ACCOUNTING PRINCIPLES 7TH CANADIAN EDITION (VOLUME 1) BY WEYGANDT, DONALD KIESO, KIMMEL TRENHOLM, WA by QuentinAxel

ACCOUNTING PRINCIPLES 7TH CANADIAN EDITION (VOLUME 1) BY WEYGANDT, DONALD KIESO, KIMMEL TRENHOLM, WARREN NOVAK SOLUTIONS MANUAL

CHAPTER 1 Accounting in Action ASSIGNMENT CLASSIFICATION TABLE Questions

Brief Exercises

Exercises

Problems Set A

Problems Set B

1. Identify the use and users of accounting and the objective of financial reporting.

1, 2, 3

1, 2, 5

2. Compare different forms of business organization.

3. Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. 4. Describe the components of the financial statements and explain the accounting equation.

5, 6, 7, 8, 9, 10, 11

3, 4, 5, 6

4, 5, 9, 10

2, 5, 7, 11

12, 13, 14. 15, 16

7, 8, 9, 10, 11, 15

6, 7, 13

3, 4, 6, 7, 8, 11

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

17, 18

12, 13, 14

5, 8, 9, 10, 11, 12, 13

5, 7, 8, 11

6, 7, 8, 9, 10, 11

6. Prepare financial statements.

19, 20

14, 15, 16 17, 18

9, 14, 15, 16, 17

6, 7, 8, 9, 10, 11

2, 5, 7, 11

Learning Objectives

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Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Identify users and use of accounting information.

Simple

15-20

Determine forms of business organization and types of accounting standards. Determine missing items.

Simple

15-20

Moderate

20-25

Simple

20-30

Classify accounts and prepare accounting equation. Assess accounting treatment.

Moderate

20-25

Analyze transactions and calculate owner’s equity.

Simple

35-45

Analyze transactions and prepare balance sheet.

Simple

40-50

Moderate

40-50

Analyze transactions and prepare financial statements. Prepare financial statements.

Simple

35-45

10A

Determine missing amounts, and comment.

Moderate

35-45

11A

Discuss errors and prepare corrected balance sheet.

Moderate

45-55

Identify users and use of accounting information.

Simple

15-20

Determine forms of business organization and types of accounting standards. Determine missing items.

Simple

15-20

Moderate

20-25

Simple

20-30

Classify accounts and prepare accounting equation. Assess accounting treatment.

Moderate

20-25

Analyze transactions and calculate owner’s equity.

Simple

35-45

Analyze transactions and prepare balance sheet.

Simple

40-50

Moderate

40-50

Analyze transactions and prepare financial statements. Prepare financial statements.

Simple

35-45

10B

Determine missing amounts, and comment.

Moderate

35-45

11B

Discuss errors and prepare corrected balance sheet.

Moderate

45-55

3A 4A

3B 4B

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Accounting Principles, Seventh Canadian Edition

BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material

Learning Objective 1. Identify the use and users of accounting and the objective of financial reporting.

Knowledge Q1-3 BE1-1 E1-5

2. Compare different forms of business organization .

Comprehension Q1-1 Q1-2 E1-1 E1-2

Application

Q1-4 BE1-2 BE1-4 BE1-10 E1-3 E1-7

P1-2A P1-2B P1-11B

3. Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework.

Q1-6 Q1-7 E1-5

Q1-5 Q1-8 Q1-9 Q1-10 Q1-11 BE1-4 BE1-5 BE1-6 E1-4 E1-9 E1-10 P1-5A P1-5B

P1-2A P1-2B P1-3A P1-3B P1-7A P1-7B P1-11A P1-11B

4. Describe the components of the financial statements and explain the accounting equation.

Q1-12 Q1-13 Q1-14 Q1-16 BE1-11

BE1-7

BE1-8 BE1-9 BE1-10 BE1-14 BE1-15 E1-6 E1-7 E1-13 P1-4A P1-4B P1-6A P1-6B P1-7A P1-7B P1-8A P1-8B P1-11A P1-11B

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Analysis

Synthesis P1-1A P1-1B

Evaluat ion

BE1-3

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Accounting Principles, Seventh Canadian Edition

BLOOM’S TAXONOMY TABLE (Continued) Learning Objective 5. Analyze the effects of business transactions on the accounting equation.

Knowledge Q1-19 E1-5

6. Prepare financial statements.

Broadening Your Perspective

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Comprehension Q1-17 Q1-20 E1-8 E1-9 E1-10 E1-11 P1-5A P1-5B

Q1-19 Q1-20 E1-9

BYP1-1

Santé Saga BYP1- 6

1-4

Application Q1-18 BE1-12 BE1-13 BE1-14 E1-12 E1-13 P1-7A P1-7B P1-8A P1-8B P1-11A P1-11B BE1-15 BE1-16 BE1-17 BE1-18 E1-14 E1-15 E1-16 E1-17 P1-6A P1-6B P1-7A P1-7B P1-8A P1-8B P1-9A P1-9B P1-11A P1-11B BYP1-3

Analysis

Synthesis

Evaluat ion

P1-10A P1-10B

BYP1-4

BYP1-2 BYP1-5

Chapter 1

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Accounting Principles, Seventh Canadian Edition

ANSWERS TO QUESTIONS 1.

Yes. Accounting is the financial information system that provides useful financial information to every person who owns and uses economic resources or otherwise engages in economic activity.

Internal users are those who plan, organize, and run businesses and include managers, supervisors, directors, and company officers. External users work for other organizations but have reasons to be interested in the company’s financial position and performance, and include current or potential investors (owners), and creditors. Internal users may want answers to several types of questions. For example, the finance department wants to know if there is enough cash to pay the bills. The marketing department wants to know what price the business should use in selling its products to maximize profits. The human resources department wants to know how many people the business can afford to hire. The production department wants to know which product lines make the business the most profit. External users may want answers to several types of questions. For example, investors want to know if the company is earning enough to give them a return on their investment. Creditors want to know if the company is able to pay its debts as they come due. Labour unions want to know whether the owners can afford to pay increased wages and benefits. Customers are interested in whether a company will continue to honour its product warranties and support its product lines. Taxing authorities want to know whether the company respects the tax laws. Regulatory agencies want to know whether the company is respecting established rules.

The main objective of financial reporting is to provide useful information to investors and creditors (external users) to make decisions about a business. Users may be potential investors who need to decide if they wish to invest in the business or they may be creditors deciding if they wish to lend money to the business. These users want to know if the business is running successfully and can generate cash and earn a profit.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 4.

Proprietorships, partnerships and corporations are the three main forms of business organization. The main difference among these three forms is the size of the business. Since a proprietorship is a business owned by one person, it has limited resources. The size of the business is typically small and the life of the business is limited to the life of the owner. The size of businesses can expand in the case of a partnership as more owners are involved in the day to day operations of the business. In order to achieve a large size, with a diverse group of owners, the corporate form is used to have easy transferability of the ownership through the issuance of shares. Another important difference is that the corporation is a separate legal entity and pays income taxes. In addition, the corporation is the only form where owners have limited liability with respect to the business. The following are the main characteristics of each form: a)

A proprietorship is a private business with one owner who has unlimited liability for the business. The proprietorship has a limited life tied to the life of the owner. There is transparency between the owner and the business. Ultimately the owner is personally responsible to pay tax on the profit of the business.

A partnership has essentially the same characteristics as a proprietorship except that in a partnership, there is more than one owner. A partnership need not be a private business, although it usually is.

For corporations, the owners are one or more shareholders who enjoy limited liability. The corporation pays income taxes and can have an indefinite live since its ownership units, in the form of shares, are easily transferred to other owners.

Ethics is a fundamental business concept. If accountants do not have a high ethical standard, the information they produce will not have any credibility. Ethics are important to statement users because it provides them comfort that the financial information they are using is credible and reliable.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 6.

The users of financial information of publicly accountable companies have different needs than the users of financial information of private companies. Publicly traded corporations are required to to present financial information using accounting rules that are consistent with those used globally. To do this, public traded companies need to follow International Financial Reporting Standards (IFRS). Doing so helps Canadian companies compete in a global market. But following this set of policies and standards is often not essential or cost effective for privately owned businesses. The users of private company financial statements often do not require the extensive measurements and disclosures required by IFRS and thus private companies may report under Accounting Standards for Private Enterprises (ASPE).

The reporting entity concept states that economic events can be identified with a particular unit of accountability. This concept requires that the activities of the entity be kept separate and distinct from the activities of its owners and all other economic entities.

Accounting information has relevance if it makes a difference in a decision. Faithful representation shows the economic reality of events rather than just their legal form. Faithful representation is achieved if the information is complete, neutral and free from material error. Complete information includes all information necessary to show the economic reality of the transaction. Accounting information is neutral if it is free from bias intended to attain a predetermined result or encourage a particular behaviour.

Historical cost represents the amount paid in a transaction. The fair value of an asset is generally the amount an asset could be sold for in the market. On the date of purchase, fair value and cost are the same. As time progresses, the fair value changes depending on the nature of the asset.

10. In order for an event to be recognized in the accounting records, the event must change the entity’s financial position. Examples of events that are not transactions include hiring of employees and signing a lease for premises. 11. The monetary unit concept states that only transaction data that can be expressed as an amount of money may be included in the accounting records. Consequently, information that cannot be objectively measured in dollars cannot be included as transactions of the business. It is also assumed that the monetary unit is stable with respect to the value over several years. In other words, inflation is ignored.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 12. The basic accounting equation is Assets = Liabilities + Owner's Equity and the expanded accounting equation is Assets = Liabilities + Owner's Capital – Owner’s Drawings + Revenue − Expenses. The equation is the basis for recording and summarizing all of the economic events and transactions of a business. 13. (a) Assets are resources controlled by a business as a result of past events and from which future economic benefits (like cash) are expected to flow into the business. Liabilities are current obligations, arising from past events, the settlement of which will include an outflow of economic benefits (such as cash or services) Put more simply, liabilities are existing debts and obligations. Owner's equity is the residual assets in a business after deducting liabilities. (b)

Revenues and investments by the owner increase owner's equity. Drawings and expenses decrease owner’s equity.

14. Accounts Receivable represent amounts owed to the business by its customers for services performed or goods provided, but for which collection has not yet been received. It is an asset. Accounts Payable represent amounts owed by the business for services or goods received, but for which payment has not yet been made. It is a liability. 15. Profit or loss is the result of the calculation: revenues less expenses. If revenues exceed expenses, the business has experienced profit. If expenses exceed revenues, a loss is experienced by the business. 16. (a) (b)

Accounts for assets, liabilities and owner’s equity are reported on the balance sheet. Accounts for revenue and expenses are reported on the income statement.

17. Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a decrease in another asset, such as when equipment is purchased for cash (resulting in an increase in the equipment asset account which is offset by a decrease in the cash asset account).

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 18. No, this treatment is not proper. While the transaction does involve a disbursement of cash, it does not represent an expense. Expenses are decreases in owner's equity resulting from business activities entered into for the purpose of earning profit. This transaction is a withdrawal of capital from the business by the owner and should be recorded as a decrease in both cash and owner’s equity. 19. Financial statements are prepared the following order: 1) Income statement 2) Statement of owners’ equity and 3) Balance sheet. This sequence is necessary because the profit or loss calculated on the income statement is used in the statement of owner’s equity, reporting the amounts that affect the owner’s equity during the year. The ending balance on the statement of owner’s equity is the year-end balance of the owner’s capital account. That balance is needed in the Balance sheet. 20. It is likely that the use of rounded figures would not change the decisions made by the users of the financial statements. As well, presenting the information in this manner make the statements easier to read and analyze, thereby increasing their usefulness to the users.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 1-1 (a) Kind of Decision 4 3 2 5 1

User Owner Marketing manager Creditor Chief financial officer Labour union

(b) Internal or External User Internal Internal External Internal External

BRIEF EXERCISE 1-2 (a) (b)

(c)

C PP

BRIEF EXERCISE 1-3 (a)

The student is provided with the opportunity to cheat on an exam.

(b)

A production supervisor might become aware of a defect in a company’s product that is ready to ship but his/her bonus is based on volume of shipments.

(c)

A banker is able to approve a loan for an unqualified family member.

BRIEF EXERCISE 1-4 (a) (b) (c) (d) (e)

F F T T T

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BRIEF EXERCISE 1-5 (a) (b) (c) (d)

F F T T

BRIEF EXERCISE 1-6 (a) (b) (c) (d) (e)

5. 1. 4. 2. 3.

Monetary unit Historical cost Reporting entity Revenue recognition Going concern assumption

BRIEF EXERCISE 1-7

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

Component

Balance Sheet or Income Statement

Revenues Assets Owner’s equity Liabilities Expenses

Income Statement Balance Sheet Balance Sheet Balance Sheet Income Statement

BRIEF EXERCISE 1-8 (a)

$75,000 − $24,000 = $51,000 (Owner's Equity)

(b) $150,000 + $91,000 = $241,000 (Assets) (c)

$89,000 − $52,000 = $37,000 (Liabilities)

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BRIEF EXERCISE 1-9 (a)

$120,000 + $232,000 = $352,000 (Assets)

(b) $190,000 − $91,000 = $99,000 (Total liabilities) (c)

$800,000 − ($800,000 x ½) = $400,000 (Owner’s equity)

BRIEF EXERCISE 1-10 Assets = Liabilities + Owner’s Equity $850,000 = $550,000 + X Owner’s Equity = Assets − Liabilities $300,000 = $850,000 − $550,000 (a)

($850,000 + $130,000) − ($550,000 − $80,000) = $510,000 (Owner's equity)

(b) ($550,000 − $95,000) + ($300,000 − $40,000 + $100,000) = $815,000 (Assets) (c)

($850,000 + $45,000) − ($550,000 − $50,000) = $395,000 ending balance Owner’s equity $395,000 + $40,000 − $300,000 = $135,000 Profit

BRIEF EXERCISE 1-11 1. 2. 3. 4. 5. 6.

Accounts receivable Salaries payable Equipment Supplies Owner’s capital Notes payable

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BRIEF EXERCISE 1-12 Transaction (a) (b) (c) (d) (e) (f) (g) (h) (i)

Assets +$250 +500 –300 –250 +1,000 –400 NE +500 / –500 +450

Owner's Equity Drawings Revenues NE NE NE +$500 NE NE NE NE NE NE –$400 NE NE NE

Liabilities +$250 NE NE –250 NE NE NE

Capital NE NE NE NE +$1,000 NE NE

+450

Expenses NE NE –$300 NE NE NE NE

BRIEF EXERCISE 1-13 (a) (b) (c) (d)

Description Transaction Analysis Company paid in advance for rent. 2 Owner invests cash in the business. 1 Supplies are purchased on account. 3 Company provides service on account. 4

BRIEF EXERCISE 1-14 E R I E R E D

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(a) Advertising expense (b) Commission fees earned (c) Cash received from company owner (d) Amounts paid to employees (e) Services performed on account (f) Utilities incurred (g) Cash distributed to company owner

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BRIEF EXERCISE 1-15 (a) (b) (c) (d)

$68,000 − $25,000 − $50,000 = drawings $7,000 $65,000 + $33,000 − $68,000 = profit $30,000 $65,000 Ending balance 2014 = Opening balance 2015 $65,000 + $20,000 + 17,000 − $12,000 = $90,000

BRIEF EXERCISE 1-16 PRAIRIE COMPANY Income Statement Month Ended October 31, 2017 Revenues Service revenue ............................................... Expenses Advertising expense ........................................ $3,600 Rent expense ................................................... 2,600 Total expenses ............................................ Profit......................................................................

$23,000

6,200 $16,800

BRIEF EXERCISE 1-17 PRAIRIE COMPANY Statement of Owner's Equity Month Ended October 31, 2017 N. Woods, Capital, October 1 .............................. Add: Profit ......................................................... Less: Drawings.................................................... N. Woods, Capital, October 31 ............................

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$36,000 16,800 52,800 6,000 $46,800

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 1-18

PRAIRIE COMPANY Balance Sheet October 31, 2017 Assets Cash .................................................................................. $ 59,300 Accounts receivable ........................................................ 77,500 Total assets ............................................................... $136,800 Liabilities and Owner's Equity Liabilities Accounts payable ..................................................... $ 90,000 Owner's equity N. Woods, capital ....................................................... 46,800 Total liabilities and owner's equity.................... $136,800

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SOLUTIONS TO EXERCISES EXERCISE 1-1 (a)

Customer Store manager Canada Revenue Agency Supplier Labour unions Chief Financial Officer Marketing manager Loan officer

E - External I - Internal E - External E - External E - External I – Internal I - Internal E - External

(b) Can the company afford to give our members a pay raise?

How does the company’s profitability compare with other companies in the industry? E Do we need to borrow money in the near future?

What does it cost to manufacture each unit produced?

Has the company paid all income tax amounts owing?

Which product should we emphasize?

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EXERCISE 1-2 (a)

Chief Financial Officer — Can lululemon Athletica Inc. generate enough cash to expand its product line? Human Resource Manager — What is lululemon Athletica Inc.’s annual salary expense?

(b) Creditor — Does lululemon Athletica Inc. have enough cash available to make its monthly debt payments? Investor — How much did lululemon Athletica Inc. pay in dividends last year?

EXERCISE 1-3

Proprietorship F F F F F F T F

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

Partnership F F F F F T T F

Publicly Traded Corporation T F T T T T F T

EXERCISE 1-4 (a) (b) (c) (d) (e) (f)

2 1 5 6 4 3

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Faithful representation Relevance Neutrality Understandability Verifiability Comparability

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EXERCISE 1-5 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)

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

Corporation Generally accepted accounting principles (GAAP) Accounts payable Accounts receivable Owner’s equity Prepaid expense Creditor Assets International Financial Reporting Standards (IFRS) Profit Expenses Unearned revenue

EXERCISE 1-6 (a) (b) (c) (d) (e)

$6,800 - $400 - $900 - $3,500 = $2,000 $18,000 - $6,800 = $11,200 Same as (b) $11,200 $26,200 - $21,700 = $4,500 $21,200 – $11,200 = $10,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 1-7 The statement of owner’s equity is a calculation presented in statement form, therefore, we can use the following equation and solve for the unknown in this question: Owner’s equity, beginning of period + Owner’s investments + Profit (loss) for the period – Owner’s withdrawals = Owner’s equity, end of period

(a)

Owner’s equity, December 31, 2017 = $370,000 – $210,000 = $160,000 $0 + $100,000 + Profit(loss) - $50,000 = $160,000 Profit(loss) = $160,000 - $100,000 + 50,000 Profit (loss) = $110,000

(b) Owner’s equity, December 31, 2018 = $440,000 - $290,000 = $150,000 $160,000 (see a) + $40,000 + Profit(loss) - $0 = $150,000 Profit(loss) = $150,000 - $160,000 - $40,000 Profit (loss) = ($50,000) (c)

Owner’s equity, December 31, 2019 = $525,000 - $355,000 = $170,000

$150,000 (see b) + $10,000 + Profit(loss) - $60,000 = $170,000 Profit(loss) = $170,000 - $150,000 - $10,000 + $60,000 Profit (loss) = $70,000

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EXERCISE 1-8 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Accounts payable Accounts receivable Cash Equipment Interest payable Interest revenue Interest expense Investment by the owner Service revenue Prepaid rent P. Zizler, capital (opening balance) P. Zizler, drawings Salaries expense Supplies Supplies expense Unearned revenue

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(a) L A A A L Eq Eq Eq Eq A

(b) BS BS BS BS BS IS IS OE IS BS

Eq Eq Eq A Eq L

OE OE IS BS IS BS

Chapter 1

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 1-9 (a) and (b) 1. This accounting treatment is incorrect, as it violates the historical cost principle. Land was reported at its market value, when it should have been recorded and reported at cost. 2. This accounting treatment is correct. Although a commitment for future payments is put into place when the lease is signed, an exchange has not yet taken place so there is no transaction that needs to be recorded. At this time, all that is required concerning this lease is to disclose the details of the commitment in the notes to the financial statements. 3. This accounting treatment is incorrect, as it violates the reporting entity assumption. An owner’s personal transactions should be kept separate from those of the business. Instead of being charged as an expense to the business, the transaction should be recorded as drawings taken by the owner. 4. This accounting treatment is incorrect, because at the time of payment, the insurance coverage had not yet been used up. The amount should have been recorded to Prepaid Insurance. Eventually, when the coverage expires at the end of one year, the full amount of $1,200 will have become insurance expense. 5. This accounting treatment is partially correct. It is assumed that a company is a going concern, unless the notes state otherwise. Consequently, the statement in the notes that the company is a going concern need not be added. On the other hand, the company is required to make the disclosure that it is following ASPE.

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EXERCISE 1-10 (a) and (b) 1. This is a transaction that should be recorded in the accounts as there has been an exchange of assets. Cash was reduced and equipment was increased. The historical cost of $10,000 should be used when recording this transaction. 2. This is a transaction that should be recorded in the accounts as there has been an exchange of assets. Cash was reduced and equipment was increased. The transaction is to be recorded in Canadian funds in order to follow the monetary unit concept, so the amount that should be used when recording this transaction is $5,200. 3. This is a transaction that should be recorded in the accounts because a performance obligation has been completed related to a contract with a customer and accounts receivable should be increased as the company now has a right to payment. The amount of $4,000 should be used when recording this transaction. 4. This is not a transaction as an exchange has not yet occurred. 5. This is a transaction that should be recorded in the accounts because an asset, cash has increased and a liability has been created (unearned revenue) to perform services to the customer at a future date. The amount of $4,000 should be used in when recording this transaction.

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EXERCISE 1-11 1.

Purchase inventory on credit. Increases an asset (inventory) and increases a liability (accounts payable).

Investment made by owner. Increases an asset (cash) and increases owner’s equity (owner’s capital).

Payment of accounts payable. Decreases an asset (cash) and decreases a liability (accounts payable).

Withdrawal of cash by the owner or payment of an expense. Decreases an asset (cash) and decreases owner’s equity (drawings or expense).

Record salaries due to employees. Increases a liability (salaries payable) and decreases owner’s equity (expense).

Collect an accounts receivable. Increases one asset (cash) and decreases another asset (accounts receivable).

Note: These are examples. There are other correct responses.

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EXERCISE 1-12 Assets

Trans. Cash Bal. $12,000 1 –3,000 2 +12,000 3 –3,000 4 –2,500 5 +7,000 6 –1,000 7 –5,000 8 –2,100 9 No entry 10 Total $14,400

+ Accounts Rec.

= + Equipment

$18,000

Liabilities + Accounts Payable $4,000

+ Note Payable

Owner's Equity + G. Brister Capital $26,000

G. Brister Drawings

+ Revenues Expenses

+$20,000

+$23,000

–12,000 –$3,000 –2,500 +$7,000 –1,000 –$5,000

+$6,000

+$23,000

+1,500 +$3,000

–2,000

–100

+$18,000

–1,500 –$5,600

+$26,000

–$5,000

+$7,000

$43,400 = $ 43,400

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Accounting Principles, Seventh Canadian Edition

EXERCISE 1-13 (a)

Owner invested $18,000 cash and equipment with the fair value of $6,000 in the business. 2. Purchased equipment for $8,000, paying $4,000 in cash with the balance of $4,000 on account. 3. Prepaid for insurance for $750 cash. 4. Earned $8,300 in service revenue, receiving $3,500 cash with the remaining $4,800 on account. 5. Paid $2,000 cash on accounts payable. 6. B. Star withdrew $3,300 cash for personal use. 7. Paid $800 cash for rent for the month of July. 8. Collected $1,350 cash from customers on account. 9. Paid salaries of $2,700. 10. Incurred $420 of utilities expense on account.

(b)

Revenues ................................................................... Rent expense ............................................................. Salaries expense........................................................ Utilities expense ........................................................ Profit...........................................................................

(c)

Investment ................................................................. $24,000 Profit........................................................................... 4,380 Drawings .................................................................... (3,300) Increase in owner’s equity ........................................ $25,080

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$8,300 (800) (2,700) (420) $4,380

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EXERCISE 1-14 STAR & CO. Income Statement Month Ended July 31, 2017 Revenues Service revenue ............................................... Expenses Salaries expense .............................................. $2,700 Rent expense ................................................... 800 Utilities expense .............................................. 420 Total expenses ............................................ Profit......................................................................

$8,300

3,920 $4,380

STAR & CO. Statement of Owner's Equity Month Ended July 31, 2017 B. Star, Capital, July 1.......................................... Add: Investments .............................................. $24,000 Profit .......................................................... 4,380 Less: Drawings.................................................... B. Star, Capital, July 31........................................

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28,380 28,380 3,300 $25,080

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EXERCISE 1-14 (Continued)

STAR & CO. Balance Sheet July 31, 2017 Assets Cash .................................................................................. Accounts receivable ........................................................ Prepaid insurance ............................................................ Equipment......................................................................... Total assets ...............................................................

$ 9,300 3,450 750 14,000 $27,500

Liabilities and Owner's Equity Liabilities Accounts payable ..................................................... $ 2,420 Owner's equity B. Star, Capital ............................................................. 25,080 Total liabilities and owner's equity...................... $27,500

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EXERCISE 1-15 ATLANTIC CRUISE CO. Income Statement Year Ended May 31, 2017 Revenues Ticket revenue ............................................ $350,640 Expenses Salaries expense......................................... $126,950 Maintenance expense................................. 82,870 Other expenses........................................... 66,500 Interest expense ......................................... 20,960 Advertising expense................................... 3,640 Insurance expense ..................................... 2,566 Total expenses ....................................... 303,486 Profit................................................................. $ 47,154

ATLANTIC CRUISE CO. Statement of Owner's Equity Year Ended May 31, 2017 I. Temelkova, Capital, June 1, 2016 ................ Add: Investments .......................................... Profit ..................................................... Less: Drawings............................................... I. Temelkova, Capital, May 31, 2017 ...............

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$311,182 $5,847 47,154

53,001 364,183 33,950 $330,233

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Accounting Principles, Seventh Canadian Edition

EXERCISE 1-16 ATLANTIC CRUISE CO. Balance Sheet May 31, 2017 Assets Cash ....................................................................... Accounts receivable ............................................. Supplies ................................................................. Prepaid insurance ................................................. Building.................................................................. Equipment.............................................................. Total assets ..................................................

$ 20,080 42,950 16,800 1,283 122,570 553,300 $756,983

Liabilities and Owner's Equity Liabilities Notes payable........................................................ $379,000 Accounts payable ................................................. 47,750 Total liabilities .............................................. 426,750 Owner's equity I. Temelkova, Capital............................................. 330,233 Total liabilities and owner's equity .................. $756,983

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EXERCISE 1-17 (a)

Revenues—camping fees ........................................ $150,000 Revenues—general store......................................... 40,000 Total revenue..................................................... 190,000 Operating expenses ................................................. 150,000 Profit .......................................................................... $ 40,000

(b)

J. Cumby, Capital, April 1, 2016 .............................. Add: Profit .............................................................. Less: J. Cumby, Drawings ...................................... J. Cumby, Capital, March 31, 2017 ..........................

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$17,000 40,000 57,000 5,000 $52,000

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EXERCISE 1-17 (Continued) (c) DEER PARK Balance Sheet March 31, 2017 Assets Cash ........................................................................... $ 9,400 Accounts receivable ...................................................... 21,000 Supplies ..................................................................... 2,500 Prepaid insurance ..................................................... 600 Equipment .................................................................. 110,000 Total assets ........................................................... $143,500 Liabilities and Owner's Equity Liabilities Notes payable ....................................................... $ 70,000 Accounts payable ..................................................... 11,500 Unearned revenue ................................................... 10,000 Total liabilities ...................................................... 91,500 Owner's equity J. Cumby, Capital ................................................... 52,000 Total liabilities and owner's equity .................. $143,500

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SOLUTIONS TO PROBLEMS PROBLEM 1-1A 1. (a) In deciding to extend credit to a new customer, Pierson Industries is an external user of the accounting information of its customers. (b) Pierson Industries would focus its attention on the information about the customer’s economic resources and claims to those resources. The terms of the credit they are extending to customers, requires collection in a short period of time. Funds used to pay Pierson Industries would come from cash on hand. The balance sheet will show if the new customer has enough cash to meet its obligations, including those to Pierson Industries. 2. (a) The owner, Dean Gunnerson is an internal user of the accounting information of Toys and Sports Co. (b) When deciding which manufactured products generate the most profit, the information that will be most relevant to the owner will be shown on the income statement. The income statement reports the past performance of the business in terms of its revenue, expenses and profit. Using the details of revenue and expenses at a product line level, the owner can establish which product line is more profitable. 3. (a) The president of Hi-tech Adventure is an internal user of the accounting information. (b) In order to determine if Hi-tech Adventure is holding enough cash to buy additional equipment, the president should examine the business’s economic resources and claims to those resources in order to determine if the necessary cash is available to meet obligations and address the equipment purchase plans.

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PROBLEM 1-1A (Continued) 4. (a) Standen Bank is an external user of the accounting information of the small business that is the loan applicant. (b) In deciding whether to extend a loan, Standen Bank is interested in two things—the ability of the company to make interest payments on an annual basis for the next five years and the ability to repay the principal amount at the end of five years. In order to evaluate both of these factors, the focus should be on business’s economic resources and claims to those resources in order to determine if the necessary cash is available to meet obligations. As well, Standen Bank will look at the economic performance of the business that should generate the necessary cash from its operations on an ongoing basis. This will be the most important factor in determining if the company will survive and be able to repay the loan. Taking It Further: When making decisions based on the financial statements of a business, users need to rely on the faithful representation of the financial statements. The individual preparing the financial statements must adhere to the highest standards of ethical behaviour to ensure that the decision maker is not hurt by false or misleading financial information.

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PROBLEM 1-2A 1. (a) Tom will likely operate his walking service as a proprietorship because he is planning on operating it for a short time period and a proprietorship is the simplest and least costly business organization to form and dissolve. (b) ASPE will likely be the accounting standard followed, as it is simpler to follow. 2. (a) Joseph and Sabra might form a partnership as it is a small operation and would be easy to set up. However, a corporation may offer benefits that the partnership will not offer. The corporation will give them limited liability. Also a corporation may be the best form of business for them because they plan to raise funds in the coming year. It is easier to raise funds in a corporation. A corporation may also receive more favourable income tax treatment. (b) ASPE will likely be the accounting standard followed, as it is simpler to follow. The business would not be a publicly traded corporation requiring the use of IFRS. 3. (a) The professors should incorporate their business because of their concerns about the legal liabilities. A corporation is the only form of business that provides limited liability to its owners. (b) ASPE will likely be the accounting standard followed, as it is simpler to follow. The business would not be a publicly traded corporation requiring the use of IFRS.

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PROBLEM 1-2A (Continued) 4. (a) Abdur would likely form a corporation because he needs to raise funds to invest in inventories and equipment. He has no savings or personal assets and it is normally easier to raise funds through a corporation than through a proprietorship or partnership. (b) ASPE will likely be the accounting standard followed, as it is simpler to follow. The business would not be a publicly traded corporation requiring the use of IFRS.

Taking It Further: The advantages of starting a business as a proprietorship and later incorporating the business include: the ease of formation, simplicity and reduced costs. As the business grows and the additional costs and administration that are required of corporations are justified, incorporating the business provides additional advantages.

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PROBLEM 1-3A (a)

Total assets (Jan. 1, 2015) ...................................... Total liabilities (Jan. 1, 2015) .................................. Total owner's equity (Jan. 1, 2015) .........................

$40,000 0 $40,000

(b)

Total liabilities (Dec. 31, 2015 ................................. $50,000 Total owner's equity (Dec. 31, 2015) (c) below ...... 75,000 Total assets (Dec. 31, 2015) .................................... $125,000

(c)

Total owner's equity (Dec. 31, 2015) ...................... Equal to owner's equity (Jan. 1, 2016) given

$75,000

(d)

Total owner's equity (Dec. 31, 2015) ...................... Total owner's equity (Jan. 1, 2015)......................... Increase in owner's equity ......................................

$75,000 40,000 $35,000

Increase in owner's equity ...................................... Less: Investments ................................................... Add: Drawings ......................................................... Profit .........................................................................

$35,000 (7,000) 15,000 $43,000

(e)

Total revenues ......................................................... $132,000 Less: Profit (d) above .............................................. (43,000) Total expenses......................................................... $ 89,000

(f)

Total liabilities (Jan. 1, 2016) .................................. $50,000 Total owner's equity (Jan. 1, 2016)......................... 75,000 Total assets (Jan. 1, 2016) ...................................... $125,000 Also same as (b) above

(g)

Total assets (Dec. 31, 2016) ................................... Total owner's equity (Dec. 31, 2016)...................... Total liabilities (Dec. 31, 2016) ...............................

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$140,000 97,000 $ 43,000

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PROBLEM 1-3A (Continued) (h)

Total owner's equity (Dec. 31, 2016) ...................... Total owner's equity (Jan. 1, 2016) (c) above ........ Increase in owner's equity ......................................

$97,000 75,000 $22,000

Increase in owner's equity ...................................... Less: Profit................................................. $40,000 Investments ...................................... 0 Drawings ..................................................................

$22,000

(i)

Profit......................................................................... Total expenses ........................................................ Total revenues .........................................................

$40,000 95,000 $135,000

(j)

Total assets (Jan. 1, 2017) ........................................ $140,000 Equal to total assets (Dec. 31, 2016) given

(k)

Total liabilities (Jan. 1, 2017) .................................... Equal to total liabilities (Dec. 31, 2016) (g) above

$43,000

(l)

Total owner's equity (Jan. 1, 2017............................ Equal to total owner's equity (Dec. 31, 2016) given

$97,000

40,000 $18,000

(m) Total assets (Dec. 31, 2017) ................................... Total liabilities (Dec. 31, 2017)............................... Total owner's equity (Dec. 31, 2017) .....................

$172,000 65,000 $107,000

(n) Total owner's equity (Dec. 31, 2017) ..................... Total owner's equity (Jan. 1, 2017) (l) above ........ Increase in owner's equity .....................................

$107,000 97,000 $ 10,000

Increase in owner's equity ..................................... Less: Profit (o) below .............................. ($31,000) Add: Drawings ........................................ 36,000 Investments ............................................................

$10,000

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5,000 $15,000

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PROBLEM 1-3A (Continued) (o)

Total revenues ........................................................... $157,000 Less: Total expenses ................................................ 126,000 Profit ............................................................................ $ 31,000

Taking It Further: In order to decide if an owner is able to withdraw cash from the business, the owner needs to find out if her/his capital account is sufficiently high to cover the drawings charge. S/He also needs to know that there is sufficient cash available to make the withdrawal and still have enough cash to meet the obligations of the business.

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PROBLEM 139A (a) and (b) ($ in thousands) 1. L 2. A 3. A 4. R 5. A 6. E 7. E 8. C 9. D 10. E 11. E

(c)

BS BS BS IS BS IS IS OE OE IS IS

Accounts payable Accounts receivable Cash Consulting revenue Equipment Interest expense Rent expense S. Parker, capital, January 1 S. Parker, drawings Salaries expense Utilities expense

$ 810 900 3,500 15,730 5,700 790 4,800 6,600 3,900 3,200 350

(in thousands) Revenue – Expenses = Profit Revenue = $15,730 Expenses ($4,800 + $790 +$3,200 + $350) = $9,140 Profit ($15,730 - $9,140) = $6,590

Taking It Further: It is important for Parker Information Technology Company to keep track of its different types of expenses to ensure that management is able to get the necessary information to make decisions concerning where improvements in performance can be made. The Company can also determine, by comparing the expenses with the revenues, if the amount of expenses is reasonable.

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PROBLEM 1-5A 1. (a) This accounting treatment is incorrect as people involved with the organization are not an asset of the business to be placed on the balance sheet. There is no reasonable way that a measurement of their value could be made. (b) The entries to record people as assets should be removed from the accounting records. 2. (a) This accounting treatment is incorrect as it violates the historical cost concept. The land and building should be recorded at $350,000, the amount paid on purchase. If the company was in the business of buying and reselling land and buildings, they may be able to value these items at fair value but that does not appear to be the case here. It appears that Sharon is attempting to deliberately overstate her assets to get a loan. These actions would be considered professionally unethical. (b) The entry to increase the carrying value of the land and building from $350,000 to $500,000 should be removed from the accounting records of Barton Industries. 3. (a) This accounting treatment is incorrect as it violates the reporting entity concept. The electric guitar is a personal asset, and not an asset of the business. (b) The entry to record the purchase of the guitar should be removed from the equipment account. Instead this should be recorded as a drawing by Will Viceira. 4. (a) West Spirit Oil Corp. does not have a choice in adopting IFRS because it is a publicly traded corporation. (b) The 2017 financial statements must be prepared in accordance with the International Financial Reporting Standards (IFRS).

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PROBLEM 1-5A (Continued) Taking It Further: It is important for private and public companies to follow generally accepted accounting principles (GAAP) because a common set of standards, applied by all businesses and entities, provides financial statements which are reasonably comparable. Without a common set of standards, each enterprise could develop its own theory structure and set of practices, resulting in non-comparability among enterprises, to the detriment of financial statement users.

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PROBLEM 1-6A (a)

PETRONIC ACCOUNTING SERVICES Assets

Transaction June 4 6 8

Cash +$4,376 -1,050

Acc. Rec.

Supplies

Furniture

Acc. Payable

+$3,160

Owner's Equity

+ F. Petronick Capital +$4,376

– F. Petronick Drawings

+900

-128

Revenues

Expenses

-1,580 +$344

-49

–

+$1,865

-1,580

+3,160

+1,865

Total

Liabilities +

-$1,050

15 15

+344 -49

-900 -$128

$2,469

$965

$344

$3,160

$1,924

+$4,376

-$128

+$1,865

–$1,099

$6,938 = $6,938 Note: Events at other dates than the transactions above are not transactions or are personal transactions of F. Petronick.

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PROBLEM 1-6A (Continued) (b) Capital Investment ......................................................... $4,376 Less: Drawings......................................................... 128 4,248 Add: Revenue .......................................................... 1,865 Less: Expenses ........................................................... (1,099) F. Petronick, Capital, June 30 ....................................... $5,014 Taking It Further: $144 should be reported as an asset, Supplies, on the June 30 balance sheet. This is the amount of supplies on hand. $200 should be reported as an expense. This is the cost of supplies that were actually used in the month of June.

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PROBLEM 1-7A (a)

LETOURNEAU LEGAL SERVICES Assets +

Transaction 1

Cash

Acc. Rec.

Liabilities

Supplies

Equipment

Acc. Payable

+ Unearned Revenue

Owner's Equity

+ +

–

Note Payable

A. LeTourneau Capital

A. LeTourneau Drawings

Revenues

Expenses

2 3

+$50,000

4 5

–2,500

–$2,500

6 7

–10,000

+10,000

8 9

+$400 –3,000

+400 +$6,500

+$3,500

+2,500

–500

–400

Total

$36,100

+$3,500 +$2,500 -500 –400

$3,500

$400

$16,500

$2,500

$3,500

$50,000

$3,500

$56,500 = $56,500 Solutions Manual

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PROBLEM 1-7A (Continued) (a) (Continued) Notes: Items 1 (March 4), 2 (March 7), and 4 (March 14) are not relevant to the business entity. They are personal transactions. Item 6 (March 19) is not recorded, because the transaction has not yet been completed. There is no expense, nor liability, until he begins working. (b)

Profit = Revenues − Expenses = ($3,500 − $3,000) = $500 Owner’s Equity = Investment − Drawings + Profit = ($50,000 − $0 + $500) = $50,500

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PROBLEM 1-7A (Continued) (c) LETOURNEAU LEGAL SERVICES Balance Sheet March 31, 2017 Assets Cash .......................................................................... Accounts receivable ................................................ Supplies .................................................................... Equipment.................................................................

$36,100 3,500 400 16,500

Total assets ..........................................................

$56,500

Liabilities and Owner's Equity Note payable ................................................................. $ 3,500 Unearned revenue ..................................................... 2,500 Total liabilities...................................................... 6,000 Owner’s Equity A. LeTourneau, Capital ............................................ 50,500 Total liabilities and owner's equity ........................ $56,500 Taking It Further: Recognition of an event or transaction should take place only when there has been a change in the financial position of the company. In other words, if a transaction meets the definition of an asset, liability, equity, revenue or expense and has a measureable dollar amount, it should be recognized in the accounting records. As well, personal transactions must be excluded, to comply with the reporting entity concept.

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PROBLEM 1-8A (a)

Bal Sept. 4 5 7 12 15 15 15 18 20 26 29 30

Izabela Jach, MD Accounts SupEquipAccounts Notes I. Jach, I. Jach, Cash + Receivable + plies + ment = Payable + Payable + Capital – Drawings + Revenues – Expenses $3,000 + $1,500 + $600 + $7,500 = $5,500 $3,000 + $4,100 +800 −800 +7,700 +2,800 +$10,500 −2,900 -2,900 −800 +2,300 +1,500 –2,800 –$2,800 –1,900 –1,900 –275 –275 +700 –700 −1,000 –$1,000 +3,000 +3,000 +325 –325 $5,525 +10,000 +10,000 + $12,800 + $600 + $9,800 = $4,425 + $6,000 + $4,100 – $1,000 + $20,500 – $5,300

$28,725 = $28,725 Note that the September 28 transaction is not recorded, because the work will not commence until October.

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PROBLEM 1-8A (Continued) (b) IZABELA JACK, MD Income Statement Month Ended September 30, 2017 Revenues Service revenue ....................................................... $20,500 Expenses Advertising expense.................................... $ 275 Rent expense .................................................. 1,900 Salaries expense ............................................. 2,800 Utilities expense............................................. 325 Total expenses ...................................................... 5,300 Profit..............................................................................$15,200

IZABELA JACH, MD Statement of Owner's Equity Month Ended September 30, 2017 I.Jach, Capital, September 1 ........................................ $4,100 Add: Profit.................................................................. 15,200 19,300 Less: Drawings .......................................................... 1,000 I. Jach, Capital, September 30 .............................. $18,300

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PROBLEM 1-8A (Continued) (b) (Continued) IZABELA JACH, MD Balance Sheet September 30, 2017 Assets Cash ........................................................................... Accounts receivable ................................................. Supplies on hand ...................................................... Equipment..................................................................

$ 5,525 12,800 600 9,800

Total assets ........................................................... $28,725 Liabilities and Owner's Equity Liabilities Accounts payable ................................................. $ 4,425 Notes payable ....................................................... 6,000 Total liabilities ...................................................... 10,425 Owner's Equity L. Anderson, Capital ............................................... 18,300 Total liabilities and owner's equity .................... $28,725 Taking It Further: When an item is purchased on account, payment usually must be made in 30 days. If a note payable is used, payment will be delayed until the maturity date of the note, which is typically longer than 30 days. Although this will likely mean that interest will also have to be paid, the cash remains in the business longer than if the item had been purchased on account.

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PROBLEM 1-9A PAVLOV’S HOME RENOVATIONS Income Statement Year Ended December 31, 2017 Revenues Service revenue ............................................................ $153,750 Expenses Interest expense .......................................... Insurance expense ...................................... Supplies expense ........................................ Salaries expense.......................................... Operating expenses .................................... Total expenses ........................................

$ 1,195 3,375 20,095 88,230 3,545 116,440

Profit .................................................................................... $ 37,310

PAVLOV’S HOME RENOVATIONS Statement of Owner's Equity Year Ended December 31, 2017 J. Pavlov, Capital, January 1 ............................................ Add: Profit ....................................................................... Less: J. Pavlov, Drawings ............................................... J. Pavlov, Capital, December 31.......................................

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$45,850 37,310 83,160 44,800 $38,360

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PROBLEM 1-9A (Continued) PAVLOV’S HOME RENOVATIONS Balance Sheet December 31, 2017

Assets Cash ................................................................................... Accounts receivable ......................................................... Supplies ............................................................................. Prepaid insurance ............................................................. Equipment.......................................................................... Vehicles .............................................................................

$ 8,250 10,080 595 1,685 29,400 42,000

Total assets ................................................................... $92,010 Liabilities and Owner's Equity Liabilities Notes payable ................................................................. $30,800 Accounts payable ......................................................... 7,850 Unearned revenue ........................................................... 15,000 Total liabilities .............................................................. 53,650 Owner's equity J. Pavlov, Capital ............................................................ 38,360 Total liabilities and owner's equity ............................ $92,010 Taking It Further: In order to prepare the statement of owner’s equity, you need to have the amount of the profit or loss for the year. This is why the income statement is prepared first. The statement of owner’s equity is prepared next in order to have the ending capital balance for the balance sheet.

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PROBLEM 1-52A $91,300 (from ii) − $9,500 − $5,300 − $41,500 = $35,000 (ii) Total liabilities and owner’s equity = $91,300 (iii) $43,800 − $26,000 = $17,800 (iv) $91,300 − $43,800 = $47,500 (v) $59,500 − $32,000 − $1,500 = $26,000 (vi) $95,000 − $59,500 = $35,500 (vii) $62,500 − $22,000 − $35,500 (from viii) = $5,000 (viii) $35,500 from income statement (from vi) (ix) $62,500 − $47,500 (from x) = $15,000 (x) $47,500 from the balance sheet (from iv)

(a) (i)

(b) In preparing the financial statements, the first statement to be prepared is the income statement. The profit figure is used in the statement of owner’s equity to calculate the ending balance of capital. The balance sheet is then completed, using the balance of capital as calculated in the statement of owner’s equity. Taking It Further: The balance sheet, which is sometimes referred to as the statement of financial position, reports balances at a specific point in time – as of the last day of the reporting period. , The income statement on the other hand, reports the results of revenue and expense business transactions for a period of time, whether it is a month, a quarter or a fiscal year. The statement of owner’s equity also reports for the period of time, those items that have increased or decreased capital. Consequently, the income statement and the statement of owner’s equity are for the period of time ending on a specific date and the balance sheet is at that specific date.

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PROBLEM 1-11A (a) 1.

The land should be recorded at cost of $36,000 until it is sold. The increase in value is not recognized until the land is sold. (historical cost concept)

The accounts receivable should be recorded in Canadian dollars not in Chinese yuan (monetary unit concept). Accounts receivable should have the corrected balance of $7,000 Canadian.

Equipment is an asset and not a liability. The entry in the liabilities for equipment of $58,000 must be removed and appear instead under assets. Supplies are also assets, not liabilities. This item will also have to be removed from the liabilities and added to assets.

Notes payable are liabilities, not assets. The company has an obligation to pay the note in the future. The entry in the assets for notes payable must be removed from assets and instead should appear under liabilities.

C. Dryfuss, capital is an equity account, not an asset. His investment in the company is an asset to him, but for the company it is equity (reporting entity concept). The entry in the assets for C. Dryfuss, capital should be removed and instead appear under owner’s equity section of the balance sheet. The ‘plug’ figure needs to be removed. The accounting equation states that Assets = Liabilities + Owner’s Equity. Dryfuss needs to make the corrections above in order to determine the Owner’s Equity balance.

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PROBLEM 1-11A (Continued) (b) REFLECTIONS BOOK SHOP Balance Sheet April 30, 2017 Assets Cash ................................................................................ Accounts receivable ($5,000 + $2,000) .......................... Supplies ........................................................................... Land ................................................................................. Equipment........................................................................ Building............................................................................ Total assets .................................................................

$ 10,000 7,000 1,000 36,000 58,000 110,000 $222,000

Liabilities and Owner's Equity Liabilities Notes payable ............................................................... $120,000 Accounts payable ......................................................... 15,000 Total liabilities ............................................................ 135,000 Owner's equity: C. Dryfuss, capital ........................................................... 87,000 Total liabilities and owner's equity .......................... $222,000

Taking It Further: All transactions affect a minimum of two financial statement items to ensure that the accounting equation always remains in balance – what we do to one side of the equation must be done to the other side. For example, when cash is decreased the reason why the cash is decreased is also recorded. Thus, an increase in another asset or a decrease in a liability or owner’s equity must also be recorded.

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PROBLEM 1-1B 1. (a) The owner, Samuel Colt is an internal user of the accounting information of Organics To You. (b) When deciding which retail products, in this case pasta, generate the most profit, the owner will be interested in the economic performance of the business as shown on the income statement. The income statement reports the past performance of the business in terms of its revenue, expenses and profit. Using the details of revenue and expenses at a product line level, the owner can establish which pasta is more profitable to its retail chain of stores. 2. (a) In deciding to extend credit to a new customer, Backroads Company is an external user of the accounting information of its customers. (b) Backroads Company would focus its attention on the information about Europe Tours Company’s economic resources and claims to those resources. The terms of the credit extended to customers, requires collection in a short period of time. Funds used to pay Backroads Company would come from cash on hand. The balance sheet will show if the new customer has enough cash to meet its obligations, including those to Backroads Company. 3. (a) The senior partner of Accountants R Us is an internal user of the accounting information. (b) In order to determine if the partnership is holding enough cash to increase the amount of partners’ drawings and still have enough cash to expand its operations, the senior partner should examine the business’s economic resources and claims to those resources in order to determine if the necessary cash is available to meet obligations and address the drawings and expansion plans.

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PROBLEM 1-1B (Continued)

Taking It Further: When making decisions based on the financial statements of a business, users need to rely on the faithful representation of the financial statements. To ensure this principle can be met, the individual preparing the financial statements must adhere to the highest standards of ethical behaviour so that the decision maker is not hurt by false or misleading financial information.

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PROBLEM 1-2B 1. (a) The computer science students should incorporate their business because of their concerns about legal liabilities. A corporation is the only form of business that provides limited liability to its owners. (b) ASPE will likely be the accounting standards followed, as they are simpler to follow. The business would not be a publicly traded corporation requiring the use of IFRS. 2. (a) Shamira should run her small cupcake shop as a proprietorship because this is the simplest and least costly form of business organization to establish and eventually dissolve. She is the only person involved in the business and is planning to operate for a limited time. (b) ASPE will likely be the accounting standards followed, as they are simpler to follow. 3. (a) Robert and Tom should form a corporation when they combine their operations. This is the best form of business for them to choose because they expect to raise funds in the coming year and it is easier to raise funds in a corporation. A corporation may also receive more favourable income tax treatment. (b) ASPE will likely be the accounting standards followed, as they are simpler to follow. The business would not be a publicly traded corporation requiring the use of IFRS. 4. (a) A partnership would be the most likely form of business for Darcy, Ellen and Meg to choose. It is simpler to form than a corporation and less costly. (b) ASPE will likely be the accounting standards followed, as they are simpler to follow.

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PROBLEM 1-2B (Continued)

Taking It Further: The advantages of starting a business such as a partnership and later incorporating the business include: ease of formation, simplicity, and reduced costs. As the business grows and the additional costs and administration that are required of corporations are justified, incorporating the business provides additional advantages.

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PROBLEM 1-3B (a)

Total owner's equity (Jan. 1, 2015)......................... Total liabilities (Jan. 1, 2015) .................................. Total assets (Jan. 1, 2015).......................................

$60,000 0 $60,000

(b)

Total assets (Dec. 31, 2015) .................................... Total owner's equity (Dec. 31, 2015) ...................... Total liabilities (Dec. 31, 2015)................................

$75,000 45,000 $30,000

(c)

Total owner's equity (Dec. 31, 2015) ...................... Total owner's equity (Jan. 1, 2015)......................... Decrease in owner's equity .....................................

$45,000 60,000 $15,000

Decrease in owner's equity .................................... Add: Investments..................................................... Less: Drawings ........................................................ Loss ..........................................................................

$15,000 5,000 0 $20,000

(d)

Total expenses ........................................................ $120,000 Less: Loss................................................................ (20,000) Total revenues ......................................................... $100,000

(e)

Total liabilities (Jan. 1, 2016) .................................... Equal to total liabilities (Dec. 31, 2015) (b) above

(f)

Total owner's equity (Jan. 1, 2016)........................... $45,000 Equal to total owner's equity (Dec. 31, 2015) given

(g)

Total assets (Dec. 31, 2016) ................................... Equal to total assets (Jan. 1, 2017) given

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$30,000

$127,000

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PROBLEM 1-3B (Continued) (h)

Total assets (Dec. 31, 2016) (g) above .................. Total liabilities (Dec. 31, 2016)............................... Total owner's equity (Dec. 31, 2016)......................

$127,000 45,000 $ 82,000

(i)

Total owner's equity (Dec. 31, 2016) ...................... Total owner's equity (Jan. 1, 2016) (f) above ......... Increase in owner's equity ......................................

$82,000 45,000 $37,000

Increase in owner's equity ...................................... Less: Profit............................................... $(35,000) Add: Drawings.......................................... 10,000 Investments .............................................................

$37,000

(j)

Profit......................................................................... Add: Total expenses ............................................... Total revenues .........................................................

$ 35,000 95,000 $130,000

(k)

Total liabilities (Jan. 1, 2017)....................................... $45,000 Equal to total liabilities (Dec. 31, 2016) given

(l)

Total owner's equity (Jan. 1, 2017) ............................. $82,000 Equal to total owner's equity (Dec. 31, 2016) (h) above

(25,000) $12,000

(m) Total assets (Dec. 31, 2017) ...................................... $170,000 Total owner's equity (Dec. 31, 2017)......................... 100,000 Total liabilities (Dec. 31, 2017) ................................... $ 70,000 (n) Total owner's equity (Dec. 31, 2017) ......................... $100,000 Total owner's equity (Jan. 1, 2017) (l) above............. 82,000 Increase in owner's equity ......................................... $ 18,000 Increase in owner's equity ..................................... Less: Profit............................................... $(30,000) Less: Investments .................................. .. 0 Drawings .................................................................

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$18,000 (30,000) $12,000

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PROBLEM 1-3B (Continued) (o) Total revenues ........................................................... $160,000 Less: Profit................................................................. 30,000 Total expenses........................................................... $130,000 Taking It Further: In order to decide if an owner needs to invest additional cash in the business, the owner needs to determine if there is sufficient cash available to pay the obligations of the business. Quite often when a business is new, cash infusions are needed to fund the purchase of operating assets. Once the business is established and profitable, the owner is able to start making withdrawals.

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PROBLEM 1-4B (a) and (b) ($ in thousands) 1. L 2. A 3. A 4. A 5. E 6. E 7. A 8. L 9. A 10. E 11. A 12. L 13. R 14. R 15. L 16. C 17. D 18. L

(c)

BS BS BS BS IS IS BS BS BS IS BS BS IS IS BS OE OE BS

Accounts payable Accounts receivable Cash Equipment Interest expense Insurance expense Land and buildings Notes payable Prepaid insurance Operating expenses Other assets Other liabilities Other revenue Rent revenues Salaries payable T. Yuen, capital, January 1 T. Yuen, drawings Unearned rent revenue

$195 160 120 600 45 15 1,495 950 30 871 615 396 52 1,295 125 934 20 24

($ in thousands) Revenue – Expenses = Profit Revenue ($1,295 + $52) = $1,347 Expenses ($45 + $15 +$871) = $931 Profit ($1,347 - $931) = $416

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PROBLEM 1-4B (Continued) Taking It Further: It is important for Paradise Mountain Family Resort to keep track of its different types of expenses to ensure that management is able to get the necessary information to make decisions concerning where improvements in performance can be made. As well, separate expenses can be compared with their related revenues to determine the amount of profit from the different sources of revenue activity for the business.

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PROBLEM 1-5B 1. (a) The accounting treatment is incorrect. The president is a person outside of the organization and not an asset of the business so the impact of his death should not be recorded. (b) The entry to record the impact of the death of the president should be removed from the accounting records. Users of the statements would be aware of the death and no mention need be made in the financial statements notes. 2. (a) The accounting treatment is incorrect as it violates the historical cost concept. The equipment should be recorded at the amount paid to purchase it. (b) The entry to record the purchase of the equipment should be reduced by $100,000 in the accounting records of Montigny. 3. (a) A note to the financial statements stating that Vertical Lines Company is a going concern is not necessary. The business is assumed to be a going concern, unless there is evidence to the contrary. (b) Any note stating that the business is a going concern should be removed. Taking It Further: It is important for companies to follow generally accepted accounting principles (GAAP) because a common set of standards, applied by all businesses and entities, provides financial statements that are reasonably comparable. Without a common set of standards, each enterprise could develop its own theory structure and set of practices, resulting in noncomparability among enterprises, to the detriment of financial statement users.

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PROBLEM 1-6B (a) KENSINGTON BIKE REPAIR SHOP

Cash

Acc. Rec.

SupEquipAcc. Unearned Note L.Depres, L.Depres, Ex+ plies + ment = Payable + Revenue + Payable + Capital – Drawings +Revenue – penses

April 1 +$21,000 2 +$9,000 −3,000 5 −1,050 7 +$975 9 +3,200 16 +$2,900 26 +1,200 −1,200 27 −975 28 −290 29 −1,300 30 30 −1,400 30 +750 30 +2,100 $19,485+ $2,450 + $975 + $9,000 =

+$21,000 +$6,000

−$1,050

+$975 +$3,200 +2,900 −975 −290 −1,300 −200 −1,400

+200 +750 $200 +

+$2,100 $2,100 + $6,000 + $21,000 −

$1,300 + $6,850 − $2,940

$31,910 = $31,910

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PROBLEM 1-6B (Continued) (b)

Capital investment .................................................... Less: Drawings ........................................................ Add: Revenue.......................................................... Less: Expenses ........................................................ L. Depres, Capital, April 30 .......................................

$21,000 1,300 19,700 6,850 (2,940) $23,610

Taking It Further: $500 should be reported as an asset, Supplies, on the April 30 balance sheet; the unused supplies on hand as of that date. $475 should be reported as Supplies Expense representing supplies that were actually used in the month of June.

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PROBLEM 1-7B (a)

Transaction

Cash

BARRY CONSULTING

Acc. + SupRec. plies June 1 +$6,000 2 –900 3 5 –95 9 +3,275 12 –600 15 +$5,000 17 21 22 26 29 30 30

–1,800 +3,000 –545 +5,500 –2,150 –150 +2,500 $14,035 +

+ Equip. =

Acc. + Notes Payable Pay.

Unearn ed Ex+ Reve- + L. Barry, – L. Barry, + Revenue – nue Capital Drawings penses +$6,000 –$900

+$545

$545 –95 +$3,275 –$600 +5,000 –1,800

–3,000 -545 +$5,500 +$2,150 –150 +$2,500 $2,000 +

$545 + $2,150 =

0 + $ 5,500 + $2,500 +

$6,000 –

$600 +

$8,275 –

$18,730 = $18,730

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PROBLEM 1-7B (Continued) (a) Note:

(Continued) The first June 1 transaction is not relevant to the business entity. It is a personal transaction. The June 25 transaction is not recorded because the transaction has not yet been completed. Revenue will not be recognized until the services are performed in July.

(b)

Profit = Revenues − Expenses = ($8,275 − $2,945) = $5,330 Owner’s Equity = Investment − Drawings + Profit = ($6,000 − $600 + $5,330) = $10,730

(c) BARRY CONSULTING Balance Sheet June 30, 2017 Assets Cash ........................................................................... $14,035 Accounts receivable ................................................. 2,000 Supplies ..................................................................... 545 Equipment.................................................................. 2,150 Total assets ........................................................... $18,730 Liabilities and Owner's Equity Liabilities Note payable ............................................................ $ 5,500 Unearned revenue ..................................................... 2,500 Total liabilities....................................................... 8,000 Owner’s equity L. Barry, Capital (see part (b)) ................................ 10,730 Total liabilities and owner's equity ........................ $18,730

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PROBLEM 1-7B (Continued) Taking It Further: Recognition of an event or transaction should take place only when there has been a change in the financial position of the company. In other words, if a transaction meets the definition of an asset, liability, equity, revenue or expense and has a measureable dollar amount, it should be recognized in the accounting records. As well, personal transactions must be excluded, to comply with the reporting entity concept.

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PROBLEM 1-8B (a)

BAKER’S ACCOUNTING SERVICE +

Trans. Oct. 1 1 1 4 8 14 15 18 20 25 28 29 29 30 30 Total

Cash $5,700 -3,800 -900 +1,550 -500

Acc. SupRec. plies $2,100 $350

Equipment $7,600

+ + + + – F. UnF. Acc. Notes earned Baker, Baker, Pay. Revenue Payable Capital Drawings $4,300 $11,450 -3,800

–

Revenues

Expenses

-$900 -1,550 +4,000

+$3,500

+900 -300 +400 -500 +8,000 +3,100 -720 +2,800

+$900 -300

-400 -$500 +8,000 +2,300

+5,400 -720 +$2,800 +205

-1,200 $13,630

$3,350 $350

$11,600 =

$ 705

-205 $ 2,800

$11,500 +

$11,450

-1,200 -$ 1,700

$ 6,300 -$2,125

$28,930 = $28,930

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PROBLEM 1-8B (Continued) (a)

(Continued)

Note: The October 5 and October 26 events are not recorded because no accounting transaction has taken place. The October 26 statement is not a transaction. In the October 5 transaction, the expense incurred for the office assistant will be recorded when the office assistant has worked for Baker. (b) BAKER’S ACCOUNTING SERVICE Income Statement Month Ended October 31, 2017 Revenues Service revenue ........................................................ $6,300 Expenses Advertising expense ........................................ $300 Rent expense ............................................... 900 Salaries expense.......................................... 720 Telephone expense .......................................... 205 Total expenses ..................................................... 2,125 Profit ............................................................................... $4,175 BAKER’S ACCOUNTING SERVICE Statement of Owner's Equity Month Ended October 31, 2017 F. Baker, Capital, October 1 ........................................ $11,450 Add: Profit ................................................................. 4,175 15,625 Less: Drawings.......................................................... 1,700 F. Baker, Capital, October 31 ...................................... $13,925

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PROBLEM 1-8B (Continued) (b) (Continued) BAKER’S ACCOUNTING SERVICE Balance Sheet October 31, 2017 Assets Cash ............................................................................. $13,630 Accounts receivable ........................................................ 3,350 Supplies ....................................................................... 350 Equipment ..................................................................... 11,600 Total assets ............................................................. $28,930 Liabilities and Owner's Equity Liabilities Notes payable.......................................................... $11,500 Accounts payable ................................................... 705 Unearned revenue ..................................................... 2,800 Total liabilities ...................................................... 15,005 Owner's Equity F. Baker, Capital ....................................................... 13,925 Total liabilities and owner's equity .................... $28,930

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PROBLEM 1-8B (Continued) (b) (Continued) Taking It Further: Although a payment was made from the business bank account, the payment was with respect to a personal transaction of the owner for his family. The amount must be recorded as a drawings transaction to the F. Baker, Drawings account as it is not a business expense. The reporting entity concept guides the accounting treatment for these transactions, it states that transactions related to the business must be kept separate from the personal transactions of the owner. In this case, the cost of the dinner is not a benefit to the business nor does it represent a cost associated with operating the business.

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PROBLEM 1-9B JOHANSEN DESIGNS Income Statement Year Ended December 31, 2017 Revenues Service revenue ............................................................ $132,900 Expenses Salaries expense ................................................ $70,500 Rent expense ....................................................... 18,000 Supplies expense ............................................. 3,225 Telephone expense .......................................... 3,000 Utilities expense ............................................... 2,400 Insurance expense ........................................... 1,800 Interest expense.................................................. 350 Total expenses ........................................................... 99,275 Profit ..................................................................................... $33,625 JOHANSEN DESIGNS Statement of Owner's Equity Year Ended December 31, 2017 J. Johansen, Capital, January 1 ....................................... Add: Profit ....................................................................... Less: Drawings................................................................. J. Johansen, Capital, December 31..................................

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$35,800 33,625 69,425 40,000 $29,425

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PROBLEM 1-9B (Continued) JOHANSEN DESIGNS Balance Sheet December 31, 2017 Assets Cash ................................................................................... $ 11,895 Accounts receivable ......................................................... 6,745 Supplies ............................................................................. 675 Prepaid insurance ............................................................. 600 Furniture ............................................................................ 15,750 Equipment.......................................................................... 9,850 Total assets ................................................................... $45,515 Liabilities and Owner's Equity Liabilities Notes payable ............................................................... Accounts payable ......................................................... Unearned revenue ........................................................ Total liabilities ..........................................................

$ 7,000 6,590 2,500 16,090

Owner's equity J. Johansen, Capital ........................................................ 29,425 Total liabilities and owner's equity ............................ $45,515 Taking It Further: In order to be able to determine the December 31, 2017, balance in the J. Johansen, Capital account for the balance sheet, you need to have prepared the statement of owner’s equity first. The balance in the owner’s capital is not updated each time owner’s equity is increased or decreased. Instead, at the end of the accounting period, the impact of the revenues, expenses, and drawings on owner’s capital is determined in the income statement and then in the statement of owner’s equity.

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PROBLEM 1-76B (a)

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x)

$110,000 − $5,000 − $10,000 − $45,000 = $50,000 $66,500 − $59,600 = $6,900 $110,000 − $66,500 = $43,500 Total assets = $110,000 $62,500 − $37,500 − $6,000 = $19,000 $80,000 − $62,500 = $17,500 $57,500 − $35,000 − $17,500 (from vi) = $5,000 $17,500 (from vi) $57,500 − $43,500 (from iii) = $14,000 $43,500 from the balance sheet (from iii)

(b) In preparing the financial statements, the first statement to be prepared is the income statement. The profit figure is used in the statement of owner’s equity to calculate the ending balance of capital. The balance sheet is then completed using the balance of capital as calculated in the statement of owner’s equity. Taking It Further: The balance sheet, which is sometimes referred to as the statement of financial position, reports balances at a specific point in time – as of the last day of the reporting period. The income statement on the other hand, reports the results of the business transactions of revenues and expenses for a period of time, whether it is a month, a quarter, or a fiscal year. The statement of owner’s equity also reports for the period of time, those items that have increased or decreased capital. Consequently, the income statement and the statement of owner’s equity are for the period of time ending at a specific date and the balance sheet is at that specific date.

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PROBLEM 1-11B (a)

1. Only the assets that belong to the business and the liabilities that are owed by the business should be recorded in its financial statements. The boat and related debt should be removed from the balance sheet to conform to the reporting entity concept. 2.

The supplies should be recorded at cost of $15,000 until they are used. (historical cost concept)

The $5,000 should be returned to cash as this transaction has not yet occurred. (recognition criteria)

G. Goodman, Capital should be reported at its ending balance at December 31, 2017 on the balance sheet. He needs to update the balance to include the impact of all revenues, expense, and drawings during the period on owner’s equity.

The prepaid insurance of $1,200 needs to be added to the assets of the business.

The profit should not appear on the balance sheet, but should be included in the ending balance of the Capital account.

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PROBLEM 1-11B (Continued) (b) GG Company Balance Sheet December 31, 2017 Assets Liabilities and Owner’s Equity Cash $20,000 Accounts payable $45,000 Accounts receivable 55,000 Supplies 15,000 G. Goodman, Capital 46,200 Prepaid insurance 1,200 Total liabilities and Total assets $91,200 owner’s equity $91,200 G. Goodman, Capital = $91,200 – $45,000 = $46,200. Taking It Further: If Gil Goodman did not make any withdrawals from GG Company nor make further investments into the business during 2017, the change in his capital account will correspond to the profit for the year ending December 31, 2017. In this case the G. Goodman, Capital account increased from $25,000 to $46,200 and so the profit was $21,200.

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BYP 1-1 FINANCIAL REPORTING PROBLEM

(a) Corus uses an August 31 fiscal year end. (b) As mentioned in note 2 to the financial statements, titled Basis of Preparation and Statement of Compliance, Corus confirms that it has reported under IFRS . (c) The four consolidated financial statements presented for the year ended August 31, 2014 include: 1. Statements of Financial Position 2. Statements of Income and Comprehensive Income 3. Statements of Changes in Shareholders’ Equity 4. Statements of Cash Flows (d) At the top of each financial statement, immediately after the title of the statement in brackets (in thousands of Canadian dollars) appears. For the statement of income and comprehensive income, the further clarification is given that this presentation excludes the amounts reported for earnings per share (except per share amounts). (e) Total assets as at August 31, 2014: August 31, 2013: (f)

$2,784,582,000 $2,167,137,000

Total liabilities as at August 31, 2014: August 31, 2013:

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$1,474,456,000 $946,304,000

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BYP 1-1 (Continued)

(g) Net income for year ended: August 31, 2014: August 31, 2013: Decline in net income

$156,169,000 165,749,000 $ 9,580,000

Or 5.8% decline in net income ($9,580,000 ÷ $165,749,000)

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BYP 1-2 INTERPRETING FINANCIAL STATEMENTS

(a)

Employees are the most important economic resource to a business such as Apple. Employees bring innovation in the development of new products and are therefore expected to provide future economic benefit to the business. In order for an asset to be included on a company’s balance sheet, that asset needs to be owned or controlled by the company and expected to provide future services or economic benefits. In addition, the value must be able to be reliably measured in monetary terms. While employees do provide future services and economic benefits, their value cannot be measured in monetary terms, and they are not owned by Apple Inc. Unrecorded economic resources such as employees are not included on the balance sheet.

(b) The total assets reported on the balance sheet do not reveal what Apple is worth. A full balance sheet would be needed to find out how these assets are financed. If there was a great deal of debt on the balance sheet that would have to be paid out from the assets, this would leave very little equity to the shareholders, which is the amount that would be closer to the value of the business. There are other limitations to the balance sheet besides omitting the value of the employees. Many assets on the balance sheet are recorded at cost, rather than fair value. Other assets, such as the Apple trademark, are not listed. As well, what a business is “worth” or can be sold for may not be representative of either its cost or fair value. In the end, it is what someone is willing to pay for a company that determines a company’s worth, ideally supported by its current fair value or expected future profits.

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BYP 1-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

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Accounting Principles, Seventh Canadian Edition

BYP 1-4 COMMUNICATION ACTIVITY Date: To: Robert Joote From: Student Subject: Balance Sheet Correction I have reviewed the balance sheet of Peak Company as at December 31, 2017 and offer the following comments for your review and consideration: a.

The balance in your capital account should be the accumulation of all investments, either in cash or other assets, contributed by you to the company, less any drawings, in either cash or other assets, you have made for personal use, plus profit and less losses over time. The purpose of a balance sheet is to present the financial position of the company at a point in time. The balance sheet lists the company’s assets, liabilities and equities.

A number of items in your balance sheet are not properly reported as indicated below: 1.

The balance sheet should be dated as of a specific date, not for a period of time such as the month ended December 31, 2017. Rather, it should be dated "December 31, 2017."

Assets on the balance sheet are normally listed in order of liquidity.

Assets include Accounts Receivable and Prepaid Insurance, which should be included in the assets section rather than as deductions to liabilities and owner’s equity.

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Accounting Principles, Seventh Canadian Edition

BYP 1-4 (Continued) (b) (Continued) 4.

The bottom portion of the balance sheet, headed "Liabilities and Owner's Equity", should be sub-divided into two sections: one for Liabilities and one for Owner's Equity. Liabilitiy accounts would include Notes Payable and Accounts Payable. The owner’s equity section would include the capital account.

Accounts Payable should be reported in the liability section, rather than as a deduction in the assets section of the balance sheet.

R. Joote, Drawings should not be reported separately on the balance sheet but rather should be subtracted from R. Joote, Capital to arrive at owner's equity for the end of the period.

In order to be able to prepare the statement of owner’s equity, you need to have the amount of the profit or loss for the year. This is why the income statement is prepared first. In order to determine the ending balance in the capital account for the balance sheet, you need to have the balance in the owner’s capital account. This is why the statement of owner’s equity is prepared second.

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Accounting Principles, Seventh Canadian Edition

BYP 1-4 (Continued) (c)

A correct balance sheet follows: PEAK COMPANY Balance Sheet December 31, 2017

Assets Cash ................................................................................... $10,500 Accounts receivable ......................................................... 3,000 Supplies ............................................................................. 2,000 Prepaid insurance ............................................................. 2,500 Equipment.......................................................................... 20,500 Total assets ................................................................... $38,500 Liabilities and Owner's Equity Liabilities Notes payable ................................................................. $12,000 Accounts payable ............................................................ 5,000 Total liabilities .............................................................. 17,000 Owner's equity R. Joote, Capital .............................................................. 21,500 Total liabilities and owner's equity ............................ $38,500 R. Joote, Capital = $38,500 − $17,000 = $21,500.

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Accounting Principles, Seventh Canadian Edition

BYP 1-5 ALL ABOUT YOU (a) 1. When deciding what kind of summer job to apply for, considerations would include: tuition and textbooks costs, living expenses, and spending money requirements for the year. The wage rate of any employment opportunity is also relevant in the decision, including the the number of weeks of worked during the the summer months. Financial stability of the employer to ensure continued employment may also be a consideration particularly if continued part-time employment beyond the summer months is desired. (b)

By understanding an income statement and how it is used, the concept can be applied to assist in choosing an appropriate “profitable” job. Wages earned constitute the revenues that a student can expect less any of the relevant monthly expenses required to cover school and living expenses. This can help determine whether the wages earned by a particular job will result in a profit or loss at the end of the period. 2. In determining the affordability of purchasing a second hand car and incurring parking expenses versus using public transit to get back and forth to college each day, several pieces of financial information are required in order to compare the costs of these options. The relevant information for the purchase and financing of a second hand car include: the actual cost of the car, financing costs, insurance costs, maintenance costs, gas and parking costs, along with the value of the car at the end of the school term. Lending costs would be dependent on negotiations regarding the car purchase including amount that could be borrowed, money available for a down payment, interest rates and the loan amortization period. All of these factors will affect the monthly loan payment required. Other debt obligations should also be taken into consideration. Alternatively, public transit

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Accounting Principles, Seventh Canadian Edition

could be used. The cost would be limited to the college term. BYP 1-5 (Continued) (b) (Continued) (b) By understanding the financial statements a better analysis of the value of the car as an asset and the associated debt as a liability can be determined, the student can make a more informed decision regarding the obligations of a car purchase. Monthly costs of owning the vehicle or using a transit pass will also have an impact on the amount of money (revenues / wages) the student requires to cover these additional expenses. 3. When assessing whether or not an employer is financially stable and has growth potential, it is useful to have financial information. If the two options include publicly traded companies, annual reports and audited financial statements are a good source of information about the companies’ financial stability and growth potential. (b)

By understanding the financial statements of a business, an individual is in a better position to reduce the risks involved in choosing between employers, whether this decision is upon graduation or for summer employment. The income statement provides information regarding profitability, while the balance sheet is used to assess long term stability and immediate liquidity or solvency of the firm.

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Accounting Principles, Seventh Canadian Edition

BYP 1-6 Santé Smoothie Saga (a)

Natalie has a choice between a sole proprietorship and a corporation. A partnership is not an option since she is the sole owner of the business. A proprietorship is the easiest to create and operate because there are no formal procedures involved in creating the proprietorship. However, if she operates the business as a proprietorship she will personally have unlimited liability for the debts of the business. Operating the business as a corporation may limit her liability to her investment in the business; however, in Canada it is not unusual for business lenders to require the shareholder(s) of small privately held corporations to personally guarantee corporate loans. In this case the shareholder may still be responsible for the business debt in the event of bankruptcy and / or insolvency. Natalie will in all likelihood require the services of a lawyer to incorporate. Costs to incorporate, as well as additional ongoing costs to administrate and operate the business as a corporation, could be more costly than a proprietorship.1 The corporation would pay income taxes on its profits, instead of Natalie personally paying taxes on the net income of the proprietorship. The amount of taxes that would be paid could be higher with the corporation.1 My recommendation is that Natalie choose the proprietorship form of business organization. This is a very small business where the cost of incorporating outweighs the benefits of incorporating at this point in time. Furthermore, it will be easier to stop operating the business if Natalie decides not to continue with it once she is finished college.

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Additional comments that are not specifically covered in the text that some students may identify or the instructor may wish to discuss with the students.

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Accounting Principles, Seventh Canadian Edition

BYP 1-6 (Continued) (b) Yes, Natalie will need accounting information to help her operate her business. She will need information on her cash balance on a daily or weekly basis to help her determine if she can pay her bills. She will need to know the cost of her smoothies so she can establish what to charge her customer. She will need to know the company’s revenues and expenses so she can report her profit for personal income tax reporting purposes on an annual basis. If she borrows money, she will need financial statements so lenders can assess the company’s ability to the service the debt. Ie. pay the principal plus interest. . Natalie would also find financial statements useful to better understand her business and identify any financial issues as early as possible. Monthly financial statements would be best because accounting information is needed on a timely basis. (c)

If Natalie needs to borrow money from a relative or from the bank or needs to establish credit with some suppliers, she will need to be able to present these creditors with a set of financial statements to obtain credit and to demonstrate her ability to repay loans. The Canada Revenue Agency (CRA) is another user of the financial information. CRA will want to ensure that Natalie is reporting all of the profits properly and that the expenses of the business are in fact deductible. Natalie will personally pay income taxes on the (net) profit of the company.

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Accounting Principles, Seventh Canadian Edition

BYP 1-6 (Continued) (d) Assets: Cash, Accounts Receivable, Supplies, Equipment Liabilities: Accounts Payable, Unearned Revenue, Notes Payable Owner’s Equity: N. Koebel, Capital, N. Koebel, Drawings Revenue: Revenue Expenses: Advertising Expense, Interest Supplies Expense, Telephone Expense (e)

Expense,

Natalie should have a separate bank account used solely by Santé Smoothies. This will make it easier to prepare financial statements for her business. The business is a separate entity from Natalie and must be accounted for separately.

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Accounting Principles, Seventh Canadian Edition

CHAPTER 2 The Recording Process ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Questions

Brief Exercises

1. Describe how

1, 2, 3, 4, 5, 6

accounts, debits, and credits are used to record business transactions. 2. State how a journal is used in the recording process and journalize transactions. 3. Explain how a ledger helps in the recording process and post transactions. 4. Prepare a trial balance.

Solutions Manual .

Exercises

Problems Set A

Problems Set B

1, 2, 3, 4, 5

1, 2, 3, 4

1, 4

7, 8, 9, 10, 11

6, 7, 8, 9, 10, 11, 12

2, 5, 6, 7, 8, 9, 14, 16

1, 2, 3, 4, 5, 6, 7, 8, 11

12, 13, 14

13, 14, 15

2, 10, 11, 12, 13, 15, 16

4, 5, 6, 7, 8, 11

15, 16, 17, 18, 19, 20

16, 17, 18

2, 10, 12, 13, 14, 15, 16, 17, 18, 19

4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Perform transaction analysis and journalize transactions.

Simple

15-20

Journalize transactions.

Simple

20-30

Journalize transactions.

Simple

20-30

Journalize transactions, post, and prepare trial balance.

Moderate

40-50

Journalize transactions, post, and prepare trial balance.

Moderate

40-50

Journalize transactions, post, and prepare trial balance.

Moderate

55-65

Journalize transactions, post, and prepare trial balance.

Moderate

55-65

Journalize transactions, post, and prepare trial balance.

Moderate

55-65

Prepare a trial balance.

Simple

25-35

10A

Prepare financial statements.

Simple

25-35

11A

Journalize transactions, post, and prepare trial balance.

Moderate

65-75

12A

Prepare financial statements.

Simple

25-35

13A

Prepare trial balance and financial statements.

Simple

35-45

14A

Analyze errors and effects on trial balance.

Moderate

25-35

15A

Prepare correct trial balance.

Complex

30-40

Perform transaction analysis and journalize transactions.

Simple

15-20

Journalize transactions.

Simple

20-30

Journalize transactions.

Simple

20-30

Journalize transactions, post, and prepare trial balance.

Moderate

40-50

Journalize transactions, post, and prepare trial balance.

Moderate

40-50

Journalize transactions, post, and prepare trial balance.

Moderate

55-65

Journalize transactions, post, and prepare trial balance.

Moderate

55-65

Journalize transactions, post, and prepare trial balance.

Moderate

55-65

Prepare a trial balance.

Simple

25-35

10B

Prepare financial statements.

Simple

25-35

11B

Journalize transactions, post, and prepare trial balance.

Moderate

65-75

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

12B

Prepare financial statements.

Simple

25-35

13B

Prepare trial balance and financial statements.

Simple

35-45

14B

Analyze errors and effects on trial balance.

Moderate

25-35

15B

Prepare correct trial balance.

Complex

30-40

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives, and End-ofChapter Material Study Objective 1. Describe how accounts, debits, and credits are used to record business transactions.

Knowledge Q2-2 Q2-3 BE2-2 BE2-3 BE2-4 BE2-5 E2-1 E2-2

Comprehension Q2-1 Q2-4 Q2-5 Q2-6 E2-3 E2-4

Application BE2-1 P2-1A P2-1B P2-4A P2-4B

2. State how a journal is used in the recording process and journalize transactions.

Q2-8 Q2-10 BE2-6

Q2-7 Q2-9 Q2-11 BE2-7 BE2-8

BE2-9 BE2-11 E2-5 E2-6 E2-8 E2-14 P2-1A P2-2A P2-3A P2-4A P2-5A P2-6A P2-7A P2-8A P2-11A

3. Explain how a ledger helps in the recording process and post transactions

Q2-12 E2-2 E2-11

Q2-13 Q2-14

BE2-13 BE2-14 BE2-15 P2-4A P2-5A P2-6A P2-7A P2-8A P2-11A

4. Prepare a trial balance.

Q2-15 E2-2

Q2-16 Q2-17 Q2-18 Q2-19

Q2-20 BE2-16 BE2-17 BE2-18 E2-10 E2-14 P2-4A P2-5A P2-6A P2-7A P2-8A P2-9A P2-10A P2-11A P2-12A P2-13A

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E2-1 E2-2

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Analysis

Synthesis

Evaluation

BE2-10 BE2-12 E2-7 E2-9 E2-16 P2-1B P2-2B P2-3B P2-4B P2-5B P2-6B P2-7B P2-8B P2-11B E2-10 E2-12 E2-13 E2-15 E2-16 P2-4B P2-5B P2-6B P2-7B P2-8B P2-11B E2-12 E2-13 E2-15 E2-16 E2-17 E2-19 P2-4B P2-5B P2-6B P2-7B P2-8B P2-9B P2-10B P2-11B P2-12B P2-13B

Q2-19 E2-18 P2-14A P2-14B P2-15A P2-15B

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Study Objective Broadening Your Perspective

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Knowledge

Comprehension BYP2-1 BYP2-4

2-5

Accounting Principles, Seventh Canadian Edition

Application BYP2-2 BYP2-3 BYP2-5 BYP2-6

Analysis

Synthesis

Evaluation

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

ANSWERS TO QUESTIONS 1.

An account is an accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. A company will need, at a minimum, two accounts to represent an asset account and either a liability or owner’s equity account. However, companies usually have many accounts since they will have different types of assets, liabilities, and owner’s equity items, including drawings, revenues, and expenses.

Debiting an account refers to the practice of entering an amount on the debit (or left) side of an account. Crediting an account signifies entering an amount on the credit (or right) side of an account.

Assets are on the left side of the basic accounting equation and liabilities and owner’s equity are on the right side of the basic accounting equation. Since debits are on the left side, and assets are also on the left side, the normal balance of an asset is a debit balance. Since credits are on the right side and liabilities are on the right side, the normal balance of a liability is a credit balance. The same is also true for owner’s equity. Revenues increase owner’s equity and therefore also have a normal credit balance. But expenses and drawings are decreases to owner’s equity and thus have a normal debit balance.

Dmitri is incorrect because debit and credit don’t mean increase or decrease. Debit means left side and credit means right side. Different types of accounts will increase with debits versus credits. Accounts on the left side of the accounting equation (assets) will increase with debits. Accounts on the right side of the accounting equation (liabilities and owner’s equity) will increase with credits except for expenses and drawings which are decreases to owner’s equity and therefore are increased with debits. This way, the accounting equation remains in balance.

The normal balance of owner’s capital is a credit. The account is increased by credits and decreased by debits. Both drawings and expenses reduce owner’s equity. Because of this, their normal balance is a debit. These two accounts are increased by debits, which end up reducing owner’s equity.

Gustave is incorrect. The double-entry system merely records the effect of a transaction on the two (or more) accounts affected. A transaction is not recorded twice; it is recorded once, with a dual (or multiple) effect on the accounting equation.

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 7.

An event or transaction is recorded only if it causes the company’s financial position (assets, liabilities, and/or owner’s equity) to change. In some events, nothing is currently obtained nor given up so nothing is recorded. The event may lead to a future transaction that changes the company’s financial position but is not recorded until that time. An example of an event that is not currently recorded but will result in a future transaction is the signing of a lease.

The three basic steps in the recording process are analyze, journalize, and post.

After it is determined that a transaction should be recorded because it does cause the company’s financial position to change, analyzing a business transaction involves: identifying (1) the type of accounts involved, (2) whether the accounts are increased or decreased, and (3) whether the accounts need to be debited or credited.

10.

A simple journal entry refers to an entry that affects only two accounts, a debit to one account and a credit to another account. A compound entry refers to an entry that affects three or more accounts. To ensure the accounting equation remains balanced, the totals of the debit amounts and credit amounts must be equal.

11.

The accounts that could be credited are Revenue, Accounts Receivable, and Unearned Revenue. Revenue would be credited for a cash sale. Accounts Receivable would be credited when a customer makes a payment on account for revenue that was previously earned and recorded. Unearned Revenue would be credited when a customer pays in advance.

12.

The advantages of recording the individual transactions in a journal before posting to the ledger are: 1. The journal discloses in one place the complete effect of a transaction. 2. The journal provides a chronological record of all transactions. 3. The journal helps to prevent or locate errors, because the debit and credit amounts for each entry can be readily compared.

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 13.

The T account is often used in accounting textbooks for illustrative purposes. It shows only the debit and credit side of a ledger account. It is faster to create and more efficient for analyzing the impact of specific transactions Businesses however usually use a “standard” form of account. This form shows a debit and credit column but also includes additional information such as the balance of the account (to show the account balance after every transaction), the date, explanation, and reference. This additional information is useful in preventing and detecting errors.

14.

The entire group of accounts and related transactional details maintained by a company, including all the asset, liability, and owners' equity accounts, is referred to collectively as the ledger. A chart of accounts lists only the account names and account numbers that identify their location in the ledger. The numbering system used to identify the accounts usually starts with the balance sheet accounts and follows with the income statement accounts. The chart of accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and identify their location in the ledger.

15.

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

16.

Since accounts are given an account number in the chart of accounts, the trial balance is prepared in numerical order. Accounts are generally listed and assigned account numbers in the chart of accounts using the following numerical sequence: assets, liabilities, owner’s equity, drawings, revenues, and lastly expenses. This convention makes is easy for anyone to find an account either in the chart of accounts or in a trial balance.

17.

The sequence in which the first four steps in the accounting process does matter in properly accounting for transactions. Unless business transactions are first analyzed, it is possible for the transaction to be misinterpreted or omitted from the accounting process. Once analyzed, the transactions need to be journalized in a journal, after which the transactions are posted to the general ledger in order to arrive at updated balances which then appear in a trial balance.

18.

The company should use “December 31” on its trial balance. The trial balance simply shows the balance in the accounts at a specific point in time.

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 19.

(a) The trial balance would not balance, because there were two debits for $750 and no credits. The debits do not equal the credits. Accounts Payable should have been credited, not debited, for $750. (b) The trial balance would balance, because the debits ($1,000) and credits ($1,000) are equal. But both the Service Revenue and the Accounts Receivable balances would be incorrect as the credit should have been recorded to Accounts Receivable, not Service Revenue. (c) The trial balance would not balance, because the debit to Rent Expense for $650 is not equal to the credit to Cash for $560. The debit side of the trial balance is overstated by $90, because either the Rent Expense is overstated by $90 (Rent Expense should have been debited for $560), or cash is overstated by $90 (the payment should have been credited for $650).

20.

The following are three types of errors that could cause the trial balance to not balance, in spite of the fact that the ledger accounts have correct balances. 1. When transcribing amounts from the ledger to the trial balance, an account balance was recorded at an incorrect amount or omitted. 2. Balances in the trial balance did not appear in the correct column. 3. The addition of the trial balance columns was not done correctly.

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2-1 (a)

$7,500 + $16,700 – $15,400 = $8,800

(b) $8,800 + $13,100 – $4,700 = $17,200 (c)

$3,800 – $6,400 + $6,800 = $4,200

(d) $3,800 + $7,700 – $5,900 = $5,600 (e)

$100,000 – $24,000 + $45,000 = $121,000

(f)

$149,000 – $121,000 + $27,000 = $55,000

BRIEF EXERCISE 2-2 Account 1. Prepaid Insurance 2. Accounts Payable 3. Land 4. Service Revenue 5. Utilities Expense 6. Owner’s Capital 7. Equipment 8. Salaries Expense 9. Supplies 10. Unearned Revenue

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Type of Account Asset Liability Asset Owner’s Equity Owner’s Equity Owner’s Equity Asset Owner’s Equity Asset Liability

2-10

Normal Balance Debit Credit Debit Credit Debit Credit Debit Debit Debit Credit

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-3

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

(a) Type of Account Asset Owner’s Equity Owner’s Equity Asset Liability Owner’s Equity Asset Liability

Account Accounts Receivable Rent Expense B. Damji, Drawings Supplies Unearned Revenue Service Revenue Prepaid Insurance Notes Payable

(b) Normal Balance Debit Debit Debit Debit Credit Credit Debit Credit

BRIEF EXERCISE 2-4 Cash Dr. 500 800 8,920 5,355 10,435 Sub. 26,010 Bal. 10,045

Service Revenue Dr. Cr. 9,500 3,200 4,500 1,050 Bal. 18,250

Cr. 8,720 495 6,750

15,965

Accounts Payable Dr. Cr. 1,720 6,740 495 2,500 6,750 Sub. 8,965

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Salaries Expense Dr. Cr. 4,550 550 3,750 425 Bal. 9,275

9,240 Bal. 275

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-5

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

Accounts Payable Supplies J. Takamoto, Capital J. Takamoto, Drawings Prepaid Rent Utilities Expense Service Revenue Unearned Revenue

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

(b) Debit Effect Decrease Increase Decrease Increase Increase Increase Decrease Decrease

BRIEF EXERCISE 2-6 (a)

1. Increase in D. Parmelee, Capital

Account Owner’s Equity

2. Decrease in Cash

Asset

3. Decrease in Notes Payable Liability

Debit

Owner’s

Debit Equity

4. Increase in Rent Expense

(b) Change with Credit

Credit

5. Increase in D. Parmelee, Drawings

Owner’s Equity

Debit

Increase in Equipment

Asset

Debit

Increase in Accounts Payable

Liability

Credit

Increase in Service Revenue

Owner’s Equity

Credit

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-7 Transaction 1: (Solution provided in text.) Basic Analysis Debit/Credit Analysis

The asset account Cash is decreased by $439. The asset account Supplies is increased by $439. Debits increase assets: debit Supplies $439. Credits decrease assets: credit Cash $439.

Transaction 2: Basic Analysis Debit/Credit Analysis

The asset account Accounts Receivable is increased by $1,020. The revenue account Service Revenue is increased by $1,020. Debits increase assets: debit Accounts Receivable $1,020. Credits increase revenues: credit Service Revenue $1,020.

Transaction 3: Basic Analysis Debit/Credit Analysis

The asset account Equipment is increased by $2,230. The liability account Accounts Payable is increased by $2,230. Debits increase assets: debit Equipment $2,230. Credits increase liabilities: credit Accounts Payable $2,230.

Transaction 4: Basic Analysis Debit/Credit Analysis

Solutions Manual .

The expense account Utilities Expense is increased by $293. The asset account Cash is decreased by $293. Debits increase expenses: debit Utilities Expense $293. Credits decrease assets: credit Cash $293.

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-7 (Continued) Transaction 5: Basic Analysis Debit/Credit Analysis

The asset account Cash is increased by $750. The revenue account Service Revenue is increased by $750. Debits increase assets: debit Cash $750. Credits increase revenues: credit Service Revenue $750.

Transaction 6: Basic Analysis Debit/Credit Analysis

Solutions Manual .

The asset account Cash is increased by $7,100. The liability account Unearned Revenue is increased by $7,100. Debits increase assets: debit Cash $7,100. Credits increase liabilities: credit Unearned Revenue $7,100.

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-8 Account Debited (a) (b) Basic Specific Type Account Asset Cash

+ $17,970

Asset

+ $4,720

Asset

Prepaid Rent Supplies

Asset

Cash

Asset

Owner’s Equity Owner’s Equity

Accounts Receivable Salaries Expense B. Fleming, Drawings

Transaction Aug. 1*

Account Credited (a) (b) (c) Basic Specific Effect Type Account + $17,970 Owner’s B. Fleming, Equity Capital Asset Cash – $4,720

+ $625

Liability

+ $560

+ $980

Owner’s Equity Owner’s Equity Asset

Accounts Payable Service Revenue Service Revenue Cash

+ $720

Asset

Cash

+ $1,210

+ $625 + $560 + $1,210 – $980 – $720

*Solution provided in text.

Solutions Manual .

2-15

Chapter 2 .

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-9 June 1 transaction: (Soltuion provided in text) Basic Analysis Debit/Credit Analysis Journal Entry

The asset account Cash is increased by $8,430. The owner’s equity account T. Pridham, Capital is increased by $8,430. Debits increase assets: debit Cash $8,430. Credits increase owner’s equity: credit T. Pridham, Capital $8,430. June 1 Cash 8,430 T. Pridham,Capital 8,430 Invested cash in business.

June 2 transaction: Basic Analysis Debit/Credit Analysis Journal Entry

The asset account Equipment is increased by $2,620. The liability account Accounts Payable is increased by $2,620. Debits increase assets: debit Equipment $2,620. Credits increase liabilities: credit Accounts Payable $2,620. June 2 Equipment 2,620 Accounts Payable 2,620 Purchased equipment on account.

June 5 transaction: Basic Analysis

Solutions Manual .

An accounting transaction has not occurred. A debit/credit analysis is not needed because there is no accounting entry.

2-16

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-9 (Continued) June 17 transaction: Basic Analysis Debit/Credit Analysis Journal Entry

The asset account Accounts Receivable is increased by $2,500. The revenue account Service Revenue is increased by $2,500. Debits increase assets: debit Accounts Receivable $2,500. Credits increase revenues: credit Service Revenue $2,500. June 17 Accounts Receivable 2,500 Service Revenue 2,500 Performed services on account for R. Windl.

June 27 transaction: Basic Analysis Debit/Credit Analysis Journal Entry

Solutions Manual .

The asset account Cash is increased by $1,190. The asset account Accounts Receivable is decreased by $1,190. Debits increase assets: debit Cash $1,190. Credits decrease assets: credit Accounts Receivable $1,190. June 27 Cash 1,190 Accounts Receivable 1,190 Collected cash on account from R. Windl.

2-17

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-10 Oct.

Solutions Manual .

Cash ..................................................... 30,000 L. Berge, Capital ............................. Rent Expense ...................................... Cash ................................................

30,000

700 700

Equipment ........................................... 2,800 Accounts Payable...........................

2,800

Accounts Receivable .......................... 4,400 Service Revenue.............................

4,400

Accounts Payable ............................... 1,100 Cash ................................................

1,100

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

2-18

130 130

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-11 Aug. 31

Solutions Manual .

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

439 439

Accounts Receivable .......................... 1,020 Service Revenue.............................

1,020

Equipment ........................................... 2,230 Accounts Payable...........................

2,230

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

293

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

750

293

750

Cash ..................................................... 7,100 Unearned Revenue .........................

7,100

2-19

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-12 Aug

Solutions Manual .

Cash ..................................................... 17,970 B. Fleming, Capital .........................

17,970

Prepaid Rent ........................................ 4,720 Cash ................................................

4,720

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

625

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

560

625

560

Accounts Receivable .......................... 1,210 Service Revenue............................. Salaries Expense................................. Cash ................................................

980

B. Fleming, Drawings.......................... Cash ................................................

720

2-20

1,210

980 720

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-13 Aug. 1 6 Bal.

Cash 17,970 Aug. 4 560 27 29 12,110

B. Fleming, Capital Aug. 1 17,970

4,720 980 720

Bal.

17,970

Accounts Receivable Aug. 17 1,210

B. Fleming, Drawings Aug. 29 720

Bal.

1,210

Bal.

Aug. 4

Prepaid Rent 4,720

Bal.

4,720

720 Service Revenue Aug. 6 17 Bal.

Aug. 5

Supplies 625

Salaries Expense Aug. 27 980

Bal.

625

Bal.

Accounts Payable Aug. 5

980

625

Bal.

625

BRIEF EXERCISE 2-14 Cash Apr. 1

1,600

Apr. 16

700

3,400

250

Bal.

Solutions Manual .

4,050

2-21

Chapter 2

560 1,210 1,770

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-15

Sept. 4

Cash 2,400

3,000

1,325

Sept. 30 Bal.

6,725

Accounts Receivable Sept. 2 4,400 Sept. 4 28

1,325

Service Revenue Sept. 2 10

4,400 3,000

Sept. 30 Bal. 675

Sept.30 Bal.

BRIEF EXERCISE 2-16 AMARO COMPANY Trial Balance June 30, 2017 Debit Cash ............................................................... Accounts receivable ..................................... Equipment ..................................................... Accounts payable.......................................... Owner’s capital.............................................. Owner’s drawings ......................................... Service revenue............................................. Rent expense ................................................. Salaries expense ...........................................

Solutions Manual .

2,400

2-22

Credit

$5,800 3,000 17,000 $ 8,100 15,000 1,200 10,000 1,000 5,100 $33,100

$33,100

Chapter 2

7,400

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-17 PETTIPAS COMPANY Trial Balance April 30, 2017 Debit

Credit

Cash ............................................................... $6,400 Accounts receivable ..................................... 5,000 Supplies ......................................................... 650 Prepaid rent ................................................... 800 Equipment ..................................................... 14,600 Accounts payable.......................................... Unearned revenue ......................................... C. Pettipas, capital ........................................ 1,100 C. Pettipas, drawings .................................... Service revenue............................................. 4,500 Rent expense ................................................. Salaries expense ............................................ 1,000 $34,050

$ 3,300 250 22,500

Solutions Manual .

2-23

8,000 $34,050

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 2-18 1.

The Prepaid insurance balance was in the wrong column. Assets have a normal debit balance. When this account is moved to the debit column, the new total in the debit column will be $46,200 ($42,700 + $3,500) and the new total in the credit column will be $47,100 ($50,600 – $3,500).

The trial balance is now out of balance by $900 ($46,200 – $47,100). The transposition error in L. Bourque, Capital account is the cause of the $900 difference. If the $15,400 balance in that account is transposed to $14,500 this will reduce the total credits by $900 and the trial balance will now balance. See revised trial balance below: BOURQUE COMPANY Trial Balance December 31, 2017

Debit Cash ............................................................... $15,000 Accounts receivable ..................................... 1,800 Prepaid insurance ......................................... 3,500 Accounts payable.......................................... Unearned revenue ......................................... L. Bourque, capital ........................................ L. Bourque, drawings.................................... 4,900 Service revenue............................................. Rent expense ................................................. 2,400 Salaries expense ........................................... 18,600 $46,200

Solutions Manual .

2-24

Credit

$ 2,000 2,200 14,500 27,500

$46,200

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 2-1 1.

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

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.

EXERCISE 2-2 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

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

Credit Analyzing transactions Posting Account Debit Journalizing Trial balance Credit Chart of accounts Journal

Solutions Manual .

2-25

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-3 (a) Account Cash* M. Kobayashi, Capital Accounts Payable Building Fees Earned Insurance Expense Interest Revenue M. Kobayashi, Drawings Notes Receivable Prepaid Insurance Rent Expense Supplies

(1) Type of Account Asset Owner’s Equity (Capital) Liability Asset Owner’s Equity (Revenue) Owner’s Equity (Expense) Owner’s Equity (Revenue) Owner’s Equity (Drawings) Asset Asset Owner’s Equity (Expense) Asset

(2) Financial Statement Balance Sheet Balance Sheet and Statement of Owner’s Equity Balance Sheet Balance Sheet Income Statement

(3) Normal Balance Debit Credit Credit Debit Credit

Income Statement

Debit

Income Statement

Credit

Statement of Owner’s Equity Balance Sheet Balance Sheet Income Statement

Debit

Balance Sheet

Debit

Debit Debit Debit

*Solution provided in text. (b) Assets are on the left side of the basic accounting equation and liabilities and owner’s equity are on the right side of the basic accounting equation. Since debits are on the left side, and assets are also on the left side, the normal balance of an asset is a debit balance. Since credits are on the right side and liabilities are on the right side, the normal balance of a liability is a credit balance. The same is also true for owner’s equity. Revenues increase owner’s equity and therefore also have a normal credit balance. But expenses and drawings are decreases to owner’s equity and thus have a normal debit balance.

Solutions Manual .

2-26

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 2-4 (a) Basic Date Type Mar. 5 Asset*

Account Debited (b) (c) Specific Effect Account Cash + $10,220

7 Owner’s Equity 9 Asset

Advertising Expense Supplies

11 Asset 13 Asset 25 Asset

Vehicles Accounts Receivable Cash

26 Asset 29 Liability 30 Asset

+ $1,050

Liability

+ $8,770 + $1,520 + $10,880

Asset Owner’s Equity Liability

Cash

+ $1,140

Asset

Accounts Payable Cash

– $1,050

Asset

+ $800

Liability

+ $1,720

Asset

31 Owner’s J. MacKenzie, Equity Drawings *Solution provided in text.

Solutions Manual .

+ $350

Account Credited (a) (b) (c) Basic Specific Effect Type Account Owner’s J. MacKenzie, +$10,220 Equity Capital Asset Cash – $350

2-27

Accounts Payable Cash Service Revenue Notes Payable Accounts Receivable Cash Unearned Revenue Cash

+ $1,050 – $8,770 + $1,520 +$10,880 – $1,140 – $1,050 + $800 – $1,720

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-5 Mar.

Solutions Manual .

Cash ..................................................... 10,220 J. MacKenzie, Capital ..................... Advertising Expense .......................... Cash ................................................

10,220

350 350

Supplies............................................... 1,050 Accounts Payable ..........................

1,050

Vehicles ............................................... 8,770 Cash ................................................

8,770

Accounts Receivable .......................... 1,520 Service Revenue.............................

1,520

Cash ..................................................... 10,880 Notes Payable.................................

10,880

Cash ..................................................... 1,140 Accounts Receivable .....................

1,140

Accounts Payable ............................... 1,050 Cash ................................................

1,050

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

800

J. MacKenzie, Drawings ..................... 1,720 Cash ................................................

2-28

800 1,720

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-6 Transaction 1: Basic Analysis Debit/Credit Analysis Journal Entry

The expense account Rent Expense is increased by $550. The asset account Cash is decreased by $550. Debits increase expenses: debit Rent Expense $550. Credits decrease assets: credit Cash $550. June 1 Rent Expense 550 Cash 550 Paid June rent.

Transaction 2: Basic Analysis Debit/Credit Analysis Journal Entry

The expense account Insurance Expense is increased by $175. The asset account Cash is decreased by $175. Debits increase expenses: debit Insurance Expense $175. Credits decrease assets: credit Cash $175. June 2 Insurance Expense 175 Cash 175 Paid one month of insurance.

Transaction 3: Basic Analysis Debit/Credit Analysis Journal Entry

Solutions Manual .

The asset account Cash is increased by $1,255. The asset account Accounts Receivable is decreased by $1,255. Debits increase assets: debit Cash $1,255. Credits decrease assets: credit Accounts Receivable $1,255. June 5 Cash 1,255 Accounts Receivable 1,255 Collected cash on account.

2-29

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-6 (Continued) Transaction 4: Basic Analysis

June 9: An accounting transaction has not occurred. A debit/credit analysis is not needed because there is no accounting entry.

Transaction 5: Basic Analysis Debit/Credit Analysis Journal Entry

The liability account Accounts Payable is decreased by $675. The asset account Cash is decreased by $675. Debits decrease liabilities: debit Accounts Payable $675. Credits decrease assets: credit Cash $675. June 14 Accounts Payable 675 Cash 675 Paid cash on account.

Transaction 6: Basic Analysis

Debit/Credit Analysis Journal Entry

Solutions Manual .

The asset account Accounts Receivable is increased by $1,420. The revenue account Service Revenue is increased by $1,420. Debits increase assets: debit Accounts Receivable $1,420. Credits increase revenues: credit Service Revenue $1,420. June 17 Accounts Receivable 1,420 Service Revenue 1,420 Performed services on account for Rudy Holland.

2-30

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-6 (Continued) Transaction 7: Basic Analysis Debit/Credit Analysis Journal Entry

The asset account Cash is increased by $1,000. The liability account Unearned Revenue is increased by $1,000. Debits increase assets: debit Cash $1,000. Credits increase liabilities: credit Unearned Revenue $1,000. June 19 Cash 1,000 Unearned Revenue 1,000 Received advance from J. Dupuis for future services.

Transaction 8: Basic Analysis Debit/Credit Analysis Journal Entry

The asset account Equipment is increased by $1,575. The liability account Accounts Payable is increased by $1,575. Debits increase assets: debit Equipment $1,575. Credits increase liabilities: credit Accounts Payable $1,575. June 29 Equipment 1,575 Accounts Payable 1,575 Purchased equipment on account.

Transaction 9: Basic Analysis Debit/Credit Analysis Journal Entry

Solutions Manual .

The expense account Salaries Expense is increased by $850. The asset account Cash is decreased by $850. Debits increase expenses: debit Salaries Expense $850. Credits decrease assets: credit Cash $850. June 30 Salaries Expense 850 Cash 850 Paid employee.

2-31

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-6 (Continued) Transaction 10: Basic Analysis Debit/Credit Analysis Journal Entry

Solutions Manual .

The owner’s equity account D. Bratt, Drawings is increased by $1,250. The asset account Cash is decreased by $1,250. Debits increase drawings: debit D. Bratt, Drawings $1,250. Credits decrease assets: credit Cash $1,250. June 30 D. Bratt, Drawings 1,250 Cash 1,250 Paid D. Bratt, the company owner.

2-32

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-7 June

Solutions Manual .

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

550

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

175

550

175

Cash ..................................................... 1,255 Accounts Receivable ..................... Accounts Payable ............................... Cash ................................................

1,255

675 675

Accounts Receivable .......................... 1,420 Service Revenue.............................

1,420

Cash ..................................................... 1,000 Unearned Revenue .........................

1,000

Equipment ........................................... 1,575 Accounts Payable ..........................

1,575

Salaries Expense ................................ Cash ................................................

850

D. Bratt, Drawings............................... 1,250 Cash ................................................

2-33

850 1,250

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-8 GENERAL JOURNAL Trans. 1.

5. 6.

Solutions Manual .

Account Titles

Debit

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

1,820

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

1,095

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

450

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

2,105

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

1,225

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

7,960

Prepaid Advertising .............................. Cash....................................................

8,120

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

450

S. Beaulieu, Drawings ............................ Cash....................................................

2,800

2-34

Credit

1,820

1,095

450

2,105

1,225 7,960

8,120

450 2,800

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-9 GENERAL JOURNAL Date June

Account Titles 1

Debit

Cash ........................................................ 13,430 Equipment .............................................. 3,490 S. Polland, Capital ............................. 16,920

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

1,420

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

4,580

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

220

1,420 930 3,650

220

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

8,000

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

650

Telephone Expense ............................... Accounts Payable..............................

30 Salaries Expense.................................... Cash....................................................

1,830

8,000

Solutions Manual .

Credit

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

2-35

8,000

650

1,830 8,000

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-10 (a) and (b) Cash June 1 13,430 June 2 1,420 10 220 3 930 30 8,000 27 650 30 1,830 June30Bal. 16,820

S. Polland, Capital June 1 16,920

Accounts Receivable June 16 8,000 June 30 8,000

Service Revenue June10 220 16 8,000 June30 Bal. 8,220

June 30 Bal.

June30Bal. 16,920

Prepaid Insurance June 2 1,420 June 30Bal. 1,420 Equipment June 1 3,490 3 4,580 June30 Bal. 8,070

Notes Payable June 3

Salaries Expense June30 1,830 June30Bal. 1,830

3,650

June30 Bal3,650

Advertising Expense June 27 650 June 30 Bal.650

Accounts Payable June29

Telephone Expense June29 80

June30 Bal.

June 30 Bal. 80

Solutions Manual .

2-36

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-10 (Continued) (b) POLLAND REAL ESTATE AGENCY Trial Balance June 30, 2017

Cash ........................................................ Prepaid insurance .................................. Equipment .............................................. Accounts payable .................................. Notes payable......................................... S. Polland, capital .................................. Service revenue...................................... Salaries expense .................................... Advertising expense .............................. Telephone expense ................................

Debit $16,820 1,420 8,070

Credit

80 3,650 16,920 8,220

1,830 650 80 $28,870

$28,870

EXERCISE 2-11 1. 2. 3.

4. 5.

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

Solutions Manual .

2-37

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-12 (a) and (b) Cash Sept. 1 17,400 (1) 1,200 (4) 1,000 Sept.30Bal.18,700

(2) (3)

700 200 (3)

Accounts Receivable Sept. 1 2,000 (4) 1,000 Sept. 30 Bal.1,000

Accounts Payable Sept. 1 1,000 (6) 1,000 200 Sept.30 Bal. 1,800

Unearned Service Revenue (5) 1,200 Sept. 1 1,600 Sept.30Bal.

400

Supplies Sept. 1 1,900 (6) 1,000 Sept. 30 Bal. 2,900

Owner’s Capital Sept. 1

Salaries Expense Sept. 1 1,400 (2) 700

Service Revenue Sept. 1 4,100 (1) 1,200 (5) 1,200 Sept. 30Bal. 6,500

Sept.30Bal.

Solutions Manual .

16,000

Sept.30Bal. 16,000

2,100

2-38

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-12 (Continued) (c) DEPOT COMPANY Trial Balance September 30, 2017

Debit Cash ....................................................... $18,700 Accounts receivable ............................. 1,000 Supplies ................................................. 2,900 Accounts payable ................................. Unearned revenue ................................. Owner’s capital...................................... Service revenue..................................... Salaries expense ................................... 2,100 $24,700

Solutions Manual .

2-39

Credit

$ 1,800 400 16,000 6,500 $24,700

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-13 (a) Cash 5,000 Aug. 12 2,300 2,600 900 6,200

Aug. 1 10 31 Aug.31Bal.

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

Aug. 12

900

800

J. Feldman, Capital Aug. 1 5,000

Aug. 31Bal. 5,000

Service Revenue Aug.10 2,600 25 1,700 Aug.31Bal. 4,300

Equipment 5,000

Notes Payable Aug. 12

Aug. 31Bal. 5,000

2,700

Aug.31 Bal 2,700

(b) JUNE FELDMAN, INVESTMENT BROKER Trial Balance August 31, 2017

Cash ....................................................... Accounts receivable ............................. Equipment ............................................. Notes payable........................................ J. Feldman, capital ................................ Service revenue....................................

Debit $6,200 800 5,000

$12,000

Solutions Manual .

2-40

Credit

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

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-14 (a) Date Oct.

GENERAL JOURNAL Account Titles and Explanation

J1 Debit

Credit

1 Cash ........................................................... 1,200 A. Fortin, Capital ................................... Invested cash in business.

1,200

3 Equipment .................................................. 5,400 Cash....................................................... Notes Payable ....................................... Purchased equipment and issued a note.

400 5,000

4 Supplies ........................................................ 800 Accounts Payable................................. Purchased supplies on account.

800

6 Accounts Receivable................................. 1,000 Service Revenue ................................... Performed services on account.

1,000

10 Cash .............................................................. 650 Service Revenue ................................... Performed services for cash.

650

12 Accounts Payable......................................... 500 Cash....................................................... Paid cash on account.

500

15 Cash ........................................................... 3,000 Service Revenue ................................... Performed services for cash.

3,000

20 Accounts Receivable.................................... 940 Service Revenue ................................... Performed services on account.

940

Solutions Manual .

2-41

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-14 (Continued) (a) (Continued) GENERAL JOURNAL Date

Account Titles and Explanation

J1 Debit

Credit

21 Cash .............................................................. 800 Accounts Receivable............................ Received cash on account.

800

25 Cash ........................................................... 2,000 A. Fortin, Capital ................................... Invested cash in business.

2,000

28 Advertising Expense................................. 400 Accounts Payable................................. Purchased advertising on account.

400

30 A. Fortin, Drawings ................................... Cash....................................................... Withdrew cash for personal use.

600

31 Rent Expense ............................................ 250 Cash....................................................... Paid rent.

250

31 Salaries Expense .......................................... 500 Cash....................................................... Paid salaries.

500

Solutions Manual .

2-42

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-14 (Continued) (b) FORTIN CO. Trial Balance October 31, 2017

Debit Cash ....................................................... $ 5,400 Accounts receivable ............................. 1,140 Supplies ................................................. 800 Equipment ............................................. 5,400 Notes payable........................................ Accounts payable ................................. A. Fortin, capital .................................... A. Fortin, drawings................................ 600 Service revenue..................................... Advertising expense ............................. 400 Rent expense......................................... 250 Salaries expense ................................... 500 $14,490

Solutions Manual .

2-43

Credit

$ 5,000 700 3,200 5,590

$14,490

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-15 (a) and (b) Cash July 31 8,800 Aug. 1 Aug. 12 2,400 10 31 5,910 25 30 31 Aug.31 Bal. 7,930

1,200 420 2,250 540 4,770

Aug. 31 Bal. 2,900

Fees Earned July 31 10,410 Aug. 31 8,460 Aug.31Bal.18,870

Bal. 585 Equipment 15,550

July 31

Rent Expense July 31 1,200 Aug. 1 1,200 Aug.31 Bal. 2,400

Aug.31Bal. 15,550

Aug. 30

L. Meche, Drawings July 31 5,125 Aug. 31 4,770 Aug.31Bal. 9,895

Supplies 585

July 31

15,000

Aug. 31 Bal. 15,000

Accounts Receivable July 31 2,750 Aug. 12 2,400 Aug. 31 2,550

Aug.31

L. Meche, Capital July 31

Notes Payable 500 July 31 10,000

Salaries Expense July 31 2,250 Aug. 25 2,250 Aug. 31 Bal. 9,500 Aug.31 Bal.4,500

Accounts Payable Aug. 10 420 July 31

Interest Expense 850 Aug.30 40

Aug. 31 Bal. 430 Aug.31

Solutions Manual .

2-44

Bal. 40

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-15 (Continued) (c) LEE MECHE, MD Trial Balance August 31, 2017

Cash ............................................................ Accounts receivable .................................. Supplies ...................................................... Equipment .................................................. Notes payable............................................. Accounts payable ...................................... L. Meche, capital ........................................ L. Meche, drawings .................................... Fees earned ................................................ Interest expense......................................... Rent expense.............................................. Salaries expense ........................................

Solutions Manual .

2-45

Debit $7,930 2,900 585 15,550

Credit

$9,500 430 15,000 9,895 18,870 40 2,400 4,500 $43,800

$43,800

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-16 (a) GENERAL JOURNAL Date July

Account Titles

J1 Debit

Credit

2 Rent Expense ............................................ 1,060 Cash.......................................................

1,060

4 Supplies ........................................................ 790 Accounts Payable.................................

790

15 Accounts Payable ........................................ 680 Cash.......................................................

680

31 Salaries expense ....................................... 2,420 Cash.......................................................

2,420

31 Cash ........................................................... 9,940 Accounts Receivable ................................... 400 Service Revenue ...................................

10,340

(b) and (c) Cash Accounts Payable June 30 5,820 July 2 1,060 June 30 680 31 9,940 15 680 July 4 790 680 31 2,420 July 15 July31 Bal. 11,600 July 31 Bal.790 Accounts Receivable June 30 400 July 31 Bal. 400

Solutions Manual .

Notes Payable June 30 50,020 July 31Bal. 50,020

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-16 (Continued) (b) and (c) (Continued) Supplies June 30 1,180 July 4 790 July 31 Bal. 1,970

June 30

Equipment 64,990

July31Bal.

64,990

July 2

S. Ahuja, Capital June 30 21,290 July31Bal. 21,290 Service Revenue July 31

July 31Bal. 10,340

Rent Expense 1,060

July31Bal.

10,340

Salaries Expense July 31 2,420 July31Bal.2,420

1,060

(d) AHUJA DENTAL SERVICES Trial Balance July 31, 2017

Debit Cash ............................................................ $11,600 Accounts receivable .................................. 400 Supplies ...................................................... 1,970 Equipment .................................................. 64,990 Notes payable............................................. Accounts payable ...................................... S. Ahuja, capital ......................................... Service revenue.......................................... Rent expense.............................................. 1,060 Salaries expense ........................................ 2,420 $82,440

Solutions Manual .

2-47

Credit

$50,020 790 21,290 10,340

$82,440

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-17 (a) O’NEILL’S PHYCHOLOGICAL SERVICES Trial Balance July 31, 2017

Cash .......................................................... Accounts receivable ................................ Supplies .................................................... Equipment ................................................ Notes payable........................................... Accounts payable .................................... Unearned revenue .................................... T. O’Neill, capital ...................................... T. O’Neill, drawings .................................. Service revenue........................................ Rent expense............................................ Salaries expense ...................................... Supplies expense.....................................

This

assumes

Solutions Manual .

notes

payable

2-48

are

Debit $ 6,470 7,340 790 58,900

Credit

$22,960 9,030 1,350 64,340 57,980 96,180 10,880 45,540 5,960 $193,860 $193,860

repayable

very

quickly.

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-17 (Continued)

(b) O’NEILL’S PSYCHOLOGICAL SERVICES Income Statement Year Ended July 31, 2017 Revenues Service revenue ....................................................... $96,180 Expenses Rent expense ............................................ $10,880 Salaries expense......................................... 45,540 Supplies expense ....................................... 5,960 Total expenses .................................................... 62,380 Profit.............................................................................. $33,800

O’NEILL’S PSYCHOLOGICAL SERVICES Statement of Owner's Equity Year Ended July 31, 2017 T. O’Neill, capital, August 1, 2016 ............................. Add: Profit ............................................................... Less: Drawings ......................................................... T. O’Neill, capital, July 31, 2017 ................................

Solutions Manual .

2-49

$64,340 33,800 98,140 57,980 $40,160

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-17 (Continued)

(b) (Continued) O’NEILL’S PSYCHOLOGICAL SERVICES Balance Sheet July 31, 2017 Assets Cash ............................................................................ $ 6,470 Accounts receivable .................................................. 7,340 Supplies ...................................................................... 790 Equipment .................................................................. 58,900 Total assets............................................................ $73,500 Liabilities and Owner's Equity Liabilities Notes payable .......................................................... $22,960 Accounts payable .................................................. 9,030 Unearned revenue .................................................... 1,350 Total liabilities ............................................................ 33,340 Owner's Equity T. O’Neill, capital ....................................................... 40,160 Total liabilities and owner's equity..................... $73,500

Solutions Manual .

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-18 (b)

(d)

Error 1.*

(a) In Balance No

Difference $400

Yes

None

Rent Expense Prepaid Rent

Yes

None

Accounts Receivable Service Revenue

$500

Credit

Accounts Payable

Yes

None

Supplies Cash

$18

Credit

Advertising Expense

Yes

None

Cash Salaries Expense

Incorrect Accounts Accounts Payable

*Solution provided in text.

Solutions Manual .

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 2-19 ROYAL MOUNTAIN TOURS Trial Balance March 31, 2017

Debit Cash ($12,800+ $400 – [$240 × 2]) ..............$12,720 Accounts receivable ($4,090 + $900 + $770) .......................................... 5,760 Supplies ...................................................... 840 Equipment .................................................. 7,350 Accounts payable ($2,500 + 400) .............. T. Zelinski, capital ...................................... T. Zelinski, drawings .................................. 3,650 Service revenue ($6,750 + $770) ............... Advertising expense .................................. 3,700 Salaries expense ........................................ 400 Totals $34,420

Solutions Manual .

2-52

Credit

$ 2,900 24,000 7,520

$34,420

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 2-1A (a)

Basic Type Asset

Account Debited (2) Specific Account Cash

Effect + $12,800

Asset

Equipment

+ $5,000

Liability

Accounts Payable

+$5,000

Owner’s Equity

Insurance Expense

+ $134

Asset

Cash

– $134

Asset

Supplies

+ $590

Asset

Cash

– $590

Owner’s Equity

Advertising Expense

+ $600

Asset

Cash

– $600

Asset

Cash

+ $630

Owner’s Equity

Service Revenue

+ $630

(1) Transaction Apr. 1*

Solutions Manual .

(3)

2-53

Account Credited (1) (2) (3) Specific Basic Type Account Effect Owner’s N. Dhaliwal, + $12,800 Equity Capital

Chapter 2 .

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-1A (Continued) (a) (Continued)

(1) Transaction 10

Basic Type

Account Debited (2) Specific Account

(3) Effect

Account Credited (1) (2) Specific Basic Type Account

(3) Effect

No transaction at this point in time (see Apr. 28).

Owner’s Equity

N. Dhaliwal, Drawings

+ $960

Asset

Cash

– $960

Asset

Cash

+ $1,270

Owner’s Equity

Service Revenue

+ $1,270

Asset

Cash

+ $1,800

Liability

Unearned Revenue

+ $1,800

Liability

Accounts Payable

– $5,000

Asset

Cash

– $5,000

*Solution provided in text.

Solutions Manual .

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Chapter 2 .

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-1A (Continued) (b)

GENERAL JOURNAL

Date Apr.

Account Titles 1

Debit

Cash ....................................................... 12,800 N. Dhaliwal, Capital...........................

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

5,000

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

134

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

590

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

600

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

630

Credit

12,800

5,000

134

590

600

630

10 No transaction at this time. 25 N. Dhaliwal, Drawings ........................... Cash...................................................

960

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

1,270

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

1,800

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

5,000

Solutions Manual .

2-55

960

1,270

1,800 5,000

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-1A (Continued) Taking It Further The investment by the owner increases cash, an asset. Assets are on the left (or debit) side of the accounting equation. The same transaction also increases the right (or credit) side of the accounting equation and increases the owner’s capital. Since both the left and right side of the accounting equation must remain in balance, a transaction must have both a debit and a credit.

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Chapter 2

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Accounting Principles, Seventh Canadian Edition

PROBLEM 2-2A GENERAL JOURNAL Date May

Account Titles 1

Debit

Cash ...................................................... 73,800 A. Mawani, Capital ...........................

Credit

73,800

2 Land ...................................................... 108,500 Building................................................. 84,300 Equipment............................................. 59,100 Cash.................................................. 60,300 Notes Payable ($251,900 – $60,300) 191,600 4

Equipment............................................. 17,000 Accounts Payable ............................

17,000

5 No entry required. 6 Prepaid Insurance ................................ Cash..................................................

2,580

15 Cash ...................................................... Fees Earned .....................................

1,830

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

5,480

20 Cash ...................................................... Accounts Receivable ........................... Fees Earned .....................................

350 1,060

1,060

Solutions Manual .

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

2-57

2,580

1,830

5,480

1,410 1,060

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-2A (Continued) Date

Account Titles

Debit

May 31 Cash ...................................................... Fees Earned .....................................

3,100

31 Salaries Expense .................................. Cash..................................................

2,220

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

710

31 A. Mawani, Drawings............................ Cash..................................................

1,540

Credit

3,100

2,220

710 1,540

Solutions Manual .

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Chapter 2

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Accounting Principles, Seventh Canadian Edition

PROBLEM 2-3A Aug.

Cash ....................................................... 35,000 J. Green, Capital ............................... Supplies ................................................. Accounts Payable ............................

550 550

Equipment.............................................. 10,000 Notes Payable ...................................

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

7,500 7,500

14 Salaries Expense ................................... Cash...................................................

1,200

15 J. Green, Drawings ................................ Cash...................................................

4,300

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

2,450

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

550

Solutions Manual .

10,000

15,000

1,200

4,300

2,450

550

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

7,500

Office Expense ...................................... Cash...................................................

3,200

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

2-59

35,000

7,500

3,200 50

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-3A (Continued) Taking It Further Service revenue and salaries expense are considered equity accounts because transactions that cause increases in service revenue will cause increases in equity and transactions that cause increases in salaries expense will cause decreases in equity. Increases in revenues are recorded on the credit side of the account and so the credit side of the equity account represents an increase. On the other hand, increases in salaries expense are recorded on the debit side of the account and so the debit side of the equity account represents a decrease.

Solutions Manual .

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Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-4A (a) Date

Account Titles

Ref.

Debit

Apr. 1

Cash............................................ E. Valley, Capital................

101 301

20,000 20,000

No entry—not a transaction.

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

729 101

1,100

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

126 201

4,000

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

112 400

5,100

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

101 209

1,000

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

101 400

2,100

Salaries Expense ....................... Cash ...................................

726 101

2,800

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

201 101

2,400

3 10

11 20 30

Solutions Manual .

2-61

J1 Credit

1,100 4,000 5,100 1,000 2,100 2,800

2,400

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-4A (Continued) (b)

Date Apr. 1 2 11 20 30 30

Explanation

Cash Ref. Debit J1 20,000 J1 J1 1,000 J1 2,100 J1 J1

Date Apr. 10

Accounts Receivable Explanation Ref. Debit J1 5,100

Date Apr. 3

Explanation

Supplies Ref. Debit 4,000 J1

Explanation

Accounts Payable Ref. Debit J1 J1 2,400

Explanation

Unearned Revenue Ref. Debit J1

Date Apr. 3 30

Date Apr. 11

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2-62

Credit 1,100

2,800 2,400

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

Credit

No. 112 Balance 5,100

Credit

No. 126 Balance 4,000

Credit 4,000

No. 201 Balance 4,000 1,600

Credit 1,000

No. 209 Balance 1,000

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-4A (Continued) E. Valley, Capital Date Apr. 1

Explanation

Ref. J1

No. 301 Debit

Credit 20,000

Balance 20,000

Service Revenue Date Apr. 10 20

Explanation

Ref. J1 J1

No. 400 Debit

Credit 5,100 2,100

Salaries Expense Date Apr. 30

Date Apr. 2 (c)

Explanation

Ref. J1

Balance 5,100 7,200

No. 726 Debit 2,800

Rent Expense Ref. J1

Debit 1,100

Credit

Balance 2,800

No. 729 Credit Balance 1,100

EMILY VALLEY, DENTIST Trial Balance April 30, 2017 Cash.......................................................... Accounts Receivable............................... Supplies ................................................... Accounts Payable .................................... Unearned Revenue .................................. E. Valley, Capital ...................................... Service Revenue ...................................... Salaries Expense ..................................... Rent Expense ...........................................

Solutions Manual .

2-63

Debit $16,800 5,100 4,000

Credit

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

$29,800

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-4A (Continued) Taking It Further The next step in the accounting cycle will be the preparation of a trial balance. The main purpose of the trial balance is to prove that the debits equal the credits after posting. It is also useful in preparing financial statements.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 2-5A

(a)

GENERAL JOURNAL

Date

Account Titles

Ref.

Debit

Sept. 1 Cash ............................................... 101 G. Rodewald, Capital ................ 301

9,630

2 Rent Expense................................. 726 Cash ........................................... 101

690

2 Prepaid Insurance ......................... 130 Cash ........................................... 101

750

5 Equipment ...................................... 151 Accounts Payable ..................... 201

2,640

7 Advertising Expense ..................... 610 Cash ........................................... 101

420

13 Cash ............................................... 101 Service Revenue ....................... 400

500

21 Accounts Receivable..................... 112 Service Revenue ....................... 400

800

24 Cash ............................................... 101 Accounts Receivable ................ 112

540

28 Utilities Expense ............................ 737 Cash ........................................... 101

210

29 Accounts Payable.......................... 201 Cash ........................................... 101

1,470

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2-65

Credit

9,630

690

750

2,640

420

500

800

540

210 1,470

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-5A (Continued) (a) (Continued) Date

Account Titles

Ref.

Debit

Credit

Sept. 30 Cash ............................................ 101 Unearned Revenue ................ 209

860

30 Cash ............................................ 101 Service Revenue .................... 400

1,045

30 G. Rodewald, Drawings.............. 306 Cash........................................ 101

1,490

860

1,045 1,490

(b) Cash Date Sept. 1 2 2 7 13 24 28 29 30 30 30

Date Sept. 21 24

Solutions Manual .

Explanation

Ref. J1 J1 J1 J1 J1 J1 J1 J1 J1 J1 J1

Debit 9,630

690 750 420 500 540 210 1,470 860 1,045 1,490

Accounts Receivable Explanation Ref. Debit J1 J1

2-66

Credit

No. 101 Balance 9,630 8,940 8,190 7,770 8,270 8,810 8,600 7,130 7,990 9,035 7,545

No. 112 Credit Balance

800 540

800 260

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-5A (Continued) (b) (Continued)

Date

Prepaid Insurance Explanation Ref.

Debit

750

Ref.

Debit

No. 151 Balance

2,640

Sept. 2

Credit

Equipment Date Sept. 5

Date Sept. 5 29

Date Sept. 30

Date Sept. 1

Date Sept. 30

Solutions Manual .

Explanation

Accounts Payable Explanation Ref. J1 J1 Unearned Revenue Explanation Ref.

Debit

860

No. 301 Credit Balance 9,630

1,490

2,640 1,170

No. 209 Credit Balance 860

G. Rodewald, Drawings Explanation Ref. Debit

2-67

No. 201 Credit Balance

1,470

2,640

J1 G. Rodewald, Capital Explanation Ref.

Credit

No. 130 Balance

9,630

No. 306 Credit Balance 1,490

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-5A (Continued) (b) (Continued)

Date Sept. 13 21 30

Date Sept. 7

Date Sept. 2

Date Sept. 28

Solutions Manual .

Service Revenue Explanation Ref.

Debit

J1 J1 J1 Advertising Expense Explanation Ref. J1 Rent Expense Explanation Ref. J1 Utilities Expense Explanation Ref. J1

2-68

Debit

Credit

No. 400 Balance

500 800 1,045

500 1,300 2,345

Credit

No. 610 Balance

420

Debit

420

Credit

690

Debit 210

No. 726 Balance 690

Credit

No. 737 Balance 210

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-5A (Continued) (c) GRETE KANINES Trial Balance September 30, 2017 Debit Cash............................................................. Accounts receivable ................................... Prepaid insurance....................................... Equipment ................................................... Accounts payable ....................................... Unearned revenue ...................................... G. Rodewald, capital................................... G. Rodewald, drawings .............................. Service revenue .......................................... Advertising expense................................... Rent expense .............................................. Utilities expense .........................................

Credit

$7,545 260 750 2,640 $1,170 860 9,630 1,490 2,345 420 690 210 $14,005

$14,005

Taking It Further While Grete is correct in making the connection that transactions involving investments, drawings, revenues, and expenses ultimately have an impact on the owner’s capital account, there remains a need for these separate accounts. Without them, a business is unable to report the revenues and expenses on the income statement, and the investments and drawings by the owner on the statement of owner’s equity. This detailed information is relevant and necessary to the users of the financial statements.

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Chapter 2

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Accounting Principles, Seventh Canadian Edition

PROBLEM 2-6A (a)

GENERAL JOURNAL

Date May

Account Titles

Debit

1 Cash .................................................... Equipment........................................... J. Abramson, Capital .....................

Credit

44,810 10,690 55,500

1 No entry—not a transaction. 2 Prepaid Insurance .............................. Cash................................................

3,255

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

2,275 2,275

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

15,870

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

570

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

730

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

3,200

22 Telephone Expense............................ Cash................................................

320

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

1,120

Solutions Manual .

2-70

3,255

4,550 7,150 8,720

570

730

3,200

320 1,120

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-6A (Continued) (a) (Continued) Date

Account Titles

Debit

May 26 J. Abramson, Drawings...................... Cash................................................

1,980

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

2,720

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

730

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

31 Cash .................................................... Unearned Revenue ........................

500

31 Salaries Expense ................................ Cash................................................

2,340

Credit

1,980

2,720

730

500

2,340

(b) May 1 25 28 31

Bal.

Cash May 44,810 2 1,120 5 2,720 8 500 9 22 26 30 30 31 28,188

Solutions Manual .

3,255 4,550 7,150 570 320 1,980 730 67 2,340

2-71

Accounts Receivable 3,200 May 2,720 May 17 28 Bal.

480

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-6A (Continued) (b) (Continued) Supplies 570 730 1,300

May 9 15 Bal.

J. Abramson, Capital May 1 55,500 Bal.

Prepaid Insurance May 2 3,255 Bal. 3,255

May 5

Prepaid Rent 2,275

Bal.

2,275

May 1 8 Bal.

Equipment 10,690 15,870 26,560 Unearned Revenue May 31 Bal. Notes Payable May 8 Bal.

Accounts Payable May 30 730 May 15 Bal.

Solutions Manual .

55,500

J. Abramson, Drawings May 26 1,980 Bal. 1,980 Service Revenue May 17 3,200 25 1,120 Bal. 4,320 Interest Expense May 30 67 Bal.

500 500

Rent Expense May 5 2,275 Bal. 2,275

8,720 8,720

Salaries Expense May 31 2,340 Bal. 2,340

730 0

2-72

Telephone Expense May 22 320 Bal. 320

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-6A (Continued) (c) ABRAMSON FINANCIAL SERVICES Trial Balance May 31, 2017 Debit Cash............................................................. $28,188 Accounts receivable ................................... 480 Supplies ...................................................... 1,300 Prepaid insurance....................................... 3,255 Prepaid rent................................................. 2,275 Equipment ................................................... 26,560 Unearned revenue ...................................... Notes payable ............................................. J. Abramson, capital................................... J. Abramson, drawings .............................. 1,980 Service revenue .......................................... Interest expense ......................................... 67 Rent expense .............................................. 2,275 Salaries expense......................................... 2,340 Telephone expense .................................... 320 $69,040

Solutions Manual .

2-73

Credit

$ 500 8,720 55,500 4,320

$69,040

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-6A (Continued) Taking It Further This is not true. The cash account shows an increase of $28,188 during the month of May, whereas the company shows a loss of $682 for the month ($4,320 – $67 – $2,275 – $2,340 – $320). The change in the cash account does not reflect profit or loss because not all transactions that changed cash represent increases in revenues or expenses. One of the major sources of cash during the month is an investment by the owner of $55,500. This increases owner’s equity, but is not a source of revenue for the company. The company received cash in advance of doing work (unearned revenue of $500) and performed services in advance of payment (accounts receivable of $480), as well as making non-expense payments for services in advance (prepaid rent and insurance), equipment, and owner drawings. The statement of cash flows reconciles the changes in the cash account to its various uses and sources.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 2-7A (a) GENERAL JOURNAL Date May

Account Titles

Debit

1 Film Rental Expense ......................... Cash............................................... Accounts Payable.........................

Credit

25,000 10,784 14,216

2 No entry—not a transaction. 7 Advertising Expense ......................... Cash...............................................

1,090

Cash ................................................... Admission Revenue .....................

35,940

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

14,216

15 Film Rental Expense ......................... Cash............................................... Accounts Payable.........................

28,600

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

4,990

30 Salaries Expense............................... Cash...............................................

6,230

Solutions Manual .

2-75

1,090

35,940

14,216 14,300 14,300

4,990 6,230

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-7A (Continued) (a) (Continued) Date

Account Titles

May 31

31 31

Debit

Credit

Cash ................................................... Accounts Receivable ........................ Concession Revenue ...................

2,370 1,785

Cash ................................................... Admission Revenue .....................

41,800

Mortgage Payable ............................. Interest Expense ............................... Cash...............................................

1,185 605

4,155

41,800

1,790

(b) and (c) Cash Date May

Explanation 1 Balance 1 7 10 10 15 25 30 31 31 31

Date

Ref. Debit 

Balance 18,900 10,784 8,116 1,090 7,026 35,940 42,966 14,216 28,750 14,300 14,450 4,990 9,460 6,230 3,230 2,370 5,600 41,800 47,400 1,790 45,610

Accounts Receivable Explanation Ref. Debit

May 31

Solutions Manual .

1,785

2-76

Credit

Balance 1, 785

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 2-7A (Continued) (b) and (c) (Continued) Land Date May

Explanation

Ref.

Debit

Credit



1 Balance

Balance 75,000

Buildings Date May

Explanation

Ref.

Debit

Credit



1 Balance

Balance 69,800

Equipment Date May

Explanation

Accounts Payable Explanation Ref.

May

Credit

14,300 4,990

Debit

Credit



1 Balance

2-77

Debit

Balance 4,990 19,206 4,990 19,290 14,300

Balance 106,300 105,115

1,185

N. Wood, Capital Explanation Ref.

Solutions Manual .

Debit

14,216

1 Balance 31

Balance 17,000

14,216

Mortgage Payable Explanation Ref.

Date

Credit



1 Balance 1 10 15 25

Date

Debit



1 Balance

Date May

Ref.

Credit

Balance 69,410

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Accounting Principles, Seventh Canadian Edition

PROBLEM 2-7A (Continued) (b) and (c) (Continued) Admission Revenue Explanation Ref.

Date

Debit

May 10 31 Concession Revenue Explanation Ref. Debit

Date May 31

Advertising Expense Explanation Ref. Debit

Date May

May

1 15

Date

Interest Expense Explanation Ref.

35,940 77,740

Credit

Balance

4,155

Credit

Balance

Debit

1,090

Credit

Debit

Salaries Expense Explanation Ref.

Debit 6,230

2-78

Balance 25,000 53,600

Credit

605

May 30

Solutions Manual .

35,940 41,800

25,000 28,600

May 31

Date

Balance

1,090 Film Rental Expense Explanation Ref.

Date

Credit

Balance 605

Credit

Balance 6,230

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Accounting Principles, Seventh Canadian Edition

PROBLEM 2-7A (Continued) (d) SEQUEL THEATRE Trial Balance May 31, 2017 Debit Cash ....................................................... Accounts receivable ............................. Land........................................................ Buildings ................................................ Equipment .............................................. Accounts payable .................................. Mortgage payable .................................. N. Wood, capital..................................... Admission revenue................................ Concession revenue.............................. Advertising expense.............................. Film rental expense ............................... Interest expense .................................... Salaries expense ...................................

Credit

$45,610 1,785 75,000 69,800 17,000 $ 14,300 105,115 69,410 77,740 4,155 1,090 53,600 605 6,230 $270,720 $270,720

Taking It Further The revenues less the expense in the trial balance show a profit for the month of May of $20,370 ($77,740 + $4,155 – $1,090 – $53,600 – $605 – $6,230). Although a positive profit is a good indication of the company’s profitability, it is not sufficient information to determine whether Sequel Theatre is a sound business. One month’s transactions do not indicate a pattern of profitability, in particular for businesses such as theatres where revenues tend to be seasonal. The financial results for the entire year should be examined, along with comparative amounts for previous years, to determine if the company has a trend of profitability.

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PROBLEM 2-8A (b)

GENERAL JOURNAL

Date Dec.

Account Titles

Debit

Credit

1 Rent Expense................................................ 475 Cash.....................................................

475

1 Equipment .................................................. 3,500 Cash..................................................... Accounts Payable ...............................

1,500 2,000

3 Cash ........................................................... 2,500 Notes Payable .....................................

2,500

4 Accounts Payable...................................... 2,000 Cash.....................................................

2,000

4 Cash ........................................................... 1,800 Accounts Receivable ..........................

1,800

7 Insurance Expense ....................................... 310 Cash.....................................................

310

8 Supplies ........................................................ 150 Cash.....................................................

150

10 Accounts Payable...................................... 2,130 Cash.....................................................

2,130

15 Unearned Revenue ....................................... 825 Fees Earned ........................................

825

20 Cash ........................................................... 3,300 Fees Earned ........................................

3,300

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PROBLEM 2-8A (Continued) (b) (Continued) Dec. 21 Telephone Expense................................. Cash..................................................... 22

135 135

Accounts Receivable .............................. 2,250 Fees Earned ........................................

2,250

24 A. Zhawaki, Drawings.............................. 3,000 Cash.....................................................

3,000

29 Cash ......................................................... Unearned Revenue .............................

525

Travel Expense ........................................ Cash.....................................................

695

31 Notes Payable.......................................... Interest Expense...................................... Cash.....................................................

200 10

525

695

210

(a) and (c) Nov.30 3 4 20 29

Bal.

Solutions Manual .

Cash 2,965 Dec. 1 2,500 1 1,800 4 3,300 7 525 8 10 21 24 30 31 485

Accounts Receivable Nov.30 2,200 Dec. 4 1,800 22 2,250 Bal. 2,650

475 1,500 2,000 310 150 2,130 135 3,000 695 210

Supplies Nov. 30 1,450 Dec. 8 150 Bal. 1,600

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PROBLEM 2-8A (Continued) (a) and (c) (Continued)

Equipment Nov.30 17,500 Dec. 1 3,500 Bal. 21,000 Notes Payable Dec. 31 200 Dec. 3 Bal.

Fees Earned Nov.30 47,075 Dec. 15 825 20 3,300 22 2,250 Bal. 53,450 2,500 2,300

Insurance Expense Nov.30 3,410 Dec. 7 310 Bal. 3,720

Accounts Payable Dec. 4 2,000 Nov.30 4,235 10 2,130 1 2,000 Bal. 2,105 Unearned Revenue Dec. 15 825 Nov. 30 Dec. 29 Bal.

Rent Expense Nov.30 5,225 Dec. 1 475 Bal. 5,700

825 525 525

Telephone Expense Nov.30 1,485 Dec. 21 135 Bal. 1,620

A. Zhawaki, Capital Nov.30 19,500

Travel Expense Nov.30 6,050 Dec. 30 695 Bal. 6,745

A. Zhawaki, Drawings Nov.30 31,350 Dec. 24 3,000 Bal. 34,350

Interest Expense Dec. 31 10 Bal. 10

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PROBLEM 2-8A (Continued) (d) A TO Z MUSIC Trial Balance December 31, 2017 Debit Cash............................................................. $ 485 Accounts receivable ....................................... 2,650 Supplies ........................................................... 1,600 Equipment ................................................... 21,000 Notes payable ............................................. Accounts payable ....................................... Unearned revenue ...................................... A. Zhawaki, capital...................................... A. Zhawaki, drawings ................................. 34,350 Fees earned................................................. Insurance expense ..................................... 3,720 Rent expense .............................................. 5,700 Telephone expense .................................... 1,620 Travel expense............................................ 6,745 Interest expense ......................................... 10 $77,880

Credit

$ 2,300 2,105 525 19,500 53,450

$77,880

Taking It Further The cash balance has decreased from $2,965 to $485 during the month of December. This is a substantial decrease from the opening balance and exposes the company to the possibility of not being able to pay its outstanding liabilities. The company borrowed $2,500 at the beginning of December and used this cash to purchase used equipment for $3,500. Had the company not borrowed or purchased the additional equipment, the cash balance for the month would have been $1,695 ($485 + $3,500 – $2,500 + $210 payment on the note payable). This still represents a substantial decrease from the November ending balance and is cause for concern. Solutions Manual .

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PROBLEM 2-8A (Continued) Taking It Further (Continued) During the month of January, the company should collect outstanding receivables as quickly as possible (in particular those amounts still outstanding from November) and reduce owner drawings. The company will also need to ensure the additional used equipment generates additional cash as soon as possible.

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PROBLEM 285A J. SAGGIT Trial Balance June 30, 2017 Debit

Credit

Cash ............................................................ $ 8,000 Accounts receivable .................................. 10,250 Supplies ...................................................... 5,000 Prepaid expenses....................................... 3,000 Land ............................................................ 64,000 Equipment................................................... 18,250 Accounts payable....................................... $ 12,500 Notes payable ............................................. 30,000 J. Saggit, capital ......................................... 28,000 J. Saggit, drawings..................................... 12,000 Service revenue.......................................... 63,050 Rent expense .............................................. 4,500 Utilities expense ......................................... 550 Salaries expense ........................................ 7,500 Interest expense ......................................... 500 $133,550 $133,550 Taking It Further J. Saggit is incorrect in his belief. While the ledger and the trial balance may be in balance, omissions or duplications of entries as well as entries to incorrect accounts may cause the financial statements to be incorrect and therefore not error free.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 2-10A (a) ABRAMSON FINANCIAL SERVICES Income Statement Month Ended May 31, 2017

Revenues Service revenue .................................................. Expenses Interest expense ................................. $ 67 Rent expense ...................................... 2,275 Salaries expense................................. 2,340 Telephone expense ................................. 320 Total expenses ............................................... Loss .........................................................................

$4,320

5,002 $( 682)

(b) ABRAMSON FINANCIAL SERVICES Statement of Owner's Equity Month Ended May 31, 2017

J. Abramson, capital, May 1, 2017.......................... Add: Investment ...................................................... Less: Loss ............................................... $ 682 Drawings........................................ 1,980 J. Abramson, capital, May 31, 2017........................

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0 55,500 55,500

2,662 $52,838

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Accounting Principles, Seventh Canadian Edition

PROBLEM 2-10A (Continued) (c) ABRAMSON FINANCIAL SERVICES Balance Sheet May 31, 2017 Assets Cash ........................................................................... $28,188 Accounts receivable ................................................. 480 Supplies ..................................................................... 1,300 Prepaid insurance ..................................................... 3,255 Prepaid rent ............................................................... 2,275 Equipment ................................................................. 26,560 Total assets ........................................................... $62,058 Liabilities and Owner's Equity Liabilities Notes payable ....................................................... Unearned service revenue ...................................

$ 8,720 500 9,220

Owner's Equity J. Abramson, Capital ............................................ 52,838 Total liabilities and owner's equity ................. $62,058 Taking It Further In its first month of operations Abramson Financial Services incurred more expenses than it generated in revenues resulting in a loss of $682. Since this is a new business, it may take a few months for revenues to reach and exceed the level of expenses. Jacob will need to monitor the revenues generated as compared to expenses incurred to ensure the company reaches profitability as soon as possible.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 2-11A (a)

GENERAL JOURNAL

Date

Account Titles

Feb. 1

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

Solutions Manual .

Debit

Credit

430 430

Rent Expense ........................................ 1,050 Cash...................................................

1,050

Cash ....................................................... Fees Earned ......................................

4,240 4,240

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

720

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

970

Salaries Expense................................... Cash...................................................

400

720

970

400

Rent Expense ........................................ 1,050 Cash...................................................

1,050

Accounts Receivable ............................ 1,475 Fees Earned ......................................

1,475

Internet Expense ................................... Cash...................................................

185

Cash ....................................................... 2,830 Unearned Revenue ...........................

2-88

185 2,830

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Accounting Principles, Seventh Canadian Edition

PROBLEM 2-11A (Continued) (a) (Continued) 27

D. Scoffin, Drawings ............................. Cash...................................................

575

Salaries Expense................................... Cash...................................................

400

575

400

Prepaid Rent .......................................... 1,050 Cash...................................................

1,050

(b) and (c) Jan.31 3 4

Bal.

Cash 2,100 Feb. 1 430 4,240 2 1,050 720 6 970 14 400 15 1,050 2,830 26 185 27 575 28 400 28 1,050 3,780

Accounts Payable Jan.31 1,470 Feb. 6 970 Bal. 500 Unearned Revenue Feb. 27 2,830 Bal. 2,830

D. Scoffin, Capital Jan.31 13,750

Accounts Receivable Jan.31 720 Feb. 4 720 23 1,475 Bal. 1,475

Bal.

13,750

D. Scoffin, Drawings Feb. 27 575 Bal. 575

Prepaid Rent Feb.28 1,050 Bal. 1,050 Equipment Jan.31 12,400 Bal. 12,400

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Accounting Principles, Sixth Canadian Edition

PROBLEM 2-11A (Continued) (b) and (c) (Continued) Fees Earned Feb. 3 Feb. 23 Bal.

4,240 1,475 5,715

Feb. 1

Advertising Expense 430

Feb. 26

Internet Expense 185

Feb. 2 Feb. 15 Bal.

Rent Expense 1,050 1,050 2,100

Feb. 14 Feb. 28 Bal.

Salaries Expense 400 400 800

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PROBLEM 2-11A (Continued) (d) YH CURLING SCHOOL Trial Balance February 28, 2017 Debit Cash ................................................................. Accounts receivable ....................................... Prepaid rent ..................................................... Equipment ....................................................... Accounts payable ........................................... Unearned revenue ........................................... D. Scoffin, capital ............................................ D. Scoffin, drawings........................................ Fees earned ..................................................... Advertising expense ....................................... Internet expense.............................................. Rent expense................................................... Salaries expense .............................................

Credit

$ 3,780 1,475 1,050 12,400 $

500 2,830 13,750

575 5,715 430 185 2,100 800 $22,795

$22,795

Taking It Further The payments to YH Curling Club for February ice rental are an expense as they are a cost of the month to have a rink available to deliver the services performed by the school during the month. They are not an asset because there is no future benefit beyond the end of the month. However, the February 28 ice rental payment is for March ice rental, and thus has not been used yet, therefore it is an asset as it has a future benefit.

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PROBLEM 2-12A (a) YH CURLING SCHOOL Income Statement Month Ended February 28, 2017 Revenues Fees earned................................................................. Expenses Advertising expense.................................... $ 430 Internet expense .......................................... 185 Rent expense ............................................... 2,100 Salaries expense........................................... 800 Total expenses ....................................................... Profit ................................................................................

$5,715

3,515 $2,200

(b) YH CURLING SCHOOL Statement of Owner's Equity Month Ended February 28, 2017 D. Scoffin, capital, February 1, 2017 ....................................$13,750 Add: Profit ...................................................................... 2,200 15,950 Less: Drawings................................................................ 575 D. Scoffin, capital, February 28, 2017 ..................................$15,375

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PROBLEM 2-12A (Continued) (c) YH CURLING SCHOOL Balance Sheet February 28, 2017 Assets Cash .................................................................................... $ 3,780 Accounts receivable .......................................................... 1,475 Prepaid rent ........................................................................ 1,050 Equipment .......................................................................... 12,400 Total assets.................................................................... $18,705 Liabilities and Owner's Equity Liabilities Accounts payable .......................................................... $ 500 Unearned revenue.............................................................. 2,830 Total liabilities ........................................................... 3,330 Owner's Equity D. Scoffin, capital ...............................................................15,375 Total liabilities and owner's equity.............................$18,705 Taking It Further There is a difference between cash collected from customers and revenue in any specific month. Although the school has earned revenue, it has not necessarily collected all of the cash from providing the services. In addition, the school has received cash in advance of providing the services so this amount is not yet included in fees earned.

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PROBLEM 2-13A (a) SUPER DELIVERY SERVICE Trial Balance August 31, 2017

Debit Credit Cash (to balance debits = credits*) ........... $ 6,301 Accounts receivable .................................. 4,226 Supplies ...................................................... 299 Prepaid insurance ...................................... 358 Equipment .................................................. 49,660 Notes payable............................................. $19,480 Accounts payable ...................................... 3,250 Salaries payable ......................................... 883 Unearned revenue ...................................... 643 T. Rowe, capital .......................................... 48,840 T. Rowe, drawings...................................... 25,000 Service revenue.......................................... 37,800 Gas expense ............................................... 12,177 Insurance expense ..................................... 2,016 Interest expense ......................................... 1,006 Repairs expense......................................... 1,549 Salaries expense ........................................ 5,698 Supplies expense ....................................... 2,606 $110,896 $110,896 * Total debits without cash = $104,595 $110,896 – $104,595 = $6,301

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PROBLEM 2-13A (Continued) (b) SUPER DELIVERY SERVICE Income Statement Year Ended August 31, 2017 Revenues Service revenue .......................................................$37,800 Expenses Gas expense.............................................. $12,177 Insurance expense .................................. 2,016 Interest expense ...................................... 1,006 Repairs expense ...................................... 1,549 Salaries expense ..................................... 5,698 Supplies expense .................................... 2,606 Total expenses ......................................................25,052 Profit..............................................................................$12,748

SUPER DELIVERY SERVICE Statement of Owner's Equity Year Ended August 31, 2017 T. Rowe, capital, August 31, 2016 ............................. Plus: Profit ............................................................... Less: Drawings ......................................................... T. Rowe, capital, August 31, 2017 .............................

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$48,840 12,748 61,588 25,000 $36,588

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Accounting Principles, Sixth Canadian Edition

PROBLEM 2-13A (Continued) (b) (Continued) SUPER DELIVERY SERVICE Balance Sheet August 31, 2017 Assets Cash ............................................................................ Accounts receivable .................................................. Supplies ...................................................................... Prepaid insurance ...................................................... Equipment ..................................................................

$6,301 4,226 299 358 49,660

Total assets............................................................ $60,844 Liabilities and Owner's Equity Liabilities Notes payable .......................................................... $19,480 Accounts payable .................................................. 3,250 Salaries payable .................................................... 883 Unearned revenue.................................................... 643 Total liabilities .......................................................24,256 Owner's Equity T. Rowe, capital ........................................................ 36,588 Total liabilities and owner's equity.....................$60,844

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PROBLEM 2-13A (Continued) Taking It Further Tom Rowe has withdrawn almost twice as much cash compared to the profit. This has resulted in a net decrease to the owner’s capital account. Tom’s drawings have left the company with a low level of liquid assets (Cash of $6,301 + Accounts receivable of $4,226 = $10,527) to pay off liabilities (Notes payable of $19,480 + Accounts payable of $3,250 + Salaries payable of $883 = $23,613). Tom’s drawings should be based on his cash budget for the coming year and leave the company with sufficient cash to meet its liabilities and to be able to grow.

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Accounting Principles, Sixth Canadian Edition

PROBLEM 2-14A (a)

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

Correct Correct Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect

(b) 1 1 2 3 4

Interest Revenue Yes Salaries Expense Drawings

Yes Unearned Revenue Service Revenue No Supplies

Unearned Revenue Yes Cash Salaries Payable

Solutions Manual .

Understated $750 Overstated $1,000 Understated $1,000 Overstated $325 Understated $325 Understated $1,540 Understated $500 Overstated $495 Overstated $495

2-98

Yes Yes

Yes

Increase $1,540 Yes Decrease by $495

Increase by $750 Yes

Decrease by $325 Increase by $325 Yes Increase by $500 Decrease by $495

Chapter 2

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Accounting Principles, Sixth Canadian Edition

PROBLEM 2-14A (Continued) (b) (Continued) 2 Equipment

3 Overstated $3,600

4 Decrease by $3,600

Yes

10 Yes Utilities Expense Accounts Payable

Understated $650 Understated $650

Increase by $650

1 No

Taking It Further Disagree. Even though the trial balance is balanced, uncorrected errors misstate the financial position of the company. For example: 4. This error overstates Salaries Expense and thereby lowers profit on the income statement. 8. This error shows higher liabilities by overstating Salaries Payable and higher assets by overstating Cash. 10. This error understates Utilities Expense and understates Accounts Payable. It results in a higher profit on the income statement because of the unrecorded expense that was consumed in generating the profits.

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Accounting Principles, Sixth Canadian Edition

PROBLEM 2-15A (a)

WINTER CO. Trial Balance June 30, 2017

Debit

Credit

Cash ($2,835 + $570 - $750) ................................... $ 2,655 Accounts receivable ($1,861 + $750 – $570 + $980 – $98) ................................................... 2,923 Prepaid insurance (correct balance provided).... 655 Supplies ($500 + $360) .......................................... 860 Equipment ($7,900 – $360) ................................... 7,540 Accounts payable ($2,695 + $608– $806)............. $ 2,497 Unearned fees (correct balance provided) .......... 1,855 F. Winter, capital (correct balance provided) ...... 11,231 F. Winter, drawings ($800 + $400) ........................ 1,200 Service revenue ($3,460– $3,460 + $4,360) .......... 4,360 Office expense ($1,010 + $500)............................. 1,510 Salaries expense ($3,000 – $400) ......................... 2,600 $19,943 $19,943 Taking It Further There could still be errors after correcting the items identified. The errors could be counter-balancing errors that affect both the debit and credit side equally, such as a transposition error in recording a journal entry that affects both the debit and credit sides, or errors that counter-balance on the debit side, or on the credit side, of the trial balance (items #1, 2, and 6). The trial balance could also be in balance and not show transactions that have been omitted but that should have been recorded.

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Accounting Principles, Sixth Canadian Edition

PROBLEM 2-1B (a) (1) Transaction Jan. 2* 4

Basic Type Owner’s Equity Asset

Asset

7 10

Account Debited (2) Specific Account Rent Expense

Effect + $525

Cash

+ $1,055

Supplies

+ $420

(3)

No transaction at this point in time (see Jan. 18). Asset Cash + $1,500

Account Credited (1) (2) Specific Basic Type Account Asset Cash Service Revenue Accounts Payable

+ $1,055

Liability

+ $1,500

+ $500

Asset

+ $1,085

Service Revenue Cash

+ $1,085

– $420

Owner’s Equity Asset

+ $1,085

Asset

Accounts Receivable Notes Payable Cash

– $1,085

18 25

Liability

Asset

Cash

+ $5,000

Liability

Asset

Equipment

+ $1,950

Asset

2-101

+ $420

Unearned Revenue Cash

K. Battistella, Drawings Accounts Receivable Accounts Payable Cash

Solutions Manual .

Effect – $525

Owner’s Equity Liability

Owner’s Equity Asset

(3)

Chapter 2

– $500

– $420

+ $5,000 – $1,950

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-1B (Continued) *Solution provided in text. (b) GENERAL JOURNAL Date Jan.

Account Titles 2

Debit

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

525

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

1,055

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

420

Credit

525

1,055

420

7 No transaction at this time. 10

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

1,500

12 K. Battistella, Drawings......................... Cash...................................................

500

1,500

500

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

1,085

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

420

1,085

420

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

1,085

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

5,000

1,950

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Equipment.............................................. Cash................................................... 2-102

1,085

5,000 1,950 Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-1B (Continued) Taking It Further

Cash is an asset and is on the left-hand side of the accounting equation. When cash is received, it increases the balance, and when cash is paid out, it decreases the balance. To decrease an asset, it is credited, so a credit to cash decreases cash.

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PROBLEM 2-2B GENERAL JOURNAL Date May

Account Titles

Debit

Credit

1 Cash .......................................................... 70,000 D. Tanner, Capital ............................... 70,000 3 Land ...................................................... 225,000 Building................................................. 75,000 Equipment............................................. 55,000 35,000 Cash.................................................. Notes Payable .................................. 320,000 3 Insurance Expense.................................. Cash.....................................................

780

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

1,950

780

1,950

Cash ......................................................... 5,400 Admissions Revenue..........................

16 Salaries Expense ..................................... Cash.....................................................

5,400

2,600

20 Cash ......................................................... 500 Accounts Receivable .............................. 2,250 Admissions Revenue..........................

2,600

2,750

22 No entry required 29

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Cash ......................................................... 2,250 Accounts Receivable ..........................

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2,250

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PROBLEM 2-2B (Continued) Date

Account Titles

May 30

Ref.

Debit

Credit

Cash ......................................................... 5,750 Admissions Revenue..........................

5,750

31 Interest Expense...................................... 1,200 Notes Payable.......................................... 5,333 Cash.....................................................

6,533

31 D. Tanner, Drawings................................ Cash.....................................................

1,800 1,800

31 Salaries Expense ..................................... Cash.....................................................

3,800 3,800

Taking It Further The purpose of the journal entries is to show the debit and credit effects of each transaction on specific accounts. This helps to prevent and locate errors because the debit and credit amounts in the entry have to balance. The journal entries also provide a chronological record of transactions, give an explanation of the transaction, and identify source documents. The next step in the recording process is to transfer the information to the ledger by posting the transactions to specific ledger accounts. Dustin should find the information generated by this next step more useful since posting transactions to the ledger will update the ledger account balances. Once this step is completed, a trial balance can be prepared from the ledger accounts as can the financial statements.

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PROBLEM 2-3B Apr.

Cash ....................................................... 27,750 A. Rai, Capital....................................

27,750

Equipment.............................................. Notes Payable ...................................

5,000 5,000

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

250

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

6,300 5,950

A. Rai, Drawings .................................... Cash...................................................

4,300

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

250

Solutions Manual .

250

12,250

4,300

250

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

2,450

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

5,950

Office Expense ...................................... Cash...................................................

1,200

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

2-106

2,450

5,950

1,200 45

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-3B (Continued) Taking It Further Assets are on the left side of the basic accounting equation and liabilities and owner’s equity are on the right side of the basic accounting equation. Since debits are on the left side, and assets are also on the left side, the normal balance of an asset is a debit balance. Since credits are on the right side and liabilities are on the right side, the normal balance of a liability is a credit balance. The same is also true for owner’s equity. Revenues increase owner’s equity and therefore also have a normal credit balance. But expenses and drawings are decreases to owner’s equity and thus have a normal debit balance.

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PROBLEM 2-4B (a) J1 Credit

Date

Account Titles

Ref.

Debit

Apr. 1

Cash................................................. B. Fair, Capital ........................

101 301

45,000 45,000

No entry—not a transaction.

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

729 101

800

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

126 201

1,500

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

112 400

1,800

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

101 209

500

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

101 400

1,500

Salaries Expense ............................ Cash ........................................

726 101

2,000

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

201 101

600

3 10

11 20 30

Solutions Manual .

2-108

800 1,500 1,800 500 1,500 2,000

600

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-4B (Continued) (b) Cash Date Apr. 1 2 11 20 30 30

Date Apr. 10

Date Apr. 3

Explanation

Ref. J1 J1 J1 J1 J1 J1

Accounts Receivable Explanation Ref. J1 Supplies Explanation Ref. J1

Debit 45,000

Credit 800

500 1,500 2,000 600

Debit 1,800

Debit 1,500

No. 101 Balance 45,000 44,200 44,700 46,200 44,200 43,600

Credit

No. 112 Balance 1,800

Credit

No. 126 Balance 1,500

Credit 1,500

Date Apr. 3 30

Accounts Payable Explanation Ref. J1 J1

600

No. 201 Balance 1,500 900

Date Apr. 11

Unearned Service Revenue Explanation Ref. Debit J1

No. 209 Balance 500

Solutions Manual .

2-109

Debit

Credit 500

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-4B (Continued) B. Fair, Capital Date Apr. 1

Explanation

Ref. J1

No. 301 Debit

Credit 45,000

Service Revenue Date Apr. 10 20

Explanation

Ref. J1 J1

No. 400 Debit

Credit 1,800 1,500

Salaries Expense Date Apr. 30

Date Apr. 2

(c)

Explanation

Ref. J1

Rent Expense Explanation Ref. J1

Balance 45,000

Balance 1,800 3,300

No. 726 Debit 2,000

Credit

Debit 800

Credit

Balance 2,000

No. 729 Balance 800

BARBARA FAIR, ARCHITECT Trial Balance April 30, 2017 Cash.......................................................... Accounts Receivable............................... Supplies ................................................... Accounts Payable .................................... Unearned Revenue .................................. B. Fair, Capital ......................................... Service Revenue ...................................... Salaries Expense ..................................... Rent Expense ...........................................

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Debit $43,600 1,800 1,500

Credit

$ 900 500 45,000 3,300 2,000 800 $49,700

$49,700 Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-4B (Continued) Taking It Further Barbara is not correct. Debits mean left and credits mean right. Whether we debit or credit an account depends on the type of account (asset, liability, or owner’s equity) and whether the account is increasing or decreasing. For example, if we buy equipment with cash, we debit an equipment account and credit a cash account. Just because this transaction reduces (credits) the cash account, it does not mean it is bad. It means a transaction has taken place that has used some of the cash of the entity and this needs to be reflected in the books.

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PROBLEM 2-5B (a) GENERAL JOURNAL Date Aug.

Account Titles

Ref.

Debit

1 Cash ............................................... 101 T. Nguyen, Capital ..................... 301

25,000

1 Rent Expense................................. 726 Cash ........................................... 101

750

2 Utilities Expense ............................ 737 Cash ........................................... 101

250

3 Equipment ...................................... 151 Cash ........................................... 101

5,250

5 Supplies ......................................... 126 Accounts Payable ..................... 201

675

8 Accounts Receivable..................... 112 Service Revenue ....................... 400

1,270

12 Advertising Expense ..................... 610 Cash ........................................... 101

945

20 Cash ............................................... 101 Service Revenue ....................... 400

1,320

24 Cash ............................................... 101 Unearned Revenue ................... 209

2,500

25 Accounts Payable.......................... 201 Cash ........................................... 101

675

Solutions Manual .

2-112

Credit

25,000

750

250

5,250

675

1,270

945

1,320

2,500 675

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-5B (Continued) (a) (Continued) Aug. 28 Cash ............................................. 101 Accounts Receivable .............. 112

970

29 T. Nguyen, Drawings ................... 306 Cash......................................... 101

1,225

31 Utilities Expense.......................... 737 Accounts Payable ................... 201

225

970

1,225

225

(b) CASH Date Aug.

Explanation 1 1 2 3 12 20 24 25 28 29

Debit

J1 J1 J1 J1 J1 J1 J1 J1 J1 J1

25,000

8 28

Solutions Manual .

J1 J1

2-113

Credit

1,225

25,000 24,250 24,000 18,750 17,805 19,125 21,625 20,950 21,920 20,695

Credit

No. 112 Balance

970

1,270 300

750 250 5,250 945 1,320 2,500 675 970

ACCOUNTS RECEIVABLE Explanation Ref. Debit

Date Aug.

Ref.

No. 101 Balance

1,270

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-5B (Continued) (b) (Continued) SUPPLIES Date Aug.

Explanation 5

Date Aug.

5 25 31

675

Debit

No. 151 Balance

J1 J1 J1

Aug. 24

Solutions Manual .

2-114

Credit

No. 201 Balance

225

675 0 225

Credit

No. 209 Balance

2,500

Credit

No. 301 Balance

25,000

675

5,250

675

T. NGUYEN, CAPITAL Explanation Ref. Debit

Date

Credit

5,250

UNEARNED REVENUE Explanation Ref. Debit

Date

Aug.

Debit

ACCOUNTS PAYABLE Explanation Ref. Debit

Date Aug.

Ref.

EQUIPMENT Explanation Ref.

Credit

No. 126 Balance

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-5B (Continued) (b) (Continued)

T. NGUYEN, DRAWINGS Explanation Ref. Debit

Date Aug. 30

SERVICE REVENUE Explanation Ref.

Date Aug.

8 20

Aug. 12

Debit

J1 J1

J1 RENT EXPENSE Explanation Ref.

Date 1

J1 UTILITIES EXPENSE Explanation Ref.

Date Aug.

1,225

ADVERTISING EXPENSE Explanation Ref. Debit

Date

Aug.

2 31

Solutions Manual .

J1 J1

2-115

Credit

1,225

Credit

No. 400 Balance

1,270 1,320

1,270 2,590

Credit

No. 610 Balance

945

Debit

945

Credit

750

Debit 250 225

No. 306 Balance

No. 726 Balance 750

Credit

No. 737 Balance 250 475

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-5B (Continued) (c) NGUYEN IMPORT SERVICES Trial Balance August 31, 2017

Debit Cash ............................................................ $20,695 Accounts receivable .................................. 300 Supplies ...................................................... 675 Equipment................................................... 5,250 Accounts payable....................................... Unearned revenue ...................................... T. Nguyen, capital....................................... T. Nguyen, drawings .................................. 1,225 Service revenue.......................................... Advertising expense .................................. 945 Rent expense .............................................. 750 Utilities expense ......................................... 475 $30,315

Credit

225 2,500 25,000 2,590

$30,315

Taking It Further While Thanh is correct in making the connection that transactions recorded to the drawings, revenue, and expense accounts ultimately impact the owner’s capital account, there remains a need for these separate accounts. Without them, a business is unable to report the revenues and expenses on the income statement, and the drawing by the owner as reported on the statement of owner’s equity. This detailed information is relevant and necessary to the users of the financial statements.

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PROBLEM 2-6B (a)

GENERAL JOURNAL

Date Nov.

Account Titles

Debit

1 Cash .................................................... Equipment........................................... H. Kiersted, Capital ........................

Credit

35,000 12,000 47,000

2 No entry—not a transaction. 3 Rent Expense ..................................... Prepaid Rent ....................................... Cash................................................ 4

2,140 2,140 4,280

Insurance Expense............................. Cash ($4,740 ÷ 12)..........................

395

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

18,000

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

1,550

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

475

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

990

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

4,500

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

1,000

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2-117

395 6,000 12,000

1,550

475

990

4,500 1,000

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-6B (Continued) (a) (Continued) Date

Account Titles

Debit

Nov. 27 Telephone Expense............................ Accounts Payable ..........................

220

27 Cash .................................................... Unearned Revenue ........................

750

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

2,800

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

30 Salaries Expense ................................ Cash................................................

2,825

30 H. Kiersted, Drawings ........................ Cash................................................

700

30 H. Kiersted, Drawings ........................ Cash................................................

1,150

Credit

220

750

2,800

2,825

700

1,150

(b) Cash Nov. 1 35,000 Nov3 16 990 4 27 750 5 29 2,800 7 26 30 30 30 30 Bal. 22,655 Solutions Manual .

4,280 395 6,000 475 1,000 60 2,825 700 1,150

2-118

Accounts Receivable Nov.20 4,500 Nov 29 2,800 Bal. 1,700

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-6B (Continued) (b) (Continued)

Nov.6 7 Bal.

Supplies 1,550 475 2,025

Nov.3

Prepaid Rent 2,140

Bal.

2,140

Nov. 1 5 Bal.

Equipment 12,000 18,000 30,000

Insurance Expense Nov. 4 395

Accounts Payable Nov26 1,000 Nov 6 1,550 Nov 27 220 Bal. 770

Interest Expense Nov. 30 60

Unearned Revenue Nov27 Bal. Notes Payable Nov.5 Bal.

H. Kiersted, Drawings Nov.30 700 Nov.30 1,150 Bal. 1,850 Service Revenue Nov.16 990 20 4,500 Bal. 5,490

Bal.

750 750

12,000 12,000

H. Kiersted, Capital Nov. 1 47,000 Bal. 47,000

Solutions Manual .

2-119

395

Bal.

Nov. 3 Bal.

60 Rent Expense 2,140 2,140

Salaries Expense Nov 30 2,825 Bal. 2,825 Telephone Expense Nov. 27 220 Bal. 220

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-6B (Continued) (c) KIERSTED FINANCIAL SERVICES Trial Balance November 30, 2017 Debit Cash............................................................. $22,655 Accounts receivable ................................... 1,700 Supplies ...................................................... 2,025 Prepaid rent................................................. 2,140 Equipment ................................................... 30,000 Accounts payable ....................................... Unearned revenue ...................................... Notes payable ............................................. H. Kiersted, capital ..................................... H. Kiersted, drawings ................................. 1,850 Service revenue .......................................... Insurance expense ..................................... 395 Interest expense ......................................... 60 Rent expense .............................................. 2,140 Salaries expense......................................... 2,825 Telephone expense .................................... 220 $66,010

Solutions Manual .

2-120

Credit

$ 770 750 12,000 47,000 5,490

$66,010

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-6B (Continued) Taking It Further This is not true. The cash account shows an increase of $22,655 during the month of November, whereas the company shows a loss of $150 for the month ($5,490 – $395 – $60 – $2,140 – $2,825 – $220). The change in the cash account does not reflect profit or loss because not all transactions represent increases in revenues or expenses. One of the major sources of cash during the month is an investment by the owner of $35,000. This increases owner’s equity, but is not a source of revenue for the company. The company received cash in advance of doing work (unearned service revenue of $750) and performed services in advance of payment (accounts receivable of $1,700), as well as making non-expense payments for services in advance (prepaid rent), equipment and owner drawings. The statement of cash flows reconciles the changes in the cash account to its various uses and sources.

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PROBLEM 2-7B (a)

GENERAL JOURNAL

Date July

Account Titles

Debit

2 Film Rental Expense ........................... Cash.................................................

800

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

620

Credit

800

620

3 No entry—not a transaction. 5 No entry—not a transaction. 10

Cash ..................................................... Admissions Revenue......................

1,950

11 Mortgage Payable................................ Interest Expense.................................. Cash.................................................

2,000 500

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

350

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

2,800

Solutions Manual .

1,950

2,500

350

2,800

Film Rental Expense ........................... Accounts Payable ...........................

750

Cash ..................................................... Admissions Revenue......................

3,500

2-122

750 3,500

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-7B (Continued) (a) (Continued) July 30 F. Ferguson, Drawings ........................ Cash.................................................

1,200

30 Prepaid Film Rental ............................. Cash.................................................

700

31 Salaries Expense ................................. Cash.................................................

1,900

31 Cash ..................................................... Accounts Receivable .......................... Concession Revenue......................

260 260

1,200

700

1,900

520

(b) and (c) Cash Date

Explanation

June 30 Balance July 2 2 10 11 12 16 29 30 30 31 31

Solutions Manual .

Ref.  J1 J1 J1 J1 J1 J1 J1 J1 J1 J1 J1

2-123

Debit

Credit

800 620 1,950 2,500 350 2,800 3,500 1,200 700 1,900 260

Balance 6,000 5,200 4,580 6,530 4,030 3,680 880 4,380 3,180 2,480 580 840

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-7B (Continued) (b) and (c) (Continued) Accounts Receivable Date

Explanation

July 31

Ref.

Debit

260

Ref.

Debit

Credit Balance

700

Ref.

Debit

Credit

Balance

Prepaid Film Rental Date

Explanation

July 30

700

Land Date

Explanation

Credit Balance



June 30 Balance

100,000

Buildings Date

Explanation

Ref.

Debit

Credit



June 30 Balance

Balance 80,000

Equipment Date

Explanation

June 30 Balance

Solutions Manual .

Ref. 

2-124

Debit

Credit

Balance 25,000

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-7B (Continued) (b) and (c) (Continued) Accounts Payable Date

Explanation

Ref.  J1 J1

June 30 Balance July 16 19

Debit

Credit

Balance

750

5,000 2,200 2,950

Credit

Balance

2,800

Mortgage Payable Date

Explanation

June 30 Balance July 11

Ref.  J1

Debit

125,000 123,000

2,000

F. Ferguson, Capital Date

Explanation

June 30 Balance

Ref.

Debit

Credit



Balance 81,000

F. Ferguson, Drawings Date

Explanation

July 30

Ref.

Debit

1,200

Credit

Balance 1,200

Admissions Revenue Date July 10 29

Solutions Manual .

Explanation

Ref. J1 J1

2-125

Debit

Credit

Balance

1,950 3,500

1,950 5,450

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-7B (Continued) (b) and (c) (Continued) Concession Revenue Explanation

Date July 31

Ref.

Debit

Credit

Balance

520

Credit

Balance

Advertising Expense Explanation

Date July

Ref. J1

Debit 620

620

Film Rental Expense Explanation

Date July

2 19

Ref. J1 J1

Debit

Credit

800 750

Balance 800 1,550

Interest Expense Date

Explanation

July 11

Ref. J1

Debit

Credit

500

Balance 500

Repairs Expense Date July 12

Solutions Manual .

Explanation

Ref. J1

2-126

Debit 350

Credit

Balance 350

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-7B (Continued) (b) and (c) (Continued) Salaries Expense Explanation

Date July 31

Ref.

Debit

1,900

Credit

Balance 1,900

(d) HIGHLAND THEATRE Trial Balance July 31, 2017

Debit Cash ....................................................... Accounts receivable ............................. Prepaid film rental ................................. Land ....................................................... Buildings................................................ Equipment.............................................. Accounts payable.................................. Mortgage payable .................................. F. Ferguson, capital .............................. F. Ferguson, drawings .......................... Admissions revenue ............................. Concession revenue ............................. Advertising expense ............................. Film rental expense ............................... Interest expense .................................... Repairs expense.................................... Salaries expense ...................................

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Credit

$840 260 700 100,000 80,000 25,000 $ 2,950 123,000 81,000 1,200 5,450 520 620 1,550 500 350 1,900 $212,920 $212,920

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-7B (Continued) Taking It Further The revenue and expense accounts in the trial balance show a profit for the month of July of $1,050 ($5,450 + $520 – $620– $1,550 – $500 – $350 – $1,900). Although a positive profit is a good indication of the company’s profitability, it is not sufficient information to determine whether Highland Theatre is a sound business. One month’s transactions do not indicate a pattern of profitability, in particular for businesses such as theatres where revenues tend to be seasonal. The financial results for the entire year should be examined, along with comparative amounts for previous years, to determine if the company has a trend of profitability.

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PROBLEM 2-8B (b)

GENERAL JOURNAL

Date Dec.

Account Titles and Explanation

J1 Debit

Credit

1 Rent Expense................................................ 525 Cash.....................................................

525

1 Equipment .................................................. 3,270 Cash..................................................... Notes Payable .....................................

1,270 2,000

4 Cash ........................................................... 1,880 Accounts Receivable ..........................

1,880

7 Insurance Expense ....................................... 308 Cash.....................................................

308

8 Supplies ........................................................ 135 Accounts Payable ...............................

135

10 Accounts Payable...................................... 2,140 Cash.....................................................

2,140

12 Unearned Revenue ....................................... 765 Service Revenue .................................

765

20 Cash ........................................................... 3,480 Service Revenue .................................

3,480

21 Advertising Expense .................................... 115 Cash.....................................................

115

24 L. Kuznetsova, Drawings .......................... 2,860 Cash.....................................................

2,860

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PROBLEM 2-8B (Continued) (b) (Continued) Dec. 28

Accounts Receivable .............................. 2,280 Service Revenue .................................

29 Cash ......................................................... Unearned Revenue .............................

560

30 Salaries Expense ..................................... Cash.....................................................

655

31 Notes Payable.......................................... Interest Expense...................................... Cash.....................................................

160 10

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2-130

2,280

560

655

170

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-8B (Continued) (a) and (c)

Nov. 30 4

20 29

Bal.

Cash 3,165 Dec. 1 1 1,880 7 10 3,480 21 560 24 30 31 1,042

Accounts Payable Dec. 10 2,140 Nov. 30 4,245 Dec. 8 135

525 1,270

Bal. 308 2,140 115 2,860 655 170

2,240

Unearned Revenue Dec. 12 765 Nov. 30 Dec. 29 Bal.

765 560 560

L. Kuznetsova, Capital Nov. 30 19,300

Accounts Receivable Nov. 30 2,110 Dec. 4 1,880 Dec. 28 2,280 Bal. 2,510

L. Kuznetsova, Drawings Nov. 30 31,190 Dec. 24 2,860 Bal. 34,050

Supplies Nov. 30 1,340 Dec. 8 135 Bal. 1,475 Equipment Nov. 30 17,730 Dec. 1 3,270 Bal. 21,000 Notes Payable Dec.31 160 Nov. 30 2,000 Bal. 1,840

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PROBLEM 2-8B (Continued) (a) and (c) (Continued) Service Revenue Nov. 30 47,963 Dec. 12 765 20 3,480 28 2,280 Bal. 54,488 Advertising Expense Nov. 30 1,265 Dec. 21 115 Bal. 1,380 Insurance Expense Nov. 30 3,388 Dec. 7 308 Bal. 3,696 Rent Expense Nov. 30 5,775 Dec. 2 525 Bal. 6,300 Salaries Expense Nov. 30 6,310 Dec. 30 655 Bal. 6,965 Interest Expense Dec. 31 10

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PROBLEM 2-8B (Continued) (d) LVK COACHING SERVICES Trial Balance December 31, 2017 Debit Cash ............................................................ $ 1,042 Accounts receivable .................................. 2,510 Supplies ...................................................... 1,475 Equipment................................................... 21,000 Accounts payable....................................... Notes payable ............................................. Unearned revenue ...................................... L. Kuznetsova, capital................................ L. Kuznetsova, drawings ........................... 34,050 Service revenue.......................................... Advertising expense .................................. 1,380 Insurance expense ..................................... 3,696 Rent expense .............................................. 6,300 Salaries expense ........................................ 6,965 Interest expense ......................................... 10 $78,428

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Credit

$ 2,240 1,840 560 19,300 54,488

$78,428

Chapter 2

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 2-8B (Continued) Taking It Further The cash balance has decreased from $3,165 to $1,042 or $2,123 during the month of December. This is a substantial decrease from the opening balance and exposes the company to the possibility of not being able to pay its outstanding liabilities. The company borrowed $2,000 at the beginning of December to purchase equipment. Had the company not purchased the additional equipment, the cash balance for the month would have been $2,482 ($1,042 + $1,270 + $170 payment on the note payable). This still represents a decrease from the December ending balance. Depending on the timing of the repayment of the note payable, the company may be able to generate sufficient cash from the collection of its account receivable to be able to honour its commitments on its liabilities. During the month of January, the company should collect outstanding receivables as quickly as possible (in particular those amounts still outstanding from November) and reduce owner drawings. The company will also need to ensure the new equipment generates additional cash as soon as possible.

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PROBLEM 2135B J. NIKKO Trial Balance November 30, 2017 Debit Cash ............................................................ Accounts receivable .................................. Supplies ...................................................... Prepaid expenses....................................... Land ............................................................ Equipment................................................... Accounts payable....................................... Notes payable ............................................. J. Nikko, capital .......................................... J. Nikko, drawings ...................................... Service revenue.......................................... Rent expense .............................................. Utilities expense ......................................... Salaries expense ........................................ Interest expense .........................................

Credit

$ 8,000 10,250 5,000 3,000 64,000 18,250 $ 12,500 30,000 28,000 12,000 63,050 4,500 550 7,500 500 $133,550 $133,550

Taking It Further The advantages of first recording the individual transactions in a journal and then posting to the ledger are: 1. The journal discloses in one place, the complete effect of a transaction. 2. The journal provides a chronological record of all transactions. 3. The journal helps to prevent or locate errors, because the debit and credit amounts for each entry can be readily compared. The advantage of the last step in the posting process is to indicate that the item has been posted, and to provide a crossreference. Solutions Manual .

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PROBLEM 2-10B (a) KIERSTED FINANCIAL SERVICES Income Statement Month Ended November 30, 2017 Revenues Service revenue ..................................................... $ 5,490 Expenses Insurance expense .................................. $ 395 Interest expense ...................................... 60 Rent expense ........................................... 2,140 Salaries expense...................................... 2,825 Telephone expense ...................................... 220 Total expenses ..................................................... 5,640 Loss............................................................................. $ (150) (b) KIERSTED FINANCIAL SERVICES Statement of Owner's Equity Month Ended November 30, 2017 H. Kiersted, capital, November 1, 2017 .................. $ 0 Add: Investment ........................................................ 47,000 47,000 Less: Loss ................................................. $ 150 Drawings ......................................... 1,850 2,000 H. Kiersted, capital, November 30, 2017..................... $45,000

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PROBLEM 2-10B (Continued) (c) KIERSTED FINANCIAL SERVICES Balance Sheet November 30, 2017 Assets Cash .......................................................................... Accounts receivable ................................................ Supplies .................................................................... Prepaid rent .............................................................. Equipment................................................................. Total assets ..........................................................

$22,655 1,700 2,025 2,140 30,000 $58,520

Liabilities and Owner's Equity Liabilities Notes payable ...................................................... Accounts payable ................................................ Unearned service revenue .................................. Total liabilities .................................................

$12,000 770 750 13,520

Owner's Equity H. Kiersted, capital ................................................... 45,000 Total liabilities and owner's equity .................... $58,520 Taking It Further In its first month of operations, Kiersted Financial Services incurred more expenses than it generated in revenues resulting in a loss of $150. Since this is a new business, it may take a few months for revenues to reach and exceed the level of expenses. Haakon will need to monitor the revenues generated as compared to expenses incurred to ensure the company reaches profitability as soon as possible.

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PROBLEM 2-11B (a)

GENERAL JOURNAL Account Titles

Mar.

Debit

Credit

1 Cash ......................................................... 12,000 Notes Payable ....................................

12,000

2 Accounts Payable ....................................13,000 Cash....................................................

13,000

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

145

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

550

145

550

Cash ........................................................ 8,000 Accounts Receivable .........................

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

5,000

30 Miscellaneous Expense ......................... Cash....................................................

580

8,000

5,000

580

31 Cash ........................................................ 2,000 Accounts Receivable ............................. 5,000 Service Revenue ................................

7,000

31 Salaries Expense .................................... Cash....................................................

1,650

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1,650

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PROBLEM 2-11B (Continued) (a) (Continued) Mar. 31 Interest Expense..................................... Notes Payable......................................... Cash....................................................

55 500

31 Rent Expense ......................................... Prepaid Rent ........................................... Cash....................................................

950 950

31 H. Nolan, Drawings................................. Cash....................................................

1,000

555

1,900 1,000

(b) and (c) Cash Feb.28 3,500 2 13,000 Mar. 1 12,000 3 145 16 8,000 10 550 18 5,000 30 580 31 2,000 31 1,650 31 555 31 1,900 31 1,000 Bal. 1,120

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Accounts Receivable Feb.28 14,450 Mar.16 8,000 31 5,000 Bal. 11,450 Prepaid Rent Feb.28 950

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PROBLEM 2-11B (Continued) (b) and (c) (Continued) Service Revenue Feb.28 7,000

Equipment Feb.28 15,100

Advertising Expense Mar. 10 550

Accounts Payable Feb.28 18,750 Mar. 2 13,000 18 5,000 Bal. 750

Interest Expense Mar. 31 55 Miscellaneous Expense Mar. 30 580

Notes Payable Mar. 30 500 Feb.28 12,000 Bal.

11,500

Rent Expense Mar. 31 950

H. Nolan, Capital Feb.28 14,300

Insurance Expense Mar. 3 145

H. Nolan, Drawings Mar. 31 1,000

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Salaries Expense Mar. 31 1,650

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PROBLEM 2-11B (Continued) (d) HN HR CONSULTING Trial Balance March 31, 2017

Debit Cash ........................................................... $1,120 Accounts receivable ................................... 11,450 Prepaid rent ................................................. 950 Equipment.................................................... 15,100 Accounts payable........................................ Notes payable .............................................. H. Nolan, capital .......................................... H. Nolan, drawings ...................................... 1,000 Service revenue........................................... 550 Advertising expense ................................... Interest expense .......................................... 55 Miscellaneous expense............................... 580 Rent expense ............................................... 950 Insurance expense ...................................... 145 Salaries expense ......................................... 1,650 $33,550

Credit

$750 11,500 14,300 7,000

$33,550

Taking It Further The March rent payment of $1,900 is half asset and half expense. The asset portion of $950 is for the rent for April and the expense portion of $950 is for the March rent. April’s rent is a future benefit at March 31, and thus is an asset, whereas March’s rent has been used by March 31 and thus is an expense.

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PROBLEM 2-12B (a) HN HR CONSULTING Income Statement Month Ended March 31, 2017 Revenues Service revenue ....................................................... $ 7,000 Expenses Advertising expense................................ $ 550 Insurance expense .................................. 145 Interest expense ...................................... 55 Miscellaneous expense ........................... 580 Rent expense ........................................... 950 Salaries expense ........................................ 1,650 Total expenses ....................................................... 3,930 Profit ............................................................................... $3,070 (b) HN HR CONSULTING Statement of Owner's Equity Month Ended March 31, 2017 H. Nolan, capital, March 1, 2017.................................. $14,300 Add: Profit ..................................................................... 3,070 17,370 Less: Drawings ............................................................. 1,000 H. Nolan, capital, March 31, 2017................................ $16,370

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PROBLEM 2-12B (Continued) (c) HN HR CONSULTING Balance Sheet March 31, 2017 Assets Cash ............................................................................. $ 1,120 Accounts receivable ...................................................... 11,450 Prepaid rent ................................................................. 950 Equipment ...................................................................... 15,100 Total assets ............................................................. $28,620 Liabilities and Owner's Equity Liabilities Accounts payable ................................................... $ 750 Notes payable.......................................................... 11,500 Total liabilities ...................................................... 12,250 Owner's Equity H. Nolan, capital ........................................................ 16,370 Total liabilities and owner's equity .................... $28,620 Taking It Further Hobson would not be able to retire and take out cash from the business in an amount equal to his capital account balance of $16,370. The cash balance is only $1,120. All other assets would need to be converted to cash, and the debts paid first. Hobson would have the right to whatever cash remained.

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PROBLEM 2-13B (a) LAZDOWSKI MARKETING SERVICES Trial Balance October 31, 2017

Cash ......................................................... Accounts receivable ............................... Supplies ................................................... Prepaid rent ............................................. Furniture .................................................. Equipment................................................ Notes payable .......................................... Accounts payable.................................... Unearned revenue ................................... I. Lazdowski, capital ................................ I. Lazdowski, drawings ........................... Fees earned (to balance*) ....................... Advertising expense ............................... Insurance expense .................................. Interest expense ...................................... Supplies expense .................................... Rent expense ........................................... Salaries expense .....................................

Debit $ 4,930 6,010 1,240 975 56,685 25,970

Credit

$48,850 4,403 3,555 57,410 75,775 114,047 14,970 2,020 2,445 5,000 11,700 20,545 $228,265 $228,265

*Total credits without fees earned = $114,218 $228,265 – $114,218=$114,047

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PROBLEM 2-13B (Continued) (b) LAZDOWSKI MARKETING SERVICES Income Statement Year Ended October 31, 2017 Revenues Fees earned ........................................................... $114,047 Expenses Advertising expense ................................. $14,970 Insurance expense .................................. 2,020 Interest expense ...................................... 2,445 Supplies expense .................................... 5,000 Rent expense ..............................................11,700 Salaries expense .........................................20,545 Total expenses ............................................... 56,680 Profit ............................................................................. $57,367

LAZDOWSKI MARKETING SERVICES Statement of Owner's Equity Year Ended October 31, 2017 I. Lazdowski, capital, November 1, 2016 ................ Add: Profit ............................................................ Less: Drawings....................................................... I. Lazdowski, capital, October 31, 2017..................

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$57,410 57,367 114,777 75,775 $39,002

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PROBLEM 2-13B (Continued) (b) (Continued) LAZDOWSKI MARKETING SERVICES Balance Sheet October 31, 2017 Assets Cash ........................................................................... $ 4,930 Accounts receivable ................................................. 6,010 Supplies ..................................................................... 1,240 Prepaid rent ............................................................... 975 Furniture .................................................................... 56,685 Equipment.................................................................. 25,970 Total assets ........................................................... $95,810 Liabilities and Owner's Equity Liabilities Notes payable ..........................................................$48,850 Accounts payable ................................................. 4,403 Unearned revenue ................................................... 3,555 Total liabilities .......................................................56,808 Owner's Equity I. Lazdowski, capital................................................ 39,002 Total liabilities and owner's equity .................... $95,810

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PROBLEM 2-13B (Continued) Taking It Further Drawings exceeded profit. This has resulted in a net decrease to the owner’s capital account. Inga’s drawings have left the company with a low level of liquid assets (Cash of $4,930 + Accounts receivable of $6,010 = $10,940) to pay off liabilities (Notes payable of $48,850 + Accounts payable of $4,403 = $53,253). Inga’s drawings should be based on her cash budget for the coming year and should leave the company with sufficient cash to able to meet its liabilities and grow.

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PROBLEM 2-14B (a)

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

(b) Trans 1 1 No 2

3 4

2 Prepaid Insurance Yes Accounts Receivable Accounts Payable

3 Understated $3,600 Understated $500 Understated $500

4 Increase by $3,600 Increase by $500

Yes Salaries Payable Cash

Understated $1,200 Understated $1,200 Understated $250 Understated $1,200 Overstated $1,200

Increase by $1,200

Increase by $250 Yes

Yes

Cash

Yes Drawings Salaries Expense

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5 Yes Increase by $500

Yes

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PROBLEM 2-14B (Continued) (b) (Continued) Trans 1 2 7 Yes Unearned Revenue Service Revenue 8 No Accounts Payable 9

3 Understated $400 Overstated $400 Understated $750 = ($375 × 2) No Equipment Overstated $1,800 Cash Overstated $8,600 Accounts Understated $6,800 Payable Yes Accounts Understated Receivable $950 Understated Service Revenue $950

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Yes

Increase by $750

Decrease by $10,400

Increase by $6,800

Increase by $950

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PROBLEM 2-14B (Continued) Taking It Further 2. This error understates Accounts Receivable and Accounts Payable. It may lead to liabilities being unpaid and receivables being uncollected. 4. This error may lead to salaries to employees not being paid since the transaction was posted as a credit to Cash. It would show as already being paid. The error would also understate the company’s liabilities. 6. This error overstates Salaries Expense. It results in lower profits on the income statement because of the additional expense. 7. This error shows lower liabilities by understating Unearned Revenue. It results in higher profit on the income statement because of the overstated Service Revenue. 10. This error understates the asset Accounts Receivable and understates Service Revenue. It results in a lower profit on the income statement because of the unrecorded revenue.

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PROBLEM 2-15B SHAWNEE SLOPES COMPANY Trial Balance June 30, 2017 Debit Cash ($5,875 + $210 – $120 +$650) ................... $ 6,615 Accounts receivable ($3,620 – $385– $385) .......... 2,850 Supplies ($0 + $650) ........................................... 650 Equipment ($14,020 – $650 + $2,000) .................. 15,370 Notes payable ($0 + $2,000)............................... Accounts payable ($5,290 – $165– $165 +$650) Property taxes payable ($500 – $500) ............... A. Shawnee, capital ($17,900 + $750) ................ A. Shawnee, drawings ($0 + $750) .................... 750 Service revenue ($7,027– $560 + $650) ............. Advertising expense ($1,132 – $210 + $120) ......... 1,042 Property tax expense ($1,100 + $500) ................... 1,600 Salaries expense ($4,150 + $350) ...................... 4,500 $33,377

Credit

$ 2,000 5,610 0 18,650 7,117

$33,377

Taking It Further There could still be errors after correcting the items identified. The errors could be counter-balancing errors that affect both the debit and credit side equally, such as a transposition error in recording a journal entry that affects both the debit and credit sides (item #6), or errors that counter-balance on the debit side or on the credit side of the trial balance. The trial balance could also be in balance and not show transactions that have been omitted but that should have been recorded.

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Accounting Principles, Seventh Canadian Edition

BYP2-1 FINANCIAL REPORTING PROBLEM (1) Financial Statement

(a)

Account Interest expense Cash and cash equivalents Unearned revenues Inventories Long-term debt Prepaid expenses Sales Accounts payable and accrued expenses

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Income Statement Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Income Statement Balance Sheet

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(2)

(3) Normal Balance

(4) Increase Side

(4) Decrease Side

Expense

Debit

Credit

Asset

Debit

Credit

Liability

Credit

Debit

Asset

Debit

Credit

Liability

Credit

Debit

Asset

Debit

Credit

Revenue

Credit

Debit

Liability

Credit

Debit

Account

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BYP2-1 (Continued) (b)

1. Cash is decreased. 2. Cash is increased. 3. Cash and/or Accounts Receivable are increased. 4. Accounts Payable and Accrued Liabilities is increased or Cash is decreased. 5. Cash is decreased.

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BYP2-2 INTERPRETING FINANCIAL STATEMENTS (a) 1. Deferred income tax liability. 2. Income tax expense. 3. Also in a corporation the owners are called shareholders. So the final two amounts listed would only exist in a corporation and not in a proprietorship.

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BYP2-2 (Continued) (b) WESTJET AIRLINES LTD. Trial Balance December 31, 2014

Cash....................................................................... Accounts receivable ............................................. Inventory ............................................................... Prepaid expenses and deposits........................... Property and equipment....................................... Intangibles............................................................. Other assets .......................................................... Accounts payable and accrued liabilities ........... Advance ticket sale liability ................................. Non-refundable guest credits liability ................. Maintenance provisions liability .......................... Other liabilities ...................................................... Deferred income tax liability ................................ Long-term debt ..................................................... Shareholders’ (owners’) equity, January 1, 2015 Shareholders’ (owners’) “drawings” .................. Guest revenues ..................................................... Other revenues ..................................................... Aircraft fuel, leasing, and maintenance expense Airport operations expense ................................. Flight operations and navigational charges ....... Depreciation and amortization expense.............. Sales and distribution expense ........................... Marketing, general, and administration expense In flight expense ................................................... Employee profit share expense ........................... Non-operating expenses ...................................... Income tax expense ..............................................

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$1,416,220 54,950 36,658 144,192 2,793,194 122,913 78,306 $502,432 575,781 45,434 191,768 227,804 296,892 1,028,820 1,589,840 96,295 3,599,157 377,395 1,466,465 507,743 458,146 226,740 376,676 224,783 171,741 68,787 85,164 106,350 $8,435,323

$8,435,323

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BYP2-2 (Continued) (c)

Items have been grouped on the WestJet income statement based on the nature of the expenses such as expenses related to marketing, general, and administrative. Preparing a more condensed statement of income is preferable for large organizations such as WestJet as the users of the financial statements are generally investors who are not interested in any greater detail concerning expenses than what has been presented by management.

(d)

Most customers using WestJet services book their flights well in advance of their trip. The customers also pay for their tickets before the flight. The cash obtained by WestJet represents unearned revenue until the service of the flight has been delivered to the customer. WestJet has used two main accounts for unearned revenue: Advance Ticket Sale Liability and Non-refundable Guest Credits Liability.

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BYP2-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

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BYP2-4 COMMUNICATION ACTIVITY

e-mail: Hello instructor, As requested, following is an explanation and illustration of the steps in the recording process as they relate to the March 15 transactions for White Glove Company: (1)

In the first example, a transaction has not yet taken place. White Glove’s financial position (assets, liabilities, and owner’s equity) is not changed as a result of the contract. There has been no exchange between the parties involved in the event.

(2)

In the second example, bills totalling $6,000 were sent to customers for services performed. First, we analyze the transaction to determine the accounts involved and the debits/credits required. We determine that the asset Accounts Receivable is increased $6,000 and Service Revenue is increased $6,000. Debits increase assets and credits increase revenues, so the next step is preparing the journal entry: Accounts Receivable ......................................... 6,000 Service Revenue ............................................ Billed customer for services performed.

6,000

The third step is posting the entry. The $6,000 amount is then posted to the debit side of the general ledger account Accounts Receivable and to the credit side of the general ledger account Service Revenue.

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BYP2-4 (Continued) (3)

In the third example, $2,000 was paid in salaries to employees. First we analyze the transaction to determine the accounts involved and the debits/credits required. We determine that the expense Salaries Expense is increased $2,000 and the asset Cash is decreased $2,000. Debits increase expenses and credits decrease assets, so the next step is preparing the journal entry: Salaries Expense ................................................. 2,000 Cash................................................................ 2,000 Paid salaries. The third step is posting the entry. The $2,000 amount is then posted to the debit side of the general ledger account Salaries Expense and to the credit side of the general ledger account Cash.

I trust that the foregoing is satisfactory. Please let me know if anything further is required.

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BYP2-5 “All About You” Activity (a) On September 1, 2017, my personal equity would be as follows: Cash ($4,000 + $14,000) ......... Clothes.................................... Cell phone................................ Total assets ............................ Less Student loan .................. Personal equity, Sept. 1, 2017

$18,000 1,000 200 19,200 (14,000) $5,200

(b) Personal Trial Balance December 15, 2017

Cash ............................................................... Clothes ($1,000 + $1,500) .............................. Cell phone...................................................... Computer ....................................................... Damage deposit on apartment ..................... Unused bus pass........................................... Student loan .................................................. Personal equity ............................................. Rent expense ................................................. Groceries expense ........................................ Tuition for September to December............. Textbooks for September to December ....... Entertainment expense ................................. Cell phone expense....................................... Cable TV and Internet expense .................... Bus pass expense ......................................... Airfare ............................................................

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Debit $6,000 2,500 200 1,000 400 250

Credit

$14,000 5,200 1,600 1,200 2,800 600 1,500 250 200 250 450 $19,200

$19,200

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BYP2-5 (Continued) (b) (Continued) Errors in the Trial Balance:  The cash amount should be the amount in the bank account at December 15th.  The computer was recorded at $100 rather than the actual cost of $1,000.  Rent expense of $2,000 should be split between the actual expense of $1,600 ($400 per month for September to December inclusive) and the damage deposit on the apartment which is an asset and not an expense.  Groceries are an expense and should be listed in the debit column.  Bus pass expense of $500 should be split between the amount used for September through December $250 and the amount of the bus pass that represents an asset as at the end of December 2013 of $250.  The airfare is $450, not $540. (c) Personal equity, September 1 Net loss * Personal equity (deficit), December 15th

$5,200 (8,850) $(3,650)

Rent expense....................................................... Groceries expense .............................................. Tuition for September to December................... Textbooks for September to December............. Entertainment expense....................................... Cell phone expense ............................................ Cable TV and internet expense .......................... Bus pass for September to December............... Airfare expense ................................................... * Net loss ................................................................

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$1,600 1,200 2,800 600 1,500 250 200 250 450 $8,850

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BYP2-5 (Continued) (d) Personal Balance Sheet December 15, 2017 Assets Cash .......................................................................... Clothes ...................................................................... Cell phone................................................................. Damage deposit on apartment ................................ Unused bus pass...................................................... Computer .................................................................. Total assets ..........................................................

$6,000 2,500 200 400 250 1,000 $10,350

Liability and Deficit Liability Student loan ............................................................ $14,000 Personal equity (deficit) ........................................... (3,650) Total liabilities and owner's equity ........................ $10,350 (e) The amount of expenses in the September to December semester totalled $8,850. Of this amount, it will not be necessary to use cash to pay for the $250 bus pass next semester as it has already been purchased. If the other expenses are kept at the same level, I will need $8,600 ($8,850 – $250) of cash which exceeds my current cash balance of $6,000 by $2,600. The cash balance is inadequate. (f) Expenses that can be avoided in the second semester include entertainment expenses of $1,500 and the airfare of $450. Another expense that can be reduced substantially but not eliminated is the cell phone expense. (g) Additional cash expenditures that could occur in the second semester may possibly include repair to the computer or the loss of the damage deposit and additional payments to the landlord for damage to the apartment. Textbooks are another likely expense. Solutions Manual .

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BYP2-5 (Continued) (h) Unless I get a part-time job, or cut expenses in addition to the entertainment and airfare expenses mentioned in (f), it will be necessary to ask for more money from my parents.

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BYP2-6 Santé Smoothie Saga (a) Apr. 12 No entry required for cashing Canada Savings Bonds—this is a personal transaction. 13 Cash ....................................................... N. Koebel, Capital .............................

900 900

15 Cash .......................................................... 3,000 Notes Payable ................................... 18 Advertising Expense............................. Cash...................................................

325

20 Supplies ................................................. Cash...................................................

198

22 Equipment ............................................. N. Koebel, Capital .............................

825

23 Account Receivable .............................. Revenue ............................................

300

24 Telephone Expense............................... Accounts Payable.............................

28 Cash ....................................................... Unearned Revenue ...........................

125

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3,000

325

198

825

300

98 125

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BYP2-6 (Continued) (b) Apr. 13 Apr. 15 Apr.28

Cash 900 3,000 Apr. 18 125 Apr. 20

Bal.

3,502

Apr. 23

Accounts Receivable 300

Apr. 20

Supplies 198

Apr. 22

Equipment 825

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325 198

Accounts Payable Apr. 24

Unearned Revenue Apr. 28

125

Notes Payable Apr. 15

3,000

N. Koebel, Capital Apr. 13 Apr. 22 Bal.

900 825 1,725

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BYP2-6 (Continued) (b) (Continued) Revenue Apr. 23

Apr. 18

Advertising Expense 325

Apr. 24

Telephone Expense 98

300

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Debit $3,502 300 198 825

Credit

98 125 3,000 1,725 300

325 98 $5,248

$5,248

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CHAPTER 3 Adjusting the Accounts ASSIGNMENT CLASSIFICATION TABLE Study Objectives

Questions

Brief Exercises

Exercises

Problems Set A

Problems Set B

1. Explain accrual basis accounting, and when to recognize revenues and expenses.

1, 2, 3, 4

1, 3

1, 2

2. Prepare adjusting entries for prepayments.

5, 6, 7, 8, 9, 10, 11, 14, 15, 16, 17 12, 13, 14, 15, 16, 17

2, 3, 4, 5, 6, 7, 8, 9, 13

2, 4, 5, 6, 7, 8, 10, 11, 12, 13

18, 19, 20

14, 15, 16

3, 4, 5, 6, 7, 8, 9, 10, 11, 14, 15 3, 4, 7, 8, 9, 10,11, 12, 13, 14, 15 14, 15, 16

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

3. Prepare adjusting entries for accruals.

4. Describe the nature and purpose of an adjusted trial balance, and prepare one.

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10, 11, 12, 13

3-1

3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 10, 11, 12, 13

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ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Determine profit on cash and accrual bases; recommend method.

Complex

20-25

Prepare and post prepayment transaction entries. Prepare basic analysis, debit/credit analysis, and journal entry, and post adjustments for the prepayments.

Moderate

25-35

Prepare entries for accrual subsequent cash transactions.

Moderate

25-35

Prepare adjusting journal entries.

Simple

15-20

Moderate

25-35

Prepare adjusting entries and subsequent cash payments. Prepare transaction and adjusting entries.

Moderate

25-35

Prepare adjusting entries.

Moderate

25-35

Prepare adjusting entries.

Moderate

25-35

Prepare transaction and adjusting entries for notes and interest.

Moderate

25-35

10A

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

Moderate

50-60

11A

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

Moderate

50-60

12A

Journalize transactions, and adjusting entries, flow the entries through the accounting cycle to the preparation of the financial statements. Prepare adjusting entries, adjusted trial balance, and financial statements.

Complex

60-70

Moderate

50-60

13A

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and

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Difficulty Level

Time Allotted (min.)

Determine profit on cash and accrual bases; recommend method.

Complex

20-25

Prepare and post prepayment transaction entries. Prepare basic analysis, debit/credit analysis, and journal entry, and post adjustments for the prepayments.

Moderate

25-35

Prepare entries for accrual subsequent cash transactions.

Moderate

25-35

Prepare adjusting journal entries,

Simple

15-20

Moderate

25-35

Prepare adjusting entries and subsequent cash payments. Prepare transaction and adjusting entries.

Moderate

25-35

Prepare adjusting entries.

Moderate

25-35

Prepare adjusting entries.

Moderate

25-35

Prepare transaction and adjusting entries for notes and interest.

Moderate

25-35

10B

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

Moderate

50-60

11B

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

Moderate

50-60

12B

Complex

60-70

Moderate

50-60

13B

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Description

3-3

adjustments

and

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material Study Objectives 1. Explain accrual basis accounting, and when to recognize revenues and expenses.

Knowledge Q3-1

Comprehension Q3-2 Q3-3 Q3-4 Q3-5

Application BE3-1 BE3-3 E3-1 E3-2 E3-8

Analysis

Synthesis

P3-1B

2. Prepare adjusting entries for prepayments.

3. Prepare adjusting entries for accruals.

Solutions Manual .

Q3-6 Q3-8 Q3-15 Q3-16

Q3-15 Q3-16

Q3-7 Q3-9 Q3-10 Q3-11 Q3-14 Q3-17 BE3-13

BE3-2 BE3-3 BE3-4 BE3-5 BE3-6 BE3-7 BE3-8 BE3-9 BE310 BE312

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

Q3-12 Q3-14 Q3-17 BE3-13

3-4

P3-2A P3-4A P3-5A P3-6A P3-7A P3-8A P3-10A P3-11A P3-12A P3-13A P3-2B P3-4B P3-5B P3-6B P3-7B P3-8B P3-10B P3-11B P3-12B P3-13B

E3-14

P3-7A P3-8A P3-9A P3-10A P3-11A P3-12A P3-13A P3-3B P3-4B P3-5B P3-6B P3-7B P3-8B P3-9B P3-10B P3-11B P3-12B P3-13B

E3-14

Chapter 3

Evaluation

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BLOOM’S TAXONOMY TABLE (Continued) Study Objectives 4. Describe the nature and purpose of an adjusted trial balance, and prepare one.

Broadening Your Perspective

Solutions Manual .

Knowledge

Comprehension Q3-18 Q3-19 Q3-20

Application BE3-14 P3-13A BE3-15 P3-8B BE3-16 P3-9B E3-15 P3-10B E3-16 P3-11B P3-10A P3-12B P3-11A P3-13B P3-12A Cumulative Coverage, BYP3-2 BYP3-3 BYP3-5 BYP3-6 Santé

BYP3-1

3-5

Analysis E3-14

Synthesis

BYP3-4

Chapter 3

Evaluation

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

ANSWERS TO QUESTIONS 1.

(a) Accountants divide the life of a business into specific time periods so that they can provide feedback on how the business is doing. The periods chosen are of equal lengths so that the information provided is comparable, period to period. Management usually wants monthly financial statements. Investors want to view the results of publicly traded companies at least quarterly. The Canada Revenue Agency (CRA) requires financial statements to be filed with annual income tax returns. Consequently, accountants divide the life of a business into specific time periods, such as a month, a three-month quarter, or a year. (b) A fiscal year is an accounting period that is one year long, but does not need to start and end on the same days as does the calendar year. A calendar year begins on January 1 and ends on December 31.

The accrual basis provides useful information for decision making as it reflects transactions in the period in which they occur. Compared to the cash basis, the accrual basis gives a more realistic measure of the performance and future earnings potential of the business.

The law firm should recognize the revenue in April. The revenue should be recognized in the accounting period in which it is earned (i.e., when the work is done).

Expenses of $3,000 ($500 + $2,500) should be deducted from the revenues in April since April was when the revenue was recognized as earned. Expense recognition is tied to revenue recognition when there is a direct association between costs incurred and the earning of revenue. Wages are the costs related to earning the fee revenue.

Prepaid expenses are costs paid before they are used or consumed. For example, rent or insurance is often paid in advance. Prepaid expenses need to be adjusted at the end of each accounting period to reflect the fact that part of the asset has been used up or consumed.

Normally, adjusting entries to prepaid expense cause expenses to be increased with the debit side of the adjustment and an asset to be decreased with the credit side of the adjustment.

No. Depreciation is the process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner. Depreciation results in the presentation of the carrying amount of the asset, not its fair value.

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 8.

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

Cost includes the amount paid to purchase the asset. Carrying amount is the cost of the asset reduced by the accumulated depreciation.

The Accumulated Depreciation contra asset account is used in order to show both the original cost of an asset and the portion of the cost that has been allocated to expense to date.

10. The equipment will be shown on the balance sheet at its carrying amount of $12,000. The Accumulated Depreciation account is offset (deducted) against the related asset account which remains at its cost on the balance sheet in order to show the asset`s carrying amount as follows: Property, plant, and equipment Equipment ....................................................... Less: Accumulated depreciation...................... Carrying amount ..............................................

$18,000 6,000 $12,000

11. Unearned revenue exists when cash is received for goods or services to be provided in the future. It represents a liability and belongs on the balance sheet because the cash has not yet been earned – the company has a future obligation to provide the goods or services. As the business provides the goods or the services, adjusting journal entries are recorded at the end of the period to recognize the corresponding amount of revenue earned that will then appear on the income statement. 12. It is necessary to prepare an adjusting entry to record the revenue earned during the month and to show the receivable that exists at the end of the month. When the interest payment is received at the beginning of each month, Waiparous will increase (debit) the Cash account and decrease (credit) the Interest Receivable account. 13. Accrued Expense: On the balance sheet, liabilities (accounts payable) are understated $600 and owner’s equity is overstated $600. On the income statement, expenses are understated $600 and profit is overstated $600.

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Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 14. (a) Type of adjusting entry 1. Accrued revenue 2. Unearned revenue 3. Accrued expense 4. Prepaid expense 5. Prepaid expense 6. Accrued revenue

15.

(b) Related account Revenue Revenue Interest expense Supplies Insurance expense Interest receivable

First half of the entry:

Balance understated understated understated overstated understated understated

Second half of the entry:

(a)

Salaries Expense is debited Salaries Payable is credited

(b)

Depreciation Expense is debited Accumulated Depreciation is credited Interest Payable is credited Interest

Supplies is credited

Supplies Expense

is debited (e)

Accounts Receivable is debited Service Revenue is credited Unearned Revenue is debited Service Revenue is credited

(f)

16. Disagree. The Cash account is never involved in adjusting journal entries. Adjusting entries are intended to implement the accrual basis of accounting. Accrued revenues and expenses are recorded by adjusting journal entries before the cash is received or paid. Prepayments and unearned revenues require adjustments after the cash has been received or paid. 17. Disagree. An adjusting entry affects only one balance sheet account and one income statement account. 18. Both the trial balance and the adjusted trial balance list the balances of all accounts and prove the equality of the total debit and credit balances. The trial balance lists the balances in the accounts prior to adjusting entries; the adjusted trial balance lists the balances after all adjustments have been posted. The adjusted trial balance is used to prepare the financial statements. 19. An adjusted trial balance, similar to all trial balances, only proves that the ledger is mathematically accurate. Having a balanced trial balance does not mean there are no mistakes in the ledger. Entries may be omitted, duplicated, or recorded to the wrong accounts.

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

20. The balance sheet will not balance. The balance sheet must be prepared using the ending owner`s capital balance that is reported in the statement of owner`s equity. Profit is added to the balance in Owner’s Equity (Capital account) and Drawings are subtracted. The resulting balance then appears on the balance sheet.

Solutions Manual .

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Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3-1 Transaction 1. Collected $550 cash from customers for services provided in May. 2. Billed customers $725 for services provided in May. 3. Received $350 from customers for services to be provided in June. 4. Purchased $250 of supplies on account. All of the supplies were used in May but were paid for in June. Profit

(a) Cash

(b) Accrual

+$550

+725

+350

0 $900

–250 $1,025

BRIEF EXERCISE 3-2 Supplies used: $795 + $3,830 – $665 = $3,960 Supplies on hand, May 31, 2017: $985 + $3,070 – x = $2,750 x = $1,305 Green Co. Supplies used: $1,325 + $2,395 - $1,700 = $2,020 Red Co. Blue Co.

BRIEF EXERCISE 3-3 (b) Balance sheet account Overstated or Understated

(a) Type of adjustment 1. 2. 3. 4.

Solutions Manual .

Prepaid expense Accrued revenue Accrued expense Unearned revenue

3-10

Overstated Understated Understated Overstated

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 3-4 T accounts not required Supplies Jan. 1 785 May 31 3,255 Dec. 31 3,005 Dec. 31 Bal. 1,035 (a) May 31

Supplies Expense Jan. 1 0 Dec. 31 3,005 Dec. 31 3,005 Bal.

Supplies ............................................ 3,255 Cash ...........................................

3,255

(b) Supplies used = $785 + $3,255 − $1,035 = $3,005 (c)

Dec. 31

Solutions Manual .

Supplies Expense ............................ 3,005 Supplies .....................................

3-11

3,005

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 3-5 (a)

March 1 Prepaid Insurance .............................. 4,800 Cash .............................................

4,800

(b) Monthly cost: $4,800 ÷ 12 = $400/month; Number of months expired: March to December—10 months Amount expired in 2017: 10 months × $400 = $4,000 Number of months remaining: January to February—2 months Amount unexpired at December 31: 2 months × $400 = $800 Total $4,800 = $4,000 + $800 (c)

Dec. 31 Insurance Expense ............................. 4,000 Prepaid Insurance .......................

4,000

T accounts not required Prepaid Insurance Mar. 1 4,800 Dec. 31 4,000 Dec. 31 Bal.

Solutions Manual .

Insurance Expense Dec. 31 4,000

800

3-12

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 3-6 (a)

July 1

Prepaid Insurance ............................ 12,750 Cash .............................................

12,750

(b) Monthly cost: $12,750 ÷ 36 = $354.17/month; Number of months expired: July to December—6 months Amount expired in 2017: 6 months × $354.17 = $2,125 Dec. 31 Insurance Expense ............................. 2,125 Prepaid Insurance .......................

2,125

T accounts not required Prepaid Insurance July 1 12,750 Dec. 31 2,125

Insurance Expense Dec. 31 2,125

Dec. 31 Bal. 10,625

BRIEF EXERCISE 3-7 (a) July 1/17

(b)

Equipment .................................... 30,000 Cash .........................................

$30,000 ÷ 10 X 6/12 = $3,000 per year X 6/12 = $1,500

(c) Dec. 31/17 Depreciation Expense ................... 1,500 Accumulated Depreciation —Equipment...........................

Solutions Manual .

30,000

3-13

1,500

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 3-8 (a) Jan. 1/17

Equipment .................................... 27,000 Cash .........................................

(b) Dec. 31/17 Depreciation Expense ................... 3,000 Accumulated Depreciation —Equipment........................... ($27,000 ÷ 9 = $3,000 per year) Dec. 31/18 Depreciation Expense ................... 3,000 Accumulated Depreciation —Equipment...........................

27,000

3,000

2017

Property, plant, and equipment Equipment ............................................... $27,000 Less: Accumulated depreciation ........... 6,000 Carrying amount ..................................... $21,000

$27,000 3,000 $24,000

ZHANG COMPANY Income Statement (partial) Year Ended December 31

Depreciation Expense .............................

Solutions Manual .

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2018

2017

$3,000

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 3-9 (a)

Mar. 1

Cash .................................................... 4,800 Unearned Revenue ......................

4,800

(b) $4,800 ÷ 12 = $400 per month Number of months earned March to October—8 months Amount earned to October 31: 8 × $400 = $3,200 Number of months remaining November to February—4 months Amount unearned at October 31: 4 × $400 = $1,600 Total $4,800 = $3,200 + $1,600 (c)

Oct. 31 Unearned Revenue ............................. 3,200 Service Revenue..........................

3,200

(d) Unearned Revenue Mar. 1 4,800 Oct. 31 3,200 Oct. 31 Bal.

Service Revenue Oct. 31 3,200

1,600

BRIEF EXERCISE 3-10 (a)

July 28 Salaries Expense.............................. 7,080 Cash .............................................

(b)

July 31

(c)

Aug. 4 Salaries Expense ................................ 2,360 Salaries Payable ................................. 4,720 Cash .............................................

Solutions Manual .

7,080

Salaries Expense.............................. 4,720 4,720 Salaries Payable .......................... ($7,080 ÷ 6, number of days worked in week = $1,180 (Monday to Thursday at $1,180 each)

3-15

7,080

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 3-11 (a)

Note 1: $50,000 × 6% × 5/12 = Note 2: $20,000 × 5% × 1/12 = Total accrued interest

$1,250 83 $1,333

(b) May 31/17 Interest Receivable ......................... 1,333 Interest Revenue .....................

1,333

BRIEF EXERCISE 3-12 (a) July 31/16 Equipment ......................................150,000 40,000 Cash ......................................... Notes Payable ......................... 110,000 (b) Nov. 30/16 Interest Expense ........................... 1,833 Interest Payable ...................... ($110,000 × 5% × 4/12)

1,833

(c) Jan. 31/17 Interest Expense*.......................... 917 Interest Payable .............................. 1,833 Notes Payable ...............................110,000 Cash ........................................ 112,750 *($110,000 × 5% × 6/12) – $1,833

BRIEF EXERCISE 3-13 1.

Solutions Manual .

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

400 400

Accounts Receivable ....................... 2,300 Service Revenue.......................... Salaries Expense.............................. Salaries Payable ..........................

3-16

2,300

900 900

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 3-14 WINTERHOLT COMPANY Adjusted Trial Balance September 30, 2017

Debit

Credit

Cash............................................................. $ 1,100 Accounts receivable ................................... 6,050 Prepaid rent................................................. 780 Equipment ................................................... 29,800 Accumulated depreciation—equipment.... $ 6,400 Accounts payable ....................................... 2,890 Salaries payable.......................................... 875 Unearned service revenue ......................... 840 C. Winterholt, capital .................................. 16,150 C. Winterholt, drawings .............................. 21,000 Service revenue .......................................... 48,450 Depreciation expense ................................. 3,100 Rent expense .............................................. 1,560 Salaries expense......................................... 12,215 $75,605 $75,605

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A A A A A L L L C D R E E E

Chapter 3

BS BS BS BS BS BS BS BS OE OE IS IS IS IS

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 3-15 WILDWOOD COMPANY Income Statement Year Ended December 31, 2017

Revenues Service revenue ............................................................... $39,000 Expenses Depreciation expense...................................... $ 1,300 Insurance expense ........................................ 2,000 Rent expense ................................................. 4,000 Salaries expense ........................................... 1,500 Supplies expense ............................................. 1,500 Total expenses.......................................... 10,300 Profit .................................................................................... $ 28,700

BRIEF EXERCISE 3-16 WILDWOOD COMPANY Statement of Owner's Equity Year Ended December 31, 2017 D. Wood, capital, Beginning of Year............................... Add: Profit .................................................................... Less: Drawings .............................................................. D. Wood, capital, End of Year .........................................

Solutions Manual .

3-18

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

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 3-1 (a) CASH BASIS Revenues 1. Cash collected from customers during the year for services provided that year. 3. Cash collected from customers for services provided on account the previous year. 4. Cash collected from customers for services to be provided the following year. Total Revenues Expenses 6. Cash paid for operating expenses incurred during the year. 8. Cash paid to creditors for operating expenses incurred on account during the previous year. Total Expenses Profit (cash basis)

Solutions Manual .

3-19

2017

2018

$50,250

$55,430

–

12,070

4,580

1,760

54,830

69,260

17,380

18,990

17,380

2,199 21,189

$37,450

$48,071

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-1 (Continued) (b) ACCRUAL BASIS Revenues 1. Cash collected from customers during the year for services provided that year. 2. Accounts receivable at year end for services provided on account during the year. 5. Services provided to customers who had paid cash in advance the previous year. Total Revenues Expenses 6. Cash paid for operating expenses incurred during the year. 7. Accounts payable at year end for operating expenses incurred on account during the year. Total Expenses Profit (accrual basis) (c)

2017

2018

$50,250

$55,430

12,070

18,080

– 62,320

4,580 78,090

17,380

18,990

2,199 19,579

3,120 22,110

$42,741

$55,980

The accrual basis provides more useful information for decision-makers as it reflects transactions in the period in which they occur. Compared to the cash basis, the accrual basis gives a more realistic measure of the performance and future earnings potential of the business.

Solutions Manual .

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Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 321 1. When the flight takes place in December. 2. When the home theatre is delivered. 3. As the tickets are used over the season. 4. Over the period of time the loan is outstanding. 5. When the sweater is shipped in September. 6. As each magazine is delivered. 7. When the gift card is redeemed in January.

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Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-3 Adjustment 1: Basic Analysis Debit-Credit Analysis

Adjusting Journal Entry

The asset Prepaid Insurance is decreased by $435. The expense Insurance Expense is increased by $435. Debits increase expenses: debit Insurance Expense $435. Credits decrease assets: credit Prepaid Insurance $435. Dec. 31 Insurance Expense 435 Prepaid Insurance 435 To record insurance expired.

Adjustment 2: Basic Analysis Debit-Credit Analysis Adjusting Journal Entry

Solutions Manual .

The asset Supplies is decreased by $425. The expense Supplies Expense is increased by $425. Debits increase expenses: debit Supplies Expense $425. Credits decrease assets: credit Supplies $425. Dec. 31 Supplies Expense 425 Supplies 425 To record supplies used.

3-22

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-3 (Continued) Adjustment 3: Basic Analysis

Debit-Credit Analysis

Adjusting Journal Entry

One year of depreciation increases the contra asset Accumulated Depreciation—Equipment (which decreases the carrying value of the asset Equipment) by $1,240. The expense Depreciation Expense is increased by $1,240. Debits increase expenses: debit Depreciation Expense $1,240. Credits increase contra assets: credit Accumulated Depreciation—Equipment $1,240. Dec. 31 Depreciation Expense 1,240 Accumulated Depreciation —Equipment 1,240 To record depreciation of equipment.

Adjustment 4: Basic Analysis Debit-Credit Analysis

Adjusting Journal Entry

Solutions Manual .

The liability Unearned Revenue is decreased by $320. The revenue account Service Revenue is increased by $320. Debits decrease liabilities: debit Unearned Revenue $320. Credits increase revenues: credit Service Revenue $320. Dec. 31 Unearned Revenue 320 Service Revenue 320 To record revenue for services provided.

3-23

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-3 (Continued) Adjustment 5: Basic Analysis Debit-Credit Analysis

Adjusting Journal Entry

The liability account Salaries Payable is increased by $835. The expense Salaries Expense is increased by $835. Debits increase expenses: debit Salaries Expense $835. Credits increase liabilities: credit Salaries Payable $835. Dec. 31 Salaries Expense 835 Salaries Payable 835 To record accrued salaries.

Adjustment 6: Basic Analysis Debit-Credit Analysis

Adjusting Journal Entry

Solutions Manual .

The liability account Accounts Payable is increased by $230. The expense Utilities Expense is increased by $230. Debits increase expenses: debit Utilities Expense $230. Credits increase liabilities: credit Accounts Payable $230. Dec. 31 Utilities Expense 230 Accounts Payable 230 To record accrued expenses.

3-24

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-3 (Continued) Adjustment 7: Basic Analysis Debit-Credit Analysis

Adjusting Journal Entry

The asset account Accounts Receivable is increased by $935. The revenue account Service Revenue is increased by $935. Debits increase assets: debit Accounts Receivable $935. Credits increase revenues: credit Service Revenue $935. Dec. 31 Accounts Receivable 935 Service Revenue 935 To accrue revenue earned but not collected.

Adjustment 8: Basic Analysis Debit-Credit Analysis

Adjusting Journal Entry

Solutions Manual .

The liability account Interest Payable is increased by $85. The expense Interest Expense is increased by $85. Debits increase expenses: debit Interest Expense $85. Credits increase liabilities: credit Interest Payable $85. Dec. 31 Interest Expense 85 Interest Payable 85 To record interest on note payable.

3-25

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-4 1. 2.

Solutions Manual .

Insurance Expense .......................... 2,800 Prepaid Insurance ....................... Unearned Revenue........................... Service Revenue..........................

500

Interest Expense .............................. Interest Payable ........................... ($10,000 x 4% X 6/12)

200

2,800

500

Depreciation expense ...................... 2,150 Accumulated Depreciation —Equipment .............................

200

2,150

Supplies Expense ............................ 1,610 Supplies ....................................... ($950 + $1,395 - $735) = $1,610

1,610

Salaries Expense.............................. 1,464 Salaries Payable .......................... (4 x 3 x 8 x $15.25) = $1,464

1,464

Accounts Receivable ....................... 5,000 Service Revenue..........................

3-26

5,000

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-5 (a) and (b) Transaction 1: (a) Apr. 1

(b) Dec. 31

Prepaid Insurance ............................ 4,020 Cash ............................................. Insurance Expense .......................... 3,015 Prepaid Insurance ....................... ($4,020 × 9/12 = $3,015)

4,020

3,015

Transaction 2: (a) Aug. 31

(b) Dec. 31

Prepaid Rent ..................................... 6,500 Cash ............................................. Rent Expense ................................... 5,200 Prepaid Rent ................................ ($6,500 × 4/5 = $5,200)

6,500

5,200

Transaction 3: (a) Sept. 27

(b) Dec. 31

Cash .................................................. 3,600 Unearned Revenue ...................... Unearned Revenue........................... 1,080 Fees Earned ................................. ($3,600 × 3/10 = $1,080)

3,600

1,080

Transaction 4: (a) Nov. 30

(b) Dec. 31

Solutions Manual .

Prepaid Expenses ............................ 1,500 Cash ............................................. Office Expense ................................. Prepaid Expenses........................

3-27

1,500

500 500

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-5 (Continued) Transaction 5: (a) Dec. 15

(b) Dec. 31

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

935

Unearned Revenue........................... Admission Revenue .................... ($935 – $545 = $390)

390

935

390

EXERCISE 3-6 (a)

Dec. 31 Depreciation Expense..................... Accumulated Depreciation— Building....................................... ($68,000 ÷ 25 = $2,720 per year)

2,720

31 Depreciation Expense..................... Accumulated Depreciation— Vehicles....................................... ($28,000 ÷ 7 = $4,000 per year)

4,000

31 Depreciation Expense..................... Accumulated Depreciation —Equipment .............................. ($12,600 ÷ 8 = $1,575 per year)

1,575

2,720

4,000

1,575

(b) Cost Less: Accumulated Depreciation Carrying amount

Building $68,000

Vehicles $28,000

Equipment $12,600

* 21,760 $46,240

** 16,000 $12,000

***8,663 $ 3,937

* $2,720 × 8 = $21,760 ** $4,000 × 4 = $16,000 **$1,575 × 5.5 = $8,663

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 329 1. 2. 3.

Solutions Manual .

Accounts Receivable ....................... 2,400 Service Revenue.......................... Utilities Expense .............................. Accounts Payable........................

400

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

500

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

600

2,400

400

500

600

Insurance Expense .......................... 1,000 Prepaid Insurance ....................... ($12,000 ÷ 12 = $1,000)

1,000

Supplies Expense ............................ 1,700 Supplies ....................................... ($2,600 - $900 = $1,700)

1,700

3-29

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 330 1.

Solutions Manual .

Insurance Expense .......................... Prepaid Insurance ....................... ($3,600 ÷ 24 = $150)

150

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

500

Interest Expense .............................. Interest Payable ........................... ($20,000 x 6% X 1/12) = $100

100

150

500 100

Accounts Receivable ....................... 1,500 Service Revenue.......................... Unearned Revenue........................... Service Revenue..........................

3-30

1,500

600 600

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 331 (a)

May 31 Interest Expense .............................. Interest Payable ........................... ($48,000 × 4% × 1/12 = $160)

160 160

31 Salaries Expense ............................. 1,500 Salaries Payable .......................... ($3,500 × 3/7 = $1,500)

(b)

June

31 Accounts Receivable ....................... Commission Revenue .................

520

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

425

31 Interest Receivable .......................... Interest Revenue ......................... ($6,000 × 6% × 1/12 = $30)

1 Interest Payable ............................... Cash .............................................

160

520

425

160

5 Salaries Payable............................... 1,500 Salaries Expense ............................. 2,000 Cash ............................................. 7

Aug.

Solutions Manual .

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

520

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

425

3,500

520

Cash .................................................. 6,090 Interest Receivable ..................... Interest Revenue ($6,000 × 6% × 2/12) Notes Receivable.........................

3-31

1,500

425 30 60 6,000

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-32 (a)

July

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

750

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

200

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

850

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

700

750

200

850

700

25 Cash .................................................. 1,300 Service Revenue..........................

(b)

July 31 Accounts Receivable ....................... Service Revenue..........................

800

31 Rent Expense ................................... Prepaid Rent ................................ ($750 ÷ 3 = $250)

250

31 Supplies Expense ............................ Supplies ....................................... ($1,100 + $200 – $800 = $500)

500

31 Depreciation Expense..................... Accumulated Depreciation —Equipment ............................... ($9,360 ÷ 6 × 1/12)

130

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

900

Solutions Manual .

3-32

1,300

800

250

500

130

900

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-33 1.

Mar. 31 Depreciation Expense..................... Accumulated Depreciation —Equipment ............................... ($37,800 ÷ 4 × 3/12)

Solutions Manual .

2,363 2,363

31 Unearned Rent Revenue................. 6,975 Rent Revenue ($9,300 × 3/4) ...... 31 Interest Expense ............................. Interest Payable .......................... ($30,000 × 6% × 3/12)

450 450

31 Supplies Expense ........................... 13,550 Supplies ($14,400 – $850) .......... 31 Insurance Expense ($3,600 × 3/12) Prepaid Insurance ......................

900

700

Accounts Receivable ...................... Rent Revenue .............................

3-33

6,975

13,550

900 700

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-34 (a) July 1/17

Nov. 1/17 (b) Dec. 1/17

Dec. 31/17

Jan. 1/18

Feb. 1/18

Mar. 1/18

Solutions Manual .

Cash................................................ 75,000 Notes Payable .........................

75,000

Cash................................................ 42,000 Notes Payable .........................

42,000

Interest Expense ........................... Cash ......................................... ($42,000 × 5% × 1/12)

175 175

Interest Expense ........................... 1,500 Interest Payable ...................... ($75,000 × 4% × 6/12) Interest Expense ........................... Interest Payable ...................... ($42,000 × 5% × 1/12)

175

Interest Payable ............................ Cash ......................................... ($42,000 × 5% × 1/12)

175

Interest Expense*.......................... 175 Notes Payable ............................... 42,000 Cash ........................................ *($42,000 × 5% × 1/12) Interest Expense*.......................... 500 Interest Payable ............................ 1,500 Notes Payable ............................... 75,000 Cash ........................................ *($75,000 × 4% × 8/12) – $1,500

3-34

1,500

175

42,175

77,000

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-35 (a) July 1/17

Nov. 1/17 (b) Nov. 30/17

Nov. 30/17

Dec. 1/17

Jan. 1/18

Feb. 1/18

Mar. 1/18

Solutions Manual .

Notes Receivable ........................... 75,000 Cash .........................................

75,000

Notes Receivable ........................... 42,000 Cash .........................................

42,000

Interest Receivable ....................... 1,250 Interest Revenue ..................... ($75,000 × 4% × 5/12) Interest Receivable ....................... Interest Revenue ..................... ($42,000 × 5% × 1/12)

175

Cash............................................... Interest Receivable ................. ($42,000 × 5% × 1/12)

175

Cash............................................... Interest Revenue ..................... ($42,000 × 5% × 1/12)

175

1,250

175

Cash............................................... 42,175 Interest Revenue*.................... Notes Receivable .................... *($42,000 × 5% × 1/12)

175 42,000

Cash............................................... 77,000 Interest Revenue*.................... Interest Receivable ................. Notes Receivable .................... *($75,000 × 4% × 8/12) – $1,250

750 1,250 75,000

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Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-36 Answer (a)

Unearned revenue = $1,150

Calculation Service Revenue (01/31/17) $2,000 Unearned Revenue (01/31/17) 750 2,750 Cash received in Jan. 1,600 Unearned Revenue (12/31/16) $1,150

(b) Purchase date On Jan. 31/17, there is $3,660 in = Jan. 1, 2012 Accumulated Depreciation: $3,660 ÷ $60/month = 61 months Purchase date: 61 months or 5 years and one month earlier than Jan. 31/17. (c)

Total premium = $4,800

Total premium = Monthly premium × 12 $400 × 12 = $4,800

Purchase date = June 1, 2016

Purchase date: On Jan. 31, there are 4 months coverage remaining ($400 × 4). Thus, the purchase date was 8 months earlier, on June 1, 2016.

(d)

Supplies purchased = $850

Supplies Expense Add: Supplies (01/31/17) Less: Supplies (01/01/17) Supplies purchased

$950 700 (800) $850

(e)

Salaries paid = $2,200

Salaries Payable (12/31/16) Salaries Payable (01/31/17)

$1,200 (800) 400 1,800 $2,200

Plus: Salaries Expense Salaries paid

Solutions Manual .

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Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-37 Oct. 31

Oct. 31

Solutions Manual .

Accounts Receivable ($9,230 – $8,700) . Service Revenue.................................

530 530

Supplies Expense ($2,450 – $710) ......... 1,740 Supplies ..............................................

1,740

Insurance Expense($3,775 - $2,525) ...... 1,250 Prepaid Insurance ..............................

1,250

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

2,275 2,275

Salaries Expense .................................... 1,125 Salaries Payable ................................. Interest Expense ..................................... Interest Payable ................................... Unearned Service Revenue ($1,600 – $900) ........................................ Service Revenue..................................

3-37

1,125

500 500

700 700

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-16 LANE COMPANY Income Statement Year Ended October 31, 2017

Revenues Service revenue ............................................................... $46,230 Expenses Depreciation expense...................................... $ 2,275 Insurance expense ........................................ 1,250 Interest expense ............................................ 2,000 Rent expense .................................................... 15,000 Salaries expense .............................................. 18,125 Supplies expense ............................................. 1,740 Total expenses.......................................... 40,390 Profit ................................................................................. $ 5,840

LANE COMPANY Statement of Owner's Equity Year Ended October 31, 2017 E. Lane, capital, Beginning of Year ................................ Add: Profit .................................................................... Less: Drawings .............................................................. E. Lane, capital, End of Year ...........................................

Solutions Manual .

3-38

$ 5,600 5,840 11,440 10,000 $ 1,440

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 3-16 (Continued)

LANE COMPANY Balance Sheet October 31, 2017

Assets Cash.................................................................................. Accounts receivable ........................................................ Prepaid insurance............................................................ Supplies............................................................................ Equipment ........................................................... $34,100 Less: Accumulated depreciation ....................... 5,800 Total assets .............................................................

$ 9,100 9,230 2,525 710 28,300 $49,865

Liabilities and Owner's Equity Liabilities Notes payable .............................................................. Accounts payable........................................................ Interest payable ........................................................... Salaries payable .......................................................... Unearned service revenue.......................................... Total liabilities.........................................................

$40,000 5,900 500 1,125 900 48,425

Owner's equity E. Lane, capital ................................................................ 1,440 Total liabilities and owner's equity ............................ $49,865

Solutions Manual .

3-39

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 3-1A Students may find this to be a fairly challenging problem, so here are a few points that should help:  Under the CASH BASIS, revenues are recorded when they are collected (received in cash), even if they were earned (the sale was made) earlier;  Under the ACCRUAL BASIS of accounting, revenues are recorded when they are earned (the sale is made) even if the cash is not collected until later, or is received prior to the revenue being earned;  Under the CASH BASIS, expenses are recorded when the cash is paid out; and  Under the ACCRUAL BASIS of accounting, expenses are recorded when the cost has “expired” or been “used up”, which is not always in the same time period as when the cash is paid out. For example,  Under the CASH BASIS, supplies are recorded as expenses as soon as they are purchased and paid for; other items, such as insurance, are recorded as expenses when they are paid for even if a portion of the payment relates to future periods;  Under the ACCRUAL BASIS of accounting, supplies are not recorded as expenses until they have been used up. While the supplies are still on hand, they are recorded as assets because they have future benefits;  Under the CASH BASIS, amounts such as Salaries Payable at the end of 2016 would not be considered expenses until they are actually paid out in 2017; and  Under the ACCRUAL BASIS of accounting, Salaries Payable at the end of 2016 would be considered expenses in 2016, because the cost was incurred or “used up” during 2016, even though the cash will not be paid out until 2017.

Solutions Manual .

3-40

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-1A (Continued) (a) and (b) $37,100

Cash basis profit ($85,500 – $48,400)

–1,310 Accounts Payable owing at the end 2017 should be accrued; the related expense was incurred in 2017 and thus, reduces income. +2,250 Accounts Payable owing at year end 2016 represent expenses of 2016. Amounts have been deducted from cash and must be added back for accrual basis profit. +4,230 Accounts Receivable arise from sales that have been made in 2017, and thus, revenue must be recognized and recorded in 2017. –2,650 Accounts Receivable collected in 2017 from sales made (and revenue that was earned) in 2016. –640

Depreciation Expense is equal to the increase in accumulated depreciation from 2016 to 2017 ($11,040 – $10,400 = $640)

+1,580 Prepaid Insurance at year end 2017 is an asset rather than an expense. Amount has been deducted from cash basis and must be added back for accrual basis profit. –1,250 Prepaid Insurance at year end 2016 has been used up and must be recorded as an expense during 2017 under the accrual basis. +910 Supplies on hand at year end 2017 represent assets rather than an expense. Amount has been deducted from cash basis and must be added back for accrual basis profit. –490 Supplies on hand at year end 2016 have been used up and must be recorded as an expense during 2017.

Solutions Manual .

3-41

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-1A (Continued) (a) and (b) (Continued) –1,260

Unearned Revenue was received in cash in 2017 but has not been earned and thus, must be deducted.

+1,480

Unearned Revenue received in cash in 2016 has now been earned and must be recorded in 2017.

$39,950

Accrual basis income

Taking It Further: Recommend that Southlake Co. use the accrual basis of accounting. The cash basis does not correctly show when the revenue was earned or when the expenses were incurred. The cash basis of accounting is not in accordance with generally accepted accounting principles.

Solutions Manual .

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Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-2A (a)

1. Jan. 10 Supplies ............................................. 3,290 Cash ............................................ 2. Feb. 1 Prepaid Insurance ............................. 3,696 Cash ............................................ 3. Mar. 31 Equipment ....................................... 21,072 Cash ............................................ 4. Sept. 1 Prepaid Rent ...................................... 6,480 Cash ............................................ 5. Oct. 15 Cash ................................................... 1,749 Unearned Revenue ..................... 6. Nov. 1 Cash ................................................... 1,794 Unearned Revenue .....................

3,290

3,696

21,072

6,480

1,749

1,794

(b) 1. Basic Analysis Debit-Credit Analysis Adjusting Journal Entry

Solutions Manual .

The asset Supplies is decreased by $2,340. The expense Supplies Expense is increased by $2,340. Debits increase expenses: debit Supplies Expense $2,340. Credits decrease assets: credit Supplies $2,340. Dec. 31 Supplies Expense 2,340 Supplies ($3,290 – $950) 2,340 To record supplies used.

3-43

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-2A (Continued) 2. Basic Analysis Debit-Credit Analysis

Adjusting Journal Entry

The asset Prepaid Insurance is decreased by $3,388. The expense Insurance Expense is increased by $3,388. Debits increase expenses: debit Insurance Expense $3,388. Credits decrease assets: credit Prepaid Insurance $3,388. Dec. 31 Insurance Expense 3,388 Prepaid Insurance 3,388 To record insurance expired. ($3,696 × 11/12)

3. Basic Analysis

Debit-Credit Analysis

Adjusting Journal Entry

Solutions Manual .

One year of depreciation increases the contra asset Accumulated Depreciation—Equipment (which decreases the carrying value of the asset Equipment) by $1,976. The expense Depreciation Expense is increased by $1,976. Debits increase expenses: debit Depreciation Expense $1,976. Credits increase contra assets: credit Accumulated Depreciation—Equipment $1,976. Dec. 31 Depreciation Expense 1,976 Accumulated Depreciation —Equipment 1,976 To record depreciation of equipment. ($21,072 ÷ 8 × 9/12)

3-44

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-2A (Continued) 4. Basic Analysis Debit-Credit Analysis Adjusting Journal Entry

The asset Prepaid Rent is decreased by $2,160. The expense Rent Expense is increased by $2,160. Debits increase expenses: debit Rent Expense $2,160. Credits decrease assets: credit Prepaid Rent $2,160. Dec. 31 Rent Expense ($6,480 × 4/12) 2,160 Prepaid Rent 2,160 To record truck lease expired.

5. Basic Analysis Debit-Credit Analysis

Adjusting Journal Entry

The liability Unearned Revenue is decreased by $1,166. The revenue account Service Revenue is increased by $1,166. Debits decrease liabilities: debit Unearned Revenue $1,166. Credits increase revenues: credit Service Revenue $1,166. Dec. 31 Unearned Revenue ($1,749 × 2/3) 1,166 Service Revenue 1,166 To record revenue for services provided.

6. Basic Analysis Debit-Credit Analysis

Adjusting Journal Entry

Solutions Manual .

The liability Unearned Revenue is decreased by $1,196. The revenue account Rent Revenue is increased by $1,196. Debits decrease liabilities: debit Unearned Revenue $1,196. Credits increase revenues: credit Rent Revenue $1,196. Dec. 31 Unearned Revenue ($1,794 × 2/3) 1,196 Rent Revenue 1,196 To record revenue for rent earned.

3-45

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-3A (a)

Dec. 31 Interest Receivable ......................... Interest Revenue ........................ ($10,000 × 8% × 1/12 = $67)

67 67

31 Salaries Expense ............................ 3,250 Salaries Payable ......................... ($6,500 ÷ 10 × 5 = $3,250) 31 Accounts Receivable ...................... 3,375 Service Revenue......................... 31

(b)

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

485

31 Interest Expense ............................. Interest Payable .......................... ($25,000 × 5% × 2/12 = $208)

208

Jan. 1 Jan. 10

Cash ................................................. Interest Receivable.....................

208

67 67

Jan. 18 Cash ................................................... 3,375 Accounts Receivable ................. Jan. 22 Accounts Payable ........................... Cash ............................................

485

Apr. 30

417* 208

Solutions Manual .

3-47

3,375

485

Salaries Expense ............................ 3,250* Salaries Payable.............................. 3,250 Cash ............................................ *($6,500 ÷ 10 × 5 = $3,250)

Interest Expense ............................. Interest Payable .............................. Cash ............................................ *($25,000 × 5% × 4/12)

3,250

6,500

3,375

485

625

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-3A (Continued) Taking It Further: The following revenue accounts would be understated by: Service Revenue ...................................................... $3,375 Interest Revenue ..................................................... 67 $ 3,442 The following expense accounts would be understated by: Interest Expense ..................................................... 208 Salaries Expense .................................................... 3,250 Utilities Expense ..................................................... 485 3,943 Profit would be overstated by ................................

$ 501

Assets would be understated by: Interest Receivable ................................................. $ 67 Accounts Receivable .............................................. 3,375

$3,442

Liabilities would be understated by: Interest Payable ..................................................... Accounts Payable .................................................. Salaries Payable ....................................................

3,943

208 485 3,250

Owner’s equity would be overstated by................

$ 501

Solutions Manual .

Chapter 3

3-48

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-4A May 31, 2017 1. Supplies Expense ............................ Supplies ....................................... 2.

900 900

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

250

Insurance Expense .......................... Prepaid Insurance ....................... ($3,600 ÷ 12 = $300)

300

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

190

Interest Expense .............................. Interest Payable ........................... ($10,000 x 6% X 1/12) = $50

Salaries Expense.............................. Salaries Payable .......................... ($920 x 2 X 3/5) = $1,104

1,104

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

500

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

1,700

250 300

190 50

1,104

500

1,700

Taking It Further: Utility companies send invoices to customers after the delivery of services have been performed. The invoice received by Logan Miller is for services received in May 2017. Consequently, an adjusting journal entry should be recorded at May 31, 2017 increasing the Utilities Expense account with a debit and increasing Accounts Payable with a credit. Solutions Manual .

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Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-5A 1. (a)

Dec. 31 Interest Expense ............................. Interest Payable ($10,000 × 4% × 4/12)..................

133

(b) Aug. 31 Interest Expense ($10,000 × 4% × 8/12) ...................... 267 Interest Payable ............................. 133 Notes Payable.................................. 10,000 Cash ............................................ 2. (a)

Dec. 31 Supplies Expense ........................... 1,550 Supplies ($2,450- $900) ..............

3. (a) Dec.

4. (a) Dec.

5. (a) Dec.

6. (a) Dec.

10,400

1,550

1,000

31 Insurance Expense............................ 1,225 Prepaid Insurance .................. ($2,100 x 7/12 = $1,225)

1,225

31 Unearned Revenue ............................ 8,000 Service Revenue ..................... ($32,000 X 1/4 = $6,400)

8,000

31 Accounts Receivable ........................ 4,200 Service Revenue .....................

(b) Jan. 15

Solutions Manual .

Depreciation Expense..................... 1,000 Accumulated Depreciation— Equipment ...............................

133

Cash ................................................... 4,200 Accounts Receivable..............

3-50

4,200

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-5A (Continued) 7. (a) Dec.

(b) Jan.

31 Salaries Expense............................... 9,000 Salaries Payable .....................

9,000

3 Salaries Payable ................................ 9,000 Cash ........................................

9,000

Taking It Further: For most businesses, it is impractical to try to keep track of supplies used in the business. This is the case for Devin Wolf Company. Rather than recording supplies expense based on the system of tracking which supplies have been used, it is less time consuming to count what is left in supplies at the end of the accounting period using a physical count. The count amount is then compared to the Supplies account balance, which has been debited with all supplies purchases, and proceed with the adjustment of the asset account to the value of supplies remaining.

Solutions Manual .

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Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-6A 1.

(a)

June 10 Supplies ............................................. 1,905 Cash ............................................

1,905

(b) Dec. 31 Supplies Expense ($875 + $1,905 – $870) ....................... 1,910 Supplies ......................................

1,910

(a) Aug.

(b) Dec.

1 Equipment ....................................... 43,500 Cash ............................................

43,500

31 Depreciation Expense ....................... 1,510 Accumulated Depreciation— Equipment ($43,500 ÷ 12 × 5/12)

1,510

(a)

July

(b) Dec. 31

Solutions Manual .

Cash ($500 × 250) ............................125,000 Unearned Revenue ..................... 125,000 Unearned Revenue .......................... 62,500 Admission Revenue ($125,000 ÷ 8 × 4) ........................

3-52

62,500

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-6A (Continued)

4. (a)

(b)

(c)

5. (a)

(b)

(c)

6. (a)

(b)

(c)

Dec. 27

Dec. 31

Jan. 3

Dec. 10

Salaries Expense ............................ 5,400 Cash ............................................

5,400

Salaries Expense ............................ 5,400 Salaries Payable .........................

5,400

Salaries Payable.............................. 5,400 Cash ............................................

5,400

Cash ................................................. Rent Revenue .............................

550

Dec. 31 Accounts Receivable ($800 – $550) Rent Revenue .............................

250

Jan. 10

June

550

250

Cash ($250 + $800).......................... 1,050 Accounts Receivable ................. Rent Revenue .............................

250 800

1 Cash ................................................. 25,000 Notes Payable.............................

25,000

Dec. 31 Interest Expense ............................. Interest Payable ($25,000 × 4.5% × 7/12) ...............

656

May 31 Interest Expense ($25,000 × 4.5% × 5/12) ................... 469 Interest Payable .............................. 656 Notes Payable.................................. 25,000 Cash ............................................

Solutions Manual .

3-53

656

26,125

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-6A (Continued) 7. (b) Dec. 31 Telephone Expense ........................ Accounts Payable ......................

573

(c)

573

Jan. 12

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

573

Taking It Further: The three basic reasons that a trial balance may not contain complete or up-to-date data are: 1. Some events are not journalized daily because it is not efficient to do so. 2. Some costs are not journalized during the accounting period because they expire through the passage of time and are not daily transactions. 3. Some items may be unrecorded. The adjustment to record supplies used (Item 1) is an example of the first reason above. It is not practical to record an expense every time supplies are used. The adjustment to record depreciation (Item 2) is an example of the second reason above. The cost of a long-lived asset expires through the passage of time. The adjustment to record the telephone bill (Item 7) is an example of the third reason above. The bill was for the month of December but had not been recorded in the recording of daily transactions.

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-7A 1.

Sept. 30 Supplies Expense ($2,080 + $1,700 – $810) .................... 2,970 Supplies ......................................

2,970

30 Insurance Expense ($3,200 × 11/12) 2,933 Prepaid Insurance ......................

2,933

30 Unearned Revenue ............................ 1,800 Fees Earned ................................

1,800

30 Depreciation Expense ....................... 1,333 Accumulated Depreciation— Equipment ($24,000 ÷ 12 × 8/12)

1,333

10.

Solutions Manual .

30 Interest Expense ............................. Interest Payable ($25,000 × 4% × 5/12)..................

417 417

30 Accounts Receivable ........................ 2,000 Fees Earned ................................

2,000

30 Rent Expense ($9,000 ÷ 9) ................ 1,000 Prepaid Rent ...............................

1,000

30 Salaries Expense............................... 3,500 Salaries Payable .........................

3,500

30 Accounts Receivable ........................ 1,500 Fees Earned ................................

1,500

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

3-55

895 895

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-7A (Continued) Taking It Further: The timing of the preparation of the adjusting journal entries in the accounting cycle depends completely on the business’ needs to communicate financial information to those who use it. If the business does not need financial statements monthly, and decides that financial statements are only needed on an annual basis, then the preparation of adjusting journal entries on an annual basis is adequate. On the other hand, the practice of recording adjusting journal entries at the end of each month should be adopted if doing so will provide feedback to the business on action that should be taken to rectify a business problem, or initiate changes in the way the business is managed. Companies reporting under IFRS must prepare quarterly financial statements and must therefore prepare adjusting entries on a quarterly basis.

Solutions Manual .

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Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-8A (a) 1.

Dec. 31 Advertising Expense ......................... 4,659 Prepaid Advertising ................... A650 – $5,000 ÷ 12 = $417 per month for 8 months = ............................................ B974 – $10,600 ÷ 24 = $442 per month for 3 months = ............................................

$3,333 1,326 $4,659

Dec. 31 Depreciation Expense ($30,000 ÷ 7)....................................... 4,286 Accumulated Depreciation— Vehicles.......................................

4,286

Dec. 31 Depreciation Expense ($40,000 ÷ 8)....................................... 5,000 Accumulated Depreciation— Vehicles.......................................

5,000

Dec. 31 Interest Expense ............................... 2,302 Interest Payable .......................... ($85,000 × 6.5% × 5/12 mos. = $2,302) Dec. 31 Salaries Expense............................... 6,300 Salaries Payable ......................... 6 × $750........................................ 3 × $600 ....................................... Total .............................................

4,659

2,302

6,300

$4,500 1,800 $6,300

Dec. 31 Unearned Revenue .......................... 69,000 Rent Revenue .............................

69,000

6 × $4,000 × 2 = ............................... $48,000 3 × $7,000 × 1 = ............................... 21,000 Total rent earned ............................ $69,000 Solutions Manual .

3-57

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-8A (Continued) (b) Truck 1, Accumulated depreciation = $4,286 × 3 = $12,858 Carrying amount = $30,000 – $12,858 = $17,142 Truck 2, Accumulated depreciation = $5,000 + $5,000 × 7/12 = $7,917 Carrying amount = $40,000 – $7,917 = $32,083 Taking It Further: The purpose of depreciation is to allocate the cost of a long-lived asset to expense over the useful life of the asset in a systematic and rational manner. Land is not depreciated because it has an unlimited useful life.

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-9A (a) Cobalt Co.: Mar. 31/17

Cash .................................................. 107,900 Notes Payable (Note 1) ........... 107,900

June 1/17

Cash .................................................... 75,000 Notes Payable (Note 2) ...........

June 30/17

Sept. 1/17

Sept. 30/17

Oct. 1/17

Nov. 1/17

Solutions Manual .

Interest Expense ............................ 1,025 Cash ......................................... Note 1: ($107,900 × 3.8% × 3/12) Cash .................................................... 24,400 Notes Payable (Note 3) ........... Interest Expense ............................ 1,025 Cash ......................................... Note 1: ($107,900 × 3.8% × 3/12) Interest Expense ............................ Interest Payable ...................... Note 3: ($24,400 × 5% × 1/12)

102

Interest Expense ............................ Interest Payable ...................... Note 2: ($75,000 × 4.6% × 4/12)

1,150

Interest Payable ............................. Cash ......................................... Note 3: ($24,400 × 5% × 1/12)

102

Interest Expense ............................ Cash ......................................... Note 3: ($24,400 × 5% × 1/12)

102

3-59

75,000

1,025

24,400

1,025

102

1,150

102

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-9A (Continued) (a) (Continued) Dec. 1/17

Dec. 31/17

Mar. 1/18

Mar. 31/18

Interest Expense ............................ 102 Notes Payable (Note 3) ...................... 24,400 Cash ......................................... Interest Expense ............................ 1,025 Cash ......................................... Note 1: ($107,900 × 3.8% × 3/12) Interest Expense*........................... 1,438 Interest Payable ............................. 1,150 Notes Payable (Note 2) ...................... 75,000 Cash ........................................ * Note 2: ($75,000 × 4.6% × 5/12)

24,502

1,025

77,588

Interest Expense*........................... 1,025 Notes Payable (Note 1) .................... 107,900 Cash ........................................ 108,925 * Note 1: ($107,500 × 3.8% × 3/12)

(b) Azores Enterprises: Mar. 31/17

Notes Receivable (Note 1) ............. 107,900 Cash ......................................... 107,900

June 1/17

Notes Receivable (Note 2) ............. Cash .........................................

June 30/17

Sept. 1/17

Solutions Manual .

75,000

Cash................................................ 1,025 Interest Revenue ..................... Note 1: ($107,900 × 3.8% × 3/12) Notes Receivable (Note 3) .................24,400 Cash .........................................

3-60

75,000

1,025

24,400

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-9A (Continued) (b) (Continued) Sept. 30/17

Oct. 1/17

Oct. 31/17

Nov. 1/17

Dec. 1/17

Dec. 31/17

Solutions Manual .

Cash................................................ Interest Revenue ..................... Note 1: ($107,900 × 3.8% × 3/12)

1,025

Cash................................................ Interest Revenue ..................... Note 3: ($24,400× 5% × 1/12)

102

Interest Receivable ........................ Interest Revenue ..................... Note 1: ($107,900 × 3.8% × 1/12)

342

Interest Receivable ........................ Interest Revenue ..................... Note 2: ($75,000 × 4.6% × 5/12)

1,438

Interest Receivable ........................ Interest Revenue ..................... Note 3: ($24,400× 5% × 1/12)

102

Cash................................................ Interest Receivable ................. Note 3: ($24,400 × 5% × 1/12)

102

Cash................................................ Interest Revenue ..................... Notes Receivable (Note 3) ......

24,502

1,025

102

342

1,438

102

Cash................................................ 1,025 Interest Receivable ................. Interest Revenue ..................... Note 1: *($107,900 × 3.8% × 2/12)

3-61

102 24,400

342 683*

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-9A (Continued) (b) (Continued) Mar. 1/18

Mar. 31/18

Cash ....................................................77,588 Interest Receivable ................. Interest Revenue*.................... Notes Receivable (Note 2) ...... * Note 2: ($75,000 × 4.6% × 4/12)

1,438 1,150 75,000

Cash ..................................................108,925 Interest Revenue*.................... 1,025 Notes Receivable (Note 1) ...... 107,900 * Note 1: ($107,900 × 3.8% × 3/12)

Taking It Further: It is appropriate because the accrued interest payable records the obligation that exists at the balance sheet date and the offsetting expense that applies to the current accounting period. If it is not recorded, both liabilities and expenses are understated and profit and owner’s equity are overstated.

Solutions Manual .

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PROBLEM 3-10A (b) 1. Aug. 31 Supplies Expense ................................ 3,605 Supplies ($4,455 – $850) .......... 2.

Solutions Manual .

3,605

31 Insurance Expense ($12,660 × 10/12)10,550 Prepaid Insurance ....................

10,550

31 Depreciation Expense ($40,320 ÷ 10). 4,032 Accumulated Depreciation— Equipment.................................

4,032

31 Depreciation Expense ($421,200 ÷ 12) ................................. 35,100 Accumulated Depreciation—Vehicles

35,100

31 Unearned Revenue ($25,000 – $4,500) ............................ 20,500 Service Revenue.......................

20,500

31 Interest Expense ($162,000 × 4.5% × 1/12) ............... Interest Payable ........................

608 608

31 Salaries Expense ................................. 2,725 Salaries Payable ($545 × 5) ......

2,725

31 Accounts Receivable........................... 1,350 Service Revenue.......................

1,350

31 Fuel Expense ................................... Accounts Payable ....................

3-63

620 620

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-10A (Continued) (a) and (c)

Aug. 31

Aug. 31 Aug. 31 Bal.

Aug. 31 Bal.

Aug. 31

Cash 9,000

Accounts Receivable 7,080 1,350 8,430

Prepaid Insurance 12,660 Aug. 31 2,110

Supplies 4,455 Aug. 31

Bal.

Aug. 31

10,550

3,605

850

Vehicles 421,200

Accumulated Depreciation-Vehicles Aug. 31 175,500 Aug. 31 35,100 Bal. 210,600

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-10A (Continued) (a) and (c)

Aug. 31

Equipment 40,320

Accumulated Depreciation-Equipment Aug. 31 25,200 Aug. 31 4,032 Bal. 29,232

Aug. 31

Accounts Payable Aug. 31 Aug. 31 Bal.

5,700 620 6,320

Notes Payable Aug. 31

162,000

Unearned Revenue Aug. 31 20,500 Bal.

Solutions Manual .

3-65

25,000

4,500

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-10A (Continued) (a) and (c)

Aug. 31

Interest Payable Aug. 31

608

Salaries Payable Aug. 31

2,725

J. Reyes, Capital Aug. 31

105,075

J. Reyes, Drawings 141,000

Service Revenue Aug. 31 Aug. 31 Aug. 31 Bal.

Aug. 31 Aug. 31 Bal.

Solutions Manual .

334,300 20,500 1,350 356,150

Salaries Expense 140,625 2,725 143,350

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PROBLEM 3-10A (Continued) (a) and (c)

Aug. 31 Aug. 31 Bal.

Interest Expense 9,653 608 10,261

Aug. 31

Rent Expense 22,810

Aug. 31 Aug. 31 Bal.

Fuel Expense 23,972 620 24,592

Aug. 31

Insurance Expense 10,550

Aug. 31 Aug. 31 Bal.

Depreciation Expense 4,032 35,100 39,132

Aug. 31

Supplies Expense 3,605

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-10A (Continued) (d) REYES RIDES Adjusted Trial Balance August 31, 2017

Cash.................................................................. Accounts receivable ........................................ Prepaid insurance............................................ Supplies............................................................ Equipment ........................................................ Accumulated depreciation—equipment......... Vehicles ............................................................ Accumulated depreciation—vehicles............. Accounts payable ............................................ Notes payable .................................................. Interest payable ............................................... Salaries payable............................................... Unearned revenue ........................................... J. Reyes, capital ............................................... J. Reyes, drawings .......................................... Service revenue ............................................... Depreciation expense ...................................... Fuel expense .................................................... Insurance expense .......................................... Interest expense .............................................. Rent expense ................................................... Salaries expense.............................................. Supplies expense ............................................

Solutions Manual .

3-68

Debit $ 9,000 8,430 2,110 850 40,320

Credit

$ 29,232 421,200 210,600 6,320 162,000 608 2,725 4,500 105,075 141,000 356,150 39,132 24,592 10,550 10,261 22,810 143,350 3,605 $877,210 $877,210

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-10A (Continued) Taking It Further: The carrying amount of the vehicles at Aug. 31, 2017 is $421,200 − $210,600 = $210,600 or half of the purchase price. Since the carrying amount is half of the purchase price, the vehicles are half depreciated through their useful life estimated at 12 years. Consequently the vehicles are 6 years old. The accumulated depreciation of the equipment at Aug. 31, 2017 is $29,232. Annual depreciation expense is $4,032. Consequently the equipment is 7.25 years old ($29,232 ÷ $4,032).

Solutions Manual .

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PROBLEM 3-11A (b) 1.

May 31 Insurance Expense ($6,360 × 1/12) Prepaid Insurance ......................

530

31 Supplies Expense ($995 – $560) .... Supplies ......................................

435

Solutions Manual .

530

435

31 Depreciation Expense [($150,000 ÷ 50) × 1/12] ................... 250 Accumulated Depreciation—Buildings

250

31 Depreciation Expense [($33,000 ÷ 10) × 1/12] ..................... 275 Accumulated Depreciation—Furniture

275

31 Unearned Revenue.......................... 10,000 Rent Revenue ............................. ($15,000 X 2/3)

10,000

31 Interest Expense ($96,000 × 6.5% × 2/12)...................... 1,040 Interest Payable ..........................

1,040

31 Salaries Expense............................... 1,450 Salaries Payable .........................

1,450

31 Utilities Expense ............................... 3,420 Accounts Payable ......................

3,420

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PROBLEM 3-11A (Continued) (a) and (c)

May 31

May 31 Bal.

May 31

Cash 17,520

Prepaid Insurance 1,590 May 31 1,060

Supplies 995 May 31

Bal.

May 31

Buildings 150,000

Accumulated Depreciation-Buildings May 31 May 31 Bal.

Solutions Manual .

435

560

Land 35,000

May 31

530

47,750 250 48,000

Furniture 33,000

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PROBLEM 3-11A (Continued) (a) and (c) Accumulated Depreciation-Furniture May 31

May 31

Solutions Manual .

12,925

May 31 Bal.

275 13,200

Accounts Payable May 31 May 31 Bal.

8,500 3,420 11,920

Mortgage Payable May 31

96,000

Unearned Revenue May 31 10,000 Bal.

15,000 5,000

Interest Payable May 31

1,040

Salaries Payable May 31

1,450

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PROBLEM 3-11A (Continued) (a) and (c) K. MacPhail, Capital May 31

May 31

K. MacPhail, Drawings 42,735

Rent Revenue May 31 May 31 Bal.

May 31 May 31 Bal.

Salaries Expense 156,710 1,450 158,160

May 31 May 31 Bal.

Interest Expense 5,720 1,040 6,760

May 31

Repairs Expense 14,400

Solutions Manual .

85,000

3-73

246,150 10,000 256,150

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-11A (Continued) (a) and (c)

May 31 May 31 Bal.

Utilities Expense 37,600 3,420 41,020

May 31 May 31 Bal.

Insurance Expense 5,830 530 6,360

May 31 May 31 May 31 Bal.

Depreciation Expense 5,775 250 275 6,300

May 31 May 31 Bal.

Supplies Expense 4,450 435 4,885

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-11A (Continued) (c) HIGHLAND COVE RESORT Adjusted Trial Balance May 31, 2017 Debit Credit Cash ................................................................... $ 17,520 Prepaid insurance............................................. 1,060 Supplies............................................................. 560 Land ................................................................... 35,000 Buildings ........................................................... 150,000 $ 48,000 Accumulated depreciation—buildings ............ Furniture ............................................................ 33,000 13,200 Accumulated depreciation—furniture ............. Accounts payable ............................................. 11,920 Unearned revenue ............................................ 5,000 Salaries payable................................................ 1,450 Interest payable ................................................ 1,040 Mortgage payable ............................................. 96,000 K. MacPhail, capital .......................................... 85,000 K. MacPhail, drawings ...................................... 42,735 Rent revenue ..................................................... 256,150 Depreciation expense ....................................... 6,300 Insurance expense ........................................... 6,360 Interest expense ............................................... 6,760 Repairs expense ............................................... 14,400 Salaries expense............................................... 158,160 Supplies expense ............................................. 4,885 Utilities expense ............................................... 41,020 $517,760 $517,760

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-11A (Continued) (d) HIGHLAND COVE RESORT Income Statement Year Ended May 31, 2017

Revenues Rent revenue ............................................... $256,150 Expenses Depreciation expense ................................ $ 6,300 Insurance expense ...................................... 6,360 Interest expense .......................................... 6,760 Repairs expense.......................................... 14,400 Salaries expense ......................................... 158,160 Supplies expense ........................................ 4,885 Utilities expense .......................................... 41,020 Total expenses........................................ 237,885 Profit ................................................................. $ 18,265

HIGHLAND COVE RESORT Statement of Owner's Equity Year Ended May 31, 2017 K. MacPhail, capital, June 1, 2016 .................................. Add: Profit ........................................................................ Less: Drawings ................................................................ K. MacPhail, capital, May 31, 2017..................................

Solutions Manual .

3-76

$ 85,000 18,265 103,265 42,735 $ 60,530

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-11A (Continued) (d) (Continued) HIGHLAND COVE RESORT Balance Sheet May 31, 2017

Assets Cash.................................................................... $ 17,520 Prepaid insurance.............................................. 1,060 Supplies.............................................................. 560 Land .................................................................... 35,000 Buildings ........................................................... $150,000 Less: Accumulated depreciation ...................... 48,000 102,000 Furniture .................................................. 33,000 Less: Accumulated depreciation ...................... 13,200 19,800 Total Assets................................................... $175,940 Liabilities and Owner's Equity Liabilities Accounts payable........................................................ $ 11,920 Unearned revenue ....................................................... 5,000 Salaries payable .......................................................... 1,450 Interest payable .......................................................... 1,040 Mortgage payable........................................................ 96,000 Total liabilities......................................................... 115,410 Owner's equity K. MacPhail, capital ........................................................ 60,530 Total liabilities and owner's equity .......................... $175,940

Solutions Manual .

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Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-11A (Continued) Taking It Further: The balance of the owner’s capital account that appears on the adjusted trial balance on May 31, 2017 does not correspond to the amount of the owner’s capital that appears on the balance sheet at that date. The reason for the difference is that the owner’s capital account in the trial balance does not include the amount of the profit and the drawings taken by the owner for the year ended May 31, 2017.

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-12A (b)

Nov.

8 Salaries Payable.............................. 700 Salaries Expense ............................ 1,000 Cash ............................................ 10

Cash ................................................. 3,620 Accounts Receivable .................

3,620

Cash ................................................. 3,100 Service Revenue.........................

3,100

Equipment ....................................... 2,000 Accounts Payable ......................

2,000

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

700 700

20 Accounts Payable ........................... 2,700 Cash ............................................ 22

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

2,700

400 400

25 Salaries Expense ............................ 1,700 Cash ............................................

1,700

27 Accounts Receivable ...................... 2,200 Service Revenue.........................

2,200

Solutions Manual .

1,700

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

3-79

600 600

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-12A (Continued) (c) HAMM EQUIPMENT REPAIR Trial Balance November 30, 2017

Cash................................................................... Accounts receivable ......................................... Supplies............................................................. Equipment ......................................................... Accumulated depreciation—equipment.......... Accounts payable ............................................. Unearned revenue ............................................ J. Hamm, capital ............................................... Service revenue ................................................ Salaries expense............................................... Rent expense ....................................................

Debit $ 3,220 2,830 2,500 14,000

Credit

$2,000 2,600 1,800 13,950 5,300 2,700 400 $25,650

$25,650

(d) Nov.

Solutions Manual .

30 Supplies Expense ............................. 1,100 Supplies ...................................... ($2,500 - $1,400 = $1,100) 30 Salaries Expense ............................ Salaries Payable .........................

350

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

200

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

1,220

3-80

1,100

350

200 1,220

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-12A (Continued) (a), (b), and (d)

Nov. 1 Nov. 10 Nov. 12 Nov. 29 Bal.

Cash 2,400 3,620 3,100 600 3,220

Nov. 1 Nov. 27 Bal.

4,250 2,200 2,830

Nov. 1 Nov. 17 Bal.

Supplies 1,800 700 2,500

Nov. 8 Nov. 20 Nov. 22 Nov. 25

Accounts Receivable Nov. 10 3,620

Nov. 30 Bal.

Nov. 1 Nov. 15 Bal.

1,100

1,400 Equipment 12,000 2,000 14,000

Accumulated Depreciation-Equipment Nov. 1 Nov. 30 Bal.

Solutions Manual .

1,700 2,700 400 1,700

3-81

2,000 2,000 200 2,200

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-12A (Continued) (a), (b), and (d)

Nov. 20

Nov. 30

Nov. 8

Solutions Manual .

Accounts Payable Nov. 1 2,700 Nov. 15 Nov. 17 Bal.

Unearned Revenue Nov. 1 Nov. 29 Bal. 1,220 Bal. Salaries Payable Nov. 1 700 Nov. 30 Bal.

2,600 2,000 700 2,600

1,200 600 1,800 580

700 350 350

J. Hamm, Capital Nov. 1

13,950

Service Revenue Nov. 12 Nov. 27 Bal. Nov. 30 Bal.

3,100 2,200 5,300 1,220 6,520

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-12A (Continued) (a), (b), and (d)

Nov. 22

Salaries Expense 1,000 1,700 2,700 350 3,050 Rent Expense 400

Nov. 30

Depreciation Expense 200

Nov. 30

Supplies Expense 1,100

Nov. 8 Nov. 25 Bal. Nov. 30 Bal.

Solutions Manual .

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-12A (Continued) (e) HAMM EQUIPMENT REPAIR Adjusted Trial Balance November 30, 2017

Cash................................................................... Accounts receivable ......................................... Supplies............................................................. Equipment ......................................................... Accumulated depreciation—equipment.......... Accounts payable ............................................. Salaries payable................................................ Unearned revenue ............................................ J. Hamm, capital ............................................... Service revenue ................................................ Salaries expense............................................... Depreciation expense ....................................... Supplies expense ............................................. Rent expense ....................................................

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

Credit

$2,200 2,600 350 580 13,950 6,520 3,050 200 1,100 400 $26,200

$26,200

(f) HAMM EQUIPMENT REPAIR Income Statement Month Ended November 30, 2017

Revenues Service revenue........................................... Expenses Depreciation expense ................................. Rent expense ............................................... Salaries expense ......................................... Supplies expense ........................................ Total expenses........................................ Profit Solutions Manual .

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

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-12A (Continued) (f) HAMM EQUIPMENT REPAIR Statement of Owner's Equity Month Ended November 30, 2017

J. Hamm, capital, November 1, 2017 .............................. Add: Profit ........................................................................ J. Hamm, capital, November 30, 2017 ............................

$13,950 1,770 $15,720

HAMM EQUIPMENT REPAIR Balance Sheet November 30, 2017

Assets Cash.................................................................... Accounts receivable .......................................... Supplies.............................................................. Equipment ........................................................... $14,000 Less: Accumulated depreciation ......................... 2,200 Total Assets ..............................................

$ 3,220 2,830 1,400 11,800 $19,250

Liabilities and Owner’s Equity Liabilities Accounts payable........................................................ Unearned revenue ....................................................... Salaries payable .......................................................... Total liabilities.........................................................

$2,600 580 350 3,530

Owner’s Equity J. Hamm, capital .............................................................. 15,720 Total liabilities and owner’s equity.................................$19,250

Solutions Manual .

3-85

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-12A (Continued)

Taking It Further: Although the balance in the accounts payable account remains unchanged after recording the adjusting entries, its balance must appear on the adjusted trial balance along with all accounts that have any balance. Failing to include this account will result in the adjusted trial balance being out of balance.

Solutions Manual .

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Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-13A (b) 1.

Jan. 31 Insurance Expense ($3,960 × 7/12) ................................. 2,310 Prepaid Insurance ......................

2,310

31 Supplies Expense ........................... 5,660 Supplies ($6,580 − $920) ............

5,660

31 Depreciation Expense ($32,350 ÷ 5) 6,470 Accumulated Depreciation— Equipment...................................

6,470

31 Unearned Revenue ......................... 5,230 Service Revenue.........................

5,230

Solutions Manual .

31 Interest Expense ($11,000 × 6% × 3/12) ...................... Interest Payable .......................... 31

165 165

Salaries Expense ............................ 1,315 Salaries Payable .........................

1,315

31 Accounts Receivable ...................... 2,675 Service Revenue.........................

2,675

31 Telephone Expense ........................ Accounts Payable ......................

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PROBLEM 3-13A (Continued) (a) and (b)

Jan. 31

Jan. 31 Jan. 31 Bal.

Cash 4,970

Accounts Receivable 14,540 2,675 17,215

Bal.

Prepaid Insurance 3,960 Jan. 31 1,650

Jan. 31

Supplies 6,580

Jan. 31

Jan. 31 Bal.

Jan. 31

5,660

920

Equipment 32,350

Accumulated Depreciation-Equipment Jan. 31 Jan. 31 Bal.

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2,310

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12,940 6,470 19,410

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PROBLEM 3-13A (Continued) (a) and (b) Accounts Payable Jan. 31 Jan. 31 Bal.

7,760 170 7,930

Notes Payable Jan. 31

Jan. 31

Solutions Manual .

Unearned Revenue Jan. 31 5,230 Bal.

11,000

7,480 2,250

Interest Payable Jan. 31

165

Salaries Payable Jan. 31

1,315

E. Fox, Capital Jan. 31

18,320

E. Fox, Drawings 119,000

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PROBLEM 3-13A (Continued) (a) and (b) Service Revenue Jan. 31 Jan. 31 Jan. 31 Bal.

Jan. 31 Jan. 31 Bal.

Salaries Expense 66,950 1,315 68,265

Jan. 31

Interest Expense 165

Jan. 31

Rent Expense 20,750

Jan. 31 Jan. 31 Bal.

Telephone Expense 2,900 170 3,070

Jan. 31

Insurance Expense 2,310

Jan. 31

Depreciation Expense 6,470

Jan. 31

Supplies Expense 5,660

214,500 5,230 2,675 222,405

Fill in white space

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PROBLEM 3-13A (Continued) (c) FOX ENTERPRISES Adjusted Trial Balance January 31, 2017 Debit Credit Cash................................................................... $ 4,970 Accounts receivable ......................................... 17,215 Supplies ............................................................ 920 Prepaid insurance ............................................ 1,650 Equipment ......................................................... 32,350 Accumulated depreciation—equipment ......... $ 19,410 Notes payable ................................................... 11,000 Accounts payable ............................................ 7,930 Interest payable ................................................ 165 Salaries payable................................................ 1,315 Unearned revenue ............................................ 2,250 E. Fox, capital.................................................... 18,320 E. Fox, drawings ............................................... 119,000 Service revenue ............................................... 222,405 Depreciation expense ....................................... 6,470 Insurance expense ........................................... 2,310 Interest expense ............................................... 165 Rent expense .................................................... 20,750 Salaries expense............................................... 68,265 Supplies expense ............................................. 5,660 Telephone expense........................................... 3,070 $282,795 $282,795

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PROBLEM 3-13A (Continued) (d) FOX ENTERPRISES Income Statement Year Ended January 31, 2017

Revenues Service revenue............................................ $222,405 Expenses Depreciation expense .................................. $ 6,470 Insurance expense ....................................... 2,310 Interest expense ........................................... 165 Rent expense ................................................ 20,750 Salaries expense .......................................... 68,265 Supplies expense ......................................... 5,660 Telephone expense ...................................... 3,070 Total expenses......................................... 106,690 Profit .................................................................. $115,715

FOX ENTERPRISES Statement of Owner's Equity Year Ended January 31, 2017 E. Fox, capital, February 1, 2016..................................... Add: Profit ........................................................................ Less: Drawings ................................................................ E. Fox, capital, January 31, 2017 ....................................

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$ 18,320 115,715 134,035 119,000 $ 15,035

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PROBLEM 3-13A (Continued) (d) (Continued) FOX ENTERPRISES Balance Sheet January 31, 2017

Assets Cash................................................................... Accounts receivable ......................................... Supplies............................................................. Prepaid insurance............................................. Equipment ......................................................... $32,350 Less: Accumulated depreciation ..................... 19,410 Total Assets .............................................

$ 4,970 17,215 920 1,650 12,940 $37,695

Liabilities and Owner's Equity Liabilities Notes payable .............................................................. Accounts payable........................................................ Interest payable ........................................................... Salaries payable .......................................................... Unearned revenue ....................................................... Total liabilities.........................................................

$11,000 7,930 165 1,315 2,250 22,660

Owner's equity E. Fox, capital .................................................................. 15,035 Total liabilities and owner's equity ............................ $37,695

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PROBLEM 3-13A (Continued) Taking It Further: Fox Enterprises is performing very well. Profit is positive and expenses represent only 48% of total revenues. A negative indicator in these financial statements is the amount of drawings the owner has taken. This amount exceeds the profit for the year. The financial position of Fox Enterprises is also positive, total cash and accounts receivable ($22,185) exceeds liabilities (excluding unearned revenues) of $20,410. As long as all accounts receivable are collected there should be adequate cash to pay all outstanding liabilities. If Fox Enterprises wishes to purchase additional assets, the company may require additional cash. This will have to be obtained from Edmund Fox by additional investment of cash or by bank financing.

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PROBLEM 3-1B Students may find this to be a fairly challenging problem, so here are a few points that should help:  Under the CASH BASIS of accounting, revenues are recorded when they are collected (received in cash), even if they were earned (the sale was made) in an earlier accounting period;  Under the ACCRUAL BASIS of accounting, revenues are recorded when they are earned (the sale is made) even if the cash is not collected until later, or is received prior to the revenue being earned;  Under the CASH BASIS of accounting, expenses are recorded when the cash is paid out; and  Under the ACCRUAL BASIS of accounting, expenses are recorded when the cost has “expired” or been “used up”, which is not always in the same time period as when the cash is paid out. For example:  Under the CASH BASIS of accounting, Supplies are recorded as expenses as soon as they are purchased and paid for. Expenses, such as insurance, are recorded when items are paid for even if a portion relates to future periods;  Under the ACCRUAL BASIS of accounting, Supplies are not recorded as expenses until they have been used up. While the supplies are still on hand, they are recorded as assets because they have future benefits;  Under the CASH BASIS of accounting, amounts such as Salaries Payable at the end of 2016 would not be considered expenses until they are actually paid out in 2017; and  Under the ACCRUAL BASIS of accounting, Salaries Payable at the end of 2016 would be considered expenses in 2017, because the cost was incurred or “used up” during 2016, even though the cash will not be paid out until 2017.

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PROBLEM 3-1B (Continued) (a) and (b) $27,500

Cash basis income ($136,200 − $108,700)

−3,990 Accounts Payable owing at the end 2017 should be accrued; the related expense was incurred in 2017 and thus, reduces income. +1,460 Accounts Payable owing at year end 2016 represents expenses of 2016. Amount has been deducted from cash and must be added back for accrual basis profit. +6,100 Accounts Receivable arise from sales that have been made in 2017, and thus, revenue must be recognized and recorded in 2017. −13,200 Accounts Receivable collected in 2017 from sales made (and revenue that was earned) in 2016. −3,250

Depreciation Expense is equal to the increase in accumulated depreciation from 2016 to 2017 ($18,250 − $15,000 = $3,250)

+620 Prepaid Insurance at year end 2017 is an asset rather than an expense. Amount has been deducted from cash basis and must be added back for accrual basis profit. −1,530 Prepaid Insurance at year end 2016 has been used up and must be recorded as an expense during 2017. +550 Supplies on hand at year end 2017 represent assets rather than an expense. Amount has been deducted from cash basis and must be added back for accrual basis profit. −2,350 Supplies on hand at year end 2016 have been used up and must be recorded as an expense during 2017.

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PROBLEM 3-1B (Continued) (a) and (b) (Continued) −7,400

Unearned Revenue was received in cash in 2017 but has not been earned and thus, must be taken away.

+1,560

Unearned Revenue received in cash in 2016 has now been earned and must be recorded in 2017.

$6,070

Accrual basis income

Taking It Further: Recommend that Northland Co. use the accrual basis of accounting. The cash basis does not correctly show when the revenue was earned or the expenses were incurred. The cash basis of accounting is not in accordance with generally accepted accounting principles.

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PROBLEM 3-2B (a)

1. Jan. 2. Mar.

9 Supplies ............................................. 2,950 Cash ............................................

2,950

1 Prepaid Insurance ............................. 4,920 Cash ............................................

4,920

Equipment ....................................... 31,200 Cash ............................................

31,200

3. June 1

4. Sept. 1 Prepaid Rent ...................................... 1,650 Cash ............................................ 5. Oct. 1 Cash ................................................... 2,600 Unearned Revenue ..................... 6. Nov. 15 Cash ................................................... 2,500 Unearned Revenue .....................

1,650

2,600

2,500

(b) 1. Basic Analysis Debit-Credit Analysis Adjusting Journal Entry

Solutions Manual .

The asset Supplies is decreased by $2,235. The expense Supplies Expense is increased by $2,235. Debits increase expenses: debit Supplies Expense $2,235. Credits decrease assets: credit Supplies $2,235. Dec. 31 Supplies Expense 2,235 Supplies ($2,950 – $715) 2,235 To record supplies used.

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PROBLEM 3-2B (Continued) 2. Basic Analysis Debit-Credit Analysis

Adjusting Journal Entry

The asset Prepaid Insurance is decreased by $4,100. The expense Insurance Expense is increased by $4,100. Debits increase expenses: debit Insurance Expense $4,100. Credits decrease assets: credit Prepaid Insurance $4,100. Dec. 31 Insurance Expense 4,100 Prepaid Insurance 4,100 To record insurance expired. ($4,920 × 10/12)

3. Basic Analysis

Debit-Credit Analysis

Adjusting Journal Entry

Solutions Manual .

Seven months of depreciation increases the contra asset Accumulated Depreciation—Equipment (which decreases the carrying value of the asset Equipment) by $2,275. The expense Depreciation Expense is increased by $2,275. Debits increase expenses: debit Depreciation Expense $2,275. Credits increase contra assets: credit Accumulated Depreciation—Equipment $2,275. Dec. 31 Depreciation Expense 2,275 Accumulated Depreciation —Equipment 2,275 To record depreciation of equipment. ($31,200 ÷ 8 × 7/12)

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PROBLEM 3-2B (Continued) 4. Basic Analysis Debit-Credit Analysis Adjusting Journal Entry

The asset Prepaid Rent is decreased by $1,100. The expense Rent Expense is increased by $1,100. Debits increase expenses: debit Rent Expense $1,100. Credits decrease assets: credit Prepaid Rent $1,100. Dec. 31 Rent Expense ($275 × 4) 1,100 Prepaid Rent 1,100 To record equipment lease expired.

5. Basic Analysis Debit-Credit Analysis

Adjusting Journal Entry

The liability Unearned Revenue is decreased by $975. The revenue account Rent Revenue is increased by $975. Debits decrease liabilities: debit Unearned Revenue $975. Credits increase revenues: credit Rent Revenue $975. Dec. 31 Unearned Revenue ($325 × 3) 975 Rent Revenue 975 To record revenue for rent earned.

6. Basic Analysis Debit-Credit Analysis

Adjusting Journal Entry

Solutions Manual .

The liability Unearned Revenue is decreased by $1,500. The revenue account Service Revenue is increased by $1,500. Debits decrease liabilities: debit Unearned Revenue $1,500. Credits increase revenues: credit Service Revenue $1,500. Dec. 31 Unearned Revenue ($500 × 3) 1,500 Service Revenue 1,500 To record revenue for services provided.

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PROBLEM 3-2B (Continued) (c)

Jan. 9

Supplies 2,950 Dec. 31 2,235

Dec. 31 Bal.

Supplies Expense Dec. 31 2,235

715

2. Prepaid Insurance Mar. 1 4,920 Dec. 31 4,100 Dec. 31 Bal. 820

Insurance Expense Dec. 31 4,100

Mar. 31

Accumulated Depreciation—Equipment Dec. 31 2,275

Equipment 31,200

Depreciation Expense Dec. 31 2,275 4. Prepaid Rent Sept. 1 1,650 Dec. 31 1,100 Dec. 31 Bal. 550

Solutions Manual .

Rent Expense Dec. 31 1,100

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PROBLEM 3-2B (Continued) 5. Unearned Revenue Oct. 1 2,600 Dec. 31 975

Rent Revenue Dec. 31

975

Dec. 31 Bal. 1,625 6. Service Revenue Dec. 31 1,500

Unearned Revenue Nov. 15 2,500 Dec. 31 1,500 Dec. 31 Bal. 1,000

Taking It Further: Burke Bros. cannot avoid recording adjusting journal entries at the end of the fiscal year. Had Burke originally recorded items 1 through 4 as expenses and items 5 and 6 as revenues, there would still have been a need to adjust asset and liability accounts at the end of the fiscal year in order to arrive at accurate balances.

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PROBLEM 3-3B (a)

(b)

Dec. 31 Interest Expense ............................. Interest Payable .......................... ($40,000 × 5.5% × 1/12 = $183)

183 183

31 Salaries Expense............................... 7,500 Salaries Payable .........................

7,500

31 Accounts Receivable ...................... 12,000 Rental Revenue ..........................

12,000

31 Telephone Expense ........................ Accounts Payable ......................

290

31 Interest Receivable ......................... Interest Revenue ........................ ($10,000 × 7% × 2/12 = $117)

117

Jan. 1 Interest Payable .............................. Cash ............................................

183

290

117

183

Jan. 2 Salaries Payable.............................. 7,500 Cash ............................................ Jan. 5

Cash ................................................. 18,000 Accounts Receivable ................. Rental Revenue ..........................

Jan. 9 Accounts Payable ........................... Cash ............................................

290

Apr. 30

350

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Cash ($10,000 × 7% × 6/12)............. Interest Receivable..................... Interest Revenue ($10,000 × 7% × 4/12)..................

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7,500 12,000 6,000 290

117 233

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PROBLEM 3-3B (Continued) Taking It Further: The following revenue accounts would be understated by: Rental Revenue ..................................................... $12,000 Interest Revenue .................................................. 117 $12,117 The following expense accounts would be understated by: Interest Expense ..................................................... $ 183 Salaries Expense ...................................................... 7,500 Utilities Expense ..................................................... 290 7,973 Profit would be understated by .............................

$ 4,144

Assets would be understated by: Interest Receivable ................................................. $ 117 Accounts Receivable .............................................. 12,000 $12,117 Liabilities would be understated by: Interest Payable ..................................................... $ 183 Accounts Payable .................................................. 290 Salaries Payable........................................................ 7,500 Owner’s equity would be understated by .............

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7,973 $ 4,144

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PROBLEM 3105B Sept. 30, 2017 1. Supplies Expense ............................ 1,100 Supplies ....................................... 2.

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

775

Insurance Expense .......................... Prepaid Insurance ....................... ($2,360 ÷ 12 = $197)

197

Depreciation Expense...................... Accumulated Depreciation —Equipment ............................. ($9,600 ÷ 48 = $200)

200

Interest Expense .............................. Interest Payable ........................... ($15,000 x 4.5% X 1/12) = $56

775 197

200

Salaries Expense.............................. 3,000 Salaries Payable .......................... ($1,000 x 3) = $3,000 Accounts Receivable ....................... Service Revenue..........................

1,100

3,000

950 950

Taking It Further: Sam is incorrect in stating that it is never appropriate to make adjusting entries to accrue for revenue. Service revenue is susceptible to the need for adjusting entries at the end of accounting periods. This is particularly true if the amount of time working on an assignment or service takes several days, even weeks to perform. It would be unfair to postpone the recognition of revenue just because a task was in process. Solutions Manual .

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PROBLEM 3-5B 1.

(a)

June 30 Rent Expense .................................. Prepaid Rent ...............................

900

June 30 Supplies Expense ........................... Supplies ($1,415- $900) ..............

515

900

(a)

515

(a) June 30 Depreciation Expense ....................... 2,000 Accumulated Depreciation— Equipment ............................... ($12,000 ÷ 36 x 6) ...................

2,000

(a)

June 30 Interest Expense ............................. Interest Payable ($5,000 × 4.5% × 5/12).................

(b) Jan. 31 Interest Expense ($5,000 × 4.5% × 7/12) ..................... 131 Interest Payable .............................. 94 Notes Payable.................................... 5,000 Cash ............................................

5,225

(a) June 30 Accounts Receivable ........................ 3,650 Service Revenue .....................

3,650

(a) June 30 Salaries Expense ............................... 3,000 Salaries Payable ..................... (b) July

Salaries Payable ................................ 3,000 Cash ........................................

3,000

(a) June 30 Unearned Revenue ............................ 2,190 Service Revenue ..................... ($2,590 - $400 = $2,190)

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2,190

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PROBLEM 3-5B (Continued) Taking It Further: The statement: “The amount included in an adjusted trial balance for a specific account will always be more than the amount that was included in the trial balance for the same account” is true when accruals are recorded as adjustments to revenue and expense accounts and their respective asset and liability accounts. For prepayments adjustments, the unadjusted account balances will be reduced by the adjustments. The exception to this relationship is the adjusting entry for depreciation. When depreciation is recorded, it does increase an expense and it does increase a contra-asset account Accumulated Depreciation.

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PROBLEM 3-6B 1. (a)

(b)

2. (a)

(b)

3. (a)

(b)

(c)

Jan. 31

Supplies ............................................. 2,880 Cash ............................................

2,880

Nov. 30 Supplies Expense ($950 + $2,880 − $670) ....................... 3,160 Supplies ......................................

3,160

Aug.

Cash ($200 × 310) ............................ 62,000 Unearned Revenue .....................

62,000

Nov. 30 Unearned Revenue.......................... 18,600 Admission Revenue ($62,000 ÷ 10 × 3) ........................

18,600

Nov. 29 Salaries Expense............................... 4,500 Cash ............................................

4,500

Nov. 30 Salaries Expense............................... 1,800 Salaries Payable ......................... ($4,500 x 2/5) = $1,800 Dec.

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6 Salaries Payable ................................ 1,800 Salaries Expense............................... 2,700 Cash ............................................

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1,800

4,500

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PROBLEM 3-6B (Continued) 4. (a)

(b)

(c)

5. (a)

(b)

(c)

Nov.

Cash ................................................. Rent Revenue .............................

245

Nov. 30 Accounts Receivable ($425 − $245) Rent Revenue .............................

180

Dec.

605

June

4 Cash ($180 + $425) ......................... Accounts Receivable ................. Rent Revenue .............................

180 180 425

1 Cash ................................................. 11,000 Notes Payable.............................

Nov. 30 Interest Expense ............................. Interest Payable ($11,000 × 4.5% × 6/12) ...............

11,000

248 248

1 Interest Expense ($11,000 × 4.5% × 2/12) ................... 82 Interest Payable .............................. 248 Notes Payable.................................. 11,000 Cash ............................................

11,330

6. (b) Nov. 30 Utilities Expense................................ 1,420 Accounts Payable ......................

1,420

(c)

Feb.

245

Dec. 10 Accounts Payable ............................. 1,420 Cash ............................................

1,420

7. (b) Nov. 30 Depreciation Expense ($37,975 ÷ 8) 4,747 Accumulated Depreciation—Vehicles..............

4,747

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PROBLEM 3-6B (Continued) Taking It Further: The three basic reasons that a trial balance may not contain complete or up-to-date data are: 1. Some events are not journalized daily because it is not efficient to do so; 2. Some costs are not journalized during the accounting period because they expire through the passage of time so are not daily transactions; 3. Some items may be unrecorded. The adjustment to record supplies used (Item 1) is an example of the first reason above. It is not practical to record an expense every time supplies are used. The adjustment to record depreciation (Item 7) is an example of the second reason above. The cost of a long-lived asset expires through the passage of time. The adjustment to record the utility bill (Item 6) is an example of the third reason above. The bill was for the month of November but had not been recorded in the recording of daily transactions.

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PROBLEM 3-7B 1.

Oct. 31 Depreciation Expense ....................... 1,500 Accumulated Depreciation— Equipment ($9,000 ÷ 6)...............

1,500

31 Supplies Expense ($1,000 + $2,500 – $980).................. 2,520 Supplies ......................................

2,520

7. 8.

Solutions Manual .

31 Interest Expense ............................. Interest Payable ($28,000 × 6% × 4/12)..................

560

800

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

560

800

31 Unearned Revenue ......................... 2,000 Fees Earned [$200 × (15 − 5)] ....

2,000

31 Accounts Receivable ...................... 1,550 Fees Earned ................................

1,550

31 Wages Expense ($125 × 2 × 3) ....... Wages Payable ...........................

750

31 Telephone Expense ....................... Accounts Payable ......................

360

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PROBLEM 3-7B (Continued) Taking It Further: The timing of the preparation of the adjusting journal entries in the accounting cycle depends completely on the business’ needs to communicate financial information to those who use it. If the business does not need financial statements monthly, and decides that financial statements are only needed on an annual basis, then the preparation of adjusting journal entries on an annual basis is adequate. On the other hand, the practice of recording adjusting journal entries at the end of each month should be adopted if doing so will provide feedback to the business on action that should be taken to rectify a business problem, or initiate changes in the way the business is managed. Companies reporting under IFRS must prepare quarterly financial statements and must therefore prepare adjusting entries on a quarterly basis.

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PROBLEM 3-8B (a) 1.

July 31 Insurance Expense............................ 7,035 Prepaid Insurance ...................... Expired insurance: B4564 $10,440 × 11/24 A2958 $ 5,400 × 5/12

$4,785 2,250 $7,035

July 31 Rent Expense .................................... 4,675 Prepaid Rent ............................... Expired rent: Agreement 1: Agreement 2:

7,035

$335 × 5 months $375 × 8 month

4,675

$1,675 3,000 $4,675

July 31 Depreciation Expense ($127,800 ÷ 30) ................................... 4,260 Accumulated Depreciation— Building.......................................

4,260

31 Depreciation Expense ($164,160 ÷ 40)................................. 4,104 Accumulated Depreciation— Building.......................................

4,104

July 31 Unearned Revenue .......................... 34,242 Service Revenue.........................

34,242

Earned Revenue at July 31, 2017: October 325 × $35 × 10/12 = November 450 × $35 × 9/12 = December 555 × $35 × 8/12 =

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$ 9,479 11,813 12,950 $34,242

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PROBLEM 3-8B (Continued) (a) (Continued) 5.

July 31 Salaries Expense ............................... 1,290 Salaries Payable .........................

1,290

6 × $650 × 1/5 = $ 780 3 × $850 × 1/5 = 510 Total $ 1,290

(b)

First building, Accumulated Depreciation = ($4,260 × 15 ) + $4,260 × 11/12 = $63,900 + $3,905 (11 months for first year) = $67,805 Carrying amount = $127,800 − $67,805 = $59,995 Second building, Accumulated Depreciation = $4,104 × 14 + $4,104 × 3/12 = $57,456 + $1,026 (3 months for 2003) = $58,482 Carrying amount = $164,160 − $58,482 = $105,678

Taking It Further: The purpose of depreciation is to allocate the cost of a long-lived asset to expense over the useful life of the asset in a systematic and rational manner. Land is not depreciated because it has an unlimited useful life.

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PROBLEM 3-9B (a) Alabaster Co.: June 1/17

Sept. 30/17

Oct. 1/17

Oct. 31/17

Nov. 1/17

Dec. 1/17

Dec. 31/17

Solutions Manual .

Cash................................................ Notes Payable (Note 1) ...........

50,000

Cash................................................ Notes Payable (Note 2) ...........

80,000

Cash................................................ Notes Payable (Note 3) ...........

45,000

Interest Expense ............................ Interest Payable ...................... Note 1: ($50,000 × 4% × 5/12)

833

Interest Expense ............................ Interest Payable ...................... Note 2: ($80,000 × 3.5% × 1/12)

233

Interest Expense ............................ Interest Payable ...................... Note 3: ($45,000 × 5.5% × 1/12)

206

Interest Payable ............................. Cash .........................................

206

Interest Expense ............................ Cash ......................................... Note 3: ($45,000 × 5.5% × 1/12)

206

Interest Expense*........................... Interest Payable ............................. Cash ........................................ * Note 2: ($80,000 × 3.5% × 2/12)

467 233

3-115

50,000

80,000

45,000

833

233

206

700

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-9B (Continued) (a) (Continued) Jan. 1/18

Jan. 1/18

Mar. 31/18

June 30/18

Sept. 30/18

Interest Expense ............................ Notes Payable (Note 3) .................. Cash .........................................

206 45,000

Interest Expense*........................... Interest Payable ............................. Notes Payable (Note 1) .................. Cash ........................................ * Note 1: ($50,000 × 4% × 2/12)

334 833 50,000

Interest Expense ............................ Cash ......................................... Note 2: ($80,000 × 3.5% × 3/12)

700

Interest Expense ............................ Cash ......................................... Note 2: ($80,000 × 3.5% × 3/12)

700

45,206

51,167

700

Interest Expense*........................... 700 Notes Payable (Note 2) .................. 80,000 Cash ........................................ * Note 2: ($80,000 × 3.5% × 3/12)

80,700

(b) Fuchsia Enterprises: June 1/17

Sept. 30/17

Oct. 1/17

Solutions Manual .

Notes Receivable (Note 1) ............. Cash .........................................

50,000

Notes Receivable (Note 2) ............. Cash .........................................

80,000

Notes Receivable (Note 3) ............. Cash .........................................

45,000

3-116

50,000

80,000 45,000

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PROBLEM 3-9B (Continued) (b) (Continued) Nov. 1/17

Nov. 30/17

Dec. 1/17

Dec. 31/17

Jan. 1/18

Solutions Manual .

Cash................................................ Interest Revenue ..................... Note 3: ($45,000 × 5.5% × 1/12)

206

Interest Receivable ........................ Interest Revenue ..................... Note 1: ($50,000 × 4% × 6/12)

1,000

Interest Receivable ........................ Interest Revenue ..................... Note 2: ($80,000 × 3.5% × 2/12)

467

Interest Receivable ........................ Interest Revenue ..................... Note 3: ($45,000 × 5.5% × 1/12)

206

Cash................................................ Interest Receivable ................. Note 3: ($45,000 × 5.5% × 1/12)

206

Cash................................................ Interest Receivable ................. Interest Revenue ..................... Note 2: ($80,000 × 3.5% × 1/12)

700

Cash................................................ Interest Revenue ..................... Notes Receivable (Note 3) ......

45,206

Cash................................................ Interest Receivable ................. Interest Revenue*.................... Notes Receivable (Note 1) ...... * Note 1: ($50,000 × 4% × 1/12)

51,167

3-117

206

1,000

467

206

467 233

206 45,000 1,000 167 50,000

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-9B (Continued) (b) (Continued) Mar. 31/18

June 30/18

Sept. 30/18

Cash................................................ Interest Revenue ..................... Note 2: ($80,000 × 3.5% × 3/12)

700

Cash................................................ Interest Revenue ..................... Note 2: ($80,000 × 3.5% × 3/12)

700

Cash................................................ 80,700 Interest Revenue*.................... Notes Receivable (Note 2) ...... * Note 2: ($80,000 × 3.5% × 3/12)

700

700 80,000

Taking It Further: It is appropriate because the accrued interest receivable records the asset that exists at the balance sheet date and the offsetting revenue that applies to the current accounting period. If it is not recorded, both assets and revenues are understated and profit and owner’s equity are understated.

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PROBLEM 3-10B (b) 1.

June 30 Supplies Expense ........................... 3,755 Supplies ($4,470 − $715) ............

3,755

30 Insurance Expense ($9,480 × 9/12) 7,110 Prepaid Insurance ......................

7,110

30 Depreciation Expense..................... 5,040 Accumulated Depreciation— Equipment ($30,240 ÷ 6).............

5,040

30 Depreciation Expense ..................... 26,325 Accumulated Depreciation— Vehicles ($210,600 ÷ 8)...............

26,325

30 Unearned Revenue.......................... 16,500 Service Revenue ($18,750 – $2,250)

16,500

Solutions Manual .

30 Interest Expense ($120,000 × 4.5% × 1/12) ................. Interest Payable ..........................

450 450

30 Salaries Expense............................... 2,340 Salaries Payable ($390 × 6) ........

2,340

30 Accounts Receivable ........................ 1,100 Service Revenue.........................

1,100

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PROBLEM 3-10B (Continued) (a) and (c) Cash 9,810

June 30

Accounts Receivable 5,310

June 30

1,100

Bal.

6,410

June 30

Prepaid Insurance 9,480 7,110

June 30

3,755

2,370

Bal.

June 30

Supplies 4,470

715

Bal.

June 30

Solutions Manual .

June 30

Vehicles 210,600

3-120

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PROBLEM 3-10B (Continued) (a) and (c) (Continued) Accumulated Depreciation-Vehicles June 30

26,325

June 30

26,325

Bal.

52,650

Equipment June 30

30,240

Accumulated Depreciation-Equipment June 30 June 30 Bal.

June 30

10,080

Accounts Payable June 30

5,075

Notes Payable June 30

120,000

Unearned Revenue June 30

18,750

16,500 Bal.

Solutions Manual .

5,040 5,040

3-121

2,250

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

Interest Payable June 30

450

Salaries Payable June 30

2,340

K. Cordial, Capital June 30

75,000

K. Cordial, Drawings June 30

91,650

Service Revenue June 30

252,795

June 30

16,500

June 30

1,100

Bal.

270,395

Salaries Expense Jun e 30

101,400

Jun e 30

2,340

Bal.

103,740

PROBLEM 3-10B (Continued) Solutions Manual .

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(a) and (c) (Continued) Interest Expense June 30

4,950

June 30

450 Bal.

5,400 Rent Expense

June 30

17,095 Fuel Expense

June 30

17,980 Insurance Expense

June 30

7,110

Depreciation Expense June 30

26,325

June 30

5,040 Bal.

31,365 Supplies Expense

June 30

3,755

PROBLEM 3-10B (Continued)

Solutions Manual .

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(d) RED BRIDGES TOWING Adjusted Trial Balance June 30, 2017 Debit Credit Cash................................................................... $ 9,810 Accounts receivable ......................................... 6,410 Prepaid insurance............................................. 2,370 Supplies............................................................. 715 Vehicles ............................................................. 210,600 Accumulated depreciation—vehicles.............. $ 52,650 Equipment ......................................................... 30,240 Accumulated depreciation—equipment.......... 10,080 Accounts payable ............................................. 5,075 Notes payable ................................................... 120,000 Unearned revenue ............................................ 2,250 Interest payable ................................................ 450 Salaries payable................................................ 2,340 K. Cordial, capital ............................................. 75,000 K. Cordial, drawings ......................................... 91,650 Service revenue ................................................ 270,395 Salaries expense............................................... 103,740 Interest expense ............................................... 5,400 Rent expense .................................................... 17,095 Fuel expense ..................................................... 17,980 Insurance expense ........................................... 7,110 Depreciation expense ....................................... 31,365 Supplies expense ............................................. 3,755 $538,240 $538,240

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PROBLEM 3-10B (Continued) Taking It Further: The carrying amount of the vehicles at June 30, 2017 is $210,600 − $52,650 = $157,950 or 75% of the purchase price. The automobiles are 25% depreciated. Since the useful life is estimated at 8 years, the automobiles are 2 years old (25% of 8 years). The carrying amount of the equipment at June 30, 2017 is $30,240 − $10,080 = $20,160 or 67% of the purchase price. Since the carrying amount is 67% of the purchase price, the equipment is 33% depreciated through its useful life estimated at 6 years. Consequently the equipment is also 2 years old (33% × 6 years).

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PROBLEM 3-11B (b) 1.

May 31 Insurance Expense ($5,280 × 1/12) Prepaid Insurance ......................

440

31 Supplies Expense ($1,050 − $760) . Supplies ......................................

290

Solutions Manual .

440

290

31 Depreciation Expense ($180,000 ÷ 40) × 1/12 ..................... 375 Accumulated Depreciation—Buildings

375

31 Depreciation Expense ($21,000 ÷ 5) × 1/12.......................... Accumulated Depreciation— Furniture .....................................

350

31 Unearned Revenue............................ 2,000 Rent Revenue (40 × $50) ............ 31 Interest Expense ............................. Interest Payable .......................... ($146,400 × 5.5% × 1/12)

2,000

671 671

31 Salaries Expense............................... 1,025 Salaries Payable .........................

1,025

31 Utilities Expense ............................... 1,250 Accounts Payable ......................

1,250

31 Accounts Receivable ...................... Rent Revenue .............................

3-126

950 950

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-11B (Continued) (a) and (c)

May 31

Cash 12,365

May 31

Accounts Receivable 950

May 31

Prepaid Insurance 3,080

Bal.

May 31

Bal.

May 31

440

May 31

290

2,640

Supplies 1,050

760

May 31

Land 80,000

May 31

Buildings 180,000

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PROBLEM 3-11B (Continued) (a) and (c) Accumulated Depreciation-Buildings May 31 May 31 Bal.

May 31

Solutions Manual .

76,125 375 76,500

Furniture 21,000

Accumulated Depreciation-Furniture May 31 May 31 Bal.

12,250 350 12,600

Accounts Payable May 31 May 31 Bal.

4,780 1,250 6,030

Mortgage Payable May 31

146,400

Unearned Revenue May 31 2,000 Bal.

3-128

8,500 6,500

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-11B (Continued) (a) and (c)

May 31

Interest Payable May 31

671

Salaries Payable May 31

1,025

M. Rundle, Capital May 31

54,800

M. Rundle, Drawings 18,750

Rent Revenue May 31 May 31 May 31 Bal.

May 31 May 31 Bal.

Salaries Expense 49,304 1,025 50,329

May 31 May 31 Bal.

Interest Expense 7,381 671 8,052

Solutions Manual .

3-129

102,100 2,000 950 105,050

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-11B (Continued) (a) and (c)

May 31

Advertising Expense 500

May 31 May 31 Bal.

Utilities Expense 13,300 1,250 14,550

May 31 May 31 Bal.

Insurance Expense 4,840 440 5,280

May 31 May 31 May 31 Bal.

Depreciation Expense 7,975 375 350 8,700

May 31 May 31 Bal.

Supplies Expense 5,410 290 5,700

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PROBLEM 3-11B (Continued) (c) MOUNTAIN BEST LODGE Adjusted Trial Balance May 31, 2017 Debit Credit Cash................................................................... $ 12,365 Accounts receivable ......................................... 950 Prepaid insurance............................................. 2,640 Supplies............................................................. 760 Land ................................................................... 80,000 Buildings ........................................................... 180,000 Accumulated depreciation—buildings ............ $ 76,500 Furniture ............................................................ 21,000 Accumulated depreciation—furniture ............. 12,600 Accounts payable ............................................. 6,030 Unearned revenue ............................................ 6,500 Salaries payable................................................ 1,025 Interest payable ................................................ 671 Mortgage payable ............................................. 146,400 M. Rundle, capital ............................................. 54,800 M. Rundle, drawings ......................................... 18,750 Rent revenue ..................................................... 105,050 Advertising expense ......................................... 500 Depreciation expense ....................................... 8,700 Salaries expense............................................... 50,329 Supplies expense ............................................. 5,700 Interest expense ............................................... 8,052 Insurance expense ........................................... 5,280 Utilities expense ............................................... 14,550 $409,576 $409,576

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PROBLEM 3-11B (Continued) (d) MOUNTAIN BEST LODGE Income Statement Year Ended May 31, 2017

Revenues Rent revenue ................................................ $105,050 Expenses Advertising expense .................................... $ 500 Depreciation expense .................................. 8,700 Salaries expense .......................................... 50,329 Supplies expense ......................................... 5,700 Interest expense ........................................... 8,052 Insurance expense ....................................... 5,280 Utilities expense ........................................... 14,550 Total expenses......................................... 93,111 Profit .................................................................. $ 11,939

MOUNTAIN BEST LODGE Statement of Owner's Equity Year Ended May 31, 2017 M. Rundle, capital, June 1, 2016 ..................................... Add: Profit...................................................................... Less: Drawings ............................................................... M. Rundle, capital, May 31, 2017.....................................

Solutions Manual .

3-132

$54,800 11,939 66,739 18,750 $47,989

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PROBLEM 3-11B (Continued) (d) (Continued) MOUNTAIN BEST LODGE Balance Sheet May 31, 2017

Assets Cash................................................................... $ 12,365 Accounts receivable ......................................... 950 Prepaid insurance............................................. 2,640 Supplies............................................................. 760 Land ................................................................... 80,000 Buildings ........................................................... $180,000 Less: Accumulated depreciation ...................... 76,500 103,500 Furniture ................................................................ 21,000 Less: Accumulated depreciation ...................... 12,600 8,400 Total assets .............................................. $208,615 Liabilities and Owner's Equity Liabilities Accounts payable........................................................ $ 6,030 Unearned revenue ....................................................... 6,500 Salaries payable .......................................................... 1,025 Interest payable ........................................................... 671 Mortgage payable........................................................ 146,400 Total liabilities......................................................... 160,626 Owner's equity M. Rundle, capital .......................................................... 47,989 Total liabilities and owner's equity .......................... $208,615

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PROBLEM 3-11B (Continued) Taking It Further: The balance of the owner’s capital account that appears on the adjusted trial balance on May 31, 2017 does not correspond to the amount of the owner’s capital that appears on the balance sheet at that date. The reason for the difference is that the owner’s capital account in the trial balance is the opening balance and does not include the amount of the profit and the drawings taken by the owner for the year ended May 31, 2017.

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PROBLEM 3-12B (b)

Nov.

8 Salaries Payable.............................. Salaries Expense ............................ Cash ............................................ 10

500 600 1,100

Cash ................................................. 1,200 Accounts Receivable .................

1,200

Cash ................................................. 1,400 Service Revenue.........................

1,400

Equipment ....................................... 3,000 Accounts Payable ......................

3,000

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

500 500

20 Accounts Payable ........................... 2,500 Cash ............................................ 22

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

300 300

25 Salaries Expense ............................ 1,300 Cash ............................................

Solutions Manual .

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

900

550

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

3-135

2,500

1,300

900 550

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-12B (Continued) (d) PINE EQUIPMENT REPAIR Trial Balance November 30, 2017

Cash................................................................... Accounts receivable ......................................... Supplies............................................................. Equipment ......................................................... Accumulated depreciation—equipment.......... Accounts payable ............................................. Unearned revenue ............................................ S. Seed, capital ................................................. Service revenue ................................................ Salaries expense............................................... Rent expense ....................................................

Debit $ 740 2,210 2,500 13,000

Credit

$ 500 3,100 1,950 12,800 2,300 1,900 300 $20,650

$20,650

(e) Nov.

Solutions Manual .

30 Supplies Expense ............................. 1,500 Supplies ...................................... ($2,500 - $1,000 = $1,500) 30 Salaries Expense ............................ Salaries Payable .........................

500

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

100

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

1,150

3-136

1,500

500

100 1,150

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-12B (Continued) (a), (c) and (e) 101 Nov. 1 Nov. 10 Nov. 12 Nov. 29 Bal.

Cash 2,790 1,200 1,400 550 740

Nov. 8 Nov. 20 Nov. 22 Nov. 25

112 Nov. 1 Nov. 27 Bal.

Accounts Receivable 2,510 Nov. 10 900 2,210

126 Nov. 1 Nov. 17 Bal.

Supplies 2,000 500 2,500

1,100 2,500 300 1,300

1,200

Nov. 30 Bal.

1,000

153 Nov. 1 Nov. 15 Bal.

Equipment 10,000 3,000 13,000

154

Solutions Manual .

Accumulated Depreciation-Equipment Nov. 1 Nov. 30 Bal.

3-137

1,500

500 100 600

Chapter 3

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PROBLEM 3-12B (Continued) (a), (c) and (e) 201 Nov. 20

209

Nov. 30

212 Nov. 8

301

Solutions Manual .

Accounts Payable Nov. 1 2,500 Nov. 15 Nov. 17 Bal.

Unearned Revenue Nov. 1 Nov. 29 Bal. 1,150 Bal. Salaries Payable Nov. 1 500 Nov. 30 Bal.

2,100 3,000 500 3,100

1,400 550 1,950 800

500 500 500

S. Seed, Capital Nov. 1

12,800

Service Revenue Nov. 12 Nov. 27 Bal. Nov. 30 Bal.

1,400 900 2,300 1,150 3,450

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PROBLEM 3-12B (Continued) (a), (c) and (e)

Nov. 30 Bal.

Salaries Expense 600 1,300 1,900 500 2,400 Rent Expense 300 300 Depreciation Expense 100 100

Nov. 30 Bal.

Supplies Expense 1,500 1,500

Nov. 8 Nov. 25 Bal. Nov. 30 Bal. Nov. 22 Bal.

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PROBLEM 3-12B (Continued) (f) PINE EQUIPMENT REPAIR Adjusted Trial Balance November 30, 2017

Cash................................................................... Accounts receivable ......................................... Supplies............................................................. Equipment ......................................................... Accumulated depreciation—equipment.......... Accounts payable ............................................. Salaries payable................................................ Unearned revenue ............................................ S. Seed, capital ................................................. Service revenue ................................................ Salaries expense............................................... Depreciation expense ....................................... Supplies expense ............................................. Rent expense ....................................................

Debit $ 740 2,210 1,000 13,000

Credit

$ 600 3,100 500 800 12,800 3,450 2,400 100 1,500 300 $21,250

$21,250

(g) PINE EQUIPMENT REPAIR Income Statement Month Ended November 30, 2017

3-140

$3,450 $ 100 300 2,400 1,500 4,300 $(850) Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-12B (Continued) (g) PINE EQUIPMENT REPAIR Statement of Owner's Equity Month Ended November 30, 2017

S. Seed, capital, November 1, 2017 ................................ Less: Loss ........................................................................ S. Seed, capital, November 30, 2017 ..............................

$12,800 850 $11,950

PINE EQUIPMENT REPAIR Balance Sheet November 30, 2017

Assets Cash.................................................................... Accounts receivable .......................................... Supplies.............................................................. Equipment ........................................................... $13,000 Less: Accumulated depreciation ......................... 600 Total Assets ..............................................

$ 740 2,210 1,000 12,400 $16,350

$3,100 800 500 4,400

Owner’s Equity S. Seed, capital ................................................................ 11,950 Total liabilities and owner’s equity.................................$16,350

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PROBLEM 3-12B (Continued)

Taking It Further: The results from operations for the month of November, 2017 are negative with a loss of $850 experienced as shown on the income statement. Salaries expense is very high when compared to service revenue. As well, the supplies expense is very high. There is very little cash left to pay off the accounts payable. Even if the accounts receivable are collected immediately, there would not be enough cash. As a result, S. Seed was unable to withdraw any cash from the business in November.

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PROBLEM 3-13B (a) 1.

Dec. 31 Insurance Expense ($5,940 × 8/12) 3,960 Prepaid Insurance ......................

3,960

31 Supplies Expense ........................... 7,390 Supplies ($8,680 – $1,290) .........

7,390

31 Depreciation Expense ($24,240 ÷ 6) 4,040 Accumulated Depreciation— Equipment...................................

4,040

4. 5.

Solutions Manual .

Unearned Revenue ......................... 4,000 Service Revenue.........................

31 Interest Expense ($14,000 × 5% × 3/12) ...................... Interest Payable ..........................

175

915

Salaries Expense ............................ Salaries Payable .........................

175

915

Accounts Receivable ...................... 2,000 Service Revenue......................... Telephone Expense ........................ Accounts Payable ......................

3-143

4,000

2,000

210 210

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 3-13B (Continued) (b) SHEK ENTERPRISES Adjusted Trial Balance December 31, 2017

Debit Credit Cash ................................................................... $ 6,725 Accounts receivable ($10,915 + $2,000) .......... 12,915 Supplies ($8,680 − $7,390)................................ 1,290 Prepaid insurance ($5,940 − $3,960)................ 1,980 Equipment ......................................................... 24,240 Accumulated depreciation— equipment ($10,100 + $4,040)......................... $ 14,140 Note payable ..................................................... 14,000 Accounts payable ($5,765 + $210) ................... 5,975 Interest payable ................................................ 175 Salaries payable................................................ 915 Unearned revenue ($5,550 − $4,000) ............... 1,550 M. Shek, capital ................................................. 13,750 M. Shek, drawings ............................................ 85,000 Service revenue ($160,875 + $2,000 + $4,000)........................... 166,875 Depreciation expense ....................................... 4,040 Insurance expense ........................................... 3,960 Interest expense ($350 + $175) ........................ 525 Rent expense .................................................... 15,600 Salaries expense ($50,225 + $915)................... 51,140 Supplies expense ............................................. 7,390 Telephone expense ($2,365 + $210) ................ 2,575 $217,380 $217,380

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PROBLEM 3-13B (Continued) (c) SHEK ENTERPRISES Income Statement Year Ended December 31, 2017

Revenues Service revenue............................................ $166,875 Expenses Depreciation expense .................................. $ 4,040 Insurance expense ....................................... 3,960 Interest expense ........................................... 525 Rent expense ................................................ 15,600 Salaries expense .......................................... 51,140 Supplies expense ......................................... 7,390 Telephone expense ...................................... 2,575 Total expenses......................................... 85,230 Profit .................................................................. $ 81,645

SHEK ENTERPRISES Statement of Owner's Equity Year Ended December 31, 2017 M. Shek, capital, January 1, 2017.................................... Add: Profit ...................................................................... Less: Drawings .............................................................. M. Shek, capital, December 31, 2017 ..............................

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$13,750 81,645 95,395 85,000 $10,395

Chapter 3

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PROBLEM 3-13B (Continued) (c) (Continued) SHEK ENTERPRISES Balance Sheet December 31, 2017 Assets Cash................................................................... Accounts receivable ......................................... Supplies............................................................. Prepaid insurance............................................. Equipment ......................................................... $24,240 Less: Accumulated depreciation .................... 14,140 Total assets ..................................................

$ 6,725 12,915 1,290 1,980 10,100 $33,010

Liabilities and Owner's Equity Liabilities Notes payable .................................................................. $14,000 Accounts payable........................................................ 5,975 Interest payable ........................................................... 175 Salaries payable .......................................................... 915 Unearned revenue ........................................................... 1,550 Total liabilities......................................................... 22,615 Owner's equity M. Shek, capital................................................................ 10,395 Total liabilities and owner's equity ............................ $33,010

Solutions Manual .

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PROBLEM 3-13B (Continued) Taking It Further: Shek Enterprises is performing very well. Profit is positive and expenses represent only 51% of total revenues. On the other hand, Memphis Shek has withdrawn a large amount of cash from the company and consequently the cash and the owner’s equity are low. As a result, the ability of the business to pay its liabilities may be in jeopardy. Total cash and accounts receivable ($19,640) fall below the amount of the total liabilities ($22,615). This may not be a problem since the note payable is due more than 2 years in the future. Cash and receivables exceed liabilities that are payable within the coming year of $7,065 (total liabilities of $22,615 – note payable of $14,000 – unearned revenue of $1,550 = $7,065).

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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (a), (c), and (e) Cash Date

Explanation

Ref.  J102 J102 J102 J102 J102 J102 J102 J102

Aug. 31 Balance Sept. 1 8 10 12 20 22 25 29

Debit

Credit

10,000 1,100 1,200 3,400 4,500 1,000 1,200 700

Balance 1,880 11,880 10,780 11,980 15,380 10,880 9,880 8,680 9,380

Accounts Receivable Date

Explanation

Aug. 31 Balance Sept. 10 27

Ref.  J102 J102

Debit

Credit

Balance

1,200

3,720 2,520 3,420

Credit

Balance

900

Prepaid Rent Date Sep. 22

Solutions Manual .

Explanation

Ref.

Debit

J102

500

3-148

500

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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (a), (c), and (e) (Continued) Supplies Date

Explanation

Aug. 31 Balance Sept. 17 30 Adj. entry

Ref.

Debit

 J102 J103

Credit

Balance

1,020

800 2,300 1,280

Credit

Balance

1,500

Equipment Date

Explanation

Aug. 31 Balance Sept. 30

Ref.

Debit

 J102

15,000 18,000

3,000

Accumulated Depreciation—Equipment Date

Explanation

Aug. 31 Balance Sept. 30 Adj. entry

Ref.

Debit

 J103

Credit

Balance

250

1,500 1,750

Credit

Balance

Accounts Payable Date

Explanation

Aug. 31 Balance Sept. 17 20 30

Solutions Manual .

Ref.  J102 J102 J102

3-149

Debit

1,500 4,500 3,000

3,100 4,600 100 3,100

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (a), (c), and (e) (Continued) Unearned Revenue Explanation

Date

Aug. 31 Balance Sept. 29 30 Adj. entry

Ref.

Debit

 J102 J103

Credit

Balance

700

400 1,100 450

Credit

Balance

775

700 0 775

Credit

Balance

Credit

Balance

10,000

Credit

Balance

650

Salaries Payable Explanation

Date

Aug. 31 Balance Sept. 8 30 Adj. entry

Ref.

Debit

 J102 J103

700

Interest Payable Explanation

Date

Sep. 30 Adj. entry

Ref.

Debit

J103 Notes Payable

Explanation

Date Sep.

Ref.

Debit

J102

R. Pitre, Capital Date

Explanation

Aug. 31 Balance

Solutions Manual .

Ref. 

3-150

Debit

15,700

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (a), (c), and (e) (Continued) Service Revenue Date

Explanation

Sep. 12 27 30 Adj. entry

Ref.

Debit

J102 J102 J103

Credit

Balance

3,400 900 650

3,400 4,300 4,950

Credit

Balance

Depreciation Expense Date

Explanation

Sep. 30 Adj. entry

Ref.

Debit

J103

250

Interest Expense Date

Explanation

Sep. 30 Adj. entry

Ref.

Debit

J103

Credit

Balance 42

Rent Expense Date Sep. 22

Solutions Manual .

Explanation

Ref.

Debit

J102

500

3-151

Credit

Balance 500

Chapter 3

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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (a), (c), and (e) (Continued)

Salaries Expense Explanation

Date Sep.

8 25 30 Adj. entry

Ref.

Debit

J102 J102 J103

400 1,200 775

Credit

Balance 400 1,600 2,375

Supplies Expense Date

Explanation

Sep. 30 Adj. entry

Solutions Manual .

Ref.

Debit

J103

1,020

3-152

Credit

Balance 1,020

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (b) GENERAL JOURNAL Date Sep.

Account Titles and Explanation

J102 Debit

Credit

1 Cash ........................................................... 10,000 Notes Payable....................................... 10,000 8 Salaries Payable ........................................... 700 Salaries Expense.......................................... 400 Cash ......................................................

1,100

10 Cash ........................................................... 1,200 Accounts Receivable ...........................

1,200

12 Cash ........................................................... 3,400 Service Revenue...................................

3,400

17 Supplies ..................................................... 1,500 Accounts Payable ................................

1,500

20 Accounts Payable ..................................... 4,500 Cash ......................................................

4,500

22 Rent Expense ............................................... 500 Prepaid Rent ................................................. 500 Cash ......................................................

1,000

25 Salaries Expense....................................... 1,200 Cash ......................................................

1,200

27 Accounts Receivable ................................... 900 Service Revenue...................................

900

29 Cash .............................................................. 700 Unearned Revenue ...............................

700

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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (a) (Continued) GENERAL JOURNAL Date

J102

Account Titles and Explanation

Debit

30 Equipment ................................................. 3,000 Accounts Payable ................................

Credit

3,000

(d) and (f) PITRE EQUIPMENT REPAIR Unadjusted and Adjusted Trial Balances September 30, 2017

Cash Accounts receivable Prepaid rent Supplies Equipment Accumulated depreciation —equipment Accounts payable Unearned revenue Salaries payable Interest payable Notes payable R. Pitre, capital Service revenue Depreciation expense Interest expense Rent expense Salaries expense Supplies expense

Solutions Manual .

Unadjusted Dr. Cr. $ 9,380 3,420 500 2,300 18,000

Adjusted Dr. Cr. $ 9,380 3,420 500 1,280 18,000

$ 1,500 3,100 1,100 0 0 10,000 15,700 4,300

$ 1,750 3,100 450 775 42 10,000 15,700 4,950

0 250 0 42 500 500 1,600 2,375 0 1,020 _ $35,700 $35,700 $36,767 $36,767 3-154

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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (e) GENERAL JOURNAL Date 1.

Account Titles and Explanation

J103 Debit

Sep. 30 Supplies Expense .............................. 1,020 Supplies ($2,300 – $1,280) ............

Solutions Manual .

Salaries Expense................................ Salaries Payable ............................

775

30 Depreciation Expense........................ Accumulated Depreciation —Equipment .................................. [($15,000 ÷ 5 years) × 1/12]

250

Credit

1,020

775

250

30 Unearned Revenue............................. 650 Service Revenue ($400 + $700 – $450)

650

30 Interest Expense ($10,000 × 5% × 1/12) 42 Interest Payable .............................

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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (g) PITRE EQUIPMENT REPAIR Income Statement Month Ended September 30, 2017

Revenues Service revenue........................................... Expenses Depreciation expense ................................. Interest expense.......................................... Rent expense............................................... Salaries expense ......................................... Supplies expense........................................ Total expenses......................................... Profit ..................................................................

$4,950 $ 250 42 500 2,375 1,020 4,187 $ 763

PITRE EQUIPMENT REPAIR Statement of Owner's Equity Month Ended September 30, 2017 R. Pitre, capital, September 1, 2017.................................. Add: Profit ........................................................................ R. Pitre, capital, September 30, 2017 ................................

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$15,700 763 $16,463

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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (g) (Continued) PITRE EQUIPMENT REPAIR Balance Sheet September 30, 2017

Assets Cash.................................................................... Accounts receivable .......................................... Prepaid rent........................................................ Supplies.............................................................. Equipment ........................................................... $18,000 Less: Accumulated depreciation ...................... 1,750 Total assets ...................................................

$ 9,380 3,420 500 1,280 16,250 $30,830

Liabilities and Owner's Equity Liabilities Accounts payable........................................................ Salaries payable .......................................................... Interest payable ........................................................... Unearned revenue ....................................................... Notes payable .............................................................. Total liabilities.........................................................

$ 3,100 775 42 450 10,000 14,367

Owner's equity R. Pitre, capital................................................................. 16,463 Total liabilities and owner's equity ............................ $30,830

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BYP3-1 FINANCIAL REPORTING PROBLEM (a) The title used by Corus Entertainment for its income statement is “Consolidated Statements of Income and Comprehensive Income.” For its balance sheet Corus uses “Consolidated Statements of Financial Position”. (b)Depreciation and amortization expense was $24,068,000 in 2014 and $26,812,000 in 2013. (c) Instead of using the term profit, Corus uses the term Net Income. This is a more common term for public companies. (d)Corus shows prepaid expenses on its balance sheet. These prepaid expenses may include prepaid insurance and prepaid rent.

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BYP3-2 INTERPRETING FINANCIAL STATEMENTS (a)

Revenue from monthly subscriber fees are recognized on a prorata basis as the service is provided.

(b) Rogers should record unearned revenue from its subscription services when customers prepay their account, before the service is provided. It should record unearned revenue for its Blue Jays home game admission revenue when tickets are purchased in advance of the games. (c)

If unearned revenue were recorded as revenue, profit and therefore owner’s equity would be overstated. Liabilities would be omitted and therefore, would be understated.

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BYP3-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

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BYP3-4 COMMUNICATION ACTIVITY Memorandum To: From: Student Date: Re: Cash versus accrual basis of accounting for profit

The accrual basis of calculating profit recognizes revenues as they are earned and expenses when they are incurred. The cash basis of calculating profit recognizes revenues when cash is received and expenses when cash is paid. The accrual basis of calculating profit is a better measure of performance than the cash method because earnings reflect economic events in the period that they occur. Using the revenue and expense recognition principles ensures that the effect of events are recorded in the same period and provides a better measure of a company’s economic performance. It is possible for management to manipulate profit using both the cash basis and accrual basis of accounting. Using the cash basis, profit can be manipulated by changing the timing of payments, for example deferring payment of expenses. Using the accrual basis, profits can be manipulated by changing estimates in calculating expenses, for example management can increase profit by increasing the useful life of long-lived assets.

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BYP3-5 “ALL ABOUT YOU” ACTIVITY (a)

Chapter 1 introduced the concept and definition of an asset as a resource owned and controlled by the entity that is capable of producing future services or benefits. The benefits are generally focussed around the production of revenue to make profits and increase the equity (wealth) of the owner(s). While education costs resemble payments made by a business as an investment toward the production of future earning of revenue, there is too much uncertainty to record these costs as assets. Education is generally acquired by a person in the hopes of obtaining knowledge that will be useful in earning employment or other income. This advantage is nontransferable and the likelihood of realizing the future production of revenue is uncertain and cannot be reasonably measured. Consequently it should be treated as an expense. When a business spends money training its employees, that cost is also expensed.

(b) The program of study chosen by a student might enhance the likelihood of earning income if the program of study will help the student in obtaining a profession or a job that is in high demand. However, the risk that education will not lead to better earning potential for the student remains too strong to warrant treating these costs as an asset. Consequently, we would still conclude that education costs should be expensed. (c)

Cost-benefit analysis is unconsciously applied to purchases or expenditures made by individuals. But the benefit received may be consumed in the present. An example would be the rest and relaxation obtained from a vacation to Hawaii. It is only when the expenditure will result in a future benefit that it can be recorded as an asset.

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BYP3-5 (Continued) (c) (Continued) As an education may result in a future benefit, it is more reasonable to consider recording the cost of your education as an asset than the cost of a vacation that doesn’t have a future benefit. But as already discussed, the benefit is still too uncertain to record your education costs as an asset. (d) When applying for a loan, an applicant will present to the financial institution, a list of assets, a list of debts, and an employment history to demonstrate an ability to repay the loan. If the assets listed are understated, the loan application might be unsuccessful. If the assets presented to the bank are overstated and the expenses understated, the bank might be more receptive to the loan application. However, if it is later determined that you falsified your application then this could result in the bank calling your loan or in damage to your credit rating.

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BYP3-6 Santé Smoothie Saga

(a) Apr. 30 Supplies Expense ..................................... Supplies ................................................ ($198 − $105)

93 93

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

175

Salaries Expense ...................................... Salaries Payable ................................... (4 hours x $12)

175

30 Depreciation Expense .............................. 23 Accumulated Depreciation—Equipment ($825 ÷ 36 months)

30 Interest Expense ....................................... Interest Payable.................................... ($3,000 × 3% × 1/12 × 1/2)

Apr. 13 Apr. 15 Apr.28

Cash 900 3,000 Apr. 18 125 Apr. 20

Bal.

3,502

Apr. 23 Apr. 30 Bal.

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325 198

Accounts Receivable 300 175 475

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BYP3-6 (Continued) (a) (Continued)

Apr. 20 Bal.

Supplies 198 Apr. 30 105

Apr. 22

Equipment 825

Solutions Manual .

Accumulated Depreciation-Equipment Apr. 30

Accounts Payable Apr. 24

Salaries Payable Apr. 30

Interest Payable Apr. 30

Unearned Revenue Apr. 28

125

Notes Payable Apr. 15

3,000

N. Koebel, Capital Apr. 13 Apr. 22 Bal.

900 825 1,725

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BYP3-6 (Continued) (a) (Continued) Revenue Apr. 23 Apr. 30 Bal.

Apr. 18

Advertising Expense 325

Apr. 30

Salaries Expense 48

Apr. 30

Depreciation Expense 23

Apr. 24

Telephone Expense 98

Apr. 30

Supplies Expense 93

Apr. 30

Interest Expense 4

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300 175 475

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BYP3-6 (Continued) (b) SANTÉ SMOOTHIES Adjusted Trial Balance April 30, 2017

Debit $3,502 475 105 825

Cash.................................................................... Accounts receivable .......................................... Supplies.............................................................. Equipment .......................................................... Accumulated depreciation—equipment........... Accounts payable .............................................. Salaries payable................................................. Interest payable ................................................. Unearned revenue ............................................. Notes payable .................................................... N. Koebel, capital ............................................... Revenue.............................................................. Salaries expense................................................ 48 Advertising expense .......................................... 325 Telephone expense............................................ 98 Supplies expense .............................................. 93 Depreciation expense ........................................ 23 Interest expense ................................................ 4 Totals ............................................................. $5,498

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Credit

23 98 48 4 125 3,000 1,725 475

$5,498

Chapter 3

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BYP3-6 (Continued) (c) SANTÉ SMOOTHIES Income Statement For the month ended April 30, 2017

Revenues Revenue .................................................................. $475 Expenses Advertising expense .............................................. $325 Telephone expense ................................................ 98 Supplies expense ................................................... 93 Depreciation expense ............................................ 23 Salaries expense .................................................... 48 Interest expense ..................................................... 4 591 Loss ............................................................................ $(116)

(d)

No, Santé Smoothies was not profitable in the first month of operations. It has a loss of $116. The main reason for the loss was the high cost of initial advertising. It is better to measure profitability after preparing and posting the adjusting journal entries instead of before. By implementing accrual accounting, a better measure of the amount of revenue and expenses for the accounting period is achieved, and consequently, a fairer report of profit performance.

(e)

Natalie has $3,502 in cash available to her to operate the business going forward. The amount is different because cash includes transactions that do not affect profit directly such as the $3,000 loan from her mother and the unearned revenue. Profit also includes items for which cash has not yet been received or paid such as accounts receivable and telephone expense. The cash balance of $3,502 plus $475 in outstanding accounts receivable total $3,977. If we ignore the note payable to Natalie’s mother and the unearned revenue, there remain very few liabilities that will need cash payments in the very near future.

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BYP3-6 (Continued) (e) (Continued) Even though the company has more cash and receivables than liabilities, Natalie may have to borrow additional money from her mother in order to purchase additional supplies and equipment to grow her business. She also has not taken any money out of the business as withdrawals to pay her living expenses.

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Accounting Principles, Seventh Canadian Edition

CHAPTER 4 Completion of the Accounting Cycle ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Questions

Brief Exercises

Problems Set A

Problems Set B

1. Prepare closing entries and a postclosing trial balance. 2. Explain the steps in the accounting cycle including optional steps and the preparation of correcting entries. 3. Prepare a classified balance sheet. 4. Illustrate measures used to evaluate liquidity. *5. Prepare a work sheet (Appendix 4A).

1, 2 ,3, 4, 5, 6

1, 2, 3, 4, 6, 7

1, 2, 3, 4, 5, 6, 7, 8, 9, *19 8, 9, 10, 11

1, 2, 3, 4, 5, 6, 7, 9, *13 5, 6, 7, 8

6, 7, 8, 9, 10, 11,

12, 13, 14, 15, 16, 17 18, 19, 20

8, 9, 10, 11, 12 13, 14, 15

12, 13, 14, 15 15, 16

2, 3, 4, 6, 7, 9 9, 10

9, 10

*21, *22, *23

*16, *17

*17, *18

*11, *12

*13, *14

*6. Prepare reversing entries (Appendix 4B).

*24, *25

*18, *19

*19, *20

*13, *14

1, 2, 3, 4, 5, 6, 7, 9, *13

Exercises

*11, *12

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

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Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Difficulty Level

Time Allotted (min.)

Prepare closing entries, and a post-closing trial balance. Prepare financial statements, closing entries and post-closing trial balance.

Simple

30-40

Simple

40-50

Prepare financial statements, closing entries and post-closing trial balance.

Simple

70-80

Prepare adjusting entries, adjusted trial balance, financial statements and closing entries.

Simple

60-70

Complete all steps in the accounting cycle.

Moderate

80-100

Prepare adjusting entries, adjusted trial balance, financial statements and closing entries.

Simple

60-70

Analyze errors and prepare corrections.

Moderate

60-70

Determine impact of errors on financial statements, and correct.

Moderate

60-70

Calculate capital account balance; prepare classified balance sheet and liquidity ratios.

Moderate

30-40

10A

Calculate current assets and liabilities, working capital, current ratio, and acid-test ratio; comment on liquidity.

Moderate

30-35

*11A

Prepare work sheet.

Moderate

50-60

*12A

Prepare work sheet.

Moderate

50-60

*13A

Prepare and post adjusting, closing, reversing, and cash transaction entries.

Moderate

40-50

*14A

Prepare adjusting, reversing and subsequent cash entries.

Simple

40-50

Problem Number 1A 2A

Description

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Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Difficulty Level

Time Allotted (min.)

Prepare closing entries, and a post-closing trial balance. Prepare financial statements, closing entries and post-closing trial balance.

Simple

30-40

Simple

40-50

Prepare financial statements, closing entries and post-closing trial balance.

Simple

70-80

Prepare adjusting entries, adjusted trial balance, financial statements and closing entries.

Simple

60-70

Complete all steps in accounting cycle.

Moderate

90-120

Prepare adjusting entries, adjusted trial balance, financial statements, and closing entries.

Simple

60-70

Analyze errors and prepare corrections.

Moderate

60-70

Determine impact of errors on financial statements, and correct.

Moderate

60-70

Calculate capital account balance; prepare classified balance sheet and liquidity ratios.

Moderate

30-40

10B

Calculate current assets and liabilities, working capital, current ratio, and acid-test ratio; comment on liquidity.

Moderate

30-35

11B

Prepare work sheet.

Moderate

50-60

12B

Prepare work sheet.

Moderate

50-60

*13B

Prepare and post adjusting, closing, reversing, and cash transaction entries.

Moderate

40-50

*14B

Prepare adjusting, reversing and subsequent cash entries.

Simple

40-50

Problem Number 1B 2B

Description

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Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material

1. Prepare closing Q4-4 entries and a post- BE4-1 closing trial balance.

Comprehension Q4-1 Q4-2 Q4-3 Q4-5

2. Explain the steps BE4-6 in the accounting Q4-8 cycle including optional steps and the preparation of correcting entries.

Q4-5 Q4-6 Q4-7 Q4-9 Q4-10 Q4-11

Prepare a Q4-14 classified balance Q4-17 sheet. BE4-8

Q4-12 Q4-13 Q4-15 Q4-16

Illustrate BE4-13 measures used to evaluate liquidity.

Q4-18 Q4-19 Q4-20

Learning Objective

Knowledge

*5. Prepare a work sheet (Appendix 4A).

*Q4-21 *Q4-22 *Q4-23

*6. Prepare reversing entries (Appendix 4B).

*Q4-24 *Q4-25

Broadening Your Perspective

Solutions Manual .

BYP4-3 BYP4-4

Application BE4-2 BE4-3 BE4-4 BE4-5 BE4-7 E4-1 E4-2 E4-3 E4-4 E4-5 E4-6 BE4-7 E4-8 E4-9 E4-10 E4-11 P4-5A P4-6A BE4-9 BE4-10 BE4-11 BE4-12 E4-12 E4-13 P4-1A

E4-7 E4-8 E4-9 *E4-19 P4-1A P4-2A P4-3A P4-4A P4-5A P4-6A P4-7A

Synthesis

Evaluation

P4-9A *P4-13A P4-1B P4-2B P4-3B P4-4B P4-5B P4-6B P4-7B P4-9B *P4-13B P4-7A P4-8A P4-5B P4-6B P4-7B P4-8B

P4-2A P4-3A P4-2A P4-3A P4-4A P4-6A P4-7A

P4-9A P4-2B P4-3B P4-4B P4-6B P4-7B P4-9B

BE4-14 BE4-15 P4-9A P4-9B *BE4-16 *BE4-17 *E4-17 *E4-18

*P4-11A *P4-12A *P4-11B *P4-12B

*BE4-18 *BE4-19 *E4-19 *E4-20

*P4-13A *P4-14A *P4-13B *P4-14B

E4-14 E4-15 P4-10A P4-10B

E4-15 E4-16 P4-8A P4-8B

Santé Smoothie Cumulative Coverage BYP4-1

4-4

Analysis

BYP4-2 BYP4-6

BYP4-5

Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

ANSWERS TO QUESTIONS 1.

Permanent accounts appear on the balance sheet and are never closed at the end of the annual accounting year. Temporary accounts do not appear on the balance sheet and are closed at the end of the year. The net result of the closing entries updates the owner’s equity capital account, a permanent account on the balance sheet.

Closing entries are made at the end of an accounting period after preparation of the financial statements to: a. transfer revenue, expense, and drawings account balances to the owner’s capital account, and b. reset these temporary account balances to zero.

The Income Summary account is used to avoid having a lot of detailed entries on the permanent owner’s capital account. The summary data posted to the Income Summary account are the totals of revenue and expense accounts. After posting the closing entries of the revenue and expense accounts, the balance in the Income Summary account should equal the profit or loss for the period. If the amounts are equal, it indicates the closing entries prepared so far have been journalized and posted correctly.

Preparing and posting closing entries should only be done at the end of the fiscal year, not at the end of each accounting period (such as the end of each month). If the accounting period in question is the fiscal year end, then Kathleen is correct. If the period in question is not the fiscal year end, it is necessary to carry forward balances from one accounting period to the next to ensure that all transactions for the fiscal year to date are reported on the financial statements.

The post-closing trial balance lists only permanent accounts after the closing entries have been journalized and posted. Its purpose is to prove the equality of the permanent accounts that are carried forward to the next accounting period. This indicates that all closing entries have been journalized and posted correctly. The account balance appearing in the owner’s capital account must correspond to the ending balance appearing in the statement of owner’s equity. This trial balance also verifies that the temporary accounts have been properly reset to zero, ready for the posting of transactions of the next fiscal year.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 6.

Analyzing business transactions is a critical and necessary step in the accounting cycle because at this step, we determine whether or not the business’s financial position has changed. Through this analysis, we determine which accounts have been changed and whether the accounts involved have increased or decreased by an amount that can be measured.

(1) The purpose of the unadjusted trial balance is to prove that the ledger is mathematically accurate. It is used primarily when scrutinizing account balances to decide which accounts need adjustments at the end of the accounting cycle. (2) The purpose of the adjusted trial balance is also to prove that the ledger is mathematically accurate following the posting of adjusting journal entries. The adjusted trial balance is then used to prepare all of the financial statements at the end of the accounting cycle. (3) Finally, the purpose of the post-closing trial balance is to prove the equality of the permanent account balances that are carried forward to the next accounting period. The post-closing trial balance provides evidence that the closing entries have been prepared and posted properly to the accounts and it also shows that the accounting equation is in balance at the end of the accounting period and the beginning of the next accounting period.

a) Daily: Analyze transactions and journalize transactions. b) Periodic: Post to ledger, prepare a trial balance, journalize and post adjusting entries, prepare an adjusted trial balance, prepare financial statements. c) Fiscal year end: Journalize and post closing entries, prepare a postclosing trial balance.

Correcting entries differ from adjusting entries because they (1) are not a required part of the accounting cycle if no errors have been made, (2) may be made at any time, and (3) may affect any combination of accounts. Adjusting entries are an important step in the accounting cycle, required to implement accrual accounting. Adjusting entries will always affect an income statement and a balance sheet account and they are prepared at the end of an accounting cycle.

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QUESTIONS (Continued) 10.

Correcting entries are necessary. Without correcting entries, the accounts in the ledger would be incorrect. The information reported on the financial statements would also be incorrect. Cristobal’s suggestion of erasing or removing previously recorded incorrect entries and replacing them with correct entries is not acceptable. The preparers and users of the accounting information could not rely on the completeness and accuracy of the entries to reflect the transactions of the business. Correcting entries leave behind a proper trail of the original incorrect journal entry and the entry recorded for the correction of the error. Once an incorrect journal entry has been posted to the ledger, a correcting entry is required to fix the error.

11.

In order to properly correct for entry errors, it is important to identify which accounts should have been involved in the transaction and which accounts were used to record the transaction. As well, it is important to determine if the amounts that have been recorded are correct. By comparing what should have been recorded to what was actually recorded, the correcting entry may be determined. The accounts that are not in error can be omitted from the correcting entry. An alternative is to reverse the incorrect entry and to then record the correct entry.

12.

Current assets are normally cash and other assets that are expected to be converted to cash, sold, or used up within one year from the balance sheet date or within its operating cycle. Current liabilities are obligations that are expected to be settled within one year from the balance sheet date or in the company’s operating cycle. On the other hand, non-current assets are assets that are not expected to be converted to cash, sold, or used by the business within one year of the balance sheet date or within its operating cycle. Basically that means that non-current assets are everything not classified as a current asset. Non-current liabilities are obligations that are expected to be paid after one year or longer.

13.

A company’s operating cycle is the average time it takes to go from starting with cash and ending with cash in producing revenues.

14.

The standard classifications that are used in the preparation of a classified balance sheet include: Assets Liabilities and Owner’s Equity Current assets Current liabilities Long-term investments Non-current liabilities Property, plant, and equipment Owner’s (shareholders’) equity Intangible assets Goodwill

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 15.

Current assets for a Canadian company are listed in liquidity order on the balance sheet. The accounts listed will appear in the following order: cash, short-term investments, accounts receivable, inventory, supplies, and lastly, prepaid insurance.

16.

Long-term investments are assets that can be realized in cash. However, the conversion is not expected within one year. They include shares (equity) and bonds (debt) of other companies. Property, plant, and equipment assets are resources that have a physical substance, are used in the business, and are not intended for resale.

17.

Intangible asset are long-lived assets that do not have physical substance and are rights and privileges that result from ownership. They include patents, copyrights, trademarks, trade names, and licences. They are similar to property, plant, and equipment, but lack physical substance. Goodwill is separate from intangibles because it does not exist on its own and can only exist along with the business to which it relates. Goodwill is only recorded when purchased. Intangibles are listed below property, plant and equipment, followed by goodwill on the balance sheet.

18.

Liquidity is the ability of a company to pay its obligations that become due within the next year. One measure of liquidity is working capital. Other measures include the current and acid-test ratios.

19.

Ratios should never be interpreted without considering certain factors: (1) general economic and industry conditions, (2) other specific financial information about the company over time, and (3) the ratios should be compared to the ratios for other companies in the same or related industries.

20.

The acid-test ratio is a measure of the company’s immediate short-term liquidity. The acid-test ratio is calculated by dividing the sum of cash, short-term investments, and accounts receivable by current liabilities. The current ratio is a measure of the short-term debt-paying ability that is determined by dividing all current assets by current liabilities.

*21. To calculate the income on a work sheet, each of the financial statement columns must be totalled. The profit or loss for the period is then found by calculating the difference between the totals of the two income statement columns. If a company has profit, the amount is entered in the income statement debit column and the balance sheet credit column of the work sheet. If the company has a loss, the amount is entered in the income statement credit column and in the balance sheet debit column of the work sheet.

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QUESTIONS (Continued) *22. No. The preparation of the work sheet is not a required step in the accounting cycle and consequently it is not part of the company’s permanent accounting records. The work sheet is simply an optional tool for completing steps 4-6 (trial balance, adjusting entries, adjusted trial balance) and for assisting with step 7 (prepare financial statements) in the accounting cycle. *23. Using a work sheet, accountants can prepare financial statements before adjusting entries have been journalized and posted. However, the completed work sheet is not a substitute for formal financial statements. Data in the financial statement columns of the work sheet are not properly arranged for statement purposes. Also, the financial statement presentation for some accounts differs from their statement columns on the work sheet. A work sheet is basically an accountant’s working tool. It is not given to management or other parties. *24. A reversing entry is an optional entry that is the exact opposite, both in amount and in account titles, of an adjusting entry for an accrual. Reversing entries are prepared at the beginning of the accounting period and are used to simplify the recording of subsequent transactions related to the accrual adjustments. *25. It is helpful to use reversing entries for accruals because then the payment can be processed in the normal manner without having to check whether there has been an accrual, i.e., all cash payments can be debited to the appropriate expense account. The use of reversing entries does not change the amounts reported in the financial statements. It simply makes it easier to record transactions in the next accounting period.

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 4-1 1. (NC) 2. (NC) 3. (C) 4. (C) 5. (NC) 6. (C) 7. (NC) 8. (NC) 9. (C) 10. (NC) 11. (NC) 12. (C) 13. (NC) 14. (NC)

Accounts payable Accounts receivable Depreciation expense Operating expenses Unearned revenue Interest expense S. Young, capital Notes payable Rent revenue Prepaid expenses Equipment S. Young, drawings Accumulated depreciation Supplies

BRIEF EXERCISE 4-2 July 31

Solutions Manual .

Service Revenue................................. 16,400 Income Summary ...........................

16,400

Income Summary ............................... 10,900 Salaries Expense ........................... Rent Expense .................................

8,400 2,500

Income Summary ............................... T. Arid, Capital ...............................

5,500

4-10

5,500

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BRIEF EXERCISE 4-3 (a) Nov. 30

(b)

Service Revenue................................. 38,500 Income Summary ...........................

38,500

Income Summary ............................... 12,250 Insurance Expense ........................ Rent Expense ................................. Supplies Expense ..........................

2,750 8,000 1,500

Income Summary ............................... 26,250 L. Wilfrid, Capital ...........................

26,250

L. Wilfrid, Capital ................................ 29,000 L. Wilfrid, Drawings .......................

29,000

The closing balance of the L. Wilfrid, Capital account at November 30, 2017 is $39,250, calculated as follows: L. Wilfrid, Capital 42,000 26,250 29,000 Bal.

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BRIEF EXERCISE 4-4 Oct

31 Service Revenue ................................. 130,000 Income Summary ...........................

130,000

31 Income Summary................................ 105,000 Maintenance Expense ................... Rent Expense ................................. Salaries Expense ...........................

23,000 10,000 72,000

31 Income Summary.................................. 25,000 N. Mosquera, Capital .....................

25,000

31 N. Mosquera, Capital ............................ 45,000 N. Mosquera, Drawings .................

45,000

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BRIEF EXERCISE 4-5 MOSQUERA GOLF CLUB Post-Closing Trial Balance October 31, 2017 Debit Cash .................................................................... $ 7,500 Prepaid expenses............................................... 3,000 Equipment........................................................... 65,000 Accumulated depreciation—equipment ........... Accounts payable............................................... Unearned revenue .............................................. N. Mosquera, capital ........................................... $75,500

Credit

$15,000 14,000 1,500 45,000* $75,500

* N. Mosquera, Capital 65,000 25,000 45,000 45,000

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BRIEF EXERCISE 4-6 The proper sequencing of the required steps in the accounting cycle is as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Analyze business transactions Journalize the transactions Post to the ledger accounts Prepare a trial balance Journalize and post the adjusting entries Prepare an adjusted trial balance Prepare the financial statements Journalize and post the closing entries Prepare a post-closing trial balance

Filling in the blanks, the answers are 9, 6, 1, 4, 2, 8, 7, 5, 3.

BRIEF EXERCISE 4-7 1.

Solutions Manual .

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

750

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

600

Roch Hébert, Drawings ......................... Salaries Expense ............................

500

4-14

750

600

500

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 4-8 Accounts payable........................................... CL Accounts receivable ...................................... CA Cash ................................................................ CA L. Dawn, capital .............................................. OE Patents ............................................................ IA Salaries payable ............................................. CL Merchandise inventory .................................. CA Short-term investments ................................. CA Accumulated depreciation – equipment .......... PPE Buildings ............................................................ PPE Land.................................................................... PPE Notes payable ..................................................... LTL Supplies .......................................................... CA Equipment .......................................................... PPE Prepaid expenses........................................... CA

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BRIEF EXERCISE 4-9 DARIUS COMPANY Balance Sheet December 31, 2017 (a) Current assets Cash............................................................................... $ 16,400 Short-term investments................................................ 8,200 Accounts receivable ..................................................... 14,500 Merchandise inventory................................................. 9,000 Supplies......................................................................... 4,200 Prepaid insurance......................................................... 1,600 Total current assets ................................................. $53,900 (b) Long-term investments Notes receivable (due February 1, 2019).........$ 5,500 Property, plant, and equipment Vehicles ............................................................... 22,500 Intangible assets Patents ...................................................................3,900 Goodwill .....................................................................9,250 Current liabilities Unearned revenue .................................................2,900

BRIEF EXERCISE 4-10 Current assets Cash............................................................................... $ 4,100 Short-term investments................................................ 6,700 Accounts receivable ..................................................... 12,500 Supplies......................................................................... 5,200 Prepaid insurance......................................................... 3,600 Total current assets ................................................. $32,100

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BRIEF EXERCISE 4-11 Current liabilities Accounts payable ......................................................... Interest payable ............................................................ Unearned revenue ........................................................ Current portion of mortgage payable .......................... Notes payable ...............................................................

$ 8,500 750 2,500 5,000 6,700

Total current liabilities ............................................. $23,450

BRIEF EXERCISE 4-12 ODOM COMPANY Balance Sheet December 31, 2017 Non-current assets Property, plant, and equipment Land .................................................. $85,000 Buildings ........................................ $125,000 Less: Accumulated depreciation ... 37,400 87,600 Equipment .......................................... 43,000 Less: Accumulated depreciation .. 25,800 17,200 $189,800 Intangible assets Patents ............................................................................... 12,300 Goodwill ............................................................................ 5,520

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BRIEF EXERCISE 4-15 (a) (1) Working capital = Current assets − Current liabilities Working capital 2016 = $33,510 − $24,800 = $8,710 Working capital 2017 = $35,100 − $24,460 = $10,640 (2) Current ratio = Current assets ÷ Current liabilities Current ratio 2016 = $33,510 ÷ $24,800 = 1.35:1 Current ratio 2017 = $35,100 ÷ $24,460 = 1.43:1 (3) Acid-test ratio

= (Cash + Accounts Receivable + Short-term Investments) ÷ Current liabilities

Acid-test ratio 2016

= $20,430 ÷ $24,800 = 0.82:1

Acid-test ratio 2017

= $22,680 ÷ $24,460 = 0.93:1

(b) All three measures of Drew Co.’s improvement in 2017 compared to 2016.

liquidity

show

*BRIEF EXERCISE 4-16

Totals Profit Totals

Income Statement Dr. Cr. 75,000 95,500 20,500 95,500 95,500

Balance Sheet Dr. Cr. 191,000 170,500 20,500 191,000 191,000

Coulombe Company had a profit for 2017. Revenue exceeded expenses by $20,500, which increased retained earnings.

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*BRIEF EXERCISE 4-17

Totals Loss Totals

Income Statement Dr. Cr. 53,875 43,425 10,450 53,875 53,875

Balance Sheet Dr. Cr. 55,550 66,000 10,450 66,000 66,000

Orange Line Company had a loss for 2017. Expenses exceeded revenue by $10,450, which decreased retained earnings.

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*BRIEF EXERCISE 4-18 (a) Dec. 31 Salaries Expense .................................. 1,700 Salaries Payable............................... To accrue salaries at year-end. (b) Dec. 31 Income Summary.................................. 1,700 Salaries Expense.............................. Closing entry (c) Jan. 1 Salaries Payable ....................................... 1,700 Salaries Expense.............................. To reverse Dec. 31 accrual. 4 Salaries Expense...................................... 3,000 Cash .................................................. To record Jan. 4 payment of salary.

1,700

3,000

(d) Date

Salaries Expense Explanation Ref. Debit

Dec. 31 31 Jan. 1 4

Accrual Closing entry Reversing entry Payment of salary

Date

Credit

Balance

1,700 1,700 3,000

1,700 Dr. 0 1,700 Cr. 1,300 Dr.

Salaries Payable Explanation Ref. Debit

Credit Balance

1,700

Dec. 31 Accrual Jan. 1 Reversing entry

1,700 1,700

1,700 0

The balances after posting the entries are a debit of $1,300 in Salaries Expense and $0 in Salaries Payable.

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*BRIEF EXERCISE 4-19 (a) Dec. 31 Interest Receivable ............................... 1,125 Interest Revenue .............................. To accrue interest at year-end. ($90,000 × 5% × 3/12 = $1,125) (b) Jan.1 Interest Revenue................................... 1,125 Interest Receivable .......................... To record reversing entry. (c) Mar. 1 Cash ...................................................... 91,875 Notes Receivable ............................. Interest Revenue .............................. To record collection of note and interest. ($90,000 × 5% × 5/12 = $1,875)

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1,125

90,000 1,875

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SOLUTIONS TO EXERCISES EXERCISE 4-1 (a) Dec. 31 Revenues .............................................. 50,000 Income Summary ...........................

50,000

31 Income Summary.................................. 34,000 Salaries Expense ........................... Rent Expense ................................. Supplies Expense ..........................

21,000 6,000 7,000

31 Income Summary.................................. 16,000 L. Lee, Capital ................................

16,000

31 L. Lee, Capital ......................................... 2,000 L. Lee, Drawings ............................

2,000

(b) Clos. Clos.

Income Summary 34,000 Clos. 50,000 Bal. 16,000 16,000 Bal. 0 L. Lee, Capital Bal. 2,000 Clos. Bal.

Clos.

Revenues 50,000 Bal. Bal.

Bal. Bal.

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Rent Expense 6,000 Clos. 0

30,000 16,000 44,000

50,000 0

6,000

4-23

Bal. Bal.

L. Lee, Drawings 2,000 Clos. 2,000 0

Salaries Expense Bal. 21,000 Clos. 21,000 Bal. 0 Supplies Expense Bal. 7,000 Clos. 7,000 Bal. 0

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EXERCISE 4-2 (a) VICTOIRE ESTHETICS Statement of Owner's Equity Month Ended August 31, 2017 B. Victoire, capital, August 1, 2017 ................................ Add: Investment .............................................................. Profit ....................................................................... Less: Drawings............................................................... B. Victoire, capital, August 31, 2017 ..............................

$ 9,000 2,000 7,000 18,000 4,700 $13,300

(b) Aug. 31 Income Summary ................... B. Victoire, Capital .............

7,000

31 B. Victoire, Capital.................. B. Victoire, Drawings .........

4,700

7,000

4,700

Income Summary Aug. 31 8,000 Aug. 31 15,000 Bal. 7,000 Clos. 7,000 Bal. 0 V. Victoire, Capital Aug. 31 11,000 Clos. 31 4,700 Clos. 31 7,000 Bal. 13,300

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V. Victoire, Drawings Aug. 31 4,700 Clos. 4,700 Bal. 0

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Accounting Principles, Seventh Canadian Edition

EXERCISE 4-3 GENERAL JOURNAL Date

Account Titles

J15 Debit

Credit

July 31 Service Revenue................................. 75,000 Interest Revenue ................................ 320 Income Summary ...........................

75,320

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Income Summary ............................... 81,300 Depreciation Expense ................... Interest Expense ............................ Rent Expense ................................. Salaries Expense ........................... Supplies Expense ..........................

2,850 3,000 18,550 36,050 20,850

B. Donatello, Capital........................... Income Summary ...........................

5,980

B. Donatello, Capital........................... 16,500 B. Donatello, Drawings..................

16,500

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EXERCISE 4-4 Aug. 31 Service Revenue .................... Income Summary ...............

35,900

31 Income Summary ................... Depreciation Expense ....... Insurance Expense ............ Interest Expense ................ Supplies Expense ..............

22,745

31 Income Summary ................... T. Williams, Capital ............

13,155

31 T. Williams, Capital................. T. Williams, Drawings ........

18,500

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35,900 9,300 4,100 1,500 7,845

13,155 18,500

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Accounting Principles, Seventh Canadian Edition

EXERCISE 4-5 (a) Aug. 31

Solutions Manual .

Service Revenue ................................ 42,400 Rent Revenue ..................................... 6,100 Income Summary ..........................

48,500

Income Summary .............................. 49,900 Depreciation expense .................... Salaries expense............................ Utilities expense ............................

2,700 37,100 10,100

S. Strong, Capital ............................... Income Summary ...........................

1,400

S. Strong, Capital .............................. 12,000 S. Strong, Drawings ......................

12,000

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EXERCISE 4-5 (Continued) (b) Clos. Bal.

Income Summary 49,900 Clos. 48,500 1,400 Clos. 1,400 Bal.

Clos. Clos.

S. Strong, Capital 1,400 Bal. 31,700 12,000 Bal. 18,300

S. Strong, Drawings Bal. 12,000 Clos. 12,000 Bal. 0

Clos.

Service Revenue 42,400 Bal. 42,400 Bal. 0

Rent Revenue 6,100 Bal. Bal.

Depreciation Expense Bal. 2,700 Clos. 2,700 Bal. 0

Bal. Bal.

Clos.

6,100 0

Salaries Expense Bal. 37,100 Clos. 37,100 Bal. 0

Utilities Expense 10,100 Clos. 10,100 0

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EXERCISE 4-5 (Continued) (c) HERCULES COMPANY Post-Closing Trial Balance August 31, 2017 Debit Cash ................................................................. $ 10,900 Accounts receivable ....................................... 6,200 Equipment........................................................ 10,600 Accumulated depreciation—equipment ........ Accounts payable............................................ Unearned revenue ........................................... S. Strong, capital ............................................. $27,700

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Credit

$ 5,400 2,800 1,200 18,300 $27,700

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Accounting Principles, Seventh Canadian Edition

EXERCISE 4-6 (a) June 30

Service Revenue ................................ Income Summary ..........................

4,300

Income Summary .............................. Supplies expense .......................... Salaries expense............................ Miscellaneous expense .................

3,416

Income Summary ............................... V. Lee, Capital ................................

884

V. Lee, Capital..................................... V. Lee, Drawings ...........................

550

4,300 1,900 1,260 256

884

550

(b) VICTORIA LEE COMPANY Post-Closing Trial Balance June 30, 2017

Cash ................................................................. Accounts receivable ....................................... Supplies ........................................................... Accounts payable............................................ Salaries payable .............................................. Unearned revenue ........................................... V. Lee, capital ..................................................

Debit $ 3,712 3,904 480

$8,096

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Credit

$1,382 460 160 6,094 $8,096

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Accounting Principles, Seventh Canadian Edition

EXERCISE 4-7 (a)

Apr.

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

500

30 Depreciation Expense ............ Accumulated Depreciation —Equipment ...................... [($24,000 ÷ 8) ÷ 12 = $250]

250

30 Interest Expense .................... Interest Payable ................. [($12,000 × 6%) ÷ 12 = $60]

500

250

(b) Unearned Revenue Apr. 30 500 Bal. 1,500 Bal.

1,000

Accumulated Depreciation Equipment Bal. 6,000 Apr. 30 250 Bal. 6,250

Service Revenue Bal. 15,400 500 Apr. 30 Bal. 15,900

Interest Payable Apr. 30 Bal.

Depreciation Expense Bal. 2,750 Apr. 30 250

Interest Expense Bal. 660 Apr. 30 60

Bal.

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3,000

4-31

60 60

720

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EXERCISE 4-7 (Continued) (c)

Apr.

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30 Service Revenue .................... Income Summary ...............

15,900

30 Income Summary ................... Salaries Expense ............... Depreciation Expense ....... Interest Expense ................

13,585

30 Income Summary ................... T. Muzyka, Capital.............. 30 T. Muzyka, Capital .................. T. Muzyka, Drawings .........

2,315 2,315 4,150

4-32

15,900 9,865 3,000 720

4,150

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EXERCISE 4-8 (a)

Apr.

2 Cash ...................................................4,000 Tim Sasse, Capital .....................

4,000

6 Supplies .............................................1,500 Cash............................................

1,500

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

600

25 Cash....................................................2,200 Unearned Revenue ....................

600

2,200

(b) (c), and (e) Cash Apr. 2 4,000 Apr. 6 Apr. 15 600 Apr. 25 2,200 Bal.

1,500

Apr. 6 Bal.

Supplies 1,500 Apr. 30 800

700

5,300

Unearned Revenue Apr.30 800 Apr. 25 2,200 Bal. 1,400

Service Revenue Apr. 15 600 Apr. 30 600 Apr. 30 800 Clos. 2,000 Bal. 2,000 Bal. 0

Accounts Receivable Apr. 30 600

Supplies Expense Apr. 30 700 Clos. Bal. 0

Income Summary Clos. 700 Clos. 2,000 Clos. 1,300 Bal. 0

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700

Tim Sasse, Capital Apr. 2 4,000 Clos. 1,300 Bal. 5,300

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EXERCISE 4-8 (Continued) (c)

(Continued) Apr. 30 Accounts Receivable ..................... Service Revenue ........................

600

30 Supplies Expense........................... Supplies...................................... ($1,500 – $800 = $700)

700

800

600

700

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

800

(d) SASSE ROOF REPAIRS Adjusted Trial Balance April 30, 2017

Cash ................................................................. Accounts receivable ....................................... Supplies ........................................................... Unearned revenue ........................................... Tim Sasse, capital ........................................... Service revenue............................................... Supplies expense ............................................

(e)

Apr.

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Debit $ 5,300 600 800

700 $7,400

30 Service Revenue .................... Income Summary ...............

2,000

30 Income Summary ................... Supplies Expense ..............

700

30 Income Summary ................... Tim Sasse, Capital .............

1,300

4-34

Credit

$ 1,400 4,000 2,000 _ $7,400

2,000

700 1,300

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Accounting Principles, Seventh Canadian Edition

EXERCISE 4-9 (a)

Dec.

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

10,440

31 Insurance Expense................. Prepaid Insurance.............. ($7,440 ÷ 12 × 7 = $4,340)

4,340

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

2,780

31 Supplies Expense................... Supplies.............................. ($5,260 – $1,750 = $3,510)

3,510

31 Interest Receivable................. Interest Revenue................ [($12,000 × 4%) ÷ 12 × 3 = $120]

10,440

4,340

2,780

3,510

120 120

(b) Bal. Dec. 31 Bal.

Accounts Receivable 6,250 10,440 16,690

Dec. 31

Interest Receivable 120

Bal. Bal.

Prepaid Insurance 7,440 Dec. 31 3,100

Solutions Manual .

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4,340

Chapter 4

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Accounting Principles, Seventh Canadian Edition

EXERCISE 4-9 (Continued) (b) (Continued) Supplies 5,260

Bal.

Dec. 31 Bal.

3,510

1,750

Accumulated Depreciation-Equipment Bal. 8,340 Dec. 31 2,780 Bal. 11,120 Service Revenue Bal. Dec. 31 Bal.

112,300 10,440 122,740

Interest Revenue Dec. 31

120

Dec. 31

Supplies Expense 3,510

Dec. 31

Depreciation Expense 2,780

Dec. 31

Insurance Expense 4,340

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Accounting Principles, Seventh Canadian Edition

EXERCISE 4-9 (Continued) (c)

Dec.

Solutions Manual .

31 Service Revenue .................... Interest Revenue .................... Income Summary ...............

122,740 120

31 Income Summary ................... Insurance Expense ............ Salaries Expense ............... Depreciation Expense ....... Supplies Expense ..............

50,030

31 Income Summary ................... H. Duguay, Capital .............

72,830

31 H. Duguay, Capital.................. H. Duguay, Drawings .........

53,500

4-37

122,860 4,340 39,400 2,780 3,510

72,830 53,500

Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 4-10 1. 2.

Accounts Payable ($750 − $570) ................ Cash.........................................................

180

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

560

L. Choi, Drawings ........................................ Salaries Expense ....................................

500

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

700

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

350

Solutions Manual .

4-38

180

560

500

700 350

Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 4-11 (a) 1.

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

700

Salaries Expense............................... Cash ............................................

700

Cash ................................................... Short-Term Investments ............

2,000

Cash ................................................... T. D’Addario, Capital ..................

2,000

700

2,000

No correction needed

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

440

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

440

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

3,500

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

3,500

Solutions Manual .

4-39

440

3,500 3,500

Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 4-11 (Continued) (b) 1.

Salaries Expense............................... Equipment...................................

700

Cash ................................................... Short-Term Investments ............ T. D’Addario, Capital ..................

4,000

700 2,000 2,000

No correction needed

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

440

Equipment ......................................... Equipment Expense ...................

3,500

Solutions Manual .

4-40

440 3,500

Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 4-41 J. PARRA COMPANY Balance Sheet December 31, 2017 (in thousands)

Assets Current assets Cash............................................................................. $ 2,668 Short-term investments.............................................. 3,690 Accounts receivable ................................................... 1,696 Merchandise inventory............................................... 1,256 Prepaid insurance ........................................................... 880 Total current assets ............................................... 10,190 Long-term investments Long-term investments .............................................. 264 Property, plant, and equipment Equipment ...................................................... $11,500 Less: Accumulated depreciation .................. 5,655 5,845 Total assets ................................................................ $16,299 Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... $ 1,444 Notes payable ............................................................. 500 Total current liabilities ........................................... 1,944 Long-term liability Long-term debt................................................. $1,000 Notes payable ................................................ 400 1,400 Total liabilities ........................................................ 3,344 Owner's equity J. Parra, capital ........................................................... 12,955 Total liabilities and owner's equity ............................ $16,299

Solutions Manual .

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Chapter 4

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Accounting Principles, Seventh Canadian Edition

EXERCISE 4-13 (a) DONATELLO COMPANY Income Statement Year Ended July 31, 2017 Revenues Service revenue ............................................. $75,000 Interest revenue ............................................. 320 Total revenues........................................... 75,320 Expenses Depreciation expense .....................................$ 2,850 Interest expense ............................................ 3,000 Rent expense ................................................. 18,550 Salaries expense............................................ 36,050 Supplies expense .......................................... 20,850 Total expenses .......................................... 81,300 Loss .................................................................... $ 5,980 DONATELLO COMPANY Statement of Owner's Equity Year Ended July 31, 2017 B. Donatello, capital, August 1, 2016*............................ Add: Investment ........................................................... Less: Loss ......................................................... $ 5,980 Drawings.................................................... 16,500 B. Donatello, capital, July 31, 2017 ................................

$23,285 5,000 28,285 22,480 $ 5,805

* ($28,285 – $5,000)

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Accounting Principles, Seventh Canadian Edition

EXERCISE 4-13 (Continued) (b) DONATELLO COMPANY Balance Sheet July 31, 2017

Assets Current assets Cash............................................................................. $ 4,650 Accounts receivable ................................................... 11,400 Prepaid rent ..................................................................... 500 Supplies....................................................................... 750 Total current assets ............................................... 17,300 Long-term investments Debt investments ................................................... 8,000 Property, plant, and equipment Equipment ...................................................... $19,950 Less: Accumulated depreciation .................. 5,700 14,250 Intangible assets Patents ........................................................... 18,300 Total assets ................................................................ $57,850 Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... $ 4,245 Interest payable .......................................................... 750 Unearned revenue ...................................................... 2,050 Total current liabilities ........................................... 7,045 Long-term liabilities Notes payable ............................................................. 45,000 Owner's equity B. Donatello, capital ................................................... 5,805 Total liabilities and owner's equity ............................ $57,850

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Accounting Principles, Seventh Canadian Edition

EXERCISE 4-14 (a) BASTEN COMPANY Income Statement Year Ended July 31, 2017

Revenues Service revenue ............................................. $63,000 Rent revenue .................................................... 8,500 Total revenues........................................... Expenses Depreciation expense.................................... 4,000 Utilities expense ............................................ 22,600 Salaries expense............................................ 48,700 Total expenses .......................................... Loss ....................................................................

$71,500

75,300 $ 3,800

BASTEN COMPANY Statement of Owner's Equity Year Ended July 31, 2017 D. Basten, capital, August 1, 2016 ................................. Less: Loss............................................................. $3,800 Drawings ............................................................... 3,000 D. Basten, capital, July 31, 2017.....................................

Solutions Manual .

4-44

$51,200 6,800 $44,400

Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 4-14 (Continued) (b) BASTEN COMPANY Balance Sheet July 31, 2017

Assets Current assets Cash ................................................................................. $14,200 Accounts receivable ................................................... 9,780 Total current assets ............................................... 23,980 Property, plant, and equipment Equipment ...................................................... $34,400 Less: Accumulated depreciation .................. 6,000 28,400 Total assets ................................................................ $52,380 Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... Salaries payable.......................................................... Total current liabilities ........................................... Long-term liabilities Notes payable ............................................................. Total liabilities ........................................................

$ 4,100 2,080 6,180 1,800 7,980

Owner's equity D. Basten, capital ............................................................ 44,400 Total liabilities and owner's equity ............................ $52,380

Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

EXERCISE 4-15 (a) JPC ENTERPRISES Balance Sheet December 31, 2017 Assets Current assets Cash............................................................................. $ 16,500 Accounts receivable ....................................................... 197,000 Supplies....................................................................... 10,100 Prepaid expenses ........................................................... 6,900 Total current assets ................................................... 230,500 Long-term investments Equity investments ..................................................... 45,800 Property, plant, and equipment Land ................................................. $105,600 Building ........................................... $306,300 Less: Accumulated depreciation ... 79,900 226,400 332,000 Intangible assets Licences ...................................................................... 98,300 Goodwill ........................................................................... 36,000 Total assets ................................................................. $742,600

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Accounting Principles, Seventh Canadian Edition

EXERCISE 4-15 (Continued) (a) (Continued) Liabilities and Owner's Equity Current liabilities Accounts payable ..........................................................$105,600 Salaries payable......................................................... 28,700 Interest payable ......................................................... 16,500 Unearned revenue ..................................................... 27,400 Notes payable ............................................................ 55,000 Current portion of mortgage payable ............................ 17,250 Total current liabilities .......................................... 250,450 Long-term liabilities Mortgage payable ($230,000 – $17,250) ....................... 212,750 Total liabilities ............................................................ 463,200 Owner's equity J. Chrowder, capital ...................................................... 279,400 Total liabilities and owner's equity .......................... $742,600 (b) Working capital = Current Assets – Current Liabilities $230,500 − $250,450 = $(19,950) Current Ratio = Current Assets ÷ Current Liabilities $230,500 ÷ $250,450 = .92:1 Acid-test ratio

= (Cash + Accounts receivable + Shortterm investments) ÷ Current liabilities = ($16,500 + $197,000) ÷ $250,450 = $213,500 ÷ $250,450 = 0.85:1

(c)

The company's liquidity is very poor. There is insufficient cash to pay for accounts payable and salaries payable that are likely due within days. Some of the investments might have to be sold to meet these obligations on time.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 4-16 (a) Working Capital Current Ratio

Acid-test ratio

March 28, 2015 $421,955 – $223,239 $421,955 $223,239 $203,162 + $4,896 $223,239

$198,716

1.89

0.93

$189,696

1.96

0.83

$ 224,343

2.05

1.02

March 29, 2014 Working Capital Current Ratio

Acid-test ratio

$387,323

–

$197,627

$387,323 $197,627 $157,578 + $5,582 $197,627 March 30, 2013

Working Capital Current Ratio

Acid-test ratio

$438,374

–

$214,031

$438,374 $214,031 $210,562 + $7,126 $214,031

(b) Indigo’s liquidity at March 28, 2015 is very similar to that of the two previous fiscal years. Ratios are strong, due in part to very few sales on account.

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Accounting Principles, Seventh Canadian Edition

*EXERCISE 4-17 GARDENS DESIGNS Work Sheet Month Ended April 30, 2017 Unadjusted Trial Balance Account Titles

Dr.

Cash Accounts receivable Prepaid rent Equipment Accum.deprec.–equip. Accounts payable Notes payable Unearned revenue Interest payable T. Muzyka, capital T. Muzyka, drawings Service revenue Salaries expense Depreciation expense Interest expense

Cr.

Adjustments

Adjusted Trial Balance

Dr.

Cr.

11,430 8,780 4,875 24,000 (2)250

(1) 500 (3) 60

4,150 9,865 2,750 660

(1) 500 2)250 3) 60

66,510

810

4-49 .

Dr.

Cr.

11,430 8,780 4,875 24,000 6,250 5,650 12,000 1,000 60 25,960

4,150 15,400

Solutions Manual

Cr.

Balance Sheet

6,250 5,650 12,000 1,000 60 25,960

25,960

66,510

Dr.

11,430 8,780 4,875 24,000 6,000 5,650 12,000 1,500

Totals Profit Totals

Cr.

Income Statement

4,150 15,900

15,900

9,865 3,000 720

66,820 66,820

13,585 2,315 15,900

15,900

53,235

15,900

53,235

Chapter 4

50,920 2,315 53,235

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

*EXERCISE 4-18 SWIFT CREEK ENGINEERING Work Sheet Year Ended December 31, 2017 Unadjusted Trial Balance Account Titles Cash Accounts receivable Interest receivable Supplies Prepaid insurance Notes receivable Equipment Acc. depr.—equip. Accounts payable H. Duguay, capital H. Duguay, draw. Service revenue Interest revenue Depr. expense Insurance exp. Salaries expense Supplies expense Totals Profit Totals

Dr.

Cr.

8,450 6,250

Adjustments

Dr.

Adjusted Trial Balance

Cr.

Dr.

10,440 120

5,260 7,440 12,000 27,800

3,510 4,340

8,340 4,560 34,900

2,780

112,300

10,440 120

39,400

Dr.

160,100

3,510 21,190

Cr.

8,450 16,690

120 1,750 3,100 12,000 27,800

120 1,750 3,100 12,000 27,800 11,120 4,560 34,900 53,500 122,740 120

2,780 4,340 39,400 3,510 21,190 173,440

4-50 .

Cr.

53,500

2,780 4,340

Solutions Manual

Dr.

Balance Sheet

11,120 4,560 34,900

53,500

160,100

Cr.

Income Statement

173,440

122,740 120 2,780 4,340 39,400 3,510 50,030 72,830 122,860

122,860 123,410

50,580 72,830 122,860 123,410 123,410

Chapter 4

*EXERCISE 4-19 (a) (1) Dec.31 Accounts Receivable ..................... Service Revenue ....................... 31

(2) Dec.31

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

6,900 1,250 1,250

Service Revenue ............................ 98,900 Income Summary .................... Income Summary ........................... Interest Expense .......................

9,050

6,900

1,250

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

8,200

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

2,235

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4-51

89,850

6,900

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

98,900

9,050

Income Summary ........................... 89,850 I. Masterson, Capital .................

(b) Jan. 1 Service Revenue ............................ Accounts Receivable ................

6,900

1,250

8,200 2,235

Chapter 4

*EXERCISE 4-19 (Continued) (a), (b), and (c)

Date

Explanation

Cash Ref.

Dec. 31 Unadjusted balance Jan. 10 31

Date

8,200

7,600 15,800 13,565

Accounts Receivable Explanation Ref. Debit

6,900

Interest Payable Explanation Ref. Debit

Credit Balance

1,250

I. Masterson, Capital Explanation Ref. Debit

Credit Balance

1,250

Income Summary Explanation Ref. Debit

Dec. 31 Closing entry 31 Closing entry 31 Closing entry

Solutions Manual .

24,000 30,900 24,000

0 1,250 0

Dec. 31 Unadjusted balance 31 Closing entry

Date

Credit Balance

6,900

Dec. 31 Unadjusted balance 31 Adjusting entry Jan. 1 Reversing entry

Date

Credit Balance

2,235

Dec. 31 Unadjusted balance 31 Adjusting entry Jan. 1 Reversing entry

Date

Debit

9,050 89,850

4-52

89,850

48,000 137,850

Credit

Balance

98,900

98,900 89,850 0

Chapter 4

*EXERCISE 4-19 (Continued) (a), (b), and (c) (Continued)

Date Dec. 31 31 31 Jan. 1 10

Date Dec. 31 31 31 Jan. 1 31

Solutions Manual .

Service Revenue Explanation Ref. Debit Unadjusted balance Adjusting entry Closing entry Reversing entry

Credit Balance

6,900 98,900 6,900 8,200

Interest Expense Explanation Ref. Debit Unadjusted balance Adjusting entry Closing entry Reversing entry

Credit Balance

1,250 9,050 1,250 2,235

4-53

92,000 98,900 0 6,900 Dr. 1,300

7,800 9,050 0 1,250 Cr. 985

Chapter 4

*EXERCISE 4-20 (a) It would be useful to prepare reversing entries for adjustments 1, 4, and 6. (b) (1)

(4)

(6)

May

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

600

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

545

600

1 Property Tax Payable ................... 1,304 Property Tax Expense ............. ($3,912 ÷ 12 × 4)

545

1,304

(c) Reversing entries are useful for these adjustments because it simplifies the recording of future transactions. Without reversing entries, transactions 1, 4, and 6 would require compound journal entries. If reversing entries are prepared, the future transactions can be recorded with simple journal entries. You will not have to remember what has gone before. The use of reversing entries does not change the amounts reported in the financial statements. It simply makes it easier to record future transactions. Since there are no future transactions related to items 2, 3, and 5, there is nothing to be gained by reversing these entries.

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Chapter 4

SOLUTIONS TO PROBLEMS PROBLEM 4-1A (a) General Journal

J14 Credit

Date Account Titles Dec. 31 Service Revenue ................................. Income Summary.......................

Ref. 400 350

Debit 61,000

31 Income Summary................................ Advertising Expense ................. Supplies Expense...................... Depreciation Expense ............... Insurance Expense .................... Salaries Expense ....................... Interest Expense........................

350 610 631 711 722 726 905

50,100

31 Income Summary................................ D. Thao, Capital .........................

350 301

10,900

31 D. Thao, Capital .................................. D. Thao, Drawings .....................

301 306

7,000

61,000 8,400 4,000 5,600 3,500 28,000 600 10,900 7,000

(b) Income Summary No.350 Clos. 50,100 Clos. 61,000 Bal. 10,900 Clos. 10,900 Bal. 0

D. Thao, Capital Bal. Clos. 7,000 Clos. Bal.

Solutions Manual .

No. 301 13,000 10,900 16,900

4-55

D. Thao, Drawings No.306 Bal. 7,000 Clos. 7,000 Bal. 0

Chapter 4

PROBLEM 4-1A (Continued) (b) (Continued) Service Revenue No. 400 Clos. 61,000 Bal. 61,000 Bal. 0 Advertising Expense No. 610 Bal. . 8,400 Clos. . 8,400 Bal. 0

Supplies Expense No. 631 Bal. 4,000 Clos. 4,000 Bal. 0

Depreciation Expense No. 711 Bal. 5,600 Clos. 5,600 Bal. 0

Insurance Expense No. 722 Bal. 3,500 Clos. 3,500 Bal. 0

Interest Expense No. 905 600 Clos. 600 0

Salaries Expense No. 726 Bal. 28,000 Clos. 28,000 Bal. 0

Bal. Bal.

(c) THAO COMPANY Post-Closing Trial Balance December 31, 2017 Cash.............................................................. Accounts receivable .................................... Supplies ....................................................... Prepaid insurance........................................ Equipment .................................................... Accumulated depreciation—equipment..... Notes payable .............................................. Accounts payable ........................................ Salaries payable .......................................... Interest payable ........................................... D. Thao, capital ............................................ Totals .................................................... Solutions Manual .

4-56

Debit $ 5,300 10,800 1,500 2,000 27,000

$46,600

Credit

$ 5,600 15,000 6,100 2,400 600 16,900 $46,600 Chapter 4

PROBLEM 4-1A (Continued) Taking It Further: The drawings account is not closed with the expense accounts because it is not part of profit. Drawings represent the distribution of profit to the owner and are not used to calculate profit. Drawings are reported on the statement of owner’s equity, not the income statement. The drawings account is closed in a separate entry and not with expenses because it is closed to the capital account, not the Income Summary account.

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PROBLEM 4-2A (a) BRAY COMPANY Income Statement For the Year Ended December 31, 2017 Revenues Service revenue ........................................... Expenses Maintenance expense.................................. Depreciation expense.................................. Insurance expense ...................................... Salaries expense.......................................... Utilities expense .......................................... Total expenses ..................................... Profit ...................................................................

$60,000 1,700 2,800 1,800 $30,000 1,400 37,700 $22,300

BRAY COMPANY Statement of Owner’s Equity For the Year Ended December 31, 2017 L. Bray, Capital, January 1............................................. Add: Profit..................................................................... Less: Drawings.............................................................. L. Bray, Capital, December 31 .......................................

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$19,500 22,300 41,800 11,000 $30,800

Chapter 4

PROBLEM 4-2A (Continued) (a) (Continued) BRAY COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash.............................................................. $8,800 Accounts receivable .................................... 10,800 Prepaid insurance........................................ 2,800 Total current assets ............................. 22,400 Property, plant, and equipment Equipment .................................................... $24,000 Less: Accumulated depreciation— equipment 4,200 19,800 Total assets .......................................... $42,200 Liabilities and Owner’s Equity Current liabilities Accounts payable ........................................ Salaries payable .......................................... Total current liabilities ......................... Owner’s equity L. Bray, capital ............................................. Total liabilities and owner’s equity .....

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$9,000 2,400 11,400 30,800 $42,200

Chapter 4

PROBLEM 4-2A (Continued) (b) General Journal Date Dec. 31

Account Titles Service Revenue ................................. Income Summary .......................

Ref. 400 350

Debit 60,000

31 Income Summary ................................ Maintenance Expense ................ Depreciation Expense ................ Insurance Expense..................... Salaries Expense........................ Utilities Expense ........................

350 622 711 722 726 732

37,700

31 Income Summary ................................ L. Bray, Capital ..........................

350 301

22,300

31 L. Bray, Capital ................................... L. Bray, Drawings ......................

301 306

11,000

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Credit 60,000 1,700 2,800 1,800 30,000 1,400 22,300 11,000

Chapter 4

PROBLEM 4-2A (Continued) (c) L. Bray, Capital Clos.

11,000 1/1 Bal. Clos. Bal.

L. Bray, Drawings 12/31 Bal. Bal.

Clos. Clos.

Clos.

11,000 Clos. 0

No. 301 19,500 22,300 30,800

Depreciation Expense No. 711 12/31Bal. 2,800 Clos. 2,800 Bal. 0

No. 306 11,000

12/31 Bal.

Income Summary 37,700 Clos. Bal. 22,300 Bal.

No. 350 60,000 22,300

Service Revenue 60,000 12/31 Bal. Bal.

No. 400 60,000 0

Bal.

Insurance Expense 1,800 Clos.

No. 722 1,800

12/31 Bal. Bal.

Salaries Expense 30,000 Clos. 0

No. 726 30,000

12/31 Bal. Bal.

Utilities Expense 1,400 Clos. 0

No. 732 1,400

Maintenance Expense No. 622 12/31 Bal. 1,700 Clos. 1,700 Bal. 0 Bal. 0

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-2A (Continued) (d)

BRAY COMPANY Post-Closing Trial Balance December 31, 2017

Cash ............................................................... Accounts receivable ...................................... Prepaid insurance.......................................... Equipment ...................................................... Accumulated depreciation—equipment....... Accounts payable .......................................... Salaries payable............................................. L. Bray, capital ............................................... Totals ......................................................

Debit $ 8,800 10,800 2,800 24,000

$46,400

Credit

$ 4,200 9,000 2,400 _30,800 $46,400

Taking It Further: After posting the closing entries for the revenue and expense accounts, the balance of the Income Summary account is compared to the profit or loss appearing on the income statement to ensure that the closing entries prepared so far have been journalized and posted correctly. In addition, following the posting of the last closing entries, the account balance appearing in the owner’s capital account must correspond to the ending balance appearing in the statement of owner’s equity. Finally, L. Bray should prepare a post-closing trial balance, which lists only permanent accounts after the closing entries have been journalized and posted. Its purpose is to determine that all closing entries have been journalized and posted correctly. This trial balance also verifies that the temporary accounts have been properly reset to zero, ready for the posting of the transactions of the next fiscal year.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-3A (a) MARINE FISHING CENTRE Income Statement Year Ended March 31, 2017 Revenues Service revenue ............................................ $124,300 Interest revenue .......................................... 1,500 $125,800 Expenses Depreciation expense ................................. 9,850 Interest expense .......................................... 3,960 Insurance expense ...................................... 4,500 Salaries expense ......................................... 30,000 Supplies expense ........................................ 5,700 Utilities expense .......................................... 5,400 59,410 Profit .................................................................................... $ 66,390

(b) MARINE FISHING CENTRE Statement of Owner's Equity Year Ended March 31, 2017

R. Falkner, capital, April 1, 2016* ................................... $ 163,000 Add: Investment ............................................... $ 2,300 Profit..................................................... 66,390 68,690 231,690 Less: Drawings .............................................................. 46,200 R. Falkner, capital, March 31, 2017 ................................. $ 185,490 * $165,300 - $2,300

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-3A (Continued) (c) MARINE FISHING CENTRE Balance Sheet March 31, 2017 Assets Current assets Cash ............................................................................... $ 7,720 Interest receivable......................................................... 750 Supplies ......................................................................... 1,425 Total current assets.................................................. 9,895 Long-term debt investment............................................... 30,000 Property, plant, and equipment Land ................................................. $46,800 Building .......................................... $186,900 Less: Accumulated depreciation .. 31,150 155,750 Equipment .......................................... 36,200 Less: Accumulated depreciation . 18,100 18,100 220,650 Total assets ...................................................................... $260,545 Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ $5,875 Interest payable ........................................................... 990 Unearned revenue ....................................................... 2,190 Current portion of notes payable ................................... 6,000 Total current liabilities............................................ 15,055 Long-term liabilities Notes payable .................................................................. 60,000 Total liabilities......................................................... 75,055 Owner's equity R. Falkner, capital .......................................................... 185,490 Total liabilities and owner's equity .......................... $260,545

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-3A (Continued) (d) GENERAL JOURNAL Date

Account Titles

Debit

Credit

Mar. 31 Service Revenue ............................... 124,300 Interest Revenue ................................ 1,500 Income Summary .........................

125,800

Solutions Manual .

Income Summary .............................. 59,410 Depreciation expense ................... Interest expense ............................ Insurance expense ........................ Salaries expense ........................... Supplies expense .......................... Utilities expense ............................

9,850 3,960 4,500 30,000 5,700 5,400

Income Summary .............................. 66,390 R. Falkner, Capital ........................

66,390

R. Falkner, Capital ............................. 46,200 R. Falkner, Drawings ....................

46,200

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-3A (Continued) (e) Clos. Clos.

Income Summary 59,410 Clos. 125,800 Bal. 66,390 66,390 Bal. 0

R. Falkner, Capital Bal. 165,300 Clos. 46,200 Clos. 66,390 Bal. 185,490

R. Falkner, Drawings Bal. 46,200 Clos. 46,200 Bal. 0

Service Revenue 124,300 Bal. 124,300 Bal. 0

Interest Revenue Clos. 1,500 Bal. 1,500 Bal. 0

Clos.

Bal. Bal.

Clos.

Bal. Bal.

Depreciation Expense 9,850 Clos. 9,850 0

Interest Expense 3,960 Bal. Bal.

Supplies Expense 5,700 Clos. 0

Solutions Manual .

3,960 0

5,700

Bal. Bal.

Insurance Expense 4,500 Clos. 4,500 0

Salaries Expense Bal. 30,000 Clos. 30,000 Bal. 0

Utilities Expense Bal. 5,400 Clos. 5,400 Bal. 0

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PROBLEM 4-3A (Continued) (f) MARINE FISHING CENTRE Post-Closing Trial Balance March 31, 2017 Debit Credit Cash .................................................................... $ 7,720 Interest receivable ............................................. 750 Supplies.............................................................. 1,425 Debt investments ............................................... 30,000 Land .................................................................... 46,800 Building .............................................................. 186,900 Accumulated depreciation—building .............. $ 31,150 Equipment ......................................................... 36,200 Accumulated depreciation—equipment .......... 18,100 Accounts payable ............................................. 5,875 Interest payable ................................................. 990 Unearned revenue ............................................. 2,190 Notes payable .................................................... 66,000 R. Falkner, capital .............................................. 185,490 $309,795 $309,795 The balance in the R. Falkner, capital account after the closing entries have been posted will be $185,490 as shown in the above post-closing trial balance. This balance corresponds to the ending balance on the statement of owner’s equity in part (b) above.

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PROBLEM 4-3A (Continued) Taking It Further: When deciding how to present financial information in the classified balance sheet, Marine Fishing Centre could show the presentation as was followed in part (c) above but it also had the alternative to prepare the classified balance sheet following the International Financial Reporting Standards (IFRS). If it followed IFRS, the statement would have been titled Statement of Financial Position. The balance sheet would have the same amounts and key sub-totals, but the sequence of the major categories of the elements in the balance sheet may have changed.

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PROBLEM 4-4A (a) GENERAL JOURNAL Date

Account Titles

Debit

Jan. 31 Insurance Expense ($6,420 × 8/12) ... Prepaid Insurance ........................

4,280

31 Supplies Expense ($5,240 − $1,310) . Supplies ........................................

3,930

31 Depreciation Expense ....................... Accumulated Depreciation— Building ($190,000 ÷ 50) ................ Accumulated Depreciation— Equipment ($27,000 ÷ 9)................

6,800

4,280

3,930

3,800 3,000

31 Interest Expense ($182,000 × 5% × 1/12) Interest Payable ............................

758

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

1,300

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Credit

758 1,300

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-4A (Continued) (b) ELBOW CYCLE REPAIR SHOP Adjusted Trial Balance January 31, 2017

Debit Credit Cash ................................................................... $ 3,200 Accounts receivable .......................................... 6,630 Prepaid insurance ($6,420 − $4,280)................. 2,140 Supplies ($5,240 − $3,930)................................. 1,310 Land .................................................................... 50,000 Building .............................................................. 190,000 Accumulated depreciation—building ($11,000 + $3,800) ........................................... $ 14,800 Equipment ......................................................... 27,000 Accumulated depreciation—equipment ($4,500 + $3,000) ............................................. 7,500 Accounts payable ............................................. 6,400 Interest payable ................................................. 758 Unearned revenue ($21,950 − $1,300)............... 20,650 Mortgage payable .............................................. 182,000 H. Dude, capital ................................................. 61,000 H. Dude, drawings ............................................. 101,100 Service revenue ($235,550 + $1,300) ................ 236,850 Depreciation expense ........................................ 6,800 Insurance expense ............................................ 4,280 Interest expense ($5,610 + $758) ...................... 6,368 Salaries expense................................................ 115,200 Supplies expense .............................................. 3,930 Utilities expense ................................................ 12,000 $529,958 $529,958

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PROBLEM 4-4A (Continued) (c) ELBOW CYCLE REPAIR SHOP Income Statement Year Ended January 31, 2017

Service revenue ................................................................. $236,850 Expenses Salaries expense .......................................... $115,200 Utilities expense .......................................... 12,000 Interest expense .......................................... 6,368 Insurance expense ...................................... 4,280 Supplies expense ........................................ 3,930 Depreciation expense ................................... 6,800 Total expenses........................................................ 148,578 Profit ................................................................................. $ 88,272

ELBOW CYCLE REPAIR SHOP Statement of Owner's Equity Year Ended January 31, 2017

H. Dude, capital, February 1, 2016 * ................................... $ 56,000 Add: Investment ................................................ $ 5,000 Profit..................................................... 88,272 93,272 149,272 Less: Drawings ................................................................. 101,100 H. Dude, capital, January 31, 2017 ..................................... $ 48,172 *($61,000 − $5,000)

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PROBLEM 4-4A (Continued) (c) (Continued) ELBOW CYCLE REPAIR SHOP Balance Sheet January 31, 2017 Assets Current assets Cash .................................................................................. $ 3,200 Accounts receivable ..................................................... 6,630 Prepaid insurance ......................................................... 2,140 Supplies .......................................................................... 1,310 Total current assets ...................................................... 13,280 Property, plant, and equipment Land ................................................ $50,000 Building ........................................... $190,000 Less: Accumulated depreciation ...... 14,800 175,200 Equipment ........................................... 27,000 Less: Accumulated depreciation . 7,500 19,500 244,700 Total assets ........................................................................ $257,980 Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ $ 6,400 Interest payable ........................................................... 758 Unearned revenue ....................................................... 20,650 Current portion of mortgage payable ........................ 4,500 Total current liabilities............................................ 32,308 Long-term liabilities Mortgage payable .......................................................... 177,500 Total liabilities ............................................................. 209,808 Owner's equity H. Dude, capital.............................................................. 48,172 Total liabilities and owner's equity .......................... $257,980

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-4A (Continued) (d) GENERAL JOURNAL Date

Account Titles

Debit

Credit

Jan 31 Service Revenue ................................. 236,850 Income Summary ..........................

236,850

31 Income Summary ................................ 148,578 Salaries Expense ........................... Utilities Expense............................ Interest Expense............................ Insurance Expense........................ Supplies Expense.......................... Depreciation Expense ...................

115,200 12,000 6,368 4,280 3,930 6,800

31 Income Summary .................................. 88,272 H. Dude, Capital .............................

88,272

31 H. Dude, Capital................................... 101,100 H. Dude, Drawings.........................

101,100

Taking It Further: Likely the reason that Henry had to invest $5,000 cash into the business in November of 2016 is because during the year he withdrew $101,100 cash when the business’ profit was only $88,272. Henry should be concerned that his capital balance is diminishing and he should try to reduce his drawings in the coming year.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5A (a) GENERAL JOURNAL Date July

Account Titles 1

J1 Debit

Credit

Cash .................................................... 20,000 L. Chang, Capital ...........................

20,000

Vehicles .............................................. 25,000 Cash ............................................... Notes Payable................................

5,000 20,000

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

2,800

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

3,300

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

2,100

18 Salaries Expense ............................... Cash ...............................................

3,000

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

8,900

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

3,300

31 Fuel Expense………………………… .. Cash ...............................................

550

31 L. Chang, Drawings ........................... Cash ...............................................

2,600

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2,800

3,300

2,100

3,000

8,900

3,300

550 2,600

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5A (Continued) (a), (c), and (f) Note items in italics are the balances used to prepare the trial balance in part (b). Cash Date July

Explanation

1 1 1 18 28 31 31

Ref.

Debit

J1 J1 J1 J1 J1 J1 J1

20,000

Credit

Balance

550 2,600

20,000 15,000 12,200 9,200 12,500 11,950 9,350

Credit

Balance

5,000 2,800 3,000 3,300

Accounts Receivable Date July 5 25 28 31

Explanation

Ref.

Debit 3,300 8,900

Adjusting

J1 J1 J1 J2

3,300 1,500

3,300 12,200 8,900 10,400

Supplies Date July 12 31

Explanation

Ref.

Debit 2,100

Adjusting

J1 J2

Credit

Balance

1,400

2,100 700

Credit

Balance

233

2,800 2,567

Prepaid Insurance Date July 1 31

Solutions Manual .

Explanation

Ref.

Debit 2,800

Adjusting

J1 J2

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5A (Continued) (a), (c), and (f) (Continued)

Date July

Explanation 1

Vehicles Ref.

Debit

Credit Balance

25,000

Accumulated Depreciation—Vehicles Date

Explanation

Ref.

July 31

Adjusting

Debit

Credit

Balance

417

Credit

Balance

2,100

Credit

Balance

800

Credit

Balance

Accounts Payable Date

Explanation

Ref.

July 12

Debit

Salaries Payable Date

Explanation

Ref.

July 31

Adjusting

Debit

Interest Payable Date

Explanation

Ref.

July 31

Adjusting

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Debit

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5A (Continued) (a), (c), and (f) (Continued) Notes Payable Date July

Explanation 1

Ref.

Debit

Credit

Balance

20,000

Credit

Balance

L. Chang, Capital Date July

1 31 31

Explanation

Ref.

Closing Closing

J1 J3 J3

Debit

20,000 7,208 2,600

20,000 27,208 24,608

L. Chang, Drawings Date July 31 31

Explanation

Ref.

Debit 2,600

Closing

J1 J3

Credit

2,600

Balance 2,600 0

Income Summary Date

Explanation

Ref.

July 31 31 31

Closing Closing Closing

J3 J3 J3

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4-77

Debit

Credit 13,700

6,492 7,208

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Balance 13,700 7,208 0

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5A (Continued) (a), (c), and (f) (Continued) Service Revenue Date July

5 25 31 31

Explanation

Ref.

Adjusting Closing

J1 J1 J2 J3

Debit

13,700

Credit

Balance

3,300 3,300 8,900 12,200 1,500 13,700 0

Fuel Expense Date July 31 31

Explanation

Ref.

Debit 550

Closing

J1 J3

Credit

Balance

550

550 0

Credit

Balance

3,800

3,000 3,800 0

Credit

Balance

1,400

1,400 0

Salaries Expense Date July 18 31 31

Explanation

Ref.

Adjusting Closing

J1 J2 J3

Debit 3,000 800

Supplies Expense Date

Explanation

Ref.

Debit

July 31 31

Adjusting Closing

J2 J3

1,400

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5A (Continued) (a), (c), and (f) (Continued) Depreciation Expense Date

Explanation

Ref.

Debit

July 31 31

Adjusting Closing

J2 J3

417

Credit

Balance

417

417 0

Credit

Balance

233

233 0

Credit

Balance

Insurance Expense Date

Explanation

Ref.

Debit

July 31 31

Adjusting Closing

J2 J3

233

Interest Expense Date

Explanation

Ref.

Debit

July 31 31

Adjusting Closing

J2 J3

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5A (Continued) (b) LEE’S WINDOW WASHING Trial Balance July 31, 2017 Debit $9,350 8,900 2,100 2,800 25,000

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4-80

Credit

$ 2,100 20,000 20,000 12,200

$54,300

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5A (Continued) (c) GENERAL JOURNAL

Date

Account Titles

Debit

July 31

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

1,500

31 Depreciation Expense ....................... Accumulated Depreciation —Vehicles ...................................... ($25,000 ÷ 5 years) × 1/12

417

31 Insurance Expense ............................ Prepaid Insurance ......................... ($2,800 ÷ 12)

233

31 Supplies Expense .............................. Supplies ......................................... ($2,100 − $700)

1,400

1,500

417

233

1,400

Salaries Expense ............................... Salaries Payable ............................

800

31 Interest Expense ................................ Interest Payable............................. ($20,000 × 5.5% × 1/12)

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Credit

800

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5A (Continued) (d) LEE’S WINDOW WASHING Adjusted Trial Balance July 31, 2017 Debit $9,350 10,400 700 2,567 25,000

Cash.................................................................... Accounts receivable .......................................... Supplies.............................................................. Prepaid insurance.............................................. Vehicles .............................................................. Accumulated depreciation—vehicles............... Accounts payable .............................................. Salaries payable................................................. Interest payable ................................................. Notes payable .................................................... L. Chang, capital ................................................ L. Chang, drawings............................................ 2,600 Service revenue ................................................. Depreciation expense ........................................ 417 Fuel expense ...................................................... 550 Insurance expense ............................................ 233 Interest expense ................................................ 92 Salaries expense................................................ 3,800 Supplies expense .............................................. 1,400 Totals ............................................................. $57,109

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Credit

417 2,100 800 92 20,000 20,000 13,700

$57,109

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5A (Continued) (e) LEE’S WINDOW WASHING Income Statement Month Ended July 31, 2017 Revenues Service revenue ............................................................... $13,700 Expenses Depreciation expense ................................... $ 417 Fuel expense ................................................. 550 Insurance expense ........................................ 233 Interest expense ............................................ 92 Salaries expense ........................................... 3,800 Supplies expense ............................................. 1,400 Total expenses........................................................ 6,492 Profit ................................................................................. $7,208 LEE’S WINDOW WASHING Statement of Owner's Equity Month Ended July 31, 2017 L. Chang, capital, July 1 .................................................. Add: Investments .............................................. $20,000 Profit......................................................... 7,208 Less: Drawings ............................................................... L. Chang, capital, July 31 ................................................

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27,208 27,208 2,600 $24,608

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PROBLEM 4-5A (Continued) (e) (Continued) LEE’S WINDOW WASHING Balance Sheet July 31, 2017 Assets Current assets Cash ............................................................................. Accounts receivable ................................................... Supplies ....................................................................... Prepaid insurance ....................................................... Total current assets................................................ Pr operty, plant, and equipment Vehicles........................................................... $25,000 Less: Accumulated depreciation-vehicles . 417 Total assets .............................................................

$ 9,350 10,400 700 2,567 23,017

24,583 $47,600

Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ Salaries payable .......................................................... Interest payable ........................................................... Notes payable, current portion................................... Total current liabilities............................................ Long term liabilities Notes payable .............................................................. Total liabilities .................................................................. Owner's equity L. Chang, capital ......................................................... Total liabilities and owner's equity ........................

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$ 2,100 800 92 5,000 7,992 15,000 22,992 24,608 $47,600

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5A (Continued) (f) GENERAL JOURNAL

Date

Account Titles

Debit

Credit

July 31

Service Revenue ................................ 13,700 Income Summary ..........................

13,700

Income Summary ............................... Depreciation Expense .................. Fuel Expense ................................. Insurance Expense........................ Interest Expense............................ Salaries Expense ........................... Supplies Expense..........................

6,492 417 550 233 92 3,800 1,400

Income Summary ............................... L. Chang, Capital ...........................

7,208

L. Chang, Capital................................ L. Chang, Drawings .......................

2,600

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7,208 2,600

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5A (Continued) (g) LEE’S WINDOW WASHING Post-Closing Trial Balance July 31, 2017 Debit Cash ................................................................... $ 9,350 Accounts receivable .......................................... 10,400 Supplies.............................................................. 700 Prepaid insurance.............................................. 2,567 Vehicles .............................................................. 25,000 Accumulated depreciation—vehicles............... Accounts payable .............................................. Salaries payable................................................. Interest payable ................................................. Notes payable .................................................... L. Chang, capital ................................................ $48,017

Credit

$ 417 2,100 800 92 20,000 24,608 $48,017

Taking It Further: Lee’s Window Washing will need to record adjusting journal entries every month if it wishes to prepare financial statements each month. Closing entries are done only at the end of the fiscal year.

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PROBLEM 4-6A

(a) GENERAL JOURNAL Date

Account Titles

J2 Debit

Oct. 31 Depreciation Expense ....................... Accumulated Depreciation —Equipment .................................. ($140,000 ÷ 10 years) Accumulated Depreciation —Vehicles ...................................... ($110,000 ÷ 8 years)

27,750

31 Supplies Expense .............................. Supplies ......................................... ($6,000 − $2,000)

4,000

Salaries Expense ............................... Salaries Payable ............................

2,550

31 Interest Expense ................................ Interest Payable............................. ($60,000 × 5.5% × 1/12)

275

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Credit

14,000

13,750

4,000

2,550

275

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-6A (Continued) (a) (Continued) SILVER RIDGE PLUMBING Adjusted Trial Balance October 31, 2017 Debit Credit Cash.................................................................. $ 35,420 Supplies ($6,000 – $4,000)............................... 2,000 Equipment ........................................................ 140,000 $ 56,000 * Accumulated depreciation—equipment......... Vehicles ............................................................ 110,000 61,875 ** Accumulated depreciation—vehicles............. Accounts payable ............................................ 7,950 Salaries payable............................................... 2,550 Notes payable .................................................. 60,000 Interest payable ............................................... 275 H. Burke, capital............................................... 75,750 H. Burke, drawings .......................................... 36,000 Service revenue ............................................... 200,525 27,750 Depreciation expense ...................................... Fuel expense .................................................... 28,038 Insurance expense .......................................... 9,500 Interest expense ($3,392 + $275) .................... 3,667 Rent expense ................................................... 21,000 Salaries expense ($45,000 + $2,550)............... 47,550 Supplies expense ............................................ 4,000 $464,925 $464,925 * $42,000 + $14,000 = $56,000 ** $48,125 + $13,750 = $61,875

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-6A (Continued) (b) Revenues Service revenue........................................... $200,525 Expenses Depreciation expense ................................. $27,750 Fuel expense ............................................... 28,038 Insurance expense ...................................... 9,500 Interest expense .......................................... 3,667 Rent expense ............................................... 21,000 Salaries expense ......................................... 47,550 Supplies expense ........................................ 4,000 141,505 Profit ................................................................. $59,020 (c) SILVER RIDGE PLUMBING Statement of Owner's Equity Year Ended October 31, 2017 H. Burke, capital, November 1, 2016 ....................................$73,750 * Add: Investments ............................................... $ 2,000 Profit........................................................ 59,020 61,020 134,770 Less: Drawings................................................................... 36,000 H. Burke, capital, October 31, 2017 ..................................... $98,770 * $75,750 – $2,000 = $73,750

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-6A (Continued) (c)

(Continued) SILVER RIDGE PLUMBING Balance Sheet October 31, 2017 Assets

Current assets Cash ...................................................................................... $ 35,420 Supplies .................................................................................... 2,000 Total current assets......................................................... 37,420 Property, plant, and equipment Equipment ............................................ $140,000 Less: Accumulated depreciation ... 56,000 $84,000 Vehicles ........................................... 110,000 Less: Accumulated depreciation ... 61,875 48,125 132,125 Total assets ............................................................. $169,545 Liabilities and Owner's Equity Current liabilities Accounts payable................................................................. $ 7,950 Salaries payable ................................................................... 2,550 Interest payable ............................................................. 275 Current portion of notes payable .......................................... 10,000 Total current liabilities..................................................... 20,775 Long-term liabilities Notes payable ......................................................................... 50,000 Total liabilities.................................................................. 70,775 Owner's equity H. Burke, capital .................................................................... 98,770 Total liabilities and owner's equity ....................................... $169,545

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-6A (Continued) (d) GENERAL JOURNAL Date

Account Titles

Debit

Credit

Oct. 31 Service Revenue ................................. 200,525 Income Summary ..........................

200,525

31 Income Summary ................................ 141,505 Depreciation expense ................... Fuel expense ................................. Insurance expense ........................ Interest expense ............................ Rent expense ................................. Salaries expense ........................... Supplies expense ..........................

27,750 28,038 9,500 3,667 21,000 47,550 4,000

31 Income Summary .................................. 59,020 H. Burke, Capital ...........................

59,020

31 H. Burke, Capital ................................... 36,000 H. Burke, Drawings ......................

36,000

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PROBLEM 4-6A (Continued) (d) (Continued) Clos. Clos.

Clos.

Income Summary 141,505 Clos. 200,525 Bal. 59,020 59,020 Bal. 0

H. Burke, Capital Bal. 75,750 36,000 Clos. 59,020 Bal. 98,770

H. Burke, Drawings Bal. 36,000 Clos. 36,000 Bal. 0

The ending balance in the capital account after the closing entries have been posted is $98,770. This is the same as the ending balance on the statement of owner’s equity.

Taking It Further: Although the amount of the investment of $2,000 made by the owner H. Burke was correctly recorded as an increase to the capital account during the year, you will need to know the amount of the transaction in order to show it properly in the statement of owner’s equity. The investment of $2,000 will appear as an addition to the opening balance at November 1, 2016 along with the profit for the year.

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PROBLEM 4-7A (a)

(1) INCORRECT ENTRY 1.Cash ......................... Accts. Receivable

950

2.Misc. Expense.......... Cash .....................

3.Salaries Expense..... Cash .....................

1,900

310

5.Equipment................ Cash .....................

(3) CORRECTING ENTRY 590

950

Cash .......................... Accts. Receivable Advertising Expense Cash......................

Salaries Expense ..... Salaries Payable ...... Cash......................

1,200 700

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

310

Maintenance Expense Cash......................

1,900

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

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4-93

360

590

Accounts Receivable Cash....................... Advertising Expense Misc. Expense.......

Salaries Payable ...... Salaries Expense ..

700

Equipment ................. Supplies ................

310

Maintenance Expense Cash....................... Equipment .............

360

700

1,900

310 96

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 4-7A (Continued) (b) GLOBAL CABLE Trial Balance April 30, 2017 Debit Cash ($4,100 – $360 – $27) ................................ $ 3,713 Accounts receivable ($3,200 + $360) ................ 3,560 Supplies ($800 – $310) ...................................... 490 Equipment ($10,600 + $310 – $69) .................... 10,841 Accumulated depreciation—equipment........... Accounts payable .............................................. Salaries payable ($700 – $700).......................... Unearned revenue ............................................. S. Spade, capital ................................................ Service revenue ................................................. Salaries expense ($3,300 – $700)...................... 2,600 Advertising expense ($600 + $75)..................... 675 Miscellaneous expense ($290 – $75) ................ 215 Depreciation expense........................................ 500 Maintenance expense........................................ 96 $22,690

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Credit

$ 1,350 2,100 0 890 12,900 5,450

$22,690

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PROBLEM 4-7A (Continued) Taking It Further: If error 4 was not detected, the Supplies account would initially be overstated, but only until the end-of-year adjustment process, at which time the Supplies account would be reduced to the amount of supplies remaining on hand. Assuming we ignore the effect of recording depreciation expense on the equipment that should have been recorded, this error would have the following effects on the financial statements: Income statement: Supplies expense overstated by $310 Profit understated by $310 Statement of owner’s equity: Profits understated by $310 Owner’s capital understated by $310 Balance sheet: Property, plant, and equipment understated by $310 Owner’s capital understated by $310 For subsequent accounting periods, the depreciation that would have been recorded on the equipment would affect the profit in those fiscal years and corresponding owner’s equity balances.

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PROBLEM 4-8A 1.

Solutions Manual .

Cash .................................................. Rent Payable ..............................

500

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

500

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

400

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

400

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

320

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

230

Unearned Revenue ........................... Accounts Receivable.................

850

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

850

Interest Receivable ........................... Interest Expense ........................

600

Interest Receivable ........................... Interest Revenue........................

600

500

400

320

230

850

600

No error

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PROBLEM 4-8A (Continued) 7.

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

300

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

300

Accounts Payable............................. Repair Expense..........................

2,000

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

2,000

300

2,000 2,000

Taking It Further: Since the work has been done, the revenue has been earned. It does not matter that the customer has not paid cash yet. Many students make the error of thinking that cash must be received in order for the revenue to be earned.

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PROBLEM 4-9A (a) Although not required, the closing entries would be: GENERAL JOURNAL Date

Account Titles

Debit

Credit

Dec. 31 Service Revenue ................................ 65,000 Interest Revenue ................................ 1,100 Income Summary .........................

66,100

Income Summary .............................. 16,700 Depreciation Expense ................... Insurance Expense........................ Interest Expense ........................... Supplies Expense..........................

10,000 1,500 2,800 2,400

Income Summary .............................. 49,400 F. Dunder, Capital .........................

49,400

F. Dunder, Capital ............................. 33,000 F. Dunder, Drawings ....................

33,000

Closing

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F. Dunder, Capital Dec. 31, 2016 July 18 33,000 Bal. Closing Dec. 31, 2017

4-98

14,100 3,200 17,300 49,400 33,700

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PROBLEM 4-9A (Continued) (b) DUNDER TOUR COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash ............................................................................. $ 4,500 Short-term investments .............................................. 2,700 Accounts receivable ................................................... 3,500 Interest receivable....................................................... 100 Supplies ....................................................................... 3,100 Prepaid insurance ........................................................... 2,900 Total current assets................................................ 16,800 Long-term Investment Notes receivable.......................................................... 18,400 Property, plant, and equipment Equipment ....................................................... $50,000 Less: Accumulated depreciation ................ 15,000 35,000 Intangible asset Patents ............................................................................. 15,000 Total assets ................................................................. $85,200 Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... $ 7,300 Interest payable ........................................................... 700 Unearned revenue ....................................................... 3,500 Current portion of notes payable ............................... 3,000 Total current liabilities ........................................... 14,500 Long-term liabilities Notes payable.............................................................. 37,000 Total liabilities......................................................... 51,500 Owner's equity F. Dunder, capital ............................................................ 33,700 Total liabilities and owner's equity ............................ $85,200

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PROBLEM 4-9A (Continued)

December 31, 2016

Working Capital

$16,800 − $14,500 = $2,300

$17,400 − $22,300 = $(4,900)

Current Ratio

$16,800 ÷ $14,500 = 1.16:1

$17,400 ÷ $22,300 = 0.78:1

December 31, 2017

December 31, 2016

$10,800* ÷ $14,500 = 0.74:1

$15,600 ÷ $22,300 = 0.70:1

(d)

Acid-test Ratio

*$10,800 = $4,500 + $2,700 + $3,500 + $100

Taking It Further: Although the acid-test ratio shows very little change, the working capital and current ratios both show a substantial improvement in 2017 over 2016. In 2016, the working capital was negative and the current ratio less than 1, indicating that the company did not have sufficient current assets to cover current liabilities. In 2017, the company had a positive working capital amount of $2,300 and a current ratio greater than 1. Dunder Tour Company’s liquidity has improved.

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PROBLEM 4-10A (a)

Amounts in thousands

Cash Income tax recoverable Accounts receivable Acid-test assets Inventories Prepaid expenses Current assets

June 28, 2014 $13,507 3,461 638 17,606 21,721 643 $39,970

June 29, 2013 $24,541 358 1,197 26,096 22,810 803 $49,709

June 30, 2012 $34,332 426 517 35,275 24,891 799 $60,965

Payables and accruals Deferred revenue Other current liabilities Current liabilities

$ 9,185 1,511 94 $10,790

$10,101 1,548 99 $11,748

$10,161 1,463 124 $11,748

(b)

Amounts in thousands June 28, 2014

June 29, 2013

June 30, 2012

Working Capital

$39,970 − $10,790 = $29,180

$49,709 − $11,748 = $37,961

$60,965 − $11,748 = $49,217

Current Ratio

$39,970 ÷ $10,790 = 3.70:1

$49,709 ÷ $11,748 = 4.23:1

$60,965 ÷ $11,748 = 5.19:1

Acid-test Ratio

$17,606 ÷ $10,790 = 1.63:1

$26,096 ÷ $11,748 = 2.22:1

$35,275 ÷ $11,748 = 3.00:1

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PROBLEM 4-10A (Continued) (c)

The acid-test ratio is a measure of the company’s immediate short-term liquidity. The current ratio is a measure of the short-term debt-paying ability. Finally, working capital is the excess of current assets over current liabilities. If the amount is negative, the term used is a working capital deficiency. Danier Leather demonstrates very strong short-term liquidity and current debt-paying ability at each point in time. Any current ratio in excess of 2:1 or acid-test ratio in excess of 1:1 is considered very strong. Although each ratio has deteriorated in the period from June 30, 2012 to June 28, 2014, they remain very strong.

Taking It Further: When looking at the ratio analysis, we see that there is a large difference between the current and the acid-test ratios each year. Danier’s largest current asset, by far, is inventory. In 2014 the inventory amount made up 54% of total current assets. Since in the acid-test ratio inventory is excluded, this would lead to the acid-test ratio being less than half that of the current ratio. This is normal for a retail operation.

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 4-11A ELBOW CYCLE REPAIR SHOP Work Sheet Year Ended January 31, 2017 Account Titles

Trial Balance Debit Credit 3,200

Cash Accounts receivable 6,630 Prepaid insurance 6,420 Supplies 5,240 Land 50,000 Building 190,000 Accum. deprec.— building Equipment 27,000 Accum. deprec.— equipment Accounts payable Interest payable

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Adjustments Debit Credit

(1) 4,280 (2) 3,930

11,000

Adjusted Trial Balance Debit Credit 3,200

Income Statement Debit Credit

6,630

2,140 1,310 50,000 190,000

(3) 3,800

14,800 27,000

4,500

14,800 27,000

(3) 3,000

7,500

(4)758

6,400 758

6,400

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Balance Sheet Debit Credit 3,200

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 4-11A (Continued) Account Titles

Trial B alance Debit Credit

Adjustments Debit Credit

Adjusted Trial Balance Debit Credit

Income Statement Debit Credit

Balance Sheet Debit Credit

Unearned revenue 21,950 (5)1,300 20,650 20,650 Mortgage payable 182,000 182,000 182,000 H. Dude, capital 61,000 61,000 61,000 H. Dude, drawings 101,100 101,100 101,100 Service revenue 235,550 (5) 1,300 236,850 236,850 Deprec. exp. (3) 6,800 6,800 6,800 Insurance exp. (1) 4,280 4,280 4,280 Interest exp. 5,610 (4) 758 6,368 6,368 Salaries exp. 115,200 115,200 115,200 (2) 3,930 3,930 3,930 Supplies exp. Utilities exp. 12,000 _ 12,000 12,000 Totals 522,400 522,400 17,068 17,068 529,958 529,958 148,578 236,850 381,380 293,108 Profit 88,272 88,272 Totals 236,850 236,850 381,380 381,380 Taking It Further: Adjusting entries must be recorded in a journal and posted to the general ledger. Otherwise, the account balances will not agree with the financial statements.

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 4-12A

Account Titles Cash Supplies Equipment Accum. deprec.– equipment Vehicle Accum.deprec.– vehicle Accounts payable Salaries payable Interest payable

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Trial Balance Debit Credit 35,420 6,000 140,000

SILVER RIDGE PLUMBING Worksheet Year Ended October 31, 2017 Adjusted Trial Adjustments Balance Debit Credit Debit Credit 35,420 (2)4,000 2,000 140,000

42,000

(1)14,000

110,000

56,000 110,000

(1)13,750

61,875

(3)2,550 (4) 275

7,950 2,550 275

7,950

4-105

Balance Sheet Debit Credit 35,420 2,000 140,000

56,000 110,000

48,125

Income Statement Debit Credit

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 4-12A (Continued)

Account Titles Notes payable H. Burke, capital H. Burke, drawings Service revenue Deprec. exp. Fuel exp. Insurance exp. Interest exp. Rent exp. Salaries exp. Supplies exp. Totals Profit Totals

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Trial Balance

Adjustments

Adjusted Trial Balance

Debit

Credit

60,000 75,750

Credit

Income Statement Debit

Credit

Balance Sheet Debit

60,000 75,750

36,000

60,000 75,750

36,000 200,525

Credit

36,000 200,525

(1)27,750

200,525

27,750 27,750 28,038 28,038 28,038 9,500 9,500 9,500 3,392 (4) 275 3,667 3,667 21,000 21,000 21,000 45,000 (3) 2,550 47,550 47,550 (2)4,000 4,000 4,000 434,350 434,350 34,575 34,575 464,925 464,925 141,505 200,525 323,420 264,400 59,020 59,020 200,525 200,525 323,420 323,420

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*PROBLEM 4-12A (Continued) Taking It Further: The preparation of the work sheet is optional because it is not part of the company’s books but basically a tool for accountants in the preparation of financial statements. Since all of the adjustments recorded on the worksheet ultimately get recorded in the general ledger, the preparation of the work sheet is not absolutely necessary. Adjusting entries can be posted as they are recorded in the journal to arrive at the adjusted trial balance and financial statements.

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*PROBLEM 4-13A

(b) GENERAL JOURNAL Date

Account Titles

Debit

Sept. 30 Interest Receivable ............................ Interest Revenue ........................... ($50,000 × 3.5% × 6/12) 30

875 875

Salaries Expense ............................... Salaries Payable ............................

2,400

30 Interest Expense ................................ Interest Payable............................. ($80,000 × 5% × 2/12)

667

30 Depreciation Expense ....................... Accumulated Depreciation ...........

4,250

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Credit

2,400

667

4,250

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*PROBLEM 4-13A (Continued) (a) and (b) Interest Receivable Sept. 30 875 Bal. 875

Interest Revenue Sept. 30 Bal.

Salaries Payable Sept. 30

Salaries Expense Sept. 30 153,000 2,400 Bal. 155,400

Bal.

2,400

Interest Payable Sept. 30 Bal.

2,400

667 667

Accumulated Depreciation Sept. 30 4,250

Bal.

4,250 8,500

875 875

Interest Expense Sept.30 3,333 667 Bal. 4,000 Depreciation Expense Sept. 30 4,250 Bal.

4,250

Account Titles and Explanation

Sept. 30 Interest Revenue ............................... Income Summary .........................

Debit 875

30 Income Summary ................................ 163,650 Salaries expense ........................... Interest expense ............................ Depreciation expense ...................

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Credit

875 155,400 4,000 4,250

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*PROBLEM 4-13A (Continued) (c) (Continued) Interest Receivable Sept. 30 875 Bal. 875

Salaries Payable Sept. 30 Bal.

2,400 2,400

Interest Payable Sept. 30 Bal.

Interest Revenue Sept. 30 Clos. 875 Bal.

667 667

Accumulated Depreciation Sept. 30 4,250

Bal.

4,250 8,500

875 0

Salaries Expense Sept. 30 153,000 2,400 Bal. 155,400 Clos. 155,400 Bal. 0 Interest Expense Sept.30 3,333 667 Bal. 4,000 Clos. 4,000 Bal. 0 Depreciation Expense Sept. 30 4,250 Bal. Bal.

4,250 Clos. 0

4,250

(d) GENERAL JOURNAL Date Oct.

Account Titles 1

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Debit

Interest Revenue ................................ Interest Receivable .......................

875

Salaries Payable................................. Salaries Expense ...........................

2,400

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

667

4-110

Credit

875

2,400 667

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*PROBLEM 4-13A (Continued) (d) (Continued) Interest Receivable Sept. 30 875 Bal. 875 Rev. Bal.

875

Rev.

Salaries Payable Sept. 30 Rev.

2,400

2,400 Bal.

Interest Payable Sept. 30 Rev.

Interest Revenue Sept. 30 Clos. 875 Bal.

667

667 Bal.

875 0

875

Salaries Expense Sept. 30 153,000 2,400 Bal. 155,400 Clos. 155,400 Bal. 0 Rev. 2,400 Bal. 2,400 Interest Expense Sept.30 3,333 667 Bal. 4,000 Clos. 4,000 Bal. 0 Rev. 667 Bal. 667

(e) GENERAL JOURNAL Date Oct.

Account Titles 1

Debit

Cash .................................................... Interest Revenue ...........................

875

2 Salaries Expense ............................... Cash ...............................................

3,000

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

1,000

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Credit

875

3,000 1,000

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*PROBLEM 4-13A (Continued) (e) (Continued) Interest Receivable Sept. 30 875 Bal. 875 Rev. Bal.

875

Rev.

Salaries Payable Sept. 30

Rev.

2,400

2,400 Bal.

Interest Payable Sept. 30 Rev.

Interest Revenue Sept. 30 Clos. 875 Bal.

667

667 Bal.

875 Oct. 1 Bal.

875 0 875 0

Salaries Expense Sept. 30 153,000 2,400 Bal. 155,400 Clos. 155,400 Oct. 2 3,000 Rev. 2,400 Bal. 600 Interest Expense Sept.30 3,333 667 Bal. 4,000 Clos. 4,000 Oct. 31 1,000 Rev. 667 Bal. 333

Taking It Further: Reversing entries can be useful because they simplify the recording of cash transactions after the fiscal year end. It is not necessary to look at the previous year’s adjusting entries to decide how to record a cash transaction after the year end.

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*PROBLEM 4-14A (a) May 31 Accounts Receivable .............................. Service Revenue.................................

750 750

31 Supplies Expense ($2,910 – $765).............. 2,145 Supplies ..............................................

2,145

31 Depreciation Expense ($115,000 ÷ 10)... 11,500 11,500 Accumulated Depreciation—Equipment 31 Salaries Expense ........................................ 1,390 Salaries Payable ................................. 31 Interest Expense ($60,000 × 6% × 1/12) . Interest Payable..................................

300

31 Unearned Revenue ................................. Service Revenue ($1,500 − $700).......

800

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

750

1,390

300

800

(b) June

750

1 Salaries Payable .......................................... 1,390 Salaries Expense ................................ 1 Interest Payable ...................................... Interest Expense.................................

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1,390

300 300

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*PROBLEM 4-14A (Continued) (c) June

1 Interest Expense ($60,000 × 6% × 1/12) . Cash ....................................................

300

2 Salaries Expense .................................... Cash ....................................................

1,980

Cash ($750 + $1,150)............................... Service Revenue.................................

1,900

1 Interest Payable ...................................... Cash ($60,000 × 6% × 1/12) ................

300

1,980

1,900

(d) June

300

Salaries Expense .................................... Salaries Payable...................................... Cash ....................................................

590 1,390

Cash ($750 + $1,150)............................... Accounts Receivable ......................... Service Revenue.................................

1,900

1,980 750 1,150

Taking It Further: Reversing entries should only be used for adjusting journal entries that are accruals: accrued revenues and accrued expenses. Reversing prepayment adjusting entries would not provide the objective achieved through their use.

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PROBLEM 4-1B (Continued) (c) UNSER COMPANY Post-Closing Trial Balance December 31, 2017

Cash................................................................. Accounts receivable ........................................ Supplies............................................................ Prepaid insurance............................................ Equipment ........................................................ Accumulated depreciation—equipment......... Notes payable .................................................. Accounts payable ............................................ Salaries payable............................................... J. Unser, capital ............................................... Totals ...........................................................

Debit $ 5,300 10,800 1,500 2,000 27,000

$46,600

Credit

5,600 15,000 6,100 2,400 17,500 $46,600

Taking It Further: A classified balance sheet groups together similar assets and similar liabilities, using standard classifications as follows: Assets Liabilities and Owner’s Equity Current assets Current liabilities Long-term investments Non-current liabilities Property, plant, and equipment Owner’s (shareholders’) equity Intangible assets Goodwill This is useful as items within a group have similar characteristics. These groupings help readers determine such things as whether the company has enough assets to pay its debts as they come due, and the claims of short- and long-term creditors on total assets.

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PROBLEM 4-2B (a) EDGEMONT ENTERTAINMENT SOLUTIONS Income Statement For the Year Ended December 31, 2017 Revenues Service revenue........................................... Expenses Depreciation expense ................................. Insurance expense ...................................... Salaries expense ......................................... Utilities expense .......................................... Total expenses..................................... Loss ...................................................................

$46,000 2,800 1,200 $39,600 4,000 47,600 $1,600

EDGEMONT ENTERTAINMENT SOLUTIONS Statement of Owner’s Equity For the Year Ended December 31, 2017 L. Bray, Capital, January 1*........................................... Add: Investment............................................................. Less: Loss .......................................................... $1,600 Drawings ................................................... 7,200 L. Bray, Capital, December 31.......................................

$30,000 4,000 34,000 8,800 $25,200

*($34,000 - $4,000)

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PROBLEM 4-2B (Continued) (a) (Continued) EDGEMONT ENTERTAINMENT SOLUTIONS Balance Sheet December 31, 2017 Assets Current assets Cash ............................................................. $ 6,200 Accounts receivable ................................... 7,500 Prepaid insurance ....................................... 1,800 Total current assets............................. 15,500 Property, plant, and equipment Equipment ................................................... $33,000 Less: Accumulated depreciation— equipment 8,600 24,400 Total assets.......................................... $39,900 Liabilities and Owner’s Equity Current liabilities Accounts payable .......................................

$14,700

Owner’s equity M. Edgemont, capital .................................. Total liabilities and owner’s equity.....

25,200 $39,900

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PROBLEM 4-2B (Continued) (b) GENERAL JOURNAL

J14

Date

Account Titles

Debit

Credit

Dec. 31

Service Revenue ............................... 46,000 Income Summary .........................

46,000

Income Summary .............................. 47,600 Depreciation Expense ................... Insurance Expense ....................... Salaries Expense .......................... Utilities Expense ...........................

2,800 1,200 39,600 4,000

31 M. Edgemont, Capital ........................ Income Summary ..........................

1,600

31 M. Edgemont, Capital ........................ M. Edgemont, Drawings ...............

7,200

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PROBLEM 4-2B (Continued) (c) Income Summary Clos. 47,600 Clos. 46,000 Bal. 1,600 Clos. 1,600 Bal. 0 M. Edgemont, Capital Bal. 34,000 Clos. 1,600 Clos. 7,200 25,200

M. Edgemont, Drawings Bal. 7,200 Clos. 7,200 Bal.

Service Revenue Bal. 46,000 Clos. 46,000 Bal. 0 Depreciation Expense Bal. 2,800 Clos. 2,800 Bal. 0

Insurance Expense Bal. 1,200 Clos. 1,200 Bal. 0

Utilities Expense Bal. 4,000 Clos. Bal. 0

Salaries Expense Bal. 39,600 Clos. 39,600 Bal. 0

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4,000

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PROBLEM 4-2B (Continued) (d)

EDGEMONT ENTERTAINMENT SOLUTIONS Post-Closing Trial Balance December 31, 2017

Cash................................................................. Accounts receivable ........................................ Prepaid insurance............................................ Equipment ........................................................ Accumulated depreciation—equipment......... Accounts payable ............................................ M. Edgemont, capital ....................................... Totals ...........................................................

Debit $ 6,200 7,500 1,800 33,000

$48,500

Credit

$ 8,600 14,700 25,200 $48,500

Taking It Further: Current assets are normally cash and other assets that are expected to be converted to cash, sold, or used up within one year from the balance sheet date, or its operating cycle, whichever is longer. Current assets are listed on the balance sheet in liquidity order, with the most liquid asset, normally cash, listed first.

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PROBLEM 4-3B (a) Revenues Service revenue ............................................................. $114,300 Expenses Depreciation expense..................................... $10,025 Insurance expense ...................................... 5,625 Interest expense .......................................... 4,950 Salaries expense ......................................... 37,200 Supplies expense ........................................ 7,125 Utilities expense .............................................. 6,750 Total expenses ............................................................ 71,675 Profit ..................................................................................... $ 42,625

(b) BOREAL ROCK CLIMBING CENTRE Statement of Owner's Equity Year Ended January 31, 2017 L. Massak, capital, February 1, 2016 *............................... $147,000 Add: Investment................................................. $ 3,700 Profit........................................................ 42,625 46,325 193,325 Less: Drawings ............................................................. 52,500 L. Massak, capital, January 31, 2017................................. $140,825 *($150,700 − $3,700)

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PROBLEM 4-3B (Continued) (c) BOREAL ROCK CLIMBING CENTRE Balance Sheet January 31, 2017 Assets Current assets Cash ...................................................................................... $ 9,650 Short-term investments ....................................................... 9,375 Supplies ................................................................................ 1,780 Total current assets......................................................... 20,805 Equity investments ................................................................... 20,000 Property, plant, and equipment Land ........................................................................ $58,500 Building............................................ $165,000 Less: Accumulated depreciation ... 27,500 137,500 Equipment........................................ $ 45,250 Less: Accumulated depreciation ... 22,625 22,625 218,625 Total assets ............................................................. $259,430 Liabilities and Owner's Equity Current liabilities Accounts payable................................................................. $ 7,355 Salaries payable ................................................................... 1,250 Current portion of notes payable ............................................ 5,500 Total current liabilities..................................................... 14,105 Long-term liabilities Notes payable ........................................................................ 104,500 Total liabilities ..................................................................... 118,605 Owner's equity L. Massak, capital .................................................................. 140,825 Total liabilities and owner's equity .................................. $259,430

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PROBLEM 4-3B (Continued) (d) GENERAL JOURNAL

J14

Date

Account Titles

Debit

Credit

Jan. 31

Service Revenue ............................... 114,300 Income Summary .........................

114,300

Income Summary .............................. 71,675 Depreciation Expense ................... Insurance Expense ....................... Interest Expense ........................... Salaries Expense .......................... Supplies Expense ......................... Utilities Expense ...........................

10,025 5,625 4,950 37,200 7,125 6,750

Income Summary ............................... 42,625 L. Massak, Capital .........................

42,625

L. Massak, Capital.............................. 52,500 L. Massak, Drawings ....................

52,500

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PROBLEM 4-3B (Continued) (e) Income Summary Clos.71,675 Clos.114,30 0 Clos.42,625 Bal. 42,625 Bal. 0 L. Massak, Capital 1/31 Bal. 150,700 Clos.52,500 Clos.42,625 Bal. 140,825

L. Massak, Drawings 1/31 Bal.52,500 Bal.

Clos.52,500 0

Service Revenue 1/31 Clos.114,300 Bal.114,300 Bal. 0 Depreciation Expense 1/31 Bal.10,025 10,025 Bal. 0

Insurance Expense 1/31 Bal.5,625 Clos.5,625 Bal. 0

Interest Expense 1/31 Bal.4,950 Clos.4,950 Bal. 0

Salaries Expense 1/31 Bal.37,200 Clos.37,200 Bal. 0

Supplies Expense 1/31 Bal.7,125 Clos.7,125 Bal. 0

Utilities Expense 1/31 Bal.6,750 Clos.6,750 Bal. 0

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PROBLEM 4-3B (Continued) (f) BOREAL ROCK CLIMBING CENTRE Post-Closing Trial Balance January 31, 2017

Debit $ 9,650 9,375 1,780 20,000 58,500 165,000

Credit

Cash................................................................. Short-term investment..................................... Supplies............................................................ Equity investments .......................................... Land .................................................................. Building ............................................................ Accumulated depreciation—building ............. $ 27,500 Equipment ........................................................ 45,250 Accumulated depreciation—equipment......... 22,625 Accounts payable ............................................ 7,355 Salaries payable............................................... 1,250 Notes payable .................................................. 110,000 L. Massak, capital ............................................ 140,825 Totals ........................................................... $309,555 $309,555 The balance of L. Massak capital shown in the post-closing trial balance matches the balance shown on the statement of owner’s equity.

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PROBLEM 4-3B (Continued) Taking It Further: When deciding how to present financial information in the classified balance sheet, Boreal Rock Climbing Centre could show the presentation as was followed in part (c) above but it could have chosen to prepare the classified balance sheet following the International Financial Reporting Standards (IFRS). Had it followed IFRS, the statement would likely have been titled Statement of Financial Position. The content of the balance sheets would have been the same as to amounts and key sub-totals but the sequence of the major categories of the elements in the balance sheet would have changed.

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PROBLEM 4-4B (a) GENERAL JOURNAL Date

Account Titles

Debit

Credit

Sept. 30

Accounts Receivable ............................ 5,350 Service Revenue...............................

5,350

30 Insurance Expense ($4,140 × 8/12) ...... 2,760 Prepaid Insurance ............................

2,760

30 Supplies Expense ($3,780 – $560) ....... 3,220 Supplies ............................................

3,220

30 Depreciation Expense .......................... 7,000 Accumulated Depreciation —Building ($100,000 ÷ 50) ............... Accumulated Depreciation —Equipment ($40,000 ÷ 8) ............... 30

Salaries Expense .................................. 1,975 Salaries Payable ...............................

30 Interest Expense ................................... Interest Payable................................ ($125,000 × 4.5% × 1/12)

4-129

5,000

1,975

469

30 Unearned Revenue ($3,300 × ¾) .......... 2,475 Service Revenue...............................

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2,000

469

2,475

Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Seventh Canadian Edition

PROBLEM 4-4B (Continued) (b) EDGE SPORTS REPAIR SHOP Adjusted Trial Balance September 30, 2017

Account Titles Debit Credit Cash.................................................................... $ 6,750 Accounts receivable ($11,540 + $5,350) ........... 16,890 Prepaid insurance ($4,140 – $2,760)................. 1,380 Supplies ($3,780 – $3,220)................................. 560 Land .................................................................... 55,000 Building .............................................................. 100,000 Accumulated depreciation—building ($19,150 + $2,000) ............................................ $ 21,150 Equipment .......................................................... 40,000 Accumulated depreciation—equipment ($11,500 + $5,000) ............................................ 16,500 Accounts payable .............................................. 8,850 Interest payable ($0 + $469) .............................. 469 Salaries payable ($0 + $1,975)........................... 1,975 Unearned revenue ($3,300 – $2,475)................. 825 Mortgage payable .............................................. 125,000 R. Brachman, capital ......................................... 60,000 R. Brachman, drawings ..................................... 103,525 Service revenue ($189,250 + $5,350 + $2,475) . 197,075 Depreciation expense ........................................ 7,000 Insurance expense ............................................ 2,760 Interest expense ($6,302 + $469) ...................... 6,771 Salaries expense ($75,900 + $1,975)................. 77,875 Supplies expense .............................................. 3,220 Utilities expense................................................. 10,113 $431,844 $431,844

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PROBLEM 4-4B (Continued) (c) EDGE SPORTS REPAIR SHOP Income Statement Year Ended September 30, 2017

Service revenue ...............................................................

$197,075

Expenses Depreciation expense ..................................... $ 7,000 Insurance expense ........................................ 2,760 Interest expense ............................................ 6,771 Salaries expense .............................................. 77,875 Supplies expense .......................................... 3,220 Utilities expense .............................................. 10,113 Total expenses.......................................... 107,739 Profit ................................................................................. $ 89,336

EDGE SPORTS REPAIR SHOP Statement of Owner's Equity Year Ended September 30, 2017

R. Brachman, capital, October 1, 2016* Add: Investment....................................... Profit................................................

$56,000 $ 4,000 89,336

93,336 149,336 Less: Drawings ................................................................. 103,525 R. Brachman, capital, September 30, 2017 ......................... $45,811 *($60,000 − $4,000)

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PROBLEM 4-4B (Continued) (c) (Continued) EDGE SPORTS REPAIR SHOP Balance Sheet September 30, 2017 Assets Current assets Cash ............................................................................. $ 6,750 Accounts receivable ................................................... 16,890 Prepaid insurance ....................................................... 1,380 Supplies ....................................................................... 560 Total current assets................................................ 25,580 Pr operty, plant, and equipment $55,000 Land .......................................................... Building ......................................... $100,000 78,850 Less: Accumulated depreciation 21,150 Equipment................................... 40,000 23,500 157,350 Less: Accumulated depreciation 16,500 Total assets ............................................................... $182,930 Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ $ 8,850 Current portion of mortgage payable ...................... 5,400 Interest payable ........................................................... 469 Salaries payable .......................................................... 1,975 Unearned revenue ....................................................... 825 Total current liabilities............................................ 17,519 Long-term liabilities Mortgage payable .......................................................... 119,600 Total liabilities ............................................................. 137,119 Owner's equity R. Brachman, capital ..................................................... 45,811 Total liabilities and owner's equity .......................... $182,930

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PROBLEM 4-4B (Continued) (d) GENERAL JOURNAL Date

Account Titles

Debit

Credit

Sept. 30 Service Revenue ................................. 197,075 Income Summary ..........................

197,075

30 Income Summary ................................ 107,739 Depreciation Expense ................... Insurance Expense........................ Interest Expense............................ Salaries Expense ........................... Supplies Expense.......................... Utilities Expense............................

7,000 2,760 6,771 77,875 3,220 10,113

30 Income Summary .................................. 89,336 R. Brachman, Capital ....................

89,336

30 R. Brachman, Capital .......................... 103,525 R. Brachman, Drawings ................

103,525

Taking It Further: Likely the reason that Ralph had to invest $4,000 cash into the business in November of 2016 is because during the year he withdrew $103,525 cash when the business’ profit was only $89,336. Ralph should be concerned that his capital balance is diminishing and he should try to reduce his drawings in the coming year.

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PROBLEM 4-5B (a) GENERAL JOURNAL Date Mar.

Account Titles 1

J1 Debit

Credit

Cash .................................................... 10,000 L. Eddy, Capital .............................

10,000

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

6,500

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

1,200

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

1,200

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

4,800

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

500

20 Salaries Expense ............................... Cash ...............................................

1,800

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

1,400

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

2,500

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1,500 5,000

1,200

4,800

500

1,800

1,400 2,500

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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5B (Continued) (a) (Continued) Mar. 31 Fuel Expense...................................... Cash ...............................................

375

31 L. Eddy, Drawings.............................. Cash ...............................................

900

375 900

(a), (c), and (f) Note items in italics are the balances used to prepare the trial balance in part (b). Cash Date Mar.

Explanation

1 1 5 18 20 21 31 31

Ref.

Debit

J1 J1 J1 J1 J1 J1 J1 J1

10,000

1,400

Credit

Balance

10,000 1,500 8,500 1,200 7,300 500 6,800 1,800 5,000 6,400 375 6,025 900 5,125

Accounts Receivable Date Mar. 12 21 25 31

Solutions Manual .

Explanation

Ref.

Adjusting

J1 J1 J1 J2

4-135

Debit

Credit

Balance

4,800 1,400 2,500 500

Chapter 4

4,800 3,400 5,900 6,400

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5B (Continued) (a), (c), and (f) (Continued) Supplies Date Mar. 3 31

Explanation

Ref.

Debit 1,200

Adjusting

J1 J2

Credit

Balance

800

1,200 400

Credit

Balance

100

1,200 1,100

Prepaid Insurance Date Mar. 5 31

Date Mar.

Explanation

Ref.

Debit 1,200

Adjusting

J1 J2

Explanation 1

Vehicles Ref.

Debit

Credit Balance

6,500

Accumulated Depreciation—Vehicles Date

Explanation

Ref.

Mar. 31

Adjusting

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Debit

Credit

Balance

108

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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5B (Continued) (a), (c), and (f) (Continued) Accounts Payable Date Mar.

Explanation

Ref.

3 18

J1 J1

Debit

Credit

Balance

1,200

1,200 700

Credit

Balance

500

Credit

Balance

500

Salaries Payable Date

Explanation

Ref.

Mar. 31

Adjusting

Debit

Interest Payable Date

Explanation

Ref.

Mar. 31

Adjusting

Debit

Notes Payable Date Mar.

Explanation 1

Solutions Manual .

Ref. J1

4-137

Debit

Credit

Balance

5,000

Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5B (Continued) (a), (c), and (f) (Continued) L. Eddy, Capital Date Mar.

1 31 31

Explanation

Ref.

Closing Closing

J1 J3 J3

Debit

Credit

Balance

10,000 4,098

10,000 14,098 13,198

900

L. Eddy, Drawings Date Mar. 31 31

Explanation

Ref.

Closing

J1 J3

Debit

Credit

Balance

900

900 0

900

Income Summary Date

Explanation

Ref.

Mar. 31 31 31

Closing Closing Closing

J3 J3 J3

Debit

Credit

Balance

7,800

7,800 4,098 0

3,702 4,098

Service Revenue Date Mar. 12 25 31 31

Solutions Manual .

Explanation

Ref.

Adjusting Closing

J1 J1 J2 J3

4-138

Debit

Credit

Balance

4,800 2,500 500 7,800

Chapter 4

4,800 7,300 7,800 0

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5B (Continued) (a), (c), and (f) (Continued) Depreciation Expense Date

Explanation

Ref.

Mar. 31 31

Adjusting Closing

J2 J3

Debit

Credit

Balance

108

108 0

108

Fuel Expense Date Mar. 31 31

Explanation

Ref.

Closing

J1 J3

Debit

Credit

Balance

375

375 0

375

Insurance Expense Date

Explanation

Ref.

Mar. 31 31

Adjusting Closing

J2 J3

Debit

Credit

Balance

100

100 0

100

Interest Expense Date

Explanation

Ref.

Mar. 31 31

Adjusting Closing

J2 J3

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Debit

Credit

Balance

19 19

Chapter 4

19 0

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5B (Continued) (a), (c), and (f) (Continued) Salaries Expense Date Mar. 20 31 31

Explanation

Ref.

Adjusting Closing

J1 J2 J3

Debit

Credit

Balance

1,800 500

1,800 2,300 0

2,300

Supplies Expense Date

Explanation

Ref.

Mar. 31 31

Adjusting Closing

J2 J3

Debit

Credit

Balance

800 800

(b) EDDY’S CARPET CLEANERS Trial Balance March 31, 2017 Debit Cash.................................................................... $ 5,125 Accounts receivable .......................................... 5,900 Supplies.............................................................. 1,200 Prepaid insurance.............................................. 1,200 Vehicles .............................................................. 6,500 Accounts payable .............................................. Notes payable .................................................... L. Eddy, capital .................................................. L. Eddy, drawings .............................................. 900 Service revenue ................................................. Fuel expense ...................................................... 375 Salaries expense................................................ 1,800 Totals ............................................................. $23,000

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4-140

Credit

700 5,000 10,000 7,300

$23,000

Chapter 4

800 0

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5B (Continued) (c) GENERAL JOURNAL Date

Account Titles

J2 Debit

Mar. 31 Depreciation Expense ....................... Accumulated Depreciation —Vehicles ...................................... ($6,500 ÷ 5 years) × 1/12

108

31 Insurance Expense ............................ Prepaid Insurance ......................... ($1,200 ÷ 12)

100

31 Supplies Expense .............................. Supplies ......................................... ($1,200 − $400)

800

Salaries Expense ............................... Salaries Payable ............................

500

31 Interest Expense ................................ Interest Payable............................. ($5,000 × 4.5% × 1/12)

500

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

4-141

Credit

108

100

800

500

Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5B (Continued) (d)

EDDY’S CARPET CLEANERS Adjusted Trial Balance March 31, 2017

Debit Cash.................................................................... $ 5,125 Accounts receivable .......................................... 6,400 Supplies.............................................................. 400 Prepaid insurance.............................................. 1,100 Vehicles .............................................................. 6,500 Accumulated depreciation—vehicles............... Accounts payable .............................................. Salaries payable................................................. Interest payable ................................................. Notes payable .................................................... L. Eddy, capital .................................................. L. Eddy, drawings .............................................. 900 Service revenue ................................................. Depreciation expense ........................................ 108 Fuel expense ...................................................... 375 Insurance expense ............................................ 100 Interest expense ................................................ 19 Salaries expense................................................ 2,300 Supplies expense .............................................. 800 Totals ............................................................. $24,127

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Credit

108 700 500 19 5,000 10,000 7,800

$24,127

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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5B (Continued) (e) EDDY’S CARPET CLEANERS Income Statement Month Ended March 31, 2017 Revenues Service revenue........................................................... Expenses Depreciation expense ................................... $ 108 Fuel expense ................................................. 375 Insurance expense ........................................ 100 Interest expense ............................................ 19 Salaries expense ........................................... 2,300 Supplies expense .............................................. 800 Total expenses........................................................ Profit .................................................................................

$7,800

3,702 $4,098

EDDY’S CARPET CLEANERS Statement of Owner's Equity Month Ended March 31, 2017 L. Eddy, capital, March 1 ................................................. Add: Investments .............................................. $10,000 Profit......................................................... 4,098 Less: Drawings ............................................................... L. Eddy, capital, March 31 ...............................................

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14,098 14,098 900 $13,198

Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5B (Continued) (e) (Continued) EDDY’S CARPET CLEANERS Balance Sheet March 31, 2017 Assets Current assets Cash ............................................................................. $ 5,125 Accounts receivable ................................................... 6,400 Supplies ....................................................................... 400 Prepaid insurance ....................................................... 1,100 Total current assets................................................ 13,025 Pr operty, plant, and equipment $6,500 Vehicles ......................................................... Less: Accumulated depreciation ................. 108 6,392 Total assets ................................................................. $19,417 Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ $ 700 Salaries payable .......................................................... 500 Interest payable ........................................................... 19 Current portion of notes payable ............................... 2,000 Total current liabilities............................................ 3,219 Long term liabilities Notes payable .............................................................. 3,000 Total liabilities......................................................... 6,219 Owner's equity L. Eddy, capital ................................................................ 13,198 Total liabilities and owner's equity ............................ $19,417

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PROBLEM 4-5B (Continued) (f) GENERAL JOURNAL

Date

Account Titles

Debit

Mar. 31

Service Revenue ................................ Income Summary ..........................

7,800

3,702

Income Summary ............................... L. Eddy, Capital .............................

4,098

L. Eddy, Capital .................................. L. Eddy, Drawings .........................

900

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4-145

Credit

7,800 108 375 100 19 2,300 800

4,098 900

Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Seventh Canadian Edition

PROBLEM 4-5B (Continued) (g) EDDY’S CARPET CLEANERS Post-Closing Trial Balance March 31, 2017 Debit Cash.................................................................... $ 5,125 Accounts receivable .......................................... 6,400 Supplies.............................................................. 400 Prepaid insurance.............................................. 1,100 Vehicles .............................................................. 6,500 Accumulated depreciation—Vehicles .............. Accounts payable .............................................. Salaries payable................................................. Interest payable ................................................. Notes payable .................................................... L. Eddy, capital .................................................. $19,525

Credit

$ 108 700 500 19 5,000 13,198 $19,525

Taking It Further: Eddy’s Carpet Cleaners will need to record adjusting journal entries every month if it wishes to prepare financial statements each month. Closing entries are done only at the end of the fiscal year.

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PROBLEM 4-6B

(a) GENERAL JOURNAL Date

Account Titles

J2 Debit

Aug. 31 Depreciation Expense ....................... Accumulated Depreciation —Equipment .................................. ($108,000 ÷ 12 years) Accumulated Depreciation —Vehicles ...................................... ($98,000 ÷ 8 years)

21,250

31 Supplies Expense .............................. Supplies ......................................... ($23,400 − $1,500)

21,900

31 Unearned Revenue ............................ Service Revenue............................ ($4,500 − $2,500)

2,000

31 Interest Receivable ............................ Interest Revenue ........................... ($18,000 × 4% × 6/12)

360

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Salaries Expense ............................... Salaries Payable ............................

4-147

Credit

9,000

12,250

21,900

2,000

360

1,850 1,850

Chapter 4

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Seventh Canadian Edition

PROBLEM 4-6B (Continued) (a) (Continued) NAZARI ELECTRICAL SERVICES Adjusted Trial Balance August 31, 2017 Debit Credit Cash.................................................................. $ 13,870 Interest receivable ........................................... 360 Supplies............................................................ 1,500 Debt investments ............................................. 18,000 Equipment ........................................................ 108,000 Accumulated depreciation—equipment......... $ 47,250 * Vehicles ............................................................ 98,000 Accumulated depreciation—vehicles............. 55,125 ** Accounts payable ............................................ 7,115 Salaries payable............................................... 1,850 Unearned revenue ($4,500 − $2,000) .............. 2,500 Notes payable .................................................. 48,000 A. Nazari, capital .............................................. 68,175 A. Nazari, drawings.......................................... 32,400 Service revenue ($180,115 + $2,000) .............. 182,115 720 Interest revenue ($360 + $360) ........................ 21,250 Depreciation expense ...................................... Fuel expense .................................................... 25,235 Insurance expense .......................................... 8,550 Interest expense .............................................. 2,535 Rent expense ................................................... 18,900 Salaries expense ($40,500 + $1,850)............... 42,350 Supplies expense ............................................ 21,900 $412,850 $412,850 * $38,250 + $9,000 = $47,250 ** $42,875 + $12,250 = $55,125

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PROBLEM 4-6B (Continued) (b) Revenues Service revenue........................................... $182,115 Interest ....................................................... 720 $182,835 Expenses Depreciation expense ................................. 21,250 Fuel expense ............................................... 25,235 Insurance expense ...................................... 8,550 Interest expense .......................................... 2,535 Rent expense ............................................... 18,900 Salaries expense ......................................... 42,350 Supplies expense ........................................ 21,900 140,720 Profit ................................................................. $ 42,115 (c) NAZARI ELECTRICAL SERVICES Statement of Owner's Equity Year Ended August 31, 2017 A. Nazari, capital, September 1, 2016..................................$ 65,175 * Add: Investments ............................................... $ 3,000 Profit........................................................ 42,115 45,115 110,290 Less: Drawings................................................................... 32,400 A. Nazari, capital, August 31, 2017..................................... $ 77,890 * $68,175 – $3,000 = $65,175

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PROBLEM 4-6B (Continued) (c)

(Continued) NAZARI ELECTRICAL SERVICES Balance Sheet August 31, 2017 Assets

Current assets Cash ...................................................................................... $ 13,870 Interest receivable................................................................ 360 Supplies .................................................................................. 1,500 Total current assets......................................................... 15,730 Debt investments ...................................................................... 18,000 Property, plant, and equipment Equipment ........................................... $ 108,000 Less: Accumulated depreciation ... 47,250 $ 60,750 Vehicles ........................................... 98,000 Less: Accumulated depreciation ... 55,125 42,875 103,625 Total assets ............................................................. $137,355 Liabilities and Owner's Equity Current liabilities Accounts payable................................................................. $ 7,115 Salaries payable ................................................................... 1,850 Unearned revenue ................................................................ 2,500 Current portion of notes payable .......................................... 8,000 Total current liabilities..................................................... 19,465 Long-term liabilities Notes payable ......................................................................... 40,000 Total liabilities.................................................................. 59,465 Owner's equity A. Nazari, capital ..................................................................... 77,890 Total liabilities and owner's equity .................................. $137,355

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PROBLEM 4-6B (Continued) (d) GENERAL JOURNAL Date

Account Titles

Debit

Credit

Aug. 31 Service Revenue ................................. 182,115 Interest Revenue ................................ 720 Income Summary ..........................

182,835

31 Income Summary ................................ 140,720 Depreciation expense ................... Fuel expense ................................. Insurance expense ........................ Interest expense ............................ Rent expense ................................. Salaries expense ........................... Supplies expense ..........................

21,250 25,235 8,550 2,535 18,900 42,350 21,900

31 Income Summary .................................. 42,115 A. Nazari, Capital ...........................

42,115

31 A. Nazari, Capital ................................... 32,400 A. Nazari, Drawings .......................

32,400

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PROBLEM 4-6B (Continued) (d) (Continued) Clos. Clos.

Clos.

Income Summary 140,720 Clos. 182,835 Bal. 42,115 42,115 Bal. 0 A. Nazari, Capital Bal. 68,175 32,400 Clos. 42,115 Bal. 77,890

A. Nazari, Drawings Bal. 32,400 Clos. 32,400 Bal. 0

The ending balance in the capital account after the closing entries have been posted is $77,890. This is the same as the ending balance on the statement of owner’s equity. Taking It Further: Although the amount of the investment of $3,000 made by the owner A. Nazari was correctly recorded as an increase to the capital account during the year, you will need to know the amount of the transaction in order to show it properly in the statement of owner’s equity. The investment of $3,000 will appear as an addition to the opening balance at September 1, 2016 along with the profit for the year.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-7B (a) (1)

INCORRECT ENTRY

(2)

CORRECT ENTRY

(3)

CORRECTING ENTRY

1. Supplies 5,200 Equipment 5,100 Equipment Accounts Payable 5,200 Accounts Payable 5,100 Accounts Payable Supplies 2. Misc. Expense Cash

2,050

Rent Expense 2,050 Cash

2,050

5,100 100 5,200

Rent Expense 2,050 2,050 Miscellaneous Expense 2,050

3. Cash 1,735 Cash 1,735 Service Revenue 1,735 Service Revenue 1,735 Accounts Receivable 1,735 Accounts Receivable 1,735 4. Cash 575 Accounts Payable Accounts Receivable 575 Cash

5. Salaries Payable Cash

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3,000 Salaries Expense 3,000 Salaries Payable Cash

4-153

575

Accounts Receivable 575 575 Accounts Payable 575 Cash 1,150

2,250 750

Salaries Expense Salaries Payable 3,000

Chapter 4

2,250 2,250

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-7B (Continued) (a) Continued (1) INCORRECT ENTRY

6. Salary Expense Cash 7. No entry

Solutions Manual .

(2) CORRECT ENTRY

(3) CORRECTING ENTRY

1,800 M. Hubert, Drawings 1,800 1,800 Cash 1,800

M. Hubert, Drawings 1,800 Salary Expense 1,800

Depreciation exp. 295 Depreciation expense 295 Accum. Depr.—Equip. 295 Accum. Depr.—Equip. [($12,620 + $5,100) ÷ 5 ÷ 12 = $295]

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PROBLEM 4-7B (Continued) (b) INTERACTIVE COMPUTER INSTALLATIONS Trial Balance March 31, 2017 Debit Cash ($6,680 − $1,150) ....................................... $ 5,530 Accounts receivable ($3,850 − $1,735 + $575).. 2,690 Supplies ($5,900 − $5,200) ................................. 700 Equipment ($12,620 + $5,100)............................ 17,720 Accumulated depreciation ($6,000 + $295)....... Accounts payable ($5,330 – $100 − $575)........ Salaries payable (−$2,250 + $2,250) .................. Unearned revenue .............................................. M. Hubert, capital ............................................... M. Hubert, drawings ($0 + $1,800) ..................... 1,800 Service revenue ($7,800 − $1,735)..................... Depreciation expense ($0 + $295) ..................... 295 Miscellaneous expense ($3,360 − $2,050) ........ 1,310 Rent expense ($0 + $2,050)................................ 2,050 Salaries expense ($4,800 + $2,250 − $1,800) .... 5,250 $37,345

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Credit

$ 6,295 4,655 0 4,955 15,375 6,065

$37,345

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PROBLEM 4-7B (Continued) Taking It Further: Error 6 would have the following effects on the financial statements: Income statement: Salary expense overstated by $1,800 Profit understated by $1,800 Statement of owner’s equity: Drawing understated by $1,800 Profit understated by $1,800 While it is true that M. Hubert’s capital account balance reported on the balance sheet is not affected, other financial statements, including the income statement and the statement of owner’s equity are affected as described above. This error might alarm creditors, for example, who feel that the expenses for salaries are too high. Creditors are also very concerned about how much an owner withdraws from the business.

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PROBLEM 4-8B

Solutions Manual .

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

700

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

700

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

600

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

600

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

350

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

575

Accumulated Depreciation ............... Depreciation Expense ................

1,280

Depreciation Expense....................... Accumulated Depreciation ........

1,820

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

650

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

650

4-157

700

600

350

575

1,280

1,820

650 650

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Accounting Principles, Seventh Canadian Edition

PROBLEM 4-8B (Continued) (b) Continued 6.

Interest Payable ................................ Interest Receivable.....................

750

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

750

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

500

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

500

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

950

J. Fu, Drawings ................................. Cash ............................................

950

750

500

950 950

Taking It Further: The owner’s apartment rental cost is a personal expense and not a business expense. Charging personal expenses to the business as a business expense is unethical and causes the business’ expenses to be overstated and the profit understated. Although J. Fu’s capital account balance remains unaffected, from a tax perspective, the rent expense is not a deductible item and so there would be a violation of the reporting of the business income on the tax return for the owner.

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PROBLEM 4-9B (a) Although not required, the closing entries would be: GENERAL JOURNAL Date

Account Titles

Debit

Credit

Mar. 31 Service Revenue................................. 79,800 Interest Revenue ................................ 400 Income Summary ..........................

80,200

Income Summary .............................. 29,500 Advertising Expense ..................... Depreciation Expense ................... Insurance Expense ........................ Interest Expense ............................ Supplies Expense ..........................

12,000 8,000 4,000 1,800 3,700

Income Summary .............................. 50,700 N. Anderson, Capital .....................

50,700

N. Anderson, Capital ......................... 57,700 N. Anderson, Drawings ................

57,700

Closing

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N. Anderson, Capital Mar. 31, 2016 Sept. 20 Bal. 57,700 Closing Mar. 31, 2017

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32,700 3,800 36,500 50,700 29,500

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PROBLEM 4-9B (Continued) (b) MATRIX CONSULTING SERVICES Balance Sheet March 31, 2017 Assets Current assets Cash............................................................................. $ 3,900 Short-term investments.............................................. 3,000 Accounts receivable ................................................... 4,700 Interest receivable ...................................................... 200 Supplies....................................................................... 2,300 Prepaid insurance ........................................................... 4,400 Total current assets ............................................... 18,500 Long-term Investment Notes receivable ......................................................... 10,000 Property, plant, and equipment Equipment ...................................................... $48,000 Less: Accumulated depreciation ................ 20,000 28,000 Intangible asset Patents ............................................................................. 16,000 Total assets ..........................................................................$72,500 Liabilities and Owner's Equity Current liabilities Accounts payable .......................................................... $ 11,650 Interest payable .......................................................... 150 Unearned revenue ...................................................... 1,200 Current portion of notes payable ................................... 15,000 Total current liabilities ........................................... 28,000 Long-term liabilities Notes payable * ............................................................... 15,000 Total liabilities ........................................................ 43,000 Owner's equity N. Anderson, capital ....................................................... 29,500 Total liabilities and owner's equity ............................ $72,500 *($30,000 – $15,000)

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PROBLEM 4-9B (Continued) (c) March 31, 2017

March 31, 2016

Working Capital

$18,500 − $28,000 = $(9,500)

$30,700 − $15,950 = $14,750

Current Ratio

$18,500 ÷ $28,000 = 0.66:1

$30,700 ÷ $15,950 = 1.92:1

March 31, 2017

March 31, 2016

$11,800* ÷ $28,000 = 0.42:1

$25,500 ÷ $15,950 = 1.60:1

(d)

Acid-test Ratio

*$11,800 = $3,900 + $3,000 + $4,700 + $200

Taking It Further: Working capital has turned negative in 2017, and by a significant amount. This means that there are insufficient current assets to pay off current liabilities. This also explains why the current ratio of 2017 is less than 1. There was a substantial decline in all ratios from 2016 to 2017; indicating a severe weakening in the company’s liquidity from 2016 to 2017.

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PROBLEM 4-10B (a) Amounts in thousands

Cash Current taxes receivable Accounts receivable Acid test assets Inventories Prepaid expense Current assets Acc. payable and accr. liabilities Dividends payable Current taxes payable Cur. portion of long-term debt Current liabilities

Dec. 30, 2014 $1,484 21,2,44713 1,473 5,198 3,813 669 $9,680

Dec. 30, 2013 $2,317 1,353 1,353 3,670 2,983 754 $7,407

Dec. 30, 2012 $4,281 2,358 2,358 6,639 3,892 364 $10,895

$3,583 1,375 0 0 $4,958

$4,100 1,214 1,953 0 $7,267

$3,978 1,214 426 700 $6,318

(b) Amounts in thousands Dec. 30, 2014 Working Capital

Dec. 30, 2013

Dec. 30, 2012

$9,680 – $4,958 $7,407 – $7,267 $10,895 – $6,318 = $4,722 = $140 = $4,577

Current Ratio

$9,680 ÷ $4,958 = 1.95:1

$7,407 ÷ $7,267 = 1.02:1

$10,895 ÷ $6,318 = 1.72:1

Acid-test Ratio

$5,198 ÷ $4,958 = 1.05:1

$3,670 ÷ $7,267 = 0.51:1

$6,639 ÷ $6,318 = 1.05:1

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PROBLEM 4-10B (Continued) (c) The acid-test ratio is a measure of the company’s immediate short-term liquidity. The current ratio is a measure of the short-term debt-paying ability. Finally, working capital is the excess of current assets over current liabilities. If the amount is negative, the term used is working capital deficiency. The amount of working capital was similar in 2014 and 2012 and low at the 2013 year end. The current ratio was close to 2:1 in 2014 and the acid-test ratio was in excess of 1:1 in 2014, after being much lower at the 2013 year end. This demonstrates a liquidity that is considered very strong.

Taking It Further: Any type of business that holds merchandise inventory will always have a larger current ratio than acid-test ratio. Since inventory and prepaid expenses are excluded in the acid-test ratio and all current liabilities are included in both ratios, this will invariably be the result. Since an airline would not have merchandise inventory and Big Rock has substantial amounts of inventory, the difference between the current ratio and the acid-test ratio will be much larger for Big Rock than for WestJet Airlines. This is why a company like Big Rock should not be compared to an airline when using the acid-test ratio.

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*PROBLEM 4-11B

Trial Balance Debit Credit 6,750

EDGE SPORTS REPAIR SHOP Worksheet Year Ended September 30, 2017 Adjusted Trial Income Adjustments Balance Statement Debit Credit Debit Credit Debit Credit 6,750

Account Titles Cash Accounts receivable 11,540 (1) 5,350 16,890 Prepaid insurance 4,140 (2) 2,760 1,380 Supplies 3,780 (3) 3,220 560 Land 55,000 55,000 Building 100,000 100,000 Accum. deprec.— bldg. 19,150 (4) 2,000 21,150 Equipment 40,000 40,000 Accum. deprec.— equip. 11,500 (4) 5,000 16,500 Accounts payable 8,850 8,850 Interest payable (6) 469 469 Salaries payable (5) 1,975 1,975

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Balance Sheet Debit Credit 6,750 16,890 1,380 560 55,000 100,000 21,150 40,000 16,500 8,850 469 1,975

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 4-11B (Continued) Trial Balance

Adjustments

Adjusted Trial Balance

Income Statement

Balance Sheet

Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Unearned revenue 3,300 (7)2,475 825 825 Mortgage payable 125,000 125,000 125,000 R. Brachman, capital 60,000 60,000 60,000 R. Brachman, 103,525 103,525 103,525 drawings Service (1) 5,350 revenue 189,250 (7) 2,475 197,075 197,075 Deprec. expense (4) 7,000 7,000 7,000 Insurance expense (2) 2,760 2,760 2,760 Interest expense 6,302 (6) 469 6,771 6,771 Salaries expense 75,900 (5) 1,975 77,875 77,875 Supplies expense (3) 3,220 3,220 3,220 Utilities expense 10,113 10,113 10,113 Totals 417,050 417,050 23,249 23,249 431,844 431,844 107,739 197,075 324,105 234,769 Profit 89,336 89,336 Totals 197,075 197,075 324,105 324,105 Taking It Further: Adjusting entries must be recorded in a journal and posted to the general ledger. Otherwise the account balances will not agree with the financial statements.

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*PROBLEM 4-12B

Trial Balance Debit Credit 13,870

NAZARI ELECTRICAL SERVICES Worksheet Year Ended August 30, 2017 Adjusted Trial Income Adjustments Balance Statement Debit Credit Debit Credit Debit Credit 13,870

Account Titles Cash Interest receivable (4) 360 360 Supplies 23,400 (2)21,900 1,500 Debt investments 18,000 18,000 Equipment 108,000 108,000 Accum. deprec.— equipment 38,250 (1) 9,000 47,250 Vehicle 98,000 98,000 Accum.deprec.— vehicle 42,875 (1)12,250 55,125 Accounts payable 7,115 7,115 Salaries payable (5)1,850 1,850 Unearned revenue 4,500 (3)2,000 2,500

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Balance Sheet Debit Credit 13,870 360 1,500 18,000 108,000 47,250 98,000 55,125 7,115 1,850 2,500

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 4-12B (Continued)

Account Titles Notes payable A. Nazari, capital A. Nazari, drawings Service revenue Interest revenue Deprec. exp. Fuel exp. Insurance exp. Interest exp. Rent exp. Salaries exp. Supplies exp. Totals Profit Totals

Solutions Manual .

Trial Balance

Adjustments

Adjusted Trial Balance

Debit

Credit

48,000 68,175

Credit

Income Statement Debit

Credit

Balance Sheet Debit

48,000 68,175

32,400

48,000 68,175

32,400 180,115 360

(3)2,000 (4) 360

Credit

32,400 182,115 720

(1)21,250

182,115 720

21,250 21,250 25,235 25,235 25,235 8,550 8,550 8,550 2,535 2,535 2,535 18,900 18,900 18,900 40,500 (5) 1,850 42,350 42,350 (2)21,900 21,900 21,900 389,390 389,390 47,360 47,360 412,850 412,850 140,720 182,835 272,130 230,015 42,115 42,115 182,835 182,835 272,130 272,130

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* PROBLEM 4-12B (Continued) Taking It Further: The preparation of the work sheet is optional because it is not part of the company’s books. It is a tool for accountants to use in the preparation of financial statements. Since all of the adjustments recorded on the work sheet ultimately get recorded in the general ledger, the preparation of the work sheet is not absolutely necessary. Adjusting entries can be posted as they are recorded in the journal to arrive at the adjusted trial balance and financial statements.

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*PROBLEM 4-13B

(b) GENERAL JOURNAL Date

Account Titles

Debit

Oct. 31 Interest Receivable............................. Interest Revenue ............................ ($60,000 × 3.75% × 6/12) 31

1,125 1,125

Salaries Expense ................................ Salaries Payable ............................

3,200

31 Interest Expense................................. Interest Payable ............................. ($90,000 × 5% × 2/12)

750

31 Depreciation Expense ........................ Accumulated Depreciation ...........

5,500

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Credit

3,200

750

5,500

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*PROBLEM 4-13B (Continued) (a) and (b) Interest Receivable Oct. 31 1,125 Bal. 1,125 Salaries Payable Oct. 31

Bal.

3,200

Interest Payable Oct. 31 Bal.

Interest Revenue Oct. 31 1,125 Bal. 1,125

750 750

Accumulated Depreciation Oct. 31 16,500

Bal.

5,500 22,000

Salaries Expense Oct. 31 156,000 3,200 Bal. 159,200 Interest Expense Oct. 31 3,750 750 Bal. 4,500 Depreciation Expense Oct. 31 5,500 Bal.

5,500

Account Titles

Debit

Credit

Oct. 31 Interest Revenue ..................................... 1,125 Income Summary ...........................

1,125

31 Income Summary................................ 169,200 Depreciation expense .................... Interest expense ............................ Salaries expense............................

5,500 4,500 159,200

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*PROBLEM 4-13B (Continued) (c) (Continued) Interest Receivable Oct. 31 1,125 Bal. 1,125

Salaries Payable Oct. 31 Bal.

3,200 3,200

Interest Payable Oct. 31 Bal.

Interest Revenue Oct. 31 1,125 Clos. 1,125 Bal. 1,125 Bal. 0

750 750

Accumulated Depreciation Oct. 31 16,500

Bal.

5,500 22,000

Salaries Expense Oct. 31 156,000 3,200 Bal. 159,200 Clos. 159,200 Bal. 0 Interest Expense Oct. 31 3,750 750 Bal. 4,500 Clos. 4,500 Bal. 0 Depreciation Expense Oct. 31 5,500 Bal. Bal.

5,500 Clos. 0

5,500

(d) GENERAL JOURNAL Date Nov.

Account Titles Debit 1 Interest Revenue ................................ 1,125 Interest Receivable ........................ 1

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Salaries Payable ................................. Salaries Expense ...........................

3,200

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

750

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Credit 1,125

3,200 750

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*PROBLEM 4-13B (Continued) (d) (Continued) Interest Receivable Oct. 31 1,125 Bal. 1,125 Rev. 1,125

Interest Revenue Oct. 31 1,125 Clos. 1,125 Bal. 0

Bal.

Rev.

0 Salaries Payable Oct. 31

Rev.

3,200

3,200 Bal.

Interest Payable Oct. 31 Rev.

750

750 Bal.

1,125

Salaries Expense Oct. 31 156,000 2,400 Bal. 159,200 Clos. 159,200 Bal. 0 Rev. 3,200 Interest Expense Oct. 31 3,750 750 Bal. 4,500 Clos. 4,500 Bal. 0 Rev. 750

(e) GENERAL JOURNAL Date Nov.

Dec.

Account Titles

Debit

Cash .................................................... Interest Revenue ............................

1,125

6 Salaries Expense ................................ Cash................................................

6,000

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

1,125

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Credit

1,125

6,000 1,125

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*PROBLEM 4-13B (Continued) (e) (Continued) Interest Receivable Oct. 31 1,125 Bal. 1,125 Rev. 1,125

Interest Revenue Oct. 31 1,125 Clos. 1,125 Bal. 0

Bal.

Rev.

Salaries Payable Oct. 31 Rev.

3,200

3,200 Bal.

Interest Payable Sept. 30 Rev.

750

750 Bal.

1,125 Nov. 1 Bal.

1,125 0

Salaries Expense Oct. 31 156,000 3,200 Bal. 159,200 Clos. 159,200 Bal. 0 Rev. 3,200 Nov. 6 6,000 Bal. 2,800 Interest Expense Oct. 31 3,750 750 Bal. 4,500 Clos. 4,500 Bal. 0 Rev. 750 Dec. 1 1,125 Bal. 375

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*PROBLEM 4-14B (a) Apr. 30

Accounts Receivable ............................. Fees Earned .......................................

1,550

30 Supplies Expense ($4,270 – $880)......... Supplies..............................................

3,390

30 Depreciation Expense ($130,000 ÷ 10) .. Accumulated Depreciation —Equipment.......................................

13,000

Salaries Expense .................................... Salaries Payable ................................

2,150

30 Interest Expense ($90,000 × 4.5% × 1/12) Interest Payable .................................

338

Unearned Revenue ................................. Fees Earned .......................................

565

Fees Earned ............................................ Accounts Receivable .........................

1,550

Salaries Payable ..................................... Salaries Expense ...............................

2,150

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

338

1,550

3,390

13,000

2,150

338

565

(b) May

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1,550

2,150 338

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*PROBLEM 4-14B (Continued) (c) May

1 Interest Expense ($90,000 × 4.5% × 1/12) Cash....................................................

338

8 Salaries Expense ................................... Cash....................................................

4,300

Cash ($2,750 + $1,550) ........................... Fees Earned .......................................

4,300

1 Interest Payable ($90,000 × 4.5% × 1/12) Cash....................................................

338

4,300

(d) May

338

Salaries Expense .................................... Salaries Payable ..................................... Cash....................................................

2,150 2,150

Cash ........................................................ Accounts Receivable ......................... Fees Earned .......................................

4,300

4,300 1,550 2,750

Taking It Further: Reversing entries should only be used for adjusting journal entries that are accruals: accrued revenues and accrued expenses. Reversing adjusting entries other than accruals would not provide the objective achieved through their use.

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CUMULATIVE COVERAGE–CHAPTERS 2 TO 4 (b) GENERAL JOURNAL Date

Account Titles

Debit

Sept. 1 Cash .................................................... Notes Payable ................................ 2

10,000 10,000

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

500

8 Salaries Expense ................................ Cash................................................

1,050

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

1,500

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

5,700

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

1,300

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

2,300

21 Telephone Expense............................ Cash................................................

200

22 Salaries Expense ................................ Cash................................................

1,050

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

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Credit

500

1,050

1,500

5,700

1,300

2,300

200

1,050 900 900

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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (b) (Continued) Sept. 29 Cash .................................................... Unearned Revenue ........................

550

30 J. Alou, Drawings ............................... Cash................................................

800

550 800

(a), (c), (e), and (h)

Aug. 31 Sept. 1

Sept. 12 Sept. 15

Sept. 29 Bal.

Aug. 31 Sept. 27 Bal. Aug. 31 Sept. 17 Bal. Bal.

Solutions Manual .

Cash 2,790 10,000 Sept. 2 Sept. 8 1,500 5,700 Sept. 20 Sept. 21 Sept. 22 550 Sept. 30 14,640 Accounts Receivable 7,910 Sept. 12 900 7,310 Supplies 8,500 1,300 9,800 Sept. 30 1,000

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500 1,050

2,300 200 1,050 800

1,500

8,800

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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (a), (c), (e), and (h) (Continued)

Aug. 31

Equipment 9,000

Accumulated Depreciation—Equipment Aug. 31 1,800 Sept. 30 1,800 Bal. 3,600

Sept. 20

Sept. 30

Solutions Manual .

Accounts Payable Aug. 31 Sept. 17 2,300 Bal. Unearned Revenue Aug. 31 Sept. 29 Bal. 500 Bal.

3,100 1,300 2,100

400 550 950 450

Salaries Payable Sept. 30

630

Interest Payable Sept. 30

Notes Payable Sept. 1

10,000

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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (a), (c), (e), and (h) (Continued)

Clos

Aug. 31 Sept. 30 Bal. Bal.

Clos 30 Clos

Clos

Aug. 31 Sept. 2 Bal. Bal.

Solutions Manual .

J. Alou, Capital Aug. 31 Clos. 30 16,400 Bal. J. Alou, Drawings 15,600 800 16,400 Clos 0 Income Summary 46,372 Clos 10,328 Bal. Service Revenue Aug. 31 Sept. 15 Sept. 27 Bal. Sept. 30 56,700 Bal. Bal. Rent Expense 5,500 500 6,000 Clos 0

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21,200 10,328 15,128

16,400

56,700 0

49,600 5,700 900 56,200 500 56,700 0

6,000

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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (a), (c), (e), and (h) (Continued) Aug. 31 Sept. 8 Sept. 22 Bal. Sept. 30 Bal. Bal.

Salaries Expense 24,570 1,050 1,050 26,670 630 27,300 Clos 0

Aug. 31 Sept. 21 Bal. Bal.

Telephone Expense 2,230 200 2,430 Clos 0

Sept. 30 Bal.

Supplies Expense 8,800 Clos 0

8,800

Sept. 30 Bal.

Depreciation Expense 1,800 Clos 0

1,800

Sept. 30 Bal.

Interest Expense 42 Clos 0

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27,300

2,430

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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (d) ALOU EQUIPMENT REPAIR Unadjusted Trial Balance September 30, 2017 Debit Cash ....................................................................$ 14,640 Accounts receivable .......................................... 7,310 Supplies .............................................................. 9,800 Equipment........................................................... 9,000 Accumulated depreciation—equipment ........... Accounts payable............................................... Unearned revenue .............................................. Notes payable ..................................................... J. Alou, capital .................................................... J. Alou, drawings................................................ 16,400 Service revenue.................................................. Rent expense ...................................................... 6,000 Salaries expense ................................................ 26,670 Telephone expense ............................................ 2,430 Totals .............................................................. $92,250

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Credit

$ 1,800 2,100 950 10,000 21,200 56,200

$92,250

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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (e) GENERAL JOURNAL Date

Account Titles

Debit

Sept. 30 Supplies Expense............................... Supplies.......................................... ($9,800 – $1,000) 30

8,800 8,800

Salaries Expense ................................ Salaries Payable ............................

630

30 Depreciation Expense ........................ Accumulated Depreciation —Equipment................................... ($9,000 ÷ 5 years)

1,800

30 Unearned Revenue ............................. Service Revenue ............................ ($950 – $450)

500

30 Interest Expense................................. Interest Payable ............................. ($10,000 × 5% × 1/12)

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Credit

630

1,800

500

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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (f) ALOU EQUIPMENT REPAIR Adjusted Trial Balance September 30, 2017 Debit Cash .................................................................... $14,640 Accounts receivable .......................................... 7,310 Supplies .............................................................. 1,000 Equipment........................................................... 9,000 Accumulated depreciation—equipment ........... Accounts payable............................................... Unearned revenue .............................................. Salaries payable ................................................. Interest payable .................................................. Notes payable ..................................................... J. Alou, capital .................................................... J. Alou, drawings................................................ 16,400 Service revenue.................................................. Depreciation expense ........................................ 1,800 Interest expense ................................................. 42 Rent expense ...................................................... 6,000 Salaries expense ................................................ 27,300 Supplies expense ............................................... 8,800 Telephone expense ............................................ 2,430 Totals .............................................................. $94,722

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Credit

$ 3,600 2,100 450 630 42 10,000 21,200 56,700

$94,722

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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (g) ALOU EQUIPMENT REPAIR Income Statement Year Ended September 30, 2017 Revenues Service revenue .............................................................. $56,700 Expenses Salaries expense ............................................ $27,300 Supplies expense .......................................... 8,800 Rent expense ................................................. 6,000 Telephone expense ....................................... 2,430 Depreciation expense.................................... 1,800 Interest expense............................................. 42 46,372 Total expenses ....................................................... Profit................................................................................. $10,328

ALOU EQUIPMENT REPAIR Statement of Owner's Equity Year Ended September 30, 2017 J. Alou, capital, Oct. 1, 2016 ........................................ Add: Profit................................................................... Less: Drawings............................................................ J. Alou, capital, Sept. 30, 2017 ....................................

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$21,200 10,328 31,528 16,400 $15,128

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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (g) (Continued) ALOU EQUIPMENT REPAIR Balance Sheet September 30, 2017 Assets Current assets Cash............................................................................. Accounts receivable ................................................... Supplies....................................................................... Total current assets ............................................... Pr operty, plant, and equipment Equipment ........................................................ $9,000 Less: Accumulated depreciation ................... 3,600 Total assets ............................................................

$14,640 7,310 1,000 22,950

5,400 $28,350

Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... Salaries payable.......................................................... Interest payable .......................................................... Unearned revenue ...................................................... Total current liabilities ........................................... Long-term liabilities Notes payable ............................................................. Total liabilities ................................................................. Owner's equity J. Alou, capital ............................................................ Total liabilities and owner's equity .......................

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$ 2,100 630 42 450 3,222 10,000 13,222 15,128 $28,350

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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (h) GENERAL JOURNAL

Date

Account Titles

Debit

Credit

Sept. 30

Service Revenue................................. 56,700 Income Summary ...........................

56,700

Income Summary ............................... 46,372 Rent Expense ................................. Salaries Expense ........................... Telephone Expense ....................... Depreciation Expense .................. Supplies Expense .......................... Interest Expense ............................

6,000 27,300 2,430 1,800 8,800 42

Income Summary ............................... 10,328 J. Alou, Capital ...............................

10,328

J. Alou, Capital ................................... 16,400 J. Alou, Drawings...........................

16,400

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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (i) ALOU EQUIPMENT REPAIR Post-Closing Trial Balance September 30, 2017 Debit Cash .................................................................... $14,640 Accounts receivable .......................................... 7,310 Supplies .............................................................. 1,000 Equipment........................................................... 9,000 Accumulated depreciation—equipment ........... Accounts payable............................................... Interest payable .................................................. Notes payable ..................................................... Salaries payable ................................................. Unearned revenue .............................................. J. Alou, capital .................................................... $31,950

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Credit

$ 3,600 2,100 42 10,000 630 450 15,128 $31,950

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BYP4-1 FINANCIAL REPORTING PROBLEM

(a)

Corus’ balance sheet (statement of financial position) is classified based on the liquidity of the assets and liabilities. Classifications include current and non-current assets, current and non-current liabilities, and shareholders’ equity.

(b) The current assets are listed in the order of liquidity. Within the non-current assets, investments and long-term receivables are shown first, followed by tangible long-term assets and intangible assets making up the majority of the assets. Second to last listed is goodwill followed by deferred tax assets.

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BYP4-1 (Continued) (c), (d), and (e) (Amounts in thousands) Working Capital Current ratio

Acid-test ratio

Working Capital Current ratio

Acid-test ratio

2014 $217,394 –

$175,725

$217,394 $175,725 $11,585 + $183,009 +$9,768 $175,725

2013 $310,070 –

$168,384

$310,070 $168,384 $81,266 + $164,302 + $351 $168,384

$41,669

1.24 : 1

1.16 : 1

$141,686

1.84 : 1

1.46 : 1

The working capital and the current and acid-test ratios show a weakening trend in Corus’ liquidity.

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BYP 4-2 INTERPRETING FINANCIAL STATEMENTS (a) When comparing the liquidity position in fiscal year 2011 and 2015, one can conclude that The Gap’s liquidity position has improved, but only slightly. Working capital and the current ratio both provide a good indication of liquidity. Working capital provides more information in that it provides the dollar value. The change in the liquidity during the period could be explained by general economic conditions or by opening or closing of stores. (b) Creditors lend money to companies with the expectation that they will be repaid at a specified point in time in the future. In 2011 to 2015, the current ratio was somewhat comfortable, in spite of exceeding 2:1 only once. Liquidity remains strong. Accordingly, the Gap’s creditors will not likely be concerned about its liquidity. Creditors generally look at the performance of other retailers in the industry before becoming alarmed.

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BYP4-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

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BYP4-4 COMMUNICATION ACTIVITY MEMO To:

Friend

From:

A. Student

Re:

Steps in the Accounting Cycle

The required steps in the accounting cycle, in the order in which they should be completed, are: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Analyze business transactions. Journalize the transactions. Post to the ledger accounts. Prepare a trial balance. Journalize and post the adjusting entries. Prepare an adjusted trial balance. Prepare the financial statements. Journalize and post the closing entries. Prepare a post-closing trial balance.

The optional steps in the accounting cycle include preparing a work sheet and preparing reversing entries. If a work sheet is prepared, it is done after step 3 above, and it includes steps 4 and 6. The work sheet is a form used to make it easier to prepare the adjusting entries and financial statements. If reversing entries are prepared, they are journalized and posted after step 9, at the beginning of the next accounting period. A reversing entry is the exact opposite of a previously recorded adjusting entry, and simplifies the recording of subsequent transactions.

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BYP4-5 “ALL ABOUT YOU” ACTIVITY Answers will vary depending on students’ circumstances.

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BYP4-6 Santé Smoothie Saga (a) SANTÉ SMOOTHIES Income Statement Two Months Ended May 31, 2017

Revenue ..............................................................

$ 1,225

Expenses $ 325 Advertising expense...................................... Depreciation expense.................................... 66 Interest expense ............................................ 11 Salaries expense............................................ 48 Supplies expense .......................................... 211 Telephone expense ....................................... 174 Total expenses ....................................................... Profit.................................................................................

835 $ 390

(b) SANTÉ SMOOTHIES Statement of Owner's Equity Two Months Ended May 31, 2017 N. Koebel, capital, April 1 ............................................... Add: Investments .......................................................... Profit ..................................................................... Less: Drawings............................................................... N. Koebel, capital, May 31...............................................

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0 1,725 390 2,115 0 $2,115

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BY4-6 (Continued) (b) (Continued) SANTÉ SMOOTHIES Balance Sheet May 31, 2017

Assets Current assets Cash............................................................................. Accounts receivable ................................................... Supplies....................................................................... Total current assets ............................................... Pr operty, plant, and equipment Equipment ........................................................ $1,550 Less: Accumulated depreciation .................... 66 Total assets ...............................................

$3,060 675 95 3,830

1,484 $5,314

Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... Interest payable .......................................................... Unearned revenue ...................................................... Notes payable ............................................................. Total current liabilities ........................................... Owner's equity N. Koebel, capital ........................................................ Total liabilities and owner's equity .......................

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88 11 100 3,000 3,199

2,115 $5,314

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BY4-6 (Continued) (c) 1. Working Capital = 2.

Current Ratio

$3,830 –

$3,199

$3,830

$ 631

1.20:1

1.17:1

$3,199 3.

Acid-test ratio =

$3,060 + $675 $3,199

Santé Smoothie’s liquidity at May 31, 2017 is moderately strong. Current assets are adequate to cover current liabilities.

(d) 2017 May 31

Solutions Manual .

Revenue ............................................. Income Summary ..........................

1,225

Income Summary .............................. Advertising Expense .................... Depreciation Expense .................. Interest Expense ........................... Salaries Expense .......................... Supplies Expense ......................... Telephone Expense ......................

835

Income Summary .............................. N. Koebel, Capital .........................

390

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1,225 325 66 11 48 211 174 390

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BY4-6 (Continued) (e) SANTÉ SMOOTHIES Post-Closing Trial Balance May 31, 2017 Account Cash .................................................................... Accounts receivable .......................................... Supplies .............................................................. Equipment........................................................... Accumulated depreciation—equipment ........... Accounts payable............................................... Interest payable .................................................. Unearned revenue .............................................. Notes payable ..................................................... N. Koebel, capital ...............................................

Debit $3,060 675 95 1,550

Credit

$5,380

66 88 11 100 3,000 2,115 $5,380

(f) Ignoring the effects of depreciation expense, not correcting the error would have resulted in the expenses being overstated by $725. Profit would be understated by $725. Assets and N. Koebel’s capital would be understated by $725.

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CHAPTER 5 Accounting for Merchandising Operations ASSIGNMENT CLASSIFICATION TABLE Learning Objectives 1. Describe the differences between service and merchandising companies. 2. Prepare entries for purchases under a perpetual inventory system. 3. Prepare entries for sales under a perpetual inventory system. 4. Perform the steps in the accounting cycle for a merchandising company. 5. Prepare single-step and multiple-step income statements. 6. Calculate the gross profit margin and profit margin.

Questions 1, 2, 3, 4

*7. Prepare the entries for purchases and sales under a periodic inventory system and calculate cost of goods sold (Appendix 5A)

Brief Exercises 1, 2

Exercises 1, 2, 5, 6

Problems Set A 1

Problems Set B 1

5, 6, 7, 8, 9, 11, 12

3, 4, 5,

2, 3, 5, 6, 7

2, 3, 4, 5

7, 10, 11, 12, 13, 14

6, 7, 8

2, 4, 5, 6, 7

2, 3, 4, 5

15, 16, 17

9, 10

2, 8, 10

6, 7

18, 19, 20, 21,

11, 12

2, 9, 10, 11

5, 6, 7

22, 23

2, 11, 12

6, 8

*24, *25, *26

* 14, *15, *16

*13, *14, *15, *16

*9, *10, *11, *12, *13

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

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Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Identify problems and recommend inventory system.

Moderate

20-30

Record and post inventory transactions – perpetual system. Record inventory transactions– perpetual system.

Moderate

30-40

Moderate

20-30

Record inventory transactions and post to inventory account – perpetual system.

Moderate

30-40

Record and post inventory transactions – perpetual system. Prepare partial income statement.

Moderate

50-60

Prepare adjusting and closing entries and single-step income statement – perpetual system. Calculate ratios.

Moderate

40-50

Prepare adjusting and closing entries and financial statements – perpetual system.

Moderate

50-60

Calculate ratios and comment.

Moderate

20-25

*9A

Record inventory transactions – periodic system.

Moderate

30-40

*10A

Record inventory transactions – periodic system.

Moderate

30-40

*11A

Record and post inventory transactions – periodic system. Prepare partial income statement.

Moderate

60-70

*12A

Prepare correct multiple-step income statement, statement of owner’s equity and classified balance sheet – periodic system.

Moderate

60-70

*13A

Prepare financial statements and closing entries – periodic system.

Moderate

60-70

Identify problems and recommend inventory system.

Moderate

20-30

Record and post inventory transactions – perpetual system.

Moderate

30-40

Record inventory transactions – perpetual system.

Moderate

20-30

Record inventory transactions and post to inventory account – perpetual system.

Moderate

30-40

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Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Time Allotted (min.)

Record and post inventory transactions – perpetual system. Prepare partial income statement.

Moderate

50-60

Prepare adjusting and closing entries and single-step income statement – perpetual system. Calculate ratios.

Moderate

40-50

Prepare adjusting and closing entries, single-step and multiple step income statements – perpetual system.

Moderate

50-60

Calculate ratios and comment.

Moderate

20-25

*9B

Record inventory transactions – periodic system.

Moderate

30-40

*10B

Record inventory transactions – periodic system.

Moderate

30-40

*11B

Record and post inventory transactions – periodic system. Prepare partial income statement.

Moderate

60-70

*12B

Prepare correct multiple-step income statement, statement of owner’s equity and classified balance sheet – periodic system.

Moderate

60-70

*13B

Prepare financial statements and closing entries – periodic system.

Moderate

60-70

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Difficulty Level

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Chapter 5

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Accounting Principles, Seventh Canadian Edition

BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material

Learning Objective Describe the differences between service and merchandising companies.

Knowledge E5-2

Comprehension Q5-1 Q5-2 Q5-3 Q5-4 E5-1 P5-1A P5-1B Q5-6 Q5-7 Q5-9 Q5-11 BE5-3

Prepare entries for purchases under a perpetual inventory system.

Q5-5 Q5-8 E5-2

Prepare entries for sales under a perpetual inventory system.

Q5-12 E5-2

Q5-7 Q5-10 Q5-11 Q5-13 Q5-14 BE5-6

Perform the steps in the accounting cycle for a merchandising company.

E5-2 Q5-17

Q5-15 Q5-16

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Application BE5-1 BE5-2 E5-5 E5-6

Analysis

Synthesis

Evaluation

BE5-4 BE5-5 E5-3 E5-5 E5-6 E5-7 P5-2A P5-3A P5-4A P5-5A P5-2B P5-3B P5-4B P5-5B BE5-7 BE5-8 E5-4 E5-5 E5-6 E5-7 P5-2A P5-3A P5-4A P5-5A P5-2B P5-3B P5-4B P5-5B BE5-9 BE5-10 E5-6 E5-7 E5-8 E5-10 P5-6A P5-7A P5-6B P5-7B

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Accounting Principles, Seventh Canadian Edition

BLOOM’S TAXONOMY TABLE (Continued)

Learning Objective Prepare single-step and multiple-step income statements.

Knowledge Q5-18 Q5-19 E5-2

Comprehension Q5-20 Q5-21

Calculate the gross profit margin and profit margin.

E5-2

Q5-22

*7.

Prepare the entries for purchases and sales under a periodic inventory system and calculate cost of goods sold (Appendix 5A)

*Q5-24 *Q5-25

*Q5-26

Application BE5-11 BE5-12 E5-9 E5-10 E5-11 P5-5A P5-6A P5-7A P5-5B P5-6B P5-7B Q5-23 BE5-13 BE5-14 E5-11 P5-6A P5-6B *BE5-14 *BE5-15 *BE5-16 *E5-13 *E5-14 *E5-15 *E5-16 *P5-9A *P5-10A *P5-11A *P5-12A *P5-13A *P5-9B *P5-10B *P5-11B *P5-12B *P5-13B Santé Smoothie Saga Cumulative Coverage Chapters 2-5 BYP5-3

Broadening Your Perspective

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Analysis

Synthesis

Evaluation

E5-12 P5-8A P5-8B

BYP5-1 BYP5-2

BYP5-4 BYP5-5

Chapter 5

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Accounting Principles, Seventh Canadian Edition

ANSWERS TO QUESTIONS 1.

Profit for a merchandising company is determined principally by the gross profit created by the difference between sales revenue and cost of goods sold. Service companies will have service revenue or service fees earned as their primary source of revenue. Service companies do not have an expense comparable to cost of goods sold. Both types of companies will have operating expenses such as advertising expense, depreciation expense, insurance expense, rent expense, and salaries expense.

A “perpetual” inventory system reflects changes for inventory purchases and sales on a “perpetual” or continuous basis. The company keeps detailed records of quantity and cost of inventory on hand for every item. When inventory is sold, the cost of goods sold is recorded as part of the sale transaction and the Merchandise Inventory account is decreased. A “periodic” inventory system does not keep detailed records of inventory on hand throughout the period. Cost of goods sold and ending inventory are determined at the end of the “period”, usually by an inventory count. When inventory is sold, the cost of goods sold is not recorded and the Merchandise Inventory account is not decreased.

A physical count is an important control feature. With a perpetual inventory system a company knows what should be on hand, but there still could be errors in the record keeping or shortages in stock. By performing a physical count and comparing it to the perpetual inventory records, an error or shortage can be detected. If an error or shortage is found, it is important to adjust the accounting records to reflect actual quantities on hand.

The benefits of the perpetual inventory system are that it continuously— perpetually—shows the quantity and cost of the inventory purchased, sold, and on hand. Under a perpetual inventory system, the cost of goods sold and reduction in inventory are recorded each time a sale occurs. A perpetual inventory system gives stronger internal control over inventories compared with a periodic system. Another benefit of a perpetual inventory system is that it makes it easier to answer questions from customers about merchandise availability. Management can also maintain optimum inventory levels and avoid running out of stock. In a periodic system the number of items on hand cannot be determined without physically examining the inventory. A perpetual inventory system requires more record keeping and therefore is more expensive to use than a periodic system. For example, a perpetual inventory system usually requires an investment in a point-ofsale system that is integrated with the inventory system. In a periodic system, this not required.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 5.

A subsidiary ledger is a group of accounts that share a common characteristic (for example, all inventory accounts). The subsidiary ledger frees the general ledger from the details of individual balances. In addition to having one for inventory, it is very common to have subsidiary ledgers for accounts receivable (to track individual customer balances), accounts payable (to track individual creditor balances), and payroll (to track individual employee pay records).

Disagree. Sales taxes include the federal Goods and Services Tax (GST), the Provincial Sales Tax (PST), and the Harmonized Sales Tax (HST) (which is a combination of GST and PST). GST and HST are paid by merchandising companies on inventory purchases. Companies conducting business in provinces that are subject to PST do not pay PST on merchandise purchased for resale. PST is paid by the final customer only.

The letters FOB mean free on board. FOB shipping point means that the goods are placed on a carrier (such as a truck or train) by the seller, and the buyer pays the freight costs. Ownership transfers to the buyer as soon as the goods are placed on the carrier. FOB destination means that the goods are shipped to the buyer’s place of business, and the seller pays the freight. Ownership transfers to the buyers when the goods are delivered to the buyer’s place of business. Freight costs paid on inventory purchases are added to the cost of the inventory. Freight costs paid on sales are recorded as an expense such as Freight Out or Delivery Expense.

Purchase returns occur when goods purchased for resale are returned to a supplier. If the merchandise does not correspond to what was ordered or the quantity shipped is in excess of quantities ordered, goods are shipped back to the supplier for credit. In this case, the Merchandise Inventory account is reduced (credited) and the Accounts Payable account is reduced (debited) for the cost amount of the goods returned. In the case of a purchase allowance, the merchandise is not returned. Purchase allowances are granted by suppliers when the product has some defect or deficiency when received by the buyer. An amount is negotiated to reduce the purchase price of the goods and an allowance is granted by the supplier. In this case the Merchandise Inventory account is reduced (credited) and the Accounts Payable account is reduced (debited) for the reduction in the purchase price.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 9.

Fukushima Company should take advantage of the discount offered. The bank rate of 7.25% is an annual rate which is equivalent to 0.4% for 20 days (7.25% × 20/365). Since 0.4% cost of borrowing is less than 1% saved by paying 10 days after the purchase—20 days before the final due date—it is advantageous to borrow and pay within the discount period. Another way to explain the advantage is to convert the discount to an annual rate. In order to obtain the 1% discount the company must pay 20 days ahead of the final due date (30 days – 10 days = 20 days). The effective annual interest rate of doing this is 18.25% (1% × 365/20). Since the 18.25% savings is greater than the 7.25% rate on the bank loan, the company should borrow from the bank and take advantage of the discount.

10. The company needs to record a credit to Sales for $75 and to debit Cost of Goods Sold for $50 instead of the $25 credit to Gross Profit. Recording the sales and cost of goods sold in separate accounts allows the company and users of financial information to do ratio analysis to measure the company’s profitability and it allows management to analyze trends and variances in both revenues and expenses separately. A debit will also be recorded for $75 of cash received and a credit will be recorded for $50 of inventory that was sold. 11. A quantity discount gives a reduction in price according to the volume of the purchase—in other words, the larger the number of items purchased, the larger the discount. Quantity discounts are not the same as purchase discounts, which are offered to customers for early payment of the balance due. Purchase discounts are noted on the invoice by the use of credit terms that specify the amount and time period for the purchase discount. Quantity discounts are not recorded or accounted for separately, whereas purchase discounts are recorded separately. When an invoice is paid within the discount period, the Merchandise Inventory account will be reduced by the amount of the discount because inventory is recorded at cost. By paying within the discount period, a company reduces the cost of its inventory. A sales discount is the counterpart of the purchase discount. A purchase discount is a discount taken by the purchaser, and a sales discount is the discount offered by the seller. When the invoice is paid within the discount period, the discount is recorded in a separate contra revenue account called Sales Discount.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 12.

By using separate sales accounts for major product lines, management can monitor sales trends more closely and respond more strategically to changes in sales patterns and manage inventory. For example, a car dealership that sells cars and car parts would want to be able to track car sales separately from parts sales. This would allow managing these two segments of the business separately and possibly apply different strategies to increase sales. For internal reporting purposes the sales amounts would be reported separately as it is meaningful to managers in both segments of the business. For distribution of information to outsiders, sales would be grouped into a single amount. This ensures that the financial information is simple and easy to understand. It also protects the business from revealing detailed information that could be used against it if the information fell into the hands of competitors.

13.

Disagree with Geoff’s advice. Sales returns are not debited directly to the Sales account because this would not provide information on the amount of sales returns and allowances. This information is important to management as it may suggest inferior merchandise, errors in billing, or incorrect sales techniques. Debiting returns directly to sales may also cause problems in comparing sales for different periods. Geoff may be suggesting this to hide the volume of returns associated with his sales if many of the sales returns are from his customers. Raymond should record the sales returns in a separate contra account in order to have better information to manage the company.

14.

A sales allowance occurs when the buyer keeps the merchandise, but the sales price is adjusted. This may happen because the purchaser is dissatisfied because the goods are damaged, of inferior quality, or do not meet the purchaser’s specifications. Since the goods are not returned, the Merchandise Inventory account cannot be debited. The transaction is recorded as a reduction to Accounts Receivable or Cash and a debit to Sales Returns and Allowances. When goods are returned and are in saleable condition, they are available to be resold to another customer. A journal entry will debit Merchandise Inventory and credit Cost of Goods Sold for the same amount as the original cost of the inventory. If the goods are damaged and cannot be resold, the transaction is recorded in the same way as a sales allowance; there is no entry to Merchandise Inventory or Cost of Goods Sold. Since the items are damaged they do not represent assets to the company and cannot be returned to the Merchandise Inventory account.

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Chapter 5

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 15.

Disagree. The steps in the accounting cycle are the same for both a merchandising company and a service enterprise. The types of transactions are different, but the steps in the accounting cycle are the same.

16.

This difference could be the result of errors in the perpetual inventory records, or because of errors in the annual physical inventory count. An adjustment at the end of the period will be necessary to correctly reflect the actual inventory on hand at year end. If the dollar value of actual inventory on hand is greater than what is reflected in the perpetual inventory records, the difference will be an increase (debit) to Merchandise Inventory and a decrease (credit) to Cost of Goods Sold.

17.

The additional accounts that must be closed for a merchandising company using a perpetual inventory system are Sales, Sales Returns and Allowances, Sales Discounts, Cost of Goods Sold, and Freight Out. The Sales account is debited to close it to the Income Summary account. The remaining accounts have normal debit balances and are credited when closed to Income Summary.

18.

The single-step income statement differs from the multiple-step income statement in that (1) all data are classified into two categories: revenues and expenses; and (2) only one step, subtracting total expenses from total revenues, is required in determining profit (or loss). A multiple step income statement includes three main steps: (1) cost of goods sold is subtracted from sales to determine gross profit (2) operating expenses are subtracted from gross profit to determine profit from operations, and (3) non-operating expenses are subtracted from (and nonoperating revenues are added to) profit from operations to determine profit.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 19.

Net sales is calculated by deducting the contra revenue accounts, Sales Returns and Allowances and Sales Discounts, from Sales. Gross profit is calculated by subtracting cost of goods sold from net sales. Profit from operations is calculated by subtracting operating expenses from gross profit. Profit is calculated by subtracting non-operating expenses from (or adding non-operating revenues to) profit from operations. Only merchandising companies show net sales and gross profit; service companies would show service revenues. Profit from operations is used by both merchandising and service companies as both of these types of companies may have non-operating revenues or expenses.

20.

Interest expense is a non-operating expense because it relates to how a company’s operations are financed, so it is not an expense related to main operating activities.

21.

Yes, it is possible for profit from operations and profit to be the same. This would occur if the company has no non-operating expenses or revenues. If companies do not have non-operating expenses or revenues, the profit from operations is referred to as profit.

22.

Operating expenses are those expenses related to the main activity or main operations of the business. Recurring expenses of different types are incurred to generate the revenue from providing goods or services. Non-operating expenses have more to do with how the business is financed or how much cash it has available to invest and generate additional revenues beyond its main source of revenue from operations. If a business is partly financed with debt, it will have interest expense. If a company has excess cash, it can earn revenue from investments, including interest revenue. The multiple-step income statement highlights the non-operating expenses and presents them separately so that income from operations can be reported. This is not the case when the single-step income statement format is used.

23.

Gross profit is calculated as the difference between net sales revenue and cost of goods sold and is expressed in dollars. Gross profit margin represents gross profit expressed as a percentage of net sales. The gross profit margin allows the company to compare its results with past periods, competitors, and industry averages. It shows the relative relationship between net sales and gross profit.

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QUESTIONS (Continued) *24. In a periodic inventory system, purchases are debited to the Purchases account. Purchase returns and allowances, purchase discounts, and freight in are also recorded in separate accounts. In a perpetual inventory system, purchases, purchase returns and allowances, purchase discounts, and freight in are recorded directly to the Merchandise Inventory account. In a perpetual system, cost of goods sold and inventory are updated as each sale occurs. This does not happen in a periodic system. *25. To arrive at the cost of goods purchased using the periodic system, purchase discounts and purchase returns (contra accounts to purchases) are deducted from the account Purchases. Freight in, on the other hand, is added to Purchases.

*26. The purpose of these entries is to update the Merchandise Inventory account to the correct ending balance (i.e., adjust for the change between the beginning and ending inventories).

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5-1 (a) & (b) Company A Cost of goods sold = $227,500 ($350,000-$122,500) Profit = $17,500 ($122,500-$105,000) (c) & (d) Company B Gross profit = $367,500 ($735,000-$367,500) Operating expenses = $294,000 ($367,500-$73,500) (e) & (f) Company C Gross Profit = $210,000 ($525,000-$315,000) Profit = $94,500 ($210,000-$115,500) (g) & (h) Company D Sales = $495,000 ($346,500+$148,500) Loss = $(39,600) ($148,500-$188,100)

BRIEF EXERCISE 5-2 (1) (a) Cost of goods available for sale = $250,000 + $170,000 = $420,000. (b) Cost of goods sold = $420,000 – $50,000 = $370,000 (2) (c) Cost of goods available for sale = $108,000 + $70,000 = $178,000. (d) Ending inventory = $178,000 – $90,000 = $88,000. (3) (e) Purchases = $130,000 – $75,000 = $55,000. (f) Ending inventory = $130,000 – $38,000 = $92,000. (4) (g) Beginning inventory = $95,000 – $75,000 = $20,000. (h) Cost of goods sold = $95,000 – $45,000 = $50,000.

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 5-3 (a)

Mar. 16

Merchandise Inventory.................... 15,000 Accounts Payable ....................... 15,000

18 Accounts Payable............................ Merchandise Inventory ...............

750

25 Accounts Payable ($15,000 – $750) Merchandise Inventory ($14,250 × 2%) ............................. Cash .............................................

14,250

(b) Date Mar. 16 18 25

Assets Inventory + $15,000 Inventory – $750 Inventory – $285 Cash – $13,965

Liabilities Accounts Payable + $15,000 Accounts Payable – $750 Accounts Payable – $14,250

750

285 13,965 Owner’s Equity NE NE NE

BRIEF EXERCISE 5-4 Jan. 2

Jan. 4 Merchandise Inventory.................... Cash .............................................

215

Jan. 6 Accounts Payable............................ Merchandise Inventory ...............

1,500

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

18,500

Feb. 1

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Merchandise Inventory.................... 20,000 Accounts Payable ....................... 20,000

5-14

215

1,500 18,500

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 5-5 Mar. 12 Merchandise Inventory ....................... 25,000 Accounts Payable ....................... 25,000 13 No entry required. 14 Accounts Payable............................ Merchandise Inventory ...............

2,000 2,000

21 Accounts Payable ($25,000 – $2,000) 23,000 Merchandise Inventory ($23,000 × 2%) ............................. 460 Cash ............................................. 22,540

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BRIEF EXERCISE 5-6 (a)

Mar. 16 Accounts Receivable ...................... Sales ............................................

15,000

Cost of Goods Sold ......................... Merchandise Inventory ...............

8,700

Freight Out ....................................... Cash .............................................

170

18 Sales Returns and Allowances ....... Accounts Receivable ..................

750

25 Cash ($14,250 – $285) ..................... Sales Discounts ($14,250 × 2%) ..... Accounts Receivable ($15,000 – $750)...........................

13,965 285

15,000

8,700

170

750

14,250

(b) Date Mar.16 16 17 18 25

Solutions Manual .

Assets Accounts Receivable + $15,000 Merchandise Inventory – $8,700 Cash – $170 Accounts Receivable – $750 Cash + $13,965 Accounts Receivable – $14,250

5-16

Liabilities NE

Owner’s Equity + $15,000

NE NE NE

– $8,700 – $170 – $750

NE – $285

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 5-7 Jan. 2 Accounts Receivable ...................... Sales ............................................

20,000

Cost of Goods Sold ......................... Merchandise Inventory ...............

7,900

20,000

7,900

4 No entry required. 6 Sales Returns and Allowances ....... Accounts Receivable ..................

1,500

Merchandise Inventory.................... Cost of Goods Sold.....................

590

Feb. 1

1,500

590

Cash ($20,000 – $1,500)................... 18,500 Accounts Receivable .................. 18,500

BRIEF EXERCISE 5-8 Mar. 12 Accounts Receivable ...................... Sales ............................................

25,000

Cost of Goods Sold ......................... Merchandise Inventory ...............

13,250

13 Freight Out ....................................... Cash .............................................

265

14 Sales Returns and Allowances ....... Accounts Receivable ..................

2,000

22 Cash ($23,000 – $460) ..................... Sales Discounts ($23,000 × 2%) ..... Accounts Receivable ..................

22,540 460

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25,000

13,250

265

2,000

23,000

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BRIEF EXERCISE 5-9 Cost of Goods Sold.............................. Merchandise Inventory ($98,000 – $96,100) ..........................

1,900 1,900

BRIEF EXERCISE 5-10 Sept. 30 Sales ................................................. Income Summary ........................

218,750 218,750

30 Income Summary ............................. 171,000 Sales Returns and Allowances .. Sales Discounts .......................... Cost of Goods Sold .................... Freight Out .................................. Salaries Expense ........................ Merchandise Inventory and Supplies are (permanent) accounts and are not closed.

3,150 950 125,000 1,900 40,000

balance

sheet

BRIEF EXERCISE 5-11 NELSON COMPANY Income Statement For the Month Ended October 31, 2017 Sales* ............................................................................ Less: Sales returns and allowances............... $11,000 Sales discounts ................................... 5,000 Net sales ....................................................................... * ($280,000 + $95,000)

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$375,000 16,000 $359,000

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 5-12 (a) Net sales = $539,000 ($561,000 – $5,500 – $16,500) (b) Gross profit = $154,000 ($539,000 – $385,000) (c) Operating expenses = $115,500 ($13,200 + $3,300 + $44,000 + $55,000) (d) Profit from operations $38,500 ($154,000 – $115,500) (e) Profit = $36,300 ($38,500 + $8,800 – $11,000)

BRIEF EXERCISE 5-13 2017 Gross profit margin = 36.84% [($950,000 – $600,000) ÷ $950,000] Profit margin = 7.37% [$70,000 ÷ $950,000] 2016 Gross profit margin = 37.50% [($800,000 – $500,000) ÷ $800,000] Profit margin = 8.13% [$65,000 ÷ $800,000] GS Retail’s profitability has deteriorated since both its gross profit margin and its profit margin have decreased from the previous year.

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Accounting Principles, Seventh Canadian Edition

*BRIEF EXERCISE 5-14 Feb. 5

Purchases .......................................12,000 Accounts Payable ...................... 6 Freight In ......................................... Cash ............................................

12,000

110 110

8 Accounts Payable........................... 1,000 Purchase Returns and Allowances

1,000

11 Accounts Payable ($12,000 − $1,000) ........................... 11,000 Purchases Discounts ($11,000 × 2%) Cash ($11,000 – $220) ................

220 10,780

*BRIEF EXERCISE 5-15 Feb. 5 Accounts Receivable ...................... 12,000 Sales ...........................................

12,000

6 No entry required.

Solutions Manual .

8 Sales Returns and Allowances ....... 1,000 Accounts Receivable .................

1,000

11 Cash ($11,000 – $220)..................... 10,780 Sales Discounts ($11,000 × 2%) ..........220 Accounts Receivable .................

11,000

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*BRIEF EXERCISE 5-16 Cost of goods sold Merchandise inventory, beginning ................ $ 51,000 Purchases................................... $340,000 Less: Purchase discounts ... $6,800 Purchase returns and allowances....... 9,350 16,150 Net purchases ........................ 323,850 Add: Freight in ........................ 13,600 Cost of goods purchased ............................. 337,450 Cost of goods available for sale .............. 388,450 Merchandise inventory, ending .................... 68,000 Cost of goods sold ............................................................ $320,450

Note: Freight out is not included; it is an operating expense.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 5-1 (a)

Jean-Pierre’s retail business has more complex inventory management issues. The company stocks 2,000 separate items and monthly physical inventory counts are becoming onerous and likely expensive. Management can maintain optimum inventory levels and avoid running out of stock. Financing of excess inventory can be reduced as well as a savings in warehousing space taken up by excess inventory. Monthly reporting to the bank can be accomplished easily without a physical count because a perpetual system keeps track of all the inventory that should be on hand at any time. Jean-Pierre can also estimate the approximate amount of shrinkage and recognize that on a monthly basis for monthly reporting. A perpetual inventory system also makes it easier to answer questions from customers about merchandise availability. Physical inventory counts can be done only once or twice a year and any differences between actual and the accounting records can be immediately investigated.

(b)

Perpetual records capture the transactions occurring involving inventory. This does not mean that the records are perfect. If employees make errors in recording sales or purchases, or if there is theft, the inventory value will not be correct. Management needs to ensure that procedures and policies are put in place to correctly manage the new system. The major drawback is the cost of acquisition and the conversion and retraining of employees involved in changing systems.

(c)

With the bank wanting up-to-date inventory information, and the expected growth in revenue, conversion to a perpetual record is strongly recommended. The benefits of the change far exceed the drawbacks in the long run.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 5-2 (a)

Cost of goods sold

(b)

Subsidiary ledger

(c)

Contra revenue account

(d)

Purchase returns

(e)

FOB destination

(f)

Periodic inventory system

(g)

Sales allowance

(h)

Gross profit

(i)

Non-operating activities

(j)

FOB shipping point

(k)

Perpetual inventory system

(l)

Merchandise inventory

(m)

Profit margin

(n)

Sales discounts

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Accounting Principles, Seventh Canadian Edition

EXERCISE 5-3 (a) Mar. 1

Merchandise Inventory ...................... Accounts Payable...........................

9,000

2 Merchandise Inventory ....................... Cash ................................................

155

Accounts Payable ............................... Merchandise Inventory...................

9,000

155 1,000 1,000

Merchandise Inventory ...................... 13,000 Accounts Payable...........................

13,000

22 (FOB destination point means the seller pays the freight, therefore no entry required here.) 23

Accounts Payable ............................... Merchandise Inventory...................

400

30 Accounts Payable ($9,000 – $1,000) .. Cash ................................................

8,000

400

31 Accounts Payable ($13,000 – $400) ... 12,600 Merchandise Inventory ($12,600 × 2%) .......................... Cash ..........................................

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8,000

252 12,348

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Accounting Principles, Seventh Canadian Edition

EXERCISE 5-3 (Continued) (b) Merchandise Inventory Mar. 1 9,000 2 155 Mar. 3 1,000 21 13,000 23 400 31 252 20,503 Cash payments: March 2 $ 155 March 30 8,000 March 31 12,348 Total cash payments for inventory in March $20,503

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Accounting Principles, Seventh Canadian Edition

EXERCISE 5-4 (a) Mar. 1 Accounts Receivable ......................... Sales ...............................................

9,000 9,000

Cost of Goods Sold ................................. 3,960 Merchandise Inventory ..................

3,960

2 (FOB shipping point means the buyer pays the freight, therefore no entry required here.) 3 Sales Returns and Allowances ......... Accounts Receivable.....................

1,000

Merchandise Inventory ....................... Cost of Goods Sold .......................

440

21 Accounts Receivable .......................... Sales ...............................................

13,000

Cost of Goods Sold............................. Merchandise Inventory ..................

5,720

Freight Out........................................... Cash ................................................

170

23 Sales Returns and Allowances ......... Accounts Receivable.....................

400

Cash ($9,000 – $1,000) ........................ Accounts Receivable......................

8,000

30 31

Solutions Manual .

1,000

440

13,000

5,720

170

400

8,000

Cash ..................................................... 12,348 Sales Discounts ($12,600 × 2%) ......... 252 Accounts Receivable ($13,000 – $400)

12,600

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Accounting Principles, Seventh Canadian Edition

EXERCISE 5-4 (Continued)

(b) Sales ($9,000 + $13,000) Less: Sales returns ($1,000 + $400) Less: Sales discounts Net sales

$22,000 1,400 252 $20,348

Cost of goods sold ($3,960 + $5,720) Less: Returns to inventory Cost of goods sold

$9,680 440 $9,240

Net sales (above) Less: Cost of goods sold (above) Gross profit

$20,348 9,240 $11,108

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Accounting Principles, Seventh Canadian Edition

EXERCISE 528 (a) Apr. 5

Merchandise Inventory................ 12,000 Accounts Payable ...................

6 Merchandise Inventory................ Cash .........................................

300

8 Accounts Payable........................ Merchandise Inventory ...........

1,800

12,000

300

1,800

May 4 Accounts Payable ($12,000 – $1,800) ........................ 10,200 Cash .........................................

10,200

(b) Apr. 5 Accounts Receivable .................. 12,000 Sales ............................................

12,000

Cost of Goods Sold ......................... 8,500 Merchandise Inventory ...........

8,500

6 No entry required. 8 Sales Returns and Allowances ... Accounts Receivable ..............

1,800

May 4 Cash ($12,000 – $1,800) ................. 10,200 Accounts Receivable ..............

1,800 10,200

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EXERCISE 529

(a) Dec. 3 Accounts Receivable .................. 32,000 Sales ........................................

32,000

Cost of Goods Sold ..................... 18,000 Merchandise Inventory. ..........

18,000

Freight Out ................................... Cash .........................................

650

8 Sales Returns and Allowances ... Accounts Receivable ..............

1,800

Merchandise Inventory................ Cost of Goods Sold.................

990

650

1,800

990

13 Cash ($30,200 × 98%) .................. 29,596 Sales Discounts ($30,200 × 2%) . 604 Accounts Receivable ($32,000 – $1,800).................... (b) Dec. 3

Merchandise Inventory................ 32,000 Accounts Payable ...................

30,200

32,000

4 No entry required. 8 Accounts Payable........................ Merchandise Inventory ...........

1,800

13 Accounts Payable........................ Merchandise Inventory ($30,200 × 2%) ......................... Cash .........................................

30,200

1,800

604 29,596

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6,000 32,000 Dec. 8 Dec. 13 35,596

5-29

1,800 604

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Accounting Principles, Seventh Canadian Edition

EXERCISE 530

(a) Disagree (b) June 10 Merchandise Inventory................. 4,000 Accounts Payable .................... (a) Disagree (b) June 11 Merchandise Inventory................. 225 Cash .......................................... (a) Disagree (b) June 12 Accounts Payable......................... 200 Merchandise Inventory ............ (a) Disagree (b) June 20 Accounts Payable ($4,000 – $200) 3,800 Merchandise Inventory ($3,800 × 2%) ............................ Cash ($3,800 × 98%)................. (a) Disagree (b) July 15 Accounts Receivable ................... 9,275 Sales .........................................

(a) (b) (a) (b)

15 Cost of Goods Sold ...................... Merchandise Inventory ............ Disagree July 15 Freight Out .................................... Cash .......................................... Disagree July 17 Sales Returns and Allowances .... Accounts Receivable ...............

Solutions Manual .

5-30

4,000

225

200

76 3,724

9,275

3,800 3,800 175 175 300 300

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Accounting Principles, Seventh Canadian Edition

EXERCISE 531 (a) Jan. 31 Cost of goods sold ...................... Merchandise Inventory ........... ($21,600 –- $21,000)

600 600

(b) Jan. 31 Sales .............................................. 380,000 Income Summary ..................... 380,000 31 Income Summary .......................... 335,600 Cost of Goods Sold* ................ 218,600 Freight Out ............................... 7,000 Sales Returns and Allowances 13,000 Sales Discounts ....................... 10,000 Salaries Expense ..................... 55,000 Rent Expense ........................... 20,000 Insurance Expense .................. 12,000 ($218,000 + $600)

Solutions Manual .

31 Income Summary ........................... 44,400 D. Flamont, Capital................... ($380,000 - $335,600)

44,400

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Accounting Principles, Seventh Canadian Edition

EXERCISE 5-9

Sales Sales returns and allowances Net sales Cost of goods sold Gross profit Operating expenses Profit from operations Other expenses Profit

Natural Family Cosmetics Grocery $215,000 (e) $360,000

SE Footwear $275,000

(a) 14,000 201,000 99,000 (b) 102,000 45,000

25,000 335,000 (f) 140,000 195,000 (g) 122,000

20,000 (i) 255,000 (j) 105,000 150,000 95,000

(h) 73,000 10,000 $63,000

(k) 55,000 (l) 14,000 $41,000

(a) Sales ........................................................................... $215,000 Less: *Sales returns and allowances ............................... (14,000) Net sales ..................................................................... $201,000 (b) Net sales ..................................................................... $201,000 Less: cost of goods sold ............................................ (99,000) *Gross profit ............................................................... $102,000 (c) Gross profit ................................................................ $102,000 Less: Operating expenses.......................................... (45,000) *Profit from operations ............................................... $ 57,000 (d) Profit from operations ................................................. $57,000 Less: Other expenses .................................................. (5,000) *Profit ............................................................................ $52,000 (e) *Sales .......................................................................... $360,000 Less: Sales returns and allowances ......................... (25,000) Net sales ..................................................................... $335,000

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EXERCISE 5-9 (Continued) (f)

Net sales................................................................... *Cost of goods sold ................................................. Gross profit ..............................................................

(g)

Gross profit .............................................................. $195,000 *Operating expenses ............................................... (122,000) Profit from operations (from (h)) ............................ $73,000

(h)

*Profit from operations............................................ Less: Other expenses ............................................. Profit .........................................................................

$73,000 (10,000) $63,000

(i)

Sales ......................................................................... Less : Sales returns................................................. *Net sales .................................................................

$275,000 (20,000) $255,000

(j)

Net sales................................................................... Less: *Cost of goods sold....................................... Gross profit ..............................................................

$255,000 (105,000) $150,000

(k)

Gross profit .............................................................. $150,000 Less: Operating expenses ...................................... (95,000) *Profit from operations............................................ $55,000

(l)

Profit from operations ............................................. Less: *Other expenses ............................................ Profit .........................................................................

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$335,000 (140,000) $195,000

$55,000 (14,000) $41,000

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EXERCISE 5-10 (a) CRYSTAL COMPANY Income Statement Year Ended December 31, 2017 Revenues Net sales ($1,980,000 – $59,400 – $9,900) $1,910,700 Interest revenue ........................................ 10,000 Rent revenue ............................................. 24,000 Total revenues...................................... 1,944,700 Expenses Cost of goods sold ................................... $851,500 Salaries expense....................................... 650,000 Advertising expense................................. 55,000 Depreciation expense............................... 45,000 Freight out................................................. 25,000 Insurance expense ................................... 15,000 Interest expense ....................................... 10,500 Total expenses ..................................... 1,652,000 Profit............................................................... $ 292,700

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EXERCISE 5-10 (Continued) (b) Dec. 31 Sales................................................1,980,000 Interest Revenue ......................... 10,000 Rent Revenue .............................. 24,000 2,014,000 Income Summary ..................... 31 Income Summary ...........................1,721,300 Sales Returns and Allowances ........ Sales Discounts ................................ Cost of Goods Sold........................... Salaries Expense .............................. Advertising Expenses....................... Depreciation Expense....................... Freight out ......................................... Insurance Expense ........................... Interest Expense ...............................

59,400 9,900 851,500 650,000 55,000 45,000 25,000 15,000 10,500

31 Income Summary ($2,014,000 – $1,721,300) ......... 292,700 L. Crystal, Capital.....................

292,700

31 L. Crystal, Capital .............................. 150,000 L. Crystal, Drawings.................

150,000

CRYSTAL COMPANY Post-closing Trial Balance December 31, 2017 Debit $ 75,700 100,000 70,000 450,000

Cash ............................................................. Notes receivable.......................................... Merchandise inventory ............................... Equipment.................................................... Accumulated depreciation—equipment .... Unearned revenue ....................................... Notes payable .............................................. *L. Crystal, capital ....................................... Totals ........................................................... $695,700

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Credit

$135,000 8,000 175,000 377,700 $695,700

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Accounting Principles, Seventh Canadian Edition

EXERCISE 5-10 (Continued) L. Crystal, capital

Clos.

150,000

Solutions Manual .

Bal.

235,000

Clos.

292,700

Bal.

377,700*

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Accounting Principles, Seventh Canadian Edition

EXERCISE 5-11 (a) RIKARDS COMPANY Income Statement Year Ended August 31, 2017 Sales................................................................................. $465,000 Less: Sales returns and allowances ......................... 16,300 Net sales...................................................................... 448,700 Cost of goods sold .......................................................... 271,500 Gross profit...................................................................... 177,200 Operating expenses Salaries expense ............................................ $50,000 Rent expense ................................................. 24,000 Depreciation expense.................................... 7,000 Supplies expense .......................................... 6,325 Insurance expense ........................................ 3,575 Total operating expenses ...................................... 90,900 Profit from operations..................................................... 86,300 Other expenses Interest expense ......................................................... 2,100 Profit................................................................................. $ 84,200 RIKARDS COMPANY Statement of Owner’s Equity Year Ended August 31, 2017 R. Smistad, capital September 1, 2016* ............................ $ 62,250 Add: Investment.............................................. $ 3,500 Profit ....................................................... 84,200 87,700 149,950 Less: Drawings .................................................................... 80,000 R. Smistad, capital, August 31, 2017 .................................. $69,950 *($65,750 – $3,500)

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EXERCISE 5-11 (Continued) (a) (Continued) RIKARDS COMPANY Balance Sheet August 31, 2017

Assets Current assets Cash............................................................................. $ 15,450 Merchandise inventory.............................................. 70,350 Supplies....................................................................... 950 Prepaid insurance....................................................... 575 Total current assets ............................................... 87,325 Property, plant, and equipment Equipment .................................... $35,000 Less: Accumulated depreciation 14,000 $21,000 Furniture ......................................... 42,000 Less: Accumulated depreciation 17,500 24,500 Total property, plant, and equipment ...................... 45,500 Total assets .............................................................. $132,825 Liabilities and Owner’s Equity Current liabilities Accounts payable ....................................................... $ 15,500 Salaries payable.......................................................... 2,250 Interest payable .......................................................... 525 Unearned revenue ...................................................... 2,600 Current portion of non-current notes payable ............. 6,000 Total current liabilities ........................................... 26,875 Long-term liabilities Notes payable* ............................................................... 36,000 Total liabilities ........................................................ 62,875 Owner’s equity R. Smistad, capital ........................................................ 69,950 Total liabilities and owner’s equity ............................. $132,825 *($42,000 – $6,000)

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EXERCISE 5-11 (Continued) (b) Gross profit margin = $177,200 ÷ $448,700 = 39.5% Profit margin = $84,200 ÷ $448,700 = 18.8%

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EXERCISE 5-12 (a) Gross profit margin 2015 = 50.9% [($1,797,213– $883,033) ÷ $1,797,213] 2014 = 52.8% [($1,591,188 – $751,112) ÷ $1,591,188] 2013 = 55.7% [($1,370,358 – $607,532) ÷ $1,370,358] Profit margin 2015 = 13.3% [$239,033 ÷ $1,797,213] 2014 = 17.6% [$279,547 ÷ $1,591,188] 2013 = 19.8% [$271,431 ÷ $1,370,358] (b) Profit margin (Profit from operations) 2015 = 20.9% [$376,033 ÷ $1,797,213] 2014 = 24.6% [$391,358 ÷ $1,591,188] 2013 = 27.5% [$376,439 ÷ $1,370,358] (c) The gross profit margin has declined steadily from 2013 to 2015, from 55.7% to 50.9%. The profit margin has decreased steadily from 19.8% in 2013 to 13.3% in 2015. The profit margin based on profit from operations also weakened from 27.5% in 2013 to 20.9% in 2015.

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*EXERCISE 5-41 (a) Apr. 5

Purchases .................................... 12,000 Accounts Payable ................... Freight In ...................................... Cash .........................................

300

8 Accounts Payable........................ Purchase Returns and Allowances ..............................

1,800

May 4 Accounts Payable ($12,000 – $1,800) ........................ Cash .........................................

12,000

300

1,800

10,200 10,200

(b) Apr. 5 Accounts Receivable .................. 12,000 Sales .........................................

12,000

6 No entry required. 8 Sales Returns and Allowances ... Accounts Receivable .............. May 4

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1,800

Cash ($12,000 – $1,800)............... 10,200 Accounts Receivable ..............

5-41

1,800 10,200

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*EXERCISE 5-14 (a)

July 2

Solutions Manual .

Purchases ...................................... 15,000 Accounts Payable ....................

15,000

Accounts Payable ............................ 1,200 Purchase Returns and Allowances ...............................

1,200

Freight In ....................................... Cash ..........................................

500

Cash.................................................. 2,000 Sales ......................................... Accounts Payable ($15,000-$1,200) Purchase Discounts ($13,800 × 2%) .......................... Cash ($13,800 × 98%)...............

500

2,000 13,800 276 13,524

Accounts Receivable ....................... 6,000 Sales .........................................

6,000

Cash ($6,000 × 99%) ........................ 5,940 Sales Discounts ($6,000 × 1%) .... 60 Accounts Receivable ...............

6,000

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*EXERCISE 5-14 (Continued) (b) Sales revenues Sales ($2,000 + $6,000) ............................................... Less: Sales discounts ............................................... Net sales...................................................................... Cost of goods sold Merchandise inventory, July 1 .................... $ 0 Purchases ................................... $15,000 Less: Purchase returns and 1,200 allowances ..................... Less: Purchase discounts ......... 276 Net purchases ............................. 13,524 Add: Freight in ............................ 500 Cost of goods purchased......................... 14,024 Cost of goods available for sale .............. 14,024 Merchandise inventory, July 31 ............... 10,500 Cost of goods sold................................................. Gross profit......................................................................

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$8,000 60 7,940

3,524 $4,416

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*EXERCISE 5-44 (a) Sales revenues Sales .............................................................................. $840,000 Less: Sales discounts .............................. $5,000 Sales returns and allowances ........ 10,000 15,000 Net sales .......................................................................... 825,000 Cost of goods sold Merchandise inventory, Jan. 1 ..................... $ 50,000 Purchases ................................... $509,000 Less: Purchase returns and 2,000 allowances ..................... Less: Purchase discounts ......... 6,000 Net purchases ............................. 501,000 Add: Freight in ............................ 4,000 505,000 Cost of goods purchased......................... Cost of goods available for sale .............. 555,000 Merchandise inventory, Dec. 31 .............. 66,000 Cost of goods sold................................................. 489,000 Gross profit...................................................................... $336,000 (b) Gross profit...................................................................... Less profit........................................................................ Operating expenses ........................................................

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$336,000 130,000 $206,000

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*EXERCISE 5-16 (a) OKANAGAN COMPANY Income Statement Year Ended January 31, 2017

Sales revenues Sales .............................................................................. $325,000 Less: Sales returns and allowances ............. $20,000 Sales discounts.................................... 14,000 34,000 Net sales .............................................................................. 291,000 Cost of goods sold Merchandise Inventory, beginning ................ $ 61,000 Purchases................................... $210,000 Less: Purchase discounts .$12,000 Purchase returns and allowances........ 16,000 28,000 Net purchases ........................ 182,000 Add: Freight in ............................ 6,500 Cost of goods purchased ............................. 188,500 Cost of goods available for sale .............. 249,500 Merchandise Inventory, ending.................... 42,000 Cost of goods sold ............................................................. 207,500 Gross profit...................................................................... 83,500 Operating expenses Freight out ................................................. $ 7,000 Insurance expense .................................. 12,000 Rent expense ........................................... 20,000 Salary expense ......................................... 61,000 Total operating expenses ...................................... 100,000 Loss from operations...................................................... (16,500) Other expenses Interest expense ......................................................... 6,000 Loss ................................................................................. $ (22,500)

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*EXERCISE 5-16 (Continued) (b) Jan. 31 Sales.................................................. 325,000 Merchandise Inventory (end of year) 42,000 Purchase Returns and Allowances. 16,000 Purchase Discounts ........................... 12,000 Income Summary ....................

395,000

31 Income Summary ............................. 417,500 Merchandise Inventory (beginning of year).................. Purchases................................ Freight In ................................. Freight Out .............................. Insurance Expense ................. Rent Expense .......................... Salaries Expense .................... Interest Expense ..................... Sales Returns and Allowances Sales Discounts ......................

61,000 210,000 6,500 7,000 12,000 20,000 61,000 6,000 20,000 14,000

31 O. G. Pogo, Capital ..............................22,500 Income Summary ....................

22,500

31 O. G. Pogo, Capital ............................. 42,000 O. G. Pogo, Drawings .............

42,000

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SOLUTIONS TO PROBLEMS PROBLEM 5-1A (a)

A company’s operating cycle is the average time it takes to go from cash to cash in producing revenues. The operating cycle for a merchandising company covers the period of time between when you pay for your inventory, sell it, and eventually collect the accounts receivable from a sale. You are having problems paying your bills because suppliers expect to be paid in 30 days and it takes 45 days, on average, to sell merchandise and an additional 60 days to collect accounts receivable.

(b)

Your inventory system is contributing to the problem because the periodic system does not keep track of inventory as sales occur. Therefore you do not know what inventory you have on hand at any given time and you often run out of inventory.

Taking It Further: You should consider switching to a perpetual inventory method because it has detailed records of each inventory purchase and sale. This system continuously—perpetually—shows the quantity and cost of the inventory purchased, sold, and on hand. This will allow you to order inventory on a more timely basis. Perpetual systems are more expensive, so a cost-benefit analysis should be conducted. Since your business is profitable, it could be worthwhile obtaining quotes on a perpetual system. Depending on the number of transactions per month, it might not make sense to invest in the required technology for a perpetual system.

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PROBLEM 5-2A (a)

GENERAL JOURNAL

Date

Account Titles

Debit

Apr. 2

Merchandise Inventory ....................... Accounts Payable...........................

6,400

4 Accounts Payable [5 × ($6,400 ÷ 160)] Merchandise Inventory...................

200

5 Accounts Receivable (45 × $90) ......... Sales ................................................

4,050

Cost of Goods Sold (45 × $40) ........... Merchandise Inventory...................

1,800

6 Sales Returns and Allowances .......... Accounts Receivable (15 × $90) ....

1,350

Merchandise Inventory (15 × $40) ...... Cost of Goods Sold ........................

600

Cash (40 × $90) .................................... Sales ...............................................

3,600

Cost of Goods Sold (40 × $40) ........... Merchandise Inventory...................

1,600

12 Sales Returns and Allowances .......... Cash (10 × $90) ...............................

900

Merchandise Inventory (10 × $40) ...... Cost of Goods Sold ........................

400

17 Sales Returns and Allowances .......... Cash (10 × $90) ...............................

900

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Credit

6,400

200

4,050

1,800

1,350

600

3,600

1,600

900

400 900

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PROBLEM 5-2A (Continued) (a) (Continued) Apr. 25 Accounts Receivable (60 × $90) ............. 5,400 Sales ................................................

5,400

Cost of Goods Sold (60 × $40) ................ 2,400 Merchandise Inventory...................

2,400

29 Sales Returns and Allowances ............... 2,250 Accounts Receivable (25 × $90) ....

2,250

Merchandise Inventory (25 × $40) .......... 1,000 Cost of Goods Sold .......................

1,000

(b) Apr. 1 2 6 12 29 Bal.

Inventory 2,000 6,400 4 5 600 10 400 25 1,000 4,400

200 1,800 1,600 2,400

Cost of Goods Sold Apr. 5 1,800 6 600 10 1,600 12 400 25 2,400 29 1,000

Bal.

Sales Apr. 5 10 25

4,050 3,600 5,400

Bal.

13,050

3,800

Sales Returns and Allowances Apr. 6 1,350 12 900 17 900 29 2,250 Bal. 5,400

The April 1 inventory is 50 racquets times $40, or $2,000.

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PROBLEM 5-2A (Continued) Taking It Further: The owner will be missing the detail of the amount of sales returns. This can convey important information about the quality of the merchandise, or sales practices. A significant amount of sales returns can negatively affect customer loyalty and satisfaction. It is also time consuming and expensive to process the sales returns and to restock the returned merchandise. Therefore, the owner should know the amount of sales returns to determine if any of these problems exist.

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PROBLEM 5-3A GENERAL JOURNAL Date

Account Titles

J1 Debit

Credit

Sept. 1 Merchandise Inventory ........................ 45,000 Accounts Payable .......................

45,000

2 (FOB destination means the seller pays the freight, therefore no entry required here.) 5 Accounts Payable............................ Merchandise Inventory ...............

3,000

15 Accounts Receivable....................... Sales ............................................

70,000

Cost of Goods Sold ($45,000 – $3,000) ............................ Merchandise Inventory ............... 16

3,000

70,000 42,000 42,000

Freight Out ....................................... Cash .............................................

1,800

17 Sales Returns and Allowances ...... Accounts Receivable ..................

5,000

Merchandise Inventory.................... Cost of Goods Sold.....................

3,000

Sales Discounts ($65,000 × 2%)...... Cash ($65,000 – $1,300)................... Accounts Receivable ($70,000 – $5,000)........................

1,300 63,700

1,800

5,000

3,000

30 Accounts Payable ($45,000 – $3,000) 42,000 Cash .............................................

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65,000 42,000

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PROBLEM 5-3A (Continued) Oct.

Merchandise Inventory.................... Accounts Payable .......................

52,000

2 Merchandise Inventory.................... Cash .............................................

1,100

3 Accounts Payable............................ Merchandise Inventory ...............

2,000

52,000

1,100

2,000

10 Accounts Payable ($52,000 – $2,000) 50,000 Cash ($50,000 – $1,000) ............. Merchandise Inventory ($50,000 × 2%)

49,000 1,000

11 Accounts Receivable ........................... 83,500 Sales ............................................

83,500

Cost of Goods Sold ($52,000 + $1,100 – $2,000 – $1,000) Merchandise Inventory ...............

50,100 50,100

12 (FOB shipping point means the buyer pays the freight, therefore no entry required here.) 17 Sales Returns and Allowances ....... Accounts Receivable ..................

1,500

31 Cash ................................................. 82,000 Accounts Receivable ($83,500 – $1,500)........................ (No discount as not received within 10 days)

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1,500

82,000

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PROBLEM 5-3A (Continued) Taking It Further: Companies should take all available discounts since not taking the discount is equivalent to paying interest for the use of the money owing to the seller. For the Sept. 1 purchase from Hillary Company, the interest rate is calculated as follows: Amount owing to Hillary Company ($45,000 − $3,000) = $42,000 Credit terms: 1/15, n/30 Discount not taken: $42,000 × 1% = $420. This equals to an annual interest rate of 24.33% (1% x (365 ÷ 15)). For the Oct. 1 purchase from Kimmel Company, the interest rate is calculated as follows: Amount owing to Kimmel Company ($52,000 − $2,000) = $50,000 Credit terms: 2/10, n/30 Discount taken: $50,000 × 2% = $1,000. This equals to an annual interest rate of 36.50% (2% x (365 ÷ 20)). In both cases, Norlan Company should be able to obtain financing from the bank at a lower rate of interest.

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PROBLEM 5-4A (a) GENERAL JOURNAL Date

Account Titles

Debit

Credit

July 1 Merchandise Inventory (50 × $30) .......... 1,500 Accounts Payable...........................

1,500

2 (FOB destination means the seller pays the freight, therefore no entry required here.) 4

Accounts Payable ............................... Merchandise Inventory...................

150

10 Accounts Receivable (45 × $55) ........ Sales ................................................

2,475

Cost of Goods Sold (45 × $30) ........... Merchandise Inventory...................

1,350

12 Sales Returns and Allowances .......... Accounts Receivable.....................

275

Merchandise Inventory (5 × $30) ........ Cost of Goods Sold ........................

150

15 Merchandise Inventory (60 × $27.50) Accounts Payable...........................

1,650

18 Merchandise Inventory ....................... Cash ................................................

150

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150

2,475

1,350

275

150

1,650 150

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PROBLEM 5-4A (Continued) (a) (Continued) July 21 Accounts Receivable (54 × $55) ......... Sales ................................................

2,970

Cost of Goods Sold (54 × $30) ........... Merchandise Inventory...................

1,620

23 Sales Returns and Allowances .......... Accounts Receivable.....................

110

2,970

1,620

110

Accounts Payable ............................... Cash ($1,500 – $150) ......................

1,350

Cash ($2,475 – $275) ........................... Accounts Receivable .....................

2,200

1,350

2,200

(b) Merchandise Inventory Bal. 750* July 1 1,500 July 4 150 10 1,350 12 150 15 1,650 18 150 21 1,620 Bal. 1,080 * Balance from June 30 = 25 suitcases × $30 per suitcase

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PROBLEM 5-4A (Continued) (c)

There are 36* suitcases on hand on July 31. The balance in the merchandise inventory account is $1,080: $30 per suitcase × 36 suitcases = $1,080. Quantity Beginning inventory 25 Purchased July 1 50 Returned to supplier July 4 (5) Sold July 10 (45) Returned by customer July 12 5 Purchased July 15 60 Sold July 21 (54) Ending Inventory 36*

Note that the units returned on July 23 were disposed of and are therefore not included in the ending inventory. Taking It Further: Freight terms indicate when ownership of the goods transfers from the seller to the buyer and who pays for the transportation charges. In the July 1st transaction, the freight terms are FOB destination. The seller, Trunk Manufacturers, pays for the freight charges, resulting in an inventory cost of $30 per item (50 suitcases × $30 = $1,500). When the seller pays for the freight costs, this usually results in a higher unit cost to cover the shipping expense, as shown in the July 1st transaction. In the July 15th transaction, the freight terms are FOB shipping point. The buyer, Travel Warehouse, pays for the freight charges, resulting in a lower unit cost charged by the vendor. Invoice cost (60 suitcases × $27.50) $1,650 Freight 150 Total inventory cost $1,800 Cost per suitcase ($1,800 ÷ 60) $30

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PROBLEM 5-4A (Continued) Shipping terms also impact the cost of merchandise by identifying the beginning of the discount period for calculating discounts on purchases. With FOB shipping point, the discount period starts when the goods are shipped. With FOB destination, the discount period starts when the goods are received.

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PROBLEM 5-5A (a)

GENERAL JOURNAL

Date

Account Titles

J1 Debit

Credit

June 1 Merchandise Inventory............................ 9,200 Accounts Payable...........................

9,200

2 (FOB destination means the seller pays the freight, therefore no entry required here.) 5 Accounts Receivable .......................... Sales ................................................

12,000

Cost of Goods Sold............................. Merchandise Inventory...................

7,400

6 Sales Returns and Allowances .......... Accounts Receivable......................

900

Merchandise Inventory ....................... Cost of Goods Sold ........................

550

Freight Out........................................... Cash ................................................

300

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

790

Merchandise Inventory ....................... Accounts Payable...........................

4,750

10 Merchandise Inventory ....................... Cash ................................................

130

250

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12,000

7,400

900

550

300

790

4,750

130 250

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PROBLEM 5-5A (Continued) (a) (Continued) June 14 Accounts Payable.................................... 9,200 Merchandise Inventory ($9,200 × 1%) Cash ($9,200 − $92) ........................

92 9,108

15 Cash ($11,100 − $222) ......................... 10,878 Sales Discounts ($11,100 × 2%) ......... 222 Accounts Receivable ($12,000 – $900)

11,100

19 Cash ......................................................... 7,200 Sales ................................................

7,200

Cost of Goods Sold ................................. 4,600 Merchandise Inventory...................

4,600

20 Accounts Payable ($4,750 − $250) ......... 4,500 Merchandise Inventory ($4,500 × 2%) Cash ($4,500 − $90) ........................

90 4,410

25 Sales Returns and Allowances .......... Cash ................................................

500

30 Accounts Receivable .............................. 4,100 Sales ................................................

4,100

Cost of Goods Sold ................................. 2,600 Merchandise Inventory...................

2,600

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PROBLEM 5-5A (Continued) (b)

Date June 1 1 5 6 10 10 12 14 19 20 30

Date

Merchandise Inventory Explanation Ref. Debit  J1 9,200 J1 J1 550 J1 4,750 J1 130 J1 J1 J1 J1 J1

Balance

250 92 4,600 90 2,600

Credit

Balance

12,000 7,200 4,100

12,000 19,200 23,300

Sales Returns and Allowances Explanation Ref. Debit Credit

Balance

Explanation

Sales Ref.

J1 J1

5-60

7,400

900 500

Sales Discounts Explanation Ref. Debit

June 15

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Debit

J1 J1 J1

June 6 25

Date

Balance 5,900 15,100 7,700 8,250 13,000 13,130 12,880 12,788 8,188 8,098 5,498

June 5 19 30

Date

Credit

222

900 1,400

Credit

Balance 222

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PROBLEM 5-5A (Continued) (b) (Continued)

Date

Cost of Goods Sold Explanation Ref. Debit

June 5 6 19 30

J1 J1 J1 J1

Credit

7,400 550 4,600 2,600

Balance 7,400 6,850 11,450 14,050

Sales revenues Sales ................................................................................ $23,300 Less: Sales returns and allowances........ 1,400 Sales discounts.............................. 222 1,622 Net sales...................................................................... 21,678 Cost of goods sold .............................................................. 14,050 Gross profit...................................................................... $ 7,628 Taking It Further: Willingham would face uncertainty about the amount of sales recorded in June that may be returned in a subsequent accounting period. If Willingham experiences significant returns and accepts returns for up to six months after the initial sale, the June gross profit will be overstated. If a company experiences substantial returns, it has to record an estimate of them in the same time period as the related sale in order to properly reflect the gross profit for that period’s sale. This topic is usually explored further in an intermediate accounting course.

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PROBLEM 5-6A

(a) Aug. 31 Cost of Goods Sold.......................... 2,300 Merchandise Inventory ($57,000 − $54,700).....................

2,300

(b) WOLCOTT WAREHOUSE STORE Income Statement Year Ended August 31, 2017 Revenues Net sales ($704,000 – $3,300 – $14,700)..... $686,000 Interest revenue ......................................... 960 $686,960 Expenses Cost of goods sold ($575,500 + $2,300) ..... $577,800 Depreciation expense ................................. 6750 Freight out ................................................... 4,600 Insurance expense ...................................... 2,900 Interest expense .......................................... 2,000 Rent expense............................................... 15,500 Supplies expense ........................................ 5,600 615,150 Profit................................................................ $ 71,810

(c) Gross profit = $686,000 - $577,800 = $108,200 Gross profit margin = $108,200 ÷ $686,000 = 15.8% Profit margin = $71,810 ÷ $686,000 = 10.5% The gross profit margin has deteriorated significantly from 20% in 2016 to 15.8% in 2017. The profit margin however has improved from 9% in 2016 to 10.5% in 2017.

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PROBLEM 5-6A (Continued) (d) Aug. 31

Interest Revenue ............................... 960 Sales .................................................. 704,000 Income Summary..........................

704,960

Income Summary .............................. 632,970 Sales Returns and Allowances .... Sales Discounts ............................ Cost of Goods Sold ...................... Depreciation Expense ................ Freight Out .................................. Insurance Expense ..................... Interest Expense ........................... Rent Expense.............................. Supplies Expense .......................

14,700 3,300 577,800 6,570 4,600 2,900 2,000 15,500 5,600

Income Summary .............................. V. Wolcott, Capital ........................

71,990 71,990

V. Wolcott, Capital............................. V. Wolcott, Drawings ....................

61,200

Income Summary 704,960 632,970 Bal.* 71,990 71,990 Bal. 0 * Check $71,990 = Profit

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PROBLEM 5-6A (Continued) Taking It Further: The most important factor in increasing profitability is to generate as high a gross profit margin as possible. To improve gross profit, the primary steps are to try to increase sales at a higher rate than cost of the goods sold increases. Negotiating better purchase prices from its suppliers is the primary way businesses can attempt to price its product attractively to generate more sales with its customers. As for the profit margin, reduction of expenses will contribute to a healthier profit. Some expenses are fixed, such as rent, insurance, and depreciation, but other expenses can be managed. For example, Wolcott could negotiate shipping terms with its customers that would reduce freight out costs. Depending on how Wolcott is financed, there could be measures taken to finance the business with more investments by the owner to reduce the debt and therefore the corresponding interest expense. Finally Wolcott should investigate the possibility of reducing its supplies expense in the future.

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PROBLEM 5-7A (a) Dec. 31 Supplies Expense .............................. Supplies ......................................... ($2,950 − $750)

2,200

31 Insurance Expense ............................ Prepaid Insurance ......................... ($3,000 × 10/12)

2,500

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

14,500

2,500

10,000 4,500

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

675

31 Unearned Revenue ............................ Sales ............................................. ($4,000 − $975)

3,025

Cost of Goods Sold ........................... Merchandise Inventory .................

1,750

31 Cost of Goods Sold .......................... Merchandise Inventory ................. [($37,050 − $1,750) − $32,750]

2,550

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2,220

5-65

675

3,025

1,750

2,550

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PROBLEM 5-7A (Continued) (b) WORLD ENTERPRISES Income Statement Year Ended December 31, 2017 Sales revenues Sales ($265,000 + $3,025) ........................................... $268,025 Less: Sales returns and allowances.............. $2,500 Sales discounts .................................... 3,275 5,775 Net sales...................................................................... 262,250 Cost of goods sold ($153,000 + $1,750 + $2,550) .......... 157,300 Gross profit...................................................................... 104,950 Operating expenses Salaries expense ................................. 35,450 Utilities expense ............................................ 5,100 Supplies expense .......................................... 2,200 Insurance expense ........................................ 2,500 Depreciation expense ................................... 14,500 Total operating expenses ...................................... 59,750 Profit from operations..................................................... 45,200 Other expenses Interest expense ($6,875 + $675) ............................... 7,550 Profit ................................................................................ $ 37,650

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PROBLEM 5-7A (Continued) (c) WORLD ENTERPRISES Income Statement Year Ended December 31, 2017 Revenues Net sales ......................................................................... $262,250 Expenses Cost of goods sold ........................................ $157,300 Depreciation expense ........................................ 14,500 Insurance expense ..............................................2,500 Interest expense ..................................................7,550 Salaries expense ............................................... 35,450 Utilities expense ..................................................5,100 Supplies expense ............................................ 2,200 224,600 Profit................................................................................. $ 37,650

(d) Dec. 31 Sales ............................................. 268,025 Income Summary ..................

268,025

31 Income Summary ......................... 230,375 Sales Returns and Allowances Sales Discounts .................... Cost of Goods Sold............... Interest Expense ................... Salaries Expense .................. Utilities Expense ................... Supplies Expense ................. Insurance Expense ............... Depreciation Expense...........

2,500 3,275 157,300 7,550 35,450 5,100 2,200 2,500 14,500

31 Income Summary ........................... 37,650 S. Kim, Capital .......................

37,650

31 S. Kim, Capital ............................... 48,000 S. Kim, Drawings...................

48,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 5-7A (Continued) Taking It Further: A multiple-step income statement separates operating transactions from the non-operating transactions and matches costs and expenses with related revenues. A singlestep format is simpler, and no one type of revenue or expense item is implied to have priority over any other. The multi-step is considered more useful than a single-step income statement because the steps give additional information about a company’s profitability. Management wants more information about gross profit as it is the result of the main focus of the business activity as a merchant. As well, when reading the multiple-step format, the reader can make comparisons, for example salaries expense, to gross profit. Management may find this relationship key in managing the work force. Finally, because it is more detailed, the multiple-step format provides the reader with the amount of sales returns, allowances, and discounts that they may find out of proportion to the amount of gross sales.

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PROBLEM 5-8A (a) 2014

2013

Gross profit margin

13.7%

($36,641 – $31,623) ÷ ($34,835 –$ 30,287) $36,641 ÷ $34,835

($30,837– ÷ $30,837

Profit margin

5.14%

4.48%

4.65%

$1,882 ÷ $36,641

$1,561 ÷ $34,835

$1,433 ÷ $30,837

1.36:1

1.37:1

$9,923 ÷ $7,309

$9,135 ÷ $6,684

Current 1.31:1 ratio $10,007 ÷ $7,611

13.1%

2012 12.4% $27,019)

(b) Magna International’s gross profit margin and profit margin have steadily improved from 2012 to 2014 with the exception of a modest decrease in profit margin in 2013. The current ratio decreased between 2012 and 2014 but only very slightly for an overall decrease in liquidity.

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PROBLEM 5-8A (Continued) Taking It Further The underlying financial statements, in particular the income statement, would provide additional information to explain the nature of the changes in the ratios and to help an investor assess performance. The balance sheet would also help a potential investor assess the change in liquidity over the 3-year period by examining the underlying current assets and liabilities. For example, an increase in inventory and receivables can signal a deteriorating liquidity even though the current ratio shows an increase over the previous year. The financial statements would also allow a potential investor to calculate additional ratios to assess profitability and liquidity as well as measure the level of growth in sales experienced by Magna.

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*PROBLEM 5-9A GENERAL JOURNAL Date

Account Titles

Debit

Credit

Sept. 1 Purchases ............................................ 45,000 Accounts Payable ........................

45,000

2 (FOB destination means the seller pays the freight, therefore no entry required here.) 5 Accounts Payable .................................. 3,000 Purchase Returns and Allowances

3,000

15 Accounts Receivable ........................... 70,000 Sales ..............................................

70,000

16 Freight Out ....................................... Cash .............................................

1,800 1,800

17 Sales Returns and Allowances ...... Accounts Receivable ..................

5,000

25 Sales Discounts ($65,000 × 2%)...... 1,300 Cash ($65,000 − $1,300) ....................... 63,700 Accounts Receivable ($70,000 − $5,000)........................

5,000

65,000

30 Accounts Payable ($45,000 − $3,000) 42,000 Cash ............................................. 42,000 (No discount as not paid within discount period)

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*PROBLEM 5-9A (Continued) Oct.

Purchases ........................................ Accounts Payable .......................

52,000

Freight In .......................................... Cash .............................................

1,100

52,000

1,100

3 Accounts Payable............................ 2,000 Purchase Returns and Allowances

2,000

10 Accounts Payable ($52,000 − $2,000) 50,000 Cash ($50,000 − $1,000) ............. Purchase Discounts ($50,000 × 2%)

49,000 1,000

11 Accounts Receivable....................... Sales ............................................

83,500

12 (FOB shipping point means the buyer pays the freight, therefore no entry required here.) 17 Sales Returns and Allowances ....... Accounts Receivable ..................

1,500

31 Cash ................................................. 82,000 Accounts Receivable ($83,500 − $1,500)........................ (No discount as not received within 10 days)

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1,500

82,000

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*PROBLEM 5-9A (Continued) Taking It Further Norlan Company has few transactions (1 purchase and 1 sale per month). A periodic inventory system is less costly to implement and maintain than a perpetual system. If the company has relatively low inventory quantities and can maintain control over its inventory visually rather than electronically, then a periodic inventory system may be sufficient to meet their information needs.

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*PROBLEM 5-10A GENERAL JOURNAL Date July

Account Titles 1

Debit

Purchases (50 × $30) ........................ Accounts Payable ........................

Credit

1,500 1,500

2 (FOB destination means the seller pays the freight, therefore no entry required here.) 4 Accounts Payable.............................. Purchase Returns and Allowances

150

10 Accounts Receivable (45 × $55) ...... Sales .............................................

2,475

12 Sales Returns and Allowances ........ Accounts Receivable ...................

275

2,475

275

Purchases (60 × $27.50) .................... Accounts Payable ........................

1,650

Freight In ............................................ Cash ..............................................

150

21 Accounts Receivable (54 × $55) ...... Sales .............................................

2,970

23 Sales Returns and Allowances ........ Accounts Receivable ...................

110

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150

1,650

150

2,970

110

Accounts Payable.............................. Cash ($1,500 – $150) .....................

1,350

Cash ($2,475 − $275) ......................... Accounts Receivable ....................

2,200

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1,350 2,200

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*PROBLEM 5-10A (Continued) Taking It Further: A perpetual inventory system provides detailed records of inventory. This would allow Travel Warehouse to track the quantity and cost of inventory purchased, sold, and on hand. This would provide the benefit of being able to answer customer questions about merchandise availability and for management to maintain optimum inventory levels and avoid running out of stock. This system also allows the company to prepare financial statements more easily, since the cost of goods sold and ending inventory amounts are readily available. For a company such as Travel Warehouse, a perpetual system includes the freight-in costs in the inventory account rather than in a separate account. This would reflect the fact that the cost is the same regardless of whether Travel Warehouse or the supplier pays the freight. When the supplier pays the freight, they typically charge a higher amount for the inventory to compensate for the freight cost. A perpetual inventory system is more costly to implement and maintain because of the need to enter all merchandise in the accounting system. The accounting system must also be sufficiently sophisticated to track purchases and sales of merchandise, usually through the use of scanners.

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*PROBLEM 5-11A (a)

GENERAL JOURNAL

Date

Account Titles

J1 Debit

Credit

June 1 Purchases ................................................ 9,200 Accounts Payable ..........................

9,200

2 (FOB destination means the seller pays the freight, therefore no entry required here.) 5 Accounts Receivable ......................... Sales ...............................................

12,000

6 Sales Returns and Allowances .......... Accounts Receivable .....................

900

Freight Out .......................................... Cash ...............................................

300

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

790

Purchases............................................ Accounts Payable ..........................

4,750

Freight In ............................................. Cash ...............................................

130

Accounts Payable .............................. Purchase Returns and Allowances

250

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12,000

900

300

790

4,750

130 250

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*PROBLEM 5-11A (Continued) (a) (Continued) June 14 Accounts Payable ............................... Purchase Discounts ($9,200 × 1%) Cash ($9,200 − $92) ........................

9,200 92 9,108

15 Cash ($11,100 − $222) ........................ 10,878 Sales Discounts ($11,100 × 2%) ......... 222 Accounts Receivable ($12,000 - $900)

11,100

19 Cash ......................................................... 7,200 Sales ...............................................

7,200

20 Accounts Payable ($4,750 − $250) ......... 4,500 Purchase Discounts ($4,500 × 2%) Cash ($4,500 − $90) ........................

90 4,410

25 Sales Returns and Allowances ......... Cash ................................................

500 500

30 Accounts Receivable .............................. 4,100 Sales ................................................

4,100

(b)

Date

Merchandise Inventory Explanation Ref. Debit

June 1

Balance

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Credit

Balance 5,900

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*PROBLEM 5-11A (Continued) (b) (Continued)

Date

Explanation

Sales Ref.

Credit

Balance

12,000 7,200 4,100

12,000 19,200 23,300

Sales Returns and Allowances Explanation Ref. Debit Credit

Balance

June 5 19 30

Date

J1 J1 J1

June 6 25

Date

Debit

J1 J1

900 500

Sales Discounts Explanation Ref. Debit

June 15

900 1,400

Credit

Balance

222

Purchases Ref.

Debit

J1 J1

9,200 4,750

9,200 13,950

Purchases Discounts Date Explanation Ref. Debit June 14 J1 20 J1

Credit Balance 92 92 90 182

Date

Explanation

June 1 10

222

Credit

Balance

Purchases Returns and Allowances Date Explanation Ref. Debit Credit Balance June 12 J1 250 250

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*PROBLEM 5-11A (Continued) (b) (Continued) Freight In Ref.

Debit

June 10

130

Date

Freight Out Ref. Debit

Date

Explanation

June 6

Credit

Balance 130

Credit

300

Balance 300

Sales revenues Sales ................................................................................ $23,300 Less: Sales returns and allowances ............... $1,400 Sales discounts................................. 222 1,622 Net sales........................................................ 21,678 Cost of goods sold Merchandise inventory, June 1................... 5,900 Purchases........................................ $13,950 Less: Purchase discounts .......... $ 182 Purchase returns and allowances ................. 250 432 Net purchases ............................. 13,518 Add: Freight in ............................ 130 Cost of goods purchased......................... 13,648 Cost of goods available for sale .............. 19,548 Merchandise inventory, June 30.............. 5,498 Cost of goods sold ..................................................... 14,050 Gross profit...................................................................... $ 7,628

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*PROBLEM 5-11A (Continued) Taking It Further: The gross profit should be the same under both periodic and perpetual systems since the same transactions are recorded with the same impact on cash outflows, and the company will have the same amount of ending inventory because the balances are arrived at by the inventory count.

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*PROBLEM 5-12A NEW WEST COMPANY Income Statement Year Ended December 31, 2017 Sales ................................................................................... $395,000 Less: Sales discounts ................................. $ 2,900 Sales returns and allowances........... 7,500 10,400 Net sales .......................................................................... 384,600 Cost of goods sold Inventory, January 1, 2017 ....................... 30,000 Purchases................................... $232,000 Less: Purchase discounts ... $3,480 Purchase returns and allowances........ 4,000 7,480 Net purchases .............................. 224,520 229,020 Freight in ..................................... 4,500 Goods available for sale........................... 259,020 Inventory, December 31, 2017.................. 24,000 Cost of goods sold................................................. 235,020 Gross profit...................................................................... 149,580 Operating expenses Freight out................................................. 9,500 Insurance expense ................................... 10,500 Rent expense ............................................ 18,000 Salary expense ......................................... 42,000 Depreciation expense............................... 7,000 Total operating expenses ...................................... 87,000 Profit from operations..................................................... 62,580 Other revenues and expenses Interest revenue ....................................... 1,500 (1,000) Interest expense ...................................... (2,500) Profit................................................................................. $ 61,580

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*PROBLEM 5-12A (Continued) NEW WEST COMPANY Statement of Owner’s Equity Year Ended December 31, 2017 L. Oliver, capital, January 1, 2017 .................................. Add: Investment............................................................. Profit ...................................................................... Less: Drawings................................................................ L. Oliver, capital, December 31, 2017.............................

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$75,000 3,500 61,580 140,080 48,000 $92,080

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*PROBLEM 5-12A (Continued) NEW WEST COMPANY Balance Sheet December 31, 2017

Assets Current assets Cash ................................................................................ $ 16,780 Accounts receivable ................................................... 7,800 Merchandise inventory ................................................... 24,000 Total current assets ............................................... 48,580 Long-term investments Long-term investment ................................................ 50,000 Property, plant, and equipment Equipment ........................................................ 70,000 Less: Accumulated depreciation .................. 21,000 Total property, plant, and equipment ........................ 49,000 Total assets .............................................................. $147,580 Liabilities and Owner’s Equity Current liabilities Unearned revenue ...................................................... $ 5,500 Loan payable, current portion ................................... 5,000 Total current liabilities ........................................... 10,500 Long-term liabilities Loan payable ($50,000 − $5,000) .................................... 45,000 Total liabilities ........................................................ 55,500 Owner’s equity L. Oliver, capital .............................................................. 92,080 Total liabilities and owner’s equity ............................. $147,580

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*PROBLEM 5-12A (Continued) Taking It Further: A company using a periodic inventory system does not have to show the details of how cost of goods sold is calculated. The company can show its income statement using only the account cost of goods sold or show the details produced by the periodic system. GAAP for private enterprises as well as IFRS do not require the additional detail produced by the periodic system to be disclosed. This is because the decision to use either the periodic or perpetual system is a question of cost of the system as opposed to its benefits for a particular company. The additional detail produced by the periodic system provides information that is valuable to management and not to outside users of the income statement.

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*PROBLEM 5-13A (a) BUD’S BAKERY Income Statement Year Ended November 30, 2017 Sales ................................................................................... $872,000 Less: Sales discounts ................................. $ 8,250 Sales returns and allowances........... 9,845 18,095 Net sales .......................................................................... 853,905 Cost of goods sold Merchandise inventory, December 1, 2016 34,360 Purchases................................... $634,700 Less: Purchase discounts ... $6,300 Purchase returns and allowances........ 13,315 19,615 Net purchases .............................. 615,085 Freight in .................................... 5,060 620,145 Goods available for sale........................... 654,505 Merchandise inventory, November 30, 2017 37,350 Cost of goods sold................................................. 617,155 Gross profit...................................................................... 236,750 Operating expenses Depreciation expense............................... 14,000 Property tax expense ............................... 3,500 Salaries expense....................................... 122,000 Freight out................................................. 8,200 Insurance expense ................................... 9,000 Utilities expense ....................................... 19,800 Total operating expenses ...................................... 176,500 Profit from operations..................................................... 60,250 Other revenues and expenses Rent revenue ............................................ 2,800 (2,500) Interest expense ...................................... (5,300) Profit................................................................................. $ 57,750

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*PROBLEM 5-13A (Continued) (a) (Continued) BUD’S BAKERY Statement of Owner’s Equity Year Ended November 30, 2017 B. Hachey, capital, December 1, 2016............................ Add: Profit........................................................................ Less: Drawings................................................................ B. Hachey, capital, November 30, 2017..........................

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$104,480 57,750 162,230 12,000 $150,230

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*PROBLEM 5-13A (Continued) (a) (Continued) BUD’S BAKERY Balance Sheet November 30, 2017

Assets Current assets Cash............................................................................. $ 8,500 Accounts receivable ................................................... 13,770 Merchandise inventory............................................... 37,350 Prepaid insurance....................................................... 4,500 Total current assets ............................................... 64,120 Pr operty, plant, and equipment Land ............................................................ $ 85,000 Building ........................................ $175,000 Less: Accumulated depreciation 61,200 113,800 Equipment .................................. 57,000 Less: Accumulated depreciation 19,880 37,120 Total property, plant, and equipment ...................... 235,920 Total assets .............................................................. $300,040 Liabilities and Owner’s Equity Current liabilities Accounts payable .......................................................... $ 32,310 Salaries payable.......................................................... 8,500 Unearned revenue ...................................................... 3,000 Mortgage payable, current portion ............................ 8,500 Total current liabilities ........................................... 52,310 Long-term liabilities Mortgage payable ($106,000 − $8,500) ........................... 97,500 Total liabilities ............................................................ 149,810 Owner’s equity B. Hachey, capital ......................................................... 150,230 Total liabilities and owner’s equity ............................. $300,040

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*PROBLEM 5-13A (Continued) (b) Nov. 30 Sales ............................................... 872,000 Purchase Discounts ...................... 6,300 Purchase Returns and Allowances 13,315 Rent Revenue................................. 2,800 Merchandise Inventory (Nov. 30, 2017) 37,350 Income Summary ......................

931,765

30 Income Summary........................... 874,015 Purchases.................................. Freight In ................................... Sales Discounts ........................ Sales Returns and Allowances Salaries Expense ...................... Freight Out................................. Depreciation Expense............... Utilities Expense ....................... Property Tax Expense .............. Insurance Expense ................... Interest Expense ....................... Merchandise Inventory (Dec. 1, 2016)

634,700 5,060 8,250 9,845 122,000 8,200 14,000 19,800 3,500 9,000 5,300 34,360

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Income Summary........................... B. Hachey, Capital.....................

57,750

B. Hachey, Capital ......................... B. Hachey, Drawings.................

12,000

5-88

57,750 12,000

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*PROBLEM 5-13A (Continued) (c)

Date

Merchandise Inventory Explanation Ref. Debit

Dec. 1 Nov. 30 30

Balance Closing entry Closing entry

Date

B. Hachey, Capital Explanation Ref. Debit

Dec. 1 Nov. 30 30

Balance Closing entry Closing entry

Credit

Balance

34,360

34,360 0 37,350

Credit

Balance

 37,350

 12,000

104,480 57,750 162,230 150,230

Taking It Further: The list of accounts includes the following accounts that are used in a periodic inventory system: purchases, purchase discounts, purchase returns and allowances, and freight in. The periodic inventory system provides information about purchase returns and allowances, and purchase discounts. The purchase returns and allowances account provides management with similar information as the sales returns and allowances account. This account provides information about the volume of returns to suppliers and information about the quality of the products. The Freight In account allows management to see directly the cost of transportation for its purchased merchandise.

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PROBLEM 590B (a) A company’s operating cycle is the average time it takes to go from cash to cash in producing revenues. The operating cycle for a merchandising company covers the period of time from when you pay for your inventory, sell it, and eventually collect the accounts receivable from a sale. You are having problems paying your bills because the period of time between your sales and your collection of accounts receivable is lengthened because many customers take more than one month to pay. (b) Your inventory system is contributing to the problem because a periodic system does not keep track of inventory as sales occur. Therefore, you do not know what inventory you have on hand at any given time and you often run out of inventory. Taking It Further: You should consider switching to a perpetual inventory system where detailed records of each inventory purchase and sale are maintained. This system continuously—perpetually—shows the quantity and cost of the inventory purchased, sold, and on hand. This will allow you to order inventory on a more timely basis.

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PROBLEM 5-2B (a) GENERAL JOURNAL

Date

Account Titles

Debit

Credit

Apr. 2

Merchandise Inventory ....................... 16,000 Accounts Payable...........................

16,000

4 Accounts Payable [5 × ($16,000 ÷ 100)] Merchandise Inventory...................

800

5 Accounts Receivable (20 × $265) ....... Sales ................................................

5,300

Cost of Goods Sold (20 × $160) ......... Merchandise Inventory...................

3,200

6 Sales Returns and Allowances .......... Accounts Receivable (8 × $265) ....

2,120

Merchandise Inventory (8 × $160) ...... Cost of Goods Sold ........................

1,280

Cash (30 × $265) .................................. Sales ................................................

7,950

Cost of Goods Sold (30 × $160) ......... Merchandise Inventory...................

4,800

12 Sales Returns and Allowances .......... Cash (10 × $265) .............................

2,650

Merchandise Inventory (10 × $160) .... Cost of Goods Sold ........................

1,600

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800

5,300

3,200

2,120

1,280

7,950

4,800

2,650 1,600

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PROBLEM 5-2B (Continued) (a) (Continued) Apr. 17 Sales Returns and Allowances .......... Cash (10 × $265) .............................

2,650 2,650

25 Accounts Receivable (45 × $265) ....... 11,925 Sales ................................................ Cost of Goods Sold (45 × $160) ......... Merchandise Inventory...................

7,200

29 Sales Returns and Allowances .......... Accounts Receivable (25 × $265) ..

6,625

Merchandise Inventory (25 × $160) .... Cost of Goods Sold ........................

4,000

11,925

7,200

6,625 4,000

(b) Merchandise Inventory Apr. 1 3,200* 2 16,000 4 800 5 3,200 6 1,280 10 4,800 12 1,600 25 7,200 29 4,000 Bal. 10,080

Cost of Goods Sold Apr. 5 3,200 6 1,280 10 4,800 12 1,600 25 7,200 29 4,000

Bal.

8,320

*Balance from April 1, 2017 = 20 clubs x $160 each = $3,200

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PROBLEM 5-2B (Continued) (b) (Continued)

Sales Apr. 5 10 25

5,300 7,950 11,925

Bal.

25,175

Sales Returns and Allowances Apr. 6 2,120 12 2,650 17 2,650 29 6,625 Bal. 14,045

Taking It Further: The sales returns and allowances account can convey important information about inferior quality of the merchandise and the volume of returns. A significant amount of sales returns and allowances can negatively affect customer loyalty and satisfaction. They can also signify inefficiencies in filling orders, billing errors, or mistakes in the delivery of goods. Dealing with sales returns also involves costs of inspecting and restocking the merchandise.

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PROBLEM 5-3B GENERAL JOURNAL Date

Account Titles

Debit

Credit

Oct. 2

Merchandise Inventory ........................ 35,000 Accounts Payable .........................

35,000

4 No entry as FOB destination means the seller pays the freight. 5

Accounts Payable.............................. Merchandise Inventory .................

6,000 6,000

Accounts Payable ($35,000 − $6,000) 29,000 Merchandise Inventory ($29,000 × 2%) ............................... Cash ($29,000 − $580) ..................

580 28,420

Accounts Receivable......................... Sales ..............................................

62,500

Cost of Goods Sold ........................... 28,420 Merchandise Inventory ................. 18

No entry as FOB shipping means purchaser pays freight.

Sales Returns and Allowances ......... Accounts Receivable ....................

2,500

Sales Discounts ($60,000 × 2%)........ Cash ($60,000 − $1,200)..................... Accounts Receivable ($62,500 − $2,500)..........................

1,200 58,800

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28,420

5-94

2,500

60,000

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PROBLEM 5-3B (Continued) Nov. 1

Solutions Manual .

Merchandise Inventory ........................ 60,000 Accounts Payable .........................

60,000

Merchandise Inventory .......................... 4,000 Cash ...............................................

4,000

Accounts Receivable ......................... 110,500 Sales ..............................................

110,500

Cost of Goods Sold ($60,000 + $4,000) 64,000 Merchandise Inventory .................

64,000

Freight Out ......................................... Cash ...............................................

2,600 2,600

Sales Returns and Allowances ......... Accounts Receivable ...................

7,000

Merchandise Inventory...................... Cost of Goods Sold.......................

4,050

7,000 4,050

Cash ($110,500 − $7,000) ................... 103,500 Accounts Receivable .................... (No discount as not received within 10 days)

103,500

Accounts Payable ................................ 60,000 Cash .............................................. (No discount as not paid within 15 days)

60,000

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PROBLEM 5-3B (Continued) Taking It Further: Companies should take all available discounts since not taking the discount is equivalent to paying interest for the use of the money owing to the seller. For the Oct. 2 purchase from Gregory Company, the interest rate is calculated as follows: Amount owing to Gregory: ($35,000 − $6,000) = $29,000 Credit terms: 2/10, n/30 Discount taken: $29,000 × 2% = $580. This equals to an annual interest rate of 36.50% (2% x (365 ÷ 20)) For the Nov. 1 purchase from Romeo Company, the interest rate is calculated as follows: Amount owing to Romeo Company = $60,000 Credit terms: 1/15, n/30 Discount not taken: $60,000 × 1% = $600. This equals to an annual interest rate of 24.33% (1% x (365 ÷ 15)). In both cases, Leeland Company should be able to obtain financing from the bank at a lower rate of interest.

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PROBLEM 5-4B (a) GENERAL JOURNAL Date

Account Titles

Debit

Credit

June 1

Merchandise Inventory (170 × $7) ......... 1,190 Accounts Payable .........................

1,190

2 (FOB destination means the seller pays the freight, therefore no entry required here.) 3

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Accounts Receivable (190 × $12) ..... Sales ..............................................

2,280

Cost of Goods Sold (190 × $7) .......... Merchandise Inventory .................

1,330

Accounts Payable.............................. Merchandise Inventory .................

Sales Returns and Allowances ......... Accounts Receivable ....................

Merchandise Inventory (140 × $6.50) Accounts Payable .........................

910

Merchandise Inventory...................... Cash ...............................................

Accounts Receivable (100 × $12) ..... Sales ..............................................

1,200

Cost of Goods Sold (100 × $7) .......... Merchandise Inventory .................

700

5-97

2,280

1,330

910

1,200 700

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PROBLEM 5-4B (Continued) (a) (Continued) 28

Sales Returns and Allowances ......... Accounts Receivable ....................

180

Merchandise Inventory (15 × $7) ...... Cost of Goods Sold.......................

105

Accounts Payable ($1,190 − $70)...... Cash ...............................................

1,120

180

105

Cash ................................................... 2,232 Accounts Receivable ($2,280 − $48)

1,120

2,232

(b) Merchandise Inventory Bal. 1,610* June 1 1,190 June 3 1,330 20 910 6 70 21 70 27 700 28 105 Bal. 1,785 * On May 31, there were 230 books on hand at a cost of $7 per book = $1,610 (c)

There are 255* books on hand on June 30. The average cost per book is: $1,785 ÷ 255 books = $7.00 per book Quantity Beginning inventory 230 Purchased June 1 170 Sold June 3 (190) Returned to supplier June 6 (10) Purchased June 20 140 Sold June 27 (100) Returned by customer June 28 15 Ending Inventory 255* Note that the books returned on June 18 were disposed of and are therefore not included in the ending inventory.

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PROBLEM 5-4B (Continued) Taking It Further: Freight terms indicate when ownership of the goods transfers from the seller to the buyer and who pays for the transportation charges. In the June 1st transaction, the freight terms are FOB destination. The seller, Reader’s World Publishers, pays for the freight charges, resulting in an inventory cost of $7 per item. When the seller pays for the freight costs, this usually results in a higher invoice price to cover the shipping expense In the June 20th transaction, the freight terms are FOB shipping point. The buyer, Phantom Book Warehouse, pays for the freight charges. Invoice cost (140 books × $6.50) $910 Freight 70 Total inventory cost $980 Cost per book ($980 ÷ 140) $7.00 Shipping terms also impact the cost of merchandise by identifying the beginning of the discount period for calculating discounts on purchases. With FOB shipping point, the discount period starts when the goods are shipped. With FOB destination, the discount period starts when the goods are received.

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PROBLEM 5-5B (a)

GENERAL JOURNAL

Date

Account Titles

Debit

Credit

Sept. 2

Merchandise Inventory ........................ 13,500 Accounts Payable .........................

13,500

4 No entry as FOB destination means the seller pays the freight. 5

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Accounts Receivable......................... Sales ..............................................

18,000 18,000

Cost of Goods Sold ........................... 11,310 Merchandise Inventory .................

11,310

Sales Returns and Allowances ......... Accounts Receivable ...................

1,400 1,400

Merchandise Inventory...................... Cost of Goods Sold.......................

890

Freight Out ......................................... Cash ...............................................

420

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

900

Merchandise Inventory...................... Accounts Payable ........................

6,450

Merchandise Inventory...................... Cash ...............................................

150

Accounts Payable.............................. Merchandise Inventory .................

450

5-100

890

420

900

6,450

150 450

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PROBLEM 5-5B (Continued) (a) (Continued) Sept.15

Solutions Manual .

Accounts Payable.............................. 13,500 Merchandise Inventory ($13,500 × 1%) ............................... Cash ($13,500 − $135) ................... Cash ( $16,600 − $332) ...................... 16,268 332 Sales Discount (2% × $16,600).......... Accounts Receivable .................... ($18,000 – $1,400)

135 13,365

16,600

Cash .................................................. 10,875 Sales .............................................

10,875

Cost of Goods Sold .......................... Merchandise Inventory .................

6,855 6,855

Accounts Payable ($6,450 – $450).... Merchandise Inventory ($6,000 × 2%) ................................. Cash ($6,000 − $120) .....................

6,000

Sales Returns and Allowances ......... Cash ..............................................

750

Accounts Receivable......................... Sales ..............................................

6,420

Cost of Goods Sold ........................... Merchandise Inventory .................

4,050

5-101

120 5,880

750

6,420 4,050

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PROBLEM 5-5B (Continued) (b) Date Sept. 1 2 5 6 10 10 12 15 19 20 30

Date

Merchandise Inventory Explanation Ref. Debit  J1 13,500 J1 J1 890 J1 6,450 J1 150 J1 J1 J1 J1 J1

Balance

450 135 6,855 120 4,050

Credit

Balance

18,000 10,875 6,420

18,000 28,875 35,295

Sales Returns and Allowances Explanation Ref. Debit Credit

Balance

Explanation

Sales Ref.

J1 J1

5-102

11,310

1,400 750

Sales Discounts Explanation Ref. Debit

Sept.15

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Debit

J1 J1 J1

Sept. 6 25

Date

Balance 7,500 21,000 9,690 10,580 17,030 17,180 16,730 16,595 9,740 9,620 5,570

Sept. 5 19 30

Date

Credit

332

1,400 2,150

Credit

Balance 332

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PROBLEM 5-5B (Continued) (b) (Continued)

Date

Cost of Goods Sold Explanation Ref. Debit

Sept. 5 6 19 30

J1 11,310 J1 J1 6,855 J1 4,050

Credit

890

Balance 11,310 10,420 17,275 21,325

(c) STOJANOVIC DISTRIBUTING COMPANY Income Statement (Partial) Month Ended September 30, 2017 Sales revenues Sales ................................................................................ $35,295 Less: Sales returns and allowances ............. $2,150 Sales discounts.................................. 332 2,482 Net sales .......................................................................... 32,813 Cost of goods sold .............................................................. 21,325 Gross profit .......................................................................... $11,488 Taking It Further: Stojanovic would face uncertainty about the amount of sales recorded in September that may be returned in a subsequent accounting period. If Stojanovic experiences significant returns and accepts returns for up to six months after the initial sale, the September gross profit will be overstated. If a company experiences substantial returns, it has to record an estimated amount in the same time period as the related sales in order to properly reflect the gross profit for that period. This topic is usually explored further in an intermediate accounting course.

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PROBLEM 5-6B (a) July 31 Cost of Goods Sold ($41,250 − $40,000) .................................. 1,250 Merchandise Inventory...................

1,250

(b) WESTERN LIGHTING WAREHOUSE Income Statement Year Ended July 31, 2017 Revenues Net sales ($450,000 – $4,500 – $11,250) ....... $434,250 Interest revenue ............................................ 3,000 $437,250 Expenses Cost of goods sold ($247,500 + $1,250)......... $248,750 Depreciation expense ........................................... 8,350 Freight out ............................................................. 6,055 Insurance expense ............................................... 3,195 Interest expense ................................................... 2,300 Rent expense ...................................................... 62,000 Salaries expense................................................. 45,000 Utilities expense ............................................... 12,600 388,250 Profit................................................................................. $ 49,000

(c) Gross profit = $434,250 - $248,750 = $185,500 Gross profit margin = $185,500 ÷ $434,250 = 42.7% Profit margin = $49,000 ÷ $434,250 = 11.3% The gross profit margin has improved from 40% in 2016 to 42.7% in 2017. The profit margin has also improved slightly from 10% in 2016 to 11.3% in 2017.

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PROBLEM 5-6B (Continued) (d) July 31

Interest Revenue ............................... 3,000 Sales .................................................. 450,000 Income Summary..........................

453,000

Income Summary .............................. 404,000 Sales Returns and Allowances .... Sales Discounts ............................ Cost of Goods Sold ...................... Depreciation Expense .................. Freight out..................................... Insurance Expense ....................... Interest Expense ........................... Rent Expense................................ Salaries Expense .......................... Utilities Expense ...........................

11,250 4,500 248,750 8,350 6,055 3,195 2,300 62,000 45,000 12,600

Income Summary .............................. A. Jamal, Capital ...........................

49,000 49,000

A. Jamal, Capital ............................... A. Jamal, Drawings.......................

39,600 39,600

Income Summary 453,000 404,000 * 49,000 49,000 0 * Check $49,000 = Profit

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PROBLEM 5-6B (Continued) Taking It Further: To most users of financial statements, the gross profit margin is generally considered to be more useful than the gross profit amount because the gross margin shows the relative relationship between net sales and gross profit. Gross profit margin measures the proportion of the selling price remaining after accounting for cost of goods sold. The profit margin measures the proportion of the selling price remaining after accounting for all expenses including cost of goods sold. For a merchant, having a healthy gross margin is critical. Paying attention to negotiating favourable terms with suppliers or taking advantage of discounted purchase prices from buying in bulk have the potential of increasing gross profit by reducing cost of goods sold. Pricing policies are also important as they have an effect on the volume of sales and the gross profit derived from generating those sales. The profit margin measures the percentage of each dollar of sales that results in profit. It is affected by the management of expenses, not just cost of goods sold. A user can understand why, for example, the profit margin of a start-up company is lower than that of a competitor if there is a lot of debt on the balance sheet and so there are large interest costs, reducing the profit.

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PROBLEM 5-7B (a) Dec. 31 Supplies Expense .............................. Supplies ......................................... ($1,650 − $700)

950

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

9,560

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

1,750

Interest Receivable ............................ Interest Revenue ...........................

720

31 Unearned Revenue ........................... Sales .............................................. ($3,000 − $1,600)

1,400

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950

5,360 4,200

1,750

720

1,400

Cost of Goods Sold ........................... Merchandise Inventory .................

755

Cost of Goods Sold ........................... Merchandise Inventory ................. [($37,500 − $755) − $35,275]

1,470

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PROBLEM 5-7B (Continued) (b)

GLOBAL ENTERPRISES Income Statement Year Ended December 31, 2017 Sales revenues Sales ($245,000 + $1,400) ............................................. $246,400 Less: Sales returns and allowances .............. $6,670 Sales discounts .................................. 2,450 9,120 Net sales .......................................................................... 237,280 Cost of goods sold ($132,300 + $755 + $1,470)................. 134,525 Gross profit .......................................................................... 102,755 Operating expenses Insurance expense .................................... 1,800 Rent expense ............................................. 9,300 Salaries expense........................................ 28,400 Supplies expense ...................................... 950 Depreciation expense................................ 9,560 Total operating expenses ......................................... 50,010 Profit from operations..................................................... 52,745 Other revenues and expenses Interest revenue ......................................... 720 Interest expense ........................................ (1,750) (1,030) Profit................................................................................. $ 51,715

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PROBLEM 5-7B (Continued) (c)

GLOBAL ENTERPRISES Income Statement Year Ended December 31, 2017 Revenues Net sales ....................................................... $237,280 Interest revenue .......................................... 720 $238,000 Expenses Cost of goods sold........................................ $134,525 Depreciation expense..................................... 9,560 Insurance expense ......................................... 1,800 Interest expense ............................................. 1,750 Rent expense .................................................. 9,300 Salaries expense............................................. 28,400 Supplies expense ........................................... 950 186,285 Profit................................................................................. $ 51,715

(d) Dec. 31 Sales..................................................... 246,400 Interest Revenue ................................. 720 Income Summary............................

247,120

31 Income Summary ................................ 195,405 Sales Returns and Allowances ...... Sales Discounts .............................. Cost of Goods Sold ........................ Insurance Expense ......................... Rent Expense.................................. Salaries Expense ............................ Supplies Expense ........................... Depreciation Expense .................... Interest Expense .............................

6,670 2,450 134,525 1,800 9,300 28,400 950 9,560 1,750

31 Income Summary .................................. 51,715 I. Rochefort, Capital .......................

51,715

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PROBLEM 5-7B (Continued) (d) (Continued)

31 I. Rochefort, Capital............................... 35,500 I. Rochefort, Drawings....................

35,500

Taking It Further: A multiple-step income statement separates operating transactions from the non-operating transactions and matches costs and expenses with related revenues. A singlestep format is simpler, and no one type of revenue or expense item is implied to have priority over any other. The multiple-step is considered more useful than a singlestep income statement because the steps give additional information about a company’s profitability. Management wants more information about gross profit as it is the result of the main focus of the business activity as a merchant. In the case of Global Enterprises, non-operating transactions are minimal in relation to the general operations. This is made clearer when reading the multiple-step format. As well, the reader can make comparisons, for example salaries expense, to gross profit. Management may find this relationship key in managing the work force. Finally, because it is more detailed, the multiple-step format provides the reader with the amount of sales returns, allowances, and discounts that they may find out of proportion to the amount of gross sales. In the case of Global Enterprises, these amounts are not disproportionate.

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PROBLEM 5-8B (a) 2014

2013

Gross profit margin

48.08%

Profit margin

-5.4%

0.9%

2.7%

$-7,663 ÷ $141,930

$1,411 ÷ $154,995

$4,003 ÷ $148,219

3.15:1

4.23:1

5.19:1

$33,970 ÷ $10.790

$49,709 ÷ $11,748

$60,965 ÷ $11,748

Current ratio

50.59%

2012 51.75%

($141,930 − $73,697) ($154,995 − $76,579) ÷ ($148,219 − $71,513) ÷ $141,930 $154,995 ÷ $148,219

(b) Danier Leather’s gross profit margin keeps declining. The 2014 sales declined faster than the cost of goods sold, explaining the decline in the gross profit margin. The decline in gross profit has led to a loss for 2014 and a corresponding negative profit margin. The current ratio deteriorated steadily, but still remains very healthy at amounts well beyond 2:1 for all three years.

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PROBLEM 5-8B (Continued) Taking It Further The underlying financial statements, in particular the income statement, would provide additional information to explain the nature of the changes in the ratios, to help an investor assess the cause for the loss in 2014, and to determine whether this may be of a recurring nature. The balance sheet would also help a potential investor assess the overall financial position over the 3-year period, particularly in view of major declines in sales, profit, and the loss of 2014. The financial statements would also allow a potential investor to calculate additional ratios to assess profitability, liquidity, and solvency.

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*PROBLEM 5-9B GENERAL JOURNAL Date

Account Titles

Debit

Credit

Oct. 2

Purchases ............................................ 35,000 Accounts Payable .........................

35,000

No entry as FOB destination means the seller pays the freight.

Accounts Payable............................. 6,000 Purchase Returns and Allowances

6,000

Accounts Payable ($35,000 − $6,000) 29,000 Purchase Discounts ($29,000 × 2%) Cash ($29,000 − $580) ..................

580 28,420

Accounts Receivable ........................... 62,500 Sales ..............................................

62,500

No entry as FOB shipping means purchaser pays freight.

Sales Returns and Allowances ........ Accounts Receivable ....................

2,500

Sales Discounts ($60,000 × 2%)........ Cash ($60,000 − $1,200)..................... Accounts Receivable ($62,500 − $2,500)..........................

1,200 58,800

Nov. 1

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2,500

60,000

Purchases .......................................... 60,000 Accounts Payable .........................

60,000

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*PROBLEM 5-9B (Continued) Nov. 2

Freight In ............................................ Cash ...............................................

4,000 4,000

Accounts Receivable......................... 110,500 Sales .............................................. Freight Out ......................................... Cash ...............................................

2,600

Sales Returns and Allowances ......... Accounts Receivable ....................

7,000

110,500

2,600 7,000

Cash ($110,500 − $7,000) .................... 103,500 Accounts Receivable .................... (No discount as not received within 10 days)

103,500

Accounts Payable ................................ 60,000 Cash .............................................. (No discount as not paid within 15 days)

60,000

Taking It Further Leeland Company has few transactions (1 purchase and 1 sale per month). A periodic inventory system is less costly to implement and maintain than a perpetual system. If the company has relatively low inventory quantities and can maintain control over its inventory visually rather than electronically, then a periodic inventory system may be sufficient to meet their information needs.

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*PROBLEM 5-10B GENERAL JOURNAL Date

Account Titles

Debit

Credit

June 1

Purchases (170 × $7) ............................. 1,190 Accounts Payable .........................

1,190

(FOB destination means the seller pays the freight, therefore no entry required here.)

Accounts Receivable (190 × $12) ..... Sales ..............................................

2,280

Accounts Payable.............................. Purchase Returns and Allowances

Sales Returns and Allowances ......... Accounts Receivable ....................

Purchases (140 × $6.50) .................... Accounts Payable .........................

910

Freight In ............................................ Cash ...............................................

Accounts Receivable (100 × $12) ..... Sales ..............................................

1,200

Sales Returns and Allowances ......... Accounts Receivable ....................

180

Accounts Payable ($1,190 − $70)...... Cash ...............................................

1,120

Cash ($2,280 − $48) ........................... Accounts Receivable ....................

2,232

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2,280

910

1,200

180

1,120 2,232

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*PROBLEM 5-10B (Continued) Taking It Further: A perpetual inventory system provides detailed records of inventory. This would allow Phantom Book Warehouse to track the quantity and cost of inventory purchased, sold, and on hand. This would provide the benefit of being able to answer customer questions about merchandise availability and for management to maintain optimum inventory levels and avoid running out of stock. This system also allows the company to prepare financial statements more easily since the cost of goods sold and ending inventory amounts are readily available. For a company such as Phantom Book Warehouse, a perpetual system includes the freight-in costs in the inventory account rather than in a separate account. This would reflect the fact that the cost is the same regardless of whether Phantom Book Warehouse or the supplier pays the freight. When the supplier pays the freight, they typically charge a higher amount for the inventory to compensate for the freight cost.

A perpetual inventory system is more costly to implement and maintain because of the need to enter all merchandise in the accounting system. The accounting system must also be sufficiently sophisticated to track purchases and sales of merchandise, usually through the use of scanners.

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*PROBLEM 5-11B (a) GENERAL JOURNAL

Date

Account Titles

Debit

Credit

Sept. 2

Purchases ............................................ 13,500 Accounts Payable .........................

13,500

No entry as FOB destination means the seller pays the freight.

Accounts Receivable......................... 18,000 Sales ..............................................

18,000

Sales Returns and Allowances ......... Accounts Receivable ...................

1,400 1,400

Freight Out ......................................... Cash ...............................................

420

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

900

Purchases .......................................... Accounts Payable ........................

6,450

Freight In ............................................ Cash ...............................................

150

Accounts Payable.............................. Purchase Returns and Allowances

450

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420

900

6,450

150 450

Accounts Payable ................................ 13,500 Purchase Discounts ($13,500 × 1%) Cash ($13,500 − $135) ...................

135 13,365

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*PROBLEM 5-11B (Continued) (a) (Continued) Sept.15

Cash ($16,600 − $332) ....................... 16,268 332 Sales Discount (2% × $16,600).......... Accounts Receivable .................... ($18,000 - $1,400)

16,600

Cash ................................................... 10,875 Sales ..............................................

10,875

Accounts Payable ($6,450 - $450)..... Purchase Discounts ($6,000 × 2%) Cash ($6,000 − $120) .....................

6,000 120 5,880

Sales Returns and Allowances ......... Cash ..............................................

750

Accounts Receivable......................... Sales ..............................................

6,420

750

6,420

(b) Date

Merchandise Inventory Explanation Ref. Debit

Sept. 1

Balance

Date

Explanation

 Sales Ref.

Sept. 5 19 30

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Credit

J1 J1 J1

5-118

Balance 7,500

Debit

Credit

Balance

18,000 10,875 6,420

18,000 28,875 35,295

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*PROBLEM 5-11B (Continued) (b) (Continued)

Date

Sales Returns and Allowances Explanation Ref. Debit Credit

Sept. 6 25

Date

J1 J1

1,400 750

Sales Discounts Explanation Ref. Debit

Sept.15

Date Sept. 2 10

Purchases Ref. Debit J1 13,500 J1 6,450

Explanation

Balance 1,400 2,150

Credit

332

Balance 332

Credit

Balance 13,500 19,950

Purchase Returns and Allowances Date Explanation Ref. Debit Credit Balance Sept. 12 J1 450 450

Date Sept. 15 20

Purchase Discounts Explanation Ref. Debit J1 J1

Credit Balance 135 135 120 255

Date Explanation Sept. 10

Freight In Ref. J1

Date Sept. 6

Freight Out Ref. Debit Credit Balance J1 420 420

Solutions Manual .

Explanation

5-119

Debit Credit 150

Balance 150

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Accounting Principles, Seventh Canadian Edition

PROBLEM 5-11B (Continued) (c) STOJANOVIC DISTRIBUTING COMPANY Income Statement (Partial) Month Ended September 30, 2017 Sales revenues Sales ................................................................................ $35,295 Less: Sales returns and allowances ............. $2,150 Sales discounts.................................. 332 2,482 Net sales .......................................................................... 32,813 Cost of goods sold Merchandise inventory, September 1, 2017.... 7,500 Purchases ........................................ $19,950 Less: Purchase returns and allowances ................ $450 Purchase discounts ......... 255 705 Net purchases .................................. 19,245 Add: Freight in ................................. 150 Cost of goods purchased .................................. 19,395 Cost of goods available for sale .........................26,895 Merchandise inventory, September 30, 2017 ... 5,570 Cost of goods sold................................................. 21,325 Gross profit .......................................................................... $11,488 Taking It Further: The gross profit should be the same under both periodic and perpetual systems since the same transactions are recorded with the same impact on cash outflows, and the company will have the same amount of ending inventory because the balances are arrived at by the inventory count.

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*PROBLEM 5-12B UP NORTH COMPANY Income Statement Year Ended December 31, 2017 Sales ................................................................................... $474,000 Less: Sales discounts ................................. $ 3,480 Sales returns and allowances........... 9,000 12,480 Net sales .......................................................................... 461,520 Cost of goods sold Merchandise inventory, January 1, 2017 36,000 Purchases................................... $278,400 Less: Purchase discounts ... $4,175 Purchase returns and allowances........ 4,800 8,975 Net purchases ............... 269,425 Freight in ..................................... 5,400 274,825 310,825 Goods available for sale........................... 28,800 Merchandise inventory, December 31, 2017 Cost of goods sold................................................. 282,025 Gross profit...................................................................... 179,495 Operating expenses Freight out ................................................. 11,400 Insurance expense ................................... 12,600 Rent expense ............................................ 21,600 Salary expense ......................................... 50,400 Depreciation expense............................... 8,400 Total operating expenses ...................................... 104,400 Profit from operations..................................................... 75,095 Other revenues and expenses Interest revenue ....................................... 1,800 Interest expense ...................................... (3,000) (1,200) Profit................................................................................. $ 73,895

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 5-12B (Continued) UP NORTH COMPANY Statement of Owner’s Equity Year Ended December 31, 2017 J. Prideaux, capital, January 1, 2017 ............................. $ 90,000 Add: Investment............................................................. 4,200 Profit ...................................................................... 73,895 168,095 Less: Drawings................................................................ 57,600 J. Prideaux, capital, December 31, 2017 ........................ $110,495

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 5-12B (Continued) UP NORTH COMPANY Balance Sheet December 31, 2017

Assets Current assets Cash ................................................................................ $ 20,135 Accounts receivable ................................................... 9,360 Merchandise inventory ................................................... 28,800 Total current assets ............................................... 58,295 Long-term investments Long-term investment ................................................ 60,000 Property, plant, and equipment Equipment ...................................................... $84,000 Less: Accumulated depreciation .................. 25,200 Total property, plant, and equipment ...................... 58,800 Total assets .............................................................. $177,095 Liabilities and Owner’s Equity Current liabilities Unearned revenue ...................................................... $ 6,600 Loan payable, current portion ....................................... 6,000 Total current liabilities ........................................... 12,600 Long-term liabilities Loan payable ($60,000 − $6,000) ................................... 54,000 Total liabilities ........................................................ 66,600 Owner’s Equity J. Prideaux, capital........................................................ 110,495 Total liabilities and owner’s equity ............................. $177,095

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 5-12B (Continued) Taking It Further: The balance sheet reports the assets, liabilities, and owner’s equity at December 31, 2017. The beginning inventory is no longer an asset at December 31, 2017 since the merchandise has been sold. It now represents an expense and is related to the sales revenue earned from the sale of the goods. Under both IFRS and ASPE, companies are required to present comparative information on their financial statements, so users would see the beginning inventory as the balance of merchandise unsold at the end of the previous year.

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 5-13B (a) TSE’S TATOR TOTS Income Statement Year Ended December 31, 2017 Sales revenues Sales .............................................................................. $642,800 Less: Sales discounts ...................................$ 12,700 Sales returns and allowances ............ 11,900 24,600 Net sales .......................................................................... 618,200 Cost of goods sold Merchandise inventory, January 1 .......... 40,500 Purchases ................................ $441,600 Less: Purchase discounts ....$ 8,830 Purchase returns and allowances ................. 20,070 28,900 Net purchases .......................... 412,700 Add: Freight in ......................... 5,600 418,300 Cost of goods purchased......................... Cost of goods available for sale .............. 458,800 Merchandise inventory, December 31 ..... 34,600 Cost of goods sold................................................. 424,200 Gross profit...................................................................... 194,000 Operating expenses Depreciation expense............................... 23,400 Freight out ................................................. 7,500 Insurance expense ................................... 9,600 Property tax expense ............................... 4,800 Salaries expense....................................... 127,500 Utilities expense ....................................... 18,000 Total operating expenses ...................................... 190,800 Profit from operations..................................................... 3,200 Other revenues and expenses Interest revenue ................................................. 1,050 Interest expense .......................................... (11,345) (10,295) Loss ................................................................................. $(7,095)

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 5-13B (Continued) (a) (Continued) TSE’S TATOR TOTS Statement of Owner’s Equity Year Ended December 31, 2017 H. Tse, capital, January 1, 2017 ........................................ $143,600 Less: Loss........................................................................... 7,095 136,505 Less: Drawings .................................................................. 14,450 H. Tse, capital, December 31, 2017 ................................... $122,055

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 5-13B (Continued) (a) (Continued) TSE’S TATOR TOTS Balance Sheet December 31, 2017

Assets Current assets Cash............................................................................... $ 17,000 Accounts receivable ......................................................... 44,200 Merchandise inventory .................................................. 34,600 Total current assets ..................................................... 95,800 Property, plant, and equipment Land ............................................................... $ 75,000 Building ......................................... $190,000 Less: Accumulated depreciation 51,800 138,200 Equipment ....................................... 110,000 Less: Accumulated depreciation 42,900 67,100 280,300 Total assets .............................................................. $376,100 Liabilities and Owner’s Equity Current liabilities Accounts payable ....................................................... $ 86,300 Interest payable .......................................................... 945 Salaries payable.......................................................... 3,500 Unearned revenue ...................................................... 8,300 Current portion of mortgage payable ........................... 17,000 Total current liabilities ............................................... 116,045 Long-term liabilities Mortgage payable ($155,000 − $17,000) ........................... 138,000 Total liabilities ............................................................ 254,045 Owner’s equity H. Tse, capital ................................................................ 122,055 Total liabilities and owner’s equity ............................. $376,100

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 5-13B (Continued) (b) GENERAL JOURNAL

Date

Account Titles and Explanation

Debit

Credit

Dec. 31

Sales ................................................. 642,800 Interest Revenue.............................. 1,050 Inventory (Dec. 31) .......................... 34,600 Purchase Returns and Allowances 20,070 Purchase Discounts ........................ 8,830 Income Summary ........................

707,350

Income Summary............................. 714,445 Inventory (Jan. 1) ........................ Purchases.................................... Freight In ..................................... Salaries Expense ........................ Utilities Expense ......................... Depreciation Expense................. Insurance Expense ..................... Property Tax Expense ................ Freight Out................................... Interest Expense ......................... Sales Returns and Allowances .. Sales Discounts ..........................

40,500 441,600 5,600 127,500 18,000 23,400 9,600 4,800 7,500 11,345 11,900 12,700

31 H. Tse, Capital .................................. Income Summary ........................

7,095

14,450

Solutions Manual .

H. Tse, Capital .................................. H. Tse, Drawings .........................

5-128

7,095 14,450

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 5-13B (Continued) (c) Date

Merchandise Inventory Explanation Ref. Debit

Jan. 1 Dec. 31 Dec. 31

Balance Closing entry Closing entry

 J2 34,600 J2

Credit

Balance

40,500

40,500 75,100 34,600

Check: Merchandise Inventory on Balance Sheet = $34,600 H. Tse, Capital Date Explanation Ref. Debit Credit Balance Jan. 1 Dec. 31 Dec. 31

Balance Closing entry Closing entry

 J2 7,095 J2 14,450

143,600 136,505 122,055

Check: H.Tse, Capital on Balance Sheet = $122,055 Taking It Further: The list of accounts includes the following accounts that are used in a periodic inventory system: purchases, purchase discounts, purchase returns and allowances, and freight in. The periodic inventory system provides information about purchase returns and allowances, and purchase discounts. The purchase returns and allowances account provides management with similar information as the sales returns and allowances account. This account provides information about the volume of returns to suppliers and information about the quality of the products. The freight in account allows management to see directly the cost of transportation for its purchased merchandise.

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Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE – CHAPTERS 2 TO 5 (a) , (b), (d), and (g)

Date Aug.

Explanation 1 1 2 4 5 9 11 15 19 24 30 30 31

1 10 12 19

Solutions Manual .

Debit

Credit

 1,650 6,500 12,260 500 425 12,250 3,100 14,700 525 3,100 8,918 4,800

Accounts Receivable Explanation Ref. Debit

Date Aug.

Balance

Cash Ref.

21,385 19,735 13,235 25,495 24,995 24,570 12,320 9,220 23,920 24,445 21,345 12,427 7,627

Credit Balance

 15,750 750 15,000

5-130

Balance

0 15,750 15,000 0

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Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (a) , (b), (d), and (g) (Continued)

Merchandise Inventory Explanation Ref. Debit

Date Aug.

1 4 5 5 9 10 12 21 23 30 31 31

Date Aug.

1 8 31

1 31

Solutions Manual .

9,765 465 9,900 800 182 2,325 2,223

Adjusting entry Adjusting entry Supplies Ref.

Debit

Credit Balance

345

3,750 4,095 755

 Adjusting entry

Balance

3,340 Equipment Ref.

64,125 56,225 80,725 81,225 81,490 71,725 72,190 82,090 81,290 81,108 78,783 76,560

Debit

Credit Balance



70,800

Accumulated Depreciation—Equipment Explanation Ref. Debit Credit Balance

Date Aug.

24,500 500 265

Explanation 1

 7,900

Explanation

Date Aug.

Balance

Credit Balance

Balance Adjusting entry

 8,850

5-131

13,275 22,125

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Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (a), (b), (d), and (g) (Continued) Accounts Payable Explanation Ref. Debit

Date Aug.

1 2 5 8 11 21 23 30

Aug.

1 24 31

Date Aug.

1 31

1 31 31

Solutions Manual .

24,500 345 12,250 9,900 800 9,100

Adjusting entry

Explanation Balance



Balance Adjusting entry

Balance Closing entry Closing entry

525

4,680 5,205 1,455

Credit

Balance 42,000

Credit

Balance

175

0 175

Credit

Balance

70,442

58,400 128,842 71,242



 57,600 5-132

12,650 6,150 30,650 30,995 18,745 28,645 27,845 18,745

Balance

3,750

Notes Payable Ref. Debit

Balance

Credit



Balance

A. John, Capital Explanation Ref. Debit

Date Aug.

6,500

Interest Payable Explanation Ref. Debit

Date Aug.



Balance

Unearned Revenue Explanation Ref. Debit

Date

Credit

Chapter 5

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (a), (b), (d), and (g) (Continued) A. John, Drawings Explanation Ref. Debit

Date

Credit

Balance

Closing entry

57,600

52,800 57,600 0

Date

Income Summary Explanation Ref. Debit

Credit Balance

Aug. 31 31 31

Closing entry Closing entry Closing entry

Aug.

1 31 31

Date Aug.

1 4 10 31 31

Balance

518,460 448,018 70,442

518,460 70,442 0

Debit

Credit Balance

517,260

485,500 497,760 513,510 517,260 0

Sales Ref. 

12,260 15,750 3,750

Adjusting entry Closing entry

Sales Returns and Allowances Explanation Ref. Debit Credit 1 9 12 31

Solutions Manual .

 4,800

Explanation

Date Aug.

Balance

 425 750

Closing entry

12,595

5-133

Balance 11,420 11,845 12,595 0

Chapter 5

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Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (a), (b), (d), and (g) (Continued) Sales Discounts Explanation Ref. Debit

Date Aug.

1 19 31

Date Aug.

Aug.

1 4 9 10 12 31 31 31

Aug.

1 15 30 31

Solutions Manual .

Closing entry Rent Revenue Ref. Debit

Balance Closing entry

Credit

Balance

1,200

1,200 0

Credit

Balance



Balance



322,493

301,010 308,910 308,645 318,410 317,945 320,270 322,493 0

Credit

Balance

74,400

68,200 71,300 74,400 0

7,900 265 9,765 465 Adjusting entry Adjusting entry Closing entry

2,325 2,223

Salaries Expense Explanation Ref. Debit

Date

300

0 300 0

300

Cost of Goods Sold Explanation Ref. Debit

Date

Balance



Balance

Explanation 1 31

Credit

Balance

 3,100 3,100

Closing entry

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Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (a), (b), (d), and (g) (Continued) Supplies Expense Explanation Ref. Debit

Date Aug.

1 31 31

Date Aug.

1 1 31

Date Aug.

1 31

1 31 31

Solutions Manual .

3,340

0 3,340 0

Credit

Balance

Closing entry

19,800

18,150 19,800 0

Insurance Expense Explanation Ref. Debit

Credit

Balance

4,140

4,140 0

Credit

Balance

2,100

1,925 2,100 0

Credit

Balance

8,850

0 8,850 0

Balance Adjusting entry Closing entry

 3,340

Explanation

Rent Expense Ref. Debit

Balance

 1,650

Balance Closing entry



Balance Adjusting entry Closing entry

 175

Depreciation Expense Explanation Ref. Debit

Date Aug.

Balance

Interest Expense Explanation Ref. Debit

Date Aug.

Credit

Balance Adjusting entry Closing entry

 8,850

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Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) GENERAL JOURNAL Date

Account Titles

Aug. 1

Solutions Manual .

Debit

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

1,650

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

6,500

Credit

1,650

6,500

Cash ................................................... 12,260 Sales ..............................................

12,260

Cost of Goods Sold ........................... Merchandise Inventory .................

7,900

Merchandise Inventory...................... 24,500 Accounts Payable ......................... Merchandise Inventory...................... Cash ...............................................

500

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

345

Sales Returns and Allowances ......... Cash ...............................................

425

Merchandise Inventory...................... Cost of Goods Sold.......................

265

24,500

500

345

425

265

Accounts Receivable......................... 15,750 Sales ..............................................

15,750

Cost of Goods Sold ........................... Merchandise Inventory .................

9,765

5-136

9,765

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Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) (Continued)

Aug. 11

15 19

Solutions Manual .

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

12,250

Sales Returns and Allowances ......... Accounts Receivable ....................

750

Merchandise Inventory...................... Cost of Goods Sold.......................

465

Salaries Expense ............................... Cash ...............................................

3,100

12,250

750

465

3,100

Cash ($15,000 − $300) ....................... 14,700 Sales Discounts ($15,000 × 2%)........ 300 Accounts Receivable ($15,750 − $750)

15,000

Merchandise Inventory .......................... 9,900 Accounts Payable .........................

9,900

Accounts Payable.............................. Merchandise Inventory .................

800

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

525

800

525

Salaries Expense ................................... 3,100 Cash ...............................................

3,100

Accounts Payable ($9,900 − $800) .......... 9,100 Merchandise Inventory ($9,100 × 2%) Cash ($9,100 − $182) .....................

182 8,918

A. John, Drawings ............................ Cash ..............................................

4,800

5-137

4,800

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Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (c)

THE BOARD SHOP Trial Balance August 31, 2017

Cash .......................................................... Merchandise inventory ............................ Supplies .................................................... Equipment................................................. Accumulated depreciation—equipment . Accounts payable..................................... Unearned revenue .................................... Notes payable ........................................... A. John, capital......................................... A. John, drawings .................................... Sales.......................................................... Sales returns and allowances ................. Sales discounts ........................................ Rent revenue ............................................ Cost of goods sold ................................... Salaries expense ...................................... Rent expense ............................................ Insurance expense ................................... Interest expense ....................................... Totals ....................................................

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Debit $ 7,627 81,108 4,095 70,800

Credit

$ 13,275 18,745 5,205 42,000 58,400 57,600 513,510 12,595 300 1,200 317,945 74,400 19,800 4,140 1,925 $652,335

$652,335

Chapter 5

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (d)

GENERAL JOURNAL Date

Account Titles

Debit

Credit

Aug. 31

Supplies Expense ($4,095 – $755) ........ 3,340 Supplies .........................................

3,340

Depreciation Expense ($70,800 ÷ 8) Accumulated Depreciation —Equipment ..................................

8,850

No entry required—reclassification on balance sheet only.

Unearned Revenue ............................ Sales ..............................................

3,750

Cost of Goods Sold .......................... Merchandise Inventory .................

2,325

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

175

Solutions Manual .

8,850

Cost of Goods Sold ($76,560 – [$81,108 – $2,325]) ........... Merchandise Inventory .................

5-139

3,750

2,325

175

2,223 2,223

Chapter 5

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Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (e)

THE BOARD SHOP Adjusted Trial Balance August 31, 2017 Debit Credit Cash .................................................................. $ 7,627 Merchandise inventory .................................... 76,560 Supplies ............................................................ 755 Equipment......................................................... 70,800 Accumulated depreciation—equipment ......... $ 22,125 Accounts payable............................................. 18,745 Unearned revenue ............................................ 1,455 Notes payable ................................................... 42,000 Interest payable ................................................ 175 A. John, capital................................................. 58,400 A. John, drawings ............................................ 57,600 Sales.................................................................. 517,260 Sales returns and allowances ......................... 12,595 Sales discounts ................................................ 300 Rent revenue .................................................... 1,200 Cost of goods sold ........................................... 322,493 Salaries expense .............................................. 74,400 Rent expense .................................................... 19,800 Interest expense ............................................... 2,100 Insurance expense ........................................... 4,140 Supplies expense ............................................. 3,340 Depreciation expense ..................................... 8,850 Totals ............................................................ $661,360 $661,360

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Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (f)

THE BOARD SHOP Income Statement Year Ended August 31, 2017 Sales revenues Sales .............................................................................. $517,260 Less: Sales returns and allowances ............ $12,595 Sales discounts ................................ 300 12,895 Net sales .......................................................................... 504,365 Cost of goods sold ............................................................. 322,493 Gross profit .......................................................................... 181,872 Operating expenses Salaries expense........................................ 74,400 Rent expense ............................................. 19,800 Insurance expense .................................... 4,140 Supplies expense ...................................... 3,340 Depreciation expense .................................... 8,850 Total operating expenses ......................................... 110,530 Profit from operations..................................................... 71,342 Other revenues and expenses Rent revenue .............................................. 1,200 Interest expense ........................................ 2,100 (900) Profit................................................................................. $ 70,442 THE BOARD SHOP Statement of Owner’s Equity Year Ended August 31, 2017 A. John, capital, September 1, 2016............................... Add: Profit........................................................................ Less: Drawings................................................................ A. John, capital, August 31, 2017 ...................................

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5-141

$ 58,400 70,442 128,842 57,600 $ 71,242

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Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (f) (Continued) THE BOARD SHOP Balance Sheet August 31, 2017 Assets Current assets Cash............................................................................. $ 7,627 Merchandise inventory............................................... 76,560 Supplies....................................................................... 755 Total current assets ............................................... 84,942 Property, plant, and equipment Equipment ...................................................... $70,800 Less: Accumulated depreciation ............. 22,125 48,675 Total assets .............................................................. $133,617 Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... $ 18,745 Unearned revenue ...................................................... 1,455 Interest payable .......................................................... 175 Current portion of notes payable ................................... 6,000 Total current liabilities ........................................... 26,375 Long-term liabilities Notes payable ................................................................ 36,000 Total liabilities ........................................................ 62,375 Owner's equity A. John, capital ............................................................... 71,242 Total liabilities and owner's equity .......................... $133,617

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Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (g) GENERAL JOURNAL Date

Account Titles

Debit

Credit

Aug. 31

Sales ................................................... 517,260 1,200 Rent revenue...................................... Income Summary ..........................

518,460

Income Summary............................... 448,018 Sales Returns and Allowances .... Sales Discounts ............................ Cost of Goods Sold....................... Salaries Expense .......................... Supplies Expense ......................... Rent Expense ................................ Interest Expense ........................... Insurance Expense ....................... Depreciation Expense...................

12,595 300 322,493 74,400 3,340 19,800 2,100 4,140 8,850

Income Summary............................... 70,442 A. John, Capital .............................

70,442

A. John, Capital ................................. 57,600 A. John, Drawings.........................

57,600

5-143

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Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (h) THE BOARD SHOP Post-closing Trial Balance August 31, 2017

Debit $ 7,627 76,560 755 70,800

Credit

Cash .................................................................. Merchandise inventory .................................... Supplies ............................................................ Equipment......................................................... Accumulated depreciation—equipment ......... $ 22,125 Accounts payable............................................. 18,745 Unearned revenue ............................................ 1,455 Notes payable ................................................... 42,000 Interest payable ................................................ 175 A. John, capital................................................. 71,242 Totals ............................................................ $155,742 $155,742

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Accounting Principles, Seventh Canadian Edition

BYP5-1 FINANCIAL REPORTING PROBLEM

(a) Note 2 to the Indigo financial statements describes the nature of operations and mentions that the business is a retailer and is “focused on the merchandising of products and services.” It considers all sources of revenue as one operating segment. (b) The choice of periodic versus perpetual involves managing the inventory and does not affect the presentation or amounts of inventory on the balance sheet or income statement. Readers do not need to know which system is used because the choice of method does not affect their decision-making ability. A company with many retail stores such as Indigo most likely uses a perpetual inventory system. (c) Indigo uses a multiple-step income statement format. (d) Non-operating revenues and non-operating expenses reported on Indigo’s income statement are investment income and interest expense. Investment income includes: 1) share of earnings from an equity investment and 2) interest income generated from excess cash and cash equivalents. Interest expense is incurred on long-term debt.

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Accounting Principles, Seventh Canadian Edition

BYP 5-1 (Continued) (e)

Gross profit margin 2015 = 43.8% [$392,317 ÷ $895,376] 2014 = 43.1% [$373,713 ÷ $867,668] Profit margin 2015 = (0.4)% 2014 = (3.6)%

[$(3,534) ÷ $$895,376] [$(30,999) ÷ $867,668]

The negative profit margin indicates that, in spite of generating a reasonable gross profit, Indigo’s operating expenses are so large that they exceed the gross profit, resulting in a negative profit from operations. (f)

The amount reported at March 28, 2015 for inventories is $208,395,000

(g) Supplemental operating and administrative expenses are outlined in Note 15 to the Indigo financial statements. They include employee benefits-related details such as wages, salaries, and bonuses, termination, retirement, and stock compensation-related expenses. (h) Merchandise inventory cost includes freight charges and is decreased for purchase discounts, allowances. and returns. The cost of merchandise inventory is also adjusted for inventory losses, shrinkage, and errors.

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BYP5-2 INTERPRETING FINANCIAL STATEMENTS (a) Gross profit 2015 = $392,317 2014 = $373,713 2013 = $383,686

[$895,376 − $503,059] [$867,668 − $493,955] [$878,785 − $495,099]

Profit from operations 2015 = $(5,714) [$392,317 − $398,031] 2014 = $(29,980) [$373,713 − $403,693] 2013 = $367 [$383,686 − $383,319] (b) Percentage change in revenue: 2014 to 2015: 3.2% [($895,376 − $867,668) ÷ $867,668] 2013 to 2014: −1.3% [($867,668 − $878,785) ÷ $878,785] Percentage change in profit from operations: 2014 to 2015: [{$(5,714) − $(29,980)} ÷ $(29,980)] = Note 2013 to 2014: [{$(29,980) + $367} ÷ $367] = Note Note: the results are meaningless due to the negative profit from operations amounts. (c) Gross profit margin 2015 = 43.8% [$392,317 ÷ $895,376] 2014 = 43.1% [$373,713 ÷ $867,668] 2013 = 43.7% [$383,319 ÷ $878,785] Gross profit margin is fairly constant over the three years (d) Profit margin 2015 = (0.4)% 2014 = (3.6)% 2013 = 0.5%

[$(3,534) ÷ $895,376] [$(30,999) ÷ $867,668] [$4,288 ÷ $878,785]

The only positive profit margin was generated in 2013. In 2014, a substantial loss was experienced, and 2015 was somewhat of a recovery with essentially breakeven results.

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BYP5-2 (Continued) (e) Profit margin using profit from operations 2015 = (0.6)% [$(5,714) ÷ $895,376] 2014 = (3.5)% [$(29,980) ÷ $867,668] 2013 = 0.04% [$367 ÷ $878,785] Profit margin (using profit from operations) showed essentially the same results as profit margin, except not quite as negative in 2013 and 2015 since non-operating income added to profit or reduced the loss. In 2014 income taxes played a small role in impacting the calculations. (f)

Users may agree or disagree. Profit from operations reflects the company’s normal operating activities. The items shown on the income statement below this subtotal include non-operating activities that are not related to the company’s main operations. These items may or may not be recurring and some are unusual in nature, by their nature or size. The company’s main operations should have the most significant impact on the profit, but occasionally non-operating activities can significantly affect profit. The nature of the non-operating items will determine whether they are meaningful in a comparison. In the case of Indigo, the margin calculations for the threeyear period are essentially the same. The non-operating activities relate to earning investment revenue using the cash generated from a sale in 2012. To the extent cash is not depleted, this source of revenue could continue into the future, although the amount is small in relation to operating revenue. Management may believe these nonoperating items to be non-recurring and therefore not meaningful to a comparison of profitability.

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BYP5-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.

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BYP5-4 COMMUNICATION ACTIVITY (a) and (b) MEMORANDUM TO:

President, Great Canadian Snowboards

FROM: SUBJECT: Revenue and Expense Recognition Criteria DATE:

Revenue is recognized when there is an increase in assets or a decrease in liabilities as the result of a contract with a customer. In general, this simply means that the revenue must be recognized in the period when it is earned. Typically, sales revenues are earned when the goods are transferred from the buyer to the seller. At this point, the sales transaction is completed and the sales price is established. In this situation Dexter has made a down payment before the snowboard is complete and the company should record the amount as unearned revenue. Revenue on the snowboard ordered by Dexter is earned at event No. 6, when Dexter picks up the snowboard. Whether Dexter makes a down payment or pays 100% of the board with his purchase order is irrelevant in recognizing sales revenue because at this time, the company has not done anything to earn the revenue. A payment at the time of the order may be an indication of Dexter’s “good faith.” However, its effect on your financial statements is limited to recognizing the payment as unearned revenue.

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BYP 5-151 (Continued) Expenses, on the other hand, are recognized when there is a decrease in assets or an increase in liabilities, excluding transactions with the owner. Expense recognition is tied to revenue recognition when there is a direct association between costs incurred and the earning of revenue. Thus any costs directly associated with the snowboard, such as cost of goods sold, should be recognized as expenses at the same time the sales revenue is recognized. If you have further questions about the accounting for this sale, please let me know.

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BYP 5-5 (Continued) (e) Controls to reduce employee theft:

I. have an updated policies and procedures manual II. prevent employees from being alone in the store III. limit access to store keys IV. limit markdown availability V. control false refunds by collecting customer information and doing follow-up VI. use a cash register that produces an audit trail VII. control the back door of the store to prevent merchandise from being taken out the back. VIII. check the garbage and employee parcels. IX. do new employee reference checks. X. provide employee discounts on merchandise. (f)

Since the sales discounts are not authorized, the friend’s behaviour is inappropriate and is employee theft. The sales discounts reduce the amount received as sales revenue and reduce profitability of the store. If you fail to inform management of the unauthorized sales discounts, you are contributing to the lower profitability of the store. Inventory shrinkage, through theft such as unauthorized discounts, leads to higher prices for consumers and affects the store’s ability to be competitive. If management knows that you are aware of the unauthorized discounts given by your friend, they could consider that you participated in the theft and this could lead to the loss of your employment and reputation. Management would also question your integrity and this could affect your future promotion opportunities.

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BYP5-6 Santé Smoothie Saga (a) Responses to Natalie’s questions 1. The mixers should be classified as inventory as they are for resale. 2. A perpetual inventory system will provide better control over inventory. Because you are dealing with highvalue items, you should use the perpetual system. Also because you are dealing with low volumes and not operating a store, the cost of a perpetual system is minimized because it is not necessary to invest in technology such as scanners. 3. You still need to count inventory to ensure that your records are accurate and that the inventory that is supposed to be on hand is actually there. I suggest you should count once a month. (b) GENERAL JOURNAL Date

Account Titles

June 6

7 8

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J1 Debit

Merchandise Inventory...................... Accounts Payable .........................

1,575

Merchandise Inventory...................... Cash ...............................................

Accounts Payable [($1,575 ÷ 3) + $20] Merchandise Inventory .................

545

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

500

Accounts Receivable......................... Sales ..............................................

2,100

5-154

Credit

1,575

60 545

500 2,100

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BYP 5-6 (Continued) (b) (Continued) June 13 Cost of Goods Sold [($1,575 + $60) ÷ 3 × 2] ....................... Merchandise Inventory ................. 14

28 29

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1,090 1,090

Freight Out ......................................... Cash ...............................................

Merchandise Inventory...................... Accounts Payable .........................

2,100

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

125

Cash ................................................... N. Koebel, Capital..........................

1,000

Merchandise Inventory...................... Cash ...............................................

Cash ................................................... Sales .............................................

2,100

Cost of Goods Sold .......................... Merchandise Inventory ................. [($2,100 + $80) ÷ 4 × 2]

1,090

Salaries Expense ............................... Cash (20 x $12) ..............................

240

Accounts Payable.............................. Telephone Expense ........................... Cash ...............................................

88 66

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

3,130

5-155

2,100

125

1,000

2,100

1,090

240

154 3,130

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BYP 5-6 (Continued) (b) and (d) May 31 Bal. June 9 June 15 June 20 June 21 Bal.

Cash 3,060 June 7 500 June 14 125 June 21 1,000 June 28 2,100 June 29 June 30 3,046

May 31 Bal. June 13 Bal.

Accounts Receivable 675 June 9 2,100 2,275

May 31 Bal. June 6 June 7 June 14 June 21 Bal.

Merchandise Inventory June 8 1,575 June 13 60 June 21 2,100 80 1,090

May 31 Bal.

Supplies 95

May 31 Bal.

Equipment 1,550

Accumulated Depreciation-Equipment May 31 Bal. June 31 Bal.

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60 75 80 240 154 3,130

500

545 1,090 1,090

66 43 109

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BYP 5-6 (Continued) (b) and (d)

June 8 June 29 June 30

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Accounts Payable 545 May 31 Bal. 88 June 6 3,130 June 14 Bal.

88 1,575 2,100 -

Interest Payable May 31 Bal. June 30 Bal.

11 8 19

Unearned Revenue May 31 Bal. June 15 Bal.

100 125 225

Notes Payable May 31 Bal.

3,000

N. Koebel, Capital May 31 Bal. June 20 Bal.

2,115 1,000 3,115

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BYP 5-6 (Continued) (b) and (d) Sales June 13 June 21 Bal.

June 13 June 21 Bal.

Cost of Goods Sold 1,090 1,090 2,180

June 28

Salaries Expense 240

June 30

Depreciation Expense 43

June 14

Freight Out 75

June 29

Telephone Expense 66

June 30

Interest Expense 8

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2,100 2,100 4,200

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BYP 5-6 (Continued) (c) SANTÉ SMOOTHIES Trial Balance June 30, 2017 Debit Cash .................................................................... $ 3,046 Accounts receivable ......................................... 2,275 Merchandise inventory ..................................... 1,090 Supplies ............................................................. 95 Equipment .......................................................... 1,550 Accumulated depreciation—equipment .......... Unearned revenue ............................................. Interest payable ................................................. Notes payable .................................................... N. Koebel, capital .............................................. Sales ................................................................... Cost of goods sold ............................................ 2,180 Salary expense .................................................. 240 Telephone expense ............................................ 66 Freight out ......................................................... 75 $10,617

Credit

66 225 11 3,000 3,115 4,200

$10,617

(d) GENERAL JOURNAL Date

Account Titles

J2 Debit

June 30 Depreciation Expense ....................... Accumulated Depreciation— Equipment ..................................... ($1,550 ÷ 36 months)

30 Interest Expense ................................ Interest Payable ............................ ($3,000 × 3% × 1/12)

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BYP 5-6 (Continued) (e) SANTÉ SMOOTHIES Adjusted Trial Balance June 30, 2017 Debit Cash .................................................................... $ 3,046 Accounts receivable ......................................... 2,275 Merchandise inventory ..................................... 1,090 Supplies ............................................................. 95 Equipment .......................................................... 1,550 Accumulated depreciation—equipment .......... Unearned revenue ............................................. Interest payable ................................................. Notes payable .................................................... N. Koebel, capital .............................................. Sales ................................................................... Cost of goods sold ............................................ 2,180 Salary expense .................................................. 240 Depreciation expense ........................................ 43 Telephone expense ............................................ 66 Interest expense ................................................. 8 Freight out ......................................................... 75 $10,668

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Credit

$ 109 225 19 3,000 3,115 4,200

$10,668

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BYP 5-6 (Continued) (f) SANTÉ SMOOTHIES Income Statement Month ended June 30, 2017

Sales................................................................................. Cost of goods sold .......................................................... Gross profit...................................................................... Operating expenses Salaries expense............................................ $240 Telephone expense ....................................... 66 Depreciation expense.................................... 43 Freight out ...................................................... 75 Total operating expenses ...................................... Profit from operations..................................................... Other expenses Interest expense ......................................................... Profit.................................................................................

$4,200 2,180 2,020

424 1,596 8 $1,588

(g) Gross profit margin = 48.1% ($2,020 ÷ $4,200) Profit margin = 37.8% ($1,588 ÷ $4,200)

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CHAPTER 6 Inventory Costing ASSIGNMENT CLASSIFICATION TABLE Questions

Brief Exercises

Exercises

Problems Set A

Problems Set B

1. Describe the steps in determining inventory quantities.

1, 2, 3

1, 2

1, 7

2. Calculate cost of goods sold and ending inventory in a perpetual inventory system using specific identification, FIFO, and weighted average methods of cost determination.

4, 5, 6

3, 4, 5, 6, 7, 8

3, 4, 5, 6, 7, *15, *16

2, 3, 4, 5, 6, *12, *13

3. Determine the financial statement effects of inventory cost determination methods.

7, 8, 9

9, 10

6, 7

4, 5

4. Determine the financial statement effects of inventory errors 5. Value inventory at the lower of cost and net realizable value. 6. Demonstrate the presentation and analysis of inventory.

10, 11,

11, 12

8, 9

3, 7, 8

12, 13, 14

13, 14

10, 11

6, 9

15, 16, 17, 18

15, 16

11, 12

8, 10

*7. Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas (Appendix 6A).

*19, *20, *21

*17, *18

*13, *14, *15, *16

*11, *12, *13

*8. Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B).

*22, *23, *24

*19, *20

*17, *18

*14, *15

Learning Objectives

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ASSIGNMENT CHARACTERISTIC TABLE Problem Number

Description

Time Allotted (min.)

Identify items in inventory.

Moderate

20-25

Apply specific identification.

Simple

15-20

Apply perpetual FIFO. Record sales and inventory adjustment and calculate gross profit, and answer questions.

Moderate

20-25

Apply perpetual weighted average and answer questions.

Moderate

20-25

Apply perpetual FIFO and weighted average. Answer questions about financial statement effects.

Moderate

35-45

Record transactions using perpetual weighted average. Apply LCNRV.

Moderate

35-45

Determine effects of inventory errors.

Complex

25-30

Determine effects of inventory errors. Calculate inventory turnover.

Complex

35-45

Apply LCNRV and prepare adjustment.

Moderate

20-25

10A

Calculate ratios.

Simple

15-20

*11A

Apply periodic FIFO and weighted average.

Simple

20-25

*12A

Apply periodic and perpetual FIFO.

Moderate

20-25

*13A

Apply periodic and perpetual weighted average.

Moderate

20-25

*14A

Determine inventory loss using gross profit method.

Moderate

20-30

*15A

Determine ending inventory using retail method.

Moderate

20-30

Identify items in inventory.

Moderate

20-25

Apply specific identification.

Simple

15-20

Apply perpetual weighted average. Record sales and inventory adjustment and calculate gross profit, and answer questions.

Moderate

20-25

Apply perpetual FIFO and answer questions.

Moderate

20-25

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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Time Allotted (min.)

Apply perpetual FIFO and weighted average. Answer questions about financial statement effects.

Moderate

35-45

Record transactions using perpetual FIFO. Apply LCNRV.

Moderate

35-45

Determine effects of inventory errors.

Complex

25-30

Determine effects of inventory errors. Calculate inventory turnover.

Complex

35-45

Apply LCNRV and prepare adjustment.

Moderate

20-25

10B

Calculate ratios.

Simple

15-20

*11B

Apply periodic FIFO and weighted average.

Simple

20-25

*12B

Apply periodic and perpetual weighted average.

Moderate

20-25

*13B

Apply periodic and perpetual FIFO.

Moderate

20-25

*14B

Determine inventory loss using gross profit method.

Moderate

20-30

*15B

Determine ending inventory using retail method.

Moderate

20-30

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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material 1.

Learning Objective Describe the steps in determining inventory quantities.

Knowledge BE6-1 E6-1

Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.

Determine the financial statement effects of inventory cost determination methods.

Q6-9

Determine the financial statement effects of inventory errors.

Q6-11

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Comprehension Q6-1 Q6-2 Q6-3

Application BE6-2 E6-2 P6-1A P6-1B

Q6-4 Q6-5 Q6-6

BE6-3 BE6-4 BE6-5 BE6-6 BE6-7 BE6-8 *BE6-18 E6-3 E6-4 E6-5 E6-6 E6-7 *E6-15 *E6-16 P6-2A P6-3A P6-4A P6-5A P6-6A P6-2B P6-3B P6-4B P6-5B P6-6B *P6-12A *P6-13A *P6-12B *P6-13B E6-6 E6-7 P6-4A P6-5A P6-4B P6-5B

Q6-7 Q6-8 BE6-9 BE6-10

Q6-10

P6-3A P6-3B

6-4

Analysis P6-7A P6-7B

Synthesis

Evaluation

BE6-11 BE6-12 E6-8 E6-9 P6-7A P6-8A P6-7B P6-8B

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BLOOM’S TAXONOMY TABLE (Continued) 5.

Learning Objective Value inventory at the lower of cost and net realizable value.

Knowledge Q6-13

Comprehension Q6-12 Q6-14

Application BE6-13 BE6-14 E6-10 E6-11 P6-6A P6-6B P6-9A P6-9B

Analysis

Q6-17 P6-8A P6-10A P6-8B P6-10B

Demonstrate the presentation and analysis of inventory.

Q6-15 Q6-16

Q6-18 BE6-16

BE6-15 E6-11 E6-12

Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas (Appendix 6A).

*Q6-20

*Q6-19 *Q6-21

*8.

Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B)

*Q6-22

*Q6-23 *Q6-24

*BE6-17 *BE6-18 *E6-13 *E6-14 *E6-15 *E6-16 *P6-11A *P6-12A *P6-13A *P6-11B *P6-12B *P6-13B *BE6-19 *BE6-20 *E6-17 *E6-18 *P6-14A *P6-15A *P6-14B *P6-15B

Broadening Your Perspective

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BYP6-3 BYP6-4 BYP6-5

6-5

BYP6-1 BYP6-2 BYP6-6

Synthesis

Evaluation

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ANSWERS TO QUESTIONS 1.

Taking a physical inventory involves counting, weighing, or measuring each kind of inventory on hand. This is normally done when the store is closed. Tom will probably count items, and mark the quantity, description, location, and inventory number on pre-numbered inventory tags. Retailers, such as a hardware store, generally have thousands of different items to count. Later, unit costs will likely be applied to the inventory quantities using either specific identification or a cost formula. Many businesses also use electronic devices, such as hand-held scanners. Information on the scanners can be uploaded to the perpetual inventory system to partially automate taking an inventory.

Goods in transit should be included in the inventory of the company (buyer or seller) that has ownership of the goods. This is determined by the terms of sale and is evidenced by the free on board (FOB) terms. When the terms are FOB shipping point, ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. When the terms are FOB destination, ownership of the goods remains with the seller until the goods reach the buyer.

Consigned goods are goods held on a company’s premises (the consignee), but belong to someone else (the consignor). The consignee agrees to sell the goods for a fee but never takes ownership of the goods even though the goods are physically located on the consignee’s premises. Therefore, the consignor, not the consignee, owns the goods and should include them in inventory.

Specific identification is appropriate when goods are uniquely identifiable or produced for a specific purpose, for example, automobiles. GAAP does not allow companies to use specific identification when goods are interchangeable.

Specific identification tracks the actual physical flow of goods in the system and matches the cost of a particular item of inventory against its sale price. Each good is uniquely identifiable and can be traced back to its purchase cost, for example, automobiles. This gives the specific identification method the advantage of producing financial results that are more accurate. Specific identification may be more expensive to operate since each item must be tracked individually in the accounting system.

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QUESTIONS (Continued) 5. (Continued) The FIFO cost formula assumes that the first goods purchased are the first goods sold. The weighted average cost formula determines the cost using a weighted average of the cost of the items purchased. Both the FIFO and the weighted average cost formulas assume a flow of goods that may not exactly match the actual flow of physical goods. These cost formulas can be used in both a periodic and perpetual inventory system; whereas, the specific identification method can only be used in a perpetual system. An example of merchandise that would be valued using the FIFO basis is electronic products; whereas, merchandise such as clothing might be valued on a weighted average basis. 6.

Disagree. The weighted average cost per unit is calculated by dividing the cost of goods available for sale by the units available for sale at the date of each purchase. This means that every purchase of product will change the weighted average cost per unit. Sales of product mean that items of inventory are removed from the cost “pool” at the weighted average cost. This does not change the weighted average cost (unless by rounding).

(a) Cash: No effect. The cash impact of the purchase and sale is the same regardless of which inventory cost formula is chosen. The inventory cost formula simply allocates the cost of goods available for sale between cost of goods sold and ending inventory. (b) Ending inventory: In a period of rising prices, FIFO will produce a higher ending inventory as inventory is costed using the most recent (higher) prices; Weighted average will produce a lower ending inventory as ending inventory is costed at an average of all the inventory available for sale during the accounting period. (c) Cost of goods sold: The cost of goods sold effect is opposite to that of ending inventory. Hence, cost of goods sold will be lower under FIFO and higher under weighted average cost. (d) Profit: Because of the effect on the cost of goods sold, profit will be higher under FIFO and lower under weighted average cost.

The weighted average cost formula results in more recent costs being reflected in cost of goods sold. This better matches current costs with current revenues and provides a better income statement valuation. The FIFO cost formula provides the better inventory valuation because the cost of older items is transferred to cost of goods sold. This leaves the more recently purchased items in ending inventory, which better reflects replacement cost.

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QUESTIONS (Continued) 9.

(a) Choose a method that corresponds as closely as possible to the physical flow of goods. (b) Report an inventory cost on the balance sheet that is close to the inventory’s recent costs. (c) Use the same method for all inventories having a similar nature and use in the company.

10.

(a) Mila Company's 2016 profit will be overstated (O) $5,000. Beginning inventory + Purchases = Cost of goods available for sale – Ending inventory = Cost of goods sold

Sales – Cost of goods sold = Gross profit/Profit

U $5,000 O $5,000

O $5,000 U $5,000

(b) Mila’s 2017 profit will be understated (U) $5,000 since the ending inventory of 2016 becomes the beginning inventory of 2017. Beginning inventory + Purchases = Cost of goods available for sale – Ending inventory = Cost of goods sold

O $5,000

Sales – Cost of goods sold O $5,000 = Gross profit/Profit U $5,000

O $5,000 O $5,000

(c) The combined profit for the two years will be correct because the errors offset each other (O $5,000 in 2016 and U $5,000 in 2017). 11.

Common errors that occur related to inventory include: Recording errors Errors in taking the physical count Errors caused by not properly investigating goods in transit or goods on consignment Pricing errors for the ending inventory Errors in the compilation or summarizing of the inventory count. Errors in arriving at the proper value for the lower of cost and net realizable value

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QUESTIONS (Continued) 12.

Lucy should know the following: (a) A departure from the cost basis of accounting for inventories is justified when the utility (revenue-producing ability) of the goods is no longer as great as its cost. The writedown to net realizable value should be recognized in the period in which the decline in utility occurs. (b) Net realizable value means the estimated selling price less any estimated costs required to complete the sale.

13.

Net realizable value is the selling price of an inventory item, less any estimated costs required to make the item saleable.

14.

No. Net realizable value is usually higher than cost because this is the nature of selling merchandise inventory for a profit. The recognition of the gain occurs when the inventory is sold, in accordance with revenue recognition criteria.

15.

In order to be classified as inventory, an asset must be owned by the business and must be in a form ready for sale.

16.

The additional disclosures on the financial statements concerning inventory include (a) Details of inventory categories such as raw materials and finished goods. (b) The cost determination method used (specific identification, FIFO, or weighted average). (c) A statement that the inventory is reported at the lower of cost and net realizable value. (d) The amount of cost of goods sold. (e) The amount of any writedown to net realizable value. (f) The amount of any reversals of previous writedowns, including the reason why the writedown was reversed.

17.

A decrease in the days sales in inventory ratio from one year to the next would usually be seen as an improvement in the company’s efficiency in managing inventory. It means that less inventory is being held relative to sales.

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QUESTIONS (Continued) 18.

The inventory turnover ratio measures the number of times, on average, inventory is sold (turned over) during the period. Although there is no right number of times, there would be an optimum number of times depending on which industry the business belongs. Having too high an inventory turnover ratio can result in too few items left in inventory causing a stockout or shortages, which may upset customers. Having too low a turnover may add risks to the business that the inventory will go out of date, deteriorate, or become obsolete and lose its resale value. In addition, too slow an inventory turnover brings on additional costs to the business such as warehousing and financing. Inventory ties up the firm’s cash and can compromise working capital.

*19. It is necessary to calculate cost of goods available for sale in a periodic inventory system because we wait until the end of the period to allocate the amount to ending inventory (unsold) and cost of goods sold (sold). *20. The cost flow relationships for inventory can be translated into the following equations: (1) Beginning Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale, (2) Cost of Goods Available for Sale – Cost of Goods Sold = Ending Inventory. *21. In a periodic system, the average is a weighted average calculated at the end of the period based on total goods available for sale for the entire period. In a perpetual system, the weighted average is calculated after each purchase (goods available for sale in dollars ÷ goods available for sale in units). A new weighted average must be calculated with each purchase and thus the weighted average becomes a moving average. *22. Inventories must be estimated when (1) a company uses the periodic inventory system and management wants interim (monthly or quarterly) financial statements but a physical inventory is only taken annually, or (2) a fire or other type of casualty makes it impossible to take a physical inventory. An estimate of the inventory can also help to test the reasonableness of the inventory balance that was determined when a physical count is done. *23. Disagree. A company’s gross profit margin does not necessarily remain constant from year to year. Gross profit can change due to changes in merchandising policies or in market conditions. The accuracy of the method is also affected by the mix of products sold during the year and whether the method is applied to a product line, a department, or the company as a whole. The year-end inventory count also serves internal control purposes. It helps management examine the presence of merchandise and its physical condition.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) *24. The retail inventory method is an averaging technique and may produce an incorrect inventory valuation if the blend of inventory items in ending inventory is not the same as in cost of goods available for sale. It produces an estimate of ending inventory based on the weighted average cost formula and would not be appropriate if the company is using a FIFO approach.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 6-1 (a)

Ownership of the goods belongs to the consignor (Helgeson). Thus, these goods should be included in Helgeson’s inventory.

(b)

The goods in transit should not be included in inventory as title remains with the seller until the goods reach the buyer (Helgeson).

(c)

The goods being held belong to the customer. They should not be included in Helgeson’s inventory.

(d) Ownership of these goods rests with the other company (the consignor). These goods should not be included in Helgeson’s inventory. (e)

The goods in transit to a customer should not be included in inventory as title passes to the buyer when the public carrier accepts the goods from the seller.

BRIEF EXERCISE 6-2 The correct cost of inventory is: Total cost per inventory count $55,500 (a) Inventory held for alterations (1,500) (b) Inventory held on consignment (4,250) (c) Goods shipped FOB shipping point prior to Dec. 31 2,875 Freight on inventory purchase 310 (d) Goods shipped FOB destination prior to Dec. 31 0 Freight on inventory purchase 0 Correct inventory cost at December 31 $52,935

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 6-3 Cost of Goods Sold Painting 3 4 Total

Total Cost $2,900 3,900 $6,800

Ending Inventory Painting 1 2 Total

Total Cost $ 500 2,500 $3,000

BRIEF EXERCISE 6-4 (a) (b) (c) (d) (e) (f) (g)

2 1 3 3 3 1 1

Solutions Manual .

FIFO Specific identification Weighted Average Weighted Average Weighted Average Specific identification Specific identification

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 6-5 Date

Units

Purchases Cost

Total

Cost Of Goods Sold Units Cost Total

June 1

200

$25.00

$5,000.00

200

$25.00

$5,000.00

400

$22.00

$8,800.00

(a) 200 400

(b) $25.00 $22.00

(f) 250

(g) $22.00

(h) 5,500.00

(j) $22.00 $20.00

(k) 5,500.00 7,000.00 12,500.00

18 200 150 26

350

$20.00

(d) $25.00 $22.00

$7,000.00

(e) $5,000.00 $3,300.00 $8,300.00

Units

(i) 250 350

6-14

Inventory Balance Cost Total

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 6-6 Date

Purchases Units

01-Jun

07-Jun

Cost

Total

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

Inventory Balance

Units

Cost

Total

Beginning inventory 400 $25.00 $10,000.00 600

22.00

13,200.00

18-Jun

26-Jun

Cost of goods sold

550

450

20.00

(d) $23.20

(e) $12,760.00

9,000.00

Weighted Average Calculations Total WA Cost

Cost

Total

400

$25.00

$10,000.00

(a)

(b)

(c)

1,000

23.20

23,200.00

(f) 450

(g) 23.20

(h) 10,440.00

(i)

(j)

(k)

900

21.60

19,440.00

Units

Cost

per unit

B÷A

400

$10,000.00

600

13,200.00

1,000

23,200.00

1,000

23,200.00

-550

-12,760.00

450

10,440.00

450

10,440.00

450

9,000.00

900

19,440.00

$23.20

$ 21.60

1,000 = 400 + 600 ($10,000.00 + $13,200.00) ÷ (400 + 600) = $23.20 $13,800.00 = $5,000.00 + $8,800.00 see (b) above $12,760.00 = 550 × $23.20 450 = 1,000 – 550 see (b) above $10,440.00 = 450 × $23.20 (or $23,200.00 - $12,760.00) 900 = 450 + 450 $21.60 = ($10,440.00 + $9,000.00) ÷ (450 + 450) $19,440.00 = 600 × $21.25 (or $10,440.00 + $9,000.00)

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 6-7 (a)

FIFO Purchases Date Units Cost Total Nov. 1 Beginning inventory 10 $5.00 $50 4 20 5.50 110

6.00

Cost of Goods Sold Units Cost Total

120

$5.00

$50

20 10

5.50 6.00

110 60 170 $220

Total

$280

Cost of goods available for sale

40 Cost of goods sold

Cost $280.00 220.00 $ 60.00

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6-16 .

10 10 20

$5.00 5.00 5.50

10 20 20

5.00 5.50 6.00

20 20

5.50 6.00

6.00

10 Ending inventory

Check: Cost of goods available for sale Less: cost of goods sold Ending inventory

Inventory Balance Units Cost Total

Units 50 40 10

Chapter 6

$50 50 110 160 50 110 120 280 110 120 230 60 $60

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 6-7 (Continued) (b) Weighted Average Date

Purchases Units

Nov 1

Cost

Total

Cost of goods sold

Inventory Balance

Units

Cost

Total

Beginning inventory

$5.00

$50.00

$5.00

$50.00

5.50

110.00

5.33

170.00

6.00

120.00

$5.60

Total

Weighted Average Calculations Total WA Cost

50 $280.00 Cost of goods available for sale-

5.60

$56.00

168.00

$224.00 Cost of goods sold

5.60

Cost of goods available for sale Less: cost of goods sold Ending inventory

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6-17 .

224.00

56.00

$ 56.00 Ending inventory

Check: Cost $280.00 224.00 $ 56.00

280.00

Units 50 40 10

Chapter 6

Units

Cost

per unit

B÷A

10 20

$50.00 110.00

160.00

30 20

160.00 120.00

280.00

50 -10

280.00 -56.00

224.00

40 -30

224.00 -168.00

56.00

$5.33

$5.60

$ 5.60

$5.60

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 6-8 (a)

FIFO

Date

Account Titles and Explanation

Nov. 4

Merchandise Inventory (20 × $5.50) .. Accounts Payable .........................

110

Accounts Receivable ......................... Sales (30 × $8.00)...........................

240

Cost of Goods Sold ............................ Merchandise Inventory……………

170

Nov. 12

Debit

Credit

110

240 170

([20 × $5.50] + [10 × $6.00]) (b)

Weighted Average

Date

Account Titles and Explanation

Nov. 4

Merchandise Inventory (20 × $5.50) .. Accounts Payable .........................

110

Accounts Receivable ......................... Sales (30 × $8.00)...........................

240

Cost of Goods Sold ............................ Merchandise Inventory (30 × $5.60)

168

Nov. 12

Debit

Credit

110

240 168

BRIEF EXERCISE 6-9 (a) (b) (c) (d)

FIFO Weighted average cost Weighted average cost FIFO

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 6-10 (a)

Weighted average cost gives the higher inventory valuation when prices are falling. This is because the cost of the units are a blend of older and newer items. Under the FIFO system, ending inventory is composed of newer items purchased at a lower cost.

(b) FIFO gives the higher cost of goods sold amount. This is because the cost of the units purchased earlier, at a higher cost, are assumed to have been sold first and are allocated to cost of goods sold. (c)

The selection of a cost formula does not affect cash flow. The cost formula is a method of allocating costs to cost of goods sold and ending inventory. It does not involve the inflow or outflow of cash.

(d) In selecting a cost formula, the company should consider their type of inventory and its actual physical flow. While it is not essential to match the actual physical flow to the cost formula, it does give the company an indication as to its flow of costs throughout the period. The company should also consider the method that will report inventory on the balance sheet that is close to the inventory’s recent costs.

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 6-11

2016 2017

Assets =

Liabilities +

Owner’s Equity

No Effect No Effect

2016 Beginning inventory + Purchases Cost of goods available for sale - Ending inventory Cost of goods sold

O $23,000

Sales - Cost of goods sold O $23,000

O $23,000

Gross profit/Profit

U $23,000

O $23,000

Note that the inventory error first occurred on December 31, 2015 and that 2015 profit and owner’s equity would be overstated by $23,000. The 2016 profit is understated by $23,000. This error is added to the prior year’s overstatement of $23,000, and the two errors cancel out. Owner’s equity at the end of 2016 is correct. The ending inventory is also correct at the end of 2016. 2017 Since the 2016 error reverses the impact of an error originally occurring in 2015, there would be no impact on the 2017 financial statements. Profit, owner’s equity, and ending inventory would all be correctly stated (assuming no new errors have occurred).

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 6-12 (a) The understatement of ending inventory caused cost of goods sold to be overstated by $7,000 and profit to be understated by $7,000. The correct profit for 2016 is $97,000 ($90,000 + $7,000). Beginning inventory + Purchases Cost of goods available for sale - Ending inventory Cost of goods sold

Sales - Cost of goods sold

O $7,000

Gross profit / Profit

U $7,000

U $7,000 O $7,000

(b) Total assets and owner’s equity in the balance sheet will both be understated by the amount that ending inventory is understated, $7,000. If profit is understated, then owner’s equity is also understated as profit is a component of owner’s equity. Using the accounting equation: A = L + OE U$7,000 = U$7,000 (c) The error arising in 2016, if left uncorrected, will flow through into 2017. The 2016 error will affect the 2017 beginning inventory by an understatement of $7,000. This causes cost of goods sold to be understated $7,000 and profit to be overstated $7,000. Beginning inventory + Purchases Cost of goods available for sale - Ending inventory Cost of goods sold

U $7,000 Sales - Cost of goods sold Gross profit / Profit

U $7,000 O $7,000

U $7,000

Total assets and owner’s equity in the balance sheet will both be correct since 2017 ending inventory is correct. The 2016 error causes an understatement of 2016 profit of $7,000 and an overstatement of 2017 profit of $7,000, causing the total profit for the two-year period to self correct. This causes owner’s capital in 2017 to be correctly stated. Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 6-13 (a) Inventory Categories

Cost

NRV

LCNRV

Adj.

Personal computers Servers Total Solution Printers Total

$27,000 18,000 10,000 $55,000

$21,500 19,500 8,500 $49,500

$21,500 18,000 8,500 $48,000

$5,500 N/A 1,500 $7,000*

(b)

*The entry to record the adjustment would be: Cost of goods sold .............................. 7,000 Merchandise inventory ............. 7,000

BRIEF EXERCISE 6-14 The correct ending inventory should be $48,000. The correct cost of goods sold should be $425,500 ($418,500 + $7,000).

BRIEF EXERCISE 6-15 Inventory turnover = $1,150,000 ÷ [($132,000 + $143,000) ÷ 2] = 8.4 times Days sales in inventory = 365 ÷ 8.4 = 43.5 days

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 6-16 The company’s inventory management has deteriorated in 2017. The inventory turnover ratio went from 9.1 in 2016 to 8.4 in 2017. The decrease in this ratio means that the company is selling its inventory fewer times in 2017 than in 2016. The days sales in inventory shows this deterioration by interpreting the turnover ratio in days that inventory is on hand. We can see that the number of days that inventory is on hand has increased from 40.1 days in 2016 to 43.5 days in 2017. *BRIEF EXERCISE 6-17 Goods Available for Sale st

1 purchase 2nd purchase 3rd purchase Goods available for sale Ending inventory in units Number of units sold (a)

Units Unit Cost 200 $8 250 7 300 6 750 400 350

Total Cost $1,600 1,750 1,800 $5,150

FIFO Ending Inventory: Purchase Units rd 300 3 nd 100 2 Total 400

Unit Cost $6 7

Total Cost $1,800 700 $2,500

Cost of goods sold: $5,150 – $2,500 = $2,650 Check of cost of goods sold: Purchase Units Unit Cost st 200 $8 1 nd 150 7 2 350 Total

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Total Cost $1,600 1,050 $2,650

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Accounting Principles, Seventh Canadian Edition

*BRIEF EXERCISE 6-17 (Continued) (b) Weighted Average Weighted Average unit cost: $5,150  750 units = $6.87 per unit Ending Inventory: 400 units × $6.87 per unit = $2,748 Cost of Goods Sold: $5,150 – $2,748 = $2,402 Check of cost of goods sold: 350 units × $6.87 per unit = $2,405 (rounding the weighted average cost per unit to the nearest penny introduces a slight rounding difference).

* BE6-18 Date

Account Titles and Explanation

Debit

Jan. 3

Accounts Receivable ........................ Sales (550 × $10)...........................

5,500

Purchases (1,000 × $4.50) ................. Accounts Payable ........................

4,500

Cash ................................................... Sales (850 × $10)...........................

8,500

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Credit

5,500

4,500 8,500

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Accounting Principles, Seventh Canadian Edition

*BRIEF EXERCISE 6-19 Net sales ............................................................................ $275,000 Less: Estimated gross profit (45% × $275,000)............... 123,750 Estimated cost of goods sold ........................................... $151,250 Cost of goods available for sale ($40,000 + $160,000).. $200,000 Less: Estimated cost of goods sold ................................ 151,250 Estimated cost of ending inventory ............................... $ 48,750

*BRIEF EXERCISE 6-20 Goods available for sale Net sales Ending inventory at retail

At Cost

At Retail

$35,000

$50,000 40,000 $10,000

Cost-to-retail ratio = $35,000 ÷ $50,000 = 70% Estimated cost of ending inventory = $10,000 × 70% = $7,000

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 6-1 1.

Do not include in inventory – Sam’s does not own items held on consignment for another company.

Include in inventory – Because the shipping terms are FOB destination, Sam’s owns the goods until they arrive at the customer’s premises.

Do not include in inventory – Shipping terms FOB destination means that Sam’s does not own the items until delivered to their premises.

Include in inventory – Because the shipping terms are FOB shipping point, Sam’s owns the goods in transit.

Include in inventory – Because the shipping terms are FOB shipping point, ownership has transferred to Sam’s and Sam’s pays the freight charges.

Do not include in inventory – Because freight costs paid by the seller are freight-out or delivery expense they are included in operating expenses, not as part of the cost of inventory.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 6-2 Ending inventory—physical count ................................... $281,000 Adjustments: 1. Add to inventory: Title passed to Moghul when goods were shipped .................................................. 95,000 2. Add to inventory: Title remains with Moghul until buyer receives goods................................................ 35,000 3. Add to inventory: Consignor (Moghul) own goods. 30,500 4. Add to inventory: Title passed to Moghul when 28,000 goods were shipped .................................................. $469,500

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Accounting Principles, Seventh Canadian Edition

EXERCISE 6-3 (a) Carrie’s Car Emporium should use the specific identification instead of one of the cost formulas. Specific identification is used when a company sells items that are not interchangeable. In the case of cars, these items are not interchangeable. Each car has a unique identifiable VIN (vehicle identification number), along with its cost. (b) Description 2014 Red Jeep 2015 Blue Honda 2016 Black Audi 2013 Grey Toyota 2013 Green Range Rover

Cost of Cost Goods Sold $15,000 $15,000 12,000 $12,000 25,000 18,000 10,000 $80,000 $27,000

Ending Inventory

$25,000 18,000 10,000 $53,000

Account Titles and Explanation

Debit

Dec. 22

Cash or Accounts Receivable .......... Sales ($16,500 × 2)........................

33,000

Cost of Goods Sold ........................... Merchandise Inventory ................ ($15,000 + $12,000)

27,000

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Credit

33,000

27,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 6-4 (a)

FIFO Date May 1

Purchases Units Cost Total Beginning inventory 400 $4.00 $1,600

3 4

1,300

$4.10

5,330

700

$4.40

3,080

Cost of Goods Sold Units Cost Total

300

$4.00

100 900

4.00 4.10

18 29

400

4.10

Total

Solutions Manual .

500

4.75

$1,200

400 3,690 4,090 1,640

2,375

2,900 $12,385 Cost of goods available for sale

1,700 $6,930 Cost of goods sold

6-29

Units

Balance Cost

400 100 100 1,300

$4.00 4.00 4.00 4.10

100 1,300 700

4.00 4.10 4.40

400 700

4.10 4.40

700 700 500 1,200

4.40 4.40 4.75

Total $1,600 400 400 5,330 5,730 400 5,330 3,080 8,810 1,640 3,080 4,720 3,080 3,080 2,375 $5,455

Ending inventory

Chapter 6 .

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 6-4 (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory

Cost $12,385 6,930 $ 5,455

Units 2,900 1,700 1,200

(b) Date

Account Titles and Explanation

Debit

May 3

Accounts Receivable ......................... Sales (300 × $7.00).........................

2,100

Credit

2,100

Cost of Goods Sold ............................ 1,200 Merchandise Inventory (300 × $4.00)

1,200

Merchandise Inventory (1,300 × $4.10) 5,330 Accounts Payable .........................

5,330

Accounts Receivable ......................... Sales (1,000 × $7.00)......................

7,000 7,000

Cost of Goods Sold ............................ Merchandise Inventory ................. [(100 × $4.00) + (900 × $4.10)]

4,090 4,090

$12,100 6,930 $5,170

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Accounting Principles, Seventh Canadian Edition

EXERCISE 6-5 (a)

Weighted Average Weighted Average Calculations

Date

Purchases Units

Jan. 1 Feb. 15

Cost

Cost of goods sold Total

Cost

Total

Units

Cost

Total

Beginning inventory 1,000

$12.00

$12,000

1,000

$12.00

$12,000

2,000

18.00

36,000

3,000

16.00

48,000

Apr. 24

June 6

Units

Inventory Balance

2,500

3,500

23.00

Totals

7,900

26.00

Cost of goods available for sale

Solutions Manual .

22.13

44,260

36,400

$164,900

500

4,000

2,000

1,400

40,000

80,500

Oct. 18

Dec. 4

16.00

4,500

$84,260 Cost of goods sold

6-31

16.00

22.13

8,000

88,500

2,000

22.12

44,240

3,400

23.72

80,640

3,400

Total

WA Cost

Units

Cost

per unit

B÷A

1,000

12,000

2,000

36,000

3,000

48,000

3,000 -2,500

48,000 -40,000

500

8,000

500

8,000

3,500

80,500

4,000

88,500

4,000 -2,000

88,500 -44,260

2,000 2,000 1,400 3,400

44,240 44,240 36,400 80,640

$16.00

$ 22.13

$22.12

$23.72

$80,640 Ending inventory

Chapter 6 .

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Accounting Principles, Seventh Canadian Edition

EXERCISE 6-5 (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory

Cost $164,900 84,260 $ 80,640

Units 7,900 4,500 3,400

(b) Date

Account Titles and Explanation

Debit

Credit

June 6

Merchandise Inventory (3,500 × $23) 80,500 Accounts Payable .........................

80,500

Accounts Receivable ......................... 66,000 Sales (2,000 × $33).........................

66,000

Cost of Goods Sold ............................ 44,260 Merchandise Inventory (2,000 × $22.13)

44,260

Oct. 18

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$141,000 84,260 $56,740

Chapter 6

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Accounting Principles, Seventh Canadian Edition

EXERCISE 6-6 (a)

(1) FIFO

Date July 1

Purchases Units Cost

Total

Cost of Goods Sold Unit Cost Total s

Units

Beginning inventory 150 $5.00 $750.00

July 12 230

6.75

150 100

$5.00 6.75

750.00 675.00 1,425.00

July 28 490 7.00 3,430.00 Total 870 $5,732.50 250 $1,425 Cost of goods available Cost of goods sold for sale Check: Cost Units Cost of goods available for sale $5,732.50 870 Less: cost of goods sold 1,425.00 250 Ending inventory $4,307.50 620

6-33 .

Chapter 6

Total

150 150 230

$5.00 5.00 6.75

$ 750.00 750.00 1,552.50 2,302.50

130

6.75

877.50

130 490

6.75 7.00

1,552.50

July 20

Solutions Manual

Balance Cost

620

877.50 3,430.00 4,307.50 $4,307.50 Ending inventory

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 6-6 (Continued) (2) Weighted Average Weighted Average Calculations Date

Purchases Units

01-Jul

Cost of goods sold Cost

Total

Units

Cost

Inventory balance Total

Units

Cost

Total

Beginning inventory

12-Jul

150

$5.00

$750.00

150

$5.00

$750.00

230

6.75

1,552.50

380

6.06

2,302.50

20-Jul

250

28-Jul

490

Total

7.00

870

$6.06

$1,515.00

3,430.00

$5,732.50

Cost of goods available

130

620

250

$1,515.00

Cost of goods sold

6.06

6.80

620

Ending inventory

Check: Units

Cost of goods available for sale

$5,732.50

870

Less: Cost of goods sold

1,515.00

250

Ending Inventory

$4,217.50

620

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6-34 .

4,217.50

$4,217.50

sale

Cost

787.50

Chapter 6

Total

WA Cost

Units

Cost

per unit

B÷A

150

$750.00

230

1,552.50

380

2,302.50

380

2,302.50

-250

-1,515.00

130

787.50

130

787.50

490 620

3,430.00 4,217.50

6.06

6.80

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 6-6 (Continued) (b)

FIFO—Perpetual

Cost of Goods Sold $1,425.00

Ending Inventory $4,307.50

$1,515.00

$4,217.50

Weighted Average— Perpetual

The FIFO cost formula will produce the higher ending inventory because costs have been rising. Under this formula, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory. For Dene Company, the ending inventory under FIFO is $4,307.50 compared to $4,217.50 under weighted average cost. (c) The weighted average cost formula will produce the higher cost of goods sold for Dene Company. Under the weighted average cost formula some of the most recent costs are averaged into cost of goods sold, and the earliest costs are averaged into the ending inventory. The cost of goods sold is $1,515.00 for the weighted average compared to $1,425.00 under FIFO.

Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

EXERCISE 6-7 (a) (1) FIFO $17,700 8,060 $ 9,640

Sales ($15 × 1,180) Cost of goods sold Gross profit

(2) Weighted Average $17,700 7,787 $ 9,913

Gross profit is different under the two methods because a different flow of goods is assumed. Under the FIFO method, the earliest costs are assigned to cost of goods sold. Since product costs are decreasing, this means that older, higher costs are flowing to cost of goods sold. Under the weighted average method, the older, higher costs are averaged into cost of goods sold with newer, lower costs, producing a lower amount than the FIFO method. (b) The choice of inventory cost formula does not affect cash flow. It affects the allocation of costs between inventory and cost of goods sold.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 6-8 (a) Ending inventory, incorrect Error Ending inventory, correct Cost of goods sold, incorrect Error – beginning inventory 2016 Error – ending inventory 2016 Error – ending inventory 2017 Cost of goods sold, correct

2017 $30,000 $4,000 $34,000

2016 $30,000 $5,500 O $24,500

$170,000 5,500

$175,000 5,500 U

4,000 $160,500

$180,500

(b) In 2016 profit is overstated by $5,500, the amount of the error in ending inventory. This error flows through to owner’s equity in 2016 to produce an overstatement of $5,500. In 2017 both errors have an impact. The net effect is an understatement of profit by $9,500. This is a result of the $5,500 overstatement of the beginning inventory plus $4,000 understatement of ending inventory. Owner’s equity in 2017 would show only an understatement of $4,000. The $5,500 overstatement of 2016 would be offset by the $5,500 understatement in profit caused by the impact on beginning inventory in 2017. (c)

It is important that Glacier Fishing Gear correct these errors because users of the financial statements look at the results for individual years and also look at any trends.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 6-9 (a) MARRAKESH COMPANY Income Statement (Partial) December 31 2017 2016 Sales .................................................................. $500,000 $500,000 Cost of goods sold* ........................................... 430,000 390,000 Gross profit ........................................................ $ 70,000 $110,000 * Cost of goods sold (2016) = $410,000 – $20,000 = $390,000 Cost of goods sold (2017) = $410,000 + $20,000 = $430,000 (b) The cumulative effect on total gross profit for the two years is zero, as shown below: 2017 2016 Incorrect gross profits: $90,000 + $90,000 = $180,000 Correct gross profits: $70,000 + $110,000 = 180,000 Difference $ 0

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Accounting Principles, Seventh Canadian Edition

EXERCISE 6-10 (a) Clothing Jewellery Greeting cards Stuffed toys Total inventory (b)

Cost $ 665 1,440 47 672 $2,824

NRV $ 570 2,016 94 2,184 $4,864

Cost of Goods Sold .................................. Merchandise Inventory ($2,824 – $2,729)

LCNRV $ 570 1,440 47 672 $2,729 95 95

EXERCISE 6-11 (a) Cameras Nikon Canon Total Lenses Sony Sigma Total Total inventory (b)

(c)

NRV

LCNRV

$10,125 6,800 16,925

$ 9,000 7,225 16,225

$16,225

2,970 4,300 7,270

2,728 4,400 7,128

7,128

$24,195

$23,353

Cost of Goods Sold .................................. 842 Merchandise Inventory ($24,195 – $23,353)

842

In the notes to the financial statements, the following information should be reported: (1) the major inventory classifications; (2) the cost determination method; (3) the value of inventory reported at net realizable value ($23,353); (4) the cost of goods sold; and (5) the amount of the writedown to net realizable value ($842).

Solutions Manual .

Cost

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Accounting Principles, Seventh Canadian Edition

EXERCISE 6-12 (a) Inventory turnover

2017 2.00 times =

2016 1.60 times =

$50,000 $51,200 [($20,000 + $30,000) ÷ 2] [($30,000 + $34,000) ÷ 2] Days sales in inventory Gross profit margin

183 days = 365 ÷ 2.00

228 days = 365 ÷ 1.60

60.0% =

($125,000 – $50,000) $125,000

($128,000 – $51,200) $128,000

(b) Inventory turnover has increased from 1.60 (2016) to 2.00 (2017). As well, days sales in inventory has decreased from 228 days (2016) to 183 days (2017). Both of these ratios indicate that it is taking less time to sell inventory. The gross profit margin has remained at the same level of 60%. The sales volume and cost of goods sold have also remained relatively constant from 2016 to 2017. The improvement in inventory turnover and days sales in inventory seem to come from decreasing the level of merchandise on hand. Whereas the gross profit margin has remained constant, lowering the quantity of merchandise on hand usually lowers carrying costs and increases overall profitability. The increase in inventory turnover (and decrease in days sales in inventory) indicate an improving liquidity.

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Accounting Principles, Seventh Canadian Edition

*EXERCISE 6-13 (a) FIFO Ending Inventory: Date

Units

Unit Cost

Total Cost

Apr. 16 Apr. 12

15 10 25

$12 11

$180 110 $290

Cost of Goods Sold: $915 – $290 = $625 Weighted Average Weighted Average unit cost: $915 ÷ 90 units = $10.17 (rounded) per unit Ending Inventory: 25 units × $10.17 per unit = $254 (rounded) Cost of Goods Sold: $915 – $254 = $661 (b) FIFO Check of Cost of Goods Sold: Date

Units

Unit Cost

Total Cost

Apr. 1 Apr. 12

30 35 65

$ 8 11

$240 385 $625

Weighted Average Check of Cost of Goods Sold: 65 units × $10.17 per unit = $661 (rounded) Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

*EXERCISE 6-14 (a) Cost of Goods Available for Sale Unit Total Date Units Cost Cost July 1 150 $5.00 $ 750.00 12 230 6.75 1,552.50 28 490 7.00 3,430.00 Total 870 $5,732.50 1.

FIFO Ending Inventory: Date

Units

Unit Cost

June 28 12

490 130 620

$7.00 6.75

Total Cost $3,430.00 877.50 $4,307.50

Cost of Goods Sold: $5,732.50-$4,307.50 = $1,425.00 Check of Cost of Goods Sold:

Date

Units

Unit Cost

Total Cost

June 1 12

150 100 250

$ 5.00 6.75

$ 750 675 $1,425

Weighted Average Weighted Average unit cost: $5,732.50 ÷ 870 units = $6.59 per unit Ending inventory: 620 units x $6.59 per unit = $4,085.80 Cost of goods sold: $$5,732.50 – $4,085.80 = $1,646.70

Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

*EXERCISE 6-14 (Continued) (b) The weighted average cost is not $6.25 because the weighted average cost method uses a weighted average unit cost, not a simple average of unit costs ($5 + $6.75 + $7 = $18.75 ÷ 3 = $6.25). (c) FIFO—Periodic FIFO—Perpetual

Cost of Goods Sold $1,425.00 1,425.00

Ending Inventory $4,307.50 4,307.50

1,646.70

4,085.80

1,515.00

4,217.50

Weighted Average— Periodic Weighted Average— Perpetual

FIFO: The results are identical using either the periodic or the perpetual inventory systems. Weighted Average: Cost of goods sold is $131.70 lower and ending inventory $131.70 higher using a perpetual system. This is because in the perpetual system the higher priced purchases on July 28 are not considered in the last sale; in the periodic system the weighted average is based on all of the purchases and is applied to all of the sales.

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Accounting Principles, Seventh Canadian Edition

*EXERCISE 6-15 (a) FIFO Purchases Cost of Goods Sold Balance Date Units Cost Total Units Cost Total Units Cost Total Oct.1 Beginning inventory 25 $295 $7,375 25 $295 $7,375 Oct. 10 30 300 9,000 25 295 7,375 30 300 9,000 16,375 Oct. 12 25 $295 $7,375 13 300 3,900 17 300 5,100 12,475 Oct. 13 35 305 10,675 13 300 3,900 35 305 10,675 14,575 Oct. 25 13 300 3,900 32 305 9,760 3 305 915 13,660 Oct. 27 20 310 6,200 3 305 915 20 310 6,200 7,115 Total

110

$33,250 87 $26,135 Cost of goods Cost of goods sold available for sale

23 $7,115 Ending inventory

Check: Cost of goods available for sale Less: cost of goods sold Ending inventory

Solutions Manual .

6-44

Cost $33,250 26,135 $ 7,115

Units 110 87 23

Chapter 6

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

*EXERCISE 6-15 (Continued) Weighted Average Date

Oct 1

Purchases

Cost of goods sold

Unit s Cost Total Beginning inventory

Units

25 30

$295.00 300.00

305.00

Total

$297.73

$12,504.66

10,675.00

Total

$7,375.00 9,000.00

Cost

310.00

303.03

13,636.35

6,200.00

110 $33,250.00 Cost of goods available for sale

87 Cost of goods sold

$26,141.01

Cost $33,250.00 26,141.01 $7,108.99

Units 110 87 23

Cost

Total

25 55

$295.00 297.73

$7,375.00 16,375.00

297.72

3,870.34

Units

303.03

14,545.34

303.00

908.99

309.09

7,108.99

23 $7,108.99 Ending inventory

Check: Cost of goods available for sale Less: Cost of goods sold Ending Inventory

Solutions Manual

6-45 .

Weighted Average Calculations Total WA Cost

Inventory balance

Chapter 6

Units A

Cost B

25 30

$7,375.00 9,000.00

55 55 -42 13

16,375.00 16,375.00 -12,504.66 3,870.34

13 35

3,870.34 10,675.00

48 48 -45 3 3 20 23

14,545.34 14,545.34 -13,636.35 908.99 908.99 6,200.00 7,108.99

per unit B÷A

$297.73

$297.72

$303.03

$303.00

$309.09

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

*EXERCISE 6-15 (Continued) (b) Cost of Goods Available for Sale Unit Total Date Units Cost Cost Oct 1 25 $295 $ 7,375 Oct. 10 30 300 9,000 Oct. 13 35 305 10,675 Oct. 27 20 310 6,200 Total 110 $33,250 FIFO Ending Inventory: Date

Units

Unit Cost

Total Cost

Oct. 27 13

20 3 23

$310 305

$6,200 915 $7,115

Cost of Goods Sold: $33,250 – $7,115 = $26,135 Weighted Average Weighted Average cost per unit: $33,250 ÷ 110 units = $302.27 per unit Ending inventory: 23 × $302.27 = $6,952.21 Cost of goods sold: $33,250 – $6,952.21 = $26,297.79

Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

*EXERCISE 6-16 (a)

Perpetual FIFO Dr. 9,000

Oct. 10 Merchandise Inventory Accounts Payable

Cr. 9,000

12 Cash Sales

18,900

Weighted Average Dr. Cr. 9,000 9,000 18,900

18,900

Cost of Goods Sold Merchandise Inventory

12,475

18,900 12,504.66

12,475

12,504.66

(b) Periodic FIFO Oct. 13 Purchases Accounts Payable 25 Cash Sales

Solutions Manual .

Dr. 10,675

Cr. 10,675

20,700

20,700 20,700

6-47

Weighted Average Dr. Cr. 10,675 10,675

20,700

Chapter 6

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

*EXERCISE 6-17 Net sales ($90,000 – $1,500 – $700) ............................... Less: Estimated gross profit (40% × $87,800) ............. Estimated cost of goods sold ........................................

$87,800 35,120 $52,680

Beginning inventory ....................................................... Cost of goods purchased ($51,200 – $2,400 – $1,300 + $2,200) ..................... Cost of goods available for sale .................................... Less: Estimated cost of goods sold ............................. Estimated cost of merchandise inventory ....................

$25,000 49,700 74,700 52,680 $22,020

*EXERCISE 6-18 Men’s Shoes

Women’s Shoes

Cost Retail Cost Retail Beginning inventory $ 36,000 $ 58,050 $ 45,000 $ 95,750 Goods purchased 216,000 348,400 315,000 670,200 Goods available for sale $252,000 406,450 $360,000 765,950 Net sales 365,000 635,000 Ending inventory at retail $ 41,450 $130,950 Cost to retail ratio: Estimated cost of ending inventory

Solutions Manual .

$252,000 = 62% $406,450

$360,000 = 47% $765,950

$41,450 × 62% = $25,699

$130,950 × 47% = $61,547

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM 6-1A (a) 1.

Include the unsold portion of $510 ($875 – $365) in Carberry’s inventory. Title passes to the buyer on sale.

Exclude the items from Carberry’s inventory. These goods have been sold.

Exclude the items from Carberry’s inventory. These goods are owned by Craft Producers.

Title to the goods does not transfer to the customer until March 3. Include the $950 in ending inventory.

Carberry owns the goods once they are shipped on February 26. Include inventory of $405 ($375 + $30).

Include $630 in inventory. These goods have not yet been sold.

Title of the goods does not transfer to Carberry until March 2. Exclude this amount from the February 28 inventory.

The sale will be recorded on February 26. The goods should be excluded from Carberry’s inventory at the end of February.

(b)

$65,000 +510 +950 +405 +630 $67,495

Solutions Manual .

Original Feb. 28 inventory valuation 1. 4. 5. 6. Revised Feb. 28 inventory valuation

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Accounting Principles, Seventh Canadian Edition

PROBLEM 6-1A (Continued) Taking It Further The accountant would consider overlooking item 4. A sale to a customer has taken place but the legal ownership of the merchandise is transferred after year end. Recording this transaction in February will increase profit and increase the accountant’s bonus. Intentionally not correcting this error would be unethical.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 6-2A

Nov.

Model 8 Corolla Camry 18 Camry Venza Tundra

Cost of goods sold Cost/ Sales price/ Serial # Unit Unit C81362 $20,000 $22,000 G62313 26,000 28,000 G71891 25,000 27,000 X3892 27,000 31,000 F1921 25,000 29,000 $123,000 $137,000

Ending inventory Model Corolla Tundra Camry Venza Venza Tundra Camry

Serial # C63825 F1883 G71811 X4212 X4214 F2182 G72166

Cost/ Unit $15,000 22,000 27,000 28,000 31,000 23,000 30,000 $176,000

Taking It Further: EastPoint Toyota should use the specific identification method because the vehicles are large dollar value items that are specifically identifiable and they are not interchangeable.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 6-3A (a) Purchases Date Units Cost Total Nov. 1 Beginning inventory 60 $50 $3,000 9 100 46 4,600

Cost of Goods Sold Balance Units Cost Total Units Cost Total

60 60

150

40 120 45

Total

355

$3,000 2,760 5,760

6,600

$50 46

46 44

1,840 5,280 7,120

1,890 $16,090

280

$12,880

60 60 100

$50 $3,000 50 3,000 46 4,600 7,600

1,840

40 150

46 44

1,840 6,600 8,440

44 1,320

30 45

44 42

1,320 1,890 3,210 $3,210

Check: Cost of goods available for sale Less: cost of goods sold Ending inventory

Solutions Manual .

6-52

Cost $16,090 12,880 $ 3,210

Units 355 280 75

Chapter 6

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Accounting Principles, Seventh Canadian Edition

PROBLEM 6-3A (Continued) (b) Nov. 22 Merchandise Inventory ........................... 6,600 Accounts Payable (150 × $44) ...... 29

Accounts Receivable .............................. 9,600 Sales (160 × $60)............................

9,600

Cost of Goods Sold ................................ 7,120 Merchandise Inventory [(40 × $46) + (120 × $44)] ..............

7,120

6,600

$17,520 12,880 $ 4,640

The entry to record the adjustment would be: Cost of Goods Sold (2 × $44)............. Merchandise Inventory .................

88 88

Revised gross profit would be: $4,640 – $88 = $4,552 (e) The merchandise inventory on the balance sheet would be overstated by $88, as well as the owner’s capital account by the same amount. On the income statement, the cost of goods sold would be understated by $88. This would lead to an overstatement of gross profit by $88 and of profit by $88. Taking It Further: The FIFO cost formula produces more meaningful inventory amounts for the balance sheet because the units are costed at the most recent purchase prices. These prices approximate replacement cost, which is the most relevant value for decision making. The FIFO cost formula is more likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence.

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PROBLEM 6-4A (a)

Date

Purchases Units

Nov. 1

Cost

Total

Cost of goods sold

Inventory Balance

Units

Unit s

Cost

Total

Cost

Total

Beginning inventory

$50.00

$3,000.00

$50.00

$3,000.00

100

46.00

4,600.00

160

47.50

7,600.00

120

150

44.00

42.00

190

160

5,700.00

6,600.00

47.50

44.74

7,158.40

1,890.00

47.50

44.74

44.72

43.09

1,900.00

8,500.00

1,341.60

3,231.60

_ Totals

355

$16,090.00

Cost of goods available for sale

Solutions Manual

$12,858.40

Cost of goods sold

6-54 .

280

$3,231.60 Ending inventory

Chapter 6

Weighted Average Calculations Total

WA Cost

Units

Cost

per unit

B÷A

3,000.00

100

4,600.00

160

7,600.00

160 -120

7,600.00 -5,700.00

1,900.00

40 150

1,900.00 6,600.00

190

8,500.00

190 -160

8,500.00 -7,158.40

30 30 45 75

1,341.60 1,341.60 1,890.00 3,231.60

$47.50

$ 44.74

$44.72

$43.09

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 6-4A (Continued) Check: Cost $16,090.00 12,858.40 $ 3,231.60

Units 355 280 75

Accounts Receivable .............................. 7,920 Sales (120 × $66)............................

7,920

Cost of Goods Sold ................................ 5,700 Merchandise Inventory (120 × $47.50)

5,700

Cost of goods available for sale Less: cost of goods sold Ending inventory (b) Nov. 15

(c) Before making the change to the FIFO cost formula, the company must consider if the FIFO formula would result in more relevant information in the financial statements. Or has the physical flow of inventory changed from average flow to FIFO? Comparison FIFO Ending Cost of Inventory Goods Sold $3,210 $12,880

Weighted Average Ending Cost of Inventory Goods Sold $3,231.60 $12,858.40

If prices continue to fall, the FIFO cost formula will continue to yield lower ending inventory and higher cost of goods sold than the weighted average cost formula.

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PROBLEM 6-4A (Continued) Taking It Further: In selecting a cost formula, management should consider their circumstances—the type of inventory and the flow of costs throughout the period. Management should also consider their financial reporting objectives. In the final determination; however, management should select the cost formula that will provide the most relevant financial information for decision-making.

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PROBLEM 6-5A (a)

(1) FIFO

Purchases Date Units Cost Total June 1 Beginning inventory 5 $105 $525 4 18 5 $115 $575

Cost of Goods Sold Units Cost Total

July 5

120

2 $105

$210

3 3

315 345 660

600

2 1

25 Total 15 Check:

$1,700

2 13

Cost of goods available for sale Less: cost of goods sold Ending inventory

Solutions Manual .

105 115

6-57

115 120

230 120 350 120 240 $1,460 Cost $1,700 1,460 $240

Balance Units Cost Total 5 $105 3 105 3 105 5 115

$525 315 315 575 890

115

230

2 5

115 120

230 600 830

120

480

2 2

120

240 $240

Units 15 13 2

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Accounting Principles, Seventh Canadian Edition

PROBLEM 6-5A (Continued) (2) Date

Weighted Average

Purchases Units

June 1

Cost

Total

Cost of goods sold

Inventory Balance

Units

Cost

Total

Cost

Total

Beginning inventory 5

$105.00

$525.00

115.00

120.00

$105.00

$525.00

105.00

315.00

$210.00

575.00

July 5

$105.00

111.25

667.50

600.00

111.25

117.50

890.00

222.50

822.50

117.50

352.50

117.50

470.00

117.50

235.00

117.50

235.00

$1,465.00

Totals

$1,700.00

Cost of goods available for sale

Solutions Manual

Cost of goods sold

6-58 .

$235.00 Ending inventory

Chapter 6

Weighted Average Calculations Total

WA Cost

Units

Cost

per unit

B÷A

5 -2

$525.00 -210.00

315.00

3 5

315.00 575.00

890.00

8 -6

890.00 667.50

222.50

600.00

822.50

7 -3

822.50 -352.50

4 4 -2 2

470.00 470.00 235.00 235.00

$105.00

$111.25

$117.50

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 6-5A (Continued) (a) (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory

Cost $1,700 1,465 $235

Units 15 13 2

(b)

Sales* ............................................................... Cost of goods sold .......................................... Gross profit......................................................

FIFO

Weighted Average

$3,105 1,460 $1,645

$3,105 1,465 $1,640

* Sales = (2 × $210) + (6 × $235) + (3 × $255) + (2 × $255)

Taking It Further: In selecting a cost formula, management should consider their circumstances—the type of inventory and the flow of costs throughout the period. In the final determination; however, management should select the cost formula that best approximates the physical flow of goods or represents recent costs on the balance sheet.

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PROBLEM 6-6A (a) Date

Purchases Units

July 1 5

Cost of goods sold

Cost

Total

Units

Totals

Total

Units

Cost

Total

$10.00

$250.00

$10.00

$250.00

9.00

495.00

9.31

475.00

8.00

145

451.00

125

Cost of goods available for sale

$1,102.70

Cost of goods sold

6-60 .

8.20

70.00

$1,255.00

Solutions Manual

$651.70

$9.31

440.00

Inventory Balance

Beginning inventory

Cost

Weighted Average Calculations Total

9.33

8.20

8.23

7.62

93.30

533.30

82.30

152.30

$152.30 Ending inventory

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Units

Cost

WA Cost per unit

B÷A

25 55

$250.00 495.00

745.00

80 -70

745.00 -651.70

93.30

440.00

533.30

65 -55

533.30 -451.00

82.30

10 10

82.30 70.00

152.30

$9.31

$9.33

$8.20

$8.23

$7.62

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Accounting Principles, Seventh Canadian Edition

PROBLEM 6-6A (Continued) (a) (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory

Cost $1,255.00 1,102.70 $ 152.30

Units 145 125 20

GENERAL JOURNAL Date July

Account Titles 5

Solutions Manual .

Debit

Merchandise Inventory (55 × $9).. Cash ..........................................

495.00 495.00

Cash (70 × $15) ............................. 1,050.00 Sales.......................................... Cost of Goods Sold (70 × $9.31) .. Merchandise Inventory ............

651.70

Merchandise Inventory (55 × $8).. Cash .........................................

440.00

Cash (55 × $12) ............................. Sales ........................................

660.00

Cost of Goods Sold (55 × $8.20) .. Merchandise Inventory ...........

451.00

Merchandise Inventory (10 × $7).. Cash .........................................

70.00

6-61

Credit

1,050.00

651.70

440.00

660.00

451.00 70.00

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PROBLEM 6-6A (Continued) (b) The total cost of ending inventory is $152.30 and consists of 20 units. (c)

Since the weighted average cost per unit of $7.62 is less than net realizable value, no entry is required to adjust the amount to lower of cost and net realizable value. Cost:$152.30 Calculated net realizable value: $160 (20 × $8)

(d) The ending inventory should be valued at $152.30, the lower of cost and net realizable value. The cost of goods sold is $1,102.70. Taking It Further: If Amelia had used FIFO instead of weighted average, the cost of the ending inventory on July 31 would be calculated as follows: (10 units × $7) + (10 units × $8) = $150 The FIFO cost is lower than net realizable value, so no adjustment is required. The inventory will be presented on the balance sheet at its cost basis of $150.

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PROBLEM 6-7A (a)

As reported Impact of Dec.31/2015 inventory overstatement Correct amount

As reported Impact of Dec.31/2015 inventory overstatement Impact of Dec.31/2016 inventory understatement Correct amount

As reported Impact of Dec.31/2016 inventory understatement Correct amount

Solutions Manual .

Year Ended December 31, 2015 Total Owner's Cost of Assets Equity Goods Sold $ 850,000 $ 650,000 $ 500,000

Profit $ 70,000

O 20,000 $ 830,000

U 20,000 $ 520,000

O 20,000 $ 50,000

Year Ended December 31, 2016 Total Owner's Cost of Assets Equity Goods Sold $ 900,000 $ 700,000 $ 550,000

Profit $80,000

O 20,000 $ 630,000

U 32,000 $ 932,000

U 32,000 $ 732,000

O 20,000

O 32,000 U 32,000 $ 498,000 $ 132,000

Year Ended December 31, 2017 Total Owner's Cost of Assets Equity Goods Sold $ 925,000 $ 750,000 $ 550,000

NE 925,000

6-63

NE 750,000

U 20,000

U 32,000 $ 582,000

Profit $90,000

O 32,000 $ 58,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 6-7A (Continued) (b)

The errors in calculating the company’s ending inventory will not have an impact on the company’s cash account. The cash balances will be correctly stated at December 31, 2015, 2016, and 2017.

Taking It Further: Part (a) shows that even though 2017 year end inventory and owner’s equity are correct, the income statement shows the impact of the 2016 error on cost of goods sold and profit. In addition, comparative amounts for 2016 and 2015 would show incorrect amounts for inventory, owner’s equity, cost of goods sold, and profit. These errors impact trend and profitability analyses and would need to be corrected.

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PROBLEM 6-8A (a)

(Incorrect) HARRISON COMPANY Income Statement Year Ended July 31 2017 $350,000 245,000 105,000 76,000 $ 29,000

Sales Cost of goods sold Gross profit Operating expenses Profit

2016 2015 $330,000 $310,000 235,000 225,000 95,000 85,000 76,000 76,000 $ 19,000 $ 9,000

(Corrected) HARRISON COMPANY Income Statement Year Ended July 31 2017 2016 2015 $350,000 $330,000 $310,000 240,000** 240,000* 225,000 110,000 90,000 85,000 76,000 76,000 76,000 $ 34,000 $ 14,000 $ 9,000

Sales Cost of goods sold Gross profit Operating expenses Profit

** $240,000 = $245,000 + $10,000 – $15,000 * $240,000 = $235,000 – $10,000 + $15,000

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PROBLEM 6-8A (Continued) (b) The impact of these errors on owner’s equity at July 31, 2017 is zero because the total of the profit over the three-year period is the same with the incorrect statements as it is with the correct statements. However, using the incorrect numbers it appears the company’s profit is increasing at a steady rate over the three-year period when in fact it increased slightly in 2016 and increased substantially in 2017. (c)

Inventory turnover = Cost of goods sold ÷ Weighted average inventory Incorrect 2016: $235,000 ÷ [($45,000 + $35,000) ÷ 2] = 5.88 2017: $245,000 ÷ [($55,000 + $45,000) ÷ 2] = 4.90 Corrected 2016: $240,000 ÷ [($40,000 + $35,000) ÷ 2] = 6.40 2017: $240,000 ÷ [($55,000 + $40,000) ÷ 2] = 5.05

Taking it Further: The incorrect annual profits show an increasing trend of profitability with profits increasing at a steady rate from $9,000 in 2015 to $19,000 in 2016 and then to $29,000 in 2017. The corrected profit also shows an increase in profitability but with a slow rate of increase from 2015 to 2016 and a much sharper increase from 2016 to 2017. Profits increased from $9,000 to $14,000 in 2016 and subsequently increased to $34,000 in 2017. It is not possible to determine if the errors were deliberate or not. Certain factors can indicate a higher likelihood that the errors are deliberate. For example, if management bonuses are tied to trends in profitability or income smoothing, then it may be possible the errors were deliberate.

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PROBLEM 6-9A (a)

Tonnes

Total Cost

Total NRV

LCNRV

2,500 2,000

$1,262,500 1,070,000

$1,350,000 1,040,000

$1,262,500 1,040,000

(1) Sept. 30 (2) Oct. 31 (b)

(1) Sept. 30 No entry (2) Oct. 31 Cost of Goods Sold .................... 30,000 Merchandise Inventory ....... (c)

An adjusting entry is required at November 30 because the inventory, on which a previous writedown had been recorded, is still on hand and the net realizable value has partly recovered. If the inventory on hand at October 31 had been sold then an adjusting entry would not be required. The adjustment is: Nov. 30

(d)

30,000

Merchandise Inventory ............... 20,000 Cost of Goods Sold............. [($530 – $520) × 2,000]

20,000

The notes should disclose the cost determination method, the value of inventory reported at net realizable value, the amount of any writedown to net realizable value (for the month of October) and reversals of previous writedowns (for the month of November), including the reason why the writedown was reversed. This type of disclosure would be required if the company prepares monthly financial statements.

Taking It Further: Essentially all companies are required to report inventory at LCNRV on the balance sheet. A few exceptions apply such as inventory items that will be used in production of finished goods where the sales price of the finished good is stable. Solutions Manual .

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PROBLEM 6-10A (a) PepsiCo. Inc.

2014

Inventory turnover

$30,884 ($3,143 + $3,409) 2

9.43

times

Days sales in inventory

365

days

Gross profit margin

($66,683 - $30,884) $66,683

53.69%

9.43

PepsiCo. Inc.

2013

Inventory turnover

$31,243 ($3,409 + $3,581) 2

8.94

times

Days sales in inventory

365

days

Gross profit margin

($66,415 - $31,243) $66,415

52.96%

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PROBLEM 6-10A (Continued) (a) (Continued) Coca-Cola Company

2014

Inventory turnover

$17,889 ($3,100 + $3,277) 2

5.61

times

Days sales in inventory

365

days

61.11%

5.61

($45,998 $17,889) $45,998

Gross profit margin Coca-Cola Company

2013

Inventory turnover

$18,421 ($3,277 + $3,264) 2

5.63

times

Days sales in inventory

365

days

60.68%

Gross profit margin

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5.63

($46,854 $18,421) $46,854

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PROBLEM 6-10A (Continued) (b) PepsiCo’s inventory turnover improved and days sales in inventory showed an improvement of 2 days from 2013 to 2014. PepsiCo’s gross profit margin showed a slight improvement from 52.96% to 53.69%. Coca-Cola’s inventory turnover and days sales in inventory are practically identical for 2013 and 2014. Coca-Cola’s gross profit margin also showed a slight improvement from 60.68% to 61.10%. In spite of the positive performance on inventory turnover and gross profit margin, both companies’ profit declined in 2014. It is meaningful to compare these two companies in terms of their ratios because the companies operate in the same industry. They are different in terms of their size and a ratio analysis eliminates this difference and makes for a meaningful comparison. Although PepsiCo has a better inventory turnover than Coca-Cola, it earns substantially less gross profit as a percentage of sales. It would be useful to know if their accounting polices differ in any significant ways.

Taking It Further: In selecting a cost formula, management should consider their circumstances—the type of inventory and the flow of costs throughout the period. Management selects the cost formula that best approximates the physical flow of goods or represents recent costs on the balance sheet. Both Pepsi and Coca-Cola have different types of inventories such as ingredients for raw materials, and finished goods such as concentrates, syrups, beverages, and snack and other foods. A cost formula such as weighted average is better suited for products such as concentrates or syrups. Other products such as snack foods, where freshness is important, would be better tracked with a cost method such as FIFO.

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*PROBLEM 6-11A (a)

Cost of Goods Available for Sale Date Jan. 1 Mar. 15 July 20 Sept. 4 Dec. 2 Total

Explanation Units Unit Cost Total Cost Beginning inventory 200 $110 $22,000 Purchase 80 111 8,880 Purchase 60 110 6,600 Purchase 25 108 2,700 Purchase 10 103 1,030 375 $41,210

(b) Number of units sold = 375 units available for sale – 35 units on hand at the end of the year = 340 units sold Sales = 340 units × $290 = $98,600 (c)

(1) FIFO Ending Inventory: Date Units Dec. 2 10 Sep. 4 25 35

Unit Cost $ 103 108

Total Cost $1,030 2,700 $3,730

Cost of goods sold: $41,210 – $3,730 = $37,480 Check of cost of goods sold: Date Units Unit Cost Total Cost Jan. 1 200 $110 $22,000 Mar. 15 80 111 8,880 July 20 60 110 6,600 340* $37,480 *340 = 375 – 35

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*PROBLEM 6-11A (Continued) (c) (Continued) (2) Weighted Average Weighted Average unit cost: $41,210  375 units = $109.89 per unit Ending Inventory: 35 units × $109.89 per unit = $3,846 Cost of Goods Sold: $41,210 – $3,846 = $37,364 (d) FIFO $98,600 37,480 $61,120

Sales revenue (340 × $290) Cost of goods sold Gross profit

Weighted Average $98,600 37,364 $61,236

Taking It Further: The Baby Store should continue to use the weighted average cost method. GAAP requires that a cost determination method be applied consistently from year to year. Changes in cost determination methods are allowed only if the physical flow of inventory has changed and the new method results in more relevant information. The company cannot change methods simply because they wish to achieve a particular outcome for profit. One user, or set of users, should not be considered above other users.

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*PROBLEM 6-12A

(a)

Cost of goods available for sale Date Explanation Units July 1 Beginning inventory 400 10 Purchase 1,300 13 Purchase 700 27 Purchase 600 Total 3,000

Unit Cost Total Cost $3.00 $1,200 3.10 4,030 3.40 2,380 3.75 2,250 $9,860

Number of units of ending inventory = 3,000 units available for sale – 1,700* units sold = 1,300 units of ending inventory. *1,700 units sold = 300 + 1,000 + 400 (b) FIFO — periodic: Ending Inventory: Date Units July 27 600 July 13 700 1,300

Unit Cost $ 3.75 3.40

Total Cost $2,250 2,380 $4,630

Cost of goods sold: $9,860 – $4,630 = $5,230 Sales revenue Cost of goods sold Gross profit

$10,400 * 5,230 $ 5,170

*(300 × $6.00) + (1,000 × $6.00) + (400 × $6.50)

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*PROBLEM 6-12A (Continued) (c) FIFO—Perpetual Purchases Date Units Cost Total July 1 Beginning inventory 400 $3.00 $1,200 2 10 1,300 3.10 4,030

Accounting Principles, Seventh Canadian Edition

Cost of Goods Sold Units Cost Total

300

$3.00

$ 900

100 900

3.00 3.10

300 2,790 3,090

Balance Units Cost 400 100 100 1,300

$3.00 3.00 3.00 3.10

$1,200 300 300 4,030 4,330

400

3.10

1,240 1,240 2,380 3,620 1,240 2,380 2,250 5,870 2,380 2,250 4,630 $4,630

700

3.40

2,380

400 700

3.10 3.40

600

3.75

2,250

400 700 600

3.10 3.40 3.75

700 600

3.40 3.75

28 Total

400

3.10

1,240

3,000 $9,860 1,700 $5,230 1,300 Cost of goods available Cost of goods sold Ending inventory for sale

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Accounting Principles, Seventh Canadian Edition

*PROBLEM 6-12A (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory

Cost $9,860 5,230 $4,630

Sales revenue Cost of goods sold Gross profit

Units 3,000 1,700 1,300 $10,400 5,230 $ 5,170

(d) (1) FIFO periodic GENERAL JOURNAL Date

Account Titles

July 10

Debit

Purchases ..................................... Cash (1,300 × $3.10) .................

4,030

Cash (1,000 × $6.00)...................... Sales..........................................

6,000

Credit

4,030 6,000

(2) FIFO perpetual GENERAL JOURNAL Date

Account Titles

July 10

Debit

Merchandise Inventory ................. Cash (1,300 × $3.10) .................

4,030

Cash (1,000 × $6.00)...................... Sales..........................................

6,000

Cost of Goods Sold ...................... Merchandise Inventory ............ [(100 × $3.00) + (900 × $3.10)]

3,090

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Credit

4,030

6,000 3,090

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

*PROBLEM 6-12A (Continued) (e)

Comparison: Periodic $4,630 5,230 5,170

Ending inventory Cost of goods sold Gross profit

Perpetual $4,630 5,230 5,170

The numbers are the same because regardless of the system (perpetual or periodic), the first costs are assigned to the cost of goods sold.

Taking It Further: Companies are required to disclose their inventory cost determination method (FIFO, weighted average, or specific identification), but not whether a periodic or perpetual system is used. This additional level of information does not provide information that is relevant to users of financial information. The differences between FIFO and weighted average, for example, would inform users of how costs flow to the income statement when increases or decreases in costs occur. This pattern is not affected by the choice between periodic and perpetual systems.

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*PROBLEM 6-13A (a)

Goods Available for Sale Date Units Unit Cost Total Cost Jan. 5 10 $1,000 $10,000 Jun. 11 10 1,200 12,000 Oct. 18 15 1,300 19,500 Dec. 20 20 1,500 30,000 Total 55 $71,500 Number of units of ending inventory = 55 units available for sale – 50* units sold = 5 units of ending inventory. *50 units sold = 15 + 35 (b) Weighted Average cost per unit: $71,500 ÷ 55 = $1,300

Ending inventory = 5 × $1,300 = $6,500 Cost of goods sold = $71,500 – $6,500 = $65,000

Sales revenue Cost of goods sold Gross profit

$100,000 * 65,000 $ 35,000

*(15 × $2,000) + (35 × $2,000)

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*PROBLEM 6-13A (Continued) (c)

Weighted Average—perpetual Weighted Average Calculations

Date

Purchases Units

Jan. 1

Cost of goods sold

Cost

Total

Units

Cost

Total

Units

Cost

Total

Beginning inventory 0

1,000

10,000

1,000

10,000

June 11

1,200

12,000

1,100

22,000

July 4

Oct. 18

Dec. 20

1,300

1,500

30,000

$71,500

Cost of goods sold

6-78 .

1,375

Cost of goods available for sale

Solutions Manual

1,100

16,500

19,500

Totals

1,100

Total

WA Cost

Units

Cost

per unit

B÷A

Inventory Balance

48,125

$64,625

1,250

1,375

Ending inventory

Chapter 6

10 10

10,000 12,000

22,000

5,500

22,000

25,000

-15 5 5

16,500 5,500 5,500

19,500

25,000

20 20

25,000 30,000

40 40 -35 5

55,000 55,000 -48,125 6,875

55,000

6,875

$6,875

$1,100

$1,250

$1,375

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

*PROBLEM 6-13A (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory

Cost $ 71,500 64,625 $ 6,875

Sales revenue Cost of goods sold Gross profit

Units 55 50 5 $100,000 64,625 $ 35,375

(d) (1) Weighted Average periodic GENERAL JOURNAL Date

Account Titles

Dec. 20

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Debit

Credit

Purchases ..................................... 30,000 Cash (20 × $1,500) ....................

30,000

Cash (35 × $2,000)......................... Sales..........................................

70,000

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*PROBLEM 6-13A (Continued) (d) (Continued) (2) Weighted Average perpetual GENERAL JOURNAL Date

Account Titles

Dec. 20

Debit

Credit

Merchandise Inventory ................. 30,000 Cash (20 × $1,500) ....................

30,000

Cash (35 × $2,000)......................... Sales..........................................

70,000 70,000

Cost of Goods Sold (35 × $1,375) Merchandise Inventory ............

48,125 48,125

(e) Comparison: Perpetual $6,875 64,625 35,375

Ending inventory Cost of goods sold Gross profit

Periodic $6,500 65,000 35,000

The numbers are different. Using the perpetual system, the weighted average cost is recalculated after every purchase. Because the prices are rising, this results in a lower cost of goods sold.

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*PROBLEM 6-13A (Continued) Taking It Further: Under the periodic system, the weighted average cost is calculated at the end of the period and involves a weighted average of beginning inventory and all purchases during the period. This weighted average cost is applied to the total volume of items sold throughout the period to calculate cost of goods sold, even though some sales have occurred before some of the purchases. This pattern of cost flows yields a higher cost of goods sold in a period of rising prices and a lower ending inventory than applying a perpetual weighted average method. In a period of increasing prices, the perpetual weighted average method will yield higher ending inventory, but lower cost of goods sold and higher gross profit than the periodic weighted average method. Although applying the perpetual weighted average method yields a higher profit in a period of rising prices, this does not represent a real benefit in most circumstances. The differences in the information that is available to manage inventory under the perpetual system, the cost of implementing a perpetual system, and the type of inventory involved will usually outweigh the differences caused by the flow of costs to the income statement.

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*PROBLEM 6-14A November Net sales ($674,000 – $14,000) ........................................... $660,000 Cost of goods sold Beginning inventory ................................. $34,050 Purchases ................................... $441,190 Less: Purchase returns and allowances.......................... 17,550 Net purchases .............................. 423,640 Add: Freight in.......................... 6,860 Cost of goods purchased ......................... 430,500 Cost of goods available for sale .............. 464,550 Ending inventory....................................... 39,405 Cost of goods sold ........................................................ 425,145 Gross profit ........................................................................ $234,855 Gross profit margin = $234,855 = 35.6% $660,000 December Net sales ($965,390 – $26,600) ....................................... Less: Estimated gross profit (35.6% × $938,790) .......... Estimated cost of goods sold ........................................

$938,790 334,209 $604,581

Beginning inventory........................................................ $ 39,405 Purchases ........................................................ $621,660 Less: Purchase returns and allowances ................................ 22,575 Net purchases ................................................. 599,085 Freight in.......................................................... 12,300 Cost of goods purchased ............................................... 611,385 Cost of goods available for sale..................................... 650,790 Less: Estimated cost of goods sold .............................. 604,581 Estimated inventory lost in fire ...................................... $ 46,209

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*PROBLEM 6-14A (Continued) Taking It Further: The gross profit method is based on the assumption that the gross profit ratio remains constant from November to December. The gross profit ratio will be affected by merchandising policies or market conditions. In addition, the gross profit ratio may be affected by the product mix included in the sales amount. This method is more accurate when applied to a department or product line, rather than to operations as a whole.

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*PROBLEM 6-15A Women’s Shoes Men’s Shoes Cost Retail Cost Retail Beginning inventory $ 276,000 $424,000 $ 191,000 $ 323,000 Purchases 1,181,000 1,801,000 1,046,000 1,772,000 Purchase returns (24,600) (37,000) (21,900) (36,400) Freight in 6,000 7,200 Goods available for sale$1,438,400 2,188,000 $1,222,300 2,058,600 Net sales (1,798,000) (1,626,000) Ending inventory at retail $ 390,000 $ 432,600 Cost-to-retail ratio: Women’s Shoes—$1,438,400 ÷ $2,188,000 = 65.7% Men’s Shoes—$1,222,300 ÷ $2,058,600 = 59.4% Estimated ending inventory at cost: $390,000 × 65.7% = $256,230—Women’s Shoes $432,600 × 59.4% = $256,964—Men’s Shoes

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*PROBLEM 6-15A (Continued) Taking It Further: Women’s Shoes—$381,250 × 65.7% =

$250,481 256,230 $ 5,749

per count estimated loss at cost

Loss at retail = $390,000 – $381,250 = $8,750 Men’s Shoes—$426,100 × 59.4% =

$253,103 256,964 $ 3,861

per count estimated loss at cost

Loss at retail = $432,600 – $426,100 = $6,500

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PROBLEM 6-1B (a) 1. The unsold portion of these goods $510 ($875 – $365) is owned by Carberry Company, not Morden Company and should not be included in Morden Company’s count. Therefore, no adjustment is required because it was correct to not include them. 2. $750 should be included in inventory as the goods were shipped FOB shipping point on February 27. Title passes to Morden on February 27, the date of shipping. 3. The goods should not be included in inventory as they were shipped FOB shipping point on February 26. Title to the goods transfers to the customer on February 26, the date of shipping. Since these items were not on the premises, they were not counted in inventory. No correction is required. 4. The amount should not be included in inventory as they were shipped FOB destination and not received until March 2. The seller still owns the inventory. Since these items were not on the premises, they were not counted in the ending inventory valuation. No correction is required. 5. The sale will be recorded on March 2. The goods should be included in inventory at the end of February at their cost of $360. Since they were in the shipping department, they were not included in the inventory count. 6. The damaged goods should not be included in inventory because they are not saleable and have no value. Therefore, no adjustment is required because it was correct not to include them.

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PROBLEM 6-1B (Continued) (a) (Continued) 7. As these items have been sold, they should be excluded from Morden’s inventory. Therefore, no adjustment is required because it was correct to not include them. 8. Include $620 in inventory. These goods have not yet been sold.

(b)

$56,000 +750 +360 +620 $57,730

Original Feb. 28 inventory valuation 2. 5. 8. Revised Feb. 28 inventory valuation

Taking It Further The owner might tell the accountant not to correct item 8. This transaction relates to the timing of when inventory is transferred to cost of goods sold. Not correcting this item would cause a discrepancy between the inventory records and the count and trigger an adjusting entry. Since the items are not yet sold to customers, no sale would be recorded in the same accounting period as the charge to cost of goods sold. This would decrease gross profit and minimize income taxes. This would; however, cause the business to pay more taxes in the following year when the merchandise is sold and the sale is recorded on the income statement. The sale would have no offsetting cost of goods sold and the full sales price would be taxable, rather than the gross profit. The owner might consider telling the accountant not to correct item 5 as well if the sale is not recorded in the February year end. Recording the sale in the same period as the cost of goods sold increases gross profit and increases the income taxes. Intentionally not correcting these items is unethical behaviour for the owner and the accountant.

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PROBLEM 6-2B Cost of Goods Sold Cost/ Sales Supplier Serial # Unit price/ Unit July 10 Civic SZ5828 $26,600 $29,800 13 Fit

Ending Inventory Supplier Accord

Serial # ST8411

Cost/ Unit $27,600

YH4418

26,300

28,900

Fit

YH5632

26,600

Accord

ST0944

27,200

28,700

Civic

SZ6148

26,600

Civic

SZ5824

26,700

29,850

27 Civic

SZ6132

26,800

28,800

Accord

ST0815

26,200

27,000

Fit

YH6318

26,500

29,500

$186,300

$202,550

$80,800

Taking It Further: EastPoint Honda should use the specific identification method because it sells items that are specifically identifiable and not interchangeable.

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PROBLEM 6-3B (a) Weighted Average Calculations Date

Purchases Units

June 1

Cost

Total

Cost of goods sold

Inventory Balance

Units

Cost

Total

Cost

Total

Beginning inventory

$50.00

$1,000.00

$50.00

$1,000.00

55.00

4,675.00

105

54.05

5,675.00

58.00

Totals

60.00

155

120

$6,568.80

Cost of goods sold

6-89 .

1,704.30

$8,605.00

Solutions Manual

56.81

900.00

Cost of goods available for sale

$4,864.50

2,030.00

$54.05

54.03

56.81

58.18

35 Ending inventory

Chapter 6

810.50

2,840.50

1,136.20

2,036.20

$2,036.20

Total

WA Cost

Units

Cost

per unit

B÷A

20 85

$1,000.00 4,675.00

105

5,675.00

105 90

5,675.00 4,864.50

810.50

2,030.00

2,840.50

50 -30

2,840.50 -1,704.30

20 20 15 35

1,136.20 1,136.20 900.00 2,036.20

$54.05

$54.03

$ 56.81

$56.81

$58.18

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 6-3B (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory

Cost $8,605.00 6,568.80 $2,036.20

Units 155 120 35

(b) June 10 Accounts Receivable .......................... 8,100.00 Sales (90 × $90) ............................. 8,100.00 Cost of Goods Sold ............................ 4,864.50 Merchandise Inventory (90 × $54.05) 4,864.50 18

(c)

Merchandise Inventory ....................... 2,030.00 Accounts Payable (35 × $58) ........ 2,030.00

The entry to record the adjustment would be: Cost of Goods Sold ($58.18 × 3) .......... 174.54 Merchandise Inventory .................

174.54

(d) The merchandise inventory on the balance sheet would be overstated by $174.54, as well as the owner’s capital account by the same amount. On the income statement, the cost of goods sold would be understated by $174.54. This would lead to an overstatement of gross profit by $174.54 and of profit by $174.54. Taking It Further: The weighted average cost formula produces the more meaningful profit because weighted average costs are matched against current revenues (sales).

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PROBLEM 6-4B (a) Purchases Cost of Goods Sold Units Cost Total Units Cost Total

Date June 1 Beginning inventory

$50 $1,000

20 $50 20 50 85 55

4,675 20 70

15 155

$50 $1,000 55 3,850 4,850

2,030 15 15

55 58

825 870 1,695

900 $8,605

Balance Units Cost Total

120

$6,545

825

15 35

55 58

825 2,030 2,855

58 1,160

20 15

58 60

Check: Cost of goods available for sale Less: cost of goods sold Ending inventory

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Cost $8,605 6,545 $2,060

$1,000 1,000 4,675 5,675

Units 155 120 35

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1,160 900 2,060 $2,060

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Accounting Principles, Seventh Canadian Edition

PROBLEM 6-4B (Continued) (b) June 25 Accounts Receivable ......................... Sales (30 × $95) .............................

2,850

Cost of Goods Sold ............................ Merchandise Inventory ................. ([15 × $55] + [15 × $58])

1,695

2,850

1,695

Weighted Average Ending Cost of Inventory Goods Sold $2,036.20 $6,568.80

If prices continue to rise, the FIFO cost formula will continue to yield higher ending inventory and lower cost of goods sold than the weighted average cost formula.

Taking It Further: Before making the change to the weighted average cost formula, the company must consider if the weighted average formula would result in more relevant information in the financial statements. For example, has the physical flow of inventory changed from FIFO to weighted average? In selecting a cost formula, management should consider their circumstances—the type of inventory and the flow of costs throughout the period. Management should also consider their financial reporting objectives. In the final determination; however, management should select the cost formula that will provide the most relevant financial information for decision-making.

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PROBLEM 6-5B (a)

(1) FIFO

Purchases Cost of Goods Sold Balance Date Units Cost Total Units Cost Total Units Cost Total Feb. 1 Beginning inventory 36 $21 $756 36 $21 $756 7 18 $21 $ 378 18 21 378 23 50 20 1,000 18 21 378 50 20 1,000 1,378 26 18 21 378 32 20 640 18 20 360 1,018 Mar. 10 24 19 456 18 20 360 24 19 456 816 23 18 20 360 10 19 190 14 19 266 626 110 $2,212 100 $2,022 10 $190 Cost of goods available for sale Cost of goods sold Ending inventory Check: Cost of goods available for sale Less: cost of goods sold Ending inventory

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Cost $2,212 2,022 $ 190

Units 110 100 10

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Accounting Principles, Seventh Canadian Edition

PROBLEM 6-5B (Continued) (2) Weighted Average

Date

Purchases Units

Feb. 1

Cost

Total

$21.00

Units

20.00

Cost

Total

19.00

Cost

Total

$2,212.00

Cost of goods available for sale

6-94 .

20.26

1,013.00

$21.00

$756.00

21.00

378.00

20.26

365.00

20.28

365.00

Solutions Manual

$378.00

456.00

110

$21.00

1,000.00

Totals

Units

$756.00

Mar. 10

Inventory Balance

Beginning inventory 36

Cost of goods sold

100

19.55

625.60

$2,016.60

Cost of goods sold

19.55

19.54

821.00

195.40

$195.40 Ending inventory

Chapter 6

Weighted Average Calculations Total

WA Cost

Units

Cost

per unit

B÷A

36 -18

$756.00 -378.00

378.00

18 50

378.00 1,000.00

1,378.00

-50

-1,013.00

365.00

18 24

365.00 456.00

821.00

42 -32

821.00 -625.60

195.40

$21.00

$20.26

$20.28

$19.55

$19.54

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 6-5B (Continued) Check: Cost of goods available for sale Less: Cost of goods sold Ending Inventory

Cost $2,212.00 2,016.60 $195.40

Units 110 100 10

(b) Weighted FIFO Average Sales................................................................. Cost of goods sold .......................................... Gross profit......................................................

$3,004 $3,004.00 2,022 2,016.60 982 987.40

* Sales = (18 × $32) + (50 × $30) + (32 × $29) Taking It Further: In selecting a cost formula, Bennett Basketball should consider their circumstances—the type of inventory and the flow of costs throughout the period. In the final determination; however, Bennett Basketball should select the cost formula that best approximates the physical flow of goods or represents recent costs on the balance sheet.

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PROBLEM 6-6B (a)

GENERAL JOURNAL Date

Account Titles Oct. 5 8

15 20

Solutions Manual .

Debit

Merchandise Inventory ............... Cash (110 × $13) .....................

1,430

Cash (140 × $20) .......................... Sales .......................................

2,800

Cost of Goods Sold ..................... Merchandise Inventory .......... (60 × $14) + (80 × $13)

1,880

Merchandise Inventory (52 × $12) Cash ........................................

624

Cash (70 × $16) ............................ Sales .......................................

1,120

Cost of Goods Sold ..................... Merchandise Inventory .......... (30 × $13) + (40 × $12)

870

Merchandise Inventory (15 × $11) Cash ........................................

165

6-96

Credit

1,430 2,800 1,880

624 1,120 870

165

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Accounting Principles, Seventh Canadian Edition

PROBLEM 6-6B (Continued) (b)

Ending Inventory (FIFO): Date Units Unit Cost Oct. 25 15 $ 11 15 12 12 27*

Total Cost $165 144 $309

*27 = 60 + 110 – 140 + 52 – 70 + 15 (c)

Cost: $309 Net realizable value: 27 × $10 = $270 The inventory should be valued at its net realizable value of $270. This is the lower of cost and net realizable value. Cost of Goods Sold ($309 – $270) .... Merchandise Inventory .................

39 39

(d)

The cost of goods sold is $2,495: Cost of goods sold per (a)* Plus: write down to NRV ($309 – $270) Cost of goods sold reported on the income statement

$2,750 39 $2,789

*$2,750 = $1,880 + $870

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PROBLEM 6-6B (Continued) Taking It Further: Weighted Average Calculations Date

Purchases Units

Oct. 1

Cost

Cost of goods sold

Inventory Balance

Units

Total

Cost

Total

Cost

Total

Beginning inventory

$14.00

$840.00

$14.00

$840.00

110

13.00

1,430.00

170

13.35

2,270.00

140

12.00

Totals

237

11.00

12.50

875.00

165.00

210

Cost of goods available for sale

$2,744.00 Cost of goods sold

6-98 .

$3,059.00

Solutions Manual

1,869.00

624.00

13.35

13.37

12.50

11.67

401.00

1,025.00

150.00

315.00

$315.00 Ending inventory

Chapter 6

Total

WA Cost

Units

Cost

per unit

B÷A

840.00

110

1,430.00

170

2,270.00

170 -140

2,270.00 -1,869.00

401.00

30 52

401.00 624.00

1,025.00

82 -70

1,025.00 -875.00

12 12 15 27

150.00 150.00 165.00 315.00

$13.35

$13.37

$12.50

$11.67

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM 6-6B (Continued) Check: Cost of goods available for sale Less:Cost of goods sold Ending Inventory

Cost $3,059.00 2,744.00 $315.00

Units 237.00 210.00 27.00

The ending inventory cost under the weighted average cost formula is $315. The October 31 balance sheet amount would be $270, the lower of cost and net realizable value. The balance sheet amount is the same under both methods, because net realizable value is lower than cost under both cost formulae.

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PROBLEM 6-7B (a)

Year Ended December 31, 2015

As reported

Total Assets $525,000

Owner's Cost of Equity Goods Sold $250,000 $ 300,000

Profit $ 40,000

Impact of Dec. 31/15 Inventory overstatement Correct amount

O 20,000 $505,000

O 20,000 $230,000

U 20,000 $ 320,000

O 20,000 $ 20,000

Year Ended December 31, 2016 Total Owner's Cost of Assets Equity Goods Sold $575,000 $275,000 $335,000

Profit $ 50,000

As reported

Impact of Dec. 31/15 Inventory overstatement

O 20,000

U 20,000

Impact of Dec. 31/16 Inventory understatement Correct amount

U 30,000 $605,000

U 30,000 $305,000

O 30,000 $285,000

U 30,000 $100,000

Year Ended December 31, 2017

As reported

Total Assets $600,000

Owner's Cost of Equity Goods Sold $280,000 $315,000

Profit $ 60,000

Impact of Dec. 31/16 Inventory understatement Correct amount

NE $600,000

NE $280,000

O 30,000 $ 30,000

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U 30,000 $345,000

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PROBLEM 6-7B (Continued) The errors in calculating the company’s ending inventory will not have an impact on the company’s cash account. The cash balances will be correctly stated at December 31, 2015, 2016 and 2017.

(b)

Taking It Further: Part (a) shows that even though inventory and owner’s equity are correct, the income statement shows the impact of the 2016 error on cost of goods sold and profit. In addition, comparative amounts for 2016 and 2015 would show incorrect amounts for inventory, owner’s equity, cost of goods sold and profit. These errors impact trend and profitability analyses and should be corrected.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 6-8B (a)

(Incorrect) JAMES COMPANY Income Statement Year Ended July 31 2017 $648,000 540,000 108,000 100,000 $ 8,000

Sales Cost of goods sold Gross profit Operating expenses Profit

2016 2015 $624,000 $600,000 510,000 480,000 114,000 120,000 100,000 100,000 $14,000 $20,000

(Corrected) JAMES COMPANY Income Statement Year Ended July 31 2017 2016 2015 $648,000 $624,000 $600,000 520,000* 500,000** 510,000* ** 128,000 124,000 90,000 100,000 100,000 100,000 $ 28,000 $24,000 $(10,000)

Sales Cost of goods sold Gross profit Operating expenses Profit (loss)

* $520,000 = $540,000 – $20,000 ** $500,000 = $510,000 + $20,000 – $30,000 *** $510,000 = $480,000 + $30,000 (b) The combined effect of the errors at July 31, 2017 before correction is nil. The error in 2016 closing inventory is offset by the error in 2017 opening inventory and the error in the 2015 purchases is offset by the error in 2016 purchases. The trend over the three years is completely opposite using the incorrect numbers as compared to the correct numbers. Solutions Manual .

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PROBLEM 6-8B (Continued)

(c)

Inventory turnover ratio = Cost of goods sold ÷ Weighted average inventory Incorrect 2016: $510,000 ÷ [($60,000 + $70,000) ÷ 2] = 7.85 2017: $540,000 ÷ [($40,000 + $60,000) ÷ 2] = 10.80 Corrected 2016: $500,000 ÷ [($70,000 + $40,000) ÷ 2] = 9.09 2017: $520,000 ÷ [($40,000 + $40,000) ÷ 2] = 13.0

Taking it Further: The incorrect annual profits show a decreasing trend of profitability with profits decreasing from $20,000 in 2015 to $14,000 in 2016 and then to $8,000 in 2017. The corrected profit (loss) show an increasing trend in profitability with profits increasing from a loss of $10,000 to profits of $24,000 in 2016 and then to a profit of $28,000 in 2017. It is not possible to determine if the errors were deliberate or not. Certain factors can indicate a higher likelihood that the errors are deliberate. Management bonuses tied to trends in profitabilityor a desire to maintain profitability every year, could encourage deliberate misstatement. In addition, the magnitude of the errors is unlikely not to be noticed by management. If management were deliberately recording the errors it could indicate that they had a motivation to minimize profits for purposes of paying less income tax.

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PROBLEM 6-9B (a)

(1) (2)

June 30 July 31

Total Cost $2,520,000 4,216,000

Total NRV $2,925,000 3,813,000

LCNRV $2,520,000 3,813,000

(b)

(1) June 30 No entry (2) July 31 Cost of Goods Sold ................... 403,000 Merchandise Inventory........ ($4,216,000 – $3,813,000)

403,000

An adjusting entry is required at August 31 because some of the inventory, on which a previous writedown had been recorded, is still on hand and the net realizable value has partly recovered. If the inventory on hand at July 31 had been sold then an adjusting entry would not be required. The adjustment is:

(c)

Aug. 31

Merchandise Inventory .............325,000 Cost of Goods Sold ............. [($680 – $615) × 5,000]

325,000

The notes should disclose the cost determination method, the value of inventory reported at net realizable value, the amount of any writedown to net realizable value (for the month of July) and reversals of previous writedowns (for the month of August), including the reason why the writedown was reversed. This type of disclosure would be required if the company prepares monthly financial statements.

(d)

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PROBLEM 6-9B (Continued) Taking It Further: Reporting inventory at the LCNRV is important in order to not overstate the value of inventory on the balance sheet. It would be misleading to report inventory, an asset, at an amount higher than what it could be sold for because inventory is held for resale purposes. If assets are overstated, this would mean that expenses are understated which will cause profit and owner’s equity to be overstated.

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PROBLEM 6-10B (a) Home Depot, Inc.

2015

Inventory turnover

$54,222 ($11,079 + $11,057) 2

4.90

times

Days sales in inventory

365

days

Gross profit margin

($83,176 - $54,222) $83,176

34.81%

4.90

Home Depot, Inc.

2014

Inventory turnover

$51,422 ($11,057 + $10,710) 2

4.72

times

Days sales in inventory

365

days

Gross profit margin

($78,812 - $51,422) $78,812

34.75%

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4.72

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PROBLEM 6-10B (Continued) (a) (Continued) Lowe’s Companies, Inc.

2015

Inventory turnover

$36,665 ($8,911 + $9,127) 2

4.07

times

Days sales in inventory

365

4.07

days

Gross profit margin

($56,223 - $36,665) $56,223

34.79%

Lowe’s Companies, Inc.

2014

Inventory turnover

$34,941 ($9,127 + $8,600) 2

3.94

times

Days sales in inventory

365

3.94

days

Gross profit margin

($53,417 - $34,941) $53,417

34.59%

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PROBLEM 6-10B (Continued) Both Home Depot’s and Lowe’s inventory turnover improved and days sales in inventory showed an improvement of 3 days from 2014 to 2015. In addition, Home Depot’s and Lowe’s gross profit margins are essentially the same in the two years.

(b)

The inventory turnover improvement helped profit increase for both companies in 2015. It is meaningful to compare these two companies in terms of their ratios because the companies operate in the same industry. They are different in terms of their size and a ratio analysis eliminates this difference and makes for a meaningful comparison. Although Home Depot has a better inventory turnover than Lowe’s, it earns practically identical gross profit as a percentage of sales. It would be useful to know if their accounting polices differ in any significant ways. Taking It Further: In order to use the retail inventory method to value 74% of its inventory, Home Depot has to have demonstrated that the use of this technique does not have a material effect on the ultimate measurement of the cost of inventory shown on the financial statements. Consequently, there is no impact on the comparison between Home Depot and Lowe’s.

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*PROBLEM 6-11B (a)

Cost of Goods Available for Sale Date Jan. 1 Feb. 17 Apr. 12 Jul. 10 Oct. 26 Total

Explanation Units Unit Cost Total Cost Beginning inventory 150 $65 $ 9,750 Purchase 70 65 4,550 Purchase 40 66 2,640 Purchase 30 68 2,040 Purchase 25 70 1,750 315 $20,730

(b) Number of units sold = 315 units available for sale – 20 units on hand at the end of the year = 295 units sold Sales = 295 units × $135 = $39,825 (c)

(1) FIFO Ending Inventory: Date Units Oct. 26 20 20

Unit Cost $70

Total Cost $1,400 $1,400

Cost of goods sold: $20,730 – $1,400 = $19,330 Check of cost of goods sold: Date Units Unit Cost Jan. 1 150 $65 Feb. 17 70 65 Apr. 12 40 66 Jul. 10 30 68 Oct. 26 5 70 295*

Total Cost $ 9,750 4,550 2,640 2,040 350 $19,330

*295 = 315 – 20

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*PROBLEM 6-11B (Continued) (c) (Continued) (2) WEIGHTED AVERAGE Weighted average unit cost: $20,730  315 units = $65.81 per unit Ending Inventory: 20 units × $65.81 per unit = $1,316 Cost of Goods Sold: $20,730 – $1,316 = $19,414 (d)

Sales revenue (295 × $135) Cost of goods sold Gross profit

FIFO $39,825 19,330 $20,495

Weighted Average $39,825 19,414 $20,411

Taking It Further: Big Kids Store should continue to use the FIFO cost formula. GAAP requires that cost determination methods be applied consistently from year to year. Changes in cost determination methods are allowed only if the physical flow of inventory has changed and the new method results in more relevant information. The company cannot change methods simply because they wish to achieve a particular outcome for profit. One user, or set of users, should not be considered above other users.

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*PROBLEM 6-12B (a)

Cost of Goods Available for Sale Date Units Unit Cost Total Cost Apr. 1 400 $4.00 $1,600 10 1,300 4.10 5,330 25 1,200 4.50 5,400 27 600 4.75 2,850 Total 3,500 $15,180 Number of units of ending inventory = 3,500 units available for sale – 2,700* units sold = 800 units of ending inventory. *2,700 units sold = 300 + 1,000 + 1,400 (b) Weighted Average cost per unit: $15,180 ÷ 3,500 = $4.34

Ending inventory = 800 × $4.34 = $3,472 Cost of goods sold = $15,180 – $3,472 = $11,708 Sales revenue Cost of goods sold Gross profit

$19,600 * 11,708 $ 7,892

*(300 × $7.00) + (1,000 × $7.00) + (1,400 × $7.50)

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*PROBLEM 6-12B (Continued)

Purchases Units

Apr. 1

400

Cost

Total

$4.00

Cost of goods sold

Inventory Balance

Units

300

1,300

4.10

600

4.50

4.75

4,090.00

2,850.00

$15,180.00

2,700

4.50

$4.00

$1,600.00

100

4.00

400.00

400

6,300.00

800

$11,590.00

800

Cost of goods sold

6-112 .

400

2,200.00

Cost of goods available for sale

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Total

1,600

1,400

3,500

4.09

5,400.00

Totals

$1,200.00

Cost

1,400

1000

1,200

$4.00

5,330.00

Total

$1,600.00

Cost

4.09

4.10

4.40

4.50

4.49

5,730.00

1,640.00

7,040.00

9,890.00

3,590.00

$3,590.00 Ending inventory

Chapter 6

Total

WA Cost

Units

Cost

per unit

400 -300

$1,600.00 -1,200.00

100

400.00

100

400.00

1,300

5,330.00

1,400

5,730.00

1,400 -1,000

5,730.00 -4,090.00

400

1,640.00

$4.10

400 1,200 1,600

1,640.00 5,400.00 7,040.00

$4.40

1,600

7,040.00

600

2,850.00

2,200

9,890.00

$4.50

2,200 -1,400 800

9,890.00 -6,300.00 3,590.00

$4.49

$4.00

$4.09

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*PROBLEM 6-12B (Continued) Check: Cost $15,180 11,590 $3,590

Cost of goods available for sale Less: Cost of goods sold Ending Inventory Sales revenue Cost of goods sold Gross profit

Units 3,500 2700 800

$19,600 11,590 $ 8,010

(d) (1) Weighted Average periodic

GENERAL JOURNAL Date

Account Titles

April 25

Debit

Purchases ...................................... Cash (1,200 × $4.50)..................

5,400

Cash (1,400 × $7.50) ...................... Sales ..........................................

10,500

Credit

5,400 10,500

(d) (2) Weighted Average perpetual GENERAL JOURNAL Date

Account Titles

April 25

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Debit

Merchandise Inventory ................. Cash (1,200 × $4.50)..................

5,400

Cash (1,400 × $7.50) ...................... Sales ..........................................

10,500

Cost of Goods Sold (1,400 × $4.50) Merchandise Inventory .............

6,300

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Credit

5,400

10,500 6,300

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*PROBLEM 6-12B (Continued) (e) Comparison: Perpetual $3,590 11,590 8,010

Ending inventory Cost of goods sold Gross profit

Periodic $3,472 11,708 7,892

The numbers are different. Using the perpetual system, the weighted average cost is recalculated after every purchase. Because the prices are rising this results in a lower cost of goods sold. Taking It Further: Companies are required to disclose their inventory cost determination method (FIFO, weighted average, or specific identification), but not whether a periodic or perpetual system is used. This additional level of information does not provide information that is relevant to users of financial information. The differences between FIFO and weighted average, for example, would inform users of how costs flow to the income statement when increases or decreases in costs occur. This pattern is not affected by the choice between periodic and perpetual systems.

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*PROBLEM 6-13B (a)

Cost of goods available for sale Date Explanation Units Feb. 7 Purchase 20 Apr. 12 Purchase 20 Jul. 18 Purchase 25 Oct. 26 Purchase 40 Total 105

Unit Cost Total Cost $100 $ 2,000 120 2,400 130 3,250 150 6,000 $13,650

Number of units of ending inventory = 105 units available for sale – 85* units sold = 20 units of ending inventory. *85 units sold = 35 + 50 (b) Ending Inventory at Dec. 31: Date Units Unit Cost Oct. 26 20 $150 Total 20

Total Cost $3,000 $3,000

Cost of goods sold: $13,650 – $3,000 = $10,650 Sales revenue Cost of goods sold Gross profit

$12,200 * 10,650 $ 1,550

*(35 × $120) + (50 × $160)

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*PROBLEM 6-13B (Continued) (c) FIFO—Perpetual Purchases Cost of Goods Sold Balance Date Units Cost Total Units Cost Total Units Cost Total Feb. 1 Beginning inventory 0 $0 $0 0 $0 $0 7 20 100 2,000 20 100 2,000 Apr. 12 20 120 2,400 20 100 2,000 20 120 2,400 4,400 30 20 $100 $2,000 15 120 1,800 5 120 600 3,800 Jul. 18 25 130 3,250 5 120 600 25 130 3,250 3,850 Oct. 26 40 150 6,000 5 120 600 25 130 3,250 40 150 6,000 9,850 Nov. 12 5 120 600 25 130 3,250 20 150 3,000 20 150 3,000 6,850 Total 105 $13,650 85 $10,650 20 $3,000 Check: Cost of goods available for sale Less: Cost of goods sold Ending Inventory Sales revenue Cost of goods sold Gross profit

Cost $13,650 10,650 $3,000

Units 105 85 20

$12,200 10,650 $ 1,550

Sales revenue is 35 x $120 + 50 x $160 = $12,200

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*PROBLEM 6-13B (Continued) (d) (1) FIFO periodic GENERAL JOURNAL Date

Account Titles

Apr. 12

Debit

Credit

Purchases ...................................... Accounts Payable (20 × $120)..

2,400

Accounts Receivable (35 × $120) . Sales ..........................................

4,200

2,400 4,200

(2) FIFO perpetual GENERAL JOURNAL Date

Account Titles

Apr. 12

Debit

Credit

Merchandise Inventory ................. Accounts Payable (20 × $120)..

2,400

Accounts Receivable (35 × $120) . Sales ..........................................

4,200

Cost of Goods Sold ....................... Merchandise Inventory ............. [(20 × $100) + (15 × $120)]

3,800

2,400

4,200

3,800

(e) Comparison: Perpetual $3,000 10,650 1,550

Ending inventory Cost of goods sold Gross profit

Periodic $3,000 10,650 1,550

The numbers are the same because regardless of the system (perpetual or periodic), the first costs are assigned to the cost of goods sold.

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*PROBLEM 6-13B (Continued) Taking It Further: When using FIFO, the periodic and perpetual systems produce the same results. The benefits from using perpetual versus periodic will depend on the differences in the information that is available to manage inventory under the perpetual system versus the cost of implementing a perpetual system. This also depends on the type of inventory involved.

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*PROBLEM 6-14B February Net sales ($310,000 – $7,000) ............................................ $303,000 Cost of goods sold Beginning inventory ............................. $ 18,500 Net purchases ($204,000 – $5,300) ................ $198,700 Add: Freight in......................... 4,000 Cost of goods purchased ..................... 202,700 Cost of goods available for sale .......... 221,200 Less: Ending inventory ........................ 26,200 Cost of goods sold ..................................................... 195,000 Gross profit ........................................................................ $108,000 Gross profit margin = $108,000 = 35.6% $303,000 March Net sales ($293,500 – $6,800) ......................................... Less: Estimated gross profit (35.6% × $286,700) ......... Estimated cost of goods sold ........................................

$286,700 102,065 $184,635

Beginning inventory ....................................................... $ 26,200 Net Purchases ($197,000 – $4,940) .................. $192,060 Add: Freight in ................................................... 3,940 Cost of goods purchased............................................... 196,000 Cost of goods available for sale .................................... 222,200 Less: Estimated cost of goods sold .............................. 184,635 Estimated total cost of ending inventory ...................... 37,565 Less: Inventory not lost (20% × $37,565) ...................... 7,513 Estimated inventory lost in fire (80% × $37,565) .......... $ 30,052

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*PROBLEM 6-14B (Continued) Taking It Further: The gross profit method is based on the assumption that the gross profit ratio remains constant from February to March. The gross profit ratio can be affected by merchandising policies or market conditions. In addition, the gross profit ratio may be affected by the product mix included in the sales amount. This method is more accurate when applied to a department or product line, rather than to operations as a whole.

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*PROBLEM 6-15B

Clothing Jewellery Cost Retail Cost Retail Beginning inventory $ 55,600 $ 98,000 $ 34,000 $ 54,000 Purchases 775,000 1,445,000 565,000 923,000 Purchase returns (41,000) (71,500) (17,200) (25,700) Freight in 8,900 6,700 Goods avail. for sale $798,500 1,471,500 $588,500 951,300 Net sales (1,268,000) (839,600) Ending inventory at retail $ 203,500 $ 111,700 Cost-to-retail ratio: Clothing—$798,500 ÷ $1,471,500 = 54.3% Jewellery—$588,500 ÷ $951,300 = 61.9% Estimated ending inventory at cost: $203,500 × 54.3% = $110,501—Clothing $111,700 × 61.9% = $69,142—Jewellery

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*PROBLEM 6-15B (Continued) Taking It Further: Clothing—$100,750 × 54.3% =

$54,707 per count 110,501 estimated $ 55,794 loss at cost

Loss at retail = $203,500 – $100,750 = $102,750 Jewellery—$40,300 × 61.9% =

$24,946 per count 69,142 estimated $ 44,196 loss at cost

Loss at retail = $111,700 – $40,300 = $71,400

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BYP6-1 FINANCIAL REPORTING PROBLEM (a)

Inventories are valued at the lower of cost and net realizable value. Net realizable value is the estimated selling price determined on an item by item basis less estimated selling costs.

(b) Hudson’s Bay Company uses the weighted average cost formula to determine cost with the exception of inventories for Saks. Saks costs their inventory using the retail inventory method that approximates cost. (c) The specific identification method would not be appropriate. Most of the goods sold by Hudson’s Bay Company are not individually distinguishable. (d) Amounts are reported in millions of Canadian dollars. Inventory as a percentage of current assets 2015: $2,349 ÷ $4,606 = 51.0% 2014: $2,048 ÷ $4,110 = 49.8% Cost of sales as a percentage of total revenue (Sales) 2015: $4,893 ÷ $8,169 = 59.9% 2014: $3,217 ÷ $5,223 = 61.6% Inventory as a percentage of current assets increased slightly from 2014 to 2015 and cost of sales as a percentage of total revenue decreased slightly indicating that gross profit and inventory management have been stable over the last two years.

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BYP 6-1 (Continued) (e) Hudson’s Bay Co Inventory turnover Days sales in inventory

2015 $4,893 ($2,349+$2,048) 2 365

2.2

Hudson’s Bay Co. Inventory turnover Days sales in inventory

2.2

times

166

days

2.1

times

174

days

2014 $3,217 ($2,048 + $994) 2 365

2.1

Hudson’s Bay’s inventory management appears to have improved in 2015. The inventory turnover and day’s sales in inventory has remained stable over the past two years, although in 2015 inventory is turning over (being sold or moved) better.

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BYP6-2 INTERPRETING FINANCIAL STATEMENTS (a)

Inventory Turnover

Days Sales in Inventory 365 2015 $503,059 = 155 days ($208,395 + $218,979) ÷ 2 2.35 times = 2.35 times 2014

$493,955 ($218,979 + $216,533) ÷ 2 = 2.27 times

365

= 161 days

2.27 times

The ratios have improved. This means that the inventory is being sold more quickly in 2015 than in 2014. (b)

Indigo applies the lower of cost and net realizable value rule. The amount of inventory write-downs as a result of net realizable value being lower than cost was $9.4 million in fiscal 2015. At March 28, 2015 there was $1.8 million of inventory on hand that had net realizable value equal to cost.

(c)

Amazon.com Inc. would have a better balance sheet valuation because FIFO results in an ending inventory value that approximates replacement cost. This will cause difficulties in comparing the two companies because it is impossible to know what the inventory valuation of Amazon.com would have been had it used moving weighted average. However, if inventory costs are relatively stable, both inventory methods would yield similar results.

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BYP6-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

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BYP6-4 COMMUNICATION ACTIVITY

Subject:

2016 Ending Inventory Error

From:

controller.small toys@hotmail.com

Sent:

February 10, 2018

To:

Mutahir Kazmi, President

Hello Mr. Kazmi, I wanted to clarify the situation with respect to the ending inventory error of 2016 and its impact on the financial statements of 2016 and 2017. The combined gross profit and profit for 2016 and 2017 are correct. However, the gross profit and profit for each individual year are incorrect. As you know, the 2016 ending inventory was understated by $1 million. This error will cause the 2016 profit to be incorrect because the ending inventory is used to calculate the 2016 cost of goods sold. An understatement of ending inventory results in an overstatement of cost of goods sold. Therefore, gross profit (sales – cost of goods sold) is understated, as is profit. Unless corrected, this error will also affect 2017 profit. The 2016 ending inventory is also the 2017 beginning inventory. Therefore, the 2017 beginning inventory is also understated, which causes an understatement of cost of goods sold. The 2017 gross profit and profit are subsequently overstated. If the error is not corrected, the gross profit and profit for 2016 and 2017 will be incorrect. Although the combined profits will be correct, (because the understatement in 2016 cancels the overstatement in 2017), the profit trend may be misleading. Solutions Manual .

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BYP6-5 “ALL ABOUT YOU” ACTIVITY

(a)

Selling on consignment means that the supplier of the inventory (in this case you the student) retains ownership of the merchandise and becomes the consignor. The store (the consignee) sells the merchandise on your behalf but does not own it. The store usually takes a commission as its fee for selling the merchandise and remits the remainder to the consignor.

(b) The advantage for the student is that ownership of the books is retained. If the student changes his/her mind about selling the books, the student still owns them and can take them back. In some arrangements, the consignor may be able to state the price he/she wants to receive for the books. The disadvantage is that the seller (consignor) does not get paid until the books have been sold. (c)

The consignment arrangement may specify various aspects of the transaction to protect both parties. For example:  commission to be kept by the seller (consignee);  who determines the selling price (in the case of the used textbooks, the second-hand bookstore may be in a better position to determine the likely selling price);  how long the goods will be kept, or when the arrangement is terminated;  who assumes the risks of loss and damage to merchandise for sale.

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BYP6-6 Santé Smoothie Saga

(a)

Natalie has been using the specific identification method to track her inventory of juicers. She has been able to do this because each juicer has a unique serial number. This allows her to match the exact cost of the juicer to the sales revenue when the juicer is sold. But it also allows Natalie to manipulate profit by choosing the specific juicer to sell. To prevent this, Accounting Standards for Private Enterprises (ASPE) and International accounting standards (IFRS) do not allow companies to use specific identification when goods are interchangeable. Instead, Natalie will need to choose either the weighted average cost or FIFO cost formulas. In this situation, I recommend the weighted average cost formula because the juicers are identical. Since she is selling juicers and the inventory items are not subject to spoilage or obsolescence, the FIFO cost formula would not be advantageous.

(b) Natalie has purchased juicers #3, #4, #5, #6, and #7. She has sold juicers #2, #4, and #5 and has returned juicer #6. At the end of August, her ending inventory would consist of juicers #1, #3, and #7 using the specific identification method: Ending Inventory:

Juicer #1 - #12459 Juicer #3 - #49295 Juicer #7 - #72531 Total

$545 550 571 $1,666

Cost of Goods Sold:

Juicer #2 - #23568 Juicer #4 - #56204 Juicer #5 - #62897 Total

$545 550 550 $1,645

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BYP6-6 (Continued) (c)

Moving Weighted Average–Perpetual

Date

Purchases Units July 1 14

Cost of goods sold

Cost

Total

Units

Cost

Total

$545.00

$1,090.00

$545.00

$1,090.00

550.00

1,650.00

548.00

2,740.00

-1

571.00

-571.00

$3,311.00

Cost of goods available for sale

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$548.00

1,142.00

Totals

Total

Beginning inventory

Aug. 17

Cost

Inventory Balance

552.60

548.00

555.67

2,192.00

3,334.00

552.60

2,763.00

1,105.20

552.60

1,657.80

$1,653.20

Cost of goods sold

Chapter 6

$1,657.80 Ending inventory

Weighted Average Calculations Total

WA Cost

Units

Cost

per unit

B÷A

2 3

$1,090.00 1,650.00

2,740.00

5 -1

2,740.00 -548.00

2,192.00

1,142.00

3,334.00

6 -1

3,334.00 -571.00

5 5 -2 3

2,763.00 2,763.00 -1,105.20 1,657.80

$548.00

$555.67

$552.60

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

BYP6-6 (Continued) Check: Cost of goods available for sale Less: Cost of goods sold Ending Inventory

(d)

Cost $3,311.00 1,653.20 $1,657.80

Units 6 3 3

Comparison

Cost of Goods Sold Ending Inventory

From (c) From (b) Moving Specific Weighted Identification Average $1,645.00 $1,653.20 1,666.00 1,657.80

Difference $8.20 8.20

GENERAL JOURNAL Date

Account Titles

Debit

Aug. 31 Cost of Goods Sold ........................... Merchandise Inventory ................

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BYP6-6 (Continued) (e) GENERAL JOURNAL Date

Account Titles

July 3

No entry.

Credit

Merchandise Inventory ..................... 1,650.00 Accounts Payable......................... 1,650.00

Cash ................................................... 1,050.00 Sales ............................................. 1,050.00

Cost of Goods Sold .............................. 548.00 Merchandise Inventory.................

Aug. 3

548.00

No entry.

Merchandise Inventory ..................... 1,142.00 Accounts Payable......................... 1,142.00

Accounts Payable ................................ 571.00 Merchandise Inventory.................

571.00

Cash ................................................... 2,100.00 Sales ............................................. 2,100.00

Cost of Goods Sold ($552.60 × 2) ..... 1,105.20 Merchandise Inventory................. 1,105.20

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CHAPTER 7 Internal Control and Cash ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Brief Problems Problems Questions Exercises Exercises Set A Set B

1. Define cash and internal control.

1, 2, 3, 4, 5, 6

2. Apply control activities to cash receipts and cash payments. 3. Describe the operation of a petty cash fund.

1, 2

1, 2, 4

1, 2, 3, 4, 1, 2, 3, 4, 5 5

7, 8, 9, 10, 3, 4, 5, 6 11, 12

2, 3, 4

1, 2, 3, 4, 1, 2, 3, 4, 5 5

13, 14, 15 7, 8

5, 6, 7

4, 5, 6,

4. Describe the control features 16, 17, 18, 9, 10, 11, 8, 9, 10, 6, 7, 8, 9, 6, 7, 8, 9, 19, 20, 21 12, 13, 14, 11, 12, 10, 11, 10, 11, 12 of a bank account and 15, 16, 17, 13, 14, 15 12 prepare a bank reconciliation. 18, 19, 20 5. Report cash on the balance 22, 23 21, 22 16, 17 13 13 sheet.

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ASSIGNMENT CHARACTERISTICS TABLE Problem Description Number 1A Identify internal control activities related to cash payments.

Difficulty Level

Time Allotted (min.)

Moderate

25-35

Identify internal controls weaknesses for cash receipts and cash payments.

Moderate

25-35

Identify internal controls for cash receipts and cash payments and suggest improvements.

Simple

25-35

Record petty cash transactions and identify internal controls.

Simple

25-35

Record debit and bank credit card and petty cash transactions, and identify internal controls.

Moderate

25-35

Record petty cash transactions and identify impact on financial statements.

Moderate

20-30

Prepare back reconciliation and related entries.

Moderate

25-35

Prepare back reconciliation and related entries.

Moderate

25-35

10A

Prepare bank reconciliation and related entries.

Moderate

40-50

11A

Prepare bank reconciliation and related entries.

Moderate

40-50

12A

Prepare bank reconciliation and adjusting entries.

Moderate

30-40

13A

Calculate cash balance and report other items.

Moderate

20-30

Identify internal control weaknesses over cash receipts and suggest improvements. Identify internal control weaknesses over cash receipts and suggest improvements.

Moderate

25-35

Moderate

25-35

Identify internal controls for cash receipts and cash payments.

Simple

25-35

Record petty cash transactions and identify internal controls.

Moderate

25-35

Record petty cash transactions and identify internal controls.

Moderate

20-30

Moderate

20-30

Record petty cash transactions and identify impact on financial statements. Prepare bank reconciliation and related entries.

Moderate

25-35

Prepare bank reconciliation and related entries.

Moderate

40-50

Prepare bank reconciliation and related entries.

Moderate

40-50

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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Description Number 10B Prepare bank reconciliation and related entries.

Difficulty Level

Time Allotted (min.)

Complex

40-50

11B

Prepare bank reconciliation and related entries.

Moderate

40-50

12B

Prepare bank reconciliation and adjusting entries.

Moderate

30-40

13B

Calculate cash balance and report other items.

Moderate

20-30

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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material 1.

Learning Objective Explain the activities that help achieve internal control.

Knowledge Comprehension Q7-1 Q7-2 P7-1A Q7-3 Q7-4 P7-2A Q7-5 P7-3A Q7-6 P7-1B BE7-1 P7-2B BE7-2 P7-3B E7-1 E7-2

Apply control activities to cash receipts.

Q7-7 Q7-8 Q7-9 Q7-10 Q7-11 Q7-12 Q7-13 BE7-3

Apply control activities to cash payments including petty cash.

BE7-4

Describe the control features of a bank account and prepare a bank reconciliation.

Q7-16 Q7-18 Q7-19 Q7-20 BE7-9 BE7-10

Report cash on the balance sheet.

BE7-4 E7-2 P7-1A P7-2A P7-3A P7-1B P7-2B P7-3B

BE7-5 BE7-6 E7-3 E7-4

P7-4A P7-5A P7-4B P7-5B

Q7-14 Q7-15

BE7-7 BE7-8 E7-5 E7-6 E7-7 P7-4A

P7-5A P7-4B P7-5B P7-6A P7-6B

Q7-17 Q7-21 BE7-11 BE7-12

BE7-13 BE7-14 BE7-15 BE7-16 BE7-17 BE7-18 BE7-19 BE7-20 E7-8 E7-9 E7-10 E7-11 E7-12 E7-13 E7-14 BE7-21 E7-16 E7-17 BYP7-1 BYP7-2 BYP7-3 BYP7-4

E7-15 P7-6A P7-7A P7-8A P7-9A P7-10A P7-11A P7-12A P7-6B P7-7B P7-8B P7-9B P7-10B P7-11B P7-12B P7-13A P7-13B

Q7-22 Q7-23 BE7-22

Broadening Your Perspective

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Application E7-4 P7-4A P7-5A P7-4B P7-5B

7-4

Analysis

Synthesis Evaluation

Santé Saga BYP7-5

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ANSWERS TO QUESTIONS 1.

Cash is cash on hand and in bank accounts. It includes coins, currency, cheques, money orders and travellers cheques. Cash equivalents are short-term highly liquid (easily sold) investments that are not subject to significant changes in value and with maturities of three months or less when purchased. Cash would include cash and coins kept on hand to make change at cash registers and cash equivalents would include a term deposit for 60 days.

Agree. Internal control is the process designed and implemented by management to help an organization achieve (1) reliable financial reporting, (2) effective and efficient operations, and (3) compliance with relevant laws and regulations. Through the implementation of internal control, the efficiency of the operations will be improved.

This is a violation of internal control. An essential control activity is to make specific employees responsible for specific tasks. When all clerks make change out of the same cash register drawer, this is a violation of establishing responsibility. In this case, each sales clerk should have a separate cash register, cash drawer, or password with pre- and post-shift counts.

Independent checks of performance are necessary even if proper segregation of duties is in place. This procedure is used to ensure that the segregation of duties, and other, control procedures are being correctly followed and working effectively. For example, the accounting records are compared with existing assets or with external sources of information. Problems or changes can be addressed immediately to restore the proper controls and ensure the compliance with the business’ policies and procedures.

Documentation procedures provide evidence of the occurrence of transactions and events. Many documents used in an organization require pre-numbering and accounting for the numerical sequence of these documents. An example is the use of pre-numbered cheques used for payments. Checking the numerical sequence of used and recorded prenumbered documents helps to ensure that a transaction is not recorded more than once or not at all.

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QUESTIONS (Continued) 6.

A company’s system of internal control can only give reasonable assurance that assets are properly safeguarded and that accounting records are reliable. The concept of reasonable assurance is based on the belief that the cost of control activities should not be more than their expected benefit. Ordinarily, a system of internal control provides reasonable but not absolute, assurance. Absolute assurance would be too costly. The human element is an important factor in a system of internal control. A good system may become ineffective through employee fatigue, carelessness, and indifference. Moreover, internal control may become ineffective as a result of collusion.

Sales using debit cards and bank credit cards are similar in that they are both considered cash transactions to retailers. Banks usually charge the retailer a transaction fee for each debit card transaction and a fee that is a percentage of the credit card sale. In both types of transactions, the retailer’s bank will wait until the end of the day and make a deposit for the full day’s transactions. Fees for bank credit cards are generally higher than debit card fees. Debit cards allow customers to spend only what is in their bank account whereas a bank credit card gives the customer access to money made available by a bank or other financial institution (similar to a short-term loan).

Exact procedures will be different in every company, but the basic principles should be the same. At the end of a day (or shift) the cashier should count the cash in the cash register, record the amount, and turn over the cash and the record of the amount to either a supervisor or the person responsible for making the bank deposit. The person or persons who handle the cash and make the bank deposit should not have access to the cash register tapes or the accounting records. The cash register tapes should be used in creating the journal entries in the accounting records. An independent person who does not handle the cash should make sure that the amount deposited at the bank agrees with the cash register tapes and the accounting records.

Cash registers with scanners are readily visible to the customer. Thus, they prevent the sales clerk from ringing up or scanning in a lower amount and pocketing the difference. In addition, the customer receives an itemized receipt, and the store’s cash register tape is locked into the register for further verification.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 10.

Mail-in receipts in the form of cheques are generally accompanied by a remittance slip. The envelopes should be opened in the presence of two mail clerks. The amount of the remittance slip and the amount of the cheque should be compared to establish any discrepancies. Each cheque should be promptly stamped “For Deposit Only”. The remittance slips are sent to the accounting department for recording and the cheques are sent to the person responsible for making the bank deposits. Persons handling the cheques must not be able to alter the accounting records. An independent person should compare the deposit recorded by the bank with the amount recorded in the accounting records. In a small company, where it is not possible to have the necessary segregation of duties, the owner should be responsible for cash receipts.

11.

Sanjeet is incorrect. Although internal controls for handling electronic funds transfers (EFTs) are different from those for handling cash and cheques, they nevertheless include proper authorization and segregation of duties to ensure an employee cannot divert a customer payment to a personal bank account and then cover it up through fraudulent accounting entries.

12.

Incorrect. Payment by cheque or electronic funds transfer contributes to effective internal control over cash payments. Pre-numbered cheques help to ensure that all payments are accounted for. In addition, the bank provides another record of the cash payments, and safekeeping of the cash. However, effective control is also possible when small payments are made from a petty cash fund.

13.

Wanda could potentially commit a fraud by: (1) shipping merchandise to herself and creating a false sale on account; therefore, the inventory account will balance. She can then omit to record a cash sale, and take the cash from the cash sale and use it to settle the false accounts receivable that was created as a result of the false sale. (2) when invoicing customers, Wanda could charge significantly lower prices for sales to friends. Instructor’s note: These are only two examples. Students may develop other valid examples.

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QUESTIONS (Continued) (f) Based on the company policies, the bank will enforce company policy by allowing only authorized employees to sign cheques or have access to banking information. 17.

The purpose of the bank reconciliation is to establish the accuracy of the amount reported as cash in the accounting records and to provide effective internal control over cash. The employee that is assigned to prepare the bank reconciliation should be someone who has no other responsibilities that relate to cash. If a person had responsibility for handling cash and also prepared the bank reconciliation, they could use the bank reconciliation to hide fraud with cash receipts or cash payments. If the divisions of the duties does not allow this segregation, (handling of cash and record keeping) then the owner of the business should prepare the bank reconciliation.

18.

The four steps are: (1) determine deposits in transit, (2) determine outstanding cheques, (3) discover any errors made, (by the bank or by the business) and (4) trace bank memoranda and other receipts and payments.

19.

(a) An NSF cheque occurs when the cheque writer’s bank balance is less

than the amount of the cheque issued in payment. (b) In a bank reconciliation, a customer’s NSF cheque is deducted from the balance per books. The bank has record of the NSF, but the business does not. (c) An NSF cheque results in an adjusting entry in the company’s books, as a debit to Accounts Receivable and a credit to Cash. 20.

Paul should not rely on on-line banking to give him an accurate balance in his bank account. On-line banking can provide an up-to-date balance but the balance will not be accurate if there are any deposits in transit or outstanding cheques. The balance will also not be accurate if the bank has made an error. Paul might also have made an EFT payment to a supplier and post-dated the payment date to the due date of an invoice. When looking at the balance on-line, he may have lost track of this pending payment that does not yet appear on his bank account. Paul should keep his own records and reconcile his calculation of the bank balance with what the bank has reported. This is the only way to know if there are any deposits in transit, outstanding cheques or bank errors. This is the only way to have accurate information on his bank account balance.

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QUESTIONS (Continued) 21.

Jayne should include the monthly interest of $32 in the book section of her bank reconciliation and not the bank section as is being suggested. The bank has correctly reflected this transaction on the bank statement, while the accounting records have not yet been updated for this transaction. The bank has charged Jane $32 in interest and she needs to update the books to capture this. If the interest is not included, Jayne will be unable to reconcile the bank and book balances. Including the amount on the book section will lead to someone else preparing a journal entry to record the transaction in the accounting records.

22.

Disagree. The credit balance in the cash account does not mean there is an error in the account. It is possible for the cash account to have a credit balance to reflect a cash deficit or negative position. This situation can occur assuming the business’ bank allows an overdraft position which is, in effect, a temporary bank loan.

23.

A company may have cash that is not available for general use because it is restricted for a special purpose. If the restricted cash is expected to be used within the next year, the amount should be reported as a current asset. When restricted funds will not be used in that time, they should be reported as a noncurrent asset.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 7-1 Cash in bank savings account Cash on hand Chequing account balance Cash

$8,000 850 14,000 $22,850

BRIEF EXERCISE 7-2 The six control activities include: 1.

Establishment of responsibility: This control activity involves assigning a task to one employee and making that employee accountable for the task assigned. An example would be assigning the responsibility to a cashier who is in charge of taking in cash, using a cash register and making change when collecting parking fees.

Segregation of duties: This activity involves assigning task to different individuals to prevent fraud or errors. An example would be to separate the responsibility of handling the cash from the record keeping of the parking fee revenue.

Documentation procedures: This control activity provides evidence of the transactions and events that have taken place. This is particularly important when an employee is handling cash. For Liberty Parking, when parking tickets are issued giving customers parking access, the tickets should be pre-numbered and time and date stamped.

Physical and IT controls: These include mechanical and electronic controls to safeguard (protect) assets and improve the accuracy and reliability of the accounting records. An example for the parking garage would be barriers or gates for entering and exiting the parking lot.

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BRIEF EXERCISE 7-2 (Continued) 5.

Independent checks of performance: This control involves the verification by an independent person that the control activities are being followed. An example would be to have a supervisor observe how the cashier is handling the collection and recording of the cash using the cash register.

Human resource controls: These controls involve protection against employee fraudulent behaviour. The parking garage should conduct thorough background checks before hiring the parking lot cashier. Back ground checks may include: criminal records and reference checks, verification of credentials and credit checks.

BRIEF EXERCISE 7-3 1. 2. 3. 4. 5. 6.

Human resource controls Physical and IT controls Independent checks of performance Segregation of duties Documentation procedures Establishment of responsibility

BRIEF EXERCISE 7-4 1. 2. 3. 4. 5. 6.

Documentation procedures Physical and IT controls Human resource controls Independent checks of performance Establishment of responsibility Segregation of duties

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BRIEF EXERCISE 7-5 Sept. 12 Cash .................................................... Debit Card Expense (5 X $0.70) ......... Sales .............................................

496.50 3.50 500.00

BRIEF EXERCISE 7-6 April 16 Cash ........................................................ 12,626 Credit Card Expense ($12,950 × 2.5%) 324 Sales .............................................

12,950

BRIEF EXERCISE 7-7 March 2

Petty Cash ........................................ Cash .............................................

100

March 27 Supplies ........................................... Postage Expense ............................. Repairs Expense .............................. Cash .............................................

20 27 35

100

BRIEF EXERCISE 7-8 Nov. 30

Solutions Manual .

Postage Expense ............................. Supplies ............................................ Travel Expense................................. Cash Over and Short ....................... Cash ($100 − $10) ........................

7-13

31 42 16 1 90

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 7-11 (a)

Items that will result in an adjustment to the companies records: 1. EFT payment made by a customer 2. Bank debit memorandum for service charges 8. Bank credit memorandum for interest revenue 9. Company error in recording a deposit of $160 as $1,600 10. Bank debit memorandum for a customer’s NSF cheque 12. Company error in recording cheque made out for $630 as $360

(b) Why the other items do not require an adjustment: 3. Outstanding cheques from the current month need to be deducted from the bank balance to determine the adjusted bank balance. Since the company has already recorded the cheques, the company does not need to record an adjustment. 4. A bank error in recording a $1,779 deposit as $1,977 creates a $198 ($1,779 − $1,977) adjustment to the bank balance. The company has not made an error and so does not need to make an adjustment. 5. Outstanding cheques from the previous month that are still outstanding need to be deducted from the bank balance because they are still outstanding. No adjusting entry is required for this. 6. Outstanding cheques from the previous month that are no longer outstanding will not appear on the bank reconciliation. These cheques have now been deducted from both the company’s cash balance and the bank account and so neither balance needs adjusting. 7. A bank error in recording a company cheque made out for $160 as $1,600 creates a $1,440 ($160 − $1,600) adjustment to the bank balance. The company has not made an error and so does not need to make an adjustment.

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BRIEF EXERCISE 7-11 (Continued) 11. A deposit in transit from the current month will be added to the bank balance to calculate the adjusted bank balance. It has already been recorded by the company so no adjustment is required.

BRIEF EXERCISE 7-12 (a) (b) (c) (d)

Outstanding cheques of $1,200 – Deducted from the unadjusted bank balance. Deposits in transit of $5,250 – Added to the unadjusted bank balance. Debit memorandum for bank service charge of $25.00 – Deducted from the unadjusted cash balance per books. EFT of $1,970 from a customer for goods received – Added to the unadjusted cash balance per books.

BRIEF EXERCISE 7-13 Randolph Electric Bank Reconciliation December 31 Cash balance per bank ................................................... Add: Deposits in transit ................................................ Less: Outstanding cheques .......................................... Adjusted cash balance per bank .................................... Cash balance per books ................................................. Add: EFT collection on account from customer .......... Less: Service charge ..................................................... Adjusted cash balance per books..................................

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$6,653 5,250 11,903 1,200 $10,703 $8,758 1,970 10,728 25 $10,703

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BRIEF EXERCISE 7-14 Dec. 31

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

1,970

Bank Charges Expense ................... Cash .............................................

1,970 25

BRIEF EXERCISE 7-15 Cash balance per bank ................................................... Add: Deposits in transit ................................................ Less: Outstanding cheques .......................................... Adjusted cash balance per bank ....................................

$7,420 1,620 9,040 762 $8,278

BRIEF EXERCISE 7-16 Cash balance per books ................................................. Add: Interest earned ...................................................... Less: Charge for printing company cheques ............... Adjusted cash balance per books..................................

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$9,500 40 9,540 35 $9,505

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 7-17 Howel Company Bank Reconciliation August 31 Cash balance per bank ................................................... Add: Deposits in transit ................................................ Less: Outstanding cheques .......................................... Adjusted cash balance per bank .................................... Cash balance per books ................................................. Add: Interest earned ..................................................... Less: NSF cheque .......................................................... Service charge ..................................................... Adjusted cash balance per books..................................

$8,370 3,005 11,375 1,623 $9,752 $10,050 22 10,072 280 40 $9,752

BRIEF EXERCISE 7-18 Aug. 31

Solutions Manual .

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

280

Bank Charges Expense ................... Cash .............................................

Cash .................................................. Interest Revenue..........................

7-18

280

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BRIEF EXERCISE 7-19 1.

(a)

The amount of the payment of an account payable has been recorded in the books as $2,270 when the correct amount is $1,270. The reconciling item of $1,000 ($2,270 − $1,270) will appear as an increase to the book cash balance.

(b) March 31 Cash ...................................................... 1,000 Accounts Payable........................ 2.

(a) The amount of the collection on account has been recorded in the books as $2,450 when the correct amount is $4,250. This is a transposition error. The reconciling item of $1,800 ($2,450 − $4,250) will appear as an increase to the book cash balance.

(b) March 31 Cash ...................................................... 1,800 Accounts Receivable .................. 3.

1,000

1,800

(a)

The amount of the deposit was recorded by the bank as $5,750 when the correct amount is $2,720. The reconciling item of $3,030 ($5,750 − $2,720) will appear as a decrease to the bank cash balance.

(b)

No entry needed, as this is a bank error.

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BRIEF EXERCISE 7-20 1.

(a)

(b) June 30

Cash ...................................................... 1,000 Accounts Payable........................

1,000

(a) The amount of the collection on account has been recorded in the books as $2,222 when the correct amount is $3,333. The reconciling item of $1,111 ($2,222 − $3,333) will appear as an increase to the book cash balance.

(b) June 30

The amount of the payment of an account payable has been recorded in the books as $2,810 when the correct amount is $1,810. The reconciling item of $1,000 ($2,810 − $1,810) will appear as an increase to the book cash balance.

Cash ...................................................... 1,111 Accounts Receivable ..................

1,111

(a) The amount of the incorrect charge for the cheque clearing was recorded by the bank as $825 when no charge should have been recorded. This is a bank error. The reconciling item of $825 will appear as an increase to the bank cash balance. (b)

Solutions Manual .

No entry needed as this is a bank error.

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 7-21 Cash and cash equivalents should be reported at $19,750 ($5,500 + $750 + $10,000 + 3,500). The cash refund due from CRA is a receivable. Stale-dated cheques cannot be used, so the corresponding accounts receivable remains outstanding. Postdated cheques are receivables until they can be cashed on their valid date. The Treasury bill is a short-term investment of less than 90 days and may be considered a cash equivalent.

BRIEF EXERCISE 7-22 Current Assets: Dupré Company should report the cash in bank, payroll bank, store cash floats, and petty cash as cash on its balance sheet. The investments with original maturity dates of fewer than 90 days may be grouped with cash as cash and cash equivalents. The short-term investments with maturity dates of 100 to 365 days should be reported as a separate item. Noncurrent Assets: The plant expansion fund cash should be reported as a noncurrent asset, assuming the fund is not expected to be used during the next year.

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SOLUTIONS TO EXERCISES EXERCISE 7-1 (a) Weakness or Strength 1. No establishment of responsibility over the cash—weakness

(b) Suggested Improvements The employees should use separate cash drawers.

Cash counts not performed independently—weakness

Cash counts should be performed by a supervisor at the end of the shift and the totals compared to the cash register tape.

Improper segregation of duties could result in the misappropriation of cash— weakness

Different individuals should receive cash, record cash receipts and deposit the cash. In a small business this may be impossible; therefore, it is imperative that management take an active role in the operations of the business so to be able to detect any accounting irregularities.

Improper segregation of duties—weakness.

The same individual could omit the documentation of a purchase order, receive a shipment and take the merchandise, all without a trace. Implement segregation of duties to prevent the misappropriation (loss) of assets.

Repair of physical controls—strength.

Internal reviews completed regularly and issues resolved—strength.

Human resources control over employees’ duties including vacations— strength except for the controller position.

Solutions Manual .

Apply the policy of replacing the position during vacations to the controller position.

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EXERCISE 7-2 1.

(a)

Access to cash is not restricted. Cash is not placed in a secure device until deposited. The locked metal box being used is likely portable and not secure. The control activity that is being violated is the physical and IT control.

(b)

The excess cash should be stored in a secure storage device such as a safe with no access possible by the employees.

(a)

The responsibility for the cash drawer is not assigned to a single employee. Follow up and control over cash shortages is compromised. The control activity that is being violated is the establishment of responsibilities.

(b)

If several employees need to share the same cash drawer to ring up sales, each employee should be assigned an access code that is tracked by the cash register for each transaction. Any cash shortages or entry errors can be narrowed down to a particular employee using the access code.

(a) All employees handling cash should be bonded. Failing to do so violates the human resource control. Cash shortages through fraud may not be recoverable from insurance. (b)

Bond all employees handling cash.

(a) Improper segregation of duties has been established leaving the possibility of the misappropriation of company assets by the assistant controller. The control activity violated is the segregation of duties. (b)

Solutions Manual .

Reassign the duties such that anyone having access to cash does not also have access to the accounting records.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 7-2 (Continued) 5.

(a) Destroying the remittance advices and credit card sales receipts weekly exposes the business to the risk of not being able to substantiate a claim against a customer. The control activity violated is the documentation procedures. (b)

Obtain adequate storage space and eliminate the weekly destruction of the documents.

EXERCISE 7-3 (a)

(b)

Mar. 15 Cash ($8,740 − $54) ................... Debit Card Expense ($1.35 × 40) ............................ Sales ......................................

8,686

June 21 Cash ($1,960 − $78) ................... Credit Card Expense ($1,960 × 4%) ......................... Sales ......................................

1,882

54 8,740

78 1,960

July 17 No entry (c)

Oct.

7 Accounts Receivable—Ramos . Sales ......................................

Nov. 10 Cash ........................................... Accounts Receivable—Ramos

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EXERCISE 7-4 1.

(a) Company cheques are not pre-numbered and access to blank cheques is not restricted, leaving the possibility for someone to make an unauthorized payment from the business bank account, which may go undetected. Payment transactions may also remain unrecorded in the accounting records. The control activities that are being violated are the documentation and physical and IT controls. (b)

Obtain pre-numbered cheques and account for their numerical sequence. Store the unused cheques in a secure area.

(a) Improper segregation of duties, because only one employee is signing cheques. (b)

Require two employees to sign each cheque. It would be appropriate to have only one person sign the cheques, only if it was the owner.

(a)

Improper segregation of duties, leaving the possibility of the misappropriation of company assets as a result of having supplier paid for goods, which have not been ordered or received. As well, the purchasing agent can direct merchandise to be delivered to a location other than the company’s place of business. The control activities violated are establishment of responsibility and the segregation of duties.

(b)

Reassign the duties such that anyone having access to inventory is not assigned the duty of authorizing payments. As well, purchasing agents should be restricted from having access to the inventory.

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EXERCISE 7-4 (Continued) 7.

(a)

The control activity violated is human resource controls. The purchasing agent may be misappropriating company assets.

(b)

Insist that all personnel take scheduled vacation and have their positions staffed during their absence.

EXERCISE 7-5 (a) Feb. 14

(b) Feb. 28

Petty Cash ........................................ Cash .............................................

100

Petty Cash ($175 − $100) ................. Supplies ($10 + $13 + $23) ............... Miscellaneous Expense ................... Merchandise Inventory .................... Freight Out........................................ Cash ($175 − $5) .......................... Cash Over and Short ...................

75 46 7 30 17

100

170 5

EXERCISE 7-6 (a) Sept. 4

(b) Sept. 30

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Petty Cash ........................................ Cash .............................................

Merchandise Inventory ($25 + $30 + $40) .......................... Freight Out ($15 + $20) .................... Supplies ............................................ Cash Over and Short ....................... Petty Cash ($200 − $150)............. Cash ($150 − $50) ........................

7-27

200 200

95 35 10 10 50 100

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Accounting Principles, Seventh Canadian Edition

EXERCISE 728 May

June 1

July 1

July 10

Solutions Manual .

Petty Cash ........................................ 150.00 Cash .............................................

150.00

Delivery Expense ............................. Postage Expense ............................. Travel Expense................................. Cash Over and Short ....................... Cash ($150.00 – $4.75).................

31.25 39.00 62.00 13.00 145.25

Delivery Expense ............................. Entertainment Expense ................... Supplies ............................................ Cash ($150.00 – $3.25).................

31.00 71.00 44.75 146.75

Petty Cash............................................. 50.00 Cash .............................................

50.00

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Accounting Principles, Seventh Canadian Edition

EXERCISE 729 (a) TINDALL COMPANY Bank Reconciliation September 30, 2017 Cash balance per bank statement.................................. Add: Deposits in transit ................................................ Less: Outstanding cheques .......................................... Adjusted cash balance per bank .................................... Cash balance per books .................................... Add: Error in cheque No. 212: Supplies ......... EFT collection of Accounts Receivable

$5,470 $ 54 78

Less: Bank service charge ............................... $ 22 NSF cheque ............................................. 220 Adjusted cash balance per books.................................. (b)

Sept. 30

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Cash ........................................... Supplies ($482 – $428) ......... Accounts Receivable............

132

Bank Charges Expense ............ Account Receivable .................. Cash.......................................

22 220

7-29

$7,100 1,380 8,480 3,120 $5,360

132 5,602 242 $5,360 54 78

242

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EXERCISE 730 (a) Bank Reconciliation January 31 Cash balance per bank statement................ Add: Deposits in transit ..............................

$3,560.20 530.00 4,090.20 730.00 $3,360.20

Less: Outstanding cheques......................... Adjusted cash balance per bank ..................

Cash balance per books ............................... $3,875.20 Less: NSF cheque ........................................ $490.00 Bank service charge .............................. 25.00 515.00 Adjusted cash balance per books ................ $3,360.20

(b)

Jan. 31 Accounts Receivable ................ Bank Charges Expense ............ Cash.......................................

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490 25 515

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EXERCISE 7-31 (a) CRANE VIDEO COMPANY Bank Reconciliation July 31 Cash balance per bank statement ................ Add: Deposits in transit ..............................

$7,263 1,300 8,563 591 $7,972

Less: Outstanding cheques......................... Adjusted cash balance per bank .................. Cash balance per books ............................... Add: Collection of note receivable .............. Collection of interest revenue .............

$7,284 $700 36

Less: Bank service charges ($28+ $20) ..... Adjusted cash balance per books ................

(b)

July 31 Bank Charges Expense ............ Cash.......................................

31 Cash ........................................... Note Receivable .................... Interest Revenue...................

736

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736 8,020 48 $7,972

48 700 36

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Accounting Principles, Seventh Canadian Edition

EXERCISE 7-32 (a) BRAD’S BURGER COMPANY Bank Reconciliation July 31 Cash balance per bank statement ................ Add: Bank error ............................................. Deposits in transit ................................

$7,363 $700 2,200

$8,784 $1,250 36

Less: NSF cheque ......................................... Error on cash sales ($32 - $23) ........... Bank service charges ($22 + $20)....... Adjusted cash balance per books ................

350 9 42

(b)

July 31 Bank Charges Expense ............ Sales........................................... Accounts Receivable ................ Cash.......................................

42 9 350

31 Cash ........................................... Note Receivable .................... Interest Revenue...................

1,286

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2,900 10,263 594 $9,669

1,286 10,070 401 $9,669

401 1,250 36

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Accounting Principles, Seventh Canadian Edition

EXERCISE 7-33 (a)

Deposit in transit on May 31: $1,353

(b) Other adjustments:  Interest earned of $32 must be added to the balance per books.  EFT deposit of $956 must be added to the balance per books  The error in the May 9th deposit must be corrected on the books; therefore the balance per books must increase by $63 ($3,281 − $3,218).

EXERCISE 7-13 (a)

Outstanding cheques on May 31: No. 255 $ 262 No. 261 786 No. 264 680 $1,728

(b) Other adjustments:  Decrease balance per books $54 for service charges recorded by bank.  Decrease balance per books $450 for error in cheque 260—should be $500 not $50.  Decrease balance per books for NSF cheque of $395.

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EXERCISE 7-34 1. (a) The amount of $40 ($2,090 – $2,050) needs to be added to the company cash balance. (b) July

Cash....................................... Account Receivable .......

40 40

2. (a) The amount of $450 ($1,060 – $610) needs to be added to the company cash balance. (b) July 14

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

450 450

3. (a) The amount of $270 ($630 – $360) needs to be deducted from the company cash balance. (b) July 16

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

270 270

4. (a) Nothing is recorded on the bank reconciliation. This was a bank error and it was corrected by the bank on July 23. (b) No entry needed as this was a bank error. 5. (a) The amount of $300 ($970 – $670) needs to be added to the company cash balance. (b) July 31

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

300 300

6. (a) The amount of $200 needs to be added to the bank balance. (b) No entry needed as this was a bank error.

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EXERCISE 7-35 (a) CLARESVIEW COMPANY Bank Reconciliation August 31, 2017 Cash balance per bank statement.................................. Add: Error Cheque# 705 ($198 – $189) ... $ 9 Deposits in transit ............................... 17,050 Less: Outstanding cheques # 673................................................ $1,490 # 710................................................. 2,550 # 712................................................. 2,480 Adjusted cash balance per bank .................................... Cash balance per books ................................................. Add: EFT deposits of Accounts Receivable ............... Less: Bank service charge ....................... $ 25 NSF cheque ..................................... 416 Adjusted cash balance per books.................................. (b)

$17,100 17,059 34,159

6,520 $27,639 $26,030 2,050 28,080 441 $27,639

Aug. 31 Cash ............................................... 2,050 Accounts Receivable............

2,050

31 Bank Charges Expense ............ Account Receivable .................. Cash.......................................

441

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Accounting Principles, Seventh Canadian Edition

EXERCISE 7-36 (a)

Cash and cash equivalents balance June 30, 2017 1. Currency and coin ............................................. 2. Guaranteed investment certificate .................. 3. June cheques..................................................... 5. Royal Bank chequing account.......................... 6. Royal Bank savings account ............................ 9. Cash register floats ........................................... 10. Over-the-counter cash receipts for June 30: Currency and coin......................................... Cheques from customers ............................. Debit card slips ............................................. Bank credit card slips ................................... Total cash and cash equivalents ......................

$ 76 12,900 375 2,360 4,160 330 540 90 550 740 $22,121

(b) 2. Note: The Guaranteed investment certificate in the amount of $12,900 could be reported as a short-term investment on the balance sheet instead of as a cash equivalent. If it was reported as a short-term investment then the balance sheet would show Cash of $9,221. 4. Postdated cheque—Balance sheet (accounts receivable) 7. Prepaid postage in postage meter—Balance sheet (prepaid expense) 8. IOU from company receptionist—Balance sheet (other receivables)

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EXERCISE 7-17 (a)

Cash and cash equivalents balance: Cash in bank ........................................... Cash on hand ......................................... Highly liquid investments ...................... Petty cash ............................................... Total cash and cash equivalents...........

$42,000 12,000 34,000 500 $88,500

(b) The “Cash in plant expansion fund” should be reported as part of long-term investments (a noncurrent asset). “Receivables from customers” should be reported as accounts receivable in the current assets. “Stock investments” should also be reported in the current assets.

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SOLUTIONS TO PROBLEMS PROBLEM 7-1A 1. (a) The same employee is responsible for purchasing and receiving goods as well as matching the purchase order to the receiving report and the supplier’s invoice. This employee also approves the invoice for payment. (b) The following duties should be divided among the staff: (1) Purchasing, (2) Receiving and preparing receiving reports, (3) Matching receiving reports to invoices, and (4) Approving the invoice for payment. The responsibility for the matching of the purchase order with the receiving report and the invoice should be assigned to the assistant controller. 2. (a) (b)

The numerical sequence of cheques is not tracked. The numerical sequence of cheques should be tracked. Checking the numerical sequence of used and recorded pre-numbered cheques helps to ensure that a payment is not recorded more than once or not at all.

3. (a) The controller is responsible for stamping the invoice paid. (b) The cheque signer, the owner Stephanie Seegall, should be assigned the responsibility for stamping the invoices paid to prevent reuse. 4. (a) The controller is responsible for preparing all of the cheques. (b) The responsibility for the preparation of the cheques along with the accompanying supporting documents (invoices matched to receiving reports) should be done by the assistant to the controller as stated in item 1 above and the assistant should also check the invoice’s accuracy and pricing.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 7-1A (Continued) 5. (a) (b)

6. (a) (b)

The controller is responsible for the preparation of all of the journal entries. The journal entries should be prepared by the assistant controller and the controller should approve the entries. The assistant controller posts the journal entries. The task of posting approved journal entries should be assigned to the bookkeeper or accountant in charge of entering other business transactions.

7. (a) Pre-signed cheques are left in the safe for the controller to use in the owner’s absence. (b) During the absence of the owner, payments should be postponed until the owner’s return, or signing authority for reduced amounts of payments delegated to the controller. Upon the owners’ return, the cheque duplicates or journals of the cheques signed by the controller should be approved by the owner. 8. (a) Unrecorded cheques are charged to the owner’s drawing account and there currently is no approval of the bank reconciliation. (b) All entries relating to the owner’s account should be approved by the owner. The owner should review and approve the bank reconciliation monthly. Taking It Further: Designing and implementing a strong system of internal control can help employees from being falsely accused of fraud. Any errors in the purchasing and recording of payment transactions could lead to false fraud accusations directed to anyone involved in these activities.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 7-2A

(a) Weaknesses & (b) Problems 1. No segregation of duties between receiving the cash and admitting students to the lessons. The teachers could admit students for free or charge extra and pocket the difference or report fewer students and pocket the extra money.

Taking It Further: Suggested Improvements The duties of receiving cash and admitting students should be assigned to separate individuals.

2. No segregation of duties in the accounting functions. The general manager could prepare fictitious invoices for payment and it would not be detected.

An independent person should approve the invoices for payment and prepare the bank reconciliations.

3. No segregation of duties. Sales persons are responsible for determining credit policies and they receive a commission based on sales. They could provide credit to a bad credit risk customer in order to receive the commission on the sale.

An independent person should be responsible for providing credit to customers. Alternatively, a policy could be implemented where salespeople are only paid a commission on sales that are collected. This would reduce motivation to make sales to financially weak customers.

4. No establishment of responsibility. No individual is solely responsible for the accounting software. All programmers have access to the accounting software which could provide unauthorized changes to the accounting records.

Access to the accounting records should be restricted and protected with password or biometric restrictions.

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PROBLEM 7-2A (Continued) 5. Documentation is lacking. Receiving and purchase orders have been eliminated which could result in unauthorized purchases and/or receipts or fictitious invoices being paid, since no support is required. An employee could set up a bank account and collect the payment.

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PROBLEM 7-3A Roger has created a situation that leaves many opportunities for undetected fraud. Here is a list of some of the deficiencies in internal control. You may find others. 1.

Establishment of responsibility (a) Inadequate control over the cash box. In effect, it was operated like a petty cash fund, but too many people had the key. (b) Roger should have had the key and dispersed funds when necessary for purchases.

Segregation of duties (a) Freda Stevens counted the funds, made out the deposit slip, and took the funds to the bank. This made it possible for Freda to take some of the money and deposit the rest since there was no external check on her work. (b) Roger should have counted the funds, with someone observing him. Then he could have made out the deposit slip and had Freda deposit the funds. (a) Sara Billings was collecting tickets and receiving cash for additional tickets sold. (b) There should have been one person selling tickets at the door and a second person collecting tickets.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 7-3A (Continued) 3.

Documentation procedures (a) The tickets were unnumbered. (b) By numbering the tickets, the students could have been held more accountable for the tickets. (a) No record was kept of which students took tickets to sell or how many they took. (b) In combination with items 1 and 2 above, the student assigned control over the tickets should have kept a record of which tickets were issued to each student for resale. (Note: This problem could have been largely avoided if the tickets had been sold at the door on the day of the dance.) (a) There was no control over unsold tickets. This deficiency made it possible for students to sell tickets, keep the cash, and tell Roger that they had disposed of the unsold tickets. (b) Students should have been required to return the unsold tickets to the student maintaining control over tickets, and the cash to Roger. In each case, the students should have been issued a receipt for the cash they turned in and the tickets they returned. (a) Instead of receipts, students simply wrote notes saying how they used the funds. (b) A requirement to provide a valid receipt should have been put in place. (a) A receipt was not received from Obnoxious Al. Without a receipt, there is no way to verify how much Obnoxious Al was actually paid. For example, it is possible that he was only paid $100 and that Roger took the rest. (b) If the payment has to be done in cash, Obnoxious Al should be required to sign that the receipt, confirming that he has received the payment.

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PROBLEM 7-3A (Continued) 4.

Physical and IT controls

(a) The tickets were left in an unlocked box on his desk. (b) Roger should have assigned control of the tickets to one individual, and kept the tickets in a locked box over which that student alone had control. 5. Independent checks of performance (a) No verification of the number of students attending the event was established. (b) A count of the number of people attending the event should have taken place when admission was granted. This total could then have been compared to the sales proceeds to determine that all ticket sales have been properly accounted for and cash obtained. 6.

Human resource controls None apply in this case

Taking It Further: Designing and implementing a strong system of internal control can help protect students and their teacher from being falsely accused of fraud. The instincts of Principal Skinner are correct, when it didn’t appear reasonable to him that only $430 in cash would be left from an event generating roughly $2,000 in sales. His suspicions could lead to false fraud accusations directed to anyone involved in organizing the event. Had proof been required to explain this unreasonable result, it would have been very difficult for Roger or the students to defend themselves. Bad feelings between the students and the teacher could develop from suspicions concerning who had perpetrated the fraud. Roger and the SRC students had done the work on a volunteer basis and for a good cause. If they feel they have been suspected of fraud, they will likely not volunteer in the future.

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PROBLEM 7-4A (a)

Feb. 1 15

Mar. 15

16 31

Solutions Manual .

Petty Cash ...................................... Cash ........................................

200.00

Freight-Out ..................................... Postage Expense ........................... Entertainment Expense ................. Cash Over and Short ..................... Cash ($200.00 - $5.00) ............

82.00 72.50 36.60 3.90

Freight-Out ..................................... Contribution Expense.................... Repairs Expense ............................ Supplies .......................................... Cash Over and Short ..................... Cash ($200.00 – $48.00) .........

42.50 25.00 41.90 45.00

Freight-Out ..................................... Entertainment Expense ................. Postage Expense ........................... Supplies .......................................... Cash Over and Short.............. Cash ($200.00 – $13.00) .........

37.60 53.75 33.25 67.00

Petty Cash ...................................... Cash ........................................

50.00

Postage Expense ........................... Travel Expense............................... Freight-Out ..................................... Entertainment Expense ................. Cash Over and Short ..................... Cash ($250.00 – $16.00) .........

40.00 75.60 47.10 68.50 2.80

7-45

200.00

195.00

2.40 152.00

4.60 187.00 50.00

234.00

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Accounting Principles, Seventh Canadian Edition

PROBLEM 7-4A (Continued) (b) The internal control features of a petty cash fund include: (1) A custodian is responsible for the fund. (2) A pre-numbered petty cash receipt signed by the custodian and the individual receiving payment is required for each payment from the fund. (3) The treasurer’s office examines all payments and stamps supporting documents to indicate they were paid when the fund is replenished. (4) Surprise counts can be made at any time to determine whether the fund is intact. Taking It Further: This could be a problem for the company as Su Ma may start taking longer and longer to repay the cash and may eventually end up stealing cash from the petty cash fund for personal expenses. Another problem is that there may not be cash in the petty cash fund when needed to pay for expenses, depending on the amount Su Ma is borrowing. To strengthen the system the company could implement the following controls:  Management should not allow the fund to be used for certain types of transactions (such as making shortterm loans to employees).  Each payment from the fund must be documented on a pre-numbered petty cash receipt, signed by both the custodian and the person who receives the payment.  Management should periodically conduct a surprise check of the petty cash fund and ensure the cash on hand plus receipts are equal to the petty cash fund balance—they should make sure there are no unexplained shortages and all payments have been in accordance with company policies.

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PROBLEM 7-5A

(a)

July

Petty Cash.................................. Cash.......................................

300 300

8 Cash ............................................. 32,347 ($32,750 − $168 − $235) Debit Card Expense (134 × $1.25) 168 Credit Card Expense ($11,726* × 2%)...................... 235 Sales ...................................... *($32,750 − $12,081 − $8,943) 8 Freight Out................................. Supplies ..................................... Advertising Expense ................. R. Malik, Drawings..................... Cash Over and Short................. Cash ($300 − $87) .................

69 35 46 58 5 213

15 Cash ........................................... 28,689 ($29,050 − $195 − $166) Debit Card Expense (156 × $1.25) 195 Credit Card Expense ($8,306* × 2%)........................ 166 Sales ...................................... *($29,050 − $10,912 − $9,832) 25

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Postage Expense...................... Advertising Expense ................. Supplies ..................................... Cash Over and Short................. Petty Cash ($300-250 ).......... Cash ($250 − $16) .................

7-47

32,750

29,050

79 93 98 14 50 234

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Accounting Principles, Seventh Canadian Edition

PROBLEM 7-5A (Continued) (b) The benefit of having a petty cash fund is that it can be used to pay relatively small amounts, while still maintaining control. Some expenses are best made by cash rather than by cheque because of the nature of the expense. There are some instances where either a cheque is not accepted or it is not practical to issue a cheque. Because of the costs involved in issuing a cheque, the business is justified in paying for small purchases with petty cash. There are a number of internal controls over the petty cash fund that Malik should follow:  One person should be appointed the petty cash custodian and made responsible for the fund.  A pre-numbered petty cash receipt should be signed by the custodian and the individual receiving payment for each payment from the fund.  The controller’s office should examine all payments and stamp supporting documents to indicate they were paid when the fund is replenished.  Surprise counts should be made to determine whether the fund is properly administered and that the sum of the petty cash receipts and remaining cash is equal to the petty cash fund balance. Taking It Further: An advantage of accepting debit and bank credit card transactions, as opposed to accepting only cash and personal cheques from customers, is that the company knows immediately if the customer has enough money or established credit to pay for their purchases. Another advantage is that sales will likely increase if customers can use debit or credit cards. Accepting debit and credit card transactions also acts as an internal control by limiting the amount of cash employees are exposed to. The disadvantage is that the bank charges a fee on all transactions using debit and credit cards.

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PROBLEM 7-6A (a) Nov.

1 15

Petty Cash.................................. Cash.......................................

150

Repairs Expense ($16 + $26) .... Advertising Expense ................. R. Hayes, Drawings ................... Miscellaneous Expense ............ Cash Over and Short ............ Cash ($150 − $11) .................

42 51 38 9

Repairs Expense ($30 + $11) .... Supplies ..................................... R. Hayes, Drawings ................... Miscellaneous Expense ............ Cash Over and Short................. Cash ($150 − $11) .................

41 44 44 7 3

150

1 139

139

(b) Had the petty cash fund not be reimbursed as of the end of November, the financial statements would be affected as follows: Expenses understated: Repairs ............................................... $41 Cash Over and Short ........................... 3 Miscellaneous Expense ....................... 7 $51 Profit overstated ...................................... 51 R. Hayes, Drawings understated ............ 44 Cash overstated....................................... 139 Supplies understated .............................. 44 Total assets overstated ($139 – $44)...... 95 Total owner’s equity overstated ($51 + $44) 95

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PROBLEM 7-6A (Continued) Taking It Further: In order to ensure that the petty cash fund is properly administered, the owner should ensure the following internal control features: 1. Responsibility for the petty cash fund is assigned to a single person. 2. The petty cash fund is kept in a secure location, out of reach by other employees. 3. The petty cash custodian insists that supporting documents or receipts are provided before any reimbursement or payment is made from the petty cash fund. 4. A pre-numbered petty cash receipt is signed by the custodian and the individual receiving payment for each payment from the fund. 5. The petty cash custodian does not accept I.O.U.s from employees in exchange for loans. 6. The petty cash custodian prepares a schedule of the payments that have been made and sends the schedule, supported by petty cash receipts and other documentation, to the controller. 7. The receipts and supporting documents are examined by the controller to verify that they were proper payments from the fund and that the documents are marked “Paid” so that they cannot be submitted again for payment. The controller’s approval is documented before a cheque is issued to restore the fund to its established amount.

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PROBLEM 7-6A (Continued) Taking It Further: (Continued) 8. The cheque issued for replenishment of the fund must be made payable to the custodian who must then endorse the cheque to cash it and replenish the fund. 9. Check that the amounts of cash over and short are reasonable in size. 10. Perform surprise counts to determine whether the fund is properly administered and whether the sum of the petty cash receipts and remaining cash is equal to the petty cash fund.

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PROBLEM 7-7A (a) LISIK COMPANY Bank Reconciliation October 31, 2017 Cash balance per bank statement ...................................... $10,155 Add: Deposit in transit ......................................... $ 960 Bank error—Lasik cheque ................................. 585 1,545 11,700 Less: Outstanding cheques ($415 + $555 + $646 + $315)............................... 1,931 Adjusted cash balance per bank .................................... $ 9,769 Cash balance per books ................................................. Add: Collection of EFT....................................... $1,875 Error in recording cheque #1181 for Accounts Payable ($574 − $457) .......... 117 Interest revenue ...................................... 25 Less: NSF cheque ............................................. $805 Error in Oct. 12 deposit of cash sales 324 ($741 − $417) .................................... Bank service charge ............................... 30 Cheque printing charge .......................... 35 Adjusted cash balance per books..................................

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$ 8,946

2,017 10,963

1,194 $9,769

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Accounting Principles, Seventh Canadian Edition

PROBLEM 7-7A (Continued) (b)

Oct. 31 Cash ............................................... 2,017 Accounts Receivable............. Accounts Payable—Helms & Co. Interest Revenue....................

1,875 117 25

31 Accounts Receivable—W. Hoad 805 Sales............................................ 324 Bank Charges Expense ($35 + $30) 65 1,194 Cash........................................ Check: $8,946 + $2,017 − $1,217 = $9,769 adjusted cash balance Taking It Further: Any business that chooses not follow the policy of performing bank reconciliations on its bank accounts runs several risks: 1.

The business will be relying on a bank balance, which is missing reconciling items. This could lead to decisions that might cause the bank account to fall into an overdraft position, causing issues with the bank and additional interest charges. Unauthorized payments will remain undetected. If the perpetrator has since left the business, the amount may not be recoverable. Deposits that did not reach the bank account and have been diverted intentionally could be permanently lost.

Errors in the accounting records remain undetected. If the error is with a customer deposit, it will be embarrassing or impossible for the business to rectify the error and obtain additional collections from the customer. Errors made on payments to suppliers may hurt the business’s relationship with its suppliers.

Errors made by the bank will be undetected.

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PROBLEM 7-8A (a) FORESTER THEATRE Bank Reconciliation October 31, 2017 Cash balance per bank statement.................................. Add: Bank error Bohr Company cheque ....... $600 Deposits in transit .................................... 1,436 Less: Outstanding cheques ........................................... Adjusted cash balance per bank .................................... Cash balance per books ................................................. Add: Collection of note receivable .............................. Less: Correction of cheque #1581 error for Payment on account ($685 - $658)......... $27 NSF cheque Tyler Bickell ....................... 934 Service charge ........................................ 45 Correction in May 12 deposit of cash sales ($846 − $836) ...................................... 10 Adjusted cash balance per books.................................. (b)

Oct. 31 Cash ............................................... 2,500 Notes Receivable ...................

$6,804 2,036 8,840 515 $8,325 $6,841 2,500 9,341

1,016 $8,325

2,500

31 Accounts Payable – M. Datz ...... 27 Accounts Receivable—Y. Bickell 934 Sales............................................ 10 Bank Charges Expense ............. 45 1,016 Cash........................................ Check: $6,841 + $2,500 − $1,016 = $8,325 adjusted cash balance

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PROBLEM 7-8A (Continued) Taking It Further: It might be true that the cost of making payments to suppliers using EFTs is less costly than making payments using cheques. Sue Forester is not correct in her statement that using EFTs is less expensive because there is a reduced need for internal control compared to writing cheques. The internal control procedures will be the same, but adapted to another method of payment. Some additional programmed controls and password controls will have to be implemented to protect the business against unauthorized payments.

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PROBLEM 7-9A (a) YAP CO. Bank Reconciliation March 31, 2017

Cash balance per bank statement ...................................... $10,863 Add: Deposits in transit................................................ 1,025 11,888 Less: Outstanding cheques No. 3451 .............................................. $2,260 No. 3479 .............................................. 159 No. 3481 .............................................. 862 No. 3482 .............................................. 1,126 Bank error—cheque #3478 ($1,380 – $1,080) ............................... 300 4,707 Adjusted cash balance per bank .................................... $7,181 Cash balance per books ................................................. Add: Correction to cheque #3473 ($725 – $275) ......................................... $450 Interest revenue ...................................... 23 Less: Loan payment—principal.......................... $1,000 Loan payment—interest ......................... 125 NSF cheque Mr. Jordan .......................... 595 Service charge ........................................ 49 Correction in Mar. 26 cash receipts of Accounts Receivable ($2,675−$2,657) ...... 18 Adjusted cash balance per books..................................

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$8,495 473 8,968

1,787 $7,181

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PROBLEM 7-9A (Continued)

(b)

Mar. 31

Cash ........................................... Accounts Payable ................. Interest Revenue...................

473

Note Payable.............................. Interest Expense ....................... Accounts Receivable—Jordan . Bank Charges Expense ............ Accounts Receivable ................ Cash.......................................

1,000 125 595 49 18

450 23

1,787

Check: $8,495 + $473 − $1,787 = $7,181 adjusted cash balance Taking It Further: The accountant for Yap Co. needs to notify the bank of the details of the bank error for cheque #3478. The bank will need to withdraw a further $300 from Yap’s bank account. Until such time as the bank corrects this error, the amount of $300 will remain a reconciling item on the bank side of the bank reconciliation.

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PROBLEM 7-10A (a) MALONEY COMPANY Bank Reconciliation November 30, 2017 Cash balance per bank statement................................. Add: Deposits in transit ............................................... Less: Outstanding cheques No. 2451 ......................................... $1,260 No. 2472 ......................................... 504 No. 2478 ......................................... 538 No. 2482 ......................................... 612 No. 2484 ......................................... 830 No. 2485 ......................................... 975 No. 2487 ......................................... 1,200 Adjusted cash balance per bank ................................... Cash balance per books ................................................ Add: EFT collected by Bank ....................... $2,479 Error in Nov. 20 deposit of Accounts Receivable ($2,966 − $2,699) .......... 267 Less: NSF cheque—Pendray Holdings....... $ 260 Error in cheque #2476 for Accounts Payable ($2,830 − $2,380) ................ 450 Loan payment .................................... 2,250 Adjusted cash balance per books.................................

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$14,527 1,338 15,865

5,919 $ 9,946 $10,160

2,746 12,906

2,960 $ 9,946

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PROBLEM 7-10A (Continued) (b)

Nov. 30

Cash ........................................... Accounts Receivable............ Interest Revenue................... Accounts Receivable............

2,746

Accounts Receivable ................ Accounts Payable ..................... Notes Payable............................ Interest Expense ....................... Cash.......................................

260 450 2,000 250

2,430 49 267

2,960

Check: $10,160 + $2,746 − $2,960 = $9,946 adjusted cash balance Taking It Further: When performing the bank reconciliation, it is easier to detect a company error than an error committed by the bank. For errors in recording transactions on the Cash account of the company, the source documents and data supporting the entries are readily at hand to retrace the transaction and the resulting error. In the procedure of retracing or matching entries appearing on the bank statement to the accounting records, research can be performed to determine that the error was in the recording of the transaction on the company books. Although rare, some errors can occur that are caused by the bank. These errors could include a transaction belonging to a different business recorded on the bank statement of the company. Determining that the error is a bank error is done by process of elimination, after determining that the error is clearly not a recording error in the books of the company. In this case, since the transaction recorded by the bank is not supported by source documents of the company, an inquiry needs to be made with the bank, particularly in the case of a deposit. If the error relates to a cheque, the paid cheque can be inspected for some clues as to the source and nature of the error.

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PROBLEM 7-11A (a)

Balance per Bank Statement Balance May 31, 2017 .................................................. $17,690 Add: Deposits ............................................ $14,052 Interest .............................................. 35 14,087 31,777 Less: Cheques cleared............................... $10,748 NSF cheques .................................... 175 EFT for insurance............................. 500 Service charge ................................. 12 11,435 Unadjusted bank balance, June 30, 2017 ............... $20,342 Balance Per Books Adjusted balance, May 31, 2017 ............................. Add: Cash receipts................................................. Less: Cash payments ............................................. Unadjusted cash balance, June 30, 2017 ..............

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$ 16,940 17,809 (18,491) $ 16,258

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Accounting Principles, Seventh Canadian Edition

PROBLEM 7-11A (Continued) (b) TRILLO COMPANY Bank Reconciliation June 30, 2017 Unadjusted bank balance Add: Deposits in transit................................... $ 3,127 Error Trillo Co. cheque #119 .................. 467

$20,342 3,594 23,936

Less: Outstanding cheques No. 694 ................................................ $ 264 No. 708 ................................................ 2,910 No. 713 ................................................ 3,058 No. 714 ................................................ 3,860 10,092 Adjusted bank balance........................................................ $13,844 Unadjusted cash balance .................................................... $16,258 Add: Interest .................................................... $ 35 Error in cheque # 712 for Equipment ($3,626 − $3,266) ................................... 360 395 16,653 Less: NSF cheque ................................................. $ 175 Cheque # 710 for Accounts Payable not recorded .............................................. 1,492 Error in June 17 deposit of Accounts Receivable ($3,810 – $3,180) ................ 630 EFT for insurance payment .................... 500 Bank service charges ............................. 12 2,809 Adjusted cash balance ........................................................ $13,844

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PROBLEM 7-11A (Continued) (c)

June 30 Cash .......................................... Interest Revenue................... Equipment .............................

395

30 Accounts Receivable—Massif Co. 175 Accounts Payable ..................... 1,492 Accounts Receivable ................ 630 Bank Charges Expense ............ 12 Insurance Expense.................... 500 Cash.......................................

35 360

2,809

Check: $16,258 + $395 − $2,809 = $13,844 adjusted cash balance (d) The reported cash balance on the June 30, 2017 balance sheet is $13,844. Taking It Further: The bank officials would expect that the bank account balance will not equal the balance on Trillo Company’s balance sheet. Depending on the time lag between the recording of transactions on the books and the bank, it is possible that the difference is substantial. This is normal and should not be alarming. The discrepancy between the two balances would be larger for businesses that operate seven days a week. Deposits made on the weekend would not be processed by the bank until Monday. In that case, the bank balance would seem low until the deposits are processed by the bank. On the other hand, if the business mails many payments made by cheque to several areas of the country, it is possible that large amounts of outstanding cheques will make the bank account appear high until the cheques are presented for payment and clear the bank account.

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PROBLEM 7-12A (a) SALLY’S SWEET SHOP Bank Reconciliation August 31 Unadjusted bank balance $11,135 Add: Deposits in transit ................................... $ 2,530 Bank error Cheque #4832 Wally’s Water Works ............... 795 3,325 14,460 Less: Outstanding cheques No. 421 ................................................ $ 165 No. 485 ................................................ 265 No. 492 ................................................ 175 No. 494 ................................................ 1,165 1,770 Outstanding EFT—for utilities ............... 245 2,015 Adjusted bank balance ................................................... $12,445 Unadjusted cash balance ............................................... Add: EFT collections of Accounts Receivable $1,735 Deposit error August 15 – cash sales ($4,990- $4,690) ....................................... 300 Error in cheque # 490 for Accounts Payable ($266 − $206) ............................... 60 Less: NSF cheque ($385 + $25) ........................ $410 Bank service charges—cheque printing 45 Adjusted cash balance ...................................................

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$10,805

2,095 12,900 455 $12,445

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Accounting Principles, Seventh Canadian Edition

PROBLEM 7-12A (Continued) (b)

Aug. 31

Cash .......................................... Accounts Receivable............ Sales ...................................... Accounts Payable .................

2,095

Accounts Receivable ................ Bank Charges Expense ............ Cash.......................................

410 45

1,735 300 60

455

Check: $10,805 + $2,095 − $455 = $12,445 adjusted cash balance (c)

The reported cash balance on the August 31 balance sheet is $12,445.

Taking It Further: The appropriate segregation of duties internal control activity calls for the task of preparing the bank reconciliation to be separated from the responsibility of signing cheques. This is to ensure that someone who has signing authority on the business bank account is not able to conceal the fraud of an unauthorized payment by making false entries on the bank reconciliation.

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PROBLEM 7-13A (a)

Cash and cash equivalents: 1. 2. 3.

Cash on hand.................................................... Petty cash fund................................................. Chequing account ............................................ US bank account .............................................. Treasury bills .................................................... Total ..............................................................

530 125 24,500 16,300 25,000 $66,455

(b) 2. The petty cash fund should have been replenished at year-end. Since this has not happened, the company must record the petty cash expenses and reduce petty cash by $175. Once the petty cash fund is reimbursed, $300 cash will be available once again. 4. The overdraft protection for $10,000 on the chequing account would not be reported on the balance sheet. It may be disclosed in the notes to the financial statements. 5.

Access to the $4,250 is restricted to a specific purpose and should be reported as restricted cash, reported as a current or noncurrent asset, depending on the when the leases expire.

6. Postdated cheques are not assets. The amount would be part of the Accounts Receivable balance. 7. Short-term investments with original maturity dates greater than 90 days (shares intended to be sold within a year and guaranteed investment certificate) would be listed separately in the current asset section. 8. The owner’s personal bank account is not an asset of the business. 9. NSF cheques would be included in Accounts Receivable, assuming the company expects collection. Solutions Manual .

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PROBLEM 7-13A (Continued) Taking It Further: It is important to present restricted cash separately from cash on the balance sheet so that creditors and other users of the financial statements realize that the restricted amounts are not available for the everyday payments required by the business in normal operations.

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PROBLEM 7-1B

Activities

Application to Cash Receipts

Establishment of responsibility

Only cashiers are authorized to sell tickets. Only the manager and cashier can handle cash. Only the manager has access to unlocked rolls of tickets.

Segregation of duties

The duties of receiving cash and admitting customers are assigned to the cashier and to the usher. The manager maintains custody of the cash, and the company accountant records the cash.

Documentation procedures

Tickets are pre-numbered. Cash count sheets are prepared. Deposit slips are prepared. Copies are used for verification and recording.

Physical and IT controls

A safe is used for the storage of cash and a machine is used to issue tickets.

Performance reviews

Cash counts are made by the manager at the end of each cashier's shift. Daily comparisons are made by the company controller.

Other controls

Cashiers are bonded.

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PROBLEM 7-1B (Continued) Taking It Further: Actions by the usher and cashier to misappropriate cash could include: (1) Instead of tearing the tickets, the usher could return the tickets to the cashier who could resell them, and the two could divide the cash. (2) The cashier could issue a less expensive ticket than paid for, and the usher would admit the customer. The difference between the ticket issued and the cash received could be divided between the usher and cashier. (3) The cashier and usher could agree to let friends into the theatre at no cost (or in exchange for an "under the table" payment).

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(3) Following the count, the financial secretary should prepare a deposit slip, in duplicate, for the total cash received, and the secretary should immediately deposit the cash in the bank’s night deposit vault. (4) At the end of each month, a member of the finance committee should prepare the bank reconciliation. (5) All cheques should be made payable in the church’s name. (6) A petty cash fund should be set up for small expenditures. Taking It Further: When the opportunity, financial pressure or rationalization factors are present, the weaknesses in internal control can lead to fraud.

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PROBLEM 7-3B

(a) Weaknesses & (b) Problems 1. Cash is collected and kept in the car. This could result in theft.

Taking It Further Suggested Improvements Cash should be deposited in the bank each day.

2. The person purchasing the merchandise is the same person that verifies receipt of the goods and approves invoices for payment. Because this person is responsible for all activities related to purchasing, errors and theft could occur.

An independent person should verify the receipt of goods. The purchaser should approve bills for payment by the controller.

3. All three cashiers use the same cash drawer. This could result in difficulty establishing responsibility for errors or missing money.

Each employee should use a separate cash drawer.

4. The office manager deposits the cheques and posts the entry in the accounting records. This could result in the office manager depositing cheques in his/her own account, taking the cash and not posting the entry for accounting purposes.

Mail should be opened by two individuals. The reconciliation of daily cash receipts should be forwarded to the accounting department and used as a basis for entering the receipt information into the accounting records.

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PROBLEM 7-3B (Continued) Taking It Further Suggested Improvements

(a) Weaknesses & (b) Problems 5. The custodian creates receipts for employees when they don’t have them. Cash is given to employees without any documentation provided. Naiara could create fictitious receipts and take cash herself or give it to friends.

Naiara never takes a vacation. This may be a technique to prevent others from assisting with her accounting functions; thereby, examining her work and discovering errors or misappropriations.

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Pre-numbered petty cash receipts must be signed by the custodian and the individual receiving payment for each payment from the fund. Surprise counts can be made at any time to determine whether the fund is intact. Employees should be required to take vacation.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 7-4B (a) July

1 15

Aug. 15

16 31

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Petty Cash ...................................... Cash ........................................

200.00

Freight-Out ..................................... Postage Expense ........................... Entertainment Expense ................. Supplies .......................................... Cash Over and Short ..................... Cash ($200.00 - $ 5.70) ...........

94.00 42.40 45.90 10.70 1.30

Freight-Out ..................................... Contribution Expense .................... Postage Expense ........................... Repairs Expense ............................ Cash ($200.00 - $8.00) ............

82.10 30.00 47.80 32.10

77.60 30.00 47.80 32.10 .50

Petty Cash ...................................... Cash ........................................

100.00

Postage Expense ........................... Travel Expense............................... Freight-Out ..................................... Cash Over and Short ..................... Cash ($300.00 - $17.00) ..........

145.00 90.60 46.00 1.40

7-73

200.00

194.30

192.00

188.00 100.00

283.00

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Accounting Principles, Seventh Canadian Edition

PROBLEM 7-4B (Continued) (c) The internal control features of a petty cash fund include: (1) A custodian is responsible for the fund. (2) A pre-numbered petty cash receipt signed by the custodian and the individual receiving payment is required for each payment from the fund. (3) The treasurer’s office examines all payments and stamps supporting documents to indicate they were paid when the fund is replenished. (4) Surprise counts can be made at any time to determine whether the fund is intact. Taking It Further: Frank Cheema is not correct. Transactions occurring in the petty cash fund do not get recorded into the general ledger unless entries for the different expenses are recorded at the point of replenishing the petty cash fund. Until the replenishment of the fund occurs, from a general ledger stand point, the amount recorded to the general ledger Petty Cash account represents cash. At any point in time, the petty cash fund will likely have some cash and some receipts for payments made out of the fund. This is one of the reasons why it is a good practice to replenish the fund at the end of the fiscal year so that the expenses can be recorded in the fiscal year and the amount of cash in the petty cash fund is in fact cash that should be included on the balance sheet.

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PROBLEM 7-5B

(a)

May

1 Petty Cash.................................. Cash.......................................

250 250

8 Cash ............................................. 34,371 ($35,000 − $128 − $501) Debit Card Expense (122 × $1.05) 128 Credit Card Expense ($12,530* × 4%)...................... 501 Sales ...................................... 35,000 *($35,000 − $12,912 − $9,558 = $12,530) 8

Freight Out................................. Postage Expense....................... Advertising Expense ................. Miscellaneous Expense ............ Cash Over and Short ............ Cash ($250 − $75) .................

4 175

Cash ........................................... 16,079 ($16,380 − $89 − $212) Debit Card Expense (85 × $1.05) 89 Credit Card Expense ($5,300* × 4%)........................ 212 Sales ...................................... *($16,380 − $3,690 − $7,390 = $5,300)

15 Petty Cash ($300 − $250) .......... B. Ramesh, Drawings................ Supplies ..................................... Freight Out................................. Cash Over and Short................. Cash ($250 − $5) ...................

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7-75

16,380

50 98 36 60 1 245

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Accounting Principles, Seventh Canadian Edition

PROBLEM 7-5B (Continued) (b) An advantage of accepting debit and bank credit card transactions as opposed to accepting only cash and personal cheques from customers is that the company knows immediately if the customer has enough money or established credit to pay for their purchases. Another advantage is that sales will likely increase if customers can use debit or credit cards. Accepting debit and credit card transactions also acts as an internal control by limiting the amount of cash to which employees are exposed. The disadvantage is that the bank charges a fee on all transactions using debit and credit cards. Taking It Further: The benefit of having a petty cash fund is that it can be used to pay relatively small amounts, while still maintaining control. Some expenses are best paid by cash rather than by cheque because of the nature of the expense. There are some instances where either a cheque is not accepted or it is not practical to issue a cheque. Because of the costs involved in issuing a cheque, the business is justified in paying small amounts of purchases with petty cash. There are a number of internal controls over the petty cash fund that Ramesh should follow:  One person should be appointed the petty cash custodian and will be responsible for the fund.  A pre-numbered petty cash receipt should be signed by the custodian and the individual receiving payment for each payment from the fund.  The controller’s office should examine all payments and stamp supporting documents to indicate they were paid when the fund is replenished.  Surprise counts should be made to determine whether the fund is properly administered and whether the sum of the petty cash receipts and remaining cash is equal to the petty cash fund.

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PROBLEM 7-6B

(a)

June

8 15

Petty Cash.................................. Cash.......................................

200

Supplies ..................................... Repairs Expense ....................... Advertising Expense ................. E. Bender, Drawings ................. Miscellaneous Expense ............ Cash Over and Short................. Cash ($200 − $1) ...................

35 48 55 40 19 2

Freight Out................................. Supplies ..................................... Advertising Expense ................. E. Bender, Drawings ................. Miscellaneous Expense ............ Cash Over and Short ............ Cash ($200 − $29) .................

10 54 48 45 18

200

199

4 171

(b) Had the petty cash fund not be reimbursed as of the end of June, the financial statements would be affected as follows: Expenses understated: Freight Out ........................................... $10 Advertising Expense............................ 48 Cash Over and Short (Expense recovery) (4) Miscellaneous Expense ....................... 18 $72 Profit overstated ...................................... 72 E. Bender, Drawings understated .......... 45 Cash overstated....................................... 171 Supplies understated .............................. 54 Total assets overstated ($171 – $54) ..... 117 Total owner’s equity overstated ($72 + $45) 117

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PROBLEM 7-6B (Continued) Taking It Further: Some expenses are made from petty cash rather than by cheque because of the nature of the expense. There are some instances where either a cheque is not accepted or it is not practical to issue a cheque. Because of the costs involved in issuing a cheque, the business is justified in paying for small purchases with petty cash. The internal controls over payments from petty cash include: 1. Responsibility for the petty cash fund is assigned to a single person. 2. The petty cash fund is kept in a secure location, out of reach by other employees. 3. The petty cash custodian insists on supporting documents or receipts are provided as evidence of the amount that has been paid before any reimbursement or payment is made from the petty cash fund. 4. A pre-numbered petty cash receipt is signed by the custodian and the individual receiving payment, for each payment from the fund. 5. The petty cash custodian does not accept I.O.U.s from employees in exchange for loans. 6. The petty cash custodian prepares a schedule or summary of the payments that have been made and sends the schedule, supported by petty cash receipts and other documentation, to the controller.

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PROBLEM 7-6B (Continued) Taking It Further: (Continued) 7. The receipts and supporting documents are examined by the controller to verify that they were proper payments from the fund and stamped “Paid” so that they cannot be submitted again for payment. The controller’s approval is documented before a cheque is issued to restore the fund to its established amount. 8. The cheque issued for replenishment of the fund must be made payable to the custodian who must then endorse the cheque to cash it and replenish the fund. 9. Check that the amounts of cash over and short are reasonable in size. 10. Perform surprise counts to determine whether the fund is properly administered and whether the sum of the petty cash receipts and remaining cash is equal to the petty cash fund.

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PROBLEM 7-7B (a) AGRICULTURAL GENETICS COMPANY Bank Reconciliation May 31, 2017

Cash balance per bank statement.................................. Add: Deposit in transit.................................................. Less: Outstanding cheques ($236 + $105 + $235) Adjusted cash balance per bank Cash balance per books ................................................. Add: EFT collections of Accounts Receivable 2,200 Interest revenue ...................................... 80 Less: NSF cheque Pete Dell ............................. $680 Error in deposit of May 18 for cash sales ($886 – $836).................................. 50 Error in cheque # 1151 for payment on account ($685 − $658) ....................... 27 Bank service charge ($40 + $20) ............ 60 Adjusted cash balance per books.................................. (b)

$6,405 2,416 8,821 576 $8,245 $6,782 2,280 9,062

817 $8,245

May 31 Cash ............................................... 2,280 Accounts Receivable............ Interest Revenue...................

2,200 80

31 Accounts Receivable—P. Dell .. Sales........................................... Accounts Payable—L. Kingston Bank Charges Expense ............ Cash.......................................

817

680 50 27 60

Check: $6,782 + $2,280 – $817 = $8,245 adjusted cash balance

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PROBLEM 7-7B (Continued) Taking It Further: The bank manager should expect that the bank and book balances will not be equal. Depending on the time lag between recording of transactions on the books and the bank, it is possible that the difference is substantial. This is normal and should not be alarming. The discrepancy between the two balances would be larger for businesses that operate seven days a week. Deposits made during the week end would not be processed by the bank until Monday. The bank balance would seem low until the deposits are processed by the bank. On the other hand, if the business mails many payments made by cheque to several areas of the country, it is possible that large amounts of outstanding cheques will make the bank account appear high until the cheques are presented for payment and clear the bank account.

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PROBLEM 7-8B (a) EZ FERTILIZER Bank Reconciliation June 30, 2017 Cash balance per bank statement.................................. Add: Bank error Bohr Company cheque ............ $ 234 Deposit in transit ....................................... 1,587 Less: Outstanding cheques .......................................... Adjusted cash balance per bank Cash balance per books ................................................. Add: EFT collections of note receivable............. 1,550 Error payment on account cheque #1924 D. Katz ($536 - $356) ............................... 180 Interest revenue .......................................... 45 Less: NSF cheque A. Vallee ............................. Error in deposit of June 21 for cash sales ($642 – $624)..................................

1,821 8,597 946 $7,651 $6,925

1,775 8,700

$966 18

Bank service charge ($40 + $25) ............ 65 Adjusted cash balance per books.................................. (b)

$6,776

1,049 $7,651

June 30 Cash ............................................... 1,775 Notes Receivable .................. Accounts Payable—D. Katz . Interest Revenue...................

1,550 180 45

30 Accounts Receivable— A. Vallee Sales........................................... Bank Charges Expense ............ Cash.......................................

1,049

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PROBLEM 7-8B (Continued) Taking It Further: The purpose of the bank reconciliation is to ensure that the transactions recorded in the records of the business are authorized, complete and accurate. Since the bank account is used daily, it is important that the reconciliation be performed on a monthly basis. Doing so ensures that the internal control features of the bank reconciliation are adhered to in order to protect the asset and to provide accurate up-to-date accounting information. Decisions concerning the availability of cash are frequent. It is important that, when those decisions are being made, management can rely on the accuracy of the amounts provided by the accounting system. Should bank or accounting record errors be detected through the process of preparing the bank reconciliation, timely action can be taken place to correct those errors and prevent additional errors from occurring in the future.

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PROBLEM 7-9B (a) KATSARIS COMPANY Bank Reconciliation September 30, 2017 Cash balance per bank statement................................ Add: Deposits in transit .............................................. Less: Outstanding cheques No. 4451 ...... $1,740 No. 4464 ...... 620 No. 4469 ...... 600

No. 4471 No. 4473 No. 4476

$621 1,234 1,280 6,095

Bank error on cheque No. 4475 ($553 − $535) ............................... 18 Adjusted cash balance per bank ................................. Cash balance per books .............................................. Add: Error in cheque No. 4470 for Accounts Payable ($3,400 − $3,040) ........... 360 Interest revenue ............................ 65 EFT collection of Accounts Receivable ($3,145 − $65) .............................. 3,080 Less: NSF cheque ................................... $1,027 Error in Sept. 16 deposit of Accounts Receivable ($2,763 − $2,673) ...... 90 Bank service charges ................... 45 Adjusted cash balance per books................................

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$17,930 754 18,684

6,113 $12,571 $10,228

3,505 13,733

1,162 $12,571

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PROBLEM 7-9B (Continued) (b)

Sept. 30 Cash ............................................... 3,505 Account Payable................... Interest Revenue................... Accounts Receivable............

360 65 3,080

30 Accounts Receivable —Hopper Holdings ............... Accounts Receivable ................ Bank Charges Expense ............ Cash.......................................

1,162

1,027 90 45

Check: $10,228 + $3,505 – $1,162 = $12,571 adjusted cash balance Taking It Further: The accountant for Katsaris Company needs to notify Hopper Holdings of the NSF cheque they had given to Katsaris as a payment on account. A replacement cheque should be requested immediately. Hopper needs to be notified of the additional $12 service charge that it is expected to include with its replacement cheque. The accountant also needs to notify the bank of the details of the bank error for cheque #4475. The bank will need to withdraw a further $18 from Katsaris’s bank account. Until such time as the bank corrects this error, the amount of $18 will remain a reconciling item on the bank side of the bank reconciliation

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PROBLEM 7-10B (a) RIVER ADVENTURES COMPANY Bank Reconciliation May 31, 2017 Cash balance per bank statement.................................. Add: Deposits in transit .............................. $1,286 Error in cheque #564 ($603 − $306) ... 297 Less: Outstanding cheques No. 533 ............................................ $279 No. 555 ............................................ 79 No. 558 ............................................ 943 No. 560 ............................................ 890 No. 566 ............................................ 950 Adjusted cash balance per bank .................................... Cash balance per books ................................................. Add: EFT proceeds of Accounts Receivable plus interest ($1,615 + $35) .............. $1,650 Error in May 26 deposit of Accounts Receivable ($980 − $890) ............... 90 Error in cheque #563 for Accounts Payable ($2,887 − $2,487)............... 400 Less: NSF cheque ......................................... $ 440 Bank service charges ......................... 25 Adjusted cash balance per books..................................

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$4,308 1,583 5,891

3,141 $2,750 $1,075

2,140 3,215 465 $2,750

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Accounting Principles, Seventh Canadian Edition

PROBLEM 7-10B (Continued) (b)

May 31

Cash ........................................... Accounts Receivable............ Interest Revenue................... Accounts Receivable............ Accounts Payable .................

2,140

31 Accounts Receivable—R. King Bank Charges Expense ............ Cash.......................................

440 25

1,615 35 90 400

465

Check: $1,075 + $2,140 − $465 = $2,750 adjusted cash balance Taking It Further: When performing the bank reconciliation, it is easier to detect a company error than an error committed by the bank. For errors in recording transactions on the Cash account of the company, the source documents and data supporting the entries are readily at hand to retrace the transaction and the resulting error. During the process of matching entries appearing on the bank statement to the accounting records, research can be performed to determine that the error was in the recording of the transaction on the company books. Although rare, some errors can occur that are caused by the bank. These errors could include a transaction belonging to a different business recorded on the bank statement of the company. Determining that the error is a bank error is done by process of elimination, after determining that the error is clearly not a recording error in the books of the company. In this case, since the transaction recorded by the bank is not supported by source documents of the company, an inquiry needs to be made with the bank, particularly in the case of a deposit. If the error relates to a cheque, the paid cheque can be inspected for some clues as to the source and nature of the error.

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PROBLEM 7-11B (a)

Balance per Bank Statement Balance November 30, 2017 ................................... Add: Deposits........................................................ Less: Cheques cleared................................ $8,741 NSF cheques ................................... 520 Service charge ................................ 48 Balance, December 31, 2017 ..................................

$ 7,181 11,951 19,132 9,309 $9,823

Balance Per Books Adjusted cash balance, November 30, 2017.......... $ 6,968 Add: Cash receipts................................................. 13,741 Less: Cash payments ................................................. (11,548) Unadjusted cash balance, December 31, 2017...... $9,161

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PROBLEM 7-11B (Continued) (b) KIRAN’S KAYAKS Bank Reconciliation December 31, 2017 Balance per bank statement ........................................... Add: Deposits in transit................................................

$ 9,823 2,218 12,041

Less: Outstanding cheques No. 165 ................................................ $ 812 No. 185 .................................................... 1,165 No. 189 ................................................... 1,721 Adjusted cash balance per bank ....................................

3,698 $8,343

Balance per books .......................................................... Add: Error in cheque No. 186 for Equipment ($3,941 − $3,491) ................................................ Less: NSF cheque ............................................. $520 Error in Dec. 18 deposit of Accounts Receivable ($3,707 − $3,007) ................ 700 Bank service charges ............................. 48 Adjusted cash balance ................................................... (c)

Dec. 31 Cash .......................................... Equipment .............................

$9,161 450 9,611

1,268 $8,343

450

31 Accounts Receivable—M. Sevigny 520 Accounts Receivable ................ 700 Bank Charges Expense ............ 48 Cash.......................................

450

1,268

Check: $9,161 + $450 − $1,268 = $8,343 adjusted cash balance (d) The reported cash balance on the December 31, 2017 balance sheet is $8,343.

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PROBLEM 7-11B (Continued) Taking It Further: The bank reconciliation must be prepared before the closing entries so that all the affected account balances are brought upto-date first. The bank reconciliation is a key control to ensure all items flowing through the cash account are recorded correctly and completely. If the bank is not reconciled, closing entries may be posted and the books closed with material errors and missing items.

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PROBLEM 7-12B (a)

SOUTH HAMPTON POOL SUPPLIES Bank Reconciliation May 31, 2017 Unadjusted bank balance Add: Deposits in transit.................................... $ 2,930 Bank error cheque #3723 South Hampton Pizzeria.......... 600 Less: Outstanding cheques No. 321 ................................................ $ 653 No. 371 ................................................ 238 No. 375 ................................................ 281 No. 376 ................................................ 958 2,130 Outstanding EFT—for utilities ............... 225 Adjusted bank balance ................................................... Unadjusted cash balance ............................................... Add: EFT collections of Account Receivable ............. Less: NSF cheque ($249 + $17) ........................ $266 Error in cheque #370 for Accounts Payable ($488 – $408) ........................... 80 Error in May 15 deposit of cash sales ($2,850 – $2,580).................................... 270 Bank service charges ............................. 44 Adjusted cash balance ...................................................

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$7,350 3,530 10,880

2,355 $8,525 $8,210 975 9,185

660 $8,525

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PROBLEM 7-12B (Continued) (b)

May 31 Cash .......................................... Accounts Receivable............

975

31 Accounts Receivable ................ Accounts Payable ..................... Sales........................................... Bank Charges Expense ............ Cash.......................................

266 80 270 44

975

660

Check: $8,210 + $975 − $660 = $8,525 adjusted cash balance (c)

The reported cash balance on the May 31, 2017 balance sheet is $8,525.

Taking It Further: The prompt preparation of the bank reconciliation is a key activity for proper internal control. Assuming the appropriate segregation of duties have been followed in the assignment of the responsibility of preparing the bank reconciliation, this process allows for the detection of errors or omissions in transactions affecting the cash account. Following the reconciliation process, adjusting journal entries are prepared for the correction of errors or for transactions that have occurred in the bank account but have not yet been recorded in the cash account in the business’s books. Once completed, an added independent check of the preparation of the reconciliation is performed by the individual assigned to review and approve the bank reconciliation. Through proper segregation of the cash handling, record keeping, and bank reconciliation tasks, an additional layer of internal control becomes effective in properly controlling cash and preventing fraud.

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PROBLEM 7-13B (a)

Cash and Cash Equivalents balance: 1. 2. 3. 4. 6.

Cash on hand ..................................................... $ 2,339 Petty cash fund .................................................. 69 Bank chequing account .................................... 7,460 60-day treasury bill ............................................ 5,000 US Dollar Account ................................................. 8,555 Total ................................................................... $23,423

(b) 2. The petty cash fund should have been replenished at year-end. Since this has not happened, the company must record the $206 total expenses for the receipts in the fund. 4. The 6-month $3,000 term deposit should be reported as short-term investments, in the current assets section on the balance sheet, because its term exceeds three months. 5. The stale-dated cheque is not an asset of the business. The amount owed by the customer would be part of the accounts receivable balance. 7. The $10,500 cash received from the property sale is restricted and should be reported as either a current or noncurrent asset depending on when the property sale will be completed. 8. The $500 deposit with Ontario Hydro should be recorded as an advance or deposit in the current assets section of the balance sheet.

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PROBLEM 7-13B (Continued) Taking It Further: Cash may be reported as a non-current asset when the cash is not available to be used in the next twelve months. If the company has placed cash in trust for a property sale as in item 7 above, but the sale is not expected to occur in the next twelve months, the amount should be classified as non-current on the balance sheet. It would be important to classify this amount as non-current to assist the users of the financial statements in evaluating the liquidity of the business and measuring the amount of cash that is available to settle liabilities in the future.

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BYP 7-1 FINANCIAL REPORTING AND ANALYSIS

(a)

Cash and cash equivalents balance at: Aug. 31, 2014 $11,585,000 Aug. 31, 2013 81,266,000 (These amounts appear on the statement of financial position and the statement of cash flows)

Decrease in the cash and cash equivalent from 2013 to 2014 $69,681,000

Cash provided from operating activities for the year ended Aug. 31, 2014 $194,477,000

(b) Based on the information appearing above, we can conclude that there must have been an unusual transaction that occurred during the year for the cash and cash equivalent to decrease by 86% ($69,681,000 ÷ $81,266,000) in spite of a strong amount of cash being generated from operating activities. By scanning the statement of cash flows, we see that close to one half of one billion dollars was spent on business combinations.

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BYP 7-2 INTERPRETING FINANCIAL STATEMENTS (a)

Cash equivalents are short-term highly liquid investments that are not subject to significant changes in value and with maturities of three months or less when purchased.

(b) 2014 (1) Working capital = (2) Current ratio

$164,931 =

–

$32,677

$164,931 $32,677

= $132,254

5.0:1

2013 (1) Working capital =

$157,102 –

(2) Current ratio

$157,102 $20,818

$20,818 =

= $136,284 7.5:1

Avigilon Corporation is extremely liquid. The cash balances alone are able to cover the current liabilities and still have large remaining balances. (c)

Inventory should be excluded in the calculation of an acidtest ratio because it is considered a slower asset to turn over and ultimately convert to cash.

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BYP 7-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

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BYP 7-4 COMMUNICATION ACTIVITY Ms. L.S. Osman Tenacity Corporation Re: Internal control over your business Dear Ms. Osman: Your company has grown significantly over the past several years to the point where controls over cash must be implemented. The most significant weakness we identified was the lack of segregation of duties in the accounting department. In the past, operations were small enough that one person could perform the accounting and you could review almost all transactions. However, this is no longer the situation and the lack of segregation of duties could have adverse consequences for your business. For example, because Blake Pike is responsible for ordering parts, taking delivery, authorizing payments and signing cheques, it is possible that he could pay himself as a payee. Also, without segregating the signing process from the bank reconciliation process, any misappropriation of funds could proceed undetected. Because Blake is involved in all aspect of the handling of purchasing and paying for parts, without anyone supervising his work or checking his work, it is possible for Blake to take parts from your business and cover for the shortage in the accounting records. It is also possible for him to pay a friend for parts that have not been received.

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BYP 7-4 (Continued) To minimize the risk of misappropriation of parts and cash the following segregation of duties should be implemented: 1.

There should be segregation between the individuals who order parts, take delivery of the auto parts, authorize the payments and then sign the cheques for the payments of the auto parts. What is essential in the assignment of duties is that those individuals who have access to parts or cash should not have access to the accounting records and vice-versa.

Individuals other than those handling parts should be assigned the responsibility to sign cheques once they have checked that the parts were actually received for orders that were authorized.

An individual other than the individuals handling parts and signing cheques should be assigned the responsibility of preparing the monthly bank reconciliation.

Monthly bank reconciliations should be reviewed by a person independent of the recording process. In your case, the reviewer should probably be you.

I would be pleased to discuss these weaknesses and my recommended improvements to your system of internal control with you, at your convenience. Yours sincerely,

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BYP 7-5 “ALL ABOUT YOU” ACTIVITY (a)

Identity theft occurs when someone uses your personal information without your knowledge, for criminal purposes. The key types of information that thieves use include: 1) Social insurance card 2) Driver’s licence 3) Credit cards and PINs 4) Bank cards 5) Passport

(b) Identity thieves may get your personal information by: 1) Stealing your mail 2) Looking for personal documents in your trash 3) Tampering with ATMs or card machines in shops to steal your banking information 4) Taking personal information through public sources (e.g. telephone books and social media) (c)

Some of the signs your identity might have been stolen: 1) Bills and statements don't arrive when they are supposed to — they may have been stolen from the mailbox or someone may have changed the mailing address for your accounts. 2) You receive calls from collection agencies or creditors for an account you don't have. 3) You receive notification from your bank, credit card or online business about a new account in your name, or added charges. 4) Financial account statements show withdrawals or transfers you didn't make. 5) A creditor calls to say you've been approved or denied credit that you haven't applied for.

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BYP7-5 (Continued) (d) 1. and 2. Some of the physical and IT controls that can be implemented to safeguard your identity and some of the checks that you can do to recognize identity theft and prevent it from continuing include: 1.

4. 5.

empty your mailbox daily (if you’re going away on vacation, ask friends or trusted neighbours to pick up your mail or you can also opt for Canada Post's "hold mail" service) store ID cards and documents, such as birth certificates, social insurance numbers and passports, in a secure place such as a locked fireproof safe shred any documents and items with personal information once you no longer need them (e.g., expired ID cards, credit card offers and financial statements) check balances on your statements from banks, credit cards and companies regularly report any strange activities in your bills and statements, however minor, right away (fraudsters often steal in small amounts from many cards to evade detection) check your credit report once a year for errors or strange activities (you may also wish to consider purchasing a credit monitoring service that alerts you when there are changes to your credit report or score) avoid giving out any personal information over the telephone unless you've placed the call yourself or know the business avoid giving out sensitive personal information like a SIN number or credit card number over the telephone when you’re in a public place (you never know who may be listening) limit information on your personal cheques to no more than your name and address

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BYP7-5 (Continued) 10. 11. 12.

13.

14.

15. 16. 17.

18.

19. 20. 21.

22.

change your passwords often and make them strong avoid posting personal information online such as your date of birth and mailing address review and understand the privacy settings on all social media sites you use before posting any update (you should review the privacy settings regularly as they often change) disable the “geo-tracking” option on your phone before posting public photos on social media sites (by default, this option is enabled on most phones and it allows someone to figure out exactly where your photos were taken) remove all the information from your hard drive before you sell or dispose of your computer, phone or tablet, alternatively have the device destroyed set up email alerts that notify you each time your name is used somewhere online avoid online shopping and banking when using public WiFi as the connection may not be secure verify the security of a website before giving your credit card number or other financial information to a business, (look for a lock symbol located somewhere on the web page or make sure the URL begins with "https”) sign out of the website after completing a financial transaction online, and clear your browser’s cookies and cache ensure your computer’s anti-virus and other security features to detect malware are up-to-date avoid downloading apps or software on your phone or tablet unless they’re from official app stores or libraries understand that government organizations, financial institutions and police will never email or text to ask for your passwords or PINs never click on a link from a spam message, especially when it promises rewards, prizes or any exclusive information

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BYP 7-6 Santé Smoothie Saga Divisions of duty to strengthen internal accounting control are limited as the situation allows the involvement of only two individuals: Natalie and John. (a) 1.

Natalie and not John should perform the procedure of making deposits. If performed by John, the cash could be stolen before it is deposited in the bank. The frequency of the deposits should be increased from once a week to on an as needed basis instead of being kept in Natalie’s house, particularly if the receipts are in cash. If John was allowed to have control over the cash, he could avoid making a cash deposit and keep the cash. Later on in the record keeping for the deposits, he could cover up the fraud.

John should be assigned the task of preparing cheques with the accompanying supporting documents only when the payments are due. Natalie should be the sole signing authority on the business bank account. She should review the supporting documents and write “paid” on the invoices to avoid duplicating the payment. Natalie should mail the payments and not John. In Natalie’s absence, no payments should be made directly by John and all payments should be postponed until Natalie’s return. If John was allowed to sign cheques, he could make unauthorized payments and cover the fraud in the record keeping of the transaction.

John can record the deposits in the accounting records.

John can record the cheques in the accounting records.

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BYP7-6 (Continued) 5.

Natalie should prepare the monthly bank reconciliation. In Natalie’s absence the procedure should be postponed until her return because John could potentially cover up a mistake in the recording of transactions when preparing the bank reconciliation.

The accounting information for the business could be lost or stolen if it is all stored on John’s laptop. The accounting records should be under the care and custody of Natalie. Regular back-ups should be prepared.

John can be assigned the duty to prepare financial statement on the condition that any adjusting journal entries are approved by Natalie before they are entered in the accounting system.

John should not be able to write cheques to himself as this leaves the company vulnerable to theft. John should submit a monthly invoice to Natalie for her approval. Natalie should then write and sign the cheque. Having John perform a lot of the bookkeeping functions relating to the accounting system has the advantage of giving Natalie more time to do other tasks for her business. On the other hand, it opens up the possibility for some errors in accounting. Natalie will need to devote time for the review and approval of the accounting transactions initiated by John. In order to get better assurance that the work performed by John is proper and timely, Natalie can do spot checks on key accounts in the accounting system. She can also access the bank records on line regularly to review the activity in the business bank account and satisfy herself that all of the cash received by the business reaches the bank account and that payments out of the account are valid. This would strengthen the component of internal control for independent check for performance.

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BYP7-6 (Continued) (b) Santé Smoothie Bank Reconciliation October 31, 2017

Cash balance per bank statement.................................. Add: Deposits in transit – Oct. 28 ................................ Correction of cheque #452 ($452 - $425) ............ Less: Outstanding cheques No. 595 ................................................ No. 604 ................................................

$3,359 110 27 3,496

$238 297

Adjusted cash balance per bank ....................................

535 $2,961

Cash balance per books .................................................

$3,224

Less: EFT for Telus ........................................... $85 NSF cheque Ron Black........................... 100 NSF fee .................................................... 35 Bank service charges ............................. 13 Correction in Oct. 20 deposit of cash Sales ($125 −$155) ............................................ 30 Adjusted cash balance per books..................................

263 $2,961

Oct. 30

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7-105

85 135 13 30 263

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CHAPTER 8 Accounting for Receivables ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Questions

Brief Exercises Exercises

1. Prepare journal entries for accounts receivable transactions.

1, 2, 3, 4,

1, 2, 3, 4

1, 2, 3, 6

1, 2, 3, 8, 9

2. Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.

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

5, 6, 7, 8, 9, 10

4, 5, 6, 7, 12

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

3. Prepare journal entries for notes receivable transactions. 4. Demonstrate the presentation, analysis, and management of receivables.

14, 15, 16, 17

11, 12, 13, 14

8, 9, 10, 11

9, 10

18, 19, 20, 21, 22, 23

6, 14, 15, 16

3, 11, 12, 13

2, 3, 8, 10, 11, 12, 13

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Problems Set B

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ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A

Difficulty Level Moderate

Time Allotted (min.) 35-45

Moderate

20-30

Moderate

35-45

Moderate

15-25

Moderate

20-30

Prepare aging schedule and record bad debts and explain method. Prepare aging schedule and record bad debts.

Moderate

15-25

Determine missing amounts.

Complex

20-30

Record accounts receivable transactions and record bad debt expense. Record receivables transactions.

Simple

15-25

Moderate

35-45

Moderate

25-30

Moderate

20-30

12A

Record notes receivable transactions; show balance sheet presentation. Prepare assets section of balance sheet; calculate and interpret ratios. Calculate and interpret ratios.

Moderate

15-25

13A

Evaluate liquidity.

Moderate

15-25

Record accounts receivable transactions. Post to subsidiary and general ledgers and prepare adjusting entry. Identify impact of accounts receivable transactions; determine statement presentation Record accounts receivable and bad debts transactions; show financial statement presentation. Calculate bad debt amounts and answer questions.

Moderate

35-45

Moderate

20-30

Moderate

35-45

Moderate

15-25

Moderate

20-30

Prepare aging schedule and record bad debts and comment. Prepare aging schedule and record bad debts.

Moderate

15-25

Determine missing amounts.

Complex

20-30

Record accounts receivable transactions and record bad debt expense. Record receivables transactions.

Simple

15-25

Moderate

35-45

Moderate

30-40

Moderate

20-30

12B

Record note receivable transactions; show balance sheet presentation. Prepare assets section of balance sheet; calculate and interpret ratios. Calculate and interpret ratios.

Moderate

15-25

13B

Evaluate liquidity.

Moderate

15-25

2A 3A 4A 5A

9A 10A 11A

2B 3B 4B 5B

9B 10B 11B

Description Record accounts receivable transactions, post to subsidiary and general ledgers and prepare adjusting entry. Identify impact of accounts receivable transactions; determine statement presentation Record accounts receivable and bad debts transactions; show financial statement presentation. Calculate bad debt amounts and answer questions.

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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material Learning Objective

1. Record

accounts receivable transactions.

2. Calculate the

net realizable value of accounts receivable and account for bad debts.

3. Account for

Knowledge Q8-2 Q8-4 BE8-1

Comprehension Q8-1 Q8-3

Application BE8-2 P8-3A BE8-3 P8-8A BE8-4 P8-9A E8-1 P8-10A E8-2 P8-1B E8-3 P8-2B E8-6 P8-3B P8-1A P8-8B P8-2A P8-9B P8-10B

Analysis

Q8-8 Q8-11 Q8-13

Q8-5 Q8-6 Q8-7 Q8-9 Q8-10 Q8-11 Q8-12

BE8-5 BE8-6 BE8-7 BE8-8 BE8-9 BE8-10 E8-4 E8-5 E8-6 E8-7 E8-12 P8-1A

P8-7A P8-7B

Q8-17

Q8-14 Q8-16

Q8-23

Q8-18 Q8-19 Q8-20 Q8-21 Q8-22

Q8-15 BE8-11 BE8-12 BE8-13 BE8-14 E8-8 E8-9 BE8-6 P8-8A BE8-14 P8-10A BE5-15 P8-2B E8-3 P8-3B E8-11 P8-8B E8-12 P8-10B P8-2A P8-3A Santé Saga BYP8-6

notes receivable.

4. Demonstrate

the presentation, analysis, and management of receivables. Broadening Your Perspective

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P8-2A P8-3A P8-4A P8-5A P8-6A P8-8A P8-1B P8-2B P8-3B P8-4B P8-5B P8-6B P8-8B E8-10 E8-11 P8-9A P8-10A P8-9B P8-10B

BE8-16 E8-13 P8-11A P8-12A P8-13A P8-11B P8-12B P8-13B BYP8-1 BYP8-2

Synthesis Evaluation

BYP8-4 BYP8-5

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ANSWERS TO QUESTIONS 1.

For a service company, a receivable is recorded when service is provided on account, the performance obligation is complete, and the revenue is recognized. For a merchandising company, a receivable is recorded when the goods are delivered, fulfilling the performance obligation, revenue is recognized, and the customer is given credit terms.

Accounts receivable are amounts owed by customers on account while notes receivable are claims for which formal instruments (written instructions) of credit are issued as evidence of the debt. An account receivable is the result of a credit sale while a note receivable can result from financing a purchase, lending money, or extending an account receivable beyond normal amounts or due dates. An account receivable is usually due in a short period of time (e.g., 30 days) while a note receivable can extend for a longer period of time (e.g., 30 days to many years). An account receivable does not incur interest unless the account is overdue. A note usually bears interest for the entire term.

3. (a) In order to manage its accounts receivable, a company must be able to account for customer transactions on a customer-by-customer basis. The use of detailed customer accounts ensures that customer payments on account are properly recorded and outstanding balances are promptly and appropriately updated. Up-to-date accounts assist management with collection efforts. Detailed records also allow management to properly assess the credit status of any individual customer when deciding on credit terms and determining if allowing additional sales creates additional credit risks. (b) In order to keep track of individual customer accounts, companies use a subsidiary ledger that shows all of the sales and collection activity on a customer-by-customer basis. The accounts receivable account in the general ledger is a control account that tracks all transactions affecting accounts receivable in total for all customer accounts. That total is in turn used when preparing the balance sheet. Each transaction that affects accounts receivable is posted twice: once to the subsidiary ledger and once to the general ledger. Normally, in a manual system, entries to the subsidiary ledger are posted daily, while entries to the general ledger are summarized and posted monthly. 4.

Interest is recorded on an account receivable balance once the customer has failed to pay the account by the due date documented on the invoice. Sometimes a grace period, for example three days, is given for payments received beyond the due date, before interest is applied to the account. The rate of interest calculated must correspond to the terms given in the invoice.

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QUESTIONS (Continued) 5.

Companies decide to sell goods or services on credit because of the forces of competition. Given a choice between two suppliers, a customer will choose the supplier that offers credit over one that does not. Lost sales have a direct adverse impact on profit. Consequently, it is better for a business to offer credit and suffer some losses from accounts that need to be written off than to lose the sale outright.

I agree that Access can eliminate bad debts by making only cash sales. I agree with the sales manager that doing so might not be a prudent decision. The sales lost to competitors might cause a downturn in profit far greater than any caused by bad debt expense. Strategies, including doing a proper scrutiny of potential customers’ credit worthiness, can greatly reduce the risk of non-collection. As well, Access should closely monitor its accounts receivable to reduce further losses on suspect accounts by suspending sales.

The net realizable value of accounts receivable is the collectible amount of the accounts receivable; the amount of the cash expected from the collection of the accounts. Reporting accounts receivable at net realizable value ensures that the company is portraying its current assets accurately on its balance sheet, which indicates the company’s ability to pay its liabilities when due.

The allowance method of accounting for bad debts affects the financial statements. It leads to the accrual and recognition of bad debt expenses on the income statement. This accrual is recorded to recognize the expense in the same accounting period as the sale on account. The risk of not being able to convert the account receivable to cash that could lead to a write-off should be estimated and accrued. The second result that occurs from recording of the accrual is the creation and maintenance of a contra asset account called Allowance for Doubtful Accounts which reduces gross accounts receivable to the net realizable value of those accounts receivable reported in the balance sheet. Consequently, assets are not overstated in the balance sheet. The financial statement reader is therefore able to properly assess the liquidity of the business, and expected future collections on account of the business.

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QUESTIONS (Continued) 9.

The two approaches of estimating uncollectibles under the allowance method are (1) percentage of receivables (balance sheet approach) and (2) percentage of sales (income statement approach). Under the percentage of receivables approach, the balance in the allowance for doubtful accounts is derived either (a) by applying a percentage estimate of bad debts to total receivables or (b) from an analysis of individual customer accounts. This method emphasizes net realizable value of accounts receivable. The percentage of sales approach establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This method emphasizes the matching of expenses with revenues.

10.

The bad debts expense account is a temporary account that reflects only the current year’s estimate of expense required to bring the allowance account to its required balance. Since it is a temporary account, it is closed at the end of the fiscal year. On the other hand, the allowance account is a permanent account, which is used to value accounts receivable at net realizable value at the end of a reporting period. Entries for the accrual of bad debt expenses cause the allowance account to increase, but write offs and collections of accounts previously written off also result in decreases and increases to the allowance account, respectively.

11.

When a specific customer account is determined to be uncollectible and written off, bad debt expense does not increase. The recognition of the expense occurred earlier, when an estimate of the expense was accrued at the end of a previous reporting period. Having done so, the write-off entry is an expected outcome of what the earlier estimate predicted. Recording of a write off to the expense account would cause the expense to be double counted.

12.

An aging schedule is a summary of all accounts receivable outstanding showing a total for each age category. A percentage estimate of likely write-offs is applied to each age category to arrive at a more accurate estimate of the required balance in the allowance for doubtful accounts and consequently the net realizable value of accounts receivable. The older the account receivable, the higher the percentage of write-off applied, based on past experience.

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QUESTIONS (Continued) 13.

The first entry is made to reverse the write-off of the account receivable in order to reinstate the accounts receivable since it has been proven to be collectible. The second entry records the collection of the account receivable. Although the result of the two journal entries could be accomplished with one combined entry, it is best to have separate journal entries for the reversal and subsequent collection. By both debiting and crediting accounts receivable, the customer’s subsidiary ledger account will be updated to show the reversal of the previous write-off and the collection of the cash. This will provide more accurate information about the customer’s payment history in case that customer wants to obtain credit again in the future.

14.

A company will take a note receivable from a customer in settlement of a late accounts receivable because it provides a stronger legal claim to assets and normally includes interest. The note is further evidence and acknowledgement on the part of the customer of the amounts owed to the company.

15.

A dishonoured note is a note that is not paid in full at maturity. The payee still has a claim against the maker of the note for both the principal and the unpaid interest. If there is hope of collection, the payee can transfer the amount owing to an accounts receivable account. If there is no hope of collection, the payee should write off the note.

16.

A note receivable is a formal credit instrument and a written promise to pay a specified amount of money on demand or at a definite time. The party to whom payment is made is called the payee and the party making the promise is referred to as the maker of the note. Notes will generally carry a formal interest rate and interest is paid throughout the term of the note. An accounts receivable is a short term (usually 30 days) financing vehicle that customers can use, no interest is charged for the period before the amount is due, and no formal written document is prepared. Customers are simply granted a credit term and expected to pay the amount in the appropriate time period. Notes receivable generally have a term longer than 30 days and can have terms up to several years.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 17.

Disagree. Although the account has a normal credit balance, it is a contra asset account which should appear on the asset side of the balance sheet as a deduction from gross accounts receivable. The sub-total (accounts receivable less allowance for doubtful accounts) reports the net realizable value of the accounts receivable.

18.

Each of the major types of receivables should be identified in the balance sheet as follows: Current assets: Accounts receivable xx Less: Allowance for doubtful accounts......... xx Notes receivable .......................................... Sales taxes recoverable ............................................... Income taxes receivable ............................................... Total current assets ................................................. Long-term investments Notes receivable ...........................................................

xx xx xx xx xx xx

19.

An increase in the current ratio normally indicates an improvement in liquidity. This may not always be the case because the composition of current assets may vary. For example, increased receivables will result in a higher current asset position, and higher current ratio. However, the increase in receivables may be due to slower collections rather than improved sales. The same argument would hold true for increases in inventory balances.

20.

In order to determine if the increase in the current ratio is an improvement in financial health, other ratios the firm should consider are receivable turnover and collection period, inventory turnover, and days sales in inventory ratios.

21.

When a company’s receivable turnover is slower (fewer times), this means that the business has not been able to convert accounts receivable to cash as quickly as it did in the past. The management of receivables has therefore worsened.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 22.

The reasons companies sometimes sell their receivables are: (1) For competitive reasons, sellers of large ticket items often must provide financing to purchasers of their goods for extended periods. Selling receivables provides a more current source of cash to help finance operations. (2) Receivables may be sold because they may be the only reasonable source of cash readily at hand. (3) The collection of accounts is often time-consuming and costly. As a result, it is often easier for a retailer to sell the receivable to another party who has the necessary resources and expertise in collection matters. This will also speed up the collection of cash and possibly avoid bad debt write-offs.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 8-1 (a) (b) Trans. Accounts Notes No.: Receivable Receivable

(d) Total Liabilities

(e) Owner's Equity

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

Increase Increase Increase No effect No effect No effect

No effect Increase No effect No effect No effect Decrease

Increase No effect Increase No effect No effect Increase

Increase No effect No effect Decrease Decrease No effect

No effect No effect Increase No effect Increase No effect

BRIEF EXERCISE 8-2 (a) Sept. 1

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

16,000

(b) Sept. 10 Cash .................................................... 15,680 320 Sales Discount ($16,000 × 2%) .......... Accounts Receivable .....................

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16,000

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BRIEF EXERCISE 8-3 (a) May 1

Accounts Receivable ............................ 30,000 Sales ...............................................

(b) June 30 Accounts Receivable ......................... Interest Revenue ............................ ($30,000 × 10% × 1/12) (c) July 5

30,000

250 250

Cash ($30,000 + $250)........................... 30,250 Accounts Receivable .....................

30,250

BRIEF EXERCISE 8-4 Aug. 7

Credit Card Receivable—J. Biggs .... Sales ............................................... Cost of Goods Sold ............................ Merchandise Inventory ..................

600

15 Sales Returns and Allowances.......... Credit Card Receivable— J. Biggs

100

Credit Card Receivable— J. Biggs ... Interest Revenue ............................ [($600 - $100) × 18% × 1/12)]

7.50

Sept. 7

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8-11

600 250 250

100 7.50

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 8-5 Number of Days Outstanding 0-30 days 31-60 days 61-90 days Over 90 days Total

Accounts Receivable

% Estimated Uncollectible

$265,000 70,000 45,000 20,000 $400,000

1% 4% 10% 20%

Accounts receivable Less: Allowance for doubtful accounts Net realizable value

Estimated Uncollectible Accounts $ 2,650 2,800 4,500 4,000 $13,950 $400,000 13,950 $386,050

BRIEF EXERCISE 8-6 (a) Dec. 31

Bad Debts Expense: [$13,950 − $4,500]

$9,450

(b) GOUDREAU CO. Balance Sheet (Partial) December 31, 2017 Assets Current assets $ 90,000 Cash............................................................................. Accounts receivable ..................................... $400,000 Less: Allowance for doubtful accounts ... 13,950 386,050 Merchandise inventory............................................... 130,000 Prepaid insurance....................................................... 7,500 Total current assets ............................................... $613,550

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 8-7 (a) Apr. 30

Bad Debts Expense .............................. 13,050 [($950,000 − $60,000 − $20,000) x 1.5%] Allowance for Doubtful Accounts .

(b) Accounts receivable Less: Allowance for doubtful accounts* Net realizable value *($6,000 + $13,050)

13,050 $310,000 19,050 $290,950

BRIEF EXERCISE 8-8 1. 2. 3. 4. 5. 6.

Collect previously written off account Provide service on account Write off uncollectible account Collect accounts receivable Record bad debt expense Reverse previously written off account

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

BRIEF EXERCISE 8-9 (a)

Jan. 31 Allowance for Doubtful Accounts Accounts Receivable............

5,500 5,500

(b) Accounts receivable Less: Allowance for doubtful accounts Net realizable value

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(1) Before Write-Off $575,000

(2) After Write-Off $569,500

28,000 $547,000

22,500 $547,000

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BRIEF EXERCISE 8-10 June 4

Accounts Receivable ......................... Allowance for Doubtful Accounts.

5,500

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

5,500

5,500 5,500

BRIEF EXERCISE 8-11 Note (a) Total Interest 1. $15,000 × 6% × 9/12 = $675 2. $44,000 × 8% × 6/12 = $1,760 3. $30,000 × 7% × 15/12 = $2,625

(b) Interest 2017 $15,000 × 6% × 4/12 = $300 $44,000 × 8% × 2/12 = $587 $30,000 × 7% × 3/12 = $525

BRIEF EXERCISE 8-12 Jan. 10 Accounts Receivable—Lechner .......... 15,600 Sales ...............................................

15,600

Feb. 9 Notes Receivable—Lechner................. 15,600 Accounts Receivable—Lechner ...

15,600

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BRIEF EXERCISE 8-13 (a) June 1 Notes Receivable .................................. 27,000 Accounts Receivable..................... Oct.

27,000

1 Cash ...................................................... 27,540 Notes Receivable ........................... Interest Revenue [$27,000 × 6% × 4/12]

27,000 540

1 Accounts Receivable............................ 27,540 Notes Receivable ........................... Interest Revenue [$27,000 × 6% × 4/12]

27,000 540

1 Allowance for Doubtful Accounts ....... 27,000 Notes Receivable ...........................

27,000

(b)

Oct.

Note: The Allowance for Doubtful Accounts is used assuming Lee Company uses only one allowance account for both accounts and notes receivable.

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 8-14 (a) 2017 July 1 Oct 1

Notes Receivable ................................ 100,000 Cash................................................

100,000

Cash ........................................................ 1,000 Interest Revenue............................ ($100,000 × 4% × 3/12)

1,000

Interest Receivable ................................. 1,000 Interest Revenue............................ ($100,000 × 4% × 3/12)

1,000

(b) Dec 31

(c) Included in the current assets section of the balance sheet will be $1,000 of interest receivable and $100,000 note receivable.

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BRIEF EXERCISE 8-15 Receivables turnover $2,000,000 ÷ [($270,000 + $280,000) ÷ 2] = 7.27 times Collection period 365 days ÷ 7.27 = 50 days

BRIEF EXERCISE 8-16 (a) Receivables turnover — 2014 $3,157,241 ÷ [($60,396 + $111,034) ÷ 2] = 36.83 times Collection period — 2014 365 days ÷ 36.83 = 9.9 days Receivables turnover — 2013 $2,954,777 ÷ [($111,034 + $117,533) ÷ 2] = 25.85 times Collection period — 2013 365 days ÷ 25.85 = 14.1 days (b) The company’s receivables turnover and collection period have improved dramatically in 2014, and so the company’s liquidity should have improved.

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 8-1 June 3 Credit Card Receivable—Kidd .................. 1,050 Sales ......................................................

1,050

6 Cash ........................................................... Credit Card Expense [$840 × 2.5%] .......... Sales ......................................................

819 21 840

9 Accounts Receivable—Montpetit ............. Sales ......................................................

421 421

19 Cash .......................................................... 229.50 0.50 Debit Card Expense ................................. 230.00 Sales ...................................................... 20

Cash ........................................................... Credit Card Receivable—Kidd .............

315

23 Accounts Receivable—Montpetit ............. Sales ......................................................

498

421

Cash ........................................................... Accounts Receivable— Montpetit .......

315

498

421

30 Cash ......................................................... 409.50 Credit Card Expense [$420 × 2.5%] .......... 10.50 420.00 Sales ......................................................

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EXERCISE 8-2 (a) Jan.

6 Accounts Receivable—Pryor.................... 7,000 Sales ......................................................

7,000

16 Cash ........................................................... 6,860 Sales Discounts ($7,000 x 2%) ................. 140 Accounts Receivable—Pryor ...............

7,000

Jan. 10 Accounts Receivable—Laskowski ........... 9,000 Sales ......................................................

9,000

15 Sales Returns and Allowances................. Accounts Receivable—Laskowski ......

600 600

Mar. 10 Accounts Receivable—Laskowski ........... Interest Revenue .................................. [($9,000 − $600) × 1%]

(b)

Mar. 31 Cash ........................................................... 8,484 Accounts Receivable—Laskowski .......... ($9,000 - $600 + $84)

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Accounting Principles, Seventh Canadian Edition

EXERCISE 8-3 (a) Oct. 15 20

Credit Card Receivable ............................. 15,000 Service Revenue .................................. 15,000 Cash [$7,500 − $263] ................................. 7,237 263 Credit Card Expense [$7,500 × 3.5%] ....... Service Revenue ..................................

30 Accounts Receivable ................................ Service Revenue ............................ 31

7,500

2,000 2,000

Cash [$5,000 − $50] ................................... 4,950 50 Debit Card Expense [100 × $0.50] ............ Service Revenue ...................................

5,000

Nov. 15 Cash ........................................................... 15,000 Credit Card Receivable......................... 15,000

(b) CASA GARAGE CO. Income Statement Two Months Ended November 30, 2017 Service revenue............................................................. Operating expenses Salaries expense...................................... $5,000 Rent expense ........................................... 4,000 Supplies expense .................................... 500 Credit and debit card expense ................ 313 Profit...............................................................................

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$ 29,500

9,813 $ 19,687

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Accounting Principles, Seventh Canadian Edition

EXERCISE 8-4 (a) (1)

Dec. 31 Bad Debts Expense ..................... 15,800 Allowance for Doubtful Accounts [($180,000 x 10%) − $2,200]

(2)

15,800

31 Bad Debts Expense ..................... 20,250 Allowance for Doubtful Accounts 20,250 [($1,420,000 − $50,000 − $20,000) x 1.5%]

(b) Accounts receivable Less: Allowance for doubtful accounts Net realizable value

(1) $180,000

(2) $180,000

18,000* $162,000

22,450** $157,550

*$18,000 = $2,200 + $15,800 **$22,450 = $2,200 + $20,250 (c) (1) Bad debt expense = $18,000 + $2,600 = $20,600 (2) Bad debt expense = $20,250 (1) Accounts receivable $180,000 Less: Allowance for doubtful 18,000* accounts Net realizable value $162,000

(2) $180,000 17,650** $162,350

*$18,000 = −$2,600 + $20,600 **$17,650 = −$2,600 + $20,250

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EXERCISE 8-5 (a) Age of Accounts 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding

Amount $170,000 35,700 20,000 15,300

% 1 10 25 60

Estimated Uncollectible $1,700 3,570 5,000 9,180 $19,450

(b)

Accounts receivable Less: Allowance for doubtful accounts Net realizable value

(c)

Sept. 30 Bad Debts Expense ..................... 20,850 Allowance for Doubtful Accounts [$19,450 + $1,400]

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$241,000 19,450 $221,550

20,850

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Accounting Principles, Seventh Canadian Edition

EXERCISE 8-6 (a) and (b) Item (a) $45,000 Amount of credit sales in sales account (b)

$800

(c)

$ 15,000 +45,000 −800 −35,200 $24,000

Opening balance Item (a) Sales on account Item (b) Write offs of accounts receivable Collection on account (given) Ending balance

(d)

$1,200 −800 −2,400

Opening balance Write offs of accounts receivable (given) Required ending balance in Allowance (Item (c) $24,000 x 10%) Adjustment to allowance and bad debt expense recorded

$-2,000

Write offs of accounts receivable

(e) $2,400 Required balance based on aging 10% of (c)

Entries (not required) with description: (a)

(b)

(d)

(c)

Accounts Receivable ......................... 45,000 Sales ............................................... Sales on account for the year Allowance for Doubtful Accounts ..... Accounts Receivable ..................... Write-off of accounts receivable

45,000

800

Bad Debts Expense ............................ 2,000 Allowance for Doubtful Accounts. To record estimate of uncollectible accounts.

800

2,000

Cash collected $35,200 (credit entry to accounts receivable).

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Accounting Principles, Seventh Canadian Edition

EXERCISE 8-7 (a) 2016 Dec. 31 Bad Debts Expense [(5% × $650,000) + $2,300] ................. Allowance for Doubtful Accounts.

34,800 34,800

2017 Mar. 5 Allowance for Doubtful Accounts ..... Accounts Receivable—Mirza ........

3,700 3,700

5 Allowance for Doubtful Accounts ..... Accounts Receivable—Wight .......

6,900

June 6 Accounts Receivable—Wight ............ Allowance for Doubtful Accounts.

6,900

6 Cash .................................................... Accounts Receivable—Wight .......

6,900

(b)

Date 2016 Dec. 31 31 2017 Mar. 5 5 June 6

General Ledger Allowance for Doubtful Accounts Explanation Ref. Debit Credit Balance unadjusted AJE

DR 2,300 34,800 32,500

Write off Mirza Write off Wight Collection of Wight

3,700 6,900 6,900

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Balance

8-24

28,800 21,900 28,800

Before Recovery $641,000

After Recovery $641,000

21,900 $619,100

28,800 $612,200

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Accounting Principles, Seventh Canadian Edition

EXERCISE 8-8 Using the equation, Interest (I) = Principal (P) x Rate (R) x Time (T): (a)

Solve for P $12,000 = P x 6% x 2 $12,000 = P x 0.12 $12,000 ÷ 0.12 = P x 0.12 ÷ 0.12 P = $12,000 ÷ 0.12 P = $100,000 (b) Solve for R $4,800 = $120,000 x R x (6 ÷ 12) $4,800 = $60,000 x R $4,800 ÷ $60,000 = $60,000 x R ÷ $60,000 R = $4,800 ÷ $60,000 R = 0.08 or 8% (c)

Solve for I I = $180,000 × 10% × 3/12 I = $4,500

(d)

Total interest on the note is $4,500 ($180,000 × 10% × 3/12 – same in (c) above)

(e)

Solve for I I = $120,000 x 0.08 x (5/12) I = $4,000 OR $4,800 ÷ 6 × 5 = $4,000

(f)

Solve for I I = $100,000 x 0.06 x (2/12) I = $1,000 OR $12,000 ÷ 24 × 2 = $1,000

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EXERCISE 8-9 Using the equation = Interest (I) = Principal (P) x Rate (R) x Time (T): (a) Solve for P $450 = P x 9% x (4 ÷ 12) $450 = P x 0.03 $450 ÷ .03 = (P x 0.03) ÷ 0.03 P = $450 ÷ .03 P = $15,000 (b) Solve for R $1,500 = $60,000 x R x (5 ÷ 12) $1,500 = $25,000 x R $1,500 ÷ $25,000 = ($25,000 x R) ÷ $25,000 R = $1,500 ÷ $25,000 R = 0.06 or 6% (c) Solve for I I = $30,000 x 10% x (6 ÷ 12) I = $1,500 (d) Solve for I I = $45,000 X 8% x (4 ÷ 12) I = $1,200

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EXERCISE 8-10 Nov. 1 Notes Receivable—Morgan ............... 60,000 Cash................................................ 15

Dec. 1

Accounts Receivable—Giorgi ........... 12,000 Sales ............................................... Cost of Goods Sold ............................ 7,500 Merchandise Inventory .................. Notes Receivable—Wrightman.......... 21,000 Sales ............................................... Cost of Goods Sold ............................ 14,000 Merchandise Inventory ..................

15 Notes Receivable—Giorgi.................. Accounts Receivable—Giorgi ....... Dec. 31

Interest Receivable............................. Interest Revenue* ..........................

*Calculation of interest revenue: Morgan: $60,000 × 8% × 2/12 Wrightman: $21,000 × 6% × 1/12 Giorgi: $12,000 × 7% × 0.5/12 Total accrued interest

7,500

21,000 14,000

12,000 940 940

$800 105 35 $940

June 15 Accounts Receivable—Giorgi ........... 12,420 Interest Receivable ........................ Interest Revenue [$12,000 × 7% × 5.5/12] .................. Notes Receivable—Giorgi .............

8-27

12,000

Mar. 1 Cash ...................................................... 21,315 Interest Receivable ........................ Interest Revenue [$21,000 × 6% × 2/12] ..................... Notes Receivable—Wright ............

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60,000

105 210 21,000

35 385 12,000

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EXERCISE 8-11 May

Notes Receivable—Jioux ................... 15,000 Accounts Receivable—Jioux ........

June 30 Interest Receivable............................. Interest Revenue [$15,000 × 6% × 2/12] .....................

150

July 31 Notes Receivable—Irvine................... Cash................................................

2,000

15,000

150

Aug. 31 Cash .................................................... Interest Revenue ($2,000 × 5% × 1/12)

2,000 8 8

Sept. 30 Cash......................................................... 2,008 Interest Revenue ($2,000 × 5% × 1/12) Notes Receivable—Irvine ..............

8 2,000

Nov. 1 Allowance for Doubtful Accounts........ 15,150 Notes Receivable—Jioux .............. Interest receivable .........................

15,000 150

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EXERCISE 8-12 (a)

Total interest revenue for the year ended December 31, 2017 − $1,448 calculated as follows: Note 1. 2. 3.

Calculation

Interest Revenue $15,000 × 4% × 4/12 = $ 200 $32,000 × 4% × 11/12 = 1,173 $9,000 × 5% × 2/12 = 75 Total $1,448

Interest Revenue is reported under other revenues on the income statement. (b)

All notes receivable will be reported under the current asset section of the balance sheet because they are all due within the next 12 months from the balance sheet date for a total of $56,000. Interest receivable is also due within the next 12 months of the balance sheet date and therefore is reported under the current asset section of the balance sheet in the amount of $1,448.

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EXERCISE 8-13 (a)

Dec. 31

Bad Debts Expense .............................. 28,000 Allowance for Doubtful Accounts. ($700,000 × 4%)

28,000

(b)

NICHOLAY INDUSTRIES Balance Sheet (Partial) December 31, 2017

Assets Current assets Cash.......................................................................... $ 40,000 Short-term investments........................................... 50,000 Accounts receivable ..................................$700,000 Less: Allowance for doubtful accounts . 28,000 672,000 Notes receivable, due April 10, 2018 ...................... 45,000 Interest receivable ................................................... 1,125 Merchandise inventory............................................ 325,000 Prepaid insurance.................................................... 8,000 Total current assets ............................................ $1,141,125 (c) Receivables Turnover:

($4,000,000 − $100,000) ÷ [($700,000 + $0*) ÷ 2] = 11.1 times *Accounts receivable at the beginning of the year would have been $0 because this was the first year of business. Average Collection Period: 365 days ÷ 11.1 = 32.9 days

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EXERCISE 8-14 (a)

Current Ratio: 2014: $2,066 ÷ $2,201 = 0.94 2013: $1,977 ÷ $2,498 = 0.79

(b) Receivables Turnover: 2014: $12,134 ÷ [($937 + $822) ÷ 2] = 13.80 times 2013: $10,575 ÷ [($822 + $841) ÷ 2] = 12.72 times Average Collection Period: 2014: 365 days ÷ 13.80 = 26.5 days 2013: 365 days ÷ 12.72 = 28.7 days (c)

Both liquidity and the management of accounts receivable have improved. For liquidity, the current ratio is low but has increased significantly from 0.79 to 0.94. For the management of accounts receivable, the improvement is evidenced by the decrease in the average collection period from 28.7 days to 26.5 days and the increase in the receivables turnover from 12.72 times to 13.80 times.

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SOLUTIONS TO PROBLEMS PROBLEM 8-1A (a) Jan. 3

25 26

Cash ........................................................ 18,000 Accounts Receivable—Brown’s Rep.

18,000

Accounts Receivable—Custom Rep... Allowance for Doubtful Accounts.

1,400

Cash .......................................................... 1,400 Accounts Receivable—Custom Rep.

1,400

Accounts Receivable—Jen’s Auto Body 3,800 Sales ...............................................

3,800

Cash .......................................................... 1,500 Sales ...............................................

1,500

Sales Returns and Allowances ........... 800 Accounts Receivable—Jen’s Auto Body

800

Cash ........................................................ 13,200 Accounts Receivable—Luxury Autos

13,200

Cash ........................................................ 25,000 Accounts Receivable—Jen’s Auto Body

25,000

Accounts Receivable—Brown’s Repair 5,600 Sales ...............................................

5,600

Cash (Visa) ............................................. 10,000 Sales ...............................................

10,000

Accounts Receivable—Luxury Autos. 18,000 Sales ...............................................

18,000

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PROBLEM 8-1A (Continued) (a) (Continued) Jan. 31 Allowance for Doubtful Accounts ........... 3,800 Accounts Receivable—Best Auto Rep. (b) Dec. 31 Bal. Jan. 4 Jan. 8 Jan. 23 Jan. 26

Jan. 31 Bal.

Jan. 31

Accounts Receivable 75,000 Jan. 3 1,400 Jan. 4 3,800 Jan. 18 5,600 Jan. 19 18,000 Jan. 20 Jan. 31

18,000 1,400 800 13,200 25,000 3,800

41,600

Allowance for Doubtful Accounts Dec. 31 Bal. 3,800 Jan. 4 Unadj. Bal.

Accounts Receivable—Best Auto Repair Dec. 31 Bal. 3,800 Jan. 31 Jan. 31 Bal. 0 Accounts Receivable—Brown’s Repair Dec. 31 Bal. 23,000 Jan. 3 Jan. 23 5,600 Jan. 31 Bal. 10,600 Accounts Receivable—Custom Repair Dec. 31 Bal. 0 Jan. 4 Jan. 4 1,400 Jan. 31 Bal. 0

Solutions Manual .

3,800

8-33

3,750 1,400 1,350

3,800

18,000

1,400

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Accounting Principles, Seventh Canadian Edition

PROBLEM 8-1A (Continued) (b) (Continued) Accounts Receivable—Jen’s Auto Body Dec. 31 Bal. 35,000 Jan. 18 Jan. 8 3,800 Jan. 20 Jan. 31 Bal. 13,000 Accounts Receivable—Luxury Autos Dec. 31 Bal. 13,200 Jan. 19 Jan. 26 18,000 Jan. 31 Bal. 18,000 (c)

(d)

Bad Debts Expense ........................................ 2,810 Allowance for Doubtful Accounts [($41,600 × 10%) − $1,350] ..................... Best Auto Repair Brown’s Repair Custom Repair Jen’s Auto Body Luxury Autos Total subsidiary ledgers

800 25,000

13,200

2,810

$ 0 10,600 0 13,000 18,000 $41,600

Balance equals control account of $41,600 Taking It Further: While discontinuing to offer credit to customers and insisting that customers use only credit or debit cards and cash will essentially eliminate the risk of non-collection and speed up collection of cash, it will have adverse effects. Customers will likely decide to buy goods or services from another supplier who does offer credit. In addition, credit and debit cards will bring about fees expenses. Losing a sale can bring adverse consequences to profitability.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 8-2A (a) Transaction Cash Sept. 1. NE 2. NE 3. +$59,200 4. NE 5. NE Oct. 1. NE 2. +$350 3. +$58,500 4. NE 5. NE 6. NE

(1) (2)

Acc. Receiv.

Allow. for Doubt. Accts.

+$56,300 −$900 −$59,200 +$745 NE

NE −$25,335 NE +$400 NE NE NE NE (1)+$1,108 NE

+$30,965 +$30,965 −$500 −$500 NE NE +$745 +$745 −$1,108 −$1,108

+$63,900 NE −$58,500 −$7,500 +$710 NE

NE −$28,700 +$350 NE NE NE −$7,500 NE NE NE (2)+$5,864 NE

+$35,200 +$35,200 NE NE NE NE NE NE +$710 +$710 −$5,864 −$5,864

Invent.

Total Assets

Owner's Equity

($56,300 − $900) x 2% = $1,108 Bad Debts Expense = [($70,055 x 4%) + $3,062] = $5,864 (See Accounts Receivable and Allowance for Doubtful Accounts balances in ledger that follows.)

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PROBLEM 8-2A (Continued) (a) (Continued) Ledgers not required, used for accumulating balances

Date Sept. 1. 2. 3. 4. Oct. 1. 2. 2. 3. 4. 5.

Date Sept. 5. Oct. 2. 4. 6.

Accounts Receivable Explanation Ref. Debit Opening Balance Sales Returns Collections Interest charges

Credit

 56,300 900 59,200 745

Sales Recovery Collection recovery Collections Write offs Interest charges

63,900 350 350 58,500 7,500 710

Allowance for Doubtful Accounts Explanation Ref. Debit Credit Opening Balance Bad debts expense

 1,108

Recovery Write offs Bad debts expense

350 7,500 5,864

Balance 74,500 130,800 129,900 70,700 71,445 135,345 135,695 135,345 76,845 69,345 70,055

Balance 2,980 4,088 4,438 3,062Dr. 2,802

(b)

Current assets: Accounts receivable.............................. Less: Allowance for doubtful accounts

$70,055 2,802 $67,253

(c)

Bad debts expense: $16,832 ($9,860 + $1,108 + $5,864)

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PROBLEM 8-2A (Continued) Taking It Further: Cotton Company can use the percentage of sales method at month-end periods to accrue bad debt expenses and then use the percentage of accounts receivable method at the end of the fiscal year because the interim statements are not distributed to anyone outside of the company. The percentage of sales method is easy to administer and provides an adequate estimate for interim internal financial statement reporting. For the fiscal year end, the percentage of receivables method, a balance sheet approach, shows the accounts receivable at their net realizable value.

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PROBLEM 8-3A (a)

(b)

(c)

Accounts Receivable.................................. 400,000 Sales .......................................................

400,000

Cash ............................................................ 361,500 Accounts Receivable.............................

361,500

Allowance for Doubtful Accounts ............. 10,500 Accounts Receivable.............................

10,500

Accounts Receivable ................................. Allowance for Doubtful Accounts ........

1,750 1,750

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

1,750 1,750

Posting to accounts not required:

Date

Accounts Receivable Explanation Ref. Debit

Credit

Balance

361,500 10,500 1,750

100,000 500,000 138,500 128,000 129,750 128,000

Allowance for Doubtful Accounts Explanation Ref. Debit Credit

Balance

 Balance Sales 400,000 Collections Write offs Reverse write off 1,750 Coll. of prev. write off

Date

Balance Write offs Reverse write off Bad debts expense

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 10,500 (d)

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1,750 9,750

7,000 3,500 Dr. 1,750 Dr. 8,000

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Accounting Principles, Seventh Canadian Edition

PROBLEM 8-3A (Continued) (d) Bad Debts Expense ($8,000 + $1,750) ........... 9,750 Allowance for Doubtful Accounts ........

9,750

(e) Current assets: Accounts receivable ................................. $128,000 Less: Allowance for doubtful accounts 8,000

$120,000

(f)

The bad debts expense on the income statement for the period would be $9,750.

Taking It Further: When a specific customer account is determined to be uncollectible and written off, bad debt expense does not increase. Recognition of the expense occurred earlier, when an estimate of the expense was accrued at the end of a reporting period. Having done so, the write-off entry is an expected outcome of what the earlier estimate predicted. Recording a write off to the expense account would cause the expense to be double counted.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 8-4A (a)

$19,000 [$24,000 − ($20,000 − $17,500 + $2,500)]

(b) $22,500 ($1,000,000 x 2.25%) The balance in the allowance is not taken into consideration when using the percentage of sales approach. (c)

$27,000 [$24,000 − ($12,000 − $17,500 + $2,500)]

(d) The write off of an uncollectible account does not affect the current year’s bad debts expense at the time of recording the write off (debit the allowance and credit the accounts receivable). Accounts receivable is decreased and the allowance for doubtful accounts is also decreased, resulting in no change in the amount of the net realizable value of accounts receivable. However, when using the percentage of receivables approach, the amount of the bad debt expense recorded at the end of the period will be impacted by the amount of accounts receivable written off during the period. Since write offs decrease the allowance for doubtful accounts and the allowance account needs to be adjusted to the required balance at the end of the accounting period, the more the allowance account is reduced by write offs during the year, the higher the expense for the period will need to be in order to restore the allowance account to the required balance. If write offs during the accounting period are very low, then the expense should also be low for the accounting period.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 8-4A (Continued) (e)

The collection of an account previously written off will decrease the net realizable value of accounts receivable. The collection involves two entries; the first entry reverses the original write off and the second entry records a collection on account. This first entry increases the accounts receivable and the allowance for doubtful accounts, and so has no effect on the net realizable value of accounts receivable. But, the second entry decreases the accounts receivable balance, so the net realizable value of the receivables decreases.

Taking It Further: Hohenberger could speed up collection of accounts receivable by either borrowing from a bank using the accounts receivable as collateral or by selling the accounts receivable to a finance company that specializes in collecting these amounts. The advantages to each approach is a ready supply of cash that can be used in operations. Hohenberger would not have to wait 30 or more days for cash to be collected. In the case of selling accounts receivable, Hohenberger will not have to incur the time and cost involved to collect from customers. The disadvantages of borrowing from the bank are: Interest will have to be paid on the loan Banks are normally only willing to loan up to 75% of accounts receivable amounts and will not loan money on old outstanding accounts. The disadvantages of selling the accounts receivable to a finance company are: The amount of cash received in exchange for the accounts receivable will be discounted (reduced) by a fee charged by the finance company. So the amount of cash received will be less than the balance of accounts receivable. The finance company may be able to recover from Hohenberger any amounts that their customers ultimately did not pay.

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PROBLEM 8-4A (Continued) -

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Customers may not be satisfied with the arrangement, i.e., having to pay a different company, and may take their business elsewhere.

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PROBLEM 8-5A (a)

Total Estimated percentage uncollectible Estimated uncollectible accounts

Total $640,000

$36,200

0-30 31-60 $360,000 $140,000

61-90 $100,000

91-120 $40,000

10%

30%

$7,200

$7,000

$10,000

$12,000

(b)

Bad Debts Expense .................................. 39,200 Allowance for Doubtful Accounts [$36,200 + $3,000] .......................... 39,200

(c)

Allowance for Doubtful Accounts ........... 18,000 Accounts Receivable .................... 18,000

(d)

Accounts Receivable................................ Allowance for Doubtful Accounts

5,500

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

4,500

(e)

5,500 4,500

When the year-end adjusting journal entry is prepared, bad debts expense is increased and the allowance for doubtful accounts is also increased. This results in recording bad debts expenses in the same period as the sales to which they relate, which means the expense has been matched with the revenue.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 8-5A (Continued) (f)

The allowance method requires the accrual of bad debt expenses in the period in which the sales revenue is recorded. The Allowance for Doubtful Accounts account is a contra asset to accounts receivable. Its purpose is to reduce the value of the accounts receivable asset to its net realizable value reported on the balance sheet.

Taking It Further: The advantage of using an aging schedule to estimate uncollectible accounts is the amount calculated is much more sensitive to the length of time the receivable has been outstanding. The disadvantage of using an aging schedule (as compared to estimating uncollectible accounts as a percentage of total receivables) is it can be time consuming to gather the information if the accounting system being used does not calculate an aging of the accounts receivable.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 8-6A

(a)

2016 # of Days Outstanding 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding

2017 # of Days Outstanding 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding

(b)

Amount $145,000 63,000 38,000 24,000 $270,000

Amount $115,000 35,000 45,000 80,000 $275,000

% 3 6 12 25

Estimated Uncollectible $ 4,350 3,780 4,560 6,000 $18,690

% 3 6 12 25

Estimated Uncollectible $ 3,450 2,100 5,400 20,000 $30,950

2016 Accounts Receivable................................................. $270,000 Less: Allowance for Doubtful Accounts .................. 18,690 Net Realizable Value .................................................. $251,310 2017 Accounts Receivable................................................. $275,000 Less: Allowance for Doubtful Accounts .................. 30,950 Net Realizable Value .................................................. $244,050

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PROBLEM 8-6A (Continued) (c) 1.

Bad Debts Expense .................................... Allowance for Doubtful Accounts [$18,690 − $6,600] ..................................

12,090 12,090

Allowance for Doubtful Accounts ............. 23,500 Accounts Receivable.............................

23,500

Accounts Receivable ................................. Allowance for Doubtful Accounts ........

2,200 2,200

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

2,200

Bad Debts Expense .................................... 33,560 Allowance for Doubtful Accounts ........ [$30,950 − ($18,690 − $23,500 + $2,200)]

2,200

33,560

Taking It Further: Although accounts receivable have only increased $5,000 or 2% ($275,000 − $270,000), the estimated uncollectible amounts have increased by $12,260 or 66% ($30,950 − $18,690). The most significant increase occurred in the over 90 day balance where estimated uncollectible accounts rose from $24,000 to $80,000, demonstrating a dramatic deterioration in the age of the accounts receivable, resulting in a much larger allowance for doubtful accounts.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 8-7A

Beg. Bal. Sales End. Bal.

Accounts Receivable 845,000 Note 1 (b) 4,200 (a) 5,370,000 Write offs (c) 50,400 4,200 Collections (d) 5,237,100 927,500

Note 1 Collection of account previously written off

Write off

Allowance for Doubtful Accounts Beg. Bal. 76,050 Rev. write off (b) 4,200 50,400 Bad debts (e) 53,700 End. Bal. 83,550 Sales Sales

5,370,000

Bad Debts Expense (e) 53,700 Accounts Receivable (a) ............................... 5,370,000 Sales ....................................................... Accounts Receivable.............................................. 4,200 Allowance for Doubtful Accounts (b)........ Cash ........................................................................ 4,200 Accounts Receivable (b) ............................ Collection of previously written off account Allowance for Doubtful Accounts ............. Accounts Receivable (c) .......................

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5,370,000 4,200 4,200

50,400 50,400

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Accounting Principles, Seventh Canadian Edition

PROBLEM 8-7A (Continued) Bad Debts Expense (e) .............................. Allowance for Doubtful Accounts (e) ... (Sales $5,370,000 x 1% = $53,700)

53,700 53,700

Cash ............................................................ 5,237,100 Accounts Receivable (f) ........................ 5,237,100 Force in account receivables account: ($845,000 + $5,370,000 + $4,200 − $50,400 − $4,200 − $927,500 = $5,237,100)

Taking It Further: Bad debt expense is a temporary account reported on the income statement. The balance is closed to Income Summary at the end of the accounting period. Allowance for doubtful accounts is a permanent account which is a contra asset to accounts receivable. Its purpose is to reduce the value of the accounts receivable asset to its net realizable value.

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PROBLEM 849A (a) # of Days Past due Not yet due 1-30 days past due 31-60 days past due 61-90 days past due Over 90 days past due

(b)

Amount $137,000 29,000 24,000 30,000 44,000 $264,000

% 2 5 10 24 50

Estimated Uncollectible $ 2,740 1,450 2,400 7,200 22,000 $35,790

Bad Debts Expense ...................................... 25,790 Allowance for Doubtful Accounts ........ ($35,790 − $10,000) =$25,790

25,790

(c)

Current assets: Accounts receivable .................................. $264,000 Less: Allowance for doubtful accounts 35,790 $228,210 Taking It Further: By increasing the amount of credit checking, Kimler’s credit manager should be able to reduce the risk of not being able to collect accounts receivable but he won’t be able to eliminate the risk completely. Consequently, so long as Kimler sells on account, it will have bad debts. The risk of non-collection is not always apparent when first taking on a customer. Financial difficulties for a customer can develop over time or from an unpredictable, sudden event.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 8-9A

Jan.

Accounts Receivable —Sapounas .... 24,000 Sales ............................................... Cost of Goods Sold ............................ 14,400 Merchandise Inventory ..................

Feb. 1 Notes Receivable—Sapounas ........... 24,000 Accounts Receivable —Sapounas 15

Notes Receivable—Garrison ............. 15,000 Sales ............................................... Cost of Goods Sold ............................ 9,000 Merchandise Inventory ..................

Mar. 15

Accounts Receivable—Hoffman ....... 12,000 Sales ............................................... Cost of Goods Sold ............................ 7,200 Merchandise Inventory ..................

Apr. 15

Cash .................................................... 12,000 Accounts Receivable—Hoffman ...

May 15 Cash .................................................... Notes Receivable—Garrison ......... Interest Revenue [$15,000 × 5% × 3/12] ..................... 31

July

1 Allowance for Doubtful Accounts........ 24,400 Notes Receivable—Sapounas....... Interest Receivable ........................

8-50

14,400

24,000

15,000 9,000

12,000 7,200

12,000

15,188

Interest Receivable............................. 400 Interest Revenue ............................ (Sapounas note $24,000 × 5% × 4/12 = $400)

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24,000

15,000 188 400

24,000 400

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PROBLEM 8-9A (Continued)

July 13

Notes Receivable—Weber ................. Sales ............................................... Cost of Goods Sold ............................ Merchandise Inventory ..................

6,000

Oct. 13 Accounts Receivable— Weber. ......... Notes Receivable— Weber............ Interest Revenue ($6,000 × 7% × 3/12) .......................

6,105

6,000 3,600 3,600

6,000 105

Taking It Further: The advantages of a note receivable compared to accounts receivable are that a note receivable gives a stronger legal claim to assets and includes interest. The disadvantage of a note receivable is that it postpones the collection of cash. The delay in collection can add to the risk of non-collection as time goes by if the financial condition of the customer is deteriorating further. Although the note can provide interest revenue if collected, if the note is dishonoured, neither the principal nor the interest is collected.

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PROBLEM 8-10A

(a)

Oct. 31 Accounts Receivable—Fournier Notes Receivable—Fournier Interest Receivable ($9,000 × 9% × 1/12) .............. Interest Revenue ($9,000 × 9% × 1/12) ..............

9,136 9,000 68 68

31 Cash ........................................... 12,240 Notes Receivable—Leroy ..... Interest Receivable ($12,000 × 8% × 2/12) ............ Interest Revenue ($12,000 × 8% × 1/12) ............ Oct. 31

Interest Receivable.................... 93 Interest Revenue................... (Nesbitt note $16,000 × 7% × 1/12 = $ 93)

12,000 160 80 93

(b) Notes Receivable Explanation Ref. Debit

Date Oct.

1 31 31

Oct.

1 31 31 31

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Balance

9,000 12,000

37,000 28,000 16,000

Credit

Balance

68 160

228 160 0 93



Balance

Interest Receivable Explanation Ref. Debit

Date

Credit



Balance

Adjusting entry

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PROBLEM 8-10A (Continued) (c) FARWELL COMPANY Balance Sheet (partial) October 31, 2017

Assets Current assets Interest receivable ......................................................

$93

Long-term investments Notes receivable ............................................................. $16,000

(d)

Oct. 31 Allowance for Doubtful Accounts Notes Receivable—Fournier . Interest Receivable ($9,000 × 9% × 1/12) ...............

9,068 9,000 68

The interest previously accrued on this note should be written off, as well as the note itself. Also, no interest would be accrued for October. Taking It Further: The Fournier Co. note carries a higher interest rate as it is likely that Fournier has a poor credit rating and represents a collection risk that is higher than the average customer. Companies and banks will often charge a higher rate of interest to customers who have a history of defaulting on their loans – this is an attempt to compensate for the higher risk taken when loaning to customers with poor credit ratings.

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PROBLEM 8-11A (a) JENSEN COMPANY Balance Sheet (Partial) December 31, 2017 (in thousands)

Assets Current assets Cash............................................................................... $ 395.6 Short-term investments................................................ 194.9 Notes receivable ........................................................... 96.0 Accounts receivable ....................................... $590.4 Less: Allowance for doubtful accounts ........ 35.4 555.0 Merchandise inventory................................................. 630.9 Prepaid expenses ......................................................... 20.1 Supplies ........................................................................... 21.7 Total current assets ......................................................... 1,914.2 Long-term investments Notes receivable ......................................................... 191.1 Property, plant, and equipment Equipment ......................................................$1,732.8 Less: Accumulated depreciation ................ 858.7 874.1 Total assets ............................................................... $2,979.4

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PROBLEM 8-11A (Continued) (b) 2017 Receivables turnover:

2016

($4,565.5 − $31.3) ($590.4 + $611.1) ÷ 2 = 7.5

= 8.3*

365 ÷ 7.5 = 48.7 days

365 ÷ 8.3 = 44 days

*Given in the problem Average collection period:

Jensen’s receivables turnover ratio was lower in 2017, which means that Jensen was taking a little longer in 2017 in turning receivables into cash. The increase average collection period from 2016 to 2017 is consistent with the decrease in the receivables turnover ratio clearly indicating that it is taking a little longer to turn accounts receivable into cash. Taking It Further: When analyzing the accounts receivable turnover and average collection period, consideration should be given to any changes in policy implemented by management during 2017 with respect to granting credit or offering discounts to their customers. As well, sales of accounts receivable during the year would also affect the receivables turnover. Other ratios that would be useful in assessing the accounts receivable turnover and average collection period are the current ratio and inventory turnover. Jensen should also look at average turnover and collection periods in their industry. By comparing to their industry, companies have a benchmark to compare against to assess their own performance.

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PROBLEM 8-12A (a) Rogers

Shaw

($ in millions) Beginning of year Accounts receivable (net) Add: allowance balance Gross accounts receivable

$1,509 104 $1,613

$486 27 $513

End of year Accounts receivable (net) Add: allowance balance Gross accounts receivable

$1,591 98 $1,689

$493 32 $525

Receivables turnover:

Rogers

Shaw

$12,850 ($1,613 + $1,689) ÷ 2

$5,241 ($513 + $525) ÷ 2

= 7.8 Average collection period:

365 ÷ 7.8 = 47 days

= 10.1 365 ÷ 10.1 = 36 days

(b) Shaw’s receivables turnover is 29% [(10.1 – 7.8) ÷ 7.8] higher than Rogers which means Shaw was more efficient than Rogers in collecting its receivables. Taking It Further: Selling accounts receivable will increase the receivable turnover ratio and will reduce the average collection period. Even though both companies follow the same practice, it would make comparisons between the two companies difficult because of the amount and the timing of the accounts receivable being sold.

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PROBLEM 8-13A (a)

Collection period Days sales in inventory Operating cycle

2017 365 ÷ 7.3 = 50.0 days 365 ÷ 6.3 = 57.9 days 50.0 + 57.9 = 107.9 days

2016 365 ÷ 10.1 = 36.1 days 365 ÷ 6.1 = 59.8 days 36.1 + 59.8 = 95.9 days

2015 365 ÷ 10.3 = 35.4 days 365 ÷ 6.4 = 57.0 days 35.4 + 57.0 = 92.4 days

(b)

Initially, it seems like Satellite Mechanical’s liquidity has improved over the three-year period. The current ratio has improved from 1.4 to 1 to 2.0 to 1. The acid-test ratio has also improved from 0.7 to 1 to 1.1 to 1. However, this has occurred mainly because of the accounts receivable collection period increasing over the three-year period. The operating cycle has also weakened from 92.4 days to 107.9 days. So, it may be that their liquidity has not improved.

(c)

To the extent that a lower inventory turnover ratio causes the business to incur additional costs for financing, storage, or waste, the inventory turnover can and does reduce profitability. The opposite trend would also hold true. Having cash tied up in receivables could result in higher borrowing costs to finance operations, which would affect profitability.

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PROBLEM 8-13A (Continued) Taking It Further: The dramatic deterioration in the collection period in 2017 of 13.9 days (50.0 days – 36.1 days) is explained by Satellite’s change in policy concerning no longer offering sales discounts to its customers. Satellite should continue to weigh the benefit of saving the cost of sales discounts against the additional cost of financing accounts receivable by an extra 13.9 days or longer. If Satellite determines that the benefit no longer exceeds the costs, they should reconsider their sales discount policy for the future.

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PROBLEM 8-1B (a) Jan. 3

Cash .......................................................... 8,000 Accounts Receivable—Hair Designs

4 Accounts Receivable—New Do .......... Allowance for Doubtful Accounts.

900

Cash ...................................................... Accounts Receivable—New Do ....

900

8 Accounts Receivable—Great Looks... Sales ...............................................

3,000

Cash ...................................................... Sales ...............................................

2,000

18 Sales Returns and Allowances ........... Accounts Receivable—Great Looks

500

19 Cash ...................................................... Accounts Receivable—Luxury Spa

5,000

8,000

900

3,000

2,000

500 5,000

Cash ........................................................ 10,000 Accounts Receivable—Great Looks.

10,000

Accounts Receivable—Hair Designs.. Sales ...............................................

9,000

Cash .......................................................... 3,000 Accounts Receivable—Ken’s Salon

3,000

Cash (Visa) ............................................... 5,000 Sales ...............................................

5,000

Accounts Receivable—Luxury Spa....... 12,000 Sales ...............................................

12,000

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PROBLEM 8-1B (Continued) (a) (Continued) Jan. 31 Allowance for Doubtful Accounts ........... 6,000 Accounts Receivable—Ken’s Salon (b) Dec. 31 Bal. Jan. 4 Jan. 8 Jan. 23 Jan. 26

Jan. 31 Bal.

Accounts Receivable 35,000 Jan. 3 900 Jan. 4 3,000 Jan. 18 9,000 Jan. 19 12,000 Jan. 20 Jan. 24 Jan. 31 26,500

Allowance for Doubtful Accounts Dec. 31 Bal. Jan. 31 6,000 Jan. 4 Unadj. Bal. 1,600 Accounts Receivable—Hair Designs Dec. 31 Bal. 8,000 Jan. 3 Jan. 23 9,000 Jan. 31 Bal. 9,000

6,000

8,000 900 500 5,000 10,000 3,000 6,000

3,500 900

8,000

Accounts Receivable—Great Looks Dec. 31 Bal. 11,000 Jan. 18 Jan. 8 3,000 Jan. 20 Jan. 31 Bal. 3,500

500 10,000

Accounts Receivable—Ken’s Salon Dec. 31 Bal. 9,000 Jan. 24 Jan. 31 Jan. 31 Bal. 0

3,000 6,000

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PROBLEM 8-1B (Continued) (b) (Continued) Accounts Receivable—Luxury Spa Dec. 31 Bal. 7,000 Jan. 19 Jan. 26 12,000 Jan. 31 Bal. 14,000 Accounts Receivable—New Do Dec. 31 Bal. 0 Jan. 4 Jan. 4 900 Jan. 31 Bal. 0 (c)

(d)

Bad Debts Expense ........................................ 3,190 Allowance for Doubtful Accounts [($26,500 × 6%) + $1,600] ....................... Hair Designs Great Looks Ken’s Salon Luxury Spa New Do Total subsidiary ledger

5,000

900

3,190

$9,000 3,500 0 14,000 0 $26,500

Balance equals control account of $26,500. Taking It Further: If the subsidiary ledger is not reconciled to the general ledger control account for accounts receivable, it could mean that sales have not been properly recognized in the general ledger accounts. In addition, cash transactions may be incorrect in the general ledger. Cash receipts could be recorded in the subsidiary ledger and not in the general ledger accounts. This would lead to bank reconciliations that do not agree with the accounting records if cash was received and deposited. Cash receipts recorded in the subsidiary leger but not in the general ledger might also indicate employee theft of cash or cheques. Further, customers may receive statements for transactions Solutions Manual .

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that were recorded in error. In summary, errors introduced will be in sales, accounts receivable, and cash. Reconciling the subledger accounts to the control account is a critical step to ensure that errors, omissions, and fraud are minimized. In a computerized accounting system, posting to the subsidiary accounts receivable and control accounts occurs simultaneously and so the chances of error are far reduced. The reconciliation step is still required, but it is generally much easier and faster.

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PROBLEM 8-2B (a) Transaction Cash April 1. NE 2. NE 3. +$69,200 4. NE 5. NE May 1. NE 2. $450 3. +$78,500 4. NE 5. NE 6. NE

(1) (2)

Acc. Receiv.

Allow. for Doubt. Accts.

+$64,600 −$800 −$69,200 +$1,645 NE

NE −$35,530 NE NE NE NE NE NE (1)+$1,914 NE

+$29,070 +$29,070 −$800 −$800 NE NE +$1,645 +$1,645 −$1,914 −$1,914

+$76,600 NE −$78,500 −$9,580 +$1,570 NE

NE −$42,130 $450 NE NE NE −$9,580 NE NE NE (2)+$6,818 NE

+$34,470 +$34,470 NE NE NE NE NE NE +$1,570 +$1,570 −$6,818 −$6,818

Invent.

Total Assets

Owner's Equity

($64,600 − $800) x 3% = $1,914 Bad Debt Expense = [($75,535 x 6%) + 2,286] = $6,818 (See Accounts Receivable and Allowance for Doubtful Accounts balances in ledger that follows.)

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PROBLEM 8-2B (Continued) (a) (Continued) Ledgers not required, used for accumulating balances

Date April 1. 2. 3. 4. May 1. 2. 2. 3. 4. 5.

Date April 5. May 2. 4. 6.

Accounts Receivable Explanation Ref. Debit Opening Balance Sales Returns Collections Interest charges

Credit

 64,600 800 69,200 1,645

Sales Recovery Collection recovery Collections Write-offs Interest charges

76,600 450 450 78,500 9,580 1,570

Balance 89,200 153,800 153,000 83,800 85,445 162,045 162,495 162,045 83,545 73,965 75,535

Allowance for Doubtful Accounts Explanation Ref. Debit Credit Balance Opening Balance Bad debts expense

 1,914

Recovery Write-offs Bad debts expense

450 9,580 6,818

4,930 6,844 7,294 2,286 Dr. 4,532

(b) Current assets: Accounts receivable.............................. Less: Allowance for doubtful accounts

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$75,535 4,532

$71,003

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PROBLEM 8-2B (Continued) (c)

The bad debts expense on the income statement for the period would be $28,612 ($19,880 + $1,914 + $6,818)

Taking It Further: Rayon Co. can use the percentage of sales method at month end for the purpose of accruing bad debt expenses and then use the percentage of accounts receivable method at the end of the fiscal year when the monthly statements are not distributed to anyone outside of the company or when the percentage of sales approach gives a good approximation of the expense and net realizable value of the accounts receivable. The percentage of sales method is easy to administer and provides an adequate estimate for interim internal financial statement reporting. For the fiscal year end, the percentage of receivables method, a balance sheet approach, reduces the year-end balance of accounts receivable to the net realizable value.

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PROBLEM 8-3B (a) Accounts Receivable..................................1,900,000 Sales ....................................................... 1,900,000 Cash ............................................................2,042,000 Accounts Receivable............................. 2,042,000 (b)

(c)

Allowance for Doubtful Accounts ............. 58,000 Accounts Receivable.............................

58,000

Accounts Receivable ................................. Allowance for Doubtful Accounts ........

4,000 4,000

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

4,000 4,000

Posting to accounts not required:

Date

Accounts Receivable Explanation Ref. Debit

Credit

Balance

 Balance 800,000 Sales 1,900,000 2,700,000 Collections 2,042,000 658,000 Write offs 58,000 600,000 Coll. of prev. write off 4,000 604,000 Payment 4,000 600,000

Date

Allowance for Doubtful Accounts Explanation Ref. Debit Credit  Balance Write offs 58,000 Coll. of prev. write off Bad debts expense (d)

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4,000 46,000

Balance 44,000 14,000 Dr. 10,000 Dr. 36,000

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PROBLEM 8-3B (Continued) (d) Bad Debts Expense ($36,000 + $10,000) ... 46,000 Allowance for Doubtful Accounts ........ (e)

(f)

Current assets: Accounts receivable ............................... $600,000 Less: Allowance for doubtful accounts 36,000

46,000

$564,000

The bad debts expense on the income statement for the period would be $46,000.

Taking It Further: When a customer account is collected after it had been written off, bad debt expense does not get reduced. Write offs and collections of accounts previously written off do not get recorded to the bad debt expense account. When a customer’s account is collected, subsequent to it having been written off, the allowance for doubtful accounts is reinstated with a credit entry for the reversal of the original write off. Later on, when the required balance in the allowance account is established, a smaller amount will be needed to restore the allowance account. The entry to restore the allowance account to its required balance will bring about a reduced amount of bad debts expense.

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PROBLEM 8-4B (a)

$62,000 [$52,000 − ($30,000 − $48,000 + $8,000)]

(b) $49,750 [$52,000 − ($42,250 − $48,000 + $8,000)] (c)

($3,300,000 x 1.5%) = $49,500

(d) The write off of an uncollectible account does not affect the current year’s bad debts expense at the time of recording the write off (debit the allowance and credit the accounts receivable). Accounts receivable are decreased and the allowance for doubtful accounts is also decreased resulting in no change in the amount of the net realizable value of accounts receivable. But, the amount of the bad debt expense recorded at the end of the period will be impacted by the amount of accounts receivable write offs during the period. Since write -offs decrease the allowance for doubtful accounts and the allowance account needs to be adjusted to the required balance at the end of the accounting period, the more the allowance account is reduced by write offs during the year, the higher the expense will be to return the allowance account to the required balance. If write offs during the accounting period are very low, then the expense should also be low for the accounting period. (e)

Similar to a collection on account, the collection of an account previously written off will decrease the net realizable value of accounts receivable. The collection of an account previously written off involves two entries. The first entry reverses the original write off, which increases the accounts receivable and the allowance for doubtful accounts and thus does not affect the net realizable value of the accounts receivable. The second entry records a collection on account, which will decrease accounts receivable and thus, the net realizable value.

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PROBLEM 8-4B (Continued) Taking It Further: In spite of being very diligent when scrutinizing a customer’s credit worthiness prior to the shipment of goods, the risk of non-collection remains. A company cannot be absolutely certain of getting paid by all customers. A certain amount of collection risk must be tolerated in order to remain competitive to attract and retain customers. If the company had some way of determining which accounts were going to be uncollectible, it could avoid the collection risk altogether by not selling to these customers on credit. Unknown and unforeseen circumstances or events may arise that render customers unable to pay their accounts. They themselves might be suffering from collection risks from their own customers.

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PROBLEM 870B (a)

Total estimated uncollectible accounts Number of Days Outstanding Total 0-30 31-60 61-90 Over 90 Accounts $210,000 $120,000 $55,000 $20,000 $15,000 receivable 1% 7% 12% 25% Estimated % uncollectible Estimated uncollectible $11,200 $1,200 $3,850 $2,400 $3,750 accounts

(b)

(c)

(d)

(e)

Bad Debts Expense .................................... Allowance for Doubtful Accounts ........ [$11,200 − $5,000]

6,200 6,200

Allowance for Doubtful Accounts ............. 12,200 Accounts Receivable.............................

12,200

Accounts Receivable ................................. Allowance for Doubtful Accounts ........

3,400 3,400

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

3,400 3,400

If Creative Co. used 8% of total accounts receivable rather than aging the accounts, the adjustment would be $11,800 [($210,000 × 8%) − $5,000]. The remaining entries would remain unchanged.

Taking It Further: Aging the accounts rather than applying a percentage to the total accounts receivable should produce a more accurate allowance and bad debts expense. It also focuses management’s attention on the receivables and the loss percentages, which can result in better receivables management. Solutions Manual .

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PROBLEM 8-6B

(a)

2016 # of Days Outstanding 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding

2017 # of Days Outstanding 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding

(b)

Amount $220,000 105,000 40,000 25,000 $390,000

Amount $190,000 40,000 65,000 75,000 $370,000

% 2.5 6 18 25

Estimated Uncollectible $ 5,500 6,300 7,200 6,250 $25,250

% 2.5 6 18 25

Estimated Uncollectible $ 4,750 2,400 11,700 18,750 $37,600

2016 Accounts Receivable .............................................. Less: Allowance for Doubtful Accounts ................ Net Realizable Value ...............................................

$390,000 25,250 $364,750

2017 Accounts Receivable................................................. $370,000 Less: Allowance for Doubtful Accounts .................. 37,600 Net Realizable Value .................................................. $332,400

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PROBLEM 8-6B (Continued) (c) 1.

Bad Debts Expense .................................... Allowance for Doubtful Accounts [$25,250 + $3,400] ..................................

28,650 28,650

Allowance for Doubtful Accounts ............. 22,300 Accounts Receivable.............................

22,300

Accounts Receivable ................................. Allowance for Doubtful Accounts ........

2,500 2,500

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

2,500

Bad Debts Expense .................................... 32,150 Allowance for Doubtful Accounts ........ [$37,600 − ($25,250 − $22,300 + $2,500)]

2,500

32,150

Taking It Further: Although total accounts receivable decreased by $20,000 or 5% ($390,000 − $370,000), the estimated uncollectible amounts increased by $12,350 ($37,600 − $25,250) or 49%. The most significant increase occurred in the over 90 day balance. The balance rose from $25,000 to $75,000, demonstrating a dramatic deterioration in the age of the accounts receivable, resulting in a higher allowance.

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PROBLEM 8-7B

Beg. Bal. Sales Rev. Write off End Bal.

Accounts Receivable 360,000 Collections 2,545,000 (a) 2,633,540 Write offs (d) 28,540 (b) 5,520 Note 1 5,520 (c) 420,000

Note 1 Collection of account previously written off

Write-offs

Allowance for Doubtful Accounts Beg. Bal. (e) 21,600 Rev. write off (b) 5,520 28,540 Bad debts (f) 30,820 End. Bal. 29,400 Sales Sales

(a) 2,633,540

Bad Debts Expense (f) 30,820 Beginning balance of the Allowance for Doubtful Accounts is 6% of the beginning balance of Accounts Receivable of $360,000 ($360,000 × .06) = $21,600 (e). Ending balance of the Allowance for Doubtful Accounts of $29,400 is 7% of the ending balance of Accounts Receivable (c) of $420,000 ($29,400 ÷ .07). Allowance for Doubtful Accounts ................ Accounts Receivable (d) ..........................

28,540

Accounts Receivable (b)............................... 5,520 Allowance for Doubtful Accounts (b)... Cash ............................................................... 5,520 Accounts Receivable ............................ Collection of account which was previously written off

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5,520 5,520

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PROBLEM 8-7B (Continued) Bad Debts Expense (f) .................................. 30,820 Allowance for Doubtful Accounts (f) ....... Force in allowance account: ($29,400 − $21,600 − $5,520 + $28,540 = $30,820)

30,820

Accounts Receivable (a) ................................. 2,633,540 Sales (a)..................................................... 2,633,540 Force in accounts receivable account: ($420,000 − $360,000 − $5,520 + $5,520 + $28,540 + $2,545,000) = $2,633,540

Taking It Further: Bad debt expense is a temporary account reported on the income statement. The balance is closed to Income Summary at the end of the accounting period. Allowance for doubtful accounts is a permanent account which is a contra asset to accounts receivable. Its purpose is to reduce the accounts receivable asset to its net realizable value.

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PROBLEM 8-8B (a) # of Days outstanding 1-7 not yet due 1-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding

(b)

Amount $74,000 70,000 25,000 37,000 22,500 $228,500

% 1 4 8 18 40

Estimated Uncollectible $ 740 2,800 2,000 6,660 9,000 $21,200

Bad Debts Expense .................................... 27,700 Allowance for Doubtful Accounts ........ ($21,200 + $6,500) =$27,700

27,700

(c) Current assets: Accounts receivable .................................. $228,500 Less: Allowance for doubtful accounts 21,200 $207,300 (d)

The amount reported on the income statement for bad debt expense will be $27,700.

Taking It Further: Should Bravo eliminate credit sales altogether and only sell for cash, they will likely have a large decrease in sales because customers will prefer to have credit terms and may seek out a competitor. The decrease in sales will have a more adverse effect on profits than would the cost of bad debts resulting from the current credit terms.

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PROBLEM 8-9B Jan. 2

Accounts Receivable—Braun............ 25,000 Sales ............................................... Cost of Goods Sold ............................ 13,750 Merchandise Inventory ..................

25,000 13,750

Feb. 1 Notes Receivable—Braun. ................. 25,000 Accounts Receivable—Braun .......

25,000

Mar. 31 Cash ($20,000 + $200 + $300) ............ 20,500 Notes Receivable—Vincent........... Interest Revenue [$20,000 × 6% × 3/12] Interest Receivable [$20,000 × 6% × 2/12]

20,000 300 200

May

1 Cash ($25,000 + $375) .......................... 25,375 Notes Receivable—Braun ............. Interest Revenue ............................ [$25,000 × 6% × 3/12] 25 Notes Receivable—Noah Inc................ 12,000 Accounts Receivable—Noah Inc. .

Jun. 25 Cash .................................................... Interest Revenue ............................ [$12,000 × 6% × 1/12]

25,000 375

12,000

60 60

Jul. 25 Allowance for Doubtful Accounts ....... 12,000 Notes Receivable—Noah Inc.........

12,000

Nov. 30 Notes Receivable—UOA Corp ............. 10,000 Cash................................................

10,000

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PROBLEM 8-9B (Continued) Dec. 31 Interest Receivable............................. 38 Interest Revenue ............................ (UOA Corp. note: $10,000 × 4.5% × 1/12 = $38)

Taking It Further: Durand Co. could continue to sell to Noah Inc. if the following conditions are followed: 1) Collect the note receivable plus interest that was previously written off. 2) Until Noah establishes a good relationship with Durand, deliver goods COD (Cash on delivery), and 3) For large purchases, require a deposit in advance of shipment.

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PROBLEM 8-10B (a)

The interest receivable at June 30, 2017 is: ALD Inc. Kabam Ltd. Best Foot Forward Shoe Co. DNR Co. M&J Hardware Corp. Total

$6,000 × 4% × 1/12 = $ 20 $10,000 × 5% × 1/12 = 42 $15,000 × 5.5% × 5/12 = 344 $4,800 × 8.75% × 1/12 = 35 $9,000 × 5% × 0/12 = 0 $441

The notes receivable balance at June 30, 2017 is $44,800 ($6,000 + $10,000 + $15,000 + $4,800 + $9,000). (b) July 1 Cash ............................................... Interest Receivable ($6,000 × 4% × 1/12)...................

2 Cash ............................................... Interest Receivable ($10,000 × 5% × 1/12).................

31 Cash ............................................... 15,413 Interest Revenue ($15,000 × 5.5% × 1/12).............. Interest Receivable.................... Notes Receivable—Best Foot... 31 Accounts Receivable—DNR Co. ... Notes Receivable—DNR Co...... Interest Receivable ($4,800 × 8.75% × 1/12).............. Interest Revenue ($4,800 × 8.75% × 1/12)..............

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4,870 4,800 35 35

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PROBLEM 8-10B (Continued) (b) (Continued) July 31 Interest Receivable ....................... Interest Revenue ....................... ALD Inc. Kabam Ltd. M&J Hardware Corp. Total

100 100

$ 6,000 × 4% × 1/12 = $10,000 × 5% × 1/12 = $ 9,000 × 5% × 1/12 =

$ 20 42 38 $100

Date July

1 31 31

Balance

July 31

July

1 1 31 31 31 31

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15,000 4,800

44,800 29,800 25,000

Credit

Balance

4,870 Interest Receivable Explanation Ref. Debit

Date

Balance



Accounts Receivable Explanation Ref. Debit

Date

Credit

Balance

4,870 Credit

Balance

20 42 344 35

441 421 379 35 0 100



Adjusting entry

100

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PROBLEM 8-10B (Continued) (d) OUELLETTE CO. Balance Sheet (partial) July 31, 2017 Assets Current assets Accounts receivable ................................................... Interest receivable ...................................................... Notes receivable ......................................................... Total current assets ............................................... Long-term investments Notes receivable .........................................................

$ 4,870 100 19,000 23,970 6,000

(e) Interest should not be accrued on this note if it is unlikely to be collected. In addition, consideration would have to be given as to whether the note should be written off. At the very least, an allowance should be created with respect to the DNR note, based upon the estimated probability of collection.

Taking It Further: The DNR Co. note carries a higher interest rate as it is likely that DNR Co. has a poor credit rating and represents a collection risk that is higher than that of the average customer. Companies and banks will often charge a higher rate of interest to customers who have a history of defaulting on their loans – this is an attempt to compensate for the higher risk taken when granting loans to customers with poor credit ratings.

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PROBLEM 8-11B (a) NORLANDIA SAGA COMPANY Balance Sheet (Partial) November 30, 2017 (in thousands) Assets Current assets Cash............................................................................... $ 417.1 Short-term investments................................................ 224.6 Accounts receivable $311.4 Less: Allowance for doubtful accounts ........ 14.8 296.6 Merchandise inventory................................................. 336.5 Notes receivable ........................................................... 51.2 Prepaid expenses ......................................................... 19.3 Supplies .......................................................................... 15.9 Total current assets ......................................................... 1,361.2 Long-term investments Notes receivable ........................................................... 101.9 Property, plant and equipment Equipment ........................................................ $924.2 Less: Accumulated depreciation .................. 471.7 452.5 Total assets ............................................................... $1,915.6

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PROBLEM 8-11B (Continued) (b) 2017 Receivables turnover:

2016

($2,823.8 − $18.5) ($311.4 + $271.7) ÷ 2 = 9.6

= 9.1*

365 ÷ 9.6 = 38 days

365 ÷ 9.1 = 40 days

*Given in the problem Average collection period:

Norlandia’s receivables turnover ratio was a little higher in 2017, which means that Norlandia was more efficient in 2017 in turning receivables into cash. The average collection period echoes that finding as the average collection period was reduced from 40 days in 2016 to 38 days in 2017 Taking It Further: When analyzing the accounts receivable turnover and average collection period, consideration should be given to any changes in policy implemented by management during 2017 with respect to granting credit or offering discounts to their customers. As well, sales of accounts receivable during the year would also affect the receivables turnover. Other ratios that would be useful in assessing the accounts receivable turnover and average collection period are the current ratio and inventory turnover. Norlandia should also look at average turnover and collection periods in their industry. By comparing to their industry averages, companies have a benchmark to compare against to assess their own performance.

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PROBLEM 8-12B Nike

Adidas

($ in U.S. millions)

(in Euro millions)

Beginning of Year Jan. 1, 2014 Accounts receivable (net) Add: allowance Gross Accounts receivable

$3,117 104 $3,221

€1,809 120 €1,929

End of Year Dec. 31, 2014 Accounts receivable (net) Add: allowance Gross Accounts receivable

$3,434 78 $3,512

€1,946 139 €2,085

Receivables turnover:

Nike

Adidas

$27,799 ($3,221 + $3,512) ÷ 2

€14,534 (€1,929 + €2,085) ÷ 2

= 8.3 Average collection period:

= 7.2

365 ÷ 8.3 = 44.0 days

365 ÷ 7.2 = 50.7 days

Nike’s receivables turnover ratio was higher than Adidas’, which means that Nike was more efficient than Adidas in turning receivables into cash. This is further evidenced by the difference in the average collection period. Nike is able to collect receivables on average every 44 days while it takes Adidas 50.7 days.

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PROBLEM 8-12B (Continued) Taking It Further: The receivable turnover ratio and collection period were used as tools to make comparisons between Nike and Adidas. Their calculation is not affected by the fact that these companies use different currencies in reporting. Since the currency within a particular company’s financial statements is consistent, comparison of amounts appearing within these financial statements will yield comparative ratios to other companies with different but consistent currencies used in their financial statements.

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PROBLEM 8-13B (a)

Collection period Days sales in inventory Operating cycle

(b)

2017 365 ÷ 10.6 = 34.4 days 365 ÷ 7.3 = 50.0 days 34.4 + 50.0 = 84.4 days

2016 365 ÷ 8.9 = 41.0 days 365 ÷ 7.6 = 48.0 days 41.0 + 48.0 = 89.0 days

2015 365 ÷ 9.0 = 40.6 days 365 ÷ 7.5 = 48.7 days 40.6 + 48.7 = 89.3 days

The current ratio has deteriorated from 1.9 to 1 to 1.6 to 1. The acid-test ratio has also deteriorated from 1.2 to 1 to 0.8 to 1. On the other hand, Western experienced a substantial improvement in the accounts receivable turnover in 2017. This may have reduced the balance in accounts receivable which would reduce both the current and the acid-test ratios. Inventory turnover has slightly deteriorated but the improvement in the accounts receivable turnover outweighs the deterioration in the inventory turnover and the net result is a reduction in the operating cycle. Although speeding up the collection of accounts receivable improved Western’s liquidity, the current and acid-test ratios deteriorated. The possible explanation is that other assets, besides accounts receivable and inventory (such as short-term investments), have decreased or current liabilities have increased over the years which adversely affected the current and acid test ratios. Overall, liquidity has weakened.

(c)

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PROBLEM 8-12B (Continued) (c) (Continued) Having cash tied up in receivables could result in higher borrowing costs to finance operations, which would affect profitability. Taking It Further: The dramatic improvement in the collection period in 2017 of 6.6 days (41.0 days – 34.4 days) is explained by Western’s change in policy concerning offering sales discounts to its customers. Although this ratio dramatically improved, Western must weigh the benefit of collecting accounts receivable faster with the cost of the discounts. If Western determines that the cost exceeds the benefit, they should reconsider the policy for the future.

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BYP8-1 FINANCIAL REPORTING PROBLEM (a) ($ in thousands) Receivables turnover

2014

2013

= 4.8*

$751,536 [($164,302 + $163,345) ÷ 2] = 4.6

Collection period

= 76 days*

365 days = 79 days 4.6

*Given in text (b) Although the change from 2013 to 2014 is not dramatic, it shows an improvement. Receivables are turning over faster and being converted into cash 3 days faster in 2014. (c)

Gross accounts receivable Less: allowance for doubtful accounts Net realizable value of accounts receivable

$188,809,000 5,800,000 $183,009,000

(d)

Accounts receivable over three months past due Accounts receivable written off

$18,304,000 1,064,000

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BYP8-2 INTERPRETING FINANCIAL STATEMENTS (a)

($ in millions)

2014

2013

Current ratio

$1,322a ÷ $1,396 = 0.95:1

$1,076b ÷ $2,205 = 0.49:1

Acid-test ratio

$1,130c ÷ $1,396 = 0.81:1

$908d ÷ $2,205 = 0.41:1

Receivables turnover

Average collection period

$5,241 ($525 + $513) ÷ 2 = 10.1

$5,142 ($513 + $461) ÷ 2 = 10.6

365 ÷ 10.1 = 36.1 days

365 ÷ 10.6 = 34.4 days

$1,322 = $637 + $525 − $32 + $119 + $73 $1,076 = $422 + $513 − $27 + $96 + $72 c $1,130 = $637 + $525 − $32 d $908 = $422 + $513 − $27 b

Shaw’s current and acid-test ratios have improved dramatically from 2013 to 2014. On the other hand, Shaw’s receivables turnover and average collection period have deteriorated somewhat. Overall, Shaw’s liquidity is not strong. (b)

Allowance balance end of 2013 Bad debt expense provision 2014 Less allowance balance end of 2014 Accounts receivable written off in 2014

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BYP8-2 (Continued)

(c)

Shaw has the advantage of billing its customers prior to delivering services. This practice allows Shaw to enforce collection of accounts receivable far more rapidly than those merchants who have to wait several days after sending invoices for the account to become due to allow collection. Should a Shaw customer fail to pay in any given billing period, Shaw has the option of suspending service to that customer immediately, thereby minimizing the risk of large outstanding accounts receivable with little chance of collection.

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BYP8-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

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BYP8-4 COMMUNICATION ACTIVITY Memorandum To:

Management

From:

Student

Re:

Management of the credit function

During the year, Toys for Big Boys has experienced a significant increase in sales due to the efforts of the sales staff. However, it is important that the sales staff be aware that, in order for the company to generate the cash it needs to continue operations, it is essential that Toys for Big Boys be able to generate cash from these sales. Cash is needed to pay for the inventory the company has purchased and to cover other operating expenses such as sales commissions. Over the past year, the company has noticed a trend whereby the sales have doubled, accounts receivable have quadrupled, and cash flow has halved. Sales staff assumed the role of managing the credit function, but it appears that they were too focused on sales without considering the quality of the sales and the ability of the customer to pay the receivable within a reasonable period of time. Given the increase in the accounts receivable, it is likely that the company has now assumed additional credit risk. The longer a customer takes to pay, the more likely that he will default on the receivable.

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BYP8-4 (Continued) The selling staff has been placed in a conflict of interest position. Since it is in their best interest to stimulate sales, this may deter them from performing adequate credit checks. To improve this process I would recommend using a separate credit department to evaluate the credit worthiness of all potential credit customers. If this change is not implemented, at the very least, a set of specific criteria should be developed that would ensure that the selling staff only grant credit to those customers who meet the company’s credit standards.

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BYP8-5 “ALL ABOUT YOU” ACTIVITY (a)

Ten tips to use your card wisely: 1. Avoid impulse buys. 2. Aim to pay your balance in full by the due date every month. 3. If you have to carry a balance, try to make payments as soon as you can. 4. Make regular payments to help build a good credit history. 5. If your monthly balance is growing, stop using your credit card until you get your finances under control. 6. Avoid taking cash advances on your credit card. 7. Every month, carefully check your credit card statement. 8. If your credit card has a rewards program, avoid increasing your spending or buying things you don’t need just to get points. 9. If unexpected expenses come up, talk to your financial institution about your options. There may be alternatives to using your credit card that will cost less in interest, such as a line of credit. 10. Keep your card, your PIN, and your security code secure.

(b) The grace period on new purchases must be a minimum of 21 days. The grace period is the time given by the credit card company between the statement date and the due date for payment. The interest-free period includes the grace period as well as the period of time between the purchase date and the statement date. Consequently the interest-free period is from Sept. 15 to 21 days beyond October 7 or October 28, resulting in 43 days. (c)

Cash advances are withdrawals of cash that are added to the credit card balance. Balance transfers are charges put on one credit card to pay off some or all of the balance on another credit card.

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BYP8-5 (Continued) (d) Number of days for the cash advance: April 1 — May 14 = 44 days. Interest charge: $1,000 × 19% × 44/365 = $22.90. (e) Calculation Results Option A: Option B: Make Make the the minimum minimum payment plus an payment each additional $10 month each month.

Option C: Pay a fixed amount of $100.00 each month.

Time to pay off

10 years and 5 months

4 years and 7 months

11 months

Interest paid

$889.40

$413.60

$97.28

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BYP8-6 Santé Smoothie Saga (a)

Answers to Natalie’s questions 1. Calculations you should perform on the statements are:  Working capital = Current assets − Current liabilities  Current ratio = Current assets ÷ Current liabilities  Acid-test ratio = (Cash + Short-term investments + Accounts receivable) ÷ Current liabilities  Inventory turnover = Cost of goods sold ÷ Average inventory  Days sales in inventory = Days in the year ÷ Inventory turnover  Operating cycle = Days sales in inventory + Collection period Given the type of business, it is unlikely that Curtis would have a significant amount of accounts receivable. Positive working capital and a current ratio of greater than 1 are indications that the company has good liquidity and will be more likely to be able to pay for the mixer. Note that the current ratio should be considered strong only if it is not artificially inflated by receivables or inventory. The inventory turnover and days sales in inventory will provide additional information – the days sales in inventory will tell you how long, on average it takes for inventory to be sold. The operating cycle will tell how long, on average, it takes to sell the inventory on account, and collect the cash. Of course, with few receivables, the operating cycle will not likely differ significantly from the days sales in inventory.

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BYP8-6 (Continued) (a) (Continued)

2. A promissory note gives you the advantage of earning interest for the 30 days that it is outstanding. If Curtis does not pay the note and the interest after 30 days, you are in a better position to take legal action to collect, having a promissory note in hand.

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BYP8-6 (Continued) (b) Nov. 1

Notes Receivable—Lesperance ..... Sales ............................................ Cost of Goods Sold ......................... Merchandise Inventory ...............

1,050 1,050 553 553

30 No entry Dec. 15 Cash ................................................. Interest Revenue ($1,050 × 7.5% × 1.5/12) .............. Notes Receivable—Lesperance .

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CHAPTER 9 Long-Lived Assets ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Brief Problems Problems Questions Exercises Exercises Set A Set B

1. Calculate the cost of property, plant, and equipment.

1, 2, 3, 4, 1, 2, 3, 4 5

2. Apply depreciation methods to property, plant, and equipment.

6, 7, 8, 9, 5, 6, 7, 8, 2, 3, 4, 5, 2, 3, 6, 7, 2, 3, 6, 7, 9 12 8, 9 8, 9, 12

3. Explain the factors that cause 9, 10, 11, 10, 11 12, 13, changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. 4. Demonstrate how to account 14, 15, 16, 17, for property, plant, and equipment disposals.

1, 2, 3, 12 1, 2, 3, 4, 1, 2, 3, 4, 6 6

6, 7, 8

12, 13, 14 9, 10

4, 5, 6, 12 4, 5, 6

6, 7, 8, 9 6, 7, 8, 9

5. Record natural resource transactions and calculate depletion.

18, 19, 20 15

6. Identify the basic accounting issues for intangible assets and goodwill.

21, 22

12, 13, 14 10, 11

7. Illustrate the reporting and 23, 24 analysis of long-lived assets.

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9, 11, 12, 9, 11, 12, 13 13

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ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Difficulty Time Level Allotted (min.)

Description

Record property transactions.

Simple

20-30

Allocate cost and calculate partial period depreciation.

Moderate

20-30

Determine cost; calculate and compare depreciation under different methods.

Moderate

30-40

Account for operating and capital expenditures and asset impairments.

Moderate

20-30

Record impairment and calculate revised depreciation.

Moderate

20-30

Record acquisition, depreciation, impairment and disposal of land and building.

Moderate

25-35

Calculate and compare depreciation and gain or loss on disposal under three methods of depreciation.

Moderate

30-40

Record acquisition, depreciation and disposal of equipment.

Moderate

30-40

Record property, plant and equipment transactions; prepare partial financial statements.

Complex

40-50

10A

Correct errors in recording intangible asset transactions.

Complex

15-20

11A

Record intangible asset transactions; prepare partial balance sheet.

Moderate

30-40

12A

Record natural resource transactions; prepare partial financial Moderate statements.

25-30

13A

Calculate ratios and comment.

Moderate

15-25

Record property transactions.

Simple

20-30

Allocate cost and calculate partial period depreciation.

Moderate

20-30

Determine cost; calculate and compare depreciation under different methods.

Moderate

30-40

Account for operating and capital expenditures and asset impairments.

Moderate

20-30

Record impairment and calculate revised depreciation.

Moderate

20-30

Record acquisition, depreciation, impairment and disposal of land and buildings.

Moderate

25-35

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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Difficulty Time Level Allotted (min.)

Description

Calculate and compare depreciation and gain or loss on disposal under three methods of depreciation.

Moderate

30-40

Record acquisition, depreciation and disposal of furniture.

Moderate

30-40

Record property, plant and equipment transactions; prepare partial financial statements.

Complex

40-50

10B

Correct errors in recording intangible asset transactions.

Complex

15-20

11B

Record intangible asset transactions; prepare partial balance sheet.

Moderate

30-40

12B

Record equipment, note payable, and natural resource transactions; prepare partial financial statements.

Moderate

25-30

13B

Calculate ratios and comment.

Moderate

15-25

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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom's Taxonomy, Study Objectives and End-ofChapter Exercises and Problems Learning Objective

1. Calculate the cost of property, plant, and equipment.

Knowledge Comprehension Q9-1 Q9-3 Q9-2 Q9-4 BE9-3 Q9-5 E9-3

2. Apply depreciation Q9-7 methods to property, Q9-9 plant, and equipment.

Q9-6 Q9-8 Q9-10 Q9-11 E9-3

3. Explain the factors Q9-9 that cause changes in Q9-12 periodic depreciation and calculate revised depreciation for property, plant, and equipment.

Q9-10 Q9-11 Q9-13

4. Demonstrate how to account for property, plant, and equipment disposals.

Q9-16

Q9-14 Q9-15 Q9-17

5. Record natural Q9-18 resource transactions and calculate depletion. 6. Identify the basic accounting issues for intangible assets and goodwill. 7. Illustrate the reporting Q9-23 and analysis of long- BE9-17 lived assets.

Q9-19 Q9-20

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Q9-21 Q9-22

Q9-24

9-4

Application BE9-1 P9-2A BE9-2 P9-3A BE9-4 P9-4A E9-1 P9-6A E9-2 P9-1B E9-12 P9-2B P9-1A P9-3B P9-4B P9-6B BE9-5 P9-3A BE9-6 P9-6A BE9-7 P9-7A BE9-8 P9-8A BE9-9 P9-9A E9-2 P9-2B E9-4 P9-3B E9-5 P9-6B E9-12 P9-7B P9-2A P9-8B P9-9B P9-12B BE9-10 P9-5A BE9-11 P9-6A E9-6 P9-12A E9-7 P9-4B E9-8 P9-5B P9-4A P9-6B

Analysis

BE9-12 BE9-13 BE9-14 E9-9 E9-10 P9-6A P9-7A BE9-15 E9-11

P9-8A P9-9A P9-6B P9-7B P9-8B P9-9B

BE9-16 E9-12 E9-13 E9-14 BE9-18 BE9-19 E9-15 P9-9A

P9-10A P9-11A P9-10B P9-11B P9-11A E9-16 P9-12A P9-13A P9-9B P9-13B P9-11B P9-12B

Synthesis Evaluation

P9-12A P9-12B

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BLOOM’S TAXONOMY TABLE (Continued) Learning Objective

Knowledge Comprehension

Broadening Your Perspective

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Application

Analysis Synthesis Evaluation BYP9-4 BYP9-5

BYP9-1 BYP9-2 BYP9-3

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ANSWERS TO QUESTIONS 1.

Three characteristics of property, plant, and equipment include: they (1) have a physical substance (a definite size and shape), (2) are used in the operations of the business, and (3) are not intended for sale to customers.

Examples of land improvements are: a road, driveway, sidewalks or parking lot on the property, fencing and underground sprinkler systems.

The invoice cost, the cost of the safety inspection, and the cost for the required logo painted on the vehicle are capitalized, as they are required costs to put the vehicle into use. The insurance costs benefit the business for the term of the policy and so the costs should be allocated to the period of benefit from the policy, typically by initially recording the payment as prepaid insurance and then reducing the prepayment, charging insurance expense as the policy expires.

The purpose of depreciation is not to accumulate the cash needed to replace an asset. Rather, depreciation is a cost allocation method which records an expense in those accounting periods where the asset has been used and has contributed to the earning of revenues. This charge also reduces the carrying amount of the asset, but it does not involve any cash.

The purchase cost must be split between the land and building because the building is depreciated and the land is not. In addition, the cost of each item will be needed to determine any gain or loss on disposal if either one is later sold.

Residual value is the estimated amount that a company would obtain from disposing of a long-lived asset at the end of its useful life. Residual value is not depreciated, since the amount is expected to be recovered at the end of the asset’s useful life. Residual value is used in the formula for calculating periodic depreciation using the straight line and unit-ofproduction methods. Residual value is used in an indirect way in the diminishing balance method. Rather than using residual value to reduce the depreciable amount, as is done using the other two methods, the amount of the depreciation recorded is limited to the amount that will cause the carrying amount to equal the residual value of the asset.

The three factors that affect the calculation of depreciation include: cost, useful life and residual value. The cost of a depreciable asset must include all necessary costs to get the asset ready for use. The useful life is the period of time an asset is expected to be available for use. This length may be measured as a function of time or number of units of production. The residual value is the estimated amount that a company would obtain from disposing of the asset at the end of its useful life.

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QUESTIONS (Continued) 8.

The amount of annual depreciation is different over the useful life of an asset depending on which of the three depreciation methods are being used. The straight-line method creates a constant amount of depreciation over the useful life. The diminishing-balance method is devised to charge a higher amount of depreciation in the earlier part of the useful life of the asset. Lastly, the unit-of-production method is less predictable in that it is based on the amount of use that is being made of the asset.

A company should choose the depreciation method it believes will best reflect the pattern over which the asset’s future economic benefits are expected to be consumed. The depreciation method must be revised if the expected pattern of consumption of the future economic benefits has changed.

10.

Operating expenditures are ordinary repairs made to maintain the operating efficiency and expected productive life of the asset. Because they are recurring expenditures and normally benefit only the current accounting period, they are expensed when incurred. Capital expenditures are additions and improvements made to increase efficiency, productivity, or expected useful life of the asset. Because they benefit future periods, capital expenditures are debited to the asset account affected. Once capitalized, these expenditures are depreciated over their benefiting period.

11.

Revision of the depreciation generally occurs when there is a change to any of the three factors that affect the calculation of depreciation: the asset’s cost, useful life, or residual value. Depreciation needs to be revised if there are capital expenditures, impairments in the asset’s recoverable amount, changes in the depreciation method, or changes in the estimated remaining useful life or residual value. The revisions are based on new information that will affect only current and future periods so there is no revision of depreciation previously recorded.

12.

Factors that may contribute to an impairment loss include: obsolescence of a piece of equipment, loss of a market for a product manufactured, bankruptcy of the supplier of replacement parts for equipment, or environmental concerns causing extra costs of disposal at the end of the useful life.

13.

Extending the total service life and consequently the estimated remaining useful life of a depreciable asset will reduce the amount of depreciation recorded in the remaining years of use. The carrying amount of the asset will become the new basis to which the business will apply the formula of the depreciation method. The residual value may also be revised.

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QUESTIONS (Continued) 14.

Depreciation must be updated from the last time depreciation entries were recorded to the date of the sale because the depreciation expense must properly reflect the total period over which the asset’s economic benefits are used. Updating depreciation also aids in determining the correct amount of the gain or loss on disposal.

15.

The asset and related accumulated depreciation should continue to be reported on the balance sheet, without further depreciation or adjustment, until the asset is retired. Reporting the asset and related accumulated depreciation on the balance sheet informs the reader of the financial statements that the asset is still being used by the company. However, once an asset is fully depreciated, no additional depreciation should be taken on this asset, even if it is still being used. In no situation can the accumulated depreciation exceed the cost of the asset.

16.

In a sale of property, plant, or equipment, the carrying amount of the asset is compared to the proceeds from the sale. If the proceeds of the sale exceed the carrying amount of the asset, a gain on disposal occurs. If the proceeds of the sale are less than the carrying amount of the asset sold, a loss on disposal occurs. In an exchange, a new asset is received in an exchange for the old asset given up. The gain or loss is calculated by comparing the fair value of the asset given up to its carrying amount. The trade-in allowance on the asset given up is not relevant because it rarely reflects the fair value of the asset that is given up. Instead of using the trade-in allowance, the fair value of the asset given up is used to calculate the gain or loss on the asset being given up. A loss results if the carrying amount of the asset being given up is more than its fair value. A gain results if the carrying amount is less than its fair value.

17.

Carrying amount of an item of property, plant, or equipment is a sub-total amount representing the net amount of the cost less the accumulated depreciation. The amount is not a general ledger account and so is not used in journal entries used to record dispositions. Instead, the asset and accumulated depreciation accounts are used in the journal entry.

18.

Natural resources have two characteristics that make them different from other long-lived assets: (1) they are physically extracted in operations such as mining, cutting, or pumping; and (2) only an act of nature can replace them. Similar to property, plant, and equipment, natural resources are tangible long lived assets which are expected to last beyond one year and are therefore classified on the balance sheet as non-current. When natural resources are extracted, depletion is recorded, causing an increase in another asset, inventory, which is subsequently sold.

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QUESTIONS (Continued) 19.

The units-of-production method is a common and ideal method of recording the depletion of natural resources. There is a finite quantity of units of natural resource to be extracted. As extraction occurs, the conversion from one asset (natural resource) to another (inventory) can be measured in units and cost of the units can be fairly applied. Consequently, a more precise charge for depletion can be arrived at that corresponds to the asset created (inventory) when the natural resource is reduced.

20.

I disagree. The useful life of some intangible assets might be limited to the legal life of those assets and in that case, I would agree. I disagree with the limitation of the period of amortization to the legal life of intangibles. Some intangible assets have useful lives that are much shorter than their respective legal lives and so it is appropriate for the proper matching of expenses to revenues for the shorter length of benefiting periods to be used in the calculation of amortization. In some cases, the legal life could be without time limits. In that case it would not be possible to execute a calculation. Finally, in the case of goodwill, GAAP dictates that no depreciation can be recorded under any circumstances. Only impairment losses reduce the carrying amount of goodwill.

21.

The accounting for tangible and intangible assets is much the same. Tangible and intangible assets are reported at cost, which includes all expenditures necessary to prepare the asset for its intended use. Both tangible and intangible assets with finite lives are amortized over their useful life. In the case of long-lived tangible assets, the useful life or the physical life of the asset will be used as a limit of the length of time the assets will be depreciated. In the case of intangible life, there is no physical limitation in the usefulness of asset and the length of time the asset will be amortized is the shorter of its useful life or its legal life, usually on a straight-line basis. Due to their lack of substance, intangible assets are more likely to have indefinite useful lives and not need to be amortized, but only tested for impairment. This characteristic is the main difference between the accounting of tangible and intangible assets.

22.

Goodwill is the value of many favourable attributes that are intertwined in a business enterprise. Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be sold separately. Goodwill is only recorded on the purchase of a business if the purchaser pays a price that is greater than the fair value of the net assets of the business.

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QUESTIONS (Continued) 23.

Property, plant, and equipment and natural resources are often combined and reported in the balance sheet as “property, plant, and equipment” or “capital assets”. Intangible assets are listed separately after property, plant, and equipment. Goodwill must be disclosed separately. For assets that are depreciated or amortized, the balances of the accumulated depreciation and/or amortization must be disclosed in the balance sheet or in the notes to the financial statements. Depreciation and amortization expense for the period must also be disclosed either on the income statement, elsewhere in the financial statements or in the notes to the financial statements. When impairment losses have occurred they should be shown on a separate line on the income statement, with the details disclosed in a note. The notes to financial statements should disclose the depreciation or amortization methods and rates that are used. The carrying amount of each major class of long-lived assets should also be disclosed. Companies should also disclose their impairment policy in the notes to the financial statements.

24.

I disagree. Higher turnover of assets does not necessarily result in increased profits. A higher asset turnover just means that more revenue or sales are being generated for each dollar of assets. On the other hand, a higher return on assets means a proportionately higher profit has been generated for each dollar of assets.

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9-1 (a) (b)

The cost of the land is $95,000 ($85,000 + $1,500 + $5,000 + $3,500). The cost of the land improvements is $5,000 (parking lot).

BRIEF EXERCISE 9-2 The cost of the equipment is $42,000 (invoice price $40,375 + transportation $625 + installation and testing $1,000). The payment of $1,750 for the insurance should be recorded as prepaid insurance which will later be expensed as it is consumed.

BRIEF EXERCISE 9-3 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

O C C C O C O C C O

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BRIEF EXERCISE 9-4 Jan.

Land [$850,000 × ($352,000 ÷ $880,000)] .... 340,000 Building [$850,000 × ($396,000 ÷ $880,000)] .... 382,500 Equipment [$850,000 × ($132,000 ÷ $880,000)] .... 127,500 Cash................................................ Mortgage Notes Payable ($850,000 − $170,000) .................

170,000 680,000

BRIEF EXERCISE 9-5 Depreciable amount is $36,000 ($42,000 − $6,000). With a 4-year useful life, annual depreciation is $9,000 ($36,000  4). Under the straight-line method, depreciation is the same each year. Thus, depreciation expense is $9,000 for each year of the equipment’s life.

BRIEF EXERCISE 9-6 The diminishing-balance rate is 50% (200%÷ 4) and this rate is applied to the carrying amount at the beginning of the year. Depreciation expense for each year is as follows: Carrying Amount End of Year Beginning Depr. Depr. Accum. Carrying Year Of Year × Rate = Expense Depr. Amount $42,000 2017 $42,000 50% $21,000 $21,000 21,000 2018 21,000 50% 10,500 31,500 10,500 2019 10,500 50% 4,500¹ 36,000 6,000 ¹ Limited to the amount that reduces the carrying amount to the residual value of $6,000

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BRIEF EXERCISE 9-7 (a)

Depreciable amount per unit: ($38,950 − $4,300)  550,000 km. = $0.063/km.

(b)

Annual depreciation expense: 2016: 90,000 × $0.063 = 2017: 135,000 × $0.063 =

$5,670 $8,505

BRIEF EXERCISE 9-8 Depreciation expense for each year:

Depreciable Year Amount* × 2017 2018

$32,000 32,000

Depr. Rate

25% × 9/12 25%

Depr. Expense $ 6,000 8,000

End of Year Accum. Carrying Depr. Amount $38,000 $ 6,000 32,000 14,000 24,000

*Depreciable amount = $38,000 − $6,000 = $32,000

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 9-9 The double diminishing-balance rate is 50% (25% × 2) and this rate is applied to the carrying amount at the beginning of the year. Depreciation expense for each year is as follows: Double Diminishing-balance Carrying Amount Beginning Year Of Year × 2017 2018 2019 2020

$38,000 28,500 14,250 7,125

Depr. Rate

50% × 1/2 50% 50% 50%

Depr. Expense $ 9,500 14,250 7,125 1,125¹

End of Year Accum. Carrying Depr. Amount $ 38,000 $ 9,500 28,500 23,750 14,250 30,875 7,125 32,000 6,000

¹ Limited to the amount that brings the carrying amount to the residual value of $6,000

BRIEF EXERCISE 9-10 (a)

Annual depreciation: ($250,000 − $10,000)  6 = $40,000 Equipment cost ............................................... Less accumulated depreciation ($40,000 × 3) for 2015 to 2017................. Carrying amount Dec. 31, 2017 ......................

(b) Impairment Loss......................................... Accumulated Depreciation—Equipment Carrying amount (a) ........................................ Less: Recoverable amount ............................ Impairment loss...............................................

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$250,000 120,000 $130,000 30,000 30,000 $130,000 100,000 $ 30,000

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 9-11 Carrying amount, Jan. 1, 2017 ($32,000 − $9,000) ............. $23,000 Less: Residual value ....................................................... (2,000) Remaining depreciable amount ..................................... 21,000 Remaining useful life......................................................... ÷ 4 years Revised annual depreciation expense 2017 .................. $ 5,250

BRIEF EXERCISE 9-12 Accumulated Depreciation— Equipment................................................... Equipment ..............................................

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 9-13 (a) Mar. 31

(b) Mar. 31

Depreciation Expense [($86,400 − $2,200) ÷ 5 × 3/12] ........ Accumulated Depreciation —Equipment .............................

4,210 4,210

Cash ................................................ 35,000 Accumulated Depreciation— Equipment ¹ .................................... 54,730 Gain on Disposal ...................... 3,330 Equipment ................................. 86,400

¹ [($86,400 − $2,200) ÷ 60 months × 39 months] = $54,730

$16,840 x 3 years (2014-2016) ........................... $50,520 Depreciation for 3 months in 2017 .................. 4,210 Accumulated Depreciation to March 31 .......... $54,730¹ Cost of equipment .................................... Less: accumulated depreciation ............. Carrying amount at date of disposal....... Proceeds from sale .................................. Gain on disposal ...................................... (c) Mar. 31

Cash ................................................ 29,000 Accumulated Depreciation— 54,730 Equipment....................................... Loss on Disposal............................ 2,670 Equipment ................................. 86,400

Cost of equipment .................................... Less: accumulated depreciation ............. Carrying amount at date of disposal....... Proceeds from sale .................................. Loss on disposal ......................................

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$86,400 54,730 31,670 35,000 $ 3,300

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$86,400 54,730 31,670 29,000 $ 2,670

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 9-14 Jan. 7

Equipment (new) ........................... Accumulated Depreciation —Equipment .................................. Loss on Disposal........................... Equipment (old) ........................ Cash...........................................

29,000** 30,000 7,000* 61,000 5,000

**Cost of new = consideration paid in cash plus fair value of old asset: ($5,000 + $24,000 = $29,000) *Loss on disposal = Carrying amount − fair value: [($61,000 − $30,000) − $24,000 = $7,000]

BRIEF EXERCISE 9-15 Depletion base = $6,500,000 − $500,000 = $6,000,000 Depletion per unit = $6,000,000 ÷ 25,000,000 tonnes = $0.24 per tonne Depletion expense for ore extracted in Year 1: $0.24 per tonne × 5,000,000 tonnes = $1,200,000 Aug. 31 Inventory ....................................... 1,200,000 Accumulated Depletion—Mine 1,200,000

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BRIEF EXERCISE 9-16 (a)

(b)

2017 Jan.

2 Patents .................................... Cash....................................

150,000

Dec. 31 Amortization Expense ($150,000  8) .......................... 18,750 Accumulated Amortization— Patents ...............................

150,000

18,750

BRIEF EXERCISE 9-17 (a) (b) (c) (d) (e) (f)

PPE NA (expense) I NR NA (current asset) PPE

(g) (h) (i) (j) (k) (l)

PPE NA (investment) PPE I NA (expense) I

BRIEF EXERCISE 9-18 H. DENT COMPANY Balance Sheet (Partial) December 31, 2017 (in millions)

Property, plant, and equipment Land .......................................................... $ 400,000 Buildings .................................................... $1,100,000 Less: Accumulated depreciation ............ 600,000 500,000 Nickel mine............................................... 500,000 Less: Accumulated depletion ................. 108,000 392,000 Total property, plant, and equipment .............. 1,292,000 Goodwill ............................................................................... 410,000 Solutions Manual .

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BRIEF EXERCISE 9-19 ($ in US millions)

Return on assets

$720 [($17,108 + $15,977) ÷ 2] = 4.35%

Asset turnover

$16,042 [($17,108 + $15,977) ÷ 2] = 0.97 times

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 9-1 (a)

The acquisition cost of a property, plant, and equipment includes all expenditures necessary to acquire the asset and make it ready for its intended use. This includes not only the invoice cost of acquisition, but any freight, installation, testing, and similar costs to get the asset ready for use. For example, the cost of factory equipment includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs. Costs such as these benefit the life of the factory equipment and not just the current period. Consequently, they should be capitalized and depreciated over the equipment’s useful life.

(b) 1. 2. 3. 4. 5. 6. 7. 8.

Land Land Land Land ($4,800 − $900 = $3,900) Vehicles Vehicles Licence Expense Land Improvements

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-2 (a) Land Building Land Improvements

(b)

(c)

Appraised Value $ 476,000 748,000 136,000 $1,360,000

% of Total 35% 55% 10%

Land ......................................................... Building.................................................... Land Improvements ................................ Cash..................................................... Mortgage Payable ...............................

Cost Allocated $ 448,000 704,000 128,000 $1,280,000 448,000 704,000 128,000 255,000 1,025,000

Depreciable amount for the building is $654,000 ($704,000 – $50,000). With a 60-year useful life, annual depreciation expense is $10,900 ($654,000  60). Depreciable amount for the land improvements is $128,000. With a fifteen year useful life, annual depreciation expense is $8,533 ($128,000  15).

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-3 1.

False. The inverse is true. Depreciation is a process of cost allocation, not asset valuation.

True.

False. The fair value of a plant asset may exceed the carrying amount of that asset. The best example is land because it is not depreciated.

False. Depreciation does not apply to land because its revenue producing ability generally remains intact over time.

False. Buildings do not have indefinite physical life and must therefore be depreciated.

True. Although there could be exceptions due to the nature of the long-lived asset.

False. The process of depreciating a long-lived asset does not involve cash, but a charge as an expense on the income statement. No cash is being accumulated for the purpose of replacing the asset.

True.

False. Depreciation expense is reported on the income statement but the accumulated depreciation is reported on the balance sheet.

10.

False. The fair value of a depreciable asset is not a factor used in the calculation of depreciation.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-4 (a) Straight-line

Depreciable Year Cost** ×

Depr. Rate*

Depr. Expense

2016 2017

20% × 1/2 20%

$33,000 66,000

$330,000 330,000

End of Year Accum. Carrying Depr. Amount $345,000 $33,000 312,000 99,000 246,000

* Straight-line rate = 100% ÷ 5 years = 20% ** $345,000 − $15,000 = $330,000 (b) Diminishing-balance Carrying Amount Beginning Year × of Year

Depr. Rate*

Depr. Expense

2016 2017

40% × 1/2 40%

$69,000 110,400

$345,000 276,000

End of Year Accum. Carrying Depr. Amount $345,000 $69,000 276,000 179,400 165,600

*Double diminishing balance rate = 200% ÷ 5 years = 40% (c)

Units-of-Production

Units-ofDepr. Year Production × Cost/Unit* =

Depr. Expense

2016 2017

$39,050 65,230

71,000 118,600

$0.55 0.55

End of Year Accum. Carrying Depr. Amount $345,000 $39,050 305,950 104,280 240,720

*Depreciable amount per unit is $0.55 per unit: [($345,000 − $15,000) ÷ 600,000 units = $0.55]

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-4 (Continued) (d)

In this particular case, the unit-of-production can be used as management is able to reliably estimate the amount of total production that will be obtained by using the equipment. This method allows for the best matching of depreciation costs with the related benefits obtained from the asset’s use. Another factor affecting the choice of depreciation methods is consistency with methods used in the past for similar type assets. Since this is a rather expensive piece of equipment, Blue Ribbon’s policy of recording a half year’s depreciation in the year of acquisition could conceivably bias the amount charged for depreciation in 2016. Coincidentally, the date of purchase happens to be within one month of the mid-point of the fiscal year. The choice of methods would consequently not differ tremendously between the unit-of-production and the straight-line methods. Future purchases of depreciable assets could nonetheless unfairly charge depreciation in the year of purchase. By choosing the unitof-production, the bias is removed.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-5 (a)

(1) Straight-line

Depreciable Year Amount* ×

Depr. Rate**

Depr. Expense

2016 2017 2018 2019 2020

25% × 8/12 25% 25% 25% 25% × 4/12

$19,200 28,800 28,800 28,800 9,600

$115,200 115,200 115,200 115,200 115,200

End of Year Accum. Carrying Depr. Amount $129,200 $19,200 110,000 48,000 81,200 76,800 52,400 105,600 23,600 115,200 14,000

* $129,200 − $14,000 = $115,200 **Straight-line rate = 100% ÷ 4 years = 25% (2)

Double diminishing-balance

Carrying Amount Beginning Year of Year × 2016 2017 2018 2019

$129,200 86,133 43,066 21,533

Depr. Rate* =

Depr. Expense

50% × 8/12 50% 50% 50%

$43,067 43,067 21,533 7,533**

End of Year Accum. Carrying Depr. Amount $129,200 $43,067 86,133 86,134 43,066 107,667 21,533 115,200 14,000

*Double diminishing rate = 200% ÷ 4 years = 50% ** Limited to the amount that brings the carrying amount to the residual value of $14,000.

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EXERCISE 9-5 (Continued) (a) (Continued) (3) Units-of-Production

Year 2016 2017 2018 2019 2020

End of Year Units of Deprec. Depr. Accum. Carrying Production × Amt/Unit* = Expense Depr. Amount $129,200 1,900 $9.60 $18,240 $18,240 110,960 2,800 9.60 26,880 45,120 84,080 3,700 9.60 35,520 80,640 48,560 2,700 9.60 25,920 106,560 22,640 1,100 9.60 8,640** 115,200 14,000

* Depreciation amount per unit is $9.60/hour [($129,200 – $14,000)  12,000 hours = $9.60] ** Limited to the amount that brings the carrying amount to the residual value of $14,000 (actual production of 12,200 exceeded estimated total production of 12,000). (b)

Over the life of the asset, depreciation expense (in total) will be the same for all three methods, so the total profit will also be the same.

(c)

Cash flow is the same under all three methods. Depreciation is an allocation of the cost of a long-lived asset and not a cash expenditure.

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EXERCISE 9-6 (a)

July 1 Equipment .................................. 500,000 2015 Cash.......................................

500,000

Dec. 31 Depreciation Expense ................. 25,000 2015 Accumulated Depreciation— Equipment ($500,000 ÷ 10 × 6/12)

25,000

Dec. 31 Depreciation Expense ................. 50,000 2016 Accumulated Depreciation— Equipment ($500,000 ÷ 10) ...

50,000

(b) Carrying amount of the equipment—Dec. 31, 2016 [$500,000 – ($50,000 × 1.5 years)] ............. $425,000 Recoverable amount .................................. 325,000 Impairment loss.......................................... $100,000 Dec. 31 Impairment Loss ........................ 100,000 2016 Accumulated Depreciation— Equipment ............................. (c)

100,000

January 1, 2017 Carrying amount is $325,000 Depreciation expense for 2017: $325,000 ÷ 8.5 years = $38,235. December 31, 2017 Carrying amount is $286,765 ($325,000 − $38,235).

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EXERCISE 9-7 (a)

Annual depreciation — current estimate Building: ($800,000 – $40,000) ÷ 20 yrs = $38,000 per year Equipment: ($125,000 – $5,000) ÷ 5 yrs = $24,000 per year

(b) Carrying amount — Building Jan. 1, 2017: $230,000 [$800,000 – ($38,000 × 15)] Carrying amount — Equipment Jan. 1, 2017: $77,000 [$125,000 – ($24,000 × 2)] (c)

Annual depreciation — revised estimate — 2017 Building: [($230,000 – $60,500) ÷ (30 − 15 yrs)] = $11,300 per year Equipment: [($77,000 – $4,000) ÷ (4 – 2 yrs)] = $36,500 Carrying amount — Building Dec. 31, 2017: $218,700 ($230,000 – $11,300) Carrying amount — Equipment Dec. 31, 2017: $40,500 ($77,000 – $36,500)

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EXERCISE 9-8 (a)

Annual depreciation — first two years of equipment’s life ($90,000 – $9,000) ÷ 6 yrs = $13,500 per year

(b) Carrying amount Building Sept. 30, 2017: $63,000 [$90,000 – ($13,500 × 2)] (c)

2017 Oct.

1 Equipment .................................... 15,000 Cash.......................................

15,000

(d) 2018 Sept. 30 Depreciation Expense ................. 24,333 Accumulated Depreciation —Equipment .........................

24,333

Carrying amount Sept. 30, 2017 (b)........................ Add: Upgrade .......................................................... Less: Revised residual value ................................ Remaining depreciable amount ............................. Remaining useful life (4 − 1) ................................... Revised annual depreciation expense ...................

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$63,000 15,000 78,000 5,000 $73,000 ÷ 3 years $24,333

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-9 (a) Apr.

1 Depreciation Expense ............................ 1,125 Accumulated Depreciation —Equipment................................... ($45,000 ÷ 10 years × 3/12)

July 30 Depreciation Expense ............................ 2,450 Accumulated Depreciation —Equipment................................... ($12,600 ÷ 3 years × 7/12) Nov. 1 Depreciation Expense ............................ 3,125 Accumulated Depreciation—Vehicles ($35,000 − $5,000) ÷ 8 years × 10/12)

1,125

2,450

3,125

(b) Apr.

1 Accumulated Depreciation —Equipment*...................................... Loss on Disposal................................ Equipment ...................................... *[($45,000 ÷ 10 years) × 9] + $1,125

July 30 Cash .................................................... Accumulated Depreciation —Equipment*...................................... Loss on Disposal ............................... Equipment ...................................... *[($12,600 ÷ 3 years) × 2] + $2,450 Nov. 1 Vehicles (New) ($7,000+$36,000) ....... Accumulated Depreciation —Vehicles*.......................................... Loss on Disposal** ($7000-$12,500**) Vehicles (Old)................................. Cash................................................ *($35,000 − $5,000) ÷ 8 X 6 ** ($33,500 - $22,500) - $7,000 Solutions Manual .

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41,625 3,375 45,000

1,100 10,850 650 12,600

43,000 22,500 5,500 35,000 36,000

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EXERCISE 9-9 (Continued) *Accumulated depreciation on old truck: 2011 (3,750 x 2/12) 2012-2016 (3,750 x 5 years) 2017 (from part a) Total accumulated depreciation

$ 625 18,750 3,125 $22,500

**Carrying value of old truck on November 1, 2017 $12,500 (35,000-22,500)

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EXERCISE 9-10 (a) 2020 Jan. 2 Cash .................................................... Accumulated Depreciation —Equipment*...................................... Gain on Disposal ........................... Equipment ...................................... *($65,000 − $5,000) ÷ 5 X 3

31,000 36,000 2,000 65,000

(b) 2020 May 1 Cash .................................................... 31,000 Accumulated Depreciation —Equipment*...................................... 40,000 Gain on Disposal ........................... 6,000 Equipment ...................................... 65,000 *($65,000 − $5,000) ÷ 5 = $12,000 $12,000 X (3 years + 4 months) = $40,000 (c) 2020 Jan. 2 Cash .................................................... Accumulated Depreciation —Equipment*...................................... Loss on Disposal................................ Equipment ...................................... *($65,000 − $5,000) ÷ 5 X 3

11,000 36,000 18,000 65,000

(d) 2020 Oct. 1 Cash .................................................... 11,000 Accumulated Depreciation —Equipment*...................................... 45,000 Loss on Disposal................................ 9,000 Equipment ...................................... 65,000 *($65,000 − $5,000) ÷ 5 = $12,000 $12,000 X (3 years + 9 months) = $45,000

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EXERCISE 9-11 (a)

The units-of-production method is recommended for depleting natural resources because it best reflects the pattern over which the assets’ future economic benefits are expected to be consumed. It requires that an estimate can be made of the total number of units that are available to be extracted from the resource.

(b) Dec. 31 Inventory ($1.50 × 100,000) ....... 150,000 Accumulated Depletion—Resource

150,000

Depreciable amount $1,300,000 − $100,000 = $1,200,000 Depreciable amount per unit: $1,200,000 ÷ 800,000 tonnes = $1.50 per tonne (c) PHILLIPS EXPLORATION Income Statement (Partial) Year Ended December 31, 2017 Cost of goods sold: (will include this amount plus other costs) ($1.50 × 100,000 tonnes) ............................ $150,000 PHILLIPS EXPLORATION Balance Sheet (Partial) December 31, 2017 Assets Property, plant, and equipment Ore mine ................................................ $1,300,000 Less: Accumulated depletion ............ 150,000

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$1,150,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-12 1.

The original entry to add the cost of removing the old building, legal fees and clearing and grading the land to the Land account is correct. The student’s accounting treatment is incorrect. The costs involved must be added to the cost of land as they were necessary costs to acquire the land and get it ready for its intended use.

Although consistency is necessary in applying accounting policies, in this case it should not have been the basis for recording depreciation on the trademarks. Trademarks can have usefulness to the business indefinitely. This is the probable reason that depreciation had not been recorded for trademarks in the past. As long as trademarks continue to assist in producing revenue and their carrying amounts have not been impaired, they should not be depreciated. Rather they should be tested regularly for impairment. If a permanent decline in value has occurred, the trademarks must be written down and an impairment loss recorded on the income statement. Therefore, the depreciation entry should be reversed and no decline in value recorded unless an impairment occurs.

This student’s reasoning is faulty and an incorrect application of the principle of consistency in accounting. Adjusting property, plant, and equipment for increases to their fair value occurs when the business uses the revaluation model or fair value model under the International Financial Accounting Standards (IFRS). This is very unlikely the case for Chin Company. As well, current fair values are subjective and not reliable; they are not used to increase the recorded value of an asset after acquisition. The appropriate accounting treatment is to leave the building on the books at its zero carrying amount.

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EXERCISE 9-13 (a) 2016 Jan. 9

Patents ............................................. Cash.............................................

45,000

Goodwill ........................................... Cash.............................................

450,000

Dec. 31 Amortization Expense ..................... Accumulated Amortization —Patents ($45,000 ÷ 5) ...............

9,000

May 15

45,000

450,000

9,000

Impairment Loss.............................. Goodwill ($450,000 − $400,000)..

50,000

Patents ............................................. Cash.............................................

30,000

Mar. 31 Research Expense .......................... Cash.............................................

175,000

Apr.

Copyrights ....................................... Cash.............................................

66,000

Trademark ........................................ Cash.............................................

275,000

2017 Jan. 2

July

Dec. 31

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50,000

30,000

175,000

66,000

275,000

Amortization Expense ..................... 21,450 Accumulated Amortization—Patents [($45,000 – $9,000 + $30,000) ÷ 4] Accumulated Amortization— Copyrights [($66,000 ÷ 10) × 9/12]

16,500

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EXERCISE 9-13 (Continued) (b) Assets Intangible assets Patents ................................................. Less: Accumulated amortization ....... Copyrights............................................ Less: Accumulated amortization ....... Trademark ............................................ Total intangible assets ........................ Goodwill ....................................................

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$75,000 25,500 66,000 4,950

$49,500 61,050 275,000 $385,550 $400,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-14 (a) Patent Purchase price Jan. 1, 2014 Amortization 2014 (1) Amortization 2015 Amortization 2016 Balance Dec. 31, 2016 Amortization 2017 (2) Balance Dec. 31, 2017 (1) (2)

Cost $400,000

Carrying Amount

Amort. $50,000 50,000 50,000

$250,000 $83,333 $166,667

($400,000 ÷ 8 years) Carrying amount ÷ (6 – 3 years) = $250,000 ÷ 3

Trademark Purchase price during 2010 Legal defence during 2016 Balance Dec. 31, 2016 Balance Dec. 31, 2017 (3)

Cost $250,000 50,000 $300,000

(b) Income statement – December 31, 2017 Operating expenses: Amortization expense—Patents Impairment loss

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Carrying Impairment Amount

$300,000 $25,000 $275,000

$83,333 25,000

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EXERCISE 9-15 (a)

Account Accumulated amortization— Buildings Accumulated amortization— Leasehold Improvements Accumulated amortization— Fixtures & Equipment Accumulated amortization— Computer Equipment Accumulated amortization— Software Accumulated amortization – Other intangibles

Financial Statement

Balance Sheet

Section Property, Plant and Equipment Property, Plant and Equipment Property, Plant and Equipment Property, Plant and Equipment

Balance Sheet

Intangibles

Balance Sheet

Intangibles Property, Plant and Equipment

Balance Sheet Balance Sheet Balance Sheet

Buildings Cost-U-Less banner (trademark)

Balance Sheet

Computer Equipment

Balance Sheet

Fixtures & Equipment Goodwill Interest expenses

Balance Sheet Balance Sheet Income Statement

Land

Balance Sheet

Leasehold improvements Other intangible assets Other non-current assets Software

Balance Sheet Balance Sheet Balance Sheet Balance Sheet

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Intangibles Property, Plant and Equipment Property, Plant and Equipment Intangibles Operating Expenses Property, Plant and Equipment Property, Plant and Equipment Intangibles Non-current Assets Intangibles

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Accounting Principles, Seventh Canadian Edition

EXERCISE 9-15 (Continued) (b) The North West Company Inc. Balance Sheet (Partial) January 31, 2015 (in thousands)

Non-current assets: Other non-current assets................................................ Property, plant, and equipment Land ............................................................................. Buildings ....................................................... $377,061 Less: Accumulated amortization ................. 209,584 Fixtures and equipment .......................... 265,706 Less: Accumulated amortization ............ 186,617 Leasehold improvements........................ 51,845 Less: Accumulated amortization ........... 30,296 Computer equipment............................... 73,151 Less: Accumulated amortization ................. 62,074 Total property, plant, and equipment ...................

$12,555 16,041 167,477 79,089 21,549 11,077 295,233

Intangible assets Cost-U-Less banner (trademark) ............................... Software .......................................................... $28,376 Less: Accumulated amortization ................... 17,032 Other intangible assets .............................. 7,989 Less: Accumulated amortization ................... 5,750 Total intangible assets...........................................

11,344

Goodwill ...........................................................................

33,653

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8,902

2,239 22,485

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EXERCISE 9-16 (a) (in millions) December 31, 2014 Asset $39,862 turnover [($79,671 + $78,315) ÷ 2]

Return on assets

December 31, 2013 $39,593 [($78,315 + $76,401) ÷ 2]

= 0.50 times

= 0.51 times

$2,699 [($79,671 + $78,315) ÷ 2]

$3,911 [($78,315 + $76,401) ÷ 2]

= 3.4%

= 5.1%

(b) Suncor’s asset turnover has essentially remained the same as revenues and total assets changed only slightly from 2013 to 2014. On the other hand, profits declined significantly, in spite of steady revenues. Return on assets has deteriorated from 5.1% to 3.4%.

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SOLUTIONS TO PROBLEMS PROBLEM 9-1A (a)

Jan. 12

Land ........................................... 420,000 Cash....................................... Notes Payable .......................

16 Land ............................................... Cash....................................... 31

Feb. 13

Mar. 14

Apr. 22

Sept. 26

8,500 8,500

Land ........................................... 25,000 Cash.......................................

25,000

Cash ........................................... 10,000 Land .......................................

10,000

Land ........................................... Cash.......................................

9,000

Building...................................... 38,000 Cash.......................................

38,000

Building...................................... 15,000 Cash.......................................

15,000

Building...................................... 17,000 Cash.......................................

17,000

Building...................................... 750,000 Cash....................................... Mortgage Payable .................

150,000 600,000

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

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95,000 325,000

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4,500 4,500

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PROBLEM 9-1A (Continued) (a) (Continued) Oct. 20 Land Improvements..................... 45,000 Cash.......................................

45,000

Nov. 15 Land Improvements..................... 12,000 Cash.......................................

12,000

(b) Date 2017 Jan. 12 16 31 Feb. 13 28

Date 2017 Mar. 14 31 Apr. 22 Sept.26

Date 2017 Oct. 20 Nov. 15

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Explanation

Land Ref.

Debit

Credit

420,000 8,500 25,000 10,000 9,000

Explanation

Building Ref.

Debit

Credit

38,000 15,000 17,000 750,000

Land Improvements Explanation Ref. Debit 45,000 12,000

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Balance 420,000 428,500 453,500 443,500 452,500

Balance 38,000 53,000 70,000 820,000

Credit

Balance 45,000 57,000

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PROBLEM 9-1A (Continued) (b) (Continued) The costs that will appear on Kadlec’s December 31, 2017 balance sheet will be: Land $452,500 Building 820,000 Land Improvements 57,000 Taking It Further: Companies should start to record depreciation when the asset is ready for use. In the case of Kadlec, the building was ready for use on September 26, 2017 and land improvements were completed on November 15, 2017 and so depreciation should be calculated from those dates. Kadlec should depreciate only the building and land improvements. Land has an indefinite useful life and therefore is not depreciated.

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PROBLEM 9-2A (a)

Land Building Equipment

Appraised Value $275,000 343,750 68,750 $687,500

% of Total 40% 50% 10%

Cost Allocated $260,000 325,000 65,000 $650,000

(b) Building: Straight-line 1. To the nearest whole month Depreciable Year Amount* × 2016 2017

$300,000 300,000

Depr. Rate

Depr. Expense

1/60 × 10/12 1/60

$4,167 5,000

End of Year Accum. Carrying Depr. Amount $325,000 $4,167 320,833 9,167 315,833

*$325,000 − $25,000 = $300,000 2. Half a year in the year of acquisition Depreciable Year Amount* × 2016 2017

$300,000 300,000

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Depr. Rate

Depr. Expense

1/60 × 6/12 1/60

$2,500 5,000

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End of Year Accum. Carrying Depr. Amount $325,000 $2,500 322,500 7,500 317,500

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PROBLEM 9-2A (Continued) (b) (Continued) Equipment: Double diminishing-balance 1. To the nearest whole month Carrying Amount Beginning Depr. Depr. Year of Year × Rate* = Expense 2016 2017

$65,000 51,458

25% × 10/12 25%

$13,542 12,865

End of Year Accum. Carrying Depr. Amount $65,000 $13,542 51,458 26,407 38,593

* 200% ÷ 8 = 25% 2. Half a year in the year of acquisition Carrying Amount Beginning Depr. Depr. Year of Year × Rate = Expense 2016 2017 (c)

$65,000 56,875

25% × 1/2 25%

$8,125 14,219

End of Year Accum. Carrying Depr. Amount $65,000 $8,125 56,875 22,344 42,656

Both options are acceptable. When deciding between adopting policy of recording depreciation to the nearest whole month or recording a half year of depreciation in the year of acquisition, ChalkBoard should consider, for purpose of consistency, the policy used in the past. Since this is the first year of business, ChalkBoard should consider what other categories or types of assets it will be purchasing in the current and future years that will be depreciated using this policy. If for example, the remaining categories of assets will be depreciated using the units-ofproduction method, the choice will not matter. The impact of the choice will not be significant in the long run, particularly if the assets are bought and sold frequently. Also, the impact is insignificant for assets with very long useful lives, as is demonstrated in part (b) for the building. No matter the choice taken by ChalkBoard, the policy must be followed consistently.

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PROBLEM 9-2A (Continued) Taking It Further: ChalkBoard should not consider depreciating to the exact day of acquisition as this level of precision is not relevant on the long-run particularly for assets with long useful lives, such as is the case for the building. Since the length of the useful life is an estimate, applying a policy of depreciating to the day will provide an amount for the depreciation expense that is insignificantly different from the amount arrived at using to the nearest month policy.

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PROBLEM 9-3A (a)

Invoice price $210,000 Delivery cost 4,400 Installation and testing 5,600 Cost of the equipment $220,000 The $1,975 insurance policy is an annual operating expenditure and not included in the cost of the asset.

(b) 1. STRAIGHT-LINE DEPRECIATION

Depreciable Year Amount ×

Depr. Rate

2016 2017 2018 2019

25%** 25% 25% 25%

* **

$205,000* 205,000 205,000 205,000

Depr. Expense $ 51,250 51,250 51,250 51,250

End of Year Accum. Carrying Depr. Amount $220,000 $ 51,250 168,750 102,500 117,500 153,750 66,250 205,000 15,000

$220,000 − $15,000 = $205,000 100% ÷ 4= 25%

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PROBLEM 9-3A (Continued) (b) (Continued) 2. DOUBLE DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×

Depr. Rate

2016 2017 2018 2019

50%* 50% 50% 50%

$220,000 110,000 55,000 27,500

End of Year Depr. Accum. Carrying = Expense Depr. Amount $220,000 $110,000 $110,000 110,000 55,000 165,000 55,000 27,500 192,500 27,500 12,500** 205,000 15,000

* 200% ÷ 4 = 50% ** Limited to the amount that brings carrying amount to the residual value of $15,000. 3. UNITS-OF-PRODUCTION End of Year Units of Depr. Depr. Accum. Carrying Year Production × Amt/Unit* = Expense Depr. Amount $220,000 2016 16,750 $2.50* $ 41,875 $ 41,875 178,125 2017 27,600 2.50 69,000 110,875 109,125 2018 22,200 2.50 55,500 166,375 53,625 2019 16,350 2.50 38,625** 205,000 15,000 * Depreciable amount per unit is $2.50 per unit [($220,000 – $15,000)  82,000 = $2.50] ** Equal to the amount that brings the carrying amount to the residual value of $15,000 (actual production of 82,900 exceeded estimated total production of 82,000).

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PROBLEM 9-3A (Continued) (c)

The straight-line method of calculating depreciation provides the lowest amount of depreciation expense for 2017, which results in the highest amount of profit. Over the life of the asset, all three methods result in the same total depreciation expense (equal to the depreciable amount) and therefore the same amount of profit.

Taking It Further: The cost of recycling the equipment at the end of its useful life is an asset retirement cost and the amount must be estimated and added to the cost the equipment — part (a). These costs would consequently be added to the depreciable amount in the calculation of depreciation under all of the methods and would proportionately increase the amount of depreciation charge — part (b).

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PROBLEM 9-4A (a) Transaction

Land

Building

Equip. ment

Jan. 12 Feb. 6 Apr. 24 May 17 July 19 Aug. 21 Sept. 20 Oct. 25 Dec. 31 Dec. 31

NE NE NE NE NE NE NE NE NE NE

NE NE +$75,000 NE NE NE NE NE NE NE

NE NE NE NE NE NE NE NE NE NE +$26,000 NE NE NE +$20,000 NE NE NE NE +$37,500

Accum. Depr.

Total PP&E

NE −$2,200 NE −$5,400 +$75,000 NE NE −$3,100 NE −$5,900 +$26,000 NE NE −$2,700 +$20,000 NE NE NE −$37,500 −$37,500

(b) Jan. 12 Repairs Expense ....................... Cash.......................................

2,200

Feb.

5,400

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

Apr. 24

Profit

2,200

5,400

Building...................................... 75,000 Cash.......................................

75,000

Note: Possibly add to as a separate component of the building depending on the type of system, and whether it has the same useful life as the rest of the building. May. 17 Training Expense ...................... Cash.......................................

3,100

July 19 Repairs Expense ....................... Cash.......................................

5,900

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PROBLEM 9-4A (Continued) (b) (Continued)

Aug. 21

Vehicles ..................................... 26,000 Cash.......................................

Sept. 20 Repairs Expense ....................... Cash....................................... Oct. 25

2,700

Equipment.................................. 20,000 Cash.......................................

Dec. 31 Impairment Loss ....................... 37,500 Accumulated Depreciation— Equipment ............................ [($150,000 − $62,500) − $50,000] Note:

26,000

2,700

20,000

37,500

ASPE does not allow the reversal of the impairment loss for the land.

Taking It Further: Given that the engine has to be replaced frequently, consideration should be given to depreciating this component of the equipment using a four year useful life and the remainder of the equipment the twelve year useful life. The major difficulty with this is determining how much of the cost of the equipment to allocate to the engine. One possibility is to use the value of a replacement motor to establish the cost of the original motor at the date of the purchase of the equipment.

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PROBLEM 9-5A (a)

Depreciable Year Amount ×

Depr. Rate*

2013 2014 2015 2016 2017

10%** 10% 10% 10% 10%

$700,000** 700,000 700,000 700,000 700,000

Depr. Expense $70,000 70,000 70,000 70,000 70,000

End of Year Accum. Carrying Depr. Amount $750,000 $70,000 680,000 140,000 610,000 210,000 540,000 280,000 470,000 350,000 400,000

** 100% ÷ 10 years = 10% ** Depreciable amount = $750,000 − $50,000 = $700,000 (b)

Dec. 31 Impairment Loss ....................... 2017 Accumulated Depreciation— Equipment ............................ ($400,000 − $320,000)

80,000 80,000

(c)

On Slope’s income statement will be reported depreciation expense in the amount of $70,000 and the impairment loss of $80,000. On Slope’s balance sheet, the equipment will be reported at its cost of $750,000 and accumulated depreciation of $430,000 ($350,000 + $80,000) so that the carrying amount will be $320,000 ($750,000-$430,000) and, equal to the impaired amount.

(d)

End of Year Depr. Depr. Accum. Carrying Rate = Expense Depr. Amount $430,000* $320,000 33.33%** $103,333 533,333 216,667 33.33% 103,333 636,666 113,334 33.33% 103,334 740,000 10,000

Depreciable Year Amount*** × 2018 2019 2020

$310,000 310,000 310,000

*Accumulated Depreciation = $350,000 end of year before impairment loss + $80,000 impairment loss ** 100% ÷ 3 years remaining (8 – 5 years) = 33.33% *** Carrying amount – revised res. value = $320,000 – $10,000 Solutions Manual .

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PROBLEM 9-5A (Continued) Taking It Further: One of the major differences between IFRS and ASPE concerns the measurement and reporting of depreciable assets. Under IFRS, it is possible to report these types of assets at their fair value, using the revaluation model, while under ASPE, no revaluation beyond a capital asset’s historical cost is possible. Consistent with this distinction, is the treatment of recoveries of previously recorded impairments. The basis for reporting depreciable assets at their fair value under IFRS is that the value used can be reliably measured. As well, under IFRS the frequency of the scrutiny of the assets to determine any impairment is greater and the measures taken more rigorous. Private companies reporting under ASPE typically do not have the same level of resources needed (as a public company reporting under IFRS) to determine if an impairment exists or if it has been reversed. Under ASPE, impairments are recorded less frequently and thus it is reasonable that ASPE does not allow the recording of reversals of impairment losses.

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PROBLEM 9-6A (a) 2015 Apr.

1 Land............................................ 150,000 Building ...................................... 235,000 Cash....................................... Notes Payable .......................

Dec. 31

Depreciation Expense ............... 6,000 Accumulated Depreciation—Building ($235,000 - $35,000) × 4% × 9/12 = $6,000)

31 Interest Expense .......................... 10,125 Cash....................................... ($270,000 × 5% × 9/12 = $10,125) 2016 Feb. 17 Dec. 31

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

115,000 270,000 6,000

10,125

225 225

Depreciation Expense ............... 8,000 Accumulated Depreciation—Building ($235,000 - $35,000) × 4% = $8,000)

8,000

31 Interest Expense .......................... 13,500 Cash....................................... ($270,000 × 5% = $13,500)

13,500

31 Impairment Loss .......................... 30,000 Land ....................................... ($150,000 − $120,000)

30,000

Building — no entry as carrying amount = $221,000; ($235,000 − $6,000 − $8,000 = $221,000) which does not exceed the recoverable amount of $240,000.

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PROBLEM 9-6A (Continued) (a) (Continued) 2017 Jan. 31 Depreciation Expense ............... 667 Accumulated Depreciation—Building ($200,000 × 4% × 1/12) 31 Cash ........................................... 320,000 Accumulated Depreciation— Building*...................................... 14,667 Loss on Disposal (see below) ..... 20,333 Land ....................................... Building ................................. * ($6,000 + $8,000 + $667) Land (Carrying amount)....... Building................................. $235,000 Less: Accumulated dep’n .... 14,667 Carrying amount .................. Proceeds ............................... Loss on disposal .................. Feb.

(b)

1 Interest Expense ($270,000 × 5% × 1/12) .................. 1,125 Notes Payable ............................ 270,000 Cash.......................................

667

120,000 235,000

$120,000 220,333 340,333 320,000 $ 20,333

271,125

The land may have been impaired due to contamination found on it or surrounding properties. It may also have been because plans for a proposed new development on adjacent land that would have increased the value of NW Tool Supply’s property at the date of purchase, have been permanently shelved.

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PROBLEM 9-6A (Continued) (c)

Oct. 31 Depreciation Expense ................... 6,667 Accumulated Depreciation—Building ($200,000 × 4% × 10/12) Oct. 31 Cash ........................................... 400,000 Accumulated Depreciation —Building*................................. 20,667 Land ....................................... Building ................................. Gain on Sale (see below)...... * ($6,000 + $8,000 + $6,667) Land (Carrying amount)....... Building................................. $235,000 Less: Accumulated dep’n .... 20,667 Carrying amount .................. Proceeds ............................... Gain on disposal (sale) ........

6,667

120,000 235,000 65,667

$120,000 214,333 334,333 400,000 $ 65,667

Taking It Further: For purposes of calculating and recording impairments, the recoverable amount of a property is based on the comparison of the carrying amount of the asset against the higher of the fair value of the asset less the cost to sell it, or its value in use. In this case, the property is made up of land and a building which are somewhat inseparable. Consequently, the value in use to NW Tool Supply would be the amount management expects to recover in operations by using the assets together. As for establishing the fair value of the combined assets, property of similar location and type that have been recently sold can be used to make comparisons of what would be obtained on sale. Management should be diligent about looking for possible causes for impairment.

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PROBLEM 9-6A (Continued) Taking It Further: (Continued) When considering impairment of the land on its own, uninsured damages or conditions uncovered during the year may require management to recalculate the value in use or the resale fair value of the land. Under ASPE the review of property, plant, and equipment for possible impairment need not be performed each year, but must be performed on a regular basis, particularly when changes in circumstance or conditions occur. If the company is using IFRS, annual impairment testing is required.

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PROBLEM 9-7A

(a)

1. STRAIGHT-LINE DEPRECIATION

Depreciable Year Amount × 2015 2016 2017

$97,000* 97,000 97,000

Depr. Rate

33.33%** 33.33% 33.33%

Depr. Expense $32,333 32,333 32,334

End of Year Accum. Carrying Depr. Amount $107,500 $32,333 75,167 64,666 42,834 97,000 10,500

* $107,500 − $10,500 = $97,000 ** 100% ÷ 3 years = 33.33% 2. DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×

Depr. Rate

2015 2016 2017

40% 40% 40%

$107,500 64,500 38,700

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Depr. Expense $43,000 25,800 15,480

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End of Year Accum. Carrying Depr. Amount $107,500 $43,000 64,500 68,800 38,700 84,280 23,220

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PROBLEM 9-7A (Continued) (a) (Continued) 3. UNITS-OF-PRODUCTION Units of Depr. Depr. Year Production × Amt/Unit* = Expense 2015 2016 2017

10,000 20,000 29,000

$1.617* 1.617 1.617

$ 16,170 32,340 46,893

End of Year Accum. Carrying Depr. Amount $107,500 $ 16,170 91,330 48,510 58,990 95,403 12,097

* Depreciable amount per unit is $1.617 per unit [($107,500 – $10,500)  60,000 = $1.617] (b)

(1) (2) Straight- DiminishingLine Balance

Cost ...................................... $107,500 Accumulated depreciation.. 97,000 Carrying amount ................. 10,500 Cash proceeds .................... 15,000 Gain (loss) on sale .............. $ 4,500 (c)

$107,500 84,280 23,220 15,000 $ (8,220)

(1) (2) Straight- DiminishingLine Balance

Depreciation expense ......... $97,000 Add loss (less gain) on sale (4,500) Net expense ......................... $92,500

$84,280 8,220 $92,500

(3) Unit –ofProduction $107,500 95,403 12,097 15,000 $ 2,903 (3) Unit –ofProduction $95,403 (2,903) $92,500

The net expense is the same under all three methods. The different depreciation methods results in different accumulated depreciation at the date of sale, which in turn causes a different gain or loss on sale. Consequently, the total depreciation expense recognized over the life of the asset, plus the loss on sale (or less the gain on sale), results in the same net expense of $92,500 over the life of the asset.

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PROBLEM 9-7A (Continued) Taking It Further: I disagree. Experiencing a gain or loss on the disposal of a depreciable asset is not the result of an error or mistake. Rather, a gain or loss is an expected outcome due to the limitations of the cost allocation that has occurred for the asset up to the date of its disposal. Since estimates are involved in arriving at the factors used in calculating depreciation, such as the estimated useful life and the estimated residual value, it is natural that some differences between the carrying amount and proceeds of disposition will occur when the asset is ultimately disposed of. Depreciation is a cost allocation process and is not intended to ensure the carrying amount of the asset reflects fair value.

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PROBLEM 9-8A (a)

(b)

2015 Mar.

1 Equipment .................................... 95,000 Accounts Payable .................

2015 Aug. 31 Depreciation Expense ................... 9,500 Accumulated Depreciation —Equipment ......................... $95,000 × 20% × 6/12 months = $9,500 2016 Aug. 31 Depreciation Expense ................. 17,100 Accumulated Depreciation —Equipment ......................... ($95,000 − $9,500) × 20% = $17,100

95,000

9,500

17,100

2017 Aug. 31 Depreciation Expense ................. 13,680 Accumulated Depreciation —Equipment ......................... 13,680 ($95,000 − $9,500 − $17,100) × 20% = $13,680 (c)

2018 Feb.

1 Depreciation Expense ................... 4,560 Accumulated Depreciation —Equipment ......................... 4,560 ($95,000 − $9,500 − $17,100 − $13,680) × 20% × 5/12 = $4,560 Accumulated Depreciation at February 1, 2018: $9,500 + $17,100 + $13,680 + $4,560 = $44,840 Carrying Amount at February 1, 2018: Cost – Accumulated Depreciation $50,160 = $95,000 − $44,840

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PROBLEM 9-8A (Continued) (c) (Continued) 1.

Feb.

1 Accumulated Depreciation —Equipment ................................ 44,840 Loss on Disposal* ....................... 50,160 Equipment .............................

95,000

*Proceeds – Carrying Amount = Gain (loss) $0 – [$95,000 – $44,840] = ($50,160) 2.

Feb.

1 Cash ............................................. 55,000 Accumulated Depreciation —Equipment ................................ 44,840 Gain on Disposal** .................... Equipment ............................. ** $55,000 – [$95,000 – $44,840] = $4,840 1 Cash ............................................. 45,000 Accumulated Depreciation —Equipment ................................ 44,840 Loss on Disposal*** ....................... 5,160 Equipment ............................. *** $45,000 – [$95,000 – $44,840] = ($5,160)

4,840 95,000

Feb.

1 Equipment (new) ($47,000 + $45,000) ...................... 92,000 Accumulated Depreciation —Equipment ................................ 44,840 Loss on Disposal**** ..................... 3,160 Cash ($97,000 − $52,000)...... Equipment (old) .................... **** $47,000 – [$95,000 – $44,840] = ($3,160)

95,000

Feb.

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PROBLEM 9-8A (Continued) Taking It Further: The following are the arguments in favour of recording gains and losses on disposal of property, plant, and equipment as: 1.

Part of profit from operations: Gains and losses are basically just adjustments to depreciation expense and should be recorded in the same section of the income statement. Classifying gains and losses as operations removes the potential for management bias in the selection of depreciation methods or in the estimates concerning useful lives and residual values of the assets. Bias might be at play concerning management’s unwillingness to show losses in operations because management bonuses may be based on the amount of profit from operations.

Non-operating items: The same management bias described above would be applied for gains recognized by the business. A common view is that the disposal of property, plant, and equipment is not an everyday occurrence and gains or losses are not predictable. It can also be argued that selling property, plant, and equipment is not part of normal operations and thus gains or losses should not be reported as part of profit from operations.

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PROBLEM 9-9A (a)

April

1 Land............................................2,200,000 Cash....................................... 550,000 Notes Payable ....................... 1,650,000

May

1 Depreciation Expense .................. 46,667 Accumulated Depreciation—Equip. ($1,400,000 ÷ 10 × 4/12) ........

46,667

1 Cash .............................................150,000 Accumulated Depreciation —Equipment. ............................1,166,667 Loss on Disposal .......................... 83,333 Equipment ............................. 1,400,000 Cost Accumulated depreciation—equip. [($1,400,000 ÷ 10) × 8 + $46,667)] Carrying amount Cash proceeds Loss on disposal

$1,400,000 1,166,667 233,333 150,000 $ (83,333)

June

1 Cash .............................................450,000 Notes Receivable ......................1,350,000 Land ....................................... 700,000 Gain on Disposal .................. 1,100,000

July

1 Equipment .................................1,100,000 Cash....................................... 1,100,000

Dec. 31 Depreciation Expense .................. 50,000 Accumulated Depreciation —Equipment ($500,000 ÷ 10)

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PROBLEM 9-9A (Continued) (a) (Continued) Dec. 31 Accum. Depr.—Equipment..........350,000 Loss on disposal* ........................150,000 Equipment ............................. 500,000 Cost $500,000 Accumulated depreciation—equipment ($500,000 ÷ 10 × 7) 350,000 Carrying amount 150,000 Cash proceeds 0 Gain (loss) on disposal $ (150,000)* (b) Dec. 31 Depreciation Expense .................974,000 Accumulated Depreciation —Building ($48,700,000 ÷ 50) 974,000 31 Depreciation Expense ..............7,365,000 Accumulated Depreciation —Equipment ......................... 7,365,000 $73,100,000* ÷ 10 $1,100,000 ÷ 10 × 6/12

$7,310,000 55,000 $7,365,000

*$75,000,000 − $1,400,000 − $500,000 = $73,100,000

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31 Interest Expense ........................... 74,250 Interest Payable .................... ($1,650,000 × 6% × 9/12)

74,250

31 Interest Receivable ....................... 39,375 Interest Revenue................... ($1,350,000 × 5% × 7/12)

39,375

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PROBLEM 9-9A (Continued) (c) (Continued) Equipment Jan. 1, 2017 July 1, 2017

75,000,000 1,100,000

May 1, 2017 Dec. 31, 2017

1,400,000 500,000

Dec.31, 2017Bal. 74,200,000 Accumulated Depreciation—Building Jan. 1, 2017 Dec. 31, 2017

31,100,000 974,000

Dec. 31, 2017 Bal. 32,074,000

Accumulated Depreciation—Equipment May 1, 2017 Dec. 31, 2017

1,166,667 350,000

Jan. 1, 2017 May 1, 2017 Dec. 31, 2017 Dec. 31, 2017

27,000,000 46,667 50,000 7,365,000

Dec. 31, 2017 Bal. 32,945,000

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PROBLEM 9-9A (Continued) Taking It Further: Although the use of the revaluation model is permitted for public companies following International Financial Reporting Standards (IFRS), its adoption is voluntary, and somewhat rare. The revaluation model results in more relevant information on the balance sheet, because the long-lived assets are revalued to fair value on a regular basis. An investor may be better able to assess the current economic position of the company with this information. However, the revaluation model increases the risk of error and bias in the financial statements because the revaluation model uses a fair value amount that is not necessarily supported by a transaction with an independent buyer.

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PROBLEM 9-69A 1.

Research Expense ($160,000 × 55%) ........ 88,000 Patents.................................................... Accumulated Amortization—Patents........ Amortization Expense ........................... $88,000 ÷ 15 years = $5,867

5,867

Goodwill ...................................................... Amortization Expense ........................... ($400,000 ÷ 40 years) × 6/12 = $5,000

5,000

88,000

5,867

Impairment Loss ($80,000 − $70,000)........ 10,000 Licence ...................................................

5,000

10,000

Taking It Further: The majority of intangible assets that are developed internally cannot be recognized as intangible assets on the balance sheet because the expenditures on internally developed intangibles cannot be distinguished from the cost of other research and development performed by the business. The costs cannot be separately measured and must be expensed as incurred.

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PROBLEM 9-11A (a)

Jan.

Patent #1 .................................... 23,200 Cash.......................................

23,200

June 30 Research Expense .................... 180,000 Cash.......................................

180,000

Patent #2 .................................... 60,000 Cash.......................................

60,000

Sept. 1 Advertising Expense ................. 12,000 Cash.......................................

12,000

Oct.

(b)

Dec. 31 Amortization Expense............... 12,400 Accumulated Amortization— Patent #1* .............................. Accumulated Amortization— Patent #2**.............................

18,000

10,900 1,500

* [($80,000 × 1/10) + ($23,200 × 1/8)] At Jan. 1, 2017 Patent # 1 has been amortized 2 years ($16,000 ÷ $80,000 = 2/10) — remaining period to amortize is 8 years. ** [$60,000 × 1/20 × 6/12 = $1,500] 31 Amortization Expense............... Accumulated Amortization— Copyright #1* ........................ Accumulated Amortization— Copyright #2** ....................... *($48,000 × 1/10) **($18,000 × 1/6 × 3/12)

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PROBLEM 9-11A (Continued) (c) IP COMPANY (Partial) Balance Sheet December 31, 2017

Assets Intangible assets Patents1 ................................................ Less: Accumulated amortization2...... Copyrights3 .......................................... Less: Accumulated amortization4...... Total intangible assets ........................ Goodwill ....................................................

$163,200 28,400 66,000 34,350

$134,800 31,650 $166,450 $220,000

Cost: Patent #1 ($80,000 + $23,200) + Patent #2 ($60,000) = $163,200 2 Accumulated Amortization: Patent #1 ($16,000 + $10,900) + Patent #2 ($1,500) = $28,400 3 Cost: Copyright #1 ($48,000) + Copyright #2 ($18,000) = $66,000 4 Accumulated Amortization: Copyright #1 ($28,800 + $4,800) + Copyright #2 ($750) = $34,350

Taking It Further: Although intangible assets do not have physical substance, they have characteristics common to other assets in that they contribute to the revenue producing ability of a business that owns them. They are owned and controlled by the business and therefore fit the definition of assets.

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PROBLEM 9-12A (a)

2016 Mar. 31 Resource ................................... 2,860,000 Cash.................................. 2,860,000 ($2,600,000 + $260,000) Dec. 31 Inventory ................................. Accumulated Depletion — Resource ..........................

570,000 570,000

($2,860,000 − $200,000) ÷ 560,000 t = $4.75/t $4.75/t × 120,000 t = $570,000 Dec. 31 Cost of Goods Sold ................ Inventory .......................... 2017 Dec. 31 Inventory ................................. Accumulated Depletion — Resource ..........................

570,000 570,000 380,000 380,000

($2,860,000 − $570,000 − $200,000) ÷ 550,000 t = $3.80/t $3.80/t ×100,000 t = $380,000 Dec. 31 Cost of Goods Sold ................ Inventory ..........................

380,000 380,000

(b) RIVERS MINING COMPANY Income Statement (partial) Year Ended December 31, 2017 Cost of goods sold ........................................

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PROBLEM 9-12A (Continued) (b) (Continued) RIVERS MINING COMPANY (Partial) Balance Sheet December 31, 2017 Property, plant, and equipment Resource ................................................ $2,860,000 Less: Accumulated depletion* ........... 950,000 $1,910,000 * $570,000 + $380,000 = $950,000 Taking It Further: Due to its nature, it is expected that the estimate of the total amount of ore to be extracted from a mine would need to be adjusted as extraction occurs and better estimates can be made. Management should not be influenced by the need for changes in estimates when choosing the units-of-production method for recording depletion of the resource. It is the method that best allocates the cost of the mine to the units of ore that are recorded in inventory.

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PROBLEM 9-13A (a) (in thousands) Andruski Company

Brar Company

$552.0 [($702.5 + $662.8) ÷ 2]

$1,762.9 [($1,523.5 + $1,410.7) ÷2]

= 0.81 to 1

= 1.20 to 1

$515.9 [($662.8 + $602.5) ÷ 2]

$1,588.2 [($1,410.7 + $1,318.4) ÷2]

= 0.82 to 1

= 1.16 to 1

Return on assets 2017

$21.4 [($702.5 + $662.8) ÷ 2]

$96.5 [($1,523.5 + $1,410.7) ÷2]

= 3.13%

= 6.58%

Return on assets 2016

$20.6 [($662.8 + $602.5) ÷ 2]

$85.4 [($1,410.7 + $1,318.4) ÷2]

= 3.26%

= 6.26%

Asset turnover 2017

Asset turnover 2016

(b) Brar Company is far more efficient in using its assets to generate sales–its assets turnover of 1.20 times is higher than 0.82 times for Andruski Company and is increasing, while Andruski’s is decreasing. Brar is also more efficient in using assets to produce profit–with a return on assets of 6.58% compared to 3.13% for Andruski Company. Brar’s ratio is increasing while Andruski’s in decreasing.

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PROBLEM 9-13A (Continued) Taking It Further: Although the ability to compare two companies in the same industry using ratios is affected by the depreciation methods adopted by the companies being compared, absolute conclusions cannot be drawn from these differences. Brar uses the straight-line method of depreciation and Andruski uses the diminishing-balance method which results in higher charges of depreciation in the early years and lower amounts in the later years for Andruski. Assets are acquired throughout the life of a company as well so it is not possible to determine the impact of the different methods without more information. Notwithstanding this limitation, and assuming a normal turnover of assets, one could generally conclude that the amount of profit and total assets of Andruski would be lower than that of Brar, simply because of the accelerated method of depreciation being used, which generated a higher expense for depreciation and a lower carrying amount for the assets.

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PROBLEM 9-1B (a)

Feb.

Land ........................................... 575,000 Cash....................................... Notes Payable ....................... Land ........................................... Cash.......................................

115,000 460,000

7,500 7,500

Land ........................................... 19,000 Cash.......................................

19,000

Cash ........................................... Land .......................................

8,500

Land ........................................... 10,500 Cash.......................................

10,500

Building...................................... 28,000 Cash.......................................

28,000

Building...................................... 18,000 Cash.......................................

18,000

Building...................................... 850,000 Cash....................................... Notes Payable .......................

170,000 680,000

Sept. 3 Land Improvements .................. 40,000 Cash.......................................

40,000

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

3,750

Mar.

Aug. 31

3,750

Oct. 31 Land Improvements .................. 37,750 Cash.......................................

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PROBLEM 9-1B (Continued) (b) Date 2017 Feb. 7 9 15 17 25

Date 2017 Mar. 2 15 Aug. 31

Date 2017 Sept. 3 Oct. 31

Explanation

Land Ref.

Debit

Credit Balance

575,000 7,500 19,000 10,500

575,000 582,500 601,500 593,000 603,500

Debit

Credit Balance

28,000 18,000 850,000

28,000 46,000 896,000

Land Improvements Explanation Ref. Debit

Credit Balance

40,000 37,750

40,000 77,750

8,500

Explanation

Building Ref.

The costs that will appear on Weisman’s December 31, 2017 balance sheet will be: Land $603,500 Building 896,000 Land Improvements 77,750

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PROBLEM 9-1B (Continued) Taking It Further: Companies should start to record depreciation when the asset is ready for use. In the case of Weisman, the building was ready for use on August 31, 2017 and land improvements were completed on October 31, 2017 and so depreciation should be calculated from those dates. Weisman should depreciate only the building and land improvements. Land has an indefinite useful life and therefore is not depreciated.

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PROBLEM 9-2B (a)

Land Building Equipment

Appraised Value $262,500 337,500 150,000 $750,000

% of Total 35% 45% 20%

Cost Allocated $245,000 315,000 140,000 $700,000

(b) Building: Straight-line 1. To the nearest month Depreciable Year Amount* × 2016 2017

$300,000 300,000

Depr. Rate

Depr. Expense

1/60 × 2/12 1/60

$833 5,000

End of Year Accum. Carrying Depr. Amount $315,000 $833 314,167 5,833 309,167

* $315,000 − $15,000 = $300,000 (2) Half a year in the year of acquisition Depreciable Year Amount* × 2016 2017

$300,000 300,000

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Depr. Rate

Depr. Expense

1/60 × 6/12 1/60

$2,500 5,000

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End of Year Accum. Carrying Depr. Amount $315,000 $2,500 312,500 7,500 307,500

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PROBLEM 9-2B (Continued) (b) (Continued) Equipment: Double diminishing-balance 1. To the nearest month Carrying Amount Beginning Depr. Depr. Year of Year × Rate* = Expense 2016 2017

$140,000 134,167

25% × 2/12 25%

$5,833 33,542

End of Year Accum. Carrying Depr. Amount $140,000 $5,833 134,167 39,375 100,625

* 200% ÷ 8 = 25% 2) Half a year in the year of acquisition Carrying Amount Beginning Depr. Depr. Year of Year × Rate = Expense 2016 2017 (c)

$140,000 122,500

25% × 6/12 25%

$17,500 30,625

End of Year Accum. Carrying Depr. Amount $140,000 $17,500 122,500 48,125 91,875

Both options are acceptable. When deciding between the two policies, Solinger should consider, for purpose of consistency, the policy used in the past. Since this is the first year of business, Solinger should consider what other categories or types assets it will be purchasing in the future that will be depreciated using this policy. If for example, the remaining categories of assets will be depreciated using the units-of-production method, the choice will not matter. The impact of the choice will not be significant in the long run, particularly if the assets are bought and sold frequently. Also, the impact is insignificant for assets with very long useful lives, as is demonstrated in part (b) for the building. No matter the choice taken by Solinger, the policy must be followed consistently.

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PROBLEM 9-2B (Continued) Taking It Further: If Solinger had decided to use the units-of-production method instead of the diminishing-balance method for depreciating its equipment, the decision between the adoption of a policy for depreciating to the nearest month or half a year in the year of acquisition would not matter. When using the units-ofproduction method, the calculation of depreciation is not calculated as a function of the time the asset is used but is based on the amount of use that is being made of the asset, which in turn is based on some units of output or production. There is no pro-ration for time used in the units-of-production method.

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PROBLEM 9-3B (a)

Cost: Cash price Delivery costs Installation and testing Total cost

$442,000 4,000 6,000 $452,000

The one-year insurance policy is not included as it is an operating expenditure, benefiting only the current period. (b) 1. STRAIGHT-LINE DEPRECIATION

Depreciable Year Amount ×

Depr. Rate

2016 2017 2018 2019

25% 25% 25% 25%

* **

$432,000* 432,000 432,000 432,000

End of Year Depr. Accum. Carrying = Expense Depr. Amount $452,000 $ 108,000 $ 108,000 344,000 108,000 216,000 236,000 108,000 324,000 128,000 108,000 432,000 20,000

$452,000 − $20,000 = $432,000 100% ÷ 4 years = 25%

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PROBLEM 9-3B (Continued) (b) (Continued) 2. DOUBLE DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×

Depr. Rate

2016 2017 2018 2019

50% 50% 50% 50%

$452,000 226,000 113,000 56,500

End of Year Depr. Accum. Carrying = Expense Depr. Amount $452,000 $226,000 $226,000 226,000 113,000 339,000 113,000 56,500 395,500 56,500 36,500** 432,000 20,000

* 200% ÷ 4 = 50% ** Use the amount that brings carrying amount to the residual value of $20,000. 3. UNITS-OF-PRODUCTION DEPRECIATION Units of Depr. Year Production × Amt./Unit* = 2016 2017 2018 2019

22,600 45,600 49,700 32,200

$2.88* 2.88 2.88 2.88

End of Year Depr. Accum. Carrying Expense Depr. Amount $452,000 $65,088 $ 65,088 386,912 131,328 196,416 255,584 143,136 339,552 112,448 92,448** 432,000 20,000

* Depreciation amount per unit: ($452,000 − $20,000) ÷ 150,000 units = $2.88 ** Use the amount that makes carrying amount equal to residual value (actual production exceeded estimated total production).

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PROBLEM 9-3B (Continued) (c)

The straight-line method provides the lowest amount of depreciation expense for 2017, thus resulting in the highest profit that year. Over the life of the asset, all three methods result in the same total depreciation expense (equal to the depreciable amount).

Taking It Further: The cost of recycling the equipment at the end of its useful life is an asset retirement cost which must added to the cost of the equipment — part (a). These costs would consequently be added to the depreciable amount in the calculation of depreciation under all of the methods and would proportionately increase the amount of depreciation expense — part (b).

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PROBLEM 9-4B (a) Transaction

Land

Building

Equip. ment

Accum. Depr.

Total PP&E

Profit

Jan. 22 NE NE NE NE NE −$4,600 Apr. 10 NE NE +$95,000 NE +$95,000 NE May 6 NE NE NE NE NE −$30,500 July 20 NE NE NE NE NE −$10,000 Aug. 7 NE NE +$35,000 NE +$35,000 NE Aug. 15 NE NE NE NE NE −$1,900 Oct. 25 NE NE +$18,200* NE +18,200 NE Nov. 6 NE +$120,000 NE NE +$120,000 NE Dec. 31 NE NE NE +$85,000** −$85,000 −$85,000 Dec. 31 +$75,000*** NE NE NE +$75,000 +$75,000

*$18,200 = $16,700 + $1,500 **$85,000 = [($250,000 − $75,000) − $90,000] ***$75,000 = $575,000 − $500,000 (b) Jan. 22

Apr. 10

May

July 20

Aug.

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Repairs Expense ....................... Accounts Payable .................

4,600 4,600

Equipment.................................. 95,000 Accounts Payable .................

95,000

Repairs Expense ....................... 30,500 Accounts Payable .................

30,500

Repairs Expense ....................... 10,000 Accounts Payable .................

10,000

Equipment.................................. 35,000 Accounts Payable .................

35,000

Training Expense ...................... Accounts Payable .................

1,900

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PROBLEM 9-4B (Continued) (b) (Continued) Oct. 25

Nov.

Equipment.................................. 16,700 Accounts Payable .................

16,700

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

1,500

Building...................................... 120,000 Accounts Payable .................

120,000

Dec. 31 Impairment Loss ....................... 85,000 Accumulated Depreciation— Equipment .............................

85,000

Dec. 31

Land ........................................... 75,000 Impairment Loss ...................

75,000

Under IFRS, the reversal of the impairment loss is limited to the amount required to increase the asset’s carrying amount to what it would have been if the impairment loss had not been recorded. In this case the original cost of the land was $575,000 and the amount of the impairment recorded to date is $75,000 ($575,000 − $500,000). Since the current recoverable amount of $600,000 is greater than the original cost of the land, before impairment was recorded, the recovery entry is limited to $75,000. Taking It Further: Given that the engine has to be replaced frequently, consideration should be given to depreciating this component of the equipment using a five year useful life and the remainder of the equipment the fifteen year useful life. If the original equipment does not have an amount specified for the engine as a component, it would be reasonable to use the value of a replacement motor to establish the cost of the original motor at the date of the purchase of the equipment.

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PROBLEM 9-5B (a)

Depreciable Year Amount ×

Depr. Rate

2013 2014 2015 2016 2017

10% 10% 10% 10% 10%

$575,000* 575,000 575,000 575,000 575,000

Depr. Expense $57,500 57,500 57,500 57,500 57,500

End of Year Accum. Carrying Depr. Amount $600,000 $ 57,500 542,500 115,000 485,000 172,500 427,500 230,000 370,000 287,500 312,500

* Depreciable amount = $600,000 − $25,000 = $575,000 ** 1 ÷ 10 years = 10% (b)

Dec. 31 Impairment Loss .......................... 52,500 2017 Accumulated Depreciation— Equipment ............................ ($312,500 − $260,000)

52,500

(c)

On Short Track’s income statement will be reported depreciation expense in the amount of $57,500 and the impairment loss of $52,500. On Short Track’s balance sheet the equipment will be reported at its cost of $600,000 and the accumulated depreciation of $340,000 ($287,500 + 52,500) so that the book value will be $260,000 equal to the impaired amount.

(d)

End of Year Depr. Accum. Carrying = Expense Depr. Amount $340,000¹ $260,000 $125,000 465,000 135,000 125,000 590,000 10,000

Year

Depreciable Amount ×

Depr. Rate

2018 2019

$250,0002 250,000

50%3 50%

¹ Accumulated Depreciation = $287,500 end of year before impairment loss + $52,500 impairment loss 2 Depreciable amount = Recoverable amount at date of impairment less revised residual value of $10,000 3 1 ÷ 2 years (7 – 5 years) remaining = 50% Solutions Manual .

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PROBLEM 9-5B (Continued)

Taking It Further: It is important to record impairment losses when they occur to ensure that the amount of benefit to be derived from long-lived assets is not overstated on the balance sheet. When assets lose their utility, they must be reduced to the recoverable amount expected to be obtained through their use. Postponing a loss until the asset is sold or disposed of would result in mismatching costs and their related revenues and an overstatement of assets.

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PROBLEM 9-6B (a)

2015 Jul.

1 Equipment .................................. 395,000 Cash....................................... Notes Payable .......................

Dec. 31 Depreciation Expense ................. 19,750 Accumulated Depreciation— Equipment ............................ [($395,000 x (200% ÷ 20)) x 6/12] 31 Interest Expense ............................ 7,375 Cash....................................... ($295,000 x 5% x 6/12 = $7,375) 2016 May 21 Software Expense ......................... 2,000 Cash....................................... Dec. 31 Depreciation Expense ................. 37,525 Accumulated Depreciation— Equipment ............................ ($395,000-$19,750) x 10% = $37,525) 31 Interest Expense ....................... 14,750 Cash....................................... ($295,000 × 5% = $14,750)

100,000 295,000

19,750

7,375

2,000

37,525

14,750

31 Impairment Loss ....................... 62,725 Accumulated Depreciation— Equipment ............................ 62,725 [$275,000 – ($395,000 - $19,750 - $37,525)] Carrying value of equipment: $337,725 ($395,000-$19,750$37,525) Impairment loss: $62,725 ($337,725-$275,000)

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PROBLEM 9-6B (Continued) (a) (Continued) 2017 Mar. 31 Depreciation Expense ................... 6,875 Accumulated Depreciation— Equipment ............................ $275,000 x 10% × 3/12 = $6,875 31 Cash ........................................... 240,000 Accumulated Depreciation— Equipment* ............................ 126,875 Loss on Disposal ......................... 28,125 Equipment ............................. * ($19,750+$37,525+$62,725+$6,875) Equipment ................................... Less: Accumulated depreciation Carrying amount ......................... Proceeds ...................................... Loss on disposal ......................... Apr.

1 Interest Expense ................... 3,688 Notes Payable ....................... 295,000 Cash ..................................

6,875

395,000 $395,000 126,875 268,125 240,000 $ 28,125

298,688

(b) The products made using the robot may not be as popular so revenue will be declining in the future. Or there could be new technology that will make the robot obsolete and of lower value to the company. Alternatively, there could have been physical damage to the robot that might be the cause of the impairment in value.

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PROBLEM 9-6B (Continued) (c)

Sept. 30 Depreciation Expense ................. 20,625 Accumulated Depreciation— Equipment ............................ ($275,000 x 10%) x 9/12 = 20,625 30 Cash ........................................... 260,000 Accumulated Depreciation— Equipment** ............................... 140,625 Gain on Disposal .................. Equipment .............................

20,625

5,625 395,000

** ($19,750+$37,525+$62,725+$20,625) Equipment ............................................... Less: Accumulated depreciation ........... Carrying amount ..................................... Proceeds ................................................. Gain on disposal .....................................

$395,000 140,625 254,375 260,000 $ 5,625

Taking It Further: The recoverable amount of an asset is the higher of the fair value of the asset less the cost to sell it or its value in use calculated using discounted cash flows. In this case, the industrial robot will be used in production. Consequently, the value in use to SE Parts Supply would be the amount management expects to recover in operations by using the asset. As for establishing the fair value of the asset, equipment of similar type that has been recently sold can be used to make estimates of what would be obtained on sale. Under ASPE, impairment tests of property, plant and equipment need not be done every year, particularly if the likelihood of impairment is remote. Management should be diligent about looking for possible causes for impairment when changes in circumstances or conditions occur. If the company is using IFRS, annual impairment tests are required regardless of circumstances. Solutions Manual .

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PROBLEM 9-7B (a)

Invoice price Less proceed from sale Cost of ownership

$125,000 21,000 $104,000

1. STRAIGHT-LINE DEPRECIATION Depreciable Year Amount × 2016 2017 2018

$107,000* 107,000 107,000

Depr. Rate

33.333%** 33.333% 33.333%

Depr. Expense $35,667 35,667 35,666

End of Year Accum. Carrying Depr. Amount $125,000 $35,667 89,333 71,334 53,666 107,000 18,000

* $125,000 − $18,000 = $107,000 ** 1 ÷ 3 years = 33.333%

2. DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×

Depr. Rate

2016 2017 2018

45% 45% 45%

$125,000 68,750 37,812

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Depr. Expense $56,250 30,938 17,015

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End of Year Accum. Carrying Depr. Amount $125,000 $56,250 68,750 87,188 37,812 104,203 20,797

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PROBLEM 9-7B (Continued) (a) (Continued) 3. UNITS-OF-PRODUCTION Units of Depr. Depr. Year Production × Amt/Unit* = Expense 2016 2017 2018

6,000 2,000 3,800

$8.917* 8.917 8.917

$ 53,502 17,834 33,885

End of Year Accum. Carrying Depr. Amount $125,000 $ 53,502 71,498 71,336 53,664 105,221 19,779

* Depreciable amount per unit is $8.917 per unit [($125,000 – $18,000)  12,000 = $8.917] (b)

(1) (2) Straight- DiminishingLine Balance

Cost ...................................... $125,000 Accumulated depreciation.. 107,000 Carrying amount ..................... 18,000 Cash proceeds...................... 21,000 Gain on sale......................... $ 3,000 (c)

(3) Unit –ofProduction

$125,000 104,203 20,797 21,000 $ 203

$125,000 105,221 19,779 21,000 $ 1,221

(1) (2) Straight- DiminishingLine Balance

(3) Unit –ofProduction

Depreciation expense ......... $107,000 Deduct Gain on sale ............ 3,000 Net expense ......................... $104,000

$104,203 203 $104,000

$105,221 1,221 $104,000

The net expense is the same under all three methods. The different depreciation methods results in different accumulated depreciation at the date of sale, which in turn causes a different gain on sale. Consequently, the total depreciation expense recognized over the life of the asset, less the gain on sale, results in the same net expense of $104,000 over the life of the asset.

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PROBLEM 9-7B (Continued) Taking It Further: I disagree. Experiencing a gain or loss on the disposal of a depreciable asset is not the result of an error or mistake. Rather, a gain or loss is an expected outcome due to the limitations of the cost allocation that has occurred for the asset up to the date of its disposal. Since estimates are involved in arriving at the factors used in calculating depreciation, such as the estimated useful life and the estimated residual value, it is natural that some differences between the carrying amount and any proceeds of disposition will occur when the asset is disposed of.

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PROBLEM 9-8B (a)

(b)

2015 Feb.

4 Furniture ...................................... 70,000 Accounts Payable .................

2015 Sept. 30 Depreciation Expense ................... 9,333 Accumulated Depreciation —Furniture ............................ $70,000 × 20% × 8/12 months 2016 Sept. 30 Depreciation Expense ................. 12,133 Accumulated Depreciation —Furniture ............................ ($70,000 − $9,333) × 20% 2017 Sept. 30 Depreciation Expense ................... 9,707 Accumulated Depreciation —Furniture ............................ ($70,000 − $9,333 − $12,133) × 20%

(c)

2018 Jan. 26 Depreciation Expense ................... 2,588 Accumulated Depreciation —Furniture ............................ ($70,000 − $9,333 − $12,133 − $9,707) × 20% × 4/12

70,000

9,333

12,133

9,707

2,588

Accumulated Depreciation at January 26, 2018: $9,333 + $12,133 + $9,707 + $2,588 = $33,761 Carrying Amount at January 26, 2018: Cost – Accumulated Depreciation $70,000 − $33,761 = $36,239

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PROBLEM 9-8B (Continued) (c) (Continued) (1)

(2)

(3)

(4)

Jan. 26 Accumulated Depreciation— Furniture ...................................... 33,761 Loss on Disposal* ....................... 36,239 Furniture................................ * $0 – [$70,000 – $33,761] = ($36,239)

Jan. 26 Cash ............................................. 30,000 Accumulated Depreciation— Furniture ...................................... 33,761 Loss on Disposal** ........................ 6,239 Furniture................................ ** $30,000 – [$70,000 – $33,761] = ($6,239) Jan. 26 Cash ............................................. 40,000 Accumulated Depreciation— Furniture ...................................... 33,761 Gain on Disposal*** .............. Furniture................................ *** $40,000 – [$70,000 – $33,761] = $3,761

70,000

3,761 70,000

Jan. 26 Furniture ($55,000 + $30,000) ...................... 85,000 Accumulated Depreciation— Furniture ...................................... 33,761 Loss on Disposal**** ..................... 6,239 Cash ($100,000 − $45,000).... 55,000 Furniture................................ 70,000 **** $30,000 – [$70,000 – $33,761] = ($6,239)

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PROBLEM 9-8B (Continued) Taking It Further: The following are the arguments in favour of recording gains and losses on disposal of property, plant, and equipment as: 1.

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PROBLEM 9-9B

(a)

April

1 Land............................................1,900,000 Cash....................................... 475,000 Notes Payable ....................... 1,425,000

May

1 Depreciation Expense ................. 25,000 Accumulated Depreciation —Equipment ($750,000 ÷ 10 × 4/12) ..........

25,000

1 Cash ........................................... 350,000 Accumulated Depreciation— Equipment .................................. 550,000 Gain on Disposal .................. Equipment .............................

150,000 750,000

Cost $750,000 Accumulated depreciation—equipment 550,000 [($750,000 ÷ 10) × 7 + $25,000)] Carrying amount 200,000 Cash proceeds 350,000 Gain on disposal $150,000 June

July

1 Cash ........................................... 380,000 Notes Receivable ....................... 820,000 Land ....................................... Gain on Disposal ..................

1 Equipment ..................................1,000,000 Accounts Payable ................. 1,000,000

Dec. 31 Depreciation Expense ............... 47,000 Accumulated Depreciation —Equipment ($470,000 ÷ 10)

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300,000 900,000

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PROBLEM 9-9B (Continued) (a) (Continued) Dec. 31

Accumulated Depreciation— Equipment .................................. 376,000 Loss on disposal ......................... 94,000 Equipment .............................

470,000

Accumulated Depreciation on equipment: $376,000 [($470,000 ÷ 10) x 8 years] (b) Dec. 31 Depreciation Expense ............... 570,000 Accumulated Depreciation— Building ($28,500,000 ÷ 50) ..

570,000

31 Depreciation Expense ...............4,728,000 Accumulated Depreciation— Equipment ............................. 4,728,000 $46,780,000* ÷ 10 $1,000,000 ÷ 10 × 6/12

$4,678,000 50,000 $4,728,000

*$48,000,000 − $750,000 − $470,000 = $46,780,000

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31 Interest Expense .......................... 64,125 Interest Payable .................... ($1,425,000 × 6% × 9/12) = $64,125

64,125

31 Interest Receivable ...................... 28,700 Interest Revenue................... ($820,000 × 6% × 7/12) = $28,700

28,700

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PROBLEM 9-9B (Continued) (c)

JAINA COMPANY Balance Sheet (Partial) December 31, 2017

Property, plant, and equipment* Land ............................................. $ 5,600,000 Building ........................................... $28,500,000 Less: Accumulated depreciation . 12,670,000 15,830,000 Equipment ....................................... $47,780,000 Less: Accumulated depreciation . 18,874,000 28,906,000 Total property, plant, and equipment $50,336,000 *See T accounts that follow for balances Land Jan. 1, 2017 April 1, 2017

4,000,000 1,900,000

June 1, 2017

300,000

Dec. 31, 2017 Bal. 5,600,000 Building Jan. 1, 2017

28,500,000

Dec. 31, 2017 Bal. 28,500,000 Equipment Jan. 1, 2017 July 1, 2017

48,000,000 1,000,000

May 1, 2017 Dec. 31, 2017

750,000 470,000

Dec. 31, 2017 Bal. 47,780,000

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PROBLEM 9-9B (Continued) (c) (Continued) Accumulated Depreciation—Building Jan. 1, 2017 Dec. 31, 2017

12,100,000 570,000

Dec. 31, 2017 Bal. 12,670,000

Accumulated Depreciation—Equipment May 1, 2017 Dec. 31, 2017

550,000 376,000

Jan. 1, 2017 May 1, 2017 Dec. 31, 2017 Dec. 31, 2017

15,000,000 25,000 47,000 4,728,000

Dec. 31, 2017 Bal. 18,874,000 Taking It Further: Although the use of the revaluation model is permitted for those companies adopting the International Financial Reporting Standards (IFRS), its adoption is voluntary, and somewhat rare. Once adopted, the business will need to be consistent with the application of the model in the future. Additional evidence will be required each year to support the values that are being used in the revaluation. This could become expensive and the costs may exceed the benefits of implementing the revaluation model. Comparability with other companies might also be affected. Because the revaluation model is not acceptable under ASPE and most companies are private, this would be the primary reason why most companies use the cost model.

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PROBLEM 9-10B 1.

Research Expense ..................................... 70,000 Patents....................................................

70,000

Patents ........................................................ 21,000 Professional Fees Expense ..................

21,000

Amortization Expense................................ 7,450 Accumulated Amortization—Patents ... {[($45,000 + $21,000) ÷ 5 years] − $5,750}

7,450

Taking It Further: The majority of intangible assets that are developed internally cannot be recognized as intangible assets on the balance sheet because the expenditures on internally developed intangibles cannot be distinguished from the costs of other research and development performed by the business. The costs cannot be separately measured and are expensed as incurred.

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PROBLEM 9-11B (a)

Jan.

July

Aug.

Oct.

Trademark................................ Cash.....................................

7,000

1 Research Expense .................. Cash.....................................

275,000

Patents ..................................... Cash.....................................

50,000

1 Prepaid Advertising ................ Cash.....................................

45,000

7,000

275,000

50,000

Dec. 31 Amortization Expense............. 1,250 Accumulated Amortization— Patents ................................ [($50,000 ÷ 20) × 6/12] = $1,250]

45,000

168,000

1,250

Dec. 31 Amortization Expense ................. 19,000 Accumulated Amortization— Copyrights........................... 19,000 [($36,000 × 1/3) + ($168,000 × 1/6 × 3/12)]

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PROBLEM 9-11B (Continued)

(b) GHANI CORPORATION Balance Sheet (Partial) December 31, 2017

Assets Intangible assets Patents ................................................. $ 50,000 Less: Accumulated amortization ....... 1,250 $ 48,750 1 Copyrights .......................................... $204,000 Less: Accumulated amortization ....... 43,000 161,000 Trademark2 ........................................... 59,000 Total intangible assets ............................................. $268,750 Goodwill ............................................................................. $150,000 1

Copyright: Cost $36,000 + $168,000 = $204,000 Copyright: Amortization $24,000 + $19,000 = $43,000 2 Trademark: $52,000 + $7,000 = $59,000 Taking It Further: Although intangible assets do not have physical substance, they have characteristics common to other assets in that they contribute to the revenue producing ability of a business that owns them. They are owned and controlled by the business and therefore fit the definition of assets.

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PROBLEM 9-12B (a)

2016 June

7 Resource (Timber Land)...... 50,000,000 Cash................................ 10,000,000 Mortgage Payable .......... 40,000,000 26

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

196,000 196,000

Dec. 31 Inventory ................................ 5,280,000 Accumulated Depletion— 5,280,000 Resource ........................... ($50,000,000 − $2,000,000) ÷ 1,000,000 t = $48/t $48/t × 110,000 t = $5,280,000 31 Cost of Goods Sold ................ 5,280,000 Inventory ........................... 5,280,000 31 Depreciation Expense ........... Accumulated Depreciation —Equipment ..................... $196,000 ÷ 7 × 6/12 = $14,000

14,000 14,000

31 Interest Expense ($40,000,000 × 7% × 7/12) ....... 1,633,333 Cash................................... 1,633,333

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PROBLEM 9-12B (Continued) (a) (Continued) 2017 Dec. 31 Inventory ($48/t × 240,000 t)................... 11,520,000 Accumulated Depletion .— Resource ........................... 11,520,000 31 Cost of Goods Sold ............... 11,520,000 Inventory ........................... 11,520,000 31 Depreciation Expense ........... Accumulated Depreciation —Equipment ..................... ($196,000 ÷ 7) = $28,000

28,000 28,000

31 Interest Expense ($40,000,000 × 7%)................. 2,800,000 Cash................................... 2,800,000

(b) CYPRESS TIMBER COMPANY Income Statement (partial) Year Ended December 31, 2017 Cost of goods sold .................................

$11,520,000

Operating expenses: Depreciation expense.........................

Other expenses: Interest expense .................................

$ 2,800,000

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PROBLEM 9-12B (Continued) (b) (Continued) CYPRESS TIMBER COMPANY (Partial) Balance Sheet December 31, 2017

Property, plant, and equipment Resource ............................................. $50,000,000 Less: Accumulated depletion1 ........... 16,800,000 $33,200,000 Equipment ........................................... $196,000 2 Less: Accumulated depreciation ...... 42,000 154,000 Total property, plant, and equipment ..................$33,354,000 1 2

$5,280,000 + $11,520,000 = $16,800,000 $14,000 (2016) + $28,000 (2017) = $42,000

Taking It Further: Due to its nature, it is expected that the estimate of the total amount of units to be extracted from a timber tract would need to be adjusted as extraction occurs and better estimates can be made. Management should not be influenced by the need for changes in estimates when choosing the units-of-production method for recording depreciation of the timber tract. It is the depreciation method that best allocates the cost of the tract to the units of timber that are recorded to inventory.

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PROBLEM 9-13B (a) (in thousands) Mock Orange Company

Cotoneaster Company

$9,428.0 [($5,829.1 + $5,771.4) ÷ 2]

$3,839.8 [($2,754.5 + $2,504.1) ÷ 2]

= 1.63 to 1

= 1.46 to 1

$8,894.3 [($5,771.4 + $5,343.9) ÷ 2]

$3,656.9 [($2,504.1 + $2,340.3) ÷ 2]

= 1.60 to 1

= 1.51 to 1

Return on assets 2017

$627.7 [($5,829.1 + $5,771.4) ÷ 2]

$143.4 [($2,754.5 + $2,504.1) ÷ 2]

= 10.82%

= 5.45%

Return on assets 2016

$597.8 [($5,771.4 + $5,343.9) ÷ 2]

$137.9 [($2,504.1 + $2,340.3) ÷ 2]

= 10.76%

= 5.69%

Asset turnover 2017

Asset turnover 2016

(b) Mock Orange Company is more efficient in using its assets to generate sales–its asset turnover of 1.63 times is higher than the turnover of 1.46 for Cotoneaster Company and its ratio is increasing while Cotoneaster’s in decreasing. Mock Orange is also much more efficient in using assets to produce profit–with a return on assets of 10.82% compared to 5.45% for Cotoneaster Company. Moreover, Mock Orange's ratio is increasing while Cotoneaster’s is decreasing.

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PROBLEM 9-13B (Continued) Taking it Further: Although the ability to compare two companies in the same industry using ratios is affected by the depreciation methods adopted by the companies being compared, absolute conclusions cannot be drawn from these differences. In this particular comparison, in the early years of the useful lives of depreciable assets owed by Mock Orange will have lower amounts of depreciation recorded compared to Cotoneaster and will also have higher carrying amounts for the assets. This is the case because Mock Orange uses the straight-line method of depreciation and Cotoneaster uses the diminishing-balance method which results in high charges of depreciation in the early years and lower amounts in the later years. The opposite effect would occur in the amount of depreciation recorded in the later years of the useful lives of the assets being depreciated.

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BYP 9-1 FINANCIAL REPORTING PROBLEM (a)

(in thousands)

Land Broadcasting and computer equipment Buildings and Leasehold improvements Furniture and fixtures Other

Cost $5,539

(2) Accumu lated Deprecia tion

(3) Net Carrying Amount $5,539

146,115

$95,908

50,207

107,430 18,575 4,560 $282,219

30,198 11,193 1,302 $138,601

77,232 7,382 3,258 $143,618

(b) (1)

Broadcast licenses Goodwill (c)

(2)

Cost Impairments $997,435 $17,451 $1,000,408

65,549

(3) Net Carrying Amount $979,984 $934,859

As part of the disclosure provided in note 9 to the financial statements, no disposals or retirements were recorded for Broadcast licenses or Goodwill. On the other hand, impairment losses were recorded in the amount of $65,549,000 for Goodwill and $17,451,000 for Broadcast licenses.

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BYP 9-1 (Continued)

(d) The amount of depreciation and amortization expense for the fiscal year ending August 31, 2014 was $24,068,000. These expenses were outlined in the Consolidated Statement of Income and Comprehensive Income.

(e)

Corus use the cost model

Corus uses the straight-line method of depreciation for property and equipment.

The estimated useful lives for property and equipment and intangibles are: Buildings—Structure 20 to 30 years Buildings—Components 10 to 20 years Fixtures and equipment 7 years Leasehold improvements lease term Computer equipment 3 to 5 years Broadcasting equipment 5 to 10 years Other 4 to 10 years 4)

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Corus derecognized assets upon disposal or when no future economic benefits are expected from their use or disposal. Any gains or losses arising on derecognition of the assets are calculated as the difference between the net disposal proceeds and the carrying amount of the assets.

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BYP 9-2 INTERPRETING FINANCIAL STATEMENTS

(a)

Westjet could use unit-of-production method of depreciation for engine, airframe and landing gear overhaul. For safety reasons, the overhaul costs are done at fixed points following the use of the specific overhauled equipment. These fixed points are likely based on the number of hours this equipment is used in flight. If the use of the assets varied over time, or were seasonal, the unitof-production method would provide a better measure of the charge for depreciation against the revenue produced. It is likely that the amount of use of these assets does not vary a great deal over time, which justifies Westjet’s choice of the straight-line method. If the amount of use varies greatly over time Westjet should use the unit-ofproduction method.

(b) Major overhaul expenditures involve equipment that must be overhauled as a function of amount of use, typically hours in flight. These overhauls must be performed for safety reasons. The expected life between overhauls is very predictable, and likely dictated by safety associations or regulators. Since the timing of the benefit is easily measured, the best match of the major overhaul costs to the revenues is achieved by capitalizing the costs and then depreciating the capitalized overhauls over the benefiting periods. This is an appropriate technique as it is the best and fairest way to deal with major overhaul costs. Other fleet maintenance is minor and less predictable and Westjet’s policy to expense these costs immediately is appropriate.

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BYP 9-2 (Continued) (c)

Leasehold improvements frequently have physical lives that are longer than the terms of the lease. But since the control and enjoyment of leasehold improvements is limited to the term of a lease, it is appropriate to use the term of the lease for purposes of calculating depreciation. Consequently, the maximum length of benefit to the lessee is the term of lease, which is appropriate in the calculation of depreciation. If, on the other hand, the leasehold improvements have a physical life shorter than the term of the lease, the shorter period should be used for purposes of calculating depreciation.

(d) Westjet uses component depreciation for engine, airframe and landing gear overhaul. Engines, in particular are constantly being overhauled, and so spares are needed to ensure that the airplane can be used during the period needed to perform the overhaul. Since the period of benefit of these major overhauls is considerably shorter than the useful life of the aircraft, this technique is a good example of where component depreciation is very appropriate.

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BYP 9-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

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BYP 9-4 COMMUNICATION ACTIVITY Memorandum To: From:

Jason Long, Owner Ken Bond, Controller

Re:

Exchange of Long-Lived Assets

I am writing to you about the proposed exchange of one of our semi-trucks for a garage we could use as a branch of our repair operations. The truck we intend to exchange has a carrying value on our books of $100,000 but its fair value in its current condition is $75,000. The garage we would get in exchange has a fair value of $90,000. Consequently we would need to pay, in cash, in the amount of $15,000 ($90,000 less $75,000), the difference in the fair values of the two assets exchanged. (1) Because the fair value of the semi-truck is not the same as the carrying amount on our books, a gain or loss has to be recorded at the date of the exchange. The exchange transaction is a disposal combined with a purchase. In our case, the fair value is lower than the carrying amount and a loss of $25,000 ($100,000 carrying amount less $75,000 fair value) would have to be recorded. This loss will reduce profit for the period. The garage we obtain would be recorded at its fair value of $90,000. Because these are different types of assets with different useful lives, the garage will be depreciated at a different rate than the semi-truck. We will be consistent in our methods of depreciation with other assets in the same group. It is likely the depreciation on the garage will be lower than the depreciation we were recording on the semi-truck. As well, the garage is not likely to need frequent repairs as is the current case for the semi-truck.

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BYP 9-4 (Continued) (2)

The exchange of assets would be recorded as follows: Building .......................................... 90,000 Accumulated Depreciation— Vehicles.......................................... 65,000 Loss on Disposal .......................... 25,000 Vehicles .................................... 165,000 Cash .......................................... 15,000

(3) As I mentioned earlier, we will be consistent and use the same depreciation method for the garage as already use for buildings. Once we have established what our intentions are concerning how long we want to use the garage for operations and what the physical life of the garage, we will be able to calculate and record depreciation as soon as the garage is available for use.

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BYP 9-5 “ALL ABOUT YOU” ACTIVITY (a)

Generally, copyright means the sole right to produce or reproduce a work or a substantial part of it in any form. It also includes the right to perform a work, or in the case of a lecture to deliver it, and the right to publish an unpublished work. Copyright applies to all original literary, dramatic, musical, and artistic works. These include books, other writings, music, sculptures, paintings, maps, photographs, films, plays, television and radio programs, and computer programs. Copyright also applies to other subject matter including recordings (such as records, cassettes, DVDs, videos and tapes), performer's performances, and communication signals.

(b) A person acquires a copyright automatically when he or she creates an original work or other subject matter, provided the conditions set out in the Copyright Act have been met. Since you automatically obtain copyright, the law automatically protects you. You do not have to register your copyright in order to be protected. (c)

The Copyright Act provides that a certificate of registration is evidence that the copyright exists and that the person registered is the owner of the copyright. Being on the Register of Copyrights may also assist those wishing to seek permission to use the work.

(d) Registration of a copyright is done by completing an application and sending it to the Copyright Office, along with the appropriate fee.

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BYP 9-5 (Continued) (e)

The fee for filing on-line is $50 and is so small that it is not material. Consequently, most businesses decide to expense the fee immediately. It is possible that with several copyrights, a meaningful amount can be recorded as an asset as the fees have been incurred to protect the right to the works and will bring benefit to the business in the future.

(f)

Copyright infringement refers to unlawful use of copyright material. Plagiarism—passing off someone else's work as your own—is a form of infringement.

(g) A copyright generally lasts for the life of the author, plus 50 year following the calendar year the author dies.

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BYP 9-6 Santé Smoothie Saga

(a)

Purchase price ........................................................ Painting .................................................................... Shelving ................................................................... Cost of van...............................................................

(b)

1. STRAIGHT-LINE METHOD

Depreciable Year Amount × 2018 2019 2020 2021 2022 2023 Total

$28,000* 28,000 28,000 28,000 28,000 28,000

Depr. Rate

20% × 5/12 20% 20% 20% 20% 20% × 7/12

Depr. Expense $ 2,333 5,600 5,600 5,600 5,600 3,267 $28,000

$28,400 3,000 1,600 $33,000

End of Year Accum. Carrying Depr. Amount $33,000 $ 2,333 30,667 7,933 25,067 13,533 19,467 19,133 13,867 24,733 8,267 28,000 5,000

* ($33,000 − $5,000 = $28,000) 2. DIMINISHING-BALANCE AT DOUBLE THE STRAIGHTLINE RATE METHOD Carrying End of Year Amount (Beg. Depr. Depr. Accum. Carrying Year of Year × Rate = Expense Depr. Amount $33,000 2018 $33,000 40%* × 5/12 $ 5,500 $ 5,500 27,500 2019 27,500 40% 11,000 16,500 16,500 2020 16,500 40% 6,600 23,100 9,900 2021 9,900 40% 3,960 27,060 5,940 2022 5,940 40% 940** 28,000 5,000 $28,000 * 40% = 20% × 2 [double the straight-line rate] **amount required for carrying amount to equal residual value

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Accounting Principles, Seventh Canadian Edition

BYP 9-6 (Continued) (b) (Continued) 3. UNITS-OF-PRODUCTION METHOD Units of Depreciable Year Production × Cost/Unit =

Depr. Expense

2018 2019 2020 2021 2022 2023

$ 4,200 5,250 5,600 6,650 4,900 1,400 $28,000

30,000 37,500 40,000 47,500 35,000 10,000

$0.14* 0.14 0.14 0.14 0.14 0.14

End of Year Accum. Carrying Depr. Amount $33,000 $ 4,200 28,800 9,450 23,550 15,050 17,950 21,700 11,300 26,600 6,400 28,000 5,000

* ($33,000 − $5,000) ÷ 200,000 km = $0.14 per km (c)

The units-of-production method of depreciation will result in the greatest amount of profit reported for the year ended May 31, 2019 because it has the lowest depreciation expense for the year. There will be no difference in the total profit over the life of the asset.

(d) As indicated in the three different schedules prepared in part (b), the carrying amount on the balance sheet at May 31, 2019 would be the highest if the straight-line method were used. By the end of the useful life the carrying amount will be the same under all depreciation methods. (e)

I recommend the unit-of-production method of depreciation because this method will provide Natalie with the best pattern to match the economic benefits of the van. It will provide the fairest charge for each year.

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Accounting Principles, Seventh Canadian Edition

CHAPTER 10 Current Liabilities and Payroll ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Exercises

Problems Set A

Problems Set B

1, 2, 3, 4, 5, 6, 7, 12

1, 2, 3, 4, 5, 6, 7, 16, 17

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 14

1, 2, 3, 4, 5

8, 9, 10, 11, 12, 13, 14, 15, 16 17, 18, 19, 20

8, 9, 10, 11, 12, 13, 16 14, 15, 16

11, 12, 13, 14, 15

1, 2, 5, 6, 7, 8,

1, 16, 17, *20

5, 9, 10,

21, 22, 23

16, 17, 18

10, 18, 19

3, 4, 5, 8, 11, 12,

*24, *25

*19, *20

*20, *21

*13

Learning Objectives

Questions

1. Account for determinable or certain current liabilities. 2. Account for uncertain liabilities. 3. Determine payroll costs and record payroll transactions. 4. Prepare the current liabilities section of the balance sheet. *5. Calculate mandatory payroll deductions (Appendix 10A).

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Chapter 10

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Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A

Description Prepare current liability entries and adjusting entries.

Difficulty Level Moderate

Time Allotted (min.) 15-25

Prepare current liability entries, adjusting entries and current liability section.

Moderate

25-35

Calculate current and non-current portion of notes payable, and interest payable.

Moderate

15-25

Record note transactions; show financial statement presentation.

Moderate

30-40

Record current liability transactions; prepare current liabilities section.

Moderate

30-40

Record warranty transactions.

Moderate

15-25

Record customer loyalty program and gift card transactions; determine impact on financial statements.

Moderate

15-25

Discuss reporting of contingencies and record provisions.

Moderate

15-25

Prepare payroll register and record payroll.

Moderate

25-35

10A

Record payroll transactions and calculate balances in payroll liability accounts.

Moderate

25-35

11A

Prepare current liabilities section; calculate and comment on ratios.

Moderate

25-35

12A

Prepare current liabilities section; calculate and comment on ratios.

Moderate

25-35

*13A

Calculate payroll deductions; prepare payroll register.

Moderate

25-35

Prepare current liability entries and adjusting entries.

Moderate

15-25

Prepare current liability entries, adjusting entries and current liability section.

Moderate

25-35

Calculate current and non-current portion of notes payable, and interest payable.

Moderate

15-25

Record note transactions; show financial statement presentation.

Moderate

30-40

Record current liability transactions; prepare current liabilities section.

Moderate

30-40

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Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number 6B

Description Record warranty transactions.

Difficulty Level Moderate

Time Allotted (min.) 15-25

Record customer loyalty program and gift card transactions; determine impact on financial statements.

Moderate

15-25

Discuss reporting of contingencies and record provisions.

Moderate

15-25

Prepare payroll register and record payroll.

Moderate

25-35

10B

Record payroll transactions and calculate balances in payroll liability accounts.

Moderate

25-35

11B

Prepare current liabilities section; calculate and comment on ratios.

Moderate

25-35

12B

Prepare current liabilities section; calculate and comment on ratios.

Moderate

25-35

*13B

Calculate payroll deductions; prepare payroll register.

Moderate

25-35

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Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material Learning Objectives

Knowledge Comprehension

1. Account for determinable or certain current liabilities.

Q10-1 Q10-2 Q10-4 Q10-5 Q10-12 BE10-16

Q10-6 Q10-7 E10-14

2. Account for uncertain liabilities.

Q10-12 BE10-16

Q10-8 Q10-9 Q10-10 Q10-11 Q10-13 Q10-14 Q10-15 Q10-16 BE10-12 E10-14

3. Determine payroll costs and record payroll transactions.

Q10-19 BE10-13

Q10-17 Q10-18 Q10-20

4. Prepare the current liabilities section of the balance sheet.

Q10-21 Q10-22 Q10-23 BE10-16

*5. Calculate mandatory payroll deductions (Appendix 10A).

*Q10-24 *Q10-25

Q10-3 BE10-1 BE10-2 BE10-3 BE10-4 BE10-5 BE10-6 BE10-7 BE10-17 E10-1 E10-2 E10-3 E10-4 E10-5 E10-6 BE10-8 BE10-9 BE10-10 BE10-11 BE10-13 E10-11 E10-12 E10-13 E10-15 P10-1A P10-2A

E10-7 E10-8 E10-9 E10-10 P10-1A P10-2A P10-3A P10-4A P10-5A P10-1B P10-2B P10-3B P10-4B P10-5B

BE10-14 BE10-15 BE10-16 E10-1 E10-16 E10-17 *E10-20

P10-5A P10-9A P10-10A P10-5B P10-9B P10-10B

BE10-17 BE10-18 E10-10 E10-18 E10-19 P10-3A P10-4A P10-5A P10-8A *BE10-19 *BE10-20 *E10-20 *E10-21

P10-10A P10-11A P10-12A P10-3B P10-4B P10-5B P10-8B P10-11B P10-12B *P10-13A *P10-13B

10-4

Analysis

Synthesi s

BYP10-1

BYP10-2 BYP10-5

P10-5A P10-6A P10-7A P10-8A P10-1B P10-2B P10-5B P10-6B P10-7B P10-8B

Santé Smoothie Saga Cumulative Coverage Chapters 3 – 10 BYP10-3 BYP10-4

Broadening Your Perspective

Solutions Manual .

Application

Chapter 10

Evaluation

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

ANSWERS TO QUESTIONS 1.

A determinable liability is also referred to as a certain liability or a known liability. Examples include accounts payable, salaries payable, HST payable, and CPP and EI payable.

The transaction does not meet the definition of a liability. A liability is defined as a present obligation, arising from past events, to make future payments of assets or services. A commitment to purchase is usually not an obligation and no past event (a purchase) has occurred since goods have not been delivered or services received.

(a)

(b)

Cash .......................................................... Unearned Revenue .............................. (5,000 × $80)

400,000

Unearned Revenue ................................... Service Revenue .................................. ($400,000 ÷ 6)

66,667

400,000

66,667

Interest payable is calculated as the product of the principal, the interest rate, and the fraction of the year in the accrual. The amount of interest payable at the fiscal year end is calculated with reference to the amount of time since the last interest payment if regular interest payments are required.

An operating line of credit is a pre-authorized bank loan that allows a company to borrow up to a pre-set limit, and repay the loan, as needed. When the company borrows against its line of credit, the cash account balance is increased and notes payable are increased. A bank overdraft occurs when a bank account is overdrawn due to withdrawals and cheques in excess of deposit amounts. In this case, the cash account will show a credit balance. There is no separate liability shown, as the overdraft is itself a liability.

The roommate is confusing different taxes. Incorporated businesses pay income tax on profits. Those taxes do appear as expenses on the income statement. Sales taxes, on the other hand, do not appear on the income statement. Merchants are directed by law to charge sales taxes on the selling price of most goods and services. In doing so, the merchant is acting as an agent of the federal and provincial governments when the business is charging, collecting, and remitting the sales taxes when due. Until the sales taxes are remitted, they appear as current liabilities on the balance sheet.

Laurel is not correct. Some long-term debts have portions that will be due in the coming year. This portion is classified as a current liability since it will be paid within one year of the balance sheet date.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 8.

I don’t agree. Although you don’t know which specific appliances will be returned for repair, you can estimate the cost of repairs that will be required under warranty based on past experience or industry information. If repair costs are not recorded until units are brought in, liabilities on the balance sheet will be understated and the expenses will not be properly matched with revenue on the income statement. If sales are increasing, this will probably result in an overstatement of income.

Future savings provided to customers through customer loyalty programs produces a future performance obligation. This future performance obligation results in unearned revenue, in that the entity has promised to deliver goods or services in the future. When the promised goods or services are delivered, the performance obligation is met, and this results in the recognition of the related revenue.

10.

The company should estimate the number of vouchers that will likely be used and the stand-alone value of these vouchers. The total of the standalone value of the vouchers and the stand-alone value of the restaurant meals sold should be used to allocate the revenue to current sales and unearned revenue. When the vouchers are redeemed, the restaurant has satisfied its future performance obligation and it can then recognize this unearned revenue as earned.

11.

Gift cards are similar to unearned revenues in that they represent cash received from customers for future products or services. They are classified as a liability because they are an obligation for the issuing company to provide assets or services in the future. Unearned passenger revenue usually has a determinable time at which the flight will be taken and the unearned revenue becomes earned. Gift cards however do not have a fixed date at which the obligation will be satisfied, and frequently are not used at all. In some cases, a portion or the entire amount of the gift card is not used at all. Over time, companies need to determine if a portion of this unearned revenue can be considered earned since the likelihood of redemption becomes more remote.

12. A determinable liability has a known amount, payee, and due date. An estimated liability is an obligation that exists but whose amount and timing are uncertain. There is no uncertainty about the existence of a determinable liability and an estimated liability. Under ASPE, a contingent liability is an obligation that is uncertain with respect to existence, timing, and amount. The existence of a contingent liability depends on the resolution of a future event outside of the company’s control. Under IFRS, situations where it is probable an obligation exists and the amount can be reasonably estimated are treated as estimated liabilities. Contingent liabilities are possible obligations that the company probably will not have to settle, or obligations for which the amount cannot be reliably measured.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 13. Under ASPE, a contingent liability is defined as a possible obligation that will be confirmed by the occurrence or non-occurrence of an uncertain future event. An estimated liability is an obligation that exists but whose amount and timing are uncertain. A contingent liability may be recognized as an estimated liability if it is likely that a present obligation exists and the amount can be reliably estimated. Under IFRS, a contingent liability is a possible obligation that does not meet the criteria for recognition and does not meet the definition of a liability. Under IFRS, situations where it is probable an obligation exists and the amount can be reasonably estimated are treated as estimated liabilities. 14.

Under ASPE, if a contingent liability is both likely to occur and reasonably estimable, it is recorded in the accounts. If its likelihood is not determinable, or if it is not reasonably estimable, it is not recorded in the accounts but disclosed in a note. If it is unlikely to occur, but could have a substantial negative effect on the company’s financial position, it should be disclosed. Otherwise, contingent liabilities are neither recorded nor disclosed.

15.

Under IFRS, a contingent liability is never recorded because it is a possible liability that does not meet the criteria for recognition, either because it is not probable or the amount cannot be reliably measured. The criteria for recognition of an estimated liability are that it is probable a present obligation exists and that the amount can be reliably estimated. Under IFRS, the threshold for recognizing liabilities is “probable” rather than “likely” as used under ASPE. This threshold is generally considered lower.

16.

If the chance of a contingency occurring is considered small, it should still be disclosed if the occurrence could have a substantial effect on the company’s financial position.

17.

Gross pay is the amount an employee actually earns. Net pay, the amount an employee is paid, is gross pay reduced by both mandatory and voluntary deductions, such as income tax, union dues, etc. Gross pay should be recorded as wages or salaries expense.

18.

Employee payroll deductions are the amounts subtracted from an employee’s gross pay in determining net pay. Mandatory employee payroll deductions include federal and provincial income taxes, Canada Pension Plan, and Employment Insurance. When an employer withholds these amounts from an employee pay cheque, the employer is merely acting as a collection agent for the taxing body. Since the employer holds employees' funds, these withholdings are a liability for the employer until they are remitted to the government. Employee payroll deductions also include voluntary deductions for things such as insurance, pensions, union dues, and donations to charities.

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Chapter 10

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) 18. (Continued) Employer payroll deductions are amounts the employer is expected to pay. These include CPP where the employer is expected to pay the same amount as the employee and EI where the employer is expected to pay 1.4 times the amount the employee has paid. These are expenses for the employer over and above gross pay. 19.

The employee earnings record is used in (1) determining when an employee has earned the maximum earnings subject to CPP and EI deductions, (2) filing information returns with the CRA, and (3) providing each employee with a statement of gross earnings and tax withholdings for the year on the T4 form. The payroll register accumulates gross earnings, deductions, and net pay for all employees for each pay period. It provides the documentation to support the preparation of the paycheque for each employee.

20.

Income tax, CPP, and EI deductions are remitted to the Receiver General, usually on a monthly basis. Workplace, Health, Safety, and Compensation is remitted quarterly (or monthly depending on the province) to the Workplace, Health, Safety and Compensation Commission (or similar body depending on the province). Other deductions are paid to different organizations, such as the United Way, and would normally be made on a monthly basis.

21.

Current liabilities are usually listed in order of their liquidity, by maturity date. It may not be possible to list current liabilities in order of liquidity because of the varying maturity dates that may exist for certain specific obligations. They are also often listed in order of magnitude with the largest items listed first.

22.

If companies have used their line of credit and are overdrawn or show a negative cash balance, the amount is included in current liabilities and called bank indebtedness, bank overdraft, or bank advances. Note disclosure will include security or collateral that was required by the bank, the maximum amount that can be withdrawn, as well as the interest rate charged on the bank overdraft. Terms associated with notes payable are also disclosed.

23.

A company can determine if its current liabilities are too high by monitoring the relationship of current assets to current liabilities and calculating the current ratio (current assets ÷ current liabilities). This relationship is critical in evaluating a company’s short-term ability to repay debt.

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Accounting Principles, Seventh Canadian Edition

QUESTIONS (Continued) *24. Contribution rates for CPP are set by the federal government (Quebec government for QPP) and are adjusted every January if applicable. Employee contributions under the Canada Pension Plan Act are set at a percentage of pensionable earnings (currently 4.95%). Pensionable earnings are gross earnings less a basic yearly exemption (currently $3,500). A maximum ceiling or limit is imposed on pensionable earnings ($53,600 for 2015). The exemption and ceiling are prorated to the relevant pay period (e.g., weekly, biweekly, semimonthly, monthly). Contribution rates for EI are based upon a percentage (currently 1.88%) of insurable earnings, to a maximum earnings ceiling ($49,500 for 2015). In most cases, insured earnings are gross earnings plus any taxable benefits. *25. The amount deducted from an employee’s salary for income tax is determined by using payroll accounting software programs, CRA payroll deduction tables easily accessible online, or using the payroll deductions online calculator. The income tax that should be withheld from gross salary is based on the number of personal tax credits claimed by an employee as shown on their TD1 form.

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Chapter 10

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10-1 (a) (b) (c) (d) (e) (f)

No Yes Yes for $30,000 Yes Yes Yes

BRIEF EXERCISE 10-2 (a)

(b)

Cash ............................................... Unearned Revenue.................... (2,000 × $120)

240,000

Unearned Revenue ........................ Service Revenue ....................... ($240,000 ÷ 6)

40,000

240,000

40,000

BRIEF EXERCISE 10-3 (a)

(b)

Solutions Manual .

Cash ............................................... Unearned Revenue.................... (15,000 × $18)

270,000

Unearned Revenue ........................ Revenue ..................................... ($270,000 ÷ 12)

22,500

10-10

270,000

22,500

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 10-4 (a) 2017

July

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

60,000 60,000

(b) 2017

Dec. 31 Interest Expense ($60,000 × 4% × 6/12) ..................... Interest Payable ........................ (c) 2018 July 1 Interest Expense ($60,000 × 4% × 6/12) ..................... Interest Payable ............................. Notes Payable ................................ Cash ...........................................

1,200 1,200

1,200 1,200 60,000 62,400

BRIEF EXERCISE 10-5 (a) Calculation of sales tax payable – Ottawa store: HST payable = $7,200 × 13% = $936 Calculation of sales tax payable – Regina store: GST payable = $8,400 × 5% = $420 PST payable = $8,400 × 5% = $420

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Chapter 10

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 10-5 (Continued) (b) Ottawa store: Mar. 12 Cash ................................................... Sales .............................................. HST Payable .................................. Regina store: Mar. 12 Cash ................................................... Sales .............................................. GST Payable .................................. PST Payable ..................................

8,136 7,200 936 9,240 8,400 420 420

BRIEF EXERCISE 10-6 (a) May 10, 2017: Calculation of sales tax collected: HST: $1,800 × 13% × 40 =

$9,360

May 17, 2017: Calculation of sales tax collected: HST: $1,800 x 13% x 95 =

$22,230

(b) May. 10 Cash ................................................... Sales ($1,800 × 40) ........................ HST Payable .................................. May 17

Solutions Manual .

81,360 72,000 9,360

Cash ................................................... 193,230 Sales ($1,800 x 95) ....................... HST Payable ..................................

171,000 22,230

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 10-7 Mar. 31

Property Tax Expense ($9,600 × 3/12) Property Tax Payable....................

2,400

June 30 Property Tax Payable ........................ Property Tax Expense ($9,600 × 3/12) Prepaid Property Tax ($9,600 × 6/12) Cash ...............................................

2,400 2,400 4,800

Dec. 31

4,800

Property Tax Expense ....................... Prepaid Property Tax ....................

2,400

9,600 4,800

BRIEF EXERCISE 10-8 Dec. 31 Warranty Expense ................................ 18,700 Warranty Liability .......................... [(4,400 units × 5%) × $85/unit]

18,700

BRIEF EXERCISE 10-9 July 3

Unearned Revenue–Loyalty Program Sales ............................................. To recognize the loyalty program redemption.

50 50

Note: Each time One-Stop has a point redemption it satisfies the related performance obligation and therefore the unearned revenue becomes earned.

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Chapter 10

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 10-10 (a) Stand-alone book sales (50,000 novels × $8) Stand-alone value of coupons = 50,000*10%*$2 Total Value .................................................. Allocate as follows: Earned revenue= ($400,000/$410,000)*$400,000 Unearned revenue= ($10,000/$410,000)*$400,000 (b) July Cash .................................................. 400,000 Sales............................................ Unearned Revenue–Loyalty Program

= $400,000 = 10,000 $ 410,000 =

390,244 = 9,756

390,244 9,756

BRIEF EXERCISE 10-11 Dec. 2017 Cash ................................................. Unearned Revenue.....................

4,750

Jan. 2018 Unearned Revenue .......................... Sales............................................

2,425

Cost of Goods Sold ......................... Merchandise Inventory ..............

1,070

4,750

2,425 1,070

BRIEF EXERCISE 10-12 (a)

(2) Disclosed: This liability should be disclosed. The outcome is neither likely nor unlikely (not determinable). The treatment would be the same under both IFRS and ASPE.

(b)

(1) Recorded: This liability is likely and can be reasonably estimated. The treatment would be the same under both IFRS and ASPE.

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BRIEF EXERCISE 10-12 (Continued) (c)

(1) Recorded under IFRS: This liability is “probable” and can be reasonably estimated. (2) Disclosed under ASPE: The outcome is not “likely”; the chance of occurrence is not considered sufficiently high.

BRIEF EXERCISE 10-13 The arguments for recording this liability are that the outcome is probable and the amount can be estimated. Since the company is public, IFRS applies. In this case, the lawsuit is considered an estimated liability and is recorded since the loss is considered probable. Management may be reluctant to disclose this information separately on the financial statements for fear it will be taken as an admission of guilt.

BRIEF EXERCISE 10-14 (a) Gross pay: Regular pay (40 × $12.50).................................. $500.00 Overtime pay (6 × $18.75) ................................. 112.50

$612.50

Less: CPP contributions .................................. $26.99 EI premiums ........................................... 11.21 Income tax withheld ............................... 94.56 132.76 Net pay.................................................................................. $479.74

(b) Employer costs: CPP contributions................................................. $26.99 EI premiums ($11.21 × 1.4) .................................... 15.69 $42.68 The employer does not bear any costs for employee income taxes.

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 10-15 Aug. 22 Employee Benefits Expense ............. CPP Payable .................................. EI Payable ($1,281 × 1.4) ...............

5,123 3,330 1,793

BRIEF EXERCISE 10-16 (a) (b) (c) (d) (e) (f) (g)

Current liability Current liability Current liability Current liability Current liability Current asset Disclosed in the notes to the financial statements as a contingent liability (h) Current liability (i) Current asset (j) Current liability ($5,000) and long-term liability ($70,000)

BRIEF EXERCISE 10-17 (a)

Current liability: $12,000 Non-current liability: $48,000 Only the portion of principal to be repaid in 2018 would be shown as a current liability.

(b) Current liability: $24,000 ($2,000 per month × 12 months) Non-current liability: $66,000 ($96,000 – [$2,000 × 3] – $24,000) The principal repayments of $2,000 per month to be repaid in 2018 would be shown as a current liability.

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE 10-18 (a) SUNCOR ENERGY INC. (Partial) Balance Sheet December 31, 2014 (in millions)

Liabilities Current liabilities Accounts payable and accrued liabilities ................. Income taxes payable ................................................. Current portion of provisions .................................... Short-term debt ........................................................... Current portion of long-term debt.............................. Total current liabilities ...........................................

$5,704 1,058 752 806 34 $8,354

Note: This presentation lists the accounts in order of size, with the largest one (accounts payable and accrued liabilities) listed first. Other alternatives are also possible, such as listing the accounts in order of liquidity, by estimated maturity date. (b) Current Ratio = Current Assets ÷ Current Liabilities $13,916* ÷ $8,354 = 1.67 to 1 * $4,275 + $5,495 + $680 + $3,466 = $13,916 Acid-Test Ratio = (Cash + AR + Income Tax Recoverable) ÷ Current Liabilities ($4,275 + $5,495 + $680) ÷ $8,354 = 1.25 to 1

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Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE 10-1 March 1

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

350

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

200

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

200

Salaries Expense ...................... CPP Payable ......................... EI Payable ............................. Income Tax Payable............. Cash ......................................

5,000

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

350

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350

200

200 230 94 1,400 3,276 350

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 10-2 2017 July 1

Cash .................................................... 50,000 Notes Payable ...............................

50,000

Nov. 1 Cash .................................................... 60,000 Notes Payable ...............................

60,000

Dec. 31 Interest Expense ................................ Interest Payable ............................ ($50,000 × 8% × 6/12) = $2,000 + ($60,000 × 6% × 2/12) = $600

2,600 2,600

2018 Feb. 1 Notes Payable..................................... 60,000 Interest Payable.................................. 600 300 Interest Expense ................................ Cash .............................................. ($60,000 × 6% × 1/12) = $300

60,900

Apr. 1 Notes Payable..................................... 50,000 Interest Payable.................................. Interest Expense ................................ Cash .............................................. ($50,000 × 8% × 3/12) = $1,000

Solutions Manual .

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2,000 1,000 53,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-3 (a) June 1 Cash .................................................... 90,000 Notes Payable ............................... (b) June 30 Interest Expense ................................ Interest Payable ............................ ($90,000 × 6% × 1/12) = $450

90,000

450

(c) Dec. 1 Notes Payable..................................... 90,000 Interest Payable.................................. 2,700 Cash ..............................................

450

92,700

(d) Total financing cost was $2,700 ($90,000 × 6% × 6/12)

Solutions Manual .

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-4 Novack Company 2017 June

July

Aug.

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

50,000

Accounts Payable..................... Notes Payable ......................

50,000

1 Interest Expense....................... Cash ...................................... ($50,000 × 7% × 1/12)

292

Aug. 31

Sep. Oct.

Solutions Manual .

50,000

292

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

292

1 Interest Payable ........................ Cash ......................................

292

Interest Expense....................... Notes Payable ........................... Cash ......................................

10-22

292

292 292 50,000 50,292

Chapter 10

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-5 (a)

Tundra Trees Mar. 1 Equipment................................. Notes Payable ......................

30,000 30,000

July 31 Interest Expense....................... Interest Payable ................... ($30,000 × 8% × 5/12)

1,000

Oct.

400 1,000 30,000

Interest Expense* ..................... Interest Payable ........................ Notes Payable ........................... Cash ...................................... * ($30,000 × 8% × 2/12)

(b) Edworthy Equipment Mar. 1 Notes Receivable...................... Sales .....................................

1,000

31,400

30,000 30,000

1 Cost of Goods Sold .................. Merchandise Inventory ........

18,000

May 31 Interest Receivable ................... Interest Revenue .................. ($30,000 × 8% × 3/12)

600

Oct.

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Cash .......................................... Interest Receivable .............. Interest Revenue*................. Notes Receivable ................. * ($30,000 × 8% × 4/12)

10-23

18,000

600

31,400 600 800 30,000

Chapter 10

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-6 1.

Sainsbury

April 10

13,200 1,716

Montgomery

April 21

Cash .......................................... 14,916 Sales ..................................... HST Payable ($13,200 × 13%)

Cash .......................................... 31,500 Sales ..................................... GST Payable ($30,000 × 5%)

30,000 1,500

Cash .......................................... 28,112 Sales ..................................... GST Payable ($25,100 × 5%) PST Payable ($25,100 × 7%)

25,100 1,255 1,757

Winslow

April 27

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-7 (a)

Quebec

April 10

Cash ................................................. Sales ($80,000) ........................... GST Payable ($80,000 x 5%) ...... QST Payable ($80,000 x 9.975%)

91,980 80,000 4,000 7,980

(b) Nova Scotia April 10

(c)

Cash ................................................. Sales............................................ HST Payable ($80,000x 15%) .....

92,000

Cash ................................................. Sales ........................................... GST Payable ($80,000 x 5%) ......

84,000

80,000 12,000

Alberta

April 10

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10-25

80,000 4,000

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 10-8 2017 (a) Oct. 31 Cash .................................................... 21,000 Unearned Revenue ....................... (100 × $210) (b) 1. Nov. 30 Unearned Revenue............................. Admission Revenue ..................... ($21,000 × 1/6)

3,500 3,500

2018 2. Mar. 31 Unearned Revenue ................................ 3,500 Admission Revenue ..................... ($21,000 × 1/6)* 3. Apr. 30 Unearned Revenue ................................ 3,500 Admission Revenue ..................... ($21,000 × 1/6)* *

21,000

3,500

Charleswood adjusts its accounts on a monthly basis. There would be a similar entry at December 31, 2017, January 31, 2018, and February 28, 2018.

Date 2017 Oct. 31 Nov. 30 Dec. 31 2018 Jan. 31 Feb. 28 Mar. 31 Apr. 30

Solutions Manual .

Unearned Revenue Explanation Ref. Debit

Credit

Balance

21,000 Adjusting entry Adjusting entry

3,500 3,500

21,000 17,500 14,000

Adjusting entry Adjusting entry Adjusting entry Adjusting entry

3,500 3,500 3,500 3,500

10,500 7,000 3,500 0

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-9 2017 (a) Nov.

Cash .................................................... 270,000 270,000 Unearned Revenue ....................... (15,000 × $18)

(b) Dec. 31 Unearned Revenue............................. 22,500 Revenue ........................................ ($270,000 × 1/12) 2018 (c) Mar. 31 Unearned Revenue............................. 67,500 Revenue ........................................ ($270,000 × 3/12)

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22,500

67,500

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 10-10 (a)

May 31 Property Tax Expense ($24,000 × 1/12) ......................... Property Tax Payable...........

2,000 2,000

The company would have accrued property tax expense on a monthly basis using the 2016 monthly expense of $2,200 per month. An adjustment would be required when the property tax bill is received for the over accrual: May 31 Property Tax Payable .............. 800 Property Tax Expense ......... [($24,000 × 1/12) – $2,200] × 4 months

800

The company accrues property tax expense on June 30, 2017 for one month. July 31 Property Tax Payable ($24,000 × 6/12) ......................... Property Tax Expense ($24,000 × 1/12) ........................ Prepaid Property Tax ($24,000 × 5/12) ......................... Cash ......................................

12,000 2,000 10,000 24,000

The company makes monthly adjusting entries for property tax expense on from August to December, as follows: Property Tax Expense .............. 2,000 Prepaid Property Tax ........... 2,000 (b) Since the company’s fiscal year matches the annual property tax bill, there are no prepaid property taxes or property taxes payable. Income Statement, Year Ended December 31, 2017 (Partial) Operating expenses Property tax expense................................................... $24,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-10 (Continued) (b) (Continued)

Date Jul. 31 Aug. 31 Sep. 30 Oct. 31 Nov. 30 Dec. 31

Date Jan. 31 Feb. 28 Mar. 31 Apr. 30 May 31 May 31 June 30 July 31 Aug. 31 Sep. 30 Oct. 31 Nov. 30 Dec. 31

Solutions Manual .

Prepaid Property Tax Explanation Ref. Debit 10,000

Property Tax Expense Explanation Ref. Debit 2,200 2,200 2,200 2,200 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000

10-29

Credit

Balance 10,000 2,000 8,000 2,000 6,000 2,000 4,000 2,000 2,000 2,000 0

Credit

Balance 2,200 4,400 6,600 8,800 10,800 800 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 10-11 (a)

Estimated warranty costs for November and December sales: Number of units sold (30,000 + 32,000) Estimated rate of defective units Total estimated defective units Average warranty repair cost Estimated warranty costs for Nov. and Dec.

62,000 × 2.5% 1,550 × $20 $31,000

Dec. 31 Warranty Expense............................ 31,000 Warranty Liability ....................

31,000

(b) Dec. 31 Warranty Liability ............................. 21,600 Repair Parts Inventory, Salaries Payable, Cash, etc. ... (450 + 630) x $20 = $21,600 .........

21,600

(c) Income Statement, Year Ended December 31, 2017 (Partial) Operating expenses Warranty expense ........................................................ $31,000 Balance Sheet, at December 31, 2017 (Partial) Current Liabilities Warranty liability ($31,000 – $21,600).....................

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$9,400

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-12 (a)

Warranty expense: 2015: ($2,000 × 500 units sold × 5%) = 2016: ($2,000 × 600 units sold × 5%) = 2017: ($2,000 × 525 units sold × 5%) =

(b)

$50,000 $60,000 $52,500

Warranty liability at the end of the year: Estimated warranty expense for 2015: Less: Cost incurred in 2015 Warranty liability at end of 2015:

$50,000 (30,000) 20,000

Add: Estimated warranty expense for 2016: Less: Cost incurred 2016 Warranty liability at end of 2016:

60,000 (46,000) 34,000

Add: Estimated warranty expense for 2017: Less: Cost incurred 2017 Warranty liability at end of 2017:

52,500 (53,500) $33,000

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-13 (a)

2016: 900,000 × 35% × $0.01 = $3,150 2017:1,200,000 × 35% × $0.01 = $4,200

(b)

2016- Stand-alone sales= $300,000 Total value of goods =$300,000 + $3,150= $303,150

Amount to allocate to revenue = $300,000*($300,000/$303,150) = $296,883 Amount to allocate to unearned revenue–rewards program = = $300,000* ($3,150/$303,150) = $3,117 2016

Cash .................................................. 300,000 Sales............................................ Unearned Revenue–Loyalty Program

296,883 3,117

2017- Stand-alone sales= $400,000 Total value of goods = $400,000 + $4,200 = $404,200 Amount to allocate to revenue= $400,000 X ($400,000/$404,200) = $395,844 Amount to allocate to unearned revenue–rewards program = $400,000 X ($4,200/$404,200) = $4,156 2017

Solutions Manual .

Cash .................................................. 400,000 Sales............................................ Unearned Revenue–Loyalty Program

395,844 4,156

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-13 (Continued) (c) When the points are redeemed, the following entry would be done:

Unearned Revenue–Loyalty Program Cash ................................................. Sales............................................

XXX XXX

Cost of Goods Sold ......................... Inventory .....................................

XXX

XXX XXX

The redemption of the points increases net income as the unearned revenue is now recognized as earned. There is no impact on cash when the points are redeemed as the entry is to debit Unearned Revenue–Loyalty Program and credit Sales.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-14 (1)

(a) Estimable. The amount and timing with respect to brake replacement is uncertain. The existence of the liability to replace the brakes is certain and the amount can be reasonably estimated. The liability should be recorded in the financial statements. (b)

(2)

Not required.

(a) Estimable. The amount and timing with respect to “money back, no questions asked” guarantee is uncertain. The existence of the money back guarantee is certain. (b)

Not required.

(3)

Same as (2) above.

(4)

(a) Determinable. The timing with respect to the prizes to be distributed is uncertain. The existence of the liability and the cost of the trip are certain. The liability should be recorded in the financial statements. (b)

(5)

Not required.

(a) Contingent Liability under both IFRS and ASPE. The contingent liability is neither likely nor unlikely and the amount cannot be reasonably estimated. (b)

Solutions Manual .

Under both IFRS and ASPE, the contingent liability would be disclosed in the notes to the financial statements because the outcome and the amount are both unknown.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-15 (a)

The company should record an estimate of the cost of replacing the cribs in its financial statements. This liability is probable and can be reasonably estimated. The company also has a contingent liability with respect to the lawsuit. If the probability of loss of the lawsuit is remote, the company does not have to report or disclose anything else. If it is either possible (and the loss cannot be estimated) or if it cannot be determined if the lawsuit will be successful, the lawsuit should be disclosed in the notes as a contingent liability. If it is probable the lawsuit will be successful and the $1,500,000 is a reasonable estimate, it should be accrued as an estimated liability.

(b)

If Sleep-a-Bye Baby Company’s lawyers advise that it is likely that the company will have to pay damages of $100,000, then a journal entry should be recorded. The liability is likely and the amount can be reasonably estimated. The journal entry would be as follows: Loss due to Damages .................................... 100,000 Liability for Damages Due to Unsafe Cribs

(c)

100,000

If Sleep-a-Bye Baby Company is a private company, the answer to part (a) will be changed to assess the likelihood of loss from the lawsuit as “likely” rather than “probable”. If the likelihood of loss of the lawsuit is remote, the company does not have to report or disclose anything else. If it is either “likely” (and the loss cannot be estimated) or if it cannot be determined if the lawsuit will be successful, the lawsuit should be disclosed in the notes as a contingent liability. If it is “likely” the lawsuit will be successful and the $1,500,000 is a reasonable estimate, it should be recorded. Part (b) stays the same, since the higher threshold of “likely” was applied.

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Accounting Principles, Seventh Canadian Edition

EXERCISE 10-16 (a) Apr. 30 Salaries Expense .................................. 46,600 CPP Payable .................................. EI Payable ...................................... Income Tax Payable ...................... Cash ............................................... (b) Apr. 30 Employee Benefits Expense ............. 5,686 CPP Payable .................................. EI Payable ($853 × 1.4).................. Workers’ Compensation Payable ($46,600 × 1%) ......................... Vacation Pay Payable ($46,600 × 4%) (c) May 15 CPP Payable ($2,162 + $2,162).......... EI Payable ($853 + $1,194) ................ Income Tax Payable .......................... Cash ..............................................

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10-36

2,162 853 9,011 34,574

2,162 1,194 466 1,864

4,324 2,047 9,011 15,382

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE 10-17 (a)

AHMAD COMPANY Payroll Register Week Ended May 31 Gross Earnings

Total Employee Hours Regular Overtime A. Kassam H. Faas G. Labute Totals

47 45 46

$ 520.00 560.00 600.00 $1,680.00

(b) May 31

Solutions Manual .

Gross Pay

$136.50 $ 656.50 105.00 665.00 135.00 735.00 $376.50 $2,056.50

Deductions CPP

Income Health Tax Insurance

$29.17 $12.34 $ 85.55 29.59 12.50 87.10 33.05 13.82 102.55 $91.81 $38.66 $275.20

Employee Benefits Expense....................................... CPP Payable ($91.81 × 1) ....................................... EI Payable ($38.66 × 1.4) ........................................ Workers’ Compensation Payable ($2,056.50 × 2%) Vacation Pay Payable ($2,056.50 × 4%)................. Health Insurance Payable ......................................

10-37

Total

$10.00 $137.06 15.00 144.19 15.00 164.42 $40.00 $445.67

Salaries Expense......................................................... 2,056.50 CPP Payable............................................................ EI Payable................................................................ Income Tax Payable ............................................... Health Insurance Payable ...................................... Salaries Payable .....................................................

Net Pay $ 519.44 520.81 570.58 $1,610.83

91.81 38.66 275.20 40.00 1,610.83

309.32 91.81 54.12 41.13 82.26 40.00

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

EXERCISE 10-18 Date Issued

Rate

Term

Current Portion

$60,000 3/31/16 $30,000 7/1/16 $120,000 9/1/16

6% 4% 5%

6 yrs. 7 mo. 30 mo.

$10,000 $30,000 $48,000

Principal 1. 2. 3.

NonCurrent Portion $50,000 $0 $60,000

Interest Payable $2,700 $600 $450

Current Portion: Note 1: One payment of $10,000 will be made in the coming year. Note 3: $48,000 = 12 monthly payments × $4,000 Non-Current Portion: Note 1: $50,000 = $60,000 – $10,000 Note 3: $60,000 = $120,000 – (3 payments in 2016 × $4,000) – $48,000 Interest Payable: Note 1: $2,700 = $60,000 × 6% × 9/12 Note 2: $600 = $30,000 × 4% × 6/12 Note 3: $450 = [$120,000 – (3 payments in 2016 × $4,000)] × 5% × 1/12

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EXERCISE 10-19 MEDLEN MODELS (Partial) Balance Sheet December 31, 2017

Current liabilities Accounts payable ....................................................... Salaries payable.......................................................... Unearned revenue ...................................................... Notes Payable ............................................................ Litigation liability ........................................................ Mortgage payable—current portion .......................... Total current liabilities ...........................................

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10-39

$ 63,000 32,000 70,000 40,000 25,000 90,000 $320,000

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

*EXERCISE 10-20 (a)

Gross Pay = (40 hours × $22.60) + (4 hours × [$22.60 × 1.5]) = $904.00 + $135.60 = $1,039.60 Deductions (using Illustration 10A-3): CPP [($1,039.60 – ($3,500 ÷ 52)) × 4.95%] EI ($1,039.60 × 1.88%) Federal income tax (claim code 1) Ontario income tax (claim code 1) Total deductions

$48.13 19.54 123.05 61.70 $252.42

(b) June 15 Salaries Expense .......................1,039.60 CPP Payable.......................... 48.13 EI Payable.............................. 19.54 Income Tax Payable ($123.05 + $61.70) 184.75 Cash....................................... 787.18 (c)

June 15 Employee Benefits Expense ......... 75.49 CPP Payable.......................... EI Payable ($19.54 × 1.4) ......

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*EXERCISE 10-21

Month

Gross Salary

Jan. – Oct. November December Totals

$47,500.00 4,750.00 4,750.00 $57,000.00

Cumulative Salary

CPP 4.95%

$47,500.00 $ 2,206.90 2 52,250.00 220.69 1 57,000.00 52.36 3 $2,479.95

EI 1.88% $893.00 4 37.60 5 0 $930.60

1. CPP = ($4,750 – [$3,500 ÷ 12]) × 4.95% = $220.69 2. CPP = $220.69/month × 10 months = $2,206.90 3. CPP = $52.36 (annual CPP maximum – CPP to end of November = maximum to be deducted in November [$2,479.95 – ($220.69 × 11) 4. EI = $4,750 × 1.88% = $89.30 EI = $86.93/month × 10 months = $893.00 5. EI = ($49,500 maximum insurable earnings – $47,500) × 1.88% = $37.60

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SOLUTIONS TO PROBLEMS PROBLEM 10-1A

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

Feb.

2,500 2,500

10 Cash .................................................... 48,816 Sales.............................................. GST Payable ................................. PST Payable..................................

43,200 2,160 3,456

15 Cash .................................................... 35,000 Notes Payable...............................

35,000

21 Salaries Expense ............................... 50,000 CPP Payable ................................. EI Payable ..................................... Income Tax Payable ..................... Salaries Payable ...........................

2,308 940 8,900 37,852

21 Employee Benefits Expense ............. CPP Payable ................................. EI Payable ($940 x 1.4) .................

3,624 2,308 1,316

28 Interest Expense ................................ Interest Payable............................ ($35,000 x 6% x 1/12 X .5)

87.50

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87.50

28 Warranty Expense.............................. 14,000 Warranty Liability .........................

14,000

28 Salaries Payable................................. 37,852 Cash ..............................................

37,852

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PROBLEM 10-1A (Continued) Mar.

1 GST Payable ....................................... PST Payable ....................................... Cash ..............................................

2,160 3,456

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

2,500

15 CPP Payable ($2,308 x 2) ................... EI Payable ($940 + $1,316)................. Income Tax Payable........................... Cash ..............................................

4,616 2,256 8,900

5,616

2,500

15,772

Taking It Further: Some additional mandatory employee benefits paid entirely by the employer include payments to fund the workplace health, safety, and compensation plan. Vacations are also mandatory and the amounts and limits vary among provinces. The remaining benefits are not mandatory and have more to do with the negotiated employment package with employees. The latter could include full or partial payments into pension plans, savings plans, and medical or life insurance related coverage. Finally, again based on a business’ practice, paid absences for sick leave, for example, are additional employee benefits paid by the employer. Mandatory and negotiated employee benefit accounted for as expenses when incurred.

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costs

are

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 10-2A

(a) Jan.

2 Cash .................................................... 27,000 Notes Payable...............................

27,000

5 Cash .................................................... 23,165 Sales.............................................. HST Payable ($20,500 x 13%) ......

20,500 2,665

12 Unearned Revenue ............................ 10,000 Service Revenue .......................... HST Payable .................................

8,849 1,151

14 HST Payable ....................................... Cash ..............................................

7,700

20 Accounts Receivable ......................... 50,850 Sales (900 X $50) .......................... HST Payable ($45,000 x 13%) ......

45,000 5,850

25 Cash .................................................... 14,125 Sales.............................................. HST Payable ($12,500 x 13%) ......

12,500 1,625

(b) 31 Interest Expense ................................ Interest Payable............................ ($27,000 x 6% x 1/12)

135

31 Warranty Expense.............................. Warranty Liability ......................... ($45,000 x 7%)

3,150

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3,150

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 10-2A (Continued)

(c) ACCARDO COMPANY (Partial) Balance Sheet January 31, 2017 Current liabilities Accounts payable ....................................................... HST payable ($2,665 + $1,151+ $5,850 + $1,625) ...... Interest payable .......................................................... Warranty liability ......................................................... Unearned revenue ($16,000 - $10,000) ...................... Notes payable ............................................................. Total current liabilities ...........................................

$52,000 11,291 135 3,150 6,000 27,000 $99,576

Taking It Further: Warranty liabilities and the related expenses are accrued at the time of the sale of the product on which the warranty applies. Merchants accrue the expenses before a customer has any issues with the product in order to recognize the expense in the same accounting period as the sale. This fulfills the matching principle in the conceptual framework of accounting. Doing so also honours the accrual basis of accounting. Failing to do so could result in the benefit of the sale occurring in one accounting period and the related expenses being incurred in a subsequent accounting period. This latter treatment would provide financial information that would be misleading to the financial statement users.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 10-3A

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

Original Principal $ 35,000 $ 15,000 $ 26,000 $ 60,000 $ 100,000 $ 40,000

Date issued Aug. 1/17 Sept. 1/17 Nov. 1/17 Mar. 31/17 Oct. 1/17 Jan. 31/16

Rate 5.0% 4.0% 4.5% 3.5% 5.0% 5.0%

Term 10 months 4 months 6 months 5 years 6 years 4 years

$145.83 = $35,000 × 5.0% × 1/12 $200.00 = $15,000 × 4.0% × 4/12 $195.00 = $26,000 × 4.5% × 2/12 $1,575.00 = $60,000 × 3.5% × 9/12 $400.00 = $96,000 × 5.0% × 1/12 Interest was paid on December 31, 2017

Solutions Manual .

(a)

(b)

(c)

Current Portion $ 35,000 $ 15,000 $ 26,000 $ 12,000 $ 24,000 $ 10,000

Noncurrent Portion $ $ $ $ 48,000 $ 72,000 $ 20,000

Interest Payable $ 145.83 $ 200.00 $ 195.00 $1,575.00 $ 400.00 $ -

8 9

1 2 3 4 5 6

current: $24,000 = $2,000 × 12 months non-current: $72,000 = $100,000 – $24,000 – $4,000

non-current: $20,000 = $40,000 – ($10,000 × 2)

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 10-3A (Continued) Taking It Further: For the maker, a note payable bears interest which is an additional cost. Some liabilities, such as accounts payable to suppliers are usually non-interest bearing as long as they are paid within the credit period. In addition, the term of the note may call for periodic payments of interest. This adds to the administrative burden of managing the note. The benefit to the maker is that the terms of the note are usually negotiated with the payee and the interest rate is more favourable than financing obtained through a bank. If the note is used to pay a supplier, the term of the note gives the maker additional time to repay the principal. For the payee, the note provides a stream of interest revenue. Because it is a signed document, it also provides additional security of collection. The cost to the payee is that cash is not received until the note reaches maturity.

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PROBLEM 10-4A (a)

Jan. 12

Merchandise Inventory ............. 25,000 Accounts Payable .................

25,000

Accounts Payable ..................... 25,000 Notes Payable .......................

25,000

Feb. 28 Interest Expense ....................... ($25,000 × 7% × 1/12) Cash....................................... Mar. 31

146 146

Notes Payable............................ 14,000 490 Interest Payable......................... Interest Expense 245 ($14,000 × 7% × 3/12)................. Cash.......................................

Mar. 31 Interest Expense ....................... ($25,000 × 7% × 1/12) Cash.......................................

146 146

Apr. 30 Notes Payable............................ 25,000 Interest Expense 146 ($25,000 × 7% × 1/12)................. Cash....................................... Aug.

14,735

25,146

Equipment.................................. 41,000 Cash....................................... Notes Payable .......................

11,000 30,000

Sept. 30 Cash ........................................... 100,000 Notes Payable .......................

100,000

Dec. 31

Solutions Manual .

Interest Expense ....................... ($100,000 × 5% × 3/12) Cash.......................................

10-48

1,250 1,250

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PROBLEM 10-4A (Continued) (a) (Continued) Dec. 31

Interest Expense ....................... ($30,000 × 6% × 5/12) Interest Payable ....................

750 750

(b) LEARNSTREAM COMPANY (Partial) Balance Sheet December 31, 2017

Current liabilities Notes payable ............................................................. Current portion of long-term notes payable ............. Interest payable .......................................................... Long-term liabilities Notes payable ............................................. $100,000 Less current portion .................................. (10,000)

$30,000 10,000 750 40,750

90,000

(c) LEARNSTREAM COMPANY (Partial) Income Statement Year Ended December 31, 2017 Other expense Interest expense ......................................................... ($146 X 3) + $245 +$1,250 +$ 750) = $2,683

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$2,683

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PROBLEM 10-4A (Continued) Taking It Further: Notes payable are classified according to their maturity dates as being either current or non-current. This classification is also extended to the portion of long-term debt that is repayable in the current term. This classification is important because it represents amounts that must be settled within the next year and is an important factor in assessing the company’s liquidity.

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PROBLEM 10-5A (a) Jan. 2 Cash................................................ Notes Payable .......................... 5

14 15

46,000 46,000

Cash................................................ Sales ......................................... HST Payable ($8,600 × 13%) ....

9,718

Cost of Goods Sold ....................... Merchandise Inventory ............

4,100

Unearned Revenue ........................ Service Revenue ..................... HST Payable .............................

8,000

HST Payable ................................... Cash ..........................................

8,630

CPP Payable................................... EI Payable....................................... Income Tax Payable....................... Cash ..........................................

1,320 680 3,340

8,600 1,118

4,100 7,080 920

8,630

5,340

17 Accounts Payable .......................... 14,800 Cash ..........................................

14,800

20 Accounts Receivable ..................... 118,085 Sales (1,900 × $55) ................... HST Payable ($104,500 × 13%)

104,500 13,585

Cost of Goods Sold (1,900 × $25) . 47,500 Merchandise Inventory ............

47,500

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 10-5A (Continued) (a) (Continued) Jan. 29 Unearned Revenue–Loyalty Program ......................................... 2,300 HST Payable ............................. Revenue from Rewards Program ($2,300 − $265) 31 Cash ................................................ 250,000 Sales ......................................... Unearned Revenue–Loyalty Program Stand-alone sales ............................. Stand-alone value of loyalty points (30,000 × $1 × 20%)........................... Total Value

265 2,035

244,141 5,859 $250,000 6,000 $256,000

Allocate as follows: Earned revenue= ($250,000/$256,000) X $250,000 = $244,141 Unearned revenue= ($6,000/$256,000) X $250,000 = $5,859 31

Salaries Expense ........................... 18,750 CPP Payable ............................. EI Payable ................................. Income Tax Payable ................. Salaries Payable.......................

764 343 3,481 14,162

31 Salaries Payable ............................ 14,162 Cash ..........................................

14,162

(b) (1) Jan. 31 Interest Expense ............................ Interest Payable ....................... ($46,000 × 7% × 1/12)

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PROBLEM 10-5A (Continued) (b) (Continued) (2) Jan. 31 Warranty Expense (1,900 × 9% × $10) .......................... Warranty Liability ..................... (3) Jan. 31 Employee Benefits Expense ......... CPP Payable ............................. EI Payable ($343 × 1.4) ............. Vacation Pay Payable .............. ($18,750 x 4%) = $750

1,710 1,710 1,994

(4) Jan. 31 Property Tax Expense ($8,820 ÷ 12) ................................... 735 Property Tax Payable............... (c) SHUMWAY SOFTWARE COMPANY (Partial) Balance Sheet January 31, 2017

764 480 750

735

Current liabilities Notes payable ............................................................. $ 46,000 Accounts payable ($40,000 – $14,800) ...................... 25,200 Unearned revenue ($15,300 – $8,000......................... 7,300 Unearned revenue–loyalty program ($3,700 - $2,300 + $5,859) ........................................... 7,259 HST payable ($8,630 + $1,118 + $920 – $8,630 + $13,585 + $265) .. 15,888 Income tax payable ($3,340 – $3,340 + $3,481) ......... 3,481 CPP payable ($1,320 – $1,320 + $764 + $764) ........... 1,528 EI payable ($680 – $680 + $343 + $480) ..................... 823 Vacation pay payable ($8,660 + $750) ....................... 9,410 Property tax payable .................................................. 735 Warranty liability ......................................................... 1,710 Interest payable............................................................. 268 Total current liabilities ........................................... $ 119,602

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PROBLEM 10-5A (Continued) Taking It Further: Most companies require employees to take their vacation as soon as possible after it is earned, usually after a year of work when the full annual entitlement is earned. This prevents the accumulation of vacation pay liability for the company, and ensures staff is rotated and cross-trained for other functions. Ensuring staff take vacation on a regular basis also results in stronger internal controls and reduces the likelihood of fraud and theft by ensuring one staff member’s work is performed by another staff member. When employees take their vacation, the Vacation Pay Payable account is debited. The credit side of the entry is the same as for regular payroll: CPP Payable, EI Payable, Income Taxes Payable, and Salaries payable are credited.

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PROBLEM 10-6A (a)

Warranty expense 2015 – (1,500 × 5% × $30) = $2,250 2016 – (1,700 × 5% × $30) = $2,550 2017 – (1,800 × 5% × $30) = $2,700 Warranty liability at year end 2015 – ($0 – $2,250 + $2,250) = $0 2016 – ($0 – $2,400 + $2,550) = $150 2017 – ($150 – $2,640 + $2,700) = $210

Note: See analysis of Warranty Liability account in (b) below. (b) 2015

2016

2017

Warranty Liability ................................. Repair Parts Inventory .....................

2,250

Warranty Expense (1,500 × 5% × $30) . Warranty Liability .............................

2,250

Warranty Liability ................................. Repair Parts Inventory .....................

2,400

Warranty Expense (1,700 × 5% × $30) . Warranty Liability .............................

2,550

Warranty Liability ................................. Repair Parts Inventory .....................

2,640

Warranty Expense (1,800 × 5% × $30) . Warranty Liability .............................

2,700

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10-55

2,250

2,400

2,550

2,640 2,700

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 10-6A (Continued) (b) (Continued)

Date 2015 During Dec. 31 2016 During Dec. 31 2017 During Dec. 31 (c)

Warranty Liability Explanation Ref. Debit

Credit Balance

2,250

2,250 Dr 2,250 0

2,400

2,400 Dr 2,550 150

2,640

2,490 Dr 2,700 210

Percentage of units returned for repair = Number of units returned ÷ Number of units sold Returned 2015 75 2016 90 2017 105 270

Sold 1,500 1,700 1,800 5,000

Percentage returned = 270 ÷ 5,000 = 5.4% Average actual warranty cost per unit = Total actual warranty costs ÷ Total units returned Actual costs 2015 $2,250 2016 2,400 2017 2,640 $7,290 Average warranty cost per unit over the three-year period: $7,290 ÷ 270 = $27

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PROBLEM 10-6A (Continued) Taking It Further: Revisions of estimates are applied prospectively. This means that the changes in estimates will be applied to 2017 only. The January 1, 2017 opening balance in the Warranty Liability account remains at $150. The revised warranty expense for 2017 is calculated as follows: Warranty expense 2017: 1,800 × 7% × $27 = $3,402 Warranty liability at December 31, 2017: $150 – $2,640 + $3,402 = $912

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PROBLEM 10-7A (a)

1. Will reduce revenues and profit as a portion of the sales are allocated to the future performance obligation and therefore recorded as unearned revenues. 2. Increases revenues and profit (form of unearned revenue) 3. No effect on revenues, expenses, and profit 4. Increases revenues, expenses (cost of goods sold), and profit

(b) 2016: 1.

Cash ............................................... 4,560,000 Sales ................................... 4,447,334 Unearned Revenue–Loyalty Program 112,666

Stand-alone gas sales........................................ Stand-alone value of loyalty coupons ((3,800,000 x $0.038 x 80%) ................................ Total Value ...................................................

$4,560,000 115,520 $4,675,520

Allocate as follows: Earned revenue= ($4,560,000/$4,675,520) X $4,560,000 = $4,447,334 Unearned revenue = ($115,520/$4,675,520) X $4,560,000 = $112,666 2.

Unearned Revenue-Loyalty Program . Revenue from Rewards Program

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46,000 46,000

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PROBLEM 10-7A (Continued) (b) (Continued) 2017: 3.

Cash ...............................................6,045,000 Sales ................................... 5,906,870 Unearned Revenue–Loyalty Program 138,130

Stand-alone gas sales........................................ Stand-alone value of loyalty coupons (4,650,000 x $0.038 x 80%) ................................. Total Value ...................................................

$6,045,000 141,360 $6,186,360

Allocate as follows: Earned revenue= ($6,045,000/$6,186,360) x $6,045,000 =$5,906,870 Unearned revenue= ($141,360 /$6,186,360) x $6,045,000 = $138,130

Unearned Revenue–Loyalty Program Revenue from Rewards Program

53,500

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

82,000

Unearned Revenue .............................. Sales .............................................

45,000

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53,500

82,000 45,000

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PROBLEM 10-7A (Continued) (c) Date 2016 During Dec. 31

Unearned Revenue–Loyalty Program Explanation Ref. Debit Credit Balance 112,666 66,666

138,130

204,796 151,296

Credit

Balance

82,000

82,000 37,000

46,000

2017 During Dec. 31

Date 2017 During Dec. 31

112,666

53,500

Unearned Revenue Explanation Ref. Debit

45,000

Taking It Further: Management should consider the following factors:  The historical rate of redemption on the grocery coupons. Some coupons will never be redeemed and management needs to determine over time, if the estimated redemption rate should be revised.  Factors to consider for the gift cards include long periods of inactivity by customers, or low residual balances. These factors increase the likelihood that the cards will not be used. Unearned revenue linked to gift cards where there is a remote chance they will be used can be transferred to a revenue account.

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PROBLEM 10-8A 1.

Note disclosure: It does not appear that it is probable that the company will lose the lawsuit. If the possibility of loss is considered remote, Mega Company would not need to disclose the lawsuit.

Note disclosure: Since it is likely that the company will lose the lawsuit, but the amount of the liability cannot be reliably measured, the lawsuit should be disclosed.

Accrue in the financial statements: Because Mega has negotiated a settlement, it now has a liability and the amount is measurable.

Taking It Further: Making an accrual for a contingency reflects the impact of the loss on the current year’s profit. If the contingency is only reflected in the notes and not accrued, its impact on the financial results is not as readily visible. Thus a benefit of recording the accrual is that it allows users of financial statements to make better informed decisions. Also, by reflecting the amounts in the financial statements, this improves the ability of users to generate meaningful ratios. The cost of accruing a contingency is that companies must be very careful in wording the information in order to avoid the appearance of admitting culpability in matters that are not fully resolved. In addition, until the loss and liability are probable and measurable, the company risks damaging its ability to attract investors or obtain credit by portraying weaker financial results if the loss and liability are not realized in a later period.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 10-9A (a) SURE VALUE HARDWARE Payroll Register Week Ended March 14, 2017 Gross Earnings Employee Hours Regular I. Dahl F. Gualtieri G. Ho A. Israeli Totals

37.5 42.5 43.5 45

Solutions Manual .

Overtime

Gross Pay

$637.50 0 $637.50 660.00 $61.88 721.88 620.00 81.38 701.38 600.00 112.50 712.50 $2,517.50 $255.76 $2,773.26

Deductions CPP

Income United Tax Way

$27.80 $11.83 $82.25 $ 7.50 32.40 13.57 91.20 8.00 31.39 13.19 97.50 5.00 31.94 13.40 107.75 10.00 $123.53 $51.99 $378.70 $30.50

10-62

Total

Net Pay

$129.38 $508.12 145.17 576.71 147.08 554.30 163.09 549.41 $584.72 $2,188.54

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PROBLEM 10-9A (Continued) (b) Mar.14

Salaries Expense ......................... 2,773.26 CPP Payable ......................... 123.53 EI Payable ............................. 51.99 Income Tax Payable............. 378.70 United Way Contributions Payable 30.50 Salaries Payable................... 2,188.54

14 Employee Benefits Expense ..... 307.25 CPP Payable ($123.53 × 1) ... EI Payable ($51.99 × 1.4)...... Vacation Pay Liability .......... Vacation pay liability = $2,773.26 × 4% (c) Mar.14 Salaries Payable ........................ Cash ...................................... (d) Apr. 15 CPP Payable ($123.53 + $123.53) .................... EI Payable ($51.99 + $72.79) ..... Income Tax Payable .................. Cash ......................................

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123.53 72.79 110.93

2,188.54 2,188.54 247.06 124.78 378.70 750.54

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PROBLEM 10-9A (Continued) Taking It Further: The owner of a proprietorship is not considered an employee for income tax purposes. Since the business is not a separate legal entity, the owner is considered to own all of the profit of the business and is taxed on his/her personal income tax return for the profit of the business and not on the drawings. Income tax payments are usually made through the payment of instalments rather than through monthly remittances with the employees’ payroll. A proprietor is not required, nor able, to pay EI on business profit for purposes of collecting employment insurance if he or she is not working. However, a proprietor can choose to pay EI for special benefits such as sickness or maternity benefits. Business profit is considered pensionable earnings for CPP and the owner must make CPP remittances on the business profit. This is accomplished through the owner’s personal income tax return and is not calculated or remitted as part of the payroll function.

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PROBLEM 10-10A (a) Feb. 4 Union Dues Payable ........................... Cash................................................ 7

Disability Insurance Payable ............. Life Insurance Payable ...................... Cash................................................

1,450 1,280 855 2,135

CPP Payable ....................................... 7,887 EI Payable ........................................... 3,755 Income Tax Payable ........................... 16,252 Cash................................................

20 Workers’ Compensation Payable ...... Cash................................................ 28

1,450

4,275 4,275

Salaries Expense................................ 92,600 CPP Payable................................... EI Payable....................................... Income Tax Payable ...................... Union Dues Payable ...................... Disability Insurance Payable ........ Salaries Payable ............................

28 Salaries Payable ................................. Cash................................................

10-65

4,281 1,695 17,595 1,574 1,380 66,075

66,075

28 Employee Benefits Expense.............. 15,914 CPP Payable................................... EI Payable ($1,695 × 1.4) ............... Workers’ Compensation Payable ($92,600 × 5%) ................................ Vacation Pay Payable ($92,600 × 4%) Life Insurance Payable ($92,600 × 1%)

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27,894

66,075 4,281 2,373 4,630 3,704 926

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PROBLEM 10-10A (Continued) (b)

Date Feb. 1 13 28 28

Date Feb. 1 13 28

Date Feb. 1 20 28

Solutions Manual .

Canada Pension Plan Payable Explanation Ref. Debit Credit Balance



Balance

4,281 4,281

7,887 0 4,281 8,562

Employment Insurance Payable Explanation Ref. Debit Credit

Balance

7,887

Balance

 1,695 2,373

3,755 0 1,695 4,068

Credit

Balance

17,595

16,252 0 17,595

Workers’ Compensation Payable Explanation Ref. Debit Credit

Balance

3,755

Income Tax Payable Explanation Ref. Debit Balance

 16,252

Balance

 4,275 4,630

10-66

4,275 0 4,630

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PROBLEM 10-10A (Continued) (b) (Continued)

Date Feb. 1 4 28

Date Feb. 1 7 28

Date Feb. 1 28

Date Feb. 1 7 28

Date Feb. 28 28

Solutions Manual .

Union Dues Payable Explanation Ref. Debit

Credit

Balance

1,574

1,450 0 1,574

Credit

Balance

926

855 0 926

Credit

Balance

3,704

20,520 24,224

Disability Insurance Payable Explanation Ref. Debit Credit

Balance

 1,450

Life Insurance Payable Explanation Ref. Debit Balance

 855

Vacation Pay Payable Explanation Ref. Debit Balance

Balance



 1,280 1,380

Salaries Payable Explanation Ref. Debit 

10-67

Credit Balance 66,075

66,075

1,280 0 1,380

66,075 0

Chapter 10

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition

PROBLEM 10-10A (Continued) Taking It Further: The employee earning record is required to determine the employee’s total earnings for the year and total deductions. This document is used to prepare the annual T4 slip that is required for the employee’s income tax filing requirement. This information is also filed with CRA by the employer. The employee earning record also helps the employer determine when the employee has reached maximum pensionable and insurable earnings for CPP and EI purposes. The earning record is also used for other requirements such as the statement of earnings for EI benefits. The payroll register contains the current pay information for all employees for a particular pay period. It allows the company to accumulate gross pay, CPP, EI, Income tax, and other amounts withheld from the employees’ pay. The summary information can then be used to prepare the journal entry and paycheques for each employee.

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PROBLEM 10-11A (a)

LIGHTHOUSE DISTRIBUTORS (Partial) Balance Sheet September 30, 2017

Current liabilities Bank indebtedness ............................................... Accounts payable ................................................. Warranty liability .................................................... Property taxes payable.......................................... CPP payable ........................................................... EI payable............................................................... Workers’ compensation payable .......................... Vacation pay payable ............................................ Income tax payable................................................ HST payable ........................................................... Interest payable ..................................................... Unearned revenue–loyalty program ..................... Unearned card revenue ......................................... Current portion of notes payable ......................... Current portion of mortgage payable ................... Total current liabilities ...................................... (b)

$ 62,500 90,000 22,500 10,000 7,500 3,750 1,250 13,500 35,000 15,000 10,000 5,000 30,000 12,000 10,000 $328,000

Current assets: $182,000 + $275,000 + $12,500 = $469,500 Current ratio: $469,500 ÷ $328,000 = 1.43:1 Acid-test ratio: $182,000 ÷ $328,000 = 0.55:1

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PROBLEM 10-11A (Continued) (c)

LightHouse Distributors did not show any cash on the trial balance because the bank account is in overdraft which represents a loan to LightHouse from the bank. LightHouse is using its line of credit to pay off its current liabilities, until its accounts receivable are collected and can provide cash for use in operations. The current ratio is low, but LightHouse still has $75,000 available in its line of credit for immediate cash needs.

Taking It Further: The accountant is not correct. Recording a full year of property tax expense when the payment is made, on the basis that the payment is unavoidable is not proper accounting. The property taxes are paid for a full calendar year of services to be delivered by the municipality or city. These services are not obtained at the time of the tax payment. The payment should be allocated to property tax expense in all accounting periods that benefit from the services provided during the year. The expense for property taxes is recognized through the passage of time, evenly over the fiscal year.

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PROBLEM 10-12A (a)

MAPLE LEAF FOODS INC. (Partial) Balance Sheet December 31, 2014 (in thousands)

Current liabilities Accounts payable and accruals .............................. Income taxes payable............................................... Current portion of long-term debt ........................... Other current liabilities............................................. Provisions ................................................................. Total current liabilities ......................................... (b)

$275,249 26,614 472 24,383 60,443 $387,161

Current assets = $496,328 + $60,396 + $105,743 + $270,401 + $110,209 + $20,157 = $1,063,234 Current ratio: $1,063,234 ÷ $387,161 = 2.75:1 Acid-test ratio: ($496,328 + $60,396 + $110,209) ÷ $387,161 = 1.72:1

(c)

Current ratio Dec. 31, 2013: $1,183,171 ÷ $966,522 = 1.22:1 Acid-test ratio Dec. 31, 2013: ($506,670 + $111,034+ 115,514) ÷ $966,522 = 0.76:1 Both the current ratio and the asset test ratio improved considerably in 2014.

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PROBLEM 10-12A (Continued) Taking It Further: In assessing liquidity, we should also look at the receivables and inventory turnover ratios to ensure that the current assets are liquid. A slow-down in the turnover ratios of receivables and inventory would trigger an increase in current assets and in the current ratio, but would signal a decrease in the liquidity of receivables and inventory. We should also look at the difference between the acid-test ratio and the current ratio. The acid-test ratio uses only the liquid current assets (those that can be converted to cash readily). A significant difference between the current ratio and the acid-test ratio may indicate that the company has less short-term liquidity. In the case of Maple Leaf Foods Inc. the acid-test ratio is less than the current ratio indicating that the company has a high proportion of less liquid current assets. Other factors to consider include general economic and industry conditions, as well as comparisons with ratios from other companies in the same or related industries.

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Accounting Principles, Seventh Canadian

*PROBLEM 10-13A (a) WESTERN ELECTRIC COMPANY Payroll Register Week Ended June 9, 2015

Employee C. Tanm T. Ng O. Stavtech A. Mandell Totals

Gross Pay $945.00 1,130.00 1,130.00 1,067.00 $4,272.00

CPP $43.45 52.60 52.60 49.48 $198.13

1 2 2 3

Deductions Federal EI Income Tax 4 $99.85 $17.77 5 125.90 21.24 5 141.50 21.24 6 128.30 20.06 $495.55 $80.31

Ontario Total Income Tax Deductions Net Pay $52.10 $213.17 $731.83 64.45 264.19 865.81 69.60 284.94 845.06 64.10 261.94 805.06 $250.25 $1,024.24 $3,247.76

1. CPP = ($945.00 – [$3,500 ÷ 52]) × 4.95% = $43.45 2. CPP = ($1,130.00 – [$3,500 ÷ 52]) × 4.95% = $52.60 3. CPP = ($1,067.00 – [$3,500 ÷ 52]) × 4.95% = $49.48 4. EI = $945.00 × 1.88% = $17.77 5. EI = $1,130.00 × 1.88% = $21.24 6. EI = $1,067.00 × 1.88% = $20.06

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*PROBLEM 10-13A (Continued) (b) Semi-monthly Payroll Ended June 15, 2015:

Employee

Annual Salary

Gross Pay

CPP 4.95%

EI 1.88%

S. Goodspeed M. Giancarlo H. Ridley

$43,440 64,770 76,880

$1,810.00 2,698.75 3,203.33

$ 82.38 1 126.37 2 151.35 3

$34.03 4 50.74 5 60.22 6

1. CPP = ($1,810.00 – [$3,500 ÷ 24]) × 4.95% = $82.38 2. CPP = ($2,698.75 – [$3,500 ÷ 24]) × 4.95% = $126.37 3. CPP = ($3,203.33 – [$3,500 ÷ 24]) × 4.95% = $151.35 4. EI = $1,810.00 × 1.88% = $34.03 5. EI = $2,698.75 × 1.88% = $50.74 6. EI = $3,203.33 × 1.88% = $60.22 (c) Pay period in which CPP maximum is reached = Maximum

annual employee CPP contribution ÷ semi-monthly contribution for the employee (the answer is rounded up since the maximum is reached in the next pay period). Pay period in which EI maximum is reached = Maximum annual employee EI premium ÷ semi-monthly premium for the employee (the answer is rounded up since the maximum is reached in the next pay period). S. Goodspeed: His annual salary is less than the maximum pensionable earnings and the maximum insurance earnings. He will not reach the maximum CPP and EI payments for 2015. M. Giancarlo: Pay period in which CPP maximum is reached = $2,479.95 ÷ $126.37 = 19.6; rounded up to pay period 20 (October 31).

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*PROBLEM 10-13A (Continued) (c) (Continued) Pay period in which EI maximum is reached = $930.60 ÷ $50.74 = 18.34; rounded up to pay period 19 (October 15). H. Ridley: Pay period in which CPP maximum is reached = $2,479.95 ÷ $151.35 = 16.39; rounded up to pay period 17 (September 15). Pay period in which EI maximum is reached = $930.60 ÷ $60.22 = 15.45; rounded up to pay period 16 (August 31). Taking It Further: The payroll tables are prepared for various pay periods used by different companies, or for different groups of employees of the same company. The amounts of CPP, EI, and income tax to be deducted are all dependent upon the length of the pay period, thus different tables are required.

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PROBLEM 10-1B

Feb. 1 Cash .................................................... 30,000 Notes Payable...............................

30,000

8 Accounts Receivable ......................... 16,385 Sales.............................................. HST Payable .................................

14,500 1,885

14 Salaries Expense ............................... 15,000 CPP Payable ................................. EI Payable ..................................... Income Tax Payable ..................... Salaries Payable ...........................

692 282 2,700 11,326

14 Employee Benefits Expense ............. CPP Payable ................................. EI Payable ($282 x 1.4) .................

1,087

15 Furniture ............................................. Accounts Payable ........................

1,975

692 395

1,975

21 Salaries Payable................................. 11,326 Cash .............................................. 28 Interest Expense ................................ Interest Payable............................ ($30,000 x 5% x 1/12)

125

28 Warranty Expense.............................. Warranty Liability .........................

500

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11,326

125

500

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PROBLEM 10-1B (Continued) Taking It Further: The accountant is mostly correct. Accounts payable are an example of a current liability that can be expected to be paid within the next year. However, unearned revenue is a current liability that will not be paid within the year, but can be expected to be extinguished by goods or services being provided.

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PROBLEM 10-2B (a)Jan. 1

Cash ......................................................30,000 Notes Payable...............................

30,000

5 Cash .................................................... 11,648 Sales.............................................. GST Payable ($10,400 x 5%) ........ PST Payable ($10,400 x 7%) ........

10,400 520 728

12 Unearned Revenue ............................ Service Revenue ................................ GST Payable ................................. PST Payable..................................

9,000

14 GST Payable ....................................... Cash ..............................................

5,800

8,036 402 562

5,800

20 Accounts Receivable ......................... 52,416 Sales (900 X $52) .......................... GST Payable ($46,800 x 5%) ........ PST Payable ($46,800 x 7%) ........

46,800 2,340 3,276

25 Cash .................................................... 20,966 Sales.............................................. GST Payable ($18,720 x 5%) ........ PST Payable ($18,720 x 7%) ........

18,720 936 1,310

(b) 31 Interest Expense ................................ Interest Payable............................ ($30,000 x 8% x 1/12)

200

31 Warranty Expense.............................. Warranty Liability ......................... ($46,800 x 5%)

2,340

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2,340

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PROBLEM 10-2B (Continued) (c) EDMISTON SOFTWARE COMPANY (Partial) Balance Sheet January 31, 2017 Current liabilities Accounts payable ....................................................... GST payable ($520 + $402 + $2,340 + $936) .............. PST payable ($728 + $562 + $3,276 + $1,310) ........... Interest payable .......................................................... Warranty liability ......................................................... Unearned revenue ($15,000 - $9,000) ........................ Notes payable ............................................................. Total current liabilities ...........................................

$42,500 4,198 5,876 200 2,340 6,000 30,000 $91,114

Taking It Further: James is incorrect. The payroll taxes withheld are amounts that belong to the employee. The employer is instructed by law to take from the gross pay of employees and remit these amounts for income taxes, CPP, and EI to the Receiver General. By doing so, these amounts reach the CPP and EI funds to finance the benefits to which employees are entitled. As well, the remittances represent instalments on individual employees’ tax liability accounts for federal and provincial income taxes withheld. The employer has already recognized the expense as part of the gross salaries paid to the employees. The gross amount of the salaries is debited to Salaries Expense. The employee benefits are paid by the employer to the Receiver General along with the employer’s portion of CPP and EI payments, which are over and above what has been deducted from the employee’s pay.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 10-3B

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

Principal $ 25,000 $ 10,000 $ 40,000 $ 80,000 $ 126,000 $ 50,000

Date issued July 1/17 Sept. 1/17 Nov. 1/17 May 31/17 Oct. 1/17 Mar. 31/16

Rate 5.00% 4.00% 4.50% 3.75% 4.25% 5.00%

Term 9 months 6 months 7 months 5 years 3 years 4 years

(a)

(b)

(c)

Current Portion $ 25,000 $ 10,000 $ 40,000 $ 16,000 $ 42,000 $ 12,500

Noncurrent Portion $ $ $ $ 64,000 $ 77,000 $ 25,000

Interest Payable $ 104.17 $ 133.33 $ 300.00 $1,750.00 $ 421.46 $ -

7 9

8 9

1 2 3 4 5 6

7 $104.17 = $25,000 × 5.0% × 1/12 current: $42,000 = $3,500 × 12 months 8 $133.33 = $10,000 × 4.0% × 4/12 non-current: $77,000 = $126,000 – ($3,500 × 2) $300.00 = $40,000 × 4.5% × 2/12 – $42,000 9 $1,750.00 = $80,000 × 3.75% × 7/12 non-current: $25,000 = $50,000 – ($12,500 × 2) $421.46 = ($126,000 – [2 × $3,500]) × 4.25% × 1/12 Interest was paid on December 31, 2017

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PROBLEM 10-3B (Continued) Taking It Further: For the maker, a note payable bears interest, which is an additional cost. Some liabilities, such as accounts payable to suppliers, are usually non-interest bearing as long as they are paid within the credit period. In addition, the term of the note may call for periodic payments of interest. This adds to the administrative burden of managing the note. The benefit to the maker is that the terms of the note are usually negotiated with the payee and the interest rate is more favourable than financing obtained through a bank. If the note is used to pay a supplier, the term of the note gives the maker additional time to repay the principal. For the payee, the note provides a stream of interest revenue. Because it is a signed document, it also provides additional security of collection. The cost to the payee is that cash is not received until the note reaches maturity.

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PROBLEM 10-4B (a)

2016: Dec. 1 Interest Expense ($15,000 × 6% × 1/12)................. 75 Interest Payable......................... 375 Notes Payable............................ 15,000 Cash....................................... 2017: Apr. 1 Land ........................................... 75,000 Notes Payable ....................... Apr. 30 Equipment.................................. Accounts Payable .................

8,000

May 31 Accounts Payable ..................... Notes Payable .......................

8,000

July

1,313

1 Interest Expense ....................... ($75,000 × 7% × 3/12) Cash.......................................

Aug. 31 Interest Expense ($8,000 × 8% × 3/12)................... Note Payable.............................. Cash....................................... Oct.

Oct.

1 Interest Expense ($75,000 × 7% × 3/12)................ Cash....................................... 1 31

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15,450

75,000 8,000 8,000

1,313 160 8,000 8,160

1,313 1,313

Cash ........................................... 90,000 Notes Payable .......................

90,000

Interest Expense ....................... 888 [($90,000 × 6% × 1/12) + ($1,313 × ⅓)] Interest Payable ....................

888

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PROBLEM 10-4B (Continued) (b) MILEHI MOUNTAIN BIKES (Partial) Balance Sheet October 31, 2017 Current liabilities Notes payable ............................................................. Current portion of long-term notes payable ............. Interest payable .......................................................... Total current liabilities ...........................................

$75,000 18,000 888 93,888

Long-term liabilities Notes payable .......................................... Less current portion ................................

72,000

$90,000 (18,000 )

(c) MILEHI MOUNTAIN BIKES (Partial) Income Statement Year ended October 31, 2017 Other expenses Interest expense ......................................................... *($75 + $1,313 + $160 + $1,313 + $888)

$3,749*

Taking It Further: Notes payable are classified according to their maturity dates as being either current or non-current. This classification is also extended to the current maturity of the portion of long-term debt that is repayable in the current term. This classification is important because it shows the amount that must be settled within one year, which is an important factor in evaluating the company’s liquidity.

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PROBLEM 10-5B (a) Jan. 5

Cash............................................... 17,854 Sales ....................................... HST Payable ($15,800 × 13%) .

15,800 2,054

Unearned Revenue ....................... HST Payable ............................ Service Revenue .....................

805 6,195

7,000

HST Payable.................................. 11,390 Cash .........................................

15 CPP Payable.................................. EI Payable ..................................... Income Tax Payable ..................... Cash .........................................

2,152 1,019 4,563

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

18,000

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

35,000

Solutions Manual .

11,390

7,734 18,000

35,000

Accounts Receivable.................... 33,900 Sales (500 × $60) ..................... HST Payable ($30,000 × 13%) .

30,000 3,900

Unearned Revenue- Loyalty Program...................................... 1,750 HST Payable ($1,549 × 13%) ... Service Revenue ($1,750 ÷ 1.13)

201 1,549

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PROBLEM 10-5B (Continued) (a) (Continued) Jan.

31 Cash ............................................500,000 Sales ........................................ Unearned Revenue–Loyalty Program

495,050 4,950

Stand-alone sales ................................... $500,000 Stand-alone value of loyalty points 5,000 (50,000 × 10% × $1) ................................. Total Value .............................................. $505,000 Allocate as follows: Earned revenue = ($500,000/$505,000) x $500,000 = $495,050 Unearned revenue = ($5,000/$505,000) x $500,000 = $4,950 31 Warranty Liability ...................... Repair Parts Inventory ......... 31

(b)

875 875

Salaries Expense....................... 25,350 CPP Payable.......................... EI Payable ............................. Income Tax Payable ............. Salaries Payable ...................

1,183 464 4,563 19,140

31 Salaries Payable ........................ 19,140 Cash.......................................

19,140

Jan. 31 Interest Expense ....................... Interest Payable .................... [($18,000 × 6% × 1/12) × 1/2]

31 Warranty Expense ..................... Warranty Liability ................. (500 × 6% × $10)

300

Solutions Manual .

Employee Benefits Expense..... 2,847 CPP Payable.......................... EI Payable ($464 × 1.4) ......... Vacation Pay Payable ($25,350 × 4%)

10-85

300

1,183 650 1,014

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PROBLEM 10-5B (Continued) (c) ZAUR COMPANY (Partial) Balance Sheet January 31, 2017 Liabilities Current liabilities Accounts payable ($63,700 – $35,000) ...................... Notes payable ............................................................. Vacation pay liability ($9,120 + $1,014) ..................... Unearned revenue ($16,000 – $7,000)........................ Unearned revenue–loyalty program ($2,150 – $1,750 + $4,950).................................................................. HST payable ($11,390 + $2,054 + $805 – $11,390 + $3,900 + $201)...................................................... Warranty liability ($5,750 – $875 + $300) ................... Income tax payable ($4,563 – $4,563 + $4,563) ......... CPP payable ($2,152 – $2,152 + $1,183 + $1,183) ..... EI payable ($1,019 – $1,019 + $464 + $650) ............... Interest payable .......................................................... Total current liabilities ...........................................

$28,700 18,000 10,134 9,000 5,350 6,960 5,175 4,563 2,366 1,114 45 $91,407

Taking It Further: Most companies require employees to take their vacation as soon as possible after it is earned, usually after a year of work when the full annual entitlement is earned. This prevents the accumulation of vacation pay liability for the company, and ensures staff is rotated and cross-trained for other functions. Ensuring staff take vacation on a regular basis also results in stronger internal controls and reduces the likelihood of fraud and theft by ensuring one staff member’s work is performed by another staff member. When employees take their vacation, the Vacation Pay Payable account is debited. The credit side of the entry is the same as for regular payroll: CPP Payable, EI Payable, Income Taxes Payable, and Salaries Payable are credited.

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PROBLEM 10-6B (a)

Warranty expense 2015 – (1,200 × 5% × $25) = $1,500 2016 – (1,320 × 5% × $25) = $1,650 2017 – (1,420 × 5% × $25) = $1,775 Warranty liability at year end 2015 – ($0 – $1,275 + $1,500) = $225 2016 – ($225 – $1,600 + $1,650) = $275 2017 – ($275 – $1,960 + $1,775) = $90

Note: See analysis of Warranty Liability account in (b) below. (b) 2015 Warranty Liability ................................ Repair Parts Inventory...................

1,275

Dec. 31 Warranty Expense (1,200 × 5% × $25) Warranty Liability...........................

1,500

1,275

1,500

2016 Warranty Liability ................................ Repair Parts Inventory...................

1,600

Dec. 31 Warranty Expense (1,320 × 5% × $25) Warranty Liability...........................

1,650

1,600

1,650

2017 Warranty Liability ................................ Repair Parts Inventory...................

1,960

Dec. 31 Warranty Expense (1,420 × 5% × $25) Warranty Liability...........................

1,775

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PROBLEM 10-6B (Continued) (b) (Continued)

Date 2015 During Dec. 31 2016 During Dec. 31 2017 During Dec. 31 (c)

Warranty Liability Explanation Ref. Debit

Credit

Balance

1,500

1,275 Dr 225

1,650

1,375 Dr 275

1,775

1,685 Dr 90

1,275

1,600

1,960

Percentage of units returned for repair = Number of units returned ÷ Number of units sold Returned 2015 60 2016 70 2017 80 210

Sold 1,200 1,320 1,420 3,940

Percentage returned = 210 ÷ 3,940 = 5.3% Average actual warranty cost per unit = Total actual warranty costs ÷ Total units returned 2015 2016 2017

Actual costs $1,275 1,600 1,960 $4,835

Average warranty cost over the three-year period: $4,835 ÷ 210 = $23

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PROBLEM 10-6B (Continued) Taking It Further: Revisions of estimates are applied prospectively. This means that the changes in estimates will be applied to 2017 only. The January 1, 2017 opening balance in the Warranty Liability account remains at $275. The revised warranty expense for 2017 is calculated as follows: Warranty expense 2017: 1,420 × 7% × $25 = $2,485 Warranty liability at December 31, 2017: $275 – $1,960 + $2,485 = $800

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PROBLEM 10-7B (a) 1. Will reduce revenues and profit as a portion of the sales are allocated to the future performance obligation and therefore recorded as unearned revenues 2. Increases revenues and profit 3. No effect on revenues, expenses, and profit 4. Increases revenues, expenses (cost of goods sold), and profit 2016: 1.

Cash ............................................... 1,050,000 Sales .................................. 1,037,037 Unearned Revenue–Loyalty Program 12,963

Stand-alone gas sales........................................ Stand-alone value of loyalty coupons (750,000 × $0.025 x 70%) .................................... Total Value ...................................................

$1,050,000 13,125 $1,063,125

Allocate as follows: Earned revenue= ($1,050,000/$1,063,125) x $1,050,000 = $1,037,037 Unearned revenue= ($13,125/$1,063,125) x $1,050,000 = $12,963

2. Unearned Revenue–Loyalty Program Revenue from Rewards Program

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PROBLEM 10-7B (Continued) (b) (Continued) 2017: 3. Cash ............................................... 1,255,000 Sales .................................. 1,240,983 Unearned Revenue–Loyalty Program 14,017 Stand-alone gas sales........................................ Stand-alone value of loyalty coupons (810,000 × $0.025 x 70%) .................................... Total Value ...................................................

$1,255,000 14,175 $1,269,175

Allocate as follows: Earned revenue= ($1,255,000/$1,269,175) x $1,255,000 = $1,240,983 Unearned revenue= ($14,175 /$1,269,175) x $1,255,000 = $14,017

4. Unearned Revenue–Loyalty Program Revenue from Rewards Program

9,500

5. Cash ...................................................... Unearned Revenue .......................

3,950

Unearned Revenue .............................. Sales .............................................

1,500

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3,950 1,500

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PROBLEM 10-7B (Continued) (c) Date 2016 During Dec. 31 2017 During Dec. 31

Date 2017 During Dec. 31

Unearned Revenue–Loyalty Program Explanation Ref. Debit Credit Balance 12,963

12,963 7,013

14,017

21,030 11,530

Credit

Balance

3,950

3,950 2,450

5,950

9,500 Unearned Revenue Explanation Ref. Debit

1,500

Taking It Further: Management should consider the following factors:  The historical rate of redemption on the service coupons should be reviewed and revised as needed to ensure an appropriate amount of revenue is being recorded and an appropriate amount of revenue is being deferred.  The likelihood of redemption of the gift cards. Factors such as long periods of inactivity by customers, or low residual balances increase the likelihood that the cards will not be used. Unearned revenue linked to gift cards where the likelihood of use is remote should be transferred to a revenue account.

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PROBLEM 10-8B 1.

Note disclosure: Since the amount of the liability cannot be reliably measured, the lawsuit cannot be recorded, but it should be disclosed.

It appears that it is unlikely that Big Fork will lose the lawsuit; therefore the company does not need to record or report it in the notes to the financial statements. If the loss from the lawsuit could have a substantial negative effect on the company’s financial position, then note disclosure is still desirable.

Accrue in the financial statements: It appears likely that the company will lose this claim as it was at fault and the claim of $250,000 appears to be a reasonable estimate.

Taking It Further: Making an accrual for a contingency reflects the impact of the loss on the current year’s profit. This allows users of financial statements to make better informed decisions. If the contingency is only reflected in the notes and not accrued, its impact on the financial results is not as readily visible. Also, by reflecting the amounts in the financial statements, this improves the ability of users to generate meaningful ratios. The cost of accruing a contingency is that companies must be very careful in wording the information in order to avoid the appearance of admitting culpability in matters that are not fully resolved. In addition, until the loss and liability are likely and measurable, the company risks damaging its ability to attract investors or obtain credit by portraying weaker financial results if the loss and liability are not realized in a later period.

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Accounting Principles, Seventh Canadian Edition

PROBLEM 10-9B (a)

SCOOT SCOOTERS Payroll Register Week Ended February 17, 2015

Earnings Gross Employee Hours Regular Overtime Pay CPP P. Kilchyk 40 $610.00 0 $610.00 $26.86 B. Quon 42 600.00 $45.00 645.00 28.60 C. Pospisil 40 650.00 0 650.00 28.84 B. Verwey 44 580.00 87.00 667.00 29.68 Totals $2,440.00 $132.00 $2,572.00 $113.98

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Deductions Income United EI Tax Way Total Net Pay $11.16 $76.60 $5.00 $119.62 $490.38 11.80 83.70 7.25 131.35 513.65 11.90 84.10 5.50 130.34 519.66 12.21 87.10 8.25 137.24 529.76 $47.07 $331.50 $26.00 $518.55 $2,053.45

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PROBLEM 10-9B (Continued) (b) Feb.15

Salaries Expense ..........................2,572.00 CPP Payable.......................... 113.98 EI Payable.............................. 47.07 Income Tax Payable ............. 331.50 United Way Contributions Payable 26.00 Salaries Payable ................... 2,053.45

15 Employee Benefits Expense ........ 282.76 CPP Payable.......................... EI Payable ($47.07 × 1.4) ...... Vacation Pay Payable ........... ($2,572.00 × 4%)

113.98 65.90 102.88

Salaries Payable............................2,053.45 Cash....................................... 2,053.45

(d) Mar.15

CPP Payable ($113.98 + $113.98). 227.96 EI Payable ($47.07 + $65.90) ............112.97 Income Tax Payable .........................331.50 Cash.......................................

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672.43

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PROBLEM 10-9B (Continued) Taking It Further: The owner of a proprietorship is not considered an employee for income tax purposes. Since the business is not a separate legal entity, the owner is considered to own all of the profit of the business and is taxed on his/her personal income tax return for the profit of the business and not on the drawings. Income tax payments are usually made through the payment of instalments rather than through monthly remittances with the employees’ payroll. Business profit is not considered insurable profit for EI purposes, so no EI is deducted from business profit or drawings. Business profit is considered pensionable profit for CPP and the owner must make CPP remittances on the business profit. This is accomplished through the owner’s personal income tax return and is not calculated or remitted as part of the payroll function.

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PROBLEM 10-10B (a) Apr.

4 Union Dues Payable ........................... Cash................................................

1,285

1,134 756

Disability Insurance Payable ............. Life Insurance Payable ...................... Cash................................................

1,890

CPP Payable ....................................... 6,907 EI Payable ........................................... 3,320 Income Tax Payable ........................... 14,364 Cash................................................

20 Workers’ Compensation Payable ...... Cash................................................ 28

1,285

3,780 3,780

Salaries Expense................................ 83,160 CPP Payable................................... EI Payable....................................... Income Tax Payable ...................... Union Dues Payable ...................... Disability Insurance Payable ........ Salaries Payable ............................

28 Salaries Payable ................................. Cash................................................

10-97

3,799 1,522 15,800 1,414 1,247 59,378

59,378

28 Employee Benefits Expense.............. 14,246 CPP Payable................................... EI Payable ($1,522 × 1.4) ............... Workers’ Compensation Payable ($83,160 × 5%) ................................ Vacation Pay Payable ($83,160 × 4%) Life Insurance Payable ($83,160 × 1%)

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24,591

59,378 3,799 2,131 4,158 3,326 832

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PROBLEM 10-10B (Continued) (b) Canada Pension Plan Payable Explanation Ref. Debit Credit

Date Apr.

1 13 28 28

1 13 28

Date Apr.

1 13 28 28

Date Apr.

 3,799 3,799

6,907 0 3,799 7,598

Credit

Balance

15,800

14,364 0 15,800

Employment Insurance Payable Explanation Ref. Debit Credit

Balance

6,907

Income Tax Payable Explanation Ref. Debit

Date Apr.

Balance

1 20 28

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Balance

 14,364

Balance

 1,522 2,131

3,320 0 1,522 3,653

Workers’ Compensation Payable Explanation Ref. Debit Credit

Balance

3,320

Balance

 3,780 4,158

10-98

3,780 0 4,158

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PROBLEM 10-10B (Continued) (b) (Continued) Union Dues Payable Explanation Ref. Debit

Date Apr.

1 4 28

Date Apr.

1 7 28

1 28

1 7 28

Disability Insurance Payable Explanation Ref. Debit Credit

Balance

 1,285

Balance



1 28 28

Solutions Manual .

1,247

1,134 0 1,247

Credit

Balance

3,326

3,024 6,350

Credit

Balance

832

756 0 832

Credit

Balance

59,378

0 59,378 0

1,134

Balance



Balance

 756

Salaries Payable Explanation Ref. Debit

Date Apr.

1,414

1,285 0 1,414

Balance

Life Insurance Payable Explanation Ref. Debit

Date Apr.

Balance

Vacation Pay Payable Explanation Ref. Debit

Date Apr.

Credit

Balance

 59,378

10-99

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PROBLEM 10-10B (Continued) Taking It Further: The employee earning record is required to determine the employee’s total earnings and total deductions for the year. This document is used to prepare the annual T4 slip that is required for the employee’s income tax filing requirement. This information is also filed with CRA by the employer. The employee earning record also helps the employer determine when the employee has reached maximum pensionable and insurable earnings for CPP and EI purposes. The earning record is also used for other requirements such as the statement of earnings for EI benefits purposes. The payroll register contains the current pay information for all employees for a particular pay period. It allows the company to accumulate gross pay, CPP, EI, Income tax, and other amounts withheld from the employees’ pay. The summary information can then be used to prepare the journal entry and paycheques for each employee.

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PROBLEM 10-11B (a)

CREATIVE CARPENTRY (Partial) Balance Sheet March 31, 2017

Current liabilities Bank indebtedness ............................................... Accounts payable ................................................. Warranty liability .................................................... CPP payable ........................................................... EI payable............................................................... Vacation pay payable ............................................ Income tax payable................................................ HST payable ........................................................... Interest payable ..................................................... Unearned revenue ................................................. Notes payable ........................................................ Current portion of mortgage payable ................... Total current liabilities ...................................... (b)

$ 55,200 60,000 12,500 2,300 1,750 1,200 25,000 12,250 8,000 9,385 30,000 50,000 $267,585

Current assets: $184,000 + $120,600 + $500 = $305,100 Current ratio: $305,100 ÷ $267,585 = 1.14:1 Acid-test ratio: $184,000 ÷ $267,585 = 0.69:1

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PROBLEM 10-11B (Continued) (c)

Creative Carpentry did not show any cash on the trial balance because the bank account is in overdraft which represents a loan to Creative from the bank. Creative is using its line of credit to pay off its current liabilities, until its accounts receivable are collected and can provide cash for use in operations. The current ratio is low, but Creative still has $25,000 available in its line of credit for immediate cash needs.

Taking It Further: When customers purchase gift cards from Creative Carpentry, no goods or services have yet been delivered by the business to earn the cash obtained. Consequently, the amount received for the gift cards is initially recorded to the Unearned Revenue account. Later on, when the card is redeemed, the Unearned Revenue account is reduced for the value redeemed and revenue is recorded, along with sales taxes if applicable. This fulfills the revenue recognition principle of accounting and provides a fair reporting of when revenue is being earned.

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PROBLEM 10-12B

(a) BCE INC. (Partial) Balance Sheet December 31, 2014 (in millions of dollars)

Current liabilities Trade payables and other liabilities ..................... Current tax liabilities ............................................. Dividends payable ................................................. Interest payable ..................................................... Debt due within one year ...................................... Total current liabilities ...................................... (b)

$4,398 269 534 145 3,743 $9,089

Current assets: $142 + $424 + $333 + $198 + $379 + $3,069 = $4,545 Current ratio: $4,545 ÷ $9,089 = 0.50:1 Acid-test ratio: ($142 + $424 + $3,069) ÷ $9,089 = 0.40:1

(c)

Current ratio Dec. 31, 2013: $5,070 ÷ $7,890 = 0.64:1 Acid-test ratio Dec. 31, 2013: ($335 + $3,043) ÷ $7,890 = 0.43:1 Both the current and acid-test ratios weakened in 2014.

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PROBLEM 10-12B (Continued) Taking It Further: In assessing liquidity, we should also look at the receivables and inventory turnover ratios to ensure that the current assets are liquid. A slow-down in the turnover ratios of receivables and inventory would trigger an increase in current assets and in the current ratio, but would signal a decrease in the liquidity of receivables and inventory. We should also look at the difference between the acid-test ratio and the current ratio. The acid-test ratio uses only the liquid current assets (those than can be converted to cash readily). A significant difference between the current ratio and the acid-test ratio may indicate that the company has less short-term liquidity. In the case of BCE Inc. the acid-test and current ratios are relatively close, indicating that the company has a high proportion of liquid current assets. Other factors to consider include general economic and industry conditions, as well as comparisons with ratios from other companies in the same or related industries.

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Accounting Principles, Seventh Canadian

*PROBLEM 10-13B (a)

SLOVAK PLUMBING COMPANY Payroll Register Week Ended May 12, 2015

Employee D. Quinn K. Holub A. Lowhorn I. Kostra Totals

Gross Pay $985.00 1,037.00 1,080.00 950.00 $4,052.00

CPP $45.43 1 48.00 2 50.13 3 43.69 4 $187.25

Deductions Federal EI Income Tax 5 $111.45 $18.52 6 113.65 19.50 7 130.95 20.30 8 87.40 17.86 $443.45 $76.18

Ontario Total Income Tax Deductions Net Pay $56.70 $232.10 $752.90 57.90 239.05 797.95 65.20 266.58 813.42 48.70 197.65 752.35 $228.50 $935.38 $3,116.62

1. CPP = ($985.00 – [$3,500 ÷ 52]) × 4.95% = $45.43 2. CPP = ($1,037.00 – [$3,500 ÷ 52]) × 4.95% = $48.00 3. CPP = ($1,080.00 – [$3,500 ÷ 52]) × 4.95% = $50.13 4. CPP = ($950.00 – [$3,500 ÷ 52]) × 4.95% = $43.69 5. EI = $985.00 × 1.88% = $18.52 6. EI = $1,037.00 × 1.88% = $19.50 7. EI = $1,080.00 × 1.88% = $20.30 8. EI = $950.00 × 1.88% = $17.86

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*PROBLEM 10-13B (Continued) (b) Semi-monthly Payroll Ended May 15, 2015:

Employee B. Dolina H. Koleno A. Krneta

Annual Salary

Gross Pay

CPP 4.95%

$80,700 62,500 44,120

$3,362.50 $159.23 1 2,604.17 121.69 2 1,838.33 83.78 3

EI 1.88% $63.22 4 48.96 5 34.56 6

1. CPP = ($3,362.50 – [$3,500 ÷ 24]) × 4.95% = $159.23 2. CPP = ($2,604.17 – [$3,500 ÷ 24]) × 4.95% = $121.69 3. CPP = ($1,838.33 – [$3,500 ÷ 24]) × 4.95% = $83.78 4. EI = $3,362.50 × 1.88% = $63.22 5. EI = $2,604.17 × 1.88% = $48.96 6. EI = $1,838.33 × 1.88% = $34.56 (c) Pay period in which CPP maximum is reached = Maximum

annual employee CPP contribution ÷ semi-monthly contribution for the employee (the answer is rounded up since the maximum is reached in the next pay period). Pay period in which EI maximum is reached = Maximum annual employee EI premium ÷ semi-monthly premium for the employee (the answer is rounded up since the maximum is reached in the next pay period). B. Dolina: Pay period in which CPP maximum is reached = $2,479.95 ÷ $159.23 = 15.57; rounded up to pay period 16 (August 31). Pay period in which EI maximum is reached = $930.60 ÷ $63.22 = 14.72; rounded up to pay period 15 (August 15).

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*PROBLEM 10-13B (Continued) (c) (Continued) H. Koleno: Pay period in which CPP maximum is reached = $2,479.95 ÷ $121.69 = 20.38; rounded up to pay period 21 (November 15). Pay period in which EI maximum is reached = $930.60 ÷ $48.96 = 19.01; rounded up to pay period 20 (October 31). A. Krneta: Her annual salary is less than the maximum pensionable earnings and the maximum insurance earnings. She will not reach the maximum CPP and EI payments for 2015. Taking It Further: The payroll tables are prepared for various pay periods used by different companies, or for different groups of employees of the same company. The amounts deducted for CPP, EI, and income taxes depends on the length of the pay period, thus different tables are necessary.

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CUMULATIVE COVERAGE: CHAPTERS 3 TO 10 (a) 1.

July 31 Operating Expenses.................. Accounts Receivable ................ Cash.......................................

50 650 700

31 Bad Debt Expense ..................... 1,850 Allowance for Doubtful Accounts ($3,850 − $2,000) ................... 31 Interest Receivable.................... Interest Revenue ($10,000 × 8% × 1/12 months)

1,850

67 67

31 Cost of Goods Sold ....................... 6,700 Merchandise Inventory ($45,900 − $39,200) ...............

6,700

31 Operating Expenses ...................... 5,500 Prepaid Expenses .................

5,500

31 Depreciation Expense ($5,600 + $5,120) .......................... 10,720 Amortization Expense ................. 15,000 Accumulated Depreciation —Building.............................. Accumulated Depreciation —Equipment ......................... Accumulated Amortization —Patent ................................. Calculations Building ($155,000 − $15,000) ÷ 25 years = $5,600 Equipment ($25,000 − $12,200) × 40%* = $5,120 *(2 × 1 ÷ 5 years) Patent $75,000 ÷ 5 years = $15,000

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CUMULATIVE COVERAGE (Continued) (a) (Continued) 7.

July 31 Interest Expense ....................... Interest Payable ($124,200 × 6% × 1/12) ..........

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Operating Expenses.................. Warranty Liability..................

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621 621 1,975 1,975

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CUMULATIVE COVERAGE (Continued) (b) LEBRUN COMPANY Adjusted Trial Balance July 31, 2017 Debit $ 15,850 200 39,150

Credit

Cash .......................................................... Petty cash ................................................. Accounts receivable ................................ Allowance for doubtful accounts ............ $ 3,850 Note receivable ........................................ 10,000 Interest receivable.................................... 67 Merchandise inventory ............................ 39,200 Prepaid expenses..................................... 10,500 Land .......................................................... 50,000 Building..................................................... 155,000 Accumulated depreciation—building ..... 16,400 Equipment................................................. 25,000 Accumulated depreciation—equipment . 17,320 Patent ........................................................ 75,000 Accumulated amortization—patent ........ 30,000 Accounts payable..................................... 78,900 Interest payable ........................................ 621 Warranty liability ...................................... 7,975 Note payable ............................................. 124,200 S. LeBrun, capital ..................................... 124,700 S. LeBrun, drawings................................. 54,000 Sales.......................................................... 750,000 Cost of goods sold ................................... 456,700 Bad debt expense..................................... 1,850 Operating expenses ................................. 188,745 Amortization expense .............................. 15,000 Depreciation expense .............................. 10,720 Interest revenue ....................................... 467 Interest expense .......................................... 7,451 Total ............................................................. $1,154,433 $1,154,433 See the following page for calculations.

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CUMULATIVE COVERAGE (Continued) (b) This format not required but is presented to show calculations. Account

Cash Petty cash Accounts receivable Allowance for doubtful accounts Note receivable Interest receivable Merchandise inventory Prepaid expenses Land Building Accumulated depreciation —building Equipment Accumulated depreciation —equipment Patent Accumulated amortization —patent Accounts payable

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Adjustments

Unadjusted Trial Balance Dr. Cr. 16,550 200

38,500

Cr. (1) 700

(1) 650

2,000

Adjusted Trial Balance Dr. Cr. 15,850 200 39,150

(2) 1,850

10,000

3,850 10,000

(3) 67

45,900

(4) 6,700

39,200

16,000 50,000 155,000

(5) 5,500

10,500 50,000 155,000

10,800

(6) 5,600

25,000

16,400 25,000

12,200

(6) 5,120

75,000

17,320 75,000

15,000

(6)15,000

30,000

78,900

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CUMULATIVE COVERAGE (Continued) (b) (Continued) Account Interest payable Warranty liability Note payable S. LeBrun, capital S. LeBrun, drawings Sales Cost of goods sold Bad debt expense Operating expenses Amortization expense Depreciation expense Interest revenue Interest expense Total

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Unadjusted Trial Balance Dr. Cr.

Adjusted Trial Balance Dr. Cr.

Adjustments Dr. Cr.

6,000 124,200

(7) 621

621

(8) 1,975

7,975 124,200

124,700

54,000

54,000 750,000

750,000

450,000

(4) 6,700

456,700 1,850

181,220

(2) 1,850 (5) 5,500 (8) 1,975 (1) 50

188,745

(6)15,000

15,000

(6)10,720

10,720

400

(3)

467

6,830 1,124,200

(7) 621 1,124,200 43,133

10-112

7,451 43,133 1,154,433 1,154,433

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CUMULATIVE COVERAGE (Continued) (c) LEBRUN COMPANY Income Statement Year Ended July 31, 2017 Sales revenues Sales .............................................................................. $750,000 Cost of goods sold........................................................ 456,700 Gross profit ..................................................................... 293,300 Operating and other expenses Operating expenses ..................................... $188,745 Amortization expense................................. 15,000 Depreciation expense................................. 10,720 Bad debt expense ......................................... 1,850 Total expenses .......................................................... 216,315 Profit from operations..................................................... 76,985 Other revenues Interest revenue .......................................... 467 Other expenses Interest expense ......................................... 7,451 6,984 Profit ..................................................................................... $70,001

LEBRUN COMPANY Statement of Owner’s Equity Year Ended July 31, 2017 S. LeBrun, capital, August 1, 2016 ................................. Add: Profit........................................................................ Less: Drawings................................................................ S. LeBrun, capital, July 31, 2017 ....................................

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$124,700 70,001 194,701 54,000 $140,701

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CUMULATIVE COVERAGE (Continued) (c) (Continued) LEBRUN COMPANY Balance Sheet July 31, 2017 Assets Current assets Cash ($15,850 + $200)................................................. $ 16,050 Accounts receivable ...................................... $39,150 Less: Allowance for doubtful accounts ........ 3,850 35,300 Note receivable ........................................................... 10,000 Interest receivable ...................................................... 67 Merchandise inventory............................................... 39,200 Prepaid expenses ....................................................... 10,500 Total current assets ............................................... 111,117 Property, plant, and equipment Land ............................................................. 50,000 Building .........................................$155,000 Less: Accumulated depreciation 16,400 138,600 Equipment ................................. 25,000 Less: Accumulated depreciation 17,320 7,680

196,280

Intangible assets Patent .......................................................... Less: Accumulated amortization ...............

45,000

75,000 30,000

Total assets........................................................................ $352,397

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CUMULATIVE COVERAGE (Continued) (c) (Continued) LEBRUN COMPANY Balance Sheet (Continued) July 31, 2017 Liabilities and Owner’s Equity Current liabilities Accounts payable ....................................................... Interest payable .......................................................... Warranty liability......................................................... Current portion of note payable ................................ Total current liabilities ...........................................

$ 78,900 621 7,975 1,680 89,176

Long-term liabilities Note payable ($124,200 − $1,680) .................................. 122,520 Total liabilities ............................................................ 211,696 Owner’s equity S. LeBrun, capital .......................................................... 140,701 Total liabilities and owner’s equity ............................. $352,397

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BYP10-1 FINANCIAL REPORTING PROBLEM (a)

Total current liabilities at August 31, 2014, were $175,725,000. There was a $7,341,000 increase from the previous year ($175,725,000 – $168,384,000), which was equivalent to a 4.4% increase ($7,341,000 ÷ $168,384,000).

(b) The first of two components of total current liabilities on August 31, 2014 was accounts payable and accrued liabilities for the lion’s share of the total followed by a modest amount for provisions. Since provisions usually involve estimates, the order used by Corus was liquidity order. (c)

Current ratio: 2014 $217,394,000 ÷ $175,725,000 = 1.24:1 Current ratio: 2013 $310,070,000 ÷ $168,384,000 = 1.84:1 Receivables turnover: 2014 $833,016,000 ÷ [($183,009,000 + $164,302,000) ÷ 2] = 4.8 times Receivables turnover: 2013 $751,536,000 ÷ [($164,302,000 + $163,345,000) ÷2] = 4.6 times While the current ratio has deteriorated substantially, showing poor liquidity, the receivables turnover is very similar and slightly better than 2013.

(d)

As footnoted at the bottom of the Consolidated Statement of Financial Position, Corus directs us to the discussion of contingencies in note 27 to its financial statements. A very short paragraph describes litigation matters arising out of the ordinary course and conduct of the business. In management’s opinion, the exposure from these matters is considered not material to the financial statements.

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BYP10-2 INTERPRETING FINANCIAL STATEMENTS Loblaw does not accrue legal proceedings, as they are not expected to have a material impact on the reported results. It also does not accrue the class action proceedings as the company cannot predict the outcome with certainty. These class action proceedings however, if successful, would result in material losses for the company and it is desirable to disclose these items because they would have a substantial negative effect on the company’s financial position.

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BYP10-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.

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BYP10-4 COMMUNICATION ACTIVITY

RE: TO: FROM: DATE:

Accounting for Gift Certificates Show_Time_Movie_Theatre@gmail.com Student@gmail.com

In response to your request, I wish to answer your questions regarding the accounting for gift certificates in your theatre. (a)

A liability is recorded when these certificates are sold because there is still a service to be provided by the theatre. The certificates sold are considered unearned revenue until they are redeemed and the service provided. At this point, the theatre's obligation is fulfilled and the amounts can be transferred from a liability account to a revenue account. The foregoing applies even though the gift certificates may, as you suggest, also generate additional revenues for the theatre.

(b) Since the gift certificates have no expiry date, the theatre will always have a liability for any gift certificates produced and redeemed. However, based upon the experience of your theatre and the theatre industry in general, estimates could be developed for the proportion of gift certificates that will never be redeemed. An entry would be made to reduce the liability related to unearned revenue, and to record the estimated amount that will never be redeemed as earned (or perhaps as a gain), rather than carrying an unlikely liability on your books in perpetuity.

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BYP10-5 “ALL ABOUT YOU” ACTIVITY (a)

Some of the factors to consider in determining if a worker is an employee or self-employed include:  the level of control the payer has over the worker;  whether or not the worker provides the tools and equipment;  whether the worker can subcontract the work or hire assistants;  the degree of financial risk taken by the worker;  the degree of responsibility for investment and management held by the worker;  the worker’s opportunity for profit; and  any other relevant factors, such as written contracts.

(b) The amount of cash received each month is the gross pay less the payroll deductions: Gross pay: Less: CPP Contribution EI Contribution Income taxes Cash received (net pay)

$3,000.00 $134.06 54.90 409.35

598.31 $2,401.69

The total amount of cash received in a year: Annual salary ($3,000 × 12) Less deductions: CPP Contribution ($134.06 × 12) EI Contribution ($54.90 × 12) Income tax ($409.35 × 12) Cash received (net pay)

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$36,000.00 1,608.72 658.80 4,912.20 $28,820.28

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BYP 10-5 (Continued) (c)

The total CPP paid in the year will be $134.06 × 12 = $1,608.72. Since the employee’s annual salary of $36,000 is less than the 2015 maximum pensionable earnings of $53,600, the employee will not reach the maximum annual contribution. The total EI paid in the year will be $54.90 × 12 = $658.80. The employee’s annual salary is less than the 2015 maximum insurable earnings of $49,500, so the maximum annual employee EI premium will not be reached.

(d) If you are self-employed, you will receive the full $3,000 each month. As a self-employed individual, you will be responsible for making periodic instalmentt payments to CRA for personal income tax. The amount paid in income taxes may differ depending on the expenses that you may be able to claim as a self-employed individual. If no expenses are claimed, the amount of CPP paid in a year will include the employee and the employer portion as follows: $1,608.72 × 2 = $3,217.44 If no expenses are claimed, and the individual has chosen to pay EI, the amount of EI paid in a year will include only the employee’s contribution of $658.80.

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BYP 10-5 (Continued) (e)

(f)

Consulting revenue ($3,000 × 12) Less deductions: Income tax ($409.35 × 12) CPP Contribution ($134.06 × 12 × 2) Net pay

$36,000.00 4,912.20 3,217.44 $27,870.36

Based on the calculations in (c) and (e), it is preferable to be an employee because the net pay is higher.

(g) The answer to (f) may change if there is more than one client. It would be likely that additional expenses, such as travelling to the client’s location would be incurred. As a self-employed consultant, these costs could be deductible for income tax purposes and could decrease the amount of taxes paid.

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BYP10-6 Santé Smoothie Saga

The cash from the sale of gift certificates must be recorded as unearned revenue. Unearned revenue represents cash payments received in advance of earning the revenue because the service or goods has not been provided to the customer. With a gift certificate, Natalie’s business owes a recipe book and all of the supplies needed to create two cups of smoothies. This is the same rationale as deposits received for pre-made smoothies.

If the sale of gift certificates is recorded as revenue, revenues on the income statement will be overstated and profit will also be overstated. The revenue is not earned until the recipe book and supplies are provided to customers. The gift certificate does not represent a good or service but rather an entitlement to receive goods in the future when they are redeemed. If the gift certificates are never used, Natalie will need to use her past experience to determine what her liability is and the likelihood of the older gift certificates being redeemed. She can then recognize revenue on gift certificates unlikely to be redeemed.

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Accounting Principles, Seventh Canadian Edition

APPENDIX B Sales Taxes SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE B-1 There are two main types of sales taxes in Canada, the federal Goods and Services Tax (GST) or Harmonized Sales Tax (HST) and the Provincial Sales Tax (PST) sometimes called the Retail Sales Tax. For a business that is a registrant which charges GST/HST to its customers, all GST/HST paid by the business on all purchases is recovered and does not represent a cost to the business. On the other hand, the PST is not recoverable and the amount paid by the business is included as a cost of purchasing an asset or paying for a service. From the perspective of a consumer, the two types of taxes are viewed as the same because neither tax is fully recoverable.

BRIEF EXERCISE B-2 Accounts Receivable .................................... 1,839.60 Sales......................................................... GST Payable ($1,600 × 5%) .................... QST Payable ($1,600 × 9.975%)............. Cost of Goods Sold ....................................... Merchandise Inventory ..........................

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B-1

1,600.00 80.00 159.60

900.00 900.00

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BRIEF EXERCISE B-3 Sales Returns and Allowances ................... GST Payable ($800 × 5%) ............................. QST Payable ($800 × 9.975%)...................... Accounts Receivable ............................

800.00 40.00 79.80

Merchandise Inventory ................................ Cost of Goods Sold ...............................

450.00

919.80

450.00

BRIEF EXERCISE B-4 Accounts Receivable ................................... 1,839.60 Sales........................................................ GST Payable ($1,600 × 5%) ................... QST Payable ($1,600 × 9.975%)............ Sales Returns and Allowances ................... GST Payable ($800 × 5%) ............................. QST Payable ($800 × 9.975%)...................... Accounts Receivable ............................

1,600.00 80.00 159.60

800.00 40.00 79.80 919.80

BRIEF EXERCISE B-5 Accounts Receivable .................................... Service Revenue .....................................

450 450

BRIEF EXERCISE B-6 Accounts Receivable .................................... Service Revenue ..................................... GST Payable ($700 × 5%) .......................

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B-2

735 700 35

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BRIEF EXERCISE B-7 Merchandise Inventory ................................. GST Recoverable ($4,100 × 5%) ................... Accounts Payable...................................

4,100 205 4,305

BRIEF EXERCISE B-8 Accounts Payable.......................................... GST Recoverable ($500 × 5%) ............... Merchandise Inventory ..........................

525 25 500

BRIEF EXERCISE B-9 Merchandise Inventory ................................. HST Recoverable ($4,100 × 13%) ................. Accounts Payable...................................

4,100 533 4,633

BRIEF EXERCISE B-10 Accounts Payable.......................................... HST Recoverable ($500 × 13%) ............. Merchandise Inventory ..........................

565 65 500

BRIEF EXERCISE B-11 Supplies ($600 × 1.05) ................................... GST Recoverable ($600 × 5%) ...................... Cash .........................................................

630 30 660

BRIEF EXERCISE B-12 Supplies .......................................................... HST Recoverable ($600 × 15%) .................... Cash .........................................................

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B-3

600 90 690

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Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE B-13 Vehicles .......................................................... HST Recoverable ($32,000 × 14%) ............... Accounts Payable...................................

32,000 4,480 36,480

BRIEF EXERCISE B-14 Vehicles ($32,000 × 1.07) .............................. GST Recoverable ($32,000 × 5%) ................. Accounts Payable...................................

34,240 1,600 35,840

BRIEF EXERCISE B-15 Merchandise Inventory ................................. Supplies ($300 × 1.08) ................................... GST Recoverable ($5,300 × 5%) ................... Accounts Payable...................................

5,000 324 265 5,589

BRIEF EXERCISE B-16 GST Payable ................................................... GST Recoverable .................................... Cash .........................................................

6,120

PST Payable ................................................... Cash .........................................................

8,570

940 5,180

8,570

BRIEF EXERCISE B-17 Cash ................................................................ HST Payable ................................................... HST Recoverable ....................................

Solutions Manual .

B-4

690 3,920 4,610

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO EXERCISES EXERCISE B-1 Province of Manitoba GENERAL JOURNAL Account Titles and Explanation May

Rent Expense ............................................ GST Recoverable ($7,300 × 5%).............. Cash ....................................................

Debit 7,300 365

7,665

Accounts Receivable—Marvin ................ 28,250 Sales .................................................... GST Payable ($25,000 × 5%) ............. PST Payable ($25,000 × 8%) .............

25,000 1,250 2,000

Cost of Goods Sold .................................. 18,600 Merchandise Inventory......................

18,600

Sales Returns and Allowances ............... GST Payable ($800 × 5%)......................... PST Payable ($800 × 8%) ......................... Accounts Receivable—Marvin .........

800 40 64 904

Merchandise Inventory ............................ 11,000 GST Recoverable ($11,000 × 5%)............ 550 Accounts Payable—Macphee........... Furniture ($600 × 1.08) ............................. GST Recoverable ($600 × 5%)................. Cash ...................................................

648 30

31 GST Payable.............................................. GST Recoverable ............................... Cash ...................................................

7,480

Solutions Manual .

Credit

B-5

11,550

678 1,917 5,563

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

EXERCISE B-2 Province of Alberta GENERAL JOURNAL Account Titles and Explanation

Date May

1 Rent Expense ............................................. GST Recoverable ($7,300 × 5%) ............... Cash ..................................................

Debit

Credit

7,300 365 7,665

3 Accounts Receivable—Marvin ................. 26,250 Sales.................................................. 25,000 GST Payable ($25,000 × 5%) ........... 1,250 Cost of Goods Sold ................................... 18,600 Merchandise Inventory ................... 18,600 5 Sales Returns and Allowances ................ GST Payable ($800 × 5%) .......................... Accounts Receivable—Marvin .......

800 40 840

7 Merchandise Inventory.............................. 11,000 GST Recoverable ($11,000 × 5%) ............. 550 Accounts Payable—Macphee.......... 11,550 12 Furniture ..................................................... GST Recoverable ($600 × 5%) .................. Cash ...................................................

600 30

31 GST Payable ............................................... GST Recoverable .............................. Cash ...................................................

7,480

Solutions Manual .

B-6

630 1,917 5,563

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

EXERCISE B-3 Province of Ontario GENERAL JOURNAL Account Titles and Explanation

Date May

Debit

1 Rent Expense ..................................... HST Recoverable ($7,300 × 13%) ..... Cash ..............................................

7,300 949

3 Accounts Receivable—Marvin ......... Sales.............................................. HST Payable ($25,000 × 13%) .....

28,250

Cost of Goods Sold ........................... Merchandise Inventory ...............

18,600

5 Sales Returns and Allowances ........ HST Payable ($800 × 13%) ................ Accounts Receivable—Marvin ...

800 104

7 Merchandise Inventory ..................... HST Recoverable ($11,000 × 13%) ... Accounts Payable—Macphee .....

11,000 1,430

12 Furniture ............................................. HST Recoverable ($600 × 13%) ........ Cash ..............................................

600 78

31 HST Payable ....................................... HST Recoverable ......................... Cash ..............................................

7,480

Solutions Manual .

B-7

Credit

8,249 25,000 3,250

18,600

904

12,430

678 1,917 5,563

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

EXERCISE B-4 Province of Manitoba GENERAL JOURNAL Account Titles and Explanation

Date Nov.

Solutions Manual .

Debit

Rent Expense ........................................... GST Recoverable ($5,500 × 5%) ............. Cash ....................................................

5,500 275

Purchases ................................................. GST Recoverable ($8,000 × 5%) ............. Accounts Payable—Comet ................

8,000 400

Accounts Payable—Comet ..................... Purchase Returns and Allowances GST Recoverable ($500 x 5%)

525

Credit

5,775

8,400 500 25

Accounts Receivable—Solar Star ......... 11,300 Sales ................................................... GST Payable ($10,000 × 5%)............. PST Payable ($10,000 × 8%) .............

10,000 500 800

Computer Equipment ($1,200 × 1.08)..... GST Recoverable ($1,200 × 5%) ............. Cash ....................................................

1,296 60 1,356

GST Payable ............................................. GST Recoverable ............................... Cash ....................................................

2,520

B-8

985 1,535

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

EXERCISE B-5 Province of Alberta GENERAL JOURNAL Account Titles and Explanation

Date Nov.

Debit

1 Rent Expense ............................................. GST Recoverable ($5,500 × 5%) ............... Cash ..................................................

5,500 275

4 Purchases ................................................. GST Recoverable ($8,000 × 5%) ............. Accounts Payable—Comet ................

8,000 400

6 Accounts Payable—Comet ..................... Purchase Returns and Allowances... GST Recoverable ($500 x 5%) ..........

525

Credit

5,775

8,400 500 25

7 Accounts Receivable—Solar Star ............ 10,500 Sales.................................................. 10,000 GST Payable ($10,000 × 5%) ........... 500 12 Computer Equipment ................................ GST Recoverable ($1,200 × 5%) ............... Cash ...................................................

1,200 60

30 GST Payable ............................................... GST Recoverable .............................. Cash ...................................................

2,520

Solutions Manual .

B-9

1,260 985 1,535

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

EXERCISE B-6 Province of Ontario GENERAL JOURNAL Account Titles and Explanation

Date Nov.

Debit

1 Rent Expense ..................................... HST Recoverable ($5,500 × 13%) ..... Cash ..............................................

5,500 715

4 Purchases........................................... HST Recoverable ($8,000 × 13%) ..... Accounts Payable—Comet..........

8,000 1,040

6 Accounts Payable—Comet ............... Purchase Returns and Allowance HST Recoverable ($500 x 13%) ..

565

7 Accounts Receivable—Solar Star ... Sales............................................... HST Payable ($10,000 × 13%) ......

11,300

12 Computer Equipment ........................ HST Recoverable ($1,200 × 13%) ..... Cash ..............................................

1,200 156

31 HST Payable ....................................... HST Recoverable ......................... Cash ..............................................

2,520

Solutions Manual .

B-10

Credit

6,215

9,040 500 65 10,000 1,300

1,356 985 1,535

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

EXERCISE B-7 Date

GENERAL JOURNAL Account Titles and Explanation

Debit

June 1 Freight Out ($200 × 1.07) .................. GST Recoverable ($200 × 5%) ......... Cash ..............................................

214.00 10.00

5 Repairs Expense ($800 × 1.07) ....... GST Recoverable ($800 × 5%) ......... Cash ..............................................

856.00 40.00

10 Supplies ($250 × 1.07) ...................... GST Recoverable ($250 × 5%) ......... Accounts Payable........................

267.50 12.50

Credit

224.00

896.00

280.00

13 Accounts Receivable ........................ 5,264.00 Service Revenue .......................... GST Payable ($4,700 × 5%)......... PST Payable ($4,700 × 7%) ......... 15 Cash ................................................... Accounts Receivable ..................

896.00

22 Travel Expense ($720 × 1.07) ........... GST Recoverable ($720 × 5%) ......... Cash ..............................................

770.40 36.00

30 Telephone Expense ($150 × 1.07) ... GST Recoverable ($150 × 5%) ......... Accounts Payable........................

160.50 7.50

4,700.00 235.00 329.00 896.00

806.40

168.00

30 GST Payable ...................................... 1,890.50 GST Recoverable ......................... Cash ..............................................

741.60 1,148.90

30 PST Payable ...................................... 2,640.00 Cash ..............................................

2,640.00

Solutions Manual .

B-11

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

EXERCISE B12 Date

GENERAL JOURNAL Account Titles and Explanation

Debit

June 8 Equipment ................................................. HST Recoverable ($1,500 × 15%) ............ Accounts Payable ..............................

1,500.00 225.00

10 Supplies..................................................... HST Recoverable ($100 × 15%) ............... Cash......................................................

100.00 15.00

12 Accounts Receivable ............................... Service Revenue ................................. HST Payable ($1,250 × 15%) ..............

1,437.50

18 Repairs Expense ...................................... HST Recoverable ($220 × 15%) ............... Cash......................................................

220.00 33.00

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

1,437.50

30 HST Payable .............................................. HST Recoverable ................................ Cash......................................................

2,520.60

Solutions Manual .

B-12

Credit

1,725.00

115.00 1,250.00 187.50

253.00

1,437.50 820.45 1,700.15

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

EXERCISE B-9 Date

GENERAL JOURNAL Account Titles and Explanation

Debit

June 8 Equipment ................................................. GST Recoverable ($1,500 × 5%).............. Accounts Payable ..............................

1,500.00 75.00

10 Supplies..................................................... GST Recoverable ($100 × 5%)................. Cash......................................................

100.00 5.00

12 Accounts Receivable ............................... Service Revenue ................................. GST Payable ($1,250 × 5%) ................

1,312.50

18 Repairs Expense ...................................... GST Recoverable ($220 × 5%)................. Cash......................................................

220.00 11.00

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

1,312.50

30 GST Payable.............................................. GST Recoverable ................................ Cash......................................................

970.50

Solutions Manual .

B-13

Credit

1,575.00

105.00 1,250.00 62.50

231.00

1,312.50 315.55 654.95

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM B-1 Province of Ontario GENERAL JOURNAL Account Titles and Explanation

Date

Debit

Nov 2 Merchandise Inventory ($900 × 3) ............ HST Recoverable ($2,700 × 13%) ............. Accounts Payable—Fender Supply ....

2,700 351

4 Cash............................................................. Sales ...................................................... HST Payable ($2,600 × 13%) ...............

2,938

Cost of Goods Sold ($675 × 2) .................. Merchandise Inventory ........................

1,350

5 Accounts Payable—Western Acoustic.... HST Recoverable ($700 × 13%) ........... Merchandise Inventory .........................

791

7 Sales Returns and Allow.($2,600 ÷ 2) ...... HST Payable ($1,300 × 13%) ..................... Cash.......................................................

1,300 169

Merchandise Inventory .............................. Cost of Goods Sold .............................

675

8 Supplies ...................................................... HST Recoverable ($200 × 13%)................. Cash.......................................................

200 26

Solutions Manual .

B-14

Credit

3,051 2,600 338 1,350 91 700

1,469 675

226

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-1 (Continued) GENERAL JOURNAL Account Titles and Explanation

Date

Debit

Nov. 10 Accounts Receivable—Regional Band.... Sales ...................................................... HST Payable ($5,100 × 13%) ...............

5,763

Cost of Goods Sold ................................... Merchandise Inventory........................

2,850

13 Merchandise Inventory ($1,900 × 2) ......... HST Recoverable ($3,800 × 13%) ............. Accounts Payable—Yamaha Canada .

3,800 494

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

4,150

16 Accounts Payable—Yamaha Canada ...... HST Recoverable ($1,900 × 13%) ........ Merchandise Inventory.........................

2,147

20 Accounts Payable—Fender Supply ......... Cash ......................................................

3,051

Solutions Manual .

B-15

Credit

5,100 663

2,850

4,294

4,150

247 1,900

3,051

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-2 Province of British Columbia GENERAL JOURNAL Account Titles and Explanation

Date Nov

Debit

2 Merchandise Inventory ($900 × 3) ............ GST Recoverable ($2,700 × 5%) ............... Accounts Payable—Fender Supply ....

2,700 135

4 Cash ............................................................. Sales ...................................................... GST Payable ($2,600 × 5%) ................. PST Payable ($2,600 × 7%)..................

2,912

Cost of Goods Sold.................................... Merchandise Inventory ........................

1,350

5 Accounts Payable—Western Acoustic .... GST Recoverable ($700 × 5%) ............. Merchandise Inventory .........................

735

7 Sales Returns and Allow.($2,600 ÷ 2) ...... GST Payable ($1,300 × 5%) ....................... PST Payable ($1,300 × 7%) ........................ Cash.......................................................

1,300 65 91

Merchandise Inventory .............................. Cost of Goods Sold..............................

675

8 Supplies ($200 × 1.07)................................ GST Recoverable ($200 × 5%) .................. Cash.......................................................

214 10

Solutions Manual .

B-16

Credit

2,835 2,600 130 182 1,350 35 700

1,456 675

224

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-2 (Continued) GENERAL JOURNAL Account Titles and Explanation

Date

Debit

Nov. 10 Accounts Receivable—Regional Band.... Sales ...................................................... GST Payable ($5,100 × 5%) ................. PST Payable ($5,100 × 7%) .................

5,712

Cost of Goods Sold ................................... Merchandise Inventory........................

2,850

13 Merchandise Inventory ($1,900 × 2) ......... GST Recoverable ($3,800 × 5%) ............... Accounts Payable—Yamaha Canada .

3,800 190

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

4,150

16 Accounts Payable—Yamaha Canada ...... GST Recoverable ($1,900 × 5%) .......... Merchandise Inventory.........................

1,995

20 Accounts Payable—Fender Supply ......... Cash ......................................................

2,835

Solutions Manual .

B-17

Credit

5,100 255 357

2,850

3,990

4,150

95 1,900

2,835

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-3 Province of Ontario Date

GENERAL JOURNAL Account Titles and Explanation

Debit

Nov 2 Purchases ($900 × 3) ................................. HST Recoverable ($2,700 × 13%) ............. Accounts Payable—Fender Supply ....

2,700 351

4 Cash............................................................. Sales ...................................................... HST Payable ($2,600 × 13%) ...............

2,938

5 Accounts Payable—Western Acoustic.... HST Recoverable ($700 × 13%) ........... Purchase Returns and Allowances .....

791

7 Sales Returns and Allow.($2,600 ÷ 2) ...... HST Payable ($1,300 × 13%) ..................... Cash.......................................................

1,300 169

8 Supplies ...................................................... HST Recoverable ($200 × 13%)................. Cash....................................................... 10 Accounts Receivable—Regional Band Sales ...................................................... HST Payable ($5,100 × 13%) ...............

200 26

13 Purchases ($1,900 × 2) .............................. HST Recoverable ($3,800 × 13%).............. Accounts Payable—Yamaha Canada .

Solutions Manual .

B-18

Credit

3,051 2,600 338 91 700

1,469

226 5,763 5,100 663 3,800 494 4,294

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-3 (Continued)

Date

GENERAL JOURNAL Account Titles and Explanation

Debit

Nov. 14 Cash ............................................................ Accounts Receivable...........................

4,150

16 Accounts Payable—Yamaha Canada ...... HST Recoverable ($1,900 × 13%) ........ Purchase Returns and Allowances.....

2,147

20 Accounts Payable—Fender Supply ......... Cash ......................................................

3,051

Solutions Manual .

B-19

Credit

4,150

247 1,900

3,051

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-4 Province of British Columbia GENERAL JOURNAL Account Titles and Explanation

Date Nov

Debit

2 Purchases ($900 × 3) ................................. GST Recoverable ($2,700 × 5%) ............... Accounts Payable—Fender Supply ....

2,700 135

2,912

5 Accounts Payable—Western Acoustic .... GST Recoverable ($700 × 5%) ............. Purchase Returns and Allowances .....

735

1,300 65 91

8 Supplies ($200 × 1.07)................................ GST Recoverable ($200 × 5%) .................. Cash.......................................................

214 10

10 Accounts Receivable—Regional Band Sales ...................................................... GST Payable ($5,100 × 5%) ................. PST Payable ($5,100 × 7%)..................

5,712

Solutions Manual .

B-20

Credit

2,835 2,600 130 182 35 700

1,456

224

5,100 255 357

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-4 (Continued)

Date

GENERAL JOURNAL Account Titles and Explanation

Debit

Nov. Purchases ($1,900 × 2) .............................. GST Recoverable ($3,800 × 5%) ............... Accounts Payable—Yamaha Canada .

3,800 190

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

4,150

16 Accounts Payable—Yamaha Canada ...... GST Recoverable ($1,900 × 5%) .......... Purchase Returns and Allowances.....

1,995

20 Accounts Payable—Fender Supply ......... Cash ......................................................

2,835

Solutions Manual .

B-21

Credit

3,990

4,150

95 1,900

2,835

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-5 (a)

Province of Alberta

Date May 1

18 19

Solutions Manual .

GENERAL JOURNAL Account Titles and Explanation

Debit

Rent Expense ....................................... Prepaid Rent ......................................... GST Recoverable ($3,300 × 5%) ......... Cash ................................................

1,650 1,650 165

Furniture ............................................... GST Recoverable ($4,100 × 5%) ......... Accounts Payable—George’s ......

4,100 205

Accounts Payable—George’s ............ GST Recoverable ($800 × 5%) ....... Furniture ..........................................

840

Cash ...................................................... Service Revenue ............................ GST Payable ($2,500 × 5%) ...........

2,625

Supplies ................................................ GST Recoverable ($300 × 5%) ............ Cash ................................................

300 15

Accounts Receivable—Manson ......... Service Revenue ............................ GST Payable ($1,100 × 5%) ...........

1,155

Accounts Payable—George’s ............ Cash ($4,305 − $840) .....................

3,465

Office Expense ..................................... Cash ................................................

B-22

Credit

3,465

4,305 40 800 2,500 125

315 1,100 55

3,465 22

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-5 (Continued) (a) (Continued)

Date May 21

GENERAL JOURNAL Account Titles and Explanation

Debit

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

150

Cash .................................................. Accounts Receivable—Manson

1,155

27 Accounts Receivable—Pedneault . Service Revenue........................ GST Payable ($600 × 5%)..........

630

(b) Transaction Date May 1 May 4 May 5 May 6 May 10 May 13 May 27

GST Recoverable $165 205 (40)

Credit

150

1,155 600 30

GST Payable

$125 15 55 30 $210

$345

A refund from the Receiver General would be received and recorded as follows: Cash .................................................. GST Payable..................................... GST Recoverable.......................

Solutions Manual .

B-23

135 210 345

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-6 (a)

Province of Ontario

Date May 1

18 19

Solutions Manual .

GENERAL JOURNAL Account Titles and Explanation

Debit

Rent Expense ....................................... Prepaid Rent ......................................... HST Recoverable ($3,300 × 13%) ...... Cash ................................................

1,650 1,650 429

Furniture .............................................. HST Recoverable ($4,100 × 13%) ....... Accounts Payable—George’s ......

4,100 533

Accounts Payable—George’s ............ HST Recoverable ($800 × 13%) ..... Furniture ..........................................

904

Cash ...................................................... Service Revenue ............................ HST Payable ($2,500 × 13%) .........

2,825

Supplies ................................................ HST Recoverable ($300 × 13%) .......... Cash ................................................

300 39

Accounts Receivable—Manson ......... Service Revenue ............................ HST Payable ($1,100 × 13%) .........

1,243

Accounts Payable—George’s ............ Cash ($4,633 − $904) .....................

3,729

Office Expense ..................................... Cash ................................................

B-24

Credit

3,729

4,633 104 800 2,500 325

339 1,100 143

3,729 22

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow

Accounting Principles, Seventh Canadian Edition

PROBLEM B-6 (Continued) (a) (Continued)

Date May 21

GENERAL JOURNAL Account Titles and Explanation

Debit

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

150

Cash .................................................. Accounts Receivable—Manson

1,243

27 Accounts Receivable—Pedneault . Service Revenue........................ HST Payable ($600 × 13%) ........

678

(b) Transaction Date May 1 May 4 May 5 May 6 May 10 May 13 May 27

HST Recoverable $429 533 (104)

Credit

150

1,243 600 78

HST Payable

$325 39 143 78 $546

$897

A refund from the Receiver General would be received and recorded as follows: Cash .................................................. HST Payable ..................................... HST Recoverable .......................

Solutions Manual .

B-25

351 546 897

Appendix B

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

APPENDIX C Subsidiary Ledgers and Special Journals SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE C-1 (a)

Date

(b) Accounts Receivable Subsidiary Ledger

General Ledger

Chiu Co.

Accounts Receivable

Ref.

Jan. 7 17

Debit

Credit Balance

1,800 700

Date

Ref.

1,800 Jan.31 1,100 31

Debit

Credit Balance

11,5001 2

6,400

11,500 5,100

Elbaz Inc. Date

Ref.

Debit Credit

Balance

6,000

Jan.15 24

6,000 4,000

2,000 Lewis Co.

Date

Ref.

Jan.23 29 1 2

Debit Credit Balance 3,700

3,700 0

3,700

$1,800 + $6,000 + $3,700 = $11,500 $700 + $2,000 + $3,700 = $6,400

BRIEF EXERCISE C-2 1. General ledger 2. Subsidiary ledger 3. General ledger 4. General ledger Solutions Manual .

5. 6. 7. 8.

General ledger Subsidiary ledger General ledger General ledger C-1

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

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

Sales Journal Cash Payments Journal General Journal Cash Receipts Journal Cash Payments Journal Cash Receipts Journal General Journal Purchases Journal Purchases Journal Cash Payments Journal

BRIEF EXERCISE C-4 (a) Journal

(b) Journal Columns

General Journal

Sales Returns and Allowances (Dr.), Accounts Receivable (Cr.), Inventory (Dr.), Cost of Goods Sold (Cr.) *

Cash Receipts

Cash (Dr.), Accounts Receivable (Cr.)

Cash Payments

Cash (Cr.), Merchandise Inventory (Dr.)

Cash Payments

Cash (Cr.), Accounts Payable (Dr.)

Cash Payments

Cash (Cr.), Merchandise Inventory (Dr.)

Cash Payments

Cash (Cr.), Other Accounts (Equipment) (Dr.)

Cash Receipts

Cash (Dr.), Merchandise Inventory (Cr.)

Cash Payments

Cash (Cr.), Other Accounts (Drawings) (Dr.)

Cash Receipts

Cash (Dr.), Sales (Cr.), Cost of Goods Sold (Dr.), Merchandise Inventory (Cr.)

* There are no column titles in the general journal, but these are the account titles that would be used in journalizing. Solutions Manual .

C-2

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE C-3 Journal

Column Titles

Cash Receipts

Cash (Dr.), Sales (Cr.)

Sales

Accounts Receivable (Dr.), Sales (Cr.)

General

*Sales Returns and Allowances (Dr.), Accounts Receivable (Cr.)

Cash Receipts

Cash (Dr.), Other Accounts (Cr.) (Purchase Returns)

Cash Payments

Other Accounts (Dr.) (Freight Out), Cash (Cr.)

Cash Payments

Other Accounts (Dr.) (Purchases), Cash (Cr.)

Purchases

Supplies (Dr.), Accounts Payable (Cr.)

Cash Payments

Other Accounts (Dr.) (Freight In), Cash (Cr.)

* There are no column titles in the general journal, but these are the account titles that would be used in journalizing.

Solutions Manual .

C-3

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BRIEF EXERCISE C-6 General Journal Date

Account Titles and Explanations

Apr. 30

J1 Ref.

Debit

Service Revenue ........................................ Rent Revenue............................................. Income Summary................................

53,800 12,000

Income Summary....................................... Depreciation Expense ........................ Salaries Expense ................................ Supplies Expense...............................

30,900

Income Summary....................................... B. Willis, Capital .................................

34,900

B. Willis, Capital......................................... B. Willis, Drawings .............................

18,000

Credit

65,800 8,000 19,400 3,500

34,900 18,000

BRIEF EXERCISE C-7 General Journal Date

Account Titles and Explanations

J1 Ref.

Nov. 30 Depreciation Expense ............................... Accumulated Depreciation—Furniture

Debit

Credit

6,800 6,800

BRIEF EXERCISE C-8 General Journal Date

Account Titles and Explanations

Feb. 28 Accounts Payable ($960 – $690)............... Cash ..................................................

Solutions Manual .

C-4

J1 Ref.

Debit

Credit

270 270

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

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

General Journal Cash Payments Journal Cash Receipts Journal General Journal Purchases Journal Purchases Journal Cash Payments Journal

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

Cash Payments Journal General Journal Cash Receipts Journal General Journal Sales Journal Cash Receipts Journal

EXERCISE C-2 (a) and (b) Date

Account Debited

Sept. 2 T. Lu 26 M. Gafney

Solutions Manual .

WONG COMPANY Sales Journal S1 Invoice Accounts Receivable Cost of Goods Sold Dr. Dr. Merchandise Inventory No. Ref. Cr. Sales Cr.  321 2,720 1,960 322  890 570

C-5

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-2 (Continued) (a) and (c) (Continued)

Date

Purchases Journal Accounts Merchandise Payable Inventory Supplies Account Credited Terms Ref. Cr. Dr Dr.

Sept. 3 Berko Co. 10 Leonard Co. 12 Wells Co.

n/30

Solutions Manual

  

175 800 7,700

Other Accounts Account Debited

Ref. Amount

Equipment

7,700

175 800

C-6 .

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-3

(a) and (b)

WONG COMPANY Cash Receipts Journal

Account Credited

Date

Sept. 16 L. Maille 25 T. Lu

Ref.

Cash Dr.

 

860 2,720

(a) and (c)

Ch. No.

Date Sept. 11 18 24 26 30 30 30

Solutions Manual .

Payee

Accounts Receivable Cr.

Sales Cr. 860

CR1 Cost of Goods Sold Dr. Other Merchandise Accounts Inventory Cr. Cr. 490

2,720

WONG COMPANY Cash Payments Journal Merch. Accounts Cash Inventory Payable Account Cr. Dr. Dr. Debited

A&F Shippers Leonard Co. Leonard Co. Freight Co. Employees names

90 450 800 75 2,360

V. Wong Berko Co.

1,250 175

CP1 Other Accounts Ref. Dr.

90 450 800 Freight Out Salaries Expense V. Wong, Drawings

75 2,360 1,250

175

C-7

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-3 (Continued) (a) and (d) WONG COMPANY General Journal Date

Account Titles and Explanations

Sept. 11

J1 Ref.

Debit

Accounts Payable—Leonard Co. ............... Merchandise Inventory........................

200

20 Sales Returns and Allowances................... Cash......................................................

860

Inventory ...................................................... Cost of Goods Sold .............................

490

Credit 200

860 490

EXERCISE C-4 (a) and (b) Account Debited Date Sept. 2 T. Lu 26 M. Gafney

Solutions Manual .

WONG COMPANY Sales Journal S1 Invoice Accounts Receivable Dr. No. Ref. Sales Cr. 321  2,720 322  890

C-8

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-4 (Continued) (a) and (c) (Continued)

Date

Purchases Journal Accounts Payable Purchases Account Credited Terms Ref. Cr. Dr

Sept. 3 Berko Co. 10 Leonard Co. 12 Wells Co.

n/30

Solutions Manual

  

175 800 7,700

Supplies Dr.

Other Accounts Account Debited

Ref. Amount

Equipment

7,700

175 800

C-9 .

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-5 (a) and (b) WONG COMPANY Cash Receipts Journal Account Credited

Ref.

Cash Dr.

Sept. 16 L. Maille 25 T. Lu

 

860 2,720

Date

(a) and (c)

Ch. No.

Date Sept. 11 18 24 26 30 30 30

Solutions Manual .

Payee

Accounts Receivable Cr.

CR1 Sales Cr.

Other Accounts Cr.

860 2,720

WONG COMPANY Cash Payments Journal Pur- Accounts Cash chases Payable Account Cr. Dr. Dr. Debited

A&F Shippers Leonard Co. Leonard Co. Freight Co. Employees names

90 450 800 75 2,360

V. Wong Berko Co.

1,250 175

CP1 Other Accounts Ref. Dr.

Freight In

Freight Out Salaries Expense V. Wong, Drawings

450 800 2,360 1,250

175

C-10

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-11 (Continued) (a) and (d) WONG COMPANY General Journal Date

Account Titles and Explanations

J1 Ref.

Debit

Sept. 11 Accounts Payable—Leonard Co. ............... Purchase Returns and Allowances ....

200

20 Sales Returns and Allowances................... Cash......................................................

860

Credit 200 860

EXERCISE C-6 (a) Oct.

5 Accounts Payable—Lyden Company ........ Merchandise Inventory .......................

720

7 Sales Returns and Allowances .................. Accounts Receivable—M. Presti........

600

Merchandise Inventory ............................... Cost of Goods Sold ............................

375

720 600 375

Note: The purchase of the equipment from Lifelong Inc. on Oct. 2, for $13,200 would be recorded in the purchases journal.

Solutions Manual .

C-11

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-12 (Continued) (b) Oct. 5 Accounts Payable—Lyden Company ........ Purchase Returns and Allowances ... 7 Sales Returns and Allowances .................. Accounts Receivable—M. Presti........

720 720 600 600

Note: The purchase of the equipment from Lifelong Inc. on Oct. 2, for $13,200 would be recorded in the purchases journal. (c) To:

President, Lee Ltd.

From:

Student

Subject:

Posting to Control and Subsidiary Accounts

The posting to the control and subsidiary ledger accounts varies with the journals used in recording the transactions. Sales and purchases journals—the totals for the month are posted to the control accounts. The individual entries are posted daily to the subsidiary accounts receivable and accounts payable accounts (also to the subsidiary inventory accounts, if maintained). Cash receipts and cash payments journals—the totals for the month are posted to the control account. The individual entries are posted daily to the subsidiary accounts receivable and accounts payable accounts (also to the subsidiary inventory accounts, if maintained). General journal—the individual entries are posted daily. Each entry that pertains to a control and a subsidiary account is dualposted. That is, it is posted to both the control account and the subsidiary account. I hope this memo answers your questions about posting.

Solutions Manual .

C-12

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C13 (a) Debit balance of $156,790. Beginning balance of $137,800 plus $98,670 debit from sales journal less $79,680 credit from cash receipts journal. (b) Credit balance of $141,600. Beginning balance of $144,200 plus $39,700 credit from purchases journal less $42,300 debit from cash payments journal. (c) The column total of $98,670 in the sales journal would be posted to the credit side of the Sales account and the debit side of the Accounts Receivable account in the general ledger. The column total of $56,440 in the sales journal would be posted to the debit side of the Cost of Goods Sold account and the credit side of the Merchandise Inventory account in the general ledger. (d) The accounts receivable column total of $79,680 in the cash receipts journal would be posted to the credit side of the Accounts Receivable account in the general ledger.

Solutions Manual .

C-13

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-8 (a) and (b) General Ledger Accounts Receivable Date Sept.

1 30 30 30

Explanation

Ref.

Balance

 S1 CR1 J1

Debit

Credit

Balance

7,030 190

10,960 15,150 8,120 7,930

4,190

Accounts Receivable Subsidiary Ledger Zhang Date Sept.

1 30 30 30

Explanation

Ref.

Balance

 S1 CR1 J1

Debit

Credit

800 2,300 190

Balance 3,820 4,620 2,320 2,130

Cavanaugh Date Sept.

1 30 30

Explanation

Ref.

Balance

 S1 CR1

Debit

Credit

1,100 1,310

Balance 2,060 3,160 1,850

Iman Date

Explanation

Ref.

Sept. 30 30

Solutions Manual .

S1 CR1

C-14

Debit

Credit

1,030 380

Balance 1,030 650

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

EXERCISE C-8 (Continued) (a) and (b) (continued) Accounts Receivable Subsidiary Ledger Jana Date Sept.

1 30 30

Explanation

Ref.

Balance

 S1 CR1

Debit

Credit

Balance 2,440 3,700 2,460

1,260 1,240

London Date

Explanation

Ref.

Sept. 1 30

Balance

 CR1

Debit

Credit

Balance 2,640 840

1,800

(c) MAC COMPANY Schedule of Customers September 30 Zhang................................................................................. Cavanaugh ........................................................................ Iman ................................................................................... Jana ................................................................................... London .............................................................................. Total ...........................................................................

$2,130 1,850 650 2,460 840 $7,930

Accounts Receivable (per general ledger account) .......

$7,930

Solutions Manual .

C-15

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

SOLUTIONS TO PROBLEMS PROBLEM C-1 (a), (b), and (c) Sales Journal

Date Jan.

Account Debited

4 Wong 9 Tops Corp. 17 NFQ Co. 31 Wong

Invoice No. Ref. 371 372 373 374

   

Accounts Receivable Dr. Sales Cr.

S1 Cost of Goods Sold Dr. Merchandise Inventory Cr.

6,500 2,600 7,500 7,380 23,980 (112)/(401)

3,900 1,560 4,500 4,428 14,388 (505)/(120)

General Journal Date Jan.

Account Titles and Explanations

J1 Ref.

5 Accounts Payable—Sun Distributors....... 201/ Merchandise Inventory ...................... 120

Solutions Manual .

C-16

Debit

Credit

1,450 1,450

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-1 (Continued) (a), (b) and (c) (Continued) Cash Receipts Journal

Account Credited

Date

Ref.

Jan. 6 13 15 Tops Corp. 17 Wong 20 27 30 NFQ Co.

Cash Dr.

2,650 5,290  2,600  6,500 1,400 4,370  7,500 30,310 (101)

Accounts Receivable Sales Cr. Cr.

CR1 COGS Dr. Merch. Other Inventory Accounts Cr. Cr.

2,650 5,290 2,600 6,500

7,500 16,600 (112)

1,400 840 4,370 2,622 _ _ 13,710 8,226 (401) (505)/(120)

Cash Payments Journal

Date

Ch. No.

Jan. 13 15 20 31

Solutions Manual .

Payee Sun Dist.

Merch. Accounts Cash Inv. Payable Cr. Dr. Dr.

6,350 11,300 Irvine Co. 5,400 11,000 34,050 (101)

1,590 3,174

Account Debited

CP1 Other Accounts Ref. Dr.

 6,350 Sun Dist. Salaries Exp. 729 11,300  5,400 Irvine Co. Salaries Exp. 729 11,000 11,750 22,300 (201) (X)

C-17

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-1 (Continued) (a), (b) and (c) (Continued)

Date

Purchases Journal Accounts Merchandise Payable Inventory Supplies Account Credited Terms Ref. Cr. Dr Dr.

P1 Other Accounts Account Debited

Jan. 4 4 8 11 19 23 24

Sun Distributors Moon Inc. Irvine Co. Lewis Co. Mark Corp Sun Distributors Levine Corp.

Solutions Manual

      

7,800 480 5,400 4,300 6,600 4,800 4,690 34,070 (201)

7,800 480 5,400 4,300 Equipment 157 4,800 4,690 26,990 (120)

C-18 .

Ref. Amount

480 (126)

6,600

6,600 X

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-2 (a), (b), and (c) Sales Journal

Account Debited

Date Oct.

4 Petro Corp. 17 Trudeau Co. 25 Golden Corp. 30 Trudeau Co.

Invoice Ref. No. 204 205 206 207

Accounts Receivable Dr. Sales Cr.

S1 Cost of Goods Sold Dr. Merchandise Inventory Cr.

8,600 5,530 5,520 5,200 24,850 (112)/(401)

5,590 3,595 3,588 3,380 16,153 (505)/(120)

   

General Journal Date

Account Titles and Explanations

J1 Ref.

Oct. 13 Accounts Payable—Chen Corp. ............ 201/ Merchandise Inventory ................... 120

Solutions Manual .

C-19

Debit

Credit

260 260

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-2 (Continued) (a), (b), and (c) (Continued) Cash Receipts Journal

Date

Account Credited

Oct. 7 12 Petro Corp. 14 16 Land 21 25 Trudeau Co. 28

Ref.

Cash Dr.

A/R Cr.

CR1

Sales Cr.

9,610  8,600 8,600 8,810 45,000 140 8,640  5,530 5,530 9,320 95,510 14,130 (101) (112)

COGS Dr. Other Merch. Inventory Accounts Cr. Cr.

9,610

6,247

8,810

5,727 45,000

8,640

5,616

9,320 6,058 36,380 23,648 (401) (505)/(120)

Cash Payments Journal

Date

Payee

Cash Cr.

Oct. 9 Madison Co. 5,800 18 2,215 23 Chen Corp. 4,640 26 45,000 26 30 The Gazette 600 58,255 (101)

Solutions Manual .

Merch. Accts. Invent. Payable Dr. Dr.

45,000 (X)

CP1 Account Debited

5,800 Madison Co.

Other Accts. Ref Dr. 

2,215  4,640 Chen Corp. 140 26,000 Land 145 19,000 Buildings Advertising 610 600 2,215 10,440 45,600 (120) (201) (X)

C-20

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-2 (Continued) (a), (b) and (c) (Continued)

Account Credited

Date

Terms Ref.

Purchases Journal Merchandise Accounts Inventory Supplies Payable Cr. Dr Dr.

P1 Other Accounts Account Debited Ref. Amount

Oct. 2 5 10 25 27 30

     

Madison Co. Frey Co. Chen Corp. Frey Co. Schmid Co. Madison Co.

Solutions Manual

5,800 315 4,900 260 9,000 16,200 36,475 (201)

C-21 .

5,800 315 4,900 260 9,000 16,200 35,900 (120)

575 (126)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (b) Sales Journal

Account Debited

Date Jan.

3 24

Cost of Goods Sold Dr. Accounts Invoice Receivable Dr. Merchandise No. Ref. Sales Cr. Inventory Cr.  

B. Rohl B. Lu

3,000 7,800 10,800 (112)/(401)

1,250 3,300 4,550 (505)/(120)

Cash Receipts Journal

Date

Account Credited

Other Accounts COGS Dr. Cash Receivable Sales Merch. Accounts Ref. Dr. Cr. Cr. Inv. Cr. Cr.

Jan. 7 S. Armstrong  4,000  3,000 13 B. Rohl 23 7,700 115 35,000 29 Notes Rec. 49,700 (101)

Solutions Manual .

CR1

4,000 3,000 7,700 7,000 (112)

C-22

4,840

7,700 4,840 (401) (505)/(120)

35,000 35,000 (X)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (b) (Continued)

Date

Purchases Journal Accounts Merchandise Payable Inventory Supplies Account Credited Terms Ref. Cr. Dr Dr.

P1 Other Accounts Account Debited

Jan. 5 Warren Parts 17 Voyer Co.

Solutions Manual

 

2,900 4,900 7,800 (201)

2,900 4,900 7,800 (120)

C-23 .

Ref. Amount

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

ROBLEM C-3 (Continued) (b) (Continued) Cash Payments Journal

Date

Payee

Cash Cr.

Jan. 11 15 18 27

Lindon Co. Harms Dist. Employees Warren Parts

350 16,000 3,900 1,150

M. Perrault

1,300 22,700 (101)

Merc. Inv. Dr.

Accts. Payable Dr.

CP1 Account Debited

Other Accts. Dr. Ref

350 16,000 Harms Dist. Salaries Exp. 1,150 Warren Parts M. Perrault, Drawings 350 17,150 (120) (201)

 725 3,900  310

General Journal Date

Account Titles and Explanations

J1 Ref.

Debit

Jan. 14 Sales Returns and Allowances.................... 410 Accounts Receivable—R. Goge...........  /112

6,000

20 Accounts Payable—Watson & Co. ..............  /201 Notes Payable ....................................... 200

14,000

30 Accounts Payable—Voyer Co. ....................  /201 Merchandise Inventory......................... 120

400

Solutions Manual .

C-24

1,300 5,200 (X)

Credit

6,000

14,000 400

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (a) and (c)

General Ledger Cash

Date Jan.

1 31 31

No. 101

Explanation

Ref.

Balance



CR1 CP1

Debit

Credit

Balance

22,700

17,900 67,600 44,900

49,700

Accounts Receivable Date Jan.

1 14 31 31

Explanation

Ref.

Balance



J1 S1 CR1

No. 112 Debit

Credit 6,000

10,800 7,000

Notes Receivable Date Jan.

1 31

Explanation

Ref.

Balance



Debit

CR1

Jan.

1 30 31 31 31 31

Solutions Manual .

Explanation

Ref.

Balance



J1 S1 P1 CR1 CP1

C-25

38,000 32,000 42,800 35,800 No. 115

Credit

Balance

35,000

45,000 10,000

Merchandise Inventory Date

Balance

No. 120 Debit

Credit 400 4,550

7,800 4,840 350

Balance 22,600 22,200 17,650 25,450 20,610 20,960

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (a) and (c) (Continued) Land Date Jan.

No. 140

Explanation

Ref.

Balance



Debit

Credit

25,000

Building Date Jan.

No. 145

Explanation

Ref.

Balance



Debit

Credit

Jan.

Explanation

Ref.

Balance



Debit

No. 146 Credit

Jan.

No. 157

Explanation

Ref.

Balance



Debit

Credit

Jan.

Explanation

Ref.

Balance



Debit

No. 158 Credit

No. 200

Explanation

Ref.

Jan. 20

Solutions Manual .

Balance 1,950

Notes Payable Date

Balance 6,450

Accumulated Depreciation—Equipment Date

Balance 38,800

Equipment Date

Balance 75,000

Accumulated Depreciation—Building Date

Balance

C-26

Debit

Credit

Balance

14,000

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (a) and (c) (Continued) Accounts Payable Date Jan.

1 20 30 31 31

Explanation

Ref.

Balance



J1 J1 P1 CP1

No. 201 Debit

Credit

14,000 400 7,800 17,150

Mortgage Payable Date Jan.

Explanation

Ref.

Balance



Jan.

Explanation

Ref.

Balance



Debit

Credit

Explanation

Jan. 31

No. 301 Debit

Credit

No. 310

Ref.

Debit

CP1

1,300

Credit

1,300

Ref.

Debit

S1 CR1

Credit

Balance

10,800 7,700

10,800 18,500

Sales Returns and Allowances Date

Explanation

Jan. 14

Solutions Manual .

Balance

No. 401

Explanation

Jan. 31 31

Balance 87,600

Sales Date

Balance 67,400

M. Perrault, Drawings Date

34,200 20,200 19,800 27,600 10,450 No. 275

M. Perrault, Capital Date

Balance

C-27

Ref.

Debit

6,000

No. 410 Credit

Balance 6,000

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (a) and (c) (Continued) Cost of Goods Sold Date

Explanation

Jan. 31 31

No. 505

Ref.

Debit

S1 CR1

4,550 4,840

Credit

4,550 9,390

Salaries Expense Date Jan.

Explanation 31

Solutions Manual .

C-28

Balance

No. 725

Ref.

Debit

CP1

3,900

Credit

Balance 3,900

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (a) and (c) (Continued) Accounts Receivable Subsidiary Ledger S. Armstrong Date Jan.

1 7

Explanation

Ref.

Balance

 CR1

Debit

Credit

Balance

4,000

6,500 2,500

Credit

Balance

6,000

30,000 24,000

Credit

Balance

R. Goge Date Jan.

1 14

Explanation

Ref.

Balance

 J1

Debit

B. Lu Date Jan.

1 24

Explanation

Ref.

Debit

Balance

 S1

7,800

Ref.

Debit

S1 CR1

3,000

1,500 9,300

B. Rohl Date Jan.

Explanation 3 13

Solutions Manual .

C-29

Credit

Balance

3,000

3,000 0

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (a) and (c) (Continued) Accounts Payable Subsidiary Ledger Denomme Corp. Date Jan.

Explanation

Ref.

Balance



Debit

Credit

Balance 4,000

Harms Distributors Date Jan.

1 15

Explanation

Ref.

Debit

Balance

 CP1

16,000

Ref.

Debit

Credit

Balance 16,000 0

Voyer Co. Date Jan.

Explanation 17 30

P1 J1

400

Ref.

Debit

Credit

Balance

4,900

4,900 4,500

Credit

Balance

2,900

2,900 1,750

Credit

Balance

Warren Parts Date Jan.

Explanation 5 27

P1 CP1

1,150

Explanation

Ref.

Debit

Balance

 J1

Watson & Co. Date Jan.

1 20

Solutions Manual .

C-30

14,000

14,200 200

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (d) PERRAULT MUSIC CO. Trial Balance January 31, 2017 Debit Cash ..................................................................... Accounts receivable ........................................... Notes receivable .................................................. Merchandise inventory ....................................... Land ..................................................................... Building................................................................ Accumulated depreciation—building ................ Equipment............................................................ Accumulated depreciation—equipment ............ Notes payable ...................................................... Accounts payable................................................ Mortgage payable ................................................ M. Perrault, capital .............................................. M. Perrault, drawings .......................................... Sales..................................................................... Sales returns and allowances ............................ Cost of goods sold .............................................. Salaries expense .................................................

Solutions Manual .

C-31

Credit

$ 44,900 35,800 10,000 20,960 25,000 75,000 $ 38,800 6,450 1,950 14,000 10,450 67,400 87,600 1,300 18,500 6,000 9,390 3,900 $238,700

$238,700

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-3 (Continued) (e) Accounts Receivable Subsidiary Ledger S. Armstrong .................................................................... $ 2,500 R. Goge ............................................................................. 24,000 B. Lu ...................................................................................... 9,300 $35,800 Accounts Receivable control account balance .......................... $35,800

Accounts Payable Subsidiary Ledger Denomme Corp ................................................................ Voyer Co. ......................................................................... Warren Parts..................................................................... Watson & Co.....................................................................

$ 4,000 4,500 1,750 200 $10,450

Accounts Payable control account balance ............................... $10,450

Solutions Manual .

C-32

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (b) Sales Journal

Date

Account Debited

May 3

B. Simone

Invoice No. Ref.

Accounts Receivable Dr. Sales Cr.

COGS Dr. Merch. Inv. Cr

2,400 (112)/(401)

1,050 (505)/(120)



General Journal Date

Account Titles and Explanations

Ref.

Debit

May 14 Sales Returns and Allowances ................... Accounts Receivable—W. Karasch ....

410  /112

750

Merchandise Inventory ................................ Cost of Goods Sold .............................

120 505

325

20 Accounts Payable—Cobalt Sports. ............ Notes Payable ......................................

 /201

15,500

Solutions Manual .

C-33

750

325

200

Accounts Payable—Lancio Co. ..................  /201 Merchandise Inventory ........................ 120

Credit

15,500 510 510

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (b) (Continued)

Date

Purchases Journal Accounts Merchandise Payable Inventory Supplies Account Credited Terms Ref. Cr. Dr Dr.

P1 Other Accounts Account Debited

May 5 WN Shaw 17 Lancio Co. 30 Summers Corp.

Solutions Manual

  

2,600 2,100 4,000 8,700 (201)

2,600 2,100 _ 4,700 (120)

C-34 .

Ref. Amount

Equipment 157

4,000 4,000 X

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (b) (Continued)

Cash Receipts Journal

Date

Account Credited

May 7 G. Parrish 13 B. Simone 23 29 Notes Rec.

Cash Dr.

Ref.

CR1

Accounts Other COGS Dr. Receivable Sales Merch. Inv. Accounts Cr. Cr. Cr. Cr.

 

2,800 2,400 9,500 115 40,000 54,700 (101)

2,800 2,400 9,500 5,200 (112)

4,450

9,500 4,450 (401) (505)/(120)

Cash Payments Journal

Date

Payee

Cash Cr.

May 11 12 15 Buttercup 18 27 WN Shaw

318 1,500 17,400 4,700 1,000

31 C. Lee

1,000 25,918 (101)

Solutions Manual .

Merch. Inv. Dr.

Accts. Payable Dr.

40,000 40,000 (X)

CP1 Account Debited

Other Accts. Ref. Dr.

318 Rent Expense 730 17,400 Buttercup  Salaries Exp. 725 1,000 WN Shaw  C. Lee, 310 Drawings 18,400 (201)

318 (120)

C-35

1,500 4,700

1,000 7,200 (X)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (a) and (c)

General Ledger Cash

Date May

1 31 31

No. 101

Explanation

Ref.

Balance

 CR1 CP1

Debit

Credit

54,700 25,918

Accounts Receivable Date May

1 14 31 31

May

1 31

Explanation

Ref.

Balance

 J1 CR1 S1

Debit

Credit 750 5,200

2,400

Explanation

Ref.

Balance

 CR1

May

1 14 20 31 31 31 31

Solutions Manual .

Explanation

Ref.

Balance

 J1 J1 P1 S1 CR1 CP1

C-36

Balance 15,400 14,650 9,450 11,850 No. 115

Debit

Credit 40,000

Merchandise Inventory Date

36,700 91,400 65,482

No. 112

Notes Receivable—Cole Company Date

Balance

Balance 48,000 8,000

No. 120 Debit

Credit

325 510 4,700 1,050 4,450 318

Balance 22,000 22,325 21,815 26,515 25,465 21,015 21,333

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (a) and (c) (Continued) Equipment Date May

1 30

No. 157

Explanation

Ref.

Balance

 P1

Debit

Credit

8,200 12,200

4,000

Accumulated Depreciation—Equipment Date May

Explanation

Ref.

Balance



Debit

No. 158 Credit

Explanation

No. 200 Ref.

May 20

Debit

Credit 15,500

Accounts Payable Date May

1 20 20 31 31

May

Explanation

Ref.

Balance

 J1 J1 P1 CP1

Debit

Credit

15,500 510 8,700 18,400

Explanation

Ref.

Balance



Explanation

Ref.

May 31 Solutions Manual .

CP1 C-37

15,500

Balance 43,400 27,900 27,390 36,090 17,690

No. 301 Debit

Credit

Balance 85,100

C. Lee, Drawings Date

Balance

No. 201

C. Lee, Capital Date

Balance 1,800

Notes Payable Date

Balance

No. 310 Debit 1,000

Credit

Balance 1,000 Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (a) and (c) (Continued) Sales Date

No. 401

Explanation

Ref.

May 31 31

Debit

CR1 S1

Credit 9,500 2,400

Sales Returns and Allowances Date

Explanation

Ref.

May 14

Explanation

Debit

Credit

750

J1 S1 CR1

Debit

Credit 325

1,050 4,450

Salaries Expense Date

Explanation

Ref.

May 31

CP1

Explanation

Solutions Manual .

CP1

C-38

(325) 725 5,175

Debit

Credit

4,700

Balance 4,700 No. 730

Ref.

May 31

Balance

No. 725

Rent Expense Date

Balance

No. 505 Ref.

May 14 31 31

9,500 11,900 No. 410

Cost of Goods Sold Date

Balance

Debit 1,500

Credit

Balance 1,500

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (a) and (c) (Continued) Accounts Receivable Subsidiary Ledger L. Cellars Date May

Explanation

Ref.

Balance



Explanation

Ref.

Balance

 J1

Debit

Credit

Balance 7,400

W. Karasch Date May

1 14

Debit

Credit 750

Balance 3,250 2,500

G. Parrish Date May

1 7

Explanation

Ref.

Balance

 CR1

Debit

Credit 2,800

Balance 4,750 1,950

B. Simone Date May

Explanation

Ref.

3 13

Solutions Manual .

S1 CR1

C-39

Debit

Credit

2,400 2,400

Balance 2,400 0

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (a) and (c) (Continued) Accounts Payable Subsidiary Ledger Buttercup Distributors Date May

1 15

Explanation

Ref.

Debit

Balance

 CP1

17,400

Explanation

Ref.

Debit

Balance

 J1

15,500

Ref.

Debit

Credit

Balance 17,400 0

Cobalt Sports Date May

1 20

Credit

Balance 15,500 0

Lancio Co. Date

Explanation

May 17 20

P1 J1

Credit 2,100

510

Balance 2,100 1,590

WN Shaw Date May

Explanation

Ref.

5 27

P1 CP1

Debit

Credit 2,600

1,000

Balance 2,600 1,600

Summers Corp. Date May

1 30

Solutions Manual .

Explanation

Ref.

Balance

 P1

C-40

Debit

Credit 4,000

Balance 10,500 14,500

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-4 (Continued) (d) LEE CO. Trial Balance May 31, 2017 Debit Cash ..................................................................... Accounts receivable ........................................... Notes receivable.................................................. Merchandise inventory ....................................... Equipment............................................................ Accumulated depreciation—equipment ............ Notes payable ...................................................... Accounts payable................................................ C. Lee, capital ...................................................... C. Lee, drawings.................................................. Sales..................................................................... Sales returns and allowances ............................ Cost of goods sold .............................................. Salaries expense ................................................. Rent expense .......................................................

(e)

Credit

$ 65,482 11,850 8,000 21,333 12,200 $ 1,800 15,500 17,690 85,100 1,000 11,900 750 5,175 4,700 1,500 $131,990

Accounts Receivable control account balance ..............

$131,990 $11,850

Accounts Receivable Subsidiary Ledger account balances: L. Cellars .................................................................... $ 7,400 W. Karasch ................................................................ 2,500 G. Parrish ................................................................... 1,950 $11,850 Accounts Payable control account balance ................... Accounts Payable Subsidiary Ledger account balances: Lancio Co................................................................... WN Shaw.................................................................... Summers Corp. .........................................................

Solutions Manual .

C-41

$13,690 $ 1,590 1,600 14,500 $17,690

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-5 (a), (b) and (c) Sales Journal Date

Account Debited

Feb. 4 9 17 28

Gilles Co. Earlton Corp. Lumber Co. Gilles Co.

Invoice No.

Ref.

371 372 373 374

   

S1 Accounts Receivable Dr. Sales Cr. 5,220 2,050 1,800 9,810 18,880 (112)/(401)

GENERAL JOURNAL Date Feb.

Account Titles and Explanations

J1 Ref.

Debit

5 Accounts Payable—Zears Co ..................... 201/ Purchase Returns and Allowances..... 512

450

Solutions Manual .

C-42

Credit 450

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-5 (Continued) (a), (b) and (c) (Continued)

Cash Receipts Journal

Date

Accounts Other Cash Receivable Sales Accounts Ref. Dr. Cr. Cr. Cr.

Account Credited

Feb. 6 13 15 Earlton Corp. 17 Gilles Co. 20 27 28 Lumber Co.

Ch. Date No. Feb. 13 15 20 28

Solutions Manual .

Payee Zears Co. Fell Elect.

CR1

1,950 3,850  2,050  5,220 4,900 4,560  1,800 24,330 (101)

1,950 3,850 2,050 5,220 4,900 4,560 1,800 9,070 15,260 (112) (401)

Cash Payments Journal

CP1

Accounts Payable Dr.

Other Accounts Dr.

Cash Cr. 3,750 14,100 7,200 14,900 39,950 (101)

Account Debited

3,750 Zears Co. Salaries 7,200 Fell Elect. Salaries 10,950 (201)

C-43

Ref.  726  726

14,100 14,900 29,000 (X)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

PROBLEM C-5 (Continued) a), (b) and (c) (Continued)

Date

Purchases Journal Accounts Payable Purchases Account Credited Terms Ref. Cr. Dr

P1 Supplies Dr.

Other Accounts Account Debited

Feb 3 4 8 11 19 23 24

Zears Co. Green Deer Inc. Fell Electronics Thomas Co. Brown Corp. Zears Co. Lewis Co.

Solutions Manual

      

4,200 290 7,200 9,100 16,400 4,800 5,130 47,120 (201)

Amount

Equipment 157

16,400

4,200 290 7,200 9,100 4,800 _5,130 30,430 (510)

C-44 .

Ref.

290 (126)

16,400 X

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE: Chapters 2 to 6 and Appendix C (a) Sales Journal

Date Jan. 3 3 11 11 22 22 25 25

Account Debited B. Soto J. Ebel R. Draves S. Tang B. Soto R. Draves B. Jacovetti J. Ebel

Solutions Manual .

Invoice No. 510 511 512 513 514 515 516 517

Ref.        

C-45

S1 Accounts Cost of Goods Receivable Sold Dr. Dr. Merch. Inventory Sales Cr. Cr. 3,100 1,240 1,800 720 1,900 760 900 360 1,700 680 800 320 3,500 1,400 6,100 2,440 19,800 7,920 (112)/(401) (505)/(120)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (a) (Continued) Cash Receipts Journal CR1 Accounts COGS Dr. Other Account Cash Receivable Sales Merch. Inv. Accounts Date Credited Ref. Dr. Cr. Cr. Cr. Dr. Jan. 7 S. Tang 5,000 5,000  7 B. Jacovetti  2,000 2,000 10 16,500 16,500 6,600 20 17,500 17,500 7,000 21 S. Tang  900 900 31 19,920 19,920 7,968 31 B. Soto  4,800 4,800 31 J. Ebel  7,500 7,500 74,120 20,200 53,920 21,568 (101) (112) (401) (505)/(120)

Date Jan. 8 9 9 15 23 23 31

Payee

Cash Payments Journal Merch. Accts. Cash Invent. Payable Cr. Dr. Dr.

Freight Co. 180 Liazuk Co. 10,000 Nguyen & Son 11,000 A. Winters 2,000 Nguyen & Son 15,000 Liazuk Co. 13,400 6,900 58,480 (101)

Solutions Manual .

Account Debited

CP1 Other Accts. Ref. Dr.

180

180 (120)

C-46

10,000 Liazuk Co. 11,000 Nguyen & Son A. Winters, Drawings 15,000 Nguyen & Son 13,400 Liazuk Co. Salaries Exp. 49,400 (201)

  310   725

2,000

6,900 8,900 (X)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (a) (Continued)

Date

Account Credited

Terms Ref.

Purchase s Journal Merchandise Accounts Inventory Supplies Payable Cr. Dr Dr.

P1 Other Accounts Account Debited Ref. Amount

Jan. 5 Welz Wares 5 Laux Supplies 16 Nguyen & Son 16 Liazuk Co. 16 Welz Wares 17 Laux Supplies 27 Nguyen & Son 27 Laux Supplies 27 Welz Wares 28 Laux Supplies

Solutions Manual

         

3,000 2,700 15,000 13,900 1,500 400 14,500 1,200 2,800 800 55,800 (201)

C-47 .

3,000 2,700 15,000 13,900 1,500 400 14,500 1,200 2,800 54,600 (120)

800 1,200 (125)

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (a) , (d), and (f)

Date Jan.9

General Journal Account Titles and Explanations

Ref.

Sales Returns and Allowances ...... Accounts Receivable—J. Ebel

410 112/

400

Merchandise Inventory ................... Cost of Goods Sold .................

120 505

160

Accounts Payable—Liazuk Co....... Merchandise Inventory ...........

201/ 120

500

Accounts Payable—Mikush Bros. . Notes Payable..........................

201/ 200

15,000

Supplies Expense ........................... Supplies ................................... ($1,000 + $400 + $800 − $700)

728 125

1,500

Insurance Expense (1/9 × $2,000) Prepaid Insurance ...................

722 130

222

Depreciation Expense .................... Accumulated Depreciation— Building (1/12 × $6,000) ... Accumulated Depreciation— Equipment (1/12 × $1,500)

711

625

Debit

J1 Credit

400 160

500 15,000

Adjusting Journal Entries 31

Solutions Manual .

C-48

1,500

222

146

500

158

125

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (a) , (d), and (f) (Continued)

Date Jan. 31 31

General Journal Account Titles and Explanations Interest Expense ............................. Interest Payable.......................

Ref. 718 230

Debit 45

505 120

102

Sales ................................................ Income Summary ....................

401 300

73,720

Income Summary............................ Sales Returns and Allowances Cost of Goods Sold .................. Depreciation Expense .............. Interest Expense ....................... Insurance Expense ................... Salaries Expense ...................... Supplies Expense .....................

300 410 505 711 718 722 725 728

39,122

Income Summary............................ A. Winters, Capital ..................

300 301

34,598

A. Winters, Capital .......................... A. Winters, Drawings ..............

301 310

2,000

Cost of Goods Sold ........................ Merchandise Inventory ........... ($44,850 − $44,952)

J2 Credit 45 102

Closing Journal Entries 31 31

31 31

Solutions Manual .

C-49

73,720 400 29,430 625 45 222 6,900 1,500 34,598 2,000

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued)

(b) and (f)

General Ledger Cash

Date Jan. 1 31 31

Explanation Balance

Ref.  CR1 CP1

Date Jan. 1 9 31 31

Accounts Receivable Explanation Ref. Balance  J1 S1 CR1

Date Jan. 1

Notes Receivable Explanation Ref. Balance 

Debit

Credit

74,120 58,480

Debit

Credit 400

19,800 20,200

Debit

Credit

Merchandise Inventory Date Jan. 1 9 18 31 31 31 31 31

Solutions Manual .

Explanation Balance

Adjusting entry

Ref.  J1 J1 S1 P1 CR1 CP1 J2

C-50

No. 101 Balance 35,050 109,170 50,690 No. 112 Balance 14,000 13,600 33,400 13,200 No. 115 Balance 39,000 No. 120

Debit

Credit

160 500 7,920 54,600 21,568 180 102

Balance 20,000 20,160 19,660 11,740 66,340 44,772 44,952 44,850

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Supplies Date Jan. 1 31 31

Date Jan. 1 31

Explanation Balance Adjusting entry

No. 125 Ref.  P1 J1

Prepaid Insurance Explanation Ref. Balance  Adjusting entry J1

Debit

Credit

1,200 1,500

Debit

Credit 222

Land Date Jan. 1

Explanation Balance

Ref. 

Debit

Explanation Balance

Date Jan. 1 31

Accumulated Depreciation—Building Explanation Ref. Debit Balance  Adjusting entry J1

Solutions Manual .

Ref. 

C-51

Debit

No. 130 Balance 2,000 1,778

Credit

No. 140 Balance 50,000

Credit

No. 145 Balance 100,000

Credit

No. 146 Balance 25,000 25,500

Building Date Jan. 1

Balance 1,000 2,200 700

500

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Equipment Date Jan. 1

Explanation Balance

No. 157 Ref. 

Debit

Accumulated Depreciation—Equipment Date Explanation Ref. Debit Jan. 1 Balance  31 Adjusting entry J1

Date Jan. 21

Notes Payable Explanation Ref. J1

Date Jan. 1 18 21 31 31

Accounts Payable Explanation Ref. Balance  J1 J1 P1 CP1

Date Jan. 31

Interest Payable Explanation Ref. Adjusting entry J2

Date Jan. 1

Mortgage Payable Explanation Ref.  Balance

Solutions Manual .

C-52

Debit

Credit

125

No. 158 Balance 1,500 1,625

Credit 15,000

No. 200 Balance 15,000

Credit

500 15,000 55,800 49,400

Debit

Balance 6,450

Credit 45

Credit

No. 201 Balance 36,000 35,500 20,500 76,300 26,900 No. 230 Balance 45 No. 275 Balance 125,000

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Income Summary Date Jan. 31 31 31

Explanation Closing entry Closing entry Closing entry

Ref. J2 J2 J2

Date Jan. 1 31 31

A. Winters, Capital Explanation Ref. Balance  Closing entry J2 Closing entry J2

Date Jan. 31 31

A. Winters, Drawings Explanation Ref. CP1 Closing entry J2

No. 300 Debit

Credit 73,720

39,122 34,598

Debit

Credit 34,598

2,000

Debit 2,000

Credit 2,000

Sales Date Jan. 31 31 31

Date Jan. 9 31

Solutions Manual .

Balance 73,720 34,598 0 No. 301 Balance 80,000 114,598 112,598 No. 310 Balance 2,000 0

Credit 19,800 53,920

73,720

No. 401 Balance 19,800 73,720 0

Sales Returns and Allowances Explanation Ref. Debit J1 400 Closing entry J2

Credit

No. 410 Balance 400 0

Explanation

Closing entry

Ref. S1 CR1 J2

C-53

Debit

400

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Cost of Goods Sold Date Jan. 9 31 31 31 31

Explanation

Adjusting entry Closing entry

Ref. J1 S1 CR1 J2 J2

Date Jan. 31 31

Depreciation Expense Explanation Ref. Adjusting entry J1 Closing entry J2

Date Jan. 31 31

Interest Expense Explanation Ref. Adjusting entry J2 Closing entry J2

Date Jan. 31 31

Insurance Expense Explanation Ref. Adjusting entry J1 Closing entry J2

Date Jan. 31 31

Salaries Expense Explanation Ref. CP1 Closing entry J2

Date Jan. 31 31

Supplies Expense Explanation Ref. Adjusting entry J1 Closing entry J2

Solutions Manual .

C-54

No. 505 Debit

Credit 160

7,920 21,568 102 29,430

Debit 625

Credit 625

Debit 45

Credit 45

Debit 222

Credit 222

Debit 6,900

Credit 6,900

Debit 1,500

Credit 1,500

Balance (160) 7,760 29,328 29,430 0 No. 711 Balance 625 0 No. 718 Balance 45 0 No. 722 Balance 222 0 No. 725 Balance 6,900 0 No. 728 Balance 1,500 0

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Accounts Receivable Subsidiary Ledger R. Draves Date Jan. 1 11 22

Ref.  S1 S1

Debit

Ref. S1 J1 S1 CR1

Debit 1,800

B. Jacovetti Date Explanation Jan. 1 Balance 7 25

Ref.  CR1 S1

Debit

S. Tang Date Jan. 1 7 11 21

Ref.  CR1 S1 CR1

Debit

Ref. S1 S1 CR1

Debit 3,100 1,700

J. Ebel Date Jan. 3 9 25 31

Explanation Balance

Explanation

Explanation Balance

Credit

Balance 1,500 3,400 4,200

Credit

Balance 1,800 1,400 7,500 0

1,900 800

400 6,100 7,500

Credit 2,000

3,500

Credit 5,000

900 900

Balance 7,500 5,500 9,000

Balance 5,000 0 900 0

B. Soto Date Jan. 3 22 31

Solutions Manual .

Explanation

C-55

Credit

4,800

Balance 3,100 4,800 0

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Accounts Payable Subsidiary Ledger Laux Supplies Date Jan. 5 17 27 28

Explanation

Ref. P1 P1 P1 P1

Debit

Credit 2,700 400 1,200 800

Balance 2,700 3,100 4,300 5,100

Explanation Balance

Ref.  CP1 P1 J1 CP1

Debit

Credit

Balance 10,000 0 13,900 13,400 0

Liazuk Co. Date Jan. 1 9 16 18 23

10,000 13,900 500 13,400

Mikush Bros. Date Jan. 1 21

Explanation Balance

Nguyen & Son Date Explanation Jan. 1 Balance 9 16 23 27

Ref.  J1

Ref.  CP1 P1 CP1 P1

Debit

Credit

Balance 15,000 0

Credit

14,500

Balance 11,000 0 15,000 0 14,500

Credit 3,000 1,500 2,800

Balance 3,000 4,500 7,300

15,000

Debit 11,000

15,000 15,000

Welz Wares Date Jan. 5 16 27

Solutions Manual .

Explanation

Ref. P1 P1 P1

C-56

Debit

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (c) and (d)

WINTERS COMPANY Trial Balance January 31, 2017 Unadjusted Debit Credit $ 50,690 13,200 39,000 44,952 2,200 2,000 50,000 100,000

Cash ........................................ Accounts receivable............... Notes receivable ..................... Merchandise inventory........... Supplies .................................. Prepaid insurance .................. Land......................................... Building ................................... Accumulated depreciation— building............................... Equipment ............................... 6,450 Accumulated depreciation— equipment........................... Notes payable ......................... Accounts payable ................... Interest payable ...................... Mortgage payable ................... A. Winters, capital .................. A. Winters, drawings .............. 2,000 Sales ........................................ Sales returns & allowances 400 Cost of goods sold ................. 29,328 Depreciation expense............. Interest expense ..................... Salaries expense .................... 6,900 Insurance expense ................. Supplies expense ................... Totals .................................. $347,120

Solutions Manual .

C-57

Adjusted Debit Credit $ 50,690 13,200 39,000 44,850 700 1,778 50,000 100,000

$ 25,000

$ 25,500 6,450

1,500 15,000 26,900

1,625 15,000 26,900 45 125,000 80,000

125,000 80,000 2,000 73,720

73,720

$347,120

400 29,430 625 45 6,900 222 1,500 $347,790 $347,790

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (c) (Continued) Accounts Receivable control account balance Subsidiary ledger account balances R. Draves .................................................. B. Jacovetti ...............................................

$13,200 $4,200 9,000 $13,200

Accounts Payable control account balance .. Subsidiary ledger account balances Laux Supplies........................................... Nguyen & Son........................................... Welz Wares ...............................................

$25,700 $ 5,100 14,500 7,300 $26,900

Solutions Manual .

C-58

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (e) WINTERS COMPANY Income Statement Month Ended January 31, 2017 Sales revenues Sales ................................................................. Less: Sales returns and allowances.............. Net sales ....................................................

$73,720 400 $73,320

Cost of goods sold ................................................ Gross profit ............................................................ Operating expenses Salaries expense.............................................. Supplies expense ............................................ Insurance expense .......................................... Depreciation expense...................................... Total operating expenses.......................... Profit from operations ...........................................

29,430 43,890 $6,900 1,500 222 625

Other expenses Interest expense .............................................. Profit .......................................................................

9,247 34,643 45 $34,598

WINTERS COMPANY Statement of Owner’s Equity Month Ended January 31, 2017 A. Winters, capital, January 1 ................................................ Add: Profit ............................................................................. Less: Drawings ...................................................................... A. Winters, capital, January 31 ..............................................

Solutions Manual .

C-59

$ 80,000 34,598 114,598 2,000 $112,598

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (e) (Continued) WINTERS COMPANY Balance Sheet January 31, 2017 Assets Current assets Cash ............................................................ Notes receivable......................................... Accounts receivable .................................. Merchandise inventory .............................. Supplies ...................................................... Prepaid insurance ...................................... Total current assets............................ Property, plant, and equipment Land ................................................. Building ........................................... $100,000 Less: Accumulated depreciation ... 25,500 Equipment ....................................... 6,450 Less: Accumulated depreciation .. 1,625 Total assets..............................

$ 50,690 39,000 13,200 44,850 700 1,778 150,218

$50,000 74,500 4,825

129,325 $279,543

Liabilities and Owner’s Equity Current liabilities Notes payable............................................. Accounts payable ...................................... Interest payable .......................................... Total current liabilities .......................

$ 15,000 26,900 45 41,945

Long-term liabilities Mortgage payable....................................... Total liabilities.....................................

125,000 166,945

Owner’s equity A. Winters, capital ...................................... Total liabilities and owner’s equity....

112,598 $279,543

Solutions Manual .

C-60

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

CUMULATIVE COVERAGE (Continued) (g) WINTERS COMPANY Post-Closing Trial Balance January 31, 2017 Cash ................................................................ Accounts receivable ...................................... Notes receivable ............................................ Merchandise inventory .................................. Supplies.......................................................... Prepaid insurance .......................................... Land ................................................................ Building .......................................................... Accumulated depreciation—building ........... Equipment ...................................................... Accumulated depreciation—equipment ....... Notes payable................................................. Accounts payable .......................................... Interest payable.............................................. Mortgage payable .......................................... A. Winters, capital .......................................... Totals .........................................................

Solutions Manual .

C-61

Debit $ 50,690 13,200 39,000 44,850 700 1,778 50,000 100,000

Credit

$ 25,500 6,450

$306,668

1,625 15,000 26,900 45 125,000 112,598 $306,668

Appendix C

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

Present Value Concepts Solutions to Brief Exercises BEPV–1 (a)

$50.00

($1,000 × 5%)

(b)

$40.00

($500 × 4% × 2 periods)

(c)

$40.80

($500 × 4%) + ($520 × 4%)

Solutions Manual .

PV-1

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–2 Using tables: Discount rate from Table PV-1 is 0.82193 (5 periods at 4%). The present value of $600,000 to be received in 5 years discounted at 4% is therefore $493,158 ($600,000 × 0.82193). Wong Ltd. should therefore invest $493,158 to have $600,000 in five years. Using a financial calculator: Enter: 4 5 Press:

I/Y

600000

PMT

CPT

Result: PV = $ (493,156.26) Using Excel: =PV(rate,nper,pmt,fv,type) RATE .04 NPER

PMT

FV Type

$600,000 0

Result: PV = $(493,156.26)

Solutions Manual .

PV-2

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–3 Using tables: Present value factor of 1, for 10 periods at 4% is 0.67556. PV = $10,000 x 0.67556 PV = $6,755.60 Using a financial calculator: 10000 Enter: 4 10 0 Press:

I/Y

PMT

CPT

Result = $6,755.64

Solutions Manual .

PV-3

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–4

Using tables: Present value = Future amount × Present value of 1 Factor OR Present value of 1 Factor = Present value ÷ Future amount 0.44401= $44,401 ÷ $100,000 The 0.44401 at 7% is found in the 12 years column. Xin Su therefore must wait 12 years to receive $100,000. Using a financial calculator: Enter: 7 –44401 Press:

I/Y

100000

PMT

CPT

Result: N = 12 Using Excel functions: the formula is: =NPER(rate,pmt,pv,fv,type) RATE .07 PMT

$ (44,401.00)

$ 100,000.00

Type

Result: NPER = 12

Solutions Manual .

PV-4

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–5

Using tables: Present value = Future amount × Present value of 1 Factor $3,152 = $10,000 × Present value of 1 Factor Present value of 1 Factor = $3,152 ÷ $10,000 Present value of 1 Factor = 0.31520 The closest PV factor for 15 periods is 0.31524, which is found in the 8% column. As this factor is almost exactly equal to 0.31520, this means Jin Fei will earn an 8% return. Using a financial calculator: 10000 Enter: 15 0 –3152 Press:

PMT

CPT

I/Y

Result: I = 8.001% Using Excel functions: the formula is: =RATE(nper,pmt,pv,fv,type) NPER

PMT

$ (3,152.00)

$ 100,000.00

Type

Result: Rate = 8.001%

Solutions Manual .

PV-5

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV-6 Using a financial calculator: (a) Enter:

25000

Press:

I/Y

PMT

CPT

Result: PV = $(10,602.44) (b) Enter:

25000

Press:

I/Y

PMT

Result: PV = $(112,147.96)

Solutions Manual .

PV-6

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–8 Annual Number Interest of Frequency Rate Years of Payment 1. 6% 2 Quarterly Semi2. 5% 8 annually 3. 7% 5 Annually 4. 4% 3 Quarterly Semi5. 2% 6 annually 6. 6% 9 Monthly

Solutions Manual .

PV-8

(n) Number of (i) Discount Periods Rate 2×4=8 6% ÷ 4 = 1.5% 8 × 2 = 16 5 3 × 4 = 12

5% ÷ 2 = 2.5% 7% 4% ÷ 4 = 1%

6 × 2 = 12 9 × 12 = 108

2% ÷ 2 = 1% 6% ÷ 12 = 0.5%

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–9 Using tables: Present value of principal to be received at maturity: $100,000 × 0.61027 (PV of $1 due in 20 periods at 2.5% from Table PV-1) ............................................. $61,027.00 Present value of interest to be received periodically over the term of the bonds: $2,750* × 15.58916 (PV of $1 due each period for 20 periods at 2.5% from Table PV-2) ............................................................... 42,870.19 Present value of bonds ................................................... $103,897.19 * $100,000 × 5.5% ÷ 2 = $2,750 Using a financial calculator: Enter: 2.5 20

2750

100000

Press:

PMT

I/Y

CPT

Result: PV = $(103,897.29) Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) RATE

.025

NPER

PMT

$2,750

$100,000

Type

Result: PV = $(103,897.29)

Solutions Manual .

PV-9

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–10 Using tables: Present value of principal to be received at maturity: $100,000 × 0.55368 (PV of $1 due in 20 periods at 3% from Table PV-1) ..................................................... Present value of interest to be received periodically over the term of the bonds: $2,750* × 14.87747 (PV of $1 due each period for 20 periods at 3% from Table PV-2)............................................................ Present value of bonds................................................. *$100,000 x 5.5% / 2 = $2,570 Using a financial calculator: 100000 Enter: 3 20 2750 Press:

I/Y

PMT

$55,368.00

40,913.04 $96,281.04

CPT

Result: PV = $(96,280.63) Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) RATE

.03

NPER

PMT

$2,750

$100,000

Type

Result: PV = $(96,280.63)

Solutions Manual .

PV-10

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV-11 Using a financial calculator: (a) Enter: 7.35 7

-16000

Press:

PMT

I/Y

CPT

Result: PV = $85,186.34 (b) Enter:

10.65

16000*

200000

Press:

I/Y

PMT

Result: PV = $(168,323.64)

*PMT is face value x 8% contractual (coupon) rate of 8% = ($1,000 x 200) x 8% = $16,000

Solutions Manual .

PV-11

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–12 Using tables: From Table PV-2, n = 6, i = 8%, the present value for a $1 payment annually is $4.62288. In this problem, we want to determine the payment that would result in a present value of $50,000. The required payment would be $10,815.77 ($50,000 ÷ 4.62288). Using a financial calculator: 0 Enter: 8 6 –50000 Press:

I/Y

CPT

PMT

Result: PMT = $10,815.77 Using Excel functions: the formula is: =PMT(rate,nper,pv,fv,type) RATE

.08

NPER

$(50,000.00)

Type

Result: PMT = $10,815.77

Solutions Manual .

PV-12

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–13 Using tables: From Table PV-2, n = 6, i = 9%, the present value for a $1 payment annually is $4.48592. In this problem, we want to determine the payment that would result in a present value of $50,000. The required payment would be $11,145.99 ($50,000 ÷ 4.48592). Using a financial calculator: 0 Enter: 9 6 –50000 Press:

I/Y

CPT

PMT

Result: PMT = $11,145.99 Using Excel functions: the formula is: =PMT(rate,nper,pv,fv,type) RATE

.09

NPER

$(50,000.00)

Type

Result: PMT = $11,145.99

Solutions Manual .

PV-13

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–14 Using tables: Using present value tables, for an annuity, find the rate for 12 periods that will give the factor arrived at by dividing the present value (PV) by the amount of the payment (PMT). $1,058,871 ÷ $112,825 = 9.38507 The factor will be found in the column for 4% interest*. Using a financial calculator: Enter: 12 –112825 Press:

PMT

1058871

CPT

I/Y

Result: I = 4%* Using Excel functions: the formula is: =RATE(nper,pmt,pv,fv,type) NPER

PMT

$(112,825.00)

$1,058,871.00

Type

Result: Rate = 4%* *Semi-annual rate of 4% × 2 = annual rate of 8%

Solutions Manual .

PV-14

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–15 Using a financial calculator: Enter: 1.25* 12** Press:

I/Y

185000

CPT

PMT

Result: PMT = $(16,697.79) * 5 ÷ 4 = 1.25 ** 3 × 4 = 12 Using Excel functions: the formula is: =PMT(rate,nper,pv,fv,type) RATE

.0125

NPER

$185,000

Type

Result: PMT = $(16,697.79)

Solutions Manual .

PV-15

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–16 Using tables: First divide the present value with the amount of the payment: $18,000 ÷ $1,702 = 10.57579 Look in the Present Value Table PV-2 for an annuity under the column for 2% and locate the number of periods which is close to the factor 10.57579. You will find the factor 10.57534 under 12 periods. **(within rounding) Using a financial calculator: 0 Enter: 2* 18000 –1702 Press:

I/Y

PMT

CPT

Result: N = 12 periods** *4 ÷ 2 = 2 Using Excel functions: the formula is: =NPER(rate,pmt,pv,fv,type) RATE .02 PMT

$(1,702.00)

$18,000.00

Type

Result: NPER = 12 periods **12 semi-annual periods will equal 6 years

Solutions Manual .

PV-16

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–17 Using tables: From Table PV-2, n = 5, i = 3%, the present value for a $1 payment annually is $4.57971. In this problem, we want to determine the payment that would result in a present value of $32,000. The required payment would be $6,987.34 ($32,000 ÷ 4.57971). Using a financial calculator: 0 Enter: 3 5 32000 Press:

I/Y

CPT

PMT

Result: PMT = $(6,987.35) Using Excel functions: the formula is: =PMT(rate,nper,pv,fv,type) RATE

.03

NPER

$32,000

Type

Result: PMT = $(6,987.35)

Solutions Manual .

PV-17

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–18 Using a financial calculator: (a) Enter: 0.65* 96** Press:

I/Y

42000

CPT

PMT

CPT

PMT

Result: PMT = $(589.48) *I is 7.8% ÷ 12 for monthly payments = 0.65% ** N is 8 years x 12 = 96 (b) Enter:

7.25

8000

Press:

I/Y

Result: PMT = $(1,964.20)

Solutions Manual .

PV-18

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–19

The better option for repayment of this piece of equipment is the single payment of $46,000 in 2 years.

Using a financial calculator: Option 1:

Enter:

–10000

Press:

I/Y

PMT

CPT

Result: PV = $39,927.10 Option 2:

Enter:

–46000

Press:

I/Y

PMT

Result: PV = $39,437.59

Solutions Manual .

PV-19

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–19 (Continued) Using Excel functions the formula is: =PV(rate,nper,pmt,fv,type) Option 1

Option 2

RATE

.08

RATE

.08

NPER

PMT

$(10,000)

PMT

Type

Result PV = $39,927.10

Solutions Manual .

$(46,000) 0

Result PV = $39,437.59

PV-20

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–20 Using tables:

The same option would not be chosen; the better choice now is 5 payments of $10,000 each. As market (or discount) rates rise, the effect of the timing of repayments becomes more significant. Using a financial calculator: Option 1:

Enter:

–10000

Press:

I/Y

PMT

CPT

Result: PV = $37,907.87 Option 2:

Enter:

–46000

Press:

I/Y

PMT

Result: PV = $38,016.53

Solutions Manual .

PV-21

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–20 (Continued) Using Excel functions the formula is: =PV(rate,nper,pmt,fv,type) Option 1

Option 2

RATE

.10

RATE

.10

NPER

PMT

$(10,000)

PMT

Type

Result PV = $37,907.87

Solutions Manual .

$(46,000) 0

Result PV = $38,016.53

PV-22

Appendix PV

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak

Accounting Principles, Seventh Canadian Edition

BEPV–21 The present value of an annuity collected of $21,000 for 12 years at 4% is calculated as follows: Using tables: $21,000 × 9.38507 = $197,086.47 (discount rate from Table PV-2) Using a financial calculator: Enter: 4 12

21000

Press:

PMT

I/Y

CPT

Result: PV = $(197,086.55) The value in use is $197,086.55. Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) RATE

.04

NPER

PMT

$21,000

Type

Result: PV = $(197,086.55) The value in use is $197,086.55.

Solutions Manual .

PV-23

Appendix PV