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01/10/2013

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Sections

  • 2. Cash and Investments
  • 3. Accounts Receivable
  • 4. Inventory
  • 5. Long-term Assets
  • 6. Liabilities
  • 7. Shareholders’ Equity
  • 8. The Accounting Cycle Revisited
  • 9. The Statement of Cash Flow
  • 10. Financial Statement Analysis
  • 11. SOLUTION TO PROBLEMS

INTRODUCTORY FINANCIAL ACCOUNTING

Jacques Maurice, MBA, CA, CMA, FCMA Rebecca Renfroe, B.Comm, B. Ed, CMA

Introductory Financial Accounting, v.1.1

Page 2

Table of Contents

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

The Accounting Cycle – Income Statement and Statement of Financial Position Cash and Investments Accounts Receivable Inventory Long-term Assets Liabilities Shareholders’ Equity The Accounting Cycle Revisited The Statement of Cash Flow Financial Statement Analysis Solutions to Problems

3 48 58 67 86 100 114 122 131 146 159

Introductory Financial Accounting, v.1.1

Page 3

1.

The Accounting Cycle – Income Statement and Balance Sheet

The Accounting Equation To begin any discussion about accounting, the Accounting Equation is a critical starting point. The key components of the accounting equation are Assets, Liabilities and Shareholders’ Equity. The definition of an asset is a probable future economic benefit obtained or controlled by a particular entity as a result of a past transaction or event. There are three key components to this definition: a) the asset will provide some probable, future benefit to the company, b) the asset is under the control of the company; and, c) the asset has come into the company’s control through some past transaction or event. Examples of assets are Cash, Accounts Receivable, Inventory and Capital Assets. A liabilitiy, on the other hand, is an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. Examples of liabilities are accounts payable and accrued liabilities, bank loans and long-term debt. If you were to liquidate all of the assets of a company and pay off all liabilities with the proceeds, any amount left over would be the Equity in the company. Shareholders’ Equity, as it is sometimes called, is a numerical representation of the shareholders’ interest in a company. The Accounting Equation is as follows:

Assets = Liabilities + Shareholders’ Equity
The equation must hold true at all times. How we manage this is through balanced entries. That is, each time we record an event within a company’s accounting life, if we affect one side of the equation, we must also affect the other, OR we can both increase and decrease the same side of the equation to keep it in balance. Hence, we have our second truth of accounting: Debits = Credits The normal balances of the above accounts are as follows: Assets - Debit Liabilities - Credit Shareholders’ Equity - Credit

Introductory Financial Accounting, v.1.1

Page 4

Let’s look at a few examples of manipulating the Accounting Equation. Recall the accounting equation:

Assets = Liabilities + Shareholders’ Equity
Example (a) When an owner invests their own cash in starting up a company, this will have two effects. First, the cash account (an asset) will increase, and the Contributed Capital account will also increase. The Contributed Capital account is part of Shareholders’ Equity and comprises of all contributions made by the shareholders to the company. Say an owner invests $50,000 of their own money to start a company. The journal entry would be: Cash Contributed Capital 50,000 50,000

The cash account gets debited (dr.) and the Contributed Capital Account gets credited (cr.). Note the convention above: • when writing journal entries, the account label that gets debited is flush against the left margin and the account label that gets credited is tabbed in; • the debit dollar amount is in the first column whereby the credit dollar amount is in the second column. The equation stays in balance as we are increasing both sides of the equation: Assets + 50,000 = Liabilities + Equity +50,000

(b)

That same company then uses some of that cash to purchase inventory to resell. That inventory costs $10,000. The journal entry would be: Inventory Cash 10,000 10,000

Note that both of these are asset accounts, but our equation stays balanced because we are increasing one asset (inventory), but decreasing another (cash): Assets + 10,000 - 10,000 = Liabilities + Equity

000 worth of inventory on account. therefore.000 (d) = Liabilities +10. The journal entry would be: Equipment Cash 75. by increasing one and decreasing another the equation holds true: Assets + 75.Introductory Financial Accounting. The journal entry would be: Inventory Accounts Payable 5.000 Upon signing the loan. we increase the asset account Cash.000. our equation holds true: Assets + 10.000 Both the Equipment account and the Cash account are assets. our equation stays in balance: Assets + 100.1 Page 5 (c) That same company then purchases an additional $5.75. By increasing both sides of the equation.1.000 = Liabilities +100.000 + Equity The company then uses cash to purchase equipment that costs $75. they do not pay cash but take on an account payable with the supplier. The loan is for $100.000 . they will take on a liability to pay back the bank the $100.000. that is. Furthermore.000 100. and increasing a liability.000 5.000 We are increasing an asset. therefore.000 + Equity . the company would receive $100.000 75.000. therefore.000 cash. The journal entry to record the loan would be: Cash Bank Loan 100. v.000 = Liabilities + Equity (e) The same company is a little short on cash and has to take out a loan from its bank. an asset and a liability.

The journal entry would be: Cash Sales Revenue 30. which is part of the Shareholders’ Equity section of the Statement of Financial Position.1 Page 6 Transactions that impact the Statement of Income The above examples used accounts that appear on the Statement of Financial Position. For example. the income and expense accounts are closed out to zero. i. the company will have generated a net income and a net Credit entry to Retained Earnings will result. Revenue accounts normally have a credit balance. when a revenue account is increased we credit the account.000 30. If Revenues are greater than Expenses during a period. via the Retained Earnings Account. If Expenses are greater than Revenues. At the end of each year. and the resulting debit or credit is either added or subtracted to an account called Retained Earnings. the company will have generated a net loss and a net Debit balance to Retained Earnings will result. v.000 in sales in its first month.e. All revenue and expense accounts are temporary accounts in the sense that we start the year with a zero balance in the account.000 = Liabilities + Equity +30. Conversely. If we continue with our examples… (f) Say that the company from the above example has $30.000 . If you remember that Income and Expense accounts get closed to Retained Earnings (which we will discuss in further detail later) then you can see how recording sales and expenses will still keep the accounting equation in balance. an expense account’s normal balance is a debit balance.1.000 The accounting equation is maintained since Assets are increased and Equity is increased: Assets + 30.Introductory Financial Accounting. Income Statement accounts will consist of Revenue accounts or Expense accounts. an debit entry to an expense account is viewed as a reduction of Equity and a credit entry to a revenue account is viewed as an increase in Equity.

and both are divided into current and non-current based on their liquidity. The Statement of Financial Position (also called the Balance Sheet) is. as are liabilities. Assets and liabilities that will come due or have to be settled within 12 months or one accounting cycle (whichever is longest) are classified as current.000 = Liabilities + Equity -15.000 15. an expanded form of the accounting equation: The Statement of Financial Position Assets = Liabilities & Shareholders’ Equity Liabilities Current Liabilities Current Assets Non-Current Liabilities Shareholders’ Equity Contributed Capital Non-Current Assets Retained Earnings Assets are listed from most liquid to least liquid.1. basically. and all other assets and liabilities are classified as non-current.000 The Statement of Financial Position The Statement of Financial Position is a snapshot of a company’s financial position at a particular point in time.000 Note that this entry removes the inventory from the company’s accounts. the company sold all $15. The accounting equation remains in balance: Assets . as they no longer have it on hand to sell.000 worth of its inventory. v. .Introductory Financial Accounting.15. The journal entry to record that would be: Cost of Goods Sold Inventory 15.1 Page 7 (g) To incur these sales. Note that Cost of Goods Sold is an expense account.

000 would be classified as a long-term liability. The associated Accumulated Amortization contra account is normally shown directly below the asset account. Because the policy has not yet expired. Long-term investments – these are investments that are to be held for many years. this account includes all currency and equivalents (bank drafts. stocks. you would break out the current portion and classify it as such. when we take out an insurance policy. Prepaid Expenses – this account represents amounts that have been paid in cash for expenses that have not been incurred by the company. but is a listing of all equipment owned and used by the company. and classify the remainder as non-current. In this case. or manufactured by the company itself. complete. The classic example of this is breaking out the current portion of the long-term debt of a company. More on this in Chapter 5. The inventory can either be purchased. A more detailed discussion of this account will take place Chapter 4. Note that amortization is never taken on land. that in some cases you may have an asset or a liability that is partly current and partly non-current. Typical accounts you will see on the Statement of Financial Position are: Current Assets: Cash – the most liquid of all assets. if your loan balance is $200.). and the asset is therefore shown net of accumulated amortization.000 of this balance within the next year.1. For example. Non-current Assets: Buildings – this account is a listing of all depreciable buildings owned by the company. and includes investments in bonds. v. . Accounts Receivable is normally reported net of an Allowance for Uncollectible Accounts (discussed further in Chapter 3). Inventory – this account is a listing of all of the items that the company normally sells in its day-to-day activities. ready for resale.000 would be classified as a current liability and the remaining $150. we normally pay the annual premium the day the policy takes effect. other companies or special funds. Equipment – this account is treated in the same manner as the Buildings account.000 and the agreement with the bank is that you will be required to pay $50. money orders etc. this $50. Accounts Receivable – the account is the sum total of all outstanding invoices which are owed to the company by its customers.Introductory Financial Accounting.1 Page 8 Note. the cost of the policy will be classified as a prepaid expense. For example. Land – this account is a listing of all land held by the company.

The retained earnings account reconciliation from the beginning of year to end of year balance is as follows: Retained Earnings. beginning balance Add Net Income for the year or deduct the Net Loss for the year Less Dividends declared to shareholders Retained Earnings. Current Liabilities: Accounts payable – a listing of all accounts that will be due to suppliers which are expected to be repaid within one year or one accounting cycle. end of year XXX ± XXX . trademarks and copyrights would be classified as longterm assets.Introductory Financial Accounting. The retained earnings account is adjusted at the end of each year to account for a company’s net income or loss. v.1. Taxes payable – a listing of all taxes due within one year or one accounting cycle. Note that the wages payable account is normally the result of an adjusting entry. Wages payable – a listing of all wages due to employees within one year or one accounting cycle. Shareholders’ Equity: Contributed Capital – this account contains any amounts which have been invested in the company by the company’s shareholders. Non-current liabilities: Long-term debt including bonds and notes payable – this account is a listing of all debt which the company has incurred which is not due within one year or one accounting cycle.1 Page 9 Intangible assets such as patents. Retained Earnings – this account represents the cumulative total of the net income of a company that has not been distributed to shareholders.XXX XXX . It is when the amount is due back to the lender that differentiates between current and non-current debt.

000 18. v.000) (8.000) $10.000) $10.000 (60. most companies tend to use some form of a multi-step statement. Either one is acceptable under GAAP.000 . It takes the reader from total Revenues to Net Income.000 (8.000 (60. 20x8 Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Income Interest Income Net Income before Taxes Income Tax Expense Net Income $100.000) 40.000 3. The single step statement lists all revenues and then all expenses without breaking out any further subtotals.000) (25.Introductory Financial Accounting.1 Page 10 The Income Statement The income statement is a statement that shows how a company performed during one period.000) 15. however.000 (25. and for the above company would look like the following: The Miller Company Income Statement For the Period ended December 31.000 The multi-step statement has multiple subtotals. the amount left over after all relevant expenses have been taken into account. For example: The Miller Company Income Statement For the Period ended December 31.000 3.1. 20x8 Sales Interest Income Cost of Goods Sold Operating Expenses Income Tax Expense Net Income $100. typically the fiscal year of the company. Income statements can take on one of two formats: single step and multi-step.

1 Page 11 The T-Account Named for its shape. Accounts Receivable Debit Credit The following represent how increases and decreases in accounts get recorded: Liabilities & Shareholders’ Equity Assets + Expenses - Revenues + + - - + . v.1. a T-account is a tool used by accountants to keep track of entries that are made to individual accounts. When an entry is made and an account is to be debited. Thus. which resembles a capital “T”. it is placed on the right hand sand. When a credit is made.Introductory Financial Accounting. for every entry the lefthand entry must equal the right-hand entry in order for the Accounting Equation to hold true. an entry is placed on the left-hand side of the T.

January 2. 20x7 through December 31.000. which covered the period of January 2. is located in the Meadowvale Mall. . 20x7 for $350. 20x8.000 was purchased on account. he has decided he is ready to go out on his own. Ian’s Incredible Instruments Inc.1.200 per month.$310. Ian’s Incredible Instruments. An outside storage facility has been rented to fill this need. The lessor required Ian to pay the first and last month’s rent on January 2. An insurance policy.000 common shares of the Corporation. 20x7.760 cash. 20x7. That is. January 2. More inventory was purchased on account June 1. his entire life savings. interest payments are due every 6 months. Opened for business in a local mall. He only rented the outside facility to the end of November.. and was able to give up his off-site storage facility. 20x7.Introductory Financial Accounting. Having proven himself a good tenant. 5. 8. (Record the payments made from March to November only. but is not large enough to store any extra inventory. The lease is in effect from January 2. Ian purchased furniture and fixtures for the store at an auction for $30. and was rented on a month-to-month basis. 20x7: 1. The mall location is suitable for Ian’s retail needs.000. The terms of the loan. Inc. Credit sales . Ian was able to convince his landlord at the mall to give him additional storage space (at no extra cost). He received 1.000 The company took out a loan for $200. the annual rate is 10%. 20x7. was purchased for $5. A total of $280. v.000 due on the first of each month. After years of planning and saving. which was taken out on June 1.1 Page 12 Comprehensive Example Ian has worked at a music store for the last 20 years.) Inventory of $120. 20x7 through December 31. 11. 3.000 of the accounts receivable were collected throughout the year. 10. Ian invested $175. 9. 20x7. 6. however. Rent is $1.) 2.000.000. Ian’s Incredible Instruments Inc. Ian signed a two-year lease with monthly rent of $8. 7. into the company upon incorporation. 4. Ian’s Incredible Instruments Inc. beginning February 1. are for 5 years. (Record the February rental payment only.’s Sales for the first year were as follows: Cash sales . 20x7.$430. He paid cash. The following transactions took place during the fiscal year ended December 31.000. with 10% annual interest due semiannually. 20x7.

This is what we call a prepaid expense.1 Page 13 12.Introductory Financial Accounting.000 3. the appropriate journal entries would look like this: 1.200 1. We know that the first month’s rent will be “used up” in this year. Additional cash disbursements for the year were as follows: Wages & salaries Rent Advertising Miscellaneous expenses Payments of accounts payable Interest on bank loan $165. Rent Expense Cash 1.000. The total cost of the inventory sold during the year was $300.000 $446.1. 175.000 8.000 10. For each of the above. the deposit for the last month won’t be used until 2 years from now.000 120. Prepaid Rent Rent Expense Cash 8.000 175. 14. However.000 To record the payment of first and last month’s rent on the lease. and therefore it is an expense in this fiscal period.000 16.000 (note that a dividend is debited against retained earnings). To record the rent paid on the outside storage facility in February for one month.000 . Ian declared and paid a dividend of $60.000 23. Inventory Accounts Payable 120.000 88. Cash Contributed Capital 2.000 13. To record the purchase of inventory on account. To record Ian’s initial investment into the company.200 4.000 40.000 120. v.

$1. they will get $200.1 Page 14 5.760 5.800. Cash Accounts Receivable Sales 430. Upon receiving the loan.000 280. Note that in reality. 20x7.000 9. (Remember. However. as they are no longer due to us. Furniture and Fixtures Cash 30.1.000 10.000 740. we must remove the receivable from our books. sales are recorded individually as they are made. they will have an outstanding loan for the same amount.000 310. the entire amount applies to the current fiscal year and therefore there is no prepaid portion.000 11. Note that because it expires December 31. we already recorded the initial payment in February). Note that as we collect the cash. Inventory Accounts Payable 350. To record the rental expense incurred from March through November. for the purposes of this example we will be entering them in one journal entry. We will deal with the interest expense incurred on the loan in a separate entry. Cash Bank Loan 200.000 7. the credit to the Accounts Receivable account. To record the collection of accounts receivable throughout the year. Rent Expense Cash 10.000 cash from the bank.Introductory Financial Accounting. Insurance Expense Cash 5.200/month x 9 months = $10. Hence.760 6. two things will happen to Ian’s Incredible Instruments Inc. First. To record the purchase of furniture and fixtures. Cash Accounts Receivable 280. To record purchase and payment of the insurance policy. To record the purchase of inventory on account.800 10.000 8. v.800 . second. To record sales for the first year. for which cash was paid.000 30.000 350.000 200.

000 23.000 14.000 Interest on bank loan .Introductory Financial Accounting.000 10.000 Wages & Salaries Expense Rent Expense Advertising Expense Miscellaneous Expenses Accounts Payable Interest Expense Cash 165.000 120. To record the various other cash disbursements made throughout the year. To remove the inventory which was sold from the inventory account and record the resulting Cost of Goods Sold expense.000 88.000/month = $88.000 13.000 300.000 .1. To record the dividend paid.000 40.1 Page 15 12. Note the following supporting calculations: Rent Expense – 11 months x $8.000 x (10% x year) = $10. v. Cost of Goods Sold Inventory 300.000 446. Retained Earnings Cash 60.$200.000 60.

v.000 4 9 Accounts Receivable 7 310.000 350.000 5 Insurance 5.000 7 Rent 2 3 11 12 8.800 446.000 350.000 12 Advertising Expense 40.000 1.000 10.000 30.1 Page 16 The recording of the above journal entries in T-Accounts would be as follows: Assets BALANCE SHEET Liabilities & Equity Cash 1 7 8 10 175.000 1 Retained Earnings 13 60.000 108. Expenses 12 23.1.000 1.000 280.000 Cost of Goods Sold 13 300.760 Wages & Salaries Expense 12 165.000 2 3 5 6 11 12 13 2 Prepaid Rent 8.000 10 Bank Loan 200.200 5.000 8 515.000 12 Interest Expense 10.000 13 6 Furniture & Fixtures 30.000 Misc.000 300.240 Inventory 4 9 120.200 10.000 120.000 Expenses INCOME STATEMENT Revenues Sales 740.000 170.000 Contributed Capital 175.000 60.Introductory Financial Accounting.000 200.000 12 Accounts Payable 120.000 .760 30.000 350.800 88.000 16.000 280.000 430.

000 200.000 30.000 40.000 740.000 8.1 Page 17 A trial balance of all of the closing balances of the above accounts would look like this: Ian’s Incredible Instruments Inc.000 5.1.000 175.240 30. v.000 10.000 108.000 23.000 $1.000 .000 170. 20x7 Cash Accounts Receivable Inventory Prepaid Rent Furniture and fixtures Accounts Payable Bank Loan Contributed Capital Retained earnings Sales Cost of Goods Sold Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Interest Expense Miscellaneous Expenses Debit $515.Introductory Financial Accounting.465.000 Credit $350. Trial Balance As at December 31.465.000 $1.000 300.760 165.000 60.

240 $740. all balances get returned to zero. would look like this: Ian’s Incredible Instruments Inc. v. Income Statement for the year ending December 31.Introductory Financial Accounting.000 440.000 108.000 300.760 165.000 5.000 23.000 88.000 $88.000 40.240 .1.000 108. At the end of the year. they are referred to as temporary accounts. and the offsetting amount is the net income (or loss) that gets recorded to retained earnings.240 10.000 23.000 10. As such.1 Page 18 A multi-step income statement for Ian’s Incredible Instruments Inc. 20x7 Sales Cost of Goods Sold Gross Profit Operating Expenses Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Miscellaneous Expenses Operating income Interest Expense Net income Closing Accounts All revenue and expense accounts are closed out to zero at the end of each fiscal period.000 40.000 300.760 165.000 5. The closing entry for Ian’s Incredible Instruments is as follows: Sales Cost of Goods Sold Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Interest Expense Miscellaneous Expenses Retained Earnings 740.000 341.760 98.

000 723. Statement of Financial Position as at December 31.240 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Long-term liabilities Bank loan Shareholders’ Equity Contributed Capital Retained earnings 200. v.000 175.000 28.000) $ 28. 20x7 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures $515.1.000 550. December 31. January 1.000 8.240 350.240 30. 20x7 Net income Dividends Retained Earnings.240 30. 20x7 Retained Earnings.1 Page 19 The Statement of Retained Earnings outlines the changes in the Retained Earnings account from the beginning of the year balance to the ending balance: Ian’s Incredible Instruments Inc.240 (60. Statement of Retained Earnings for the year ending December 31. 20x7 0 88.Introductory Financial Accounting.240 $753.000 170.000 $753.240 203.240 $ We can now prepare a Statement of Financial Position for Ian’s Incredible Instruments: Ian’s Incredible Instruments Inc.000 .

the receivable is removed.1 Page 20 Adjusting Entries Most adjusting entries can be classified in one of two ways: Prepayments – Cash is paid out or received before event occurs.1. we will Debit the liability and Credit cash to record the payment. plant & equipment Accrual – Event has occurred. Utilities Expense Revenues Unearned Revenue – Cash is received and a liabilitiy is recorded. Rent Revenue.Introductory Financial Accounting. an adjusting entry is made to remove the liability and record the revenue. Accured Expenses – When an expense has been incurred. Examples: Prepaid rent/insurance. but will not be paid in the current period. office supplies. Examples: Credit sales. Examples: Rent collected in advance. Interest Expense. Interest Receivable . Examples: Payroll. Expenses Prepaid Expenses – Cash is paid and an asset is recorded before it is used. As the liability is paid in future periods. Income taxes. performs the service or delivers the goods. The adjusting entry sets up an asset. deposits on orders. subscriptions collected in advance and gift certificates sold. Accrued Revenues – These entries are used then revenue has been earned. but cash has not been paid or received. As cash is received in payment in future periods.e. but not yet paid in cash. As the company earns the revenue. then both the liability and the expense are recorded in the amount relating to the current period. v. i. a receivable. and records the revenue. The asset will then be allocated to future periods using adjusting entries.

that will expire in 20x8. Therefore. 2. What would be the adjusting entry on December 31.Introductory Financial Accounting. 20x5 reveals that you have $5. During the year you purchased an additional $13.1. On January 1.000 The balance that remains in the prepaid insurance account of $7. 20x5? To answer this question. 20x5 you had $3.000 represents the portion of the insurance policy that is unexpired. 3. and what we have left at the end of the year. the missing credit or Supplies Expense has to be 11.200 ???? Supplies Expense As the T-Account shows.800 13. On August 1. and therefore should be an expense of the current period. i.000 of office supplies. solving the equation. assume that the company’s year-end is December 31. . 1. v. The missing piece to the puzzle is the amount of supplies that were used during the year. What would be the journal entry to record the purchase of the policy? What would be the adjusting journal entry at the end of the year? To record the purchase of the policy: Prepaid Insurance Cash 12. However.000 $ 5.200 of supplies on hand.200.000 does not equal 5. This means that 5 months have been used in the current period. we know our opening balance. A physical count of the supplies on December 31. it might be helpful to look at the T-Account for Office Supplies for the year: Supplies Inventory Opening Balance Purchases Ending Balance $ 3.800 in your office supplies inventory account. what was purchased during the year.000 5.e. 20x7 you pay $12. The adjusting entry would be: Insurance Expense Prepaid Insurance 5.000 12.800 + 13.600.000 for an insurance policy that will cover the next 12 months.000 At the end of the year you will have 7 months remaining on the policy.1 Page 21 Example In examples 1-5.

20x8.000 10. v. You own an apartment building and have a tenant whose parents have paid their rent for the entire year in advance. Therefore.000 on January 1. The apartment rents for $800/month.000 per year for the next 10 years.600 9. 20x8.1 Page 22 The adjusting entry on December 31.400. What would be your amortization expense and what would be the adjusting entry to record it? The cost of the furniture needs to be spread out over its entire useful life.000) $ 90. office furniture in this case. on the other hand. What is your adjusting entry? On May 1. you would have earned 8 of the 12 months of revenue. It is now December 31.600 As of December 31. The long-term asset section of the Statement of Financial Position would be as follows: Office Furniture Less accumulated amortization $100.e. 20x5 would be: Supplies Expense Office Supplies 3. we will take $10. will appear on the Statement of Financial Position as a reduction of the related asset account. 20x6. 11.000 Because the Accumulated Amortization account is applied as a reduction of the related asset account. or $10. we call it a contra account to the Office Furniture account. i. the revenue to be recorded for the year would be 8 months x $800/month = $6. Furthermore. It is now December 31. when you received the revenue. Each and every year. The Accumulated Amortization account. you would have recorded an entry of: Cash ($800 x 12) Unearned Rental Revenue 9. Therefore. 20x6.000 (10.1. 4.Introductory Financial Accounting.000 as an expense this year. instead of taking the full $100.000 per year for the life of the furniture.000 Note that the amortization expense account will appear on the income statement as an operating expense for the year. You received payment for the full year on May 1. there would still be 4 months of unearned .600 You purchase new office furniture for a cost of $100. 20x8.600 11. the adjusting journal entry would be: Amortization Expense Accumulated Amortization 10. You estimate that the furniture will last 10 years and have no salvage value at the end of its useful life.

000.000 x 4 days = $64. 3. Your average weekly payroll is $80. However. interest expense for 20x3 would be $8. and our employees work 5 days a week. The loan agreement states that interest will be charged at a rate of 8% annually.000 x 5/12 = $3. This reconciles to our calculation above.400 6. therefore.000 . v. the balance in the Unearned Rental Revenue account will be equal to $9. the loan has not been outstanding for the full 12 months.000. no cash has been paid for the interest expense.000.1 Page 23 revenue left.000 64. The balance in the Unearned Rental Revenue Account would have 4 months x $800/month = $3. 20x3. and interest and the principal will be due August 1. 20x3.000/week. and therefore.333 3. and furthermore. Our employees worked 4 days from the time of their last payday until the end of the year. The adjusting entry would be: Wages Expense Wages Payable 64.000. 20x4.1. your year-end. What is the adjusting entry? To calculate the adjusting entry. we can calculate that the annual interest on the loan will be equal to $100.200.600 – 6.333 You last paid your employees on March 27. It is March 31 (Friday).Introductory Financial Accounting. 20x6 (a Monday). The loan has been outstanding for 5 months.400 According to the journal entries above. how much do we owe to our employees for the 4 days that we haven’t paid them? If the average weekly payroll is $80. as of December 31. the accrued wages payable will be $16. only 5 months of interest pertain to the current period. then our daily payroll rate can be calculated as $80. What is your adjusting entry to record interest expense for the year? Looking at the terms of the loan. 20x3 you take out a loan for $100. 5.200. The adjusting entry would be: Interest Expense Interest Payable 6.333. The adjusting entry on December 31.000. It is December 31. we have to first figure out how much needs to be accrued. that is.400 = $3. 20x8 would be: Unearned Rental Revenue Rental Revenue 6.000 x 8% = $8.000/5 = $16. That is. On August 1.

For example. Just because you don’t pay cash for something does not mean that the expense wasn’t incurred.Introductory Financial Accounting. second. then the goods belong to the customer the minute they are loaded on the truck and revenue can be recognized immediately. a 5-year warranty is provided with the product. v. this can get complicated when say. • the revenue must be earned (all significant acts must be completed). • collectibility is reasonably assured. But.1 Page 24 Note that this adjusting entry does two things: First. In this case. and • all associated costs can be estimated.1. We MUST record all expenses relevant to the current period. then the amount of the discount gets debited to the Sales Discounts account. it gets onto our books the expense that we have incurred during the last 4 days of the period. we credit the Sales account. whenever the discount is taken. Revenue Recognition and the Matching Principle For a firm to recognize revenue. If the goods are shipped under the terms FOB Destination. assume that we make a sale of $1. In the case of a simple sale. it gets onto our books the liability that we owe to our employees. instead of debiting the sales account. whether we have paid for them or not. However. as we will see later. the revenue recognition point takes place when the transaction takes place. Sales and Sales Contra Accounts Whenever a sale is made. If the customer pays 1 FOB stands for ‘Free on Board’ . we debit an account called ‘sales returns’. the following transactions are related: • Sales Returns: whenever customers return merchandise for refund. then they belong to the customer only when they are delivered and therefore the revenue recognition point is when the goods are shipped. This allows the company to keep track of all sales returns separately from the original sale. this means that the cost of the goods sold become an expense the day the sale is made. The matching principle is related to the revenue recognition principle and states that all costs incurred to earn the revenue recognized must be recorded at the same time as the related revenues. the company must estimate the total warranty expense that will be expended on this product and accrue the full amount in the year of sale. For most sales.000 and we offer a discount of 2% if the invoice is paid within 10 days. • Sales Discounts: if early payment discounts are offered to customers. the following criteria must be met (with regards to the amount of revenue that is to be recognized): • the amount of revenue must be determinable. This can become an issue for goods that are in transit around the company’s year-end. If the goods are shipped to the customer under the terms FOB1 Shipping.

1. A credit is granted to the customer.500 is returned to the company Sales returns Accounts receivable 1.1 Page 25 • within 10 days. v. they will pay us $980.Introductory Financial Accounting. otherwise the full amount is payable in 30 days.500 .000. Sales Allowances are when merchandise is sold to a customer which is slightly defective.000 $40. n30. • merchandise is shipped FOB Shipping to a customer. The $20 discount will get debited to the Sales Discount account. Accounts receivable Sales • $40. a 2 % discount is offered if payment is made within 10 days. when reported on the income statements. that is. These three accounts are considered contra accounts to the Sales account and. The selling price is $40.500 1.000 merchandise whose sales price was $1. Sales Normal credit Balance Sales returns Merchandise returned Sales Discounts Early payment discounts Sales Allowances Customer keeps merchandise but is given a discount Example – Assume the following transactions. would be netted out against the Sales account. but the customer keeps the merchandise. Terms of payment are 2/10.

and • to provide information about the economic resources of a firm. or similar decisions. • to provide information to help in assessing cash flows. such as dividends. claims on those resources. interest. and so on. Sales Allowances Accounts Receivable 2. It would be impossible for financial statements to meet the needs of all users of financial statements. payment of $35.Introductory Financial Accounting. The conceptual framework plays a vital role in the development of new standards and in the revision of previously issued standards.280 720 36. These two groups are most likely to have the following primary needs: • forecast future cash flows: will the company have sufficient future cash flows to meet future interest. v. Cash Sales discounts Accounts receivable 35. These problems must be dealt with in an organized and consistent manner.500 2.500 is granted to the customer. credit. Users and their needs Financial accounting standard setters have narrowed down the users of financial information to two broad groups: creditors and shareholders (both present and potential). Accountants are continuously faced with new situations and business innovations that present accounting and reporting problems.000 The Conceptual Framework A strong theoretical foundation is essential if accounting practice is to keep pace with a changing business environment. This does not imply that there are no other users of financial statements. principal and dividend payments?. Consequently.500 • on the 9th day after the sale. and changes in those resources to help in assessing cash flows. . the objectives of financial reporting are as follows: • to provide information useful to present and potential users in making investment. A credit of $2.280 is received. and • what is the fallback position: does the company have sufficient assets to satisfy its liabilities? To summarize. loan repayments. since these needs could conflict.1 Page 26 • some of the merchandise was slightly damaged during before it was shipped.1. the focus of financial statements is to meet the needs of creditors and shareholders.

000 today. For example.Introductory Financial Accounting. the concept of relevance and reliability conflict. The $100 is an established transaction and is reliable. If a company purchased a parcel of land in 1856 for $100. Reliability wins in this case. To be relevant. For example.000 is far more relevant.1. One could argue that regardless of what you call this security. Verifiability implies that independent measures using the same measurement method should yield approximately the same result. • representational faithfulness – accounting information should portray the substance of transactions over their form. the representational faithfulness principle would argue that it meets all the characteristics of long-term debt and should be classified as such. accounting information should meet the following criteria: • predictive value – information should be useful in predicting future outcomes. Secondary qualitative characteristics – the following two characteristics (neutrality and comparability are qualified as secondary because they are desirable qualities of accounting information. Relevance implies that accounting information can make a difference when making a decision – the user of financial statements is better off having the information than not having it. . For example. the income statement is generally structured by segregating recurring items against non-recurring items. The rationale is that income from recurring items is a best predictor of future income. • feedback value – information presented today helps confirm previous decisions. that land is recorded on the company’s books at $100 regardless of the fact that it may well be worth $10. consider the application of the historical cost principle which states that assets should get recorded at their original cost. v. From a shareholders’ perspective the value of $10. the rationale for providing interim reporting to shareholders is in part based on the timeliness principle: it is better to provide information on a quarterly basis as opposed to waiting for the annual results. accounting information should meet the following criteria: • verifiability – accounting professionals. Reliability implies that the accounting information can be depended upon. For example.e.000.1 Page 27 Qualitative Characteristics of Accounting Information There are two primary qualitative characteristics of accounting information: relevance and reliability.000. At times. but are not as important as relevance and reliability. assume a company issues a new type of security called a ‘Special Preferred Share’ which has a limited life (i. • timeliness – information should be available to the users as quickly as possible. when establishing the validity of an accounting estimate should come to a consensus. This implies that the information provided should be useful to the users. To be reliable. gets refunded in a pre-specified number of years) and pays a fixed rate of interest.

Conservatism is an effort to ensure that the risk or uncertainty inherent in business situations is adequately considered. The principle of conservatism also leads to the recognition of contingent losses but does not recognize any contingent gains. Thus. information costs. Information benefits vs. For example. When introducing an accounting principle.e. we must estimate which accounts receivable are likely to become uncollectible in the future and establish an allowance for doubtful accounts. it may be .1. the financial statements of a company with net income of $10.Introductory Financial Accounting. but should be used as a way of thinking. The manager responsible for making the decision may have a bias to not replace the equipment so that the loss does not appear on the financial statements. Assume that existing equipment is technologically obsolete and a net present value analysis shows that if the equipment were to be replaced. For example. The principle of timeliness implies that the financial statements should be in the hands of users as soon as possible. Comparability implies that accounting information is comparable with previous periods (interperiod comparability or consistency) and comparable to other firms operating in the same industry (interfirm comparability). $100. the principle of conservatism implies that the one with the least favourable impact on net income should be the one chosen. Consistency implies that accounting principles are applied from period to period in the same manner. accounting policy makers should weigh the cost of implementing the accounting principle against the benefits that the implementation of such an accounting principle will provide users. when companies sell depreciable assets. Materiality implies that financial statements are not precise but are accurate enough that any potential errors of misstatements would not affect any user. When accountants can choose between two equally acceptable accounting principles. The concept of materiality can play against the concept of timeliness.000 would not be significantly affected if they were misstated by say.000. Modifying concepts Conservatism means that it is generally preferable that any possible errors be in the direction of understatement of net income.000. changes in accounting principles require retroactive adjustment and restatement of prior period financial statements. the project has a significantly positive net present value). the company would have to show a large loss on disposal. Also. a gain or loss arises when the proceeds on disposal differ from the net book value of the asset sold.1 Page 28 Freedom from bias (neutrality) – accounting information should be even-handed with respect to the impact of accounting information on users’ behaviour. For example. v. That’s not to say that accounting principles cannot be changed. Here is an example of an accounting rule that could lead to dysfunctional economic decision making. Accounting rules should not provide the motivation for dysfunctional decisions. but changes should occur infrequently and only for valid reasons. as we will see in Lesson 4. The only problem is that if the asset were to be disposed of. Cost/benefit analysis is very difficult to quantify since most costs and benefits are intangible. the company would benefit economically from it (i.

One of the basic assumptions when amortizing fixed assets over their useful lives is that the entity will be able to absorb future amortization charges. Periodicity assumes that we can breakup the life of a business in separate reporting periods (years. v. Other Principles Economic entity principle states that the financial statements of an entity should report all assets and liabilities under its control.i. quarters. Historical Cost Principle is an extension of the conservatism principle and states that assets should be recorded at their original cost and never be subsequently written-up to their market values. otherwise they would have to be recorded at the lower of their depreciable cost or liquidation value. This omission is justified on the basis of materiality. This is probably one of the most flawed principles. Monetary unit principle assumes that the value of the dollar does not change . a 1925 dollar is equivalent to a dollar today. months…) and report income and prepare a balance sheet for each of these periods. Going concern principle assumes that the entity will continue operating in the future.e.Introductory Financial Accounting. Consequently.1. Also refer to the definition of an asset (later in this section). This principle will be invoked when dealing with leases and intercorporate investments in later lessons. .1 Page 29 possible that additional invoices are received after the financial statements are issued. Revenue Recognition Principle states that revenues should only be recorded when earned. we can add assets together even if they were purchased in different years. the measurability of such revenues are reasonably certain and collectibility is reasonably assured. Matching principle assumes that when we record revenues. all associated expenses related to the recognition of these revenues are recorded also. This assumption allows us to record long-term assets at their depreciable cost.

provision of services or other yielding of economic benefits in the future.1 Page 30 Elements of Financial Statements The following definitions of the elements of financial statements are drawn from Section 1000 of the CICA Handbook. to provide services. and (c) the transaction or event giving rise to the entity's right to. it includes specific categories of items. either by way of inflows or enhancements of assets or reductions of liabilities. to contribute directly or indirectly to future net cash flows. thereby leaving it little or no discretion to avoid it. and (c) the transaction or event obligating the entity has already occurred. in the case of profit oriented enterprises. Liabilities have three essential characteristics: (a) they embody a duty or responsibility to others that entails settlement by future transfer or use of assets. Revenues are increases in economic resources. types of share capital. . singly or in combination with other assets. interest. in the case of not-for-profit organizations. the benefit has already occurred. the settlement of which may result in the transfer or use of assets. or on demand. for example. Revenues of entities normally arise from the sale of goods. on occurrence of a specified event. resulting from the ordinary activities of an entity. In addition. Assets are economic resources controlled by an entity as a result of past transactions or events and from which future economic benefits may be obtained. While equity of a profit oriented enterprise in total is a residual. (b) the duty or responsibility obligates the entity. either by way of outflows or reductions of assets or incurrences of liabilities. contributed surplus and retained earnings. Equity is the ownership interest in the assets of a profit oriented enterprise after deducting its liabilities. government grants and other contributions. the rendering of services or the use by others of entity resources yielding rent. Liabilities are obligations of an entity arising from past transactions or events.Introductory Financial Accounting. v. resulting from an entity's ordinary revenue generating or service delivery activities. provision of services or other yielding of economic benefits. Expenses are decreases in economic resources. many not-for-profit organizations receive a significant proportion of their revenues from donations. (b) the entity can control access to the benefit. and.1. or control of. Assets have three essential characteristics: (a) they embody a future benefit that involves a capacity. royalties or dividends. at a specified or determinable date.

events and circumstances affecting the entity except those that result from revenues or equity / net assets contributions. Losses are decreases in equity / net assets from peripheral or incidental transactions and events affecting an entity. v. and from all other transactions.1 Page 31 Gains are increases in equity / net assets from peripheral or incidental transactions and events affecting an entity. . events and circumstances affecting the entity except those that result from expenses or distributions of equity / net assets. and from all other transactions.1.Introductory Financial Accounting.

assumption or constraint is being applied in this situation? a) Full-disclosure principle b) Conservatism principle c) Matching principle d) Unit-of-measure assumption . v. assumption. assumption. or constraint was violated? a) Continuity assumption b) Matching principle c) Cost principle d) Time period assumption 3.Introductory Financial Accounting. What accounting principle.1 Page 32 Problems with Solutions Problem 1-1 Multiple Choice Questions 1.1. recently completed construction on a new 12-storey office building that will be used partly for its own head office and partly for renting to three other tenants. While making a delivery. Nimto Inc. He paid for the computer by writing a cheque on the company chequing account and charged the “Office Equipment” account. The party sued Fastrac for damages that could exceed Fastrac’s insurance coverage. Existence of the lawsuit was reported in the notes to Fastrac’s financial statements. even though the floor covering has an estimated useful life of 5 years. The cost of the floor covering for the company offices was expensed. What accounting principle. The proprietor of Front Street Drugs bought a computer for his personal use. the driver of Fastrac Courier collided with another vehicle causing both property damage and personal injury. or constraint was violated? a) Continuity assumption b) Matching principle c) Materiality constraint d) Separate entity assumption 2. What accounting principle.

20x9. there will be a balance of $25. The December 31.999 6.000 worth of inventory in the company’s December 31. 5. 20x5.039. 20x5.000 in the Prepaid insurance account on December 31. According to generally accepted accounting principles. after correcting for the inventory error? a) $ 40.1.999 d) $1.Introductory Financial Accounting. M. ABC Ltd. Shaw included a $200.000 personal residence as an asset on the balance sheet of his company. there will be a balance of $20. Total liabilities of $500. there will be a balance of $35. will be $5. 20x5. Harry.1 Page 33 4. v. What generally accepted accounting principle does this contradict? a) Time period principle b) Cost principle c) Going concern principle d) Business entity principle 7.000 in the Prepaid insurance account on December 31. which included this error.000. 20x8. Shaw’s Rent-all.000 c) $ 999. and Total shareholders’ equity of $499.000. c) Under cash basis accounting. Which of the following statements is true? a) Under cash basis accounting. What would be the balance for Total assets on December 31. 20x9. the Insurance expense for the period ending December 31. d) Under accrual accounting.000 in the Prepaid insurance account on December 31.000.999. 20x8.999. the bookkeeper for Ytwok. In the rush to make it to a New Year’s party. On July 1. ABC has a December 31 year end.000 b) $ 959. b) Under accrual accounting. failed to include $40. 20x8. financial statements. showed Total assets of $999. financial statements should be prepared using which of the following? a) Fair market values b) Historic costs c) Future values d) Replacement costs . inventory count. purchased a 4-year insurance policy and paid a premium of $40.

20x8. v.1. K.1 Page 34 8.Introductory Financial Accounting. What generally accepted accounting principle does this contradict? a) Time period principle b) Revenue recognition principle c) Objectivity principle d) Business entity principle . Smart presented land and buildings on her company’s balance sheet based on the appraised value of these assets at December 31.

000 of inventory was purchased on account.000 in return for shares in the company.. These are purchased for cash.e. 5. Furniture and fixtures are purchased at a cost of $15. v. An additional $120.000 every 4 months with the first payment due November 1. you decided to start up a new business – Heavenly Books Inc. 20x2 to October 31. You and several other shareholders invested $20. The loan agreement calls for repayments of $4. 20x2. .1 Page 35 Problem 1-2 On July 2. The lease agreement is for one year. an offcampus bookstore where students can purchase textbooks and supplies at reduced prices. 20x3.200 cash. 3. the company’s year end. 4. The policy takes effect on July 2. A suitable location is found and rent is $1. The following are summary transactions for the period July 2.$190. on June 30.000 A total of $4. Interest payments are due on the 1st of each month.$6. Sales for the period ended October 31. 9.1. 20x2.000 of the sales made on account were collected. 1.Introductory Financial Accounting. An insurance policy was purchased for $1. 2. 6.000 was purchased on account. The annual interest rate is 9%. 8.000 per month. The first and last month’s rent are due upon signing of the lease on July 2.000 Sales on account . an annual charge equal to 1% of sales is due at the end of the year (i. In addition to the monthly rent. 20x2.000 was obtained on August 1. A bank loan in the amount of $20. 7. 20x3). 20x2. 20x2 were: Cash sales . Books and supplies of $50. 20x2.000. 20x2 and expires on June 30.

1. Books costing $15. Credit Accrued Liabilities. 15. 16.800 The following adjustments at year end must be made: 11. c. 19. The adjustment for insurance expense. An inventory count shows that a total of $25. Adjustment for rent payable. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . Credit Accrued Liabilities. v. 17. Enter all the above transactions in T-Accounts. Required – a. 12. Additional cash disbursements for the year were as follows: Wages and salaries Rent Advertising Miscellaneous expenses Dividends to shareholders Interest on bank loan Payments on account re: purchases of inventory $36.000 3. Invoices received but not yet paid amount to $700 for miscellaneous expenses. Credit Accrued Liabilities. The straight line method is to be used. Credit Accrued Liabilities. b.500 10. 18.000 $182. The interest payable on the bank loan.Introductory Financial Accounting.000 1. The expected income tax rate is 30%.000 300 130.000 were returned to the publishers.000 2.000 of inventory is on hand. Employees are owed a total of $600. 13. 14. The furniture and fixtures are expected to last a total of 10 years with no salvage value.1 Page 36 10.

due December 31.000 84. 20x6: a.400 2.1.1 Page 37 Problem 1-3 On January 1.300 18.000 4. A statement of financial position. $ 7.100 3.600 4. A statement of retained earnings.000 1.500 .300 44.100 21. On December 31. Global Production.Introductory Financial Accounting.800 2..100 2.000 1.000 24.000 25. 20x6. v.500 157. b. A multi-step income statement.100 14. 20x6. c. the accounting records contained the following selected amounts: Accounts payable Accounts receivable Accumulated amortization – Office Equipment Bank loan.500 4.900 ? 40. Inc.000 invested by the owners as capital stock.600 2. was started with $50. 20x8 Cash Capital stock Cost of goods sold Amortization expense Dividends declared Interest expense Income tax expense Insurance expense Inventory Income taxes payable Office equipment Prepaid insurance Rent expense Salary expense Salaries payable Sales Sales returns Supplies Supplies expense Telephone expense Required – Prepare the following for the year ended/as at December 31.100 3.100 50.200 1.

What would the adjusting entry be? You pay weekly salaries to your staff and your accounting period end falls on a Wednesday. and you have provided your services Big Al’s Used Cars for the past month. A new customer purchases a subscription in January. Today is the end of the accounting period. You sell subscriptions to your magazine.000 on June 1st and again on December 1st for providing these services for one year. You have provided $2. you bought a piece of machinery for $50. Record the adjusting entry for amortization for the year. The contract. your year-end. Issues come out in March. which was signed June 1. Kittens Quarterly.300 worth of services. You signed the agreement and wrote the cheque on June 30th. stated that they would pay you $6.750. but you will not be billing Big Al until next month..1. a) On June 1. ahead of time. You are a consultant. It is now December 31. INC Inc. September and December. What adjusting entry must be recorded to account for the unpaid salaries? You paid $5. for their monthly staff meetings. It is now your year-end. $4. Your daily salary expense is $600. Your year-end is June 30th. The estimated useful life of the machine is 8 years.000 for your annual property insurance policy eight months ago. It is now April 30. prepare the appropriate adjusting entry. June.1 Page 38 Problem 1-4 For each of the following isolated situations. What is the appropriate adjusting entry? You have a contract to provide catering services for a local company. v. Part of your new lease agreement required you to pay your first month’s rent. First.000. What is the adjusting entry required if your year-end is December 31st? Your company is moving into a new office on July 1st. your year-end. What would be the entry to record this? What would be the entry you would make on July 31st to record rent for the month? b) c) d) e) f) g) .Introductory Financial Accounting. and then record the adjusting entry for the end of April. with no salvage value estimated at that time. record the journal entry to record the receipt of the subscription fee in January. on a yearly basis for the fee of $24/year.

August 31.000 b. Doby Company borrowed $3. 20x5 Cash Unearned subscription revenues $440 $440 . 20x5. The total interest of $300 is payable on the due date.1 Page 39 Problem 1-5 Below are four transactions that were completed during 20x5 by Doby Company. 20x6. The $440 collection was recorded as follows: Oct 1. On September 1. 20x5 a tenant renting some office space from Doby Company had not paid the rent of $500 for December.000 cash and gave a oneyear. Coverage of the insurance policy starts on July 1. Doby Company paid for a two-year insurance premium for a policy on its equipment. The subscription start on October 1.1. The annual accounting period ends on December 31. The note was recorded as follows: Sep 1. On October 1. 20x5 Prepaid Insurance Cash $1. On December 31.000 $3. You are to provide the 20x5 adjusting entries required for Doby Company. 10 percent. 20x5. This transaction was recorded as follows: Jul 1. 20x5. d. 20x5. On July 1. the company collected $440 for subscriptions two years in advance. Assume Doby Company publishes a monthly magazine. 20x5. note payable. Each transaction will require an adjusting entry at December 31. v.000 $1. 20x5.000 c.Introductory Financial Accounting. 20x5 Cash Note payable $3. a.

What is total shareholders’ equity after this transaction? On April 3. 7.Introductory Financial Accounting. What are the total assets of Wild Corporation immediately after it has been formed and the shares sold? 2.000 cash. Wild Corporation is formed on April 1. What are the total assets of Wild Corporation after this transaction? 5. 20x6. 10. The company used the perpetual inventory method. ensure your answer reflects the cumulative impact of all prior parts. What is total shareholders’ equity after this transaction? On April 5. What are the total assets of Wild Corporation after this transaction? 8. 20x6. What are the total liabilities of Wild Corporation after this transaction? 9. Wild Corporation sells 200 units of inventory for $50 per unit. What are the total liabilities of Wild Corporation at this point? 3.1 Page 40 Problem 1-6 For the next set of questions. Wild Corporation purchases 1.000 units of inventory for $20 per unit. 1. 20x6. What is total shareholders’ equity at this point? On April 2. What are the total liabilities of Wild Corporation after this transaction? 12. The customer pays cash.1. What is total shareholders’ equity after this transaction? (CGA Canada Adapted) . Assume Wild Corporation uses a Perpetual Inventory System. 20x6. Initial financing comes from the sale of 100. The purchase is made “on account” with the company agreeing to pay for the goods within 30 days. What are the total assets of Wild Corporation after this transaction? 11. v. 4.000 common shares at $10 per share cash. What are the total liabilities of Wild Corporation after this transaction? 6. Wild Corporation purchases a warehouse for $300.

What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x6? 3.Introductory Financial Accounting.000. Purchased for $500 cash an insurance policy for the following year. (CGA Canada Heavily Adapted) . What is the subscription revenue to be earned in 20x8 for which the subscription fee had been received in 20x7? (CGA Canada) Problem 1-8 Identify the net effect of independent transactions (1) through (7) on assets.1. Purchased new equipment by obtaining a $200.000 Entries during 20x7 Required – 1. and no change by NC. 6. 20x7 128. 6% interest note in exchange for extending the due date on a receivable. 7. Received $2. 4. 7% note payable from the seller. Show increases by a plus. decreases by a minus. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x7? 4. Received a $50. v. Received from Smith a $10. What was the subscription revenue earned during 20x7? 2. 5.000 90-day. Interest accrued on note receivable was $1. 2.000 Entries during 20x7 80.000 1-year. shareholders’ equity and net income. Interest accrued on the note payable was $1. The company requires that customers pay the annual subscription fee for the magazine in advance. 3.000 from a customer for an outstanding invoice.400.1 Page 41 Problem 1-7 The following information was extracted from You Read Magazines Co. liabilities.000 120.000 cash injection from one of the owners of the company. General Ledger Account Subscriptions Received in Advance Dr Cr Balance January1. Example: Shareholders’ Equity -500 Net Income -500 Assets Interest accrued on notes payable was $500 NC Liabilities +500 Required – 1.

At the end of 20x6.000 40. 2. At the end of 20x6 and 20x7. calculate Sales. Ronald found the following: 1. Purchases.000 16. He was perplexed that the profit margin had improved in spite of his intuition to the contrary. 6. the proprietor of Error Margin was excited to learn about profit margin analysis and immediately applied his knowledge to evaluate his business.000 $21.66% 20x7 $70. v. 2. Cash’s personal expenses. Cash’s analysis.1 Page 42 Problem 1-9 Mr.000 which was a deposit on goods that were to be purchased in 20x7.000 30% On examination.000 10.000 had not yet been received. Cash paid for purchases in 20x6 included an amount of $2. 5. Cost of goods sold.000 35.000 and $5.000 was received in 20x7 and was included in cash received for sales in 20x7. An amount of $5. 3. 4. (CGA Canada) .000. Net income and Profit margin for 20x6 and 20x7.000 received in 20x6 pertained to a sale made in 20x5.000 14. The $20. accounts receivable for sales made to customers totaling $20. Based on the above. respectively. there were goods in inventory costing $3. Identify any two generally accepted accounting principles that were violated in Mr.000 of Mr.1. He asked his friend Ronald to have a look at his analysis as follows: 20x6 Cash received for sales Cash paid for purchases Other Expenses Net income Profit margin $60. Cash. using the accrual method of accounting.000 $10. Other expenses in 20x7 included $1. Required 1. There was no money due from customers at the end of 20x7.Introductory Financial Accounting.

in parking lots at select locations in major urban areas. . v. It normally takes about 15 years for a tree to grow to a suitable size. pruning and maintaining the trees be accounted for? Explain. The largest cost of this business is the cost of fertilizing. operates a tree farming business.1. and harvests evergreen trees. Use the criteria for revenue recognition to explain when revenue should be recognized for this tree farming business.1 Page 43 Problem 1-10 Evergreen Inc. It sells the trees for cash. pruning and maintaining the trees over the 15-year period. b. maintains. Required a. It plants.Introductory Financial Accounting. How should the annual cost of fertilizing. primarily during the Christmas season.

paying $1. V.000 in cash and agreeing to pay the balance in six months. 3 Dec. Performed a count of office supplies.000 cash. the following transactions were completed during December 20x6. Prepare journal entries for the above transactions What is operating income for V.Introductory Financial Accounting. Required – a. Purchased the office furniture and equipment of a retiring architect for $4. 31 Issued 100 common shares of the new company. 7 Dec. 1 Dec. Purchased office supplies on credit for $300. 31 Dec.000. 31 Dec. Strait in exchange for $6. Completed work for a client and immediately collected $680 in cash for the work done. for the month ending December 31. Strait opened an architecture company.1 Page 44 Problem 1-11 V. Completed work for JP Developers and sent them an invoice for $1. 13.300 cash to the office secretary for December’s wages.1. 13 Dec. Paid $1. v. Dec. Strait Ltd. 17 Dec. Strait Ltd.875. b.875 from JP Developers for the work completed on Dec.000 for rental of office space for December rent. 28 Dec. Paid $1. to V. Received $1.. which revealed that $200 of the $300 worth of office supplies purchased on December 17 were still on hand. 20x6? (CGA Canada Adapted) .

Prepare an income statement. Total sales were $900. e. $189. 20x2 for Ruiz Pharmacy: a. The merchandise inventory as at December 31. 20x2. which were all paid in cash. The notes receivables are from a major supplier of vitamins. Required 1. v. . r. For the interest on the note receivable. 20x5. statement of retained earnings and balance sheet for 20x2. For insurance. 20x2 was $240. $74. Merchandise inventory purchased on account was $520. 20x2. 20x2: n. To Revenue Canada for income taxes. k. b.1 Page 45 Problem 1-12 The following summarized transactions (in thousands of dollars) occurred during the year ended December 31. $36. $15 Total income tax expense for 20x2 is $20. Post all of the above transactions in T-Accounts. The principal on the current notes was collected on May 1. The rate is 12% per annum. For miscellaneous expenses such as store rents. 20x2. o. To trade creditors. $19. The principal on the remaining notes is payable on May 1.depreciation expense for 20x2 was $30. d. m. Interest for twelve months on all notes was collected on May 1. l. q. utilities and supplies. 20x2. f. j. of which 80% were on credit. The board of directors declared cash dividends of $26 on December 15 to be paid on January 21. c. For new equipment acquired on July 1. To the insurance company for a new three-year fire insurance policy effective September 1. For depreciation . The following adjustments were made on December 31. Cash disbursements were: g. h. 2. $500.1.Introductory Financial Accounting. To employees for wages. $193. December 31. Collections from credit customers were $700. p. computed as 40% of pretax income of $50. i. Wages earned but unpaid. advertising.

Peter supplies appliances to retail customers as well as to builders of the many new homes and apartments that are going up in the community. Sales during the year were $1. 20x4 Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures Accumulated amortization $ 30. 3. Peter's Appliances Shop Ltd. The following information has been obtained about the fiscal year just ended: 1.000 260. At year end the accountant estimates that Peter owes an additional $12.500 by Peter. v.000 $763. 20x4.500 100.000 during the year from customers who purchased on credit. 20x5.000 123. 6. Cash sales were $775. the company's year end. Peter has been in business for five years. employees were owed $7. 4.1 Page 46 Problem 1-13 Peter is the owner and operator of Peter's Appliance Shop Ltd. 5. 2.000.000 190.000 in taxes.000. Peter uses the financial statements mainly for tax purposes and to show the holders of the long-term notes. Peter needs to prepare its financial statements for the year ended August 31.000 20. Balance Sheet As at August 31. mainly to builders.000.000. Peter’s balance sheet for August 31. Peter collected $375. . 20x5.000 8. During fiscal 20x5 Peter paid $15.000 446. is shown below.000 -40.500 14. 7.. The remainder was on account. Peter paid suppliers $600.1. The cost of the appliances sold during fiscal 20x5 was $745. During the year Peter paid the taxes it owed at the end of fiscal 20x4. Ottkancester’s largest independent household appliance store.000 $763.000. All purchases were made on account.000 for appliances it purchased on credit.350.Introductory Financial Accounting. Peter purchased appliances from suppliers for $850. Peter paid salaries and commissions to employees of $200.500 It is now mid-September 20x5.000 110.000 in installments on its taxes. On August 31.500 Liabilities and shareholders' equity Accounts payable Taxes payable Interest payable Long-term notes payable Capital stock Retained earnings $265.

1 Page 47 8. Peter recently redecorated his kitchen at home. In addition to the interest payment. The prepaid rent at the beginning of the year represented 4 months of prepaid rent at the old location. 12.000 in cash for other expenses related to operating the business in fiscal 20x5.Introductory Financial Accounting. for the year ended August 31. These deposits were not included as part of cash sales. and microwave that cost $4.000 cash. He took a refrigerator. . Required – Prepare an income statement. 20x5 Peter paid $3. Peter must pay 2% of annual sales to the property owner 60 days after the year end.000 on September 1. treat this as a dividend. During the year Peter paid $8. The terms of the lease require that rent be paid six months in advance on January 1 and July 1 of each year. 20x4 to reduce the balance owed on the long-term notes. Amortization expense for 20x5 is $22. Peter paid $225. In addition.500 in interest to the holders of the long-term notes. The interest rate on the notes is 8. stove. 14. For accounting purposes.500 a month in rent. 10. Before July 1.000 a month for the rent of its store. During 20x5 Peter purchased new capital assets (furniture and fixtures) for $25. Peter paid $20. Interest is paid annually on September 1. a statement of retained earnings and a balance sheet and a statement of cash flow for Peter's Appliance Shop Ltd. v. Beginning July 1.500 from the store and installed them in his new kitchen. 20x5 Peter pays $4.000. 9. Peter accepted $10. 13. 20x5. 11. The deposits pertained to a particularly hard-to-get appliance.5%.000 in deposits from customers who wanted a guarantee that their appliances would be delivered when they needed them.1. Peter expects that the appliances will be delivered in early November 20x5.

and Prepare a list of deposits that were made in the cash account but were not yet recorded on the bank statement (outstanding deposits). 2. etc. It starts with the opening bank balance and ends with the ending balance. Ensure that all cheques returned correspond to the amount entered into the cash account.1. The bank statement is a running total of all transactions that were made in the account since the last bank statement was produced. petty cash and any foreign currency on hand. Cash Cash and Investments For accounting purposes. bank accounts. Prepare journal entries to record these items and post to the general ledger. Accompanying the bank statement are all the cheques that have cleared the bank account. every 30 days a company will receive a bank statement from the bank.1 Page 48 2. 5. The bank reconciliation starts with the balance per the bank statement.Introductory Financial Accounting. The balance showing on the bank statement needs to be reconciled to the balance shown in the company’s cash account. cheques deposited that are returned due to insufficient funds (NSF cheques). v. adds the outstanding deposits and deducts the outstanding cheques to arrive at the balance per books: Balance per bank statement Add outstanding deposits Less outstanding cheques Balance per books $XXX XXX -XXX $XXX . This process is as follows: 1. Compare all deposits recorded on the bank statement to those recorded in the cash account. Prepare a list of cheques that were written but that have not yet cleared the bank account (outstanding cheques). cash generally means any cash on hand. bank service charges. Identify any transactions that appear on the bank statement that have not been recorded in the cash account.. Typically. 4. For example. 3.

Introductory Financial Accounting. v. 20x7 shows the following: • ending balance of $45. we prepare the bank reconciliation: Cash per bank.1.644 $156 $156 788 788 9 9 Finally.579 (before any adjustments above) The first thing we do is make adjustments to the cash account for items on the bank statement that have not yet been recorded: Bank service charges Cash To record the bank service charges for the month of August.579 (156) (788) 9 $42.673 • bank service charges not yet recorded by the company of $156 • returned cheque (NSF) from a customer in the amount of $788 • cheque # 345 was written for $323 and cleared the back for that amount. August 31. The cheque was incorrectly written in the cash disbursement journal as $332.574) $42.644 .545 (6. The correct amount is $323. 20x7 Add outstanding deposits Less outstanding cheques Cash per books. 20x7 $45.1 Page 49 Example – The Parkes Company’s bank statement dated Aug 31. The next step will be to calculate the revised cash balance: Cash balance. before adjustments Less bank service charges Less NSF Cheque Add error on cheque # 345 Cash balance after adjustments $43.673 3.574 • a deposit made on August 31 in the amount of $3. Cash ($332 – 323) Accounts payable To record the error in recording cheque # 345. • the total outstanding cheques amount to $6. Accounts receivable Cash To record the returned cheque. August 31.545 was not recorded on the bank statement • the general ledger cash account shows a balance of $43.

are charged to Net Income. An available for sale investment occurs whenever companies invests in equity securities that are not classified as held for trading and are not strategic investments. Other Comprehensive Income becomes part of Shareholders' Equity. Available for sale investments also occur whenever debt securities are acquired with the intent of liquidating them before their maturity.1 Page 50 Non Strategic Investments Investments in the shares of another corporation can broadly be classified as non-strategic or strategic investments. otherwise they are classified as long-term assets. • available for sale investments: any unrealized gains or losses are charged to Other Comprehensive Income. Held for trading investments are acquired or incurred principally for the purpose of selling or repurchasing it in the near term and are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking. • . whether realized or unrealized. strategic investments are classified as long-term investments. and balance sheet valuation is the same: interest accrued or dividends declared are recorded as investment income. The classification of available for sale investments as current or long-term assets depends on management intent.1. Where the two methods differ is on how the adjustment to fair market value is recorded. trading investments: all gains. If management intends to hold these for a period of less than one year. By their very nature. consist of passive investments in the shares of another company. operational or financial policies. They would normally be classified as current assets. They are therefore specifically held for purposes of resale and are designated by management as such.Introductory Financial Accounting. the investments are carried at fair market value. For both types of investments. there is no difference in the accounting for these investments. they are classified as current assets. at the balance sheet date. Any realized gains or losses are charged to Net Income. Strategic investments occur when we take a significant equity position in another company and are in a position to either control the other company or significantly influence its strategic. Non-strategic investments. the accounting for investment income. Regardless of how they are classified. These investments will either be classified as held for trading or available for sale securities. v. the subject of this chapter.

000.500 1.500 1. then the following journal entries would have been recorded: Jun 30.1 Page 51 Example . $15. 20x5 Dec 31. The investment is classified as an available for sale investment.000 600 600 1.000 600 600 1. At December 31. 20x5 you purchase the shares of another company for $15.500 1.000 $15. the fair market value of the shares is $16. 20x5 (the balance sheet date).500 $16. 20x5 we receive a dividend cheque for these shares in the amount of $600. 20x5 At December 31. v. 20x6 Cash Unrealized holding gain Gain on sale of investments Available for Sale Investments XXXX XXXX $1. 20x5. 20x5 Dec 31.000 $15.Introductory Financial Accounting. On February 12. 20x5 Held for Trading Investments Cash Cash Investment income Held for Trading Investments Unrealized trading gain Note: the difference is that the unrealized trading gain is part of net income and gets closed out to retained earnings.900 1. On October 15.900. you sell the investment for $16.500 If the investment has been classified as a trading investment. 20x5 Available for Sale Investments Cash Cash Investment income Available for Sale Investments Unrealized holding gain $15. the unrealized gain will be part of Other Comprehensive Income and will be part of Shareholders' Equity: Shareholders Equity: Common Shares Retained Earnings Other Comprehensive Income Unrealized holding gains Feb 12.500.500 Oct 15. 20x5 .500 Oct 15. 20x6.1.on June 30. The following journal entries will be recorded with regards to this investment: Jun 30.900 $16.

Introductory Financial Accounting.1 Page 52 Feb 12.500 . v.900 400 $16.1. 20x6 Cash Realized trading gain Temporary Investments $16.

An analysis of the cash account for Swiss Company at December 31. and it was deposited on May 18. 20x8? a) $15.Introductory Financial Accounting.095 d) $31. The May bank statement listed the deposit at $512.1 Page 53 Problems with Solution Problem 2-1 1.595 . v. on hand but not yet deposited Swiss Company cheques that have not cleared the bank account $15.095 b) $21. a company received a cheque from a customer in payment of the related account receivable.200 What amount should be reported as cash in the current asset section of Swiss Company’s balance sheet at December 31. 20x8. During May.1. The cheque was written for the correct amount of $152.595 c) $25.700 3. How should this error be corrected on the May bank reconciliation? a) Add $360 to the bank balance b) Add $360 to the book balance c) Subtract $360 from the bank balance d) Subtract $360 from the book balance 2. 20x8 revealed the following details: Balance in bank account Customer cheques dated December 31.095 9.

December 1 Cash received during December Cash payments made during December Cash balance per bank statement.288 c) $4.’s bookkeeper. Prepare any adjusting journal entries that would result from the December 2006 bank reconciliation.300 5.548 6. December 31 Bank service charges for December Deposits in transit at December 31 Cheque issued by Sparg Ltd.1 Page 54 3.700 77. The ending balance on the May bank statement is shown as $4.312 d) $4.1. with respect to cash activities.000 77. deducted from Sarg’s account in error by the bank A $1.327 $15 48 63 34 Problem 2-2 The following information for the month of December 20x6.Introductory Financial Accounting. the following information was provided by company records and the monthly bank statement: Bank service charges shown on the bank statement NSF cheques from customers shown on the bank statement Deposits in transit at the end of the month determined by the company’s bookkeeper A cheque for $43 (the correct amount) written by the company was recorded in the books at What is the correct cash balance shown on the bank reconciliation? a) $4.200 cheque received from a customer on December 13 in payment of an account receivable was incorrectly recorded as Required a. A company is preparing its May bank reconciliation.300 52 1. Prepare the December 20x6 bank reconciliation for Sarg.020 .700 580 1. v. Cash balance per books. December 31 Cheques outstanding. $ 3.225. was gathered by Sarg Ltd.279 b) $4. b. At the end of the month.

b) The March 31. deposit of $6. c) Bank service charges for December amounted to $35 and had not yet been recorded by Focus Ltd. v. bank statement for Focus Ltd. for the cash purchase of office equipment. in the amount of $620.200 had not been received by the bank in time to be included in the December bank statement. as $350. Required – 1. Prepare the necessary journal entry(ies) to bring Focus Ltd. In preparing the bank reconciliation.1. Prepare a bank reconciliation for Focus Ltd. at March 31.915. showed a balance of $480. 20x7. 2. 20x7. f) The balance in Focus Ltd. 20x7: #501 for $780 and #533 for $1. d) Cheque #521 issued by Focus Ltd.’s cash account according to its accounting records was $4. e) A $530 payment on account received from a customer was incorrectly recorded in the books of Focus Ltd.’s cash account up to date at March 31.Introductory Financial Accounting.200. 20x7. (CGA Canada) . 20x7. had been incorrectly recorded in the books of Focus Ltd. as $260.1 Page 55 Problem 2-3 The March 31. the following information was determined: a) The following cheques are outstanding at March 31.

000.000 30.'s temporary investments at December 31. Holdco Ltd. is shown below: Temporary Investments Company Name XYZ Computer Satellite Systems Strategic Air Defence Systems Generic Engineering Cellulose Telephone Cost Number of Shares Market Value as at December 31. The data on Holdco Ltd.000 10.000 28. Assuming these investments are classified as held for sale investments.Introductory Financial Accounting.000 45. Support your answers with calculations. . Management is quite unfamiliar with these different methods and has approached you for this information. b) On January 10.000 26.000 63.000 5. advise management of two alternative methods of accounting for temporary investments and indicate the effect each has on balance sheet and income statement information.000 51.1. all the XYZ Computer shares are sold for $75.000 Recent discussions have brought to management's attention that there are different methods of accounting for temporary investments.000 $ 70.000 51. v. write the journal entries to record the two sales.000 31.000. Required a) As chief accountant for Holdco. decided to invest in the shares of a number of "Hi-tech" companies.000 20. 20x1. 20x0 $ 72.000 9.1 Page 56 Problem 2-4 During 20x0. 20x0.000 $226.000 7.000 $234. and all the Strategic Air Defence Systems shares are sold for $35.000 44.

1.000 32. calculate the balance in Other Comprehensive Income at the end of each year.500 Required a) b) Assuming these investments are classified as available for sale. .000 10.000 $57.000 14.000 28.500 29. v.Introductory Financial Accounting.300 20x1 $19.000 20x2 $16. Assuming these investments are classified as trading investments.1 Page 57 Problem 2-5 Mable Company has a portfolio of temporary investments consisting of the following (all investments were purchased in 20x0): December 31 Market Value Cost Security A B C $20.500 14. calculate the amount of unrealized trading gain or loss for each year.500 31.800 $60.000 12.500 $62.000 $66.000 20x0 $18.

Introductory Financial Accounting. the aggregate of the unpaid invoices at any point in time. the company estimates that 1% of current accounts will eventually become uncollectible. therefore. The net realizable value is equal to: Gross Accounts Receivable Less Allowance for Doubtful Accounts Calculating the Allowance for Doubtful Accounts The allowance for doubtful accounts normally has a credit balance and is equal to the amount of accounts receivable that are expected to not be collected.500 .000 120. whereby we estimate the amount of bad debt expense on the income statement.1 Page 58 3.000 $1. which is equal to the net amount of outstanding invoices the firm expects to recover.000 50. There are two approaches to calculating the allowance for doubtful accounts: the balance sheet approach.000 x 40% $ 7.500 8. Accounts receivable are.000 x 1% 280.400 9. v. 8% of accounts between 61-90 days and 40% of accounts over 90 days. Aging of the accounts receivable listing This involves grouping all outstanding receivables based on how long these have been outstanding. Accounts receivable are reported on the statement of financial position at their net realizable value (NRV).000 280.000 Based on past experience.1. Accounts Receivable Whenever credit is extended to customers for the provision of goods or services. and the income statement approach.000 $45. where the allowance for doubtful accounts is estimated directly. The allowance for doubtful accounts at the end of the year will be: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750. an account receivable is created.600 20. 3% of accounts between 31-60 days. For example.000 and that the aging of accounts receivable is as follows: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750.000 x 8% 50. There are generally three approaches to estimating the allowance for doubtful accounts directly (balance sheet approach): 1.000 x 3% 120. assume the total receivables add up to $1.200.200.

Note that this approach does not estimate the allowance for doubtful accounts. Accounts Receivable Cr. v. then the allowance for doubtful accounts at the end of the year will be $1. Allowance for Doubtful Accounts Recording accounts written off An account will generally be written off when (1) you receive a notice from a Trustee in Bankruptcy that you will receive an amount that is less than the amount owed. if the ending accounts receivable balance is $1. Allowance for Doubtful Accounts . so we estimate the bad debt expense as a percentage of credit sales.000 x 5% = $60.Introductory Financial Accounting. 3.e.200. we first reverse the journal entry made to write off the account: Dr.000 and the company estimates that 5% of these accounts will eventually become uncollectible. In this case. Bad Debt Expense Cr. Accounts Receivable Recording recoveries of accounts written off When an account that was previously written off is subsequently recovered. it may be able to identify which specific accounts may become uncollectible.000. but estimates the amount of bad debt expense. Any accounts written off are written off against the allowance for doubtful accounts: Dr. it would not be meaningful to age the accounts receivable listing. As a percentage of the ending accounts receivable balance This approach simply takes then ending accounts receivable balance and multiplies it by a percentage. a department store which offers their customers a credit card). The journal entry to record bad debt expense under either the balance sheet or income statement approaches is: Dr. Specific account identification When a company has accounts receivable from a limited number of customers and has an intimate knowledge of these customers. The income statement approach is used whenever a company offers their customers revolving credit facilities (i. For example. or (2) the amount is small and the cost of recovering the account is greater than the balance owed.200. Allowance for Doubtful Accounts Cr.1 Page 59 2. The sum of the estimated uncollectible accounts at any point in time will form the allowance for doubtful accounts.1.

000 10.1 Page 60 We then record the collection on the recovered accounts receivable: Dr.000 $10.000 The journal entry to record the recovery will first be to reverse the entry initially made when these accounts were written off: Accounts receivable Allowance for doubtful accounts $10.000 debit balance in the Allowance for Doubtful Accounts: Allowance for Doubtful Accounts Write-offs $75. Cash Cr.000 $75. Accounts Receivable Example – The Jasmine Company’s accounts receivable at the end of the year totaled $2. the following transactions took place: • • accounts totaling $75. previously written off accounts totaling $10. The balance in the allowance for doubtful accounts at the beginning of the year was $50.000. The journal entry to record the accounts written off will be: Allowance for doubtful accounts Accounts receivable $75.000 were recovered.000.000 We then record the cash receipt on the accounts receivable: Cash Accounts Receivable $10.000 were written off.800.000 Beginning Bal Recoveries Ending balance before adjustment .000 $50.Introductory Financial Accounting. During the year.000 This will result in a $15.000 $10.1. v.000 $15.

The allowance for doubtful account should be established at $2.000 x 2. $94.000 $83.000 3.5%) + (600.000 600.75% of the accounts receivable balance will be uncollectible.000 150.000 .0%) = $79.5%) + (250. Using specific identification of accounts.500 $94.500 The bad debt expense will be $94. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $83.800.0%) + (150.000 x 1.000 x 15. v.1 Page 61 In order to calculate the bad debt expense for the year. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $92.75% = $77.800.000.000 x 6.500: Bad Debt Expense Allowance for Doubtful Accounts 2.800.000 x 2.000. management estimates that the allowance for doubtful accounts should be $68.0% Management estimates that 2.000 $2.000 The allowance for doubtful accounts is estimated to be: (1.5% 2.1.0% 15.500 since this is the entry required in the Allowance for Doubtful Accounts account to bring the account to a credit balance of $79.Introductory Financial Accounting.000 250.800. The accounts receivable aging is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days 1.500 Estimated % Uncollectible 1.5% 6.000 $92. we will assume four independent scenarios: 1.

we are effectively estimating the bad debt expense for the year and the residual becomes the Allowance for Doubtful Accounts.000.000 cr. v.Introductory Financial Accounting.000 dr.000. = $75. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $90.5% of total credit sales.000. Note that when using this approach.1. In approaches 1-3. . Total credit sales for the year amounted to $6.000 $90.000 x 1. we were estimating the Allowance for Doubtful Accounts with the residual being bad debt expense.000 This will cause the allowance for doubtful accounts to have a credit balance of $15.000. + $90. Management estimates that bad debt expense will be equal to 1.000.1 Page 62 4. Bad debt expense will then be equal to $6.5% = $90.

A company estimated the needed balance in its account “allowance for doubtful accounts” by aging the accounts receivable.000) 400. 20x8 a) $4. During 20x9. the balance of the allowance account was $5. the aging schedule indicated that the balance of the allowance account should be $6. 20x8 (credit) Total credit sales during 20x8 Total collections on accounts receivable during 20x8 Uncollectible accounts written off during 20x8 $80. January 1. the company wrote off $500 and collected a $300 receivable that had been previously written off as uncollectible.900 c) $6.800 . At the end of 20x9.400.1.600 b) $1.000 e) $13.1 Page 63 Problems with Solutions Problem 3-1 – Multiple Choice Questions 1. At the end of 20x8.000 (11. v.000.000 20.000 360.000 b) $4. 20x8 Allowance for doubtful accounts balance.000 d) $13.Introductory Financial Accounting.600 d) $6. January 1.000 Experience indicates that 4% of the uncollected accounts receivable at the end of each year ultimately will be uncollectible. A company reported the following items for 20x8: Accounts receivable balance.800 c) $7. What should be the adjusting entry amount for doubtful accounts at December 31.900 2. What is bad debt expense for 20x9? a) $1.

000 1.000 800. A company had accounts receivable of $3.975 $2. $ 15.000 and an allowance for doubtful accounts of $125.000 dr.000 After $2.1. January 1.000 $3.000 55. 2004 Required – a. 2004 Allowance for doubtful accounts.1 Page 64 3. assuming the allowance method is used and management estimates the allowance to be 3% of the closing Accounts Receivable balance.000.000.875 $2. . 2004 adjusting journal entry to record bad debts.000 14.900.875 $2. Provide the December 31. b. January 1. c. What were the net realizable values of the accounts receivable as shown by the accounting records before and after the write-off? Before $2.000 11. v. Provide the December 31. for the year ended December 31. 2004: Total sales Cash sales Credit sales Cash collections from credit customers Actual accounts receivable determined to be uncollectible and written off during the year Recoveries of previously written off accounts receivable Accounts receivable. just prior to writing off as uncollectible an account receivable of $30.200. Provide the journal entry to write off actual accounts receivable determined to be uncollectible and recoveries. 63. assuming the allowance method is used to account for uncollectible accounts.Introductory Financial Accounting.000 cr.875 $3. assuming the allowance method is used and uncollectible accounts are estimated to be of 1% of credit sales.095 a) b) c) d) Problem 3-2 The following information relates to Merit Ltd.970 $3. 2004 adjusting journal entry to record bad debts.000 3.

000 20x0 $2.000 16.915.000 2.000 - 277.000 234.000 45. 20x1 and 20x0: 20x1 Credit Sales Collections (excluding recoveries) Accounts written off Recovery of accounts previously written off Days Past Invoice at December 31 0 – 30 31 – 60 61 – 90 Over 90 Required – Prepare all journal entries to record the above transactions $3.000 2.000 7.000 90.000 .000 27. The Sigma Company calculates its allowance for doubtful accounts by aging the accounts receivable based on the following percentages: Days Past Invoice Date 0 – 30 31 – 60 61 – 90 Over 90 Percent Estimated To be Uncollectible 1% 5% 20% 80% The following additional information relates to the years ended December 31.000 25. 20x0.000.Introductory Financial Accounting.000 60.1.400.000 15.1 Page 65 Problem 3-3 Sigma Company began operations on January 1. v.800.000 80.

20x6 there was a $2. 4. Sold merchandise on credit for $500. (CGA Canada adapted) 2. required at December 31. Wrote off uncollectible accounts receivable in the amount of $1. The company uses the allowance method of accounting for bad debt expense.1. began operations on January 1. EED Ltd. On December 1. 20x7. Received cash of $400. With all other data being the same from above. required at December 31. to record bad debt expense for the year and accrue interest on the promissory note.500. Prepare journal entries to record the above transactions on the books of EED Ltd.1 Page 66 Problem 3-4 EED Ltd.000 debit balance in the accounts receivable account. if any. Based on industry averages and its experience in 20x6. 20x7 to record bad debt expense for the year. During 20x7 the following summarized transactions occurred: 1. an accounts receivable in the amount of $3. The promissory note bears an interest rate of 12%. 20x6. prepare journal entries. prepare the journal entries. In addition. Required 1.000 was converted to a 6-month promissory note to allow a cash-strapped customer some time to meet his obligations. 3. 2. Suppose now that instead.000 credit balance in the allowance for doubtful accounts account and a $40. 20x7.000 in payment of outstanding accounts receivable. expects 2% of credit sales to be uncollectable. . EED Ltd. On December 31.Introductory Financial Accounting. v.000. decided that an allowance equal to 5% of total accounts receivable would be sufficient to cover uncollectible accounts. if any.

Furthermore. each time an item is sold is removed directly from the inventory account by crediting the inventory account and debiting the Cost of Goods Sold account. or never ending.Introductory Financial Accounting.000 worth of inventory to a customer for $6.000 10.1. Inventory Accounts Payable 10. When we talk about a perpetual inventory system.000 of inventory. We still increase the inventory account by the amount of the purchase. On the first day. Example: It is Little Company’s first year of business. we mean an inventory system that has no interruptions. we just create a payable instead of reducing our cash account. Each item that is purchased for resale gets debited to the inventory account. Note that unless a company is offering a discount to get rid of inventory or for some other reason. Little Company purchases an additional $10. as well as valuing the items that it has on hand to resell at any point in time.000 The next day. Little Company makes its first big sale. v. this time on account. paying cash.1 Page 67 4. . and any adjustments that are needed will be made to the inventory account. The Perpetual Inventory System The term perpetual means continuing without interruptions. a physical count of inventory will be taken to ensure accuracy of the perpetual records.000 cash. We will begin by looking at two fundamentally different types of systems. the amount the company generally receives from its customer should always be greater than the value of the inventory.000 5. and then evaluate the different valuation methods a company can chose to determine the cost of inventory.000 worth of inventory. After two weeks of business. The journal entry would be: Inventory Cash 5. They sell $4. is the inventory system that it chooses. the effect on the inventory account is the same as the above journal entry. Inventory A key part of determining the cost of the items that a company sells to its customers. Little Company purchases $5. From time to time.000 Note that even though we are not paying cash. What that means is that inventory is tracked constantly in a real-time basis.

000 worth of inventory from our Inventory Asset account. These are: . This varies significantly from the Periodic Inventory System. we do not keep a “running total” of inventory.Introductory Financial Accounting. the journal entry would be: Cost of Goods Sold Inventory 4.000 This journal entry does two very important things. Under the Perpetual system the COGS is a running total. it records the expense of the items that were sold. as: Purchases Cash 5. we do a physical count of inventory at the end of the year to determine the amount to include on the Statement of Financial Position under “Inventory”. that first purchase of inventory for $5. However. This expense account. v. To do this.000 6. which we will now turn our attention to. under a periodic inventory system. Second. however. as is the inventory account. So what do we do with the purchases of inventory we make throughout the year? Throughout the year.1.1 Page 68 To record the sale. The Periodic Inventory System Under the Periodic Inventory System. we have recorded the sale and the receipt of cash. First. nor do we keep a running total of COGS.000 The Purchases account keeps a running total for the year of all purchases of inventory made.000 4. Cost of Goods Sold (COGS). Continuing with the example above. is used to keep track of all of the costs of all of the items a company sells in one period. Instead. the journal entry would be: Cash Sales Revenue 6. as purchases are made of inventory they are tracked in a temporary account called “Purchases”. we have not removed the items that were sold from our inventory account.000 5. it removes the $4.000 cash would be recorded. Purchases has several contra accounts that track other expenses or discounts that may be associated with the purchases.000 At this point.

1. Purchases of $5. To calculated COGS: . the inventory account is adjusted to the appropriate ending balance.1 Page 69 Purchases Normal debit balance Transportation – In Freight charges Purchase Discounts Early payment discounts Purchase Returns Merchandise returned Purchase Allowances We keep merchandise but are given a credit Running totals are kept in each of the above accounts for the year.000 worth of inventory on hand.000 10.000 Let us suppose that those were the only purchases made during the year.000 and $10. At the end of the year. The amount needed to balance the equation is the Cost of Goods Sold.000 10.000 5. the opening inventory was $0. At the same time. If you remember. the Purchase account and all contra accounts are closed out to zero.Introductory Financial Accounting. The new journal entries would be: Purchases Cash Purchases Accounts Payable 5. as this is a new business. and that at the end of the year a physical count of the inventory revealed that there was $11. v.000 were made. based on the physical count. The Cost of Goods Sold Equation is as follows: Beginning Inventory + Purchases (net of contra accounts) = Cost of Goods Available for Sale Ending Inventory = Cost of Goods Sold Example 1 – Let us use the Little Company example from above.

000 – 48.000 2.000. Furthermore.836.000 we must increase it (or debit it) by $185.000 Example 2 – Tetrie Company shows the following balances at the end of the year: Dr.1. Therefore.000 185.000) = Cost of Goods Available for Sale .000 $4.000 27.000 Cr.000 Tetrie uses a periodic inventory system.000 36.Introductory Financial Accounting.000 + 36.700.000) $2.000 = $185. in order to get the balance in the inventory account to $360.1 Page 70 Beginning Inventory + Purchases ($5. They are ready for the next fiscal year. The journal entry to record Cost of Goods sold at the end of the year would be as follows: Cost of Goods Sold (calculate to balance) Purchase returns and allowances (close account) Purchase discounts (close account) Inventory ($360.000.000 and it should be.661.476.000 2.476. the Purchases account and all of the associated contra accounts have been set back to $0.000 – 27.000 11.000 + 10.700.000 2. $175.000.000 (360. Cost of goods sold can be independently calculated as follows: Beginning Inventory + Purchases (2.000 36.000 48. A year-end count reveals that the ending inventory balance should be $360.Ending Inventory (as per count) = Cost of Goods Sold $175. v.000 would be the ending inventory balance from last year.Ending Inventory (as per count) = Cost of Goods Sold $ 0 15.000 increase) Purchases (close account) Transportation-in (close account) 2.700.000 .000) . $360. according to our count.000 – 175. The balance is sitting at $175.000 27.000 2.000 Note that the Inventory balance given of $175. Inventory Purchases Transportation-in Purchase returns and allowances Purchase discounts 48.

that is at what cost do we record the inventory and COGS. That is. .Introductory Financial Accounting. FIFO Under the FIFO method. In this case. when the item is sold. the ending inventory is equal to the most recent purchases. That is to say. like a car dealership. both the COGS and the ending inventory cost will be the same under the FIFO valuation method. Under this method we can make one of two assumptions: that the first inventory that arrived is the first inventory that was sold (FIFO Method). we don’t know specifically which items are being sold so we use an average of some sort to determine cost. We will now discuss how we attach value to the inventory. Note that regardless if a company is using a periodic or perpetual system. Conversely. we assume that the “First In = First Out”. Cost-Flow Assumption This method is used when items cannot be differentiated from one another. v.1. perpetual inventory systems dealt with how we track the inventory and purchases that flow through a company. it is possible to track each item in inventory separately. or when the value of the items is so small that it does not warrant the cost of tracking the specific item value. Specific Item Valuation This method is used when inventory items can be specifically identified. that inventory is mixed all together and.1 Page 71 Inventory Valuation Methods The above discussion of periodic vs. or when a company has relatively few items in inventory that have a specific cost associated with them. the COGS is equal to the opening inventory + earlier purchases. we remove its specific cost from inventory and debit COGS at the carrying amount. like a jeweler. There are two different valuation methods that can be used to calculate the value of inventory: specific item valuation or cost flow assumption. Some examples of situations where this method would be possible are: when items have specific serial numbers. therefore.

10 each Sold 200 units Under the FIFO periodic method.140 Jan 19 Jan 25 300 600 400 375 705 455 Note that the ending inventory result under FIFO is the same under both the periodic and perpetual methods.25 1.070 1. the ending inventory is calculated as follows: Purchases (Sales) Date Jan 1 Jan 3 Jan 5 Jan 10 Units 200 400 (400) (200) (100) 300 (200) Unit Cost Total Cost $1. Throughout the period. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.1.10 = $330 January 5 purchase = 100 units x $1. This is not a coincidence – both approaches always provide the same result.000 $400 640 1.00 each. Under FIFO.20 1. we know that we sold a total of 700 + 200 = 900 units.1 Page 72 Example – On January 1. They purchased these units for $1. using the cost of goods sold equation: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.470 (455) $1.25 $240 500 (400) (240) (125) 330 (250) Balance Units Total Cost 400 600 1. we sold .25 each Sold 700 units Purchased 300 units @ $1. we first calculate the number of units in ending inventory = 400 units and then look at the most recent purchases in order to cost out the ending inventory: January 19 purchase = 300 units x $1.25 1.00 1.20 1.015 Secondly. Cost of goods sold can be calculated in two ways. First.10 1. Lainey Company has 400 units in its opening inventory. v.Introductory Financial Accounting.20 each Purchased 400 units @ $1.25 = $125 Total value of ending inventory = $330 + 125 = $455 Using the FIFO perpetual method.

that is. Using this method. Throughout the period.25 each Sold 700 units Purchased 300 units @ $1.00 = 200 units @ $1. the total sum of the year’s activities are taken into account at the end of the year to make the determination of the value of inventory. you will remember that we do an inventory count once a year to determine the ending inventory balance.Introductory Financial Accounting.015 Weighted-Average Method There are two versions of this method.20 = 300 units @ $1. We then close out the purchase account and the associated contra accounts to determine what the COGS is. one is used when you have a periodic system. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.00 each. we calculate the average cost of inventory as follows: . Opening Inventory January 3 purchase January 5 purchase COGS 400 units @ $1. the unit cost of inventory items is determined using the following formula: Unit Cost = Cost of Goods Available for Sale/Units Available for Sale Example – On January 1.1. and one is used when you have a perpetual system. The annual weighted-average for periodic systems uses a similar methodology. v.25 = 900units $ 400 $ 240 $ 375 $1. They purchased these units for $1.1 Page 73 the units in opening inventory plus the first of the purchases we made through the year. Annual Weighted-Average – Periodic Systems Under a periodic system.20 each Purchased 400 units @ $1.10 each Sold 200 units Under the annual Weighted Average method. Lainey Company has 400 units in its opening inventory. So COGS would be calculated as the cost of the first 900 units.

300 units = $1. As such. we are keeping a running total in the inventory account.13077/unit Ending Inventory = # units in inventory x unit cost = 400 units x $1.13077/unit = $452 COGS = # units sold x unit cost = 900 units x $1.13077/unit = $1.018 Moving Weighted-Average – Perpetual Systems You will remember that under a perpetual inventory system. the average unit cost is recalculated every time a purchase is made.25 each) January 19 Purchase (300 units @ $1. whatever the unit cost is at the time of a sale.00 each) January 3 Purchase (200 units @ $1. Subsequently.1. v.1 Page 74 Cost of Goods Available for Sale Opening Inventory (400 units @ $1. Under this system.20 each) January 5 Purchase (400 units @ $1. .10 each) $ $400 240 500 330 $1. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1. when we make a purchase we debit the inventory account for the amount of the purchase.300 Average unit cost = Cost of Goods Available for Sale/Units Available for Sale = $1. Unit Cost = Cost of all goods on hand/number of units on hand. that is the unit cost after the last purchase previous to the sale. then that is the unit cost used to determine the COGS for that sale.018 Alternatively.Introductory Financial Accounting.070 1.470/1.470 Units 400 200 400 300 1.470 (452) $1. The moving weighted-average system of inventory valuation takes this into account.

v. Unit Cost = Cost of all goods on hand/number of units on hand.1 Page 75 Example – On January 1.14000 1.12000 Unit Cost = $640 / 600 Unit Cost = $1.20 each Purchased 400 units @ $1.066671 640 2 1.10 each Sold 200 units Remember.022 Alternatively. They purchased these units for $1.000 3 Unit Cost = $672 / 600 Cost of goods sold is equal to the cost of goods sold for the two sales: $798 + 224 = $1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.12000 672 448 Units 200 400 (700) 300 (200) Unit Cost $1.25 each Sold 700 units Purchased 300 units @ $1.140 / 1.470 (448) $1. Throughout the period.Introductory Financial Accounting.00000 $400 1.00 each.20000 1.070 1. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.1.022 .25000 1. Purchases (Sales) Date Jan 1 Jan 3 Jan 5 Jan 10 Jan 19 Jan 25 1 2 Balance Total Cost $240 500 (798) 330 (224) Units 400 600 1.000 300 600 400 Unit Cost Total Cost $1.10000 1. under this system we recalculate the unit cost each and every time we make a purchase. Lainey Company has 400 units in its opening inventory.140 342 3 1.14000 1.

000. If. the analysis reveals that no allowance is required.000 At present.1 Page 76 Application of Lower of Cost or Market Rule At the balance sheet date a company must compare the aggregate cost of its inventory to its aggregate market value.000 – ($40. Show the journal entry to record the proper carrying value of the inventory. v. First of all. If the market value is less than cost. We do this by creating a contra account to inventory called ‘Allowance for decrease in value of inventory’.000 14. This account operates much like the Allowance for doubtful accounts in that it gets adjusted to the desired balance at year end.000. the accountant determines that they could sell this inventory for $40.000. The net inventory balance that will be reported on the statement of financial position is $50. Furthermore. Market value is defined as the net realizable value of the inventory – the sales price of the inventory item less any costs incurred to sell it. we must determine that the inventory’s net realizable value.000 – 14.1. the credit will be to income. . then the inventory must be written down to market value.000 = $36.000 to bring it to a zero balance. the inventory account has a balance of $50. This rule ensures that companies will not overstate their inventory balances by keeping on record at cost inventory which may have decreased in value in the marketplace. next year.000 Note that the Inventory Loss account will appear on the Income Statement and be registered as a loss for the company in this period.000 X 10%) = $40. At the balance sheet date. The net realizable value of this inventory is: = Selling Price – Commission = $40. then the allowance will be debited by $14.Introductory Financial Accounting.000 = $36.000 – 4. Example –VenTure Ltd. Inventory Loss Allowance for decrease in value of inventory 14.000. commissions of 10% would have to be paid to the sales team on any sale of this inventory. is showing an ending inventory balance of $50.

000 860.000 $1.200. but we did have the Gross Profit Ratio.000 x (1 – 25%) = $1.000 350.000 100% 60% 40% In the above example.000 Purchases .000 Ending Inventory = $310. the Gross Profit Ratio = 40%.000 If Sales are $1. v.000 25% . You are given the following information: Sales to the date of the fire Opening inventory Purchases to the date of the fire Gross Profit Ratio The estimated cost of goods sold = $1.000.000. we could estimate COGS by using the following formula: Gross Profit = Sales x Gross Profit Ratio = $1.000 The estimated ending inventory is: $350. If we did not have the COGS number.000 x 40% = $400. we must first understand how to calculate the Gross Profit %. for whatever reason. then we can estimate COGS as follows: COGS = Sales x (1 – gross profit ratio = $1.000.000 Example – The Gennissen Company’s inventory were destroyed by a fire and you need to estimate the ending inventory.000 600. To understand the application of this method.200.000 x (1 – 40%) = $1.000 x 60% = $600.000.000 and Gross Profit is $400.000 400.000 x 75% = $900.000. Example – Assume the following: Sales Cost of Goods Sold Gross Profit 1.900.200.000 Opening Inventory + 860.000.Introductory Financial Accounting.1.1 Page 77 Gross Profit Method The Gross Profit Method of inventory valuation is used to estimate inventory when other data is not available to use one of the previous methods discussed.

b) Inventory is understated by $6.1 Page 78 Problems with Solutions Problem 4-1 – Multiple Choice Questions 1.000 c) $515. After completing its inventory count and making the appropriate adjusting journal entries. a) Liabilities would be overstated by $200.000 to suppliers and incurred $25.000 in shipping charges on merchandise purchased during the period.400.000. 20x4. Which of the following statements is true with respect to the impact of this error on the December 31. During the year the company purchased $500.000. financial statements. On January 1.000. Fri. . In addition. A year-end inventory count revealed merchandise on hand in the amount of $66. discovered that a $6. d) Shareholders’ equity is overstated by $6.000.000. Owl Enterprises had merchandise inventory on hand amounting to $60.000 worth of inventory and took advantage of purchase discounts amounting to $6.Introductory Financial Accounting.000 d) $523. c) Shareholders’ equity is understated by $6.000 b) $503. b) Assets would be understated by $200.000.000. financial statements of Confu Ltd.000.000 2. the company returned merchandise costing $10.600. v. Ltd.000.000.000 instead of the correct balance of $1. What was cost of goods sold for the year ending December 31. 20x8. 20x8? a) $478.000 computer purchased for the chief financial officer on December 27 had been recorded incorrectly as an inventory purchase. Which of the following statements correctly describes the effect of incorrectly recording the computer purchase on the financial statements? a) Inventory is overstated by $6. 20x4. The December 31. included an adding error in the inventory count that resulted in ending inventory of $1.1. c) Cost of goods sold would be understated by $200. 3.000. d) Owners’ equity would be understated by $200.000.

Sales totaled $80. a shoe wholesaler. FOB destination.000.000. n/30. One customer returned goods with a sales value of $500 and was issued a credit note. .200. Merchandise was purchased at a cost of $50.000. e.000 for the goods and uses the periodic method to account for its inventory. 20x8. d) Revenues for 20x8 are understated by $57.000.000 during the month with terms 1/10. shipped goods to a customer on December 30. CIF destination. n/45. 20x9. e. The customer received the goods on January 6. Transportation out paid on delivery of goods sold during the month equaled $1.Introductory Financial Accounting. e.1. b) Income for 20x9 is overstated by $42. Cozy sets the selling price on its shoes so that the cost of sales is equal to 70% of the selling price. The selling price of the goods was $57. Czech Ltd. All other sales made during the month were collected in the month with all customers taking advantage of the sales discount offered.1 Page 79 4. All of the merchandise purchased during the month was paid for with Cozy taking advantage of the purchase discount offered. for the month of July 2006.. The company uses a perpetual inventory system. The sale was recorded by Czech on January 2. 20x9.000. e.000. all of which were made on credit with terms 2/10. e. Czech had paid $42. FOB Shipping. Problem 4-2 The following summarized transactions relate to Cozy Co. Which of the following statements with respect to this transaction is true? a) Income for 20x8 is understated by $42. v. c) Income for 20x9 is understated by $15. Required – Prepare the journal entries required to record the above events and transactions.

Problem 4-4 The following information concerns one of a company’s products.00 = $ 300 60 @ $11.000 2. v. first-out (FIFO) cost flow method is used.500 Date May 1 May 5 May 14 May 21 May 29 Totals Sales Beginning inventory Purchase Sale Purchase Sale 20 @ $20.1 Page 80 Problem 4-3 Anvil Rock Company had the following inventory and purchases for the month of May.00 = 420 50 @ $22. assuming a firstin. assuming a weighted-average cost flow method is used. Calculate the cost of ending inventory for May.00 = $ 400 Anvil Rock uses a perpetual inventory system. assuming a FIFO cost flow system is used. the Hawkeye: Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Required – Calculate the value of the ending inventory assuming the company uses: (a) (b) periodic FIFO perpetual moving average Transaction Beginning Inventory Purchase Sale Purchase Sale Quantity 1.000 Price/Cost $12 18 30 23 33 .000 2. Prepare the journal entries to record the May 29 sale on account.500 3.00 = 1.1.000 2. c. b.50 = 690 35 @ $12.Introductory Financial Accounting.100 125 $ 1. Calculate the cost of ending inventory for May. Required – a. Beginning Inventory/ Purchases 30 @ $10.410 70 $ 1.

20x8 Purchases (all on credit) during 20x8 Purchase returns Payments to suppliers for purchases Customs and duty on purchases Sales (all on credit) at retail price Sales returns at retail price Cash collected from accounts receivable $150. under each of the following assumptions: a. Fortunately.000 units at $50 each 1.000 30. 20x5 1. After a very successful ski season and just as it was about to commence shipping its hiking equipment for the upcoming season.000 15. 20x5. v.000 units at $58 each $50.000 8.1.000 580. 20x5 June 15. Costs are assigned to inventory and cost of goods sold on a weighted average basis.000 units at $52 each 1. (Banff) sells skiing and hiking equipment to retailers.000 615. The store had an excellent Christmas season with the result that only 70 MP3 players were left in inventory on December 31. the Music Store had 400 MP3 players in inventory with a cost of $48 per unit. Corporate records disclose the following: Inventory — January 1.1 Page 81 Problem 4-5 On January 1. 20x5. 20x5 October 15.000 480. (CGA Canada) Problem 4-6 Banff Mountain Equipment Ltd.Introductory Financial Accounting. the company’s insurance policy will cover 80% of the loss suffered in this fire. The loss is to be determined based on the cost of the inventory in accordance with generally accepted accounting principles.000 Due to competitive pressures. During 20x5 the company made the following purchases of MP3 players: February 21. Banff lost all of its hiking equipment in a fire in March 20x8. Required – Assuming the company uses a periodic inventory system. calculate gross profit for the year ending December 31. the company was unable to pass on price increases to customers and thus maintained a selling price of $100 per unit throughout the year.000 440.000 58.000 Banff normally realizes a gross profit of 30% on its sales. Costs are assigned to inventory and cost of goods sold on a FIFO basis. b. . It accounts for its inventory using a periodic inventory system.000 52. 20x5.

20x7 20 units @ $900 each 440 units @ $950 each 200 units @ $1. (CGA Adapted) Problem 4-7 During June 20x8. 20x7. n/60.000 of merchandise on account with credit terms of 2/10. 20x7.050 each During the year. The cost of the merchandise inventory sold was $15. v.000. inventory for 20x7: Beginning inventory. performed the following transactions. The company uses a periodic inventory system. 20x7 Purchases — June 7.1 Page 82 Required – Calculate the net loss from the fire. Saret purchased merchandise inventory costing $42. The supplier provided purchase credit terms of 1/15. Required 1. June 2 June 9 June 12 The company uses a perpetual inventory system. The cost of the merchandise inventory returned was $5. Whinr returned $10. inventory value using the FIFO inventory pricing method.1. Calculate December 31.000. n/30. 3. Show your calculations. $30.100 per unit. January 1. Calculate the cost of goods available for sale. taking advantage of the sales discount. Show all your calculations. Whinr paid the balance due on the June 1 sale. Required – Prepare journal entries for the above transactions. Calculate December 31. 20x7 Purchases — February 20.Introductory Financial Accounting. Ending inventory consisted of 60 units. Show all your calculations. the company sold 600 units at an average price of $2.000 on account. Saret Ltd. inventory value using the Weighted Average . Problem 4-8 The following information relates to Mejewel Ltd. 2. June 1 Sold Whinr Ltd.000 of the merchandise inventory claiming it did not meet its needs.

000 in cash for freight charges on merchandise purchased during the month. b. i) ii) Purchased merchandise on account from Hirwin Toys for $80. The president has asked you to explain the benefits of taking advantage of purchase discounts because it often results in the company paying for merchandise before it has been sold. The payment of $48. Prepare journal entries for each of the above summarized transactions. iii) iv) Required a. which was paid within the discount period of 3/15. you have made it a policy to ensure that all purchase discounts are taken advantage of. (CGA Canada) c. Briefly explain the benefits. assuming merchandise inventory on December 1.500 represented payment of a $50. Show all your calculations.Introductory Financial Accounting. Toyjoy had not yet paid for the merchandise. 20x7.500. amounted to $150.000.000 under credit terms of 3/15. Toyjoy paid $3.000 credit purchase. n30. for the month of December 20x7. revealed merchandise inventory on hand of $30. The company uses the periodic inventory method and the gross method of recording purchases. 20x7. n30. . which has a negative impact on the company’s cash flow. Received a $1. amounted to $48.200 credit memorandum from a supplier on defective merchandise Toyjoy had purchased and returned. As the new controller.000 and a count of inventory on December 31.1 Page 83 inventory pricing method. v. Prepare a schedule of the cost of goods sold section of the income statement. Cash payments on merchandise purchased from Patel Inc. FOB shipping point.1. (CGA Canada adapted) Problem 4-9 The following is a summary of selected transactions for Toyjoy Ltd.

000. 20x6 Ending Inventory. There were no errors in the December 31.000 worth of goods which were in an off-site storage location.1 Page 84 Problem 4-10 The following is a list of inventory errors which occurred in 20x6. v. i) A company failed to include in its December 31. and included in the year end inventory count. 20x6 inventory count. 20x6. None of the errors were explicitly discovered or corrected in 20x6 or 20x7 (some of the errors would automatically be corrected if normal accounting procedures were followed in 20x7). ii) iii) Required For each error. indicate the dollar amount of the overstatement (O) or understatement (U) in 20x6 Cost of Goods Sold. for use by the sales manager was incorrectly accounted for as an inventory purchase. There were no errors in the December 31. Assume the companies involved used a periodic inventory system and treat each situation independently. goods costing $5. 20x6 Retained Earnings. inventory count $10. 20x7. then state so. a company received. Use the following format in answering this question.1.000 computer purchased on December 28. If the error has no effect (NE). Error 20x6 Cost of Goods Sold 20x6 Ending Inventory 20x6 Retained 20x7 Cost of Earnings Goods Sold (CGA Canada) . A $6. The company failed to record the purchase of these goods until January 15. 20x7 inventory count. and for 20x7 Cost of Goods Sold. 20x6.Introductory Financial Accounting. On December 28. 20x6.

1 (at $24) Purchase No. Weighted-average. 20x7 Inventory stored at another location. Assume that the transactions occurred in the order given. FIFO. FIFO. v. perpetual system c. 20x7. calculate the total dollar amount for ending inventory and cost of goods sold. the accounting records were kept in a separate location and the company was able to reconstruct the following information: Inventory at January 1. perpetual inventory system .Introductory Financial Accounting. (CGA Canada) $100. 1 Sale No.000 $ 5.1.40 9. a.000 $ 60. at January 13.000 5.000 $ 10.00 Units Beginning inventory Purchase No.1 Page 85 Problem 4-11 On January 13.000 6. 20x7 Sales from January 1 to January 13 Purchases from January 1 to January 13 Gross profit percentage on sales Required – Calculate the cost of inventory destroyed by the fire. periodic inventory system d.500 For each assumption given.000 40% Problem 4-12 The records of Egypt Company showed the following data relative to one of the major items being sold. Moving weighted average. Unit Cost $7. the Bamboo Brush store was destroyed in a fire.000 7. Luckily.95 8.500 8. 2 Sale No. periodic inventory system b. 2 (at $26) Required 6.

2. how do we account for these expenditures. and 4. v. furniture and fixtures and intangible assets. • buildings.000 450.000 $500. When a long-term asset is acquired.000 375. namely land. and • intangible assets such as patents. the cost of acquiring these assets needs to be allocated based on the relative fair market value of the assets acquired. buildings.e. the shares or the long-term debt of another company). The essential accounting issues in accounting for long-term assets can be summarized as follows: 1.000 respectively. These generally comprise of: • land.Introductory Financial Accounting. How do we account for the disposal of long-term assets. The acquisition cost would be allocated to land and building as follows: Individual Fair Market Value per Appraisal Land Building $150. Long-term Assets Long-term assets generally comprise of any assets that will be converted to cash or used up in the business for periods exceeding one year. copyrights and trademarks. land and building). We will only focus on the accounting for those long-term assets that are not investments in financial instruments. equipment and furniture and fixtures.000 % 25% 75% Allocation of Purchase Price $125. assume that you pay $500.000 for land and a building. When on-going expenditures are made in order to keep the asset in operable condition.000 and $450.000 $600. If you pay one price to acquire a group of assets (i.000 . • long-term investments in financial instruments (i. what constitutes the cost of this asset. An independent appraisal of the land and building are $150. but are not limited to.1.1 Page 86 5. Cost of Long-Term Assets The cost of a long-term asset is generally equal to all costs incurred in order to put the asset into productive use. the acquisition cost of asset. How do we allocate the cost of long-term assets over the periods these long-term assets are put to use in the business.e. equipment. For example. any costs of transportation to get the asset to its location and any installation costs. These include. 3.

would generally be considered to be repairs and would be expensed. or iv. iii. Straight-line method. v. ii.000 $500. Accounting for the use of Long-Term Assets (Amortization of Long-Term Assets) Long-term assets provide the ability of the company to generate future revenues. the useful life of the asset is extended.1. in which case the expenditure should be expensed to the income statement.1 Page 87 The journal entry to record this transaction would be as follows: Land Building Cash $125. or whether the expenditure is a betterment of the asset and therefore needs to be capitalized to the cost of the asset on the Statement of Financial Position. Consequently. The underlying assumption is that this asset generated revenues that are. any costs to maintain a truck. the expenditure enhanced the quality of the asset in a substantive way. the rate of output of the asset is increased. The annual amortization expense is calculated as follows: (Cost – Salvage Value) / Useful Life . the operating costs of the asset are decreased. such as oil changes or brake replacements. the matching principle requires that the cost of long-term assets should be spread over the periods that the asset generated revenues. For example. more or less. This method allocates the cost of the asset over its estimated useful life in equal amounts.000 Accounting for on-going expenditures Once a long-term asset has been acquired. The process by which this is done is amortization of long-term assets. then we would likely increase the useful life of the truck. There are three general approaches to amortizing capital assets: 1. equal over its useful life. we often incur ongoing expenditures in order to maintain the asset. We would therefore capitalize the cost of the new engine to the asset account. However. For an expenditure to be considered a betterment it must meet one of the following four criteria: i.Introductory Financial Accounting.000 375. if we were to replace the truck’s engine. A determination has to be made whether the expenditure is required to maintain the asset in operable condition.

The asset’s estimated useful life is 8 years and the estimated salvage value of the asset is $35. Under the straight-line method. i. The annual amortization expense is calculated as follows: Net book value of asset x Amortization Rate (%) The net book value of the asset is equal to the asset’s original cost less the total amortization taken on the asset to date (accumulated amortization).000. mileage.e.125 $31. 1. This assumes that the use can be measured.1 Page 88 The cost less the salvage value is called the amortizable base of the asset. The annual amortization expense is calculated as follows: (Cost – Salvage Value) / Useful Life in units of production x Units of production expended during the period Example – Assume that an asset is purchased at a cost of $300. the annual amortization charge will be: ($300. then the straight-line rate is 1/10 and the DDB rate is 1/10 x 2 = 20%. This method allocates the cost of the asset over its estimated useful life by taking higher amortization charges at the beginning of the asset’s useful life and lower amortization charges in the later years of the estimated useful life. The asset’s useful life can also be measured in terms of total machine hours of 150. if you are told that an asset has a useful life of 10 years.125 The journal entry to record amortization expense will be as follows: Amortization Expense Accumulated Amortization $31. i.000. Units of production method. 2.e.125 . v. Declining balance method. This method allocates the cost of the asset over its estimated useful life based on the use made of the asset. The amortization rate can either be given or you may be told that the company uses the double declining balance (DDB) method of amortization. machine hours. For example.000) / 8 = $31.1. We deduct the salvage value since we do not want to write down the asset below its salvage value. The underlying assumption is that the asset generates higher revenues at the beginning of its life and that these revenues gradually decline as the asset is used up. 3. The rate used for DDB is twice the straight-line rate.000 – 35. a truck rental company that bases rental charges on the mileage driven.Introductory Financial Accounting.000 hours. The underlying assumption is that the asset generates revenues based on usage.

1 Page 89 2.393 40. . this would have resulted in a net book value at the end of the year that would be lower than the asset’s salvage value. Note that we will assume double declining balance amortization at the rate of 1/8 x 2 = 25% per year.562 94.750 126.756 = $53. the amortization charge per hour would be: ($300. 3.7667 per hour.191 53. The net book value at the end of any given year can be calculated directly as follows: Original Cost of Asset x (1 – a)n Where a = amortization rate n = number of years since acquisition For example. the net book value at the end of the 6th year is: $300.801. the amortization taken in year 8 is the lesser of the calculated amortization of $10. Therefore.000 168.188 31.562 94.011.011 of amortization in year 8.000) / 150.000 Year 1 2 3 4 5 6 7 8 Note that the year 8 amortization is not equal to $40.1.393.011 or the amortization amount needed to bring the net book value down to the asset’s salvage value.250 42. then the amortization charge would be 18. Recall that we do not depreciate the asset below its salvage value. Under the units of production method. v.731 17.045 Amortization Expense @ 25% $75.000 – 35. the amortization charges for the 8 years will be as follows.000 hours = $1.045 x 25% = $10. Assume that the total number of hours of use in the first year is 18.7667 = $31.348 5.750 126.393 40.000 x 0.798 13.922 71.000 56. If we had taken $10.Introductory Financial Accounting.000 168.000 hours x $1.191 53.045 Net Book Value End of Year $225. Under the declining balance method.000.000 225.045 35.922 71.640 23. Net Book Value Beginning of Year $300.

000 $11. In 20x5.1 Page 90 Disposals of Long-Term Assets On the date of disposal.000 Changes in estimates If the estimates of the useful life and/or the salvage value of an asset change subsequent to its acquisition. The asset’s useful life was expected to be 10 years and the salvage value was estimated to be $20.000/year x 7 years Net book value The gain on disposal of this asset is: Proceeds on disposal Less net book value Gain on disposal The journal entry to record the disposal of the asset is as follows: Cash Accumulated amortization Asset Gain in disposal $100.000 161. an asset costing $100. The difference will be equal to the gain or loss on disposal. At the time.000.000.000 $100.000) / 10 = $23.000. The asset is sold at the end of 20x9 for $100.000 $250. Assume straight-line amortization. 20x3 for $250.000 was purchased on January 2.000 – 20.000. For example. assume that an asset was purchased on January 2. For example. . 20x1.000 (161.Introductory Financial Accounting. v.000.000 11.000 250.000 89.1. these estimates were revised as follows: the total estimated useful life of the asset is expected to be 15 years and the salvage value is expected to be $10. we compare the net book value of the asset sold to the proceeds on disposal. the asset’s useful life was expected to be 10 years with an estimated salvage value of $20.000) $89. the changes in estimates are applied prospectively from the date of the change in estimate onwards. The net book value of the asset at the end of 20x9 is: Original cost Less Accumulated amortization ($250.

you will not see the value of its trademark listed as an asset.e. Internally developed intangible assets cannot be capitalized on the Statement of Financial Position. Consequently. location or superior products.000 – 10. they are expected to provide future benefits. For example.000 (32. the trademark ‘Coca-Cola’ was never purchased by the Coca-Cola Company but rather. The patent’s legal life is 17 years but it is expected that emerging technologies will make this .1. This need not coincide with the asset’s legal life. For example.000/year x 4 years $100. you cannot touch them or see them) and yet they represent costs incurred that meet the definition of an asset. Note that only expenditures incurred by the company can be capitalized as intangible assets.000. Examples of intangible assets are: • trademarks – a name or symbol that identifies a company or a product. musical compositions and works of art. Annual amortization charges for 20x5 and future years will be: (68. are the result of a past transaction and are under the control of the company. was developed internally.Introductory Financial Accounting.e. • patents – a legal right ensuring the company’s exclusive right to a product or process. • copyrights – the protection of writings. if you look at Coca-Cola’s Statement of Financial Position.000) / 11 remaining years = $5.000 – 20.000) $68. i. • franchises – the exclusive rights to sell products or perform services. The accounting for intangible assets depends on whether these assets have limited or an unlimited life. Intangible assets whose life is limited should be amortized on a straight-line basis over their estimated useful lives.1 Page 91 The net book value at the beginning of 20x5 is: Original cost Less Accumulated amortization ($100.273 per year Intangible Assets Intangible assets are those assets that do not possess a physical quality (i.000 This net book value will then be amortized over the remaining useful life of the asset.000) / 10 = $8. v. typical within a certain geographical area • goodwill – the added value of a business attributable to factors such as reputation. assume that a patent is granted to a company at a cost of $100.

That is.1. then the asset must be written down to the fair market value. some franchises. If the fair market value is lower than book value and is not expected to recover.e.Introductory Financial Accounting. goodwill) are not amortized but instead subject to an annual impairment test. the book value of the intangible asset is compared to its fair market value. Any impairment losses cannot be subsequently reversed if the fair market value of the asset subsequently is recovered.1 Page 92 patent obsolete by the end of the 5th year. Intangible assets whose life is unlimited (i. v. we would amortize the patent over 5 years. . In this case.

000 10 years $5. What is the impact of this expenditure on income before taxes for 1998? a) Income will decrease by $12.Introductory Financial Accounting. Sinha. A small room was built on the back of the building at a cost of $12. v.500.000.705. At the beginning of 20x8.1. The patent is valid for 17 years and has an estimated life of 10 years. What is the amount of depreciation expense on the building for 20x8? a) $4.88 b) $5.1 Page 93 Problem with Solutions Problem 5-1 – Multiple Choice Questions 1.000.000. 2. What will be the annual amortization expense for patents? a) $4. and was used as office space commencing July 1.00 Use the following information to answer questions 2 and 3: The Jasper Company has an old building which requires frequent repairs and constant maintenance. Brown and Das obtained a patent for their earnings forecasting software at a cost of $80.00 d) $8.200 d) Income will decrease by $632 e) Income will decrease by $600 . The room was completed on June 30.000 150.000 Jasper uses the straight-line method for calculating depreciation expense.000 b) Income will decrease by $6.000 c) $19.000 3.500 b) $5.500 d) $20.000 in legal costs defending it.000 c) Income will decrease by $1.00 c) $8. 1998. the situation was as follows: Building cost Accumulated depreciation — building Estimated remaining useful life Estimated salvage value at end of useful life $200.000 and spent $5.

production was 20.000 commission was paid to a real estate agent.000.000 5.000. What is amortization expense for 20x7 under the productive output method? a) $4. The Amortization expense for 20x6.000 c) $1.500 b) $5.000.000 . The equipment is expected to have a 5-year life and produce a total of 80. and a 10% residual value. Yaari and Yosha Company bought a machine for $85.500 d) $80.750 d) $65. During 20x7. At what amount should the land be reported on the balance sheet? a) $1.000 were incurred to clear the land in preparation for construction of an office building. The machine is expected to be used for a total of 1.000 7.1. During 20x6.500 b) $72.000 with an estimated life of 4 years and a salvage value of $5. 20x6? a) $67.735 6. If the company uses the double-declining-balance method for amortization.015.160 d) $5.000 c) $5.000 b) $42. To acquire the land. If the company were to use the units-ofproduction method instead of the straight-line method.000. a $60.000.000. It has an estimated 4-year life. 20x6.060. Stone and Wall Company bought equipment for $100.500 productive hours over the next 4 years. A land site was acquired for $1.000.000 units.Introductory Financial Accounting.000 units. On January 1. what would be the balance reported for the net book value of the machine at December 31. using the straight-line method.500 c) $63.1 Page 94 4.075. it was used 430 hours. 20x7. Ireland Company purchased a machine that cost $20. 20x7.000 b) $1. v.000 c) $77.000 d) $1. was $18. what would be the balance reported for the net book value of the equipment at December 31. On July 1. Costs of $15. 20x7? a) $40. On January 1.

1.000 kilometers during the year. assuming the company uses the units-of-production method of amortization and that the van was driven 55. Required – a. 20x7. as a result of heavy usage. 2008. Prepare the adjusting journal entry to record amortization expense for the year ended December 31.000.000 and was expected to have a useful life of 5 years or 200.000 at the end of its useful life. b. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. At the end of its useful life.000 kilometers. management of the company decided that. purchased a van to transport guests between the resort and a nearby airport. Prepare the adjusting journal entry to record amortization expense for the year ended December 31.1 Page 95 Problem 5-2 On January 1. 20x7. assuming the company uses the doubledeclining-balance method of amortization. c. it was estimated that the van could be sold for $5. The van cost $65. 20x7. assuming the company uses the straight-line method of amortization. management felt that the van could only be sold for $2. Resort Ltd. assuming the company used the straight-line method of amortization. v.Introductory Financial Accounting. During 20x8. 20x7 and 20x8. . the total life of the van would only be 4 years instead of the original estimate of 5 years. In addition. d.

Dec 31.1 Page 96 Problem 5-3 The Connor Company had the following transactions over the life of an asset purchased on January 2. 20x5 Dec 31. 20x6 Sep 30. 20x3: Jan 2. 20x5 Dec 31. . The estimated useful life of the asset is expected to be 5 years with a $10. Recorded amortization expense.000. 20x8 Required – Record all of the above transactions assuming that the company uses the straight-line method.000. 20x4 Dec 31. 20x3 Purchased equipment for $60. 20x4 Apr 31. This increased the useful life of the asset by three years. v. Expenditures totaling $2.000 were made to the equipment. Recorded amortization expense. 20x7 Aug 31. Recorded amortization expense. 20x3 Aug 31. This increased the quality of the asset’s output but did not change its useful life or the estimate of salvage value. Sold the asset for $25. The original estimate of salvage value holds. Routine repairs costing $600 were made to the equipment. Recorded amortization expense.1. The equipment was completely overhauled at a cost of $20. Recorded amortization expense.000 salvage value. 20x7 Dec 31.000.Introductory Financial Accounting.

000. 20x8.500 Problem 5-5 On July 1. 20x6. Market value of old asset on June 30.000 cash. On January 1. 2.1 Page 97 Problem 5-4 On June 30. (CGA Canada) .1. v. 20x7 Required – Prepare the journal entry to record the purchase of the lathe. bought a state of the art numerically-controlled lathe from GPL by trading in a dissimilar asset and paying $90. adapted) $ 50. Prepare the journal entry to record the sale of the machine on January 1.000.000. MNO Co. 20x6. ABC Ltd. Required – 1. purchased a machine at a cost of $25. how the machine will be presented in the assets section of the balance sheet at December 31. ABC had to spend $2. 20x7. Show. During the installation there was minor damage to the frame. The following additional information is available: Original cost of the old asset Accumulated amortization at June 30. 20x7 Price of new lathe.Introductory Financial Accounting. Prepare the journal entry to record the amortization expense on December 31.000 cash.000 15. 4. the machine was sold for $20. 3. and the repair cost for it amounted to $500. 20x8. 20x6. Prepare the journal entry to record the asset acquisition on July 1.000 38. (CGA Canada. Assume a straight-line method of amortization.500 108. The machine was expected to have a life of 4 years and a salvage value of $3. in good form. 20x7. which included freight charges of $1.000 to install the machine.

Introductory Financial Accounting. (b).000 units b. the equipment was sold for $75. On January 1. Prepare the journal entry to record the sale assuming the company uses the: i) straight-line method ii) units-of-production method $120.000 $ 20. assuming the company uses the: i) straight-line method ii) units-of-production method On January 1.000 4 years 40.000 units were produced.1 Page 98 Problem 5-6 The following information pertains to the equipment acquired by Xie Co. management felt that the total estimated life of the equipment would be 5 years with a total estimated production of 50. on January 1. 20x6.000 units. due to a preventative maintenance system that had been implemented. Use this information to answer parts (a). and (c). v. 20x6. In 20x7. assuming the company uses the: i) straight-line method ii) units-of-production method c. 20x7.000. Accordingly. 20x8. No change in estimated residual value was anticipated. Determine the amortization expense for the year ending December 31. . the estimates were revised. Determine the amortization expense for the year ending December 31. Cost Estimated residual value Estimated life Estimated production 20x6 actual production Required a. 12.1.000 units 9. 20x7.

000 on this loan during 20x3. v. n/30 $ 5. income can be minimized in 20x3. However.1 Page 99 Problem 5-7 German Ltd. 20x3. German intends to use the machine for 8 years and hopes to sell it for $15. Prepare the journal entry to record the sale assuming the straight-line method of amortization was used. 20x6.000 to pay for the machine within the discount period and take advantage of the cash discount.800 The company borrowed $150. The president of German tells you to record a high amount of amortization in early years and a small amount of amortization in later years of the machine’s life. Required – a. 103 has a physical life expectancy of 10 years with a salvage value of zero.000 at that time. .000 cash. c. Otherwise.1. we have to pay the full invoice price within 30 days.Introductory Financial Accounting. for $100. It incurred interest costs of $12. Machine No. In this way. Assume that the machine is sold on January 1. What amortization method could be used to abide by the president’s request? Is this method acceptable under generally accepted accounting principles? Explain. Compute amortization expense for 20x3 using the straight-line method. b.000 2/10. 103 on January 2. * this means that is we pay within 10 days. purchased Machine No. we get a 2% discount.000 $ 14. The following information relates to this machine: Invoice price Credit terms* Customs and duty costs Preparation and installation costs $ 140.

v.000. when the payment is made for the full week. but have not been paid.000 on account. We have already covered several of these when we did adjusting entries. however. a company takes out a loan on January 1st for $10.000 Wages/Salaries Payable – these are wages/salaries that are due to employees for hours worked.000 3. The principal must be repaid equally over 5 years. and will not be paid again until April 4th. assuming the employees worked the full 7 days in the week. $7. services or supplies for the operation of the company.000 This way.Introductory Financial Accounting.000/day.000 3.000 with the terms set at 6% interest due annually.000/day) that were performed in the period but not paid for.000 to last period and $4. the only time we see this account set up is at the end of a fiscal period when an adjusting entry must be made.000/day) Wages Payable (to remove the adjusting entry) Cash 4. For example. it is split appropriately and applied to the correct periods. On April 4th. . Accounts Payable – these are liabilities that were incurred to purchase goods.1 Page 100 6. whichever is longer.000. the entry would be: Wage Expense (4 days x $1. the adjusting entry made March 31st would be: Wage Expense Wages Payable 3. Current Liabilities A current liability is one that will be settled within one year or the business cycle of the firm. Liabilities To begin our discussion about liabilities we have to first differentiate between those liabilities that will come due within on year or accounting period (current liabilities) and those liabilities that will come due at a later point in time (long-term liabilities).000 2. If the average daily wage expense is $1.1.000 to the new period. For example. Employees were last paid on March 28th. a company has a fiscal year end of March 31st. The entry would be: Office Supplies Accounts Payable 2.000 7. a company purchases office supplies from a supplier for $2. we will go over the main types of current liabilities. $3. Current Portion of Long-term Debt – This is a current liability that is incurred when a company has long-term debt that requires a certain amount to be repaid within the next year year. Interest and Principal payments are due December 31st of each year. which represents the three days of work (3 x $1. Typically.000 Note that we are debiting the Wage Expense for $3. For example.

CPP. EI.000 + 7. and that which is due later than one year. $8. v.000 x 6%).500.Introductory Financial Accounting.000) Cash 100. the journal entry would be as follows: Cash Long-term debt 10. and pays 1. For example. CPP and EI from employee’s paycheques.000 10. Wages total $100.1.000. Not only must the company submit the employee’s portion. but they also must submit the employer portion of CPP and EI. This ensures accurate reflection of the financial obligations of the company on the Statement of Financial Position.000 If a Statement of Financial Position were prepared on the January 1. The entry to record payroll for the month would be: Wages Expense Employee Withholdings Payable ($27.000. and the employer ducted the following amounts from its employees’ cheques: Income Taxes.000. a company pays its employees monthly.000 600 8.000 On the Statement of Financial Position.500 57. we would split the long-term debt as follows: Current liabilities Current portion of long-term debt Long-term liabilities Long-term debt $2.1 Page 101 When the company takes out the loan. The journal entry would be as follows: Long-term debt Interest Expense Cash 2. At December 31st.000. the interest expense for the year would be $600 ($10. we will now show a balance in the Current Liabilities section of $2. and a balance in the Long-Term Liabilities section of $6.000 The debt is split into the portion that is due within the year. Deductions for each month are due on the 15th day of the following month. The employer matches the employee’s contribution for CPP.4 times the employee deduction for EI.500 + 8.000 42.500 . Employee Withholdings Payable – Employers are responsible for deducting income taxes. 27.000. $7.000 8.

1 Page 102 At the same time.500 x 100%) EI Expense ($8.700 Note that CPP Expense and EI Expense could be tracked separately.200 61. A contingent loss should be recognized only when: a) it is likely that a future event will confirm the loss. then it has to be disclosed through a note in the financial statements.Introductory Financial Accounting. the company would record its portion of payroll expenses due to the government: CPP Expense ($7.000 . Your lawyer says that previous case law in similar matters is not in your favor and you will likely lose and the judge will award the full amount to the plaintiff.200 18.000 x 1. and therefore a loss of some kind to the company. On the 15th of the next month. as done above.500 + 18.200 Contingent Liabilities One of the guiding principles of accounting is the idea of conservatism. or simply lumped in with Wages Expense. The journal entry would be: Unrecognized Loss on lawsuit Contingent Liability – lawsuit 400. If a company knows that there will be a liability. the company pays the government: Employee Withholdings Payable ($42. when there are multiple options or positions or courses of action available to present financial statements or financial data that the most conservative approach should be taken. Contingent liabilities are those liabilities which are likely to be incurred in the future. For example.40) Employee Withholdings Payable 7.500 11. The justification is that the financial statements should not be misleading or give false hope or information to any reader.1. This principle states that.700) Cash 61. If a contingency meets the first criteria but not the second. and b) the loss can be reasonably estimated.000. but have not yet come to be. v.000 400. your company is being sued for $400. You would record or recognize the FULL amount. then they must disclose it when they know about it. One of the resulting GAAP rules that stems from this idea of conservatism is the establishment of contingent liabilities. but it does not have to be recognized.

such as wages. Again. on average. For example. If. they should try and estimate what the total warranty expense will be so that it can be matched and recorded in the period when the revenue was generated. in the same scenario. When a company sells a product that has a warranty. is 4% of sales. The warranty expense is normally determined through evaluating historical data and coming up with a % of sales that represents the future warranty costs. This principle is the one that guides us when making adjusting entries at the end of the year with regards to expenses. Total Sales for the year totaled $300.000 x 4%) Warranty Liability 12. your lawyer felt you would win. in order to adhere to the matching principle. The journal entry to record warranty expense for the year would be: Warranty Expense ($300. your lawyer felt you would lose. This principle states that for all revenues generated in a specific period.1 Page 103 If. Continuing on with the same example. and the fact that you were likely to lose.000. all expenses related to those revenues should be recorded at the same time. the company pays $10. but you would not have to record the loss or the liability. Warranties & Premiums Another of the guiding principles of accounting is the matching principle.1.000 to repair various vacuum cleaners that are under warranty.000 This entry not only matches the expense to the period when the revenues were generated. then you do not have to do anything because you do not meet either of the criteria for recording a contingent liability.000 10. we must record the associated expense in the period when the . The company estimates that warranty expense. The journal entry would be: Warranty Liability Cash/Inventory/Wages 10.Introductory Financial Accounting. that have been incurred but not paid. Another example of matching has to do with warranties. in the same scenario. but there was no legal precedent for the amount that would be awarded and therefore are unable to estimate the future loss. v. but it also sets up a liability that will be drawn down as actual expenses are incurred over the life of the warranty.000 Premium liabilities come to be when a company offers its customers some product or service through the redemption of coupons or some other device whereby the customer can receive goods/services in the future based on current sales. a company sells vacuum cleaners that come with a 2-year warranty.000 12. You would simply write a note in the financial statements disclosing the lawsuit. let’s assume that during the next year.

000 Whenever coupons are redeemed. then you are missing out on the opportunity to invest that money today and earn interest on it. They can then redeem 10 coupons for a watch valued at $10.1 Page 104 original sale is made. If you are going to be receiving money in the future.000 32. To record the premium liability at the end of the year.000 32. one of the most frequently used financing instruments in business. We will instead focus on long-term bonds. the greater the “discount” or decrease in the dollar value will be. The combination of these two facts results in a dollar today being worth more than a dollar received in the future.Introductory Financial Accounting. notes payable. v. Long-term Liabilities Long-term liabilities are defined as liabilities that would not be reasonably expected to be liquidated within a year. The premise behind this is that a dollar today is not worth the same as a dollar received tomorrow. for every $10 your customers spend. The Time Value of Money Before we begin our analysis of accounting for bonds we must first discuss the concept of time value of money. These typically include long-term bonds. you are taking on the risk that the money might not be repaid at all. pensions and other more complicated longterm liabilities in this section.000 to be received in 5 years from now at an interest rate of 6%. For example. you have determined that only 40% of your customers will redeem their coupons. or ten years from now.000 coupons x 40% = $32. we are trying the calculate the present value of $1.1. they receive 1 coupon. Furthermore. or a year from now. Based on past redemption data. the journal entry would be: Premium Expense* Premium Liability * $800. Your sales for the year were $800.000/$10 = 80. the premium liability account is drawn down. The format for solutions using a financial calculator is as follows: N 5 I/Y 6 PV X PMT FV 1000 Enter Compute In the above example. We will not get into a discussion of leases. longterm leases and pension obligations. . The farther in the future you are to receive the funds.000.

how much of the $1.000 from your favorite uncle. Assume you inherit $1.542.26. press CPT and the TVM register you are attempting to solve for.Introductory Financial Accounting.000 per year for the next 30 years. You want to be able to withdraw $60. what is that $10. v. This means that if you were to invest $747. enter the numbers above in the TVM memory registers to solve. Calculating the Present Value of a Future Single Sum .1 Page 105 With the Texas Instruments BA II Plus.An annuity is defined as a series of identical cash flows that end at a specified time. If the current and expected future rate of return is 6%. the amount would grow to $1.000 will you have to set aside in order to set up this annuity? N 30 I/Y 7 PV X= $744.000 worth in “today’s dollars”? N 5 I/Y 6 PV 7.47 PMT 60000 FV Enter Compute . If i=7%. clear the Time Value of Money memory as follows: 2ND FV You should do this every time you do a time value of money calculation.000.472.58 PMT FV 10000 Enter Compute Present Value of an Annuity . you need to do the following: set the calculator to accept one payment per year as follows: 1 2ND N You only need to do this once.000.26 today (money out of pocket and therefore the negative sign) and invest it for 5 years at 6% compounded annually.1.Assume you are going to receive $10.000.000 from your mother 5 years from now. in this case PV the answer provided is -747.

then the bond will sell at a premium. What is your monthly payment to the manufacturer going to be? N 3 I/Y 6.06 FV Enter Compute Bonds A bond is a financial instrument that is a contractual obligation by a company to pay a stated amount of money at some stated time in the future. Assume the rate is 7%. You expect to live another 25 years. If the YTM > Coupon Rate. Coupon rate = Annual Coupon Payments/Face value Yield-to-maturity (YTM) – the rate of return that bondholders expect on the bond given its risk. how much can you withdraw each year? N 25 I/Y 7 PV 675000 PMT X= $57. For example. The manufacturer is offering you financing at a rate of 6.000. A few definitions: Face Value – the stated amount of the bond and is equal to the redemption value of the bond on its maturity date.1.5% on a 36-month loan. This is because the buyer of the bond could get a higher rate on the open market (the YTM) than they can from investing in the bond (the Coupon Rate). Coupon Rate – the stated interest rate to be paid on the face value.992. This is because the buyer of the bond gets a higher return by investing in the bonds. If the YTM < Coupon Rate.Introductory Financial Accounting. as well as make interest payments on the stated amount. The market takes this into consideration.1 Page 106 Annuity Payment Calculation . Also called the market rate. It is rare that the yield-to-maturity rate and coupon rate are the same. and therefore is willing . Coupon – the amount of semi-annual interest payments to be made on the bond.10 FV Enter Compute Your company is purchasing a piece of equipment costing $80. then in order to sell your bonds you will have to sell them at less than face value because investors would be willing to pay face value if they could get a return of 6%.000 in the bank. if you issue a bond with a coupon rate of 5% and the YTM is 6%.You have retired with $675.206. v.5 PV 80000 PMT X= $30. then the bond will sell at a discount. and the bonds will sell for a value less than the face value of the bond.

000.451 PMT 580002 FV 2000000 Enter Compute 1 2 YTM of 7% / 2 = 3.000 x 5.000 is not our interest expense.000. therefore it will have to be cut in to reflect the situation. or the amount that we would have received in proceeds would be equal to $1.8% and they mature in 10 years.451.829. YTM = 7%. How much would be raised through this bond issuance? N 20 I/Y 3.On January 1. As such.000 coupon payment.8% x = $58. Example . To calculate the value of a bond at any point in time: N = Number of periods left until maturity I = YTM or Market Interest Rate (note that the YTM needs to be divided by two since the coupon payments are made semi-annually) PMT = the semi annual coupon Payment FV = the Face Value of the bond Solve for PV It is important to remember that bonds pay coupon payments semi-annually. The Present Value of the bonds. In order to attract investors. This is less than the face value of $2. The Coupon Rate = 5. because PMT is equal to the payment made every six months.451 1.000 of bonds.829.1. N will equal the number of coupon payments left.1 Page 107 to pay more than face value for the bonds in order to reap this benefit. we must adjust the other factors in the formula to a “6-month” basis. this $58.000. 20x8 you issue $2. The journal entry to record the sale would be as follows: Cash Bonds Payable Calculating Interest Expense on Bonds It is now June 30th and the first coupon payment is due. v. The PMT & FV remain the same.451 .8% is less than the market rate of 7%. However.Introductory Financial Accounting. We have already calculated that we will be writing a cheque for $58.000.51 PV X= $1.829. every 6 months. the YTM is normally expressed as an annual rate.5% $2. 1. This is because our coupon rate of 5. we have to sell our bonds at a discount. Furthermore. Interest will be paid semiannually on June 30 and December 31.829. not the number of years.000 to cover our coupon obligation.

1 Page 108 The interest expense for a given period of time is calculated by multiplying the carrying value of the bonds for the period times the market interest rate or YTM.242 6.829.031 6.000 Note that the $6. The difference between the Interest Expense and the Coupon Payment is either debited or credited to the Bonds Payable account depending on whether the bond was issued at a premium or a discount.451 + 6.835.000 . the journal entry will be: Bonds Payable Cash 2.835.829.000.000. On December 31st. the balance in the Bonds Payable account will have been written up to $2.242 58.000.451 x 7% x Bonds Payable Cash ) 64.000 After all 20 interest payments have been made.Introductory Financial Accounting. At the time of settlement. therefore.301 credit to Bonds Payable increases the carrying value of the bond payable account to (1. This will be the amount used to calculate the interest expense on December 31st.482 x 7% x Bonds Payable Cash ) 64. the entry for interest expense would be: Interest Expense (1. v. Continuing our example.031 58.000. on June 30th. you would record the following journal entry: Interest Expense (1.000 2. give or a take a few dollars for rounding.301) $1.482.1.

1 Page 109 Problems with Solutions Problem 6-1 – Multiple Choice Questions 1.Introductory Financial Accounting.000 iii) The interest expense for the year will be less than $800. 20x7. 10 year 8% bonds priced to yield 6%.000 iv) The bond was issued at a discount a) b) c) d) iv) only i) and iii) i) and ii) ii) and iv) . Which of the following statements is correct? i) The bond was issued at a premium ii) The interest expense for the year will be more than $800. Which of the following items is not a contingent liability? a) Premiums offered to customers b) A risk of loss to uninsured property due to fire or other casualty c) Additional wages that may be payable on a dispute now being arbitrated d) Estimated claims under a service warranty on products sold 3. v. On January 1. Gallaghar Ltd. Issued $10 million face value.1. Which of the following is a characteristic of a contingent liability? a) It definitely exists as a liability but its amount and due date are indeterminable b) It is accrued even though not reasonably estimated c) It is not disclosed in the financial statements d) It is the result of a loss contingency 2.

400 d) $18. In an effort to increase sales.300 b) $8. d) It need not be disclosed. the coupons being redeemable for a premium.000 . a company inaugurated a sales promotional campaign on June 30.Introductory Financial Accounting.1 Page 110 4. 20x8? a) $4. the following information is available: Packages Sold Premiums Purchased Coupons Redeemed 150. How should any liability for the warranty be reported? a) It should be reported as a long-term liability. (2) a oneyear operating cycle. whereby it placed a coupon in each package of product sold.1. c) It should be reported as part current liability and part long-term liability. 20x8. Assume that a manufacturing corporation has (1) good quality control. When should a contingent liability be accrued? a) When it is certain that funds are available to settle the disputed amount b) When an asset may have been impaired c) When the amount of the loss can be reasonably estimated. (3) a relatively stable pattern of annual sales. For the 6 months ended December 31.00 and 5 coupons must be presented by a customer to receive a premium. and it is likely that an asset has been impaired or a liability incurred d) When it is likely that an asset has been impaired or a liability incurred. and (4) a continuing policy of guaranteeing new products against defects for 3 years that has resulted in material but rather stable warranty repair and replacement costs.000 10.500 What is the estimated liability for premium claims outstanding at December 31.000 e) $20.000 23. Each premium costs the company $2. b) It should be reported as a current liability. 20x8. even though the amount of the loss cannot be reasonably estimated 5. The company estimated that only 30% of the coupons issued would be redeemed.600 c) $9. v. 6.

1.Introductory Financial Accounting. v. For each $10 your customers spend.500 coupons Problem 6-3 Company X provides a 3-year warranty on all of the products it sells. and data shows that approximately 55% of your customers redeem their coupons. The following data relate to the past year: Sales Premium Liability Account – Opening Balance Coupons Actually Redeemed during the year Required – What would be the journal entries to record the premium expense and the actual premium costs incurred? $375. They can redeem 15 coupons for a $25 iTunes gift card. The warranty liability at the beginning of the year was $165.000 40. You have been running this program for several years.000.000 22. What is the balance in the warranty liability account at the end of the year? .1 Page 111 Problem 6-2 You run a computer repair company. In order to increase customer loyalty in this fiercely competitive environment you have started a coupon program. Sales for the current year were $3.000.000 and actual costs incurred to service warranties during the year amounted to $130. then receive 1 coupon.000 and it is estimated that the warranty expense is equal to 5% of sales. Required – Prepare all journal entries related to the warranty for the current year.

20x1. 4. 2. The bonds pay interest semi-annually on December 31 and June 30 and are due in five years. The bonds mature in 15 years.000 and a coupon rate of 10%.200 5. what was the estimated liability for future warranties? (CGA Canada) .5% coupon bonds on December 31. 20x1 and the first two interest payments. Required – Prepare all journal entries with regards to this bond for the years 20x4 and 20x5. Problem 6-5 The Kaplan Corporation issued $10.000 Opening balance Total credits during the year Required – 1. 3. 20x6..1 Page 112 Problem 6-4 On July 1.Introductory Financial Accounting. The yield to maturity on December 31 was 8%. The company issues warranty agreements immediately upon the sale of an automobile.000 of 8. 20x4. Gamma Corporation issued bonds with a face value of $500.000. for the year 20x7. What is the dollar value of warranty repairs performed in 20x7? What is the warranty expense for the year 20x7? At December 31. 20x1 is 8%. Required – Prepare the journal entries to record the issue of the bonds on July 1. Assume that the going market interest rate for similar bonds on July 1. Problem 6-6 The following is the general ledger account for estimated warranties of McNeil and Grace Ltd. what is the estimated liability for future warranties? At December 31. Coupon payment dates are June 30 and Dec 31 of every year.1. Warranty Liability Dr Cr $10. automobile dealers. 20x7. Assume that the Kaplan Corporation as a December 31 year end. v.800 Total debits during the year $6.

2. and pays interest on July 1 and January 1. uses the effective interest method to calculate interest expense on these bonds. 9% bonds on January 1. Prepare the journal entry(ies) to record interest expense for the period ending December 31. Show how the $1. 20x7.000 face value.000. The bonds were issued at a discount for $897. to yield 10%.591. They were issued at a price of $1. 12% coupon bonds. issued $1 million face value. 20x7. three-year. 20x6.591 was calculated. issued $1 million semi-annual. Required – 1. face value.171. 20 year. Required Prepare all journal entries for the life of this bond issue. Prepare the journal entry(ies) to record interest expense and coupon payment on June 30. indicate whether each of the following statements would be true or false. a. The Interest Expense for the 1997 year will be more than $80. 20x6. 8% bonds. b. c. (CGA Canada adapted) . 3.000. as the market rate was 10%. 20x6.1. The bonds were sold at a yield of 8%. Ardalan and Baker Inc. Prepare the journal entry to record the issue of the bonds at July 1.171. 10-year. (CGA Adapted) Problem 6-8 On July 1. The Interest Expense for the 1997 year will be less than $100.Introductory Financial Accounting.1 Page 113 Problem 6-7 GHI Company issued $500. Interest on the bonds is paid semi-annually on December 31 and June 30. The Interest Expense will be the same every year. d. 20x6. Required If Adrdalan and Baker Inc. GHI’s year end is December 31. The cash outflow towards interest on the bonds will be more than $80. v. (CGA Canada adapted) Problem 6-9 On January 1.000.000. Alpha Beta Ltd. 4.

then the journal entry would be: Cash Common shares $100. Shareholder investments will result in the company issuing shares to the investors – these shares can take the form of preferred shares or common shares. we credit an account called Contributed Surplus for the difference.000 cash. meaning they never become due. For example. that is. the shares must be cancelled (i.000 If common shares are issued in exchange for a parcel of land whose fair market value is $250. . any cash remaining after all obligations have been settled revert back to common shareholders. hold them.e. The debit to the common shares account is equal to the weighted average book value per share times the number of shares retired.000 When common shares are repurchased.1 Page 114 7. then the debit required to balance the journal entry is allocated as follows: • if there is any Contributed Surplus relative to common shares. If the book value per share is less than the cash paid out to retire the shares. Shareholders’ Equity As mentioned in Chapter 1. Common Shares Common shares typically have the following features: • they provide the right to vote at annual meetings. Contributed capital comprises of the investment made in the corporation by its shareholders. Common shares can be issued for cash or any other asset. Retained earnings represent the cumulative earnings of the corporation less any dividend distributions to its shareholders.1. and • they are a perpetuity. and then re-sell them). The corporation is under no obligation to provide a financial return to common shareholders. • upon liquidation of the company. any dividend declarations are at the sole discretion of the company’s board of directors.000 $250. a company cannot purchase its own common shares. Shareholders’ Equity is fundamentally made up of two elements: contributed capital and retained earnings.000 $100. v.000. If the book value per share is greater than the cash paid out to retire the shares. if common shares are issued for $100.Introductory Financial Accounting. the journal entry would be: Land Common shares $250. it can be drawn down. Dividends become a liability of the corporation only when the board of directors declares them.

000 Retired 20.800 61.000 + 1.500.000 common shares at a total cost of $280.000 + 50.000 + 100.Introductory Financial Accounting.000 common shares at a total cost of $260.000.000 x $18.000 $2. 1.150.000 = $18.000 Issued 250.000 Jun 16 Cash Common shares Common shares (10.000. 20x6 was as follows: Common shares.000 cash Retired 10. Example – The Noor Company’s shareholders’ equity section at December 31.09 7.800 32.500.612) Contributed surplus Retained earnings Cash Aug 18 .000.1 Page 115 • any remainder gets debited to Retained Earnings.800 260.500.000 + 2.000 = 1.150.000 common shares in exchange for land valued at $1.500.500.000 / 1.000 $15.500.000.000 Number of common shares outstanding: = 1.091) Contributed surplus Cash 1 $2.000 12.000.000 = $16.000.000 1.100 61.000 cash Issued 50.500.1.000 1.000.000.000 186.500.100 280. v.000 x $16.000 shares outstanding Retained earnings The following transactions took place during the year: Jan 15 Mar 18 Apr 30 Jun 16 Aug 18 Issued 100.000 The journal entries to record the above transactions are as follows: Jan 15 Cash Common shares Land Common shares Common shares (20.000 Book Value per common share: = $18.000 7.000.000 common shares for $2.000 common shares for $7.000 Mar 18 Apr 30 Balance in common share account: = $15.000 321.500.

• like common shares. This means that if dividends are missed.000 shares x $8. Dividends become a liability of the corporation only when the board of directors declares them.00 x 1 year = $800.000 = $25.000 The preferred share dividends were last paid on December 31. cumulative. 20x5 is as follows: Common shares.000.000 40. the preferred dividends for the year 20x6 must be paid: 100. the preferred dividends in arrears for 20x4 and 20x5 will have to be paid: 100.00.000 10.000 = 1.150.600. First. 100.000.380. 20x6 and management wants to pay a dividend of $5 per common shares. that is. Example – The Jarvis Corporation’s shareholders’ equity as at December 31.500.000 + 250.61 Preferred Shares Preferred shares have the following characteristics: • they are generally non-voting shares (voting privileges are typically only granted if the corporation does not pay the annual preferred share dividend).678.Introductory Financial Accounting. 1.000 Book Value per common share: = $25.1 Page 116 2 Balance in common share account: = $18. any dividends in arrears due to preferred shareholders must be paid before any dividends can be paid to common shareholders.000 = $18. Like common shares.800 + 7. any dividend declarations are at the sole discretion of the company’s board of directors.000 shares x $8.200/ 1. $8.678.000 . However.000.000 Next.000 shares outstanding Retained earnings $35.200 Number of common shares outstanding: = 1.000 shares outstanding Preferred shares.000 – 321.000. in most cases preferred shares are cumulative.500.00 x 2 years = $1. they are a perpetuity. the corporation is under no obligation to provide a financial return to common shareholders.380.000 – 20. It is now December 1.1. 20x3. • they carry a stated dividend per share. v.

000 + 800. a 2:1 split means that the number of shares outstanding will double.000.000 The total dividend to be declared will be: $1. the stock may become unattractive to small shareholders who have to disburse larger sums in order to acquire shares of the corporation.000 shares. the dividend to common shareholders can be paid: 1.000 = $7. . In order to reduce the share price. If a shareholder owns 1.000 shares as a result of the stock split resulting in a total of 2.000 shares of shares before the split. This will result in the share price dropping by half.000 shares x $5 = $5.Introductory Financial Accounting. Any premiums paid on retirement of shares are also charged to retained earnings.1.400. v. There is NO journal entry required when a stock split is declared.000.600. this same shareholder will receive an additional 1.1 Page 117 Finally.000 + 5. For example.000 Stock Splits When the stock price of a corporation is high. the following entry is made: Dividends payable Cash XXX XXX XXX XXX Retained Earnings Retained earnings represents the accumulated earnings of the corporation net of any dividends paid.000. All that happens is that the number of shares issued changes. the company will split the stock. Dividends On the date a dividend is declared it becomes a legal liability of the company and the following journal entry is made: Retained earnings Dividends payable On the date of payment.

beginning of year Premium on redemption of shares Net income (loss) for the year Dividends Retained earnings.1 Page 118 The statement of retained earnings is as follows: Retained earnings.1.Introductory Financial Accounting. end of year $ XXX -XXX ±XXX -XXX $ XXX . v.

Which of the following statements will be true when the stock split is accounted for? a) Retained earnings will be reduced by $4.000 common shares outstanding. c) The number of common shares outstanding will be 225.000.500. XYZ Corporation has 150.000.1. .000. b) Shareholders’ equity will increase by $3.000. The shares were selling at $30 each when management announced a three-for-two stock split. v.1 Page 119 Problems with Solutions Problem 7-1 – Multiple Choice Questions 1.000.Introductory Financial Accounting. d) The number of common shares outstanding will be 250.

Net income for the month was $56.000 common shares for cash of $12. Issued 400 preferred shares to acquire a patent with a market value of $40. Hilary and Sam Corporation completed the following transactions: February 2 February 10 February 15 February 26 February 27 February 28 Issued 9.000.000 common shares to Hilary and 12.32 per share. v. Required 1. Prepare the shareholders’ equity section of the Payne and Papineau Inc.Introductory Financial Accounting. balance sheet as at February 28.000 . to issue 10. Issued 2.000. In its first month. a new company. Declared a 2 for 1 stock split.000 $6 non-cumulative preferred shares and 100.1 Page 120 Problem 7-2 The articles of incorporation authorize Hilary and Sam Corporation.000 shares to Sam in return for cash equal to the shares’ market value of $6 per share. Declared cash dividends on the common shares in the amount of $0. Declared cash dividends on the preferred shares. 2. Record the transactions in journal entry form.000 common shares.1.

Issued 1.000 common shares at $115 per share. The equipment had a fair market value of $40. Convertible bonds with a face value of $50. c. cumulative preferred shares. During the first year of operations the following events occurred: a.00.00 common share dividend h.000 preferred shares at $20 each. $1.000. e.1. f. Declared a cash dividend on preferred shares. Net income was $64.500 common shares at $120 each. Paid the preferred dividend. is authorized to issue 100. v.1 Page 121 Problem 7-3 M-F Inc. Required 1. g. d. Issued 1. Provide the journal entries for each transaction above.Introductory Financial Accounting.000 common shares and 50. Issued 1. Prepare the shareholders’ equity section of the Statement of Financial Position.000 preferred shares in exchange for equipment.000 for the year. The convertible bonds were issued earlier in the year.000. b. Declared and paid a $5.000 and book value of $53. 2. Issued 2. .000 were converted into 500 common shares.

Introductory Financial Accounting. the only materials in this chapter are the problems with solutions. Enjoy! . just the integration of previously covered materials.1. The Accounting Cycle Revisited The purpose of this chapter is to bring all of the accounting issues discussed in the previous chapters together in the form of integrative problems. There is no new material. v. Therefore.1 Page 122 8.

1 Page 123 Problem 8-1 The Haider Corporation’s post-closing trial balance at December 31.5% and the yield to maturity at the time the bonds were issued was 6%. 20x20. 3.000 13.052.000 419.052. 5.000 144. 20x6. 20x5 was as follows: Dr.000 176. the coupon rate is 6.400 Additional information 1.200 $1.1. 20x1.600 150. The bonds mature on December 31. .400 Cr.000 5. $1. The prepaid insurance is for a one year policy taken out in 20x5 that expires on March 1. 7.000 320.600 12. The bonds were issued on January 2. The building is being amortized on a straight-line basis over 40 years. 20x5 is 8 years. The patent remaining useful life at December 31. The equipment is being amortized using the double declining balance method.000 127.400 40. 8. Cash Accounts receivable Allowance for doubtful accounts Inventory Prepaid insurance Land Building Accumulated amortization – building Equipment Accumulated amortization – equipment Patents Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Common stock Retained Earnings $36. The company uses a FIFO periodic inventory system.000. The company provides a one year warranty on its products. The average useful life of equipment is 10 years.000 38. 2. Coupon payment dates are on June 30 and Dec 31. There are 10. 4.5% of sales. Warranty expense is estimated at 1.000 300. 6.000 $23.Introductory Financial Accounting. v.000 1.000 120.000 shares of common stock outstanding. The face value of the bonds is $400.000 145.000 34.

12. .000 was returned to suppliers. 3. Accounts written off totaled $34.000 40.000 common shares were issued for $75. 13.000 23. 6. 7. Inventory purchased on account totaled $960. 9.000. Estimated % Uncollectible 3% 7% 20% 50% An adjustment is made for insurance expense.000 22. 19. The aggregate net realizable value of the inventory was determined to be $365. v.Introductory Financial Accounting.520. 11.000 26.000. Operating expenses paid $945. 2. Inventory costing $16.000. Amortization expense on the building. Total sales on account were $1. The accounts receivable aging schedule is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $144.000.000.1 Page 124 The following transactions took place during the year: 1. 20x6 and the total cost of the inventory was determined to be $378. 16.000 common shares on Aug 23 Insurance policy taken out on March 1 – one year policy. an additional 3.000.1. Payments on accounts payable Payments for salaries Interest payments on bonds payable Purchase of equipment on January 2 Warranty repairs made to products sold Payments to the Canada Revenue Agency for income taxes Repurchase of 1. 20. 21. Cash collections on accounts receivable totaled $1. Recoveries of previously written off accounts receivable totaled $5. 5.400 130. On March15. equipment and patents.000 $222. 14 15. The warranty expense for the year is accrued. 10.000 30.000 2.000 320.000 12.000 The following adjustments need to be made at year-end: 17.000. The inventory was counted on December 31.000 25. Cash disbursements were as follows: 8. 4.000 18.000 43.600.000.

Dividends of $80. Required – a. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . 23. 24. 20x6.1 Page 125 22. c. b.700.Introductory Financial Accounting. v. 20x6 amount to $6. Salaries payable at December 31. The income tax expense is 40%.1.000 were declared and paid on December 15. Prepare journal entries for the above transactions and enter all the above transactions in T-Accounts.

for the face amount plus interest for one year. The estimated useful life is 10 years. and the adjusting entries are to be made. 20x6. On April 1. you do not need to provide the original entry): a. On that date. is to be depreciated for the full year. the company signed a $60.800. and the residual value. b.600.600.1 Page 126 Problem 8-2 Pacific Company adjusts and closes its books each December 31.000. pacific Company sold 10.900. e. Credit sales for the year amounted to $320.200 was on hand. inventory of $9. September 1. which was debited to rent expense. 20x5. j. c. for one year. totalling $8. the patent account was debited and cash credited for $11.e. 20x5. During the year. the principal plus the interest is payable one year later.Introductory Financial Accounting. g. The estimated loss rate on bad debts is 3% of sales. costs incurred for the warranty to date. The company purchased a patent on January 1.900. 20x5. 20x5.000. h.500. supplies of $21. At the end of the year. amounting to $9. 20x5. amounting to $9.000. and sales revenue was credited on the date of sale. The note was dated September 1.900 were purchased and debited to supplies expense. The company received from a customer a 9% note with a face amount of $12. cash was debited and notes payable credited for $60. v. On January 1. i.700. The note is payable on March 31.000. 20x5. The sales have been recorded. were debited to warranty liability when paid.000 units of a product that was subject to a warranty. You are requested to prepare the adjusting entry that should be made for each of the following items (note that the original entries have been made. Notes receivable was debited. Past history indicates that 3% of units sold require repairs at an average cost of $40 per unit. Unpaid and unrecorded wages incurred at December 31 amounted to $4. The company paid a two-year insurance premium in advance on April 1.000. at a cost of $11. The patent has an estimated useful life of 17 years and no residual value. During the year. 10% note payable. d. It had to pay the full amount of rent one year in advance on June 1. Machine A. Pacific Corporation had a supplies inventory of $4. It is now December 31. $4. f. 20x5. No warranty expense has been recognized.1. . i.000. The company rented a warehouse on June 1. Use straight-line amortization. On that date. which cost $80. which was debited to prepaid insurance.

000 after all the above adjustments.1. Pre-tax income has been computed to be $80.1 Page 127 k. Assume an average income tax rate of 30%. v.000 bad debt. . l.Introductory Financial Accounting. ABC Corporation wrote off a $16.

The bank statement showed the following 20x2 deposits through May 3l.880 $33. for the first five months of 20x2 and a balance sheet as of May 31. 20x2. on January 1. Baking materials Rent Salaries and wages Maintenance Utilities Insurance premium Equipment Principal and interest payment on bank loan Advertising $14.600 2. Sale of common shares Cash sales Rebates from purchases Collections on credit sales Bank loan proceeds $ 2.500. Kelowna Bank & Trust has asked Spier to submit an income statement for MAS Inc.000 1.466 . and additional equipment is needed to accommodate expected continued growth.Introductory Financial Accounting.000 shares of common share for $2.500 22.920 3.800 5. 20x2.770 130 5. Anne Spier is the principal shareholder of MAS Inc. 1. She started a baking business in her home and has been operating in a rented building with a storefront.000 312 424 $31.1.500 110 4. Spier incorporated this business as MAS Inc. Spier assembled the following information from the corporation's cash basis records for use in preparing the financial statements requested by the bank.320 2.400 1. The following amounts were disbursed through May 31. 20x2. annually since operations began at the present location.1 Page 128 Problem 8-3 Anne Spier has prepared baked goods for resale for several years now. with an initial shares issue of 1. Spier wishes to purchase some additional baking equipment and to finance the equipment through a long-term note from a commercial bank. Sales have increased 30%. v.

were as follows. May 25. Rent was paid for six months in advance on January 2. 11. Payments and collections pertaining to the unincorporated business through December 31.1. 20x2. 20x2. The loan requires quarterly payments on April 1. 12. Required Using the accrual basis of accounting. and January 1 consisting of equal principal payments plus accrued interest since the last payment. 9. 20x1 were not included in the corporation's records.000 were purchased on January 2.Introductory Financial Accounting.226 at May 31. Baking materials costing $1.1 Page 129 3. 20x2. 6. 20x2. prepare for MAS Inc. 10. Unpaid invoices at May 31. October 1. Baking materials Utilities $ 256 270 $ 526 4. Anne Spier receives a salary of $750 on the last day of each month. The other employees had been paid through Friday. There were no materials in process or finished goods on hand at that date. These are the only fixed assets currently used in the business. New display cases and equipment costing $3. and were due an additional $240 on May 31. 20x2. Straight line amortization is to be used for book purposes. 20x2 MAS Inc. July 1.: (a) An income statement for the five months ended May 31. 20x2 (b) A balance sheet as of May 31. The note evidencing the 3-year bank loan is dated January 1. No materials were on hand or in process and no finished goods were on hand at January 1.840 were on hand at May 31. Customer records showed uncollected sales of $4. 7. v. 20x2. and states a simple interest rate of 10%. and no cash was transferred from the unincorporated business to the corporation. and have an estimated useful life of five years. 5. is subject to an income tax rate of 20%. 20x2. 20x2. 20x2. 8. . A one-year insurance policy was purchased on January 2. 20x2.

The income tax rate is 30 percent. At the end of 20x2.000 146. Morrow's only other asset at the beginning of 20x2 was an investment in Honeydew common shares.000.000 $406. At the beginning of 20x2. The inventory at the beginning of 20x2 was $80. In 20x2 Morrow began selling on a cash-only basis. equipment with a cost and accumulated depreciation of $80. payable annually Customer collections Proceeds on sale of fully depreciated equipment (original cost. was on hand. All equipment is depreciated on a straight-line basis over ten years with no estimated salvage value.1 Page 130 Problem 8-4 Morrow Wholesale has kept limited records and has never had an audit until 20x2. As the senior auditor in charge of the audit.000 5. Receivables at the beginning of 20x2 totalled $ 155. Prepare an income statement for the year ended December 31.1. b) Cash balance in cheque book. There have been no other common share transactions.000 and $20.500 c) d) e) f) g) h) i) j) Morrow had no outstanding payables at the beginning of 20x2 but owes creditors $36. and a balance sheet at December 31.000 $180.500 $205.000 $250.000. The sale of equipment was made on December 30.000 for unpaid purchases of merchandise on December 31. During the fourth quarter of 20x2.000 note issued on July 1 and bearing interest at 12%. v. .000 5. The uncollected receivables were written off as miscellaneous expenses in 20x2.000) Cheques written during 20x2: Purchases of merchandise Salaries Advertising (to be run in 20x3) Miscellaneous expenses $ 24. December 31.000 5. you have been presented with the following information: a) Morrow is incorporated and initially sold 11. 20x2.Introductory Financial Accounting. 20x2. $20.000 10. Retained earnings at the beginning of 20x2 totalled $63. 20x2.000.20x1 Deposits during 20x2: Cash sales Proceeds of $5. sales salaries of $1. for Morrow Wholesale.000. a cash dividend of $10.000 10. Morrow's cost of goods sold is 80 percent of sales.000 was declared and is to be paid in January 20x3. respectively.000 of its common shares for $25 per share.600 have accrued but have not been paid. 20x2. During 20x2 these shares were exchanged for land and a gain of $4.000 was recognized.

Components of the Statement of Cash Flow There are three sections to the statement of cash flow: Cash from Operations – this section shows how much cash is generated or used up by the firm in its daily operating business.000 215.Introductory Financial Accounting. Both methods will be covered later in this section. your main concern is incoming and outgoing cash. v.1 Page 131 9. If a company pays dividends. is based on the accrual system. If a company issues new shares.000 300. as accountants. this uses cash Example .000 450. If a company issues new debt. this generates cash. Some students find the statement of cash flow to be a challenge because they are still thinking with an “accrual” mind.A company reports the following partial data from the previous year: Partial Statement of Financial Position 20x8 Non-Current liabilities Bonds payable Mortgage payable Shareholders’ Equity Common shares Retained earnings $ 400. then this uses cash. If a company retires shares.000 650.000 20x7 $ 250. The Statement of Cash Flow The statement of cash flow shows a company’s inflows and outflows of cash during a particular period. if a company pays off or retires debt this uses cash. There are two distinct methods in presenting cash flow from operations: the direct and the indirect method. .000 180. Try to keep in mind that when you are working with this statement. either the direct or indirect methods can be used. however. This statement is broken into three distinct sections. Most of what we do. this generates cash.000 Additional information: Dividends of $150. GAAP suggests a preference for the direct method. and shows how a company’s actions have affected its net cash position throughout the period.000 150.1. Cash from Financing Activities – this section looks at any changes in the long-term liability and shareholders’ equity section of the Statement of Financial Position.000 were declared and paid to shareholders during the year.

or cash we receive.000 (10.000) 75. we know all numbers in this formula except Net Income. Rearranging the formula.000 (180. and the NBV (cost – accumulated amortization) is recorded as a gain/loss on sale.000.000) 100. we know that retained earnings increased by a net of $85.000) 100. we remove the asset and all associated accumulated amortization.000) 200.000 = $235. Often. Cash flow from Investing Activities – this section discloses cash that was generated or used through the sale or purchase of long-term assets.000) $ 170.000 = $300. we have to reconcile the long-term asset accounts.000 + dividends of $150.000 20x7 $ 300.000 Alternatively. when dealing with this section. we analyze at the Retained Earnings Account: Opening Retained Earnings + Net Income .A company is showing the following data regarding its last two fiscal periods: Partial Statement of Financial Position 20x8 Non-Current assets Equipment Accumulated Amortization Furniture & Fixtures Accumulated Amortization Land $ 350. the net income for the year is $85. and changes in them from one period to the next.000 To calculate the company’s net income for 20x8.000) 0 . we can calculate the Net Income. when a sale of a long-term asset is made. Remember.Introductory Financial Accounting.000 (170. Given that dividends decrease retained earnings. The difference between the proceeds.000 (60. Example .000 Net Income = $235.000.1 Page 132 The cash flow from financing can be calculated as follows: Proceeds on issuance of bonds payable Cash paid to reduce mortgage payable Proceeds on issuance of common shares Cash dividends paid $ 150.Dividends = Closing Retained Earnings In the above case.000 (150.000 (30.000 + Net Income .$150. v.1. $215.

000. there can be as many as you want): Cash collected from Customers (Sales ± changes in Accounts Receivable) Cash paid out to Suppliers & for Operating Expenses (Cost of goods sold + Operating Expenses ± changes in inventory and prepaid expenses ± changes in non-cash current liabilities.000 and the accumulated amortization was $60.000) 25. income taxes payable and dividends payable) Cash paid for Interest (Interest Expense ± changes in interest payable) Cash paid for Income Taxes (Income Tax Expense ± changes in income taxes payable) . it does not appear in this section. were sold at a gain of $10.1. • the land was obtained through issuing $100.1 Page 133 Additional Information: • $50.000. and essentially takes each income statement item and converts it into cash. Cash Flow from Operations – Direct Method This method of determining cash flow from operations uses the income statement as its starting point. then the cash proceeds on the sale of fixtures would have to be $15. All non-cash transactions are by definition excluded from the statement of cash flow.000 (100.000 + 10. There are a minimum of four main sub-sections in determining the cash flow from operations (note that these are a minimum.000 worth of common shares to the supplier. v.000. • new fixtures were purchased for $100.000 with a NBV of $15. costing $75. If the gain on sale was $10.000) ($125. The cash flow from investing section of the Statement of Cash Flow would be as follows: Purchase of Equipment Proceeds on sale of Fixtures* Purchase of Fixtures ($50.000. excluding interest payable. • the original fixtures.000) * The cost of the fixtures was $75.000 cash.000 giving a net book value of $15.000 = $25.000 worth of equipment was purchased for cash during the year. Note that because no cash exchanged hands for the purchase of the land.000.Introductory Financial Accounting.

000 10.000 325.000 21.000 62.000 27.000 14.600 $ 67. Income Statement For the Year ended December 31.000 10.000 82.000 73.000 8.000 120.000 80.000 68.000 82.000 89.000 (20.000 2.000 5.1.000 2.000 $660.000 39.000 (25.000 1.000 429.000 3. 20x7 20x7 ASSETS Cash Accounts Receivable Inventory Capital assets Less accumulated amortization LIABILITIES Accounts Payable Salaries Payable Interest Payable Taxes Payable Bonds Payable SHAREHOLDERS’ EQUITY Common Stock Retained Earnings $76.000 21.1 Page 134 Example – Calculate cash flow from operations – direct method. v.000 104.000 20x6 $42.000) 135. 20x7 Sales revenue Cost of Goods Sold Gross Margin Operating Expenses: Salaries Expense Amortization Expense Office and Administration Expenses Operating income Interest Expense Net Income before taxes Income tax Expense Net Income Jack’s Joke Shop Inc.000 $172.000 46.000 5.000 231. Jack’s Joke Shop Inc.Introductory Financial Accounting.000 12.000 23. Comparative Unclassified Statement of Financial Position As at December 31.000 200.000 15.000 50.400 .000 104.000) $172.000 $135.000 24.

v. 20x7. therefore we reduce sales to calculate cash collected from customers.000 increase in Accounts Receivable. This means that we purchased additional inventory that is now sitting in our warehouse. which is a non-cash item and interest and income tax expense which will be dealt with separately.000) $231. then we collected more than we accrued and this would be added to sales. and which are made on credit.000 $553. nor are we told how much of the 20x6 accounts receivable balance have been collected. 20x6 and the balance at December 31.000. Therefore.000) $654. Conversely. we accrued more sales than we collected.1 Page 135 Cash collected from customers: Sales Less increase in accounts receivable $660.Introductory Financial Accounting.000 2. the amount of our Inventory account increased by $2. Note also that although we combined all three expense items in one single calculation. However.000 198.000 Why did we subtract the $6. then this means that sales have not yet been collected – that is. if accounts receivable decreased. In this case.000 235.000 2.000 (6.000 Note that the starting point for each calculation is the following expense items: cost of goods sold. we can simply analyze the difference. waiting to be sold. We are not told what percentage of the total sales are made for cash. it would have been correct to show these as three separate line items in the cash flow from operations section of the Statement of Cash Flow: Cash paid out to suppliers Cash paid out to employees Cash paid out for office and administrative expenses With regards to cash paid put to suppliers the starting point is cost of goods sold. salaries expense. because we are told the balance at December 31.000 (2. . These comprise all of the expense items on the statement of financial position with the exception of amortization expense. Cash paid to suppliers & for operating expenses: Cost of goods sold Plus increase in inventory Plus Decrease in accounts payable Salaries expense Less increase in salaries payable Office & Administration Expenses $200.000 120.1. If accounts receivable increased. The first thing we do is adjust it to obtain the purchases made during the period. and office & administrative salaries.

000 more this December 31st than we did last. interest payable went up which means that we accrued more interest than we paid. Again. are treated in the manner that the Salaries Expense was treated above. then this means that we would have purchased less than what was sold and we would have decreased COGS in order to obtain purchases. like salaries payable. In dealing with the change in accounts payable. any increase in the Income Tax Payable account would be subtracted from the expense to get to the total cash paid. on the other hand. and any decrease would be added. other than interest and taxes.Introductory Financial Accounting.000 increase to COGS.000 (1. inventory decreased. so we deduce the increase in interest payable to interest expense. That is. if the Accounts Payable account decreases.600 The treatment for taxes is the same as for interest. Cash paid for taxes: Income tax expense Less increase in income taxes payable $21. In this example. should the opposite have occurred. v. you start with the Income Statement amount and then account for any changes in the associated statement of financial position account(s). then you simply include the full expense amount as the cash paid for that expense. Therefore.000. All other expenses. then we have paid more to our suppliers than the purchases. That is.600 (12. is subtracted from the expense to get to the total cash paid. Any increase in liabilities. If there is no such account. Cash paid for interest: Interest expense Less increase in interest payable $15. as in the case of Office & Administration Expenses above. we will subtract the $12.000 In this case.1 Page 136 to calculate purchases. there appears to be no associated statement of financial position account.000). we owe $12. we have to add the $2. like it did in the above example. . and any decrease in liabilities is added.1. we would have subtracted the amount from COGS to get total money paid to suppliers. Note.000) $14. Purchases for the year in this case would be $233.000 from our Interest Tax Expense to get the total cash paid for taxes.000 ($231. This is why we add back the $2.000) $9. If.000 + 2.

This would include changes in accounts receivable.000 (6. We then add back any non-cash items that may appear on the income statement.600) $ 77. v. We then add or subtract any changes in the non-cash current asset and liability accounts. The most common of these are amortization expense and gains/losses on the sale of capital assets.1 Page 137 To sum up: Cash flow from operations Cash collected from customers Cash paid to suppliers & for operating expenses Cash paid for interest Cash paid for taxes $654.000 $77.400 Cash from Operations – Indirect Method Under the Indirect Method. we start with the bottom line . Increases (decreases) in current assets are cash outflows (inflows.000) (14.Net Income.000 (553.400 5.000) (2.Introductory Financial Accounting.000) 2. as well as all current payable accounts.1.000) (2.400 .000 12. Increases (decreases) in current liabilities are cash inflows (outflows). Cash flow from Operations: Net Income Add back items not requiring a cash outlay Amortization expense Adjust for non-cash working capital items: Increase in Accounts Receivable Increase in Inventory Decrease in Accounts Payable Increase in Salaries Payable Increase in Interest Payable Increase in Taxes Payable $ 67.000) (9.000 1. inventory.

400 – 24.000 = 66.400 + 0 – 43. v.400) Opening Cash Balance – December 31.000) (66. 20x6 Ending Cash Balance – December 31.000 + 67.400) Net Change in Cash ($77. readily convertible to cash) subject to an insignificant risk of change in value. let’s finish with the cash flow statement. 20x7 30. Cash from Investing Activities No activity $0 Cash from Financing Activities Proceeds from issuance of Common Stock Payment on Bonds Payable Payment of Dividend* *Opening R/E + Net Income – Closing R/E = Dividends paid ($23.000 (7.Introductory Financial Accounting.000 42. This includes cash.000 $ 76.1 Page 138 To continue the example.400) 34.1. term deposits and any highly liquid assets (i. . the term ‘cash’ is defined as ‘cash and cash equivalents’.400) (43.e.000 Definition of Cash For purposes of the statement of cash flow.

000 207.1 Page 139 Problems with Solutions Problem 9-1 The following is the Income Statement and comparative Statement of Financial Position for Ginger’s Cookies Ltd.000 120.000) 15.000 243.100 $146.000 80.000) 226. Income Statement for the Year ended December 31. 20x6 Sales Revenue Cost of Goods Sold Gross Margin Operating Expenses: Salaries expense Amortization expense Other Operating income Interest expense Gain on Sale of Capital Assets Net Income before taxes Income tax Expense Net Income (32.000 450.000 $750.1.900 . v.000 (17. Ginger’s Cookies Ltd.000 7.Introductory Financial Accounting.000 300.000 79.

1. was replaced by a new piece of machinery costing $125.000 40. Ginger’s paid cash for the equipment. Comparative Unclassified Statement of Financial Position as at December 31.000 45.400 $275.200 20x5 Additional Information: on January 2. b.000) $144.000 (7. 20x6 20x6 ASSETS Cash Accounts Receivable Inventory Capital assets Less Accumulated amortization LIABILITIES Accounts Payable Salaries Payable Interest Payable Taxes Payable Bonds Payable SHAREHOLDERS’ EQUITY Common Stock Retained Earnings 50.500 $ 19.100 $ 14.500 90. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.000 111.200 $ 27.400 6.Introductory Financial Accounting.800 2.000 10.400 158. the only piece of equipment.000 7.100 30.1 Page 140 Ginger’s Cookies Ltd.000 10. .000 $144.000 0 33.200 80.000) $275. costing $45.000 43. Required – a.000 47.000 108.500 50.000 125. v.000 (40.000 61.200 $ 20. Prepare a Statement of Cash Flow using the Direct Method.000. 20x6.000.000 117.

212.000 43.000 1.000 999.343.000 1.000 20x2 $ 353. Statement of Financial Position December 31 20x3 Current assets Cash Accounts receivable Merchandise inventory Prepaid expenses $ 319.000 35.000 $ 4.500.000 82.000 2.091.093. are shown below. MCDUFF LTD.1.000 450.326.711.Introductory Financial Accounting.000 $ 909.000 1.842.1 Page 141 Problem 9-2 The comparative statements of financial position of McDuff Ltd.000 1.000.000 Capital assets Accumulated amortization Bonds payable Mortgage payable Shareholders’ equity Common shares Retained earnings .000 1. v.000 119.000 5.869.212.000 800.000 2.000 700.000) 1.000 $ 4.054.000 32.045.019.429.000 45.000 $ 4.000 888.854.041.060.000 1.631.000 Current liabilities Accounts payable Salaries and wages payable Interest payable Income taxes payable $ 897.000 (3.000 28.000 $ 4.000 850.000 (3.000 3.000) 1.000 30.358.000 1.060.000 319.695.000 5.000 2.000 508.000 1.

bonds with a net book value of $500.000 250.000) $4.000) 489.000) (67.000. Required a. with a book value of $87.500.000 were retired for $487. 20x3.000 Additional information 1.000. v.000.000. On April 15. Prepare a cash flow statement for the year ending December 31.000 700. 2.000 (61. b. 20x3.000 850.000 550.000 (7.Introductory Financial Accounting.1. McDuff sold capital assets that cost $158.000 2. Income Statement For the year ended December 31.000 $239.400.1 Page 142 MCDUFF LTD. 20x3. for $80. 3. 20x3 Revenues Cost of goods sold Operating expenses Salaries and wages expense Operating income Gain on retirement of bonds payable Loss on disposal of assets Interest expense Net income before taxes Income tax expense Net income $ 13. Use the indirect method to report the operating activities. On August 31. Amortization expense is included in Operating expenses. . Prepare the cash flow from operations section using the direct method.

300 1.000 1.400) Comparative partial balance sheets at December 31.000 500 .300 10. Income Statement for the year ended December 31.300 2.000 5.200 221.700 4. HHC LTD.300 600 5.400 $ (3. v.000 39.000 600 20x4 $4.300 5.700 8.800 7. 20x5 and 20x4 reveal the following: 20x5 Cash Accounts receivable Inventory Prepaid insurance Accounts payable Salaries and wages payable Long-term loan payable Interest payable Required Prepare the cash flow from operations section as it would appear on the Statement of Cash Flow using… (a) The indirect method (b) The direct method (CGA Canada.Introductory Financial Accounting.1 Page 143 Problem 9-3 The following data are available for HHC Ltd.000 $ 165.800 7. adapted) $ 4.700 500 5. 20x5 Sales Expenses: Cost of goods sold Salaries expense Insurance expense Depreciation expense Rent expense Interest expense Net loss $ 218.000 1.800 5.1.

20x6 Sales Cost of goods sold Gross profit Operating expenses Amortization expense Loss on sale of equipment Gain on sale of long-term investment Net Income $ 165.000) $ 57.000) 25.000 144.000 $ (18.000 $ 100.000 $634.000 0 85.000 92.000 39.000) (22.000 Liabilities and Shareholders’ Equity Accounts payable Bonds payable Preferred shares Common shares Retained earnings $ 22.000 4. and its income statement for the year ended December 31.000 80.000 Assets Cash Accounts receivable Inventory Long-term investment Land Buildings and equipment Accumulated amortization TORAM Ltd.000 119.000 200.000) $ 624. 31 20x5 $ 26.000 43.000 $ 699.000 423.000 (18.000 300.000) $ 681. v.000 600.1 Page 144 Problem 9-4 Toram Ltd.000 (12. 20x6 are as follows: TORAM LTD.000 53.000 18.000 $ 40.000 85.000 463.000 (123.000 (101.000 $ 65.000 87.000 32. Income Statement for the year ended December 31.000 475.000 Dec.000 0 0 58. 20x5 and 20x6.000) $ 900.’s comparative balance sheets at December 31.000 423. Balance Sheets Dec.000 0 80.Introductory Financial Accounting.000 Net Change $ 24.000) 0 (12.000 86.000 25. 31 20x6 $ 50.000 .1.

Purchased equipment for $20.000. 2. the following transactions occurred: 1. 4. Required – a.1. Issued $25. 5.1 Page 145 During 20x6. Sold the long-term investment on January 1.000 and had $21.Introductory Financial Accounting. (CGA Canada adapted) . Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.000 of accumulated amortization. 20x6. for $30. v.000 cash. Sold equipment for $7.000 of bonds payable at face value. Declared and paid a $50. 3.000 cash dividend. b. Prepare a Statement of Cash Flow using the Direct Method.000 cash that had originally cost $32.

1. etc. The nature of the analysis of financial statement information is primarily in the form of ratios. Vertical and Percentage (common size) analysis . The amount of future cash flow to service debt requirements. 7. Expected non-operating cash flows. The amount of cash expected to be invested in the firm's long lived assets as well as in working capital. of course. Nonetheless. The amount of future cash flow from random events such as windfall gain or casualties. Net cash flows from future operations.e. 3.. 4. 2. repayment of principal. However. 8. from activities considered incidental to the firm's main function. be recognized. 6. Horizontal (trend).1 Page 146 10. v. Each of these eight variables that affect future dividend policy is in turn affected by others.. Financial Statement Analysis The broad purpose of financial statement analysis is to enable a user to make predictions about the firm that will assist his/her decision making. which the investor would like to predict. Management's attitude toward future cash dividend policy. the investor must predict those things that affect dividend policy. published financial statements are historical in nature and do not provide the information we have just outlined. historical information can be used to make projections and is sometimes extremely useful in this respect. The firm's future policy regarding the holding of cash balances (for precautionary and liquidity reasons) in excess of those required to maintain the expected level of operations. In order to predict the company's future dividend policy. i.Introductory Financial Accounting. sinking fund provisions. i. The limitations of using historical information must. 5. The following are the variables that affect a firm's future dividend policy: 1.e. Future cash flows from changes in the levels of investments made by shareholders and creditors. Published financial statements are the sources of information generally available to users. interest payments. Financial Analysis Techniques 1.

1 Page 147 Horizontal analysis expresses financial data in terms of a single designated base period. v.500 10.546 1. or as compared to an amount of the preceding period. the historical financial performance data for a company for the years 20x3 to 20x6 (all data is in millions of dollars) 20x3 Revenue Expenses Net income before taxes Income taxes Net income $7. For example.673 827 273 $554 20x6 $13.509 7.1.882 627 207 $420 20x5 $11.073 354 $719 .975 7.619 12.369 606 200 $406 20x4 $8.Introductory Financial Accounting.

Introductory Financial Accounting, v.1.1

Page 148

Horizontal analysis of the data as a percentage of the year 20x3 amounts: 20x3 Revenue Expenses Net income before taxes Income taxes Net income 100% 100% 100% 100% 100% 20x4 107% 107% 103% 104% 103% 20x5 144% 145% 136% 137% 136% 20x6 171% 170% 177% 177% 177%

Horizontal analysis of the data as a percentage of the previous year's amounts: 20x3 Revenue Expenses Net income before taxes Income taxes Net income 100% 100% 100% 100% 100% 20x4 107% 107% 103% 104% 103% 20x5 135% 135% 132% 132% 132% 20x6 118% 118% 130% 130% 130%

Vertical Analysis (also referred to as common size financial statements), presents all the data in a financial statement as a percentage of a single line item. Generally, when performing vertical analysis on a balance sheet, all numbers are expressed as a percentage of total assets; on the income statement as a percentage of sales. Vertical analysis of the above data is as follows: 20x3 Revenue Expenses Net income before taxes Income taxes Net income 100% 92% 8% 3% 5% 20x4 100% 93% 7% 2% 5% 20x5 100% 93% 7% 2% 5% 20x6 100% 92% 8% 3% 5%

2.

Ratio Analysis

Ratio analysis is performed in order to evaluate the firm's liquidity, solvency, profitability and asset management: • liquidity: assessment of the firm's ability to meet current liabilities as they come due, • solvency: ability of the firm to pay both current and long-term debt, • profitability: evaluation of manager's abilities in generating returns to capital providers, • asset management (or activity ratios): how well are the firm's assets managed.

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Liquidity Analysis - the following ratios are typically used in assessing the liquidity of a firm: Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio Current Assets ÷ Current Liabilities (Cash + Accounts Receivable + Temporary Investments) ÷ Current Liabilities (Cash + Accounts Receivable + Temporary Investments) ÷ (Cash operating expenses ÷ 365) Where Cash operating expenses = Cost of Goods Sold + Operating Expenses - Depreciation The current ratio tells us how much current assets there are relative to current liabilities. The quick ratio tells us how much liquid current assets there are relative to current liabilities. The defensive interval tells us, all other things remaining equal, how many days the firm can survive without any cash inflow. Solvency Analysis - the following ratios are typically used in assessing the solvency of a firm: Debt-to-Equity Ratio Times Interest Earned Long-term Debt ÷ Shareholders' Equity

Income before Interest and Taxes ÷ Interest expense

The debt-to-equity ratio must be compared (1) to the firm's historical data (interperiod) and/or (2) to other companies operating in the same industry or industry averages (interfirm). As Lesson 12 will show, it is wrong to say that the lower the debt-to-equity ratio, the better off the firm is. All firms have a theoretical optimal debt-to-equity ratio they should be aiming for. Firms whose debt-to-equity ratio is optimal will maximize the value of the firm and minimize their weighted average cost of capital. The problem is that the finance literature does not provide us with a mechanism to establish this optimal debtto equity ratio. We tend to use the industry average as a surrogate for the optimal debt-toequity ratio. Take the following two firms: Company A 0 Company B 2.5 Industry Average 3.0

Debt-to-equity Ratio

Although, Company A is clearly more solvent than Company B, one could argue that Company B is better off than Company A since it's weighted average cost of capital should be lower.

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The times interest earned ratio is a good judge of a firm's solvency. A firm with a times interest earned ratio of 2.0 is generating operating income that is only twice as high as interest charges. Such a firm's exposure to fluctuations in interest rates is high.

Profitability Analysis - the following ratios are typically used in assessing the profitability of a firm: Return on Sales Return on Assets Return on Equity Operating Income ÷ Sales Operating Income ÷ Average total assets Net Income ÷ Average shareholders' equity

The rationale for using operating income for the return on assets ratio is that this ratio is used to compare how well firms use their assets regardless of how the assets are financed. When comparing two firms with different capital structures, the return on assets will be comparable. Using operating income also removes unusual items, extraordinary items, discontinued operations and income tax expense from the ratio. Also note that we are using averages in the denominators. This is the theoretically correct way to calculate the ratios. Whenever you divide an income statement number into a balance sheet number (or vice-versa), the balance sheet number must always be an average. However, there are times where this may be either impossible or impractical to do. In situations where you only have one year of data, it is impossible. When you have two years of data, you can calculate the ratios for one year only and you do not have any comparatives. In these situations, one can assume that the year-end balances are good surrogates for the average and simply use the year end balances. Note that multiple choice exams will always assume you use averages. Asset Management Ratios (activity ratios) - the following ratios are typically used in assessing the solvency of a firm: Inventory turnover Days Sales in Accounts Receivable Total asset turnover Cost of goods sold ÷ Average Inventory Average Accounts Receivable ÷ (Net Credit Sales ÷ 365)

Sales ÷ Average total assets

The inventory turnover measures the number of times the inventory rolls over within a year. The days sales in accounts receivable tells us what the average number of days our accounts receivable have been outstanding. The total asset turnover tells us how many sales dollars are generated by each dollar of asset invested.

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Often in an examination setting, you will be presented with a company's financial statements and the industry average accounts receivable and inventory turnover ratios. Given these, it is possible to perform some comparative analysis and, more importantly, determine how much cash could be generated by the company if it were able to reduce its accounts receivable and inventory balances. (More often than not, the question mentions that the company is cash strapped.) Limitations of Financial Statement Analysis Changes in ratios can only be interpreted by understanding the underlying economic events. For example a sudden increase in the current ratio may simply be due to the fact that a short-term bank loan was converted to a long-term loan. Ratios may change as a result of non-economic events that affect the financial statements e.g., change in accounting method or estimate Comparisons of a company’s ratios with another company’s or with industry averages involve certain restrictive assumptions: that all companies being compared are: • structurally similar • use the same (or similar) accounting principles • experience a common set of external influences

0 c) 6.000 at December 31. what effect will a payment to a creditor (account payable) on the last day of the month have? a) It will increase the current ratio b) It will decrease working capital c) It will increase working capital d) It will decrease the current ratio 3.000 at December 31. If current liabilities exceed current assets. a corporation purchased $540.500 d) $400. Net cash sales for 20x8 were $32. v.000 2.0 d) 8. The accounts receivable turnover for 20x8 was 7.500 b) $335. 20x7. and $55.0 .500.000. What were R’s total net sales for 20x8? a) $227. The beginning inventory for 20x8 was $30. R Company’s net accounts receivable were $50.0. 20x8.000 of inventory and had sales of $600.000 c) $367. What was the inventory turnover for 20x8? a) 4.000.Introductory Financial Accounting.000 and the ending inventory for 20x8 was $120.1.1 Page 152 Problems with Solutions Problem 10-1 – Multiple Choice Questions 1. Which of the following ratios measures long-term solvency? a) Quick Ratio b) Days sales in accounts receivable c) Debt to equity ratio d) Current ratio 4.5 b) 5. During 20x8.

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5.

If current assets exceed current liabilities, a payment of an account payable has what effect on working capital and the current ratio? Working Capital No effect No effect No effect Increase Decrease Current Ratio Increase No effect Decrease Decrease Decrease

a) b) c) d) e)

6.

Assuming stable business conditions, which of the following is consistent with a decline in the number of days’ sales outstanding in a company’s accounts receivable at year end from one year to the next? a) A tightening of the company’s credit policies b) The second year’s sales were made at lower prices than the first year’s sales c) A longer discount period and a more distant due date were extended to customers in the second year d) A significant decrease in the volume of sales of the second year

7.

When should an average amount be used for the numerator in computing a financial ratio? a) When both the numerator and denominator are balance sheet items b) When the numerator is an income statement item and the denominator is a balance sheet item c) When the numerator is a balance sheet item and the denominator is an income statement item d) When both the numerator and the denominator are income statement items

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8.

A company disclosed the following information for the year ended December 31, 20x8: Net cash sales Net credit sales Inventory at beginning of year Inventory at end of year Net income Accounts receivable at beginning of year Accounts receivable at end of year What is this company’s days sales in accounts receivable for 20x8? a) 182 days b) 94 days c) 65 days d) 57 days $ 75,000 125,000 50,000 62,500 12,500 40,000 22,500

9.

During 20x8, a company purchased $320,000 of inventory. The cost of goods sold for 20x8 was $300,000, and the ending inventory at December 31, 20x8, was $60,000. What was the inventory turnover for 20x8? a) 5.0 times b) 5.3 times c) 6.0 times d) 6.4 times

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Problem 10-2 The comparative financial statements for the Kuehl Company are as follows. Kuehl Company Balance Sheets as at December 31 … 20x5 ASSETS Current Assets Cash Accounts receivable Inventory $12,000 275,000 425,000 712,000 1,450,000 $2,162,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $379,000 920,000 1,299,000 300,000 563,000 863,000 $2,162,000 $371,000 850,000 1,221,000 300,000 493,000 793,000 $2,014,000 350,000 800,000 1,150,000 300,000 425,000 725,000 $1,875,000 $34,000 220,000 340,000 594,000 1,420,000 $25,000 200,000 350,000 575,000 1,300,000 20x4 20x3

Fixed Assets – net

$2,014,000 $1,875,000

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Kuehl Company Income Statements for the year ended December 31 … 20x5 Sales Cost of goods sold Gross margin Operating expenses Depreciation expense Operating Income Interest expense Net income before taxes Income taxes Net income Required – Prepare a full financial statement analysis for 20x4 and 20x5 for Kuehl Company. $2,300,000 1,400,000 900,000 550,000 120,000 230,000 60,000 170,000 60,000 $110,000 20x4 $1,900,000 1,200,000 700,000 400,000 100,000 200,000 50,000 150,000 52,000 $98,000

are as follows.000 $3.000 524.000 820.628.003.000 $4.324.000 1.000 $20.789.576.Introductory Financial Accounting.000 2.000 2.000 480.000 809.876.000 2.679.000 $524.000 650.000 2.000 700. Balance Sheets as at December 31 … 20x7 ASSETS Current Assets Cash Accounts receivable Inventory $37.000 700.808.000 1. v.000 2.000 570.003.000 1.000 20x6 20x5 Fixed Assets – net $4.000 $480.000 800.000 .979.000 1.000 1.000 $3.000 1.808.889.000 1. Rocky Mountain Camping Equipment Ltd.956.956.180.000 $3.1.000 $3.380.000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $560.000 700.000 485.928.999.000 1.000 300.000 2.000 700.114.000 $24.167.1 Page 157 Problem 10-3 The comparative financial statements for Rocky Mountain Camping Equipment Ltd.

700.1.000 30.1 Page 158 Rocky Mountain Camping Equipment Ltd.000 463.000 100.000 700.000 137.000 5.000 $51.000 800.000 20x6 $1. v.000.000 1.000 .300.000 $3.100.Introductory Financial Accounting.000 100.000 60.000 65.000 2. $2.000 81.000 635.000 56. Income Statements for the year ended December 31 … 20x7 Sales Cost of goods sold Gross margin Operating expenses Depreciation expense Operating Income Interest expense Net income before taxes Income taxes Net income (loss) Required – Prepare a full financial statement analysis for 20x6 and 20x7 for Rocky Mountain Camping Equipment Ltd.000 1.

5. v.999 . 2. 3. d b a d d d b c $40.000 $999.039.999 + 40. 4.Introductory Financial Accounting. 6. 8. SOLUTION TO PROBLEMS Problem 1-1 1.000 – ($40.1. 7.000/4 years x 6/12) = $35.1 Page 159 11.000 = $1.

000 .1.200 4.000 Accrued Liabilities 150 700 600 1.000 1.000 15. v. Amortization 500 11 10 Retained Earnings 10.800 33.960 5.000 Acc.367 8.777 Bank Loan 20.200 400 800 12 4 15 Inventory 25.Introductory Financial Accounting.000 2.000 120.000 20.000 15.000 50.000 1 3 Furn.000 25.000 4.000 Common Stock 20.000 BALANCE SHEET Accts.1 Page 160 Problem 1-2 Part (a) Assets Cash 20.000 190.000 182.000 Liabilities & Equity Accounts Payable 130. Receivable 6.000 1 4 7 8 B 2 3 6 7 B 8 10 14 5 9 B 2 Prepaid Rent 1.000 2. & Fixtures 15.000 13 16 17 18 19 B 6 B Prepaid Insurance 1.

000 0 Cost of Goods Sold 130.000 5 9 B 15 15 14 B 7 15 11 Amortization 500 10 13 B 10 17 B Wages and Salaries 36.000 600 36.1 Page 161 Expenses Purchases 50.000 Revenues Sales 196.000 0 Rent 2 10 18 B 1.1. v.367 .000 3.000 1.000 170.000 INCOME STATEMENT Purchase Returns 15.960 Interest 300 150 450 Advertising 10 2.960 5.600 Insurance 400 12 10 16 B Miscellaneous 1.000 120.200 19 Income Taxes 5.500 700 2.Introductory Financial Accounting.000 15.

800 500 500 2.000 120.000 1.000 6.000 50.000 15. 7.000 15.000 50.200 1.000 36.1. 6.Introductory Financial Accounting.000 20. v.000 120.000 4. 3.000 3.500 10. 11.000 196.000 1.000 182. .000 1.000 $20. 4.000 300 130.000 4.200 190.000 / 10 years x 4/12 $20.000 2. 5.000 2. 8.000 1.1 Page 162 Journal Entries – 1.000 20. Cash Common Stock Prepaid rent Rent expense Cash Furniture and fixtures Cash Cash Bank Loan Purchases Accounts Payable Prepaid Insurance Cash Cash Accounts receivable Sales Cash Accounts receivable Purchases Accounts payable Wages and salaries Rent Advertising Miscellaneous expenses Retained earnings Interest Accounts payable Cash Amortization expense Accumulated amortization $15. 9. 10.

15. 17.890 x 30% = 400 400 13.960 15.200 / 12 months x 4 months expired Interest expense Accrued liabilities Accrual for the month of October: $20. Insurance expense Prepaid insurance $1. 19.890 Income tax expense = $17.367 5. 150 150 14. 5.000 x 9% x 1/12 Accounts payable Purchase returns Cost of goods sold Inventory Purchase returns Purchases Miscellaneous expenses Accrued liabilities Salaries and wages Accrued liabilities Rent expense Accrued liabilities $196.000 x 1% Income tax expense Accrued liabilities Net income before taxes = $17.Introductory Financial Accounting. 16.000 25. 18.000 700 700 600 600 1.1 Page 163 12.367 .000 15.000 170. v.000 130.000 15.960 1.1.

277 . v.600 2.777 20.277 $270.000 800 1.367 $270.000 20.000 15.000 10.000 25.000 5.000 8.Introductory Financial Accounting.960 500 450 36.000 Credit $ 500 25.200 5. Trial Balance As at October 31. 20x2 Cash Accounts receivable Inventory Prepaid Insurance Prepaid rent Furniture and fixtures Accumulated amortization Accounts payable Accrued liabilities Bank loan Capital Stock Retained earnings Sales Cost of goods sold Rent Amortization Interest Wages and salaries Advertising Insurance Miscellaneous Income taxes Debit $33.000 400 2. Heavenly Books.000 130.1.1 Page 164 b.000 2. Inc.000 196.

000 400 2. Inc.200 47.000 130.Introductory Financial Accounting. October 31.600 2.000 66. 20x2 Sales Cost of goods sold Gross profit Operating expenses Rent Amortization Wages and salaries Advertising Insurance Miscellaneous Operating income Interest expense Net income before taxes Income tax expense Net income $196. 20x2 Retained earnings.000) $2.523 (10. Income Statement for the four months ended October 31.1 Page 165 c. July 2.890 5. Heavenly Books.1. Statement of Retained Earnings for the four months ended October 31.660 18.523 . v.000 5. 20x2 Net income Dividends Retained earnings. Inc.523 Heavenly Books.340 450 17. 20x2 $0 12.960 500 36.367 $12.

v.000 61.300 .300 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Accrued liabilities Current portion of bank loan Bank loan Shareholders’ Equity Capital stock Retained earnings $25.000 2.000 45.523 $76.500 $76.1 Page 166 Heavenly Books.000 500 $33.000 25.777 20.777 8.523 22.1.800 14.000 2.777 12.000 8.Introductory Financial Accounting. Inc. Statement of Financial Position as at October 31. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance Prepaid rent Furniture and fixtures Less accumulated amortization $15.000 800 1.000 53.

600 – 2.500 Global Productions Inc.200 54.000 71.beginning Net income Dividends Retained Earnings .100 3.300 21.300 18.400) Cost of goods sold Gross margin Operating expenses Amortization Insurance Rent Salaries Supplies Telephone Operating income Interest expense Net income before taxes Income tax expense Net income 4.1.600 13.600 4.200 3. v.000 17.000 4.100) $7. 20x6 Retained Earnings . 20x6 Net sales ($157.1 Page 167 Problem 1-3 Global Productions Inc.800 2.100 $9.500 (2. Statement of Retained Earnings for year ended December 31.ending $0 9.200 84.400 . Income Statement for year ended December 31.Introductory Financial Accounting.500 $155.

1.400 57.400 $107.000 9.500 1. v.000 49.Introductory Financial Accounting.1 Page 168 Global Productions Inc.000 7.800 19.000 .100 1.100 87.600 40.200 2.000 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Bank loan Shareholders' Equity Capital Stock Retained earnings $7. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Supplies Prepaid insurance Office equipment Accumulated amortization 24.800 $25.500 1.600 50.000 4. Statement of Financial Position as at December 31.200 $107.100 14.900 44.

To do this you would set up a receivable. Therefore. you will have accumulated 3 days worth of salaries that have not been paid.Introductory Financial Accounting. due from Big Al. you only had the machine in use for 7 months. Accounts Receivable Consulting Revenue 2.1.250/year.250 X 7/12 = $3. Therefore. you would have debited Prepaid Insurance and credited Cash for the full amount of $5. However.646 for the current period.333 . as these expenses were incurred during the period.333 from Prepaid Insurance and record it as Insurance Expense for the period. Salary Expense Salaries Payable 1.1 Page 169 Problem 1-4 a) Annual amortization expense for the machinery would be = $50. Therefore. therefore you will remove $5. your amortization expense would be = $6. However. Cash Unearned Revenue 24 24 As of April 30. You have used 8/12 of the policy.000 X 8/12 = 3.300 revenue this accounting period.800 1. The journal entry would be: Unearned Revenue Subscription Revenue c) 6 6 You have earned the $2.333 3.300 2. in the amount of revenue earned during the period. you would have sent out 1 of the 4 magazines in the subscription.646 3. Amortization Expense Accumulated Amortization b) 3. it is appropriate for you to record it in this period. you must record them as an expense of that period.646 When you received the cash in January. we will record salaries expense and the accompanying salaries payable of $1.800 e) When you purchased the policy.000/8 years = $6. therefore.300 d) As of Wednesday. $24 X = $6. the full amount would be recorded as an Unearned Revenue liability. you would have earned of the revenue. Insurance Expense Prepaid Insurance 3.000. v.800.

000 g) The $4. Therefore.000 has been earned and should be included in revenue for this period. you would have debited Cash and credited Unearned Revenue by $6.000 1. You will have to adjust for that fact that 5/6 of the payment has not been earned i.000 covers a 6-month period. you would have been in the premises for 1 month.e. the second payment that you received on December 1st covers the period of December – May.750 4. Prepaid Rent Cash 4. $6. and would be recorded as an asset on your accounts for the June30th period end.000 each.1.750 4..000 X 5/6 = $5.Introductory Financial Accounting.000 is unearned. and therefore you would have incurred one month worth of Rent Expense. Unearned Revenue Catering Revenue 1. No adjustment is needed for this. Rent Expense Prepaid Rent 4.750 .750 As of July 31st. The first payment that you received on June 1st would cover the catering for June – November. On December 1st. v. You would remove the Prepaid Rent account to reflect that fact that you have “used up” the rent. However. that full amount would have been earned and recorded as revenue during the period. or $1.750 you paid on June 30th represents Prepaid Rent.1 Page 170 f) Each of the payments for $6.

000 $0 $1.000 + 10.000 – 128. 10.000 $1.000 = $72.000 $1. 4.000 = $48. Debit to Subscriptions Received in Advance = $180.000 $1.000 x 6/24 = $250 Rent receivable (or accounts rec) Rent income Interest expense Interest payable $300 x 4/12 = $100 Unearned subscription revenues Subscription revenues $440 x 3/24 = $55 $250 $250 b. 4.000 1. 9. 20x5 Insurance expense Prepaid expense $1. 5. 11.000 x $10 = $1. 2. .000 (cash) = $1. 100.000 (COGS) = $1.000.000 + (200 x $50)(cash) – (200 x $20)(inventory) = $1. 20x5 55 55 Problem 1-6 1. 20x5 500 500 100 100 c.000 less the revenue earned for subscription fees received in the previous year of 80. 12. Total amount received as revenue of $128.000. Dec 31.1 Page 171 Problem 1-5 a.000.000.000. 2.000 + 300. 7.006. 6.000.000 $1.000 $20. 3.000.000 + (1.026. $80.020.000. Dec 31. the offsetting credit would be to Subscriptions Revenue.1. 8.020.000 Problem 1-7 1. Dec 31.000 x $20)(inventory) = $1. 20x5 d.000 x $20 (accounts payable) = $20.000 + 120. 3.000 (sales) – 4.000 (bldg) – 300.000. v.Introductory Financial Accounting. The opening balance in the Subscription Received in Advance account = $80.000 $1.000. Dec 31.000 (the ending balance in the account).000 $0 $1.000.

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Problem 1-8 Shareholders’ Equity Net Income

Assets 1.

Liabilities

+10,000 NC NC NC -10,000 Remove the receivable from A/R, and add a short-term note receivable.

2.

+50,000 NC +50,000 NC An increase in the cash account and an increase in the contributed capital account. +2,000 NC NC NC -2,000 An increase in the cash account and a decrease in the accounts receivable account. +500 NC NC NC -500 An increase in the prepaid insurance account and a decrease in the cash account. +200,000 +200,000 NC NC An increase in the equipment account and an increase in the notes payable account. NC +1,400 -1,400 -1,400 An increase in the interest payable account and an increase in the interest expense account, therefore, the decrease in net income. +1,000 NC +1,000 +1,000 An increase in the interest receivable account and an increase in interest revenue, and therefore both net income and retained earnings (part of shareholders’ equity)

3.

4.

5.

6.

7.

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Problem 1-9 1. Sales Cash received for sales Less cash received for previous year sales Plus Sales not paid for in current year Sales – accrual basis Purchases Cash paid for purchases Less advance payment Plus prepaid purchases Purchases – accrual basis Cost of Goods Sold Beginning inventory Plus purchases Cost of goods available for sale Less ending inventory 20x6 $ 60,000 (5,000) 20,000 $ 75,000 20x7 $ 70,000 (20,000) 0 $ 50,000

$ 40,000 (2,000) 0 $ 38,000

$ 35,000 0 2,000 $ 37,000

0 38,000 38,000 (3,000) $ 35,000

$

$ 3,000 37,000 40,000 (5,000) $ 35,000

Revised Income Statement Sales Less Cost of Goods Sold Gross margin Other expenses Operating income Profit Margin (30,000/75,000) (2,000/50,000) * 14,000 – 1,000 personal expenses 2. Revenue recognition principle – revenue must be recorded when earned, it can be measured, and the collectability is reasonably assured, not when cash payment is received. Mr. Cash violated this by recording “sales” on a cash basis. Matching principle – all expenses must be recorded in the same period as the revenue that the expenses were incurred to generate. Mr. Cash violated this principle by simply using cash paid for purchases instead of calculating the proper COGS. Economic entity principle – a business should only report on transactions that are under its control. By including his own personal expenses Mr. Cash crossed the line between “personal” and “business” and violated this principle. $ 75,000 35,000 40,000 10,000 $ 30,000 40% $ 50,000 35,000 15,000 *13,000 $ 2,000 4%

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Problem 1-10 a. Revenue should be recognized when the trees are sold to the customer during the Christmas season because that is when the benefits and risks of ownership pass from the company to the customer. Until then, the company does not know whether any customers will buy their trees, or how much the customer will pay for the trees (measurement of amount). There is so much competition and one never knows how many trees will be sold. Some trees may have to be discarded if they do not sell. Also, at the time of the sale, cash is collected so there is no uncertainty as to collectability. The company has little or no risk once the tree is sold because it is very unlikely that the tree will be returned. The annual cost of fertilizing, pruning and maintaining the trees should be capitalized as a cost of inventory. In effect, the trees are like work-in-process inventory. Then, when the trees are sold, all of these costs will be expensed as cost of goods sold. This is an example of the matching principle and the point of sale recognition method.

b.

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Problem 1-11 a. Dec 1 Cash Capital Stock Furniture and equipment Cash Note payable Cash Revenues Accounts Receivable Revenues Office supplies Accounts Payable Cash Accounts Receivable Wage expense Cash Rent expense Cash Office supplies expense Office supplies $6,000 $6,000 4,000 1,000 3,000 680 680 1,875 1,875 300 300 1,875 1,875 1,300 1,300 1,000 1,000 100 100

Dec 3

Dec 7

Dec 13

Dec 17

Dec 28

Dec 31

Dec 31

Dec 31

b.

Operating income for the month ending December 31, 20x6 would be: = $680 Sales + 1,875 Sales – 1,300 Wages Expense - 1,000 Rent Expense - 100 Supplies Expense = $155

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Problem 1-12
Assets BALANCE SHEET Accounts Receivable 100 700 720 120 Note Rec - Cur 100 100 Liabilities & Equity Accounts Payable 500 100 520 120 Wages Payable 8 8 15 15 Inventory 160 440 520 240 Interest Receivable 16 16 8 8 Prepaid Fire Ins. 3 3 36 4 32 Retained Earnings 26 322 Capital Stock 110 Inc Taxes Payable 4 4 5 5 Dividends Payable 26

B b d e f

Cash 21 500 180 193 700 189 24 74 100 36 19 14

g h i j k l

B b E

d

g

B a E

B E

f

h

B q E

B a E Equipment 110 74 184 Acc Dep 66 30 96 Note Rec - LT 100

c

l

B r E

B j E

B n E

e

m

B p E

B k E

o o

B

B

m

B

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Expenses COGS 440

INCOME STATEMENT Salaries and Wages 185 15 200 Insurance 3 4 7 Income Taxes 15 5 20

Revenues Sales 900

c

h q E

b

i

Miscellaneous 189

o o E

Interest Revenue 8 8 16

e n E

p

Depreciation 30

l r E

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Ruiz Pharmacy Income Statement for year ended December 31, 20x2 (000's) Sales Cost of goods sold Gross margin Operating expenses Salaries and wages Miscellaneous Insurance Depreciation Operating income Interest revenue Net income before taxes Income tax expense Net income 200 189 7 30 $900 440 460

426 34 16 50 20 $30

Ruiz Pharmacy Statement of Retained Earnings for year ended December 31, 20x2 (000's) Retained Earnings - beginning Net income Dividends Retained Earnings - ending $322 30 (26) $326

Introductory Financial Accounting. 20x2 (000's) ASSETS Current Assets Cash Accounts receivable Accrued interest receivable Merchandise inventory Prepaid fire insurance Noncurrent assets Note receivable Equipment Accumulated depreciation $14 120 8 240 32 414 100 184 (96) 88 188 $602 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Accrued wages payable Accrued income taxes payable Dividends payable Shareholders' Equity Paid-in Capital Retained earnings $120 15 5 26 166 110 326 436 $602 . v.1 Page 179 Ruiz Pharmacy Balance Sheet as at December 31.1.

000 600.000 Interest Payable 8.000 12.000 9 13 Long-Term Notes Payable 20.00 515.000 Capital Stock 110.Introductory Financial Accounting.000 16. And Com. 7.000 16.000 200.000 215.000 25.000 375.000 575.500 8.1 Page 180 Problem 1-13 Assets Cash 30.000 31.000 25.000 BALANCE SHEET Accounts Rec.000 62.000 Taxes Payable 20.800 Sal.500 547.000 12.000 Inventory 446.000 10.500 B 2 5 8 4 6 7 7 9 9 11 13 13 14 B 2 E 5 6 B 1 E B 1 E 3 10 7 B 7 E E 9 13 B 13 E B 11 E B 12 E 4 Customer Deposits 10.000 B E B 10 Retained Earnings 4. Depreciation 40.000 375.500 260.500 20.000 8.000 20.500 745.000 20.000 14.000 Prepaids 14.000 4.000 225.000 265.000 8 Rent Payable 27.000 Liabilities & Equity Accounts Pay 600.000 775.000 15.000 21.000 323.000 850.000 850. 123.000 Acc.500 B 9 E Furniture & Fixtures 190.000 24.000 100. v.000 B . Pay.000 80.500 6.800 6.000 22.1.

350.000 12.000 Sales 1.000 70.000 .000 13 14 Other 225.000 8.000 27.000 4 2 9 9 9 9 E Rent 14.500 Revenues 3 COGS 345.000 21. v.1.000 Interest 6.000 27.000 7 7 E Income Tax 15.Introductory Financial Accounting.1 Page 181 Expenses INCOME STATEMENT Salaries and Commissions 207.800 12 Depreciation 22.

20x5 Retained Earnings.700 27.700 -4.000 207.Introductory Financial Accounting.350.000 225.500 80. Income Statement for the year ended August 31.1. 20x5 Sales Cost of goods sold Gross margin Operating expenses Salaries and commissions Rent Amortization Other Operating income Interest expense Net income before taxes Income tax expense Net income $1.000 $46.000 605.000 46.000 524.800 73. Aug 31.500 6. 20x5 $260.000 22. Sep 1.200 .700 Peter’s Appliance Shop Ltd.500 $302. Statement of Changes in Retained Earnings for the year ended August 31.000 745. 20x4 Net income Dividends Retained Earnings.1 Page 182 Peter’s Appliance Shop Ltd. v.500 70.

000 -62.800 27.070.070.200 $1.000 302.000 578.000 917.300 110.000 7.000 153.000 10.500 6.000 658. 20x5 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Fixed Assets Furniture and fixtures Less accumulated amortization $ 31.500 .000 $1.1 Page 183 Peter’s Appliance Shop Ltd.1.500 323.300 80.200 412. v.500 LIABILITIES & SHAREHOLDER’S EQUITY Current liabilities Accounts payable Taxes payable Salaries and commissions payable Interest payable Rent payable Customer deposits Long-term notes payable Shareholder’s equity Capital Stock Retained earnings $515.500 215.000 16. Balance Sheet as at August 31.000 12.000 547.Introductory Financial Accounting.

700 (5.300 580 1. $15.1 Page 184 Problem 2-1 1.300) $3.700 77.200 .$1.548) 3. December 31 Add Sparg cheque deducted in error Add deposits in transit Less outstanding cheques Cash balance per books b.700 – 3.1. Cash balance per books. Dec 31.095 + 9.288 Problem 2-2 a.280 . 2.000 (77. v.280 $6.020) Adjusted cash balance per books. 3.225 63 $4.200 = $21. Dec 31 Cash balance per bank. Cash Accounts receivable Bank service charges Cash $180 $180 52 52 $3. before adjustments Less bank service charges Add error in recording cheque ($1.Introductory Financial Accounting.152 (52) 180 $3. Dec 1 Add cash received during December Less cash payments made during December Cash balance per books. c b b The balance on the bank statement will be overstated by $360.595 Balance per bank statement Add deposits in transit Balance per books $4.

700 (1.915 180 (35) (360) $4. Bank service charges Cash To record bank service charges for the month.200 $4. before adjustments Add error in cash receipt Less bank service charges Less error on cheque # 521 Cash balance after adjustments Bank reconciliation Cash per bank. $ 480 6. Office equipment Cash To correct error made in recording of purchase of office equipment: $620 – 260 = $360.700 $180 $180 35 35 360 360 . Cash balance. Cash Accounts Receivable To record error in deposit made ($530 – 350 = $180). March 31. March 31.200 $780 1. 20x7 Add outstanding deposits Less outstanding cheques # 201 # 533 Cash per books.980) $4. v.Introductory Financial Accounting. 20x7 2.1.1 Page 185 Problem 2-3 1.

000 (4.000 $2. the securities have to be recorded at fair market value on the balance sheet at December 31.000) 12.000 31.000 .000) $ 8. Either way.000 $35. If the securities are classified as available for sale. Available for sale securities are defined by what they are not: they are not long-term investments nor are they trading investments. then the net unrealized gain will be part of the Other Comprehensive Income section of Shareholders' Equity.000 3. If the securities are classified as trading investments. b) Cash Other Comprehensive Income Temporary investments .000 XYZ Computer Satellite Systems Strategic Air Defence Systems Generic Engineering Cellulose Telephone The difference in accounting treatment lies with how the net unrealized gain will be recorded. Trading investments are those that are held for re-sale as part of a portfolio of managed securities held for a short-term.Strategic Air Defence Gain on sale of Investments $75.000 70.1 Page 186 Problem 2-4 a) The accounting for temporary investments depends on whether the company designates the investments as available for sale investments or trading investments.Introductory Financial Accounting.000) (1.000 3. then the net unrealized gain flows through net income.000 3. v.000 7.1. 20x0: Unrealized gain (loss) ($2.XYZ Computer Gain on sale of investments Cash Other Comprehensive Income Temporary investments .

500) ($4. an unrealized holding loss of $4.500) will be charged to net income. .500) b) In 20x0.500) (2. v.700 will be charged to net income.700 ($5.1 Page 187 Problem 2-5 a) Security A Security B Security C 20x0 ($2.200) ($5.4.500) (1.000) (1. an unrealized holding gain of $1.500 ($4.700) 20x1 ($500) 0 (3.000) 20x2 ($4. In 20x2.000) (3.Introductory Financial Accounting.000 – 8.000) will be credited to net income.000) ($8.700 . In 20x1.1. an unrealized holding loss of $5.

000 Write-offs Allowance for doubtful accounts. Beg Bal + 55.000 x 3% $97.000 x 4% 4.800 = $1. 20x8.200.5%) Allowance for doubtful accounts Accounts receivable balance. a Balance in allowance account at the end of 20x9 before adjustment for bad debts: $5.000 – 500 + 300 = $4. Write offs $9.000 x 0.000 Before: $3.000 Collections – 55.1.000 cr.Introductory Financial Accounting. Required balance at December 31: ($80.800 Bad debt expense = $6. Recoveries Adjustment required Bad debt expense Allowance for doubtful accounts 86.000 3. December 31. Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable b.000 cr.350 cr.000 dr.875 2.350 $55.000 $55. Dec 31.000 cr.000 Write offs) = $100.000 Sales – 360.000 A/R Begin + 400.000.600 Balance in Allowance for Doubtful Accounts.000 c.350 cr.350 86.000 cr.000 71. Bad debt expense ($14. $3. d 3.000 Beg Bal + 14.000 – 125 = $2. before adjustment $11.900. Adjustment $13.875 After: ($3.000 Collections – 20.000 dr. $86.000 71. 2004: $1. 11. 2004 Balance in allowance before adjustment $63. December 31.000 3. .000 Credit Sales – 11.000 – 30) – (125 – 30) = $2.000 3. Write-Offs + 3.400 – 4. v.245. Beginning Bal – 20. a Problem 3-2 a.000 dr.000 cr.000 3.1 Page 188 Problem 3-1 1.200.

915.000 $2.000 2.000 2.000 16.770 cr. (Schedule) $2.840 cr.290 31. (Schedule) 20x1 Accounts Receivable Sales To record credit sales for 20x1 Cash Accounts receivable To record cash collections for 20x1 Allowance for doubtful accounts Accounts receivable To record accounts written off for 20x1 Accounts receivable Allowance for doubtful accounts To record recoveries for 20x1 Cash Accounts receivable To record cash collections for 20x1 Bad debt expense Allowance for doubtful accounts To adjust the allowance for doubtful accounts to an ending balance of $38.000 43.000 31.000 3.000 2.1 Page 189 Problem 3-3 20x0 Accounts receivable Sales To record credit sales for 20x0 Cash Accounts receivable To record cash collections for 20x0 Allowance for doubtful accounts Accounts receivable To record accounts written off for 20x0 Bad debt expense Allowance for doubtful accounts To adjust the allowance for doubtful accounts to an ending balance of $27.000 2.480 43.290 . v.000 16.000 27.000 7.1.000 27.Introductory Financial Accounting.000 7.000.400.480 3.800.000 7.000.000 7.915.400.800.

000 $442.000 31.770 4.000 43.800.000.290 38. 20x0 0 – 30 31 – 60 61 – 90 Over 90 $234.000 1% 5% 20% 80% $ 2.000 45.000 $27.400.000 90.000 $384.Introductory Financial Accounting.000 Allowance for Doubtful Accounts 16.000 $38.500 9.000 7.000 12.000 2.840 December 31.770 20x0 Bal 20x1 Bal Bal Schedule – Calculation of the Allowance for Doubtful Accounts December 31.1.000 384.000 25.000 20.000 80.000 7.000 16.340 4.000 27.000 1% 5% 20% 80% $ 2.915.000 7.770 . 20x1 0 – 30 31 – 60 61 – 90 Over 90 $277.480 27.000 12.000 442.000 15.480 27.000 60.000 2. v.000 3.1 Page 190 20x0 Bal 20x1 Accounts Receivable 2.

Accounts receivable Sales Allowance for doubtful accounts Accounts receivable Cash Accounts receivable Note receivable Accounts receivable Accounts receivable balance.500 dr.000 1.1.000 $135.000 x 2%) 10.500 1.000 x 12% x 1/12) 6.000 Credit Sales – 1. Write-offs Adjustment required Bad debt expense Allowance for doubtful accounts Interest receivable Interest income* *(3. Bad debt expense** Allowance for doubtful accounts **($500.000 3.1 Page 191 Problem 3-4 1.000 = $10.000 cr. Allowance for doubtful accounts.000 400. Beg Bal + 1.000 10.000 Collections – 3.775 cr. 20x7 Balance in allowance before adjustment: $2.400.500 Write-offs .000 Note Receivable 3.000 Note: The allowance account will now be $500 + $10.275 30 30 2.275 cr. $6. 6.500 x 5% $6.000 500. 31.500.000 Beg Bal + 500. December 31. .000 500. 20x7: $40. Dec. v.275 500 cr.500 400.Introductory Financial Accounting.

Introductory Financial Accounting.000 509.1 Page 192 Problem 4-1 1.000 49.590 79.000 $80.500 x 98%) Sales discounts Accounts receivable d. b Opening Inventory Purchases – net: $500.1.000 56. Accounts receivable Sales Cost of goods sold ($80.000 – 10.000 x 99%) Inventory $80.000 50.000 + 25.910 1.000 1. .000 x 70%) Inventory b. 3.500 500 c. 4.000 2.000 (66.200 500 500 350 350 77.000 Ending inventory Cost of goods sold $60. Delivery expense Cash Sales returns and allowances Accounts receivable Inventory ($500 x 70%) Cost of goods sold Cash ($79. c c d Czech should have recorded this sale in 20x8 since the goods were shipped FOB Shipping. v. e.000 56.000) $503.200 1.000 – 6.500 50.000 50. Problem 4-2 a. Inventory Accounts payable Accounts payable Cash ($50.

Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Purchases (Sales) Units 2.000 Units 1.00) + (20 units x $11.000) Unit Cost Total Cost 18.00 16.000 (40.50) $1. Ending inventory = 55 units (35 units x $12. v.500) 3.500 b.100 $1.190 623 Accounts receivable Sales Cost of goods sold Inventory (10 units x $10) + (40 units x $11.000 8.50) = $650 Note that the results for FIFO periodic are the same as for FIFO perpetual. Purchases (Sales) Units 60 (20) 35 (50) Unit Cost Total Cost $11.Introductory Financial Accounting.000) 69.00 23.00 11.000 (2.100 560 560 Problem 4-4 a.500 units 1.3333 $300 990 770 1.000 77.00 22.00 11. b.1.00 $12. Date May 1 May 5 May 14 May 21 May 29 c.000 3.000 (2.1 Page 193 Problem 4-3 a.00 16.00 12.500 Balance Unit Cost Total Cost $12.000 48.00 36.50 11.000 44.000 500 3.00 22.00 11. Ending balance = 1.000 .000 33.3333 $690 (220) 420 (567) Units 30 90 70 105 55 Balance Unit Cost Total Cost $10.500 units x $23 = $34.500 1.

000 x $52 930 x $58 $ 333. Weighted Average Sales COGS * Gross Profit 3.400 Weighted Average Cost per unit $ 19.7059 = $ 173. Beginning Inventory.400 = $ 52.330 x $100 400 x $48 1.000 52. December 31.000 $ 19.000 53.000 52.7059/unit Cost of Goods Sold = 3.940 Units 400 3.000 173.330 x $100 $ 333.Introductory Financial Accounting.929 $ 159.200 50.000 x $50 1.200/3.200 50.330 Gross profit 175. 20x5 Units sold during year FIFO Sales COGS 3.860 b.071 *400 x $48 1.330 x $ 52.000 x $58 3.200 = $179. January 1.000 3.000 58. 20x5 Purchases Goods Available for Sale Less Ending Inventory.000 x $52 1.400 70 3. v.1 Page 194 Problem 4-5 a.000 x $50 1.1.000 $ 179.140 $ 157.929 .

000 458.000 $150.000 10.000 Sales Returns Estimated cost of goods sold Opening Inventory Net purchases: $480.000 June 2 Sales returns Accounts receivable Inventory Cost of goods sold June 9 Cash Sales discount ($20.600 June 1 Accounts receivable Sales Cost of goods sold Inventory 30.000 608.000 19.000 x 70% $420.600 400 20.000 10.000 420.000 $188.1.000 $37.000 – 15.000 42.1 Page 195 Problem 4-6 Net Sales = $615.000 – 30.000 x 20% Problem 4-7 $600.000 42.000 15.000 Customs and Duty Cost of goods available for sale Less Cost of goods sold Estimated value of ending inventory Net loss from fire = $188.000 x 2%) Accounts receivable Inventory Accounts payable June 12 .000 15.000 Purchase Returns + 8. v.000 5.000 5.000 30.Introductory Financial Accounting.

000 $ 646. Cost of goods available for sale: 20 units x $900 each 440 units x $950 each 200 units x $1.1.050 each = = = $ 18.000 210.000 2.050 each = $ 63. v.000 418.79/unit x 60 units Ending inventory = $58.79/unit Ending inventory = $978.1 Page 196 Problem 4-8 1. Ending inventory – Weighted Average Average unit cost = Cost of goods available for sale/Units available for sale Average unit cost = $646.000/(20+440+200) Average unit cost = $646.Introductory Financial Accounting.000/660 units Average unit cost = $978.000 3.727 . Ending inventory – FIFO: 60 units X $1.

.3).300 c.09 24. 20x7 Purchases Less: Purchase returns and allowances Less: Purchase discounts Net Purchases Add: Transportation-In Cost of goods available for sale Less: Merchandise inventory. It would be equivalent to interest of $1.500 (3. it may cost a company 10% to borrow the funds. For example.000 80. TOYJOY LTD. thus giving an annual percentage cost of missing the discount of 75.09% (3.300 3.300 30. If payment was not made within the discount period.200) (1.200 1.000 $ 150.1.1 Page 197 Problem 4-9 a.000 (1.500 on a base amount of $48.500 by paying 15 days early.500 1. December 1.3 15-day periods in a year (365/15). much higher than the 10% borrowing rate. v.000 would need to be paid on the due date. discounts taken under a term of 3/15. The savings generated by purchase discounts generally make it worthwhile to borrow to take advantage of the purchase discount.000 80. In December.200 3. Cost of Goods Sold Schedule for the month ended December 31. whereas the purchase discount may generate a savings which would equate to an effective interest rate much higher than 10%.000 48. 20x7 Merchandise inventory.09%) for a 15day period (30 days – 15 days). December 31. i) Purchases Accounts Payable 80. the full amount of $50.Introductory Financial Accounting. 20x7 Cost of goods sold $ 80. There are 24. n30 generated savings of $1.500 1.000 $200.500) 77.000 50.000 ii) Accounts Payable Cash Purchase Discounts iii) Accounts Payable Purchase Returns iv) Transportation-In Cash b.300 230.000 3.

Introductory Financial Accounting. 20x7 Estimated Cost of Goods Sold* Estimated Gross Profit ($60. January 1 to January 13 Cost of goods available for sale Less estimated ending inventory.000 Cost of goods available for sale – COGS = Ending Inventory $110.000 O 6.000 36.40% = 60%.40) $ 60.000 * ** If Gross Profit = 40%.000 x .000 U 6. v.60 = $36.000 $24. then COGS = 100% .000 O 20x7 Cost of Goods Sold 10.000 = $74.000 110. January 1.000 10. 20x7 Purchases.000 .000 O 5.000 – 36.000 U N/A N/A 20x6 Retained Earnings 10.000 O Problem 4-11 Sales.000 U N/A 5.1. January 1 to January 13 Inventory.000 x .000 **74.000 U 20x6 Ending Inventory 10.000 U 5.1 Page 198 Problem 4-10 Error i) ii) iii) 20x6 Cost of Goods Sold 10. Therefore.000 $ 100. estimated COGS = $60. January 13.

500) 8.000 + 7.40 .00) = $178.50 = $76.700 106.000 Unit cost = $178.000 x $8.00000 Total Cost $58.500) Purchases (Sales) Unit Cost $8.95000 8.100 Balance Total Cost $58.000 + 8.19231 8.1 Page 199 Problem 4-12 a.400 d.500 COGS = 12.700 106.000 (6.40) + (8. Ending inventory = 6.00 From Purchase # 1: 1.50 = $102.500 14.250) 72.000 b.000 8.000 (46.400) $ 98.000 – 6.40 Ending Inventory Cost of goods sold Cost of goods available for sale Less ending inventory $72.000 x $8. Units 7.000 (6.500 9.500 = 9.500 + 8.000 6.500 53.000 13.00 8.500 / 21.759 c.500 58.600 126. From Purchase # 2: 8.250 77.000 x $8. Units 7.000 units @ $8.000 (47.000 = $8.800 (53.400 $80.000 x $7.741 COGS = $53.000 7.600 80.000 Balance Unit Cost $7.500 Total Cost $47.700) (4.Introductory Financial Accounting.800 54. v.95) + (7.200) Units 6.000 14.40000 9.400 $178.000 6.40 7.1.800 (47.509 = 100.000 (5.50 Ending inventory = 9.250 + 47.000 + 7.000 8.000 – 5.509) Units 6.500 Units available for sale = 6.000 13.500 (80.40 9.000 = 21.95 8.63793 Total Cost $47.000 units @ $9.200) 72.000 Cost of goods available for sale = (6.000) (500) 8.000 x $9.000 (5.250 125.500) Purchases (Sales) Unit Cost $8.

d c c Net book value = $85.000 + 5.000 = $1.000 ($20.5 x = $600 $1.5 x 6/12) Net book value = $63.075.750 .000 – 150.000 – ($85.000)] Net book value = $77. and not the legal life of 17 years. Estimated salvage value = $100.500/year. 3.000 Net book value = $100.000/80. v.1 Page 200 Problem 5-1 1. 5. Depreciation expense = $12.Introductory Financial Accounting.000) / 10 = $4.000 x 90%) / 1.160 To move to the units-of-production method.500 7.500 x 430 = $5.000 – [($100. we must first know the salvage value of the machinery inherent in the problem.000/year) = $10. c Double-declining-balance rate = x 2 = 50% 4. d) ($80.000 + 60.000 + 15. a d ($200.000) x (20.000 / 9.000 – 5. 6.000.000 x . 2.000 – (5 years x $18.000 – 10. Note that we use the estimated useful life of the patent. because the purpose of amortization is to expense the cost of an asset of the period of time it is in use by the company.000)/10 = $8.1.500 It is assumed that the addition should be capitalized and depreciated since it qualifies as a capital asset.

000 16.000) / 200.000 26.000 x 40% (1/5 x 2 = 40%) Amortization expense Accumulated amortization ($65. v. Amortization expense Accumulated amortization ($65. Amortization expense Accumulated amortization ($65.000 – 5.1 Page 201 Problem 5-2 a.000 – 2.500 d. Amortization expense for 20x8 = ($53.000 – 12.000) / 5 years 20x7 Amortization expense Accumulated amortization $65.600 c.000 Amortization expense Accumulated amortization 17.Introductory Financial Accounting.000 – 26. 26.000 x 55.000 – 5.000 20x8 15.000 $12.600 15.000) / 3 = $17.1.000 b.000 17.000) x 40% $12.000 .000 = $53.000 Net book value = $65.500 16.

20x4 Apr 31.000 Dec 31. 20x5 Dec 31.808 Dec 31.656 4. 20x6 10.000 / 32 months remaining = $62.500 10.000 9.000 = $10.750 10. 20x7 20.Introductory Financial Accounting.000 2. 20x7 4.000 $60.50 x 12 months) Equipment Cash Amortization expense Accumulated amortization See Schedule 1 Amortization expense Accumulated amortization $582 x 8 months Cash Accumulated amortization Loss on disposal of equipment Equipment $60.808 9.1.000 20.286 82.714 1. 20x3 Aug 31.50 / month x 8 months = $500 + 10. 20x3 Equipment Cash Amortization expense Accumulated amortization (60. v.000 2.656 25.000 + ($62.000 10. 20x5: $2.750 Oct 31.500 Amortization expense Accumulated amortization $10. 20x4 600 600 10.000 55.000 – 10.000 .500 Dec 31.000) / 5 Repairs and maintenance expense Cash Amortization expense Accumulated amortization Equipment Cash Amortization expense Accumulated amortization Original amount + amortization on amount capitalized on April 31.000 10. 20x5 Dec 31. 20x7 Aug 31.000 10.1 Page 202 Problem 5-3 (a) Jan 2.000 10.

500 15.000 Less fair market value of asset traded in (15.000 (10.000) (10.500 38.688 + 20. 20x7 Original cost of asset Capitalization made on April 1.000 90.062) $12.500) Acquisition price of new lathe ** NBV of asset at time of exchange = $50.1.000) / 39 months = $582 per month x 3 months = $1. 20x5 Less Amortization expense 20x3 20x4 20x5 20x6 20x7 to Sep 30: $10.500 50. 20x7 ($12.000 4.000 – 10.500) $105.746 = $9.746 Total amortization expense for 20x7 = $8.500 $11.688 Amortization expense – Sep 30 to Dec 31.000 $108.500 Market value of asset Gain on sale (2.500) (10.1 Page 203 Schedule 1 Amortization expense for 20x7 Net book value of asset at Sep 30.000 2.000 – 90.000) (10.750 x 9/12 $60.000 – 38.808 Problem 5-4 Equipment (new lathe)* Accumulated amortization (old equipment) Equipment (old equipment) Cash Gain on sale of asset** 105. v.750) (8.500 $ 4.062 + 1.000 * Price of new lathe Less trade-in value less fair market value of asset traded in: Trade in value: $108.000 $18.Introductory Financial Accounting.000 .

v.000 2.000** 3. Amortization expense Accumulated amortization .Introductory Financial Accounting. Machinery Cash 27.000 (9.Machinery **($27.1. 2.000 for 6-month period 3.000 *25.000 20.000 x 6/12 = $3.000 3.000* 27.000 Installation Charges = $27. Cash Accumulated amortization – Machinery Machinery Gain on sale of assets .000 27.000)/4 = $6.000 Cost of machine + 2.000/year $6.000 – $3.1 Page 204 Problem 5-5 1. The freight is included in the cost but the repair is not to be capitalized. Machinery Less: accumulated amortization $27.000 4.000 The cost plus installation.000 9.000) $18.

683) Gain on disposal of equipment Equipment $75. c. ii.Introductory Financial Accounting. ii.000 = $22.183 183 120.000)/4 = $25.500 – 20. i.000 – 25.000 $=75.000 = $22.000 – 20.750) Loss on disposal of equipment Equipment Cash Accumulated depreciation ($22.000 Units-of-production method = (120.000 x 9. v.000) / 41.000 b.000)/40.1 Page 205 Problem 5-6 a.683 Cash Accumulated depreciation ($25.000 45.000 x 12. ii.500 + 23.000 43.500 Straight-line method = (120.000 – 20.000)/(5-1) = $18.750 Units-of-production method = (120.750 1. . Straight-line method = (120.000 + 18.250 $120.1. i. i.000 – 20.000 – 22.

000 (53.000 53. If the machine does not provide decreasing benefits.000) $ 3. c.$140.000 – 15. v.1 Page 206 Problem 5-7 a.800) 5. Under this method. Cost Less accumulated depreciation: $17.750 x 3 years Net book value Less proceeds on disposal Loss Cash Accumulated amortization Loss on disposal Machine $100.1. This method is acceptable under GAAP if it properly reflects the pattern of benefits received from using the machine. $140.000) / 8 = $17.250 3.e.250) 103.Introductory Financial Accounting. if the machine generates less revenues as it gets older.000 cannot be capitalized to the asset since the asset was purchased and not self-constructed.000 (2.000 $157.000 Depreciation expense: ($157.000 x 2% Customs and duty costs Preparation and installation costs b.800 $157. amortization is high in the first year and decreases in amount as years go by.750 . A double-declining-balance amortization method could be used to abide by the president’s request.750 Note that the interest charge of $12. then this method should not be used.750 157.750 (100.. Costs capitalized: Invoice price Less discount . i.000 14.

5. I=6%. v. 2. N=10.000 (9.000 / 5 x $2 x 30% Premium redemptions: 23.Introductory Financial Accounting.321 4.400) $ 8.375 The journal entry to record the actual costs incurred during the year would be: Premium Liability ((22. FV=10. 6.500 37.000 PV=$11.018 x 6% = $688. a b b) PV of bonds at issue: PMT=800. Interest expense for the year = $11.375 The journal entry to record the premium expense would be: Premium Expense Premium Liability 34.500/15) x $25/card) Cash 37.1.375 34. c c b Premium expense: 150.000.018.500 .1 Page 207 Problem 6-1 1. 3.000 /10 coupons /15 redemption ratio x $25 x 55% = $34.472.472.500 / 5 x $2 $18.000.600 Problem 6-2 The premium expense would calculated as follows: $375.

20x1 Interest expense (540.378) x 4% Bonds payable Cash 21.000. 20x2 Interest expense (540.3.554 $540.000 x 5%) Warranty Liability The journal entry to record actual warranty costs incurred is: Warranty Liability Cash.000 $150.000 $150.000 .554 x 4%) Bonds payable Cash 21. 20x2 would be as follows: Jun 30.554 The journal entry to record the interest payments using the effective interest method of amortization is as follows: Dec 31.000 Warranty Costs Incurred = $185.000 Opening Balance + 150. 20x1 Cash Bonds payable $540.000 Warranty Expense – 130.000 130.487 3.378 25.513 25.000 The warranty liability at the end of the year will be $165. Problem 6-4 The value of the bond issue will be as follows: N 10 I/Y 4 PV X= 540. v.622 3.1 Page 208 Problem 6-3 The journal entry to record warranty expense is: Warranty expense ($3.1.000.554 PMT 25000 FV 500000 Enter Compute The journal entry to record the issuance of these bonds is as follows: July 1. Inventory 130. A/P.Introductory Financial Accounting.000 The journal entry to record the interest payment of Jun 30.554 .

432. The journal entry to record repairs as performed is debit Warranty liability. I = 4.301 $432.432. The journal entry to record warranty expense is debit warranty expense credit warranty liability.301 x 4%) Premium on Bonds Payable Cash Interest expense* Premium on Bonds Payable Cash * (10. $6.432. PMT = 425.016 425. $5.000.000 416.Introductory Financial Accounting.000 Jun 30.708) x 4% $10.200 – 6.000.800. 3. Therefore. 20x5 Problem 6-6 1. v. $10.984 8.000. the total debits to the account for the year is the total cost of repairs made during the year.800 = $10. Therefore.301 Dec 31.000.1.000 + 5. the total credits to the account for the year is the warranty expense for the year. 20x4 Cash Premium on Bonds Payable Bonds payable Interest expense ($10.000. credit cash/inventory/etc.708 425.200 2. FV = 10. 4.432.292 7.301 10.301 – 7. Solve for PV = $10.000 417. . 20x5 Dec 31.000 $10.1 Page 209 Problem 6-5 PV of bond issue: N = 30.

403 x 4% Interest payable $513.500 FV 500. 20x7 Jul 1.500 Dec 31.129 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $511.Introductory Financial Accounting.097 . 20x6 Dec 31.500 Jan 1.105 – 1.277 2.976 22.137 = $506. 20x8 Jul 1. 20x7 20.1 Page 210 Problem 6-7 Proceeds on bond issue: N 6 I/Y 4 PV $513.937 – 2.055 = $509.105 PMT 22.105 $513. 20x7 20.277 20.363 2.129 – 2.105 x 4%) Bonds payable Cash Interest expense $513.000 Enter Compute Jan 1.445 20.1.097 20.445 20.500 Jan 1.524 1.311 = $502.714 x 4% Bonds payable Cash Interest expense $504.105 20. 20x8 20. 20x8 20. 20x6 Cash Bonds Payable Interest expense ($513.714 – 2.223 22.937 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $506.055 22.074 – 2.500 Jul 1.074 x 4% Bonds payable Cash Interest expense $509.500 Dec 31. 20x6 20.445 2.137 22.223 = $504. v.311 22.189 2.277 20.976 = $511.

491 60.509 1. 20x9 Interest payable Bonds payable Cash Bonds payable Cash 20.000 3.170. 20x6 Cash Bonds payable Interest expense (1. 20x6 4. Enter Compute N 40 I/Y 5 PV X= $1.591 – 1. 20x7 ($1.171. Dec 31.1.403 22.420 60.171.000 58.591 PMT 60000 FV 1000000 2. v.000 Problem 6-8 1. June 30.591 x 5%) Bonds payable Cash (1.591 $1.500 500.000 x 12% x 1/2) Interest expense (1.1 Page 211 Jan 1.591 58. 20x7 .000. July 1.000 500.171.171* x 5%) Bonds payable Cash (1.000 x 12% x 1/2) *Bonds payable balance as of June 30.420) $1.171.580 1.171.Introductory Financial Accounting.097 2.000.

$44. v.000 x 8% x ) 2nd half of 20x7: Interest expense ($897. The interest expense will increase every year since the book value of the bonds payable will also increase.093 40.1.850 4.1 Page 212 Problem 6-9 The journal entries to record interest expense for 20x7 would be as follows: 1st half of 20x7: Interest expense ($897. The cash outflow is $80. b. .Introductory Financial Accounting.000 x 8% x ) a.093 = $89.000 True.850) x 10% x Bonds payable Cash ($1. False. c.943 False False. Interest expense for 20x7 = $44. d.000 $45.000 x 10% x ) Bonds payable Cash ($1.000.000 + 4.850 + 45.093 5.000.850 40.000 exactly.

$2. non cumulative.080) Total Shareholders’ Equity $ 138. Shareholders’ Equity Common Shares. February 2 Cash Common Shares Patent Preferred Shares No entry Cash Common Shares Dividends or R/E Cash Dividends or R/E Cash Number of common shares: Issued on Feb 2 Stock Split on Feb 15 Issues on Feb 26 126.Introductory Financial Accounting.000 shares x 3/2 = 225. v. 44.000 44.400 14.000 .080 2. $6.000 shares outstanding after the split.1.000 12.000 2.000 21.$14.000 40.000 x $0.000 February 10 February 15 February 26 12.1 Page 213 Problem 7-1 1.32 $14. 400 shares issued and outstanding Retained Earnings ($0 + $56.000 40.520 $217.000 126.000 2. c 150. Problem 7-2 1.080 February 27 February 28 21.080 14.400 .000 40.400 2.520 .000 shares issued and outstanding Preferred Shares.000 39.

issued and outstanding 3.500 .Introductory Financial Accounting.000 40. f.000 3. g.500 Dividends) $348.000 b.000 180.000 Retained Earnings ($64. issued and outstanding 3.000 20. authorized 100.000 53.000 48. c. cumulative – authorized 50. v.000 3.000 Preferred Shares. 2. Shareholders’ Equity Common Shares.000 Net Income – 15. e.000 12. h.1 Page 214 Problem 7-3 1. a.500 12.1.000 3.000 3.500 $456.000.000 20. Cash Common Shares Equipment Preferred shares Cash Preferred shares Dividends (or Retained Earnings) Preferred Dividends Payable Cash Common shares Preferred Dividends Payable Cash Retained earnings Cash Bonds payable Premium on bonds payable Common shares $115.500 50. d.000.000 180.000 $115.000 3.000 40.000 60.

000 960. Purchases Accounts payable Accounts Payable Purchase returns Cash Common stock Accounts payable Cash Salaries payable Salaries expense Cash Interest expense ($419.000 5. 1. 9.5% / 2) Interest expense ($419.400 320.Introductory Financial Accounting.1.600.000 5.000 75.000 x 6.000 25.000 1. .000 x 6.000 30. 10.000 $1.000 1.588 412 13.000 5. v.000 25. 12.600 – 412) x 3% Bonds payable Cash ($400. 3. 6.1 Page 215 Problem 8-1 a. Accounts receivable Sales Cash Accounts receivable Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable 5.5% / 2) 11.000 5.000 12.600 314. 7.000 945.000 5.000 75.000 16. Equipment Cash Warranty liability Cash $1.000 16.000 34.000 945.000 30.520.000 34.000 12. 4.520.600 x 3%) Bonds payable Cash ($400. 8.600.000 2.000 960.576 424 13.

000 cr.000 17. Insurance expense Prepaid insurance Balance in prepaid insurance account: $1.000 dr.000 + 3.000 + 75.690 22.400 x 2/12 Insurance expense 3.000 130. 2.000 / (10.320 3. Income taxes payable Cash Common shares (1.400 .400 Balance required: $2.000 17.000 x 7% 23. v. $4.310 4.000 x 50% Bad debt expense 40.930 dr.000 14. = The balance in the allowance for doubtful accounts should be: $144.1 Page 216 13.800 400 $3.000 40.000 x $17.000 23.600 6.000 dr.000 x 3% 43.400 130. 17.000 cr.400 2.010 4.930 23.1.Introductory Financial Accounting. $23.31*) Retained earnings Cash * Average book value per share = $150. + 34.000) = $17. $6.400 + 2. 18.000 x 20% 12.400 3. 15.930 16. + 5.31 Prepaid insurance Cash Operating expenses Cash Bad debt expense Allowance for doubtful accounts The balance in the allowance for doubtful accounts is: $23.400 $3.930 cr.

000) Purchase returns Purchases Check: Opening inventory Purchases – net ($960.700 80. Warranty expense Warranty liability $1.000 $320.5% Salaries expense Salaries payable Retained earnings Cash Income tax expense Income taxes payable $134.000 Purchase) = $137.000 – 320.000 13.702 53.000 – 16.250 39.600.400 4.250 20.256 x 40% = 53.702 22.150 7.000 16.000 / 8 = 4.000 944.500 27.000 NBV Beg + 30.264. Cost of goods sold Inventory ($378.000) $886. .000 960.000 13.000 21.000 1.000 24. amortization – building* Acc.000 24. 24. Amortization expense Acc.702 23.000 x 20% = $27.000 (378.500 ** ($145.000 / 40 = $7.000 x 1. v. amortization – equipment** Patents*** * $300.Introductory Financial Accounting.000) Cost of goods available for sale Less ending inventory Cost of goods sold Inventory loss Allowance for decline in value of inventory 886.1.000 53.1 Page 217 19.700 6. 6.000 80.000 – 38.400 *** $34.000 58.

000 13.400 3.000 2.500 Acc Amort .400 130.200 80.000 34.700 6.000 B 2 4 7 8 9 10 10 11 12 13 14 15 23 B 1 4 E 2 3 4 6 8 B 5 3 B 4 17 E 9 Salaries Payable 5.400 65.000 945.000 40.000 12.000 7.000 27.000 13 Inc Taxes Payable 40.000 25.690 B 24 B 15 E 18 B 12 B 21 B Acc Amort .000 23.000 5.000 Land 40.700 B 22 E E B 20 E Prepaid Insurance 1.000 Allow/Doubt Accts 34.930 17.000 B 19 E 10 10 B B 11 E Equipment 145.1.750 19 20 14 23 Retained Earnings 4.000 58.000 24.000 15.000 22.Bldg 120.000 5.600 5.000 320.250 29.000 53.000 960.000 1.310 150.510 B E .000 Liabilities & Equity Accounts Payable 16.000 5.600 BALANCE SHEET Accts Receivable 176.1 Page 218 Part (b) Assets Cash 36.400 400 Building 300. v.Equip 38.000 945.000 1.000 207.000 80.600 6.000 75.764 Common Stock 17.702 Warranty Liability 25.520.400 2.702 25.000 75.000 4.690 144.000 13.000 23.000 30.600 424 418.000 59.400 Allowance for Decline in Value of Inventory 13.000 378.000 127.930 Inventory 320.000 1.000 B 19 14 B 7 E B E Patents 34.Introductory Financial Accounting.000 222.000 12.000 175.520.000 Bonds Payable 412 419.000 126.000 30.000 13.600.500 127.000 5.

588 12.000 9 22 E Salaries 314.100 Warranty expense 24.000 960.930 19 Amortization exp.000 .576 25. v.000 16.000 INCOME STATEMENT Purchase Returns 16.164 Insurance 3.000 17 Bad Debt Expense 23. 39.000 Revenues Sales 5 20 20 6 1.700 321.Introductory Financial Accounting.150 24 Income Tax Exp.000 10 10 E Interest 12.1.400 6.702 20 Inventory Loss 13.000 1 20 Cost of Goods Sold 886. 53.600.400 21 18 16 Operating expenses 130.1 Page 219 Expenses Purchases 960.

150 13.600 222.000 53.Introductory Financial Accounting.1 Page 220 c. .100 25.680.702 12.930 378.000 418.702 $2.000 6.000 886.690 59.000 13.400 29.930 39.164 24.764 207.000 23.750 126.400 130.700 25.1.000 65.500 175.000 $17.196 $2.000 3.000 127.196 Cr. 20x6 Dr. Cash Accounts receivable Allowance for doubtful accounts Inventory Allowance for decline in value of inventory Prepaid insurance Land Building Accumulated amortization – building Equipment Accumulated amortization – equipment Patents Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Common stock Retained Earnings Sales Cost of goods sold Salaries Interest Warranty expense Insurance expense Operating expenses Bad debt expense Amortization expense Inventory loss Income tax expense $15.600.000 300. Haider Corporation Trial Balance As at December 31.000 321. v.510 1.000 400 40.680.

150 130.000 321. v.200 80.000 3.064 .580 159.554 (4. 20x6 Retained earnings.1 Page 221 d.000 554.100 24.702 $80.Introductory Financial Accounting. December 31.600.000 886.000 39.256 53.164 134. 20x6 Net income Premium on redemption of common shares Dividends Retained earnings.420 25.930 13. 20x6 $144.554 Haider Corporation Statement of Retained Earnings for the year ended December 31.000 714. January 1.1.400 23.690) (80. Haider Corporation Income Statement for the year ended December 31.000) $140. 20x6 Sales Cost of goods sold Gross profit Operating expenses Salaries Warranty Insurance Bad debts Inventory loss Amortization Other operating expenses Operating income Interest expense Net income before taxes Income tax expense Net income $1.

000 $300.850 $936.000 (65.500) 175.000 (127. v.600 204.764 589.Introductory Financial Accounting.702 12.070 40.754 $936.402 418.690 140.166 207.600 29. 20x6 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance $ 15.070 365.000 170.500 109.920 Land Building Less accumulated amortization Equipment Less accumulated amortization Patents – net .1 Page 222 Haider Corporation Statement of Financial Position as at December 31.400) 172.000 400 585.700 25.064 347.920 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Shareholders’ Equity Capital stock Retained earnings $126.000 6.1.750 351.

000 f. 4.000 12.600 b.000 x 9% x 4/12 Interest expense Interest payable $60.900 / 17) Patents or Accumulated Amortization – Patents Supplies inventory Supplies expense Increase in inventory = $9.500 Warranty expense Warranty liability 10.500 4.600 x 5/12 Interest receivable Interest revenue $12.000) / 10 Prepaid rent Rent expense $9. v.600 3.800 4. .200 – 4. 7. d.1 Page 223 Problem 8-2 a.000 x 3% x $40 Allowance for doubtful accounts Accounts receivable Income tax expense Income taxes payable $9. j.600 c.000 24. Bad debt expense Allowance for doubtful accounts $320.600 x 9/24 Amortization expense Accumulated Amortization ($80. 700 700 4.500 h.000 x 10% x 9/12 Amortization expense ($11. 16.Introductory Financial Accounting. 4.000 x 3% Wages expense Wages payable Insurance expense Prepaid insurance $9.700 4.000 – 4. 4.600 7. 12.700 i.600 e.600 $9. 360 360 g.1.000 16.800 3.000 k.000 4.000 l.000 24.

20x2 (2. 20x2 Loan balance.880 .770 Cash Sales + 5.316 12.740 110 4.000 / 5 x 5/12) $32.120 Prepaid) Advertising Depreciation (3.300 Prepaid) Salaries and wages (5.500 + 240 Payable) Maintenance Utilities (4.000 + 270 Payable) Insurance (1.Introductory Financial Accounting. v.1.536 116 6.920 .1.1.420 1.094 6.840 Ending Inventory) Gross margin Operating Expenses Rent (1.320 Collections on Credit Sales + 4. April 1.1 Page 224 Problem 8-3 MAS Inc. April 1.640 $44 .640 x 10% x 2/12 $312 72 240 2.240) Interest April & May .2.136 Operating Income Interest (72 + 44)1 Net income before taxes Provision for income taxes (6. Income Statement for the five months ending May 31.686 19.400 Baking Materials Purchases .630 1.800 .130 Rebate + 256 Payable .880 x 10% x 3/12 Principal payment.420 x 20%) Net income 1 Loan payment Less interest: $2.500 5. 20x2 Sales (22.284 $5.226 Uncollected Sales) Cost of goods sold Purchases (14.270 800 424 250 13.

620 3.840 1. v.31.500 5.750 $12.370 .136 7. Balance Sheet as at May 31.1 Page 225 MAS Inc.226 1.680 4.284 44 960 3.600 .000 -250 2.134 4.120 300 9.960) Shareholder's Equity Common Stock Retained earnings $526 240 1.636 $12.640 . 20x2 ASSETS Current Assets Cash (33.1.466) Accounts receivable Inventory Prepaid insurance Prepaid rent Fixed Assets Equipment Accumulated depreciation $2.Introductory Financial Accounting.054 1.734 2.370 LIABILITIES & SHAREHOLDER'S EQUITY Current Liabilities Accounts payable Salaries payable Income taxes payable Interest payable Current portion of note payable ($240 x 4) Note payable (2.

$275.000 (20.000 155.000 80.000 278.1.000 $338.000 80.000 63.000 $338.000 19. 20x1 ASSETS Current Assets Cash Marketable securities* Accounts receivable Inventory Noncurrent assets Equipment Accumulated depreciation $24.000) 60.Introductory Financial Accounting.1 Page 226 Problem 8-4 Morrow Wholesale Balance Sheet as at December 31. v.000 .000 SHAREHODLERS' EQUITY Shareholders' Equity Common stock Retained earnings * Plug to balance.

1.000 x 80%) Gross margin Operating expenses Salaries (10. end of year 11. 20x2 Sales Cost of goods sold ($250.000 200.600 8. beginning of year Dividends Retained earnings.000 x 12% x 6/12) Gain on sale of equipment Gain on sale of securities Net income before taxes Income tax expense (30%) Net income Retained earnings. v.220 63.220 .000 4.600) Depreciation (80.000 + 1.380 17.000 50.100 15.000 9.000 (10.000 ÷ 10) Bad debts (155.Introductory Financial Accounting.1 Page 227 Morrow Wholesale Income Statement and Statement of Retained Earnings for the year ended December 31.600 7.000 34.900 (300) 5.500 $250.000 24.146.000 5.000) Miscellaneous Operating income Interest expense ($5.000) $70.000 .

1.000 300 10.500 23. v.500) Inventory (Note 1) Prepaid advertising Noncurrent assets Land (19.380 60.500 96.220 345.000) 52.000 60.000) Accumulated depreciation (20.000 + 406.Introductory Financial Accounting.000 + 8.000 (8.000 330.500 Note 1 .000 1.20.1 Page 228 Morrow Wholesale Balance Sheet as at December 31.000 $216.000 $80.000 .000 36.000) $224.20.000 70.280 275.600 5.500 SHAREHODLERS' EQUITY Current liabilities Accounts payable Accrued wages payable Note payable Interest payable Dividends payable Income taxes payable Shareholders' Equity Common stock Retained earnings $36.Inventory Purchases of merchandise A/P .000 + 4.220 $405.000 7. 20x2 ASSETS Current Assets Cash (24.205.000 10.000) $200.000) Equipment (80.000 .000 (96.000 $405.000 .000 .ending Purchases Cost of goods sold = Opening inventory Purchases Less ending inventory $180.000 216.

000) (105.000 – 40.600 Increase in Salaries Payable) Cash paid out for other operating expenses Cash paid out for interest ($32.7.100 Increase in Income Taxes Payable) $740.000 (125. v.500) (69.000 Salaries Expense . ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($45.000) (46.1 Page 229 Problem 9-1 a.1.800 – 105.000 (294.000 Increase in A/R) Cash paid out to suppliers ($300.800) (112.000 $146.400 $ 99. Statement of Cash Flow for the Year ended December 31.000 Increase in Inventory .000 Increase in Interest Payable) Cash paid out for income taxes ($79.000) (31.000 – 69.800 Cash flow from investing Proceeds on sale of equipment (Note 1) Purchase of equipment 20.12.100 Income tax expense – 33.10.000 Interest expense .Introductory Financial Accounting.000 Sales .000 $20.000 (99. beginning Cash.500 .400) (80.000) 175.000) Gain on sale Proceeds Note 2 – Dividends paid Net income Less increase in Retained Earnings ($108.000) $ 5.500 Increase in cash ($175.500) 1.300 19. Ginger’s Cookies Ltd. 20x6 Cash flow from operations Cash collected from customers ($7500.200 $20.500) Cash.400 – 61.000 COGS + 7.000) Cash flow from financing Issue of bonds payable Dividends paid (Note 2) 30.900 47.200 Increase in AP) Cash paid out for salaries ($120.000 15.1.

200 7.900 7.1 Page 230 b.000 33.000 (15.Introductory Financial Accounting.000) 12.1.100 $175.000) (7. Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Gain on sale of capital assets Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Increase in Accounts Payable Increase in Salaries Payable Increase in Interest Payable Increase in Income Taxes Payable $146.000) (10.800 .600 1. v.

000 466. McDuff Ltd. beginning of year Amortization expense Accumulated Amortization on disposal: $158.000) $3. beginning of year Cash.000 Cash flow from investing Proceeds on sale of assets Purchase of capital assets2 80.000) (12.000 Accumulated Amortization.000) (11. v.000) 353.1.000 (50.000 ? (71.000) (37.000) (37. end of year 1 Accumulated Amortization.000) (34.Introductory Financial Accounting.000 .1 Page 231 Problem 9-2 a.695.000) 17. end of year Amortization expense = $218.000 (543.000) 7.000 (48.842.000 150. Statement of Cash Flow for the year ended December 31.000 – 87.000 $319.000) (5.000) (463.000 Decrease in cash Cash.000 218.000) 350.000 111.000 $3.000 (13. 20x3 Cash flow from operations Net income Adjust for non-cash items: Amortization expense1 Gain on retirement of bonds Loss on disposal of assets Adjust for changes in non-cash working capital items: Decrease in accounts receivable Increase in merchandise inventory Increase in prepaid expenses Decrease in accounts payable Decrease in salaries and wages payable Decrease in interest payable Increase in income taxes payable $239.000) Cash flow from financing Redemption of bonds payable Proceeds on issue of mortgage payable Proceeds on issue of common shares Cash dividends paid3 (487.

000 b.000 – 218.611.000 Increase in Prepaid Expenses) Cash paid out for salaries and wages ($850.000 Increase in Income Taxes Payable) $4.460.1.000) (887.000) (493.326.000 Amortization Expense + 11.000 Decrease in Interest Payable) Cash paid out for income taxes ($250. beginning of year Add net income Less dividends Retained Earnings.000 $5. v.400.000 Decrease in A/R) Cash paid out to suppliers ($2.000 Decrease in AP) Cash paid out for operating expenses ($700. ending Additions to capital assets = $543.000 Income tax expense – 17.500.000 COGS + 48.000 .000 Increase in Inventory + 12.000 Sales + 111.000 3 Retained Earnings.000 (2.000 Decrease in Salaries and Wages Payable) Cash paid out for interest ($67. end of year Dividends = $50.000 $319.1 Page 232 2 Capital Assets.000) $5.000) $466.711.000 239.000) (233.000 ? (158.000 Interest expense + 5. beginning Additions Disposals Capital Assets. Cash flow from operations – Direct Cash collected from customers ($4.000 Salaries and Wages Expense + 37.Introductory Financial Accounting.000 ? $508.000) (72.

1. 20x5 Cash Flow from Operating Activities Net Loss Adjust for non-cash items Depreciation Add (deduct) adjustments to non-cash current assets and liabilities: Increase in accounts receivable Increase in inventory Increase in prepaid Insurance Decrease in salaries and wages payable Increase in interest payable $ (3.300) (1.400) 7.Introductory Financial Accounting.000 Sales – 1. v.1 Page 233 Problem 9-3 (a) HHC LTD.600) (100) (400) 100 (3.300 + 400 Decrease in Salaries and Wages Payable) Cash paid for insurance ($2.100) $900 . Cash Flow Statement for the year ended December 31.800 + 100 Increase in Prepaid Insurance) Cash paid for rent Cash paid for interest ($1.500 (166.900) (5.600 Increase in Inventory) Cash paid to employees ($39.500) $ 900 (b) Cash Flow from Operating Activities Cash collections from customers ($218.200 – 100 Increase in Interest Payable) $216.000 COGS + 1.800 $ (1.500) (1.600) (39.700) (2.500 Increase in Accounts Receivable) Cash paid to suppliers ($165.

000) 0 0 32. Statement of Cash Flow for the Year ended December 31.000) Cash.000 Cash flow from financing Issue of bonds payable Dividends paid 25.000 12. Toram Ltd.000 Increase in Inventory + 18.53.000 30.000 (20.000 .000 – 25.000 Sales .000) 24.000 Increase in A/R) Cash paid out to suppliers ($600.000 COGS + 32.000 Note 2 – Proceeds on sale of long-term investment Net book value of investment Gain on sale Proceeds $ 18. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($32. v.000) (165.000 – 21.000) (25.000 + 17.000 $50.Introductory Financial Accounting.1.000 Decrease in AP) Cash paid out for other operating expenses Cash paid out for interest Cash paid out for income taxes $847. 20x6 Cash flow from operations Cash collected from customers ($900. beginning Cash.000 (4.1 Page 234 Problem 9-4 a.000) 17.000 30.000 26.000 Cash flow from investing Proceeds on sale of equipment (Note 1) Proceeds on sale of long-term investment (Note 2) Purchase of equipment 7.000 Increase in cash ($32.000) Loss on sale Proceeds $ 11.000) $7.000 (50.000 (650.

000) $32.000 (12.Introductory Financial Accounting.000) (32.000 43.1. Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Loss on sale of capital assets Gain on sale of long-term investment Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Decrease in Accounts Payable $100.1 Page 235 b.000 .000 4.000) (53.000) (18. v.

000.000) / 2 = $50.8.000 / 70.000 COGS = $30.000 Inventory turnover = $450.500 + 32. a 6. current liabilities . Impact is on the current ratio.000 and CA = 200.000 = 1. c c Average inventory = ($30.000 = $450.000) / 2 = $52.500 Total net sales = $367. 7.000 / 365) = 94 days Inventory increased by $20.000 = 6.Introductory Financial Accounting.000 = 1. c . d Average receivables = ($50.000. the current ratio becomes $90.25.500) / 2 = $31. a c b Average receivables = ($40.$100.000 and CA = 180.000 – 20. current ratio = $100.000.000 ($320. then CL = 230.000 / 80. Assume that CL = 250.000 = 6 Assume an initial amounts as follows: current assets .000 – 120.$300. If the invoice paid is $20.0 times 9.000 + 40.000 + 540.000 purchased .250 Days sales in A/R = $32.250 / ($125.000 = $40.000 / 50.000 then the current ratio is 0.500 = $400.500 x 7 = $367.000 No impact on working capital since the decrease in cash is equal to the decrease in accounts payable.1 Page 236 Problem 10-1 1. Assume that a payment of $10.000 Inventory turnover = $300.000) / 2 = $75.1. 4. 8. v.000 is made.78.000.$80.000 COGS) Beginning inventory = $60. 2. d 3. 5.000 Average inventory = ($60.000 + 120.500 Net credit sales for 20x8 = $52.29 and working capital stays the same.000 / 75. the current ratio drops to 0.000 + 55.000 + 22.

1 Page 237 Problem 10-2 Liquidity Analysis: 20x5 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 712.000 = 1.000) ÷ (1.07 200.000) ÷ (1.7 days 20x4 594.000 = 1.000 / 379.76 (12.000 / 371. v.000) / 371.000 = 4.000 + 550.000 / 863.000 + 275.68 (34.000 = 1.000 / 793.000) / 365 = 53.000 + 275.200.400.88 (12.Introductory Financial Accounting.000 = 0.07 20x4 850.000 = 0.000 = 1.000) / 379.83 * debt is defined as long-term debt in this case .60 (34.5 days Solvency Analysis: 20x5 Debt-to-Equity Ratio* 920.000 + 400.000 = 3.00 Times Interest Earned 230.1.000 + 275.000 + 220.000 / 50.000 / 60.000_ / 365 = 70.

66 [(275.000) / 2] = 12.000) / 2] = 3.3% 98.000 + 1.000 / 1.000 / [(2.1.000 + 725.875.000 / 365) = 39.875.014.000 / [(2.162.5% 200.900.200.400.000 / 365) = 40.000 / [(863.000) / 2] = 10.000 + 350.000 + 2.900.300.162.000 / [(340.1 Page 238 Profitability Analysis 20x5 Gross Profit Percentage Return on Sales Return on Assets $900.000 + 1.000 + 793.000) / 2] = 1.900.000) / 2] = 3.000) / 2] = 11% 110.000 / [(2.3% 200.000 / [(425.9% Return on Equity Asset Management (Activity Ratios) 20x5 Inventory turnover $1. v.48 [(220.000 = 39.000 = 10% 230.8% 230.300.000) / 2] / (1.1% 20x4 $700.000 = 10.3 days 1.000) / 2] = .000 + 220.2 days 2.Introductory Financial Accounting.000 + 340.014.000 + 2.000 / 1.300.000) / 2] / (2.000 = 36.10 20x4 $1.000 / [(793.000 / 2.000 / 2.000 / [(2.98 Days Sales in Accounts Receivable Total asset turnover .000) / 2] = 13.900.300.000 + 200.014.014.

92 (37.000 = 2.000) / 365 = 135.72 days Solvency Analysis: 20x7 Debt-to-Equity Ratio* 820.000 / 56.000) / 365 = 97.000 / 2.114.000) / 560.679.000 = 0.000) / 524.1 Page 239 Problem 10-3 Liquidity Analysis: 20x7 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 1.000 + 480.000) ÷ (1.000.000 = 0.167.1.000 = 0.000 + 524.000 / 60.Introductory Financial Accounting.000 + 480.000 + 524.000 = 1.000 / 560.576.000 + 635.32 20x6 800.08 * debt is defined as long-term debt in this case .13 (20.000 / 524. v.08 (37.52 days 20x6 1.000 = 2.30 137.04 (20.000 = 1.000 / 2.000) ÷ (1.000 = 2.000 + 463.300.45 Times Interest Earned 65.

000 + 485.000 / [(2.000) / 2] = 2.5% 51.100.000 = 8. v.1% 65.679.000 + 3.000 = 3.1.000 + 524.Introductory Financial Accounting.1% 137.000 + 3.13 [(480.1 Page 240 Profitability Analysis 20x7 Gross Profit Percentage Return on Sales Return on Assets $800.1% 137.000 / [(570.000) / 2] = 1.100.808.000) / 2] = 0.000 / [(4.000 + 300.628.000) / 2] / (2.000 / 2.000 / 1.700.000) / 2] = 1.000) / 2] = 0.6% 3.003.679.9% Return on Equity Asset Management (Activity Ratios) 20x7 Inventory turnover $1.000) / 2] = 1.808.000) / 2] = 0.90 [(524.3 days 2.000 + 2.000 / [(650.000 + 4.44 Days Sales in Accounts Receivable Total asset turnover .000 = 38.000 / 365) = 88.956.300.003.000 + 2.000) / 2] / (1.003.956.000.700.000 + 4.2% 65.000 / [(3.000 / 365) = 87.000 / 1.000) / 2] = 3.100.000 / 2.000 = 41.700.003.000 / [(2.1% 20x6 $700.700.52 20x6 $1.576.000 + 570.000 / [(4.5 days 1.000 / [(3.100.

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