Financial Accounting , IFRS Edition, 2nd Edition solutions manual by Ace Test Banks

Financial Accounting , IFRS Edition, 2nd Edition

BY Weygandt, Kimmel, Kieso

CHAPTER 1 Accounting in Action ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

A Problems

B Problems

5, 6, 7, 11

1A, 2A, 4A

1B, 2B, 4B

6, 7, 8, 10, 11

1A, 2A, 4A, 5A

1B, 2B, 4B, 5B

8, 9, 12, 13, 2A, 3A, 14, 15, 16, 17 4A, 5A

2B, 3B, 4B, 5B

Learning Objectives

Questions

Do It!

Exercises

Explain what accounting is.

1, 2, 5

Identify the users and uses of accounting.

3, 4

Understand why ethics is a fundamental business concept.

Explain accounting standards and the measurement principles.

Explain the monetary unit assumption and the economic entity assumption.

7, 8, 9, 10

State the accounting equation, and define its components.

11, 12, 13, 14, 22

1, 2, 3, 4, 5, 8, 9

Analyze the effects of business transactions on the accounting equation.

15, 16

6, 7

Understand the four financial statements and how they are prepared.

17, 18, 19, 20, 21

10, 11

1-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

1-2

Description

Difficulty Level

Time Allotted (min.)

Analyze transactions and compute net income.

Moderate

40–50

Analyze transactions and prepare income statement, retained earnings statement, and statement of financial position.

Moderate

50–60

Prepare income statement, retained earnings statement, and statement of financial position.

Moderate

50–60

Analyze transactions and prepare financial statements.

Moderate

40–50

Determine financial statement amounts and prepare retained earnings statement.

Moderate

40–50

Analyze transactions and compute net income.

Moderate

40–50

Analyze transactions and prepare income statement, retained earnings statement, and statement of financial position.

Moderate

50–60

Prepare income statement, retained earnings statement, and statement of financial position.

Moderate

50–60

Analyze transactions and prepare financial statements.

Moderate

40–50

Determine financial statement amounts and prepare retained earnings statement.

Moderate

40–50

WEYGANDT FINANCIAL ACCOUNTING, IFRS Version, 2e CHAPTER 1 ACCOUNTING IN ACTION Number

Difficulty

Time (min.)

BE1

Simple

2–4

BE2

Simple

3–5

BE3

Moderate

4–6

BE4

Moderate

4–6

BE5

Simple

2–4

BE6

Simple

2–4

BE7

Simple

2–4

BE8

Simple

2–4

BE9

Simple

1–2

BE10

Simple

3–5

BE11

Simple

2–4

DI1

1, 2, 4

Simple

2–4

DI2

Simple

2–4

DI3

Simple

6–8

DI4

Moderate

8–10

EX1

Moderate

5–7

EX2

Simple

6–8

EX3

Moderate

6–8

EX4

4, 5

Moderate

6–8

EX5

Simple

4–6

EX6

6, 7

Simple

6–8

EX7

6, 7

Simple

4–6

EX8

7, 8

Moderate

12–15

EX9

Simple

12–15

EX10

Moderate

8–10

EX11

6, 7

Moderate

6–8

EX12

Simple

8–10

EX13

Simple

8–10

EX14

Simple

10–12

EX15

Simple

6–8

EX16

Moderate

6–8

EX17

Moderate

8–10

1-3

ACCOUNTING IN ACTION (Continued) Number

Difficulty

Time (min.)

P1A

6, 7

Moderate

40–50

P2A

6–8

Moderate

50–60

P3A

Moderate

50–60

P4A

6–8

Moderate

40–50

P5A

7, 8

Moderate

40–50

P1B

6, 7

Moderate

40–50

P2B

6–8

Moderate

50–60

P3B

Moderate

50–60

P4B

6–8

Moderate

40–50

P5B

7, 8

Moderate

40–50

BYP1

Simple

10–15

BYP2

AN, E

Simple

10–15

BYP3

Simple

15–20

BYP4

Moderate

15–20

BYP5

Simple

12–15

BYP6

Simple

10–12

1-4

Learning Objective

Knowledge Comprehension

1. Explain what accounting is.

DI1-1

Q1-1 Q1-2

Q1-5 E1-1

2. Identify the users and uses of accounting.

DI1-1

Q1-3 Q1-4

E1-2

3. Understand why ethics is a fundamental business concept.

Application

Analysis

Synthesis

Evaluation

E1-3

4. Explain accounting standards and the measurement principles.

DI1-1

Q1-6 E1-4

5. Explain the monetary unit assumption and the economic entity assumption.

Q1-7 Q1-8 Q1-9 Q1-10

E1-4

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

Q1-11 Q1-12 Q1-13 DI1-2 BE1-5

Q1-11 Q1-14 BE1-8 BE1-9 E1-5

E1-6 E1-7

Q1-22 BE1-1 BE1-2 BE1-3 BE1-4 E1-11

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

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

Q1-15 Q1-16 BE1-6 BE1-7

E1-6 E1-7

DI1-3 E1-8 E1-11 P1-1A P1-2A

P1-4A P1-5A P1-1B P1-2B P1-4B P1-5B

8. Understand the four financial statements and how they are prepared.

Q1-17 Q1-18 Q1-19 Q1-20 BE1-11

Q1-21 BE1-10 DI1-4 E1-8 E1-9 E1-10 E1-12 E1-14 E1-15 E1-16

E1-17 P1-2A P1-3A P1-4A P1-5A P1-2B P1-3B P1-4B P1-5B

Broadening Your Perspective

Real–World Focus

E1-13

Financial Reporting Comparative Analysis

1-5

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

BLOOM’ S TAXONOMY TABLE

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

ANSWERS TO QUESTIONS 1.

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

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

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

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

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

Jackie Remmers Travel Agency should report the land at $85,000 on its December 31, 2014 statement of financial position. This is true not only at the time the land is purchased, but also over the time the land is held. In determining which measurement principle to use (cost or fair value) companies weigh the factual nature of cost figures versus the relevance of fair value. In general, companies use cost. Only in situations where assets are actively traded do companies apply the fair value principle extensively. An important concept that accountants follow is the historical cost principle.

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

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

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

1-6

Questions Chapter 1 (Continued) 10.

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

11.

The basic accounting equation is Assets = Liabilities + Equity.

12.

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

13.

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

14.

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

15.

Business transactions are the economic events of the enterprise recorded by accountants because they affect the basic equation. (a) No, the death of the president of the company is not a business transaction as it does not affect the basic equation. (b) Yes, supplies purchased on account is a business transaction as it affects the basic equation. (c) No, an employee being fired is not a business transaction as it does not affect the basic equation.

16.

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

17.

(a) Income statement. (b) Statement of financial position. (c) Income statement.

18.

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

19.

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

Decrease assets and decrease equity. Increase assets and decrease assets. Increase assets and increase equity. Decrease assets and decrease liabilities. (d) Statement of financial position. (e) Statement of financial position and retained earnings statement. (f) Statement of financial position.

1-7

Questions Chapter 1 (Continued) 20.

21.

22.

1-8

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

$198,000 158,000 $ 40,000

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

$198,000 158,000 40,000 13,000 $ 27,000

(a) Total revenues (£30,000 + £70,000) ................................................................

£100,000

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

£66,000

(c)

£100,000 66,000 £34,000

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

Nestle’s accounting equation (in millions of Swiss Francs) at December 31, 2010 was CHF111,641 = CHF49,043 + CHF62,598.

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1-1 (a) ¥90,000 – ¥50,000 = ¥40,000 (Equity). (b) ¥45,000 + ¥70,000 = ¥115,000 (Assets). (c) ¥94,000 – ¥60,000 = ¥34,000 (Liabilities). BRIEF EXERCISE 1-2 (a) $120,000 + $232,000 = $352,000 (Total assets). (b) $190,000 – $80,000 = $110,000 (Total liabilities). (c) $600,000 – 0.5($600,000) = $300,000 (Equity). BRIEF EXERCISE 1-3 (a) (€870,000 + €150,000) – (€500,000 – €80,000) = €600,000 (Equity). (b) (€500,000 + €100,000) + (€870,000 – €500,000 – €70,000) = €900,000 (Assets). (c) (€870,000 – €80,000) – (€870,000 – €500,000 + €120,000) = €300,000 (Liabilities). BRIEF EXERCISE 1-4 Equity Liabilities

Share + Capital— Ordinary

Retained Earnings + Revenues – Expenses – Dividends

+ £150,000 + £240,000

+ £450,000 – £320,000 –

£40,000

–

£7,000

Assets

(a)

X X X

= £90,000 = £90,000 = £330,000

(b)

£57,000 £57,000 X

= X + £23,000 = X + £31,000 = £26,000 (£57,000 – £31,000)

(c)

£600,000 = (£600,000 x 2/3) + X (Equity) £600,000 = £400,000 + X X = £200,000 .

+ £50,000

£35,000 –

1-9

BRIEF EXERCISE 1-5 A L A

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

A E L

(d) Supplies (e) Share Capital—Ordinary (f) Notes payable

BRIEF EXERCISE 1-6 Assets + + –

(a) (b) (c)

Liabilities + NE NE

Equity NE + –

Liabilities NE NE NE

Equity + – NE

BRIEF EXERCISE 1-7 Assets + – NE

(a) (b) (c)

BRIEF EXERCISE 1-8 E R E E

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

Advertising expense D Service revenue R Insurance expense E Salaries and wages expense

(e) Dividends (f) Rent revenue (g) Utilities expense

BRIEF EXERCISE 1-9 R NE E

1-10

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

BRIEF EXERCISE 1-10 GRANDE COMPANY Statement of Financial Position December 31, 2014 Assets Accounts receivable ..................................................................... Cash ............................................................................................... Total assets ............................................................................

$ 72,500 44,000 $116,500

Equity and Liabilities Equity Share capital—ordinary......................................................... Liabilities Accounts payable .................................................................. Total equity and liabilities .............................................

$ 31,500 85,000 $116,500

BRIEF EXERCISE 1-11 FP IS FP FP IS RE

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

Notes payable Advertising expense Share capital—ordinary Cash Service revenue Dividends SOLUTIONS FOR DO IT! REVIEW EXERCISES

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

False. The three steps in the accounting process are identification, recording, and communication. True. True. False. The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (FASB). True.

1-11

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

Dividends is dividends (D); it decreases equity. Rent Revenue is revenue (R); it increases equity. Advertising Expense is an expense (E); it decreases equity. When shareholders pay cash into the business, they receive shares (I); it increases equity.

DO IT! 1-3 Assets Cash (1) (2) +R23,000 (3) (4) – R5,000

= Liabilities +

Accounts Accounts + Receivable = Payable +

Equity Share Capital

+ R23,000 – R23,000

Retained Earnings Revenues – Expenses – Dividends + R23,000 – R2,000

+ R2,000

– R5,000

DO IT! 1-4 (a) The total assets are R$51,500, comprised of Cash R$9,000, Accounts Receivable R$13,500, and Equipment R$29,000. (b) Net income is R$21,700, computed as follows: Revenues Service revenue ................................................. R$54,000 Expenses Salaries and wages expense ............................ R$16,500 Rent expense ..................................................... 9,800 Advertising expense ......................................... 6,000 Total expenses .......................................... 32,300 Net income ................................................................ R$21,700

1-12

DO IT! 1-4 (Continued) (c) The ending equity balance of Rivera Company is R$23,500. By rewriting the accounting equation, we can compute Equity as Assets minus Liabilities, as follows: Total assets [as computed in (a)] ............................. R$51,500 Less: Liabilities Notes payable ..................................................... R$25,000 Accounts payable .............................................. 3,000 28,000 Equity ......................................................................... R$23,500 Note that it is not possible to determine the company’s equity in any other way, because the beginning balance for equity is not provided.

1-13

SOLUTIONS TO EXERCISES EXERCISE 1-1 C R C R R C C I R

Analyzing and interpreting information. Classifying economic events. Explaining uses, meaning, and limitations of data. Keeping a systematic chronological diary of events. Measuring events in monetary units. Preparing accounting reports. Reporting information in a standard format. Selecting economic activities relevant to the company. Summarizing economic events.

EXERCISE 1-2 (a)

Internal users Marketing manager Production supervisor Store manager Vice-president of finance External users Customers Labor unions Securities regulator Suppliers Taxing agency

(b)

1-14

I E I E I I E

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

EXERCISE 1-3 Leon Manternach, president of Manternach Company, instructed Carla Ruden, the head of the accounting department, to report the company’s land in their accounting reports at its fair value of $170,000 instead of its cost of $100,000, in an effort to make the company appear to be a better investment. Although we have an accounting system that permits various measurement approaches is cost should be used whenever there are questions regarding the reliability of a fair value. In this case, valuation of land is too subjective and therefore the cost principle should be used. The stakeholders include shareholders and creditors of Manternach Company, potential shareholders and creditors, other users of Manternach accounting reports, Leon Manternach, and Carla Ruden. All users of Manternach’s accounting reports could be harmed by relying on information that is misleading. Leon Manternach could benefit if the company is able to attract more investors, but would be harmed if the misleading reporting is discovered. Similarly, Carla Ruden could benefit by pleasing her boss, but would be harmed if the misleading reporting is discovered. In general, even though IFRS allows companies to revalue property, plant, and equipment and other long-held assets to fair value, most companies choose to use cost. Only in situations where assets are actually traded, such as investment securities, do companies apply the fair value principle extensively. Carla’s alternatives are to report the land at $100,000 or to report it at $170,000. Reporting the land at $170,000 is not appropriate because Leon thinks it is “probably worth” that amount and it would mislead many people who rely on Manternach’s accounting reports to make financial decisions. Carla’s should report the land at its cost of $100,000. She should try to convince Leon Manternach that this is the appropriate course of action, but be prepared to resign her position if Manternach insists. EXERCISE 1-4 1.

Correct. The fair value principle allows companies to revalue property, plant and equipment to fair value. However, most companies choose not to instead, due to reliability concerns about valuation, and negative effects on net income, most companies report property, plant and equipment at cost.

1-15

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

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

1-16

EXERCISE 1-5 Asset Cash Equipment Supplies Accounts receivable

Liability Accounts payable Notes payable Salaries and wages payable

Equity Share Capital— Ordinary

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

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

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

5. 6. 7. 8.

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

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

Shareholders invested $15,000 cash in the business. Purchased equipment for $5,000, paying $2,000 in cash and the balance of $3,000 on account. Paid $750 cash for supplies. Earned $9,100 in revenue, receiving $4,600 cash and $4,500 on account. Paid $1,500 cash on accounts payable.

1-17

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

Paid $2,000 cash dividends to shareholders. Paid $650 cash for rent. Collected $450 cash from clients on account. Paid salaries and wages of $3,900. Incurred $500 of utilities expense on account.

(b) Investment ............................................................................... Service revenue ...................................................................... Dividends ................................................................................ Rent expense .......................................................................... Salaries and wages expense .................................................. Utilities expense ..................................................................... Increase in equity....................................................................

$15,000 9,100 (2,000) (650) (3,900) (500) $17,050

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

$9,100 (650) (3,900) (500) $4,050

EXERCISE 1-9 J. L. KANG & CO. Income Statement For the Month Ended August 31, 2014 Revenues Service revenue ........................................................ Expenses Salaries and wages expense .................................... Rent expense ............................................................ Utilities expense ....................................................... Total expenses .................................................. Net income ........................................................................

1-18

$9,100 $3,900 650 500 5,050 $4,050

EXERCISE 1-9 (Continued) J. L. KANG & CO. Retained Earnings Statement For the Month Ended August 31, 2014 Retained earnings, August 1 .......................................... Add: Net income ...........................................................

0 4,050 4,050 2,000 $ 2,050

Less: Dividends.............................................................. Retained earnings, August 31 ............................. J.L. KANG & CO. Statement of Financial Position August 31, 2014 Assets Equipment........................................................................ Supplies ........................................................................... Accounts receivable ....................................................... Cash ................................................................................. Total assets ..............................................................

$ 5,000 750 4,050 9,250 $19,050

Equity and Liabilities Equity Share capital—ordinary........................................... Retained earnings.................................................... Liabilities Accounts payable .................................................... Total equity and liabilities .................................

$15,000 2,050

$17,050 2,000 $19,050

EXERCISE 1-10 (a) Equity—12/31/13 ($400,000 – $260,000) ................................ Equity—1/1/13 ........................................................................ Increase in equity .................................................................. Add: Dividends .................................................................... Net income for 2013 ...............................................................

$140,000 100,000 40,000 15,000 $ 55,000

1-19

EXERCISE 1-10 (Continued) (b) Equity—12/31/14 ($480,000 – $300,000) .............................. Equity—1/1/14—see (a) ....................................................... Increase in equity................................................................. Less: Additional investment .............................................. Net loss for 2014 ..................................................................

$180,000 140,000 40,000 50,000 $(10,000)

(c) Equity—12/31/15 ($590,000 – $400,000) .............................. Equity—1/1/15—see (b) ....................................................... Increase in equity ................................................................ Less: Additional investment ..............................................

$190,000 180,000 10,000 15,000 (5,000) 30,000 $ 25,000

Add: Dividends .................................................................. Net income for 2015 .............................................................

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

£ 97,000 85,000 £ 12,000

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

£ 40,000 12,000 £ 28,000

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

£215,000 175,000 £ 40,000

Increase in equity............................................ Less: Net income ........................................... Add: Dividends ............................................. Additional investment ....................................

£ 28,000 £(40,000) 24,000)

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

1-20

(16,000) £ 12,000 £129,000 75,000 £ 54,000

EXERCISE 1-11 (Continued) (d) Total equity (end of year) .................................................... Total equity (beginning of year).......................................... Increase in equity ................................................................

£130,000 75,000 £ 55,000

£100,000 55,000 £ 45,000

Increase in equity ........................................... Less: Net income ........................................... Additional investment ......................... Dividends ........................................................

£ 55,000 £(45,000) (25,000)

(70,000) £ 15,000

EXERCISE 1-12 KAREN WEIGEL CO. Income Statement For the Year Ended December 31, 2014 Revenues Service revenue .................................................... Expenses Salaries and wages expense ............................... Rent expense ........................................................ Utilities expense ................................................... Advertising expense ............................................. Total expenses .............................................. Net income ....................................................................

$62,500 $28,000 10,400 3,100 1,800 43,300 $19,200

KAREN WEIGEL CO. Retained Earnings Statement For the Year Ended December 31, 2014 Retained earnings, January 1 ......................................................... Add: Net income ........................................................................... Less: Dividends .............................................................................. Retained earnings, December 31 ...................................................

$48,000 19,200 67,200 5,000 $62,200

1-21

EXERCISE 1-13 SANCULI COMPANY Statement of Financial Position December 31, 2014 Assets Equipment ........................................................................ Supplies ........................................................................... Accounts receivable........................................................ Cash ................................................................................. Total assets ..............................................................

€48,000 8,000 8,500 14,000 €78,500

Equity and Liabilities Equity Share capital—ordinary ........................................... Retained earnings (€17,500 – €9,000) ..................... Liabilities Accounts payable .................................................... Total equity and liabilities................................

€50,000 8,500

€58,500 20,000 €78,500

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

BEAR PARK Statement of Financial Position December 31, 2014 Assets Equipment .............................................................................. Supplies .................................................................................. Cash ........................................................................................ Total assets ....................................................................

1-22

$140,000 47,000 187,000 150,000 $ 37,000

$105,500 2,500 20,000 $128,000

EXERCISE 1-14 (Continued) BEAR PARK Statement of Financial Position (Continued) December 31, 2014 Equity and Liabilities Equity Share capital—ordinary .................................. Retained earnings ........................................... Total equity .............................................. Liabilities Notes payable .................................................. Accounts payable ........................................... Total liabilities.......................................... Total equity and liabilities .......................................

$20,000 37,000 $ 57,000 60,000 11,000 71,000 $128,000

EXERCISE 1-15 DELGADO CRUISE COMPANY Income Statement For the Year Ended December 31, 2014 Revenues Ticket revenue .................................................. Expenses Salaries and wages expense ........................... R$142,000 Maintenance and repairs expense................... 97,000 Utilities expense ............................................... 10,000 Advertising expense ......................................... 3,500 Total expenses .......................................... Net income ................................................................

R$335,000

252,500 R$ 82,500

1-23

EXERCISE 1-16 WILLIAMS AND DOUGLAS, ATTORNEYS AT LAW Retained Earnings Statement For the Year Ended December 31, 2014 Retained earnings, January 1 ................................................ Add: Net income ................................................................... Less: Dividends ..................................................................... Retained earnings, December 31 ..........................................

$ 23,000 129,000* 152,000 64,000 $ 88,000

*Legal service revenue ........................................................... Total expenses ....................................................................... Net income ..............................................................................

$340,000 211,000 $129,000

EXERCISE 1-17 JAVA COMPANY Statement of Cash Flows For the Year Ended December 31, 2014 (Amounts in thousands) Cash flows from operating activities Cash receipts from revenues .......................... Cash payments for expenses ......................... Net cash provided by operating activities Cash flows from investing activities Purchase of equipment ................................... Cash flows from financing activities ...................... Sale of ordinary shares ................................... Payment of cash dividends ............................. Net increase in cash ................................................ Cash at the beginning of the period ....................... Cash at the end of the period .................................

1-24

Rp600,000 (430,000) 170,000 (100,000) Rp280,000 (20,000)

260,000 330,000 30,000 Rp360,000

KINNEY’S REPAIR LTD.

(a)

Cash

Accounts Accounts + Receivable + Supplies + Equipment = Payable +

1. +£10,000

+£10,000 +

+ 10,000

3. +

–400

4,600

4. +

–500

4,100

+£5,000 +

+ 500 +

+ 5,000

+0000

+00,000

+ 500 +

+ 5,000

+0000

+00,000

+ 500 +

+ 5,000

+0000

+00,000

+ 500 +

+ 5,000

+0000

+00,000

+ 500 +

+ 5,000

+0000

+00,000

+ 500 +

+ 5,000

+0250

10,000 +

5,680

–1,790

+£500 +

+£5,000

+£250

£10,000 +

£5,680 –

£1,790

9. +

–140

6,660

10. +000,000

+£980

6,660 +

+ 980

+120

+–120

+£ 6,780 +

+£860

11. –

1-25

£13,140

(a)

–400

10,000 +

+00,000

8. + –1,000 6,800

+0000

7,800

+ 5,000

8,800

+ 5,000

+ 500 +

4,100

–£400

+00,000

–1,000

+ 0010,000 +

+£500

–+4,700 +

+00,000

5. +000,000 +

+ 5,000

+000,

+ =

–400

10,000000 +

–250

+£250 =

+ 250

+£4,700

+ 250

+ 00010,000 +

+0000

+ 250

–650

+ 00010,000000 +

+0000

10,000 +

4,700

+ 250

4,700

+0250

–650 –650

10,000 +

4,700

(e)

–1,650

–1,000

–140 +

10,000 +

+0000

4,700

(f)

–1,790

–1,000

+980

£13,140

(d)

–1,000

+0000 =

(b)

(g) –1,000 –

£1,000

PROBLEM 1-1A

5,000

0010,000

SOLUTIONS TO PROBLEMS

2. + –5,000 +

Equity Retained Earnings + Revenues – Expenses – Dividends

Share Capital

PROBLEM 1-1A (Continued) Key to Retained Earnings Column (a) Rent expense (b) Advertising expense (c) Service revenue (d) Dividends (e) Salaries and wages expense (f) Utilities expense (g) Service revenue (b) Service revenue(£4,700 + £980) ............................ Expenses Salaries and wages ........................................ Rent ................................................................. Advertising ..................................................... Utilities ............................................................ Net income ..............................................

1-26

£5,680 £1,000 400 250 140

1,790 £3,890

1-26

(a)

DONAHUE VETERINARY CLINIC

Cash

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

Bal.

$ 9,000 +

$1,700

–2,900

00,000

6,100 +

1,700

+1,300

–1,300

7,400 +

400

–800

00,000

6,600 +

400

+2,500 9,100 +

5,200

–400

00,000

8,700 +

5,200

$600

0000 +

600

+4,800

600

700

6,000

8,100

$700

0 +

13,000

700

13,000

700

13,000

700

+1,300 =

2,000 00,000

2,000

000,000 +

00,000

000,000

0000 +

6,000

+ $13,000

–2,900

+2,100

0000 +

$3,600

000,000

0000 +

000,000

0000 +

$ 6,000

Retained + Earnings + Revenues – Expenses – Dividends

+$7,300 +

13,000

700

7,300 –$400

00,000 =

2,000

13,000

700

–400

7,300 –$1,700 –900

–2,800

00,000

5,900 +

5,200

000,000

+10,000

5,900 +

$15,900 +

0000 +

00,000 5,200

600

000,000 +

0000 +

600

8,100

2,000

000,000 +

8,100

–200

00,000 =

13,000

700

–2,800

7,300

–170

+170 =

2,170

–400

13,000

700

+ $13,000

$700

7,300

–2,970

–400

$ 2,970 –

$400

+$10,000 $5,200

$600

$29,800

$ 8,100

= +$10,000 + $2,170

$29,800

$7,300

–

PROBLEM 1-2A

Share Capital

1-27

PROBLEM 1-2A (Continued) (b)

DONAHUE VETERINARY CLINIC Income Statement For the Month Ended September 30, 2014 Revenues Service revenue ................................................. Expenses Salaries and wages expense ............................ Rent expense ..................................................... Advertising expense ......................................... Utilities expense ................................................ Total expenses ........................................... Net income ................................................................

$7,300 $1,700 900 200 170 2,970 $4,330

DONAHUE VETERINARY CLINIC Retained Earnings Statement For the Month Ended September 30, 2014 Retained earnings, September 1............................................ Add: Net income ................................................................... Less: Dividends ..................................................................... Retained earnings, September 30..........................................

1-28

$ 700 4,330 5,030 400 $4,630

PROBLEM 1-2A (Continued) DONAHUE VETERINARY CLINIC Statement of Financial Position September 30, 2014 Assets Equipment ................................................................... Supplies ...................................................................... Accounts receivable ................................................... Cash............................................................................. Total assets .........................................................

$ 8,100 600 5,200 15,900 $29,800

Equity and Liabilities Equity Share capital—ordinary ...................................... $13,000 Retained earnings ............................................... 4,630 Total equity .................................................. $17,630 Liabilities Notes payable ...................................................... 10,000 Accounts payable ............................................... 2,170 Total liabilities.............................................. 12,170 Total equity and liabilities ......................................... $29,800

1-29

PROBLEM 1-3A

(a)

PARK FLYING SCHOOL Income Statement (in thousands) For the Month Ended May 31, 2014 Revenues Service revenue ........................................... Expenses Gasoline expense ........................................ Rent expense ............................................... Advertising expense ................................... Utilities expense .......................................... Maintenance and repairs expense ............. Total expenses ..................................... Net income ..........................................................

W6,800 W2,500 1,200 500 400 400 5,000 W 1,800

PARK FLYING SCHOOL Retained Earnings Statement (in thousands) For the Month Ended May 31, 2014 Retained Earnings, May 1................................... Add: Net income ............................................... Less: Dividends ................................................. Retained earnings, May 31 .................................

0 1,800 1,800 500 W 1,300

PARK FLYING SCHOOL Statement of Financial Position (in thousands) May 31, 2014 Assets Equipment ............................................................................... Accounts receivable ............................................................... Cash ......................................................................................... Total assets .....................................................................

1-30

W64,000 7,200 4,500 W 75,700

PROBLEM 1-3A (Continued) PARK FLYING SCHOOL Statement of Financial Position (Continued) May 31, 2014 Equity and Liabilities Equity Share capital—ordinary .................................. Retained earnings ........................................... Total equity .............................................. Liabilities ................................................................. Notes payable .................................................. Accounts payable ........................................... Total liabilities.......................................... Total equity and liabilities ...................................... (b)

W45,000 1,300 W46,300 W28,000 1,400 29,400 W75,700

PARK FLYING SCHOOL Income Statement (in thousands) For the Month Ended May 31, 2014 Revenues Service revenue (W6,800 + W900) ............... Expenses Gasoline expense (W2,500 + W1,500) ......... Rent expense ................................................ Advertising expense .................................... Utilities expense ........................................... Maintenance and repairs expense .............. Total expenses...................................... Net income ...........................................................

W7,700 W4,000 1,200 500 400 400 6,500 W1,200

PARK FLYING SCHOOL Retained Earnings Statement (in thousands) For the Month Ended May 31, 2014 Retained Earnings, May 1 ................................... Add: Net income ................................................ Less: Dividends .................................................. Retained Earnings, May 31 .................................

0 1,200 1,200 500 W 700

1-31

1-32

(a)

STINER DELIVERIES

Assets

Accounts Date

Cash

June 1

$10,000

+ Receivable + Supplies + Equipment =

Accounts

Payable + Payable +

+$14,000

8,000 +

7,500 +

June 5

+$12,000

14,000

12,000 +

10,000

+14,000

12,000 +

10,000 +

$4,800

+0014,000

12,000 +

10,000 +

4,800

–500

+ 14,000

12,000 +

10,000 +

4,800 –

–500

–

–300

10,000 +

4,800 –

–500

–

–300

10,000 +

4,800 –

–500

–

–300

4,800 –

–600

–

–300

+$4,800 4,800

7,2000+

4,800

7,200 +

4,800

150

14,000

12,000 +

+$150 –1,250

+ 150 +00

8,450 +

3,550

150

14,000

12,000 +

+ 150

+ 8,450 +

3,550

150

14,000

12,000 +

+ 250

10,000 +

3,550

150

+14,000

12,000 +

+ 250

10,000 +

6,300 –

–600

–

–300

3,550

150

14,000

11,500 +

+0250

10,000 +

6,300 –

–600

–

–300

3,550

150

14,000

11,500 +

10,000 +

6,300 –

–850

–

–300

3,550

150

14,000

11,500 +

150

10,000 +

6,300 –

–850

–

–300

–

–1,000

$3,550

$150

$14,000

= $ 11,500 +

$150

$10,000 +

$6,300 –

$1,850

–

$300

–100

+100

9,950 +

–500

June 23 +

9,450 +

1,500

–250

+0250

(f)

–100

–1,000 $ 8,100 +

(e)

–100 9,100 +

(d)

–500

–250 9,200 +

(c)

+$150

June 20 + +1,500

1-32

(b) –$300

+050

June 17

June 30

(a)

–500

–300

June 15 + +1,250

June 29

+ Revenues – Expenses – Dividends

–$ 500

June 12

June 26+

Capital

(g)

PROBLEM 1-4A

7,500 +

–

Retained Earnings

–500

June 9 +

Equity Share

+$10,000

June 2 + –2,000 June 3 +

Liabilities Notes

PROBLEM 1-4A (Continued) Key to Retained Earnings Column (a) Rent expense (b) Service revenue (c) Dividends (d) Gasoline expense (b)

(e) (f) (g)

Service revenue Utilities expense Salaries and wages expense

STINER DELIVERIES Income Statement For the Month Ended June 30, 2014 Revenues Service revenue ($4,800 + $1,500)..................... Expenses Salaries and wages expense ............................. Rent expense ...................................................... Utilities expense ................................................. Gasoline expense............................................... Total expenses............................................ Net income .................................................................

(c)

$6,300 $1,000 500 250 100 1,850 $4,450

STINER DELIVERIES Statement of Financial Position June 30, 2014 Assets Equipment .................................................................. Supplies ..................................................................... Accounts receivable .................................................. Cash............................................................................ Total assets ........................................................

$14,000 150 3,550 8,100 $25,800

Equity and Liabilities Equity Share capital—ordinary ..................................... $10,000 Retained earnings ($4,450 – $300) .................... 4,150 Total equity ................................................. Liabilities Notes payable ..................................................... 11,500 Accounts payable .............................................. 150 Total liabilities............................................. Total equity and liabilities ...................................................... .

$14,150

11,650 $25,800 1-33

PROBLEM 1-5A

(a)

(b)

Crosby Company (a) $ 25,000 (b) 95,000 (c) 5,000

Stills Company (d) $50,000 (e) 62,000 (f) 48,000

Nash Company (g) $120,000 (h) 70,000 (i) 431,000

Young Company (j) $ 50,000 (k) 220,000 (l) 465,000

STILLS COMPANY Retained Earnings Statement For the Year Ended December 31, 2014 Retained earnings, January 1............................ Add: Net income .............................................. Less: Dividends ................................................ Retained earnings, December 31 ......................

$20,000 35,000 55,000 48,000 $ 7,000

(c) The sequence of preparing financial statements is income statement, retained earnings statement, and statement of financial position. The interrelationship of the retained earnings statement to the other financial statements results from the fact that net income from the income statement is reported in the retained earnings statement and ending retained earnings reported in the retained earnings statement is the amount reported for retained earnings on the statement of financial position.

1-34

(a)

HOLIDAY TRAVEL AGENCY

Cash

Accounts Accounts + Receivable + Supplies + Equipment = Payable +

+€2,500 + 2,500 +00,000 + 2,500 +00,000 + 2,500 +00,000 + 2,500 +00,000 + 2,500 +00,000 + 2,500 +00,000 + 2,500

+€2,500

+ + + +€6,500 + 6,500 + 0,000 + 6,500 + 0,000 + 6,500 + 0,000 + 6,500 –5,700 + €800

+ + + + +

+€600 + 600 +0000 + 600 +0000 + 600 +0000 + 600 +0000 + 600 + +€600

€15,400

+ + + +

+€10,000 10,000

10,000

– –

€ 400 400

– – –

400 300 700

–

700

–

700

(a)

= = = = =

+€300 + 300 +0000 + 300 +0000 + 300 +0000 + 300 +–300 + 0 +0000

+ +000,000 +

10,000

+ +

10,000

–

700

10,000

+ 8,500 +000,000 + + 8,500

10,000

– – –

€10,000

–

= =

+ +€

(b)

–€8,500 + 8,500

+ 8,500 + +€8,500 €15,400

€200 200

700 2,200 2,900

–

200

–

200

€2,900

–

€200

(d)

(e)

PROBLEM 1-1B

1. +€10,000 + 10,000 2. + –400 + 9,600 3. + –2,500 + 7,100 4. +000,000 + 7,100 5. + –600 + 6,500 6. – +2,000 + 8,500 + 7. + –200 + 8,300 + 8. + –300 + 8,000 + 9. + –2,200 + 5,800 + 10. – +5,700 +€11,500 +

Share Capital

Equity Retained Earnings + Revenues – Expenses – Dividends

1-35

PROBLEM 1-1B (Continued) Key to Retained Earnings Column (a) Rent Expense (b) Advertising Expense (c) Service Revenue

(d) Dividends (e) Salaries and Wages Expense

(b) Service revenue ....................................................................... Expenses Salaries and wages ....................................... €2,200 Rent ................................................................. 400 Advertising ..................................................... 300 Net income ..............................................

1-36

€8,500

2,900 €5,600

(a)

MANDY ARNOLD, ATTORNEY AT LAW Accounts Notes Accounts Share Retained Cash + Receivable + Supplies + Equipment = Payable + Payable + Capital + Earnings + Revenues – Expenses – Dividends

Bal.

$4,000 +

$1,500

+1,400

–1,400

–2,700

5,400 +

100

100 +4,900

5,700 +

5,000

–400

00,000

5,300 +

5,000

–4,250

500

5,000

6,000

$6,000

4,200

1,500

$ 800 000,000

6,000

–2,700

800 000,000

6,000

800

6,000

800 +

00,000 =

1,500

+1,000 +

00,000

00,000 +

0000 +

$4,200

00,000

0000 +

00,000

0000 +

$5,000

+$7,900

+600 =

2,100

PROBLEM 1-2B

+3,000

$500 0000

00,000

2,700 + 3.

7,900

000,000 +

6,000

800 +

7,900 –$3,000 –900

00,000

0000

1,050 +

5,000

–450

00,000

+2,000

00,000

2,600 +

5,000

500

$2,600 +

$5,000

$500

600 +

5,000

500

00,000 +

0000 +

500

6,000

2,100

00,000 +

0000

6,000

–350

00,000 =

6,000

800 +

7,900

–

4,250 –$450

00,000 =

2,100

00,000

+$2,000

00,000

6,000

= + 2,000 +

2,100

+210

$6,000

= +$2,000 +

$2,310

$14,100

6,000

800 +

1-37

(a)

Service revenue

(d)

Advertising expense

(b)

Salaries expense

(e)

Dividends

(c)

Rent expense

(f)

Utilities expense

–

4,250

–

450

–

450

–

$450

6,000

800 +

7,900

–

4,250

$6,000

$ 800 +

$7,900

–

$4.460

–210

$14,100

Key to changes in Retained Earnings

7,900

000,000

PROBLEM 1-2B (Continued) (b)

MANDY ARNOLD, ATTORNEY AT LAW Income Statement For the Month Ended August 31, 2014 Revenues Service revenue ............................................. Expenses Salaries and wages expense ........................ Rent expense ................................................. Advertising expense ..................................... Utilities expense ............................................ Total expenses ....................................... Net income ............................................................

$7,900 $3,000 900 350 210 4,460 $3,440

MANDY ARNOLD, ATTORNEY AT LAW Retained Earnings Statement For the Month Ended August 31, 2014 Retained earnings, August 1 ................................ Add: Net income ................................................. Less: Dividends ................................................... Retained earnings, August 31 ..............................

1-38

$ 800 3,440 4,240 450 $3,790

PROBLEM 1-2B (Continued) MANDY ARNOLD, ATTORNEY AT LAW Statement of Financial Position August 31, 2014 Assets Equipment ................................................................. Supplies .................................................................... Accounts receivable ................................................. Cash........................................................................... Total assets .......................................................

$ 6,000 500 5,000 2,600 $14,100

Equity and Liabilities Equity Share capital—ordinary .................................... Retained earnings ............................................. Total equity ................................................ Liabilities Notes payable .................................................... Accounts payable ............................................. Total liabilities............................................ Total equity and liabilities .........................................

$6,000 3,790 $9,790 2,000 2,310 4,310 $14,100

1-39

PROBLEM 1-3B

(a)

ANGELIC COSMETICS CO. Income Statement (in thousands) For the Month Ended June 30, 2014 Revenues Service revenue ........................................... Expenses Rent expense ............................................... Gasoline expense ........................................ Advertising expense ................................... Utilities expense .......................................... Total expenses ..................................... Net income ..........................................................

¥5,500 ¥1,600 600 500 300 3,000 ¥2,500

ANGELIC COSMETICS CO. Retained Earnings Statement (in thousands) For the Month Ended June 30, 2014 Retained Earnings, June 1 ................................. Add: Net income ............................................... Less: Dividends ................................................. Retained Earnings, June 30 ...............................

0 2,500 2,500 900 ¥1,600

ANGELIC COSMETICS CO. Statement of Financial Position June 30, 2014 Assets Equipment ............................................................................... Supplies ................................................................................... Accounts receivable ............................................................... Cash ......................................................................................... Total assets .....................................................................

1-40

¥25,000 2,000 4,000 10,000 ¥41,000

PROBLEM 1-3B (Continued) ANGELIC COSMETICS CO. Statement of Financial Position (Continued) June 30, 2014 Equity and Liabilities Equity Share capital—ordinary .................................... Retained earnings ............................................. Total equity ................................................ Liabilities Notes payable .................................................... Accounts payable ............................................. Total liabilities............................................ Total equity and liabilities .........................................

(b)

¥25,000 1,600 ¥26,600 13,000 1,400 14,400 ¥41,000

ANGELIC COSMETICS CO. Income Statement (in thousands) For the Month Ended June 30, 2014 Revenues Service revenue (¥5,500 + ¥800) ................. Expenses Rent expense................................................ Gasoline expense (¥600 + ¥100) ................. Advertising expense .................................... Utilities expense ........................................... Total expenses...................................... Net income ...........................................................

¥6,300 ¥1,600 700 500 300 3,100 ¥3,200

ANGELIC COSMETICS CO. Retained Earnings Statement (in thousands) For the Month Ended June 30, 2014 Retained earnings, June 1 .................................. Add: Net income ................................................ Less: Dividends .................................................. Retained earnings, June 30 ................................ .

0 3,200 3,200 900 ¥2,300 1-41

1-42

(a)

PAULIS CONSULTING

Assets

Accounts Date

Cash

May 1

+$ 8,000

Notes

Accounts

+ Receivable + Supplies + Equipment = Payable + Payable

Equity Share

Retained Earnings

Capital

+ Revenues – Expenses – Dividends

+$8,000

8,000

–800

May 2

–$ 800

7,200

May 3 7,200 +

500

8,000 +

800 –50

7,150 +

500

+3,000

+050

10,150 +

500

800

500

–

8,000

850

+$3,000 =

500

8,000 +

3,000

850

–700

May 12

–$700

9,450 + May 15

500

8,000 +

+$3,300 9,450 +

3,300

3,000

7,350 +

3,300

May 20

–500 6,850 +

3,300

May 23

+2,000

–2,000

8,850 +

1,300

+ May 26

500

8,000 +

6,300

(e) –

–2,100

700 (f)

6,300

–

2,950 –

700

8,000 +

6,300

–

2,950 –

700

–0–

8,000 +

6,300

–

2,950 –

700

–0–

8,000 +

6,300

–

2,950 –

700

8,000 +

6,300

–

2,950 –

700

+ +

500

+ +$5,000

1,300

500

5,000

1,300

500

2,300

+2,300 =

5,000

2,300

–150 $13,700 +

850 –

– 8,000 +

–0–

+$2,300 13,850 +

700

500

May 29 May 30

850 –

(d)

–500

+5,000 13,850 +

–

+3,300

–2,100

May 17

(b)

–150 $ 1,300

+ $500

$17,800

$2,300

$5,000 +

$2,300

$8,000 +

$6,300

$17,800

–

$3,100 –

(g) $700

PROBLEM 1-4B

(a)

+$ 500

–50

May 9

–

8,000 +

+$500

May 5

1-42

Liabilities

PROBLEM 1-4B (Continued) Key to Retained Earnings Column (a) (b) (c) (d) (b)

Rent Expense Advertising Expense Service Revenue Dividends

(e) Service Revenue (f) Salaries and Wages Expense (g) Utilities Expense

PAULIS CONSULTING Income Statement For the Month Ended May 31, 2014 Revenues Service revenue ($3,000 + $3,300)................ Expenses Salaries and wages expense ........................ Rent expense ................................................. Utilities expense ............................................ Advertising expense ..................................... Total expenses....................................... Net income ............................................................

(c)

$6,300 $2,100 800 150 50 3,100 $3,200

PAULIS CONSULTING Statement of Financial Position May 31, 2014 Assets Equipment ................................................................... Supplies ...................................................................... Accounts receivable ................................................... Cash............................................................................. Total assets .........................................................

$ 2,300 500 1,300 13,700 $17,800

Equity and Liabilities Equity Share capital—ordinary ...................................... Retained earnings ($3,200 – $700) ..................... Total equity .................................................. Liabilities Notes payable ...................................................... Accounts payable ............................................... Total liabilities.............................................. Total equity and liabilities.................................................. .

$8,000 2,500 $10,500 5,000 2,300 7,300 $17,800 1-43

PROBLEM 1-5B

(a)

(b)

John Company (a) $28,000 (b) 95,000 (c) 7,000

Paul Company (d) $40,000 (e) 38,000 (f) 10,000

George Company (g) $129,000 (h) 80,000 (i) 408,000

Ringo Company (j) $ 50,000 (k) 225,000 (l) 460,000

JOHN COMPANY Retained Earnings Statement For the Year Ended December 31, 2014 Retained earnings, January 1 ............................ Add: Net income ............................................... Less: Dividends ................................................. Retained earnings December 31 ........................

0 15,000 15,000 10,000 $ 5,000

1-44

CCC1

(a)

CONTINUING COOKIE CHRONICLE

Natalie has a choice between a sole proprietorship and a corporation. A partnership is not an option since she is the sole owner of the business. A proprietorship is the easiest to create and operate because there are no formal procedures involved in creating the proprietorship. However, if she operates the business as a proprietorship she will personally have unlimited liability for the debts of the business. Operating the business as a corporation would limit her liability to her investment in the business. Natalie will in all likelihood require the services of a lawyer to incorporate. Costs to incorporate as well as additional ongoing costs to administrate and operate the business as a corporation may be costly. My recommendation is that Natalie choose the corporate form of business organization. If she expands the business after graduation, she can raise additional capital by issuing more shares. In addition, she limits her liability to her investment in the business. If she decides to transfer ownership to another student, she can do so without dissolving the corporation.

(b) Yes, Natalie will need accounting information to help her operate her business. She will need information on her cash balance on a daily or weekly basis to help her determine if she can pay her bills. She will need to know the cost of her services so she can establish her prices. She will need to know revenue and expenses so she can report her net income for personal income tax purposes, on an annual basis. If she borrows money, she will need financial statements so lenders can assess the liquidity, solvency, and profitability of the business. Natalie would also find financial statements useful to better understand her business and identify any financial issues as early as possible. Monthly financial statements would be best because they are more timely, but they are also more work to prepare.

1-45

CCC1 (Continued) (c)

Assets: Cash, Accounts Receivable, Supplies, Equipment, Prepaid Insurance Liabilities: Accounts Payable, Unearned Service Revenue, Notes Payable Equity: Share Capital—Ordinary, Retained Earnings, Dividends Revenue: Service Revenue Expenses: Advertising Expense, Supplies Expense, Utilities Expense, Insurance Expense

(d) Natalie should have a separate bank account. This will make it easier to prepare financial statements for her business. The business is a separate entity from Natalie and must be accounted for separately.

1-46

BYP 1-1

FINANCIAL REPORTING PROBLEM

(a) Samsung’s total assets at December 31, 2010 were W 134,288,744 million and at December 31, 2009 were W 112,179,789 million. (b) Samsung had W 9,791,419 million of cash and cash equivalents at December 31, 2010. (c) Samsung had trade and other payables totaling W 16,049,800 million on December 31, 2010 and W 13,542,626 million on December 31, 2009. (d) Samsung reports revenues for 2009 of W 136,323,670 million and for 2010 of W 154,630,328 million. (e) From 2009 to 2010, Samsung’s net income increased W 6,385,975 million from W 9,760,550 million to W 16,146,525 million.

1-47

BYP 1-2

COMPARATIVE ANALYSIS PROBLEM

(a) 1. Total assets 2. Accounts (trade) receivable (net) 3. Net sales 4. Net income (profit) (b) Receivables as a percentage of total assets.

Nestlé (in millions) CHF 111,641 CHF 12,083

Zetar (in thousands) £ 93,062 £ 24,935

CHF 104,613 CHF 9,048

£ 134,998 £ 4,482

Nestlé 10.82%

Zetar 26.79%

8.65%

3.32%

Net income as a percentage of sales (revenue).

1-48

BYP 1-3

REAL–WORLD FOCUS

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

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

Auditing Medium Medium Medium High Medium Low Medium High

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

Management Accounting Medium Low High High High Medium Medium Very High

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

1-49

BYP 1-3 (Continued) Financial: Financial accountants prepare financial statements based on general ledgers and participate in important financial decisions involving mergers and acquisitions, benefits/ERISA planning, and long-term financial projections. This work can be varied over time. One day you may be running spreadsheets. The next day you may be visiting a customer or supplier to set up a new account and discuss business. This work requires a good understanding of both accounting and finance. Management Accounting: Management accountants work in companies and participate in decisions about capital budgeting and line of business analysis. Major functions include cost analysis, analysis of new contracts, and participation in efforts to control expenses efficiently. This work often involves the analysis of the structure of organizations. Is responsibility to spend money in a company at the right level of our organization? Are goals and objectives to control costs being communicated effectively? Historically, many management accountants have been derided as “bean counters.” This mentality has undergone major change as management accountants now often work side by side with marketing and finance to develop new business. Tax: Tax accountants prepare corporate and personal income tax statements and formulate tax strategies involving issues such as financial choice, how to best treat a merger or acquisition, deferral of taxes, when to expense items and the like. This work requires a thorough understanding of economics and the tax code. Increasingly, large corporations are looking for persons with both an accounting and a legal background in tax. A person, for example, with a JD and a CPA would be especially desirable to many firms. (e) Junior Staff Accountant

1-50

$46,000 – $63,000

BYP 1-4

DECISION–MAKING ACROSS THE ORGANIZATION

(a) The estimate of the $4,900 loss was based on the difference between the $20,000 invested in the driving range and the bank balance of $15,100 at March 31. This is not a valid basis for determining income because it only shows the change in cash between two points in time. (b) The statement of financial position at March 31 is as follows: CHIP-SHOT DRIVING RANGE COMPANY Statement of Financial Position March 31, 2014 Assets Building ....................................................................... Equipment ................................................................... Cash............................................................................. Total assets .........................................................

$ 6,000 800 15,100 $21,900

Equity and Liabilities Equity Share capital—ordinary ...................................... $20,000 Retained earnings ............................................... 1,650 Liabilities Accounts payable ($150 + $100) ........................ Total equity and liabilities ...........................

$21,650 250 $21,900

As shown in the statement of financial position, the equity at March 31 is $21,650. The estimate of $1,650 of net income is the difference between the initial investment of $20,000 and $21,650. This was not a valid basis for determining net income because changes in equity between two points in time may have been caused by factors unrelated to net income. For example, there may be dividends and/or additional capital investments by the shareholders.

1-51

BYP 1-4 (Continued) (c) Actual net income for March can be determined by adding dividends to the change in equity during the month as shown below: Equity, March 31, per statement of financial position .......... Equity, March 1 ....................................................................... Increase in equity.................................................................... Add: Dividends...................................................................... Net income ..............................................................................

$21,650 (20,000) 1,650 800 $ 2,450

Alternatively, net income can be found by determining the revenues earned [described in (d) below] and subtracting expenses. (d) Revenues earned can be determined by adding expenses incurred during the month to net income. March expenses were Rent, $1,000; Salaries and Wages, $400; Advertising, $750; and Utilities, $100 for a total of $2,250. Revenues earned, therefore, were $4,700 ($2,250 + $2,450). Alternatively, since all revenues are received in cash, revenues earned can be computed from an analysis of the changes in cash as follows: Beginning cash balance ........................................ Less: Cash payments Caddy shack ......................................... Golf balls and clubs.............................. Rent ....................................................... Advertising ............................................ Salaries and wages............................... Dividends .............................................. Cash balance before revenues ............................. Cash balance, March 31 ........................................ Revenues earned ...................................................

1-52

$20,000 $6,000 800 1,000 600 400 800

9,600 10,400 15,100 $ 4,700

BYP 1-5

To: From:

COMMUNICATION ACTIVITY

Erin Danielle Student

I have received the statement of financial position of Liverpool Company as of December 31, 2014. A number of items in this statement of financial position are not properly reported. They are: 1.

The statement of financial position should be dated as of a specific date, not for a period of time. Therefore, it should be dated “December 31, 2014.”

Cash should be reported after Supplies on the statement of financial position.

Accounts receivable should be shown as an asset, not a liability, and reported between Cash and Supplies on the statement of financial position.

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

Liabilities and equity should be shown on the statement of financial position. Share capital—ordinary is not a liability.

Share capital—ordinary and retained earnings are part of equity.

1-53

BYP 1-5 (Continued) A correct statement of financial position is as follows: LIVERPOOL COMPANY Statement of Financial Position December 31, 2014 Assets Equipment ............................................................... Supplies .................................................................. Accounts receivable............................................... Cash ........................................................................ Total assets .......................................................

£22,500 2,000 6,000 9,000 £39,500

Equity and Liabilities Equity Share capital—ordinary .................................. Retained earnings ........................................... Total liabilities ......................................... Liabilities Notes payable ................................................. Accounts payable ........................................... Total liabilities ......................................... Total equity and liabilities ......................................

1-54

£23,000 (2,000) £21,000 10,500 8,000 18,500 £39,500

BYP 1-6

ETHICS CASE

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

1-55

GAAP EXERCISES

GAAP 1-1 The International Accounting Standards Board, IASB, and the Financial Accounting Standards Board, FASB, are two key players in developing international accounting standards. The IASB releases international standards known as International Financial Reporting Standards (IFRS). The FASB releases U.S. standards, referred to a Generally Accepted Accounting Principles or GAAP. GAAP 1-2 Accounting standards have developed in different ways because the standard setters have responded to different user needs. In some countries, the primary users of financial statements are private investors; in others the primary users are taxing authorities or central government planners. GAAP 1-3 A single set of high-quality accounting standards is needed because of increases in multinational corporations, mergers and acquisitions, use of information technology, and international financial markets. GAAP 1-4 Currently the internal control standards applicable to Sarbanes-Oxley (SOX) apply only to large public companies listed on U.S. exchanges. If such standards were adopted by non-U.S. companies, users of statements would benefit from more uniform regulation and U.S. companies would be competing on a more “even” playing field. The disadvantage of adopting SOX would be the additional cost associated with its required internal control measures. 1-56

GAAP FINANCIAL REPORTING PROBLEM GAAP 1-5 * (Amounts in thousands) (a)

Tootsie Roll’s total assets at December 31, 2010 were $ 860,383; and at December 31, 2009 were $ 838,247.

(b)

Tootsie Roll had $ 115,976 in cash and cash equivalents at December 31, 2010.

(c)

Tootsie Roll had $ 9,791 in accounts payable at December 31, 2010; and $9,140 at December 31, 2009.

(d)

Total revenue in 2010 was $521,448; and $499,331 in 2009 for Tootsie Roll.

(e)

The amount of change in Tootsie Roll’s net income between 2009 and 2010 was ($164).

1-57

1-58

CHAPTER 2 The Recording Process ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Learning Objectives

Questions

Explain what an account is and how it helps in the recording process.

Define debits and credits and explain their use in recording business transactions.

2, 3, 4, 5, 6, 7, 8, 9, 14, 21

1, 2, 5

Identify the basic steps in the recording process.

10, 19

Explain what a journal is and how it helps in the recording process.

11, 12, 13, 14, 16

3, 6

Explain what a ledger is and how it helps in the recording process.

Explain what posting is and how it helps in the recording process.

15, 17

7, 8

Prepare a trial balance and explain its purposes.

18, 20

9, 10

Do It!

A Exercises Problems

B Problems

2, 4, 6, 7, 14

1A, 2A, 3A, 5A

1B, 2B, 3B, 5B

1A, 2A, 3A, 5A

1B, 2B, 3B, 5B

9, 12

2A, 3A, 5A

2B, 3B, 5B

11, 13, 14, 15

2A, 3A, 4A, 5A

2B, 3B, 4B, 5B

6, 7

3, 5, 6, 7 10, 11, 12

2-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

2-2

Description

Difficulty Level

Time Allotted (min.)

Journalize a series of transactions.

Simple

20–30

Journalize transactions, post, and prepare a trial balance.

Simple

30–40

Journalize and post transactions and prepare a trial balance.

Moderate

40–50

Prepare a correct trial balance.

Moderate

30–40

Journalize transactions, post, and prepare a trial balance.

Moderate

40–50

Journalize a series of transactions.

Simple

20–30

Journalize transactions, post, and prepare a trial balance.

Simple

30–40

Journalize transactions, post, and prepare a trial balance.

Moderate

40–50

Prepare a correct trial balance.

Moderate

30–40

Journalize transactions, post, and prepare a trial balance.

Moderate

40–50

WEYGANDT FINANCIAL ACCOUNTING, IFRS Version, 2e CHAPTER 2 THE RECORDING PROCESS Number

Difficulty

Time (min.)

BE1

Simple

6–8

BE2

Simple

4–6

BE3

Simple

4–6

BE4

Moderate

4–6

BE5

Simple

6–8

BE6

Simple

4–6

BE7

Simple

4–6

BE8

Simple

4–6

BE9

Simple

4–6

BE10

Moderate

6–8

DI1

Simple

3–5

DI2

Simple

3–5

DI3

Simple

2–4

DI4

Simple

6–8

EX1

Simple

2–4

EX2

Simple

10–15

EX3

Simple

8–10

EX4

Simple

6–8

EX5

Simple

6–8

EX6

2–4

Simple

6–8

EX7

2–4

Simple

8–10

EX8

Simple

2–4

EX9

6, 7

Simple

10–12

EX10

4, 7

Moderate

10–12

EX11

4, 7

Moderate

12–15

EX12

4, 6

Moderate

12–15

EX13

Moderate

6–8

EX14

2, 7

Simple

8–10

EX15

Simple

4–6

2-3

THE RECORDING PROCESS (Continued) Number

Difficulty

Time (min.)

P1A

2, 4

Simple

20–30

P2A

2, 4, 6, 7

Simple

30–40

P3A

2, 4, 6, 7

Moderate

40–50

P4A

Moderate

30–40

P5A

2, 4, 6, 7

Moderate

40–50

P1B

2, 4

Simple

20–30

P2B

2, 4, 6, 7

Simple

30–40

P3B

2, 4, 6, 7

Moderate

40–50

P4B

Moderate

30–40

P5B

2, 4, 6, 7

Moderate

40–50

BYP1

Simple

8–10

BYP2

2, 6

Simple

8–10

BYP3

—

Simple

15–20

BYP4

6, 7

AP, S

Moderate

20–30

BYP5

3, 6

Simple

10–15

BYP6

AN, E

Moderate

10–15

2-4

Learning Objective

Knowledge

Comprehension

Application

Analysis

Explain what an account is and how it helps in the recording process.

Define debits and credits and Q2–21 explain their use in recording business transactions.

Q2-2 Q2-3 Q2-4 Q2-5 Q2-6

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

Identify the basic steps in the recording process.

Q2-10

Q2-19 BE2-4

E2-6 E2-7

Explain what a journal is and how it helps in the recording process.

Q2-12

Q2-11 Q2-13 Q2-14

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

Explain what a ledger is and how it helps in the recording process.

E2-8

Q2-17

Explain what posting is and how it helps in the recording process.

Q2-15 Q2-17

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

Prepare a trial balance and explain its purposes.

Q2-18 E2-15

BE2-9 E2-11 P2-5A Q2-20 DI2-4 E2-14 P2-2B BE2-10 E2-9 P2-2A P2-3B E2-13 E2-10 P2-3A P2-5B P2-4A

Broadening Your Perspective

Synthesis

Evaluation

Q2-1 E2-1

Financial Reporting Decision–Making Across the Organization Real–World Focus

P2-4B

Comparative Analysis Communication Ethics Case Ethics Case Decision Making Across the Organization

BLOOM’ S TAXONOMY TABLE

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

2-5

ANSWERS TO QUESTIONS 1.

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

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

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

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

(a) Asset accounts are increased by debits and decreased by credits. (b) Liability accounts are decreased by debits and increased by credits. (c) Revenues, Share Capital—Ordinary, and Retained Earnings are increased by credits and decreased by debits. Expenses and Dividends are increased by debits and decreased by credits.

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

Accounts Receivable—debit balance. Cash—debit balance. Dividends—debit balance. Accounts Payable—credit balance. Service Revenue—credit balance. Salaries and Wages Expense—debit balance. Share Capital—Ordinary—credit balance.

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

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

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

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

10.

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

2-6

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

Questions Chapter 2 (Continued) 11.

The advantages of using a journal in the recording process are: (a) It discloses in one place the complete effects of a transaction. (b) It provides a chronological record of transactions. (c) It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared.

12.

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

13.

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

14.

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

15.

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

16.

(a) Cash ............................................................................................ Share Capital—Ordinary ...................................................... (Issued ordinary shares for cash)

9,000

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

800

(c)

17.

9,000

800

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

2,000

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

7,500

2,000

7,500

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

2-7

Questions Chapter 2 (Continued) 18.

A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting. A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements.

19.

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

20.

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

21.

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

2-8

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2-1

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

Accounts Payable Advertising Expense Service Revenue Accounts Receivable Share Capital—Ordinary Dividends

(a) Debit Effect Decrease Increase Decrease Increase Decrease Increase

(b) Credit Effect Increase Decrease Increase Decrease Increase Decrease

BRIEF EXERCISE 2-2

June 1 2 3 12

Account Debited Cash Equipment Rent Expense Accounts Receivable

Account Credited Share Capital—Ordinary Accounts Payable Cash Service Revenue

BRIEF EXERCISE 2-3 June 1 2 3 12

Cash...................................................................... Share Capital—Ordinary ..............................

4,000

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

900

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

800

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

300

4,000 900 800 300

2-9

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

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

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

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

BRIEF EXERCISE 2-5 (a) Aug.

2-10

Effect on Accounting Equation

(b)

Debit-Credit Analysis

1 The asset Cash is increased; the equity account Share Capital— Ordinary is increased.

Debits increase assets: debit Cash R$5,000. Credits increase equity: credit Share Capital—Ordinary R$5,000.

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

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

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

Debits increase assets: debit Cash R$1,100. Credits increase revenues: credit Service Revenue R$1,100.

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

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

BRIEF EXERCISE 2-6 Aug. 1 4 16 27

Cash ...................................................................... Share Capital—Ordinary ..............................

5,000

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

1,800

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

1,100

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

1,000

5,000 1,800 1,100 1,000

BRIEF EXERCISE 2-7 Cash 5/12 2,100 5/15 3,000 Ending Bal. 5,100

5/5

Accounts Receivable 5,000 5/12

Service Revenue 5/5 5,000 5/15 3,000 Ending Bal. 8,000

2,100

Ending Bal. 2,900

BRIEF EXERCISE 2-8 Cash Date May 12 15

Explanation

Ref. J1 J1

Debit 2,100 3,000

Credit

Balance 2,100 5,100

2-11

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

Ref. J1 J1

Debit 5,000

Service Revenue Date Explanation May 5 15

Ref. J1 J1

Debit

Credit 2,100

Balance 5,000 2,900

Credit 5,000 3,000

Balance 5,000 8,000

Debit $ 6,800 3,000 17,000

Credit

BRIEF EXERCISE 2-9 STARR COMPANY Trial Balance June 30, 2014 Cash ........................................................................... Accounts Receivable ................................................ Equipment .................................................................. Accounts Payable...................................................... Share Capital—Ordinary............................................ Dividends ................................................................... Service Revenue ........................................................ Salaries and Wages Expense ................................... Rent Expense.............................................................

2-12

$ 9,000 20,000 1,200 6,000 6,000 1,000 $35,000

$35,000

BRIEF EXERCISE 2-10 CHENG COMPANY Trial Balance December 31, 2014 Cash ............................................................................ Prepaid Insurance ...................................................... Accounts Payable ...................................................... Unearned Service Revenue ....................................... Share Capital—Ordinary ............................................ Dividends ................................................................... Service Revenue ........................................................ Salaries and Wages Expense.................................... Rent Expense .............................................................

Debit £16,800 3,500

Credit £ 3,000 4,200 13,000

4,500 25,600 18,600 2,400 £45,800

£45,800

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

Notes Payable (credit balance) Accounts Payable (credit balance) Share Capital—Ordinary (credit balance) Rent Expense (debit balance)

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

3. .

Cash .............................................................. Share Capital—Ordinary......................

8,000

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

1,600

8,000 400 1,200

No entry because no transaction has occurred. 2-13

DO IT! 2-3 Cash 4/1 1,600 4/16 600 4/3 3,700 4/20 500 4/30 4,200

DO IT! 2-4 CHILLIN’ COMPANY Trial Balance December 31, 2014 Debit Cash ........................................................................... R$ 6,000 Accounts Receivable ................................................ 8,000 Supplies ..................................................................... 5,000 Equipment .................................................................. 76,000 Notes Payable ............................................................ Accounts Payable...................................................... Salaries and Wages Payable .................................... Share Capital—Ordinary............................................ Dividends ................................................................... 8,000 Service Revenue ........................................................ Rent Expense............................................................. 2,000 Salaries and Wages Expense ................................... 38,000 R$143,000

2-14

Credit

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

SOLUTIONS TO EXERCISES EXERCISE 2-1 1.

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

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

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

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

True.

2-15

(a) Basic Type

(b) Specific Account

Effect

(d) Normal Balance

(a) Basic Type

(b) Specific Account

Effect

(d) Normal Balance

Asset

Cash

Increase

Debit

Equity

Share Capital— Ordinary

Increase

Credit

Asset

Equipment

Increase

Debit

Asset

Cash

Decrease

Debit

Asset

Supplies

Increase

Debit

Liability

Accounts Payable

Increase

Credit

Asset

Accounts Receivable

Increase

Debit

Equity

Service Revenue

Increase

Credit

Equity

Advertising Expense

Increase

Debit

Asset

Cash

Decrease

Debit

Asset

Cash

Increase

Debit

Asset

Accounts Receivable

Decrease

Debit

Liability

Accounts Payable

Decrease

Credit

Asset

Cash

Decrease

Debit

Equity

Dividends

Increase

Debit

Asset

Cash

Decrease

Debit

Date Jan.

Account Credited (c)

(c)

EXERCISE 2-2

2-16 Account Debited

EXERCISE 2-3 General Journal Account Titles and Explanation

Date Jan. 2

3 9 11 16 20 23 28

Ref.

Debit

Cash .................................................. Share Capital—Ordinary ...........

15,000

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

7,000

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

500

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

1,800

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

200

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

700

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

300

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

1,000

J1 Credit 15,000 7,000 500 1,800 200 700 300 1,000

EXERCISE 2-4 Oct. 1

Debits increase assets: debit Cash ¥200,000. Credits increase equity: credit Share Capital—Ordinary ¥200,000.

No transaction.

Debits increase assets: debit Equipment ¥19,000. Credits increase liabilities: credit Accounts Payable ¥19,000.

2-17

EXERCISE 2-4 (Continued) Oct. 6

Debits increase assets: debit Accounts Receivable ¥32,000. Credits increase revenues: credit Service Revenue ¥32,000.

Debits decrease liabilities: debit Accounts Payable ¥8,500. Credits decrease assets: credit Cash ¥8,500.

Debits increase expenses: debit Salaries and Wages Expense ¥25,000. Credits decrease assets: credit Cash ¥25,000.

EXERCISE 2-5

Date Oct. 1

Debit 200,000

No entry.

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

19,000

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

32,000

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

8,500

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

25,000

27 30

Credit 200,000

2-18

General Journal Account Titles Ref. Cash .................................................. Share Capital—Ordinary..........

19,000 32,000 8,500 25,000

EXERCISE 2-6 (a)

1. 2. 3.

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

(b)

Cash .................................................................. Notes Payable ........................................... Equipment ....................................................... Cash ........................................................... Supplies ............................................................ Accounts Payable .....................................

2. 3.

50,000 50,000 25,000 25,000 4,500 4,500

EXERCISE 2-7 (a)

(b)

Assets = Liabilities + Equity 1. + + 2. – – 3. + + 4. – – 1. 2. 3. 4.

(Issued shares) (Expense) (Revenue) (Dividends)

Cash .................................................................. Share Capital—Ordinary ........................... Rent Expense ................................................... Cash ........................................................... Accounts Receivable ....................................... Service Revenue ....................................... Dividends.......................................................... Cash ...........................................................

5,000 5,000 1,100 1,100 4,700 4,700 700 700

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

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

2-19

EXERCISE 2-9 (a)

Aug. 1 10 31 Bal.

Cash 5,000 Aug. 12 2,700 850 7,550

Accounts Receivable Aug. 25 1,600 Aug. 31 Bal. 750

Aug. 12 (b)

Notes Payable Aug. 12

1,000

Share Capital—Ordinary Aug. 1 5,000 850

Service Revenue Aug. 10 25 Bal.

Equipment 5,000

2,700 1,600 4,300

ROBERTA MENDEZ, INVESTMENT BROKER Trial Balance August 31, 2014 Cash ........................................................................ Accounts Receivable ............................................. Equipment .............................................................. Notes Payable ........................................................ Share Capital—Ordinary ........................................ Service Revenue ....................................................

Debit $ 7,550 750 5,000

$13,300

2-20

4,000

Credit

$ 4,000 5,000 4,300 $13,300

EXERCISE 2-10 (a) Date Apr. 1

General Journal Account Titles and Explanation Ref. Cash ..................................................... 101 Share Capital—Ordinary ................. 311 (Issued shares for cash)

Debit 10,000

Credit 10,000

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

101 400

900

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

726 101

720

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

201 101

1,500

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

101 112

400

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

101 209

1,000

900

720

1,500

400

1,000

2-21

EXERCISE 2-10 (Continued) (b)

PADRE LANDSCAPING COMPANY Trial Balance April 30, 2014 Cash .......................................................................... Accounts Receivable ............................................... Supplies .................................................................... Accounts Payable .................................................... Unearned Service Revenue ..................................... Share Capital—Ordinary .......................................... Service Revenue ...................................................... Salaries and Wages Expense ..................................

Debit $10,080 2,800 1,800

Credit

300 1,000 10,000 4,100

720 $15,400

$15,400

EXERCISE 2-11 (a) Oct. 1 Cash ............................................................. Share Capital—Ordinary ...................... (Issued shares for cash)

5,000

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

650

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

3,000

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

500

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

940

2-22

5,000

650

3,000

500

940

EXERCISE 2-11 (Continued) (b)

SPARKS CO. Trial Balance October 31, 2014 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Equipment .......................................................... Notes Payable..................................................... Accounts Payable .............................................. Share Capital—Ordinary .................................... Dividends ............................................................ Service Revenue ................................................ Salaries and Wages Expense ............................ Rent Expense .....................................................

Debit $ 8,170 1,240 400 2,000

Credit

$ 3,000 500 7,000 300 2,390 500 280 $12,890

$12,890

EXERCISE 2-12 (a) Date Sept. 1 5

25 30

General Journal Account Titles Cash .................................................. Share Capital—Ordinary ...........

Ref. 101 311

Debit 10,000

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

157 101 201

12,000

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

201 101

2,400

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

332 101

500

J1 Credit 10,000 4,000 8,000 2,400 500

2-23

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

Explanation

Equipment Date Explanation Sept. 5 Accounts Payable Date Explanation Sept. 5 25

Share Capital—Ordinary Date Explanation Sept. 1 Dividends Date Explanation Sept. 30

2-24

Ref. J1 J1 J1 J1

Debit 10,000

Credit 4,000 2,400 500

Ref. J1

Debit 12,000

Ref. J1 J1

Debit

Credit

No. 157 Balance 12,000

Credit 8,000

No. 201 Balance 8,000 5,600

2,400

Ref. J1

Debit

Ref. J1

Debit 500

No. 101 Balance 10,000 6,000 3,600 3,100

Credit 10,000

Credit

No. 311 Balance 10,000 No. 332 Balance 500

EXERCISE 2-13 Error 1. 2. 3. 4. 5. 6.

(a) In Balance No Yes Yes No Yes No

(b) Difference $400 — — 300 — 36

EXERCISE 2-14 TEMPUS FUGIT DELIVERY SERVICE Trial Balance July 31, 2014 Debit Cash (£90,907 – Debit total without Cash £69,340) .................................................................. Accounts Receivable ................................................. Prepaid Insurance ...................................................... Equipment .................................................................. Notes Payable ............................................................ Accounts Payable ...................................................... Salaries and Wages Payable ..................................... Share Capital—Ordinary ............................................ Retained Earnings ..................................................... Dividends ................................................................... Service Revenue ........................................................ Salaries and Wages Expense.................................... Maintenance and Repairs Expense .......................... Gasoline Expense ...................................................... Utilities Expense ........................................................

Credit

£21,567 10,642 1,968 49,360 £26,450 8,396 815 40,000 4,636 700 10,610 4,428 961 758 523 £90,907

£90,907

EXERCISE 2-15 Transactions 4, 5, and 7 are operating activities Transaction 3 is an investing activity Transactions 1, 2 and 6 are financing activities. .

2-25

SOLUTIONS TO PROBLEMS PROBLEM 2-1A

Date

Account Titles and Explanation

Apr. 1

Cash ....................................................... Share Capital—Ordinary ................ (Issued shares for cash)

50,000

Land........................................................ Cash ............................................... (Purchased land for cash)

30,000

Advertising Expense ............................. Accounts Payable .......................... (Incurred advertising expense on account)

1,800

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

1,500

Debit

50,000

30,000

1,800

1,500

No entry—Not a transaction.

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

1,500

Dividends ............................................... Cash ............................................... (Declared and paid a cash dividend)

1,400

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

5,700

2-26

Ref.

J1 Credit

1,500

1,400

5,700

PROBLEM 2-1A (Continued) Date

Account Titles and Explanation

Apr. 25

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

3,000

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

8,900

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

900

Ref.

Debit

Credit 3,000

8,900

900

2-27

PROBLEM 2-2A

(a) Date 2014 May 1

Ref.

Debit

Cash ....................................................... Share Capital—Ordinary ................ (Issued shares for cash)

101 311

20,000 20,000

No entry—not a transaction.

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

126 201

1,500

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

729 101

900

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

112 400

2,800

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

101 209

3,500

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

101 400

1,200

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

726 101

2,000

2-28

Account Titles and Explanation

J1 Credit

1,500

900

2,800

3,500

1,200

2,000

PROBLEM 2-2A (Continued) Date

Account Titles and Explanation

Ref.

Debit

May 31

Accounts Payable (€1,500 X 40%) ......... Cash .............................................. (Paid creditor on account)

201 101

600

Credit 600

(b) Cash Date 2014 May 1 7 12 17 31 31

Explanation

Accounts Receivable Date Explanation 2014 May 11 Supplies Date Explanation 2014 May 3 Accounts Payable Date Explanation 2014 May 3 31 Unearned Service Revenue Date Explanation 2014 May 12

Ref.

Debit

J1 J1 J1 J1 J1 J1

20,000

Credit

No. 101 Balance

2,000 600

20,000 19,100 22,600 23,800 21,800 21,200

Credit

No. 112 Balance

900 3,500 1,200

Ref.

Debit

2,800

Ref.

Debit

No. 126 Balance

1,500

Debit

No. 201 Balance

Ref. J1 J1 Ref. J1

Credit

Credit 1,500

600

900

Debit

Credit

No. 209 Balance

3,500

2-29

PROBLEM 2-2A (Continued) Share Capital—Ordinary Date Explanation 2014 May 1 Service Revenue Date Explanation 2014 May 11 17 Salaries and Wages Expense Date Explanation 2014 May 31 Rent Expense Date Explanation 2014 May 7 (c)

Ref.

Debit

Ref.

Debit

J1 J1

20,000

Credit

No. 400 Balance

2,800 1,200

2,800 4,000

Credit

No. 726 Balance

Ref.

Debit

2,000

Ref.

Debit

No. 729 Balance

900

Credit

900

KARA SHIN, INC. Trial Balance May 31, 2014 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Accounts Payable .............................................. Unearned Service Revenue ............................... Share Capital—Ordinary .................................... Service Revenue ................................................ Salaries and Wages Expense ............................ Rent Expense .....................................................

2-30

Credit

No. 311 Balance

Debit €21,200 2,800 1,500

Credit

€ 900 3,500 20,000 4,000 2,000 900 €28,400

€28,400

PROBLEM 2-3A

(a) & (c) Balance

(4) (6)

Cash 8,000 (1) (3) 13,000 (5) 5,000 (7) (8) 3,300

Share Capital—Ordinary Balance 1,000 1,700 Retained Earnings Balance

15,000 3,000 2,000 (8)

Service Revenue (6)

Balance (2)

Supplies 13,000 4,000 17,000

(1)

Advertising Expense 1,000 1,000

Balance

Prepaid Rent 3,000 3,000

(3)

Miscellaneous Expense 1,700 1,700

Balance

Equipment 21,000 21,000

(5)

11,000 11,000

Dividends 2,000 2,000

Accounts Receivable Balance 15,000 (4) 13,000 (6) 9,000 11,000

Accounts Payable Balance (2) 15,000

30,000 30,000

14,000 14,000

Salaries and Wages Expense (7) 3,000 3,000 19,000 4,000 8,000

2-31

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

Account Titles

Debit

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

1,000

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

4,000

Miscellaneous Expense ......................... Cash ...............................................

1,700

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

13,000

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

15,000

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

5,000 9,000

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

3,000

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

2,000

2. 3. 4. 5. 6.

7. 8.

2-32

Credit 1,000 4,000 1,700 13,000 15,000

14,000 3,000 2,000

PROBLEM 2-3A (Continued) (d)

BYTE REPAIR SERVICE, INC. Trial Balance January 31, 2014 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Prepaid Rent ....................................................... Equipment .......................................................... Accounts Payable .............................................. Share Capital—Ordinary .................................... Retained Earnings .............................................. Dividends ............................................................ Service Revenue ................................................ Advertising Expense .......................................... Miscellaneous Expense ..................................... Salaries and Wages Expense ............................

Debit $ 3,300 11,000 17,000 3,000 21,000

Credit

$ 8,000 30,000 11,000 2,000 14,000 1,000 1,700 3,000 $63,000

$63,000

2-33

PROBLEM 2-4A

GARLAND COMPANY Trial Balance May 31, 2014 Debit Cash (£3,850 + £520 – £405) ........................................ £ 3,965 Accounts Receivable (£2,570 – £420) ......................... 2,150 Prepaid Insurance (£700 + £100) ................................. 800 Supplies (£0 + £520) ..................................................... 520 Equipment (£12,000 – £520) ......................................... 11,480 Accounts Payable (£4,500 – £100 + £520 – £420) ....... Unearned Service Revenue ......................................... Share Capital—Ordinary (£11,700 + £1,000) ................ Dividends (£0 + £1,000) ................................................ 1,000 Service Revenue ........................................................... Salaries and Wages Expense (£4,200 + £200) ............ 4,400 Advertising Expense (£1,100 + £405) .......................... 1,505 Utilities Expense (£800 + £100).................................... 900 £26,720

2-34

Credit

£ 4,500 560 12,700 8,960

£26,720

PROBLEM 2-5A (a) & (c) Cash Date 2014 Apr. 1

Explanation Balance

2 9 10 12 25 29 30 30 Accounts Receivable Date Explanation 2014 Apr. 30 Prepaid Rent Date Explanation 2014 Apr. 30 Land Date 2014 Apr. 1

Explanation Balance

Buildings Date Explanation 2014 Apr. 1 Balance

Ref.   J1 J1 J1 J1 J1 J1 J1 J1

Debit

Credit

No. 101 Balance

900

6,000 5,200 7,000 4,000 3,700 8,900 7,300 7,390 6,490

Credit

No. 112 Balance

800 1,800 3,000 300 5,200 1,600 90

Ref.

Debit

Ref.

Debit

No. 136 Balance

900

Debit

No. 140 Balance

Ref.  

Ref.

Credit

10,000

Debit

Credit



No. 145 Balance 8,000 2-35

PROBLEM 2-5A (Continued) Equipment Date Explanation 2014 Apr. 1 Balance Accounts Payable Date Explanation 2014 Apr. 1 Balance 10 20 Mortgage Payable Date Explanation 2014 Apr. 1 Balance 10 Share Capital—Ordinary Date Explanation 2014 Apr. 1 Balance Service Revenue Date Explanation 2014 Apr. 9 25 Rent Revenue Date Explanation 2014 Apr. 30

2-36

Ref.

Debit

Credit

No. 157 Balance



6,000

Ref.

Credit

No. 201 Balance

1,000

2,000 1,000 2,000

Credit

No. 275 Balance

Debit

 J1 J1

1,000

Ref.

Debit

 J1

Ref.

2,000

8,000 6,000

Debit

No. 311 Balance

Credit



20,000

Ref.

Credit

No. 400 Balance

1,800 5,200

1,800 7,000

Credit

No. 429 Balance

180

Debit

J1 J1

Ref.

Debit

PROBLEM 2-5A (Continued) Advertising Expense Date Explanation 2014 Apr. 12 Salaries and Wages Expense Date Explanation 2014 Apr. 29 Rent Expense Date Explanation 2014 Apr. 2 20

Ref.

Debit

Credit

300

No. 610 Balance 300

Credit

No. 726 Balance

Ref.

Debit

1,600

Ref.

Debit

No. 729 Balance

J1 J1

800 1,000

Credit

800 1,800

(b) Date 2014 Apr. 2

Account Titles and Explanation

Ref.

Debit

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

729 101

800 800

No entry—not a transaction.

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

101 400

1,800

Mortgage Payable .............................. Accounts Payable .............................. Cash ........................................... (Made payments on mortgage and accounts payable)

275 201 101

2,000 1,000

J1 Credit

1,800

3,000

2-37

PROBLEM 2-5A (Continued) Date

Account Titles and Explanation

Apr. 11

No entry—not a transaction.

2-38

Ref.

Debit

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

610 101

300

Rent Expense......................................... Accounts Payable......................... (Rented film on account)

729 201

1,000

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

101 400

5,200

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

726 101

1,600

Cash ....................................................... Accounts Receivable ............................ Rent Revenue ............................... (18% X $1,000) (Received cash and balance on account for concession revenue)

101 112 429

90 90

Prepaid Rent .......................................... Cash .............................................. (Paid cash for future film rentals)

136 101

900

Credit

300

1,000

5,200

1,600

180

900

PROBLEM 2-5A (Continued) (d)

CLASSIC THEATER Trial Balance April 30, 2014

Cash .................................................................... Accounts Receivable ......................................... Prepaid Rent ....................................................... Land .................................................................... Buildings ............................................................. Equipment .......................................................... Accounts Payable .............................................. Mortgage Payable .............................................. Share Capital—Ordinary .................................... Service Revenue ................................................ Rent Revenue ..................................................... Advertising Expense .......................................... Salaries and Wages Expense ............................ Rent Expense .....................................................

Debit $ 6,490 90 900 10,000 8,000 6,000

Credit

$ 2,000 6,000 20,000 7,000 180 300 1,600 1,800 $35,180

$35,180

2-39

PROBLEM 2-1B

Date Mar. 1

2-40

Account Titles and Explanation Ref. Cash ......................................................... Share Capital—Ordinary ................. (Issued shares for cash)

Debit 60,000

Land ......................................................... Buildings ................................................. Equipment ............................................... Cash ................................................ (Purchased Lee's Golf Land)

23,000 9,000 6,000

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

1,600

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

2,400

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

1,050

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

340

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

1,800

J1 Credit 60,000

38,000

1,600

2,400

1,050

340

1,800

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

Account Titles and Explanation Dividends ............................................ Cash............................................. (Declared and paid a cash dividend)

Ref.

Debit 800

Credit 800

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

250

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

1,050

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

200

250

1,050

200

2-41

PROBLEM 2-2B (a) Date 2014 Apr. 1

Ref.

Debit

Cash ........................................................ Share Capital—Ordinary ................ (Issued shares for cash)

101 311

40,000 40,000

No entry—not a transaction.

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

729 101

1,400

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

126 201

5,200

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

112 400

6,600

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

101 209

1,000

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

101 400

2,100

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

726 101

2,400

2-42

Account Titles and Explanation

J1 Credit

1,400

5,200

6,600

1,000

2,100

2,400

PROBLEM 2-2B (Continued) Date Apr. 30

(b) Cash Date 2014 Apr. 1 2 11 20 30 30

Account Titles

Ref.

Debit

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

201 101

1,900

Explanation

Accounts Receivable Date Explanation 2014 Apr. 10 Supplies Date Explanation 2014 Apr. 3 Accounts Payable Date Explanation 2014 Apr. 3 30 Unearned Service Revenue Date Explanation 2014 Apr. 11

Ref.

Debit

J1 J1 J1 J1 J1 J1

40,000

Credit 1,900

Credit

No. 101 Balance

2,400 1,900

40,000 38,600 39,600 41,700 39,300 37,400

Credit

No. 112 Balance

1,400 1,000 2,100

Ref.

Debit

6,600

Ref.

Debit

No. 126 Balance

5,200

Debit

No. 201 Balance

Ref. J1 J1 Ref. J1

Credit

Credit 5,200

1,900

5,200 3,300

Debit

Credit

No. 209 Balance

1,000

2-43

PROBLEM 2-2B (Continued) Share Capital—Ordinary Date Explanation 2014 Apr. 1

Ref. J1

Service Revenue Date Explanation 2014 Apr. 10 20

Ref.

(c)

Debit

J1 J1

Salaries and Wages Expense Date Explanation 2014 Apr. 30 Rent Expense Date Explanation 2014 Apr. 2

Debit

40,000

Credit

No. 400 Balance

6,600 2,100

6,600 8,700

Credit

No. 726 Balance

Ref.

Debit

2,400

Ref.

Debit

No. 729 Balance

1,400

Credit

1,400

JUDI DENCH, DENTIST Trial Balance April 30, 2014 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Accounts Payable .............................................. Unearned Service Revenue ............................... Share Capital—Ordinary .................................... Service Revenue ................................................ Salaries and Wages Expense ............................ Rent Expense .....................................................

2-44

Credit

No. 311 Balance

Debit $37,400 6,600 5,200

Credit

$ 3,300 1,000 40,000 8,700 2,400 1,400 $53,000

$53,000

PROBLEM 2-3B (a) Trans.

Account Titles

Debit

Cash .................................................... Share Capital—Ordinary ...........

50,000 50,000

No entry—Not a transaction.

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

24,000

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

30,000

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

1,800

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

750

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

1,300

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

8,000 12,000

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

400

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

3,000

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

260

10.

11.

Credit

24,000

8,000 22,000

1,800

750

1,300

20,000

400

3,000

260 2-45

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

Account Titles and Explanation

Debit

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

5,600

Credit 5,600

(b) (1)

(8) (10)

(8)

(6) (7)

(5)

(3)

2-46

Cash 50,000 (3) (4) (5) (6) 8,000 (9) 3,000 (12) 20,450

Equipment 30,000 30,000

(4) 24,000 8,000 1,800 750

Accounts Payable (4) 22,000 (7) 1,300 400 (11) 260 23,160

400 (9) 5,600

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

Share Capital—Ordinary (1) 50,000 50,000

Service Revenue (8)

Supplies 750 1,300 2,050

Prepaid Insurance 1,800 1,800

Prepaid Rent 24,000 24,000

20,000 20,000

Salaries and Wages Expense (12) 5,600 5,600

(11)

Utilities Expense 260 260

PROBLEM 2-3B (Continued) (c)

CHAMBERLAIN SERVICES Trial Balance May 31, 2014 Cash ................................................................ Accounts Receivable ..................................... Supplies .......................................................... Prepaid Insurance .......................................... Prepaid Rent ................................................... Equipment ...................................................... Accounts Payable .......................................... Share Capital—Ordinary ................................ Service Revenue ............................................ Salaries and Wages Expense ........................ Utilities Expense ............................................

Debit £20,450 9,000 2,050 1,800 24,000 30,000

Credit

£23,160 50,000 20,000 5,600 260 £93,160

£93,160

2-47

PROBLEM 2-4B

RON SALEM CO. Trial Balance June 30, 2014 Cash ($3,840 + $180) ................................................. Accounts Receivable ($2,898 – $180) ...................... Supplies ($800 – $620) .............................................. Equipment ($3,000 + $620) ........................................ Accounts Payable ($2,666 – $309 – $390) ................ Unearned Service Revenue ...................................... Share Capital—Ordinary............................................ Dividends ($800 + $600) ............................................ Service Revenue ($2,380 + $801).............................. Salaries and Wages Expense ($3,400 + $700 – $600) Utilities Expense ........................................................

2-48

Debit $ 4,020 2,718 180 3,620

Credit

$ 1,967 2,200 9,000 1,400 3,181 3,500 910 $16,348

$16,348

PROBLEM 2-5B (a) & (c) Cash Date 2014 Mar. 1 2 9 10 12 20 20 31 31 31

Explanation

Ref.

Balance

 J1 J1 J1 J1 J1 J1 J1 J1 J1

Accounts Receivable Date Explanation 2014 Mar. 31 Land Date 2014 Mar. 1

Credit

375 9,000

8,000 7,000 11,000 6,900 6,450 11,450 9,050 6,550 6,925 15,925

Ref.

Debit

No. 112 Balance

375

Debit

No. 140 Balance

1,000 4,000 4,100 450 5,000 2,400 2,500

Credit

Explanation

Ref.

Balance



21,000

Ref.

No. 145 Balance

Buildings Date Explanation 2014 Mar. 1 Balance Equipment Date Explanation 2014 Mar. 1 Balance

Debit

No. 101 Balance

Debit

Credit



10,000

Ref.

No. 157 Balance



Debit

Credit

8,000

2-49

PROBLEM 2-5B (Continued) Accounts Payable Date Explanation 2014 Mar. 1 Balance 2 10 Share Capital—Ordinary Date Explanation 2014 Mar. 1 Balance Service Revenue Date Explanation 2014 Mar. 9 20 31 Rent Revenue Date Explanation 2014 Mar. 31 Advertising Expense Date Explanation 2014 Mar. 12

2-50

Ref.

Debit

 J1 J1

Credit

4,100

7,000 9,500 5,400

Debit

No. 311 Balance

2,500

Ref.

No. 201 Balance

Credit



40,000

Ref.

Credit

No. 400 Balance

4,000 5,000 9,000

4,000 9,000 18,000

Credit

No. 429 Balance

750

Credit

No. 610 Balance

Debit

J1 J1 J1

Ref.

Debit

Ref.

Debit

450

PROBLEM 2-5B (Continued) Salaries and Wages Expense Date Explanation 2014 Mar. 31 Rent Expense Date Explanation 2014 Mar. 2 20

Credit

No. 726 Balance

Ref.

Debit

2,500

Ref.

Debit

No. 729 Balance

J1 J1

3,500 2,400

Credit

3,500 5,900

(b) J1 Date 2014 Mar. 2

Ref.

Debit

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

729 201 101

3,500

No entry.

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

101 400

4,000

Accounts Payable ($2,500 + $1,600) ...... Cash ............................................. (Paid creditors on account)

201 101

4,100

610 101

450

No entry.

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

Credit

2,500 1,000

Account Titles and Explanation

4,000

4,100

450

2-51

PROBLEM 2-5B (Continued) Date 20

2-52

Account Titles and Explanation Cash ...................................................... Service Revenue .......................... (Received cash for services provided)

Ref. 101 400

Debit 5,000

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

729 101

2,400

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

726 101

2,500

Cash ....................................................... Accounts Receivable ............................ Rent Revenue............................... (15% X $5,000) (Received cash and balance on account for concession revenue)

101 112 429

375 375

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

101 400

9,000

Credit 5,000

2,400

2,500

750

9,000

PROBLEM 2-5B (Continued) (d)

RUSSO THEATER Trial Balance March 31, 2014 Cash ................................................................. Accounts Receivable ...................................... Land ................................................................. Buildings ......................................................... Equipment ....................................................... Accounts Payable ........................................... Share Capital—Ordinary ................................. Service Revenue ............................................. Rent Revenue .................................................. Advertising Expense ...................................... Salaries and Wages Expense ......................... Rent Expense ..................................................

Debit $15,925 375 21,000 10,000 8,000

Credit

$ 5,400 40,000 18,000 750 450 2,500 5,900 $64,150

$64,150

2-53

CCC2

CONTINUING COOKIE CHRONICLE

(a)

GENERAL JOURNAL Account Titles

2014 Nov.

2-54

Debit

J1 Credit

8 No entry required for selling her investments—this is a personal transaction. 8 Cash ......................................................... Share Capital—Ordinary ....................

500

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

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

125

14 Equipment................................................ Share Capital—Ordinary ....................

300

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

2,000

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

900

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

125

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

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

1,320

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

CCC2 (Continued) (b)

Date Explanation 2014 Nov. 8 11 13 16 17 20 25 30

Date Explanation 2014 Nov. 13

Date Explanation 2014 Nov. 30

Date Explanation 2014 Nov. 14 17

Date Explanation 2014 Nov. 25

Cash Ref. J1 J1 J1 J1 J1 J1 J1 J1

Debit 500

Credit

Balance

900 125 30

125

Credit

1,320

Equipment Ref. Debit J1 J1

1,320

2,000

Prepaid Insurance Ref. Debit

Balance 1,320

Credit

300 900

Balance 300 1,200

Unearned Service Revenue Ref. Debit Credit J1

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

65 125

Supplies Ref. Debit J1

Credit

Balance 30

2-55

CCC2 (Continued) (b) (Continued)

Date Explanation 2014 Nov. 16

Date Explanation 2014 Nov. 8 14

Date Explanation 2014 Nov. 20

Date Explanation 2014 Nov. 11

2-56

Notes Payable Ref. Debit

Credit

Balance

2,000

Share Capital—Ordinary Ref. Debit

Credit

Balance

J1 J1

500 300

500 800

Credit

Balance

125

Credit

Balance

Service Revenue Ref. Debit J1

Advertising Expense Ref. Debit J1

CCC2 (Continued) (c) COOKIE CREATIONS Trial Balance November 30, 2014 Cash........................................................................... Supplies .................................................................... Prepaid Insurance..................................................... Equipment ................................................................. Unearned Service Revenue ...................................... Notes Payable ........................................................... Share Capital—Ordinary .......................................... Service Revenue ....................................................... Advertising Expense ................................................

Debit $ 245 125 1,320 1,200

Credit

65 $2,955

30 2,000 800 125

$2,955

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

2-57

BYP 2-1

FINANCIAL REPORTING PROBLEM

(a) Account Accounts (Trade) Payable

(1) Increase Side Credit

(1) Decrease Side Debit

(2) Normal Balance Credit

Accounts (Trade) Receivable

Debit

Credit

Debit

Property, Plant, and Equipment

Debit

Credit

Debit

Tax Payable

Credit

Debit

Credit

Interest Expense (finance cost)

Debit

Credit

Debit

Inventories

Debit

Credit

Debit

(b) 1. 2. 3.

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

Cash is decreased or Interest Payable is increased. Cash is decreased or Notes or Mortgage Payable or Share Capital—Ordinary is increased.

2-58

BYP 2-2

(a)

COMPARATIVE ANALYSIS PROBLEM

Nestlé

Zetar Accounts (Trade) Receivable:

Inventory:

debit

Property, Plant, and Equipment:

debit

Cash and Cash Equivalents:

debit

Accounts (Trade) Payable:

credit

Cost of Goods Sold (expense):

debit

Interest Expense (Finance Cost):

debit

Sales (revenue)

credit

(b) The following other accounts are ordinarily involved:

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

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

Increase in Property, Plant, and Equipment: Notes Payable is increased (credited) or Cash is decreased (credited) or Share Capital—Ordinary is increased (credited).

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

2-59

BYP 2-3

REAL–WORLD FOCUS

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

2-60

BYP 2-4

DECISION–MAKING ACROSS THE ORGANIZATION

(a) May 1

Correct.

5 7 14 15 20

Cash ......................................................... Lesson Revenue ..............................

250

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

500

Office Equipment .................................... Cash ..................................................

800

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

440

Cash ......................................................... Riding Revenue ................................

184

Correct.

Hay and Feed Supplies ........................... Accounts Payable ............................

250 500 800 440 184

1,500 1,500

(b) The errors in the entries of May 14 and 20 would prevent the trial balance from balancing. (c) Net income as reported Add: 5/15, Salaries expense (Dividends paid) ...... 5/31, Hay and feed expense (still on hand) ....

$4,600 $ 440 1,500

Less: 5/7, Boarding revenue unearned .................. Correct net income................................................... (d) Cash as reported Add: 5/20, Transposition error .............................. 5/31, Purchase on account ........................... Correct cash balance............................................... .

1,940 6,540 500 $6,040 $12,475

36 1,500

1,536 $14,011

2-61

BYP 2-5

COMMUNICATION ACTIVITY

Date:

May 25, 2014

To:

Accounting Instructor

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

6,000 6,000

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

2,000 2,000

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

2-62

BYP 2-6

ETHICS CASE

(a) The stakeholders in this situation are:  Sara Rankin, assistant chief accountant.  Users of the company’s financial statements.  The Hokey Company.

(b) By adding $1,000 to the Equipment account, that account total is intentionally misstated. By not locating the error causing the imbalance, some other account may also be misstated by $1,000. If the amount of $1,000 is determined to be immaterial, and the intent is not to commit fraud (cover up an embezzlement or other misappropriation of assets), Sara’s action might not be considered unethical in the preparation of interim financial statements. However, if Sara is violating a company accounting policy by her action, then she is acting unethically. (c) Sara’s alternatives are: 1. Miss the deadline but find the error causing the imbalance. 2. Tell her supervisor of the imbalance and suffer the consequences. 3. Do as she did and locate the error later, making the adjustment in the next quarter.

2-63

GAAP EXERCISE

GAAP 2-1 In deciding whether the U.S. should adopt IFRS, the SEC should consider the following. • • • • • •

Whether IFRS is sufficiently developed and consistent in application Whether the IASB is sufficiently independent Whether IFRS is established for the benefit to investors The issues involved in educating investors about IFRS The impact of a switch to IFRS on U.S. laws and regulations The impact on companies including changes to their accounting systems, contractual arrangements, corporate governance, and litigation • The issues involved in educating accountants, so they can prepare statements under IFRS

2-64

GAAP FINANCIAL REPORTING PROBLEM

GAAP 2-2 (a)

Accounts Payable Accounts Receivable Buildings Inventories Rent Revenue Rent Expense

(1) Increase Decrease Side Side Credit Debit Debit Credit Debit Credit Debit Credit Credit Debit Debit Credit

(2) Normal Balance Credit Debit Debit Debit Credit Debit

(b) The following other accounts are ordinarily involved: 1. Accounts Receivable is decreased: Cash is increased (debited). 2. Accounts Payable is decreased: Cash is decreased (credited). 3. Inventories is increased: Cash is decreased (credited) or Accounts Payable is increased (credited).

2-65

2-66

CHAPTER 3 Adjusting the Accounts ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

*1.

Explain the time period assumption.

*2.

Brief Exercises

A Problems

B Problems

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

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

1B, 2B, 3B, 4B, 5B

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

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

1B, 2B, 3B, 4B, 5B

10, 11, 12, 13, 14

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

1B, 2B, 3B, 5B

17, 18

12, 13 14, 15

19, 20, 21, 22, 23

Do It!

Exercises

Explain the accrual basis of accounting.

2, 3, 4, 5

2, 3, 10,16

*3.

Explain the reasons for adjusting entries.

6, 7

*4.

Identify the major types of adjusting entries.

8, 18

2, 8

*5.

Prepare adjusting entries for deferrals.

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

2, 3, 4, 5, 6

*6.

Prepare adjusting entries for accruals.

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

*7.

Describe the nature and purpose of an adjusted trial balance.

9, 10

*8.

Prepare adjusting entries for the alternative treatment of deferrals.

*9.

Discuss financial reporting concepts.

23, 24, 25, 26, 27, 28

4, 6, 11

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

3-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

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

Simple

40–50

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

Simple

50–60

Prepare adjusting entries and financial statements.

Moderate

40–50

Prepare adjusting entries.

Moderate

30–40

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

Moderate

60–70

*6A*

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

Moderate

40–50

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

Simple

40–50

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

Simple

50–60

Prepare adjusting entries and financial statements.

Moderate

40–50

Prepare adjusting entries.

Moderate

30–40

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

Moderate

60–70

3-2

WEYGANDT FINANCIAL ACCOUNTING, IFRS EDITION, 2e CHAPTER 3 ADJUSTING THE ACCOUNTS Number

Difficulty

Time (min.)

BE1

Simple

4–6

BE2

Moderate

6–8

BE3

Simple

3–5

BE4

Simple

3–5

BE5

Simple

2–4

BE6

Simple

2–4

BE7

Simple

4–6

BE8

Simple

5–7

BE9

Simple

4–6

BE10

Simple

2–4

BE11*

Moderate

3–5

BE12*

Simple

3–5

BE13*

Simple

2–4

BE14*

Simple

2–4

BE15*

Simple

1–2

DI1

1, 2

Simple

2–4

DI2

Simple

6–8

DI3

Simple

4–6

DI4

Moderate

20–30

EX1

Simple

3–5

EX2

Moderate

10–15

EX3

Simple

6–8

EX4

Simple

5–6

EX5

5, 6

Moderate

10–15

EX6

4–6

Moderate

10–12

EX7

5, 6

Moderate

8–10

EX8

5, 6

Moderate

8–10

EX9

5, 6

Simple

8–10

EX10

2, 5–7

Moderate

8–10

EX11

4–7

Moderate

12–15

EX12

5–7

Moderate

8–10

3-3

ADJUSTING THE ACCOUNTS (Continued) Number

Difficulty

Time (min.)

EX13

5–7

Simple

8–10

EX14

Simple

12–15

EX15

5, 6

AN, S

Moderate

8–10

EX16

5, 6

Moderate

8–10

EX17*

Moderate

6–8

EX18*

Moderate

10–12

EX19*

Simple

3–5

EX20*

Simple

3–5

EX21*

Simple

6–8

EX22*

Simple

10–20

EX23*

Simple

10–20

P1A

5–7

Simple

40–50

P2A

5–7

Simple

50–60

P3A

5–7

Moderate

40–50

P4A

5, 6

Moderate

30–40

P5A

5–7

Moderate

60–70

P6A

5–8

Moderate

40–50

P1B

5–7

Simple

40–50

P2B

5–7

Simple

50–60

P3B

5–7

Moderate

40–50

P4B

5, 6

Moderate

30–40

P5B

5–7

Moderate

60–70

BYP1

5, 6

Simple

10–15

BYP2

—

Simple

10–15

BYP3

—

Simple

10–15

BYP4

2–7

Moderate

15–20

BYP5

3–6

Simple

10–15

BYP6

3–6

Moderate

10–15

3-4

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

Knowledge

Comprehension

Application

Analysis

Synthesis

Explain the time period assumption.

DI3-1

Q3-1

E3-1

*2.

Explain the accrual basis of accounting.

DI3-1

Q3-2 Q3-3

Q3-4 Q3-5 E3-3

*3.

Explain the reasons for adjusting entries.

Q3-6 Q3-7

BE3-1

*4.

Identify the major types of adjusting entries.

Q3-8

Q3-18 BE3-2 BE3-8

E3-4 E3-16 E3-6 E3-11

*5.

Prepare adjusting entries for deferrals.

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

Q3-18 BE3-3 BE3-4 BE3-5 BE3-6 DI3-2 E3-5 E3-6 E3-7 E3-8

E3-9 E3-10 E3-11 E3-12 E3-13 E3-15 P3-1A P3-2A P3-3A

P3-4A E3-15 P3-5A P3-6A P3-1B P3-2B P3-3B P3-4B P3-5B

*6.

Prepare adjusting entries for accruals.

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

Q3-17

Q3-16 Q3-18 BE3-7 DI3-3 E3-5 E3-6 E3-7 E3-8 E3-9

E3-10 E3-11 E3-12 E3-13 E3-15 P3-1A P3-2A P3-3A

P3-4A E3-15 P3-5A P3-6A P3-1B P3-2B P3-3B P3-4B P3-5B

*7.

Describe the nature and purpose of an adjusted trial balance.

Q3-21

BE3-9 BE3-10 E3-14

DI3-4 E3-10 E3-11 E3-12 E3-13

P3-1A P3-2A P3-3A P3-5A P3-6A

P3-1B P3-2B P3-3B P3-5B

*8.

Prepare adjusting entries for the alternative treatment of deferrals.

Q3-22

BE3-11

*9.

Discuss financial reporting concepts

Broadening Your Perspective

Q3-23 BE3-12 BE3-13 BE3-14 BE3-15 E3-19 E3-21

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

E3-10

Evaluation

E3-2

E3-17 P3-6A E3-22 E3-23

Financial Reporting Decision-Making Ethics Case Comparative Analysis Across the Real-World Focus Organization

BLOOM’ S TAXONOMY TABLE

*1.

3-5

ANSWERS TO QUESTIONS 1.

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

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

The law firm should recognize the revenue in April. When a company agrees to perform a service for a customer it has a performance obligation. The revenue recognition principle states that revenue should be recognized in the accounting period in which the performance obligation is satisfied which is April in this case.

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

Expenses of $4,700 should be deducted from the revenues in April. Under the expense recognition principle efforts (expenses) should be matched with accomplishments (revenues).

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

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

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

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

10.

No. Depreciation is the process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner. Depreciation results in the presentation of the book value of the asset, not its fair value.

11.

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

12.

Equipment .................................................................................. Rs 18,000,000 Less: Accumulated Depreciation—Equipment ..................................... 7,000,000

3-6

Rs 11,000,000

Questions Chapter 3 (Continued) *13.

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

*14.

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

*15.

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

*16.

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

*17.

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

2,000 4,000 6,000

*18.

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

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

*19.

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

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

*20.

Disagree. An adjusting entry affects only one statement of financial position account and one income statement account.

*21.

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

*22.

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

*23. (a) The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions about providing capital. (b) The fundamental qualitative characteristics are relevance and faithful representation. The enhancing qualities are comparabiIity, consistency, verifiability, timeliness, and understandability. *24.

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

3-7

Questions Chapter 3 (Continued) *25.

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

*26.

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

*27.

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

*28.

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

3-8

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

(a) Type of Adjustment

(b) Account Balances before Adjustment

Prepaid Expenses

Assets Overstated Expenses Understated

Accrued Revenues

Assets Understated Revenues Understated

Accrued Expenses

Expenses Understated Liabilities Understated

Unearned Revenues

Liabilities Overstated Revenues Understated

BRIEF EXERCISE 3-3 Dec. 31

Supplies Expense ................................................ Supplies (£6,700 – £1,900) ...........................

Supplies 6,700 12/31 12/31 Bal. 1,900

4,800

12/31

4,800 4,800

Supplies Expense 4,800

3-9

BRIEF EXERCISE 3-4 Dec. 31

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

Depreciation Expense 12/31 6,000

6,000 6,000

Accum. Depreciation—Equipment 12/31 6,000

Statement of Financial Position: Equipment ........................................................... Less: Accumulated Depreciation— Equipment ................................................

$32,000 6,000

$26,000

BRIEF EXERCISE 3-5 July 1 Dec. 31

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

13,200

Insurance Expense [($13,200 ÷ 3) X 1/2] ........ Prepaid Insurance ...................................

2,200

Prepaid Insurance 7/1 13,200 12/31 12/31 Bal. 11,000

2,200

12/31

13,200 2,200

Insurance Expense 2,200

BRIEF EXERCISE 3-6 July 1 Dec. 31

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

13,200

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

2,200

Unearned Service Revenue 12/31 2,200 7/1 13,200 12/31 Bal. 11,000

3-10

13,200

Service Revenue 12/31

2,200

BRIEF EXERCISE 3-7 1. 2. 3.

Dec. 31 31 31

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

360

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

1,750

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

900

360 1,750 900

BRIEF EXERCISE 3-8 Account

(a) Type of Adjustment

(b) Related Account

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

Accrued Revenues Prepaid Expenses Prepaid Expenses Accrued Expenses Unearned Revenues

Service Revenue Insurance Expense Depreciation Expense Interest Expense Service Revenue

BRIEF EXERCISE 3-9 KWUN COMPANY Income Statement For the Year Ended December 31, 2014 (in thousands) Revenues Service revenue .................................................... Expenses Salaries and wages expense ............................... Rent expense ........................................................ Insurance expense ............................................... Supplies expense ................................................. Depreciation expense ........................................... Total expenses .............................................. Net income ....................................................................

W38,400 W16,000 4,400 2,000 1,500 1,300

25,200 W13,200

3-11

BRIEF EXERCISE 3-10 KWUN COMPANY Retained Earnings Statement For the Year Ended December 31, 2014 (in thousands) Retained earnings, January 1 ......................................................... Add: Net income ............................................................................. Less: Dividends .............................................................................. Retained earnings, December 31 ...................................................

W 7,240 13,200 20,440 6,000 W14,440

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

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

1,000

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

2,000

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

Predictive value. Confirmatory value. Materiality. Complete. Neutral. Comparability. Verifiability. Timeliness.

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

3-12

1,000 2,000

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

1. 2. 3. 4.

Predictive value. Neutral. Verifiable. Timely.

BRIEF EXERCISE 3-15 (c) SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 3-1 1. (d) 2. (e) 3. (h) 4. (c) DO IT! 3-2 1.

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

300

Supplies Expense (CHF2,500 – CHF1,400) ................. Supplies ................................................................. (To record supplies used)

1,100

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

200

Unearned Service Revenue (CHF9,000 x 2/5) ............. Service Revenue.................................................... (To record revenue for services performed)

3,600

300

1,100

200

3,600

3-13

DO IT! 3-3 1.

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

1,300

Interest Expense ($20,000 x .09 x 1/12) ....................... Interest Payable ..................................................... (To record accrued interest)

150

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

2,400

1,300

150

2,400

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

3-14

R$11,360 900 12,260 R$7,400 1,200 700 380 160 40 9,880 R$ 2,380

DO IT! 3-4 (Continued) (b) Total assets and liabilities are computed as follows: Assets Cash .................................................................. R$ 5,190 Accounts receivable ........................................ 480 Prepaid rent ...................................................... 720 Supplies ............................................................ 920 Equipment .................................................. R$12,000 Less: Accumulated depreciation— equipment .............................................. 700 11,300 Total assets ............................................... R$18,610 Liabilities Notes payable ................................................... Accounts payable ............................................ Unearned rent revenue .................................... Salaries and wages payable ............................ Interest payable ................................................ Total liabilities........................................... (c) Retained Earnings, April 1 ...................................... Add: Net income .................................................... Less: Dividends ...................................................... Retained Earnings, June 30 ....................................

R$ 4,000 790 400 300 40 R$ 5,530 R$ –0– 2,380 2,380 500 R$1,880

3-15

SOLUTIONS TO EXERCISES EXERCISE 3-1 1.

True.

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

True.

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

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

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

3-16

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

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

$105,000 (72,000) $ 33,000

(b)

Revenues [($105,000 – $28,000) + $44,000] ................... Expenses [($72,000 – $30,000) + $37,000] ..................... Accrual-basis net income ......................................

$121,000 (79,000) $ 42,000

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

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

3-17

EXERCISE 3-5 1.

2. 3. 4.

6. 7.

3-18

Interest Expense..................................................... Interest Payable ($8,000 X 10% X 3/12) ...................................

200

Supplies Expense................................................... Supplies ($2,450 – $780) .................................

1,670

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

1,000

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

1,225

Unearned Service Revenue ................................... Service Revenue ($30,000 X 1/4) ..............................................

7,500

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

3,900

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

5,400

200 1,670 1,000

1,225

7,500 3,900

5,400

EXERCISE 3-6 Item

(a) Type of Adjustment

(b) Accounts before Adjustment

Accrued Revenues

Assets Understated Revenues Understated

Prepaid Expenses

Assets Overstated Expenses Understated

Accrued Expenses

Expenses Understated Liabilities Understated

Unearned Revenues

Liabilities Overstated Revenues Understated

Accrued Expenses

Expenses Understated Liabilities Understated

Prepaid Expenses

Assets Overstated Expenses Understated

EXERCISE 3-7 1.

2. 3. 4. 5.

Mar. 31

31 31 31 31

Depreciation Expense ($300 X 3)................. Accumulated Depreciation— Equipment .........................................

900

Unearned Rent Revenue .............................. Rent Revenue ($9,900 X 1/3) ................

3,300

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

500

Supplies Expense ......................................... Supplies ($2,800 – $650) .......................

2,150

Insurance Expense ($200 X 3) ..................... Prepaid Insurance .................................

600

900 3,300 500 2,150

600

3-19

EXERCISE 3-8 1. 2. 3.

Jan. 31 31 31

31 4. 5.

31 31

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

875

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

520

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

400

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

500

Insurance Expense ($18,000 ÷ 6) ................. Prepaid Insurance .................................

3,000

Supplies Expense ($1,600 – $700) ............... Supplies .................................................

900

Supplies Expense ......................................... Supplies ($2,500 – $800) .......................

1,700

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

100

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

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

600

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

300

875 520

400 500 3,000 900

EXERCISE 3-9 1. 2. 3.

4. 5.

3-20

Oct. 31 31 31

31 31

1,700 100

50 600 300

EXERCISE 3-9 (Continued) 6. 7.

Oct. 31 31

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

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

1,200

70 1,200

EXERCISE 3-10 MIDLAND CO. Income Statement For the Month Ended July 31, 2014 Revenues Service revenue ($5,500 + $920) ............................. Expenses Salaries and wages expense ($2,300 + $280) ........ Supplies expense ($1,200 – $300) .......................... Utilities expense ...................................................... Insurance expense .................................................. Depreciation expense .............................................. Total expenses ................................................. Net income .......................................................................

$6,420 $2,580 900 500 400 150 4,530 $1,890

EXERCISE 3-11 Answer

Computation

(a) Supplies balance = £1,130

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

(b) Total premium = £4,800

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

Purchase date = Aug. 1, 2013

950 850 (670) £ 1,130

Purchase date: On Jan. 31, there are 6 months’ coverage remaining (£400 X 6). Thus, the purchase date was 6 months earlier on Aug. 1, 2013.

3-21

EXERCISE 3-11 (Continued) (c) Salaries and wages payable = £1,600

Cash paid Salaries and wages payable (1/31/14)

£3,300 800 4,100

Less: Salaries and wages expense Salaries and wages payable (12/31/13)

2,500 £1,600

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

3-22

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

200

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

2,000

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

1,200

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

750

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

800

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

620

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

1,200

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

900

200 2,000 1,200 750 800 620 1,200 900

EXERCISE 3-13 Aug. 31 31 31 31

31 31

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

1,200

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

1,600

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

1,500

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

1,300

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

1,100

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

700

1,200 1,600 1,500

1,300 1,100 700

EXERCISE 3-14 MATUSIAK COMPANY Income Statement For the Year Ended August 31, 2014 Revenues Service revenue ....................................................... Rent revenue ............................................................ Total revenues .................................................. Expenses Salaries and wages expense .................................. Rent expense ........................................................... Supplies expense .................................................... Insurance expense .................................................. Depreciation expense .............................................. Total expenses ................................................. Net income .......................................................................

€35,200 11,700 46,900 €18,100 15,000 1,600 1,500 1,300

37,500 € 9,400

3-23

EXERCISE 3-14 (Continued) MATUSIAK COMPANY Retained Earnings Statement For the Year Ended August 31, 2014 Retained earnings, September 1, 2013 .......................................... Add: Net income ............................................................................ Retained earnings, August 31, 2014 ..............................................

€ 3,600 9,400 €13,000

MATUSIAK COMPANY Statement of Financial Position August 31, 2014 Assets Equipment ........................................................................ Less: Accum. depreciation—equipment....................... Prepaid insurance ........................................................... Supplies ........................................................................... Accounts receivable........................................................ Cash ................................................................................. Total assets ......................................................

€14,000 4,900

€ 9,100 2,500 700 10,000 10,400 €32,700

Equity and Liabilities Equity Share capital—ordinary .......................................... Retained earnings ................................................... Liabilities Accounts payable ................................................... Salaries and wages payable................................... Unearned rent revenues ......................................... Total equity and liabilities ..............................................

3-24

€12,000 13,000 5,800 1,100 800

€25,000

7,700 €32,700

EXERCISE 3-15 (a) 1. 2. 3.

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

9,000

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

20,000

(a) Cash ........................................................... Unearned Service Revenue ...............

35,000

(b) Unearned Service Revenue ($35,000 – $17,000) ................................ Service Revenue ................................ 4.

9,000 20,000 35,000 18,000 18,000

Accounts Receivable ........................................ Service Revenue ($153,000 – $20,000 – $18,000) .............

115,000

Cash ................................................................... Accounts Receivable ($115,000 – $12,000) ..............................

103,000

115,000

103,000

(b) Cash received by the club = $9,000 + $103,000 + $35,000 = $147,000 EXERCISE 3-16 (a) Cash received from services provided .................. Cash paid for expenses .......................................... Cash paid for prepaid insurance ............................ Cash flow from operations......................................

Rs25,200 (12,000) (2,600) Rs10,600

(b) Service revenue ....................................................... Operating expenses ................................................. Net income ...............................................................

Rs30,000 17,000 Rs13,000

(c) Under the accrual basis, companies record transactions that change a company and financial statements in the period in which the events occur. Cash basis accounting fails to record revenue that a company has earned but has not collected the cash. Also it does not match expenses with earned revenue. Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

3-25

*EXERCISE 3-17 1.

Prepaid Insurance .................................................. Insurance Expense ($2,880 X 3/12) ..............................................

720

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

30,000

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

420

720

30,000 420

*EXERCISE 3-18 (a) Jan. 2 10 15

1/15

1/2

2,640

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

1,700

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

6,400

Cash 6,400 1/2 1/10 Insurance Expense 2,640

(b) Jan. 31 31 31

3-26

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

2,640 1,700 6,400

Service Revenue 1/15

2,640 1,700

1/10

Supplies Expense 1,700

Prepaid Insurance (€220 X 11 months) ...... Insurance Expense ..............................

2,420

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

650

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

3,900

6,400

2,420 650 3,900

Prepaid Insurance 1/31 2,420

1/31

Supplies 650

Unearned Service Revenue 1/31 3,900

Insurance Expense 1/2 2,640 1/31 2,420 Bal. 220

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

Service Revenue 1/31 3,900 1/15 6,400 Bal. 2,500

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

€2,420 650 3,900 2,500 220 1,050

*EXERCISE 3-19 (a) (b) (c) (d) (e) (f)

2 6 3 4 5 1

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

*EXERCISE 3-20 (a) This is a violation of the historical cost principle. The inventory was written up to its fair value when it should have remained at cost. (b) This is a violation of the economic entity assumption. The treatment of the transaction treats Jay Rosman and Rosman Co. as one entity when they are two separate entities. Salaries and Wages Expense should have been debited for the purchase of the truck. (c) This is a violation of the time period assumption. This assumption states that the economic life of a business can be divided into artificial time periods (months, quarters, or a year). By adding two more weeks to the year, Rosman Co. would be misleading financial statement readers. In addition, 2014 results would not be comparable to previous years’ results. The company should use a 52 week year. Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

3-27

*EXERCISE 3-21 1. Comparability 2. Going concern assumption 3. Materiality 4. Full disclosure principle 5. Time period assumption 6. Relevance 7. Historical cost principle 8. Consistency 9. Economic entity assumption 10. Faithful representation 11. Monetary unit assumption 12. Expense recognition principle

*EXERCISE 3-22 (a) The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions about providing capital. Since Net Nanny’s shares appear to be actively traded, investors must be capable of using the information made available by Net Nanny to make decisions about the company. (b) The investors must feel as if the company will show earnings In the future. They must recognize that information relevant to their investment choice is indicated by more than Net Nanny’s net income. (c) The change from Canadian dollars to U.S. dollars for reporting purposes should make Net Nanny more comparable with companies traded on U.S. stock exchanges.

*EXERCISE 3-23 (a) Accounting information is the compilation and presentation of financial information for a company. It provides information in the form of financial statements and additional disclosures that is useful for decision making. 3-28

EXERCISE 3-23 (Continued) The accounting rules and practices that have substantial authoritative support and are recognized as a general guide for financial reporting purposes are referred to as international financial reporting standards (IFRS). The biotechnology company that employs Ana will follow IFRS to report its assets, liabilities, equity, revenues, and expenses as it prepares financial statements. (b) Ana is correct in her understanding that the low success rate for new biotech products will be a cause of concern for investors. Her suggestion that detailed scientific findings be reported to prospective investors might offset some of their concerns but it probably won’t conform to the qualitative characteristics of accounting information. These characteristics consist of relevance, faithful representation, comparability, and consistency, verifiability, timeliness, and understandability. They apply to accounting information rather than the scientific findings that Ana wants to include.

3-29

SOLUTIONS TO PROBLEMS PROBLEM 3-1A

(a) Date 2014 June 30

30 30

3-30

Account Titles and Explanation

Ref.

Debit

Supplies Expense ........................... Supplies ($2,000 – $1,100).................

631

900

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

732 201

150

Insurance Expense ......................... Prepaid Insurance ($3,000 ÷ 12 months) ..........

722

250

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

209 400

2,500

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

726

1,600

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

711

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

112 400

126

J3 Credit

900 150

130

250 2,500

212

1,600 300

158

300 2,100 2,100

PROBLEM 3-1A (Continued) (b) Cash Date 2014 June 30

No. 101 Explanation

Ref.

Balance



6,200

Ref.

No. 112 Balance

Accounts Receivable Date Explanation 2014 June 30 Balance 30 Adjusting Supplies Date 2014 June 30 30

 J3

Explanation

Ref.

Balance Adjusting

 J3

Prepaid Insurance Date Explanation 2014 June 30 Balance 30 Adjusting Equipment Date Explanation 2014 June 30 Balance

Ref.

Debit

Credit

Balance

2,100

6,000 8,100

Debit

Credit

No. 126 Balance

900

2,000 1,100

Credit

No. 130 Balance

250

3,000 2,750

Credit

No. 157 Balance

Debit

 J3

Ref.

Credit

Debit



14,400

Accumulated Depreciation—Equipment Date Explanation Ref. 2014 June 30 Adjusting J3

Credit

No. 158 Balance

300

Debit

3-31

PROBLEM 3-1A (Continued) Accounts Payable Date Explanation 2014 June 30 Balance 30 Adjusting Unearned Service Revenue Date Explanation 2014 June 30 Balance 30 Adjusting

Ref.

Debit

 J3

Ref.

Debit

 J3

Credit

No. 201 Balance

150

4,700 4,850

Credit

No. 209 Balance 4,000 1,500

2,500

Salaries and Wages Payable Date 2014 June 30

Explanation

Ref.

Adjusting

Share Capital—Ordinary Date Explanation 2014 June 30 Balance Service Revenue Date Explanation 2014 June 30 Balance 30 Adjusting 30 Adjusting

3-32

No. 212 Debit

Ref.

Debit

Credit

Balance

1,600

Credit

No. 311 Balance



20,000

Ref.

Credit

No. 400 Balance

2,500 2,100

7,900 10,400 12,500

Debit

 J3 J3

PROBLEM 3-1A (Continued) Supplies Expense Date Explanation 2014 June 30 Adjusting Depreciation Expense Date Explanation 2014 June 30 Adjusting Insurance Expense Date Explanation 2014 June 30 Adjusting Salaries and Wages Expense Date Explanation 2014 June 30 Balance 30 Adjusting

Ref.

Debit

900

Ref.

Debit

No. 711 Balance

300

Ref.

Debit

No. 722 Balance

250

Debit

No. 726 Balance

Ref.  J3

Credit

4,000 5,600

1,600

Rent Expense Date 2014 June 30

No. 729

Explanation

Ref.

Balance



Debit

Credit

Balance 1,000

Utilities Expense Date 2014 June 30

No. 631 Balance

No. 732

Explanation

Ref.

Debit

Adjusting

150

Credit

Balance 150

3-33

PROBLEM 3-1A (Continued) (c)

CUONO COMPANY Adjusted Trial Balance June 30, 2014 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Prepaid Insurance .............................................. Equipment ........................................................... Accumulated Depreciation— Equipment ....................................................... Accounts Payable............................................... Unearned Service Revenue ............................... Salaries and Wages Payable.............................. Share Capital—Ordinary .................................... Service Revenue ................................................. Supplies Expense ............................................... Depreciation Expense ........................................ Insurance Expense ............................................. Salaries and Wages Expense ............................ Rent Expense ...................................................... Utilities Expense .................................................

3-34

Debit $ 6,200 8,100 1,100 2,750 14,400

Credit

300 4,850 1,500 1,600 20,000 12,500

900 300 250 5,600 1,000 150 $40,750

$40,750

PROBLEM 3-2A

(a) Date Aug. 31 31 31

31 31 31 31

Account Titles and Explanation Insurance Expense (€400 X 3) ........... Prepaid Insurance .....................

Ref. 722 130

Debit 1,200

Supplies Expense (€3,300 – €900) ........ Supplies .....................................

631 126

2,400

711

1,725

Depreciation Expense (€4,500 X 1/4) + (€2,400 X 1/4) ........ Accumulated Depreciation— Buildings ................................ Accumulated Depreciation— Equipment ..............................

J1 Credit 1,200 2,400

144

1,125

158

600

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

208 429

4,100

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

726 212

400

Accounts Receivable ......................... Rent Revenue ............................

112 429

3,700

Interest Expense................................. Interest Payable [(€80,000 X 9%) X 1/12] ..........

718

600

4,100 400 3,700

230

600

(b) Cash Date Explanation Aug. 31 Balance

Ref. 

Debit

Credit

No. 101 Balance 19,600

3-35

PROBLEM 3-2A (Continued) Accounts Receivable Date Explanation Aug. 31 Adjusting Supplies Date Explanation Aug. 31 Balance 31 Adjusting Prepaid Insurance Date Explanation Aug. 31 Balance 31 Adjusting

Ref. J1

Debit 3,700

Ref.  J1

Debit

Credit

No. 112 Balance 3,700

Credit

No. 126 Balance 3,300 900

2,400

Ref.  J1

Debit

Credit 1,200

Land Date Explanation Aug. 31 Balance Buildings Date Explanation Aug. 31 Balance

No. 140 Ref. 

Debit

Ref. 

Debit

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

Debit

Credit

Credit 1,125

Equipment Date Explanation Aug. 31 Balance

3-36

No. 130 Balance 6,000 4,800

Balance 25,000 No. 143 Balance 125,000 No. 144 Balance 1,125 No. 157

Ref. 

Debit

Credit

Balance 26,000

PROBLEM 3-2A (Continued) Accumulated Depreciation—Equipment Date Explanation Ref. Aug. 31 Adjusting J1

Debit

Credit 600

Accounts Payable Date Explanation Aug. 31 Balance Unearned Rent Revenue Date Explanation Aug. 31 Balance 31 Adjusting

No. 201 Ref. 

Ref.  J1

Debit

Credit

4,100

Salaries and Wages Payable Date Explanation Aug. 31 Adjusting Interest Payable Date Explanation Aug. 31 Adjusting Mortgage Payable Date Explanation Aug. 31 Balance

Balance 6,500 No. 208 Balance 7,400 3,300 No. 212

Ref. J1

Ref. 

Debit

Credit 400

Balance 400

Credit 600

No. 230 Balance 600

Credit

Share Capital—Ordinary Date Explanation Aug. 31 Balance

No. 158 Balance 600

No. 275 Balance 80,000 No. 311

Ref. 

Debit

Credit

Balance 100,000

3-37

PROBLEM 3-2A (Continued) Dividends Date Explanation Aug. 31 Balance Rent Revenue Date Explanation Aug. 31 Balance 31 Adjusting 31 Adjusting

Ref. 

Debit

Ref.  J1 J1

Debit

Credit

Credit 4,100 3,700

Maintenance and Repairs Expense Date Explanation Aug. 31 Balance

Ref. 

Debit

Credit

Interest Expense Date Explanation Aug. 31 Adjusting

Ref. J1

Debit 2,400

Credit

3-38

Balance 2,400 No. 711

Ref. J1

Debit 1,725

Ref. J1

Debit 600

Credit

Insurance Expense Date Explanation Aug. 31 Adjusting

Balance 3,600 No. 631

Depreciation Expense Date Explanation Aug. 31 Adjusting

No. 429 Balance 80,000 84,100 87,800 No. 622

Supplies Expense Date Explanation Aug. 31 Adjusting

No. 332 Balance 5,000

Balance 1,725 No. 718 Balance 600 No. 722

Ref. J1

Debit 1,200

Credit

Balance 1,200

PROBLEM 3-2A (Continued) Salaries and Wages Expense Date Explanation Aug. 31 Balance 31 Adjusting

Ref.  J1

Debit

Credit

400

Utilities Expense Date Explanation Aug. 31 Balance (c)

No. 726 Balance 51,000 51,400 No. 732

Ref. 

Debit

Credit

Balance 9,400

Debit € 19,600 3,700 900 4,800 25,000 125,000

Credit

LAZY RIVER RESORT, INC. Adjusted Trial Balance August 31, 2014 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Prepaid Insurance .............................................. Land .................................................................... Buildings ............................................................. Accumulated Depreciation—Buildings ............. Equipment........................................................... Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Unearned Rent Revenue .................................... Salaries and Wages Payable ............................. Interest Payable .................................................. Mortgage Payable............................................... Share Capital—Ordinary .................................... Dividends ............................................................ Rent Revenue ..................................................... Maintenance and Repairs Expense ................... Supplies Expense............................................... Depreciation Expense ........................................ Interest Expense................................................. Insurance Expense ............................................. Salaries and Wages Expense ............................ Utilities Expense.................................................

€

1,125

26,000 600 6,500 3,300 400 600 80,000 100,000 5,000 87,800 3,600 2,400 1,725 600 1,200 51,400 9,400 €280,325

€280,325 3-39

PROBLEM 3-2A (Continued) (d)

LAZY RIVER RESORT, INC. Income Statement For the Three Months Ended August 31, 2014 Revenues Rent revenue ................................................. Expenses Salaries and wages expense ........................ Utilities expense ............................................ Maintenance and repairs expense ............... Supplies expense .......................................... Depreciation expense ................................... Insurance expense ........................................ Interest expense ............................................ Total expenses ....................................... Net income ............................................................

€87,800 €51,400 9,400 3,600 2,400 1,725 1,200 600 70,325 €17,475

LAZY RIVER RESORT, INC. Retained Earnings Statement For the Three Months Ended August 31, 2014 Retained Earnings, June 1 .................................................... Add: Net income .................................................................. Less: Dividends .................................................................... Retained Earnings, August 31 ..............................................

3-40

€

0 17,475 17,475 5,000 €12,475

PROBLEM 3-2A (Continued) LAZY RIVER RESORT, INC. Statement of Financial Position August 31, 2014 Assets Land ................................................................... Buildings ........................................................... Less: Accum. depreciation—buildings .......... Equipment ......................................................... Less: Accum. depreciation—equipment ........ Prepaid insurance............................................. Supplies ............................................................ Accounts receivable ......................................... Cash................................................................... Total assets ........................................

€ 25,000 €125,000 1,125 26,000 600

123,875 25,400 4,800 900 3,700 19,600 €203,275

Equity and Liabilities Equity Share capital—ordinary ............................ Retained earnings ..................................... Liabilities Accounts payable ..................................... Mortgage payable...................................... Unearned rent revenue ............................. Interest payable ......................................... Salaries and wages payable ..................... Total equity and liabilities ................................

€100,000 12,475 6,500 80,000 3,300 600 400

€112,475

90,800 €203,275

3-41

PROBLEM 3-3A

(a) Dec. 31 31 31 31

31 31 31

(b)

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

3,500

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

1,600

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

3,600

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

5,000

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

150

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

850

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

1,300

1,600 3,600

5,000 150 850 1,300

COSTELLO ADVERTISING AGENCY, INC. Income Statement For the Year Ended December 31, 2014 Revenues Service revenue ................................................ Expenses Salaries and wages expense ........................... Depreciation expense ...................................... Rent expense .................................................... Supplies expense ............................................. Insurance expense ........................................... Interest expense ............................................... Total expenses .......................................... Net income ...............................................................

3-42

3,500

$63,700 $11,300 5,000 4,000 3,600 850 500 25,250 $38,450

PROBLEM 3-3A (Continued) COSTELLO ADVERTISING AGENCY, INC. Retained Earnings Statement For the Year Ended December 31, 2014 Retained Earnings, January 1 ................................................. Add: Net income ..................................................................... Less: Dividends ...................................................................... Retained Earnings, December 31 ...........................................

$ 5,500 38,450 43,950 12,000 $31,950

COSTELLO ADVERTISING AGENCY, INC. Statement of Financial Position December 31, 2014 Assets Equipment ............................................................. Less: Accumulated depreciation— equipment ............................................ Prepaid insurance................................................. Supplies ................................................................ Accounts receivable ............................................. Cash....................................................................... Total assets ............................................

$60,000 33,000

$27,000 2,500 5,000 23,500 11,000 $69,000

Equity and Liabilities Equity Share capital—ordinary ................................ Retained earnings ......................................... Liabilities Notes payable ................................................ Accounts payable ......................................... Unearned service revenue............................ Salaries and wages payable ......................... Interest payable ............................................. Total equity and liabilities ....................................

$20,000 31,950 5,000 5,000 5,600 1,300 150

$51,950

17,050 $69,000

3-43

PROBLEM 3-3A (Continued) (c) (1) I = P X R X T $150 = $5,000 X R X 1/2 $150 = $2,500R R = $150 $2,500 R = 6% (2) Salaries and Wages Expense, $11,300 less Salaries and Wages Payable 12/31/14, $1,300 = $10,000. Total payments, $14,500 – $10,000 = $4,500 Salaries and Wages Payable 12/31/13.

3-44

PROBLEM 3-4A

Dec. 31

Salaries and Wages Expense .................. Salaries and Wages Payable ............ [5 X £800 X 2/5 = £1,600 [3 X £500 X 2/5 = 600 £2,200]

2,200

Unearned Rent Revenue .......................... Rent Revenue .................................... [5 X £4,000 X 2 = £40,000) (4 X £8,500 X 1 = 34,000) £74,000]

74,000

Advertising Expense ................................ Prepaid Advertising .......................... [A650 – £500 per month for 8 months = £4,000) (B974 – £400 per month for 3 months = 1,200) £5,200]

5,200

Interest Expense ....................................... Interest Payable (£100,000 X 9% X 7/12) ..................

5,250

2,200

74,000

5,200

5,250

3-45

PROBLEM 3-5A

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

Explanation 1 Balance 8 10 12 20 22 25 29

Accounts Receivable Date Explanation Sept. 1 Balance 10 27

Supplies Date Explanation Sept. 1 Balance 17 30 Adjusting

Equipment Date Explanation Sept. 1 Balance 15

3-46

Ref.  J1 J1 J1 J1 J1 J1 J1

Debit

Credit 1,700

1,200 3,400 4,500 500 1,050 750

Ref.  J1 J1

Debit

Credit 1,200

1,600

Ref.  J1 J1

Debit

Credit

1,200 1,500

Ref.  J1

Debit 3,000

Credit

No. 101 Balance 4,880 3,180 4,380 7,780 3,280 2,780 1,730 2,480

No. 112 Balance 3,520 2,320 3,920

No. 126 Balance 2,000 3,200 1,700

No. 157 Balance 18,000 21,000

PROBLEM 3-5A (Continued) Accumulated Depreciation—Equipment Date Explanation Ref. Sept. 1 Balance  30 Adjusting J1

Accounts Payable Date Explanation Sept. 1 Balance 15 17 20

Unearned Service Revenue Date Explanation Sept. 1 Balance 29 30 Adjusting

Salaries and Wages Payable Date Explanation Sept. 1 Balance 8 30 Adjusting

Share Capital—Ordinary Date Explanation Sept. 1 Balance Retained Earnings Date Explanation Sept. 1 Balance

Ref.  J1 J1 J1

Ref.  J1 J1

Ref. 

Debit

Credit 140

Debit

Credit 3,000 1,200

4,500

Debit

Credit 750

1,450

Debit

Credit

500 400

Debit

No. 158 Balance 2,100 2,240

No. 201 Balance 3,400 6,400 7,600 3,100

No. 209 Balance 1,400 2,150 700

No. 212 Balance 500 0 400

Credit

No. 311 Balance 10,000

Credit

No. 320 Balance 11,000

3-47

PROBLEM 3-5A (Continued) Service Revenue Date Explanation Sept. 12 27 30 Adjusting

Supplies Expense Date Explanation Sept. 30 Adjusting

Depreciation Expense Date Explanation Sept. 30 Adjusting

Ref. J1 J1 J1

Debit

Ref. J1

Debit 1,500

Ref. J1

Debit 140

Credit 3,400 1,600 1,450

Credit

No. 631 Balance 1,500

Credit

No. 711 Balance 140

Salaries and Wages Expense Date Sept.

Explanation 8 25 30

Adjusting

No. 726 Ref. J1 J1 J1

Debit 1,200 1,050 400

Credit

Rent Expense Date Explanation Sept. 22

3-48

No. 400 Balance 3,400 5,000 6,450

Balance 1,200 2,250 2,650

No. 729 Ref. J1

Debit 500

Credit

Balance 500

PROBLEM 3-5A (Continued) (b)

General Journal J1

Date Sept. 8

10 12 15 17 20 22 25 27 29

Account Titles Ref. Salaries and Wages Payable ................ 212 Salaries and Wages Expense............... 726 Cash ................................................ 101

Debit 500 1,200

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

101 112

1,200

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

101 400

3,400

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

157 201

3,000

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

126 201

1,200

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

201 101

4,500

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

729 101

500

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

726 101

1,050

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

112 400

1,600

Cash....................................................... 101 Unearned Service Revenue ............. 209

750

Credit

1,700 1,200 3,400 3,000 1,200 4,500 500 1,050 1,600

750

3-49

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

BECK EQUIPMENT REPAIR, INC. Trial Balances September 30, 2014

Cash ........................................... Accounts Receivable ................ Supplies ..................................... Equipment .................................. Accumulated Depreciation— Equipment ............................... Accounts Payable...................... Unearned Service Revenue ...... Salaries and Wages Payable..... Share Capital—Ordinary ........... Retained Earnings ..................... Service Revenue ........................ Depreciation Expense ............... Supplies Expense ...................... Salaries and Wages Expense ... Rent Expense .............................

(e) 1. Sept. 30

3-50

Before Adjustment Dr. Cr. £ 2,480 3,920 3,200 21,000

After Adjustment Dr. Cr. £ 2,480 3,920 1,700 21,000

£ 2,100 3,100 2,150 -010,000 11,000 5,000

£ 2,240 3,100 700 400 10,000 11,000 6,450

140 1,500 2,250 2,650 500 500 £33,350 £33,350 £33,890 £33,890

Supplies Expense ....................... Supplies (£3,200 – £1,700) .....

631 126

1,500

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

726

400

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

711

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

209 400

1,500

212

400 140

158

140 1,450 1,450

PROBLEM 3-5A (Continued) (g)

BECK EQUIPMENT REPAIR, INC. Income Statement For the Month Ended September 30, 2014 Revenues Service revenue.................................................. Expenses Salaries and wages expense ............................. Supplies expense ............................................... Rent expense ...................................................... Depreciation expense ........................................ Total expenses............................................ Net income .................................................................

£6,450 £2,650 1,500 500 140 4,790 £1,660

BECK EQUIPMENT REPAIR, INC. Retained Earnings Statement For the Month Ended September 30, 2014 Retained Earnings, September 1 ............................................ Add: Net income .................................................................... Retained Earnings, September 30 ..........................................

£11,000 1,660 £12,660

3-51

PROBLEM 3-5A (Continued) BECK EQUIPMENT REPAIR, INC. Statement of Financial Position September 30, 2014 Assets Equipment ............................................................. Less: Accumulated depreciation— equipment ............................................ Supplies ................................................................. Accounts receivable ............................................. Cash ....................................................................... Total assets ...................................................

£21,000 2,240

£18,760 1,700 3,920 2,480 £26,860

Equity and Liabilities Equity Share capital—ordinary ................................ Retained earnings ......................................... Liabilities Accounts payable.......................................... Unearned service revenue ............................ Salaries and wages payable ......................... Total equity and liabilities ....................................

3-52

£10,000 12,660 3,100 700 400

£ 22,660

4,200 £26,860

*PROBLEM 3-6A

(a) 1. 2.

4. 5.

June 30 30

30 30

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

680 680

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

750

Prepaid Insurance [($2,880 ÷ 12) X 8] ............................. Insurance Expense .......................

1,920

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

750

1,920 1,100 1,100 1,125

1,125

3-53

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

ALPHA GRAPHICS COMPANY, INC. Adjusted Trial Balance June 30, 2014 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Prepaid Insurance .............................................. Equipment ........................................................... Accumulated Depreciation—Equipment ........... Notes Payable ..................................................... Accounts Payable............................................... Interest Payable .................................................. Unearned Service Revenue ............................... Share Capital—Ordinary .................................... Service Revenue ($58,280 – $1,100) .................. Salaries and Wages Expense ............................ Supplies Expense ($3,900 – $680) ..................... Advertising Expense .......................................... Rent Expense ...................................................... Utilities Expense ................................................. Depreciation Expense ........................................ Insurance Expense ($2,880 – $1,920) ................ Interest Expense .................................................

3-54

Debit $ 8,400 14,000 680 1,920 45,000

Credit

30,000 3,220 1,900 1,500 1,700 1,125 960 750 $111,155

1,125 20,000 9,000 750 1,100 22,000 57,180

$111,155

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

ALPHA GRAPHICS COMPANY, INC. Income Statement For the Six Months Ended June 30, 2014 Revenues Service revenue............................................. Expenses Salaries and wages expense ........................ Supplies expense .......................................... Advertising expense ..................................... Utilities expense ............................................ Rent expense ................................................. Depreciation expense ................................... Insurance expense ........................................ Interest expense ............................................ Total expenses....................................... Net income ............................................................

$57,180 $30,000 3,220 1,900 1,700 1,500 1,125 960 750 41,155 $16,025

ALPHA GRAPHICS COMPANY, INC. Retained Earnings Statement For the Six Months Ended June 30, 2014 Retained Earnings, January 1 ................................................. Add: Net income ..................................................................... Retained Earnings, June 30 ....................................................

0 16,025 $16,025

3-55

*PROBLEM 3-6A (Continued) ALPHA GRAPHICS COMPANY, INC. Statement of Financial Position June 30, 2014 Assets Equipment ............................................................. Less: Accumulated depreciation— equipment .............................................. Prepaid insurance ................................................. Supplies ................................................................. Accounts receivable ............................................. Cash ....................................................................... Total assets ............................................

$45,000 1,125

$43,875 1,920 680 14,000 8,400 $68,875

Equity and Liabilities Equity Share capital—ordinary ................................ Retained earnings ......................................... Liabilities Notes payable ................................................ Accounts payable.......................................... Unearned service revenue ............................ Interest payable ............................................. Total equity and liabilities......................................

3-56

$22,000 16,025 20,000 9,000 1,100 750

$38,025

30,850 $68,875

PROBLEM 3-1B (a) J4 Date Account Titles 2014 May 31 Supplies Expense................................ Supplies ......................................

Ref.

Debit

631 126

500

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

736 201

200

31 Insurance Expense .............................. Prepaid Insurance (R$2,400 ÷ 24 months) ............

722

100

31 Unearned Service Revenue ................ Service Revenue ( R$2,600 – R$1,000) ...............

209

31 Salaries and Wages Expense ............. Salaries and Wages Payable [(3/5 X R$500) X 2 employees] ..........................

726

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

711

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

112 400

Credit

500 200

130

100 1,600

400

1,600 600 600

212 200

158

200 1,400 1,400

(b) Cash Date Explanation 2012 May 31 Balance

Ref.

Debit

Credit



No. 101 Balance 7,700

3-57

PROBLEM 3-1B (Continued) Accounts Receivable Date Explanation 2014 May 31 Balance 31 Adjusting

Supplies Date Explanation 2014 May 31 Balance 31 Adjusting

Ref.

Debit

 J4

Ref.

Credit

1,400

4,000 5,400

Debit

Credit

No. 126 Balance

500

1,500 1,000

 J4

Prepaid Insurance Date Explanation 2014 May 31 Balance 31 Adjusting

No. 130 Ref.

Debit

 J4

Credit

Balance

100

2,400 2,300

Equipment Date Explanation 2014 May 31 Balance

No. 112 Balance

No. 157 Ref.

Debit

Credit

Balance



12,000

Accumulated Depreciation—Equipment

No. 158

Date Explanation 2014 May 31 Adjusting

3-58

Ref.

Debit

Credit

Balance

200

PROBLEM 3-1B (Continued) Accounts Payable Date Explanation 2014 May 31 Balance 31 Adjusting Unearned Service Revenue Date Explanation 2014 May 31 Balance 31 Adjusting

Ref.

Debit

 J4

Ref.  J4

Debit

Credit

No. 201 Balance

200

4,500 4,700

Credit

No. 209 Balance 2,600 1,000

1,600

Salaries and Wages Payable Date Explanation 2014 May 31 Adjusting Share Capital—Ordinary Date Explanation 2014 May 31 Balance Service Revenue Date Explanation 2014 May 31 Balance 31 Adjusting 31 Adjusting Supplies Expense Date Explanation 2014 May 31 Adjusting

No. 212 Ref.

Debit

Ref.

Debit

Credit

Balance

600

Credit

No. 311 Balance



16,000

Ref.

Credit

No. 400 Balance

1,600 1,400

8,500 10,100 11,500

Credit

No. 631 Balance

Debit

 J4 J4

Ref.

Debit

500

500 3-59

PROBLEM 3-1B (Continued) Depreciation Expense Date Explanation 2014 May 31 Adjusting

Ref.

Debit

200

Credit

200

Insurance Expense Date Explanation 2014 May 31 Adjusting

No. 722 Ref.

Debit

100

Credit

Rent Expense Date Explanation 2014 May 31 Balance

726 Ref.

Debit

 J4

Ref.

Credit

3-60

Balance

600

3,000 3,600

Debit

No. 729 Balance

Credit



1,000

Utilities Expense Date Explanation 2014 May 31 Adjusting

Balance 100

Salaries and Wages Expense Date Explanation 2014 May 31 Balance 31 Adjusting

No. 711 Balance

No. 732 Ref.

Debit

200

Credit

Balance 200

PROBLEM 3-1B (Continued) (c)

LIRA CONSULTING, INC. Adjusted Trial Balance May 31, 2014 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Prepaid Insurance .............................................. Equipment........................................................... Accumulated Depreciation— Equipment ....................................................... Accounts Payable .............................................. Unearned Service Revenue ............................... Salaries and Wages Payable ............................. Share Capital—Ordinary .................................... Service Revenue................................................. Salaries and Wages Expense ............................ Rent Expense ..................................................... Depreciation Expense ........................................ Insurance Expense ............................................. Utilities Expense................................................. Supplies Expense...............................................

Debit Credit R$ 7,700 5,400 Prepaid 1,000 Insurance 2,300 12,000 R$ 200 4,700 1,000 600 16,000 11,500 3,600 1,000 200 100 200 500 R$34,000

R$34,000

3-61

PROBLEM 3-2B

(a) Date May 31

31 31

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

Ref. 722

Supplies Expense ................................ Supplies ($1,520 – $350) ............

631 126

1,170

711

345

Depreciation Expense ($2,640 X 1/12) + ($1,500 X 1/12) ..... Accumulated Depreciation— Buildings ................................. Accumulated Depreciation— Equipment ...............................

Debit 200

130

J1 Credit

200 1,170

142

220

158

125

Interest Expense .................................. Interest Payable [($38,000 X 12%) X 1/12] ...........

718

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

208

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

726 212

380

230

380 2,200

429

2,200 750 750

(b) Cash Date Explanation May 31 Balance

3-62

Ref. 

Debit

Credit

No. 101 Balance 2,500

PROBLEM 3-2B (Continued) Supplies Date Explanation May 31 Balance 31 Adjusting Prepaid Insurance Date Explanation May 31 Balance 31 Adjusting

Ref.  J1

Debit

Credit 1,170

Debit

Credit 200

Land Date Explanation May 31 Balance Buildings Date Explanation May 31 Balance

No. 130 Balance 2,400 2,200 No. 140

Ref. 

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

Debit

Credit

Credit 220

Equipment Date Explanation May 31 Balance

No. 126 Balance 1,520 350

Balance 14,000 No. 141 Balance 58,000 No. 142 Balance 220 No. 157

Ref. 

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

Debit

Credit

Credit 125

Balance 15,000 No. 158 Balance 125

3-63

PROBLEM 3-2B (Continued) Accounts Payable Date Explanation May 31 Balance Unearned Rent Revenue Date Explanation May 31 Balance 31 Adjusting Salaries and Wages Payable Date Explanation May 31 Adjusting Interest Payable Date Explanation May 31 Adjusting

Ref. 

Debit

Ref.  J1

Debit

Credit

No. 201 Balance 4,800

Credit

No. 208 Balance 3,300 1,100

2,200

Ref. J1

Debit

Ref. J1

Debit

Credit 750

No. 212 Balance 750

Credit 380

No. 230 Balance 380

Mortgage Payable Date Explanation May 31 Balance Share Capital—Ordinary Date Explanation May 31 Balance Rent Revenue Date Explanation May 31 Balance 31 Adjusting

3-64

No. 275 Ref. 

Debit

Ref. 

Debit

Ref.  J1

Debit

Credit

No. 311 Balance 40,000

Credit

No. 429 Balance 12,300 14,500

2,200

Balance 38,000

PROBLEM 3-2B (Continued) Advertising Expense Date Explanation May 31 Balance

Ref. 

Debit

Credit

Supplies Expense Date May 31

Explanation Adjusting

Depreciation Expense Date Explanation May 31 Adjusting

Interest Expense Date Explanation May 31 Adjusting

No. 631 Ref. J1

Ref. J1

Debit 1,170

Debit 345

Debit 380

Credit

Salaries and Wages Expense Date Explanation May 31 Balance 31 Adjusting

Credit

No. 718 Balance 380

No. 722 Ref. J1

Ref.  J1

Debit 200

Debit

Credit

750

Utilities Expense Date May 31

Explanation Balance

Balance 1,170

No. 711 Balance 345

Insurance Expense Date Explanation May 31 Adjusting

No. 610 Balance 780

Balance 200

No. 726 Balance 3,300 4,050 No. 732

Ref. 

Debit

Credit

Balance 900

3-65

PROBLEM 3-2B (Continued) (c)

BADGER MOTEL, INC. Adjusted Trial Balance May 31, 2014 Cash .................................................................... Supplies .............................................................. Prepaid Insurance .............................................. Land..................................................................... Buildings ............................................................. Accumulated Depreciation—Buildings ............. Equipment ........................................................... Accumulated Depreciation—Equipment ........... Accounts Payable............................................... Unearned Rent Revenue .................................... Salaries and Wages Payable.............................. Interest Payable .................................................. Mortgage Payable ............................................... Share Capital—Ordinary .................................... Rent Revenue ..................................................... Advertising Expense .......................................... Supplies Expense ............................................... Depreciation Expense ........................................ Interest Expense ................................................. Insurance Expense ............................................. Salaries and Wages Expense ............................ Utilities Expense .................................................

3-66

Debit $ 2,500 350 2,200 14,000 58,000

Credit

220

15,000 125 4,800 1,100 750 380 38,000 40,000 14,500 780 1,170 345 380 200 4,050 900 $99,875

$99,875

PROBLEM 3-2B (Continued) (d)

BADGER MOTEL, INC. Income Statement For the Month Ended May 31, 2014 Revenues Rent revenue ................................................... Expenses Salaries and wages expense .......................... Supplies expense ............................................ Utilities expense .............................................. Advertising expense ....................................... Interest expense .............................................. Depreciation expense ..................................... Insurance expense .......................................... Total expenses......................................... Net income ..............................................................

$14,500 $4,050 1,170 900 780 380 345 200 7,825 $ 6,675

BADGER MOTEL, INC. Retained Earnings Statement For the Month Ended May 31, 2014 Retained Earnings, May 1 ....................................................... Add: Net income .................................................................... Retained Earnings, May 31 .....................................................

0 6,675 $6,675

3-67

PROBLEM 3-2B (Continued) BADGER MOTEL, INC. Statement of Financial Position May 31, 2014 Assets Land .................................................................... Buildings ............................................................ Less: Accumulated depreciation— ................. buildings ........................................... Equipment .......................................................... Less: Accumulated depreciation— equipment .......................................... Prepaid insurance .............................................. Supplies .............................................................. Cash .................................................................... Total assets .........................................

$14,000 $58,000 220 15,000

57,780

125

14,875 2,200 350 2,500 $91,705

Equity and Liabilities Equity Share capital—ordinary ............................. Retained earnings ...................................... Liabilities Accounts payable....................................... Mortgage payable ....................................... Unearned rent revenue .............................. Salaries and wages payable ...................... Interest payable .......................................... Total equity and liabilities ...................................

3-68

$40,000 6,675 4,800 38,000 1,100 750 380

$46,675

45,030 $91,705

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

(b)

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

1,100

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

1,000

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

1,250

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

1,125

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

100

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

850

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

725

1,100 1,000 1,250 1,125 100 850 725

LAUSANNE CO., INC. Income Statement For the Quarter Ended September 30, 2014 Revenues Service revenue.................................................. CHF17,900 Rent revenue ...................................................... 2,560 Total revenues ............................................ 20,460 Expenses Salaries and wages expense ............................. CHF8,725 Rent expense ...................................................... 2,900 Utilities expense ................................................. 1,510 Supplies expense ............................................... 1,250 Depreciation expense ........................................ 1,125 Interest expense ................................................. 100 Total expenses............................................ 15,610 Net income ................................................................. CHF 4,850

3-69

PROBLEM 3-3B (Continued) LAUSANNE CO., INC. Retained Earnings Statement For the Quarter Ended September 30, 2014 Retained Earnings, July 1, 2014.............................................. CHF 0 Add: Net income .................................................................... 4,850 4,850 Less: Dividends ...................................................................... 1,000 Retained Earnings, September 30, 2014 ................................ CHF 3,850 LAUSANNE CO., INC. Statement of Financial Position September 30, 2014 Assets Equipment .......................................................... CHF20,000 Less: Accum. depreciation—equipment ......... 1,125 CHF18,875 Prepaid rent ........................................................ 1,200 Supplies .............................................................. 650 Accounts receivable .......................................... 11,500 Cash .................................................................... 8,700 Total assets ......................................... CHF40,925 Equity and Liabilities Equity Share capital—ordinary ............................. CHF22,000 Retained earnings ...................................... 3,850 Total equity ......................................... CHF25,850 Liabilities Notes payable ............................................. 10,000 Accounts payable....................................... 3,200 Salaries and wages payable ...................... 725 Unearned rent revenue .............................. 1,050 Interest payable .......................................... 100 Total liabilities ..................................... 15,075 Total equity and liabilities ................................. CHF40,925 (c) Interest of 12% per year equals a monthly rate of 1%; monthly interest is CHF100 (CHF10,000 X 1%). Since total interest expense is CHF100, the note has been outstanding one month.

3-70

PROBLEM 3-4B

Dec. 31

Insurance Expense ....................................... Prepaid Insurance ................................. [(€6,000 ÷ 3) = €2,000 [(€4,800 ÷ 2) = 2,400 €4,400]

4,400

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

84,000

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

1,800

Salaries and Wages Expense ...................... Salaries and Wages Payable ................ [5 X €640 X 3/5 = €1,920 [3 X €500 X 3/5 = 900 €2,820]

2,820

4,400

84,000

1,800

2,820

3-71

PROBLEM 3-5B

(a), (c) & (e) Cash Date Nov. 1 8 10 12 20 22 25 29

Explanation Balance

Accounts Receivable Date Explanation Nov. 1 Balance 10 27

Supplies Date Explanation Nov. 1 Balance 17 30 Adjusting

Equipment Date Explanation Nov. 1 Balance 15

3-72

Ref.  J1 J1 J1 J1 J1 J1 J1

Debit

Credit 1,500

3,420 3,100 2,700 500 1,500 350

Ref.  J1 J1

Debit

Credit 3,420

1,900

Ref.  J1 J1

Debit

Credit

700 1,100

Ref.  J1

Debit 2,000

Credit

No. 101 Balance 2,400 900 4,320 7,420 4,720 4,220 2,720 3,070

No. 112 Balance 4,450 1,030 2,930

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

No. 157 Balance 16,000 18,000

PROBLEM 3-5B (Continued) Accumulated Depreciation—Equipment Date Explanation Ref. Nov. 1 Balance  30 Adjusting J1

Accounts Payable Date Explanation Nov. 1 Balance 15 17 20

Unearned Service Revenue Date Explanation Nov. 1 Balance 29 30 Adjusting

Salaries and Wages Payable Date Explanation Nov. 1 Balance 8 30 Adjusting

Share Capital—Ordinary Date Explanation Nov. 1 Balance Retained Earnings Date Explanation Nov. 1 Balance

Ref.  J1 J1 J1

Ref.  J1 J1

Ref. 

Debit

Credit 200

Debit

Credit 2,000 700

2,700

Debit

Credit 350

1,380

Debit

Credit

700 350

Debit

No. 158 Balance 2,000 2,200

No. 201 Balance 2,600 4,600 5,300 2,600

No. 209 Balance 1,360 1,710 330

No. 212 Balance 700 0 350

Credit

No. 311 Balance 10,000

Credit

No. 320 Balance 7,990

3-73

PROBLEM 3-5B (Continued) Service Revenue Date Explanation Nov. 12 27 30 Adjusting

Supplies Expense Date Explanation Nov. 30 Adjusting

Depreciation Expense Date Explanation Nov. 30 Adjusting

Ref. J1 J1 J1

Debit

Ref. J1

Debit 1,100

Ref. J1

Debit 200

Credit 3,100 1,900 1,380

Credit

No. 631 Balance 1,100

Credit

No. 711 Balance 200

Salaries and Wages Expense Date Nov.

Explanation 8 25 30

Adjusting

No. 726 Ref. J1 J1 J1

Debit 800 1,500 350

Credit

Rent Expense Date Explanation Nov. 22

3-74

No. 400 Balance 3,100 5,000 6,380

Balance 800 2,300 2,650

No. 729 Ref. J1

Debit 500

Credit

Balance 500

PROBLEM 3-5B (Continued) (b)

General Journal J1

Date Nov.

10 12 15 17 20 22 25 27 29

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

Ref. 212 726 101

Debit 700 800

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

101 112

3,420

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

101 400

3,100

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

157 201

2,000

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

126 201

700

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

201 101

2,700

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

729 101

500

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

726 101

1,500

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

112 400

1,900

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

101 209

350

Credit

1,500 3,420 3,100 2,000 700 2,700 500 1,500 1,900

350

3-75

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

SAMONE EQUIPMENT REPAIR, INC. Trial Balances November 30, 2014

(e) 1. Nov. 30

3-76

Before Adjustment Dr. Cr. $ 3,070 2,930 2,500 18,000

After Adjustment Dr. Cr. $ 3,070 2,930 1,400 18,000

$ 2,000 2,600 1,710 –0– 10,000 7,990 5,000

$ 2,200 2,600 330 350 10,000 7,990 6,380

200 1,100 2,300 2,650 500 500 $29,300 $29,300 $29,850

$29,850

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

631 126

1,100

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

726

350

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

711

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

209 400

1,100

212

350 200

158

200 1,380 1,380

PROBLEM 3-5B (Continued) (g)

SAMONE EQUIPMENT REPAIR, INC. Income Statement For the Month Ended November 30, 2014 Revenues Service revenue............................................... Expenses Salaries and wages expense .......................... Supplies expense ............................................ Rent expense ................................................... Depreciation expense ..................................... Total expenses......................................... Net Income ..............................................................

$6,380 $2,650 1,100 500 200 4,450 $1,930

SAMONE EQUIPMENT REPAIR, INC. Retained Earnings Statement For the Month Ended November 30, 2014 Retained Earnings, November 1 ............................................. Plus: Net income.................................................................... Retained Earnings, November 30 ...........................................

$7,990 1,930 $9,920

3-77

PROBLEM 3-5B (Continued) SAMONE EQUIPMENT REPAIR, INC. Statement of Financial Position November 30, 2014 Assets Equipment ............................................................. Less: Accumulated depreciation— equipment ............................................ Supplies ................................................................. Accounts receivable ............................................. Cash ....................................................................... Total assets ...................................................

$18,000 2,200

$15,800 1,400 2,930 3,070 $23,200

3-78

$10,000 9,920 2,600 330 350

$19,920

3,280 $23,200

CCC3

CONTINUING COOKIE CHRONICLE

(a) Date

GENERAL JOURNAL Account Titles and Explanation

Debit

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

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

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

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

300

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

J2 Credit

5 300

3-79

CCC3 (Continued) (a) (Continued)

Date

Explanation

Nov. 30 Balance

Date

Explanation

Cash Ref.

Debit

✓ Accounts Receivable Ref. Debit J2

Date

Supplies Ref. Debit

Nov. 30 Balance 30

Date

Explanation

Nov. 30 Balance

Date

Explanation

Nov. 30

3-80

Credit

300

✓ J2 Prepaid Insurance Ref. Debit

Balance 300

Credit

Balance

125 90

Credit

Balance

✓

1,320

Equipment Ref. Debit

Credit

Balance

✓

1,200

Accumulated Depreciation—Equipment Explanation Ref. Debit Credit

Balance

Nov. 30 Balance

Date

Balance 245

Nov. 30

Explanation

Credit

CCC3 (Continued) (a) (Continued)

Date

Explanation

Nov. 30

Date

Explanation

Nov. 30

Date

Unearned Service Revenue Explanation Ref. Debit

Explanation

Nov. 30 Balance

Date

Explanation

Nov. 30 Balance

Date

Interest Payable Ref. Debit J2

Nov. 30 Balance

Date

Accounts Payable Ref. Debit

Explanation

Nov. 30 Balance 30

Credit

Balance

Credit

Balance

Credit

Balance

✓ Notes Payable Ref. Debit

Credit

✓ Share Capital—Ordinary Ref. Debit

2,000

Credit

✓ Service Revenue Ref. Debit ✓ J2

Balance

Balance 800

Credit

Balance

300

125 425

3-81

CCC3 (Continued) (a) (Continued)

Date

Explanation

Nov. 30

Date

Explanation

Nov. 30 Balance

Date

Explanation

Nov. 30

Date

Explanation

Nov. 30

3-82

Advertising Expense Ref. Debit ✓

Supplies Expense Ref. Debit

Credit

Balance 35

Credit

Interest Expense Ref. Debit

Balance 65

Depreciation Expense Ref. Debit

Balance 45

Explanation

Credit

Nov. 30

Date

Utilities Expense Ref. Debit

Balance 20

Credit

Balance 5

CCC3 (Continued) (b) COOKIE CREATIONS Adjusted Trial Balance November 30, 2014 Account Cash ............................................................................... Accounts Receivable .................................................... Supplies ......................................................................... Prepaid Insurance ......................................................... Equipment ..................................................................... Accumulated Depreciation—Equipment ..................... Accounts Payable ......................................................... Interest Payable ............................................................ Unearned Service Revenue .......................................... Notes Payable ............................................................... Share Capital—Ordinary ............................................... Service Revenue ........................................................... Utilities Expense ........................................................... Advertising Expense ..................................................... Supplies Expense ......................................................... Depreciation Expense ................................................... Interest Expense ........................................................... Totals ................................................................

Debit $ 245 300 90 1,320 1,200

Credit

20 45 5 30 2,000 800 425

45 65 35 20 5 $3,325

$3,325

3-83

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

$425 $65 45 35 20 5

170 $255

Yes, Cookie Creations has been profitable in November. It has a profit of $255 which is more than one half of the revenue recognized in November.

3-84

BYP 3-1

FINANCIAL REPORTING PROBLEM

(a) Items that may result in adjusting entries for prepayments are: 1. Prepaid expenses and other current assets (per statement of financial position). 2. Property, plant and equipment, net of depreciation (per statement of financial position). 3. Amortizable intangible assets, net (per statement of financial position)—amortization is similar to depreciation (explained later in Chapter 9). (b) Accrual adjusting entries were probably made for trade payable and other current liabilities, finance (interest) expense, and income tax payable.

3-85

BYP 3-2

COMPARATIVE ANALYSIS PROBLEM

Nestlé

Zetar

(a)

Net increase (decrease) in property, plant, and equipment (net) for current fiscal year.

(CHF161,000,000)

£1,697,000

(b)

Increase in marketing and administrative expenses, for current fiscal year.

CHF1,018,000,000

£449,000

(c)

Increase (decrease) in non-current liabilities for current fiscal year.

(CHF2,305,000,000)

£2,029,000

(d)

Increase in net income for current fiscal year.

CHF23,591,000,000

£214,000

(e)

Increase in cash and cash equivalents for current fiscal year.

CHF5,323,000,000

£25,000

3-86

BYP 3-3

REAL–WORLD FOCUS

Answers will vary depending on the company and article chosen by the student.

3-87

BYP 3-4

(a)

DECISION-MAKING ACROSS THE ORGANIZATION

HAPPY TRAILS PARK, INC. Income Statement For the Quarter Ended March 31, 2014 Revenues Rent revenue ($88,000 – $14,000)................. Expenses Salaries and wages expense [$28,800 + ($300 X 2)] ................................. Advertising expense ($5,200 + $130) ........... Supplies expense ($6,200 – $1,450) ............. Maintenance and repairs expense ($4,000 + $260) ............................................ Insurance expense ($7,500 X 3/12)............... Utilities expense ($750 + $120) ..................... Depreciation expense ................................... Interest expense ($12,000 X 10% X 3/12) ........ Total expenses ....................................... Net income ............................................................

$74,000 $29,400 5,330 4,750 4,260 1,875 870 800 300 47,585 $26,415

(b) The international financial reporting standards pertaining to the income statement that were not recognized by Alicia were the revenue recognition principle and the expense recognition principle. The revenue recognition principle states that revenue is recognized in the accounting period in which the performance obligation is satisfied. The $14,000 for summer rentals is a prepayment for services to be performed in a later period. As a result, the performance obligation is not satisfied and, therefore, should not be reported in income for the quarter ended March 31. The expense recognition principle dictates that efforts (expenses) be matched with accomplishments (revenues) whenever it is reasonable and practicable to do so. This means that the expenses should include amounts incurred in March but not paid until April. The difference in expenses was $8,035 ($47,585 – $39,550). The overstatement of revenues ($14,000) plus the understatement of expenses ($8,035) equals the difference in reported income of $22,035 ($48,450 – $26,415).

3-88

BYP 3-5

COMMUNICATION ACTIVITY

Dear Ms. Danon: Upon reviewing the accounts of your company at the end of the year, I discovered that adjusting entries were not made. Adjusting entries are made at the end of the accounting period to ensure that the revenue recognition and expense recognition principles required under international financial reporting standards are followed. The use of adjusting entries makes it possible to report on the statement of financial position the appropriate assets, liabilities, and equity at the statement date and to report on the income statement the proper net income (or loss) for the year. Adjusting entries are needed because the trial balance may not contain an up-to-date and complete record of transactions and events for the following reasons: 1.

Some events are not journalized daily because it is not efficient to do so. Examples are the use of supplies and the earning of wages by employees.

The expiration of some costs is not journalized during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions. Examples of such costs are building and equipment depreciation, rent, and insurance.

Some expenses, such as the cost of utility service and property taxes, may be unrecorded because the bills for the costs have not been received.

There are four types of adjusting entries: 1.

Prepaid expenses—expenses paid in cash and recorded as assets before they are used or consumed.

Unearned revenues—revenues received in cash and recorded as liabilities before they are earned.

3-89

BYP 3-5 (Continued) 3.

Accrued revenues—revenues earned but not yet received in cash or recorded.

Accrued expenses—expenses incurred but not yet paid in cash or recorded.

I will be happy to answer any questions you may have on adjusting entries. Signature

3-90

BYP 3-6

ETHICS CASE

(a) The shareholders in this situation are:  Diane Leno, controller.  The president of Watkin Company.  Watkin Company shareholders. (b) 1.

It is unethical for the president to place pressure on Diane to misstate net income by requesting her to prepare incorrect adjusting entries.

It is customary for adjusting entries to be dated as of the statement of financial position date although the entries are prepared at a later date. Diane did nothing unethical by dating the adjusting entries December 31.

(c) Diane can accrue revenues and defer expenses through the preparation of adjusting entries and be ethical so long as the entries reflect economic reality. Intentionally misrepresenting the company’s financial condition and its results of operations is unethical (it is also illegal).

3-91

GAAP EXERCISES GAAP 3-1 IFRS might choose to revalue land and buildings at fair value because it provides more relevant information. GAAP, on the other hand, requires land and buildings be valued at cost because it is more verifiable and therefore provides information that is representationally faithful.

GAAP 3-2 No. GAAP classifies revenues as the economic benefit that arises from an entity's normal operating activities and gains as the benefits associated with activities outside the normal sales of goods and services. GAAP also classifies expenses as those costs associated with an entity's normal operations and loses as those costs associated with activities outside the normal sales of goods and services.

3-92

GAAP FINANCIAL REPORTING PROBLEM GAAP 3-3 (a) Tootsie Roll could have adjustments for prepayments such as: Prepaid Expenses, Supplies, and Depreciation Expense. (b) Tootsie Roll could have adjustments for accruals such as: Accounts Receivable (trade), Accounts Payable, and Liabilities.

Accrued

3-93

3-94

CHAPTER 4 Completing the Accounting Cycle ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Do It!

Exercises

A Problems

B Problems

1, 2, 3, 4, 5

1, 2, 3

1, 2, 3, 5, 6, 17

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

1B, 2B, 3B, 4B, 5B

Explain the process of closing the books.

6, 7, 11, 12

4, 5, 6

4, 7, 8, 11, 19

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

1B, 2B, 3B, 4B, 5B

*3.

Describe the content and purpose of a post-closing trial balance.

8, 9

4, 7, 8

2A, 3A, 4A, 5A

2B, 3B, 4B, 5B

*4.

State the required steps in the accounting cycle.

10, 11, 12

10, 19

*5.

Explain the approaches to preparing correcting entries.

12, 13

*6.

Identify the sections of a classified statement of financial position.

14, 15, 16, 17, 18, 19

10, 11

3, 9, 14, 15, 16, 17

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

*7.

Prepare reversing entries.

10, 20, 21

Learning Objectives

Questions

*1.

Prepare a worksheet.

*2.

3, 4

1B, 2B, 3B, 4B, 5B

18, 19

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

4-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Time Allotted (min.)

Prepare worksheet, financial statements, and adjusting and closing entries.

Simple

40–50

Complete worksheet; prepare financial statements, closing entries, and post-closing trial balance.

Moderate

50–60

Prepare financial statements, closing entries, and postclosing trial balance.

Moderate

40–50

Complete worksheet; prepare classified statement of financial position, adjusting and closing entries, and post-closing trial balance.

Moderate

50–60

Complete all steps in accounting cycle.

Complex

70–90

Analyze errors and prepare correcting entries and trial balance.

Moderate

40–50

Prepare worksheet, financial statements, and adjusting and closing entries.

Simple

40–50

Complete worksheet; prepare financial statements, closing entries, and post-closing trial balance.

Moderate

50–60

Prepare financial statements, closing entries, and postclosing trial balance.

Moderate

40–50

Complete worksheet; prepare classified statement of financial position, adjusting and closing entries, and post-closing trial balance.

Moderate

50–60

Complete all steps in accounting cycle.

Complex

70–90

Comprehensive Problem: Chapters 2 to 4

4-2

Difficulty Level

WEYGANDT FINANCIAL ACCOUNTING, IFRS Version, 2e CHAPTER 4 COMPLETING THE ACCOUNTING CYCLE Number

Difficulty

Time (min.)

BE1

Simple

2–4

BE2

Moderate

6–8

BE3

Simple

3–5

BE4

Simple

3–5

BE5

Simple

4–6

BE6

Simple

6–8

BE7

Simple

2–4

BE8

Simple

3–5

BE9

Moderate

4–6

BE10

Simple

4–6

BE11

Simple

3–5

BE12

Moderate

4–6

DI1

Simple

4–6

DI2

Simple

2–4

DI3

Simple

6–8

DI4

Simple

4–6

EX1

Simple

12–15

EX2

Simple

10–12

EX3

1, 6

Simple

12–15

EX4

2, 3

Simple

12–15

EX5

Simple

10–12

EX6

Moderate

12–15

EX7

2, 3

Simple

8–10

EX8

2, 3

Simple

10–12

EX9

Simple

12–15

EX10

Simple

3–5

EX11

Simple

6–8

EX12

Moderate

8–10

EX13

Moderate

4–6

EX14

Moderate

10–12

EX15

Simple

5–8

EX16

Simple

8–10

4-3

COMPLETING THE ACCOUNTING CYCLE (Continued) Number

Difficulty

Time (min.)

EX17

1, 6

Simple

12–15

EX18

Moderate

5–7

EX19

2, 4, 7

Moderate

10–12

P1A

1, 2, 6

Simple

40–50

P2A

1-3, 6

Moderate

50–60

P3A

1-3, 6

Moderate

40–50

P4A

1-3, 6

Moderate

50–60

P5A

1-4, 6

Complex

70–90

P6A

Moderate

40–50

P1B

1, 2, 6

Simple

40–50

P2B

1-3, 6

Moderate

50–60

P3B

1-3, 6

Moderate

40–50

P4B

1-3, 6

Moderate

50–60

P5B

1-4, 6

Complex

70–90

BYP1

Simple

10–12

BYP2

Simple

8–10

BYP3

—

Simple

10–12

BYP4

Moderate

15–20

BYP5

Simple

15–20

BYP6

—

Moderate

10–15

4-4

Learning Objective

Knowledge

Comprehension

Prepare a worksheet.

BE4-1

Q4-1 Q4-2 Q4-3 Q4-4 Q4-5

*2.

Explain the process of closing the books.

Q4-6 Q4-11 Q4-12

*3.

Describe the content and purpose of a post-closing trial balance.

*4.

State the required steps in the accounting cycle.

*5.

Explain the approaches to preparing correcting entries.

*6.

Identify the sections of a classified statement of financial position.

*7.

Prepare reversing entries.

BE4-3 DI4-1

Broadening Your Perspective

Q4-11 Q4-12 BE4-8

Q4-14 Q4-15 Q4-16

Analysis

E4-1 E4-2 E4-3 E4-17 P4-2A

P4-3A P4-2B P4-3B

BE4-2 E4-5 E4-6 P4-1A P4-4A

P4-5A P4-1B P4-4B P4-5B

Q4-7

BE4-4 BE4-5 BE4-6 DI4-2 E4-4 E4-7

E4-8 E4-11 P4-2A P4-3A P4-2B P4-3B

E4-19 P4-1A P4-4A P4-5A P4-1B P4-4B

P4-5B

Q4-8 Q4-9 BE4-7

E4-4 E4-7 E4-8 P4-2A

P4-3A P4-2B P4-3B

P4-4A P4-5A

P4-4B P4-5B

*1.

Application

Q4-10 E4-10

E4-19 P4-5A P4-5B

Q4-13

BE4-9 E4-12 E4-13 P4-6A

Q4-17 Q4-18 BE4-11 DI4-4 E4-15

Q4-19 BE4-10 DI4-3 E4-3 E4-9 E4-14

Synthesis

Evaluation

E4-16 P4-1A E4-17 P4-4A P4-2A P4-5A P4-3A P4-1B P4-2B P4-4B P4-3B P4-5B

4-5

Q4-10 Q4-20

Q4-21 BE4-12

E4-18 E4-19

Communication

Financial Reporting Comparative Analysis Decision Making Across the Organization

Real–World Focus Ethics Case

BLOOM’ S TAXONOMY TABLE

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

ANSWERS TO QUESTIONS 1.

No. A worksheet is not a permanent accounting record. The use of a worksheet is an optional step in the accounting cycle.

The worksheet is merely a device used to make it easier to prepare adjusting entries and the financial statements.

The amount shown in the adjusted trial balance column for an account equals the account balance in the ledger after adjusting entries have been journalized and posted.

The net income of $12,000 will appear in the income statement debit column and the statement of financial position credit column. A net loss will appear in the income statement credit column and the statement of financial position debit column.

Formal financial statements are needed because the columnar data are not properly arranged and classified for statement purposes. For example, the Dividends account is listed with assets.

(1) (2) (3) (4)

Income Summary is a temporary account that is used in the closing process. The account is debited for expenses and credited for revenues. The difference, either net income or net loss, is then closed to the Retained Earnings account.

The post-closing trial balance contains only statement of financial position accounts. Its purpose is to prove the equality of the permanent account balances that are carried forward into the next accounting period.

The accounts that will not appear in the post-closing trial balance are: Depreciation Expense; Dividends; and Service Revenue.

10.

A reversing entry is the exact opposite, both in amount and in account titles, of an adjusting entry and is made at the beginning of the new accounting period. Reversing entries are an optional step in the accounting cycle.

11.

The steps that involve journalizing are: (1) journalize the transactions, (2) journalize the adjusting entries, and (3) journalize the closing entries.

12.

The three trial balances are the: (1) trial balance, (2) adjusted trial balance, and (3) post-closing trial balance.

13.

Correcting entries differ from adjusting entries because they: (1) are not a required part of the accounting cycle, (2) may be made whenever an error is discovered, and (3) may affect any combination of accounts.

4-6

(Dr) Individual revenue accounts and (Cr) Income Summary. (Dr) Income Summary and (Cr) Individual expense accounts. (Dr) Income Summary and (Cr) Retained Earnings. (Dr) Retained Earnings and (Cr) Dividends.

Questions Chapter 4 (Continued) *14. The standard classifications used in a statement of financial position are: Assets Intangible Assets Property, Plant, and Equipment Long-term Investments Current Assets

Equity and Liabilities Equity Non-current Liabilities Current Liabilities

*15. The operating cycle of a company is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers. *16. Current assets are assets that a company expects to convert to cash or use up in one year. Some companies use a period longer than one year to classify assets and liabilities as current because they have an operating cycle longer than one year. Companies usually list current assets in the reverse order in which they expect to convert them into cash. *17. Long-term investments are generally investments in shares and bonds of other companies that are normally held for many years and non-current assets such as land or buildings that a company is not using in its operating activities. Property, plant, and equipment are assets with relatively long useful lives that a company is currently using in operating the business. *18. The two equity accounts and the purpose of each are: (1) Share Capital—Ordinary is used to record investments of assets in the business by the owners (shareholders) through share transactions. (2) Retained Earnings is used to record net income retained in the business. *19.. Samsung’s current liabilities at December 31, 2010 and December 31, 2009 were W 39,944,721 million and W 34,204,424 million respectively. Samsung’s current liabilities were lower than its current assets in both years. *20. After reversing entries have been made, the balances will be Interest Payable, zero balance; Interest Expense, a credit balance. *21. (a) Jan. 10 Salaries and Wages Expense ................................................... Cash ................................................................................

9,200 9,200

Because of the January 1 reversing entry that credited Salaries and Wages Expense for $3,500, Salaries and Wages Expense will have a debit balance of $5,700 which equals the expense for the current period. (b) Jan. 10 Salaries and Wages Payable .................................................... Salaries and Wages Expense ................................................... Cash ................................................................................

3,500 5,700 9,200

Note that Salaries and Wages Expense will again have a debit balance of $5,700.

4-7

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 4-1 The steps in using a worksheet are performed in the following sequence: (1) prepare a trial balance on the worksheet, (2) enter adjustment data, (3) enter adjusted balances, (4) extend adjusted balances to appropriate statement columns and (5) total the statement columns, compute net income (loss), and complete the worksheet. Filling in the blanks, the answers are 1, 3, 4, 5, 2. The solution to BRIEF EXERCISE 4-2 is on page 4-9. BRIEF EXERCISE 4-3

Account Accumulated Depreciation Depreciation Expense Share Capital—Ordinary Dividends Service Revenue Supplies Accounts Payable

Income Statement Dr. Cr.

Statement of Financial Position Dr. Cr. X

X X X X X X

BRIEF EXERCISE 4-4 Dec. 31 31

31 31

4-8

Service Revenue ............................................. Income Summary ....................................

47,000

Income Summary ............................................ Salaries and Wages Expense ................. Supplies Expense ....................................

32,000

Income Summary ............................................ Retained Earnings ...................................

15,000

Retained Earnings........................................... Dividends .................................................

2,000

47,000 27,000 5,000 15,000 2,000

BRIEF EXERCISE 4-2

KEO COMPANY Worksheet

Account Titles Prepaid Insurance Service Revenue Salaries and Wages Expense Accounts Receivable Salaries and Wages Payable Insurance Expense

Trial Balance Dr. Cr. 3,000 61,000 25,000

Adjustments Dr. Cr. (a) 1,300 (b) 1,100 (c) 800 (b) 1,100

25,800 1,100 (c)

(a) 1,300

Adjusted Trial Balance Dr. Cr. 1,700 62,100

800

Income Statement Dr. Cr. 62,100 25,800

1,100 800

1,300

Statement of Financial Position Dr. Cr. 1,700

800 1,300

4-9

BRIEF EXERCISE 4-5 Salaries and Wages Expense Bal. 27,000 (2) 27,000

Supplies Expense Bal. 5,000 (2) 5,000

Income Summary (2) 32,000 (1) 47,000 (3) 15,000 47,000 47,000

Service Revenue (1) 47,000 Bal. 47,000

Retained Earnings (4) 2,000 Bal. 30,000 (3) 15,000 Bal. 43,000

Dividends Bal. 2,000 (4) 2,000

BRIEF EXERCISE 4-6 July 31 31

Date 7/31 7/31

4-10

Service Revenue .............................................. Income Summary .....................................

19,200

Income Summary ............................................. Salaries and Wages Expense .................. Maintenance and Repairs Expense .........

11,300

Explanation Balance Closing entry

Service Revenue Ref. Debit

19,200 8,800 2,500

Credit 19,200

Balance 19,200 0

Credit

Balance 8,800 0

19,200 Salaries and Wages Expense Ref. Debit 8,800

8,800

BRIEF EXERCISE 4-6 (Continued)

Date 7/31 7/31

Maintenance and Repairs Expense Explanation Ref. Debit Credit Balance 2,500 Closing entry 2,500

Balance 2,500 0

BRIEF EXERCISE 4-7 The accounts that will appear in the post-closing trial balance are: Accumulated Depreciation Share Capital—Ordinary Supplies Accounts Payable

BRIEF EXERCISE 4-8 The proper sequencing of the required steps in the accounting cycle is as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Analyze business transactions. Journalize the transactions. Post to ledger accounts. Prepare a trial balance. Journalize and post adjusting entries. Prepare an adjusted trial balance. Prepare financial statements. Journalize and post closing entries. Prepare a post-closing trial balance.

Filling in the blanks, the answers are 4, 2, 8, 7, 5, 3, 9, 6, 1.

4-11

BRIEF EXERCISE 4-9 1. 2.

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

690

Accounts Payable (€1,850 – €1,580) ................................. Supplies ......................................................................

270

690 270

BRIEF EXERCISE 4-10 KREN COMPANY Partial Statement of Financial Position Current assets Prepaid insurance ................................................................... Supplies ................................................................................... Accounts receivable ............................................................... Short-term investments .......................................................... Cash ......................................................................................... Total current assets.........................................................

£ 3,600 5,200 12,500 4,900 6,700 £32,900

BRIEF EXERCISE 4-11 CL Accounts payable CA Accounts receivable PPE Accum. depreciation—buildings PPE Buildings CA Cash IA Copyrights

CL Income taxes payable LTI Debt investments (long-term) PPE Land CA Inventory IA Patents CA Supplies

*BRIEF EXERCISE 4-12 Nov. 1

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

1,680 1,680

The balances after posting the reversing entry are Salaries and Wages Expense (Cr.) $1,680 and Salaries and Wages Payable $0.

4-12

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 4-1 Income statement debit column—Utilities Expense Income statement credit column—Service Revenue Statement of financial position debit column—Accounts Receivable Statement of financial position credit column—Notes Payable; Accumulated Depreciation; Share Capital—Ordinary DO IT! 4-2 Dec. 31 Dec. 31

Income Summary......................................... Retained Earnings .................................

47,000

Retained Earnings ....................................... Dividends ...............................................

15,000

47,000 15,000

DO IT! 4-3 ZERMATT COMPANY Partial Statement of Financial Position December 31, 2014 Property, plant, and equipment Equipment ................................................... Less: Accumulated depreciation— equipment ............................................... Long-term investments Investments in ordinary shares ................. Current assets Inventory ..................................................... Accounts receivable ................................... Short-term investments ............................. Cash............................................................. Total assets ........................................................

CHF21,700 5,200

CHF16,500 6,500

4,100 4,300 1,200 3,900

13,500 CHF36,500

4-13

DO IT! 4-4 NA CL CL CA NCL IA

4-14

Interest revenue Utilities payable Accounts payable Supplies Bonds payable Trademarks

E PPE PPE NA LTI CL

Share capital—ordinary Accumulated depreciation– equipment Equipment Salaries and wages expense Investment in real estate Unearned rent revenue

SOLUTIONS TO EXERCISES EXERCISE 4-1 LIM COMPANY Worksheet For the Month Ended June 30, 2014 (in thousands) Account Titles

Cash

Trial Balance

Adjustments

Dr.

Cr.

4,020

Adj. Trial Balance Dr.

Cr.

Income Statement Dr.

Cr.

Statement of Financial Position Dr.

4,020

2,440

500

Cr.

Accounts Receivable Supplies

2,440 1,900

Accounts Payable

(a) 1,400 1,120

1,120

100

Unearned Service Revenue

240 (b)

140

Share Capital— Ordinary

5,000

Service Revenue

5,000

3,100

(b)

140

5,000

3,240

Salaries and Wages Expense

860

(c)

250

1,110

240

1,400

Miscellaneous Expense

240

Totals

9,460

Supplies Expense

9,460 (a) 1,400

Salaries and Wages Payable Totals

250 1,790

250 9,710

9,710

250 2,750

Net Income

490

Totals

3,240

6,960

6,470 490

3,240

6,960

4-15

EXERCISE 4-2 ALBANESE COMPANY (Partial) Worksheet For the Month Ended April 30, 2014

Account Titles Cash Accounts Receivable Prepaid Rent Equipment Accum. Depreciation— Equipment Notes Payable Accounts Payable Share Capital— Ordinary Retained Earnings Dividends Service Revenue Salaries and Wages Expense Rent Expense Depreciation Expense Interest Expense Interest Payable Totals Net Income Totals

4-16

Adjusted Trial Balance

Income Statement

Dr. 7,442 7,840 2,280 23,000

Dr.

Cr.

Dr. 7,442 7,840 2,280 23,000

Cr.

4,800 5,700 5,672 22,000

4,000

3,000

3,000 12,590

9,840 760 600 57 54,819

Statement of Financial Position

12,590 9,840 760 600 57

57 54,819

11,257 1,333 12,590

12,590

43,562

12,590

43,562

57 42,229 1,333 43,562

EXERCISE 4-3 ALBANESE COMPANY Income Statement For the Month Ended April 30, 2014 Revenues Service revenue ....................................................... Expenses Salaries and wages expense .................................. Rent expense ........................................................... Depreciation expense .............................................. Interest expense ...................................................... Total expenses ................................................. Net income .......................................................................

€12,590 € 9,840 760 600 57 11,257 € 1,333

ALBANESE COMPANY Retained Earnings Statement For the Month Ended April 30, 2014 €4,000 1,333 5,333 3,000 €2,333

Retained Earnings, April 1 ....................................................... Add: Net income ..................................................................... Less: Dividends ....................................................................... Retained Earnings, April 30 .....................................................

ALBANESE COMPANY Statement of Financial Position April 30, 2014 Assets Property, plant, and equipment Equipment ................................................................ Less: Accumulated depreciation—equipment ..... Current assets Prepaid rent.............................................................. Accounts receivable ................................................ Cash.......................................................................... Total assets .....................................................................

€23,000 4,800 2,280 7,840 7,442

€18,200

17,562 €35,762

4-17

EXERCISE 4-3 (Continued) ALBANESE COMPANY Statement of Financial Position (Continued) April 30, 2014 Equity and Liabilities Equity Share capital—ordinary ........................................... Retained earnings .................................................... Current liabilities Notes payable ........................................................... Accounts payable .................................................... Interest payable ........................................................ Total equity and liabilities ..............................................

€22,000 2,333 5,700 5,672 57

€24,333

11,429 €35,762

EXERCISE 4-4 (a) Apr. 30 30

30 30

Service Revenue ...................................... Income Summary .............................

12,590

Income Summary ..................................... Salaries and Wages Expense .......... Rent Expense.................................... Depreciation Expense ...................... Interest Expense ...............................

11,257

Income Summary ..................................... Retained Earnings ............................

1,333

Retained Earnings.................................... Dividends ..........................................

3,000

12,590 9,840 760 600 57 1,333 3,000

(b) Income Summary 11,257 12,590 1,333 12,590 12,590

4-18

Retained Earnings 3,000 Bal. 4,000 1,333 Bal. 2,333

EXERCISE 4-4 (Continued) (c)

ALBANESE COMPANY Post-Closing Trial Balance April 30, 2014 Cash..................................................................... Accounts Receivable .......................................... Prepaid Rent ....................................................... Equipment ........................................................... Accumulated Depreciation—Equipment ........... Notes Payable ..................................................... Accounts Payable ............................................... Interest Payable .................................................. Share Capital—Ordinary .................................... Retained Earnings ..............................................

Debit €7,442 7,840 2,280 23,000

€40,562

Credit

€ 4,800 5,700 5,672 57 22,000 2,333 €40,562

EXERCISE 4-5 (a) Accounts Receivable .......................................... Service Revenue .........................................

600

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

400

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

900

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

500

600 400 900 500

4-19

EXERCISE 4-5 (Continued) (b)

Accounts Receivable Prepaid Insurance Accum. Depreciation—Equip. Salaries and Wages Payable Service Revenue Salaries and Wages Expense Insurance Expense Depreciation Expense

Statement of Income Statement Financial Position Dr. Cr. Dr. Cr. X X X X X X X X

EXERCISE 4-6 (a) Accounts Receivable—27,000 (34,000 – 7,000). Supplies—2,300 (7,000 – 4,700). Accumulated Depreciation—Equipment—22,000 (12,000 + 10,000). Salaries and Wages Payable—0 No liability recorded until adjustments are made. Insurance Expense—8,000 (26,000 – 18,000). Salaries and Wages Expense—44,000 (49,000 – 5,000). (b) Accounts Receivable ................................................ Service Revenue ................................................

7,000

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

8,000

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

4,700

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

10,000

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

5,000

4-20

7,000 8,000 4,700 10,000 5,000

EXERCISE 4-7 (a) Service Revenue .................................................... Income Summary .............................................

4,300

Income Summary ................................................... Salaries and Wages Expense ......................... Miscellaneous Expense .................................. Supplies Expense ............................................

3,424

Income Summary ................................................... Retained Earnings ...........................................

876

Retained Earnings ................................................. Dividends .........................................................

600

(b)

4,300 1,344 180 1,900 876 600

LANZA COMPANY Post-Closing Trial Balance For the Month Ended June 30, 2014 Account Titles Cash........................................................................ Accounts Receivable ............................................. Supplies ................................................................. Accounts Payable .................................................. Salaries and Wages Payable ................................. Unearned Service Revenue ................................... Share Capital—Ordinary ....................................... Retained Earnings .................................................

Debit R$3,712 3,904 480

Credit

R$1,556 344 160 4,000 2,036 R$8,096 R$8,096

4-21

EXERCISE 4-8 (a) General Journal Date Account Titles July 31 Service Revenue ................................. Rent Revenue...................................... Income Summary.......................

Ref. 400 429 350

Debit 64,000 6,500

31 Income Summary ................................ Salaries and Wages Expense ... Utilities Expense ........................ Depreciation Expense ...............

350 726 732 711

74,300

31 Retained Earnings .............................. Income Summary.......................

320 350

3,800

31 Retained Earnings .............................. Dividends ...................................

320 332

12,000

J15 Credit

70,500 55,700 14,900 3,700 3,800 12,000

(b) Retained Earnings Date Explanation Ref. Debit July 31 Balance 31 Close net loss J15 3,800 31 Close dividends J15 12,000 Income Summary Date Explanation Ref. Debit July 31 Close revenue J15 31 Close expenses J15 74,300 31 Close net loss J15

4-22

Credit

Credit 70,500 3,800

No. 320 Balance 20,260 16,460 4,460 No. 350 Balance 70,500 (3,800) 0

EXERCISE 4-8 (Continued) (c)

ROTH COMPANY Post-Closing Trial Balance July 31, 2014 Cash..................................................................... Accounts Receivable .......................................... Equipment ........................................................... Accumulated Depreciation—Equipment ........... Accounts Payable ............................................... Unearned Rent Revenue .................................... Share Capital—Ordinary .................................... Retained Earnings ..............................................

Debit $9,840 8,140 15,900

$33,880

Credit

$ 5,400 2,220 3,800 18,000 4,460 $33,880

EXERCISE 4-9 (a)

ROTH COMPANY Income Statement For the Year Ended July 31, 2014 Revenues Service revenue........................................... Rent revenue ............................................... Total revenues ..................................... Expenses Salaries and wages expense ...................... Utilities expense .......................................... Depreciation expense ................................. Total expenses..................................... Net loss ...............................................................

$64,000 6,500 $70,500 55,700 14,900 3,700 74,300 ($ 3,800)

4-23

EXERCISE 4-9 (Continued) ROTH COMPANY Retained Earnings Statement For the Year Ended July 31, 2014 Retained Earnings, August 1, 2013 ................... Less: Net loss .................................................... Dividends ................................................. Retained Earnings, July 31, 2014 ...................... (b)

$20,260 $ 3,800 12,000

15,800 $ 4,460

ROTH COMPANY Statement of Financial Position July 31, 2014 Assets Property, plant, and equipment Equipment ...................................................... Less: Accumulated depreciation— equipment ............................................ Current assets Accounts receivable ...................................... Cash................................................................ Total assets ...........................................................

$15,900 5,400 8,140 9,840

$10,500 17,980 $28,480

Equity and Liabilities Equity Share capital—ordinary ................................ Retained earnings.......................................... Current liabilities Accounts payable .......................................... Unearned rent revenue .................................. Total equity and liabilities.....................................

4-24

$18,000 4,460 2,220 3,800

$22,460 6,020 $28,480

EXERCISE 4-10 1.

False. “Analyze business transactions” is the first step in the accounting cycle.

False. Reversing entries are an optional step in the accounting cycle.

True.

False. Steps 1–3 may occur daily in the accounting cycle. Steps 4–7 are performed on a periodic basis. Steps 8 and 9 are usually prepared only at the end of a company’s annual accounting period.

False. The step of “journalize the transactions” occurs before the step of “post to the ledger accounts.”

False. Closing entries are prepared after financial statements are prepared.

EXERCISE 4-11 (a) June 30 30

30 30

Service Revenue ................................... Income Summary ...........................

18,100

Income Summary .................................. Salaries and Wages Expense ....... Supplies Expense .......................... Rent Expense .................................

12,700

Income Summary .................................. Retained Earnings .........................

5,400

Retained Earnings ................................. Dividends .......................................

2,200

18,100 8,800 900 3,000 5,400 2,200

(b) Income Summary June 30 12,700 June 30 June 30 5,400 18,100

18,100 18,100

4-25

EXERCISE 4-12 (a) 1.

(b) 1.

4-26

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

700

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

700

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

300

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

800

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

670

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

760

Salaries and Wages Expense ......................... Equipment ...............................................

700

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

300 500

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

700

300

800

670

760

700

800

EXERCISE 4-13 1. 2.

Accounts Payable (R$840 – R$480) ........................ Cash ..................................................................

360

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

380

Dividends ................................................................. Salaries and Wages Expense ..........................

500

360 38 342 500

EXERCISE 4-14 (a)

REGO BOWLING ALLEY Statement of Financial Position December 31, 2014 Assets Property, plant, and equipment Land ............................................. Buildings...................................... Less: Acc. depr.—buildings ...... Equipment ................................... Less: Acc. depr.—equipment .... Current assets Prepaid insurance ....................... Accounts receivable ................... Cash ............................................. Total assets .........................................

$67,000 $128,000 42,600 62,400 18,720

85,400 43,680 4,680 7,540 18,040

$196,080

30,260 $226,340

4-27

EXERCISE 4-14 (Continued) REGO BOWLING ALLEY Statement of Financial Position (Continued) December 31, 2014 Equity and Liabilities Equity Share capital—ordinary .............................. Retained earnings ($28,000 + $8,440*) ....... Non-current liabilities Note payable ................................................ Current liabilities Current portion of note payable ................. Accounts payable ........................................ Interest payable ........................................... Total equity and liabilities ...................................

$80,000 36,440

$116,440 80,000

15,000 12,300 2,600

29,900 $226,340

*Net income = $19,180 – $780 – $7,360 – $2,600 = $8,440 (b) Current assets exceed current liabilities by only $360 ($30,260 – $29,900). However, approximately 60% of current assets are in the form of cash. The company’s liquidity appears to be reasonably good, but some caution is needed.

EXERCISE 4-15 CL Accounts payable CA Accounts receivable CA Cash E Share capital—ordinary IA Patents CL Salaries and wages payable CA Inventory LTI Investments

4-28

PPE Accumulated depreciation PPE Buildings PPE Land NCL Long-term debt CA Supplies PPE Equipment CA Prepaid expenses

EXERCISE 4-16 SEXTON COMPANY Statement of Financial Position December 31, 2014 (in thousands) Assets Property, plant, and equipment Equipment .................................................. Less: Accumulated depreciation— equipment ....................................... Long-term investments ..................................... Current assets Prepaid insurance ...................................... Inventory ..................................................... Accounts receivable .................................. Short-term investments ............................. Cash ............................................................ Total assets ........................................................

£11,500 (4,125) 680 1,256 1,696 3,619 2,668

£ 7,375 1,200

9,919 £18,494

Equity and Liabilities Equity Share capital—ordinary ............................. Retained earnings ...................................... Non-current liabilities Long-term debt ........................................... Notes payable (due after 2015).................. Current liabilities Notes payable due in 2015 ........................ Accounts payable ...................................... Total equity and liabilities .................................

£10,000 4,750

£14,750

1,000 800

1,800

500 1,444

1,944 £18,494

4-29

EXERCISE 4-17 (a) EMJAY COMPANY Income Statement For the Year Ended July 31, 2014 Revenues Service revenue ....................................... Rent revenue ............................................ Total revenues.................................. Expenses Salaries and wages expense .................. Utilities expense ...................................... Depreciation expense.............................. Total expense ................................... Net loss ............................................................

$62,000 8,500 $70,500 50,700 22,600 2,500 75,800 $ (5,300)

EMJAY COMPANY Retained Earnings Statement For the Year Ended July 31, 2014 Retained Earnings, August 1, 2013 ................ Less: Net loss ................................................. Dividends .............................................. Retained Earnings, July 31, 2014 ...................

4-30

$22,700 $5,300 3,000

8,300 $14,400

EXERCISE 4-17 (Continued) (b) EMJAY COMPANY. Statement of Financial Position July 31, 2014 Assets Property, plant, and equipment Equipment ...................................................... Less: Accumulated depreciation— equipment ............................................ Current assets Accounts receivable ...................................... Cash ................................................................ Total assets ............................................................

$30,000 6,000 9,180 14,200

$24,000 23,380 $47,380

Equity and Liabilities Equity Share capital—ordinary ................................. Retained earnings .......................................... Non-current liabilities Note payable ................................................... Current liabilities Accounts payable .......................................... Salaries and wages payable .......................... Total equity and liabilities .....................................

$25,000 14,400

$39,400 1,800

4,100 2,080

6,180 $47,380

4-31

*EXERCISE 4-18 (a) Dec. 31

Jan. 4

(b) Dec. 31 Jan. 1 Jan. 4

Salaries and Wages Expense (R$9,000 X 4/5) ..................................... Salaries and Wages Payable ..........

7,200 7,200

Salaries and Wages Payable .................. Salaries and Wages Expense (R$9,000 X 1/5) ..................................... Cash .................................................

7,200

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

7,200

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

7,200

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

9,000

1,800 9,000 7,200 7,200 9,000

*EXERCISE 4-19 (a) Dec. 31 31 (b) Jan. 1 1

4-32

Service Revenue ..................................... Income Summary ............................

93,800

Income Summary .................................... Interest Expense .............................

8,300

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

5,000

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

1,300

93,800 8,300 5,000 1,300

*EXERCISE 4-19 (Continued) (c) & (e) Accounts Receivable Dec. 31 Balance *19,500 31 Adjusting 5,000 24,500 Jan. 1 Reversing

5,000

*($24,500 – $5,000)

Dec. 31 Closing

Jan. 1

Reversing

Service Revenue 93,800 Dec. 31 Balance 31 Adjusting 93,800 5,000 Jan. 10

88,800* 5,000 93,800 5,000

*($93,800 – $5,000)

Jan. 1

Reversing

Dec. 31 Balance 31 Adjusting Jan. 15

Interest Payable Dec. 31 Adjusting 1,300 Interest Expense *7,000 Dec. 31 Closing 1,300 8,300 3,000 Jan. 1 Reversing

1,300

8,300 8,300 1,300

*($8,300 – $1,300) (d) Jan. 10

(1) Cash .............................................................. Service Revenue ...................................

5,000

(2) Interest Expense .......................................... Cash.......................................................

3,000

5,000

3,000

4-33

4-34

(a)

HERCULES POIROT, P.I., INC. Worksheet For the Quarter Ended March 31, 2014

Adjustments

Dr.

Cr.

11,410 5,920 1,250 2,400 30,000

Cr.

(e) 1,080 (a) (d)

770 600

Dr.

Cr.

11,410 7,000 480 1,800 30,000

10,000 12,350 20,000

600 14,200

(e) 1,080

Cr.

11,410 7,000 480 1,800 30,000 10,000 12,350 20,000

600

2,240 1,300 1,200 230 56,550

Cr.

Statement of Financial Position

600 15,280

15,280

2,240 1,300 1,200 230

770 720

56,550 (a) (b)

770 720

(c)

300

(d)

600 3,470

(b)

720

720 300

(c)

300 3,470

720 300

300 600 58,650

58,650

300 600 7,360 7,920 15,280

15,280

51,290

15,280

51,290

43,370 7,920 51,290

Key: (a) Supplies Used; (b) Depreciation Expensed; (c) Accrued Interest on note; (d) Insurance Expired; (e) Service Revenue Earned but unbilled.

SOLUTIONS TO PROBLEMS

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Notes Payable Accounts Payable Share Capital—Ordinary Dividends Service Revenue Salaries and Wages Expense Travel Expense Rent Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Accumulated Depreciation—Equipment Interest Expense Interest Payable Insurance Expense Totals Net Income Totals

Trial Balance

Income Statement

PROBLEM 4-1A

Account Titles

Adjusted Trial Balance

PROBLEM 4-1A (Continued) (b)

HERCULES POIROT, P.I., INC Income Statement For the Quarter Ended March 31, 2014 Revenues Service revenue............................................... Expenses Salaries and wages expense .......................... Travel expense ................................................ Rent expense ................................................... Depreciation expense ..................................... Insurance expense .......................................... Supplies expense ............................................ Interest expense .............................................. Miscellaneous expense .................................. Total expenses......................................... Net income ..............................................................

€15,280 €2,240 1,300 1,200 720 600 770 300 230 7,360 € 7,920

HERCULES POIROT, P.I., INC. Retained Earnings Statement For the Quarter Ended March 31, 2014 Retained Earnings, January 1 .......................................... Add: Net income............................................................. Less: Dividends ................................................................ Retained Earnings, March 31 ............................................

€

0 7,920 7,920 600 €7,320

4-35

PROBLEM 4-1A (Continued) HERCULES POIROT, P.I., INC. Statement of Financial Position March 31, 2014 Assets Property, plant, and equipment Equipment ..................................................... Less: Accumulated depreciation— equipment ............................................... Current assets Prepaid insurance ......................................... Supplies ......................................................... Accounts receivable ..................................... Cash ............................................................... Total assets ........................................................... Equity and Liabilities Equity Share capital—ordinary ................................ Retained earnings ......................................... Current liabilities Notes payable ................................................ Accounts payable.......................................... Interest payable ............................................. Total equity and liabilities .................................... (c) Mar. 31 31

31 31

4-36

€30,000 720 1,800 480 7,000 11,410

€20,000 7,320 10,000 12,350 300

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

770

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

720

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

300

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

600

€29,280

20,690 €49,970

€27,320

22,650 €49,970 770

720 300 600

PROBLEM 4-1A (Continued) Mar. 31

(d) Mar. 31

31 31

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

1,080

Service Revenue ....................................... Income Summary ..............................

15,280

Income Summary...................................... Travel Expense.................................. Salaries and Wages Expense ........... Rent Expense .................................... Insurance Expense ........................... Depreciation Expense....................... Supplies Expense ............................. Interest Expense ............................... Miscellaneous Expense ....................

7,360

Income Summary...................................... Retained Earnings ............................

7,920

Retained Earnings .................................... Dividends...........................................

600

1,080

15,280 1,300 2,240 1,200 600 720 770 300 230 7,920 600

4-37

PROBLEM 4-2A

(a)

WATSON COMPANY Partial Worksheet For the Year Ended December 31, 2014

Account No. Titles 101 112 126 130 157 158 200 201 212 230 311 320 332 400 610 631 711 722 726 905

4-38

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Acc. Depr.—Equip. Notes Payable Accounts Payable Salaries and Wages Payable Interest Payable Share Capital—Ordinary Retained Earnings Dividends Service Revenue Advertising Expense Supplies Expense Depreciation Expense Insurance Expense Salaries and Wages Expense Interest Expense Totals Net Income Totals

Adjusted Trial Balance Dr. Cr.

Income Statement Dr. Cr.

17,800 14,400 2,300 4,400 46,000

Statement of Financial Position Dr. Cr. 17,800 14,400 2,300 4,400 46,000

18,000 20,000 8,000

2,600 1,000 15,000 9,800

12,000

12,000 86,200

86,200

10,000 3,700 6,000 4,000

39,000 1,000 160,600 160,600

39,000 1,000 63,700 22,500 86,200

86,200

96,900

86,200

96,900

74,400 22,500 96,900

PROBLEM 4-2A (Continued) (b)

WATSON COMPANY Income Statement For the Year Ended December 31, 2014 Revenues Service revenue............................................. Expenses Salaries and wages expense ........................ Advertising expense ..................................... Depreciation expense ................................... Insurance expense ........................................ Supplies expense .......................................... Interest expense ............................................ Total expenses....................................... Net income ............................................................

$86,200 $39,000 10,000 6,000 4,000 3,700 1,000 63,700 $22,500

WATSON COMPANY Retained Earnings Statement For the Year Ended December 31, 2014 Retained Earnings, January 1 ................................................ Add: Net income ................................................................... Less: Dividends ..................................................................... Retained Earnings, December 31 ..........................................

$ 9,800 22,500 32,300 12,000 $20,300

4-39

PROBLEM 4-2A (Continued) WATSON COMPANY Statement of Financial Position December 31, 2014 Assets Property, plant, and equipment Equipment...................................................... Less: Accumulated depreciation— equipment ............................................... Current assets Prepaid insurance ......................................... Supplies ......................................................... Accounts receivable ..................................... Cash ............................................................... Total assets ...........................................................

$46,000 18,000 4,400 2,300 14,400 17,800

$28,000

38,900 $66,900

Equity and Liabilities Equity Share capital—ordinary ................................ Retained earnings ......................................... Non-current liabilities Notes payable (due after 2015) ..................... Current liabilities Notes payable (due in 2015) ......................... Accounts payable.......................................... Salaries and wages payable ......................... Interest payable ............................................. Total equity and liabilities ....................................

4-40

$15,000 20,300

$35,300 15,000

5,000 8,000 2,600 1,000

16,600 $66,900

PROBLEM 4-2A (Continued) (c) General Journal Date Account Titles Dec. 31 Service Revenue ................................. Income Summary .......................

Ref. 400 350

Debit 86,200

31 Income Summary ................................ Advertising Expense.................. Supplies Expense ...................... Depreciation Expense................ Insurance Expense .................... Salaries and Wages Expense .... Interest Expense ........................

350 610 631 711 722 726 905

63,700

31 Income Summary ................................ Retained Earnings......................

350 320

22,500

31 Retained Earnings ............................... Dividends ....................................

320 332

12,000

J14 Credit 86,200 10,000 3,700 6,000 4,000 39,000 1,000 22,500 12,000

(d) Date

Explanation Balance Dec. 31 Closing entry 31 Closing entry

Retained Earnings Ref. Debit  J14 J14 12,000 Dividends Ref.  J14

Date Explanation Dec. 31 Balance 31 Closing entry

Debit 12,000

Credit 9,800 22,500

No. 320 Balance 9,800 32,300 20,300

Credit

No. 332 Balance 12,000 0

12,000

4-41

PROBLEM 4-2A (Continued)

Explanation Closing entry Closing entry Closing entry

Income Summary Ref. Debit J14 J14 63,700 J14 22,500

Date Explanation Dec. 31 Balance 31 Closing entry

Service Revenue Ref. Debit  J14 86,200

Date Explanation Dec. 31 Balance 31 Closing entry

Advertising Expense Ref. Debit  10,000 J14

Date Explanation Dec. 31 Balance 31 Closing entry

Supplies Expense Ref. Debit  3,700 J14

Date Explanation Dec. 31 Balance 31 Closing entry

Depreciation Expense Ref. Debit  6,000 J14

Date Dec. 31 31

Insurance Expense Ref. Debit  4,000 J14

Date Dec. 31 31 31

4-42

Explanation Balance Closing entry

Credit 86,200

No. 350 Balance 86,200 22,500 0

Credit 86,200

No. 400 Balance 86,200 0

Credit

No. 610 Balance 10,000 0

10,000

Credit 3,700

Credit 6,000

Credit 4,000

No. 631 Balance 3,700 0 No. 711 Balance 6,000 0 No. 722 Balance 4,000 0

PROBLEM 4-2A (Continued) Salaries and Wages Expense Date Explanation Ref. Debit Dec. 31 Balance  39,000 31 Closing entry J14

Date Explanation Dec. 31 Balance 31 Closing entry

(e)

Interest Expense Ref. Debit  1,000 J14

Credit 39,000

Credit 1,000

No. 726 Balance 39,000 0 No. 905 Balance 1,000 0

WATSON COMPANY Post-Closing Trial Balance December 31, 2014 Cash..................................................................... Accounts Receivable .......................................... Supplies .............................................................. Prepaid Insurance............................................... Equipment ........................................................... Accumulated Depreciation— Equipment ....................................................... Notes Payable ..................................................... Accounts Payable ............................................... Salaries and Wages Payable .............................. Interest Payable .................................................. Share Capital—Ordinary .................................... Retained Earnings ..............................................

Debit $17,800 14,400 2,300 4,400 46,000

$84,900

Credit

$18,000 20,000 8,000 2,600 1,000 15,000 20,300 $84,900

4-43

PROBLEM 4-3A (a)

HUBBS COMPANY Income Statement For the Year Ended December 31, 2014 Revenues Service revenue .......................................... Expenses Salaries and wages expense ..................... Maintenance and repairs expense ............ Utilities expense ......................................... Depreciation expense ................................ Insurance expense ..................................... Total expenses .................................... Net loss...............................................................

$47,000 $35,200 4,100 4,000 3,300 2,200 48,800 $ (1,800)

HUBBS COMPANY Retained Earnings Statement For the Year Ended December 31, 2014 Retained Earnings, January 1 ........................... Less: Net loss ................................................... Dividends ................................................ Retained Earnings, December 31 .....................

$9,700 $1,800 4,000

5,800 $3,900

HUBBS COMPANY Statement of Financial Position December 31, 2014 Assets Property, plant, and equipment Equipment................................................... Less: Accumulated depreciation— equipment ....................................... Current assets Prepaid insurance ...................................... Accounts receivable .................................. Cash ............................................................ Total assets ........................................................

4-44

$33,000 9,900 1,800 7,500 6,200

$23,100

15,500 $38,600

PROBLEM 4-3A (Continued) HUBBS COMPANY Statement of Financial Position (Continued) December 31, 2014 Equity and Liabilities Equity Share capital—ordinary .............................. Retained earnings ....................................... Current liabilities Accounts payable ....................................... Salaries and wages payable ....................... Total equity and liabilities ..................................

$20,000 3,900 11,700 3,000

$23,900 14,700 $38,600

(b) General Journal Date Account Titles Dec. 31 Service Revenue ................................. Income Summary ....................... 31

Ref. 400 350

Debit 47,000

Income Summary ............................... Maintenance and Repairs Expense .................................. Depreciation Expense ............... Insurance Expense.................... Salaries and Wages Expense ... Utilities Expense........................

350

48,800

Retained Earnings .............................. Income Summary ......................

320 350

1,800

Retained Earnings .............................. Dividends ...................................

320 332

4,000

Credit 47,000

622 711 722 726 732

4,100 3,300 2,200 35,200 4,000

1,800

4,000

4-45

PROBLEM 4-3A (Continued) (c) 12/31 12/31

12/31 Bal.

12/31

(d)

Retained Earnings No. 320 1,800 1/1 Bal. 9,700 4,000 12/31 Bal. 3,900

Dividends 4,000 12/31

Income Summary 48,800 12/31 12/31 48,800

No. 332 4,000

No. 350 47,000 1,800 48,800

Service Revenue No. 400 47,000 12/31 Bal. 47,000

Maintenance and Repairs Expense 12/31 Bal. 4,100 12/31

Depreciation Expense No. 711 12/31 Bal. 3,300 12/31 3,300

Insurance Expense 12/31 Bal. 2,200 12/31

No. 722 2,200

Salaries and Wages Expense 12/31 Bal. 35,200 12/31

No. 726 35,200

Utilities Expense 12/31 Bal. 4,000 12/31

No. 732 4,000

HUBBS COMPANY Post-Closing Trial Balance December 31, 2014 Cash .................................................................... Accounts Receivable ......................................... Prepaid Insurance .............................................. Equipment .......................................................... Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Salaries and Wages Payable ............................. Share Capital—Ordinary.................................... Retained Earnings ............................................. Totals ..........................................................

4-46

No. 622 4,100

Debit $ 6,200 7,500 1,800 33,000

$48,500

Credit

$ 9,900 11,700 3,000 20,000 3,900 $48,500

TERESINA AMUSEMENT PARK Worksheet For the Year Ended September 30, 2014 Account Titles

Cash Supplies Prepaid Insurance Land Equipment Accumulated Depreciation— Equipment Accounts Payable Unearned Ticket Revenue Mortgage Payable Share Capital—Ordinary Retained Earnings Dividends Ticket Revenue Salaries and Wages Expense Maintenance and Repairs Expense Advertising Expense Utilities Expense Property Tax Expense Interest Expense Totals Insurance Expense Supplies Expense Interest Payable Depreciation Expense Property Taxes Payable Totals Net Income Totals

Trial Balance

Adjustments

Adjusted Trial Balance

Income Statement

Dr.

Cr.

34,400 18,600 29,900 80,000 120,000

Cr. (a) 16,400 (b) 19,000

36,200 14,600 3,900 50,000 60,000 36,100

(d)

(c)

6,000

(d)

2,900

Cr.

34,400 2,200 10,900 80,000 120,000

42,200 14,600 1,000 50,000 60,000 36,100 14,000

280,800

98,000

30,500 9,400 16,900 21,000 6,000 478,700 478,700

3,000 2,000

30,500 9,400 16,900 24,000 8,000

(b) 19,000 (a) 16,400

19,000 16,400

(e) (f)

(f) (c)

2,000

6,000

2,000 6,000

(e) 49,300

3,000 49,300

Cr.

34,400 2,200 10,900 80,000 120,000

14,000 277,900

Dr.

42,200 14,600 1,000 50,000 60,000 36,100

2,900

14,000

Cr.

Statement of Financial Position

3,000 489,700 489,700

2,000 6,000 228,200 280,800 52,600 280,800 280,800

261,500 261,500

3,000 208,900 52,600 261,500

Key: (a) Supplies Used; (b) Expired Insurance; (c) Depreciation Expensed; (d) Ticket Revenue Earned; (e) Accrued Property Taxes; (f) Accrued Interest Payable.

PROBLEM 4-4A

(a)

4-47

PROBLEM 4-4A (Continued) (b)

TERESINA AMUSEMENT PARK, INC. Statement of Financial Position September 30, 2014 Assets Property, plant, and equipment Land ............................................. R$80,000 Equipment.................................... R$120,000 Less: Accum. depreciation— equipment ......................... 42,200 77,800 R$157,800 Current assets Prepaid insurance ....................... 10,900 Supplies ....................................... 2,200 Cash ............................................. 34,400 47,500 Total assets ......................................... R$205,300 Equity and Liabilities Equity Share capital—ordinary .............. Retained earnings ....................... Non-current liabilities Mortgage payable (due after 2015) ....................... Current liabilities Mortgage payable (due in 2015) . Accounts payable........................ Interest payable ........................... Property taxes payable ............... Unearned ticket revenue .................................... Total equity and liabilities ..................

R$60,000 74,700* R$134,700 35,000 15,000 14,600 2,000 3,000 1,000

*R$36,100 + R$52,600 – R$14,000

4-48

35,600 R$205,300

PROBLEM 4-4A (Continued) (c) Sept. 30 30 30

30 30 30

(d) Sept. 30 30

30 30

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

16,400

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

19,000

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

6,000

Unearned Ticket Revenue ................... Ticket Revenue .............................

2,900

Property Tax Expense ......................... Property Taxes Payable ...............

3,000

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

2,000

Ticket Revenue..................................... Income Summary .........................

280,800

Income Summary ................................. Salaries and Wages Expense ...... Maintenance and Repairs Expense ..................................... Insurance Expense ....................... Property Tax Expense .................. Supplies Expense ......................... Utilities Expense ........................... Interest Expense ........................... Advertising Expense .................... Depreciation Expense ..................

228,200

Income Summary ................................. Retained Earnings ........................

52,600

Retained Earnings ............................... Dividends ......................................

14,000

16,400 19,000

6,000 2,900 3,000 2,000

280,800 98,000 30,500 19,000 24,000 16,400 16,900 8,000 9,400 6,000 52,600

14,000 4-49

PROBLEM 4-4A (Continued) (e)

TERESINA AMUSEMENT PARK Post-Closing Trial Balance September 30, 2014 Debit Cash .................................................................... R$ 34,400 Supplies .............................................................. 2,200 Prepaid Insurance .............................................. 10,900 Land .................................................................... 80,000 Equipment .......................................................... 120,000 Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Interest Payable ................................................. Property Taxes Payable..................................... Unearned Ticket Revenue ................................. Mortgage Payable .............................................. Share Capital—Ordinary.................................... Retained Earnings ............................................. R$247,500

4-50

Credit

R$ 42,200 14,600 2,000 3,000 1,000 50,000 60,000 74,700 R$247,500

PROBLEM 4-5A

(a) Date Mar. 1 1

3 5 14 18 20 21 28 31 31

General Journal Account Titles Cash .................................................... Share Capital—Ordinary ...........

Ref. 101 311

Debit 14,000

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

157 101 201

8,000

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

126 201

1,200

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

130 101

1,800

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

112 400

4,800

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

201 101

2,000

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

726 101

1,800

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

101 112

1,600

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

112 400

2,500

Gasoline Expense .............................. Cash ...........................................

633 101

320

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

332 101

800

J1 Credit 14,000 3,000 5,000 1,200 1,800 4,800 2,000 1,800 1,600 2,500 320

800

4-51

FRESH STEP CARPET CLEANERS Worksheet For the Month Ended March 31, 2014 Account Titles

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accounts Payable Share Capital—Ordinary Dividends Service Revenue Gasoline Expense Salaries and Wages Expense Totals Depreciation Expense Accum. Depr.—Equipment Insurance Expense Supplies Expense Salaries and Wages Payable Totals Net Income Totals

Trial Balance

Adjustments

Adjusted Trial Balance

Income Statement

Dr.

Cr.

5,880 5,700 1,200 1,800 8,000

(a)

Cr.

750 (d) (c)

950 150

Cr.

5,880 6,450 250 1,650 8,000

4,200 14,000

Dr.

4,200 14,000

800 7,300

(a) (e)

720

(b)

300

750

Cr.

5,880 6,450 250 1,650 8,000 4,200 14,000

800 320 1,800 25,500

Cr.

Statement of Financial Position

800 8,050

320 2,520

8,050 320 2,520

25,500 300 (b) (c) (d)

300 150 950

150 950 (e) 2,870

300 300

720 2,870

27,270

300 150 950

720 27,270

4,240 3,810 8,050

8,050

23,030

8,050

23,030

720 19,220 3,810 23,030

Key: (a) Service Revenue Earned; (b) Depreciation Expensed; (c) Insurance Expired; (d) Cleaning Supplies Used; (e) Unpaid Salaries.

PROBLEM 4-5A (Continued)

4-52 (b)&(c)

PROBLEM 4-5A (Continued) (a), (e) & (f)

Date Mar. 1 1 5 18 20 21 31 31

Date Mar. 14 21 28 31

Date Mar. 3 31

Date Mar. 5 31

Date Mar. 1

Cash Ref. J1 J1 J1 J1 J1 J1 J1 J1

Explanation

Adjusting

Supplies Ref. J1 J2

Adjusting

Explanation

1,600 320 800

Debit 1,200

Credit 1,600

Credit 950

Prepaid Insurance Ref. Debit J1 1,800 J2 Equipment Ref. J1

Credit 3,000 1,800 2,000 1,800

Accounts Receivable Ref. Debit J1 4,800 J1 J1 2,500 J2 750

Explanation

Debit 14,000

Debit 8,000

Credit 150

Credit

No. 101 Balance 14,000 11,000 9,200 7,200 5,400 7,000 6,680 5,880 No. 112 Balance 4,800 3,200 5,700 6,450 No. 126 Balance 1,200 250 No. 130 Balance 1,800 1,650 No. 157 Balance 8,000

4-53

PROBLEM 4-5A (Continued)

Date Mar. 31

Date Mar. 1 3 18

Accumulated Depreciation—Equipment Explanation Ref. Debit Credit Adjusting J2 300

Explanation

Accounts Payable Ref. Debit J1 J1 J1 2,000

Date Mar. 31

Salaries and Wages Payable Explanation Ref. Debit Adjusting J2

Date Mar. 1

Share Capital—Ordinary Ref. Debit J1

Date Mar. 1 31 31

Date Mar. 31 31

Date Mar. 31 31 31 4-54

Explanation

Explanation Closing Closing

Explanation Closing

Explanation Closing Closing Closing

Retained Earnings Ref. Debit J3 J3

Credit 5,000 1,200

Credit 720

Credit 14,000

No. 311 Balance 14,000

Credit

800

Debit 800

Credit 800

Income Summary Ref. Debit J3 J3 4,240 J3 3,810 .

No. 201 Balance 5,000 6,200 4,200 No. 212 Balance 720

3,810

Dividends Ref. J1 J3

No. 158 Balance 300

Credit 8,050

No. 320 Balance 0 3,810 3,010 No. 332 Balance 800 0 No. 350 Balance 8,050 3,810 0

PROBLEM 4-5A (Continued)

Date Mar. 14 28 31 31

Explanation

Adjusting Closing

Service Revenue Ref. Debit J1 J1 J2 J3 8,050

Closing

Gasoline Expense Ref. Debit J1 320 J3

Explanation Adjusting Closing

Supplies Expense Ref. Debit J2 950 J3

Explanation Adjusting Closing

Depreciation Expense Ref. Debit J2 300 J3

Date Mar. 31 31

Explanation Adjusting Closing

Insurance Expense Ref. Debit J2 150 J3

Date Mar. 20 31 31

Salaries and Wages Expense Explanation Ref. Debit J1 1,800 Adjusting J2 720 Closing J3

Date Mar. 31 31

Explanation

Credit 4,800 2,500 750

No. 400 Balance 4,800 7,300 8,050 0

Credit

No. 633 Balance 320 0

320

Credit 950

Credit 300

Credit 150

Credit

2,520

No. 631 Balance 950 0 No. 711 Balance 300 0 No. 722 Balance 150 0 No. 726 Balance 1,800 2,520 0

4-55

PROBLEM 4-5A (Continued) (d)

FRESH STEP CARPET CLEANERS Income Statement For the Month Ended March 31, 2014 Revenues Service revenue ............................................. Expenses Salaries and wages expense ........................ Supplies expense .......................................... Depreciation expense ................................... Gasoline expense .......................................... Insurance expense ........................................ Total expenses ....................................... Net income ............................................................

$8,050 $2,520 950 300 320 150 4,240 $3,810

FRESH STEP CARPET CLEANERS Retained Earnings Statement For the Month Ended March 31, 2014 Retained Earnings, March 1 ................................. Add: Net income .................................................

0 3,810 3,810 800 $3,010

Less: Dividends ................................................... Retained Earnings, March 31 ...............................

FRESH STEP CARPET CLEANERS Statement of Financial Position March 31, 2014 Assets Property, plant, and equipment Equipment....................................................... Less: Accumulated depreciation— equipment .................................................

4-56

$ 8,000 300

$ 7,700

PROBLEM 4-5A (Continued) FRESH STEP CARPET CLEANERS Statement of Financial Position (Continued) March 31, 2014 Assets (Continued) Current assets Prepaid insurance .......................................... Supplies .......................................................... Accounts receivable ...................................... Cash ................................................................ Total assets ............................................................

1,650 250 6,450 5,880

14,230 $21,930

Equity and Liabilities Equity Share capital—ordinary .................................. Retained earnings ........................................... Current liabilities Accounts payable ........................................... Salaries and wages payable ........................... Total equity and liabilities ......................................

$14,000 3,010 4,200 720

$17,010 4,920 $21,930

(e) Date Mar. 31 31

31 31 31

General Journal Account Titles Accounts Receivable ......................... Service Revenue .......................

Ref. 112 400

Debit 750

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

711

300

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

722 130

150

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

631 126

950

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

726 212

720

J2 Credit 750

158

300 150 950 720

4-57

PROBLEM 4-5A (Continued) (f) General Journal Date Account Titles Mar. 31 Service Revenue................................. Income Summary ....................... 31

31 31

(g)

Ref. 400 350

Debit 8,050

Income Summary ............................... Salaries and Wages Expense ... Depreciation Expense ............... Insurance Expense .................... Supplies Expense ...................... Gasoline Expense ......................

350 726 711 722 631 633

4,240

Income Summary ............................... Retained Earnings .....................

350 320

3,810

Retained Earnings .............................. Dividends ...................................

320 332

800

8,050 2,520 300 150 950 320 3,810 800

FRESH STEP CARPET CLEANERS Post-Closing Trial Balance March 31, 2014

Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Prepaid Insurance .............................................. Equipment .......................................................... Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Salaries and Wages Payable ............................. Share Capital—Ordinary.................................... Retained Earnings ............................................. 000,000

4-58

J3 Credit

Debit $ 5,880 6,450 250 1,650 8,000

Credit

$22,230

300 4,200 720 14,000 3,010 $22,230

(1) INCORRECT ENTRY 1.

(2) CORRECT ENTRY

Cash ................................... Accts. Receivable ........

950

Misc. Expense ................... Cash .............................

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

Cash ................................... Accts. Receivable ........

590

950

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

1,850 1,850

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

310

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

152

(3) CORRECTING ENTRY

310

152

Salaries and Wages Expense .......................... Salaries and Wages Payable ........................... Cash ............................. Equipment ......................... Accounts Payable ....... Maintenance and Repairs Expense .......................... Cash .............................

590

Accounts Receivable ......... 360 Cash ...............................

360

Advertising Expense ......... Misc. Expense ...............

1,150 700

Salaries and Wages Payable ............................ 700 Salaries and Wages Expense ......................

700

Equipment .......................... 310 Supplies ........................

310

Maintenance and Repairs Expense ........................... Cash ................................. Equipment .....................

152

1,850 310 310

125 125

125 27

PROBLEM 4-6A

(a)

4-59

PROBLEM 4-6A (Continued) (b)

INFO CABLE Trial Balance April 30, 2014 Cash (£4,100 – £360 + £27) ................................... Accounts Receivable (£3,200 + £360) .................. Supplies (£800 – £310) .......................................... Equipment (£10,600 + £310 – £152) ..................... Accumulated Depreciation—Equipment ............. Accounts Payable ................................................. Salaries and Wages Payable (£700 – £700) ......... Unearned Service Revenue .................................. Share Capital—Ordinary....................................... Retained Earnings ................................................ Service Revenue ................................................... Salaries and Wages Expense (£3,300 – £700) ..... Advertising Expense (£480 + £75) ....................... Miscellaneous Expense (£290 – £75) ................... Depreciation Expense .......................................... Maintenance and Repairs Expense .....................

4-60

Debit £ 3,767 3,560 490 10,758

Credit

£ 1,250 2,100 0 890 10,000 2,880 5,450 2,600 555 215 500 125 £22,570

£22,570

FIRMAMENT ROOFING Worksheet For the Month Ended March 31, 2014 Account Titles

Cash Accounts Receivable Supplies Equipment Accumulated Depreciation—Equipment Accounts Payable Unearned Service Revenue Share Capital—Ordinary Dividends Service Revenue Salaries and Wages Expense Miscellaneous Expense Totals Supplies Expense Depreciation Expense Salaries and Wages Payable Totals Net Income Totals

Trial Balance

Adjustments

Adjusted Trial Balance

Income Statement

Dr.

Cr.

2,720 2,700 1,500 11,000 1,250 2,500 550 10,000

(c)

(a)

950

(b)

250

(c)

260

Dr.

Cr.

2,720 2,700 550 11,000 1,500 2,500 290 10,000

1,500 2,500 290 10,000

1,100 6,300

1,300 280 20,600

Cr.

2,720 2,700 550 11,000

260

1,100

Cr.

Statement of Financial Position

1,100 6,560

6,560

(d)

480

1,780 280

(a) (b)

950 250

20,600

(d) 1,940

480 1,940

21,330

480 21,330

3,260 3,300 6,560

Key: (a) Supplies Used; (b) Depreciation Expensed; (c) Service Revenue Earned; (d) Salaries Accrued.

6,560

18,070

6,560

18,070

480 14,770 3,300 18,070

PROBLEM 4-1B

(a)

4-61

PROBLEM 4-1B (Continued) (b)

FIRMAMENT ROOFING Income Statement For the Month Ended March 31, 2014 Revenues Service revenue ................................................. Expenses Salaries and wages expense ............................ Supplies expense .............................................. Miscellaneous expense..................................... Depreciation expense ....................................... Total expenses ........................................... Net income ................................................................

$6,560 $1,780 950 280 250 3,260 $3,300

FIRMAMENT ROOFING Retained Earnings Statement For the Month Ended March 31, 2014 Retained Earnings, March 1 ...................................................... Add: Net income ...................................................................... Less: Dividends ........................................................................ Retained Earnings, March 31 ....................................................

0 3,300 3,300 1,100 $2,200

FIRMAMENT ROOFING Statement of Financial Position March 31, 2014 Assets Property, plant, and equipment Equipment.......................................................... Less: Accum. depreciation—equipment ........ Current assets Supplies ............................................................. Accounts receivable ......................................... Cash ................................................................... Total assets ...............................................................

4-62

$11,000 1,500 550 2,700 2,720

$ 9,500

5,970 $15,470

PROBLEM 4-1B (Continued) FIRMAMENT ROOFING Statement of Financial Position (Continued) March 31, 2014 Equity and Liabilities Equity Share capital—ordinary ..................................... $10,000 Retained earnings .............................................. 2,200 Current liabilities Accounts payable .............................................. 2,500 Salaries and wages payable .............................. 480 Unearned service revenue................................. 290 Total equity and liabilities .......................................... (c) Mar. 31 31

31 31

(d) Mar. 31 31

31 31

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

950

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

250

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

260

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

480

Service Revenue ......................................... Income Summary ................................

6,560

Income Summary........................................ Salaries and Wages Expense ............. Supplies Expense ............................... Depreciation Expense......................... Miscellaneous Expense ......................

3,260

Income Summary........................................ Retained Earnings ..............................

3,300

Retained Earnings ...................................... Dividends.............................................

1,100

$12,200

3,270 $15,470

950

250 260 480

6,560 1,780 950 250 280 3,300 1,100

4-63

PROBLEM 4-2B

(a)

EAGLE COMPANY Partial Worksheet For the Year Ended December 31, 2014

Account No. 101 112 126 130 157 158 200 201 212 230 311 320 332 400 610 631 711 722 726 905

4-64

Titles Cash Accounts Receivable Supplies Prepaid Insurance Equipment Acc. Depr.—Equip. Notes Payable Accounts Payable Salaries and Wages Payable Interest Payable Share Capital—Ordinary Retained Earnings Dividends Service Revenue Advertising Expense Supplies Expense Depreciation Expense Insurance Expense Salaries and Wages Expense Interest Expense Totals Net Income Totals

Adjusted Trial Balance

Income Statement

Statement of Financial Position

Dr. 5,300 10,800 1,500 2,000 27,000

Dr.

Dr. 5,300 10,800 1,500 2,000 27,000

Cr.

5,600 15,000 4,600

2,400 600 10,000 4,200

5,000

5,000 59,000

59,000

8,400 4,000 5,600 3,200

28,000 600 101,400

28,000 600 49,800 9,200 59,000

101,400

59,000

51,600

59,000

51,600

42,400 9,200 51,600

PROBLEM 4-2B (Continued) (b)

EAGLE COMPANY Income Statement For the Year Ended December 31, 2014 Revenues Service revenue............................................. Expenses Salaries and wages expense ........................ Advertising expense ..................................... Depreciation expense ................................... Supplies expense .......................................... Insurance expense ........................................ Interest expense ............................................ Total expenses....................................... Net income ............................................................

£59,000 £28,000 8,400 5,600 4,000 3,200 600 49,800 £ 9,200

EAGLE COMPANY Retained Earnings Statement For the Year Ended December 31, 2014 Retained Earnings, January 1 ................................................ Add: Net income ................................................................... Less: Dividends ..................................................................... Retained Earnings, December 31 ..........................................

£4,200 9,200 13,400 5,000 £8,400

4-65

PROBLEM 4-2B (Continued) EAGLE COMPANY Statement of Financial Position December 31, 2014 Assets Property, plant, and equipment Equipment...................................................... Less: Accumulated depreciation— equipment .......................................... Current assets Prepaid insurance ......................................... Supplies ......................................................... Accounts receivable ..................................... Cash ............................................................... Total assets ...........................................................

£27,000 5,600 2,000 1,500 10,800 5,300

£21,400

19,600 £41,000

4-66

£10,000 8,400

£18,400 12,000

3,000 4,600 2,400 600

10,600 £41,000

PROBLEM 4-2B (Continued) (c) General Journal Date Account Titles Dec. 31 Service Revenue ................................. Income Summary .......................

Ref. 400 350

Debit 59,000

350 610 631 711 722 726 905

49,800

31 Income Summary ................................ Retained Earnings......................

350 320

9,200

31 Retained Earnings ............................... Dividends ....................................

320 332

5,000

J14 Credit 59,000 8,400 4,000 5,600 3,200 28,000 600 9,200 5,000

(d)

Date Jan. 1 Dec. 31 31

Date

Explanation Balance Closing entry Closing entry

Retained Earnings Ref. Debit  J14 J14 5,000

Dividends Ref.

Explanation

 J14

Dec. 31 Balance 31 Closing entry

Debit

Credit 4,200 9,200

No. 320 Balance 4,200 13,400 8,400

Credit

No. 332 Balance

5,000

5,000 0

5,000

4-67

PROBLEM 4-2B (Continued)

Explanation Closing entry Closing entry Closing entry

Income Summary Ref. Debit J14 J14 49,800 J14 9,200

Date Dec. 31 31

Explanation Balance Closing entry

Service Revenue Ref. Debit  J14 59,000

Date Dec. 31 31

Advertising Expense Explanation Ref. Debit Balance  8,400 Closing entry J14

Date Dec. 31 31

Explanation Balance Closing entry

Supplies Expense Ref. Debit  4,000 J14

Date Dec. 31 31

Depreciation Expense Explanation Ref. Debit Balance  5,600 Closing entry J14

Date Dec. 31 31

Insurance Expense Ref. Debit  3,200 J14

Date Dec. 31 31 31

4-68

Explanation Balance Closing entry

Credit 59,000

No. 350 Balance 59,000 9,200 0

Credit 59,000

No. 400 Balance 59,000 0

Credit

No. 610 Balance 8,400 0

8,400

Credit 4,000

Credit 5,600

Credit 3,200

No. 631 Balance 4,000 0 No. 711 Balance 5,600 0 No. 722 Balance 3,200 0

PROBLEM 4-2B (Continued)

Date Dec. 31 31

Salaries and Wages Expense Explanation Ref. Debit Balance  28,000 Closing entry J14

Date Dec. 31 31

Interest Expense Ref. Debit  600 J14

(e)

Explanation Balance Closing entry

Credit 28,000

Credit 600

No. 726 Balance 28,000 0 No. 905 Balance 600 0

EAGLE COMPANY Post-Closing Trial Balance December 31, 2014 Cash..................................................................... Accounts Receivable.......................................... Supplies .............................................................. Prepaid Insurance............................................... Equipment ........................................................... Accumulated Depreciation— Equipment ....................................................... Notes Payable ..................................................... Accounts Payable ............................................... Salaries and Wages Payable .............................. Interest Payable .................................................. Share Capital—Ordinary .................................... Retained Earnings .............................................. Totals ...........................................................

Debit £ 5,300 10,800 1,500 2,000 27,000

£46,600

Credit

£ 5,600 15,000 4,600 2,400 600 10,000 8,400 £46,600

4-69

PROBLEM 4-3B (a)

LATHROP COMPANY Income Statement For the Year Ended December 31, 2014 Revenues Service revenue ............................................. Expenses Salaries and wages expense ........................ Depreciation expense ................................... Insurance expense ........................................ Maintenance and repairs expense ............... Utilities expense ............................................ Total expenses ....................................... Net income ............................................................

$56,000 $27,000 3,000 1,800 1,600 1,400 34,800 $21,200

LATHROP COMPANY Retained Earnings Statement For the Year Ended December 31, 2014 Retained Earnings, January 1 .......................................... Add: Net income ............................................................. Less: Dividends ............................................................... Retained Earnings, December 31 ....................................

$16,400 21,200 37,600 8,000 $29,600

LATHROP COMPANY Statement of Financial Position December 31, 2014 Assets Property, plant, and equipment Equipment...................................................... Less: Accumulated depreciation— equipment .......................................... Current assets Prepaid insurance ......................................... Accounts receivable ..................................... Cash ............................................................... Total assets ...........................................................

4-70

$28,000 4,500 2,800 10,800 8,900

$23,500

22,500 $46,000

PROBLEM 4-3B (Continued) LATHROP COMPANY Statement of Financial Position (Continued) December 31, 2014 Equity and Liabilities Equity Share capital—ordinary ................................. $12,000 Retained earnings .......................................... 29,600 Current liabilities Accounts payable .......................................... 2,000 Salaries and wages payable .......................... 2,400 Total equity and liabilities .....................................

$41,600 4,400 $46,000

(b) Date Dec. 31 31

31 31

General Journal Account Titles Service Revenue ................................. Income Summary .......................

Ref. 400 350

Debit 56,000

Income Summary ................................ Maintenance and Repairs Expense ................................... Depreciation Expense ................ Insurance Expense..................... Salaries and Wages Expense .... Utilities Expense.........................

350

34,800

Income Summary ................................ Retained Earnings ......................

350 320

21,200

Retained Earnings ............................... Dividends ....................................

320 332

8,000

Credit 56,000

622 711 722 726 732

1,600 3,000 1,800 27,000 1,400 21,200 8,000

4-71

PROBLEM 4-3B (Continued) (c) 12/31

Retained Earnings No. 320 8,000 1/1 Bal. 16,400 12/31 21,200 12/31 Bal. 29,600

12/31 Bal.

12/31 12/31

12/31

(d)

Dividends 8,000 12/31

No. 332 8,000

Income Summary 34,800 12/31 21,200 56,000

No. 350 56,000 56,000

Maintenance and Repairs Expense No. 622 12/31 Bal. 1,600 12/31 1,600

Depreciation Expense No. 711 12/31 Bal. 3,000 12/31 3,000

Insurance Expense 12/31 Bal. 1,800 12/31

No. 722 1,800

Salaries and Wages Expense 12/31 Bal. 27,000 12/31

No. 726 27,000

Utilities Expense 12/31 Bal. 1,400 12/31

No. 732 1,400

Service Revenue No. 400 56,000 12/31 Bal. 56,000

LATHROP COMPANY Post-Closing Trial Balance December 31, 2014 Cash .................................................................... Accounts Receivable ......................................... Prepaid Insurance .............................................. Equipment .......................................................... Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Salaries and Wages Payable ............................. Share Capital—Ordinary.................................... Retained Earnings ............................................. Totals ..........................................................

4-72

Debit $ 8,900 10,800 2,800 28,000

$50,500

Credit

$ 4,500 2,000 2,400 12,000 29,600 $50,500

CARROLL MANAGEMENT SERVICES INC. Worksheet For the Year Ended December 31, 2014 Account Titles

Trial Balance

Adjustments

Adjusted Trial Balance

Dr.

Cr.

Income Statement Dr.

Cr.

Statement of Financial Position Dr.

Cr.

Cash 13,800 13,800 13,800 Accounts Receivable 26,300 26,300 26,300 Prepaid Insurance 3,600 (a) 1,800 1,800 1,800 Land 67,000 67,000 67,000 Buildings 127,000 127,000 127,000 Equipment 59,000 59,000 59,000 Accounts Payable 12,500 12,500 12,500 Unearned Rent Revenue 8,000 (c) 4,500 3,500 3,500 Mortgage Payable 120,000 120,000 120,000 Share Capital—Ordinary 80,000 80,000 80,000 Retained Earnings 54,000 54,000 54,000 Dividends 16,000 16,000 16,000 Service Revenue 90,700 90,700 90,700 Rent Revenue 26,000 (c) 4,500 30,500 30,500 Salaries and Wages Expense 42,000 42,000 42,000 Advertising Expense 17,500 17,500 17,500 Utilities Expense 19,000 19,000 19,000 Totals 391,200 391,200 Insurance Expense (a) 1,800 1,800 1,800 Depr. Expense (b) 6,600 6,600 6,600 Accum. Depr.—Buildings (b) 3,000 3,000 3,000 Accum. Depr.—Equipment (b) 3,600 3,600 3,600 Interest Expense (d) 9,600 9,600 9,600 Interest Payable (d) 9,600 9,600 9,600 Totals 22,500 22,500 407,400 407,400 96,500 121,200 310,900 286,200 Net Income 24,700 24,700 Totals 121,200 121,200 310,900 310,900 Key: (a) Expired Insurance; (b) Depreciation Expense—Buildings and Equipment; (c) Rent Revenue Earned; (d) Accrued Interest Payable.

PROBLEM 4-4B

Inc. Financial, & Sons, WileyInc. Only) Principles, © 2011 Manual 4-74 Copyright Weygandt, Accounting 10/e, Solutions (For Instructor Use 4-73 Use Only) Weygandt (For Instructor © 2013 John & Sons, Copyright WileyJohn IFRS, 2/e, Solution’ s Manual

(a)

PROBLEM 4-4B (Continued) (b)

CARROLL MANAGEMENT SERVICES INC. Statement of Financial Position December 31, 2014 Assets Property, plant, and equipment Land .............................................. Buildings ....................................... Less: Accumulated depreciation—buildings ... Equipment..................................... Less: Accumulated depreciation—equipment .. Current assets Prepaid insurance ........................ Accounts receivable .................... Cash .............................................. Total assets ..........................................

£ 67,000 £127,000 3,000 59,000

124,000

3,600

55,400 1,800 26,300 13,800

£246,400

41,900 £288,300

Equity and Liabilities Equity Share capital—ordinary ............................... Retained earnings ........................................ Non-current liabilities Mortgage payable (due after 2015).............. Current liabilities Mortgage payable (due in 2015) .................. Accounts payable......................................... Interest payable ............................................ Unearned rent revenue ................................ Total equity and liabilities ................................... *£54,000 + £24,700 – £16,000

4-74

£80,000 62,700* £142,700 95,000 25,000 12,500 9,600 3,500

50,600 £288,300

PROBLEM 4-4B (Continued) (c) Dec. 31 31

31 31

(d) Dec. 31

31 31

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

1,800

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

6,600

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

4,500

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

9,600

Service Revenue ................................... Rent Revenue ........................................ Income Summary ...........................

90,700 30,500

Income Summary .................................. Salaries and Wages Expense ....... Advertising Expense ..................... Interest Expense ............................ Utilities Expense ............................ Depreciation Expense ................... Insurance Expense ........................

96,500

Income Summary .................................. Retained Earnings .........................

24,700

Retained Earnings ................................. Dividends .......................................

16,000

1,800

3,000 3,600 4,500 9,600

121,200 42,000 17,500 9,600 19,000 6,600 1,800 24,700 16,000

4-75

PROBLEM 4-4B (Continued) (e)

CARROLL MANAGEMENT SERVICES INC. Post-Closing Trial Balance December 31, 2014 Cash ................................................................. Accounts Receivable ...................................... Prepaid Insurance ........................................... Land ................................................................. Buildings ......................................................... Accumulated Depreciation—Buildings ......... Equipment ....................................................... Accumulated Depreciation—Equipment ....... Accounts Payable ........................................... Interest Payable .............................................. Unearned Rent Revenue................................. Mortgage Payable ........................................... Share Capital—Ordinary................................. Retained Earnings ..........................................

Debit £ 13,800 26,300 1,800 67,000 127,000 £

3,000

59,000

£294,900

4-76

Credit

3,600 12,500 9,600 3,500 120,000 80,000 62,700 £294,900

PROBLEM 4-5B

(a) Date July 1 1

3 5 12 18 20 21 25 31 31

General Journal Account Titles Cash .................................................... Share capital—ordinary ............

Ref. 101 311

Debit 20,000

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

157 101 201

12,000

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

126 201

2,100

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

130 101

1,800

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

112 400

5,900

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

201 101

2,900

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

726 101

4,500

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

101 112

4,400

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

112 400

8,000

Gasoline Expense .............................. Cash ...........................................

633 101

350

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

332 101

1,200

J1 Credit 20,000 4,000 8,000 2,100 1,800 5,900 2,900 4,500 4,400 8,000 350 1,200

4-77

Account Titles Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accounts Payable Share Capital—Ordinary Dividends Service Revenue Gasoline Expense Salaries and Wages Expense Totals Depreciation Expense Accum. Depr.—Equipment Insurance Expense Supplies Expense Salaries and Wages Payable Totals Net Income Totals

BRENNAN'S CLEANING SERVICE Worksheet For the Month Ended July 31, 2014 Trial Balance

Adjustments

Adjusted Trial Balance

Income Statement

Dr.

Cr.

9,650 9,500 2,100 1,800 12,000

Cr.

(a) 3,300 (d) 1,500 (c) 150

Cr.

9,650 12,800 600 1,650 12,000

7,200 20,000

Dr.

7,200 20,000

1,200 13,900

(a) 3,300

1,200 17,200

350 6,700

(e) 2,200

Cr.

9,650 12,800 600 1,650 12,000 7,200 20,000

1,200 350 4,500 41,100

Cr.

Statement of Financial sheet

17,200 350 6,700

41,100 (b)

500

500 (b)

500

500 500

150 1,500 (e) 2,200 7,650

47,100

500 150 1,500

2,200 47,100

9,200 8,000 17,200

17,200

37,900

17,200

37,900

2,200 29,900 8,000 37,900

Key: (a) Service Revenue Earned; (b) Depreciation Expense; (c) Insurance Expired; (d) Cleaning Supplies Used; (e) Unpaid Salaries.

PROBLEM 4-5B (Continued)

4-78 (b) & (c)

PROBLEM 4-5B (Continued) (a), (e) & (f)

Date Explanation July 1 1 5 18 20 21 31 31

Cash Ref. J1 J1 J1 J1 J1 J1 J1 J1

Date Explanation July 12 21 25 31 Adjusting

Accounts Receivable Ref. Debit J1 5,900 J1 J1 8,000 J2 3,300

Date July 3 31

Explanation Adjusting

Date Explanation July 5 31 Adjusting

Date July 1

Explanation

Supplies Ref. J1 J2

Debit 20,000

4,000 1,800 2,900 4,500 4,400 350 1,200

Debit 2,100

Credit 4,400

Credit 1,500

Prepaid Insurance Ref. Debit J1 1,800 J2 Equipment Ref. J1

Credit

Debit 12,000

Credit 150

Credit

No. 101 Balance 20,000 16,000 14,200 11,300 6,800 11,200 10,850 9,650 No. 112 Balance 5,900 1,500 9,500 12,800 No. 126 Balance 2,100 600 No. 130 Balance 1,800 1,650 No. 157 Balance 12,000

4-79

PROBLEM 4-5B (Continued)

Date July 31

Date July 1 3 18

Accumulated Depreciation—Equipment Explanation Ref. Debit Credit Adjusting J2 500

Explanation

Accounts Payable Ref. Debit J1 J1 J1 2,900

Date July 31

Salaries and Wages Payable Explanation Ref. Debit Adjusting J2

Date July 1

Share Capital—Ordinary Ref. Debit J1

Date July 1 31 31

Date July 31 31

Date July 31 31 31 4-80

Explanation

Explanation Closing Closing

Explanation Closing

Explanation Closing Closing Closing

Retained Earnings Ref. Debit J3 J3

Credit 8,000 2,100

Credit 2,200

Credit 20,000

No. 311 Balance 20,000

Credit

No. 320 Balance

1,200

Debit 1,200

Credit 1,200

Income Summary Ref. Debit J3 J3 9,200 J3 8,000 .

No. 201 Balance 8,000 10,100 7,200 No. 212 Balance 2,200

8,000

Dividends Ref. J1 J3

No. 158 Balance 500

Credit 17,200

8,000 6,800 No. 332 Balance 1,200 0 No. 350 Balance 17,200 8,000 0

PROBLEM 4-5B (Continued)

Date July 12 25 31 31

Explanation

Adjusting Closing

Service Revenue Ref. Debit J1 J1 J2 J3 17,200

Closing

Gasoline Expense Ref. Debit J1 350 J3

Explanation Adjusting Closing

Supplies Expense Ref. Debit J2 1,500 J3

Explanation Adjusting Closing

Depreciation Expense Ref. Debit J2 500 J3

Date July 31 31

Explanation Adjusting Closing

Insurance Expense Ref. Debit J2 150 J3

Date July 20 31 31

Salaries and Wages Expense Explanation Ref. Debit J1 4,500 Adjusting J2 2,200 Closing J3

Date July 31 31

Explanation

Credit 5,900 8,000 3,300

No. 400 Balance 5,900 13,900 17,200 0

Credit

No. 633 Balance 350 0

350

Credit 1,500

Credit 500

Credit 150

Credit

6,700

No. 631 Balance 1,500 0 No. 711 Balance 500 0 No. 722 Balance 150 0 No. 726 Balance 4,500 6,700 0

4-81

PROBLEM 4-5B (Continued) (d)

BRENNAN'S CLEANING SERVICE Income Statement For the Month Ended July 31, 2014 Revenues Service revenue .............................................. Expenses Salaries and wages expense ......................... Supplies expense ........................................... Depreciation expense .................................... Gasoline expense ........................................... Insurance expense ......................................... Total expenses ........................................ Net income .............................................................

$17,200 $6,700 1,500 500 350 150 9,200 $ 8,000

BRENNAN'S CLEANING SERVICE Retained Earnings Statement For the Month Ended July 31, 2014 Retained Earnings, July 1 ..................................... Add: Net income .................................................. Less: Dividends .................................................... Retained Earnings, July 31 ...................................

0 8,000 8,000 1,200 $ 6,800

BRENNAN'S CLEANING SERVICE Statement of Financial Position July 31, 2014 Assets Property, plant, and equipment Equipment....................................................... $ 12,000 Less: Accumulated depreciation— equipment ................................................ 500

4-82

$ 11,500

PROBLEM 4-5B (Continued) BRENNAN'S CLEANING SERVICE Statement of Financial Position (Continued) July 31, 2014 Assets (Continued) Current assets Prepaid insurance .......................................... Supplies .......................................................... Accounts receivable ...................................... Cash ................................................................ Total assets .............................................................

1,650 600 12,800 9,650

24,700 $36,200

Equity and Liabilities Equity Share capital—ordinary ................................. Retained earnings .......................................... Current liabilities Accounts payable .......................................... Salaries and wages payable .......................... Total equity and liabilities .....................................

$20,000 6,800 7,200 2,200

$26,800 9,400 $36,200

(e) Date July 31 31

31 31 31

General Journal Account Titles Accounts Receivable ......................... Service Revenue .......................

Ref. 112 400

Debit 3,300

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

711

500

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

722 130

150

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

631 126

1,500

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

726 212

2,200

J2 Credit 3,300

158

500 150 1,500

2,200

4-83

PROBLEM 4-5B (Continued) (f)

General Journal

Date July 31 31

31 31

(g)

Account Titles Service Revenue ................................. Income Summary.......................

Ref. 400 350

Debit 17,200

Income Summary................................ Salaries and Wages Expense ... Depreciation Expense ............... Insurance Expense .................... Supplies Expense ...................... Gasoline Expense......................

350 726 711 722 631 633

9,200

Income Summary................................ Retained Earnings .....................

350 320

8,000

Retained Earnings .............................. Dividends ...................................

320 332

1,200

17,200 6,700 500 150 1,500 350 8,000 1,200

BRENNAN'S CLEANING SERVICE Post-Closing Trial Balance July 31, 2014 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Prepaid Insurance .............................................. Equipment .......................................................... Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Salaries and Wages Payable ............................. Share Capital—Ordinary.................................... Retained Earnings .............................................

Debit $ 9,650 12,800 600 1,650 12,000

Credit

$36,700

4-84

J3 Credit

500 7,200 2,200 20,000 6,800 $36,700

COMPREHENSIVE PROBLEM: CHAPTERS 2 TO 4

(a) Date July 1 1

3 5 12 18 20 21 25 31 31

General Journal Account Titles and Explanation Cash ..................................................... Share Capital—Ordinary ...........

Ref. 101 311

Debit 15,000

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

157 101 201

10,000

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

126 201

1,700

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

130 101

1,800

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

112 400

4,200

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

201 101

1,400

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

726 101

1,900

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

101 112

2,400

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

112 400

2,100

Gasoline Expense ............................... Cash ...........................................

633 101

400

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

332 101

500

J1 Credit 15,000 3,000 7,000 1,700 1,800 4,200 1,400 1,900 2,400 2,100 400

500

4-85

Account Titles Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accounts Payable Share Capital—Ordinary Dividends Service Revenue Gasoline Expense Salaries and Wages Expense Total Depreciation Expense Accum. Depr.—Equipment Insurance Expense Supplies Expense Salaries and Wages Payable Totals Net Income Totals

MARY'S MAIDS CLEANING SERVICE Worksheet For the Month Ended July 31, 2014 Trial Balance

Adjustments

Adjusted Trial Balance

Income Statement

Dr.

Cr.

8,400 3,900 1,700 1,800 10,000

Cr.

(a) 1,300 (d) 1,420 (c) 150

Cr.

8,400 5,200 280 1,650 10,000

7,300 15,000

Dr.

7,300 15,000

500 6,300

(a) 1,300 (e)

630

(b)

200

Cr.

8,400 5,200 280 1,650 10,000 7,300 15,000

500 400 1,900 28,600

Cr.

Statement of Financial Position

500 7,600

400 2,530

7,600 400 2,530

28,600 200 (b)

200

150 1,420 (e)

3,700

200 200

630 3,700

30,730

200 150 1,420

630 30,730

4,700 2,900 7,600

7,600

26,030

7,600

26,030

Key: (a) Service Revenue; (b) Depreciation Expense; (c) Insurance Expired; (d) Cleaning Supplies Used; (e) Unpaid Salaries.

630 23,130 2,900 26,030

COMPREHENSIVE PROBLEM (Continued)

4-86 (b) & (c)

COMPREHENSIVE PROBLEM (Continued) (a), (e) & (f)

Date July 1 1 5 18 20 21 31 31

Date July 12 21 25 31

Date July 3 31

Date July 5 31

Date July 1

Cash Ref. J1 J1 J1 J1 J1 J1 J1 J1

Explanation

Adjusting

Supplies Ref. J1 J2

Adjusting

Explanation

2,400 400 500

Debit 1,700

Prepaid Insurance Ref. Debit J1 1,800 J2 Equipment Ref. Debit J1 10,000

Credit 3,000 1,800 1,400 1,900

Accounts Receivable Ref. Debit J1 4,200 J1 J1 2,100 J2 1,300

Explanation

Debit 15,000

Credit 2,400

Credit 1,420

Credit 150

Credit

No. 101 Balance 15,000 12,000 10,200 8,800 6,900 9,300 8,900 8,400 No. 112 Balance 4,200 1,800 3,900 5,200 No. 126 Balance 1,700 280 No. 130 Balance 1,800 1,650 No. 157 Balance 10,000

4-87

COMPREHENSIVE PROBLEM (Continued)

Date July 31

Date July 1 3 18

Accumulated Depreciation—Equipment Explanation Ref. Debit Credit Adjusting J2 200

Explanation

Accounts Payable Ref. Debit J1 J1 J1 1,400

Date July 31

Salaries and Wages Payable Explanation Ref. Debit Adjusting J2

Date July 1

Share Capital—Ordinary Ref. Debit J1

Date July 31 31

Date July 31 31 31 4-88

Explanation

Explanation Closing Closing

Explanation Closing

Explanation Closing Closing Closing

Retained Earnings Ref. Debit J3 J3 500 Dividends Ref. J1 J3

Debit 500

Credit 7,000 1,700

No. 201 Balance 7,000 8,700 7,300

Credit 630

No. 212 Balance 630

Credit 15,000

No. 311 Balance 15,000

Credit 2,900

No. 320 Balance 2,900 2,400

Credit

No. 332 Balance 500 0

500

Income Summary Ref. Debit J3 J3 4,700 J3 2,900

No. 158 Balance 200

Credit 7,600

No. 350 Balance 7,600 2,900 0

COMPREHENSIVE PROBLEM (Continued)

Date July 12 25 31 31

Explanation

Adjusting Closing

Service Revenue Ref. Debit J1 J1 J2 J3 7,600

Closing

Gasoline Expense Ref. Debit J1 400 J3

Explanation Adjusting Closing

Supplies Expense Ref. Debit J2 1,420 J3

Explanation Adjusting Closing

Depreciation Expense Ref. Debit J2 200 J3

Date July 31 31

Explanation Adjusting Closing

Insurance Expense Ref. Debit J2 150 J3

Date July 20 31 31

Salaries and Wages Expense Explanation Ref. Debit J1 1,900 Adjusting J2 630 Closing J3

Date July 31 31

Explanation

Credit 4,200 2,100 1,300

No. 400 Balance 4,200 6,300 7,600 0

Credit

No. 633 Balance 400 0

400

Credit 1,420

Credit 200

Credit 150

Credit

2,530

No. 631 Balance 1,420 0 No. 711 Balance 200 0 No. 722 Balance 150 0 No. 726 Balance 1,900 2,530 0

4-89

COMPREHENSIVE PROBLEM (Continued) (d)

MARY'S MAIDS CLEANING SERVICE Income Statement For the Month Ended July 31, 2014 Revenues Service revenue .............................................. Expenses Salaries and wages expense ......................... Supplies expense ........................................... Gasoline expense ........................................... Depreciation expense .................................... Insurance expense ......................................... Total expenses ........................................ Net income .............................................................

$7,600 $2,530 1,420 400 200 150 4,700 $2,900

MARY'S MAIDS CLEANING SERVICE Retained Earnings Statement For the Month Ended July 31, 2014 Retained Earnings, July 1 ................................................... Add: Net income ................................................................ Less: Dividends .................................................................. Retained Earnings, July 31 .................................................

4-90

0 2,900 2,900 500 $2,400

COMPREHENSIVE PROBLEM (Continued) MARY'S MAIDS CLEANING SERVICE Statement of Financial Position July 31, 2011 Assets Property, plant, and equipment Equipment ....................................................... Less: Accumulated depreciation— equipment.................................................. Current assets Prepaid insurance ........................................... Supplies ........................................................... Accounts receivable ....................................... Cash ................................................................. Total assets .............................................................

$10,000 200 1,650 280 5,200 8,400

$ 9,800

15,530 $25,330

$15,000 2,400 7,300 630

$17,400 7,930 $25,330

4-91

COMPREHENSIVE PROBLEM (Continued) (e) Date July 31 31

31 31 31

General Journal Account Titles Accounts Receivable ........................ Service Revenue ......................

Ref. 112 400

Debit 1,300

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

711

200

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

722 130

150

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

631 126

1,420

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

726 212

630

J2 Credit 1,300

158

200 150 1,420 630

(f) Date July 31 31

31 31

4-92

General Journal Account Titles Service Revenue ............................... Income Summary .....................

Ref. 400 350

Debit 7,600

Income Summary .............................. Salaries and Wages Expense .. Depreciation Expense .............. Insurance Expense .................. Supplies Expense .................... Gasoline Expense ....................

350 726 711 722 631 633

4,700

Income Summary .............................. Retained Earnings ....................

350 320

2,900

Retained Earnings............................. Dividends ..................................

320 332

500

J3 Credit 7,600 2,530 200 150 1,420 400 2,900 500

COMPREHENSIVE PROBLEM (Continued) (g)

MARY'S MAIDS CLEANING SERVICE Post-Closing Trial Balance July 31, 2014 Cash..................................................................... Accounts Receivable .......................................... Supplies .............................................................. Prepaid Insurance............................................... Equipment ........................................................... Accumulated Depreciation—Equipment ........... Accounts Payable ............................................... Salaries and Wages Payable .............................. Share Capital—Ordinary .................................... Retained Earnings ..............................................

Debit $ 8,400 5,200 280 1,650 10,000 $

$25,530

Credit

200 7,300 630 15,000 2,400 $25,530

4-93

CCC4

CONTINUING COOKIE CHRONICLE

(a) COOKIE CREATIONS Income Statement For the Two Months Ended December 31, 2014 Revenues Service revenue ....................................................... Expenses Supplies expense..................................................... Salaries and wages expense ................................... Advertising expense ................................................ Utilities expense....................................................... Insurance expense................................................... Depreciation expense .............................................. Interest expense....................................................... Total expenses .................................................... Net income....................................................................

$4,515 $1,025 1,006 165 125 110 40 15 2,486 $2,029

COOKIE CREATIONS Retained Earnings Statement For the Two Months Ended December 31, 2014 Retained earnings, November 1 ................................... Add: Net income ......................................................... Less: Dividends ........................................................... Retained earnings, December 31 .................................

4-94

0 2,029 2,029 500 $1,529

CCC4 (Continued) (a) (Continued) COOKIE CREATIONS Statement of Financial Position December 31, 2014 Assets Property, plant, and equipment Equipment .................................................................. Less: Accumulated depreciation—equipment ....... Current assets Prepaid insurance...................................................... Supplies...................................................................... Accounts receivable .................................................. Cash............................................................................ Total current assets .............................................. Total assets ...........................................................

$1,200 40

$1,160

1,210 350 875 1,180 3,615 $4,775

Equity and Liabilities Equity Share Capital—Ordinary ............................... Retained earnings.......................................... Non-current liabilities Interest payable ............................................. $ 15 Notes payable ................................................ 2,000 Total non-current liabilities ...................... Current liabilities Accounts payable .......................................... 75 Salaries and wages payable ......................... 56 Unearned service revenue ............................ 300 Total current liabilities .............................. Total liabilities ..................................... Total equity and liabilities ...................

$ 800 1,529

$2,329

2,015

431 2,446 $4,775

4-95

CCC4 (Continued) (b) Date

GENERAL JOURNAL Account Titles

Debit

2014 Dec. 31 Service Revenue ..................................... Income Summary ...............................

4-96

4,515 4,515

31 Income Summary.................................... Salaries and Wages Expense ............ Utilities Expense ................................ Advertising Expense.......................... Supplies Expense .............................. Insurance Expense ............................ Depreciation Expense........................ Interest Expense ................................

2,486

31 Income Summary.................................... Retained Earnings .............................

2,029

31 Retained Earnings .................................. Dividends............................................

500

J4 Credit

1,006 125 165 1,025 110 40 15 2,029 500

CCC4 (Continued) (c)

COOKIE CREATIONS Post-Closing Trial Balance December 31, 2014

Account Cash ........................................................................ Accounts Receivable ............................................. Supplies .................................................................. Prepaid Insurance ................................................. Equipment .............................................................. Accumulated Depreciation–Equipment................ Accounts Payable .................................................. Salaries and Wages Payable ................................. Unearned Service Revenue ................................... Interest Payable ..................................................... Notes Payable ........................................................ Share Capital—Ordinary........................................ Retained Earnings .................................................

Debit $1,180 875 350 1,210 1,200

$4,815

Credit

40 75 56 300 15 2,000 800 1,529 $4,815

4-97

BYP 4-1

FINANCIAL REPORTING PROBLEM

(a)

Total current assets were W61,402,589 million at December 31, 2010, and W54,211,297 million at December 31, 2009.

(b)

No. Current assets are normally listed in reverse order of liquidity. Samsung’s current assets are listed in order of liquidity.

(c)

The asset classifications are: (1) current assets, and non-current assets.

(d)

Cash equivalents are investments with original maturities of 3 months or less that Samsung does not intend to rollover beyond three months.

(e)

Total current liabilities were W39,944,721 million at December 31, 2010, and W34,204,424 million at December 31, 2009.

4-98

BYP 4-2

COMPARATIVE ANALYSIS PROBLEM

(a) 1. 2. 3. 4.

Total current assets Net property, plant & equipment Total current liabilities Total equity

Nestlé (in millions)

Zetar (in thousands)

CHF38,997 21,438 30,146 62,598

£45,670 16,583 40,474 46,287

(b) Current assets are cash and other resources that are reasonably expected to be realized in cash or sold or consumed within one year or the company’s operating cycle, whichever is longer. Current liabilities are obligations that are reasonably expected to be paid from existing current assets or through the creation of other current liabilities. Nestlé’s current assets were 29.4% greater than its current liabilities, while Zetar’s current assets were 12.8% greater than its current liabilities. From this information, it appears that Nestlé is in a better liquidity position than Zetar.

4-99

BYP 4-3

REAL–WORLD FOCUS

The solution is dependent upon the companies chosen by the student.

4-100

BYP 4-4

(a)

DECISION–MAKING ACROSS THE ORGANIZATION

EVERCLEAN JANITORIAL SERVICE Statement of Financial Position December 31, 2014 Assets Property, plant, and equipment Equipment ($22,000 + $4,000) ....................... Less: Accum. depreciation— equipment ($4,000 + $2,000) ................. Delivery trucks ($34,000 + $5,000) ... Less: Accum. depreciation— delivery trucks ($5,000 + $5,000) ................. Current assets Prepaid insurance ($4,800 X 2/3)....... Supplies ($5,200 – $3,100) ......................... Accounts receivable ($9,000 + $3,900) ......................... Cash ................................................ Total assets ............................................

$26,000 6,000 39,000

$20,000

10,000

29,000

$49,000

3,200 2,100 12,900 5,500

23,700 $72,700

Equity and Liabilities Equity Share capital—ordinary .................................... $30,000 Retained earnings ............................................. 14,330* $44,330 Non-current liabilities Notes payable, due July 1, 2016....................... 15,000 Current liabilities Notes payable due within one year .................. 10,000 Accounts payable ($1,500 + $620) ................... 2,120 Interest payable ($25,000 X 10% X 6/12) .......... 1,250 13,370 Total equity and liabilities ......................................... $72,700

4-101

BYP 4-4 (Continued) EVERCLEAN JANITORIAL SERVICE Statement of Financial Position (Continued) December 31, 2014 *Retained earnings balance as reported .............. Add: Earned but unbilled fees ........................... Less: Janitorial supplies used............................ Insurance expired ($4,800 X 1/3) .............. Depreciation ($2,000 + $5,000) ................. Expenses incurred but unpaid ................. Interest accrued......................................... Total .................................................... Retained earnings balance as adjusted ..............

$24,000 3,900 27,900 $3,100 1,600 7,000 620 1,250 13,570 $14,330

(b) Everclean Janitorial Service met the terms of the bank loan because current assets exceed current liabilities by $10,330 ($23,700 – $13,370) at December 31, 2014.

4-102

BYP 4-5

COMMUNICATION ACTIVITY

MEMO To:

Accounting Instructor

From:

Student

Re:

Accounting Cycle

The required steps in the accounting cycle, in the order in which they should be completed, are: 1. 2. 3. 4. 5. 6. 7. 8. 9.

The optional steps in the accounting cycle include preparing a worksheet and preparing reversing entries. If a worksheet is prepared, it is done after step 3 above, and it includes steps 4 and 6. The worksheet is a form used to make it easier to prepare adjusting entries and financial statements. If reversing entries are prepared, they are journalized and posted after step 9, at the beginning of the next accounting period. A reversing entry is the exact opposite of a previously recorded adjusting entry and simplifies the recording of subsequent transactions.

4-103

BYP 4-6

ETHICS CASE

(a) The stakeholders in this case are:  You, as controller.  Phil McNally, president.  Users of the company’s financial statements.

(b) The ethical issue is the continued circulation of significantly misstated financial statements. As controller, you have just issued misleading financial statements. You have acted ethically by telling the company’s president. The president has reacted unethically by allowing the misleading financial statements to continue to circulate. (c) As controller, you should impress upon the president the consequences of having those misleading financial statements be detected by some user or securities regulator. Also stress upon him that you have a professional obligation to correct the statements or to resign.

4-104

GAAP EXERCISES GAAP 4-1 The statement of financial position required under IFRS and the balance sheet prepared under GAAP usually present the same information regarding a company’s assets, liabilities, and equity at a point in time. IFRS does not dictate a specific order but most companies list non-current items before current. Differences in ordering are: IFRS

GAAP

Statement of Financial Position presentation Non-current assets Current assets Equity Non-current liabilities Current liabilities

Balance Sheet presentation Current assets Non-current assets Current liabilities Non-current liabilities Stockholders’ equity

Under GAAP, current assets are usually listed in the order of liquidity. GAAP 4-2 GAAP uses the term balance sheet rather than statement of financial position. GAAP 4-3 DIAZ COMPANY Partial Balance Sheet Current assets Cash......................................................................................... Short-term investments.......................................................... Accounts receivable ............................................................... Supplies .................................................................................. Prepaid insurance................................................................... Total .................................................................................

$ 15,400

6,700 12,500 5,200 3,600 $43,400

4-105

GAAP 4-4 ZURICH COMPANY Partial Balance Sheet December 31, 2014 Current assets Cash ............................................................. Short-term investments .............................. Accounts receivable ................................... Inventories................................................... Long-term investments Investments in stock .................................. Property, plant and equipment Equipment ................................................... Less: Accumulated depreciation— equipment ............................................... Total assets ........................................................

4-106

$ 13,100 120 4,300 2,700

$20,220 6,500

21,700 5,700

16,000 $42,720

GAAP 4-5 (a)

REGO BOWLING ALLEY Balance Sheet December 31, 2014 Assets

Current assets Cash.................................................. Accounts receivable ........................ Prepaid insurance............................ Property, plant, and equipment Land .................................................. Buildings .......................................... Less: Acc. depr.—buildings............ Equipment ........................................ Less: Acc. depr.—equipment ......... Total assets .............................................

$18,040 7,540 4 ,680

$30,260

67,000 $128,000 42,600 62,400 18,720

85,400 43,680

196,080 $226,340

Liabilities and Stockholders’ Equity Current liabilities Current portion of notes payable ............ $ 13,900 Accounts payable ..................................... 12,300 Interest payable ........................................ 2,600 $28,800 Long-term liabilities Notes payable .......................................... 81,100 Total liabilities ................................................. $109,900 Stockholders’ equity Common stock ........................................ 90,000 Retained earnings ($22,000 + $4,440*) ... 26,440 116,440 Total liabilities and stockholders’ equity ...... $226,340 *Net income = $15,180 – $780 – $7,360 – $2,600 = $4,440 GAAP 4-6 It is possible to compare liquidity and solvency for companies using different currencies. The ratios that are used to do so, such as the current ratio and debt to total assets, indicate relative amounts of assets and liabilities rather than absolute monetary values.

4-107

GAAP FINANCIAL REPORTING PROBLEM GAAP 4-7 (a) Tootsie Roll’s total current assets at December 31, 2010 were $ 237,591 thousand and at December 31, 2009 were $ 211,878 thousand. (b) Yes, under GAAP current assets are listed in the order of their liquidity. (c) Tootsie Roll’s assets are classified as current assets, property, plant and equipment, and other assets. (d) Tootsie Roll’s total current liabilities at December 31, 2010 were $ 58,505 thousand and at December 31, 2009 were $ 56,066 thousand.

4-108

CHAPTER 5 Accounting for Merchandising Operations ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief Exercises

A Problems

B Problems

*1.

Identify the differences between service and merchandising companies.

2, 3, 4

*2.

Explain the recording of purchases under a perpetual inventory system.

6, 7, 8

2, 4

2, 3, 4, 11

1A, 2A, 4A

1B, 2B, 4B

*3.

Explain the recording of sales revenues under a perpetual inventory system.

5, 9, 10, 11

2, 3

3, 4, 5, 11

1A, 2A, 4A

1B, 2B, 4B

*4.

Explain the steps in the accounting cycle for a merchandising company.

1, 12, 13, 14

5, 6

6, 7, 8

3A, 4A, 8A

3B, 4B

*5.

Prepare an income statement for a merchandiser.

15, 16, 17, 18

7, 8, 9, 11

6, 9, 10, 12, 13, 14

2A, 3A, 8A

2B, 3B

*6.

Explain the recording of purchases and sales of inventory under a periodic inventory system.

19, 20

10, 11, 12

15, 16, 17, 18, 19

5A, 6A, 7A

5B, 6B, 7B

*7.

Prepare a worksheet for a merchandising company.

20, 21

Do It!

Exercises 1

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

5-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Journalize purchase and sales transactions under a perpetual inventory system.

Simple

20–30

Journalize, post, and prepare a partial income statement.

Simple

30–40

Prepare financial statements and adjusting and closing entries.

Moderate

40–50

Journalize, post, and prepare a trial balance.

Simple

30–40

*5A

Determine cost of goods sold and gross profit under periodic approach.

Moderate

40–50

*6A

Calculate missing amounts and assess profitability.

Moderate

20–30

*7A

Journalize, post, and prepare trial balance and partial income statement using periodic approach.

Simple

30–40

*8A

Complete accounting cycle beginning with a worksheet.

Moderate

50–60

Journalize purchase and sales transactions under a perpetual inventory system.

Simple

20–30

Journalize, post, and prepare a partial income statement.

Simple

30–40

Prepare financial statements and adjusting and closing entries.

Moderate

40–50

Journalize, post, and prepare a trial balance.

Simple

30–40

*5B

Determine cost of goods sold and gross profit under periodic approach.

Moderate

40–50

*6B

Calculate missing amounts and assess profitability.

Moderate

20–30

*7B

Journalize, post, and prepare trial balance and partial income statement using periodic approach.

Simple

30–40

5-2

WEYGANDT FINANCIAL ACCOUNTING, IFRS Edition, 2e CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS Number

Difficulty

Time (min.)

BE1

Simple

4–6

BE2

2, 3

Simple

2–4

BE3

Simple

6–8

BE4

Simple

6–8

BE5

Simple

1–2

BE6

Simple

2–4

BE7

Simple

2–4

BE8

Simple

4–6

BE9

Simple

4–6

BE10

Simple

4–6

BE11

Simple

4–6

BE12

Simple

3–5

BE13

Simple

2–4

DI1

Simple

2–4

DI2

Simple

4–6

DI3

Simple

4–6

DI4

Simple

10–12

EX1

Simple

3–5

EX2

Simple

8–10

EX3

2, 3

Simple

8–10

EX4

2, 3

Simple

8–10

EX5

Simple

8–10

EX6

4, 5

Simple

6–8

EX7

Simple

6–8

EX8

Simple

8–10

EX9

Simple

8–10

EX10

Simple

8–10

EX11

2, 3

Moderate

6–8

EX12

Simple

8–10

EX13

Simple

6–8

5-3

ACCOUNTING FOR MERCHANDISING OPERATIONS (Continued) Number

Difficulty

Time (min.)

EX14

Moderate

8–10

EX15

Simple

6–8

EX16

Simple

8–10

EX17

Moderate

10–12

EX18

Simple

8–10

EX19

Simple

8–10

EX20

Simple

2–4

EX21

Simple

8–10

P1A

2, 3

Simple

20–30

P2A

2, 3, 5

Simple

30–40

P3A

4, 5

Moderate

40–50

P4A

2–4

Simple

30–40

P5A

Moderate

40–50

P6A

Moderate

20–30

P7A

Simple

30–40

P8A

4, 5, 7

Moderate

50–60

P1B

2, 3

Simple

20–30

P2B

2, 3, 5

Simple

30–40

P3B

4, 5

Moderate

40–50

P4B

2–4

Simple

30–40

P5B

Moderate

40–50

P6B

Moderate

20–30

P7B

Simple

30–40

BYP1

AN, E

Simple

10–15

BYP2

AN, E

Simple

15–20

BYP3

—

Simple

10–15

BYP4

AN, S, E

Moderate

20–30

BYP5

Simple

10–15

BYP6

Simple

10–15

5-4

Learning Objective

Knowledge Comprehension

Identify the differences between service and merchandising companies.

Explain the recording of purchases under a perpetual inventory system.

Explain the recording of sales revenues under a perpetual inventory system.

Explain the steps in the accounting cycle for a merchandising company.

Prepare an income statement Q5-18 for a merchandiser.

*6.

Explain the recording of purchases and sales under a periodic inventory system.

*7.

Prepare a worksheet for a merchandising company.

Broadening Your Perspective

Application

Analysis

Q5-3 Q5-4

E5-1 BE5-1

Q5-6 Q5-7

Q5-8 BE5-2 BE5-4 DI5-1 E5-2

E5-3 E5-4 P5-1A P5-2A P5-1B

P5-2B E5-11 P5-4A P5-4B

Q5-11 BE5-2 BE5-3 DI5-2 E5-3

E5-4 E5-5 P5-1A P5-2A P5-4A

P5-1B Q5-9 P5-2B E5-11 P5-4B

Q5-1 Q5-12 Q5-14

Q5-13 BE5-5 BE5-6 DI5-3

E5-6 E5-7 E5-8 P5-4A

P5-8A P5-3A P5-4B P5-3B

Q5-17 BE5-8 DI5-4

Q5-15 Q5-16 BE5-7 BE5-9 BE5-11 E5-6 E5-9

E5-10 E5-12 E5-13 P5-2A

P5-2B E5-14 P5-5A P5-3A P5-5B P5-3B P5-8A P5-6A P5-6B

Q5-19

Q5-20 BE5-10 BE5-11 BE5-12

E5-15 E5-17 E5-18 E5-19

P5-5A E5-16 P5-5B P5-6A P5-7A P5-6B P5-7B

Q5-21 BE5-13

E5-20 E5-21

Q5-2

Q5-5 Q5-10

Synthesis

Evaluation

P5-8A

Communication Real–World Focus

Financial Reporting Decision–Making Comparative Analysis Across the Decision–Making Across Organization the Organization

Comparative Analysis Financial Reporting Decision–Making Across the Organization Ethics Case

BLOOM’ S TAXONOMY TABLE

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

5-5

ANSWERS TO QUESTIONS 1.

(a) Disagree. The steps in the accounting cycle are the same for both a merchandising company and a service company. (b) The measurement of income is conceptually the same. In both types of companies, net income (or loss) results from the matching of expenses with revenues.

The normal operating cycle for a merchandising company is likely to be longer than in a service company because inventory must first be purchased and sold, and then the receivables must be collected.

(a) The components of revenues and expenses differ as follows: Merchandising Revenues Expenses

Service Fees, Rents, etc. Operating (only)

Sales Cost of Goods Sold and Operating

(b) The income measurement process is as follows: Sales Revenue

Less

Cost of Goods Sold

Equals

Gross Profit

Less

Operating Expenses

Equals

Net Income

Income measurement for a merchandising company differs from a service company as follows: (a) sales are the primary source of revenue and (b) expenses are divided into two main categories: cost of goods sold and operating expenses.

In a perpetual inventory system, cost of goods sold is determined each time a sale occurs.

The letters FOB mean Free on Board. FOB shipping point means that goods are placed free on board the carrier by the seller. The buyer then pays the freight and debits Inventory. FOB destination means that the goods are placed free on board to the buyer’s place of business. Thus, the seller pays the freight and debits Freight-out.

Credit terms of 2/10, n/30 mean that a 2% cash discount may be taken if payment is made within 10 days of the invoice date; otherwise, the invoice price, less any returns, is due 30 days from the invoice date.

July 24

Accounts Payable ($2,500 – $200) ............................................... Inventory ($2,300 X 2%) ........................................................ Cash ($2,300 – $46)..............................................................

2,300 46 2,254

Agree. In accordance with the revenue recognition principle, companies record sales revenue when the performance obligation is satisfied. The performance obligation is satisfied when the goods transfer from the seller to the buyer; that is, when the exchange transaction occurs. The earning of revenue is not dependent on the collection of credit sales.

10.

(a) The primary source documents are: (1) cash sales—cash register tapes and (2) credit sales— sales invoice.

5-6

Questions Chapter 5 (Continued) (b) The entries are: Debit Cash sales—

Credit sales—

11.

July 19

Cash .............................................................. Sales Revenue ...................................... Cost of Goods Sold ....................................... Inventory ................................................

Accounts Receivable ..................................... Sales Revenue ...................................... Cost of Goods Sold ....................................... Inventory ................................................

Cash ($600 – $12) ............................................................... Sales Discounts ($600 X 2%)................................................ Accounts Receivable ($700 – $100) ..............................

Credit XX

XX XX

XX XX XX

588 12 600

12.

The perpetual inventory records for merchandise inventory may be incorrect due to a variety of causes such as recording errors, theft, or waste.

13.

Two closing entries are required: (1) Sales Revenue .............................................................................. Income Summary ...................................................................

180,000

(2) Income Summary ........................................................................... Cost of Goods Sold ................................................................

125,000

180,000

125,000

14.

Of the merchandising accounts, only Inventory will appear in the post-closing trial balance.

15.

Sales revenue........................................................................................................ Cost of goods sold ................................................................................................. Gross profit ............................................................................................................

$109,000 70,000 $ 39,000

Gross profit rate: $39,000 ÷ $109,000 = 35.8% 16.

Gross profit ............................................................................................................ Less: Net income .................................................................................................. Operating expenses...............................................................................................

17.

There are three distinguishing features in the income statement of a merchandising company: (1) a sales revenues section, (2) a cost of goods sold section, and (3) gross profit.

¥570,000 240,000 ¥330,000

5-7

Questions Chapter 5 (Continued) *18.

(a) The operating activities part of the income statement has three sections: sales revenues, cost of goods sold, and operating expenses. (b) The nonoperating activities part consists of two sections: other income and expense, and interest expense.

* *19.

*20.

*21.

5-8

Accounts

Added/Deducted

Purchase Returns and Allowances Purchase Discounts Freight-In

Deducted Deducted Added

July 24

Accounts Payable ($2,000 – $200) ................................................... Purchase Discounts ($1,800 X 2%) ........................................... Cash ($1,800 – $36)..................................................................

1,800 36 1,764

The columns are: (a) Inventory—Trial Balance (Dr.), Adjusted Trial Balance (Dr.), and Statement of Financial Position (Dr.). (b) Cost of Goods Sold—Trial Balance (Dr.), Adjusted Trial Balance (Dr.), and Income Statement (Dr.).

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5-1 (a) Cost of goods sold = £45,000 (£75,000 – £30,000). Operating expenses = £19,200 (£30,000 – £10,800). (b) Gross profit = £53,000 (£108,000 – £55,000). Operating expenses = £23,500 (£53,000 – £29,500). (c) Sales revenue = £163,500 (£83,900 + £79,600). Net income = £40,100 (£79,600 – £39,500).

BRIEF EXERCISE 5-2 Giovanni Company Inventory ............................................................. Accounts Payable ....................................... Gordon Company Accounts Receivable .......................................... Sales Revenue ............................................. Cost of Goods Sold ............................................ Inventory ......................................................

780 780 780 780 560 560

BRIEF EXERCISE 5-3 (a) Accounts Receivable .......................................... Sales Revenue ............................................. Cost of Goods Sold ............................................ Inventory ......................................................

800,000

(b) Sales Returns and Allowances .......................... Accounts Receivable .................................. Inventory ............................................................. Cost of Goods Sold .....................................

120,000

800,000 620,000 620,000 120,000 90,000

90,000

5-9

BRIEF EXERCISE 5-3 (Continued) (c) Cash ($680,000 – $13,600) .................................. Sales Discounts ($680,000 X 2%)....................... Accounts Receivable .................................. ($800,000 – $120,000)

666,400 13,600 680,000

BRIEF EXERCISE 5-4 (a) Inventory ............................................................. Accounts Payable .......................................

800,000

(b) Accounts Payable ............................................... Inventory ......................................................

120,000

(c) Accounts Payable ($800,000 – $120,000) .......... Inventory ($680,000 X 2%) ....................................... Cash ($680,000 – $13,600) ..........................

680,000

800,000 120,000

13,600 666,400

BRIEF EXERCISE 5-5 Cost of Goods Sold .................................................... Inventory .............................................................

3,400 3,400

BRIEF EXERCISE 5-6 Sales Revenue ............................................................ Income Summary ................................................

192,000

Income Summary ....................................................... Cost of Goods Sold ............................................ Sales Discounts ..................................................

107,000

5-10

192,000 105,000 2,000

BRIEF EXERCISE 5-7 YANGTZE COMPANY Income Statement (Partial) For the Month Ended October 31, 2014 Sales revenues Sales revenue (¥280,000 + ¥100,000)................. Less: Sales returns and allowances ................ Sales discounts ....................................... Net sales ..............................................................

¥380,000 ¥18,000 5,000

23,000 ¥357,000

BRIEF EXERCISE 5-8 The format of an income statement for a merchandising company is designed to differentiate between various sources of income and expense. Item (a) (b) (c) (d) (e)

Gain on sale of equipment Interest expense Casualty loss from vandalism Cost of goods sold Depreciation expense

Section Other income and expense After other income and expenses Other income and expense Cost of goods sold Operating expenses

5-11

BRIEF EXERCISE 5-9 (a) Net sales = $506,000 – $13,000 = $493,000. (b) Gross profit = $493,000 – $330,000 = $163,000. (c) Income from operations = $163,000 – $110,000 = $53,000. (d) Gross profit rate = $163,000 ÷ $493,000 = 33.1%. *BRIEF EXERCISE 5-10 Purchases ...................................................................... Less: Purchase returns and allowances .................... Purchase discounts ........................................... Net purchases................................................................ Net purchases................................................................ Add: Freight-in ............................................................. Cost of goods purchased .............................................

W430,000 W13,000 8,000

21,000 W409,000 W409,000 16,000 W425,000

*BRIEF EXERCISE 5-11 Net sales ........................................................................ W680,000 Beginning inventory ...................................................... W 60,000 Add: Cost of goods purchased* .................................. 425,000 Cost of goods available for sale ................................... 485,000 Less: Ending inventory ................................................. 90,000 Cost of goods sold ........................................................ 395,000 Gross profit .................................................................... W285,000 *Information taken from Brief Exercise 5-10.

5-12

*BRIEF EXERCISE 5-12 (a) (b) (c)

Purchases ............................................................. Accounts Payable .........................................

900,000

Accounts Payable ................................................ Purchase Returns and Allowances ..............

184,000

Accounts Payable ($900,000 – $184,000) ........... Purchase Discounts ($716,000 X 2%) .......... Cash ($716,000 – $14,320) ............................

716,000

900,000 184,000 14,320 701,680

*BRIEF EXERCISE 5-13 (a) Cash: Trial balance debit column; Adjusted trial balance debit column; Statement of financial position debit column. (b) Inventory: Trial balance debit column; Adjusted trial balance debit column; Statement of financial position debit column. (c) Sales revenue: Trial balance credit column; Adjusted trial balance credit column, Income statement credit column. (d) Cost of goods sold: Trial balance debit column, Adjusted trial balance debit column, Income statement debit column. SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 5-1 Oct. 5

Oct. 8

Inventory ................................................................ Accounts Payable ........................................... (To record goods purchased on account)

4,700

Accounts Payable.................................................. Inventory .......................................................... (To record return of defective goods)

650

4,700

650

5-13

DO IT! 5-2 Oct. 5

Oct. 8

Accounts Receivable............................................. Sales Revenue ................................................. (To record credit sales)

4,700

Cost of Goods Sold ............................................... Inventory ......................................................... (To record cost of goods sold)

3,100

Sales Returns and Allowances ............................ Accounts Receivable ...................................... (To record credit granted for receipt of returned goods)

650

Inventory ................................................................ Cost of Goods Sold ........................................ (To record fair value of goods returned)

160

4,700

3,100

650

160

DO IT! 5-3 Dec. 31 Sales Revenue ....................................................... 156,000 Interest Revenue ................................................... 3,000 Income Summary ............................................. 159,000 (To close accounts with credit balances) Income Summary ................................................... 128,200 Cost of Goods Sold ......................................... Sales Returns and Allowances ....................... Sales Discounts ............................................... Freight-Out ....................................................... Utilities Expense .............................................. Salaries and Wages Expense.......................... (To close accounts with debit balances)

5-14

92,400 4,000 3,000 1,900 7,400 19,500

DO IT! 5-4 Account

Financial Statement

Classification

Accounts Payable

Statement of Financial Position Statement of Financial Position Statement of Financial Position Statement of Financial Position Income statement

Current liabilities

Accounts Receivable Accumulated Depreciation— Buildings Cash Casualty Loss from Vandalism Cost of Goods Sold Depreciation Expense Dividends Equipment Freight-Out Insurance Expense Interest Payable Inventory Land Notes Payable (due in 5 years) Property Taxes Payable Salaries and Wages Expense Salaries and Wages Payable Sales Returns and Allowances Sales Revenue Share Capital—Ordinary Unearned Rent Revenue Utilities Expense

Income statement Income statement Retained earnings statement Statement of Financial Position Income statement Income statement Statement of Financial Position Statement of Financial Position Statement of Financial Position Statement of Financial Position Statement of Financial Position Income statement Statement of Financial Position Income statement Income statement Statement of Financial Position Statement of Financial Position Income statement

Current assets Property, plant, and equipment Current assets Other income and expense Cost of goods sold Operating expenses Deduction section Property, plant, and equipment Operating expenses Operating expenses Current liabilities Current assets Property, plant, and equipment Non-current liabilities Current liabilities Operating expenses Current liabilities Sales revenues Sales revenues Equity Current liabilities Operating expenses

5-15

SOLUTIONS TO EXERCISES EXERCISE 5-1 1. 2. 3. 4. 5.

6. 7. 8.

True. False. For a merchandiser, sales less cost of goods sold is called gross profit. True. True. False. The operating cycle of a merchandiser differs from that of a service company. The operating cycle of a merchandiser is ordinarily longer. False. In a periodic inventory system, no detailed inventory records of goods on hand are maintained. True. False. A perpetual inventory system provides better control over inventories than a periodic system.

EXERCISE 5-2 (a) (1) April 5

Inventory .......................................... Accounts Payable ....................

25,000

Inventory .......................................... Cash ..........................................

900

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

26,000

Accounts Payable ........................... Inventory ..................................

2,600

Accounts Payable ........................... ($25,000 – $2,600) Inventory [($25,000 – $2,600) X 2%] ..... Cash ($22,400 – $448) ..............

22,400

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

22,400

(2) April 6 (3) April 7 (4) April 8 (5) April 15

(b) May 4

5-16

25,000 900 26,000 2,600

448 21,952

22,400

EXERCISE 5-3 Sept. 6 9 10 12

Inventory (90 X €20) ........................................ Accounts Payable ...................................

1,800

Inventory ......................................................... Cash .........................................................

180

Accounts Payable ........................................... Inventory ..................................................

Accounts Receivable (26 X €33) .................... Sales Revenue ......................................... Cost of Goods Sold (26 X €22) ....................... Inventory ..................................................

858

Sales Returns and Allowances ..................... Accounts Receivable ............................. Inventory ........................................................ Cost of Goods Sold ................................

Accounts Receivable (40 X €32) ................... Sales Revenue ........................................ Cost of Goods Sold (40 X €22) ...................... Inventory .................................................

1,280

1,800 180 66 858 572 572 33 22 22 1,280 880 880

EXERCISE 5-4 (a) June 10 11 12 19

Inventory ................................................. Accounts Payable ...........................

7,600

Inventory ................................................. Cash .................................................

400

Accounts Payable................................... Inventory..........................................

300

Accounts Payable ($7,600 – $300)......... Inventory ($7,300 X 2%) ............................... Cash ($7,300 – $146) .......................

7,300

7,600 400 300

146 7,154 5-17

EXERCISE 5-4 (Continued) (b) June 10

Accounts Receivable ............................. Sales Revenue ................................ Cost of Goods Sold ............................... Inventory .........................................

7,600

Sales Returns and Allowances ............. Accounts Receivable ..................... Inventory ................................................ Cost of Goods Sold ........................

300

Cash ($7,300 – $146).............................. Sales Discounts ($7,300 X 2%) ............. Accounts Receivable ($7,600 – $300) ............................

7,154 146

7,600 4,300 4,300 300 70 70

7,300

EXERCISE 5-5 (a) 1.

Accounts Receivable ...................... Sales Revenue ......................... Cost of Goods Sold ......................... Inventory ..................................

570,000

Sales Returns and Allowances ...... Accounts Receivable ..............

20,000

Cash (HK$550,000 – HK$5,500) ...... Sales Discounts [(HK$570,000 – HK$20,000) X 1%] Accounts Receivable (HK$570,000 – HK$20,000) ..

544,500

(b) Cash .......................................................................... Accounts Receivable ( HK$570,000 – HK$20,000) ..........................

550,000

2. 3.

5-18

Dec. 3

Dec. 8 Dec. 13

570,000 364,800 364,800 20,000

5,500 550,000

550,000

EXERCISE 5-6 (a)

MENDOZA COMPANY Income Statement (Partial) For the Year Ended October 31, 2014 Sales revenues Sales revenue ................................................. Less: Sales returns and allowances ........... Sales discounts.................................. Net sales .........................................................

$820,000 $28,000 13,000

41,000 $779,000

Note: Freight-Out is a selling expense. (b) (1) Oct. 31

Sales Revenue ............................. Income Summary .................

820,000

Income Summary ......................... Sales Returns and Allowances ....................... Sales Discounts....................

41,000

(a) Cost of Goods Sold .............................................. Inventory ........................................................

1,400

(b) Sales Revenue ...................................................... Income Summary ..........................................

115,000

Income Summary .................................................. Cost of Goods Sold ($60,000 + $1,400) ........ Operating Expenses ..................................... Sales Returns and Allowances .................... Sales Discounts ............................................

93,400

Income Summary ($115,000 – $93,400) ............... Retained Earnings .........................................

21,600

(2)

820,000

28,000 13,000

EXERCISE 5-7

1,400 115,000 61,400 29,000 1,700 1,300

21,600

5-19

EXERCISE 5-8 (a) Cost of Goods Sold .............................................. Inventory ........................................................

600

(b) Sales Revenue ...................................................... Income Summary ..........................................

378,000

Income Summary .................................................. Cost of Goods Sold ($208,000 + $600) ......... Freight-Out..................................................... Insurance Expense........................................ Rent Expense ................................................ Salaries and Wages Expense ....................... Sales Discounts............................................. Sales Returns and Allowances.....................

327,600

Income Summary ($378,000 – $327,600) ............. Retained Earnings .........................................

50,400

600 378,000 208,600 7,000 12,000 20,000 59,000 8,000 13,000 50,400

EXERCISE 5-9 (a)

BACH COMPANY Income Statement For the Month Ended March 31, 2014 Sales revenues Sales revenue ................................................... Less: Sales returns and allowances .............. Sales discounts .................................... Net sales ........................................................... Cost of goods sold ............................................... Gross profit ........................................................... Operating expenses Salaries and wages expense ........................... Rent expense .................................................... Freight-out ........................................................ Insurance expense ........................................... Total operating expenses..................... Net income........................................................

(b) Gross profit rate = £148,400 ÷ £360,400 = 41.18%. 5-20

£380,000 £13,000 6,600

19,600 360,400 212,000 148,400

58,000 32,000 9,000 6,000 105,000 £ 43,400

EXERCISE 5-10 (a)

MICHAEL COMPANY Income Statement For the Year Ended December 31, 2014 Net sales .............................................. Cost of goods sold ............................. Gross profit ......................................... Operating expenses ........................... Income from operations ..................... Other income and expense Interest revenue .......................... Loss on disposal of plant assets ................................... Interest expense ................................. Net income ..........................................

€2,200,000 1,256,000 944,000 725,000 219,000 € 33,000 (17,000)

16,000 70,000 € 165,000

5-21

EXERCISE 5-11 1. 2.

3. 4.

Sales Returns and Allowances ........................................ Sales Revenue ...........................................................

175

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

150 150

Sales Discounts ................................................................ Sales Revenue ...........................................................

215

Inventory ........................................................................... Cash ................................................................................... Freight-Out.................................................................

20 180

175

150 150 215

200

EXERCISE 5-12 (a) $860,000 – $533,200 = $326,800. (b) $326,800/$860,000 = 38%. The gross profit rate is generally considered to be more useful than the gross profit amount. The rate expresses a more meaningful (qualitative) relationship between net sales and gross profit. The gross profit rate indicates what portion of each sales dollar goes to gross profit. The trend of the gross profit rate is closely watched by financial statement users, and is compared with rates of competitors and with industry averages. Such comparisons provide information about the effectiveness of a company’s purchasing function and the soundness of its pricing policies. (c) Income from operations is $105,800 ($326,800 – $221,000), and net income is $98,800 ($105,800 – $7,000). (d) Inventory is reported as a current asset immediately below prepaid expenses.

5-22

EXERCISE 5-13 (a) (*missing amount) a.

Sales revenue .............................................................. *Sales returns ............................................................... Net sales ......................................................................

py 90,000) (9,000) py 81,000)

Net sales ...................................................................... Cost of goods sold ...................................................... *Gross profit .................................................................

py 81,000) (56,000) py 25,000)

Gross profit .................................................................. Operating expenses .................................................... *Net income...................................................................

py 25,000) (12,000) py 13,000)

*Sales revenue .............................................................. py 103,000) Sales returns ............................................................... (5,000) Net sales ...................................................................... py 98,000)

Net sales ...................................................................... *Cost of goods sold ...................................................... Gross profit ...................................................................

py 98,000) 60,500) py 37,500)

Gross profit .................................................................. *Operating expenses .................................................... Net income ...................................................................

py 37,500) 22,500) py 15,000)

) (b) Natasha Company Gross profit ÷ Net sales = py 25,000 ÷ py 81,000 = 30.9% Boru’s Company Gross profit ÷ Net sales = py 37,500 ÷ py 98,000 = 38.3%

5-23

EXERCISE 5-14 (*Missing amount) (a)

Sales revenue ........................................................ Sales returns and allowances .............................. Net sales ................................................................

$ 90,000 (4,000)* $ 86,000

(b)

Net sales ................................................................ Cost of goods sold ................................................ Gross profit ...........................................................

$ 86,000 (56,000) $ 30,000*

(c) and (d) Gross profit ........................................................... Operating expenses .............................................. Income from operations (c) .................................. Other income and expense .................................. Net income (d) .......................................................

$ 30,000 (15,000) $ 15,000* (4,000) $ 11,000*

(e)

$100,000* (5,000) $ 95,000

(f)

$ 95,000 (73,000)* $ 22,000

(g) and (h) Gross profit ........................................................... Operating expenses (g) ........................................ Income from operations (h) .................................. Other income and expense .................................. Net income.............................................................

$ 22,000 (8,000)* $ 14,000* (3,000) $ 11,000

(i)

$122,000 (12,000) $110,000*

(j)

$110,000 (86,000)* $ 24,000

5-24

EXERCISE 5-14 (Continued) (k) and (l) Gross profit ........................................................... Operating expenses .............................................. Income from operations (k) .................................. Other income and expense (l) .............................. Net income ............................................................

$24,000 18,000 $ 6,000* 1,000* $ 5,000

EXERCISE 5-15 Inventory, September 1, 2013 ....................................... Purchases ...................................................................... Less: Purchase returns and allowances .................... Net Purchases ............................................................... Add: Freight-in ............................................................. Cost of goods purchased ............................................. Cost of goods available for sale................................... Less: Inventory, August 31, 2014 ................................. Cost of goods sold ................................................

Rp17,200 Rp149,000 6,000 143,000 5,000 148,000 165,200 14,000 Rp151,200

EXERCISE 5-16 (a)

(b)

Sales revenue ....................................... Less: Sales returns and allowances .... Sales discounts......................... Net sales ............................................... Cost of goods sold Inventory, January 1....................... Purchases ....................................... Less: Purch. rets. and alls. ........... Purch. discounts ................. Net purchases ................................. Add: Freight-in ................................ Cost of goods available for sale .... Less: Inventory, December 31 ....... Cost of goods sold .................. Gross profit .....................................

$840,000 $ 11,000 7,000

18,000 822,000

50,000 $509,000 8,000 6,000 495,000 4,000 599,000 60,000 439,000 $383,000

Gross profit $383,000 – Operating expenses = Net income $130,000. Operating expenses = $253,000.

5-25

EXERCISE 5-17 (a) $1,580 (b) $1,675 (c) $1,515 (d) $30 (e) $250 (f) $90

($1,620 – $40) ($1,580 + $95) ($1,825 – $310) ($1,060 – $1,030) ($1,280 – $1,030) ($1,350 – $1,260)

(g) $6,500 ($290 + $6,210) (h) $1,730 ($7,940 – $6,210) (i) $8,940 ($1,000 + $7,940) (j) $6,200 ($49,530 – $43,330 from (I)) (k) $2,500 ($43,590 – $41,090) (l) $43,330 ($41,090 + $2,240)

*EXERCISE 5-18 (a) 1. 2. 3. 4.

(b)

5-26

April 5 April 6 April 7 April 8

April 15

May

Purchases ....................................... Accounts Payable .....................

18,000

Freight-In ......................................... Cash ...........................................

820

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

30,000

Accounts Payable........................... Purchase Returns and Allowances ............................

2,800

Accounts Payable (€18,000 – €2,800)........................ Purchase Discounts [(€18,000 – €2,800) X 2%)] ..... Cash (€15,200 – €304) ............... Accounts Payable (€18,000 – €2,800)........................ Cash ...........................................

18,000 820 30,000

2,800 15,200 304 14,896 15,200 15,200

*EXERCISE 5-19 (a) 1. 2. 3. 4.

(b)

April 5 April 6 April 7 April 8

April 15

May

Purchases ....................................... Accounts Payable .....................

16,000

Freight-In......................................... Cash...........................................

800

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

27,000

Accounts Payable .......................... Purchase Returns and Allowances ............................

4,000

Accounts Payable .......................... ($16,000 – $4,000) Purchase Discounts [($16,000 – $4,000) X 2%)] ..... Cash ($12,000 – $240)...............

12,000

Accounts Payable ($16,000 – $4,000) ....................... Cash...........................................

16,000 800 27,000

4,000

240 11,760 12,000 12,000

*EXERCISE 5-20

Accounts

Adjusted Trial Balance Debit

Cash Inventory Sales Revenue Sales Returns and Allowances Sales Discounts Cost of Goods Sold

Credit

Income Statement Debit

Credit

9,000 76,000

Debit

Credit

9,000 76,000 460,000

10,000 9,000 288,000

Statement of Financial Position

460,000 10,000 9,000 288,000

5-27

*EXERCISE 5-21 BARBOSA COMPANY Worksheet For the Month Ended June 30, 2014 Account Titles Cash Accounts Receivable Inventory Accounts Payable Share Capital—Ordinary Sales Revenue Cost of Goods Sold Operating Expenses Totals Net Income Totals

5-28

Trial Balance Dr. Cr. 2,120 2,440 11,640 1,120 4,000 42,500 20,560 10,860 47,620 47,620

Adjustments Dr. Cr.

1,500

1,500 1,500 1,500

Adj. Trial Income Statement of Balance Statement Financial Position Dr. Cr. Dr. Cr. Dr. Cr. 2,120 2,120 2,440 2,440 11,640 11,640 2,620 2,620 4,000 4,000 42,500 42,500 20,560 20,560 12,360 12,360 49,120 49,120 32,920 42,500 16,200 6,620 9,580 9,580 42,500 42,500 16,200 16,200

SOLUTIONS TO PROBLEMS PROBLEM 5-1A

July 1 3

20 21

Inventory ....................................................... Accounts Payable .................................

1,500

Accounts Receivable ................................... Sales Revenue ......................................

2,200

Cost of Goods Sold ...................................... Inventory................................................

1,400

Accounts Payable......................................... Inventory ($1,500 X .02) ..................................... Cash .......................................................

1,500

Cash .............................................................. Sales Discounts ............................................ Accounts Receivable ............................

2,178 22

Accounts Receivable ................................... Sales Revenue ......................................

1,400

Cost of Goods Sold ...................................... Inventory................................................

1,010

Inventory ....................................................... Accounts Payable .................................

1,900

Inventory ....................................................... Cash .......................................................

125

Accounts Payable......................................... Inventory................................................

300

Cash .............................................................. Sales Discounts ............................................ Accounts Receivable ............................

1,386 14

1,500 2,200 1,400

30 1,470

2,200 1,400 1,010 1,900 125 300

1,400 5-29

PROBLEM 5-1A (Continued) July 22

30 31

5-30

Accounts Receivable .................................... Sales Revenue .......................................

2,250

Cost of Goods Sold ...................................... Inventory ................................................

1,350

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

1,600

Sales Returns and Allowances ..................... Accounts Receivable ............................

200

Inventory ....................................................... Cost of Goods Sold ...............................

120

2,250 1,350 1,600 200 120

PROBLEM 5-2A

(a) Date Apr. 2 4

5 6 11

14 16 18 20

General Journal Account Titles Inventory ............................................. Accounts Payable.......................

Ref. 120 201

Debit 6,200

Accounts Receivable ......................... Sales Revenue ............................ Cost of Goods Sold ............................ Inventory .....................................

112 401 505 120

5,500

Freight-Out ......................................... Cash ............................................

644 101

240

Accounts Payable .............................. Inventory .....................................

201 120

500

Accounts Payable (€6,200 – €500) ...... Inventory ..................................... (€5,700 X 1%) Cash ............................................

201 120

5,700

Cash .................................................... Sales Discounts (€5,500 X 1%) .......... Accounts Receivable .................

101 414 112

5,445 55

Inventory ............................................. Cash ............................................

120 101

3,800

Cash .................................................... Inventory .....................................

101 120

500

Inventory ............................................. Accounts Payable.......................

120 201

4,500

Inventory ............................................. Cash ............................................

120 101

160

J1 Credit 6,200 5,500

3,400 3,400 240 500 57

101

5,643

5,500 3,800 500 4,500

160

5-31

PROBLEM 5-2A (Continued)

Date Apr. 23

26 27

5-32

General Journal Account Titles Cash .................................................... Sales Revenue ............................ Cost of Goods Sold ............................ Inventory .....................................

Ref. 101 401 505 120

Debit 7,400

Inventory ............................................. Cash.............................................

120 101

2,300

Accounts Payable .............................. Inventory ..................................... (€4,500 X 2%) Cash.............................................

201 120

4,500

Sales Returns and Allowances.......... Cash............................................. Inventory ............................................. Cost of Goods Sold ....................

412 101 120 505

Accounts Receivable ......................... Sales Revenue ............................ Cost of Goods Sold ............................ Inventory .....................................

112 401 505 120

3,400

J1 Credit 7,400

4,120 4,120 2,300 90

101

4,410 90 30 30 3,400 1,900 1,900

PROBLEM 5-2A (Continued) (b) Cash Date Apr.

1 5 11 13 14 16 20 23 26 27 29

Explanation Balance

Ref.  J1 J1 J1 J1 J1 J1 J1 J1 J1 J1

Debit

Credit 240 5,643

5,445 3,800 500 160 7,400 2,300 4,410 90

Accounts Receivable Date Apr.

Explanation 4 13 30

Inventory Date Explanation Apr. 2 4 6 11 14 16 18 20 23 26 27 29 30

No. 101 Balance 8,000 7,760 2,117 7,562 3,762 4,262 4,102 11,502 9,202 4,792 4,702 No. 112

Ref. J1 J1 J1

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

Debit 5,500

Credit 5,500

3,400

Debit 6,200

Credit 3,400 500 57

3,800 500 4,500 160 4,120 2,300 90 30 1,900

Balance 5,500 0 3,400 No. 120 Balance 6,200 2,800 2,300 2,243 6,043 5,543 10,043 10,203 6,083 8,383 8,293 8,323 6,423 5-33

PROBLEM 5-2A (Continued) Accounts Payable Date Explanation Apr. 2 6 11 18 27 Share Capital—Ordinary Date Explanation Apr. 1 Balance Sales Revenue Date Explanation Apr. 4 23 30 Sales Returns and Allowances Date Explanation Apr. 29 Sales Discounts Date Explanation Apr. 13

Ref. J1 J1 J1 J1 J1

Debit

Credit 6,200

500 5,700 4,500 4,500

Ref. 

Debit

Ref. J1 J1 J1

Debit

Ref. J1

Debit 90

Ref. J1

Debit 55

Credit

Credit 5,500 7,400 3,400

5-34

Explanation 4 23 29 30

No. 311 Balance 8,000 No. 401 Balance 5,500 12,900 16,300

Credit

No. 412 Balance 90

Credit

No. 414 Balance 55

Cost of Goods Sold Date Apr.

No. 201 Balance 6,200 5,700 0 4,500 0

No. 505 Ref. J1 J1 J1 J1

Debit 3,400 4,120

Credit

30 1,900

Balance 3,400 7,520 7,490 9,390

PROBLEM 5-2A (Continued) Freight-Out Date Explanation Apr. 5

(c)

Ref. J1

Debit 240

Credit

No. 644 Balance 240

VREE DISTRIBUTING COMPANY Income Statement (Partial) For the Month Ended April 30, 2014 Sales revenues Sales revenue ..................................................... Less: Sales returns and allowances ................ Sales discounts ...................................... Net sales ............................................................. Cost of goods sold .................................................... Gross profit ................................................................

€16,300 €90 55

145 16,155 9,390 € 6,765

5-35

PROBLEM 5-3A

(a)

STARZ DEPARTMENT STORE Income Statement For the Year Ended December 31, 2014

Sales revenues Sales ................................................... Less: Sales returns and allowances .............................. Net sales ............................................. Cost of goods sold ................................... Gross profit ............................................... Operating expenses Salaries and wages expense...... Depreciation expense ................. Sales commissions expense ..... Utilities expense ......................... Insurance expense ..................... Property tax expense.................. Total operating expenses .... Income from operations ........................... Other income and expense Interest revenue ................................. Interest expense ....................................... Net income ................................................

5-36

$724,000 8,000 716,000 412,700 303,300 $108,000 23,700 14,500 12,000 7,200 4,800 170,200 133,100 4,000 8,600 $ 128,500

PROBLEM 5-3A (Continued) STARZ DEPARTMENT STORE Retained Earnings Statement For the Year Ended December 31, 2014 Retained earnings, January 1 ....................................................... Add: Net income .......................................................................... Less: Dividends ............................................................................ Retained earnings, December 31 .................................................

$64,600 128,500 193,100 24,000 $169,100

STARZ DEPARTMENT STORE Statement of Financial Position December 31, 2014 Assets Property, plant, and equipment Buildings ............................................. Less: Accumulated depreciation— buildings .................................. Equipment ........................................... Less: Accumulated depreciation— equipment ................................ Current assets Prepaid insurance............................... Inventory ............................................. Accounts receivable ........................... Cash..................................................... Total assets ...............................

$290,000 52,500 110,000

$237,500

42,900

67,100 2,400 75,000 50,300 23,800

$304,600

151,500 $456,100

5-37

PROBLEM 5-3A (Continued) STARZ DEPARTMENT STORE Statement of Financial Position (Continued) December 31, 2014 Equity and Liabilities Equity Share capital—ordinary .......................................... $112,000 Retained earnings ................................................... 169,100 Non-current liabilities Mortgage payable ................................................... Current liabilities Accounts payable ................................................... 80,300 Mortgage payable (due next year) ......................... 16,000 Interest payable ...................................................... 5,600 Property taxes payable ........................................... 4,800 Sales commissions payable .................................. 4,300 Total equity and liabilities .............................................. (b) Dec. 31

31 31 31

5-38

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

23,700

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

7,200

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

5,600

Property Tax Expense ........................... Property Taxes Payable .................

4,800

$281,100 64,000

111,000 $456,100

10,400 13,300 7,200 5,600 4,800

PROBLEM 5-3A (Continued) 31 31

31 31

Sales Commissions Expense ............... Sales Commissions Payable .........

4,300

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

1,000

Sales ....................................................... Interest Revenue.................................... Income Summary ...........................

724,000 4,000

Income Summary................................... Sales Returns and Allowances....... Cost of Goods Sold ....................... Salaries and Wages Expense ........ Sales Commissions Expense........ Property Tax Expense ................... Utilities Expense ............................ Depreciation Expense.................... Insurance Expense ........................ Interest Expense ............................

599,500

Income Summary................................... Retained Earnings .........................

128,500

Retained Earnings ................................. Dividends........................................

24,000

4,300 1,000

728,000 8,000 412,700 108,000 14,500 4,800 12,000 23,700 7,200 8,600 128,500

24,000

5-39

PROBLEM 5-4A (a) Date Apr. 4 6 8

10 11 13

14 15 17 18

5-40

General Journal Account Titles Inventory ............................................... Accounts Payable .........................

Ref. 120 201

Debit 760

Inventory ............................................... Cash...............................................

120 101

Accounts Receivable ........................... Sales Revenue ..............................

112 401

1,150

Cost of Goods Sold .............................. Inventory .......................................

505 120

790

Accounts Payable ................................ Inventory .......................................

201 120

Inventory ............................................... Cash...............................................

120 101

420

Accounts Payable (¥760 – ¥60) ........... Inventory ....................................... (¥700 X 2%) Cash...............................................

201 120

700

Inventory ............................................... Accounts Payable .........................

120 201

800

Cash ...................................................... Inventory .......................................

101 120

Inventory ............................................... Cash...............................................

120 101

Accounts Receivable ........................... Sales Revenue ..............................

112 401

980

Cost of Goods Sold .............................. Inventory .......................................

505 120

520

J1 Credit 760 40 1,150 790 60 420 14

101

686 800 50 30 980 520

PROBLEM 5-4A (Continued)

Date Apr. 20 21

27 30

General Journal Account Titles Cash ..................................................... Accounts Receivable ...................

Ref. 101 112

Debit 600

Accounts Payable ............................... Inventory (¥800 X 3%) .................. Cash..............................................

201 120 101

800

Sales Returns and Allowances........... Accounts Receivable ...................

412 112

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

101 112

820

J1 Credit 600 24 776 40 820

(b) Cash Date Apr. 1 6 11 13 15 17 20 21 30

No. 101 Explanation Balance

Accounts Receivable Date Explanation Apr. 8 18 20 27 30

Ref.  J1 J1 J1 J1 J1 J1 J1 J1

Ref. J1 J1 J1 J1 J1

Debit

Credit 40 420 686

50 30 600 776 820

Debit 1,150 980

Credit

600 40 820

Balance 2,200 2,160 1,740 1,054 1,104 1,074 1,674 898 1,718 No. 112 Balance 1,150 2,130 1,530 1,490 670

5-41

PROBLEM 5-4A (Continued) Inventory Date Explanation Apr. 1 Balance 4 6 8 10 11 13 14 15 17 18 21

Accounts Payable Date Explanation Apr. 4 10 13 14 21

Share Capital—Ordinary Date Explanation Apr. 1 Balance

Sales Revenue Date Explanation Apr. 8 18

5-42

Ref.  J1 J1 J1 J1 J1 J1 J1 J1 J1 J1 J1

Debit

Credit

760 40 790 60 420 14 800 50 30 520 24

Ref. J1 J1 J1 J1 J1

Debit

Credit 760

60 700 800 800

Ref. 

Debit

Ref. J1 J1

Debit

Credit

Credit 1,150 980

No. 120 Balance 1,800 2,560 2,600 1,810 1,750 2,170 2,156 2,956 2,906 2,936 2,416 2,392

No. 201 Balance 760 700 0 800 0

No. 311 Balance 4,000

No. 401 Balance 1,150 2,130

PROBLEM 5-4A (Continued) Sales Returns and Allowances Date Explanation Apr. 27

Ref. J1

Debit 40

Credit

Cost of Goods Sold Date Apr. 8 18

(c)

Explanation

No. 412 Balance 40 No. 505

Ref. J1 J1

Debit 790 520

Credit

Balance 790 1,310

ZHENG’S TENNIS SHOP Trial Balance April 30, 2014 Cash ........................................................................ Accounts Receivable ............................................. Inventory ................................................................. Share Capital—Ordinary ........................................ Sales Revenue ........................................................ Sales Returns and Allowances.............................. Cost of Goods Sold ................................................

Debit ¥1,718 670 2,392

Credit

¥4,000 2,130 40 1,310 ¥6,130

¥6,130

5-43

*PROBLEM 5-5A

APEX DEPARTMENT STORE Income Statement (Partial) For the Year Ended December 31, 2014 Sales revenues Sales revenue .......................... Less: Sales returns and allowances .................... Net sales ................................... Cost of goods sold Inventory, January 1 ................ Purchases ................................ Less: Purchase returns and allowances ............. Purchase discounts ..... Net purchases .......................... Add: Freight-in ........................ Cost of goods purchased ......... Cost of goods available for sale ............................... Less: Inventory, December 31 Cost of goods sold ........... Gross profit .....................................

5-44

$718,000 18,000 700,000 $ 40,500 $442,000 $ 6,400 12,000

18,400 423,600 5,600 429,200 469,700 65,000 404,700 $295,300

*PROBLEM 5-6A (a) Cost of goods sold: Beginning inventory Plus: Purchases Cost of goods available Less: Ending inventory Cost of goods sold

2012

2013

2014

$ 13,000 141,000 154,000 (11,300) $142,700

$ 11,300 150,000 161,300 (14,700) $146,600

$ 14,700 132,000 146,700 (12,200) $134,500

2012 $225,700 142,700 $ 83,000

2013 $240,300 146,600 $ 93,700

2014 $235,000 134,500 $100,500

2012 $ 20,000 141,000 135,000 $ 26,000

2013 $ 26,000 150,000 161,000 $ 15,000

2014 $ 15,000 132,000 127,000 $ 20,000

(b) Sales revenue Less: CGS Gross profit (c) Beginning accounts payable Plus: Purchases Less: Payments to suppliers Ending accounts payable

(d) Gross profit rate 1

36.8%

$83,000 ÷ $225,700

39.0%

$93,700 ÷ $240,300

42.8%

$100,500 ÷ $235,000

No. Even though sales declined in 2014 from the prior year, the gross profit rate increased. This means that cost of goods sold declined more than sales did, reflecting better purchasing power or control of costs. Therefore, in spite of declining sales, profitability, as measured by the gross profit rate, actually improved.

5-45

*PROBLEM 5-7A (a) General Journal Date Account Titles Apr. 4 Purchases ........................................................ Accounts Payable ....................................

5-46

Debit 860

860

6 Freight-In .......................................................... Cash ..........................................................

8 Accounts Receivable....................................... Sales Revenue..........................................

900

10 Accounts Payable ............................................ Purchase Returns and Allowances.........

11 Purchases ........................................................ Cash ..........................................................

300

13 Accounts Payable (CHF860 – CHF60) ............ Purchase Discounts (CHF800 X 3%)....... Cash ..........................................................

800

14 Purchases ........................................................ Accounts Payable ....................................

700

15 Cash ................................................................. Purchase Returns and Allowances.........

17 Freight-In .......................................................... Cash ..........................................................

18 Accounts Receivable....................................... Sales Revenue..........................................

1,200

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

500

21 Accounts Payable ............................................ Purchase Discounts (CHF700 X 2%)....... Cash ..........................................................

700

Credit

74 900 60 300 24 776 700 50 30 1,200 500 14 686

*PROBLEM 5-7A (Continued) Date Account Titles Debit Apr. 27 Sales Returns and Allowances ..................... 25 Accounts Receivable ............................. 30 Cash ................................................................ Accounts Receivable .............................

Credit 25

620 620

(b) Cash 4/1 Bal. 2,500 4/6 4/15 50 4/11 4/20 500 4/13 4/30 620 4/17 4/21 4/30 Bal. 1,804

74 300 776 30 686

Accounts Receivable 4/8 900 4/20 500 4/18 1,200 4/27 25 4/30 620 4/30 Bal. 955 Inventory 4/1 Bal. 1,700 4/30 Bal. 1,700 Sales Returns and Allowances 4/27 25 4/30 Bal. 25 Purchases 4/4 860 4/11 300 4/14 700 4/30 Bal. 1,860

4/10 4/13 4/21

Accounts Payable 60 4/4 800 4/14 700 4/30 Bal.

860 700 0

Share Capital—Ordinary 4/1 Bal. 4,200 4/30 Bal. 4,200 Sales Revenue 4/8 4/18 4/30 Bal. Purchase Discounts 4/13 4/21 4/30 Bal.

4/6 4/17 4/30 Bal.

900 1,200 2,100 24 14 38

Freight-In 74 30 104

Purchase Returns and Allowances 4/10 60 4/15 50 4/30 Bal. 110

5-47

*PROBLEM 5-7A (Continued) (c)

VILLAGE TENNIS SHOP Trial Balance April 30, 2014 Debit Cash ........................................................................ CHF1,804 Accounts Receivable ............................................. 955 Inventory ................................................................ 1,700 Share Capital—Ordinary ....................................... Sales Revenue ....................................................... Sales Returns and Allowances ............................. 25 Purchases .............................................................. 1,860 Purchase Returns and Allowances ...................... Purchase Discounts .............................................. Freight-In ................................................................ 104 CHF 6,448

Credit

CHF4,200 2,100 110 38 CHF 6,448

VILLAGE TENNIS SHOP Income Statement (Partial) For the Month Ended April 30, 2014 Sales revenues Sales revenue ............................. CHF2,100 Less: Sales returns and allowances ....................... 25 Net sales ...................................... 2,075 Cost of goods sold Inventory, April 1 ........................ CHF1,700 Purchases ................................... CHF1,860 Less: Purchase returns and allowances ................ CHF110 Purchase discounts ........ 38 148 Net purchases ............................. 1,712 Add: Freight-in ........................... 104 Cost of goods purchased........... 1,816 Cost of goods available for sale .................................. 3,516 Less: Inventory, April 30 ............ 2,296 Cost of goods sold .............. 1,220 Gross profit ........................................ CHF 855 5-48

MR. ROSIAK FASHION CENTER Worksheet For the Year Ended November 30, 2014 Account Titles

Trial Balance

Dr. Cash Accounts Receivable Inventory Supplies Equipment Accum. Depreciation— Equipment Notes Payable Accounts Payable Share Capital—Ordinary Retained Earnings Dividends Sales Revenue Sales Returns and Allowances Cost of Goods Sold Salaries and Wages Expense Advertising Expense Utilities Expense Maintenance and Repairs Expense Freight-Out Rent Expense Totals Supplies Expense Depreciation Expense Interest Expense Interest Payable Totals Net Loss Totals

Adjusted Trial Balance

Adjustments

Cr.

Dr.

Cr.

8,700 27,700 44,700 6,200 133,000 23,000 51,000 48,500 50,000 38,000

(d) (a)

180 4,100

(b)

11,500

8,000

Dr.

Cr.

Income Statement

Dr.

Cr.

8,700 27,700 44,520 2,100 133,000

34,500 51,000 48,500 50,000 38,000 8,000

755,200

12,800 497,580

136,000 24,400 14,000

12,100 16,700 24,000 965,700

12,100 16,700 24,000

4,100 11,500 4,000

180

Cr.

8,700 27,700 44,520 2,100 133,000

8,000

(d)

Dr.

34,500 51,000 48,500 50,000 38,000

755,200 12,800 497,400

Statement of Financial Position

965,700 (a) (b) (c)

4,100 11,500 4,000 (c) 19,780

4,000 19,780

981,200

4,000 981,200

757,180 757,180

Key: (a) Supplies used, (b) Depreciation expense, (c) Accrued interest payable, (d) Adjustment of inventory.

755,200 1,980 757,180

224,020 1,980 226,000

4,000 226,000 226,000

*PROBLEM 5-8A

(a)

5-49

*PROBLEM 5-8A (Continued) (b)

MR. ROSIAK FASHION CENTER Income Statement For the Year Ended November 30, 2014

Sales revenues Sales revenue ............................................. Less: Sales returns and allowances ....................................... Net sales ...................................................... Cost of goods sold ............................................ Gross profit ........................................................ Operating expenses Salaries and wages expense............... Advertising expense ............................ Rent expense ....................................... Freight-out ............................................ Utilities expense .................................. Maintenance and repairs expense ...... Depreciation expense .......................... Supplies expense ................................ Total operating expenses ............. Income from operations .................................... Interest expense ................................................ Net loss ..............................................................

5-50

$755,200 12,800 742,400 497,580 244,820 $136,000 24,400 24,000 16,700 14,000 12,100 11,500 4,100 242,800 2,020 4,000 $ (1,980)

*PROBLEM 5-8A (Continued) MR. ROSIAK FASHION CENTER Retained Earnings Statement For the Year Ended November 30, 2014 Retained Earnings, December 1, 2013 ...................... Less: Net loss ............................................................ Dividends ......................................................... Retained Earnings, November 30, 2014 ....................

$38,000 $ 1,980 8,000

9,980 $ 28,020

MR. ROSIAK FASHION CENTER Statement of Financial Position November 30, 2014 Assets Property, plant, and equipment Equipment ........................................ Accumulated depreciation— equipment ................................... Current assets Supplies ........................................... Inventory .......................................... Accounts receivable ........................ Cash.................................................. Total assets ..............................

$133,000 34,500 2,100 44,520 27,700 8,700

$98,500

83,020 $181,520

5-51

*PROBLEM 5-8A (Continued) MR. ROSIAK FASHION CENTER Statement of Financial Position (Continued) November 30, 2014 Equity and Liabilities Equity Share capital—ordinary ............................................ Retained earnings ..................................................... Non-current liabilities Notes payable ........................................................... Current liabilities Notes payable (due next year) ................................. Accounts payable ..................................................... Interest payable ........................................................ Total equity and liabilities ...............................................

30 30

5-52

$50,000 28,020 $ 78,020 45,000 6,000 48,500 4,000

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

4,100

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

11,500

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

4,000

Cost of Goods Sold ................................. Inventory ..........................................

180

58,500 $181,520

4,100

11,500 4,000 180

*PROBLEM 5-8A (Continued) (d) Nov. 30 30

30 30

Sales Revenue ....................................... Income Summary ...........................

755,200

Income Summary .................................. Sales Returns and Allowances ................................. Cost of Goods Sold ....................... Salaries and Wages Expense ....... Advertising Expense ..................... Utilities Expense ............................ Maintenance and Repairs Expense ...................................... Freight-Out ..................................... Rent Expense ................................. Supplies Expense .......................... Depreciation Expense ................... Interest Expense ............................

757,180

Retained Earnings ................................. Income Summary ...........................

1,980

Retained Earnings ................................. Dividends .......................................

8,000

755,200

12,800 497,580 136,000 24,400 14,000 12,100 16,700 24,000 4,100 11,500 4,000 1,980

8,000

5-53

*PROBLEM 5-8A (Continued) (e)

MR. ROSIAK FASHION CENTER Post-Closing Trial Balance November 30, 2014 Cash ................................................................ Accounts Receivable ..................................... Inventory ........................................................ Supplies.......................................................... Equipment ...................................................... Accumulated Depreciation—Equipment ...... Notes Payable ................................................ Accounts Payable .......................................... Interest Payable ............................................. Share Capital—Ordinary ............................... Retained Earnings .........................................

Debit $ 8,700 27,700 44,520 2,100 133,000

$216,020

5-54

Credit

$ 34,500 51,000 48,500 4,000 50,000 28,020 $216,020

PROBLEM 5-1B

(a) June 1 3

6 9

15 17

20 24

Inventory...................................................... Accounts Payable ...............................

1,850

Accounts Receivable .................................. Sales Revenue .....................................

2,500

Cost of Goods Sold..................................... Inventory ..............................................

1,440

Accounts Payable ....................................... Inventory ..............................................

150

Accounts Payable (€1,850 – €150) ............. Inventory (€1,700 X .02).................................... Cash .....................................................

1,700

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

2,500

Accounts Receivable .................................. Sales Revenue .....................................

1,800

Cost of Goods Sold..................................... Inventory ..............................................

1,020

Inventory...................................................... Accounts Payable ...............................

1,500

Cash ............................................................. Sales Discounts (€1,800 X .02) ................... Accounts Receivable ..........................

1,764 36

Accounts Payable ....................................... Inventory (€1,500 X .02).................................... Cash .....................................................

1,500

1,850 2,500 1,440 150

34 1,666 2,500 1,800 1,020 1,500

1,800

30 1,470

5-55

PROBLEM 5-1B (Continued) June 28

5-56

Accounts Receivable .................................. Sales Revenue .....................................

1,300

Cost of Goods Sold ..................................... Inventory ..............................................

850

Sales Returns and Allowances .................. Accounts Receivable...........................

120

Inventory ...................................................... Cost of Goods Sold .............................

1,300 850 120 72

PROBLEM 5-2B (a) Date May 1 2

5 9

11 12 15 17 19

General Journal Account Titles Inventory .......................................... Accounts Payable ....................

Ref. 120 201

Debit 4,200

Accounts Receivable ....................... Sales Revenue ..........................

112 401

2,300

Cost of Goods Sold ......................... Inventory ...................................

505 120

1,300

Accounts Payable ............................ Inventory ...................................

201 120

500

Cash ($2,300 – $23) .......................... Sales Discounts ($2,300 X 1%) ....... Accounts Receivable ...............

101 414 112

2,277 23

Accounts Payable ($4,200 – $500) ...... Inventory ($3,700 X 2%) ........... Cash ..........................................

201 120 101

3,700

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

126 101

400

Inventory .......................................... Cash ..........................................

120 101

1,400

Cash .................................................. Inventory ...................................

101 120

150

Inventory .......................................... Accounts Payable ....................

120 201

1,300

Inventory .......................................... Cash ..........................................

120 101

130

J1 Credit 4,200 2,300 1,300 500

2,300 74 3,626 400 1,400 150 1,300

130

5-57

PROBLEM 5-2B (Continued)

Date May 24

25 27

5-58

General Journal Account Titles Cash .................................................... Sales Revenue ............................

Ref. 101 401

Debit 3,200

Cost of Goods Sold ............................ Inventory .....................................

505 120

2,000

Inventory ............................................. Accounts Payable .......................

120 201

620

Accounts Payable .............................. Inventory ($1,300 X 2%) ........................... Cash.............................................

201

1,300

Sales Returns and Allowances.......... Cash.............................................

412 101

Inventory ............................................. Cost of Goods Sold ....................

120 505

Accounts Receivable ......................... Sales Revenue ............................

112 401

1,000

Cost of Goods Sold ............................ Inventory .....................................

505 120

560

J1 Credit 3,200 2,000 620

120 101

26 1,274 90 40 1,000 560

PROBLEM 5-2B (Continued) (b) Cash Date May

1 9 10 11 12 15 19 24 27 29

Explanation Balance

Accounts Receivable Date Explanation May 2 9 31 Inventory Date Explanation May 1 2 5 10 12 15 17 19 24 25 27 29 31

Ref.  J1 J1 J1 J1 J1 J1 J1 J1 J1

Ref. J1 J1 J1

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

Debit

Credit

2,277 3,626 400 1,400 150 130 3,200 1,274 90

Debit 2,300

Credit 2,300

1,000

Debit 4,200

Credit 1,300 500 74

1,400 150 1,300 130 2,000 620 26 40 560

No. 101 Balance 5,000 7,277 3,651 3,251 1,851 2,001 1,871 5,071 3,797 3,707 No. 112 Balance 2,300 0 1,000 No. 120 Balance 4,200 2,900 2,400 2,326 3,726 3,576 4,876 5,006 3,006 3,626 3,600 3,640 3,080

5-59

PROBLEM 5-2B (Continued) Supplies Date Explanation May 11

Accounts Payable Date Explanation May 1 5 10 17 25 27 Share Capital—Ordinary Date Explanation May 1 Balance Sales Revenue Date Explanation May 2 24 31 Sales Returns and Allowances Date Explanation May 29

Ref. J1

Debit 400

Ref. J1 J1 J1 J1 J1 J1

Debit

Credit

Credit 4,200

500 3,700 1,300 620 1,300

Ref. 

Debit

Ref. J1 J1 J1

Debit

Ref. J1

Debit 90

Credit

Credit 2,300 3,200 1,000

Credit

Sales Discounts Date May

5-60

Explanation 9

No. 126 Balance 400

No. 201 Balance 4,200 3,700 0 1,300 1,920 620 No. 311 Balance 5,000 No. 401 Balance 2,300 5,500 6,500 No. 412 Balance 90 No. 414

Ref. J1

Debit 23

Credit

Balance 23

PROBLEM 5-2B (Continued) Cost of Goods Sold Date Explanation May 2 24 29 31

(c)

Ref. J1 J1 J1 J1

Debit 1,300 2,000

Credit

40 560

No. 505 Balance 1,300 3,300 3,260 3,820

COPPLE HARDWARE STORE Income Statement (Partial) For the Month Ended May 31, 2014 Sales revenues Sales revenue ..................................................... Less: Sales returns and allowances ................ Sales discounts....................................... Net sales ............................................................. Cost of goods sold .................................................... Gross profit ................................................................

$6,500 $90 23

113 6,387 3,820 $2,567

5-61

PROBLEM 5-3B

(a)

THE MOULTON STORE Income Statement For the Year Ended November 30, 2014

Sales revenues Sales ................................................... Less: Sales returns & allowances ... Net sales ............................................. Cost of goods sold ................................... Gross profit ............................................... Operating expenses Salaries and wages expense...... Rent expense .............................. Sales commissions expense ..... Depreciation expense ................. Utilities expense ......................... Insurance expense ..................... Freight–out .................................. Property tax expense.................. Total oper. expenses ........... Income from operations ........................... Other income and expense Interest revenue ................................. Interest expense ....................................... Net income ................................................

5-62

£706,000 9,000 697,000 507,000 190,000 £96,000 15,000 13,500 11,000 8,500 7,000 6,500 3,500 161,000 29,000 8,000 6,100 £ 30,900

PROBLEM 5-3B (Continued) THE MOULTON STORE Retained Earnings Statement For the Year Ended November 30, 2014 Retained earnings, December 1, 2013 ........................................... Add: Net income ............................................................................ Less: Dividends .............................................................................. Retained earnings, November 30, 2014 .........................................

£61,700 30,900 92,600 8,000 £84,600

THE MOULTON STORE Statement of Financial Position November 30, 2014 Assets Property, plant, and equipment Equipment ......................................... Less: Accumulated depreciation— equipment .............................. Current assets Prepaid insurance............................. Inventory ........................................... Accounts receivable ......................... Cash................................................... Total assets ...............................

£154,300 33,000 3,500 26,000 30,500 26,000

£121,300

86,000 £207,300

5-63

PROBLEM 5-3B (Continued) THE MOULTON STORE Statement of Financial Position (Continued) November 30, 2014 Equity and Liabilities Equity Share capital—ordinary ............................................. Retained earnings ...................................................... Non-current liabilities Notes payable ............................................................ Current liabilities Accounts payable ...................................................... Sales commissions payable ..................................... Property taxes payable .............................................. Total equity and liabilities ................................................

(b) Nov. 30

30 30 30

5-64

£50,000 84,600 £134,600 37,000 25,200 7,000 3,500

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

11,000

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

7,000

Property Tax Expense .............................. Property Taxes Payable....................

3,500

Sales Commissions Expense .................. Sales Commissions Payable ............

7,000

35,700 £207,300

11,000 7,000 3,500 7,000

PROBLEM 5-3B (Continued) (c) Nov. 30

30 30

Sales Revenue ....................................... Interest Revenue .................................... Income Summary ............................

706,000 8,000

Income Summary ................................... Sales Returns and Allowances .................................. Cost of Goods Sold ........................ Salaries and Wages Expense ........ Depreciation Expense .................... Freight–Out ..................................... Sales Commissions Expense ........ Insurance Expense ......................... Rent Expense .................................. Property Tax Expense .................... Utilities Expense ............................. Interest Expense .............................

683,100

Income Summary ................................... Retained Earnings ..........................

30,900

Retained Earnings .................................. Dividends ........................................

8,000

714,000

9,000 507,000 96,000 11,000 6,500 13,500 7,000 15,000 3,500 8,500 6,100 30,900

8,000

5-65

PROBLEM 5-4B

(a) Date Apr. 5 7 9 10

12 14

17 20

5-66

General Journal Account Titles Inventory ............................................. Accounts Payable .......................

Ref. 120 201

Debit 1,200

Inventory ............................................. Cash.............................................

120 101

Accounts Payable .............................. Inventory .....................................

201 120

100

Accounts Receivable ......................... Sales Revenue ............................

112 401

930

Cost of Goods Sold ............................ Inventory .....................................

505 120

540

Inventory ............................................. Accounts Payable .......................

120 201

720

Accounts Payable ($1,200 – $100) .... Inventory ($1,100 X 2%) ........................... Cash.............................................

201

1,100

Accounts Payable .............................. Inventory .....................................

201 120

120

Accounts Receivable ......................... Sales Revenue ............................

112 401

610

Cost of Goods Sold ............................ Inventory .....................................

505 120

370

Accounts Payable ($720 – $120) ....... Inventory ($600 X 1%) .............................. Cash.............................................

201

600

1,200 75 100 930 540 720

120 101

J1 Credit

22 1,078 120 610 370

6 594

PROBLEM 5-4B (Continued)

Date Apr. 27 30

Account Titles Sales Returns and Allowances ...... Accounts Receivable ..............

Ref. 412 112

Debit 20

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

101 112

960

J1 Credit 20 960

(b) Cash Date Apr.

1 7 14 21 30

Explanation Balance

Accounts Receivable Date Explanation Apr. 10 20 27 30

Ref.  J1 J1 J1 J1

Ref. J1 J1 J1 J1

Debit

Credit 75 1,078 594

960

Debit 930 610

Credit

20 960

Inventory Date Apr.

1 5 7 9 10 12 14 17 20 21

No. 101 Balance 1,850 1,775 697 103 1,063 No. 112 Balance 930 1,540 1,520 560 No. 120

Explanation Balance

Ref.  J1 J1 J1 J1 J1 J1 J1 J1 J1

Debit

Credit

1,200 75 100 540 720 22 120 370 6

Balance 2,150 3,350 3,425 3,325 2,785 3,505 3,483 3,363 2,993 2,987

5-67

PROBLEM 5-4B (Continued) Accounts Payable Date Explanation Apr. 5 9 12 14 17 21

Share Capital—Ordinary Date Explanation Apr. 1 Balance

Ref. J1 J1 J1 J1 J1 J1

Debit

Credit 1,200

100 720 1,100 120 600

Ref. 

Debit

Credit

Sales Revenue Date Explanation Apr. 10 20

Sales Returns and Allowances Date Explanation Apr. 27

5-68

No. 311 Balance 4,000

No. 401 Ref. J1 J1

Debit

Ref. J1

Debit 20

Credit 930 610

Balance 930 1,540

Credit

No. 412 Balance 20

Cost of Goods Sold Date Explanation Apr. 10 20

No. 201 Balance 1,200 1,100 1,820 720 600 0

No. 505 Ref. J1 J1

Debit 540 370

Credit

Balance 540 910

PROBLEM 5-4B (Continued) (c)

BILL'S DISCORAMA Trial Balance April 30, 2014 Cash ....................................................................... Accounts Receivable............................................. Inventory ................................................................ Share Capital—Ordinary ....................................... Sales Revenue ....................................................... Sales Returns and Allowances ............................. Cost of Goods Sold ...............................................

Debit $ 1,063 560 2,987

Credit

$4,000 1,540 20 910 $5,540

$5,540

5-69

*PROBLEM 5-5B ILHAN DEPARTMENT STORE Income Statement (Partial) For the Year Ended November 30, 2014 Sales revenues Sales revenue ........................ Less: Sales returns and allowances .................. Net sales ................................. Cost of goods sold Inventory, Dec. 1, 2013 .......... Purchases .............................. Less: Purchase returns and allowances .......... Purchase discounts ... Net purchases ........................ Add: Freight-in ...................... Cost of goods purchased...... Cost of goods available for sale ........................ Less: Inventory, Nov. 30, 2014 .......................... Cost of goods sold .... Gross profit ...................................

5-70

$1,000,000 28,000 972,000 $40,000 $585,000 $2,900 5,300

8,200 576,800 7,500 584,300 624,300 54,600 569,700 $402,300

*PROBLEM 5-6B (1)

(a)

Cost of goods sold = Sales – Gross profit = $53,000 – $38,300 = $14,700

(b)

Net income = Gross profit – Operating expenses = $38,300 – $35,900 = $2,400

(c)

Inventory = 2011 Inventory + Purchases – CGS = $7,200 + $14,200 – $14,700 = $6,700

(d)

Cash payments to suppliers = 2011 Accounts payable + Purchases – 2012 Accounts payable = $3,200 + $14,200 – $3,400 = $14,000

(e)

Sales revenue = Cost of goods sold + Gross profit = $13,800 + $35,200 = $49,000

(f)

Operating expenses = Gross profit – Net income = $35,200 – $2,500 = $32,700

(g)

2012 Inventory + Purchases – 2013 Inventory = CGS Purchases = CGS – 2012 Inventory + 2013 Inventory = $13,800 – $6,700 [from (c)] + $8,100 = $15,200

(h)

Cash payments to suppliers = 2012 Accounts payable + Purchases – 2013 Accounts Payable = $3,400 + $15,200 [from (g)] – $2,500 = $16,100

(i)

Gross profit = Sales – CGS = $46,000 – $14,300 = $31,700

(j)

Net income = Gross profit – Operating expenses = $31,700 [from (i)] – $28,600 = $3,100

(k)

2013 Inventory + Purchases – 2014 Inventory = CGS Inventory = 2013 Inventory + Purchases – CGS = $8,100 + $13,200 – $14,300 = $7,000

(I)

Accounts payable = 2013 Accounts payable + Purchases – Cash payments = $2,500 + $13,200 – $13,600 = $2,100

5-71

*PROBLEM 5-6B (Continued) (2) A decline in sales does not necessarily mean that profitability declined. Profitability is affected by sales, cost of goods sold, and operating expenses. If cost of goods sold or operating expenses decline more than sales, profitability can increase even when sales decline. In this particular case, the sales decline was offset by cost savings to improve profitability. Therefore, profitability increased for Psang Inc. from 2012 to 2014. 2012 Gross profit rate

2014

$38,300 ÷ $53,000 $35,200 ÷ $49,000 $31,700 ÷ $46,000 = 72.3% = 71.8% = 68.9%

Profit margin ratio $2,400 ÷ $53,000 = 4.5%

5-72

2013

$2,500 ÷ $49,000 = 5.1%

$3,100 ÷ $46,000 = 6.7%

*PROBLEM 5-7B (a) Date Apr. 5 7 9 10 12 14

17 20 21

27 30

General Journal Account Titles Purchases ..................................................... Accounts Payable.................................

Debit 1,300

Credit 1,300

Freight-In ...................................................... Cash ......................................................

Accounts Payable ........................................ Purchase Returns and Allowances .....

100

Accounts Receivable ................................... Sales Revenue ......................................

670

Purchases ..................................................... Accounts Payable.................................

450

Accounts Payable (€1,300 – €100) ............... Purchase Discounts (€1,200 X 2%) ....... Cash (€1,200 – €24) ..............................

1,200

Accounts Payable ........................................ Purchase Returns and Allowances .......

Accounts Receivable ................................... Sales Revenue ......................................

600

Accounts Payable (€450 – €50) ................... Purchase Discounts (€400 X 1%)....................................... Cash (€400 – €4) ...................................

400

Sales Returns and Allowances ................... Accounts Receivable ...........................

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

630

70 100 670 450 24 1,176 50 600

4 396 55

630

5-73

*PROBLEM 5-7B (Continued) (b) 4/1 Bal. 4/30 4/30 Bal.

Cash 3,000 4/7 630 4/14 4/21 1,988

Accounts Receivable 4/10 670 4/27 4/20 600 4/30 4/30 Bal. 585

4/1 Bal. 4/30 Bal.

4/9 4/14 4/17 4/21

70 1,176 396

Sales Revenue 4/10 4/20 4/30 Bal.

55 630

1,300 450

4/5 4/12 4/30 Bal.

Purchases 1,300 450 1,750

4/7 4/30 Bal.

Freight-In 70 70

Purchase Returns and Allowances 4/9 100 4/17 50 4/30 Bal. 150 Purchase Discounts 4/14 4/21 4/30 Bal.

5-74

670 600 1,270

Sales Returns and Allowances 4/27 55 4/30 Bal. 55

Inventory 4,000 4,000

Accounts Payable 100 4/5 1,200 4/12 50 400 4/30 Bal.

Share Capital—Ordinary 4/1 Bal. 7,000 4/30 Bal. 7,000

24 4 28

*PROBLEM 5-7B (Continued) (c)

OOSTHUIZEN PRO SHOP Trial Balance April 30, 2014 Cash ...................................................................... Accounts Receivable ........................................... Inventory ............................................................... Share Capital—Ordinary ...................................... Sales Revenue ...................................................... Sales Returns and Allowances............................ Purchases ............................................................. Purchase Returns and Allowances ..................... Purchase Discounts ............................................. Freight-In...............................................................

(d)

Debit €1,988 585 4,000

Credit

€7,000 1,270 55 1,750 150 28 70 €8,448

€8,448

OOSTHUIZEN PRO SHOP Income Statement (Partial) For the Month Ended April 30, 2014

Sales revenues Sales revenue ................................ Less: Sales returns and allowances.......................... Net sales ........................................ Cost of goods sold Inventory, April 1 ........................... Purchases ...................................... Less: Purchase returns and allowances .................. Purchase discounts ........... Net purchases................................ Add: Freight-in .............................. Cost of goods purchased ............... Cost of goods available for sale ........................................ Less: Inventory, April 30 ............... Cost of goods sold ................. Gross profit...........................................

€1,270 55 1,215 €1,750 €150 28

€4,000

178 1,572 70 1,642 5,642 4,824

818 € 397

5-75

COMPREHENSIVE PROBLEM SOLUTION

(a)

Dec. 6

8 10

13 15 18

20 23

5-76

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

1,000 600

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

2,100

Cash .............................................................. Sales Revenue ......................................

6,600

Cost of Goods Sold ...................................... Inventory ...............................................

4,100

Inventory ....................................................... Accounts Payable .................................

9,000

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

2,000

1,600 2,100 6,600 4,100 9,000 2,000

Accounts Receivable ................................... 12,000 Sales Revenue ......................................

12,000

Cost of Goods Sold ...................................... Inventory ...............................................

8,400 8,400

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

1,800

Accounts Payable ........................................ Cash ...................................................... Inventory ($9,000 X .02) ........................

9,000

1,800

Cash .............................................................. 11,640 Sales Discounts ($12,000 X .03) .................. 360 Accounts Receivable............................

8,820 180

12,000

COMPREHENSIVE PROBLEM SOLUTION (Continued) (c)

Dec. 31

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

800

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

200

800

Supplies Expense ......................................... 1,500 Supplies ($3,200 – $1,700) ....................

(b) & (c)

General Ledger

Cash 12/1 Bal. 7,200 12/6 12/8 2,100 12/15 12/10 6,600 12/20 12/27 11,640 12/23 12/31 Bal. 13,320

1,600 2,000 1,800 8,820

Accounts Receivable 12/1 Bal. 4,600 12/8 2,100 12/18 12,000 12/27 12,000 12/31 Bal. 2,500

Supplies 12/1 Bal. 1,200 12/31 12/15 2,000 12/31 Bal. 1,700

4,100 8,400 180

1,500

Equipment 12/1 Bal. 22,000 12/31 Bal. 22,000 Accumulated Depr.—Equipment 12/1 Bal. 2,200 12/31 200 12/31 Bal. 2,400

12/23 Inventory 12/1 Bal. 12,000 12/10 12/13 9,000 12/18 12/23 12/31 Bal. 8,320

200

Accounts Payable 9,000 12/1 Bal. 4,500 12/13 9,000 12/31 Bal. 4,500

Salaries and Wages Payable 12/6 1,000 12/1 Bal. 1,000 12/31 800 12/31 Bal. 800

1,500

5-77

COMPREHENSIVE PROBLEM SOLUTION (Continued) Share Capital—Ordinary 12/1 Bal. 30,000 12/31 Bal. 30,000 Retained Earnings 12/1 Bal. 9,300 12/31 Bal. 9,300 Sales Revenue 12/10 6,600 12/18 12,000 12/31 Bal. 18,600

Depreciation Expense 12/31 200 12/31 Bal. 200 Salaries and Wages Expense 12/6 600 12/20 1,800 12/31 800 12/31 Bal. 3,200 Supplies Expense 12/31 1,500 12/31 Bal. 1,500

Sales Discounts 12/27 360 12/31 Bal. 360 Cost of Goods Sold 12/10 4,100 12/18 8,400 12/31 Bal. 12,500

5-78

COMPREHENSIVE PROBLEM SOLUTION (Continued) (d)

JURCZYK DISTRIBUTING COMPANY Adjusted Trial Balance December 31, 2014 Cash ................................................................... Accounts Receivable ........................................ Inventory ............................................................ Supplies ............................................................. Equipment ......................................................... Accumulated Depreciation—Equipment ......... Accounts Payable ............................................. Salaries and Wages Payable ............................ Share Capital—Ordinary ................................... Retained Earnings............................................. Sales Revenue ................................................... Sales Discounts ................................................ Cost of Goods Sold ........................................... Depreciation Expense ....................................... Salaries and Wages Expense ........................... Supplies Expense .............................................

(e)

DR. $13,320 2,500 8,320 1,700 22,000

CR.

$ 2,400 4,500 800 30,000 9,300 18,600 360 12,500 200 3,200 1,500 $65,600

$65,600

JURCZYK DISTRIBUTING COMPANY Income Statement For the Month Ending December 31, 2014 Sales revenue.................................................... Less: Sales discounts ..................................... Net sales ............................................................ Cost of goods sold ........................................... Gross profit ....................................................... Operating expenses Salaries and wages expense .................... Supplies expense ...................................... Depreciation expense ............................... Net income ........................................................

$18,600 360 18,240 12,500 5,740 $3,200 1,500 200

4,900 $ 840

5-79

COMPREHENSIVE PROBLEM SOLUTION (Continued) JURCZYK DISTRIBUTING COMPANY Retained Earnings Statement For the Month Ended December 31, 2014 Retained Earnings, Dec. 1 ............................................. Add: Net income........................................................... Retained Earnings, Dec. 31 ...........................................

$9,300 840 $10,140

JURCZYK DISTRIBUTING COMPANY Statement of Financial Position December 31, 2014 Assets Property, plant, and equipment Equipment .................................................. Less: Accumulated depreciation ............. Current assets Supplies ..................................................... Inventory .................................................... Accounts receivable .................................. Cash............................................................ Total assets ..........................................

$ 22,000 2,400 1,700 8,320 2,500 13,320

$19,600

25,840 $45,440

Equity and Liabilities’ Equity Equity Share Capital—Ordinary ........................... Retained earnings...................................... Current liabilities Accounts payable ...................................... Salaries and wages payable ..................... Total equity and liabilities ...............................

5-80

$ 30,000 10,140 $4,500 800

$40,140 5,300 $45,440

CCC5

CONTINUING COOKIE CHRONICLE

(a) Responses to Natalie’s questions 1. The mixers should be classified as inventory as they are for resale. 2. A perpetual inventory system will provide better control over inventory. Because you are dealing with high-value items you should use the perpetual system. 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 the inventory once a month. (b) GENERAL JOURNAL J1 Date Account Titles Debit Credit Jan. 4 6 7 8 12 12

Inventory ...................................................... Accounts Payable ...................................

2,875

Inventory ...................................................... Cash .........................................................

100

Accounts Payable [($2,875 ÷ 5) + $20] ....... Inventory ..................................................

595

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

375

Accounts Receivable................................... Sales Revenue.........................................

3,450

Cost of Goods Sold ($595 X 3) .................... Inventory ..................................................

1,785

2,875 100 595 375 3,450

1,785

5-81

CCC5 (Continued) (b) (Continued) Jan. 14 14 17 18 20 20 28

28 30

5-82

Freight-Out .......................................... Cash ................................................

Inventory ............................................. Accounts Payable ..........................

2,300

Cash ..................................................... Share Capital—Ordinary ................

1,000

Inventory ............................................. Cash ................................................

Cash ..................................................... Sales Revenue ................................

2,300

Cost of Goods Sold ($595 X 2) ........... Inventory .........................................

1,190

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

160 56

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

3,450

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

75 70

Accounts Payable ($2,875 – $595 + $2,300).................... Cash ................................................. Dividends ............................................. Cash .................................................

75 2,300 1,000 80 2,300 1,190

216 3,450

145 4,580 4,580 750 750

CCC5 (Continued) (b) and (d)

Date

Explanation

Jan. 1 Balance 6 8 14 17 18 20 28 28 30 31 31

Date

Explanation

Jan. 1 Balance 8 12 28

Date Jan. 4 6 7 12 14 18 20

Explanation

Cash Ref. ✓ J1 J1 J1 J1 J1 J1 J1 J1 J1 J1 J1

Debit

145 4,580 750

1,180 1,080 1,455 1,380 2,380 2,300 4,600 4,384 7,834 7,689 3,109 2,359

Credit

Balance

375 75 1,000 80 2,300 216 3,450

3,450

875 500 3,950 500

Credit

Balance

375 3,450

Inventory Ref. Debit J1 J1 J1 J1 J1 J1 J1

Balance

100

Accounts Receivable Ref. Debit ✓ J1 J1 J1

Credit

2,875 100 595 1,785 2,300 80 1,190

2,875 2,975 2,380 595 2,895 2,975 1,785

5-83

CCC5 (Continued) (b) and (d) (Continued) Explanation Date Jan. 1 Balance

Supplies Ref. Debit ✓

Prepaid Insurance Explanation Date Ref. Debit Jan. 1 Balance ✓ 31 Adjusting entry J2

Date Explanation Jan. 1 Balance

Equipment Ref. Debit ✓

Credit

Balance 350

Credit

Balance 1,210 1,100

110

Credit

Accumulated Depreciation—Equipment Date Explanation Ref. Debit Credit Jan. 1 Balance ✓ 31 Adjusting entry J2 20

Explanation Date Jan. 1 Balance 4 7 14 30 31

5-84

Accounts Payable Ref. Debit ✓ J1 J1 595 J1 J1 75 J1 4,580

Credit 2,875 2,300

Balance 1,200

Balance 40 60

Balance 75 2,950 2,355 4,655 4,580 0

CCC5 (Continued) (b) and (d) (Continued)

Date

Explanation

Jan. 1 28

Balance J1

Date

Explanation

Jan. 1

Balance

Date

Salaries and Wages Payable Ref. Debit

Jan. 1 Balance 31 Adjusting entry

Date

Explanation

Jan. 1

Balance

Date

Explanation

Jan. 1 17

Balance

Date Jan. 31

Explanation

Balance

✓ 56

Unearned Service Revenue Ref. Debit

Explanation

Credit

56 0

Credit

Balance

✓ Interest Payable Ref. Debit

300

Credit

Balance

15 25

Notes Payable Ref. Debit

Credit

Balance

✓

✓ Share Capital—Ordinary Ref. Debit

Dividends Ref.

2,000

Credit

Balance

✓ J1

1,000

2,329 3,329

Debit

Credit

Balance

750

5-85

CCC5 (Continued) (b) and (d) (Continued)

Date

Sales Revenue Ref.

Explanation

Jan. 12 20

Date

J1 J1 Cost of Goods Sold Ref. Debit

Explanation

Jan. 12 20

Date

Debit

J1 J1

Jan. 28

Date

Utilities Expense Ref. Debit

Jan. 30

Explanation

Jan. 31

Adjusting entry

3,450 2,300

3,450 5,750

Credit

Balance 1,785 2,975

Credit

160

Credit

Balance 70

Credit

Insurance Expense Ref. Debit

Balance 160

Depreciation Expense Ref. Debit

Date

Balance

1,785 1,190

Salaries and Wages Expense Explanation Ref. Debit

Explanation

Credit

Balance 20

Date

Explanation

Jan. 31

Adjusting entry

5-86

110

Credit

Balance 110

CCC5 (Continued) (b) and (d) (Continued)

Date

Explanation

Freight-Out Ref. Debit

Jan. 14

Date

Explanation

Interest Expense Ref. Debit

Jan. 31

Adjusting entry

Credit

Balance

Credit

Balance

5-87

CCC5 (Continued) (c) Cookie Creations Trial Balance January 31, 2014 Cash .......................................................................... Accounts Receivable ............................................... Inventory ................................................................... Supplies .................................................................... Prepaid Insurance .................................................... Equipment ................................................................. Accumulated Depreciation—Equipment ................ Accounts Payable .................................................... Salaries and Wages Payable ................................... Unearned Service Revenue ..................................... Interest Payable ........................................................ Notes Payable ........................................................... Share Capital—Ordinary .......................................... Dividends .................................................................. Sales Revenue .......................................................... Cost of Goods Sold .................................................. Salaries and Wages Expense .................................. Utilities Expense ....................................................... Depreciation Expense .............................................. Insurance Expense ................................................... Freight-Out ............................................................... Interest Expense .......................................................

Debit $ 2,359 500 1,785 350 1,210 1,200

40 300 15 2,000 3,329

750 5,750 2,975 160 70 75 $11,434

5-88

Credit

$11,434

CCC5 (Continued) (d) Date

GENERAL JOURNAL Account Titles

Debit

Jan. 31 Depreciation Expense .............................. Accumulated Depreciation— Equipment ($1,200 ÷ 60 months) .....

31 Interest Expense ....................................... Interest Payable ................................... ($2,000 X 6% X 1/12)

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

110

J2 Credit

20 10

110

5-89

CCC5 (Continued) (e) Cookie Creations Adjusted Trial Balance January 31, 2014 Cash .......................................................................... Accounts Receivable ............................................... Inventory ................................................................... Supplies .................................................................... Prepaid Insurance .................................................... Equipment ................................................................. Accumulated Depreciation—Equipment................. Accounts Payable .................................................... Salaries and Wages Payable ................................... Unearned Service Revenue ..................................... Interest Payable ........................................................ Notes Payable ........................................................... Share Capital—Ordinary .......................................... Dividends .................................................................. Sales Revenue .......................................................... Cost of Goods Sold .................................................. Salaries and Wages Expense .................................. Utilities Expense ....................................................... Depreciation Expense .............................................. Insurance Expense ................................................... Freight-Out ................................................................ Interest Expense .......................................................

5-90

Debit $ 2,359 500 1,785 350 1,100 1,200

Credit

60 300 25 2,000 3,329

750 5,750 2,975 160 70 20 110 75 10 $11,464

$11,464

CCC5 (Continued) (f) COOKIE CREATIONS Income Statement For the Month Ended January 31, 2014 Sales revenue .................................................................. Cost of goods sold .......................................................... Gross profit...................................................................... Operating expenses Salaries and wages expense ..................................... Insurance expense ..................................................... Freight-out................................................................... Utilities expense ......................................................... Depreciation expense ................................................. Total operating expenses ...................................... Income from operations.................................................. Interest expense .............................................................. Net income .......................................................................

$5,750 2,975 2,775 $160 110 75 70 20

435 2,340 10 $2,330

5-91

BYP 5-1

FINANCIAL REPORTING PROBLEM

2009 (a)

(1)

(2)

(b)

(c)

2010

Percentage change in sales: (W154,630,328 – W136,323,670) ÷ W136,323,670

13.4% increase

Percentage change in net income: (W16,146,525 – W9,760,550) ÷ W9,760,550

65.4% increase

Gross profit rate: W41,728,807 ÷ W136,323,670 W51,963,504 ÷ W154,630,328

30.6%

Percentage of net income to sales: W9,760,550 ÷ W136,323,670 W16,146,525 ÷ W154,630,328

7.2%

33.6%

10.4%

Comment The percentage of net income to sales increased 44.4% from 2009 to 2010 (7.2% to 10.4%). The gross profit rate increased 9.8% during this time. (30.6% to 33.6%) This indicates the company did a significantly better job of controlling operating expenses in 2010 than in 2009.

5-92

BYP 5-2

COMPARATIVE ANALYSIS PROBLEM

Zetar (£ 000)

Nestlé (CHF in Millions)

Gross profit

£27,321

CHF63,8731

(2)

Gross profit rate

20.2%2

58.2%3

(3)

Operating income

£6,733

CHF16,194

(4)

Percent change in operating income

0.1%4 increase

3.2%5 increase

(a) (1)

CHF109,722 – CHF45,849

£27,321 ÷ £134,998

CHF63,873 ÷ CHF109,722

(£6,733 – £6,726) ÷ £6,726

(CHF16,194 – CHF15,699) ÷ CHF15,699

(b) Because the companies report using different currencies, direct comparisons of total gross profit, or total operating income are difficult. Comparisons of ratios and percentages can be performed. Nestlé reported a significantly higher gross profit rate, and a much bigger percentage increase in operating income.

5-93

BYP 5-3

REAL-WORLD FOCUS

The answers to this assignment will be dependent upon the articles selected from the Internet by the student.

5-94

BYP 5-4

(a) (1)

DECISION MAKING ACROSS THE ORGANIZATION

FAMILY DEPARTMENT STORE Income Statement For the Year Ended December 31, 2014 Net sales [$700,000 + ($700,000 X 5%)] ...... Cost of goods sold ($735,000 X 76%)* ........ Gross profit ($735,000 X 24%) ..................... Operating expenses Selling expenses .................................. Administrative expenses ..................... Total operating expenses ............. Net income....................................................

$735,000 558,600 176,400 $100,000 20,000 120,000 $ 56,400

**Alternatively: Net sales, $735,000 – gross profit, $176,400. (2)

FAMILY DEPARTMENT STORE Income Statement For the Year Ended December 31, 2014 Net sales ....................................................... Cost of goods sold ....................................... Gross profit .................................................. Operating expenses Selling expenses .................................. Administrative expenses ..................... Net income....................................................

$700,000 553,000 147,000 $72,000* 20,000*

92,000 $ 55,000

*$100,000 – $30,000 + ($700,000 X 2%) – ($30,000 X 40%) = $72,000. (b) Debbie’s proposed changes will increase net income by $29,400. Mike’s proposed changes will reduce operating expenses by $28,000 and result in a corresponding increase in net income. Thus, if the choice is between Debbie’s plan and Mike’s plan, Debbie’s plan should be adopted. While Mike’s plan will increase net income, it may also have an adverse effect on sales personnel. Under Mike’s plan, sales personnel will be taking a cut of $16,000 in compensation [$60,000 – ($30,000 + $14,000)]. Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

5-95

BYP 5-4 (Continued) (c)

FAMILY DEPARTMENT STORE Income Statement For the Year Ended December 31, 2014 Net sales ............................................................. Cost of goods sold ............................................ Gross profit ........................................................ Operating expenses Selling expenses ........................................ Administrative expenses ........................... Total operating expenses................... Net income .........................................................

$735,000 558,600 176,400 $72,700* 20,000* 92,700 $ 83,700

*$72,000 + [2% X ($735,000 – $700,000)] = $72,700. If both plans are implemented, net income will be $56,700 ($83,700 – $27,000) higher than the 2013 results. This is an increase of over 200%. Given the size of the increase, Mike’s plan to compensate sales personnel might be modified so that they would not have to take a pay cut. For example, if sales commissions were 3%, the compensation cut would be reduced to $8,650 [$16,000 (from (b)) – $735,000 X (3% – 2%)].

5-96

BYP 5-5

COMMUNICATION ACTIVITY

(a), (b) President Boardin Co. Dear Sir: As you know, the financial statements for Boardin USA Co. are prepared in accordance with IFRS. One of these principles is the revenue recognition principle, which provides that revenues should be recognized when the performance obligation is satisfied. Typically, sales revenues are recognized when the goods are transferred to the buyer from the seller. At this point, the sales transaction is completed and the sales price is established. Thus, in the typical situation, revenue on the surfboard ordered by Dexter is earned at event No. 8, when Dexter picks up the surfboard. The circumstances pertaining to this sale may seem to you to be atypical because Dexter has ordered a specific kind of surfboard. From an accounting standpoint, this would be true only if you could not reasonably expect to sell this surfboard to another customer. In such case, it would be proper under IFRS to recognize sales revenue when you have completed the surfboard for Dexter. Whether Dexter makes a down payment with the purchase order is irrelevant in recognizing sales revenue because at this time, the performance obligation has not been satisfied. A down payment may be an indication of Dexter’s “good faith.” However, its effect on your financial statements is limited entirely to recognizing the down payment as unearned revenue. If you have further questions about the accounting for this sale, please let me know. Sincerely,

5-97

BYP 5-6

ETHICS CASE

(a) Anita Zurbrugg, as a new employee, is placed in a position of responsibility and is pressured by her supervisor to continue an unethical practice previously performed by him. The unethical practice is taking undeserved cash discounts. Her dilemma is either follow her boss’s unethical instructions or offend her boss and maybe lose the job she just assumed. (b) The stakeholders (affected parties) are: • Anita Zurbrugg, the assistant treasurer. • Chris Dadian, the treasurer. • Yorktown Stores, the company. • Creditors of Yorktown Stores (suppliers). • Mail room employees (those assigned the blame). (c) Anita’s alternatives: 1. Tell the treasurer (her boss) that she will attempt to take every allowable cash discount by preparing and mailing checks within the discount period—the ethical thing to do. This will offend her boss and may jeopardize her continued employment. 2. Join the team and continue the unethical practice of taking undeserved cash discounts. 3. Go over her boss’s head and take the chance of receiving just and reasonable treatment from an officer superior to Chris. The company may not condone this practice. Anita definitely has a choice, but probably not without consequence. To continue the practice is definitely unethical. If Anita submits to this request, she may be asked to perform other unethical tasks. If Anita stands her ground and refuses to participate in this unethical practice, she probably won’t be asked to do other unethical things—if she isn’t fired. Maybe nobody has ever challenged Chris’s unethical behavior and his reaction may be one of respect rather than anger and retribution. Being ethically compromised is no way to start a new job.

5-98

GAAP EXERCISES

GAAP 5-1 Expenses may be classified by “nature” or by “function”. The “nature-ofexpense” classification organizes expenses by type of expense, such as salaries, depreciation, rent, or supplies. The “function-of-expense” classification presents expenses by type of business activity. Examples would include cost of goods sold, selling, administrative, operating, and non-operating. GAAP5-2 By function By nature By nature By function By nature By nature By function

Cost of goods sold Depreciation expense Salaries and wages expense Selling expenses Utilities expense Delivery expense General and administrative expenses

GAAP5-3 ATLANTIS COMPANY Comprehensive Income Statement For the Year Ended 2014 (in thousands of dollars) Net income............................................................................... Unrealized gain related to revaluation of buildings .............. Unrealized loss on available for sale securities ................... Comprehensive income .................................................

$150 $10 (35)

(25) $125

5-99

GAAP FINANCIAL REPORTING PROBLEM

GAAP 5-4 (a) Percentage change in (1) Total revenue ($499,331 – $496,016) ÷ $496,016 ($521,448 – $499,331) ÷ $499,331 (2) Net Income ($53,878 – $39,315) ÷ $39,315 ($53,714 – $53,878) ÷ $53,878 (b) Gross profit rate $161,781 ÷ $496,016 $179,834 ÷ $499,331 $172,047 ÷ $521,448 (c) Percentage of net income to total revenue $39,315 ÷ $496,016 $53,878 ÷ $499,331 $53,714 ÷ $521,448

5-100

2008 to 2009

2009 to 2010

0.7% 4.4% 37.0% (0.3)% 2008 32.6%

2009

2010

36.0% 33.0%

7.9% 10.8% 10.3%

CHAPTER 6 Inventories ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Do It!

Exercises

A Problems

B Problems

1, 2, 3, 4, 5, 6

1, 2

7, 8, 9, 10

2, 3

3, 4, 5, 6, 7

2A, 3A, 4A, 5A, 6A, 7A

2B, 3B, 4B, 5B, 6B, 7B

3, 6, 7

2A, 3A, 4A, 5A, 6A, 7A

2B, 3B, 4B, 5B, 6B, 7B

14, 15, 16

8A, 9A

8B, 9B

9, 10

17, 18, 19

10A, 11A

10B, 11B

20, 21

12A

12B

Learning Objectives

Questions

Describe the steps in determining inventory quantities.

Explain the accounting for inventories and apply the inventory cost flow methods.

Explain the financial effects of the inventory cost flow assumptions.

Explain the lower-ofcost-or-net realizable value basis of accounting for inventories.

11, 12, 13

Indicate the effects of inventory errors on the financial statements.

Compute and interpret the inventory turnover ratio.

15, 16

*7.

Apply the inventory cost flow methods to perpetual inventory records.

*8.

Describe the two methods of estimating inventories.

18, 19, 20, 21

*9.

Apply the LIFO inventory costing method

22, 23, 24

8, 9

10, 11

12, 13

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

6-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Determine items and amounts to be recorded in inventory.

Moderate

15–20

Determine cost of goods sold and ending inventory using FIFO and average-cost with analysis.

Simple

30–40

Determine cost of goods sold and ending inventory using FIFO and average-cost with analysis.

Simple

30–40

Compute ending inventory, prepare income statements, and answer questions using FIFO and average-cost.

Moderate

30–40

Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results.

Moderate

30–40

Compare specific identification, FIFO, and average-cost under periodic method; use cost flow assumption to influence earnings.

Moderate

20–30

Compute ending inventory, prepare income statements, and answer questions using FIFO and average-cost.

Moderate

30–40

*8A

Calculate cost of goods sold and ending inventory for FIFO and moving-average cost under the perpetual system; compare gross profit under each assumption.

Moderate

30–40

*9A

Determine ending inventory under a perpetual inventory system.

Moderate

40–50

*10A

Estimate inventory loss using gross profit method.

Moderate

30–40

*11A

Compute ending inventory using retail method.

Moderate

20–30

*12A

Apply the LIFO cost method (periodic)

Simple

10–15

Determine items and amounts to be recorded in inventory.

Moderate

15–20

Determine cost of goods sold and ending inventory using FIFO and average-cost with analysis.

Simple

30–40

Determine cost of goods sold and ending inventory using FIFO and average-cost with analysis.

Simple

30–40

Compute ending inventory, prepare income statements, and answer questions using FIFO and average-cost.

Moderate

30–40

Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results.

Moderate

30–40

Compare specific identification, FIFO, and average-cost under periodic method; use cost flow assumption to justify price increase.

Moderate

20–30

6-2

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Difficulty Level

Time Allotted (min.)

Compute ending inventory, prepare income statements, and answer questions using FIFO and average-cost.

Moderate

30–40

*8B

Calculate cost of goods sold and ending inventory under FIFO, and moving-average cost, under the perpetual system; compare gross profit under each assumption.

Moderate

30–40

*9B

Determine ending inventory under a perpetual inventory system.

Moderate

40–50

*10B

Compute gross profit rate and inventory loss using gross profit method.

Moderate

30–40

*11B

Compute ending inventory using retail method.

Moderate

20–30

*12B

Apply the LIFO cost method (periodic)

Simple

10–15

6-3

WEYGANDT FINANCIAL ACCOUNTING, IFRS Edition, 2e CHAPTER 6 INVENTORIES Number

Difficulty

Time (min.)

BE1

Simple

4–6

BE2

Simple

2–4

BE3

Simple

4–6

BE4

Simple

2–4

BE5

Simple

2–4

BE6

Moderate

6–8

BE7

Simple

4–6

BE8

Simple

4–6

BE9

Simple

4–6

BE10

Simple

8–10

BE11

Simple

4–6

DI1

Simple

4–6

DI2

Simple

6–8

DI3

Simple

6–8

DI4

Simple

4–6

EX1

Simple

4–6

EX2

Simple

6–8

EX3

2, 3

AP, E

Moderate

6–8

EX4

AP, E

Simple

8–10

EX5

Simple

6–8

EX6

2, 3

Simple

8–10

EX7

2, 3

Simple

8–10

EX8

Simple

6–8

EX9

Simple

6–8

EX10

Simple

4–6

EX11

Simple

6–8

EX12

Simple

10–12

EX13

Simple

10–12

EX14

Simple

8–10

EX15

AP, E

Moderate

8–10

EX16

AP, E

Moderate

12–15

6-4

INVENTORIES (Continued) Number

Difficulty

Time (min.)

EX17

Simple

8–10

EX18

Simple

10–12

EX19

Moderate

10–12

EX20

Moderate

10–12

EX21

Moderate

10–12

P1A

Moderate

15–20

P2A

2, 3

Simple

30–40

P3A

2, 3

Simple

30–40

P4A

2, 3

Moderate

30–40

P5A

2, 3

AP, E

Moderate

30–40

P6A

2, 3

AP, E

Moderate

20–30

P7A

2, 3

Moderate

30–40

P8A

AP, E

Moderate

30–40

P9A

Moderate

40–50

P10A

Moderate

30–40

P11A

Moderate

20–30

P12A

Simple

10–15

P1B

Moderate

15–20

P2B

2, 3

Simple

30–40

P3B

2, 3

Simple

30–40

P4B

2, 3

Moderate

30–40

P5B

2, 3

AP, E

Moderate

30–40

P6B

2, 3

AP, E

Moderate

20–30

P7B

2, 3

Moderate

30–40

P8B

AP, E

Moderate

30–40

P9B

Moderate

40–50

P10B

Moderate

30–40

P11B

Moderate

20–30

P12B

Simple

10–15

BYP1

2, 6

Simple

10–15

BYP2

Simple

10–15

BYP3

Simple

10–15

BYP4

Moderate

20–25

BYP5

Simple

10–15

BYP6

Simple

10–15

6-5

Learning Objective

Knowledge Comprehension

Application

Analysis

Describe the steps in determining inventory quantities.

Q6-2 Q6-6

Q6-1 Q6-3

Q6-4 Q6-5 BE6-1

Explain the accounting for inventories and apply the inventory cost flow methods.

Q6-8 Q6-10 Q6-19 BE6-2

Q6-7 Q6-9

BE6-3 DI6-2 E6-3 E6-4 E6-5 E6-6

Explain the financial effects of the inventory cost flow assumptions.

BE 6-4

E6-3 E6-6 E6-7

Explain the lower-of-cost-or-net realizable value basis of accounting for inventories.

Q6-11 Q6-12 Q6-13

BE6-5 DI6-3 E6-8 E6-9

Indicate the effects of inventory errors on the financial statements.

Compute and interpret the inventory turnover ratio.

Q6-15 Q6-16

BE6-7 DI6-4

E6-12 BE6-9 E6-13

*7.

Apply the inventory cost flow methods to perpetual inventory records.

Q6-17

BE6-8 E6-14 E6-15 E6-16

P6-8A P6-8B P6-9A P6-9B

*8.

Describe the two methods of estimating inventories.

Q6-18 Q6-19

Q6-20 E6-17 P6-11A Q6-21 E6-18 P6-10B BE6-9 E6-19 P6-11B BE6-10 P6-10A

*9.

Apply the LIFO inventory costing method

Q6-22

BE6-11 P6-12A P6-12B E6-20 E6-21

P6-1A P6-1B

E6-7 P6-2A P6-2B P6-3A

P6-3B P6-4A P6-5A P6-4B P6-5B P6-7A P6-6A P6-6B

P6-7B

P6-2A P6-2B P6-3A P6-3B P6-5A

P6-5B P6-4A P6-6A P6-4B P6-6B P6-7A P6-7B

Q6-14 BE6-6

Q6-23 Q6-24

Broadening Your Perspective

DI6-1 E6-1 E6-2

Financial Reporting Decision–Making Across the Organization

Synthesis

Evaluation

E6-3 E6-4 P6-5A P6-5B

E6-3 P6-5A P6-5B P6-6A P6-6B

E6-10 E6-11

E6-15 E6-16 P6-8A P6-8B

Real–World Focus Communication

Comp. Analysis Ethics Case

BLOOM’ S TAXONOMY TABLE

6-6 Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

ANSWERS TO QUESTIONS 1.

Agree. Effective inventory management is frequently the key to successful business operations. Management attempts to maintain sufficient quantities and types of goods to meet expected customer demand. It also seeks to avoid the cost of carrying inventories that are clearly in excess of anticipated sales.

Inventory items have two common characteristics: (1) they are owned by the company, and (2) they are in a form ready for sale in the ordinary course of business.

Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand. Retailers, such as a hardware store, generally have thousands of different items to count. This is normally done when the store is closed.

(a) (1) The goods will be included in Hanson Company’s inventory if the terms of sale are FOB destination. (2) They will be included in Fox Company’s inventory if the terms of sale are FOB shipping point. (b) Hanson Company should include goods shipped to another company on consignment in its inventory. Goods held by Hanson Company on consignment should not be included in inventory.

Inventoriable costs are $3,050 (invoice cost $3,000 + freight charges $80 – purchase discounts $30). The amount paid to negotiate the purchase is a buying cost that normally is not included in the cost of inventory because of the difficulty of allocating these costs. Buying costs are expensed in the year incurred.

FOB shipping point means that ownership of goods in transit passes to the buyer when the public carrier accepts the goods from the seller. FOB destination means that ownership of goods in transit remains with the seller until the goods reach the buyer.

Actual physical flow may be impractical because many items are indistinguishable from one another. Actual physical flow may be inappropriate because management may be able to manipulate net income through specific identification of items sold.

The major advantage of the specific identification method is that it tracks the actual physical flow of the goods available for sale. The major disadvantage is that management could manipulate net income.

No. Selection of an inventory costing method is a management decision. However, once a method has been chosen, it should be used consistently from one accounting period to another.

10.

(a) FIFO. (b) Average-cost. (c) FIFO.

6-7

Questions Chapter 6 (Continued) 11. Steve should know the following: (a) A departure from the cost basis of accounting for inventories is justified when the value of the goods is lower than its cost. The writedown to net realizable value should be recognized in the period in which the price decline occurs. (b) Net realizable value (NRV) means the net amount that a company expects to realize from the sale, not the selling price. NRV is estimated selling price less estimated costs to complete and to make a sale. 12. Steering Music Center should report the DVD players at $90 each for a total of $450. $90 is the net realizable value under the lower-of-cost-or-net realizable value basis of accounting for inventories. A decline in net realizable value usually leads to a decline in the selling price of the item. Valuation at LCNRV is an example of the accounting concept of prudence. 13. Maggie Stores should report the toasters at $28 each for a total of $560. The $28 is the lower of cost or net realizable value. 14. (a) Cohen Company’s 2013 net income will be understated €7,600; (b) 2014 net income will be overstated €7,600; and (c) the combined net income for the two years will be correct. 15. Raglan Company should disclose: (1) the major inventory classifications, (2) the basis of accounting (cost or lower of cost or net realizable value), and (3) the costing method (FIFO or average cost). 16. An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages. Inventory outages may also cause customer ill will and result in lost future sales. *17. In a periodic system, the average is a weighted average based on total goods available for sale for the period. In a perpetual system, the average is a moving average of goods available for sale after each purchase. *18. Inventories must be estimated when: (1) management wants monthly or quarterly financial statements but a physical inventory is only taken annually and (2) a fire or other type of casualty makes it impossible to take a physical inventory. *19. In the gross profit method, the average is the gross profit rate, which is gross profit divided by net sales. The rate is often based on last year’s actual rate. The gross profit rate is applied to net sales in using the gross profit method. In the retail inventory method, the average is the cost-to-retail ratio, which is the goods available for sale at cost divided by the goods available for sale at retail. The ratio is based on current year data and is applied to the ending inventory at retail.

6-8

Questions Chapter 6 (Continued) *20. The estimated cost of the ending inventory is $60,000: Net sales ................................................................................................................. Less: Gross profit ($400,000 X 40%) ...................................................................... Estimated cost of goods sold ...................................................................................

$400,000 160,000 $240,000

Cost of goods available for sale ............................................................................... Less: Cost of goods sold ........................................................................................ Estimated cost of ending inventory ..........................................................................

$300,000 240,000 $ 60,000

*21. The estimated cost of the ending inventory is €21,000: Ending inventory at retail:

€30,000 = (€120,000 – €90,000)

Cost-to-retail ratio:

 €84, 000  70% =    €120, 000 

Ending inventory at cost:

€21,000 = (€30,000 X 70%)

*22. Barto Company is using the FIFO method of inventory costing, and Phelan Company is using the LIFO method. Under FIFO, the latest goods purchased remain in inventory. Thus, the inventory on the statement of financial position should be close to current costs. The reverse is true of the LIFO method. Barto Company will have the higher gross profit because cost of goods sold will include a higher proportion of goods purchased at earlier (lower) costs. *23. Disagree. The results under the FIFO method are the same but the results under the LIFO method are different. The reason is that the pool of inventoriable costs (cost of goods available for sale) is not the same. Under a periodic system, the pool of costs is the goods available for sale for the entire period, whereas under a perpetual system, the pool is the goods available for sale up to the date of sale. *24. During times of rising prices, using the LIFO method for costing inventories rather than FIFO or average-cost will result in lower income taxes. Since LIFO uses the most recent, higher, costs to calculate cost of goods sold, taxable income is lower, and income taxes are also lower.

6-9

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 6-1 (a) Ownership of the goods belongs to Dayne. Thus, these goods should be included in Dayne’s inventory. (b) The goods in transit should not be included in the inventory count because ownership by Dayne does not occur until the goods reach Dayne (the buyer). (c) The goods being held belong to the customer. They should not be included in Dayne’s inventory. (d) Ownership of these goods rests with the other company. Thus, these goods should not be included in Dayne’s inventory.

BRIEF EXERCISE 6-2 The items that should be included in goods available for sale are: (a) (b) (c) (e)

Freight-In Purchase Returns and Allowances Purchases Purchase Discounts

BRIEF EXERCISE 6-3 (a) The ending inventory under FIFO consists of 200 units at $8 + 250 units at $7 for a total allocation of $3,350 or ($1,600 + $1,750). (b) Average unit cost is $6.89 computed as follows: 300 X $6 = $1,800 400 X $7 = 2,800 200 X $8 = 1,600 900 $6,200 $6,200 ÷ 900 = $6.89 (rounded). The cost of the ending inventory is $3,100.50 or (450 X $6.89). 6-10

BRIEF EXERCISE 6-4 (a) (b) (c) (d)

FIFO would result in the higher net income. FIFO would result in the higher ending inventory. Average-cost would result in the lower income tax expense (because it would result in the lower taxable income). Average-cost would result in the more stable income over a number of years because it averages out any big changes in the cost of inventory.

BRIEF EXERCISE 6-5

Inventory Categories Cameras Camcorders DVD players Total valuation

Cost £12,000 9,500 14,000

NRV £12,100 9,200 12,800

Lower -of-cost -or-NRV £12,000 9,200 12,800 £34,000

BRIEF EXERCISE 6-6 The understatement of ending inventory caused cost of goods sold to be overstated $5,000 and net income to be understated $5,000. The correct net income for 2014 is $95,000 or ($90,000 + $5,000). Total assets in the statement of financial position will be understated by the amount that ending inventory is understated, $5,000. BRIEF EXERCISE 6-7 Inventory turnover:

Days in inventory:

$300,000 $300,000 = = 6.0 ( $60,000 + $40,000 ) ÷ 2 $50,000

365 = 60.8 days 6.0

6-11

*BRIEF EXERCISE 6-8 (a) FIFO Method

Date May 7 June 1 July 28

Purchases (50 @ $11) $550

Product E2-D2 Cost of Goods Sold (30 @ $11)

$330

(30 @ $13) $390

Aug. 27

(20 @ $11) (15 @ $13) } $415

Balance (50 @ $11) $550 (20 @ $11) $220 (20 @ $11) (30 @ $13) } $610 (15 @ $13)

$195

(b) Average-Cost

Date May 7 June 1 July 28 Aug. 27

Purchases (50 @ $11) $550

Product E2-D2 Cost of Goods Sold (30 @ $11)

$330

(30 @ $13) $390 (35 @ $12.20) $427

Balance (50 @ $11) $550 (20 @ $11) $220 (50 @ $12.20)*$610 (15 @ $12.20) $183

*($220 + $390) ÷ 50 *BRIEF EXERCISE 6-9 (1) Net sales ............................................................................. Less: Estimated gross profit (40% X ¥330,000) .............. Estimated cost of goods sold ...........................................

¥330,000 132,000 ¥198,000

(2) Cost of goods available for sale ....................................... Less: Estimated cost of goods sold ................................ Estimated cost of ending inventory .................................

¥230,000 198,000 ¥ 32,000

6-12

*BRIEF EXERCISE 6-10 At Cost $35,000

Goods available for sale Net sales Ending inventory at retail

At Retail $50,000 42,000 $ 8,000

Cost-to-retail ratio = ($35,000 ÷ $50,000) = 70% Estimated cost of ending inventory = ($8,000 X 70%) = $5,600 BRIEF EXERCISE 6-11 The ending inventory under LIFO consists of 300 units at $6 + 150 units at $7 for a total allocation of $2,850 or ($1,800 + $1,050).

6-13

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 6-1 Inventory per physical count .................................................... Inventory out on consignment ................................................. Inventory purchased, in transit at year-end ............................ Inventory sold, in transit at year-end ....................................... Correct December 31 inventory ...............................................

R$300,000 21,000 20,000 –0– R$341,000

DO IT! 6-2 Cost of goods available for sale = (3,000 X $5) + (8,000 X $7) = $71,000 Ending inventory = 3,000 + 8,000 – 9,400 = 1,600 units (a) FIFO: $71,000 – (1,600 X $7) = $59,800 (b) Average-cost: $71,000/11,000 = $6.455 per unit 9,400 X $6.455 = $60,677 DO IT! 6-3 (a) The lower value for each inventory type is: Small $64,000, Medium $260,000, and Large $149,000. The total inventory value is the sum of these figures, $473,000. (b) Ending inventory Cost of goods sold Equity

6-14

2013 $28,000 understated $28,000 overstated $28,000 understated

2014 No effect $28,000 understated No effect

DO IT! 6-4 2013 Inventory turnover ratio

Days in inventory

CHF1,200,000 (CHF180,000 + CHF220,000)/2 365 ÷ 6 = 60.8 days

2014 = 6

CHF1,425,000 (CHF220,000 + CHF100,000)/2

= 8.9

365 ÷ 8.9 = 41.0 days

The company experienced a very significant decline in its ending inventory as a result of the just-in-time inventory. This decline improved its inventory turnover ratio and its days in inventory. It appears that this change is a winwin situation for Lousanne Company.

6-15

SOLUTIONS TO EXERCISES EXERCISE 6-1 Ending inventory—physical count ................................................ 1. No effect: Title passes to purchaser upon shipment when terms are FOB shipping point .................................. 2. No effect: Title does not transfer to Alou until goods are received .............................................................. 3. Add to inventory: Title passed to Alou when goods were shipped........................................................................ 4. Add to inventory: Title remains with Alou until purchaser receives goods .................................................. 5. No effect: Title passes to purchaser upon shipment when terms are FOB shipping point ................................. Correct inventory ...........................................................................

$297,000 0 0 19,000 35,000 0 $351,000

EXERCISE 6-2 Ending inventory—as reported ..................................................... 1. Subtract from inventory: The goods belong to Superior Corporation. Platinum is merely holding them as a consignee ........................................................... 2. No effect: Title does not pass to Platinum until goods are received (Jan. 3) ................................................ 3. Subtract from inventory: Office supplies should be carried in a separate account. They are not considered inventory held for resale ................................. 4. Add to inventory: The goods belong to Platinum until they are shipped (Jan. 1) ............................................ 5. Add to inventory: District Sales ordered goods with a cost of £8,000. Platinum should record the corresponding sales revenue of £10,000. Platinum decision to ship extra “unordered” goods does not constitute a sale. The manager’s statement that District could ship the goods back indicates that Platinum knows this over-shipment is not a legitimate sale. The manager acted unethically in an attempt to improve Platinum reported income by over-shipping ....................................

6-16

£740,000 (250,000) 0 (17,000) 33,000

52,000

EXERCISE 6-2 (Continued) 6.

Subtract from inventory: IFRS require that inventory be valued at the lower of cost or net realizable value. Obsolete parts should be adjusted from cost to zero if they have no other use . .................................................... Correct inventory ............................................................................

(48,000) £510,000

EXERCISE 6-3 (a)

FIFO Cost of Goods Sold (#1012) $100 + (#1045) $90 = $190

(b)

It could choose to sell specific units purchased at specific costs if it wished to impact earnings selectively. If it wished to minimize earnings it would choose to sell the units purchased at higher costs—in which case the Cost of Goods Sold would be $190. If it wished to maximize earnings it would choose to sell the units purchased at lower costs—in which case the cost of goods sold would be $174.

(c)

I recommend they use the FIFO method because it produces a more appropriate Statement of Financial Position valuation and reduces the opportunity to manipulate earnings. (The answer may vary depending on the method the student chooses.)

EXERCISE 6-4 (a)

FIFO Beginning inventory (23 X HK$970) ............. HK$ 22,310 Purchases Sept. 12 (45 X HK$1,020) ........................ HK$45,900 Sept. 19 (20 X HK$1,040) ........................ 20,800 Sept. 26 (44 X HK$1,050) ........................ 46,200 112,900 Cost of goods available for sale .................. 135,210 Less: Ending inventory (11 X HK$1,050) .... 11,550 Cost of goods sold ........................................ HK$123,660

6-17

EXERCISE 6-4 (Continued)

Date 9/1 9/12 9/19 9/26

Units 23 45 20 33 121

Proof Unit Cost HK$ 970 1,020 1,040 1,050

Total Cost HK$ 22,310 45,900 20,800 34,650 HK$123,660

Average-Cost Cost of goods available for sale........................................ Less: Ending inventory (11 X HK$1,024.32*) ................... Cost of goods sold .............................................................

HK$135,210 11,268 HK$123,942

*Average unit cost is HK$1024.32 computed as follows: HK$135,210 (Cost of goods available for sale) = HK$1,024.32 (rounded) 132 units (Total units available for sale) Proof 121 units X HK$1,024.32 = HK$123,943 (HK$1 difference due to rounding) (b) FIFO HK$11,550 (ending inventory) + HK$123,660 (COGS) = HK$135,210

}

Average-cost HK$11,268 (ending inventory) + HK$123,942 (COGS) = HK$135,210

Cost of goods available for sale

Under both methods, the sum of the ending inventory and cost of goods sold equals the same amount, HK$135,210, which is the cost of goods available for sale. EXERCISE 6-5 FIFO Beginning inventory (30 X $9) .............................................. Purchases May 15 (25 X $11) ........................................................... May 24 (35 X $12) ........................................................... Cost of goods available for sale........................................... Less: Ending inventory (22 X $12) ...................................... Cost of goods sold ................................................................ 6-18

$270 $275 420

695 965 264 $701

EXERCISE 6-5 (Continued)

Date 5/1 5/15 5/24

Proof Unit Cost $ 9 11 12

Units 30 25 13 68

Total Cost $270 275 156 $701

AVERAGE-COST Cost of goods available for sale.......................................................... Less: Ending inventory (22 X $10.72*) ............................................... Cost of goods sold ...............................................................................

$965 236 $729

*Average unit cost is $10.72 computed as follows: $965 (Cost of goods available for sale) = $10.72 (rounded) 90 units (Total units available for sale) Proof 68 units X $10.72 = $729 EXERCISE 6-6 (a)

FIFO Beginning inventory (200 X $5)............................... Purchases June 12 (300 X $6) ............................................ June 23 (500 X $7) ............................................ Cost of goods available for sale ............................. Less: Ending inventory (160 X $7)......................... Cost of goods sold ..................................................

$1,000 $1,800 3,500

5,300 6,300 1,120 $5,180

6-19

EXERCISE 6-6 (Continued) AVERAGE-COST Cost of goods available for sale ............................. Less: Ending inventory (160 X $6.30*)................... Cost of goods sold ..................................................

$6,300 1,008 $5,292

*Average unit cost is: $6,300 (Cost of goods available for sale) = $6.30 1,000 units (Total units available for sale) (b) The FIFO method will produce the higher ending inventory because costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold and the latest costs remain in ending inventory. For Eastland Company, the ending inventory under FIFO is $1,120 or (160 X $7) compared to $1,008 or (160 X $6.30) under average-cost. (c) The average-cost method will produce the higher cost of goods sold for Eastland Company. The cost of goods sold is $5,292 or [$6,300 – $1,008] compared to $5,180 or ($6,300 – $1,120) under FIFO. EXERCISE 6-7 (a) (1)

FIFO Beginning inventory .......................................... Purchases .......................................................... Cost of goods available for sale ....................... Less: ending inventory (75 X $130*) ................ Cost of goods sold ............................................

$10,000 26,000 36,000 9,750 $26,250

*$26,000 ÷ 200 (2)

AVERAGE-COST Beginning inventory .......................................... Purchases .......................................................... Cost of goods available for sale ....................... Less: ending inventory (75 X $120*) ................ Cost of goods sold ............................................ *[($10,000 + $26,000) ÷ (100 + 200)]

6-20

$10,000 26,000 36,000 9,000 $27,000

EXERCISE 6-7 (Continued) (b) The use of FIFO would result in the higher net income since the earlier lower costs are matched with revenues. (c) The use of FIFO would result in inventories approximating current cost in the statement of financial position, since the more recent units are assumed to be on hand. (d) The use of average-cost would result in Givens paying lower taxes in the first year since taxable income will be lower. EXERCISE 6-8 Lower -of-Cost -or-NRV

Cost

NRV

Cameras Minolta Canon Total

W1,360,000 900,000 2,260,000

W1,248,000 912,000 2,160,000

W1,248,000 900,000

Light meters Vivitar Kodak Total Total inventory

1,500,000 1,610,000 3,110,000 W5,370,000

1,380,000 1,890,000 3,270,000 W5,430,000

1,380,000 1,610,000 W5,138,000

EXERCISE 6-9

Cameras DVD players iPods Total inventory

Cost $ 6,800 11,250 10,000 $28,050

NRV $ 7,000 10,350 9,750 $27,100

Lower -of-Costor-NRV $ 6,800 10,350 9,750 $26,900

EXERCISE 6-10 Beginning inventory ........................................... Cost of goods purchased ................................... Cost of goods available for sale ........................ Corrected ending inventory ............................... Cost of goods sold.............................................. a

€30,000 – €2,000 = €28,000. .

2013 € 20,000 150,000 170,000 28,000a €142,000

2014 € 28,000 175,000 203,000 41,000b €162,000

€35,000 + €6,000 = €41,000. 6-21

EXERCISE 6-11 (a) Sales ................................................................. Cost of goods sold Beginning inventory ................................. Cost of goods purchased ........................ Cost of goods available for sale.............. Ending inventory ($44,000 + $6,000) ....... Cost of goods sold ................................... Gross profit ......................................................

2013 $210,000

2014 $250,000

32,000 173,000 205,000 50,000 155,000 $ 55,000

50,000 202,000 252,000 52,000 200,000 $ 50,000

(b) The cumulative effect on total gross profit for the two years is zero as shown below: Incorrect gross profits: Correct gross profits: Difference

$49,000 + $56,000 = $105,000 $55,000 + $50,000 = 105,000 $ 0

(c) Dear Mr./Ms. President: Because your ending inventory of December 31, 2013 was understated by $6,000, your net income for 2013 was understated by $6,000. For 2014 net income was overstated by $6,000. In a periodic system, the cost of goods sold is calculated by deducting the cost of ending inventory from the total cost of goods you have available for sale in the period. Therefore, if this ending inventory figure is understated, as it was in December 2013, then the cost of goods sold is overstated and therefore net income will be understated by that amount. Consequently, this understated ending inventory figure goes on to become the next period’s beginning inventory amount and is a part of the total cost of goods available for sale. Therefore, the mistake repeats itself in the reverse. The error also affects the statement of financial position at the end of 2013. The inventory reported in the statement of financial postion is understated; therefore, total assets are understated. The understatement of the 2013 net income results in the Retained Earnings account balance being understated. The statement of financial position at the end of 2014 is correct because the understatement of the Retained Earnings account at the end of 2013 is offset by the overstatement of the 2014 net income and the inventory at the end of 2014 is correct. Thank you for allowing me to bring this to your attention. If you have any questions, please contact me at your convenience. Sincerely, 6-22

EXERCISE 6-12

Inventory turnover

Days in inventory Gross profit rate

2012

2013

2014

$900,000 ($100,000 + $330,000) ÷ 2

$1,120,000 ($330,000 + $400,000) ÷ 2

$1,300,000 ($400,000 + $480,000) ÷ 2

$900,000 $215,000

$1,120,000 $365,000

$1,300,000 $440,000

365 4.19

= 4.19

365 3.07

= 87.1 days

$1,200,000 – $900,000 = .25 $1,200,000

= 3.07

= 118.9 days

$1,600,000 – $1,120,000 = .30 $1,600,000

365 2.95

= 2.95

= 123.7 days

$1,900,000 – $1,300,000 = .32 $1,900,000

The inventory turnover ratio decreased by approximately 30% from 2012 to 2014 while the days in inventory increased by almost 42% over the same time period. Both of these changes would be considered negative since it’s better to have a higher inventory turnover with a correspondingly lower days in inventory. However, Sepia Photo’s gross profit rate increased by 28% from 2012 to 2014, which is a positive sign. EXERCISE 6-13 (a)

(b)

Gouda Company

Edam Company

Inventory Turnover

€192,000 (€47,000 + €55,000)/2 = 3.76

€292,000 (€71,000 + €69,000)/2 = 4.17

Days in Inventory

365/3.76 = 97 days

365/4.17 = 88 days

Edam Company is moving its inventory quicker, since its inventory turnover is higher, and its days in inventory is lower.

6-23

*EXERCISE 6-14 (1) Date Purchases Jan. 1 8 10 (6 @ $648) $3,888 15

FIFO Cost of Goods Sold (2 @ $600) $1,200 (1 @ $600) (3 @ $648) $2,544

(2)

Balance (3 @ $600) $1,800 (1 @ $600) 600 (1 @ $600) 4,488 (6 @ $648) (3 @ $648)

MOVING-AVERAGE COST Date Purchases Cost of Goods Sold Jan. 1 8 (2 @ $600) $1,200 10 (6 @ $648) $3,888 15 (4 @ $641.14) $2,565

Balance (3 @ $600) $1,800 (1 @ $600) 600 (7 @ $641.14)* 4,488 (3 @ $641.14) 1,923

*Average-cost = ($600 + $3,888) ÷ 7 = $641.14 (rounded) *EXERCISE 6-15 The cost of goods available for sale is: June 1 Inventory 200 @ $5 June 12 Purchase 300 @ $6 June 23 Purchase 500 @ $7 Total cost of goods available for sale

6-24

1,944

$1,000 1,800 3,500 $6,300

*EXERCISE 6-15 (Continued) (1) Date Purchases June 1 June 12 (300 @ $6) $1,800

FIFO Cost of Goods Sold

June 15

(200 @ $5) (200 @ $6)

}

$1,000 1,200

June 23 (500 @ $7) $3,500 June 27

Balance (200 @ $5) $1,000 (200 @ $5) $2,800 (300 @ $6)

(100 @ $6) (340 @ $7)

600 2,380 $5,180

(100 @ $6) (100 @ $6) (500 @ $7)

$ 600

} $4,100

(160 @ $7)

$1,120

Ending inventory: $1,120. Cost of goods sold: $6,300 – $1,120 = $5,180.

(2) Date June 1 June 12 June 15 June 23 June 27

Purchases

Moving-Average Cost Cost of Goods Sold

(300 @ $6) $1,800 (400 @ $5.60) (500 @ $7) $3,500 (440 @ $6.767)

Balance (200 @ $5) $1,000 (500 @ $5.60) $2,800 $2,240 (100 @ $5.60) $ 560 (600 @ $6.767) $4,060 $2,977 (160 @ $6.767) $1,083 $5,217

Ending inventory: $1,083. Cost of goods sold: $6,300 – $1,083 = $5,217. (b)

FIFO gives the same ending inventory and cost of goods sold values under both the periodic and perpetual inventory system. Moving average gives different ending inventory and cost of goods sold values under the periodic and perpetual inventory systems, due to the average calculation being based on different pools of costs.

(c)

The simple average would be [($5 + $6 + $7) ÷ 3)] or $6. However, the moving-average cost method uses a weighted-average unit cost that changes each time a purchase is made rather than a simple average.

6-25

*EXERCISE 6-16 (a) FIFO Cost of Date

Purchases

Goods Sold

9/1 9/5 9/12

(12 @ HK$ 970) (45 @ HK$1,020)

HK$11,640

HK$45,900

Balance (23 @ HK$ 970)

HK$22,310

(11 @ HK$ 970)

HK$10,670

(11 @ HK$ 970) (45 @ HK$1,020)

9/16

(11 @ HK$ 970) (39 @ HK$1,020)

9/19

(20 @ HK$1,040)

HK$50,450

HK$20,800

( 6 @ HK$1,020)

(44 @ HK$1,050)

HK$ 6,120

( 6 @ HK$1,020) (20 @ HK$1,040)

9/26

HK$56,570

HK$46,200

HK$26,920

( 6 @ HK$1,020) (20 @ HK$1,040)

HK$73,120

(44 @ HK$1,050) 9/29

( 6 @ HK$1,020) (20 @ HK$1,040) (33 @ HK$1,050)

HK$61,570

(11 @ HK$1,050)

HK$11,550

Moving-Average Cost Cost of Date

Purchases

Goods Sold

9/1 9/5 9/12

(12 @ HK$970) (45 @ HK$1,020) HK$45,900

9/16 9/19 9/26

HK$11,640

(50 @ HK$1,010.18)

HK$22,310

(11 @ HK$970)

HK$10,670

(56 @ HK$1,010.18)a

HK$56,570

* ( 6 @ HK$1,010.18)

HK$ 6,061

(26 @ HK$1,033.12)b

HK$26,861

(44 @ HK$1050) HK$46,200

(70 @ HK$1,043.73)c

HK$73,061

(11 @ HK$1,043.73)

HK$11,481

(59 @ HK$1,043.73)

HK$61,580*

*Rounded a HK$56,570 ÷ 56 = HK$1,010.18 b HK$26,861 ÷ 26 = HK$1,033.12 c HK$73,061 ÷ 70 = HK$1,043.73

6-26

(23 @ HK$970)

(20 @ HK$1040) HK$20,800

9/29

HK$50,509*

Balance

*EXERCISE 6-16 (Continued) (b) Periodic . HK$11,550 HK$11,268

Ending Inventory FIFO Ending Inventory Average

(c)

Perpetual HK$11,550 HK$11,481

FIFO yields the same ending inventory value under both the periodic and perpetual inventory system. Average cost yields different ending inventory values when using the periodic versus perpetual inventory system.

*EXERCISE 6-17 (a)

Sales ..................................................................... Rs7,500,000 Cost of goods sold Inventory, November 1 Rs1,000,000 Cost of goods purchased ........................... 5,000,000 Cost of goods available for sale ................ 6,000,000 Inventory, December 31 .............................. 1,200,000 Cost of goods sold............................. 4,800,000 Gross profit .......................................................... Rs2,700,000 Gross profit rate Rs2,700,000/Rs7,500,000 = 36%

(b) Sales Less: Estimated gross profit (36% X Rs10,000,000) Estimated cost of goods sold

Rs10,000,000 3,600,000 Rs 6,400,000

Beginning inventory .......................................................... Rs 1,200,000 Cost of goods purchased.................................................. 6,100,000 Cost of goods available for sale ....................................... 7,300,000 Less: Estimated cost of goods sold ................................ 6,400,000 Estimated cost of ending inventory ................................. Rs 900,000

6-27

*EXERCISE 6-18 (a) Net sales ($51,000 – $1,000) .................................................. Less: Estimated gross profit (40% X $50,000) .................... Estimated cost of goods sold ...............................................

$50,000 20,000 $30,000

Beginning inventory .............................................................. Cost of goods purchased ($31,200 – $1,800 + $1,200) ........ Cost of goods available for sale ........................................... Less: Estimated cost of goods sold .................................... Estimated cost of merchandise lost .....................................

$20,000 30,600 50,600 30,000 $20,600

(b) Net sales ................................................................................. Less: Estimated gross profit (32% X $50,000) .................... Estimated cost of goods sold ...............................................

$50,000 16,000 $34,000

Beginning inventory .............................................................. Cost of goods purchased ...................................................... Cost of goods available for sale ........................................... Less: Estimated cost of goods sold .................................... Estimated cost of merchandise lost .....................................

$30,000 30,600 60,600 34,000 $26,600

*EXERCISE 6-19 Women’s Shoes Cost Retail Beginning inventory Goods purchased Goods available for sale Net sales Ending inventory at retail

Cost-to-retail ratio

$ 36,500 148,000 $184,500

$ 46,000 179,000 225,000 178,000 $ 47,000

$184,500 = 82% $225,000

Estimated cost of ending inventory $47,000 X 82% = $38,540

6-28

Men’s Shoes Cost Retail $ 45,000 136,300 $181,300

$ 60,000 185,000 245,000 185,000 $ 60,000

$181,300 = 74% $245,000

$60,000 X 74% = $44,400

*EXERCISE 6-20 LIFO Beginning inventory (200 X $5)......................... Purchases June 12 (300 X $6) ...................................... June 23 (500 X $7) ...................................... Cost of goods available for sale ....................... Less: Ending inventory (160 X $5)................... Cost of goods sold ............................................

$1,000 $1,800 3,500

5,300 6,300 800 $5,500

*EXERCISE 6-21 (a) LIFO Beginning inventory .......................................... Purchases .......................................................... Cost of goods available for sale ....................... Less: ending inventory (75 X $100) ................. Cost of goods sold ............................................

$10,000 26,000 36,000 7,500 $28,500

(b) The use of FIFO would result in the higher net income since the earlier lower costs are matched with revenues. (c) The use of FIFO would result in inventories approximating current cost in the statement of financial position, since the more recent units are assumed to be on hand. (d) The use of average-cost would result in Givens paying lower taxes in the first year since taxable income will be lower.

6-29

SOLUTIONS TO PROBLEMS PROBLEM 6-1A

(a)

The goods should not be included in inventory as they were shipped FOB shipping point and shipped February 26. Title to the goods transfers to the customer February 26. Anatolia should have recorded the transaction in the Sales Revenue and Accounts Receivable accounts.

(b)

The amount should not be included in inventory as they were shipped FOB destination and not received until March 2. The seller still owns the inventory. No entry is recorded.

(c)

Include $620 in inventory.

(d)

Include $400 in inventory.

(e)

$750 should be included in inventory as the goods were shipped FOB shipping point.

(f)

The sale will be recorded on March 2. The goods should be included in inventory at the end of February at their cost of $220.

(g)

The damaged goods should not be included in inventory. They should be recorded in a loss account since they are not saleable.

6-30

PROBLEM 6-2A

(a) Date March 1 5 13 21 26

COST OF GOODS AVAILABLE FOR SALE Explanation Units Unit Cost Beginning Inventory 1,500 $ 7 Purchase 3,500 8 Purchase 4,000 9 Purchase 2,000 10 Purchase 2,000 11 Total 13,000

(b)

Total Cost $ 10,500 28,000 36,000 20,000 22,000 $116,500

FIFO (1)

Ending Inventory Unit Date Units Cost March 26 2,000 $11 21 1,000 10 3,000*

Total Cost $22,000 10,000 $32,000

(2) Cost of Goods Sold Cost of goods available for sale $116,500 Less: Ending inventory 32,000 Cost of goods sold $ 84,500

*13,000 – 10,000 = 3,000 Proof of Cost of Goods Sold Unit Total Date Units Cost Cost March 1 1,500 $ 7 $10,500 5 3,500 8 28,000 13 4,000 9 36,000 21 1,000 10 10,000 10,000 $84,500

6-31

PROBLEM 6-2A (Continued) AVERAGE-COST (1) Ending Inventory (2) Cost of Goods Sold $116,500 ÷ 13,000 = $8.9615 Cost of goods available for sale $116,500 Unit Less: Ending Units Cost Total Cost inventory 26,885 3,000 $8.9615 $26,885 Cost of goods sold $ 89,615 *rounded to nearest dollar Proof of Cost of Goods Sold 10,000 units X $8.9615 = $89,615 (c) (1) As shown in (b) above, FIFO produces the higher inventory amount, $32,000. (2) As shown in (b) above, Average-cost produces the higher cost of goods sold, $89,615.

6-32

PROBLEM 6-3A

(a) Date 1/1 2/20 5/5 8/12 12/8

COST OF GOODS AVAILABLE FOR SALE Explanation Units Unit Cost Beginning Inventory 400 £ 8 Purchase 300 9 Purchase 500 10 Purchase 600 11 Purchase 200 12 Total 2,000

(b)

Total Cost £ 3,200 2,700 5,000 6,600 2,400 £19,900

FIFO (1) Date 12/8 8/12

Ending Inventory Unit Units Cost 200 £12 300 11 500*

Total Cost £2,400 3,300 £5,700

(2) Cost of Goods Sold Cost of goods available for sale £19,900 Less: Ending inventory 5,700 Cost of goods sold £14,200

*2,000 – 1,500 = 500 Proof of Cost of Goods Sold Unit Total Date Units Cost Cost 1/1 400 £ 8 £ 3,200 2/20 300 9 2,700 5/5 500 10 5,000 8/12 300 11 3,300 1,500 £14,200

6-33

PROBLEM 6-3A (Continued) AVERAGE-COST (1) Ending Inventory (2) Cost of Goods Sold £19,900 ÷ 2,000 = £9.95 Cost of goods available for sale £19,900 Unit Less: Ending Total Units Cost inventory 4,975 Cost 500 £9.95 £4,975 Cost of goods sold £14,925 Proof of Cost of Goods Sold 1,500 units X £9.95 = £14,925 (c) (1) Average-cost results in the lower inventory amount for the statement of financial position, £4,975. (2) FIFO results in the lower cost of goods sold, £14,200.

6-34

PROBLEM 6-4A

(a)

RED ROBIN CO. Condensed Income Statement For the Year Ended December 31, 2014 FIFO Sales revenue ............................................ Cost of goods sold Beginning inventory .......................... Cost of goods purchased .................. Cost of goods available for sale ....... Ending inventory ................................ Cost of goods sold ............................. Gross profit ................................................ Operating expenses .................................. Income before income taxes ..................... Income tax expense (32%) ........................ Net income ................................................. a

$865,000

Averagecost $865,000

22,800 578,500 601,300 39,750a 561,550 303,450 147,000 156,450 50,064 $106,386

22,800 578,500 601,300 37,575b 563,725 301,275 147,000 154,275 49,368 $104,907

15,000 X $2.65 = $39,750.

$601,300 ÷ 240,000 units = $2.505. 15,000 x $2.505 = $37,575

(b) (1) The FIFO method produces the more meaningful inventory amount for the statement of financial position because the units are costed at the most recent purchase prices. (2) The FIFO method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence. (3) There will be $696 additional cash available under average-cost because income taxes are $49,368 under average-cost and $50,064 under FIFO.

6-35

PROBLEM 6-5A

Cost of Goods Available for Sale Date Explanation October 1 Beginning Inventory 9 Purchase 17 Purchase 25 Purchase Total Ending Inventory in Units: Units available for sale Sales (100 + 65 + 120) Units remaining in ending inventory

Units 60 120 70 80 330 330 285 45

Unit Cost €24 26 27 28

Total Cost €1,440 3,120 1,890 2,240 €8,690

Sales Revenue Unit Date Units Price Total Sales October 11 100 €35 € 3,500 22 65 40 2,600 29 120 40 4,800 285 €10,900

(a) (1) FIFO (i) Ending Inventory October 25 45 @ €28 = €1,260

(iii) Gross Profit Sales revenue Cost of goods sold Gross profit

6-36

€10,900 7,430 € 3,470

(ii) Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

€ 8,690 1,260 € 7,430

(iv) Gross Profit Rate Gross profit € 3,470 = 31.8% Net sales €10,900

PROBLEM 6-5A (Continued) (2) Average-Cost Weighted-average cost per unit:

cost of goods available for sale units available for sale €8,690 330

(i)

Ending Inventory 45 @ €26.333 = €1,185*

(ii) Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

*rounded to nearest dollar (iii) Gross Profit Sales revenue Cost of goods sold Gross profit

= €26.333

€10,900 7,505 € 3,395

€8,690 1,185 €7,505

(iv) Gross Profit Rate Gross profit € 3,395 = 31.1% Net sales €10,900

(b) Average-cost produces the lower ending inventory value, gross profit, and gross profit rate because its cost of goods sold is higher than FIFO.

6-37

PROBLEM 6-6A

(a) (1) To maximize gross profit, Greco Diamonds should sell the diamonds with the lowest cost. Sale Date March 5 March 25

Cost of Goods Sold 150 @ $310 $ 46,500 30 @ $350 10,500 170 @ $350 59,500 230 @ $380 87,400 580 $203,900

Sales Revenue 180 @ $600 $108,000 400 @ $650 260,000

580

$368,000

Gross profit $368,000 – $203,900 = $164,100. (2) To minimize gross profit, Greco Diamonds should sell the diamonds with the highest cost. Sale Date March 5 March 25

Cost of Goods Sold 180 @ $350 $ 63,000 350 @ $380 133,000 20 @ $350 7,000 30 @ $310 9,300 580 $212,300

Sales Revenue 180 @ $600 $108,000 400 @ $650 260,000

580

$368,000

Gross profit $368,000 – $212,300 = $155,700. (b) FIFO Cost of goods available for sale March 1 Beginning inventory 3 Purchase 10 Purchase Goods available for sale Units sold Ending inventory

6-38

150 @ $310 200 @ $350 350 @ $380 700

$ 46,500 70,000 133,000 $249,500

700 580 120 @ $380

$45,600

PROBLEM 6-6A (Continued) Goods available for sale – Ending inventory Cost of goods sold

$249,500 45,600 $203,900

Gross profit: $368,000 – $203,900 = $164,100. (c) Average-cost Cost of goods available for sale (from part b) – Ending inventory 120 @ $356.429* Cost of goods sold

$249,500 42,771 $ 206,729

Gross profit: $368,000 – $206,729 = $161,271. *$249,500 ÷ 700 = $356.429. (d) The choice of inventory method depends on the company’s objectives. Since the diamonds are marked and coded, the company could use specific identification. This could, however, result in “earnings management” by the company because, as shown, it could carefully choose which diamonds to sell to result in the maximum or minimum income. Employing a cost flow assumption, such as Average-cost or FIFO, would reduce recordkeeping costs. FIFO would result in higher income, but Average-cost would reduce income taxes.

6-39

PROBLEM 6-7A

(a)

TUDOR LTD. Condensed Income Statement For the Year Ended December 31, 2014

Sales revenue............................................ Cost of goods sold Beginning inventory ........................... Cost of goods purchased .................. Cost of goods available for sale ........ Ending inventory ................................ Cost of goods sold ............................. Gross profit ............................................... Operating expenses.................................. Income before income taxes .................... Income tax expense (28%) ....................... Net income ................................................ a

FIFO

averagecost

£665,000

35,000 501,000 536,000 131,000a 405,000 260,000 130,000 130,000 36,400 £ 93,600

35,000 501,000 536,000 123,690b 412,310 252,690 130,000 122,690 34,353 £ 88,337

(20,000 @ £4.45) + (10,000 @ £4.20) = £131,000. (£536,000 ÷130,000units) = £4.123 per unit; 30,000 @ £4.123 = $123,690

(b) Answers to questions: (1) The FIFO method produces the most meaningful inventory amount for the statement of financial position because the units are costed at the most recent purchase prices. (2) The FIFO method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence. (3) There will be £2,047 additional cash available under average-cost because income taxes are £34,353 under average-cost and £36,400 under FIFO.

6-40

Answer in business letter form: Dear Tudor Ltd. After preparing the comparative condensed income statements for 2014 under FIFO and average-cost methods, we have found the following: The FIFO method produces the most meaningful inventory amount for the statement of financial position because the units are costed at the most recent purchase prices. This method is most likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence. There will be £2,047 additional cash available under average-cost because income taxes are £34,353 under average-cost and £36,400 under FIFO. Sincerely,

6-41

*PROBLEM 6-8A (a) Sales: Date January 6 January 9 (return) January 10 January 30 Total sales (1) FIFO Date

150 units @ $40 (10 units @ $40) 50 units @ $45 160 units @ $50

Purchases

$ 6,000 (400) 2,250 8,000 $15,850

Cost of Goods Sold

January 1 January January January January

2 6 9 9

(100 @ $21) $2,100 (150 @ $19) (–10 @ $19) ( 75 @ $24) $1,800

January 10 January 10

(–15 @ $24) ($ 360)

January 23

(100 @ $26) $2,600

January 30

$2,850 ($ 190)

( 10 @ $19) ( 40 @ $21)

( 60 @ $21) ( 60 @ $24) ( 40 @ $26)

} $1,030

}

$3,740 $7,430

Balance (150 @ $19) (150 @ $19) (100 @ $21) (100 @ $21) ( 10 @ $19) (100 @ $21) ( 75 @ $24) ( 10 @ $19) (100 @ $21) ( 60 @ $24) ( 60 @ $21) ( 60 @ $24) ( 60 @ $21) ( 60 @ $24) (100 @ $26) ( 60 @ $26)

$2,850

} $4,950 $2,100

} }

$4,090

$3,730

} $2,700

}

$5,300

} $1,560

(i) Cost of goods sold = $7,430. (ii) Ending inventory = $1,560. (iii) Gross profit = $15,850 – $7,430 = $8,420.

6-42

*PROBLEM 6-8A (Continued) (2) Moving-Average Date

Purchases

January 1 January 2 January 6 January 9 January 9 January 10 January 10 January 23 January 30

Cost of goods sold

(150 @ $19) (250 @ $19.80)a (150 @ $19.80) $2,970 (100 @ $19.80) (–10 @ $19.80) ($ 198) (110 @ $19.80) (185 @ $21.503) b (170 @ $21.282) c ( 50 @ $21.282) $1,064 (120 @ $21.282) (220 @ $23.427) d (160 @ $23.427) $3,748 (60 @ $23.427) $7,584

(100 @ $21) $2,100

( 75 @ $24) $1,800 (–15 @ $24) ($ 360) (100 @ $26) $2,600

$4,950 ÷ 250 = $19.80 $3,978 ÷ 185 = $21.503

(i)

Balance $2,850 $4,950 $1,980 $2,178 $3,978 $3,618 $2,554 $5,154 $1,406

$3,618 ÷ 170 = $21.282 $5,154 ÷ 220 = $23.427

Cost of goods sold = $7,584. (ii) Ending inventory = $1,406. (iii) Gross profit = $15,850 – $7,584 = $8,266.

(b) FIFO $15,850 7,430 $ 8,420 $ 1,560

Sales Cost of goods sold Gross profit Ending inventory

Moving-Average $15,850 7,584 $ 8,266 $ 1,406

In a period of rising costs, the moving-average cost flow assumption results in the higher cost of goods sold and lower gross profit. FIFO gives the lower cost of goods sold and higher gross profit. On the statement of financial position, FIFO gives the higher ending inventory (representing the most current costs); moving-average gives the lower ending inventory.

6-43

*PROBLEM 6-9A (a) (1)

FIFO Date May 1 4 8

Cost of Goods Sold

Purchases (7 @ $155)

$1,085 (4 @ $155)

(8 @ $170)

(3 @ $155) (2 @ $170) (6 @ $185)

(7 @ $155) (3 @ $155) (3 @ $155) (8 @ $170)

} $1,825

} $805 (6 @ $170)

$1,020

(6 @ $170) (6 @ $185) (3 @ $170) (6 @ $185)

} $2,130 } $1,620

} $880 (4 @ $185)

$ 740

$620

$1,360

12 15

Balance

$1,110

(3 @ $170)

(3 @ $170) (2 @ $185)

(2)

$510

$1,085 $ 465

MOVING-AVERAGE COST Date May 1 4 8 12 15 20 25

Purchases (7 @ $155) (8 @ $170) (6 @ $185)

Cost of Goods Sold

Balance

$1,085 (4 @ $155)

$620

(5 @ $165.91)

$830

(3 @ $175.42) (5 @ $175.42)

$526 $877

$1,360 $1,110

( 7 @ $155) ( 3 @ $155) (11 @ $165.91)* ( 6 @ $165.91) (12 @ $175.42)** ( 9 @ $175.42) ( 4 @ $175.42)

$1,085 $ 465 $1,825 $ 995 $2,105 $1,579 $ 702

*Average-cost = $1,825 ÷ 11 (rounded) **$2,105 ÷ 12

(b) (1) The higher ending inventory is $740 under the FIFO method. (2) The lower ending inventory is $702 under the moving-average method.

6-44

*PROBLEM 6-10A

(a)

February €300,000

Net sales .................................................. Cost of goods sold Beginning inventory ....................... € 4,500 Net purchases................................. €197,800 Add: Freight-in............................... 2,900 Cost of goods purchased .............. 200,700 Cost of goods available for sale .... 205,200 Ending inventory ............................ 25,200 Cost of goods sold .................. 180,000 Gross profit ............................................. €120,000 Gross profit rate =

€120,000 = 40% €300,000

(b) Net sales .............................................................. Less: Estimated gross profit (40% X €260,000) ..................................... Estimated cost of goods sold ............................

€260,000

Beginning inventory ........................................... Net purchases ..................................................... Add: Freight-in ................................................... Cost of goods purchased................................... Cost of goods available for sale ........................ Less: Estimated cost of goods sold ................. Estimated total cost of ending inventory ......................................................... Less: Inventory not lost (30% X €64,200) ............................................... Estimated inventory lost in fire (70% X €64,200) ..............................................

€ 25,200

104,000 €156,000 €191,000 4,000 195,000 220,200 156,000 64,200 19,260 € 44,940

6-45

*PROBLEM 6-11A (a)

Sporting Goods Cost

Beginning inventory Purchases Purchase returns Purchase discounts Freight-in Goods available for sale Net sales Ending inventory at retail

Jewelry and Cosmetics

Retail

$ 47,360 $ 74,000 675,000 1,066,000 (26,000) (40,000) (12,360) 9,000 $693,000 1,100,000 (1,010,000) $ 90,000

Cost

$ 39,440 $ 62,000 741,000 1,158,000 (12,000) (20,000) (2,440) 14,000 $780,000 1,200,000 (1,150,000) $ 50,000

Cost-to-retail ratio: Sporting Goods—$693,000 ÷ $1,100,000 = 63%. Jewelry and Cosmetics—$780,000 ÷ $1,200,000 = 65%. Estimated ending inventory at cost: $90,000 X 63% = $56,700—Sporting Goods. $50,000 X 65% = $32,500—Jewelry and Cosmetics. (b) Sporting Goods—$85,000 X 60% = $51,000. Jewelry and Cosmetics—$54,000 X 64% = $34,560.

6-46

Retail

*PROBLEM 6-12A Cost of Goods Available for Sale Date Explanation October 1 Beginning Inventory 9 Purchase 17 Purchase 25 Purchase Total

Units 60 120 70 80 330

Ending Inventory in Units: Units available for sale Sales (100 + 65 + 120) Units remaining in ending inventory

330 285 45

Unit Cost €24 26 27 28

Total Cost €1,440 3,120 1,890 2,240 €8,690

LIFO Ending Inventory October 1 45 @ €24 = €1,080

6-47

PROBLEM 6-1B

(a)

The sale will be recorded on February 26. The goods (cost, $800) should be excluded from Banff’s February 28 inventory.

(b)

Banff owns the goods once they are shipped on February 26. Include inventory of $480.

(c)

Include $720 in inventory.

(d)

Exclude the items from Banff inventory. Title remains with the consignor.

(e)

Title of the goods does not transfer to Banff until March 2. Exclude this amount from the February 28 inventory.

(f)

Title to the goods transferred to the customer on February 28. The $200 cost should be excluded from Banff’s February 28 inventory.

6-48

PROBLEM 6-2B

(a) Date Oct. 1 3 9 19 25

COST OF GOODS AVAILABLE FOR SALE Explanation Units Unit Cost Beginning Inventory 2,000 £7 Purchase 3,000 8 Purchase 5,500 9 Purchase 4,000 10 Purchase 2,000 11 Total 16,500

(b)

Total Cost £ 14,000 24,000 49,500 40,000 22,000 £149,500

FIFO (1)

Ending Inventory Unit Date Units Cost Oct. 25 2,000 £11 19 1,000 10 3,000*

Total Cost £22,000 10,000 £32,000

(2) Cost of Goods Sold Cost of goods available for sale £149,500 Less: Ending inventory 32,000 Cost of goods sold £117,500

*16,500 – 13,500 = 3,000 Date Oct. 1 3 9 19

Proof of Cost of Goods Sold Units Unit Cost Total Cost 2,000 £7 £14,000 3,000 8 24,000 5,500 9 49,500 3,000 10 30,000 13,500 £117,500

6-49

PROBLEM 6-2B (Continued) AVERAGE COST (1) Ending Inventory (2) Cost of Goods Sold £149,500 ÷ 16,500 = £9.0606 Cost of goods available for sale £149,500 Units Unit Cost Total Cost Less: Ending inventory 27,182 3,000 £9.0606 £27,182 Cost of goods sold £122,318 Proof of Cost of Goods Sold 13,500 units X £9.0606 = $122,318 (c) (1) FIFO results in the higher inventory amount for the statement of financial position, £32,000. (2) Average-cost results in the higher cost of goods sold, £122,317.

6-50

PROBLEM 6-3B

(a) Date 1/1 3/15 7/20 9/4 12/2

COST OF GOODS AVAILABLE FOR SALE Explanation Units Unit Cost Beginning Inventory 100 $21 Purchase 300 24 Purchase 200 25 Purchase 300 28 Purchase 100 30 Total 1,000

(b)

Total Cost $ 2,100 7,200 5,000 8,400 3,000 $25,700

FIFO (1) Date 12/2 9/4

Ending Inventory Unit Units Cost 100 $30 200 28 300

Total Cost $3,000 5,600 $8,600

(2) Cost of Goods Sold Cost of goods available for sale $25,700 Less: Ending inventory 8,600 Cost of goods sold $17,100

Proof of Cost of Goods Sold Unit Total Date Units Cost Cost 1/1 100 $21 $ 2,100 3/15 300 24 7,200 7/20 200 25 5,000 9/4 100 28 2,800 700 $17,100

6-51

PROBLEM 6-3B (Continued) AVERAGE COST (1) Ending Inventory (2) Cost of Goods Sold $25,700 ÷ 1,000 = $25.70 Cost of goods available for sale $25,700 Units Unit Cost 7,710 Total Cost Less: Ending inventory 300 $25.70 $7,710 Cost of goods sold $17,990 Proof of Cost of Goods Sold 700 units X $25.70 = $17,990

(c) (1) FIFO results in the higher inventory amount, $8,600, as shown in (b) above. (2) Average-cost produces the higher cost of goods sold, $17,990 as shown in (b) above.

6-52

PROBLEM 6-4B (a)

MUNICH COMPANY Condensed Income Statements For the Year Ended December 31, 2014

Sales revenue ......................................... Cost of goods sold Beginning inventory ........................ Cost of goods purchased ................ Cost of goods available for sale ..... Ending inventory.............................. Cost of goods sold .......................... Gross profit ............................................. Operating expenses ............................... Income before income taxes.................. Income tax expense (36%) ..................... Net income .............................................. a

FIFO

Averagecost

€780,000

16,000 480,500 496,500 40,500a 456,000 324,000 130,000 194,000 69,840 €124,160

16,000 480,500 496,500 36,690b 459,810 320,190 130,000 190,190 68,468 €121,722

15,000 X €2.70 = €40,500. €496,500 ÷ 203,000=€2.446 per unit; 15,000 × €2.446=€36,690

(b) (1) The FIFO method produces the more meaningful inventory amount for the statement of financial position because the units are costed at the most recent purchase prices. (2) The FIFO method is more likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence. (3) There will be €1,372 additional cash available under average-cost because income taxes are €68,468 under average-cost and €69,840 under FIFO.

6-53

PROBLEM 6-5B

(a) Cost of Goods Available for Sale Date Explanation June 1 Beginning Inventory June 4 Purchase June 18 Purchase June 18 Purchase return June 28 Purchase Total Ending Inventory in Units: Units available for sale Sales (110 – 15 + 60) Units remaining in ending inventory

250 155 95

Units 40 135 55 (10) 30 250

Date June 10 11 25

Unit Cost $40 43 46 46 50

Total Cost $ 1,600 5,805 2,530 (460) 1,500 $10,975

Sales Revenue Unit Units Price Total Sales 110 $70 $ 7,700 (15) 70 (1,050) 60 75 4,500 155 $11,150

(1) FIFO (i) Ending Inventory June 28 30 @ $50 18 45 @ $46 4 20 @ $43 95 (iii) Gross Profit Sales revenue Cost of goods sold Gross profit

6-54

$1,500 2,070 860 $4,430

$11,150 6,545 $ 4,605

(ii) Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$10,975 4,430 $ 6,545

(iv) Gross Profit Rate Gross profit $ 4,605 = 41.3% Net sales $11,150

PROBLEM 6-5B (Continued) (2) Average-Cost Weighted-average cost per unit:

Cost of goods available for sale Units available for sale $10,975 = $43.90 250

(i) Ending Inventory 95 units @ $43.90

(iii) Gross Profit Sales revenue Cost of goods sold Gross profit

$4,170.50

$11,150.00 6,804.50 $ 4,345.50

(ii) Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold

$10,975.00 4,170.50 $ 6,804.50

(iv) Gross Profit Rate Gross profit $ 4,345.50 = 39% Net sales $11,150.00

(b) In this period of rising prices, average-cost gives the higher cost of goods sold and the lower gross profit. FIFO gives the lower cost of goods sold and the higher gross profit.

6-55

PROBLEM 6-6B (a)

GAS GUZZLERS Income Statement (partial) For the Year Ended December 31, 2014

Sales revenue Beginning inventory Purchasesb Cost of goods available for sale Ending inventoryc Cost of goods sold Gross profit

(1) Specific Identification $9,185 1,320 6,505 7,825 2,500 5,325 $3,860

(2) FIFO $9,185 1,320 6,505

(3) Averagecost $9,185 1,320 6,505

7,825 2,720 5,105 $4,080

7,825 2,450 5,375 $3,810

(a)

(2,200 @ $1.05) + (5,500 @ $1.25) (2,500 @ $.65) + (4,000 @ $.72) + (2,500 @ $.80) (c) Specific identification ending inventory consists of: (b)

Beginning inventory (2,200 liters – 1,100 – 450) 650 @ $.60 March 3 purchase (2,500 liters – 1,100 – 850) 550 @ $.65 March 10 purchase (4,000 liters – 2,900) 1,100 @ $.72 March 20 purchase (2,500 liters – 1,300) 1,200 @ $.80 3,500 liters

$ 390.00 357.50 792.00 960.00 $2,499.50

FIFO ending inventory consists of: March 20 purchase March 10 purchase

2,500 @ $.80 1,000 @ $.72 3,500 liters

$2,000 720 $2,720

Average-cost ending inventory consists of: 3,500 liters @ $.70 = $2,450 Weighted-average cost per liter:

7,825 . = $.70 per liter (2,200 + 2,500 + 4,000 + 2,500)

(b) Companies can choose a cost flow method that produces the highest possible cost of goods sold and lowest gross profit to justify price increases. In this example, Average-cost produces the lowest gross profit and best support to increase selling prices. 6-56

PROBLEM 6-7B (a)

AAR CO. Condensed Income Statement For the Year Ended December 31, 2014 FIFO Sales revenue ............................................ Cost of goods sold Beginning inventory .......................... Cost of goods purchased .................. Cost of goods available for sale ....... Ending inventory ................................ Cost of goods sold ............................. Gross profit ................................................ Operating expenses .................................. Income before income taxes..................... Income tax expense (32%) ........................ Net income ................................................. a

CHF740,000

Averagecost CHF740,000

47,000 532,000 579,000 140,000a 439,000 301,000 140,000 161,000 51,520 CHF109,480

47,000 532,000 579,000 131,600b 447,400 292,600 140,000 152,600 48,832 CHF103,768

(25,000 @ CHF5.60) = CHF140,000. (CHF579,000 ÷ 110,000 units=CHF5.264 per unit; 25,000 @ CHF5.264=CHF131,600

(b) Answers to questions: (1) The FIFO method produces the more meaningful inventory amount for the statement of financial position because the units are costed at the most recent purchase prices. (2) The FIFO method is more likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence. (3) There will be CHF2,688 additional cash available under averagecost because income taxes are CHF48,832 under average-cost and CHF51,520 under FIFO.

6-57

*PROBLEM 6-8B (a) Sales: January 8 January 10 (return) January 20

(1) FIFO Date

110 units @ $28 (10 units @ $28) 80 units @ $32 180 units

Purchases

$3,080 (280) 2,560 $5,360

Cost of Goods Sold

January 1 January 5

(150 @ $17) $2,550 (100 @ $14) ( 10 @ $17) (–10 @ $17)

January 8 January 10 January 15

( 55 @ $19) $1,045

January 16

( –5 @ $19)($

($ 170)

95)

January 20 January 25

} $1,570

(80 @ $17)

$1,360

( 30 @ $22) $ 660

Balance (100 @ $14) (100 @ $14) (150 @ $17)

$1,400

} $3,950

(140 @ $17)

$2,380

(150 @ $17) (150 @ $17) ( 55 @ $19) (150 @ $17) ( 50 @ $19) ( 70 @ $17) ( 50 @ $19) ( 70 @ $17) ( 50 @ $19) ( 30 @ $22)

$2,550

} $3,595 } $3,500 } $2,140

}

$2,800

$2,760

(i) Cost of goods sold = $2,760. (ii) Ending inventory = $2,800. (iii) Gross profit = $5,360 – $2,760 = $2,600.

6-58

*PROBLEM 6-8B (Continued) (2) Moving-Average Cost Date January 1 January 5 January 8 January 10 January 15 January 16 January 20 January 25

Purchases

Cost of Goods Sold

(150 @ $17) $2,550 (110 @ $15.80) (–10 @ $15.80)

$1,738 ($ 158)

( 80 @ $16.60)

$1,328

( 55 @ $19) $1,045 ( –5 @ $19) ($ 95) ( 30 @ $22) $ 660

Balance (100 @ $14) (250 @ $15.80)a (140 @ $15.80) (150 @ $15.80) (205 @ $16.659)b (200 @ $16.60)c (120 @ $16.60) (150 @ $17.68)d

$1,400 $3,950 $2,212 $2,370 $3,415 $3,320 $1,992 $2,652

$2,908 *rounded a $3,950 ÷ 250 = $15.80 b $3,415 ÷ 205 = $16.659

$3,320 ÷ 200 = $16.60 $2,652 ÷ 150 = $17.68

(i) Cost of goods sold = $2,908. (ii) Ending inventory = $2,652. (iii) Gross profit = $5,360 – $2,908 = $2,452.

(b) Sales Cost of goods sold Gross profit Ending inventory

FIFO $5,360 2,760 $2,600 $2,800

Moving-Average Cost $5,360 2,908 $2,452 $2,652

6-59

*PROBLEM 6-9B (a) (1) FIFO Date July

Purchases 1 6 11

(5 @ HK$120)

Cost of Goods Sold

HK$ 600 (3 @ HK$120)

(6 @ HK$136)

HK$ 816 (2 @ HK$120) (2 @ HK$136)

14 21

HK$360

(8 @ HK$147)

} HK$512

HK$1,176

(4 @ HK$136) (2 @ HK$147)

(2)

} HK$838

(5 @ HK$120) (2 @ HK$120) (2 @ HK$120) (6 @ HK$136)

HK$ 600 HK$ 240

} HK$1,056

(4 @ HK$136) (4 @ HK$136) (8 @ HK$147)

HK$ 544

} HK$1,720

(6 @ HK$147)

HK$

882

MOVING-AVERAGE COST Date July

1 6 11 14 21 27

Purchases (5 @ HK$120) (6 @ HK$136) (8 @ HK$147)

Cost of Goods Sold

HK$ 600 (3 @ HK$120)

HK$360

(4 @ HK$132)

HK$528

(6 @ HK$142)

HK$852

HK$ 816 HK$1,176

* HK$1,056 ÷ 8 = HK$132 ** HK$1,704 ÷ 12 = HK$142 (b) The higher ending inventory is HK$882 under the FIFO method.

6-60

Balance

Balance ( 5 @ HK$120) ( 2 @ HK$120) ( 8 @ HK$132)* ( 4 @ HK$132) (12 @ HK$142)** ( 6 @ HK$142)

HK$ 600 HK$ 240 HK$1,056 HK$ 528 HK$1,704 HK$ 852

*PROBLEM 6-10B

(a) Net sales ...................................................... Cost of goods sold Beginning inventory ............................ Purchases ............................................ $368,000 Less: Purchase returns and allowances ................................ 13,300 Purchase discounts ................. 8,500 Add: Freight-in ................................... 4,800 Cost of goods purchased.................... Cost of goods available for sale ......... Ending inventory ................................. Cost of goods sold ....................... Gross profit.................................................. Gross profit rate =

November $600,000 $ 30,000

351,000 381,000 33,000 348,000 $252,000

$252,000 = 42% $600,000

(b) Net sales ................................................ Less: Estimated gross profit (42% X $700,000) ........................ Estimated cost of goods sold ............... Beginning inventory .............................. Purchases .............................................. Less: Purchase returns and allowances .................................. $14,900 Purchase discounts ................... 9,500 Net purchases ........................................ Freight-in ................................................ Cost of goods purchased...................... Cost of goods available for sale ........... Less: Estimated cost of goods sold.............................................. Estimated inventory lost in fire.............

$700,000 294,000 $406,000 $ 33,000 $420,000 24,400 395,600 5,900 401,500 434,500 406,000 $ 28,500

6-61

*PROBLEM 6-11B (a)

Hardcovers Cost Beginning inventory Purchases Freight-in Purchase discounts Goods available for sale Net sales Ending inventory at retail

€ 420,000 2,094,000 26,000 (44,000) €2,496,000

Retail

Cost

Retail

€ 700,000 € 280,000 € 360,000 3,200,000 1,155,000 1,540,000 12,000 (22,000) 3,900,000 €1,425,000 1,900,000 3,100,000 1,570,000 € 800,000 € 330,000

Cost-to-retail ratio: Hardcovers—€2,496,000 ÷ €3,900,000 = 64%. Paperbacks—€1,425,000 ÷ €1,900,000 = 75%. Estimated ending inventory at cost: €800,000 X 64% = €512,000—Hardcovers. €330,000 X 75% = €247,500—Paperbacks. (b) Hardcovers—€790,000 X 65% = €513,500. Paperbacks—€335,000 X 77% = €257,950.

6-62

Paperbacks

*PROBLEM 6-12B Cost of Goods Available for Sale Date Explanation June 1 Beginning Inventory June 4 Purchase June 18 Purchase June 18 Purchase return June 28 Purchase Total Ending Inventory in Units: Units available for sale Sales (110 – 15 + 60) Units remaining in ending inventory

Units 40 135 55 (10) 30 250

Unit Cost $40 43 46 46 50

Total Cost $ 1,600 5,805 2,530 (460) 1,500 $10,975

250 155 95

LIFO Ending Inventory June 1 40 @ $40 $1,600 4 55 @ 43 2,365 95 $3,965

6-63

COMPREHENSIVE PROBLEM SOLUTION

(a)

Dec. 3 5

17 22

6-64

Inventory (4,000 X $0.72) ........................... Accounts Payable ...............................

2,880

Accounts Receivable (4,400 X $0.92) ........ Sales Revenue ....................................

4,048

Cost of Good Sold ...................................... Inventory (3,000 X $0.65) + (1,400 X $0.72) ..................................

2,958

Sales Returns and Allowances ................. Accounts Receivable..........................

184

Inventory ..................................................... Cost of Good Sold ..............................

144

Inventory (2,200 X $0.78) ........................... Cash ....................................................

1,716

Accounts Receivable (2,000 X $0.95) ........ Sales Revenue ....................................

1,900

Cost of Goods Sold (2,000 X $0.72) .......... Inventory .............................................

1,440

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

400

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

200

2,880 4,048

2,958 184 144 1,716 1,900 1,440 400

200

COMPREHENSIVE PROBLEM SOLUTION (Continued) (b)

General Ledger

Bal. Bal. Bal.

Bal.

Cash 4,650 2,934 Inventory 1,950 2,880 144 1,716 2,292 Accounts Payable Bal. Bal.

1,716

2,958 1,440

3,000 2,880 5,880

Salaries and Wages Payable 400 Bal. 400 Sales Revenue

Bal.

Cost of Goods Sold 2,958 1,440 4,254

Bal.

Depreciation Expense 200 200

4,048 1,900 5,948 144

Bal.

Accounts Receivable 3,900 4,048 1,900 9,664

Bal.

Equipment 21,000

Bal.

184

Accumulated Depreciation—Equipment Bal. 1,500 200 Bal. 1,700 Share Capital—Ordinary Bal. 20,000 Retained Earnings Bal.

7,000

Salaries and Wages Expense 400 Bal. 400 Sales Returns & Allowances 184 Bal. 184

6-65

COMPREHENSIVE PROBLEM SOLUTION (Continued) (c)

SEATTLE COMPANY Adjusted Trial Balance December 31, 2014 Cash .............................................................. Accounts Receivable ................................... Inventory ....................................................... Equipment..................................................... Accumulated Depreciation—Equipment .... Accounts Payable ........................................ Salaries and Wages Payable ....................... Share Capital—Ordinary .............................. Retained Earnings ........................................ Sales Revenue .............................................. Sales Returns & Allowances ....................... Cost of Goods Sold ...................................... Salaries and Wages Expense ...................... Depreciation Expense ..................................

(d)

Cr.

$ 1,700 5,880 400 20,000 7,000 5,948 184 4,254 400 200 $40,928

$40,928

SEATTLE COMPANY Income Statement For the Month Ending December 31, 2014 Sales revenue ............................................. Less: Sales returns and allowances ........ Net sales ..................................................... Cost of goods sold..................................... Gross profit ................................................ Operating expenses Salaries and wages expense ............. Depreciation expense ......................... Net income..................................................

6-66

Dr. $ 2,934 9,664 2,292 21,000

$5,948 184 5,764 4,254 1,510 $400 200

600 $ 910

COMPREHENSIVE PROBLEM SOLUTION (Continued) SEATTLE COMPANY Statement of Financial Position December 31, 2014 Assets Property, plant, and equipment Equipment .............................................. Less: Accumulated depreciation— Equipment .................................. Current assets Inventory ................................................ Accounts receivable.............................. Cash ....................................................... Total assets ...................................................

$21,000 1,700 2,292 9,664 2,934

$19,300

14,890 $34,190

Equity and liabilities Equity Share capital—ordinary ........................ Retained earnings ($7,000 + $910) ....... Current liabilities Accounts payable .................................. Salaries and wages payable ................. Total equity and liabilities ............................

$20,000 7,910 5,880 400

$27,910

6,280 $34,190

6-67

COMPREHENSIVE PROBLEM SOLUTION (Continued) (e) FIFO Method

Beg. Inventory Dec. 3 purchase. Dec. 17 purchase.

Units 3,000 4,000 2,200 9,200

Unit Cost $0.65 $0.72 $0.78

Cost of Goods Available for Sale $1,950 2,880 1,716 $6,546

Ending Inventory

Cost of Goods Sold

Dec. 17 2,200 X $0.78 = $1,716 Dec. 3 800* X $0.72 = 576 3,000 $2,292

Cost of goods available for sale Less: Ending inventory Cost of goods sold

*(9,200 – 4,400 + 200 – 2,000) – 2,200 (f)

Average-cost Method Weighted-average cost per unit

6-68

$6,546 = $.712/unit 9,200 units

Ending Inventory

Cost of Goods Sold

3,000 X $0.712 = $2,136

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$6,546 2,136 $4,410

$6,546 2,292 $4,254

CCC6

CONTINUING COOKIE CHRONICLE

(a) Date Feb. 1 Feb. 2 Mar. 2 Apr. 1 May 4

COST OF GOODS AVAILABLE FOR SALE Explanation Units Unit Cost Total Cost Beginning Inventory 3 $595 $1,785 Purchase 2 600 1,200 Purchase 1 618 618 Purchase 2 612 1,224 Purchase 3 625 1,875 Total 11 $6,702 FIFO

Ending Inventory Date May 4 Apr. 1

Total Cost $1,875 612 $2,487

Units Unit Cost 3 $625 1 612 4

Cost of Goods Sold Cost of goods available for sale $6,702 Less: Ending inventory 2,487 Cost of goods sold $4,215

Gross Profit Sales Less: Cost of goods sold Gross profit

Gross Profit Rate $3,835 $8,050

$8,050 4,215 $3,835

47.64%

Average Cost Ending Inventory

Cost of Goods Sold Cost of goods available for sale $6,702.00 Less: Ending inventory 2,437.09 Cost of goods sold $4,264.91

$6,702/11 = $609.273 Units 4

Total Unit Cost Cost $609.273 $2,437.09 Gross Profit

Sales $8,050.00 Less: Cost of goods sold 4,264.91 Gross profit $3,785.09 .

Gross Profit Rate $3,785.09 $8,050.00

47.02%

6-69

BYP 6-1

(a) Inventories

FINANCIAL REPORTING PROBLEM

December 31, 2010 W13,364,524 million

December 26, 2009 W9,839,329million

(b) Won change in inventories between 2009 and 2010: W13,364,524 – W9,839,329 = W3,525,195 million increase Percent change in inventories between 2009 and 2010: W3,525,195 ÷ W9,839,329 = 35.8% increase 2010 inventory as a percent of current assets: W13,364,524 ÷ W61,402,589 = 21.8% (c) Inventories are valued at lower of cost or net realizable value. Cost is determined using the average-cost method. (See Note 2.8). (d)

Samsung (in millions) Cost of Goods Sold

2010 W102,666,824

2010 cost of goods sold as a percent of sales: W102,666,824 ÷ W154,630,328 = 66.4%

6-70

2009 W94,594,863

BYP 6-2

COMPARATIVE ANALYSIS PROBLEM

(a) (1) Inventory turnover: Nestlé:

CHF45,849 ÷

CHF7,925 + CHF7,734 2

Zetar:

£107,677 ÷

£16,453 + £16,039 = 6.6 times 2

= 5.9 times

(2) Days in inventory: Nestlé: Zetar:

365 ÷ 5.9 = 62 days 365 ÷ 6.6 = 55 days

(b) Zetar’s turnover of 6.6 times is approximately 12% higher than Nestlé’s 5.9 times, resulting in days in inventory of 55 versus 62. Thus, Zetar’s inventory control is more effective.

6-71

BYP 6-3

REAL-WORLD FOCUS

The following responses are based on the 2011 annual report: (a) $1,486,000,000, as of July 30, 2011. (b) $1,486,000,000 – $1,327,000,000 = $159,000,000 increase. (c) 64.7 percent ($962 ÷ $1,486). (d) Lower of cost or market using standard cost, which approximates FIFO.

6-72

BYP 6-4

DECISION-MAKING ACROSS THE ORGANIZATION

(a) (1) Sales January 1–March 31.................... Cash sales 4/1–4/10 ($20,500 X 40%) ... Acknowledged credit sales 4/1–4/10.... Sales made but unacknowledged ........ Sales as of April 10 ...............................

$180,000 8,200 37,000 5,600 $230,800

(2) Purchases January 1–March 31 ........... Cash purchases 4/1–4/10...................... Credit purchases 4/1–4/10 .................... Less: Items in transit ........................... Purchases as of April 10.......................

$ 94,000 4,200

*(b) Net sales ........................................................ Cost of goods sold Inventory, January 1 ............................. Cost of goods purchased ..................... Cost of goods available for sale .......... Inventory, December 31........................ Cost of goods sold ............................... Gross profit ................................................... Gross profit rate ........................................... Average gross profit rate .....................

$12,400 1,900

10,500 $108,700

2013 $600,000

2012 $480,000

60,000 404,000 464,000 80,000 384,000 $216,000

40,000 346,400 386,400 60,000 326,400 $153,600

36%

32% 34%

*(c) Sales (from (a) (1)) ........................................ Less: Gross profit ($230,800 X 34%) .......... Cost of goods sold .......................................

$230,800 78,472 $152,328

Inventory, January 1 ..................................... Purchases (from (a) (2))................................ Cost of goods available for sale .................. Cost of goods sold ....................................... Estimated inventory at time of fire .............. Less: Inventory salvaged ............................ Estimated inventory loss .............................

$ 80,000 108,700 188,700 152,328 36,372 17,000 $ 19,372

6-73

BYP 6-5

COMMUNICATION ACTIVITY

MEMO To: From:

Kathy McDonnell, President Student

Re:

2013 ending inventory error

As you know, 2013 ending inventory was overstated by $1 million. Of course, this error will cause 2013 net income to be incorrect because the ending inventory is used to compute 2013 cost of goods sold. Since the ending inventory is subtracted in the computation of cost of goods sold, an overstatement of ending inventory results in an understatement of cost of goods sold and therefore an overstatement of net income. Unfortunately, unless corrected, this error will also affect 2014 net income. The 2013 ending inventory is also the 2014 beginning inventory. Therefore, 2014 beginning inventory is also overstated, which causes an overstatement of cost of goods sold and an understatement of 2014 net income.

6-74

BYP 6-6

ETHICS CASE

(a) The higher cost of the items ordered, received, and on hand at yearend will increase the weighted average cost per unit used to calculate cost of goods sold, thereby lowering current year’s income and income taxes. If the purchase at year-end had been made in the next year, the next year’s cost of goods sold would have absorbed the higher cost. Next year’s income will be increased if unit purchases (next year) are less than unit sales (next year). This is because the lower costs carried from the earlier year as inventory will be charged to next year’s cost of goods sold. Therefore, next year’s income taxes will increase. (b) No. The president would not have given the same directive because the purchase under FIFO would have had no effect on net income of the current year. (c) The accountant has no grounds for not ordering the goods if the president insists. The purchase is legal and ethical.

6-75

GAAP EXERCISES GAAP6-1 Key Similarities are (1) the definitions for inventory are essentially the same, (2) the guidelines on who owns the goods—goods in transit, consigned goods, and the costs to include in inventory are essentially accounted for the same under IFRS and U.S. GAAP; (3) use of specific identification cost flow assumption, where appropriate; (4) unlike property, plant, and equipment, IFRS does not permit the option of valuing inventories at fair value. Key differences are related to (1) the LIFO cost flow assumption—U.S. GAAP permits the use of LIFO for inventory valuation, but IFRS prohibits its use. FIFO and average-cost are the only two acceptable cost flow assumptions permitted under IFRS; (2) lower-of-cost-or-market test for inventory valuation—IFRS defines market as net realizable value. U.S. GAAP on the other hand defines market as replacement cost; (3) inventory write-downs—under U.S. GAAP, if inventory is written down under the lower-of-cost-or-market valuation, the new basis is now considered its cost. As a result, the inventory may not be written back up to its original cost in a subsequent period. Under IFRS, the write-down may be reversed in a subsequent period up to the amount of the previous writedown. Both the write-down and any subsequent reversal should be reported on the income statement; (4) IFRS requires pre-harvest inventories of agricultural products to be reported at fair value less cost of disposal. GAAP requires these items to be recorded at cost; (5) The requirements for accounting and reporting for inventories are more principles-based under IFRS. That is, U.S. GAAP provides more detailed guidelines for inventory accounting. GAAP6-2 Under IFRS, LaTour’s inventory turnover ratio is computed as follows: Cost of Goods Sold/Average Inventory €578/ €154 = 3.75 or approximately 97 days (365 ÷ 3.75). Difficulties in comparison to a company using U.S. GAAP could arise if the U.S. company uses the LIFO cost flow assumption, which is prohibited under IFRS. Generally, in times of rising prices, LIFO results in a lower inventory balance reported on the balance sheet (assumes more recently purchased items are sold first). Thus, the U.S. GAAP company will report higher inventory turnover ratios. The LIFO reserve can be used to adjust the reported LIFO numbers to FIFO and to permit an “apples to apples” comparison.

6-76

GAAP6-3 Item No. AB TRX NWA SGH

Cost $ 1,700 2,200 7,800 3,000 $14,700

Market $ 1,400 2,300 7,100 3,700 $14,500

LCM $ 1,400 2,200 7,100 3,000 $13,700

6-77

GAAP FINANCIAL REPORTING PROBLEM GAAP6-4 (a)

(b)

Inventories:

2010

2009

Finished goods and work-in-progress

$36,935

$35,570

Dollar amount of inventory change: ($36,935 - $35,570) = $1,365 Percent change in inventories from 2009 to 2010: $36,935 - $35,570 = 3.8% $35,570 Inventory as a percent of current assets in 2010: $36,935 $237,591

= 15.5%

(c)

(Product) cost of goods sold

2010

2009

2008

$348,313

$318,645

$333,314

(Product) cost of goods sold as percent of net product sales in 2010: $348,313 = 67.4% $517,149

6-78

CHAPTER 7 Fraud, Internal Control, and Cash ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief Exercises

Define fraud and internal control.

1, 2, 3, 4

1, 2, 3

Identify the principles of internal control activities.

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

Explain the applications of internal control principles to cash receipts.

A Problems

B Problems

1, 2, 3, 5, 6

1A, 6A

1B, 6B

2, 5, 6

1B, 6B

3, 4, 5, 6

1A, 6A

7, 8

9, 10, 11, 12, 13

3A, 4A, 5A

3B, 4B, 5B, 6B

Do It!

Exercises

6, 13, 14, 15

5, 6, 7

Explain the applications of internal control principles to cash disbursements.

16, 17, 18, 19

Describe the operation of a petty cash fund.

Indicate the control features of a bank account.

Prepare a bank reconciliation.

20, 23, 24, 25

11, 12 13, 14

Explain the reporting of cash.

12, 26

7-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

7-2

Description

Difficulty Level

Time Allotted (min.)

Identify internal control principles over cash disbursements.

Simple

20–30

Journalize and post petty cash fund transactions.

Simple

20–30

Prepare a bank reconciliation and adjusting entries.

Simple

20–30

Prepare a bank reconciliation and adjusting entries from detailed data.

Moderate

40–50

Prepare a bank reconciliation and adjusting entries.

Moderate

30–40

Identify internal control weaknesses in cash receipts and cash disbursements.

Complex

35–45

Identify internal control weaknesses over cash receipts.

Simple

20–30

Journalize and post petty cash fund transactions.

Simple

20–30

Prepare a bank reconciliation and adjusting entries.

Simple

20–30

Prepare a bank reconciliation and adjusting entries from detailed data.

Moderate

40–50

Prepare a bank reconciliation and adjusting entries.

Moderate

30–40

Prepare comprehensive bank reconciliation with theft and internal control deficiencies.

Complex

40–50

WEYGANDT FINANCIAL ACCOUNTING, IFRS EDITION, 2e CHAPTER 7 FRAUD, INTERNAL CONTROL, AND CASH Number

Difficulty

Time (min.)

BE1

Simple

2–4

BE2

Simple

2–4

BE3

Simple

4–6

BE4

Simple

3–5

BE5

Simple

4–6

BE6

Simple

4–6

BE7

Simple

2–4

BE8

Simple

4–6

BE9

Simple

4–6

BE10

Simple

2–4

BE11

Simple

3–5

BE12

Simple

3–5

BE13

Simple

2–4

BE14

Simple

2–4

BE15

Simple

2–4

DI1

Moderate

6–8

DI2

Simple

4–6

DI3

Simple

4–6

DI4

Simple

2–4

EX1

Simple

8–10

EX2

2, 3

Moderate

8–10

EX3

2, 4

Moderate

8–10

EX4

Moderate

12–15

EX5

2–4

Simple

6–8

EX6

2–4

Simple

6–8

EX7

Simple

8–10

EX8

Simple

6–8

EX9

Simple

8–10

EX10

Simple

3–5

7-3

FRAUD, INTERNAL CONTROL, AND CASH (Continued) Number

Difficulty

Time (min.)

EX11

Simple

10–12

EX12

Simple

12–15

EX13

Moderate

10–12

EX14

C, AP

Simple

8–10

P1A

2, 4

Simple

20–30

P2A

Simple

20–30

P3A

Simple

20–30

P4A

Moderate

40–50

P5A

Moderate

30–40

P6A

2–4

Complex

35–45

P1B

2, 3

Simple

20–30

P2B

Simple

20–30

P3B

Simple

20–30

P4B

Moderate

40–50

P5B

Moderate

30–40

P6B

2–4, 7

Complex

40–50

BYP1

2, 8

Simple

10–15

BYP2

Simple

8–12

BYP3

2, 7

Simple

10–15

BYP4

Moderate

15–20

BYP5

Simple

10–15

BYP6

Simple

10–15

7-4

Learning Objective

Knowledge

Comprehension

Application

Analysis

Synthesis

Evaluation

1. Define fraud and internal control.

Q7-1 Q7-2 Q7-3 Q7-4

BE7-1 BE7-2 BE7-3

2. Identify the principles of internal control activities.

Q7-5 Q7-6 Q7-7 Q7-8 Q7-9

Q7-10 E7-1 Q7-11 E7-5 BE7-4 E7-6 DI7-1 P7-1A

3. Explain the applications of internal control principles to cash receipts.

Q7-6 Q7-13 Q7-14 Q7-15

BE7-5 BE7-6 DI7-2 BE7-7 E7-5 E7-6

E7-2 P7-6A P7-1B P7-6B

Q7-16 Q7-17 BE7-8

E7-5 E7-6 P7-1A

E7-3 E7-4 P7-6A

E7-2 E7-3 P7-6A P7-1B

P7-6B

4. Explain the applications of internal control principles to cash disbursements.

Q7-18 Q7-19

5. Describe the operation of a petty cash fund.

Q7-21

6. Indicate the control features of a bank account.

Q7-22 BE7-10

7. Prepare a bank reconciliation.

Q7-20 Q7-24

P7-6B

BE7-9 E7-8 DI7-3 P7-2A E7-7 P7-2B

Q7-23 Q7-25 BE7-11 BE7-12

DI7-4 BE7-13 BE7-14 E7-10

8. Explain the reporting of cash.

Q7-26 BE7-15

E7-14 Q7-12 E7-14

Broadening Your Perspective

Financial Reporting

E7-9 E7-11 E7-12 E7-13

P7-3A P7-4A P7-5A P7-3B

P7-4B P7-5B

Comparative Analysis Decision Making Across the Organization

P7-6B

Real-World Focus Communication Ethics Case

BLOOM’ S TAXONOMY TABLE

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

7-5

ANSWERS TO QUESTIONS 1.

Fraud is dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. An example of fraud that might occur at a bank would be a computer operator embezzling funds by transferring a customer’s deposits into another account.

The three main factors that contribute to employee fraud are opportunity, financial pressure, and rationalization. Opportunities that an employee can take advantage of occur when the workplace lacks sufficient controls to deter and detect fraud. Financial pressure occurs when employees want to lead a lifestyle that they cannot afford on their current salary. Rationalization involves employees justifying fraud because they believe they are underpaid while their employer is making lots of money.

The five components of a good internal control system are: (1) A control environment, (2) Risk assessment, (3) Control activities, (4) Information and communication, and (5) Monitoring. • • • • •

Control environment. Top management must make it clear that the organization values integrity and that unethical activity will not be tolerated. Risk assessment. Companies must identify and analyze the various factors that create risk for the business and must determine how to manage these risks. Control activities. To reduce the occurrence of fraud, management must design policies and procedures to address the specific risks faced by the company. Information and communication. The internal control system must capture and communicate all pertinent information both down and up the organization, as well as communicate information to appropriate external parties. Monitoring. Internal control systems must be monitored periodically for their adequacy. Significant deficiencies need to be reported to top management and/or the board of directors.

Disagree. Internal control is also concerned with the safeguarding of company assets from employee theft, robbery, and unauthorized use.

The principles of internal control are: (a) establishment of responsibility, (b) segregation of duties, (c) documentation procedures, (d) physical controls, (e) independent internal verification, and (f) human resource controls.

This is a violation of the internal control principle of establishing responsibility. In this case, each sales clerk should have a separate cash register or cash register drawer.

The two applications of segregation of duties are: (1) Different individuals should be responsible for related activities. (2) Responsibility for the record keeping for an asset should be separate from the physical custody of that asset.

Documentation procedures contribute to good internal control by providing evidence that transactions and events have occurred and, when signatures (or initials) are added, the documents establish responsibility for the transactions. The prompt transmittal of documents to accounting contributes to recording transactions in the proper period, and the prenumbering of documents helps to ensure that a transaction is not recorded more than once or not at all.

7-6

Questions Chapter 7 (Continued) 9.

Safes, vaults, and locked warehouses contribute to the safeguarding of company assets. Cash registers and time clocks contribute to the accuracy and reliability of the accounting records, and electronic burglary systems and sensors help to safeguard assets.

10.

(a) Independent internal verification involves the review of data prepared by employees. (b) Maximum benefit is obtained from independent internal verification when: (1) The verification is made periodically or on a surprise basis. (2) The verification is done by an employee who is independent of the personnel responsible for the information. (3) Discrepancies and exceptions are reported to a management level that can take appropriate corrective action.

11.

(a) The concept of reasonable assurance rests on the premise that the costs of establishing control procedures should not exceed their expected benefit. (b) The human element is an important factor in a system of internal control. A good system can become ineffective through employee fatigue, carelessness, or indifference. Moreover, internal control may become ineffective as a result of collusion.

12.

Cash should be reported at $18,850 ($6,000 + $850 + $12,000).

13.

Daily cash counts pertain primarily to the principles of segregation of duties, documentation procedures, and independent internal verification. Daily cash counts also involve the establishment of responsibility for performing the counts.

14.

Cash registers are readily visible to the customer. Thus, they prevent the sales clerk from ringing up a lower amount and pocketing the difference. In addition, the customer receives an itemized receipt, and the cash register tape is locked into the register for further verification, providing documentation and enabling independent internal verification.

15.

Two mail clerks contribute to a more accurate listing of mail receipts and to the endorsement of all checks “For Deposit Only.” In addition, two clerks reduce the likelihood of mail receipts being diverted to personal use.

16.

Payment by check contributes to effective internal control over cash disbursements. However, effective control is also possible when small payments are made from petty cash.

17.

The procedure and related principle are:

18.

Procedure

Principle

(1) Treasurer signs checks. (2) Checks imprinted by a machine in indelible ink. (3) Comparing check with approved invoice before signing.

* Establishment of responsibility. * Physical controls. * Independent internal verification.

Physical controls apply to cash disbursements when: (a) blank checks are stored in a safe, and access to the safe is restricted to authorized personnel, and (b) a checkwriting machine and indelible ink are used to imprint amounts on checks. Documentation procedures apply when the company uses prenumbered checks and account for them in sequence, and stamps invoices “paid”.

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7-7

Questions Chapter 7 (Continued) 19.

(a) A voucher system is a network of approvals by authorized individuals acting independently to ensure that all disbursements by check are proper. (b) The internal control principles applicable to a voucher system are: (1) establishment of responsibility, (2) segregation of duties, (3) independent internal verification, and (4) documentation procedures.

20.

Electronic funds transfer is a cash disbursement system that uses wire, telephone, or computers to transfer cash from one location to another.

21.

The activities in a petty cash system and the related principles are: (a) (1) Establishing the fund. * Establishment of responsibility for custody of fund. (2) Making payments from the fund. * Documentation procedures because the custodian must use a prenumbered petty cash receipt. (3) Replenishing the fund. * Independent internal verification because the request for replenishment must be approved before the check is written. (b) Journal entries are required for a petty cash fund when it is established and replenished. Entries are also required when the size of the fund is increased or decreased.

22.

Yes. A bank contributes significantly to internal control over cash because it: (1) safeguards cash on deposit, (2) minimizes the amount of currency that must be kept on hand, and (3) provides a double record of all bank transactions.

23.

The lack of agreement between the balances may be due to either: (1) Time lags—a check written in July does not clear the bank until August. (2) Errors—a check for $110 is recorded by the depositor at $101.

24.

The four steps are: (1) determine deposits in transit, (2) determine outstanding checks, (3) discover any errors made, and (4) trace bank memoranda.

25.

(a) An NSF check occurs when the checkwriter’s bank balance is less than the amount of the check. (b) In a bank reconciliation, a customer’s NSF check is deducted from the balance per books. (c) An NSF check results in an adjusting entry in the company’s books, as a debit to Accounts Receivable and a credit to Cash.

26.

(a) Yes. Cash equivalents are highly liquid investments that can be converted into a specific amount of cash with maturities of three months or less when purchased. Cash equivalents may be reported with cash in the current assets section of the statement of financial position. (b) Cash restricted for a special purpose should be reported as a current or noncurrent asset depending on when the cash is expected to be used.

7-8

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 7-1 1. 2. 3. 4.

Financial Pressure Rationalization Financial Pressure Opportunity

BRIEF EXERCISE 7-2 1. 2. 3.

True. True. False. The three components of the fraud triangle are opportunity, financial pressure, and rationalization.

BRIEF EXERCISE 7-3 The purposes of internal control are to: 1.

Safeguard a company’s assets from employee theft, robbery, and unauthorized use. An application for Preferred Parking is the use of a cash register to safeguard assets.

Enhance the accuracy and reliability of a company’s accounting records by reducing the risk of errors (unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the accounting process. An application for Preferred Parking is preparation of a bank reconciliation.

Increase efficiency of operations. An application is assignment of responsibility to specific employees.

Ensure compliance with laws and regulations. An application is use of cash register tapes to document sales and applicable sales taxes.

All of these purposes are important to the success of any business endeavor.

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7-9

BRIEF EXERCISE 7-4 1. 2. 3.

Segregation of duties. Independent internal verification. Documentation procedures.

BRIEF EXERCISE 7-5 1. 2. 3. 4. 5.

Physical controls. Human resource controls. Independent internal verification. Segregation of duties. Establishment of responsibility.

BRIEF EXERCISE 7-6 1.

Cash ............................................................... Cash Over and Short .................................... Sales Revenue ........................................

6,845.25 46.25

Cash ............................................................... Cash Over and Short .............................. Sales Revenue ........................................

6,919.82

6,891.50 28.32 6,891.50

BRIEF EXERCISE 7-7 Cash ($1,125.74 – $180.00)................................... Cash Over and Short ............................................ Sales Revenue .............................................. BRIEF EXERCISE 7-8 1. 2. 3. 4. 5.

7-10

Documentation procedures. Independent internal verification. Physical controls. Establishment of responsibility. Segregation of duties.

945.74 5.09 950.83

BRIEF EXERCISE 7-9 Mar. 20

Postage Expense.......................................................... Freight-Out.................................................................... Travel Expense ............................................................. Cash Over and Short .................................................... Cash .......................................................................

520 260 100 30 910

BRIEF EXERCISE 7-10 1.

A check provides documentary evidence of the payment of a specified sum of money to a designated payee.

A bank statement provides a double record of a depositor’s bank transactions. It also is used in making periodic independent bank reconciliations.

BRIEF EXERCISE 7-11 1. 2. 3. 4.

Outstanding checks—deducted from cash balance per bank. Bank service charge—deducted from cash balance per books. Collection of note by bank—added to cash balance per books. Deposits in transit—added to cash balance per bank.

BRIEF EXERCISE 7-12 1.

The reconciling items per the books, items (2) and (3) above, will require adjustment on the books of the depositor.

The other reconciling items, deposits in transit and outstanding checks, do not require adjustment by the bank. When these items reach the bank, the bank balance will automatically adjust itself.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

7-11

BRIEF EXERCISE 7-13 Cash balance per bank ..................................................................... Add: Deposits in transit ................................................................... Less: Outstanding checks ............................................................... Adjusted cash balance per bank ......................................................

$7,420 1,620 9,040 762 $8,278

BRIEF EXERCISE 7-14 Cash balance per books ................................................................... Add: Interest earned ......................................................................... Less: Charge for printing company checks ................................... Adjusted cash balance per books ....................................................

€8,900 40 8,940 35 €8,905

BRIEF EXERCISE 7-15 Plano Company should report Cash in Bank and Payroll Bank account as current assets. Plant Expansion Fund Cash should be reported as a non-current asset, assuming the fund is not expected to be used during the next year.

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 7-1 1.

7-12

Violates the control activity of documentation procedures. Source documents should be promptly forwarded to the accounting department so accounting entries can be made. This control activity helps to ensure timely recording of sales transactions and contributes directly to the accuracy and reliability of the accounting records.

DO IT! 7-1 (Continued) 2.

Violates the control activity of segregation of duties. Different individuals should be responsible for related activities, such as these three related purchasing activities. Many abuses could occur: placing orders with friends and getting kickbacks; performing cursory counts and inspections of delivered goods; approving fictitious invoices for payment.

Violates the control activity of establishment of responsibility. Ralph’s Foods would be unable to determine who was responsible for a cash shortage; this lapse could even encourage employee theft.

DO IT! 7-2 All mail receipts should be opened in the presence of two mail clerks. Those mail clerks should immediately stamp each check “For Deposit Only.” The mail clerks should prepare, in duplicate, a list of the checks received each day. The checks and prelist should be sent on to the cashier’s department each day, and the cashier should deposit the checks daily. The duplicate prelist should be sent to the treasurer’s department and used to confirm that all receipts were deposited and recorded. DO IT! 7-3 Aug. 1 30

Petty Cash .................................................... Cash .......................................................

100

Postage Expense ......................................... Supplies ........................................................ Miscellaneous Expense ............................... Cash Over and Short ................................... Cash (£100 – £6) ....................................

31 42 16 5

100

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7-13

DO IT! 7-4 Jon should treat the reconciling items as follows: 1. 2. 3. 4.

7-14

Outstanding checks: Deduct from balance per bank. A deposit in transit: Add to balance per bank. The bank charged to our account a check written by another company: Add to balance per bank. A debit memorandum for a bank service charge: Deduct from balance per books.

SOLUTIONS TO EXERCISES EXERCISE 7-1 1. Establishment of responsibility. The counter clerk is responsible for handling cash. Other employees are responsible for making the pizzas. 2. Segregation of duties. Employees who make the pizzas do not handle cash. 3. Documentation procedures. The counter clerk uses your order invoice (ticket) in registering the sale on the cash register. The cash register produces a tape of all sales. 4. Physical controls. A cash register is used to record the sale. 5. Independent internal verification. The counter clerk, in handling the pizza, compares the size of the pizza with the size indicated on the order. 6. Human resource controls. No visible application possible.

EXERCISE 7-2 (a) Procedure

Weakness

Principle

(b) Recommended Change

Cash is not adequately protected from theft.

Physical controls.

Cash should be stored in a safe until it is deposited in bank.

Inability to establish responsibility for cash with a specific clerk.

Establishment of responsibility.

There should be separate cash drawers and register codes for each clerk.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

7-15

EXERCISE 7-2 (Continued) (a) Principle

(b) Recommended Change

Procedure

Weakness

The accountant should not handle cash.

Segregation of duties.

The cashier’s department should make the deposits.

Cash is not independently counted.

Independent internal verification.

A cashier office supervisor should count cash.

Cashiers are not bonded.

Human resource controls.

All cashiers should be bonded.

EXERCISE 7-3 (a)

(b) Recommended Change

Procedure

Weakness

Principle

The bank reconciliation is not independently prepared.

Independent internal verification.

Someone with no other cash responsibilities should prepare the bank reconciliation.

The approval and payment of bills is done by the same individual.

Segregation of duties.

The store manager should approve bills for payment and the treasurer should sign and issue checks.

Checks are not stored in a secure area.

Physical controls.

Checks should be stored in a safe or locked file drawer.

7-16

EXERCISE 7-3 (Continued) (a)

(b) Recommended Change

Procedure

Weakness

Principle

After payment, bills are simply filed in a folder.

Documentation procedures.

Bills should be stamped paid before being placed in the folder.

Checks are not prenumbered.

Documentation procedures.

Checks should be prenumbered and subsequently accounted for.

EXERCISE 7-4 (a) Weaknesses

(b) Suggested Improvement

Checks are not prenumbered.

Use prenumbered checks.

The purchasing agent signs checks.

Only the treasurer’s department personnel should sign checks.

Unissued checks are stored in unlocked file cabinet.

Unissued checks should be stored in a locked file cabinet with access restricted to authorized personnel.

Purchasing agent approves and pays for goods purchased.

Purchasing agent should approve bills for payment by the treasurer.

After payment, the invoice is filed.

The invoice should be stamped PAID.

The purchasing agent records payments in cash disbursements journal.

Only accounting department personnel should record cash disbursements.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

7-17

EXERCISE 7-4 (Continued) (a) Weaknesses

(b) Suggested Improvement

The treasurer records the checks in cash disbursements journal.

Same as answer to No. 6 above.

The treasurer reconciles the bank statement.

An internal auditor should reconcile the bank statement.

(b) To:

Treasurer, Teresa Company

From:

Accounting Student

I have reviewed your cash disbursements system and suggest that you make the following improvements: 1.

Teresa Company should use prenumbered checks. These should be stored in a locked file cabinet or safe with access restricted to authorized personnel.

The purchasing department should approve bills for payment. The treasurer’s department should prepare and sign the checks. The invoices should be stamped paid so that they cannot be paid twice.

Only the accounting department personnel should record cash disbursements.

An internal auditor should reconcile the bank statement.

If you have any questions about implementing these suggestions, please contact me.

7-18

EXERCISE 7-5 Procedure 1. 2. 3. 4. 5.

IC good or weak? Weak Good Weak Good Weak

Related internal control principle Establishment of Responsibility Independent Internal Verification Segregation of Duties Segregation of Duties Documentation Procedures

IC good or weak? Good Weak Weak Good Good

Related internal control principle Human Resource Controls Establishment of Responsibility Segregation of Duties Independent Internal Verification Physical Controls

EXERCISE 7-6 Procedure 1. 2. 3. 4. 5. EXERCISE 7-7 May 1 June 1

July 1

July 10

Petty Cash ...................................................... Cash ..........................................................

100.00

Delivery Expense ........................................... Postage Expense ........................................... Miscellaneous Expense ................................. Cash Over and Short ..................................... Cash ..........................................................

31.25 41.00 25.00 1.00

Delivery Expense ........................................... Entertainment Expense ................................. Miscellaneous Expense ................................. Cash ..........................................................

21.00 51.00 24.75

Petty Cash ...................................................... Cash ..........................................................

50.00

100.00

98.25

96.75

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

50.00

7-19

EXERCISE 7-8 Mar. 1 15

Petty Cash................................................................. Cash...................................................................

100

Postage Expense....................................................... Freight-out ................................................................. Miscellaneous Expense ............................................ Travel Expense .......................................................... Cash Over and Short................................................. Cash....................................................................

39 17 13 24 3

Petty Cash.................................................................. Cash....................................................................

100

96 50

EXERCISE 7-9 (a) Cash balance per bank statement .................. Add: Deposits in transit.................................

CHF3,660.20 480.00 4,140.20 930.00 CHF3,210.20

Less: Outstanding checks ............................. Adjusted cash balance per bank ....................

Cash balance per books .................................. CHF3,825.20 Less: NSF check ............................................. CHF590.00 Bank service charge ............................. 25.00 615.00 Adjusted cash balance per books .................. CHF3,210.20 (b) Accounts Receivable ....................................... Cash ..........................................................

590.00

Miscellaneous Expense ................................... Cash ..........................................................

25.00

7-20

590.00 25.00

EXERCISE 7-10 The outstanding checks are as follows: No. 255 260 262 Total

Amount $ 720 820 750 $2,290

EXERCISE 7-11 (a)

TERESINA VIDEO COMPANY Bank Reconciliation July 31 Cash balance per bank statement .................................... Add: Deposits in transit ..................................................

R$7,293 1,500 8,793 621 R$8,172

Less: Outstanding checks ............................................... Adjusted cash balance per bank ...................................... Cash balance per books.................................................... Add: Collection of note receivable (R$800 plus accrued interest R$36, less collection fee R$20) ........................................

R$7,384 816 8,200 28 R$8,172

Less: Bank service charge............................................... Adjusted cash balance per books .................................... (b) July 31

Cash ................................................................... Miscellaneous Expense.................................... Notes Receivable ...................................... Interest Revenue .......................................

816 20

Miscellaneous Expense.................................... Cash ...........................................................

800 36

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7-21

EXERCISE 7-12 (a)

WASSON COMPANY Bank Reconciliation September 30 Cash balance per bank statement .......................... Add: Deposits in transit.........................................

$16,122 4,450 20,572 2,383 $18,189

Less: Outstanding checks ..................................... Adjusted cash balance per bank ............................ Cash balance per books .......................................... Add: Collection of note receivable ($1,500 + $30) .... Interest earned .............................................. Less: NSF check ..................................................... Safety deposit box rent ................................ Adjusted cash balance per books .......................... (b) Sept. 30

30 30 30

$17,404 $ 1,530 45 725 65

Cash ....................................................... Notes Receivable ........................... Interest Revenue............................

1,530

Cash ....................................................... Interest Revenue ............................

Accounts Receivable—Violet Jones ...... Cash ...............................................

725

Miscellaneous Expense ........................ Cash ...............................................

1,575 18,979 790 $18,189 1,500 30 45 725 65

EXERCISE 7-13 (a) Deposits in transit: Deposits per books in July ..................................... Less: Deposits per bank in July ............................ Deposits in transit, June 30 .................. July receipts deposited in July ............................... Deposits in transit, July 31 ...................................... 7-22

€15,750 €15,600 (920) 14,680 € 1,070

EXERCISE 7-13 (Continued) (b) Outstanding checks: Checks per books in July ............................... Less: Checks clearing bank in July .............. Outstanding checks, June 30 ............. July checks cleared in July ............................ Outstanding checks, July 31 ..........................

€17,200 €16,400 (880) 15,520 € 1,680

(c) Deposits in transit: Deposits per bank statement in September .................................................... Add: Deposits in transit, September 30 ...... Total deposits to be accounted for ................ Less: Deposits per books .............................. Deposits in transit, August 31 ........................

€26,700 2,600 29,300 25,400 € 3,900

(d) Outstanding checks: Checks clearing bank in September .............. Add: Outstanding checks, September 30 ... Total checks to be accounted for .................. Less: Cash disbursements per books .......... Outstanding checks, August 31 .....................

€24,000 2,100 26,100 23,700 € 2,400

EXERCISE 7-14 (a) Cash and cash equivalents should be reported at $83,500. Cash in bank .................................................... Cash on hand .................................................. Petty cash ........................................................ Highly liquid investments ...............................

$41,000 8,000 500 34,000 $83,500

(b) “Cash in plant expansion fund” should be reported as part of long-term investments (a noncurrent asset). “Receivables from customers” should be reported as accounts receivable in the current assets. “Share investments” should also be reported in the current assets. (c) Nayak should disclose in the financial statements an explanation of what entails each equivalents.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

7-23

SOLUTIONS TO PROBLEMS PROBLEM 7-1A

Principles

Application to Cash Disbursements

Establishment of responsibility.

Only the treasurer and assistant treasurer are authorized to sign checks.

Segregation of duties.

Invoices must be approved by both the purchasing agent and the receiving department supervisor. Payment can only be made by the treasurer or assistant treasurer, and the check signers do not record the cash disbursement transactions.

Documentation procedures.

Checks are prenumbered. Following payment, invoices are stamped PAID.

Physical controls.

Blank checks are kept in a safe in the treasurer’s office. Only the treasurer and assistant treasurer have access to the safe. A checkwriting machine is used in writing checks.

Independent internal verification.

The check signer compares the check with the approved invoice prior to issue. Bank and book balances are reconciled monthly by the assistant chief accountant.

Human resource controls.

All employees who handle or record cash are bonded.

7-24

PROBLEM 7-2A

(a) July

1 15

Aug. 15

16 31

Petty Cash .............................................. Cash ................................................

200.00

Freight-out .............................................. Postage Expense ................................... Entertainment Expense ......................... Miscellaneous Expense ......................... Cash Over and Short ............................. Cash ................................................

87.00 51.40 46.60 11.20 1.80

Freight-out .............................................. Charitable Contribution Expense.......... Postage Expense ................................... Miscellaneous Expense ......................... Cash ................................................

82.10 45.00 25.50 39.40

Freight-out .............................................. Entertainment Expense ......................... Postage Expense ................................... Miscellaneous Expense ......................... Cash Over and Short ...................... Cash ................................................

75.60 43.00 33.00 37.00

Petty Cash .............................................. Cash ................................................

100.00

Postage Expense ................................... Travel Expense....................................... Freight-out .............................................. Cash Over and Short ............................. Cash ................................................

133.00 95.60 47.10 1.30

200.00

198.00

192.00

1.60 187.00 100.00

277.00

(b) Petty Cash Date July 1 Aug. 16

Explanation

Ref. CP CP

Debit 200 100

Credit

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Balance 200 300 7-25

PROBLEM 7-2A (Continued) (c) The internal control features of a petty cash fund include: (1) A custodian is responsible for the fund. (2) A prenumbered petty cash receipt signed by the custodian and the individual receiving payment is required for each payment from the fund. (3) The treasurer’s office examines all payments and stamps supporting documents to indicate they were paid when the fund is replenished. (4) Surprise counts can be made at any time to determine whether the fund is intact.

7-26

PROBLEM 7-3A (a)

TERRELL COMPANY Bank Reconciliation May 31, 2014 Cash balance per bank statement ................... Add: Deposit in transit ................................... Bank error—Bridges check ..................

£6,804.60 £1,916.15 600.00

2,516.15 9,320.75 276.25 £9,044.50

Less: Outstanding checks .............................. Adjusted cash balance per bank ..................... Cash balance per books................................... Add: Collection of note receivable (£3,000 note plus £80 interest less £20 fee) ........................................... Less: NSF check .............................................. Error in May 12 deposit (£886.15 – £836.15) ............................ Error in recording check No. 1181 ....... Check printing charge ........................... Adjusted cash balance per books ...................

£6,781.50 3,060.00 9,841.50 £ 680.00 50.00 27.00* 40.00

797.00 £9,044.50

*£685 – £658 (b) May 31

31 31 31 31

Cash .............................................................. Miscellaneous Expense............................... Notes Receivable ................................. Interest Revenue ..................................

3,060 20

Accounts Receivable—Sandy Grifton ........ Cash ......................................................

680

Sales Revenue ............................................. Cash ......................................................

Accounts Payable—Barry Dietz .................. Cash ......................................................

Miscellaneous Expense............................... Cash ......................................................

3,000 80 680 50 27

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40 7-27

PROBLEM 7-4A (a)

RINTALA COMPANY Bank Reconciliation December 31, 2014 Cash balance per bank statement ..................... Add: Deposits in transit ...................................

$20,154.30 1,190.40 21,344.70

Less: Outstanding checks No. 3470 ................................................ $ 720.10 No. 3474 ................................................ 1,050.00 No. 3478 ................................................ 621.30 No. 3481 ................................................ 807.40 No. 3484 ................................................ 798.00 No. 3486 ................................................ 1,889.50 Adjusted cash balance per bank ....................... Cash balance per books ..................................... Add: Note collected by bank ($3,500 note plus $160 interest less $15 fee) .............................................

5,886.30 $15,458.40 $12,485.20 3,645.00 16,130.20

Less: NSF check ................................................ $ 572.80 Error in recording check No. 3485.......... 90.00* Error in 12-21 deposit ($2,954 – $2,945) ................................. 9.00 671.80 Adjusted cash balance per books ..................... $15,458.40 *$540.80 – $450.80 (b) Dec. 31

31 31 31

7-28

Cash .................................................... Miscellaneous Expense ..................... Notes Receivable ....................... Interest Revenue ........................

3,645.00 15.00

Accounts Receivable—D. Chagnon .... Cash ............................................

572.80

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

90.00

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

9.00

3,500.00 160.00 572.80 90.00 9.00

PROBLEM 7-5A (a)

CAYEMBERG COMPANY Bank Reconciliation July 31, 2014 €24,514 7,400 31,914

Cash balance per bank statement .......................... Add: Deposits in transit (1) ................................... Less: Outstanding checks (2) ................................ Bank error (€255 – €155) .............................. Adjusted cash balance per bank ............................ Cash balance per books.......................................... Add: Collection of note receivable by bank (€1,400 note plus €70 interest) .................... Book error (€320 – €230) ..............................

€8,460 100

€21,850 €1,470 90

Less: Check printing charge .................................. Adjusted cash balance per books ..........................

1,560 23,410 56 €23,354 €81,400

(1) July receipts per books ....................... July deposits per bank ........................ Less: Deposits in transit, June 30 ...................................... Deposits in transit, July 31 .................. (2) Disbursements per books in July................................................ Less: Book error ................................. Total disbursements to be accounted for .............................. Checks clearing bank in July................................................ Add: Bank error.................................. Less: June 30 outstanding checks .................. Outstanding checks, July 31 ...............................................

8,560 €23,354

€81,000 7,000

74,000 € 7,400 €77,150 90 77,060

€74,700 € 100 6,200

6,100

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

68,600 € 8,460

7-29

PROBLEM 7-5A (Continued) (b) July 31

31 31

7-30

Cash ............................................................... Notes Receivable ................................... Interest Revenue ...................................

1,470

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

Miscellaneous Expense ................................ Cash .......................................................

1,400 70 90 56

PROBLEM 7-6A Rob has created a situation that leaves many opportunities for undetected theft. Here is a list of some of the deficiencies in internal control. You may find others. 1.

Documentation procedures. The tickets were unnumbered. By numbering the tickets, the students could have been held more accountable for the tickets. See number 3 below.

Physical controls and establishment of responsibility. The tickets were left in an unlocked box on his desk. Instead, Rob should have assigned control of the tickets to one individual, in a locked box which that student alone had control over.

Documentation procedures. No record was kept of which students took tickets to sell or how many they took. In combination with items 1 and 2 above, the student assigned control over the tickets should have kept a record of which tickets were issued to each student for resale. (Note: This problem could have been largely avoided if the tickets had only been sold at the door on the day of the dance.)

Documentation procedures. There was no control over unsold tickets. This deficiency made it possible for students to sell the tickets, keep the cash, and tell Rob that they had disposed of the unsold tickets. Instead, students should have been required to return the unsold tickets to the student maintaining control over tickets, and the cash to Rob. In each case, the students should have been issued a receipt for the cash they turned in and the tickets they returned.

Establishment of responsibility. Inadequate control over the cash box. In effect, it was operated like a petty cash fund, but too many people had the key. Instead, Rob should have had the key and dispersed funds when necessary for purchases.

Documentation procedures. Instead of receipts, students simply wrote notes saying how they used the funds. Instead, it should have been required that they provided a valid receipt.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

7-31

PROBLEM 7-6A (Continued) 7.

Segregation of duties. Erik Radley counted the funds, made out the deposit slip, and took the funds to the bank. This made it possible for Erik Radley to take some of the money and deposit the rest since there was no external check on his work. Rob should have counted the funds, with someone observing him. Then he could have made out the deposit slip and had Erik Radley deposit the funds.

Documentation procedures. Rob did not receive a receipt from Obnoxious AI. 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 Rob took the rest.

Segregation of duties. Sobia Hamm was collecting tickets and receiving cash for additional tickets sold. Instead, there should have been one person selling tickets at the door and a second person collecting tickets.

7-32

PROBLEM 7-1B

(a) Principles

Application to Orpheum Theater

Establishment of responsibility.

Only cashiers are authorized to sell tickets. Only the manager and cashier can handle cash.

Segregation of duties.

The duties of receiving cash and admitting customers are assigned to the cashier and to the usher. The manager maintains custody of the cash, and the company accountant records the cash.

Documentation procedures.

Tickets are prenumbered. Cash count sheets are prepared. Deposit slips are prepared.

Physical controls.

A safe is used for the storage of cash and a machine is used to issue tickets.

Independent internal verification.

Cash counts are made by the manager at the end of each cashier’s shift. Daily comparisons are made by the company treasurer.

Human resource controls.

Shifts are rotated among the cashiers.

(b) Actions by the usher and cashier to misappropriate cash might 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 lower price 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.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

7-33

PROBLEM 7-2B

(a) July

1 15

Aug. 15

16 31

Petty Cash ................................................ Cash...................................................

100.00

Freight-out ................................................ Postage Expense ..................................... Entertainment Expense ........................... Miscellaneous Expense ........................... Cash................................................... Cash Over and Short ........................

51.00 20.50 23.10 4.10

Freight-out ................................................ Charitable Contribution Expense ............ Postage Expense ..................................... Miscellaneous Expense ........................... Cash...................................................

43.50 20.00 20.10 9.30

Freight-out ................................................ Entertainment Expense ........................... Postage Expense ..................................... Miscellaneous Expense ........................... Cash Over and Short................................ Cash...................................................

40.20 21.00 14.00 19.80 3.00

Petty Cash ................................................ Cash...................................................

50.00

Freight-out ................................................ Entertainment Expense ........................... Postage Expense ..................................... Cash Over and Short................................ Cash...................................................

74.00 43.20 17.70 2.10

100.00

94.90 3.80

92.90

98.00 50.00

137.00

(b) Petty Cash Date Explanation July 1 Aug. 16 7-34

Ref. CP CP

Debit 100 50 .

Credit

Balance 100 150

PROBLEM 7-2B (Continued) (c) The internal control features of a petty cash fund include: (1) A custodian is responsible for the fund. (2) A prenumbered petty cash receipt signed by the custodian and the individual receiving payment is required for each payment from the fund. (3) The treasurer’s office examines all payments and stamps supporting documents to indicate they were paid when the fund is replenished. (4) Surprise counts can be made at any time to determine whether the fund is intact.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

7-35

PROBLEM 7-3B (a)

AGLIFE GENETICS COMPANY Bank Reconciliation May 31, 2014 Cash balance per bank statement ..................... Add: Deposit in transit ..................................... Bank error—Bohr check..........................

$12,732 $2,100 900

3,000 15,732 1,425 $14,307

Less: Outstanding checks ................................ Adjusted cash balance per bank ....................... Cash balance per books ...................................... Add: Collection of note receivable ($4,000 note plus $80 interest less $25 fee) ............................................. Less: NSF check ................................................. Error in May 12 deposit ........................... Error in recording check No. 1181.......... Check printing charge ............................. Adjusted cash balance per books .....................

$13,287 4,055 17,342 $1,908 100 992* 35

3,035 $14,307

*$1,102 – $110 (b) May 31

31 31 31 31

7-36

Cash ................................................................ Miscellaneous Expense ................................. Notes Receivable .................................... Interest Revenue ....................................

4,055 25

Accounts Receivable—Tyler Gricius ............ Cash ........................................................

1,908

Sales Revenue ................................................ Cash ........................................................

100

Accounts Payable—M. Datz ........................... Cash ........................................................

992

Miscellaneous Expense ................................. Cash ........................................................

4,000 80 1,908 100 992 35

PROBLEM 7-4B

(a)

BRASILIA COMPANY Bank Reconciliation November 30, 2014 Balance per bank statement .......................... Add: Deposits in transit ............................... Less: Outstanding checks No. 2451............................................ No. 2472............................................ No. 2478............................................ No. 2482............................................ No. 2484............................................ No. 2485............................................ No. 2487............................................ No. 2488............................................ Adjusted cash balance per bank ...................

R$ 9,100 1,581 10,681 R$700 170 300 350 460 525 340 635

Balance per books .......................................... Add: Note collected by bank (R$1,300 note plus R$91 interest less R$16 fee) ...................................... Less: Check printing charge ......................... Error in recording check No. 2479 ....... Error in 11-21 deposit (R$1,642 – R$1,624) .......................... Adjusted cash balance per books .................

3,480 R$ 7,201 R$ 5,969 1,375 7,344

R$ 35 90* 18

143 R$ 7,201

*R$980 – R$890

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

7-37

PROBLEM 7-4B (Continued) (b) Nov. 30

30 30 30

7-38

Cash .......................................................... Miscellaneous Expense ........................... Notes Receivable .............................. Interest Revenue ...............................

1,375 16

Miscellaneous Expense ........................... Cash ...................................................

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

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

1,300 91 35 90 18

PROBLEM 7-5B (a)

TIZANI COMPANY Bank Reconciliation August 31, 2014 Cash balance per bank statement ....................... Add: Deposits in transit (1) ................................ Bank error ($277 – $275) ...........................

$17,146 $ 4,729 2

Less: Outstanding checks (2) ............................. Adjusted cash balance per bank ......................... Cash balance per books....................................... Add: Collection of note receivable by bank ($4,400 note plus $105 interest) ............... Book error ($430 – $340) ........................... Interest earned...........................................

$12,815 $ 4,505 90 41

Less: Safety deposit box rent ............................. Adjusted cash balance per books ....................... (1) August receipts per books ........................... August deposits per bank ............................ Less: Deposits in transit, July 31 ................ Deposits in transit, August 31 ...................... (2) Disbursements per books in August...................................... Less: Book error ........................ Total disbursements to be accounted for .......................... Checks clearing bank in August...................................... Less: Bank error......................... July 31 outstanding checks........................... Outstanding checks, August 31.................................

4,731 21,877 4,456 $17,421

4,636 17,451 30 $17,421 $50,050

$47,521 2,200

45,321 $ 4,729 $47,794 90 47,704

$46,175 $

2 2,925

2,927

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

43,248 $ 4,456

7-39

PROBLEM 7-5B (Continued) (b) Aug. 31

31 31 31

7-40

Cash .............................................................. Notes Receivable .................................. Interest Revenue ...................................

4,505

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

Cash .............................................................. Interest Revenue ...................................

Miscellaneous Expense ............................... Cash .......................................................

4,400 105 90 41 30

PROBLEM 7-6B

(a)

STUPENDOUS COMPANY Bank Reconciliation October 31, 2014 Balance per bank statement ............................................. Plus: Undeposited receipts .............................................

£15,313.00 3,226.18 18,539.18

Less: Outstanding checks No. 62 183 284

Amount £107.74 127.50 215.26

No. 862 863 864

Amount £132.10 192.78 140.49 ...................

915.87

Adjusted balance per bank ...............................................

£17,623.31

Cash balance per books.................................................... Add: Bank credit (collection of note receivable) ........... Adjusted balance per books (before theft) ...................... Less: Theft ........................................................................ Adjusted balance per books .............................................

£18,608.81 460.00 19,068.81 1,445.50* £17,623.31

*£19,068.81 – £17,623.31 (b) The cashier attempted to cover the theft of £1,445.50 by: 1.

Not listing as outstanding three checks totaling £450.50 (No. 62, £107.74; No. 183, £127.50; and No. 284, £215.26).

Underfooting the outstanding checks listed by £75.00 (The correct total is £465.37.)

Subtracting the £460 bank credit from the book balance instead of adding it to the book balance, thereby concealing £920 of the theft.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

7-41

PROBLEM 7-6B (Continued) (c) 1.

The principle of independent internal verification has been violated because the cashier prepared the bank reconciliation.

The principle of segregation of duties has been violated because the cashier had access to the accounting records and also prepared the bank reconciliation.

7-42

COMPREHENSIVE PROBLEM SOLUTION

(a)

Dec. 7 12 17

19 22

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

3,600 3,600

Inventory...................................................... 12,000 Accounts Payable ...............................

12,000

Accounts Receivable .................................. 16,000 Sales Revenue .....................................

16,000

Cost of Goods Sold .................................... 10,000 Inventory ..............................................

10,000

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

2,200

Accounts Payable ....................................... 12,000 Cash ($12,000 X .99) ............................ Inventory ..............................................

11,880 120

Cash ($16,000 X .98) ................................... 15,680 Sales Discounts .......................................... 320 Accounts Receivable ..........................

16,000

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

2,700

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

7-43

COMPREHENSIVE PROBLEM SOLUTION (Continued) (b) & (e) Cash 12/1 Bal. 18,200 12/19 12/7 3,600 12/22 12/26 15,680 12/31 12/31 2,700 12/31 2,000 12/31 Bal. 27,420 Notes Receivable 12/1 Bal. 2,000 12/31 12/31 Bal. – 0 –

General Ledger

2,200 11,880 680

Share Capital—Ordinary 12/1 Bal. 50,000

Prepaid Insurance 12/1 Bal. 1,600 12/31 12/31 Bal. 1,200

10,000 120

400

Equipment 12/1 Bal. 28,000 Accumulated to Depreciation— Equipment 12/1 Bal. 3,000 12/31 200 12/31 Bal. 3,200

7-44

Retained Earnings 12/1 Bal. 14,200

2,000

Accounts Receivable 12/1 Bal. 7,500 12/7 3,600 12/17 16,000 12/26 16,000 12/31 680 12/31 2,700 12/31 Bal. 1,880 Inventory 12/1 Bal. 16,000 12/17 12/12 12,000 12/22 12/31 Bal. 17,880

12/22

Accounts Payable 12,000 12/1 Bal. 6,100 12/12 12,000 12/31 Bal. 6,100

Sales Revenue 12/17 16,000 12/31 Bal. 16,000 Sales Discounts 12/26 320 12/31 Bal. 320 Cost of Goods Sold 12/17 10,000 12/31 Bal. 10,000 Depreciation Expense 12/31 200 12/31 Bal. 200 Salaries and Wages Expense 12/19 2,200 12/31 Bal. 2,200 Insurance Expense 12/31 400 12/31 Bal. 400

COMPREHENSIVE PROBLEM SOLUTION (Continued) (c)

WESTMORELAND COMPANY Bank Reconciliation December 31, 2014 Cash balance per bank statement .......................... Add: Deposits in transit ..........................................

$25,930 2,700 28,630 1,210 $27,420

Less: Outstanding checks ...................................... Adjusted cash balance per bank ............................ Cash balance per books ......................................... Add: Collection of note receivable .........................

26,100 2,000 28,100 680 $27,420

Less: NSF check ...................................................... Adjusted cash balance per books .......................... (d) Dec. 31 Cash .......................................................... Notes Receivable ...............................

2,000

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

680

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

200

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

400

2,000 680

200

400

7-45

COMPREHENSIVE PROBLEM SOLUTION (Continued) (f)

WESTMORELAND COMPANY Adjusted Trial Balance December 31, 2014 Cash ............................................................. Accounts Receivable .................................. Inventory ...................................................... Prepaid Insurance ....................................... Equipment.................................................... Accumulated Depreciation—Equipment ... Accounts Payable ....................................... Share Capital—Ordinary ............................. Retained Earnings ....................................... Sales Revenue ............................................. Sales Discounts .......................................... Cost of Goods Sold ..................................... Depreciation Expense ................................. Salaries and Wages Expense ..................... Insurance Expense......................................

(g)

CR.

$ 3,200 6,100 50,000 14,200 16,000 320 10,000 200 2,200 400 $89,500

$89,500

WESTMORELAND COMPANY Income Statement For the Month Ending December 31, 2014 Sales revenue .............................................. Less: Sales discounts ............................... Net sales ...................................................... Cost of goods sold...................................... Gross profit ................................................. Operating expenses Salaries and wages expense .............. Insurance expense .............................. Depreciation expense .......................... Net income...................................................

7-46

DR. $27,420 1,880 17,880 1,200 28,000

$16,000 320 15,680 10,000 5,680 $2,200 400 200

2,800 $ 2,880

COMPREHENSIVE PROBLEM SOLUTION (Continued) (g)

WESTMORELAND COMPANY Statement of Financial Position December 31, 2014 Assets Property, plant, and equipment Equipment .............................................. Less: Accumulated depreciation—equipment ........ Current assets 1. Prepaid insurance ............................. 2. Inventory ............................................ 3. Accounts receivable .......................... 4. Cash ................................................... Total assets ...................................................

$28,000 3,200 1,200 17,880 1,880 27,420

$24,800

48,380 $73,180

Equity and Liabilities Equity Share capital ordinary ........................... Retained earnings ($14,200 + $2,880) ..

$50,000 17,080

Current liabilities Accounts payable .................................. Total equity and liabilities. ...........................

$67,080 6,100 $73,180

7-47

CCC7

CONTINUING COOKIE CHRONICLE

Part 1 The weaknesses in internal accounting controls in the system recommended by John are: (1) (2)

(3) (4)

The cash could be stolen from John’s vehicle before it is deposited in the bank. John could potentially steal from the company and then cover the theft because of a lack of segregation of duties between the handling of cash, bank reconciling process, and recording of transactions in the accounting records. The accounting information for the business could be lost or stolen if it is all stored on John’s laptop. John should not be able to write checks to himself as this leaves the company vulnerable to theft.

Improvements should include the following: (1) (2)

(3)

7-48

Cash should be deposited in the bank daily. At a minimum cash should be locked in a safe until such as time as it can be deposited. John should be responsible for the accounting function only. Natalie (or some other independent person) should sign all checks and make all deposits. Checks should be signed only when there is documentation present to support the payment. All invoices should be stamped “PAID” to avoid duplicate payment. Bank reconciliations should be prepared by a person independent of the handling and recording of cash. However, this may not be possible in a small organization such as Cookie Creations. At a minimum, Natalie and not John should prepare bank reconciliations monthly.

CCC7 (Continued) Part 1 (Continued) (4)

(5)

The accounting records should be maintained on site and regular back-ups should be prepared. It would be best if John used a computer at Cookie Creations to prepare the accounting information; however, if he is going to use his laptop, Natalie should ensure that she is provided with a regular back-up of all the accounting records. This ensures that if John should ever lose his laptop or decide to no longer perform Cookie Creation’s accounting, Natalie would still have access to the company’s accounting records. John should submit a monthly invoice for the work he has done to Natalie for her approval. Natalie should then write and sign the check.

Part 2 (a) COOKIE CREATIONS Bank Reconciliation June 30, 2014 Cash balance per bank statement.............................. Add: Deposit in transit ............................................. Bank error Check No. 603 ($452 – $425) ........

$3,359 $110 27

Less: Outstanding checks ($238 + $297) ................. Adjusted cash balance per bank .................... Cash balance per books ............................................. Less: Service charge ................................................. Error in deposit June 20th ($155 – $125) ......... Telus ................................................................. NSF check ($100 + $35 service charge) ......... Adjusted cash balance per books..............................

137 3,496 535 $2,961 $3,224

$ 13 30 85 135

263 $2,961

7-49

CCC7 (Continued) Part 2 (Continued) (b) June 30 Miscellaneous Expense ......................... Cash ....................................................

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

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

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

135

13 30 85 135

Check: $3,224 – $13 – $30 – $85 – $135 = $2,961 adjusted cash balance (c) If a statement of financial position were prepared, cash at June 30th, 2014 would be $2,961.

7-50

BYP 7-1

FINANCIAL REPORTING PROBLEM

(a) (Amounts in millions of Korean Won) 2010 _ Cash and cash equivalents W9,791,419

2009___ W10,149,930

(b) Footnote 4 defines cash and cash equivalents as, “cash on hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of less than three months.”

7-51

BYP 7-2

COMPARATIVE ANALYSIS PROBLEM

Zetar

Nestlé

(a) (1) £4,282 thousand

CHF8,057 million

(2) £753 thousand

CHF13,608 million

(b) Both companies generated significant cash from operating activities. This cash is used for investing and financing activities. Both companies use the cash provided by operating activities to purchase land, buildings and equipment, to make acquisitions of other companies, to buy back their shares, and to pay dividends. Both companies have large cash balances at the end of 2010 and are capable of generating huge amounts of cash.

7-52

BYP 7-3

REAL-WORLD FOCUS

(a)

The system of internal control should be evaluated by: (1) responsible individuals from a particular university unit, (2) internal and external auditors, and (3) university management.

(b)

Reconciliations ensure accuracy and completeness of transactions. In particular, a reconciliation ensures that all cash received is: (1) properly deposited in university bank accounts and (2) recorded accurately in the financial records. The reconciliation should be reviewed by the department manager.

(c)

Some examples given of physical controls are a safe, vault, locked doors, campus police, computer passwords, and card key systems.

(d)

Two ways to accomplish inventory counts are: (1) annual complete inventory or (2) cycle counting programs.

7-53

BYP 7-4

DECISION–MAKING ACROSS THE ORGANIZATION

(a) The weaknesses in internal accounting control over collections are: (1) Each usher could take cash from the collection plates enroute to the basement office. (2) The head usher counts the cash alone. (3) The head usher’s notation of the count is left in the safe. (4) The financial secretary counts the cash alone. (5) The financial secretary withholds $150 to $200 per week. (6) The cash is vulnerable to robbery when kept in the safe overnight. (7) Checks are made payable to “cash.” (8) The financial secretary has custody of the cash, maintains church records, and prepares the bank reconciliation. (b) The improvements should include the following: (1) The ushers should transfer their cash collections to a cash pouch (or bag) held by the head usher. The transfer should be witnessed by a member of the finance committee. (2) The head usher and finance committee member should take the cash to the office. The cash should be counted by the head usher and the financial secretary in the presence of the finance committee member. (3) Following the count, the financial secretary should prepare a deposit slip in duplicate for the total cash received, and the secretary should immediately deposit the cash in the bank’s night deposit vault. (4) At the end of each month, a member of the finance committee should prepare the bank reconciliation. (c) The policies that should be changed are: (1) Members should make checks payable to the church. (2) A petty cash fund should be established for the financial secretary to be used for weekly cash expenditures and requests for replenishment of the fund should be sent to the chairperson of the finance committee for approval. (3) The financial secretary should be bonded. (4) The financial secretary should be required to take an annual vacation.

7-54

BYP 7-5

COMMUNICATION ACTIVITY

Mr. Jack Meyer Stillwater Company Main Street, USA Dear Mr. Meyer: During our audit of your financial statements, we reviewed the internal controls over cash receipts. The weaknesses we discovered and our suggested improvements are listed below. Weaknesses

Suggested Improvement

A list of checks received is not prepared by the person who opens the mail.

This list should be prepared so that it can later be compared with the daily cash summary. While this procedure does not assure that all checks will be listed, it does allow the company to verify that all checks on the list did get deposited.

Mail is opened by only one person.

When this occurs, there is no assurance that all incoming checks are forwarded to the cashier’s department.

The cashier is allowed to open the mail.

Under this arrangement, it is possible for the cashier to open the mail, prepare the cash summary and make the bank deposit. This involves no segregation of duties as the cashier controls the cash from the time it is received until it is deposited in the bank.

The accounts receivable clerk is allowed to open the mail.

Again, there is poor segregation of duties. In this case, the clerk could writeoff a customer’s account as uncollectible and then misappropriate the collection when it’s received.

7-55

BYP 7-5 (Continued)

Weaknesses

Suggested Improvement

Mail receipts are deposited weekly.

This makes the receipts vulnerable to robbery and to misappropriation. The receipts should be deposited intact daily.

We would be pleased to discuss the weaknesses and our recommended improvements with you, at your convenience. Yours sincerely,

Murphy, Mooney, and Feeney Chartered Accountants

7-56

BYP 7-6

ETHICS CASE

(a) You, as assistant controller, may suffer some negative effects from Anne Shirley, the financial vice-president, if you don’t follow her instructions. Maybe the insurance company will react the way Anne suggests, but probably not. If you comply and falsify the June 30 cash balance by holding the cash receipts book open for one day, you will suffer personally by sacrificing your integrity. If you are found out, you could be prosecuted for preparing a fraudulent report. The insurance company, as the lender and creditor, is deceived. (b) Holding the cash receipts book open in order to overstate the cash balance is a fraudulent, deceitful, unethical action. The financial vicepresident should not encourage such behavior and a controller should not follow such instructions. (c) (1) You can follow the vice-president’s instructions and misstate the cash balance—wrong! (2) You can advise the vice-president against holding the books open, prepare an accurate report, and have the vice-president or the president discuss the situation with the insurance company. It can be explained that the low cash balance was only temporary. Honesty is still the best policy.

7-57

GAAP EXERCISES

GAAP7-1 Companies listed on U.S. stock exchanges must comply with the Sarbanes-Oxley Act. This compliance gives investors greater assurance that these companies have adequate internal controls in place. In addition, the auditors for these publicly traded companies must attest to the effectiveness of such controls. This process can result in discovery of weaknesses that companies had previously overlooked. After correcting these weaknesses to satisfy auditors, investors may find such companies to be less risky and therefore better investments. In order to comply with SOX, a company must document its internal control procedures and have an auditor attest to their effectiveness. Doing so costs money. A recent study indicated that audit fees can double in the first year of a company’s compliance. Since this cost is incurred only if a company lists on U.S. exchanges, many investors see SOX compliance as a costly undertaking. GAAP7-2 (a) (b) (c) (d)

7-58

True. False. Different cultures have different perspectives on bribery and other questionable activities. False. Cash (not cash equivalents) is comprised of cash on hand and demand deposits. False. SOX was created by the U.S. Congress.

GAAP FINANCIAL REPORTING PROBLEM GAAP 7-3 (a)

According to the report of independent registered public accounting firm, the statement of each flows and the results of the company’s cash folws are presented fairly and in conformity with U.S. GAAP.

(b)

The cash and cash equivalents reported on the statements of financial position for 2010 and 2009 were $115,976 (thousand) and 90,990 (thousand) respectively.

(c)

The activities identified on the statement of cash flows are: operating, investing, and financing.

(d)

Note 1 defines cash and cash equivalents as, “temporary cash investments with an original maturity of three months or less to be cash equivalents.”

(e)

Management is responsible for establishing and maintaining adequate internal control over financial reporting. The management of Tootsie Roll Industries conducted an evaluation of the company’s internal control system and concluded that it was effective as of December 31, 2010. The effectiveness of the internal control system was also audited by PriceWaterhouseCoopers LLP, an independant registered accounting firm.

7-59

7-60

CHAPTER 8 Accounting for Receivables ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief Exercises

Identify the different types of receivables.

1, 2

Explain how companies recognize accounts receivable.

Distinguish between the methods and bases companies use to value accounts receivable.

4, 5, 6, 7, 8

3, 4, 5, 6, 7

Describe the entries to record the disposition of accounts receivable.

9, 10, 11

Compute the maturity date of and interest on notes receivable.

12, 13, 14, 15, 16

Explain how companies recognize notes receivable.

Describe how companies value notes receivable.

Describe the entries to record the disposition of notes receivable.

Explain the statement presentation and analysis of receivables.

18, 19

Do It!

A Problems

B Problems

1, 2

1A, 3A, 4A, 1B, 3B, 4B, 6A, 7A 6B, 7B

3, 4, 5, 6

1A, 2A, 3A, 1B, 2B, 3B, 4A, 5A 4B, 5B

7, 8, 9

6A, 7A

6B, 7B

9, 10

10, 11, 12, 13

6A, 7A

6B, 7B

10, 11, 12

3, 12

Exercises

12, 13

6A, 7A

6B, 7B

1A, 6A

1B, 6B

8-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description

8-2

Difficulty Time Level Allotted (min.)

Prepare journal entries related to bad debt expense.

Simple

15–20

Compute bad debt amounts.

Moderate

20–25

Journalize entries to record transactions related to bad debts.

Moderate

20–30

Journalize transactions related to bad debts.

Moderate

20–30

Journalize entries to record transactions related to bad debts.

Moderate

20–30

Prepare entries for various notes receivable transactions.

Moderate

40–50

Prepare entries for various receivable transactions.

Complex

50–60

Prepare journal entries related to bad debt expense.

Simple

15–20

Compute bad debt amounts.

Moderate

20–25

Journalize entries to record transactions related to bad debts.

Moderate

20–30

Journalize transactions related to bad debts.

Moderate

20–30

Journalize entries to record transactions related to bad debts.

Moderate

20–30

Prepare entries for various notes receivable transactions.

Moderate

40–50

Prepare entries for various receivable transactions.

Complex

50–60

WEYGANDT FINANCIAL ACCOUNTING, IFRS Edition, 2e CHAPTER 8 ACCOUNTING FOR RECEIVABLES Number

Difficulty

Time (min.)

BE1

Simple

1–2

BE2

Simple

5–7

BE3

3, 9

Simple

4–6

BE4

Simple

4–6

BE5

Simple

4–6

BE6

Simple

2–4

BE7

Simple

4–6

BE8

Simple

6–8

BE9

Simple

8–10

BE10

Moderate

8–10

BE11

Simple

2–4

BE12

Simple

4–6

DI1

Simple

2–4

DI2

Simple

4–6

DI3

5, 8

Simple

6–8

DI4

Simple

4–6

EX1

Simple

8–10

EX2

Simple

8–10

EX3

Simple

8–10

EX4

Simple

6–8

EX5

Simple

6–8

EX6

Simple

6–8

EX7

Simple

4–6

EX8

Simple

6–8

EX9

Simple

6–8

EX10

5, 6

Simple

8–10

EX11

5, 6

Simple

6–8

EX12

5, 6, 8

Moderate

10–12

EX13

5, 8

Simple

8–10

EX14

Simple

8–10

8-3

ACCOUNTING FOR RECEIVABLES (Continued) Number

Difficulty

Time (min.)

P1A

2, 3, 9

Simple

15–20

P2A

Moderate

20–25

P3A

2, 3

Moderate

20–30

P4A

2, 3

Moderate

20–30

P5A

Moderate

20–30

P6A

2, 4, 5, 8, 9

Moderate

40–50

P7A

2, 4–8

Complex

50–60

P1B

2, 3, 9

Simple

15–20

P2B

Moderate

20–25

P3B

2, 3

Moderate

20–30

P4B

2, 3

Moderate

20–30

P5B

Moderate

20–30

P6B

2, 4, 5, 8, 9

Moderate

40–50

P7B

2, 4–8

Complex

50–60

BYP1

Moderate

20–25

BYP2

AN, E

Simple

10–15

BYP3

Simple

10–15

BYP4

Moderate

20–30

BYP5

Simple

10–15

BYP6

Simple

10–15

8-4

Learning Objective

Knowledge

Identify the different types of receivables.

Explain how companies recognize accounts receivable.

Distinguish between the methods and bases companies used to value accounts receivable.

Q8-8

Describe the entries to record the disposition of accounts receivable.

Compute the maturity date of and interest on notes receivable.

Q8-2

Comprehension Q8-1

Application

Analysis

Synthesis

BE8-1 E8-2 P8-1A P8-4A P8-7A P8-3A P8-6A P8-7B P8-1B

P8-3B P8-4B P8-6B

Q8-4 Q8-5 Q8-6

BE8-4 BE8-5 BE8-6 DI8-1 E8-5

E8-6

Q8-7 BE8-3 BE8-7 E8-3 E8-4

P8-1B P8-2B P8-3B P8-4B P8-5B

Q8-9

Q8-10

Q8-11 BE8-8 DI8-2 E8-7

E8-8 P8-6A E8-9 P8-6B P8-7A P8-7B

Q8-13

Q8-12 Q8-16

Q8-14 Q8-15 BE8-9 BE8-10 DI8-3

E8-12 E8-10 E8-13 E8-11 P8-7A P8-6A P8-7B P8-6B

Explain how companies recognize notes receivable.

BE8-11 P8-7A

P8-7B E8-10 E8-12 E8-11

Describe how companies value notes receivable.

P8-7A P8-7B

Describe the entries to record the disposition of notes receivable.

Explain the statement presentation and analysis of receivables.

Q8-3 BE8-2 E8-1

Broadening Your Perspective

Q8-17

Q8-18

Evaluation

DI8-3 E8-12 E8-13 Q8-19 Q8-20 BE8-12 E8-14

P8-1A P8-2A P8-3A P8-4A P8-5A

P8-7A P8-6A P8-7B P8-6B BE8-3 DI8-4 P8-1A P8-6A

P8-1B P8-6B

Real-World Focus Decision-Making Across the Organization Comparative Analysis

Financial Reporting Comparative Analysis Ethics Case Communication

BLOOM’ S TAXONOMY TABLE

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

8-5

ANSWERS TO QUESTIONS 1.

Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services. Notes receivable represent claims that are evidenced by formal instruments of credit.

Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable.

Accounts Receivable ............................................................................................. Interest Revenue............................................................................................

40 40

The essential features of the allowance method of accounting for bad debts are: (1) Uncollectible accounts receivable are estimated and matched against revenue in the same accounting period in which the revenue occurred. (2) Estimated uncollectibles are debited to Bad Debt Expense and credited to Allowance for Doubtful Accounts through an adjusting entry at the end of each period. (3) Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off.

Roger Holloway should realize that the decrease in cash realizable value occurs when estimated uncollectibles are recognized in an adjusting entry. The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, cash realizable value does not change.

The two bases of estimating uncollectibles are: (1) percentage-of-sales and (2) percentage-ofreceivables. The percentage-of-sales basis establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This method emphasizes the matching of expenses with revenues. Under the percentage-of-receivables basis, the balance in the allowance for doubtful accounts is derived from an analysis of individual customer accounts. This method emphasizes cash realizable value.

The adjusting entry under the percentage-of-sales basis is: Bad Debt Expense ............................................................................... Allowance for Doubtful Accounts ..................................................

370,000

The adjusting entry under the percentage-of-receivables basis is: Bad Debt Expense ............................................................................... Allowance for Doubtful Accounts (NT$580,000 – NT$320,000) ....

260,000

370,000

260,000

Under the direct write-off method, bad debt losses are not estimated and no allowance account is used. When an account is determined to be uncollectible, the loss is debited to Bad Debt Expense. The direct write-off method makes no attempt to match bad debts expense to sales revenues or to show the cash realizable value of the receivables in the statement of financial position.

From its own credit cards, the Freida Company may realize financing charges from customers who do not pay the balance due within a specified grace period. National credit cards offer the following advantages: (1) The credit card issuer makes the credit investigation of the customer. (2) The issuer maintains individual customer accounts.

8-6

Questions Chapter 8 (Continued) (3) The issuer undertakes the collection process and absorbs any losses from uncollectible accounts. (4) The retailer receives cash more quickly from the credit card issuer than it would from individual customers. 10.

The reasons companies are selling their receivables are: (1) Receivables may be sold because they may be the only reasonable source of cash. (2) Billing and collection are often time-consuming and costly. It is often easier for a retailer to sell the receivables to another party with expertise in billing and collection matters.

11.

Cash ....................................................................................................... Service Charge Expense (3% X HK$800,000) ........................................ Accounts Receivable ......................................................................

7,760,000 240,000 8,000,000

12.

A promissory note gives the holder a stronger legal claim than one on an accounts receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. The holder of a promissory note also can earn interest.

13.

The maturity date of a promissory note may be stated in one of three ways: (1) on demand, (2) on a stated date, and (3) at the end of a stated period of time.

14.

The maturity dates are: (a) March 13 of the next year, (b) August 4, (c) July 20, and (d) August 30.

15.

The missing amounts are: (a) €15,000, (b) €9,000, (c) 12%, and (d) four months.

16.

If a financial institution uses 360 days rather than 365 days, it will receive more interest revenue. The reason is that the denominator is smaller, which makes the fraction larger and, therefore, the interest revenue larger.

17.

When Jana Company has dishonored a note, the ledger can set up a receivable equal to the face amount of the note plus the interest due. It will then try to collect the balance due, or as much as possible. If there is no hope of collection it will write-off the receivable.

18.

Each of the major types of receivables should be identified in the statement of financial position or in the notes to the financial statements. Both the gross amount of receivables and the allowance for doubtful accounts should be reported. If collectible within a year or the operating cycle, whichever is longer, these receivables are reported as current assets immediately above short-term investments.

19.

Net credit sales for the period are 8.14 X £400,000 = $3,256,000.

8-7

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 8-1 (a) Accounts receivable. (b) Notes receivable. (c) Other receivables. BRIEF EXERCISE 8-2 (a) Accounts Receivable ........................................... Sales Revenue ..............................................

17,200

(b) Sales Returns and Allowances ........................... Accounts Receivable ...................................

3,800

(c) Cash ($13,400 – $268) .......................................... Sales Discounts ($13,400 X 2%).......................... Accounts Receivable ($17,200 – $3,800) .......

13,132 268

17,200 3,800

13,400

BRIEF EXERCISE 8-3 (a) Bad Debt Expense ............................................... Allowance for Doubtful Accounts ...............

31,000

(b) Current assets Prepaid insurance ........................................ Inventory ....................................................... Accounts receivable .................................... $600,000 Less: Allowance for doubtful Accounts ........................................... 31,000 Cash .............................................................. Total current assets .................................

8-8

31,000

$ 7,500 118,000 569,000 90,000 $784,500

BRIEF EXERCISE 8-4 (a) Allowance for Doubtful Accounts ............................ Accounts Receivable—Marcello ....................... (b)

(1) Before Write-Off Accounts receivable Allowance for doubtful accounts Cash realizable value

6,200 6,200

(2) After Write-Off

£700,000

£693,800

54,000 £646,000

47,800 £646,000

BRIEF EXERCISE 8-5 Accounts Receivable—Marcello ...................................... Allowance for Doubtful Accounts ............................

6,200

Cash ................................................................................... Accounts Receivable—Marcello ...............................

6,200

6,200 6,200

BRIEF EXERCISE 8-6 Bad Debt Expense [($800,000 – $38,000) X 2%] .............. Allowance for Doubtful Accounts ............................

15,240 15,240

BRIEF EXERCISE 8-7 (a) Bad Debt Expense [(£420,000 X 1%) – £1,500]............ Allowance for Doubtful Accounts .....................

2,700 2,700

(b) Bad Debt Expense [(£420,000 X 1%) + £740] = £4,940 BRIEF EXERCISE 8-8 (a) Cash (€175 – €7)......................................................... Service Charge Expense (€175 X 4%) ...................... Sales Revenue ....................................................

168 7

(b) Cash (€70,000 – €2,100) ............................................. Service Charge Expense (€70,000 X 3%) ................. Accounts Receivable .........................................

67,900 2,100

175

70,000 8-9

BRIEF EXERCISE 8-9 Interest (a) $800 (b) $1,120 (c) $200

Maturity Date August 9 October 12 July 11

BRIEF EXERCISE 8-10 Maturity Date

Annual Interest Rate

Total Interest

5% 8% 10%

$5,000 $ 600 $6,000

(a) May 31 (b) August 1 (c) September 7

BRIEF EXERCISE 8-11 Jan. 10 Feb. 9

Accounts Receivable ...................................... Sales Revenue .........................................

11,600

Notes Receivable............................................. Accounts Receivable ...............................

11,600

BRIEF EXERCISE 8-12 Accounts Receivable Turnover Ratio: $20B $20B = = 7.3 times ($2.7B + $2.8B) ÷ 2 $2.75B

Average Collection Period for Accounts Receivable:

365 days = 50 days 7.3 times

8-10

11,600 11,600

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 8-1 The following entry should be prepared to increase the balance in the Allowance for Doubtful Accounts from R$4,700 credit to R$15,500 credit (5% X R$310,000): Bad Debt Expense ..................................................... Allowance for Doubtful Accounts ................... (To record estimate of uncollectible accounts)

10,800 10,800

DO IT! 8-2 To speed up the collection of cash, Paltrow could sell its accounts receivable to a factor. Assuming the factor charges Paltrow a 3% service charge, it would make the following entry: Cash............................................................................ 970,000 Service Charge Expense ........................................... 30,000 Accounts Receivable........................................ 1,000,000 (To record sale of receivables to factor) DO IT! 8-3 (a)

The maturity date is September 30. When the life of a note is expressed in terms of months, you find the date it matures by counting the months from the date of issue. When a note is drawn on the last day of a month, it matures on the last day of a subsequent month.

(b) The interest to be received at maturity is $186: Face X Rate X Time = Interest $6,200 X 9% X 4/12 = $186 The entry recorded by Karbon Wholesalers at the maturity date is: Cash ..................................................................... 6,386 Notes Receivable .......................................... 6,200 Interest Revenue ........................................... 186 (To record collection of Bazaar note)

8-11

DO IT! 8-4 (a) Net credit sales

Average net accounts receivable

Accounts receivable turnover

$1,480,000

$112,000 + $108,000 2

13.5 times

Days in year

Accounts receivable = turnover

365

(b)

8-12

13.5 times

Average collection period in days 27 days

SOLUTIONS TO EXERCISES EXERCISE 8-1 March 1 3

15 31

Accounts Receivable—Lynda Company .... Sales Revenue ......................................

3,800

Sales Returns and Allowances .................... Accounts Receivable— Lynda Company .............................................

500

Cash .............................................................. Sales Discounts ............................................ Accounts Receivable— Lynda Company .............................................

3,234 66

Accounts Receivable ................................... Sales Revenue ......................................

200

Accounts Receivable ................................... Interest Revenue ...................................

Accounts Receivable—Jackie Inc ............... Sales Revenue ......................................

7,000

Cash ($7,000 – $140) .................................... Sales Discounts (2% X $7,000) .................... Accounts Receivable—Jackie Inc .......

6,860 140

Accounts Receivable—C. Bybee ................. Sales Revenue ......................................

9,000

Cash .............................................................. Accounts Receivable—C. Bybee .........

6,000

Accounts Receivable—C. Bybee ................. Interest Revenue [2% X ($9,000 – $6,000)] ....................

3,800

500

3,300 200 3

EXERCISE 8-2 (a) Jan. 6 16

(b) Jan. 10 Feb. 12 Mar. 10

7,000

9,000 6,000

8-13

EXERCISE 8-3 (a)

Dec. 31

(b) (1) Dec. 31

(2) Dec. 31

Bad Debt Expense .............................. Accounts Receivable—T.Thum ...... Bad Debt Expense [(€840,000 – €28,000) X 1%] ............ Allowance for Doubtful Accounts .................................. Bad Debt Expense .............................. Allowance for Doubtful Accounts [(€110,000 X 10%) – €2,100] ..... Bad Debt Expense [(€840,000 – €28,000) X .75%] ......... Allowance for Doubtful Accounts .................................. Bad Debt Expense .............................. Allowance for Doubtful Accounts [(€110,000 X 6%) + €200] .........

1,400 1,400 8,120 8,120 8,900 8,900

6,090 6,090 6,800 6,800

EXERCISE 8-4 (a) Accounts Receivable 1–30 days 31–60 days 61–90 days Over 90 days

(b) Mar. 31

8-14

Amount

Estimated Uncollectible

$65,000 17,600 8,500 7,000

2.0 5.0 30.0 50.0

$1,300 880 2,550 3,500 $8,230

Bad Debt Expense ...................................... Allowance for Doubtful Accounts ($8,230 – $900) .................................

7,330 7,330

EXERCISE 8-5 Allowance for Doubtful Accounts ................................... Accounts Receivable ................................................

14,100

Accounts Receivable ....................................................... Allowance for Doubtful Accounts ...........................

1,800

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

1,800

Bad Debt Expense ............................................................ Allowance for Doubtful Accounts [£19,000 – (£15,000 – £14,100 + £1,800)] ..............

16,300

14,100 1,800 1,800

16,300

EXERCISE 8-6 December 31, 2013 Bad Debt Expense (2% X $360,000) ................................ Allowance for Doubtful Accounts ...........................

7,200

May 11, 2014 Allowance for Doubtful Accounts ................................... Accounts Receivable—Vetter ..................................

1,100

June 12, 2014 Accounts Receivable—Vetter .......................................... Allowance for Doubtful Accounts ...........................

1,100

Cash .................................................................................. Accounts Receivable—Vetter ..................................

7,200

1,100

1,100 1,100 1,100

EXERCISE 8-7 (a) Mar. 3

Cash (W620,000,000 – W18,600,000).................................... 601,400,000 Service Charge Expense (3% X W620,000,000).................... 18,600,000 Accounts Receivable................... 620,000,000

(b) May 10

Cash (W3,500,000 – W175,000)........ Service Charge Expense (5% X W3,500,000)........................ Sales Revenue........................... .

3,325,000 175,000 3,500,000 8-15

EXERCISE 8-8 (a) Apr. 2 May 3

June 1

(b) July 4

Accounts Receivable—J. Keiser ............ Sales Revenue ..................................

1,500

Cash.......................................................... Accounts Receivable— J. Keiser ........................................

900

Accounts Receivable—J. Keiser ............ Interest Revenue [($1,500 – $900) X 1%] ..................

Cash.......................................................... Service Charge Expense (3% X $200)........................................... Sales Revenue ..................................

194

Accounts Receivable ............................... Sales Revenue ..................................

18,000

Cash (HK$4,800 – HK$96) ....................... Service Charge Expense (HK$4,800 X 2%)................................... Sales Revenue ..................................

4,704

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

10,000

Accounts Receivable (HK$8,000 X 1.5%) Interest Revenue ..............................

120

1,500

900

6 200

EXERCISE 8-9 (a) Jan. 15 20

Feb. 10

18,000

96 4,800

10,000

(b) Interest Revenue is reported under other income and expense. Service Charge Expense is a selling expense.

8-16

120

EXERCISE 8-10 (a) Nov. 1 Dec. 11 16 31

2014 Notes Receivable ............................................ Cash .........................................................

15,000 15,000

Notes Receivable ............................................ Sales Revenue .........................................

6,750

Notes Receivable ............................................ Accounts Receivable—Russo ................

4,400

Interest Receivable ......................................... Interest Revenue* ....................................

277

6,750 4,400 277

*Calculation of interest revenue: Jeanne’s note: $15,000 X 9% X 2/12 = $225 Sharbo’s note: 6,750 X 8% X 20/360 = 30 Russo’s note: 4,400 X 12% X 15/360 = 22 Total accrued interest $277 (b) Nov. 1

2015 Cash ................................................................. Interest Receivable.................................. Interest Revenue* .................................... Notes Receivable.....................................

16,350 225 1,125 15,000

*($15,000 X 9% X 10/12) EXERCISE 8-11 May 1

Dec. 31

2014 Notes Receivable ............................................. Accounts Receivable— Monroe ..................................................

7,500 7,500

Interest Receivable .......................................... Interest Revenue (€7,500 X 9% X 8/12) .............................

450

Interest Revenue .............................................. Income Summary .....................................

450

450 450

8-17

EXERCISE 8-11 (Continued)

May 1

2015 Cash ................................................................. Notes Receivable ..................................... Interest Receivable .................................. Interest Revenue (€7,500 X 9% X 4/12) ............................

8,175 7,500 450 225

EXERCISE 8-12 5/1/14 7/1/14 12/31/14

4/1/15

5/1/15

8-18

Notes Receivable ............................................ Accounts Receivable—Crane .................

16,000

Notes Receivable ............................................ Cash .........................................................

25,000

Interest Receivable ......................................... Interest Revenue ($16,000 X 12% X 8/12) ........................

1,280

Interest Receivable ......................................... Interest Revenue ($25,000 X 10% X 6/12) ........................

1,250

Accounts Receivable—Howard...................... Notes Receivable..................................... Interest Receivable .................................. Interest Revenue ($25,000 X 10% X 3/12 = $625) ............

26,875

Cash ................................................................. Notes Receivable..................................... Interest Receivable .................................. Interest Revenue ($16,000 X 12% X 4/12 = $640) ............

17,920

16,000 25,000

1,280

1,250 25,000 1,250 625 16,000 1,280 640

EXERCISE 8-13 (a)

May 2

(b) Nov. 2

Notes Receivable.................................. 7,600,000 Cash.................................................

7,600,000

Accounts Receivable—Cortland Inc....................................................... 7,904,000 Notes Receivable.......................... Interest Revenue (¥7,600,000 X 8% X 1/2).............. (To record the dishonor of Cortland Inc. note with expectation of collection)

7,600,000 304,000

Allowance for Doubtful Accounts.......... 7,600,000 Notes Receivable............................. (To record the dishonor of Cortland Inc. note with no expectation of collection)

7,600,000

EXERCISE 8-14 (a) Beginning accounts receivable ....................................... Net credit sales ................................................................. Cash collections ............................................................... Accounts written off ......................................................... Ending accounts receivable ............................................

$ 100,000 1,000,000 (920,000) (30,000) $ 150,000

(b) $1,000,000/[($100,000 + $150,000)/2] = 8 (c) 365/8 = 45.6 days

8-19

SOLUTIONS TO PROBLEMS PROBLEM 8-1A

(a) 1. 2. 3. 4. 5.

Accounts Receivable ................................ Sales Revenue ...................................

3,315,000

Sales Returns and Allowances ................ Accounts Receivable ........................

50,000

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

2,810,000

Allowance for Doubtful Accounts ............ Accounts Receivable ........................

90,000

Accounts Receivable ................................ Allowance for Doubtful Accounts.......

29,000

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

29,000

3,315,000 50,000 2,810,000 90,000 29,000 29,000

(b) Bal. (1) (5) Bal.

8-20

Accounts Receivable 960,000 (2) 50,000 3,315,000 (3) 2,810,000 29,000 (4) 90,000 (5) 29,000 1,325,000

Allowance for Doubtful Accounts (4) 90,000 Bal. 70,000 (5) 29,000

Bal.

9,000

PROBLEM 8-1A (Continued) (c) Balance before adjustment [see (b)] .................................... Balance needed ..................................................................... Adjustment required ..............................................................

R$ 9,000 125,000 R$116,000

The journal entry would therefore be as follows: Bad Debt Expense........................................... Allowance for Doubtful Accounts .......... (d)

116,000 116,000

R$3,265,000 R$3,315,000 – R$50,000 = = 3.12 times (R$890 ,000 + R$1,200 ,000) ÷ 2 R $ 1,045 ,0 00

8-21

PROBLEM 8-2A

(a) £66,000. (b) £75,000 (£2,500,000 X 3%). (c) £64,900 [(£970,000 X 7%) – £3,000]. (d) £70,900 [(£970,000 X 7%) + £3,000]. (e) The weakness of the direct write-off method is two-fold. First, it does not match expenses with revenues. Second, the accounts receivable are not stated at cash realizable value at the statement of financial position date.

8-22

PROBLEM 8-3A

(a) Dec. 31

Bad Debt Expense .................................... Allowance for Doubtful Accounts ($41,730 – $9,000) .........................

32,730 32,730

(a) & (b) Bad Debt Expense Date Explanation 2014 Dec. 31 Adjusting

Ref.

Debit

Credit

32,730

Balance 32,730

Allowance for Doubtful Accounts Date 2014 Dec. 31 31 2015 Mar. 31 May 31

Explanation

Ref.

Debit

Balance Adjusting

Credit

Balance

32,730

9,000 41,730

1,000

40,730 41,730

1,000

(b) Mar. 31

May 31 31

2015 (1) Allowance for Doubtful Accounts ........... Accounts Receivable........................ (2) Accounts Receivable ............................... Allowance for Doubtful Accounts ...... Cash .......................................................... Accounts Receivable ........................ 2015 Bad Debt Expense .................................... Allowance for Doubtful Accounts ($31,600 + $800) ............................

1,000 1,000 1,000 1,000 1,000 1,000

32,400 32,400 8-23

PROBLEM 8-4A

(a)

Total estimated bad debts Number of Days Outstanding 31–60 61–90 91–120

Total

0–30

HK$193,000

HK$70,000 1%

HK$46,000 HK$39,000 3% 5%

HK$23,000 HK$15,000 8% 10%

HK$7,370

HK$700

HK$1,380

HK$1,950

HK$1,840

(b) Bad Debt Expense .................................................... Allowance for Doubtful Accounts [HK$7,370 + HK$3,000] .....................................

10,370

(c) Allowance for Doubtful Accounts............................ Accounts Receivable ..........................................

5,000

(d) Accounts Receivable ................................................ Allowance for Doubtful Accounts ......................

5,000

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

5,000

Accounts receivable % uncollectible Estimated Bad debts

Over 120

HK$1,500

10,370 5,000 5,000 5,000

(e) If Hú Inc. used 3% of total accounts receivable rather than aging the individual accounts the bad debt expense adjustment would be HK$8,790 [(HK$193,000 X 3%) + HK$3,000]. The rest of the entries would be the same as they were when aging the accounts receivable. Aging the individual accounts rather than applying a percentage to the total accounts receivable should produce a more accurate allowance account and bad debts expense.

8-24

PROBLEM 8-5A

(a) The allowance method. Since the balance in the allowance for doubtful accounts is given, they must be using this method because the account would not exist if they were using the direct write-off method. (b) (1) Dec. 31

(2) Dec. 31

Bad Debt Expense ($11,750 – $800) ............................ Allowance for Doubtful Accounts................................ Bad Debt Expense ($918,000 X 1%) ............................. Allowance for Doubtful Accounts................................ Bad Debt Expense ($11,750 + $800) ............................ Allowance for Doubtful Accounts................................

10,950 10,950 9,180 9,180

12,550 12,550

Bad Debt Expense ............................ Allowance for Doubtful Accounts................................

9,180

(d) Allowance for Doubtful Accounts ............................ Accounts Receivable .........................................

3,000

9,180

3,000

Note: The entry is the same whether the amount of bad debt expense at the end of 2014 was estimated using the percentage-of-receivables or the percentage-of-sales method. (e) Bad Debt Expense ..................................................... Accounts Receivable ......................................... (f)

3,000 3,000

Allowance for Doubtful Accounts is a contra-asset account. It is subtracted from the gross amount of accounts receivable so that accounts receivable is reported at its cash realizable value. .

8-25

PROBLEM 8-6A

(a) Oct. 7 12

15 15

Accounts Receivable ................................... Sales Revenue ......................................

6,300

Cash ($1,200 – $36)...................................... Service Charge Expense ($1,200 X 3%) ............................................ Sales Revenue ......................................

1,164

Accounts Receivable ................................... Interest Revenue ..................................

460

Cash.............................................................. Notes Receivable ................................. Interest Receivable ($8,000 X 8% X 45/360) ..................... Interest Revenue ($8,000 X 8% X 15/360) .....................

8,107

Accounts Receivable—Skinner .................. Notes Receivable ................................. Interest Receivable ($9,000 X 10% X 36/360) ................... Interest Revenue ($9,000 X 10% X 24/360) ...................

9,150

6,300

36 1,200 460 8,000 80 27

Interest Receivable ($14,000 X 9% X 1/12)............................... Interest Revenue ..................................

9,000 90 60 105 105

(b) Notes Receivable Date Explanation Oct. 1 Balance 15 24 8-26

Ref. 

Debit

Credit 8,000 9,000

Balance 31,000 23,000 14,000

PROBLEM 8-6A (Continued) Accounts Receivable Date Explanation Oct. 7 15 24 Interest Receivable Date Explanation Oct. 1 Balance 15 24 31

Ref.

Debit 6,300 460 9,150

Credit

Balance 6,300 6,760 15,910

Ref. 

Debit

Credit

Balance 170 90 0 105

80 90 105

(c) Current assets Notes receivable............................................................... Accounts receivable ........................................................ Interest receivable............................................................ Total receivables ......................................................

$14,000 15,910 105 $30,015

8-27

PROBLEM 8-7A

Jan.

5 20

Feb. 18 Apr. 20

May 25 Aug. 18

Sept. 1

8-28

Accounts Receivable—Zwingle Company.......... Sales Revenue ............................................

24,000

Notes Receivable ............................................... Accounts Receivable— Zwingle Company .................................................

24,000

Notes Receivable ............................................... Sales Revenue ............................................

8,000

Cash (€24,000 + €540) ........................................ Notes Receivable ....................................... Interest Revenue (€24,000 X 9% X 3/12) .............................

24,540

Cash (€30,000 + €1,200) ..................................... Notes Receivable ....................................... Interest Revenue (€30,000 X 12% X 4/12) ...........................

31,200

Notes Receivable ............................................... Accounts Receivable— Isabella Inc..........

4,000

Cash (€8,000 + €320).......................................... Notes Receivable ....................................... Interest Revenue (€8,000 X 8% X 6/12) ...............................

8,320

Accounts Receivable—Isabella Inc. (€4,000 + €70) ................................................. Notes Receivable ....................................... Interest Revenue (€4,000 X 7% X 3/12) ............................... Notes Receivable ............................................... Sales Revenue ............................................

24,000

24,000 8,000 24,000 540 30,000 1,200 4,000 8,000 320 4,070 4,000 70 12,000 12,000

8-29

PROBLEM 8-1B

(a) 1. 2. 3. 4. 5.

Accounts Receivable ................................... 2,400,000 Sales Revenue ...................................... Sales Returns and Allowances ................... Accounts Receivable ...........................

2,400,000

45,000 45,000

Cash .............................................................. 2,250,000 Accounts Receivable ........................... Allowance for Doubtful Accounts ............... Accounts Receivable ...........................

13,000

Accounts Receivable ................................... Allowance for Doubtful Accounts ...........................................

2,000

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

2,000

2,250,000 13,000

2,000 2,000

(b) Bal. (1) (5) Bal.

Accounts Receivable 220,000 (2) 45,000 2,400,000 (3) 2,250,000 2,000 (4) 13,000 (5) 2,000 312,000

Allowance for Doubtful Accounts (4) 13,000 Bal. 15,000 (5) 2,000

Bal.

4,000

(c) Balance before adjustment [see (b)] ................................... Balance needed .................................................................... Adjustment required .............................................................

$ 4,000 22,000 $18,000

The journal entry would therefore be as follows: Bad Debt Expense ............................................ Allowance for Doubtful Accounts ...........

(d)

8-30

$2,355,000 $2,400,000 – $45,000 = = 9.52 times $247, 500 ($290,000 + $205,000) ÷ 2 .

18,000 18,000

PROBLEM 8-2B

(a) $23,400. (b) $27,600 ($920,000 X 3%). (c) $21,830 [($369,000 X 7%) – $4,000]. (d) $27,830 [($369,000 X 7%) + $2,000]. (e) There are two major weaknesses with the direct write-off method. First, it does not match expenses with the associated revenues. Second, the accounts receivable are not stated at cash realizable value at the statement of financial position date.

8-31

PROBLEM 8-3B

(a) Dec. 31

Bad Debt Expense ................................... Allowance for Doubtful Accounts ($54,250 – $14,000).......................

40,250 40,250

(a) & (b) Bad Debt Expense Date Explanation 2014 Dec. 31 Adjusting

Ref.

Debit

Credit

40,250

Balance 40,250

Allowance for Doubtful Accounts Date Explanation 2014 Dec. 31 Balance 31 Adjusting 2015 Mar. 1 May 1 (b) Mar. 1

May 1 1

8-32

Ref.

Debit

Credit

Balance

40,250

14,000 54,250

1,900

52,350 54,250

1,900

2015 (1) Allowance for Doubtful Accounts ............ Accounts Receivable ......................... (2) Accounts Receivable ................................ Allowance for Doubtful Accounts ....... Cash ........................................................... Accounts Receivable ......................... 2015 Bad Debt Expense ..................................... Allowance for Doubtful Accounts ($42,300 + $3,400) .......................... .

1,900 1,900 1,900 1,900 1,900 1,900

45,700 45,700

PROBLEM 8-4B

(a)

Total estimated bad debts

Total

0–30

Accounts receivable CHF383,000 CHF220,000 % uncollectible 1% Estimated Bad debts CHF9,840 CHF2,200

31–60

Number of Days Outstanding 61–90 91–120 Over 120

CHF90,000 3%

CHF40,000 CHF18,000 CHF15,000 5% 8% 10%

CHF2,700

CHF2,000

CHF1,440

(b) Bad Debt Expense .................................................... Allowance for Doubtful Accounts (CHF9,840 – CHF1,600) ...................................

8,240

(c) Allowance for Doubtful Accounts ........................... Accounts Receivable .........................................

1,100

(d) Accounts Receivable ................................................ Allowance for Doubtful Accounts.....................

700

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

700

CHF1,500

8,240 1,100 700 700

(e) When an allowance account is used, an adjusting journal entry is made at the end of each accounting period. This entry satisfies the expense recognition principle by recording the bad debt expense in the period in which the sales occur.

8-33

PROBLEM 8-5B

(a) (1) Dec. 31

(2) Dec. 31

(b) (1) Dec. 31

(2) Dec. 31

Bad Debt Expense ($13,800 – $1,400).......................... Allowance for Doubtful Accounts ................................ Bad Debt Expense ($600,000 X 2%) ............................. Allowance for Doubtful Accounts ................................ Bad Debt Expense ($13,800 + $1,400) ......................... Allowance for Doubtful Accounts ................................

12,400 12,400 12,000 12,000

15,200 15,200

Bad Debt Expense ............................ Allowance for Doubtful Accounts ................................

12,000

(c) Allowance for Doubtful Accounts............................. Accounts Receivable .........................................

3,200

12,000

3,200

Note: The entry is the same whether the amount of bad debt expense at the end of 2014 was estimated using the percentage-of-receivables or the percentage-of-sales method. (d) Bad Debt Expense ..................................................... Accounts Receivable .........................................

3,200 3,200

(e) The advantages of the allowance method over the direct write-off method are: (1) It attempts to match bad debt expense related to uncollectible accounts receivable with sales revenues on the income statement. (2) It attempts to show the cash realizable value of the accounts receivable on the statement of financial position. 8-34

PROBLEM 8-6B

(a) July 5 14

14 15

Accounts Receivable ................................ Sales Revenue ...................................

7,200

Cash (€1,300 – €39) ................................... Service Charge Expense (€1,300 X 3%) ......................................... Sales Revenue ...................................

1,261

Accounts Receivable ................................ Interest Revenue ................................

510

Cash ........................................................... Notes Receivable ............................... Interest Receivable (€12,000 X 9% X 45/360) ................. Interest Revenue (€12,000 X 9% X 15/360) .................

12,180

Accounts Receivable—Ascot Co. ............ Notes Receivable ............................... Interest Receivable (€30,000 X 10% X 36/360) ............... Interest Revenue (€30,000 X 10% X 24/360) ...............

30,500

Interest Receivable (€18,000 X 12% X 1/12) .......................... Interest Revenue ................................

7,200

39 1,300 510 12,000 135 45 30,000 300 200 180 180

(b) Notes Receivable Date Explanation July 1 Balance 15 24

Ref. 

Debit

Credit 12,000 30,000

Balance 60,000 48,000 18,000

8-35

PROBLEM 8-6B (Continued) Accounts Receivable Date Explanation July 5 14 24 Interest Receivable Date Explanation July 1 Balance 15 24 31 Adjusting

Ref.

Debit 7,200 510 30,500

Credit

Balance 7,200 7,710 38,210

Ref. 

Debit

Credit

Balance 435 300 0 180

135 300 180

(c) Current assets Notes receivable ............................................................... Accounts receivable ........................................................ Interest receivable ............................................................ Total receivables.......................................................

8-36

€18,000 38,210 180 €56,390

PROBLEM 8-7B

Jan.

Feb. 2

12 26 Apr.

5 12

June 2

July

15 Oct. 15

Accounts Receivable—Patrick Company ........................................................ Sales Revenue............................................

8,400 8,400

Notes Receivable ............................................... Accounts Receivable—Patrick Company.................................................

8,400

Notes Receivable ............................................... Sales Revenue............................................

13,500

Accounts Receivable—Felton Co. .................... Sales Revenue............................................

7,000

Notes Receivable ............................................... Accounts Receivable— Felton Co. ...........

7,000

Cash ($13,500 + $225) ....................................... Notes Receivable ....................................... Interest Revenue ($13,500 X 10% X 2/12) ...........................

13,725

Cash ($8,400 + $280) ......................................... Notes Receivable ....................................... Interest Revenue ($8,400 X 10% X 4/12) .............................

8,680

Accounts Receivable—Felton Co. ($7,000 + $140) ............................................... Notes Receivable ....................................... Interest Revenue ($7,000 X 8% X 3/12) ...............................

8,400 13,500 7,000 7,000 13,500 225 8,400 280 7,140 7,000 140

Notes Receivable ............................................... Sales Revenue ...........................................

14,000

Allowance for Doubtful Accounts .................... Notes Receivable .......................................

14,000

14,000 14,000 8-37

COMPREHENSIVE PROBLEM SOLUTION (a) Jan. 1

3 8 11

17 21 24

27 31 8-38

Notes Receivable ........................................... Accounts Receivable— Leon Company ....................................

1,500

Allowance for Doubtful Accounts ................ Accounts Receivable .............................

780

Inventory ........................................................ Accounts Payable ..................................

17,200

Accounts Receivable..................................... Sales Revenue........................................

25,000

Cost of Goods Sold ....................................... Inventory.................................................

17,500

Cash ............................................................... Service Charge Expense ............................... Sales Revenue........................................

1,164 36

Cost of Goods Sold ....................................... Inventory.................................................

780

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

22,900

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

16,300

Accounts Receivable..................................... Allowance for Doubtful Accounts .........

330

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

330

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

1,400

Other Operating Expenses ........................... Cash ........................................................

3,218

1,500 780 17,200 25,000 17,500

1,200 780 22,900 16,300 330 330 1,400 3,218

COMPREHENSIVE PROBLEM SOLUTION (Continued) Adjusting Entries Jan. 31 31

(b)

Interest Receivable ........................................ Interest Revenue ($1,500 X 8% X 1/12) ....... Bad Debt Expense [($19,600 X 5%) – ($800 – $780 + $330)] .................................. Allowance for Doubtful Accounts ......... Supplies Expense .......................................... Supplies ($1,400 – $470) ........................

10 10 630 630 930 930

VICTORIA COMPANY Adjusted Trial Balance January 31, 2014 Cash ............................................................ Notes Receivable ....................................... Accounts Receivable ................................. Allowance for Doubtful Accounts............. Interest Receivable .................................... Inventory .................................................... Supplies ...................................................... Accounts Payable ...................................... Share Capital—Ordinary ........................... Retained Earnings ..................................... Sales Revenue ........................................... Cost of Goods Sold ................................... Supplies Expense ...................................... Bad Debt Expense ..................................... Service Charge Expense ........................... Other Operating Expenses ........................ Interest Revenue ........................................

Debit $16,576 1,500 19,600

980 10 8,320 470 9,650 20,000 12,730 26,200 18,280 930 630 36 3,218 $69,570

Credit

10 $69,570

8-39

COMPREHENSIVE PROBLEM SOLUTION (Continued) (b)

Optional T accounts for accounts with multiple transactions

Cash 1/1 Bal. 13,100 1/21 1/15 1,164 1/27 1/17 22,900 1/31 1/24 330 1/31 Bal. 16,576

16,300 1,400 3,218

1/27 1/31 Bal.

1/21 Accounts Receivable 1/1 Bal. 19,780 1/1 1,500 1/11 25,000 1/3 780 1/24 330 1/17 22,900 1/24 330 1/31 Bal. 19,600 Allowance for Doubtful Accounts 1/3 780 1/1 Bal. 800 1/24 330 1/31 630 1/31 Bal. 980 Inventory 1/1 Bal. 9,400 1/11 1/8 17,200 1/15 1/31 Bal. 8,320

8-40

Supplies 1,400 1/31 470

930

Accounts Payable 16,300 1/1 Bal. 8,750 1/8 17,200 1/31 Bal. 9,650 Sales Revenue 1/11 25,000 1/15 1,200 1/31 Bal. 26,200

Cost of Goods Sold 1/11 17,500 1/15 780 1/31 Bal. 18,280

17,500 780

COMPREHENSIVE PROBLEM SOLUTION (Continued) (c)

VICTORIA COMPANY Income Statement For the Month Ending January 31, 2014 Sales revenue.................................................. Cost of goods sold ......................................... Gross profit ..................................................... Operating expenses........................................ Other operating expenses ...................... Supplies expense .................................... Bad debt expense .................................... Service charge expense .......................... Total operating expenses ............................... Income from operations ................................. Other income and expense ............................ Interest revenue ....................................... Net Income ......................................................

$26,200 18,280 7,920 $3,218 930 630 36 4,814 3,106 10 $ 3,116

8-41

COMPREHENSIVE PROBLEM SOLUTION (Continued) VICTORIA COMPANY Retained Earnings Statement For the Month Ending January 31, 2014 Retained Earnings, January 1 ........................................... Add: Net income ................................................................ Retained Earnings, January 31 .........................................

$12,730 3,116 $15,846

VICTORIA COMPANY Statement of Financial Position January 31, 2014 Assets Current assets Supplies ..................................................... Inventory .................................................... Notes receivable ........................................ Accounts receivable .................................. Less: Allowance for doubtful accounts ......................................... Interest receivable ..................................... Cash............................................................ Total assets .......................................................

470 8,320 1,500

$19,600 980

18,620 10 16,576 $45,496

Equity and Liabilities Equity Share capital—ordinary ........................... Retained earnings...................................... Current liabilities Accounts payable ...................................... Total equity and liabilities ................................

8-42

$20,000 15,846

$ 35,846 9,650 $45,496

CCC8

(a)

CONTINUING COOKIE CHRONICLE

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 Inventory turnover = Cost of goods sold ÷ Average inventory Days sales in inventory = Days in the year ÷ Inventory turnover

Given the type of business it is unlikely that Curtis would have a significant amount of accounts receivable. Positive working capital and a high current ratio are indications that the company has good liquidity and will be more likely to be able to pay for the mixer. 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. 2. Other alternatives to extending credit to Curtis include: • Waiting for 30 days to make the sale. • Have Curtis borrow from the bank. • Have Curtis use a credit card to finance the purchase.

8-43

CCC8 (Continued) (a) (Continued) 3. The advantage of extending credit to customers is the anticipated increase in sales expected from customers who will purchase goods only if they can receive credit. The disadvantages of extending credit are the additional costs incurred to keep track of amounts owed, the additional costs incurred when staff need to be assigned to follow up on late account balances, and the risk of not collecting a receivable from a customer who is unable to pay. The advantages of allowing customers to use credit cards include making the purchase easier for the customer, potentially increasing sales, as customers are not limited to the amount of cash in their wallet, and reducing the accounts receivable you have to manage if credit cards are used instead of granting credit to customers. In addition, the credit card company assumes the risk of nonpayment, and if a bank credit card is used the seller has cash immediately. The disadvantage is the cost to your business. When a customer makes a purchase using a credit card you will have to pay a percentage of the sale to the credit card company. The rate varies but 3% would not be unusual. You will also have to pay to rent the equipment to process the credit card sales. The fee is not large but is an ongoing expense. (b) June 1 Accounts Receivable—Lesperance ..... Sales Revenue................................... Cost of Goods Sold ............................... Inventory............................................

1,150

30 Notes Receivable ................................. Accounts Receivable—Lesperance

1,150

8-44

1,150 620 620 1,150

CCC8 (Continued) (b) (Continued) July 31 Accounts Receivable—Lesperance [$1,150 + $8] 1,158 Notes Receivable ............................................ Interest Revenue [$1,150 X 8.25% X 1/12] .......

1,150 8

Aug. 7 Cash ..................................................................... Accounts Receivable—Lesperance...............

1,158

8-45

BYP 8-1

(a)

FINANCIAL REPORTING PROBLEM

CAF COMPANY Accounts Receivable Aging Schedule May 31, 2014

Not yet due Less than 30 days past due 30 to 60 days past due 61 to 120 days past due 121 to 180 days past due Over 180 days past due

(b)

Proportion of Total

Amount in Category

Probability of NonCollection

Estimated Uncollectible Amount

.600 .220 .090 .050 .025 .015 1.000

$ 840,000 308,000 126,000 70,000 35,000 21,000 $1,400,000

.02 .04 .06 .09 .25 .70

$16,800 12,320 7,560 6,300 8,750 14,700 $66,430

CAF COMPANY Analysis of Allowance for Doubtful Accounts May 31, 2014 June 1, 2013 balance .................................................... Bad debts expense accrual ($2,800,000 X .045).......... Balance before write-offs of bad accounts ................. Write-offs of bad accounts ........................................... Balance before year-end adjustment .......................... Estimated uncollectible amount .................................. Additional allowance needed ....................................... Bad Debt Expense ........................................................ 12,930 Allowance for Doubtful Accounts ........................

8-46

$ 29,500 126,000 155,500 102,000 53,500 66,430 $ 12,930

12,930

BYP 8-1 (Continued) (c) 1. Steps to Improve the Accounts Receivable Situation

2. Risks and Costs Involved

Establish more selective creditgranting policies, such as more restrictive credit requirements or more thorough credit investigations.

This policy could result in lost sales and increased costs of credit evaluation. The company may be all but forced to adhere to the prevailing credit-granting policies of the office equipment and supplies industry.

Establish a more rigorous collection policy either through external collection agencies or by its own personnel.

This policy may offend current customers and thus risk future sales. Increased collection costs could result from this policy.

Charge interest on overdue accounts. Insist on cash on delivery (cod) or cash on order (coo) for new customers or poor credit risks.

This policy could result in lost sales and increased administrative costs.

8-47

BYP 8-2

COMPARATIVE ANALYSIS PROBLEM

(a) (1) Accounts receivable turnover ratio Zetar

Nestlé

£131,922 (£24,935 + £19,062) ÷ 2

CHF109,722 (CHF12,083 + CHF12,309) ÷ 2

£131,922 = 6.00 times £21,998.5

CHF109,722 = 9.0 times CHF12,196

(2) Average collection period 365 = 60.8 days 6.0

365 9.0

= 40.6 days

(b) Nestlé’s average collection period is 20 days shorter the Zetar’s. While this might be due to Zetar’s difficulty in collecting from customers, it also might be at least partially explained by our assumption that all receivables are trade receivables.

8-48

BYP 8-3

(a)

REAL-WORLD FOCUS

Factoring invoices enhances cash flow and allows a company to meet business expenses and take on new opportunities. The benefits of factoring include: • • • •

Predictable cash flow and elimination of slow payments. Flexible financing, as factoring line is tied to sales. It’s the ideal tool for growth. Factoring is easy to obtain. Works well with startups and established companies. Factoring financing lines can be setup in a few days.

(b)

Factoring rates range between 1.5% and 3.5% per month. The two major variables considered when determining the rate are: (1) the size of the transaction, and (2) the credit quality of the company’s clients.

(c)

The first installment is paid within a couple of days and is typically 90% of the invoice amount. After customers pay the invoice amount to the factor, the second installment (10%) is paid, less a fee for the transaction.

8-49

BYP 8-4

DECISION-MAKING ACROSS THE ORGANIZATION

(a) Net credit sales .................................... Credit and collection expenses Collection agency fees ............... Salary of accounts receivable clerk ......................................... Uncollectible accounts .............. Billing and mailing costs ........... Credit investigation fees ............ Total ..................................... Total expenses as a percentage of net credit sales ................................

2014

2013

2012

$500,000

$650,000

$400,000

2,450

2,500

2,300

4,100 8,000 2,500 750 $ 17,800

4,100 10,400 3,250 975 $ 21,225

4,100 6,400 2,000 600 $ 15,400

3.56%

3.27%

3.85%

$ 25,000

$ 32,500

$ 20,000

Investment earnings (8%) ...................

Total credit and collection expenses per above ......................................... Add: Investment earnings* ................ Net credit and collection expenses ........

$ 17,800 2,000 $ 19,800

$ 21,225 2,600 $ 23,825

$ 15,400 1,600 $ 17,000

Net expenses as a percentage of net credit sales ................................

3.96%

3.67%

4.25%

(b) Average accounts receivable (5%).........

2,000

2,600

1,600

*The investment earnings on the cash tied up in accounts receivable is an additional expense of continuing the existing credit policies. (c) The analysis shows that the credit card fee of 4% of net credit sales will be higher than the percentage cost of credit and collection expenses in each year before considering the effect of earnings from other investment opportunities. However, after considering investment earnings, the credit card fee of 4% will be less than the company’s percentage cost if annual net credit sales are less than $500,000. 8-50

BYP 8-4 (Continued) Finally, the decision hinges on: (1) the accuracy of the estimate of investment earnings, (2) the expected trend in credit sales, and (3) the effect the new policy will have on sales. Non-financial factors include the effects on customer relationships of the alternative credit policies and whether the Piweks want to continue with the problem of handling their own accounts receivable.

8-51

BYP 8-5

COMMUNICATION ACTIVITY

Of course, this solution will differ from student to student. Important factors to look for would be definitions of the methods, how they are similar and how they differ. Also, look for use of good sentence structure, correct spelling, etc. Example: Dear Lily, The three methods you asked about are methods of dealing with uncollectible accounts receivable. Two of them, percentage-of-sales and percentage-ofreceivables, are “allowance” methods used to estimate the amount uncollectible. Under the percentage-of-sales basis, management establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This is based on past experience and anticipated credit policy. The percentage is then applied to either total credit sales or net credit sales of the current year. This basis of estimating emphasizes the matching of expenses with revenues. Under the percentage-of-receivables basis, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. Customer accounts are classified by the length of time they have been unpaid. This basis emphasizes cash realizable value of receivables and is therefore deemed a “statement of financial position” approach. The direct write-off method does not estimate losses and an allowance account is not used. Instead, when an account is determined to be uncollectible, it is written off directly to Bad Debt Expense. Unless bad debt losses are insignificant, this method is not acceptable for financial reporting purposes. Sincerely,

8-52

BYP 8-6

ETHICS CASE

(a) The stakeholders in this situation are:  The president of Vestin Co.  The controller of Vestin Co.  The shareholders. (b) Yes. The controller is posed with an ethical dilemma—should he/she follow the president’s “suggestion” and prepare misleading financial statements (understated net income) or should he/she attempt to stand up to and possibly anger the president by preparing a fair (realistic) income statement. (c) Vestin Co.’s growth rate should be a product of fair and accurate financial statements, not vice versa. That is, one should not prepare financial statements with the objective of achieving or sustaining a predetermined growth rate. The growth rate should be a product of management and operating results, not of creative accounting.

8-53

GAAP EXERCISE

GAAP-1 The FASB and IASB have both worked toward reporting financial instruments at fair value. Both require disclosure of fair value information in notes to financial statements and both permit (but do not require) companies to record some types of financial instruments at fair value. IFRS requires that specific loans and receivables be reviewed for impairment and then all loans and receivables as a group be reviewed. This “twotiered” approach is not used by the FASB. IFRS and GAAP also differ in the criteria used to derecognize receivables. IFRS considers risks and rewards as well as loss of control over the receivables sold or factored. GAAP uses only the loss of control as its criteria. In addition, IFRS allows partial derecognition but GAAP does not.

8-54

GAAP FINANCIAL REPORTING PROBLEM

GAAP 8-2 (a) Accounts receivable turnover ratio 2010

2009

$517,149 __ ($37,394+$37,512)/2

$495,592 ___ ($37,512+$31,213)/2

= $517,149 $37,453

= $495,592 $34,362.50

= 13.8 times

= 14.4 times

Average collection period 365 = 26.4 days 13.8

(b)

365 = 25.3 days 14.4

The accounts receivable turnover ratio measures the number of times, on average, a company collects accounts receivable during a period. The average collection period measures the number of days it takes to collect a receivable. From the results shown in (a), it is apparent that Tootsie Roll Industries’ accounts receivable collections deteriorated slightly in 2010 over 2009. Both the turnover and the related collection period were worse in 2010 as compared to 2009. However, if Tootsie Roll’s credit terms are 30 days, both years’ collection period fall within those terms.

8-55

CHAPTER 9 Plant Assets, Natural Resources, and Intangible Assets ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief Exercises

Do It!

Exercises

A Problems

B Problems

Describe how the cost principle applies to plant assets.

1, 2, 3

1, 2

1, 2, 3

Explain the concept of depreciation and how to compute it.

4, 5, 6, 7, 8, 9, 10, 24, 25, 26

3, 4, 5, 6, 7, 8, 9

2, 3

4, 5, 6, 7, 8, 9, 10

2A, 3A, 4A, 5A

2B, 3B, 4B, 5B

Distinguish between revenue and capital expenditures, and explain the entries for each.

11, 27

Explain how to account for the disposal of a plant asset.

12, 13

11, 12

5A, 6A

5B, 6B

Compute periodic depletion of extractable natural resources.

14, 15

Explain the basic issues related to accounting for intangible assets.

16, 17, 18, 19, 20, 21, 22

14, 15

7A, 8A

7B, 8B

Indicate how plant assets, natural resources, and intangible assets are reported.

16, 17

5A, 7A, 9A 5B, 7B, 9B

*8.

Explain how to account for the exchange of plant assets.

28, 29

18, 19

17, 18

9-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

9-2

Description

Difficulty Level

Time Allotted (min.)

Determine acquisition costs of land and building.

Simple

20–30

Compute depreciation under different methods.

Simple

30–40

Compute depreciation under different methods.

Moderate

30–40

Calculate revisions to depreciation expense.

Moderate

20–30

Journalize a series of equipment transactions related to purchase, sale, retirement, and depreciation.

Moderate

40–50

Record disposals.

Simple

30–40

Prepare entries to record transactions related to acquisition and amortization of intangibles; prepare the intangible assets section.

Moderate

30–40

Prepare entries to correct errors made in recording and amortizing intangible assets.

Moderate

30–40

Calculate and comment on asset turnover ratio.

Moderate

5–10

Determine acquisition costs of land and building.

Simple

20–30

Compute depreciation under different methods.

Simple

30–40

Compute depreciation under different methods.

Moderate

30–40

Calculate revisions to depreciation expense.

Moderate

20–30

Journalize a series of equipment transactions related to purchase, sale, retirement, and depreciation.

Moderate

40–50

Record disposals.

Simple

30–40

Prepare entries to record transactions related to acquisition and amortization of intangibles; prepare the intangible assets section.

Moderate

30–40

Prepare entries to correct errors made in recording and amortizing intangible assets.

Moderate

30–40

Calculate and comment on asset turnover ratio.

Moderate

5–10

WEYGANDT FINANCIAL ACCOUNTING, IFRS EDITION, 2e CHAPTER 9 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS Number

Difficulty

Time (min.)

BE1

Simple

2–4

BE2

Simple

1–2

BE3

Simple

2–4

BE4

Moderate

4–6

BE5

Simple

4–6

BE6

Simple

2–4

BE7

Simple

4–6

BE8

Simple

2–4

BE9

Simple

4–6

BE10

Simple

4–6

BE11

Simple

4–6

BE12

Simple

2–4

BE13

Simple

4–6

BE14

Simple

2–4

BE15

Simple

4–6

BE16

Simple

4–6

BE17

Simple

2–4

BE18

Simple

4–6

BE19

Simple

4–6

DI1

Simple

4–6

DI2

Simple

2–4

DI3

Simple

6–8

DI4

Simple

2–4

DI5

Simple

2–4

EX1

Simple

6–8

EX2

Simple

4–6

EX3

Simple

4–6

EX4

Simple

4–6

EX5

Simple

6–8

EX6

Simple

8–10

9-3

PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS (Continued) Number

Difficulty

Time (min.)

EX7

Simple

10–12

EX8 EX9 EX10 EX11 EX12 EX13 EX14 EX15 EX16 EX17 EX18 P1A P2A P3A P4A P5A P6A P7A P8A P9A P1B P2B P3B P4B P5B P6B P7B P8B P9B BYP1 BYP2 BYP3 BYP4 BYP5 BYP6

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

AP AN AP AP AP AP AP AP AP AP AP C AP AN AP AP AP AP AP AN C AP AN AP AP AP AP AP AN AN AN, E C AP, E C E

Simple Moderate Moderate Moderate Moderate Simple Simple Simple Simple Moderate Moderate Simple Simple Moderate Moderate Moderate Simple Moderate Moderate Moderate Simple Simple Moderate Moderate Moderate Simple Moderate Moderate Moderate Simple Simple Simple Moderate Simple Simple

4–6 8–10 6–8 8–10 10–12 6–8 4–6 6–8 4–6 8–10 8–10 20–30 30–40 30–40 20–30 40–50 30–40 30–40 30–40 5–10 20–30 30–40 30–40 20–30 40–50 30–40 30–40 30–40 5–10 15–20 10–15 10–15 20–25 5–10 10–15

9-4

Learning Objective

Knowledge Comprehension

1. Describe how the cost principle applies to plant assets.

Q9-1 Q9-2 Q9-3 DI9-1

E9-1 P9-1A P9-1B

BE9-1 BE9-2

2. Explain the concept of Q9-5 depreciation and how to compute it.

Q9-4 Q9-6 Q9-7 Q9-8 Q9-9 Q9-10 Q9-21 Q9-24 Q9-25 Q9-26

E9-4

BE9-3 BE9-5 BE9-6 BE9-7 BE9-8 BE9-9 DI9-2 DI9-3

3. Distinguish between revenue and capital expenditures, and explain the entries for each.

Q9-11 Q9-27

BE9-10

E9-5 P9-5A E9-6 P9-2B E9-7 P9-4B E9-8 P9-5B EX9-10 P9-2A P9-4A

Q9-12 DI9-4

Q9-13

BE9-11 E9-10 P9-5B BE9-12 P9-5A P9-6B E9-11 P9-6A EX9-12

5. Compute periodic depletion of natural resources.

Q9-14

Q9-15

BE9-13 E9-13

6. Explain the basic issues related Q9-20 to accounting for intangible assets. DI9-5

Q9-16 Q9-17 Q9-18

*8. Explain how to account for the exchange of plant assets. Broadening Your Perspective

Q9-19 Q9-21 Q9-22

Q9-29

Synthesis

Evaluation

E9-9 P9-3A P9-3B

BE9-4

BE9-14 P9-7A P9-8B BE9-15 P9-8A E9-14 P9-7B E9-15 Q9-23 E9-16 P9-5B BE9-16 P9-5A P9-7B BE9-17 P9-7A

Q9-28

Analysis

E9-2 E9-3

4. Explain how to account for the disposal of a plant asset.

7. Indicate how plant assets, natural resources, and intangible assets are reported.

9-2

Application

BE9-18 BE9-19

P9-9A P9-9B

E9-17 E9-18

Real-World Focus Decision-Making Across Financial Reporting Communication the Organization Comp. Analysis

Comp. Analysis Decision-Making Across the Organization Ethics Case

BLOOM’ S TAXONOMY TABLE

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

9-5

ANSWERS TO QUESTIONS 1.

For plant assets, the cost principle means that cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use.

Examples of land improvements include driveways, parking lots, fences, and underground sprinklers.

(a) When only the land is to be used, all demolition and removal costs of the building less any proceeds from salvaged materials are necessary expenditures to make the land ready for its intended use. (b) When both the land and building are to be used, necessary costs of the building include remodeling expenditures and the cost of replacing or repairing the roofs, floors, wiring, and plumbing.

You should explain to the president that depreciation is a process of allocating the cost of a plant asset to expense over its service (useful) life in a rational and systematic manner. Recognition of depreciation is not intended to result in the accumulation of cash for replacement of the asset.

(a) Residual value, also called salvage value, is the expected value of the asset at the end of its useful life. (b) Residual value is used in determining depreciation in each of the methods except the decliningbalance method.

(a) Useful life is expressed in years under the straight-line method and in units of activity under the units-of-activity method. (b) The pattern of periodic depreciation expense over useful life is constant under the straight-line method and variable under the units-of-activity method.

The effects of the three methods on annual depreciation expense are: Straight-line—constant amount; units of activity—varying amount; declining-balance—decreasing amounts.

Component depreciation is a method of allocating the cost of a plant asset into separate parts based on the estimated useful lives of each component. IFRS requires an entity to use component depreciation whenever significant parts of a plant asset have significantly different useful lives.

A revision of depreciation is made in current and future years but not retroactively. The rationale is that continual restatement of prior periods would adversely affect confidence in the financial statements.

10.

Revaluation is an accounting procedure that adjusts plant assets to fair value at the reporting date. Revaluation must be applied annually to assets that are experiencing rapid price changes.

11.

Revenue expenditures are ordinary repairs made to maintain the operating efficiency and productive life of the asset. Capital expenditures are additions and improvements made to increase operating efficiency, productive capacity, or useful life of the asset. Revenue expenditures are recognized as expenses when incurred; capital expenditures are generally debited to the plant asset affected.

12.

In a sale of plant assets, the book value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal occurs. If the proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal occurs.

9-6

(For Instructor Use Only)

Questions Chapter 9 (Continued) 13.

The plant asset and its accumulated depreciation should continue to be reported on the statement of financial position without further depreciation adjustment until the asset is retired. Reporting the asset and related accumulated depreciation on the statement of financial position informs the reader of the financial statements that the asset is still in use. However, once an asset is fully depreciated, even if it is still being used, no additional depreciation should be taken. In no situation can the accumulated depreciation on the plant asset exceed its cost.

14.

Extractable natural resources consist of underground deposits of oil, gas, and minerals. These long-lived productive assets have two distinguishing characteristics: they are physically extracted in operations, and they are replaceable only by an act of nature.

15.

Depletion is the allocation of the cost of natural resources to expense in a rational and systematic manner over the resource’s useful life. It is computed by multiplying the depletion cost per unit by the number of units extracted and sold.

16.

The terms depreciation, depletion, and amortization are all concerned with allocating the cost of an asset to expense over the periods benefited. Depreciation refers to allocating the cost of a plant asset to expense, depletion to recognizing the cost of a natural resource as expense, and amortization to allocating the cost of an intangible asset to expense.

17.

The intern is not correct. The cost of an intangible asset should be amortized over that asset’s useful life (the period of time when operations are benefited by use of the asset). In addition, some intangibles have indefinite lives and therefore are not amortized at all.

18.

The favorable attributes which could result in goodwill include exceptional management, desirable location, good customer relations, skilled employees, high-quality products, and harmonious relations with labor unions.

19.

Goodwill is the value of many favorable attributes that are intertwined in the business enterprise. Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be sold separately. Goodwill can only be sold if the entire business is sold. And, if goodwill appears on the statement of financial position, it means the company has purchased another company for more than the fair value of its net assets.

20.

Goodwill is recorded only when there is a transaction that involves the purchase of an entire business. Goodwill is the excess of cost over the fair value of the net assets (assets less liabilities) acquired. The recognition of goodwill without an exchange transaction would lead to subjective valuations which would reduce the reliability of financial statements.

21.

Research and development costs present several accounting problems. It is sometimes difficult to assign the costs to specific projects, and there are uncertainties in identifying the extent and timing of future benefits. As a result, IFRS requires that research costs be recorded as an expense when incurred. Development costs incurred prior to technological feasibility are also expensed but development costs incurred after technological feasibility are capitalized.

9-7

Questions Chapter 9 (Continued) 22.

Both types of development expenditures relate to the creation of new products but one is expensed and the other is capitalized. Development costs incurred before a new product achieves technological feasibility are recorded as development expenses and appear as part of operating expenses on the income statement. Development costs incurred after the product achieves technological feasibility are recorded as assets, and reported in the statement of financial position.

23.

McDonald’s asset turnover ratio is computed as follows: =

= .71 times

24.

Since Alpha uses the straight-line depreciation method, its depreciation expense will be lower in the early years of an asset’s useful life as compared to using an accelerated method. Zito’s depreciation expense in the early years of an asset’s useful life will be higher as compared to the straight-line method. Alpha’s net income will be higher than Zito’s in the first few years of the asset’s useful life. And, the reverse will be true late in an asset’s useful life.

25.

Yes, the tax regulations often allow a company to use a different depreciation method on the tax return than is used in preparing financial statements. Wanzo Corporation uses an accelerated depreciation method for tax purposes to minimize its income taxes and thereby the cash outflow for taxes.

26.

By selecting a longer estimated useful life, Lam Corp. is spreading the plant asset’s cost over a longer period of time. The depreciation expense reported in each period is lower and net income is higher. Shuey’s choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower net income.

27.

Expensing these costs will make current period income lower but future period income higher because there will be no additional depreciation expense in future periods. If the costs are ordinary repairs, they should be expensed.

*28. When assets are exchanged, the gain or loss on disposal is computed as the difference between the book value and the fair value of the asset given up at the time of exchange. *29. Yes, Morris should recognize a gain equal to the difference between the fair value of the old machine and its book value. If the fair value of the old machine is less than its book value, Morris should recognize a loss equal to the difference between the two amounts.

9-8

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9-1 All of the expenditures should be included in the cost of the land. Therefore, the cost of the land is $75,300, or ($64,000 + $3,000 + $2,500 + $2,000 + $3,800). BRIEF EXERCISE 9-2 The cost of the truck is £32,200 (cash price £30,000 + sales tax £1,800 + painting and lettering £400). The expenditures for insurance and motor vehicle license should not be added to the cost of the truck. BRIEF EXERCISE 9-3 Depreciable cost of $33,000, or ($42,000 – $9,000). With a four-year useful life, annual depreciation is $8,250, or ($33,000 ÷ 4). Under the straight-line method, depreciation is the same each year. Thus, depreciation expense is $8,250 for both the first and second years. BRIEF EXERCISE 9-4 It is likely that management requested this accounting treatment to boost reported net income. Land is not depreciated; thus, by reporting land at HK$1,250,000 above its actual value the company increased yearly income  HK$1,250,000  by HK$62,500   or the reduction in depreciation expense. This  20 years  practice is not ethical because management is knowingly misstating asset values. BRIEF EXERCISE 9-5 The declining balance rate is 50%, or (25% X 2) and this rate is applied to book value at the beginning of the year. The computations are:

Year 1 Year 2

Book Value $42,000 ($42,000 – $21,000) .

Rate 50% 50%

Depreciation $21,000 $10,500 9-9

BRIEF EXERCISE 9-6 The depreciation cost per unit is 22 cents per mile computed as follows: Depreciable cost ($33,500 – $500) ÷ 150,000 = $.22 Year 1 36,000 miles X $.22 = $7,920 Year 2 22,000 miles X $.22 = $4,840 BRIEF EXERCISE 9-7 Warehouse component: ($280,000 – $40,000)/20 HVAC component: $40,000/10 Total component depreciation in first year

= $12,000 = 4,000 $16,000

BRIEF EXERCISE 9-8 Book value, 1/1/14 .......................................................................... Less: Residual value ..................................................................... Depreciable cost ............................................................................. Remaining useful life ..................................................................... Revised annual depreciation ($21,000 ÷ 4) ...................................

$23,000 2,000 $21,000 4 years $ 5,250

BRIEF EXERCISE 9-9 (a) Accumulated Depreciation—Equipment ................. Equipment .............................................................. Revaluation Surplus .............................................. (To record revaluation of plant assets)

60,000

(b) Accumulated Depreciation—Equipment .................. Revaluation Surplus .................................................. Equipment........................................................... (To record revaluation of plant assets)

60,000 20,000

9-10

20,000 40,000

80,000

(For Instructor Use Only)

BRIEF EXERCISE 9-10 1.

Maintenance and Repairs Expense .......................... Cash ....................................................................

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

580

BRIEF EXERCISE 9-11 (a) Accumulated Depreciation— Equipment .............................................................. Equipment ..........................................................

44,000

(b) Accumulated Depreciation— Equipment .............................................................. Loss on Disposal of Plant Assets ............................ Equipment ..........................................................

39,000 5,000

44,000

Cost of equipment CHF44,000 Less accumulated depreciation 39,000 Book value at date of disposal 5,000 Proceeds from sale 0 Loss on disposal CHF 5,000

9-11

BRIEF EXERCISE 9-12 (a) Depreciation Expense .............................................. Accumulated Depreciation— Equipment......................................................

4,800

(b) Cash ........................................................................... Accumulated Depreciation—Equipment ................. Loss on Disposal of Plant Assets............................ Equipment..........................................................

20,000 46,800 5,200

Cost of equipment Less: Accumulated depreciation Book value at date of disposal Proceeds from sale Loss on disposal

4,800

72,000

$72,000 46,800* 25,200 20,000 $ 5,200

*$42,000 + $4,800

BRIEF EXERCISE 9-13 (a) Depletion cost per unit = ¥7,000,000 ÷ 28,000,000 = ¥0.25 depletion cost per ton ¥0.25 X 5,000,000 = ¥1,250,000 Depletion Expense ....................................... Accumulated Depletion........................

1,250,000

(b) Ore mine ...................................................... Less: Accumulated depletion ...................

¥7,000,000 1,250,000

9-12

1,250,000

¥5,750,000

(For Instructor Use Only)

BRIEF EXERCISE 9-14 (a) Amortization Expense (R$120,000 ÷ 8)...................... Patents .................................................................

15,000 15,000

(b) Intangible Assets Patents .................................................................

R$105,000

BRIEF EXERCISE 9-15 Research Expense ............................................................ Development Expense ...................................................... Development Costs ........................................................... Cash............................................................................ (To record research and development costs)

300,000 400,000 200,000 900,000

BRIEF EXERCISE 9-16 LOOMIS COMPANY Statement of Financial Position (partial) December 31, 2014 Intangible assets Goodwill ............................................ Property, plant, and equipment Coal mine .......................................... Less: Accumulated depletion ......... Buildings ........................................... Less: Accumulated depreciation— buildings ................................ Total property, plant, and equipment ..............................

$ 410,000 $ 500,000 122,000 1,300,000

$378,000

650,000

650,000 1,028,000

BRIEF EXERCISE 9-17

 $44.5 + $43.7  $65.8 ÷   = 1.49 times 2  

9-13

*BRIEF EXERCISE 9-18 Equipment (new) .............................................................. Accumulated Depreciation—Equipment......................... Loss on Disposal of Plant Assets ................................... Equipment (old) ........................................................ Cash ........................................................................... Fair value of old delivery equipment Cash paid Cost of delivery equipment

24,000 28,000 14,000 61,000 5,000 $19,000 5,000 $24,000

Fair value of old delivery equipment Book value of old delivery equipment ($61,000 – $28,000) Loss on disposal

$19,000 33,000 $14,000

*BRIEF EXERCISE 9-19 Equipment (new) .............................................................. Accumulated Depreciation—Equipment......................... Gain on Disposal of Plant Assets ............................ Equipment (old) ........................................................ Cash ........................................................................... Fair value of old delivery equipment Cash paid Cost of new delivery equipment Fair value of old delivery equipment Book value of old delivery equipment ($61,000 – $28,000) Gain on disposal

9-14

41,000 28,000 3,000 61,000 5,000

$36,000 5,000 $41,000 $36,000 33,000 $ 3,000

(For Instructor Use Only)

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 9-1 The following four items are expenditures necessary to acquire the truck and get it ready for use: Negotiated purchase price .............................................. Installation of special shelving........................................ Painting and lettering ....................................................... Sales tax ........................................................................... Total paid ..................................................................

£24,000 1,100 780 1,300 £27,180

Thus, the cost of the truck is £27,180. The payments for the motor vehicle license and for the insurance are operating costs and are expensed in the first year of the truck’s life. DO IT! 9-2 Cost – Residual $18,000 – $2,000 value Depreciation expense = = = $2,000 Useful life 8 years The entry to record the first year’s depreciation would be: Depreciation Expense ...................................................... Accumulated Depreciation—Equipment ................... (To record annual depreciation on mower)

2,000 2,000

DO IT! 9-3 Original depreciation expense = ($50,000 – $2,000) ÷ 6 years = $8,000 Accumulated depreciation after three years = 3 X $8,000 = $24,000 Book value, $50,000 – $24,000 ............................................ Less: Residual value ........................................................... Depreciable cost .................................................................. Remaining useful life ........................................................... Revised annual depreciation ($22,000 ÷ 5) ......................... .

$26,000 4,000 $22,000 5 years $ 4,400 9-15

DO IT! 9-4 (a) Sale of truck for cash at a gain: Cash ............................................................................. Accumulated Depreciation—Equipment .................. Equipment ............................................................. Gain on Disposal of Plant Assets ....................... (b) Sale of truck for cash at a loss: Cash ............................................................................. Loss on Disposal of Plant Assets ............................. Accumulated Depreciation—Equipment .................. Equipment .............................................................

26,000 28,000 48,000 6,000 15,000 5,000 28,000 48,000

DO IT! 9-5 1. 2. 3. 4. 5. 6.

9-16

b. Intangible assets d. Amortization e. Franchises f. Development costs a. Goodwill c. Development expenses

(For Instructor Use Only)

SOLUTIONS TO EXERCISES EXERCISE 9-1 (a) Under the cost principle, the acquisition cost for a plant asset includes all expenditures necessary to acquire the asset and make it ready for its intended use. For example, the cost of factory machinery includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs. (b) 1. 2. 3. 4. 5. 6. 7. 8.

Land Equipment Equipment Land Improvements Equipment Equipment Prepaid Insurance License Expense

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

Equipment Equipment Equipment Land Prepaid Insurance Land Improvements Land Improvements Land Buildings

9-17

EXERCISE 9-3 (a) Cost of land Cash paid .......................................................................... Net cost of removing warehouse (€9,400 – €1,700) ........................................................... Attorney’s fee ................................................................... Real estate broker’s fee ................................................... Total ...........................................................................

€80,000 7,700 1,100 5,000 €93,800

(b) The architect’s fee (€7,800) should be debited to the Buildings account. The cost of the driveways and parking lot (€12,700) should be debited to Land Improvements. EXERCISE 9-4 1. False. Depreciation is a process of cost allocation, not asset valuation. 2. True. 3. False. The book value of a plant asset may be quite different from its market value. 4. False. Depreciation applies to three classes of plant assets: land improvements, buildings, and equipment. 5. False. Depreciation does not apply to land because its usefulness and revenue-producing ability generally remain intact over time. 6. True. 7. False. Recognizing depreciation on an asset does not result in an accumulation of cash for replacement of the asset. 8. True. 9. False. Depreciation expense is reported on the income statement, and accumulated depreciation is reported as a deduction from plant assets on the statement of financial position. 10. False. Three factors affect the computation of depreciation: cost, useful life, and residual value (also called salvage value).

9-18

(For Instructor Use Only)

EXERCISE 9-5 (a) Depreciation cost per unit is R$1.30 per mile [(R$145,000 – R$15,000) ÷ 100,000]. (b)

Computation

Year 2014 2015 2016 2017

End of Year

Annual Units of Depreciation Depreciation Activity X Cost /Unit = Expense 26,000 R$1.30 R$33,800 32,000 1.30 41,600 25,000 1.30 32,500 17,000 1.30 22,100

Accumulated Book Depreciation Value R$ 33,800 R$111,200 75,400 69,600 107,900 37,100 130,000 15,000

EXERCISE 9-6 (a) Straight-line method:

 $96,000 – $12,000    = $16,800 per year. 5 2014 depreciation = $16,800 X 3/12 = $4,200. (b) Units-of-activity method:

 $96,000 – $12,000    = $8.40 per hour. 10,000 2014 depreciation = 1,700 hours X $8.40 = $14,280. (c) Declining-balance method: 2014 depreciation = $96,000 X 40% X 3/12 = $9,600. Book value January 1, 2015 = $96,000 – $9,600 = $86,400. 2015 depreciation = $86,400 X 40% = $34,560.

9-19

EXERCISE 9-7 (a) (1)

2014: (R$36,000 – R$6,000)/8 = R$3,750 2015: (R$36,000 – R$6,000)/8 = R$3,750

(2)

(R$36,000 – R$6,000)/100,000 = R$0.30 per mile 2014: 15,000 X R$0.30 = R$4,500 2015: 12,000 X R$0.30 = R$3,600

(3)

2014: R$36,000 X 25% = R$9,000 2015: (R$36,000 – R$9,000) X 25% = R$6,750

(b) (1) (2)

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

3,750 3,750

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

R$36,000 3,750 R$32,250

EXERCISE 9-8 Building depreciation: $1,920,000*/40 years = $ 48,000 Personal property depreciation: $300,000/5 years = 60,000 Land improvement depreciation: $180,000/10 years = 18,000 Total component depreciation $126,000 *$2,400,000 – $300,000 – $180,000 = $1,920,000

9-20

(For Instructor Use Only)

EXERCISE 9-9 (a) Type of Asset Book value, 1/1/14 Less: Residual value Depreciable cost

Building $648,000 18,000 $630,000

Warehouse $82,000 3,700 $78,300

Remaining useful life in years

Revised annual depreciation

$ 15,000

$ 5,220

(b) Dec. 31

Depreciation Expense .............................. Accumulated Depreciation— Buildings .......................................

15,000 15,000

EXERCISE 9-10 (a)

(b)

(c)

Depreciation Expense ................................................... 70,000 Accumulated Depreciation—Equipment.................... (To record depreciation expense) Accumulated Depreciation—Equipment....................... 70,000 Equipment................................................................. Revaluation Surplus .................................................. (To adjust the plant assets to fair value and record revaluation surplus) Depreciation Expense .................................................... 80,000* Accumulated Depreciation—Equipment ............... (To record depreciation expense)

70,000

30,000 40,000

80,000

*$350,000 – $30,000 = $320,000; $320,000/4 years = $80,000

9-21

EXERCISE 9-11 Jan.

June 30

Dec. 31

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

58,000

Depreciation Expense .................................... Accumulated Depreciation—Equipment (£40,000 X 1/5 X 6/12) ..........................

4,000

Cash ................................................................. Accumulated Depreciation—Equipment (£40,000 X 3/5 = £24,000; £24,000 + £4,000).... Gain on Disposal of Plant Assets [£14,000 – (£40,000 – £28,000)] ........... Equipment ...............................................

14,000

Depreciation Expense .................................... Accumulated Depreciation—Equipment [(£33,000 – £3,000) X 1/6] ....................

5,000

Loss on Disposal of Plant Assets ................. Accumulated Depreciation—Equipment [(£33,000 – £3,000) X 5/6] ............................ Equipment ...............................................

8,000

58,000

4,000

28,000 2,000 40,000

5,000

25,000 33,000

EXERCISE 9-12 (a)

(b)

Cash ......................................................................... Accumulated Depreciation—Equipment [($50,000 – $8,000) X 3/5] .................................... Equipment....................................................... Gain on Disposal of Plant Assets .................

25,200

Depreciation Expense [($50,000 – $8,000) X 1/5 X 4/12] .......................... Accumulated Depreciation—Equipment ......

2,800

Cash ......................................................................... Accumulated Depreciation—Equipment ($25,200 + $2,800) ................................................ Equipment....................................................... Gain on Disposal of Plant Assets ................. 9-22

28,000 50,000 3,200

2,800 28,000 28,000

50,000 6,000

(For Instructor Use Only)

EXERCISE 9-12 (Continued) (c) Cash ........................................................................... Accumulated Depreciation—Equipment.................. Loss on Disposal of Plant Assets ............................ Equipment ........................................................... (d) Depreciation Expense [($50,000 – $8,000) ÷ 5 X 9/12] ............................... Accumulated Depreciation—Equipment........... Cash ........................................................................... Accumulated Depreciation—Equipment ($25,200 + $6,300) .................................................. Loss on Disposal of Plant Assets ............................ Equipment ...........................................................

11,000 25,200 13,800 50,000 6,300 6,300 11,000 31,500 7,500 50,000

EXERCISE 9-13 (a) Dec. 31

Depletion Expense ................................... Accumulated Depletion (120,000 X CHF0.90) ......................

Cost Units estimated Depletion cost per unit [(a) ÷ (b)]

108,000 108,000

(a) CHF720,000 (b) 800,000 tons CHF0.90

(b) The costs pertaining to the unsold units are reported in current assets as part of inventory (30,000 X CHF0.90 = CHF27,000). EXERCISE 9-14 Dec. 31

Amortization Expense .................................. Patents ($84,000 ÷ 5 X 8/12) ..................

11,200 11,200

Note: No entry is made to amortize goodwill because it has an indefinite life.

9-23

EXERCISE 9-15 1/2/14 4/1/14

7/1/14 9/1/14 11/1/14

Patents .......................................................... Cash ......................................................

560,000

Goodwill........................................................ Cash ...................................................... (Part of the entry to record purchase of another company)

360,000

Franchises .................................................... Cash ......................................................

440,000

Research Expense ....................................... Cash ......................................................

223,000

Development Expense ................................. Cash ......................................................

225,000

12/31/14 Amortization Expense ($560,000 ÷ 8) + [($440,000 ÷ 10) X 1/2] ... Patents .............................................. Franchises ........................................

560,000 360,000

440,000 223,000 225,000 92,000 70,000 22,000

Ending balances, 12/31/14: Patents = $490,000 ($560,000 – $70,000). Goodwill = $360,000 Franchises = $418,000 ($440,000 – $22,000). Research expense = $223,000 Development expense = $225,000 EXERCISE 9-16 Asset turnover ratio =

9-24

$5,200,000 = 3.25 times $1,600,000

(For Instructor Use Only)

*EXERCISE 9-17 (a) Equipment (new) ........................................................ Accumulated Depreciation—Equipment (old) ......... Loss on Disposal of Plant Assets ............................ Equipment (old) .................................................. Cash .................................................................... Cost of old trucks Less: Accumulated depreciation Book value Fair value of old trucks Loss on disposal

£64,000 22,000 42,000 38,000 £ 4,000

Fair value of old trucks Cash paid Cost of new trucks

£38,000 17,000 £55,000

(b) Equipment (new) ........................................................ Accumulated Depreciation—Equipment (old) ......... Gain on Disposal of Plant Assets ..................... Equipment (old) .................................................. Cash .................................................................... Cost of old machine Less: Accumulated depreciation Book value Fair value of old machine Gain on disposal

£12,000 4,000 8,000 9,000 £ 1,000

Fair value of old machine Cash paid Cost of new machine

£ 9,000 2,700 £11,700

55,000 22,000 4,000 64,000 17,000

11,700 4,000 1,000 12,000 2,700

9-25

*EXERCISE 9-18 (a) Equipment (new) ....................................................... Loss on Disposal of Plant Assets............................ Accumulated Depreciation—Equipment (old) ........ Equipment (old) ................................................. Cost of old truck Less: Accumulated depreciation Book value Fair value of old truck Loss on disposal

4,000 2,000 16,000 22,000

$22,000 16,000 6,000 4,000 $ 2,000

(b) Equipment (new) ....................................................... Accumulated Depreciation—Equipment (old) ........ Equipment (old) ................................................. Gain on Disposal of Plant Assets .................... Cost of old truck Less: Accumulated depreciation Book value Fair value of old truck Gain on disposal

$10,000 7,000 3,000 4,000 $ 1,000

Cost of new truck*

$ 4,000

4,000 7,000 10,000 1,000

*Fair value of old truck

9-26

(For Instructor Use Only)

SOLUTIONS TO PROBLEMS PROBLEM 9-1A

Item 1 2 3 4 5 6 7 8 9 10

Land (€ 6,000)

Buildings

Other Accounts

€780,000 € 5,000

Property Taxes Expense

14,000

Land Improvements

( 145,000) 35,000 10,000 (

2,000)

(

15,000) (3,600) (€164,400)

€825,000

9-27

PROBLEM 9-2A

(a) Year

Computation

Accumulated Depreciation 12/31

2012 2013 2014

BUS 1 $ 90,000 X 20% = $18,000 $ 90,000 X 20% = $18,000 $ 90,000 X 20% = $18,000

$ 18,000 36,000 54,000

2012 2013 2014

BUS 2 $140,000 X 50% = $70,000 $ 70,000 X 50% = $35,000 $ 35,000 X 50% = $17,500

$ 70,000 105,000 122,500

2013 2014

BUS 3 24,000 miles X $.70* = $16,800 36,000 miles X $.70* = $25,200

$ 16,800 42,000

*$84,000 ÷ 120,000 miles = $.70 per mile.

(b)

9-28

Year

Computation

Expense

(1)

2012

BUS 2 $140,000 X 50% X 9/12 = $52,500

$52,500

(2)

2013

$87,500 X 50% = $43,750

$43,750

(For Instructor Use Only)

PROBLEM 9-3A

(a) (1) Purchase price ................................................................. R$ 35,000 Sales tax ........................................................................... 1,700 Shipping costs ................................................................. 150 Insurance during shipping .............................................. 80 Installation and testing .................................................... 70 Total cost of machine ............................................... R$ 37,000 Equipment ........................................................... Cash .............................................................

37,000 37,000

(2) Recorded cost .................................................................. R$ 37,000 Less: Residual value ....................................................... 5,000 Depreciable cost .............................................................. R$ 32,000 Years of useful life ........................................................... ÷ 5 Annual depreciation ................................................. R$ 6,400 Depreciation Expense ......................................... Accumulated Depreciation—Equipment ....

6,400 6,400

(b) (1) Recorded cost .................................................................. R$ 80,000 Less: Residual value ....................................................... 5,000 Depreciable cost .............................................................. R$ 75,000 Years of useful life ........................................................... ÷ 4 Annual depreciation ................................................. R$ 18,750 (2) Year 2014 2015 2016 2017

Book Value at Beginning of Year R$80,000 40,000 20,000 10,000

DDB Rate *50%* *50%* *50%* *50%*

Annual Depreciation Expense R$40,000 20,000 10,000 ** 5,000

Accumulated Depreciation R$40,000 60,000 70,000 75,000

**100% ÷ 4-year useful life = 25% X 2 = 50%.

9-29

PROBLEM 9-3A (Continued) (3) Depreciation cost per unit = (R$80,000 – R$5,000)/125,000 units = R$.60 per unit. Annual Depreciation Expense 2014: R$.60 X 42,000 = R$25,200 2015: .60 X 35,000 = 21,000 2016: .60 X 28,000 = 16,800 2017: .60 X 20,000 = 12,000 (c) The declining-balance method reports the highest amount of depreciation expense the first year while the straight-line method reports the lowest. In the fourth year, the straight-line method reports the highest amount of depreciation expense while the declining-balance method reports the lowest. These facts occur because the declining-balance method is an accelerated depreciation method in which the largest amount of depreciation is recognized in the early years of the asset’s life. If the straight-line method is used, the same amount of depreciation expense is recognized each year. Therefore, in the early years less depreciation expense will be recognized under this method than under the declining-balance method while more will be recognized in the later years. The amount of depreciation expense recognized using the units-of-activity method is dependent on production, so this method could recognize more or less depreciation expense than the other two methods in any year depending on output. No matter which of the three methods is used, the same total amount of depreciation expense will be recognized over the four-year period.

9-30

(For Instructor Use Only)

PROBLEM 9-4A

Year 2012 2013 2014 2015 2016 2017 2018

Depreciation Expense (b) $12,000(a) 12,000 (b) 9,600(b) 9,600 9,600 11,400(c) 11,400

Accumulated Depreciation $12,000 24,000 33,600 43,200 52,800 64,200 75,600

(a)

$80,000 – $8,000 = $12,000 6 years

(b)

Book value – Residual value $56,000 – $8,000 = = $9,600 Remaining useful life 5 years

(c)

$27,200 – $4,400 = $11,400 2 years

9-31

PROBLEM 9-5A (a) Apr. 1 May 1

Land................................................. Cash .........................................

2,200,000

Depreciation Expense .................... Accumulated Depreciation— Equipment (€750,000 X 1/10 X 4/12) ......

25,000

Cash ................................................ Accumulated Depreciation— Equipment ................................... Equipment ............................... Gain on Disposal of Plant Assets ........................

460,000

2,200,000

25,000

325,000 750,000 35,000

Cost €750,000 Accum. depreciation— equipment 325,000 [(€750,000 X 1/10 X 4) + €25,000] Book value 425,000 Cash proceeds 460,000 Gain on disposal € 35,000 June 1

July 1 Dec. 31

9-32

Cash ................................................ Land ......................................... Gain on Disposal of Plant Assets ........................

1,800,000

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

2,400,000

Depreciation Expense .................... Accumulated Depreciation— Equipment (€500,000 X 1/10) .................

50,000

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

300,000 1,500,000 2,400,000

50,000 500,000

500,000 (For Instructor Use Only)

PROBLEM 9-5A (Continued) Cost €500,000 Accum. depreciation— equipment 500,000 (€500,000 X 1/10 X 10) Book value € 0 (b) Dec. 31

Depreciation Expense ..................... Accumulated Depreciation— Buildings .............................. (€26,500,000 X 1/50)

530,000

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

3,995,000

530,000

3,995,000

(€38,750,000* X 1/10) €3,875,000 [(€2,400,000 X 1/10) X 6/12] 120,000

€3,995,000 *(€40,000,000 – €750,000 – €500,000)

(c)

JIMENEZ COMPANY Partial Statement of Financial Position December 31, 2014 Plant Assets* Land ..................................................... Buildings.............................................. Less: Accumulated depreciation— buildings .................................. Equipment ........................................... Less: Accumulated depreciation— equipment ................................ Total plant assets ........................

€ 4,900,000 €26,500,000 12,630,000 41,150,000

13,870,000

8,245,000

32,905,000 €51,675,000

*See T-accounts which follow.

9-33

PROBLEM 9-5A (Continued)

Bal. Apr. 1 Bal.

Land 3,000,000 June 1 2,200,000 4,900,000

Bal. Bal.

Buildings 26,500,000 26,500,000

300,000

Accumulated Depreciation—Buildings Bal. 12,100,000 Dec. 31 adj. 530,000 Bal. 12,630,000

Bal. July 1 Bal.

Equipment 40,000,000 May 1 2,400,000 Dec. 31 41,150,000

750,000 500,000

Accumulated Depreciation—Equipment May 1 325,000 Bal. 5,000,000 Dec. 31 500,000 May 1 25,000 Dec. 31 50,000 Dec. 31 adj. 3,995,000 Bal. 8,245,000

9-34

(For Instructor Use Only)

PROBLEM 9-6A

(a) Accumulated Depreciation—Equipment .................. Loss on Disposal of Plant Assets ............................ Equipment ..........................................................

22,000 28,000

(b) Cash............................................................................ Accumulated Depreciation—Equipment .................. Loss on Disposal of Plant Assets ............................ Equipment ..........................................................

25,000 22,000 3,000

(c) Cash............................................................................ Accumulated Depreciation—Equipment .................. Gain on Disposal of Plant Assets ..................... Equipment ..........................................................

31,000 22,000

50,000

3,000 50,000

9-35

PROBLEM 9-7A

(a) Jan. 2

Patents ..................................................... Cash ..................................................

36,000 36,000

Jan.– June

Research Expense................................... 140,000 Cash ..................................................

140,000

Sept. 1

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

58,000

Oct. 1

(b) Dec. 31

58,000

Franchises ............................................... 100,000 Cash .................................................. Amortization Expense ............................. Patents.............................................. [($60,000 X 1/10) + ($36,000 X 1/9)]

10,000

Amortization Expense ............................. Franchises ........................................ [($48,000 X 1/10) + ($100,000 X 1/50 X 3/12)]

5,300

100,000

10,000

(c) Intangible Assets Patents ($96,000 cost – $16,000 amortization) (1) ............... Franchises ($148,000 cost – $24,500 amortization) (2) ....... Total intangible assets ...................................................

5,300

$ 80,000 123,500 $203,500

(1) Cost ($60,000 + $36,000); amortization ($6,000 + $10,000). (2) Cost ($48,000 + $100,000); amortization ($19,200 + $5,300).

9-36

(For Instructor Use Only)

PROBLEM 9-8A

Research Expense .................................................. Development Expense ........................................... Patents .............................................................

97,000 50,000

Patents .................................................................... Amortization Expense [$10,350 – ($60,000 X 1/20)] ........................

7,350

Goodwill .................................................................. Amortization Expense.....................................

800

147,000

7,350

800

Note: Goodwill should not be amortized because it has an indefinite life unlike Patents.

9-37

PROBLEM 9-9A

(a) Asset turnover ratio

Luō

Zhào

HK$1,200,000 = .60 times HK$2,000,000

HK$1,140,000 = .76 times HK$1,500,000

(b) Based on the asset turnover ratio, Zhào is more effective in using assets to generate sales. Its asset turnover ratio is almost 27% higher than Luō’s ratio.

9-38

(For Instructor Use Only)

PROBLEM 9-1B

Item 1 2 3 4 5 6 7 8 9 10

Land ($ 9,000)

Buildings

Other Accounts $ 6,500

Property Taxes Expense

18,000

Land Improvements

6,000

Land Improvements

$500,000 19,000 100,000 9,000 ( 19,000) ( (3,800) ($124,200)

$528,000

9-39

PROBLEM 9-2B

(a) Year

Computation

2011 2012 2013 2014

MACHINE 1 ¥100,000 X 12.5% = ¥12,500 ¥100,000 X 12.5% = ¥12,500 ¥100,000 X 12.5% = ¥12,500 ¥100,000 X 12.5% = ¥12,500

¥12,500 25,000 37,500 50,000

2012 2013 2014

MACHINE 2 ¥150,000 X 20% = ¥30,000 ¥120,000 X 20% = ¥24,000 ¥ 96,000 X 20% = ¥19,200

¥30,000 54,000 73,200

2014

MACHINE 3 1,300 X (¥85,000 ÷ 25,000) = ¥4,420

¥ 4,420

(b)

9-40

Accumulated Depreciation 12/31

Year

Depreciation Computation

Expense

(1)

2012

MACHINE 2 ¥150,000 X 20% X 8/12 = ¥20,000

¥20,000

(2)

2013

¥130,000 X 20% = ¥26,000

¥26,000

(For Instructor Use Only)

PROBLEM 9-3B

(a) (1) Purchase price ................................................................. Sales tax ........................................................................... Shipping costs ................................................................. Insurance during shipping .............................................. Installation and testing .................................................... Total cost of machine ...............................................

$ 55,000 2,750 100 75 75 $ 58,000

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

58,000

(2) Recorded cost .................................................................. Less: Residual value ....................................................... Depreciable cost .............................................................. Years of useful life ........................................................... Annual depreciation ................................................. Depreciation Expense ........................................ Accumulated Depreciation— Equipment ................................................

13,000 13,000

(b) (1) Recorded cost .................................................................. Less: Residual value ....................................................... Depreciable cost .............................................................. Years of useful life ........................................................... Annual depreciation ................................................. (2) Year 2014 2015 2016 2017 2018

Book Value at Beginning of Year $130,000 78,000 46,800 28,080 16,848

DDB Rate *40%* *40%* *40%* *40%* 40*40%

$ 58,000 6,000 $ 52,000 ÷ 4 $ 13,000

Annual Depreciation Expense $52,000 31,200 18,720 11,232 6,848**

$130,000 10,000 $120,000 ÷ 5 $ 24,000

Accumulated Depreciation $52,000 83,200 101,920 113,152 120,000

*100% ÷ 5-year useful life = 20% X 2 = 40%. **$16,848 – $10,000 = $6,848. .

9-41

PROBLEM 9-3B (Continued) (3) Depreciation cost per unit = ($130,000 – $10,000)/24,000 units = $5.00 per unit. Annual Depreciation Expense 2014: 2015: 2016: 2017: 2018:

$5.00 X 4,700 = $23,500 5.00 X 7,000 = 35,000 5.00 X 8,000 = 40,000 5.00 X 2,500 = 12,500 5.00 X 1,800 = 9,000

(c) The units-of-activity method reports the lowest amount of depreciation expense the first year while the declining-balance method reports the highest. In the fifth year, the declining-balance method reports the lowest amount of depreciation expense while the straight-line method reports the highest. These facts occur because the declining-balance method is an accelerated depreciation method in which the largest amount of depreciation is recognized in the early years of the asset’s life. If the straight-line method is used, the same amount of depreciation expense is recognized each year. Therefore, in the early years less depreciation expense will be recognized under this method than under the declining-balance method while more will be recognized in the later years. The amount of depreciation expense recognized using the units-of-activity method is dependent on production, so this method could recognize more or less depreciation expense than the other two methods in any year depending on output. No matter which of the three methods is used, the same total amount of depreciation expense will be recognized over the four-year period.

9-42

(For Instructor Use Only)

PROBLEM 9-4B

Year 2012 2013 2014 2015 2016 2017 2018

Depreciation Expense £9,000(a) 9,000 7,200(b) 7,200 7,200 8,700(c) 8,700

Accumulated Depreciation £ 9,000 18,000 25,200 32,400 39,600 48,300 57,000

(a)

£60,000 – £6,000 = £9,000 6 years

(b)

Book value – Residual value £42,000 – £6,000 = = £7,200 Remaining useful life 5 years

(c)

£20,400 – £3,000 = £8,700 2 years

9-43

PROBLEM 9-5B

(a) Apr. 1 May 1

Land................................................. Cash .........................................

1,200,000

Depreciation Expense .................... Accumulated Depreciation— Equipment ........................... ($420,000 X 1/10 X 4/12)

14,000

246,000

Cost Accum. depreciation— equipment

1,200,000

14,000

182,000 420,000 8,000

$420,000 182,000

[($420,000 X 1/10 X 4) + $14,000]

Book value Cash proceeds Gain on disposal June 1

Oct. 1 Dec. 31

9-44

238,000 246,000 $ 8,000

Cash ................................................ Land ......................................... Gain on Disposal of Plant Assets ........................

1,000,000

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

1,280,000

Depreciation Expense .................... Accumulated Depreciation— Equipment ........................... ($300,000 X 1/10)

30,000

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

310,000 690,000 1,280,000

30,000

300,000

300,000 (For Instructor Use Only)

PROBLEM 9-5B (Continued) Cost Accum. depreciation— equipment

$300,000 300,000

($300,000 X 1/10 X 10)

Book value (b) Dec. 31

Depreciation Expense ..................... Accumulated Depreciation— Buildings .............................. ($28,500,000 X 1/50)

570,000

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

2,960,000

570,000

2,960,000

($29,280,000* X 1/10) $2,928,000 [($1,280,000 X 1/10) X 3/12] 32,000

$2,960,000 *($30,000,000 – $420,000 – $300,000)

(c)

DURANGO COMPANY Partial Statement of Financial Position December 31, 2014 Plant Assets* Land ..................................................... Buildings.............................................. Less: Accumulated depreciation— buildings .................................. Equipment ........................................... Less: Accumulated depreciation— equipment ................................ Total plant assets ........................

$ 2,890,000 $28,500,000 12,670,000 30,560,000

15,830,000

6,522,000

24,038,000 $42,758,000

*See T-accounts which follow.

9-45

PROBLEM 9-5B (Continued)

Bal. Apr. 1 Bal.

Land 2,000,000 June 1 1,200,000 2,890,000

Bal. Bal.

Buildings 28,500,000 28,500,000

310,000

Accumulated Depreciation—Buildings Bal. 12,100,000 Dec. 31 adj. 570,000 Bal. 12,670,000

Bal. Oct. 1 Bal.

Equipment 30,000,000 May 1 1,280,000 Dec. 31 30,560,000

420,000 300,000

Accumulated Depreciation—Equipment May 1 182,000 Bal. 4,000,000 Dec. 31 300,000 May 1 14,000 Dec. 31 30,000 Dec. 31 adj. 2,960,000 Bal. 6,522,000

9-46

(For Instructor Use Only)

PROBLEM 9-6B

(a) Accumulated Depreciation—Equipment .................. Loss on Disposal of Plant Assets ............................ Equipment ..........................................................

29,000 11,000

(b) Cash............................................................................ Accumulated Depreciation—Equipment .................. Gain on Disposal of Plant Assets ..................... Equipment ..........................................................

24,000 29,000

(c) Cash............................................................................ Accumulated Depreciation—Equipment .................. Loss on Disposal of Plant Assets ............................ Equipment ..........................................................

10,000 29,000 1,000

40,000

13,000 40,000

40,000

9-47

PROBLEM 9-7B

(a) Jan. 2

Patents .................................................. Cash ...............................................

54,000

Jan.– June

Research Expense................................ Cash ...............................................

230,000

Sept. 1

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

125,000

Copyrights ............................................ Cash ...............................................

180,000

Amortization Expense .......................... Patents........................................... [($100,000 X 1/10) + ($54,000 X 1/9)]

16,000

Amortization Expense .......................... Copyrights ..................................... [($80,000 X 1/10) + ($180,000 X 1/40 X 2/12)]

8,750

Nov. 1

(b) Dec. 31

54,000 230,000 125,000 180,000

16,000

(c) Intangible Assets Patents ($154,000 cost – $26,000 amortization) (1) ............. Copyrights ($260,000 cost – $40,750 amortization) (2) ....... Total intangible assets ...................................................

8,750

$128,000 219,250 $347,250

(1) Cost ($100,000 + $54,000); amortization ($10,000 + $16,000). (2) Cost ($80,000 + $180,000); amortization ($32,000 + $8,750). (d) The intangible assets of the company consist of two patents and two copyrights. One patent with a total cost of $154,000 is being amortized in two segments ($100,000 over 10 years and $54,000 over 9 years); the other patent was obtained at no recordable cost. A copyright with a cost of $80,000 is being amortized over 10 years; the other copyright with a cost of $180,000 is being amortized over 40 years.

9-48

(For Instructor Use Only)

PROBLEM 9-8B

Development Expense .............................................. Patents ................................................................

110,000

Patents ....................................................................... Amortization Expense [€9,000 – (€70,000 X 1/20)] .............................

5,500

Goodwill ..................................................................... Amortization Expense........................................

2,500

110,000

5,500

2,500

Note: Goodwill should not be amortized because it has an indefinite life unlike Patents.

9-49

PROBLEM 9-9B

(a) Asset turnover ratio

Nina Corp.

Vernon Corp.

$1,100,000 = 1.10 times $1,000,000

$930,000 = .91 times $1,020,000

(b) Based on the asset turnover ratio, Nina Corp. is more effective in using assets to generate sales. Its asset turnover ratio is 21% higher than Vernon’s asset turnover ratio.

9-50

(For Instructor Use Only)

CHAPTER 9 COMPREHENSIVE PROBLEM SOLUTION

(a) 1. Equipment ............................................................ Cash .................................................................

13,780

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

450

Cash ...................................................................... Accumulated Depreciation—Equipment ............ Equipment ....................................................... Gain on Disposal of Plant Assets ..................

3,500 2,250

3. Accounts Receivable ........................................... Sales Revenue .................................................

9,400

Cost of Goods Sold.............................................. Inventory ..........................................................

6,600

4. Bad Debt Expense ............................................... Allowance for Doubtful Accounts ..................

3,700

5. Interest Receivable ($10,000 X .08 X 9/12) .......... Interest Revenue .............................................

600

6. Insurance Expense ($4,400 X 3/6) ....................... Prepaid Insurance ...........................................

2,200

7. Depreciation Expense.......................................... Accumulated Depreciation—Buildings .........

3,500

8. Depreciation Expense.......................................... Accumulated Depreciation—Equipment [($60,000 – $5,000) – ($55,000 X .10)] ÷ 5 .....

9,900

9. Depreciation Expense.......................................... Accumulated Depreciation—Equipment [($13,780 – $1,000) ÷ 5] X 8/12 ......................

1,704

13,780 450

5,000 750 9,400 6,600 3,700 600 2,200 3,500

9,900

1,704

9-51

COMPREHENSIVE PROBLEM (Continued) 10. Amortization Expense......................................... Patents ............................................................

800

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

2,200

12. Unearned Rent Revenue ($6,000 ÷ 4) ................. Rent Revenue .................................................

1,500

13. Interest Expense ($11,000 + $35,000) X .09 ........ Interest Payable ..............................................

4,140

14. Income Tax Expense ........................................... Income Taxes Payable ...................................

17,000

9-52

800 2,200 1,500 4,140

17, 000

(For Instructor Use Only)

COMPREHENSIVE PROBLEM (Continued) (b)

RAYMOND COMPANY Trial Balance December 31, 2014

Cash .................................................................... Accounts Receivable ......................................... Notes Receivable ............................................... Interest Receivable ............................................ Inventory ............................................................. Prepaid Insurance .............................................. Land .................................................................... Buildings ............................................................ Equipment .......................................................... Patents ................................................................ Allowance for Doubtful Accounts ..................... Accumulated Depreciation—Buildings ............ Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Income Taxes Payable ....................................... Salaries and Wages Payable ............................. Unearned Rent Revenue .................................... Notes Payable (due in 2015) .............................. Interest Payable ................................................. Notes Payable (due after 2015) ......................... Share Capital—Ordinary .................................... Retained Earnings.............................................. Dividends ............................................................ Sales Revenue.................................................... Interest Revenue ................................................ Rent Revenue ..................................................... Gain on Disposal of Plant Assets ..................... Bad Debt Expense.............................................. Cost of Goods Sold............................................ Depreciation Expense ........................................ Income Tax Expense.......................................... Insurance Expense ............................................ Interest Expense ................................................ Other Operating Expenses ................................ Amortization Expense ....................................... Salaries and Wages Expense ............................ Total ....................................................................

Debits $ 17,720 46,200 10,000 600 29,600 2,200 20,000 160,000 68,780 7,200

Credits

4,000 52,500 33,804 28,300 17,000 2,200 4,500 11,000 4,140 35,000 50,000 63,600

12,000

3,700 636,600 15,554 17,000 2,200 4,140 61,800 800 112,200 $1,228,294

919,400 600 1,500 750

$1,228,294

9-53

COMPREHENSIVE PROBLEM (Continued) (c)

RAYMOND COMPANY Income Statement For the Year Ended December 31, 2014

Sales Revenue ................................................... Cost of Goods Sold ........................................... Gross Profit ....................................................... Operating Expenses Salaries and Wages Expense ...................... Other Operating Expenses .......................... Depreciation Expense .................................. Bad Debt Expense ........................................ Insurance Expense....................................... Amortization Expense .................................. Total Operating Expenses ................................ Income From Operations .................................. Other Income and Expense Rent Revenue ............................................... Gain on Disposal of Plant Assets ............... Interest Revenue .......................................... Interest Expense ............................................... Income Before Income Taxes ........................... Income Tax Expense ......................................... Net Income .........................................................

$919,400 636,600 282,800 $112,200 61,800 15,554 3,700 2,200 800 196,254 86,546 1,500 750 600

2,850 4,140 85,256 17,000 $ 68,256

RAYMOND COMPANY Retained Earnings Statement For the Year Ended December 31, 2014 Retained Earnings, 1/1/14 .................................................... Add: Net Income ................................................................... Less: Dividends .................................................................... Retained Earnings, 12/31/14 ................................................

9-54

$ 63,600 68,256 131,856 12,000 $119,856

(For Instructor Use Only)

COMPREHENSIVE PROBLEM (Continued) (d)

RAYMOND COMPANY Statement of Financial Position December 31, 2014 Assets

Intangible Assets Patents ...................................................... Property, Plant, and Equipment Land .......................................................... $160,000 Buildings................................................... 52,500 Less Accum. Depr.—Buildings ............... 68,780 Equipment ................................................ 33,804 Less Accum. Depr.—Equipment ............. Total Property, Plant and Equipment .......................................... Current Assets Prepaid Insurance .................................... Inventory ................................................... Interest Receivable .................................. Notes Receivable ..................................... Accounts Receivable ............................... 46,200 Less Allowance for Doubtful Accounts 4,000 Cash ............................................................... Total Current Assets ......................... Total Assets...................................................

7,200

$ 20,000 107,500 34,976 162,476 2,200 29,600 600 10,000 42,200 17,720

102,320 $271,996

Equity and Liabilities Equity Share Capital—Ordinary .......................... Retained Earnings .................................... Non-current Liabilities Notes Payable .......................................... Current Liabilities Notes Payable .......................................... 11,000 Accounts Payable .................................... 28,300 Income Taxes Payable ............................. 17,000 Interest Payable........................................ 4,140 Unearned Rent Revenue .......................... 4,500 Salaries and Wages Payable ................... 2,200 Total Current Liabilities ..................... Total Liabilities .............................................. Total Equity and Liabilities ........................... .

$ 50,000 119,856

$ 169,856

35,000

67,140 102,140 $271,996 9-55

CCC9

(a)

CONTINUING COOKIE CHRONICLE

Purchase price............................................................ Painting ....................................................................... Shelving ...................................................................... Cost of van ..................................................................

$36,500 2,500 1,500 $40,500

(b) Straight-line depreciation

Depreciable Year

Cost

2014 2015 2016

$33,000* 33,000 33,000

Deprec. X

Rate

Deprec. Accum. Net Book = Expense

Deprec.

$2,200 6,600 6,600

$ 2,200 8,800 15,400

20% X 4/12 20% 20%

Value $40,500 38,300 31,700 25,100

*$40,500 – $7,500 Double-declining-balance depreciation

NBV (Beg. Deprec. Year of Year) X Rate 2014 2015 2016

$40,500 35,100 21,060

40% X 4/12 40% 40%

Deprec. Accum. Net Book = Expense

Deprec.

Value $40,500 35,100 21,060 12,636

$ 5,400 14,040 8,424

$ 5,400 19,440 27,864

Deprec.

Accum. Net Book

Units-of-activity depreciation

Units of Year

Activity

2014 2015 2016

15,000 45,000 50,000

Deprec. X

Cost/Unit = Expense

Deprec.

$0.165* 0.165 0.165

$ 2,475 9,900 18,150

$ 2,475 7,425 8,250

Value $40,500 38,025 30,600 22,350

*($40,500 – $7,500) ÷ 200,000 = $0.165 per mile 9-56

(For Instructor Use Only)

CCC9 (Continued) (c)

Impact on Cookie Creation’s statement of financial position and income statement in 2014: Double declining Units-ofStraight-Line Balance Activity Cost of asset $40,500 $40,500 $40,500 Accumulated depreciation (2,200) ( 5,400) ( 2,475 ) Net book value $38,300 $35,100 $38,025 Depreciation expense

$ 2,200

$ 5,400

$ 2,475

The double-declining method of depreciation will result in the lowest amount of net income reported, the lowest amount of equity reported, and the lowest net book value of the asset reported. The straight-line method of depreciation will result in the greatest amount of net income reported, the greatest amount of equity reported, and the greatest net book value of the asset reported. (d) Over the van’s 5-year useful life, the total depreciation will be $33,000 (resulting in a net book value equal to the residual value of $7,500) under each of the methods. The impact will affect only the timing of the depreciation expense recognized each year. (e)

The units-of-activity method may provide Natalie with a more accurate assessment of usage of the van in relation to the amount of revenue earned. As long as Natalie is willing to track the number of miles driven over the course of the year, then this would be the method recommended.

9-57

BYP 9-1

FINANCIAL REPORTING PROBLEM

(a) Property, plant, and equipment is reported at net book value, on the December 31, 2010, statement of financial position at ￦52,964,594 million. The cost of the property, plant, and equipment is ￦115,535,327 million as shown in Note 11. (b) Depreciation expense is calculated on a straight-line basis over an asset’s estimated useful life. (see Note 2.9). (c) Depreciation expense was: 2010: 2009:

￦10,847,374 million. ￦10,771,334 million.

(d) Samsung's capital spending was: 2010: 2009:

￦21,619,244 million. ￦8,072,165 million.

(e) Samsung reports its intangible assets on the statement of financial position, under the non-current assets section and in Note 12. Their intangibles consisted of goodwill, capitalized development, and other intangibles (patents, trademarks ad software licenses).

9-58

(For Instructor Use Only)

BYP 9-2

COMPARATIVE ANALYSIS PROBLEM

(a)

Zetar Asset turnover ratio

₤134,998 ÷

Nestlé

£ 93, 062 + £ 85, 108

CHF109,722 ÷

CHF111, 641 + CHF110, 916 2

= 1.52 times

= .99 times

(b) The asset turnover ratio measures how efficiently a company uses its assets to generate sales. It shows the dollars of sales generated by each dollar invested in assets. Zetar’s asset turnover ratio (1.52) was 54% higher than Nestlé’s (.99). Therefore, it can be concluded that Zetar was more efficient during the most recent period in utilizing assets to generate sales.

9-59

BYP 9-3

REAL-WORLD FOCUS

Answers will vary depending on the company selected.

9-60

(For Instructor Use Only)

BYP 9-4

DECISION-MAKING ACROSS THE ORGANIZATION

(a)

Givens Company—Straight-line method Annual Depreciation Buildings [($320,000 – $20,000) ÷ 40].............................. Equipment [($125,000 – $10,000) ÷ 10] ........................... Total annual depreciation ................................................

$ 7,500 11,500 $19,000

Total accumulated depreciation ($19,000 X 3) .......................

$57,000

Runge Company—Double-declining-balance method

Year 2012 2013 2014

Asset Buildings Equipment Buildings Equipment Buildings Equipment

(b)

2012 2013 2014 Total net income

Accumulated Depreciation $41,000 35,200 30,440 $106,640

Company Net Income

Runge Company Net Income As Adjusted

Computations for Runge Company

$ 84,000 88,400 90,000

$ 90,000 92,200 96,440

$68,000 + $41,000 – $19,000 = $90,000 $76,000 + $35,200 – $19,000 = $92,200 $85,000 + $30,440 – $19,000 = $96,440

$262,400

$278,640

Givens Year

Computation $320,000 X 5% $125,000 X 20% $304,000 X 5% $100,000 X 20% $288,800 X 5% $ 80,000 X 20%

Annual Depreciation $16,000 25,000 15,200 20,000 14,440 16,000

(c) As shown above, when the two companies use the same depreciation method, Runge Company is more profitable than Givens Company. When the two companies are using different depreciation methods, Runge Company has more cash than Givens Company for two reasons:

9-61

BYP 9-4 (Continued) (1) its earnings are generating more cash than the earnings of Givens Company, and (2) depreciation expense has no effect on cash. Cash generated by operations can be arrived at by adding depreciation expense to net income. If this is done, it can be seen that Runge Company’s operations generate more cash ($229,000 + $106,640 = $335,640) than Givens Company’s ($262,400 + $57,000 = $319,400). Based on the above analysis, Linda Yanik should buy Runge Company. It not only is in a better financial position than Givens Company, but it is also more profitable.

9-62

(For Instructor Use Only)

BYP 9-5

COMMUNICATION ACTIVITY

To:

Instructor

From:

Student

Re:

American Exploration Company (USA) footnote

American Exploration Company (USA) accounts for its oil and gas activities using the successful efforts approach. Under this method, only the costs of successful exploration are included in the cost of the natural resource, and the costs of unsuccessful explorations are expensed. Depletion is determined using the units-of-activity method. Under this method, a depletion cost per unit is computed based on the total number of units expected to be extracted. Depletion expense for the year is determined by multiplying the units extracted and sold by the depletion cost per unit.

9-63

BYP 9-6

ETHICS CASE

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

Edward Mohling, president of Dieker Container Company. Betty Fetters, controller. The stockholders of Dieker Container Company. Potential investors in Dieker Container Company.

(b) The intentional misstatement of the life of an asset or the amount of the residual value is unethical for whatever the reason. There is nothing per se unethical about changing the estimate either of the life of an asset or of an asset’s residual value if the change is an attempt to better match cost and revenues and is a better allocation of the asset’s depreciable cost over the asset’s useful life. In this case, it appears from the controller’s reaction that the revisions in the life are intended only to improve earnings and, therefore, are unethical. The fact that the competition uses a longer life on its equipment is not necessarily relevant. The competition’s maintenance and repair policies and activities may be different. The competition may use its equipment fewer hours a year (e.g., one shift rather than two shifts daily) than Dieker Container Company. (c) Income before income taxes in the year of change is increased $140,000 by implementing the president’s proposed changes.

Asset cost Estimated residual Depreciable cost Depreciation per year (1/8) Asset cost Estimated residual Depreciable cost Depreciation taken to date ($350,000 X 2) Remaining life in years Depreciation per year

9-64

Old Estimates $3,100,000 300,000 2,800,000 $ 350,000 Revised Estimates $3,100,000 300,000 2,800,000 700,000 2,100,000 10 years $ 210,000

(For Instructor Use Only)

GAAP EXERCISES GAAP9-1 Component depreciation is a method of allocating the cost of a plant asset into separate parts based on the estimated useful lives of each component. IFRS requires an entity to use component depreciation whenever significant parts of a plant asset have significantly different useful lives. GAAP does not require component depreciation, but does allow companies to use it. GAAP9-2 Revaluation is an accounting procedure that adjusts plant assets to fair value at the reporting date. Under IFRS revaluation must be applied annually to assets that are experiencing rapid price changes. Revaluation of plant assets is not acceptable under GAAP. GAAP9-3 Both types of development expenditures relate to the creation of new products but under IFRS one is expensed and the other is capitalized. Development costs incurred before a new product achieves technological feasibility are recorded as development expenses and appear as part of operating expenses on the income statement. Cost incurred after technological feasibility are recorded as development costs and appear as an intangible asset on the statement of financial position. Under GAAP development costs are expensed as incurred. GAAP9-4 Component depreciation : Warehouse component: ($280,000 – $40,000)/20 = $12,000 HVAC component: $40,000/10 = $4,000 Total component depreciation in first year $16,000 Straight-line depreciation-GAAP:$280,000/20=$14,000

9-65

GAAP9-5 (a) IFRS entry: Development Expense .................................................... Research Expense........................................................... Development Costs ......................................................... Cash.......................................................................... (To record research and development costs) (b) GAAP entry: Research and Development Expenses .......................... Cash.......................................................................... (To record research and development costs)

9-66

400,000 300,000 200,000 900,000

900,000

(For Instructor Use Only)

GAAP FINANCIAL STATEMENT ANALYSIS GAAP9-6 (a) Total cost of property, plant, and equipment for 2010: $440,974,000 Book value of property, plant, and equipment for 2010: $715,492,000 (b) Depreciation is completed using the straight-line method based on useful levels of 20 to 35 years for buildings and 5 to 20 years for machinery and equipment. (c) Depreciation expense

(d) Capital expenditures

2010

2009

$18,279,000

$17,862,000

2010 $12,813,000

2009_ _ $20,831,000

2008_ _ $17,036,000

(e) Goodwill and intangible assets with indefinite levels are not amortized, but rather tested for impairment at least annually unless certain interim triggering events or circumstances require more frequently testing. No impairments were recorded in 2010, nor any amortization.

9-67

9-68

(For Instructor Use Only)

CHAPTER 10 Liabilities ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief Exercises

* 1. Explain a current liability, and identify the major types of current liabilities.

* 2. Describe the accounting for notes payable.

1, 2

1A, 2A

* 3. Explain the accounting for other current liabilities.

3, 4, 5

3, 4

3, 4, 5

* 4. Explain why bonds are issued, and identify the types of bonds.

6, 7, 8, 9, 10,

6, 7

* 5. Prepare the entries for the issuance of bonds and interest expense.

11, 12, 13

6, 7, 8

8, 9, 10, 11, 16, 17, 18, 19

3A, 4A, 6A, 2B, 3B, 5B, 7A, 8A, 9A 6B, 7B, 8B, 9B

*6. Describe the entries when bonds are redeemed.

11, 12

3A, 4A, 10A

2B, 3B, 9B

7. Describe the accounting for long-term notes payable.

8. Identify the methods for the presentation and analysis of non-current liabilities.

3A, 4A, 5A

2B, 3B, 4B

*9. Compute the market price of 19 a bond.

*10. Apply the effective-interest method of amortizing bond discount and bond premium.

16, 17

6A, 7A

5B, 6B

17, 18

Do It!

Exercises

A Problems

B Problems

10-1

ASSIGNMENT CLASSIFICATION TABLE (Continued) Learning Objectives

Questions

Brief Exercises Do It!

A Exercises Problems

*11. Apply the straight-line method of amortizing bond discount and bond premium. *12. Prepare entries for payroll and payroll taxes under U.S. law.

20, 21

14, 15

18, 19

16, 17

20, 21

B Problems

8A, 9A, 10A 7B, 8B, 9B

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

10-2

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare current liability entries, adjusting entries, and current liabilities section.

Moderate

30–40

Journalize and post note transactions; and show statement of financial position presentation.

Moderate

30–40

Prepare entries to record issuance of bonds, interest accrual, and bond redemption.

Moderate

20–30

Prepare entries to record issuance of bonds, interest accrual, and bond redemption.

Moderate

15–20

Prepare installment payments schedule and journal entries for a mortgage note payable.

Moderate

20–30

*6A

Prepare entries to record issuance of bonds, payment of interest, and amortization of bond premium using effective-interest method.

Moderate

30–40

*7A

Prepare entries to record issuance of bonds, payment of interest, and amortization of discount using effectiveinterest method. In addition, answer questions.

Moderate

30–40

*8A

Prepare entries to record issuance of bonds, interest accrual, and straight-line amortization for 2 years.

Simple

30–40

*9A

Prepare entries to record issuance of bonds, interest, and straight-line amortization of bond premium and discount.

Simple

30–40

*10A

Prepare entries to record interest payments, straight-line premium amortization, and redemption of bonds.

Moderate

30–40

Prepare current liability entries, adjusting entries, and current liabilities section.

Moderate

30–40

Prepare entries to record issuance of bonds, interest accrual, and bond redemption.

Moderate

20–30

Prepare entries to record issuance of bonds, interest accrual, and bond redemption.

Moderate

15–20

Prepare installment payments schedule and journal entries for a mortgage note payable.

Moderate

20–30

*5B

Prepare entries to record issuance of bonds, payment of interest, and amortization of bond discount using effective-interest method.

Moderate

30–40

10-3

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Difficulty Level

Time Allotted (min.)

*6B

Prepare entries to record issuance of bonds, payment of interest, and amortization of premium using effectiveinterest method. In addition, answer questions.

Moderate

30–40

*7B

Prepare entries to record issuance of bonds, interest accrual, and straight-line amortization for two years.

Simple

30–40

*8B

Prepare entries to record issuance of bonds, interest, and straight-line amortization of bond premium and discount.

Simple

30–40

*9B

Prepare entries to record interest payments, straight-line discount amortization, and redemption of bonds.

Moderate

30–40

10-4

WEYGANDT FINANCIAL ACCOUNTING, IFRS EDITION, 2e CHAPTER 10 LIABILITIES Number

Difficulty

Time (min.)

BE1 BE2 BE3 BE4 BE5 BE6 BE7 BE8 BE9 BE10 BE11 BE12 BE13 *BE14 *BE15 *BE16 *BE17 DI1 DI2 DI3 DI4 DI5 EX1 EX2 EX3 EX4 EX5 EX6 EX7 EX8 EX9 EX10 EX11 EX12 EX13 EX14

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

C AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP C C AP AP AP AN AN AP AN AP C AN AP AP AP AP AP AP AP

Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Moderate Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Moderate Simple Simple

3–5 2–4 2–4 2–4 6–8 4–6 3–5 4–6 3–5 6–8 3–5 3–5 4–6 4–6 4–6 3–5 3–5 6–8 2–3 4–6 3–5 4–6 8–10 6–8 4–6 6–8 6–8 4–6 4–6 4–6 4–6 6–8 6–8 8–10 6–8 3–5

10-5

LIABILITIES (Continued) Number

Difficulty

Time (min.)

*EX15 *EX16 *EX17 *EX18 *EX19 *EX20 *EX21 P1A P2A P3A P4A P5A *P6A *P7A *P8A *P9A *P10A P1B P2B P3B P4B P5B *P6B *P7B *P8B *P9B BYP1 BYP2 BYP3 BYP4 BYP5 BYP6

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

AP AP AP AP AP AP AP AN AN AP AP AP AP AP AP AP AP AN AP AP AP AP AP AP AP AP AN AP C AN C E

Simple Moderate Moderate Simple Simple Simple Simple Moderate Moderate Moderate Moderate Moderate Moderate Moderate Simple Simple Moderate Moderate Moderate Moderate Moderate Moderate Moderate Simple Simple Moderate Simple Simple Simple Moderate Simple Simple

4–2 8–10 8–10 6–8 6–8 6–8 3–5 30–40 30–40 20–30 15–20 20–30 30–40 30–40 30–40 30–40 30–40 30–40 20–30 15–20 20–30 30–40 30–40 30–40 30–40 30–40 5–10 10–15 10–15 15–20 10–15 10–15

10-6

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

Knowledge

Comprehension

Application

Q10-1 BE10-1

2. Describe the accounting for notes payable.

Q10-2 DI10-1

3. Explain the accounting for other current liabilities.

Q10-3 Q10-4 DI10-1

Q10-5

BE10-3 BE10-4

Q10-6 Q10-7 Q10-8

Q10-9 DI10-2

BE10-5 E10-6

4. Explain why bonds are issued, and identify the types of bonds.

Q10-10

BE10-2

E10-1 E10-2 E10-3 E10-5

Synthesis

Evaluation

E10-7

Q10-11 Q10-13

Q10-12 BE10-6 BE10-7 BE10-8 DI10-3 E10-8 E10-9 E10-10 E10-11 E10-12

E10-16 E10-17 E10-18 E10-19 P10-3A P10-4A P10-6A P10-7A P10-8A

6. Describe the entries when bonds are redeemed.

Q10-14

BE10-9 DI10-4 E10-11 E10-12

P10-3A P10-3B P10-4A P10-9B P10-10A P10-2B

7. Describe the accounting for longterm notes payable.

Q10-15 DI10-5 BE10-10 E10-13 Q10-16

P10-1A P10-2A P10-1B

E10-4 P10-1B P10-1A

5. Prepare the entries for the issuance of bonds and interest expense.

8. Identify the methods for the presentation and analysis of non-current liabilities.

Analysis P10-1A P10-1B

BLOOM’ S TAXONOMY TABLE

1. Explain a current liability, and identify the major types of current liabilities.

P10-9A P10-2B P10-3B P10-5B P10-6B P10-7B P10-8B P10-9B

P10-4B P10-5A

BE10-11 P10-4A P10-3B E10-14 P10-5A P10-4B P10-3A P10-2B

*9. Compute the market price of a bond.

Q10-19

BE10-12 E10-15

*10. Apply the effective-interest method of amortizing bond discount and bond premium.

Q10-17 Q10-18

BE10-13 P10-6A E10-16 P10-7A E10-17 P10-5B

*11. Apply the straight-line method of amortizing bond discount and bond premium.

Q10-20

Q10-21 E10-19 P10-7B BE10-14 P10-8A P10-8B BE10-15 P10-9A P10-9B E10-18 P10-10A

*12. Prepare entries for payroll and payroll taxes under U.S. GAAP.

Q10-22

BE10-16 E10-20 BE10-17 E10-21

Broadening Your Perspective

Communication Real-World Focus

Comparative Analysis

P10-6B

10-7

Financial Reporting Decision-Making Across the Organization

Ethics Case

ANSWERS TO QUESTIONS 1.

Brenda is not correct. A current liability is a debt that can reasonably be expected to be paid: (a) from existing current assets or through the creation of other current liabilities and (2) within one year or the operating cycle, whichever is longer.

In the statement of financial position, Notes Payable of Rs300,000 and Interest Payable of Rs6,750 (Rs300,000 X .09 X 3/12) should be reported as current liabilities. In the income statement, Interest Expense of Rs6,750 should be reported after other income and expense.

(a) Disagree. The company only serves as a collection agent for the taxing authority. It does not report sales taxes as an expense; it merely forwards the amount paid by the customer to the government. (b) The entry to record the proceeds is: Cash............................................................................................... 7,400 Sales Revenue ....................................................................... 7,000 Sales Taxes Payable .............................................................. 400

(a) The entry when the tickets are sold is: Cash......................................................................................... Unearned Ticket Revenue ................................................

900,000

(b) The entry after each game is: Unearned Ticket Revenue ........................................................ Ticket Revenue.................................................................

180,000

900,000

180,000

Liquidity refers to the ability of a company to pay its maturing obligations and meet unexpected needs for cash. Two measures of liquidity are working capital (current assets – current liabilities) and the current ratio (current assets ÷ current liabilities).

(a) Non-current liabilities are obligations that are expected to be paid after one year. Examples include bonds, long-term notes, and lease obligations. (b) Bonds are a form of interest-bearing notes payable used by corporations, universities, and governmental agencies.

(a) The major advantages are: (1) Shareholder control is not affected—bondholders do not have voting rights, so current shareholders retain full control of the company. (2) Tax savings result—In some countries bond interest is deductible for tax purposes; dividends on stock are not. (3) Earnings per share may be higher—although bond interest expense will reduce net income, earnings per share on ordinary shares will often be higher under bond financing because no additional shares are issued. (b) The major disadvantages in using bonds are that interest must be paid on a periodic basis and the principal (face value) of the bonds must be paid at maturity.

10-8

Questions Chapter 10 (Continued) 8.

(a) Secured bonds have specific assets of the issuer pledged as collateral. In contrast, unsecured bonds are issued against the general credit of the borrower. These bonds are called debenture bonds. (b) Term bonds mature at a single specified future date. In contrast, serial bonds mature in installments. (c) Registered bonds are issued in the name of the owner. In contrast, bearer (coupon) bonds are issued to bearer and are unregistered. Holders of bearer bonds must send in coupons to receive interest payments. (d) Convertible bonds may be converted into ordinary shares at the bondholders’ option. In contrast, callable bonds are subject to call and retirement at a stated dollar amount prior to maturity at the option of the issuer.

(a) Face value is the amount of principal due at the maturity date. (Face value is also called par value.) (b) The contractual interest rate is the rate used to determine the amount of cash interest the borrower pays and the investor receives. This rate is also called the stated interest rate because it is the rate stated on the bonds. (c) A bond indenture is a legal document that sets forth the terms of the bond issue. (d) A bond certificate is a legal document that indicates the name of the issuer, the face value of the bonds, and such other data as the contractual interest rate and maturity date of the bonds.

10.

The two major obligations incurred by a company when bonds are issued are the interest payments due on a periodic basis and the principal which must be paid at maturity.

11.

Less than. Investors are required to pay more than the face value; therefore, the market interest rate is less than the contractual rate.

12.

R$24,000. R$800,000 X 6% X 1/2 year = R$24,000.

13.

HK$9,000,000. The balance of the Bonds Payable account plus the unamortized bond discount (or minus the unamortized bond premium) equals the face value of the bonds.

14.

Debits: Credits:

15.

No, Roy is not right. Each payment by Roy consists of: (1) interest on the unpaid balance of the loan and (2) a reduction of loan principal. The interest decreases each period while the portion applied to the loan principal increases each period.

Bonds Payable (for the carrying value of the bonds). Cash (for 97% of the face value) and Gain on Bond Redemption (for the difference between the cash paid and the bonds’ carrying value).

10-9

Questions Chapter 10 (Continued) *16.

The nature and the amount of each non-current liability should be presented in the statement of financial position or in schedules in the accompanying notes to the statements. The notes should also indicate the interest rates, maturity dates, conversion privileges, and assets pledged as collateral.

*17.

Ginny is probably indicating that since the borrower has the use of the bond proceeds over the term of the bonds, the borrowing rate in each period should be the same. The effective-interest method results in a varying amount of interest expense but a constant rate of interest on the balance outstanding. Accordingly, it results in a better matching of expenses with revenues than the straight-line method.

*18.

Decrease. Under the effective-interest method the interest charge per period is determined by multiplying the carrying value of the bonds by the effective-interest rate. When bonds are issued at a premium, the carrying value decreases over the life of the bonds. As a result, the interest expense will also decrease over the life of the bonds because it is determined by multiplying the decreasing carrying value of the bonds at the beginning of the period by the effective-interest rate.

*19. No, Vera is not right. The market price of any bond is a function of three factors: (1) The currency amounts to be received by the investor (interest and principal), (2) The length of time until the amounts are received (interest payment dates and maturity date), and (3) The market interest rate. *20. The straight-line method results in the same amortized amount being assigned to Interest Expense each interest period. This amount is determined by dividing the total bond discount or premium by the number of interest periods the bonds will be outstanding. *21. $24,000. Interest expense is the interest to be paid in cash less the premium amortization for the year. Cash to be paid equals 7% X $400,000 or $28,000. Total premium equals 5% of $400,000 or $20,000. Since this is to be amortized over 5 years (the life of the bonds) in equal amounts, the amortization amount is $20,000 ÷ 5 = $4,000. Thus, $28,000 – $4,000 or $24,000 equals interest expense for 2014. *22. Three taxes commonly withheld by employers from employees’ gross pay are: (1) federal income taxes (2) state income taxes, and (3) social security (FICA) taxes.

10-10

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10-1 (a) A note payable due in two years is a non-current liability, not a current liability. (b) $30,000 of the mortgage payable is a current maturity of long-term debt. This amount should be reported as a current liability. (c) Interest payable is a current liability because it will be paid out of current assets in the near future. (d) Accounts payable is a current liability because it will be paid out of current assets in the near future.

BRIEF EXERCISE 10-2 July 1 Dec. 31

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

60,000

Interest Expense .............................................. Interest Payable (£60,000 X 10% X 1/2) ...........................

3,000

60,000

3,000

BRIEF EXERCISE 10-3 Sales tax payable (1) Sales = $12,800 = ($13,440 ÷ 1.05) (2) Sales taxes payable = $640 = ($12,800 X 5%) Mar. 16

Cash .................................................................. Sales Revenue .......................................... Sales Taxes Payable .................................

13,440

12,800 640

10-11

BRIEF EXERCISE 10-4 Cash ............................................................................... Unearned Ticket Revenue ..................................... (To record sale of 4,000 season tickets)

720,000

Unearned Ticket Revenue ............................................. Ticket Revenue ...................................................... (To record basketball ticket revenues earned)

72,000

720,000

72,000

BRIEF EXERCISE 10-5 Income before interest and taxes Interest (€2,000,000 X 7%) Income before income taxes Income tax expense (30%) Net income (a)

Issue Shares €700,000 0 700,000 210,000 €490,000

Issue Bond €700,000 140,000 560,000 168,000 €392,000

700,000 €0.70

500,000 €0.78

Outstanding shares (b) Earnings per share (a) ÷ (b)

Net income is higher if shares is used. However, earnings per share is lower than earnings per share if bonds are used because of the additional shares that are outstanding.

BRIEF EXERCISE 10-6 (a) Jan. 1

(b) July 1 (c) Dec. 31

10-12

Cash................................................. Bonds Payable (4,000 X $1,000) ...................

4,000,000

Interest Expense ............................. Cash ($4,000,000 X 6% X 1/2) ...

120,000

Interest Expense ............................. Interest Payable ($4,000,000 X 6% X 1/2) .......

120,000

4,000,000 120,000

120,000

BRIEF EXERCISE 10-7 (a) Jan. 1 (b) Jan. 1

Cash (€1,000,000 X .97) .................. Bonds Payable ........................

970,000

Cash (€1,000,000 X 1.04) ................ Bonds Payable ........................

1,040,000

970,000 1,040,000

BRIEF EXERCISE 10-8 1.

2. 3.

Jan. 1

July 1 Sept. 1

Cash (1,000 X $1,000) ..................... Bonds Payable ........................

1,000,000

Cash ($800,000 X 1.02) ................... Bonds Payable ........................

816,000

Cash ($200,000 X .97) ..................... Bonds Payable ........................

194,000

1,000,000

816,000 194,000

BRIEF EXERCISE 10-9 Bonds Payable ........................................................ Loss on Bond Redemption (£1,010,000 – £960,000) ....................................... Cash (£1,000,000 X 101%) ...............................

960,000 50,000

1,010,000

10-13

BRIEF EXERCISE 10-10 (A) Semiannual Interest Period Issue Date 1 Dec. 31

June 30

Cash Payment

(B) Interest Expense (D) X 5%

$32,097

$20,000

$12,097

(D) Principal Balance (D) – (C) $400,000 387,903

Cash ............................................................. Mortgage Payable ................................

400,000

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

20,000 12,097

400,000

32,097

BRIEF EXERCISE 10-11 Non-current liabilities Bonds payable, due 2016 ...................................... Notes payable, due 2019 ....................................... Lease liability ......................................................... Total non-current liabilities ...........................

CHF500,000 80,000 60,000 CHF640,000

*BRIEF EXERCISE 10-12 (a)

i = 8% ?

$10,000

Discount rate from Table 10 A-1 is .54027 (8 periods at 8%). Present value of $10,000 to be received in 8 periods discounted at 8% is therefore $5,402.70 ($10,000 X .54027).

10-14

*BRIEF EXERCISE 10-12 (Continued) (b)

i = 10% ?

$20,000 $20,000 $20,000 $20,000 $20,000 $20,000

Discount rate from Table 10A-2 is 4.35526 (6 periods at 10%). Present value of 6 payments of $20,000 each discounted at 10% is therefore $87,105.20 ($20,000 X 4.35526). *BRIEF EXERCISE 10-13 (a) Interest Expense .................................................... Bonds Payable ............................................... Cash ................................................................

32,513 2,513 30,000

(b) Interest expense is greater than interest paid because the bonds sold at a discount which must be amortized over the life of the bonds. The bonds sold at a discount because investors demanded a market interest rate higher than the contractual interest rate. (c) Interest expense increases each period because the bond carrying value increases each period. As the market interest rate is applied to this bond carrying amount, interest expense will increase. *BRIEF EXERCISE 10-14 (a) Jan. 1

(b) July 1

Cash (.96 X HK$3,000,000) .............. Bonds Payable .........................

2,880,000

Interest Expense .............................. Bonds Payable (HK$120,000 ÷ 20) ................. Cash (HK$3,000,000 X 9% X 1/2)

141,000

2,880,000

6,000 135,000

10-15

*BRIEF EXERCISE 10-15 (a) Cash (1.02 X $2,000,000)................................... Bonds Payable ..........................................

2,040,000

(b) Interest Expense ............................................... Bonds Payable ($40,000 ÷ 10) ................................................ Cash ($2,000,000 X 10% X 1/2)..................

96,000

2,040,000

4,000 100,000

*BRIEF EXERCISE 10-16 Gross earnings: Regular pay (40 X $14) ........................................... Overtime pay (7 X $21) .......................................... Gross earnings .............................................................. Less: FICA taxes payable ............................................ Federal income taxes payable ........................... Net pay ...........................................................................

$560.00 147.00

$707.00 $707.00

$ 54.09 95.00

149.09 $557.91

*BRIEF EXERCISE 10-17 Jan. 15

Jan. 15

Salaries and Wages Expense ......................... FICA Taxes Payable ................................. Federal Income Taxes Payable ............... Salaries and Wages Payable ...................

707.00

Salaries and Wages Payable........................... Cash ..........................................................

557.91

54.09 95.00 557.91

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 10-1 1. $70,000 X 9% X 5/12 = $2,625 2. $42,000/1.05 = $40,000; $40,000 X 5% = $2,000 3. $42,000 X 1/6 = $7,000

10-16

557.91

DO IT! 10-2 1. 2. 3. 4. 5.

False. Mortgage bonds and sinking fund bonds are both examples of secured bonds. False. Convertible bonds can be converted into ordinary shares at the bondholder’s option; callable bonds can be retired by the issuer at a set amount prior to maturity. True. True. True.

10-17

DO IT! 10-3 (a) Cash ................................................................ 308,000,000 Bonds Payable ....................................... (To record sale of bonds at a premium) (b) Non-current liabilities Bonds payable .......................................

308,000,000

W308,000,000

DO IT! 10-4 Loss on Bond Redemption ................................... Bonds Payable ....................................................... Cash ................................................................ (To record redemption of bonds at 98)

2,000 390,000 392,000

DO IT! 10-5 Cash ....................................................................... Mortgage Payable .......................................... (To record mortgage loan)

390,000

Interest Expense .................................................... Mortgage Payable .................................................. Cash ................................................................ (To record semiannual payment on mortgage)

9,750* 8,883

*Interest expense = R$390,000 X 5% X 6/12

10-18

390,000

18,633

SOLUTIONS TO EXERCISES EXERCISE 10-1 July 1, 2014 Cash ...................................................................... Notes Payable ................................................

60,000

November 1, 2014 Cash ...................................................................... Notes Payable ................................................

50,000

60,000

50,000

December 31, 2014 Interest Expense (€60,000 X 8% X 6/12) ....................................... Interest Payable .............................................

2,400

Interest Expense (€50,000 X 9% X 2/12) ....................................... Interest Payable .............................................

750

February 1, 2015 Notes Payable....................................................... Interest Payable.................................................... Interest Expense .................................................. Cash ...............................................................

50,000 750 375

April 1, 2015 Notes Payable....................................................... Interest Payable.................................................... Interest Expense .................................................. Cash ...............................................................

60,000 2,400 1,200

2,400

750

51,125

63,600

10-19

EXERCISE 10-2 (a) June 1 Cash.......................................................... Notes Payable ...................................

70,000

(b) June 30 Interest Expense ...................................... Interest Payable [($70,000 X 9%) X 1/12] ................

525

(c) Dec. 1 Notes Payable .......................................... Interest Payable ($70,000 X 9% X 6/12)........................... Cash ...................................................

70,000

525

3,150 73,150

(d) $3,150

EXERCISE 10-3 Apr. 10

10-20

KEMER COMPANY Cash ............................................................... Sales Revenue........................................ Sales Taxes Payable .............................. BODRUM COMPANY Cash ............................................................... Sales Revenue ($20,330 ÷ 1.07) ............. Sales Taxes Payable ($19,000 X .07) ....................................

31,650 30,000 1,650

20,330 19,000 1,330

EXERCISE 10-4 (a) Nov. 30

(b) Dec. 31

Cash .......................................................... Unearned Subscription Revenue (12,000 X $18) ................................

216,000

Unearned Subscription Revenue ............ Subscription Revenue ($216,000 X 1/12) ...........................

18,000

Unearned Subscription Revenue ............. Subscription Revenue ($216,000 X 3/12) ...........................

54,000

216,000

18,000

54,000

EXERCISE 10-5 (a) Current ratio 2010 $12,215 ÷ $6,089 = 2.01:1 2009 $10,795 ÷ $4,897 = 2.20:1 Working capital 2010 $12,215 – $6,089 = $6,126 million 2009 $10,795 – $4,897 = $5,898 million (b) Current ratio $12,015 ÷ $5,889 = 2.04:1 Working capital $12,015 – $5,889 = $6,126 million It would make its current ratio increase slightly, but its working capital would remain the same.

10-21

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

True. True. False. When seeking long-term financing, an advantage of issuing bonds over issuing ordinary shares is that tax savings result. True. False. Unsecured bonds are also known as debenture bonds. False. Bonds that mature in installments are called serial bonds. True. True. True. True.

EXERCISE 10-7

Income before interest and taxes Interest (¥2,400,000 X 10%) Income before taxes Income tax expense (30%) Net income Outstanding shares Earnings per share

10-22

Plan One Issue Shares ¥800,000 — 800,000 240,000 ¥560,000 150,000 ¥3.73

Plan Two Issue Bonds ¥800,000 240,000 560,000 168,000 ¥392,000 90,000 ¥4.36

EXERCISE 10-8 (a) Jan. 1

(b) July 1

Cash ...................................................... Bonds Payable ..............................

200,000

Interest Expense ................................... Cash ($200,000 X 8% X 1/2) ..........

8,000

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

8,000

200,000

8,000

EXERCISE 10-9 (a) Jan. 1

(b) July 1

Cash ....................................................... Bonds Payable ...............................

400,000

Interest Expense .................................... Cash (R$400,000 X 7% X 1/2) ........

14,000

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

14,000

400,000

14,000

10-23

EXERCISE 10-10 (a) 1. 2.

Cash ................................................................ Bonds Payable .........................................

294,000 294,000

Semiannual interest payments ($12,000* X 10) ............................................ Plus: Bond discount....................................... Total cost of borrowing ..................................

$120,000 6,000 $126,000

*($300,000 X .08 X 6/12) OR Principal at maturity ....................................... Semiannual interest payments ($12,000 X 10).............................................. Cash to be paid to bondholders .................... Cash received from bondholders .................. Total cost of borrowing .................................. (b) 1. 2.

Cash ................................................................ Bonds Payable ......................................... Semiannual interest payments ($12,000 X 10).............................................. Less: Bond Premium...................................... Total cost of borrowing ..................................

$300,000 120,000 420,000 (294,000) $126,000 312,000 312,000 $120,000 12,000 $108,000

OR Principal at maturity ....................................... Semiannual interest payments ($12,000 X 10).............................................. Cash to be paid to bondholders .................... Cash received from bondholders .................. Total cost of borrowing ..................................

10-24

$300,000 120,000 420,000 (312,000) $108,000

EXERCISE 10-11 (a) Jan. 1

(b) Jan

Interest Payable .................................... Cash ...............................................

56,000

Bonds Payable ...................................... Loss on Bond Redemption .................. Cash ($600,000 X 1.04)..................

600,000 24,000

Interest Expense ................................... Cash ($1,000,000 X 7% X 1/2) .......

35,000

56,000

624,000

35,000

EXERCISE 10-12 1.

June 30

Bonds Payable .................................... Loss on Bond Redemption (£132,600 – £117,500) ...................... Cash (£130,000 X 102%) ..............

117,500

Bonds Payable .................................... Gain on Bond Redemption (£151,000 – £145,500) ............... Cash (£150,000 X 97%) ................

151,000

15,100 132,600

5,500 145,500

10-25

EXERCISE 10-13

Dec. 31

June 30

Dec. 31

2014 Issuance of Note Cash ............................................................. Mortgage Payable ................................ 2015 First Installment Payment Interest Expense ($240,000 X 8% X 6/12) ............................ Mortgage Payable ....................................... Cash ..................................................... Second Installment Payment Interest Expense [($240,000 – $8,060) X 8% X 6/12] ........... Mortgage Payable ....................................... Cash .....................................................

240,000 240,000

9,600 8,060 17,660

9,277.60 8,382.40 17,660

EXERCISE 10-14 Non-current liabilities Bonds payable, due 2019............................... Lease liability.................................................. Total non-current liabilities ....................

HK$204,000 59,500 HK$263,500

*EXERCISE 10-15 Present value of principal ($250,000 X .61391) ............ Present value of interest ($10,000 X 7.72173) .............. Market price of bonds ...................................................

10-26

$153,478 77,217 $230,695

*EXERCISE 10-16 (a) Jan. 1

(b) July 1

Cash ...................................................... Bonds Payable .............................. Interest Expense (€468,844 X 5%)................................. Bonds Payable .............................. Cash (€500,000 X 9% X 1/2) .......... Interest Expense [(€468,844 + €942) X 5%] .................. Bonds Payable .............................. Bond Interest Payable ..................

468,844 468,844

23,442 942 22,500

23,489

989 22,500

10-27

Semiannual Interest Periods Issue date 1 2

(A) Interest to Be Paid (4.5% X €500,000)

€22,500 22,500

(B) Interest Expense to Be Recorded (5% X Preceding Bond Carrying Value) (D X .05)

€23,442 23,489

(D) Bond Carrying Value

€942 989

€468,844 469,786 470,775

*EXERCISE 10-16 (Continued)

10-28

(b), (c)

*EXERCISE 10-17 (a) Jan. 1

(b) July 1

Cash ........................................................ Bonds Payable ................................

321,319 321,319

Interest Expense ($321,319 X 3.5%)................................ Bonds Payable ........................................ Cash ($300,000 X 8% X 1/2) ............

11,246 754

Interest Expense [($321,319 – $754) X 3.5%] ................. Bonds Payable ........................................ Bond Interest Payable ....................

11,220 780

12,000

10-29

Semiannual Interest Periods Issue date 1 2

(A) Interest to Be Paid (4% X $300,000)

(B) Interest Expense to Be Recorded (C) (3.5% X Preceding Premium Bond Carrying Value) Amortization (D X 3.5) (A) – (B)

(D) Bond Carrying Value $321,319

$12,000

$11,246

$754

12,000

11,220

780

320,565 319,785

*EXERCISE 10-17 (Continued)

10-30

(b), (c)

*EXERCISE 10-18 (a) Jan. 1

(b) July 1

(d) Jan.

Cash (€700,000 X 103%) ........................ Bonds Payable ...............................

721,000

Interest Expense .................................... Bonds Payable (€21,000 X 1/40) .................................. Cash (€700,000 X 9% X 1/2) ...........

30,975

Interest Expense .................................. Bonds Payable ..................................... Bond Interest Payable ..................

30,975 525

2034 Bonds Payable ..................................... Cash...............................................

721,000

525 31,500

31,500 700,000 700,000

*EXERCISE 10-19 (a) Dec. 31 (b) June 30

(d) Dec. 31

2013 Cash ...................................................... Bonds Payable .............................. 2014 Interest Expense .................................. Bonds Payable ($25,000 ÷ 20) ............................ Cash ($600,000 X 7% X 1/2) .......... 2014 Interest Expense .................................. Bonds Payable .............................. Cash ($600,000 X 7% X 1/2) .......... 2023 Bonds Payable ..................................... Cash...............................................

575,000 575,000 22,250 1,250 21,000 22,250 1,250 21,000 600,000 600,000

10-31

*EXERCISE 10-20 (a) Net pay = Gross pay – FICA taxes – Federal income tax Net pay = $1,780 – $136 – $303 Net pay = $1,341 (b) Salaries and Wages Expense .................................... FICA Taxes Payable ............................................. Federal Income Taxes Payable ........................... Salaries and Wages Payable ...............................

1,780

(c) Salaries and Wages Payable ..................................... Cash ......................................................................

1,341

136 303 1,341 1,341

*EXERCISE 10-21 Payroll Tax Expense .................................................. FICA Taxes Payable ............................................. Federal Unemployment Taxes Payable .............. State Unemployment Taxes Payable ..................

10-32

244.38 137.68 13.77 92.93

SOLUTIONS TO PROBLEMS PROBLEM 10-1A

(a) Jan. 5

12 14 20

21 25

(b) Jan. 31

Cash ........................................................... Sales Revenue (£22,470 ÷ 107%) ...... Sales Taxes Payable (£22,470 – £21,000) ........................

22,470

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

10,000

Sales Taxes Payable ................................. Cash ...................................................

5,800

Accounts Receivable ................................ Sales Revenue ................................... Sales Taxes Payable (600 X £50 X 7%) ............................

32,100

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

14,000

Cash ........................................................... Sales Revenue (£12,947 ÷ 107%) ...... Sales Taxes Payable (£12,947 – £12,100) ........................

12,947

Interest Expense ....................................... Interest Payable................................. (£14,000 X 8% X 1/12 = (£93; £93 X 1/3)

21,000 1,470 10,000 5,800 30,000 2,100 14,000 12,100 847

10-33

PROBLEM 10-1A (Continued) (c) Current liabilities Notes payable ................................................................... Accounts payable............................................................. Unearned service revenue (£14,000 – £10,000) .............. Sales taxes payable (£1,470 + £2,100 + £847) ................. Interest payable ................................................................ Total current liabilities..............................................

10-34

£14,000 52,000 4,000 4,417 31 £74,448

PROBLEM 10-2A

(a) Jan. Feb.

2 1

Mar. 31

Apr.

July

Sept. 30

Oct.

Dec.

Dec. 31

Inventory ................................................. Accounts Payable ............................

30,000

Accounts Payable ................................... Notes Payable ..................................

30,000

Interest Expense ($30,000 X 6% X 2/12) .......................... Interest Payable ...............................

30,000 30,000 300 300

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

30,000 300

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

48,000

Interest Expense ($40,000 X 7% X 3/12) .......................... Interest Payable ...............................

30,300 8,000 40,000 700 700

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

40,000 700

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

15,000

Interest Expense ($15,000 X 6% X 1/12) .......................... Interest Payable ...............................

40,700 15,000 75 75

10-35

PROBLEM 10-2A (Continued) (b) 4/1 10/1

4/1 10/1

3/31 9/30 12/31 12/31 Bal.

Notes Payable 30,000 2/1 40,000 7/1 12/1 12/31 Bal.

30,000 40,000 15,000 15,000

Interest Payable 300 3/31 700 9/30 12/31 12/31 Bal.

300 700 75 75

Interest Expense 300 700 75 1,075

(c) Current liabilities Notes payable ................................................. Interest payable .............................................. (d) Total interest is $1,075

10-36

$15,000 75

$15,075

PROBLEM 10-3A (a) May 1

(b) Dec. 31

2014 Cash .................................................... Bonds Payable ............................ Interest Expense ................................. Interest Payable (CHF720,000 X 7% X 2/12) .......

(c) Non-current Liabilities Bonds Payable, due 2019............................. Current Liabilities Interest Payable ............................................ (d) May 1

(e) Nov. 1

(f)

Nov. 1

2015 Interest Payable .................................. Interest Expense (CHF720,000 X 7% X 4/12) .............. Cash .............................................

720,000 720,000 8,400 8,400 CHF720,000 CHF

8,400 16,800 25,200

Interest Expense ................................. Cash (CHF720,000 X 7% X 1/2) ...

25,200

Bonds Payable .................................... Loss on Bond Redemption ................ Cash (CHF720,000 X 1.02) ..........

720,000 14,400

8,400

25,200

734,400

10-37

PROBLEM 10-4A

(a) Jan. 1

2014 Cash ($400,000 X 1.05) ..................... Bonds Payable ..........................

420,000 420,000

(b) Non-current Liabilities Bonds payable, due 2024...........................

$418,000

Current Liabilities Interest payable ($400,000 X 9% X 1/2) .............................

$ 18,000

2016 Bonds Payable .................................. Loss on Bond Redemption .............. Cash ($400,000 X 1.05) ..............

*($420,000 – $416,000)

10-38

416,000** 4,000* 420,000

PROBLEM 10-5A

(a)

Semiannual Interest Period Issue Date 1 2 3 4

(b) Dec. 31

June 30

Dec. 31

Cash Payment

Interest Expense

R$58,865 58,865 58,865 58,865

Reduction of Principal

R$32,000 30,925 29,808 28,646

R$26,865 27,940 29,057 30,219 R$114,081

Principal Balance R$800,000 773,135 745,195 716,138 685,919

2013 Cash ...................................................... Mortgage Payable .........................

800,000

2014 Interest Expense .................................. Mortgage Payable................................. Cash...............................................

32,000 26,865

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

(c)

800,000

58,865 30,925 27,940 58,865 12/31/14

Non-current Liabilities Mortgage payable, due 2023

R$685,919**

Current Liabilities Current portion of mortgage payable

R$ 59,276*

**(R$29,057 + R$30,219) **(R$745,195 – R$29,057 – R$30,219)

10-39

*PROBLEM 10-6A (a) July 1

(b)

2014 Cash.................................................. Bonds Payable .........................

5,679,533

STRIGEL CORPORATION Bond Premium Amortization Effective-Interest Method—Semiannual Interest Payments 10% Bonds Issued at 8% (A)

(B)

Semiannual Interest Interest to Be Periods Paid Issue date 1 $250,000 $227,181 2 250,000 226,269 3 250,000 225,319 (c) Dec. 31

(d)

$22,819 23,731 24,681

Interest Expense ($5,679,533 X 4%) ......................... Bonds Payable ................................. Interest Payable ($5,000,000 X 5%) .................

(D) Bond Carrying Value $5,679,533 5,656,714 5,632,983 5,608,302

227,181 22,819 250,000

2015 July 1

(e) Dec. 31

10-40

5,679,533

Interest Expense [($5,679,533 – $22,819) X 4%] ...... Bonds Payable ................................. Cash ..........................................

226,269 23,731

Interest Expense [($5,656,714 – $23,731) X 4%] ...... Bonds Payable ................................. Interest Payable........................

225,319 24,681

250,000

*PROBLEM 10-7A

(a) 1. July 1 2.

Dec. 31

3. July 1

Dec. 31

2014 Cash ............................................. 3,375,680 Bonds Payable..................... Interest Expense (€3,375,680 X 5%) .................... Bonds Payable............................. Interest Payable (€3,600,000 X 4.5%).......... 2015 Interest Expense [(€3,375,680 + €6,784) X 5%] .... Bonds Payable............................. Cash ..................................... Interest Expense [(€3,382,464 + €7,123) X 5%] ..... Bonds Payable............................. Interest Payable ....................

(b) Bonds payable .....................................................

3,375,680

168,784 6,784 162,000

169,123 7,123 162,000 169,479 7,479 162,000

€3,397,066

*(€3,375,680 + €6,784 + €7,123 + €7,479)

10-41

*PROBLEM 10-7A (Continued) (c) Dear

Thank you for asking me to clarify some points about the bonds issued by Kingston Company. 1.

The amount of interest expense reported for 2015 related to these bonds is €338,602 (€169,123 + €169,479).

When the bonds are sold at a discount, the effective-interest method will result in less interest expense reported than the straight-line method in 2015. Straight-line interest expense for 2015 is €346,432 [€162,000 + €162,000 + (€11,216 + €11,216)].

The total cost of borrowing is €3,464,320 as shown below: Semiannual interest payments (€3,600,000 X 4.5%) = €162,000; €162,000 X 20...... Add: Bond discount (€3,600,000 – €3,375,680) ........ Total cost of borrowing .......................................

The total bond interest expense over the life of the bonds is the same under either method of amortization.

If you have other questions, please contact me. Sincerely,

10-42

€3,240,000 224,320 €3,464,320

*PROBLEM 10-8A

(a) Jan. 1

2014 Cash ($2,000,000 X 1.04) .................. Bonds Payable ..........................

2,080,000 2,080,000

(b) See page 10-44. (c) July 1

Dec. 31

Jan. 1 July 1

Dec. 31

2014 Interest Expense ............................... Bonds Payable ($80,000 ÷ 20) ................................ Cash ........................................... Interest Expense ............................... Bonds Payable .................................. Interest Payable ........................ 2015 Interest Payable ................................ Cash ...........................................

86,000 4,000 90,000 86,000 4,000 90,000

90,000 90,000

Interest Expense ............................... Bonds Payable .................................. Cash ...........................................

86,000 4,000

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

86,000 4,000

(d) Non-current Liabilities Bonds payable, due 2024 .......................... Current Liabilities Interest payable ..........................................

90,000

90,000 $2,064,000 $

90,000

10-43

10-44

Semiannual Interest Periods Issue date 1 2 3 4

(A) Interest to Be Paid (4.5% X $2,000,000) $90,000 90,000 90,000 90,000

(B) Interest Expense to Be Recorded (A) – (C)

$86,000 86,000 86,000 86,000

$4,000 4,000 4,000 4,000

(D) Bond Carrying Value

$2,080,000 2,076,000 2,072,000 2,068,000 2,064,000

*PROBLEM 10-8A (Continued)

(b)

*PROBLEM 10-9A

(a) July 1 Dec. 31

(b) July 1 Dec. 31

2014 Cash (Rs3,000,000 X 103%) ............ Bonds Payable ......................... Interest Expense .............................. Bonds Payable (Rs90,000 ÷ 20)............................. Interest Payable (Rs3,000,000 X 8% X 1/2) ..... 2014 Cash (Rs3,000,000 X 96%) .............. Bonds Payable ......................... Interest Expense .............................. Bonds Payable (Rs120,000 ÷ 20) ..... Interest Payable (Rs3,000,000 X 8% X 1/2) .....

3,090,000 3,090,000 115,500 4,500 120,000 2,880,000 2,880,000 126,000 6,000 120,000

Rs3,085,500

Discount Non-current Liabilities Bonds payable, due 2024 .........................

Rs2,886,000

10-45

*PROBLEM 10-10A

(a) Jan. 1

(b) July 1

2014 Interest Payable .............................. Cash ......................................... Interest Expense ............................. Bonds Payable ($180,000 ÷ 20) ............................ Cash ......................................... Bonds Payable ($1,200,000 + $68,400*) Gain on Bond Redemption ..... ($1,268,400 – $1,212,000) Cash ($1,200,000 X 101%).......

90,000** 90,000 81,000** 9,000 90,000 1,268,400** 56,400 1,212,000

*($180,000 – $9,000) X .40 = $68,400 (d) Dec. 31

Interest Expense ............................. Bonds Payable ................................ Interest Payable ($1,800,000 X 6% X 1/2) ......

**$180,000 – $9,000 – $68,400 = $102,600;

10-46

48,600** 5,400**

$102,600 = $5,400 or $9,000 X .60. 19

54,000

PROBLEM 10-1B

(a) Jan. 1 5

12 14 20

(b) Jan. 31

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

15,000

Cash ............................................................. Sales Revenue (¥9,434 ÷ 106%) .......... Sales Taxes Payable (¥9,434 – ¥8,900) .............................

9,434

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

9,000

Sales Taxes Payable ................................... Cash .....................................................

5,800

Accounts Receivable .................................. Sales Revenue ..................................... Sales Taxes Payable (700 X ¥44 X 6%) ..............................

32,648

Cash ............................................................. Sales Revenue(¥16,536 ÷ 106%) ......... Sales Taxes Payable (¥16,536 – ¥15,600) ..........................

16,536

Interest Expense ......................................... Interest Payable (¥15,000 X 6% X 1/12) ......................

15,000 8,900 534 9,000 5,800 30,800 1,848 15,600 936

10-47

PROBLEM 10-1B (Continued) (c) Current liabilities Notes payable ............................................................ Accounts payable...................................................... Unearned service revenue (¥15,000 – ¥9,000) ......... Sales taxes payable (¥534 + ¥1,848 + ¥936) ............ Interest payable ......................................................... Total current liabilities.......................................

10-48

¥15,000 42,500 6,000 3,318 75 ¥66,893

PROBLEM 10-2B

(a) June 1 (b) Dec. 31

2014 Cash .................................................. Bonds Payable .......................... Interest Expense ............................... Interest Payable ($1,200,000 X 8% X 1/12) .........

1,200,000 1,200,000 8,000 8,000

$ 1,200,000

Current Liabilities Interest Payable .........................................

$ 8,000

(d) June 1

(e) Dec. 1 (f)

Dec. 1

2015 Interest Payable ................................ Interest Expense ($1,200,000 X 8% X 5/12) ................ Cash ...........................................

8,000 40,000 48,000

Interest Expense ............................... Cash ($1,200,000 X 8% X 1/2) ...

48,000

Bonds Payable .................................. Loss on Bond Redemption .............. Cash ($1,200,000 X 1.01)...........

1,200,000 12,000

48,000

1,212,000

10-49

PROBLEM 10-3B

(a) Jan. 1

2014 Cash (R$300,000 X 1.04) ..................... Bonds Payable ............................

312,000 312,000

(b) Non-current Liabilities Bond payable, due 2024...............................

R$310,800

Current Liabilities Interest payable (R$300,000 X 10% X 1/2) .............

R$ 15,000

2016 Bonds Payable .................................... Loss on Bond Redemption ................ Cash (R$300,000 X 1.05) .............

*(R$315,000 – R$309,600)

10-50

309,600 5,400* 315,000

PROBLEM 10-4B

(a)

Semiannual Interest Period Issue Date 1 2 3 4

(b) Dec. 31

June 30

Dec. 31

Cash Payment

Interest Expense

Reduction of Principal

$27,961 27,961 27,961 27,961

$15,200 14,690 14,159 13,607

$12,761 13,271 13,802 14,354 $54,188

2013 Cash ..................................................... Mortgage Payable ........................

380,000

2014 Interest Expense ................................. Mortgage Payable................................ Cash..............................................

15,200 12,761

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

(c)

Principal Balance $380,000 367,239 353,968 340,166 325,812

380,000

27,961 14,690 13,271 27,961 12/31/14

Non-current Liabilities Mortgage payable...........................................

$325,812**

Current Liabilities Current portion of mortgage payable .............

$ 28,156**

**($13,802 + $14,354) **($353,968 – $28,156)

10-51

*PROBLEM 10-5B

(a) July 1

(b)

2014 Cash................................................. Bonds Payable ........................

4,194,218

VISNAK SATELLITES Bond Discount Amortization Effective-Interest Method—Semiannual Interest Payments 7% Bonds Issued at 8% (B) (C) Interest Discount Interest Expense Amorto Be to Be tization Paid Recorded (B) – (A)

(A)

(D)

Semiannual Interest Periods Issue date 1 £157,500 £167,769 2 157,500 168,179 3 157,500 168,607

Bond Carrying Value £4,194,218 4,204,487 4,215,166 4,226,273

(d)

£10,269 10,679 11,107

Interest Expense (£4,194,218 X 4%) ........................ Bonds Payable ......................... Interest Payable (£4,500,000 X 7% X 1/2) .......

167,769 10,269 157,500

2015 July 1

(e) Dec. 31

10-52

4,194,218

Interest Expense [(£4,194,218 + £10,269) X 4%]..... Bonds Payable ......................... Cash ......................................... Interest Expense [(£4,204,487 + £10,679) X 4%]..... Bonds Payable ......................... Interest Payable.......................

168,179 10,679 157,500 168,607 11,107 157,500

*PROBLEM 10-6B

(a) 1. July 1 2.

Dec. 31

3. July 1

Dec. 31

2014 Cash ............................................. 4,311,783 Bonds Payable..................... Interest Expense ($4,311,783 X 2.5%) ................. Bonds Payable ............................ Interest Payable ($4,000,000 X 3%) ............ 2015 Interest Expense [($4,311,783 – $12,205) X 2.5%] Bonds Payable ............................ Cash ..................................... Interest Expense [($4,299,578 – $12,511) X 2.5%] Bonds Payable ............................ Interest Payable ...................

(b) Bonds payable .....................................................

4,311,783

107,795 12,205 120,000

107,489 12,511 120,000 107,177 12,823 120,000 4,274,244

*($4,311,783 – $12,205 – $12,511 – $12,823)

10-53

*PROBLEM 10-6B (Continued) (c) Dear

Thank you for asking me to clarify some points about the bonds issued by Keokuk Chemical Company. 1.

The amount of interest expense reported for 2015 related to these bonds is $214,666 ($107,489 + $107,177)

When the bonds are sold at a premium, the effective-interest method will result in more interest expense reported than the straight-line method in 2015. Straight-line interest expense for 2015 is $208,822 [$120,000 + $120,000 – ($15,589 + $15,589)].

The total cost of borrowing is as shown below: Semiannual interest payments ($4,000,000 X 6% X 1/2) = $120,000 X 20 ................ Less: Bond premium ($4,311,783 – $4,000,000) ....... Total cost of borrowing .......................................

The total bond interest expense over the life of the bonds is the same under either method of amortization.

If you have other questions, please contact me. Sincerely,

10-54

$2,400,000 311,783 $2,088,217

*PROBLEM 10-7B

(a)

2014 Jan. 1

Cash (¥5,000,000 X 97%) .................. Bonds Payable ..........................

4,850,000 4,850,000

(b) See page 10-57. (c)

2014 July 1

Dec. 31

Interest Expense ............................... Bonds Payable (¥150,000 ÷ 40) ........ Cash (¥5,000,000 X 8% X 1/2) ...

203,750

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

203,750

3,750 200,000

2015 Jan. 1 July 1

Dec. 31

Interest Payable ................................ Cash ...........................................

200,000

Interest Expense ............................... Bonds Payable................................... Cash (¥5,000,000 X 8% X 1/2) ...

203,750

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

203,750

200,000

3,750 200,000

10-55

*PROBLEM 10-7B (Continued) (d) Non-current Liabilities Bonds payable ..........................................

¥4,865,000

Current Liabilities Interest payable ........................................

¥ 200,000

10-56

Semiannual Interest Periods Issue date 1 2 3 4

(A) Interest to Be Paid (4% X ¥5,000,000) ¥200,000 200,000 200,000 200,000

(B) (C) Interest Expense Discount to Be Recorded Amortization (A) + (C) (¥150,000 ÷ 40) ¥203,750 203,750 203,750 203,750

¥3,750 3,750 3,750 3,750

(D) Bond Carrying Value ¥4,850,000 4,853,750 4,857,500 4,861,250 4,865,000

*PROBLEM 10-7B (Continued)

(b)

10-57

*PROBLEM 10-8B

(a) Jan. 1 July 1

Dec. 31

(b) Jan. 1 July 1

Dec. 31

10-58

Cash ($6,000,000 X 102%) ................ Bonds Payable ..........................

6,120,000

Interest Expense ............................... Bonds Payable ($120,000 ÷ 20) .............................. Cash ($6,000,000 X 9% X 1/2) ...

264,000

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

264,000 6,000

Cash ($6,000,000 X 96%) .................. Bonds Payable ..........................

5,760,000

Interest Expense ............................... Bonds Payable ($240,000 ÷ 20) ........ Cash ...........................................

282,000

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

282,000

6,120,000

6,000 270,000

270,000 5,760,000

12,000 270,000 12,000 270,000

*PROBLEM 10-8B (Continued) (c) Premium Non-current Liabilities Bonds payable, due 2024 .......................

$6,108,000

Current Liabilities Interest payable .......................................

$ 270,000

Discount Non-current Liabilities Bonds payable, due 2024 .......................

$5,784,000

Current Liabilities Interest payable .......................................

$ 270,000

10-59

*PROBLEM 10-9B

(a) Jan. 1

(b) July 1

Interest Payable ................................ Cash ...........................................

84,000

Interest Expense ............................... Bonds Payable (€90,000 ÷ 20) .......... Cash (€2,400,000 X .035) ...........

88,500

Bonds Payable .................................. Loss on Bond Redemption .............. Cash (€800,000 X 103%)............

771,500 52,500

84,000**

4,500** 84,000**

824,000**

*(€90,000 – €4,500) X 1/3 = €28,500 €800,000 – €28,500 = €771,500

(d) Dec. 31

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

59,000 3,000** 56,000**

*(€90,000 – €4,500) X 2/3 = €57,000; *(€57,000 ÷ 19 = €3,000 or *(€4,500 X 2/3 = €3,000 **(€2,400,000 – €800,000 = €1,600,000; **(€1,600,000 X 3.5% = €56,000)

10-60

COMPREHENSIVE PROBLEM SOLUTION 10–1

(a)

1. Interest Payable .............................................. Cash .........................................................

2,500

2. Inventory ......................................................... Accounts Payable ...................................

241,100

3. Cash................................................................. Sales Revenue......................................... Sales Taxes Payable ...............................

481,500

Cost of Goods Sold ........................................ Inventory ..................................................

250,000

4. Account Payable ............................................. Cash .........................................................

230,000

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

2,500

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

5,600

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

12,000

8. Sales Taxes Payable....................................... Cash .........................................................

24,000

9. Other Operating Expenses............................. Cash .........................................................

91,000

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

2,500

Bonds Payable ................................................ Cash ......................................................... Gain on Bond Redemption .....................

50,000

2,500 241,100 450,000 31,500 250,000 230,000 2,500 5,600 12,000 24,000 91,000 2,500 47,000 3,000

10-61

COMPREHENSIVE PROBLEM SOLUTION (Continued) 11. Cash ($90,000 X 104%) ................................... Bonds Payable ........................................

93,600 93,600

Adjusting Entries 12. Insurance Expense ($12,000 X 5/12) .............. Prepaid Insurance ...................................

5,000

13. Depreciation Expense ($43,000 – $3,000) ÷ 5 .... Accumulated Depreciation–Equipment .

8,000

14. Income Tax Expense ...................................... Income Taxes Payable ............................

26,520

(b)

8,000 26,520

JAMES CORPORATION Trial Balance 12/31/2014 Account Cash ............................................................ Inventory ..................................................... Prepaid Insurance ...................................... Equipment .................................................. Accumulated Depreciation–Equipment .... Accounts Payable ...................................... Sales Taxes Payable .................................. Income Taxes Payable ............................... Bonds Payable ........................................... Share Capital–Ordinary ............................. Retained Earnings...................................... Sales Revenue............................................ Cost of Goods Sold.................................... Depreciation Expense ................................ Insurance Expense .................................... Other Operating Expenses ........................ Interest Expense ........................................ Gain on Bond Redemption ........................ Income Tax Expense..................................

10-62

5,000

Debit $194,100 16,850 7,000 43,000

Credit

8,000 24,850 7,500 26,520 93,600 20,000 18,600 450,000

250,000 8,000 10,600 91,000 5,000 3,000 26,520 $652,070

$652,070

COMPREHENSIVE PROBLEM SOLUTION (Continued) (a) and (b) Optional T accounts

Bal.

Bal. Bal.

Cash 30,500 481,500 93,600

2,500 230,000 2,500 12,000 24,000 91,000 2,500 47,000

194,100 Inventory 25,750 241,100 16,850

250,000

Interest Payable 2,500 Bal. Bal.

Sales Taxes Payable 24,000 31,500 Bal. 7,500 Income Taxes Payable 26,520

Bonds Payable 50,000 Bal. Bal.

Bal.

Prepaid Insurance 5,600 12,000 7,000

Bal.

Equipment 43,000

Bal.

5,600 5,000

2,500 0

50,000 93,600 93,600

Share Capital–Ordinary Bal. 20,000

Retained Earnings Bal. 18,600

Accumulated Depreciation – Equipment 8,000

Sales Revenue 450,000

Accounts Payable 230,000 Bal. 13,750 241,100 Bal. 24,850 .

10-63

COMPREHENSIVE PROBLEM SOLUTION (Continued) (a) and (b) (Continued) Cost of Goods Sold 250,000 Bal. Depreciation Expense 8,000

Bal.

Interest Expense 2,500 2,500 5,000

Gain on Bond Redemption 3,000

Insurance Expense 5,600 5,000 10,600

Income Tax Expense 26,520

Other Operating Expenses 91,000

(c)

JAMES CORPORATION Income Statement For the Year Ending 12/31/14 Sales revenue ............................................. Cost of goods sold..................................... Gross profit ................................................ Operating expenses Insurance expense ............................. Depreciation expense ........................ Other operating expenses ................. Total operating expenses .......................... Income from operations ............................ Other income and expense Gain on bond redemption .................. Interest expense ................................. Income before taxes .................................. Income tax expense ........................... Net income..................................................

10-64

$450,000 250,000 200,000 $10,600 8,000 91,000 109,600 90,400 3,000 5,000 88,400 26,520 $ 61,880

COMPREHENSIVE PROBLEM SOLUTION (Continued) JAMES CORPORATION Retained Earnings Statement For the Year Ending 12/31/14 Retained earnings, 1/1/14 .......................................... Add: Net income ......................................................

$18,600 61,880 80,480 – $80,480

Less: Dividends ........................................................ Retained earnings, 12/31/14 ...................................... JAMES CORPORATION Statement of Financial Position 12/31/2014 Assets Property, Plant, and Equipment Equipment ........................................... Less: Accumulated depreciation....... Current Assets Prepaid insurance .............................. Inventory ............................................. Cash .................................................... Total current assets ...................... Total assets

$43,000 8,000

$ 35,000

7,000 16,850 194,100 217,950 $252,950

Equity and Liabilities Equity Share Capital–Ordinary ...................... Retained earnings .............................. Total equity ................................... Non-current liabilities Bonds payable ....................................

$20,000 80,480 $100,480 93,600

Current Liabilities Accounts payable .............................. $24,850 Income taxes payable ....................... 26,520 Sales taxes payable........................... 7,500 Total current liabilities ................. 58,870 Total liabilities ............................... Total equity and liabilities ...................... Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

152,470 $252,950 10-65

COMPREHENSIVE PROBLEM SOLUTION 10–2

(a) Plant and Equipment Accumulated Depreciation (2.) Inventory Accounts Receivable Allowance for Doubtful Accounts (1.) Cash Total Assets

Eastland Company CHF255,300 (188,375) 463,900 304,700 (13,600) 63,300 CHF885,225

Westside Company CHF257,300 ( (189,850) 515,200 302,500 (18,000) 48,400 CHF915,550

Equity Non-current Liabilities Current Liabilities (3.) Total Equity and Liabilities

CHF367,025* 78,000 440,200 CHF885,225

CHF402,050** 66,000 447,500 CHF915,550

**CHF442,750 – CHF75,725 (CHF188,375 – CHF112,650) change in accumulated depreciation. **CHF420,050 – CHF18,000 allowance for doubtful accounts. (b) Based on a review of the companies and revision of financial statements for purposes of comparability, it can be seen that Westside Company is in a better financial position. However, this claim to the better position is a tenuous one. The amounts within each category in the statement of financial position of each company are very similar. In terms of short-term liquidity, Westside Company is in a little stronger financial position. Total current assets for Eastland Company are CHF818,300 versus CHF848,100 for Westside. Comparing these to the current liabilities, Westside has a current ratio of 1.90 (CHF 848,100 ÷ CHF447,500) versus 1.86 (CHF818,300 ÷ CHF440,200) for Eastland.

10-66

BYP 10-1

FINANCIAL REPORTING PROBLEM

(a) Total current liabilities at December 31, 2010, W39,944,721 million. Samsung’s total current liabilities increased by W5,740,297 (W39,944,721 – W34,204,424) million over the prior year. (b) The components of current liabilities for December 31, 2010 are: Trade and other payables ........................................ W16,049,800 million Short-term borrowing ..............................................8,429,721 Advance received .................................................... 883,585 With holdings ...........................................................1,052,555 Accrued expenses ...................................................7,102,427 Income tax payable..................................................2,051,452 Current position of long-term borrowings and debentures ...............................1,123,934 Provisions ................................................................2,917,919 Other current liabilities............................................ 333,328 (c) At December 31, 2010, Samsung’s non-current liabilities was W4,994,932 million. There was a W64,769 million increase (W4,994,932 – W4,930,163) in non-current liabilities during the year. The components of current liabilities for December 31, 2010 are: Long-term trade and other payables ........................ W1,072,661 million Debentures ................................................................. 587,338 Long-term borrowings .............................................. 634,381 Retirement benefit obligation ................................... 597,829 Deferred income tax liabilities ..................................1,652,667 Provisions .................................................................. 295,356 Other non-current liabilities ...................................... 154,700

10-67

BYP 10-2

COMPARATIVE ANALYSIS PROBLEM

(a) Nestlé’s largest current liability was “Financial debt” at CHF12,617 million. Its total current liabilities were CHF30,146 million. Zetar’s largest current liability was “Trade and other payables” at £25,075 thousand. Its total current liabilities were £40,474 thousand. (b)

(in millions)

Nestlé

(1) Working capital CHF38,997 – CHF30,146 = CHF8,851 (1) Current ratio

CHF38,997 = 1.29:1 CHF30,146

Zetar

£45,670 – £40,474 = £5,196 £45,670 = 1.13:1 £40,474

(c) Based on this information, it appears that both are barely liquid. Additional analysis should be done to assess the reason for the low working capital and current ratio. (d) 1. Debt to total assets 2. Times interest earned

Nestlé CHF49,043 = 43.9% CHF111,641 CHF35,384 + CHF847 + CHF3,693 CHF847

Zetar £46,775 = 50.3% £93,062

= 47.1 times

£4,482 + £1,101 + £1,656 £1,101

= 6.6 times

(e) The higher the percentage of debt to total assets, the greater the risk that a company may be unable to meet its maturing obligations. Zetar’s debt to total assets ratio was nearly 15% higher than Nestlé’s. The times interest earned ratio provides an indication of a company’s ability to meet interest payments. Nestlé’s times interest earned ratio is excellent and is more than 7 times greater than Zetar’s. However, Zetar should have no difficulty meeting its interest payments.

10-68

BYP 10-3

REAL-WORLD FOCUS

(a) In 1924, the Fitch Publishing Company introduced the now familiar “AAA” to “D” ratings scale to meet the growing demand for independent analysis of financial securities. (b) The terms “investment grade” and “speculative grade” have established themselves over time as shorthand to describe the categories ‘AAA’ to ‘BBB’ (investment grade) and ‘BB’ to ‘D’ (speculative grade). (c) Moody’s and Standard and Poor’s are two other major credit rating agencies.

10-69

BYP 10-4

DECISION-MAKING ACROSS THE ORGANIZATION

*(a) Face value of bonds .......................................... Proceeds from sale of bonds ($2,400,000 X .96) ........................................... Discount on bonds payable ..............................

$2,400,000 2,304,000 $ 96,000

Bond discount amortization per year: $96,000 ÷ 5 = $19,200 Face value of bonds .......................................... Amount of original discount ............................. Less: Amortization through January 1, 2014 (2-year) .................................................... Carrying value of bonds, January 1, 2014 .......

$2,400,000 $96,000 38,400

(b) 1. Bonds Payable ............................................. 2,342,400 Gain on Bond Redemption .................. Cash ...................................................... (To record redemption of 7% bonds)

57,600 $2,342,400

342,400* 2,000,000

*$2,342,000 – $2,000,000 2. Cash ........................................................... Bonds Payable ................................... (To record sale of 10-year, 10% bonds at par)

10-70

2,000,000 2,000,000

BYP 10-4 (Continued) (c) Dear President Fleming: The early redemption of the 7%, 5-year bonds results in recognizing a gain of $342,400 that increases current year net income by the aftertax effect of the gain. The amount of the liabilities on the statement of financial position will be lowered by the issuance of the new bonds and retirement of the 5-year bonds. 1.

The cash flow of the company as it relates to bonds payable will be adversely affected as follows: Annual interest payments on the new issue ($2,000,000 X .10) ..................................................... Annual interest payments on the 5-year bonds ($2,400,000 X .07) ..................................................... Additional cash outflows per year ..............................

$200,000 (168,000) $ 32,000

The amount of interest expense shown on the income statement will be higher as a result of the decision to issue new bonds: Annual interest expense on new bonds ......... Annual interest expense on 7% bonds: Interest payment....................................... Discount amortization .............................. Additional interest expense per year..............

$200,000 $168,000 19,200

(187,200) $ 12,800

These comparisons hold for only the 3-year remaining life of the 7%, 5-year bonds. The company must acknowledge either redemption of the 7% bonds at maturity, January 1, 2017, or refinancing of that issue at that time and consider what interest rates will be in 2017 in evaluating a redemption and issuance in 2014. Sincerely,

10-71

BYP 10-5

COMMUNICATION ACTIVITY

To:

Ron Seiser

From:

I. M. Student

Subject:

Bond Financing

(1) The advantages of bond financing over equity stock financing include: 1.

Shareholder control is not affected.

Tax savings result.

Earnings per share of ordinary shares may be higher.

(2) The types of bonds that may be issued are: 1.

Secured or unsecured bonds. Secured bonds have specific assets of the issuer pledged as collateral. Unsecured bonds are issued against the general credit of the borrower.

Term or serial bonds. Term bonds mature at a single specified date, while serial bonds mature in installments.

Registered or bearer bonds. Registered bonds are issued in the name of the owner, while bearer bonds are not.

Convertible bonds, which can be converted by the bondholder into ordinary shares.

Callable bonds, which are subject to early retirement by the issuer at a stated amount.

(3) State laws grant corporations the power to issue bonds after formal approval by the board of directors and shareholders. The terms of the bond issue are set forth in a legal document called a bond indenture. After the bond indenture is prepared, bond certificates are printed.

10-72

BYP 10-6

ETHICS CASE

(a) The stakeholders in the Wesley case are:      

Dylan Horn, president, founder, and majority shareholder. Mary Sommers, minority shareholder. Other minority shareholders. Existing creditors (debt holders). Future bondholders. Employees, suppliers, and customers.

(b) The ethical issues: The desires of the majority shareholder (Dylan Horn) versus the desires of the minority shareholders (Mary Sommers and others). Doing what is right for the company and others versus doing what is best for oneself. Questions: Is what Dylan wants to do legal? Is it unethical? Is Dylan’s action brash and irresponsible? Who may benefit/suffer if Dylan arranges a highrisk bond issue? Who may benefit/suffer if Mary Sommers gains control of Wesley? (c) The rationale provided by the student will be more important than the specific position because this is a borderline case with no right answer.

10-73

GAAP EXERCISES GAAP 10-1 The similarities between GAAP and IFRS include: (1) the basic definition of a liability, (2) both classify liabilities as current or non-current on the face of the statement of financial position, and (3) both use the same basic calculation for bond valuation. Differences between GAAP and IFRS include: (1) GAAP allows straight line amortization of bond discounts and premiums, but IFRS requires the effective-interest method in all cases, (2) IFRS does not isolate unamortized bond discount or premium in a separate account, (3) IFRS splits the proceeds from convertible bonds into debt and equity components, and (4) GAAP uses a “rules-based” approach to account for liabilities while IFRS is more conceptual in its approach. GAAP 10-2 (a) Jan.

Cash ($2,000,000 X .97) ........................ 1,940,000 Discount on Bonds Payable ................ 60,000 Bonds Payable .............................. 2,000,000

(b) Jan.

Cash ($2,000,000 X 1.04) ...................... 2,080,000 Bonds Payable .............................. 2,000,000 Preminum on Bonds Payable ...... 80,000

GAAP 10-3 (a) Cash (£4,000,000 X .99) ......................................... 3,960,000 Discount on Bonds Payable.................................. 40,000 Bonds Payable ............................................ 4,000,000 (b) Cash (£4,000,000 X .99) ......................................... 3,960,000 Bonds Payable ............................................ 3,800,000 Share Premium—Conversion Equity ......... 160,000

10-74

GAAP10-4 INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) Tootsie Roll’s total current liabilities at December 31, 2010 were $58,505 thousand. Current liabilities increased by $2,439 ($58,505 – $56,066) during 2010. (b) Accounts payable were $9,791 at December 31, 2010. (c) The components of total current liabilities, other than Accounts payable, were: Dividends Payable .................................................. Accrued Liabilities ..................................................

$ 4,529 44,185

10-75

10-76

CHAPTER 11 Corporations: Organization, Share Transactions, Dividends, and Retained Earnings ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Do It!

Exercises

1, 2, 3, 4, 5, 6

1, 2

Record the issuance of ordinary shares.

7, 8, 9, 10, 11

2, 3, 4

*3.

Explain the accounting for treasury shares.

12, 13, 14

*4.

Differentiate preference shares from ordinary shares.

*5.

Prepare the entries for cash dividends and share dividends.

17, 18, 19, 20, 21, 22

7, 8, 9

*6.

Identify the items reported in a retained earnings statement.

16, 23, 24

Prepare and analyze a comprehensive equity section.

*8.

Describe the use and content of the statement of changes in equity.

Compute book value per share.

Learning Objectives

Questions

*1.

Identify the major characteristics of a corporation.

*2.

A Problems

B Problems

2, 3, 4, 7, 8, 11, 12

1A, 3A, 6A

1B, 3B

5, 7, 9 11, 12

2A, 3A, 6A

2B, 3B

6, 7, 10, 11, 12, 24

1A, 3A, 6A

1B, 3B

5, 6

13, 14, 15, 16, 25

4A, 5A, 7A

4B, 6B

10, 11

17, 18

5B, 6B

10, 11, 19, 20, 21, 22, 23, 25

1A, 2A, 3A, 1B, 2B, 3B, 4A, 5A, 6A, 4B, 5B, 6B, 7A, 8A, 9A 7B 9A

25, 26

23, 24, 25

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

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Journalize share transactions, post, and prepare share capital section.

Simple

30–40

Journalize and post treasury share transactions, and prepare equity section.

Moderate

25–35

Journalize and post transactions, prepare equity section.

Moderate

40–50

Prepare dividend entries and equity section.

Moderate

30–40

Prepare retained earnings statement and equity section, and compute earnings per share.

Moderate

30–40

Prepare entries for share transactions and prepare equity section.

Moderate

30–40

Prepare dividend entries and equity section.

Moderate

30–40

*8A

Prepare equity section; compute book value per share.

Simple

20–30

*9A

Prepare statement of changes in equity.

Simple

20–30

Journalize share transactions, post, and prepare share capital section.

Simple

30–40

Journalize and post treasury share transactions, and prepare equity section.

Moderate

25–35

Journalize and post transactions, prepare equity section.

Moderate

40–50

Prepare dividend entries and equity section.

Moderate

30–40

Prepare retained earnings statement and equity section.

Moderate

30–40

Prepare retained earnings statement and equity section, and compute earnings per share.

Moderate

30–40

*7B

Prepare equity section; compute book value per share.

Simple

20–30

11-2

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

WEYGANDT FINANCIAL ACCOUNTING, IFRS Edition, 2e CHAPTER 11 CORPORATIONS: ORGANIZATION, SHARE TRANSACTIONS, DIVIDENDS, AND RETAINED EARNINGS Number

Difficulty

Time (min.)

BE1 BE2 BE3 BE4 BE5 BE6 BE7 BE8 BE9 BE10 BE11 BE12 BE13 DI1 DI2 DI3 DI4 DI5 DI6 DI7 DI8 EX1 EX2 EX3 EX4 EX5 EX6 EX7 EX8 EX9 EX10 EX11 EX12 EX13 EX14

1 2 2 2 3 4 5 5 5 6 6 7 9 1 1 2 3 5 5 6 7 1 1, 2 2 2 3 4 2–4 2 3 4, 7 2–4, 7 2–4 5 5

K AP AP AP AP AP AP AP AP AP AP AP AP K AP AP AP AP AP AP AP K K AP AP AP AP AP AP AP AP C AN AP AP

Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Moderate Simple Simple

4–6 2–3 2–3 2–4 4–6 2–3 2–4 4–6 6–8 3–5 4–6 4–6 2–4 2–4 4–6 4–6 4–6 6–8 6–8 4–6 6–8 6–8 6–8 6–8 8–10 8–10 6–8 6–8 4–6 8–10 8–10 6–8 8–10 6–8 4–6

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-3

CORPORATIONS: ORGANIZATION, SHARE TRANSACTIONS, DIVIDENDS, AND RETAINED EARNINGS Number

Difficulty

Time (min.)

EX15 EX16 EX17 EX18 EX19 EX20 EX21 EX22 EX23 EX24 EX25 P1A P2A P3A P4A P5A P6A P7A P8A P9A P1B P2B P3B P4B P5B P6B P7B BYP1 BYP2 BYP3 BYP4 BYP5 BYP6

5 5 6 6 7 7 7 7 7, 9 4, 9 5, 7, 9 2, 4, 7 3, 7 2–4, 7 5, 7 5, 6, 7 2–4, 7 5, 7 7, 9 7, 8 2, 4, 7 3, 7 2–4, 7 5, 7 6, 7 5, 6, 7 7, 9 1 7, 9 3 1, 3, 4 1, 4 —

AP AN AP AP C AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AN AN S AP E

Simple Moderate Simple Simple Simple Simple Simple Simple Simple Simple Simple Simple Moderate Moderate Moderate Simple Moderate Moderate Simple Simple Simple Moderate Moderate Moderate Moderate Moderate Simple Simple Simple Simple Moderate Simple Simple

6–8 5–7 4–6 4–6 4–6 8–10 6–8 6–8 10–12 6–8 8–10 30–40 25–35 40–50 30–40 20–30 20–30 30–40 20–30 20–30 30–40 25–35 40–50 30–40 30–40 30–40 20–30 10–15 15–20 15–20 15–20 10–15 10–15

11-4

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

Learning Objective

Knowledge

1. Identify the major characteristics of a corporation.

Q11-4 DI11-1 Q11-5 E11-1 Q11-6 E11-2 BE11-1

Comprehension

Application

Analysis

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Q11-1 Q11-2 Q11-3 BE11-1

DI11-2

2. Record the issuance of ordinary shares. E11-2

Q11-8 Q11-9 Q11-10 Q11-11 E11-11

Q11-7 BE11-2 BE11-3 BE11-4 DI11-3

E11-3 E11-4 E11-7 E11-8 P11-1A

P11-3A P11-6A P11-1B P11-3B

E11-12

3. Explain the accounting for treasury shares.

Q11-12 Q11-13 Q11-14 E11-11

BE11-5 DI11-4 E11-5 E11-7

E11-9 P11-2A P11-3A

P11-6A P11-2B P11-3B

E11-12

4. Differentiate preference shares from ordinary shares.

Q11-15 E11-11

BE11-6 E11-6 E11-7 E11-10

E11-24 P11-1A P11-3A P11-6A

P11-1B P11-3B

E11-12

5. Prepare the entries for cash dividends and share dividends.

Q11-17 Q11-18 Q11-19 Q11-20

BE11-7 BE11-8 BE11-9 DI11-5 DI11-6

E11-13 E11-14 E11-15 E11-25

P11-4A P11-5A P11-7A P11-4B P11-6B

E11-16

6. Identify the items reported in a retained earnings statement.

Q11-16 Q11-23 Q11-24

BE11-10 BE11-11 DI11-7

E11-17 E11-18 P11-5A

P11-5B P11-6B

7. Prepare and analyze a comprehensive equity section.

Q11-17 E11-11 E11-19

BE11-12 DI11-8 E11-10 E11-20 E11-21 E11-22 E11-23 E11-25

P11-1A P11-2A P11-3A P11-4A P11-5A P11-6A P11-7A P11-8A

P11-9A P11-1B P11-2B P11-3B P11-4B P11-5B P11-6B P11-7B

*8.

Describe the use and content of the statement of changes in equity.

*9.

Compute book value per share.

Broadening Your Perspective

Q11-21 Q11-22

Synthesis

Evaluation

P11-9A Q11-26

Q11-25

BE11-13 E11-23 E11-24

E11-25 P11-8A P11-7B

Real-World Focus

Financial Reporting Comparative Analysis Communication

Decision-Making Ethics Case Across the Organization

BLOOM’ S TAXONOMY TABLE

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

11-5

ANSWERS TO QUESTIONS 1.

(a) Separate legal existence. A corporation is separate and distinct from its owners and it acts in its own name rather than in the name of its shareholders. In contrast to a partnership, the acts of the owners (shareholders) do not bind the corporation unless the owners are duly appointed agents of the corporation. (b) Limited liability of shareholders. Because of its separate legal existence, creditors of a corporation ordinarily have recourse only to corporate assets to satisfy their claims. Thus, the liability of shareholders is normally limited to their investment in the corporation. (c) Transferable ownership rights. Ownership of a corporation is held in capital shares. The shares are transferable units. Shareholders may dispose of part or all of their interest by simply selling their shares. The transfer of ownership to another party is entirely at the discretion of the shareholder.

(a) Corporation management is an advantage to a corporation because it can hire professional managers to run the company. Corporation management is a disadvantage to a corporation because it prevents owners from having an active role in directly managing the company. (b) Two other disadvantages of a corporation are government regulations and additional taxes. A corporation is subject to numerous regulations. For example, securities laws govern the sale of shares to the general public. Corporations must pay income taxes. These taxes are substantial. In addition, shareholders must pay income taxes on cash dividends received.

(1) A charter is a document that creates a corporation. A charter is also referred to as the articles of incorporation. (2) The by-laws are the internal rules and procedures for conducting the affairs of a corporation. They also indicate the powers of the shareholders, directors, and officers of the corporation. (3) Organization costs are costs incurred in the formation of a corporation. Organization costs are expensed as incurred.

In the absence of restrictive provisions, the basic ownership rights of ordinary shareholders are the rights to: (1) vote in the election of the board of directors and on corporate actions that require shareholders’ approval. (2) share in corporate earnings. (3) maintain the same percentage ownership when additional ordinary shares are issued (the preemptive right). (4) share in assets upon liquidation.

Legally, a corporation is an entity, separate and distinct from its owners. As a legal entity, a corporation has most of the privileges and is subject to the same duties and responsibilities as a person. The corporation acts under its own name rather than under the names of its shareholders. A corporation may buy, own, and sell property, borrow money, enter into legally binding contracts, and sue or be sued.

11-6

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Questions Chapter 11 (Continued) 6.

(a) The two principal components of equity for a corporation are share capital (the investment of cash and other assets in the corporation by shareholders in exchange for share capital) and retained earnings. The principal source of retained earnings is net income. (b) Share capital is the term used to describe the total amount paid-in for shares. Share capital may result through the sale of ordinary shares, preference shares, or treasury shares.

The maximum number of shares that a corporation is legally allowed to issue is the number authorized. Keller Corporation is authorized to sell 100,000 shares. Of these shares, 70,000 shares have been issued. Outstanding shares are those issued shares which have not been reacquired by the corporation; in other words, issued shares less treasury shares. Keller has 63,000 shares outstanding (70,000 issued less 7,000 treasury).

The par value of ordinary shares has no effect on its market value. Par value is a legal amount per share which usually indicates the minimum amount at which a share can be issued. The market value of shares depends on a number of factors, including the company’s anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the securities markets. Therefore, either investment mentioned in the question could be the better investment, based on the above factors and future potential. The relative par values should have no effect on the investment decision.

Among the factors which influence the market value of shares are the company’s anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the securities markets.

10.

The sale of ordinary shares below par value is rare and is not permitted in most jurisdictions.

11.

When shares are issued for services or noncash assets, the cost should be measured at either the fair value of the consideration given up (in this case, the shares) or the fair value of the consideration received (in this case, the land), whichever is more clearly evident. In this case, the fair value of the shares is more objectively determinable than that of the land, since the shares are actively traded in the securities market. The appraised value of the land is merely an estimate of the land’s value, while the market price of the share is the amount the shares were actually worth on the date of exchange. Therefore, the land should be recorded at $95,000, the share capital—ordinary at $10,000, and the excess ($85,000) as share premium—ordinary.

12.

A corporation may acquire treasury shares: (1) to reissue the shares to officers and employees under bonus and share compensation plans, (2) to increase trading of the company’s shares in the securities market in the hopes of enhancing its market value, (3) to have additional shares available for use in the acquisition of other companies, (4) to reduce the number of shares outstanding and, thereby, increase earnings per share, and (5) to rid the company of disgruntled investors.

13.

When treasury shares are purchased, Treasury Shares is debited and Cash is credited at cost (€9,000 in this example). Treasury Shares is a contra equity account and cash is an asset. Thus, this transaction: (a) has no effect on net income, (b) decreases total assets, (c) has no effect on retained earnings, and (d) decreases total equity.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-7

Questions Chapter 11 (Continued) 14.

When treasury shares are resold at a price above original cost, Cash is debited for the amount of the proceeds (€13,000), Treasury Shares is credited at cost (€9,000), and the excess (€4,000) is credited to Share Premium—Treasury. Cash is an asset, and the other two accounts are part of equity. Therefore, this transaction: (a) has no effect on net income, (b) increases total assets, (c) has no effect on retained earnings, and (d) increases total equity.

15.

(a) Ordinary shares and preference shares both represent ownership of the corporation. Ordinary shares signify the basic residual ownership; preference shares are ownership with certain privileges or preferences. Preference shareholders typically have a preference as to dividends and as to assets in the event of liquidation. However, preference shareholders generally do not have voting rights. (b) Some preference shares possess the additional feature of being cumulative. Most preference shares are cumulative—preference shareholders must be paid both current-year dividends and unpaid prior year dividends before ordinary shareholders receive any dividends. (c) Dividends in arrears are disclosed in the notes to the financial statements.

16.

The debits and credits to retained earnings are: Debits 1. 2. 3. 4.

Net loss Prior period adjustments for overstatements of net income Cash and share dividends Some disposals of treasury shares

Credits 1. 2.

Net income Prior period adjustments for understatements of net income

17.

For a cash dividend to be paid, a corporation must have retained earnings, adequate cash, and a dividend declared by the board.

18.

(a) The three dates are: Declaration date is the date when the board of directors formally declares the cash dividend and announces it to shareholders. The declaration commits the corporation to a binding legal obligation that cannot be rescinded. Record date is the date that marks the time when ownership of the outstanding shares is determined from the shareholder records maintained by the corporation. The purpose of this date is to identity the persons or entities that will receive the dividend. Payment date is the date on which the dividend checks are mailed to the shareholders.

11-8

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Questions Chapter 11 (Continued) (b) The accounting entries and their dates are: Declaration date—Debit Cash Dividends and Credit Dividends Payable. No entry is made on the record date. Payment date—Debit Dividends Payable and Credit Cash. 19. A cash dividend decreases assets, retained earnings, and total equity. A share dividend decreases retained earnings, increases share capital and share premium, and has no effect on total assets and total equity. 20. A corporation generally issues share dividends for one of the following reasons: (1) To satisfy shareholders’ dividend expectations without spending cash. (2) To increase the marketability of its shares by increasing the number of shares outstanding and thereby decreasing the market price per share. Decreasing the market price of the shares makes the shares easier to purchase for smaller investors. (3) To emphasize that a portion of shareholders’ equity that had been reported as retained earnings has been permanently reinvested in the business and therefore is unavailable for cash dividends. 21. In a share split, the number of shares is increased in the same proportion that par value is decreased. Thus, in the Meloy Corporation the number of shares will increase to 90,000 = (30,000 X 3) and the par value will decrease to $3 = ($9 ÷ 3). The effect of a split on market value is generally inversely proportional to the size of the split. In this case, the market price would fall to approximately $40 per share ($120 ÷ 3). 22. The different effects of a share split versus a share dividend are: Item Total retained earnings Total par value (ordinary shares) Par value per share

Share Split No change No change

Share Dividend Decrease Increase

Decrease

No Change

23. A prior period adjustment is a correction of an error in reporting income of a prior period. The correction is reported in the current year’s retained earnings statement as an adjustment of the beginning balance of retained earnings. 24. The purpose of a retained earnings restriction is to indicate that a portion of retained earnings is currently unavailable for dividends. Restrictions may result from the following causes: legal, contractual, or voluntary. *25. The formula for computing book value per share when a corporation has only ordinary share outstanding is: Total Number of Book Ordinary Shareholders’ ÷ Ordinary Shares = Value Equity Outstanding per Share Book value per share represents the equity an ordinary shareholder has in the net assets of the corporation from owning one share.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-9

Questions Chapter 11 (Continued) *26. Par value is a legal amount per share, often set at an arbitrarily selected amount, which usually indicates the minimum amount at which a share can be issued. Book value per share represents the equity an ordinary shareholder has in the net assets of the corporation from owning one share. If the corporation has been reinvesting some of its earnings over the years, or if the shares were originally issued above par, or both, the book value per share will exceed the par value. Market value is generally unrelated to par value and at best is only remotely related to book value. A share’s market value will reflect many factors, including the company’s anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the securities markets.

11-10

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 11-1 The advantages and disadvantages of a corporation are as follows: Advantages Separate legal existence Limited liability of shareholders Transferable ownership rights Ability to acquire capital Continuous life Corporation management— professional managers

Disadvantages Corporation management— separation of ownership and management Government regulations Additional taxes

BRIEF EXERCISE 11-2 May 10

Cash (2,000 X $13)......................................... Share Capital—Ordinary (2,000 X $6) ... Share Premium—Ordinary (2,000 X $7).........................................

26,000 12,000 14,000

BRIEF EXERCISE 11-3 June 1

Cash (4,000 X ¥6)........................................... Share Capital—Ordinary (4,000 X ¥2) ... Share Premium—Ordinary(4,000 X ¥4)

24,000 8,000 16,000

BRIEF EXERCISE 11-4 Land (5,000 X $15) .......................................................... Share Capital—Ordinary (5,000 X $10) .................. Share Premium—Ordinary (5,000 X $5).................

75,000

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50,000 25,000

11-11

BRIEF EXERCISE 11-5 July 1 Sept. 1

Treasury Shares (500 X HK$80) ................... Cash .......................................................

40,000

Cash (300 X HK$90) ...................................... Treasury Shares (300 X HK$80) ............ Share Premium— Treasury (300 X HK$10).....................

27,000

40,000 24,000 3,000

BRIEF EXERCISE 11-6 Cash (5,000 X $118) ....................................................... Preference Shares (5,000 X $100) ......................... Share Premium—Preference (5,000 X $18) ..........

590,000 500,000 90,000

BRIEF EXERCISE 11-7 Nov. 1 Cash Dividends (80,000 X €2/share) ............ Dividends Payable .................................

160,000

Dec. 31 Dividends Payable ........................................ Cash .......................................................

160,000

160,000 160,000

BRIEF EXERCISE 11-8 Dec. 1

11-12

Share Dividends (5,600 X $16) ..................... Ordinary Share Dividends Distributable (5,600 X $10) ................ Share Premium—Ordinary (5,600 X $6)

89,600

Ordinary Share Dividends Distributable...... Share Capital—Ordinary .......................

56,000

56,000 33,600

56,000

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BRIEF EXERCISE 11-9

(a)

Equity Share Capital— Ordinary, ₤10 par Share Premium—Ordinary Retained Earnings Total equity (1)

30,000 X (₤14 – ₤10)

(2)

Before Dividend

After Dividend

₤2,000,000 — 500,000 ₤2,500,000

₤2,300,000 120,000 (1) 80,000 (2) ₤2,500,000

[₤500,000 – (30,000 X ₤14)]

(b)

Outstanding shares

200,000

230,000

(c)

Par value per share

₤10.00

BRIEF EXERCISE 11-10 ABBOTT INC. Retained Earnings Statement For the Year Ended December 31, 2014 Balance, January 1 ........................................................ Add: Net income .......................................................... Less: Dividends ............................................................ Balance, December 31 ...................................................

$220,000 140,000 360,000 55,000 $305,000

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11-13

BRIEF EXERCISE 11-11 SANDRA INC. Retained Earnings Statement For the Year Ended December 31, 2014 Balance, January 1, as reported ............................ Correction for overstatement of net income in prior period (depreciation expense error) ......... Balance, January 1, as adjusted ............................ Add: Net income.................................................... Less: Cash dividends ........................................... $60,000 Share dividends .......................................... 8,000 Balance, December 31 ...........................................

$800,000 (44,000) 756,000 120,000 876,000 68,000 $808,000

BRIEF EXERCISE 11-12 Equity Share capital—ordinary, €10 par value, 5,000 shares issued and 4,500 shares outstanding Share premium—ordinary Retained earnings Less: Treasury shares (500 shares) Total equity

€ 50,000 32,000 45,000 9,000 €118,000

*BRIEF EXERCISE 11-13 Book value per share = ($817,000 ÷ 38,000) = $21.50

11-14

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SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 11-1 1. 2. 3. 4. 5.

True. True. False. Additional government regulation is a disadvantage of the corporate form of business. True. False. No-par value shares are is quite common today.

DO IT! 11-2 (a) Income Summary ................................................. Retained Earnings ........................................ (To close Income Summary and transfer net income to retained earnings)

228,000 228,000

(b) Equity Share Capital—Ordinary ........................... $1,000,000 Retained Earnings ........................................ 228,000 Total equity ........................................ $1,228,000

DO IT! 11-3 Apr. 1

Cash............................................................... Share Capital—Ordinary ....................... Share Premium—Ordinary ....................... (To record issuance of 50,000 shares at CHF13 per share)

650,000

Apr. 19 Organization Expense ................................. Share Capital—Ordinary ...................... Share Premium—Ordinary ........................ (To record issuance of 2,000 shares for attorney’s fees)

27,500

100,000 550,000

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4,000 23,500

11-15

DO IT! 11-4 Aug. 1

Dec. 1

Treasury Shares ............................................. Cash ......................................................... (To record the purchase of 2,000 shares at $64 per share)

128,000

Cash ................................................................. Treasury Shares ...................................... Share Premium—Treasury .................... (To record the sale of 1,200 shares at $72 per share)

86,400

128,000

76,800 9,600

DO IT! 11-5 1.

The company has not missed past dividends and the preference shares are non-cumulative; thus, the preference shareholders are paid only this year’s dividend. The dividend paid to preference shareholders would be €28,000 (4,000 X .07 X €100). The dividend paid to ordinary shareholders would be €82,000 (€110,000 – €28,000).

The preference shares are non-cumulative; thus, past unpaid dividends do not have to be paid. The dividend paid to preference shareholders would be €28,000 (4,000 X .07 X €100). The dividend paid to ordinary shareholders would be €82,000 (€110,000 – €28,000).

The preference shares are cumulative; thus, dividends that have been missed in the past (dividends in arrears) must be paid. The dividend paid to preference shareholders would be €84,000 (3 X 4,000 X .07 X €100). The dividend paid to ordinary shareholders would be €26,000 (€110,000 – €84,000).

11-16

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DO IT! 11-6 (a) 1.

The share dividend amount is $2,940,000 [(400,000 X 15%) X $49]. The new balance in retained earnings is $9,060,000 ($12,000,000 – $2,940,000).

The retained earnings after the share split would be the same as it was before the split: $12,000,000.

(b) (1) and (2) The effects on the equity accounts are as follows: Original Balances Share capital and share premium $ 2,400,000 Retained earnings 12,000,000 Total equity $14,400,000 Shares outstanding 400,000 Par value per share $ 2

After Dividend After Split $ 5,340,000 $ 2,400,000 9,060,000 12,000,000 $14,400,000 $14,400,000 460,000 800,000 $ 2 $ 1

Total equity remains the same under both options. DO IT! 11-7 RAYMOND CORPORATION Retained Earnings Statement For the Year Ended December 31, 2014 Balance, January 1, as reported.............................. Correction for understatement of net income in prior period (depreciation error) ........ Balance, January 1, as adjusted ............................. Add: Net income ..................................................... Less: Cash dividends ............................................. Balance, December 31 .............................................

€3,100,000 86,000 3,186,000 1,200,000 4,386,000 150,000 €4,236,000

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11-17

DO IT! 11-8 2013 ($ 200, 000 – $ 30, 000 ) Return on ordinary = 2 5% shareholders’ equity ($ 600, 00 0 + $ 760, 000 ) /2

11-18

2014 ($21 0, 000 – $30 ,0 00) ($ 760, 00 0 + $ 830, 000 )/2

= 2 2.6 %

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

SOLUTIONS TO EXERCISES EXERCISE 11-1 1.

True.

False. Most of the largest U.S. corporations are publicly held corporations.

True.

False. The net income of a corporation is taxed as a separate entity.

False. Creditors have no legal claim on the personal assets of the owners of a corporation if the corporation does not pay its debts.

False. The transfer of shares from one owner to another does not require the approval of either the corporation or other shareholders; it is entirely at the discretion of the shareholder.

False. The board of directors of a corporation manages the corporation for the shareholders, who legally own the corporation.

True.

10.

False. Corporations are subject to more government regulations than partnerships or proprietorships.

EXERCISE 11-2 1.

True.

False. Corporation management (separation of ownership and management), government regulations, and additional taxes are the major disadvantages of a corporation.

False. When a corporation is formed, organization costs are expensed as incurred.

True.

False. The number of issued shares is always less than or equal to the number of authorized shares.

False. No journal entry is required for the authorization of ordinary shares.

False. Publicly held corporations usually issue shares indirectly through an investment banking firm.

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11-19

EXERCISE 11-2 (Continued) 8.

True.

False. The market value of ordinary shares has no relationship with the par value.

10.

False. Share capital is the total amount of cash and other assets paid in to the corporation by shareholders in exchange for shares.

EXERCISE 11-3 (a) Jan. 10 July 1

(b) Jan. 10

July 1

Cash (70,000 X Rs4) .............................. Share Capital—Ordinary ...............

280,000

Cash (30,000 X Rs7) .............................. Share Capital—Ordinary (30,000 X Rs4) ............................. Share Premium—Ordinary (30,000 X Rs3)

210,000

Cash (70,000 X Rs4) .............................. Share Capital—Ordinary (70,000 X Rs1) ............................. Share Premium—Ordinary (70,000 X Rs3) ............................

280,000

Cash (30,000 X Rs7) .............................. Share Capital—Ordinary (30,000 X Rs1) ............................. Share Premium—Ordinary (30,000 X Rs6) .............................

210,000

280,000

120,000 90,000

70,000 210,000

30,000 180,000

EXERCISE 11-4 (a) Cash ........................................................................ Share Capital—Ordinary (1,000 X $5) ............ Share Premium—Ordinary .............................

48,000

(b) Cash ........................................................................ Share Capital—Ordinary (1,000 X $5) ............ Share Premium—Ordinary .............................

48,000

11-20

5,000 43,000 5,000 43,000

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EXERCISE 11-4 (Continued) (c) (d)

(e)

Cash ...................................................................... Share Capital—Ordinary ..............................

48,000

Organization Expense ......................................... Share Capital—Ordinary (1,000 X $5) .......... Share Premium—Ordinary ...........................

48,000

Land ...................................................................... Share Capital—Ordinary (1,000 X $5) .......... Share Premium—Ordinary ...........................

48,000

48,000 5,000 43,000 5,000 43,000

EXERCISE 11-5 Treasury Shares .............................................................. Cash .........................................................................

250,000

Cash (1,500 X ¥54) ........................................................... Treasury Shares (1,500 X ¥50) ................................ Share Premium—Treasury .....................................

81,000

Cash (2,000 X ¥49) ........................................................... Share Premium—Treasury ............................................ Treasury Shares (2,000 X ¥50) ................................

98,000 2,000

Cash (1,500 X ¥40) ........................................................... Share Premium—Treasury (¥6,000 – ¥2,000) .......................................................... Retained Earnings ........................................................... Treasury Shares (1,500 X ¥50) ................................

60,000

250,000 75,000 6,000

100,000

4,000 11,000

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75,000

11-21

EXERCISE 11-6 (a)

Cash ........................................................................ 2,080,000 Preference Shares (100,000 X $20) .................. 2,000,000 Share Premium—Preference............................ 80,000

(b)

Total Dividend ........................................................ Less: Preference Shares Dividend ($2,000,000 X 9%) ........................................ Ordinary Shares Dividends ...................................

$ 550,000

Total Dividend ........................................................ Less: Preference Shares Dividend [($2,000,000 X 9%) X 3]................................ Ordinary Shares Dividends ...................................

$ 550,000

(c)

180,000 $ 370,000

540,000 $ 10,000

EXERCISE 11-7 Mar.

June 12

July 11

Nov. 28

11-22

Organization Expense ................................. Share Capital—Ordinary (5,000 X R$1) Share Premium—Ordinary ...................

38,000 5,000 33,000

Cash .............................................................. 475,000 Share Capital—Ordinary (60,000 X R$1) Share Premium—Ordinary ................... Cash (1,000 X R$110) ................................... Share Capital—Preference (1,000 X R$100) .............................. Share Premium—Preference (1,000 X R$10) ................................

110,000

Treasury Shares............................................ Cash ......................................................

18,000

60,000 415,000

100,000 10,000 18,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 11-8 1.

Land ........................................................................ Share Capital—Ordinary (5,000 X $10) ......... Share Premium—Ordinary ............................

124,000

Land (20,000 X $11) ............................................... Share Capital—Ordinary (20,000 X $10) ....... Share Premium—Ordinary (20,000 X $1) ......

220,000

50,000 74,000 200,000 20,000

EXERCISE 11-9 (a) Mar. 1 July 1

Sept. 1

(b) Sept. 1

Treasury Shares (50,000 X ₤12) ............. Cash.................................................

600,000

Cash (10,000 X ₤14) ................................ Treasury Shares (10,000 X ₤12) ..... Share Premium—Treasury (10,000 X ₤2) ................................

140,000

Cash (8,000 X ₤11) .................................. Share Premium—Treasury (8,000 X ₤1) ......................................... Treasury Shares (8,000 X ₤12) .......

88,000

Cash (8,000 X ₤9) .................................... Share Premium—Treasury .................... Retained Earnings .................................. Treasury Shares (8,000 X ₤12) .......

72,000 20,000 4,000

600,000 120,000 20,000

8,000 96,000

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96,000

11-23

EXERCISE 11-10 (a) Feb. 1

July 1

Cash (12,000 X $53) .......................... Share Capital—Preference (12,000 X $50) ........................ Share Premium—Preference (12,000 X $3) ...........................

636,000

Cash (23,000 X $57) .......................... Share Capital—Preference (23,000 X $50) ........................ Share Premium—Preference (23,000 X $7) ..........................

1,311,000

600,000 36,000

1,150,000 161,000

(b) Share Capital—Preference Date Feb. 1 July 1

Explanation

Share Premium—Preference Date Explanation Feb. 1 July 1

Ref.

Debit

Credit 600,000 1,150,000

Balance 600,000 1,750,000

Ref.

Debit

Credit 36,000 161,000

Balance 36,000 197,000

(c) Share Capital—Preference—listed first in the equity section. Share Premium—Preference—listed first in a series of types of share premium.

11-24

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EXERCISE 11-11 MEMO To:

President

From:

Your name , Chief Accountant

Re:

Questions about Equity Section

Your memorandum about the equity section was received this morning. I hope the following will answer your questions. (a) Ordinary shares outstanding is 525,000 shares. (Issued shares 600,000 less treasury shares 75,000.) (b) The stated value of the ordinary shares is €2 per share. (Ordinary shares issued €1,200,000 ÷ 600,000 shares.) (c) The par value of the preference shares is €60 per share. (Preference shares €300,000 ÷ 5,000 shares.) (d) The dividend rate is 10%, or (€30,000 ÷ €300,000). (e) The Retained Earnings balance is still €1,858,000. Cumulative dividends in arrears are only disclosed in the notes to the financial statements. If I can be of further help, please contact me.

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11-25

EXERCISE 11-12 May 2

15 31

Cash (10,000 X $13) ...................................... Share Capital—Ordinary (10,000 X $10) Share Premium—Ordinary (10,000 X $3) ......................................

130,000 100,000 30,000

Cash .............................................................. 580,000 Share Capital—Preference (10,000 X $50) Share Premium—Preference (10,000 X $8) ...................................... Treasury Shares ........................................... Cash .......................................................

18,000

Cash (500 X $16) ........................................... Treasury Shares (500 X $15) ................ Share Premium—Treasury (500 X $1) ...........................................

8,000

500,000 80,000 18,000 7,500 500

EXERCISE 11-13 (a) June 15 July 10 Dec. 15

Cash Dividends (123,000 X €1) ........... Dividends Payable .......................

123,000

Dividends Payable ............................... Cash ..............................................

123,000

Cash Dividends (125,000 X €1.20) ...... Dividends Payable .......................

150,000

123,000 123,000 150,000

(b) In the retained earnings statement, dividends of €273,000 will be deducted. In the statement of financial position, Dividends Payable of €150,000 will be reported as a current liability.

11-26

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 11-14 (a) Share Dividends (24,750* X $18) ............................ Ordinary Share Dividends Distributable (24,750 X $8) ................................................ Share Premium—Ordinary (24,750 X $10) ..............................................

445,500 198,000 247,500

*[($1,000,000 ÷ $8) + 40,000] X 15%. (b) Share Dividends (36,000* X $20) ............................ Ordinary Share Dividends Distributable (36,000 X $5) ................................................ Share Premium—Ordinary (36,000 X $15) .............................................

720,000 180,000 540,000

*[($1,000,000 ÷ 5) + 40,000] X 15%. EXERCISE 11-15

Before Action Equity Share capital—ordinary Share premium—ordinary Retained earnings Total equity

CHF 300,000 0 900,000 CHF1,200,000

Outstanding shares Par value per share 2,500 X (CHF13 – CHF6)

(1)

50,000 CHF 6 (2)

After Share Dividend CHF 315,000 17,500 (1) 867,500 (2) CHF1,200,000

After Share Split CHF 300,000 0 900,000 CHF1,200,000

52,500 CHF 6

100,000 CHF 3

CHF900,000 – (2,500 X CHF13)

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11-27

EXERCISE 11-16 1. 2.

Dec. 31 31

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

50,000

Share Dividends............................. Dividends Payable ......................... Ordinary Share Dividends Distributable ....................... Share Premium—Ordinary (€17 – €10) X 1,200 .............

8,400* 12,000

50,000

12,000 8,400

*(1,200 X €17) – €12,000 3.

Share Capital—Ordinary ............... Retained Earnings ..................

2,000,000 2,000,000

EXERCISE 11-17 RICHARD CORPORATION Retained Earnings Statement For the Year Ended December 31, 2014 Balance, January 1, as reported ............................. Correction for overstatement of 2013 net income (depreciation error) ................................ Balance, January 1, as adjusted............................. Add: Net income .................................................... Less: Cash dividends ............................................. Share dividends ........................................... Balance, December 31 ............................................

11-28

$550,000 (40,000) 510,000 350,000 860,000 $96,000 80,000

176,000 $684,000

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EXERCISE 11-18 BINDRA COMPANY Retained Earnings Statement For the Year Ended December 31, 2014 $340,000 16,000 356,000 285,000 641,000

Balance, January 1, as reported.................................. Correction for understatement of 2012 net income....... Balance, January 1, as adjusted ................................. Add: Net income .......................................................... Less: Cash dividends ................................................. $100,0001 Share dividends ................................................ 140,0002 Balance, December 31 ................................................. 1

(200,000 shares X $.50/share)

240,000 $401,000

(200,000 shares X .05 X $14/share)

EXERCISE 11-19

Account Share Capital—Ordinary Share Capital—Preference Treasury Shares Share Premium—Preference Share Premium—Ordinary Share Premium—Treasury Retained Earnings

Share Capital X X

Share Premium

Retained Earnings Other

X X X X X

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11-29

EXERCISE 11-20 TIGER INC. Statement of Financial Position (Partial) December 31, 200X Equity Share capital—preference, 8%, ¥5 par value, 40,000 shares authorized, 30,000 shares issued ................................ Share capital—ordinary, no par, ¥1 stated value, 400,000 shares authorized, 300,000 shares issued and 290,000 outstanding ................................. Ordinary share dividends distributable .............................................. Share premium—preference ........................ Share premium—ordinary ............................ Retained earnings (see Note R) ................... Less: Treasury shares (10,000 shares) .......................................... Total equity ....................................

¥ 150,000

300,000 30,000 50,000 1,200,000 800,000 65,000 ¥2,465,000

Note R: Retained earnings is restricted for plant expansion, ¥150,000.

11-30

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EXERCISE 11-21 PERRIN COMPANY Statement of Financial Position (Partial) December 31, 2014 Equity Share capital—preference ................................... Share capital—ordinary ....................................... Share premium—preference................................ Share premium—ordinary.................................... Retained earnings ................................................ Less: Treasury shares ........................................ Total equity ..........................................

125,000 400,000 40,000 220,000 342,000* 40,000 $ 1,087,000

*$250,000 + $140,000 – $48,000 EXERCISE 11-22 (a)

ORASCO CORPORATION Income Statement For the Year Ended December 31, 2014 ____________________________________________________________ Net sales .................................................................. R$600,000 Cost of goods sold ................................................. 360,000 Gross profit ............................................................. 240,000 Operating expenses ................................................ 153,000 Income from operations ......................................... 87,000 Interest expense...................................................... 7,500 Income before income taxes .................................. 79,500 Income tax expense (25% X R$79,500) .................. 19,875 Net income .............................................................. R$ 59,625

(b)

Net income – Preference dividends = R$59,625 – R$12,000 = 26.5% Average ordinary shareholders’ equity R$180,000

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11-31

*EXERCISE 11-23 ATRIO, INC. (a) Equity (in millions of dollars) Share capital—preference, €100 par value, €3.75, cumulative, 557,740 shares authorized, 557,649 shares issued and 546,024 shares outstanding .................................................... Share capital—ordinary, €1 par value, 1,800,000,000 shares authorized, 924,600,000 issued and 844,800,000 shares outstanding .................................................... Share premium ............................................................... Retained earnings .......................................................... Less: Treasury shares .................................................. Total equity ..................................................

€

925 6,101 7,428 2,828 €11,682

(b) Total equity............................................................................. Less: Preference share equity (par value) .......................... Ordinary share equity ............................................................

€11,682 56 €11,626

Ordinary shares outstanding (in millions) ...........................

844.8

Book value per share (€11,626 ÷ 844.8) ................................

€13.76

11-32

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*EXERCISE 11-24

Total equity Less: Preference share equity Par value Call price (10,000 X ₤60) Dividends in arrears (10,000 X ₤4) Ordinary share equity

(a) ₤3,200,000

(b) ₤3,200,000

(₤500,000)

₤2,700,000

(600,000) (40,000) ₤2,560,000

Ordinary shares outstanding

200,000

Book value per share

₤13.50

₤12.80

*EXERCISE 11-25 (a) 1.

Book value before the share dividend was $8.13 ($650,000 ÷ 80,000).

Book value after the share dividend is $7.07 ($650,000 ÷ 92,000).

(b) Share capital—ordinary Balance before dividend ................................................ Dividend shares (12,000 X $5) ....................................... New balance ............................................................

$400,000 60,000 $460,000

Share premium—ordinary Balance before dividend ................................................ Excess over par of shares issued (12,000 X $10) ........ New balance ............................................................

$ 25,000 120,000 $145,000

Retained earnings Balance before dividend ................................................ Dividend (12,000 X $15) ................................................. New balance ............................................................

$225,000 (180,000) $ 45,000

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11-33

SOLUTIONS TO PROBLEMS PROBLEM 11-1A

(a) Jan. 10

Cash (100,000 X HK$50) ......................... 5,000,000 Share Capital—Ordianry (100,000 X HK$20)........................ 2,000,000 Share Premium—Ordinary (100,000 X HK$30)........................ 3,000,000

Mar. 1

Cash (5,000 X HK$1,050) ........................ 5,250,000 Share Capital—Preference (5,000 X HK$1,000)....................... 5,000,000 Share Premium—Preference (5,000 X HK$50) ........................... 250,000

Apr. 1

Land ......................................................... Share Capital—Ordinary (18,000 X HK$20) ......................... Share Premium—Ordinary (HK$920,000 – HK$360,000) ........

360,000 560,000

May 1

Cash (80,000 X HK$45) ........................... 3,600,000 Share Capital—Ordinary (80,000 X HK$20) ......................... 1,600,000 Share Premium—Ordinary (80,000 X HK$25) ......................... 2,000,000

Aug. 1

Organization Expense ............................ Share Capital—Ordinary (10,000 X HK$20) ......................... Share Premium—Ordinary (HK$300,000 – HK$200,000) ........

300,000

Cash (10,000 X HK$50) ........................... Share Capital—Ordinary (10,000 X HK$20) ......................... Share Premium—Ordinary (10,000 X HK$30) .........................

500,000

Sept. 1

11-34

920,000

200,000 100,000

200,000 300,000

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PROBLEM 11-1A (Continued) Nov. 1

Cash (1,000 X HK$1,080) ........................ 1,080,000 Share Capital—Preference (1,000 X HK$1,000) ...................... 1,000,000 Share Premium—Preference (1,000 X HK$80) ........................... 80,000

(b) Share Capital—Preference Date Mar. 1 Nov. 1

Explanation

Ref. J5 J5

Debit

Credit 5,000,000 1,000,000

Balance 5,000,000 6,000,000

Ref. J5 J5 J5 J5 J5

Debit

Credit 2,000,000 360,000 1,600,000 200,000 200,000

Balance 2,000,000 2,360,000 3,960,000 4,160,000 4,360,000

Ref. J5 J5

Debit

Credit 250,000 80,000

Balance 250,000 330,000

Ref. J5 J5 J5 J5 J5

Debit

Credit 3,000,000 560,000 2,000,000 100,000 300,000

Balance 3,000,000 3,560,000 5,560,000 5,660,000 5,960,000

Share Capital—Ordinary Date Jan. 10 Apr. 1 May 1 Aug. 1 Sept. 1

Explanation

Share Premium—Preference Date Mar. 1 Nov. 1

Explanation

Share Premium—Ordinary Date Jan. 10 Apr. 1 May 1 Aug. 1 Sept. 1

Explanation

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-35

PROBLEM 11-1A (Continued) (c)

GÂO CORPORATION Statement of Financial Position (Partial) December 31, 2014 Equity Share capital—preference 8%, HK$1,000 par value, 10,000 shares authorized, 6,000 shares issued and outstanding .................. Share capital—ordinary, no par, HK$20 stated value, 500,000 shares authorized, 218,000 shares issued and outstanding .................. Share premium—preference .............. Share premium—ordinary .................. Total share capital .......................

11-36

HK$ 6,000,000

4,360,000 330,000 5,960,000 HK$16,650,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-2A

(a) Mar. 1 June 1

Sept. 1

Dec. 1

Treasury Shares (5,000 X $9) ................... Cash ...................................................

45,000

Cash (500 X $12) ....................................... Treasury Shares (500 X $9)............... Premium—Treasury (500 X $3) .......................................

6,000

Cash (2,500 X $10) .................................... Treasury Shares (2,500 X $9)............ Share Premium—Treasury (2,500 X $1) ...................................

25,000

Cash (1,000 X $6) ...................................... Share Premium—Treasury (1,000 X $3) ............................................ Treasury Shares (1,000 X $9)............

6,000

Income Summary ...................................... Retained Earnings .............................

34,000

45,000 4,500 1,500 22,500 2,500

3,000 9,000 34,000

(b) Share Premium—Treasury Date Explanation June 1 Sept. 1 Dec. 1

Ref. J10 J10 J10

Debit

Treasury Shares Date Explanation Mar. 1 June 1 Sept. 1 Dec. 1

Ref. J10 J10 J10 J10

Debit 45,000

Credit 1,500 2,500

Balance 1,500 4,000 1,000

Credit

Balance 45,000 40,500 18,000 9,000

3,000

4,500 22,500 9,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-37

PROBLEM 11-2A (Continued) Retained Earnings Date Explanation Jan. 1 Balance Dec. 31

(c)

Ref.  J10

Debit

34,000

Balance 100,000 134,000

ELSTON CORPORATION Statement of Financial Position (Partial) December 31, 2014 Equity Share capital—ordinary, $5 par, 80,000 shares issued and 79,000 outstanding ........................ Share premium—ordinary ........................ Share premium—treasury......................... Retained earnings ..................................... Less: Treasury shares (1,000 shares) ..... Total equity .....................................

11-38

Credit

$400,000 200,000 1,000 134,000 9,000 $726,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-3A

(a) Feb. 1

Apr. 14

Sept. 3

Nov. 10 Dec. 31

Cash ....................................................... 120,000 Share Capital—Ordinary (25,000 X €1) Share Premium—Ordinary (€120,000 – €25,000) ................... Cash ....................................................... Share Premium—Treasury (€46,000 – €22,500) ..................... Treasury Shares (9,000 X €2.50) ...

25,000 95,000

46,000 23,500 22,500

Patents ................................................... 42,000 Share Capital—Ordinary (7,000 X €1) Share Premium—Ordinary (€42,000 – €7,000) .......................

35,000

Treasury Shares .................................... Cash ................................................

6,000 6,000

Income Summary................................... Retained Earnings .........................

452,000

7,000

452,000

(b) Share Capital—Preference Date Jan.

Explanation Balance

Share Capital—Ordinary Date Explanation Jan. 1 Balance Feb. 1 Sept. 3

Ref. 

Debit

Credit

Balance 400,000

Ref.  J5 J5

Debit

Credit

Balance 1,000,000 1,025,000 1,032,000

25,000 7,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-39

PROBLEM 11-3A (Continued) Share Premium—Preference Date Explanation Jan. 1 Balance

Ref. 

Debit

Credit

Balance 100,000

Ref.  J5 J5

Debit

Credit 95,000 35,000

Balance 1,450,000 1,545,000 1,580,000

Ref. J5

Debit

Credit 23,500

Balance 23,500

Ref.  J5

Debit

Credit

Balance 1,816,000 2,268,000

Ref.  J5 J5

Debit

Share Premium—Ordinary Date Jan. 1 Feb. 1 Sept. 3

Explanation Balance

Share Premium—Treasury Date Apr. 14

Explanation

Retained Earnings Date Explanation Jan. 1 Balance Dec. 31

452,000

Treasury Shares Date Jan. 1 Apr. 14 Nov. 10

Explanation Balance

11-40

Credit 22,500

6,000

Balance 50,000 27,500 33,500

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-3A (Continued) (c)

TERRELL CORPORATION Statement of Financial Position (Partial) December 31, 2014 Equity Share capital—preference, 9% €50 par value, cumulative, 10,000 shares authorized, 8,000 shares issued and outstanding ......................................... Share capital—ordinary, no par, €1 stated value, 2,000,000 shares authorized, 1,032,000 shares issued and 1,020,000 shares outstanding ......................................... Share premium—preference .................. Share premium—ordinary ...................... Share premium—treasury ...................... Retained earnings (see Note X) .................... Less: Treasury shares (12,000 shares) ........ Total equity ..........................

€ 400,000

1,032,000 100,000 1,580,000 23,500 2,268,000 33,500 €5,370,000

Note X: Dividends on preference shares totaling €36,000 [8,000 X (9% X €50)] are in arrears.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-41

SOLUTIONS TO PROBLEMS PROBLEM 11-4A

(a) Feb. Mar.

1 1

48,000

Dividends Payable ................................. Cash ................................................

48,000

Apr.

Memo—five-for-one share split increases number of shares to 240,000 = (48,000 X 5) and reduces par value to $5 per share.

July

Share Dividends (24,000 X $7) .............. Ordinary Share Dividends Distributable (24,000 X $5) ......... Share Premium—Ordinary (24,000 X $2) ...............................

Dec.

1 31

11-42

Cash Dividends (48,000 X $1) ............... Dividends Payable .........................

Ordinary Share Dividends Distributable ....................................... Share Capital—Ordinary ................

48,000 48,000

168,000 120,000 48,000 120,000 120,000

Cash Dividends (264,000 X $.40) .......... Dividends Payable .........................

105,600

Income Summary ................................... Retained Earnings ..........................

350,000

Retained Earnings ................................. Share Dividends .............................

168,000

Retained Earnings ................................. Cash Dividends ..............................

153,600

105,600 350,000 168,000 153,600

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-4A (Continued) (b) Share Capital—Ordinary Date Jan. Apr.

1 1

July

Explanation Balance 5 for 1 split—new par $5

Ref. 

Debit

Credit

Balance 1,200,000

120,000

1,320,000

Credit 120,000

Balance 120,000 0

Credit

Balance 200,000 248,000

Ordinary Share Dividends Distributable Date July

Explanation

Ref.

1 31

Debit 120,000

Share Premium—Ordinary Date Jan. July

1 1

Explanation Balance

Ref.

Debit

 48,000

Retained Earnings Date Jan.

1 31

Explanation Balance Net income Share dividend Cash dividend

Ref.

Debit

Credit

 350,000 168,000 153,600

Balance 600,000 950,000 782,000 628,400

Cash Dividends Date Feb. 1 Dec. 1 Dec. 31

Explanation

Ref.

Debit 48,000 105,600

Credit

153,600

Balance 48,000 153,600 0

Share Dividends Date July 1 Dec. 31

Explanation

Ref.

Debit 168,000

Credit 168,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Balance 168,000 0 11-43

PROBLEM 11-4A (Continued) (c)

PRASAD CORPORATION Statement of Financial Position (Partial) December 31, 2014 Equity Share capital—ordinary, $5 par value, 264,000 shares issued and outstanding .............................. Share premium—ordinary .......................................... Retained earnings ....................................................... Total equity ...................................................

11-44

$1,320,000 248,000 628,400 $2,196,400

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-5A

(a)

(b)

Retained Earnings Sept. 1 Prior Per. Adj. 56,000 Jan. 1 Balance Dec. 31 Cash Dividends 250,000 Dec. 31 Net Income Dec. 31 Share Dividends 425,000 Dec. 31 Balance

1,054,000

RUSSO CORPORATION Retained Earnings Statement For the Year Ended December 31, 2014 €1,200,000

Balance, January 1, as reported ................... Correction of overstatement of 2013 net income because of understatement of depreciation ............................................... Balance, January 1, as adjusted ................... Add: Net income .......................................... Less: Cash dividends ................................... Share dividends .................................. Balance, December 31 ................................... (c)

1,200,000 585,000

(56,000) 1,144,000 585,000 1,729,000 €250,000 425,000

675,000 €1,054,000

RUSSO CORPORATION Partial Statement of Financial Position December 31, 2014 Equity Share capital—preference 7%, €50 par value, cumulative, 20,000 shares authorized, 15,000 shares issued and outstanding ..........................................

€ 750,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-45

PROBLEM 11-5A (Continued) RUSSO CORPORATION (Continued) Share capital—ordinary, €10 par value, 500,000 shares authorized, 250,000 shares issued and outstanding ......................................... Ordinary share dividends distributable ........................................ Share premium—preference .................. Share premium—ordinary ...................... Retained earnings (see Note X).............. Total equity .....................

€2,500,000 250,000 250,000 425,000 1,054,000 €5,229,000

Note X: Retained earnings is restricted for plant expansion, €200,000. (d) Total cash dividend ....................................... Allocated to preference shares Dividend in arrears—2013 [15,000 X (€50 X 7%)] .......................... 2014 dividend ......................................... Remainder to ordinary shares ......................

11-46

€250,000 €52,500 52,500

105,000 €145,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-6A

(a) (1) Land ........................................................... 132,000 Share Capital—Preference (1,200 X $100) Share Premium—Preference ............

120,000 12,000

(2) Cash (400,000 X $6.50) .............................. 2,600,000 Share Capital—Ordinary (400,000 X $2.50) Share Premium—Ordinary ................

1,000,000 1,600,000

(3) Treasury Shares (1,500 X $9) ................... Cash ...................................................

13,500

(4) Cash (500 X $11)........................................ Treasury Shares (500 X $9) ............... Share Premium—Treasury................

5,500

13,500

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

4,500 1,000

11-47

PROBLEM 11-6A (Continued) (b)

JUDE CORPORATION Statement of Financial Position (Partial) December 31, 2014 Equity Share capital—preference 10%, $100 par value, non-cumulative, 20,000 shares authorized, 1,200 shares issued and outstanding ........................................ Share capital—ordinary, no par, $2.50 stated value, 1,000,000 shares authorized, 400,000 shares issued, and 399,000 outstanding ........................................ Share premium—preference ................. Share premium—ordinary ..................... Share premium—treasury ..................... Retained earnings .................................. Less: Treasury shares (1,000 shares) . Total equity .................................

11-48

$ 120,000

1,000,000 12,000 1,600,000 1,000 82,000 9,000 $2,806,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-7A

(a) Jan. 15 Feb. 15 Apr. 15

May 15

Cash Dividends (75,000 X £1) .............. Dividends Payable ........................

75,000

Dividends Payable ................................ Cash ...............................................

75,000

Share Dividends (7,500 X £14) ............. Ordinary Share Dividends Distributable (7,500 X £10) ........... Share Premium—Ordinary (7,500 X £4) ....................................

105,000

75,000 75,000

75,000 30,000

Ordinary Share Dividends Distributable ..................................... 75,000 Share Capital—Ordinary (7,500 X £10)

July

Memo—two-for-one share split increases the number of shares outstanding to 165,000, or (82,500 X 2) and reduces the par value to £5 per share.

Dec.

Cash Dividends (165,000 X £.60) ......... Dividends Payable ........................

99,000

Income Summary.................................. Retained Earnings ........................

250,000

Retained Earnings ................................ Cash Dividends .............................

174,000

Retained Earnings ................................ Share Dividends ............................

105,000

31 31 31

75,000

99,000 250,000 174,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

105,000

11-49

PROBLEM 11-7A (Continued) (b) Share Capital—Ordinary Date Jan. 1 May 15 July 1

Explanation Balance

Ref. 

Debit

Credit 75,000

Balance 750,000 825,000

2 for 1 share split— new par value = $5

Share Premium—Ordinary Date Jan. 1 Apr. 15

Explanation Balance

Ref. 

Debit

Credit 30,000

Balance 200,000 230,000

Retained Earnings Date Jan. 1 Dec. 31 Apr. 31 31

Explanation Balance Cash dividends Share dividends Net income

Cash Dividends Date Explanation Jan. 1 Dec. 1 Dec. 31 Share Dividends Date Explanation Apr. 15 Dec. 31

Ref. 

Debit

Credit

174,000 105,000 250,000

Ref.

Debit 75,000 99,000

Credit

174,000

Ref.

Debit 105,000

Credit 105,000

Balance 540,000 366,000 261,000 511,000

Balance 75,000 174,000 0

Balance 105,000 0

Ordinary Share Dividends Distributable Date Apr. 15 May 15

11-50

Explanation

Ref.

Debit 75,000

Credit 75,000

Balance 75,000 0

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-7A (Continued) (c)

PRIMO CORPORATION Statement of Financial Position (Partial) December 31, 2014 Equity Share capital—ordinary, £5 par value, 165,000 shares issued and outstanding .............................. Share premium—ordinary .......................................... Retained earnings ....................................................... Total equity ..........................................................

£ 825,000 230,000 511,000 £1,566,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-51

PROBLEM 11-8A

(a)

WESTIN CORPORATION Statement of Financial Position (Partial) December 31, 2014 Equity Share capital—preference 8%, $100 par value, noncumulative, 3,600 shares issued and outstanding .................................... Share capital—ordinary, no par, $10 stated value, 150,000 shares issued, and 143,000 outstanding ........................................... Share premium—preference .................... Share premium—ordinary ........................ Share premium—treasury ........................ Retained earnings ..................................... Less: Treasury shares (7,000 shares) .... Total equity ..................................

$ 360,000

1,500,000 42,400 690,000 6,000 776,000 92,000 $3,282,400

*(b) The book value of the ordinary shares is $20.18 computed as follows: Total equity .............................................................. Less: Preference share equity Call price ($110 X 3,600) ................................... Ordinary share equity .....................................................

$3,282,400

Ordinary shares outstanding .........................................

143,000

Book value per share ($2,886,400 ÷ 143,000) ................

$20.18

396,000 $2,886,400

Note: No preference dividends are assigned to the preference shares equity because the preference shares are non-cumulative.

11-52

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

*PROBLEM 11-9A

CHAMBLIN INC. Statement of Changes in Equity For the Year Ending December 31, 2014 (in thousands, except shares) Ordinary Share Share Share Capital— Premium— Dividends Treasury Retained Ordinary Ordinary Distributable Shares Earnings Balances, Jan. 1 Issued 60,000 shares for share dividend Issued 30,000 shares for cash Purchased 25,000 treasury shares Declared cash dividend Sold 8,000 treasury shares Net income for year Balances, Dec. 31

CHF 800

CHF 500

CHF 120

120 60

CHF

CHF 600

(120) 60

120

(125) (111)

(111)

360 CHF849

40 360 CHF2,304

CHF560

CHF 2,020 0

(125)

CHF980

Total

CHF

CHF (85)

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-53

PROBLEM 11-1B

(a) Jan. 10

Mar. 1

Apr. 1

May 1

Aug. 1

Sept. 1

11-54

Cash (80,000 X $3) .................................. Share Capital—Ordinary (80,000 X $1)................................. Share Premium—Ordinary (80,000 X $2).................................

240,000

Cash (10,000 X $45) ................................ Share Capital—Preference (10,000 X $40)............................... Share Premium—Preference (10,000 X $5).................................

450,000

Land ......................................................... Share Capital—Ordinary (25,000 X $1)................................. Share Premium—Ordinary ($75,000 – $25,000) ......................

75,000

Cash (75,000 X $4) .................................. Share Capital—Ordinary (75,000 X $1)................................. Share Premium—Ordinary (75,000 X $3).................................

300,000

Organization Expense ............................ Share Capital—Ordinary (10,000 X $1)................................. Share Premium—Ordinary ($44,000 – $10,000) ......................

44,000

Cash (5,000 X $6) .................................... Share Capital—Ordinary (5,000 X $1)................................... Share Premium—Ordinary (5,000 X $5)...................................

30,000

80,000 160,000

400,000 50,000

25,000 50,000

75,000 225,000

10,000 34,000

5,000 25,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-1B (Continued) Nov. 1

Cash (2,000 X $48) .................................. 96,000 Share Capital—Preference (2,000 X $40) Share Premium—Preference (2,000 X $8) ..................................

80,000 16,000

(b) Share Capital—Preference Date Explanation Mar. 1 Nov. 1

Ref. J1 J1

Debit

Credit 400,000 80,000

Balance 400,000 480,000

Share Capital—Ordinary Date Explanation Jan. 10 Apr. 1 May 1 Aug. 1 Sept. 1

Ref. J1 J1 J1 J1 J1

Debit

Credit 80,000 25,000 75,000 10,000 5,000

Balance 80,000 105,000 180,000 190,000 195,000

Share Premium—Preference Date Explanation Mar. 1 Nov. 1

Ref. J1 J1

Debit

Credit 50,000 16,000

Balance 50,000 66,000

Share Premium—Ordinary Date Explanation Jan. 10 Apr. 1 May 1 Aug. 1 Sept. 1

Ref. J1 J1 J1 J1 J1

Debit

Credit 160,000 50,000 225,000 34,000 25,000

Balance 160,000 210,000 435,000 469,000 494,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-55

PROBLEM 11-1B (Continued) (c)

WELLES CORPORATION Statement of Financial Position (Partial) December 31, 2014 Equity Share Capital—Preference 6%, $40 par value, 20,000 shares authorized, 12,000 shares issued and outstanding ...................................... Share Capital—Ordinary, no par, $1 stated value, 500,000 shares authorized, 195,000 shares issued and outstanding ..................................... Share Premium—Preference .................... Share Premium—Ordinary........................ Total Share Capital ............................

11-56

$ 480,000

195,000 66,000 494,000 $1,235,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-2B

(a) Mar. 1 June 1

Sept. 1

Dec. 1

Treasury Shares (5,000 X £7) ................... Cash ...................................................

35,000

Cash (800 X £10) ....................................... Treasury Shares (800 X £7)............... Share Premium—Treasury (800 X £3) ..........................................

8,000

Cash (1,700 X £9) ...................................... Treasury Shares (1,700 X £7)............ Share Premium—Treasury (1,700 X £2) ........................................

15,300

Cash (1,000 X £5) ...................................... Share Premium—Treasury (1,000 X £2) ............................................ Treasury Shares (1,000 X £7)............

5,000

Income Summary ....................................... Retained Earnings ..............................

80,000

35,000 5,600 2,400 11,900 3,400

2,000 7,000 80,000

(b) Share Premium—Treasury Date Explanation June 1 Sept. 1 Dec. 1

Ref. J12 J12 J12

Debit

Treasury Shares Date Explanation Mar. 1 June 1 Sept. 1 Dec. 1

Ref. J12 J12 J12 J12

Debit 35,000

Credit 2,400 3,400

Balance 2,400 5,800 3,800

Credit

Balance 35,000 29,400 17,500 10,500

2,000

5,600 11,900 7,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-57

PROBLEM 11-2B (Continued) Retained Earnings Date Explanation Jan. 1 Balance Dec. 31

(c)

Ref.  J12

Debit

80,000

Balance 100,000 180,000

PLOVER CORPORATION Statement of Financial Position (Partial) December 31, 2014 Equity Share Capital—Ordinary £1 par, 400,000 shares issued and 398,500 outstanding ....................... Share Premium—Ordinary ............. Share Premium—Treasury ............. Retained Earnings ..................................... Less: Treasury Shares (1,500 shares) .... Total Equity .........................

11-58

Credit

£ 400,000 500,000 3,800 180,000 10,500 £1,073,300

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-3B

(a) Feb.

Mar. 20 June 14

Sept. 3

Dec. 31

Cash ...................................................... 19,500 Share Capital—Ordinary (3,000 X $3) Share Premium—Ordinary ...........

9,000 10,500

Treasury Shares (1,500 X $6) ............... Cash ...............................................

9,000 9,000

Cash ...................................................... Share Premium—Treasury ........... Treasury Shares (4,000 X $6) .......

26,000 2,000 24,000

Patents .................................................. 14,000 Share Capital—Ordinary (2,000 X $3) Share Premium—Ordinary ........... Income Summary.................................. Retained Earnings ........................

6,000 8,000

350,000 350,000

(b) Share Capital—Preference Date Jan.

Explanation Balance

Share Capital—Ordinary Date Explanation Jan. 1 Balance Feb. 1 Sept. 3

Ref. 

Debit

Credit

Balance 300,000

Ref.  J1 J1

Debit

Credit

Balance 660,000 669,000 675,000

9,000 6,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-59

PROBLEM 11-3B (Continued) Share Premium—Preference Date Explanation Jan. 1 Balance

Ref. 

Debit

Credit

Balance 20,000

Ref.  J1 J1

Debit

Credit 10,500 8,000

Balance 396,000 406,500 414,500

Ref. J1

Debit

Credit 2,000

Balance 2,000

Ref.  J1

Debit

Credit

Balance 488,000 838,000

Ref.  J1 J1

Debit

Share Premium—Ordinary Date Jan. Feb. Sept.

1 1 3

Explanation Balance

Share Premium—Treasury Date June 14

Explanation

Retained Earnings Date Explanation Jan. 1 Balance Dec. 31

350,000

Treasury Shares Date Jan. 1 Mar. 20 June 14

Explanation Balance

11-60

Credit

9,000 24,000

Balance 30,000 39,000 15,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-3B (Continued) (c)

MARYA CORPORATION Statement of Financial Position (Partial) December 31, 2014 Equity Share Capital—Preference 9%, $100 par value, cumulative, 5,000 shares authorized, 3,000 shares issued and outstanding ........................................... Share Capital—Ordinary, no par, $3 stated value, 300,000 shares authorized, 225,000 shares issued and 222,500 shares outstanding ........................................... Share Premium—Preference..................... Share Premium—Ordinary ........................ Share Premium—Treasury ........................ Retained Earnings ..................................... Less: Treasury Shares (2,500 shares) ..... Total Equity ............................

$ 300,000

675,000 20,000 414,500 2,000 838,000 15,000 $2,234,500

Note X: Dividends on preference shares totaling $27,000 [3,000 X (9% X $100)] are in arrears.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-61

PROBLEM 11-4B (a) Jan. 15 Feb. 15 Apr. 15

May 15

250,000

Dividends Payable ................................. Cash ................................................

250,000

Share Dividends (25,000 X €11) ............ Ordinary Share Dividends Distributable (25,000 X €4) ......... Share Premium—Ordinary (25,000 X €7) ...............................

275,000

Ordinary Share Dividends Distributable ................................... Share Capital—Ordinary (25,000 X €4) ...............................

250,000 250,000

100,000 175,000 100,000 100,000

July

Memo—two-for-one share split increases the number of shares outstanding to 550,000, (275,000 X 2) and reduces par value to €2.00 per share.

Dec.

Cash Dividends (550,000 X €.50) .......... Dividends Payable .........................

275,000

Income Summary ................................... Retained Earnings ..........................

264,000

Retained Earnings ................................. Cash Dividends ..............................

525,000

Retained Earnings ................................. Share Dividends .............................

275,000

11-62

Cash Dividends (250,000 X €1) ............. Dividends Payable .........................

275,000 264,000 525,000 275,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-4B (Continued) (b) Share Capital—Ordinary Date Jan. 1 May 15 July 1

Explanation Balance

Ref. 

Debit

Credit 100,000

Balance 1,000,000 1,100,000

2 for 1 share split— new par value = $2.00

Ordinary Share Dividends Distributable Date Apr. 15 May 15

Explanation

Ref.

Debit

Credit 100,000

Balance 100,000 0

Credit

Balance 200,000 375,000

100,000

Share Premium—Ordinary Date Jan. 1 Apr. 15

Explanation Balance

Ref.

Debit

 175,000

Retained Earnings Date Jan. 1 Dec. 31 31 31

Explanation Balance Net income Cash dividends Share dividends

Ref.

Debit

Credit

 264,000 525,000 275,000

Balance 840,000 1,104,000 579,000 304,000

Cash Dividends Date Jan. 15 Dec. 1 31

Explanation

Ref.

Debit 250,000 275,000

Credit

525,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Balance 250,000 525,000 0

11-63

PROBLEM 11-4B (Continued) Share Dividends Date Apr. 15 Dec. 31

(c)

Explanation

Ref.

Debit 275,000

Credit 275,000

BELGIUM CORPORATION Statement of Financial Position (Partial) December 31, 2014 Equity Share Capital—Ordinary €2.00 par value, 550,000 shares issued and outstanding.............................. Share Premium—Ordinary.......................................... Retained Earnings ....................................................... Total Equity ...........................................

11-64

Balance 275,000 0

€1,100,000 375,000 304,000 €1,779,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-5B

(a) ANDES COMPANY Retained Earnings Statement For the Year Ended December 31, 2014 Balance, January 1, as reported ....................... Correction for overstatement of net income in 2013 (depreciation error) ............. Balance, January 1, as adjusted ....................... Add: Net income .............................................. Less: Cash dividends—ordinary ..................... Cash dividends—preference ................. Balance, December 31 .......................................

$ 900,000 (65,000) 835,000 3,600,000 4,435,000 $1,480,000* 800,000

2,280,000 $2,155,000

*(1,500,000 – 20,000) X $1

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-65

PROBLEM 11-5B (Continued) (b) ANDES COMPANY Partial Statement of Financial Position December 31, 2014 Equity Share Capital—Preference, $100 par value, 8%, cumulative, 100,000 shares issued and outstanding ....................... Share Capital—Ordinary, $10 par value, 1,500,000 shares issued and 1,480,000 shares outstanding ............................... Share Premium—Preference .......... Share Premium—Ordinary.............. Retained earnings ......................................... Less: Treasury Shares (20,000 shares) ............................ Total Equity ........................

11-66

$10,000,000

15,000,000 500,000 1,500,000 2,155,000 280,000 $28,875,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-6B

(a)

(b)

Retained Earnings Nov. 1 Cash Dividends 500,000 Jan. 1 Balance Dec. 31 Share Dividends 400,000 Dec. 31 Net Income Dec. 31 Balance

FORTALEZA CORPORATION Retained Earnings Statement For the Year Ended December 31, 2014 Balance, January 1 ......................................... Add: Net income ........................................... Less: Cash dividends.................................... Share dividends .................................. Balance, December 31 ...................................

(c)

2,450,000 970,000 2,520,000

R$2,450,000 970,000 3,420,000 R$500,000 400,000

900,000 R$2,520,000

FORTALEZA CORPORATION Partial Statement of Financial Position December 31, 2014 ____________________________________________________________ Equity Share Capital—Preference 8%, R$100 par value, noncumulative, callable at R$125, 20,000 shares authorized, 8,000 shares issued and outstanding ......................................... R$800,000 Share Capital—Ordinary, no par, $5 stated value, 600,000 shares authorized, 400,000 shares issued and outstanding ...................... 2,000,000 Ordinary Share Dividends Distributable ........................................ 200,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-67

PROBLEM 11-6B (Continued) FORTALEZA CORPORATION (Continued) Share Premium—Preference .................. Share Premium—Ordinary ..................... Retained Earnings (see Note A) ............. Total Equity....................................... Note A: Retained R$100,000.

plant

expansion,

(d) Total dividend ........................................................................ Allocated to preference shares—current year only............. Remainder to ordinary shares ..............................................

R$500,000 64,000 R$436,000

11-68

earnings

restricted

R$ 100,000 1,220,000 2,520,000 R$6,840,000 for

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 11-7B

(a)

CRIVELLO CORPORATION Statement of Financial Position (Partial) December 31, 2014 Equity Share Capital—Preference 8%, $50 par non-cumulative, 16,000 shares issued ......................... Share Capital—Ordinary, no par, $3 stated value, 800,000 shares issued and 790,000 outstanding ........................................ Share Premium—Preference.................. Share Premium—Ordinary ..................... Share Premium—Treasury ..................... Retained Earnings .................................. Less: Treasury Shares (10,000 shares) Total Equity ......................................

$ 800,000

2,400,000 220,000 1,600,000 10,000 1,448,000 75,000 $6,403,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-69

PROBLEM 11-7B (Continued) *(b) The book value of the ordinary shares is $6.89 computed as follows: Total equity .............................................................. Less: Preference share equity Call price (16,000 X $60) ................................... Ordinary share equity .....................................................

$6,403,000

Ordinary shares outstanding .........................................

790,000

Book value per share ($5,443,000 ÷ 790,000) ................

$6.89

960,000 $5,443,000

Note: No preference dividends are assigned to the preference shares equity because the preference shares are non-cumulative.

11-70

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

COMPREHENSIVE PROBLEM SOLUTION

(a)

1. Cash ................................................................ Share Capital—Preference ..................... Share Premium—Preference .................

33,000

2. Cash ................................................................ Share Capital—Ordinary ........................ Share Premium—Ordinary .....................

6,300

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

276,000

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

36,000

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

267,000

6. Supplies .......................................................... Account Payable .....................................

26,100

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

32,200

8. Treasury Shares ............................................. Cash .........................................................

3,200

9. Other Operating Expenses ............................ Cash .........................................................

188,200

10. Cash Dividends (€1,800 + €25,250*) .............. Dividends Payable ..................................

27,050

11. Allowance for Doubtful Accounts ................. Accounts Receivable ..............................

1,300

30,000 3,000 900 5,400 276,000 36,000 267,000 26,100 32,200 3,200 188,200 27,050 1,300

*[(€50,000 ÷ €1) + 900 – 400] X €.50

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-71

COMPREHENSIVE PROBLEM SOLUTION (Continued) Adjusting Entries 1. Supplies Expense (€4,400 + €26,100 – €5,900) .. Supplies ................................................... 2. Unearned Service Revenue ........................... Service Revenue (€36,000 X 9/12) .......... 3. Bad Debt Expense €3,500 – (€1,500 – €1,300)] ....... Allowance for Doubtful Accounts .......... 4. Depreciation Expense .................................... Accumulated Depreciation—Buildings (€130,000 – €10,000) ÷ 30 ..................... 5. Income Tax Expense ...................................... Income Taxes Payable ............................ (b)

24,600 27,000 27,000 3,300 3,300 4,000 4,000 24,870 24,870

VOLTAIRE CORPORATION Adjusted Trial Balance 12/31/14 Account Cash ..................................................................... Accounts Receivable .......................................... Allowance for Doubtful Accounts ...................... Supplies ............................................................... Land ..................................................................... Buildings.............................................................. Accum. Depreciation—Buildings ....................... Accounts Payable ............................................... Income Taxes Payable ........................................ Unearned Service Revenue ................................ Dividends Payable .............................................. Share Capital—Preference ................................. Share Premium—Preference. ............................. Share Capital—Ordinary ..................................... Share Premium—Ordinary. ................................ Retained Earnings............................................... Cash Dividends ................................................... Treasury Shares .................................................. Service Revenue ................................................. Bad Debt Expense............................................... Depreciation Expense ......................................... Supplies Expense ............................................... Other Operating Expenses ................................. Income Tax Expense ........................................... Total ..................................................................

11-72

24,600

Debit €143,300 53,200

Credit €

3,500

5,900 40,000 130,000 24,000 19,500 24,870 9,000 27,050 30,000 3,000 50,900 5,400 147,400 27,050 3,200 303,000 3,300 4,000 24,600 188,200 24,870 €647,620

€647,620

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

COMPREHENSIVE PROBLEM SOLUTION (Continued) (c) Optional T Accounts

Bal.

Cash 24,600 33,000 6,300 36,000 267,000 143,300

32,200 3,200 188,200

Accum. Depreciation—Buildings Bal. 20,000 4,000 Bal. 24,000 Accounts Payable 32,200 Bal. 25,600 26,100 Bal. 19,500

Accounts Receivable 45,500 267,000 276,000 1,300 53,200

Income Taxes Payable 24,870

Allowance for Doubtful Accounts 1,300 Bal. 1,500 3,300 Bal. 3,500

Unearned Service Revenue 27,000 36,000 Bal. 9,000

Bal. Bal.

Bal.

Supplies 4,400 26,100 5,900 Land 40,000

Buildings 130,000

Dividends Payable 27,050

24,600

Share Capital—Preference 30,000

Share Premium—Preference 3,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

11-73

COMPREHENSIVE PROBLEM SOLUTION (Continued) (c)

(Continued) Share Capital—Ordinary Bal. 50,000 900 Bal. 50,900 Share Premium—Ordinary 5,400

Bad Debt Expense 3,300

Depreciation Expense 4,000

Supplies Expense 24,600 Retained Earnings 147,400 Other Operating Expenses 188,200 Cash Dividends 27,050 Income Tax Expense 24,870 Treasury Shares 3,200

Service Revenue

Bal.

11-74

276,000 27,000 303,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

COMPREHENSIVE PROBLEM SOLUTION (Continued) (d)

VOLTAIRE CORPORATION Income Statement For the Year ending 12/31/14 Service revenue ............................................ Operating expenses Supplies expense .................................. Depreciation expense ........................... Bad debt expense .................................. Other operating expenses .................... Total operating expenses ............................. Income before taxes ..................................... Income tax expense .............................. Net income ....................................................

€303,000 € 24,600 4,000 3,300 188,200 220,100 82,900 24,870 € 58,030

VOLTAIRE CORPORATION Retained Earnings Statement For the Year ending 12/31/14 Retained earnings, 1/1/14 ............................................ Add: Net income ........................................................ Less: Dividends .......................................................... Retained earnings, 12/31/14 ........................................

€147,400 58,030 205,430 27,050 €178,380

Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

11-75

COMPREHENSIVE PROBLEM SOLUTION (Continued) VOLTAIRE CORPORATION Statement of Financial Position At 12/31/2014 Assets Property, plant, and equipment Land ........................................................ Buildings ................................................ $130,000 Accumulated depreciation-building .....(24,000) Current assets Supplies ................................................. Accounts receivable ..............................53,200 Allowance for doubtful accounts ......... (3,500) Cash........................................................ Total current assets ......................... Total assets ...................................................

$40,000 106,000

$146,000

5,900 49,700 143,300 198,900 $344,900

Equity and Liabilities Equity Share capital—premium ........................ Share capital—ordinary ........................ Share premium—preference ................. Share premium—ordinary Retained earnings.................................. Less: Treasury shares (400 shares) ..... Total equity .................................. Current liabilities Accounts payable .................................. Income taxes payable ............................ Dividends payable ................................. Unearned service revenue .................... Total current liabilities .................................. Total equity and liabilities ..................................

11-76

$30,000 50,900 3,000 5,400 178,380 3,200 $264,480 19,500 24,870 27,050 9,000 80,420 $344,900

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 11-1

FINANCIAL REPORTING PROBLEM

(a) The ordinary shares of Samsung Electronics Co. has a par value of W5,000 per share. (b) There are 250,303,189 shares authorized of which 129,843,077 are issued. The percentage is 51.9% (129,843,077 ÷ 250,303,189). (c) The outstanding shares were: 2010 Shares issued and outstanding .................129,843,077

2009 128,271,387*

*148,125,121−19,853,734 (preferred stock)

Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

11-77

BYP 11-2

COMPARATIVE ANALYSIS PROBLEM

Zetar

Nestlé

(a)

Basic earnings per share

£35.1

CHF10.16

(b)

Return on ordinary

£4,482

CHF35,384

(£46,287 + £41,755)/2

CHF62,598 + CHF53,631)/2

10.2%

60.9%

shareholders’ equity

Nestlé’s return on ordinary shareholders’ equity is almost 6 times as great as Zetar’s, indicating that it is significantly more profitable in terms of ordinary shareholders investment.

(c)

11-78

Total dividends paid in most recent fiscal years

Zetar £-0-

Nestlé CHF5,443 million

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BYP 11-3

REAL-WORLD FOCUS

Answers will vary depending on company chosen by student.

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11-79

BYP 11-4

DECISION-MAKING ACROSS THE ORGANIZATION

(a) The cumulative provision means that preference shareholders must be paid both current-year dividends and unpaid prior-year dividends before ordinary shareholders receive any dividends. When preference shares are cumulative, preference dividends not declared in a given period are called dividends in arrears. (b) The market price of a share is caused by many factors. Among the factors to be considered are: (1) the corporation’s anticipated future earnings, (2) its expected dividend rate per share, (3) its current financial position, (4) the current state of the economy, and (5) the current state of the securities markets. Par value is the amount assigned to each share in the corporate charter. Par value may be any amount selected by the corporation. Generally, the amount of par value is quite low because governments often levy a tax on the corporation based on par value. Par value is not indicative of the worth or market value of the shares. The significance of par value is a legal matter. Par value represents the legal capital per share that must be retained in the business for the protection of corporate creditors. (c) A corporation may acquire treasury shares to: 1. 2. 3. 4. 5.

11-80

Reissue the shares to officers and employees under bonus or share compensation plans. Increase trading of the company’s shares in the securities market in hope of enhancing its market value. Have additional shares available for use in the acquisition of other companies. Reduce the number of shares outstanding and thereby increase earnings per share. To rid the company of disgruntled investors.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 11-4 (Continued) Treasury shares are not an asset. If treasury shares were reported as an asset, then unissued shares should also be shown as an asset, also an erroneous conclusion. Rather than being an asset, treasury shares reduce shareholder claims on corporate assets. This effect is correctly shown by reporting treasury shares as a deduction from total share capital and retained earnings.

Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

11-81

BYP 11-5

COMMUNICATION ACTIVITY

Dear Uncle Jerrod: Thanks for your recent letter and for asking me to explain four terms. Here are my explanations: 1.

Authorized shares is the total amount of shares that a corporation is given permission to sell as indicated in its charter. If all authorized shares are sold, a corporation must obtain consent from the government to amend its charter before it can issue additional shares.

Issued shares is the amount of shares that have been sold either directly to investors or indirectly through an investment banking firm.

Outstanding shares are capital shares that have been issued and are being held by shareholders.

Preference shares are capital shares that have contractual preferences over ordinary shares in certain areas.

I really enjoy my accounting classes and especially like the accounting instructors. I hope your corporation does well, and I wish you continued success with your inventions. Regards,

11-82

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 11-6

ETHICS CASE

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

The director of Hancock R&D division. The president of Hancock. The shareholders of Hancock. Those who live in the environment to be sprayed by the new (untested) chemical.

(b) The president is risking the environment and everything and everybody in it that is exposed to this new chemical in order to enhance his company’s sales and to preserve his job. Presidents and entrepreneurs frequently take risks in performing their leadership functions, but this action appears to be irresponsible and unethical. (c) A parent company may protect itself against loss and most reasonable business risks by establishing separate subsidiary corporations but whether it can insulate itself against this type of action is a matter of corporate law and criminal law.

Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

11-83

GAAP EXERCISES

GAAP 11-1 May 10 Cash (1,000 X $18) ............................................ Common Stock (1,000 X $10) ..................... Paid-in Capital in Excess of Par–Common Stock (1,000 X $8) ................

18,000 10,000 8,000

GAAP 11-2 INGRAM CORPORATION Balance Sheet (Partial) December 31, 2014 Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 5,000 shares issued and 4,500 shares outstanding .......... Additional paid-in capital In excess of par–common stock Total paid-in capital ............ Retained earnings ..................................... Total paid-in capital and retained earnings................ Less: Treasury stock (500 common shares) ............................................ Total stockholders’ equity ...................................

11-84

$50,000 10,000 $60,000 45,000 105,000 11,000 $94,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

GAAP 11-3 Mar. 2 Organization Expense ....................................... Common Stock (5,000 X $1) ....................... Paid-in Capital in Excess of Par–Common Stock ....................................

30,000

June 12 Cash ................................................................. Common Stock (60,000 X $1) ..................... Paid-in Capital in Excess of Par–Common Stock ....................................

375,000

July 11 Cash (1,000 X $110) .......................................... Preferred Stock (1,000 X $100) ........................................... Paid-in Capital in Excess of Par–Preferred Stock (1,000 X $10) .............

110,000

Nov. 28 Treasury Stock ................................................. Cash .............................................................

80,000

5,000 25,000 60,000 315,000

100,000 10,000

Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

80,000

11-85

GAAP FINANCIAL REPORTING PROBLEM GAAP 11-4 (a)

The par value of both classes of common stock is $.69 4/9.

(b)

Tootsie roll has issued 35% of the shares they are authorized

(c)

At December 31, 2010 and December 31, 2009 there were 56,454 and 55,654 shares outstanding, respectively.

(d)

At December 31, 2010:

11-86

Earnings per share

$53,714 ÷ 56,997 shares = $0.94

Return on common stockholders' equity

$53,714 ÷ [($668,954 + $655,139)/2] = 8.11%

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

CHAPTER 12 Investments ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Learning Objectives

Questions

Discuss why corporations invest in debt and share securities.

Explain the accounting for debt investments.

2, 3, 4

Explain the accounting for share investments.

5, 6, 7, 8, 9, 10

2, 3

Describe the use of consolidated financial statements.

Indicate how debt and share investments are reported in financial statements.

12, 13, 14, 15, 16, 17

4, 5, 6, 7, 8

Distinguish between short-term and long-term investments.

18, 19

5, 7, 8

*7.

Explain the form and content of consolidated financial statements as well as how to prepare them.

20, 21

9, 10

Note:

Do It!

A Problems

B Problems

2, 3

1A, 2A

1B, 2B

4, 5, 6, 7, 8

2A, 3A, 4A, 5A

2B, 3B, 4B, 5B

8, 10, 11, 12

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

1B, 2B, 3B, 5B, 6B

10, 11, 12

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

1B, 2B, 3B, 5B, 6B

13, 14

Exercises 1

All asterisked Question, Exercises, and Problems relate to material contained in the appendix to the chapter.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Journalize debt investment transactions and show financial statement presentation.

Moderate

30–40

Journalize investment transactions, prepare adjusting entry, and show statement presentation.

Moderate

30–40

Journalize transactions and adjusting entry for share investments.

Moderate

30–40

Prepare entries under the cost and equity methods, and tabulate differences.

Simple

20–30

Journalize share investment transactions and show statement presentation.

Moderate

40–50

Prepare a statement of financial position.

Moderate

30–40

*7A

Prepare consolidated worksheet and statement of financial position when cost exceeds book value.

Simple

30–40

Journalize debt investment transactions and show financial statement presentation.

Moderate

30–40

Journalize investment transactions, prepare adjusting entry, and show statement presentation.

Moderate

30–40

Journalize transactions and adjusting entry for share investments.

Moderate

30–40

Prepare entries under the cost and equity methods, and tabulate differences.

Simple

20–30

Journalize share investment transactions and show statement presentation.

Moderate

40–50

Prepare a statement of financial position.

Moderate

30–40

*7B

Prepare consolidated worksheet and statement of financial position when cost exceeds book value.

Simple

30–40

12-2

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

WEYGANDT FINANCIAL ACCOUNTING, IFRS EDITION, 2e CHAPTER 12 INVESTMENTS Number

Difficulty

Time (min.)

BE1

Simple

2–4

BE2

Simple

3–5

BE3

Simple

3–5

BE4

Simple

2–3

BE5

5, 6

Simple

2–4

BE6

Simple

2–3

BE7

5, 6

Simple

2–4

BE8

5, 6

Simple

3–5

*BE9

Simple

3–5

*BE10

Simple

3–5

DI1

Moderate

6–8

DI2

Simple

6–8

DI3

Simple

4–6

DI4

Simple

4–6

EX1

Simple

8–10

EX2

Moderate

8–10

EX3

Moderate

8–10

EX4

Simple

8–10

EX5

Simple

6–8

EX6

Simple

8–10

EX7

Simple

6–8

EX8

3, 5

Simple

8–10

EX9

Simple

6–8

EX10

5, 6

Simple

4–6

EX11

5, 6

Simple

8–10

EX12

5, 6

Simple

6–8

*EX13

Simple

3–5

*EX14

Simple

4–6

P1A

2, 5, 6

Moderate

30–40

P2A

2, 3, 5, 6

Moderate

30–40

P3A

3, 5, 6

Moderate

30–40

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-3

INVESTMENTS (Continued) Number

Difficulty

Time (min.)

P4A

Simple

20–30

P5A

3, 5, 6

Moderate

40–50

P6A

5, 6

Moderate

30–40

*P7A

Moderate

20–30

P1B

2, 5, 6

Moderate

30–40

P2B

2, 3, 5, 6

Moderate

30–40

P3B

3, 5, 6

Moderate

30–40

P4B

Simple

20–30

P5B

3, 5, 6

Moderate

40–50

P6B

5, 6

Moderate

30–40

*P7B

Moderate

20–30

BYP1

Simple

10–15

BYP2

Simple

10–15

BYP3

—

Simple

10–15

BYP4

Moderate

15–20

BYP5

Simple

5–10

BYP6

Simple

10–15

12-4

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Learning Objective

Knowledge

Comprehension

Application

Analysis

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

1. Discuss why corporations invest in debt and share securities.

Q12-1

E12-1

2. Explain the accounting for debt investments.

Q12-2

Q12-3 Q12-4

BE12-1 DI12-1

E12-2 E12-3

P12-1A P12-2A

P12-1B P12-2B

3. Explain the accounting for share investments.

Q12-7

Q12-5 Q12-8 Q12-9 Q12-10

Q12-6 BE12-2 BE12-3 DI12-2 E12-4

E12-5 E12-6 E12-7 E12-8

P12-2A P12-3A P12-4A P12-5A

P12-2B P12-3B P12-4B P12-5B

4. Describe the use of consolidated Q12-11 financial statements.

E12-9

5. Indicate how debt and share investments are reported in financial statements.

Q12-13

Q12-14 Q12-16 BE12-4 BE12-7 BE12-8 E12-8 P12-6A P12-6B

Q12-15 BE12-5 BE12-6 DI12-3 E12-10 E12-11 E12-12 P12-1A

P12-2A P12-3A P12-5A P12-1B P12-2B P12-3B P12-5B

6. Distinguish between short-term and long-term investments.

Q12-18 Q12-19 DI12-4

BE12-7 BE12-8 P12-6A P12-6B

BE12-5 E12-10 E12-11 E12-12 P12-1A P12-2A

P12-3A P12-5A P12-1B P12-2B P12-3B P12-5B

*7. Explain the form and content of consolidated financial statements as well as how to prepare them.

Q12-20 Q12-21

BE12-9 P12-7A BE12-10 P12-7B E12-13 E12-14

Broadening Your Perspective

Financial Reporting Real-World Focus Decision-Making Across the Organization Communication

Q12-12 Q12-17

Comparative Analysis

Synthesis Evaluation

Ethics Case

BLOOM’ S TAXONOMY TABLE

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

12-5

ANSWERS TO QUESTIONS 1.

The reasons corporations invest in securities are: (1) excess cash not needed for operations that can be invested, (2) for additional earnings, and (3) strategic reasons.

(a) The cost of an investment in bonds consists of all expenditures necessary to acquire the bonds, such as the market price of the bonds plus any brokerage fees. (b) Interest is recorded as it is earned; that is, over the life of the investment in bonds.

(a) Losses and gains on the sale of debt investments are computed by comparing the cost of the investment to the net proceeds from the sale. (b) Gains and losses are reported in the income statement under other income and expense.

Kolkata Company is incorrect. The gain is the difference between the net proceeds, exclusive of interest, and the cost of the bonds. The correct gain is Rs4,500, or [(Rs45,000 – Rs500) – Rs40,000].

The cost of an investment in shares includes all expenditures necessary to acquire the investment. These expenditures include the actual purchase price plus any commissions or brokerage fees.

The entry is: Share Investments ..................................................................................... Cash ..................................................................................................

63,200 63,200

(a) Whenever the investor’s influence on the operating and financial affairs of the associate is significant, the equity method should be used. The major factor in determining significant influence is the percentage of ownership interest held by the investor in the investee. The general guideline for use of the equity method is 20%–50% ownership interest. Companies are required to use judgment, however, rather than blindly follow the 20%–50% guideline. (b) Revenue is recognized by the investor as it is earned by the associate.

Since Rijo Corporation uses the equity method, the income reported by Pippen Packing (€80,000) should be multiplied by Rijo’s ownership interest (30%) and the result (€24,000) should be debited to Share Investments and credited to Revenue from Share Investments. Also, of the total dividend declared and paid by Pippen (€10,000) Rijo will receive 30% or €3,000. This amount should be debited to Cash and credited to Share Investments.

Significant influence over an associate may result from representation on the board of directors, participation in policy-making processes, material intercompany transactions. One must also consider whether the shares held by other shareholders is concentrated or dispersed. An investment (direct or indirect) of 20%–50% of the voting shares of an associate constitutes significant influence unless there exists evidence to the contrary.

12-6

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Questions Chapter 12 (Continued) 10. Under the cost method, an investment is originally recorded and reported at cost. Dividends are recorded as revenue. In subsequent periods, it is adjusted to fair value and an unrealized gain or loss is recognized and included in income (trading security) or as a separate component of equity (non-trading security). Under the equity method, the investment is originally recorded and reported at cost; subsequently, the investment account is adjusted during each period for the investor’s share of the earnings or losses of the associate. The investor’s share of the associate’s earnings is recognized in the earnings of the investor. Dividends received from the associate are reductions in the carrying amount of the investment. 11. Consolidated financial statements present the details of the assets and liabilities controlled by the parent company and the total revenues and expenses of the affiliated companies. Consolidated financial statements are especially useful to the shareholders, board of directors, and management of the parent company. 12. Companies classify debt investments into two categories 1. Trading securities are bought and held primarily for sale in the near term to generate income on short-term price differences. 2. Held-for-collection securities are debt securities that the investor has the intent and ability to hold to maturity. Share investments are classified either as trading or non-trading securities. Share investments have no maturity date and therefore are never classified as held-for-collection securities. Investments recorded under the equity method are reported at their carrying value. The carrying value is the cost adjusted for the investor’s share of the associate’s income and dividends received. 13. Tina should report as follows: (1) Under current assets in the statement of financial position: Short-term investment, at fair value .......................................................... (2) Under other income and expense in the income statement: Unrealized loss—income ..........................................................................

$70,000 $ 4,000

14. Tina should report as follows: (1) Under investments in the statement of financial position: Investments in shares of less than 20% owned companies, at fair value .. (2) Under equity in the statement of financial position: Less: Unrealized loss on non-trading securities.......................................

$70,000 $ 4,000

15. The entry is: Fair Value Adjustment—Non-Trading ....................................................... Unrealized Gain or Loss—Equity ......................................................

10,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

10,000

12-7

Questions Chapter 12 (Continued) 16. The entry is: Fair Value Adjustment—Trading ............................................................... Unrealized Gain—Income .................................................................

10,000 10,000

17. Unrealized Loss—Equity is reported as a deduction from equity. The unrealized loss is not included in the computation of net income. 18. Reporting Unrealized Gains (Losses)—Equity in the equity section serves two important purposes: (1) it reduces the volatility of net income due to fluctuations in fair value, and (2) it still informs the financial statement user of the gain or loss that would occur if the securities were sold at fair value. 19. No. The investment in Key Corporation shares is a long-term investment because there is no intent to convert the shares into cash within a year or the operating cycle, whichever is longer. *20. (a) The parent company’s investment in the subsidiary’s ordinary shares and the subsidiary’s equity account balances are eliminated. (b) The investment account represents an interest in the assets of the subsidiary. The statement of financial position of the subsidiary lists all its assets and liabilities (the net assets). Therefore, there would be a double counting of net assets. Similarly, there would be a double counting in equity because all the ordinary shares of the subsidiary are owned by the shareholders of the parent. *21. The remaining excess of HK$8,000,000 [HK$318,000,000 – (HK$290,000,000 + HK$20,000,000)] should be allocated to goodwill and presented in the consolidated statement of financial position as an intangible asset—Goodwill.

12-8

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 12-1 Jan. 1 July 1

Debt Investments ............................................. Cash ..........................................................

52,000

Cash .................................................................. Interest Revenue.......................................

2,340

52,000 2,340

BRIEF EXERCISE 12-2 Aug. 1 Dec. 1

Share Investments ........................................... Cash ..........................................................

35,700

Cash .................................................................. Share Investments.................................... Gain on Sale of Share Investments .........

40,000

35,700 35,700 4,300

BRIEF EXERCISE 12-3 Dec. 31 31

Share Investments (25% X €180,000) .............. Revenue from Share Investments ...........

45,000

Cash (25% X €50,000) ...................................... Share Investments....................................

12,500

45,000 12,500

BRIEF EXERCISE 12-4 Dec. 31

Unrealized Loss—Income................................ Fair Value Adjustment—Trading ($62,000 – $59,000) ...............................

3,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

3,000

12-9

BRIEF EXERCISE 12-5 Statement of Financial Position Current assets Short-term investments, at fair value .............................

$59,000

Income Statement Other income and expense Unrealized loss—income.................................................

3,000

BRIEF EXERCISE 12-6 Dec. 31

Unrealized Gain or Loss—Equity .......................... Fair Value Adjustment— Non-Trading ..........

6,000 6,000

BRIEF EXERCISE 12-7 Statement of Financial Position Investments Investments in shares of less than 20% owned companies, at fair value ....................................................

$66,000

Equity Less: Unrealized loss on non-trading securities ................

$ 6,000

BRIEF EXERCISE 12-8 Investments Investments in shares of less than 20% owned companies, at fair value .................................................... Investment in shares of 20–50% owned company, at equity .............................................................................. Total investments ...........................................................

12-10

$115,000 270,000 $385,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

*BRIEF EXERCISE 12-9 Eliminations Paula Company Investment in Shannon Ordinary Shares Share Capital Retained Earnings

Shannon Company

Dr.

190,000

Cr.

Consolidated Data

190,000 120,000 70,000

0 0 0

120,000 70,000

*BRIEF EXERCISE 12-10 Eliminations Paula Company Investment in Shannon Ordinary Shares Excess of Cost Over Book Value of Subsidiary Share Capital Retained Earnings

Shannon Company

Dr.

200,000

120,000 70,000

Cr.

Consolidated Data

200,000

10,000 120,000 70,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

10,000 0 0

12-11

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 12-1 (a) Jan. July

July

1 1

(b) Dec. 31

Debt Investments ..................................... Cash ....................................................

50,000

Cash.......................................................... Interest Revenue (£50,000 × 12% × 6/12) .....................

3,000

Cash.......................................................... Loss on Sale of Debt Investments .......... Debt Investments (£50,000 × 30/50) ..............................

29,200 800

Interest Receivable .................................. Interest Revenue (£20,000 × 12% × 6/12) .....................

1,200

50,000

3,000

30,000

1,200

DO IT! 12-2 (1) June 17

Sept. 3 (2) Jan.

May 15 Dec. 31

12-12

Share Investments [(500,000 × 10%) × $11] .......................... Cash ..................................................... Cash........................................................... Dividend Revenue ............................... Share Investments [(100,000 × 30% × $18] ......................... Cash .....................................................

550,000 550,000 16,000 16,000 540,000 540,000

Cash........................................................... Share Investments...............................

45,000

Share Investments .................................... Revenue from Share Investments .......

81,000

45,000 81,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

DO IT! 12-3 Trading securities: Unrealized Loss—Income ................................................. Fair Value Adjustment—Trading .................................

13,600* 13,600

*¥11,400 + ¥2,200 Non-trading securities: Fair Value Adjustment—Non-Trading ................................ 11,950** Unrealized Gain or Loss—Equity ................................

11,950

**¥7,750 + ¥4,200 DO IT! 12-4

1. 2. 3. 4. 5.

Item Loss on sale of investments in shares. Unrealized gain on nontrading securities. Fair value adjustment— trading. Interest earned on investments in bonds. Unrealized loss on trading securities.

Financial statement Income statement Statement of financial position Statement of financial position Income statement Income statement

Category Other income and expense Equity Current assets Other income and expense Other income and expense

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-13

SOLUTIONS TO EXERCISES EXERCISE 12-1 1.

Companies purchase investments in debt or share securities because they have excess cash, to generate earnings from investment income, or for strategic reasons.

A corporation would have excess cash that it does not need for operations due to seasonal fluctuations in sales and as a result of economic cycles.

The typical investment when investing cash for short periods of time is low-risk, high liquidity, short-term securities such as government-issued securities.

The typical investments when investing cash to generate earnings are debt securities and share securities.

A company would invest in securities that provide no current cash flows for speculative reasons. They are speculating that the investment will increase in value.

The typical share investment when investing cash for strategic reasons is shares of companies in a related industry or in an unrelated industry that the company wishes to enter.

EXERCISE 12-2 (a) Jan. July

1 1 1

12-14

Debt Investments ..................................... Cash ..................................................

50,000

Cash ($50,000 X 8% X 1/2) ....................... Interest Revenue ..............................

2,000

Cash.......................................................... Debt Investments ($50,000 X 3/5) .............................. Gain on Sale of Debt Investments ($33,500 – $30,000) .......................

33,500

50,000 2,000

30,000 3,500

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 12-2 (Continued) (b) Dec. 31

Interest Receivable ................................... Interest Revenue ($20,000 X 8% X 1/2) ......................

800 800

EXERCISE 12-3 January 1, 2014 Debt Investments .............................................................. Cash............................................................................

70,000

July 1, 2014 Cash (€70,000 X 12% X 6/12) ............................................ Interest Revenue ........................................................

4,200

December 31, 2014 Interest Receivable............................................................ Interest Revenue ........................................................

4,200

January 1, 2015 Cash ................................................................................... Interest Receivable ....................................................

4,200

January 1, 2015 Cash ................................................................................... Debt Investments (40/70 X €70,000) ......................... Gain on Sale of Debt Investments ............................

70,000

4,200

4,200 40,100

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

40,000 100

12-15

EXERCISE 12-4 (a) Feb. 1 July 1 Sept. 1

Dec. 1

Share Investments ................................... Cash ..................................................

6,200

Cash (600 X $1) ........................................ Dividend Revenue ............................

600

Cash.......................................................... Share Investments ($6,200 X 3/6) ................................ Gain on Sale of Share Investments ($4,300 – $3,100) ...........................

4,300

Cash (300 X $1) ........................................ Dividend Revenue ............................

300

6,200 600

3,100 1,200 300

(b) Dividend revenue and the gain on sale of share investments are reported under other income and expense in the income statement. EXERCISE 12-5 Jan. 1 July 1 Dec. 1

Dec. 31

12-16

Share Investments .......................................... Cash..........................................................

142,100

Cash (2,500 X €3) ............................................. Dividend Revenue....................................

7,500

Cash ................................................................. Share Investments (€142,100 X 1/5) ....... Gain on Sale of Share Investments ........

31,200

Cash (2,000 X €3) ............................................. Dividend Revenue....................................

6,000

142,100 7,500 28,420 2,780 6,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 12-6 February 1 Share Investments ............................................................ Cash (500 X $30.80) ...................................................

15,400

March 20 Cash ................................................................................... Loss on Sale of Share Investments ................................. Share Investments ($15,400 X 100/500)....................

2,850 230

April 25 Cash (400 X $1.00) ............................................................. Dividend Revenue......................................................

400

June 15 Cash ................................................................................... Share Investments ($15,400 X 200/500).................... Gain on Sale of Share Investments ..........................

15,400

3,080

400 7,310 6,160 1,150

July 28 Cash (200 X $1.25) ............................................................. Dividend Revenue......................................................

250 250

EXERCISE 12-7 (a) Jan. 1 Dec. 31 31

Share Investments.................................... Cash ...................................................

180,000

Cash (₤60,000 X 25%) ............................... Share Investments ............................

15,000

Share Investments.................................... Revenue from Share Investments (₤200,000 X 25%) .............................

50,000

180,000 15,000

(b) Investment in Morelli, January 1......................................... Less: Dividend received ..................................................... Plus: Share of reported income ........................................ Investment in Morelli, December 31 ...................................

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

50,000 ₤180,000 15,000 50,000 ₤215,000

12-17

EXERCISE 12-8 1.

2014 Mar. 18 June 30

Dec. 31

Jan.

June 15

Dec. 31

Share Investments.................................. Cash (200,000 X 15% X $13) ...........

390,000

Cash ........................................................ Dividend Revenue ($60,000 X 15%) ...........................

9,000

Fair Value Adjustment—Non-Trading ... Unrealized Gain or Loss—Equity ($450,000 – $390,000) ..................

60,000

Share Investments.................................. Cash (30,000 X 30% X $9) ...............

81,000

Cash ........................................................ Share Investments ($30,000 X 30%) ...........................

9,000

Share Investments.................................. Revenue from Share Investments ($80,000 X 30%) ...........................

24,000

390,000

9,000

60,000

81,000

9,000

24,000

EXERCISE 12-9 (a) Since Edna owns more than 50% of the ordinary shares of Damen Corporation, Edna is called the parent company. Damen is the subsidiary (affiliated) company. Because of its share ownership, Edna has a controlling interest in Damen. (b) When a company owns more than 50% of the ordinary shares of another company, consolidated financial statements are usually prepared. Consolidated financial statements present the total assets and liabilities controlled by the parent company. They also present the total revenues and expenses of the affiliated companies. (c) Consolidated financial statements are useful because they indicate the magnitude and scope of operations of the companies under common control.

12-18

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 12-10 (a) Dec. 31

Unrealized Loss—Income ............................. Fair Value Adjustment—Trading ..........

(b)

4,000 4,000

Statement of Financial Position Current assets Short-term investments, at fair value .....................

CHF49,000

Income Statement Other income and expense Unrealized loss on trading securities .....................

CHF 4,000

EXERCISE 12-11 (a) Dec. 31

Unrealized Gain or Loss—Equity ................. Fair Value Adjustment—Non-Trading .

(b)

4,000 4,000

Statement of Financial Position Investments Investments in shares of less than 20% owned companies, at fair value .......................................

CHF49,000

Equity Less: Unrealized loss on non-trading securities ......................................................

CHF 4,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-19

EXERCISE 12-11 (Continued) (c) Dear Ms. Devonshire: Investments which are classified as trading (held for sale in the near term) are reported at fair value in the statement of financial position, with unrealized gains or losses reported in net income. Share investments which are classified as non-trading (held longer than trading) are also reported at fair value, but unrealized gains or losses are reported in the equity section. Fair value is used as a reporting basis because it represents the cash realizable value of the securities. Unrealized gains or losses on trading investments are reported in the income statement because of the likelihood that the securities will be sold at fair value in the near term. Unrealized gains or losses on non-trading securities are reported in equity rather than in income because there is a significant chance that future changes in fair value will reverse unrealized gains or losses. So as to not distort income with these fluctuations, they are reported directly in equity. I hope that the preceding discussion clears up any misunderstandings. Please contact me if you have any questions. Sincerely, Student

12-20

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 12-12 (a) Fair Value Adjustment—Trading ($124,000 – $120,000) .................................................... Unrealized Gain—Income .......................................... Unrealized Gain or Loss—Equity ..................................... Fair Value Adjustment—Non-Trading ....................... (b)

4,000 4,000 6,000 6,000

Statement of Financial Position Current assets Short-term investments, at fair value ....................... Investments Investments in shares of less than 20% owned companies, at fair value ......................................... Equity Less: Unrealized loss on non-trading securities ......................................................... Income Statement Other income and expense Unrealized gain on trading securities .......................

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

$124,000 94,000 $

6,000

4,000

12-21

*EXERCISE 12-13 LENNON COMPANY AND SUBSIDIARY Worksheet—Consolidated Statement of Financial Position January 1, 2014 Lennon Ono Eliminations Consolidated Assets Company Inc. Dr. Cr. Data Plant and equipment (net) 300,000 220,000 520,000 Investment in Ono Inc. ordinary shares 220,000 220,000 0 Current assets 60,000 50,000 110,000 Totals 580,000 270,000 630,000 Equity and liabilities Share capital— Lennon Co. Share capital— Ono Inc. Retained earnings— Lennon Co. Retained earnings— Ono Inc. Current liabilities Totals

12-22

230,000

230,000 80,000

80,000

170,000 180,000 580,000

170,000 140,000 50,000 270,000

140,000 220,000

220,000

0 230,000 630,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

*EXERCISE 12-14 LENNON CORPORATION AND SUBSIDIARY Worksheet—Consolidated Statement of Financial Position January 1, 2014 Assets Plant and equipment (net) Investment in Ono Inc. ordinary shares Current assets Excess of cost over book value Totals

Lennon Corporation

Ono Inc.

300,000

220,000

225,000 55,000

Eliminations Dr. Cr.

Consolidated Data 520,000

225,000 50,000 5,000

580,000

0 105,000 5,000 630,000

270,000

Equity and liabilities Share capital— Lennon Co. Share capital— Ono Inc. Retained earnings— Lennon Co. Retained earnings— Ono Inc. Current liabilities Totals

230,000

230,000 80,000

80,000

170,000 180,000 580,000

170,000 140,000 50,000 270,000

140,000 225,000

225,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

0 230,000 630,000

12-23

SOLUTIONS TO PROBLEMS .

PROBLEM 12-1A

(a) 2014 Jan. 1 July 1 Dec. 31

2017 Jan. 1 1

July 1 Dec. 31

12-24

Debt Investments .................................. 2,000,000 Cash ............................................... 2,000,000 Cash (HK$2,000,000 X .08 X 1/2) .......... Interest Revenue ...........................

80,000

Interest Receivable ............................... Interest Revenue ...........................

80,000

Cash....................................................... Interest Receivable .......................

80,000

80,000 80,000

80,000

Cash (HK$1,000,000 X 1.06) ................. 1,060,000 Debt Investments .......................... 1,000,000 Gain on Sale of Debt Investments ............................... 60,000 Cash (HK$1,000,000 X .08 X 1/2) .......... Interest Revenue ...........................

40,000

Interest Receivable ............................... Interest Revenue ...........................

40,000

40,000 40,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 12-1A (Continued) (b)

Statement of Financial Position Current assets Interest receivable....................................................... HK$ 80,000 Investments Debt investments, at fair value................................... HK$2,000,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-25

PROBLEM 12-2A

(a) Feb. 1 Mar. 1 Apr. 1 July 1 Aug. 1

Sept. 1 Oct. 1 1

Share Investments ................................... Cash ..................................................

32,400

Share Investments ................................... Cash ..................................................

20,400

Debt Investments ..................................... Cash ..................................................

50,000

Cash ($.60 X 600) ..................................... Dividend Revenue ............................

360

Cash ($57 X 200) ...................................... Share Investments [($32,400 ÷ 600) X 200] ................. Gain on Sale of Share Investments ..................................

11,400

Cash ($1 X 800) ........................................ Dividend Revenue ............................

800

Cash ($50,000 X 7% X 1/2) ....................... Interest Revenue ..............................

1,750

Cash.......................................................... Loss on Sale of Debt Investments ($50,000 – $49,000) .............................. Debt Investments .............................

49,000

Share Investments Feb. 1 32,400 Aug. 1 Mar. 1 20,400 Dec. 31 Bal. 42,000

12-26

10,800

Apr. 1 Dec. 31 Bal.

32,400 20,400 50,000 360

10,800 600 800 1,750

1,000 50,000

Debt Investments 50,000 Oct. 1

50,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 12-2A (Continued) (b) Dec. 31

Unrealized Loss—Income ......................... Fair Value Adjustment—Trading ($42,000 – $41,200) .........................

Security Superior ordinary shares Pawlik ordinary shares

800

Cost

Fair Value

$21,600

$22,000

(400 X $55)

20,400 $42,000

19,200 $41,200

(800 X $24)

(c) Current assets Short-term investments, at fair value .............................. (d) Income Statement Account Dividend Revenue Gain on Sale of Share Investments Interest Revenue Loss on Sale of Debt Investments Unrealized Loss—Income

800

$41,200

Category Other income and expense Other income and expense Other income and expense Other income and expense Other income and expense

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-27

PROBLEM 12-3A

(a) July 1 Aug. 1 Sept. 1

Oct. 1

Nov. 1 Dec. 15 31

2014 Cash (5,000 X ₤1) ..................................... Dividend Revenue ............................

5,000

Cash (2,000 X ₤0.50) ................................ Dividend Revenue ............................

1,000

Cash (1,500 X ₤8) ..................................... Loss on Sale of Share Investments (₤13,500 – ₤12,000) .............................. Share Investments (1,500 X ₤9) .......

12,000

Cash (800 X ₤33) ...................................... Share Investments (800 X ₤30) ........ Gain on Sale of Share Investments (₤26,400 – ₤24,000) .......................

26,400

Cash (1,500 X ₤1) ..................................... Dividend Revenue ............................

1,500

Cash (1,200 X ₤0.50) ................................ Dividend Revenue ............................

600

Cash (3,500 X ₤1) ..................................... Dividend Revenue ............................

3,500

2014 Jan. 1 Balance 2014 Dec. 31 Balance

12-28

Share Investments 2014 135,000 Sept. 1 Oct. 1

5,000 1,000

1,500 13,500 24,000 2,400 1,500 600 3,500

13,500 24,000

97,500

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PROBLEM 12-3A (Continued) (b) Dec. 31

Unrealized Gain or Loss—Equity (₤97,500 – ₤93,400) ................................... Fair Value Adjustment—Non-Trading..

Security Carlene Co. common Riverdale Co. common Raczynski Co. common

Cost ₤36,000 31,500 30,000 ₤97,500

Fair Value ₤38,400 28,000 27,000 ₤93,400

(c) Investments Investments in shares of less than 20% owned companies, at fair value ................................................... Equity Share capital—ordinary ........................ Retained earnings ................................. Less: Unrealized loss on non-trading securities ................................... Total equity ....................................

4,100 4,100

(1,200 × £32) (3,500 × £ 8) (1,500 × £18)

₤

93,400

₤1,500,000) 1,000,000) 4,100 ₤2,495,900

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12-29

PROBLEM 12-4A

(a) Jan.

Mar. 15

June 15 Sept. 15 Dec. 15 31

(b) Jan.

Mar. 15 June 15 Sept. 15 Dec. 15

12-30

Share Investments................................ Cash ...............................................

800,000

Cash ...................................................... Dividend Revenue (45,000 X $0.30) .........................

13,500

Cash ...................................................... Dividend Revenue .........................

13,500

Cash ...................................................... Dividend Revenue .........................

13,500

Cash ...................................................... Dividend Revenue .........................

13,500

Fair Value Adjustment—Trading ......... Unrealized Gain—Income [$800,000 – ($24 X 45,000)] .......

280,000

Share Investments................................ Cash ...............................................

800,000

Cash ...................................................... Share Investments ........................

13,500

Cash ...................................................... Share Investments ........................

13,500

Cash ...................................................... Share Investments ........................

13,500

Cash ...................................................... Share Investments ........................

13,500

800,000

13,500 13,500 13,500 13,500

280,000 800,000 13,500 13,500 13,500 13,500

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 12-4A (Continued) Dec. 31

Share Investments ............................... Revenue from Share Investments ($320,000 X 30%) .......................

(c)

Share Investments Unrealized Gain—Income Dividend Revenue Revenue from Share Investments

96,000 96,000

Cost Method

Equity Method

$1,080,000* 280,000 54,000 0

$842,000** 0 96,000

**$24 X 45,000 shares **$800,000 + $96,000 – $54,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-31

PROBLEM 12-5A

(a) Jan. 20

28 30

Feb. 8 18

July 30 Sept. 6 Dec. 1

(b)

12-32

Cash.......................................................... Share Investments ........................... Gain on Sale of Share Investments ..................................

54,400

Share Investments ................................... Cash (400 X R$79.20) .......................

31,680

Cash.......................................................... Dividend Revenue (R$1.15 X 1,400) ............................

1,610

Cash.......................................................... Dividend Revenue (R$0.40 X 1,200)

480

Cash (R$26.70 X 1,200) ............................ Loss on Sale of Share Investments ........ Share Investments ...........................

32,040 1,560

Cash.......................................................... Dividend Revenue (R$1.00 X 1,400)

1,400

Share Investments ................................... Cash (R$82 X 900) ............................

73,800

Cash.......................................................... Dividend Revenue (R$1.50 X 1,300) ............................

1,950

Share Investments 1/1 Bal. 169,600 1/20 1/28 31,680 2/18 9/6 73,800 12/31 Bal. 189,480

52,000 2,400 31,680

1,610 480

33,600 1,400 73,800

1,950

52,000 33,600

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 12-5A (Continued) (c) Dec. 31

Unrealized Gain or Loss—Equity ................ Fair Value Adjustment—Non-Trading (R$189,480 – R$183,200) ..................

Security Elderberry Corporation ordinary Hachito Corporation ordinary

Cost

6,280

Fair Value

R$ 84,000

R$ 89,600 (1,400 X R$64)

105,480 R$189,480

93,600 (1,300 X R$72) R$183,200

(d) Investments Investments in shares of less than 20% owned companies, at fair value ........................................... Equity Total share capital and retained earnings .................. Less: Unrealized loss on non-trading securities ........................................................... Total equity ...........................................................

6,280

R$183,200 xxxxx 6,280 R$ xxxxx

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-33

PROBLEM 12-6A

RADAR CORPORATION Statement of Financial Position December 31, 2014 Assets Intangible assets Goodwill ..........................................................

$200,000

Property, plant, and equipment Land ................................................... $390,000 Buildings ........................................... $950,000 Less: Accumulated depr.— buildings ........................................ 180,000 770,000 Equipment ......................................... 275,000 Less: Accumulated depr.— Equipment ........................................... 52,000 223,000

1,383,000

Investments Investments in shares of less than 20% owned companies, at fair value ................. Investment in shares of 20%–50% owned company, at equity ......................... Current assets Prepaid Insurance ............................. Inventory ........................................... Accounts receivable ......................... Less: Allowance for doubtful accounts .................................... Short-term investments, at fair value ............................... Cash ................................................... Total assets...............................................

12-34

286,000 380,000

666,000

16,000 170,000 140,000 6,000

134,000 180,000 42,000

542,000 $2,791,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 12-6A (Continued) RADAR CORPORATION Statement of Financial Position (Continued) December 31, 2014 Equity and Liabilities Equity Share capital—ordinary, $10 par value, 500,000 shares authorized 150,000 shares issued and outstanding ............................... $1,500,000 Share premium—ordinary ................ 130,000 $1,630,000 Retained earnings……………………. 103,000 Add: Unrealized gain on Non-trading securities ........... 8,000 $1,741,000 Non-current liabilities Bonds payable, 10%, due 2020 Current liabilities Notes payable ................................... Accounts payable ............................. Income taxes payable ....................... Dividends payable ............................ Total equity and liabilities........................

540,000 70,000 240,000 120,000 80,000

510,000 $2,791,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-35

*PROBLEM 12-7A

(a)

2014 Dec. 31 Share Investments Current Assets

(b)

1,225,000 1,225,000

LIU CORPORATION AND SUBSIDIARY Worksheet—Consolidated Statement of Financial Position December 31, 2014 Assets Plant and equipment (net) Investment in Yang Plastics ordinary shares Current assets Excess of cost over book value of subsidiary Totals

Liu Corporation

Yang Plastics

Eliminations Dr. Cr.

2,100,000

676,000

86,000

1,225,000 255,000

435,500

3,580,000

1,111,500

Consolidated Data 2,862,000

1,225,000

120,000

0 690,500

120,000 3,672,500

Equity and liabilities Share capital—Liu Corporation Share capital—Yang Plastics Retained earnings— Liu Corporation Retained earnings— Yang Plastics Current liabilities Totals

12-36

1,950,000

1,950,000 525,000

525,000

1,052,000

578,000 3,580,000

1,052,000 494,000 92,500 1,111,500

494,000 1,225,000

1,225,000

0 670,500 3,672,500

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

*PROBLEM 12-7A (Continued) (c)

LIU CORPORATION AND SUBSIDIARY Consolidated Statement of Financial Position December 31, 2014 Assets Goodwill (¥206,000 − ¥86,000) ........................ Plant and equipment, net (¥2,776,000 + ¥86,000) Current assets ................................................. Total assets .............................................. Equity and Liabilities Equity ............................................................... Share capital—ordinary ........................... Retained earnings .................................... Current liabilities ............................................. Total equity and liabilities ...................

¥ 120,000 2,862,000 690,500 ¥3,672,500

¥1,950,000 1,052,000

¥3,002,000 670,500 ¥3,672,500

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-37

PROBLEM 12-1B

(a) 2014 Jan. 1 July 1 Dec. 31

2017 Jan. 1 1

July 1 Dec. 31

12-38

Debt Investments ................................. Cash ..............................................

400,000

Cash ($400,000 X .09 X 1/2) ................. Interest Revenue ..........................

18,000

Interest Receivable .............................. Interest Revenue ..........................

18,000

Cash...................................................... Interest Receivable ......................

18,000

Cash ($200,000 X 1.14) ........................ Debt Investments ......................... Gain on Sale of Debt Investments ..............................

228,000

Cash ($200,000 X .09 X 1/2) ................. Interest Revenue ..........................

9,000

Interest Receivable .............................. Interest Revenue ..........................

9,000

400,000 18,000 18,000

18,000 200,000 28,000 9,000 9,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 12-1B (Continued) (b)

Statement of Financial Position Current assets Interest receivable......................................................

$ 18,000

Investments Debt investments, at fair value..................................

$400,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-39

PROBLEM 12-2B

(a) Feb. 1 Mar. 1 Apr. 1 July 1 Aug. 1

Sept. 1 Oct. 1 1

Share Investments ..................................... Cash ....................................................

30,800

Share Investments ..................................... Cash ....................................................

20,300

Debt Investments ....................................... Cash ....................................................

40,000

Cash ($0.60 X 500) ..................................... Dividend Revenue ..............................

300

Cash............................................................ Gain on Sale of Share Investments .. Share Investments [($30,800 ÷ 500) X 300] ...................

20,700

Cash ($1 X 600) .......................................... Dividend Revenue ..............................

600

Cash ($40,000 X 9% X 1/2) ......................... Interest Revenue ................................

1,800

Cash............................................................ Debt Investments ............................... Gain on Sale of Debt Investments ($44,000 – $40,000) .........................

44,000

Share Investments Feb. 1 30,800 Aug. 1 Mar. 1 20,300 Dec. 31 Bal. 32,620

12-40

18,480

Apr. 1 Dec. 31 Bal.

30,800 20,300 40,000 300 2,220 18,480 600 1,800 40,000 4,000

Debt Investments 40,000 Oct. 1

40,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 12-2B (Continued) (b) Dec. 31

Unrealized Loss—Income ........................ Fair Value Adjustment—Trading ......

Security Joy ordinary Aurelius ordinary

Cost $12,320 20,300 $32,620

Fair Value $13,200 17,400 $30,600

2,020

(200 X $66) (600 X $29)

(d) Income Statement Account Dividend Revenue Gain on Sale of Share Investments Interest Revenue Gain on Sale of Debt Investments Unrealized Loss—Income

2,020

$30,600

Category Other income and expense Other income and expense Other income and expense Other income and expense Other income and expense

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-41

PROBLEM 12-3B

(a) July 1 Aug. 1 Sept. 1

Oct. 1

Nov. 1 Dec. 15 31

2014 Cash (5,000 X $1) ..................................... Dividend Revenue ............................

5,000

Cash (4,000 X $0.50) ................................ Dividend Revenue ............................

2,000

Cash (1,500 X $8) ..................................... Share Investments (1,500 X $6) ....... Gain on Sale of Share Investments ..................................

12,000

Cash (600 X $30) ...................................... Share Investments (600 X $25) ........ Gain on Sale of Share Investments ($18,000 – $15,000) .......................

18,000

Cash (3,000 X $1) ..................................... Dividend Revenue ............................

3,000

Cash (3,400 X $0.50) ................................ Dividend Revenue ............................

1,700

Cash (3,500 X $1) ..................................... Dividend Revenue ............................

3,500

2014 Jan. 1 Balance 2014 Dec. 31 Balance

12-42

5,000

Share Investments 2014 190,000 Sept. 1 Oct. 1

2,000 9,000 3,000 15,000 3,000 3,000 1,700 3,500

9,000 15,000

166,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 12-3B (Continued) (b) Dec. 31

Unrealized Gain or Loss—Equity ($166,000 – $159,700) ............................... Fair Value Adjustment— Non-Trading .......................................

Security Trowbridge Co. ordinary Holly Co. ordinary Oriental Motors Co. ordinary

Cost $ 85,000 21,000

Fair Value $ 78,200 24,500

60,000 $166,000

57,000 $159,700

(c) Investments Investments in shares of less than 20% owned companies, at fair value ................................................. Equity Share capital—ordinary ...................... Retained earnings ............................... Less: Unrealized loss on non-trading securities .................................. Total equity ..................................

6,300 6,300

(3,400 X $23) (3,500 X $7) (3,000 X $19)

$ 159,700 $2,000,000 1,200,000 6,300 $3,193,700

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-43

PROBLEM 12-4B

(a) 2014 Jan.

June 30

Dec. 31

(b) 2014 Jan.

June 30 Dec. 31 31

12-44

Share Investments.............................. 1,100,000 Cash ............................................. Cash .................................................... Dividend Revenue (40,000 X $0.50) .......................

20,000

Cash .................................................... Dividend Revenue (40,000 X $0.50) .......................

20,000

Fair Value Adjustment— Non-Trading .................................... Unrealized Gain or Loss— Equity [$1,100,000 – ($30 X 40,000)]......

20,000

20,000 100,000 100,000

20,000

Cash .................................................... Share Investments ......................

20,000

Share Investments.............................. Revenue from Share Investments ($600,000 X 20%) ...

120,000

1,100,000

1,100,000 20,000 20,000

120,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 12-4B (Continued) (c)

Cost Method Share Investments Unrealized Gain—Equity Dividend Revenue Revenue from Share Investments

Equity Method

$1,200,000* $1,180,000** 100,000 40,000 0 0 120,000

**$30 X 40,000 shares **$1,100,000 + $120,000 – $40,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-45

PROBLEM 12-5B

(a) Jan. 7

10 26 Feb. 2 10

July 1

Sept. 1 Dec. 15 (b)

12-46

Cash (700 X €55) ......................................... Share Investments .............................. Gain on Sale of Share Investments .....................................

38,500

Share Investments ...................................... Cash (300 X €78.80).............................

23,640

Cash............................................................. Dividend Revenue (€1.15 X 900).........

1,035

Cash............................................................. Dividend Revenue (€0.40 X 800).........

320

Cash (€26 X 800) ......................................... Loss on Sale of Share Investments ........... Share Investments ..............................

20,800 1,600

Cash............................................................. Dividend Revenue (€1.00 X 900) ....................................

900

Share Investments ...................................... Cash (€75 X 800)..................................

60,000

Cash............................................................. Dividend Revenue (€1.50 X 1,100)......

1,650

Share Investments 1/1 Bal. 99,400 1/7 1/10 23,640 2/10 9/1 60,000 12/31 Bal. 125,640

35,000 3,500 23,640 1,035 320

22,400

900 60,000 1,650

35,000 22,400

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 12-5B (Continued) (c) Dec. 31

Unrealized Gain or Loss—Equity ................... Fair Value Adjustment—Non-Trading (€125,640 – €122,400) ..........................

Security Ukraine Corporation Ordinary Shares Vanucci Corporation Ordinary Shares

3,240 3,240

Cost

Fair Value

€ 42,000

€ 43,200

(900 X €48)

83,640 €125,640

79,200 €122,400

(1,100 X €72)

(d) Investments Investments in shares of less than 20% owned companies, at fair value .............................................. Equity Total share capital and retained earnings ..................... Less: Unrealized loss on non-trading securities .............................................................. Total equity ..............................................................

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

€122,400 xxxxx 3,240 € xxxxx

12-47

PROBLEM 12-6B

REDLANDS CORPORATION Statement of Financial Position December 31, 2014 Assets Intangibles Goodwill .............................................................................

CHF300,000

Property, plant, and equipment Land ................................................................ CHF780,000 Buildings ......................................................... CHF1,350,000 Less: Accumulated Depreciation─buildings ..................... 270,000 1,080,000 Equipment....................................................... 415,000 Less: Accumulated depreciation─equipment ................... 80,000 335,000 Investments Investment in shares of 20%–50% owned company, at equity ............................................ Current assets Prepaid insurance ......................................... Inventory ........................................................ Accounts receivable ..................................... 135,000 Less: Allowance for doubtful accounts ........................................... 10,000 Short-term investments, at fair value ............................................. Cash ............................................................... Total assets...............................................................................

12-48

2,195,000

900,000

25,000 255,000

125,000 280,000 210,000

895,000 CHF4,290,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 12-6B (Continued) REDLANDS CORPORATION Statement of Financial Position (Continued) December 31, 2014 Equity and Liabilities Equity Share capital—ordinary, CHF5 par value, 500,000 shares authorized, 440,000 shares issued and outstanding ........................................ CHF2,200,000 Share premium—ordinary ........................ ....... 300,000 Retained earnings..................................... . 480,000 CHF2,980,000 Non-current liabilities Bonds payable, 10%, due 2024 ................ ....................... Current liabilities Notes payable ........................................... Accounts payable ..................................... Income taxes payable .............................. Dividends payable .................................... .. Total equity and liabilities................................

.. 110,000 .. 375,000 . 180,000 75,000

570,000

740,000 CHF4,290,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-49

*PROBLEM 12-7B

(a) Dec. 31 Share Investments Current Assets (b)

710,000 710,000

PATEL COMPANY AND SUBSIDIARY Worksheet—Consolidated Statement of Financial Position December 31, 2014 Assets Plant and equipment (net) Investment in Singh Company ordinary shares Current assets Excess of cost over book value of subsidiary Totals Equity and Liabilities Share capital— Patel Company Share capital— Singh Company Retained earnings— Patel Company Retained earnings— Singh Company Current liabilities Totals

12-50

Patel Company

Singh Company

1,882,000

351,000

710,000 768,000

Eliminations Dr. Cr. 20,000

2,253,000

710,000 379,000

50,000 3,360,000

730,000

1,947,000 360,000

360,000

543,000

0 1,147,000

50,000 3,450,000

1,947,000

870,000 3,360,000

Consolidated Data

543,000 280,000 90,000 730,000

280,000 710,000

710,000

0 960,000 3,450,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

*PROBLEM 12-7B (Continued) (c)

PATEL COMPANY AND SUBSIDIARY Consolidated Statement of Financial Position December 31, 2014 Assets Goodwill ($70,000 − $20,000) .......................... Plant and equipment, net ($2,233,000 + $20,000) ................................. Current assets ................................................. Total assets ..........................................

50,000

2,253,000 1,147,000 $3,450,000

Equity and Liabilities Equity Share capital—ordinary .......................... Retained earnings ................................... Current liabilities ............................................. Total equity and liabilities ...................

$1,947,000 543,000

$2,490,000 960,000 $3,450,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-51

COMPREHENSIVE PROBLEM: CHAPTERS 11 TO 12

Part I (a) To:

Mindy Feldkamp, Oscar Lopez, and Lori Melton

From:

Joe Student

Date:

5/26/2013

Re:

Analysis of Partnership vs. Corporate Form of Business Organization

I have examined your situation regarding the establishment of your business. Before discussing my recommendations, I would like to briefly review the advantages and disadvantages of partnerships and corporations. The primary advantages of a partnership over a corporation are:

12-52

Partnerships are more easily formed than corporations. Partnerships can be formed simply by the voluntary agreement of two or more individuals. Forming a corporation requires preparing and filing documents with governmental agencies, paying incorporation fees, etc.

Income from a partnership is subject to less tax than income from a corporation. Even though partnerships are required to file information tax returns (returns that show financial information, but do not require any payment of taxes), they are not considered taxable entities. A partner’s share of partnership income is taxed only on the partner’s personal income tax return. Corporations are taxable entities and pay taxes on corporate income. In addition, any dividends distributed by corporations to individuals are subject to personal income tax on the personal income tax return. This is known as double taxation.

Partnerships have more flexibility in decision making. The decisionmaking process used in a partnership is determined by the partners, whereas some decisions required in corporations must follow formal procedures described in the bylaws of the corporation.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

COMPREHENSIVE PROBLEM (Continued) The primary advantages of a corporation over a partnership are: 1.

Mutual agency does not exist in a corporation. This means that the owners of a corporation (shareholders) do not have the power to bind the corporation beyond their authority. For example, a shareholder who is not employed by the firm cannot enter into contracts or other agreements on behalf of the corporation. Owners of a partnership (partners) are bound by the actions of their partners, even when partners act beyond the scope of their authority. This is true as long as the actions seem appropriate for the business.

The owners of a corporation have limited liability. When the corporation’s assets are not sufficient to pay creditors’ claims, the personal assets of the shareholders are protected from the corporation’s creditors. In a partnership, once the assets of the partnership have been used to pay creditors’ claims, the personal assets of the partners can be taken to satisfy the creditors’ demands. A special type of partnership, a limited partnership, protects the personal assets of limited partners, but at least one partner’s assets are still at risk. This partner is called a general partner.

The life of a corporation is unlimited. When ownership changes occur (e.g., shareholders buy or sell shares), the corporation continues to exist as a legal entity. When ownership changes occur in a partnership (e.g., existing partner leaves, new partner is added), the old partnership no longer exists as a legal entity. A new partnership can be formed and the business can continue, but the original partnership must be dissolved.

After examining your situation, I believe that you would be wise to choose the corporate form of business organization. There are two reasons for this recommendation. The first reason is that the venture you are about to undertake will require significant capital and, generally, capital is more easily raised via a corporation than a partnership. The other reason is that you will be protected from unlimited liability if you incorporate as opposed to forming a partnership. Given the potential risk of starting a venture of this kind, I believe it is in your best interest to protect your personal assets by using the corporate form of organization. I wish you the best in your new endeavor and please call upon me when you are in need of further assistance. Copyright © 2013 John Wiley & Sons, Inc.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-53

COMPREHENSIVE PROBLEM (Continued) Part II (b) Equity financing option: Positives No fixed interest payments required

Negatives Control of the corporation is lost Difficulty of finding an interested investor Earnings per share are lower

Debt financing option: Positives Control stays with three incorporators No need for additional investor Earnings per share are higher

Negatives Interest payments quickly drain cash

Shares outstanding before financing

Income before interest and taxes Interest expense Income before taxes Tax expense Net income Shares outstanding after financing Earnings per share

60,000 shares

Equity Financing $300,000 — 300,000 96,000 $204,000 200,000 $ 1.02

Debt Financing $300,000 126,000 174,000 55,680 $118,320 60,000 $ 1.97

Part III (c) 1.

12-54

6/12/13

Cash............................................. Buildings ..................................... Share Capital—Ordinary ..... Share Premium—Ordinary .

100,000 200,000 120,000 180,000

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COMPREHENSIVE PROBLEM (Continued) 7/21/13

7/27/14

Cash .............................................. Share Capital—Ordinary....... Share Premium—Ordinary ... Share Dividends (150,000 X .10 X $3) .................. Ordinary Share Dividends Distributable ...................... Share Premium—Ordinary ...

900,000 180,000 720,000 45,000 30,000 15,000

7/31/14

No entry

8/15/14

Ordinary Share Dividends Distributable ............................. Share Capital—Ordinary.......

30,000

Cash Dividends (165,000 X $0.05) ....................... Dividends Payable ................

8,250

12/4/14

30,000

8,250

12/14/14 No entry 12/24/14 Dividends Payable ........................ Cash ....................................... 2.

8,250 8,250

Shares Issued and Outstanding Total Shares Number of Issued and Shares Issued Outstanding 60,000 60,000 90,000 150,000 15,000 165,000

Date 6/12/13 7/21/13 8/15/14

Event Issuance to Incorporators Issuance to Marino Share dividend issuance

6/1/15

Cash ............................................. Bonds Payable .....................

Part IV (d) 1.

548,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

548,000

12-55

COMPREHENSIVE PROBLEM (Continued) 2.

12/1/15 Interest Expense .................................... 20,600 Bonds Payable ($52,000 ÷ 20) ......... Cash ($600,000 X .03) ...................... 12/31/15 Interest Expense .................................... Bonds Payable [($52,000 ÷ 20) ÷ 6] ....................... Interest Payable [($600,000 X .03) ÷ 6] ................... 6/1/16

2,600 18,000

3,433 433 3,000

Interest Payable ..................................... 3,000 Interest Expense ($20,600 – $3,433) ..... 17,167 Cash ................................................. Bonds Payable ($2,600 – $433) ......

18,000 2,167

Part V (e) (1) 2013

2014

12-56

Share Investments .......................... Cash ..........................................

900,000

Share Investments .......................... Revenue from Share Investments (.6* X $30,000) . *90,000 ÷ 150, 000

18,000

Cash ................................................. Share Investments (.6 X $2,100) ..........................

1,260

Share Investments .......................... Revenue from Share Investments (.6 X $70,000) ..

42,000

Cash ................................................. Share Investments (.6 X $20,000) ........................

12,000

900,000

18,000

1,260

42,000

12,000

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COMPREHENSIVE PROBLEM (Continued) 2015

(2)

Share Investments ........................ Revenue from Share Investments (.6 X $105,000) ....................

63,000

Cash ............................................... Share Investments (.6 X $50,000) ......................

30,000

63,000

30,000

Share Investments 900,000 18,000 1,260 42,000 12,000 63,000 30,000 979,740

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12-57

CCC12

(a)

CONTINUING COOKIE CHRONICLE

1. The amount of influence you would have in The Beanery would determine how you would account for the investment. Given that you would own 30% of the ordinary shares of The Beanery, it would be assumed (unless there was evidence to the contrary) that you could exert significant influence over the day-to-day operations of the business. This is especially so given the small number of shareholders. Significant influence over an associate may also result from representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. Assuming significant influence existed, the investment would be accounted for using the equity method of accounting. However, in this case, the Thornton sisters will still exercise majority control and may not be willing to let an investor participate in the decisionmaking process. If this did occur, significant influence may not exist and the investment would be accounted for using the cost method. 2. One of the major advantages of going ahead with this investment would be the strategic advantage of the horizontal and vertical integration that would occur. Not only would you eliminate a competitor but you both could learn the business of roasting beans while taking advantage of the expertise the Thornton sisters have developed with respect to the operation of their coffee shop.

12-58

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

CCC12 (Continued) (a) (Continued) 3. There would be disadvantages associated with this investment as well. For example, there may be a significant time investment required by both of you especially since both of the Thornton sisters are very busy and would like the investor to take over some of the responsibilities of running the business. Also, the Thornton sisters will still exercise majority control and may not be willing to let an investor participate in the decision-making process. Finally, if the investment did not work out, it may be difficult to find another investor to purchase the shares held by Cookie & Coffee Creations. (b) Share Investments ................................................

15,000

Cash ..............................................................

15,000

7,500

Dividend Revenue ($25,000 X 30%) ..............

7,500

Equity Method Share Investments ................................................

15,000

Revenue from Share Investments ($50,000 X 30%) ........................................ Cash ($25,000 X 30%) ............................................

15,000 7,500

Share Investments ........................................

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7,500

12-59

CCC12 (Continued) (d) Because the investment in The Beanery is a strategic investment, it would be classified as a long-term investment in the non-current assets section of Cookie & Coffee Creations’ statement of financial position. If the investment were accounted for using the cost method, it would be recorded at its original cost of $15,000. If the investment were accounted for using the equity method, it would be accounted for at its original cost plus a proportionate share of The Beanery’s income, less a proportionate share of any dividends paid by The Beanery. For the current year the investment would be at $22,500 ($15,000 + $15,000 – $7,500).

12-60

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BYP 12-1

FINANCIAL REPORTING PROBLEM

(a) Samsung made the following statement about what was included on its consolidated financial statement: The consolidated financial statements include the accounts of SEC (Samsung Electronics Co., Ltd) and its controlled subsidiaries (collectively referred to as “the Company”). Controlled subsidiaries generally include those companies over which the company exercises control. Control over an entity is presumed to exist when the Company owns, directly or indirectly through subsidiaries, over 50% of the voting rights of the entity, the Company has the power to govern the operating and financial policies of the entity through agreement or the Company has the power to appoint or remove the majority of the members of the board of the entity. (b) Samsung’s Consolidated Statement of Cash Flows shows that W21,619,244 million was spent for the purchase of property and equipment during the year.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-61

BYP 12-2

COMPARATIVE ANALYSIS PROBLEM

(a) 1. Cash provided (used) for investing activities 2. Cash used for capital expenditures (spending)

Zetar ₤4,092 thousand

Nestlé CHF14,549 million

3,789

4,576

(b) In Note 1 to the consolidated financial statements, Nestlé states that the consolidated financial statements comprise those of Nestlé S.A., and of its affiliated companies, including joint ventures and associates (the Group). The Group’s referable operating segments are; – – – – – –

12-62

Zone Europe Zone Americas Zone Asia, Oceania and Africa Nestlé Waters Nestlé Nutrition Other

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 12-3

REAL-WORLD FOCUS

Answers will vary depending on company chosen. The following sample solution is provided for Medtronic, Inc. (a) (b) (c) (d)

30 analysts rated this company. 5/30 or 16 2/3% of the analysts rated it a strong buy. Average rating 2.5 on a scale of 1.0 (strong buy) to 5.0 (strong sell). Average rating: No change.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-63

BYP 12-4

DECISION-MAKING ACROSS THE ORGANIZATION

The dollar amount received upon the sale of the UMW Company shares was $1,468,000. Since Kemper Corporation has a 30% interest in UMW, the equity method should be used to report dividends and net income. A reconstruction of the correct entries can be prepared for the acquisition, the equity method treatment of dividends and revenue, and the sale. A plug figure for cash will balance the entry for the sale. These entries are provided below. Both the shareholder and the president are correct. Since the equity method adjusts the investment account for the earnings of the associate, the “very profitable” UMW investment balance has increased during the period the shares were held. The shares were sold at less than their current investment balance and thus a loss was recognized. Shareholder Kerwin is correct in labeling this a very profitable company and in noting that a loss was recognized on the sale. President Chavez is correct in that the investment was sold at a higher figure than the $1,300,000 purchase price. The key to the dilemma is to note that the selling price was less than the carrying amount of the investment. The carrying amount has increased due to the recognition of UMW income during the time the shares were held. Entries for the investment in UMW Company: Acquisition Share Investments.................................................... Cash ...................................................................

1,300,000 1,300,000

Previous Years—Equity Method Share Investments.................................................... 372,000 Revenue from Share Investments ($1,240,000 X 30%) ...........................

372,000

Cash .......................................................................... Share Investments ($440,000 X 30%) ..............

132,000

12-64

132,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 12-4 (Continued) This Year—Equity Method Share Investments ................................................. Revenue from Share Investments ($520,000 X 30%) ................................ Cash ........................................................................ Share Investments ($160,000 X 30%) ............

156,000 156,000* 48,000

Sale of the UMW Company Shares Cash (Cash is a plug.) ............................................ 1,468,000 Loss on Sale of Investments ................................. 180,000 Share Investments ..........................................

48,000*

1,648,000*

*$1,300,000 + ($372,000 + $156,000) – ($132,000 + $48,000)

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-65

BYP 12-5

COMMUNICATION ACTIVITY

Dear Mr. Scholes: I am writing this memo to make suggestions regarding the appropriate treatment for the two securities you are holding in your portfolio. Assuming that your investment in Longley Corporation does not represent a significant interest in that firm, it should be accounted for as a non-trading security because it is a share investment that you do not intend on selling in the near future. You will not report any gains or losses on this investment in your income statement until you sell it. On the other hand, your debt investment should be accounted for as a trading security since you purchased it with the intent to generate a short-term profit. Unrealized gains and losses at your statement of financial position date should be reported in other income and expense on the income statement.

12-66

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 12-6

ETHICS CASE

(a) Classifying the securities as they propose will indeed have the effect on net income that they say it will. Classifying all the gains as trading securities will cause all the gains to flow through the income statement this year and classifying the losses as non-trading securities will defer the losses from this year’s income statement. Classifying the gains and losses just the opposite will have the opposite effect. (b) What each proposes is unethical since it is knowingly not in accordance with IFRS. The financial statements are fraudulently, not fairly, stated. The affected stakeholders are other members of the company’s officers and directors, the independent auditors (who may detect these misstatements), the shareholders, and prospective investors. (c) The act of selling certain securities (those with gains or those with losses) is management’s choice and is not per se unethical. Accounting standards allow the sale of selected securities so long as the method of assigning cost adopted by the company is consistently applied. If the officers act in the best interest of the company and its stakeholders, and in accordance with IFRS, and not in their self-interest, their behavior is probably ethical. Knowingly engaging in unsound and poor business and accounting practices that waste assets or that misstate financial statements is unethical behavior.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

12-67

GAAP FINANCIAL REPORTING PROBLEM GAAP 12-1 (a)

Tootsie Roll purchased $2,902 thousand of trading securities in 2010. In addition, they purchased $9,301 of available for sale securities in 2010. (b) If the decline is judged to be other than temporary, a company writes down the cost basis of the security to fair value. The company accounts for the write-down as a realized loss. Therefore, it includes the amount in net income. (c) Per Note 1, the company’s 50% interest in two foreign companies is accounted for using the equity method. The company records an increase in its investment to the extent of its share of earnings, and reduces its investment to the extent of losses and dividends received. No dividends were paid in 2010, 2009 and 2008.

12-68

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

CHAPTER 13 Statement of Cash Flows ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Do It!

Exercises

A Problems

B Problems

Learning Objectives

Questions

*1.

Indicate the usefulness of the statement of cash flows.

1, 2, 6,15

*2.

Distinguish among operating, investing, and financing activities.

3, 4, 5, 6, 7, 8, 9

1, 2, 3

*3.

Prepare a statement of cash flows using the indirect method.

10, 11, 12, 13, 14

4, 5, 6, 7

4, 5, 6, 7, 8, 9

2A, 3A, 5A, 7A, 9A, 11A

2B, 3B, 5B, 7B, 9B, 11B

*4.

Analyze the statement of cash flows.

8, 9, 10, 11

7, 9

7A, 8A

7B, 8B

*5.

Explain how to use a worksheet to prepare the statement of cash flows using the indirect method.

12A

*6.

Prepare a statement of cash flows using the direct method.

8, 17, 18, 19, 20

13, 14, 15

11, 12, 13, 14

4A, 6A, 8A, 10A

4B, 6B, 8B, 10B

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

13-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Distinguish among operating, investing, and financing activities.

Simple

10–15

Determine cash flow effects of changes in equity accounts.

Simple

10–15

Prepare the operating activities section—indirect method.

Simple

20–30

*4A

Prepare the operating activities section—direct method.

Simple

20–30

Prepare the operating activities section—indirect method.

Simple

20–30

*6A

Prepare the operating activities section—direct method.

Simple

20–30

Prepare a statement of cash flows—indirect method, and compute free cash flow.

Moderate

40–50

*8A

Prepare a statement of cash flows—direct method, and compute free cash flow.

Moderate

40–50

Prepare a statement of cash flows—indirect method.

Moderate

40–50

*10A

Prepare a statement of cash flows—direct method.

Moderate

40–50

11A

Prepare a statement of cash flows—indirect method.

Moderate

40–50

*12A

Prepare a worksheet—indirect method.

Moderate

40–50

Distinguish among operating, investing, and financing activities.

Simple

10–15

Determine cash flow effects of changes in plant asset accounts.

Simple

10–15

Prepare the operating activities section—indirect method.

Simple

20–30

*4B

Prepare the operating activities section—direct method.

Simple

20–30

Prepare the operating activities section—indirect method.

Simple

20–30

*6B

Prepare the operating activities section—direct method.

Simple

20–30

Prepare a statement of cash flows—indirect method, and compute free cash flow.

Moderate

40–50

13-2

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number

Description

Difficulty Level

Time Allotted (min.)

*8B

Prepare a statement of cash flows—direct method, and compute free cash flow.

Moderate

40–50

Prepare a statement of cash flows—indirect method.

Moderate

40–50

*10B

Prepare a statement of cash flows—direct method.

Moderate

40–50

11B

Prepare a statement of cash flows—indirect method.

Moderate

40–50

13-3

WEYGANDT FINANCIAL ACCOUNTING, IFRS EDITION, 2e CHAPTER 13 STATEMENT OF CASH FLOWS Number

Difficulty

Time (min.)

BE1

Simple

3–5

BE2

Simple

2–4

BE3

Simple

3–5

BE4

Simple

4–6

BE5

Simple

3–5

BE6

Simple

4–6

BE7

Moderate

3–5

BE8

Simple

2–4

BE9

Simple

2–3

BE10

Simple

2–3

BE11

Simple

4–6

BE12

Simple

4–6

BE13

Simple

2–4

BE14

Simple

3–5

BE15

Moderate

3–5

DI1

Simple

2–4

DI2

Simple

4–6

DI3

Simple

4–6

EX1

Simple

5–7

EX2

Simple

6–8

EX3

Simple

8–10

EX4

Simple

5–7

EX5

Simple

6–8

EX6

Moderate

10–12

EX7

3, 4

Simple

12–14

EX8

Simple

10–12

EX9

3, 4

Simple

12–14

EX10

Moderate

16–20

EX11

Moderate

6–8

EX12

Moderate

6–8

EX13

Simple

5–7

13-4

STATEMENT OF CASH FLOWS (Continued) Number

Difficulty

Time (min.)

EX14

Moderate

6–8

P1A

Simple

10–15

P2A

Simple

10–15

P3A

Simple

20–30

P4A

Simple

20–30

P5A

Simple

20–30

P6A

Simple

20–30

P7A

3, 4

AP, AN

Moderate

40–50

P8A

4, 6

AP, AN

Moderate

40–50

P9A

Moderate

40–50

P10A

Moderate

40–50

P11A

Moderate

40–50

P12A

Moderate

40–50

P1B

Simple

10–15

P2B

Simple

10–15

P3B

Simple

20–30

P4B

Simple

20–30

P5B

Simple

20–30

P6B

Simple

20–30

P7B

3, 4

AP, AN

Moderate

40–50

P8B

4, 6

AP, AN

Moderate

40–50

P9B

Moderate

40–50

P10B

Moderate

40–50

P11B

Moderate

40–50

BYP1

Simple

15–20

BYP2

AP, E

Simple

8–12

BYP3

—

Simple

15–20

BYP4

—

Simple

10–15

BYP5

AP, E

Moderate

25–30

BYP6

Simple

10–15

BYP7

Simple

10–15

13-5

Learning Objective

Knowledge Comprehension

Application

Analysis

Indicate the usefulness of the statement of cash flows.

Q13-4

Q13-1 Q13-2

Q13-15

Distinguish among operating, investing, and financing activities.

Q13-4 Q13-6 BE13-1

Q13-3 Q13-5 Q13-7 Q13-8 Q13-9

BE13-2 BE13-3 DI13-1 E13-2 E13-1 E13-3 E13-2 P13-1A P13-1B

Prepare a statement of cash flows using the indirect method.

Q13-13

Q13-10 Q13-11 Q13-12 Q13-14

BE13-4 BE13-5 BE13-6 DI13-2 E13-4 E13-5 E13-7

E13-8 P13-3B BE13-7 E13-9 P13-5B E13-6 P13-3A P13-7B P13-2A P13-5A P13-9B P13-2B P13-7A P13-11B P13-7A P13-7B P13-9A P13-11A

Analyze the statement of cash flows.

E13-7 E13-9 P13-7A P13-8A P13-7B

P13-8B BE13-8 BE13-9 BE13-10 BE13-11 DI13-3

Explain how to use a worksheet to prepare the statement of cash flows using the indirect method.

*6.

Prepare a statement of cash flows using the direct method.

Broadening Your Perspective

Q13-17 Q13-18

Q13-16

BE13-12 E13-10 P13-12A

Q13-8 Q13-20

Q13-19 E13-13 P13-4B P13-8A BE13-13 E13-14 P13-6B P13-8B BE13-14 P13-4A P13-8B BE13-15 P13-6A P13-10B E13-11 P13-8A E13-12 P13-10A

Synthesis

Evaluation

P13-7A P13-8A P13-7B P13-8B

Real-World Focus Comparative Analysis Financial Reporting Decision Making Across the Organization Communication

Comp. Analysis Decision Making Across the Organization Ethics Case

BLOOM’ S TAXONOMY TABLE

13-6 Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

ANSWERS TO QUESTIONS 1.

(a) The statement of cash flows reports the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during a period. (b) Disagree. The statement of cash flows is required. It is the fourth basic financial statement.

The statement of cash flows answers the following questions about cash: (a) Where did the cash come from during the period? (b) What was the cash used for during the period? and (c) What was the change in the cash balance during the period?

The three types of activities are: Operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. Investing activities include: (a) acquiring and disposing of investments and property, plant and equipment and (b) lending money and collecting loans. Financing activities include: (a) obtaining cash from issuing debt and repaying amounts borrowed and (b) obtaining cash from shareholders, repurchasing shares, and paying dividends.

(a) Major inflows of cash in a statement of cash flows include cash from operations; issuance of debt; collection of loans; issuance of ordinary shares; sale of investments; and the sale of property, plant, and equipment. (b) Major outflows of cash include purchase of inventory, payment of wages and other operating expenses, payment of cash dividends; redemption of debt; purchase of investments; making loans; redemption of ordinary shares; and the purchase of property, plant, and equipment.

The statement of cash flows presents investing and financing activities so that even non-cash transactions of an investing and financing nature are disclosed in the financial statements. If they affect financial conditions significantly, the IASB requires that they be disclosed in either a separate note or supplementary schedule to the financial statements.

Examples of significant non-cash activities are: (1) issuance of ordinary shares for assets, (2) conversion of bonds into ordinary shares, (3) issuance of bonds or notes for assets, and (4) exchanges of plant assets.

Comparative statements of financial position, a current income statement, and certain transaction data all provide information necessary for preparation of the statement of cash flows. Comparative statements of financial position indicate how assets, liabilities, and equities have changed during the period. A current income statement provides information about the amount of cash provided or used by operations. Certain transactions provide additional detailed information needed to determine how cash was provided or used during the period.

The advantage of the direct method is that it presents the major categories of cash receipts and cash payments in a format that is similar to the income statement and familiar to statement users. Its principal disadvantage is that the necessary data can be expensive and time-consuming to accumulate. The advantage of the indirect method is it is often considered easier to prepare, and it focuses on the differences between net income and net cash provided by operating activities. It also tends to reveal less company information to competitors. Its primary disadvantage is the difficulty in understanding the adjustments that comprise the reconciliation. Both methods are acceptable but the IASB expressed a preference for the direct method. Yet, the indirect method is the overwhelming favorite of companies.

13-7

Questions Chapter 13 (Continued) 9. When total cash inflows exceed total cash outflows, the excess is identified as a “net increase in cash” near the bottom of the statement of cash flows. 10. The indirect method involves converting accrual net income to net cash provided by operating activities. This is done by starting with accrual net income and adding or subtracting non-cash items included in net income. Examples of adjustments include depreciation and other non-cash expenses, gains and losses on the sale of non-current assets, and changes in the balances of current asset and current liability accounts from one period to the next. 11. It is necessary to convert accrual-based net income to cash-basis income because the unadjusted net income includes items that do not provide or use cash. An example would be an increase in accounts receivable. If accounts receivable increased during the period, revenues reported on the accrual basis would be higher than the actual cash revenues received. Thus, accrual-basis net income must be adjusted to reflect the net cash provided by operating activities. 12. A number of factors could have caused an increase in cash despite the net loss. These are (1) high cash revenues relative to low cash expenses; (2) sales of property, plant, and equipment; (3) sales of investments; (4) issuance of debt or ordinary shares, and (5) differences between cash and accrual accounting, e.g. depreciation. 13. Depreciation expense. Gain or loss on sale of a non-current asset. Increase/decrease in accounts receivable. Increase/decrease in inventory. Increase/decrease in accounts payable. 14. Under the indirect method, depreciation is added back to net income to reconcile net income to net cash provided by operating activities because depreciation is an expense but not a cash payment. 15. The statement of cash flows is useful because it provides information to the investors, creditors, and other users about: (1) the company’s ability to generate future cash flows, (2) the company’s ability to pay dividends and meet obligations, (3) the reasons for the difference between net income and net cash provided by operating activities, and (4) the cash investing and financing transactions during the period. *16. A worksheet is desirable because it allows the accumulation and classification of data that will appear on the statement of cash flows. It is an optional but efficient device that aids in the preparation of the statement of cash flows. *17. Net cash provided by operating activities under the direct approach is the difference between cash revenues and cash expenses. The direct approach adjusts the revenues and expenses directly to reflect the cash basis. This results in cash net income, which is equal to “net cash provided (used) by operating activities.”

13-8

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Questions Chapter 13 (Continued) *18. (a) Cash receipts from customers = Revenues from sales

+ Decrease in accounts receivable – Increase in accounts receivable

+ Increase in inventory – Decrease in inventory

(b) Purchases = Cost of goods sold

Cash payments to suppliers = Purchases

+ Decrease in accounts payable – Increase in accounts payable

*19. Sales revenue........................................................................................................ NT $2,000,000 Add: Decrease in accounts receivable .................................................................. 140,000 Cash receipts from customers ............................................................................... NT $2,140,000 *20. Depreciation expense is not listed in the direct method operating activities section because it is not a cash flow item—it does not affect cash.

13-9

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 13-1 (a) (b) (c) (d)

Cash inflow from financing activity, $ 150,000. Cash outflow from investing activity, $ 200,000. Cash inflow from investing activity, $ 50,000. Cash outflow from financing activity, $ 20,000.

BRIEF EXERCISE 13-2 (a) Investing activity. (b) Investing activity. (c) Financing activity.

(d) Operating activity. (e) Financing activity. (f) Financing activity.

BRIEF EXERCISE 13-3 Cash flows from financing activities Proceeds from issuance of bonds payable ....................... Payment of dividends .......................................................... Net cash provided by financing activities ..................

$500,000) (60,000) $440,000)

BRIEF EXERCISE 13-4 Net income .......................................................... €2,000,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................ €160,000 Accounts receivable increase ................... (350,000) Accounts payable increase ....................... 280,000 90,000 Net cash provided by operating activities €2,090,000

13-10

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BRIEF EXERCISE 13-5 Cash flows from operating activities Net income ............................................................ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................... Gain on disposal of plant assets ................. Net cash provided by operating activities ..

$250,000 $ 70,000 (12,000)

58,000 $308,000

BRIEF EXERCISE 13-6 Net income .................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Decrease in prepaid expenses............................. Decrease in inventory .......................................... Increase in accounts receivable .......................... Net cash provided by operating activities ......

R$250,000 R$28,000) 30,000 (80,000)

(22,000) R$228,000

BRIEF EXERCISE 13-7 Original cost of equipment sold ................................................. Less: Accumulated depreciation .............................................. Book value of equipment sold ................................................... Less: Loss on disposal of plant assets .................................... Cash received from sale of equipment ......................................

$22,000 8,500 13,500 6,500 $ 7,000

BRIEF EXERCISE 13-8 Free cash flow = $155,397,000 – $130,820,000 – $0 = $24,577,000 BRIEF EXERCISE 13-9 Free cash flow = £450,000 – £250,000 – £0 = £200,000 BRIEF EXERCISE 13-10 Free cash flow = $45,000,000 – $1,400,000 = $43,600,000

13-11

BRIEF EXERCISE 13-11 Free cash flow is cash provided by operations less capital expenditures and cash dividends paid. For Russel Ltd. this would be €283,000 (€643,000 – €280,000 – €80,000). Since it has positive free cash flow that far exceeds its dividend, an increase in the dividend might be possible. However, other factors should be considered. For example, it must have adequate retained earnings, and it should be convinced that a larger dividend can be sustained over future years. It should also use the free cash flow to expand its operations or pay down its debt. *BRIEF EXERCISE 13-12 Reconciling Items

Statement of Financial Position

Balance 1/1/14

Credit

Balance 12/31/14

Prepaid expenses Accrued expenses payable

18,600 8,200

(a) 6,500 (b) 2,000

12,100 10,200

Debit

Statement of Cash Flow Effects Operating activities Decrease in prepaid expenses Increase in accrued expenses payable

(a) 6,500 (b) 2,000 8,500

_____ 8,500

*BRIEF EXERCISE 13-13 Receipts from Sales = customers revenues

+ Decrease in accounts receivable – Increase in accounts receivable

$1,022,679,000 = $1,085,307,000 – $62,628,000 (Increase in accounts receivable)

13-12

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

*BRIEF EXERCISE 13-14 + Decrease in income taxes payable

Cash payments Income tax = for income taxes expense

– Increase in income taxes payable

$112,000,000 = $360,000,000 – $248,000,000* *$525,000,000 – $277,000,000 = $248,000,000 (Increase in income taxes payable) *BRIEF EXERCISE 13-15 + Increase in prepaid expenses – Decrease in prepaid expenses

Cash Operating payments for expenses, = operating excluding expenses depreciation

and + Decrease in accrued expenses payable – Increase in accrued expenses payable

€58,700 = €70,000 – €6,800 – €4,500 SOLUTIONS TO DO IT! REVIEW EXERCISES DO IT! 13-1 1. 2. 3. 4. 5.

Financing activity Operating activity Financing activity Investing activity Investing activity

13-13

DO IT! 13-2 Cash flows from operating activities Net income ............................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .................................... R$4,000 Amortization expense .................................... 3,000 Gain on disposal of equipment ..................... (3,900) Decrease in accounts receivable .................. 6,000 Increase in accounts payable ........................ 3,200 Net cash provided by operating activities .................................................

R$100,000

12,300 R$112,300

DO IT! 13-3 (a) Free cash flow = $72,400 – $26,000 – $18,000 = $28,400 (b) Cash provided by operating activities fails to take into account that a company must invest in new plant assets just to maintain the current level of operations. Companies must also maintain dividends at current levels to satisfy investors. The measurement of free cash flow provides additional insight regarding a company’s cash-generating ability.

13-14

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

SOLUTIONS TO EXERCISES EXERCISE 13-1 (a) (b) (c) (d) (e) (f) (g)

Financing activities. Non-cash investing and financing activities. Non-cash investing and financing activities. Financing activities. Investing activities. Operating activities. Operating activities.

EXERCISE 13-2 (a) Operating activity. (b) Non-cash investing and financing activity. (c) Investing activity. (d) Financing activity. (e) Operating activity. (f) Operating activity. (g) Operating activity. (h) Financing activity.

(i) Operating activity. (j) Non-cash investing and financing activity. (k) Investing activity. (l) Non-cash investing and financing activity. (m) Operating activity (loss); investing activity (cash proceeds from sale). (n) Financing activity.

EXERCISE 13-3 1. (a) Cash ...................................................... Loss on Disposal of Plant Assets ...... Land ..............................................

10,000 2,000 12,000

(b) The cash receipt (£10,000) is reported in the investing section. The loss (£2,000) is added to net income in the operating section. 2. (a) Cash ...................................................... Share Capital-Ordinary ................

22,000 22,000

(b) The cash receipt (£22,000) is reported in the financing section. 3. (a) Depreciation Expense ......................... Accumulated Depreciation— Buildings.................................

14,000 14,000

(b) Depreciation expense (£14,000) is added to net income in the operating section. .

13-15

EXERCISE 13-3 (Continued) 4. (a) Salaries and Wages Expense ............................... Cash ................................................................

7,000 7,000

(b) Salaries and Wages Expense is not reported separately on the statement of cash flows. It is part of the computation of net income in the income statement, and is included in the net income amount on the statement of cash flows. 5. (a) Equipment .............................................................. Share Capital-ordinary .................................. Share Premium-Ordinary ..............................

9,000 1,000 8,000

(b) The issuance of ordinary shares for equipment (£9,000) is reported as a non-cash financing and investing activity in a note to the financial statements. 6. (a) Cash ....................................................................... Accumulated Depreciation—Equipment .............. Equipment ...................................................... Gain on Disposal of Plant Assets .................

3,200 8,000 10,000 1,200

(b) The cash receipt (£3,200) is reported in the investing section. The gain (£1,200) is deducted from net income in the operating section. EXERCISE 13-4 BRACEWELL COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income .............................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ..................................... Gain on disposal of plant assets ................... Increase in accounts receivable..................... Decrease in prepaid expenses ....................... Increase in accounts payable ......................... Net cash provided by operating activities ...

13-16

$195,000 $40,000 (5,000) (15,000) 4,000 17,000

41,000 $236,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 13-5 NASREEN CO. Partial Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income .......................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................. Increase in accounts receivable ................ Decrease in inventory ................................. Increase in prepaid expenses .................... Decrease in accounts payable ................... Increase in accrued expenses payable ..... Net cash provided by operating activities

€153,000 €24,000) (31,000) 14,000) (2,000) (10,000) 6,000)

1,000 €154,000

13-17

EXERCISE 13-6 CHAUDRY CO. Partial Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income ....................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .............................. Loss on disposal of plant assets ............ Net cash provided by operating activities ............................................. Cash flows from investing activities Sale of plant assets ......................................... Construction of equipment ............................. Purchase of equipment ................................... Net cash used by investing activities .....

$ 67,000)

$ 23,000) 5,000)

95,000) 16,000* (53,000) (70,000) (107,000)

Cash flows from financing activities Payment of cash dividends ............................. *Cost of equipment sold .................................. *Accumulated depreciation ............................. *Book value ...................................................... *Loss on disposal of plant assets .................. *Cash proceeds ................................................

13-18

28,000)

(17,000) $ 49,000) (28,000) 21,000) (5,000) $ 16,000)

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 13-7 (a)

MEERA COMPANY Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income .......................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .................................... £ 5,000 Loss on disposal of land ............................ 1,000 Decrease in accounts receivable ............... 2,600 Decrease in accounts payable ................... (15,730 ) Net cash provided by operating activities . Cash flows from investing activities Sale of land ......................................................... Cash flows from financing activities Issuance of ordinary shares .............................. Payment of dividends ........................................ Net cash used by financing activities ........... Net increase in cash ................................................. Cash at beginning of period ..................................... Cash at end of period ...............................................

£ 22,630)

(7,130) 15,500 5,000

3,000 (19,500 ) (16,500) 4,000 10,700 £ 14,700

(b) £15,500 – £0 – £19,500 = (£4,000)

13-19

EXERCISE 13-8 SYAL COMPANY Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income .................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ......................... Increase in accounts receivable ........ Decrease in inventory......................... Decrease in accounts payable ........... Net cash provided by operating activities ........................................ Cash flows from investing activities Sale of land ................................................. Purchase of equipment .............................. Net cash used by investing activities .......................................... Cash flows from financing activities Issuance of ordinary shares ..................... Payment of cash dividends ....................... Redemption of bonds ................................ Net cash used by financing activities .......................................... Net increase in cash .......................................... Cash at beginning of period .............................. Cash at end of period ........................................

13-20

$103,000)

$32,000) (14,000) 17,000) (12,000)

23,000) 126,000)

27,000) (60,000) (33,000) 42,000) (45,000) (50,000) (53,000) 40,000) 33,000) $ 73,000)

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 13-9 (a)

CASSANDRA COMPANY Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income.................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense........................... € 5,800* Loss on disposal of plant assets ........ 4,700** Increase in accounts receivable .......... (2,900) Increase in accounts payable .............. 3,500) Net cash provided by operating activities Cash flows from investing activities Sale of plant assets...................................... Purchase of investments ............................. Net cash used by investing activities ........

3,500) (4,000)

Cash flows from financing activities Issuance of ordinary shares ........................ Payment of dividends .................................. Retirement of bonds .................................... Net cash used by financing activities .....

5,000 (14,600) (20,000)

Net decrease in cash ....................................... Cash at beginning of period ........................... Cash at end of period ...................................... *[€14,000 – (€10,000 – €1,800)]

€ 18,300)

) ) 11,100 29,400)

(500)

(29,600) (700)) 17,700 € 17,000

**[€3,500 – (€10,000 – €1,800)]

(b) €29,400 – €0 – €14,600 = €14,800

13-21

*EXERCISE 13-10 ERISA MAGAMBO COMPANY Worksheet Statement of Cash Flows For the Year Ended December 31, 2014 Statement of Financial Position Accounts

Reconciling Items

Balance 12/31/13

Debit

Credit

Balance 12/31/14

Debits Land Equipment Inventory Accounts receivable Cash Total

100,000 200,000 187,000 76,000 22,000 585,000

(f)

(e)

25,000

(b)

7,000

(i) (j)

50,000 120,000

(d)

24,000

(a)

9,000

(c)

11,000

(f)

50,000

(g) (h)

70,000 50,000

(k)

416,000 36,000 452,000

50,000

(a) (k)

9,000 36,000

(g) (h)

70,000 50,000

75,000 250,000 180,000 85,000 58,000 648,000

Credits Share capital—ordinary Retained earnings Bonds payable Accumulated depreciation—equipment Accounts payable Total

164,000 134,000 200,000 42,000 45,000 585,000

(c)

11,000

(j)

120,000

(b)

7,000

214,000 184,000 150,000 66,000 34,000 648,000

Statement of Cash Flow Effects Operating activities Net income Increase in accounts receivable Decrease in inventory Decrease in accounts payable Depreciation expense Investing activities Sale of land Purchase of equipment Financing activities Payment of dividends Redemption of bonds Issuance of ordinary shares Totals Increase in cash Totals

13-22

(d)

24,000

(e)

25,000

(i)

50,000 452,000 452,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

*EXERCISE 13-11 Revenues .................................................................. R$195,000) Deduct: Increase in accounts receivable .............. 60,000 Cash receipts from customers* ....................... R$135,000 Operating expenses ................................................. 78,000) Deduct: Increase in accounts payable................... 25,000 Cash payments for operating expenses** ...... (53,000) Net cash provided by operating activities .............. R$ 82,000 **

Accounts Receivable Balance, Beginning of year 0 Revenues for the year 195,000 Cash receipts for year Balance, End of year 60,000

** Payments for the year

Accounts Payable Balance, Beginning of year 53,000 Operating expenses for year Balance, End of year

135,000

0 78,000 25,000

*EXERCISE 13-12 (a) Cash payments to suppliers Cost of goods sold .................................. Add: Increase in inventory .................... Cost of purchases ................................... Deduct: Increase in accounts payable .... Cash payments to suppliers ..................

$4,527.8 million 17.1 $4,544.9 million 139.6 $4,405.3 million

(b) Cash payments for operating expenses Operating expenses exclusive of depreciation .................................... $9,397.6 million ($10,517.6 – $1,120) Add: Increase in prepaid expenses ...... $ 65.3) Deduct: Increase in accrued expenses payable .................... 190.6 (125.3) Cash payments for operating expenses .... $9,272.3 million

13-23

*EXERCISE 13-13 Cash flows from operating activities Cash receipts from Customers .................................................. Dividend revenue .......................................

£240,000* 18,000* £258,000*

Less cash payments: To suppliers ................................................ For salaries and wages .............................. For operating expenses ............................. For income taxes ........................................ For interest ................................................. Net cash provided by operating activities ...

115,000 57,000 28,000 16,000 10,000

226,000 £ 32,000*

*£50,000 + £190,000

*EXERCISE 13-14 Cash payments for rent Rent expense ........................................................... Add: Increase in prepaid rent ................................ Cash payments for rent ...........................................

$ 40,000* 3,400* $ 43,400*

Cash payments for salaries Salaries and wages expense................................... Add: Decrease in salaries payable ........................ Cash payments for salaries ....................................

$ 65,000* 2,000* $ 67,000*

Cash receipts from customers Sales revenue........................................................... Add: Decrease in accounts receivable .................. Cash receipts from customers................................

$170,000* 12,000* $182,000*

13-24

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

SOLUTIONS TO PROBLEMS PROBLEM 13-1A

Transaction (a) Recorded depreciation expense on the plant assets. (b) Recorded and paid interest expense. (c) Recorded cash proceeds from a sale of plant assets. (d) Acquired land by issuing ordinary shares. (e) Paid a cash dividend to preference shareholders. (f) Distributed a share dividend to ordinary shareholders. (g) Recorded cash sales. (h) Recorded sales on account. (i) Purchased inventory for cash. (j) Purchased inventory on account.

SCF Activity Affected

Cash Inflow, Outflow, or No Effect?

No cash flow effect

Cash outflow

Cash inflow

No cash flow effect

Cash outflow

No cash flow effect

O O O O

Cash inflow No cash flow effect Cash outflow No cash flow effect

13-25

PROBLEM 13-2A

(a) Net income can be determined by analyzing the retained earnings account. Retained earnings beginning of year .......................... Add: Net income (plug) ................................................ Less: Cash dividends .................................................. Share dividends ................................................. Retained earnings, end of year ....................................

$250,000 77,200* 327,200 16,000 11,200 $300,000

*($300,000 + $11,200 + $16,000 – $250,000) (b) Cash inflow from the issue of ordinary shares was $13,800 ($155,000 – $130,000 – $11,200). Share Capital Ordinary 130,000 11,200 13,800 155,000

Share Dividend Shares Issued for Cash

Cash outflow for dividends was $16,000. The share dividend does not use cash. (c) Both of the above activities (issue of ordinary shares for cash and payment of cash dividends) would be classified as financing activities on the statement of cash flows.

13-26

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 13-3A

TOBY ZED COMPANY Partial Statement of Cash Flows For the Year Ended November 30, 2014 Cash flows from operating activities Net income .......................................................... Adjustments to reconcile net income to net cash provided by operating activities activities: Depreciation expense ............................. Increase in accounts receivable ........... Decrease in inventory ............................. Increase in prepaid expenses ................ Decrease in accounts payable ............... Decrease in accrued expenses payable ... Net cash provided by operating activities .............................................

€1,450,000

€ 85,000 (200,000) 500,000 (175,000) (340,000) (105,000)

(235,000) €1,215,000

13-27

*PROBLEM 13-4A

TOBY ZED COMPANY Partial Statement of Cash Flows For the Year Ended November 30, 2014 Cash flows from operating activities Cash receipts from customers......... Less cash payments: To suppliers ……………………… .... €4,740,000 (2) For operating expenses ............ 1,345,000 (3) Net cash provided by operating activities ..............

€7,300,000 (1) 6,085,000 €1,215,000

Computations: (1) Cash receipts from customers Sales.................................................................. Deduct: Increase in accounts receivable ...... Cash receipts from customers ........................

€7,500,000 200,000 €7,300,000

(2) Cash payments to suppliers Cost of goods sold ........................................... Deduct: Decrease in inventory ....................... Cost of purchases ............................................ Add: Decrease in accounts payable .............. Cash payments to suppliers ............................

€4,900,000 500,000 4,400,000 340,000 €4,740,000

(3) Cash payments for operating expenses Operating expenses, exclusive of depreciation............................... Add: Increase in prepaid expenses .................................. Decrease in accrued expenses payable .................... Cash payments for operating expenses ........................................

€1,065,000* €175,000 105,000

280,000 €1,345,000

* (€1,150,000 – €85,000)

13-28

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 13-5A

RATTIGAN COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income ........................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .................................. $ 55,000 Loss on disposal of plant assets ................ 25,000 Increase in accounts receivable ................. (15,000) Increase in accounts payable...................... 14,000 Increase in income taxes payable............... 6,000 Net cash provided by operating activities

$226,000

85,000 $311,000

13-29

*PROBLEM 13-6A

RATTIGAN COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Cash receipts from customers.......... Less cash payments: For operating expenses ............. For income taxes ........................ Net cash provided by operating activities .........................................

$955,000 (1) $610,000 (2) 34,000 (3)

(1) Computation of cash receipts from customers Service revenue ....................................................... Deduct: Increase in accounts receivable ($75,000 – $60,000) ................................... Cash receipts from customers................................ (2) Computation of cash payments for operating expenses Operating expenses................................................. Deduct: Increase in accounts payable ($41,000 – $27,000) ................................... Cash payments for operating expenses ................ (3) Computation of cash payments for income taxes Income tax expense ................................................ Deduct: Increase in income taxes payable ($13,000 – $7,000) ..................................... Cash payments for income taxes ...........................

13-30

644,000 $311,000 $970,000 15,000 $955,000 $624,000 14,000 $610,000 $ 40,000 6,000 $ 34,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 13-7A

(a)

RAJESH COMPANY Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income ......................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................. £13,300 Increase in accounts receivable ................ (19,000) Increase in inventory .................................. (10,000) Increase in accounts payable .................... 14,000 Decrease in income taxes payable ............ (1,000) Net cash provided by operating activities Cash flows from investing activities Sale of equipment ............................................... Cash flows from financing activities Issuance of ordinary shares .............................. Redemption of bonds ......................................... Payment of dividends ......................................... Net cash used by financing activities ........... Net increase in cash ................................................ Cash at beginning of period ................................... Cash at end of period ..............................................

£32,000

(2,700) 29,300 9,700

4,000 (6,000) (20,000) (22,000) 17,000 20,000 £37,000

(b) £29,300 – £0 – £20,000 = £9,300

13-31

*PROBLEM 13-8A

(a)

RAJESH COMPANY Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Cash receipts from customers ...... Less cash payments: To suppliers ............................ For operating expenses ......... For income taxes .................... For interest ............................. Net cash provided by operating activities ...........

£223,000 (1) £171,000 (2) 10,700 (3) 9,000 (4) 3,000

29,300

Cash flows from investing activities Sale of equipment .......................... Cash flows from financing activities Issuance of ordinary shares .......... Redemption of bonds .................... Payment of dividends .................... Net cash used by financing activities ............................

193,700

9,700 4,000 (6,000) (20,000)

Net Increase in cash .............................. Cash at beginning of period .................. Cash at end of period ............................

(22,000) 17,000 20,000 £ 37,000

Computations: (1)

13-32

Cash receipts from customers Sales revenue ................................................. Deduct: Increase in accounts receivable ..... Cash receipts from customers ..............................

£242,000 19,000 £223,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

*PROBLEM 13-8A (Continued) (2)

(3)

(4)

Cash payments to suppliers Cost of goods sold ............................................... Add: Increase in inventory .................................. Cost of purchases ................................................ Deduct: Increase in accounts payable ............... Cash payments to suppliers ................................

£175,000 10,000 185,000 14,000 £171,000

Cash payments for operating expenses Operating expenses ............................................. Deduct: Depreciation........................................... Cash payments for operating expenses .............

£ 24,000 13,300 £ 10,700

Cash payments for income taxes Income tax expense ............................................. Add: Decrease in income taxes payable ............. Cash payments for income taxes ........................

£ £

8,000 1,000 9,000

(b) £29,300 – £0 – £20,000 = £9,300

13-33

PROBLEM 13-9A

SINJH LTD. Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income ......................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................ Gain on disposal of plant assets............... Increase in accounts receivable................ Increase in inventory ................................. Increase in prepaid expenses ................... Increase in accounts payable .................... Decrease in accrued expenses payable ..... Net cash provided by operating activities

$172,900 $45,000 (5,000) (59,800) (9,650) (3,300) 44,700 (500)

Cash flows from investing activities Sale of equipment .............................................. Purchase of long-term investments ................. Purchase of equipment ..................................... Net cash used by investing activities ..........

12,500 (26,000) (80,000)

Cash flows from financing activities Sale of ordinary shares ..................................... Redemption of bonds ........................................ Payment of cash dividends ............................... Net cash used by financing activities .........

45,000 (40,000) (43,900)

Net increase in cash .................................................. Cash at beginning of period ..................................... Cash at end of period ................................................

13-34

11,450 184,350

(93,500)

(38,900) 51,950 48,400 $ 100,350

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

*PROBLEM 13-10A

SINJH LTD. Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Cash receipts from customers ............. Less cash payments: To suppliers.................................... For income taxes............................ For operating expenses ................. For interest ..................................... Net cash provided by operating activities...................................... Cash flows from investing activities Sale of plant assets ............................... Purchase of long-term investments ..... Purchase of plant assets....................... Net cash used by investing activities...................................... Cash flows from financing activities Sale of ordinary shares ......................... Redemption of bonds ............................ Payment of cash dividends................... Net cash used by financing activities......................................

$332,980 (1) $100,410 (2) 27,280 16,210 (3) 4,730

148,630 184,350

12,500 (26,000) (80,000) (93,500) 45,000 (40,000) (43,900)

Net increase in cash...................................... Cash at beginning of period ......................... Cash at end of period ....................................

(38,900) 51,950 48,400 $100,350

Computations: (1) Cash receipts from customers Sales revenue .............................................. Deduct: Increase in accounts receivable .... Cash receipts from customers ................... .

$392,780 59,800 $332,980 13-35

*PROBLEM 13-10A (Continued) (2) Cash payments to suppliers Cost of goods sold ................................................ Add: Increase in inventory ................................... Cost of purchases ................................................. Deduct: Increase in accounts payable ................ Cash payments to suppliers ................................. (3) Cash payments for operating expenses Operating expenses exclusive of depreciation ............................................ Add: Increase in prepaid expenses ......... $3,300 Decrease in accrued expenses payable .......................................... 500 Cash payment for operating expenses ....

13-36

$135,460 9,650 145,110 44,700 $100,410

$ 12,410 3,800 $ 16,210

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 13-11A

AMARAL REIS COMPANY Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income ........................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................... Loss on disposal of plant asset ................... Decrease in accounts receivable ................. Increase in inventory .................................... Decrease in prepaid expenses ..................... Increase in accounts payable ...................... Net cash provided by operating activities ..

R$ 45,000 R$40,000 6,000* 18,000 (12,550) 5,720 6,350

Cash flows from investing activities Sale of land .......................................................... Sale of equipment ................................................ Purchase of equipment ....................................... Net cash used by investing activities .........

20,000 6,000 (95,000)

Cash flows from financing activities Payment of cash dividends................................. Net cash used by financing activities .........

(25,000)

63,520 108,520

(69,000)

(25,000)

Net increase in cash.................................................... Cash at beginning of period ....................................... Cash at end of period ..................................................

14,520 45,000 R$ 59,520

Note 1: Non-cash investing and financing activities Exchange of ordinary shares for land ................

R$ 35,000

*(R$6,000 – R$12,000)

13-37

*PROBLEM 13-12A

JHUTTI COMPANY Worksheet—Statement of Cash Flows For the Year Ended December 31, 2014 Statement of Financial Position

Reconciling Items Debit Credit

Balance 12/31/13

Balance 12/31/14

Debits Equipment Investments Inventory Accounts receivable Cash Totals Credits Share capital––ordinary Retained earnings Bonds payable Accumulated depreciation—equipment Accounts payable Accrued expenses payable Totals

205,000 87,000 102,650 57,000 47,250 498,900 200,000 121,790 70,000 40,000 48,280 18,830 498,900

(f)

92,000

(b) (a) (m)

19,250 23,900 43,050

(I)

80,600

(h)

41,300

(d)

6,730

(h) (e)

47,000 3,000

250,000 84,000 121,900 80,900 90,300 627,100

(j) 40,000 (k) 133,810 (i) 30,000 (g) 47,900 (c) 5,120

240,000 175,000 100,000 46,600 53,400 12,100 627,100

Statement of Cash Flow Effects Operating activities Net income Increase in accounts receivable Increase in inventory Increase in accounts payable Decrease in accrued expenses payable Depreciation expense Gain on disposal of equipment Investing activities Sale of investments Sale of equipment Purchase of equipment Financing activities Sale of ordinary shares Issuance of bonds Payment of dividends Totals Increase in cash Totals

13-38

(k) 133,810 (c)

5,120

(g)

47,900

(e) (h) (j) (i)

(a) (b)

23,900 19,250

(d)

6,730

(h)

8,550

(f)

92,000

3,000 14,250 40,000 30,000 (l) 580,910 580,910

80,600 537,860 (m) 43,050 580,910

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 13-1B

Transaction (a) Recorded depreciation expense on the plant assets. (b) Incurred a loss on disposal of plant assets. (c) Acquired a building by paying cash. (d) Made principal repayments on a mortgage. (e) Issued ordinary shares (f) Purchased shares of another company to be held as a long-term equity investment. (g) Paid dividends to ordinary shareholders. (h) Sold inventory on credit. The company uses a perpetual inventory system. (i) Purchased inventory on credit. (j) Paid wages to employees.

SCF Activity Affected O

Cash inflow, outflow, or no cash flow effect? No cash flow effect

No cash flow effect

I F

Cash outflow Cash outflow

F I

Cash inflow Cash outflow

Cash outflow

No cash flow effect

O O

No cash flow effect Cash outflow

13-39

PROBLEM 13-2B

(a) Cash inflows (outflows) related to plant assets 2014: Equipment purchase Land purchase Proceeds from equipment sold

(€90,000) (30,000) 21,000*

*Cost of equipment sold €250,000 + €90,000 – €300,000 = €40,000 Accumulated depreciation removed from accounts for sale of plant assets Accumulated Depreciation— Equipment 93,000 Plug 12,000 64,000 Depreciation Expense 145,000 Cash proceeds = Cost €40,000 – accumulated depreciation €12,000 – loss €7,000 = €21,000 Note to instructor—some students may find journal entries helpful in understanding this exercise. Equipment .............................................................. Cash ................................................................

90,000

Land........................................................................ Cash ................................................................

30,000

Cash (plug) ............................................................ Accumulated Depreciation—Equipment.............. Loss on Disposal of Plant Assets ........................ Equipment .....................................................

21,000 12,000 7,000

(b) Equipment purchase Land purchase Proceeds from equipment sold

13-40

90,000 30,000

40,000

Investing activities (outflow) Investing activities (outflow) Investing activities (inflow)

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 13-3B

ASQUITH COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income ......................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................ Amortization expense ................................ Decrease in accounts receivable .............. Increase in inventory ................................. Increase in prepaid expenses ................... Increase in accounts payable.................... Increase in accrued expenses payable ....... Net cash provided by operating activities

$ 880,000 $ 95,000 20,000 230,000 (120,000) (125,000) 50,000 155,000

305,000 $1,185,000

13-41

*PROBLEM 13-4B

ASQUITH COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Cash receipts from customers......... Less cash payments: To suppliers ............................... For operating expenses ............ Net cash provided by operating activities ...................................

$5,480,000 (1) $3,380,000 (2) 915,000 (3)

4,295,000 $1,185,000

Computations: (1) Cash receipts from customers Sales revenue ................................................... Add: Decrease in accounts receivable .......... Cash receipts from customers ........................

$5,250,000 230,000 $5,480,000

(2) Cash payments to suppliers Cost of goods sold ........................................... Add: Increase in inventory .............................. Cost of purchases ............................................ Deduct: Increase in accounts payable........... Cash payments to suppliers ............................

$3,310,000 120,000 3,430,000 50,000 $3,380,000

(3) Cash payments for operating expenses Operating expenses .................. Add: Increase in prepaid expenses .......................... $125,000 Deduct: Increase in accrued expenses payable ...... 155,000 Cash payments for operating expenses ................................

13-42

$ 945,000

(30,000) $ 915,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 13-5B

ANNE DROID CO. Partial Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income .......................................................... Adjustments to reconcile net income to net cash provided by operating activities: Decrease in accounts receivable ............... £ 15,000 Decrease in accounts payable ................... (11,000) Increase in income taxes payable .............. 8,000 Net cash provided by operating activities................................................

£115,000

12,000 £127,000

13-43

*PROBLEM 13-6B

ANNE DROID CO. Partial Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Cash receipts from customers............. Less cash payments: For operating expenses ................ For income taxes ........................... Net cash provided by operating activities .......................................

£566,000 (1) £411,000 (2) 28,000 (3)

(1) Computation of cash receipts from customers Service revenue .............................................................. Add: Decrease in accounts receivable (£70,000 – £55,000) ............................................... Cash receipts from customers....................................... (2) Computation of cash payments for operating expenses Operating expenses........................................................ Add: Decrease in accounts payable (£51,000 – £40,000) ............................................... Cash payments for operating expenses ....................... (3) Income tax expense ........................................................ Deduct: Increase in income taxes payable (£12,000 – £4,000) ............................................ Cash payments for income taxes ..................................

13-44

439,000 £127,000

£551,000 15,000 £566,000

£400,000 11,000 £411,000 £ 36,000 8,000 £ 28,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 13-7B

(a)

ROCASTLE COMPANY Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income.................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense........................... Increase in accounts receivable .......... Increase in inventory ............................ Decrease in accounts payable............. Increase in income taxes payable ....... Net cash used by operating activities ......................................... Cash flows from investing activities Sale of equipment ........................................ Purchase of equipment................................ Net cash provided by investing activities ............................................ Cash flows from financing activities Issuance of bonds ........................................ Payment of cash dividends ......................... Net cash used by financing activities ............................................ Net decrease in cash ........................................... Cash at beginning of period ............................... Cash at end of period ..........................................

$28,000

$ 6,000 (11,000) (20,000) (12,000) 4,000

(33,000) (5,000)

12,000 (7,000) 5,000 10,000 (25,000) (15,000) (15,000) 33,000 $18,000

(b) ($5,000) – $7,000 – $25,000 = ($37,000)

13-45

*PROBLEM 13-8B

(a)

ROCASTLE COMPANY Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Cash receipts from customers ........ Less cash payments: To suppliers .............................. For operating expenses ($37,000 – $6,000) ................. For interest ................................ For income taxes ...................... Net cash used by operating activities ............... Cash flows from investing activities Sale of equipment ............................ Purchase of equipment .................... Net cash provided by investing activities ................ Cash flows from financing activities Issuance of bonds ............................ Payment of cash dividends ............. Net cash used by financing activities ................................

$275,000 (1) $236,000 (2) 31,000 7,000 6,000 (3)

280,000 (5,000)

12,000 (7,000) 5,000 10,000 (25,000)

Net decrease in cash ............................... Cash at beginning of period .................... Cash at end of period ..............................

(15,000) (15,000) 33,000 $ 18,000

Computations: (1) Cash receipts from customers Sales revenue ................................................. Deduct: Increase in accounts receivable ..... Cash receipts from customers ......................

13-46

$286,000 11,000 $275,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

*PROBLEM 13-8B (Continued) (2) Cash payments to suppliers Cost of goods sold ............................................... Add: Increase in inventory .................................. Cost of purchases ................................................ Add: Decrease in accounts payable................... Cash payments to suppliers ................................

$204,000 20,000 224,000 12,000 $236,000

(3) Cash payments for income taxes Income tax expense ............................................. Deduct: Increase in income taxes payable ........ Cash payments for income taxes ........................

$ 10,000 4,000 $ 6,000

(b) ($5,000) – $7,000 – $25,000 = ($37,000)

13-47

PROBLEM 13-9B

KELLER MINDEN COMPANY Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income ....................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .............................. Loss on disposal of plant assets ............ Increase in accounts receivable.............. Increase in inventory ............................... Increase in accounts payable .................. Decrease in accrued expenses payable .................................................. Net cash provided by operating activities .............................................. Cash flows from investing activities Sale of investments ......................................... Sale of equipment ............................................ Purchase of equipment ................................... Net cash used by investing activities ................................................ Cash flows from financing activities Issuance of bonds ........................................... Sale of ordinary shares ................................... Payment of cash dividends ............................. Net cash provided by financing activities ................................................ Net increase in cash ................................................ Cash at beginning of period ................................... Cash at end of period ..............................................

13-48

€ 108,160

€ 25,000 5,000 (26,200) (21,850) 8,320 (3,730)

(13,460) 94,700

27,500 10,000 (149,000) (111,500) 70,000 50,000 (43,000) 77,000 60,200 33,400 € 93,600

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

*PROBLEM 13-10B

KELLER MINDEN COMPANY Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Cash receipts from customers ............. Less cash payments: To suppliers.................................... For income taxes............................ For operating expenses ................. For interest ..................................... Net cash provided by operating activities........................................ Cash flows from investing activities Sale of investments ....................... Sale of plant assets........................ Purchase of plant assets ............... Net cash used by investing activities...................................... Cash flows from financing activities Sale of ordinary shares ......................... Issuance of bonds ................................. Payment of cash dividends................... Net cash provided by financing activities ..................... Net increase in cash...................................... Cash at beginning of period ......................... Cash at end of period ....................................

€271,300 (1) € 112,990 (2) 37,270 23,400 (3) 2,940

176,600 94,700

27,500 10,000 (149,000) (111,500) 50,000 70,000 (43,000) 77,000 60,200 33,400 € 93,600

13-49

*PROBLEM 13-10B (Continued) Computations: (1) Cash receipts from customers Sales revenue ................................................................ Deduct: Increase in accounts receivable ................... Cash receipts from customers .....................................

€297,500 26,200 €271,300

(2) Cash payments to suppliers Cost of goods sold ........................................................ Add: Increase in inventory .......................................... Cost of purchases ......................................................... Deduct: Increase in accounts payable........................ Cash payments to suppliers .........................................

€ 99,460 21,850 121,310 8,320 €112,990

(3) Cash payments for operating expenses Operating expenses ...................................................... Add: Decrease in accrued expenses payable ............ Cash payments for operating expenses ......................

€ 19,670 3,730 € 23,400

13-50

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 13-11B

VERNET COMPANY Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities Net income ........................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .................................. Gain on disposal of plant asset .................. Increase in accounts receivable ................. Increase in inventory ................................... Decrease in prepaid expenses .................... Increase in accounts payable...................... Net cash provided by operating activities .. Cash flows from investing activities Sale of land .......................................................... Sale of equipment ................................................ Purchase of equipment ....................................... Net cash used by investing activities .........

$50,000 $ 57,000 (6,000)* (13,000) (30,000) 4,400 13,000

25,400 75,400

35,000 37,000 (80,000) (8,000)

Cash flows from financing activities Payment of cash dividends.................................

(82,940)

Net decrease in cash................................................... Cash at beginning of period ....................................... Cash at end of period ..................................................

(15,540) 57,000 $41,460

Note 1: Non-cash investing and financing activities Exchange of ordinary shares for land ................

$25,000

*($37,000 – $31,000)

13-51

BYP 13-1

FINANCIAL REPORTING PROBLEM

(a) Net cash provided by operating activities: 2010 2009

W23,826,779 million W18,522,468 million

(b) The decrease in cash and cash equivalents for the year ended December 31, 2010 was W358,511 million, and the increase was W3,245,564 million for the year ended December 31, 2009. (c) Samsung uses the indirect method of computing and presenting the net cash provided by operating activities. (d) The change in accounts and notes receivable used cash of W1,512,055 million in 2010. The change in inventories required cash of W3,525,195 million in 2010. The change in accounts payable (and other current liabilities) provided cash of W2,507,174 million in 2010. (e) The net cash used by investing activities in 2010 was W23,984,877 million. (f)

13-52

Per the adjustments section of cash flows from operating activities interest paid during 2010 amounted to W582,292 million and income taxes paid were W2,135,287 million.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 13-2

(a)

COMPARATIVE ANALYSIS PROBLEM

£753 – £3,789 – £0 = CHF 13,608 – CHF 4,576 – CHF 5,443 = Zetar amounts in thousands Nestlé amounts in millions

Zetar £(3,036)

Nestlé

CHF3,589

(b) Zetar did not produce sufficient cash from operating activities to cover their capital expenditures nor enough to pay a dividend. As a result, Zetar generated a negative free cash flow. Nestlé on the other hand, produced sufficient cash from operating activities to cover both their capital expenditures and pay a dividend. By generating a positive free cash flow, they have sufficient cash to invest in other capital expenditures, pay off debt, repurchase shares, or just improve their liquidity.

13-53

BYP 13-3

REAL-WORLD FOCUS

(a) Crucial to the SEC’s effectiveness is its enforcement authority. Each year, the SEC brings hundreds of civil enforcement actions against individuals and companies that break the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them. (b) The main purposes of these laws can be reduced to two common-sense notions:  Companies publicly offering securities for investment dollars must

tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing.  People who sell and trade securities—brokers, dealers, and exchan-

ges—must treat investors fairly and honestly, putting investors’ interests first. (c) President Franklin Delano Roosevelt appointed Joseph P. Kennedy, President John F. Kennedy’s father, to serve as the first Chairman of the SEC.

13-54

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 13-4

REAL-WORLD FOCUS

Answers will vary depending on the company chosen by the student.

13-55

BYP 13-5

(a)

DECISION-MAKING ACROSS THE ORGANIZATION

DEL CARPIO COMPANY Statement of Cash Flows For the Year Ended January 31, 2014 Cash flows from operating activities Net loss .................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .................... Gain from sale of investment ........ Net cash provided by operating activities .................................. Cash flows from investing activities Sale of investment................................. Purchase of investment ........................ Purchase of fixtures and equipment .... Net cash used by investing activities ..................................... Cash flows from financing activities Sale of ordinary shares ......................... Purchase of treasury shares ................ Net cash provided by financing activities ..................................... Net increase in cash ..................................... Cash at beginning of period ......................... Cash at end of period ................................... Note 1: Non-cash investing and financing activities Issuance of note for truck .....................

13-56

$ (44,000)*

$ 75,000 (10,000)

65,000 21,000

85,000 (75,000) (320,000) (310,000)* 405,000 (15,000) 390,000 101,000 140,000 $241,000

$ 25,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 13-5 (Continued) *Computation of net income (loss) Sales of merchandise .............................. Interest revenue ....................................... Gain on sale of investment ($85,000 – $75,000) ............................... Total revenues and gains ................. Merchandise purchased .......................... Operating expenses ($160,000 – $75,000) ............................. Depreciation ............................................. Interest expense ....................................... Total expenses.................................. Net loss .....................................................

$350,000 6,000 10,000 366,000 $245,000 85,000 75,000 5,000 410,000 $ (44,000)

(b) From the information given, it appears that from an operating standpoint, Del Carpio Company did not have a superb first year, having suffered a $44,000 net loss. Sara is correct; the statement of cash flows is not prepared in correct form. The correct format classifies cash flows from three activities—operating, investing, and financing; and it also presents significant non-cash investing and financing activities in a separate schedule. Sara is wrong, however, about the actual increase in cash not being $101,000; $101,000 is the correct increase in cash.

13-57

BYP 13-6

COMMUNICATION ACTIVITY

MEMO To:

Bart Sampson

From:

Student

Re:

Statement of cash flows

The statement of cash flows provides information about the cash receipts and cash payments of a firm, classified as operating, investing, and financing activities. The operating activities section of the company’s statement of cash flows shows that cash increased by €172,000 as a result of transactions which affected net income. This amount is computed by adjusting net income for those items which affect net income, but do not affect cash, such as sales on account which remain uncollected at year-end. The investing activities section of the statement reports cash flows resulting from changes in investments and other non-current assets. The company had a cash outflow from investing activities due to purchases of buildings and equipment. The financing activities section of the statement reports cash flows resulting from changes in non-current liabilities and equity. The company had a cash inflow from financing activities due to the issuance of ordinary shares and an outflow due to the payment of cash dividends. If you have any further questions, please do not hesitate to contact me.

13-58

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 13-7

ETHICS CASE

(a) The stakeholders in this situation are: Milton Williams, president of Babbit Corporation. Jerry Roberts, controller. The Board of Directors. The shareholders of Babbit Corporation. (b) The president’s statement, “We must get that amount above $1 million,” puts undue pressure on the controller. This statement along with his statement, “I know you won’t let me down, Jerry,” encourages Jerry to do something unethical. Controller Jerry Roberts’ reclassification (intentional misclassification) of a cash inflow from a long-term note (financing activity) issuance to an “increase in payables” (operating activity) is inappropriate and unethical. (c) It is unlikely that any board members (other than board members who are also officers of the company) would discover the misclassification. Board members generally do not have detailed enough knowledge of their company’s transactions to detect this misstatement. It is possible that an officer of the bank that made the loan would detect the misclassification upon close reading of Babbit Corporation’s statement of cash flows. It is also possible that close scrutiny of the statement of financial position showing an increase in notes payable (long-term debt) would reveal that there is no comparable financing activity item (proceeds from note payable) in the statement of cash flows.

13-59

GAAP EXERCISES

GAAP 13-1 Under GAAP bank overdrafts are treated as part of liabilities on the balance sheet. As a result, on the statement of cash flows they are classified as financing activities. In contrast, under IFRS they are treated as part of cash and cash equivalents on the balance sheet, and as part of the change in cash and cash equivalents on the statement of cash flows. GAAP 13-2 The treatment of these items under IFRS and GAAP is as follows:

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

Interest paid Interest received Dividends paid Dividends received

IFRS

GAAP

Operating or financing Operating or investing Operating or financing Operating or investing

Operating Operating Financing Operating

GAAP 13-3 In the future cash equivalents will probably not be combined with cash. Instead they will most likely be reported separately, as a type of short-term investment.

13-60

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

GAAP 13-4

GAAP FINANCIAL REPORTING PROBLEM

(All amounts in thousands) (a)

Net cash provided by operating activities

2010 2009 $82,805 $76,994

(b)

Increase in cash and cash equivalents

$24,986

(c)

Tootsie Roll uses the indirect method in preparing its statement of cash flows.

(d)

For 2010, accounts receivable decreased by $717; inventories increased by $2,468; and accounts payable increased by $2,180.

(e)

For 2010, net cash used in investing activities was $16,808.

(f)

In 2010, interest paid was $49, and income taxes paid were $20,586.

13-61

13-62

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

APPENDIX E Time Value of Money SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE E-1 (a) Interest = p X i X n I = $9,000 X .05 X 12 years I = $5,400 Accumulated amount = $9,000 + $5,400 = $14,400 (b) Future value factor for 12 periods at 5% is 1.79586 (from Table 1) Accumulated amount = $9,000 X 1.79586 = $16,162.74

BRIEF EXERCISE E-2 (1) Case A Case B

5% 6%

3 periods 8 periods

(2) Case A Case B

3% 4%

8 periods 12 periods

BRIEF EXERCISE E-3 FV = p X FV of 1 factor = $8,400 X 1.60103 = $13,448.65

BRIEF EXERCISE E-4 FV of an annuity of 1 = p X FV of an annuity factor = $60,000 X 16.86994 = $1,012,196.40

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E-1

BRIEF EXERCISE E-5 FV = p X FV of 1 factor + (p X FV of an annuity factor) = ($5,000 X 2.40662) + ($1,000 X 28.13238) = $12,033.10 + $28,132.38 = $40,165.48

BRIEF EXERCISE E-6 FV = p X FV of 1 factor = $35,000 X 1.46933 = $51,426.55

BRIEF EXERCISE E-7

(1) CASE A CASE B CASE C

(a) 12% 8% 3%

(b) 7 periods 11 periods 16 periods

(2) CASE A CASE B CASE C

10% 10% 4%

20 periods 7 periods 10 periods

BRIEF EXERCISE E-8 (a)

i = 10% ?

$25,000

Discount rate from Table 3 is .42410 (9 periods at 10%). Present value of $25,000 to be received in 9 years discounted at 10% is therefore $10,602.50 ($25,000 X .42410).

E-2

Weygandt Financial, IFRS, 2/e, Solutions Manual

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BRIEF EXERCISE E-8 (Continued) (b)

i = 9% ?

$25,000 $25,000 $25,000 $25,000 $25,000 $25,000

Discount rate from Table 4 is 4.48592 (6 periods at 9%). Present value of 6 payments of $25,000 each discounted at 9% is therefore $112,148.00 ($25,000 X 4.48592).

BRIEF EXERCISE E-9 i = 8% ?

$750,000

Discount rate from Table 3 is .63017 (6 periods at 8%). Present value of $750,000 to be received in 6 years discounted at 8% is therefore $472,627.50 ($750,000 X .63017). Chaffee Company should therefore invest $472,627.50 to have $750,000 in six years.

BRIEF EXERCISE E-10 i = 6% ?

$450,000

Discount rate from Table 3 is .62741 (8 periods at 6%). Present value of $450,000 to be received in 8 years discounted at 6% is therefore $282,334.50 ($450,000 X .62741). Lloyd Company should invest $282,334.50 to have $450,000 in eight years. Copyright © 2013 John Wiley & Sons, Inc.

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E-3

BRIEF EXERCISE E-11 i = 8% ?

$46,000 $46,000 $46,000 $46,000

$46,000 $46,000

Discount rate from Table 4 is 8.55948. Present value of 15 payments of $46,000 each discounted at 8% is therefore $393,736.08 ($46,000 X 8.55948). Arthur Company should pay $393,736.08 for this annuity contract.

BRIEF EXERCISE E-12 i = 5% ?

$80,000

Discount rate from Table 4 is 5.07569. Present value of 6 payments of $80,000 each discounted at 5% is therefore $406,055.20 ($80,000 X 5.07569). Kaehler Enterprises invested $406,055.20 to earn $80,000 per year for six years.

E-4

Weygandt Financial, IFRS, 2/e, Solutions Manual

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BRIEF EXERCISE E-13 i = 5% ?

$300,000

Diagram for Principal

i = 5% ?

$16,500 $16,500 $16,500 $16,500

$16,500 $16,500

Diagram for Interest

Present value of principal to be received at maturity: $300,000 X 0.37689 (PV of $1 due in 20 periods at 5% from Table 3) .............................................................. Present value of interest to be received periodically over the term of the bonds: $16,500* X 12.46221 (PV of $1 due each period for 20 periods at 5% from Table 4) ........................................................................ Present value of bonds ...............................................................

$113,067*

205,626** $318,693**

*$300,000 X .055 **Rounded. BRIEF EXERCISE E-14 The bonds will sell at a discount (for less than $300,000). This may be proven as follows: Present value of principal to be received at maturity: $300,000 X .31180 (PV of $1 due in 20 periods at 6% from Table 3) .............................................................. Present value of interest to be received periodically over the term of the bonds: $16,500 X 11.46992 (PV of $1 due each period for 20 periods at 6% from Table 4) ........................................................................ Present value of bonds ...............................................................

$ 93,540*

189,254* $282,794*

*Rounded.

Weygandt Financial, IFRS, 2/e, Solutions Manual

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E-5

BRIEF EXERCISE E-15 i = 6% ?

$65,000

Diagram for Principal

i = 6% ?

$2,600

Diagram for Interest

Present value of principal to be received at maturity: $65,000 X .70496 (PV of $1 due in 6 periods at 6% from Table 3) ............................................................. Present value of interest to be received annually over the term of the note: $2,600* X 4.91732 (PV of $1 due each period for 6 periods at 6% from Table 4) ................................................................. Present value of note received ..................................................

$45,822.40

12,785.03 $58,607.43

*$65,000 X .04

E-6

Weygandt Financial, IFRS, 2/e, Solutions Manual

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BRIEF EXERCISE E-16 i = 4% ?

$2,500,000

Diagram for Principal

i = 4% ?

$75,000 $75,000 $75,000 $75,000

$75,000 $75,000 $75,000

Diagram for Interest

Present value of principal to be received at maturity: $2,500,000 X 0.53391 (PV of $1 due in 16 periods at 4% from Table 3) ............................................................. Present value of interest to be received periodically over the term of the bonds: $75,000* X 11.65230 (PV of $1 due each period for 16 periods at 4% from Table 4) ....................................................................... Present value of bonds and cash proceeds ............................. *($2,500,000 X .06 X 1/2)

$1,334,775

873,923** $2,208,698**

**Rounded

BRIEF EXERCISE E-17 i = 9% ?

$3,200 $3,200 $3,200 $3,200 $3,200 $3,200 $3,200 $3,200

Discount rate from Table 4 is 5.53482. Present value of 8 payments of $3,200 each discounted at 9% is therefore $17,711.42 ($3,200 X 5.53482). Mark Barton should not purchase the tire retreading machine because the present value of the future cash flows is less than the $18,000 purchase price of the retreading machine. Copyright © 2013 John Wiley & Sons, Inc.

Weygandt Financial, IFRS, 2/e, Solutions Manual

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E-7

BRIEF EXERCISE E-18 i = 5% ?

$48,850

Discount rate from Table 4 is 7.72173. Present value of 10 payments of $48,850 each discounted at 5% is therefore $377,206.51 ($48,850 X 7.72173). Frazier Company should receive $377,206.51 from the issuance of the note.

BRIEF EXERCISE E-19 i = 8% ?

$40,000

$45,000

$50,000

To determine the present value of the future cash inflows, discount the future cash flows at 8%, using Table 3. Year 1 ($40,000 X .92593) = Year 2 ($45,000 X .85734) = Year 3 ($50,000 X .79383) = Present value of future cash inflows

$ 37,037.20 38,580.30 39,691.50 $115,309.00

To achieve a minimum rate of return of 8%, Leffler Company should pay no more than $115,309.00. If Leffler pays less than $115,309.00, its rate of return will be greater than 8%.

E-8

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BRIEF EXERCISE E-20 i=? $4,765.50

$12,000

Present value = Future value X Present value of 1 factor $4,765.50 = $12,000 X Present value of 1 factor Present value of 1 factor = $4,765.50 ÷ $12,000 = .39713 The .39713 for 12 periods approximates the value found in the 8% column (.39711). Colleen Mooney will receive a 8% return.

BRIEF EXERCISE E-21 i = 11% $29,319

$75,000

n=? Present value = Future value X Present value of 1 factor $29,319 = $75,000 X Present value of 1 factor Present value of 1 factor = $29,319 ÷ $75,000 = .39092 The .39092 at 11% is found in the 9 years row. Wayne Kurt therefore must wait 9 years to receive $75,000.

Weygandt Financial, IFRS, 2/e, Solutions Manual

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E-9

BRIEF EXERCISE E-22 i=? ?

$1,200 $1,200 $1,200 $1,200 $1,200 $1,200

$1,200 $1,200

$10,271.38

Present value = Future amount X Present value of an annuity factor $10,271.38 = $1,200 X Present value of an annuity factor Present value of an annuity factor = $10,271.38 ÷ $1,200 = 8.55948

The 8.55948 for 15 periods is found in the 8% column. Joanne Quick will therefore earn a rate of return of 8%.

BRIEF EXERCISE E-23 i = 9% $1,300 $1,300 $1,300 $1,300 $1,300 $1,300

$6,542.83 n=? Present value = Future amount X Present value of an annuity factor $6,542.83 = $1,300 X Present value of an annuity factor Present value of an annuity factor = $6,542.83 ÷ $1,300 = 5.03295

The 5.03295 at an interest rate of 9% is shown in the 7-year row. Therefore, Patty will receive 7 payments.

E-10

Weygandt Financial, IFRS, 2/e, Solutions Manual

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BRIEF EXERCISE E-24 10*

–18,000

50,000

I/YR.

PMT

10.76% *2024 – 2014 BRIEF EXERCISE E-25 10

60,000

–8,860

I/YR.

PMT

7.80%

BRIEF EXERCISE E-26 40

178,000*

–8,400

I/YR.

PMT

3.55% (semiannual) *$198,000 – $20,000

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E-11

BRIEF EXERCISE E-27 (a) Inputs:

6.9

–16,000

PMT

Answer:

86,530.07

(b) Inputs:

8.65

14,000**

200,000*

PMT

–178,491.52

Answer:

*200 X $1,000

E-12

**$200,000 X .07

Weygandt Financial, IFRS, 2/e, Solutions Manual

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BRIEF EXERCISE E-28 (a) Note—set payments at 12 per year. Inputs: 96 7.8

42,000

PMT

–589.48

Answer: (b) Note—set payments to 1 per year. Inputs: 5 7.25

8,000

PMT

–1,964.20

Answer:

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E-13

E-14

Weygandt Financial, IFRS, 2/e, Solutions Manual

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CHAPTER 14 Financial Statement Analysis ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief Exercises

Discuss the need for comparative analysis.

1, 2, 3, 5

Identify the tools of financial statement analysis.

2, 3, 5, 6

Explain and apply horizontal analysis.

3, 4

2, 3, 5, 6, 7

Describe and apply vertical analysis.

3, 4

2, 4, 8

Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency.

5, 6, 7, 8, 9, 10, 11,12, 13, 14, 15, 16, 17, 18, 19

2, 9, 10, 11, 12, 13

Understand the concept of earning power, and how discontinued operations are presented.

20, 21, 22

14, 15

Understand the concept of quality of earnings.

Do It!

Exercises

1, 4

1, 3, 4

Problems

2, 3, 4

2, 4

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

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

3, 4

12, 13

8, 9

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14-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

14-2

Description

Difficulty Level

Time Allotted (min.)

Prepare vertical analysis and comment on profitability.

Simple

20–30

Compute ratios from statement of financial position and income statement.

Simple

20–30

Perform ratio analysis, and evaluate financial position and operating results.

Simple

20–30

Compute ratios, and comment on overall liquidity and profitability.

Moderate

30–40

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

Moderate

50–60

Compute numerous ratios.

Simple

30–40

Compute missing information given a set of ratios.

Complex

30–40

Prepare income statement with discontinued operations.

Moderate

30–40

Prepare income statement with non-typical items.

Moderate

30–40

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

WEYGANDT FINANCIAL ACCOUNTING, IFRS EDITION, 2e CHAPTER 14 FINANCIAL STATEMENT ANALYSIS Number

Difficulty

Time (min.)

BE1

Moderate

10–12

BE2

2–5

K, AP

Simple

8–10

BE3

Simple

6–8

BE4

Simple

6–8

BE5

Simple

4–6

BE6

Simple

4–6

BE7

Simple

4–6

BE8

Simple

5–7

BE9

Simple

4–6

BE10

Simple

3–5

BE11

Simple

6–8

BE12

Moderate

6–8

BE13

Moderate

6–8

BE14

Simple

4–6

BE15

Simple

3–5

DI1

Simple

6–8

DI2

Simple

10–12

DI3

Simple

6–8

DI4

3, 5–7

Simple

3–5

EX1

Simple

10–12

EX2

Simple

10–12

EX3

3, 4

Simple

12–15

EX4

3, 4

Simple

10–12

EX5

Simple

8–10

EX6

Simple

8–10

EX7

Simple

6–8

EX8

Simple

6–8

EX9

Simple

6–8

EX10

Moderate

8–10

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-3

FINANCIAL STATEMENT ANALYSIS (Continued) Number

Difficulty

Time (min.)

EX11

Simple

10–12

EX12

Moderate

8–10

EX13

Simple

6–8

4, 5

AP, AN

Simple

20–30

Simple

20–30

AP, AN

Simple

20–30

AP, AN

Moderate

30–40

AP, AN

Moderate

50–60

Simple

30–40

Complex

30–40

Moderate

30–40

Moderate

30–40

BYP1

3, 5

AN, E

Moderate

20–25

BYP2

3, 5

AN, E

Simple

15–20

BYP3

C, E

Moderate

15–20

BYP4

Moderate

20–25

BYP5

1, 7

Simple

15–20

14-4

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

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

1. Discuss the need for comparative analysis.

Comprehension Q14-1 Q14-2 Q14-3

Q14-5 BE14-1 Q14-5

Application

Analysis

Weygandt Financial, IFRS, 2/e,Solutions Manual (For Instructor Use Only)

2. Identify the tools of financial statement analysis.

Q14-6 BE14-2

Q14-2 Q14-3

3. Explain and apply horizontal analysis.

BE14-2

Q14-3 D1 14-4

Q14-4 BE14-2 BE14-3 BE14-5 BE14-6

BE14-7 DI14-1 E14-1 E14-3 E14-4

4. Describe and apply vertical BE14-2 analysis.

Q14-3

Q14-4 BE14-2 BE14-4 BE14-8

E14-2 E14-3 E14-4

P14-1

5. Identify and compute ratios Q14-6 used in analyzing a firm’s Q14-8 liquidity, profitability, and BE14-2 solvency.

Q14-5 Q14-7 Q14-9 Q14-10 Q14-11 Q14-12 Q14-13

Q14-14 Q14-15 Q14-16 Q14-17 Q14-18 DI14-4

Q14-19 BE14-2 BE14-9 BE14-10 DI14-2 E14-6 E14-7

E14-8 E14-9 E14-10 E14-11 P14-1 P14-2 P14-3 P14-4 P14-5 P14-6

BE14-11 BE14-12 BE14-13 E14-5 P14-1

6. Understand the concept of earning power, and how discontinued operations are presented.

Q14-20 Q14-21 Q14-22

DI14-4

BE14-14 BE14-15 DI14-3

E14-13 P14-8 P14-9

E14-12

7. Understand the concept of quality of earnings.

Q14-23 DI14-4

8. Broadening Your Perspective

Decision-Making Across the Organization Communication

Synthesis

Evaluation

BE14-2

P14-2 P14-3 P14-4 P14-7

Financial Reporting Comp. Analysis

Financial Reporting Comp. Analysis Decision-Making Across the Organization. Ethics Case

BLOOM’ S TAXONOMY TABLE

Learning Objective

14-5

ANSWERS TO QUESTIONS 1.

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

(a) Comparison of financial information can be made on an intracompany basis, an intercompany basis, and an industry average basis (or norms). (1) An intracompany basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years. (2) The industry averages basis compares an item or financial relationship of a company with industry averages (or norms) published by financial rating services. (3) An intercompany basis compares an item or financial relationship of one company with the same item or relationship in one or more competing companies. (b) The intracompany basis of comparison is useful in detecting changes in financial relationships and significant trends within a company. The industry averages basis provides information as to a company’s relative performance within the industry. The intercompany basis of comparison provides insight into a company’s competitive position.

Horizontal analysis (also called trend analysis) measures the dollar and percentage increase or decrease of an item over a period of time. In this approach, the amount of the item on one statement is compared with the amount of that same item on one or more earlier statements. Vertical analysis (also called common-size analysis) expresses each item within a financial statement in terms of a percent of a base amount.

(a) €350,000 X 1.224 = €428,400, 2014 net income. (b) €350,000 ÷ .05 = €7,000,000, 2013 revenue.

A ratio expresses the mathematical relationship between one quantity and another. The relationship is expressed in terms of either a percentage (200%), a rate (2 times), or a simple proportion (2:1). Ratios can provide clues to underlying conditions that may not be apparent from individual financial statement components. The ratio is more meaningful when compared to the same ratio in earlier periods or to competitors’ ratios or to industry ratios.

(a) Liquidity ratios: Current ratio, acid-test ratio, accounts receivable turnover, and inventory turnover. (b) Solvency ratios: Debt to total assets and times interest earned.

Gordon is correct. A single ratio by itself may not be very meaningful and is best interpreted by comparison with: (1) past ratios of the same company, (2) ratios of other companies, or (3) industry norms or predetermined standards. In addition, other ratios of the company are necessary to determine overall financial well-being.

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

14-6

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Questions Chapter 14 (Continued) 9.

The current ratio relates current assets to current liabilities. The acid-test ratio relates cash, short-term investments, and net receivables to current liabilities. The current ratio includes inventory and prepaid expenses while the acid-test ratio excludes these. The acid-test ratio provides additional information about short-term liquidity and is an important complement to the current ratio.

10.

Monte Company does not necessarily have a problem. The accounts receivable turnover ratio can be misleading in that some companies encourage credit and revolving charge sales and slow collections in order to earn a healthy return on the outstanding accounts receivable in the form of high rates of interest.

11.

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

12.

The price earnings (P/E) ratio is a reflection of investors’ assessments of a company’s future earnings. In this question, investors favor Microsoft because it has the higher P/E ratio. The investors feel that Microsoft will be able to generate even higher future earnings and so the investors are willing to pay more for the shares.

13.

The payout ratio is cash dividends divided by net income. In a growth company, the payout ratio is often low because the company is reinvesting earnings in the business.

14.

(a) The increase in profit margin is good news because it means that a greater percentage of net sales is going towards income. (b) The decrease in inventory turnover signals bad news because it is taking the company longer to sell the inventory and consequently there is a greater chance of inventory obsolescence. (c) An increase in the current ratio signals good news because the company improved its ability to meet maturing short-term obligations. (d) The earnings per share ratio is a deceptive ratio. The decrease might be bad news to the company because it could mean a decrease in net income. If there is an increase in shareholders’ investment (as a result of issuing additional shares) and a decrease in EPS, then this means that the additional investment is earning a lower return (as compared to the return on ordinary shareholders’ equity before the additional investment). Generally, this is undesirable. (e) The increase in the price-earnings ratio is generally good news because it means that the market price per share has increased and investors are willing to pay that higher price for the shares. An increase in the P/E ratio is good news for investors who own the shares and don’t want to buy any more. It is bad news for investors who want to buy (or buy more of) the shares. (f) The increase in the debt to total assets ratio is bad news because it means that the company has increased its obligations to creditors and has lowered its equity “buffer.” (g) The decrease in the times interest earned ratio is bad news because it means that the company’s ability to meet interest payments as they come due has weakened.

Asset turnover. Inventory turnover. Return on ordinary shareholders’ equity. Times interest earned.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-7

Questions Chapter 14 (Continued)

15.

Net Income Return on assets = Average Assets (7.6%)

Return on ordinary shareholders’ equity = (12.8%)

Net Income – Preference Dividends Average Ordinary Shareholders' Equity

The difference between the two rates can be explained by looking at the denominator value and by remembering the basic accounting equation, A = L + E. The asset value will clearly be the larger of the two denominator values; therefore, it will also give the smaller return. 16.

(a) The times interest earned ratio, which is an indication of the company’s ability to meet interest payments, and the debt to total assets ratio, which indicates the company’s ability to withstand losses without impairing the interests of creditors. (b) The current ratio and the acid-test ratio, which indicate a company’s liquidity and short-term debt-paying ability. (c) The earnings per share and the return on ordinary shareholders’ equity, both of which indicate the earning power of the investment.

17.

Earnings per share means earnings per ordinary share. Preference share dividends are subtracted from net income in computing EPS in order to obtain income available to ordinary shareholders.

18.

(a) Trading on the equity means that the company has borrowed money at a lower rate of interest than it is able to earn by using the borrowed money. Simply stated, it is using money supplied by non-owners to increase the return to the owners. (b) A comparison of the return on total assets with the rate of interest paid for borrowed money indicates the profitability of trading on the equity.

19.

Net income – Preference dividends = Earnings per share Weighted average – ordinary shares outstanding

R$160,000 – R$30,000 = R$2.60 50,000 EPS of R$2.60 is high relative to what? Is it high relative to last year’s EPS? The president may be comparing the EPS of R$2.60 to the market price of the company’s stock. 20.

Discontinued operations refers to the disposal of a significant component of the business such as the stopping of an entire activity or eliminating a major class of customers. It is important to report discontinued operations separately from continuing operations because the discontinued component will not affect future income statements.

21.

EPS on income from continuing operations usually is more relevant to an investment decision than EPS on net income. Income from continuing operations represents the results of continuing and ordinary business activity. It is therefore a better basis for predicting future operating results than an EPS figure which includes the effect of discontinued operations that are not expected to recur again in the foreseeable future.

14-8

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Questions Chapter 14 (Continued) 22.

When comparing EPS trends, discontinued operations should be omitted since they are not reflective of normal operations. In this example, the trend is unfavorable because EPS, exclusive of discontinued operations, has decreased from $3.20 to $2.99.

23.

(1) Use of alternative accounting methods. Variations among companies in the application of IFRS may hamper comparability. (2) Use of pro forma income measures that do not follow IFRS. Pro forma income is calculated by excluding items that the company believes are unusual or nonrecurring. It is often difficult to determine what was included and excluded. (3) Improper revenue and expense recognition. Many high-profile cases of inappropriate accounting involve recording items in the wrong period.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-9

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 14-1 Dear Uncle Liam, It was so good to hear from you! I hope you and Aunt Doreen are still enjoying your new house. You asked some interesting questions. They relate very well to the material that we are studying now in my financial accounting class. You said you heard that different users of financial statements are interested in different characteristics of companies. This is true. A short-term creditor, such as a bank, is interested in the company’s liquidity, or ability to pay obligations as they become due. The liquidity of a borrower is extremely important in evaluating the safety of a loan. A long-term creditor, such as a bondholder, would be interested in solvency, the company’s ability to survive over a long period of time. A long-term creditor would also be interested in profitability. They are interested in the likelihood that the company will survive over the life of the debt and be able to meet interest payments. Shareholders are also interested in profitability, and in the solvency of the company. They want to assess the likelihood of dividends and the growth potential of the shares. It is important to compare different financial statement elements to other items. The amount of a financial statement element such as cash does not have much meaning unless it is compared to something else. Comparisons can be done on an intracompany basis. This basis compares an item or financial relationship within a company for the current year to one or more previous years. Intracompany comparisons are useful in detecting changes in financial relationships and significant trends. Comparisons can also be done with industry averages. This basis compares an item or financial relationship with industry averages or norms. Comparisons with industry averages provide information as to a company’s relative performance within the industry. Finally, comparisons can be done on an intercompany basis. This basis compares an item or financial relationship with the same item or relationship in one or more competing companies. Intercompany comparisons are useful in determining a company’s competitive position. I hope this answers your questions. If it does not, or you have more questions, please write me again or call. We could even meet for lunch sometime; it would be great to see you! Love, Your niece (or nephew) 14-10

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BRIEF EXERCISE 14-2 (a) The three tools of financial statement analysis are horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis evaluates a series of financial statement data over a period of time. Vertical analysis evaluates financial statement data by expressing each item in a financial statement as a percent of a base amount. Ratio analysis expresses the relationship among selected items of financial statement data. (b) Horizontal Analysis Current assets

2012 100%

2013 105%

2014 109%

(105% = $230,000/$220,000; 109% = $240,000/$220,000) Vertical Analysis Current assets*

2012 44%

2013 38%

2014 38%

*as a percentage of total assets (44% = $220,000/$500,000; 38% = $230,000/$600,000; 38% = $240,000/$630,000) Ratio Analysis Current ratio

2012 1.38

2013 1.35

2014 1.30

(1.38 = $220,000/$160,000; 1.35 = $230,000/$170,000; 1.30 = $240,000/$184,000) BRIEF EXERCISE 14-3 Horizontal analysis:

Dec. 31, 2014 Dec. 31, 2013 Inventory € 840,000 € 500,000 Accounts receivable € 520,000 € 350,000 Total assets €2,500,000 €3,000,000 340,000 = .68 500,000

Increase or (Decrease) Amount Percentage €340,000 68% €170,000 49% (€500,000) (17)%

170,000 = .49 350,000

(500,000) = (.17) 3,000,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-11

BRIEF EXERCISE 14-4 Vertical analysis:

Inventory Accounts receivable Total assets

Dec. 31, 2014 Dec. 31, 2013 Amount Percentage* Amount Percentage** € 840,000 33.6% € 500,000 16.7% € 520,000 20.8% € 350,000 11.7% €2,500,000 100% €3,000,000 100%

* 840,000 = .336 2,500,000

** 500,000 = .167 3,000,000

* 520,000 = .208 2,500,000

** 350,000 = .117 3,000,000

BRIEF EXERCISE 14-5

Net income

2014 $525,000

2013 $475,000

2012 $550,000

(a) 2012–2013 (b) 2013–2014

Increase or (Decrease) Amount Percentage (75,000) (14%) (50,000) (11%)

75,000 = .14 550,000

50,000 = .11 475,000

BRIEF EXERCISE 14-6

Net income X .40 =

2014 $560,000

2013 X

Increase 40%

$560,000 – X X

.40X = $560,000 – X

14-12

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BRIEF EXERCISE 14-6 (Continued) 1.40X = $560,000 X = $400,000 2013 Net income = $400,000

BRIEF EXERCISE 14-7 Comparing the percentages presented results in the following conclusions: The net income for Kemplar increased in 2013 because of the combination of an increase in sales revenue and a decrease in both cost of goods sold and expenses. However, the reverse was true in 2014 as sales revenue decreased while both cost of goods sold and expenses increased. This resulted in a decrease in net income.

BRIEF EXERCISE 14-8

Sales revenue Cost of goods sold Expenses Net income

2014 100.0 59.2 25.0 15.8

2013 100.0 62.4 25.6 12.0

2012 100.0 64.5 27.5 8.0

Net income as a percent of sales revenue for Dagman increased over the three-year period because cost of goods sold and expenses both decreased as a percent of sales every year.

BRIEF EXERCISE 14-9 (a) Working capital = Current assets – Current liabilities Current assets Current liabilities Working capital

£46,690,000 40,600,000 £ 6,090,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-13

BRIEF EXERCISE 14-9 (Continued) (b) Current ratio:

Current assets £ 46,690,000 = Current liabilities £ 40,600,000 = 1.15:1 (c) Acid-test ratio:

Cash+ Short-term investments + Receivables (net) £8,113,000 + £ 4,947,000 + £12,545,000 = Current liabilities £ 40,600,000 =

£25,605,000 £ 40,600,000

= .63:1 BRIEF EXERCISE 14-10 (a) Asset turnover =

Net sales Average assets

$88,000,000 $14,000,000 + $18,000,000 2

= 5.5 times

(b) Profit margin

Net income Net sales

$12,760,000 $88,000,000

= 14.5% 14-14

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BRIEF EXERCISE 14-11 (a) Accounts receivable turnover =

Net credit sales Average net accounts receivable

2014

2013

(1)

$3,745,000 = 7.0 times $535,000* *($520,000 + $550,000) ÷ 2

$3,000,000 = 6.0 times $500,000** **($480,000 + $520,000) ÷ 2

(2)

Average collection period

365 = 60.8 days 6.0

365 = 52.1 days 7.0

(b) Gladow Company should be pleased with the effectiveness of its credit and collection policies. The company has decreased the average collection period by 8.7 days and the collection period of approximately 52 days is well within the 60 days allowed in the credit terms. BRIEF EXERCISE 14-12 (a) Inventory turnover = (1)

Cost of goods sold Average inventory

2014

2013

$ 4,400,000 = 4.4 times  $ 980,000 + $ 1,020,000    2  

Beginning inventory Purchases Goods available for sale Ending inventory Cost of goods sold

$ 4,600,000 = 5.0 times  $ 860,000 + $ 980,000    2  

$ 980,000

$ 860,000

4,440,000 5,420,000 1,020,000 $4,400,000

4,720,000 5,580,000 980,000 $4,600,000

(2) Days in inventory

365 = 83.0 days 4.4

365 = 73.0 days 5.0

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14-15

BRIEF EXERCISE 14-12 (Continued) (b) Management should be concerned with the fact that inventory is moving slower in 2014 than it did in 2013. The decrease in the turnover could be because of poor pricing decisions or because the company is stuck with obsolete inventory.

BRIEF EXERCISE 14-13 Payout ratio =

.20 =

Cash dividends Net income X $68,000

X = $68,000 (.20) = $13,600 Cash dividends = $13,600 Return on assets =

Net income Average assets .16 =

$68,000 X

.16X = $68,000 X=

$68,000 .16

X = $425,000 Average assets = $425,000

14-16

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BRIEF EXERCISE 14-14 MING CORPORATION Partial Income Statement Income before income taxes ......................................... Income tax expense ($400,000 X 30%) .......................... Income from continuing operations ............................. Discontinued operations Income from operations of retail division, net of $3,000 tax (10,000 X 30%)……………… $ 7,000 Loss on disposal of retail division, net of $24,000 tax saving ($80,000 X 30%)………….. (56,000) Net income ......................................................................................

$400,000 120,000 280,000

(49,000) $231,000

BRIEF EXERCISE 14-15 BLEVINS CORPORATION Partial Income Statement Loss from operations of European facilities, net of €105,000 income tax saving (€350,000 X 30%) ... €245,000 Loss on disposal of European facilities, net of €45,000 income tax saving (€150,000 X 30%) ......... 105,000 €350,000 SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 14-1

Plant assets Current assets Total assets

Amount $71,000 (26,000) $ 45,000

Increase (Decrease) in 2014 Percent 9.5% [($821,000 – $750,000) ÷ $750,000] (11.6)% [($199,000 – $225,000) ÷ $225,000] 4.6% [($1,020,000 – $975,000) ÷ $975,000]

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-17

DO IT! 14-2 2014 (a) Current ratio: €1,350 ÷ €900 = €1,343 ÷ €810 =

1.50:1

(b) Inventory turnover: €984/[(€430 + €390) ÷ 2)] = €895/[(€390 + €326) ÷ 2)]=

2.40 times

9.1%

(d) Return on assets: €364/[(€2,310 + €2,243) ÷ 2)] = €213/[(€2,243 + €2,100) ÷ 2)] =

16.0%

(e) Return on ordinary shareholders’ equity: €364/[(€1,020 + €1,040) ÷ 2)] = €213/[€1,040 + €960) ÷ 2)] =

35.3%

(f)

Debt to total assets ratio: €1,290 ÷ €2,310 = €1,203 ÷ €2,243 =

(g) Times interest earned: (€364 + €242 + €10) ÷ €10 = (€213 + €142 + €20) ÷ €20 =

14-18

2013 1.66:1

2.50 times

5.9%

9.8%

21.3% 55.8% 53.6% 62 times 19 times

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

DO IT! 14-3 GRINDERS CORPORATION Income Statement (Partial) Income before income taxes ........................................ Income tax expense ...................................................... Income from continuing operations ............................ Discontinued operations Loss from operations of music division, net of $21,000 income tax saving ........ Gain from disposal of music division, net of $14,000, taxes............................. Net income .....................................................................

$500,000 175,000 325,000 $39,000 26,000

(13,000) $312,000

DO IT! 14-4 1. 2. 3. 4. 5. 6.

A measure used to evaluate a company’s liquidity. Pro forma income: Usually excludes items that a company thinks are unusual or non-recurring. Quality of earnings: Indicates the level of full and transparent information provided to users of the financial statements. Discontinued operations: The disposal of a significant component of a business. Horizontal analysis: Determines increases or decreases in a series of financial statement data. Comprehensive income: Includes all changes in equity during a period except those resulting from investments by shareholders and distributions to shareholders. Current ratio:

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-19

SOLUTIONS TO EXERCISES EXERCISE 14-1 GALLUP INC. Condensed Statements of Financial Position December 31

Assets Plant assets (net) Current assets Total assets Equity Share capital— ordinary, $1 par Retained earnings Total equity Liabilities Non-current liabilities Current liabilities Total liabilities Total equity and liabilities

14-20

Increase or (Decrease) Amount Percentage

2014

2013

$396,000 128,000 $524,000

$330,000 100,000 $430,000

($66,000 ( 28,000 $94,000

(20.0%) (28.0%) (21.9%)

$ 159,000 135,300 294,300

$ 115,000 150,000 265,000

( $44,000) ((14,700)) ( 29,300)

(38.3%) (((9.8%)) ( 11.1%)

138,700 91,000 229,700

95,000 70,000 165,000

( 43,700 21,000 ( 64,700)

(46.0%) 30.0% ( 39.2%)

$524,000

$430,000

($94,000)

21.9%

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 14-2 CONARD CORPORATION Condensed Income Statements For the Years Ended December 31

Net sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income taxes Income tax expense Net income

2014 Amount Percent

2013 Amount Percent

£750,000 480,000 270,000 105,000 75,000 180,000 90,000 36,000 £ 54,000

£600,000 408,000 192,000 84,000 54,000 138,000 54,000 18,000 £ 36,000

100.0% 64.0% 36.0% 14.0% 10.0% 24.0% 12.0% 4.8% 7.2%

100.0% 68.0% 32.0% 14.0% 9.0% 23.0% 9.0% 3.0% 6.0%

EXERCISE 14-3 (a)

GARCIA CORPORATION Condensed Statements of Financial Position December 31

2014 Assets Intangibles Property, plant & equipment (net) Current assets Total assets

2013

Percentage Increase Change (Decrease) from 2013

$ 24,000 $ 40,000

$ (16,000)

(40.0%)

100,000 90,000 76,000 80,000 $200,000 $210,000

( 10,000) (4,000) $(10,000)

( 11.1%) (5.0%) (4.8%)

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-21

EXERCISE 14-3 (Continued) GARCIA CORPORATION Condensed Statements of Financial Position (Continued) December 31

2014 Equity and liabilities Equity Non-current liabilities Current liabilities Total equity and liabilities

(b)

14-22

2013

Percentage Increase Change (Decrease) from 2013

$ 20,000 $ 12,000

$ 8,000

66.7%

140,000 40,000

150,000 48,000

(10,000) (8,000)

(6.7%) ((16.7%))

$200,000 $210,000

$(10,000)

(4.8%)

GARCIA CORPORATION Condensed Statements of Financial Position December 31, 2014 Amount

Percent

Assets Intangibles Property, plant, and equipment (net) Current assets Total assets

$ 24,000 100,000 76,000 $200,000

12.0% 50.0% 38.0% 100.0%

Equity and liabilities Equity Non-current liabilities Current liabilities Total equity and liabilities

$ 20,000 140,000 40,000 $200,000

10% 70% 20% 100%

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 14-4 (a)

HENDI CORPORATION Condensed Income Statements For the Years Ended December 31 Increase or (Decrease) During 2013

Net sales Cost of goods sold Gross profit Operating expenses Net income

(b)

2014

2013

Amount

Percentage

$600,000

$500,000

$100,000

468,000 132,000 60,000 $ 72,000

400,000 100,000 54,000 $ 46,000

68,000 32,000 6,000 $ 26,000

20.0% 17.0% 32.0% 11.1% 56.5%

HENDI CORPORATION Condensed Income Statements For the Years Ended December 31 2014

Net sales Cost of goods sold Gross profit Operating expenses Net income

2013

Amount

Percent

Amount

Percent

$600,000

100.0% 78.0% 22.0% 10.0% 12.0%

$500,000

100.0% 80.0% 20.0% 10.8% 9.2%

468,000 132,000 60,000 $ 72,000

400,000 100,000 54,000 $ 46,000

EXERCISE 14-5 (a) Current ratio = 2.0:1 ($4,054 ÷ $2,014) Acid-test ratio = 1.4:1 ($2,830 ÷ $2,014) Accounts receivable turnover = 4.2 times ($8,258 ÷ $1,988.5)* Inventory turnover = 5.9 times ($5,328 ÷ $899)** *($2,035 + $1,942) ÷ 2 **(898 + 900) ÷ 2

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-23

EXERCISE 14-5 (Continued) (b)

Ratio Current Acid-test Accounts receivable turnover Inventory turnover

Nordstrom 2.0:1 1.4:1 4.2 5.9

Park Street 2.05:1 1.05:1 37.2 3.1

Industry 1.70:1 .70:1 46.4 4.3

Nordstrom is similar to Park Street for the current and acid-test ratios but significantly below for the accounts receivable turnover. Nordstrom is much better than Park Street for the inventory turnover. Nordstrom is better than the industry average for the current and acidtest ratios but below the industry average for the accounts receivable turnover. Its inventory turnover ratio however is higher than the industry average.

EXERCISE 14-6 (a) Current ratio as of February 1, 2014 = 2.8:1 (R$140,000 ÷ R$50,000). Feb. 3 7 11 14 18

2.8:1 2.2:1 2.2:1 2.6:1 2.3:1

No change in total current assets or liabilities. (R$112,000 ÷ R$50,000). No change in total current assets or liabilities. (R$100,000 ÷ R$38,000). (R$100,000 ÷ R$43,000).

(b) Acid-test ratio as of February 1, 2014 = 2.5:1 (R$125,000* ÷ R$50,000). * R$140,000 – R$10,000 – R$5,000 Feb. 3 7 11 14 18

14-24

2.5:1 1.9:1 1.9:1 2.2:1 1.9:1

No change in total quick assets or current liabilities. (R$97,000 ÷ R$50,000). (R$94,000 ÷ R$50,000). (R$82,000 ÷ R$38,000). (R$82,000 ÷ R$43,000).

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 14-7 (a)

$140,000 = 2.8:1. $50,000

(b)

$80,000 = 1.6:1. $50,000

(c)

$390,000 = 6.5 times. $60,000 (1)

(d)

$187,000 = 3.4 times. $55,000 (2) (1)

$70,000 + $50,000 2

(2)

$60,000 + $50,000 2

EXERCISE 14-8

£42,000 = 6.0%. £700,000

(a) Profit margin

£700,000 = 1.25 times.  £540,000 + £580,000    2

(b) Asset turnover

£42,000 = 7.5%. £560,000

(d) Return on ordinary shareholders’ equity

£42,000 = 11.2%.  £325,000 + £425,000    2

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-25

EXERCISE 14-9 (a)

$60,000 – $6,000 = $1.80. 30,000 shares

(b)

$10.80 = 6.0 times. $1.80

(c)

$21,000 = 35%. $60,000

(d)

$60,000 + $14,000 + $17,000 $91,000 = = 6.5 times. $14,000 $14,000

EXERCISE 14-10 (a) Inventory turnover = 3.4 =

Cost of goods sold  € 200,000 + € 180,000    2

3.4 X €190,000 = Cost of goods sold Cost of goods sold = €646,000. (b) Accounts receivable turnover = 8.8 =

Net sales (credit)  € 73,000 + € 126,000    2

8.8 X €99,500 = Net sales (credit) = €875,600. (c) Return on ordinary shareholders’ equity = 25% =

Net income  € 400,000 + €134,000 + €400,000 + €122,000    2 .25 X €528,000 = Net income = €132,000.

14-26

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 14-10 (Continued) (d) Return on assets = 20% =

Average assets =

€132,000 [see (c) above] Average assets

€ 132,000 = €660,000 .20

Total assets (Dec. 31, 2014) + €650,000 = €660,000 2 Total assets (Dec. 31, 2014) = (€660,000 X 2) – €650,000 = €670,000. EXERCISE 14-11 (a)

($4,300 + $22,000+ $10,000)/$12,000 = 3.03:1

(b) ($4,300 + $22,000)/$12,000 = 2.19:1 (c)

$100,000/[($22,000 + $24,000)/2] = 4.35 times

(d) $60,350/[($10,000 + $7,000)/2] = 7.10 times (e)

$14,000/$100,000 = 14%

(f)

$100,000/[($111,300 + $120,700)/2] = .86 times

(g) $14,000/[($111,300 + $120,700)/2] = 12.1% (h) $14,000/[($99,300 + $89,600)/2] = 14.8% (i)

$12,000/$111,300 = 10.8%

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-27

EXERCISE 14-12 (a)

DOUGLAS CORPORATION Partial Income Statement For the Year Ended October 31, 2014 Income before income taxes ..................................... Income tax expense (£550,000 X 30%) ..................... Income from continuing operations………………… Discontinued operations Loss from operations of discontinued division, net of £18,000 income tax saving……………………………………………. £42,000 Loss from disposal of discontinued division, net of £27,000 income tax savings………………………………………… 63,000 Net income ..................................................................

(b) To:

£550,000 165,000 385,000

(105,000) £280,000

Chief Accountant

From: Your name, Independent Auditor After reviewing your income statement for the year ended 10/31/14, we believe it is misleading for the following reasons: The amount reported for income before discontinued operations is overstated by £45,000. The income tax expense should be 30% of £550,000, or £165,000, not £120,000. Also, the effect of the loss from the discontinued division on net income is only £105,000, not £150,000. An income tax savings of £45,000 should be netted against the loss on the discontinued division.

14-28

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 14-13

(a)

MAULDER CORPORATION Partial Income Statement For the Year Ended December 31, 2014 Income from continuing operations ...................................... Discontinued operations Gain on discontinued division, net of $10,500 income taxes ..................................................... Net income ..............................................................................

$290,000 24,500 $314,500

(b) The correction of an error in last year’s financial statements is a prior period adjustment. The correction is reported in the 2014 retained earnings statement as an adjustment that increases the reported beginning balance of retained earnings by $17,500, or [$25,000 – ($25,000 X 30%)].

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-29

SOLUTIONS TO PROBLEMS PROBLEM 14-1

(a)

Condensed Income Statement For the Year Ended December 31, 2014 Lionel Company Dollars Percent Net sales $1,549,035 100.0% Cost of goods sold 1,053,345 68.0% Gross profit 495,690 32.0% Operating expenses 278,825 18.0% Income from operations 216,865 14.0% Interest expense 7,745 .5% Income before income taxes 209,120 13.5% Income tax expense 61,960 4.0% Net income $ 147,160 9.5%

Barrymore Company Dollars Percent $339,038 237,325 101,713 77,979 23,734 2,034 21,700 8,476 $ 13,224

100.0% 70.0% 30.0% 23.0% 7.0% .6% 6.4% 2.5% 3.9%

(b) Lionel Company appears to be more profitable. It has higher relative gross profit, income from operations, income before taxes, and net income.  $147,160  a Lionel’s return on assets of 15.0%  is higher than Barrymore’s  $981, 067  $13,224  b return on assets of 6.0%  . Also, Lionel’s return on ordinary  $220,400   $147,160  c shareholders’ equity of 18.0%  is higher than Barrymore’s  $817, 556  $13,224  d return on ordinary shareholders’ equity of 7.0%  .  $188,914 

14-30

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 14-1 (Continued) $147,160 is Lionel’s 2014 net income. $981,067 is Lionel’s 2014 average assets: a

Plant assets Current assets Total assets

2014 2013 $596,920 $575,610 401,584 388,020 $998,504 + $963,630 =

$1,9 62,134 2

$13,224 is Barrymore’s 2014 net income. $220,400 is Barrymore’s 2014 average assets: b

Plant assets Current assets Total assets

2014 2013 $142,842 $128,927 86,450 82,581 $229,292 + $211,508 = $440,800 2

$147,160 is Lionel’s 2014 net income. $817,556 is Lionel’s 2014 average ordinary shareholders’ equity: c

Share capital ordinary Retained earnings Total equity

2014 2013 $578,765 $578,765 252,224 225,358 $830,989 + $804,123 =

$1,635,112 2

$13,224 is Barrymore’s 2014 net income. $188,914 is Barrymore’s 2014 average ordinary shareholders’ equity: d

Share capital ordinary Retained earnings Total equity

2014 2013 $137,435 $137,435 55,528 47,430 $192,963 + $184,865 =

$377, 828 2

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-31

PROBLEM 14-2

(a) Earnings per share =

R$192,000 = R$3.20. 60,000

(b) Return on ordinary shareholders’ equity =

R$192,000  R$465,400 + R$542,600    2 R$ 192,000 R$ 504,000

= 38.1%.

(d) Current ratio =

R$345,800 = 1.70:1 R$203,500

(e) Acid-test ratio =

(f)

R$ 192,000 R$192,000 = = 21.3%. R$899,450  R$852,800 + R $946,100    2

R$234,850 = 1.15:1 R$203,500

Accounts receivable turnover =

R$1,818,500  (R$102,800 + R$105,750 )    2

R$1,818,500 R$104,275

= 17.4 times.

14-32

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 14-2 (Continued) R $ 1,011,500 R$1,011,500 = R$113,225  R$115,500 + R $110,950    2 = 8.9 times.

(g) Inventory turnover =

(h) Times interest earned =

(i)

Asset turnover =

R$291,000 = 19.4 times. R$15,000

R$1,818,500 = 2.0 times. R$899,450*

*(R$852,800 + R$946,100) ÷ 2

(j)

Debt to total assets =

R$403,500 = 42.6%. R$946,100

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-33

PROBLEM 14-3

(a)

2013

2014

(1) Profit margin.

$42,000 = 6.0% $700,000

$32,000 = 5.0% $640,000 (2) Asset turnover.

$640,000

 $533,000 + $600,000    2  

= 1.1 times

$700,000

 $600,000 + $640,000    2  

= 1.1 times

(3) Earnings per share.

$42,000 = $1.31 32,000

$32,000 = $1.03 31,000 (4) Price-earnings ratio.

$8.00 = 6.1 times $1.31

$5.00 = 4.9 times $1.03 (5) Payout ratio.

$20,000 * = 62.5% $32,000

$22,000 ** = 52.4% $42,000

*($113,000 + $32,000 – $125,000)

**($125,000 + $42,000 – $145,000)

(6) Debt to total assets.

$160,000 = 26.7% $600,000

14-34

$150,000 = 23.4% $640,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 14-3 (Continued) (b) The underlying profitability of the corporation appears to have improved. For example, profit margin and earnings per share have both increased. In addition, the corporation’s price-earnings ratio has increased, which suggests that investors may be looking more favorably at the corporation. Also, the corporation appears to be involved in attempting to reduce its debt burden as its debt to total assets ratio has decreased. Similarly, its payout ratio has decreased, which should help its overall solvency.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-35

PROBLEM 14-4 (a) LIQUIDITY 2012

2013

Change

Current

€ 343,000 = 1.9:1 € 182,000

€ 374,000 =1.9:1 € 192,000

No change

Acid-test

€ 185,000 = 1.0:1 € 182,000

€ 220,000 = 1.1:1 € 192,000

Increase

Accounts receivable turnover

€ 798,000 € 858,000 = 9.5 times = 9.6 times € 84,000* € 89,000**

*(€88,000 + €80,000) ÷ 2 Inventory turnover

Increase

**(€80,000 + €98,000) ÷ 2

€575,000 € 611,000 = 4.5 times = 4.7 times Increase € 130,000** € 126,500*

*(€118,000 + €135,000) ÷ 2

**(€135,000 + €125,000) ÷ 2

An overall increase in short-term liquidity has occurred. PROFITABILITY

€ 42,500 = 5.0% € 858,000

Profit margin

€ 42,000 = 5.3% € 798,000

Asset turnover

€ 798,000 € 858,000 = 1.2 times = 1.3 times Increase € 660,000 * * € 640,000 *

*(€632,000 + €648,000) ÷ 2

Decrease

**(€648,000 + €672,000) ÷ 2

Return on assets

€ 42,000 = 6.6% € 640,000

€ 42,500 = 6.4% € 660,000

Decrease

Earnings per share

€ 42,000 = $2.10 20,000

€ 42,500 = $2.13 20,000

Increase

Profitability has remained relatively the same.

14-36

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 14-4 (Continued) (b)

2013 1.

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

€ 42,500

2014

€ 50,000

Change

Return on ordinary shareholders’ equity

€ 323,000 (a)

Debt to total assets

€ 342,000 (c) € 242,000 = 50.9% = 34.6% € 700,000 € 672,000

Decrease

Price-earnings ratio

€ 9.00 = 4.2 times € 2.13

Increase

= 13.2%

€ 445,000 (b)

= 11.2%

€ 12.50 = 5.0 times € 2.50 (d)

Decrease

(€200,000 + €130,000 + €200,000 + €116,000) ÷ 2. (€380,000 + €180,000 + €200,000 + €130,000) ÷ 2. €100,000 + €48,000 + €44,000 + €150,000. €50,000 ÷ 20,000.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-37

PROBLEM 14-5

(a)

Ratio

Target

Wal-Mart

(All Dollars Are in Millions) (1) Current 1.7:1 ($17,213 ÷ $10,070) (2) Accounts receivable turnover 10.3 ($67,390 ÷ $6,560) (3) Average collection period 35.4 (365 ÷ 10.3) (4) Inventory turnover 6.2 ($45,725 ÷ $7,388) (5) Days in inventory 58.9 (365 ÷ 6.2) (6) Profit margin 4.3% ($2,920 ÷ $67,390) (7) Asset turnover 1.5 ($67,390 ÷ $44,119a) (8) Return on assets 6.6% ($2,920 ÷ $44,119a) (9) Return on ordinary shareholders’ equity 18.9% ($2,920 ÷ $15,417b) (10) Debt to total assets 64.6% ($28,218 ÷ $43,705) (11) Times interest earned 6.9 ($5,252 ÷ $757)

($43,705 + $44,533) ÷ 2 b ($15,487 + $15,347) ÷ 2

.9:1

($48,331 ÷ $55,561)

100.6

($405,046 ÷ $4,025)

3.6 (365 ÷ 100.6) 9.0 ($304,657 ÷ $33,836) 40.6 (365 ÷ 9.0) 3.5% ($14,335 ÷ $405,046) 2.4 ($405,046 ÷ $167,067.5c) 8.6% ($14,335 ÷ $167,067.5c) 21.1% ($14,335 ÷ $68,017d) 58.6% ($99,957 ÷ $170,706) 12.4 ($23,358 ÷ $1,884)

($170,706 + $163,429) ÷ 2 ($70,749 + $65,285) ÷ 2

(b) The comparison of the two companies shows the following: Liquidity—Target’s current ratio of 1.7:1 is significantly better than Wal-Mart’s .9:1. However, Wal-Mart has a better inventory turnover ratio than Target and its accounts receivable turnover is substantially better than Target’s. Profitability—With the exception of profit margin, Wal-Mart betters Target in all of the profitability ratios. Thus, it is more profitable than Target. Solvency—Wal-Mart betters Target in both of the solvency ratios. Thus, it is more solvent than Target.

14-38

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 14-6

(a) Current ratio =

£204,000 = 1.5:1. £134,000

(b) Acid-test ratio =

£21,000 + £18,000 + £85,000 = 0.93:1. £134,000 £500,000  (£85,000 + £75,000)    2 = 6.3 times.

(d) Inventory turnover =

(e) Profit margin ratio =

(f)

Asset turnover =

£315,000 = 4.5 times.  £80,000 + £60,000    2

£36,700 = 7.3%. £500,000

£500,000 = 0.8 times.  £627,000 + £551,000    2

(g) Return on assets =

£36,700 = 6.2%.  £627,000 + £551,000    2 £36,700  £373,000 + £350,000    2 = 10.2%.

(h) Return on ordinary shareholders’ equity =

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-39

PROBLEM 14-6 (Continued) (i)

Earnings per share =

£36,700 = £1.22. 30,000 (1)

(1) £150,000 ÷ £5.00

(j)

Price-earnings ratio =

(k) Payout ratio =

£19.50 = 16.0 times. £1.22

£13,700 (2) = 37.3%. £36,700

(2) £200,000 + £36,700 – £223,000

(l)

Debt to total assets =

£254,000 = 40.5%. £627,000

(m) Times interest earned =

£64,200 (3) = 8.6 times. £7,500

(3) £36,700 + £20,000 + £7,500

14-40

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 14-7

Accounts receivable turnover = 10 =

$10,500,000 Average net accounts receivable

Average net accounts receivable =

$10,500,000 = $1,050,000 10

Net accounts receivable 12/31/14 + $950,000 = $1,050,000 2 Net accounts receivable 12/31/14 + $950,000 = $2,100,000 Net accounts receivable 12/31/14 = $1,150,000 Profit margin = 14.5% = .145 =

Net income $10,500,000

Net income = $10,500,000 X .145 = $1,522,500 Income before income taxes = $1,522,500 + $550,000 = $2,072,500 Return on assets = 20% = .20 =

$1,522,500 Average assets

Average assets = $1,522,500 ÷ .20 = $7,612,500

Assets (12/31/14)+ $7,500,000 = $7,612,500 2 Assets (12/31/14) = $7,725,000 Total current assets = $7,725,000 – $4,620,000 = $3,105,000 Inventory = $3,105,000 – $1,150,000 – $480,000 = $1,475,000 Total liabilities and equity = $7,725,000 Total liabilities = $7,725,000 – $3,400,000 = $4,325,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-41

PROBLEM 14-7 (Continued) Current ratio = 3.0 =

$3,105,000 Current liabilities

Current liabilities = $3,105,000 ÷ 3.0 = $1,035,000 Long-term notes payable = $4,325,000 – $1,035,000 = $3,290,000

Inventory turnover = 4.2 =

Cost of goods sold  $1,720,000 + $1,475,000   2  

Cost of goods sold = $1,597,500 X 4.2 = $6,709,500 Gross profit = $10,500,000 – $6,709,500 = $3,790,500 Income from operations = $3,790,500 – $1,500,000 = $2,290,500 Interest expense = $2,290,500 – $2,072,500 = $218,000

14-42

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 14-8

VIOLET BICK CORPORATION Condensed Income Statement For the Year Ended December 31, 2014 Operating revenues (€12,900,000 – €2,000,000)......................... Operating expenses (€8,700,000 – €2,500,000)........................... Income from operations ................................ Other income and expense ........................... Income before income taxes ......................... Income tax expense (€4,500,000 X 30%) ...... Income from continuing operations ............. Discontinued operations Loss from operations of hotel chain*, net of €150,000 income tax saving ........................................... Gain on sale of hotels, net of €90,000 income taxes......................... Net income ..................................................... *€2,000,000 – €2,500,000 = (€500,000)

€10,900,000 6,200,000 4,700,000 200,000 4,500,000 1,350,000 3,150,000

(€350,000) 210,000

(140,000) € 3,010,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-43

PROBLEM 14-9

GOWER CORPORATION Income Statement For the Year Ended December 31, 2014 Net sales ............................................................. Cost of goods sold ............................................ Gross profit ........................................................ Selling and administrative expenses ............... Income from operations .................................... Other income and expense ............................... Income before income taxes ............................. Income tax expense ($334,000 X 30%) ............. Income from continuing operations ................. Discontinued operations Income from operations of discontinued division, net of $4,500 income taxes ....... Loss on sale of discontinued division, net of $24,000 income tax saving .......... Net income ........................................................

14-44

$1,600,000 1,100,000 500,000 160,000 340,000 (6,000) 334,000 100,200 233,800 10,500 (56,000)

(45,500) $ 188,300

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 14-1

(a)

FINANCIAL REPORTING PROBLEM

SAMSUNG ELECTRONICS CO. Trend Analysis of Net Sales and Net Income For the Five Years Ended 2010 Base Period 2006—(in millions)

(1) Net sales Trend (2) Net income Trend

2010

2009

2008

2007

2006

W154,630,328

W136,323,670

W121,294,319

W98,507,817

W85,834,604

180%

159%

141%

115%

100%

16,146,525

9,760,550

5,890,214

7,922,981

8,193,659

197%

119%

72%

97%

100%

Between 2006 and 2007 Samsung’s net sales increased by 15%. Its net sales increased by 23% between 2007 and 2008 and by 13% each year between 2008 and 2010. Samsung’s net income decreased by 3% between 2006 and 2007, and by 26% between 2007 and 2008. Net income increased by 66% between 2008 and 2009 and by 65% between 2009 and 2010. (b) (Korean Won amounts in millions) (1) Profit Margin 2010: 2009:

W16,146,525 ÷ W154,630,328 = 10.4% W9,760,550 ÷ W136,323,670 = 7.2%

(2) Asset Turnover 2010: 2009:

W154,630,328 ÷ [(W134,288,744 + W112,179,789) ÷ 2] = 1.25 times W136,323,670 ÷ [(W112,179,789 + W105,300,650) ÷ 2] = 1.25 times

(3) Return on Assets 2010: 2009:

W16,146,525 ÷ [(W134,288,744 + W112,179,789) ÷ 2] = 13.1% W9,760,550÷ [(W112,179,789 + W105,300,650) ÷ 2] = 9.0%

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-45

BYP 14-1 (Continued) (4) Return on Ordinary Shareholders’ Equity 2010: 2009:

W16,146,525 ÷ [(W89,349,091 + W73,045,202) ÷ 2] = 19.9% W9,760,550 ÷ [(W73,045,202 + W63,460,385) ÷ 2] = 14.3%

Samsung’s profitability increased from 2009 to 2010. (c) (dollar amounts in millions) (1) Debt to Total Assets 2010: 2009:

W44,939,653 ÷ W134,288,744 = 33.5% W39,134,587 ÷ W112,179,789 = 34.9%

(2) Times Interest Earned 2010: 2009:

(W19,328,656 + W7,700,099) ÷ W7,700,099 = 3.5 times (W12,191,596 + W10,174,219) ÷ W10,174,219 = 2.2 times

Creditors provide roughly one-third of Samsung’s total assets, so its long-term solvency is not in jeopardy. Even through samsung’s times interest earned ratio is low it improved in 2010 and the company has the ability to pay the interest on its debt.

(d) Substantial amounts of important information about a company are not in its financial statements. Events involving such things as industry changes, management changes, competitors’ actions, technological developments, governmental actions, and union activities are often critical to the successful operation of a company. Financial reports in the media and publications of financial service firms (Standard & Poors, Dun & Bradstreet) will provide relevant information not usually found in the annual report.

14-46

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 14-2

COMPARATIVE ANALYSIS PROBLEM

(a)

Zetar (1) (i) Percentage increase in net sales (ii) Percentage increase (decrease) in net income (2) (i) Percentage increase (decrease) in total assets (ii) Percentage increase (decrease) in total ordinary shareholders’ equity

Nestlé

£134,998 − £131,922 = 2.3% £131,922

£4,482 − £4,268

CHF 107,618

= 5.0%

CHF 35,384 − CHF 11,793 = 2.0% CHF 11,793

= 9.3%

CHF 111,641 − CHF 110,916 = 0.7%

£4,268

£93,062 − £85,108 £85,108

£46,287 − £41,755 £41,755

CHF109,722 − CHF 107,618 = 2.0%

CHF 110,916

= 10.9%

CHF 62,598 − CHF 53,631

= 16.7%

CHF 53,631

The two companies net sales increased by roughly the same percentage. However, it appear that Nestlé’s percentage increase in net income is substantially greater than Zetar’s (200% vs 5%). This apparent disparity is due to the profit on discontinued operations that was included in Nestlé’s net income. If you remove these amounts for 2009 and 2010, Nestle’s net income actually decreased by 5%. Zetar’s total assets increased by a greater percentage than Nestlé’s (9.3% VS 0.7%), but the percentage increase in the return on ordinary shareholders’ equity is the opposite, with Nestlé’s increasing by 16.7% while Zetar’s increased only 10.9%.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-47

BYP 14-3

DECISION-MAKING ACROSS THE ORGANIZATION

The current ratio increase is a favorable indication as to liquidity, but alone tells little about the going-concern prospects of the client. From this ratio change alone, it is impossible to know the amount and direction of the changes in individual accounts, total current assets, and total current liabilities. Also unknown are the reasons for the changes. The acid-test ratio decrease is an unfavorable indication as to liquidity, especially when the current-ratio increase is also considered. This decline is also unfavorable as to the going-concern prospects of the client because it reflects a declining cash position and raises questions as to reasons for the increases in other current assets, such as inventories. The change in asset turnover cannot alone tell anything about either solvency or going-concern prospects. There is no way to know the amount and direction of the changes in sales and assets. An increase in sales would be favorable for going-concern prospects, while a decrease in assets could represent a number of possible scenarios and would need to be investigated further. The increase in net income is a favorable indicator for both solvency and going-concern prospects, although much depends on the quality of receivables generated from sales and how quickly they can be converted into cash. If there has been a decline in sales, a significant factor is that management has been able to reduce costs to produce an increase in earnings. Indirectly, the improved income picture may have a favorable impact on solvency and going-concern potential by enabling the client to borrow currently (if it needs to do so) to meet cash requirements. The 32-percent increase in earnings per share, which is identical to the percentage increase in net income, is an indication that there has probably been no change in the number of ordinary shares outstanding. This, in turn, indicates that financing was not obtained through the issuance of ordinary shares. It is not possible to reach conclusions about solvency and going-concern prospects without additional information about the nature and extent of financing.

14-48

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 14-3 (Continued) The collective implications of these data alone are that the client entity is about as solvent and as viable a going concern at the end of the current year as it was at the beginning although there may be a need for short-term operating cash.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-49

BYP 14-4

COMMUNICATION ACTIVITY

To:

Kyle Benson

From:

Accounting Major

Subject:

Financial Statement Analysis

There are two fundamental considerations in financial statement analysis: (1) the bases of comparison and (2) the factors affecting quality of earnings. Each of these considerations is explained below. 1.

14-50

Bases of comparison. The bases of comparison are: a.

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

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

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

Factors affecting quality of earnings are: a.

Alternative accounting methods—Variations among companies in the application of IFRS may hamper comparability and reduce quality of earnings.

Pro forma income—This income figure usually excludes items that the company thinks are unusual or nonrecurring.

Improper recognition—Because some managers have felt pressure from investors to continually increase earnings, they have manipulated the earnings numbers to meet these expectations.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 14-5

ETHICS CASE

(a) The stakeholders in this case are:      

Robert Turnbull, president of Turnbull Industries. Perry Jarvis, public relations director. You, as controller of Turnbull Industries. Shareholders of Turnbull Industries. Potential investors in Turnbull Industries. Any readers of the press release.

(b) The president’s press release is deceptive and incomplete and to that extent his actions are unethical. (c) As controller you should at least inform Perry, the public relations director, about the biased content of the release. He should be aware that the information he is about to release, while factually accurate, is deceptive and incomplete. Both the controller and the public relations director (if he agrees) have the responsibility to inform the president of the bias of the about to be released information.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-51

GAAP EXERCISES

GAAP 14-1 CHEN COMPANY Statement of Comprehensive Income For the Year Ended December 31, 2014 Sales revenue..................................................... Cost of goods sold ............................................ Gross profit ........................................................ Operating expenses........................................... Net income ......................................................... Other comprehensive income ........................... Unrealized gain on non-trading securities Comprehensive income.....................................

$1,000,000 700,000 300,000 200,000 100,000 75,000 $ 175,000

GAAP 14-2 CHEN COMPANY Income Statement For the Year Ended December 31, 2014 Sales revenue..................................................... Cost of goods sold ............................................ Gross profit ........................................................ Operating expenses........................................... Net income .........................................................

$1,000,000 700,000 300,000 200,000 $ 100,000

CHEN COMPANY Statement of Comprehensive Income For the Year Ended December 31, 2014 Net income ......................................................... Other comprehensive income ........................... Unrealized gain on non-trading securities ................................................ Comprehensive income.....................................

14-52

$100,000 75,000 $175,000

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

GAAP 14-3

GAAP FINACIAL REPORTING PROBLEM

(a)

TOOTSIE ROLL INDUSTRIES, INC. Trend Analysis of Net Sales and Net Income For the Five Years Ended 2010 Base Period 2006…..(in thousands)

(1) Net Sales Trend

(2) Net Earnings Trend

2010 $517,149 104%

2009 $495,592 100%

2008 $492,051 99%

2007 $492,742 99%

2006 $495,990 100%

53,714

53,878

39,315

51,914

66,011

81%

82%

60%

79%

100%

Between 2006 and 2009 Net sales were fairly constant, however 2010 net sales increased by 4% over 2006. Tootsie Rolls net income decreased 40% from 2006 to 2008. Net income in 2009 and 2010 increased approximately 37% over that of 2008, however, 2010 net income was still 19% below that of 2006. So, while net sales have increased 4% over the 5-year period, net income has decreased by 19%.

(b)

2010 (1) Debt to total assets ratio (2) Times interest earned ratio

$191,429

2009 = 22.2%

$183,108

$860,383

$838,247

$53,714+$20,375+$142

$53,878+$10,301+$243

$142 = 522.8 times

= 21.8%

$243 = 265.1 times

Creditors are providing approximately 22% of Tootsie Roll’s total assets and the company’s times interest earned ratio indicates the company is in no danger of not being able to service their debt.

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

14-53

(c)

2010

(1) Profit margin

$53,714

2009 = 10.4%

$517,149

(2) Asset turnover

$517,149

$53,714

= .61 times

shareholder’s equity

$53,714 ($668,954+$655,139)/2

$495,592

= .60 times

($838,247+$813,525)/2 = 6.3%

($860,383+$838,247)/2

(4) Return on ordinary

= 10.9%

$495,592

($860,383+$838,247)/2

(3) Return on assets

$53,878

= 6.5%

($838,247+$813,525)/2 = 8.1%

$53,878

= 8.3%

($655,139+$637,021)/2

Tootsie Roll had a small decline in profitability as evidenced by the slight decrease in the profit margin, return on assets and return on ordinary shareholders equity ratios. The asset, turnover ratio had a slight increase. (d) Substantial amounts of important information about a company are not in its financial statements. Events involving such things as industry changes, management changes, competitors’ actions, technological developments, governmental actions, and union activities are often critical to the successful operations of a company. Finanacial reports in the media and publications of financial service firms (Standard & Poors, Dun & Bradstreet) will provide relevant information not usually found in the annual report.

14-54

Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

APPENDIX F Payroll Accounting ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Exercises

A Problems

B Problems

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

1, 2

1, 2, 3, 4

1A, 2A, 3A

1B, 2B, 3B

2. Describe and record employer payroll taxes.

2, 3, 4, 8

3, 5

1A, 2A, 3A

1B, 2B, 3B

3. Discuss the objectives of internal control for payroll.

9, 10

Weygandt Financial, IFRS, 2/e, Solutions Manual

Learning Objectives

Questions

1. Compute and record the payroll for a pay period.

(For Instructor Use Only)

F-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

F-1A

Prepare payroll register and payroll entries.

Simple

30–40

F-2A

Journalize payroll transactions and adjusting entries.

Moderate

30–40

F-3A

Prepare entries for payroll and payroll taxes; prepare W-2 data.

Moderate

30–40

F-4A

Identify internal control weaknesses and make recommendations for improvement.

Simple

20–30

F-1B

Prepare payroll register and payroll entries.

Simple

30–40

F-2B

Journalize payroll transactions and adjusting entries.

Moderate

30–40

F-3B

Prepare entries for payroll and payroll taxes; prepare W-2 data.

Moderate

30–40

F-4B

Identify internal control weaknesses and make recommendations for improvement.

Simple

20–30

F-2

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

ANSWERS TO QUESTIONS 1.

Gross pay is the amount an employee actually earns. Net pay, the amount an employee is paid, is gross pay reduced by both mandatory and voluntary deductions, such as FICA taxes, union dues, federal income taxes, etc. Gross pay should be recorded as wages or salaries expense.

Both employees and employers are required to pay FICA taxes.

No. When an employer withholds federal or state income taxes from employee paychecks, the employer is merely acting as a collection agent for the taxing body. Since the employer holds employees’ funds, these withholdings are a liability for the employer until they are remitted to the government.

FICA stands for Federal Insurance Contribution Act; FUTA stands for Federal Unemployment Tax Act; and SUTA stands for State Unemployment Tax Act.

A W-4 statement shows the employee’s name, address, social security number, marital status and the number of allowances claimed for income tax withholding purposes. A W-2 statement contains the employee’s name, address, social security number, wages, tips, other compensation, social security taxes withheld, wages subject to social security taxes, and federal, state and local income taxes withheld.

Payroll deductions can be classified as either mandatory (required by law) or voluntary (not required by law). Mandatory deductions include FICA taxes and income taxes. Examples of voluntary deductions are health and life insurance premiums, pension contributions, union dues, and charitable contributions.

The employee earnings record is used in: (1) determining when an employee has earned the maximum earnings subject to FICA taxes, (2) filing state and federal tax returns, and (3) providing each employee with a statement of gross earnings and tax withholdings for the year.

(a) The three types of taxes are: (1) FICA, (2) federal unemployment, and (3) state unemployment. (b) The tax liability accounts are classified as current liabilities in the balance sheet. Payroll tax expense is classified under operating expenses in the income statement.

The main internal control objectives associated with payrolls are: (1) to safeguard company assets from unauthorized payments of payrolls and (2) to assure the accuracy and reliability of the accounting records pertaining to payrolls.

10.

The four functions associated with payroll are: (1) hiring employees, (2) timekeeping, (3) preparing the payroll, and (4) paying the payroll.

Weygandt Financial, IFRS, 2/e, Solutions Manual

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F-3

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE F-1 Gross earnings: Regular pay (40 X $16) ........................................... Overtime pay (7 X $24) .......................................... Gross earnings .............................................................. Less: FICA taxes payable ($808 X 7.65%) ................... Federal income taxes payable ........................... Net pay ...........................................................................

$640.00 168.00

$808.00 $808.00

$ 61.81 95.00

156.81 $651.19

BRIEF EXERCISE F-2 Jan. 15

Jan. 15

Salaries and Wages Expense ...................... FICA Taxes Payable ($808 X 7.65%) .... Federal Income Taxes Payable ............ Salaries and Wages Payable ................

808.00

Salaries and Wages Payable........................ Cash .......................................................

651.19

61.81 95.00 651.19 651.19

BRIEF EXERCISE F-3 Jan. 31

Payroll Tax Expense ..................................... FICA Taxes Payable ($84,000 X 7.65%) Federal Unemployment Taxes Payable ($84,000 X .8%) .................... State Unemployment Taxes Payable ($84,000 X 5.4%) ................................

11,634 6,426 672 4,536

BRIEF EXERCISE F-4 (a) Timekeeping (b) Hiring

F-4

Weygandt Financial, IFRS, 2/e, Solutions Manual

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SOLUTIONS TO EXERCISES EXERCISE F-1 (a) 1.

Regular 40 X $14.00 = $560.00 Overtime 4 X $21.00 = 84.00 Gross earnings $644.00

FICA taxes—$49.27 = ($644 X 7.65%).

Federal income taxes $55.

State income taxes $12.88 = ($644 X 2%).

Net pay $498.85 = ($644.00 – $49.27 – $55.00 – $12.88 – $28.00).

(b) Salaries and Wages Expense ................................... FICA Taxes Payable........................................... Federal Income Taxes Payable ......................... State Income Taxes Payable ............................. Health Insurance Payable ................................. Salaries and Wages Payable.............................

644.00 49.27 55.00 12.88 28.00 498.85

EXERCISE F-2 D. Edwards

$4,200 X 7.65% = $321.30 Edwards’s total gross earnings for the year are $87,700 ($83,500 + $4,200), which is below the $106,800 maximum for FICA taxes.

M. Ihrke

($1,200 X 6.2%) + ($4,200 X 1.45%) = $135.30. Ihrke’s total gross earnings for the year are $109,800. Thus, only $1,200 of the gross earnings ($4,200 – $3,000) for this pay period are subject to Social Security taxes. In addition, $4,200 is subject to Medicare (1.45%) taxes.

A. Seligman

($2,300 X 6.2%) + ($4,200 X 1.45%) = $203.50. Seligman’s total gross earnings for the year are $108,700. Thus, only $2,300 of the gross earnings ($4,200 – $1,900) for this pay period are subject to Social Security taxes.

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

F-5

EXERCISE F-2 (Continued) ($4,200 X 1.45%) = $60.90 Paik’s gross earnings prior to this pay period equal the maximum amount subject to Social Security taxes. However, all of the gross earnings in the December 31 pay period are subject to Medicare taxes.

P. Paik

EXERCISE F-3 (a) See next page. (b) Jan. 31

F-6

Salaries and Wages Expense ............... FICA Taxes Payable ...................... Federal Income Taxes Payable ..... Health Insurance Payable ............. Salaries and Wages Payable ........

1,721.00

Weygandt Financial, IFRS, 2/e, Solutions Manual

131.65 135.00 48.00 1,406.35

(For Instructor Use Only)

EXERCISE F-3 (Continued)

(a)

WELSTEAD COMPANY Payroll Register For the Week Ending January 31 Earnings

Employee W. Jeong C. Garrison J. Buss Totals

Total Hours 46 42 43

Regular

Overtime

Gross Pay

$ 440.00 520.00 560.00 $1,520.00

$ 99.00 39.00 63.00 $201.00

$ 539.00 559.00 623.00 $1,721.00

FICA Taxes $ 41.23 42.76 47.66 $131.65

Deductions Federal Health Income Taxes Insurance $ 34.00 43.00 58.00 $135.00

$18.00 15.00 15.00 $48.00

Total

Net Pay

$ 93.23 100.76 120.66 $314.65

$ 445.77 458.24 502.34 $1,406.35

(For Instructor Use Only)

F-7

EXERCISE F-3 (Continued) (b) Jan. 31

Payroll Tax Expense ................................ FICA Taxes Payable ......................... Federal Unemployment Taxes Payable ($1,721 X .8%) ................. State Unemployment Taxes Payable ($1,721 X 5.4%) ...............

238.35 131.65 13.77 92.93

EXERCISE F-4 (a) (1) (2) (3) (4) (5)

$1,100 [$10,000 see (2) below – $8,900]. $10,000 (FICA taxes $765 ÷ 7.65%). $400 ($10,000 X 4%). $2,660 ($10,000 – $7,340). $6,000($10,000 – $4,000).

(b) Feb. 28

Salaries and Wages Expense ............ FICA Taxes Payable .................... Federal Income Taxes Payable .................................... State Income Taxes Payable ...... Union Dues Payable .................... Salaries and Wages Payable ......

10,000

Salaries and Wages Payable .............. Cash .............................................

7,340

765 1,395 400 100 7,340 7,340

EXERCISE F-5 (a) FICA tax ($786,000 X 6.2%) + ($850,000 X 1.45%) ... SUTA tax ($90,000 X 5.4%) ....................................... FUTA tax ($90,000 X 0.8%) ....................................... Total payroll tax ................................................. (b) Payroll Tax Expense ................................................. FICA Taxes Payable .......................................... State Unemployment Taxes Payable ............... Federal Unemployment Taxes Payable ...........

F-8

$61,057 4,860 720 $66,637 66,637

Weygandt Financial, IFRS, 2/e, Solutions Manual

61,057 4,860 720

(For Instructor Use Only)

Earnings

Deductions

Weygandt Financial, IFRS, 2/e, Solution’ s Manual

Employee

Hours

Regular

Overtime

Gross Pay

FICA

Fed.

State

U.F.

Total

Net Pay

A. Joseph J. Wilgus P. Kirk L. Zhang Totals

35 42 44 48

490.00 480.00 480.00 480.00 1,930.00

0 36.00 72.00 144.00 252.00

490.00 516.00 552.00 624.00 2,182.00

37.49 39.47 42.23 47.74 166.93

40.00 27.00 57.00 52.00 176.00

14.70 15.48 16.56 18.72 65.46

0 5.00 7.50 5.00 17.50

92.19 86.95 123.29 123.46 425.89

397.81 429.05 428.71 500.54 1,756.11

SOLUTIONS TO PROBLEMS

ETHRIDGE DRUG STORE Payroll Register For the Week Ended February 15, 2014

PROBLEM F-1A

(a)

Formatted: German (Germany)

(For Instructor Use Only)

F-9

PROBLEM F-1A (Continued) (b) Feb. 15

(d) Feb. 28

F-10

Salaries and Wages Expense ............. 2,182.00 FICA Taxes Payable .................... Federal Income Taxes Payable..................................... State Income Taxes Payable....... United Fund Contributions Payable Salaries and Wages Payable ...... Payroll Tax Expense ........................... FICA Taxes Payable ($2,182 X 7.65%) ...................... Federal Unemployment Taxes Payable ($2,182 X .8%) ............ State Unemployment Taxes Payable ($2,182 X 5.4%) ..........

302.22

Salaries and Wages Payable .............. Cash .............................................

1,756.11

FICA Taxes Payable ($166.93+ $166.93)........................... Federal Income Taxes Payable .......... Cash .............................................

166.93 176.00 65.46 17.50 1,756.11

166.93 17.46 117.83

1,756.11

333.86 176.00

Weygandt Financial, IFRS, 2/e, Solution’s Manual

509.86

(For Instructor Use Only)

PROBLEM F-2A

(a) Jan. 10 12

15 17 20

Union Dues Payable ....................... Cash .........................................

250.00

FICA Taxes Payable ....................... Federal Income Taxes Payable...... Cash .........................................

662.20 1,254.60

U.S. Savings Bonds Payable ......... Cash .........................................

350.00

State Income Taxes Payable ......... Cash .........................................

102.15

Federal Unemployment Taxes Payable........................................ State Unemployment Taxes Payable........................................ Cash .........................................

250.00

1,916.80 350.00 102.15 312.00 1,954.40 2,266.40

Salaries and Wages Expense ........ FICA Taxes Payable ................ Federal Income Taxes Payable ................................ State Income Taxes Payable ................................ Union Dues Payable ............... United Fund Contributions Payable ................................ Salaries and Wages Payable ..

46,200.00

Salaries and Wages Payable ......... Cash .........................................

38,335.70

Weygandt Financial, IFRS, 2/e, Solution’s Manual

3,534.30 1,770.00 360.00 400.00 1,800.00 38,335.70 38,335.70

(For Instructor Use Only)

F-11

PROBLEM F-2A (Continued) (b) Jan. 31

F-12

Payroll Tax Expense ........................... FICA Taxes Payable ($46,200 X 7.65%)................... Federal Unemployment Taxes Payable ($46,200 X .8%) ........ State Unemployment Taxes Payable ($46,200 X 5.4%) ......

6,398.70

Weygandt Financial, IFRS, 2/e, Solution’s Manual

3,534.30 369.60 2,494.80

(For Instructor Use Only)

PROBLEM F-3A

(a) Salaries and Wages Expense ................................ FICA Taxes Payable........................................ Federal Income Taxes Payable ...................... State Income Taxes Payable .......................... United Fund Contributions Payable .............. Health Insurance Payable .............................. Salaries and Wages Payable..........................

520,000

(b) Payroll Tax Expense .............................................. FICA Taxes Payable ....................................... Federal Unemployment Taxes Payable ($110,000 X .8%) .......................................... State Unemployment Taxes Payable ($110,000 X 2.5%) ........................................

39,070

(c)

35,440 153,000 13,520 25,000 26,800 266,240

35,440 880 2,750

Employee

Wages, Tips, Other Compensation

Federal Income Tax Withheld

State Income Tax Withheld

FICA Wages

FICA Tax Withheld

S. Brand R. Morin

$56,000 27,000

$20,500 11,000

$1,456 (1) 702 (2)

$56,000 27,000

$4,284 2,066

(1) $56,000 X 2.6%. (2) $27,000 X 2.6%.

Weygandt Financial, IFRS, 2/e, Solution’s Manual

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F-13

PROBLEM F-4A (a) Weaknesses 1.

F-14

(b) Recommended Procedures



Hours worked are marked on time card by employee.



Time cards should be punched by a time clock and the punching of the clock by employees should be supervised so that one employee cannot punch more than one card.



Employees give the approved cards to payroll.



The manager should deliver the cards to payroll in order to prevent possible alterations by employees during delivery.



Department manager indicates the rates of pay.



Rates of pay should be authorized in writing by the human resources department.



The department manager pays the employees.



Payment is in cash.



Payment should be made by check.



Manager prepares payroll register which is sent to the payroll department.



The payroll department should prepare the payroll register on the basis of the clock cards approved by the manager.



A payroll supervisor pays each employee by check.



Payment to employees should be made by the treasurer’s department.

The treasurer’s department should pay employees.

Weygandt Financial, IFRS, 2/e, Solution’s Manual

(For Instructor Use Only)

Earnings

Deductions

Employee

Hours

Regular

Overtime

Gross Pay

FICA

Fed.

U.F.

Total

Net Pay

K. Litwack E. Burgess R. Perez H. Hosseini Totals

40 42 44 48

600.00 520.00 520.00 520.00 2,160.00

0 39.00 78.00 156.00 273.00

600.00 559.00 598.00 676.00 2,433.00

45.90 42.76 45.75 51.71 186.12

72.00 27.00 5.00 41.00 25.16 5.00 60.00 26.91 8.00 67.00 30.42 5.00 240.00 109.49 23.00

149.90 113.92 140.66 154.13 558.61

450.10 445.08 457.34 521.87 1,874.39

State

PROBLEM F-1B

Weygandt Financial, IFRS, 2/e, Solution’ s Manual

RALPH’S HARDWARE Payroll Register For the Week Ending March 15, 2014

(a)

Formatted: German (Germany)

(For Instructor Use Only)

F-15

PROBLEM F-1B (Continued) (b) Mar. 15

(d) Mar. 31

F-16

Salaries and Wages Expense ............. FICA Taxes Payable .................... Federal Income Taxes Payable..................................... State Income Taxes Payable....... United Fund Contributions Payable..................................... Salaries and Wages Payable ......

2,433.00

Payroll Tax Expense ........................... FICA Taxes Payable ($2,433 X 7.65%) ...................... Federal Unemployment Taxes Payable ($2,433 X .8%) ............ State Unemployment Taxes Payable ($2,433 X 5.4%) ..........

336.96

Salaries and Wages Payable .............. Cash .............................................

1,874.39

FICA Taxes Payable ($186.12 + $186.12).......................... Federal Income Taxes Payable .......... Cash .............................................

186.12 240.00 109.49 23.00 1,874.39

186.12 19.46 131.38

1,874.39

372.24 240.00

Weygandt Financial, IFRS, 2/e, Solution’s Manual

612.24

(For Instructor Use Only)

PROBLEM F-2B

(a) Jan. 10 12

15 17 20

Union Dues Payable ....................... Cash .........................................

740.00

FICA Taxes Payable ....................... Federal Income Taxes Payable...... Cash .........................................

760.00 1,204.60

U.S. Savings Bonds Payable ......... Cash .........................................

360.00

State Income Taxes Payable ......... Cash .........................................

108.95

Federal Unemployment Taxes Payable........................................ State Unemployment Taxes Payable........................................ Cash .........................................

740.00

1,964.60 360.00 108.95 288.95 1,954.40 2,243.35

Salaries and Wages Expense ........ FICA Taxes Payable ................ Federal Income Taxes Payable ................................ State Income Taxes Payable ................................ United Fund Contributions Payable ................................ Union Dues Payable ............... Salaries and Wages Payable ..

50,600.00

Salaries and Wages Payable ......... Cash .........................................

42,069.00

Weygandt Financial, IFRS, 2/e, Solution’s Manual

3,871.00 1,958.00 414.00 1,888.00 400.00 42,069.00 42,069.00

(For Instructor Use Only)

F-17

PROBLEM F-2B (Continued) (b) 1. Jan.

F-18

Payroll Tax Expense.................... FICA Taxes Payable ($50,600 X 7.65%)................... Federal Unemployment Taxes Payable ($50,600 X .8%) ........ State Unemployment Taxes Payable ($50,600 X 5.4%) ......

7,008.20

Weygandt Financial, IFRS, 2/e, Solution’s Manual

3,871.00 404.80 2,732.40

(For Instructor Use Only)

PROBLEM F-3B

(a) Salaries and Wages Expense ................................ FICA Taxes Payable........................................ Federal Income Taxes Payable ...................... State Income Taxes Payable .......................... United Fund Contributions Payable .............. Health Insurance Premiums Payable ............ Salaries and Wages Payable..........................

550,000

(b) Payroll Tax Expense .............................................. FICA Taxes Payable........................................ Federal Unemployment Taxes Payable ($125,000 X .8%) .......................................... State Unemployment Taxes Payable ($125,000 X 2.5%) ........................................

42,108

Federal Wages, Income Tips, Other Tax Compensation Withheld $59,000 26,000

$19,500 9,200

37,983 168,000 17,600 27,500 32,200 266,717

37,983 1,000 3,125

State Income Tax Withheld

FICA Wages

FICA Tax Withheld

$1,888 (1) $59,000 832 (2) 26,000

$4,514 1,989

(1) $59,000 X 3.2%. (2) $26,000 X 3.2%.

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F-19

PROBLEM F-4B

(a) Weaknesses 1.

F-20

(b) Recommended Procedures



Department managers have too much authority in hiring.



The human resources department should do the hiring.



An interview should not be the sole basis for hiring or rejecting an applicant.



The qualifications of each applicant should be determined and letters of recommendation should be obtained.



The pay rate should not be manually written on the W-4 form.



The human resources department should notify the payroll department of new hires through a hiring authorization form.



The chief accountant manually signs the payroll checks.



The treasurer should sign the payroll checks.



The department managers distribute the payroll checks.



A representative of the treasurer’s department should distribute the payroll checks.



The department managers retain custody of unclaimed checks.



A representative of the treasurer’s department should have custody of unclaimed checks.

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PROBLEM F-4B (Continued) (a) Weaknesses 3.



(b) Recommended Procedures

The assignment of duties among the payroll clerks does not result in any independent internal verification.



The duties of the payroll clerks should be assigned so that one clerk computes gross earnings for all employees. Then the computations made should be verified by the clerk that did not make the initial determination of the data. Each month the duties of the clerks should be reversed.

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F-21

BYP F-1

REAL-WORLD FOCUS

(a) A worker who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. Get Pub. 15-A, Employer’s Supplemental Tax Guide, for more information on how to determine whether an individual providing services is an independent contractor or an employee. Generally, people in business for themselves are not employees. For example, doctors, lawyers, veterinarians, construction contractors, and others in an independent trade in which they offer their services to the public are usually not employees. However, if the business is incorporated, corporate officers who work in the business are employees. (b) Payments for the services of a child under the age of 18 who works for his or her parent in a trade or business (sole proprietorship or a partnership in which each partner is a parent of the child) are not subject to social security and Medicare taxes. If these services are for work other than in a trade or business, such as domestic work in the parent’s private home, they are not subject to social security and Medicare taxes until the child reaches 21. (c) Any employee without a social security card can get one by completing Form SS-5, Application for a Social Security Card. (d) Tips that your employee receives are generally subject to withholding. Your employee must report cash tips to you by the 10th of the month after the month the tips are received. The report should include tips you paid over to the employee for charge customers and tips that the employee received directly from customers. No report is required for months when tips are less than $20. Your employee reports the tips on Form 4070, Employee’s Report of Tips to Employer, or on a similar statement.

F-22

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BYP F-1 (Continued) (e) In general, you must deposit income tax withheld and both the employer and employee social security and Medicare taxes (minus any advance EIC payments) by mailing or delivering a check, money order, or cash to a financial institution that is an authorized depositary for Federal taxes. However, some taxpayers are required to deposit using the Electronic Federal Tax Deposit System (EFTPS).

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F-23

BYP F-2

DECISION-MAKING ACROSS THE ORGANIZATION

(a)

OXFORD SERVICES INC. Month January-March April-May June-October November-December Total Cost

Number of Employees 2 3 2 3

Days Worked 60 (20 X 3) 50 (25 X 2) 90 (18 X 5) 46 (23 X 2)

Daily Rate $96 96 96 96

Cost $11,520 14,400 17,280 13,248 $56,448

PERMANENT EMPLOYEES Salaries ($28,000 X 2) .............................................. Additional payroll costs FICA taxes (7.65% X $56,000) .......................... Federal unemployment taxes (.8% X $14,000) ............................................. State unemployment taxes (5.4% X $14,000) ........................................... Medical and dental insurance (2 X $100 X 12) ..............................................

$56,000 $4,284 112 756 2,400

7,552 $63,552

Longwell Processing Company would save $7,104 ($63,552 – $56,448), as shown, by discharging the two employees and accepting the Oxford Services Inc. plan. (b) Jen should consider the following additional factors:

F-24

The effect on the morale of the continuing employees if two employees are terminated.

The anticipated efficiency of Oxford Services Inc. workers compared to the efficiency of the two employees who would be terminated.

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BYP F-2 (Continued) 3.

The effect on management control and supervision of using Oxford Services Inc. personnel.

The time that may be required to indoctrinate the different Oxford Services Inc. personnel into the Longwell Processing Company’s procedures.

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F-25

BYP F-3

COMMUNICATION ACTIVITY

Dear Mr. Forseth: In response to your request, I wish to explain the types of taxes that are involved in determining the payroll and in recording and paying employer payroll taxes. The taxes that are involved in determining the payroll are as follows: 1. FICA taxes. These taxes were enacted by Congress to provide workers with supplemental retirement, employment disability, and medical benefits. These benefits are financed by a tax levied on employees’ earnings. The tax rate and tax base are set by Congress and both change intermittently. The current rate is 7.65% on the first $106,800 of gross earnings. FICA taxes are withheld by the employer and then remitted to the government. These taxes are not an expense to the employer. 2.

Federal income taxes. Employers are required to withhold federal income taxes from employees each pay period. The amount depends on the employee’s gross earnings, the number of allowances claimed by the employee, and the length of the pay period. The amounts withheld are remitted by the employer to the government. These taxes are not an expense to the employer.

State and city income taxes. Where applicable, these income taxes are similar to federal income taxes.

There are three types of payroll taxes that are levied on employers that are recognized as payroll tax expense by the employer. 1.

FICA taxes. The employer must match each employee’s FICA contribution. The employer’s tax is subject to the same rate and maximum earnings applicable to the employee.

Federal unemployment taxes. These taxes provide benefits to employees who lose their jobs through no fault of their own. The tax is 6.2% on the first $7,000 of gross earnings paid to each employee during a calendar year. The employer is allowed a maximum credit of 5.4% on the federal rate for contributions to state unemployment taxes.

F-26

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BYP F-3 (Continued) 3.

State unemployment taxes. These taxes also provide benefits to employees who lose their jobs. The basic rate is usually 5.4% on the first $7,000 of wages paid to an employee during the year.

Very truly yours,

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F-27

BYP F-4

ETHICS CASE

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

Jerry Martin, owner and manager. Sixteen part-time employees of Jerry’s. Andrea Sun, public accountant.

(b) Not withholding federal and state taxes from employees’ payroll is both illegal and unethical. Also, not paying FICA taxes, and state and federal unemployment taxes, is illegal and unethical. (c) Andrea Sun, as Jerry’s public accountant, should not be an accomplice to improper payroll deductions and accounting. Andrea should constantly remind Jerry of the consequences of his illegal payroll payments and the unrecorded payments. She should advise Jerry that not only is the government deprived of its proper tax revenues, but employees are deprived of social security and possibly Medicare credits as well as workmen’s compensation insurance. (d) An important internal control principle is to make no payments from cash receipts. All cash receipts should be deposited daily intact in the bank and all disbursements should be made by properly authorized and signed checks.

F-28

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APPENDIX G Subsidiary Ledgers and Special Journals ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Do It!

Exercises

1, 2, 5, 7,12

1, 2

Explain how companies use special journals in journalizing.

3, 4, 6, 7, 8, 9, 10, 13

3, 4, 5, 6

Indicate how companies post a multi-column journal.

8, 11

Learning Objectives

Questions

Describe the nature and purpose of a subsidiary ledger.

Weygandt Financial, IFRS, 2/e, Solutions Manual

A Problems

B Problems

1, 2, 3, 4, 5, 6, 7, 9, 11, 12

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

1B, 2B, 3B, 4B, 5B

6, 7, 8, 10, 12

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

1B, 2B, 3B, 4B, 5B

1, 3, 9, 11, 13, 14

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

1B, 2B, 3B, 4B, 5B

(For Instructor Use Only)

G-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

G-1A

Journalize transactions in cash receipts journal; post to control account and subsidiary ledger.

Simple

30–40

G-2A

Journalize transactions in cash payments journal; post to control account and subsidiary ledgers.

Simple

30–40

G-3A

Journalize transactions in multi-column purchases journal; post to the general and subsidiary ledgers.

Moderate

40–50

G-4A

Journalize transactions in special journals.

Moderate

50–60

G-5A

Journalize in sales and cash receipts journals; post; prepare a trial balance; prove control to subsidiary; prepare adjusting entries; prepare an adjusted trial balance.

Moderate

60–70

G-6A

Journalize in special journals; post; prepare a trial balance.

Complex

60–70

G-1B

Journalize transactions in cash receipts journal; post to control account and subsidiary ledger.

Simple

30–40

G-2B

Journalize transactions in cash payments journal; post to the general and subsidiary ledgers.

Simple

30–40

G-3B

Journalize transactions in multi-column purchases journal; post to the general and subsidiary ledgers.

Moderate

40–50

G-4B

Journalize transactions in special journals.

Moderate

50–60

G-5B

Journalize in purchases and cash payments journals; post; prepare a trial balance; prove control to subsidiary; prepare adjusting entries; prepare an adjusted trial balance.

Moderate

60–70

G-2

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Learning Objective

Knowledge

Comprehension

Application

Analysis

Weygandt Financial, IFRS, 2/e, Solution’ s Manual (For Instructor Use Only)

QG-2 QG-5 QG-12 BGG-1 BEG-2 EG-2 EG-11

DIG-1 EG-9 PG-5A QG-7 EG-1 EG-11 PG-6A EG-3 EG-12 PG-1B EG-4 PG-1A PG-2B EG-5 PG-2A PG-3B EG-6 PG-3A PG-4B EG-7 PG-4A PG-5B

Explain how companies use special journals in journalizing.

QG-3 QG-4 QG-6 QG-8 QG-9 QG-10 QG-13

BEG-3 EG-6 PG-4A PG-5B QG-7 BEG-4 EG-7 PG-5A BEG-5 EG-10 PG-6A BEG-6 EG-12 PG-1B DIG-2 PG-1A PG-2B EG-8 PG-2A PG-3B EG-10 PG-3A PG-4B

Indicate how companies post a multi-column journal.

QG-8 QG-11 BEG-7 EG-11

EG-1 PG-2A PG-2B EG-3 PG-3A PG-3B EG-9 PG-4A PG-4B EG-13 PG-5A PG-5B EG-14 PG-6A PG-1A PG-1B

Real-World Focus

Financial Reporting (Mini Practice Set)

Describe the nature and purpose of a subsidiary ledger.

Broadening Your Perspective

QG-1

Synthesis

Evaluation

Decision Making Across the Organization Communication Ethics Case

BLOOM’ S TAXONOMY TABLE

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

G-3

ANSWERS TO QUESTIONS 1.

A subsidiary ledger is a group of accounts with a common characteristic. The accounts are assembled together to facilitate the accounting process by freeing the general ledger from details concerning individual balances. The advantages of using subsidiary ledgers are that they:

 Permit transactions affecting a single customer or single creditor to be shown in a single account, thus providing necessary up-to-date information on specific account balances.

 Free the general ledger of excessive details relating to accounts receivable and accounts  

payable. As a result, a trial balance of the general ledger does not contain potentially thousands and thousands of individual account balances. Assist in locating errors in individual accounts by reducing the number of accounts in one ledger and by using control accounts. Permit a division of labor in posting by having one employee post to the general ledger and (a) different employee(s) post to the subsidiary ledgers.

(a) (1) Transactions to individual accounts are generally posted daily to the subsidiary ledger. (2) In contrast, postings to the control accounts are usually made in total at the end of the month. (b) A control account is a general ledger account that summarizes subsidiary ledger data. Subsidiary ledger accounts keep track of specific account activity (i.e., specific debtors or creditors). A subsidiary ledger is an addition to, and an expansion of, the general ledger.

Sales journal. Records entries for all sales of merchandise on account. Cash receipts journal. Records entries for all cash received by the business. Purchases journal. Records entries for all purchases of merchandise on account. Cash payments journal. Records entries for all cash paid. Some advantages of each journal are given below:

 Sales journal. (1) Since the sales journal employs only one line to record a sales transaction, its 

 

use reduces recording time; (2) the column totals are only posted to the general ledger once an accounting period; and (3) the journal’s use separates responsibilities between employees. Cash receipts journal. (1) Its use aids in the posting process since the totals for Cash, Sales Discounts, Accounts Receivable, and Sales Revenue are all recorded in the general ledger only at the end of the month; and (2) it allows all accounts receivable credits to be posted to the appropriate subsidiary ledger accounts daily. Purchases journal. The advantages are similar to those of the sales journal except that items involved are Inventory debits and Accounts Payable credits. Cash payments journal. Similar advantages to cash receipts journal except the columns involved are different.

In general, special journals: (1) allow greater division of labor because various individuals can record entries in different journals at the same time; and (2) reduce posting time of journals. 4.

G-4

The entry for the sales return should be recorded in the general journal. Since Burguet Company has a single-column sales journal, only credit sales can be recorded there. A purchase by Burguet Company has not taken place, so the use of the purchases journal is inappropriate. Finally, no cash is received or paid, so neither the cash receipts or cash payments journal should be used.

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Questions Appendix E (Continued) 5.

At the end of the month, after all postings to both the general ledger and the subsidiary accounts have been made, the total of the subsidiary account balances should equal the balance of the control account in the general ledger. In this case, the control account balance will be ₤450 larger than the total of the subsidiary accounts.

The purpose of special journals is to facilitate the recording process of the business entity. Therefore, the columns included in any special journal should correspond to the unique needs of the entity. In particular, one type of business which might not require an Accounts Receivable column would be grocery stores. These businesses rarely sell on credit to their customers. The minimum frequency of the transaction implies no need for an Accounts Receivable column in the cash receipts journal.

(a) No, the customers’ ledger will not agree with the Accounts Receivable control account. The customers’ ledger will be posted correctly, but the Accounts Receivable control account will be incorrect. (b) The trial balance will balance, although Cash will be $4,000 too high and Accounts Receivable $4,000 too low.

The special journal is the sales journal. The other account is Sales Revenue. (The cash receipts journal is an incorrect answer because there would be more than two month-end postings to general ledger accounts.)

(a) General journal. (b) General journal. (c) Cash receipts journal.

(d) Sales journal. (e) Cash receipts journal. (f) General journal.

10.

(a) Cash receipts journal. (b) Cash receipts journal. (c) General journal.

(d) Purchases journal. (e) General journal. (f) Cash payments journal.

11.

Typically included would be credit purchases of equipment, office supplies, and store supplies. However, any other item purchased on credit could also be included in a special column or the “other” column.

12.

One such example is a purchase return. Here the Accounts Payable control and subsidiary account must be debited for the same amount. The debit/credit equality is unaffected since the accounting equation is computed using general ledger (control) accounts only. The subsidiary accounts should prove to the control account balance.

13.

The general journal may be used to record such transactions as the granting of credit to a customer for a sales return or allowance, the receipt of credit from a supplier for purchases returned, acceptance of a note receivable from a customer, or the purchase of a plant asset by issuing a note payable. In addition, all correcting, adjusting, and closing entries should be made in the general journal.

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G-5

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE G-1 Accounts Receivable Subsidiary Ledger Date Jan. 7 17

Date Jan. 15 24

Date Jan. 23 29

Ref.

General Ledger

Austin Co. Debit Credit 10,000 7,000

Balance Date 10,000 Jan. 31 3,000 31

Diaz Co. Debit Credit

Balance

7,000 6,000

7,000 1,000

Nichols Co. Ref. Debit Credit 9,000 9,000

Balance 9,000 0

Accounts Receivable Ref. Debit Credit 26,000 22,000

Balance 26,000 4,000

BRIEF EXERCISE G-2 (a) General ledger (b) Subsidiary ledger

BRIEF EXERCISE G-3 (a) Cash Receipts Journal (b) Cash Payments Journal (c) Cash Payments Journal

(d) Sales Journal (e) Purchases Journal (f) Cash Receipts Journal

BRIEF EXERCISE G-4 (a) No (b) Yes

G-6

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BRIEF EXERCISE G-5 (a) General Journal (if a one-column Purchases Journal) Purchases Journal (if a multi-column Purchases Journal) (b) Purchases Journal (c) Cash Payments Journal (d) Sales Journal BRIEF EXERCISE G-6 (a) (b) (c) (d) (e)

Cash Receipts Journal Cash Receipts Journal Cash Receipts Journal Sales Journal and Cash Receipts Journal Purchases Journal

BRIEF EXERCISE G-7 (a) Both in total and daily (b) In total

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! G-1 Subsidiary balances: Gorst Company Maddox Company Tian Company

$3,300 $–0– $2,300

($9,000 – $5,700) ($12,000 – $12,000) ($10,000 – $7,700)

General ledger Accounts Payable balance: $5,600 ($3300 + $2,300) DO IT! G-2 1. Sold merchandise on account: Sales Journal 2. Purchased merchandise on account: Purchases Journal 3. Collected cash from a sale to Estes Company: Cash Receipts Journal 4. Recorded accrued interest on a note payable: General Journal 5. Paid $2,000 for supplies: Cash Payments Journal

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G-7

SOLUTIONS TO EXERCISES EXERCISE G-1 (a) ₤344,400. Beginning balance of ₤314,000 plus ₤161,400 debit from sales journal less ₤131,000 credit from cash receipts journal. (b) ₤83,600. Beginning balance of ₤77,000 plus ₤54,100 credit from purchases journal less ₤47,500 debit from cash payments journal. (c) The column total of ₤161,400 in the sales journal would be posted to the credit side of the Sales Revenue account and the debit side of the Accounts Receivable account in the general ledger. (d) The accounts receivable column total of ₤131,000 in the cash receipts journal would be posted to the credit side of the Accounts Receivable account in the general ledger. EXERCISE G-2 To:

Erica Henes, Chief Financial Officer

From:

Student

Subject:

Mailee Long account

The explanation of the three entries in the subsidiary ledger for the Mailee Long account is as follows: Sept. 2

This was a credit sale of merchandise to Long. The entry was recorded on page 31 of the Sales Journal.

Sept. 9

This was a sales return or allowance granted to Long. The entry was recorded on page 4 of the General Journal.

Sept. 27

This was a payment by Long of the balance due. The entry was recorded on page 8 of the Cash Receipts Journal.

If I can be of further help, please let me know.

G-8

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EXERCISE G-3 (a) & (b)

General Ledger

Accounts Receivable Date Explanation Sept. 1 Balance

Ref.  S CR G

Debit

Credit

4,650 7,030 185

Balance 10,960 15,610 8,580 8,395

Accounts Receivable Subsidiary Ledger Bohn Date Sept. 1

Cao Date Sept. 1

Han Date Sept. 1

Explanation Balance

Explanation

Ref.  S CR

Debit

Ref.  S CR G

Debit

Ref.

Debit

S CR

1,330

Ref.  CR

Debit

Credit

1,260 1,310

Credit

800 2,300 185

Credit

380

Balance 2,060 3,320 2,010

Balance 4,820 5,620 3,320 3,135

Balance 0 1,330 950

Lahr Date Sept. 1

Explanation Balance

Weygandt Financial, IFRS, 2/e, Solutions Manual

Credit 1,800

Balance 2,640 840

(For Instructor Use Only)

G-9

EXERCISE G-3 (Continued) Zeyen Date Sept. 1

Explanation Balance

(c)

Ref.  S CR

Debit

Credit

Balance 1,440 2,700 1,460

1,260 1,240

THONE COMPANY Schedule of Customers As of September 30, 2014 Bohn ......................................................................................... Cao ........................................................................................... Han ........................................................................................... Lahr ........................................................................................... Zeyen ........................................................................................ Total ..................................................................................

$2,010 3,135 950 840 1,460 $8,395

Accounts Receivable ...............................................................

$8,395

EXERCISE G-4 (a) (b) (c)

(d)

€3,700 [€10,200 – (€4,000 + €2,500). €12,000 [€10,200 + (€9,000 + €7,000 + €8,300) – (€8,000 + €2,500 + €9,000) – €3,000]. Burris (€4,000 + €9,000 – €8,000) € 5,000 Uhlig (€2,500 + €7,000 – €2,500 – €3,000) 4,000 Lopata (€3,700 + €8,300 – €9,000) 3,000 €12,000 The sales return (€3,000) would be recorded in the general journal.

EXERCISE G-5 (a) (b) (c)

(d)

G-10

$3,375 [$8,250 – ($3,000 + $1,875). $9,675 [$8,250 + ($6,750 + $5,250 + $6,375) – ($6,000 + $1,900 + $6,750) – $2,300]. Tym ($3,000 + $6,750 – $6,000) $3,750 Keyes ($1,875 + $5,250 – $1,900 – $2,300) 2,925 Byrne ($3,375 + $6,375 – $6,750) 3,000 $9,675 The purchase return ($2,300) would be recorded in the general journal.

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EXERCISE G-6 (a) & (b)

Date

PASHAK COMPANY Sales Journal Account Debited

2014 Sept. 2 J. Witten 21 K. Morgan

Invoice Accounts Receivable Dr. No. Ref. Sales Revenue Cr. 101 102

Cost of Goods Sold Dr. Inventory Cr.

780 800 1,580

420 480 900

PASHAK COMPANY Purchases Journal Date 2014 Sept. 10 25

Account Credited H. Gilles G. Harvey

Terms

Ref.

P1 Inventory Dr. Accounts Payable Cr.

2/10, n/30 n/30

600 835 1,435

EXERCISE G-7 (a) & (b)

Date

NEWELL CO. Cash Receipts Journal Account Credited

2014 May 1 Share Capital— Ordinary 2 22 N. Eggert

Ref.

Cash Dr.

48,000 6,340 9,000 63,340

Sales Accounts Sales Discounts Receivable Revenue Dr. Cr. Cr.

CR1 Other Accounts Cr.

Cost of Goods Sold Dr. Inventory Cr.

48,000 6,340 9,000 9,000

6,340

Weygandt Financial, IFRS, 2/e, Solutions Manual

4,200 48,000

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4,200

G-11

EXERCISE G-7 (Continued) NEWELL CO. Cash Payments Journal Ck. No. Account Debited

Date 2014 May 3 101 Inventory 14 102 Salaries and Wages Expense

CP1

Other Accounts Accounts Payable Ref. Dr. Dr. 7,200 700 7,900

Cash Cr. 7,200 700 7,900

EXERCISE G-8 (a) Journal 1. Cash Payments 2. Cash Receipts 3. Cash Payments 4. Cash Payments 5. Cash Receipts 6. Cash Payments 7. Cash Payments 8. Cash Receipts 9. Cash Payments 10. Cash Receipts

G-12

(b) Columns in the journal Cash (Cr.), Other Accounts (Dr.). Cash (Dr.), Sales Discounts (Dr.), and Accounts Receivable (Cr.). Cash (Cr.), Other Accounts (Dr.). Cash (Cr.), Inventory (Cr.), and Accounts Payable (Dr.). Cash (Dr.), Accounts Receivable (Cr.). Cash (Cr.), Other Accounts (Dr.). Cash (Cr.), Other Accounts (Dr.). Cash (Dr.), Other Accounts (Cr.). Cash (Cr.), Other Accounts (Dr.). Cash (Dr.), Sales Revenue (Cr.), Cost of Goods Sold (Dr.), and Inventory (Cr.).

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EXERCISE G-9 (a) Mar. 2

(b) To:

Equipment ..................................................... Accounts Payable—Aleksic Company ............................................

9,400

Accounts Payable—Dumont Company.................................................... Inventory ................................................

9,400 410 410

Sales Returns and Allowances .................... Accounts Receivable—Gavin Company ............................................

390

Inventory ........................................................ Cost of Goods Sold ...............................

240

390 240

President Moncada

From:

Chief Accountant

Subject:

Posting of Control and Subsidiary Accounts

The posting of these accounts varies with the journals used in recording the transactions. Sales and purchases journals—the total for the month is posted to the control accounts. The individual entries are posted daily to the subsidiary accounts. Columnar cash receipts and cash payments journals—the total of the control account column for the month is posted to the control account. The individual amounts in the column are posted daily to the subsidiary accounts. General journal—the individual entries are posted daily. Each entry that pertains to a control and a subsidiary account is dual posted. That is, it is posted to both the control account and the subsidiary account. I hope this memo answers your questions about posting.

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G-13

EXERCISE G-10 1. 2. 3. 4. 5. 6. 7.

Cash Payments Journal General Journal Cash Receipts Journal Cash Receipts Journal Sales Journal Cash Receipts Journal General Journal

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

Cash Receipts Journal Cash Payments Journal Cash Payments Journal General Journal Cash Payments Journal Purchases Journal

EXERCISE G-11 (a) The debit posting reference on February 28 should be from the cash payments journal to record the payments made during the month. The general ledger debit amount should be $28,970 to balance. Robillard’s ending balance must be $3,100. (Accounts Payable control balance of $9,800 less Lawlor, $4,600, and Tilev, $2,100.) (b) Only the general journal amounts were dual posted. Thus, the amounts were $1,400 (Dr.), $195 (Cr.), and $550 (Cr.).

EXERCISE G-12 (a) Purchases Journal Date July 3 12 14 17 20 21 29

Account Credited Dakota Co. Montana Co. Kansas Co. Georgia Corp. Dakota Co. Montana Co. Georgia Corp.

G-14

Ref.       

P1 Inventory Dr. Accounts Payable Cr. 2,400 500 1,300 1,400 700 600 1,600 8,500 120/201

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

EXERCISE G-12 (Continued) (b) Date July 1

General Journal Accounts and Explanations Ref. Equipment ......................................... 153/ Accounts Payable—Alaska Equipment Co. ..................... 201/

Debit 3,900

Credit

3,900

Inventory ........................................... 120/ 600 Accounts Payable— Oklahoma Inc ....................... 201/ 600 (This entry should have been recorded in the Purchases Journal.)

Accounts Payable—Georgia Corp. .............................................. 201/ Inventory .................................. 120/

Accounts Payable—Kansas Co. ..... 201/ Inventory .................................. 120/

380 380 200 200

EXERCISE G-13 $985 ($280 + $240 + $145 + $190 + $130). All of the debit postings to the subsidiary ledger accounts should be from sales invoices. The total of all these debits should therefore be the total credit sales for the month, which would be the same amount as the end-of-month debit to Accounts Receivable. EXERCISE G-14 (a) (b) (c) (d) (e)

€19,000 + €72,000 – €46,000 = €45,000 €22,000 + €100,000 – €48,000 = €74,000 €17,000 + €64,000 – €55,000 = €26,000 €13,500 + €72,000 – €1,000 – €63,600 = €20,900 €100,000 + €6,000 = €106,000

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

G-15

SOLUTIONS TO PROBLEMS PROBLEM G-1A

(a) Cash Receipts Journal

Date

Account Credited

Apr. 1 Share Capital— Ordinary 4 Afzal 5 Jury Co. 8 10 Siem 11 Inventory 23 Jury Co. 29 Milkie

Ref.

Cash Dr.

311 7,200  1,764  990 7,845  600 120 680  1,500  1,200 21,779 (101)

(b)

Sales Accounts Sales Discounts Receivable Revenue Dr. Cr. Cr.

CR1 Other Accounts Cr.

Cost of Goods Sold Dr. Inventory Cr.

7,200 36

1,800 990 7,845

4,347

600 680

36 (414)

1,500 1,200 6,090 (112)

7,845 (401)

7,880 (X)

4,347 (505)(120)

General Ledger

Accounts Receivable Date Explanation Apr. 1 Balance 30

Ref.  CR1

Debit

Credit 6,090

No. 112 Balance 7,450 1,360

Accounts Receivable Subsidiary Ledger Siem Date Apr. 1 10

Explanation Balance

G-16

Ref.  CR1

Debit

Credit 600

Weygandt Financial, IFRS, 2/e, Solutions Manual

Balance 1,550 950

(For Instructor Use Only)

PROBLEM G-1A (Continued) Milkie Date Apr. 1 29

Explanation Balance

Jury Co. Date Apr. 1 5 23

Explanation Balance

Afzal Date Apr. 1 4

Explanation Balance

Ref.  CR1

Debit

Ref.  CR1 CR1

Debit

Ref.  CR1

Debit

1,200

Credit 990 1,500

Credit 1,800

€1,360

Subsidiary account balances: Siem Jury Co. Total

€ 950 410 €1,360

Credit

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

Balance 1,200 0

Balance 2,900 1,910 410

Balance 1,800 0

G-17

PROBLEM G-2A

(a) Cash Payments Journal Date

Ck. No. Account Debited

Oct. 1 3 5 10 15 16 19 29

63 64 65 66 67 68 69 70

Other Accounts Accounts Payable Ref. Dr. Dr.

Inventory Equipment Deavers Company Inventory May Co. Cash Dividends Greer Co. Snell Company

120 157

300 1,200

120

2,250

332

400

   

Inventory Cr.

2,700

2,100

4,150 (X)

(b)

CP1

1,800 2,500 9,100 (201)

36 90 (120)

Cash Cr. 300 1,200 2,646 2,250 2,100 400 1,764 2,500 13,160 (101)

General Ledger

Accounts Payable Date Explanation Oct. 1 Balance 31

Ref.  CP1

Debit

Credit

9,100

No. 201 Balance 11,000 1,900

Accounts Payable Subsidiary Ledger Deavers Company Date Oct.

G-18

1 5

Explanation Balance

Ref.  CP1

Debit

Credit

2,700

Weygandt Financial, IFRS, 2/e, Solutions Manual

Balance 2,700 0

(For Instructor Use Only)

PROBLEM G-2A (Continued) Greer Co. Date Explanation Oct. 1 Balance 19

Ref.  CP1

Debit

May Co. Date Oct. 1 15

Ref.  CP1

Debit

Ref.  CP1

Debit

Explanation Balance

Credit

Balance 2,500 700

Credit

Balance 2,100 0

Credit

Balance 3,700 1,200

1,800

2,100

Snell Company Date Oct.

1 29

Explanation Balance

2,500

$1,900 $ 700 1,200 $1,900

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

G-19

PROBLEM G-3A

(a) Purchases Journal

Date

Account Credited (Debited)

Ref.

July 1 2 5 13

Chad Company Pegasus Shipping Kivlin Company Bowe Supply (Supplies) Chad Company Goran Company Wei Advertisements (Advertising Expense) Kivlin Company Bowe Supply (Equipment) Pegasus Shipping

  

15 15 18 24 26 28

Accounts Payable Cr.

Inventory Dr.

7,600 400 3,200 910

7,600 400 3,200

3,600 3,300 600

3,600 3,300

3,000 900

3,000

380 23,890 (201)

380 21,480 (120)

126/

  610/

 157/



P1 Other Accounts Dr.

910

600

900

2,410 (X)

Sales Journal Date

Account Debited

Accounts Receivable Dr. Ref. Sales Revenue Cr.

July 3 3 16 16 21 21 30

Effron Company Pitas Bros. Felber Company Pitas Bros. Effron Company Musky Company Felber Company

      

G-20

1,300 2,000 3,450 1,570 310 2,800 5,600 17,030 (112)(401)

S1 Cost of Goods Sold Dr. Inventory Cr. 910 1,400 2,415 1,099 217 1,960 3,920 11,921 (505)(120)

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

PROBLEM G-3A (Continued)

Date July

General Journal Accounts and Explanations Accounts Payable—Kivlin Company ....................................... Inventory ..................................

Ref.

Debit

201/ 120/

300

Sales Returns and Allowances Accounts Receivable— Effron Company ...................

412/  112/

(b) Accounts Receivable Date Explanation July 31 22

G1 Credit

300

General Ledger Ref. S1 G1

Debit 17,030

Credit 65

No. 112 Balance 17,030 16,965

Inventory Date July 31 8 31

No. 120 Explanation

Ref. P1 G1 S1

Debit 21,480

Credit 300 11,921

Balance 21,480 21,180 9,259

Supplies Date July 13

No. 126 Explanation

Ref. P1

Debit 910

Weygandt Financial, IFRS, 2/e, Solutions Manual

Credit

(For Instructor Use Only)

Balance 910

G-21

PROBLEM G-3A (Continued) Equipment Date Explanation July 26

Accounts Payable Date Explanation July 31 8

Sales Revenue Date Explanation July 31

Sales Returns and Allowances Date Explanation July 22

Ref. P1

Ref. P1 G1

Ref. S1

Ref. G1

Debit 900

Debit

Credit

No. 157 Balance 900

Credit 23,890

No. 201 Balance 23,890 23,590

300

Debit

Debit 65

Credit 17,030

Credit

Cost of Goods Sold Date July 31

Explanation

Advertising Expense Date Explanation July 18

G-22

No. 401 Balance 17,030

No. 412 Balance 65

No. 505 Ref. S1

Ref. P1

Debit 11,921

Debit 600

Credit

Weygandt Financial, IFRS, 2/e, Solutions Manual

Balance 11,921

No. 610 Balance 600

(For Instructor Use Only)

PROBLEM G-3A (Continued) Accounts Receivable Subsidiary Ledger Pitas Bros. Date July

Explanation

Ref. S1 S1

Debit 2,000 1,570

Credit

Balance 2,000 3,570

Effron Company Date Explanation July 3 21 22

Ref. S1 S1 G1

Debit 1,300 310

Credit

Balance 1,300 1,610 1,545

Felber Company Date Explanation July 16 30

Ref. S1 S1

Debit 3,450 5,600

Credit

Balance 3,450 9,050

Musky Company Date Explanation July 21

Ref. S1

Debit 2,800

Credit

Balance 2,800

3 16

Accounts Payable Subsidiary Ledger Bowe Supply Date Explanation July 13 26

Ref. P1 P1

Debit

Weygandt Financial, IFRS, 2/e, Solutions Manual

Credit 910 900

(For Instructor Use Only)

Balance 910 1,810

G-23

PROBLEM G-3A (Continued) Pegasus Shipping Date Explanation July 2 28

Ref. P1 P1

Debit

Credit 400 380

Balance 400 780

Ref. P1 P1

Debit

Credit 7,600 3,600

Balance 7,600 11,200

Kivlin Company Date Explanation July 5 8 24

Ref. P1 G1 P1

Debit

Credit 3,200 3,000

Balance 3,200 2,900 5,900

Wei Advertisements Date Explanation July 18

Ref. P1

Debit

Credit 600

Balance 600

Goran Company Date Explanation July 15

Ref. P1

Debit

Credit 3,300

Balance 3,300

Chad Company Date July

G-24

Explanation 1 15

300

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

PROBLEM G-3A (Continued) (c) Accounts receivable balance ................................ Subsidiary account balances Pitas Bros. ....................................................... Effron Company .............................................. Felber Company ............................................. Musky Company ............................................. Total .........................................................

$16,965 $ 3,570 1,545 9,050 2,800 $16,965

Accounts payable balance .................................... Subsidiary account balances Bowe Supply ................................................... Pegasus Shipping........................................... Chad Company ............................................... Kivlin Company .............................................. Wei Advertisements ....................................... Goran Company .............................................. Total .........................................................

Weygandt Financial, IFRS, 2/e, Solutions Manual

$23,590 $ 1,810 780 11,200 5,900 600 3,300

(For Instructor Use Only)

$23,590

G-25

PROBLEM G-4A

(a), (b) & (c) Sales Journal Account Debited

Date

Jan. 4 Hull 9 Phelan Corp. 17 Mayr Co. 31 Hull

Invoice Accounts Receivable Dr. No. Ref. Sales Revenue Cr. 371 372 373 374

   

Cost of Goods Sold Dr. Inventory Cr.

5,600 6,400 1,200 9,330 22,530 (112)(401)

3,360 3,840 720 5,598 13,518 (505)(120)

Purchases Journal Date Jan. 3 8 11 23 24

Account Credited Pirkov Co. Dubois Co. Akers Co. Pirkov Co. Fifer Corp.

Date Jan. 5

General Journal Accounts and Explanations Accounts Payable—Pirkov Co. ............ Inventory ...................................

G-26

Ref.     

Equipment.......................................... Accounts Payable—Barb Corp. ......................................

P1 Inventory Dr. Accounts Payable Cr. 10,000 4,500 3,700 7,800 5,100 31,100 (120)(201)

Ref. 201/ 120

Debit 300

157/ 201/

5,500

G1 Credit 300

Weygandt Financial, IFRS, 2/e, Solutions Manual

5,500

(For Instructor Use Only)

PROBLEM G-4A (Continued) Cash Receipts Journal Account Credited

Date

Jan. 6 13 15 Phelan Corp. 17 Hull 20 27 30 Mayr Co.

Ref.

Sales Accounts Sales Discounts Receivable Revenue Dr. Cr. Cr.

Cash Dr.

3,750 6,260  6,336  5,600 3,200 4,230  1,200 30,576 (101)

64 (414)

CR1 Other Accounts Cr.

Cost of Goods Sold Dr. Inventory Cr.

3,750 6,260

2,250 3,756

3,200 4,230

1,920 2,538

6,400 5,600

1,200 13,200 (112)

17,440 (401)

0 (X)

10,464 (505)(120)

Cash Payments Journal Other Accounts Ref. Dr.

Date

Account Debited

Jan. 4 13 15

Supplies Pirkov Co. Salaries and Wages Expense Dubois Co. Salaries and Wages Expense

20 31

126 

726

14,300

726

Accounts Payable Dr.

Inventory Cr.

Cash Cr.

194

80 9,506

4,500

14,300 4,410

14,200 (201)

284 (120)

14,300 42,596 (101)

9,700

 14,300 28,680 (X)

CP1

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

G-27

PROBLEM G-5A

(a), (d) & (g) Cash Date July 31 31

General Ledger

Explanation

Accounts Receivable Date Explanation July 31 31

Ref. CR1 CP1

Ref. S1 CR1

Debit 101,765

Credit 38,766

Debit 20,100

Credit 15,100

Inventory Date July 31 29 31 31 31

No. 112 Balance 20,100 5,000 No. 120

Explanation

Supplies Date Explanation July 4 31 Adjusting entry Prepaid Rent Date Explanation July 11 31 Adjusting entry

G-28

No. 101 Balance 101,765 62,999

Ref. P1 CR1 CP1 S1 CR1

Ref. CP1 G1

Debit 43,720

Credit 450 234 13,065 4,095

Debit 600

Credit 430

Debit 6,000

Credit 500

Weygandt Financial, IFRS, 2/e, Solutions Manual

Balance 43,720 43,270 43,036 29,971 25,876 No. 127 Balance 600 170 No. 131 Balance 6,000 5,500

(For Instructor Use Only)

PROBLEM G-5A (Continued) Accounts Payable Date Explanation July 31 31

Share Capital—Ordinary Date Explanation July 1

Cash Dividends Date Explanation July 19

Ref. P1 CP1

Ref. CR1

Ref. CP1

Debit

Credit 43,720

29,900

Debit

Debit 2,500

Credit 80,000

Credit

Sales Revenue Date July 31 31

Explanation

Sales Discounts Date Explanation July 31

Explanation

No. 311 Balance 80,000

No. 332 Balance 2,500

No. 401 Ref. S1 CR1

Ref. CR1

Debit

Debit 85

Credit 20,100 6,300

Balance 20,100 26,400

Credit

No. 414 Balance 85

Cost of Goods Sold Date July 31 31

No. 201 Balance 43,720 13,820

No. 505 Ref. S1 CR1

Debit 13,065 4,095

Weygandt Financial, IFRS, 2/e, Solutions Manual

Credit

(For Instructor Use Only)

Balance 13,065 17,160

G-29

PROBLEM G-5A (Continued) Supplies Expense Date Explanation July 31 Adjusting entry

Ref. G1

Rent Expense Date Explanation July 31 Adjusting entry

Ref. G1

Debit 430

Debit 500

Credit

No. 631 Balance 430

Credit

No. 729 Balance 500

(b) Sales Journal Date

Account Debited

Ref.

July 6 8 10 21

Dorfner Co. Bonilha L. Ortiz M.Putzi

   

Accounts Receivable Dr. Sales Revenue Cr.

Cost of Goods Sold Dr. Inventory Cr.

6,600 3,600 4,900 5,000 20,100 (112)(401)

4,290 2,340 3,185 3,250 13,065 (505)(120)

Cash Receipts Journal

Date

Account Credited

July 1 Share Capital— Ordinary 7 13 Bonilha 16 L. Ortiz 20 Dorfner Co. 29 Inventory

Ref.

311

   120

G-30

Cash Dr.

80,000 6,300 3,564 4,851 6,600 450 101,765 (101)

CR1

Sales Accounts Sales Other Discounts Receivable Revenue Accounts Dr. Cr. Cr. Cr.

Cost of Goods Sold Dr. Inventory Cr.

80,000 6,300 36 49

3,600 4,900 6,600

85 (414)

15,100 (112)

6,300 (401)

4,095

450 80,450 (X)

Weygandt Financial, IFRS, 2/e, Solutions Manual

4,095 (505)(120)

(For Instructor Use Only)

PROBLEM G-5A (Continued) (c)

Accounts Receivable Subsidiary Ledger

Dorfner Co. Date Explanation July 6 20

Ref. S1 CR1

Debit 6,600

M. Putzi Date July 21

Explanation

Ref. S1

Debit 5,000

Credit

Balance 5,000

L. Ortiz Date July 10 16

Explanation

Ref. S1 CR1

Debit 4,900

Credit

Balance 4,900 0

Bonilha Date July 8 13

Explanation

Ref. S1 CR1

Debit 3,600

Credit

Balance 6,600 0

6,600

4,900

Credit

Balance 3,600 0

3,600

Accounts Payable Subsidiary Ledger D. Talbert Date Explanation July 13 21

Ref. P1 CP1

K. Emmons Date Explanation July 5 10

Ref. P1 CP1

Debit

Credit 15,300

Balance 15,300 0

Credit 8,100

Balance 8,100 0

15,300

Debit 8,100

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

G-31

PROBLEM G-5A (Continued) G. Young Date Explanation July 20

Ref. P1

Debit

Credit 7,900

Balance 7,900

T. Cigale Date Explanation July 4 15

Ref. P1 CP1

Debit

Credit 6,500

Balance 6,500 0

M. Huang Date Explanation July 11

Ref. P1

Debit

Credit 5,920

Balance 5,920

Debit $ 62,999 5,000 25,876 600 6,000

Credit

(e)

6,500

ROSALEZ CO. Trial Balance July 31, 2014

Cash ................................................................ Accounts Receivable ..................................... Inventory ........................................................ Supplies.......................................................... Prepaid Rent .................................................. Accounts Payable .......................................... Share Capital—Ordinary ............................... Cash Dividends .............................................. Sales Revenue ............................................... Sales Discounts ............................................. Cost of Goods Sold .......................................

G-32

$ 13,820 80,000 2,500 26,400 85 17,160 $120,220

Weygandt Financial, IFRS, 2/e, Solutions Manual

$120,220

(For Instructor Use Only)

PROBLEM G-5A (Continued) (f)

Accounts receivable balance ................................................

$ 5,000

Subsidiary accounts balance M. Putzi ............................................................................

$ 5,000

Accounts payable balance ....................................................

$13,820

Subsidiary accounts balance G. Young ......................................................................... M. Huang .........................................................................

$ 7,900 5,920 $13,820

(g) Date July 31 31

General Journal Accounts and Explanations Supplies Expense ............................. Supplies ...................................

Ref. 631 127

Debit 430

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

729 131

500

Weygandt Financial, IFRS, 2/e, Solutions Manual

G1 Credit 430

(For Instructor Use Only)

500

G-33

PROBLEM G-5A (Continued) (h)

ROSALEZ CO. Adjusted Trial Balance July 31, 2014 Cash ................................................................ Accounts Receivable ..................................... Inventory ......................................................... Supplies .......................................................... Prepaid Rent ................................................... Accounts Payable .......................................... Share Capital—Ordinary ................................ Cash Dividends .............................................. Sales Revenue................................................ Sales Discounts ............................................. Cost of Goods Sold........................................ Supplies Expense .......................................... Rent Expense .................................................

G-34

Debit $ 62,999 5,000 25,876 170 5,500

Credit

$ 13,820 80,000 2,500 26,400 85 17,160 430 500 $120,220

Weygandt Financial, IFRS, 2/e, Solutions Manual

$120,220

(For Instructor Use Only)

PROBLEM G-6A

(b) & (c) Cash Receipts Journal

Date

Account Credited

Ref.

Jan. 7 13 23 29

E.Divine T.Payton

 

Notes Receivable

115

Cash Dr. 3,500 4,508 9,100 37,000 54,108 (101)

Sales Discounts Dr.

Accounts Receivable Cr.

3,500 4,600

CR1

Sales Revenue Cr.

Other Accounts Cr.

Cost of Goods Sold Dr. Inventory Cr.

9,100

5,460

0 92 (414)

8,100 (112)

37,000 37,000 (X)

9,100 (401)

5,460 (505)(120)

Cash Payments Journal Other Accounts Accounts Payable Ref. Dr. Dr.

Date

Account Debited

Jan. 11 12 15 18

Inventory Rent Expense A. Qazi Salaries and Wages Expense P.Yang

CP1

120 729 

300 1,000

726 

4,500

15,000

5,800 (X)

950 15,950 (201)

Inventory Cr.

Cash Cr.

150

300 1,000 14,850

150 (120)

4,500 950 21,600 (101)

Sales Journal Date

Account Debited

Jan. 3 T. Payton 24 J. Clare

Accounts Receivable Dr. Ref. Sales Revenue Cr.  

4,600 7,400 12,000 (112)(401)

Weygandt Financial, IFRS, 2/e, Solutions Manual

S1 Cost of Goods Sold Dr. Inventory Cr. 2,760 4,440 7,200 (505)(120)

(For Instructor Use Only)

G-35

PROBLEM G-6A (Continued) Purchases Journal Date Jan. 5 17

Account Credited P. Yang E. Monty

P1 Inventory Dr. Accounts Payable Cr. 2,800 1,600 4,400 (120)(201)

Ref.  

General Journal Date Jan. 14

20 30

Accounts and Explanations Sales Returns and Allowances ....... Accounts Receivable— M. Barajas ............................ Inventory (€300 X .60) ...................... Cost of Goods Sold .................

Ref. /412

Debit 300

/112 120 /505

Accounts Payable—L. Gold ............ Notes Payable..........................

/201 /200

18,000

Accounts Payable—E. Monty .......... Inventory ..................................

/201 120

300

Credit

300 180 180 18,000 300

(a) & (c) General Ledger Cash Date Jan. 1 31 31

G-36

Explanation Balance

Ref.  CR1 CP1

Debit

Credit

54,108 21,600

Weygandt Financial, IFRS, 2/e, Solutions Manual

No. 101 Balance 41,500 95,608 74,008

(For Instructor Use Only)

PROBLEM G-6A (Continued) Accounts Receivable Date Explanation Jan. 1 Balance 14 31 31

Ref.  G1 CR1 S1

Debit

Credit 300 8,100

12,000

Notes Receivable Date Jan. 1 29

Explanation Balance

Inventory Date Explanation Jan. 1 Balance 11 14 30 31 31 31 31

Equipment Date Explanation Jan. 1 Balance

No. 115 Ref.  CR1

Ref.  CP1 G1 G1 P1 CP1 CR1 S1

Ref. 

Debit

Credit 37,000

Debit

Credit

300 180 300 4,400 150 5,460 7,200

Debit

Credit

Accumulated Depreciation—Equipment Date Jan.

Explanation Balance

No. 112 Balance 15,000 14,700 6,600 18,600

Ref. 

Balance 45,000 8,000

No. 120 Balance 20,000 20,300 20,480 20,180 24,580 24,430 18,970 11,770

No. 157 Balance 7,500

No. 158 Debit

Weygandt Financial, IFRS, 2/e, Solutions Manual

Credit

(For Instructor Use Only)

Balance 1,500

G-37

PROBLEM G-6A (Continued) Notes Payable Date Explanation Jan. 20

Accounts Payable Date Explanation Jan. 1 Balance 20 30 31 31

Share Capital—Ordinary Date Explanation Jan. 1 Balance

Sales Revenue Date Explanation Jan. 31 31

Sales Returns and Allowances Date Explanation Jan. 14

Sales Discounts Date Explanation Jan. 31

G-38

Ref. G1

Ref.  G1 G1 P1 CP1

Ref. 

Ref. CR1 S1

Ref. G1

Ref. CR1

Debit

Credit 18,000

Credit

18,000 300 4,400 15,950

Debit

Debit 300

Debit 92

Credit

Credit 9,100 12,000

No. 200 Balance 18,000

No. 201 Balance 43,000 25,000 24,700 29,100 13,150

No. 311 Balance 84,500

No. 401 Balance 9,100 21,100

Credit

No. 412 Balance 300

Credit

No. 414 Balance 92

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

PROBLEM G-6A (Continued) Cost of Goods Sold Date Explanation Jan. 31 31 14

Ref. CR1 S1 G1

Salaries and Wages Expense Date Explanation Jan. 18

Ref. CP1

Debit 5,460 7,200

No. 505 Balance 5,460 12,660 12,480

Credit

180

Debit 4,500

No. 726 Balance 4,500

Credit

Rent Expense Date Jan. 12

No. 729

Explanation

Ref. CP1

Debit 1,000

Credit

Balance 1,000

Accounts Receivable Subsidiary Ledger M. Barajas Date Explanation Jan. 1 Balance 14

Ref.  G1

Debit

Ref.  S1

Debit

Credit 300

Balance 2,500 2,200

J. Clare Date Jan.

1 24

Explanation Balance

7,400

Weygandt Financial, IFRS, 2/e, Solutions Manual

Credit

Balance 7,500 14,900

(For Instructor Use Only)

G-39

PROBLEM G-6A (Continued) E. Divine Date Explanation Jan. 1 Balance 7

Ref.  CR1

Debit

Ref. S1 CR1

Debit 4,600

Credit 3,500

Balance 5,000 1,500

T. Payton Date Jan.

Explanation 3 13

Credit 4,600

Balance 4,600 0

Accounts Payable Subsidiary Ledger E. Monty Date Explanation Jan. 17 30

Ref. P1 G1

Debit

B. Forrest Date Explanation Jan. 1 Balance

Ref. 

L. Gold Date Jan. 1 20

Explanation Balance

Ref.  G1

A. Qazi Date Jan. 1 15

Explanation Balance

G-40

Ref.  CP1

Credit 1,600

Balance 1,600 1,300

Debit

Credit

Balance 10,000

Debit

Credit

Balance 18,000 0

Credit

Balance 15,000 0

300

18,000

Debit 15,000

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

PROBLEM G-6A (Continued) P. Yang Date Jan. 5 27

Explanation

(d)

Ref. P1 CP1

Debit

Credit 2,800

Balance 2,800 1,850

Debit € 74,008 18,600 8,000 11,770 7,500

Credit

950

AMLAND CO. Trial Balance January 31, 2014 Cash ................................................................ Accounts Receivable ..................................... Notes Receivable ........................................... Inventory ......................................................... Equipment ...................................................... Accumulated Depreciation—Equipment ...... Notes Payable ................................................ Accounts Payable .......................................... Share Capital—Ordinary ................................ Sales Revenue ................................................ Sales Returns and Allowances ..................... Sales Discounts ............................................. Cost of Goods Sold ........................................ Salaries and Wages Expense ........................ Rent Expense .................................................

€

300 92 12,480 4,500 1,000 €138,250

€138,250

(e) Accounts Receivable Subsidiary Ledger M. Barajas ........................................................................ J. Clare ............................................................................. E. Divine ........................................................................... Accounts Receivable Control .................................................

Weygandt Financial, IFRS, 2/e, Solutions Manual

1,500 18,000 13,150 84,500 21,100

(For Instructor Use Only)

€ 2,200 14,900 1,500 €18,600 €18,600

G-41

PROBLEM G-6A (Continued) Accounts Payable Subsidiary Ledger E. Monty ........................................................................... B. Forrest ......................................................................... P. Yang ............................................................................. Accounts Payable Control .....................................................

G-42

Weygandt Financial, IFRS, 2/e, Solutions Manual

€ 1,300 10,000 1,850 €13,150 €13,150

(For Instructor Use Only)

PROBLEM G-1B

(a) Cash Receipts Journal

Date

Account Credited

June 1 Share Capital─ Ordinary 3 Loomis Co. 6 Flores Co. 7 9 Detwiler & Son 11 Inventory 15 20 Glaimo Bros.

CR1

Sales Accounts Sales Other Cash Discounts Receivable Revenue Accounts Ref. Dr. Dr. Cr. Cr. Cr. 311 12,000  1,470  1,862 7,220  2,450 120 320 4,500  1,600 31,422 (101)

(b)

Cost of Goods Sold Dr. Inventory Cr.

12,000 30 38

1,500 1,900

2,500

7,220

4,800 320

4,500 118 (414)

1,600 7,500 (112)

11,720 (401)

3,000 12,320 (X)

7,800 (505/120)

General Ledger

Accounts Receivable Date Explanation June 1 Balance 30

Ref.  CR1

Debit

Credit 7,500

No. 112 Balance 7,500 0

Accounts Receivable Subsidiary Ledger Detwiler & Son Date Explanation June 1 Balance 9

Ref.  CR1

Weygandt Financial, IFRS, 2/e, Solutions Manual

Debit

Credit 2,500

Balance 2,500 0

(For Instructor Use Only)

G-43

PROBLEM G-1B (Continued) Flores Co. Date Explanation June 1 Balance 6

Ref.  CR1

Debit

Ref.  CR1

Debit

Ref.  CR1

Debit

Credit 1,900

Balance 1,900 0

Glaimo Bros. Date June

1 20

Explanation Balance

Loomis Co. Date Explanation June 1 Balance 3

Credit 1,600

Credit 1,500

Balance 1,600 0

Balance 1,500 0

G-44

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

PROBLEM G-2B

(a) Cash Payments Journal Date

Ck. No. Account Debited

Other Accounts Ref. Dr.

Nov. 1 3 5 11 15 16 19 25 30

11 12 13 14 15 16 17 18 19

120 157  120  332  130 

Inventory Equipment Weber Bros. Inventory K. Radaj Cash Dividends O. Kroll Prepaid Insurance C. Holt & Co.

Accounts Payable Dr.

Inventory Cr.

1,190 1,700 1,500

1,000

1,200

500 3,000 3,500 7,200 (201)

Cash Cr. 1,190 1,700 1,470 2,000 970 500 1,188 3,000 3,500 15,518 (101)

2,000

8,390 (X)

(b)

CP1

00 72 (120)

General Ledger

Accounts Payable Date Explanation Nov. 1 Balance 30

Ref.  CP1

Debit

Credit

7,200

No. 201 Balance 9,350 2,150

Accounts Payable Subsidiary Ledger C. Holt & Co. Date Explanation Nov. 1 Balance 30

Ref.  CP1

Debit 3,500

Weygandt Financial, IFRS, 2/e, Solutions Manual

Credit

Balance 4,500 1,000

(For Instructor Use Only)

G-45

PROBLEM G-2B (Continued) O. Kroll Date Nov. 1 19

Explanation Balance

Ref.  CP1

Debit

Ref.  CP1

Debit

Ref.  CP1

Debit

Credit

Balance 2,350 1,150

Credit

Balance 1,000 0

Credit

Balance 1,500 0

1,200

K. Radaj Date Nov. 1 15

Explanation Balance

Weber Bros. Date Explanation Nov. 1 Balance 5

1,500

$2,150

Subsidiary account balances: C. Holt O. Kroll

G-46

1,000

$1,000 1,150 $2,150

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

PROBLEM G-3B

(a) Purchases Journal

Date

Account Credited (Debited)

Ref.

Accounts Payable Cr.

May 2 Yan Company  3 Porter Freight  8 Quirk Company  8 Zamora Company  15 Rizio Supply (Supplies) 126/ 16 Yan Company  16 Quirk Company  18 Porter Freight  25 Anshus Advertising (Adv. Exp.) 610/ 28 Rizio Supply (Equipment) 157/ 0

7,100 360 8,000 8,700 900 4,500 7,200 500 900 500 38,660 (201)

P1 Inventory Dr.

Other Accounts Dr.

7,100 360 8,000 8,700 900 4,500 7,200 500

36,360 (120)

Sales Journal Date

Account Debited

Ref.

May 5 5 5 23 23

Eder Company Dixon Bros. Lamb Company Dixon Bros. Lamb Company

    

900 500 2,300 (X)

Accounts Receivable Dr. Sales Revenue Cr.

Cost of Goods Sold Dr. Inventory Cr.

2,200 2,700 1,500 1,900 3,600 11,900 (112)(401)

1,430 1,755 975 1,235 2,340 7,735 (505)(120)

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

G-47

PROBLEM G-3B (Continued)

Date May 10

General Journal Accounts and Explanations Accounts Payable—Zamora Company....................................... Inventory..................................

Ref.

Debit

201/ 120/

500

Accounts Payable—Rizio Supply ........................................... Supplies ...................................

201/ 126

100

Accounts Payable—Yan Company....................................... Inventory..................................

201/ 120/

300

412/ 112/

240

Sales Returns and Allowances ....... Accounts Receivable— Lamb Company ...................

(b)

500

100

300

240

General Ledger

Accounts Receivable Date Explanation May 31 26 Inventory Date Explanation May 31 10 20 31

G-48

Credit

Ref. S1 G1

Ref. P1 G1 G1 S1

Debit 11,900

Credit 240

Debit 36,360

Credit 500 300 7,735

Weygandt Financial, IFRS, 2/e, Solutions Manual

No. 112 Balance 11,900 11,660 No. 120 Balance 36,360 35,860 35,560 27,825

(For Instructor Use Only)

PROBLEM G-3B (Continued) Supplies Date Explanation May 15 17

Ref. P1 G1

Equipment Date Explanation May 28

Ref. P1

Accounts Payable Date Explanation May 31 10 17 20

Ref. P1 G1 G1 G1

Sales Revenue Date Explanation May 31

Ref. S1

Debit 900

Credit 100

Debit 500

Debit

Credit

No. 126 Balance 900 800 No. 157 Balance 500

Credit 38,660

500 100 300

Debit

Credit 11,900

Sales Returns and Allowances Date May 26

Explanation

Cost of Goods Sold Date Explanation May 31 Advertising Expense Date Explanation May 25

No. 201 Balance 38,660 38,160 38,060 37,760 No. 401 Balance 11,900 No. 412

Ref. G1

Ref. S1

Ref. P1

Debit 240

Debit 7,735

Debit 900

Weygandt Financial, IFRS, 2/e, Solutions Manual

Credit

Balance 240

Credit

No. 505 Balance 7,735

Credit

No. 610 Balance 900

(For Instructor Use Only)

G-49

PROBLEM G-3B (Continued) Accounts Receivable Subsidiary Ledger Eder Date May 5

Explanation

Ref. S1

Debit 2,200

Credit

Balance 2,200

Dixon Bros. Date Explanation May 5 23

Ref. S1 S1

Debit 2,700 1,900

Credit

Balance 2,700 4,600

Lamb Company Date Explanation May 5 23 26

Ref. S1 S1 G1

Debit 1,500 3,600

Credit

240

Balance 1,500 5,100 4,860

Accounts Payable Subsidiary Ledger Porter Freight Date Explanation May 3 18

Ref. P1 P1

Debit

Credit 360 500

Balance 360 860

Ref. P1 P1 G1

Debit

Credit 7,100 4,500

Balance 7,100 11,600 11,300

Yan Company Date May 2 16 20

G-50

Explanation

300

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

PROBLEM G-3B (Continued) Rizio Supply Date Explanation May 15 17 28

Ref. P1 G1 P1

Debit

Quirk Company Date Explanation May 8 16

Ref. P1 P1

Zamora Company Date Explanation May 8 10

Credit 900 500

Balance 900 800 1,300

Debit

Credit 8,000 7,200

Balance 8,000 15,200

Ref. P1 G1

Debit

Credit 8,700

Balance 8,700 8,200

Ref. P1

Debit

Credit 900

Balance 900

100

500

Anshus Advertising Date May 25

Explanation

$11,660

(c) Accounts receivable balance .................................. Subsidiary account balances Eder Company .................................................. Dixon Bros. ....................................................... Lamb Company ................................................. Total ...........................................................

$2,200 4,600 4,860

Accounts payable balance ......................................

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

$11,660 $37,760

G-51

PROBLEM G-3B (Continued) Subsidiary account balances Porter Freight ................................................. Yan Company ................................................. Rizio Supply.................................................... Quirk Company .............................................. Zamora Company ........................................... Anshus Advertising ....................................... Total .........................................................

G-52

$ 860 11,300 1,300 15,200 8,200 900

Weygandt Financial, IFRS, 2/e, Solutions Manual

$37,760

(For Instructor Use Only)

PROBLEM G-4B

(a), (b) & (c) Sales Journal Date

Account Debited

Oct. 4 17 25 30

Ebert Co. B. Reblin & Co. Marco Corp. B. Reblin & Co.

Invoice Accounts Receivable Dr. No. Ref. Sales Revenue Cr. 204 205 206 207

   

Cost of Goods Sold Dr. Inventory Cr.

7,700 5,350 5,220 4,760 23,030 (112)(401)

5,390 3,745 3,654 3,332 16,121 (505)(120)

Purchases Journal Date Oct. 2 10 27 30

Account Credited Cutler Company Frinzi Corp. Lisa Co. Cutler Company

Ref.    

P1 Inventory Dr. Accounts Payable Cr. 13,500 3,500 8,500 14,000 39,500 (120)(201)

General Journal Date Oct. 13

Accounts and Explanations Accounts Payable—Frinzi Corp. .............................................. Inventory ..................................

Ref.

Debit

201/ 120/

210

Supplies ............................................ Accounts Payable— Lewis Co...............................

126/  201/

310

Weygandt Financial, IFRS, 2/e, Solutions Manual

Credit

210

(For Instructor Use Only)

310

G-53

PROBLEM G-4B (Continued) Cash Receipts Journal Account Credited

Date Oct. 7 12 14 16 21 25

Ref.

Cash Dr.

Sales Accounts Sales Other Discounts Receivable Revenue Accounts Dr. Cr. Cr. Cr.

8,800

Ebert Co.

 7,546

Land

140

B. Reblin & Co.



CR1 Cost of Goods Sold Dr. Inventory Cr.

8,800 154

6,160

7,700

8,180 27,000 8,200

8,180

5,726 27,000

8,200

5,243 107 7,540 000 72,509 261 (101) (414)

5,740

5,350 00 13,050 (112)

7,540 32,720 (401)

5,278 22,904 (505)(120)

27,000 (X)

Cash Payments Journal

Date

Account Debited

Ref.

Oct. 5 9 18 23 26

Supplies Cutler Co. Inventory Frinzi Corp. Land Buildings Advertising Expense

126

G-54

Other Accounts Dr.

13,500



270

3,290 21,000 14,000

610

400 37,930 (X)

Cash Cr. 80 13,230 2,450 3,290

2,450

140 145

Merchandise Inventory Cr.



120

Accounts Payable Dr.

CP1

35,000

16,790 (201)

270 (120)

Weygandt Financial, IFRS, 2/e, Solutions Manual

400 54,450 (101)

(For Instructor Use Only)

PROBLEM G-5B

(b) Purchases Journal Date Feb. 2 7 16 21

Account Credited T. Valentine B. Kucera E. Nicks D. Hachey

P1 Inventory Dr. Accounts Payable Cr. 4,600 30,000 2,400 7,800 44,800 (120)(201)

Ref.    

Cash Payments Journal

Date

Account Debited

Ref.

Feb. 9 12 15 17 20 28

Supplies T. Valentine Equipment B. Kucera Cash Dividends E. Nicks

126  157  332 

Other Accounts Dr.

Accounts Payable Dr.

Inventory Cr.

1,120 4,600

138

30,000

300

2,400 37,000 (201)

438 (120)

7,000 1,100 9,220 (X)

(a), (d) & (g)

CP1

1,120 4,462 7,000 29,700 1,100 2,400 45,782 (101)

General Ledger

Cash Date Feb. 28 28

Cash Cr.

No. 101 Explanation

Ref. CR1 CP1

Debit 47,495

Weygandt Financial, IFRS, 2/e, Solutions Manual

Credit 45,782

(For Instructor Use Only)

Balance 47,495 1,713

G-55

PROBLEM G-5B (Continued) Accounts Receivable Date Explanation Feb. 28 28

Ref. S1 CR1

Debit 27,400

Credit 12,000

Inventory Date Feb. 28 18 28 28 28

No. 120 Explanation

Supplies Date Explanation Feb. 9 28 Adjusting entry Equipment Date Explanation Feb. 15

Ref. P1 CR1 CP1 S1 CR1

Ref. CP1 G1

Ref. CP1

Accumulated Depreciation—Equipment Date Explanation Ref. Feb. 28 Adjusting entry G1

Debit 44,800

Credit 150 438 18,084 3,564

Debit 1,120

Credit 820

Debit 7,000

Debit

Credit

Credit 160

Accounts Payable Date Feb. 28 28

G-56

No. 112 Balance 27,400 15,400

Explanation

Balance 44,800 44,650 44,212 26,128 22,564 No. 126 Balance 1,120 300 No. 157 Balance 7,000 No. 158 Balance 160 No. 201

Ref. P1 CP1

Debit

Credit 44,800

37,000

Weygandt Financial, IFRS, 2/e, Solutions Manual

Balance 44,800 7,800

(For Instructor Use Only)

PROBLEM G-5B (Continued) Share Capital—Ordinary Date Explanation Feb. 1

Ref. CR1

Debit

Credit 30,000

No. 311 Balance 30,000

Cash Dividends Date Feb. 20

No. 332

Explanation

Ref. CP1

Sales Revenue Date Explanation Feb. 28 28

Ref. S1 CR1

Sales Discounts Date Explanation Feb. 28

Ref. CR1

Cost of Goods Sold Date Explanation Feb. 28 28

Ref. S1 CR1

Supplies Expense Date Explanation Feb. 28 Adjusting entry

Ref. G1

Debit 1,100

Debit

Debit 55

Debit 18,084 3,564

Debit 820

Credit

Balance 1,100 No. 401 Balance 27,400 32,800

Credit 27,400 5,400

Credit

No. 414 Balance 55

Credit

No. 505 Balance 18,084 21,648

Credit

No. 631 Balance 820

Depreciation Expense Date Feb. 28

No. 711

Explanation Adjusting entry

Ref. G1

Debit 160

Weygandt Financial, IFRS, 2/e, Solutions Manual

Credit

Balance 160

(For Instructor Use Only)

G-57

PROBLEM G-5B (Continued) (c)

Accounts Receivable Subsidiary Ledger

S. Armour Date Explanation Feb. 3 13

Ref. S1 CR1

Debit 5,500

Credit

Ref. S1

Debit 8,400

Credit

Balance 8,400

Ref. S1 CR1

Debit 6,500

Credit

Balance 6,500 0

Ref. S1

Debit 7,000

5,500

Balance 5,500 0

V. Ciatti Date Feb. 12

Explanation

M. Barajas Date Explanation Feb. 9 26

6,500

A. Dobbs Date Feb. 26

Explanation

Credit

Balance 7,000

Accounts Payable Subsidiary Ledger D. Hachey Date Explanation Feb. 21

Ref. P1

Debit

Credit 7,800

Balance 7,800

T. Valentine Date Explanation Feb. 2 12

Ref. P1 CP1

Debit

Credit 4,600

Balance 4,600 0

G-58

4,600

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

PROBLEM G-5B (Continued) B. Kucera Date Explanation Feb. 7 17

Ref. P1 CP1

E. Nicks Date Feb. 16 28

Ref. P1 CP1

Explanation

(e)

Debit

Credit 28,000

Balance 28,000 0

Credit 2,400

Balance 2,400 0

Debit € 1,713 15,400 22,564 1,120 7,000

Credit

28,000

Debit 2,400

WESLEY CO. Trial Balance February 28, 2014 Cash .................................................................... Accounts Receivable ......................................... Inventory ............................................................. Supplies .............................................................. Equipment .......................................................... Accounts Payable .............................................. Share Capital—Ordinary .................................... Cash Dividends .................................................. Sales Revenue .................................................... Sales Discounts ................................................. Cost of Goods Sold ............................................

Weygandt Financial, IFRS, 2/e, Solutions Manual

€ 7,800 30,000 1,100 32,800 55 21,648 €70,600

(For Instructor Use Only)

€70,600

G-59

PROBLEM G-5B (Continued) (f)

€15,400

Accounts Receivable control account ................ Accounts Receivable subsidiary accounts V. Ciatti ........................................................... A. Dobbs ........................................................

€8,400 7,000

€15,400

Accounts Payable control account .....................

€ 7,800

Accounts Payable subsidiary account D. Hachey .......................................................

€ 7,800

(g) Date Feb. 28 28

G-60

General Journal Accounts and Explanations Supplies Expense ............................. Supplies.................................... Depreciation Expense ...................... Accumulated Depreciation— Equipment ............................

Ref. 631 126

Debit 820

711

160

G1 Credit 820

158

Weygandt Financial, IFRS, 2/e, Solutions Manual

160

(For Instructor Use Only)

PROBLEM G-5B (Continued) (h)

WESLEY CO. Adjusted Trial Balance February 28, 2014 Cash .................................................................... Accounts Receivable ......................................... Inventory ............................................................. Supplies .............................................................. Equipment .......................................................... Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Share Capital—Ordinary .................................... Cash Dividends .................................................. Sales Revenue .................................................... Sales Discounts ................................................. Cost of Goods Sold ............................................ Supplies Expense .............................................. Depreciation Expense ........................................

Weygandt Financial, IFRS, 2/e, Solutions Manual

Debit € 1,713 15,400 22,564 300 7,000

Credit

€

160 7,800 30,000

1,100 32,800 55 21,648 820 160 €70,760

(For Instructor Use Only)

€70,760

G-61

COMPREHENSIVE PROBLEM: CHAPTERS 3 TO 6 AND APPENDIX G

Note: If the working papers that accompany this text are not used in solving this problem, account numbers may differ from those presented in this solution. (a) Sales Journal Date Jan. 3 3 11 11 22 22 25 25

Account Debited W. Rayms M. Fischer G. Dukes L. Longhini W. Rayms G. Dukes M. Hall M. Fischer

Invoice No. 510 511 512 513 514 515 516 517

S1 Accounts Receivable Dr. Ref. Sales Revenue Cr.  3,600  1,800  1,900  900  3,700  800  3,500  6,100 22,300 (112)(401)

Purchases Journal Date Jan. 5 5 16 16 16 27 27 27

Account Credited K. Zapfel J. Liotta L. Quinn O. Kitson K. Zapfel L. Quinn J. Liotta K. Zapfel

G-62

Terms

Ref.        

P1 Purchases Dr. Accounts Payable Cr. 3,000 2,400 15,000 13,900 1,500 12,500 1,200 2,800 52,300 (510)(201)

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

COMPREHENSIVE PROBLEM (Continued) Cash Receipts Journal Date Jan. 7 7 10 13 13 20 21 31

Account Credited

Ref.

L. Longhini M. Hall

 

W. Rayms M. Fischer

 

L. Longhini



Accounts Receivable Cr.

Cash Dr. 4,000 2,000 15,500 3,600 1,560 17,750 900 22,920 68,230 (101)

CR1 Sales Revenue Cr.

4,000 2,000 15,500 3,600 1,560 17,750 900 12,060 (112)

22,920 56,170 (401)

Cash Payments Journal Date Jan. 8 9 9 12 15 17 23 23 28 31

Ref.

Other Accounts Dr.

Freight-In O. Kitson L. Quinn Rent Expense Cash Dividends

516

180

L. Quinn O. Kitson

 

Account Debited

Salaries and Wages Expense

 

729 332

627

Other Accounts Cr.

Accounts Payable Dr.

CP1 Supplies Dr.

200

180 9,000 11,000 1,000 650 400 15,000 13,700 200

600 (125)

7,400 58,530 (101)

9,000 11,000 1,000 650 400 15,000 13,700

7,400 9,230 (X)

48,700 (201)

Weygandt Financial, IFRS, 2/e, Solutions Manual

Cash Cr.

(For Instructor Use Only)

G-63

COMPREHENSIVE PROBLEM (Continued) (a) & (e) Date Jan.

General Journal Account Titles and Explanations Sales Returns and Allowances ................................... Accounts Receivable— M. Fischer ............................ (Issued credit for merchandise returned) Accounts Payable—O. Kitson ......... Purchase Returns and Allowances .......................... (Received credit for returned goods) Accounts Payable— D. Markoff ..................................... Notes Payable.......................... (Issued note for balance due)

Ref.

Debit

412

240

112/

201/

G1 Credit

240

200

512

200

201/ 200

15,000

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

728 125

1,020

Insurance Expense (1/10 × $2,000) .............................. Prepaid Insurance ...................

/ 722 130/

200

711

125

15,000

Adjusting Entries 31

G-64

Depreciation Expense (1/12 × $1,500) .............................. Accumulated Depreciation— Equipment............................ Interest Expense .............................. Interest Payable.......................

1,020

200

158 718 230

Weygandt Financial, IFRS, 2/e, Solutions Manual

125 30 30

(For Instructor Use Only)

COMPREHENSIVE PROBLEM (Continued)

Date Jan. 31

31 31

General Journal Account Titles and Explanations Inventory (Jan. 31) ............................ Sales Revenue .................................. Purchase Returns and Allowances.................................... Income Summary.....................

Ref. 120 401

Debit 12,600 78,470

512 350

200

Income Summary ............................. Inventory (Jan. 1) .................................. Sales Returns and Allowances ........................... Purchases ................................ Freight-In .................................. Rent Expense ........................... Salaries and Wages Expense................................ Supplies Expense .................... Insurance Expense .................. Depreciation Expense ............. Interest Expense ......................

350

82,495

Income Summary ............................. Retained Earnings ...................

350 320

8,775

Retained Earnings ............................ Cash Dividends........................

320 332

650

(b) & (e)

91,270

120

20,000

412 510 516 729

240 52,300 180 1,000

627 728 722 711 718

7,400 1,020 200 125 30 8,775 650

General Ledger

Cash Date Jan.

G1 Credit

No. 101 1 31 31

Explanation Balance

Ref.  CR1 CP1

Debit

Credit

68,230

Weygandt Financial, IFRS, 2/e, Solutions Manual

58,530

(For Instructor Use Only)

Balance 32,750 100,980 42,450

G-65

COMPREHENSIVE PROBLEM (Continued) Accounts Receivable Date Explanation Jan. 1 Balance 31 31 9 Notes Receivable Date Explanation Jan. 1 Balance

Ref.  S1 CR1 G1

Ref. 

Debit

Credit

22,300 12,060 240

Debit

Credit

Inventory Date Jan.

1 31 31

Explanation Balance

Ref.  G1 G1

Debit

Credit

12,600 20,000

1 31

Explanation Balance

Equipment Date Explanation Jan. 1

G-66

Balance 20,000 32,600 12,600 No. 125

Ref.  CP1 G1

Debit

Credit

600 1,020

Prepaid Insurance Date Jan.

No. 115 Balance 42,000 No. 120

Supplies Date Jan.

No. 112 Balance 13,000 35,300 23,240 23,000

Balance 1,000 1,600 580 No. 130

Ref.  G1

Ref. 

Debit

Credit 200

Debit

Credit

Weygandt Financial, IFRS, 2/e, Solutions Manual

Balance 2,000 1,800 No. 157 Balance 6,450

(For Instructor Use Only)

COMPREHENSIVE PROBLEM (Continued) Accumulated Depreciation—Equipment Date Explanation Ref. Jan. 1 Balance  31 G1 Notes Payable Date Explanation Jan. 21 Balance Accounts Payable Date Explanation Jan. 1 Balance 31 31 18 21 Interest Payable Date Explanation Jan. 31 Share Capital—Ordinary Date Explanation Jan. 1 Retained Earnings Date Explanation Jan. 1 Balance 31 31

Ref. G1

Ref.  P1 CP1 G1 G1

Ref. G1

Ref. 

Ref.  G1 G1

Debit

125

No. 158 Balance 1,500 1,625

Credit 15,000

No. 200 Balance 15,000

Credit

No. 201 Balance 35,000 87,300 38,600 38,400 23,400

Credit 52,300

48,700 200 15,000

Debit

Credit 30

Credit

Credit 8,775

650

Cash Dividends Date Explanation Jan. 15 31

Ref. CP1 G1

Weygandt Financial, IFRS, 2/e, Solutions Manual

Debit 650

Credit 650

No. 230 Balance 30 No. 311 Balance 70,000 No. 320 Balance 10,700 19,475 18,825 No. 332 Balance 650 0

(For Instructor Use Only)

G-67

COMPREHENSIVE PROBLEM (Continued) Income Summary Date Explanation Jan. 31 31 31

Ref. G1 G1 G1

Debit

Credit 91,270

82,495 8,775

Sales Revenue Date Jan. 31 31 31

No. 401

Explanation

Ref. S1 CR1 G1

Sales Returns and Allowances Date Explanation Jan. 9 31

Ref. G1 G1

Debit

Credit 22,300 56,170

78,470

Debit 240

Credit 240

Purchases Date Jan. 31 31

Ref. P1 G1

Purchase Returns and Allowances Date Explanation Jan. 18 31

G-68

Balance 22,300 78,470 0 No. 412 Balance 240 0 No. 510

Explanation

Freight-In Date Explanation Jan. 8 31

No. 350 Balance 91,270 8,775 0

Ref. G1 G1

Ref. CP1 G1

Debit 52,300

Credit 52,300

Debit

Credit 200

No. 512 Balance 200 0

Credit

No. 516 Balance 180 0

200

Debit 180

Balance 52,300 0

180

Weygandt Financial, IFRS, 2/e, Solutions Manual

(For Instructor Use Only)

COMPREHENSIVE PROBLEM (Continued) Salaries and Wages Expense Date Explanation Jan. 31 31

Depreciation Expense Date Explanation Jan. 31 31

Ref. CP1 G1

Ref. G1 G1

Debit 7,400

No. 627 Balance 7,400 0

Credit 7,400

Debit 125

No. 711 Balance 125 0

Credit 125

Interest Expense Date Jan. 31 31

Explanation

Insurance Expense Date Explanation Jan. 31 31

Supplies Expense Date Explanation Jan. 31 31

No. 718 Ref. G1 G1

Ref. G1 G1

Debit 30

Credit

Balance 30 0

Debit 200

Credit 200

Debit 1,020

Weygandt Financial, IFRS, 2/e, Solutions Manual

Credit 1,020

No. 722 Balance 200 0

No. 728 Balance 1,020 0

(For Instructor Use Only)

G-69

COMPREHENSIVE PROBLEM (Continued) Rent Expense Date Explanation Jan. 12 31

Ref. CP1 G1

Debit 1,000

Credit 1,000

No. 729 Balance 1,000 0

Accounts Receivable Subsidiary Ledger G. Dukes Date Explanation Jan. 1 Balance 11 22

Ref.  S1 S1

Debit

M. Fischer Date Explanation Jan. 3 9 13 25

Ref. S1 G1 CR1 S1

Debit 1,800

M. Hall Date Jan. 1 7 25

Ref.  CR1 S1

Debit

Ref.  CR1 S1 CR1

Debit

Explanation Balance

L. Longhini Date Explanation Jan. 1 Balance 7 11 21

G-70

Credit

Balance 1,800 3,700 4,500

Credit

Balance 1,800 1,560 0 6,100

1,900 800

240 1,560 6,100

Credit 2,000

3,500

Credit 4,000

900 900

Weygandt Financial, IFRS, 2/e, Solutions Manual

Balance 7,200 5,200 8,700

Balance 4,000 0 900 0

(For Instructor Use Only)

COMPREHENSIVE PROBLEM (Continued) W. Rayms Date Explanation Jan. 3 13 22

Ref. S1 CR1 S1

Debit 3,600

Credit 3,600

3,700

Balance 3,600 0 3,700

Accounts Payable Subsidiary Ledger J. Liotta Date Jan. 5 27

Explanation

O. Kitson Date Explanation Jan. 1 Balance 9 16 18 23

Ref. P1 P1

Debit

Credit 2,400 1,200

Balance 2,400 3,600

Ref.  CP1 P1 G1 CP1

Debit

Credit

Balance 9,000 0 13,900 13,700 0

9,000 13,900 200 13,700

D. Markoff Date Jan.

1 21

Explanation Balance

L. Quinn Date Explanation Jan. 1 Balance 9 16 23 27

Ref.  G1

Ref.  CP1 P1 CP1 P1

Debit

Credit

Balance 15,000 0

Credit

Balance 11,000 0 15,000 0 12,500

15,000

Debit 11,000

15,000 15,000

Weygandt Financial, IFRS, 2/e, Solutions Manual

12,500

(For Instructor Use Only)

G-71

COMPREHENSIVE PROBLEM (Continued) K. Zapfel Date Explanation Jan. 5 16 27

G-72

Ref. P1 P1 P1

Debit

Credit 3,000 1,500 2,800

Weygandt Financial, IFRS, 2/e, Solutions Manual

Balance 3,000 4,500 7,300

(For Instructor Use Only)

ZWEIFEL COMPANY Worksheet For the Month Ended January 31, 2014

Weygandt Financial, IFRS, 2/e, Solution’ s Manual (For Instructor Use Only)

Trial Balance

Adjustments

Adjusted Trial Balance

Account Titles

Dr.

Cash Accounts Receivable Notes Receivable Inventory Supplies Prepaid Insurance Equipment Accum. Depreciation—Equipment Notes Payable Accounts Payable Interest Payable Share Capital—Ordinary Retained Earnings Cash Dividends Sales Revenue Sales Returns and Allowances Purchases Purchase Returns and Allowances Freight-In Salaries and Wages Expense Rent Expense Totals Supplies Expense Insurance Expense Depreciation Expense Interest Expense Totals Net Income Totals

42,450 23,000 42,000 20,000 1,600 2,000 6,450

Cr.

(1) 1,020 (2) 200 1,500 15,000 23,400

(3)

125

(4)

42,450 23,000 42,000 20,000 580 1,800 6,450

Dr.

Cr.

Dr.

12,600

42,450 23,000 42,000 12,600 580 1,800 6,450

20,000

650 78,470

240 52,300

240 52,300 200

78,470 240 52,300

200 180 7,400

199,270 (1) 1,020 (2) 200 (3) 125 (4) 30 1,375

1,375

Cr.

1,625 15,000 23,400 30 70,000 10,700

650 78,470

180 7,400 1,000 199,270

Statement of Financial Position

1,625 15,000 23,400 30 70,000 10,700

70,000 10,700 650

Cr.

Income Statement

1,000 1,020 200 125 30 , 199,425 199,425

200 180 7,400 1,000 1,020 200 125 30 82,495 8,775 91,270

91,270

129,530

91,270

129,530

120,755 8,775 129,530

COMPREHENSIVE PROBLEM (Continued)

(c)

G-73

COMPREHENSIVE PROBLEM (Continued) (d)

ZWEIFEL CO. Income Statement For the Month Ended January 31, 2014 Sales revenues Sales revenue................................. Less: Sales returns and allowances ...................... Net sales ......................................... Cost of goods sold Inventory, 1/1/14............................. Purchases ...................................... Less: Purchase returns and allowances .......................... Net purchases ................................ Freight-in ........................................ Cost of goods available for sale.............................................. Less: Inventory, 1/31/14 ...................................... Cost of goods sold .................. Gross profit ................................... Operating expenses Salaries and wages expense......... Supplies expense .......................... Rent expense ................................. Insurance expense ........................ Depreciation expense .................... Total oper. expenses ............... Income from operations ...................... Interest expense .................................. Net income ...........................................

G-74

$78,470 240 78,230 $20,000 $52,300 200 52,100 180

52,280 72,280 12,600 59,680 18,550

7,400 1,020 1,000 200 125

Weygandt Financial, IFRS, 2/e, Solution’s Manual

9,745 8,805 30 $ 8,775

(For Instructor Use Only)

COMPREHENSIVE PROBLEM (Continued) ZWEIFEL CO. Retained Earnings Statement For the Month Ended January 31, 2014 Retained earnings, January 1, 2014 ....................................... Add: Net income ...................................................................

$ 10,700 8,775 19,475 650 $18,825

Less: Dividends ...................................................................... Retained earnings, January 31, 2014 ..................................... ZWEIFEL CO. Statement of Financial Position January 31, 2014 Assets Property, Plant, and Equipment Equipment ................................................... Less: Accumulated depreciation—equip. .................... Current assets Prepaid insurance....................................... Supplies ...................................................... Inventory ..................................................... Accounts receivable ................................... Notes receivable ......................................... Cash............................................................. Total current assets ............................ Total assets .........................................

$6,450 1,625

$4,825

1,800 580 12,600 23,000 42,000 42,450 122,430 $127,255

Equity and Liabilities Equity Share capital—ordinary ............................. Retained earnings....................................... Total equity .......................................... Current liabilities Notes payable ............................................. Accounts payable ....................................... Interest payable .......................................... Total liabilities ..................................... Total equity and liabilities ..................

Weygandt Financial, IFRS, 2/e, Solution’s Manual

$70,000 18,825 $88,825 15,000 23,400 30 38,430 $127,255

(For Instructor Use Only)

G-75

COMPREHENSIVE PROBLEM (Continued) (f)

ZWEIFEL CO. Post-Closing Trial Balance January 31, 2014 Cash ................................................................ Notes Receivable ........................................... Accounts Receivable ..................................... Inventory ........................................................ Supplies.......................................................... Prepaid Insurance.......................................... Equipment ...................................................... Accumulated Depreciation—Equipment ...... Notes Payable ................................................ Accounts Payable .......................................... Interest Payable ............................................. Share Capital—Ordinary ............................... Retained Earnings .........................................

Debit $ 42,450 42,000 23,000 12,600 580 1,800 6,450

Credit

1,625 15,000 23,400 30 70,000 18,825 $128,880

$128,880

Accounts Receivable balance .............................. Subsidiary account balances G. Dukes ........................................................ M. Fischer ...................................................... M. Hall ............................................................ W. Rayms .......................................................

$23,000

$ 4,500 6,100 8,700 3,700 $23,000

Accounts Payable balance ................................... Subsidiary account balances J. Liotta .......................................................... L. Quinn ......................................................... K. Zapfel .........................................................

$23,400 $ 3,600 12,500 7,300 $23,400

G-76

Weygandt Financial, IFRS, 2/e, Solution’s Manual

(For Instructor Use Only)

BYP G-1 FINANCIAL REPORTING PROBLEM—A MINI PRACTICE SET

(a) Sales Journal Date

Account Debited

Jan. 3 3 11 11 22 22 25 25

K. Rai J. Fieber C. Dunlap A. Nakar K. Rai C. Dunlap S. Grady J. Fieber

Invoice Accounts Receivable Dr. No. Ref. Sales Revenue Cr. 510 511 512 513 514 515 516 517

       

2,200 1,800 1,600 900 2,700 1,300 3,500 6,100 20,100 (112)(401)

Cost of Goods Sold Dr. Inventory Cr. 1,320 1,080 960 540 1,620 780 2,100 3,660 12,060 (505)(120)

Purchases Journal Date Jan. 5 5 16 16 16 27 27 27

Account Credited D. Vang W. Lachey I. Maida T. Joosten D. Vang I. Maida W. Lachey D. Vang

Terms n/30 n/30 3/10, n/30 2/10, n/30 n/30 1/10, n/30 n/30 n/30

Ref.        

P1 Inventory Dr. Accounts Payable Cr. 5,000 2,700 18,000 14,200 1,500 14,500 1,200 5,400 62,500 (120)(201)

Weygandt Financial, IFRS, 2/e, Solution’s Manual

(For Instructor Use Only)

G-77

BYP G-1 (Continued) Cash Receipts Journal

Date Jan. 7 7 10 13 13 20 21 31

Account Credited

Ref.

Cash Dr.

A. Nakar S. Grady

 4,000  2,000

K. Rai J. Fieber

 

A. Nakar



15,500 2,156 1,372 20,100 882 19,600 65,610 (101)

Sales Accounts Sales Discounts Receivable Revenue Dr. Cr. Cr.

Other Accounts Cr.

Cost of Goods Sold Dr. Inventory Cr.

4,000 2,000 15,500

9,300

20,100

12,060

19,600 55,200 (401)

11,760 33,120 (505)(120)

Cash Payments Journal

CP1

44 28

2,200 1,400

900

90 (414)

10,500 (112)

Date

Account Debited

Ref.

Other Accounts Dr.

Jan. 8 9 9 12 15 17 23 23 28 31

Inventory T. Joosten I. Maida Rent Expense Cash Dividends

120

310

I. Maida T. Joosten

 

G-78

CR1

 

729 322

Accounts Payable Dr.

Supplies Dr.

Inventory Cr.

9,000 11,000

180 110

850 800 400 18,000 14,000

540 280 200

Salaries and Wages Expense

627

7,500 9,460 (X)

52,000 (201)

600 (125)

Weygandt Financial, IFRS, 2/e, Solution’s Manual

_ 1,110 (120)

Cash Cr. 310 8,820 10,890 850 800 400 17,460 13,720 200 7,500 60,950 (101)

(For Instructor Use Only)

BYP G-1 (Continued) (a) & (e) General Journal Date Jan.

Account Titles and Explanations Sales Returns and Allowances ........ Accounts Receivable— J. Fieber................................ (Issued credit for merchandise returned) Inventory ($400 X .60).................................... Cost of Goods Sold .................

G1 Ref. 412

Debit 400

112/

Credit

400

120 505

240

Accounts Payable—T. Joosten ....... Inventory .................................. (Received credit for returned goods)

201/ 120/

200

Accounts Payable—A. Mangrich ..... Notes Payable .......................... (Payment of balance due)

201/ 200/

15,000

240 200

15,000

Adjusting Entries 31 31 31

31 31

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

728 125

700

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

722 130

250

711

125

Depreciation Expense ($1,500 ÷ 12) ................................... Accumulated Depreciation— Equipment ............................

700 250

158

125

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

718 230

Sales Revenue ................................. Income Summary.....................

401 350

75,300

Weygandt Financial, IFRS, 2/e, Solution’s Manual

50 75,300 (For Instructor Use Only)

G-79

BYP G-1 (Continued)

Date Jan. 31

31 31

General Journal Account Titles and Explanations Income Summary ............................. Sales Discounts ...................... Sales Returns and Allowances .......................... Cost of Goods Sold ................. Rent Expense .......................... Salaries and Wages Expense . Supplies Expense ................... Insurance Expense ................. Depreciation Expense ............. Interest Expense .....................

Debit 54,905

412 505 729 627 728 722 711 718

400 44,940 850 7,500 700 250 125 50

Income Summary ............................. Retained Earnings ...................

350 320

20,395

Retained Earnings............................ Cash Dividends .......................

320 332

800

(b) & (e)

20,395 800

General Ledger

Cash Date Explanation Jan. 1 Balance 31 31

Accounts Receivable Date Explanation Jan. 1 Balance 31 31 9

G-80

Ref. 350 414

G1 Credit

Ref.  CR1 CP1

Ref.  S1 CR1 G1

Debit

Credit

65,610 60,950

Debit

Credit

20,100 10,500 400

Weygandt Financial, IFRS, 2/e, Solution’s Manual

No. 101 Balance 35,750 101,360 40,410

No. 112 Balance 13,000 33,100 22,600 22,200

(For Instructor Use Only)

BYP G-1 (Continued) Notes Receivable Date Explanation Jan. 1 Balance

Inventory Date Explanation Jan. 1 Balance 31 31 31 8 31 9 18

Supplies Date Explanation Jan. 1 Balance 31 31

Prepaid Insurance Date Explanation Jan. 1 Balance 31

Ref. 

Ref.  P1 S1 CR1 CP1 CP1 G1 G1

Ref.  CP1 G1

Ref.  G1

Debit

Credit

62,500 12,060 33,120 310 1,110 240 200

Debit

Credit

600 700

Debit

Credit 250

No. 115 Balance 39,000

No. 120 Balance 18,000 80,500 68,440 35,320 35,630 34,520 34,760 34,560

No. 125 Balance 1,000 1,600 900

No. 130 Balance 2,000 1,750

Equipment Date Jan. 1

Explanation Balance

No. 157 Ref. 

Debit

Weygandt Financial, IFRS, 2/e, Solution’s Manual

Credit

Balance 6,450

(For Instructor Use Only)

G-81

BYP G-1 (Continued) Accumulated Depreciation—Equipment Date Explanation Ref. Jan. 1 Balance  31 G1 Notes Payable Date Explanation Jan. 21 Accounts Payable Date Explanation Jan. 1 Balance 31 31 18 21 Interest Payable Date Explanation Jan. 31 Share Capital—Ordinary Date Explanation Jan. 1 Balance Retained Earnings Date Explanation Jan. 1 Balance 31 31 Cash Dividends Date Explanation Jan. 15 31

G-82

Ref. G1

Ref.  P1 CP1 G1 G1

Ref. G1

Ref. 

Ref.  G1 G1

Ref. CP1 G1

Debit

125

No. 158 Balance 1,500 1,625

Credit 15,000

No. 200 Balance 15,000

Credit

Credit 62,500

52,000 200 15,000

Debit

Credit 50

Credit

Credit 20,395

800

Debit 800

Credit 800

Weygandt Financial, IFRS, 2/e, Solution’s Manual

No. 201 Balance 35,000 97,500 45,500 45,300 30,300 No. 230 Balance 50 No. 311 Balance 70,000 No. 320 Balance 8,700 29,095 28,295 No. 322 Balance 800 0

(For Instructor Use Only)

BYP G-1 (Continued) Income Summary Date Explanation Jan. 31 31 31

Ref. G1 G1 G1

Sales Revenue Date Explanation Jan. 31 31 31

Ref. S1 CR1 G1

Sales Returns and Allowances Date Explanation Jan. 9 31

Sales Discounts Date Explanation Jan. 31 31 Cost of Goods Sold Date Explanation Jan. 31 31 9 31

Ref. G1 G1

Ref. CR1 G1

Ref. S1 CR1 G1 G1

Debit

Credit 75,300

No. 350 Balance 75,300 20,395 0

Credit 20,100 55,200

No. 401 Balance 20,100 75,300 0

Credit

No. 412 Balance 400 0

54,905 20,395

Debit

75,300

Debit 400

400

Debit 90

Credit 90

Debit 12,060 33,120

Weygandt Financial, IFRS, 2/e, Solution’s Manual

Credit

240 44,940

No. 414 Balance 90 0 No. 505 Balance 12,060 45,180 44,940 0

(For Instructor Use Only)

G-83

BYP G-1 (Continued) Salaries and Wages Expense Date Explanation Jan. 31 31 Depreciation Expense Date Explanation Jan. 31 31

Ref. CP1 G1

Ref. G1 G1

Debit 7,500

Credit 7,500

Debit 125

Credit 125

Interest Expense Date Jan. 31 31

Explanation

Insurance Expense Date Explanation Jan. 31 31 Supplies Expense Date Explanation Jan. 31 31

G-84

No. 627 Balance 7,500 0 No. 711 Balance 125 0 No. 718

Ref. G1 G1

Debit 50

Credit 50

Debit 250

Credit 250

Debit 700

Credit 700

Weygandt Financial, IFRS, 2/e, Solution’s Manual

Balance 50 0 No. 722 Balance 250 0 No. 728 Balance 700 0

(For Instructor Use Only)

BYP G-1 (Continued) Rent Expense Date Explanation Jan. 12 31

Ref. CP1 G1

Debit 850

Credit 850

No. 729 Balance 850 0

Accounts Receivable Subsidiary Ledger C. Dunlap Date Jan.

1 11 22

Explanation Balance

Ref.  S1 S1

Debit

Ref. S1 G1 CR1 S1

Debit 1,800

Ref.  CR1 S1

Debit

Ref.  CR1 S1 CR1

Debit

Credit

Balance 1,500 3,100 4,400

Credit

Balance 1,800 1,400 0 6,100

1,600 1,300

J. Fieber Date Jan.

Explanation 3 9 13 25

S. Grady Date Explanation Jan. 1 Balance 7 25

400 1,400 6,100

Credit 2,000

3,500

Balance 7,500 5,500 9,000

A. Nakar Date Jan.

1 7 11 21

Explanation Balance

Credit 4,000

900

Weygandt Financial, IFRS, 2/e, Solution’s Manual

900

Balance 4,000 0 900 0

(For Instructor Use Only)

G-85

BYP G-1 (Continued) K. Rai Date Jan. 3 13 22

Explanation

Ref. S1 CR1 S1

Debit 2,200

Credit 2,200

2,700

Balance 2,200 0 2,700

Accounts Payable Subsidiary Ledger W. Lachey Date Explanation Jan. 5 27

Ref. P1 P1

Debit

Credit 2,700 1,200

Balance 2,700 3,900

T. Joosten Date Explanation Jan. 1 Balance 9 16 18 23

Ref.  CP1 P1 G1 CP1

Debit

Credit

Balance 9,000 0 14,200 14,000 0

A. Mangrich Date Explanation Jan. 1 Balance 21

Ref.  G1

I. Maida Date Jan. 1 9 16 23 27

Ref.  CP1 P1 CP1 P1

G-86

Explanation Balance

9,000 14,200 200 14,000

Debit

Credit

Balance 15,000 0

Credit

Balance 11,000 0 18,000 0 14,500

15,000

Debit 11,000

18,000 18,000 14,500

Weygandt Financial, IFRS, 2/e, Solution’s Manual

(For Instructor Use Only)

BYP G-1 (Continued) D. Vang Date Jan. 5 16 27

Explanation

Ref. P1 P1 P1

Debit

Weygandt Financial, IFRS, 2/e, Solution’s Manual

Credit 5,000 1,500 5,400

Balance 5,000 6,500 11,900

(For Instructor Use Only)

G-87

BRYANT COMPANY Worksheet For the Month Ended January 31, 2014

Trial Balance

Adjustments

Adjusted Trial Balance

Account Titles

Dr.

Cash Accounts Receivable Notes Receivable Inventory Supplies Prepaid Insurance Equipment Accum. Depreciation—Equipment Notes Payable Accounts Payable Interest Payable Share Capital—Ordinary Retained Earnings Cash Dividends Sales Sales Returns and Allowances Sales Discounts Cost of Goods Sold Salaries and Wages Expense Rent Expense Totals Supplies Expense Insurance Expense Depreciation Expense Interest Expense Totals Net Income Totals

40,410 22,200 39,000 34,560 1,600 2,000 6,450

Cr.

1,500 15,000 30,300

Cr.

(1) (2)

700 250

(3)

125

(4)

Dr.

Cr.

40,410 22,200 39,000 34,560 900 1,750 6,450 1,625 15,000 30,300 50 70,000 8,700

1,625 15,000 30,300 50 70,000 8,700

800 75,300

400 90 44,940 7,500 850 200,800

Statement of Financial Position

40,410 22,200 39,000 34,560 900 1,750 6,450

70,000 8,700 800

Cr.

Income Statement

800 75,300

75,300

400 90 44,940 7,500 850

700 250 125 50 200,975

700 250 125 50 54,905 20,395 75,300

200,800 (1) (2) (3) (4)

700 250 125 50 1,125

1,125

200,975

75,300

146,070

75,300

146,070

125,675 20,395 146,070

BYP G-1 (Continued)

G-88

(c)

(For Instructor Use Only)

BYP G-1 (Continued) (d)

BRYANT CO. Income Statement For the Month Ended January 31, 2014 Sales revenues Sales revenue ................................ Less: Sales discounts .................. Sales returns and allowances .......................... Net sales ........................................ Cost of goods sold ........................ Gross profit .................................... Operating expenses Salaries and wages expense . Rent expense.......................... Supplies expense ................... Insurance expense ................. Depreciation expense ............ Total operating expenses . Income from operations ....................... Interest expense ................................. Net income .............................................

$75,300 $ 90 400

490 74,810 44,940 29,870

$7,500 850 700 250 125

Weygandt Financial, IFRS, 2/e, Solution’s Manual

9,425 20,445 50 $20,395

(For Instructor Use Only)

G-89

BYP G-1 (Continued) BRYANT CO. Retained Earnings Statement For the Month Ended January 31, 2014 Retained earnings, January 1, 2014 ...................................... Add: Net income ................................................................... Less: Dividends ..................................................................... Retained earnings, January 31, 2014 ....................................

$ 8,700 20,395 29,095 800 $28,295

BRYANT CO. Statement of Financial Position January 31, 2014 Assets Property, plant, and equipment Equipment................................................... Less: Accumulated depreciation—equip. Current assets Prepaid insurance ...................................... Supplies ...................................................... Inventory ..................................................... Notes receivable ......................................... Accounts receivable .................................. Cash ............................................................ Total current assets ............................ Total assets .........................................

$6,450 1,625

$4,825

1,750 900 34,560 39,000 22,200 40,410 138,820 $143,645

Equity and Liabilities Equity Share capital—ordinary ............................. Retained earnings ...................................... Total equity ......................................... Current liabilities Notes payable ............................................. Accounts payable....................................... Interest payable .......................................... Total liabilities ..................................... Total equity and liabilities ..................

G-90

$70,000 28,295 $98,295 15,000 30,300 50

Weygandt Financial, IFRS, 2/e, Solution’s Manual

45,350 $143,645

(For Instructor Use Only)

BYP G-1 (Continued) (f)

BRYANT CO. Post-Closing Trial Balance January 31, 2014 Cash ................................................................ Accounts Receivable ..................................... Notes Receivable ........................................... Inventory ......................................................... Supplies .......................................................... Prepaid Insurance .......................................... Equipment ...................................................... Accumulated Depreciation—Equipment ...... Notes Payable ................................................ Accounts Payable .......................................... Interest Payable.............................................. Share Capital—Ordinary ................................ Retained Earnings ..........................................

Debit $ 40,410 22,200 39,000 34,560 900 1,750 6,450

Credit

$145,270

1,625 15,000 30,300 50 70,000 28,295 $145,270

Accounts Receivable balance .............................. Subsidiary account balances C. Dunlap ........................................................ J. Fieber .......................................................... S. Grady.......................................................... K. Rai ..............................................................

$22,200

$ 4,400 6,100 9,000 2,700 $22,200

Accounts Payable balance ................................... Subsidiary account balances W. Lachey ....................................................... I. Maida ........................................................... D. Vang ...........................................................

$30,300 $ 3,900 14,500 11,900 $30,300

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G-91

BYP G-2

REAL-WORLD FOCUS

Some of the key features of the general ledger module highlighted by the company are:  Highly flexible account and fiscal period setup, including different

account structures for separate companies.  Account numbers can be up to 20 characters long in 10 segments.  Statistical accounts for tracking nonfinancial information, such as

head count and square footage.  Standard, recurring, auto-reversing, clearing, and “quick-journal”

entries.  Unlimited budgets, unlimited years of history.

Some of the key features of the payables management module highlighted by the company are:  Handles purchases on account, manual and computer check payments,

and credit memos.  Vendor classes provide a fast, consistent method for entering new

records by entering common information for you.  Changes to one vendor in a class can be made to all vendors in the

same class.  Automatically calculates the number of days it takes to pay each

vendor.  Enter recurring transactions.  Put transactions on “hold” until you want to pay them.  A variety of inquiry windows and reports provide multiple ways to

view vendor information.  Complete vendor and transaction history.

G-92

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BYP G-3

DECISION–MAKING ACROSS THE ORGANIZATION

(a) The special journals for Hojan & Clark should be: (1) sales journal, (2) purchases journal, (3) cash receipts journal, and (4) cash payments journal. 1.

Sales Journal columns: Date. Account Debited. Invoice Number. Reference. Accounts Receivable, Dr. and Sales Revenue—Appliances, Cr. Cost of Goods Sold, Dr. and Inventory—Appliances, Cr.

Purchases Journal columns: Date. Account Credited. Terms. Reference. Accounts Payable, Cr. Inventory—Appliances, Dr. Inventory—Parts, Dr. Note: Because two different types of merchandise are purchased on credit, a three-column purchases journal might be used.

Cash Receipts Journal columns: Date. Account Credited. Reference. Cash, Dr. Accounts Receivable, Cr. Sales Revenue – Appliances, Cr. Sales Revenue – Parts, Cr. Service Revenue, Cr. Other Accounts, Cr. Cost of Goods Sold, Dr. and Inventory— Appliances, Cr. Cost of Goods Sold, Dr. and Inventory—Parts, Cr. Note: A Sales Discounts, Dr. column is not needed because all credit terms are net/30 days.

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G-93

BYP G-3 (Continued) 4.

Cash Payments Journal columns: Date. Check Number. Account Debited. Reference. Other Accounts, Dr. Accounts Payable, Dr. Advertising Expense, Dr. Salaries and Wages Expense, Dr. Inventory—Appliances, Cr. Inventory—Parts, Cr. Cash, Cr.

(b) Hojan & Clark should have: 1.

An accounts receivable control account with individual customers’ accounts in a customers’ subsidiary ledger.

An accounts payable control account with individual creditors in a creditors’ subsidiary ledger.

The use of control accounts and subsidiary ledgers will: (1) provide necessary up-to-date information on specific customer and creditor balances, (2) free the general ledger of excessive detail, (3) help locate errors in individual accounts, and (4) make possible a division of labor in posting.

G-94

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BYP G-4

COMMUNICATION ACTIVITY

Mr. Scott Hogle 2 Main Street Central City, Michigan 48172 Dear Mr. Hogle: Thank you for hiring two additional bookkeepers a month ago to help me with the accounting. Unfortunately, the inefficiencies in recording transactions have continued at an even higher rate. The reason is that there are often times when more than one person needs to use the journal. In addition, the daily posting of transactions continues to be very time consuming. I would like to suggest some changes in the accounting system. Because of the increased volume of business, I believe it is time for us to use special journals for journalizing transactions. Special journals would be in addition to the journal that we are using now. There would be four special journals: 1. 2. 3. 4.

Sales journal—for all sales of merchandise on account. Cash receipts journal—for all cash received. Purchases journal—for all purchases of merchandise on account. Cash payments journal—for all cash payments.

To use special journals, we will need columnar journal paper which can be obtained at any office supply store at very low cost. I can also quickly train the new bookkeepers in the use of special journals. Special journals will permit a division of labor so that all three of us can be recording transactions at the same time. Thus, the inefficiencies in journalizing will be eliminated. Special journals also make it possible to do some postings monthly. This will significantly reduce the time required to make daily postings. As a result, it should free up some time for us to do other things! I am confident that the use of special journals will improve the efficiency of the accounting department. If you have any questions on this recommendation, please let me know. Yours sincerely, Joan

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G-95

BYP G-5

ETHICS CASE

(a) The stakeholders in this case are: Cepeda, manager of Romberg’s centralized computer accounting operation.  The employees of Romberg’s three divisions at Freeport, Rockport, and Bayport.  Enrique

(b) Enrique’s instructions to assign the Bayport code to all uncoded and incorrectly coded sales documents overstates the sales of Bayport and understates the sales of Freeport and Rockport, thereby affecting the employee bonus plan. Enrique’s intent and action are unethical. He is padding the sales of his wife’s, relatives’, and friends’ Bayport division sales and unfairly aiding them in the bonus competition. (c) Romberg Products Company should have a written policy covering uncoded and incorrectly coded sales documents. This would prevent the manager from arbitrarily designating the division to be credited for the uncoded sales.

G-96

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APPENDIX H Other Significant Liabilities ASSIGNMENT CLASSIFICATION TABLE Brief Learning Objectives

Questions

Exercises

1. Describe the accounting and

1, 2

3, 4, 5

6, 7, 8, 9,

Do It!

Exercises

Problems

1, 2

disclosure requirements for provisions and contingent liabilities. 2. Contrast the accounting for

operating and finance leases. 3. Identify additional fringe benefits associated with

employee compensation.

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H-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

H-1A

Prepare current liability entries, adjusting entries, and current liabilities section.

Moderate

30–40

H-2A

Analyze three different lease situations and prepare journal entries.

Moderate

20–30

H-1B

Prepare current liability entries, adjusting entries, and current liabilities section.

Moderate

30–40

H-2B

Analyze three different lease situations and prepare journal entries.

Moderate

20–30

H-2

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ANSWERS TO QUESTIONS 1.

A provision is a liability of uncertain timing or amount. Provisions are only recorded in the accounts if they are probable and the amount can be reasonably estimated. Warranty costs are a provision usually recorded in the accounts since they are both probable and can be reasonably estimated.

If the contingency is only reasonably possible, then only note disclosure is required. If the possibility of a contingent liability occurring is only remote, then neither recording in the accounts nor note disclosure is required.

(a) A lease agreement is a contract in which the lessor gives the lessee the right to use an asset for a specified period in return for one or more periodic rental payments. The lessor is the owner of the property and the lessee is the renter or tenant. (b) The two most common types of leases are operating leases and finance leases. (c) In an operating lease the property is rented by the lessee and the lessor retains all ownership risks and responsibilities. A finance lease transfers substantially all the benefits and risks of ownership from the lessor to the lessee, so that the lease is in effect a purchase of the property.

This lease would be reported as an operating lease. In an operating lease each payment is debited to Rent Expense. Neither a leased asset nor a lease liability is recorded.

In a finance lease agreement the lessee records the present value of the lease payments as an asset and a liability. Therefore, Palmer Company would debit Leased Asset-Equipment for $186,300 and credit Lease Liability for the same amount.

Three additional types of fringe benefits are: (1) Paid absences—vacation pay, sick pay, and paid holidays. (2) Postretirement health-care and life insurance benefits. (3) Pension plan benefits.

Paid absences refer to compensation paid by employers to employees for vacations, sick pay benefits, and paid holidays. When the payment for such absences is probable and the amount can be reasonably estimated, a liability should be accrued for paid future absences. When this amount cannot be reasonably estimated, the potential liability should be disclosed.

Two types of postretirement benefits are: (1) postretirement health-care and life insurance benefits and (2) pension plan benefits. The IASB advocates expensing the cost of these postretirement benefits during the working years of the employees rather than the retirement years of the employees.

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H-3

Questions Appendix H (Continued) 9.

The three parties in a pension plan are generally: (1) the employer, (2) the plan administrator, and (3) the pension recipient. The employer sponsors and makes contributions to the plan. The plan administrator invests the pension assets and makes the benefit payments to the pension recipients. The recipients are retired employees who receive the benefit payments.

10.

In a defined-contribution pension plan the employer agrees to contribute a certain sum each period based on a formula. In contrast, a defined-benefit plan defines the benefits that the employee will receive at the time of retirement.

H-4

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE H-1 Dec. 31

Warranty Expense ............................................ Warranty Liability [(1,000 X 4%) X $70] ..............................

2,800 2,800

BRIEF EXERCISE H-2 1. 2.

Rent Expense ............................................................. 68,000 Cash ....................................................................

68,000

Leased Asset—Building ............................................ 900,000 Lease Liability .................................................... 900,000

BRIEF EXERCISE H-3 Jan. 31

Vacation Benefits Expense .......................... Vacation Benefits Payable (35 X $120) ..........................................

4,200 4,200

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! H-1 (a) Leased Asset—Equipment ...................................... Lease Liability ................................................... (To record leased asset and lease liability)

178,000 178,000

(b) The debt to total assets ratio = $1,100,000 ÷ $1,800,000 = 61%. This ratio means that 61% of the total assets were provided by creditors. The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations.

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H-5

SOLUTIONS TO EXERCISES EXERCISE H-1 (a)

Estimated warranties outstanding: Month November December Total

Estimate 840 960 1,800

Units Defective Outstanding 600 240 500 460 1,100 700

Estimated warranty liability—700 X ₤15 = ₤10,500. (b)

(c)

Warranty Expense (1,800 X ₤15) ................................ Warranty Liability ..............................................

27,000

Warranty Liability ........................................................ Repair Parts .......................................................

16,500

Warranty Liability (500 X ₤15)..................................... Repair Parts .......................................................

7,500

27,000 16,500 7,500

EXERCISE H-2 (a)

KESETE ONLINE COMPANY Partial Statement of Financial Position Current liabilities Accounts payable........................................................... Long-term debt due within one year ............................. Unearned ticket revenue ................................................ Warranty liability ........................................................... Sales taxes payable ....................................................... Interest payable ............................................................. Total current liabilities ...........................................

H-6

Weygandt Financial, IFRS, 2/e, Solutions Manual

$ 63,000 40,000 21,000 18,000 10,000 8,000 $160,000

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EXERCISE H-2 (Continued) (b)

Kesete Online Company’s working capital is $140,000 ($300,000 − $160,000) and its current ratio is 1.88:1 ($300,000 ÷ $160,000). Although a current ratio of 2:1 has been considered the standard for a good credit rating, many companies operate successfully with a current ratio below 2:1.

EXERCISE H-3 (a) (b)

Jan. 1

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

720

Leased Asset-Equipment ....................... Lease Liability ................................

99,474

720 99,474

EXERCISE H-4 Mar. 31

Vacation Benefits Expense .......................... Vacation Benefits Payable (10 X 2 X $96) ..................................

1,920

Pension Expense ($30,000 X 8%) ................ Pension Liability .............................

2,400

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1,920

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2,400

H-7

SOLUTIONS TO PROBLEMS PROBLEM H-1A

(a)

Jan. 1 5

12 14 20

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

15,000

Cash .......................................................... Sales Revenue (€9,540 ÷ 106%) ...... Sales Taxes Payable (€9,540 – €9,000) ..........................

9,540

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

9,000

Sales Taxes Payable ................................ Cash..................................................

5,800

Accounts Receivable ............................... Sales Revenue ................................. Sales Taxes Payable (700 X €52 X 6%) .........................

38,584

Cash .......................................................... Sales Revenue (€13,144 ÷ 106%) .... Sales Taxes Payable (€13,144 – €12,400) .....................

13,144

(b) (1) Jan. 31

(2) Jan. 31

H-8

15,000 9,000 540 9,000 5,800 36,400 2,184 12,400 744

Interest Expense ...................................... 100 Interest Payable (€15,000 X 8% X 1/12) ...................

100

Warranty Expense ................................... 1,820 Warranty Liability (€36,400 X 5%) ......

1,820

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PROBLEM H-1A (Continued) (c)

Current liabilities Notes payable ................................................................... €15,000 Accounts payable ............................................................. 42,500 Unearned service revenue (€15,000 – €9,000)................. 6,000 Sales taxes payable (€540 + €2,184 + €744) .................... 3,468 Warranty liability ............................................................... 1,820 Interest payable................................................................. 100 Total current liabilities ............................................. €68,888

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H-9

PROBLEM H-2A

(a)

Amsrud Enterprises should record the Haber Co. lease as a finance lease because the lease term is about 86% of the estimated economic life of the second property. Both the Lennon Inc. and Schell Inc. leases should be reported as operating leases because neither meets any of the four conditions that would require treatment as a finance lease.

(b)

The Haber Co. lease is a finance lease. The entry to record the finance lease on January 1, 2014, therefore is as follows: Leased Asset—Equipment ............................ Lease Liability ........................................

(c)

62,000

The Lennon Inc. lease is an operating lease. The entry to record the lease payment in 2014, therefore is as follows: Rent Expense ................................................. Cash ........................................................

H-10

62,000

4,800

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4,800

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PROBLEM H-1B

(a) Jan. 5

12 14 20

Cash ......................................................... Sales Revenue (₤17,496 ÷ 108%) .... Sales Taxes Payable (₤17,496 – ₤16,200) .....................

17,496

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

10,000

Sales Taxes Payable ............................... Cash ..................................................

7,700

Accounts Receivable .............................. Sales Revenue ................................. Sales Taxes Payable (600 X ₤50 X 8%) .........................

32,400

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

18,000

Cash ......................................................... Sales Revenue (₤12,420 ÷ 108%) .... Sales Taxes Payable (₤12,420 – ₤11,500) .....................

12,420

(b) (1) Jan. 31

(2) Jan. 31

16,200 1,296 10,000 7,700 30,000 2,400 18,000

11,500 920

Interest Expense ............................. Interest Payable ....................... (₤18,000 X 6% X 1/12 = ₤90; ₤90 X 1/3)

Warranty Expense .......................... Warranty Liability (₤30,000 X 7%) ........

2,100

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2,100

H-11

PROBLEM H-1B (Continued) (c)

H-12

Current liabilities Notes payable ........................................................................ ₤18,000 Accounts payable .................................................................. 52,000 Unearned service revenue (₤16,000 – ₤10,000).................... 6,000 Sales taxes payable (₤1,296 + ₤2,400 + ₤920) ...................... 4,616 Warranty liability .................................................................... 2,100 Interest payable ..................................................................... 30 Total current liabilities ................................................... ₤82,746

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PROBLEM H-2B

(a) McKay Inc. should record the Block Delivery lease as a finance lease because: (1) the lease term is about 86% of the estimated economic life of the leased property and (2) the present value of the lease payments is 90% of the fair market value of the computer. Both the Dunbar Co. and Jens Auto leases should be reported as operating leases because none of the four conditions is met to require treatment as a capital lease. (b) The Dunbar Co. lease is an operating lease. The entry to record the lease payment in 2014 therefore is as follows: Rent Expense ...................................................... Cash ...............................................................

4,200 4,200

(c) The Block Delivery lease is a finance lease. The entry to record the finance lease on January 1, 2014, therefore is as follows: Leased Asset—Equipment ................................. Lease Liability ...............................................

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38,000 38,000

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H-13

BYP H-1

FINANCIAL REPORTING PROBLEM

(a) Samsung reports its provisions in two places: the statement of financial position (in both the current and non-current liability sections) and in footnote 16. Contingent liabilities are also disclosed in the statement of financial position as part of other non-current liabilities and in footnote 17. (b) Per footnote 17, the outcome of several legal actions regarding alleged patent infringements cannot be reasonably determined. Therefore, Samsung has not recorded any liability for these matters in the statement of financial position. (c) Samsung disclosed the details concerning their finance leases in footnote 17. There was no rent expense on operating leases disclosed for 2010. Total minimum lease payments amounted to W212,108 million. (d) According to footnote 2.13 Samsung “has either defined benefit or defined contribution plans at respective company level.” Footnote 15 discloses the details concerning the company’s defined benefit plan.

H-14

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BYP H-2

FINANCIAL REPORTING PROBLEM

Rondo Industries, Inc. uses both operating leases and finance leases. The current portion of the finance lease obligation is $5,570 million.

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H-15

BYP H-3

(a)

DECISION-MAKING ACROSS THE ORGANIZATION

The bank probably did not loan money to Rossiter, Inc. because it believed that Rossiter had too much debt. For example, Rossiter has total debt of $1,900,000 and equity of only $500,000. Adding another $900,000 of debt to the capital structure of Rossiter, Inc. would magnify an already heavy debt position. Also, the company’s liquidity position is quite low. With only $800,000 of current assets to cover $1,200,000 of current liabilities, it would appear that Rossiter may have difficulty meeting its current obligations.

(b)

This lease should be reported as an operating lease. To be reported as a finance lease, it must meet one of four conditions: 1. The lease transfers ownership of the property to the lessee. 2. The lease contains a bargain purchase option. 3. The lease term is a major portion of the economic life of the leased property. 4. The present value of the lease payments represents substantially all of the fair value of the leased property. None of these conditions is met for this transaction. For example, the lease term is less than 50% of the economic life of the leased asset and the present value of the lease payments is about 61% of the fair value.

(c) Claire Wege means that many companies use leasing as a means of “offbalance-sheet financing.” In other words, a company leases a productive asset, but does not report the asset or the related liability on its statement of financial position. The justification for this treatment is that the lessee does not own the asset and therefore should not have to report this asset on its statement of financial position. Most lessees do not like to report leases on their statement of financial position. The primary reason for this is the lease liability will increase the company’s total liabilities. This, in turn, may make it more difficult for the company to obtain needed funds from lenders.

H-16

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CCC1

(a)

CONTINUING COOKIE CHRONICLE

Natalie has a choice between a sole proprietorship and a corporation. A partnership is not an option since she is the sole owner of the business. A proprietorship is the easiest to create and operate because there are no formal procedures involved in creating the proprietorship. However, if she operates the business as a proprietorship she will personally have unlimited liability for the debts of the business. Operating the business as a corporation would limit her liability to her investment in the business. Natalie will in all likelihood require the services of a lawyer to incorporate. Costs to incorporate as well as additional ongoing costs to administrate and operate the business as a corporation may be costly. My recommendation is that Natalie choose the corporate form of business organization. If she expands the business after graduation, she can raise additional capital by issuing more stock. In addition, she limits her liability to her investment in the business. If she decides to transfer ownership to another student, she can do so without dissolving the corporation.

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1-1

CCC1 (Continued) (b) Yes, Natalie will need accounting information to help her operate her business. She will need information on her cash balance on a daily or weekly basis to help her determine if she can pay her bills. She will need to know the cost of her services so she can establish her prices. She will need to know revenue and expenses so she can report her net income for personal income tax purposes, on an annual basis. If she borrows money, she will need financial statements so lenders can assess the liquidity, solvency, and profitability of the business. Natalie would also find financial statements useful to better understand her business and identify any financial issues as early as possible. Monthly financial statements would be best because they are more timely, but they are also more work to prepare. (c)

Assets: Cash, Accounts Receivable, Supplies, Equipment, Prepaid Insurance Liabilities: Accounts Payable, Unearned Service Revenue, Notes Payable Equity: Share Capital-Ordinary, Retained Earnings, Dividends Revenue: Service Revenue Expenses: Advertising Expense, Supplies Expense, Utilities Expense, Depreciation Expense

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1-2

CCC2

(a)

Nov.

CONTINUING COOKIE CHRONICLE

GENERAL JOURNAL Account Titles and Explanation

Debit

J1 Credit

8 No entry required for cashing government bonds—this is a personal transaction. 8 Cash .......................................................... Share Capital - Ordinary .....................

500

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

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

125

14 Equipment ................................................ Share Capital - Ordinary .....................

300

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

2,000

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

900

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

125

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

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

1,320

500 65 125 300 2,000 900 125 30

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1,320

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2-1

CCC2 (Continued) (b) Cash Date Nov.

Explanation 8 11 13 16 17 20 25 30

Date

Explanation

Nov. 13

Date

Debits

J1 J1 J1 J1 J1 J1 J1 J1

500

Explanation

Nov. 14 17

1,320

Credits

Balance

2,000 900 125 30

125

1,320

Equipment Ref. Debits J1 J1

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

Prepaid Insurance Ref. Debits Credits J1

Explanation

Credits

65 125

Supplies Ref. Debits J1

Nov. 30

Date

Ref.

Balance 1,320

Credits

300 900

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Balance 300 1,200

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2-2

CCC2 (Continued) (b) (Continued)

Date

Explanation

Nov. 25

Date

Unearned Service Revenue Ref. Debits

Credits

Balance

Credits

Balance

Explanation

Notes Payable Ref. Debits

Nov. 16

2,000

Date

Share Capital - Ordinary Ref. Debits

Credits

Balance

500 300

500 800

Credits

Balance

125

Nov.

Explanation 8 14

Date

J1 J1

Explanation

Service Revenue Ref. Debits

Nov. 20

Date

Advertising Expense Ref. Debits

Explanation

Nov. 11

Credits

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Balance 65

(For Instructor Use Only)

2-3

CCC2 (Continued) (c) COOKIE CREATIONS Trial Balance November 30, 2014 Cash........................................................................... Supplies .................................................................... Prepaid Insurance..................................................... Equipment ................................................................. Unearned Service Revenue...................................... Notes Payable ........................................................... Share Capital - Ordinary ........................................... Service Revenue ....................................................... Advertising Expense ................................................

Debit $ 245 125 1,320 1,200

Credit

30 2,000 800 125

65 $2,955

$2,955

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

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2-4

CCC3

CONTINUING COOKIE CHRONICLE

(a) Date

GENERAL JOURNAL Account Titles and Explanation

Debit

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

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

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

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

300

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

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J2 Credit

300 45

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3-1

CCC3 (Continued) (a) (Continued)

Date

Explanation

Nov. 30 Balance

Date

Explanation

Cash Ref.

Debit

✓ Accounts Receivable Ref. Debit J2

Date

Supplies Ref. Debit

Nov. 30 Balance 30

Date

Explanation

Nov. 30 Balance

Balance 245

Nov. 30

Explanation

Credit

300

Credit

Balance

125 90

Credit

Balance

✓ J2 Prepaid Insurance Ref. Debit

Balance

✓

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1,320

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3-2

CCC3 (Continued) (a) (Continued)

Date

Explanation

Accumulated Depreciation—Equipment Explanation Ref. Debit Credit

Balance

Explanation

Nov. 30

Date

Balance 1,200

Nov. 30

Date

Credit

✓

Nov. 30 Balance

Date

Equipment Ref. Debit

Accounts Payable Ref. Debit

Credit

Balance

Credit

Balance

Explanation

Nov. 30

Interest Payable Ref. Debit J2

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3-3

CCC3 (Continued) (a) (Continued)

Date

Unearned Service Revenue Explanation Ref. Debit

Nov. 30 Balance

Date

Explanation

Nov. 30 Balance

Date

Explanation

Nov. 30 Balance

Date

Explanation

Nov. 30 Balance 30

Date

Explanation

Nov. 30

Date

✓

Nov. 30 Balance

Balance 30

Notes Payable Ref. Debit

Credit

✓

Balance 2,000

Share Capital - Ordinary Ref. Debit

Credit

✓

Balance 800

Service Revenue Ref. Debit ✓ J2 Utilities Expense Ref. Debit J2

Explanation

Credit

Balance

300

125 425

Credit

Balance

Advertising Expense Ref. Debit

Credit

✓

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

Balance 65

(For Instructor Use Only)

3-4

CCC3 (Continued) (a) (Continued)

Date

Explanation

Nov. 30

Date

Explanation

Nov. 30

Date

Supplies Expense Ref. Debit

Explanation

Nov. 30

Depreciation Expense Ref. Debit J2

Balance 35

Credit

Interest Expense Ref. Debit J2

Credit

Balance 20

Credit

Balance

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

(For Instructor Use Only)

3-5

CCC3 (Continued) (b) COOKIE CREATIONS Adjusted Trial Balance November 30, 2014 Account Cash............................................................................... Accounts Receivable.................................................... Supplies ........................................................................ Prepaid Insurance ........................................................ Equipment ..................................................................... Accumulated Depreciation—Equipment ..................... Accounts Payable ......................................................... Interest Payable ............................................................ Unearned Service Revenue.......................................... Notes Payable ............................................................... Share Capital - Ordinary ............................................... Service Revenue ........................................................... Utilities Expense ........................................................... Advertising Expense .................................................... Supplies Expense ......................................................... Depreciation Expense .................................................. Interest Expense ........................................................... Totals ...............................................................

Debit $ 245 300 90 1,320 1,200

Credit

20 45 5 30 2,000 800 425

45 65 35 20 5 $3,325

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

$3,325

(For Instructor Use Only)

3-6

CCC3 (Continued) (c) COOKIE CREATIONS Income Statement Month Ended November 30, 2014 Revenues Service revenue............................................................. Expenses Advertising expense ..................................................... Utilities expense ............................................................ Supplies expense .......................................................... Depreciation expense ................................................... Interest expense ............................................................ Net income ...........................................................................

$425 $65 45 35 20 5

170 $255

Yes, Cookie Creations has been profitable in November. It has a profit of $255 which is more than one third of the revenue earned in November.

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

(For Instructor Use Only)

3-7

CCC3 (Continued) (c) (Continued) [Note: Statement of Financial Position is not required—shown for information purposes only.] COOKIE CREATIONS Statement of Financial Position November 30, 2014 Assets Equipment ....................................................................... Less: Accumulated depreciation. ................................. Prepaid insurance ........................................................... Supplies........................................................................... Accounts receivable ....................................................... Cash ................................................................................. Total assets ................................................................

$1,200 20

1,180 1,320 90 300 $ 245 $3,135

Equity and Liabilities Equity Share capital - ordinary ............................................. Retained earnings Liabilities Notes payable ............................................................. Accounts payable....................................................... Unearned service revenue ......................................... Interest payable .......................................................... Total liabilities ........................................................ Total equity and liabilities .....................................

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

$ 800 255

1,055

$2,000 45 30 5 2,080 $3,135

(For Instructor Use Only)

3-8

CCC4

CONTINUING COOKIE CHRONICLE

(a) COOKIE CREATIONS Income Statement Two Months Ended December 31, 2014 Revenues Service revenue ........................................................ Expenses Supplies expense ..................................................... Salaries and wages expense ................................... Advertising expense ................................................ Utilities expense ....................................................... Insurance expense ................................................... Depreciation expense .............................................. Interest expense ....................................................... Total expenses ..................................................... Net income ....................................................................

$4,515 $1,025 1,006 165 125 110 40 15 2,486 $2,029

COOKIE CREATIONS Retained Earnings Statement Two Months Ended December 31, 2014 Retained earnings, November 1 .................................. Add: Net income ......................................................... Less: Dividends ........................................................... Retained earnings, December 31 .................................

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

0 2,029 2,029 500 $1,529

(For Instructor Use Only)

4-1

CCC4 (Continued) (a) (Continued) COOKIE CREATIONS Statement of Financial Position December 31, 2014 Assets Property, plant, and equipment Equipment.................................................................. Less: Accumulated depreciation ................ Current assets Prepaid insurance ..................................................... Supplies ..................................................................... Accounts receivable ................................................. Cash ........................................................................... Total current assets .............................................. Total assets ...........................................................

$1,200 40

1,160

1,210 350 875 1,180 3,615 $4,775

Equity and Liabilities Equity Share capital - ordinary ............................................. Retained earnings ....................................................... Non-current liabilities Notes payable ............................................................. Interest payable .......................................................... Total non-current liabilities ................................... Current liabilities Accounts payable....................................................... Salaries and wages payable ...................................... Unearned service revenue ......................................... Total current liabilities........................................... Total liabilities .................................................. Total equity ............................................................

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

$ 800 1,529

$2,329

2,000 15 2,015 0

75 56 300 431 2,446 $4,775

(For Instructor Use Only)

4-2

CCC4 (Continued) (b) Date

GENERAL JOURNAL Account Titles and Explanation

2010 Dec. 31 Service Revenue ................................ Income Summary ..........................

Debit

4,515 4,515

31 Income Summary ............................... Salaries and Wages Expense ....... Utilities Expense............................ Advertising Expense ..................... Supplies Expense.......................... Insurance Expense ........................ Depreciation Expense ................... Interest Expense............................

2,486

31 Income Summary ............................... Retained Earnings .........................

2,029

31 Retained Earnings ............................. Dividends .......................................

500

J4 Credit

1,006 125 165 1,025 110 40 15

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

2,029 500

(For Instructor Use Only)

4-3

CCC4 (Continued) (c) COOKIE CREATIONS Post-Closing Trial Balance December 31, 2014 Account Cash ......................................................................... Accounts Receivable .............................................. Supplies................................................................... Prepaid Insurance .................................................. Equipment ............................................................... Accumulated Depreciation- Equipment ................ Accounts Payable ................................................... Salaries Payable ..................................................... Unearned Service Revenue .................................... Interest Payable ...................................................... Note Payable ........................................................... Share Capital - Ordinary ......................................... Retained Earnings ..................................................

Debit $1,180 875 350 1,210 1,200

$4,815

Credit

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

40 75 56 300 15 2,000 800 1,529 $4,815

(For Instructor Use Only)

4-4

CCC5

CONTINUING COOKIE CHRONICLE

Date Jan. 4

6 7 8 12 12

J1 Debit

Inventory ....................................................... Accounts Payable ....................................

2,875

Inventory ....................................................... Cash .........................................................

100

Accounts Payable [($2,875 ÷ 5) + $20] ........ Inventory ..................................................

595

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

375

Accounts Receivable ................................... Sales Revenue .........................................

3,450

Cost of Goods Sold ($595 X 3) .................... Inventory ..................................................

1,785

Credit

2,875 100 595 375 3,450

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

1,785

(For Instructor Use Only)

5-1

CCC5 (Continued) (b) (Continued) Jan. 14 14 17 18 20 20 28

28 30

Freight-Out .......................................... Cash ................................................

Inventory .............................................. Accounts Payable ...........................

2,300

Cash ..................................................... Share Capital - Ordinary.................

1,000

Inventory .............................................. Cash ................................................

Cash ..................................................... Sales Revenue ................................

2,300

Cost of Goods Sold ($595 X 2) ........... Inventory .........................................

1,190

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

160 56

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

3,450

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

75 70

Accounts Payable ($2,875 – $595 + $2,300) ................... Cash ................................................

75 2,300 1,000 80 2,300 1,190

216 3,450

145 4,580

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

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

4,580 750 750

(For Instructor Use Only)

5-2

CCC5 (Continued) (b) and (d)

Date

Explanation

Jan. 1 Balance 6 8 14 17 18 20 28 28 30 31 31

Date

Explanation

Jan. 1 Balance 8 12 28

Date

Explanation

Jan. 4 6 7 12 14 18 20

Cash Ref. ✓ J1 J1 J1 J1 J1 J1 J1 J1 J1 J1 J1

Debit

J1 J1 J1 J1 J1 J1 J1

145 4,580 750

Credit

Balance

375 75 1,000 80 2,300 216 3,450

3,450

875 500 3,950 500

Credit

Balance

375 3,450

Inventory Ref. Debit

Balance 1,180 1,080 1,455 1,380 2,380 2,300 4,600 4,384 7,834 7,689 3,109 2,359

100

Accounts Receivable Ref. Debit ✓ J1 J1 J1

Credit

2,875 100 595 1,785 2,300 80 1,190

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

2,875 2,975 2,380 595 2,895 2,975 1,785

(For Instructor Use Only)

5-3

CCC5 (Continued) (b) and (d) (Continued) Supplies Ref. Debit ✓

Date Explanation Jan. 1 Balance

Date Explanation Jan. 1 Balance 31 Adjusting entry

Date Explanation Jan. 1 Balance

Prepaid Insurance Ref. Debit ✓ J2

Equipment Ref. Debit ✓

Credit

Balance 350

Credit

Balance 1,210 1,100

110

Credit

Accumulated Depreciation—Equipment Date Explanation Ref. Debit Credit Jan. 1 Balance ✓ 31 Adjusting entry J2 20

Date Explanation Jan. 1 Balance 4 7 14 30 31

Accounts Payable Ref. Debit ✓ J1 J1 595 J1 J1 75 J1 4,580

Credit 2,875 2,300

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

Balance 1,200

Balance 40 60

Balance 75 2,950 2,355 4,655 4,580 0

(For Instructor Use Only)

5-4

CCC5 (Continued) (b) and (d) (Continued)

Date

Explanation

Salaries and Wages Payable Ref. Debit ✓ J1

Jan. 1 Balance 28

Date

Explanation

Jan. 1 Balance

Date

Explanation

Jan. 1 Balance 17

Date

Explanation

Jan. 1 Balance

Date

Explanation

Jan. 31

Balance 300

Interest Payable Ref. Debit

Jan. 1 Balance 31 Adjusting entry

Date

Credit

✓

Explanation

Balance 56 0

Unearned Service Revenue Ref. Debit

Jan. 1 Balance

Date

Credit

Balance

✓ J2

15 25

Notes Payable Ref. Debit

Credit

Balance

✓

2,000

Share Capital - Ordinary Ref. Debit

Credit

Balance

✓ J1

1,000

800 1,800

Retained Earnings Ref. Debit

Credit

Balance

✓ Dividends Ref. J1

1,529

Debit

Credit

750

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

Balance 750

(For Instructor Use Only)

5-5

CCC5 (Continued) (b) and (d) (Continued)

Date

Sales Revenue Ref.

Explanation

Jan. 12 20

Date

J1 J1 Cost of Goods Sold Ref. Debit

Explanation

Jan. 12 20

Date

Debit

J1 J1

Jan. 28

Date

Utilities Expense Ref. Debit

Jan. 30

Explanation

Jan. 31

Adjusting entry

Explanation

Jan. 31

Adjusting entry

3,450 5,750

Credit

Balance 1,785 2,975

Credit

Balance 160

Credit

Balance 70

Credit

Insurance Expense Ref. Debit

Date

3,450 2,300

160

Depreciation Expense Ref. Debit

Date

Balance

1,785 1,190

Salaries and Wages Expense Explanation Ref. Debit

Explanation

Credit

Balance 20

Credit

110

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

Balance 110

(For Instructor Use Only)

5-6

CCC5 (Continued) (b) and (d) (Continued)

Date

Freight Out Ref. Debit

Explanation

Jan. 14

Date

Explanation

Interest Expense Ref. Debit

Jan. 31

Adjusting entry

Credit

Balance 75

Credit

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

Balance 10

(For Instructor Use Only)

5-7

CCC5 (Continued) (c) COOKIE CREATIONS Trial Balance January 31, 2015 Cash ........................................................................... Accounts Receivable ................................................ Inventory ................................................................... Supplies..................................................................... Prepaid Insurance ..................................................... Equipment ................................................................. Accumulated Depreciation—Equipment ................. Accounts Payable ..................................................... Salaries and Wages Payable .................................... Unearned Service Revenue ...................................... Interest Payable ........................................................ Notes Payable ........................................................... Share Capital - Ordinary ........................................... Retained Earnings .................................................... Dividends .................................................................. Sales Revenue .......................................................... Cost of Goods Sold .................................................. Salaries and Wages Expense................................... Utilities Expense ....................................................... Depreciation Expense .............................................. Insurance Expense ................................................... Freight Out ................................................................ Interest Expense .......................................................

Debit $ 2,359 500 1,785 350 1,210 1,200

40 300 15 2,000 1,800 1,529

750 5,750 2,975 160 70 75 $11,434

Credit

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

$11,434

(For Instructor Use Only)

5-8

CCC5 (Continued) (d) Date

GENERAL JOURNAL Account Titles and Explanation

J2 Debit

Jan. 31 Depreciation Expense ............................ Accumulated Depreciation— Equipment ...................................... ($1,200 ÷ 60 months)

31 Interest Expense .................................... Interest Payable ................................. ($2,000 X 6% X 1/12)

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

110

Credit

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

110

(For Instructor Use Only)

5-9

CCC5 (Continued) (e) COOKIE CREATIONS Adjusted Trial Balance January 31, 2015 Cash .......................................................................... Accounts Receivable ............................................... Inventory .................................................................. Supplies.................................................................... Prepaid Insurance .................................................... Equipment ................................................................ Accumulated Depreciation—Equipment ................ Accounts Payable .................................................... Unearned Service Revenue ..................................... Interest Payable ....................................................... Notes Payable .......................................................... Share Capital - Ordinary .......................................... Retained Earnings ................................................... Dividends ................................................................. Sales Revenue ......................................................... Cost of Goods Sold ................................................. Salaries and Wages Expense.................................. Utilities Expense ...................................................... Depreciation Expense ............................................. Insurance Expense .................................................. Freight-Out ............................................................... Interest Expense ......................................................

Debit $ 2,359 500 1,785 350 1,100 1,200

Credit

60 300 25 2,000 1,800 1,529

750 5,750 2,975 160 70 20 110 75 10 $11,464

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

$11,464

(For Instructor Use Only)

5-10

CCC5 (Continued) (f) COOKIE CREATIONS Income Statement For the Month ended January 31, 2015 Sales revenue................................................................... Cost of goods sold .......................................................... Gross profit ...................................................................... Operating expenses Salaries and wages expense ...................................... Insurance expense ...................................................... Freight-out ................................................................... Utilities expense........ .................................................. Depreciation expense ................................................. Total operating expenses....................................... Income from operations .................................................. Interest expense .............................................................. Net income .......................................................................

$160 110 75 70 20

(For Instructor Use Only)

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

$5,750 2,975 2,775

435 2,340 10 $2,330

5-11

CCC6

CONTINUING COOKIE CHRONICLE

(a) Date Feb. 1 Feb. 2 Mar. 2 Apr. 1 May 4

(b) FIFO (i) Ending Inventory Date May 4 Apr. 1

Units Unit Cost 3 $625 1 612 4

Total Cost $1,875 612 $2,487

(ii) Cost of Goods Sold Cost of goods available for sale $6,702 Less: Ending inventory 2,487 Cost of goods sold $4,215

(iii) Gross Profit Sales Less: Cost of goods sold Gross profit

(iv) Gross Profit Rate $3,835 $8,050

$8,050 4,215 $3,835

47.64%

Average Cost (i) Ending Inventory $6,702/11 = $609.273 Units 4

Total Unit Cost Cost $609.273 $2,437.09

(ii) Cost of Goods Sold Cost of goods available for sale $6,702.00 Less: Ending inventory $2,437.09 Cost of goods sold $4,264.91

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicle

(For Instructor Use Only)

6-1

(iii) Gross Profit Sales $8,050.00 Less: Cost of goods sold 4,264.91 Gross profit $3,785.09

(iv) Gross Profit Rate $3,785.09 $8,050.00

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicle

47.02%

(For Instructor Use Only)

6-2

CCC7

CONTINUING COOKIE CHRONICLE

Part 1 The weaknesses in internal accounting controls in the system recommended by John are: (1) (2)

(3) (4)

Improvements should include the following: (1) (2)

(3)

Cash should be deposited in the bank daily. At a minimum cash should be locked in a safe until it can be deposited. John should be responsible for the accounting function only. Natalie (or some other independent person) should sign all checks and make all deposits. Checks should be signed only when there is documentation present to support the payment. All invoices should be stamped “PAID” to avoid duplicate payment. Bank reconciliations should be prepared by a person independent of the handling and recording of cash. However, this may not be possible in a small organization such as Cookie Creations. At a minimum, Natalie and not John should prepare bank reconciliations monthly.

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

(For Instructor Use Only)

7-1

CCC7 (Continued) Part 1 (Continued) (4)

(5)

The accounting records should be maintained on site and regular backups should be prepared. It would be best if John used a computer at Cookie Creations to prepare the accounting information; however, if he is going to use his laptop, Natalie should ensure that she is provided with a regular back-up of all the accounting records. This ensures that if John should ever lose his laptop or decide to no longer perform Cookie Creations’ accounting, Natalie would still have access to the company’s accounting records. John should submit a monthly invoice for the work he has done to Natalie for her approval. Natalie should then write and sign the check.

Part 2 (a) COOKIE CREATIONS Bank Reconciliation June 30, 2015 Cash balance per bank statement .............................. Add: Deposit in transit .............................................. Bank error Check No. 603 ($452 – $425) .........

$3,359 $110 27

Less: Outstanding checks ($238 + $297) .................. Adjusted cash balance per bank ..................... Cash balance per books .............................................. Less: Service charge .................................................. Error in deposit June 20th ($155 – $125).......... Telus.................................................................. NSF check ($100 + $35 service charge) .......... Adjusted cash balance per books ..............................

137 3,496 535 $2,961 $3,224

$ 13 30 85 135

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

263 $2,961

(For Instructor Use Only)

7-2

CCC7 (Continued) Part 2 (Continued) (b) June 30 Miscellaneous Expense ......................... Cash ...................................................

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

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

30 Accounts Receivable—Ron Black ........ Cash ...................................................

135

13 30 85 135

Check: $3,224 – $13 – $30 – $85 – $135 = $2,961 adjusted cash balance (c) If a statement of financial position were prepared, cash at June 30th, 2015 would be $2,961.

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

(For Instructor Use Only)

7-3

CCC8

(a)

CONTINUING COOKIE CHRONICLE

Answers to Natalie’s questions 1. Calculations you should perform on the statements are: • • • •

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

(For Instructor Use Only)

8-1

CCC8 (Continued) (a) (Continued) 3. The advantage of extending credit to customers is the anticipated increase in sales expected from customers who will purchase goods only if they can receive credit. The disadvantages of extending credit are the additional costs incurred to keep track of amounts owed, the additional costs incurred when staff need to be assigned to follow up on late account balances, and the risk of not collecting a receivable from a customer who is unable to pay. The advantages of allowing customers to use credit cards include making the purchase easier for the customer, potentially increasing sales, as customers are not limited to the amount of cash in their wallet, and reducing the accounts receivable you have to manage if credit cards are used instead of granting credit to customers. In addition, the credit card company assumes the risk of nonpayment, and if a bank credit card is used the seller has cash immediately. The disadvantage is the cost to your business. When a customer makes a purchase using a credit card you will have to pay a percentage of the sale to the credit card company. The rate varies but 3% would not be unusual. You will also have to pay to rent the equipment to process the credit card sales. The fee is not large but is an ongoing expense. (b) June 1 Accounts Receivable ........................... Sales Revenue ................................. Cost of Goods Sold ............................. Inventory ..........................................

1,150

30 Note Receivable—Lesperance ............ Accounts Receivable ......................

1,150

1,150 620 620

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

1,150

(For Instructor Use Only)

8-2

CCC8 (Continued) (b) (Continued) July 31 Accounts Receivable [$1,150 + $8] ................. Note Receivable........................................... Interest Revenue [$1,150 X 8.25% X 1/12] ....

1,158

Aug. 7 Cash .................................................................. Accounts Receivable ..................................

1,158

(For Instructor Use Only)

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

1,150 8

1,158

8-3

CCC9

(a)

CONTINUING COOKIE CHRONICLE

Purchase price ............................................................ Painting ....................................................................... Shelving ....................................................................... Cost of van ..................................................................

$36,500 2,500 1,500 $40,500

(b) Straight-line depreciation Year

Depreciable Cost X

Deprec. Rate

2015 2016 2017

$33,000* 33,000 33,000

20% X 4/12 20% 20%

Deprec. = Expense

Accum. Deprec.

$2,200 6,600 6,600

$ 2,200 8,800 15,400

Net Book Value $40,500 38,300 31,700 25,100

*$40,500 – $7,500 Double-declining-balance depreciation Year

NBV (Beg. of Year X

Deprec. Rate

Deprec. = Expense

Accum. Deprec.

2015 2016 2017

$40,500 35,100 21,060

40% X 4/12 40% 40%

$ 5,400 14,040 8,424

$ 5,400 19,440 27,864

Deprec. Deprec. Cost/Unit = Expense

Accum. Deprec.

$0.165* 0.165 0.165

$ 2,475 9,900 18,150

Net Book Value $40,500 35,100 21,060 12,636

Units-of activity depreciation

Year

Units of Activity

2015 2016 2017

15,000 45,000 50,000

$ 2,475 7,425 8,250

Net Book Value $40,500 38,025 30,600 22,350

*($40,500 – $7,500) ÷ 200,000 = $0.165 per mile

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

(For Instructor Use Only)

9-1

CCC9 (Continued) (c)

Impact on Cookie Creations’ statement of financial position and income statement in 2015: Double Declining Units-ofStraight-Line Balance Activity Cost of asset $40,500 $40,500 $40,500 Accumulated depreciation 2,200 5,400 2,475 Net book value $38,300 $35,100 $38,025 Depreciation expense

$2,200

$5,400

$2,475

The double-declining balance method of depreciation will result in the lowest amount of net income reported, the lowest amount of equity reported, and the lowest net book value of the asset reported. The straight-line method of depreciation will result in the greatest amount of net income reported, the greatest amount of equity reported, and the greatest net book value of the asset reported. (d) Over the van’s 5-year useful life, the total depreciation will be $33,000 (resulting in a net book value equal to the salvage value of $7,500) under each of the methods. The impact will affect only the timing of the depreciation expense recognized each year. (e)

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

(For Instructor Use Only)

9-2

CCC10

CONTINUING COOKIE CHRONICLE

(a)

$2,000 X 6% X 8.5/12 = $85

(b)

Aug. 31

(c)

Sept. 15

Interest Expense ($2,000 X 6% X 1/12) ............ Interest Payable ............................................

10 10

Notes Payable .................................................... 2,000 Interest Payable ($25 + $70) .............................. 95 Interest Expense ($2,000 X 6% X 0.5/12) .......... 5 Cash ($2,000 + ($2,000 X 6% X 10/12)) ......... 2,100

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicle

(For Instructor Use Only)

10-1

CCC11

CONTINUING COOKIE CHRONICLE

Part 1 (a) 1. One of the major advantages of issuing preference shares is that the preference shareholder does not have voting rights. In this case, Curtis’s dad and Natalie’s grandmother can participate in the future success of Cookie & Coffee Creations Inc. (by receiving annual dividends) without attempting to influence any decisions that would require shareholder approval. Both will receive an annual dividend as long as the dividend is declared. Any additional dividends declared and paid will be paid to the ordinary shareholders. This could prove to be another advantage to both Natalie and Curtis if the company is successful and has excess cash to pay out dividends. 2. It is possible to pay for the $750 legal bill by issuing ordinary shares. However, the historical cost principle still applies. Cost must equal the cash equivalent price, which is generally the fair value of the consideration given up. If this amount cannot be determined, we then look to the fair value of the consideration received to determine the cash equivalent price. In this case, Curtis and Natalie are receiving shares with a value of $1 per share. This $1 per share is the estimated fair value of the shares being given up in return for the legal fee expense. As a result, 750 shares should be given up, valued at $750, which is the value of the legal fees.

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

(For Instructor Use Only)

11-1

CCC11 (Continued)

Date

GENERAL JOURNAL Account Titles and Explanation

J1 Debit

Credit

(b) Nov.

1 Cash .................................................. Accounts Receivable ....................... Inventory .......................................... Equipment ........................................ Share Capital - Ordinary ..............

19,130 900 1,650 3,500

1 Cash .................................................. Premium Shares ...........................

10,000

1 Legal Expense.................................. Share Capital - Ordinary ..............

750

25,180

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

10,000 750

(For Instructor Use Only)

11-2

CCC11 (Continued) (d) COOKIE & COFFEE CREATIONS INC. Statement of Financial Position November 1, 2015 ___________________________________________________________ Assets Plant and equipment Equipment ............................................................. $ 3,500 Current assets Inventory................................................................ $ 1,650 Accounts receivable ............................................. 900 Cash ....................................................................... 29,130 Total current assets ........................................ 31,680 Total assets ..................................................... $35,180 Equity Equity Share capital – preference, $0.50, no par value, noncumulative,10,000 shares authorized, 2,000 shares issued ........................................ Share capital - ordinary, no par value, 100,000 shares authorized, 25,930 shares issued ...... Retained earnings (deficit) ................................... Total equity ......................................................

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

$10,000 25,930 (750) $35,180

(For Instructor Use Only)

11-3

CCC11 (Continued) Part 2 GENERAL JOURNAL Account Titles and Explanation

Date (a) Dec. 1 Apr. 30

June 1 30 Oct. 31

Cash ...................................................... Share Capital - Preference ............. Cash Dividends (2,800 X $5.00 X 1/2)........................... Dividends Payable ..........................

Debit 4,000

4,000 7,000 7,000

Dividends Payable ................................ Cash .................................................

7,000

Treasury Shares ................................... Cash .................................................

500

Income Tax Expense ............................ Income Tax Payable ($462,500 – $364,050) X 20% .......

19,690

Cash Dividends (2,800 X $5.00 X 1/2)........................... Dividends Payable ..........................

J1 Credit

7,000 500

19,690 7,000

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

7,000

(For Instructor Use Only)

11-4

CCC11 (Continued) (b) COOKIE & COFFEE CREATIONS INC. Retained Earnings Statement Year Ended October 31, 2016 Balance, November 1, 2015 ....................................... Add: Net income ......................................................

0 78,760 78,760 14,000 $64,760

Less: Cash dividends ............................................... Balance, October 31, 2016 .........................................

(c) COOKIE & COFFEE CREATIONS INC. Partial Statement of Financial Position October 31, 2016 Equity Share capital – preference, $0.50, no par value, non-cumulative, 10,000 shares authorized, 2,800 shares issued ........................................................ Share capital - ordinary, no par value, 100,000 shares authorized, 25,930 shares issued 25,180 shares outstanding ............................................. Retained earnings .......................................................... Less: Treasury stock—common (750 shares)(at cost) .. Total equity ..........................................................

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

$ 14,000 25,930 64,760 (500) $104,190

(For Instructor Use Only)

11-5

CCC11 (Continued) (d) Oct. 31 Revenues ........................................... Income Summary..........................

462,500

31 Income Summary .............................. Expenses....................................... Income Tax Expense ....................

383,740

31 Income Summary .............................. Retained Earnings ........................

78,760

31 Retained Earnings............................. Cash Dividends.............................

14,000

462,500 364,050 19,690 78,760

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

14,000

(For Instructor Use Only)

11-6

CCC12

(a)

CONTINUING COOKIE CHRONICLE

1. The amount of influence you would have in The Beanery would determine how you would account for the investment. Given that you would own 30% of the ordinary shares of the Beanery, it would be assumed (unless there was evidence to the contrary) that you could exert significant influence over the day-to-day operations of the business. This is especially so given the small number of shareholders. Significant influence over an investee may also result from representation on the board of directors, participation in policymaking processes, material inter-company transactions, interchange of managerial personnel, or technological dependency. Assuming significant influence existed, the investment would be accounted for using the equity method of accounting. However, in this case, the Thornton sisters will still exercise majority control and may not be willing to let an investor participate in the decisionmaking process. If this did occur, significant influence may not exist and the investment would be accounted for using the cost method. 2. One of the major advantages of going ahead with this investment would be the strategic advantage of the horizontal and vertical integration that would occur. Not only would you eliminate a competitor but you both could learn the business of roasting beans while taking advantage of the expertise the Thornton sisters have developed with respect to the operation of their coffee shop.

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicle

(For Instructor Use Only)

12-1

15,000 15,000

(c) Cost Method Cash ....................................................................... Dividend Revenue ($25,000 X 30%) .............

7,500 7,500

Equity Method Share Investments ................................................ Revenue from Share Investments ($50,000 X 30%) ........................................

15,000

Cash ($25,000 X 30%) ........................................... Share Investments ........................................

7,500

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicle

15,000 7,500

(For Instructor Use Only)

12-2

CCC12 (Continued) (d) Because the investment in The Beanery is a strategic investment, it would be classified as a non-current asset in the investments section of Cookie & Coffee Creations’ statement of financial position. If the investment were accounted for using the cost method, it would be recorded at its original cost of $15,000 (or fair market value, if known). If the investment were accounted for using the equity method, it would be accounted for at its original cost plus a proportionate share of The Beanery’s income, less a proportionate share of any dividends paid by The Beanery. For the current year the investment would be at $22,500 ($15,000 + $15,000 – $7,500).

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicle

(For Instructor Use Only)

12-3

CCC13

(a)

CONTINUING COOKIE CHRONICLE

Indirect method COOKIE & COFFEE CREATIONS INC. Cash Flow Statement Year Ended October 31, 2016

Operating activities Net income ................................................................ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .......................................... $ 3,900 Increase in accounts receivable ......................... (3,250) Increase in inventory ........................................... (17,897) Increase in prepaid expenses ............................. (6,300) Increase in accounts payable ............................. 5,848 Increase in income tax payable .......................... 19,690 Increase in salaries and wages payable ............ 2,250 Increase in interest payable ................................ 188 Net cash provided by operating activities ..... Investing activities Purchase of furniture .......................................... (12,500) Purchase of computer equipment ...................... (4,200) Purchase of kitchen equipment (Note X) .............. (17,000) Net cash used by investing activities ............ Financing activities Issue of preference shares ................................. 14,000 Issue of ordinary shares ..................................... 25,930 Principal repayment of note payable .................... (2,000) Repurchase of ordinary shares .......................... (500) Payment of dividends .......................................... (7,000) Net cash provided by financing activities ..... Net increase in cash ..................................................... Cash, November 1, 2015 ............................................... Cash, October 31, 2016 ................................................ Non-cash investing and financing activities Issuance of notes payable to purchase kitchen equipment ...........................................

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

$78,760

4,429 83,189

(33,700)

30,430 79,919 0 $79,919

$12,000

(For Instructor Use Only)

13-1

CCC13 (Continued) (b) Direct method COOKIE & COFFEE CREATIONS INC. Cash Flow Statement Year Ended October 31, 2016 Operating activities Cash receipts from customers (1).......................... $459,250 Cash payments To suppliers (2) ................................................... $(243,299) For operating expenses (3) ................................ (42,287) For salaries and wages (4) ................................. (90,250) For interest (5) .................................................... (225) For income tax (6) ............................................... 0 (376,061) Net cash provided by operating activities....... 83,189 Investing activities Purchase of computer equipment .......................... $ (4,200) Purchase of furniture ............................................. (12,500) Purchase of kitchen equipment (Note X) ............... (17,000) Net cash used by investing activities................ (33,700) Financing activities Issue of ordinary shares ......................................... $ 25,930 Issue of preference shares ..................................... 14,000 Principal repayment of note payable ..................... (2,000) Repurchase of ordinary shares .............................. (500) Payment of dividends (7) ........................................ (7,000) Net cash provided by financing activities ......... 30,430 Net increase in cash .................................................... 79,919 Cash, November 1, 2015 .............................................. 0 Cash, October 31, 2016 ............................................... $ 79,919 Non-cash investing and financing activities Issuance of notes payable to purchase kitchen equipment ...........................................

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

$ 12,000

(For Instructor Use Only)

13-2

CCC13 (Continued) (b) (Continued) Note X: During the year, the company acquired kitchen equipment with a cost of $17,000 by paying $5,000 cash and incurring a $12,000 note payable. Calculations: (1)

Cash receipts from customers Sales revenue.......................................................... Less: Increase in accounts receivable ................. Cash receipts from customers ..............................

(2)

Cash payments to suppliers Cost of goods sold ................................................. Add: Increase in inventory .................................... Cost of goods purchased ....................................... Less: Increase in accounts payable ..................... Cash payments to suppliers ..................................

(3)

$231,250 17,897 249,147 (5,848) $243,299

Cash payments for operating expenses Operating expenses................................................ Add: Increase in prepaid expenses ....................... Cash payments for operating expenses ...............

(4)

$462,500 (3,250) $459,250

$ 35,987 6,300 $ 42,287

Cash payments to employees Salaries and wages expense.................................. Less: Increase in salaries and wages payable .... Cash payments to employees ................................

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

$ 92,500 (2,250) $ 90,250

(For Instructor Use Only)

13-3

CCC13 (Continued) (b) (Continued) (5)

Cash payments for interest Interest expense ........................................................ Less: Increase in interest payable ........................... Cash payments for interest .......................................

(6)

413 (188) 225

Cash payments for income tax Income tax expense ................................................... Less: Increase in income tax payable ..................... Cash payments for income tax .................................

(7)

$19,690 (19,690) $ 0

Cash payments for dividends Dividends ($7,000 + $7,000) ...................................... Less: Increase in dividends payable ....................... Cash payments for dividends ...................................

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

$ 14,000 (7,000) $ 7,000

(For Instructor Use Only)

13-4

CCC14

(a) 1.

CONTINUING COOKIE CHRONICLE

Current ratio $107,366 $38,976 = 2.75:1

Accounts receivables turnover

$462,500 = 142.3 times $3,250 3.

Inventory turnover $231,250 = 12.9 times $17,897

Debt to total assets $44,976 = 30.2% $149,166

Times interest earned $98,863 $413

= 239.4 times

Gross profit rate

$231,250 = 50.0% $462,500 7.

Profit margin $78,760 $462,500

= 17.0%

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

(For Instructor Use Only)

14-1

CCC14 (Continued) (a) (Continued) 8. Asset turnover $462,500 $149,166

= 3.1 times

9. Return on assets $78,760 $149,166

= 52.8%

10. Return on ordinary shareholders’ equity $78,760 = 75.6% $104,190

(b) The company had a very good year. It was very profitable and has a healthy statement of financial position. The company is carrying very little debt and can cover the interest charges easily. There are no liquidity or solvency problems. (c) The bank should have no qualms about lending money to the company. The new debt ratio would still be reasonably low [($44,976 + $20,000) ÷ ($149,166 + $20,000) = 38.4%]. Even if there were no increases in revenue, operating income would still be more than adequate to cover the additional interest expense. The company is very profitable and is an acceptable credit risk for the bank. (d) Instead of bank financing, Cookies & Coffee Creations could lease the equipment. The company could also consider equity financing or paying cash for the equipment.

Weygandt, Financial Accounting, 8/e, Continuing Cookie Chronicles

(For Instructor Use Only)

14-2