-9 Jan. 15 20

Feb. 10

9-16

18,000

90 4,500

10,000 120

EXERCISE 9-10 (a) Nov. 1 Dec. 11 16 31

2017 Notes Receivable ............................................ Cash .........................................................

30,000 30,000

Notes Receivable ............................................ Sales Revenue .........................................

6,750

Notes Receivable ............................................ Accounts Receivable—Fernetti..............

4,000

Interest Receivable ......................................... Interest Revenue* ....................................

545

6,750 4,000 545

*Calculation of interest revenue: Lopez’s note: $30,000 X 10% X 2/12 = $500 Kremer’s note: 6,750 X 8% X 20/360 = 30 Fernetti’s note: 4,000 X 9% X 15/360 = 15 Total accrued interest $545 (b) Nov. 1

2018 Cash................................................................. Interest Receivable.................................. Interest Revenue* .................................... Notes Receivable..................................... *($30,000 X 10% X 10/12)

33,000 500 2,500 30,000

EXERCISE 9-11 May 1

Dec. 31

2017 Notes Receivable ............................................. Accounts Receivable— Chamber................................................

9,000 9,000

Interest Receivable .......................................... Interest Revenue ($9,000 X 10% X 8/12) ...........................

600

Interest Revenue .............................................. Income Summary .....................................

600

600 600

9-17

EXERCISE 9-11 (Continued)

May 1

2018 Cash ................................................................. Notes Receivable..................................... Interest Receivable .................................. Interest Revenue ($9,000 X 10% X 4/12) ..........................

9,900 9,000 600 300

EXERCISE 9-12 4/1/17 7/1/17 12/31/17

4/1/18

9-18

Notes Receivable ............................................ Accounts Receivable—Goodwin ............

30,000

Notes Receivable ............................................ Cash .........................................................

25,000

Interest Receivable ......................................... Interest Revenue ($30,000 X 12% X 9/12) ........................

2,700

Interest Receivable ......................................... Interest Revenue ($25,000 X 10% X 6/12) ........................

1,250

Cash ................................................................. Notes Receivable..................................... Interest Receivable.................................. Interest Revenue ($30,000 X 12% X 3/12 = $900) ............

33,600

Accounts Receivable ...................................... Notes Receivable..................................... Interest Receivable.................................. Interest Revenue ($25,000 X 10% X 3/12 = $625) ............

26,875

30,000 25,000

2,700

1,250 30,000 2,700 900 25,000 1,250 625

EXERCISE 9-13 (a)

May 2

(b) Nov. 2

Notes Receivable....................................... Cash ....................................................

9,000 9,000

Accounts Receivable—Chang Inc............................................................ Notes Receivable................................ Interest Revenue ($9,000 X 9% X 1/2) .......................... (To record the dishonor of Chang Inc. note with expectation of collection)

9,405 9,000 405

Allowance for Doubtful Accounts ............. Notes Receivable................................ (To record the dishonor of Chang Inc. note with no expectation of collection)

9,000 9,000

EXERCISE 9-14 (a) Beginning accounts receivable ....................................... Net credit sales ................................................................. Cash collections ............................................................... Accounts written off ......................................................... Ending accounts receivable ............................................

$ 100,000 1,000,000 (920,000) (30,000) $ 150,000

(b) $1,000,000/[($100,000 + $150,000)/2] = 8 (c) 365/8 = 45.6 days

9-19

SOLUTIONS TO PROBLEMS PROBLEM 9-1A

(a) 1. 2. 3. 4. 5.

Accounts Receivable ................................ Sales Revenue ...................................

3,700,000

Sales Returns and Allowances ................ Accounts Receivable ........................

50,000

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

2,810,000

Allowance for Doubtful Accounts ............ Accounts Receivable ........................

90,000

Accounts Receivable ................................ Allowance for Doubtful Accounts.......

29,000

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

29,000

3,700,000 50,000 2,810,000 90,000 29,000 29,000

(b) Bal. (1) (5) Bal.

9-20

Accounts Receivable 960,000 (2) 50,000 3,700,000 (3) 2,810,000 29,000 (4) 90,000 (5) 29,000 1,710,000

Allowance for Doubtful Accounts (4) 90,000 Bal. 80,000 (5) 29,000

Bal.

19,000

PROBLEM 9-1A (Continued) (c) Balance before adjustment [see (b)] .................................... Balance needed ..................................................................... Adjustment required..............................................................

$ 19,000 115,000 $ 96,000

The journal entry would therefore be as follows: Bad Debt Expense........................................... Allowance for Doubtful Accounts .......... (d)

96,000 96,000

$3,700,000 – $50,000 $3,650,000 = = 2.95 times ($880,000+$1,595,000) ÷ 2 $1,237,500

9-21

PROBLEM 9-2A

(a) $33,000. (b) $50,000 ($2,500,000 X 2%). (c) $49,500 [($875,000 X 6%) – $3,000]. (d) $55,500 [($875,000 X 6%) + $3,000]. (e) The weakness of the direct write-off method is two-fold. First, it does not match expenses with revenues. Second, the accounts receivable are not stated at cash realizable value at the balance sheet date.

9-2

PROBLEM 923A (a) Dec. 31

Bad Debt Expense.................................... Allowance for Doubtful Accounts ($38,610 – $12,000) .......................

26,610 26,610

(a) & (b) Bad Debt Expense Date 2017 Dec. 31

Explanation

Ref.

Adjusting

Mar. 31

May 31 31

Credit

26,610

Allowance for Doubtful Accounts Date Explanation 2017 Dec. 31 Balance 31 Adjusting 2018 Mar. 31 May 31 (b)

Debit

Ref.

Debit

26,610

Credit

Balance

26,610

12,000 38,610

1,000

37,610 38,610

1,000

2018 (1) Allowance for Doubtful Accounts ........... Accounts Receivable........................

1,000 1,000

(2) Accounts Receivable ............................... Allowance for Doubtful Accounts......

1,000 1,000

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

1,000 1,000

2018 Bad Debt Expense.................................... Allowance for Doubtful Accounts ($31,600 + $800) ............................

Balance

32,400 32,400

9-23

PROBLEM 924A (a)

Total estimated bad debts

Total Accounts $200,000 receivable % uncollectible Estimated Bad debts $ 9,400

0–30

Number of Days Outstanding 31–60 61–90 91–120 Over 120

$77,000 $46,000 1% 4%

$39,000 $23,000 $15,000 5% 8% 20%

$ 1,950 $ 1,840

770 $ 1,840

(b) Bad Debt Expense .................................................... Allowance for Doubtful Accounts [$9,400 + $8,000] ...............................................

17,400

(c) Allowance for Doubtful Accounts............................ Accounts Receivable ..........................................

5,000

(d) Accounts Receivable ................................................ Allowance for Doubtful Accounts ......................

5,000

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

5,000

$ 3,000

17,400

5,000 5,000 5,000

(e) If Rigney Inc. used 4% of total accounts receivable rather than aging the individual accounts the bad debt expense adjustment would be $16,000 [($200,000 X 4%) + $8,000]. The rest of the entries would be the same as they were when aging the accounts receivable. Aging the individual accounts rather than applying a percentage to the total accounts receivable should produce a more accurate allowance account and bad debts expense.

9-24

PROBLEM 925A (a) The allowance method. Since the balance in the allowance for doubtful accounts is given, they must be using this method because the account would not exist if they were using the direct write-off method. (b) (1) Dec. 31

(2) Dec. 31

Bad Debt Expense ($11,750 – $1,000) ......................... Allowance for Doubtful Accounts................................

10,750 10,750

Bad Debt Expense ($970,000 X 1%)............................. Allowance for Doubtful Accounts................................

9,700 9,700

Bad Debt Expense ($11,750 + $1,000) ......................... Allowance for Doubtful Accounts................................

12,750 12,750

Bad Debt Expense ............................ Allowance for Doubtful Accounts................................

9,700

(d) Allowance for Doubtful Accounts ............................ Accounts Receivable .........................................

3,000

9,700

3,000

Note: The entry is the same whether the amount of bad debt expense at the end of 2017 was estimated using the percentage of receivables or the percentage of sales method. (e) Bad Debt Expense ..................................................... Accounts Receivable .........................................

3,000 3,000

(f) Allowance for Doubtful Accounts is a contra-asset account. It is subtracted from the gross amount of accounts receivable so that accounts receivable is reported at its cash realizable value. .

9-25

PROBLEM 926A (a) Oct. 7 12

15 15

Accounts Receivable................................... Sales Revenue......................................

6,900

Cash ($900 – $27)......................................... Service Charge Expense ($900 X 3%)............................................... Sales Revenue......................................

873

Accounts Receivable................................... Interest Revenue ..................................

460

Cash.............................................................. Notes Receivable ................................. Interest Receivable ($12,000 X 8% X 45/360) ................... Interest Revenue ($12,000 X 8% X 15/360) ...................

12,160

Accounts Receivable—Holt ........................ Notes Receivable ................................. Interest Receivable ($9,000 X 7% X 36/360) ..................... Interest Revenue ($9,000 X 7% X 24/360) .....................

9,105

6,900

27 900

460 12,000 120 40

Interest Receivable ($16,000 X 9% X 1/12)............................... Interest Revenue ..................................

9,000 63 42 120 120

(b) Notes Receivable Date Oct.

9-26

1 15 24

Explanation Balance

Ref. �

Debit

Credit

Balance 37,000 25,000 16,000

12,000 9,000

PROBLEM 9-6A (Continued) Accounts Receivable Date Oct. 7 15 24

Explanation

Ref.

Debit 6,900 460 9,105

Credit

Balance 6,900 7,360 16,465

Ref. �

Debit

Credit

Balance 183 63 0 120

Interest Receivable Date Oct. 1 15 24 31

Explanation Balance

120 63 120

(c) Current assets Notes receivable............................................................... Accounts receivable ........................................................ Interest receivable............................................................ Total receivables ......................................................

$16,000 16,465 120 $32,585

9-27

PROBLEM 9-7A

Jan.

5 20

Feb. 18 Apr. 20

May 25 Aug. 18

Sept. 1

9-28

Accounts Receivable—Sheldon Company......... Sales Revenue............................................

20,000

Notes Receivable ............................................... Accounts Receivable—Sheldon Company.................................................

20,000

Notes Receivable ............................................... Sales Revenue............................................

8,000

Cash ($20,000 + $400)........................................ Notes Receivable ....................................... Interest Revenue ($20,000 X 8% X 3/12) .............................

20,400

Cash ($25,000 + $ 750)....................................... Notes Receivable ....................................... Interest Revenue ($25,000 X 9% X 4/12) .............................

25,750

Notes Receivable ............................................... Accounts Receivable—Potter Inc. ............

6,000

Cash ($8,000 + $360).......................................... Notes Receivable ....................................... Interest Revenue ($8,000 X 9% X 6/12) ...............................

8,360

Accounts Receivable—Potter Inc. ($6,000 + $105) ............................................... Notes Receivable ....................................... Interest Revenue ($6,000 X 7% X 3/12) ...............................

20,000

20,000 8,000 20,000 400 25,000 750 6,000 8,000 360 6,105 6,000 105

Notes Receivable ................................................... 12,000 Sales Revenue............................................

12,000

COMPREHENSIVE PROBLEM SOLUTION (a) Jan. 1

3 8 11

17 21 24

27 31

Notes Receivable........................................... Accounts Receivable— Merando Company..............................

1,200

Allowance for Doubtful Accounts ................ Accounts Receivable .............................

730

Inventory ........................................................ Accounts Payable ..................................

17,200

Accounts Receivable .................................... Sales Revenue .......................................

28,000

Cost of Goods Sold ....................................... Inventory ................................................

19,600

Cash ............................................................... Service Charge Expense............................... Sales Revenue .......................................

970 30

Cost of Goods Sold ....................................... Inventory ................................................

700

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

22,900

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

14,300

Accounts Receivable .................................... Allowance for Doubtful Accounts.........

280

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

280

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

1,400

Other Operating Expenses ........................... Cash........................................................

3,718

1,200 730 17,200 28,000 19,600

1,000 700 22,900 14,300 280 280 1,400 3,718

9-29

COMPREHENSIVE PROBLEM SOLUTION (Continued) Adjusting Entries Jan. 31 31

(b)

Interest Receivable ........................................ Interest Revenue ($1,200 X 8% X 1/12) ....... Bad Debt Expense [($22,950 X 6%) – ($800 – $730 + $280)] .................................. Allowance for Doubtful Accounts.......... Supplies Expense .......................................... Supplies ($1,400 – $560) ........................

8 8 1,027 1,027 840 840

WINTER COMPANY Adjusted Trial Balance January 31, 2017 Cash ............................................................ Notes Receivable ....................................... Accounts Receivable ................................. Allowance for Doubtful Accounts ............. Interest Receivable .................................... Inventory..................................................... Supplies ...................................................... Accounts Payable ...................................... Owner’s Capital .......................................... Sales Revenue............................................ Cost of Goods Sold.................................... Supplies Expense ...................................... Bad Debt Expense...................................... Service Charge Expense ........................... Other Operating Expenses ........................ Interest Revenue ........................................

Debit $17,832 1,200 22,950

Credit

1,377 8 6,300 560 11,650 32,730 29,000 20,300 840 1,027 30 3,718 8 $74,765

$74,765

9-30

COMPREHENSIVE PROBLEM SOLUTION (Continued) (b)

Optional T accounts for accounts with multiple transactions

Cash 1/1 Bal. 13,100 1/21 1/15 970 1/27 1/17 22,900 1/31 1/24 280 1/31 Bal. 17,832

14,300 1,400 3,718

1/27 1/31 Bal.

1/21 Accounts Receivable 1/1 Bal. 19,780 1/1 1,200 1/11 28,000 1/3 730 1/24 280 1/17 22,900 1/24 280 1/31 Bal. 22,950

Allowance for Doubtful Accounts 800 1/3 730 1/1 Bal. 1/24 280 1/31 1,027 1/31 Bal. 1,377

Inventory 1/1 Bal. 9,400 1/11 1/8 17,200 1/15 1/31 Bal. 6,300

Supplies 1,400 1/31 560

840

Accounts Payable 8,750 14,300 1/1 Bal. 1/8 17,200 1/31 Bal. 11,650 Sales Revenue 1/11 28,000 1/15 1,000 1/31 Bal. 29,000

Cost of Goods Sold 1/11 19,600 1/15 700 1/31 Bal. 20,300

19,600 700

9-31

COMPREHENSIVE PROBLEM SOLUTION (Continued) (c)

WINTER COMPANY Income Statement For the Month Ending January 31, 2017 Sales revenue ................................................. Cost of goods sold......................................... Gross profit .................................................... Operating expenses ....................................... Other operating expenses...................... Bad debt expense ................................... Supplies expense ................................... Service charge expense ......................... Total operating expenses .............................. Income from operations ................................ Other revenues and gains ............................. Interest revenue ...................................... Net Income......................................................

9-32

$29,000 20,300 8,700 $3,718 1,027 840 30 5,615 3,085 8 $ 3,093

COMPREHENSIVE PROBLEM SOLUTION (Continued) WINTER COMPANY Owner’s Equity Statement For the Month Ending January 31, 2017 Owner’s Capital, January 1 .............................................. Add: Net income ............................................................... Owner’s Capital, January 31 ............................................

$32,730 3,093 $35,823

WINTER COMPANY Balance Sheet January 31, 2017 Assets Current assets Cash ........................................................ Notes receivable ..................................... Accounts receivable............................... Less: Allowance for doubtful accounts ...................................... Interest receivable .................................. Inventory ................................................. Supplies .................................................. Total assets ....................................................

$17,832 1,200 $22,950 1,377

21,573 8 6,300 560 $47,473

Liabilities and Owner’s Equity Current liabilities Accounts payable................................... Owner’s equity Owner’s capital ....................................... Total liabilities and owner’s equity ...............

$ 11,650 35,823 $47,473

9-33

BYP 9-1

(a)

FINANCIAL REPORTING PROBLEM

RLF COMPANY Accounts Receivable Aging Schedule May 31, 2017 Proportion of Total

Amount in Category

Probability of NonCollection

Estimated Uncollectible Amount

.600 .220 .090 .050 .025 .015 1.000

$ 840,000 308,000 126,000 70,000 35,000 21,000 $1,400,000

.02 .04 .06 .09 .25 .70

$16,800 12,320 7,560 6,300 8,750 14,700 $66,430

Not yet due Less than 30 days past due 30 to 60 days past due 61 to 120 days past due 121 to 180 days past due Over 180 days past due

(b)

RLF COMPANY Analysis of Allowance for Doubtful Accounts May 31, 2017 June 1, 2016 balance .................................................... Bad debts expense accrual ($2,900,000 X .045).......... Balance before write-offs of bad accounts ................. Less: Write-offs of bad accounts................................. Balance before year-end adjustment .......................... Estimated uncollectible amount .................................. Additional allowance needed .......................................

$ 29,500 130,500 160,000 102,000 58,000 66,430 $ 8,430

Bad Debt Expense ............................................................ 8,430 Allowance for Doubtful Accounts ........................

9-34

8,430

BYP 9-1 (Continued) (c) 1. Steps to Improve the Accounts Receivable Situation

2. Risks and Costs Involved

Establish more selective creditgranting policies, such as more restrictive credit requirements or more thorough credit investigations.

This policy could result in lost sales and increased costs of credit evaluation. The company may be all but forced to adhere to the prevailing credit-granting policies of the office equipment and supplies industry.

Establish a more rigorous collection policy either through external collection agencies or by its own personnel.

This policy may offend current customers and thus risk future sales. Increased collection costs could result from this policy.

Charge interest on overdue accounts. Insist on cash on delivery (cod) or cash on order (coo) for new customers or poor credit risks.

This policy could result in lost sales and increased administrative costs.

9-35

BYP 9-2

COMPARATIVE ANALYSIS PROBLEM

(a) (1) Accounts receivable turnover PepsiCo

Coca-Cola

$66,415 ($7,041+ $6,954) ÷ 2

$46,854 ($4,759 + $4,873) ÷ 2

$66,415

$46,854

= 9.5 times

$6,997.5

= 9.7 times

$4,816

(2) Average collection period 365

365 = 37.6 days

= 38.4 days

9.5

9.7

(b) Both companies have reasonable accounts receivable turnovers and collection periods of approximately 38 days. This collection period probably approximates the credit terms that they provide to customers.

9-36

BYP 9-3

COMPARATIVE ANALYSIS PROBLEM

(a) (1) Accounts receivable turnover Amazon

Wal-Mart

$74,452 ($3,817 + $4,767) ÷ 2

$473,076 ($6,768 + $6,677) ÷ 2

$74,452

=17.3 times

$4,292

$473,076

= 70.4 times

$6,722.5

(2) Average collection period 365

= 21.1 days

17.3

365 = 5.2 days 70.4

(b) Both companies have outstanding accounts receivable turnovers and collection periods of less than 22 days. These collection periods are significantly shorter than the credit terms that they provide to customers.

9-37

BYP 9-4

REAL-WORLD FOCUS

(a) Factoring invoices enhances cash flow and allows a company to meet business expenses and take on new opportunities. The benefits of factoring include:  Predictable cash flow and elimination of slow payments  Flexible financing, as factoring line is tied to sales. It’s the ideal tool for growth.  Factoring is easy to obtain. Works well with startups and established companies  Factoring financing lines can be setup in a few days. (b) Factoring rates range between 1.5% and 3.0% per month. The two major variables considered when determining the rate are: (1) the size of the transaction, and (2) the credit quality of the company’s clients. (c) The first installment is paid within a couple of days and is typically 90% of the invoice amount. After customers pay the invoice amount to the factor, the second installment (10%) is paid, less a fee for the transaction.

9-38

BYP 9-5

DECISION MAKING ACROSS THE ORGANIZATION

(a) Net credit sales..................................... Credit and collection expenses Collection agency fees ............... Salary of accounts receivable clerk.......................................... Uncollectible accounts ............... Billing and mailing costs ............ Credit investigation fees............. Total...................................... Total expenses as a percentage of net credit sales .................................

2018

2017

2016

$500,000

$550,000

$400,000

2,450

2,500

2,300

4,100 8,000 2,500 750 $ 17,800

4,100 8,800 2,750 825 $ 18,975

4,100 6,400 2,000 600 $ 15,400

3.56%

3.45%

3.85%

$ 25,000

$ 27,500

$ 20,000

Investment earnings (8% X Ave. A/R)..

Total credit and collection expenses per above .......................................... Add: Investment earnings* ................. Net credit and collection expenses........

$ 17,800 2,000 $ 19,800

$ 18,975 2,200 $ 21,175

$ 15,400 1,600 $ 17,000

Net expenses as a percentage of net credit sales .................................

3.96%

3.85%

4.25%

(b) Average accounts receivable (5%).........

2,000

2,200

1,600

*The investment earnings on the cash tied up in accounts receivable is an additional expense of continuing the existing credit policies. (c) The analysis shows that the credit card fee of 4% of net credit sales will be higher than the percentage cost of credit and collection expenses in each year before considering the effect of earnings from other investment opportunities. However, after considering investment earnings, the credit card fee of 4% will be less than the company’s percentage cost if annual net credit sales are less than $500,000.

9-39

BYP 9-5 (Continued) Finally, the decision hinges on: (1) the accuracy of the estimate of investment earnings, (2) the expected trend in credit sales, and (3) the effect the new policy will have on sales. Nonfinancial factors include the effects on customer relationships of the alternative credit policies and whether the Foyles want to continue with the problem of handling their own accounts receivable.

9-40

BYP 9-6

COMMUNICATION ACTIVITY

Of course, this solution will differ from student to student. Important factors to look for would be definitions of the methods, how they are similar and how they differ. Also, look for use of good sentence structure, correct spelling, etc. Example: Dear Jill, The three methods you asked about are methods of dealing with uncollectible accounts receivable. Two of them, percentage-of-sales and percentage-ofreceivables, are “allowance” methods used to estimate the amount uncollectible. Under the percentage-of-sales basis, management establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This is based on past experience and anticipated credit policy. The percentage is then applied to either total credit sales or net credit sales of the current year. This basis of estimating emphasizes the matching of expenses with revenues. Under the percentage-of-receivables basis, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. Customer accounts are classified by the length of time they have been unpaid. This basis emphasizes cash realizable value of receivables and is therefore deemed a “balance sheet” approach. The direct write-off method does not estimate losses and an allowance account is not used. Instead, when an account is determined to be uncollectible, it is written off directly to Bad Debt Expense. Unless bad debt losses are insignificant, this method is not acceptable for financial reporting purposes.

Sincerely,

9-41

BYP 9-7

ETHICS CASE

(a) The stakeholders in this situation are: ⯈ The president of Diaz Co. ⯈ The controller of Diaz Co. ⯈ The stockholders. (b) Yes. The controller is posed with an ethical dilemma—should he/she follow the president’s “suggestion” and prepare misleading financial statements (understated net income) or should he/she attempt to stand up to and possibly anger the president by preparing a fair (realistic) income statement. (c) Diaz Co.’s growth rate should be a product of fair and accurate financial statements, not vice versa. That is, one should not prepare financial statements with the objective of achieving or sustaining a predetermined growth rate. The growth rate should be a product of management and operating results, not of creative accounting.

9-42

BYP 9-8

FASB CODIFICATION ACTIVITY

(a) Receivables represent contractual rights to receive money on fixed or determinable dates, whether or not there is any stated provision for interest. Receivables may arise from credit sales, loans, or other transactions. Receivables may be in the form of loans, notes, and other types of financial instruments and may be originated by an entity or purchased from another entity. (Codification reference 310-10-05-4). (b) The conditions under which receivables exist usually involve some degree of uncertainty about their collectibility, in which case a contingency exists. Subtopic 450-20 requires recognition of a loss when both of the following conditions are met: a. Information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired at the date of the financial statements. b. The amount of the loss can be reasonably estimated. Losses from uncollectible receivables shall be accrued when both the preceding conditions are met. Those conditions may be considered in relation to individual receivables or in relation to groups of similar types of receivables. If the conditions are met, accrual shall be made even though the particular receivables that are uncollectible may not be identifiable. (Codification reference 310-10-35-7, 35-8-35-9).

9-43

IFRS9-1

INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a)

Note 1.16 states: Trade accounts receivable are recorded at their face value. A provision for impairment is recorded if their net realizable value, based on the probability of their collection, is less than their carrying amount.

(b)

Note 11 indicates that provisions for impairment and product returns accounted for the difference between gross and net trade accounts receivable.

(c)

According to Note 11, the primary reason for the increase in gross accounts receivable was an increase in trade receivables.

(d)

2013:

€67 €2, 431

= 2.75%

2012:

€63 €2,227

= 2.83%

The provision for impairment as a percentage of trade receivables decrease from 2.83% to 2.75%. This decrease indicates that Louis Vuitton is doing a better job collecting its receivables.

9-44

CHAPTER 10 Plant Assets, Natural Resources, and Intangible Assets ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Brief Exercises

Do It!

Exercises

A Problems

Explain the accounting for plant asset expenditures.

1, 2, 3, 9, 24

1, 2, 3

Apply depreciation methods to plant assets.

4, 5, 6, 7, 8, 21, 22, 23

4, 5, 6 ,7, 8

2a, 2b

4, 5, 6, 7, 8

2A, 3A, 4A, 5A

Explain how to account for the disposal of plant assets.

10, 11

9, 10

5A, 6A

Describe how to account for natural resources and intangible assets.

12, 13, 14, 15, 16, 17, 18, 19

11, 12

11, 12, 13

7A, 8A

Discuss how plant assets, natural resources, and intangible assets are reported and analyzed.

13, 14

5A, 7A, 9A

25, 26

15, 16

*6. Explain how to account for the exchange of plant assets.

Questions

15, 16

10-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Determine acquisition costs of land and building.

Simple

20–30

Compute depreciation under different methods.

Simple

30–40

Compute depreciation under different methods.

Moderate

30–40

Calculate revisions to depreciation expense.

Moderate

20–30

Journalize a series of equipment transactions related to purchase, sale, retirement, and depreciation.

Moderate

40–50

Record disposals.

Simple

30–40

Prepare entries to record transactions related to acquisition and amortization of intangibles; prepare the intangible assets section.

Moderate

30–40

Prepare entries to correct errors made in recording and amortizing intangible assets.

Moderate

30–40

Calculate and comment on asset turnover.

Moderate

5–10

10-2

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 10 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS Number

Difficulty

Time (min.)

BE1

Simple

2–4

BE2

Simple

1–2

BE3

Simple

2–4

BE4

Simple

2–4

BE5

Moderate

4–6

BE6

Simple

4–6

BE7

Simple

2–4

BE8

Moderate

4–6

BE9

Simple

4–6

BE10

Simple

4–6

BE11

Simple

4–6

BE12

Simple

2–4

BE13

Simple

4–6

BE14

Simple

2–4

*BE15

Simple

4–6

*BE16

Simple

4–6

DI1

Simple

4–6

DI2a

Simple

2–4

DI2b

Simple

6–8

DI3

Simple

2–4

DI4

Simple

2–4

DI5

Simple

2–4

EX1

Simple

6–8

EX2

Simple

4–6

EX3

Simple

4–6

EX4

Simple

4–6

EX5

Simple

6–8

EX6

Simple

8–10

EX7

Simple

10–12

EX8

Moderate

8–10

10-3

PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS (Continued) Number

Difficulty

Time (min.)

EX9

Moderate

8–10

EX10

Moderate

10–12

EX11

Simple

6–8

EX12

Simple

4–6

EX13

Simple

8–10

EX14

Simple

2–4

*EX15

Moderate

8–10

*EX16

Moderate

8–10

P1A

Simple

20–30

P2A

Simple

30–40

P3A

Moderate

30–40

P4A

Moderate

20–30

P5A

2, 3, 5

Moderate

40–50

P6A

Simple

30–40

P7A

4, 5

Moderate

30–40

P8A

Moderate

30–40

P9A

Moderate

5–10

BYP1

4, 5

Simple

15–20

BYP2

AN, E

Simple

10–15

BYP3

AN, E

Simple

10–15

BYP4

2, 5

Simple

10–15

BYP5

AP, E

Moderate

20–25

BYP6

Simple

5–10

BYP7

Simple

10–15

BYP8 BYP9

4 1, 2, 4

E AP

Simple Simple

5–10 10–15

10-4

Study Objective

Knowledge Comprehension

1. Explain the accounting for plant asset expenditures.

Q10-1 Q10-2 Q10-3 Q10-9 Q10-24 DI10-1

Application

E10-1 BE10-1 P10-1A BE10-2 BE10-3

Q10-5

Q10-4 Q10-6 Q10-7 Q10-8 Q10-21 Q10-22 Q10-23 E10-4

BE10-4 E10-5 BE10-5 E10-6 BE10-6 E10-7 BE10-7 DI10-2a DI10-2b

3. Explain how to account for the disposal of plant assets.

Q10-10 DI10-3

Q10-11

BE10-9 E10-10 BE10-10 P10-5A E10-9 P10-6A

4. Describe how to account for Q10-12 natural resources and intangible Q10-18 assets. DI10-4

Q10-13 Q10-14 Q10-15 Q10-16

P10-2A BE10-8 P10-4A E10-8 P10-5A P10-3A

Q10-17 BE10-11 Q10-19 BE10-12 E10-11 E10-12 E10-13

P10-7A P10-8A

Q10-20 BE10-13 BE10-14 DI10-5

E10-14 P10-5A P10-7A

BE10-15 BE10-16

Synthesis

Evaluation

E10-2 E10-3

2. Apply depreciation methods to plant assets.

5. Discuss how plant assets, natural resources, and intangible assets are reported and analyzed.

Analysis

BE10-5

P10-9A

*6. Explain how to account Q10-25 for the exchange of plant assets.

Q10-26

E10-15 E10-16

Broadening Your Perspective

Real-World Decision Making Across Financial Reporting the Organization Comp. Analysis Focus Communication FASB Codification

Comp. Analysis Decision Making Across the Organization Ethics Case All About You

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems

10-5

ANSWERS TO QUESTIONS 1.

For plant assets, the historical cost principle means that cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use.

Examples of land improvements include driveways, parking lots, fences, and underground sprinklers.

(a) When only the land is to be used, all demolition and removal costs of the building less any proceeds from salvaged materials are necessary expenditures to make the land ready for its intended use. (b) When both the land and building are to be used, necessary costs of the building include remodeling expenditures and the cost of replacing or repairing the roofs, floors, wiring, and plumbing.

You should explain to the president that depreciation is a process of allocating the cost of a plant asset to expense over its service (useful) life in a rational and systematic manner. Recognition of depreciation is not intended to result in the accumulation of cash for replacement of the asset.

(a) Salvage value, also called residual value, is the expected value of the asset at the end of its useful life. (b) Salvage value is used in determining depreciation in each of the methods except the decliningbalance method.

(a) Useful life is expressed in years under the straight-line method and in units of activity under the units-of-activity method. (b) The pattern of periodic depreciation expense over useful life is constant under the straight-line method and variable under the units-of-activity method.

The effects of the three methods on annual depreciation expense are: Straight-line—constant amount; units of activity—varying amount; declining-balance—decreasing amounts.

A revision of depreciation is made in current and future years but not retroactively. The rationale is that continual restatement of prior periods would adversely affect confidence in the financial statements.

Revenue expenditures are ordinary repairs made to maintain the operating efficiency and productive life of the asset. Capital expenditures are additions and improvements made to increase operating efficiency, productive capacity, or useful life of the asset. Revenue expenditures are recognized as expenses when incurred; capital expenditures are generally debited to the plant asset affected.

10.

In a sale of plant assets, the book value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal occurs. If the proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal occurs.

11.

The plant asset and its accumulated depreciation should continue to be reported on the balance sheet without further depreciation 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 in use. However, once an asset is fully depreciated, even if it is still being used, no additional depreciation should be taken. In no situation can the accumulated depreciation on the plant asset exceed its cost.

10-6

Questions Chapter 10 (Continued) 12.

Natural resources consist of underground deposits of oil, gas, and minerals, and standing timber. These long-lived productive assets have two distinguishing characteristics: they are physically extracted in operations, and they are replaceable only by an act of nature.

13.

Depletion is the allocation of the cost of natural resources to expense in a rational and systematic manner over the resource’s useful life. It is computed by multiplying the depletion cost per unit by the number of units extracted and sold.

14.

The terms depreciation, depletion, and amortization are all concerned with allocating the cost of an asset to expense over the periods benefited. Depreciation refers to allocating the cost of a plant asset to expense, depletion to recognizing the cost of a natural resource as expense, and amortization to allocating the cost of an intangible asset to expense.

15.

The intern is not correct. The cost of an intangible asset should be amortized over that asset’s useful life (the period of time when operations are benefited by use of the asset). In addition, some intangibles have indefinite lives and therefore are not amortized at all.

16.

The favorable attributes which could result in goodwill include exceptional management, desirable location, good customer relations, skilled employees, high-quality products, and harmonious relations with labor unions.

17.

Goodwill is the value of many favorable attributes that are intertwined in the business enterprise. Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be sold separately. Goodwill can only be sold if the entire business is sold. And, if goodwill appears on the balance sheet, it means the company has purchased another company for more than the fair value of its net assets.

18.

Goodwill is recorded only when there is a transaction that involves the purchase of an entire business. Goodwill is the excess of cost over the fair value of the net assets (assets less liabilities) acquired. The recognition of goodwill without an exchange transaction would lead to subjective valuations which would reduce the reliability of financial statements.

19.

Research and development costs present several accounting problems. It is sometimes difficult to assign the costs to specific projects, and there are uncertainties in identifying the extent and timing of future benefits. As a result, the FASB requires that research and development costs be recorded as an expense when incurred.

20.

McDonald’s asset turnover ratio is computed as follows: Net sales Average total assets

21.

$20.5 billion = .71 times $28.9 billion

Since Stark uses the straight-line depreciation method, its depreciation expense will be lower in the early years of an asset’s useful life as compared to using an accelerated method. Zuber’s depreciation expense in the early years of an asset’s useful life will be higher as compared to the straight-line method. Stark’s net income will be higher than Zuber’s in the first few years of the asset’s useful life. And, the reverse will be true late in an asset’s useful life.

10-7

Questions Chapter 10 (Continued) 22.

Yes, the tax regulations of the IRS allow a company to use a different depreciation method on the tax return than is used in preparing financial statements. Gomez Corporation uses an accelerated depreciation method for tax purposes to minimize its income taxes and thereby the cash outflow for taxes.

23.

By selecting a longer estimated useful life, Ace Corp. is spreading the plant asset’s cost over a longer period of time. The depreciation expense reported in each period is lower and net income is higher. Liu’s choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower net income.

24.

Expensing these costs will make current period income lower but future period income higher because there will be no additional depreciation expense in future periods. If the costs are ordinary repairs, they should be expensed.

25.

When assets are exchanged, the gain or loss on disposal is computed as the difference between the book value and the fair value of the asset given up at the time of exchange.

26.

Yes, Unruh should recognize a gain equal to the difference between the fair value of the old machine and its book value. If the fair value of the old machine is less than its book value, Unruh should recognize a loss equal to the difference between the two amounts.

10-8

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10-1 All of the expenditures should be included in the cost of the land. Therefore, the cost of the land is $61,000, or ($50,000 + $3,000 + $2,500 + $2,000 + $3,500). BRIEF EXERCISE 10-2 The cost of the truck is $32,500 (cash price $30,000 + sales tax $2,100 + painting and lettering $400). The expenditures for insurance and motor vehicle license should not be added to the cost of the truck. BRIEF EXERCISE 10-3 1.

Maintenance and Repairs Expense.......................... Cash....................................................................

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

400

BRIEF EXERCISE 10-4 Depreciable cost of $32,000, or ($38,000 – $6,000). With a four-year useful life, annual depreciation is $8,000, or ($32,000 ÷ 4). Under the straight-line method, depreciation is the same each year. Thus, depreciation is $8,000 for both the first and second years. BRIEF EXERCISE 10-5



It is likely that management requested this accounting treatment to boost reported net income. Land is not depreciated; thus, by reporting land at $120,000 above its actual value the company increased yearly income by  $120,000  $8,000,  15 years  or the reduction in depreciation expense. This practice   is not ethical because management is knowingly misstating asset values. 

10-9

BRIEF EXERCISE 10-6 The declining balance rate is 50%, or (25% X 2) and this rate is applied to book value at the beginning of the year. The computations are:

Year 1 Year 2

Book Value $38,000 ($38,000 – $19,000)

Rate 50% 50%

Depreciation $19,000 $ 9,500

BRIEF EXERCISE 10-7 The depreciation cost per unit is 26 cents per mile computed as follows: Depreciable cost ($39,500 – $500) ÷ 150,000 = $.26 Year 1 30,000 miles X $.26 = $7,800 Year 2 20,000 miles X $.26 = $5,200

BRIEF EXERCISE 10-8 Book value, 1/1/17 .......................................................................... Less: Salvage value ...................................................................... Depreciable cost............................................................................. Remaining useful life ..................................................................... Revised annual depreciation ($21,000 ÷ 4) ...................................

$23,000 2,000 $21,000 4 years $ 5,250

BRIEF EXERCISE 10-9 (a) Accumulated Depreciation— Equipment .............................................................. Equipment...........................................................

41,000

(b) Accumulated Depreciation— Equipment .............................................................. Loss on Disposal of Plant Assets............................. Equipment...........................................................

37,000 4,000

10-10

41,000

BRIEF EXERCISE 10-9 (Continued) Cost of equipment Less accumulated depreciation Book value at date of disposal Proceeds from sale Loss on disposal

$41,000 37,000 4,000 0 $ 4,000

BRIEF EXERCISE 10-10 (a)

(b)

Depreciation Expense ............................................... Accumulated Depreciation— Equipment ......................................................

5,250

Cash............................................................................ Accumulated Depreciation—Equipment .................. Loss on Disposal of Plant Assets ............................ Equipment ..........................................................

18,000 47,250 6,750

Cost of equipment Less: Accumulated depreciation Book value at date of disposal Proceeds from sale Loss on disposal

5,250

72,000

$72,000 47,250* 24,750 18,000 $ 6,750

*$42,000 + $5,250

BRIEF EXERCISE 10-11 (a) Depletion cost per unit = $7,000,000 ÷ 35,000,000 = $.20 depletion cost per ton $.20 X 5,000,000 = $1,000,000 Inventory ...................................................... Accumulated Depletion .......................

1,000,000

(b) Ore mine ....................................................... Less: Accumulated depletion ....................

$7,000,000 1,000,000

1,000,000

$6,000,000

10-11

BRIEF EXERCISE 10-12 (a) Amortization Expense ($140,000 ÷ 10)........................... 14,000 Patents ................................................................. (b) Intangible Assets Patents .................................................................

14,000

$126,000

BRIEF EXERCISE 10-13 DENT COMPANY Balance Sheet (partial) December 31, 2017 Property, plant, and equipment Coal mine .......................................... Less: Accumulated depletion ......... Buildings ........................................... Less: Accumulated depreciation— buildings ................................ Total property, plant, and equipment .............................. Intangible assets Goodwill ............................................

$ 500,000 108,000 1,100,000

$392,000

600,000

500,000 $892,000 410,000

BRIEF EXERCISE 10-14 



 $44.1 + $44.5  = 1.43 times $63.4 ÷   2   



*BRIEF EXERCISE 10-15 Equipment (new) .............................................................. Accumulated Depreciation—Equipment......................... Loss on Disposal of Plant Assets ................................... Equipment (old) ........................................................ Cash ...........................................................................

10-12

29,000 30,000 7,000 61,000 5,000

*BRIEF EXERCISE 10-15 (Continued) Fair value of old delivery equipment Cash paid Cost of delivery equipment

$24,000 5,000 $29,000

Fair value of old delivery equipment Book value of old delivery equipment ($61,000 – $30,000) Loss on disposal

$24,000 31,000 $7,000

*BRIEF EXERCISE 10-16 Equipment (new) ............................................................... Accumulated Depreciation—Equipment ......................... Gain on Disposal of Plant Assets ............................. Equipment (old) ......................................................... Cash............................................................................ Fair value of old delivery equipment Cash paid Cost of new delivery equipment Fair value of old delivery equipment Book value of old delivery equipment ($61,000 – $30,000) Gain on disposal

38,000 30,000 2,000 61,000 5,000

$33,000 5,000 $38,000 $33,000 31,000 $ 2,000

10-13

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 10-1 The following four items are expenditures necessary to acquire the truck and get it ready for use: Negotiated purchase price............................................... Installation of special shelving........................................ Painting and lettering ....................................................... Sales tax............................................................................ Total paid...................................................................

$24,000 1,100 900 1,300 $27,300

Thus, the cost of the truck is $27,300. The payments for the motor vehicle license and for the insurance are operating costs and are expensed in the first year of the truck’s life. DO IT! 10-2a Depreciation expense = Cost – Salvage = $15,000 – $3,000 = $1,500 Useful life 8 years The entry to record the first year’s depreciation would be: Depreciation Expense ...................................................... Accumulated Depreciation—Equipment ................... (To record annual depreciation on mower)

1,500 1,500

DO IT! 10-2b Original depreciation expense = ($70,000 – $2,000) ÷ 8 years = $8,500 Accumulated depreciation after three years = 3 X $8,500 = $25,500 Book value, $70,000 – $25,500............................................. Less: Salvage value ............................................................ Depreciable cost................................................................... Remaining useful life ........................................................... Revised annual depreciation ($38,500 ÷ 7) ......................... 10-14

$44,500 6,000 $38,500 7 years $ 5,500 .

DO IT! 10-3 (a) Sale of truck for cash at a gain: Cash ............................................................................ Accumulated Depreciation—Equipment ................. Equipment ............................................................ Gain on Disposal of Plant Assets ......................

26,000 28,000 52,000 2,000

(b) Sale of truck for cash at a loss: Cash ............................................................................ Loss on Disposal of Plant Assets ............................ Accumulated Depreciation—Equipment ................. Equipment ............................................................

15,000 9,000 28,000 52,000

DO IT! 10-4 1. 2. 3. 4. 5.

Intangible assets Amortization Franchises Research and development costs Goodwill

DO IT! 10-5 $400,000 ($300,000 + $340,000)  2 $400,000 =  1.25 times $320,000

Asset turnover =

10-15

SOLUTIONS TO EXERCISES EXERCISE 10-1 (a) Under the historical cost principle, the acquisition cost for a plant asset includes all expenditures necessary to acquire the asset and make it ready for its intended use. For example, the cost of factory machinery includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs. (b) 1. 2. 3. 4. 5. 6. 7. 8.

Land Equipment Equipment Land Improvements Equipment Equipment Prepaid Insurance License Expense

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

10-16

Equipment Equipment Equipment Land Prepaid Insurance Land Improvements Land Improvements Land Buildings

EXERCISE 10-3 (a) Cost of land Cash paid.......................................................................... Net cost of removing warehouse ($8,600 – $1,700) ........................................................... Attorney’s fee ................................................................... Real estate broker’s fee ................................................... Total...........................................................................

$75,000 6,900 1,100 5,000 $88,000

(b) The architect’s fee ($7,800) should be debited to the Buildings account. The cost of the driveways and parking lot ($14,000) should be debited to Land Improvements. EXERCISE 10-4 1. False. Depreciation is a process of cost allocation, not asset valuation. 2. True. 3. False. The book value of a plant asset may be quite different from its fair value. 4. False. Depreciation applies to three classes of plant assets: land improvements, buildings, and equipment. 5. False. Depreciation does not apply to land because its usefulness and revenue-producing ability generally remain intact over time. 6. True. 7. False. Recognizing depreciation on an asset does not result in an accumulation of cash for replacement of the asset. 8. True. 9. False. Depreciation expense is reported on the income statement, and accumulated depreciation is reported as a deduction from plant assets on the balance sheet. 10. False. Three factors affect the computation of depreciation: cost, useful life, and salvage value (also called residual value).

10-17

EXERCISE 10-5 (a) Depreciation cost per unit is $1.40 per mile [($148,000 – $8,000) ÷ 100,000]. (b)

Computation

Year 2017 2018 2019 2020

End of Year

Annual Units of Depreciation Depreciation Activity X Cost /Unit = Expense 26,000 $1.40 $36,400 32,000 1.40 44,800 25,000 1.40 35,000 17,000 1.40 23,800

Accumulated Book Depreciation Value $ 36,400 $111,600 81,200 66,800 116,200 31,800 140,000 8,000

EXERCISE 10-6 (a) Straight-line method:  $150,000 – $12,000  = $27,600 per year. 5   2017 depreciation = $27,600 X 3/12 = $6,900. (b) Units-of-activity method:  $150,000 – $12,000  10,000 = $13.80 per hour.  

2017 depreciation = 1,700 hours X $13.80 = $23,460. (c) Declining-balance method: 2017 depreciation = $150,000 X 40% X 3/12 = $15,000. Book value January 1, 2018 = $150,000 – $15,000 = $135,000. 2018 depreciation = $135,000 X 40% = $54,000.

10-18

EXERCISE 10-7 (a) (1)

2017: ($34,000 – $2,000)/8 = $4,000 2018: ($34,000 – $2,000)/8 = $4,000

(2)

($34,000 – $2,000)/100,000 = $0.32 per mile 2017: 15,000 X $0.32 = $4,800 2018: 12,000 X $0.32 = $3,840

(3)

2017: $34,000 X 25% = $8,500 2018: ($34,000 – $8,500) X 25% = $6,375

(b) (1) (2)

Depreciation Expense ............................................. Accumulated Depreciation—Equipment ..............

4,000 4,000

Equipment................................................................ Less: Accumulated Depreciation—Equipment ....

$34,000 4,000 $30,000

EXERCISE 10-8 (a) Type of Asset Book value, 1/1/17 Less: Salvage value Depreciable cost

Building $686,000 26,000 $660,000

Warehouse $81,000 6,000 $75,000

Remaining useful life in years

Revised annual depreciation

$ 15,000

$ 5,000

(b) Dec. 31

Depreciation Expense .............................. Accumulated Depreciation— Buildings .......................................

15,000 15,000

10-19

EXERCISE 10-9 Jan.

June 30

Dec. 31

Accumulated Depreciation—Equipment ....... Equipment ...............................................

62,000

Depreciation Expense .................................... Accumulated Depreciation—Equipment ($45,000 X 1/5 X 6/12) ..........................

4,500

Cash................................................................. Accumulated Depreciation—Equipment ($45,000 X 3/5 = $27,000; $27,000 + $4,500) .... Gain on Disposal of Plant Assets [$14,000 – ($45,000 – $31,500)] ........... Equipment ...............................................

14,000

Depreciation Expense .................................... Accumulated Depreciation—Equipment [($33,000 – $3,000) X 1/6] ....................

5,000

Loss on Disposal of Plant Assets ................. Accumulated Depreciation—Equipment [($33,000 – $3,000) X 5/6] ............................ Equipment ...............................................

8,000

62,000

4,500

31,500 500 45,000

5,000

25,000 33,000

EXERCISE 10-10 (a)

(b)

Cash ......................................................................... Accumulated Depreciation—Equipment [($65,000 – $5,000) X 3/5] .................................... Equipment....................................................... Gain on Disposal of Plant Assets .................

36,000

Depreciation Expense [($65,000 – $5,000) X 1/5 X 4/12].......................... Accumulated Depreciation—Equipment ......

4,000

Cash ......................................................................... Accumulated Depreciation—Equipment ($36,000 + $4,000) ................................................ Equipment....................................................... Gain on Disposal of Plant Assets .................

10-20

31,000 65,000 2,000

4,000 31,000 40,000 65,000 6,000

EXERCISE 10-10 (Continued) (c) Cash ........................................................................... Accumulated Depreciation—Equipment.................. Loss on Disposal of Plant Assets ............................ Equipment...........................................................

11,000 36,000 18,000 65,000

(d) Depreciation Expense [($65,000 – $5,000) ÷ 5 X 9/12] ............................... Accumulated Depreciation—Equipment...........

9,000 9,000

Cash ........................................................................... Accumulated Depreciation—Equipment ($36,000 + $9,000) .................................................. Loss on Disposal of Plant Assets ............................ Equipment...........................................................

11,000 45,000 9,000 65,000

EXERCISE 10-11 (a) Dec. 31

Inventory ................................................... Accumulated Depletion (100,000 X $.80) .............................

Cost Units estimated Depletion cost per unit [(a) ÷ (b)]

80,000 80,000

(a) $720,000 (b) 900,000 tons $0.80

(b) The costs pertaining to the unsold units are reported in current assets as part of inventory (20,000 X $.80 = $16,000). EXERCISE 10-12 Dec. 31

Amortization Expense .................................. Patents ($75,000 ÷ 5 X 8/12) ..................

10,000 10,000

Note: No entry is made to amortize goodwill because it has an indefinite life.

10-21

EXERCISE 10-13 1/2/17 4/1/17

7/1/17 9/1/17

Patents .......................................................... Cash ......................................................

595,000

Goodwill........................................................ Cash ...................................................... (Part of the entry to record purchase of another company)

360,000

Franchises .................................................... Cash ......................................................

480,000

Research and Development Expense......... Cash ......................................................

185,000

12/31/17 Amortization Expense ($595,000 ÷ 7) + [($480,000 ÷ 10) X 1/2] ... Patents .............................................. Franchises ........................................

595,000 360,000

480,000 185,000 109,000 85,000 24,000

Ending balances, 12/31/17: Patents = $510,000 ($595,000 – $85,000). Goodwill = $360,000 Franchises = $456,000 ($480,000 – $24,000). R&D expense = $185,000 EXERCISE 10-14 Asset turnover =

$3,500,000 $1,400,000

10-22

= 2.5 times

*EXERCISE 10-15 (a) Equipment (new)........................................................ Accumulated Depreciation—Equipment (old) ......... Loss on Disposal of Plant Assets ............................ Equipment (old).................................................. Cash .................................................................... Cost of old trucks Less: Accumulated depreciation Book value Fair value of old trucks Loss on disposal

$64,000 22,000 42,000 38,000 $ 4,000

Fair value of old trucks Cash paid Cost of new trucks

$38,000 17,000 $55,000

55,000 22,000 4,000 64,000 17,000

(b) Equipment (new)........................................................ Accumulated Depreciation—Equipment (old) ......... Gain on Disposal of Plant Assets ..................... Equipment (old).................................................. Cash ....................................................................

Cost of old machine Less: Accumulated depreciation Book value Fair value of old machine Gain on disposal

$12,000 4,000 8,000 11,000 $ 3,000

Fair value of old machine Cash paid Cost of new machine

$ 11,000 3,000 $14,000

14,000 4,000 3,000 12,000 3,000

10-23

*EXERCISE 10-16 (a) Equipment (new) ....................................................... Loss on Disposal of Plant Assets............................ Accumulated Depreciation—Equipment (old) ........ Equipment (old) ................................................. Cost of old truck Less: Accumulated depreciation Book value Fair value of old truck Loss on disposal

3,000 4,000 15,000 22,000

$22,000 15,000 7,000 3,000 $ 4,000

(b) Equipment (new) ....................................................... Accumulated Depreciation—Equipment (old) ........ Equipment (old) ................................................. Gain on Disposal of Plant Assets ....................

3,000 8,000 10,000 1,000

Cost of old truck $10,000 Less: Accumulated depreciation 8,000 Book value 2,000 Fair value of old truck 3,000 Gain on disposal $ 1,000 Cost of new truck*

$ 3,000

*Fair value of old truck

10-24

SOLUTIONS TO PROBLEMS PROBLEM 10-1A

Item 1 2 3 4 5 6 7 8 9 10

Land $ 4,000

Buildings

Other Accounts

$690,000 $ 5,000

Property Tax Expense

14,000

Land Improvements

145,000 35,000 10,000 2,000 25,000 (3,500) $172,500

$735,000

10-25

PROBLEM 10-2A

(a) Year

Computation

Accumulated Depreciation 12/31

2015 2016 2017

BUS 1 $ 90,000 X 20% = $18,000 $ 90,000 X 20% = $18,000 $ 90,000 X 20% = $18,000

$18,000 36,000 54,000

2015 2016 2017

BUS 2 $110,000 X 50% = $55,000 $ 55,000 X 50% = $27,500 $ 27,500 X 50% = $13,750

$55,000 82,500 96,250

2016 2017

BUS 3 24,000 miles X $.70* = $16,800 34,000 miles X $.70 = $23,800

$16,800 40,600

*$84,000 ÷ 120,000 miles = $.70 per mile.

(b)

Year

Computation

Expense

(1)

2015

BUS 2 $110,000 X 50% X 9/12 = $41,250

$41,250

(2)

2016

$68,750 X 50% = $34,375

$34,375

10-26

PROBLEM 10-3A

(a) (1) Purchase price ................................................................. Sales tax ........................................................................... Shipping costs ................................................................. Insurance during shipping .............................................. Installation and testing .................................................... Total cost of machine............................................... Equipment ................................................................50,000 Cash .............................................................

$ 48,000 1,700 150 80 70 $ 50,000

50,000

(2) Recorded cost .................................................................. $ 50,000 Less: Salvage value ........................................................... 5,000 Depreciable cost .............................................................. $ 45,000 Years of useful life ........................................................... ÷ 5 Annual depreciation ................................................. $ 9,000 Depreciation Expense......................................... Accumulated Depreciation—Equipment.... (b) (1)

9,000 9,000

Recorded cost .................................................................. Less: Salvage value ........................................................ Depreciable cost .............................................................. Years of useful life ........................................................... Annual depreciation .................................................

(2) Book Value at Beginning of Year $180,000 90,000 45,000 22,500

DDB Rate 50%* 50% 50% 50%

Annual Depreciation Expense $90,000 45,000 22,500 12,500**

180,000 10,000 $170,000 ÷ 4 $ 42,500

Accumulated Depreciation $ 90,000 135,000 157,500 170,000

*100% ÷ 4-year useful life = 25%; 25% X 2 = 50%. **$170,000–$157,500.

10-27

PROBLEM 10-3A (Continued) (3) Depreciation cost per unit = ($180,000 – $10,000)/125,000 units = $1.36 per unit. Annual Depreciation Expense 2017: $1.36 X 45,000 = $61,200 2018: 1.36 X 35,000 = 47,600 2019: 1.36 X 25,000 = 34,000 2020: 1.36 X 20,000 = 27,200 (c) The declining-balance method reports the highest amount of depreciation expense the first year while the straight-line method reports the lowest. In the fourth year, the straight-line method reports the highest amount of depreciation expense while the declining-balance method reports the lowest. These facts occur because the declining-balance method is an accelerated depreciation method in which the largest amount of depreciation is recognized in the early years of the asset’s life. If the straight-line method is used, the same amount of depreciation expense is recognized each year. Therefore, in the early years less depreciation expense will be recognized under this method than under the declining-balance method while more will be recognized in the later years. The amount of depreciation expense recognized using the units-of-activity method is dependent on production, so this method could recognize more or less depreciation expense than the other two methods in any year depending on output. No matter which of the three methods is used, the same total amount of depreciation expense will be recognized over the four-year period.

10-28

PROBLEM 10-4A

Year 2015 2016 2017 2018 2019 2020 2021

Depreciation Expense $18,000(a) 18,000 14,400(b) 14,400 14,400 17,900(c) 17,900

Accumulated Depreciation $18,000 36,000 50,400 64,800 79,200 97,100 115,000

(a)

$120,000 – $12,000 = $18,000 6 years

(b)

Book value – Salvage value $84,000 – $12,000 = = $14,400 5 years Remaining useful life

(c)

$40,800 – $5,000 = $17,900 2 years

10-29

PROBLEM 10-5A (a) Apr. 1 May 1

Land................................................. Cash.........................................

2,130,000

Depreciation Expense .................... Accumulated Depreciation— Equipment ($750,000 X 1/10 X 4/12) ......

25,000

Cash ................................................ Accumulated Depreciation— Equipment................................... Equipment ............................... Gain on Disposal of Plant Assets ........................

450,000

2,130,000

25,000

325,000 750,000 25,000

Cost $750,000 Accum. depreciation— equipment 325,000 [($750,000 X 1/10 X 4) + $25,000] Book value 425,000 Cash proceeds 450,000 Gain on disposal $ 25,000 June 1

July 1 Dec. 31

10-30

Cash ................................................ Land ......................................... Gain on Disposal of Plant Assets ........................

1,500,000

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

2,500,000

Depreciation Expense .................... Accumulated Depreciation— Equipment ($500,000 X 1/10) .................

50,000

Accumulated Depreciation— Equipment................................... Equipment ...............................

400,000 1,100,000 2,500,000

50,000 500,000 500,000

PROBLEM 10-5A (Continued) Cost $500,000 Accum. depreciation— equipment 500,000 ($500,000 X 1/10 X 10) Book value $ 0 (b) Dec. 31

Depreciation Expense ..................... Accumulated Depreciation— Buildings .............................. ($28,500,000 X 1/50)

570,000

Depreciation Expense ..................... Accumulated Depreciation— Equipment ............................

4,800,000

570,000

4,800,000

($46,750,000* X 1/10) $4,675,000 [($2,500,000 X 1/10) X 6/12] 125,000

$4,800,000 *($48,000,000 – $750,000 – $500,000)

(c)

GRAND COMPANY Partial Balance Sheet December 31, 2018 Plant Assets* Land ..................................................... Buildings.............................................. Less: Accumulated depreciation— buildings .................................. Equipment ........................................... Less: Accumulated depreciation— equipment ................................ Total plant assets ........................

$ 5,730,000 $28,500,000 12,670,000 49,250,000

15,830,000

9,050,000

40,200,000 $61,760,000

*See T-accounts which follow.

10-31

PROBLEM 10-5A (Continued)

Bal. Apr. 1 Bal.

Land 4,000,000 June 1 2,130,000 5,730,000

Bal. Bal.

Buildings 28,500,000 28,500,000

400,000

Accumulated Depreciation—Buildings Bal. 12,100,000 Dec. 31 adj. 570,000 Bal. 12,670,000

Bal. July 1 Bal.

Equipment 48,000,000 May 1 2,500,000 Dec. 31 49,250,000

750,000 500,000

Accumulated Depreciation—Equipment May 1 325,000 Bal. 5,000,000 Dec. 31 500,000 May 1 25,000 Dec. 31 50,000 Dec. 31 adj. 4,800,000 Bal. 9,050,000

10-32

PROBLEM 1033A (a) Accumulated Depreciation—Equipment .................. Loss on Disposal of Plant Assets ............................ Equipment ..........................................................

50,000 30,000

(b) Cash............................................................................ Accumulated Depreciation—Equipment .................. Loss on Disposal of Plant Assets ............................ Equipment ..........................................................

21,000 50,000 9,000

(c) Cash............................................................................ Accumulated Depreciation—Equipment .................. Gain on Disposal of Plant Assets ..................... Equipment ..........................................................

31,000 50,000

80,000

1,000 80,000

10-33

PROBLEM 1034A (a) Jan. 2 Jan.– June Sept. 1

Oct. 1

(b) Dec. 31

Patents ..................................................... Cash..................................................

27,000 27,000

Research and Development Expense .................................................. 140,000 Cash..................................................

140,000

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

50,000

Franchises .................................................. 140,000 Cash.................................................. Amortization Expense ............................. Patents.............................................. [($70,000 X 1/10) + ($27,000 X 1/9)]

10,000

Amortization Expense ............................. Franchises........................................ [($48,000 X 1/10) + ($140,000 X 1/50 X 3/12)]

5,500

140,000

10,000

5,500

(c) Intangible Assets Patents ($97,000 cost – $17,000 amortization) (1) ............... Franchises ($188,000 cost – $24,700 amortization) (2) ....... Total intangible assets...................................................

$ 80,000 163,300 $243,300

(1) Cost ($70,000 + $27,000); amortization ($7,000 + $10,000). (2) Cost ($48,000 + $140,000); amortization ($19,200 + $5,500).

10-34

PROBLEM 1035A 1.

Research and Development Expense ................... Patents .............................................................

136,000

Patents .................................................................... Amortization Expense [$19,600 – ($60,000 X 1/10)] ........................

13,600

Goodwill .................................................................. Amortization Expense.....................................

920

136,000

13,600

920

Note: Goodwill should not be amortized because it has an indefinite life unlike Patents.

10-35

PROBLEM 1036A (a)

LaPorta Asset turnover

$1,300,000 = .52 times $2,500,000

Lott $1,180,000 = .59 $2,000,000 times

(b) Based on the asset turnover, Lott is more effective in using assets to generate sales. Its asset turnover is 13% higher than LaPorta’s ratio.

10-36

CHAPTER 10 COMPREHENSIVE PROBLEM SOLUTION (a) 1. Equipment ............................................................ Cash .................................................................

22,800

2. Depreciation Expense.......................................... Accumulated Depreciation—Equipment .......

450

Cash ...................................................................... Accumulated Depreciation—Equipment ............ Equipment ....................................................... Gain on Disposal of Plant Assets ..................

3,500 2,250

3. Accounts Receivable ........................................... Sales Revenue.................................................

9,000

Cost of Goods Sold.............................................. Inventory..........................................................

6,300

4. Bad Debt Expense ............................................... Allowance for Doubtful Accounts ..................

3,500

5. Interest Receivable ($10,000 X .08 X 9/12) .......... Interest Revenue .............................................

600

6. Insurance Expense ($3,600 X 4/6) ....................... Prepaid Insurance ...........................................

2,400

7. Depreciation Expense.......................................... Accumulated Depreciation—Buildings .........

4,000

8. Depreciation Expense.......................................... Accumulated Depreciation—Equipment [($60,000 – $5,000) – ($55,000 X .10)] ÷ 5 .....

9,900

9. Depreciation Expense.......................................... Accumulated Depreciation—Equipment [($22,800 – $1,800) ÷ 5] X 8/12 ......................

2,800

22,800 450

5,000 750 9,000 6,300 3,500 600 2,400 4,000

9,900

2,800

10-37

COMPREHENSIVE PROBLEM (Continued) 10. Amortization Expense......................................... Patents ............................................................

900

11. Salaries and Wages Expense ............................. Salaries and Wages Payable .........................

5,200

12. Unearned Rent Revenue ($6,000 ÷ 3) ................. Rent Revenue .................................................

2,000

13. Interest Expense ($11,000 + $30,000) X .09 ........ Interest Payable..............................................

3,690

10-38

900 5,200 2,000 3,690

COMPREHENSIVE PROBLEM (Continued) (b)

HASSELLHOUF COMPANY Trial Balance December 31, 2017

Cash ................................................................... Accounts Receivable ........................................ Notes Receivable .............................................. Interest Receivable ........................................... Inventory............................................................ Prepaid Insurance ............................................. Land ................................................................... Buildings ........................................................... Equipment ......................................................... Patents ............................................................... Allowance for Doubtful Accounts .................... Accumulated Depreciation—Buildings ........... Accumulated Depreciation—Equipment ......... Accounts Payable ............................................. Salaries and Wages Payable ............................ Unearned Rent Revenue................................... Notes Payable (due in 2018) ............................. Interest Payable ................................................ Notes Payable (due after 2018) ........................ Owner’s Capital ................................................. Owner’s Drawings............................................. Sales Revenue................................................... Interest Revenue ............................................... Rent Revenue .................................................... Gain on Disposal of Plant Assets .................... Bad Debt Expense............................................. Cost of Goods Sold........................................... Depreciation Expense....................................... Insurance Expense ........................................... Interest Expense ............................................... Other Operating Expenses ............................... Amortization Expense ...................................... Salaries and Wages Expense ........................... Total ...................................................................

Debits $ 8,700 45,800 10,000 600 29,900 1,200 20,000 150,000 77,800 8,100

Credits

4,000 54,000 34,900 27,300 5,200 4,000 11,000 3,690 30,000 113,600

12,000 914,000 600 2,000 750 3,500 636,300 17,150 2,400 3,690 61,800 900 115,200 $1,205,040

$1,205,040

10-39

COMPREHENSIVE PROBLEM (Continued) (c)

HASSELLHOUF COMPANY Income Statement For the Year Ended December 31, 2017

Sales Revenue ................................................... Cost of Goods Sold ........................................... Gross Profit ....................................................... Operating Expenses Salaries and Wages Expense ...................... Other Operating Expenses .......................... Depreciation Expense .................................. Bad Debt Expense ........................................ Insurance Expense....................................... Amortization Expense.................................. Total Operating Expenses ................................ Income From Operations .................................. Other Revenues and Gains Rent Revenue ............................................... Gain on Disposal of Plant Assets ............... Interest Revenue .......................................... Other Expenses and Losses Interest Expense........................................... Net Income.........................................................

$914,000 636,300 277,700 $115,200 61,800 17,150 3,500 2,400 900 200,950 76,750 2,000 750 600 3,350 3,690

(340) $ 76,410

HASSELLHOUF COMPANY Owner’s Equity Statement For the Year Ended December 31, 2017 Owner’s Capital, 1/1/17 ........................................................ Add: Net Income...................................................................

$113,600 76,410 190,010 12,000 $178,010

Less: Drawings..................................................................... Owner’s Capital, 12/31/17 ....................................................

10-40

COMPREHENSIVE PROBLEM (Continued) (d)

HASSELLHOUF COMPANY Balance Sheet December 31, 2017 Assets

Current Assets Cash ........................................................ Accounts Receivable ............................. $ 45,800 Allowance for Doubtful Accounts ......... 4,000 Notes Receivable ................................... Interest Receivable ................................ Inventory................................................. Prepaid Insurance .................................. Total Current Assets ....................... Property, Plant, and Equipment Land ........................................................ Buildings................................................. 150,000 Less Accum. Depr.—Buildings ............. 54,000 Equipment .............................................. 77,800 Less Accum. Depr.—Equipment ........... 34,900 Total Plant Assets............................ Intangible Assets Patents .................................................... Total Assets.................................................

$ 8,700 41,800 10,000 600 29,900 1,200 $92,200 20,000 96,000 42,900 158,900 8,100 $259,200

Liabilities and Owner’s Equity Current Liabilities Notes Payable ........................................ Accounts Payable .................................. Interest Payable...................................... Unearned Rent Revenue ........................ Salaries and Wages Payable ................. Total Current Liabilities................... Long-term Liabilities Notes Payable ........................................ Total Liabilities ............................................ Owner’s Equity Owner’s Capital ...................................... Total Liabilities and Owner’s Equity ..........

$11,000 27,300 3,690 4,000 5,200 51,190 30,000 81,190 178,010 $259,200

10-41

BYP 10-1

FINANCIAL REPORTING PROBLEM

(a) Property, plant, and equipment is reported net, book value, on the September 28, 2013, balance sheet at $16,597,000,000. The cost of the property, plant, and equipment is $28,519,000,000 as shown in Note 3. (b) Depreciation and amortization expense was: 2013: 2012: 2011:

$6,757,000,000. $3,277,000,000. $1,814,000,000.

$8,165,000,000. $8,295,000,000.

(d) Apple reports (in Note 4) amortizable intangible assets, net of $4,079,000,000, and non-amortizable trademarks of $100,000,000. In addition, it reported goodwill of $1,577,000,000.

10-42

BYP 10-2

COMPARATIVE ANALYSIS PROBLEM

(a)

PepsiCo Asset turnover

$66,415 ÷

$74,638 + $77, 478 2

Coca-Cola = 0.87 times

$46,854 ÷

$86,174 + $ 90, 055 = .53 times 2

(b) The asset turnover measures how efficiently a company uses its assets to generate sales. It shows the dollars of sales generated by each dollar invested in assets. PepsiCo’s asset turnover (0.87) was 64% higher than Coca-Cola (.53). Therefore, it can be concluded that PepsiCo was more efficient during 2013 in utilizing assets to generate sales.

10-43

BYP 10-3

COMPARATIVE ANALYSIS PROBLEM

(a)

Amazon Asset turnover

$74,452 ÷

$32, 555 + $40,159 2

Wal-Mart = 2.05 times

$473,076 ÷

$203,105 + $ 204, 751

= 2.32 times

(b)The asset turnover measures how efficiently a company uses its assets to generate sales. It shows the dollars of sales generated by each dollar invested in assets. Wal-Mart’s asset turnover (2.32) was 13% higher than Amazon (2.05). Therefore, it can be concluded that Wal-Mart was more efficient during 2013 in utilizing assets to generate sales.

10-44

BYP 10-4

REAL-WORLD FOCUS

Answers will vary depending on the company selected.

10-45

BYP 10-5

(a)

DECISION MAKING ACROSS THE ORGANIZATION

Pinson Company—Straight-line method Annual Depreciation Buildings [($360,000 – $20,000) ÷ 40].............................. Equipment [($130,000 – $10,000) ÷ 10]............................ Total annual depreciation ................................................

$ 8,500 12,000 $20,500

Total accumulated depreciation ($20,500 X 3) .......................

$61,500

Estes Company—Double-declining-balance method

Year 2015 2016 2017

Asset Buildings Equipment Buildings Equipment Buildings Equipment

(b) Year 2015 2016 2017 Total net income

Computation $360,000 X 5% $130,000 X 20% $342,000 X 5% $104,000 X 20% $324,900 X 5% $ 83,200 X 20%

Annual Depreciation $18,000 26,000 17,100 20,800 16,245 16,640

Accumulated Depreciation $44,000 37,900 32,885 $114,785

Pinson Company Net Income

Estes Company Net Income As Adjusted

Computations for Estes Company

$ 84,000 88,400 90,000

$ 91,500 93,400 97,385

$68,000 + $44,000 – $20,500 = $91,500 $76,000 + $37,900 – $20,500 = $93,400 $85,000 + $32,885 – $20,500 = $97,385

$262,400

$282,285

(c) As shown above, when the two companies use the same depreciation method, Estes Company is more profitable than Pinson Company. When the two companies are using different depreciation methods, Estes Company has more cash than Pinson Company for two reasons:

10-46

BYP 10-5 (Continued) (1) its earnings are generating more cash than the earnings of Pinson Company, and (2) depreciation expense has no effect on cash. Cash generated by operations can be arrived at by adding depreciation expense to net income. If this is done, it can be seen that Estes Company’s operations generate more cash ($229,000 + $114,785 = $343,785) than Pinson Company’s ($262,400 + $61,500 = $323,900). Based on the above analysis, Lynda Peace should buy Estes Company. It not only is in a better financial position than Pinson Company, but it is also more profitable.

10-47

BYP 10-6

COMMUNICATION ACTIVITY

To:

Instructor

From:

Student

Re:

American Exploration Company footnote

American Exploration Company accounts for its oil and gas activities using the successful efforts approach. Under this method, only the costs of successful exploration are included in the cost of the natural resource, and the costs of unsuccessful explorations are expensed. Depletion is determined using the units-of-activity method. Under this method, a depletion cost per unit is computed based on the total number of units expected to be extracted. Depletion expense for the year is determined by multiplying the units extracted and sold by the depletion cost per unit.

10-48

BYP 10-7

ETHICS CASE

(a) The stakeholders in this situation are:    

Robert Griffin, president of Turner Container Company. Alexis Landrum, controller. The stockholders of Turner Container Company. Potential investors in Turner Container Company.

(b) The intentional misstatement of the life of an asset or the amount of the salvage value is unethical for whatever the reason. There is nothing per se unethical about changing the estimate either of the life of an asset or of an asset’s salvage value if the change is an attempt to better match cost and revenues and is a better allocation of the asset’s depreciable cost over the asset’s useful life. In this case, it appears from the controller’s reaction that the revisions in the life are intended only to improve earnings and, therefore, are unethical. The fact that the competition uses a longer life on its equipment is not necessarily relevant. The competition’s maintenance and repair policies and activities may be different. The competition may use its equipment fewer hours a year (e.g., one shift rather than two shifts daily) than Turner Container Company. (c) Income before income taxes in the year of change is increased $160,000 by implementing the president’s proposed changes. Old Estimates $3,500,000 300,000 3,200,000 $ 400,000

Asset cost Estimated salvage Depreciable cost Depreciation per year (1/8) Asset cost Estimated salvage Depreciable cost Depreciation taken to date ($400,000 X 2) Remaining life in years Depreciation per year

Revised Estimates $3,500,000 300,000 3,200,000 800,000 2,400,000 10 years $ 240,000

10-49

BYP 10-8

(a) 1 c

ALL ABOUT YOU

3a 4d

(b) For the most part, the value of a brand is not reported on a company’s balance sheet. Most companies are required to expense all costs related to the maintenance of a brand name. Also any research and development that went into the development of the related product is generally expensed. The only way significant costs related to the value of the brand are reported on balance sheet is when a company purchases another company that has a significant tradename (brand). In that case, given an objective transaction, companies are able to assign value to the brand and report it on the balance sheet. A conservative approach is used in this area because the value of the brand can be extremely difficult to determine. It should be noted that international rules permit companies to report brand values on their balance sheets.

10-50

BYP 10-9

(a)

FASB CODIFICATION ACTIVITY

Capitalize is used to indicate that the cost would be recorded as the cost of an asset. That procedure is often referred to as deferring a cost, and the resulting asset is sometimes described as a deferred cost.

(b) Intangible assets are assets that lack physical substance. (The term intangible asset is used to refer to intangible assets other than goodwill.) (c)

Codification reference 360-10-35-2 addresses the concept of depreciation accounting and the various factors to consider in selecting the related periods and methods to be used in such accounting. Generally accepted accounting principles (GAAP) require that the cost of a productive facility be spread over the expected useful life of the facility in such a way as to allocate it as equitably as possible to the periods during which services are obtained from the use of the facility (Codification reference 360-10-35-4).

10-51

IFRS EXERCISES IFRS10-1 Component depreciation is a method of allocating the cost of a plant asset into separate parts based on the estimated useful lives of each component. IFRS requires an entity to use component depreciation whenever significant parts of a plant asset have significantly different useful lives. IFRS10-2 Revaluation is an accounting procedure that adjusts plant assets to fair value at the reporting date. If revaluation is used, it must be applied annually to assets that are experiencing rapid price changes. IFRS10-3 Both types of development expenditures relate to the creation of new products but one is expensed and the other is capitalized. Development costs incurred before a new product achieves technological feasibility are recorded as development expenses and appear as part of operating expenses on the income statement. Cost incurred after technological feasibility are recorded as development costs and appear as an intangible asset on the statement of financial position.

10-52

CHAPTER 11 Current Liabilities and Payroll Accounting ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief Exercises

Do It!

Exercises

A Problems

Explain how to account for current liabilities.

1, 2, 3, 4, 6, 7

1, 2, 3, 4

1A, 2A

Discuss how current liabilities are reported and analyzed.

5, 6

5, 6, 7, 8, 9

Explain how to account for payroll.

8, 9, 10, 11, 12 13, 14, 15, 16, 17

7, 8, 9, 10

3a, 3b

10, 11, 12, 13

3A, 4A, 5A

*4.

Discuss additional fringe benefits associated with employee compensation.

18, 19, 20, 21, 22

14, 15

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the chapter.

11-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare current liability entries, adjusting entries, and current liabilities section.

Moderate

30–40

Journalize and post note transactions and show balance sheet presentation.

Moderate

30–40

Prepare payroll register and payroll entries.

Simple

30–40

Journalize payroll transactions and adjusting entries.

Moderate

30–40

Prepare entries for payroll and payroll taxes; prepare W-2 data.

Moderate

30–40

11-2

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 11 CURRENT LIABILITIES AND PAYROLL ACCOUNTING Number

Difficulty

Time (min.)

BE1

Simple

3–5

BE2

Simple

2–4

BE3

Simple

2–4

BE4

Simple

2–4

BE5

Simple

2–4

BE6

Simple

1–2

BE7

Simple

3–5

BE8

Simple

3–5

BE9

Simple

2–4

BE10

Simple

2–4

*BE11

Simple

2–4

DI1

Simple

6–8

DI2

Simple

8–10

DI3a

Simple

3–5

DI3b

Simple

3–5

EX1

Moderate

8–10

EX2

Simple

6–8

EX3

Simple

4–6

EX4

Simple

6–8

EX5

Moderate

8–10

EX6

Simple

8–10

EX7

Simple

6–8

EX8

Simple

4–6

EX9

Simple

6–8

EX10

Simple

8–10

EX11

Simple

6–8

EX12

Moderate

12–15

EX13

Moderate

10–12

*EX14

Simple

6–8

11-3

CURRENT LIABILITIES AND PAYROLL ACCOUNTING (Continued) Number

Difficulty

Time (min.)

*EX15

Simple

4–6

P1A

1, 2

Moderate

30–40

P2A

Moderate

30–40

P3A

Simple

30–40

P4A

Moderate

30–40

P5A

Moderate

30–40

BYP1

1, 2

Simple

10–15

BYP2

AN, E

Simple

10–15

BYP3

AN, E

Simple

10–15

BYP4

Simple

15–20

BYP5

Moderate

15–20

BYP6

Simple

10–15

BYP7

Simple

10–15

BYP8

Moderate

15–20

BYP9

—

Simple

10–15

11-4 .

Learning Objective

Knowledge

Comprehension

Application

Analysis

1. Explain how to account for current liabilities.

Q11-1 Q11-2 Q11-6 Q11-7 BE11-1 DI11-1

Q11-3 DI11-2 E11-1 Q11-4 E11-3 E11-2 BE11-2 E11-4 BE11-3 P11-1A BE11-4 E11-7

2. Discuss how current liabilities are reported and analyzed.

Q11-5 E11-6

BE11-5 E11-8 DI11-2 E11-9 E11-7

3. Explain how to account for payroll. Q11-9 Q11-12 Q11-11 Q11-14 Q11-17

Q11-8 Q11-9 Q11-10 Q11-13

Q11-15 BE11-7 E11-11 P11-3A Q11-16 BE11-8 E11-12 P11-4A BE11-10 BE11-9 E11-13 P11-5A DI11-3a DI11-3b E11-10

*4. Discuss additional fringe benefits associated with employee compensation.

Q11-19 Q11-20 Q11-21

Q11-22

Broadening Your Perspective

Q11-18

BE11-11 E11-14 E11-15

Financial Reporting FASB Communication Codification Real-World Focus

Synthesis

Evaluation

BE11-6 E11-5 P11-1A

P11-4A

Comparative Analysis

Decision Making Across the Organization Ethics Case All About You

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

11-5

ANSWERS TO QUESTIONS 1.

Lori is not correct. A current liability is a debt that a company expects to pay within one year or the operating cycle, whichever is longer.

In the balance sheet, Notes Payable of $40,000 and Interest Payable of $700 ($40,000 X .07 X 3/12) should be reported as current liabilities. In the income statement, Interest Expense of $700 should be reported under other expenses and losses.

(a) Disagree. The company only serves as a collection agent for the taxing authority. It does not report sales taxes as an expense; it merely forwards the amount paid by the customer to the government. (b) The entry to record the proceeds is: Cash......................................................................................... 8,400 Sales Revenue ................................................................. 8,000 Sales Taxes Payable ........................................................ 400

(a) The entry when the tickets are sold is: Cash............................................................................................ 1,200,000 Unearned Ticket Revenue ................................................ 1,200,000 (b) The entry after each game is: Unearned Ticket Revenue .............................................................. 200,000 Ticket Revenue.................................................................

200,000

Liquidity refers to the ability of a company to pay its maturing obligations and meet unexpected needs for cash. Two measures of liquidity are working capital (current assets – current liabilities) and the current ratio (current assets ÷ current liabilities).

A contingent liability is a potential liability that may become an actual liability in the future. Contingent liabilities are only recorded in the accounts if they are probable and the amount is reasonably estimable. Warranty costs are a contingent liability usually recorded in the accounts since they are both probable in occurrence and subject to estimation.

If an event is reasonably possible, then only note disclosure is required. If the possibility of a contingent liability occurring is remote, then neither recording in the accounts nor note disclosure is required.

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 FICA taxes, union dues, federal income taxes, etc. Gross pay should be recorded as salaries and wages expense.

Both employees and employers are required to pay FICA taxes.

10.

No. When an employer withholds federal or state income taxes from employee paychecks, 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.

11-6

Questions Chapter 11 (Continued) 11. FICA stands for Federal Insurance Contribution Act; FUTA stands for Federal Unemployment Tax Act; and SUTA stands for State Unemployment Tax Act. 12.

A W-2 statement contains the employee’s name, address, social security number, wages, tips, other compensation, social security taxes withheld, wages subject to social security taxes, and federal, state and local income taxes withheld.

13.

Payroll deductions can be classified as either mandatory (required by the government) or voluntary (not required by the government). Mandatory deductions include FICA taxes and income taxes. Examples of voluntary deductions are health and life insurance premiums, pension contributions, union dues, and charitable contributions.

14. The employee earnings record is used in: (1) determining when an employee has earned the maximum earnings subject to FICA taxes, (2) filing state and federal payroll tax returns, and (3) providing each employee with a statement of gross earnings and tax withholdings for the year. 15. (a) The three types of employer payroll taxes are: (1) FICA, (2) federal unemployment, and (3) state unemployment. (b) The tax liability accounts are classified as current liabilities in the balance sheet. Payroll tax expense is classified under operating expenses in the income statement. 16. The main internal control objectives associated with payrolls are: (1) to safeguard company assets from unauthorized payments of payrolls and (2) to assure the accuracy and reliability of the accounting records pertaining to payrolls. 17. The four functions associated with payroll are: (1) hiring employees, (2) timekeeping, (3) preparing the payroll, and (4) paying the payroll. *18. Two additional types of fringe benefits are: (1) Paid absences—vacation pay, sick pay, and paid holidays. (2) Post-retirement benefits—pensions and health care and life insurance. *19. 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. *20. Post-retirement benefits consist of payments by employers to retired employees for: (1) pensions and (2) health care and life insurance. *21. A 401(K) works as follows: an employee can contribute up to a certain percentage of pay into a 401(K) plan and employers will match a percentage of the employee’s contribution. *22. A defined contribution plan defines the contribution that an employer will make but not the benefit that the employee will receive. In a defined benefit plan, the employer agrees to pay a defined amount to retirees based on employees meeting certain eligibility standards.

11-7

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 11-1 (a) A note payable due in two years is a long-term liability, not a current liability. (b) $30,000 of the mortgage payable is a current maturity of long-term debt. This amount should be reported as a current liability; the remainder should be reported as a long-term liability. (c) Interest payable is a current liability because it will be paid out of current assets in the near future. (d) Accounts payable is a current liability because it will be paid out of current assets in the near future.

BRIEF EXERCISE 11-2 July 1 Dec. 31

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

60,000

Interest Expense ............................................. Interest Payable ($60,000 X 10% X 1/2)...........................

3,000

60,000

3,000

BRIEF EXERCISE 11-3 Sales tax payable (1) Sales = $15,600 = ($16,380 ÷ 1.05) (2) Sales taxes payable = $780 = ($15,600 X 5%) Mar. 16

11-8

Cash ................................................................. Sales Revenue ........................................... Sales Taxes Payable..................................

16,380 15,600 780

BRIEF EXERCISE 11-4 Cash ................................................................................ Unearned Ticket Revenue ...................................... (To record sale of 4,000 season tickets)

840,000

Unearned Ticket Revenue.............................................. Ticket Revenue ....................................................... (To record basketball ticket revenues earned)

70,000

840,000

70,000

BRIEF EXERCISE 11-5 (a) Working capital = $4,594,772 – $1,717,728 = $2,877,044 (thousand) (b) Current ratio = $4,594,772 ÷ $1,717,728 = 2.67:1

BRIEF EXERCISE 11-6 Dec. 31

Warranty Expense ......................................... Warranty Liability .................................. [(1,000 X 5%) X $90]

4,500 4,500

BRIEF EXERCISE 11-7 Gross earnings: Regular pay (40 X $16) ........................................... Overtime pay (5 X $24) ...........................................

$640.00 120.00

Gross earnings ............................................................... Less: FICA taxes payable ($760 X 7.65%).................... Federal income taxes payable ........................... Net pay ............................................................................

$ 58.14 95.00

$760.00 $760.00 153.14 $606.86

11-9

BRIEF EXERCISE 11-8 Jan. 15

Jan. 15

Salaries and Wages Expense ......................... FICA Taxes Payable ($760 X 7.65%) ....... Federal Income Taxes Payable ............... Salaries and Wages Payable ...................

760.00

Salaries and Wages Payable........................... Cash ..........................................................

606.86

58.14 95.00 606.86 606.86

BRIEF EXERCISE 11-9 Jan. 31

Payroll Tax Expense........................................ FICA Taxes Payable ($80,000 X 7.65%) ..... Federal Unemployment Taxes Payable ($80,000 X .8%)....................... State Unemployment Taxes Payable ($80,000 X 5.4%) ...................................

11,080 6,120 640 4,320

BRIEF EXERCISE 11-10 (a) Timekeeping (b) Hiring employees

*BRIEF EXERCISE 11-11 Jan. 31

Vacation Benefits Expense (70 X $120) ....... Vacation Benefits Payable ....................

8,400 8,400

SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 11-1 1. 2. 3.

$70,000 X 6% X 5/12 = $1,750 $42,000/1.05 = $40,000; $40,000 X 5% = $2,000 $45,000 X 2/6 = $15,000

11-10 .

DO IT! 11-2 (a) Current liabilities Notes payable.................................................... Accounts payable ............................................. Long-term debt due within one year................ Unearned service revenue................................ Salaries and wages payable ............................. Lawsuit liability ................................................. Total current liabilities ................................

$ 40,000 63,000 90,000 70,000 32,000 25,000 $320,000

(b) Working capital = Current assets – Current liabilities = $570,000 – $320,000 = $250,000 Current ratio: Current assets ÷ Current liabilities = $570,000 ÷ $320,000 = 1.78:1 DO IT! 11-3a (a) Net pay: $80,000 – (7.65% X $80,000) – $14,000 – $1,600 = $58,280 (b) Salaries and Wages Expense ................................ FICA Taxes Payable........................................... Federal Income Taxes Payable ......................... State Income Taxes Payable ............................. Salaries and Wages Payable.............................

80,000 6,120 14,000 1,600 58,280

DO IT! 11-3b Payroll Tax Expense ...................................................... FICA Taxes Payable ($120,000 X 7.65%) ............... Federal Unemployment Taxes Payable ................. State Unemployment Taxes Payable.....................

16,620 9,180 960 6,480

11-11

SOLUTIONS TO EXERCISES EXERCISE 11-1 July 1, 2017 Cash ...................................................................... Notes Payable ................................................

50,000

November 1, 2017 Cash ...................................................................... Notes Payable ................................................

60,000

50,000

60,000

December 31, 2017

11-12 .

Interest Expense ($50,000 X 8% X 6/12) ....................................... Interest Payable .............................................

2,000

Interest Expense ($60,000 X 6% X 2/12) ....................................... Interest Payable .............................................

600

February 1, 2018 Notes Payable....................................................... Interest Payable.................................................... Interest Expense................................................... Cash ...............................................................

60,000 600 300

April 1, 2018 Notes Payable....................................................... Interest Payable.................................................... Interest Expense................................................... Cash ...............................................................

50,000 2,000 1,000

2,000

600

60,900

53,000

EXERCISE 11-2 (a) June 1 Cash ......................................................... Notes Payable ...................................

90,000

(b) June 30 Interest Expense ...................................... Interest Payable [($90,000 X 8%) X 1/12] ................

600

(c) Dec. 1 Notes Payable .......................................... Interest Payable ($90,000 X 8% X 6/12) .......................... Cash...................................................

90,000

600

3,600 93,600

(d) $3,600

EXERCISE 11-3 Apr. 10

POOLE COMPANY Cash ............................................................... Sales Revenue ....................................... Sales Taxes Payable..............................

31,500 30,000 1,500

WATERMAN COMPANY Cash ............................................................... Sales Revenue ($25,680 ÷ 1.07) ............ Sales Taxes Payable ($25,680 – $24,000).............................

25,680 24,000 1,680

11-13

EXERCISE 11-4 (a) Nov. 30

(b) Dec. 31

Cash ............................................................. 300,000 Unearned Subscription Revenue (15,000 X $20) ................................

300,000

Unearned Subscription Revenue ............ Subscription Revenue ($300,000 X 1/12) ...........................

25,000 25,000

Unearned Subscription Revenue ............. Subscription Revenue ($300,000 X 3/12)............................

75,000 75,000

EXERCISE 11-5 (a) Warranty Expense (1,860 X $15) ............................... Warranty Liability ...............................................

27,900

Warranty Liability....................................................... Repair Parts ........................................................

15,000

27,900 15,000

(b) Estimated warranties outstanding: Month November December Total

Estimate 900 960 1,860

Units Defective 600 400 1,000

Outstanding 300 560 860

Estimated warranty liability—860 X $15 = $12,900. (c) Warranty Liability (500 X $15) ................................... Repair Parts ........................................................

11-14 .

7,500 7,500

EXERCISE 11-6 (a) If a contingency is remote (unlikely to occur), it need not be recorded or disclosed. (b) Since the contingency is probable and reasonably estimable, the liability should be recorded in the accounts. In addition, the details should be disclosed in the notes to the financial statements. The journal entry is: Lawsuit Loss .................................................... 1,000,000 Lawsuit Liability ................................. 1,000,000 (c) If a contingency is reasonably possible, it need not be recorded, but must be disclosed in the notes to the financial statements. EXERCISE 11-7 (a)

YOUNGER ONLINE COMPANY Partial Balance Sheet Current liabilities Accounts payable ......................................................... Mortgage payable.......................................................... Unearned ticket revenue............................................... Warranty liability ........................................................... Sales taxes payable ...................................................... Interest payable............................................................. Total current liabilities ..........................................

$ 73,000 30,000 24,000 18,000 10,000 8,000 $163,000

(b) Younger Online Company’s working capital is $137,000 and its current ratio is 1.84:1. Although a current ratio of 2:1 has been considered the standard for a good credit rating, many companies operate successfully with a current ratio below 2:1.

11-15

EXERCISE 11-8 (a) Current ratio 2016 $9,598 ÷ $5,839 = 1.64:1 2017 $10,795 ÷ $4,897 = 2.20:1 Working capital 2016 $9,598 – $5,839 = $3,759 million 2017 $10,795 – $4,897 = $5,898 million (b) Current ratio $10,595 ÷ $4,697 = 2.26:1 Working capital $10,595 – $4,697 = $5,898 million It would make its current ratio increase slightly, but its working capital would remain the same. EXERCISE 11-9 (a) 1. Regular 40 X $16 = $640 Overtime 2 X $24 = 48 Gross earnings $688 2.

FICA taxes—$52.63 = ($688 X 7.65%).

Federal income taxes $29.

State income taxes $13.76 = ($688 X 2%).

Net pay $567.61 = ($688.00 – $52.63 – $29.00 – $13.76 – $25.00).

(b) Salaries and Wages Expense................................... FICA Taxes Payable .......................................... Federal Income Taxes Payable......................... State Income Taxes Payable ............................ Health Insurance Payable ................................. Salaries and Wages Payable ............................

11-16 .

688.00 52.63 29.00 13.76 25.00 567.61

EXERCISE 11-10 J. Seligman

$4,500 X 7.65% = $344.25. Seligman’s total gross earnings for the year are $98,000 = ($93,500 + $4,500), which is below the $117,000 maximum for Social Security taxes.

L. Marshall ($1,900 X 6.2%) + ($4,500 X 1.45%) = $183.05. Marshall’s total gross earnings for the year are $119,600 ($115,100 + $4,500). Thus, only $1,900 of the gross earnings ($4,500 – $2,600) for this pay period are subject to Social Security taxes. In addition, $4,500 is subject to Medicare (1.45%) taxes. R. Eby

($3,400 X 6.2%) + ($4,500 X 1.45%) = $282.25. Eby’s total gross earnings for the year are $118,100 ($113,600 + $4,500). Thus, only $3,400 of the gross earnings ($4,500 – $1,100) for this pay period are subject to Social Security taxes. In addition, $4,500 is subject to Medicare (1.45%) taxes.

T. Olson

($4,500 X 1.45%) = $65.25. Olson’s gross earnings prior to this pay exceed the maximum amount subject to Social Security taxes. However, all of the gross earnings in the December 31 pay period are subject to Medicare taxes.

EXERCISE 11-11 (a) See next page. (b) Jan. 31

Jan. 31

11-10 .

Salaries and Wages Expense................ 1,880.00 FICA Taxes Payable ........................ Federal Income Taxes Payable......... Health Insurance Payable ............... Salaries and Wages Payable .......... Payroll Tax Expense ............................... FICA Taxes Payable ........................ Federal Unemployment Taxes Payable ($1,880 X .8%) ................ State Unemployment Taxes Payable ($1,880 X 5.4%) ..............

143.82 129.00 60.00 1,547.18

260.38 143.82 15.04 101.52

EXERCISE 11-11 (Continued)

(a)

RAMIREZ COMPANY Payroll Register For the Week Ending January 31 Earnings

Employee L. Helton R. Kenseth D. Tavaras Totals

Total Hours 46 42 44

Regular Overtime $ 480.00 560.00 600.00 $1,640.00

$108.00 42.00 90.00 $240.00

Gross Pay

FICA Taxes

$ 588.00 602.00 690.00 $1,880.00

$ 44.98 46.05 52.79 $143.82

Deductions Federal Health Income Taxes Insurance $ 34.00 37.00 58.00 $129.00

$10.00 25.00 25.00 $60.00

Total $ 88.98 108.05 135.79 $332.82

Net Pay $ 499.02 493.95 554.21 $1,547.18

EXERCISE 11-19 (a) (1) (2) (3) (4) (5)

$ 900 [$10,000 see (2) below – $9,100]. $10,000 (FICA taxes $765 ÷ 7.65%). $ 400 ($10,000 X 4%). $ 2,405 ($10,000 – $7,595). $10,000

(b) Feb. 28

Salaries and Wages Expense .................. FICA Taxes Payable .......................... Federal Income Taxes Payable .......................................... State Income Taxes Payable ............ Union Dues Payable ......................... Salaries and Wages Payable ............

10,000

Salaries and Wages Payable ................... Cash ...................................................

7,595

765 1,140 400 100 7,595 7,595

EXERCISE 11-13 (a) FICA tax ($770,000 X 6.2%) + ($850,000 X 1.45%) .... SUTA tax ($100,000 X 5.4%) ...................................... FUTA tax ($100,000 X 0.8%) ...................................... Total payroll tax..................................................

$60,065 5,400 800 $66,265

(b) Payroll Tax Expense .................................................. FICA Taxes Payable ........................................... State Unemployment Taxes Payable ................ Federal Unemployment Taxes Payable ............

66,265 60,065 5,400 800

11-19

*EXERCISE 11-14 Mar. 31

Vacation Benefits Expense (10 X 2 X $140) ............................................ Vacation Benefits Payable ..................... Pension Expense ($40,000 X 10%) ................ Pension Liability .....................................

2,800 2,800 4,000 4,000

*EXERCISE 11-15 1.

Vacation Benefits Expense..................................... Vacation Benefits Payable (20 X 5 X $140) ............................................

14,000

Pension Expense..................................................... Cash ................................................................ Pension Liability .............................................

100,000

Vacation Benefits Payable ...................................... Cash (18 X 1 X $140).......................................

2,520

11-20 .

14,000 70,000 30,000 2,520

SOLUTIONS TO PROBLEMS PROBLEM 11-1A

(a) Jan. 5

12 14 20

21 25

Cash........................................................... Sales Revenue ($20,520 ÷ 108%)...... Sales Taxes Payable ($20,520 – $19,000) ........................

20,520

Unearned Service Revenue...................... Service Revenue ...............................

10,000

Sales Taxes Payable................................. Cash ...................................................

7,700

Accounts Receivable................................ Sales Revenue................................... Sales Taxes Payable (900 X $50 X 8%) ............................

48,600

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

27,000

Cash........................................................... Sales Revenue ($12,420 ÷ 108%)...... Sales Taxes Payable ($12,420 – $11,500) ........................

12,420

(b) (1) Jan. 31

(2) Jan. 31

19,000 1,520

10,000 7,700 45,000 3,600 27,000 11,500 920

Interest Expense ............................... Interest Payable ......................... ($27,000 X 8% X 1/12 = $180; $180 X 1/3)

60 60

Warranty Expense ($45,000 X 7%) ............................... Warranty Liability ......................

3,150 3,150

11-21

PROBLEM 11-1A (Continued) (c) Current liabilities Notes payable ................................................................... Accounts payable............................................................. Unearned service revenue ($16,000 – $10,000) .............. Sales taxes payable ($1,520 + $3,600 + $920)................. Warranty liability .............................................................. Interest payable ................................................................ Total current liabilities..............................................

11-22 .

$27,000 52,000 6,000 6,040 3,150 60 $94,250

PROBLEM 11-2A

(a) Jan. Feb.

2 1

Mar. 31

Apr.

July

Sept. 30

Oct.

Dec.

Dec. 31

Inventory .................................................. Accounts Payable............................

30,000

Accounts Payable ................................... Notes Payable ..................................

30,000

30,000 30,000

Interest Expense ($30,000 X 9% X 2/12) .......................... Interest Payable ...............................

450 450

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

30,000 450

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

71,000

30,450 11,000 60,000

Interest Expense ($60,000 X 10% X 3/12) ........................ Interest Payable ...............................

1,500 1,500

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

60,000 1,500

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

24,000

61,500 24,000

Interest Expense ($24,000 X 8% X 1/12) .......................... Interest Payable ...............................

160 160

11-23

PROBLEM 11-2A (Continued) (b) 4/1 10/1

4/1 10/1

3/31 9/30 12/31 12/31 Bal.

Notes Payable 30,000 2/1 60,000 7/1 12/1 12/31 Bal.

30,000 60,000 24,000 24,000

Interest Payable 450 3/31 1,500 9/30 12/31 12/31 Bal.

450 1,500 160 160

Interest Expense 450 1,500 160 2,110

(c) Current liabilities Notes payable ................................................. Interest payable ..............................................

$24,000 160

(d) Total interest is $2,110.

11-24 .

$24,160

(a)

Earnings

Employee Ben Abel Rita Hager Jack Never Sue Perez Totals

Hours Regular 40 42 44 46

Overtime

600.00 0 640.00 48.00 520.00 78.00 520.00 117.00 2,280.00 243.00

Deductions Gross Pay FICA

Federal State Income Income United Tax Tax Fund

600.00 688.00 598.00 637.00 2,523.00

49.00 22.00 60.00 61.00 192.00

45.90 52.63 45.75 48.73 193.01

18.00 20.64 17.94 19.11 75.69

5.00 5.00 8.00 5.00 23.00

Total 117.90 100.27 131.69 133.84 483.70

Net Pay 482.10 587.73 466.31 503.16 2,039.30

Salaries and Wages Expense 600.00 688.00 598.00 637.00 2,523.00

PROBLEM 11-3A

MANN HARDWARE Payroll Register For the Week Ending March 15, 2017

PROBLEM 11-3A (Continued) (b) Mar. 15

(d) Mar. 31

11-26 .

Salaries and Wages Expense ............. FICA Taxes Payable .................... Federal Income Taxes Payable..................................... State Income Taxes Payable....... United Fund Contributions Payable..................................... Salaries and Wages Payable ......

2,523.00

Payroll Tax Expense ........................... FICA Taxes Payable ($2,523 X 7.65%) ...................... Federal Unemployment Taxes Payable ($2,523 X .8%) ............ State Unemployment Taxes Payable ($2,523 X 5.4%) ..........

349.43

Salaries and Wages Payable .............. Cash .............................................

2,039.30

FICA Taxes Payable ($193.01 + $193.01).......................... Federal Income Taxes Payable .......... Cash .............................................

193.01 192.00 75.69 23.00 2,039.30

193.01 20.18 136.24

2,039.30

386.02 192.00 578.02

PROBLEM 11-4A

(a) Jan. 10 12

15 17 20

Union Dues Payable ...................... Cash ........................................

870.00

FICA Taxes Payable....................... Federal Income Taxes Payable ..... Cash ........................................

760.00 1,204.60

U.S. Savings Bonds Payable......... Cash ........................................

360.00

State Income Taxes Payable ......... Cash ........................................

108.95

Federal Unemployment Taxes Payable ....................................... State Unemployment Taxes Payable ....................................... Cash ........................................

870.00

1,964.60 360.00 108.95 288.95 1,954.40 2,243.35

Salaries and Wages Expense........ FICA Taxes Payable ............... Federal Income Taxes Payable ............................... State Income Taxes Payable ............................... United Fund Contributions Payable ............................... Union Dues Payable............... Salaries and Wages Payable ...............................

58,000.00

Salaries and Wages Payable ......... Cash ........................................

48,663.00

4,437.00 2,158.00 454.00 1,888.00 400.00 48,663.00

48,663.00

11-27

PROBLEM 11-4A (Continued) (b) 1. Jan.

*2.

11-28 .

Payroll Tax Expense....................... FICA Taxes Payable ($58,000 X 7.65%) ................. Federal Unemployment Taxes Payable ($58,000 X .8%) ....... State Unemployment Taxes Payable ($58,000 X 5.4%).....

8,033.00 4,437.00 464.00 3,132.00

Vacation Benefits Expense ($58,000 X 6%) ............................... 3,480.00 Vacation Benefits Payable.......

3,480.00

PROBLEM 11-5A

(a) Salaries and Wages Expense ............................... FICA Taxes Payable ....................................... Federal Income Taxes Payable ..................... State Income Taxes Payable ......................... United Fund Contributions Payable ............. Health Insurance Payable .............................. Salaries and Wages Payable .........................

570,000 38,645* 174,400 17,100 27,500 17,200 295,155

($490,000 X 6.2%) + ($570,000 X 1.45%) (b) Payroll Tax Expense .............................................. FICA Taxes Payable ....................................... Federal Unemployment Taxes Payable ($135,000 X .8%) ......................................... State Unemployment Taxes Payable ($135,000 X 2.5%) ....................................... (c) Employee

Federal Income Wages, Tips, Other Tax Compensation Withheld

Maria Sandoval Jennifer Mingenback

$59,000 26,000

$28,500 10,200

43,100 38,645 1,080 3,375

State Income Tax Withheld

FICA FICA Tax Wages Withheld

$1,770 (1) 780 (2)

$59,000 26,000

$4,514 1,989

(1) $59,000 X 3%. (2) $26,000 X 3%.

11-29

COMPREHENSIVE PROBLEM SOLUTION

(a)

1. Interest Payable .............................................. Cash .........................................................

250

2. Inventory ......................................................... Accounts Payable ...................................

261,100

3. Cash................................................................. Sales Revenue ......................................... Sales Taxes Payable ...............................

468,600

Cost of Goods Sold ........................................ Inventory ..................................................

265,000

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

230,000

5. Sales Taxes Payable....................................... Cash .........................................................

17,000

6. Other Operating Expenses............................. Cash .........................................................

30,000

7. Salaries and Wages Expense......................... FICA Taxes Payable (7.65% X $60,000).. Federal Income Taxes Payable .............. Salaries and Wages Payable ..................

60,000

11-30 .

250 261,100 440,000 28,600

265,000 230,000 17,000

30,000 4,590 8,900 46,510

COMPREHENSIVE PROBLEM SOLUTION (Continued) Adjusting Entries 8. Interest Expense ............................................. Interest Payable ......................................

250

9. Insurance Expense ($6,000 ÷ 12) ................... Prepaid Insurance ...................................

500

250 500

10. Depreciation Expense ($38,000 – $2,000) ÷ (5 X 12).............................. Accumulated Depreciation— Equipment ............................................

600 600

11. Payroll Tax Expense....................................... FICA Taxes Payable (7.65% X 60,000) ... Federal Unemployment Taxes Payable (0.8% X 60,000)...................... State Unemployment Taxes Payable (5.4% X 60,000)......................

8,310 4,590 480 3,240

11-31

COMPREHENSIVE PROBLEM SOLUTION (Continued) (a) and (b) Optional T accounts

Bal. (3)

Bal.

Cash 30,000 (1) 468,600 (4) (5) (6) 221,350

Bal. (2) Bal.

Inventory 30,750 (3) 261,100 26,850

Bal. Bal.

Prepaid Insurance 6,000 Adj. 5,500

Bal.

Equipment 38,000

250 230,000 17,000 30,000

(5) 265,000

(1)

11-32 .

Sales Taxes Payable 17,000 (3) 28,600 Bal. 11,600 Salaries and Wages Payable (7) 46,510

500 FICA Taxes Payable (7) 4,590 adj. 4,590 Bal. 9,180

Accumulated Depreciation— Equipment Adj. 600

Notes Payable Bal.

(4)

Accounts Payable 13,750 230,000 Bal. (2) 261,100 Bal. 44,850

Federal Income Taxes Payable (7) 8,900

Federal Unemployment Taxes Payable adj. 480 50,000

Interest Payable 250 Bal. adj. Bal.

250 250 250 .

State Unemployment Taxes Payable adj. 3,240

COMPREHENSIVE PROBLEM SOLUTION (Continued) (a) and (b) (Continued) Owner’s Capital Bal.

Sales Revenue (3)

(3)

40,750

440,000

Cost of Goods Sold 265,000

Salaries and Wages Expense (7) 60,000

adj.

Depreciation Expense 600

adj.

Insurance Expense 500

Other Operating Expenses (6) 30,000

adj.

Interest Expense 250

Payroll Tax Expense 8,310

11-33

COMPREHENSIVE PROBLEM SOLUTION (Continued) (b)

MORGAN COMPANY Adjusted Trial Balance January 31, 2017 Account Cash ............................................................ Inventory..................................................... Prepaid Insurance ...................................... Equipment .................................................. Accumulated Depreciation— Equipment ............................................... Accounts Payable ...................................... Interest Payable ......................................... Sales Taxes Payable .................................. Salaries and Wages Payable ..................... FICA Taxes Payable ................................... Federal Income Taxes Payable ................. Federal Unemployment Taxes Payable .... State Unemployment Taxes Payable ........ Notes Payable ............................................ Owner’s Capital .......................................... Sales Revenue............................................ Cost of Goods Sold.................................... Salaries and Wages Expense .................... Payroll Tax Expense .................................. Depreciation Expense................................ Insurance Expense .................................... Other Operating Expenses ........................ Interest Expense ........................................

11-34 .

Debit $221,350 26,850 5,500 38,000

Credit

600 44,850 250 11,600 46,510 9,180 8,900 480 3,240 50,000 40,750 440,000

265,000 60,000 8,310 600 500 30,000 250 $656,360

$656,360

COMPREHENSIVE PROBLEM SOLUTION (Continued) (c)

MORGAN COMPANY Income Statement For the Month Ended January 31, 2017 Sales revenue............................................. Cost of goods sold .................................... Gross profit ................................................ Operating expenses Salaries and wages expense ............. Payroll tax expense ............................ Depreciation expense ........................ Insurance expense ............................. Other operating expenses ................. Total operating expenses .......................... Income from operations Other expenses and losses....................... Interest expense ........................................ Net income .................................................

$440,000 265,000 175,000 $60,000 8,310 600 500 30,000 99,410 75,590 250 $75,340

MORGAN COMPANY Owner’s Equity Statement For the Month Ended January 31, 2017 Owner’s Capital, 12/31/16 .......................... Add: Net income ...................................... Owner’s Capital, 1/31/17 ............................

$ 40,750 75,340 $116,090

11-35

COMPREHENSIVE PROBLEM SOLUTION (Continued) MORGAN COMPANY Balance Sheet January 31, 2017 Current Assets Cash..................................................... Inventory ............................................. Prepaid insurance............................... Total current assets ...................... Property, Plant, and Equipment Equipment ........................................... Accumulated depreciation— equipment ........................................ Total plant assets.......................... Total assets Current Liabilities Accounts payable ............................... Salaries and wages payable .............. Sales taxes payable ............................ FICA taxes payable ............................. Federal income taxes payable ........... State unemployment taxes payable ............................................ Federal unemployment taxes payable ............................................ Interest payable .................................. Total current liabilities ..................

$221,350 26,850 5,500 $253,700 38,000 600 37,400 $291,100 $ 44,850 46,510 11,600 9,180 8,900 3,240 480 250 $125,010

Long-term liabilities Notes payable ..................................... Total liabilities ............................... Owner’s equity Owner’s capital .......................................... Total liabilities and owner’s equity .........................................

11-36 .

50,000 175,010 116,090 $291,100

BYP 11-1

FINANCIAL REPORTING PROBLEM

(a) Total current liabilities at September 28, 2013, $43,658 million. Apple’s total current liabilities increased by $5,116 ($43,658 – $38,542) million over the prior year. (b) In Note 2 under the subheading “Commitments and Contingencies,” Apple states: “We recognize liabilities for contingencies and commitments when a loss is probable and estimable.” (c) The components of current liabilities are: Accounts payable ............................................................ Accrued expenses ........................................................... Deferred revenue ............................................................. Total current liabilities ..............................................

$22,367 13,856 7,435 $43,658

11-37

BYP 11-2

COMPARATIVE ANALYSIS PROBLEM

(a) PepsiCo’s largest current liability was “accounts payable and other current liabilities” at $12,533 million. Its total current liabilities were $17,839 million. Coca-Cola’s largest current liability was “loans and notes payable” at $16,901 million. Its total current liabilities were $27,811 million. (b)

(in millions)

PepsiCo

Coca-Cola

(1) Working capital $22,203 – $17,839 = $4,364 $31,304 – $27,811 = $3,493 (2) Current ratio

$22,203 $17,839

= 1.24:1

$31,304 $27,811

= 1.13:1

11-38 .

BYP 11-3

COMPARATIVE ANALYSIS PROBLEM

(a) Amazon’s largest current liability was “accounts payable” at $15,133 million. Its total current liabilities were $22,980 million. Wal-Mart’s largest current liability was also “accounts payable” at $37,415 million. Its total current liabilities were $69,345 million. (b)

Amazon

Wal-Mart

(1) Working capital

$24,625 – $22,980 = $1,645

$61,185 – $69,345 = ($8,160)

(2) Current ratio

$24,625

$61,185

(in millions)

$22,980

= 1.07:1

$69,345

= 0.88:1

(c) Based on this information, it appears that neither company is very liquid. Amazon’s working capital was $9,805 million more than Wal-Mart’s while its current ratio was 22% higher.

11-39

BYP 11-4

REAL-WORLD FOCUS

(a) A worker who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. See Pub. 15-A, Employer’s Supplemental Tax Guide, for more information on how to determine whether an individual providing services is an independent contractor or an employee. Generally, people in business for themselves are not employees. For example, doctors, lawyers, veterinarians, construction contractors, and others in an independent trade in which they offer their services to the public are usually not employees. However, if the business is incorporated, corporate officers who work in the business are employees. (b) Payments for the services of a child under the age of 18 who works for his or her parent in a trade or business (sole proprietorship or a partnership in which each partner is a parent of the child) are not subject to social security and Medicare taxes. If these services are for work other than in a trade or business, such as domestic work in the parent’s private home, they are not subject to social security and Medicare taxes until the child reaches 21. (c) Any employee who does not have a social security card can get one by completing Form SS-5, Application for a Social Security Card, and submitting the necessary documentation. (d) Tips your employee receives are generally subject to withholding. Your employee must report cash tips to you by the 10th of the month after the month the tips are received. The report should include tips you paid over to the employee for charge customers and tips the employee received directly from customers. No report is required for months when tips are less than $20. Your employee reports the tips on Form 4070, Employee’s Report of Tips to Employer, or on a similar statement.

11-40 .

BYP 11-4 (Continued) (e) In general, you must deposit federal income tax withheld and both the employer and employee social security and Medicare taxes (minus any advance EIC payments). You must deposit by using the Electronic Federal Tax Payment System (EFTPS) or by mailing or delivering a check, money order, or cash to an authorized financial institution or Federal Reserve bank using Form 8109 Federal Tax Deposit Coupon. However, some taxpayers are required to deposit by electronic funds transfer.

11-41

BYP 11-5

DECISION MAKING ACROSS THE ORGANIZATION

(a)

BANISTER SERVICES INC.

Months January–March April–May June–October November–December Total Cost

Number of Employees 2 3 2 3

Days Worked 60 (20 X 3) 50 (25 X 2) 90 (18 X 5) 46 (23 X 2)

Daily Rate $80 80 80 80

Cost $ 9,600 12,000 14,400 11,040 $47,040

PERMANENT EMPLOYEES Salaries ($22,000 X 2) .............................................. Additional payroll costs FICA taxes (7.65% X $44,000) .......................... Federal unemployment taxes (.8% X $14,000) ............................................. State unemployment taxes (5.4% X $14,000) ........................................... Medical and dental insurance (2 X $40 X 12) ................................................

$44,000 $3,366 112 756 960

5,194 $49,194

Cunningham Processing Company would save $2,154 ($49,194 – $47,040), as shown, by discharging the two employees and accepting the Banister Services Inc. plan. (b) Carol should consider the following additional factors: (1) The effect on the morale of the continuing employees if two employees are terminated. (2) The anticipated efficiency of Banister Services Inc. workers compared to the efficiency of the two employees who would be terminated. (3) The effect on management control and supervision of using Banister Services Inc. personnel. (4) The time that may be required to integrate the different Banister Services Inc. personnel into the Cunningham Processing Company’s procedures. 11-42 .

BYP 11-6

COMMUNICATION ACTIVITY

Dear Mr. Falcon: In response to your request, I wish to explain the types of taxes that are involved in determining the payroll and in recording and paying employer payroll taxes. The taxes that are involved in determining the payroll are as follows: 1.

FICA taxes. These taxes were enacted by Congress to provide workers with supplemental retirement, employment disability, and medical benefits. These benefits are financed by a tax levied on employees’ earnings. The tax rate and tax base are set by Congress and both change intermittently. Our text uses a rate of 7.65% on the first $117,000 of gross earnings. FICA taxes are withheld by the employer and then remitted to the government. These taxes are not an expense to the employer.

Federal income taxes. Employers are required to withhold federal income taxes from employees each pay period. The amount depends on the employee’s gross earnings, the number of allowances claimed by the employee, and the length of the pay period. The amounts withheld are remitted by the employer to the government. These taxes are not an expense to the employer.

State and city income taxes. Where applicable, these income taxes are similar to federal income taxes.

There are three types of payroll taxes that are levied on employers that are recognized as payroll tax expense by the employer. 1.

FICA taxes. The employer must match each employee’s FICA contribution. The employer’s tax is subject to the same rate and maximum earnings applicable to the employee.

11-43

BYP 11-6 (Continued) 2.

Federal unemployment taxes. These taxes provide benefits to employees who lose their jobs through no fault of their own. The tax is 6.2% on the first $7,000 of gross earnings paid to each employee during a calendar year. The employer is allowed a maximum credit of 5.4% on the federal rate for contributions to state unemployment taxes.

State unemployment taxes. These taxes also provide benefits to employees who lose their jobs. The basic rate is usually 5.4% on the first $7,000 of wages paid to an employee during the year.

Very truly yours,

11-44 .

BYP 11-7

ETHICS CASE

(a) The stakeholders in this situation are:  Robert Eberle, owner and manager.  Sixteen part-time employees of Robert’s.  Anne Farr, public accountant. (b) Not withholding federal and state taxes from employees’ payroll is both illegal and unethical. Also, not paying FICA taxes, and state and federal unemployment taxes, is illegal and unethical. (c) Anne Farr, as Robert’s public accountant, should not be an accomplice to improper payroll deductions and accounting. Anne should constantly remind Robert of the consequences of his illegal payroll payments and the unrecorded payments. She should advise Robert that not only is the government deprived of its proper tax revenues, but employees are deprived of social security and possibly Medicare credits as well as worker’s compensation insurance. (d) An important internal control principle is to make no payments from cash receipts. All cash receipts should be deposited daily intact in the bank and all disbursements should be made by properly authorized and signed checks.

11-45

BYP 11-8

ALL ABOUT YOU

The answer to these questions depends on the state in which the student resides. It also will be depend on the year chosen, although we expect that the results will be much the same whether they pick any rates between 2012 and 2014. We provide a solution for this problem using the state of Wisconsin as an example. It should be pointed out that certain taxes can be deducted for computing federal income tax but are ignored in our computation. (a) Wisconsin state income taxes for a single person with a taxable income of $60,000 is $3,701. The tax rate between $17,680 and $132,580 is $950.30 plus 6.5 percent over $17,680. Therefore the computation is as follows: ($60,000 – $17,680) X 6.5% = $2,751 Base rate 950 Total state income tax $3,701 (b) The property tax on a $200,000 home at 2.1% is $4,200. (c) The state gasoline tax in Wisconsin is 32.9 cents per gallon and the federal gasoline tax is 18.4 cents per gallon. Your total taxes on gasoline are computed as follows: 300 gallons X ($0.329 + $0.184) = $154 (d) In Wisconsin the state sales tax rate is 5% and excludes food and prescription drug purchases. Therefore the sales tax is $200 ($4,000 X 5%). (e) The social security rate is 7.65% on income of $60,000 or $4,590. (f) Federal income taxes for a single person with a taxable income of $60,000 is $11,030. The tax rate between $35,350 and $85,650 is $4,867 plus 25% over $35,350. Therefore the computation is as follows: ($60,000 – $35,350) X 25% = $ 6,163 Base rate 4,867 Total tax $11,030

11-46 .

BYP 11-8 (Continued) (g) The total taxes paid therefore are computed as follows, based on a $60,000 income amount: State income tax..................................................... Property tax on home ............................................ Gasoline tax............................................................ Sales tax ................................................................. Social security tax .................................................. Federal income tax ................................................. Total tax ..................................................................

$ 3,701 4,200 154 200 4,590 11,030 $23,875

The percentage of total taxes to income is therefore 40% ($23,875/$60,000), given the information above.

11-47

BYP 11-9

FASB CODIFICATION ACTIVITY

(a) Current liabilities is used principally to designate obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities. See paragraphs 210-10-45-5 through 45-12. (b) A contingent liability is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an entity that will ultimately be resolved when one or more future events occur or fail to occur. (c) Disclosure of a contingent liability should be made if there is at least a reasonable possibility that a loss or an additional loss may have been incurred and either of the following conditions exists: a. An accrual is not made for a loss contingency because conditions for accrual are not met. b. An exposure to loss exists in excess of the amount accrued.

11-48 .

IFRS EXERCISES IFRS 11-1 Under IFRS a provision is defined as a liability of uncertain timing or amount. Examples include warranties, employee vacation pay, and anticipated losses. IFRS 11-2 The similarities between GAAP and IFRS include: (1) the basic definition of a liability, and (2) the accounting for notes payable, unearned revenue, and payroll taxes. Differences between GAAP and IFRS include: (1) IFRS showing long-term liabilities before current liabilities, (2) IFRS uses the term contingent liability to refer only to possible obligations that are not recognized in the financial statements but may be disclosed, and (3) IFRS uses the term provisions for items that GAAP would treat as recordable contingent liabilities.

11-49

CHAPTER 12 Accounting for Partnerships ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Brief Exercises

Questions

Do It!

Exercises

A Problems

Discuss and account for the formation of a partnership.

1, 2, 3, 4, 5, 17

1, 2

1, 2, 3

Explain how to account for net income or net loss of a partnership.

6, 7, 8, 9, 10, 11

3, 4, 5

4, 5, 6, 7

1A, 2A

Explain how to account for the liquidation of a partnership.

12, 13, 14, 15, 6 16

3a, 3b

8, 9, 10

*4.

Prepare journal entries when a new partner is either admitted or withdraws.

18, 19, 20, 21, 7, 8, 9, 10 22, 23, 24

11, 12, 13, 14, 15

4A, 5A

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the chapter.

12-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description

Difficulty Level

Time Allotted (min.)

Prepare entries for formation of a partnership and a balance sheet.

Simple

20–30

Journalize divisions of net income and prepare a partners’ capital statement.

Moderate

30–40

Prepare entries with a capital deficiency in liquidation of a partnership

Moderate

30–40

*4A

Journalize admission of a partner under different assumptions.

Moderate

30–40

*5A

Journalize withdrawal of a partner under different assumptions.

Moderate

30–40

12-2 .

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 12 ACCOUNTING FOR PARTNERSHIPS

Number

Difficulty

Time (min.)

BE1

Simple

2–4

BE2

Simple

3–5

BE3

Simple

4–6

BE4

Simple

4–6

BE5

Simple

6–8

BE6

Simple

2–4

*BE7

Simple

2–4

*BE8

Simple

3–5

*BE9

Simple

2–4

*BE10

Simple

3–5

DI1

Simple

2–4

DI2

Simple

4–6

DI3a

Simple

8–10

DI3b

Moderate

6–8

EX1

Simple

6–8

EX2

Simple

6–8

EX3

Simple

4–6

EX4

Simple

10–12

EX5

Simple

8–10

EX6

Simple

6–8

EX7

Simple

8–10

EX8

Simple

6–8

EX9

Simple

6–8

EX10

Simple

6–8

*EX11

Simple

4–6

*EX12

Simple

6–8

*EX13

Simple

4–6

*EX14

Moderate

8–10

*EX15

Moderate

6–8

P1A

1, 2

Simple

20–30

P2A

Moderate

30–40

P3A

Moderate

30–40

12-3

ACCOUNTING FOR PARTNERSHIPS (Continued)

Number

Difficulty

Time (min.)

*P4A

Moderate

30–40

*P5A

Moderate

30–40

BYP1

—

Simple

8–10

BYP2

1, 2

C, E

Simple

15–20

BYP3

Simple

10–15

BYP4 BYP5

2 1

E S

Simple Simple

10–15 15–20

12-4

Learning Objective

Knowledge

Comprehension

Application

1. Discuss and account for the formation of a partnership.

Q12-1 Q12-2 Q12-3 Q12-4

Q12-17 Q12-5 DI12-1 BE12-1 E12-1 BE12-2 E12-2

E12-3 P12-1A

2. Explain how to account for net income or net loss of a partnership.

Q12-6 Q12-7 Q12-9 Q12-11

Q12-8 Q12-10 BE12-3 BE12-4 BE12-5 DI12-2 E12-4

E12-5 EI12-6 EI12-7 P12-1A P12-2A

3. Explain how to account for the liquidation of a partnership.

Q12-12 Q12-13 Q12-14

Q12-15 Q12-16 BE12-6 DI12-3a DI12-3b

E12-8 E12-9 E12-10 P12-3A

*4. Prepare journal entries when a new partner is either admitted or withdraws.

Q12-18 Q12-19 Q12-23 Q12-24

Q12-20 E12-12 Q12-21 E12-13 Q12-22 E12-14 BE12-7 E12-15 BE12-8 P12-4A BE12-9 P12-5A BE12-10 E12-11

Broadening Your Perspective

Real-World Focus Decision Making Across the Organization

Analysis

Synthesis

Evaluation

Communication Decision Making All About You Across the Organization Ethics Case

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

12-5

ANSWERS TO QUESTIONS 1.

(a) Association of individuals. A partnership is a voluntary association of two or more individuals based on as simple an act as a handshake. Preferably, however, the agreement should be in writing. A partnership is both a legal entity and an accounting entity, but it is not a taxable entity. (b) Limited life. A partnership does not have unlimited life. A partnership may be ended voluntarily or involuntarily. Thus, the life of a partnership is indefinite. Any change in the members of a partnership results in the dissolution of the partnership. (c) Co-ownership of property. Partnership assets are co-owned by all the partners. If the partnership is terminated, the assets do not legally revert to the original contributor. Each partner has a claim on total assets equal to his or her capital balance. This claim does not attach to specific assets the individual partner contributed to the firm.

(a) Mutual agency. This characteristic means that the act of any partner is binding on all other partners when engaging in partnership business. This is true even when the partners act beyond the scope of their authority, so long as the act appears to be appropriate for the partnership. (b) Unlimited liability. Each partner is personally and individually liable for all partnership liabilities. Creditors’ claims attach first to partnership assets and then to personal resources of any partner, irrespective of that partner’s equity in the partnership.

The advantages of a partnership are: (1) combining skills and resources of two or more individuals, (2) ease of formation, (3) freedom from governmental regulations and restrictions, and (4) ease of decision making. Disadvantages are: (1) mutual agency, (2) limited life, and (3) unlimited liability.

A limited partnership is used when a general partner(s) wish to raise cash without involving outside investors in management of the business. Limited partners in this case have limited personal liability for business debts as long as they don’t participate in management.

Newland capital account balance should be $97,000, comprised of land $60,000, and equipment $57,000, less debt $20,000.

When the partnership agreement does not specify the division of net income or net loss, net income and net loss should be divided equally.

Factors to be considered in determining how income and loss should be divided are: (1) a fixed ratio is easy to apply and it may be an equitable basis in some circumstances; (2) capital balance ratios, when the funds invested in the partnership are considered the most critical factor; and (3) salary allowance and/or interest allowance coupled with a fixed ratio. This last approach gives specific recognition to differences that may exist among partners by providing salary allowances for time worked and interest allowances for capital invested.

The net income of $42,000 should be divided equally—$21,000 to M. Elston and $21,000 to R. Ogle

(a) Account debited: Income Summary; accounts credited: S. Pletcher, Capital and F. Holt, Capital. (b) Account debited: S. Pletcher, Drawings; account credited: Cash.

12-6

Questions Chapter 12 (Continued)

10.

Division of Net Income T. Greer Salary Allowance ............................................ Deficiency: ($15,000) ($40,000 – $55,000) T. Greer (60% X $15,000) ................... R. Parks (40% X $15,000) ................... Total division..............................

$30,000

R. Parks $25,000

$55,000

(6,000) $19,000

(9,000) (6,000) $40,000

(9,000) $21,000

Total

11. The financial statements of a partnership are similar to those of a proprietorship. The differences are due to the number of partners involved. The income statement for a partnership is identical to the income statement for a proprietorship except for the detailed information concerning the division of net income. The owners’ equity statement is called the partners’ capital statement. This statement shows the changes in each partner’s capital account and in total partnership capital during the year. On the balance sheet each partner’s capital balance is reported in the owners’ equity section. 12. Liquidation of a partnership ends both the legal and economic life of the entity. Partnership dissolution occurs whenever a partner withdraws or a new partner is admitted. Dissolution does not necessarily mean that the business ends. If the continuing partners agree, operations can continue without interruption by forming a new partnership. 13. No, Roger is not correct. All gains and losses on liquidation should be allocated to the partners on the basis of their income ratio. However, final cash distributions should be based on their capital balances. 14. Yes, Mike is correct. Capital balances are used because they represent the individual partner’s equity in the partnership. The objective of the distribution is to eliminate the balance in each partner’s capital account. 15. Total cash after paying liabilities .............................................................................. Total capital balances ($34,000 + $31,000 + $28,000) ............................................ Excess (gain on sale of noncash assets) .................................................................

16.

$103,000 93,000 $ 10,000

Allocated to Madson ($10,000 X 3/10) .....................................................................

3,000

Cash to Madson ($31,000 + $3,000)........................................................................

$ 34,000

Capital deficiency, M. Luthi ......................................................................................

4,000

Loss allocated to: L. Seastrom, capital ($4,000 X 3/8) ............................................

1,500

Cash to L. Seastrom ($12,000 – $1,500) .................................................................

10,500

17. A partnership is an association of two or more persons to carry on as co-owners of a business for profit. Apple is a corporation since its has thousands of owners (called stockholders).

12-7

Questions Chapter 12 (Continued) *18. This transaction represents the purchase of an existing partner’s interest. It is a personal transaction that has no effect on partnership net assets. *19. Partnership net assets increase $25,000. No, Jerry Park does not necessarily acquire a 1/6 income ratio. Unless stated otherwise, net income or net loss is divided evenly among all partners. *20. Jamar, Capital ......................................................................................... Parsons, Capital...............................................................................

68,000

*21. Jaime Keller, Capital ................................................................................ Sam Parmenter, Capital ...................................................................

41,000

*22. Pester’s share of the $4,000 bonus is computed as follows: Partnership assets ........................................................................... Capital credit, Riley .......................................................................... Bonus to retiring partner................................................................... Allocated to: Jaggard:$4,000 X 5/8 = ........................................................... Pester: $4,000 X 3/8 = ...........................................................

68,000

41,000

$85,000 81,000 4,000 $2,500 1,500 $

4,000 0

*23. Recording the revaluations violates the cost principle, which requires that assets be stated at original cost. It is also a departure from the going-concern assumption, which assumes the entity will continue indefinitely. *24. When a partner dies, it is usually necessary to determine the partner’s equity at the date of death by: (1) determining the net income or loss for the year to date, (2) closing the books, and (3) preparing financial statements. The partnership agreement may also require an audit of the financial statements by independent auditors and a revaluation of assets by an appraisal firm.

12-8

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 12-1 Cash ................................................................................ Equipment....................................................................... Fred Nichols, Capital ..............................................

10,000 4,000 14,000

BRIEF EXERCISE 12-2 Accounts Receivable ..................................................... Less: Allowance for doubtful accounts ........................ Equipment.......................................................................

$16,000 1,500

$14,500 11,000

Accumulated depreciation should not be shown because a new company cannot have any accumulated depreciation. BRIEF EXERCISE 12-3 The division is: Rod $45,000 ($75,000 X 60%) and Dall $30,000 ($75,000 X 40%). The entry is: Income Summary.................................................... 75,000 Rod, Capital ..................................................... 45,000 Dall, Capital ..................................................... 30,000 BRIEF EXERCISE 12-4 Division of Net Income

Salary allowance ....................... Remaining income, $20,000: ($45,000 – $25,000) P ($20,000 X 50%)............ F ($20,000 X 30%)............ W ($20,000 X 20%)............ Total remainder........ Total division of net income ..... .

Pitts $15,000

Filbert $ 5,000

Witten $ 5,000

Total $25,000

10,000 6,000 4,000 $25,000

$11,000

$9,000 .

20,000 $45,000 12-9

BRIEF EXERCISE 12-5 Division of Net Income

Salary allowance ....................................... Interest allowance ..................................... Remaining deficiency, ($6,000): [$31,000 – ($25,000 + $12,000)] Nabb ($6,000 X 50%) .......................... Fry ($6,000 X 50%) ............................. Total remainder .......................... Total division of net income .....................

Nabb $15,000 7,000

Fry $10,000 5,000

Total $25,000 12,000

(3,000) (3,000) $19,000

$12,000

(6,000) $31,000

BRIEF EXERCISE 12-6 A, Capital........................................................................... B, Capital........................................................................... C, Capital........................................................................... Cash ...........................................................................

8,000 9,000 4,000 21,000

*BRIEF EXERCISE 12-7 Eubank, Capital ................................................................ Tovar, Capital ............................................................

11,000 11,000

*BRIEF EXERCISE 12-8 Cash .................................................................................. Irey, Capital (50% X $8,600*) ............................................ Pedigo, Capital (50% X $8,600) ........................................ Vernon, Capital (45% X $148,000) ............................

58,000 4,300 4,300 66,600

*[($40,000 + $50,000 + $58,000) X 45%] – $58,000 = $8,600.

12-10 .

*BRIEF EXERCISE 12-9 Fernetti, Capital ................................................................. Lango, Capital ............................................................ Oslo, Capital...............................................................

20,000 10,000 10,000

*BRIEF EXERCISE 12-10 Fernetti, Capital ................................................................. Lango, Capital (50% X $4,000) .......................................... Oslo, Capital (50% X $4,000)............................................. Cash............................................................................

20,000 2,000 2,000 24,000

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 12-1 1. 2.

3. 4. 5.

True. False. If a partnership is dissolved, each partner has a claim on total assets equal to the balance in his or her capital account. The claim does not attach to any specific assets. False. In a limited partnership, the general partners have unlimited liability. True. True.

DO IT! 12-2 The division of net income is as follows:

Salary allowance ....................................... Remaining income ($75,000 – $43,000) Miley (40% X $32,000)........................ Guthrie (60% X $32,000) .................... Total remaining income ............. Total division of net income .....................

Miley $25,000

Guthrie $18,000

Total $43,000

12,800 19,200 $37,800

$37,200

32,000 $75,000

12-11

DO IT! 12-2 (Continued) Income Summary ...................................... Miley, Capital...................................... Guthrie, Capital ..................................

75,000 37,800 37,200

DO IT! 12-3a Noncash Item

Cash

Assets

Cisneros = Liabilities + , Capital +

Gunselman, Capital

Forren, +

Capital

Balance before liquidation

15,000

90,000

and allocation of gain

125,000

(90,000)

New balances

140,000

–0–

Pay liabilities

(40,000)

New balances

100,000

40,000

20,000

32,000

13,000

8,750

13,125

33,125

40,750

26,125

33,125

40,750

26,125

(33,125)

(40,750)

(26,125)

–0–

Sale of noncash assets 13,125 40,000

(40,000) –0–

–0–

Cash distribution to partners Final balances

(100,000) –0–

–0–

35,000 X 3/8

35,000 X 2/8

DO IT! 12-3b Oakley, Capital ($14,000 X 3/7) ......................................... Ellis, Capital ($14,000 X 4/7).............................................. Quaney, Capital .......................................................... (To record write-off of capital deficiency)

6,000 8,000

Oakley, Capital ($47,000 – $6,000).................................... Ellis, Capital ($40,000 – $8,000) ........................................ Cash............................................................................. (To record distribution of cash of partners)

41,000 32,000

12-12 .

14,000

73,000

SOLUTIONS TO EXERCISES EXERCISE 12-1 1. 2. 3. 4. 5. 6. 7. 8. 9.

False. A partnership is an association of two or more persons to carry on as co-owners of a business for profit. False. Partnerships are fairly easy to form; they can be formed simply by a verbal agreement. False. A partnership is an entity for financial reporting purposes. False. The net income of a partnership is not taxed as a separate entity. True. True. False. When a partnership is dissolved, the assets do not revert to the original contributor. True. False. Mutual agency is a disadvantage of the partnership form of business.

EXERCISE 12-2 (a) Cash............................................................................ Decker, Capital ...................................................

50,000

Land............................................................................ Buildings .................................................................... Rosen, Capital ...................................................

15,000 80,000

Cash........................................................................... Accounts Receivable................................................ Equipment ................................................................. Allowance for Doubtful Accounts .................... Toso, Capital .....................................................

9,000 32,000 39,000

50,000

95,000

3,000 77,000

(b) $50,000 + $95,000 + $77,000 = $222,000 EXERCISE 12-3 Jan. 1

Cash ................................................................... Accounts Receivable ........................................ Equipment........................................................... Allowance for Doubtful Accounts.............. Suzy Vopat, Capital..................................... .

12,000 14,000 23,500 3,000 46,500 .

12-13

EXERCISE 12-4 (a) (1)

DIVISION OF NET INCOME

Salary allowance ............................... Interest allowance McGill ($50,000 X 10%) .............. Smyth ($40,000 X 10%) .............. Total interest ........................ Total salaries and interest ............... Remaining income, $6,000 ($50,000 – $44,000) McGill ($6,000 X 60%) ................ Smyth ($6,000 X 40%) ................ Total remainder.................... Total division of net income ............

(2)

McGill

Smyth

Total

$22,000

$13,000

$35,000

5,000 4,000 27,000

17,000

3,600 2,400 $30,600

$19,400

6,000 $50,000

Smyth $13,000 4,000 17,000

Total $35,000 9,000 44,000

DIVISION OF NET INCOME Salary allowance ............................... Interest allowance............................. Total salaries and interest ............... Remaining deficiency, ($8,000) ($36,000 – $44,000) McGill ($8,000 X 60%) ................ Smyth ($8,000 X 40%) ................ Total remainder.................... Total division of net income ............

McGill $22,000 5,000 27,000

(4,800) (3,200) $22,200

$13,800

(b) (1) Income Summary .............................................. McGill, Capital............................................. Smyth, Capital ............................................

50,000

(2) Income Summary .............................................. McGill, Capital............................................. Smyth, Capital ............................................

36,000

12-14 .

9,000 44,000

(8,000) $36,000

30,600 19,400 22,200 13,800

EXERCISE 12-5 (a) Income Summary...................................................... Coburn, Capital ($80,000 X 45%) ...................... Webb, Capital ($80,000 X 55%).........................

80,000

(b) Income Summary...................................................... Coburn, Capital [$30,000 + ($25,000 X 45%)] ......................... Webb, Capital [$25,000 + ($25,000 X 55%)] .........................

80,000

(c) Income Summary....................................................... Coburn, Capital .................................................. Webb, Capital .....................................................

80,000

36,000 44,000

41,250 38,750 41,000 39,000

Coburn: [$40,000 + $6,000 – ($10,000 X 50%)] Webb: [$35,000 + $9,000 – ($10,000 X 50%)] (d) Coburn: $60,000 + $41,000 – $18,000 = $83,000 Webb: $90,000 + $39,000 – $24,000 = $105,000 EXERCISE 12-6 (a)

NATIONAL CO. Partners’ Capital Statement For the Year Ended December 31, 2017

Capital, January 1 ................... Add: Net income .................... Less: Drawings ...................... Capital, December 31..............

N. Payne $20,000 20,000 40,000 8,000 $32,000

A. Dody $18,000 20,000 38,000 5,000 $33,000

Total $38,000 40,000 78,000 13,000 $65,000

12-15

EXERCISE 12-6 (Continued) (b)

NATIONAL CO. Partial Balance Sheet December 31, 2017 Owners’ equity N. Payne, Capital ............................................ A. Dody, Capital.............................................. Total owners’ equity ................................

$32,000 33,000 $65,000

EXERCISE 12-7 THE DOCTOR PARTNERSHIP Balance Sheet December 31, 2017 Assets Current Assets Cash ($30,000 + $7,000).............................. Accounts Receivable.................................. Less: Allowance for Doubtful Accounts ...... Supplies ...................................................... Total current assets ...............................

$37,000 $36,000 4,000 32,000 3,000

Property, Plant and Equipment Land............................................................. Buildings ..................................................... Equipment ($25,000 + $27,000) .................. Total property, plant, and equipment ...... Total assets........................................................

$ 72,000 28,000 75,000 52,000 155,000 $227,000

Liabilities and Owners’ Equity Long-term Liabilities Mortgage Payable ....................................... Owners’ Equity Terry, Capital ($30,000 + $25,000).............. Nick, Capital ($28,000 + $75,000 – $20,000) Frank, Capital.............................................. Total owners’ equity .............................. Total liabilities and owners’ equity ..................

$ 20,000 $55,000 83,000 69,000* 207,000 $227,000

*$7,000 + $36,000 + $3,000 + $27,000 – $4,000 12-16 .

EXERCISE 12-8 SEDGWICK COMPANY Schedule of Cash Payments Item Cash Balances before liquidation $ 20,000 Sale of noncash assets and allocation of gain 105,000 New balances 125,000 Pay liabilities (55,000) New balances 70,000 Cash distribution to partners (70,000) Final balances $ 0

Noncash Floyd, DeWitt, + Assets =Liabilities + Capital + Capital $100,000 (100,000) 0 0

$55,000

55,000 (55,000) 0

$45,000

$20,000

3,000 48,000

2,000 22,000

48,000

22,000

(48,000) $ 0

(22,000) $ 0

EXERCISE 12-9 (a) Cash......................................................................... Noncash Assets .............................................. Gain on Realization .........................................

105,000

(b) Gain on Realization ................................................ Floyd, Capital ($5,000 X 60%) ......................... DeWitt, Capital ($5,000 X 40%) .......................

5,000

(c) Liabilities ................................................................. Cash .................................................................

55,000

(d) Floyd, Capital .......................................................... DeWitt, Capital ........................................................ Cash .................................................................

48,000 22,000

100,000 5,000

3,000 2,000

55,000

70,000

12-17

EXERCISE 12-10 (a) (1) Cash ................................................................... Pena, Capital ..............................................

8,000

(2) Vogel, Capital .................................................... Utech, Capital .................................................... Cash............................................................

17,000 15,000

(b) (1) Vogel, Capital ($8,000 X 5/8) ............................. Utech, Capital ($8,000 X 3/8) ............................. Pena, Capital ..............................................

5,000 3,000

(2) Vogel, Capital ($17,000 – $5,000)...................... Utech, Capital ($15,000 – $3,000) ..................... Cash............................................................

12,000 12,000

8,000

32,000

8,000

24,000

*EXERCISE 12-11 (a) K. Kolmer, Capital ($34,000 X 50%) ......................... D. Jernigan, Capital ...........................................

17,000

(b) C. Eidman, Capital ($26,000 X 50%) ......................... D. Jernigan, Capital ...........................................

13,000

(c) C. Ryno, Capital ($21,000 X 33 1/3%) ....................... D. Jernigan, Capital ...........................................

7,000

17,000 13,000 7,000

*EXERCISE 12-12 (a) Cash ........................................................................... S. Pagon, Capital (6/10 X $15,000).................... T. Tabor, Capital (4/10 X $15,000) ..................... W. Wolford, Capital ........................................... Total capital of existing partnership...... Investment by new partner, Wolford ..... Total capital of new partnership ............

$160,000 90,000 $250,000

Wolford’s capital credit (30% X $250,000) ............................

$ 75,000

12-18 .

90,000 9,000 6,000 75,000

*EXERCISE 12-12 (Continued) Investment by new partner, Wolford .... Wolford’s capital credit ......................... Bonus to old partners ...........................

$ 90,000 75,000 $ 15,000

(b) Cash............................................................................ S. Pagan, Capital (6/10 X $13,000) ............................ T. Tabor, Capital (4/10 X $13,000) ............................. W. Wolford, Capital ............................................ Total capital of existing partnership .... Investment by new partner, Wolford .... Total capital of new partnership ...........

$160,000 50,000 $210,000

Wolford’s capital credit (30% X $210,000) ..............................

$ 63,000

Investment by new partner, Wolford .... Wolford’s capital credit ......................... Bonus to new partner ............................

$ 50,000 63,000 $ 13,000

50,000 7,800 5,200 63,000

*EXERCISE 12-13 1.

C. Heganbart, Capital ................................................ N. Essex, Capital ................................................ C. Gilmore, Capital .............................................

30,000

C. Heganbart, Capital ................................................ C. Gilmore, Capital .............................................

30,000

C. Heganbart, Capital ................................................ N. Essex, Capital ................................................

30,000

15,000 15,000

30,000

12-19

*EXERCISE 12-14 1.

N. Rice, Capital.......................................................... B. Higgins, Capital .................................................... J. Mayo, Capital......................................................... Cash ................................................................... Capital balance of withdrawing partner ................................................. Payment to withdrawing partner............ Bonus to retiring partner ........................

$60,000 64,000 $ 4,000

Allocation of bonus Higgins, Capital ($4,000 X 5/8)................... $2,500 Mayo, Capital ($4,000 X 3/8) ................ 1,500

$ 4,000

N. Rice, Capital.......................................................... B. Higgins, Capital............................................. J. Mayo, Capital ................................................. Cash ................................................................... Capital balance of withdrawing partner ................................................. Payment to withdrawing partner............ Bonus to remaining partners .................

$60,000 52,000 $ 8,000

Allocation of bonus Higgins, Capital ($8,000 X 5/8)..................... $5,000 Mayo, Capital ($8,000 X 3/8) ................ 3,000

$ 8,000

12-20 .

60,000 2,500 1,500 64,000

60,000 5,000 3,000 52,000

*EXERCISE 12-15 (a) Cash...................................................................... Garrett, Capital ($288,000a X 25%) .............. Foss, Capital ($16,000 X 50%) ..................... Albertson, Capital ($16,000 X 30%) ............. Espinosa, Capital ($16,000 X 20%).............. a

72,000 8,000 4,800 3,200

$100,000 + $60,000 + $40,000 + $88,000

(b) Foss, Capital ............................................................ 100,000 Albertson, Capital ($10,000 X 3/5)....................... Espinosa, Capital ($10,000 X 2/5) ....................... Cash ..............................................................

88,000

6,000 4,000 110,000

12-21

SOLUTIONS TO PROBLEMS PROBLEM 12-1A

(a) Jan. 1

(b) Jan. 1

12-22 .

Cash............................................................ Accounts Receivable................................. Inventory .................................................... Equipment .................................................. Allowance for Doubtful Accounts......................................... Notes Payable .................................... Accounts Payable .............................. Sorensen, Capital ...............................

14,000 17,500 28,000 25,000

12,000 26,000 20,000 15,000

Cash............................................................ Sorensen, Capital ...............................

5,000

Cash............................................................ Lucas, Capital.....................................

19,000

4,500 18,000 22,000 40,000

4,000 15,000 31,000 23,000

5,000 19,000

PROBLEM 12-1A (Continued) (c)

SOLU COMPANY Balance Sheet January 1, 2017 Assets Current assets Cash ($14,000 + $12,000 + $5,000 + $19,000) .... Accounts receivable ($17,500 + $26,000).................................... Less: Allowance for doubtful accounts ($4,500 + $4,000) .............................. Inventory ($28,000 + $20,000) ..................... Total current assets ............................ Property, plant, and equipment Equipment ($25,000 + $15,000) .................. Total assets .........................................................

$ 50,000 $43,500 8,500

35,000 48,000 133,000 40,000 $173,000

Liabilities and Owners’ Equity Current liabilities Notes payable ($18,000 + $15,000)............. Accounts payable ($22,000 + $31,000) ...... Total current liabilities ........................ Owners’ equity Sorensen, capital ($40,000 + $5,000) ......... Lucas, capital ($23,000 + $19,000) ............. Total owners’ equity ............................ Total liabilities and owners’ equity....................

$ 33,000 53,000 86,000 $45,000 42,000 87,000 $173,000

12-23

PROBLEM 12-2A

(a) (1) Income Summary .................................................. A. Niensted, Capital ($30,000 X 60%) ........... G. Bolen, Capital ($30,000 X 30%) ................ K. Sayler, Capital ($30,000 X 10%)................

30,000

(2) Income Summary .................................................. A. Niensted, Capital ($15,000 + $5,000) ........ G. Bolen, Capital ($10,000 + $5,000)............. K. Sayler, Capital ($0 + $5,000) .....................

40,000

Net income ............................ Salary allowance Niensted ........................... Bolen ................................. Remainder ......................... To each partner ($15,000 X 1/3) ..................

18,000 9,000 3,000

20,000 15,000 5,000

$40,000 (15,000) (10,000) $15,000 $ 5,000

(3) Income Summary ..................................................... 19,000 A. Niensted, Capital ($4,800 + $15,000 – $2,100) ...................... G. Bolen, Capital ($3,000 – $2,100) ............... K. Sayler, Capital ($2,500 – $2,100) .............. Net income ............................ Interest allowance Niensted ($48,000 X 10%). Bolen ($30,000 X 10%) ...... Sayler ($25,000 X 10%) ..... Balance.................................. Salary allowance Niensted ........................... Remainder ......................... To each partner ($6,300 X 1/3) ....................

12-24 .

$19,000 (4,800) (3,000) (2,500) 8,700 (15,000) $ (6,300) $ (2,100)

17,700 900 400

PROBLEM 12-2A (Continued) (b)

DIVISION OF NET INCOME Art Niensted Salary allowance ........................ Interest allowance on capital A. Niensted ($48,000 X 10%)................. G. Bolen ($30,000 X 10%)................. K. Sayler ($25,000 X 10%)................. Total interest ................. Total salaries and interest ......... Remaining deficiency, ($6,300) A. Niensted ($6,300 X 1/3) ..................... G. Bolen ($6,300 X 1/3) ..................... K. Sayler ($6,300 X 1/3) ..................... Total remainder ............. Total division of net income......

(c)

Krista Sayler

$15,000

Total $15,000

4,800 $3,000 $2,500 19,800

3,000

2,500

10,300 25,300

(2,100) (2,100) (2,100) $17,700

$ 900

$ 400

(6,300) $19,000

NBS COMPANY Partners’ Capital Statement For the Year Ended December 31, 2017

Capital, January 1 ............. Add: Net income ............. Less: Drawings................. Capital, December 31 ........

Greg Bolen

Art Niensted

Greg Bolen

Krista Sayler

Total

$48,000 17,700 65,700 23,000 $42,700

$30,000 900 30,900 14,000 $16,900

$25,000 400 25,400 10,000 $15,400

$103,000 19,000 122,000 47,000 $ 75,000

12-25

PROBLEM 12-3A

(a)

(1) Cash ........................................................................... Allowance for Doubtful Accounts............................ Accumulated Depreciation—Equipment ................. Loss on Realization .................................................. Accounts Receivable ........................................ Inventory ............................................................ Equipment.......................................................... Noncash assets (net) ................. Sale proceeds ............................. Loss on sale of noncash assets ......................................

51,000 1,000 5,500 23,000 25,000 34,500 21,000

$74,000 51,000 $23,000

(2) A. Jamison, Capital ($23,000 X 5/10) ....................... S. Moyer, Capital ($23,000 X 3/10)............................ P. Roper, Capital ($23,000 X 2/10) ............................ Loss on Realization...........................................

11,500 6,900 4,600

(3) Notes Payable ........................................................... Accounts Payable ..................................................... Salaries and Wages Payable .................................... Cash ...................................................................

13,500 27,000 4,000

(4) Cash ........................................................................... P. Roper, Capital ($4,600 – $3,000)...................

1,600

(5) A. Jamison, Capital ($33,000 – $11,500) .................. S. Moyer, Capital ($21,000 – $6,900) ........................ Cash ...................................................................

21,500 14,100

12-26 .

23,000

44,500

1,600

35,600

PROBLEM 12-3A (Continued) (b) Bal. (1) (4) Bal.

(2) (5)

Cash 27,500 (3) 51,000 (5) 1,600 –0–

44,500 35,600

(2) (5)

A. Jamision, Capital 11,500 Bal. 33,000 21,500 Bal.

S. Moyer, Capital 6,900 Bal. 21,000 14,100 Bal. –0–

(2)

P. Roper, Capital 4,600 Bal. (4) Bal.

(c) (1) A. Jamison, Capital ($1,600 X 5/8).................... S. Moyer, Capital ($1,600 X 3/8)........................ P. Roper, Capital........................................

1,000 600

(2) A. Jamison, Capital ($21,500 – $1,000) ............ S. Moyer, Capital ($14,100 – $600) ................... Cash ($35,600 – $1,600).............................

20,500 13,500

–0–

3,000 1,600 –0–

1,600

34,000

12-27

*PROBLEM 12-4A

(a) (1) J. Pinkston, Capital ........................................... J. Terrell, Capital ........................................

9,000

(2) C. Lamar, Capital ............................................... J. Terrell, Capital ........................................

16,000

(3) Cash ................................................................... G. Donley, Capital (50% X $8,000) ............ C. Lamar, Capital (40% X $8,000) .............. J. Pinkston, Capital (10% X $8,000) .......... J. Terrell, Capital ........................................

62,000

9,000

16,000

4,000 3,200 800 54,000

Total capital of existing partnership ..................... $118,000 Investment by Terrell......... 62,000 Total capital of new partnership ..................... $180,000 Terrell’s capital credit ($180,000 X 30%) ............

$ 54,000

Investment by new partner, Terrell .............. $ 62,000 Terrell’s capital credit ....... 54,000 Bonus to old partners....... $ 8,000 (4) Cash ................................................................... G. Donley, Capital ($6,000 X 50%) .................... C. Lamar, Capital ($6,000 X 40%) ..................... J. Pinkston, Capital ($6,000 X 10%).................. J. Terrell, Capital ........................................

42,000 3,000 2,400 600 48,000

Total capital of existing partnership .................... $118,000 Investment by Terrell........ 42,000 Total capital of new partnership .................... $160,000

12-28 .

*PROBLEM 12-4A (Continued) Terrell’s capital credit ($160,000 X 30%)..............

$48,000

Investment by new partner .............................. Terrell’s capital credit.......... Bonus to new partner ..........

$42,000 48,000 $ 6,000

(b) (1) Total capital after admission ($32,000 ÷ 20%) .............. Total capital before admission ...................................... Cash investment by Terrell ...........................................

$160,000 118,000 $ 42,000

(2) Decrease in Lamar’s equity ($48,000 – $32,000) ............

$ 16,000

Lamar’s income ratio ..................................................... Bonus to new partner ($16,000 ÷ 40%) .........................

40% $ 40,000

12-29

*PROBLEM 12-5A

(a) (1) Posada, Capital .................................................. Trayer, Capital ............................................ Emig, Capital...............................................

30,000

(2) Posada, Capital .................................................. Emig, Capital...............................................

30,000

(3) Posada, Capital .................................................. Trayer, Capital ($4,000 X 5/8)............................. Emig, Capital ($4,000 X 3/8) ............................... Cash ............................................................

30,000 2,500 1,500

Posada’s capital balance .... Payment to Posada ............. Bonus to Posada .................

30,000

34,000

$30,000 34,000 $ 4,000

(4) Posada, Capital .................................................. Trayer, Capital ($8,000 X 5/8) ..................... Emig, Capital ($8,000 X 3/8) ....................... Cash ............................................................ Posada’s capital balance .... Payment to Posada ............. Bonus to old partners .........

15,000 15,000

30,000 5,000 3,000 22,000

$30,000 22,000 $ 8,000

(b) (1) Emig’s capital after withdrawal ..................................... Emig’s capital before withdrawal .................................. Bonus to Emig ................................................................ Emig’s income ratio with Trayer ................................... Total bonus ($3,600 ÷ 3/8) ......................................

$43,600 40,000 3,600 3/8 $ 9,600

(2) Posada’s capital balance ............................................... Total bonus to other partners........................................ Cash paid to Posada ..............................................

$30,000 (9,600) $20,400

12-30 .

BYP 12-1

REAL-WORLD FOCUS

Students’ answers will depend upon the firm selected and the timing of their exploration.

12-31

BYP 12-2

DECISION MAKING ACROSS THE ORGANIZATION

(a) The major disadvantages of a partnership are mutual agency, limited life, and unlimited liability. Mutual agency means that each partner acts on behalf of the partnership when engaging in partnership business. The act of any partner is binding on all other partners, even when the partners act beyond the scope of their authority, so long as the act appears to be appropriate for the partnership. A partnership does not have unlimited life. A partnership may be ended voluntarily or involuntarily. For the partnership discussed here, limited life does not appear to be a major drawback. Unlimited liability means that each partner is personally and individually liable for all partnership liabilities. Creditors’ claims attach first to partnership assets, then to the personal resources of any partner, irrespective of that partner’s capital equity in the company. This is a major limitation of a partnership. (b) The written partnership agreement, often referred to as the articles of co-partnership, is needed. It should contain such basic information as the name and principal location of the firm, the purpose of the business, and date of inception. In addition, the following should be specified: (1) names and capital contributions of partners, (2) rights and duties of partners, (3) basis for sharing net income or net loss, (4) provision for withdrawals of assets, (5) procedures for submitting disputes to arbitration, (6) procedures for the withdrawal or addition of a partner, and (7) rights and duties of surviving partners in the event of a partner’s death. (c) The best approach would be to give Stephen an interest allowance for the additional investment. This approach would therefore permit each party to share equally in net income or net loss after the interest allowance. (d) The computer equipment should be depreciated on the books of the partnership, not on Stephen’s personal tax return. The computer is owned by the partnership, and only Stephen’s share of net income should be reported on his tax return. The computer would be reported at its fair value when invested in the partnership, less the accumulated depreciation as of the end of the taxable year.

12-32 .

BYP 12-2 (Continued) (e) To facilitate the payment from partnership assets of the deceased partner’s equity, some companies obtain life insurance policies on each partner with the partnership as the beneficiary. The proceeds from the insurance policy on the deceased partner are then used to settle the estate.

12-33

BYP 12-3

COMMUNICATION ACTIVITY

To:

Ronald Hrabik Meg Percival

From:

Your Accountant

Subject:

Partnership Agreement for Pasta Shop

There are many important issues that should be included in your partnership agreement. Prior to our meeting next Tuesday, in my office, it would be helpful for you to consider the following matters. 1.

Facts about the business; i.e., name, location, purpose, and date of inception.

Facts about the partners; i.e., the name and address of each partner, the beginning capital contribution of each partner, and the rights and duties of partners with respect to: (a) making business decisions, (b) active participation in the partnership (full/part-time), and (c) allowances for vacations and sick leave.

Basis for sharing net income or net loss. The Uniform Partnership Act specifies that the basis will be equal unless another basis is stated in the partnership agreement. The basis may include provisions for partnership salaries and interest on capital balances with the remainder being divided on a proportionate basis.

Provision for withdrawals of assets. There are two kinds of withdrawals: one is called drawings; the other is called a withdrawal of capital. The former relates to providing each partner with cash for normal living expenses. You may provide for periodic drawings of a fixed amount such as $1,000 a month, or an amount not to exceed a specified amount such as $1,500 or $2,000. Withdrawals of capital can affect the future of the partnership. Thus, you may want to provide for consultation with an attorney, a financial advisor, and/or a CPA and a formal approval procedure.

12-34 .

BYP 12-3 (Continued) 5.

Procedures for submitting disputes to arbitration. Inevitably, disagreements will occur between partners. The partnership contract should provide a framework for resolving them. You may want to include some or all of the outside parties mentioned above in an arbitration committee.

Procedures for the withdrawal or addition of a partner. At this time, consideration of this issue may seem premature. However, it is still useful to have basic procedures in place. For withdrawals, consideration should be given to both voluntary and “forced” withdrawals and the basis of determining and paying the capital equity of the partner who is leaving the firm. For additions, you may wish to state whether each admission must have the unanimous approval of existing partners and the terms of admission.

Rights and duties of surviving partners. The death of a partner is often a traumatic experience. Thus, it is advisable that the partnership agreement specify the responsibilities of the surviving partners, assuming the business is continued, or if the business is terminated. Also, procedures should be included for determining the deceased partner’s equity in the firm. The procedures might include an audit of the financial statements and a revaluation of assets by an independent appraisal firm.

I look forward to a productive session with both of you next Tuesday.

12-35

BYP 12-4

ETHICS CASE

(a) The stakeholders in this situation are Alexandra and Kellie. (b) The consequences of Alexandra’s actions are 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, Kellie is going to become annoyed with Alexandra’s actions and this could cause 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. Alexandra is not trying to hide anything from Kellie. However, her actions do not seem to be fair. (c) For the differences in time worked, two changes in the partnership agreement should be considered. First, Kellie could be given a higher salary allowance than Alexandra. Second, because Kellie is contributing more to net income than Alexandra, she could be given a higher percentage of net income 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 drawing accounts at the end of each month. If this is not agreeable to Alexandra, then the partnership agreement should be changed to limit the drawings of each partner to a fixed amount.

12-36 .

BYP 12-5

ALL ABOUT YOU

Given that the students may come up with variety of answers that are correct, there is no single correct solution to this problem. You may wish to have a show of hands on each question to see whether any consensus has developed on any of the questions.

12-37

CHAPTER 13 Corporations: Organization and Capital Stock Transactions ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Brief Exercises

Questions

Discuss the major characteristics of a corporation.

1, 2, 3, 4, 5, 6, 8, 9, 11, 15

1, 2

Explain how to account for the issuance of common and preferred stock.

7, 10, 11, 12, 16

3, 4, 5, 6

Explain how to account for treasury stock.

7, 13, 14, 15, 17

Prepare a stockholders’ equity section.

14, 17, 18

Do It! 1a, 1b

Exercises

A Problems

1, 2

3A, 4A

3, 4, 5, 6, 9, 10, 12

1A, 3A, 4A, 6A

5, 7, 8, 10, 12

2A, 3A, 6A

9, 11, 12, 13, 14

1A, 2A, 3A, 4A, 5A, 6A

13-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Journalize stock transactions, post, and prepare paid-in capital section.

Simple

30–40

Journalize and post treasury stock transactions, and prepare stockholders’ equity section.

Moderate

30–40

Journalize and post transactions, and prepare stockholders’ equity section.

Complex

40–50

Journalize and post stock transactions, and prepare stockholders’ equity section.

Moderate

30–40

Prepare stockholders’ equity section.

Simple

20–30

Prepare entries for stock transactions and prepare stockholders’ equity section.

Moderate

20–30

13-2 .

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 13 CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS Number

Difficulty

Time (min.)

BE1

Simple

4–6

BE2

Simple

1–2

BE3

Simple

2–3

BE4

Simple

2–3

BE5

Simple

2–4

BE6

Simple

4–6

BE7

Simple

2–3

BE8

Simple

4–6

DI1a

Simple

2–4

DI1b

Simple

4–6

DI2

Simple

4–6

DI3

Simple

4–6

DI4

Simple

6–8

EX1

Simple

6–8

EX2

Simple

6–8

EX3

Simple

6–8

EX4

Simple

8–10

EX5

2, 3

Simple

6–8

EX6

Simple

4–6

EX7

Simple

8–10

EX8

Simple

8–10

EX9

2, 4

Simple

8–10

EX10

2, 3

Simple

6–8

EX11

Moderate

8–10

EX12

2–4

Simple

8–10

EX13

C, AP

Simple

6–8

EX14

Simple

8–10

13-3

CORPORATIONS: ORGANIZATION AND CAPITAL STOCK TRANSACTIONS (Continued) Number

Difficulty

Time (min.)

P1A

2, 4

Simple

30–40

P2A

3, 4

Moderate

30–40

P3A

1–4

Complex

40–50

P4A

1, 2, 4

Moderate

30–40

P5A

Simple

20–30

P6A

2–4

Moderate

20–30

BYP1

Simple

10–15

BYP2

Simple

10–15

BYP3

Simple

10–15

BYP4

Simple

8–12

BYP5

1–3

Moderate

15–20

BYP6

1, 2

Simple

10–15

BYP7

—

Simple

10–15

BYP8

Simple

15–20

BYP9

1, 2

Simple

10–15

13-4

Learning Objective 1. Discuss the major characteristics of a corporation.

Knowledge Comprehension Q13-4 Q13-5 BE13-1 DI13-1a E13-1 E13-2

Q13-1 Q13-2 Q13-3 Q13-6 Q13-8

Application

Analysis

Synthesis

Evaluation

Q13-9 BE13-2 Q13-11 DI13-1b Q13-15 P13-3A P13-4A

2. Explain how to account for the issuance of common and preferred stock.

Q13-10 Q13-11 Q13-12 Q13-16

Q13-7 E13-3 BE13-3 E13-4 BE13-4 E13-5 BE13-5 E13-6 BE13-6 E13-9 DI13-2 E13-10

P13-1A E13-12 P13-3A P13-4A P13-6A

3. Explain how to account for treasury stock.

Q13-13 Q13-14 Q13-15 Q13-17

Q13-7 E13-10 BE13-7 P13-2A DI13-3 P13-3A E13-5 P13-6A E13-7 E13-8

E13-12

4. Prepare a stockholders’ equity section.

Q13-14 Q13-17 Q13-18 E13-13

BE13-8 P13-2A DI13-4 P13-3A E13-9 P13-4A E13-11 P13-5A E13-12 P13-6A E13-13 E13-14 P13-1A

E13-12

Broadening Your Perspective

Decision Making Financial Reporting Across the Comparative Analysis Organization FASB Codification Real-World Focus

Communication Ethics Case All About You

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

13-5

ANSWERS TO QUESTIONS 1.

(a) Separate legal existence. A corporation is separate and distinct from its owners and it acts in its own name rather than in the name of its stockholders. In contrast to a partnership, the acts of the owners (stockholders) do not bind the corporation unless the owners are agents of the corporation. (b) Limited liability of stockholders. Because of its separate legal existence, creditors of a corporation ordinarily have recourse only to corporate assets to satisfy their claims. Thus, the liability of stockholders is normally limited to their investment in the corporation. (c) Transferable ownership rights. Ownership of a corporation is shown in shares of capital stock. The shares are transferable units. Stockholders may dispose of part or all of their interest by simply selling their stock. The transfer of ownership to another party is entirely at the discretion of the stockholder.

(a) Corporation management is an advantage to a corporation because it can hire professional managers to run the company. Corporation management is a disadvantage to a corporation because it prevents owners from having an active role in directly managing the company. (b) Two other disadvantages of a corporation are government regulations and additional taxes. A corporation is subject to numerous state and federal regulations. For example, state laws prescribe the requirements for issuing stock, and federal securities laws govern the sale of stock to the general public. Corporations must pay both federal and state income taxes. These taxes are substantial. In addition, stockholders must pay income taxes on cash dividends received.

(a) (1) A charter is a document that creates a corporation. A charter is also referred to as the articles of incorporation. (2) The by-laws are the internal rules and procedures for conducting the affairs of a corporation. They also indicate the powers of the stockholders, directors, and officers of the corporation. (3) Organization costs are costs incurred in the formation of a corporation. Organization costs are expensed as incurred. (b) Incorrect. A corporation must be incorporated in only one state. It is to the company’s advantage to incorporate in a state whose laws are favorable to the corporate form of business organization. A corporation may incorporate in a state in which it does not have a headquarters office or major operating facilities.

In the absence of restrictive provisions, the basic ownership rights of common stockholders are the rights to: (a) vote in the election of board of directors and in corporate actions that require stockholders’ approval. (b) share in corporate earnings through the receipt of dividends. (c) keep the same percentage ownership when new shares of common stock are issued (the preemptive right). (d) share in assets upon liquidation.

The two principal components of stockholders’ equity for a corporation are paid-in capital (the investment of cash and other assets in the corporation by stockholders in exchange for capital stock) and retained earnings. The principal source of retained earnings is net income. (b) Paid-in capital is the term used to describe the total amount paid-in on capital stock. Paid-in capital may result through the sale of common stock, preferred stock, or treasury stock.

13-6

(a)

Questions Chapter 13 (Continued) 6.

Each of the three basic financial statements for a corporation differs from those for a proprietorship. The income statement for a corporation will have income tax expense. For a corporation, a retained earnings statement is prepared to show the changes in retained earnings during the period. In the balance sheet, the owner’s equity section is called the stockholders’ equity section.

The maximum number of shares that a corporation is legally allowed to issue is the number authorized. Luney Corporation is authorized to sell 100,000 shares. Of these shares, 70,000 shares have been issued. Outstanding shares are those issued shares which have not been reacquired by the corporation; in other words, issued shares less treasury shares. Luney has 63,000 shares outstanding (70,000 issued less 7,000 treasury).

The par value of common stock has no effect on its market value. Par value is a legal amount per share which usually indicates the minimum amount at which a share of stock can be issued. The market value of stock 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 securities markets. Therefore, either investment mentioned in the question could be the better investment, based on the above factors and future potential. The relative par values should have no effect on the investment decision.

Among the factors which influence the market value of stock are the company’s anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the securities markets.

10.

The issuance of stock does not have any effect on the issuer’s net income. If stock is issued at a price above par, the excess is credited to a stockholders’ equity account, Paid-in Capital in Excess of Par. This excess is part of the company’s paid-in capital.

11.

The sale of common stock below par value is not permitted in most states.

12.

When stock is issued for services or noncash assets, the cost should be measured at either the fair value of the consideration given up (in this case, the stock) or the fair value of the consideration received (in this case, the land), whichever is more clearly evident. In this case, the fair value of the stock is more objectively determinable than that of the land, since the stock is actively traded in the securities market. The appraised value of the land is merely an estimate of the land’s value, while the market price of the stock is the amount the stock was actually worth on the date of exchange. Therefore, the land should be recorded at $95,000, the common stock at $20,000, and the excess ($75,000) as paid-in capital in excess of par.

13.

A corporation may acquire treasury stock: (1) to reissue the shares to officers and employees under bonus and stock compensation plans, (2) to increase trading of the company's stock and signal that management believes the stock is underpriced, which they hope will enhance its market price, (3) to have additional shares available for use in the acquisition of other companies, (4) to reduce the number of shares outstanding and thereby increase earnings per share, (5) to eliminate hostile investors, perhaps to avoid a takeover.

14.

When treasury stock is purchased, treasury stock is debited and cash is credited at cost ($12,000 in this example). Treasury stock is a contra stockholders’ equity account and cash is an asset. Thus, this transaction: (a) has no effect on net income, (b) decreases total assets, (c) has no effect on total paid-in capital, and (d) decreases total stockholders’ equity.

13-7

Questions Chapter 13 (Continued) 15.

When treasury stock is resold at a price above original cost, Cash is debited for the amount of the proceeds ($16,000), Treasury Stock is credited at cost ($12,000), and the excess ($4,000) is credited to Paid-in Capital from Treasury Stock. Cash is an asset, and the other two accounts are part of stockholders’ equity. Therefore, this transaction: (a) has no effect on net income, (b) increases total assets, (c) increases total paid-in capital, and (d) increases total stockholders’ equity.

16.

Par value is a legal amount per share, often set at an arbitrarily selected amount, which usually indicates the minimum amount at which a share of stock can be issued. Market value is generally unrelated to par value. A stock’s market value will reflect many factors, including the company’s anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the securities markets.

17.

The answers are summarized in the table below: Account

Classification

(a) Common Stock (b) Paid-in Capital in Excess of Par— Common Stock (c) Retained Earnings (d) Treasury Stock (e) Paid-in Capital from Treasury Stock (f) Paid-in Capital in Excess of Stated Value—Common Stock (g) Preferred Stock 18.

13-8

Paid-in capital—capital stock Paid-in capital—additional paid-in capital Retained earnings Deducted from total paid-in capital and retained earnings Paid-in capital—additional paid-in capital Paid-in capital—additional paid-in capital Paid-in capital—capital stock

Apple had 899 million outstanding shares at September 28, 2013 and 939 million shares at September 29, 2012.

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 13-1 The advantages and disadvantages of a corporation are as follows: Advantages Separate legal existence Limited liability of stockholders Transferable ownership rights Ability to acquire capital Continuous life Corporation management— professional managers

Disadvantages Corporation management— separation of ownership and management Government regulations Additional taxes

BRIEF EXERCISE 13-2 Dec. 31

Income Summary ......................................... Retained Earnings ................................

480,000 480,000

BRIEF EXERCISE 13-3 May 10

Cash (2,000 X $18)........................................ Common Stock (2,000 X $10)............... Paid-in Capital in Excess of Par— Common Stock (2,000 X $8).............

36,000 20,000 16,000

BRIEF EXERCISE 13-4 June 1

Cash (4,000 X $6).......................................... Common Stock (4,000 X $1)................. Paid-in Capital in Excess of Stated Value—Common Stock (4,000 X $5)........................................

24,000 4,000 20,000

13-9

BRIEF EXERCISE 13-5 Land (5,000 X $15) ......................................................... Common Stock (5,000 X $10) ................................ Paid-in Capital in Excess of Par—Common Stock (5,000 X $5) .............................................

75,000 50,000 25,000

BRIEF EXERCISE 13-6 Cash (5,000 X $130) ....................................................... Preferred Stock (5,000 X $100).............................. Paid-in Capital in Excess of Par—Preferred Stock (5,000 X $30) ............................................

650,000 500,000 150,000

BRIEF EXERCISE 13-7 July 1 Sept. 1

Treasury Stock (500 X $9)............................. Cash .......................................................

4,500

Cash (300 X $11) ........................................... Treasury Stock (300 X $9) ..................... Paid-in Capital from Treasury Stock (300 X $2) .................................

3,300

4,500 2,700 600

BRIEF EXERCISE 13-8 Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 5,000 shares issued and 4,500 shares outstanding ..................... Additional paid-in capital In excess of par—common stock ................................ Total paid-in capital ............................................... Retained earnings................................................................. Total paid-in capital and retained earnings ........ Less: Treasury stock (500 common shares)...................... Total stockholders’ equity ....................................

13-10 .

$ 50,000 30,000 80,000 45,000 125,000 11,000 $114,000

SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 13-1a 1. 2. 3. 4. 5.

True. True. False. Additional government regulation is a disadvantage of the corporate form of business. True. False. No-par value stock is quite common today.

DO IT! 13-1b (a) Income Summary................................................. Retained Earnings ........................................ (To close Income Summary and transfer net income to retained earnings)

236,000 236,000

(b) Stockholders’ equity Paid-in capital Common Stock .......................................... $1,000,000 Retained earnings ........................................... 236,000 Total stockholders’ equity ................ $1,236,000

DO IT! 13-2 Apr. 1

Cash............................................................... Common Stock ...................................... Paid-in Capital in Excess of Par— Common Stock ................................... (To record issuance of 60,000 shares at $13 per share)

780,000

Apr. 19 Organization Expense ................................. Common Stock ..................................... Paid-in Capital in Excess of Par— Common Stock .................................. (To record issuance of 2,000 shares for attorney’s fees)

27,500

300,000 480,000

10,000 17,500

13-11

DO IT! 13-2 (Continued) Cash ............................................................... Preferred Stock ..................................... Paid-in Capital in Excess of Par— Preferred Stock ..................................

6,000 1,000 5,000

DO IT! 13-3 Aug. 1

Dec. 1

13-12 .

Treasury Stock ............................................... Cash ......................................................... (To record the purchase of 2,000 shares at $65 per share)

130,000

Cash ................................................................. Treasury Stock ........................................ Paid-in Capital from Treasury Stock...... (To record the sale of 1,200 shares at $72 per share)

86,400

130,000

78,000 8,400

DO IT! 13-4 ANDERS CORPORATION Balance Sheet (partial) Stockholders’ equity Paid-in capital Capital stock 7% preferred stock, $100 par value, 10,000 shares authorized, 2,000 shares issued and outstanding............. $ 200,000 Common stock, $5 par value, 500,000 shares authorized, 100,000 shares issued, and 93,000 shares outstanding... 500,000 Total capital stock .............................. 700,000 Additional paid-in capital In excess of par—preferred stock ............... $ 23,000 In excess of par—common stock .................... 240,000 From treasury stock ..................................... 47,000 Total additional paid-in capital ........... 310,000 Total paid-in capital............................. 1,010,000 Retained earnings ................................................... 372,000 Total paid-in-capital and retained earnings ............................ 1,382,000 Less: Treasury stock (7,000 common shares) (at cost) ............... 46,000 Total stockholders’ equity .................. $1,336,000

13-13

SOLUTIONS TO EXERCISES EXERCISE 13-1 1.

True.

False. Most of the largest U.S. corporations are publicly held corporations.

True.

False. The net income of a corporation is taxed as a separate entity.

False. Creditors have no legal claim on the personal assets of the owners of a corporation if the corporation does not pay its debts.

False. The transfer of stock from one owner to another does not require the approval of either the corporation or other stockholders; it is entirely at the discretion of the stockholder.

False. The board of directors of a corporation manages the corporation for the stockholders, who legally own the corporation.

True.

10.

False. Corporations are subject to more state and federal regulations than partnerships or proprietorships.

EXERCISE 13-2 1.

True.

False. Corporation management (separation of ownership and management), government regulations, and additional taxes are the major disadvantages of a corporation.

False. When a corporation is formed, organization costs are expensed as incurred.

True.

False. The number of issued shares is always less than or equal to the number of authorized shares.

False. No journal entry is required for the authorization of capital stock.

False. Publicly held corporations usually issue stock indirectly through an investment banking firm.

13-14 .

EXERCISE 13-2 (Continued) 8.

True.

False. The market value of common stock has no relationship with the par value.

10.

False. Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.

EXERCISE 13-3 (a) Jan. 10 July 1

(b) Jan. 10

July 1

Cash (70,000 X $5) .................................. Common Stock ................................

350,000

Cash (40,000 X $7) .................................. Common Stock (40,000 X $5) ......... Paid-in Capital in Excess of Par—Common Stock (40,000 X $2) ................................

280,000

Cash (70,000 X $5) .................................. Common Stock (70,000 X $1) ......... Paid-in Capital in Excess of Stated Value—Common Stock (70,000 X $4) ................................

350,000

Cash (40,000 X $7) .................................. Common Stock (40,000 X $1) ......... Paid-in Capital in Excess of Stated Value—Common Stock (40,000 X $6) ................................

280,000

350,000 200,000

80,000

70,000 280,000 40,000 240,000

EXERCISE 13-4 (a) Cash.......................................................................... Common Stock (2,000 X $5) ............................. Paid-in Capital in Excess of Par— Common Stock .............................................

52,000 10,000 42,000

13-15

EXERCISE 13-4 (Continued) (b)

(e)

Cash ...................................................................... Common Stock (2,000 X $5) ......................... Paid-in Capital in Excess of Stated Value— Common Stock.............................

52,000

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

52,000

Organization Expense ......................................... Common Stock (2,000 X $5) ......................... Paid-in Capital in Excess of Par— Common Stock..........................................

52,000

Land ...................................................................... Common Stock (2,000 X $5) ......................... Paid-in Capital in Excess of Par— Common Stock..........................................

52,000

10,000 42,000 52,000 10,000 42,000 10,000 42,000

EXERCISE 13-5 Mar.

June 12

July 11

Nov. 28

13-16 .

Organization Expense .................................. Common Stock (5,000 X $5).................. Paid-in Capital in Excess of Par— Common Stock ..................................

30,000

Cash ............................................................... Common Stock (60,000 X $5)................ Paid-in Capital in Excess of Par— Common Stock ..................................

375,000

Cash (1,000 X $110)....................................... Preferred Stock (1,000 X $100) ............. Paid-in Capital in Excess of Par— Preferred Stock (1,000 X $10) ...........

110,000

Treasury Stock .............................................. Cash .......................................................

80,000

25,000 5,000 300,000 75,000 100,000 10,000 80,000

EXERCISE 13-6 1.

Land........................................................................ Common Stock (5,000 X $20) ........................ Paid-in Capital in Excess of Par— Common Stock ...........................................

110,000

Land (20,000 X $11) ............................................... Common Stock (20,000 X $10) ...................... Paid-in Capital in Excess of Par— Common Stock (20,000 X $1) ....................

220,000

100,000 10,000 200,000 20,000

EXERCISE 13-7 (a) Mar. 1 July 1

Sept. 1

(b) Sept. 1

Treasury Stock (50,000 X $15) .............. Cash................................................

750,000

Cash (10,000 X $17) ............................... Treasury Stock (10,000 X $15) ...... Paid-in Capital from Treasury Stock (10,000 X $2) ....................

170,000

Cash (8,000 X $14) ................................. Paid-in Capital from Treasury Stock (8,000 X $1) .............................. Treasury Stock (8,000 X $15) ........

112,000

Cash (8,000 X $12) ................................. Paid-in Capital from Treasury Stock .................................................. Retained Earnings ................................. Treasury Stock (8,000 X $15) ........

96,000

750,000 150,000 20,000

8,000 120,000

20,000 4,000 120,000

13-17

EXERCISE 13-8 Treasury Stock .......................................................... Cash....................................................................

255,000

Cash (2,000 X $54) ..................................................... Treasury Stock (2,000 X $51) ............................ Paid-in Capital from Treasury Stock ................

108,000

Cash (2,000 X $49) ..................................................... Paid-in Capital from Treasury Stock ........................ Treasury Stock (2,000 X $51) ............................

98,000 4,000

Cash (1,000 X $43) ..................................................... Paid-in Capital from Treasury Stock ($6,000 – $4,000) .................................................... Retained Earnings ..................................................... Treasury Stock (1,000 X $51) ............................

43,000

255,000 102,000 6,000

102,000

2,000 6,000 51,000

EXERCISE 13-9 (a) Feb. 1

July 1

13-18 .

Cash (20,000 X $53) ............................ Preferred Stock (20,000 X $50) ... Paid-in Capital in Excess of Par—Preferred Stock (20,000 X $3)..................

1,060,000

Cash (12,000 X $57) ............................ Preferred Stock (12,000 X $50) .......................... Paid-in Capital in Excess of Par—Preferred Stock (12,000 X $7)..................

684,000

1,000,000

60,000

600,000 84,000

EXERCISE 13-9 (Continued) (b) Preferred Stock Date Feb. 1 July 1

Explanation

Ref.

Debit

Credit 1,000,000 600,000

Balance 1,000,000 1,600,000

Credit 60,000 84,000

Balance 60,000 144,000

Paid-in Capital in Excess of Par—Preferred Stock Date Feb. 1 July 1

Explanation

Ref.

Debit

(c) Preferred stock—listed first in paid-in capital under capital stock. Paid-in Capital in Excess of Par—Preferred Stock—listed first under additional paid-in capital.

EXERCISE 13-10 May 2

15 31

Cash (10,000 X $13) ....................................... Common Stock (10,000 X $10) .............. Paid-in Capital in Excess of Par— Common Stock (10,000 X $3) ............

130,000

Cash (10,000 X $60) ....................................... Preferred Stock (10,000 X $50).............. Paid-in Capital in Excess of Par— Preferred Stock (10,000 X $10)..........

600,000

Treasury Stock .............................................. Cash........................................................

15,000

Cash (500 X $16) ............................................ Treasury Stock (500 X $15) ................... Paid-in Capital from Treasury Stock (500 X $1) .................................

8,000

100,000 30,000 500,000 100,000 15,000 7,500 500

13-19

EXERCISE 13-20 EUDALEY CORPORATION Partial Balance Sheet December 31, 2017 Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value, 5,000 shares issued ........................... Common stock, no par, $5 stated value, 300,000 shares issued, and 290,000 shares outstanding .................. Total capital stock ................. Additional paid-in capital In excess of par— preferred stock ............................. $280,000 In excess of stated value— common stock .............................. 900,000 Total additional paid-in capital ................................. Total paid-in capital ............... Retained earnings ...................................... Total paid-in capital and retained earnings............... Less: Treasury stock (10,000 common shares)............................................. Total stockholders’ equity ......

13-20 .

$ 500,000

1,500,000 2,000,000

1,180,000 3,180,000 1,234,000 4,414,000 120,000 $4,294,000

EXERCISE 13-12 MEMO To:

President

From:

Your name , Chief Accountant

Re:

Questions about Stockholders’ Equity Section

Your memorandum about the stockholders’ equity section was received this morning. I hope the following will answer your questions. (a) Common stock outstanding is 590,000 shares. (Issued shares 600,000 less treasury shares 10,000.) (b) The stated value of the common stock is $2 per share. (Common stock issued $1,200,000 ÷ 600,000 shares.) (c) The par value of the preferred stock is $50 per share. (Preferred stock $300,000 ÷ 6,000 shares.) If I can be of further help, please contact me.

13-21

EXERCISE 13-22 ALUMINUM COMPANY OF AMERICA Stockholders’ equity (in millions of dollars) Paid-in capital Capital stock Preferred stock, $100 par value, 557,740 shares authorized, 557,649 shares issued and 546,024 shares outstanding ....................... Common stock, $1 par value, 1,800,000,000 shares authorized, 924,600,000 issued and 844,800,000 shares outstanding ..................................... Total capital stock ................................... Additional paid-in capital ....................................... Total paid-in capital ................................. Retained earnings .......................................................... Total paid-in capital and retained earnings ............................................... Less: Treasury stock .................................................... Total stockholders’ equity ......................

925 981 6,101 7,082 7,428 14,510 2,828 $11,682

EXERCISE 13-14 Paid-in Capital Account Common Stock ................................. Preferred Stock ................................ Treasury Stock ................................. Paid-in Capital in Excess of Par— Preferred Stock ............................ Paid-in Capital in Excess of Stated Value—Common Stock ...... Paid-in Capital from Treasury Stock ............................................. Retained Earnings............................

13-22 .

Retained Capital Stock Additional Earnings Other X X X X X X X

SOLUTIONS TO PROBLEMS PROBLEM 13-1A

(a) Jan. 10

Mar. 1

Apr. 1

May 1

Aug. 1

Sept. 1

Cash (80,000 X $4) .................................. Common Stock (80,000 X $2) ......... Paid-in Capital in Excess of Stated Value—Common Stock (80,000 X $2) ......................

320,000

Cash (5,000 X $105) ................................ Preferred Stock (5,000 X $100) ....... Paid-in Capital in Excess of Par— Preferred Stock (5,000 X $5) .......

525,000

Land ......................................................... Common Stock (24,000 X $2) ......... Paid-in Capital in Excess of Stated Value—Common Stock ($85,000 – $48,000) ...........

85,000

Cash (80,000 X $4.50) ............................. Common Stock (80,000 X $2) ......... Paid-in Capital in Excess of Stated Value—Common Stock (80,000 X $2.50) .................

360,000

Organization Expense ............................ Common Stock (10,000 X $2) ......... Paid-in Capital in Excess of Stated Value—Common Stock ($30,000 – $20,000) ...........

30,000

Cash (10,000 X $5) .................................. Common Stock (10,000 X $2) ......... Paid-in Capital in Excess of Stated Value—Common Stock (10,000 X $3) ......................

50,000

160,000 160,000

500,000 25,000 48,000 37,000

160,000 200,000 20,000

10,000 20,000 30,000

13-23

PROBLEM 13-1A (Continued) Nov. 1

Cash (1,000 X $109) ............................... Preferred Stock (1,000 X $100) ...... Paid-in Capital in Excess of Par— Preferred Stock (1,000 X $9) ......

109,000 100,000 9,000

(b) Preferred Stock Date Mar. 1 Nov. 1

Explanation

Ref. J5 J5

Debit

Credit 500,000 100,000

Balance 500,000 600,000

Ref. J5 J5 J5 J5 J5

Debit

Credit 160,000 48,000 160,000 20,000 20,000

Balance 160,000 208,000 368,000 388,000 408,000

Credit 25,000 9,000

Balance 25,000 34,000

Common Stock Date Jan. 10 Apr. 1 May 1 Aug. 1 Sept. 1

Explanation

Paid-in Capital in Excess of Par—Preferred Stock Date Mar. 1 Nov. 1

Explanation

Ref. J5 J5

Debit

Paid-in Capital in Excess of Stated Value—Common Stock Date Jan. 10 Apr. 1 May 1 Aug. 1 Sept. 1

13-24 .

Explanation

Ref. J5 J5 J5 J5 J5

Debit

Credit 160,000 37,000 200,000 10,000 30,000

Balance 160,000 197,000 397,000 407,000 437,000

PROBLEM 13-1A (Continued) (c)

DELONG CORPORATION Paid-in capital Capital stock 8% Preferred stock, $100 par value, 10,000 shares authorized, 6,000 shares issued and outstanding .................. Common stock, no par, $2 stated value, 500,000 shares authorized, 204,000 shares issued and outstanding .................. Total capital stock........................ Additional paid-in capital In excess of par— preferred stock ................................ $ 34,000 In excess of stated value— common stock ....................................437,000 Total additional paid-in capital ....................................... Total paid-in capital .....................

$ 600,000

408,000 1,008,000

471,000 $1,479,000

13-25

PROBLEM 13-2A

(a) Mar. 1 June 1

Sept. 1

Dec. 1

Treasury Stock (5,000 X $8) ..................... Cash ...................................................

40,000

Cash (1,000 X $12) .................................... Treasury Stock (1,000 X $8) .............. Paid-in Capital from Treasury Stock (1,000 X $4) ..........................

12,000

Cash (2,000 X $10) .................................... Treasury Stock (2,000 X $8) .............. Paid-in Capital from Treasury Stock (2,000 X $2) ..........................

20,000

Cash (1,000 X $7) ...................................... Paid-in Capital from Treasury Stock (1,000 X $1) ............................................ Treasury Stock (1,000 X $8) ..............

7,000

Income Summary ...................................... Retained Earnings .............................

30,000

40,000 8,000 4,000 16,000 4,000

1,000 8,000 30,000

(b) Paid-in Capital from Treasury Stock Date June 1 Sept. 1 Dec. 1

Explanation

Treasury Stock Date Explanation Mar. 1 June 1 Sept. 1 Dec. 1

13-26 .

Ref. J10 J10 J10

Debit

Ref. J10 J10 J10 J10

Debit 40,000

Credit 4,000 4,000

Balance 4,000 8,000 7,000

Credit

Balance 40,000 32,000 16,000 8,000

1,000

8,000 16,000 8,000

PROBLEM 13-2A (Continued) Retained Earnings Date Jan. 1 Dec. 31

Explanation Balance

Ref. � J10

(c)

Debit

30,000

Balance 100,000 130,000

FECHTER CORPORATION Stockholders’ equity Paid-in capital Capital stock Common stock, $5 par, 100,000 shares issued and 99,000 outstanding.................. Additional paid-in capital In excess of par........................... From treasury stock ................... Total additional paid-in capital ............................... Total paid-in capital............. Retained earnings ...................................... Total paid-in capital and retained earnings............. Less: Treasury stock (1,000 common shares) (at cost) .............................. Total stockholders’ equity................................

Credit

$500,000 $200,000 7,000 207,000 707,000 130,000 837,000 8,000 $829,000

13-27

PROBLEM 13-3A

(a) Feb. 1

Apr. 14

Sept. 3

Nov. 10 Dec. 31

Cash........................................................ Common Stock (25,000 X $1) ........ Paid-in Capital in Excess of Stated Value—Common Stock ($120,000 – $25,000) ........

120,000

Cash........................................................ Paid-in Capital from Treasury Stock ($33,000 – $30,000) ..................... Treasury Stock (6,000 X $5)...........

33,000

Patents ................................................... Common Stock (5,000 X $1) .......... Paid-in Capital in Excess of Stated Value—Common Stock ($35,000 – $5,000) ............

35,000

Treasury Stock....................................... Cash ................................................

6,000

Income Summary................................... Retained Earnings..........................

452,000

25,000

95,000

3,000 30,000 5,000

30,000 6,000 452,000

(b) Preferred Stock Date Explanation Jan. 1 Balance

Ref. �

Debit

Credit

Balance 400,000

Ref. � J5 J5

Debit

Credit

Balance 1,000,000 1,025,000 1,030,000

Common Stock Date Jan. 1 Feb. 1 Sept. 3

13-28 .

Explanation Balance

25,000 5,000

PROBLEM 13-3A (Continued) Paid-in Capital in Excess of Par—Preferred Stock Date Jan.

Explanation Balance

Ref. �

Debit

Credit

Balance 100,000

Paid-in Capital in Excess of Stated Value—Common Stock Date Jan. 1 Feb. 1 Sept. 3

Explanation Balance

Ref. � J5 J5

Debit

Credit 95,000 30,000

Balance 1,450,000 1,545,000 1,575,000

Paid-in Capital from Treasury Stock Date Apr. 14

Explanation

Ref. J5

Debit

Credit 3,000

Balance 3,000

Ref. � J5

Debit

Credit

Balance 1,816,000 2,268,000

Ref. � J5 J5

Debit

Retained Earnings Date Jan. 1 Dec. 31

Explanation Balance

452,000

Treasury Stock Date Jan. 1 Apr. 14 Nov. 10

Explanation Balance

Credit 30,000

6,000

Balance 50,000 20,000 26,000

13-29

PROBLEM 13-3A (Continued) (c)

CASTLE CORPORATION Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $50 par value, 10,000 shares authorized, 8,000 shares issued and outstanding ............................ Common stock, no par, $1 stated value, 2,000,000 shares authorized, 1,030,000 shares issued and 1,025,000 shares outstanding ............................ Total capital stock .............. Additional paid-in capital In excess of par— preferred stock ...................... In excess of stated value— common stock ....................... From treasury stock .................. Total additional paid-in capital .............................. Total paid-in capital ............ Retained earnings ................................... Total paid-in capital and retained earnings............ Less: Treasury stock (5,000 common shares) .......................................... Total stockholders’ equity ...............................

13-30 .

$ 400,000

1,030,000 1,430,000 $ 100,000 1,575,000 3,000 1,678,000 3,108,000 2,268,000 5,376,000 26,000 $5,350,000

PROBLEM 13-4A

(a) Feb. 1

Mar. 1

July 1

Sept. 1

Dec. 1

Dec. 31

Land....................................................... Preferred Stock (2,000 X $50)....... Paid-in Capital in Excess of Par—Preferred Stock ($120,000 – $100,000)................

120,000

Cash (1,000 X $65) ................................ Preferred Stock (1,000 X $50)....... Paid-in Capital in Excess of Par—Preferred Stock (1,000 X $15) ..............................

65,000

Cash (16,000 X $7) ................................ Common Stock (16,000 X $5) ....... Paid-in Capital in Excess of Par—Common Stock (16,000 X $2) ..............................

112,000

Patent (400 X $70)................................. Preferred Stock (400 X $50).......... Paid-in Capital in Excess of Par—Preferred Stock (400 X $20) .................................

28,000

Cash (8,000 X $7.50) ............................. Common Stock (8,000 X $5) ......... Paid-in Capital in Excess of Par—Common Stock (8,000 X $2.50) ...........................

60,000

Income Summary.................................. Retained Earnings ........................

260,000

100,000 20,000 50,000 15,000 80,000 32,000 20,000 8,000 40,000 20,000 260,000

13-31

PROBLEM 13-4A (Continued) (b) Preferred Stock Date Jan. Feb. Mar. Sept.

1 1 1 1

Explanation Balance

Ref. � J2 J2 J2

Debit

Ref. � J2 J2

Debit

Credit

Balance 500,000 600,000 650,000 670,000

100,000 50,000 20,000

Common Stock Date Jan. July Dec.

1 1 1

Explanation Balance

Credit

Balance 350,000 430,000 470,000

80,000 40,000

Paid-in Capital in Excess of Par—Preferred Stock Date Jan. Feb. Mar. Sept.

1 1 1 1

Explanation Balance

Ref. � J2 J2 J2

Debit

Credit

Balance 75,000 95,000 110,000 118,000

20,000 15,000 8,000

Paid-in Capital in Excess of Par—Common Stock Date Jan. July Dec.

13-32 .

1 1 1

Explanation Balance

Ref. � J2 J2

Debit

Credit

Balance 700,000 732,000 752,000

32,000 20,000

PROBLEM 13-4A (Continued) Retained Earnings Date Jan. 1 Dec. 31

Explanation Balance

Ref. � J2

(c)

Debit

Credit 260,000

Balance 300,000 560,000

PECK CORPORATION Stockholders’ equity Paid-in capital Capital stock 10% Preferred stock, $50 par value, 20,000 shares authorized, 13,400 shares issued and outstanding ........................... $ 670,000 Common stock, $5 par value, 125,000 shares authorized, 94,000 shares issued and outstanding ........................... 470,000 Total capital stock ................... 1,140,000 Additional paid-in capital In excess of par— preferred stock .............................. $118,000 In excess of par— common stock............................... 752,000 Total additional paid-in capital ................................... 870,000 Total paid-in capital................. 2,010,000 Retained earnings .......................................... 560,000 Total stockholders’ equity ...... $2,570,000

13-33

PROBLEM 13-5A

GALINDO CORPORATION Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $50 par, 16,000 shares issued and outstanding..................... Common stock, no par, $5 stated value, 400,000 shares issued and 390,000 outstanding ............................ Total capital stock .............. Additional paid-in capital In excess of par— preferred stock ...................... In excess of stated value— common stock ....................... From treasury stock .................. Total additional paid-in capital .............................. Total paid-in capital ............ Retained earnings ................................... Total paid-in capital and retained earnings............ Less: Treasury stock (10,000 shares) .......................................... Total stockholders’ equity ...............................

13-34 .

$ 800,000

2,000,000 2,800,000 $ 679,000 1,600,000 10,000 2,289,000 5,089,000 1,748,000 6,837,000 130,000 $6,707,000

PROBLEM 13-6A

(a) (1) Land ........................................................... Preferred Stock (1,200 X $100) ......... Paid-in Capital in Excess of Par— Preferred Stock ..............................

140,000

(2) Cash (400,000 X $7.00).............................. Common Stock (400,000 X $2.50) ....... Paid-in Capital in Excess of Stated Value—Common Stock .................

2,800,000

(3) Treasury Stock (1,500 X $11).................... Cash ...................................................

16,500

(4) Cash (500 X $14)........................................ Treasury Stock (500 X $11) ............... Paid-in Capital from Treasury Stock ..............................................

7,000

120,000 20,000 1,000,000 1,800,000 16,500 5,500 1,500

13-35

PROBLEM 13-6A (Continued) (b)

IRWIN CORPORATION Stockholders’ equity Paid-in capital Capital stock 10% Preferred stock, $100 par value, 20,000 shares authorized, 1,200 shares issued and outstanding ........................... Common stock, no par, $2.50 stated value, 1,000,000 shares authorized, 400,000 shares issued, and 399,000 outstanding ........................... Total capital stock ............. Additional paid-in capital In excess of par— preferred stock ..................... In excess of stated value— common stock ...................... From treasury stock ................. Total additional paid-in capital ............................. Total paid-in capital ........... Retained earnings .................................. Total paid-in capital and retained earnings........... Less: Treasury stock (1,000 common shares)......................................... Total stockholders’ equity ..............................

13-36 .

$ 120,000

1,000,000 1,120,000 $

20,000 1,800,000 1,500 1,821,500 2,941,500 82,000 3,023,500 11,000 $3,012,500

BYP 13-1

FINANCIAL REPORTING PROBLEM

(a) The common stock of Apple has no par value. (b) There are 1.8 billion shares authorized of which 899.2 million are issued. The percentage is 50% (899.2 ÷ 1,800).

13-37

BYP 13-2

COMPARATIVE ANALYSIS PROBLEM

(a) Par value: Coca-Cola, $0.25 per share. PepsiCo, $0.01 2/3 per share. (b) Percentage of authorized shares issued: Coca-Cola, 7,040 ÷ 11,200 = 62.9%. PepsiCo, 1,529 ÷ 3,600 = 42.5%. (c) Treasury shares, year-end 2013: Coca-Cola, 2,638 million shares. PepsiCo, 337 million shares. (d) Common or capital stock shares outstanding, year-end 2013: Coca-Cola, 7,040 million – 2,638 million = 4,402 million. PepsiCo, 1,529 million – 337 million = 1,192 million.

13-38 .

BYP 13-3

COMPARATIVE ANALYSIS PROBLEM

(a) Par value: Amazon, $0.01 per share. Wal-Mart, $0.10 per share. (b) Percentage of authorized shares issued: Amazon, 483 ÷ 5,000 = 9.7%. Wal-Mart, 3,233 ÷ 11,000 = 29.4%. (c) Treasury shares, year-end 2013: Amazon, 24* million shares. Wal-Mart, None. *483 – 459 (d) Common stock shares outstanding, year-end 2013: Amazon, 459 million. Wal-Mart, 3,233 million.

13-39

BYP 13-4

REAL-WORLD FOCUS

Answers will vary depending on the company chosen by the student.

13-40 .

BYP 13-5

DECISION MAKING ACROSS THE ORGANIZATION

(a) The market price of a share of stock is caused by many factors. Among the factors to be considered are: (1) (2) (3) (4) (5)

the corporation’s anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the securities markets.

Par value is the amount assigned to each share of stock in the corporate charter. Par value may be any amount selected by the corporation. Generally, the amount of par value is quite low because states often levy a tax on the corporation based on par value. Par value is not indicative of the worth or market value of the stock. The significance of par value is a legal matter. Par value represents the legal capital per share that must be retained in the business for the protection of corporate creditors. (b) A corporation may acquire treasury stock to: (1) Reissue the shares to officers and employees under bonus and stock compensation plans. (2) Signal to the stock market that management believes the stock is underpriced in the hope of enhancing its market price. (3) Have additional shares available for use in the acquisition of other companies. (4) Reduce the number of shares outstanding and thereby increase earnings per share.

13-41

BYP 13-5 (Continued) Treasury stock is not an asset. If treasury stock was reported as an asset, then unissued stock should also be shown as an asset, also an erroneous conclusion. Rather than being an asset, treasury stock reduces stockholder claims on corporate assets. This effect is correctly shown by reporting treasury stock as a deduction from total paid-in capital and retained earnings.

13-42 .

BYP 13-6

COMMUNICATION ACTIVITY

Dear Uncle Joe: Thanks for your recent letter and for asking me to explain four terms. Here are my explanations: (1) Authorized stock is the total amount of stock that a corporation is given permission to sell as indicated in its charter. If all authorized stock is sold, a corporation must obtain consent of the state to amend its charter before it can issue additional shares. (2) Issued stock is the amount of stock that has been sold either directly to investors or indirectly through an investment banking firm. (3) Outstanding stock is capital stock that has been issued and is being held by stockholders. (4) Preferred stock is capital stock that has contractual preferences over common stock in certain areas. I really enjoy my accounting classes and especially like the accounting instructors. I hope your corporation does well, and I wish you continued success with your inventions. Regards,

13-43

BYP 13-7

ETHICS CASE

(a) The stakeholders in this situation are: ⯈ ⯈ ⯈ ⯈

The director of Pigua’s R & D division. The president of Pigua. The shareholders of Pigua. Those who live in the environment to be sprayed by the new (untested) chemical.

(b) The president is risking the environment and everything and everybody in it that is exposed to this new chemical in order to enhance his company’s sales and to preserve his job. Presidents and entrepreneurs frequently take risks in performing their leadership functions, but this action appears to be irresponsible and unethical. (c) A parent company may protect itself against loss and most reasonable business risks by establishing separate subsidiary corporations but whether it can insulate itself against this type of action is a matter of state corporate law and criminal law.

13-44 .

BYP 13-8

ALL ABOUT YOU

(a) Ernst and Young LLP was the CPA firm that audited Apple’s financial statements. (b) Apple’s basic earnings per share was $40.03 and its diluted earnings per share was $39.75. (c) Net sales in 2013 were $170,910 million. (d) Capital expenditures (spending) totaled $8,165 million in 2013. (e) Buildings are depreciated over a 30 year useful life by Apple. (f)

Proceeds from issuance of common stock were $530 million in 2013.

13-45

BYP 13-9

FASB CODIFICATION ACTIVITY

(a) Common Stock is a stock that is subordinate to all other stock of the issuer. Also called common shares. (b) Preferred Stock is a security that has preferential rights compared to common stock. (c) Shares include various forms of ownership that may not take the legal form of securities (for example, partnership interests), as well as other interests, including those that are liabilities in substance but not in form. (Business entities have interest holders that are commonly known by specialized names, such as stockholders, partners, and proprietors, and by more general names, such as investors, but all are encompassed by the descriptive term owners. Equity of business entities is, thus, commonly known by several names, such as owners’ equity, stockholders’ equity, ownership, equity capital, partners’ capital, and proprietorship. Some entities [for example, mutual organizations] do not have stockholders, partners, or proprietors in the usual sense of those terms but do have participants whose interests are essentially ownership interests, residual interests, or both.)

13-46 .

IFRS EXERCISES

IFRS 13-1 May 10 Cash (1,000 X $18) ............................................ Share Capital—Ordinary (1,000 X $10) ...... Share Premium—Ordinary (1,000 X $8) .....

18,000 10,000 8,000

IFRS 13-2 MEENEN CORPORATION Partial Statement of Financial Position (Partial) December 31, 2017 Equity Share capital—ordinary, €10 par value, 5,000 shares issued and 4,500 shares outstanding .......................................................... Share premium—ordinary...................................... Retained earnings .................................................. Less: Treasury shares (500 shares) ...................... Total equity ..................................................

€50,000 10,000 45,000 11,000 €94,000

IFRS 13-3 Mar. 2

Organization Expense .................................... Share Capital—Ordinary (5,000 X $1) ........ Share Premium—Ordinary .........................

30,000

June 12 Cash ................................................................ Share Capital—Ordinary (60,000 X $1) ...... Share Premium—Ordinary .........................

375,000

July 11 Cash (1,000 X $110) ........................................ Share Capital—Preference (1,000 X $100) ........................................... Share Premium—Preference (1,000 X $10) .............................................

110,000

Nov. 28 Treasury Shares ............................................. Cash .............................................................

80,000

5,000 25,000 60,000 315,000

100,000 10,000 80,000

13-47

IFRS 13-4 INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a)

(1) Total Equity ........................ €27,723,000,000 (2) Share premium .....................€3,849,000,000 (3) Treasury shares ........................... 7,391,919

(b)

1. Share capital 2. Share premium 3. Net profit, group share

13-48 .

Common stock Paid-in capital in excess of par Net income

CHAPTER 14 Corporations: Dividends, Retained Earnings, and Income Reporting ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief Exercises

Do It!

Exercises

A Problems

Explain how to account for cash dividends.

1, 2, 3, 4

1, 2

1, 2, 6

1A, 2A, 3A, 4A, 5A

Explain how to account for stock dividends and splits.

1, 5, 6, 7, 8

3, 4

3, 4, 5, 6, 7

1A, 2A, 3A, 4A, 5A

Prepare and analyze a comprehensive stockholders’ equity section.

9, 10, 11, 12, 13, 14, 15

5, 6, 7, 8

5, 6, 8, 9, 10, 11, 13, 15, 16

1A, 2A, 3A, 4A, 5A

Describe the form and content of corporation income statements.

15, 16, 17, 18

9, 10, 11

12, 13, 14, 15, 3A 16, 17

14-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description

Difficulty Time Allotted (min.) Level

Prepare dividend entries and stockholders’ equity section.

Simple

30–40

Journalize and post transactions; prepare retained earnings statement and stockholders’ equity section.

Moderate

30–40

Moderate

30–40

3A Prepare retained earnings statement and stockholders’ equity section, and compute allocation of dividends and earnings per share. 4A

Prepare the stockholders’ equity section, reflecting dividends and stock split.

Moderate

20–30

Prepare the stockholders’ equity section, reflecting various events.

Moderate

20–30

14-2

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 14 CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING Number

Difficulty

Time (min.)

BE1

Simple

2–4

BE2

Simple

4–6

BE3

Simple

6–8

BE4

Simple

3–5

BE5

Simple

4–6

BE6

Simple

2–4

BE7

Simple

2–4

BE8

Simple

2–4

BE9

Simple

4–6

BE10

Simple

2–4

BE11

Simple

2–4

DI1

Simple

6–8

DI2

Simple

6–8

DI3

Simple

4–6

DI4

Simple

6–8

EX1

Simple

6–8

EX2

Simple

6–8

EX3

Simple

4–6

EX4

Simple

6–8

EX5

2, 3

Simple

6–8

EX6

1–3

Simple

8–10

EX7

Moderate

5–7

EX8

Simple

4–6

EX9

Simple

4–6

EX10

Simple

6–8

EX11

Simple

8–10

EX12

Simple

6–8

EX13

Simple

6–8

EX14

Simple

4–6

14-3

CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING (Continued) Number

Difficulty

Time (min.)

EX15

3, 4

Simple

6–8

EX16

3, 4

Simple

6–8

EX17

Simple

4–6

P1A

1–3

Simple

30–40

P2A

1–3

Moderate

30–40

P3A

1–4

Moderate

30–40

P4A

1–3

Moderate

20–30

P5A

1–3

Moderate

20–30

BYP1

Simple

4–6

BYP2

3, 4

Simple

10–15

BYP3

3, 4

Simple

10–15

BYP4

Simple

15–20

BYP5

1–3

Moderate

15–20

BYP6

Simple

10–15

BYP7

1, 2

Simple

10–15

BYP8

—

Moderate

15–20

BYP9

Moderate

10–15

14-4

Learning Objective

Knowledge Comprehension

Application

1. Explain how to account for cash dividends.

Q14-1 Q14-2 Q14-3

Q14-4 BE14-1 BE14-2 DI14-1

E14-1 P14-3A E14-6 E14-2 P14-4A P14-1A P14-5A P14-2A

2. Explain how to account for stock dividends and splits.

Q14-1 Q14-5 Q14-6

Q14-7 BE14-3 Q14-8 BE14-4 DI14-2 E14-3

E14-4 P14-3A E14-6 E14-5 P14-4A E14-7 P14-1A P14-5A P14-2A E14-8 E14-16 E14-6 E14-9 P14-1A E14-10 P14-2A E14-11 P14-3A E14-13 P14-4A E14-15 P14-5A

3. Prepare and analyze a comprehensive stockholders’ equity section.

Q14-12

Q14-9 Q14-11 Q14-13 Q14-14 Q14-15

Q14-10 BE14-5 BE14-6 BE14-7 BE14-8 DI14-3 E14-5

4. Describe the form and content of corporation income statements.

Q14-18

Q14-15 Q14-16 Q14-17

BE14-9 E14-12 E14-16 BE14-10 E14-13 E14-17 BE14-11 E14-14 P14-3A DI14-4 E14-15

Broadening Your Perspective

Analysis

Financial Reporting Comparative Analysis Decision Making Across Real-World Focus the Organization Communication FASB Codification

Synthesis

Evaluation

Ethics Case All About You

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

14-5

ANSWERS TO QUESTIONS 1.

(a) A dividend is a distribution of cash or stock by a corporation to its stockholders on a pro rata (proportional) basis. (b) Disagree. Dividends may take four forms: cash, property, scrip (promissory note to pay cash), or stock.

Jan Kimler is not correct. Adequate cash is only one of the conditions. In order for a cash dividend to occur, a corporation must also have retained earnings and the dividend must be declared by the board of directors.

(a) The three dates are: Declaration date is the date when the board of directors formally declares the cash dividend and announces it to stockholders. The declaration commits the corporation to a binding legal obligation that cannot be rescinded. Record date is the date that marks the time when ownership of the outstanding shares is determined from the stockholder records maintained by the corporation. The purpose of this date is to identify the persons or entities that will receive the dividend. Payment date is the date on which the dividend checks are mailed to the stockholders. (b) The accounting entries and their dates are: Declaration date—Debit Cash Dividends and Credit Dividends Payable. No entry is made on the record date. Payment date—Debit Dividends Payable and Credit Cash.

The allocation of the cash dividend is as follows: Total dividend ............................................................................... Allocated to preferred stock Dividends in arrears—one year ............................................. Current year dividend ............................................................ Remainder allocated to common stock .........................................

$55,000 $10,000 10,000

20,000 $35,000

A cash dividend decreases assets, retained earnings, and total stockholders’ equity. A stock dividend decreases retained earnings, increases paid-in capital, and has no effect on total assets and total stockholders’ equity.

A corporation generally issues stock dividends for one of the following reasons: (a) To satisfy stockholders’ dividend expectations without spending cash. (b) To increase the marketability of its stock by increasing the number of shares outstanding and thereby decreasing the market price per share. Decreasing the market price of the stock makes the shares easier to purchase for smaller investors. (c) To emphasize that a portion of stockholders’ equity that had been reported as retained earnings has been permanently reinvested in the business and therefore is unavailable for cash dividends.

In a stock split, the number of shares is increased in the same proportion that par value is decreased. Thus, in the Gorton Corporation the number of shares will increase to 60,000 = (30,000 X 2) and the par value will decrease to $5 = ($10 ÷ 2). The effect of a split on market value is generally inversely proportional to the size of the split. In this case, the market price would fall to approximately $60 per share ($120 ÷ 2).

14-6

Questions Chapter 14 (Continued) 8.

The different effects of a stock split versus a stock dividend are: Item Total paid-in capital Total retained earnings Total par value (common stock) Par value per share

Stock Split No change No change No change Decrease

Stock Dividend Increase Decrease Increase No Change

A prior period adjustment is a correction of an error in previously issued financial statements. The correction is reported in the current year’s retained earnings statement as an adjustment of the beginning balance of retained earnings.

10.

The understatement of depreciation in a prior year overstates the beginning retained earnings balance. The retained earnings statement presentation is: Balance, January 1, as reported ..................................................................... Correction for understatement of prior year’s depreciation .............................. Balance, January 1, as adjusted .....................................................................

$230,000 (50,000) $180,000

11.

The purpose of a retained earnings restriction is to indicate that a portion of retained earnings is currently unavailable for dividends. Restrictions may result from the following causes: legal, contractual, or voluntary.

12.

Retained earnings restrictions are generally disclosed in the notes to the financial statements.

13.

The debits and credits to retained earnings are: Debits 1. 2. 3. 4.

Credits

Net loss Prior period adjustments for overstatement of net income Cash and stock dividends Some disposals of treasury stock

1. Net income 2. Prior period adjustments for understatement of net income

14.

Rafy is incorrect. Only the ending balance of retained earnings is reported in the stockholders’ equity section.

15.

Dean should be told that although many factors affect the market price of a stock at a given time, the reported net income is one of the most significant factors. When companies announce increases or decreases in net income, the market price of their stock usually increases or decreases immediately. Net income also provides an indication of the amount of dividends that a company can distribute. In addition, net income leads to a growth in retained earnings, which is often reflected in a stock’s market price.

14-7

Questions Chapter 14 (Continued) 16.

The unique feature of a corporation income statement is a separate section that shows income taxes or income tax expense. The presentation is as follows: Income before income taxes .................................................................................. Income tax expense............................................................................................... Net income ............................................................................................................

$500,000 150,000 $350,000

17.

Earnings per share means earnings per share of common stock. Preferred stock dividends are subtracted from net income in computing EPS in order to obtain income available to common stockholders.

18.

Apple reported the following basic earnings per share amounts in 2009 to 2013: $9.22, $15.41, $28.05, $44.64, and $40.03.

14-8

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 14-1 Nov. 1 Dec. 31

Cash Dividends (80,000 X $1/share) .............. Dividends Payable...................................

80,000

Dividends Payable .......................................... Cash .........................................................

80,000

80,000 80,000

BRIEF EXERCISE 14-2 Total dividend Allocated to preferred stock: Dividends in arrears 2017 dividend Remainder allocated to common stock

$375,000 $160,000 80,000

(240,000) $135,000

BRIEF EXERCISE 14-3 Dec. 1

Stock Dividends (7,500 X $16)........................ Common Stock Dividends Distributable (7,500 X $10)........................................ Paid-in Capital in Excess of Par— Common Stock (7,500 X $6)...............

120,000

Common Stock Dividends Distributable ....... Common Stock ........................................

75,000

75,000 45,000 75,000

14-9

BRIEF EXERCISE 14-4

(a)

Stockholders’ equity Paid-in capital Common stock, $10 par In excess of par Total paid-in capital Retained earnings Total stockholders’ equity

Before Dividend

After Dividend

$2,000,000 — 2,000,000 500,000 $2,500,000

$2,200,000 80,000 2,280,000 220,000 $2,500,000

(b)

Outstanding shares

200,000

220,000

(c)

Par value per share

$10.00

BRIEF EXERCISE 14-5 SOTO INC. Retained Earnings Statement For the Year Ended December 31, 2017 Balance, January 1 ........................................................................ Add: Net income .........................................................................

$220,000 170,000 390,000 85,000 $305,000

Less: Dividends ............................................................................ Balance, December 31 ..................................................................

14-10

BRIEF EXERCISE 14-6 PALMER INC. Retained Earnings Statement For the Year Ended December 31, 2017 Balance, January 1, as reported ................................ Correction for overstatement of net income in prior period (insurance expense error)............. Balance, January 1, as adjusted ................................ Add: Net income ....................................................... Less: Cash dividends ................................................ Stock dividends ............................................... Balance, December 31 ................................................

$800,000 (50,000) 750,000 120,000 870,000 $90,000 8,000

98,000 $772,000

BRIEF EXERCISE 14-7 Return on stockholders’ equity: $393 ÷

$2,581 + $2,887 = 14.4% 2

BRIEF EXERCISE 14-8 Return on common stockholders’ equity

$152,000 ($700,000+$820,000) ÷ 2

= 20%

14-11

BRIEF EXERCISE 14-9 REINSCH CORPORATION Income Statement For the Year Ended December 31, 2017 Sales revenue .............................................................................. Cost of goods sold ...................................................................... Gross profit.................................................................................. Operating expenses .................................................................... Income from operations.............................................................. Other revenues and gains........................................................... Income before income taxes ...................................................... Income tax expense ($120,000 X 30%) ....................................... Net income ...................................................................................

$350,000 205,000 145,000 75,000 70,000 50,000 120,000 36,000 $84,000

BRIEF EXERCISE 14-10 Earnings per share = $1.90, or ($380,000 ÷ 200,000) BRIEF EXERCISE 14-11 Earnings per share = $1.75, or [($380,000 – $30,000) ÷ 200,000]

14-12

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 14-1 1.

The company has not missed past dividends and the preferred stock is noncumulative; thus, the preferred stockholders are paid only this year’s dividend. The dividend paid to preferred stockholders would be $21,000 (3,000 X .07 X $100). The dividend paid to common stockholders would be $84,000 ($105,000 – $21,000).

The preferred stock is noncumulative; thus, past unpaid dividends do not have to be paid. The dividend paid to preferred stockholders would be $21,000 (3,000 X .07 X $100). The dividend paid to common stockholders would be $84,000 ($105,000 – $21,000).

The preferred stock is cumulative; thus, dividends that have been missed in the past (dividends in arrears) must be paid. The dividend paid to preferred stockholders would be $63,000 (3 X 3,000 X .07 X $100). The dividend paid to common stockholders would be $42,000 ($105,000 – $63,000).

DO IT! 14-2 (a) (1) The stock dividend amount is $2,760,000 [(400,000 X 15%) X $46]. The new balance in retained earnings is $9,240,000 ($12,000,000 – $2,760,000). (2) The retained earnings after the stock split would be the same as it was before the split: $12,000,000. (b) (1) and (2) The effects on the equity accounts are as follows:

Paid-in capital Retained earnings Total stockholders’ equity Shares outstanding

Original Balances $ 2,800,000 12,000,000 $14,800,000 400,000

After Dividend $ 5,560,000 9,240,000 $14,800,000 460,000

After Split $ 2,800,000 12,000,000 $14,800,000 800,000

Total stockholders’ equity remains the same under both options. .

14-13

DO IT! 14-3 FOLEY CORPORATION Retained Earnings Statement For the Year Ended December 31, 2017 Balance, January 1, as reported ............................. Correction for understatement of net income in prior period (depreciation error) ....... Balance, January 1, as adjusted............................. Add: Net income ....................................................

$3,100,000 110,000 3,210,000 1,200,000 4,410,000 150,000 $4,260,000

Less: Cash dividends............................................. Balance, December 31 ............................................ DO IT! 14-4

(a)

2017

2016 Return on common ($100,000 – $30,000) = 10.4% stockholders’ ($600,000 + $750,000) /2 equity

(b) Earnings per share

($100,000 – $30,000) 50,000

= $1.40

($110,000 – $30,000)

= 10.1%

($750,000 + $830,000)/2

($110,000 – $30,000)

= $1.78

45,000

(c) Between 2016 and 2017, return on common stockholders’ equity decreased from 10.4% to 10.1%. Earnings per share, however, improved from $1.40 to $1.78. It is important to note that net income barely changed during this period. The increase in EPS was due to the purchase of treasury shares, which reduced the denominator of the ratio. As the company repurchases its own shares, it becomes more reliant on debt and thus increases its risk.

14-14

SOLUTIONS TO EXERCISES EXERCISE 14-1 (a) Apr.

June 15 July 10 Dec.

Dec. 15

Cash (25,000 X $17) ................................ Common Stock (25,000 X $5) ......... Paid-in Capital in Excess of Stated Value ................................

425,000

Cash Dividends (120,000 X $1) .............. Dividends Payable ..........................

120,000

Dividends Payable.................................. Cash.................................................

120,000

Cash (2,000 X $19) .................................. Common Stock (2,000 X $5) ........... Paid-in Capital in Excess of Stated Value ................................

38,000

Cash Dividends (122,000 X $1.20) ......... Dividends Payable ..........................

146,400

125,000 300,000 120,000 120,000 10,000 28,000 146,400

(b) In the retained earnings statement, dividends of $266,400 will be deducted. In the balance sheet, Dividends Payable of $146,400 will be reported as a current liability.

14-15

EXERCISE 14-2 (a) Total dividend Allocation to preferred stock Remainder to common stock

2016 $5,000 5,000 $ 0

2017 $12,000 6,000 $ 6,000

2018 $28,000 6,000 $22,000

Total dividend Allocation to preferred stock Remainder to common stock

2016 $5,000 5,000 $ 0

2017 $12,000 9,0001 $ 3,000

2018 $28,000 7,000 $21,000

(b)

Dividends in arrears for Year 1, $2,000 + current dividend for Year 2, $7,000.

Cash Dividends....................................... Dividends Payable ..........................

28,000 28,000

EXERCISE 14-3 (a) Stock Dividends (21,000* X $18) ............................ Common Stock Dividends Distributable (21,000 X $10) .............................................. Paid-in Capital in Excess of Par— Common Stock (21,000 X $8)......................

378,000 210,000 168,000

*[($1,000,000 ÷ $10) + 40,000] X 15%. (b) Stock Dividends (36,000* X $20) ............................ Common Stock Dividends Distributable (36,000 X $5) ................................................ Paid-in Capital in Excess of Par— Common Stock (36,000 X $15)....................

720,000 180,000 540,000

*[($1,000,000 ÷ 5) + 40,000] X 15%.

14-16

EXERCISE 14-4 Before Action

After Stock Dividend

After Stock Split

$ 500,000 0 500,000 900,000

$ 525,000 10,000 535,000 865,000

$ 500,000 0 500,000 900,000

$1,400,000

Outstanding shares

50,000

52,500

100,000

Par value per share

$10.00

$5.00

(b) Common stock Balance before dividend................................................. Dividend shares (8,000 X $5) .......................................... New balance.............................................................

$400,000 40,000 $440,000

Paid-in capital in excess of par—Common stock Balance before dividend................................................. Excess over par of shares issued (8,000 X $10) ........... New balance.............................................................

$ 25,000 80,000 $105,000

Retained earnings Balance before dividend................................................. Dividend (8,000 X $15) .................................................... New balance.............................................................

$155,000 120,000 $ 35,000

Stockholders’ equity Paid-in capital Common stock In excess of par Total paid-in capital Retained earnings Total stockholders’ equity

EXERCISE 14-5 (a) (1) Par value before the stock dividend was $5. (2) Par value after the stock dividend is still $5.

14-17

EXERCISE 14-6 Paid-in Capital Item

Capital Stock

Additional

Retained Earnings

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

NE I NE I NE NE NE I

NE NE NE I NE NE NE I

D NE NE D D NE NE NE

EXERCISE 14-7 1.

Dec. 31

14-18

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

50,000

Stock Dividends.............................. Dividends Payable .......................... Common Stock Dividends Distributable ........................ Paid-in Capital in Excess of Par—Common Stock ......

8,000 10,000

Common Stock ............................... Retained Earnings...................

2,000,000

50,000

10,000 8,000 2,000,000

EXERCISE 14-8 EDDY CORPORATION Retained Earnings Statement For the Year Ended December 31, 2017 Balance, January 1, as reported ............................. Correction for overstatement of 2016 net income (inventory error) ...................................... Balance, January 1, as adjusted ............................. Add: Net income..................................................... Less: Cash dividends ............................................. Stock dividends ............................................ Balance, December 31 .............................................

$650,000 (40,000) 610,000 350,000 960,000 $120,000 90,000

210,000 $750,000

EXERCISE 14-9 NEWLAND COMPANY Retained Earnings Statement For the Year Ended December 31, 2017 Balance, January 1, as reported ................................. Correction for understatement of 2015 net income ...... Balance, January 1, as adjusted ................................. Add: Net income......................................................... Less: Cash dividends ................................................. Stock dividends ................................................ Balance, December 31 ................................................. 1

(200,000 X $.50/sh)

$100,0001 150,0002

$310,000 20,000 330,000 285,000 615,000 250,000 $365,000

(200,000 X .05 X $15/sh)

14-19

EXERCISE 14-20 DIRK COMPANY Balance Sheet (Partial) December 31, 2017 Paid-in capital Capital stock Preferred stock ................................................ $125,000 Common stock................................................. 500,000 Total capital stock ..................................... $ 625,000 Additional paid-in capital 75,000 In excess of par—preferred stock .................. In excess of par—common stock ................... 100,000 Total additional paid-in capital ................. 175,000 Total paid-in capital................................... 800,000 Retained earnings ....................................................... 374,000* Total paid-in capital and retained earnings 1,174,000 Less: Treasury stock.................................................. 40,000 Total stockholders’ equity ........................ $1,134,000 *$250,000 + $180,000 – $56,000

14-20

EXERCISE 14-11 HORNER INC. Balance Sheet (Partial) December 31, 20XX Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $5 par value, 40,000 shares authorized, 30,000 shares issued.................. Common stock, no par, $1 stated value, 400,000 shares authorized, 300,000 shares issued and 290,000 outstanding ............ $ 300,000 Common stock dividends distributable ................................ 30,000 Total capital stock................... Additional paid-in capital In excess of par— preferred stock ........................... 344,000 In excess of stated value— common stock ................................ 1,200,000 Total additional paid-in capital .................................. Total paid-in capital ................ Retained earnings (see Note R) .................... Total paid-in capital and retained earnings ................ Less: Treasury stock (10,000 common shares) ................................................ Total stockholders’ equity......

$ 150,000

330,000 480,000

1,544,000 2,024,000 800,000 2,824,000 74,000 $2,750,000

Note R: Retained earnings is restricted for plant expansion, $100,000.

14-21

EXERCISE 14-22 (a)

NORMAN CORPORATION Income Statement For the Year Ended December 31, 2017 Sales revenue ......................................................... Cost of goods sold ................................................. Gross profit ............................................................. Operating expenses ............................................... Income from operations ......................................... Other revenues and gains ...................................... Other expenses and losses ................................... Income before income taxes.................................. Income tax expense ($185,000 X 30%) .................. Net income ..............................................................

$700,000 465,000 235,000 110,000 125,000 92,000 32,000 185,000 55,500 $129,500

(b) Earnings per share = $1.99, or [($129,500 – $30,000) ÷ 50,000]

EXERCISE 14-13 (a)

PENNINGTON CORPORATION Income Statement For the Year Ended December 31, 2017 Net sales.................................................................. Cost of goods sold ................................................. Gross profit ............................................................. Operating expenses ............................................... Income from operations ......................................... Interest expense ..................................................... Income before income taxes.................................. Income tax expense (30% X $79,500) .................... Net income ..............................................................

(b)

$600,000 360,000 240,000 153,000 87,000 7,500 79,500 23,850 $ 55,650

Net income – preferred dividends = $55,650 – $15,000 = Average common stockholders’ equity $200,000

14-22

20.3%

EXERCISE 14-14 Net income: $2,000,000 – $1,300,000 = $700,000; $700,000 – (30% X $700,000) = $490,000 Preferred dividends: (50,000 X $20) X 6% = $60,000 Average common shares outstanding: 200,000 Earnings per share: $490,000 – $60,000 = $2.15 200,000 EXERCISE 14-15 2017

2016

Earnings per share

$290,000 – $20,000 = $2.70 100,000

$200,000 – $20,000 = $2.25 80,000

Return on common stockholders’ equity

$290,000 – $20,000 = 22.5% $1,200,000

$200,000 – $20,000 = 20.0% $900,000

EXERCISE 14-16 2017

2016

Earnings per share

$200,000 – $20,000 = $1.20 150,000

$191,000 – $20,000 = $0.95 180,000

Return on common stockholders’ equity

$200,000 – $20,000 = 10.0% $1,800,000

$191,000 – $20,000 = 9.0% $1,900,000

14-23

EXERCISE 14-17 (a)

$241,000 – $16,000 = $2.25 100,000

(b)

$241,000 – $16,000 = $2.50 90,000* *100,000 – 10,000 = 90,000.

14-24

SOLUTIONS TO PROBLEMS PROBLEM 14-1A

(a) Feb. Mar.

1 1

60,000

Dividends Payable................................. Cash................................................

60,000

Apr.

Memo—two-for-one stock split increases number of shares to 120,000 = (60,000 X 2) and reduces par value to $10 per share.

July

Stock Dividends (12,000 X $13) ............ Common Stock Dividends Distributable (12,000 X $10) ...... Paid-in Capital in Excess of Par—Common Stock (12,000 X $3) ...............................

Dec.

1 31

Cash Dividends (60,000 X $1) ............... Dividends Payable .........................

Common Stock Dividends Distributable ...................................... Common Stock ..............................

60,000 60,000

156,000 120,000

36,000 120,000 120,000

Cash Dividends (132,000 X $.50) .......... Dividends Payable .........................

66,000

Income Summary .................................. Retained Earnings .........................

350,000

Retained Earnings ................................. Stock Dividends .............................

156,000

Retained Earnings ................................. Cash Dividends ..............................

126,000

66,000 350,000 156,000 126,000

14-25

PROBLEM 14-1A (Continued) (b) Common Stock Date Jan. Apr.

1 1

July

Explanation Balance 2 for 1 split—new par $10

Ref.

Debit

Credit

Balance 1,200,000

120,000

1,320,000

Credit 120,000

Balance 120,000 0

Credit

Balance 200,000 236,000

�

Common Stock Dividends Distributable Date July

Explanation

Ref.

1 31

Debit 120,000

Paid-in Capital in Excess of Par—Common Stock Date Jan. July

1 1

Explanation Balance

Ref.

Debit

� 36,000

Retained Earnings Date Jan. 1 Dec. 31

Explanation Balance Net income Stock dividend Cash dividend

Ref.

Debit

Credit

Balance 600,000 950,000 794,000 668,000

� 350,000 156,000 126,000

Cash Dividends Date Feb. 1 Dec. 1 Dec. 31

Explanation

Ref.

Debit 60,000 66,000

Credit

Balance 60,000 126,000 0

126,000

Stock Dividends Date July 1 Dec. 31 14-26

Explanation

Ref.

Debit 156,000

Credit

Balance 156,000 0

156,000 .

PROBLEM 14-1A (Continued) (c)

GEFFREY CORPORATION Balance Sheet (Partial) December 31, 2017 Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 132,000 shares issued and outstanding .............. Additional paid-in capital In excess of par—common stock ............... Total paid-in capital.............................. Retained earnings ....................................................... Total stockholders’ equity ...................

$1,320,000 236,000 1,556,000 668,000 $2,224,000

14-27

PROBLEM 14-2A

(a) July

Aug. 1 Sept. 1 Dec.

Cash Dividends [($800,000 ÷ $5) X $.60]..................... Dividends Payable ........................

96,000 96,000

Retained Earnings ................................ Accumulated Depreciation ...........

25,000

Dividends Payable ................................ Cash ...............................................

96,000

Stock Dividends (24,000 X $18) ........... Common Stock Dividends Distributable (24,000 X $5)........ Paid-in Capital in Excess of Par—Common Stock (24,000 X $13) ............................

432,000

Cash Dividends [12,000 X ($50 X 6%)] ........................ Dividends Payable ........................

25,000 96,000

120,000

312,000 36,000 36,000

Income Summary.................................. Retained Earnings.........................

355,000

Retained Earnings ................................ Cash Dividends .............................

132,000

Retained Earnings ................................ Stock Dividends ............................

432,000

355,000 132,000 432,000

(b) Preferred Stock Date Jan.

14-28

Explanation Balance

Ref.

Debit

Credit

Balance 600,000

�

PROBLEM 14-2A (Continued) Common Stock Date Jan.

Explanation Balance

Ref.

Debit

Credit

Balance 800,000

Debit

Credit 120,000

Balance 120,000

Credit

Balance 200,000

Credit

Balance 300,000 612,000

�

Common Stock Dividends Distributable Date Dec.

Explanation

Ref.

Paid-in Capital in Excess of Par—Preferred Stock Date Jan.

Explanation Balance

Ref.

Debit

�

Paid-in Capital in Excess of Par—Common Stock Date Jan. Dec.

1 1

Explanation Balance

Ref.

Debit

� 312,000

Retained Earnings Date Jan. Aug.

1 1

Dec. 31 31 31

Explanation Balance Prior period adjustment— depreciation expense understated Net income Cash dividends Stock dividends

Ref.

Debit

Credit

�

25,000 355,000 132,000 432,000

Balance 800,000

775,000 1,130,000 998,000 566,000

14-29

PROBLEM 14-2A (Continued) Cash Dividends Date July 1 Dec. 15 31

Explanation

Ref.

Debit 96,000 36,000

Credit

Balance 96,000 132,000 0

132,000

Stock Dividends Date Dec.

Explanation

Ref.

1 31

(c)

Debit 432,000

Credit

Balance 432,000 0

432,000

KARP COMPANY Retained Earnings Statement For the Year Ended December 31, 2017 Balance, January 1, as reported .................... Correction of 2016 depreciation expense ..... Balance, January 1, as adjusted .................... Add: Net income ........................................... Less: Cash dividends—preferred ................. Stock dividends—common ................. Cash dividends—common .................. Balance, December 31 ....................................

14-30

$ 800,000 (25,000) 775,000 355,000 1,130,000 $ 36,000 432,000 96,000

564,000 $ 566,000

PROBLEM 14-2A (Continued) (d)

KARP COMPANY Balance Sheet (Partial) December 31, 2017 Stockholders’ equity Paid-in capital Capital stock 6% Preferred stock, $50 par value, 12,000 shares issued ... Common stock, $5 par value, 160,000 shares issued ............ Common stock dividends distributable (24,000 shares) ........................ Total capital stock................ Additional paid-in capital In excess of par— preferred stock........................ In excess of par— common stock......................... Total additional paid-in capital ............................... Total paid-in capital ............. Retained earnings (see Note B) ............... Total stockholders’ equity ................................

$ 600,000 $800,000 120,000

920,000 1,520,000

200,000 612,000 812,000 2,332,000 566,000 $2,898,000

Note B: Retained earnings is restricted for plant expansion, $200,000.

14-31

PROBLEM 14-3A

(a)

Retained Earnings Sept. 1 Prior Per. Adj. 63,000 Jan. 1 Balance Dec. 31 Cash Dividends 250,000 Dec. 31 Net Income Dec. 31 Stock Dividends 400,000 Dec. 31 Balance

(b)

1,170,000 585,000 1,042,000

STOREY CORPORATION Retained Earnings Statement For the Year Ended December 31, 2017 Balance, January 1, as reported .................. Correction of overstatement of 2016 net income because of understatement of salaries and wages expense .................... Balance, January 1, as adjusted .................. Add: Net income ......................................... Less: Cash dividends .................................. Stock dividends ................................. Balance, December 31 ..................................

(c)

$1,170,000 (63,000) 1,107,000 585,000 1,692,000 $250,000 400,000

650,000 $1,042,000

STOREY CORPORATION Partial Balance Sheet December 31, 2017 Stockholders’ equity Paid-in capital Capital stock 6% Preferred stock, $50 par value, cumulative, 20,000 shares authorized, 15,000 shares issued and outstanding............................

14-32

$ 750,000

PROBLEM 14-3A (Continued) STOREY CORPORATION (Continued) Common stock, $10 par value, 500,000 shares authorized, 250,000 shares issued and outstanding ........................... Common stock dividends distributable .......................... Total capital stock .............. Additional paid-in capital In excess of par— preferred stock ...................... In excess of par— common stock....................... Total additional paid-in capital.............................. Total paid-in capital............ Retained earnings (see Note X) ............. Total stockholders’ equity ..............................

$2,500,000 250,000

2,750,000 3,500,000

250,000 400,000 650,000 4,150,000 1,042,000 $5,192,000

Note X: Retained earnings is restricted for plant expansion, $200,000. (d) Total cash dividend ....................................... Allocated to preferred stock Dividend in arrears—2016 [15,000 X ($50 X 6%)] ......................... 2017 dividend ......................................... Remainder to common stock........................

$250,000 $45,000 45,000

90,000 $160,000

14-33

PROBLEM 14-4A (a)

VEN CORPORATION Partial Balance Sheet March 31, 2017 Stockholders’ equity Paid-in capital Capital stock Common stock, no-par value, 90,000 shares issued and outstanding ..... Retained earnings ........................................................ Total stockholders’ equity .........................

(b)

$1,600,000 410,000 $2,010,000

VEN CORPORATION Partial Balance Sheet June 30, 2017 Stockholders’ equity Paid-in capital Capital stock Common stock, no-par value, 270,000 shares issued and outstanding ... Retained earnings ........................................................ Total stockholders’ equity .........................

(c)

$1,600,000 410,000 $2,010,000

VEN CORPORATION Partial Balance Sheet September 30, 2017 Stockholders’ equity Paid-in capital Capital stock Common stock, no-par value, 283,500 shares issued and outstanding ............ $1,816,000* Retained earnings ........................................................... 194,000** Total stockholders’ equity ................................. $2,010,000 *$1,600,000 + [(270,000 X .05) X $16]

14-34

**$410,000 – $216,000

PROBLEM 14-4A (Continued) (d)

VEN CORPORATION Partial Balance Sheet December 31, 2017 Stockholders’ equity Paid-in capital Capital stock Common stock, no-par value, 283,500 shares issued and outstanding .......... $1,816,000 Retained earnings ......................................................... 402,250* Total stockholders’ equity .................................. $2,218,250 *$194,000 – ($.50 X 283,500) + $350,000

14-35

PROBLEM 14-5A

Preliminary analysis (in thousands)—NOT REQUIRED

Balance, Jan. 1 1. Issued 50,000 shares for stock dividend 2. Issued 30,000 shares for cash 3. Corrected error in 2015 net income 4. Declared cash dividend 5. Net income for year Balance, Dec. 31

Common Stock $1,500

200

Common Stock Dividends Distributable $200

Retained Earnings $600

(200)

Total $2,300

180

180 70

(80) 300 $890

(80) 300 $2,770

Stockholders’ equity Paid-in capital Capital stock Common stock, no-par value, 580,000 shares issued and outstanding....... Retained earnings ........................................................ Total stockholders’ equity ..........................

$1,880,000 890,000 $2,770,000

$1,880

SHELLENBURGER INC. Partial Balance Sheet December 31, 2017

14-36

BYP 14-1

FINANCIAL REPORTING PROBLEM

According to the Consolidated Statements of Shareholders’ Equity, Apple declared $10,676 dividends and dividend equivalent rights on common stock during the year-ended September 28, 2013.

14-37

BYP 14-2

COMPARATIVE ANALYSIS PROBLEM

(a)

PepsiCo Earnings per share Return on common stockholders’ equity

$6,740 – $1

Coca-Cola $8,584 – $0

= $4.37

1,541

= $1.88

4,568

$6,740 – $1 ($22,417 + $24,409) ÷ 2

= 28.8%

$8,584 – $0

= 26.0%

($32,790 + $33,173) ÷ 2

The return on common stockholders’ equity can be used to compare the profitability of two companies. It shows how many dollars of net income were earned for each dollar invested by the owners. Since this ratio is expressed as a percent instead of a dollar amount like earnings per share, it can be used to compare PepsiCo and Coca-Cola. During 2013, PepsiCo was 11% more profitable than Coca-Cola based on their respective returns on common stockholders’ equity. Earnings per share measures cannot be compared across companies because they may use vastly different numbers of shares to finance the company. (b) PepsiCo paid cash dividends of $3,434 million and Coca-Cola paid $4,969 million of cash dividends in 2013.

14-38

BYP 14-3

COMPARATIVE ANALYSIS PROBLEM

(a)

Amazon Earnings per share

$274 – $0 457

= $0.60

Wal-Mart $16,022 – $0

= $4.90

3,269

Earnings per share measures cannot be compared across companies because they may use vastly different numbers of shares to finance the company. (b) Wal-Mart paid cash dividends of $6,139 million but Amazon did not pay any dividends in 2013.

14-39

BYP 14-4

REAL-WORLD FOCUS

Answers will vary depending on the company chosen by the student.

14-40

BYP 14-5

DECISION MAKING ACROSS THE ORGANIZATION

Journal entries—NOT REQUIRED July

Aug. Sept. Dec.

1 1 1

15 31

(a)

Cash Dividends (140,000 X $0.50) ............................. Dividends Payable ........................

70,000 70,000

Accumulated Depreciation ................ Retained Earnings ........................

72,000

Dividends Payable ............................. Cash ..............................................

70,000

Stock Dividends (14,000 X $12) ......... Common Stock Dividends Distributable .................................

168,000

Cash Dividends (4,000 X $6).............. Dividends Payable ........................

24,000

Income Summary ............................... Retained Earnings ........................

320,000

72,000 70,000

168,000

24,000 320,000

GONZALEZ, INC. Retained Earnings Statement For the Year Ended December 31, 2017 Balance, January 1, as previously reported ........ Correction of 2016 depreciation........................... Balance, January 1, as corrected......................... Add: Net income .................................................. Less: Cash dividends—preferred........................ Stock dividends—common ....................... Cash dividends—common ........................ Balance, December 31 ..........................................

$550,000 72,000 622,000 320,000 942,000 $ 24,000 168,000 70,000

262,000 $680,000

14-41

BYP 14-5 (Continued) (b)

Treating the overstatement of 2016 depreciation expense as an adjustment of 2017 income would be incorrect because it applies to the prior year’s income statement and would distort depreciation expense for 2017.

(c)

Companies issue stock dividends instead of cash dividends to satisfy stockholders’ dividend expectations without spending cash and to increase the marketability of the corporation’s stock.

14-42

BYP 14-6

COMMUNICATION ACTIVITY

Dear Mom and Dad, Thanks for calling me about your investments in Gosser Corporation and Jenks, Inc. The effect to you as stockholders is the same for both a stock dividend and a stock split. In each case, the number of shares you own will increase. Following the stock dividend, you will own 110 shares of Gosser [100 + (100 X 10%)]. After the stock split, you will own 200 shares of Jenks (100 X 2). The total value of your investments should remain approximately the same as before the stock dividend and stock split. The reason is that the market value per share will likely decrease in proportion to the additional shares that you will own. If there is a change in value, it is more likely to be higher than lower. The effects of the stock dividend and stock split on the corporations are limited entirely to the stockholders’ equity sections as follows: Stockholders’ Equity Item Total capital stock Par value per share Total paid-in capital Total retained earnings Total stockholders’ equity

After Stock Dividend Increase No change Increase Decrease No change

After Stock Split No change Decrease No change No change No change

I hope this answers your questions, Mom and Dad. If you have any additional questions, please give me a call. Love, P.S. Please send money.

14-43

BYP 14-7

ETHICS CASE

(a) The stakeholders in this situation are: ⯈ Rob Lowery, president of Molina Corporation. ⯈ Debbie Oler, financial vice-president. ⯈ The stockholders of Molina Corporation. (b) There is nothing unethical in issuing a stock dividend. But the president’s order to write a press release convincing the stockholders that the stock dividend is just as good as a cash dividend is unethical. A stock dividend is not a cash dividend and does not necessarily place the stockholder in the same position. A stock dividend is a “paper” dividend—the issuance of a stock certificate, not a check (cash). (c) The stock dividend results in a decrease in retained earnings and an increase of the same amount in paid-in capital with no change in total stockholders’ equity. There is no change in total assets and no change in total liabilities and stockholders’ equity. As a stockholder, preference for a cash dividend versus a stock dividend is dependent upon one’s investment objective—income (cash flow) or growth (reinvestment).

14-44

BYP 14-8

ALL ABOUT YOU

Answers will vary depending on the subject of the ethics code.

14-45

BYP 14-9

FASB CODIFICATION ACTIVITY

(a) Stock Dividends: An issuance by a corporation of its own common shares to its common shareholders without consideration and under conditions indicating that such action is prompted mainly by a desire to give the recipient shareholders some ostensibly separate evidence of a part of their respective interests in accumulated corporate earnings without distribution of cash or other property that the board of directors deems necessary or desirable to retain in the business. (b) Stock Split: An issuance by a corporation of its own common shares to its common shareholders without consideration and under conditions indicating that such action is prompted mainly by a desire to increase the number of outstanding shares for the purpose if effecting a reduction in their unit market price and, thereby, of obtaining wider distribution and improved marketability of the shares. Sometimes called a stock split-up. (c) Except for a few instances, the issuance of additional shares of less than 20 or 25 percent of the number of previously outstanding shares would call for treatment as a stock dividend as described in paragraph 505-20-30-3.

14-46

IFRS 14-1 INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) The company declared and paid dividends of €1,501 in 2013 according to the statement of changes in equity and the statement of cash flows. (b) The company had a 13.4% return on ordinary shareholders’ equity. The computation is as follows: (€3,436) (€26,695 + €24,424) ÷ 2 (c) Earnings per share is €6.87 per share.

14-47

CHAPTER 15 Long-Term Liabilities ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Learning Objectives

Questions

Describe the major characteristics of bonds.

1, 2, 3, 4

Explain how to account for bond transactions.

5, 6, 7, 8, 9

1, 2, 3, 4, 5, 6, 13

Explain how to account for long-term notes payable.

10, 11, 12, 13, 14

Discuss how long-term liabilities are reported and analyzed.

15, 16

8, 9, 10

*5.

Apply the straight-line method of amortizing bond discount and bond premium.

17, 18

*6.

Apply the effective-interest method of amortizing bond discount and bond premium.

19, 20

Do It! 1

2a, 2b

Exercises

A Problems

2, 3, 4, 5, 6, 7, 8

1A, 2A, 3A

9, 10

11, 12, 13, 14

1A, 2A, 4A, 5A, 6A, 7A, 10A

11, 12

15, 16

6A, 7A, 8A

17, 18

9A, 10A

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the chapter.

15-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare entries to record issuance of bonds, interest accrual, and bond redemption.

Moderate

20–30

Prepare entries to record issuance of bonds, interest accrual, and bond redemption.

Moderate

15–20

Prepare entries for interest payment, bond redemption, and interest accrual.

Moderate

15–20

Prepare installment payments schedule and journal entries for a mortgage note payable.

Moderate

20–30

Analyze three different lease situations and prepare journal entries.

Moderate

20–30

*6A

Prepare entries to record issuance of bonds, interest accrual, and straight-line amortization for two years.

Simple

30–40

*7A

Prepare entries to record issuance of bonds, interest, and straight-line amortization of bond premium and discount.

Simple

30–40

*8A

Prepare entries to record interest payments, straight-line premium amortization, and redemption of bonds.

Moderate

30–40

*9A

Prepare entries to record issuance of bonds, payment of interest, and amortization of bond discount using effective-interest method.

Moderate

30–40

*10A

Prepare journal entries to record issuance of bonds, payment of interest, and effective-interest amortization, and balance sheet presentation.

Moderate

30–40

15-2

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 15 LONG-TERM LIABILITIES

Number

Difficulty

Time (min.)

BE1

Simple

2–3

BE2

Simple

2–3

BE3

Simple

4–6

BE4

Simple

3–5

BE5

Simple

4–6

BE6

Simple

3–5

BE7

Simple

6–8

BE8

Simple

3–5

BE9

Simple

6–8

BE10

Simple

3–5

BE11

Simple

4–6

BE12

Simple

4–6

*BE13

2, 6

Simple

4–6

DI1

Simple

2–3

DI2a

Simple

4–6

DI2b

Simple

3–5

DI3

Simple

4–6

DI4

Simple

4–6

EX1

Simple

4–6

EX2

Simple

4–6

EX3

Simple

4–6

EX4

Simple

5–7

EX5

Moderate

8–10

EX6

Simple

6–8

EX7

Simple

6–8

EX8

Moderate

8–10

EX9

Simple

6–8

EX10

Simple

8–10

EX11

Simple

3–5

EX12

Simple

4–6

EX13

Simple

4–6

EX14

Simple

4–6

15-3

LONG-TERM LIABILITIES (Continued) Number

Difficulty

Time (min.)

*EX15

Simple

6–8

*EX16

Simple

6–8

*EX17

Moderate

8–10

*EX18

Moderate

8–10

P1A

2, 4

Moderate

20–30

P2A

2, 4

Moderate

15–20

P3A

Moderate

15–20

P4A

3, 4

Moderate

20–30

P5A

Moderate

20–30

*P6A

4, 5

Simple

30–40

*P7A

4, 5

Simple

30–40

*P8A

Moderate

30–40

*P9A

Moderate

30–40

*P10A

4, 6

Moderate

30–40

BYP1

2, 4

Simple

5–10

BYP2

Simple

10–15

BYP3

Simple

10–15

BYP4

Simple

10–15

BYP5

2, 5

Moderate

15–20

BYP6

Simple

10–15

BYP7

—

Simple

10–15

BYP8

—

Simple

5–10

BYP9

—

Moderate

10–15

15-4

Learning Objective

Knowledge Comprehension

1. Describe the major characteristics of bonds.

Q15-1 Q15-2 Q15-3

2. Explain how to account for bond transactions.

Q15-5

Application

Q15-7 Q15-9 BE15-1 BE15-2 BE15-3 BE15-4 BE15-5 BE15-6 DI15-2a

DI15-2b P15-1A E15-3 P15-2A E15-4 P15-3A E15-5 E15-6 E15-7 E15-8

Q15-10

BE15-7 DI15-3

E15-9 P15-4A E15-10 P15-5A

Q15-12 Q15-13 Q15-16

Q15-11 P15-2A Q15-14 P15-4A BE15-8 P15-6A BE15-10 P15-7A DI15-4 P15-10A E15-11 E15-14 P15-1A

*5. Apply the straight-line method of amortizing bond discount and bond premium.

Q15-17 Q15-18

Q15-17 E15-16 BE15-11 P15-6A BE15-12 P15-7A E15-15 P15-8A

*6. Apply the effective-interest method of amortizing bond discount and bond premium.

Q15-19 Q15-20

BE15-13 P15-9A E15-17 P15-10A E15-18

Broadening Your Perspective

Communication Comp. Analysis Real-World Focus FASB Codification

4. Discuss how long-term liabilities are reported and analyzed.

Q15-15

Synthesis

Evaluation

Q15-4 DI15-1 E15-1

Q15-6 Q15-8

3. Explain how to account for long-term notes payable.

Analysis

E15-13

Financial Reporting Decision Making Across the Organization

All About You Ethics Case

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

15-5

ANSWERS TO QUESTIONS 1.

(a) Long-term liabilities are obligations that are expected to be paid after one year. Examples include bonds, long-term notes, and lease obligations. (b) Bonds are a form of interest-bearing notes payable used by corporations, universities, and governmental agencies.

(a) Secured bonds have specific assets of the issuer pledged as collateral. In contrast, unsecured bonds are issued against the general credit of the borrower. These bonds are called debenture bonds. (b) Convertible bonds may be converted into common stock at the bondholders’ option. Callable bonds are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer.

(a) Face value is the amount of principal due at the maturity date. (b) The contractual interest rate is the rate used to determine the amount of cash interest the borrower pays and the investor receives. This rate is also called the stated interest rate because it is the rate stated on the bonds. (c) A bond indenture is a legal document that sets forth the terms of the bond issue. (d) A bond certificate is a legal document that indicates the name of the issuer, the face value of the bonds, the contractual interest rate and maturity date of the bonds.

The two major obligations incurred by a company when bonds are issued are the interest payments due on a periodic basis and the principal which must be paid at maturity.

Less than. Investors are required to pay more than the face value; therefore, the market interest rate is less than the contractual rate.

$56,000. $800,000 X 7% = $56,000.

$780,000. The balance of the Bonds Payable account minus the balance of the Discount on Bonds Payable account (or plus the balance of the Premium on Bonds Payable account) equals the carrying value of the bonds.

Debits: Credits:

Bonds Payable (for the face value) and Premium on Bonds Payable (for the unamortized balance). Cash (for 97% of the face value) and Gain on Bond Redemption (for the difference between the cash paid and the bonds’ carrying value).

A convertible bond permits bondholders to convert it into common stock at the option of the bondholders. (a) For bondholders, the conversion option gives an opportunity to benefit if the market price of the common stock increases substantially. (b) For the issuer, convertible bonds usually have a higher selling price and a lower rate of interest than comparable debt securities without the conversion option.

10.

No, Rob is not right. Each payment by Rob consists of: (1) interest on the unpaid balance of the loan and (2) a reduction of loan principal. The interest decreases each period while the portion applied to the loan principal increases each period.

15-6

Questions Chapter 15 (Continued) 11.

The nature and the amount of each long-term liability should be presented in the balance sheet or in schedules in the accompanying notes to the statements. The notes should also indicate the interest rates, maturity dates, conversion privileges, and assets pledged as collateral.

12. (a) The major advantages are: (1) Stockholder control is not affected—bondholders do not have voting rights, so current stockholders retain full control of the company. (2) Tax savings result—bond interest is deductible for tax purposes; dividends on stock are not. (3) Earnings per share may be higher—although bond interest expense will reduce net income, earnings per share on common stock will often be higher under bond financing because no additional shares of common stock are issued. (b) The major disadvantages in using bonds are that interest must be paid on a periodic basis and the principal (face value) of the bonds must be paid at maturity. 13. (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 most common types of leases are operating leases and capital leases. (c) In an operating lease, the property is rented by the lessee and the lessor retains all ownership risks and responsibilities. A capital lease transfers substantially all the benefits and risks of ownership from the lessor to the lessee, so that the lease is in effect a purchase of the property. 14. This lease would be reported as an operating lease. In an operating lease, each payment is debited to Rent Expense. Neither a leased asset nor a lease liability is capitalized. 15. In a capital lease agreement, the lessee records the present value of the lease payments as an asset and a liability. Therefore, Benedict Company would debit Leased Asset—Equipment for $186,300 and credit Lease Liability for the same amount. 16.

Apple did not redeem any of its debt during the 2013 fiscal year.

*17. The straight-line method results in the same amortized amount being assigned to Interest Expense each interest period. This amount is determined by dividing the total bond discount or premium by the number of interest periods the bonds will be outstanding. *18. $28,000. Interest expense is the interest to be paid in cash less the premium amortization for the year. Cash to be paid equals 8% X $400,000 or $32,000. Total premium equals 5% of $400,000 or $20,000. Since this is to be amortized over 5 years (the life of the bonds) in equal amounts, the amortization amount is $20,000 ÷ 5 = $4,000. Thus, $32,000 – $4,000 or $28,000 equals interest expense for 2017. *19.

Kelli is probably indicating that since the borrower has the use of the bond proceeds over the term of the bonds, the borrowing rate in each period should be the same. The effective-interest method results in a varying amount of interest expense but a constant rate of interest on the balance outstanding. Accordingly, it results in a better matching of expenses with revenues than the straight-line method. When the difference between the straight-line method of amortization and the effective interest method is material, GAAP requires the use of the effective interest method.

15-7

Questions Chapter 15 (Continued) *20. Decrease. Under the effective-interest method the interest charge per period is determined by multiplying the carrying value of the bonds by the effective-interest rate. When bonds are issued at a premium, the carrying value decreases over the life of the bonds. As a result, the interest expense will also decrease over the life of the bonds because it is determined by multiplying the decreasing carrying value of the bonds at the beginning of the period by the effective-interest rate.

15-8

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 15-1 Mar. 1

Cash ($30,000 X 98%) ..................... Discounts on Bonds Payable ........ Bonds Payable ........................

294,000 6,000 300,000

BRIEF EXERCISE 15-2 June 1

Cash ($400,000 X 101%) ................. Bonds Payable ........................ Premium on Bonds Payable...

404,000 400,000 4,000

BRIEF EXERCISE 15-3 2017 (a) Jan. 1

(b) Dec 31

2018 (c) Jan. 1

Cash ................................................ Bonds Payable (4,000 X $1,000) ...................

4,000,000

Interest Expense............................. Interest Payable ($4,000,000 X 8%) ................

320,000

Interest Payable .............................. Cash .........................................

320,000

4,000,000

320,000

BRIEF EXERCISE 15-4 (a) Jan. 1

(b) Jan. 1

Cash ($2,000,000 X 97%) ................ Discount on Bonds Payable .......... Bonds Payable ........................

1,940,000 60,000

Cash ($2,000,000 X 104%) .............. Bonds Payable ........................ Premium on Bonds Payable.....

2,080,000

2,000,000 2,000,000 80,000 .

15-9

BRIEF EXERCISE 15-5 1.

Jan. 1

July 1

Sept. 1

Cash (1,000 X $1,000) ..................... Bonds Payable ........................

1,000,000

Cash ($900,000 X 102%) ................. Bonds Payable ........................ Premium on Bonds Payable.....

918,000

Cash ($400,000 X 98%) ................... Discount on Bonds Payable .......... Bonds Payable ........................

392,000 8,000

1,000,000

900,000 18,000

400,000

BRIEF EXERCISE 15-6 Bonds Payable......................................................... Loss on Bond Redemption ($1,010,000 – $940,000) ....................................... Discount on Bonds Payable............................ Cash ($1,000,000 X 101%) ...............................

1,000,000 70,000 60,000 1,010,000

BRIEF EXERCISE 15-7 (A) Semiannual Interest Period Issue Date 1

Cash Payment

(B) Interest Expense (D) X 10%

$130,196

$80,000

$50,196

(D) Principal Balance (D) – (C) $800,000 749,804

2017 Dec. 31

2018 Dec. 31

15-10

Cash ............................................................. Mortgage Payable................................

800,000

Interest Expense ......................................... Mortgage Payable ....................................... Cash .....................................................

80,000 50,196

800,000

130,196 .

BRIEF EXERCISE 15-8 Long-term liabilities Bonds payable, due 2019 ...................................... Less: Discount on bonds payable ....................... Notes payable, due 2022 ....................................... Lease liability ......................................................... Total long-term liabilities ...............................

$600,000 45,000 $555,000 80,000 70,000 $705,000

BRIEF EXERCISE 15-9 Income before interest and taxes Interest ($2,000,000 X 8%) Income before income taxes Income tax expense (30%) Net income (a) Outstanding shares (b) Earnings per share (a) ÷ (b)

Issue Stock $700,000 0 700,000 210,000 $490,000

Issue Bond $700,000 160,000 540,000 162,000 $378,000

700,000 $0.70

500,000 $0.76

Net income is higher if stock is used. However, earnings per share is lower than earnings per share if bonds are used because of the additional shares of stock that are outstanding.

BRIEF EXERCISE 15-10 1. 2.

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

80,000

Leased Asset—Building........................................ Lease Liability ................................................

700,000

80,000 700,000

15-11

*BRIEF EXERCISE 15-11 (a) Jan. 1

(b) Dec. 31

Cash (96% X $5,000,000) ................ Discount on Bonds Payable .......... Bonds Payable ........................

4,800,000 200,000

Interest Expense ............................. Discount on Bonds Payable ($200,000 ÷ 10) ..................... Cash ($5,000,000 X 9%) ...........

470,000

5,000,000

20,000 450,000

*BRIEF EXERCISE 15-12 (a) Jan. 1

(b) Dec. 31

Cash (102% X $4,000,000) .............. Bonds Payable ........................ Premium on Bonds Payable ...

4,080,000

Interest Expense ............................. Premium on Bonds Payable ($80,000 ÷ 5) ......................... Cash ($4,000,000 X 10%) .........

384,000

4,000,000 80,000

16,000 400,000

*BRIEF EXERCISE 15-13 (a) Interest Expense .................................................... Discount on Bonds Payable .......................... Cash ................................................................

48,070 3,070 45,000

(b) Interest expense is greater than interest paid because the bonds sold at a discount which must be amortized over the life of the bonds. The bonds sold at a discount because investors demanded a market interest rate higher than the contractual interest rate. (c) Interest expense increases each period because the bond carrying value increases each period. As the market interest rate is applied to this bond carrying amount, interest expense will increase.

15-12

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 15-1 1. 2. 3. 4. 5.

False. Mortgage bonds and sinking fund bonds are both examples of secured bonds. False. Convertible bonds can be converted into common stock at the bondholder’s option; callable bonds can be retired by the issuer at a set amount prior to maturity. True. True. True.

DO IT! 15-2a (a) Cash........................................................................... 520,000 Bonds Payable ............................................... Premium on Bonds Payable .......................... (To record sale of bonds at a premium) (b) Long-term liabilities Bonds payable ............................................... Plus: Premium on bonds payable ................

500,000 20,000

$500,000 20,000 $520,000

DO IT! 15-2b Loss on Bond Redemption ........................................... Bonds Payable .............................................................. Discount on Bonds Payable ................................. Cash ($400,000 X 99%) .......................................... (To record redemption of bonds at 99)

6,000 400,000 10,000 396,000

15-13

DO IT! 15-3 Cash .................................................................................. 700,000 Mortgage Payable .................................................. (To record mortgage loan) Interest Expense............................................................ Mortgage Payable.......................................................... Cash ........................................................................ (To record annual payment on mortgage)

700,000

42,000* 30,074 72,074

*$700,000 X 6% DO IT! 15-4 (a) Leased Asset—Equipment .......................................... 192,000 Lease Liability ................................................... (To record leased asset and lease liability)

192,000

(b) The debt to assets ratio = $1,100,000 ÷ $1,800,000 = 61%. This ratio means that 61% of the total assets were provided by creditors. The higher the percentage of debt to assets, the greater the risk that the company may be unable to meet its maturing obligations.

15-14

SOLUTIONS TO EXERCISES EXERCISE 15-1 1. 2. 3. 4. 5. 6. 7.

True. True. False. Unsecured bonds are also known as debenture bonds. True. True. True. True.

EXERCISE 15-2 2017 (a) Jan. 1

(b) Dec. 31

2018 (c) Jan. 1

Cash ...................................................... Bonds Payable ..............................

500,000

Interest Expense................................... Interest Payable ($500,000 X 10%) ........................

50,000

Interest Payable .................................... Cash ...............................................

50,000

500,000

50,000

EXERCISE 15-3 2017 (a) Jan. 1

(b) Dec. 31

2018 (c) Jan. 1 .

Cash ............................................................ 400,000 Bonds Payable ................................

400,000

Interest Expense..................................... Interest Payable ($400,000 X 8%) ...

32,000 32,000

Interest Payable ...................................... Cash .................................................

32,000

32,000 .

15-15

EXERCISE 15-4

(a) Jan.

(b) Dec. 31

(d) Jan.

2017 Cash ........................................................... 400,000 Bonds Payable ................................

400,000

Interest Expense..................................... Interest Payable ($400,000 X 9%)...

36,000

2018 Interest Payable ...................................... Cash.................................................

36,000

36,000 36,000

2027 Bonds Payable........................................ 400,000 Cash.................................................

400,000

EXERCISE 15-5 At 100 (a) (1)

Cash ............................................................... 2,000,000 Bonds Payable ......................................

2,000,000

At 98 (2)

Cash ................................................................1,960,000 Discount on Bonds Payable ....................... 40,000 Bonds Payable ...................................... 2,000,000 At 103

(3)

Cash ................................................................ 2,060,000 Bonds Payable ...................................... 2,000,000 Premium on Bonds Payable ................ 60,000 Redemption of bonds at maturity

(b)

15-16

Bonds Payable................................................2,000,000 Cash...................................................... 2,000,000 .

EXERCISE 15-5 (Continued) Redemption of bonds before maturity at 98 (c)

Bonds Payable ............................................... 2,000,000 Premium on Bonds Payable ....................... 9,000 Cash ...................................................... 1,960,000 Gain on Bond Redemption .................. 49,000 Conversion of bonds into common stock

(d)

Bonds Payable ............................................... 2,000,000 Common Stock .................................... 600,000 Paid-in Capital in Excess of Par— Common Stock .................................. 1,400,000

EXERCISE 15-6 (a) (1)

(2)

Cash .....................................................................485,000 Discount on Bonds Payable .......................... 15,000 Bonds Payable.........................................

500,000

Annual interest payments ($40,000* X 5) .............................................. Plus: Bond discount ..................................... Total cost of borrowing .................................

$200,000 15,000 $215,000

*($500,000 X .08) OR Principal at maturity ....................................... Annual interest payments ($40,000 X 5) ............................................... Cash to be paid to bondholders.................... Cash received from bondholders.................. Total cost of borrowing ................................. (b) (1)

$500,000 200,000 700,000 485,000 $215,000

Cash .....................................................................525,000 Bonds Payable......................................... Premium on Bonds Payable ...................

500,000 25,000

15-17

EXERCISE 15-6 (Continued) (2)

Annual interest payments ($40,000 X 5)................................................ Less: Bond premium ..................................... Total cost of borrowing..................................

$200,000 25,000 $175,000

OR Principal at maturity ....................................... Annual interest payments ($40,000 X 5)................................................ Cash to be paid to bondholders .................... Cash received from bondholders.................. Total cost of borrowing..................................

$500,000 200,000 700,000 525,000 $175,000

EXERCISE 15-7 (a) Jan. 1

(b) Jan. 1

Interest Payable .................................... Cash ...............................................

112,000

Bonds Payable ...................................... Loss on Bond Redemption .................. Cash ($600,000 X 1.03)..................

600,000 18,000

Interest Expense ................................... Interest Payable ($1,000,000 X 7%) ......................

70,000

112,000

618,000

70,000

EXERCISE 15-8 1.

15-18

June 30

Bonds Payable..................................... Loss on Bond Redemption ($132,600 – $117,500) ...................... Discount on Bonds Payable ($130,000 – $117,500)............... Cash ($130,000 X 102%) ..............

130,000 15,100 12,500 132,600

EXERCISE 15-8 (Continued) 2.

June 30

Dec. 31

Bonds Payable .................................... Premium on Bonds Payable ............... Gain on Bond Redemption ($151,000 – $147,000) ............... Cash ($150,000 X 98%) ................

150,000 1,000

Bonds Payable .................................... Common Stock ($5 X 20* X 30) .......................... Paid-in Capital in Excess of Par—Common Stock ...............

20,000

4,000 147,000

3,000 17,000

*($20,000 ÷ $1,000) Note: As per the textbook, the market value of the stock is ignored in the conversion.

EXERCISE 15-9

Dec. 31

2017 Issuance of Note Cash.............................................................. Mortgage Payable.................................

300,000 300,000

2018 First Installment Payment Interest Expense ($300,000 X 10%) ...................................... Mortgage Payable ........................................ Cash ......................................................

30,000 20,000 50,000

2019 Second Installment Payment Interest Expense [($300,000 – $20,000) X 10%] ................... Mortgage Payable ........................................ Cash ......................................................

28,000 22,000 50,000

15-19

EXERCISE 15-10 January 1, 2017 Cash...................................................................... Mortgage Payable .......................................

(a)

300,000 300,000

December 31, 2017 Interest Expense ($300,000 X 8%)................................................ Mortgage Payable ................................................ Cash.............................................................

24,000 16,000 40,000

December 31, 2018 Interest Expense [($300,000 – $16,000) X 8%].............................. Mortgage Payable ................................................. Cash..............................................................

22,720 17,280 40,000

(b) Current: $17,280 [$40,000 – ($284,000 X 8%)] Long-term: $266,720 ($300,000 – $16,000 – $17,280) EXERCISE 15-11 Long-term liabilities Bonds payable, due 2022 ................................. $180,000 Add: Premium on bonds payable................. 32,000 Lease liability.................................................. Total long-term liabilities ....................... Note: Interest Payable is a current liability

15-20

$212,000 89,500 $301,500

EXERCISE 15-12

Income before interest and taxes Interest ($2,700,000 X 10%) Income before taxes Income tax expense (30%) Net income Outstanding shares Earnings per share

Plan One Issue Stock $800,000 — 800,000 240,000 $560,000 210,000 $2.67

Plan Two Issue Bonds $800,000 270,000 530,000 159,000 $371,000 120,000 $3.09

EXERCISE 15-13 (a) Total assets............................................................ Less: Total liabilities ............................................ Total stockholders’ equity .................................... (b) Debt to assets ratio

$1,000,000 580,000 $ 420,000

Total liabilities $580,000 = = 58% Total assets $1,000,000

= $150,000 + $100,000 + $20,000 = 13.5 times $20,000

EXERCISE 15-14 (a)

(b) Jan. 1

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

500

Leased Asset—Equipment .................. Lease Liability ...............................

49,735

500

49,735

15-21

*EXERCISE 15-15 (a) Jan. 1

(b) Dec. 31

(d) Jan.

2017 Cash ($600,000 X 103%) ........................ Premium on Bonds Payable .......... Bonds Payable ............................... Interest Expense .................................... Premium on Bonds Payable ($18,000 X 1/20) .................................. Interest Payable ($600,000 X 9%) ..

618,000 18,000 600,000 53,100 900 54,000

2018 Interest Payable .................................... Cash...............................................

54,000

2037 Bonds Payable...................................... Cash...............................................

600,000

54,000

600,000

*EXERCISE 15-16 (a) Dec. 31

(b) Dec. 31

15-22

2016 Cash ...................................................... Discount on Bonds Payable ................ Bonds Payable .............................. 2017 Interest Expense................................... Discount on Bonds Payable ($70,000 ÷ 10) ............................ Cash ($800,000 X 11%) ................. 2026 Bonds Payable...................................... Cash...............................................

730,000 70,000 800,000 95,000 7,000 88,000 800,000 800,000

*EXERCISE 15-17 (a)

(b)

(c)

Cash ..................................................................... Discount on Bonds Payable............................... Bonds Payable .............................................

360,727 39,273

Interest Expense ($360,727 X 8%)...................... Discount on Bonds Payable ........................ Interest Payable ($400,000 X 7%) ................

28,858

Interest Payable .................................................. Cash ..............................................................

28,000

400,000 858 28,000 28,000

*EXERCISE 15-18 (a)

(b)

(c)

Cash ..................................................................... Bonds Payable ............................................. Premium on Bonds Payable ........................

407,968

Interest Expense ($407,968 X 6%)...................... Premium on Bonds Payable............................... Interest Payable ($380,000 X 7%) ................

24,478 2,122

Interest Payable .................................................. Cash ..............................................................

26,600

380,000 27,968

26,600 26,600

15-23

SOLUTIONS TO PROBLEMS PROBLEM 15-1A

(a) May 1

(b) Dec. 31

2017 Cash..................................................... Bonds Payable ............................ Interest Expense ................................. Interest Payable ($600,000 X 9% X 8/12) ............

600,000 600,000 36,000 36,000

$ 36,000

Long-term Liabilities Bonds payable, due 2022 .............................

$600,000

(d) May 1

(e) Dec. 31

(f)

15-24

Jan. 1

2018 Interest Payable .................................. Interest Expense ($600,000 X 9% X 4/12)...................... Cash ............................................. Interest Expense ................................. Interest Payable ($600,000 X 9% X 8/2) ..............

36,000 18,000 54,000 36,000 36,000

Interest Payable .................................. Cash .............................................

36,000

Bonds Payable .................................... Loss on Bond Redemption ................ Cash ($600,000 X 1.02)................

600,000 12,000

36,000

612,000

PROBLEM 1525A (a) Jan. 1

2017 Cash ($6,000,000 X 98%) ...................... 5,880,000 Discount on Bonds Payable .............. 120,000 Bonds Payable ..........................

6,000,000

(b) Long-term Liabilities Bonds payable, due 2027 ............................ $6,000,000 Less: Discount on bonds payable ........... 112,000 $5,888,000 (c) Jan. 1

2019 Bonds Payable.................................. Loss on Bond Redemption .............. Discount on Bonds Payable..... Cash ($6,000,000 X 102%) ........

6,000,000 224,000 104,000 6,120,000

*($6,120,000 – $5,896,000)

15-25

PROBLEM 1526A (a) Jan. 1 (b) Jan. 1

15-26

Interest Payable ................................ Cash ...........................................

40,000

Bonds Payable .................................. Loss on Bond Redemption .............. Cash ($200,000 X 103%) .............

200,000 6,000

Interest Expense ............................... Interest Payable ($300,000 X 8%) ........................

24,000

40,000

206,000

24,000

PROBLEM 1527A (a)

Annual Interest Period Issue Date 1 2 3 4

(b) 2016 Dec. 31

2017 Dec. 31

Cash Payment $59,612 59,612 59,612 59,612

Interest Expense $32,000 29,791 27,405 24,829

Reduction of Principal

Principal Balance

$27,612 29,821 32,207 34,783

$400,000 372,388 342,567 310,360 275,577

Cash ...................................................... Mortgage Payable .........................

400,000

Interest Expense .................................. Mortgage Payable................................. Cash...............................................

32,000 27,612

(c)

400,000

59,612 12/31/17

Current Liabilities Current portion of mortgage payable

$ 29,821**

Long-term Liabilities Mortgage payable, due 2026

$342,567**

*($372,388 – $29,821)

15-27

PROBLEM 1528A (a) Ruggiero Inc. should record the Judson Delivery lease as a capital lease because: (1) the lease term is greater than 75% of the estimated economic life of the leased property and (2) the present value of the lease payments is 90% or more of the fair value of the computer. It should be noted that only one condition needs to be met to require capitalization. Both the Hester Co. and Gunselmon Auto leases should be reported as operating leases because none of the four conditions is met to require treatment as a capital lease. (b) The Hester Co. lease is an operating lease. The entry to record the lease payment in 2017 therefore is as follows: Rent Expense ............................................................ Cash ...................................................................

4,200 4,200

(c) The Judson Delivery lease is a capital lease. The entry to record the capital lease on January 1, 2017 therefore is as follows: Leased Asset—Equipment ....................................... Lease Liability ...................................................

15-28

26,000 26,000

*PROBLEM 15-6A

(a) Jan. 1

2017 Cash ($3,000,000 X 104%) .................... 3,120,000 Bonds Payable .......................... Premium on Bonds Payable.......

3,000,000 120,000

(b) See page 15-30. (c) Dec. 31

Dec. 31

2017 Interest Expense............................... Premium on Bonds Payable ($120,000 ÷ 10) .............................. Interest Payable ........................ 2018 Interest Expense............................... Premium on Bonds Payable ............ Interest Payable ........................

288,000 12,000 300,000

(d) Current Liabilities Interest payable..........................................

$ 300,000

Long-term Liabilities Bonds payable, due 2027 ............................ $3,000,000 Add: Premium on bonds payable ............ 96,000 $3,096,000

15-29

Annual Interest Periods Issue date 1 2 3 4

(A) (B) Interest to Interest Expense Be Paid to Be Recorded (10% X $3,000,000) (A) – (C) $300,000 300,000 300,000 300,000

$288,000 288,000 288,000 288,000

(C) (D) (E) Premium Unamortized Bond Amortization Premium Carrying Value ($120,000 ÷ 10) (D) – (C) [$3,000,000 + (D)] $12,000 12,000 12,000 12,000

$120,000 108,000 96,000 84,000 72,000

$3,120,000 3,108,000 3,096,000 3,084,000 3,072,000

*PROBLEM 15-6A (Continued)

15-30

(b)

*PROBLEM 1531A (a) July 1

Dec. 31

(b) July 1

Dec. 31

2017 Cash ($3,500,000 X 104%) ............... Premium on Bonds Payable ................................. Bonds Payable ......................... Interest Expense.............................. Premium on Bonds Payable ($140,000 ÷ 10) ............................. Interest Payable ($3,500,000 X 8%) ................. 2017 Cash ($3,500,000 X 98%) ................. Discount on Bonds Payable ........... Bonds Payable ......................... Interest Expense.............................. Discount on Bonds Payable ($70,000 ÷ 10) ......... Interest Payable ($3,500,000 X 8%) .................

3,640,000 140,000 3,500,000 266,000 14,000 280,000 3,430,000 70,000 3,500,000 287,000 7,000 280,000

(c) Premium Current Liabilities Interest Payable........................................ $280,000 Long-term Liabilities Bonds payable, due 2027 ............................ $3,500,000 Add: Premium on bonds payable ........... 126,000 $3,626,000 Discount Current Liabilities Interest Payable........................................ $280,000 Long-term Liabilities Bonds payable, due 2027 ............................ $3,500,000 Less: Discount on bonds payable .......... 63,000 $3,437,000 .

15-31

*PROBLEM 15-32A

(a) Jan. 1

(b) Dec. 31

2018 Interest Payable .............................. Cash .........................................

210,000 210,000

Interest Expense ............................. Premium on Bonds Payable ($200,000 ÷ 10) ............................ Interest Payable.......................

(c)

190,000 20,000 210,000

2019 Jan. 1

1,200,000 72,000

Bonds Payable ................................ Premium on Bonds Payable .......... Gain on Bond Redemption ($1,272,000 – $1,212,000) .... Cash ($1,200,000 X 101%).......

60,000 1,212,000

*($200,000 – $20,000) X .40 = $72,000 (d) Dec. 31

Interest Expense ............................. Premium on Bonds Payable .......... Interest Payable ($1,800,000 X 7%) ................

**$200,000 – $20,000 – $72,000 = $108,000;

126,000

$108, 000 9

15-32

114,000 12,000

= $12,000 or $20,000 X .60.

*PROBLEM 1533A 2017 (a) Jan. 1

(b)

Cash ................................................. Discount on Bonds Payable ........... Bonds Payable .........................

1,667,518 132,482 1,800,000

LOCK CORP. Bond Discount Amortization Effective-Interest Method—Annual Interest Payments 5% Bonds Issued at 6% (B) (C) (D) (E) Interest Discount UnamorBond Interest Expense Amortized Carrying to Be to Be tization Discount Value Paid Recorded (B) – (A) (D) – (C) ($1,800,000 – D) (A)

Annual Interest Periods

Issue date 1 $90,000 2 90,000 3 90,000 (c) Dec. 31

2018 (d) Jan. 1

(e) Dec. 31

$100,051 100,654 101,293

$10,051 10,654 11,293

$132,482 122,431 111,777 100,484

$1,667,518 1,677,569 1,688,223 1,699,516

Interest Expense ($1,667,518 X 6%) ......................................100,051 Interest Payable ($1,800,000 X 5%) .......................... Discount on Bonds Payable.............

90,000 10,051

Interest Payable ........................................ Cash ...................................................

90,000

Interest Expense [($1,667,518 + $10,051) X 6%]...................100,654 Interest Payable ................................ Discount on Bonds Payable.............

90,000 10,654

15-33

*PROBLEM 15-34A

(a) 1.

3. 4.

Jan. 1

Dec. 31

Jan. 1 Dec. 31

2017 Cash ............................................... 2,147,202 Bonds Payable ................... Premium on Bonds Payable............................ Interest Expense ($2,147,202 X 6%) ................... Premium on Bonds Payable ................................... Interest Payable ($2,000,000 X 7%) ........... 2018 Interest Payable ......................... Cash .................................... Interest Expense ........................ [($2,147,202 – $11,168) X 6%] Premium on Bonds Payable ................................... Interest Payable..................

2,000,000 147,202

128,832 11,168 140,000 140,000 140,000 128,162 11,838 140,000

(b) Bonds payable ....................................................... 2,000,000 Add: Premium on bonds payable ..................... 124,196*

2,124,196

*($147,202 – $11,168 – $11,838) (c) (1) Total bond interest expense—2018, $128,162. (2) The effective-interest method will result in more interest expense reported than the straight-line method in 2018 when the bonds are sold at a premium. Straight-line interest expense for 2018 is $125,280 [$140,000 – ($147,202 ÷ 10)].

15-34

COMPREHENSIVE PROBLEM: CHAPTERS 13 TO 15

(a) 1.

Cash................................................................... Preferred Stock (1,000 X $20) .................... Paid-in Capital in Excess of Par—PS....................................................

22,000

2. Cash................................................................... Common Stock (1,000 X $10) ..................... Paid-in Capital in Excess of Par—CS ...................................................

23,000

3. Treasury Stock (300 X $49) .............................. Cash ............................................................

14,700

4. Cash Dividends................................................. Dividends Payable ......................................

6,750*

20,000 2,000 10,000 13,000 14,700 6,750

*$20,000 X .06 + [(3,000 + 1,000 – 300) X $1.50]

5. Bad Debt Expense ............................................ Allowance for Doubtful Accounts ($5,100 – $450) .......................

4,650

6. Depreciation Expense ...................................... Accumulated Depreciation— Buildings [($95,000 – $5,000) ÷ 30] ........

3,000

7. Depreciation Expense ...................................... Accumulated Depreciation— Equipment [($40,000 – $4,000 ÷10] ........

3,600

8. Unearned Rent Revenue ($8,000 X 3/4) ........... Rent Revenue..............................................

6,000

9. Interest Expense ($50,000 X .10)......................... Interest Payable ..........................................

5,000

4,650

3,000

3,600 6,000 5,000

15-35

COMPREHENSIVE PROBLEM (Continued) (b)

QUIGLEY CORPORATION Adjusted Trial Balance December 31, 2017 Cash................................................................. Accounts Receivable...................................... Inventory ......................................................... Land................................................................. Buildings ......................................................... Equipment ....................................................... Allowance for Doubtful Accounts ................. Accumulated Depreciation—Buildings ......... Accumulated Depreciation—Equipment ....... Accounts Payable........................................... Interest Payable .............................................. Dividends Payable .......................................... Unearned Rent Revenue ................................ Bonds Payable (10%) ..................................... Common Stock ($10 par)................................ Paid-in Capital in Excess of Par—CS ............ Preferred Stock ($20 par) ............................... Paid-in Capital in Excess of Par—PS ............ Retained Earnings .......................................... Treasury Stock................................................ Cash Dividends............................................... Sales Revenue ................................................ Rent Revenue.................................................. Bad Debts Expense ........................................ Interest Expense ............................................. Cost of Goods Sold ........................................ Depreciation Expense .................................... Other Operating Expenses............................. Salaries and Wages Expense ........................ Total.................................................................

15-36

Debit $ 55,800 51,000 22,700 65,000 95,000 40,000

Credit

5,100 33,000 18,000 19,300 5,000 6,750 2,000 50,000 40,000 19,000 20,000 2,000 75,050

14,700 6,750 570,000 6,000 4,650 5,000 400,000 6,600 39,000 65,000 $871,200

$871,200

COMPREHENSIVE PROBLEM (Continued) (c)

QUIGLEY CORPORATION Income Statement For the Year Ended December 31, 2017 Sales Revenue ................................................ Cost of Goods Sold ........................................ Gross Profit..................................................... Operating Expenses Salaries and Wages Expense ..................... Other Operating Expenses ......................... Depreciation Expense ................................. Bad Debt Expense ....................................... Total Operating Expenses ............................. Income From Operations ............................... Other Revenues and Gains Rent Revenue .............................................. Other Expenses and Losses Interest Expense .......................................... Net Income ......................................................

(d)

$570,000 400,000 170,000 $ 65,000 39,000 6,600 4,650 115,250 54,750 6,000 (5,000)

QUIGLEY CORPORATION Retained Earnings Statement For the Year Ended December 31, 2017 Balance, January 1 ......................................... Add: Net income ..........................................

$ 75,050 55,750 130,800 6,750 $124,050

Less: Cash dividends.................................... Balance, December 31 ...................................

1,000 $ 55,750

15-37

COMPREHENSIVE PROBLEM (Continued) (e)

QUIGLEY CORPORATION Balance Sheet December 31, 2017 Assets Current assets Cash....................................................... Accounts receivable ............................. Less: Allowance for doubtful accounts. Inventory ............................................... Total current assets .............................. Property, Plant, and Equipment Land ....................................................... Buildings ............................................... $95,000 Less: Accumulated Depreciation— Buildings ..................................... 33,000 Equipment ............................................. 40,000 Less: Accumulated Depreciation— Equipment ................................... 18,000 Total property, plant, and equipment .. Total assets ..............................................

$ 55,800 $51,000 5,100

45,900 22,700 124,400

65,000

62,000 22,000 149,000 $273,400

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ................................. Dividends payable ................................ Interest payable .................................... Unearned rent revenue ......................... Total current liabilities.......................... Long-term liabilities Bond payable (10%) .............................. Total liabilities ..........................................

15-38

$ 19,300 6,750 5,000 2,000 33,050 50,000 $ 83,050

COMPREHENSIVE PROBLEM (Continued) Stockholders’ equity Paid-in capital Capital stock 6% Preferred stock, $20 par, 1,000 shares issued.... $ 20,000 Common stock $10 par, 4,000 shares issued, 3,700 shares outstanding ................................... 40,000 Total capital stock ........................................... 60,000 Additional paid-in capital In excess of par—preferred stock ............................ $ 2,000 In excess of par—common stock ................................ 19,000 Total additional paid-in capital.......................................... 21,000 Total paid-in capital ......................................... Retained earnings .......................................................... Total paid-in capital and retained earnings ................... Less: Treasury stock (300 common shares) .............. Total stockholders’ equity............................................. Total liabilities and stockholders’ equity.....................

81,000 124,050 205,050 14,700 190,350 $273,400

15-39

BYP 15-1

FINANCIAL REPORTING PROBLEM

(a) At September 28, 2013, Apple’s total long-term liabilities was $39,793 million. There was a $20,481 million increase ($39,793 – $19,312) in long-term liabilities during the year. (b) Based on Apple’s Consolidated Statements of Cash Flows, no longterm debt was redeemed (bought back) during the 2013 fiscal year.

15-40

BYP 15-2

COMPARATIVE ANALYSIS PROBLEM

(a)

PepsiCo 1.

Debt to assets

$53,089 = 68.5% $77,478

Times interest earned

$6,740 + $2,104 + $911 $911

Coca-Cola

$56,615* = 62.9% $90,055 $8,584 + $2,851 + $463 = 10.7 times

$463

= 25.7 times

*$27,811 + $19,154 + $3,498 + $6,152

(b) The higher the percentage of debt to assets, the greater the risk that a company may be unable to meet its maturing obligations. PepsiCo’s 2013 debt to assets ratio was 9% more than Coca-Cola’s and it would be considered slightly less able to meet its obligations. The times interest earned ratio provides an indication of a company’s ability to meet interest payments. Since Coca-Cola’s times interest earned ratio is higher than PepsiCo, Coca-Cola has more ability to meet its interest payments than PepsiCo. However, both times interest earned ratios are excellent and therefore both companies will have no difficulty meeting these payments.

15-41

BYP 15-3

COMPARATIVE ANALYSIS PROBLEM

(a)

Amazon 1.

Debt to assets

$30,413* = 75.7% $40,159

Times interest earned

$274 + $161 + $141

Wal-Mart

$123,412* * = 60.3% $204,751 $16,022 + $8,105 + $2,335 = 4.1 times

$141

*$22,980 + $3,191 + $4,242

= 11.3 times

$2,335* **

***$2,072 + $263

**$204,751 – $81,339

(b) The higher the percentage of debt to assets, the greater the risk that a company may be unable to meet its maturing obligations. Amazon’s 2013 debt to assets ratio was 26% more than Wal-Mart’s and it would be considered less able to meet its obligations. The times interest earned ratio provides an indication of a company’s ability to meet interest payments. Since Wal-Mart’s times interest earned ratio is higher than Amazon, Wal-Mart has more ability to meet its interest payments than Amazon. However, both times interest earned ratios are excellent and therefore both companies will have no difficulty meeting these payments.

15-42

BYP 15-4

REAL-WORLD FOCUS

(a)

An ‘A’ rating means that the company has a strong capacity to meet financial commitments, but is somewhat susceptible to adverse economic conditions and changes in circumstances. A ‘C’ rating means that a company is currently highly vulnerable due to obligations and other defined circumstances.

(b)

Some factors that can change a company’s credit rating are new competition, changes in technology, increases or decreases in debt burdens, changes in the economy or business environment, or in the case of states or municipalities, shifts in populations or changes in taxpayer incomes.

(c) To determine whether an investment has merit really depends on particular issues of importance to an individual. For example, a risky investment might have merit to a wealthy investor that can afford to take a chance in order to have the chance of a large gain. That same investment might not have merit to somebody with limited wealth who cannot afford to take large risks. Therefore, credit ratings provide important inputs in determining whether an investment would be of interest to an investor. But a high (or low) credit rating does not necessary mean that a particular investment would be a good or bad investment.

15-43

BYP 15-5

DECISION MAKING ACROSS THE ORGANIZATION

(a) Face value of bonds ............................................................ Proceeds from sale of bonds ($2,400,000 X .95)................ Discount on bonds payable ................................................

$2,400,000 2,280,000 $ 120,000

Bond discount amortization per year: $120,000 ÷ 5 = $24,000 Face value of bonds ........................................ Amount of original discount ........................... Less: Amortization through January 1, 2017 (2-year) .................................................. Carrying value of bonds, January 1, 2017...... (b) 1.

Bonds Payable .......................................... Discount on Bonds Payable ............. Gain on Bond Redemption ............... Cash ................................................... (To record redemption of 8% bonds)

$2,400,000 $120,000 48,000

72,000 $2,328,000

2,400,000 72,000 328,000* 2,000,000

*$2,328,000 – $2,000,000 2.

Cash ........................................................... Bonds Payable................................... (To record sale of 10-year, 11% bonds at par)

2,000,000 2,000,000

(c) Dear President Glover: The early redemption of the 8%, 5-year bonds results in recognizing a gain of $328,000 that increases current year net income by the after-tax effect of the gain. The amount of the liabilities on the balance sheet will be lowered by the issuance of the new bonds and retirement of the 5year bonds.

15-44

BYP 15-5 (Continued) 1.

The cash flow of the company as it relates to bonds payable will be adversely affected as follows: Annual interest payments on the new issue ($2,000,000 X .11) .............................................................. $220,000 Annual interest payments on the 5-year bonds ($2,400,000 X .08) .............................................................. 192,000 Additional cash outflows per year .................................... $ 28,000

The amount of interest expense shown on the income statement will be higher as a result of the decision to issue new bonds: Annual interest expense on new bonds...... Annual interest expense on 8% bonds: Interest payment................................... Discount amortization.......................... Additional interest expense per year..........

$220,000 $192,000 24,000

216,000 $ 4,000

These comparisons hold for only the 3-year remaining life of the 8%, 5year bonds. The company must acknowledge either redemption of the 8% bonds at maturity, January 1, 2020, or refinancing of that issue at that time and consider what interest rates will be in 2020 in evaluating a redemption and issuance in 2017. Sincerely,

15-45

BYP 15-6

COMMUNICATION ACTIVITY

To:

Sam Masasi

From:

I. M. Student

Subject:

Bond Financing

(1) The advantages of bond financing over common stock financing include: 1.

Stockholder control is not affected.

Tax savings result.

Earnings per share of common stock may be higher.

(2) The types of bonds that may be issued are: 1.

Secured or unsecured bonds. Secured bonds have specific assets of the issuer pledged as collateral. Unsecured bonds are issued against the general credit of the borrower.

Convertible bonds, which can be converted by the bondholder into common stock.

Callable bonds, which are subject to early retirement by the issuer at a stated amount.

(3) State laws grant corporations the power to issue bonds after formal approval by the board of directors and stockholders. The terms of the bond issue are set forth in a legal document called a bond indenture. After the bond indenture is prepared, bond certificates are printed.

15-46

BYP 15-7

ETHICS CASE

(a) The stakeholders in the Olathe case are: ⯈ ⯈ ⯈ ⯈ ⯈ ⯈

Ken Iwig, president, founder, and majority stockholder. Barb Lowery, minority stockholder. Other minority stockholders. Existing creditors (debt holders). Future bondholders. Employees, suppliers, and customers.

(b) The ethical issues: The desires of the majority stockholder (Ken Iwig) versus the desires of the minority stockholders (Barb Lowery and others). Doing what is right for the company and others versus doing what is best for oneself. Questions: Is what Ken wants to do legal? Is it unethical? Is Ken’s action brash and irresponsible? Who may benefit/suffer if Ken arranges a high-risk bond issue? Who may benefit/suffer if Barb Lowery gains control of Olathe? (c) The rationale provided by the student will be more important than the specific position because this is a borderline case with no right answer.

15-47

BYP 15-8

ALL ABOUT YOU

Results will vary depending on article chose by the student. Some common signals identified in articles are: bills more than two months in arrears; must make decisions about who to pay; you have a debt judgment filed against you; spending exceeds income; all credit cards are at their maximum; using one credit card to pay off another.

15-48

BYP 15-9

FASB CODIFICATION ACTIVITY

(a) Long-term obligations are those scheduled to mature beyond one year (or the operating cycle, if applicable) from the date of an entity’s balance sheet. (b) The Codification provides the following guidance for disclosure of longterm obligations: Bonds, mortgages and other long-term debt, including capitalized lease. (1)

State separately, in the balance sheet or in a note thereto, each issue or type of obligation and such information as will indicate (see §210.4–06): (i)

The general character of each type of debt including the rate of interest; (ii) the date of maturity, or, if maturing serially, a brief indication of the serial maturities, such as “maturing serially from 1980 to 1990”; (iii) if the payment of principal or interest is contingent, an appropriate indication of such contingency; (iv) a brief indication of priority; and (v) if convertible, the basis. (2)

The amount and terms (including commitment fees and the conditions under which commitments may be withdrawn) of unused commitments for long-term financing arrangements that would be disclosed under this rule if used shall be disclosed in the notes to the financial statements if significant.

15-49

IFRS EXERCISES

IFRS 15-1 The similarities between GAAP and IFRS include: (1) the basic definition of a liability, and (2) liabilities are normally reported in the order of their liquidity. Differences between GAAP and IFRS include: (1) GAAP allows straight line amortization of bond discounts and premiums, but IFRS requires the effective-interest method in all cases, (2) IFRS does not isolate unamortized bond discount or premium in a separate account, (3) IFRS splits the proceeds from convertible bonds into debt and equity components, and (4) GAAP uses a “rules-based” approach to account for leases while IFRS is more conceptual in its approach. IFRS 15-2 (a) Jan.

Cash (€2,000,000 X .97) ........................ 1,940,000 Bonds Payable .............................. 1,940,000

(b) Jan.

Cash (€2,000,000 X 1.04) ...................... 2,080,000 Bonds Payable .............................. 2,080,000

IFRS 15-3 Cash (£4,000,000 X .99) ................................................. 3,960,000 Bonds Payable ....................................................... 3,800,000 Share Premium—Conversion Equity.................... 160,000

15-50

IFRS15-4

INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) Long-term gross borrowings consist of Bonds and Euro Medium Term Notes, Finance and other long-term leases, and Bank borrowings. (b) Borrowings are measured at amortized cost, i.e. nominal value net of premium and issue expenses, which are charged progressively to net financial income/expense using the effective interest method. (c) Note 18 indicates that the company has 8,847 million EUR as its Gross amount of borrowings with 7,644 having fixed rates and 1,203 having floating rates. (d) Non-current liabilities are found after Equity and before Current liabilities on the balance sheet.

15-51

CHAPTER 16 Investments ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Brief Exercises

Questions

Do It!

Exercises

A Problems

Explain how to account for debt investments.

1, 2, 3, 4

1, 2, 3

Explain how to account for stock investments.

5, 6, 7, 8, 9, 10, 11, 20

2, 3

4, 5, 6, 7, 8, 9

1A, 2A, 3A, 4A, 5A

Discuss how debt and stock investments are reported in financial statements.

10, 12, 13, 14, 15, 16, 17, 18, 19

4, 5, 6, 7, 8

3a, 3b

8, 10, 11, 12

1A, 2A, 3A, 4A, 5A, 6A

1652

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Journalize debt investment transactions and show financial statement presentation.

Moderate

30–40

Journalize investment transactions, prepare adjusting entry, and show statement presentation.

Moderate

30–40

Journalize transactions and adjusting entry for stock investments.

Moderate

30–40

Prepare entries under the cost and equity methods, and tabulate differences.

Simple

20–30

Journalize stock investment transactions and show statement presentation.

Moderate

40–50

Prepare a balance sheet.

Moderate

30–40

16-2

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 16 INVESTMENTS Number

Difficulty

Time (min.)

BE1

Simple

2–4

BE2

Simple

3–5

BE3

Simple

3–5

BE4

Simple

2–3

BE5

Simple

2–4

BE6

Simple

2–3

BE7

Simple

2–4

BE8

Simple

3–5

DI1

Moderate

6–8

DI2

Simple

6–8

DI3a

Simple

4–6

DI3b

Simple

4–6

EX1

Simple

8–10

EX2

Moderate

8–10

EX3

Moderate

8–10

EX4

Simple

8–10

EX5

Simple

6–8

EX6

Simple

8–10

EX7

Simple

6–8

EX8

2, 3

Simple

8–10

EX9

Simple

6–8

EX10

Simple

4–6

EX11

Simple

8–10

EX12

Simple

6–8

P1A

2, 3

Moderate

30–40

P2A

2, 3

Moderate

30–40

P3A

2, 3

Moderate

30–40

P4A

2, 3

Simple

20–30

P5A

2, 3

Moderate

40–50

P6A

Moderate

30–40

16-3

INVESTMENTS (Continued) Number

Difficulty

Time (min.)

BYP1

Simple

10–15

BYP2

Simple

10–15

BYP3

Simple

5–10

BYP4

—

Simple

10–15

BYP5

Moderate

15–20

BYP6

Simple

5–10

BYP7

Simple

10–15

BYP8

—

Simple

10–15

BYP9

—

Moderate

10–15

16-4

Learning Objective

Knowledge

Comprehension

Application

Analysis

1. Explain how to account for debt investments.

E16-1 Q16-1 Q16-2

Q16-3 Q16-4

BE16-1 E16-2 DI16-1 E16-3

2. Explain how to account for stock investments.

Q16-7 Q16-11 Q16-20 E16-9

Q16-5 Q16-8 Q16-9 Q16-10

Q16-6 BE16-2 BE16-3 DI16-2 E16-4

E16-5 P16-1A E16-6 P16-2A E16-7 P16-3A E16-8 P16-4A P16-5A

3. Explain how debt and stock investments are reported in financial statements.

Q16-12 Q16-17 DI16-3b

Q16-10 Q16-13 Q16-18 Q16-19

Q16-14 Q16-16 BE16-4 BE16-7 BE16-8 E16-8 P16-6A

Q16-15 BE16-5 BE16-6 DI16-3a E16-10 E16-11

Broadening Your Perspective

Real-World Focus

Financial Reporting FASB Decision Making Codification Across the Organization Communication All About You

Synthesis

Evaluation

E16-12 P16-1A P16-2A P16-3A P16-4A P16-5A

Comparative Analysis

Ethics Case

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

16-5

ANSWERS TO QUESTIONS 1.

The reasons corporations invest in securities are: (1) excess cash not needed for operations that can be invested, (2) for additional earnings, and (3) strategic reasons.

(a) The cost of an investment in bonds consists of all expenditures necessary to acquire the bonds, such as the market price of the bonds plus any brokerage fees. (b) Interest is recorded as it is earned; that is, over the life of the investment in bonds.

(a) Losses and gains on the sale of debt investments are computed by comparing the cost of the securities to the net proceeds from the sale. (b) Losses are reported in the income statement under other expenses and losses whereas gains are reported under other revenues and gains.

Seibel Company is incorrect. The gain is the difference between the net proceeds, exclusive of interest, and the cost of the bonds. The correct gain is $4,500, or [($45,000 – $500) – $40,000].

The cost of an investment in stock includes all expenditures necessary to acquire the investment. These expenditures include the actual purchase price plus any commissions or brokerage fees.

The entry is: Stock Investments ..................................................................................... Cash ..................................................................................................

62,000 62,000

(a) Whenever the investor’s influence on the operating and financial affairs of the investee is significant, the equity method should be used. The major factor in determining significant influence is the percentage of ownership interest held by the investor in the investee. The general guideline for use of the equity method is 20%–50% ownership interest. Companies are required to use judgment, however, rather than blindly follow the 20%–50% guideline. (b) Revenue is recognized as it is earned by the investee.

Since Ling Corporation uses the equity method, the income reported by Gorman Packing ($80,000) should be multiplied by Ling’s ownership interest (35%) and the result ($28,000) should be debited to Stock Investments and credited to Revenue from Stock Investments. Also, of the total dividend declared and paid by Gorman ($10,000) Ling will receive 35% or $3,500. This amount should be debited to Cash and credited to Stock Investments.

Significant influence over an investee may result from representation on the board of directors, participation in policy-making processes, material intercompany transactions. One must also consider whether the stock held by other stockholders is concentrated or dispersed. An investment (direct or indirect) of 20%–50% of the voting stock of an investee constitutes significant influence unless there exists evidence to the contrary.

16-6

Questions Chapter 16 (Continued) 10.

Under the cost method, an investment is originally recorded and reported at cost. Dividends are recorded as revenue. In subsequent periods, it is adjusted to fair value and an unrealized holding gain or loss is recognized and included in income (trading security) or as a separate component of stockholders’ equity (available-for-sale security). Under the equity method, the investment is originally recorded and reported at cost; subsequently, the investment account is adjusted during each period for the investor’s share of the earnings or losses of the investee. The investor’s share of the investee’s earnings is recognized in the earnings of the investor. Dividends received from the investee are reductions in the carrying amount of the investment.

11.

Consolidated financial statements present the details of the assets and liabilities controlled by the parent company and the total revenues and expenses of the affiliated companies. Consolidated financial statements are especially useful to the stockholders, board of directors, and management of the parent company. Conversely, they are of limited use to minority stockholders and the creditors of the subsidiary company.

12.

The valuation guidelines for investments is as follows: Category

Valuation and Reporting

Trading Available-for-sale Held-to-maturity

At fair value with changes reported in net income At fair value with changes reported in stockholders’ equity At amortized cost

Investments recorded under the equity method are reported at their carrying value. The carrying value is the cost adjusted for the investor’s share of the investee’s income and dividends received. 13.

Jill should report as follows: (1) Under current assets in the balance sheet: Short-term investments, at fair value ........................................................ (2) Under other expenses and losses in the income statement: Unrealized loss on trading securities ........................................................

14.

$ (2,000)

10,000 10,000

The entry is: Fair Value Adjustment—Trading ............................................................... Unrealized Gain—Income .................................................................

$72,000

The entry is: Fair Value Adjustment—Available-for-Sale ............................................... Unrealized Gain or Loss—Equity ......................................................

16.

$ 2,000

Jill should report as follows: (1) Under investments in the balance sheet: Investments in stock of less than 20% owned companies, at fair value .... (2) Under stockholders’ equity in the balance sheet: Less: Unrealized loss on available-for-sale securities..............................

15.

$72,000

10,000 10,000

16-7

Questions Chapter 16 (Continued) 17.

Unrealized Loss—Equity is reported as a deduction from stockholders’ equity. The unrealized loss is not included in the computation of net income.

18.

Reporting Unrealized Gains (Losses)—Equity in the stockholders’ equity section serves two important purposes: (1) it reduces the volatility of net income due to fluctuations in fair value, and (2) it still informs the financial statement user of the gain or loss that would occur if the securities were sold at fair value.

19.

No. The investment in Orr Corporation stock is a long-term investment because there is no intent to convert the stock into cash within a year or the operating cycle, whichever is longer.

20.

In Note 1, Apple stated the following regarding its accounting policy on consolidated financial statements: The accompanying consolidated financial statements include the accounts of the Company. Intercompany accounts and transactions have been eliminated. The preparation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. Certain prior year amounts in the consolidated financial statements and notes there to have been reclassified to conform to the current year’s presentation.

16-8

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 16-1 Jan. 1 July 1

Debt Investments ............................................. Cash ..........................................................

52,000

Cash .................................................................. Interest Revenue.......................................

2,340

52,000 2,340

BRIEF EXERCISE 16-2 Aug. 1 Dec. 1

Stock Investments ........................................... Cash ..........................................................

37,000

Cash .................................................................. Stock Investments .................................... Gain on Sale of Stock Investments .........

40,000

37,000 37,000 3,000

BRIEF EXERCISE 16-3 Dec. 31 31

Stock Investments (25% X $180,000) .............. Revenue from Stock Investments ...........

45,000

Cash (25% X $50,000) ...................................... Stock Investments ....................................

12,500

45,000 12,500

BRIEF EXERCISE 16-4 Dec. 31

Unrealized Loss—Income................................ Fair Value Adjustment—Trading ($64,000 – $59,000) ...............................

5,000 5,000

16-9

BRIEF EXERCISE 16-5 Balance Sheet Current assets Short-term investments, at fair value .............................

$59,000

Income Statement Other expenses and losses Unrealized Loss—Income ...............................................

5,000

BRIEF EXERCISE 16-6 Dec. 31

Unrealized Gain or Loss—Equity ..............................4,000 Fair Value Adjustment—Available-for-Sale ..

4,000

BRIEF EXERCISE 16-7 Balance Sheet Investments Investments in stock of less than 20% owned companies, at fair value ....................................................

$68,000

Stockholders’ equity Less: Unrealized loss on available-for-sale securities.......

$ (4,000)

BRIEF EXERCISE 16-8 Investments Investments in stock of less than 20% owned companies, at fair value .................................................... Investment in stock of 20–50% owned company, at equity .............................................................................. Total investments...........................................................

16-10

$115,000 260,000 $375,000

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 16-1 2017 (a) Jan. 1

2018 Jan. 1

Jan.

2017 (b) Dec. 31

Debt Investments...................................... Cash .....................................................

50,000

Cash .......................................................... Interest Receivable ($50,000 X 10%) ................................

5,000

Cash .......................................................... Loss on Sale of Debt Investments .......... Debt Investments ($50,000 X 30/50)...............................

29,000 1,000

Interest Receivable ................................... Interest Revenue ($50,000 X 10%) ................................

5,000

Stock Investments .................................... Cash .....................................................

550,000

Cash .......................................................... Dividend Revenue ...............................

16,000

Stock Investments .................................... Cash .....................................................

540,000

Cash .......................................................... Stock Investments...............................

45,000

Stock Investments .................................... Revenue from Stock Investments.......

81,000

50,000

5,000

30,000

5,000

DO IT! 16-2 (a) June 17 Sept. 3 (b) Jan.

May 15 Dec. 31

550,000 16,000 540,000 45,000 81,000

16-11

DO IT! 16-3a Trading securities: Unrealized Loss—Income ................................................. Fair Value Adjustment—Trading .................................

14,600* 14,600

*$11,400 + $3,200 Available-for-sale securities: Fair Value Adjustment—Available-for-Sale ....................... Unrealized Gain or Loss—Equity ................................

9,950** 9,950

**$5,750 + $4,200 DO IT! 16-3b

1. 2. 3. 4. 5.

16-12

Item Loss on sale of investments in stock. Unrealized gain on availablefor-sale securities. Fair value adjustment— trading. Interest earned on investments in bonds. Unrealized loss on trading securities.

Financial statement Income statement Balance sheet Balance sheet Income statement Income statement

Category Other expenses and losses Stockholders’ equity Current assets Other revenues and gains Other expenses and losses

SOLUTIONS TO EXERCISES EXERCISE 16-1 1.

Companies purchase investments in debt or stock securities because they have excess cash, to generate earnings from investment income, or for strategic reasons.

A corporation would have excess cash that it does not need for operations due to seasonal fluctuations in sales and as a result of economic cycles.

The typical investment when investing cash for short periods of time is low-risk, high liquidity, short-term securities such as government-issued securities.

The typical investments when investing cash to generate earnings are debt securities and stock securities.

A company would invest in securities that provide no current cash flows for speculative reasons. They are speculating that the investment will increase in value.

The typical investment when investing cash for strategic reasons is stock of companies in a related industry or in an unrelated industry that the company wishes to enter.

EXERCISE 16-2 1.

2017 Jan. 1

Dec. 31 2018 Jan. 1

Debt Investments...................................... Cash ...................................................

50,000

Interest Receivable ($50,000 X 9%) ......... Interest Revenue ...............................

4,500

Cash .......................................................... Interest Receivable ...........................

4,500

50,000

4,500

16-13

EXERCISE 16-2 (Continued)

2018 Jan. 1

Cash.......................................................... Debt Investments ($50,000 X 3/5) .............................. Gain on Sale of Debt Investments ($33,000 – $30,000) .......................

33,000 30,000 3,000

EXERCISE 16-3 January 1, 2017 Debt Investments .............................................................. Cash ............................................................................

70,000

December 31, 2017 Interest Receivable ($70,000 X 6%) .................................. Interest Revenue ........................................................

4,200

January 1, 2018 Cash ................................................................................... Interest Receivable ....................................................

4,200

January 1, 2018 Cash ................................................................................... Loss On Sale of Debt Investments ................................... Debt Investments (40/70 X $70,000)..........................

38,500 1,500

16-14

70,000

4,200

40,000

EXERCISE 16-4 (a) Feb. 1 July 1 Sept. 1

Dec. 1

Stock Investments ................................... Cash ..................................................

7,200

Cash (600 X $1) ........................................ Dividend Revenue ............................

600

Cash ......................................................... Stock Investments ($7,200 X 3/6) ................................ Gain on Sale of Stock Investments ($4,300 – $3,600)...........................

4,300

Cash (300 X $1) ........................................ Dividend Revenue ............................

300

7,200 600

3,600 700

300

(b) Dividend revenue and the gain on sale of stock investments are reported under other revenues and gains in the income statement. EXERCISE 16-5 Jan. 1 July 1 Dec. 1

Dec. 31

Stock Investments ........................................... Cash ..........................................................

152,000

Cash (2,500 X $3).............................................. Dividend Revenue ....................................

7,500

Cash .................................................................. Stock Investments ($152,000 X 1/5) ........ Gain on Sale of Stock Investments .........

32,000

Cash (2,000 X $3).............................................. Dividend Revenue ....................................

6,000

152,000 7,500 30,400 1,600 6,000

16-15

EXERCISE 16-6 February 1 Stock Investments............................................................. Cash (500 X $32) ........................................................

16,000

March 20 Cash ................................................................................... Loss on Sale of Stock Investments.................................. Stock Investments ($16,000 X 100/500) ....................

2,900 300

April 25 Cash (400 X $1) .................................................................. Dividend Revenue ......................................................

400

June 15 Cash ................................................................................... Stock Investments ($16,000 X 200/500) .................... Gain on Sale of Stock Investments ..........................

16,000

3,200

400 7,600 6,400 1,200

July 28 Cash (200 X $1.25) ............................................................. Dividend Revenue ......................................................

250 250

EXERCISE 16-7 (a) Jan. 1 Dec. 31 31

Stock Investments .................................... Cash ...................................................

180,000

Cash ($60,000 X 25%) ............................... Stock Investments ............................

15,000

Stock Investments .................................... Revenue from Stock Investments ($200,000 X 25%) ...........................

50,000

180,000 15,000

50,000

(b) Investment in Helbert, January 1 ........................................ Less: Dividend received ..................................................... Plus: Share of reported income ....................................... Investment in Helbert, December 31 ..................................

16-16

$180,000 (15,000) 50,000 $215,000

EXERCISE 16-8 (a) Mar. 18 June 30

Dec. 31

(b) Jan.

June 15

Dec. 31

Stock Investments................................... Cash (200,000 X 10% X $13) ............

260,000

Cash ......................................................... Dividend Revenue ($60,000 X 10%)............................

6,000

260,000

6,000

Fair Value Adjustment—Availablefor-Sale................................................. Unrealized Gain or Loss—Equity ($300,000 – $260,000) ..................

40,000 40,000

Stock Investments................................... Cash (30,000 X 40% X $9)................

108,000

Cash ......................................................... Stock Investments ($30,000 X 40%)............................

12,000

Stock Investments................................... Revenue from Stock Investments ($80,000 X 40%)............................

32,000

108,000

12,000

32,000

EXERCISE 16-9 (a) Since Agee owns more than 50% of the common stock of Himes Corporation, Agee is called the parent company. Himes is the subsidiary (affiliated) company. Because of its stock ownership, Agee has a controlling interest in Himes. (b) When a company owns more than 50% of the common stock of another company, consolidated financial statements are usually prepared. Consolidated financial statements present the total assets and liabilities controlled by the parent company. They also present the total revenues and expenses of the affiliated companies. (c) Consolidated financial statements are useful because they indicate the magnitude and scope of operations of the companies under common control.

16-17

EXERCISE 16-10 (a) Dec. 31

Unrealized Loss—Income ................................ 2,000 Fair Value Adjustment—Trading...........

(b)

2,000

Balance Sheet Current assets Short-term investments, at fair value......................

$51,000

Income Statement Other expenses and losses Unrealized loss on trading securities .....................

$ 2,000

EXERCISE 16-11 (a) Dec. 31

Unrealized Gain or Loss—Equity .................... 2,000 Fair Value Adjustment—Availablefor-Sale ...............................................

(b)

16-18

2,000

Balance Sheet Investments Investments in stock of less than 20% owned companies, at fair value .......................................

$51,000

Stockholders’ equity Less: Unrealized loss on available-for-sale securities.......................................................

$ 2,000

EXERCISE 16-11 (Continued) (c) Dear Ms. Kretsinger: Investments which are classified as trading (held for sale in the near term) are reported at fair value in the balance sheet, with unrealized gains or losses reported in net income. Investments which are classified as available-for-sale (held longer than trading but not to maturity) are also reported at fair value, but unrealized gains or losses are reported in the stockholders’ equity section. Fair value is used as a reporting basis because it represents the cash realizable value of the securities. Unrealized gains or losses on trading investments are reported in the income statement because of the likelihood that the securities will be sold at fair value in the near term. Unrealized gains or losses on available-for-sale securities are reported in stockholders’ equity rather than in income because there is a significant chance that future changes in fair value will reverse unrealized gains or losses. So as to not distort income with these fluctuations, they are reported directly in stockholders’ equity. I hope that the preceding discussion clears up any misunderstandings. Please contact me if you have any questions. Sincerely, Student

16-19

EXERCISE 16-20 (a) Fair Value Adjustment—Trading ($126,000 – $120,000)..................................................... Unrealized Gain—Income .......................................... Unrealized Gain or Loss—Equity...................................... Fair Value Adjustment—Available-for-Sale .............. (b)

6,000 6,000 4,000 4,000

Balance Sheet Current assets Short-term investments, at fair value........................ Investments Investments in stock of less than 20% owned companies, at fair value ......................................... Stockholders’ equity Less: Unrealized loss on available-for-sale securities .........................................................

$126,000 96,000

4,000

6,000

Income Statement Other revenues and gains Unrealized gain on trading securities .......................

16-20

SOLUTIONS TO PROBLEMS PROBLEM 16-1A

(a) 2017 Jan. 1

Dec. 31

2020 Jan. 1

Dec. 31

(b) 2017 Dec. 31

Debt Investments.................................. 2,000,000 Cash ............................................... 2,000,000 Interest Receivable ($2,000,000 X 8%).............................. Interest Revenue ...........................

Cash ...................................................... Interest Receivable .......................

160,000 160,000

Cash ($1,000,000 X 106%) .................... 1,060,000 Debt Investments .......................... 1,000,000 Gain on Sale of Debt Investments ............................... 60,000 Interest Receivable ($1,000,000 X 8%).............................. Interest Revenue ...........................

80,000

Fair Value Adjustment—Availablefor-Sale .............................................. Unrealized Gain or Loss—Equity ....

200,000

80,000

200,000

16-21

PROBLEM 16-1A (Continued) (c)

Balance Sheet Current assets Interest receivable .......................................................

$ 160,000

Investments Debt investments, at fair value...................................

$2,200,000

The unrealized gain of $200,000 would be reported in the stockholders’ equity section of the balance sheet as an addition to total paid-in capital and retained earnings.

16-22

PROBLEM 16-2A

(a) Feb. 1 Mar. 1 Apr. 1 July 1 Aug. 1

Sept. 1 Oct. 1 Oct. 1

Stock Investments .................................... Cash ...................................................

32,400

Stock Investments .................................... Cash ...................................................

20,000

Debt Investments...................................... Cash ...................................................

50,000

Cash ($.60 X 600) ...................................... Dividend Revenue .............................

360

Cash (200 X $58) ....................................... Stock Investments [($32,400 ÷ 600) X 200] .................. Gain on Sale of Stock Investments ...................................

11,600

Cash ($1 X 800) ......................................... Dividend Revenue .............................

800

Cash ($50,000 X 7% X 1/2)........................ Interest Revenue ...............................

1,750

Cash .......................................................... Loss on Sale of Debt Investments .......... Debt Investments ..............................

49,000 1,000

Stock Investments Feb. 1 32,400 Aug. 1 Mar. 1 20,000 Dec. 31 Bal. 41,600

10,800

Apr. 1 Dec. 31 Bal.

32,400 20,000 50,000 360

10,800 800

800 1,750

50,000

Debt Investments 50,000 Oct. 1

50,000

16-23

PROBLEM 16-2A (Continued) (b) Dec. 31

Unrealized Loss—Income ......................... Fair Value Adjustment—Trading ($41,600 – $41,200) .........................

Security Muninger common Tatman common

Cost $21,600 20,000 $41,600

Fair Value $22,000 19,200 $41,200

400 400

(400 X $55) (800 X $24)

(c) Current assets Short-term investments, at fair value............................... (d) Income Statement Account Dividend Revenue Gain on Sale of Stock Investments Interest Revenue Loss on Sale of Debt Investments Unrealized Loss—Income

16-24

$41,200

Category Other revenues and gains Other revenues and gains Other revenues and gains Other expenses and losses Other expenses and losses

PROBLEM 16-3A

(a) Aug. 1

Sept. 1

Oct. 1

Nov. 1

Dec. 15 31

2018 Cash (2,000 X $.50) ................................... Dividend Revenue .............................

1,000

Cash (1,500 X $8) ...................................... Loss on Sale of Stock Investments ($13,500 – $12,000) ............................... Stock Investments (1,500 X $9) ........

12,000

Cash (800 X $33) ....................................... Stock Investments (800 X $30) ......... Gain on Sale of Stock Investments ($26,400 – $24,000)........................

26,400

Cash (1,500 X $1) ...................................... Dividend Revenue .............................

1,500

Cash (1,200 X $.50) ................................... Dividend Revenue .............................

600

Cash (3,500 X $1) ...................................... Dividend Revenue .............................

3,500

1,500 13,500 24,000 2,400 1,500

600 3,500

Stock Investments 2018 135,000 Sept. 1 Oct. 1

2018 Jan. 1 Balance 2018 Dec. 31 Balance

1,000

13,500 24,000

97,500

16-25

PROBLEM 16-3A (Continued) (b) Dec. 31

Unrealized Gain or Loss—Equity ($97,500 – $93,400) ................................... Fair Value Adjustment—Availablefor-Sale...............................................

Security Gehring Co. common Wooderson Co. common Kitselton Co. common

Cost $36,000 31,500 30,000 $97,500

Fair Value $38,400 28,000 27,000 $93,400

4,100 4,100

(1,200 X $32) (3,500 X $ 8) (1,500 X $18)

(c) Investments Investments in stock of less than 20% owned companies, at fair value ..................................................

Stockholders’ equity Common stock ......................................... $1,500,000 Retained earnings .................................... 1,000,000 Total paid-in capital and retained earnings ...................... 2,500,000 Less: Unrealized loss on availablefor-sale securities ........................ 4,100 Total stockholders’ equity ...........

16-26

93,400

$2,495,900

PROBLEM 16-4A

(a) Jan.

Mar. 15

June 15 Sept. 15 Dec. 15 31

(b) Jan.

Mar. 15 June 15 Sept. 15 Dec. 15

Stock Investments................................ Cash...............................................

800,000

Cash ...................................................... Dividend Revenue (30,000 X $.30) ...........................

9,000

Cash ...................................................... Dividend Revenue.........................

9,000

Cash ...................................................... Dividend Revenue.........................

9,000

Cash ...................................................... Dividend Revenue.........................

9,000

Fair Value Adjustment—Trading ......... Unrealized Gain—Income [$800,000 – ($34 X 30,000)] .......

220,000

Stock Investments................................ Cash...............................................

800,000

Cash ...................................................... Stock Investments ........................

9,000

Cash ...................................................... Stock Investments ........................

9,000

Cash ...................................................... Stock Investments ........................

9,000

Cash ...................................................... Stock Investments ........................

9,000

800,000

9,000 9,000 9,000 9,000

220,000

800,000 9,000 9,000

9,000 9,000

16-27

PROBLEM 16-4A (Continued) Dec. 31

Stock Investments............................... Revenue from Stock Investments ($320,000 X 20%) ......................

64,000

Cost Method $1,020,000* 36,000 220,000 0

64,000 Equity Method $828,000** 0 0 64,000

*$34 X 30,000 shares **$800,000 + $64,000 – $36,000

16-28

PROBLEM 16-5A

(a) Jan. 20

28 30

Feb. 8 18

July 30 Sept. 6 Dec. 1

(b)

Cash .......................................................... Stock Investments ............................ Gain on Sale of Stock Investments ...................................

55,000

Stock Investments .................................... Cash ...................................................

31,200

Cash .......................................................... Dividend Revenue ($1.15 X 1,400) ...............................

1,610

Cash .......................................................... Dividend Revenue ($.40 X 1,200) .....

480

Cash ($27 X 1,200) .................................... Loss on Sale of Stock Investments......... Stock Investments ............................

32,400 1,200

Cash .......................................................... Dividend Revenue ($1 X 1,400) ........

1,400

Stock Investments .................................... Cash ($82 X 900) ...............................

73,800

Cash .......................................................... Dividend Revenue ($1.50 X 1,300) ...............................

1,950

Stock Investments 1/1 Bal. 169,600 1/20 1/28 31,200 2/18 9/6 73,800 12/31 Bal. 189,000

52,000 3,000 31,200

1,610

480

33,600 1,400 73,800

1,950

52,000 33,600

16-29

PROBLEM 16-5A (Continued) (c) Dec. 31

Unrealized Gain or Loss—Equity ................ Fair Value Adjustment—Availablefor-Sale ($189,000 – $183,200) ..........

Security Hutcherson Corporation common Liggett Corporation common

Cost $ 84,000 105,000 $189,000

5,800 5,800

Fair Value $ 89,600 93,600 $183,200

(1,400 X $64) (1,300 X $72)

(d) Investments Investments in stock of less than 20% owned companies, at fair value ...........................................

$183,200

Stockholders’ equity Total paid-in capital and retained earnings ................ Less: Unrealized loss on available-for-sale securities ........................................................... Total stockholders’ equity ...................................

16-30

xxxxx 5,800 $ xxxxx

PROBLEM 16-6A

NIETO CORPORATION Balance Sheet December 31, 2017 Assets Current assets Cash................................................................. Short-term investments, at fair value ............ Accounts receivable ....................................... Less: Allowance for doubtful accounts............................................... Inventory ......................................................... Prepaid insurance........................................... Total current assets ................................ Investments Investments in stock of less than 20% of owned companies, at fair value ................. Investment in stock of 20%–50% owned company, at equity ......................... Total investments.................................... Property, plant, and equipment Land................................................... Buildings ........................................... $950,000 Less: Accumulated depreciation— buildings ................................. 180,000 Equipment ......................................... 275,000 Less: Accumulated depreciation— equipment ............................... 52,000 Total property, plant, and equipment.....................................

62,000 180,000

$140,000 6,000

134,000 170,000 16,000 562,000

286,000* 380,000 666,000 390,000 770,000 223,000 1,383,000

Intangible assets Goodwill ..........................................................

200,000

Total assets ............................................................

$2,811,000

*$278,000 + $8,000

16-31

PROBLEM 16-6A (Continued) NIETO CORPORATION Balance Sheet (Continued) December 31, 2017 Liabilities and Stockholders’ Equity Current liabilities Notes payable .................................................. Accounts payable ............................................ Income taxes payable ...................................... Dividends payable ........................................... Total current liabilities ............................. Long-term liabilities Bonds payable, 10%, due 2025 ....................... Plus: Premium on bonds payable.................. Total long-term liabilities ......................... Total liabilities ..........................................

$ 500,000 40,000 540,000 1,070,000

Stockholders’ equity Paid-in capital Common stock, $10 par value, 500,000 shares authorized, 150,000 shares issued and outstanding........................................... 1,500,000 Paid-in capital in excess of par ..................... 130,000 Total paid-in capital .......................... 1,630,000 Retained earnings 103,000 Total paid-in capital and retained earnings ................................................ 1,733,000 Add: Unrealized gain on available-forsale securities ...................................... 8,000 Total stockholders’ equity ....................... Total liabilities and stockholders’ equity ....................................................

16-32

70,000 260,000 120,000 80,000 530,000

1,741,000 $2,811,000

COMPREHENSIVE PROBLEM: CHAPTERS 12 TO 16

Part I (a) To:

Debby Kauffman, Jamie Hiatt, and Ella Rincon

From:

Joe Student

Date:

5/26/2016

Re:

Analysis of Partnership vs. Corporate Form of Business Organization

I have examined your situation regarding the establishment of your business. Before discussing my recommendations, I would like to briefly review the advantages and disadvantages of partnerships and corporations. The primary advantages of a partnership over a corporation are:

Partnerships are more easily formed than corporations. Partnerships can be formed simply by the voluntary agreement of two or more individuals. Forming a corporation requires preparing and filing documents with governmental agencies, paying incorporation fees, etc.

Income from a partnership is subject to less tax than income from a corporation. Even though partnerships are required to file information tax returns (returns that show financial information, but do not require any payment of taxes), they are not considered taxable entities. A partner’s share of partnership income is taxed only on the partner’s personal income tax return. Corporations are taxable entities and pay taxes on corporate income. In addition, any dividends distributed by corporations to individuals are subject to personal income tax on the personal income tax return. This is known as double taxation.

Partnerships have more flexibility in decision making. The decisionmaking process used in a partnership is determined by the partners, whereas some decisions required in corporations must follow formal procedures described in the bylaws of the corporation.

16-33

COMPREHENSIVE PROBLEM (Continued) The primary advantages of a corporation over a partnership are: 1.

Mutual agency does not exist in a corporation. This means that the owners of a corporation (stockholders) do not have the power to bind the corporation beyond their authority. For example, a stockholder who is not employed by the firm cannot enter into contracts or other agreements on behalf of the corporation. Owners of a partnership (partners) are bound by the actions of their partners, even when partners act beyond the scope of their authority. This is true as long as the actions seem appropriate for the business.

The owners of a corporation have limited liability. When the corporation’s assets are not sufficient to pay creditors’ claims, the personal assets of the stockholders are protected from the corporation’s creditors. In a partnership, once the assets of the partnership have been used to pay creditors’ claims, the personal assets of the partners can be taken to satisfy the creditors’ demands. A special type of partnership, a limited partnership, protects the personal assets of limited partners, but at least one partner’s assets are still at risk. This partner is called a general partner.

The life of a corporation is unlimited. When ownership changes occur (e.g., stockholders buy or sell stock), the corporation continues to exist as a legal entity. When ownership changes occur in a partnership (e.g., existing partner leaves, new partner is added), the old partnership no longer exists as a legal entity. A new partnership can be formed and the business can continue, but the original partnership must be dissolved.

After examining your situation, I believe that you would be wise to choose the corporate form of business organization. There are two reasons for this recommendation. The first reason is that the venture you are about to undertake will require significant capital and, generally, capital is more easily raised via a corporation than a partnership. The other reason is that you will be protected from unlimited liability if you incorporate as opposed to forming a partnership. Given the potential risk of starting a venture of this kind, I believe it is in your best interest to protect your personal assets by using the corporate form of organization. I wish you the best in your new endeavor and please call upon me when you are in need of further assistance. 16-34

COMPREHENSIVE PROBLEM (Continued) Part II (b) Equity financing option: Positives No fixed interest payments required

Negatives Control of the corporation is lost Difficulty of finding an interested investor Earnings per share are lower

Debt financing option: Positives Control stays with three incorporators No need for additional investor Earnings per share are higher

Negatives Interest payments quickly drain cash

Shares outstanding before financing

Income before interest and taxes Interest expense Income before taxes Tax expense Net income Shares outstanding after financing Earnings per share

60,000 shares

Equity Financing $300,000 — 300,000 96,000 $204,000 200,000 $ 1.02

Debt Financing $300,000 126,000 174,000 55,680 $118,320 60,000 $ 1.97

Part III (c) (1) 6/12/16

Cash ............................................. Buildings ...................................... Common Stock .................... Paid-in Capital in Excess of Par—Common Stock ...

100,000 200,000 120,000 180,000

16-35

COMPREHENSIVE PROBLEM (Continued) 7/21/16

7/27/17

Cash............................................... Common Stock...................... Paid-in Capital in Excess of Par—Common Stock .... Stock Dividends (150,000 X .10 X $3)................... Common Stock Dividends Distributable ...................... Paid-in Capital in Excess of Par—Common Stock ....

900,000 180,000 720,000 45,000 30,000 15,000

7/31/17

No entry

8/15/17

Common Stock Dividends Distributable.............................. Common Stock......................

30,000

Cash Dividends (165,000 X $.05) ......................... Dividends Payable ................

8,250

12/4/17

30,000

8,250

12/14/17 No entry 12/24/17 Dividends Payable ........................ Cash .......................................

8,250 8,250

(2) Shares Issued and Outstanding Number of Date Event Shares Issued 6/12/16 Issuance to Incorporators 60,000 7/21/16 Issuance to Hansen 90,000 8/15/17 Stock dividend issuance 15,000

Total Shares Issued and Outstanding 60,000 150,000 165,000

Part IV (d) (1) 1/1/18

16-36

Cash............................................. Discount on Bonds Payable ...... Bonds Payable ....................

548,000 52,000 600,000

COMPREHENSIVE PROBLEM (Continued) (2) 12/31/18 Interest Expense .................................... 41,200 Discount on Bonds Payable ($52,000 ÷ 10)............................... Interest Payable ($600,000 X .06) ........................... (3) 1/1/19 (4) 1/1/20

5,200 36,000

Interest Payable ........................................ 36,000 Cash ($600,000 X .06) ......................

36,000

Interest Payable ........................................ 36,000 Cash.................................................

36,000

Part V (e) (1) 2016

2017

Stock Investments ........................... Cash...........................................

900,000

Stock Investments ........................... Revenue from Stock Investments (.6 X $30,000) ...

18,000

Cash ................................................. Stock Investments (.6 X $2,100) ..........................

1,260

Stock Investments........................... Revenue from Stock Investments (.6 X $70,000) ..

42,000

Cash ................................................. Stock Investments (.6 X $20,000) ........................

12,000

900,000

18,000

1,260

42,000

12,000

16-37

COMPREHENSIVE PROBLEM (Continued) 2018

(2)

16-38

Stock Investments......................... Revenue from Stock Investments (.6 X $105,000) ....................

63,000

Cash ............................................... Stock Investments (.6 X $50,000) ......................

30,000

63,000

30,000

Stock Investments 900,000 18,000 1,260 42,000 12,000 63,000 30,000 979,740

CCC16 (a)

CONTINUING COOKIE CHRONICLE

1. The amount of influence you would have in The Beanery would determine how you would account for the investment. Given that you would own 30% of the common shares of The Beanery, 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 stockholders. Significant influence over an investee may also result from representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. Assuming significant influence existed, the investment would be accounted for using the equity method of accounting. However, in this case, the Thornton sisters will still exercise majority control and may not be willing to let an investor participate in the decisionmaking process. If this did occur, significant influence may not exist and the investment would be accounted for using the cost method. 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 roasting beans while taking advantage of the expertise the Thornton sisters have developed with respect to the operation of their coffee shop.

16-39

CCC16 (Continued) (a) (Continued) 3. There would be disadvantages associated with this investment as well. For example, there may be a significant time investment required by both of you 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. Also, the Thornton sisters will still 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) Stock Investments................................................. Cash ..............................................................

15,000 15,000

(c) Cost Method Cash ....................................................................... Dividend Revenue ($25,000 X 30%) ..............

7,500 7,500

Equity Method

16-40

Stock Investments................................................. Revenue from Stock Investments ($50,000 X 30%) ........................................

15,000

Cash ($25,000 X 30%) ............................................ Stock Investments.........................................

7,500

15,000

7,500

CCC16 (Continued) (d) Because the investment in The Beanery is a strategic investment, it would be classified as a long-term investment in the noncurrent 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 of $15,000. 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 Beanery’s income, less a proportionate share of any dividends paid by The Beanery. For the current year the investment would be at $22,500 ($15,000 + $15,000 – $7,500).

16-41

BYP 16-1

FINANCIAL REPORTING PROBLEM

(a) Percentage increase from 2012 to 2013: (1) Short-term marketable securities: ($26,287 – $18,383) ÷ 18,383 = 43.0% (2) Long-term marketable securities: ($106,215 – 92,122) ÷ 92,122 = 15.3% (b) (1) Purchases of marketable securities during the year: $148,489 million. (2) Payments for business acquisitions, net of cash acquired: $496 million.

16-42

BYP 16-2

(a)

COMPARATIVE ANALYSIS PROBLEM

(in millions) 1. Cash used for investing activities 2. Cash used for capital expenditures (spending)

PepsiCo $2,625 2,795

Coca-Cola $4,214 2,550

(b) In its Note 1 to the consolidated financial statements, PepsiCo states that its financial statements include the consolidated accounts of PepsiCo Inc. and the affiliates that it controls. In addition, PepsiCo includes its share of the results of certain other affiliates based on its ownership interest. As for specific corporations consolidated, PepsiCo lists the following companies as its principal divisions. Frito-Lay North America PepsiCo Americas Beverages Quaker Foods North America Latin America Foods Europe Asia, Middle East and Africa

16-43

BYP 16-3

(a)

COMPARATIVE ANALYSIS PROBLEM

(in millions) 1. Cash used for investing activities 2. Cash used for business acquisitions

Amazon $4,276 3,444

Wal-Mart $12,293 13,119

(b) In its Note 1 to the consolidated financial statements, Amazon states: Principles of Consolidation The consolidated financial statements include the accounts of Amazon.com, Inc., its wholly-owned subsidiaries, and those entities in which we have a variable interest and are the primary beneficiary. Intercompany balances and transactions have been eliminated. As for specific corporations consolidated, Amazon lists the following: Zappos.com, Inc. Kindle Direct Publishing CreateSpace Other subsidiary companies are not named specifically in the financials though ‘certain companies’ that were acquired are discussed for several years’ acquisitions in the notes and several other brand names are owned by Amazon.

16-44

BYP 16-4

REAL-WORLD FOCUS

Answers will vary depending on company chosen. The following sample solution is provided for Medtronic, Inc. (a) (b) (c) (d) (e)

29 analysts rated this company. 7/29 or 24% of the analysts rated it a strong buy. Average rating 2.2 on a scale of 1.0 (strong buy) to 5.0 (strong sell). Average rating: No change. Earnings surprise 1.390%.

16-45

BYP 16-5

DECISION MAKING ACROSS THE ORGANIZATION

(a) The dollar amount received upon the sale of the JMB Company stock was $1,468,000. Since Neosho Corporation has a 30% interest in JMB, the equity method should be used to report dividends and net income. A reconstruction of the correct entries can be prepared for the acquisition, the equity method treatment of dividends and revenue, and the sale. A plug figure for cash will balance the entry for the sale. These entries are provided below. (b) Both the stockholder and the president are correct. Since the equity method adjusts the investment account for the earnings of the investee, the “very profitable” JMB investment balance has increased during the period the stock was held. The stock was sold at less than its current investment balance and thus a loss was recognized. Stockholder Linton is correct in labeling this a very profitable company and in noting that a loss was recognized on its sale. President Cedeno is correct in that the investment was sold at a higher figure than the $1,300,000 purchase price. The key to the dilemma is to note that the selling price was less than the carrying amount of the investment. The carrying amount has increased due to the recognition of JMB income during the time the stock was held. Entries for the investment in JMB Company: Acquisition Stock Investments ............................................ Cash ...........................................................

16-46

1,300,000 1,300,000

Previous Years—Equity Method Stock Investments ............................................ 372,000 Revenue from Stock Investments ($1,240,000 X 30%) ................................

372,000

Cash ................................................................... Stock Investments ($440,000 X 30%) .......

132,000

BYP 16-5 (Continued) This Year—Equity Method Stock Investments ............................................ Revenue from Stock Investments ($520,000 X 30%) ................................... Cash................................................................... Stock Investments ($160,000 X 30%).......

156,000 156,000 48,000 48,000

Sale of the JMB Company Stock Cash (Cash is a plug.) ...................................... 1,468,000 Loss on Sale of Stock Investments ................. 180,000 Stock Investments ....................................

1,648,000*

*$1,300,000 + ($372,000 + $156,000) – ($132,000 + $48,000)

16-47

BYP 16-6

COMMUNICATION ACTIVITY

Dear Mr. Nichols: I am writing this memo to make suggestions regarding the appropriate treatment for the two securities you are holding in your portfolio. Assuming that your investment in Plummer Corporation does not represent a significant interest in that firm, it should be accounted for as an available-for-sale security because it is a stock investment that you do not intend on selling in the near future. You will not report any gains or losses on this investment in your income statement until you sell it. On the other hand, your debt investment should be accounted for as a trading security since you purchased it with the intent to generate a short-term profit. Unrealized gains and losses at your balance sheet date should be reported directly in income.

16-48

BYP 16-7

ETHICS CASE

(a) Classifying the securities as they propose will indeed have the effect on net income that they say it will. Classifying all the gains as trading securities will cause all the gains to flow through the income statement this year and classifying the losses as available-for-sale securities will defer the losses from this year’s income statement. Classifying the gains and losses just the opposite will have the opposite effect. (b) What each proposes is unethical since it is knowingly not in accordance with GAAP. The financial statements are fraudulently, not fairly, stated. The affected stakeholders are other members of the company’s officers and directors, the independent auditors (who may detect these misstatements), the stockholders, and prospective investors. (c) The act of selling certain securities (those with gains or those with losses) is management’s choice and is not per se unethical. Generally accepted accounting principles allow the sale of selected securities so long as the method of assigning cost adopted by the company is consistently applied. If the officers act in the best interest of the company and its stakeholders, and in accordance with GAAP, and not in their self-interest, their behavior is probably ethical. Knowingly engaging in unsound and poor business and accounting practices that waste assets or that misstate financial statements is unethical behavior.

16-49

BYP 16-8

ALL ABOUT YOU

(a) ⯈ Ask—The lowest price at which a market maker will sell a specified number of shares of a stock at any given time. ⯈ Margin—Paying for stock partly in cash and partly by borrowing from the brokerage firm. ⯈ Prospectus—A document that contains important information about an investment company’s fees and expenses, investment objectives, investment strategies, risks, performance, pricing, and more. ⯈ Index Fund—A type of mutual fund or Unit Investment Trust whose investment objective typically is to achieve the same return as a particular market index, such as the S&P 500 Composite Stock Price Index. (b)

The SEC quiz is interactive, thus students are provided with feedback regarding their answers.

16-50

BYP 16-9

FASB CODIFICATION ACTIVITY

(a)

Trading Securities; Securities that are bought and held principally for the purpose of selling them in the near term and therefore held for only a short period of time. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price.

(b)

Available-for-Sale-Securities; Those not classified as either trading securities or held-to-maturity securities.

(c)

A holding gain or loss is a change in the value, above or below cost, of an asset not yet sold.

16-51

CHAPTER 17 Statement of Cash Flows ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Do It!

Exercises

A Problems

Learning Objectives

Questions

Discuss the usefulness and format of the statement of cash flows.

1, 2, 3, 4, 5, 6, 7, 8, 9, 15, 16, 17

1, 2, 3

Prepare a statement of cash flows using the indirect method.

10, 11, 12, 13, 14

4, 5, 6, 7

4, 5, 6, 7, 8, 9

2A, 3A, 5A, 7A, 9A, 11A

Analyze the statement of cash flows.

8, 9, 10, 11

7, 9

7A, 8A

*4.

Prepare a statement of cash flows using the direct method.

8, 18, 19, 20, 21

12, 13, 14

10, 11, 12, 13,

4A, 6A, 8A, 10A

*5.

Use a worksheet to prepare the statement of cash flows using the indirect method.

12A

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendices to the chapter.

1752

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Distinguish among operating, investing, and financing activities.

Simple

10–15

Determine cash flow effects of changes in equity accounts.

Simple

10–15

Prepare the operating activities section—indirect method.

Simple

20–30

*4A

Prepare the operating activities section—direct method.

Simple

20–30

Prepare the operating activities section—indirect method.

Simple

20–30

*6A

Prepare the operating activities section—direct method.

Simple

20–30

Prepare a statement of cash flows—indirect method, and compute free cash flow.

Moderate

40–50

*8A

Prepare a statement of cash flows—direct method, and compute free cash flow.

Moderate

40–50

Prepare a statement of cash flows—indirect method.

Moderate

40–50

*10A

Prepare a statement of cash flows—direct method.

Moderate

40–50

11A

Prepare a statement of cash flows—indirect method.

Moderate

40–50

*12A

Prepare a worksheet—indirect method.

Moderate

40–50

17-2

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 17 STATEMENT OF CASH FLOWS Number

Difficulty

Time (min.)

BE1

Simple

3–5

BE2

Simple

2–4

BE3

Simple

3–5

BE4

Simple

4–6

BE5

Simple

3–5

BE6

Simple

4–6

BE7

Moderate

3–5

BE8

Simple

2–4

BE9

Simple

2–3

BE10

Simple

2–3

BE11

Simple

4–6

*BE12

Simple

2–4

*BE13

Simple

3–5

*BE14

Moderate

3–5

*BE15

Simple

4–6

DI1

Simple

2–4

DI2

AP, C

Simple

4–6

DI3

AN, C

Simple

4–6

EX1

Simple

5–7

EX2

Simple

6–8

EX3

Simple

8–10

EX4

Simple

5–7

EX5

Simple

6–8

EX6

Moderate

10–12

EX7

2, 3

Simple

12–14

EX8

Simple

10–12

EX9

2, 3

Simple

12–14

EX10

Moderate

6–8

EX11

Moderate

6–8

*EX12

Simple

5–7

*EX13

Moderate

6–8

17-3

STATEMENT OF CASH FLOWS (Continued) Number

Difficulty

Time (min.)

*EX14

Moderate

16–20

P1A

Simple

10–15

P2A

Simple

10–15

P3A

Simple

20–30

*P4A

Simple

20–30

P5A

Simple

20–30

*P6A

Simple

20–30

P7A

2, 3

AP, AN

Moderate

40–50

*P8A

3, 4

AP, AN

Moderate

40–50

P9A

Moderate

40–50

*P10A

Moderate

40–50

P11A

Moderate

40–50

*P12A

Moderate

40–50

BYP1

Simple

15–20

BYP2

AP, E

Simple

8–12

BYP3

AP, E

Simple

8–12

BYP4

Simple

15–20

BYP5

—

Simple

10–15

BYP6

—

Moderate

25–30

BYP7

Simple

10–15

BYP8

Simple

10–15

BYP9

—

Simple

15–20

BYP10

Moderate

10–15

17-4

Learning Objective

Knowledge Comprehension

Discuss the usefulness and Q17-4 format of the statement of cash Q17-6 flows.

Q17-1 Q17-2 Q17-3 Q17-5 Q17-7 Q17-8 Q17-9 Q17-15

Prepare a statement of cash flows using the indirect method.

Q17-13 Dl17-2

Q17-10 Q17-11 Q17-12 Q17-14

Analyze the statement of cash flows.

Dl17-3

Application

BE17-4 E17-8 BE17-5 E17-9 BE17-6 P17-3A DI17-2 P17-5A E17-4 P17-7A E17-5 P17-9A E17-7 P17-11A

BE17-7 E17-6 P17-2A P17-7A

E17-7 E17-9 P17-7A P17-8A

BE17-8 BE17-9 BE17-10 BE17-11 DI17-3 P17-8A

Q17-8 Q17-18 Q17-21

Q17-19 E17-12 Q17-20 E17-13 BE17-12 P17-4A BE17-13 P17-6A BE17-14 P17-8A E17-10 P17-10A E17-11

Q17-22

BE17-15 E17-14 P17-12A

Broadening Your Perspective

Synthesis

Evaluation

Q17-16 BE17-1 Q17-17 BE17-3 BE17-2 E17-2 DI17-1 E17-3 E17-1 E17-2 P17-1A

*4. Prepare a statement of cash flows using the direct method.

Use a worksheet to prepare the statement of cash flows using the indirect method.

Analysis

Real-World Focus Comparative Analysis Decision Making Across the Organization Communication FASB Codification

P17-7A P17-8A

Financial Reporting

Comp. Analysis Decision Making Across the Organization Ethics Case All About You

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

17-5

ANSWERS TO QUESTIONS 1.

(a) The statement of cash flows reports the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during a period. (b) Disagree. The statement of cash flows is required. It is the fourth basic financial statement.

The statement of cash flows answers the following questions about cash: (a) Where did the cash come from during the period? (b) What was the cash used for during the period? and (c) What was the change in the cash balance during the period?

The three types of activities are: Operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. Investing activities include: (a) acquiring and disposing of investments and property, plant and equipment and (b) lending money and collecting loans. Financing activities include: (a) obtaining cash from issuing debt and repaying amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends.

(a) Major inflows of cash in a statement of cash flows include cash from operations; issuance of debt; collection of loans; issuance of capital stock; sale of investments; and the sale of property, plant, and equipment. (b) Major outflows of cash include purchase of inventory, payment of wages and other operating expenses, payment of cash dividends; redemption of debt; purchase of investments; making loans; redemption of capital stock; and the purchase of property, plant, and equipment.

The statement of cash flows presents investing and financing activities so that even noncash transactions of an investing and financing nature are disclosed in the financial statements. If they affect financial conditions significantly, the FASB requires that they be disclosed in either a separate schedule at the bottom of the statement of cash flows or in a separate note or supplementary schedule to the financial statements.

Examples of significant noncash activities are: (1) issuance of stock for assets, (2) conversion of bonds into common stock, (3) issuance of bonds or notes for assets, and (4) noncash exchanges of property, plant, and equipment.

Comparative balance sheets, a current income statement, and certain transaction data all provide information necessary for preparation of the statement of cash flows. Comparative balance sheets indicate how assets, liabilities, and equities have changed during the period. A current income statement provides information about the amount of cash provided or used by operations. Certain transactions provide additional detailed information needed to determine how cash was provided or used during the period.

The advantage of the direct method is that it presents the major categories of cash receipts and cash payments in a format that is similar to the income statement and familiar to statement users. Its principal disadvantage is that the necessary data can be expensive and time-consuming to accumulate. The advantage of the indirect method is it is often considered easier to prepare, and it focuses on the differences between net income and net cash provided by operating activities. It also tends to reveal less company information to competitors. Its primary disadvantage is the difficulty in understanding the adjustments that comprise the reconciliation. Both methods are acceptable but the FASB expressed a preference for the direct method. Yet, the indirect method is the overwhelming favorite of companies.

17-6

Questions Chapter 17 (Continued) 9.

When total cash inflows exceed total cash outflows, the excess is identified as a “net increase in cash” near the bottom of the statement of cash flows.

10. The indirect method involves converting accrual net income to net cash provided by operating activities. This is done by starting with accrual net income and adding or subtracting noncash items included in net income. Examples of adjustments include depreciation and other noncash expenses, gains and losses on the disposal of noncurrent assets, and changes in the balances of current asset and current liability accounts from one period to the next. 11. It is necessary to convert accrual-based net income to cash-basis income because the unadjusted net income includes items that do not provide or use cash. An example would be an increase in accounts receivable. If accounts receivable increased during the period, revenues reported on the accrual basis would be higher than the actual cash revenues received. Thus, accrual-basis net income must be adjusted to reflect the net cash provided by operating activities. 12. A number of factors could have caused an increase in cash despite the net loss. These are (1) high cash revenues relative to low cash expenses; (2) sales of property, plant, and equipment; (3) sales of investments; (4) issuance of debt or capital stock, and (5) differences between cash and accrual accounting, e.g. depreciation. 13. Depreciation expense. Gain or loss on disposal of a noncurrent asset. Increase/decrease in accounts receivable. Increase/decrease in inventory. Increase/decrease in accounts payable. 14. Under the indirect method, depreciation is added back to net income to reconcile net income to net cash provided by operating activities because depreciation is an expense but not a cash payment. 15. The statement of cash flows is useful because it provides information to the investors, creditors, and other users about: (1) the company’s ability to generate future cash flows, (2) the company’s ability to pay dividends and meet obligations, (3) the reasons for the difference between net income and net cash provided by operating activities, and (4) the cash investing and financing transactions during the period. 16. This transaction is reported in the note or schedule entitled “Noncash investing and financing activities” as follows: “Retirement of bonds payable through issuance of common stock, $1,700,000.” 17. In its 2013 statement of cash flows, Apple reported $53,666 million net cash provided by operating activities, $33,774 million used for investing activities, and $16,379 million used for financing activities. *18. Net cash provided by operating activities under the direct approach is the difference between cash revenues and cash expenses. The direct approach adjusts the revenues and expenses directly to reflect the cash basis. This results in cash net income, which is equal to “net cash provided by operating activities.”

17-7

Questions Chapter 17 (Continued) *19. (a) Cash receipts from customers = Revenues from sales

(b) Purchases = Cost of goods sold

+ Decrease in accounts receivable – Increase in accounts receivable

+ Increase in inventory – Decrease in inventory

Cash payments to suppliers = Purchases

+ Decrease in accounts payable – Increase in accounts payable

*20. Sales revenue........................................................................................................ Add: Decrease in accounts receivable .................................................................. Cash receipts from customers ...............................................................................

$2,000,000 200,000 $2,200,000

*21. 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. *22. A worksheet is desirable because it allows the accumulation and classification of data that will appear on the statement of cash flows. It is an optional but efficient device that aids in the preparation of the statement of cash flows.

17-8

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 17-1 (a) (b) (c) (d)

Cash inflow from financing activity, $200,000. Cash outflow from investing activity, $150,000. Cash inflow from investing activity, $20,000. Cash outflow from financing activity, $50,000.

BRIEF EXERCISE 17-2 (a) Investing activity. (b) Investing activity. (c) Financing activity.

(d) Operating activity. (e) Financing activity. (f) Financing activity.

BRIEF EXERCISE 17-3 Cash flows from financing activities Proceeds from issuance of bonds payable ....................... Payment of dividends.......................................................... Net cash provided by financing activities ..................

$300,000 (50,000) $250,000

BRIEF EXERCISE 17-4 Net income .......................................................... $2,800,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ................................. $160,000 Accounts receivable decrease .................. 350,000 Accounts payable decrease ...................... (280,000) 230,000 Net cash provided by operating activities ... $3,030,000

17-9

BRIEF EXERCISE 17-5 Cash flows from operating activities Net income ........................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense .................................. Loss on disposal of plant assets ................ Net cash provided by operating activities ......

$280,000 $ 70,000 12,000

82,000 $362,000

BRIEF EXERCISE 17-6 Net income ................................................................... Adjustments to reconcile net income to net cash provided by operating activities Decrease in accounts receivable ........................ Increase in inventory ........................................... Increase in prepaid expenses ............................. Net cash provided by operating activities .........

$300,000 $ 80,000 (30,000) (28,000)

22,000 $322,000

BRIEF EXERCISE 17-7 Original cost of equipment sold ................................. Less: Accumulated depreciation............................... Book value of equipment sold.................................... Less: Loss on disposal of equipment....................... Cash received from sale of equipment ......................

$22,000 5,500 16,500 6,500 $10,000

BRIEF EXERCISE 17-8 Free cash flow = $155,793,000 – $132,280,000 – $5,000,000 = $18,513,000 BRIEF EXERCISE 17-9 Free cash flow = $360,000 – $200,000 – $140,000 = $20,000 BRIEF EXERCISE 17-10 Free cash flow = $45,600,000 – $1,600,000 – $0 = $44,000,000

17-10

BRIEF EXERCISE 17-11 Free cash flow is cash provided by operations less capital expenditures and cash dividends paid. For Morrow Inc. this would be $384,000 ($734,000 – $280,000 – $70,000). Since it has positive free cash flow that far exceeds its dividend, an increase in the dividend might be possible. However, other factors should be considered. For example, it must have adequate retained earnings, and it should be convinced that a larger dividend can be sustained over future years. It could also use the free cash flow to expand its operations or pay down its debt. *BRIEF EXERCISE 17-12 Receipts from Sales = customers revenues

+ Decrease in accounts receivable – Increase in accounts receivable

$1,033,678,000 = $1,095,307,000 – $61,629,000 (Increase in accounts receivable) *BRIEF EXERCISE 17-13 + Decrease in income taxes payable

Cash payment Income Tax = for income taxes Expense

– Increase in income taxes payable

$115,000,000 = $340,000,000 – $225,000,000* *$522,000,000 – $297,000,000 = $225,000,000 (Increase in income taxes payable) *BRIEF EXERCISE 17-14

Cash Operating payments for expenses, = excluding operating expenses depreciation

+ Increase in prepaid expenses – Decrease in prepaid expenses and + Decrease in accrued expenses payable – Increase in accrued expenses payable

$69,000 = $80,000 – $6,600 – $4,400 .

17-11

*BRIEF EXERCISE 17-15 Balance 1/1/17 18,600 8,200

Balance Sheet Accounts Prepaid expenses Accrued expenses payable

Reconciling Items Debit Credit (a) 5,600 (b) 2,400

Statement of Cash Flow Effects Operating activities Decrease in prepaid expenses Increase in accrued expenses payable

17-12

(a) 5,600 (b) 2,400 8,000

8,000

Balance 12/31/17 13,000 10,600

SOLUTIONS TO DO IT! REVIEW EXERCISES DO IT! 17-1 1. 2. 3. 4. 5.

Financing activity Operating activity Financing activity Investing activity Investing activity

DO IT! 17-2 Cash flows from operating activities Net income ............................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ........................................ $6,000 Amortization expense .................................... 2,000 Gain on disposal of equipment ..................... (3,600) Decrease in accounts receivable .................. 6,000 Increase in accounts payable........................ 3,200 Net cash provided by operating activities .................................................

$130,000

13,600 $143,600

DO IT! 17-3 (a) Free cash flow = $73,700 – $27,000 – $15,000 = $31,700 (b) Cash provided by operating activities fails to take into account that a company must invest in new plant assets just to maintain the current level of operations. Companies must also maintain dividends at current levels to satisfy investors. The measurement of free cash flow provides additional insight regarding a company’s cash-generating ability.

17-13

SOLUTIONS TO EXERCISES EXERCISE 17-1 (a) (b) (c) (d) (e) (f) (g)

Financing activities. Noncash investing and financing activities. Noncash investing and financing activities. Financing activities. Investing activities. Operating activities. Operating activities.

EXERCISE 17-2 (a) Operating activity. (b) Noncash investing and financing activity. (c) Investing activity. (d) Financing activity. (e) Operating activity. (f) Operating activity. (g) Operating activity. (h) Financing activity.

(i) Operating activity. (j) Noncash investing and financing activity. (k) Investing activity. (l) Noncash investing and financing activity. (m) Operating activity (loss); investing activity (cash proceeds from sale). (n) Financing activity.

EXERCISE 17-3 1. (a) Cash ........................................................... Land.................................................... Gain on Disposal of Plant Assets.....

15,000 12,000 3,000

(b) The cash receipt ($15,000) is reported in the investing section. The gain ($3,000) is deducted from net income in the operating section. 2. (a) Cash ........................................................... Common Stock ..................................

20,000 20,000

(b) The cash receipt ($20,000) is reported in the financing section. 3. (a) Depreciation Expense............................... Accumulated Depreciation— Buildings .........................................

17,000 17,000

(b) Depreciation expense ($17,000) is added to net income in the operating section. 17-14

EXERCISE 17-3 (Continued) 4. (a) Salaries and Wages Expense ............................... Cash ...............................................................

9,000 9,000

(b) Salaries and wages expense is not reported separately on the statement of cash flows. It is part of the computation of net income in the income statement, and is included in the net income amount on the statement of cash flows. 5. (a) Equipment ................................................................... 8,000 Common Stock ............................................... Paid-in Capital in Excess of Par— Common Stock ...........................................

1,000 7,000

(b) The issuance of common stock for equipment ($8,000) is reported as a noncash investing and financing activity at the bottom of the statement of cash flows. 6. (a) Cash ............................................................................ 1,200 Loss on Disposal of Plant Assets ............................. 1,800 Accumulated Depreciation—Equipment................... 7,000 Equipment .......................................................

10,000

(b) The cash receipt ($1,200) is reported in the investing section. The loss ($1,800) is added to net income in the operating section. EXERCISE 17-4 GUTIERREZ COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income .............................................................. Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ..................................... Loss on disposal of equipment...................... Decrease in accounts receivable ................... Decrease in prepaid expenses ....................... Increase in accounts payable......................... Net cash provided by operating activities....... .

$225,000 $45,000 5,000 15,000 4,000 17,000

86,000 $311,000 17-15

EXERCISE 1716 SCOGGIN INC. Partial Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income .......................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ................................. Increase in accounts receivable................. Decrease in inventory ................................. Increase in prepaid expenses .................... Decrease in accounts payable ................... Increase in accrued expenses payable...... Net cash provided by operating activities ....

17-16

$153,000 $24,000 (21,000) 14,000 (5,000) (7,000) 10,000

15,000 $168,000

EXERCISE 1717 HERRICK CORP Partial Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income ........................................................ Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ............................... Loss on disposal of equipment................ Net cash provided by operating activities................................................. Cash flows from investing activities Sale of equipment ............................................. Construction of equipment .............................. Purchase of equipment .................................... Net cash used by investing activities ......

$ 77,000

$ 28,000 7,000

112,000

12,000* (53,000) (70,000) (111,000)

Cash flows from financing activities Payment of cash dividends.............................. *Cost of equipment sold................................... Accumulated depreciation.............................. Book value ....................................................... Loss on sale of equipment ............................. Cash proceeds ................................................

35,000

(14,000) $ 49,000 (30,000) 19,000 (7,000) $ 12,000

17-17

EXERCISE 1718 (a)

ROJAS CORPORATION Statement of Cash Flows For the Year Ended December 31, 2017

Cash flows from operating activities Net income .......................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ................................. Loss on disposal of land ............................ Decrease in accounts receivable ............... Decrease in accounts payable ................... Net cash provided by operating activities ........

$ 22,630 $ 5,000 1,100 2,200 (18,730)

Cash flows from investing activities Sale of land ......................................................... Cash flows from financing activities Issuance of common stock ................................ Payment of dividends......................................... Net cash used by financing activities ...............

4,900 $ 6,000 (19,500) (13,500)

Net increase in cash ................................................. Cash at beginning of period ..................................... Cash at end of period ...............................................

3,600 10,700 $ 14,300

(b) $12,200 – $0 – $19,500 = ($7,300)

17-18

(10,430) 12,200

EXERCISE 1719 VELO COMPANY Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense.......................... Increase in accounts receivable ......... Decrease in inventory ......................... Decrease in accounts payable............ Net cash provided by operating activities ........................................... Cash flows from investing activities Sale of land .................................................. Purchase of equipment............................... Net cash used by investing activities ........................................... Cash flows from financing activities Issuance of common stock ........................ Payment of cash dividends ........................ Redemption of bonds ................................. Net cash used by financing activities ...........................................

$93,000

$34,000 (9,000) 19,000 (8,000)

129,000 25,000 (70,000) (45,000) 42,000 (35,000) (50,000) (43,000)

Net increase in cash ........................................... Cash at beginning of period .............................. Cash at end of period .........................................

36,000

41,000 22,000 $ 63,000

17-19

EXERCISE 1720 (a)

RODRIQUEZ CORPORATION Statement of Cash Flows For the Year Ended December 31, 2017

Cash flows from operating activities Net income................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense........................... $ 5,200* Loss on disposal of equipment ........... 5,500** Increase in accounts receivable .......... (2,900) Increase in accounts payable .............. 3,500 Net cash provided by operating activities ..... Cash flows from investing activities Sale of equipment ....................................... Purchase of investments ............................ Net cash used by investing activities ...........

11,300 29,600

3,300 (4,000) (700)

Cash flows from financing activities Issuance of common stock ......................... $ 5,000 Payment of dividends .................................. (16,400) Retirement of bonds .................................... (20,000) Net cash used by financing activities............

(31,400)

Net increase in cash ........................................... Cash at beginning of period............................... Cash at end of period .........................................

(2,500) 17,700 $ 15,200

*[$14,000 – ($10,000 – $1,200)]

**[$3,300 – ($10,000 – $1,200)]

(b) $29,600 – $0 – $16,400 = $13,200

17-20

$ 18,300

*EXERCISE 17-10 Sales revenue ........................................................... Deduct: Increase in accounts receivable .............. Cash receipts from customers* ....................... Operating expenses ................................................. Deduct: Increase in accounts payable................... Cash payments for operating expenses** ...... Net cash provided by operating activities .............. *

$192,000 (60,000) $132,000 78,000 (23,000) 55,000 $ 77,000

Accounts Receivable Balance, Beginning of year 0 Revenues for the year 192,000 Cash receipts for year Balance, End of year 60,000

Accounts Payable Balance, Beginning of year 55,000 Operating expenses for year Balance, End of year

Payments for the year

132,000

0 78,000 23,000

*EXERCISE 17-11 (a) Cash payments to suppliers Cost of goods sold.................................. Add: Increase in inventory .................... Cost of purchases ................................... Deduct: Increase in accounts payable .... Cash payments to suppliers ..................

$4,852.7 million 18.1 $4,870.8 million 136.9 $4,733.9 million

(b) Cash payments for operating expenses Operating expenses exclusive of depreciation .................................... ($10,671.5 – $1,201) Add: Increase in prepaid expenses ...... $ 56.3 Deduct: Increase in accrued expenses payable .................... 160.9 Cash payments for operating expenses ....

$9,470.5 million

(104.6) $9,365.9 million

17-21

*EXERCISE 17-12 Cash flows from operating activities Cash receipts from Customers .................................................. Dividend revenue .......................................

$230,000* 18,000 $248,000

Less cash payments: To suppliers for merchandise ................... For salaries and wages .............................. For operating expenses ............................. For income taxes........................................ For interest ................................................. Net cash provided by operating activities ...

115,000 53,000 28,000 12,000 10,000

218,000 $ 30,000

*$48,000 + $182,000

*EXERCISE 17-13 Cash payments for rent Rent expense ..................................................... Add: Increase in prepaid rent .......................... Cash payments for rent .....................................

$ 48,000 3,100 $ 51,100

Cash payments for salaries Salaries expense................................................ Add: Decrease in salaries payable .................. Cash payments for salaries ..............................

$ 54,000 2,000 $ 56,000

Cash receipts from customers Sales revenue..................................................... Add: Decrease in accounts receivable............ Cash receipts from customers..........................

$175,000 9,000 $184,000

17-22

*EXERCISE 17-14 INTERNATIONAL COMPANY Worksheet Statement of Cash Flows For the Year Ended December 31, 2017 Reconciling Items

Balance 12/31/16

Balance Sheet Accounts

Debit

Credit

Balance 12/31/17

Debits Cash Accounts receivable Inventory Land Equipment Total

22,000 76,000 189,000 100,000 200,000 587,000

Credits Accumulated depreciation—equipment Accounts payable Bonds payable Common stock Retained earnings Total

42,000 47,000 200,000 164,000 134,000 587,000

(k) (a)

(f)

51,000 9,000 (b) (e)

9,000 25,000

(d)

24,000

(i) (j)

50,000 135,000

(a)

9,000

(c)

13,000

(f)

50,000

(g) (h)

70,000 50,000

50,000

13,000 50,000

(g)

70,000

(j)

135,000

(b)

9,000

(d)

24,000

(e)

25,000

73,000 85,000 180,000 75,000 250,000 663,000 66,000 34,000 150,000 214,000 199,000 663,000

Statement of Cash Flow Effects Operating activities Net income Increase in accounts receivable Decrease in inventory Decrease in accounts payable Depreciation expense Investing activities Sale of land Purchase of equipment Financing activities Payment of dividends Redemption of bonds Issuance of common stock Totals Increase in cash Totals

(i)

50,000 486,000 486,000

435,000 (k) 51,000 486,000

17-23

SOLUTIONS TO PROBLEMS PROBLEM 17-1A

Transaction (a) Recorded depreciation expense on the plant assets. (b) Recorded and paid interest expense. (c) Recorded cash proceeds from a disposal of plant assets. (d) Acquired land by issuing common stock. (e) Paid a cash dividend to preferred stockholders. (f) Paid a cash dividend to common stockholders. (g) Recorded cash sales. (h) Recorded sales on account. (i) Purchased inventory for cash. (j) Purchased inventory on account.

17-24

SCF Activity Affected

Cash Inflow, Outflow, or No Effect?

No cash flow effect

Cash outflow

Cash inflow

No cash flow effect

Cash outflow

O O O O

Cash inflow No cash flow effect Cash outflow No cash flow effect

PROBLEM 17-2A

(a) Net income can be determined by analyzing the retained earnings account. Retained earnings beginning of year .......................... Add: Net income (plug) ................................................

$250,000 75,500* 325,500 15,000 10,500 $300,000

Less: Cash dividends .................................................. Stock dividends................................................. Retained earnings, end of year.................................... *($300,000 + $10,500 + $15,000 – $250,000)

(b) Cash inflow from the issue of stock was $19,500 ($170,000 – $140,000 – $10,500). Common Stock 140,000 10,500 19,500 170,000

Stock Dividend Shares Issued for Cash

Cash outflow for dividends was $15,000. The stock dividend does not use cash. (c) Both of the above activities (issue of common stock and payment of dividends) would be classified as financing activities on the statement of cash flows.

17-25

PROBLEM 1726A WHITLOCK COMPANY Partial Statement of Cash Flows For the Year Ended November 30, 2017 Cash flows from operating activities Net income .......................................................... $1,650,000 Adjustments to reconcile net income to net cash provided by operating activities activities Depreciation expense ............................. $ 70,000 Increase in accounts receivable ........... (200,000) Decrease in inventory ............................. 500,000 Increase in prepaid expenses ................ (150,000) Decrease in accounts payable ............... (340,000) Decrease in accrued expenses payable.... (100,000) (220,000) Net cash provided by operating activities ............................................... $1,430,000

17-26

*PROBLEM 1727A WHITLOCK COMPANY Partial Statement of Cash Flows For the Year Ended November 30, 2017 Cash flows from operating activities Cash receipts from customers ........ Less cash payments: To suppliers............................... For operating expenses ............ Net cash provided by operating activities ........................................

$7,500,000 (1) $4,740,000 (2) 1,330,000 (3)

6,070,000 $1,430,000

Computations: (1) Cash receipts from customers Sales revenue ................................................... Deduct: Increase in accounts receivable ...... Cash receipts from customers ........................

$7,700,000 200,000 $7,500,000

(2) Cash payments to suppliers Cost of goods sold........................................... Deduct: Decrease in inventory ....................... Cost of purchases ............................................ Add: Decrease in accounts payable .............. Cash payments to suppliers ...........................

$4,900,000 500,000 4,400,000 340,000 $4,740,000

(3) Cash payments for operating expenses Operating expenses, exclusive of depreciation .............................. Add: Increase in prepaid expenses .................................. Decrease in accrued expenses payable.................... Cash payments for operating expenses........................................

$1,080,000* $150,000 100,000

250,000 $1,330,000

*($1,150,000 – $70,000)

17-27

PROBLEM 1728A ZUMBRUNN COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income .......................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ................................. $ 60,000 Loss on disposal of equipment .................. 16,000 Increase in accounts receivable................. (10,000) Increase in accounts payable..................... 18,000 Increase in income taxes payable .............. 4,000 Net cash provided by operating activities .....

17-28

$230,000

88,000 $318,000

*PROBLEM 1729A ZUMBRUNN COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Cash receipts from customers ......... Less cash payments: For operating expenses ............. For income taxes........................ Net cash provided by operating activities .........................................

$960,000 (1) $606,000 (2) 36,000 (3)

$318,000

(1) Computation of cash receipts from customers Service revenue ....................................................... Deduct: Increase in accounts receivable ($75,000 – $65,000) ................................... Cash receipts from customers ...............................

$970,000 10,000 $960,000

(2) Computation of cash payments for operating expenses Operating expenses per income statement ........... Deduct: Increase in accounts payable ($46,000 – $28,000) ................................... Cash payments for operating expenses ................ (3) Computation of cash payments for income taxes Income tax expense per income statement ........... Deduct: Increase in income taxes payable ($11,000 – $7,000) ..................................... Cash payments for income taxes ...........................

642,000

$624,000 18,000 $606,000 $ 40,000 4,000 $ 36,000

17-29

PROBLEM 1730A (a)

NOSKER COMPANY Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income ......................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ................................. Increase in accounts receivable ................ Increase in inventory .................................. Increase in accounts payable..................... Decrease in income taxes payable ............ Net cash provided by operating activities....

$32,000 $14,500 (16,000) (7,000) 9,000 (1,000)

Cash flows from investing activities Sale of equipment .............................................. Cash flows from financing activities Issuance of common stock ............................... Redemption of bonds ........................................ Payment of dividends ........................................ Net cash used by financing activities...........

8,500 4,000 (6,000) (20,000) (22,000)

Net increase in cash ................................................ Cash at beginning of period ................................... Cash at end of period ..............................................

18,000 20,000 $38,000

(b) $31,500 – $0 – $20,000 = $11,500

17-30

(500) 31,500

*PROBLEM 1731A (a)

NOSKER COMPANY Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Cash receipts from customers ...... Less cash payments: To suppliers ............................ For operating expenses ......... For income taxes .................... For interest.............................. Net cash provided by operating activities .............

$226,000 (1) $173,000 (2) 9,500 (3) 9,000 (4) 3,000

31,500

Cash flows from investing activities Sale of equipment .......................... Cash flows from financing activities Issuance of common stock ........... Redemption of bonds .................... Payment of dividends .................... Net cash used by financing activities ..............................

194,500

8,500 4,000 (6,000) (20,000) (22,000)

Net increase in cash .............................. Cash at beginning of period ................. Cash at end of period ............................

18,000 20,000 $ 38,000

Computations: (1)

Cash receipts from customers Sales revenue ................................................. Deduct: Increase in accounts receivable..... Cash receipts from customers ..............................

$242,000 16,000 $226,000

17-31

*PROBLEM 17-8A (Continued) (2)

(3)

(4)

Cash payments to suppliers Cost of goods sold ............................................... Add: Increase in inventory .................................. Cost of purchases ................................................ Deduct: Increase in accounts payable ............... Cash payments to suppliers ................................

$175,000 7,000 182,000 9,000 $173,000

Cash payments for operating expenses Operating expenses ............................................. Deduct: Depreciation........................................... Cash payments for operating expenses .............

$ 24,000 14,500 $ 9,500

Cash payments for income taxes Income tax expense.............................................. Add: Decrease in income taxes payable ............. Cash payments for income taxes ........................

$ $

(b) $31,500 – $0 – $20,000 = $11,500

17-32

8,000 1,000 9,000

PROBLEM 17-9A

CHENG INC. Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income ......................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ................................ Loss on disposal of plant assets .............. Increase in accounts receivable ............... Increase in inventory ................................. Increase in prepaid expenses ................... Increase in accounts payable.................... Decrease in accrued expenses payable..... Net cash provided by operating activities....

$158,900 $46,500 7,500 (59,800) (14,650) (2,400) 44,700 (500)

Cash flows from investing activities Sale of plant assets ........................................... Purchase of investments .................................. Purchase of plant assets................................... Net cash used by investing activities..........

1,500 (29,000) (85,000)

Cash flows from financing activities Issuance of common stock ............................... Redemption of bonds ........................................ Payment of cash dividends............................... Net cash used by financing activities........

45,000 (40,000) (40,350)

(112,500)

(35,350)

Net increase in cash.................................................. Cash at beginning of period ..................................... Cash at end of period................................................

21,350 180,250

32,400 48,400 $ 80,800

17-33

*PROBLEM 17-10A

CHENG INC. Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Cash receipts from customers.............. Less cash payments: To suppliers .................................... For income taxes............................ For operating expenses ................. For interest ..................................... Net cash provided by operating activities...................................... Cash flows from investing activities Sale of plant assets ............................... Purchase of investments....................... Purchase of plant assets....................... Net cash used by investing activities...................................... Cash flows from financing activities Issuance of common stock ................... Redemption of bonds ............................ Payment of cash dividends................... Net cash used by financing activities......................................

$332,980 (1) $105,410 (2) 27,280 15,310 (3) 4,730

152,730 180,250

1,500 (29,000) (85,000) (112,500) 45,000 (40,000) (40,350) (35,350)

Net increase in cash ...................................... Cash at beginning of period ......................... Cash at end of period ....................................

32,400 48,400 $ 80,800

Computations: (1) Cash receipts from customers Sales revenue ................................. Deduct: Increase in accounts receivable................................. Cash receipts from customers ...... 17-34

$392,780 59,800 $332,980 .

*PROBLEM 17-10A (Continued) (2) Cash payments to suppliers Cost of goods sold ................................................ Add: Increase in inventory................................... Cost of purchases ................................................. Deduct: Increase in accounts payable ................ Cash payments to suppliers ................................. (3) Cash payments for operating expenses Operating expenses exclusive of depreciation............................................. Add: Increase in prepaid expenses......... $2,400 Decrease in accrued expenses payable ........................................... 500 Cash payment for operating expenses ....

$135,460 14,650 150,110 44,700 $105,410

$ 12,410 2,900 $ 15,310

17-35

PROBLEM 17-11A

ROTHLISBERGER COMPANY Statement of Cash Flows For the Year Ended December 31, 2017 Cash flows from operating activities Net income ........................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense .................................. Loss on disposal of equipment ................... Decrease in accounts receivable ................ Increase in inventory ................................... Decrease in prepaid expenses .................... Increase in accounts payable...................... Net cash provided by operating activities ..... Cash flows from investing activities Sale of land........................................................... Sale of equipment ................................................ Purchase of equipment ....................................... Net cash used by investing activities .........

$ 42,000 $42,000 4,000* 21,000 (9,450) 5,720 7,730

71,000 113,000

25,000 6,000 (88,000) (57,000)

Cash flows from financing activities Payment of cash dividends .................................

(20,000)

Net increase in cash .................................................... Cash at beginning of period ....................................... Cash at end of period ..................................................

36,000 45,000 $ 81,000

Noncash investing and financing activities Conversion of bonds by issuance of common stock..........................................

$ 40,000

*($6,000 – $10,000)

17-36

*PROBLEM 17-12A

OAKLEY COMPANY Worksheet—Statement of Cash Flows For the Year Ended December 31, 2017 Reconciling Items Debit Credit

Balance 12/31/16

Balance Sheet Accounts

Balance 12/31/17

Debits Cash Accounts receivable Inventory Investments Equipment Totals Credits Accumulated depreciation—equipment Accounts payable Accrued expenses payable Bonds payable Common stock Retained earnings Totals Statement of Cash Flow Effects Operating activities Net income Increase in accounts receivable Increase in inventory Increase in accounts payable Decrease in accrued expenses payable Depreciation expense Gain on disposal of equipment Investing activities Sale of investments Sale of equipment Purchase of equipment Financing activities Issuance of common stock Issuance of bonds Payment of dividends Totals Increase in cash Totals

47,250 57,000 102,650 87,000 205,000 498,900

(m) (a) (b)

35,450 33,800 24,250

(f)

97,000

40,000 48,280 18,830 70,000 200,000 121,790 498,900

(h)

40,200

(d)

6,730

(l)

83,400

(e) (h)

2,500 47,000

(g) (c)

49,700 9,420

(i) 30,000 (j) 50,000 (k) 132,210

82,700 90,800 126,900 84,500 255,000 639,900 49,500 57,700 12,100 100,000 250,000 170,600 639,900

(k) 132,210 (c)

9,420

(g)

49,700

(e) (h) (j) (i)

(a) (b)

33,800 24,250

(d)

6,730

(h)

8,750

(f)

97,000

2,500 15,550 50,000 30,000 (l) 610,210 610,210

83,400 574,760 (m) 35,450 610,210

17-37

BYP 17-1

FINANCIAL REPORTING PROBLEM

(a) Net cash provided by operating activities: 2013 2012

$53,666 million $50,856 million

(b) The increase in cash and cash equivalents for the year ended September 28, 2013 was $3,513 million, and the increase was $931 million for the year ended September 29, 2012. (c) Apple uses the indirect method of computing and presenting the net cash provided by operating activities. (d) The change in accounts receivable used cash of $2,172 million in 2013. The change in inventories used cash of $973 million in 2013. The change in accounts payable provided cash of $2,340 million in 2013. (e) The net cash used by investing activities in 2013 was $33,774 million. (f)

17-38

Under the “Supplemental cash flow disclosure” section cash flow information disclosed income taxes paid of $9,128 million in 2013.

BYP 17-2

(a)

COMPARATIVE ANALYSIS PROBLEM

All amounts in millions $9,688 – $2,795 – $3,434 =

PepsiCo $3,459

Coca-Cola

$10,542 – $2,550 – $4,969 =

$3,023

(b) The companies are similar in their ability to generate cash. Both had a significant amount of “free cash” available after covering capital expenditures and cash dividends.

17-39

BYP 17-3

COMPARATIVE ANALYSIS PROBLEM

All amounts in millions $5,475 – $3,444 – $0 =

(a)

Amazon $2,031

Wal-Mart

$23,257 – $13,115 – $6,139 =

$4,003

(b) Both companies had a significant amount of “free cash” available after covering capital expenditures and cash dividends (for Wal-Mart). WalMart’s free cash flow is almost twice as large as Amazon’s, even after paying over $6,000 million more dividends.

17-40

BYP 17-4

(a)

DECISION MAKING ACROSS THE ORGANIZATION

GUTHRIE COMPANY Statement of Cash Flows For the Year Ended January 31, 2017 Cash flows from operating activities Net loss ................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense..................... Gain from sale of investment......... Net cash provided by operating activities ...................................... Cash flows from investing activities Sale of investment ................................. Purchase of investment......................... Purchase of fixtures and equipment..... Net cash used by investing activities ...................................... Cash flows from financing activities Sale of capital stock............................... Purchase of treasury stock ................... Net cash provided by financing activities ...................................... Net increase in cash ...................................... Cash at beginning of period ......................... Cash at end of period ....................................

$ (30,000)*

$ 55,000 (5,000)

20,000

80,000 (75,000) (330,000) (325,000)

420,000 (10,000) 410,000 105,000 140,000 $245,000

Noncash investing and financing activities Issuance of note for truck .....................

50,000

$ 20,000

17-41

BYP 17-4 (Continued) *Computation of net income (loss) Sales of merchandise .............................. Interest revenue........................................ Gain on sale of investment ($80,000 – $75,000) ............................... Total revenues and gains ................. Merchandise purchased .......................... Operating expenses ($160,000 – $55,000) ............................. Depreciation ............................................. Interest expense ....................................... Total expenses.................................. Net loss .....................................................

$380,000 6,000 5,000 391,000 $258,000 105,000 55,000 3,000 421,000 $ (30,000)

(b) From the information given, it appears that from an operating standpoint, Guthrie Company did not have a superb first year, having suffered a $30,000 net loss. Mary is correct; the statement of cash flows is not prepared in correct form. The correct format classifies cash flows from three activities—operating, investing, and financing; and it also presents significant noncash investing and financing activities in a separate schedule. Mary is wrong, however, about the actual increase in cash not being $105,000; $105,000 is the correct increase in cash.

17-42

BYP 17-5

REAL-WORLD FOCUS

(a) Crucial to the SEC’s effectiveness is its enforcement authority. Each year the SEC brings hundreds of civil enforcement actions against individuals and companies that break the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them. (b) The main purposes of these laws can be reduced to two common-sense notions: ⯈ Companies publicly offering securities for investment dollars must

tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing. ⯈ People who sell and trade securities—brokers, dealers, and exchan-

ges—must treat investors fairly and honestly, putting investors’ interests first. (c) President Franklin Delano Roosevelt appointed Joseph P. Kennedy, President John F. Kennedy’s father, to serve as the first Chairman of the SEC.

17-43

BYP 17-6

REAL-WORLD FOCUS

Answers will vary depending on the company chosen by the student.

17-44

BYP 17-7

COMMUNICATION ACTIVITY

MEMO To:

Will Hardin

From:

Student

Re:

Statement of cash flows

The statement of cash flows provides information about the cash receipts and cash payments of a firm, classified as operating, investing, and financing activities. The operating activities section of the company’s statement of cash flows shows that cash increased by $172,000 as a result of transactions which affected net income. This amount is computed by adjusting net income for those items which affect net income, but do not affect cash, such as sales on account which remain uncollected at year-end. The investing activities section of the statement reports cash flows resulting from changes in investments and other long-term assets. The company had a cash outflow from investing activities due to purchases of buildings and equipment. The financing activities section of the statement reports cash flows resulting from changes in long-term liabilities and stockholders’ equity. The company had a cash inflow from financing activities due to the issuance of common stock and an outflow due to the payment of cash dividends. If you have any further questions, please do not hesitate to contact me.

17-45

BYP 17-8

ETHICS CASE

(a) The stakeholders in this situation are: Samuel Gunkle, president of Wesley Corporation. Gerald Rondelli, controller. The Board of Directors. The stockholders of Wesley Corporation. (b) The president’s statement, “We must get that amount above $1 million,” puts undue pressure on the controller. This statement along with his statement, “I know you won’t let me down, Gerald,” encourages Gerald to do something unethical. Controller Gerald Rondelli’s reclassification (intentional misclassification) of a cash inflow from a long-term note (financing activity) issuance to an “increase in payables” (operating activity) is inappropriate and unethical. (c) It is unlikely that any board members (other than board members who are also officers of the company) would discover the misclassification. Board members generally do not have detailed enough knowledge of their company’s transactions to detect this misstatement. It is possible that an officer of the bank that made the loan would detect the misclassification upon close reading of Wesley Corporation’s statement of cash flows. It is also possible that close scrutiny of the balance sheet showing an increase in notes payable (long-term debt) would reveal that there is no comparable financing activity item (proceeds from note payable) in the statement of cash flows.

17-46

BYP 17-9

ALL ABOUT YOU

(a) The article describes three factors that determine how much money you should set aside. (1) Your willingness to take risk. You need to evaluate how willing you are to experience wide swings in your financial position. (2) Your needs. Your need to carefully evaluate your situation and evaluate the possibility of various events and what the financial implications would be. This is also impacted by the number of dependents you have. (3) Your upcoming expenses. Here you need to look further out into the horizon and consider the implications of larger events such as a big trip, a wedding, or education costs. (b) They recommend having at least three months of living expenses set aside, and up to six months. (c) Responses to this question will vary. What is most important is that students begin the process of considering their cash needs and developing a plan to set aside enough money to provide a cushion in the event of a financial “hiccup.”

17-47

BYP 17-10

FASB CODIFICATION ACTIVITY

(a) Cash equivalents are short-term, highly liquid investments that have both of the following characteristics: a. Readily convertible to known amounts of cash b. So near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under that definition. Original maturity means original maturity to the entity holding the investment. For example, both a three-month U.S. Treasury bill and a three-year U.S. Treasury note purchased three months from maturity qualify as cash equivalents. However, a Treasury note purchased three years ago does not become a cash equivalent when its remaining maturity is three months. Examples of items commonly considered to be cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for an entity with banking operations). (b) Financing activities include obtaining resources from owners and providing them with a return on, and a return of, their investment; receiving restricted resources that by donor stipulation must be used for long-term purposes; borrowing money and repaying amounts borrowed, or otherwise setting the obligation; and obtaining and paying for other resources obtained from creditors on long-term credit. (c) Investing activities include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment and other productive assets, that is, assets held for or used in the production of goods or services by the entity (other than materials that are part of the entity’s inventory). Investing activities exclude acquiring and disposing of certain loans or other debt or equity instruments that are acquired specifically for resale, as discussed in paragraph 230-10-45-12 and 230-10-45-21.

17-48

BYP 17-10 (Continued) (d) Operating activities include all transactions and other events that are not defined as investing or financing activities (see paragraph 230-1045-12 through 45-15). Operating activities generally involve producing and delivering goods and providing services. Cash flow from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. (e) The primary objective of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an entity during a period. As indicated in the glossary at this same section, cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty. All charges and credits to those accounts are cash receipts or payments to both the entity owning the account and the bank holding it. For example, a bank’s granting of a loan by crediting the proceeds to a customer’s demand deposit account is a cash payment by the bank and a cash receipt of the customer when the entry is made. Thus, the basis for the statement of cash flows is cash, not broader measures of liquidity, like working capital. (f)

Information about all investing and financing activities of an entity during a period that affect recognized assets or liabilities but that do not result in cash receipts or cash payments in the period shall be disclosed. Those disclosures may be either narrative or summarized in a schedule, and they shall clearly relate the cash and noncash aspects of transactions involving similar items.

17-49

IFRS EXERCISES

IFRS 17-1 Under IFRS bank overdrafts are treated as part of cash and cash equivalents on the balance sheet. As a result, on the statement of cash flows they are part of the change in cash in cash equivalents. In contrast, under GAAP they are treated as a liability on the balance sheet, as a source of financing on the statement of cash flows. IFRS 17-2 The treatment of these items under IFRS and GAAP is as follows: IFRS

GAAP Operating Operating Financing Operating

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

Interest paid Interest received Dividends paid Dividends received

Operating or financing Operating or investing Operating or financing Operating or investing

17-50

IFRS 17-3 INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a)

The company reports interest paid as an operating activity.

(b)

The company reports dividends received as an operating activity.

(c)

Under GAAP bank overdrafts are not reported in cash and cash equivalents. Instead they are treated as a financing activity, and would be reported on the balance sheet as a liability.

17-51

CHAPTER 18 Financial Statement Analysis ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief Exercises

Do It!

Exercises

Problems

Apply horizontal and vertical analysis to financial statements.

1, 2, 3, 4, 5, 6, 23

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

1, 2, 3, 4

Analyze a company’s performance using ratio analysis.

5, 6, 7, 8, 9, 10, 11,12, 13, 14, 15, 16, 17, 18, 19

2, 9, 10, 11, 12, 13

5, 6, 7, 8, 9, 10, 11

1, 2, 3, 4, 5, 6, 7

Apply the concept of sustainable income.

20, 21, 22

14, 15

12, 13

8, 9

1852

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

18-2

Description

Difficulty Level

Time Allotted (min.)

Prepare vertical analysis and comment on profitability.

Simple

20–30

Compute ratios from balance sheet and income statement.

Simple

20–30

Perform ratio analysis, and evaluate financial position and operating results.

Simple

20–30

Compute ratios, and comment on overall liquidity and profitability.

Moderate

30–40

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

Moderate

50–60

Compute numerous ratios.

Simple

30–40

Compute missing information given a set of ratios.

Complex

30–40

Prepare a statement of comprehensive income.

Moderate

30–40

Prepare a statement of comprehensive income.

Moderate

30–40

WEYGANDT ACCOUNTING PRINCIPLES 12E CHAPTER 18 FINANCIAL STATEMENT ANALYSIS Number

Difficulty

Time (min.)

BE1

Moderate

10–12

BE2

1, 2

K, AP

Simple

8–10

BE3

Simple

6–8

BE4

Simple

6–8

BE5

Simple

4–6

BE6

Simple

4–6

BE7

Simple

4–6

BE8

Simple

5–7

BE9

Simple

4–6

BE10

Simple

3–5

BE11

Simple

6–8

BE12

Moderate

6–8

BE13

Moderate

6–8

BE14

Simple

4–6

BE15

Simple

3–5

DI1

Simple

6–8

DI2

Simple

10–12

DI3

Simple

6–8

EX1

Simple

10–12

EX2

Simple

10–12

EX3

Simple

12–15

EX4

Simple

10–12

EX5

Simple

8–10

EX6

Simple

8–10

EX7

Simple

6–8

EX8

Simple

6–8

EX9

Simple

6–8

EX10

Moderate

8–10

18-3

FINANCIAL STATEMENT ANALYSIS (Continued) Number

Difficulty

Time (min.)

EX11

Simple

10–12

EX12

Moderate

8–10

EX13

Simple

6–8

1, 2

Simple

20–30

AP, AN

Simple

20–30

AP, AN

Simple

20–30

Moderate

30–40

Moderate

50–60

Simple

30–40

Complex

30–40

Moderate

30–40

Moderate

30–40

BYP1

1, 2

AN, E

Moderate

20–25

BYP2

1, 2

AN, E

Simple

15–20

BYP3

1, 2

AN, E

Simple

15–20

BYP4

—

Simple

15–20

BYP5

C, E

Moderate

15–20

BYP6

1, 3

Simple

15–20

BYP7

Simple

10–15

BYP8

—

Simple

15–20

BYP9

Simple

5–10

18-4

Learning Objective

Knowledge

Comprehension

Application

Analysis

1. Apply horizontal and vertical Q18-6 analysis to financial statements. BE18-2 Q18-23

Q18-1 Q18-2 Q18-3 Q18-5 BE18-1

Q18-4 BE18-2 BE18-3 BE18-4 BE18-5 BE18-6 BE18-7

2. Analyze a company’s performance using ratio analysis.

Q18-5 Q18-7 Q18-9 Q18-10 Q18-11 Q18-12 Q18-13

Q18-14 Q18-19 Q18-15 BE18-2 Q18-16 BE18-9 Q18-17 BE18-10 Q18-18 DI18-2 E18-6 E18-7

3. Apply the concept of sustainable income.

Q18-20 Q18-21 Q18-22

BE18-14 BE18-15 DI18-3 E18-12

Broadening Your Perspective

Decision Making FASB Codification Financial Reporting Across the Comp. Analysis Organization Real-World Focus Communication

Q18-6 Q18-8 BE18-2

Synthesis

Evaluation

BE18-8 DI18-1 E18-1 E18-2 E18-3 E18-4 P18-1 E18-8 BE18-11 E18-9 BE18-12 E18-10 BE18-13 P18-2 E18-5 P18-3 E18-11 P18-5 P18-1 P18-6

P18-2 P18-3 P18-4 P18-7

E18-13 P18-8 P18-9 Financial Reporting Comp. Analysis Decision Making Across the Organization Ethics Case All About You

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

18-5

ANSWERS TO QUESTIONS 1.

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

(a) Comparison of financial information can be made on an intracompany basis, an intercompany basis, and an industry average basis (or norms). (1) An intracompany basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years. (2) The industry averages basis compares an item or financial relationship of a company with industry averages (or norms) published by financial rating services. (3) An intercompany basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies. (b) The intracompany basis of comparison is useful in detecting changes in financial relationships and significant trends within a company. The industry averages basis provides information as to a company’s relative performance within the industry. The intercompany basis of comparison provides insight into a company’s competitive position.

Horizontal analysis (also called trend analysis) measures the dollar and percentage increase or decrease of an item over a period of time. In this approach, the amount of the item on one statement is compared with the amount of that same item on one or more earlier statements. Vertical analysis (also called common-size analysis) expresses each item within a financial statement in terms of a percent of a base amount.

(a) $390,000 X 1.245 = $485,550, 2018 net income. (b) $390,000 ÷ .06 = $6,500,000, 2017 revenue.

A ratio expresses the mathematical relationship between one quantity and another. The relationship is expressed in terms of either a percentage (200%), a rate (2 times), or a simple proportion (2:1). Ratios can provide clues to underlying conditions that may not be apparent from individual financial statement components. The ratio is more meaningful when compared to the same ratio in earlier periods or to competitors’ ratios or to industry ratios.

(a) Liquidity ratios: Current ratio, acid-test ratio, accounts receivable turnover, and inventory turnover. (b) Solvency ratios: Debt to assets and times interest earned.

Julie is correct. A single ratio by itself may not be very meaningful and is best interpreted by comparison with: (1) past ratios of the same company, (2) ratios of other companies, or (3) industry norms or predetermined standards. In addition, other ratios of the enterprise are necessary to determine overall financial well-being.

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

18-6

Questions Chapter 18 (Continued) 9.

The current ratio relates current assets to current liabilities. The acid-test ratio relates cash, short-term investments, and net receivables to current liabilities. The current ratio includes inventory and prepaid expenses while the acid-test ratio excludes these. The acid-test ratio provides additional information about short-term liquidity and is an important complement to the current ratio.

10.

Hizar Company does not necessarily have a problem. The accounts receivable turnover can be misleading in that some companies encourage credit and revolving charge sales and slow collections in order to earn a healthy return on the outstanding receivables in the form of high rates of interest.

11.

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

12.

The price earnings (P/E) ratio is a reflection of investors’ assessments of a company’s future earnings. In this question, investors favor Microsoft because it has the higher P/E ratio. The investors feel that Microsoft will be able to generate even higher future earnings and so the investors are willing to pay more for the stock.

13.

The payout ratio is cash dividends divided by net income. In a growth company, the payout ratio is often low because the company is reinvesting earnings in the business.

14.

(a) The increase in profit margin is good news because it means that a greater percentage of net sales is going towards income. (b) The decrease in inventory turnover signals bad news because it is taking the company longer to sell the inventory and consequently there is a greater chance of inventory obsolescence. (c) An increase in the current ratio signals good news because the company improved its ability to meet maturing short-term obligations. (d) The earnings per share ratio is a deceptive ratio. The decrease might be bad news to the company because it could mean a decrease in net income. If there is an increase in stockholders’ investment (as a result of issuing additional shares) and a decrease in EPS, then this means that the additional investment is earning a lower return (as compared to the return on common equity before the additional investment). Generally, this is undesirable. (e) The increase in the price-earnings ratio is generally good news because it means that the market price per share of stock has increased and investors are willing to pay that higher price for the stock. An increase in the P/E ratio is good news for investors who own the stock and don’t want to buy any more. It is bad news for investors who want to buy (or buy more of) the stock. (f) The increase in the debt to assets ratio is bad news because it means that the company has increased its obligations to creditors and has lowered its equity “buffer.” (g) The decrease in the times interest earned is bad news because it means that the company’s ability to meet interest payments as they come due has weakened.

Asset turnover. Inventory turnover. Return on common stockholders’ equity. Times interest earned.

18-7

Questions Chapter 18 (Continued)

Net Income Return on assets = Average Assets (7.6%)

15.

Net Income – Preferred Dividends Return on common stockholders’ equity = Average Common Stockholders' Equity (12.8%) The difference between the two rates can be explained by looking at the denominator value and by remembering the basic accounting equation, A = L + SE. The asset value will clearly be the larger of the two denominator values; therefore, it will also give the smaller return. 16.

(a) The times interest earned, which is an indication of the company’s ability to meet interest payments, and the debt to assets ratio, which indicates the company’s ability to withstand losses without impairing the interests of creditors. (b) The current ratio and the acid-test ratio, which indicate a company’s liquidity and short-term debt-paying ability. (c) The earnings per share and the return on common stockholders’ equity, both of which indicate the earning power of the investment.

17.

Earnings per share means earnings per share of common stock. Preferred dividends are subtracted from net income in computing EPS in order to obtain income available to common stockholders.

18.

(a) Trading on the equity means that the company has borrowed money at a lower rate of interest than it is able to earn by using the borrowed money. Simply stated, it is using money supplied by nonowners to increase the return to the owners. (b) A comparison of the return on total assets with the rate of interest paid for borrowed money indicates the profitability of trading on the equity.

19.

Net income – Preferred dividends Weighted – average common shares outstanding = Earnings per share $160,000 – $40,000

= $2.40

50,000 EPS of $2.40 is high relative to what? Is it high relative to last year’s EPS? The president may be comparing the EPS of $2.40 to the market price of the company’s stock. 20.

Discontinued operations refers to the disposal of a significant component of the business such as the stopping of an entire activity or eliminating a major class of customers. It is important to report discontinued operations separately from continuing operations because the discontinued component will not affect future income statements.

21.

EPS on income from continuing operations usually is more relevant to an investment decision than EPS on net income. Income from continuing operations represents the results of continuing and ordinary business activity. It is therefore a better basis for predicting future operating results than an EPS figure which includes the effect of discontinued operations that are not expected to recur again in the foreseeable future.

18-8

Questions Chapter 18 (Continued) 22.

When comparing EPS trends, discontinued operations should be omitted since they are not reflective of normal operations. In this example, the trend is unfavorable because EPS, exclusive of discontinued operations, has decreased from $3.20 to $2.99.

23.

The following provide examples of horizontal and vertical analysis: Horizontal Analysis: Financial Highlights; Results of operations-consolidated reviews; Result of Operations–Division Review; and Reconciliation of GAAP and Non-GAAP information. Vertical Analysis: Pie charts; Asset category allocation; and Reconciliation of GAAP and NonGAAP information.

18-9

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 18-1 Dear Uncle Sammy, It was so good to hear from you! I hope you and Aunt Jennie are still enjoying your new house. You asked some interesting questions. They relate very well to the material that we are studying now in my financial accounting class. You said you heard that different users of financial statements are interested in different characteristics of companies. This is true. A short-term creditor, such as a bank, is interested in the company’s liquidity, or ability to pay obligations as they become due. The liquidity of a borrower is extremely important in evaluating the safety of a loan. A long-term creditor, such as a bondholder, would be interested in solvency, the company’s ability to survive over a long period of time. A long-term creditor would also be interested in profitability. They are interested in the likelihood that the company will survive over the life of the debt and be able to meet interest payments. Stockholders are also interested in profitability, and in the solvency of the company. They want to assess the likelihood of dividends and the growth potential of the stock. It is important to compare different financial statement elements to other items. The amount of a financial statement element such as cash does not have much meaning unless it is compared to something else. Comparisons can be done on an intracompany basis. This basis compares an item or financial relationship within a company for the current year to one or more previous years. Intracompany comparisons are useful in detecting changes in financial relationships and significant trends. Comparisons can also be done with industry averages. This basis compares an item or financial relationship with industry averages or norms. Comparisons with industry averages provide information as to a company’s relative performance within the industry. Finally, comparisons can be done on an intercompany basis. This basis compares an item or financial relationship with the same item or relationship in one or more competing companies. Intercompany comparisons are useful in determining a company’s competitive position. I hope this answers your questions. If it does not, or you have more questions, please write me again or call. We could even meet for lunch sometime; it would be great to see you! Love, Your niece (or nephew) 18-10

BRIEF EXERCISE 18-2 (a) The three tools of financial statement analysis are horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis evaluates a series of financial statement data over a period of time. Vertical analysis evaluates financial statement data by expressing each item in a financial statement as a percent of a base amount. Ratio analysis expresses the relationship among selected items of financial statement data. (b) Horizontal Analysis 2016 100%

Current assets

2017 105%

2018 120%

(105% = $210,000/$200,000; 120% = $240,000/$200,000) Vertical Analysis 2016 40%

Current assets*

2017 35%

2018 39%

*as a percentage of total assets (40% = $200,000/$500,000; 35% = $210,000/$600,000; 39% = $240,000/$620,000) Ratio Analysis 2016 1.33:1

Current ratio

2017 1.25:1

2018 1.30:1

(1.33 = $200,000/$150,000; 1.25 = $210,000/$168,000; 1.30 = $240,000/$184,000) BRIEF EXERCISE 18-3 Horizontal analysis:

Dec. 31, 2017 Dec. 31, 2016 Accounts receivable $ 520,000 $ 400,000 Inventory $ 840,000 $ 600,000 Total assets $3,000,000 $2,500,000 $240,000 = .40 $600,000

$120,000 = .30 $400,000 .

Increase or (Decrease) Amount Percentage $120,000 30% $240,000 40% $500,000 20%

$500,000 = .20 $2,500,000 .

18-11

BRIEF EXERCISE 18-4 Vertical analysis: Dec. 31, 2017 Accounts receivable Inventory Total assets

Amount $ 520,000 $ 840,000 $3,000,000

Dec. 31, 2016

Percentage* Amount Percentage** 17.3% $ 400,000 16.0% 28.0% $ 600,000 24.0% 100% $2,500,000 100%

* $520,000 = .173 $3,000,000

** $400,000 = .16 $2,500,000

* $840,000 = .28 $3,000,000

** $600,000 = .24 $2,500,000

BRIEF EXERCISE 18-5

Net income

(a) 2016–2017 (b) 2017–2018

2018 $522,000

2017 $450,000

2016 $500,000

Increase or (Decrease) Amount Percentage (50,000) (10%) 72,000 16% $72,000 = .16 $450,000

$50,000 = .10 $500,000

BRIEF EXERCISE 18-6

Net income .20 =

2017 $585,000

2016 X

Increase 20%

$585,000 – X X

.20X = $585,000 – X 18-12

BRIEF EXERCISE 18-6 (Continued) 1.20X = $585,000 X = $487,500 2016 Net income = $487,500

BRIEF EXERCISE 18-7 Comparing the percentages presented results in the following conclusions: The net income for Dody increased in 2017 because of the combination of an increase in sales and a decrease in both cost of goods sold and expenses. However, the reverse was true in 2018 as sales decreased while both cost of goods sold and expenses increased. This resulted in a decrease in net income.

BRIEF EXERCISE 18-8 2018 100.0% 60.2% 25.0% 14.8%

Sales Cost of goods sold Expenses Net income

2017 100.0% 62.4% 25.6% 12.0%

2016 100.0% 63.5% 27.5% 9.0%

Net income as a percent of sales for Kochheim increased over the threeyear period because cost of goods sold and expenses both decreased as a percent of sales every year.

BRIEF EXERCISE 18-9 (a) Working capital = Current assets – Current liabilities Current assets Current liabilities Working capital

$45,918,000 (40,644,000) $ 5,274,000

18-13

BRIEF EXERCISE 18-9 (Continued) (b) Current ratio: Current assets $45,918,000 = $40,644,000 Current liabilities = 1.13:1 (c) Acid-test ratio: Cash + Short-term investments + Receivables (net) Current liabilities

$8,041,000 + $4,947,000 + $12,545,000 $40,644,000

$25,533,000 $40,644,000

= .63:1 BRIEF EXERCISE 18-10 (a) Asset turnover =

Net sales Average assets

$95,000,000 $14,000,000 + $18,000,000 2

= 5.9 times

(b) Profit margin

Net income Net sales

$11,440,000 $95,000,000

= 12.0% 18-14

BRIEF EXERCISE 18-11 Net credit sales

(a) Accounts Receivable turnover =

Average net accounts receivable 2018

2017

(1)

$3,960,000 = 7.4 times $535,000* *($520,000 + $550,000) ÷ 2

(2)

Average collection period

$3,100,000 = 6.2 times $500,000** **($480,000 + $520,000) ÷ 2

365

365 = 49.3 days 7.4

= 58.9 days

6.2

(b) Rainsberger Company should be pleased with the effectiveness of its credit and collection policies. The company has decreased the average collection period by 9.6 days and the collection period of approximately 49 days is well within the 60 days allowed in the credit terms. BRIEF EXERCISE 18-12 Cost of goods sold

(a) Inventory turnover =

Average inventory (1)



2017

2016

 $4,260,000 = 4.3 times  $940,000 + $1,020,000    2

 $4,581,000 = 5.1 times  $860,000 + $940,000    2















Beginning inventory $ 940,000 Purchases 4,340,000 Goods available for sale 5,280,000 Ending inventory 1,020,000 Cost of goods sold $4,260,000

$ 860,000 4,661,000 5,521,000 940,000 $4,581,000

(2) Days in inventory 365 = 84.9 days 4.3 .

365 5.1

= 71.6 days

18-15

BRIEF EXERCISE 18-12 (Continued) (b) Management should be concerned with the fact that inventory is moving slower in 2017 than it did in 2016. The decrease in the turnover could be because of poor pricing decisions or because the company is stuck with obsolete inventory.

BRIEF EXERCISE 18-13 Payout ratio =

Cash dividends Net income X

.20 =

$66,000 X = $66,000 (.20) = $13,200 Cash dividends = $13,200 Return on assets =

Net income Average assets .15 =

$66,000 X

.15X = $66,000 X=

$66,000 .15

X = $440,000 Average assets = $440,000

18-16

BRIEF EXERCISE 18-14 SILVA CORPORATION Partial Statement of Comprehensive Income Income before income taxes ......................................................... Income tax expense ($450,000 X 25%).......................................... Net income...................................................................................... Unrealized gain on available for sale securities, net of $17,500 income taxes ($70,000 X 25%) ............................................... Comprehensive income .................................................................

$450,000 112,500 337,500 52,500 $390,000

BRIEF EXERCISE 18-15 HOLLOWAY CORPORATION Partial Income Statement Loss from operations of discontinued division, net of $60,000 income tax saving ($300,000 X 20%) ....... $240,000 Loss from disposal of discontinued division, net of $24,000 income tax saving ($120,000 X 20%) ......... 96,000 $336,000 SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 18-1

Current assets Plant assets Total assets

Amount $(21,000) 41,000 $ 20,000

Increase (Decrease) in 2017 Percent (9.5)% [($199,000 – $220,000) ÷ $220,000] 5.3% [($821,000 – $780,000) ÷ $780,000] 2.0% [($1,020,000 – $1,000,000) ÷ $1,000,000]

18-17

DO IT! 18-2 2017 (a) Current ratio: $1,380 ÷ $900 = $1,310 ÷ $790 =

1.53:1

(b) Inventory turnover: $955/[($460 + $390) ÷ 2)] = $890/[($390 + $340) ÷ 2)]=

2.25 times

7.7%

(d) Return on assets: $294/[($2,340 + $2,210) ÷ 2)] = $154/[($2,210 + $1,900) ÷ 2)] =

12.9%

(e) Return on common stockholders’ equity: $294/[($1,030 + $1,040) ÷ 2)] = $154/[$1,040 + $900) ÷ 2)] =

28.4%

(f)

1.66:1

Debt to assets ratio: $1,310 ÷ $2,340 = $1,170 ÷ $2,210 =

2.44 times

4.5%

7.5%

15.9% 56.0% 52.9%

(g) Times interest earned: ($294 + $126 + $25) ÷ $25 = ($154 + $66 + $20) ÷ $20 =

18-18

2016

17.8 times 12.0 times

DO IT! 18-3 HRABIK CORPORATION Statement of Comprehensive Income (Partial) Income before income taxes ........................................ Income tax expense ...................................................... Income from continuing operations ............................ Discontinued operations Loss from operations of discontinued division, net of $12,000 income tax saving ............ $48,000 Gain from disposal of discontinued division, net of $8,000, taxes .............................. 32,000 Net income..................................................................... Unrealized loss on available for sale securities, net of $30,000 income taxes ($150,000  20%) ......... Comprehensive income ................................................

$500,000 100,000 400,000

16,000 384,000 120,000 $264,000

18-19

SOLUTIONS TO EXERCISES EXERCISE 18-1 KURZEN INC. Condensed Balance Sheets December 31 Increase or (Decrease) Amount Percentage

2017

2016

Assets Current assets Plant assets (net) Total assets

$125,000 396,000 $521,000

$100,000 330,000 $430,000

$25,000 66,000 91,000

25.0% 20.0% 21.2%

Liabilities Current liabilities Long-term liabilities Total liabilities

$ 91,000 133,000 224,000

$ 70,000 95,000 165,000

$21,000 38,000 59,000

30.0% 40.0% 35.8%

161,000 136,000

115,000 150,000

46,000 (14,000)

40.0% (9.3%)

297,000

265,000

32,000

12.1%

$521,000

$430,000

$91,000

21.2%

Stockholders’ Equity Common stock, $1 par Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

18-20

EXERCISE 1821 NAVARRO CORPORATION Condensed Income Statements For the Years Ended December 31 2017 Net sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income taxes Income tax expense Net income

2016

Amount

Percent

Amount

Percent

$750,000 465,000 285,000 105,000 60,000 165,000 120,000 36,000 $ 84,000

100.0% 62.0% 38.0% 14.0% 8.0% 22.0% 16.0% 4.8% 11.2%

$600,000 390,000 210,000 66,000 54,000 120,000 90,000 27,000 $ 63,000

100.0% 65.0% 35.0% 11.0% 9.0% 20.0% 15.0% 4.5% 10.5%

EXERCISE 18-3 (a)

GURLEY CORPORATION Condensed Balance Sheets December 31

Assets Current assets Property, plant & equipment (net) Intangibles Total assets

2017

2016

Percentage Change Increase (Decrease) from 2016

$ 74,000

$ 80,000

$ (6,000)

(7.5%)

99,000 90,000 27,000 40,000 $200,000 $210,000

9,000 (13,000) $(10,000)

10.0% (32.5%) (4.8%)

18-21

EXERCISE 18-22 (Continued) GURLEY CORPORATION Condensed Balance Sheets (Continued) December 31

2017

2016

Liabilities and stockholders’ equity Current liabilities $ 42,000 $ 48,000 Long-term liabilities 143,000 150,000 Stockholders’ equity 15,000 12,000 Total liabilities and stockholders’ equity $200,000 $210,000

(b)

18-22

Percentage Increase Change (Decrease) from 2016

$ (6,000)

(12.5%)

(7,000)

(4.7%)

3,000

25.0%

$(10,000)

(4.8%)

GURLEY CORPORATION Condensed Balance Sheet December 31, 2017 Amount

Percent

Assets Current assets Property, plant, and equipment (net) Intangibles Total assets

$ 74,000 99,000 27,000 $200,000

37.0% 49.5% 13.5% 100.0%

Liabilities and stockholders’ equity Current liabilities Long-term liabilities Stockholders’ equity Total liabilities and stockholders’ equity

$ 42,000 143,000 15,000 $200,000

21.0% 71.5% 7.5% 100.0%

EXERCISE 1823 (a)

EMLEY CORPORATION Condensed Income Statements For the Years Ended December 31

Net sales Cost of goods sold Gross profit Operating expenses Net income

(b)

2017

2016

$660,000 483,000 177,000 125,000 $ 52,000

$600,000 420,000 180,000 120,000 $ 60,000

Increase or (Decrease) During 2017 Amount Percentage $60,000 63,000 (3,000) 5,000 $ (8,000)

10.0% 15.0% (1.7)% 4.2% (13.3)%

EMLEY CORPORATION Condensed Income Statements For the Years Ended December 31 2017 Net sales Cost of goods sold Gross profit Operating expenses Net income

2016

Amount

Percent

Amount

Percent

$660,000 483,000 177,000 125,000 $ 52,000

100.0% 73.2% 26.8% 18.9% 7.9%

$600,000 420,000 180,000 120,000 $ 60,000

100.0% 70.0% 30.0% 20.0% 10.0%

EXERCISE 18-5 (a) Current ratio = 2.0:1 ($4,054 ÷ $2,014) Acid-test ratio = 1.4:1 ($2,830 ÷ $2,014) Accounts receivable turnover = 4.2 times ($8,258 ÷ $1,988.5)* Inventory turnover = 5.9 times ($5,328 ÷ $899)** *($2,035 + $1,942) ÷ 2 **(898 + 900) ÷ 2

18-23

EXERCISE 18-24 (Continued) (b) Ratio Current Acid-test Accounts Receivable Turnover Inventory turnover

Nordstrom 2.0:1 1.4:1 4.2 5.9

Macy’s 1.52:1 0.47:1

Industry 1.70:1 .70:1

69.1 3.1

46.4 4.3

Nordstrom is better than Macy’s for the current ratio and its acid-test ratio is significantly higher than Macy’s. It has a substantially lower accounts receivable turnover than Macy’s. Nordstrom is much better than Macy’s for the inventory turnover. Nordstrom is better than the industry average for the current and acidtest ratios but significantly below the industry average for the accounts receivable turnover. Its inventory turnover, however, is higher than the industry average.

EXERCISE 18-6 (a) Current ratio as of February 1, 2017 = 2.2:1 ($110,000 ÷ $50,000). Feb. 3 7 11 14 18

2.2:1 1.6:1 1.6:1 1.8:1 1.6:1

No change in total current assets or liabilities. ($82,000 ÷ $50,000). No change in total current assets or liabilities. ($70,000 ÷ $38,000). ($70,000 ÷ $43,000).

(b) Acid-test ratio as of February 1, 2017 = 1.9:1 ($93,000* ÷ $50,000). *$110,000 – $15,000 – $2,000 Feb. 3 7 11 14 18

18-24

1.9:1 1.3:1 1.2:1 1.3:1 1.2:1

No change in total quick assets or current liabilities. ($65,000 ÷ $50,000). ($62,000 ÷ $50,000). ($50,000 ÷ $38,000). ($50,000 ÷ $43,000).

EXERCISE 18-7 (a)

$145,000 = 2.9:1. $50,000

(b)

$85,000 = 1.7:1. $50,000

(c)

$390,000 = 6.0 times. $65,000 (1)

(d)

$198,000 = 3.6 times. $55,000 (2) (1)

$70,000 + $60,000 2

(2)

$60,000 + $50,000 2

EXERCISE 18-8 $45,000

(a) Profit margin

$750,000

= 6.0%.



(b) Asset turnover 

$750,000 = 1.4 times.  $500,000 + $580,000   2  



$45,000 = 8.3%. $500,000 + $580,000     2

(d) Return on common stockholders’ equity

$45,000 = 11.9%.  $325,000 + $430,000   2 



18-25

EXERCISE 18-9 (a)

$65,000 – $5,000 = $2.00. 30,000 shares

(b)

$13.00 = 6.5 times. $2.00

(c)

$21,000 = 32%. $65,000

(d)

$65,000 + $16,000 + $24,000 $105,000 = = 6.6 times. $16,000 $16,000

EXERCISE 18-10 (a) Inventory turnover = 4.5 = 



Cost of goods sold  $200,000 + $180,000   2  

4.5 X $190,000 = Cost of goods sold Cost of goods sold = $855,000. (b) Accounts Receivable turnover = 8.8 = 



Net sales (credit)  $72,500 + $126,000   2  

8.8 X $99,250 = Net sales (credit) = $873,400. (c) Return on common stockholders’ equity = 16% = Net income  $400,000 + $113,500 + $400,000 + $101,000   2  



.16 X $507,250 = Net income = $81,160.

18-26

EXERCISE 18-10 (Continued) (d) Return on assets = 12.5% =

$81,160 [see (c) above] Average assets

Average assets =

$81,160 .125

= $649,280

Total assets (Dec. 31, 2017) + $655,000 = $649,280 2 Total assets (Dec. 31, 2017) = ($649,280 X 2) – $655,000 = $643,560. EXERCISE 18-11 (a)

($4,300 + $21,200+ $10,000)/$12,370 = 2.87:1

(b) ($4,300 + $21,200)/$12,370 = 2.06:1 (c)

$100,000/[($21,200 + $23,400)/2] = 4.48 times

(d) $60,000/[($10,000 + $7,000)/2] = 7.06 times (e)

$15,000/$100,000 = 15%

(f)

$100,000/[($110,500 + $120,100)/2] = .87 times

(g) $15,000/[($110,500 + $120,100)/2] = 13% (h) $15,000/[($98,130 + $89,000)/2] = 16% (i)

$12,370/$110,500 = 11.2%

EXERCISE 18-12 (a)

HAAS CORPORATION Partial Income Statement For the Year Ended October 31, 2017 Income before income taxes....................................... $540,000 Income tax expense ($540,000 X 20%) ....................... 108,000 Income from continuing operations ........................... 432,000 Loss from operations of discontinued division, net of $10,000 income tax saving ($50,000 X 20%) ....... $40,000 Loss from disposal of discontinued division, net of $14,000 income tax saving ($70,000 X 20%)............ 56,000 96,000 Net income ................................................................... $336,000

18-27

EXERCISE 18-12 (Continued) (b) To:

Chief Accountant

From: Your name, Independent Auditor After reviewing your income statement for the year ended 10/31/17, we believe it is misleading for the following reasons: The amount reported for income from continuing operations is overstated by $24,000. The income tax expense should be 20% of $540,000, or $108,000, not $84,000. Also, the effect of the loss on discontinued operations on net income is only $96,000, not $120,000. An income tax savings of $24,000 should be netted against the loss on discontinued operations.

EXERCISE 18-13 TRAYER CORPORATION Partial Statement of Comprehensive Income For the Year Ended December 31, 2017 Income from continuing operations ....................... Discontinued operations Loss from operations of discontinued division, net of $2,000 income tax saving ................ Gain from disposal of discontinued division, net of $8,000 income tax............................. Net income ............................................................... Unrealized loss on available for sale securities, net of $16,000 income tax saving ...................... Comprehensive income...........................................

18-28

$290,000

$ 8,000 32,000

24,000 314,000 64,000 $250,000

SOLUTIONS TO PROBLEMS PROBLEM 18-1

(a)

Condensed Income Statement For the Year Ended December 31, 2017 Ratzlaff Company Dollars Percent

Farris Company Dollars Percent Net sales $1,549,035 Cost of goods sold 1,080,490 Gross profit 468,545 Operating expenses 302,275 Income from operations 166,270 Other expenses and losses Interest expense 8,980 Income before income taxes 157,290 Income tax expense 54,500 Net income $ 102,790

100.0% 69.8% 30.2% 19.5% 10.7%

$339,038 241,000 98,038 79,000 19,038

100.0% 71.1% 28.9% 23.3% 5.6%

.6% 10.1% 3.5% 6.6%

2,252 16,786 6,650 $ 10,136

.7% 4.9% 1.9% 3.0%

(b) Farris Company appears to be more profitable. It has higher relative gross profit, income from operations, income before taxes, and net income. $102,790  a Farris’s return on assets of 12.4%   is higher than Ratzlaff’s $829,848   return on assets of 4.7%  $10,136  b   . Also, Farris’s return on common  $214,172  $102,790  c stockholders’ equity of 15.6%  is higher than Ratzlaff’s return   $660, 028    on stockholders’ equity of 6.6%  $10,136  d   . $154, 047  

18-29



PROBLEM 18-1 (Continued) a

$102,790 is Farris’s 2017 net income. $829,848 is Farris’s 2017 average assets: 2017 2016 $325,975 $312,410 521,310 500,000 $847,285 + $812,410 =

Current assets Plant assets Total assets

$1,659,695 2

$10,136 is Ratzlaff’s 2017 net income. $214,172 is Ratzlaff’s 2017 average assets: 2017 2016 $ 83,336 $ 79,467 139,728 125,812 $223,064 + $205,279 =

Current assets Plant assets Total assets

$428,343 2

$102,790 is Farris’s 2017 net income. $660,028 is Farris’s 2017 average stockholders’ equity: Common stock Retained earnings Stockholders’ equity

2017 2016 $500,000 $500,000 173,460 146,595 $673,460 + $646,595 =

$1, 320, 055 2

$10,136 is Ratzlaff’s 2017 net income. $154,047 is Ratzlaff’s 2017 average stockholders’ equity: Common stock Retained earnings Stockholders’ equity

18-30

2017 2016 $120,000 $120,000 38,096 29,998 $158,096 + $149,998 =

$308,094 2

PROBLEM 18-2

(a) Earnings per share =

$203,000

= $3.56.

57,000

(b) Return on common stockholders’ equity = 

$203,000  $465,400 + $566,700    2 

$203,000 $516,050

= 39.3%.



$203,000 $203,000 = = 22.3%.  $852,800 + $970,200  $911,500   2 



(d) Current ratio =

$369,900 $203, 500

(e) Acid-test ratio =

= 1.82:1

$236,900 $203,500

(f)

= 1.16:1

Accounts receivable turnover = 

$1,818,500 ($102,800 + $107,800 )    2 

$1,818,500 $105,300

= 17.3 times.

18-31

PROBLEM 18-2 (Continued) (g) Inventory turnover = 

$1,011,500 $1,011,500 = = 8.1 times. $124,250  $115,500 + $133,000   2  



(h) Times interest earned =

$308,000 $18,000

(i)

Asset turnover =

$1,818,500 $911,500*

= 17.1 times.

= 2.0 times.

*($852,800 + $970,200) ÷ 2 (j)

Debt to assets =

$403, 500 $970,200

18-32

= 41.6%.

PROBLEM 18-3

(a)

2017

2018

(1) Profit margin. $30,000 $650,000

$45,000 = 6.4% $700,000

= 4.6%



(2) Asset turnover.



$650,000 = 1.1 times  $533,000 + $600,000 







 



$700,000 = 1.1 times  $600,000 + $640,000 



 



(3) Earnings per share. $30,000 31,000

$45,000 = $1.41 32,000

= $.97

(4) Price-earnings ratio. $5.00 = 5.2 times

$8.00

$.97

$1.41

= 5.7 times

(5) Payout ratio. $18,000* $30,000

$25,000**

= 60.0%

$45,000

*($113,000 + $30,000 – $125,000)

= 55.6%

**($125,000 + $45,000 – $145,000)

(6) Debt to assets. $165,000 $600,000

$155,000 = 24.2% $640,000

= 27.5%

18-33

PROBLEM 18-3 (Continued) (b) The underlying profitability of the corporation appears to have improved. For example, profit margin and earnings per share have both increased. In addition, the corporation’s price-earnings ratio has increased, which suggests that investors may be looking more favorably at the corporation. Also, the corporation appears to be involved in attempting to reduce its debt burden as its debt to assets ratio has decreased. Similarly, its payout ratio has decreased, which should help its overall solvency.

18-34

PROBLEM 18-4 (a) LIQUIDITY 2016

2017

Change

Current

$343,000 = 1.9:1 $182,000

$374,000 =1.9:1 $198,000

No change

Acid-test

$185,000 = 1.0:1 $182,000

$220,000 = 1.1:1 $198,000

Increase

Accounts receivable turnover

$790,000 $84,000*

$850,000 = 9.4 times $89,000** = 9.6

Increase

times

*($88,000 + $80,000) ÷ 2

**($80,000 + $98,000) ÷ 2 $575,000 = 4.5 times $620,000 = 4.8 times Increase $126,500* $130,000**

Inventory turnover

*($118,000 + $135,000) ÷ 2

**($135,000 + $125,000) ÷ 2

An overall increase in short-term liquidity has occurred. PROFITABILITY $43,000 = 5.1% $850,000

Profit margin

$42,000 = 5.3% $790,000

Asset turnover

$790,000

Return on assets

$42,000 = 6.6% $639,000

$43,000 = 6.5% $666,000

Decrease

Earnings per share

$42,000 = $2.10 20,000

$43,000 = $2.15 20,000

Increase

$850,000 = 1.2 times $666,000 = 1.3 $639,000 times

Decrease

Increase

Profitability has remained relatively the same. .

18-35

PROBLEM 18-4 (Continued) (b)

2017 1.

Return on common stockholders’ equity

$326,000 (a)

Debt to assets

$348,000 (c)

$43,000

$684,000 3.

Price-earnings ratio

2018 = 13.2%

= 50.9%

$50,000 $451,000 (b)

Change = 11.1% Decrease

$248,000 = 35.4% $700,000

$9.00 = 4.2 times

$12.80

$2.15

$2.50 (d)

= 5.1 times Increase

(a) ($200,000 + $136,000 + $200,000 + $116,000) ÷ 2. (b) ($380,000 + $186,000 + $200,000 + $136,000) ÷ 2. (c) $100,000 + $48,000 + $50,000 + $150,000. (d) $50,000 ÷ 20,000.

18-36

Decrease

PROBLEM 18-5

(a)

Ratio

Target

Wal-Mart

(All Dollars Are in Millions) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

Current 1.6:1 ($18,906 ÷ $11,782) .8:1 ($47,585 ÷ $58,454) Accounts receivable 8.6 ($61,471 ÷ $7,124) 115.3 ($374,526 ÷ $3,247) turnover Average collection period 42.4 (365 ÷ 8.6) 3.2 (365 ÷ 115.3) Inventory turnover 6.4 ($41,895 ÷ $6,517) 8.3 ($286,515 ÷ $34,433) Days in inventory 57.0 (365 ÷ 6.4) 44.0 (365 ÷ 8.3) Profit margin 4.6% ($2,849 ÷ $61,471) 3.4% ($12,731 ÷ $374,526) Asset turnover 1.5 ($61,471 ÷ $40,954.5a) 2.4 ($374,526 ÷ $157,550.5c) a Return on assets 7.0% ($2,849 ÷ $40,954.5 ) 8.1% ($12,731 ÷ $157,550.5c) Return on common stockholders’ equity 18.4% ($2,849 ÷ $15,470b) 20.2% ($12,731 ÷ $63,090.5d) Debt to assets 65.6% ($29,253 ÷ $44,560) 60.5% ($98,906 ÷ $163,514) Times interest earned 8.1 ($5,272 ÷ $647) 11.9 ($21,437 ÷ $1,798)

($44,560 + $37,349) ÷ 2 b ($15,307 + $15,633) ÷ 2

($163,514 + $151,587) ÷ 2 ($64,608 + $61,573) ÷ 2

(b) The comparison of the two companies shows the following: Liquidity—Target’s current ratio of 1.6:1 is significantly better than Wal-Mart’s .8:1. However, Wal-Mart has a better inventory turnover ratio than Target and its accounts receivable turnover is substantially better than Target’s. Profitability—With the exception of profit margin, Wal-Mart betters Target in all of the profitability ratios. Thus, it is more profitable than Target. Solvency—Wal-Mart betters Target in both of the solvency ratios. Thus, it is more solvent than Target.

18-37

PROBLEM 18-6

(a) Current ratio =

$215,000

= 1.5:1.

$145,000

$21,000 + $18,000 + $91,000 = 0.90:1. $145,000

(b) Acid-test ratio =

$595,000 ($91,000 + $74,000)    2 = 7.2 times.



$415,000 (d) Inventory turnover = = 5.4 times.  $85,000 + $70,000    2 



(e) Profit margin ratio =



$36,400 $595,000

(f)

Asset turnover = 



= 6.1%.

$595,000 = 1.0 times.  $638,000 + $560,000    2

(g) Return on assets =



$36,400 = 6.1%.  $638,000 + $560,000   2 



$36,400  $373,000 + $350,000    2 = 10.1%.

(h) Return on common stockholders’ equity =



18-38



PROBLEM 18-6 (Continued) (i)

Earnings per share =

$36,400 30,000 (1)

= $1.21.

(1) $150,000 ÷ $5.00 (j)

Price-earnings ratio =

$19.50 $1.21

(k) Payout ratio =

$13,400 (2) $36,400

= 16.1 times.

= 36.8%.

(2) $200,000 + $36,400 – $223,000 (l)

Debt to assets =

$265,000 $638,000

(m) Times interest earned =

= 41.5%.

$59,200 (3) $7,800

= 7.6 times.

(3) $36,400 + $15,000 + $7,800

18-39

PROBLEM 18-7

$11,000,000

Accounts receivable turnover = 10 =

Average accounts receivable Averages accounts receivable =

$11,000,000 10

= $1,100,000

Net accounts receivables 12/31/17 + $950,000 = $1,100,000 2 Net accounts receivable 12/31/17 + $950,000 = $2,200,000 Net accounts receivable 12/31/17 = $1,250,000 Net income

Profit margin = 14.5% = .145 =

$11,000,000 Net income = $11,000,000 X .145 = $1,595,000 Income before income taxes = $1,595,000 + $560,000 = $2,155,000 Return on assets = 22% = .22 =

$1,595,000 Average assets

Average assets = $1,595,000 ÷ .22 = $7,250,000 Assets (12/31/17) + $7,000,000 = $7,250,000 2 Assets (12/31/17) = $7,500,000 Total current assets = $7,500,000 – $4,620,000 = $2,880,000 Inventory = $2,880,000 – $1,250,000 – $450,000 = $1,180,000 Total liabilities and stockholders’ equity = $7,500,000 Total liabilities = $7,500,000 – $3,400,000 = $4,100,000 18-40

PROBLEM 18-7 (Continued) Current ratio = 3.0 =

$2,880,000 Current liabilities

Current liabilities = $2,880,000 ÷ 3.0 = $960,000 Long-term notes payable = $4,100,000 – $960,000 = $3,140,000

Inventory turnover = 4.8 = 



Cost of goods sold  $1,720,000 + $1,180,000   2  

Cost of goods sold = $1,450,000 X 4.8 = $6,960,000 Gross profit = $11,000,000 – $6,960,000 = $4,040,000 Income from operations = $4,040,000 – $1,665,000 = $2,375,000 Interest expense = $2,375,000 – $2,155,000 = $220,000

18-41

PROBLEM 18-8

TERWILLIGER CORPORATION Statement of Comprehensive Income For the Year Ended December 31, 2017 Operating revenues ($12,850,000 – $1,500,000) ........................ Operating expenses ($8,700,000 – $2,400,000) .......................... Income from operations ............................... Other revenues and gains ............................ Income before income taxes ........................ Income tax expense ($5,150,000 X 30%) ..... Income from continuing operations ............ Discontinued operations Loss from operations of discontinued division*, net of $270,000 income tax saving........................................... $630,000 Gain from disposal of discontinued division, net of $60,000 income tax.. 140,000 Net income .................................................... Unrealized loss on available for sale securities, net of $180,000 income tax saving ....... Comprehensive income................................

$11,350,000 6,300,000 5,050,000 100,000 5,150,000 1,545,000 3,605,000

490,000 3,115,000 420,000 $ 2,695,000

*$1,500,000 – $2,400,000 = ($900,000)

18-42

PROBLEM 18-9

JAIME CORPORATION Statement of Comprehensive Income For the Year Ended December 31, 2017 Net sales............................................................. Cost of goods sold ............................................ Gross profit ........................................................ Selling and administrative expenses ............... Income from operations .................................... Other revenues and gains ................................. $20,000 Other expenses and losses .............................. 28,000 Income before income taxes............................. Income tax expense ($322,000 X 25%) ............. Income from continuing operations ................. Discontinued operations Income from operations of discontinued division, net of $5,000 income tax ........... 15,000 Loss from disposal of discontinued division, net of $22,500 income tax saving...................................................... 67,500 Net income ......................................................... Unrealized gain on available for sale securities, net of $30,000 income taxes ...................... Comprehensive income ....................................

$1,700,000 1,100,000 600,000 270,000 330,000 8,000 322,000 80,500 241,500

52,500 189,000 90,000 $ 279,000

18-43

BYP 18-1

FINANCIAL REPORTING PROBLEM

(a)

APPLE, INC. Trend Analysis of Net Sales and Net Income For the Three Years Ended 2013 Base Period 2011—(in millions) 2013

2012

2011

(1) Net sales Trend

$170,910 158%

$156,508 145%

$108,249 100%

(2) Net income Trend

37,037 143%

41,733 161%

25,922 100%

Between 2011 and 2013 Apple’s net sales increased by 58%. Apple’s net income increased by 61% between 2011 and 2012 and decreased by more than 11% from 2012 to 2013. (b) (dollar amounts in millions) (1) Profit Margin 2013: 2012:

$37,037 ÷ $170,910 = 21.7% $41,733 ÷ $156,508 = 26.7%

(2) Asset Turnover 2013: 2012:

$170,910 ÷ [($176,064 + $207,000) ÷ 2] = 0.89 times $156,508 ÷ [($116,371 + $176,064) ÷ 2] = 1.07 times

(3) Return on Assets 2013: 2012:

18-44

$37,037 ÷ [($176,064 + $207,000) ÷ 2] = 19.3% $41,733 ÷ [($116,371 + $176,064) ÷ 2] = 28.5%

BYP 18-1 (Continued) (4) Return on Common Stockholders’ Equity 2013: 2012:

$37,037 ÷ [($118,210 + $123,549) ÷ 2] = 30.6% $41,733 ÷ [($76,615 + $118,210) ÷ 2] = 42.8%

In general, Apple’s profitability has decreased from 2012 to 2013. (c) (dollar amounts in millions) (1) Debt to Assets ratio 2013: 2012:

$83,451 ÷ $207,000 = 40.3% $57,854 ÷ $176,064 = 32.9%

Since creditors are providing only 40% of Apple’s total assets, its longterm solvency is not in jeopardy. (2) Times Interest Earned 2013: 2012:

($50,155 + $136) ÷ $136] = 369.8 times No interest expense incurred

Apple very easily has the ability to pay the interest on its debt as indicated by the times interest earned ratio of over 300 times in 2013. (d) Substantial amounts of important information about a company are not in its financial statements. Events involving such things as industry changes, management changes, competitors’ actions, technological developments, governmental actions, and union activities are often critical to the successful operation of a company. Financial reports in the media and publications of financial service firms (Standard & Poors, Dun & Bradstreet) will provide relevant information not usually found in the annual report.

18-45

BYP 18-2

COMPARATIVE ANALYSIS PROBLEM

(a)

PepsiCo (1) (i) Percentage increase in net sales (ii) Percentage increase (decrease) in net income

Coca-Cola Company

$66,415  $65,492 = 1.4% $65,492

$46,854  $48,017 = –2.4% $48,017

$6,740  $6,178 $6,178

$8,584  $9,019 $9,019

= 9.1%

= 4.8%

(2) (i) Percentage increase (decrease) in total assets

$77,478  $74,638 = 3.8% $74,638

$90,055  $86,174 = 4.5% $86,174

(ii) Percentage increase (decrease) in total common stockholders’ equity

$24,409  $22,417 = 8.9% $22,417

$33,173  $32,790 = 1.2% $32,790

(3) Basic earnings per share

$4.37*

$1.94*

Price-earnings ratio

$82.71 $4.37

= 18.9 times

$41.31

= 21.3 times

$1.94

*Given on income statement

(b) PepsiCo’s net sales increased 1.4% while Coca-Cola’s decreased over 2.4%. PepsiCo’s net income increased 9.1% while Coca-Cola’s net income decreased 4.8% from 2012 to 2013. PepsiCo’s total assets increased 3.8% while Coca-Cola increased its assets 4.5%. PepsiCo’s stockholders’ equity increased by 8.9% while Coca-Cola’s stockholders’ equity increased 1.2%. The absolute amounts of earnings per share, $4.37 for PepsiCo and $1.94 for Coca-Cola, are not comparable in a qualitative way since these amounts are dependent on the number of shares outstanding.

18-46

BYP 18-3

COMPARATIVE ANALYSIS PROBLEM

(a) (1) (i) Percentage increase in net sales (ii) Percentage increase (decrease) in net income (2) (i) Percentage increase (decrease) in total assets (ii) Percentage increase (decrease) in total common stockholders’ equity (3) Basic earnings per share Price-earnings ratio

Amazon

Wal-Mart

$60,903  $51,733 = 17.7% $51,733

$473,076  $465,604 = 1.6% $465,604

= 802.6%

$16,022  $16,999 = (5.7)% $16,999

$40,159  $32,555 = 23.4% $32,555

$204,751  $203,105 = 0.8% $203,105

$9,746  $8,192 $8,192

$76,255  $76,343 $76,343

$274  (39) (39)

= 19.0%

= (0.1)%

$0.60*

$4.90*

$398.79 ÷ $0.60 = 664.7 times

$74.68 ÷ $4.90 = 15.2 times

*Given on income statement

(b) Amazon’s net sales increased 17.7% while Wal-Mart’s increased 1.6%. Amazon’s net income increased 802.6% while Wal-Mart’s net income decreased 5.7% from 2012 to 2013. Amazon’s total assets increased 23.4% while Wal-Mart increased its assets 0.8%. Amazon increased stockholders’ equity by 19.0% while Wal-Mart’s stockholders’ equity decreased 0.1%. The absolute amounts of earnings per share, $1.60 for Amazon and $4.90 for Wal-Mart, are not comparable in a qualitative way since these amounts are dependent on the number of shares outstanding.

18-47

BYP 18-4

DECISION MAKING ACROSS THE ORGANIZATION

The current ratio increase is a favorable indication as to liquidity, but alone tells little about the going-concern prospects of the client. From this ratio change alone, it is impossible to know the amount and direction of the changes in individual accounts, total current assets, and total current liabilities. Also unknown are the reasons for the changes. The acid-test ratio decrease is an unfavorable indication as to liquidity, especially when the current-ratio increase is also considered. This decline is also unfavorable as to the going-concern prospects of the client because it reflects a declining cash position and raises questions as to reasons for the increases in other current assets, such as inventories. The change in asset turnover cannot alone tell anything about either solvency or going-concern prospects. There is no way to know the amount and direction of the changes in sales and assets. An increase in sales would be favorable for going-concern prospects, while a decrease in assets could represent a number of possible scenarios and would need to be investigated further. The increase in net income is a favorable indicator for both solvency and going-concern prospects, although much depends on the quality of receivables generated from sales and how quickly they can be converted into cash. If there has been a decline in sales, a significant factor is that management has been able to reduce costs to produce an increase in earnings. Indirectly, the improved income picture may have a favorable impact on solvency and going-concern potential by enabling the client to borrow currently (if it needs to do so) to meet cash requirements. The 32-percent increase in earnings per share, which is identical to the percentage increase in net income, is an indication that there has probably been no change in the number of shares of common stock outstanding. This, in turn, indicates that financing was not obtained through the issuance of common stock. It is not possible to reach conclusions about solvency and going-concern prospects without additional information about the nature and extent of financing.

18-48

BYP 18-4 (Continued) The collective implications of these data alone are that the client entity is about as solvent and as viable a going concern at the end of the current year as it was at the beginning although there may be a need for short-term operating cash.

18-49

BYP 18-5

REAL-WORLD FOCUS

(a) Optional elements include: ⯈ Financial highlights ⯈ Letter to stockholders ⯈ Corporate message ⯈ Report of management ⯈ Board of directors and management ⯈ Stockholder information

(b) SEC-required elements include: ⯈ Auditors’ report ⯈ Management discussion ⯈ Financial statements and notes ⯈ Selected financial data

(c) Management discussion. This series of short, detailed reports discusses and analyzes the company’s performance. It covers results of operations, and the adequacy of liquid and capital resources to fund operations. (d) Auditors’ report. This summary of the findings of an independent firm of certified public accountants shows whether the financial statements are complete, reasonable, and prepared consistent with generally accepted accounting principles (GAAP) at a set time. (e) Selected financial data. This information summarizes a company’s financial condition and performance over five years or longer. Data for making comparisons over time may include revenue (sales), gross profit, net earnings (net income), earnings per share, dividends per share, financial ratios such as return on equity, number of shares outstanding, and the market price per share.

18-50

BYP 18-6

COMMUNICATION ACTIVITY

To:

Abby Landis

From:

Accounting Major

Subject:

Financial Statement Analysis

The bases for comparison in analyzing financial statement are:

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

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

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

18-51

BYP 18-7

ETHICS CASE

(a) The stakeholders in this case are: ⯈ ⯈ ⯈ ⯈ ⯈ ⯈

Dave Schonhardt, president of Schonhardt Industries. Steven Verlin, public relations director. You, as controller of Schonhardt Industries. Stockholders of Schonhardt Industries. Potential investors in Schonhardt Industries. Any readers of the press release.

(b) The president’s press release is deceptive and incomplete and to that extent his actions are unethical. (c) As controller you should at least inform Steven, the public relations director, about the biased content of the release. He should be aware that the information he is about to release, while factually accurate, is deceptive and incomplete. Both the controller and the public relations director (if he agrees) have the responsibility to inform the president of the bias of the about to be released information.

18-52

BYP 18-8

ALL ABOUT YOU

Student responses will vary. We suggest that in class you ask for a few students to share their responses in order to increase students understanding of the various reasons why different people will choose different investment vehicles.

18-53

BYP 18-9

FASB CODIFICATION ACTIVITY

(a) Discontinued Operations 205-20-45-1 The results of operations of a component of an entity that either has been disposed of or is classified as held for sale under the requirements of paragraph 360-10-45-9, shall be reported in discontinued operations in accordance with paragraph 205-20-45-3 if both of the following conditions are met: a. The operations and cash flows of the component has been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction. b. The entity will not have by significant continuing involvement in the operations of the component after the disposal transaction. (b) Comprehensive Income The change in equity (net assets) of a business entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

18-54

IFRS 18-1 INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) The company’s profit margin was 11.8% for 2013 (€3,436  €29,149). Profit margin decreased from 13% in 2011 (€3,065  €23,659). (b) Operating profit for 2013 was €5,894. (c) The total recorded value of net assets at the date of disposal was £4,063,000. The company incurred costs of £220,000 to dispose of the business.

18-55

CHAPTER 19 Managerial Accounting ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Questions

Identify the features of managerial accounting and the functions of management.

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

1, 2

Describe the classes of manufacturing costs and the differences between product and period costs.

9, 11, 12, 13, 14

3, 4, 5, 6

2, 3, 4, 5, 6, 7, 13

Demonstrate how to compute cost of goods manufactured and prepare financial statements for a manufacturer.

10, 15, 16, 17, 18, 19, 20, 21

7, 8, 9, 10

8, 9, 10, 11, 3A, 4A, 5A 12, 13, 14, 15, 16, 17

Discuss trends in managerial accounting.

22, 23, 24, 25, 26

Do It!

Exercises

A Problems

Learning Objectives

1A, 2A

19-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Classify manufacturing costs into different categories and compute the unit cost.

Simple

20–30

Classify manufacturing costs into different categories and compute the unit cost.

Simple

20–30

Indicate the missing amount of different cost items, and prepare a condensed cost of goods manufactured schedule, an income statement, and a partial balance sheet.

Moderate

30–40

Prepare a cost of goods manufactured schedule, a partial income statement, and a partial balance sheet.

Moderate

30–40

Prepare a cost of goods manufactured schedule and a correct income statement.

Moderate

30–40

19-2

Learning Objective 1. Identify the features of managerial accounting and the functions of management.

Knowledge

2. Describe the classes of manufacturing costs and the differences between product and period costs.

Q19-11

3. Demonstrate how to compute cost of goods manufactured and prepare financial statements for a manufacturer.

Q19-19

4. Discuss trends in managerial accounting.

Broadening Your Perspective

Comprehension Q19-1 Q19-7 Q19-2 Q19-8 Q19-3 BE19-1 Q19-4 BE19-2 Q19-5 DI19-1 Q19-6 E19-1 Q19-9 BE19-6 Q19-12 DI19-2 Q19-13 E19-2 Q19-14 E19-3 BE19-3 E19-5 BE19-4 E19-6 BE19-5 Q19-10 Q19-20 Q19-21 E19-15

Q19-22 Q19-23 Q19-24 Q19-25

Application

E19-4 E19-7 E19-13

P19-1A P19-2A

Q19-15 Q19-16 Q19-17 Q19-18 BE19-7 BE19-8

BE19-9 BE19-10 DI19-3 E19-8 E19-9 E19-12

Analysis

Synthesis

Evaluation

E19-13 E19-10 E19-14 E19-11 E19-16 P19-3A E19-17 P19-5A P19-4A

Q19-26 BE19-11 DI19-4 E19-18 BYP19-1 BYP19-2 BYP19-3 BYP19-4

BYP19-5 BYP19-6 BYP19-7

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

19-3

ANSWERS TO QUESTIONS 1.

(a) Disagree. Managerial accounting is a field of accounting that provides economic and financial information for managers and other internal users. (b) Joe is incorrect. Managerial accounting applies to all types of businesses—service, merchandising, and manufacturing.

(a) Financial accounting is concerned primarily with external users such as stockholders, creditors, and regulators. In contrast, managerial accounting is concerned primarily with internal users such as officers and managers. (b) Financial statements are the end product of financial accounting. The statements are prepared quarterly and annually. In managerial accounting, internal reports may be prepared as frequently as needed. (c) The purpose of financial accounting is to provide general-purpose information for all users. The purpose of managerial accounting is to provide special-purpose information for specific decisions.

Differences in the content of the reports are as follows: Financial

Managerial

 Pertains to business as a whole and is highly aggregated.  Limited to double-entry accounting and cost data.  Generally accepted accounting principles.

 Pertains to subunits of the business and may be very detailed.  Extends beyond double-entry accounting system to any relevant data.  Standard is relevance to decisions.

In financial accounting, financial statements are verified annually through an independent audit by certified public accountants. There are no independent audits of internal reports issued by managerial accountants. 4.

Linda should know that the management of an organization performs three broad functions: (1) Planning requires management to look ahead and to establish objectives. (2) Directing involves coordinating the diverse activities and human resources of a company to produce a smooth-running operation. (3) Controlling is the process of keeping the company’s activities on track.

Disagree. Decision making is not a separate management function. Rather, decision making involves the exercise of good judgment in performing the three management functions explained in the answer to question five above.

Employees with line positions are directly involved in the company’s primary revenue generating operating activities. Examples would include plant managers and supervisors, and the vice president of operations. In contrast, employees with staff positions are not directly involved in revenuegenerating operating activities, but rather serve in a support capacity to line employees. Examples include employees in finance, legal, and human resources.

19-4

Questions Chapter 19 (Continued) 7.

The differences between income statements are in the computation of the cost of goods sold as follows: Manufacturing company:

Beginning finished goods inventory plus cost of goods manufactured minus ending finished goods inventory = cost of goods sold.

Merchandising company:

Beginning merchandise inventory plus cost of goods purchased minus ending merchandise inventory = cost of goods sold.

The difference in balance sheets pertains to the presentation of inventories in the current asset section. In a merchandising company, only merchandise inventory is shown. In a manufacturing company, three inventory accounts are shown: finished goods, work in process, and raw materials.

Manufacturing costs are classified as either direct materials, direct labor, or manufacturing overhead.

10.

No, Mel is not correct. The distinction between direct and indirect materials is based on two criteria: (1) physical association and (2) the convenience of making the physical association. Materials which cannot be easily associated with the finished product are considered indirect materials.

11.

Product costs, or inventoriable costs, are costs that are a necessary and integral part of producing the finished product. Period costs are costs that are identified with a specific time period rather than with a salable product. These costs relate to nonmanufacturing costs and therefore are not inventoriable costs.

12.

A merchandising company has beginning merchandise inventory, cost of goods purchased, and ending merchandise inventory. A manufacturing company has beginning finished goods inventory, cost of goods manufactured, and ending finished goods inventory.

13.

(a) (b)

14.

Raw materials inventory, beginning ....................................................................... Raw materials purchases ...................................................................................... Total raw materials available for use...................................................................... Raw materials inventory, ending ............................................................................ Direct materials used ....................................................................................

12,000 $ 170,000 182,000 (15,000) $167,000

15.

Direct materials used ............................................................................................. Direct labor used ................................................................................................... Total manufacturing overhead ............................................................................... Total manufacturing costs.............................................................................

$240,000 220,000 180,000 $640,000

16.

(a) (b)

$666,000 $634,000

17.

The order of listing is finished goods inventory, work in process inventory, and raw materials inventory.

X = total cost of work in process. X = cost of goods manufactured.

Total cost of work in process ($26,000 + $640,000)...................................... Cost of goods manufactured ($666,000 – $32,000) ......................................

19-5

Questions Chapter 19 (Continued) 18.

The products differ in how each are consumed by the customer. Services are consumed immediately; the product is not put into inventory. Meals at a restaurant are the best example where they are consumed immediately by the customer. There could be a long lead time before the product is consumed in a manufacturing environment.

19.

Yes, product costing techniques apply equally well to manufacturers and service companies. Each needs to keep track of the cost of production or services in order to know whether it is generating a profit. The techniques shown in this chapter, to accumulate manufacturing costs to determine manufacturing inventory, are equally useful for determining the cost of services.

20.

The value chain refers to all activities associated with providing a product or service. For a manufacturer, these include research and development, product design, acquisition of raw materials, production, sales and marketing, delivery, customer relations, and subsequent service.

21. An enterprise resource planning (ERP) system is an integrated software system that provides a comprehensive, centralized resource for information. Its primary benefits are that it replaces the many individual systems typically used for receivables, payables, inventory, human resources, etc. Also, it can be used to get information from, and provide information to, the company’s customers and suppliers. 22.

In a just-in-time inventory system, the company has no extra inventory stored. Consequently, if some units that are produced are defective, the company will not have enough units to deliver to customers.

23. The balanced scorecard is called “balanced” because it strives to not over emphasize any one performance measure, but rather uses both financial and non-financial measures to evaluate all aspects of a company’s operations in an integrated fashion. 24. Budgets are prepared by companies to provide future direction. Because the budget is also used as an evaluation tool, some managers try to game the budgeting process by underestimating their division’s predicted performance so that it will be easier to meet their performance targets. On the other hand, if the budget is set at unattainable levels, managers sometimes take unethical actions to meet targets to receive higher compensation or in some cases to keep their jobs. 25. CEOs and CFOs must now certify that financial statements give a fair presentation of the company’s operating results and its financial condition and that the company maintains an adequate system of internal controls. In addition, the composition of the board of directors and audit committees receives more scrutiny, and penalties for misconduct have increased. 26. Activity-based costing is an approach used to allocate overhead based on each product’s relative use of activities in making the product. Activity-based costing is beneficial because it results in more accurate product costing and in more careful scrutiny of all activities in the value chain.

19-6

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 19-1 Financial Accounting

Managerial Accounting

Primary users

External users

Internal users

Types of reports

Financial statements

Internal reports

Frequency of reports Quarterly and annually

As frequently as needed

Purpose of reports

General-purpose

Special-purpose information for specific decisions

Content of reports

Generally accepted accounting principles

Relevance to decisions

Verification process

Annual audit by certified public accountant

No independent audits

BRIEF EXERCISE 19-2 (a) 1. Planning. (b) 2. Directing. (c) 3. Controlling. BRIEF EXERCISE 19-3 (a) (b) (c) (d)

DM DL MO MO

Frames and tires used in manufacturing bicycles. Wages paid to production workers. Insurance on factory equipment and machinery. Depreciation on factory equipment.

19-7

BRIEF EXERCISE 19-4 (a) (b) (c) (d) (e) (f) (g) (h)

Direct materials. Direct materials. Direct labor. Manufacturing overhead. Manufacturing overhead. Direct materials. Direct materials. Manufacturing overhead.

BRIEF EXERCISE 19-5 (a) (b) (c) (d) (e) (f)

Product. Period. Period. Period. Product. Product.

BRIEF EXERCISE 19-6 Product Costs Direct Materials (a) (b) (c) (d)

Direct Labor

Factory Overhead X

X X X

BRIEF EXERCISE 19-7 (a) Direct materials used............................................................ Direct labor ............................................................................ Total manufacturing overhead............................................. Total manufacturing costs............................................

$180,000 209,000 208,000 $597,000

(b) Beginning work in process .................................................. Total manufacturing costs ................................................... Total cost of work in process .......................................

$ 25,000 597,000 $622,000

19-8

BRIEF EXERCISE 19-8 ROLAND COMPANY Balance Sheet December 31, 2017 Current assets Cash................................................................... Accounts receivable ......................................... Inventories Finished goods.......................................... Work in process ........................................ Raw materials ............................................ Prepaid expenses ............................................. Total current assets ..........................

$ 62,000 200,000 $91,000 87,000 83,000

261,000 38,000 $561,000

BRIEF EXERCISE 19-9 Direct Materials Used (1) (2) (3)

Direct Labor Used

Total Manufacturing Costs $151,000

Factory Overhead

$81,000 $144,000

BRIEF EXERCISE 19-10 Total Manufacturing Costs (1) $151,000* (2) (3)

Work in Process (January 1)

Work in Process (December 31)

Cost of Goods Manufactured $189,000

$133,000 $58,000

*$40,000 + $61,000 + $50,000 (data from BE 19-9)

19-9

BRIEF EXERCISE 19-11 One implication of SOX was to clarify top management’s responsibility for the company’s financial statements. CEOs and CFOs must now certify that financial statements give a fair presentation of the company’s operating results and its financial condition. In addition, top managers must certify that the company maintains an adequate system of internal controls to safeguard the company’s assets and ensure accurate financial reports. Also, more attention is now paid to the composition of the company’s board of directors. In particular, the audit committee of the board of directors must be comprised entirely of independent members (that is, non-employees) and must contain at least one financial expert. Finally, to increase the likelihood of compliance with these and other new rules, the penalties for misconduct were substantially increased. SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 19-1 1. 2. 3. 4.

False False False True

DO IT! 19-2 Period costs: Advertising Salaries of sales representatives Product costs: Blank CDs (DM) Depreciation of CD image burner (MO) Salary of factory manager (MO) Factory supplies used (MO) Paper inserts for CD cases (DM) CD plastic cases (DM) Salaries of factory maintenance employees (MO) Salaries of employees who burn music onto CDs (DL)

19-10

DO IT! 19-3 TOMLIN COMPANY Cost of Goods Manufactured Schedule For the Month Ended April 30 Work in process, April 1 ................................ Direct materials .............................................. Raw materials, April 1 ............................... Raw materials purchases .......................... Total raw materials available for use........ Less: Raw materials, April 30 .................. Direct materials used ................................ Direct labor ..................................................... Manufacturing overhead................................ Total manufacturing costs ............................ Total cost of work in process ........................ Less: Work in process, April 30 ................... Cost of goods manufactured ........................

5,000

$ 10,000 98,000 108,000 14,000 $ 94,000 80,000 160,000 334,000 339,000 3,500 $335,500

DO IT! 19-4 1. 2. 3. 4. 5. 6. 7. 8.

f a c h d e b g

19-11

SOLUTIONS TO EXERCISES EXERCISE 19-1 1. False. Financial accounting focuses on providing information to external users. 2. False. Line positions are directly involved in the company's primary revenue-generating operating activities. 3. False. Preparation of budgets is part of managerial accounting. 4. False. Managerial accounting applies to service, merchandising and manufacturing companies. 5. True. 6. False. Managerial accounting reports are prepared as frequently as needed. 7. True. 8. True. 9. False. Financial accounting reports must comply with generally accepted accounting principles. 10. False. The company treasurer reports directly to the vice president of finance/chief financial officer. EXERCISE 19-2 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

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

Direct labor.* Manufacturing overhead. Manufacturing overhead. Manufacturing overhead. Direct materials. Direct labor. Manufacturing overhead. Manufacturing overhead. Manufacturing overhead. Direct materials.

*or sometimes (c), depending on the circumstances

19-12

EXERCISE 19-3 (a) Bicycle components............... DM Depreciation on plant .......... MOH Property taxes on store.....Period Labor costs of assembly line workers............................ DL Factory supplies used ......... MOH

Advertising expense .............. Period Property taxes on plant............. MOH Delivery expense .................... Period Sales commissions ................ Period Salaries paid to sales clerks ... Period

(b) Product costs are recorded as a part of the cost of inventory because they are an integral part of the cost of producing the bicycles. Product costs are not expensed until the goods are sold. Period costs are recognized as an expense when incurred.

EXERCISE 19-4 (a) Factory utilities....................................................................... Depreciation on factory equipment ...................................... Indirect factory labor.............................................................. Indirect materials.................................................................... Factory manager’s salary ...................................................... Property taxes on factory building ....................................... Factory repairs ....................................................................... Manufacturing overhead ........................................................

$ 15,500 12,650 48,900 80,800 8,000 2,500 2,000 $170,350

(b) Direct materials ...................................................................... Direct labor ............................................................................. Manufacturing overhead ........................................................ Product costs .........................................................................

$137,600 69,100 170,350 $377,050

(c) Depreciation on delivery trucks............................................ $ 3,800 Sales salaries ......................................................................... 46,400 Repairs to office equipment.................................................. 1,300 Advertising ............................................................................. 15,000 Office supplies used.............................................................. 2,640 Period costs ........................................................................... $ 69,140

19-13

EXERCISE 19-5 1. 2.

3. 4.

(a) (c)

5. 6.

(b)* (d)

7. 8.

(a) (b)

9. 10.

*or sometimes (c), depending on the circumstances. EXERCISE 19-6 1. (b) 2. (c) 3. (a) 4. (c) 5. (c) 6. (c) 7. (c) 8. (c) 9. (c) 10. (c)

EXERCISE 19-7 (a)

(b)

19-14

Delivery service (product) costs: Indirect materials Depreciation on delivery equipment Dispatcher’s salary Gas and oil for delivery trucks Drivers’ salaries Delivery equipment repairs Total Period costs: Property taxes on office building CEO’s salary Advertising Office supplies Office utilities Repairs on office equipment Total

$ 6,400 11,200 5,000 2,200 16,000 300 $41,100 $

870 12,000 4,600 650 990 180 $19,290

EXERCISE 19-8 (a) Work-in-process, 1/1 ............................... Direct materials used .............................. Direct labor .............................................. Manufacturing overhead Depreciation on plant....................... Factory supplies used ..................... Property taxes on plant ................... Total manufacturing overhead ............... Total manufacturing costs...................... Total cost of work-in-process ................ Less: ending work-in-process................ Cost of goods manufactured..................

$ 12,000 $120,000 110,000 $60,000 23,000 14,000 97,000 327,000 339,000 15,500 $323,500

(b) Finished goods, 1/1 ................................. Cost of goods manufactured ................. Cost of goods available for sale............. Less: Finished goods, 12/31.................. Cost of goods sold..................................

$ 60,000 323,500 383,500 45,600 $337,900

EXERCISE 19-9 Total raw materials available for use: Direct materials used ....................................................... Add: Raw materials inventory (12/31) ........................... Total raw materials available for use ..............................

$180,000 22,500 $202,500

Raw materials inventory (1/1): Total raw materials available for use: Direct materials used ....................................................... Add: Raw materials inventory (12/31) ........................... Total raw materials available for use .............................. Less: Raw materials purchases...................................... Raw materials inventory (1/1) ..........................................

$180,000 22,500 202,500 158,000 $ 44,500

Total cost of work in process: Cost of goods manufactured ........................................... Add: Work in process (12/31) .......................................... Total cost of work in process ..........................................

$540,000 81,000 $621,000

19-15

EXERCISE 19-9 (Continued) Total manufacturing costs: Total cost of work in process ................................. Less: Work in process (1/1) .................................... Total manufacturing costs ...................................... Direct labor: Total manufacturing costs ...................................... Less: Total overhead ............................................... Direct materials used .................................... Direct labor ...............................................................

$621,000 210,000 $411,000

$411,000 $122,000 180,000 302,000 $109,000

EXERCISE 19-10 A + $57,000 + $46,500 = $195,650 A = $92,150

$252,500 – $11,000 = F F = $241,500

$195,650 + B = $221,500 B = $25,850

$130,000 + G + $102,000 = $253,700 G = $21,700

$221,500 – C = $185,275 C = $36,225

$253,700 + H = $337,000 H = $83,300

$68,400 + $86,000 + $81,600 = D D = $236,000

$337,000 – $70,000 = I I = $267,000

$236,000 + $16,500 = E E = $252,500 Additional explanation to EXERCISE 19-10 solution: Case A (a) Total manufacturing costs ...................................... Less: Manufacturing overhead ............................... Direct labor .................................................... Direct materials used...............................................

19-16

$195,650 $46,500 57,000

103,500 $ 92,150

EXERCISE 19-10 (Continued) (b) Total cost of work in process ................................. Less: Total manufacturing costs ............................ Work in process (1/1/17)..........................................

$221,500 195,650 $ 25,850

(c) Total cost of work in process ................................. Less: Cost of goods manufactured ........................ Work in process (12/31/17)......................................

$221,500 185,275 $ 36,225

Case B (d) Direct materials used .............................................. Direct labor............................................................... Manufacturing overhead ......................................... Total manufacturing costs ......................................

$ 68,400 86,000 81,600 $236,000

(e) Total manufacturing costs ...................................... Work in process (1/1/17).......................................... Total cost of work in process .................................

$236,000 16,500 $252,500

(f)

$252,500 11,000 $241,500

Total cost of work in process ................................. Less: Work in process (12/31/17) ........................... Cost of goods manufactured ..................................

Case C (g) Total manufacturing costs ...................................... Less: Manufacturing overhead .............................. Direct materials used ................................... Direct labor...............................................................

$253,700 $102,000 130,000

232,000 $ 21,700

(h) Total cost of work in process ................................. Less: Total manufacturing costs ............................ Work in process (1/1/17)..........................................

$337,000 253,700 $ 83,300

(i)

$337,000 70,000 $267,000

Total cost of work in process ................................. Less: Work in process (12/31/17) ........................... Cost of goods manufactured ..................................

19-17

EXERCISE 19-11 (a) (a) $117,000 + $140,000 + $87,000 = $344,000 (b) $344,000 + $33,000 – $360,000 = $17,000 (c) $450,000 – ($200,000 + $132,000) = $118,000 (d) $40,000 + $470,000 – $450,000 = $60,000 (e) $265,000 – ($80,000 + $100,000) = $85,000 (f)

$265,000 + $60,000 – $80,000 = $245,000

(g) $288,000 – ($70,000 + $75,000) = $143,000 (h) $288,000 + $45,000 – $270,000 = $63,000 (b)

HORIZON COMPANY Cost of Goods Manufactured Schedule For the Year Ended December 31, 2017 Work in process, January 1 ............................... Direct materials ................................................... Direct labor .......................................................... Manufacturing overhead .................................... Total manufacturing costs.......................... Total cost of work in process ............................ Less: Work in process inventory, December 31 ............................................ Cost of goods manufactured .............................

$ 33,000 $117,000 140,000 87,000 344,000 377,000 17,000 $360,000

19-11

EXERCISE 19-12 (a)

CEPEDA CORPORATION Cost of Goods Manufactured Schedule For the Month Ended June 30, 2017 Work in process, June 1............................. Direct materials used ................................. Direct labor.................................................. Manufacturing overhead Indirect labor ....................................... Factory manager’s salary ................... Indirect materials ................................ Maintenance, factory equipment........ Depreciation, factory equipment........ Factory utilities.................................... Total manufacturing overhead..... Total manufacturing costs ......................... Total cost of work in process .................... Less: Work in process, June 30 ............... Cost of goods manufactured .....................

(b)

$ 3,000 $20,000 40,000 $4,500 3,000 2,200 1,800 1,400 400 13,300 73,300 76,300 3,800 $72,500

CEPEDA CORPORATION Income Statement (Partial) For the Month Ended June 30, 2017 Sales revenue ......................................................... Cost of goods sold Finished goods inventory, June 1 ................. Cost of goods manufactured [from (a)] ........... Cost of goods available for sale .................... Less: Finished goods inventory, June 30 .... Cost of goods sold ......................... Gross profit .............................................................

19-12

$92,100 $ 5,000 72,500 77,500 7,500 70,000 $22,100

EXERCISE 19-20 (a) WASHINGTON CONSULTING Schedule of Cost of Contract Services Performed For the Month Ended August 31, 2017 Supplies used (direct materials) ................................... Salaries of professionals (direct labor) ........................ Service overhead: Utilities for contract operations ............................... $1,400 Contract equipment depreciation ............................ 900 Insurance on contract operations ........................... 800 Janitorial services for professional offices............. 700 Total overhead .................................................... Cost of contract services provided .........................

$ 1,700 15,600

3,800 $21,100

(b) The costs not included in the cost of contract services provided would all be classified as period costs. As such, they would be reported on the income statement under administrative expenses. EXERCISE 19-14 (a) Work-in-process, 1/1 .............................. Direct materials Materials inventory, 1/1 ................... Materials purchased ........................ Materials available for use .............. Less: Materials inventory, 12/31..... Direct materials used ............................. Direct labor ............................................. Manufacturing overhead ........................ Total manufacturing costs..................... Total cost of work-in-process................ Less: Work-in-process, 12/31 ................ Cost of goods manufactured .................

19-20

$ 13,500 $ 21,000 150,000 171,000 30,000 $141,000 220,000 180,000 541,000 554,500 17,200 $537,300

EXERCISE 19-14 (Continued) AIKMAN COMPANY Income Statement (Partial) For the Year Ended December 31, 2017 (b) Sales revenue ....................................... Cost of goods sold Finished goods, 1/1 ........................ Cost of goods manufactured ........ Cost of goods available for sale .... Less: Finished goods, 12/31 ......... Cost of goods sold .......... Gross profit ............................................

$910,000 $ 27,000 537,300 564,300 21,000 543,300 $366,700

AIKMAN COMPANY (Partial) Balance Sheet December 31, 2017 (c) Current assets Inventories Finished goods .............................................. Work in process ............................................ Raw materials.................................................

$21,000 17,200 30,000

$68,200

(d) In a merchandising company’s income statement, the only difference would be in the computation of cost of goods sold. Beginning and ending finished goods would be replaced by beginning and ending merchandise inventory, and cost of goods manufactured would be replaced by purchases. In a merchandising company’s balance sheet, there would be one inventory account (merchandise inventory) instead of three. EXERCISE 19-15 1. 2. 3. 4. 5. 6. 7. 8. .

(a) (a) (a), (c) (b) (a) (a) (a) (b), (c)

9. 10. 11. 12. 13. 14. 15. 16. .

(a) (a), (b) (b) (b) (a) (a) (a) (a) .

19-21

EXERCISE 19-16 (a)

ROBERTS COMPANY Cost of Goods Manufactured Schedule For the Month Ended June 30, 2017 Work in process inventory, June 1 ................. $ 5,000 Direct materials Raw materials inventory, June 1 ............ $ 9,000 Raw materials purchases........................ 54,000 Total raw materials available for use ........ 63,000 Less: Raw materials inventory, June 30.... 13,100 Direct materials used .............................. $49,900 Direct labor ..................................................... 47,000 Manufacturing overhead 5,500 Indirect labor............................................ Factory insurance.................................... 4,000 Machinery depreciation........................... 4,000 Factory utilities ........................................ 3,100 Machinery repairs.................................... 1,800 1,500 Miscellaneous factory costs ................... 19,900 Total manufacturing overhead ......... Total manufacturing costs ............................ 116,800 Total cost of work in process ....................... 121,800 Less: Work in process inventory, June 30...... 7,000 Cost of goods manufactured ........................ $114,800

(b)

ROBERTS COMPANY (Partial) Balance Sheet June 30, 2017 Current assets Inventories Finished goods ........................................... Work in process.......................................... Raw materials .............................................

19-22

$ 8,000 7,000 13,100

$28,100

EXERCISE 19-17 (a) Raw Materials account: (5,000 – 4,650) X $15 = $5,250 Work in Process account: (4,600 X 10%) X $15 = $6,900 Finished Goods account: (4,600 X 90% X 30%) X $15 = $18,630 Cost of Goods Sold account: (4,600 X 90% X 70%) X $15 = $43,470 Selling Expenses account: 50 X $15 = $750 Proof of cost of head lamps allocated (5,000 X $15 = $75,000) Raw materials Work in process Finished goods Cost of goods sold Selling expenses Total (b) To:

$ 5,250 6,900 18,630 43,470 750 $75,000

Chief Accountant

From:

Student

Subject:

Statement Presentation of Accounts

Two accounts will appear in the income statement. Cost of Goods Sold will be deducted from net sales in determining gross profit. Selling expenses will be shown under operating expenses and will be deducted from gross profit in determining net income. Sometimes, the calculation for Cost of Good Sold is shown on the income statement. In these cases, the balance in Finished Goods inventory would also be shown on the income statement. The other accounts associated with the head lamps are inventory accounts which contain end-of-period balances. Thus, they will be reported under inventories in the current assets section of the balance sheet in the following order: finished goods, work in process, and raw materials. EXERCISE 19-18 (a) (b) (c) (d)

3. 4. 2. 1.

Balanced scorecard Value chain Just-in-time inventory Activity-based costing

19-23

(a)

900 $

300

$58,000 800 1,100 5,700 400 14,000 10,000 $58,000

$ 75,000 58,000 22,100 $155,100

Production cost per helmet = $155,100/10,000 = $15.51.

1,500 $22,100

$25,100

SOLUTIONS TO PROBLEMS

$75,000

$75,000 (b) Total production costs Direct materials Direct labor Manufacturing overhead Total production cost

Period Costs

PROBLEM 19-1A

Cost Item Rent on factory equipment Insurance on factory building Raw materials Utility costs for factory Supplies for general office Wages for assembly line workers Depreciation on office equipment Miscellaneous materials Factory manager’s salary Property taxes on factory building Advertising for helmets Sales commissions Depreciation on factory building

Direct Materials

Product Costs Direct Manufacturing Labor Overhead $11,000 1,500

(a)

$90,000 $ 4,900 7,500 3,000 1,300 $9,500 $111,000

(1) (2) (3) (4) (5)

$90,000

650 750 $18,100

$74 X 1,500 = $111,000. $12 X 5 X 1,500 = $90,000. $5 X 1,500 = $7,500. $7,800/12 = $650. $9,000/12 = $750.

(b) Total production costs Direct materials Direct labor Manufacturing overhead Total production cost

Period Costs

$111,000 90,000 18,100 $219,100

Production cost per system = $219,100/1,500 = $146.07. (rounded)

$9,500

PROBLEM 19-2A

Cost Item Raw materials (1) Wages for workers (2) Rent on equipment Indirect materials (3) Factory supervisor’s salary Janitorial costs Advertising Depreciation on factory building (4) Property taxes on factory building (5)

Direct Materials $111,000

Product Costs Direct Manufacturing Labor Overhead

19-25

PROBLEM 19-3A

(a) Case 1 A = $9,600 + $5,000 + $8,000 = $22,600 $22,600 + $1,000 – B = $17,000 B = $22,600 + $1,000 – $17,000 = $6,600 $17,000 + C = $22,000 C = $22,000 – $17,000 = $5,000 D = $22,000 – $3,400 = $18,600 E = ($24,500 – $2,500) – $18,600 = $3,400 F = $3,400 – $2,500 = $900 Case 2 G + $8,000 + $4,000 = $16,000 G = $16,000 – $8,000 – $4,000 = $4,000 $16,000 + H – $3,000 = $24,000 H = $24,000 + $3,000 – $16,000 = $11,000 (I – $1,400) – K = $7,000 (I – $1,400) – $24,800 = $7,000 I = $1,400 + $24,800 + $7,000 = $33,200 (Note: Item I can only be solved after item K is solved.) J = $24,000 + $3,300 = $27,300 K = $27,300 – $2,500 = $24,800 $7,000 – L = $5,000 L = $2,000

19-26

PROBLEM 19-3A (Continued) (b)

CASE 1 Cost of Goods Manufactured Schedule Work in process, beginning ................................. Direct materials..................................................... Direct labor............................................................ Manufacturing overhead ...................................... Total manufacturing costs ........................... Total cost of work in process .............................. Less: Work in process, ending ........................... Cost of goods manufactured ...............................

(c)

$ 1,000 $9,600 5,000 8,000 22,600 23,600 6,600 $17,000

CASE 1 Income Statement Sales revenue ....................................................... Less: Sales discounts ......................................... Net sales................................................................ Cost of goods sold Finished goods inventory, beginning .......... Cost of goods manufactured........................ Cost of goods available for sale .................. Less: Finished goods inventory, ending .... Cost of goods sold ................................ Gross profit ........................................................... Operating expenses ............................................. Net income ............................................................

$24,500 2,500 $22,000 5,000 17,000 22,000 3,400 18,600 3,400 2,500 $ 900

CASE 1 (Partial) Balance Sheet Current assets Cash ............................................................... Receivables (net)........................................... Inventories Finished goods ...................................... Work in process..................................... Raw materials ........................................ Prepaid expenses.......................................... Total current assets .............................. .

$ 3,000 15,000 $3,400 6,600 600

10,600 400 $29,000 19-27

PROBLEM 19-4A

(a)

CLARKSON COMPANY Cost of Goods Manufactured Schedule For the Year Ended June 30, 2017 Work in process, July 1, 2016 ............ Direct materials Raw materials inventory, July 1, 2016 .............................. Raw materials purchases ........... Total raw materials available for use ...................................... Less: Raw materials inventory, June 30, 2017 ................... Direct materials used .................. Direct labor .......................................... Manufacturing overhead Plant manager’s salary ............... Factory utilities............................ Indirect labor ............................... Factory machinery depreciation ... Factory property taxes................ Factory insurance ....................... Factory repairs ............................ Total manufacturing overhead........................... Total manufacturing costs ................. Total cost of work in process ............ Less: Work in process, June 30........ Cost of goods manufactured .............

19-28

$ 19,800 $ 48,000 96,400 144,400 39,600 $104,800 139,250 58,000 27,600 24,460 16,000 9,600 4,600 1,400 141,660 385,710 405,510 18,600 $386,910

PROBLEM 19-4A (Continued) (b)

CLARKSON COMPANY (Partial) Income Statement For the Year Ended June 30, 2017 Sales revenues Sales revenue ............................................. Less: Sales discounts............................... Net sales ..................................................... Cost of goods sold Finished goods inventory, July 1, 2016 ............................................. Cost of goods manufactured..................... Cost of goods available for sale ............... Less: Finished goods inventory, June 30, 2017 ................................. Cost of goods sold ............................. Gross profit ................................................

(c)

$534,000 4,200 $529,800 96,000 386,910 482,910 75,900 407,010 $122,790

CLARKSON COMPANY (Partial) Balance Sheet June 30, 2017 Assets Current assets Cash ............................................................ Accounts receivable .................................. Inventories Finished goods ................................... Work in process.................................. Raw materials ..................................... Total current assets ....................

$ 32,000 27,000 $75,900 18,600 39,600

134,100 $193,100

19-29

PROBLEM 19-5A

(a)

EMPIRE COMPANY Cost of Goods Manufactured Schedule For the Month Ended October 31, 2017 Work in process, October 1 .............. Direct materials Raw materials inventory, October 1 ................................ Raw materials purchases ............................... Total raw materials available for use ..................................... Less: Raw materials inventory, October 31 ....................... Direct materials used ................. Direct labor ......................................... Manufacturing overhead Factory facility rent .................... Depreciation on factory equipment ............................... Indirect labor .............................. Factory utilities* ......................... Factory insurance**.................... Total manufacturing overhead.......................... Total manufacturing costs ................ Total cost of work in process ........... Less: Work in process, October 31..... Cost of goods manufactured ............

$ 20,000 $ 18,000 264,000 282,000 29,000 $253,000 190,000 60,000 31,000 28,000 9,000 4,800 132,800 575,800 595,800 14,000 $581,800

*$12,000 X 75% = $9,000 **$ 8,000 X 60% = $4,800

19-30

PROBLEM 19-5A (Continued) (b)

EMPIRE COMPANY Income Statement For the Month Ended October 31, 2017 Sales revenue ................................................... Cost of goods sold Finished goods inventory, October 1 ...... Cost of goods manufactured.................... Cost of goods available for sale .............. Less: Finished goods inventory, October 31 ..................................... Cost of goods sold ............................ Gross profit ....................................................... Operating expenses Advertising expense ................................. Selling and administrative salaries.......... Depreciation expense—sales equipment .............................................. Insurance expense** ................................. Utilities expense* ...................................... Total operating expenses ................. Net income ........................................................

$780,000 $ 30,000 581,800 611,800 50,000 561,800 218,200 90,000 75,000 45,000 3,200 3,000 216,200 $ 2,000

*$12,000 X 25% **$ 8,000 X 40%

19-31

CURRENT DESIGNS CD19 The answers to parts (a) and (b) may vary from student to student. (a) What are the primary information needs of each manager? Mike Cichanowski, CEO, needs to know the overall financial picture of the company. He also needs to have a general picture of sales by territory and product line, and of cost per unit by product line. Diane Buswell, Controller, needs all accounting-related information. Deb Welch, Purchasing Manager, needs to know the costs of the components for each product. Bill Johnson, Sales Manager, needs to know sales by territory and product line. Dave Thill, Kayak Plant Manager, needs to know all the costs of producing each type of kayak. Rick Thrune, Production Manager for Composite Kayaks, needs to know the costs related to the composite kayak production.

19-32

CD19 (Continued)

(b) Name one special-purpose management accounting report that could be designed for each manager. Include the name of the report, the information it would contain, and how frequently it should be issued. Manager

Name of report

Information report would contain

Mike Cichanowski

Analysis of proposed new product line Companywide budget analysis

Projected revenues and expenses for a possible new product line Revenues, expenses, and net income compared to the budgeted amounts for each List of items purchased and most recent cost for each item Sales by product line and by customer Direct materials, direct labor, and manufacturing overhead costs assigned to each product line Detailed direct material and direct labor costs for the composite kayaks

Diane Buswell

Deb Welch

Purchasing History

Bill Johnson

Sales Summary

Dave Thill

Cost of Production Report

Rick Thrune

Cost of Production Report for Composite Kayaks

How frequently should it be issued? As needed and requested

Monthly

Monthly or available online Monthly or weekly Monthly or weekly

Weekly

19-33

CD19 (Continued) (c) When Diane Buswell, controller for Current Designs, reviewed the accounting records for a recent period, she noted the following items. Classify each item as a product cost or a period cost. If a cost is a product cost, note if it is a direct materials, direct labor, or manufacturing overhead item. Product Costs

Payee

Purpose

Winona Agency

Property insurance for the manufacturing plant

Bill Johnson (sales manager) Xcel Energy

Payroll–payment to sales manager Electricity for manufacturing plant Price lists for salespeople Sales commissions

Payroll–payment to plant manager

Winona Printing Jim Kaiser (sales representative) Dave Thill (plant manager)

Dana Schultz (kayak Payroll–payment to assembler) kayak assembler Composite One Bagging film used when kayaks are assembled. It is discarded after use. Fastenal Shop supplies–brooms, paper towels, etc. Ravago Polyethylene powder which is the main ingredient for the rotational molded kayaks Winona County Property taxes on manufacturing plant North American Composites

Kevlar fabric for composite kayaks

Waste Management Trash disposal for the company office building None Journal entry to record depreciation of manufacturing equipment

19-34

Period Direct Direct Manufacturing Costs Materials Labor Overhead

X X

X X X

BYP 19-1

DECISION-MAKING ACROSS THE ORGANIZATION

Ending Raw Materials Inventory Beginning raw materials + Raw materials purchased = Raw materials available for use = $19,000 + $365,000 = $384,000 Raw materials available for use – Ending raw materials inventory = Direct materials used $384,000 – Ending raw materials inventory = $350,000 Ending raw materials inventory = $384,000 – $350,000 = $34,000 Ending Work in Process Inventory Direct materials + Direct labor + Manufacturing overhead = Total manufacturing costs = $350,000 + $250,000 + ($250,000 X 60%) = $750,000 Beginning work in process inventory + Total manufacturing costs = Total cost of work in process = $25,000 + $750,000 = $775,000 Cost of goods manufactured + Beginning finished goods inventory = Cost of goods available for sale Cost of goods manufactured + $38,000 = $770,000 Cost of goods manufactured = $770,000 – $38,000 = $732,000 Total cost of work in process – Ending work in process inventory = Cost of goods manufactured $775,000 – Ending work in process inventory = $732,000 Ending work in process inventory = $775,000 – $732,000 = $43,000 Ending Finished Goods Inventory Sales – Cost of goods sold = Gross profit $1,240,000 – Cost of goods sold = $1,240,000 X 40% Cost of goods sold = $1,240,000 – $496,000 = $744,000 Cost of goods available for sale – Ending finished goods inventory = Cost of goods sold $770,000 – Ending finished goods inventory = $744,000 Ending finished goods inventory = $770,000 – $744,000 = $26,000 .

19-35

BYP 19-2

MANAGERIAL ANALYSIS

Since the questions were fairly open-ended, the following are only suggested results. The class may be able to think of others, or of more items for each one. (a) Jason Dennis

Needs information on sales, perhaps by salesperson and by territory.

Peggy Groneman

Needs cost information for her department.

Dave Marley

Needs all accounting information.

Kevin Carson

Needs product cost information.

Sally Renner

Needs information on component costs and costs for her department. Income statement.

(b) Jason Dennis Peggy Groneman

None.

Dave Marley

All.

Kevin Carson

Income statement and cost of goods manufactured schedule.

Sally Renner (c) Jason Dennis

None. Sales by Territory—Detailed information, possibly by product line, issued daily or weekly.

Peggy Groneman Cost of Computer Programs—Accumulated cost incurred for each major program used including maintenance and updates of program, issued monthly.

19-36

Dave Marley

Cost of Preparing Reports—Detailed analysis of all reports provided, their frequency, time, and estimated cost to prepare, issued monthly.

Kevin Carson

Cost of Product—Detailed cost by product line, including a comparison with estimated costs for that product. Issued as each batch of production is completed.

Sally Renner

Cost of Product Design—Accumulated total costs of each new product, issued at end of each project.

BYP 19-3

REAL-WORLD FOCUS

(a) The IMA has more than 60,000 members. These members include business leaders, managers, and decision makers in accounting and finance. (b) Student and Associate members receive most of the benefits of Regular membership at a significant savings.  Unique access to the professional designation, the Certified Management Accountant (CMA)  Specialized learning opportunities  Educational assistance, grants, educational competitions  Around-the-Clock Networking  Career management resources (c) The answer to this question will vary by school.

19-37

BYP 19-4

COMMUNICATION ACTIVITY

Ms. Shelly Phillips President Phillips Company Dear Shelly: As you requested, I corrected the income statement for October from the information you gave me. The corrected statement is enclosed and it shows that you actually earned net income of $2,000 for October. I also noticed that you did not have a cost of goods manufactured schedule, so I prepared one for you. The income statement your assistant accountant prepared was not correct for two primary reasons. First, product costs were not separated from selling and administrative expenses. Second, and more importantly, the reported net loss did not reflect changes in inventories. This had the effect of treating these costs as expenses rather than assets. A reconciliation of the reported net loss of $23,000 to net income of $2,000 is as follows: Net loss as reported .................................................... Increase (decrease) in inventories Raw materials ($29,000 – $18,000) ...................... Work in process ($14,000 – $20,000) .................. Finished goods ($50,000 – $30,000) ................... Total increase ............................................... Net income as corrected .............................................

$(23,000) $11,000 (6,000) 20,000 25,000 $ 2,000

The changes in raw materials and work in process inventories are reported in the cost of goods manufactured schedule. You will see, for example, that the cost of direct materials used was $253,000, not $264,000 as reported by your accountant in the income statement. The difference is the change in raw materials inventories. Similarly, you will see that the $6,000 decrease in work in process inventories increases total manufacturing costs of $575,800 to produce cost of goods manufactured of $581,800. The change in finished goods inventories is reported in the income statement. Notice that the change of $20,000 is subtracted from cost of goods manufactured of $581,800 to produce cost of goods sold of $561,800.

19-38

BYP 19-4 (Continued) I have also modified the form of the income statement to recognize the distinction between product costs (cost of goods sold) and period costs (operating expenses) as required by generally accepted accounting principles. Thanks for letting me help. If I can be of further assistance, don’t hesitate to call. I hope you find a replacement for your controller soon. Sincerely,

19-39

BYP 19-5

ETHICS CASE

(a) The stakeholders in this situation are:    

The users of Newton Industries’ financial statements. Steve Morgan, controller. The vice-president of finance. The president of Newton Industries.

(b) The ethical issues in this situation pertain to the adherence to sound and acceptable accounting principles. Intentional violation of generally accepted accounting principles in order to satisfy a practical short-term personal or company need and thus create misleading financial statements would be unethical. Selecting one acceptable method of accounting and reporting among other acceptable methods is not necessarily unethical. (c) Ethically, the management of Newton Industries should be trying to report the financial condition and results of operations as fairly as possible; that is, in accordance with GAAP. Steve should inform management what is acceptable accounting and what is not. The basic concept to be supported in this advertising cost transaction is matching costs and revenues. Normally, advertising costs are expensed in the period in which they are incurred because it is very difficult to associate them with specific revenues.

19-40

BYP 19-6

ALL ABOUT YOU

Student responses will vary. We have provided some basic examples that may represent common responses. (a) Individuals must often make purchase decisions which involve choosing between an item that has a more expensive initial purchase price, but is expected to either last longer, or provides some form of cost savings. The question that the individual faces is whether the cost savings or additional benefit justifies the additional initial cost. For example, more expensive dishwashers and refrigerators also tend to be more energy efficient. The labels on these appliances provide information regarding the energy savings which can be used to make a break-even evaluation. (b) In order to increase control over their financial situation and reduce the probability of financial hardship, all people should prepare personal budgets. Preparation of a personal budget requires the individual to plan for the future and to prioritize expenditures. (c) Companies employ the balanced scorecard as a mechanism to ensure that their financial goals are consistent with their efforts. Use of the balanced scorecard requires clear articulation of goals, priorities, and strategies. By employing these same techniques in their everyday life, individuals can be better assured that they will expend effort on those things that really matter to them, rather than wasting efforts on less important distractions. (d) Capital budgeting involves financial evaluation of long-term assets. Companies routinely make capital budgeting decisions, but so do individuals. The purchase of a home or car is a decision that has implications for your finances for many subsequent years. Buying a house or car is a very personal decision, influenced by many personal, nonfinancial, preferences. However, these decisions should also be subjected to a financial evaluation using capital budgeting techniques to ensure that the choice makes good economic sense.

19-41

BYP 19-7

CONSIDERING YOUR COSTS AND BENEFITS

Discussion guide: This is a difficult decision. While the direct costs of outsourced tax return preparation may in fact be lower, you must also consider other issues: Will the accuracy of the returns be as high? Will your relationships with your customers suffer due to the loss of direct contact? Will customers resent having their personal information shipped overseas? While you may not want to lay off six employees, you also don’t want to put your firm at risk by not remaining competitive. Perhaps one solution would be to outsource the most basic tasks, and then provide training to the six employees so they can perform higher-skilled services such as tax planning. Many of the techniques that you learn in the remaining chapters of this text will help you evaluate the merits of your various options.

19-42

CHAPTER 20 Job Order Costing ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Do It!

Exercises

A Problems

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

1, 2

1, 2, 3, 4, 6, 7, 8, 9, 11

1A, 2A, 3A, 5A

Use a job cost sheet to assign costs to work in process.

9, 10, 11, 12

3, 4, 5

1, 2, 3, 6, 7, 8, 10, 12

1A, 2A, 3A, 5A

Demonstrate how to determine and use the predetermined overhead rate.

13, 14, 15

6, 7

2, 3, 5, 6, 7, 8, 11, 12, 13

1A, 2A, 3A, 4A, 5A

Prepare entries for manufacturing and service jobs completed and sold.

8, 9

2, 3, 6, 7, 8, 10, 11, 12

1A, 2A, 3A, 5A

Distinguish between underand overapplied manufacturing overhead.

17, 18

4, 5, 9, 13

1A, 2A, 3A, 4A, 5A

Learning Objectives

Questions

Describe cost systems and the flow of costs in a job order system.

20-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare entries in a job order cost system and job cost sheets.

Simple

30 40

Prepare entries in a job order cost system and partial income statement.

Moderate

30 40

Prepare entries in a job order cost system and cost of goods manufactured schedule.

Simple

30 40

Compute predetermined overhead rates, apply overhead, and calculate under- or overapplied overhead.

Simple

20 30

Analyze manufacturing accounts and determine missing amounts.

Complex

30 40

20-2

Learning Objective

Knowledge

Comprehension

Application

Analysis

1. Describe cost systems and the flow of costs in a job order system.

Q20-5 Q20-7 Q20-8

Q20-1 Q20-2 Q20-3

Q20-4 BE20-2 Q20-6 DI20-1 BE20-1 E20-1 E20-2 E20-3

E20-6 E20-7 E20-8 E20-9 E20-11

P20-1A P20-2A P20-3A P20-5A E20-4

2. Use a job cost sheet to assign costs to work in process.

Q20-11 Q20-12

Q20-9 Q20-10

BE20-3 BE20-4 BE20-5 DI20-2 E20-1

E20-2 E20-3 E20-6 E20-7 E20-8

E20-10 P20-2A E20-12 P20-5A P20-1A P20-3A

3. Demonstrate how to determine and use the predetermined overhead rate.

Q20-15

Q20-13 Q20-14

BE20-6 BE20-7 DI20-3 E20-2 E20-3

E20-6 E20-7 E20-8 E20-11 E20-12 E20-13

P20-1A E20-5 P20-3A P20-2A P20-4A P20-5A

4. Prepare entries for manufacturing and service jobs completed and sold.

Q20-16 BE20-9

BE20-8 DI20-4 E20-2 E20-3

E20-6 E20-7 E20-8 E20-10

E20-11 P20-2A E20-12 P20-5A P20-1A P20-3A

5. Distinguish between under- and overapplied manufacturing overhead.

Q20-17 Q20-18

E20-9 BE20-10 E20-13 P20-1A

Broadening Your Perspective

BYP20-3 BYP20-4

CD20

P20-3A DI20-5 P20-4A E20-4 E20-5 BYP20-2

Synthesis

Evaluation

P20-2A P20-5A

BYP20-1 BYP20-5 BYP20-6 BYP20-7

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

20-3

ANSWERS TO QUESTIONS 1.

(a) Cost accounting involves the measuring, recording, and reporting of product costs. A cost accounting system consists of manufacturing cost accounts that are fully integrated into the general ledger of a company. (b) An important feature of a cost accounting system is the use of a perpetual inventory system that provides immediate, up-to-date information on the cost of a product.

(a) The two principal types of cost accounting systems are: (1) job order cost system and (2) process cost system. Under a job order cost system, costs are assigned to each job or batch of goods; at all times each job or batch of goods can be separately identified. A job order cost system measures costs for each completed job, rather than for set time periods. Under a process cost system, product-related costs are accumulated by or assigned to departments or processes for a set period of time. Job order costing lends itself to specific, special-order manufacturing or servicing while process costing is better suited to similar, largevolume products and continuous process manufacturing. (b) A company can use both types of systems. For example, General Motors uses process costing for standard model cars and job order costing for custom-made vehicles.

A job order cost system is most likely to be used by a company that receives special orders, or custom builds, or produces heterogeneous items or products; that is, the product manufactured or the service rendered is tailored to the customer or client’s requests, needs, or situation. Examples of industries that use job order systems are custom home builders, commercial printing companies, motion picture companies, construction contractors, repair shops, accounting and law firms, hospitals, shipbuilders, and architects.

A process cost system is most likely to be used by manufacturing firms with continuous production flows usually found in mass production, assembly line, large-volume, uniform, or relatively similar product industries. Companies producing appliances, chemicals, pharmaceuticals, rubber and tires, plastics, cement, petroleum, and automobiles utilize process cost systems.

The major steps in the flow of costs in a job order cost system are: (1) accumulating the manufacturing costs incurred and (2) assigning the accumulated costs to work done.

The three inventory control accounts and their subsidiary ledgers are: Raw materials inventory—materials inventory records. Work in process inventory—job cost sheets. Finished goods inventory—finished goods records.

The source documents used in accumulating direct labor costs are time tickets and time cards.

Disagree. Entries to Manufacturing Overhead are also made at the end of an accounting period. For example, there will be adjusting entries for factory depreciation, property taxes, and insurance.

The source document for materials is the materials requisition slip and the source document for labor is the time ticket. The entries are: Materials

20-4

Labor

Work in Process Inventory Manufacturing Overhead Raw Materials Inventory

XX XX

Work in Process Inventory Manufacturing Overhead Factory Labor

XX XX XX

Questions Chapter 20 (Continued) 10.

The purpose of a job cost sheet is to record the costs chargeable to a specific job and to determine the total and unit costs of the completed job.

11.

The source documents for charging costs to specific jobs are materials requisition slips for direct materials, time tickets for direct labor, and the predetermined overhead rate for manufacturing overhead.

12.

The materials requisition slip is a business document used as an authorization to issue materials from inventory to production. It is approved and signed by authorized personnel so that materials may be removed from inventory and charged to production, to specific jobs, departments, or processes. The materials requisition slip is the basis for posting to the materials inventory records and to the job cost sheet.

13.

Disagree. Actual manufacturing overhead cannot be determined until the end of a period of time. Consequently, there could be a significant delay in assigning overhead and in determining the total cost of the completed job.

14.

The relationships for computing the predetermined overhead rate are the estimated annual overhead costs and an expected activity base such as direct labor hours. The rate is computed by dividing the estimated annual overhead costs by the expected annual operating activity.

15.

At any point in time, the balance in Work in Process Inventory should equal the sum of the costs shown on the job cost sheets of unfinished jobs. Alternatively, posting to Work in Process Inventory may be compared with the sum of the postings to the job cost sheets for each of the manufacturing cost elements.

16.

Jane is incorrect. There is a difference in computing total manufacturing costs. In job order costing, manufacturing overhead applied is used, whereas in Chapter 19, actual manufacturing overhead is used.

17.

Underapplied overhead means that the overhead assigned to work in process is less than the overhead incurred. Overapplied overhead means that the overhead assigned to work in process is greater than the overhead incurred. Manufacturing Overhead will have a debit balance when overhead is underapplied and a credit balance when overhead is overapplied.

18.

Under- or overapplied overhead is not closed to Income Summary. The balance in Manufacturing Overhead is eliminated through an adjusting entry. Under- or overapplied overhead generally is considered to be an adjustment of Cost of Goods Sold.

20-5

Work in Process Inventory (4) Direct (7) Cost of commaterials used pleted jobs (5) Direct labor used (6) Overhead applied

Cost of Goods Sold (8) Cost of goods sold

Key to Entries: Accumulation 1. Purchase raw materials 2. Incur factory labor 3. Incur manufacturing overhead Manufacturing Overhead (3) Depreciation (6) Overhead Insurance applied Repairs (4) Indirect materials used (5) Indirect labor used

Assignment 4. Raw materials are used 5. Factory labor is assigned 6. Overhead is applied 7. Completed goods are recognized 8. Cost of goods sold is recognized

SOLUTIONS TO BRIEF EXERCISES

Factory Labor (2) Factory labor (5) Factory labor incurred used

Finished Goods Inventory (7) Cost of com(8) Cost of goods pleted jobs sold

BRIEF EXERCISE 20-1

20-6 Raw Materials Inventory (1) Purchases (4) Materials used

BRIEF EXERCISE 20-2 Jan. 31 31

Raw Materials Inventory ...................................... Accounts Payable.........................................

4,000

Factory Labor ....................................................... Factory Wages Payable................................ Employer Payroll Taxes Payable .................

6,000

Manufacturing Overhead ..................................... Utilities Payable ............................................

2,000

4,000 5,200 800 2,000

BRIEF EXERCISE 20-3 Jan. 31

Work in Process Inventory .................................. Manufacturing Overhead ..................................... Raw Materials Inventory...............................

2,800 600 3,400

BRIEF EXERCISE 20-4 Jan. 31

Work in Process Inventory .................................. Manufacturing Overhead ..................................... Factory Labor ...............................................

5,200 800 6,000

BRIEF EXERCISE 20-5

Date 1/31 1/31

Job 1 Direct Materials 900

Direct Labor 2,200

Date 1/31 1/31

Job 3 Direct Materials 700

Job 2 Direct Materials 1,200

Direct Labor 1,600

Direct Labor 1,400

20-7

BRIEF EXERCISE 20-6 Overhead rate per direct labor cost is 180%, or ($900,000 ÷ $500,000). Overhead rate per direct labor hour is $18, or ($900,000 ÷ 50,000 DLH). Overhead rate per machine hour is $9, or ($900,000 ÷ 100,000 MH). BRIEF EXERCISE 20-7 Jan. 31

Feb. 28

Mar. 31

Work in Process Inventory ............................. Manufacturing Overhead ($40,000 X 70%)....................................

28,000

Work in Process Inventory ............................. Manufacturing Overhead ($30,000 X 70%)....................................

21,000

Work in Process Inventory ............................. Manufacturing Overhead ($50,000 X 70%)....................................

35,000

28,000

21,000

35,000

BRIEF EXERCISE 20-8 Mar. 31 31

Finished Goods Inventory .............................. Work in Process Inventory......................

50,000

Cash ................................................................. Sales Revenue .........................................

35,000

Cost of Goods Sold ......................................... Finished Goods Inventory.......................

20,000

50,000 35,000 20,000

BRIEF EXERCISE 20-9 Service Contracts in Process ......................... Operating Overhead ........................................ Service Salaries and Wages ................... Service Contracts in Process ($28,000 X .25) .......................................... Operating Overhead ................................

20-8

28,000 8,000 36,000

7,000 7,000

BRIEF EXERCISE 20-10 Dec. 31

Dec. 31

Shimeca Company Cost of Goods Sold......................................... Manufacturing Overhead ........................

1,200

Garcia Company Manufacturing Overhead ................................ Cost of Goods Sold .................................

900

1,200

900

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 20-1 (a) Raw Materials Inventory............................................ Accounts Payable ............................................... (Purchases of raw materials on account)

18,000

(b) Factory Labor............................................................. Factory Wages Payable ...................................... Employer Payroll Taxes Payable........................ (To record factory labor costs)

40,000

(c) Manufacturing Overhead .......................................... Accumulated Depreciation—Buildings.............. Utilities Payable................................................... Prepaid Property Taxes ...................................... (To record overhead costs)

15,300

18,000

31,000 9,000

9,500 3,100 2,700

20-9

DO IT! 20-2 The three summary entries are: Work in Process Inventory ($7,200 + $9,000) .................. Raw Materials Inventory ............................................ (To assign materials to jobs)

16,200

Work Process Inventory ($4,000 + $8,000) ...................... Factory Labor ............................................................. (To assign labor to jobs)

12,000

Work in Process Inventory ($5,200 + $9,800) .................. Manufacturing Overhead .......................................... (To assign overhead to jobs)

15,000

16,200

12,000

15,000

DO IT! 20-3 The predetermined overhead for Washburn Company is: $200,000  2,500 hours = $80.00 The amount of overhead assigned to number 551 would be: 90 hours  $80.00 = $7,200 The entry th to record the assignment of overhead to job number 551 on January 15 is: January 15

20-10

Work in Process Inventory......................... Manufacturing Overhead ....................... (To assign overhead to jobs)

7,200 7,200

DO IT! 20-4 Finished Goods Inventory ................................................ Work in Process Inventory........................................ (To record completion of Job 310, costing $70,000 and Job 312, costing $50,000)

120,000

Accounts Receivable ........................................................ Sales Revenue ......................................................... (To record sale of Job 312)

90,000

Cost of Goods Sold ........................................................... Finished Goods Inventory......................................... (To record cost of goods sold for Job 312)

50,000

120,000

90,000

50,000

DO IT! 20-5 Manufacturing overhead applied = 130% X $85,000 = $110,500 Underapplied manufacturing overhead = $115,000 – $110,500 = $4,500

20-11

SOLUTIONS TO EXERCISES EXERCISE 20-1 (a) Factory Labor .......................................................... Factory Wages Payable .................................. Employer Payroll Taxes Payable.................... Employer Fringe Benefits Payable.................

90,000

(b) Work in Process Inventory ($90,000 X 85%) ......... Manufacturing Overhead........................................ Factory Labor ..................................................

76,500 13,500

76,000 8,000 6,000

90,000

EXERCISE 20-2 (a) May 31

Work in Process Inventory .................... Manufacturing Overhead ....................... Raw Materials Inventory ................

10,400 800

Work in Process Inventory .................... Manufacturing Overhead ....................... Factory Labor..................................

12,500 1,200

Work in Process Inventory ($12,500 X 60%) .................................. Manufacturing Overhead ............... Finished Goods Inventory ..................... Work in Process Inventory.............

11,200

13,700 7,500 7,500 7,540 7,540

($2,000 + $2,500 + $1,900 + $1,140*)

*$1,900 X 60% (b) May 1 Balance 31 31 31 May 31 Balance

20-12

Work in Process Inventory 3,500 May 31 10,400 12,500 7,500 26,360

7,540

EXERCISE 20-2 (Continued)

Job No. 430 431

Beginning Work in Process $1,500 0 $1,500

Job Cost Sheets Direct Direct Manufacturing* Material Labor Overhead $3,500 $ 3,000 $1,800 4,400 7,600 4,560 $7,900 $10,600 $6,360

Total $ 9,800 16,560 $26,360

*Direct labor X .60 EXERCISE 20-3 (a) (1) $15,200, or ($5,000 + $6,000 + $4,200). (2) Last year 70%, or ($4,200 ÷ $6,000); this year 80% (either $6,400 ÷ $8,000 or $3,200 ÷ $4,000). (b) Jan. 31 31 31 31

Work in Process Inventory ...................... Raw Materials Inventory ...................

8,000

Work in Process Inventory ...................... Factory Labor ....................................

12,000

Work in Process Inventory ...................... Manufacturing Overhead ..................

9,600

Finished Goods Inventory ....................... Work in Process Inventory ...............

44,800

8,000 12,000 9,600 44,800

EXERCISE 20-4 (a) + $50,000 + $42,500 = $145,650 (a) = $53,150 $145,650 + (b) = $201,500 (b) = $55,850 $201,500 – (c) = $192,300 (c) = $9,200

20-13

EXERCISE 20-4 (Continued) [Note: The instructions indicate that manufacturing overhead is applied on the basis of direct labor cost, and the rate is the same in all cases. From Case A, a student should note the overhead rate to be 85%, or ($42,500 ÷ $50,000).] (d) = .85 X $140,000 (d) = $119,000 $83,000 + $140,000 + $119,000 = (e) (e) = $342,000 $342,000 + $15,500 = (f) (f) = $357,500 $357,500 – $11,800 = (g) (g) = $345,700 [Note: (h) and (i) are solved together.] (i) = .85(h) $63,150 + (h) + .85(h) = $213,000 1.85(h) = $149,850 (h) = $81,000 (i) = $68,850 (j) = $213,000 + $18,000 (j) = $231,000 $231,000 – (k) = $222,000 (k) = $9,000 EXERCISE 20-5 (a) $2.40 per machine hour ($300,000 ÷ 125,000 MH). (b) ($322,000) – ($2.40 x 130,000 Machine Hours) $322,000 – $312,000 = $10,000 underapplied (c) Cost of Goods Sold .................................................. Manufacturing Overhead ..................................

20-14

10,000 10,000

EXERCISE 20-6 (a) (1) The source documents are: Direct materials—Materials requisition slips. Direct labor—Time tickets. Manufacturing overhead—Predetermined overhead rate. (2) The predetermined overhead rate is 125% of direct labor cost. For example, on July 15, the computation is $550 ÷ $440 = 125%. The same result is obtained on July 22 and 31. (3) The total cost is: Direct materials ............................................................ Direct labor ................................................................... Manufacturing overhead..............................................

$4,700 1,360 1,700 $7,760

The unit cost is $3.10 ($7,760 ÷ 2,500). (b) July 31

Finished Goods Inventory............................ Work in Process Inventory ...................

7,760 7,760

EXERCISE 20-7 1. 2.

Raw Materials Inventory................................................ Accounts Payable ..................................................

46,300

Work in Process Inventory............................................ Manufacturing Overhead............................................... Raw Materials Inventory ........................................

29,200 6,800

Factory Labor................................................................. Factory Wages Payable ......................................... Employer Payroll Taxes Payable ..........................

59,900

Work in Process Inventory............................................ Manufacturing Overhead............................................... Factory Labor .........................................................

54,000 5,900

46,300

36,000 51,000 8,900

59,900

20-15

EXERCISE 20-16 (Continued) 5. Manufacturing Overhead....................................... Accounts Payable .......................................... 6. 7. 8. 9.

80,500 80,500

Depreciation Expense ........................................... Accumulated Depreciation—Building...........

8,100

Work in Process Inventory ($54,000 X 150%) ...... Manufacturing Overhead ...............................

81,000

Finished Goods Inventory ..................................... Work in Process Inventory ............................

88,000

Accounts Receivable ............................................. Sales Revenue ................................................

103,000

Cost of Goods Sold ............................................... Finished Goods Inventory .............................

75,000

8,100 81,000 88,000 103,000 75,000

EXERCISE 20-8 1.

20-16

Raw Materials Inventory ........................................ Accounts Payable ..........................................

192,000

Factory Labor ......................................................... Factory Wages Payable .................................

87,300

Work in Process Inventory .................................... Manufacturing Overhead....................................... Raw Materials Inventory ................................

153,530 4,470

Work in Process Inventory .................................... Manufacturing Overhead....................................... Factory Labor .................................................

80,000 7,300

Manufacturing Overhead....................................... Accounts Payable ..........................................

49,500

192,000 87,300

158,000

87,300 49,500

EXERCISE 20-8 (Continued) 4.

Manufacturing Overhead....................................... Accumulated Depreciation—Equipment ......

14,550

Depreciation Expense ............................................ Accumulated Depreciation—Building ...........

14,300

Work in Process Inventory..................................... Manufacturing Overhead (90% X $80,000) ...........................................

72,000

Finished Goods Inventory...................................... Work in Process Inventory .............................

240,930

14,550

14,300

72,000

240,930

Computation of cost of jobs finished:

Job A20 A21 A23

Direct Labor $18,000 22,000 25,000

Direct Materials $35,240 42,920 39,270

Manufacturing Overhead $16,200 19,800 22,500

Total $ 69,440 84,720 86,770 $240,930

EXERCISE 20-9 (a)

LOPEZ COMPANY Cost of Goods Manufactured Schedule For the Month Ended May 31, 2017 Work in process, May 1 ........................................ Direct materials used ........................................... Direct labor............................................................ Manufacturing overhead applied ......................... Total manufacturing costs ........................... Total cost of work in process .............................. Less: Work in process, May 31........................... Cost of goods manufactured ...............................

$ 14,700 $62,400 50,000 40,000 152,400 167,100 15,900 $151,200

20-17

EXERCISE 20-18 (Continued) (b)

LOPEZ COMPANY (Partial) Income Statement For the Month Ended May 31, 2017

Sales revenue..................................................... Cost of goods sold Finished goods, May 1 ............................... Cost of goods manufactured..................... Cost of goods available for sale................ Less: Finished goods, May 31.................. Cost of goods sold ............................. Gross profit ........................................................ (c)

$215,000 $ 12,600 151,200 163,800 9,500 154,300 $ 60,700

LOPEZ COMPANY (Partial) Balance sheet May 31, 2017 Current assets: Finished goods inventory .......................... Work in process inventory ........................ Raw materials inventory ............................

$ 9,500 15,900 7,100

$32,500

EXERCISE 20-10 (a) Work in Process Inventory April 30 $ 9,300 (#10, $5,200 + #11, $4,100) May 31 $18,600 (#11, $8,000 + #13, $4,700 + #14, $5,900) June 30 $ 9,500 (#14, $5,900 + $3,600) (b) Finished Goods Inventory April 30 $ 1,200 (#12) May 31 $ 9,600 (#10) June 30 $19,200 (#11, $10,000 + #13, $9,200) (c) Gross Profit Month May June July 20-18

Job Number 12 10 11/13

Sales $ 1,500 12,000 24,000 .

Cost of Goods Sold $ 1,200 9,600 19,200

Gross Profit $ 300 2,400 4,800 .

EXERCISE 20-11 (a) 1. 2.

4. 5.

(b) 2. 3. 5.

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

1,800

Service Contracts in Process .......... Operating Overhead ......................... Supplies .....................................

720 480

Service Contracts in Process .......... Operating Overhead ......................... Service Salaries and Wages .....

56,000 14,000

Operating Overhead ......................... Cash ...........................................

40,000

1,800

1,200

70,000

40,000

Service Contracts in Process ($56,000 X 90%) ............................. Operating Overhead ..................

50,400

Cost of Completed Service Contracts ....................................... Service Contracts in Process ...

75,000

50,400

75,000

Service Contracts in Process 720 75,000 56,000 50,400 32,120

20-19

EXERCISE 20-12 (a) Direct materials Auditor labor costs Applied overhead Total cost

Lynn $ 600 5,400 3,600 $9,600

Brian $ 400 6,600 4,400 $11,400

Mike $ 200 3,375 2,250 $5,825

(b) The Lynn job is the only incomplete job, therefore, $9,600. (c) Actual overhead Applied overhead Balance

$11,000 (DR) 10,250 (CR) $ 750 (DR)

EXERCISE 20-13 (a) Predetermined overhead rate = Estimated overhead ÷ Estimated decorator hours = $960,000 ÷ 40,000 decorator hours = $24 per decorator hour (b) Service Contracts in Process (40,500 hrs X $24) ........ 972,000 Operating Overhead..................................... 972,000 (c)

Actual overhead Applied overhead Balance

20-20

$982,800 972,000 $ 10,800 underapplied

SOLUTIONS TO PROBLEMS PROBLEM 20-1A

(a) $840,000 ÷ $700,000 direct labor costs = 120% of direct labor costs (b) See solution to part (e) for job cost sheets (c) Raw Materials Inventory............................................ Accounts Payable ..............................................

90,000

Factory Labor............................................................. Factory Wages Payable ..................................... Employer Payroll Taxes Payable ......................

70,000

Manufacturing Overhead........................................... Accounts Payable .............................................. Accumulated Depreciation—Equipment .......... Raw Materials Inventory .................................... Factory Labor .....................................................

65,000

(d) Work in Process Inventory........................................ Raw Materials Inventory ($10,000 + $39,000 + $30,000) ........................

79,000

Work in Process Inventory........................................ Factory Labor ($5,000 + $25,000 + $20,000) ..........................

50,000

Work in Process Inventory........................................ Manufacturing Overhead ................................... ($50,000 X 120% of direct labor costs)

60,000

90,000 54,000 16,000 16,000 12,000 17,000 20,000

79,000

50,000 60,000

See solution to part (e) for postings to job cost sheets.

20-21

PROBLEM 20-1A (Continued) (b)&(e)

Job Cost Sheets

Job No. 50 Date Direct Materials Beg. $20,000 Jan. 10,000 $30,000

Direct Labor $12,000 5,000 $17,000

Manufacturing Overhead $16,000 6,000* $22,000

Cost of completed job Direct materials .............................................................. Direct labor ..................................................................... Manufacturing overhead ............................................... Total cost ...............................................................................

$30,000 17,000 22,000 $69,000

*$5,000 X 120% Job No. 51 Date Jan.

Direct Materials $39,000 $39,000

Direct Labor $25,000 $25,000

Manufacturing Overhead $30,000** $30,000

$39,000 25,000 30,000 $94,000

**$25,000 X 120% Job No. 52 Date Direct Materials Jan. $30,000

Direct Labor $20,000

Manufacturing Overhead $24,000***

***$20,000 X 120%

20-22

PROBLEM 20-1A (Continued)

(f)

Finished Goods Inventory...................................... Work in Process Inventory ($69,000 + $94,000) ......................................

163,000

Accounts Receivable.............................................. Sales Revenue ($122,000 + $158,000) ............

280,000

Cost of Goods Sold ................................................ Finished Goods Inventory ($90,000 + $69,000) ......................................

159,000

(g) Beginning balance Cost of completed jobs 50 and 51 Ending balance

Finished Goods Inventory 90,000 159,000 163,000 94,000

163,000

280,000

159,000

Cost of jobs 49 and 50 sold

The balance in this account consists of the cost of completed Job No. 51 which has not yet been sold. (h) Manufacturing Overhead Actual Applied 65,000 60,000 5,000 The balance in the Manufacturing Overhead account is underapplied.

20-23

PROBLEM 20-2A

(a) 1/1

12/31

Work in Process Inventory Balance (1) 128,400 Completed work (5) (c) Direct materials (2) 131,000 Direct labor (3) 139,000 Manufacturing overhead (4) 166,800 Balance 179,000

386,200

(1)

Job 7640 Job 7641

$ 77,800 50,600 $128,400

(3)

Job 7640 Job 7641 Job 7642

$ 36,000 48,000 55,000 $139,000

(2)

Job 7640 Job 7641 Job 7642

$ 30,000 43,000 58,000 $131,000

(4)

Job 7640 Job 7641 Job 7642

$ 43,200 57,600 66,000 $166,800

(5) (a) Job 7640 Beginning balance ................................................ Direct materials..................................................... Direct labor............................................................ Manufacturing overhead ......................................

$ 77,800 30,000 36,000 43,200 $187,000

(b) Job 7641 Beginning balance ................................................ Direct materials..................................................... Direct labor............................................................ Manufacturing overhead ......................................

$ 50,600 43,000 48,000 57,600 $199,200

(c) Total cost of completed work Job 7640 ................................................................ Job 7641 ................................................................

20-24

$187,000 199,200 $386,200

PROBLEM 20-2A (Continued) Work in process balance..............................................

$179,000

Unfinished job No. 7642 ...............................................

$179,000 (a)

(a) Current year’s cost Direct materials................................. $ 58,000 Direct labor ....................................... 55,000 Manufacturing overhead ...................... 66,000 $179,000 (b) Actual overhead costs Incurred on account.............................................. Indirect materials .................................................. Indirect labor ......................................................... Depreciation ..........................................................

$120,000 14,000 18,000 8,000 $160,000

Applied overhead costs Job 7640................................................................. Job 7641................................................................. Job 7642.................................................................

$ 43,200 57,600 66,000 $166,800

Actual overhead............................................................ Applied overhead.......................................................... Overapplied overhead ..................................................

$160,000 166,800 $ 6,800

Manufacturing Overhead................................................. 6,800 Cost of Goods Sold............................................... (c) Sales revenue (given) ........................................ Cost of goods sold Add: Job 7638 ................................................... Job 7639 ................................................... Job 7641 ................................................... Less: Overapplied overhead ............................ Gross profit ........................................................

6,800 $530,000

$ 87,000 92,000 199,200 378,200 6,800

371,400 $158,600

20-25

PROBLEM 20-3A

(a) (1) Raw Materials Inventory ........................................... Accounts Payable .............................................

4,900 4,900

Factory Labor ............................................................ Cash ...................................................................

4,800

Manufacturing Overhead.......................................... Accumulated Depreciation—Equipment ......... Accounts Payable .............................................

1,300

(2) Work in Process Inventory ....................................... Manufacturing Overhead.......................................... Raw Materials Inventory ...................................

4,900 1,500

Work in Process Inventory ....................................... Manufacturing Overhead.......................................... Factory Labor ....................................................

3,600 1,200

Work in Process Inventory ($3,600 X 1.25) ............. Manufacturing Overhead ..................................

4,500

(3) Finished Goods Inventory ........................................ Work in Process Inventory ...............................

14,740

Job

Direct Materials

Direct Labor

Manufacturing Overhead*

Total Costs

Rogers Stevens Linton

$1,700 1,300 2,200

$1,560 900 1,780

$1,950 1,125 2,225

$ 5,210 3,325 6,205 $14,740

4,800 900 400

6,400

4,800 4,500 14,740

*125% X direct labor amount

20-26

Cash ........................................................................... Sales revenue ....................................................

18,900

Cost of Goods Sold .................................................. Finished Goods Inventory ................................

14,740

18,900 14,740

PROBLEM 20-3A (Continued) (b) 6/1

6/30

Work in Process Inventory Balance 5,540 June Completed work Direct materials 4,900 Direct labor 3,600 Overhead applied 4,500 Balance 3,800

14,740

$3,800

Job: Koss (Direct materials $2,000 + Direct labor $800 + Manufacturing overhead $1,000) .................................

$3,800

(d)

CASE INC. Cost of Goods Manufactured Schedule For the Month Ended June 30, 2017 Work in process, June 1.......................................... Direct materials used .............................................. Direct labor............................................................... Manufacturing overhead applied ............................ Total manufacturing costs .............................. Total cost of work in process ................................. Less: Work in process, June 30 ............................ Cost of goods manufactured ..................................

$ 5,540 $4,900 3,600 4,500 13,000 18,540 3,800 $14,740

20-27

PROBLEM 20-4A

(a) Department D: Department E: Department K:

$1,200,000 ÷ $1,500,000 = 80% of direct labor cost. $1,500,000 ÷ 125,000 = $12.00 per direct labor hour. $900,000 ÷ 120,000 = $7.50 per machine hour.

(b) Manufacturing Costs Direct materials Direct labor Overhead applied Total

D $140,000 120,000 96,000* $356,000

Department E $126,000 110,000 132,000** $368,000

K $ 78,000 37,500 78,000*** $193,500

D $99,000 96,000 $ 3,000

Department E $124,000 132,000 $ (8,000)

K $79,000 78,000 $ 1,000

*$120,000 X 80% **11,000 X $12.00 ***10,400 X $7.50 (c) Manufacturing Overhead Incurred Applied Under (over) applied

20-28

PROBLEM 20-5A

(a) $7,600

($16,850 + $7,975 – $17,225).

(b) $36,000

[$9,750 + $15,000 + (75% X $15,000)]. (Given in other data).

($16,850 – $2,900).

(d) $6,300

($8,400 X 75%).

(e) $12,200

[Given in other data—$3,800 + $4,800 + (75% X $4,800)].

(f)

($36,000 + $13,950 + $8,400 + $6,300 – $12,200).

$52,450

(g) $5,000

(Given in other data).

(h) $52,450

(See (f) above).

(i)

$53,450

($5,000 + $52,450 – $4,000).

(j)

$4,000

(Given in other data).

(k) $12,025

(Equal to factory labor incurred).

(l)

($12,025 – $8,400).

$3,625

(m) $6,300

($7,770* – $1,470) or (Same as (d)).

*$2,900 + $3,625 + $1,245

20-29

CD20

CURRENT DESIGNS

Cost for one kayak: Direct Materials Polyethylene powder Finishing kit

54 pounds @ $1.50 per pound 1 kit @ $170

Direct Labor More skilled Less skilled

2 hours @ $15 per hour 3 hours @ $12 per hour

81 170 30 36

Manufacturing overhead 150% of direct labor costs 150% * $66 Total cost for one kayak

99 $ 416

Cost for order of 20 kayaks $416 per kayak * 20 kayaks

$8,320

20-30

BYP 20-1

DECISION-MAKING ACROSS THE ORGANIZATION

(a) The manufacturing cost element that is responsible for the fluctuating unit costs is manufacturing overhead. Manufacturing overhead is being included as incurred rather than being applied on a predetermined basis. Direct materials and direct labor are not the cause as they have the same unit cost per batch in each quarter. (b) The solution is to apply overhead using a predetermined overhead rate based on a relevant basis of production activity. Based on actual overhead incurred and using batches of product TC-1 as the activity base, the overhead rate is $16,000 per batch [($105,000 + $153,000 + $97,000 + $125,000) ÷ 30]. Another approach would be to use direct labor cost as the relevant basis to apply overhead on a predetermined basis. For example, a rate of 133 1/3% of direct labor cost ($480,000 ÷ $360,000) could be used. Either approach will provide the same result. (c) The quarterly results using a predetermined overhead rate based on batches produced are as follows: Quarter Costs Direct materials Direct labor Manufacturing overhead Applied ($16,000 X batches) Total (a)

1 $100,000 60,000

2 $220,000 132,000

3 $ 80,000 48,000

4 $200,000 120,000

80,000 $240,000

176,000 $528,000

64,000 $192,000

160,000 $480,000

Production in batches (b)

$ 48,000

Unit cost (per batch) (a) ÷ (b)

(Note: The unit cost of a batch remains the same in each quarter. Both sales and production should be pleased with this solution to fluctuating unit costs.)

20-31

BYP 20-2

MANAGERIAL ANALYSIS

(1) (a) Work in Process Inventory ............................. Raw Materials Inventory..........................

25,000 25,000

(b) If not corrected, the balance sheet is affected. Cash is understated and Raw Materials Inventory is overstated. (2) (a) Sales Bonus Expense ..................................... Cash .........................................................

12,000 12,000

(b) Both the income statement and the balance sheet are affected. In the income statement, Sales Bonus Expense is understated, Income Tax Expense is overstated, and net income is overstated. The error causes the underapplied overhead to be overstated or the overapplied overhead to be understated. This affects Cost of Goods Sold, since the over- or underapplied balance is closed out to Cost of Goods Sold. The error in Cost of Goods Sold also has an effect on Retained Earnings. Also, Retained Earnings is overstated because of the overstatement of net income, and Income Taxes Payable is overstated.

(3) (a) Factory Labor .................................................. Factory Wages Payable........................... Employer Payroll Taxes Payable ............

120,000 102,000 18,000

(b) If not corrected, both the income statement and the balance sheet are affected. On the income statement, Cost of Goods Sold is understated and Wages Expense is overstated. On the balance sheet, Cash, Factory Wages Payable, and Employer Payroll Taxes Payable are understated.

20-32

BYP 20-2 (Continued) (4) (a) Manufacturing Overhead................................. Raw Materials Inventory ..........................

3,000 3,000

(b) Both the income statement and balance sheet are affected. If units that were in process during the month have been sold, then in the income statement Cost of Goods Sold is overstated, Income Tax Expense is understated, and net income is understated. This causes the Retained Earnings and Income Taxes Payable in the balance sheet to be understated. Also the error causes underapplied overhead to be understated or overapplied overhead to be overstated. This affects Cost of Goods Sold, since the over- or underapplied balance is closed out to Cost of Goods Sold. The error in Cost of Goods Sold also has an affect on Retained Earnings.

20-33

BYP 20-3

REAL-WORLD FOCUS

(a) Candidates for the CMA or CFM Certificate must complete two continuous years of professional experience in management accounting or financial management. This requirement may be completed prior to or within seven years of passing the examination. (b) CMAs, CFMs, and candidates who have completed the CMA and/or the CFM examination but have not yet met the experience requirement, are required to maintain their proficiency in the fields of management accounting and financial management. This includes knowledge of new concepts and techniques as well as their application in the management accounting and financial management professions. The objective is to maintain the professional competence of the individual and to enhance one’s ability to perform job-related requirements. Persons who have retired need not meet continuing education requirements. The continuing requirement is 30 hours per year and at least 2 of those hours must be ethics-related. A broad range of subjects may be included in the programs for which hours of credit will be given. The subjects should be related to the topics covered on the CMA/CFM examination and/or to an individual’s job responsibilities. Illustrative of the subjects that may qualify are: all aspects of accounting, financial management, business applications of mathematics and statistics, computer science, economics, management, production, marketing, business law, and organizational behavior.

20-34

BYP 20-4

COMMUNICATION ACTIVITY

Williams Company Date Nancy Kopay 123 Cedar Lane Altoona, Kansas 66651 Dear Ms. Kopay: Thank you for your prompt payment! I am very glad that you found the cost information helpful. Thank you also for your questions about our overhead costs. We do try to provide our customers with as much information as possible, but we cannot give detailed information on overhead costs. The cost of providing such information is prohibitive. You asked why we do not use actual overhead costs when we bill our customers. We estimate overhead costs, rather than use actual costs, for several reasons. One of the most important reasons for you is that we could not prepare bills in a timely manner if we had to use actual overhead. We would have to wait until we were billed for such things as electricity and telephone service. A second reason is that some costs we include in overhead are only payable once or twice a year, such as insurance and taxes. When we use an estimated rate, we are able to allow for those costs. A third reason is that some costs are fixed, which means that they stay the same in dollar amount from month to month. This category includes items such as rent. If we billed you based on our actual costs, you would be billed a higher amount if your work was done during a slow time (because we would have fewer jobs to spread the costs over). An estimated overhead rate allows us to level out these costs.

20-35

BYP 20-4 (Continued) I hope this answers some of your questions. I’m glad you are interested in our company and that you took the time to write. I am sending a copy of our annual report under separate cover. It contains some details on the information you asked about. Thanks again for your letter and for having Williams make your new cabinets! Sincerely, Student

20-36

BYP 20-5

ETHICS CASE

(a) The stakeholders in this situation are: ⯈ Alice Reiley, controller for LRF Printing. ⯈ The president of LRF Printing. ⯈ The customers of LRF Printing. ⯈ The competitors of LRF Printing. (b) Padding cost-plus contracts is both unethical and illegal. Alice is faced with an ethical dilemma. She will be in trouble with the president if she doesn’t follow his directive, and she will be committing an unethical act if she does follow his instructions. (c) Alice should continue to accurately account for cost-plus contracts and, if challenged by the president, she should say that she is doing her very best to charge each and every legitimate cost to the cost-plus contracts. Let the president perform the unethical act if he continues to persist in padding costs.

20-37

BYP 20-6

(a)

ALL ABOUT YOU

Your chances of success in small business are increased if you have the following characteristics: You are a self-starter, you get along with many different kinds of people, you are good at making decisions, you have physical and emotional stamina, you are well organized, you have a strong desire to succeed and you will receive family support during the start up phase.

(b) The top ten reasons why businesses fail as cited in the books Small Business Management by Michael Ames, and The Do it Yourself Business Book by Gustav Berle are: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

20-38

Lack of experience Insufficient capital (money) Poor location Poor inventory management Over-investment in fixed assets Poor credit arrangements Personal use of business funds Unexpected growth Competition Low sales

BYP 20-7

CONSIDERING YOUR COSTS AND BENEFITS

Discussion guide: The situation presented is a difficult one because you are presently receiving some help for free. It would seem that the best strategy is to price your services based on what it would cost you to do the landscape business without any free help. In the long run, it is going to be impossible to continue unless you can cover these costs. In addition, if you underprice your services today, your customers may expect your prices will remain as low in the future. That probably cannot happen, given that your costs will increase substantially after the first two years. However, we should note that it is not unusual to start a small business with some assets available to you. Then, as your business grows, you acquire additional assets to meet your needs. After all, you may need a low price to get started, and as you gain experience you will be able to charge more or become more efficient. So what to do? Let’s address your old truck first. You should treat the truck as an asset owned by your business. Put it on your books at its fair value, and depreciate it over a reasonable life. This will result in an overhead charge. You need to cover the cost of that truck, as you will have to buy another one some day. The land, barn, and your mother’s services are a little more difficult. If you rented the land and barn and if you paid an assistant, all of these costs would be charged to overhead. (The assistant would be indirect labor.) You are currently getting all these services for free. This is a good situation now, and you may need this situation early in your business to help you get started. But you should recognize that even if you run your business profitably for the first two years, you may have problems beginning in the third year. Thus, it would seem prudent to establish a budget based on both scenarios for the first two years. If you can charge based on your expected costs in the future, do so. If that is not realistic, because you need to establish yourself and get more experience, then charge less. But be sure from the start to cover a reasonable amount of your costs, or the business does not make sense for you financially.

20-39

CHAPTER 21 Process Costing ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives 1.

Discuss the uses of a 1, 2, 3, 4, 5, process cost system and 20 how it compares to a job order system.

Explain the flow of costs in a process cost system and the journal entries to assign manufacturing costs.

6, 7

Compute equivalent units.

*6.

Questions

Brief Exercises

Do It!

Exercises

A Problems

1, 2, 3

2, 3, 4

10, 11, 12, 13

4, 5

3, 5, 6, 7, 8, 9, 2A, 3A, 4A, 10, 11, 13, 14, 5A, 6A 15

Complete the four steps to prepare a production cost report.

8, 9, 14, 15, 16, 17, 18, 19

6, 7, 8, 9

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

Explain just-in-time (JIT) and activity-based costing (ABC). Apply activity-based costing to a manufacturer.

21, 22, 23

16, 17

21-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Journalize transactions.

Moderate

20–30

Complete four steps necessary to prepare a production cost report.

Simple

30–40

Complete four steps necessary to prepare a production cost report.

Simple

30–40

Assign costs and prepare production cost report.

Moderate

20–30

Determine equivalent units and unit costs and assign costs.

Moderate

20–30

Compute equivalent units and complete production cost report.

Moderate

15–25

*7A

Assign overhead to products using ABC and evaluate decision.

Moderate

30–40

21-2

Learning Objective

Knowledge Comprehension

1. Discuss the uses of a process cost system and how it compares to a job order system. 2. Explain the flow of costs in a process cost system and the journal entries to assign manufacturing costs. 3. Compute equivalent units.

Q21-1 Q21-2 Q21-3 Q21-6

4. Complete the four steps to prepare a production cost report.

Q21-8 Q21-16 Q21-17 Q21-19

Q21-10 Q21-11

5. Explain just-in-time (JIT) and activitybased costing (ABC). *6. Apply activity-based costing to a manufacturer. Broadening Your Perspective

Application

Analysis

Synthesis

Evaluation

Q21-4 E21-1 Q21-5 DI21-1 Q21-20

Q21-9

Q21-7 BE21-1 BE21-2 Q21-12 Q21-13 BE21-4 BE21-5 DI21-3 E21-3 E21-5 Q21-14 Q21-15 Q21-18 BE21-6 BE21-7 BE21-8 BE21-9 DI21-4

BE21-3 DI21-2 E21-2 E21-6 E21-7 E21-8 E21-9 E21-10 E21-11 E21-13 E21-3 E21-5 E21-6 E21-7 E21-8 E21-9 E21-10 E21-11

E21-3 E21-4 P21-1A E21-14 E21-15 P21-2A P21-3A P21-4A P21-5A P21-6A E21-13 E21-14 E21-15 P21-2A P21-3A P21-4A P21-5A P21-6A

BE21-10 BE21-11

E21-16 E21-17

P21-7A

E21-12

Q21-21 Q21-22 Q21-23 Q21-24

BYP21-3

CD-21

BYP21-1 BYP21-2 BYP21-6

BYP21-4

BYP21-5

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

21-3

ANSWERS TO QUESTIONS 1.

(a) Process cost. (b) Process cost. (c) Job order. (d) Job order.

The primary focus of job order cost accounting is on the individual job. In process cost accounting, the primary focus is on the processes involved in producing homogeneous products.

The similarities are: (1) all three manufacturing cost elements—direct materials, direct labor, and overhead—are the same; (2) the accumulation of the costs of materials, labor, and overhead is the same; and (3) the flow of costs is the same.

The features of process cost accounting are: (1) separate work in process accounts for each process, (2) production cost reports, (3) product costs computed for each accounting period, and (4) unit costs computed based on total manufacturing costs.

Sam is correct. The flow of costs is the same in process cost accounting as in job order cost accounting. The method of assigning costs, however, is significantly different.

(a) (1) Materials are charged to production on the basis of materials requisition slips. (2) Labor is usually charged to production on the basis of the payroll register or departmental payroll summaries. (b) The criterion used in assigning overhead to processes is to identify the activity that “drives” or causes the cost. In many companies this activity is machine time, not direct labor.

The entry to assign overhead to production is: July 31

Work in Process—Machining .................................................... Work in Process—Assembly ..................................................... Manufacturing Overhead ...................................................

15,000 12,000 27,000

To prepare a production cost report, four steps are followed: (a) compute the physical unit flow, (b) compute equivalent units of production, (c) compute unit production costs, and (d) prepare a cost reconciliation schedule.

Physical units to be accounted for consist of units in process at the beginning of the period plus units started (or transferred) into production during the period. Units accounted for consist of units completed and transferred out during the period plus units in process at the end of the period.

10.

Equivalent units of production measure the work done during the period, expressed in fully completed units.

11.

Equivalent units of production are the sum of: (1) units completed and transferred out and (2) equivalent units of ending work in process.

12.

Units started into production were 9,600, or (9,000 + 600).

21-4

Questions Chapter 21 (Continued)

13.

Equivalent Units Materials Conversion Costs 12,000 12,000

Units transferred out Work in process 500 X 100% 500 X 20% Total equivalent units

500 100 12,100

12,500

14. Units transferred out were 3,200* Units to be accounted for Work in process (beginning) Started into production Total units Units accounted for Completed and transferred out Work in process (ending) Total units *3,500 – 300

500 3,000 3,500 3,200* 300 3,500

15. (a) (b)

The cost of the units transferred out is $112,000, or (14,000 X $8). The cost of the units in ending inventory is $8,500, or [(2,000 X $3) + (500 X $5)].

16. (a) (b)

Ann is incorrect. The report is an internal report for management. There are four sections in a production cost report: (1) number of physical units, (2) equivalent units determination, (3) unit costs, and (4) cost reconciliation schedule.

17. The production cost report provides the basis for evaluating: (1) the productivity of a department, (2) whether unit and total costs are reasonable, and (3) whether current performance is meeting planned objectives. 18. The per unit conversion cost is $11.25. [Conversion costs = $6,000 – $2,400 = $3,600. Equivalent units for conversion costs are 320 (800 X 40%); $3,600 ÷ 320 = $11.25.] 19. Operations costing is similar to process costing in that standardized methods are used to manufacture the product. At the same time, the product may have some customized individual features that require the use of a job order cost system. 20. In deciding which system to use, a cost-benefit tradeoff occurs. In a job order system, detailed information related to the cost of the product is involved. The cost of implementing this system is often expensive. In a process cost system, an average cost of the product will suffice and therefore the cost to implement is less. In summary, the cost of implementing the system must be balanced against the benefits provided from the additional information. 21.

(a) (b)

Just-in-time processing has a “just-in-time” philosophy and a “pull” approach. There are three important elements in JIT processing: (1) A company must have dependable suppliers who are willing to deliver on short notice exact quantities of raw materials according to precise quality specifications. (2) A multiskilled workforce must be developed. .

21-5

(3) A total quality control system must be established. 22.

(a) The principal differences are: Activity-Based Costing Traditional Costing (1) Primary focus Activities performed in making Units of production products (2) Bases of allocation Multiple cost drivers Single unit-level bases (3) Total product costs Sum of costs of activities Direct materials plus direct labor performed in making product plus manufacturing overhead (b) There are two assumptions that must be met in using ABC: (1) All overhead costs related to the activity must be driven by the cost driver used to assign costs to products. (2) All overhead costs related to the activity should respond proportionally to changes in the activity level of the cost driver.

23.

An appropriate cost driver for each activity is: Activity Materials handling Machine setups Factory machine maintenance Factory supervision Quality control

*24.

Cost Driver Number of requisitions Number of setups Machine hours used Number of employees Number of inspections

(a) ABC involves the following steps: (1) Identify the major activities that pertain to the manufacture of specific products. (2) Accumulate manufacturing overhead costs by activities. (3) Identify the cost driver(s) that accurately measure(s) each activity’s contribution to the finished product. (4) Assign manufacturing overhead costs for each activity to products using the cost driver(s). (b) The benefits advantages of ABC are: (1) More accurate product costing is achieved. (2) Control over overhead costs is enhanced. (3) Better management decisions can be made in: (a) setting selling prices, (b) deciding whether to discontinue or expand a product line, and (c) deciding whether to make or buy a product component.

21-6

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 21-1 Mar. 31 31

Raw Materials Inventory .................................. Accounts Payable.....................................

50,000

Factory Labor ................................................... Wages Payable .........................................

60,000

50,000 60,000

BRIEF EXERCISE 21-2 Mar. 31

Work in Process—Assembly Department ...... Work in Process—Finishing Department ....... Raw Materials Inventory...........................

24,000 26,000

Work in Process—Assembly Department ...... Work in Process—Finishing Department ....... Factory Labor ...........................................

35,000 25,000

50,000

60,000

BRIEF EXERCISE 21-3 Mar. 31

Work in Process—Assembly Department ($35,000 X 160%) .......................................... Work in Process—Finishing Department ($25,000 X 160%) .......................................... Manufacturing Overhead .........................

56,000 40,000 96,000

BRIEF EXERCISE 21-4

January March July

Materials 45,000 (35,000 + 10,000) 48,000 (40,000 + 8,000) 61,000 (45,000 + 16,000)

Conversion Costs 39,000 (35,000 + 4,000a) 46,000 (40,000 + 6,000b) 49,000 (45,000 + 4,000c)

a. 10,000 X 40% b. 8,000 X 75% c. 16,000 X 25%

21-7

BRIEF EXERCISE 21-5

Units transferred out Work in process, November 30 Materials (7,000 X 100%) Conversion costs (7,000 X 40%) Total equivalent units

(a) Materials 9,000

(b) Conversion Costs 9,000

7,000 2,800 11,800

16,000

BRIEF EXERCISE 21-6 Total materials costs $33,000 Total conversion costs $54,000 Unit materials cost $3.30

Equivalent units of materials 10,000

Equivalent units of conversion costs 12,000

Unit conversion cost $4.50

Unit materials cost $3.30

Unit conversion cost $4.50

Total manufacturing cost per unit $7.80

BRIEF EXERCISE 21-7 Assignment of Costs Transferred out Transferred out Work in process, 4/30 Materials Conversion costs Total costs

21-8

Equivalent Units

Unit Cost

40,000

$11

5,000 2,000

$ 4 $ 7

$440,000

$20,000 14,000

34,000 $474,000

BRIEF EXERCISE 21-8 Total materials costs $12,000 Total conversion costs* $47,500

Equivalent units of materials 20,000

Equivalent units of conversion costs 19,000

Unit materials cost $.60

Unit conversion cost $2.50

*$29,500 + $18,000 BRIEF EXERCISE 21-9 Costs accounted for Transferred out Work in process Materials Conversion costs Total costs

(18,000 X $3.10) (2,000 X $.60) (1,000* X $2.50)

$55,800 $1,200 2,500

3,700 $59,500

*2,000 X 50%

BRIEF EXERCISE 21-10 1. 2. 3. 4. 5.

False. Just-in-time processing results in a “pull” approach. True. False. A major advantage of JIT processing is enhanced product quality. True. False. A major disadvantage of conventional costing is that it uses a single unit-level basis, such as direct labor to allocate overhead.

*BRIEF EXERCISE 21-11 Machine setups Machining Inspections

$150,000 ÷ 2,500 = $60 per setup $325,000 ÷ 25,000 = $13 per machine hour $87,500 ÷ 1,750 = $50 per inspection

21-9

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 21-1 1. 2. 3. 4.

False False True False

DO IT! 21-2 Work in Process—Mixing................................................... Work in Process—Packaging ............................................ Raw Materials Inventory ............................................. (To record materials used)

10,000 28,000

Work in Process—Mixing................................................... Work in Process—Packaging ............................................ Factory Labor .............................................................. (To assign factory labor to production)

8,000 36,000

Work in Process—Mixing................................................... Work in Process—Packaging ............................................ Manufacturing Overhead............................................ (To assign overhead to production)

12,000 54,000

Work in Process—Packaging ............................................ Work in Process—Mixing ........................................... (To record transfer of units to the Packaging Department)

21,000

38,000

44,000

66,000

21,000

Finished Goods Inventory ................................................... 106,000 Work in Process—Packaging .................................... (To record transfer of units to finished goods)

21-10

106,000

DO IT! 21-3 (a) Since materials are entered at the beginning of the process, the equivalent units of ending work in process are 10,000. 20,000 units + 10,000 units = 30,000 equivalent units of production for materials. (b) Since ending work in process is only 70% complete as to conversion costs, the equivalent units of ending work in process for conversion costs are 7,000 (70% X 10,000 units). 20,000 units + 7,000 units = 27,000 equivalent units of production for conversion costs.

DO IT! 21-4 (a) 0 (Work in process, March 1) + 26,000* (Started into production) = 26,000 *22,000 + 4,000 (b) Equivalent units of production: Units transferred out ................. Work in process, March 31 ....... Total............................................

Materials 22,000 4,000 26,000

(c) Cost reconciliation schedule Costs accounted for Transferred out (22,000 X $18) ............ Work in process, March 31 Materials (4,000 X $10) ................. Conversion costs (1,600 X $8) ..... Total costs .................................................

Conversion 22,000 1,600 (4,000 X 40%) 23,600

$396,000 $40,000 12,800

52,800 $448,800

21-11

DO IT! 21-5 1. 2. 3. 4. 5. 6.

21-12

False True True True False True

SOLUTIONS TO EXERCISES EXERCISE 21-1 1. True. 2. True. 3. False. Companies that produce soft drinks and computer chips would use process cost accounting. 4. False. In a job order cost system, costs are tracked by individual jobs. 5. False. Job order costing and process costing track the same three manufacturing cost elements. 6. True. 7. True. 8. False. In a process cost system, multiple work in process accounts are used. 9. False. In a process cost system, costs are summarized in a production cost report for each department. 10. True. EXERCISE 21-2 April 30

Work in Process—Cooking .............................. Work in Process—Canning .............................. Raw Materials Inventory ...........................

21,000 9,000

Work in Process—Cooking .............................. Work in Process—Canning .............................. Factory Labor ............................................

8,500 7,000

Work in Process—Cooking .............................. Work in Process—Canning .............................. Manufacturing Overhead ..........................

31,500 25,800

Work in Process—Canning .............................. Work in Process—Cooking ......................

53,000

30,000

15,500

57,300 53,000

21-13

EXERCISE 2114 (a) Work in process, May 1 Started into production Total units to be accounted for Less: Transferred out Work in process, May 31 (b) and (c)

400 1,600 2,000 1,700 300 Equivalent Units Materials Conversion Costs 1,700 1,700

Units transferred out Work in process, May 31 300 X 100% 300 X 40%

300

Work in process, May 1 Costs added Total costs Equivalent units Unit costs

2,000

120 1,820

Direct Materials $2,040 5,160 $7,200 2,000 $3.60

Conversion Costs $1,550 3,910* $5,460 1,820 $3.00

*$2,530 + $1,380 (d) Transferred out (1,700 X $6.60) (e) Work in process Materials (300 X $3.60) Conversion costs (120 X $3.00)

21-14

$11,220 $ 1,080 360 $ 1,440

EXERCISE 21-4 1. 2. 3.

7. 8. 9.

Raw Materials Inventory.......................................... Accounts Payable ............................................

62,500

Factory Labor........................................................... Wages Payable .................................................

60,000

Manufacturing Overhead......................................... Cash .................................................................. Accounts Payable ............................................

70,000

Work in Process—Cutting....................................... Work in Process—Assembly .................................. Raw Materials Inventory ..................................

15,700 8,900

Work in Process—Cutting....................................... Work in Process—Assembly .................................. Factory Labor ...................................................

33,000 27,000

Work in Process—Cutting (1,680 X $18) ................ Work in Process—Assembly (1,720 X $18) ............ Manufacturing Overhead .................................

30,240 30,960

Work in Process—Assembly .................................. Work in Process—Cutting ...............................

67,600

Finished Goods Inventory....................................... Work in Process—Assembly...........................

134,900

Cost of Goods Sold ................................................. Finished Goods Inventory ...............................

150,000

Accounts Receivable............................................... Sales Revenue..................................................

200,000

62,500 60,000 40,000 30,000

24,600

60,000

61,200 67,600 134,900 150,000 200,000

21-15

EXERCISE 2116 (a) Units to be accounted for Beginning work in process Started into production Total units Units accounted for Transferred out Ending work in process Total units (b)

(1) January March May July

January

May

0 13,000 13,000

0 21,000 21,000

11,000 2,000 13,000

14,000 7,000 21,000

Materials 13,000 (11,000 + 2,000) 15,000 (12,000 + 3,000) 21,000 (14,000 + 7,000) 11,500 (10,000 + 1,500)

(2)

Conversion Costs 12,200 (11,000 + 1,200) 12,900 (12,000 + 900) 19,600 (14,000 + 5,600) 10,600 (10,000 + 600)

EXERCISE 21-6 (a)

(1) Materials

(2) Conversion Costs

12,000

Units transferred out Work in process, July 31 3,000 X 100% 3,000 X 60% Total equivalent units

3,000 1,800 13,800

15,000

(b) Materials: $45,000 ÷ 15,000 = $3.00 Conversion costs: ($16,200 + $18,300) ÷ 13,800 = $2.50 Costs accounted for Transferred out (12,000 X $5.50) Work in process, July 31 Materials (3,000 X $3.00) Conversion costs (1,800 X $2.50) Total costs

21-16

$66,000 $9,000 4,500

13,500 $79,500

EXERCISE 21-7 QUIK FURNITURE COMPANY Sanding Department Production Cost Report For the Month Ended March 31, 2017

Quantities

Physical Units

Units to be accounted for Work in process, March 1 Started into production Total units

0 10,000 10,000

Units accounted for Transferred out Work in process, March 31 Total units

7,000 3,000 10,000

Equivalent Units Conversion Materials Costs

7,000 3,000 10,000

7,000 600 7,600

Costs

Materials

Conversion Costs

Unit costs Total cost Equivalent units Unit costs (a) ÷ (b)

$33,000 10,000 $3.30

$57,000* 7,600 $7.50

Costs to be accounted for Work in process, March 1 Started into production Total costs

(3,000 X 20%)

Total $90,000 $10.80

0 90,000 $90,000

Cost Reconciliation Schedule Costs accounted for Transferred out (7,000 X $10.80) Work in process, March 31 Materials (3,000 X $3.30) Conversion costs (600 X $7.50) Total costs

$75,600 $9,900 4,500

14,400 $90,000

*$21,000 + $36,000

21-17

EXERCISE 21-8 (a)

(1) Materials 17,000

Units transferred out Work in process, April 30 1,000 X 100% 1,000 X 40%

1,000 18,000

400 17,400

Materials $900,000(1) 18,000 $ 50

Conversion Costs $435,000(2) 17,400 $ 25

(b) Total cost Equivalent units Unit costs (1)

$100,000 + $800,000

(2)

$ 70,000 + $365,000

(2) Conversion Costs 17,000

Total $1,335,000 $

$1,275,000 $50,000 10,000

60,000 $1,335,000

EXERCISE 21-9 (a) Materials: 30,000* + 6,000 = 36,000 Conversion costs: 30,000* + (6,000 X 40%) = 32,400 *36,000 – 6,000 (b) Materials: $72,000/36,000 = $2.00 Conversion costs: ($61,000 + $101,000)/32,400 = $5.00 (c) Transferred out: 30,000 X $7.00 = $210,000 Ending work in process: Materials (6,000 X $2.00) Conversion costs (2,400 X $5.00) Total 21-18

= =

$12,000 12,000 $24,000

EXERCISE 21-19 (a) Beginning work in process Units started into production

Units transferred out Ending work in process

Physical Units 20,000 164,000 184,000

Equivalent Units

Conversion Materials Costs 160,000 160,000 24,000 14,400 (60% X 24,000) 184,000 174,400

160,000 24,000 184,000

(b) Materials $101,200 184,000 $0.55

Costs incurred Equivalent units Unit costs

Conversion Costs $348,800 174,400 $2.00

(c) Assignment of costs: Transferred out (160,000 X $2.55) Ending work in process Materials (24,000 X $.55) Conversion costs (14,400 X $2.00) Total costs

Total $450,000 $2.55

$408,000 $13,200 28,800

42,000 $450,000

EXERCISE 21-11 (a) Work in process, September 1 Units started into production Units transferred out Work in process, September 30

Physical Units 1,600 42,900 44,500 39,500 5,000 44,500

21-19

EXERCISE 21-11 (Continued) Equivalent Units Materials Conversion Costs 39,500 39,500

Units transferred out Work in process 5,000 X 100% 5,000 X 10%

5,000 500 40,000

44,500 (b)

Materials Work in process, September 1 Direct materials

$ 20,000

Costs added to production during September Total materials cost

175,800 $195,800

$195,800 ÷ 44,500 = $4.40 (Materials cost per unit) Conversion Costs Work in process, September 1 Conversion costs

$ 43,180

Costs added to production during September Conversion costs ($125,680 + $257,140) Total conversion costs

382,820 $426,000

$426,000 ÷ 40,000 = $10.65 (Conversion cost per unit) (c) Costs accounted for Transferred out (39,500 X $15.05) Work in process, September 30 Materials (5,000 X $4.40) Conversion costs (500 X $10.65) Total costs

21-20

$594,475 $22,000 5,325

27,325 $621,800

EXERCISE 21-21 To:

David Skaros

From:

Student

Re:

Ending inventory

The reason for any confusion related to your department’s ending inventory quantity stems from the fact that the quantity can be measured in two different ways, depending on what the information is used for. The ending inventory quantity can be measured in physical units or equivalent units. Physical units are actual units present without regard to the stage of completion. Your department’s ending inventory in physical units is at least double the amount reported as equivalent units. Equivalent units measure the work done on the physical units, expressed in terms of fully completed units. Therefore, if your ending inventory contains 4,000 units which are 50% complete, that is equivalent to having 2,000 completed units at month end. Therefore, the ending inventory could be expressed as containing 4,000 physical units or 2,000 equivalent units. I hope this clears up any misunderstandings. Please contact me if you have any further questions.

21-21

EXERCISE 21-13 HEALTHY COMPANY Welding Department Production Cost Report For the Month Ended February 28, 2017

Quantities

Physical Units

Equivalent Units Conversio Materials n Costs

(Step 1)

(Step 2)

Units to be accounted for Work in process, February 1 Started into production Total units

15,000 51,000 66,000

Units accounted for Transferred out Work in process, February 28 Total units

55,000 11,000 66,000

Costs Unit costs (Step 3) Total cost Equivalent units Unit costs (a) ÷ (b)

55,000 11,000 66,000

55,000 2,200 (11,000 X 20%) 57,200

Materials

Conversion Costs

(a) $198,000(1) (b) 66,000 $3.00

$143,000(2) 57,200 $2.50

Costs to be accounted for Work in process, February 1 Started into production Total costs

Total $341,000 $5.50

$ 32,175 308,825 $341,000

Cost Reconciliation Schedule (Step 4) Costs accounted for Transferred out (55,000 X $5.50) Work in process, February 28 Materials (11,000 X $3.00) Conversion costs (2,200 X $2.50) Total costs

$302,500 $33,000 5,500

(1)

$18,000 + $180,000 $14,175 + $67,380 + $61,445

(2)

21-22

38,500 $341,000

EXERCISE 21-23 (a)

Containers in transit, April 1 Containers loaded Total containers

0 1,200 1,200

Containers off-loaded Containers in transit, April 30 Total containers

850 350 1,200

(b) Containers off-loaded Containers in transit, April 30 Total equivalent units *350 x 40% = 140 **350 x 20% = 70

Equivalent Units Physical Direct Conversion Materials Units Costs 850 850 850 350 140* 70** 990 920

EXERCISE 21-15 (a) Applications transferred out Work in process, September 30 Equivalent units

Conversion Costs 800 180** 980

Materials 800 300* 1,100

*100 + 1,000 – 800 = 300 **300 X 60% = 180 (b) Materials: $5,500 ÷ 1,100 = $5.00 Conversion costs: $25,480* ÷ 980 = $26.00 Costs accounted for: Transferred out (800 X $31.00) Work in process, September 30 Materials (300 X $5.00) Conversion costs (180 X $26.00) Total costs *($3,960 + $12,000 + $9,520)

$24,800 $1,500 4,680

6,180 $30,980

21-23

*EXERCISE 21-16 (a) The overhead rates are: Activity Cost Pools

Expected Use Estimated of Cost Drivers Activity-Based Overhead ÷ per Activity = Overhead Rates

Materials handling Machine setups Quality inspections

$40,000 27,500 27,000

1,000 500 600

$40 55 45

(b) The assignment of the overhead costs to products is as follows: Instruments Gauges Cost Driver Number Cost Number Cost Requisitions ($40) 400 $16,000 600 $24,000 Machine setups ($55) 200 11,000 300 16,500 Inspections ($45) 200 9,000 400 18,000 Total costs assigned (a) $36,000 $58,500 Units produced (b)

Overhead cost per Unit (a) ÷ (b)

21-24

720

300 $

195

Cost Assigned $40,000 27,500 27,000 $94,500

*EXERCISE 21-16 (Continued) (c)

MEMO To:

President, Major Instrument, Inc.

From:

Student

Re:

Benefits of activity-based costing (ABC)

ABC focuses on the activities performed in producing a product. Overhead costs are assigned to products based on cost drivers that measure the activities performed on the product. The primary benefit of ABC is more accurate and meaningful product costing. This improved cost data can lead to reduced costs as managers become more aware of the underlying causes of cost incurrence. Thus, control over costs is enhanced. The improved cost data should also lead to better management decisions. More accurate product costing should contribute to setting selling prices which will help achieve desired profitability levels. In addition, it should be helpful in deciding whether to make or buy a product part or component, and sometimes even whether to eliminate a product.

21-25

*EXERCISE 21-17 (a)

Direct materials (1,000 X $35) ............................... Direct labor (1,000 X $15) ...................................... Overhead ($15,000 X 234%*) ................................. Total ............................................................

$35,000 15,000 35,100 $85,100

*($468,000/$200,000) (b)

Direct materials (1,000 X $35) ............................... Direct labor (1,000 X $15) ...................................... Overhead Materials handling (2,500 X $3*) ..................... Machining (500 X $9**) .................................... Factory supervision (1,000 X $11.50***)......... Total.............................................................

$35,000 15,000 $ 7,500 4,500 11,500

*$150,000 ÷ 50,000 **$180,000 ÷ 20,000 ***$138,000 ÷ 12,000

21-26

23,500 $73,500

SOLUTIONS TO PROBLEMS PROBLEM 21-1A

1. 2.

3. 4.

5. 6.

7. 8. 9.

Raw Materials Inventory.................................. Accounts Payable ....................................

300,000

Work in Process—Mixing ................................ Work in Process—Packaging ......................... Raw Materials Inventory ..........................

210,000 45,000

Factory Labor................................................... Wages Payable .........................................

278,900

Work in Process—Mixing ................................ Work in Process—Packaging ......................... Factory Labor ...........................................

182,500 96,400

Manufacturing Overhead................................. Accounts Payable ....................................

810,000

Work in Process—Mixing (28,000 X $23) ....... Work in Process—Packaging (6,000 X $23) ................................................. Manufacturing Overhead .........................

644,000

300,000

255,000 278,900

278,900 810,000

138,000 782,000

Work in Process—Packaging ......................... Work in Process—Mixing ........................

979,000

Finished Goods Inventory............................... Work in Process—Packaging..................

1,315,000

Accounts Receivable....................................... Sales Revenue..........................................

2,500,000

Cost of Goods Sold ......................................... Finished Goods Inventory .......................

1,604,000

979,000 1,315,000 2,500,000 1,604,000

21-27

PROBLEM 21-2A

(a) Physical units Units to be accounted for Work in process, June 1 Started into production Total units

0 22,000 22,000

Units accounted for Transferred out Work in process, June 30 Total units

20,000 2,000 22,000

(b) Equivalent units Materials 20,000

Units transferred out Work in process, June 30 2,000 X 100% 2,000 X 40% Total equivalent units

Conversion Costs 20,000

2,000 800 20,800

22,000

(c)

Unit Costs $9.00 ($198,000 ÷ 22,000) $8.00 ($166,400* ÷ 20,800) $17.00 ($9.00 + $8.00)

Materials Conversion costs Total unit cost *$53,600 + $112,800

(d) Costs accounted for Transferred out (20,000 X $17.00) Work in process, June 30 Materials (2,000 X $9.00) Conversion costs (800 X $8.00) Total costs

21-28

$340,000 $18,000 6,400

24,400 $364,400

PROBLEM 21-2A (Continued) (e)

ROSENTHAL COMPANY Molding Department Production Cost Report For the Month Ended June 30, 2017

Quantities

Physical Units

Equivalent Units Conversion Materials Costs

(Step 1)

(Step 2)

Units to be accounted for Work in process, June 1 Started into production Total units

0 22,000 22,000

Units accounted for Transferred out Work in process, June 30 Total units

20,000 2,000 22,000

Costs Unit costs (Step 3) Total cost Equivalent units Unit costs (a) ÷ (b)

20,000 2,000 22,000

20,000 800 (2,000 X 40%) 20,800

Materials

Conversion Costs

(a) $198,000 (b) 22,000 $9.00

$166,400 20,800 $8.00

Costs to be accounted for Work in process, June 1 Started into production Total costs

Total $364,400 $17.00

0 364,400 $364,400

Cost Reconciliation Schedule (Step 4) Costs accounted for Transferred out (20,000 X $17.00) Work in process, June 30 Materials (2,000 X $9.00) Conversion costs (800 X $8.00) Total costs

$340,000 $18,000 6,400

24,400 $364,400

21-29

PROBLEM 21-3A

(a) (1) Physical units T12 Tables

C10 Chairs

Units to be accounted for Work in process, July 1 Started into production Total units

0 20,000 20,000

0 18,000 18,000

Units accounted for Transferred out Work in process, July 31 Total units

17,000 3,000 20,000

17,500 500 18,000

(2) Equivalent units

Units transferred out Work in process, July 31 (3,000 X 100%) (3,000 X 60%) Total equivalent units

Units transferred out Work in process, July 31 (500 X 100%) (500 X 80%) Total equivalent units

21-30

T12 Tables Conversion Materials Costs 17,000 17,000 3,000 1,800 18,800

20,000

C10 Chairs Conversion Materials Costs 17,500 17,500 500 400 17,900

18,000

PROBLEM 21-3A (Continued) (3) Unit costs

Materials ($380,000 ÷ 20,000) ($288,000 ÷ 18,000) Conversion costs ($338,400(a) ÷ 18,800) ($214,800(b) ÷ 17,900) Total (a)

T12 Tables $19

C10 Chairs $16

18 $37

12 $28

$234,400 + $104,000

(b)

$110,000 + $104,800

(4)

T12 Tables Costs accounted for Transferred out (17,000 X $37) Work in process Materials (3,000 X $19) Conversion costs (1,800 X $18) Total costs

$629,000 $57,000 32,400

89,400 $718,400

C10 Chairs Costs accounted for Transferred out (17,500 X $28) Work in process Materials (500 X $16) Conversion costs (400 X $12) Total costs

$490,000 $8,000 4,800

12,800 $502,800

21-31

PROBLEM 21-3A (Continued) (b)

THAKIN INDUSTRIES INC. Cutting Department—Plant 1 Production Cost Report For the Month Ended July 31, 2017

Quantities

Physical Units

Equivalent Units Conversion Materials Costs

(Step 1)

(Step 2)

Units to be accounted for Work in process, July 1 Started into production Total units

0 20,000 20,000

Units accounted for Transferred out Work in process, July 31 Total units

17,000 3,000 20,000

Costs Unit costs (Step 3) Total cost Equivalent units Unit costs (a) ÷ (b)

17,000 3,000 20,000

17,000 1,800 (3,000 X 60%) 18,800

Materials

Conversion Costs

(a) $380,000 (b) 20,000 $ 19

$338,400 18,800 $ 18

Costs to be accounted for Work in process, July 1 Started into production Total costs

Total $718,400 $

0 718,400 $718,400

Cost Reconciliation Schedule (Step 4) Costs accounted for Transferred out (17,000 X $37) Work in process, July 31 Materials (3,000 X $19) Conversion costs (1,800 X $18) Total costs

21-32

$629,000 $57,000 32,400

89,400 $718,400

PROBLEM 21-4A

(a) Physical Units Units to be accounted for Work in process, November 1 Started into production Total units

35,000 660,000 695,000

Units accounted for Transferred out Work in process, November 30 Total units

670,000 25,000 695,000

Equivalent Units Conversion Materials Costs

670,000 25,000 695,000

670,000 10,000* 680,000

*25,000 X 40% Materials cost Beginning work in process Added during month Total

Equivalent units Cost per unit

Conversion costs

79,000 1,589,000 $1,668,000

$ 48,150 563,850 $612,000

695,000

680,000

$2.40

$.90

($225,920 + $337,930)

(b) Costs accounted for Transferred out (670,000 X $3.30) Work in process, November 30 Materials (25,000 X $2.40) Conversion costs (10,000 X $.90) Total costs

$2,211,000 $60,000 9,000

69,000 $2,280,000

21-33

PROBLEM 21-4A (Continued) (c)

RIVERA COMPANY Assembly Department Production Cost Report For the Month Ended November 30, 2017

Quantities

Physical Units

Equivalent Units Conversion Materials Costs

(Step 1)

(Step 2)

Units to be accounted for Work in process, November 1 Started into production Total units

35,000 660,000 695,000

Units accounted for Transferred out Work in process, November 30 Total units

670,000 25,000 695,000

Costs Unit costs (Step 3) Total cost Equivalent units Unit costs (a) ÷ (b)

670,000 25,000 695,000

670,000 10,000 (25,000 X 40%) 680,000

Materials

Conversion Costs

(a) $1,668,000 (b) 695,000 $2.40

$612,000 680,000 $.90

Total $2,280,000 $3.30

Costs to be accounted for Work in process, November 1 Started into production Total costs

$ 127,150 2,152,850 $2,280,000

Cost Reconciliation Schedule (Step 4) Costs accounted for Transferred out (670,000 X $3.30) Work in process, November 30 Materials (25,000 X $2.40) Conversion costs (10,000 X $.90) Total costs

21-34

$2,211,000 $60,000 9,000

69,000 $2,280,000

PROBLEM 21-5A

(a) (1) Physical Units Units to be accounted for Work in process, July 1 Started into production Total units

500 1,000 1,500

Units accounted for Transferred out Work in process, July 31 Total units

900 600 1,500

Equivalent Units Conversion Materials Costs

900 600 1,500

900 240* 1,140

*600 X 40% (2)

Materials cost

Conversion costs

Beginning work in process Added during month Total

$ 750 2,400 $3,150

$ 600 2,820 $3,420

Equivalent units

1,500

1,140

Cost per unit

$2.10

$3.00

($1,580 + $1,240)

(3) Costs accounted for Transferred out (900 X $5.10) Work in process, July 31 Materials (600 X $2.10) Conversion costs (240 X $3.00) Total costs

$4,590 $1,260 720

1,980 $6,570

21-35

PROBLEM 21-5A (Continued) (b)

POLK COMPANY Basketball Department Production Cost Report For the Month Ended July 31, 2017

Quantities

Physical Units

Equivalent Units Conversion Materials Costs

(Step 1)

(Step 2)

Units to be accounted for Work in process, July 1 Started into production Total units

500 1,000 1,500

Units accounted for Transferred out Work in process, July 31 Total units

900 600 1,500

Costs Unit costs (Step 3) Total costs Equivalent units Unit costs (a) ÷ (b)

(a) (b)

900 600 1,500

900 240 1,140

Materials

Conversion Costs

$3,150 1,500 $2.10

$3,420 1,140 $3.00

Total $6,570 $5.10

Costs to be accounted for Work in process, July 1 Started into production Total costs

$1,350 5,220 $6,570

Cost Reconciliation Schedule (Step 4) Costs accounted for Transferred out (900 X $5.10) Work in process, July 31 Materials (600 X $2.10) Conversion costs (240 X $3.00) Total costs

21-36

$4,590 $1,260 720

1,980 $6,570

PROBLEM 21-6A

(a) Computation of equivalent units:

Units accounted for Transferred out Work in process, October 31 (60% materials, 40% conversion costs) Total units

Physical Units

Equivalent Units Conversion Materials Costs

120,000

50,000 170,000

30,000 150,000

20,000 140,000

Computation of October unit costs Materials: $240,000 ÷ 150,000 equivalent units = $1.60 Conversion cost: $105,000 ÷ 140,000 equivalent units = .75 Total unit cost, October $2.35

(b) Cost Reconciliation Schedule Costs accounted for Transferred out (120,000 X $2.35) Work in process, October 31 Materials (30,000 X $1.60) Conversion costs (20,000 X $0.75) Total costs

$282,000 $48,000 15,000

63,000 $345,000

21-37

*PROBLEM 21-7A

(a) The allocation of total manufacturing overhead using activity-based costing is as follows:

Overhead Rate Purchase orders @ $30 Machine setups @ $50 Machine hours @ $40 Inspections @ $25 Total assigned costs (a)

Royale Drivers Cost Used Assigned

Majestic Drivers Cost Used Assigned

17,000 5,000 75,000 11,000

23,000 13,000 45,000 17,000

$ 510,000 250,000 3,000,000 275,000 $4,035,000

Units produced (b)

$ 690,000 650,000 1,800,000 425,000 $3,565,000

25,000

Cost per unit (a) ÷ (b)

161.40

Total Overhead $1,200,000 900,000 4,800,000 700,000 $7,600,000

10,000 $

356.50

(b) The cost per unit and gross profit of each model under ABC costing were: Direct materials Direct labor Manufacturing overhead Total cost per unit

Royale $ 700.00 120.00 161.40 $ 981.40

Majestic $ 420.00 100.00 356.50 $ 876.50

Sales price per unit Cost per unit Gross profit

$1,600.00 981.40 $ 618.60

$1,300.00 876.50 $ 423.50

(c) Management’s future plans for the two television models are not sound. Under ABC costing, the Royale model is $195.10 ($618.60 – $423.50) per unit more profitable than the Majestic model. If any product should be phased out, it is the Majestic. But, by applying ABC and activity-based management analysis, Schultz may determine how to reduce the costs of producing the Majestic model.

21-38

CD21

CURRENT DESIGNS

CURRENT DESIGNS Fabrication Department Production Cost Report For the Month Ended April 30, 2017

Quantities

Physical Units Materials

Equivalent Units Conversion Costs

(Step 1)

(Step 2)

Units to be accounted for Work in process, April 1 Started into production Total units

30 72 102

Units accounted for Transferred out Work in process, April 30 Total units

67 35 102

Costs Unit costs (Step 3) Total cost* Equivalent units Unit costs [(a) ÷ (b)]

67 7 (35 X 20%) 74

Materials

Conversion Costs

(a) $25,900 (b) 74 $ 350

$48,600 81 $ 600

Costs to be accounted for Work in process, April 1 Started into production Total costs

67 14 (35 X 40%) 81

Total $74,500 $

950

$17,400 57,100 $74,500

Cost Reconciliation Schedule (Step 4) Costs accounted for Transferred out (67 X $950) Work in process, April 30 Materials (7 X $350) Conversion costs (14 X $600) Total costs

$63,650 $ 2,450 8,400

10,850 $74,500

*Material costs = $8,400 + $17,500 Conversion costs = $9,000 + $39,600

21-39

BYP 21-1

DECISION-MAKING ACROSS THE ORGANIZATION

(a) The unit cost suggests that Joe took the highest total costs and divided these costs by the units started into production. The highest total costs would be the total costs charged to the Mixing Department ($88,000 + $573,000 + $765,000) divided by the units started during July (100,000 gallons), which results in a per unit cost of $14.26 ($1,426,000 ÷ 100,000). (b) The principal errors made by Joe were: (1) he did not compute equivalent units of production; (2) he did not use the weighted-average costing method; and (3) he did not assign costs to ending work-in-process.

21-40

BYP 21-1 (Continued) (c)

FLORIDA BEACH COMPANY Mixing Department Production Cost Report For the Month Ended July 31, 2017

Quantities

Physical Units

Equivalent Units Conversion Materials Costs

(Step 1)

(Step 2)

Units to be accounted for Work in process, July 1 Started into production Total units

8,000 100,000 108,000

Units accounted for Transferred out Work in process, July 31 Total units

103,000 5,000 108,000

Costs Unit costs (Step 3) Total cost Equivalent units Unit costs (a) ÷ (b)

103,000 5,000 108,000

103,000 1,000 (5,000 X 20%) 104,000

Materials

Conversion Costs

(a) $594,000 (b) 108,000 $5.50

$832,000 104,000 $8.00

Costs to be accounted for Work in process, July 1 Started into production Total costs

Total $1,426,000 $13.50

88,000 1,338,000 $1,426,000

Cost Reconciliation Schedule (Step 4) Costs accounted for Transferred out (103,000 X $13.50) Work in process, July 31 Materials (5,000 X $5.50) Conversion costs (1,000 X $8.00) Total costs

$1,390,500 $27,500 8,000

35,500 $1,426,000

21-41

BYP 21-2

MANAGERIAL ANALYSIS

(a) The unit cost of materials is $150 ($450,000 ÷ 3,000). (b) The materials cost of the goods transferred out is $375,000 (2,500 X $150). Conversion costs, therefore, are $225,000 ($600,000 – $375,000), and per unit conversion cost is $90 ($225,000 ÷ 2,500). (c) There are 500 units in ending work-in-process inventory (3,000 started – 2,500 transferred out). The materials cost is $75,000 (500 X $150). Thus, the conversion costs in the inventory are $36,000 ($261,000 – $225,000). $36,000 divided by $90 per unit conversion cost equals 400 equivalent units or 80% (400 ÷ 500) complete.

21-42

BYP 21-3

REAL-WORLD FOCUS

(a) The outer shell of the paintballs is made from a mixture that includes water, sweeteners, food ingredients, and most importantly, gelatin. All of the ingredients used to make paintballs are food grade, biodegradable products. The “paint” filling inside a paintball is comprised of the same inert ingredient used in cough syrup, as well as crayon wax. After mixing the gelatin and other materials, the mixture is heated, and then spread on rolling drums which create thin gelatin ribbons. Each of the ribbons then passes over a rotating die. The dies are designed so that they can form round capsules. The dies press against each other as they rotate. As the dies meet, both shells are filled with paint, which is injected into the area between the sheets. The two halves then seal as they press against each other to form a filled capsule. Once the capsules are sealed they drop out of the machine to become paintballs. They pass along a conveyor belt to a tumble drier, then onto a drying rack. Once they are dry, they go into a counting machine, then into a packing machine which packs exactly the correct number of balls into each container. (b) Materials: water, sweeteners, food ingredients, gelatin, “cough syrup material”, crayon wax, and food coloring. Labor: People would be needed run the various machines. Overhead: Depreciation and maintenance of the various machines. It would appear that overhead would be by far the highest cost because the process is very automated. Machines are needed for mixing the gelatin, heating it, rolling it into ribbons, making the capsules, filling the capsules, sorting and drying the capsules, counting the capsules and packing them. (c) This would appear to be a perfect situation for the use of process costing. Paintballs are a high volume product, and the paintballs are very homogenous. While there may be some differences in various types of paintballs that would merit keeping track of specific costs to make the various types, the primary method of cost determination would be process costing.

21-43

BYP 21-4

ETHICS CASE

(a) The stakeholders in this situation are: ⯈ ⯈ ⯈ ⯈

Jan Wooten, molding department head. Tony Ferneti quality control inspector. Customers of R. B. Dillman Company. The department manager of the assembly department.

(b) Tony is placed in an ethical dilemma. He can offend his department head by disregarding Jan’s instructions and lose the support of his supervisor, and maybe lose his job. He can follow Jan’s instructions and be in violation of company policy. He can also report Jan’s instructions to supervisors (plant superintendent or vice-president of production). The company should make the position of quality control inspector responsible to someone other than the department head. Tony should not report to Jan.

21-44

BYP 21-5

CONSIDERING PEOPLE, PLANET, AND PROFIT

(a) Some of the costs that the company now faces include:  Monetary damages: The company paid $21.4 million in fines as a result of an OSHA investigation; $1.6 billion to compensate those affected by the accident; and $1 billion to repair and update its refinery (plus an additional $250 million to install safety valves)  Bad publicity  Lost sales  Cost of cleaning up the affected area including transporting workers to the site; housing workers near the site; per diem for cleanup workers; safety equipment for the workers  Transportation and storage/disposal fees for any contaminants removed from the area  Legal fees associated with lawsuits/settlements  Reimburse the Coast Guard for any oil containment equipment provided  Possible air/water testing for an extensive time following the accident (b) Some steps that the company could have taken to reduce the environmental failure costs include:    

Install up to date safety equipment Increase the frequency and efficacy of inspections Increase maintenance on older facilities Be responsive to and investigate thoroughly complaints by neighbors and regulators  Invest in research to discover safer means of boosting octane  Locate plants further away from population centers to the extent possible

21-45

CHAPTER 22 Cost-Volume-Profit ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

1, 2, 3, 4, 5, 6

Explain variable, fixed, and mixed costs and the relevant range.

2. Apply the high-low method to 7, 8 determine the components of mixed costs. 3. Prepare a CVP income statement to determine contribution margin.

9, 10, 11, 17

Brief Exercises

Do It!

Exercises

A Problems

1, 2, 3

4, 5, 6, 7, 8, 9, 1A, 2A, 4A, 10 5A

Compute the break-even 12, 13, 14 point using three approaches .

6, 7

5, 6, 7, 8, 9, 10, 11, 13

1A, 2A, 3A, 4A, 5A

Determine the sales required 15, 16 to earn target net income and determine margin of safety.

8, 9, 10

11, 12, 13

2A, 4A, 5A

Use CVP analysis to respond 15, 16 to changes in the business environment.

*7.

Explain the differences between absorption costing and variable costing.

18, 19

15, 16

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the chapter.

22-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Determine variable and fixed costs, compute break-even point, prepare a CVP graph, and determine net income.

Simple

20–30

Prepare a CVP income statement, compute break-even point, contribution margin ratio, margin of safety ratio, and sales for target net income.

Moderate

30–40

Compute break-even point under alternative courses of action.

Simple

20–30

Compute break-even point and margin of safety ratio, and prepare a CVP income statement before and after changes in business environment.

Moderate

20–30

Compute contribution margin, fixed costs, break-even point, sales for target net income, and margin of safety ratio.

Moderate

20–30

*6A

Prepare income statements under absorption costing and variable costing for a company with beginning inventory, and reconcile differences.

Moderate

20–30

22-2 .

Learning Objective

Knowledge Comprehension

Application

Evaluation

Explain variable, fixed, and mixed costs and the relevant range.

E22-4

Q22-1 Q22-2 Q22-3 Q22-4 Q22-5

*2.

Apply the high-low method to E22-4 determine the components of mixed costs.

Q22-7

Q22-8 BE22-4

DI22-2 E22-2 P22-1A

*3.

Prepare a CVP income statement to determine contribution margin.

Q22-9 Q22-10

Q22-11 Q22-17 BE22-5 DI22-3 E22-5

E22-6 E22-7 E22-8 E22-9 E22-10

BE22-6 P22-1A P22-2A P22-5A

P22-4A

*4.

Compute the break-even point using three approaches.

Q22-12 Q22-14

Q22-13 BE22-6 BE22-7

DI22-4 P22-1A E22-11 P22-2A E22-13 P22-5A

P22-3A P22-4A

*5.

Determine the sales required to earn target net income and determine margin of safety.

Q22-15 Q22-16 BE22-8 BE22-9 BE22-10

DI22-5 P22-2A E22-11 P22-5A E22-12 E22-13

P22-4A

*6.

Use CVP analysis to respond to changes in the business environment.

BE22-11 DI22-6

E22-14

Explain the differences between absorption costing and variable costing.

Broadening Your Perspective

BE22-2 BE22-3 E22-2 P22-1A

Synthesis

*1.

Q22-18

Q22-6 E22-2 BE22-1 E22-5 DI22-1 E22-6 E22-1 E22-3

Analysis

Q22-19

BE22-12 E22-17

E22-15 P22-6A

BYP22-5

BYP22-3

BYP22-1

P22-6A

BYP22-4 BYP22-2 BYP22-6 BYP22-7

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

22-3

ANSWERS TO QUESTIONS 1.

(a) Cost behavior analysis is the study of how specific costs respond to changes in the level of activity within a company. (b) Cost behavior analysis is important to management in planning business operations and in deciding between alternative courses of action.

(a) The activity index identifies the activity that causes changes in the behavior of costs. Once the index is determined, it is possible to classify the behavior of costs in response to changes in activity levels into three categories: variable, fixed, or mixed. (b) Variable costs may be defined in total or on a per-unit basis. Variable costs in total vary directly and proportionately with changes in the activity level. Variable costs per unit remain the same at every level of activity.

Fixed costs remain the same in total regardless of changes in the activity level. In contrast, fixed costs per unit vary inversely with activity. As volume increases, fixed costs per unit decline and vice versa.

(a) The relevant range is the range of activity over which a company expects to operate during the year. (b) Disagree. The behavior of both fixed and variable costs are linear only over a certain range of activity. CVP analysis is based on the assumption that both fixed and variable costs remain linear within the relevant range.

This is true. Most companies operate within the relevant range. Within this range, it is possible to establish a linear (straight-line) relationship for both variable and fixed costs. If a relevant range cannot be established, segregation of costs into fixed and variable becomes extremely difficult.

Apartment rent is fixed because the cost per month remains the same regardless of how much Adam uses the apartment. Rent on a Hertz rental truck is a mixed cost because the cost usually includes a per day charge (a fixed cost) plus an activity charge based on miles driven (a variable cost).

For CVP analysis, mixed costs must be classified into their fixed and variable elements. One approach to the classification of mixed costs is the high-low method.

8. Variable cost per unit is $1.30, or [($165,000 – $100,000) ÷ (90,000 – 40,000)]. At any level of activity, fixed costs are $48,000 per month [$165,000 – (90,000 X $1.30)]. 9.

No. Only two of the basic components of cost-volume-profit (CVP) analysis, unit selling prices and variable cost per unit, relate to unit data. The other components, volume, total fixed costs, and sales mix, are not based on per-unit amounts.

10.

There is no truth in Faye’s statement. Contribution margin is sales less variable costs. It is the revenue that remains to cover fixed costs and to produce income (profit) for the company.

11.

Contribution margin is $14 ($40 – $26). The contribution margin ratio is 35% ($14 ÷ $40).

22-4

Questions Chapter 22 (Continued) 12.

Disagree. Knowledge of the break-even point is useful to management in deciding whether to introduce new product lines, change sales prices on established products, and enter new market areas.

13.

$26,000 ÷ 25% = $104,000

14.

(a) The break-even point involves the plotting of three lines over the full range of activity: the total revenue line, the total fixed cost line, and the total cost line. The break-even point is determined at the intersection of the total revenue and total cost lines. (b) The break-even point in units is obtained by drawing a vertical line from the break-even point to the horizontal axis. The break-even point in sales dollars is obtained by drawing a horizontal line from the break-even point to the vertical axis.

15.

Margin of safety is the difference between actual or expected sales and sales at the break-even point. 1,250 X $12 = $15,000; $15,000 – $13,200 = $1,800; $1,800 ÷ $15,000 = 12%.

16.

At break-even sales, the contribution margin is equal to the fixed costs. The contribution margin ratio is: $180,000 $500,000

= 36%

The sales volume to achieve net income of $90,000 is as follows: $180,000 + $90,000 = $750,000 .36 17.

PACE COMPANY CVP Income Statement Sales ................................................................................................. Variable expenses Cost of goods sold ($600,000 X .70) .......................................... Operating expenses ($200,000 X .70)........................................ Total variable expenses ..................................................... Contribution margin ...........................................................................

$900,000 $420,000 140,000 560,000 $340,000

*18. Under absorption costing, both variable and fixed manufacturing costs are considered to be product costs. Under variable costing, only variable manufacturing costs are product costs and fixed manufacturing costs are expensed when incurred. *19. (a) The rationale for variable costing centers on the purpose of fixed manufacturing costs, which is to have productive facilities available for use. Since these costs are incurred whether a company operates at zero or 100% capacity, it is argued that they should be expensed when they are incurred. Variable costing is useful in product costing internally by management and it is useful in controlling manufacturing costs. (b) Variable costing cannot be used in product costing in financial statements prepared in accordance with generally accepted accounting principles because it does not comply with the matching principle and thus understates inventory costs.

22-5

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 22-1 Indirect labor is a variable cost because it increases in total directly and proportionately with the change in the activity level. Supervisory salaries is a fixed cost because it remains the same in total regardless of changes in the activity level. Maintenance is a mixed cost because it increases in total but not proportionately with changes in the activity level.

BRIEF EXERCISE 22-2 VARIABLE COST Relevant Range $10,000

$10,000

8,000

6,000

4,000

2,000

2,000 0

80 100

Activity Level

22-6

FIXED COST Relevant Range

80 100

Activity Level

BRIEF EXERCISE 22-3

$60,000 Total Cost Line

COST

45,000

Variable Cost Element

30,000

15,000 Fixed Cost Element 0

500

1,000

1,500

2,000

2,500

Direct Labor Hours

BRIEF EXERCISE 22-4 High Low Difference $15,000 – $13,500 = $1,500 8,500 – 7,500 = 1,000 $1,500 ÷ 1,000 = $1.50—Variable cost per mile.

Total cost Less: Variable costs 8,500 X $1.50 7,500 X $1.50 Total fixed costs

High $15,000

Low $13,500

12,750 $ 2,250

11,250 $ 2,250

The mixed cost is $2,250 plus $1.50 per mile.

22-7

BRIEF EXERCISE 22-5 1.

(a) (b)

$288 = ($640 – $352) 45% ($288 ÷ $640)

$207 = ($300 – $93) 31% ($93 ÷ $300)

(e) (f)

$1,300 = ($325 ÷ 25%) $975 ($1,300 – $325)

BRIEF EXERCISE 22-6 (a) $520Q – $286Q – $163,800 = $0 $234Q = $163,800 Q = 700 units (b) Contribution margin per unit $234, or ($520 – $286) X = $163,800 ÷ $234 X = 700 units

BRIEF EXERCISE 22-7 Contribution margin ratio = [($300,000 – $180,000) ÷ $300,000] = 40% Required sales in dollars = $110,000 ÷ 40% = $275,000

BRIEF EXERCISE 22-8 If variable costs are 70% of sales, the contribution margin ratio is ($1 – $0.70) ÷ $1 = .30. Required sales in dollars = ($195,000 + $75,000) ÷ .30 = $900,000 BRIEF EXERCISE 22-9 Margin of safety = $1,000,000 – $800,000 = $200,000 Margin of safety ratio = $200,000 ÷ $1,000,000 = 20%

22-8

BRIEF EXERCISE 22-10 Contribution margin per unit $1.60 is ($6.00 – $4.40) Required sales in units = ($480,000 + $1,500,000) ÷ $1.60 = 1,237,500. BRIEF EXERCISE 22-11 HAMBY INC. Income Statement For the Quarter Ended March 31, 2017 Sales........................................................................ Variable expenses Cost of goods sold ......................................... Selling expenses............................................. Administrative expenses................................ Total variable expenses.......................... Contribution margin ............................................... Fixed expenses Cost of goods sold ......................................... Selling expenses............................................. Administrative expenses................................ Total fixed expenses ............................... Net income..............................................................

$2,000,000 $760,000 95,000 79,000 934,000 1,066,000 600,000 60,000 66,000 726,000 $ 340,000

22-9

*BRIEF EXERCISE 22-12 MEMO To:

Chief financial officer

From:

Student

Re:

Absorption and variable costing

Under absorption costing, fixed manufacturing overhead is a product cost, while under variable costing, fixed manufacturing overhead is a period cost (expensed as incurred). Since units produced (50,000) exceeded units sold (46,000) last month, income under absorption costing will be higher than under variable costing. Some fixed overhead (4,000 units X $4 = $16,000) will be assigned to ending inventory and therefore not expensed under absorption costing, whereas all fixed overhead is expensed under variable costing. Therefore, absorption costing net income will be higher than variable costing net income by $16,000.

22-10 .

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 22-1 Variable costs: Indirect labor, direct labor, and direct materials. Fixed costs: Property taxes and depreciation. Mixed costs: Utilities and maintenance. DO IT! 22-2 ($18,580 – $16,200) ÷ (10,500 – 8,800) = $1.40 per unit $18,580 – ($1.40 X 10,500 units) = $3,880 or $16,200 – ($1.40 X 8,800) = $3,880

(a)

Variable cost: Fixed cost:

(b)

Total cost to produce 9,200 units: $3,880 + ($1.40 X 9,200) = $16,760

DO IT! 22-3 Cedar Grove Industries CVP Income Statement For the Month Ended May 31, 2017 Sales Variable costs Contribution margin Fixed costs Net income

Total $360,000 176,000 184,000 120,000 $ 64,000

Per Unit $45 22 $23

DO IT! 22-4 (a)

The formula is $250Q – $170Q – $160,000 = 0. Therefore, 80Q = $160,000, and the breakeven point in units is 2,000 ($160,000 ÷ $80).

(b)

The contribution margin per unit is $80 ($250 – $170). The formula therefore is $160,000 ÷ $80, and the breakeven point in units is 2,000.

22-11

DO IT! 22-5 (a)

(b)

CM per unit = Unit selling price – Unit variable costs $12 = $30 – $18 CM ratio = CM per unit/Unit selling price 40% = $12/$30 Break-even point in dollars = Fixed costs ÷ Contribution margin ratio = $220,000 ÷ 40% = $550,000 Margin of safety

Actual sales – Break-even sales Actual sales $800,000 – $550,000 = $800,000 =

= (c)

22-12 .

31.25%

Sales – Variable costs – Fixed costs = Net income $30Q – $18Q = $220,000 + $140,000 $12Q = $360,000 Q = 30,000 units 30,000 units X $30 = $900,000 required sales

DO IT! 22-6 (a)

Break-even point in units is 7,500 units ($150,000 ÷ $20). Break-even point in sales dollars is $375,000 ($150,000 ÷ .40*). The margin of safety in dollars is $75,000 ($450,000 – $375,000). *$20 ÷ $50.

(b)

Break-even point in units is 8,333 units (rounded) ($150,000 ÷ $18*). Break-even point in sales dollars is $400,000 ($150,000 ÷ .375**). The margin of safety in dollars is $118,400 ($518,400*** – $400,000). *$50 – (.04 X $50) – 30 = $18. **$18 ÷ $48 = .375 ***9,000 + (.20 X 9,000) = 10,800 units, 10,800 units X $48 = $518,400 The increase in the break-even point from $375,000 to $400,000 indicates that management should not implement the proposed change while the increase in the margin of safety from $75,000 to $118,400 indicates that management should implement the proposed change. Since the expected 20% increase in sales volume will result in a contribution margin of $194,400 (10,800 X $18) which is only $14,400 more than the current amount, management should be cautious before reducing unit prices.

22-13

SOLUTIONS TO EXERCISES EXERCISE 22-1 (a) The determination as to whether a cost is variable, fixed, or mixed can be made by comparing the cost in total or on a per-unit basis at two different levels of production. Variable Costs Fixed Costs Mixed Costs

Vary in total but remain constant on a per-unit basis. Remain constant in total but vary on a per-unit basis. Contain both a fixed element and a variable element. Vary both in total and on a per-unit basis.

(b) Using these criteria as a guideline, the classification is as follows: Direct materials Direct labor Utilities

Variable Variable Mixed

Rent Maintenance Supervisory salaries

Fixed Mixed Fixed

EXERCISE 22-2 (a) Maintenance Costs: $2,800 $5,500 – $2,700 = = $7 variable cost per machine hour 400 700 – 300

Total costs Less: Variable costs 700 X $7 300 X $7 Total fixed costs

700 Machine Hours $5,500

300 Machine Hours $2,700

4,900 $ 600

2,100 $ 600

Thus, maintenance costs are $600 per month plus $7 per machine hour.

22-14 .

EXERCISE 22-2 (Continued) $6,000

(b)

$5,500 $5,000

Total Cost Line

$4,000

COSTS

$3,000

Variable Cost Element

$2,000

$1,000 $ 600 Fixed Cost Element 0 100 200 300 400 500 600 700 Machine Hours

EXERCISE 22-3 1. Wood used in the production of furniture. 2. Fuel used in delivery trucks. 3. Straight-line depreciation on factory building. 4. Screws used in the production of furniture. 5. Sales staff salaries. 6. Sales commissions. 7. Property taxes. 8. Insurance on buildings. 9. Hourly wages of furniture craftsmen. 10. Salaries of factory supervisors. 11. Utilities expense. 12. Telephone bill. .

Variable. Variable. Fixed. Variable. Fixed. Variable. Fixed. Fixed. Variable. Fixed. Mixed. Mixed. .

22-15

EXERCISE 22-4 MEMO To:

Marty Moser

From:

Student

Re:

Assumptions underlying CVP analysis

CVP analysis is a useful tool in analyzing the effects of changes in costs and volume on a company’s profits. However, there are some assumptions which underlie CVP analysis. When these assumptions are not valid, the results of CVP analysis may be inaccurate. The five assumptions are: 1. The behavior of both costs and revenues is linear throughout the relevant range of the activity index. 2. Costs can be classified accurately as either fixed or variable. 3. Changes in activity are the only factors that affect costs. 4. All units produced are sold. 5. When more than one type of product is sold, the sales mix will remain constant. If you want further explanation of any of these assumptions, please contact me. EXERCISE 22-5 (a) Contribution margin per lawn

$60 – ($12 + $10 + $2)

Contribution margin per lawn

$36

Contribution margin ratio

$36 ÷ $60 = 60%

Fixed costs = $1,400 + $200 + $2,000 = $3,600 Break-even point in lawns = $3,600 ÷ $36 = 100 (b) Break-even point in dollars = 100 lawns X $60 per lawn = $6,000 per month OR Fixed costs ÷ Contribution margin ratio = $3,600 ÷ .60 = $6,000 per month

22-16 .

EXERCISE 22-6 1.

Contribution margin per room

$60 – ($14 + $28)

Contribution margin per room

$18

Contribution margin ratio

$18 ÷ $60 = 30%

Fixed costs = $5,900 + $1,100 + $1,000 + $100 = $8,100 Break-even point in rooms = $8,100 ÷ $18 = 450 2.

Break-even point in dollars

= 450 rooms X $60 per room = $27,000 per month

OR Fixed costs ÷ Contribution margin ratio = $8,100 ÷ .30 = $27,000 per month EXERCISE 22-7 (a) Contribution margin in dollars: Sales = 560 X $120 =

$67,200 Variable costs = $67,200 X .60 = 40,320 Contribution margin $26,880

Contribution margin per unit: Contribution margin ratio: (b) Break-even sales in dollars: Break-even sales in units:

$120 – $72 ($120 X 60%) = $48. $48 ÷ $120 = 40%. $21,024 = $52,560. 40% $21,024 = 438. $48

22-17

EXERCISE 22-8 (a) 1. Contribution margin ratio is: $27,000 = 75% $36,000 Break-even point in dollars = $18,000 = $24,000 75% $36,000 2. Round-trip fare = = $24 1,500 fares Break-even point in fares = $24,000 = 1,000 fares $24 (b) At the break-even point fixed costs and contribution margin are equal. Therefore, the contribution margin at the break-even point would be $18,000. EXERCISE 22-9 (a) Unit contribution margin =

Fixed costs Break-even sales in units $112,000 ($350,000 ÷ $5)

= $1.60 Variable cost per unit

= Unit selling price – Unit contribution margin = $5.00 – $1.60 = $3.40

OR 70,000 X $5.00 = 70,000X + $112,000 where X = Variable cost per unit Variable cost per unit = $3.40 Contribution margin ratio = $1.60 ÷ $5.00 = 32%

22-18 .

EXERCISE 22-9 (Continued) (b) Fixed costs ÷ Contribution margin ratio = Break-even sales in dollars Fixed costs ÷ .32 = $420,000 = $134,400 ($420,000 X.32) Since fixed costs were $112,000 in 2016, the increase in 2017 is $22,400 ($134,400 – $112,000). EXERCISE 22-10 (a) and (b)

BILLINGS COMPANY CVP Income Statement For the Month Ended September 30, 2017

Sales (600 video game consoles) .................. Variable costs ................................................. Contribution margin ....................................... Fixed costs ...................................................... Net income ......................................................

(c)

Per Unit $400 280 $120

Sales = Variable costs + Fixed costs $400X = $280X + $54,000 $120X = 54,000 X = 450 units

(d)

Total $240,000 168,000 72,000 54,000 $ 18,000

BILLINGS COMPANY CVP Income Statement For the Month Ended September 30, 2017

Sales (450 video game consoles) .................. Variable costs.................................................. Contribution margin........................................ Fixed costs ...................................................... Net income.......................................................

Total $180,000 126,000 54,000 54,000 $ –0–

Per Unit $400 280 $120

22-19

EXERCISE 22-11 (a) Units sold in 2016 =

$570,000 + $210,000

(b) Units needed in 2017 =

$150 – $90

= 13,000 units

$570,000 + $262,000 * $150 – $90

= 13,867 units

(rounded) *$210,000 + $52,000 = $262,000

(c)

$570,000 + $262,000 = 13,000 units, where X = new selling price X – $90 $832,000 = 13,000X – $1,170,000 $2,002,000 = 13,000X X = $154

EXERCISE 22-12 1.

Unit sales price = $400,000 ÷ 5,000 units = $80 Increase selling price to $88, or ($80 X 110%). Net income = $440,000 – $240,000 – $90,000 = $110,000.

Reduce variable costs to 55% of sales. Net income = $400,000 – $220,000 – $90,000 = $90,000.

Alternative 1, increasing selling price, will produce the higher net income.

22-20 .

EXERCISE 22-13 (a)

$3,200

Sales Line

2,800

DOLLARS (000)

2,400

Break-even Point

Total Cost Line

2,000 1,600 1,200 800 Fixed Cost Line 400 100 200 300 400 500 600 700 800 Number of Units (in thousands)

(b) 1.

Break-even sales in units: $4X = $2.50X + $600,000 $1.50X = $600,000 X = 400,000 units

Break-even sales in dollars: X = .625X + $600,000 .375X = $600,000 X = $1,600,000 or $600,000 ÷ 37.5%

Margin of safety in dollars: $2,000,000 – $1,600,000 = $400,000 Margin of safety ratio: $400,000 ÷ $2,000,000 = 20%

22-21

EXERCISE 22-14 (a)

CAREY COMPANY CVP Income Statement For the Year Ended December 31, 2017 Total $1,560,000 900,000 660,000 500,000 $ 160,000

Sales (60,000 X $26) ...................................... Variable costs (60,000 X $15)........................ Contribution margin (60,000 X $11).............. Fixed costs..................................................... Net income ..................................................... (b)

Per Unit $26 15 $11

CAREY COMPANY CVP Income Statement For the Year Ended December 31, 2017 Total $1,543,500 756,000 787,500 600,000 $ 187,500

Sales [(60,000 X 105%) X $24.50*] ................ Variable costs (63,000 X $12.00**) ................ Contribution margin (63,000 X $12.50)......... Fixed costs ($500,000 + $100,000)................ Net income .....................................................

Per Unit $24.50 12.00 $12.50

*$26.00 – ($3 X 50%) = $24.50. **$15.00 – ($15 X 20%) = $12.00. *EXERCISE 22-15 (a)

22-22 .

Utility Expense Kilowatt X Hourly = Variable hours Charge Utilities

Months in a year

500

$0.50

Months in a year

Monthly Fee

Fixed Utilities

$1,500

= $18,000

$3,000

*EXERCISE 22-15 (Continued) Variable Costing Labor: Crate builders Material: Wood Variable Overhead: Utilities Nails Total manufacturing costs

$43,000 54,000 3,000 350 $100,350

(b) Absorption Costing Labor: Crate builders Material: Wood Variable overhead: Utilities Nails Fixed overhead: Utilities Rent Total manufacturing costs

$ 43,000 54,000 3,000 350 18,000 21,400 $139,750

(c) The entire difference in costs between the two methods is due to the fact that fixed overhead is included as part of manufacturing costs only under the absorption costing method. This difference amounts to $39,400 ($18,000 + $21,400).

22-23

*EXERCISE 22-16 (a)

MONTIER CORPORATION Income Statement For the Month Ended October 31, 2017 (Absorption Costing) Sales (20,000 X $50)..................................................... Cost of goods sold (20,000 X $32*)............................. Gross profit .................................................................. Selling and administrative expenses ......................... income ...................................................................

$1,000,000 640,000 360,000 30,000 Net $ 330,000

*$10 + $8 + $5 + ($225,000 ÷ 25,000) (b)

MONTIER CORPORATION Income Statement For the Month Ended October 31, 2017 (Variable Costing) Sales (20,000 X $50) ..................................................... Cost of goods sold (20,000 X $23) .............................. Contribution margin .................................................... Fixed costs ($225,000 + $30,000) ................................ Net income ...................................................................

$1,000,000 460,000 540,000 255,000 $ 285,000

(c) Under variable costing, all fixed manufacturing costs ($225,000) are expensed. Under absorption costing, some of the fixed manufacturing costs have been deferred to a later period [5,000 X ($225,000/25,000) = $45,000].

22-24 .

SOLUTIONS TO PROBLEMS PROBLEM 22-1A (a) Variable costs (per haircut) Barbers’ commission Barber supplies Utilities Total variable cost per haircut

Fixed costs (per month) $4.50 .30 .20 $5.00

(b) $10.00X = $5.00X + $7,000 $ 5.00X = $7,000 X = 1,400 haircuts (c)

Barbers’ salaries Manager’s extra salary Advertising Rent Utilities Magazines Total fixed

1,400 haircuts X $10 = $14,000

DOLLARS (000)

$5,000 500 200 1,100 175 25 $7,000

Sales Line Break-even Point

Total Cost Line

12 9 Fixed Cost Line 6 3

300

600

900

1,200 1,500 1,800

Number of Haircuts

(d) Net income = $16,000 – [($5.00 X 1,600) + $7,000] = $1,000

22-25

PROBLEM 2226A (a)

JORGE COMPANY CVP Income Statement (Estimated) For the Year Ending December 31, 2017 Sales .............................................................. Variable expenses Cost of goods sold ................................ Selling expenses ................................... Administrative expenses ...................... Total variable expenses ................ Contribution margin ..................................... Fixed expenses Cost of goods sold ................................ Selling expenses ................................... Administrative expenses ...................... Total fixed expenses ..................... Net income ....................................................

$1,800,000 $1,170,000* 70,000 20,000 1,260,000 540,000 280,000 65,000 60,000 405,000 $ 135,000

*Direct materials $430,000 + direct labor $360,000 + variable manufacturing overhead $380,000. (b) Variable costs = 70% of sales ($1,260,000 ÷ $1,800,000) or $.35 per bottle ($.50 X 70%). Total fixed costs = $405,000. 1.

$.50X = $.35X + $405,000 $.15X = $405,000 X = 2,700,000 units

2,700,000 X $.50 = $1,350,000

Margin of safety ratio (d) Required sales X =

22-26 .

$405,000 + $180,000 = $1,950,000 .30

PROBLEM 2227A (a) Sales were $2,500,000, variable expenses were $1,750,000 (70% of sales), and fixed expenses were $850,000. Therefore, the break-even point in dollars is: $850,000 = $2,833,333 (rounded) .30 (b) 1. The effect of this alternative is to increase the selling price per unit to $6 ($5 X 120%). Total sales become $3,000,000 (500,000 X $6). Thus, the contribution margin ratio changes to 42% [($3,000,000 – $1,750,000) ÷ $3,000,000]. The new break-even point is: $850,000 = $2,023,810 (rounded) .42 2.

The effects of this alternative are to change total fixed costs to $760,000 ($850,000 – $90,000) and to change the contribution margin to 25% [($2,500,000 – $1,750,000 – $125,000) ÷ $2,500,000]. The new break-even point is: $760,000 = $3,040,000 .25

Alternative 1 is the recommended course of action because it has a lower break-even point.

22-27

PROBLEM 2228A (a) Current break-even point: $40X = $24X + $270,000 (where X = pairs of shoes) $16X = $270,000 X = 16,875 pairs of shoes New break-even point:

$38X = $24X + ($270,000 + $24,000) $14X = $294,000 X = 21,000 pairs of shoes

(b) Current margin of safety ratio =

(20,000 X $40) – (16,875 X $40) (20,000 X $40)

= 16% (rounded)

New margin of safety ratio

(24,000 X $38) – (21,000 X $38) (24,000 X $38)

= 13% (rounded) (c)

BARGAIN SHOE STORE CVP Income Statement

Sales (20,000 X $40) Variable expenses (20,000 X $24) Contribution margin Fixed expenses Net income

Current $800,000 480,000 320,000 270,000 $ 50,000

New $912,000 576,000 336,000 294,000 $ 42,000

(24,000 X $38) (24,000 X $24)

The proposed changes will raise the break-even point 4,125 units. This is a significant increase. Margin of safety is 3% lower and net income is $8,000 lower. The recommendation is to not accept the proposed changes.

22-28 .

PROBLEM 2229A (a) (1) Current Year $1,600,000

Sales Variable costs Direct materials Direct labor Manufacturing overhead ($380,000 X .70) Selling expenses ($250,000 X .40) Administrative expenses ($270,000 X .20) Total variable costs Contribution margin

490,000 290,000 266,000 100,000 54,000 1,200,000 $ 400,000

Sales

Current Year $1,600,000 X 1.1

Variable costs Direct materials Direct labor Manufacturing overhead Selling expenses Administrative expenses Total variable costs Contribution margin

490,000 290,000 266,000 100,000 54,000 1,200,000 $ 400,000

X 1.1 X 1.1 X 1.1 X 1.1 X 1.1 X 1.1 X 1.1

Projected Year $1,760,000 539,000 319,000 292,600 110,000 59,400 1,320,000 $ 440,000

(2) Fixed Costs Current Year Manufacturing overhead ($380,000 X .30) $114,000 Selling expenses ($250,000 X .60) 150,000 Administrative expenses ($270,000 X .80) 216,000 Total fixed costs $480,000

Projected year $114,000 150,000 216,000 $480,000

22-29

PROBLEM 22-5A (Continued) (b) Unit selling price = $1,600,000 ÷ 100,000 = $16 Unit variable cost = $1,200,000 ÷ 100,000 = $12 Unit contribution margin = $16 – $12 = $4 Contribution margin ratio = $4 ÷ $16 = .25 Break-even point in units = Fixed costs ÷ Unit contribution margin 120,000 units = $480,000 ÷ $4 Break-even point in dollars = Fixed costs ÷ Contribution margin ratio $1,920,000 = $480,000 ÷ .25

(c) Sales dollars required for = (Fixed costs + Target net income) ÷ Contribution margin ratio target net income $2,720,000

($480,000

$200,000)

.25

(d) Margin of safety = (Expected sales – Break-even sales) ÷ Expected sales ratio 29.4%

22-30 .

($2,720,000

–

$1,920,000)

$2,720,000

*PROBLEM 22-6A

(a)

JACKSON COMPANY Income Statement For the Year Ended December 31, 2016 Variable Costing Sales (3,500 tons X $2,000) ......................... Variable cost of goods sold Inventory, January 1 ............................ Variable cost of goods manufactured [4,000 tons X ($2,000 X .15)] ............ Variable cost of goods available for sale .............................................. Inventory, December 31 [500 tons X ($2,000 X .15)] .............. Variable cost of goods sold ................ Variable selling expenses [3,500 tons X ($2,000 X .10)] ............ Contribution margin .................................... Fixed manufacturing overhead ................... Fixed administrative expenses ................... Net income ...................................................

$7,000,000 $

–0–

1,200,000 1,200,000 150,000 1,050,000 700,000 2,800,000 500,000

1,750,000 5,250,000 3,300,000 $1,950,000

22-31

*PROBLEM 22-6A (Continued) JACKSON COMPANY Income Statement For the Year Ended December 31, 2017 Variable Costing Sales (4,000 tons X $2,000) ........................... Variable cost of goods sold Inventory, January 1 .............................. Variable cost of goods manufactured [3,500 tons X ($2,000 X .15)] .............. Variable cost of goods available for sale ................................................ Inventory, December 31 ......................... Variable cost of goods sold................... Variable selling expenses [4,000 tons X ($2,000 X .10)] .............. Contribution margin ...................................... Fixed manufacturing overhead ..................... Fixed administrative expenses ..................... Net income ..................................................... (b)

$8,000,000 $ 150,000 1,050,000 1,200,000 –0– 1,200,000 800,000

2,000,000 6,000,000

2,800,000 500,000

3,300,000 $2,700,000

JACKSON COMPANY Income Statement For the Year Ended December 31, 2016 Absorption Costing Sales (3,500 tons X $2,000) ...................... Cost of goods sold Inventory, January 1 ......................... Cost of goods manufactured............ Cost of goods available for sale....... Inventory, December 31 .................... Cost of goods sold ............................ Gross profit ............................................... Variable selling expenses [3,500 tons X ($2,000 X .10)] ................. Fixed administrative expenses ................ Net income ................................................

$7,000,000 $ –0– 4,000,000 (1) 4,000,000 500,000 (2) 3,500,000 3,500,000 700,000 500,000

1,200,000 $2,300,000

(1) 4,000 X [($2,000 X .15) + ($2,800,000 ÷ 4,000)] (2) 500 X [($2,000 X .15) + ($2,800,000 ÷ 4,000)] 22-32 .

*PROBLEM 22-6A (Continued) JACKSON COMPANY Income Statement For the Year Ended December 31, 2017 Absorption Costing Sales (4,000 tons X $2,000) .................. $8,000,000 Cost of goods sold Inventory, January 1 ..................... $ 500,000 Cost of goods manufactured......... 3,850,000 (1) Cost of goods available for sale ... 4,350,000 Inventory, December 31................ –0– Cost of goods sold........................ 4,350,000 Gross profit ........................................... 3,650,000 Variable selling expenses [4,000 tons X ($2,000 X .10)] ............. 800,000 Fixed administrative expenses ............ 500,000 1,300,000 Net income ............................................ $2,350,000 (1) 3,500 X [($2,000 X .15) + ($2,800,000 ÷ 3,500)] (c) The variable costing and the absorption costing net income can be reconciled as follows: 2016

2017

Variable costing net income $1,950,000 Fixed manufacturing overhead expensed with variable costing $2,800,000 Less: Fixed manufacturing overhead expensed with absorption costing (2,450,000)(1) Difference 350,000 Absorption costing net income $2,300,000



In 2016, with absorption costing $2,450,000  $2, 800, 000 X

(1)



$2,700,000 $2,800,000 (3,150,000)(2) (350,000) $2,350,000

  of the 4, 000 units produced  3, 500 units sold

fixed manufacturing overhead is expensed as part of cost of goods sold, and $350,000 500 units in inventory    $2, 800, 000 X  is included in the ending inventory. 4, 000 units produced   (2)

In 2017, with absorption costing $3,150,000 of fixed manufacturing overhead is expensed as part of cost of goods sold. This includes the fixed manufacturing overhead for 2017 of $2,800,000 plus $350,000 of fixed manufacturing overhead from 2016 that was included in the beginning inventory for 2017.

22-33

*PROBLEM 22-6A (Continued) (d) Income parallels sales under variable costing as seen in the increase in net income in 2017 when 500 additional units were sold. In contrast, under absorption costing, income parallels production as seen in the higher net income in 2016 when production exceeded sales by 500 tons.

22-34 .

CD22

CURRENT DESIGNS

(a) $250 + $100 + $170 + $420 + $400 = $1,340 total variable costs (b) Contribution margin per unit = $2,000 – $1,340 = $660 (c) $359,700* ÷ $660 = 545 units *$119,700 + $240,000 (d) ($359,700 + $270,600) ÷ $660 = 955 units (e) Actual (expected) sales = $2,000 X 1,000 = $2,000,000 Break-even sales = $2,000 X 545 = $1,090,000 Margin of safety in dollars = $2,000,000 – $1,090,000 = $910,000 Margin of safety ratio = $910,000 ÷ $2,000,000 = 45.5%

22-35

BYP 22-1

DECISION-MAKING ACROSS THE ORGANIZATION

(a) (1)

Capital-Intensive

(2)

Fixed manufacturing costs $2,524,000 Incremental selling expenses 502,000 Total fixed costs $3,026,000 Selling price Variable costs Direct materials Direct labor Variable overhead Selling expenses Contribution margin

Labor-Intensive

Fixed manufacturing costs $1,550,000 Incremental selling expenses 502,000 Total fixed costs $2,052,000

$32.00

Selling price Variable costs Direct materials Direct labor Variable overhead 16.00 Selling expenses $16.00 Contribution margin

$5.00 6.00 3.00 2.00

Total fixed costs (1)

$3,026,000

$32.00 $5.50 8.00 4.50 2.00

Total fixed costs (1)

20.00 $12.00 $2,052,000

Contribution margin per unit (2)

$16.00

Contribution margin per unit (2)

$12.00

Break-even in units (1) ÷ (2)

189,125

Break-even in units (1) ÷ (2)

171,000

(b) Creative Ideas Company would be indifferent between the two manufacturing methods at the volume (X) where total costs are equal. $16X + $3,026,000 = $20X + $2,052,000 $4X = $974,000 X = 243,500 units (c) Creative Ideas should employ the capital-intensive manufacturing method if annual sales are expected to exceed 243,500 units and the labor-intensive manufacturing method if annual sales are not expected to exceed 243,500 units. The labor-intensive method is more profitable for sales up to 243,500 units because the fixed costs are lower. The capital-intensive method is more profitable for sales above 243,500 units because its contribution margin is higher.

22-36 .

BYP 22-2

MANAGERIAL ANALYSIS

(a) The variable costs per unit are: Cost of goods sold ($600,000 ÷ 240,000) ..................... $2.50 Selling expenses ($117,600 ÷ 240,000) .......................................... 49 Administrative expenses ($60,000 ÷ 240,000) ............. .................. 25 Total........................................................................ $3.24 Fixed costs are: Cost of goods sold ($800,000 X .25) ............................ Selling expenses ($280,000 X .58)................................ Administrative expenses ($150,000 X .60)...................

$200,000 162,400 90,000 $452,400

The break-even points are: X = ($3.24 ÷ $5.00) X + $452,400 X = .65X + $452,400 .35X = $452,400 X = $1,292,571 (rounded) $5.00X = $3.24X + $452,400 $1.76X = $452,400 X = 257,045 units (rounded) (b) Variable unit cost of goods sold = $2.75 ($600,000 ÷ 240,000 = $2.50; $2.50 + $.25) Sales volume = 300,000 units (240,000 X 125%) Total sales = 300,000 X $5.25 = $1,575,000 Net income computation: Sales ....................................................... Variable expenses Cost of goods sold (300,000 X $2.75) ......................... Selling expenses (300,000 X $.49) ........................... Administrative expenses (300,000 X $.25) ........................... Total variable expenses.......... Contribution margin...............................

$1,575,000 $825,000 147,000 75,000 1,047,000 528,000

22-37

BYP 22-2 (Continued) Fixed expenses Cost of goods sold ........................ Selling expenses............................ Administrative expenses............... Total fixed expenses .............. Net income.............................................

$200,000 162,400 90,000 452,400 $ 75,600

X = ($1,047,000 ÷ $1,575,000)X + $452,400 X = .66X + $452,400 .34X = $452,400 X = $1,330,588 (rounded) Profits and the break-even point would both increase. (c) Sales [384,000 (1) X ($5.00 – $.25)] ............... Variable expenses Cost of goods sold (384,000 X $2.50)................................. Selling expenses (384,000 X $.59) ......... Administrative expenses (384,000 X $.25) .................................. Total variable expenses ................. Contribution margin ...................................... Fixed expenses Cost of goods sold ................................. Selling expenses ($162,400 + $40,000) ........................... Administrative expenses ....................... Total fixed expenses ...................... Net income .....................................................

$1,824,000 $960,000 226,560 96,000 1,282,560 541,440 $200,000 202,400 90,000 492,400 $ 49,040

(1) Sales volume = 240,000 X 160% = 384,000 X = ($1,282,560 ÷ $1,824,000)X + $492,400 X = .70X + $492,400 .30X = $492,400 X = $1,641,333 (rounded) Profits and the break-even point would both increase. (d) Peri’s plan should be accepted. It produces a higher net income and a lower break-even point than Paul’s plan.

22-38 .

BYP 22-3

REAL-WORLD FOCUS

(a) Sweeteners and packaging are a variable cost to Coca-Cola because their use is directly proportional to the amount of product produced. If the unit cost of a variable cost item increases, the contribution margin will decline. This will lead to a decline in net income unless the company can increase its selling price, increase the number of units it sells, or reduce other costs. (b) This description makes the marketing expenditures sound like they are a variable cost, since it suggests that they vary with the amount of units sold. However, unlike variable costs, the relationship of marketing costs is not directly proportional to sales, since other factors also influence units sold. Thus, it is not a pure variable cost. However, it is also not a fixed cost, in that there usually is a relationship between marketing expenditures and sales. For CVP purposes, it might best be handled as a mixed cost, having both a fixed and variable component. (c) The first measure, gallon shipments of concentrates and syrups, is the activity index, since it best reflects the company’s production and sales activity at the wholesale level, its primary line of business. The second measure, unit cases of finished product, indicates the amount of activity by Coke’s primary customers, the bottlers. Coke also keeps track of this since it provides information about what is happening at the retail level.

22-39

BYP 22-4

REAL-WORLD FOCUS

(a) Barnes and Noble has 1,362 stores with a total of 18.8 million square feet. That is a huge investment in fixed costs that have very little value in an e-book environment. (b) Barnes and Noble’s big advantage (which enabled it to put lots of small independent book sellers out of business), was that each of its superstores had 150,000 books in stock. However, that is no longer as impressive when you consider that booksellers’ websites now give you access to millions of e-book titles which can be downloaded directly to e-readers. (c) The authors say that the arrival of Apple’s iPad has huge implications for e-books. ITunes has more than 125 million customers. They represent a very wide potential audience for e-books. (d) Barnes and Noble earns about $12.50 on a $25 hardcover book. The same book, as an e-book, would sell for $12.99 and Barnes and Noble would earn $3.90. Obviously they can’t afford this decline unless they can dramatically reduce their fixed costs. (e) Barnes and Noble was one of the first companies to have an e-reader, called the Rocket e-book. However, it abandoned its e-reader in 2003 because sales of e-books had been very low. Four years later Amazon introduced its Kindle e-reader, which has been hugely popular. A second mistake was that Barnes and Noble was very slow to upgrade its website to encourage the sale of e-books. Again, Amazon was more than happy to fill the void.

22-40 .

BYP 22-5

COMMUNICATION ACTIVITY

To:

My Roommate

From:

Your Roommate

Subject:

Cost-Volume-Profit Questions

In response to your request for help, I provide you the following: (a) The mathematical formula for break-even sales is: Break-even Sales = Variable Costs + Fixed Costs Break-even sales in dollars is found by expressing variable costs as a percentage of unit selling price. For example, if the percentage is 70%, the break-even formula becomes X = .70X + Fixed Costs. The answer will be in sales dollars. Break-even sales in units is found by using unit selling price and unit variable costs in the formula. For example, if the selling price is $300 and variable costs are $210, the break-even formula becomes $300X = $210X + Fixed Costs. The answer will be in sales units. (b) The formulas for unit contribution margin and contribution margin ratio differ as shown below: Unit Selling Price – Unit Variable Costs = Unit Contribution Margin Unit Contribution Margin ÷ Unit Selling Price = Contribution Margin Ratio You can see that Unit CM is used in computing the CM ratio. (c) When contribution margin is used to determine break-even sales, total fixed costs are divided by either the contribution margin ratio or unit contribution margin. Using the CM ratio results in determining the break-even point in dollars. Using unit CM results in determining the break-even point in units.

22-41

BYP 22-5 (Continued) The formula for determining break-even sales in dollars is: Fixed Costs ÷ Contribution Margin Ratio = Break-even Sales in Dollars The formula for determining break-even sales in units is: Fixed Costs ÷ Unit Contribution Margin = Break-even Sales in Units I hope this memo answers your questions.

22-42 .

BYP 22-6

ETHICS CASE

(a) The stakeholders in this situation are: ⯈ Scott Bestor, accountant of Westfield Company. ⯈ The dislocated personnel of Westfield. ⯈ The senior management who made the decision. (b) Scott is hiding an error and is knowingly deceiving the company’s management with inaccurate data. (c) Scott’s alternatives are: ⯈ Keep quiet. ⯈ Confess his mistake to management. The students’ recommendations should recognize the practical aspects of the situation but they should be idealistic and ethical. If the students can’t be totally ethical when really nothing is at stake, how can they expect to be ethical under real-world pressures?

22-43

BYP 22-7

ALL ABOUT YOU

(a)

The variable gasoline cost of going one mile in the hybrid car would be $0.09 ($3.60/40). The variable gasoline cost of going one mile in the traditional car would be $0.12 ($3.60/30).

(b)

The savings per mile of driving the hybrid vehicle would be $0.03 ($0.12 – $0.09).

(c)

In order to break even on your investment, you would need to drive 150,000 miles. This is determined by dividing the additional fixed cost of $4,500 by the cost savings per mile of $0.03.

(d)

There are many other factors that you would want to consider in your analysis. For example, do the vehicles differ in their expected repair bills, insurance costs, licensing fees, or ultimate resale value. Also, some states and some employers offer rebates for the purchase of hybrid vehicles. In addition, your decision might be influenced by non-financial factors, such as a desire to reduce emissions.

22-44 .

CHAPTER 23 Budgetary Planning ASSIGNMENT CLASSIFICATION TABLE A Problems

Brief Exercises

Do It!

Exercises

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

Prepare budgets for sales, production, and direct materials.

11, 12, 13

2, 3, 4,

2, 3, 4, 5, 6, 7, 8, 10

1A, 2A, 3A

Prepare budgets for direct labor, manufacturing overhead, and selling and administrative expenses, and a budgeted income statement.

14, 15, 16, 17, 18

5, 6, 7, 8

9, 10, 11, 12, 13

1A, 2A, 6A

Prepare a cash budget and a budgeted balance sheet.

19, 20

14, 15, 16, 17, 18, 19

4A, 6A

Apply budgeting principles to nonmanufacturing companies.

21, 22

19, 20, 21

Learning Objectives

Questions

State the essentials of effective budgeting and the components of the master budget.

23-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare budgeted income statement and supporting budgets.

Simple

30–40

Prepare sales, production, direct materials, direct labor, and income statement budgets.

Simple

40–50

Prepare sales and production budgets and compute cost per unit under two plans.

Moderate

30–40

Prepare cash budget for two months.

Moderate

30–40

Prepare purchases and income statement budgets for a merchandiser.

Simple

30–40

Prepare budgeted cost of goods sold, income statement, retained earnings and balance sheet.

Complex

40–50

23-2

Learning Objective 1. State the essentials of effective budgeting and the components of the master budget.

Knowledge Comprehension DI23-1

Q23-1 Q23-2 Q23-3 Q23-4 Q23-5 Q23-6

Application

Q23-7 Q23-8 Q23-9 Q23-10 E23-1 Q23-12 E23-2 Q23-13 E23-3 BE23-2 E23-4 BE23-3 E23-5 BE23-4 E23-6 DI23-2 E23-7

3. Prepare budgets for direct labor, manufacturing overhead, and selling and administrative expenses, and a budgeted income statement.

Q23-14 Q23-15 Q23-16 Q23-18

Q23-17 E23-9 P23-2A BE23-5 E23-10 P23-6A BE23-6 E23-11 BE23-7 E23-12 BE23-8 E23-13 DI23-3 P23-1A

Q23-11

Prepare a cash budget and Q23-19 a budgeted balance sheet.

5. Apply budgeting principles to nonmanufacturing companies. .)

Broadening Your Perspective

Q23-21 Q23-22

Synthesis

Evaluation

BE23-1

Prepare budgets for sales, production, and direct materials.

Analysis

E23-8 E23-10 P23-1A P23-2A

Q23-20 E23-15 P23-4A BE23-9 E23-17 P23-6A DI23-4 E23-18 E23-14 E23-19 BE23-10 DI23-5 E23-19

P23-3A

E23-16

E23-20 E23-21 P23-5A BYP23-2 BYP23-3 BYP23-4

BYP23-1

BYP23-5 BYP23-6 BYP23-7

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

23-3

ANSWERS TO QUESTIONS 1.

(a) A budget is a formal written statement of management’s plans for a specified future time period, expressed in financial terms. (b) A budget aids management in planning because it represents the primary method of communicating agreed-upon objectives throughout the organization. Once adopted, a budget becomes an important basis for evaluating performance.

The primary benefits of budgeting are: (1) It requires all levels of management to plan ahead and to formalize goals on a recurring basis. (2) It provides definite objectives for evaluating performance at each level of responsibility. (3) It creates an early warning system for potential problems, so that management can make changes before things get out of hand. (4) It facilitates the coordination of activities within the business by correlating the goals of each segment with overall company objectives. (5) It results in greater management awareness of the entity’s overall operations and the impact of external factors such as economic trends. (6) It motivates personnel throughout the organization to meet planned objectives.

The essentials of effective budgeting are: (1) a sound organizational structure, (2) research and analysis, and (3) acceptance by all levels of management.

(a) Disagree. Accounting information makes major contributions to the budgeting process. Accounting provides the starting point of budgeting by providing historical data on revenues, costs, and expenses. An accountant becomes the translator of the budget and communicates the budget to all areas of responsibility. Accountants also prepare periodic budget reports that compare actual results with planned objectives and provide a basis for evaluating performance. (b) The budget itself, and the administration of the budget, are the responsibility of management.

The budget period should be long enough to provide an attainable goal under normal business conditions. The budget period should minimize the impact of seasonal and cyclical business fluctuations, but it should not be so long that reliable estimates are impossible. The most common budget period is one year.

Disagree. Long-range planning usually encompasses a period of at least five years. It involves the selection of strategies to achieve long-term goals and the development of policies and plans to implement the strategies. In addition, long-range planning reports contain considerably less detail than budget reports.

Participative budgeting involves the use of a “bottom-to-top” approach, which requires input from lower level management during the budgeting process so as to involve employees from various levels and areas within the company. The potential benefits of this approach are lower-level managers have more detailed knowledge of the specifics of their job, and thus should be able to provide better budgetary estimates. In addition, by involving lower-level managers in the process, it is more likely that they will perceive the budget as being fair and reasonable. One disadvantage of participative budgeting is that it takes more time, and thus costs more. Another disadvantage of participative budgeting is that it may enable managers to game the system through such practices as budgetary slack.

23-4

Questions Chapter 23 (Continued) 8.

Budgetary slack is the amount by which a manager intentionally underestimates budgeted revenues or overestimates budgeted expenses in order to make it easier to achieve budgetary goals. Managers may have an incentive to create budgetary slack in order to increase the likelihood of receiving a bonus, or decrease the likelihood of losing their job.

A master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period. The master budget is developed within the framework of a sales forecast.

10.

The sales budget is the starting point in preparing the master budget. An inaccurate sales budget may adversely affect net income. An overly optimistic sales budget may result in excessive inventories and a very conservative sales budget may lead to inventory shortages.

11.

The statement is false. The production budget only shows the units that must be produced to meet anticipated sales and ending inventory requirements.

12.

The required units of production are 155,000 (160,000 + 15,000 = 175,000 – 20,000 = 155,000).

13.

The desired ending direct materials units are 21,000 (64,000 + 9,000 = 73,000 – 52,000 = 21,000).

14.

Total budgeted direct labor costs are $960,000 (80,000 X .75 X $16 = $960,000).

15.

(a) Manufacturing overhead rate based on direct labor cost is 48% [$198,000 + $162,000 = $360,000; $360,000 ÷ (150,000 X 1/3 X $15/hr.) = 48%]. (b) Manufacturing overhead rate per direct labor hour is $7.20 ($360,000 ÷ 50,000).

16.

The first quarter budgeted selling and administrative expenses are $74,000 [(12% X $200,000) + $50,000]. The second quarter total is $78,800 [(12% X $240,000) + $50,000].

17.

The budgeted cost per unit of product is $46 ($10 + $20 + $16). Gross profit per unit is $19 ($65 – $46). Total budgeted gross profit is $475,000 (25,000 X $19).

18.

The supporting schedules are the budgets for sales, direct materials, direct labor, and manufacturing overhead.

19.

The three sections of a cash budget are: (1) cash receipts, (2) cash disbursements, and (3) financing. The cash budget also shows the beginning and ending cash balances.

20.

Cash collections are: January—$600,000 X 40% = $240,000.February— $600,000 X 50% = $300,000.March—$600,000 X 10% = $60,000.

21.

The formula is: Budgeted cost of goods sold plus desired ending merchandise inventory minus beginning merchandise inventory equals required merchandise purchases.

22.

In a service company, expected revenues can be obtained from expected output or expected input. The former is based on anticipated billings of clients for services provided. The latter is based on expected billable time of the professional staff.

23-5

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 23-1 Sales Budget

Production Budget

Direct Materials Budget

Direct Labor Budget

Operating Budgets

Manufacturing Overhead Budget

Selling and Administrative Expense Budget

Budgeted Income Statement

Capital Expenditure Budget

23-6

Cash Budget

Financial Budgets

Budgeted Balance Sheet

BRIEF EXERCISE 23-2 PAIGE COMPANY Sales Budget For the Year Ending December 31, 2017 Quarter Expected unit sales Unit selling price Total sales

Year

10,000

14,000

15,000

18,000

57,000

X $70 $700,000

X $70 $980,000

X $70 $1,050,000

X $70 $1,260,000

X $70 $3,990,000

BRIEF EXERCISE 23-3 PAIGE COMPANY Production Budget For the Six Months Ending June 30, 2017 Quarter Expected unit sales Add: Desired ending finished goods Total required units Less: Beginning finished goods inventory Required production units a

14,000 X .25

10,000 X .25

Six Months

10,000 3,500 a 13,500 2,500b 11,000

14,000 3,750c 17,750 3,500 14,250

25,250

15,000 X .25

23-7

BRIEF EXERCISE 23-4 PERINE COMPANY Direct Materials Budget For the Month Ending January 31, 2017 Units to be produced....................................................... Direct materials per unit ................................................. Total pounds required for production............................ Add: Desired ending inventory (25% X 5,000 X 2) ...... Total materials required .................................................. Less: Beginning materials inventory (4,000 X 2 X 25%).................................................. Direct materials purchases ............................................. Cost per pound ................................................................ Total cost of direct materials purchases .......................

4,000 X 2 8,000 2,500 10,500 2,000 8,500 X $6 $51,000

BRIEF EXERCISE 23-5 GUNDY COMPANY Direct Labor Budget For the Six Months Ending June 30, 2017 Quarter Units to be produced Direct labor time (hours) per unit Total required direct labor hours Direct labor cost per hour Total direct labor cost

23-8

1 5,000 X 1.6 8,000 X $15 $120,000

Six Months

2 7,000 X 1.6 11,200 X $15 $168,000

$288,000

BRIEF EXERCISE 23-6 ROCHE INC. Manufacturing Overhead Budget For the Year Ending December 31, 2017 Quarter 1 Variable costs Fixed costs Total manufacturing overhead

$20,000 $25,000 $30,000 40,000 40,000 40,000 $60,000 $65,000 $70,000

Year

$35,000 40,000 $75,000

$110,000 160,000 $270,000

BRIEF EXERCISE 23-7 ELBERT COMPANY Selling and Administrative Expense Budget For the Year Ending December 31, 2017

Variable expenses Fixed expenses Total selling and administrative expenses

1 $24,000 40,000

Quarter 2 3 4 Year $28,000 $32,000 $36,000 $120,000 40,000 40,000 40,000 160,000

$64,000

$68,000 $72,000 $76,000 $280,000

BRIEF EXERCISE 23-8 NORTH COMPANY Budgeted Income Statement For the Year Ending December 31, 2017 Sales.................................................................................. Cost of goods sold (50,000 X $25) .................................. Gross profit....................................................................... Selling and administrative expenses .............................. Income from operations................................................... Interest expense ............................................................... Income before income taxes ........................................... Income tax expense ......................................................... Net income........................................................................ .

$2,250,000 1,250,000 1,000,000 300,000 700,000 10,000 690,000 200,000 $ 490,000 .

23-9

BRIEF EXERCISE 23-9 Collections from Customers January February March $165,000 $ 55,000 195,000 $ 65,000 225,000 $165,000 $250,000 $290,000

Credit Sales January, $220,000 February, $260,000 March, $300,000

BRIEF EXERCISE 23-10 Budgeted cost of goods sold ($400,000 X 65%) ........................ Add: Desired ending inventory ($480,000 X 65% X 20%) ....... Total inventory required ............................................................. Less: Beginning inventory ($400,000 X 65% X 20%)................ Required merchandise purchases for April ..............................

$260,000 62,400 322,400 52,000 $270,400

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 23-1 1. 2. 3. 4. 5. 6.

Operating budgets Master budget Participative budgeting Financial budgets Sales forecast Long-range plans

DO IT! 23-2 PARGO COMPANY Sales Budget For the Year Ending December 31, 2017 Quarter 1

Year

Expected unit sales 200,000 250,000 250,000 300,000 1,000,000 Unit selling price X $40 X $40 X $40 X $45 — Total sales $8,000,000 $10,000,000 $10,000,000 $13,500,000 $41,500,000

23-10 .

DO IT! 23-2 (Continued) PARGO COMPANY Production Budget For the Year Ending December 31, 2017 Quarter 1

Expected unit sales 200,000 250,000 Add: Desired ending finished goods units 62,500 62,500 Total required units 262,500 312,500 Less: Beginning finished goods units 50,000** 62,500 Required production units 212,500 250,000

250,000

300,000

75,000 325,000

60,000* 360,000

62,500 262,500

75,000 285,000

Year

1,010,000

*Estimated first-quarter 2018 sales volume 200,000 + (200,000 X 20%) = 240,000: 240,000 X 25%. **25% of estimated first-quarter 2017 sales units (200,000 X 25%).

PARGO COMPANY Direct Materials Budget For the Year Ending December 31, 2017 Quarter 1

Year

Units to be produced 212,500 250,000 262,500 285,000 X2 X2 X2 Direct materials per unit X2 Total pounds needed for 500,000 525,000 570,000 production 425,000 Add: Desired ending direct materials 52,500 57,000 *45,000 50,000 (pounds) 552,500 582,000 615,000 Total materials required 475,000 Less: Beginning direct 50,000 52,500 57,000 materials (pounds) **42,500 Direct materials 502,500 529,500 558,000 purchases 432,500 X $12 X $12 X $12 Cost per pound X $12 Total cost of direct materials purchases $5,190,000 $6,030,000 $6,354,000 $6,696,000 $24,270,000 *Estimated first-quarter 2018 production requirements 450,000 X 10% = 45,000 **10% of estimated first-quarter pounds needed for production. .

23-11

DO IT! 23-3 (a)

Total unit cost: Cost Element Direct materials .............................. Direct labor ..................................... Manufacturing overhead ................ Total unit cost ........................

(b)

Quantity Unit Cost 2 pounds $12.00 0.3 hours $15.00 0.3 hours $20.00

Total $24.00 4.50 6.00 $34.50

PARGO COMPANY Budgeted Income Statement For the Year Ending December 31, 2017 Sales (1,000,000) units from sales budget, page 23-10 ..... Cost of goods sold (1,000,000 X $34.50/unit) .................. Gross profit ....................................................................... Selling and administrative expenses ............................... Net income.........................................................................

$41,500,000 34,500,000 7,000,000 6,000,000 $ 1,000,000

DO IT! 23-4 BATISTA COMPANY Cash Budget April Beginning cash balance.............................................................. Add: Cash receipts for April ...................................................... Total available cash..................................................................... Less: Cash disbursements in April ........................................... Excess of available cash over cash disbursements ................. Add: Financing ($25,000 – $15,000) .......................................... Ending cash balance ...................................................................

$ 25,000 245,000 270,000 255,000 15,000 10,000 $ 25,000

To maintain the desired minimum cash balance of $25,000, Batista Company must borrow $10,000.

23-12 .

DO IT! 23-5 Zeller COMPANY Merchandise Purchases Budget For the Six Months Ending June 30, 2017 Quarter Budgeted cost of goods sold (Sales  .50) Add: Desired ending merchandise inventory (10% of next quarter’s cost of goods sold) Total Less: Beginning merchandise inventory (10% this quarter’s cost of goods sold) Required merchandise purchases

$20,000

$24,000

2,400 22,400

2,900 26,900

2,000 $20,400

2,400 $24,500

Six Months

$44,900

23-13

SOLUTIONS TO EXERCISES EXERCISE 23-1 MEMO To

Jim Dixon

From: Student Re:

Budgeting

I am glad Trusler Company is considering preparing a formal budget. There are many benefits derived from budgeting, as I will discuss later in this memo. A budget is a formal written statement of management’s plans for a specified future time period, expressed in financial terms. The master budget generally consists of operating budgets such as the sales budget, production budget, direct materials budget, direct labor budget, manufacturing overhead budget, selling and administrative expense budget, and budgeted income statement; and financial budgets such as the capital expenditure budget, cash budget, and budgeted balance sheet. The primary benefits of budgeting are: 1. It requires all levels of management to plan ahead and to formalize goals on a recurring basis. 2. It provides definite objectives for evaluating performance at each level of responsibility. 3. It creates an early warning system for potential problems, so that management can make changes before things get out of hand. 4. It facilitates the coordination of activities within the business by correlating the goals of each segment with overall company objectives. 5. It results in greater management awareness of the entity’s overall operations and the impact of external factors such as economic trends. 6. It motivates personnel throughout the organization to meet planned objectives. In order to maximize these benefits, it is essential that budgeting take place within a sound organizational structure, so authority and responsibility for all phases of operations are clearly defined. Also, the budget should be based on research and analysis that results in realistic goals. Finally, the effectiveness of a budget program is directly related to its acceptance by all levels of management. If you want further explanation of any of these topics, please contact me. 23-14 .

EXERCISE 23-2

.. .

EDINGTON ELECTRONICS INC. Sales Budget For the Six Months Ending June 30, 2017

Product

Units

XQ-103 XQ-104 Totals

20,000 12,000 32,000

Quarter 1 Selling Total Price Sales $15 25

Units

$300,000 22,000 300,000 15,000 $600,000 37,000

Quarter 2 Selling Total Price Sales $15 25

$330,000 375,000 $705,000

Units 42,000 27,000 69,000

Six Months Selling Total Price Sales $15 25

$ 630,000 675,000 $1,305,000

23-15

EXERCISE 23-3

3THOME AND CREDE, CPAs Sales Revenue Budget For the Year Ending December 31, 2017

Dept. Auditing Tax Consulting Totals

Billable Hours 2,300 3,000 1,500

Billable Hours 8,300a 9,700b 6,000c

Quarter 1 Billable Total Rate Rev. $ 80 $184,000 90 270,000 110 165,000 $619,000

Year Billable Rate $ 80 90 110

a2,300 + 1,600 + 2,000 + 2,400 b3,000 + 2,200 + 2,000 + 2,500 c1,500  4

Billable Hours 1,600 2,200 1,500

Total Rev. $ 664,000 873,000 660,000 $2,197,000

Quarter 2 Billable Rate $ 80 90 110

Total Rev. 128,000 198,000 165,000 $491,000

Billable Hours 2,000 2,000 1,500

Quarter 3 Billable Total Rate Rev. $ 80 $160,000 90 180,000 110 165,000 $505,000

Billable Hours 2,400 2,500 1,500

Quarter 4 Billable Total Rate Rev. $ 80 $192,000 90 225,000 110 165,000 $582,000

EXERCISE 23-4 TURNEY COMPANY Production Budget For the Year Ending December 31, 2017 Product HD-240 Quarter Expected unit sales Add: Desired ending finished goods units(1) Total required units Less: Beginning finished goods units Required production units (1) (2)

5,000

7,000

8,000

10,000

2,800 7,800

3,200 10,200

4,000 12,000

2,500 (2) 12,500

2,000 5,800

2,800 7,400

3,200 8,800

4,000 8,500

Year

30,500

40% of next quarter’s sales. 40% X (5,000 X 125%).

23-17

EXERCISE 23-5 DEWITT INDUSTRIES Direct Materials Purchases Budget For the Quarter Ending March 31, 2017

Units to be produced Direct materials per unit Total pounds needed for production Add: Desired ending direct materials (pounds)* Total materials required Less: Beginning direct materials (pounds) Direct materials purchases Cost per pound Total cost of direct materials purchases

January 10,000 X 2 20,000

February 8,000 X 2 16,000

March 5,000 X 2 10,000

3,200 23,200

2,000 18,000

1,600 11,600

4,000 19,200 X $3

3,200 14,800 X $3

2,000 9,600 X $3

$57,600

$44,400

$28,800

*20% of next month’s production needs. EXERCISE 23-6 (a)

HARDIN COMPANY Production Budget For the Six Months Ending June 30, 2017 Quarter Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units

1 5,000

2 6,000

1,500(1) 6,500 1,250(3) 5,250

1,750 (2) 7,750 1,500 6,250 11,500

(1)

25% X 6,000. 25% X 7,000. (3) 25% X 5,000. (2)

23-18 .

Six Months

EXERCISE 23-6 (Continued) (b)

HARDIN COMPANY Direct Materials Budget For the Six Months Ending June 30, 2017 Quarter Units to be produced Direct materials per unit Total pounds needed for production Add: Desired ending direct materials (pounds) Total materials required Less: Beginning direct materials (pounds) Direct materials purchases Cost per pound Total cost of direct materials Purchases (1) 40% X 18,750. (2) 7,200 X (3 X 40%). (3) 40% X 15,750.

1 5,250 X 3 15,750

2 6,250 X 3 18,750

7,500 (1) 23,250

8,640(2) 27,390

Six Months

6,300 (3) 7,500 16,950 19,890 X $4 X $4 $67,800

$79,560

Finished goods: Sales ........................................................................ Plus: Ending inventory........................................... Total required .............................................................. Less: Beginning inventory .................................... Production required ....................................................

2,675 2,200 4,875 2,230 2,645

$147,360

EXERCISE 23-7

Direct materials per unit ............................................. Units of direct material required for production ....... Plus: Ending inventory ............................................... Total required .............................................................. Less: Beginning inventory .................................... Purchases of direct material required ....................... Cost per unit ................................................................ Total cost of materials ................................................

2 5,290 2,500(a) 7,790 2,645(b) 5,145 X $4 $20,580

The May raw material purchases would be $20,580. (a)

2,390 + 2,310 – 2,200 = 2,500; 2,500 X 2 X .50 = 2,500 2,675 + 2,200 – 2,230 = 2,645; 2,645 X 2 X .50 = 2,645

(b)

23-19

EXERCISE 23-8 (a)

FUQUA COMPANY Production Budget For the Two Months Ending February 28, 2017 January Expected unit sales ................................................ 10,000 Add: Desired ending finished goods inventory ...................................................... 2,400* Total required units ................................................ 12,400 Less: Beginning finished goods inventory .......... 2,000** Required production units ..................................... 10,400

February 12,000 2,600*** 14,600 2,400 12,200

*20% X next month’s expected sales or 12,000 X 20% **20% X 10,000 ***20% X 13,000 (b)

FUQUA COMPANY Direct Materials Budget For the Month Ending January 31, 2017 January 10,400 X4 41,600 19,520* 61,120 16,640** 44,480 X $2 $88,960

Units to be produced ............................................................ Direct material pounds per unit ........................................... Total pounds needed for production ................................... Add: desired pounds in ending materials inventory ......... Total materials required ....................................................... Less: beginning direct materials (pounds) ......................... Direct materials purchases .................................................. Cost per pound ..................................................................... Total cost of direct materials purchases............................. *(12,200 X 4) X 40%

23-20 .

**(10,400 X 4) X 40%

EXERCISE 23-9 RODRIQUEZ, INC. Direct Labor Budget For the Year Ending December 31, 2017 Quarter Units to be produced Direct labor time (hours) per unit Total required direct labor hours Direct labor cost per hour Total direct labor cost

20,000

25,000

35,000

30,000

1.5

Year

1.5

30,000

37,500

52,500

45,000

X $16 $480,000

X $16 $600,000

X $18 $945,000

X $18 $810,000

$2,835,000

EXERCISE 23-10 LOWELL COMPANY Production Budget For the Quarter Ending March 31, 2017 Sales in units Plus: desired ending inventory Total needs Less: beginning inventory Required production units

Jan 12,000 19,200(1) 31,200 17,600 13,600

Feb 14,000 17,400(2) 31,400 19,200 12,200

Mar 13,000 15,400(3) 28,400 17,400 11,000

Total 39,000 15,400 54,400 17,600 36,800

(1)

(14,000 X 100%) + (13,000 X 40%) (13,000 X 100%) + (11,000 X 40%) (3) (11,000 X 100%) + (11,000 X 40%) (2)

23-21

EXERCISE 23-10 (Continued) LOWELL COMPANY Direct Labor Budget For the Quarter Ending March 31, 2017 Jan 13,600 X 2.00 27,200 X $8.00 $217,600

Production in units Direct labor hours per unit Total hours needed Direct labor cost per hour Total direct labor cost

Feb Mar 12,200 11,000 X 2.00 X 1.50 24,400 16,500 X $8.00 X $8.00 $195,200 $132,000

Total

$544,800

EXERCISE 23-11 ATLANTA COMPANY Manufacturing Overhead Budget For the Year Ending December 31, 2017 Quarter 1 Variable costs Indirect materials ($.80/hour) $12,000 Indirect labor ($1.20/hour) 18,000 Maintenance ($.50/hour) 7,500 Total variable 37,500 Fixed costs 35,000 Supervisory salaries Depreciation 15,000 Maintenance 12,000 Total fixed 62,000 Total manufacturing overhead $99,500 Direct labor hours Manufacturing overhead rate per direct labor hour ($443,000 ÷ 78,000)

15,000*

Year

$ 14,400 21,600 9,000 45,000

$ 16,800 25,200 10,500 52,500

$ 19,200 28,800 12,000 60,000

$ 62,400 93,600 39,000 195,000

35,000 15,000 12,000 62,000 $107,000

35,000 15,000 12,000 62,000 $114,500

35,000 15,000 12,000 62,000 $122,000

140,000 60,000 48,000 248,000 $443,000

18,000

21,000

24,000

78,000 $5.68

*(10,000 X 1.5)

23-22 .

EXERCISE 23-12 KIRKLAND COMPANY Selling and Administrative Expense Budget For the Six Months Ending June 30, 2017 Quarter

Six Months

Budgeted sales in units

1 20,000

2 22,000

Variable expenses (1) Sales commissions Delivery expense Advertising Total variable

$20,000* 8,000 12,000 40,000

$22,000 8,800 13,200 44,000

$ 42,000 16,800 25,200 84,000

12,000 8,000 4,200 1,500 800 500 27,000

24,000 16,000 8,400 3,000 1,600 1,000 54,000

$67,000

$71,000

$138,000

Fixed expenses Sales salaries Office salaries Depreciation Insurance Utilities Repairs expense Total fixed Total selling and administrative expenses

(1) Variable costs per dollar of sales are: Sales commissions (5%), Delivery expense (2%), and Advertising (3%). *(20,000 X $20 X 5%)

23-12 .

EXERCISE 23-24 (a) FULTZ COMPANY Computation of Cost of Goods Sold For the Year Ending December 31, 2017 Cost of one unit of finished goods: Direct materials (1 X $5) ............................................................... Direct labor (3 X $15) .................................................................... Manufacturing overhead (3 X $5) ................................................ Total ......................................................................................

$5 45 15 $65

30,000 units X $65 = $1,950,000. (b) FULTZ COMPANY Budgeted Income Statement For the Year Ending December 31, 2017 Sales (30,000 X $85) ............................................................ Cost of goods sold (see part (a)) ....................................... Gross profit ......................................................................... Selling and administrative expenses ................................ Income from operations ..................................................... Interest expense ................................................................. Income before income taxes .............................................. Income tax expense ($400,000 X 30%) .............................. Net income ..........................................................................

23-24 .

$2,550,000 1,950,000 600,000 170,000 430,000 30,000 400,000 120,000 $ 280,000

EXERCISE 23-25 DANNER COMPANY Cash Budget For the Two Months Ending February 28, 2017

Beginning cash balance ......................................... Add: Receipts Collections from customers ...................... Sale of marketable securities .................... Total receipts .............................................. Total available cash ................................................ Less: Disbursements Direct materials........................................... Direct labor ................................................. Manufacturing overhead ............................ Selling and administrative expenses ........ Total disbursements................................... Excess (deficiency) of available cash over cash disbursements .................................................... Financing Add: Borrowings.................................................... Less: Repayments .................................................. Ending cash balance ..............................................

January $ 45,000

February $ 27,500

85,000 12,000 97,000 142,000

150,000 0 150,000 177,500

50,000 30,000 19,500 15,000 114,500

75,000 45,000 23,500 20,000 163,500

27,500

14,000

0 0 $ 27,500

6,000 0 $ 20,000

23-25

EXERCISE 23-26 DEITZ CORPORATION Cash Budget For the Quarter Ended March 31, 2017 Beginning cash balance ........................................................... Add: Receipts Collections from customers......................................... Sale of equipment ......................................................... Total receipts .......................................................... Total available cash .................................................................. Less: Disbursements Direct materials............................................................. Direct labor.................................................................... Manufacturing overhead .............................................. Selling and administrative expenses .......................... Purchase of securities.................................................. Total disbursements .............................................. Excess of available cash over disbursements........................ Financing Add: Borrowings ..................................................................... Less: Repayments .................................................................... Ending cash balance ................................................................

23-26 .

$ 30,000 185,000 3,000 188,000 218,000 43,000 70,000 35,000 45,000 14,000 207,000 11,000 14,000 –0– $ 25,000

EXERCISE 23-27 (a)

TRENSHAW COMPANY Cash Budget For the Month Ended July 31, 2017 Beginning cash balance ............................ Add: Cash collections .............................. Total cash available ................................... Less: Cash disbursements Merchandise purchases ......... Operating expenses................ Equipment purchase .............. Total cash disbursements ......................... Excess of available cash over disbursements ................................ Add: Borrowings ....................................... Ending cash balance .................................

$45,000 90,000 $135,000 $56,200 40,800 20,000 117,000 18,000 7,000 $ 25,000

Cash disbursements of $117,000 plus the desired ending cash balance of $25,000 exceeds the $135,000 total cash available by $7,000. Therefore, Trenshaw Company will have to borrow $7,000. (b)

An advantage of cash budgeting is that it allows cash shortfalls to be predicted. If the timing of future cash shortfalls is known, arrangements to borrow funds can be made well in advance, which often means that interest rates may be more favorable than if the funds are needed on short notice.

23-27

EXERCISE 23-28 (a)

NIETO COMPANY Expected Collections from Customers March $ 75,000

March cash sales (30% X $250,000) ..................................... Collection of March credit sales [(70% X $250,000) X 10%].................................................. Collection of February credit sales [(70% X $220,000) X 50%].................................................. Collection of January credit sales [(70% X $200,000) X 36%].................................................. Total collections ........................................................ (b)

17,500 77,000 50,400 $219,900

NIETO COMPANY Expected Payments for Direct Materials March $19,000

March cash purchases (50% X $38,000) .............................. Payment of March credit purchases [(50% X $38,000) X 40%].................................................... Payment of February credit purchases [(50% X $36,000) X 60%].................................................... Total payments..........................................................

23-28 .

7,600 10,800 $37,400

EXERCISE 23-29 (a)

(1) GREEN LANDSCAPING INC. Schedule of Expected Collections From Clients For the Quarter Ending March 31, 2017 January November ($80,000)...... December ($90,000) ...... January ($100,000) ....... February ($120,000) ...... March ($140,000)........... Total collections .....

February

$ 8,000 27,000 60,000

$95,000

$111,000

March

Quarter $

9,000 30,000 72,000

$ 10,000 36,000 84,000 $130,000

8,000 36,000 100,000 108,000 84,000 $336,000

(2) GREEN LANDSCAPING INC. Schedule of Expected Payments for Landscaping Supplies For the Quarter Ending March 31, 2017 January December ($14,000) ...... January ($12,000) ......... February ($15,000) ........ March ($18,000)............. Total payments .......

$ 5,600 7,200

$12,800

February $ 4,800 9,000 $13,800

March

Quarter

$ 6,000 10,800 $16,800

$ 5,600 12,000 15,000 10,800 $43,400

(b) (1) Accounts receivable at March 31, 2017: ($120,000 X 10%) + ($140,000 X 40%) = $68,000 (2) Accounts payable at March 31, 2017: ($18,000 X 40%) = $7,200

23-29

EXERCISE 23-30 PLETCHER DENTAL CLINIC Cash Budget For the Two Quarters Ending June 30, 2017

Beginning cash balance ....................................... Add: Receipts Collections from patients ...................... Sale of equipment .................................. Investment interest ................................ Total receipts .................................... Total cash available .............................................. Less: Disbursements Professional salaries ............................. Overhead costs ...................................... Selling and administrative costs........... Equipment purchase.............................. Payment of income taxes ...................... Total disbursements ........................ Excess (deficiency) of cash available over cash disbursements ................................. Financing Add: Borrowings ................................................. Less: Repayments ............................................... Ending cash balance ............................................

1st Quarter $ 30,000

2nd Quarter $ 25,000

235,000 12,000 0 247,000 277,000

380,000 0 7,000 387,000 412,000

140,000 77,000 48,000* 0 0 265,000

140,000 100,000 68,000** 50,000 4,000 362,000

12,000

50,000

13,000 0 $ 25,000

0 13,200 $ 36,800

*$50,000 – $2,000 **$70,000 – $2,000

23-30 .

EXERCISE 23-31 (a)

GRAND STORES Merchandise Purchases Budget For the Month Ending June 30, 2017 Budgeted cost of goods sold ($500,000 X 75%) .................. Add: Desired ending merchandise inventory ($600,000 X 75% X 30%) .................................................... Total........................................................................................ Less: Beginning merchandise inventory ($375,000 X 30%)......................................................... Required merchandise purchases .......................................

(b)

$375,000 135,000 510,000 112,500 $397,500

GRAND STORES Budgeted Income Statement For the Month Ending June 30, 2017 Sales ...................................................................................... Cost of goods sold (75% X $500,000) .................................. Gross profit ...........................................................................

$500,000 375,000 $125,000

EXERCISE 23-21 Emeric and Ellie’s Painting Service Direct Labor Budget For the Month Ending June 30, 2017 Homes to be painted Direct labor time (hours) per house Total required direct labor hours Direct labor cost per hour Total direct labor cost

Small 10

Medium 5

Large 2

X 40

X 70

X 120

400 X $18 $7,200

350 X $18 $6,300

240 X $18 $4,320

Total

$17,820

23-31

SOLUTIONS TO PROBLEMS PROBLEM 23-1A

COOK FARM SUPPLY COMPANY Sales Budget For the Six Months Ending June 30, 2017 Quarter Expected unit sales..................... Unit selling price ......................... Total sales ...................................

1 40,000 X $60 $2,400,000

Six Months 96,000 X $60 $5,760,000

2 56,000 X $60 $3,360,000

COOK FARM SUPPLY COMPANY Production Budget For the Six Months Ending June 30, 2017 Quarter Expected unit sales ....................................... Add: Desired ending finished goods units .................................................... Total required units ....................................... Less: Beginning finished goods units ........ Required production units............................

23-32 .

1 40,000

2 56,000

15,000 55,000 8,000 47,000

18,000 74,000 15,000 59,000

Six Months

106,000

PROBLEM 23-1A (Continued) COOK FARM SUPPLY COMPANY Direct Materials Budget—Gumm For the Six Months Ending June 30, 2017 Quarter Units to be produced .................................... Direct materials per unit ............................... Total pounds needed for production .......... Add: Desired ending direct materials (pounds) ............................................. Total materials required ............................... Less: Beginning direct materials (pounds) ............................................ Direct materials purchases .......................... Cost per pound.............................................. Total cost of direct materials purchases ..................................................

47,000 X4 188,000

59,000 X4 236,000

10,000 198,000

13,000 249,000

9,000 189,000 X $3.80

10,000 239,000 X $3.80

$718,200

$908,200

Six Months

$1,626,400

COOK FARM SUPPLY COMPANY Direct Labor Budget For the Six Months Ending June 30, 2017 Quarter Units to be produced ........................... Direct labor time (hours) per unit ........ Total required direct labor hours ........ Direct labor cost per hour.................... Total direct labor cost ..........................

1 47,000 X 1/4 11,750 X $16 $188,000

2 59,000 X 1/4 14,750 X $16 $236,000

Six Months

$424,000

23-33

PROBLEM 23-1A (Continued) COOK FARM SUPPLY COMPANY Selling and Administrative Expense Budget For the Six Months Ending June 30, 2017 Quarter 1 40,000

2 56,000

Six Months 96,000

Variable (.15 X sales) .......................... $360,000 Fixed.................................................... 175,000 Total..................................................... $535,000

$504,000 175,000 $679,000

$ 864,000 350,000 $1,214,000

Budgeted sales in units

COOK FARM SUPPLY COMPANY Budgeted Income Statement For the Six Months Ending June 30, 2017 Sales............................................................................................. Cost of goods sold (96,000 X $33.20)* ....................................... Gross profit.................................................................................. Selling and administrative expenses ......................................... Income from operations.............................................................. Interest expense .......................................................................... Income before income tax .......................................................... Income tax expense (30%) .......................................................... Net income ...................................................................................

$5,760,000 3,187,200 2,572,800 1,214,000 1,358,800 100,000 1,258,800 377,640 $ 881,160

*Cost Per Bag Cost Element Direct materials Gumm .......................................... Tarr............................................... Direct labor ...................................... Manufacturing overhead (125% of direct labor cost) ......... Total ........................................

23-34 .

Quantity

Unit Cost

Total

4 pounds 6 pounds 1/4 hour

$ 3.80 1.50 16.00

$15.20 9.00 4.00 5.00 $33.20

PROBLEM 23-2A

(a)

DELEON INC. Sales Budget For the Year Ending December 31, 2017

Expected unit sales ........... Unit selling price ............... Total sales..........................

(b)

JB 50 400,000 X $20 $8,000,000

Total

$13,000,000

DELEON INC. Production Budget For the Year Ending December 31, 2017

Expected unit sales ............................ Add: Desired ending finished goods units .............................. Total required units ............................ Less: Beginning finished goods units ......................................... Required production units .................

JB 60 200,000 X $25 $5,000,000

JB 50 400,000

JB 60 200,000

30,000 430,000

15,000 215,000

25,000 405,000

10,000 205,000

23-35

PROBLEM 23-2A (Continued) (c)

DELEON INC. Direct Materials Budget For the Year Ending December 31, 2017

Units to be produced .................... Direct materials per unit ............... Total pounds needed for production.................................. Add: Desired ending direct materials (pounds)............. Total materials required ............... Less: Beginning direct materials (pounds)............. Direct materials purchases .......... Cost per pound.............................. Total cost of direct materials purchases .................................

(d)

JB 50

JB 60

405,000 X 2

205,000 X 3

810,000

615,000

30,000 840,000

10,000 625,000

40,000 800,000 X $3

15,000 610,000 X $4

$2,400,000

$2,440,000

Total

$4,840,000

DELEON INC. Direct Labor Budget For the Year Ending December 31, 2017

Units to be produced .................... Direct labor time (hours) per unit .............................................. Total required direct labor hours .......................................... Direct labor cost per hour ............ Total direct labor cost...................

23-36 .

JB 50

JB 60

405,000

205,000

X .4

X .6

162,000 X $12 $1,944,000

123,000 X $12 $1,476,000

Total

$3,420,000

PROBLEM 23-2A (Continued) (e)

DELEON INC. Budgeted Income Statement For the Year Ending December 31, 2017

Sales ..................................... Cost of goods sold .............. Gross profit .......................... Operating expenses Selling expenses .............. Administrative expenses ...................... Total operating expenses............... Income from operations ...... Interest expense .................. Income before income taxes ................................. Income tax expense (30%) ................................. Net income ........................... (1) (2)

JB 50 JB 60 Total $8,000,000 $5,000,000 $13,000,000 (1) 5,200,000 4,000,000 (2) 9,200,000 2,800,000 1,000,000 3,800,000 560,000

360,000

920,000

540,000

340,000

880,000

1,100,000 $1,700,000

700,000 $ 300,000

1,800,000 2,000,000 150,000 1,850,000 555,000 $ 1,295,000

400,000 X $13. 200,000 X $20.

23-37

PROBLEM 23-3A

(a)

HILL INDUSTRIES Sales Budget For the Year Ending December 31, 2017

Expected unit sales ................................... Unit selling price ........................................ Total sales ..................................................

Plan A Plan B (1) 765,000 950,000(2) X $8.40 X $7.50(3) $6,426,000 $7,125,000

(1)

$6,800,000 ÷ $8 = 850,000 X 90% = 765,000. 850,000 + 100,000 = 950,000. (3) $8.00 – $0.50 (2)

(b)

HILL INDUSTRIES Production Budget For the Year Ending December 31, 2017

Expected unit sales.............................................. Add: Desired ending finished goods units ...... Total required units.............................................. Less: Beginning finished goods units............... Required production units .................................. (1) 765,000 X 5%

Plan A Plan B 765,000 950,000 (1) 38,250 60,000 803,250 1,010,000 40,000 40,000 763,250 970,000

(c) Variable costs = $4.40 per unit ($1.80 + $1.40 + $1.20) for both plans. Plan A Total variable costs Total fixed costs Total costs (a) Total units (b) Unit cost (a) ÷ (b)

$3,358,300 (763,250 X $4.40) 1,895,000 $5,253,300

Plan B $4,268,000 (970,000 X $4.40) 1,895,000 $6,163,000

763,250

970,000

$6.88

$6.35

The difference is due to the fact that fixed costs are spread over a larger number of units (206,750) in Plan B. 23-38 .

PROBLEM 23-3A (Continued) (d)

Gross Profit Plan A Sales Cost of goods sold Gross profit

$6,426,000 5,263,200 (765,000 X $6.88) $1,162,800

Plan B $7,125,000 6,032,500 (950,000 X $6.35) $1,092,500

Plan A should be accepted because it produces a higher gross profit than Plan B.

23-39

PROBLEM 23-4A

(a) (1)

Expected Collections from Customers

November ($250,000) ................................ December ($320,000) ................................ January ($360,000).................................... February ($400,000) .................................. Total collections .............................. (2)

February $ 0 64,000 108,000 200,000 $372,000

$326,000

Expected Payments for Direct Materials

December ($100,000) ................................ January ($120,000).................................... February ($125,000) .................................. Total payments ................................

23-40 .

January $ 50,000 96,000 180,000

January $ 40,000 72,000

February $ 0 48,000 75,000 $123,000

$112,000

PROBLEM 23-4A (Continued) (b)

COLTER COMPANY Cash Budget For the Two Months Ending February 28, 2017

Beginning cash balance .................................. Add: Receipts Collections from customers ............ [See Schedule (1)] Notes receivable ............................... Sale of securities .............................. Total receipts ............................ Total available cash ......................................... Less: Disbursements Direct materials ............................... [See Schedule 2] Direct labor ...................................... Manufacturing overhead ................. Selling and administrative expenses* .................................... Cash dividend.................................. Total disbursements ............... Excess (deficiency) of available cash over cash disbursements ............................ Financing Add: Borrowings ............................................ Less: Repayments .......................................... Ending cash balance .......................................

January $ 60,000

February $ 51,000

326,000

372,000

15,000 341,000 401,000

6,000 378,000 429,000

112,000

123,000

90,000 70,000

100,000 75,000

78,000 350,000

84,000 6,000 388,000

51,000

41,000

0 0 $ 51,000

9,000 0 $ 50,000

*Selling and administrative expenses less $1,000 depreciation.

23-41

PROBLEM 23-5A

(a)

SUPPAR COMPANY San Miguel Store Merchandise Purchases Budget For the Months of May and June, 2017

Budgeted cost of goods sold ........................... Add: Desired ending merchandise inventory..... Total ................................................................... Less: Beginning merchandise inventory ........ Required merchandise purchases...................

May June $600,000 $630,000(1) 63,000(2) 66,150(3) 663,000 696,150 (4) 60,000 63,000 $603,000 $633,150

(1)

$800,000 X 105% = $840,000; $840,000 X 75% = $630,000. $630,000 X 10% = $63,000. (3) $840,000 X 105% = $882,000; $882,000 X 75% = $661,500; $661,500 X 10% = $66,150. (4) $600,000 X 10% = $60,000. (2)

23-42 .

PROBLEM 23-5A (Continued) (b)

SUPPAR COMPANY San Miguel Store Budgeted Income Statement For the Months of May and June, 2017

Sales .................................................................. Cost of goods sold Beginning inventory.................................. Purchases .................................................. Cost of goods available for sale .............. Less: Ending inventory............................ Cost of goods sold ............................ Gross profit ....................................................... Operating expenses Sales salaries ............................................ Advertising* ............................................... Delivery** ................................................... Sales commissions*** ............................... Rent ............................................................ Depreciation .............................................. Utilities ....................................................... Insurance ................................................... Total.................................................... Income from operations ................................... Interest expense ............................................... Income before income taxes ............................ Income tax expense (30%) ............................... Net income ........................................................

May $800,000

June $840,000

60,000 603,000 663,000 63,000 600,000 200,000

63,000 633,150 696,150 66,150 630,000 210,000

35,000 48,000 16,000 40,000 5,000 800 600 500 145,900 54,100 2,000 52,100 15,630 $ 36,470

35,000 50,400 16,800 42,000 5,000 800 600 500 151,100 58,900 2,000 56,900 17,070 $ 39,830

*6% of sales. **2% of sales. ***5% of sales.

23-43

PROBLEM 23-6A

KRAUSE INDUSTRIES Budgeted Cost of Goods Sold For the Year Ending December 31, 2017 Finished goods inventory, 1/1/17 ........................... Cost of goods manufactured Direct materials used....................................... Direct labor ....................................................... Manufacturing overhead applied .................... Cost of goods available for sale............................. Finished goods inventory 12/31/17 (2,500  $18) .. Cost of goods sold ..................................................

$ 24,000 $62,500 50,900 48,600

162,000 186,000 45,000 $141,000

KRAUSE INDUSTRIES Budgeted Income Statement For the Year Ending December 31, 2017 Sales revenue (8,000  $32) .................................... Cost of goods sold .................................................. Gross profit.............................................................. Selling and administrative expenses ..................... Income from operations.......................................... Interest expense ...................................................... Income before income taxes .................................. Income tax expense (40%) ...................................... Net income ...............................................................

$256,000 141,000 115,000 75,000 40,000 3,500 36,500 14,600 $ 21,900

KRAUSE INDUSTRIES Budgeted Retained Earnings Statement For the Year Ending December 31, 2017 Retained earnings, 1/1/17........................................ Add: Net income ......................................................

$25,000 21,900 46,900 8,000 $38,900

Deduct: Dividends ................................................... Retained earnings 12/31/17.....................................

23-44 .

PROBLEM 23-6A (Continued) KRAUSE INDUSTRIES Budgeted Balance Sheet December 31, 2017 Assets Current assets Cash...................................................................... Accounts receivable ($76,800 X 40%) ................ Finished goods inventory (2,500 X $18) ..................................................... Total current assets ..................................... Property, plant, and equipment Equipment ($40,000 + $9,000) ............................. Less: Accumulated depreciation ($10,000 + $4,000) ..................................... Total assets ..................................................

$ 5,880 30,720 45,000 $81,600 $49,000 14,000

35,000 $116,600

Liabilities and Stockholders’ Equity Liabilities Notes payable ($25,000 – $8,000) ....................... Accounts payable ($8,500* + $7,200).................. Income taxes payable.......................................... Total liabilities .............................................. Stockholders’ equity Common stock..................................................... Retained earnings................................................ Total stockholders’ equity ........................... Total liabilities and stockholders’ equity ........................................................

$17,000 15,700 5,000 $ 37,700

$40,000 38,900 78,900 $116,600

*$17,000 X 50%

23-45

PROBLEM 23-6A (Continued) Proof of budgeted cash balance December 31, 2017 Beginning cash balance.......................................... Collections Beginning accounts receivable .............................. 2017 sales less ending accounts receivable ($256,000 – $30,720)......................................... Payments Beginning accounts payable .................................. Note payment........................................................... Equipment purchase ............................................... Dividends ................................................................. Direct materials purchases ($62,500 – $8,500) .................................................... Direct labor .................................................................. Manufact. overhead and selling and admin expenses less depreciation and ending accts payable $48,600 + $75,000 – $4,000 – $7,200 ................... Interest expense .......................................................... Income taxes (14,600 – $5,000)................................... Ending cash balance ...................................................

23-46 .

7,500

$ 73,500 225,280

298,780 306,280

45,000 8,000 9,000 8,000 54,000 50,900 112,400 3,500 9,600

300,400 $ 5,880

CD23

CURRENT DESIGNS CURRENT DESIGNS Production Budget For the Year Ending December 31, 2017

Expected unit sales Add: Desired ending finished goods units Total required units Less: Beginning finished goods units Required production units

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total 1,000 1,500 750 750 4,000 300* 1,300

150* 1,650

150* 900

220** 970

220 4,220

200*** 1,100

300 1,350

150 750

150 820

200 4,020

*(20% of next quarter’s sales) **20% X 1,100 ***given in problem

23-47

CD23 (Continued) CURRENT DESIGNS Direct Materials Budget For the Year Ending December 31, 2017 Units to be produced Pounds of polyethylene powder per unit Total pounds needed for production Add: Desired ending inventory of powder Total pounds of powder required Less: Beginning inventory of powder Pounds of polyethylene powder to be purchased Cost per pound Cost of polyethylene powder to be purchased Cost of required finishing kits (one kit per kayak manufactured) @$170 each Total cost for direct materials purchases

Quarter 1

Quarter 2

Quarter 3

Quarter 4

1,100

1,350

750

820

X 54

Total 4,020

59,400

72,900

40,500

44,280

217,080

18,225*

10,125*

11,070*

15,930**

15,930

77,625

83,025

51,570

60,210

233,010

19,400***

18,225

10,125

11,070

19,400

58,225 X $1.50

64,800 X $1.50

41,445 X $1.50

49,140 X $1.50

213,610 X $1.50

$ 87,337.50

$ 97,200.00

$ 62,167.50

$ 73,710.00

$ 320,415.00

187,000.00

229,500.00

127,500.00

139,400.00

683,400.00

$274,337.50

$326,700.00

$189,667.50

$213,110.00

$1,003,815.00

*25% of needs for next quarter **Desired ending inventory for Quarter 4 = 25% of amount needed for first quarter of 2018 production. Production for first quarter of 2018 = 1,100 + 300 – 220 = 1,180 units Desired ending inventory for Quarter 4 of 2017 = 25% *(1,180 units X 54 pounds per unit) = 15,930 pounds ***given in problem

23-48 .

CD23 (Continued) CURRENT DESIGNS Direct Labor Budget For the Year Ending December 31, 2017 Units to be produced Number of hours of more skilled labor/unit Total number of hours of more skilled labor Hourly rate for more skilled labor Total cost of more skilled labor Units to be produced Number of hours of less skilled labor/unit Total number of hours of less skilled labor Hourly rate for less skilled labor Total cost of less skilled labor Total direct labor cost

Quarter 1

Quarter 2

Quarter 3

Quarter 4

1,100

1,350

750

820

Total 4,020 X

2,200 X $15 $33,000

2,700 X $15 $40,500

1,500 X $15 $22,500

1,640 X $15 $24,600

8,040 X $15 $120,600

1,100

1,350

750

820

4,020

3,300 X $12 39,600 $72,600

4,050 X $12 48,600 $89,100

2,250 $12 27,000 $49,500

2,460 $12 29,520 $54,120

12,060 X $12 144,720 $265,320

CURRENT DESIGNS Manufacturing Overhead Budget For the Year Ending December 31, 2017 Quarter 1 Quarter 2 Quarter 3 Quarter 4

Total

Total costs for direct labor $72,600 $89,100 $49,500 $54,120 $265,320 Manufacturing overhead rate per direct labor X 150% X 150% X 150% X 150% X 150% dollar Manufacturing overhead $108,900 $133,650 $74,250 $81,180 $397,980 costs

23-49

CD23 (Continued) CURRENT DESIGNS Selling and Administrative Expense Budget For the Year Ending December 31, 2017 Expected unit sales Variable selling and administrative expenses at $45 per unit sold Fixed selling and administrative expenses Total selling and administrative expenses

23-50 .

Quarter 1 Quarter 2 Quarter 3 Quarter 4 1,000 1,500 750 750

Total 4,000

$45,000

$67,500

$33,750

$180,000

7,500

30,000

$52,500

$75,000

$41,250

$210,000

BYP 23-1

DECISION-MAKING ACROSS THE ORGANIZATION

(a) The budget at Palmer Corporation is an imposed “top-down” budget which fails to consider both the need for realistic data and the human interaction essential to an effective budgeting/control process. The president has not given any basis for his goals, so one cannot know whether they are realistic for the company. True participation of company employees in preparation of the budget is minimal and limited to mechanical gathering and manipulation of data. This suggests there will be little enthusiasm for implementing the budget. The budget process is the merging of the requirements of all facets of the company on a basis of sound judgment and equity. Specific instances of poor procedures other than the approach and goals include the following: 1.

The sales by product line should be based upon an accurate sales forecast of potential market. Therefore, the sales by product line should have been developed first to derive the sales target rather than the reverse.

Production costs probably would be the easiest and most certain costs to estimate. Given variable and fixed production costs, one could estimate the sales volume needed to cover manufacturing costs plus the costs of other aspects of the operation. This would be helpful before budgets for marketing costs and corporate office expenses are set.

The initial meeting between the vice president of finance, executive vice president, marketing manager, and production manager should be held earlier. This meeting is held too late in the budgeting process.

(b) Palmer Corporation should consider the adoption of a “bottom to top” (participative) budget process. This means that the people responsible for performance under the budget would participate in the decisions by which the budget is established. In addition, this approach requires initial and continuing involvement of sales, financial, and production personnel to define sales and profit goals which are realistic within the constraints under which management operates. Although time-consuming, the approach should produce a more acceptable, honest, and workable goal-control mechanism. It also provides for goal congruence possibilities for both individuals and departments within the firm.

23-51

BYP 23-1 (Continued) The sales forecast should be developed considering internal sales forecasts as well as external factors. Costs within departments should be divided into fixed and variable, discretionary and nondiscretionary. (c) The functional areas should not necessarily be expected to cut costs when sales volume falls below budget. The time frame of the budget (one year) is short enough so that many costs are relatively fixed in amount. For those costs which are fixed, there is little hope for a reduction as a consequence of short-run changes in volume. However, the functional areas should be expected to cut costs should sales volume fall below target when: 1.

Control is exercised over the costs within their function.

Budgeted costs were more than adequate for the originally targeted sales; i.e., slack was present.

Budgeted costs vary to some extent with changes in sales.

There are discretionary costs which can be delayed or omitted with no serious effect on the department. (CMA adapted)

23-52 .

BYP 23-2

MANAGERIAL ANALYSIS

(a) Direct materials

Either lower quality materials resulting in an inferior product and possible lost sales, or fewer units produced resulting in lost sales.

Direct labor

Reduced production resulting in lost sales, or reduction in quality of product resulting in lost sales.

Insurance

Less coverage; may increase risk beyond acceptable levels.

Depreciation

To reduce depreciation, fixed assets would have to be disposed of. Could result in less production and lost sales.

Machine repairs Less efficient operations, or lost production and sales. Sales salaries

Lost sales.

Office salaries

Less effective administrative functions.

Factory salaries

Lost production due to inefficiency, and therefore lost sales.

(b) Given the nature of their product, a decline in quality should be avoided, since this could result in lower future sales. Direct materials represent the largest single cost, and thus perhaps the greatest potential savings. Perhaps substitute materials of similar quality can be found, or less expensive materials can be used for aspects of the product where quality is not as critical. Additionally, it may be possible to renegotiate prices with the supplier. Elliot & Hesse should be very reluctant to reduce repair costs, since in the long run this can be very expensive. Perhaps salaried and hourly employees can be encouraged to take pay cuts if a profit-sharing mechanism is introduced.

23-53

BYP 23-3

REAL-WORLD FOCUS

(a) According to Mr. LaFaive, zero-based budgeting requires that the existence of a government program or programs be justified in each fiscal year, as opposed to simply basing budgeting decisions on a previous year’s funding level. Zero-based budgeting is often encouraged by fiscal watchdog groups as a way to ensure against unnecessary spending. (b) In addition to saving money and improving services, zero-based budgeting may:   

Increase restraint in developing budgets; Reduce the entitlement mentality with respect to cost increases; and Make budget discussions more meaningful during review sessions.

May increase the time and expense of preparing a budget; May be too radical a solution for the task at hand. You don’t need a sledgehammer to pound in a nail; Can make matters worse if not done in the right way. A substantial commitment must be made by all involved to ensure that this doesn’t happen.

(d) In Oklahoma, which has recently adopted zero-based budgeting, officials are applying the method to two departments and several agencies each year. Once those reviews are complete, the same departments and agencies will not see another zero-based review for eight years.

23-54 .

BYP 23-4

COMMUNICATION ACTIVITY

Date 2017 Mrs. Megan Parcells, CEO Life Protection Products Dear Mrs. Parcells: Allow me to congratulate you on the success of your new venture! The growth in sales you have experienced is phenomenal. You have managed the business side of the venture very well also. At the same time, I understand your concern about cash flow. You are selling these kits as fast as you can make them, and yet you are running out of cash. There is a solution to your problem. Before describing that, it may be helpful for you to understand why this situation occurred. The primary reason is that you are purchasing kit supplies at least two months in advance of sales. As your business expands, these materials costs continue to increase. Sales do not “catch up” until the Drs. Parcells have a seminar. You did not describe in detail how often these seminars are, but I would guess that they tend to run in cycles rather than being regularly spaced. Eventually, as sales stabilize, you will find that cash inflows exceed cash outflows, and your need for additional cash will subside. Presently, I think it would be a good idea to try to borrow additional funds. I have not seen all your financial data, but judging only from the cash budget you showed me, it appears that you have the basis of a very successful company. If so, your banker will be able to see the potential in your business and should be happy to provide the cash you need. You will need to prepare a full set of financial statements. I will be happy to assist you, if you desire. There is also a possibility that you have underpriced your product. You are providing a valuable service in assembling this information and these materials. The fact that every seminar results in a sellout of the materials may mean that you have priced your product too low. I know that your husband wishes to have these materials available to every family, but increasing the price a little may not make the price too high, and would better compensate you for your efforts.

23-55

BYP 23-4 (Continued) However, even if you raised prices, you will find that you need additional cash as long as the business continues to expand. It certainly does not mean that you and Sue are doing anything wrong. It just means that you will be investing additional funds as long as you continue to grow. In my opinion, the best way to make sure these kits are available to as many families as possible is for you and Sue to have a consultant evaluate and determine the size of the market for you. Then you can decide whether to expand to meet the need, or whether to keep your own business small and allow competitors to imitate your product. Congratulations again on a very successful product. Call or email this office if we may be of further assistance preparing financial statements or providing additional advice. Sincerely, Ima Student Best and Superior, Certified Public Accountants

23-56 .

BYP 23-5

ETHICS CASE

(a) At best, if you disclose the errors in your calculations, you will be embarrassed. At worst, you will be dismissed without a recommendation for another job. (b) The president will continue making presentations using data that are grossly overstated. In time, your error may be detected when the events you projected do not materialize. (c) The most ethical scenario would be to admit your error, let the president know about the error, provide the president with corrected projections, and allow the president to decide how to alter his presentations during the second week of his speech-making.

23-57

BYP 23-6

ALL ABOUT YOU

Personal Budget Typical Month Income: Wages earned .................................................. Interest income................................................ Income subtotal .......................................................... Income tax withheld ................................................... Spendable income........................................... Expenses: Rent ............................................................................. Utilities Electricity ......................................................... Telephone and Internet ................................... Food: Groceries ......................................................... Eating out......................................................... Insurance .................................................................... Transportation ............................................................ Student loan payments .............................................. Entertainment ............................................................. Savings ....................................................................... Miscellaneous ............................................................. Total investments and expenses .............. Surplus/Shortage........................................................

23-58 .

$2,500 50 2,550 300 $2,250 500 85 125 100 150 100 150 375 250 50 210 2,095 $ 155

BYP 23-7

CONSIDERING YOUR COSTS AND BENEFITS

We are concerned that the personal budgets presented on websites and in financial planning textbooks often list student loans among the sources of income. This type of thinking can lead to an overreliance on debt during college, and will result in accumulation of large amounts of debt that must be repaid. We would prefer a format that lists non-debt sources of income, then subtracts expenses, then shows debt borrowed. This format emphasizes an important point: Just like a business, in the short run you can borrow money when your cash inflows are not sufficient to meet your outflows, but in the long run you need to learn to live within your income, and your budget.

23-59

Learning Objective

Knowledge Comprehension

Application

Analysis

Q24-1 Q24-2 Q24-3 Q24-4 Q24-5

BE24-1 BE24-2

E24-2 E24-9

2. Prepare flexible budget reports.

Q24-9 Q24-12 E24-1

Q24-6 Q24-7 Q24-8 Q24-10

Q24-11 BE24-4 DI24-1 DI24-2 E24-3 E24-5

E24-7 BE24-5 E24-9 E24-4 E24-10 E24-6 E24-11 P24-1A E24-12 P24-3A P24-1B

3. Describe responsibility accounting and apply it to cost centres and profit centres.

Q24-19

Q24-13 Q24-18 Q24-14 Q24-20 Q24-15 Q24-21 Q24-16 Q24-24 Q24-17

BE24-6 BE24-7 DI24-3 E24-10 E24-11 E24-13 E24-16

P24-6A E24-14 E24-15 P24-4A

Q24-22 Q24-23 Q24-24

BE24-8 BE24-9 BE24-10 DI24-4

E24-16 E24-19 E24-17 E24-18

1. Describe budgetary control E24-1 and static budget reports.

4. Evaluate performance in investment centers.

Broadening Your Perspective

BYP24-4

Synthesis

P24-3A

BYP24-3 BYP24-5 BYP24-6

Evaluation E24-8

BE24-3 E24-8 P24-2A

P24-5A

BYP24-1 BYP24-2

BYP24-7 BYP24-8

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

24-3

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 24-1 CROIX COMPANY Sales Budget Report For the Quarter Ended March 31, 2017 Product Line Garden-Tools

Budget $315,000

Actual $305,000

Difference $10,000 U

BRIEF EXERCISE 24-2 CROIX COMPANY Sales Budget Report For the Quarter Ended June 30, 2017 Product Line GardenTools

Second Quarter Budget Actual Difference

Year to Date Budget Actual Difference

$380,000

$695,000

$384,000

$4,000 F

$689,000

$6,000 U

BRIEF EXERCISE 24-3 (a)

Direct Labor

(b)

Direct Labor .

ROONEY COMPANY Static Direct Labor Budget Report For the Month Ended January 31, 2017 Budget $200,000

(10,000 X $20)

Actual $206,000

Difference $6,000 U

ROONEY COMPANY Flexible Direct Labor Budget Report For the Month Ended January 31, 2017 Budget $208,000 .

(10,400 X $20)

Actual $206,000 .

Difference $2,000 F 24-7

BRIEF EXERCISE 24-3 (Continued) The static budget does not provide a proper basis for evaluating performance because the budget is not based on the hours actually worked. In contrast, the flexible budget provides the proper basis for evaluating performance because the budget is based on the hours actually worked.

BRIEF EXERCISE 24-4 GUNDY COMPANY Monthly Flexible Manufacturing Budget For the Year 2017 Activity level Finished units Variable costs Direct materials ($5) Direct labor ($6) Overhead ($8) Total variable costs ($19) Fixed costs Depreciation (1) Supervision (2) Total fixed costs Total costs (1) (2)

($2 X 1,200,000) ÷ 12 ($1 X 1,200,000) ÷ 12

24-8

80,000

100,000

120,000

$ 400,000 480,000 640,000 $1,520,000

$ 500,000 600,000 800,000 $1,900,000

$ 600,000 720,000 960,000 $2,280,000

200,000 100,000 300,000 $1,820,000

200,000 100,000 300,000 $2,200,000

200,000 100,000 300,000 $2,580,000

BRIEF EXERCISE 24-5 GUNDY COMPANY Manufacturing Flexible Budget Report For the Month Ended March 31, 2017

Units produced Variable costs Direct materials Direct labor Overhead Total variable costs Fixed costs Depreciation Supervision Total fixed costs Total costs

Budget

Actual

100,000

Difference Favorable F Unfavorable U

$ 500,000 600,000 800,000 $1,900,000

$ 520,000 596,000 805,000 $1,921,000

$20,000 U 4,000 F 5,000 U $21,000 U

200,000 100,000 300,000 $2,200,000

200,000 100,000 300,000 $2,221,000

–0– –0– –0– $21,000 U

Costs were not entirely controlled as evidenced by the difference between budgeted and actual for the variable costs.

BRIEF EXERCISE 24-6 HANNON COMPANY Assembly Department Manufacturing Overhead Cost Responsibility Report For the Month Ended April 30, 2017 Controllable Cost

Budget

Actual

Indirect materials Indirect labor Utilities Supervision

$16,000 20,000 10,000 5,000 $51,000

$14,300 20,600 10,850 5,000 $50,750

Difference Favorable F Unfavorable U $1,700 F 600 U 850 U 0 $ 250 F

24-9

BRIEF EXERCISE 24-7 TORRES COMPANY Water Division Responsibility Report For the Year Ended December 31, 2017

Sales Variable costs Contribution margin Controllable fixed costs Controllable margin

Budget

Actual

$2,000,000 1,000,000 1,000,000 300,000 $ 700,000

$2,080,000 1,050,000 1,030,000 305,000 $ 725,000

Difference Favorable F Unfavorable U $80,000 F 50,000 U 30,000 F 5,000 U $25,000 F

BRIEF EXERCISE 24-8 COBB COMPANY Plastics Division Responsibility Report For the Year Ended December 31, 2017 Budget

Actual

Difference Favorable F Unfavorable U $10,000 F 2,000 U $ 8,000 F

Contribution margin Controllable fixed costs Controllable margin

$700,000 300,000 $400,000

$710,000 302,000 $408,000

Return on investment

20%

20.4%

.4% F

($400,000 ÷ $2,000,000)

($408,000 ÷ $2,000,000)

($8,000 ÷ $2,000,000)

BRIEF EXERCISE 24-9 I II III

28% ($1,400,000 ÷ $5,000,000) 25% ($2,000,000 ÷ $8,000,000) 36% ($3,600,000 ÷ $10,000,000)

24-10

EXERCISE 2420 (a)

APPLIANCE POSSIBLE INC. Flexible Production Cost Budget Activity level Production levels Variable costs: Manufacturing ($6) Administrative ($4) Selling ($3) Total variable costs ($13) Fixed costs: Manufacturing Administrative Total fixed costs Total costs

90,000

100,000

110,000

$ 540,000 360,000 270,000 1,170,000

$ 600,000 400,000 300,000 1,300,000

$ 660,000 440,000 330,000 1,430,000

160,000 80,000 240,000 $1,410,000

160,000 80,000 240,000 $1,540,000

160,000 80,000 240,000 $1,670,000

(b) Let (X) represent number of units Sales price(X) = Variable costs(X) + Fixed costs + Profit Sales price(X) = Variable costs(X) + $240,000 + $60,000 (Sales price – Variable costs)(X) = $300,000 ($16 – $13)(X) = $300,000 $3(X) = $300,000 X = 100,000 units to be sold

24-20

EXERCISE 24-21 (a)

RENSING GROOMERS Flexible Budget Activity level Direct labor hours Variable costs: Grooming supplies ($5) Direct labor ($14) Overhead ($1) Total variable costs ($20) Fixed costs: Overhead Total fixed costs Total costs

550

600

700

$ 2,750 7,700 550 11,000

$ 3,000 8,400 600 12,000

$ 3,500 9,800 700 14,000

10,000 10,000 $21,000

10,000 10,000 $22,000

10,000 10,000 $24,000

(b) A flexible budget presents expected costs at various levels of production volume, not just one, so that comparisons can be made between actual costs and budgeted costs at the same volume. This allows the person to determine whether a difference between the actual results and budget is due to better or worse cost control than expected or due to achieving a different volume than that upon which the fixed budget was predicated. (c) $21,000 ÷ 550 = $38.18 $22,000 ÷ 600 = $36.67 $24,000 ÷ 700 = $34.29 (d) Cost formula is $10,000 + $20(X), where (X) = direct labor hours Total cost = $10,000 + ($20 X 650) = $23,000. Number of clients = 650 hrs ÷ 1.30 hrs/client = 500 Cost per client = $23,000 ÷ 500 = $46.00 Charge per client = $46.00 X 1.40 = $64.40

24-21

EXERCISE 2422 (a)

SORIA COMPANY Selling Expense Flexible Budget Report Clothing Department For the Month Ended October 31, 2017

Sales in units Variable expenses Sales commissions ($.30) Advertising expense ($.09) Travel expense ($.45) Free samples ($.20) Total variable expenses ($1.04) Fixed expenses Rent Sales salaries Office salaries Depreciation—sale staff autos Total fixed expenses Total expenses

Budget 10,000

Actual 10,000

Difference Favorable F Unfavorable U

$ 3,000 900 4,500 2,000

$ 2,600 850 4,100 1,400

$ 400 F 50 F 400 F 600 F

10,400

8,950

1,450 F

1,500 1,200 800 500 4,000 $14,400

1,500 1,200 800 500 4,000 $12,950

0 0 0 0 0 $1,450 F

(b) No, Joe should not have been reprimanded. As shown in the flexible budget report, variable costs were $1,450 below budget.

24-22

EXERCISE 24-23 (a)

CHUBBS INC. Manufacturing Overhead Flexible Budget Report For the Quarter Ended March 31, 2017

Variable costs Indirect materials Indirect labor Utilities Maintenance Total variable costs Fixed costs Supervisory salaries Depreciation Property taxes and insurance Maintenance Total fixed costs Total costs

(b)

Budget

Actual

Difference Favorable F Unfavorable U

$12,000 10,000 8,000 6,000 36,000

$13,500 9,500 8,700 5,000 36,700

$1,500 U 500 F 700 U 1,000 F 700 U

36,000 7,000

8,000 5,000 56,000 $92,000

8,300 5,000 56,300 $93,000

0 0 300 U 0 300 U $1,000 U

CHUBBS INC. Manufacturing Overhead Responsibility Report For the Quarter Ended March 31, 2017

Controllable Costs Indirect materials Indirect labor Utilities Maintenance* Supervisory salaries

Budget $12,000 10,000 8,000 11,000 36,000 $77,000

Difference Favorable F Unfavorable U $1,500 U 500 F 700 U 1,000 F 0 $ 700 U

Actual $13,500 9,500 8,700 10,000 36,000 $77,700

*Includes variable and fixed costs

24-23

PROBLEM 24-2A

(a)

ZELMER COMPANY Monthly Manufacturing Overhead Flexible Budget Ironing Department For the Year 2017

Activity level Direct labor hours Variable costs Indirect labor ($.40) Indirect materials ($.50) Factory utilities ($.30) Factory repairs ($.20) Total variable costs ($1.40) Fixed costs Supervision Depreciation Insurance Rent Total fixed costs Total costs

35,000

40,000

45,000

50,000

$14,000 17,500 10,500 7,000 49,000

$16,000 20,000 12,000 8,000 56,000

$18,000 22,500 13,500 9,000 63,000

$20,000 25,000 15,000 10,000 70,000

4,000 1,500 1,000 2,500 9,000 $58,000

4,000 1,500 1,000 2,500 9,000 $65,000

4,000 1,500 1,000 2,500 9,000 $72,000

4,000 1,500 1,000 2,500 9,000 $79,000

24-35

PROBLEM 24-2A (Continued) (b)

ZELMER COMPANY Ironing Department Manufacturing Overhead Flexible Budget Report For the Month Ended June 30, 2017 Difference Direct labor hours (DLH) Variable costs Indirect labor Indirect materials Factory utilities Factory repairs Total variable costs Fixed costs Supervision* Depreciation Insurance Rent Total fixed costs Total costs (1) 41,000 X $0.40 (5) 41,000 X $0.44

Budget at 41,000 DLH

Actual Costs 41,000 DLH

Favorable F Unfavorable U

$16,400 (1) 20,500 (2) 12,300 (3) 8,200 (4) 57,400

$18,040 (5) 19,680 (6) 13,120 (7) 10,250 (8) 61,090

$1,640 U 820 F 820 U 2,050 U 3,690 U

4,000 1,500 1,000 2,500 9,000 $66,400

4,000 1,500 1,000 2,500 9,000 $70,090

0 0 0 0 0 $3,690 U

(3) 41,000 X $0.30 (7) 41,000 X $0.32

(4) 41,000 X $0.20 (8) 41,000 X $0.25

(2) 41,000 X $0.50 (6) 41,000 X $0.48

*$48,000/12 (c) The manager was ineffective in controlling variable costs ($3,690 U). Fixed costs were effectively controlled. (d) The formula is fixed costs of $9,000 plus total variable costs of $1.40 per direct labor hour.

24-36

PROBLEM 24-2A (Continued) (e)

Total Budgeted Cost Line

$80 70

Costs in (000)

60 50 Budgeted Variable Costs

40 30 20 10

Budgeted Fixed Costs

Direct Labor Hours in (000)

24-37

PROBLEM 24-3A

(a) The formula is fixed costs $35,000 plus variable costs of $2.85 per unit ($171,000 ÷ 60,000 units). (b)

RATCHET COMPANY Assembling Department Flexible Budget Report For the Month Ended August 31, 2017 Difference

Units Variable costs* Direct materials ($.80 X 58,000) Direct labor ($.90 X 58,000) Indirect materials ($.40 X 58,000) Indirect labor ($.30 X 58,000) Utilities ($.25 X 58,000) Maintenance ($.20 X 58,000) Total variable ($2.85 X 58,000) Fixed costs Rent Supervision Depreciation Total fixed Total costs

Budget at 58,000 Units

Actual Costs 58,000 Units

Favorable F Unfavorable U

$ 46,400 52,200 23,200 17,400 14,500 11,600 165,300

$ 47,000 51,200 24,200 17,500 14,900 12,400 167,200

$ 600 U 1,000 F 1,000 U 100 U 400 U 800 U 1,900 U

12,000 17,000 6,000 35,000 $200,300

12,000 17,000 6,000 35,000 $202,200

0 0 0 0 $1,900 U

*Note that the per unit variable costs are computed by taking the budget amount at 60,000 units and dividing it by 60,000. For example, $48, 000 direct materials per unit is therefore $0.80 or . 60, 000 This report provides a better basis for evaluating performance because the budget is based on the level of activity actually achieved. The manager should be criticized because every variable cost was over budget except for direct labor.

24-38

PROBLEM 24-3A (Continued) (c)

RATCHET COMPANY Assembling Department Flexible Budget Report For the Month Ended September 30, 2017 Difference Units Variable costs Direct materials (.80 X 64,000) Direct labor ($.90 X 64,000) Indirect materials ($.40 X 64,000) Indirect labor ($.30 X 64,000) Utilities ($.25 X 64,000) Maintenance ($.20 X 64,000) Total variable costs Fixed costs Rent Supervision Depreciation Total fixed costs Total costs

Budget at 64,000 Units

Actual Costs 64,000 Units

Favorable F Unfavorable U

$ 51,200 57,600 25,600 19,200 16,000 12,800 182,400

$ 51,700 56,320 26,620 19,250 16,390 13,640 183,920

$ 500 U 1,280 F 1,020 U 50 U 390 U 840 U 1,520 U

12,000 17,000 6,000 35,000 $217,400

12,000 17,000 6,000 35,000 $218,920

0 0 0 0 $1,520 U

The manager’s performance was slightly better in September than it was in August. However, each variable cost was slightly over budget again except for direct labor. Note that actual variable costs in September were 10% higher than the actual variable costs in August. Therefore to find the actual variable costs in September, the actual variable costs in August must be increased 10% as follows: August September (actual) (actual) $ 47,000 X 110% = $ 51,700 51,200 X 110% 56,320 24,200 X 110% 26,620 17,500 X 110% 19,250 14,900 X 110% 16,390 12,400 X 110% 13,640 $167,200 $183,920

Direct materials Direct labor Indirect materials Indirect labor Utilities Maintenance

24-39

CD24 (Continued) (b)

Current Designs Rotomolded Line Manufacturing Flexible Budget Report For the Quarter Ended March 31, 2017 Units to be produced 900 kayaks 1,000 kayaks Costs: Variable costs Polyethylene powder (54 X 1.50 per unit) $ 72,900 $ 81,000 Finishing kits 153,000 170,000 ($170 per unit) Labor—type I (2 hours per unit X $15 per hour) 27,000 30,000 Labor—type II (3 hours per unit X $12 per hour) 32,400 36,000 Indirect materials ($10* per unit) 9,000 10,000 Manufacturing supplies ($13.45** per unit) 12,105 13,450 Maintenance and utilities ($22*** per unit) 19,800 22,000 Total variable costs ($362.45 per unit) 326,205 362,450 Fixed costs Supervision a 22,500 22,500 Insurance b 3,600 3,600 Depreciation c 27,450 27,450 Total fixed costs 53,550 53,550 Total costs $379,755 $416,000 *$40,000 ÷ 4,000 **$53,800 ÷ 4,000 ***$88,000 ÷ 4,000

24-46

1,050 kayaks

$ 85,050.00 178,500.00

31,500.00 37,800.00 10,500.00 14,122.50 23,100.00 380,572.50 22,500.00 3,600.00 27,450.00 53,550.00 $434,122.50

a. $ 90,000 ÷ 4 b. $ 14,400 ÷ 4 c. $109,800 ÷ 4

CD24 (Continued)

(c)

Current Designs Rotomolded Line Manufacturing Flexible Budget Report For the Quarter Ended March 31, 2017

Difference Budget for Actual costs for F = favorable U = unfavorable Units to be produced 1,050 kayaks 1,050 kayaks Costs: Variable costs Polyethylene powder $ 85,050.00 $ 87,000.00 $1,950.00 Finishing kits 178,500.00 178,840.00 340.00 Labor—type I 31,500.00 31,500.00 0 Labor—type II 37,800.00 39,060.00 1,260.00 Indirect materials 10,500.00 10,500.00 0 Manufacturing supplies 14,122.50 14,150.00 27.50 Maintenance and 23,100.00 26,000.00 2,900.00 utilities Total variable costs 380,572.50 387,050.00 6,477.50 Fixed costs 22,500.00 20,000.00 2,500.00 Supervision Insurance 3,600.00 3,600.00 0 Depreciation 27,450.00 27,450.00 0 Total fixed costs 53,550.00 51,050.00 2,500.00 Total costs $434,122.50 $438,100.00 $3,977.50

U U U U U U F F U

24-47

BYP 24-1

DECISION-MAKING ACROSS THE ORGANIZATION

(a) 1. The primary causes of the loss in net income were the decrease in the number of boarding days and the decrease in the boarding fee. The number of boarding days decreased by 2,900 or approximately 13% (2,900 days ÷ 21,900 days), and the boarding fee decreased from $25(a) per day to $20(b) per day, a decrease of 20% ($5 ÷ $25). Together these resulted in a $167,500 decrease in sales revenue, a decrease of approximately 31% ($167,500 ÷ $547,500). (a)

$547,500 ÷ 21,900 days = $25 per day $380,000 ÷ 19,000 days = $20 per day

(b)

24-48

Management did a poor job in controlling variable expenses. Given that boarding days declined by about 13%, variable expenses should decline by about 13%, or more precisely, variable expenses should decline by $25,520 ($192,720 X 2,900/21,900. However, variable expenses only declined by $14,330 or about 7.4% ($14,330 ÷ $192,720). Thus, management did a poor job in controlling variable expenses. Management did a better job in controlling fixed expenses. Fixed expenses were under budget by $4,000 and this includes the additional expenses incurred in advertising and entertainment.

Management’s decisions to stay competitive probably were sound. Given the decline in boarding days, the decision not to replace the worker was sound. The decision to reduce rates was probably forced by the competition. Without the additional advertising and entertainment expenses, the loss in net income might have been even greater.

BYP 24-1 (Continued) (b)

GREEN PASTURES Income Statement Flexible Budget Report For the Year Ended December 31, 2017 Difference Boarding days (BD) Sales ($25) Less variable expenses Feed ($5) Veterinary fees ($3) Blacksmith fees ($.25) Supplies ($.55) Total variable expenses ($8.80) Contribution margin Less fixed expenses Depreciation Insurance Utilities Repairs and maintenance Labor Advertising Entertainment Total fixed expenses Net income

Budget at 19,000 BD $475,000

Actual at 19,000 BD $380,000

95,000 57,000 4,750 10,450

104,390 58,838 4,984 10,178

9,390 U 1,838 U 234 U 272 F

167,200 307,800

178,390 201,610

11,190 U 106,190 U

40,000 11,000 14,000 11,000 95,000 8,000 5,000 184,000 $123,800

40,000 11,000 12,000 10,000 88,000 12,000 7,000 180,000 $ 21,610

Favorable F Unfavorable U $ 95,000 U

0 0 2,000 F 1,000 F 7,000 F 4,000 U 2,000 U 4,000 F $102,190 U

(c) 1. The primary causes of the decrease in net income are the decreases in boarding rates and volume. The average daily rate charged was $20 = ($380,000 ÷ 19,000). This rate resulted in a decrease in sales revenue of $95,000 or 20% = ($95,000 ÷ $475,000). Given that it is “an extremely competitive business,” if Green Pastures had not reduced rates, boarding days almost certainly would have declined even more.

24-49

BYP 24-1 (Continued) 2.

Management did a poor job of controlling variable expenses. These expenses in total were $11,190 over budget or 6.7%, or ($11,190 ÷ $167,200). Moreover, each individual variable expense was over budget, except for supplies. Management did a good job of controlling fixed expenses as noted in part (a).

As noted in part (a), management’s decisions to stay competitive probably were sound.

(d) Given that the industry is “extremely competitive,” management should consider two options. One, become the lowest cost operator. If Green Pastures is the company with the lowest operating costs, it can underprice its competitors and take customers away from them (increasing its sales). Eventually, some of its competitors (those with the highest operating costs) will go out of business, and Green Pastures will get their customers, or at least some of them. (Wal-Mart is an example of this strategy.) Option two is to offer its customers a superior product or service. If customers perceive that Green Pastures is the “best” boarding stable in Kentucky, the company will take customers away from its competitors. Also, if Green Pastures is perceived as the “best,” many customers will be willing to pay a premium for its boarding service, and Green Pastures will be able to raise its rates. (Gillette is an example of this strategy.)

24-50

BYP 24-2

MANAGERIAL ANALYSIS

(a) Mary Gammel—Profit Center: Responsible for sales, inventory cost, advertising, sales personnel, printing, and travel. She is not responsible for the assets invested in her division and probably does not control the rent or depreciation costs either. As a profit center manager she might have control of the insurance, but she probably does not. Stephen Flott—Cost Center: Responsible for inventory cost, advertising, sales personnel, printing, and travel. As a cost center manager, he might or might not have control of rent and insurance costs, but he probably does not. He does not have control of the assets invested in his department; thus, he does not have control of the depreciation. Jose Gomez—Investment Center: Responsible for all items shown. (b) Mary Gammel Budget differences: The cost of goods sold is 28% ($42,000 ÷ $150,000) above budget and so should definitely be brought to her attention. Travel is 30% ($6,000 ÷ $20,000) below budget. Students may differ as to whether they believe that this should be brought to her attention. The differences in rent and depreciation should not be brought to her attention because she does not control those costs. Stephen Flott Budget differences: The cost of goods sold, which is 22% ($22,000 ÷ $100,000) above budget, should definitely be brought to his attention. Travel costs are 30% ($9,000 ÷ $30,000) below budget. This should probably be brought to his attention, so that he can verify that the goal of travel is being adequately accomplished by other means. The 67% ($20,000 ÷ $30,000) increase in rent and 10% ($10,000 ÷ $100,000) decrease in depreciation are not under his control and so should not be brought to his attention. It should probably be pointed out to students that all budget differences are monitored by someone within the company. These differences that are not the responsibility of the various managers are still within the scope of top management’s responsibility.

24-51

BYP 24-2 (Continued) Jose Gomez Budget differences: As manager of an investment center, Mr. Gomez is responsible for all categories of the budget. The selection in this case would be which differences merit his attention. Any decrease in a company’s gross profit rate (gross profit ÷ sales) is a cause for concern. (Remember the gross profit is sales minus cost of goods sold.) Thus, the 6% [($26,500 – $25,000) ÷ $25,000] increase in cost of goods sold should be brought to his attention. Travel is below budget 25% ($500 ÷ $2,000), which is $500. This is not a large percentage of total costs, nor is it a large dollar amount, so there could be an argument that this should be left out. The 23% ($2,300 ÷ $10,000) increase in rent is only a $2,300 increase, so it could be included, though it might be left out as immaterial. The 40% ($16,000 ÷ $40,000) increase in depreciation should definitely be included.

24-52

BYP 24-3

REAL-WORLD FOCUS

(a) The company’s costs do not increase proportionately with the revenues increase in the third and fourth quarter because the behavior of the costs is primarily fixed. (b) Static budgeting seems to be most appropriate for Computer Associates because costs do not respond proportionately with changes in the activity level (revenues).

24-53

BYP 24-4

REAL-WORLD FOCUS

(a) The two most common pain points are (1) dealing with other managers and (2) technology issues, mainly frustration of budgeting in Excel spreadsheets. (b) Of those companies that participated in the survey, 97 percent said that they prepare annual budgets. Of those that prepare annual budgets, 60 percent say that they begin the process by determining sales forecasts. (c) The most common amount of time for the budgeting process is 4 to 8 weeks. (d) The most commonly defined range of acceptable tolerance levels was that variances were tolerated up to 5 to 10 percent. Beyond that level there were consequences. (e) Severe consequences were defined as: Compensation is affected or other sanctions applied, the manager receives a formal reprimand, or job losses result (the manager responsible for the variance, or the variance drives company layoffs due to missed numbers).

24-54

BYP 24-7

ALL ABOUT YOU

(a)

The basic idea is to set up individual envelopes for different expense categories. Once you have used up the money in a particular envelope, you can’t use more. Begin by preparing a monthly budget. Identify those items that you will pay in cash. These would include things like groceries, eating out at restaurants, clothing, gasoline, car repairs, gifts, and entertainment. These are the categories for which you will have envelopes. Next, decide how often to fill the envelopes and determine the amount to put in each envelope. If you continually run out of money in a particular envelope you many need to re-evaluate your allocation. If you don’t use up all the money in an envelope in one month, you can carry it over to the next month.

(b)

Answers will vary by student.

24-59

BYP 24-8

CONSIDERING YOUR COSTS AND BENEFITS

In general, in past years it has usually been considered prudent to purchase a home rather than to rent. As noted, over time, home prices have usually appreciated in most parts of the country. Mortgage interest provides some tax relief, and by purchasing a home you get some control over your housing costs. However, recent turbulence in the housing market has made the decision more complicated. In some parts of the country home prices have fallen considerably, and there is no indication how soon they will recover. In some areas renting appears to be an attractive alternative to purchasing. In the scenario described, there is considerable uncertainty surrounding this individual’s life. Purchasing a home is a huge decision, with very high transactions costs. It is often suggested that, because of the high transactions costs, you should not purchase a home unless you intend on living in it for a number of years. The person in the case is starting a new job in a new community. Until they are more certain that they will like their job, that the job is stable, and that they like the community, they should delay the purchase of a home.

24-60

CHAPTER 25 Standard Costs and Balanced Scorecard ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief Exercises

Do It!

Exercises

A Problems

Describe standard costs.

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

1, 2, 3

1, 2, 3, 4, 17

Determine direct materials variances.

9, 10

4, 5

5, 7, 8, 9, 13, 14

1A, 2A, 3A, 4A, 5A, 6A

Determine direct labor and total manufacturing overhead variances.

11, 12

4, 6, 10, 11, 12

1A, 2A, 3A, 4A, 5A, 6A

Prepare variance reports and balanced scorecards.

13, 14, 15, 16, 17, 18

10, 14, 15, 16, 17, 18, 19

2A, 3A, 5A, 6A

*5.

Identify the features of a standard cost accounting system.

8, 9

20, 21, 22

*6.

Compute overhead controllable and volume variances.

20, 21, 22, 23

10, 11

23, 24, 25

7A, 8A, 9A, 10A

25-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Compute variances.

Simple

20–30

Compute variances, and prepare income statement.

Simple

30–40

Compute and identify significant variances.

Moderate

20–30

Answer questions about variances.

Complex

30– 0

Compute variances, prepare an income statement, and explain unfavorable variances.

Moderate

30–40

*6A

Journalize and post standard cost entries, and prepare income statement.

Moderate

40–50

*7A

Compute overhead controllable and volume variances.

Simple

10–15

*8A

Compute overhead controllable and volume variances.

Simple

10–15

*9A

Compute overhead controllable and volume variances.

Moderate

10–15

*10A

Compute overhead controllable and volume variances.

Moderate

10–15

25-2

Learning Objective 1. Describe standard costs.

2. Determine direct materials variances.

Knowledge Comprehension Q25-3 Q25-1 Q25-7 Q25-8 Q25-2 Q25-4 Q25-5 Q25-6 Q25-10 Q25-9

Q25-12

4. Prepare variance reports and balanced scorecard.

Q25-13 Q25-14 Q25-15 Q25-16 Q25-17 Q25-18 DI25-4 E25-19 Q25-19

3. Determine direct labor and Q25-11 total manufacturing overhead variances.

*5. Identify the features of a standard cost accounting system. *6. Compute overhead controllable and volume variances.

Broadening Your Perspective

Q25-20 Q25-21 Q25-22 Q25-23 BYP25-4 BYP25-6

Application Analysis Synthesis Evaluation BE25-1 E25-2 BE25-2 E25-3 BE25-3 E25-4 DI25-1 E25-17 E25-1 BE25-4 E25-7 P25-1A E25-8 BE25-5 E25-9 P25-2A E25-19 DI25-2 E25-13 P25-5A P25-3A E25-5 E25-14 P25-6A P25-4A BE25-6 E25-10 P25-1A E25-11 P25-4A DI25-3 E25-11 P25-2A E25-12 E25-4 E25-12 P25-5A E25-21 E25-6 E25-19 P25-6A P25-3A BE25-7 P25-6A P25-3A E25-10 E25-14 E25-15 E25-16 E25-17 P25-2A P25-5A BE25-8 E25-22 E25-21 BE25-9 P25-6A E25-20 BE25-10 P25-7A E25-22 BE25-11 P25-8A E25-23 E25-23 P25-9A E25-24 E25-24 P25-10A E25-25 BYP25-2 BYP25-1 BYP25-3 BYP25-5 BYP25-7 BYP25-8 BYP25-9

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

25-3

Questions Chapter 25 (Continued) *19. (a) A standard cost accounting system is a double-entry system of accounting in which standard costs are used in making entries and standard cost variances are formally recognized in the accounts. (b) The variance account will have: (1) a debit balance when the materials price variance is unfavorable and (2) a credit balance when the labor quantity variance is favorable. *20. Overhead controllable variance = actual overhead costs ($248,000) – overhead budgeted. Overhead budgeted is based on standard hours allowed as follows: variable costs (27,000 X $5 = $135,000) + fixed costs (28,000 X $4 = $112,000) = total overhead budgeted ($247,000). Thus, the controllable variance is $1,000 unfavorable. *21. The purpose of computing the overhead volume variance is to determine whether plant facilities were efficiently used during the period. The basic formula is fixed overhead rate X (normal capacity – standard hours allowed). *22. Fixed costs remain the same at every level of activity within the relevant range. Since the predetermined overhead rate is based on normal capacity, it follows that if standard hours allowed are less than standard hours at normal capacity, fixed overhead costs will be underapplied. The reverse is true when production exceeds normal capacity. *23.

25-6

John should include the following points about overhead variances: (1) Standard hours allowed are used in each of the variances. (2) Budgeted costs for the controllable variance are derived from the flexible budget. (3) The controllable variance generally pertains to variable costs. (4) The volume variance pertains solely to fixed costs.

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 25-1 (a) Standards are stated as a per unit amount. Thus, the standards are materials $2.80 ($1,400,000 ÷ 500,000) and labor $3.40 ($1,700,000 ÷ 500,000). (b) Budgets are stated as a total amount. Thus, the budgeted costs for the year are materials $1,400,000 and labor $1,700,000.

BRIEF EXERCISE 25-2 (a) Standard direct materials price per gallon = $2.60 ($2.30 + $.20 + $.10). (b) Standard direct materials quantity per gallon = 4 pounds (3.6 + .4). (c) Standard materials cost per gallon = $10.40 ($2.60 X 4).

BRIEF EXERCISE 25-3 (a) Standard direct labor rate per hour = $16.00 ($14.00 + $.80 + $1.20). (b) Standard direct labor hours per gallon = 1.5 hours (1.1 + .25 + .15). (c) Standard labor cost per gallon = $24.00 ($16.00 X 1.5). BRIEF EXERCISE 25-4 Total materials variance = $1,192 U (3,200 X $5.06*) – (3,000** X $5.00). Materials price variance = $192 U (3,200 X $5.06) – (3,200 X $5.00). Materials quantity variance = $1,000 U (3,200 X $5.00) – (3,000 X $5.00). *$16,192 ÷ 3,200

**1,500 X 2

BRIEF EXERCISE 25-5 Total labor variance = $1,220 U (2,150 X $10.80) – (2,000 X $11.00). Labor price variance = $430 F (2,150 X $10.80) – (2,150 X $11.00). Labor quantity variance = $1,650 U (2,150 X $11.00) – (2,000 X $11.00).

25-7

BRIEF EXERCISE 25-6 The formula is:

Overhead Actual Overhead – Applied = Total Overhead Variance $118,000 – $123,600* $5,600 F

*20,600 X $6 = $123,600

BRIEF EXERCISE 25-7 1. 2. 3. 4.

financial ...................................... (c) return on assets customer ..................................... (d) brand recognition internal process ......................... (a) plant capacity utilization learning and growth ................... (b) employee work days missed due to injury

*BRIEF EXERCISE 25-8 (a) Raw Materials Inventory ............................................. Materials Price Variance ..................................... Accounts Payable ...............................................

12,000

(b) Work in Process Inventory (5,800 X $2*) ................... Materials Quantity Variance ............................... Raw Materials Inventory (5,600 X $2) .................

11,600

500 11,500 400 11,200

*$12,000 ÷ 6,000

*BRIEF EXERCISE 25-9 (a) Factory Labor .............................................................. Labor Price Variance........................................... Factory Wages Payable ......................................

24,900

(b) Work in Process Inventory (3,150 X $8.30*) .............. Labor Quantity Variance ..................................... Factory Labor ......................................................

26,145

1,500 24,000 1,245 24,900

*$24,900 ÷ 3,000

25-8

*BRIEF EXERCISE 25-10 The formula is:

Overhead Overhead Actual Overhead – Budgeted = Controllable Variance $118,000 – $132,400* $14,400 F

*(20,600 X $4) + $50,000 = $132,400 *BRIEF EXERCISE 25-11 The formula is: Fixed Overhead Overhead X (Normal Capacity Hours – Standard Hours Allowed) = Volume Rate Variance (25,000 – 20,600)

$2.00*/hr. X

= $8,800 U

*($50,000 ÷ 25,000 hrs.) SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 25-1 Standard Quantity Standard Manufacturing Cost X Elements Direct materials 2 pounds Direct labor 0.2 hours Manufacturing overhead 0.2 hours Total

Price

Standard

$ 5.00 16.00 20.00*

DO IT! 25-2 The variances are: Total materials variance = (29,000 X $6.30) – (32,000* X $6.00) = $9,300 favorable Materials price variance = (29,000 X $6.30) – (29,000 X $6.00) = $8,700 unfavorable Materials quantity variance = (29,000 X $6.00) – (32,000* X $6.00) = $18,000 favorable

*(16,000 X 2)

25-9

DO IT! 25-3 The variances are: Total labor variance = (4,000 X $14.30) – (3,800* X $14.00) = $4,000 unfavorable Labor price variance = (4,000 X $14.30) – (4,000 X $14.00) = $1,200 unfavorable Labor quantity variance = (4,000 X $14.00) – (3,800* X $14.00) = $2,800 unfavorable Total overhead variance = $81,300 – $83,600** = $2,300 favorable *2,000 X 1.9 **3,800 hours X $22.00

DO IT! 25-4 Sales revenue Cost of goods sold (at standard) Standard gross profit Variances $ 350 U Materials price 1,700 F Materials quantity Labor price 800 F Labor quantity 500 F Overhead 1,200 U Total variance favorable Gross profit (actual)

25-10

$82,700 51,600 31,100

1,450 $32,550

SOLUTIONS TO EXERCISES EXERCISE 25-1 (a) Direct materials: (2,000 X 3) X $5 = $30,000 Direct labor: (2,000 X 1/2) X $16 = $16,000 Overhead: $16,000 X 70% = $11,200 (b) Direct materials: 3 X $5 = $15.00 Direct labor: 1/2 X $16 = 8.00 Overhead: $8.00 X 70% = 5.60 Standard cost: $28.60 (c) The advantages of standard costs which are carefully established and prudently used are: 1. Management planning is facilitated. 2. Greater economy is promoted by making employees more costconscious. 3. Setting selling prices is facilitated. 4. Management control is enhanced by providing a basis for evaluation of cost control. 5. Variances are highlighted in management by exception. 6. Costing of inventories is simplified and clerical costs are reduced. EXERCISE 25-2

Ingredient Grape concentrate Sugar (54 ÷ 50) Lemons (60 ÷ 50) Yeast Nutrient Water (2,600 ÷ 50)

Amount Per Gallon 60* oz. 1.08 lb. 1.2 1 tablet 1 tablet 52 oz.

Standard Standard Waste Usage 4% (a) 62.5 oz. 10% (b) 1.20 lb. 25% (c) 1.6 0% 1 tablet 0% 1 tablet 0% 52 oz.

Standard Price $.06 .30 .60 .25 .20 .005

Standard Cost Per Gallon $3.75 .36 .96 .25 .20 .26 $5.78

*3,000 ÷ 50 (a) (b) (c)

.96X = 60 ounces; or X = (60 ounces) /.96. .90X = 1.08 pounds; or X = (1.08 pounds)/.90. .75X = 1.2 lemons; or X = (1.2 lemons) /.75.

25-11

EXERCISE 25-3 Direct materials Cost per pound [$5 – (2% X $5) + $0.25] Pounds per unit (4.5 + 0.5)

$5.15 X 5

$25.75

Direct labor Cost per hour ($12 + $3) Hours per unit (2 + .4)

$ 15 X 2.4

36.00

Manufacturing overhead 2.4 hours X $7 Total standard cost per unit

16.80 $78.55

EXERCISE 25-4 (a) Actual service time Setup and downtime Cleanup and rest periods Standard direct labor hours per oil change

1.0 hours 0.2 hours 0.3 hours 1.5 hours

(b) Hourly wage rate Payroll taxes ($12 X 10%) Fringe benefits ($12 X 25%) Standard direct labor hourly rate

$12.00 1.20 3.00 $16.20

(c) Standard direct labor cost per oil change = 1.50 hours X $16.20 per hour = $24.30 (d) Direct labor quantity variance = (1.60 hours X $16.20) – (1.50 hours X $16.20) = $25.92 – $24.30 = $1.62 U

25-12

EXERCISE 25-5 (a) Total materials variance: ( AQ X AP ) – ( SQ X SP ) (29,000 X $4.70) (28,200* X $5.00) $136,300 – $141,000 = $4,700 F *9,400 X 3 Materials price variance: ( AQ X AP ) – ( AQ X SP ) (29,000 X $4.70) (29,000 X $5.00) $136,300 – $145,000 = $8,700 F Materials quantity variance: ( AQ X SP ) – ( SQ X SP ) (29,000 X $5.00) (28,200 X $5.00) $145,000 – $141,000 = $4,000 U (b) Total materials variance: ( AQ X AP ) – ( SQ X SP ) (28,000 X $5.15) (28,200 X $5.00) $144,200 – $141,000 = $3,200 U Materials price variance: (AQ X AP ) – ( AQ X SP ) (28,000 X $5.15) (28,000 X $5.00) $144,200 – $140,000 = $4,200 U Materials quantity variance: ( AQ X SP ) – ( SQ X SP ) (28,000 X $5.00) (28,200 X $5.00) $140,000 – $141,000 = $1,000 F

25-13

EXERCISE 25-6 (a) Total labor variance: ( AH X AR ) – ( SH X SR ) (40,600 X $12.15) (40,000* X $12.00) $493,290 – $480,000 = $13,290 U *10,000 X 4 (b) Labor price variance: ( AH X AR ) – ( AH X SR ) (40,600 X $12.15) (40,600 X $12.00) $493,290 – $487,200 = $6,090 U Labor quantity variance: ( AH X SR ) – ( SH X SR ) (40,600 X $12.00) (40,000 X $12.00) $487,200 – $480,000 = $7,200 U (c) Labor price variance: ( AH X AR ) – ( AH X SR ) (40,600 X $12.15) (40,600 X $12.25) $493,290 – $497,350 = $4,060 F Labor quantity variance: ( AH X SR ) – ( SH X SR ) (40,600 X $12.25) (41,000* X $12.25) $497,350 – $502,250 = $4,900 F *4.1 X 10,000 EXERCISE 25-7 Total materials variance: ( AQ X AP ) – ( SQ X SP ) (1,900 X $2.65*) (1,840** X $2.50) $5,035 – $4,600 = $435 U Materials price variance: ( AQ X AP ) – (1,900 X $2.65) $5,035 –

( AQ X SP ) (1,900 X $2.50) $4,750 = $285 U

*$5,035 ÷ 1,900 25-14

**230 X 8 .

EXERCISE 25-7 (Continued) Materials quantity variance: ( AQ X SP ) – ( SQ X SP ) (1,900 X $2.50) (1,840 X $2.50) $4,750 – $4,600 = $150 U Total labor variance: ( AH X AR ) – ( SH X SR ) (700 X $11.60*) (690** X $12.00) $8,280 = $160 F $8,120 – *$8,120 ÷ 700

**230 X 3

Labor price variance: ( AH X AR ) – ( AH X SR ) (700 X $11.60) (700 X $12.00) $8,120 – $8,400 = $280 F Labor quantity variance: ( AH X SR ) – ( SH X SR ) (700 X $12.00) (690 X $12.00) $8,400 – $8,280 = $120 U

25-15

EXERCISE 25-7 (Continued) (Not Required) Materials Variance Matrix (1)

(2)

(3)

Actual Quantity X Actual Price 1,900 X $2.65 = $5,035

Actual Quantity X Standard Price 1,900 X $2.50 = $4,750

Standard Quantity X Standard Price 1,840 X $2.50 = $4,600

Price Variance (1) – (2) $5,035 – $4,750 = $285 U

Quantity Variance (2) – (3) $4,750 – $4,600 = $150 U

Total Variance (1) – (3) $5,035 – $4,600 = $435 U

Labor Variance Matrix (1)

(2)

(3)

Actual Hours X Actual Rate 700 X $11.60 = $8,120

Actual Hours X Standard Rate 700 X $12.00 = $8,400

Standard Hours X Standard Rate 690 X $12.00 = $8,280

Price Variance (1) – (2) $8,120 – $8,400 = $280 F

Quantity Variance (2) – (3) $8,400 – $8,280 = $120 U

Total Variance (1) – (3) $8,120 – $8,280 = $160 F

25-16

EXERCISE 25-8 (a) Total materials variance: ( AQ X AP ) – ( SQ X SP ) (1,220 X $128) (1,200 X $130) $156,160 – $156,000 = $160 U Materials price variance: ( AQ X AP ) – ( AQ X SP ) (1,220 X $128) (1,220 X $130) $156,160 – $158,600 = $2,440 F Materials quantity variance: ( AQ X SP ) – ( SQ X SP ) (1,220 X $130) (1,200 X $130) $158,600 – $156,000 = $2,600 U Total labor variance: ( AH X AR ) – ( SH X SR ) (4,150 X $13) (4,300 X $12.50) $53,950 – $53,750 = $200 U Labor price variance: ( AH X AR ) – ( AH X SR ) (4,150 X $13) (4,150 X $12.50) $53,950 – $51,875 = $2,075 U Labor quantity variance: ( AH X SR ) – ( SH X SR ) (4,150 X $12.50) (4,300 X $12.50) $51,875 – $53,750 = $1,875 F (b) The unfavorable materials quantity variance may be caused by the carelessness or inefficiency of production workers. Alternatively, the excess quantities may be caused by inferior quality materials acquired by the purchasing department. The unfavorable labor price variance may be caused by misallocation of the work force by the production department. In this case, more experienced workers may have been assigned to tasks normally done by inexperienced workers. An unfavorable labor variance may also occur when workers are paid higher wages than expected. The manager who authorized the wage increase is responsible for this variance.

25-17

EXERCISE 25-9 (a)

Number of units = Total standard cost ÷ Standard cost per unit Number of units = $410,000 ÷ $20.00 (5 lb X $4 per lb) = 20,500

(b)

AQ = [(SQ X SP) ± Quantity variance] ÷ SP AQ = ($410,000 + $9,000) ÷ $4.00 per lb. = 104,750 pounds

(c)

AP = [(AQ X SP) ± Price variance] ÷ AQ AP = [(104,750 X $4) – $2,095] = $416,905 ÷ 104,750 lb = $3.98/lb.

(d)

AH = [(SH X SR) ± Quantity variance] ÷ SR AH = ($164,000 + $6,000) ÷ $10.00/hr. = 17,000 hours

(e)

AR = [(AH X SR) ± Price variance] ÷ AH AP = [(17,000 X $10) + $3,840] = $173,840 ÷ 17,000 hr = $10.23/hr.

EXERCISE 25-10 TOBY TOOL & DIE COMPANY Direct Labor Variance Report For the Month Ended March 31, 2017 Job No.

Actual Hours

Standard Hours

Quantity Variance (a)

Actual Standard Rate (1) Rate (2)

Price Variance (b) Explanation

A257 A258 A259

221 450 300

225 430 300

$ 80.00 F 400.00 U 0

$20.00 $21.00 $20.60

$20.00 $20.00 $20.00

A260

116 110 Totals

120.00 U $ 440.00 U

$18.00

$20.00

(1)

LQV = SR X (AH – SH) (b) LPV = AH X (AR – SR) (a)

25-18

0 Repeat job 450.00 U Rush job 180.00 U Replacement worker 232.00 F New trainee $398.00 U

Actual costs ÷ actual hours Standard costs ÷ standard hours

(2)

EXERCISE 25-11 Total overhead variance: Actual Overhead – Overhead Applied $260,000 $263,000 – (52,000 X $5)

= $3,000 U

EXERCISE 25-12 (a)

Overhead Budget ÷ (at normal capacity) Variable $250,000 Fixed 600,000 (b)

(c)

Standard Hours Allowed 95,000

Actual Overhead – $856,000 – ($256,000 + $600,000)

Direct Labor Hours (at normal capacity) 100,000 100,000

Predetermined Overhead Rate $8.50

Predetermined Overhead Rate $2.50 $6.00

Overhead Applied $807,500

Total Overhead Variance = = $48,500 U

Overhead Applied $807,500 (95,000 X $8.50)

EXERCISE 25-13 (a)

(AQ X AP) – ( SQ X SP) = Total Materials Variance ( $10,200) – (2,100* X $5) = $300 F (AQ X AP) – ( AQ X SP) = Materials Price Variance ( $10,200) – (2,400 X $5) = $1,800 F ( AQ X SP) – ( SQ X SP) = Materials Quantity Variance (2,400 X $5) – (2,100* X $5) = $1,500 U *1,050 X 2

(b) One possible cause of an unfavorable materials quantity variance is the purchase of substandard materials. Such materials would normally be purchased at a lower price than normal, which means there would also be favorable materials price variance. Substandard materials could also cause work slowdowns and delays, causing an unfavorable labor quantity variance. Therefore, the purchase of substandard materials could cause all three variances mentioned.

25-19

EXERCISE 25-14 (a) PICARD LANDSCAPING Variance Report – Purchasing Department For the Current Month

Project Remington Chang Wyco

Actual (1) Pounds Actual Purchased Price 500 400 550

(2) Standard Price Price Variance (a)

$2.40 2.30 2.60

$2.50 2.50 2.50

Total price variance

$50 F 80 F 55 U

Explanation Purchased poor-quality seeds Seeds on sale Price increased

$75 F

(a)

MPV = AQ X (AP – SP) (1)Actual costs ÷ actual quantity (2)Standard costs ÷ standard quantity.

(b) PICARD LANDSCAPING Variance Report – Production Department For the Current Month Project Remington Chang Wyco

Actual Pounds 500 400 550

Standard Standard Pounds Price 460 410 480

$2.50 2.50 2.50

Total quantity variance

Quantity Variance (b)

Explanation

$100 U 25 F 175 U

Purchased poor-quality seeds Purchased higher-quality seeds New employee

$250 U

MQV = SP X (AQ – SQ)

(b)

25-20

EXERCISE 25-15 URBAN CORPORATION Variance Report – Purchasing Department For Week Ended January 9, 2017 Type of Materials Rogue 11 Storm 17 Beast 29

Quantity Purchased 27,500 lbs. 7,000 oz. 22,000 units.

Actual Price $5.20

$3.45

Standard Price $5.00 $3.30

$0.40

$0.43

Price Variance $5,500 U $1,050 U $ 660 F

Explanation Price increase Rush order Bought larger quantity

27,500 = $5,500/($5.20 – $5.00). $5,000 U because the actual price ($5.20) exceeds the standard price ($5.00). $1,050/7,000 = $0.15; $3.30 + $0.15 = $3.45 $660/22,000 = $0.03; $0.40 + $0.03 = $0.43

EXERCISE 25-16 FISK COMPANY Income Statement For the Month Ended January 31, 2017 Sales revenue (8,000 X $8)............................................. Cost of goods sold (8,000 X $5) .................................... Gross profit (at standard) .............................................. Variances Materials price ........................................................ $1,200 U Materials quantity ................................................... 800 F Labor price .............................................................. 550 U Labor quantity......................................................... 750 U Overhead ................................................................. 800 U Total variance—unfavorable .......................... Gross profit (actual) ....................................................... Selling and administrative expenses ............................ Net income......................................................................

$64,000 40,000 24,000

2,500 21,500 8,000 $13,500

25-21

EXERCISE 25-17 1.

Balanced scorecard—(c) An approach that incorporates financial and nonfinancial measures in an integrated system that links performance measurement and a company’s strategic goals.

Variance—(a) The difference between total actual costs and total standard costs.

Learning and growth perspective—(d) A viewpoint employed in the balanced scorecard to evaluate how well a company develops and retains its employees.

Nonfinancial measures —(e) An evaluation tool that is not based on dollars.

Customer perspective—(f) A viewpoint employed in the balanced scorecard to evaluate the company from the perspective of those people who buy its products or services.

Internal process perspective—(h) A viewpoint employed in the balanced scorecard to evaluate the efficiency and effectiveness of the company’s value chain.

Ideal standards—(g) An optimum level of performance under perfect operating conditions.

Normal standards—(b) An efficient level of performance that is attainable under expected operating conditions.

EXERCISE 25-18 1. 2. 3. 4. 5. 6.

25-22

Customer perspective. Learning and growth perspective. Financial perspective. Customer perspective. Learning and growth perspective. Internal process perspective.

EXERCISE 25-19 1. 2. 3. 4. 5. 6.

Learning and growth perspective. Financial perspective. Customer perspective. Internal process perspective. Learning and growth perspective. Customer perspective.

*EXERCISE 25-20 1.

Raw Materials Inventory (18,000 X $4.40) ................ Materials Price Variance (18,000 X $.10) .................. Accounts Payable (18,000 X $4.50) ...................

79,200 1,800

Work in Process Inventory (17,500 X $4.40) ............ Materials Quantity Variance (500 X $4.40) ............... Raw Materials Inventory (18,000 X $4.40) .........

77,000 2,200

Factory Labor (15,300 X $5.50) ................................. Labor Price Variance (15,300 X $.50) ................ Factory Wages Payable (15,300 X $5.00) ..........

84,150

Work in Process Inventory (15,400 X $5.50) ............ Labor Quantity Variance (100 X $5.50) ............. Factory Labor (15,300 X $5.50) ..........................

84,700

Work in Process Inventory ($84,700 X 100%) .......... Manufacturing Overhead ...................................

84,700

81,000

79,200 7,650 76,500 550 84,150 84,700

*EXERCISE 25-21 (a) $136,000 ($138,000 – $2,000). (b) $139,000 ($136,000 + $3,000). (c) $143,500 ($145,000 – $1,500). (d) $145,900 ($145,000 + $900). (e) $163,800 ($165,000 – $1,200).

25-23

*EXERCISE 25-22 Raw Materials Inventory (1,900 X $2.50) ........................... Materials Price Variance (1,900 X $0.15) ........................... Accounts Payable (1,900 X $2.65)..............................

4,750 285

Work in Process Inventory (1,840* X $2.50)...................... Materials Quantity Variance (60 X $2.50) .......................... Raw Materials Inventory (1,900 X $2.50)....................

4,600 150

5,035

4,750

*230 X 8 Factory Labor (700 X $12) .................................................. Labor Price Variance (700 X $0.20) ............................ Factory Wages Payable (700 X $11.60)......................

8,400

Work in Process Inventory (690* X $12)............................ Labor Quantity Variance (10 X $12)................................... Factory Labor (700 X $12) ..........................................

8,280 120

280 8,120

8,400

*230 X 3 *EXERCISE 25-23 (a) Item Variable overhead ................................... Fixed overhead ....................................... Total overhead ........................................ (b) Total overhead variance: Actual Overhead – Overhead Applied $55,500 – $53,460 (16,200* X $3.30)

Amount $34,650 19,800 $54,450

Hours 16,500 16,500 16,500

= $2,040 U

*4,050 X 4 hrs. = 16,200 hrs. Overhead controllable variance: Actual Overhead – Overhead Budgeted $55,500 – $53,820 = $1,680 U (16,200 X $2.10) + $19,800]

25-24

Rate $2.10 1.20 $3.30

EXERCISE 25-23 (Continued) Overhead volume variance: Fixed Overhead Normal Capacity Standard Hours Rate X Hours – Allowed $1.20 X [(16,500 – (4,050 X 4)] = $360 U (c) The overhead controllable variance is generally associated with variable overhead costs. Thus, this variance indicates the production manager’s inefficiency in controlling variable overhead costs. The overhead volume variance relates to fixed overhead costs. This variance indicates whether plant facilities were efficiently used. In this case 500 (16,500 – 16,000) hours of plant capacity were not utilized.

25-25

*EXERCISE 25-25 (a) (Actual) – (Applied) = Total Overhead Variance ($19,500) – (1,800 X $10*) = $1,500 U (Actual) – ($19,500) – Fixed OH Rate $3**

(Budgeted) ($17,600)

Normal Capacity (1,667***

*$200,000/20,000

= Overhead Controllable Variance = $1,900 U

– –

Standard Hours Allowed 1,800)

**($5,000 X 12)/20,000

Overhead Volume = Variance = $400 F ***20,000/12

(b) The cause of an unfavorable controllable variance could be higher than expected use of indirect materials, indirect labor, and factory supplies, or increases in indirect manufacturing costs, such as fuel and maintenance costs. A favorable volume variance would be caused by production of more units than what is considered normal capacity.

25-27

SOLUTIONS TO PROBLEMS PROBLEM 25-1A

(a) Total materials variance: ( AQ X AP ) – ( SQ X SP ) (5,100 X $7.20) (4,800 X $7.00) $36,720 – $33,600 = $3,120 U Materials price variance: ( AQ X AP ) – ( AQ X SP ) (5,100 X $7.20) (5,100 X $7.00) $36,720 – $35,700 = $1,020 U Materials quantity variance: ( AQ X SP ) – ( SQ X SP ) (5,100 X $7.00) (4,800 X $7.00) $35,700 – $33,600 = $2,100 U Total labor variance: ( AH X AR ) – ( SH X SR ) (7,400 X $12.50) (7,680* X $12.00) $92,500 – $92,160 = $340 U *4,800 X 1.6 Labor price variance: ( AH X AR ) – ( AH X SR ) (7,400 X $12.50) (7,400 X $12.00) $92,500 – $88,800 = $3,700 U Labor quantity variance: ( AH X SR ) – ( SH X SR ) (7,400 X $12.00) (7,680 X $12.00) $88,800 – $92,160 = $3,360 F (b) Total overhead variance: Actual Overhead Overhead – Applied ($59,700 + $21,000) – (7,680 X $10.00) $76,800 = $3,900 U $80,700

25-28

PROBLEM 25-2A

(a) 1. Total materials variance: ( AQ X AP ) – ( SQ X SP ) (10,600 X $2.25) (10,000 X $2.10) $23,850 – $21,000 = $2,850 U Materials price variance: ( AQ X AP ) – ( AQ X SP ) (10,600 X $2.25) (10,600 X $2.10) $23,850 – $22,260 = $1,590 U Materials quantity variance: ( AQ X SP ) – ( SQ X SP ) (10,600 X $2.10) (10,000 X $2.10) $22,260 – $21,000 = $1,260 U 2. Total labor variance: ( AH X AR ) – ( SH X SR ) (14,400 X $8.40*) (15,000 X $8.00**) $120,960 – $120,000 = $960 U *$120,960 ÷ 14,400

**$120,000 ÷ 15,000

Labor price variance: (AH X AR ) – ( AH X SR ) (14,400 X $8.40) (14,400 X $8.00) $120,960 – $115,200 = $5,760 U Labor quantity variance: ( AH X SR ) – ( SH X SR ) (14,400 X $8.00) (15,000 X $8.00) $115,200 – $120,000 = $4,800 F (b)

Total overhead variance: Actual Overhead Overhead – Applied – $193,500 = $4,000 F $189,500 (45,000* X $4.30) *15,000 X 3

25-29

PROBLEM 25-2A (Continued) (c)

AYALA CORPORATION Income Statement For the Month Ended June 30, 2017 Sales revenue..................................................... Cost of goods sold (at standard) ...................... Gross profit (at standard) .................................. Variances Materials price ............................................ Materials quantity ....................................... Labor price.................................................. Labor quantity ............................................ Overhead..................................................... Total variance—favorable .................. Gross profit (actual)........................................... Selling and administrative expenses ............... Net income .........................................................

$400,000 334,500* 65,500 $ 1,590 U 1,260 U 5,760 U 4,800 F 4,000 F 190 65,690 40,000 $ 25,690

*Materials $21,000 + labor $120,000 + overhead applied $193,500.

25-30

PROBLEM 25-3A

(a) 1.

Total materials variance: (AQ X AP ) – ( SQ X SP ) (90,500 X $4.15) (90,000* X $4.40) $375,575 – $396,000 = $20,425 F *11,250 X 8 Materials price variance: (AQ X AP ) – ( AQ X SP ) (90,500 X $4.15) (90,500 X $4.40) $375,575 – $398,200 = $22,625 F Materials quantity variance: ( AQ X SP ) – ( SQ X SP ) (90,500 X $4.40) (90,000 X $4.40) $398,200 – $396,000 = $2,200 U

Total labor variance: ( AH X AR ) – ( SH X SR ) (14,250 X $14.10) (13,500* X $13.40) $200,925 – $180,900 = $20,025 U *11,250 X 1.2 Labor price variance: ( AH X AR ) – ( AH X SR ) (14,250 X $14.10) (14,250 X $13.40) $200,925 – $190,950 = $9,975 U Labor quantity variance: ( AH X SR ) – ( SH X SR ) (14,250 X $13.40) (13,500 X $13.40) $190,950 – $180,900 = $10,050 U

(b)

Total overhead variance: Actual Overhead Overhead – Applied $86,000 – $82,350 ($49,000 + $37,000) (13,500* X $6.10**) = $3,650 U *11,250 X 1.2

**$3.50 + $2.60

25-31

PROBLEM 25-3A (Continued) (c) The materials price variance is more than 4% from standard. The actual price for materials of $4.15 is $.25 below the standard price of $4.40 or 5.7% ($.25 ÷ $4.40). The same result can be obtained by dividing the total price variance by the total standard price for the quantities purchased ($22,625 ÷ $398,200). The labor price variance is 5.2% from standard ($.70 ÷ $13.40). The same result can be obtained by dividing the total price variance by the total standard price for the direct labor hours used ($9,975 ÷ $190,950). The labor quantity variance is 5.6% (750 ÷ 13,500) from standard. The same result can be obtained by dividing the total quantity variance by the total standard price for the standard hours allowed ($10,050 ÷ $180,900).

25-32

PROBLEM 25-4A

(a) $3,510 ÷ 117,000 = $.03; $.92 + $.03 = $.95 standard materials price per pound. OR 117,000 X $.92 = $107,640; $107,640 + $3,510 = $111,150; $111,150 ÷ 117,000 = $.95 per pound. (b) $4,750 ÷ $.95 = 5,000 pounds; 117,000 – 5,000 = 112,000 standard quantity for 28,000 units or 4.0 pounds (112,000 ÷ 28,000) per unit. OR $111,150 – $4,750 = $106,400; $106,400 ÷ $.95 = 112,000; 112,000 ÷ 28,000 = 4.0 pounds per unit. (c) Standard hours allowed are 44,800 (28,000 X 1.6). (d) $7,200 ÷ $12.00 = 600 hours over standard; 44,800 standard hours + 600 hours = 45,400 actual hours worked. OR 44,800 X $12 = $537,600; $537,600 + $7,200 = $544,800; $544,800 ÷ $12 = 45,400 actual hours worked. (e) $9,080 ÷ 45,400 = $.20; $12.00 – $.20 = $11.80 actual rate per hour. OR $544,800 – $9,080 = $535,720; $535,720 ÷ 45,400 = $11.80 actual rate per hour. (f)

$360,000 ÷ 50,000 = $7.20 predetermined overhead rate per direct labor hour.

(g) Direct materials 4.0 pounds X $.95 = $3.80; direct labor 1.6 X $12.00 = $19.20; manufacturing overhead 1.6 X $7.20 = $11.52. $3.80 + $19.20 + $11.52 = $34.52 standard cost per unit. (h) 44,800 X $7.20 = $322,560 overhead applied. (i)

$34.52 [see (g) above] X 28,000 = $966,560 or direct materials $106,400 + direct labor $537,600 + overhead applied $322,560 = $966,560.

25-33

PROBLEM 25-5A

(a) Materials price variance: ( AQ X AP ) – ( AQ X SP ) (3,050 X $1.40*) (3,050 X $1.46) $4,270 – $4,453

= $183 F

*$4,270 ÷ 3,050 Materials quantity variance: ( AQ X SP ) – ( SQ X SP ) (3,050 X $1.46) (2,950* X $1.46) $4,307 $4,453 – *1,475 X 2 Labor price variance: ( AH X AR) – ( AH X SR) (1,550 X $23*) (1,550 X $24) $35,650 – $37,200 *$35,650 ÷ 1,550 Labor quantity variance: ( AH X SR) – (SH X SR ) (1,550 X $24) (1,475* X $24) $37,200 – $35,400

= $146 U

= $1,550 F

= $1,800 U

*1,475 X 1 hr. (b) Total Overhead variance: Actual Overhead Overhead – Applied $22,400 – $23,600 ($7,400 + $15,000) (1,475 X $16*)

= $1,200 F

*$10 + $6

25-34

PROBLEM 25-5A (Continued) (c) HART LABS, INC. Income Statement For the Month Ended November 30, 2017 Service revenue ...................................................... Cost of service provided (at standard) (1,500 X $42.92) ................................................... Gross profit (at standard)....................................... Variances Materials price ................................................. Materials quantity............................................ Labor price ...................................................... Labor quantity ................................................. Overhead ......................................................... Total variance—favorable....................... Gross profit (actual) ............................................... Selling and administrative expenses .................... Net income ..............................................................

$75,000 64,380 10,620 $ 183 F 146 U 1,550 F 1,800 U 1,200 F 987 11,607 5,000 $ 6,607

(d) The unfavorable materials quantity variance could be caused by poor quality materials or inexperienced workers or faulty test procedures. The unfavorable labor quantity variance could be caused by inexperienced workers, poor quality materials, or faulty test procedures.

25-35

*PROBLEM 25-6A

(a) 1.

Raw Materials Inventory (6,200 X $1.00) ............ Materials Price Variance [6,200 X ($1.05 – $1.00)] .................................. Accounts Payable (6,200 X $1.05) ..............

6,200

Work in Process Inventory (5,700* X $1) ........... Materials Quantity Variance [(6,200 – 5,700) X $1.00] .................................. Raw Materials Inventory..............................

5,700

310 6,510

500 6,200

*1,900 X 3 3.

5. 6.

Factory Labor (2,000 X $8).................................. Labor Price Variance [2,000 X ($8.00 – $7.80)]........................... Factory Wages Payable (2,000 X $7.80) ..... Work in Process Inventory (1,900 X $8.00) ................................................. Labor Quantity Variance [(2,000 – 1,900) X $8.00] .................................. Factory Labor .............................................. Manufacturing Overhead .................................... Accounts Payable........................................ Work in Process Inventory (3,800* X $6.25**) ............................................. Manufacturing Overhead ............................ *1,900 X 2

25-36

16,000 400 15,600 15,200 800 16,000 25,000 25,000 23,750 23,750

**$4.00 + $2.25

Finished Goods Inventory (1,900 X $23.50) ............................................... Work in Process Inventory .........................

44,650 44,650

Accounts Receivable .......................................... Sales Revenue .............................................

65,000

Cost of Goods Sold............................................ Finished Goods Inventory .........................

44,650

65,000 44,650

*PROBLEM 25-6A (Continued) (b)

Raw Materials Inventory (1) 6,200 (2) 6,200

Materials Price Variance (1) 310

Work in Process Inventory (2) 5,700 (7) 44,650 (4) 15,200 (6) 23,750

Factory Labor 16,000 (4) 16,000

Materials Quantity Variance (2) 500

Finished Goods Inventory (7) 44,650 (8) 44,650

Manufacturing Overhead (5) 25,000 (6) 23,750

Labor Price Variance (3) 400

(3)

(8)

Cost of Goods Sold 44,650

Labor Quantity Variance (4) 800

1,250

JORGENSEN CORPORATION Income Statement For the Month Ended January 31, 2017 Sales revenue ........................................................ Cost of goods sold (at standard) (1,900 X $23.50) .................................................. Gross profit (at standard)...................................... Variances Materials price ................................................ Materials quantity........................................... Labor price ..................................................... Labor quantity ................................................ Overhead ........................................................ Total variance—unfavorable.................. Gross profit (actual) .............................................. Selling and administrative expenses ................... Net income .............................................................

1,250

$65,000 44,650 20,350 $ 310 U 500 U 400 F 800 U 1,250 U 2,460 17,890 2,000 $15,890

25-37

*PROBLEM 2538A Overhead controllable variance: Overhead Actual Budgeted Overhead – $78,800 $80,700 – = $3,100 U [(7,680* X $7.50) + $20,000] *(4,800 X 1.6 hours) Overhead volume variance: Fixed Normal Standard Overhead X Capacity – Hours Hours Rate Allowed (8,000 – 7,680) $2.50/hr. X

25-38

= $800 U

*PROBLEM 25-39A

Overhead controllable variance: Actual Overhead Overhead – Budgeted $189,500 – $190,250 [(45,000* X $3.00) + (42,500 X $1.30)]

= $750 F

*(15,000 X 3 hours) Overhead volume variance: Fixed Normal Standard Overhead X Capacity – Hours Rate Allowed Hours $1.30/hr. X (42,500 – 45,000) = $3,250 F

25-39

*PROBLEM 2540A Overhead controllable variance: Actual Overhead Overhead – Budgeted $86,000 – $84,100 = $1,900 U ($49,000 + $37,000) [(13,500* X $2.60) + $49,000] *(11,250 X 1.2 hours) Overhead volume variance: Normal Standard Fixed X Capacity – Hours Overhead Hours Allowed Rate $3.50/hr. X (14,000 – 13,500)

25-40

= $1,750 U

*PROBLEM 25-41A

Overhead controllable variance: Actual Overhead Overhead – Budgeted $22,400 – $22,850 = $450 F ($7,400 + $15,000) [(1,475 X $6) + $14,000] Overhead volume variance: Fixed Normal Standard Overhead X Capacity – Hours Rate Allowed Hours $10 X (1,400* – 1,475) = $750 F *$14,000 ÷ $10

25-41

CD25

CURRENT DESIGNS

(a) Quantity variance for polyethylene powder Price variance for polyethylene powder Quantity variance for finishing kits Price variance for finishing kits Quantity variance for type I workers Price variance for type I workers Quantity variance for type II workers Price variance for type II workers

Unfavorable Unfavorable NEI = Not enough information Favorable Favorable NEI = Not enough information Unfavorable NEI = Not enough information

(b) Quantity variance for polyethylene powder ( AQ X SP ) – ( SQ X SP ) (1,200 X $1.50) (1,080* X $1.50) $1,800 – $1,620 = $180 U *54 X 20 Price variance for polyethylene powder ( AQ X AP ) – ( AQ X SP ) (1,200 X $1.70*) (1,200 X $1.50) $2,040 – $1,800

= $240 U

*$2,040 ÷ 1,200 Quantity variance for finishing kits ( AQ X SP ) – ( SQ X SP ) (20 X $170) (20 X $170) $3,400 – $3,400

=$ 0

Price variance for finishing kits ( AQ X AP ) – ( AQ X SP ) (20 X $162*) (20 X $170) $3,240 – $3,400

= $160 F

*$3,240 ÷ 20

25-42

CD25 (Continued) Quantity variance for type I workers ( AH X SR ) – ( SH X SR ) (38 X $15) (40* X $15) $570 – $600

= $30 F

*20 X 2 Price variance for type I workers ( AH X AR ) – ( AH X SR ) (38 X $15*) (38 X $15) $570 – $570

=$ 0

*$570 ÷ 38 Quantity variance for type II workers ( AH X SR ) – ( SH X SR ) (65 X $12) (60* X $12) $780 – $720

= $60 U

*20 X 3 Price variance for type II workers ( AH X AR ) – ( AH X SR ) (65 X $12.25*) (65 X $12.00) $796.25 – $780

= $16.25 U

*$796.25 ÷ 65

25-43

BYP 25-1

DECISION-MAKING ACROSS THE ORGANIZATION

(a) When setting a standard for computer/labor hours usage, Tryon Professionals should consider the following factors: 1.

A standard set conservatively high may discourage clients from purchasing the model.

A standard set too low may encourage sales of the model, but if customers use more hours than the standard suggests, they may be upset at having been misled.

Clients are likely to use the standard as an evaluation tool for their own employees operating the model. Standards set inappropriately may adversely affect productivity and/or morale of client employees.

(b) Logical alternatives for the standard include: 1.

34 hours:

The average number of hours used for one application by all five financial institutions.

45 hours:

The conservatively high number experienced by one financial institution.

25 hours:

The optimistic low number experienced by one financial institution.

30 hours:

The number of hours required most frequently in the sample of five institutions.

(c) In light of earlier factors listed, the second and third choices for the standard should be eliminated (i.e., 45 and 25 hours). The average 34 hours is probably the most representative. However, Milton Professionals may select 30 hours, given that the company has a high incentive to sell the new model. Consequently, it may make the most sense to pick the lower of the two remaining choices (30 hours).

25-44

BYP 25-1 (Continued) (d) Standard material cost for one model application:

User Manuals:

$320 ÷ 20 manuals = $16/application.

Computer Forms:

$60 ÷ 250 forms = $.24/form $.24/form X 50 forms = $12/application.

25-45

*BYP 25-2

MANAGERIAL ANALYSIS

(a) The overhead application rate is $144,000 divided by 5,000 hours, or $28.80 per direct labor hour. (b) The standard direct labor hours are used to apply overhead to production, so the calculation is $28.80 X 4,500, or $129,600. (c)

Actual Overhead – Overhead Applied = Total Overhead Variance $150,000 $129,600 = $20,400 U The overhead budgeted for 4,500 direct labor hours is computed below. Fixed:

$22,500 + $13,000 + $27,000 + $8,000 + $3,000 + $1,500 + $500 + $300 = $75,800

Variable: ($12,000 + $43,000 + $10,000 + $2,500 + $700) ÷ 5,000 = $13.64 Fixed Variable (4,500 X $13.64)

$ 75,800 61,380 $137,180

The variances are: Controllable: Actual ($150,000) – Budgeted ($137,180) = $12,820 U Volume: $15.16*/hr. X (5,000 – 4,500) = $7,580 U *$75,800 ÷ 5,000 hrs. (d) Both variances appear significant. The controllable variance is 9.3% of budgeted overhead ($12,820 ÷ $137,180), and the volume variance is 5.8% of applied overhead ($7,580 ÷ $129,600). (e) The controllable variance is caused by either spending more than expected on overhead items, or using more than expected of overhead items (for example, more indirect labor hours). The volume variance is caused by underutilizing factory time. To improve performance, management must spend less on overhead items, use them more efficiently, and increase production to 1,000 units.

25-46

BYP 2547

REAL-WORLD FOCUS

(a) Glassmaster is using standard costs because management states that a factor that contributed to improved margins (profit) was a favorable materials price variance. (b) The materials price variance experienced should not lead to changes in the standard for the next fiscal year. Management indicates that the favorable variance is temporary and will begin to reverse itself as stronger worldwide demand for commodity products improves in tandem with the economy.

25-47

BYP 25-4

REAL-WORLD FOCUS

(a) The objectives for each perspective are: Financial: Increase profitability, lower costs, increase revenue Customer: Flight is on-time, lowest prices, more customers Internal: Improve turnaround time. Learning: Ground crew alignment. (b) To measure achievement of the customer perspective objectives of ontime flights, lowest prices and more customers, the company will use FAA on time arrival ratings, customer ranking, and number of customers. (c) To achieve the learning perspective objective of ground crew alignment, the company plans to implement an employee stock ownership plan and ground crew training.

25-48

BYP 2549

REAL-WORLD FOCUS

(a) The normal industry standard for plants to be considered operating at 100% capacity is two shifts working about 250 days a year. (b) A government task force urged the company to try to operate at 120% capacity by traditional standards. (c) It is argued that assembly lines need too much scheduled maintenance and restocking. This is normally done during the period that the company is proposing to run a third shift. For example, the paint shop typically requires 4 hours of cleaning per day. To address these issues, the company is considering “overspeeding” some parts of the line so it can be slowed down later. (d) Potential drawbacks of the midnight shift are that midnight-shift workers are prone to above-average rates of on-the-job errors, absenteeism and illness. All of these issues could cause the night shift to deviate materially from standards for materials, labor and overhead. (e) Another potential problem with this approach is that each plant can only make a limited number of car models. Adding a third shift at the Kansas City plant assumes that the market demand for these cars will be sufficient to absorb the additional cars produced. If not, the company will have to discount the selling price and lay off employees.

25-49

BYP 25-6

COMMUNICATION ACTIVITY

To:

Professor Standard

From:

I. M. Smart

Subject:

Setting Standard Costs

This memorandum covers two points as follows: (a) The comparative advantages and disadvantages of ideal versus normal standards. Ideal standards represent optimum levels of performance under perfect operating conditions. In contrast, normal standards represent efficient levels of performance that are attainable under expected operating conditions. An advantage of ideal standards is that they stimulate the conscientious worker to ever-increasing improvement. The disadvantage of ideal standards is that because they are so difficult to meet, they lower the morale of the entire work force. Normal standards are rigorous but attainable. Such standards should stimulate the worker to self-improvement without discouraging him or her or lowering the morale of the work force. (b) Factors to be considered in setting standards for direct materials, direct labor, and manufacturing overhead. 1.

25-50

Direct materials. The direct materials price standard is the cost per unit of direct materials that should be incurred. This standard should be based on the purchasing department’s best estimate of the cost of raw materials. The price standard should include allowances for related costs such as receiving, storing and handling.

BYP 25-6 (Continued) The direct materials quantity standard is the quantity of direct materials that should be used per unit of finished goods. This standard is a physical measure and it should include allowances for unavoidable waste and normal spoilage. 2.

Direct labor. The direct labor price standard is the rate per hour that should be incurred for direct labor. This standard should be based on current wage rates adjusted for expected cost of living adjustments and employer payroll taxes and fringe benefits. The direct labor quantity standard is the time that should be required to make one unit of product. In setting this standard, allowances should be made for rest periods, cleanup, and machine setup and downtime.

Manufacturing overhead. For this standard, a standard predetermined overhead rate is used. This rate is determined by dividing budgeted overhead costs by an expected standard activity index. The budgeted overhead costs should be based on a realistic estimate of overhead costs at normal capacity.

25-51

BYP 25-7

ETHICS CASE

(a) Bill and his fellow painters in the painting department will benefit from Bill’s slow action. The company and its customers are harmed. The company will incur higher costs on the product and therefore will have to set a higher selling price or suffer a smaller gross profit. Customers will have to pay a greater price for the product or stockholders will obtain less benefit from their investment. (b) Deliberately falsifying and distorting the time study was unethical. If every employee in every phase of producing this new product distorted the time study, the company would not be competitive. If the company is not competitive and profitable, it will eventually go out of business and Bill will be out of a job. It is in Bill’s best interest to support the development of reasonable standards and improved efficiency. (c) The company might conduct several time study tests using different employees. Or the company might conduct unannounced time studies. And the standard might be changed more often than every six months by conducting monthly time studies to effect continuous improvements in efficiency. Incentives might be offered to employees who produce the most efficient effort in the time studies, thereby discouraging distorted, inefficient performance.

25-52

BYP 25-8

ALL ABOUT YOU

(a) The panel made recommendations regarding a number of areas of concern in higher education. For example, it suggested that new approaches should be used to control costs, and it stated that the cost of tuition should grow no faster than median family income. It made recommendations to strengthen the Pell Grant program, which is the core of the federal financial aid program. It also recommended that public universities should use standardized tests to measure student learning. (b) As discussed in the chapter, standards provide a mechanism for evaluating performance and, if used properly, can be used as a motivational tool. The results of standardized tests might help to evaluate the effectiveness of various approaches to education. They might also be used to “weed out” schools that are not meeting minimum expectations. (c) Potential disadvantages of standards are that they might reduce the willingness of instructors or institutions to experiment with new teaching approaches. In addition, in order to obtain high scores, instructors might feel compelled to “teach to the exam,” thus narrowing the breadth of exposure obtained by the student. Also, by their very nature, standardized tests have a difficult time addressing differences across various instructional settings that can cause differences in results. (d) Answers will vary depending on student response.

25-53

BYP 25-9

CONSIDERING YOUR COSTS AND BENEFITS

Discussion Guide: The practice of medicine holds an unusual place in society. On the one hand, it provides a critical, life-sustaining service. We expect and demand the highest-quality service. We measure its success in terms of health improvement and lives saved. On the other hand, it is a business, and like other businesses, it must operate profitably. Some healthcare providers characterize this delicate balance as “The Business of Caring.” How should we balance providing quality health-care and reducing costs? In recent years, managerial accounting has played an important, although not always successful, role in this issue. In the 1990s, health-care providers made extensive use of managerial accounting techniques to reduce costs. By the end of that decade, a number of important studies suggested that the quality of health care had suffered as a result of concentrating too much on cost-controlling efforts and not enough on maintaining quality. Today, many health-care organizations are implementing balanced scorecards in an effort to balance the dual (and in some ways competing) goals of quality health-care and reduced costs. For example, by providing incentives for preventive medicine, health-care providers can reduce costs and at the same time improve patient health. It is likely that, in order to provide health-care to more Americans, we will have to reduce costs. It is hoped that successful implementation of balanced scorecard programs will result in reduced costs through increased efficiency, while increasing the quality of health-care.

25-54

CHAPTER 26 Incremental Analysis and Capital Budgeting ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief Exercises

Do It!

Exercises

A Problems

Describe management’s decision-making process and incremental analysis.

1, 2, 3, 4

1, 2

Analyze the relevant costs in various decisions involving incremental analysis.

5, 6, 7, 8, 9, 10

3, 4, 5, 6, 7

2a, 2b, 2c, 2d, 2e

2, 3, 4, 5, 6, 7, 8

1A, 2A, 3A, 4A

Contrast annual rate of return and cash payback in capital budgeting.

11, 12, 13, 14, 15

8, 9

3a, 3b

9, 10

5A, 6A, 7A

Distinguish between the net present value and internal rate of return methods.

16, 17, 18, 19

10, 11, 12

5A, 6A, 7A

26-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Use incremental analysis for special order and identify nonfinancial factors in the decision.

Simple

20–30

Use incremental analysis related to make or buy, consider opportunity cost, and identify nonfinancial factors.

Moderate

30–40

Compute gain or loss, and determine if equipment should be replaced.

Moderate

30–40

Prepare incremental analysis concerning elimination of divisions.

Moderate

30–40

Compute annual rate of return, cash payback, and net present value.

Moderate

30–40

Compute annual rate of return, cash payback, and net present value.

Complex

30–40

Compute net present value and internal rate of return.

Moderate

20–30

26-2

Learning Objective 1.

Describe management’s decisionmaking process and incremental analysis.

Analyze the relevant costs in various decisions involving incremental analysis.

Knowledge Comprehension

Application

Analysis

Q26-4 BE26-1 E26-1 BE26-2

DI26-1

Q26-8

Q26-5 Q26-6 Q26-7

Q26-9 BE26-3 Q26-10 BE26-4 BE26-5 BE26-6 BE26-7

DI26-2c DI26-2a DI26-2d DI26-2b DI26-2e E26-2 E26-3 E26-4 E26-5

Contrast annual rate of return and Q26-12 cash payback in capital budgeting.

Q26-11 Q26-13 Q26-14 Q26-15

BE26-8 BE26-9 DI26-3a

DI26-3b E26-9 E26-10 P26-5A E26-11 P26-6A P26-7A

Distinguish between the net present value and internal rate of return methods.

Q26-16

BE26-11 E26-10

BE26-10 E26-12 BE26-12 P26-5A DI26-4 P26-6A E26-11 P26-7A

BYP26-1 BYP26-4

BYP26-2

Q26-1 Q26-2 Q26-3

Broadening Your Perspective

Q26-17 Q26-18 Q26-19

E26-6 E26-7 E26-8 P26-3A P26-4A

Synthesis

Evaluation

P26-1A P26-2A

BYP26-3 BYP26-5 BYP26-6 BYP26-7

BLOOM’ S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

26-3

ANSWERS TO QUESTIONS 1.

The following steps are frequently involved in management’s decision-making process: (1) Identify the problem and assign responsibility. (2) Determine and evaluate possible courses of action. (3) Make a decision. (4) Review results of the decision.

My roommate is incorrect. Accounting contributes to the decision-making process at Steps 2 and 4. Prior to the decision, accounting provides relevant revenue and cost data for each course of action. Following the decision, internal reports are prepared to show the actual impact of the decision.

Disagree. Incremental analysis involves the identification of financial data that change under alternative courses of action.

In incremental analysis, the important point to consider is whether costs will differ (change) between the two alternatives. As a result, sometimes (1) variable costs do not change under the alternative courses of action and (2) fixed costs do change.

The relevant data in deciding whether to accept an order at a special price are the incremental revenues to be obtained compared to the incremental costs of filling the special order.

The manufacturing costs that are relevant in the make-or-buy decision are those that will change if the parts are purchased.

Opportunity cost may be defined as the potential benefit that may be obtained by following an alternative course of action. Opportunity cost is relevant in a make-or-buy decision when the facilities used to make the part can be used to generate additional income.

The decision rule in a decision to sell a product or to process it further is: Process further as long as the incremental revenue from the additional processing exceeds the incremental processing costs.

A sunk cost is a cost that cannot be changed by any present or future decision. Sunk costs, such as the book value of an old piece of equipment, therefore, are not relevant in a decision to retain or replace equipment.

10.

Net income will be lower if an unprofitable product line is eliminated when the product line is producing a positive contribution margin and its fixed costs cannot be avoided or reduced.

11.

The screening of proposed capital expenditures may be done by a capital budgeting committee which submits its findings to the officers of the company. The officers, in turn, select the projects they believe to be the most worthy of funding and submit them to the board of directors. The directors ultimately approve the capital expenditure budget for the year.

12.

The formula for the annual rate of return technique is: Expected annual net income ÷ Average investment.

Questions Chapter 26 (Continued) 13.

Cost of capital is the average rate of return that the company must pay to obtain borrowed and equity funds. The decision rule is: Accept the project when the internal rate of return is equal to or greater than the required rate of return (which often is its cost of capital). Reject the project when the internal rate of return is less than the required rate of return.

14.

Tom is not correct. The formula for the cash payback technique is: Cost of the capital investment ÷ Net annual cash flow. The formula for the annual rate of return is: Expected annual net income ÷ average investment.

15.

The cash payback technique is relatively easy to compute and understand. However, it should not ordinarily be the only basis for the capital budgeting decision because it ignores the expected profitability of the investment and the time value of money.

16.

The two tables are: (1) The present value of a single amount (Table 3 in Appendix G). This table is used when a project has uneven cash payments over its useful life and to compute the present value of the salvage value of the project. (2) The present value of an annuity (Table 4 in Appendix G). This table is used when a project has equal cash payments occurring at equal intervals of time over its useful life.

17.

The decision rule is: Accept the project when net present value is zero or positive; reject the project when net present value is negative.

18.

When the net annual cash flows are equal each year, the steps are: (1) Compute the internal rate of return factor by dividing Capital Investment by Net Annual Cash Flows. (2) Use the factor and the present value of an annuity of 1 table to find the internal rate of return.

19.

Under the internal rate of return method, the objective is to find the rate that will make the present value of the expected net annual cash flows equal the present value of the proposed capital expenditure. The decision rule under the internal rate of return method is: Accept the project when the internal rate of return is equal to or greater than the required rate of return, and reject the project when the internal rate of return is less than the required rate.

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 26-1 The correct order is: 1. 2. 3. 4.

Identify the problem and assign responsibility. Determine and evaluate possible courses of action. Make a decision. Review results of the decision.

BRIEF EXERCISE 26-2

Revenues Costs Net income

Alternative A $160,000 100,000 $ 60,000

Alternative B $180,000 125,000 $ 55,000

Net Income Increase (Decrease) $ 20,000 (25,000) ($ 5,000)

Alternative A is better than Alternative B.

BRIEF EXERCISE 26-3

Revenues Costs—Variable manufacturing Shipping Net income

Reject Order $0 0 0 $0

The special order should be accepted. *3,000 X $25 **3,000 X $20 ***3,000 X $ 3

Accept Order $75,000* 60,000** 9,000*** $ 6,000

Net Income Increase (Decrease) $ 75,000 (60,000) (9,000) $ 6,000

BRIEF EXERCISE 26-4

Make $50,000 30,000 –0– $80,000

Variable manufacturing costs Fixed manufacturing costs Purchase price Total annual cost

Buy $ –0– 30,000 60,000 $90,000

Net Income Increase (Decrease) $ 50,000 0 (60,000) $(10,000)

The decision should be to make the part. BRIEF EXERCISE 26-5

Sales price per unit Cost per unit Variable Fixed Total Net income per unit

Sell $62.00

Process Further $70.00

Net Income Increase (Decrease) $8.00

36.00 10.00 46.00 $16.00

42.00 10.00 52.00 $18.00

(6.00) 0 (6.00) $2.00

The bookcases should be processed further because the incremental revenues exceed incremental costs by $2.00 per unit. BRIEF EXERCISE 26-6

Variable manufacturing costs for 5 years New machine cost Sell old machine Total

Retain Equipment

Replace Equipment

Net 5-Year Income Increase (Decrease)

$3,000,000

$2,500,000 400,000 (30,000) $2,870,000

$ 500,000 (400,000) 30,000 $ 130,000

$3,000,000

The old factory machine should be replaced. BRIEF EXERCISE 26-7

Sales Variable costs Contribution margin Fixed costs Net income

Continue $200,000 180,000 20,000 30,000 $ (10,000)

Eliminate $ –0– –0– –0– 20,000 $(20,000)

Net Income Increase (Decrease) $(200,000) 180,000 (20,000) 10,000 $ (10,000)

The Big Bart product line should be continued because $20,000 of contribution margin will not be realized if the line is eliminated. This amount is greater than the $10,000 savings of fixed costs. BRIEF EXERCISE 26-8 $450,000 ÷ $60,000 = 7.5 years

BRIEF EXERCISE 26-9 The annual rate of return is calculated by dividing expected annual income by the average investment. The company’s expected annual income is: $130,000 – $70,000 = $60,000 Its average investment is: $490,000 + $10,000 = $250,000 2 Therefore, its annual rate of return is: $60,000/$250,000 = 24%

BRIEF EXERCISE 26-10 Project A

Present value of net annual cash flows Present value of salvage value Less: Capital investment Net present value

Cash 9% Discount Present Flows X Factor = Value $70,000 X 6.41766 = $449,236 0 X .42241 = 0 449,236 400,000 $ 49,236

Project B

Present value of net annual cash flows Present value of salvage value Less: Capital investment Net present value

Cash 9% Discount Present Flows X Factor = Value $55,000 X 6.41766 = $352,971 0 X .42241 = 0 352,971 310,000 $ 42,971

Project A has a higher net present value than Project B, and it should be accepted. BRIEF EXERCISE 26-11 When net annual cash flows are expected to be equal, the internal rate of return can be approximated by dividing the capital investment by the net annual cash flows to determine the discount factor, and then locating this discount factor on the present value of an annuity table. $176,000/$35,000 = 5.02857 By tracing across on the 7-year row we see that the discount factor for 9% is 5.03295. Thus, the internal rate of return on this project is approximately 9%.

BRIEF EXERCISE 26-12 Present Value $226,000 215,000 $ 11,000

Net annual cash flows – $40,000 X 5.65 Less: Capital investment Net present value

The investment should be made because the net present value is positive. SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 26-1

Revenues Maintenance expense Operating expenses Equipment upgrade Opportunity cost

Alternative 1 $65,000 5,000 26,000 17,000 4,000

Alternative 2 $60,000 5,000 22,000 0 0

Net Income Increase (Decrease) $(5,000) 0 4,000 0 4,000 $3,000

Sunk (s)

DO IT! 26-2a

Revenues Costs Net income

Reject $ –0– $ –0– $ –0–

Accept $180,000 144,000* $ 36,000

Net Income Increase (Decrease) $180,000 (144,000) $ 36,000

*(6,000 X $20) + (6,000 X $4) Given the results of the above analysis, Maize Company should accept the special order.

DO IT! 26-2b (a)

Direct materials Direct labor Variable manufacturing costs Fixed manufacturing costs Purchase price Total cost

Net Income Increase (Decrease) $ 30,000 42,000

Make $ 30,000 42,000

Buy $ –0– –0–

45,000

–0–

45,000

60,000 –0– $177,000

45,000 162,000* $207,000

15,000 (162,000) $ (30,000)

*60,000  $2.70 Given the results of the above analysis, Wilma Company will incur $30,000 of additional costs if it buys the switches. (b) Total cost Opportunity cost Total cost

Make $177,000 34,000 $211,000

Buy $207,000 –0– $207,000

Net Income Increase (Decrease) $(30,000) 34,000 $ 4,000

Yes, the answer is different: The analysis shows that net income will be increased by $4,000 if Wilma Company purchases the switches.

DO IT! 26-2c

Sales per unit Cost per unit Variable Fixed Total Net income per unit

Sell $75

Process Further $100

Net Income Increase (Decrease) $25

$40 10 $50

$ 59 13 $ 72

($19) (3) ($22)

$25

$ 28

The tables should be processed further and Mesa Verde should finish the tables because the incremental revenues exceed incremental costs by $3 per unit. DO IT! 26-2d

Operating expenses Repair costs Rental revenue New machine cost Sale of old machine Total cost

Retain Equipment $120,000 40,000

$160,000

Replace Equipment

$ (60,000) 170,000 (25,000) $ 85,000

Net Income Increase (Decrease) $120,000 40,000 60,000 (170,000) 25,000 $ 75,000

DO IT! 26-2e

Sales Variable costs Contribution margin Fixed costs Net income

Continue $500,000 370,000 130,000 150,000 $ (20,000)

Eliminate $ 0 0 0 38,000 $(38,000)

Net Income Increase (Decrease) $(500,000) 370,000 (130,000) 112,000 $ (18,000)

The analysis indicates that Gator should not eliminate the gloves and mittens line because net income would decrease $18,000.

DO IT! 26-3a Revenues .................................................................... Less: Expenses (excluding depreciation) .................... Depreciation ($120,000/4 years) .......................... Annual net income .....................................................

$80,000 $41,000 30,000

71,000 $ 9,000

Average investment = ($120,000 + 0)/2 = $60,000. Annual rate of return = $9,000/$60,000 = 15%. Since the annual rate of return, 15%, is greater than Wayne’s required rate of return, 12%, the proposed project is acceptable. DO IT! 26-3b Estimated annual cash inflows ................................ Estimated annual cash outflows .............................. Net annual cash flow................................................. Cash payback period = $140,000/$40,000 = 3.5 years.

$80,000 40,000 $40,000

DO IT! 26-4 (a)

Estimated annual cash inflows................................. Estimated annual cash outflows .............................. Net annual cash flow.................................................

Present value of net annual cash flows Less: Capital investment Net present value a Table 4, Appendix G.

$80,000 40,000 $40,000

Cash Flow

12% Discount Factor

Present Value

$40,000

3.03735a

$121,494 120,000 $ 1,494

Since the net present value is positive, the project should be accepted (b) Estimated annual cash inflows................................. Estimated annual cash outflows .............................. Net annual cash flow.................................................

$80,000 40,000 $40,000

$120,000/$40,000 = 3.00. Using Table 4 of Appendix G and the factors that correspond with the four-period row, 3.00 is between the factors for 12% and 15%. Since the project has an internal rate that is more than 12%, the company’s required rate of return, the project should be accepted.

SOLUTIONS TO EXERCISES EXERCISE 26-1 1. 2. 3. 4. 5. 6. 7. 8. 9.

False. The first step in management’s decision-making process is “identify the problem and assign responsibility”. False. The final step in management’s decision-making process is to review the results of the decision. True. False. In making business decisions, management ordinarily considers both financial and nonfinancial information. True. True. False. Costs that are the same under all alternative courses of action do not affect the decision. False. When using incremental analysis, either costs or revenues or both will change under alternative courses of action. False. Sometimes variable costs will not change under alternative courses of action, but fixed costs will.

EXERCISE 26-2 (a)

Revenues ($4.80) Materials ($0.50) Labor ($1.50) Variable overhead ($1.00) Fixed overhead Sales commissions Net income

Reject Order $ –0– –0– –0– –0– –0– –0– $ –0–

Accept Order $24,000 (2,500) (7,500) (5,000) (6,000) –0– $ 3,000

Net Income Increase (Decrease) $24,000 (2,500) (7,500) (5,000) (6,000) –0– $ 3,000

(b) As shown in the incremental analysis, Gruden should accept the special order because incremental revenue exceeds incremental expenses by $3,000. (c) It is assumed that sales of the golf discs in other markets would not be affected by this special order. If other sales were affected, Gruden would have to consider the lost sales in making the decision. Second, if Gruden is operating at full capacity, it is likely that the special order would be rejected.

EXERCISE 26-3 (a)

Revenues (15,000 X $7.60) Cost of goods sold Operating expenses Net income

Reject Order $0 0 0 $0

Accept Order $114,000 78,000 (1) 31,800 (2) $ 4,200

Net Income Increase (Decrease) $114,000 (78,000) (31,800) $ 4,200

(1) Variable cost of goods sold = $2,600,000 X 70% = $1,820,000. Variable cost of goods sold per unit = $1,820,000 ÷ 350,000 = $5.20 Variable cost of goods sold for the special order = $5.20 X 15,000 = $78,000.

(2) Variable operating expenses = $840,000 X 80% = $672,000 $672,000 ÷ 350,000 = $1.92 per unit 15,000 X $1.92 = $28,800 $28,800 + $3,000 = $31,800 (b) As shown in the incremental analysis, Moonbeam Company should accept the special order because incremental revenues exceed incremental expenses by $4,200. EXERCISE 26-4 (a)

Direct materials (30,000 X $4.00) Direct labor (30,000 X $5.00) Variable overhead costs ($150,000 X 70%) Fixed manufacturing costs Purchase price (30,000 X $12.95) Total annual cost

Make $120,000 150,000

0 0

Net Income Increase (Decrease) $ 120,000 150,000

105,000 45,000 0 $420,000

0 45,000 388,500 $433,500

105,000 0 (388,500) $ (13,500)

Buy

(b) No, Pottery Ranch should not purchase the finials. As indicated by the incremental analysis, it would cost the company $13,500 more to purchase the finials.

EXERCISE 26-4 (Continued) (c) Yes, by purchasing the finials, a total cost saving of $6,500 will result as shown below.

Total annual cost (above) Opportunity cost Total cost

Buy $433,500 0 $433,500

Net Income Increase (Decrease) $(13,500) 20,000 $ 6,500

Process Further (Stage 2 Kit) $36

Net Income Increase (Decrease) $6

Make $420,000 20,000 $440,000

EXERCISE 26-5 Sell (Basic Kit) Sales per unit Costs per unit Direct materials Direct labor Total

$30 $16 0 $16

$ 8 (1) 9 (2) $17

$8 (9) $(1)

Net income per unit

$14

$19

(1) The cost of materials decreases because Anna can make two Stage 2 Kits from the materials for a basic kit. (2) The total time to make the two kits is one hour at $18 per hour or $9 per unit. Anna should carry the Stage 2 Kits. The incremental revenue, $6, exceeds the incremental processing costs, $1. Thus, net income will increase by processing the kits further.

EXERCISE 26-6

Operating costs New machine cost Salvage value (old) Total

Retain Machine $125,000 (1) 0 0 $125,000

Replace Machine $100,000 (2) 25,000 (6,000) $119,000

Net Income Increase (Decrease) $ 25,000 (25,000) 6,000 $ 6,000

(1) $25,000 X 5. (2) $20,000 X 5. The current machine should be replaced. The incremental analysis shows that net income for the five-year period will be $6,000 higher by replacing the current machine. EXERCISE 26-7

Sales Variable costs Cost of goods sold Operating expenses Total variable Contribution margin Fixed costs Cost of goods sold Operating expenses Total fixed Net income (loss)

Continue $100,000

Eliminate $ 0

Net Income Increase (Decrease) $(100,000)

61,000 30,000 91,000 9,000

0 0 0 0

61,000 30,000 91,000 (9,000)

15,000 20,000 35,000 $(26,000)

15,000 20,000 35,000 $(35,000)

0 0 0 $ (9,000)

Veronica is incorrect. The incremental analysis shows that net income will be $9,000 less if the Percy Division is eliminated. This amount equals the contribution margin that would be lost through discontinuing the division. (Note: None of the fixed costs can be avoided.)

EXERCISE 26-8 (a)

$30,000 + $70,000 – $40,000 = $60,000

(b)

Tingler $300,000 150,000 150,000 142,500* $ 7,500

Sales Variable expenses Contribution margin Fixed expenses Net income

Shocker $500,000 200,000 300,000 267,500** $ 32,500

Total $800,000 350,000 450,000 410,000 $ 40,000

*$30,000 + [($300,000 ÷ $800,000) X $300,000] **$80,000 + [($500,000 ÷ $800,000) X $300,000] (c) As shown in the analysis above, Cawley should not eliminate the Stunner product line. Elimination of the line would cause net income to drop from $60,000 to $40,000. The reason for this decrease in net income is that elimination of the product line would result in the loss of $55,000 of contribution margin while saving only $35,000 of fixed expenses.

EXERCISE 26-9 (a) Year 1 2 3

AA Net Annual Cash Flow $ 7,000 9,000 12,000

Cash payback period 2.50 years $22,000 – $16,000 = $6,000 $6,000 ÷ $12,000 = .50

Cumulative Net Cash Flow $ 7,000 16,000 28,000

EXERCISE 26-9 (Continued) BB 22,000 ÷ 10,000 = 2.2 years

Year 1 2 3

CC Net Annual Cash Flow $13,000 12,000 11,000

Cumulative Net Cash Flow $13,000 25,000 36,000

Cash payback period 1.75 years $22,000 – 13,000 = $9,000 $9,000 ÷ $12,000 = .75 The most desirable project is CC because it has the shortest payback period. The least desirable project is AA because it has the longest payback period. As indicated, only CC is acceptable because its cash payback is 1.75 years. (b) Year

Discount Factor

AA Cash Present Flow Value

1 .89286 $ 7,000 2 .79719 9,000 3 .71178 12,000 Total present value Less: Investment Net present value

BB Cash Present Flow Value

$ 6,250 $10,000 7,175 10,000 8,541 10,000 21,966 (22,000) $ (34)

CC Cash Present Flow Value

$ 8,929 $13,000 7,972 12,000 7,118 11,000 24,019(1) (22,000) $ 2,019

$11,607 9,566 7,830 29,003 (22,000) $ 7,003

(1) This total may also be obtained from Table 4: $10,000 X 2.40183 = $24,018. (The difference of $1 is due to rounding)

Project CC is still the most desirable project. Also, on the basis of net present values, project BB is also acceptable. Project AA is not desirable.

EXERCISE 26-10 (a) 1. 2. (b)

Cash payback period: $190,000 ÷ $50,000 = 3.8 years. Annual rate of return: $12,000 ÷ [($190,000 + $0) ÷ 2] = 12.63%.

Item Net annual cash flows Less: Capital investment Net present value

Amount $ 50,000

Years 1–5

PV Factor 3.60478

Present Value $180,239 190,000 $ (9,761)

EXERCISE 26-11 (a)

Project

Capital Investment ÷

Net Annual Cash Flows*

Internal Rate of Return = Factor

22A 23A 24A

$240,000 $270,000 $280,000

($15,500 + $40,000) ($20,600 + $30,000) ($15,700 + $40,000)

= = =

÷ ÷ ÷

4.324 5.336 5.027

Closest Discount Factor

Internal Rate of Return

4.35526 5.32825 5.03295

10% 12% 9%

*(Annual income + Depreciation expense) (b) The acceptable projects are 22A and 23A because their rates of return are equal to or greater than the 10% required rate of return. EXERCISE 26-12 (a) Project A: ($50,000 X 3.88965) – $200,000 = $(5,518) Project B: ($65,000 X 5.03295) – $300,000 = $27,142 (b) Leung should invest in Project B only. Project B is acceptable because it has a positive net present value. Project A is unacceptable because it has a negative net present value. (c) Project A (adjusted): ($60,000 X 3.88965) – $225,000 = $8,379. Leung’s decision would change. Now both projects are acceptable.

SOLUTIONS TO PROBLEMS

PROBLEM 26-1A

(a)

Revenues (10,000 X $28) Cost of goods sold Selling and administrative expenses Net income

Reject Order $0 0

Accept Order $280,000 220,000 (1)

Net Income Increase (Decrease) $ 280,000 (220,000)

0 $0

22,500 (2) $ 37,500

(22,500) $ 37,500

(1) Variable costs = $3,600,000 – $960,000 = $2,640,000; $2,640,000 ÷ 120,000 units = $22.00 per unit; 10,000 X $22.00 = $220,000. (2) Variable costs = $405,000 – $225,000 = $180,000; $180,000 ÷ 120,000 units = $1.50 per unit; 10,000 X ($1.50 + $0.75) = $22,500. (b) Yes, the special order should be accepted because net income will increase by $37,500. (c) Unit selling price = $22.00 (variable manufacturing costs) + $2.25 variable selling and administrative expenses + $5.00 net income = $29.25. (d) Nonfinancial factors to be considered are: (1) possible effect on domestic sales, (2) possible alternative uses of the unused plant capacity, and (3) ability to meet customer’s schedule for delivery without increasing costs.

PROBLEM 26-2A

(a) Make CISCO Direct materials (8,000 X $4.80) Direct labor (8,000 X $4.30) Indirect labor (8,000 X $.43) Utilities (8,000 X $.40) Depreciation Property taxes Insurance Purchase price Freight and inspection (8,000 X $.35) Receiving costs Total annual cost

$38,400

Buy CISCO $

Net Income Increase (Decrease)

$38,400

34,400

3,440 3,200 3,000 700 1,500 0

0 0 900 200 600 80,000

3,440 3,200 2,100 500 900 (80,000)

0 0 $84,640

2,800 1,300 $85,800

(2,800) (1,300) $ (1,160)

(b) The company should continue to make CISCO because net income would be $1,160 less if CISCO were purchased from the supplier. (c) The decision would be different. Because of the opportunity cost of $3,000, net income will be $1,840 higher if CISCO is purchased as shown below: Net Income Increase (Decrease) Make CISCO Buy CISCO Total annual cost $84,640 $85,800 $(1,160) 3,000 0 3,000 Opportunity cost $87,640 $85,800 $ 1,840 Total cost (d) Nonfinancial factors include: (1) the adverse effect on employees if CISCO is purchased, (2) how long the supplier will be able to satisfy the Shatner Manufacturing Company’s quality control standards at the quoted price per unit, and (3) whether the supplier will deliver the units when they are needed by Shatner.

PROBLEM 26-3A (a)

Cost Accumulated depreciation Book value Sales proceeds Loss on sale

$120,000 (24,000*) 96,000 (25,000) $ 71,000

*$120,000 ÷ 5 years = $24,000 (b) (1) Revenues ($240,000 X 4 yrs.) Less costs: Variable costs ($35,000 X 4) Fixed costs ($23,000 X 4) Selling & administrative Depreciation Net income

Retain Old Elevator $960,000 $140,000 92,000 116,000* 96,000

444,000 $516,000

*($29,000 X 4) (2) Revenues Less costs: Variable costs ($10,000 X 4) Fixed costs ($8,500 X 4) Selling and administrative Depreciation Operating income Less: Loss on old elevator Net income

Replace Old Elevator $960,000 $ 40,000 34,000 116,000 160,000

350,000 610,000 71,000 $539,000

Retain Replace Old Elevator Old Elevator $140,000 $ 40,000 92,000 34,000 160,000 (25,000) $232,000 $209,000 .

Net Income Increase (Decrease) $ 100,000 58,000 (160,000) 25,000 $ 23,000

PROBLEM 26-3A (Continued) (d)

MEMO

TO: Ron Richter FROM: Student SUBJECT: Relevant Data for Decision to Replace Old Elevator When deciding whether or not to replace any old equipment, the analysis should only include cost data relevant to the replacement decision. The $71,000 loss that would be experienced if we replace the old elevator with the newer model is related to a sunk cost, namely the cost of the old elevator. Sunk costs are irrelevant in decision making. The loss occurs when comparing the book value of the old elevator to the cash proceeds that would be received. The book value of $96,000 would be deducted as depreciation expense over the next four years if the elevator were retained. If the elevator is replaced with the newer model, the book value will be expensed in the current year, less the cash proceeds received on disposal. Therefore, the $96,000 book value will be expensed under either alternative, making it irrelevant.

PROBLEM 26-4A

(a) Sales Variable costs Cost of goods sold Selling and administrative Total variable expenses Contribution margin

Division I $250,000

Division II $200,000

140,000 30,000 170,000 $ 80,000

172,800 36,000 208,800 $ (8,800)

(b) (1)

Net Income Increase (Decrease)

Division I

Continue

Eliminate

Contribution margin (above) Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations

$ 80,000

$(80,000)

60,000 45,000 105,000 $(25,000)

30,000 22,500 52,500 $(52,500)

30,000 22,500 52,500 $(27,500)

(2) Division II

Continue

Eliminate

Net Income Increase (Decrease)

Contribution margin (above) Fixed costs Cost of goods sold Selling and administrative Total fixed expenses Income (loss) from operations

$ (8,800)

$ 8,800

19,200 24,000 43,200 $(52,000)

9,600 12,000 21,600 $(21,600)

9,600 12,000 21,600 $30,400

Division II should be eliminated as its negative contribution margin is $8,800. Income from operations would increase $30,400 if Division II is eliminated. Division I should be continued because it is producing positive contribution margin of $80,000. Income from operations will decrease $27,500 by discontinuing this division.

PROBLEM 26-4A (Continued) (c)

BRISLIN COMPANY CVP Income Statement For the Quarter Ended March 31, 2017 Divisions Sales Variable costs Cost of goods sold Selling and administrative Total variable costs Contribution margin Fixed costs Cost of goods sold (1) Selling and administrative (2) Total fixed costs Income (loss) from operations

I $250,000

III $500,000

IV $450,000

Total $1,200,000

140,000

240,000

187,500

567,500

30,000

90,000

170,000 80,000

270,000 230,000

217,500 232,500

657,500 542,500

63,200

65,700

192,100

49,000

34,000

24,000

107,000

112,200

97,200

89,700

299,100

$(32,200) $132,800

$142,800

$ 243,400

(1) Division’s fixed cost of goods sold plus 1/3 of Division II’s unavoidable fixed cost of goods sold [$192,000 X (100% – 90%) X 50% = $9,600]. Each division’s share is $3,200. (2) Division’s fixed selling and administrative expense plus 1/3 of Division II’s unavoidable fixed selling and administrative expenses [$60,000 X (100% – 60%) X 50% = $12,000]. Each division’s share is $4,000. (d) Income from operations with Division II of $213,000 (given) plus incremental income of $30,400 from eliminating Division II = $243,400 income from operations without Division II.

PROBLEM 26-5A

(a) Project Bono $160,000 ÷ ($14,000 + $32,000) = 3.48 years

Year 1 2 3 4 5

Project Edge Cash Flow $53,000 ($18,000 + $35,000) $52,000 ($17,000 + $35,000) $51,000 ($16,000 + $35,000) $47,000 ($12,000 + $35,000) $44,000 ($ 9,000 + $35,000)

Cumulative Cash Flow $ 53,000 $105,000 $156,000 $203,000 $247,000

Cash payback period 3.40 years $175,000 – $156,000 = $19,000 $19,000 ÷ $47,000 = .40

Year 1 2 3 4 5

Project Clayton Cash Flow $67,000 ($27,000 + $40,000) $63,000 ($23,000 + $40,000) $61,000 ($21,000 + $40,000) $53,000 ($13,000 + $40,000) $52,000 ($12,000 + $40,000)

Cash payback period 3.17 years $200,000 – $191,000 = $9,000 $9,000 ÷ $53,000 = .17

Cumulative Cash Flow $ 67,000 $130,000 $191,000 $244,000 $296,000

PROBLEM 26-5A (Continued) (b)

Project Bono Item Net annual cash flows Less: Capital investment Negative net present value Discount Factor .86957 .75614 .65752 .57175 .49718

Year 1 2 3 4 5 Total Less: Capital investment Positive (negative) net present value

Amount $46,000

Years 1–5

PV Factor 3.35216

Present Value $154,199 160,000 $ (5,801)

Project Edge

Project Clayton

Cash Flow $ 53,000 52,000 51,000 47,000 44,000 $247,000

Cash Flow $ 67,000 63,000 61,000 53,000 52,000 $296,000

PV $ 46,087 39,319 33,534 26,872 21,876 167,688

PV $ 58,261 47,637 40,109 30,303 25,853 202,163 200,000

175,000 $

$ (7,312)

2,163

(c) Project Bono = $14,000 ÷ [($160,000 + $0) ÷ 2] = 17.5%. Project Edge = $14,400 ÷ [($175,000 + $0) ÷ 2] = 16.5%. Project Clayton = $19,200 ÷ [($200,000 + $0) ÷ 2] = 19.2%. (d) Project Bono Edge Clayton

Cash Payback 3 2 1

The best project is Clayton.

Net Present Value 2 3 1

Annual Rate of Return 2 3 1

PROBLEM 26-6A

(a)

Sales Expenses Drivers’ salaries Out-of-pocket expenses Depreciation Total expenses Net income Cash inflow

(1) Annual Net Income

(2) Annual Cash Inflow

$108,000*

$108,000

48,000 30,000 25,000 103,000 $ 5,000

48,000 30,000 0 78,000 $ 30,000

*5 vans X 10 trips X 6 students X 30 weeks X $12.00 = $108,000. (b) 1.

Cash payback period = $75,000 ÷ $30,000 = 2.50 years.

Annual rate of return = $5,000 ÷ ($75,000 + 0) = 13.33%. 2

(c) Present value of annual cash inflows ($30,000 X 2.28323*) = $68,497 Less: Capital investment = 75,000 Net present value $ (6,503) *3 years at 15%, PV of annuity of 1. (d) The computations show that the commuter service is not a wise investment for these reasons: (1) annual net income will only be $5,000, (2) the annual rate of return (13.33%) is less than the cost of capital (15%), (3) the cash payback period is 83% (2.5 ÷ 3) of the useful life of the vans, and (4) net present value is negative.

PROBLEM 26-7A (a) (1) Option A Present value of net annual cash flows Present value of cost to rebuild Present value of salvage value Less: Capital investment Net present value

Cash 8% Discount Present Flows X Factor = Value a $41,000 X 5.20637 = $213,461 (50,000) X .73503 = (36,752) 0 X .58349 = 0 $176,709 160,000 $ 16,709

aNet annual cash flows = $71,000 – $30,000 = $41,000

(2) The internal rate of return can be approximated by finding the discount rate that results in a net present value of approximately zero. This is accomplished with a 11% discount rate.

Present value of net annual cash flows Present value of cost to rebuild Present value of salvage value Less: Capital investment Net present value

Cash 11% Discount Present Flows X Factor = Value a $41,000 X 4.71220 = $193,200 (50,000) X .65873 = (32,937) 0 X .48166 = 0 $160,263 160,000 $ 263

aNet annual cash flows = $71,000 – $30,000 = $41,000

(1) Option B Present value of net annual cash flows Present value of cost to rebuild Present value of salvage value

Cash 8% Discount Flows X Factor b $49,000 X 5.20637 0 X .73503 8,000 X .58349

Less: Capital investment Net present value bNet annual cash flows = $80,000 – $31,000 = $49,000

Present = Value = $255,112 = 0 = 4,668 $259,780 227,000 $ 32,780

PROBLEM 26-7A (Continued) (2) Internal rate of return on Option B is 12%, as calculated below:

Present value of net annual cash flows Present value of cost to rebuild Present value of salvage value Less: Capital investment Net present value

Cash 12% Discount Present = Value Flows X Factor b $49,000 X 4.56376 = $223,624 0 X .63552 = 0 8,000 X .45235 = 3,619 $227,243 227,000 $ 243

bNet annual cash flows = $80,000 – $31,000 = $49,000

(b) Option A has a lower net present value than Option B, and also a lower internal rate of return. Therefore, Option B is the preferred project.

COMPREHENSIVE PROBLEM: CHAPTERS 19 TO 26

Note to instructor: Solutions will vary by student. This is an extensive, comprehensive problem whose solution will depend on the assumptions and computations in previous parts. While the variety of assumptions that may be made by students are valuable in themselves, requiring students to project information as required in a real-life scenario, you may wish to assist students (and reduce grading requirements) by providing students with sufficient data from the suggested solution to ensure consistency of responses (see data provided in parts (b), (c), (e), (j), (l), and (n)). You may also wish to consider assigning one or more selected parts of this problem, depending on time available. One suggested solution follows: (a) , (b), and (c) Product Costs Item Rent on production equipment Insurance on building Raw materials (plastics, polystyrene, etc.) Utility costs Office supplies Wages Depreciation on office equipment Miscellaneous Administrative salaries Property taxes on building Advertising for helmets Sales commissions Depreciation on building Professional fees Research and development Totals

Direct Materials

Direct Labor

Manufacturing Overhead

Period Costs

$ 6,000 1,500 $70,000 900 $

300

$70,000 800 1,000 15,500 400 11,000 40,000 1,500

$70,000

$11,300

500 10,000 $78,100

COMPREHENSIVE PROBLEM (Continued) (d) Assume first month of operations is December 2017. BICYCLE HELMET COMPANY Cost of Goods Manufactured Schedule For the Month Ended December 31, 2017 Work in process, December 1 Direct materials Raw materials inventory (Dec. 1) Raw materials purchased Total raw materials available for use Less: Raw materials inventory (Dec. 31) Direct materials used

$ $

0 70,000 70,000 0 $70,000

Direct labor Manufacturing overhead Rent on production equipment Insurance on building Utility costs Miscellaneous Property taxes on building Depreciation on building

70,000 $ 6,000 1,500 900 1,000 400 1,500 11,300

Total manufacturing costs Total cost of work in process Less: Work in process (Dec. 31) Cost of goods manufactured

151,300 151,300 0 $151,300

(e) Assume 10,000 helmets will be produced the first month of operations. Production cost per helmet = $151,300 [from (d)] ÷ 10,000 = $15.13. (f)

The Bicycle Helmet Company likely will use a process cost system. Process costing is used when large volumes of a homogenous product are produced on a continuous basis. The Bicycle Helmet Company would

COMPREHENSIVE PROBLEM (Continued) find it useful, using a process costing system, to identify the cost of each production batch of helmets. If the Bicycle Helmet Company moves to produce additional helmets (e.g., baseball, hockey, football, etc., or different models of bicycle helmets), it may find it useful to move to a job order costing system. (g) In a process cost system, manufacturing costs (direct materials, direct labor, and manufacturing overhead) are assigned to Work in Process accounts for each department or process. As helmets are completed, the cost of the work in process is transferred out to Finished Goods Inventory using an inventory allocation method such as FIFO. Later, when the helmets are sold, their cost is transferred to Cost of Goods Sold. (h) Item Rent on production equipment Insurance on building Raw materials (plastics, polystyrene, etc.) Utility costs Office supplies Wages Depreciation on office equipment Miscellaneous Administrative salaries Property taxes on building Advertising for helmets Sales commissions Depreciation on building Professional fees Research and development Total (i)

Variable Costs

Fixed Costs $ 6,000 1,500

$ 70,000 900 300 70,000 800 1,000 15,500 400 11,000 40,000

$181,000

Unit variable cost = $181,000 ÷ 10,000 helmets = $18.10 per helmet

1,500 500 10,000 $48,400

Total Costs $ 6,000 1,500 70,000 900 300 70,000 800 1,000 15,500 400 11,000 40,000 1,500 500 10,000 $229,400

COMPREHENSIVE PROBLEM (Continued) (j)

Estimated number of helmets sold in December 2017 = 8,000 helmets (good Christmas sales!) Projected wholesale selling price = $40 per helmet Unit contribution margin

= Unit selling Price – Unit variable costs = $40.00 – $18.10 = $21.90

Contribution margin ratio

= Unit contribution margin ÷ Unit selling price = $21.90 ÷ $40.00 = 54.75%

(k) Breakeven point in dollars: Sales dollars at the breakeven point = Variable costs as a percentage of unit selling price X Sales dollars at the breakeven point) + Total fixed costs X = 0.4525*X + $48,400 0.5475X = $48,400 X = $88,402 *$18.10 ÷ $40.00 = 0.4525 variable costs as a percentage of unit selling price Breakeven point in units: Unit selling price X Sales volume = (Variable cost per unit X Sales volume) + Total fixed costs $40X = $18.10X + $48,400 $21.90X = $48,400 X = 2,210 helmets (l)

BICYCLE HELMET COMPANY Sales Budget For the Month Ended December 31, 2017 Expected unit sales .............................................................. Unit selling price ................................................................... Total sales .............................................................................

8,000 X $40 $320,000

COMPREHENSIVE PROBLEM (Continued) BICYCLE HELMET COMPANY Production Budget For the Month Ended December 31, 2017 Expected unit sales ................................................................. Add: Desired ending finished goods units .......................... Total required units ................................................................. Less: Beginning finished goods units .................................. Required production units ......................................................

8,000 2,000 10,000 0 10,000

BICYCLE HELMET COMPANY Direct Materials Budget For the Month Ended December 31, 2017 Units to be produced ............................................................... Direct materials per unit.......................................................... Total kilograms needed for production.................................. Add: Desired ending direct materials (kilograms) .............. Total materials required .......................................................... Less: Beginning direct materials (kilograms)....................... Direct materials purchases ..................................................... Cost per kilogram .................................................................... Total cost of direct materials purchases ...............................

10,000 X 1kg 10,000 0 10,000 0 10,000 X $7 $70,000

BICYCLE HELMET COMPANY Direct Labor Budget For the Month Ended December 31, 2017 Units to be produced ............................................................... Direct labor time (hours) per unit ........................................... Total required direct labor hours............................................ Direct labor cost per hour ....................................................... Total direct labor cost .............................................................

10,000 X 0.35 3,500 X $20 $70,000

COMPREHENSIVE PROBLEM (Continued) BICYCLE HELMET COMPANY Selling and Administrative Expense Budget For the Month Ended December 31, 2017 Variable (sales commissions) .............................................. Fixed ($300 + $800 + $15,500 + $11,000 + $500 + $10,000) ....... Total [Note: Equals total of period costs from part (b)]..........

$40,000 38,100 $78,100

BICYCLE HELMET COMPANY Budgeted Income Statement For the Month Ended December 31, 2017 Sales revenue (8,000 X $40) .................................................. Cost of goods sold [8,000 X $15.13 (from part (e)] .............. Gross profit ............................................................................ Selling and administrative expenses ................................... Income from operations ........................................................ Income tax expense (45%) .................................................... Net income .............................................................................

(m)

$320,000 121,040 198,960 78,100 120,860 54,387 $ 66,473

BICYCLE HELMET COMPANY Cash Budget For the Month Ended December 31, 2017 Beginning cash balance ........................................................ Add: Receipts Collections from customers (75% of sales, $320,000) ......................................... Total receipts....................................................... Total available cash ...............................................................

0 240,000 240,000 240,000

COMPREHENSIVE PROBLEM (Continued) BICYCLE HELMET COMPANY Cash Budget (Continued) For the Month Ended December 31, 2017 Less: Disbursements Direct materials .......................................................... (75% of direct materials purchases, $70,000) Direct labor ................................................................. Manufacturing overhead ............................................ ($11,300 from part (d) – $1,500 depreciation) Selling and administrative expenses ($78,100 from part (l) – $800 depreciation) ........... Total disbursements ........................................... Excess (deficiency) of available cash over disbursements ................................................................... Financing: Borrowings......................................................... Ending cash balance .............................................................

(n)

52,500 70,000 9,800 77,300 209,600 30,400 0 $ 30,400

BICYCLE HELMET COMPANY Monthly Flexible Manufacturing Costs Budget For the Month Ended December 31, 2017 Activity level Production in units Variable costs Raw materials ($7) Wages ($7) Miscellaneous ($0.10) Total variable ($14.10) Fixed costs Total fixed costs [as per (b)] Total costs

8,000

9,000

10,000

$ 56,000 56,000 800 112,800

$ 63,000 63,000 900 126,900

$ 70,000 70,000 1,000 141,000

10,300* $123,100

10,300 $137,200

10,300 $151,300

*$11,300 [from (b)] – $1,000 miscellaneous (variable cost).

COMPREHENSIVE PROBLEM (Continued) (o) Potential causes of a materials variance: price paid for plastics or any other raw materials included in helmet; new employees; faulty equipment Potential causes of a direct labor variance: change in pay rates; inexperienced employees; faulty equipment Potential causes of a manufacturing overhead variance: change in use of supplies; increase in indirect costs such as fuel, heat, etc. (p) Cash payback period: Cost of capital investment ÷ Annual cash inflow $720,000 ÷ [$30,400 (from part (m) X 12 months)] = 2 years (1.97 years). (q) Relevant nonquantitative factors: availability of skilled workforce; location, including cost of shipping to market(s); availability of investment incentives; market surveys; ease of entry; and laws and regulations.

CD26-1

CURRENT DESIGNS

(a) Current Designs should accept the special order based on the following calculations:

Revenues Costs Net Income

Reject Order $0 0 $0

Accept Order $25,000* (19,000)** $ 6,000

Net Income Increase (Decrease) $25,000 (19,000) $ 6,000

*(100 X $250) **(($80 + $60 + $20) X 100) + ($1,000 + $2,000) (b) Assuming that Current Designs is currently operating with excess capacity, it should accept the order based on the calculations shown in part (a). If Current Designs is currently operating at full capacity, it would have to weigh its options. If it displaced production of regular kayaks in order to fill this order, it would have to consider the opportunity costs associated with this decision. The opportunity cost, when operating at full capacity, would be the lost contribution margin from regular sales given up in order to fulfill the special order. Alternatively, rather than reject the special order, it might consider temporarily expanding the plant’s capacity by adding an additional production shift to handle the special order. If this option were considered, it would have to identify all additional incremental costs (for example, overtime pay) that would be incurred.

CD26-2

CURRENT DESIGNS

(a) Average investment = ($256,000 + 0) ÷ 2 = $128,000 Annual rate of return = $15,200 ÷ $128,000 = 11.88% (b) Net annual cash flow = $15,200 + $32,000 = $47,200 Payback period = $256,000 ÷ $47,200 = 5.42 years (c) Event Net annual cash flow Oven purchase Net present value

Time Period 1-8 0

Cash 9% Discount Present Flows Factor Value $ 47,200 5.53482 $ 261,244 (256,000) 1.00000 (256,000) $ 5,244

Time Period 1-8 0

Cash 15% Discount Present Flows Factor Value $ 47,200 4.48732 $ 211,802 (256,000) 1.00000 (256,000) $ (44,198)

Accept the proposal (d) Event Net annual cash flow Oven purchase Net present value

Do not accept the proposal

BYP 26-1

DECISION-MAKING ACROSS THE ORGANIZATION

Sales Costs and expenses Cost of goods sold Selling expenses Administrative expenses Purchase price Total costs and expenses Net income

Retain Purchase Old Machine New Machine $6,000,000 (1) $6,600,000 (2)

Net Income Increase (Decrease) $ 600,000

4,500,000 (3) 900,000 500,000 — 5,900,000 $ 100,000

(120,000) (90,000) (65,000) (150,000) (425,000) $ 175,000

4,620,000 (4) 990,000 565,000 150,000 (5) 6,325,000 $ 275,000

(1) 12,000 X $100 X 5 years = $6,000,000. (2) $6,000,000 X 110% = $6,600,000. (3) $6,000,000 X (100% – 25%) = $4,500,000. (4) $6,600,000 X (100% – 30%) = $4,620,000. (5) $140,000 + $4,000 + $6,000 = $150,000.

The new machine should be purchased. The incremental analysis shows that net income will increase from $100,000 to $275,000 over the five years with the new machine.

BYP 26-2

MANAGERIAL ANALYSIS

(a)

$ 14.50

Buy— TransTech $ 14.50

$ 14.50

2.00 0.80 0.60 3.00 0.50 0 — 6.90 $ 7.60 $38,000

0 0 0 0 0 10.00 0.20* 10.20 $ 4.30 $21,500

0 0 0 0 0 5.00 0.20 5.20 $ 9.30 $46,500

Make Sales Revenue Variable Manufacturing Cost: Circuit Board Plastic Case Alarms (4 @ $.15 each) Labor Overhead Purchase Cost Fixed Manufacturing Cost: Total Manufacturing Cost Profit per Unit Total Profit

Buy— Omega

*The $1,000 cost that will continue to be incurred, even if the product is not manufactured, divided by the 5,000 units. The company will make the most profit if the clocks are purchased from Omega Company. The company will make $8,500 less if the clocks are manufactured by MiniTek. The company will make $25,000 less if the clocks are purchased from Trans-Tech. (b) There are several important nonfinancial factors described in the case. Other factors might be identified as well. The factors described are: The company is having serious difficulty manufacturing the clocks. Therefore, it would probably be willing to have someone else manufacture the clocks, even if it cost more to do so. The most promising company appears to be Omega; however, there is a serious question about Omega’s ability to remain in business. However, the company could purchase just this one order from Omega, and then continue to search for another manufacturer, or stop manufacturing the clocks. Trans-Tech’s stringent requirements for preferred customer status, in the form of large sales requirements, appear to limit the possibilities for MiniTek to use it as a supplier. However, if MiniTek does desire to continue to offer the clocks because of their popularity, then perhaps Trans-Tech could be used in the future.

BYP 26-2 (Continued) (c) Many answers are possible, depending upon each student’s assessment of the seriousness of the issues mentioned in (b). One answer would be: The company should use Omega to manufacture the Kmart order. After that, the company should not offer the clocks any longer. Especially since the clocks are no longer very profitable, it does not seem like a good idea to keep spending money to modify the process.

BYP 26-3

REAL-WORLD FOCUS

(a) Before building the special-order new ceiling fans, company management must consider the effect of the new lines on current production capacity, existing and available channels of distribution, the effect on manufacturing efficiency, the effect on sales of current lines of product, and the supply of materials and labor. (b) Incremental analysis would provide a financial comparison of income with the special-order ceiling fans to income without the special orders.

BYP 26-4

REAL-WORLD FOCUS

The following solution is provided for the year ended July 29, 2012. (a) The statement of cash flows indicates that capital expenditures (purchase of plant assets) were $323 million in 2012, an increase of $51 million from the prior year. (b) The statement of cash flows indicates $500 million of long-term borrowings were made in 2011, but none in 2012. Note 11 indicates that interest rates on existing long-term borrowing ranged from 3.05% to 8.88% during the year. (c) The internal rate of return on these capital expenditures is approximately 5%, computed as follows: $323 million ÷ $42 million = 7.69 Note that the factor for n = 10, i = 5% is 7.72173 (Table G-2, n = 10, i = 5%). Therefore the IRR is approximated to be 5%.

BYP 26-5

To:

COMMUNICATION ACTIVITY

Maria Fierro, Supervisor

From: Subject:

, Assistant Chief Accountant Recommendation for New Asset

The quantitative analysis pertaining to this management decision is as follows: 1.

Cash payback period: $190,000 ÷ $50,000 = 3.8 years.

Annual rate of return: $12,000 ÷ [($190,000 + $0) ÷ 2] = 12.63%. Item

Amount

Years

PV Factor

Present Value

Net annual cash flows Capital investment Net present value

$ 50,000

1–5

3.60478

$180,239 (190,000) $ (9,761)

These data indicate that the cash payback period is 76% of the new asset’s useful life. This would generally be considered fairly high, indicating a less desirable project. The data also show a 12.6% annual rate of return. This is a good return but the annual rate of return does not consider the time value of money. The data also show a negative net present value of $(9,761). This indicates that the asset's rate of return is less than the company's cost of capital. I believe that the information I have presented would indicate that, based on the current data, the investment should not be made.

BYP 26-6

ETHICS CASE

(a) The stakeholders are:     

Yourself. Your spouse and children. Employees of NuComp Company. Citizens of the town where the company is presently located. The stockholders of NuComp Company.

(b) The ethical issue is:  An employee’s personal interests and those of his co-workers and the town versus the best interests of the company and its stockholders. (c) The student should recognize a conflict of interest. The company should hire an outside consultant to study and evaluate such a move rather than place one of its employees in this dilemma. You should rise above the conflict of interest and perform an objective economic evaluation, but also be prepared to remind management, should they be so oblivious, of the consequences to the employees and the town. Knowingly preparing a biased or false report is unethical.

BYP 26-7

ALL ABOUT YOU

(a) Chronic homelessness is defined as being on the streets for a year or more. (b) Homelessness costs cities money because the chronic homeless have frequent jail time, shelter costs, emergency room visits and hospital stays. Some costs per city per homeless person are: New York $40,000; Dallas $50,000; San Diego $150,000. (c) The first step is to try to identify the size of the problem by doing street counts. From this count, benchmarks can be set, enabling a reward system for meeting goals. Next is to identify what the homeless people want. What do they think they need to help them address their problem? They typically want adequate housing with some privacy. (d) It has been estimated that in New York this approach costs about $22,000 per year. New York has documented an 88% success rate (defined as not returning to the streets for five years). (e) In terms of incremental analysis, two alternatives are to either continue with the current situation, with the costs presented in part (b) or to implement the approach outlined in part (d). From a purely financial perspective the approach in (d) appears to have significant merit. Also (d) does not even take into account the intangible benefits of improving the quality of life for this segment of the population.

APPENDIX G Time Value of Money SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE G-1 (a) Interest = p X i X n I = $6,000 X .05 X 12 years I = $3,600 Accumulated amount = $6,000 + $3,600 = $9,600 (b) Future value factor for 12 periods at 5% is 1.79586 (from Table 1) Accumulated amount = $6,000 X 1.79586 = $10,775.16

BRIEF EXERCISE G-2 (1) Case A Case B

5% 6%

3 periods 8 periods

(2) Case A Case B

3% 4%

8 periods 12 periods

BRIEF EXERCISE G-3 FV = p X FV of 1 factor = $9,600 X 1.60103 = $15,369.89

BRIEF EXERCISE G-4 FV of an annuity of 1 = p X FV of an annuity factor = $78,000 X 13.18079 = $1,028,101.62

G-1

BRIEF EXERCISE G-5 FV = p X FV of 1 factor + (p X FV of an annuity factor) = ($8,000 X 2.40662) + ($1,000 X 28.13238) = $19,252.96 + $28,132.38 = $47,385.34

BRIEF EXERCISE G-6 FV = p X FV of 1 factor = $35,000 X 1.46933 = $51,426.55

BRIEF EXERCISE G-7 (a) (1) 12% 8% 5%

(b) 7 periods 11 periods 16 periods

(2) 10% 10% 3%

20 periods 7 periods 10 periods

BRIEF EXERCISE G-8 (a)

i = 10% ?

$25,000

Discount rate from Table 3 is .42410 (9 periods at 10%). Present value of $25,000 to be received in 9 years discounted at 10% is therefore $10,602.50 ($25,000 X .42410).

G-2

BRIEF EXERCISE G-8 (Continued) (b)

i = 9% ?

$25,000 $25,000 $25,000 $25,000 $25,000 $25,000

Discount rate from Table 4 is 4.48592 (6 periods at 9%). Present value of 6 payments of $25,000 each discounted at 9% is therefore $112,148.00 ($25,000 X 4.48592).

BRIEF EXERCISE G-9 i = 8% ?

$900,000

Discount rate from Table 3 is .63017 (6 periods at 8%). Present value of $900,000 to be received in 6 years discounted at 8% is therefore $567,153 ($900,000 X .63017). Messi Company should therefore invest $567,153 to have $900,000 in six years.

BRIEF EXERCISE G-10 i = 6% ? 0

$450,000 1

Discount rate from Table 3 is .62741 (8 periods at 6%). Present value of $450,000 to be received in 8 years discounted at 6% is therefore $282,334.50 ($450,000 X .62741). Lloyd Company should invest $282,334.50 to have $450,000 in eight years.

G-3

BRIEF EXERCISE G-11 i = 8% ?

$40,000 $40,000 $40,000 $40,000

$40,000 $40,000

Discount rate from Table 4 is 8.55948. Present value of 15 payments of $40,000 each discounted at 8% is therefore $342,379.20 ($40,000 X 8.55948). Robben Company should pay $342,379.20 for this annuity contract.

BRIEF EXERCISE G-12 i = 5% ?

$80,000

Discount rate from Table 4 is 5.07569. Present value of 6 payments of $80,000 each discounted at 5% is therefore $406,055.20 ($80,000 X 5.07569). Kaehler Enterprises invested $406,055.20 to earn $80,000 per year for six years.

G-4

BRIEF EXERCISE G-13 i = 5% ?

$400,000

Diagram for Principal

i = 5% ?

$22,000 $22,000 $22,000 $22,000

$22,000 $22,000

Diagram for Interest

Present value of principal to be received at maturity: $400,000 X 0.37689 (PV of $1 due in 20 periods at 5% from Table 3) .............................................................. Present value of interest to be received periodically over the term of the bonds: $22,000* X 12.46221 (PV of $1 due each period for 20 periods at 5% from Table 4) ........................................................................ Present value of bonds ...............................................................

$150,756

274,169** $424,925**

*$400,000 X .055 **Rounded. BRIEF EXERCISE G-14 The bonds will sell at a discount (for less than $400,000). This may be proven as follows: Present value of principal to be received at maturity: $400,000 X .31180 (PV of $1 due in 20 periods at 6% from Table 3) .............................................................. Present value of interest to be received periodically over the term of the bonds: $22,000 X 11.46992 (PV of $1 due each period for 20 periods at 6% from Table 4) ........................................................................ Present value of bonds ...............................................................

$124,720

252,338* $377,058*

*Rounded.

G-5

BRIEF EXERCISE G-15 i = 6% ?

$75,000

Diagram for Principal

i = 6% ?

$3,000

Diagram for Interest

Present value of principal to be received at maturity: $75,000 X .70496 (PV of $1 due in 6 periods at 6% from Table 3) ............................................................. Present value of interest to be received annually over the term of the note: $3,000* X 4.91732 (PV of $1 due each period for 6 periods at 6% from Table 4) ................................................................. Present value of note received ..................................................

$52,872.00

14,751.96 $67,623.96

*$75,000 X .04

G-6

BRIEF EXERCISE G-16 i = 4% ?

$2,500,000

Diagram for Principal

i = 4% ?

$75,000 $75,000 $75,000 $75,000

$75,000 $75,000 $75,000

Diagram for Interest

Present value of principal to be received at maturity: $2,500,000 X 0.53391 (PV of $1 due in 16 periods at 4% from Table 3) .................................................................$1,334,775 Present value of interest to be received periodically over the term of the bonds: $75,000* X 11.65230 (PV of $1 due each period for 16 periods at 4% from Table 4) ......................................................................... 873,923** Present value of bonds and cash proceeds ................................ $2,208,698** *($2,500,000 X .06 X 1/2)

**Rounded

BRIEF EXERCISE G-17 i = 5% ?

$48,850

Discount rate from Table 4 is 7.72173. Present value of 10 payments of $48,850 each discounted at 5% is therefore $377,206.51 ($48,850 X 7.72173). Frazier Company should receive $377,206.51 from the issuance of the note.

G-7

BRIEF EXERCISE G-18 i=? $4,765.50

$12,000

Present value = Future value X Present value of 1 factor $4,765.50 = $12,000 X Present value of 1 factor Present value of 1 factor = $4,765.50 ÷ $12,000 = .39713 The .39713 for 12 periods approximates the value found in the 8% column (.39711) in Table 3. Colleen Mooney will receive a 8% return.

BRIEF EXERCISE G-19 i = 11% $36,125

$75,000

n=? Present value = Future value X Present value of 1 factor $36,125 = $75,000 X Present value of 1 factor Present value of 1 factor = $36,125 ÷ $75,000 = .48166 The .48166 at 11% is found in the 7 years row. Tim Howard therefore must wait 7 years to receive $75,000.

G-8

BRIEF EXERCISE G-20 i=? ?

$1,200 $1,200 $1,200 $1,200 $1,200 $1,200

$1,200 $1,200

$10,271.38

Present value = Future amount X Present value of an annuity factor $10,271.38 = $1,200 X Present value of an annuity factor Present value of an annuity factor = $10,271.38 ÷ $1,200 = 8.55948

The 8.55948 for 15 periods is found in the 8% column in Table 4. Joanne Quick will therefore earn a rate of return of 8%.

BRIEF EXERCISE G-21 i = 9% $1,300 $1,300 $1,300 $1,300 $1,300 $1,300

$7,793.83 n=? Present value = Future amount X Present value of an annuity factor $7,793.83 = $1,300 X Present value of an annuity factor Present value of an annuity factor = $7,793.83 ÷ $1,300 = 5.99525

The 5.99525 at an interest rate of 9% is shown in the 9-year row. Therefore, Kevin will receive 9 payments.

G-9

BRIEF EXERCISE G-22 i = 9% ?

$2,700 $2,700 $2,700 $2,700 $2,700 $2,700 $2,700

Discount rate from Table 4 is 5.03295. Present value of 7 payments of $2,700 each discounted at 9% is therefore $13,588.97 ($2,700 X 5.03295). Barney Googal should purchase the tire retreading machine because the present value of the future cash flows is greater than the purchase price of the retreading machine ($12,820).

BRIEF EXERCISE G-23 i = 11% ?

$25,000

$30,000

$40,000

To determine the present value of the future cash flows, discount the future cash flows at 11%, using Table 3. Year 1 ($25,000 X .90090) = Year 2 ($30,000 X .81162) = Year 3 ($40,000 X .73119) = Present value of future cash flows

$22,522.50 24,348.60 29,247.60 $76,118.70

To achieve a minimum rate of return of 11%, Snyder Company should pay no more than $76,118.70. If Snyder pays less than $76,118.70, its rate of return will be greater than 11%.

G-10

BRIEF EXERCISE G-24 10*

–18,000

50,000

I/YR.

PMT

10.76% *2027 – 2017 BRIEF EXERCISE G-25 10

42,000

–6,500

I/YR.

PMT

8.85%

BRIEF EXERCISE G-26 40

178,000*

–8,400

I/YR.

PMT

3.55% (semiannual) *$198,000 – $20,000

G-11

BRIEF EXERCISE G-27 (a) Inputs:

7.35

16,000

PMT

–85,186.34

Answer: (b) Inputs:

10.65

16,000**

200,000*

PMT

–168,323.64

Answer:

*200 X $1,000

G-12

**$200,000 X .08

BRIEF EXERCISE G-28 (a) Note—set payments at 12 per year. Inputs: 96 7.8

42,000

PMT

–589.48

Answer: (b) Note—set payments to 1 per year. Inputs: 5 7.25

8,000

PMT

–1,964.20

Answer:

G-13