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Jacques Maurice, MBA, CA, CMA, FCMA Rebecca Renfroe, B.Comm, B. Ed, CMA
Introductory Financial Accounting, v.1.1
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
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
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
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
000.1.000 100. and increasing a liability. our equation holds true: Assets + 10. the company would receive $100.1 Page 5 (c) That same company then purchases an additional $5. they do not pay cash but take on an account payable with the supplier.000 5.000 75.75. The journal entry would be: Inventory Accounts Payable 5.000. The journal entry would be: Equipment Cash 75.000 + Equity . The loan is for $100.000 .000 = Liabilities + Equity (e) The same company is a little short on cash and has to take out a loan from its bank.000 cash. therefore. v. that is. Furthermore. The journal entry to record the loan would be: Cash Bank Loan 100.000 Both the Equipment account and the Cash account are assets. our equation stays in balance: Assets + 100. they will take on a liability to pay back the bank the $100. By increasing both sides of the equation.000 We are increasing an asset.000 (d) = Liabilities +10.000 + Equity The company then uses cash to purchase equipment that costs $75. an asset and a liability.Introductory Financial Accounting.000 worth of inventory on account.000 Upon signing the loan. by increasing one and decreasing another the equation holds true: Assets + 75.000. we increase the asset account Cash.000 = Liabilities +100. therefore. therefore.
Revenue accounts normally have a credit balance. 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. Conversely. the income and expense accounts are closed out to zero.000 30. an expense account’s normal balance is a debit balance. v. the company will have generated a net income and a net Credit entry to Retained Earnings will result.e.1. If Revenues are greater than Expenses during a period.000 = Liabilities + Equity +30. If Expenses are greater than Revenues. Income Statement accounts will consist of Revenue accounts or Expense accounts.000 The accounting equation is maintained since Assets are increased and Equity is increased: Assets + 30.1 Page 6 Transactions that impact the Statement of Income The above examples used accounts that appear on the Statement of Financial Position. All revenue and expense accounts are temporary accounts in the sense that we start the year with a zero balance in the account. and the resulting debit or credit is either added or subtracted to an account called Retained Earnings.000 . which is part of the Shareholders’ Equity section of the Statement of Financial Position. The journal entry would be: Cash Sales Revenue 30. when a revenue account is increased we credit the account. For example. via the Retained Earnings Account.000 in sales in its first month. the company will have generated a net loss and a net Debit balance to Retained Earnings will result.Introductory Financial Accounting. i. 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. If we continue with our examples… (f) Say that the company from the above example has $30. At the end of each year.
1. and all other assets and liabilities are classified as non-current. Note that Cost of Goods Sold is an expense account.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. as they no longer have it on hand to sell.000 worth of its inventory. . 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. The Statement of Financial Position (also called the Balance Sheet) is. the company sold all $15.15. as are liabilities.1 Page 7 (g) To incur these sales.000 Note that this entry removes the inventory from the company’s accounts. The accounting equation remains in balance: Assets . and both are divided into current and non-current based on their liquidity. v. 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.000 = Liabilities + Equity -15. The journal entry to record that would be: Cost of Goods Sold Inventory 15.000 15.Introductory Financial Accounting. basically.
money orders etc. Because the policy has not yet expired. Equipment – this account is treated in the same manner as the Buildings account.1.000 and the agreement with the bank is that you will be required to pay $50. Note that amortization is never taken on land. this $50.000 would be classified as a long-term liability.). . In this case. The inventory can either be purchased. v. Long-term investments – these are investments that are to be held for many years. Non-current Assets: Buildings – this account is a listing of all depreciable buildings owned by the company.Introductory Financial Accounting. and the asset is therefore shown net of accumulated amortization.000 would be classified as a current liability and the remaining $150. Land – this account is a listing of all land held by the company. Typical accounts you will see on the Statement of Financial Position are: Current Assets: Cash – the most liquid of all assets. More on this in Chapter 5. the cost of the policy will be classified as a prepaid expense. A more detailed discussion of this account will take place Chapter 4.1 Page 8 Note. you would break out the current portion and classify it as such. complete.000 of this balance within the next year. Accounts Receivable is normally reported net of an Allowance for Uncollectible Accounts (discussed further in Chapter 3). The classic example of this is breaking out the current portion of the long-term debt of a company. when we take out an insurance policy. and classify the remainder as non-current. that in some cases you may have an asset or a liability that is partly current and partly non-current. or manufactured by the company itself. if your loan balance is $200. Prepaid Expenses – this account represents amounts that have been paid in cash for expenses that have not been incurred by the company. Accounts Receivable – the account is the sum total of all outstanding invoices which are owed to the company by its customers. other companies or special funds. stocks. For example. and includes investments in bonds. ready for resale. For example. this account includes all currency and equivalents (bank drafts. The associated Accumulated Amortization contra account is normally shown directly below the asset account. Inventory – this account is a listing of all of the items that the company normally sells in its day-to-day activities. but is a listing of all equipment owned and used by the company. we normally pay the annual premium the day the policy takes effect.
trademarks and copyrights would be classified as longterm assets.Introductory Financial Accounting. Retained Earnings – this account represents the cumulative total of the net income of a company that has not been distributed to shareholders. Note that the wages payable account is normally the result of an adjusting entry.XXX XXX . 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. Taxes payable – a listing of all taxes due within one year or one accounting cycle. The retained earnings account is adjusted at the end of each year to account for a company’s net income or loss. v. It is when the amount is due back to the lender that differentiates between current and non-current debt.1 Page 9 Intangible assets such as patents. 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. The retained earnings account reconciliation from the beginning of year to end of year balance is as follows: Retained Earnings. Shareholders’ Equity: Contributed Capital – this account contains any amounts which have been invested in the company by the company’s shareholders.1. end of year XXX ± XXX . Wages payable – a listing of all wages due to employees within one year or one accounting cycle.
The single step statement lists all revenues and then all expenses without breaking out any further subtotals.000 3.1 Page 10 The Income Statement The income statement is a statement that shows how a company performed during one period. Either one is acceptable under GAAP. and for the above company would look like the following: The Miller Company Income Statement For the Period ended December 31.Introductory Financial Accounting. Income statements can take on one of two formats: single step and multi-step.000 3.000 (60. 20x8 Sales Interest Income Cost of Goods Sold Operating Expenses Income Tax Expense Net Income $100.000) 40. the amount left over after all relevant expenses have been taken into account.000 (25.000 The multi-step statement has multiple subtotals.000) (25.000 (60. typically the fiscal year of the company. however.1.000 18.000) $10. most companies tend to use some form of a multi-step statement. For example: The Miller Company Income Statement For the Period ended December 31. v. 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) (8. It takes the reader from total Revenues to Net Income.000 .000) 15.000 (8.000) $10.
v.1. When an entry is made and an account is to be debited. which resembles a capital “T”.Introductory Financial Accounting. a T-account is a tool used by accountants to keep track of entries that are made to individual accounts. Accounts Receivable Debit Credit The following represent how increases and decreases in accounts get recorded: Liabilities & Shareholders’ Equity Assets + Expenses - Revenues + + - - + .1 Page 11 The T-Account Named for its shape. an entry is placed on the left-hand side of the T. for every entry the lefthand entry must equal the right-hand entry in order for the Accounting Equation to hold true. it is placed on the right hand sand. When a credit is made. Thus.
000 of the accounts receivable were collected throughout the year.000. Ian’s Incredible Instruments Inc. 6. his entire life savings. Inc. An insurance policy. 20x7.$310. are for 5 years. Ian’s Incredible Instruments Inc.’s Sales for the first year were as follows: Cash sales .000. 8. but is not large enough to store any extra inventory. 9. which covered the period of January 2. however.1. Ian’s Incredible Instruments Inc. 20x7. Ian invested $175. 7. Having proven himself a good tenant.000 The company took out a loan for $200. 20x7.) Inventory of $120. the annual rate is 10%. 5. (Record the payments made from March to November only. is located in the Meadowvale Mall. 10. 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.) 2.Introductory Financial Accounting. Ian was able to convince his landlord at the mall to give him additional storage space (at no extra cost). 20x7 for $350. Rent is $1. was purchased for $5.000 common shares of the Corporation. . into the company upon incorporation. 20x8. Ian purchased furniture and fixtures for the store at an auction for $30.000 due on the first of each month.$430. 20x7. He received 1.760 cash. 11. which was taken out on June 1. He paid cash. A total of $280. 3. Ian’s Incredible Instruments. beginning February 1. The following transactions took place during the fiscal year ended December 31. The lease is in effect from January 2. v. The terms of the loan.200 per month.1 Page 12 Comprehensive Example Ian has worked at a music store for the last 20 years. 20x7 through December 31.000. 20x7. More inventory was purchased on account June 1. Credit sales . January 2. 20x7. he has decided he is ready to go out on his own. 20x7. Ian signed a two-year lease with monthly rent of $8. He only rented the outside facility to the end of November. with 10% annual interest due semiannually. (Record the February rental payment only. That is. interest payments are due every 6 months. After years of planning and saving.000 was purchased on account. The mall location is suitable for Ian’s retail needs. and was rented on a month-to-month basis. 4. January 2. 20x7: 1.. 20x7 through December 31. Opened for business in a local mall.000.000. and was able to give up his off-site storage facility.
000 175.000 88.000. To record the purchase of inventory on account.1. 175.000 To record the payment of first and last month’s rent on the lease.000 16.000 . Inventory Accounts Payable 120. the appropriate journal entries would look like this: 1. Cash Contributed Capital 2. This is what we call a prepaid expense. Ian declared and paid a dividend of $60.000 23.200 1.200 4.000 $446. To record Ian’s initial investment into the company. Prepaid Rent Rent Expense Cash 8.000 120. The total cost of the inventory sold during the year was $300. Additional cash disbursements for the year were as follows: Wages & salaries Rent Advertising Miscellaneous expenses Payments of accounts payable Interest on bank loan $165.000 120. v. Rent Expense Cash 1.Introductory Financial Accounting. To record the rent paid on the outside storage facility in February for one month.000 8.000 (note that a dividend is debited against retained earnings). We know that the first month’s rent will be “used up” in this year. However.000 40. 14.000 13.1 Page 13 12.000 10. For each of the above. the deposit for the last month won’t be used until 2 years from now.000 3. and therefore it is an expense in this fiscal period.
we already recorded the initial payment in February). sales are recorded individually as they are made.000 30.800 .000 10.000 7. they will have an outstanding loan for the same amount. Cash Bank Loan 200. second.800 10. To record sales for the first year. Upon receiving the loan. (Remember. Note that as we collect the cash.000 280. as they are no longer due to us. Inventory Accounts Payable 350.1. Note that in reality. To record purchase and payment of the insurance policy. However. We will deal with the interest expense incurred on the loan in a separate entry. v. Furniture and Fixtures Cash 30.1 Page 14 5.000 310. two things will happen to Ian’s Incredible Instruments Inc. First. the entire amount applies to the current fiscal year and therefore there is no prepaid portion.000 350. Cash Accounts Receivable Sales 430. for which cash was paid. the credit to the Accounts Receivable account. $1.000 9.000 cash from the bank. To record the collection of accounts receivable throughout the year. for the purposes of this example we will be entering them in one journal entry. Insurance Expense Cash 5. To record the rental expense incurred from March through November. Hence. they will get $200. To record the purchase of inventory on account. Rent Expense Cash 10.760 5.000 11.000 8. To record the purchase of furniture and fixtures.200/month x 9 months = $10.800.760 6. 20x7.Introductory Financial Accounting.000 740.000 200. Cash Accounts Receivable 280. Note that because it expires December 31. we must remove the receivable from our books.
000 120. To record the various other cash disbursements made throughout the year.Introductory Financial Accounting.1 Page 15 12.000 13.000 88.000 60.000 x (10% x year) = $10. v.1.000 446. Retained Earnings Cash 60. Cost of Goods Sold Inventory 300.000 14.000 Wages & Salaries Expense Rent Expense Advertising Expense Miscellaneous Expenses Accounts Payable Interest Expense Cash 165. To remove the inventory which was sold from the inventory account and record the resulting Cost of Goods Sold expense.000 23.000/month = $88.000 . Note the following supporting calculations: Rent Expense – 11 months x $8.000 40.000 300. To record the dividend paid.$200.000 Interest on bank loan .000 10.
760 30.000 5 Insurance 5.800 446.200 5.000 7 Rent 2 3 11 12 8.000 60.000 Misc.000 1.000 4 9 Accounts Receivable 7 310.240 Inventory 4 9 120.000 Expenses INCOME STATEMENT Revenues Sales 740.000 200. v.000 280. Expenses 12 23.Introductory Financial Accounting.000 16.000 300.000 10.1.000 13 6 Furniture & Fixtures 30.000 1.200 10.000 350.000 12 Advertising Expense 40.000 .000 10 Bank Loan 200.000 2 3 5 6 11 12 13 2 Prepaid Rent 8.800 88.000 280.000 12 Interest Expense 10.000 8 515.000 170.760 Wages & Salaries Expense 12 165.000 Contributed Capital 175.1 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 12 Accounts Payable 120.000 108.000 350.000 1 Retained Earnings 13 60.000 30.000 430.000 Cost of Goods Sold 13 300.000 350.000 120.
1.000 Credit $350.000 200.000 300.000 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 10.000 .000 23.000 $1.000 30. 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 $515.000 175.000 5.Introductory Financial Accounting.240 30.000 60.465.000 740. v.000 108.465.000 $1.760 165.000 40.000 170. Trial Balance As at December 31.
1 Page 18 A multi-step income statement for Ian’s Incredible Instruments Inc.000 40.000 341. At the end of the year.000 40. all balances get returned to zero.000 5. v. would look like this: Ian’s Incredible Instruments Inc. they are referred to as temporary accounts.Introductory Financial Accounting.760 98.000 10.000 108. 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. 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 740.240 10.000 23.000 108.000 23.000 440.240 $740.000 5. As such. and the offsetting amount is the net income (or loss) that gets recorded to retained earnings.000 300. Income Statement for the year ending December 31.000 88.760 165.760 165.240 .000 300.1.000 $88.
December 31.000 28.000 175.240 $753.240 350. 20x7 Retained Earnings.000 $753.000) $ 28.Introductory Financial Accounting.1. v.240 30.000 723.240 $ We can now prepare a Statement of Financial Position for Ian’s Incredible Instruments: Ian’s Incredible Instruments Inc.000 .240 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Long-term liabilities Bank loan Shareholders’ Equity Contributed Capital Retained earnings 200. 20x7 Net income Dividends Retained Earnings.000 8.240 203. 20x7 0 88. Statement of Financial Position as at December 31.240 30. 20x7 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures $515. January 1.1 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 31.000 550.000 170.
Interest Expense.1.e. but not yet paid in cash. Expenses Prepaid Expenses – Cash is paid and an asset is recorded before it is used. Income taxes. As the company earns the revenue. The asset will then be allocated to future periods using adjusting entries. i. but cash has not been paid or received. Accrued Revenues – These entries are used then revenue has been earned.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. we will Debit the liability and Credit cash to record the payment. Examples: Credit sales. Rent Revenue. v. plant & equipment Accrual – Event has occurred. Accured Expenses – When an expense has been incurred. then both the liability and the expense are recorded in the amount relating to the current period. subscriptions collected in advance and gift certificates sold. The adjusting entry sets up an asset. an adjusting entry is made to remove the liability and record the revenue. the receivable is removed. As cash is received in payment in future periods. Utilities Expense Revenues Unearned Revenue – Cash is received and a liabilitiy is recorded. office supplies. Interest Receivable . deposits on orders. Examples: Rent collected in advance. performs the service or delivers the goods.Introductory Financial Accounting. a receivable. Examples: Payroll. As the liability is paid in future periods. but will not be paid in the current period. and records the revenue. Examples: Prepaid rent/insurance.
20x5 reveals that you have $5. 20x5 you had $3. On August 1. and what we have left at the end of the year.200. .1.000 does not equal 5.000 5. v. A physical count of the supplies on December 31. we know our opening balance. 1. it might be helpful to look at the T-Account for Office Supplies for the year: Supplies Inventory Opening Balance Purchases Ending Balance $ 3. During the year you purchased an additional $13.000 At the end of the year you will have 7 months remaining on the policy. This means that 5 months have been used in the current period.200 of supplies on hand. The missing piece to the puzzle is the amount of supplies that were used during the year.000 represents the portion of the insurance policy that is unexpired. The adjusting entry would be: Insurance Expense Prepaid Insurance 5.000 The balance that remains in the prepaid insurance account of $7.000 for an insurance policy that will cover the next 12 months.e.000 of office supplies.000 $ 5.200 ???? Supplies Expense As the T-Account shows.1 Page 21 Example In examples 1-5. the missing credit or Supplies Expense has to be 11. and therefore should be an expense of the current period. However.800 in your office supplies inventory account. 20x7 you pay $12.Introductory Financial Accounting. solving the equation. 2. assume that the company’s year-end is December 31.800 + 13.800 13. what was purchased during the year. What would be the adjusting entry on December 31. that will expire in 20x8. 20x5? To answer this question.600. 3. i. On January 1. Therefore. 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 12.000 12.
you would have recorded an entry of: Cash ($800 x 12) Unearned Rental Revenue 9. when you received the revenue.000 per year for the next 10 years. the revenue to be recorded for the year would be 8 months x $800/month = $6. we will take $10. or $10. You estimate that the furniture will last 10 years and have no salvage value at the end of its useful life.000) $ 90. on the other hand.e.600 9. The long-term asset section of the Statement of Financial Position would be as follows: Office Furniture Less accumulated amortization $100. 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. It is now December 31.000 10. You received payment for the full year on May 1. 20x5 would be: Supplies Expense Office Supplies 3. The apartment rents for $800/month.000 as an expense this year.600 11. the adjusting journal entry would be: Amortization Expense Accumulated Amortization 10. 11. 20x8. 20x8.Introductory Financial Accounting. Therefore.600 As of December 31.000 (10. instead of taking the full $100. 20x6. 20x8. will appear on the Statement of Financial Position as a reduction of the related asset account. office furniture in this case.600 You purchase new office furniture for a cost of $100.000 on January 1.1. What is your adjusting entry? On May 1. you would have earned 8 of the 12 months of revenue.000 Because the Accumulated Amortization account is applied as a reduction of the related asset account. there would still be 4 months of unearned . 4. we call it a contra account to the Office Furniture account. Furthermore. Each and every year. Therefore.1 Page 22 The adjusting entry on December 31.000 Note that the amortization expense account will appear on the income statement as an operating expense for the year. It is now December 31. 20x6. v.000 per year for the life of the furniture.400. The Accumulated Amortization account. i. You own an apartment building and have a tenant whose parents have paid their rent for the entire year in advance.
interest expense for 20x3 would be $8. 5. we can calculate that the annual interest on the loan will be equal to $100.600 – 6. as of December 31.000 x 8% = $8. On August 1. the accrued wages payable will be $16. However. and our employees work 5 days a week.000/week. What is the adjusting entry? To calculate the adjusting entry. It is March 31 (Friday).333 3. how much do we owe to our employees for the 4 days that we haven’t paid them? If the average weekly payroll is $80.000 x 4 days = $64.000. that is. v.400 6. The loan has been outstanding for 5 months.Introductory Financial Accounting. we have to first figure out how much needs to be accrued. 20x3 you take out a loan for $100.333.333 You last paid your employees on March 27. Your average weekly payroll is $80. therefore. The balance in the Unearned Rental Revenue Account would have 4 months x $800/month = $3. The adjusting entry would be: Wages Expense Wages Payable 64. no cash has been paid for the interest expense. your year-end.000/5 = $16. then our daily payroll rate can be calculated as $80.000.1 Page 23 revenue left.000 x 5/12 = $3. the balance in the Unearned Rental Revenue account will be equal to $9. The loan agreement states that interest will be charged at a rate of 8% annually.000 .000. This reconciles to our calculation above.400 = $3. Our employees worked 4 days from the time of their last payday until the end of the year.000 64. 20x3. That is. 20x8 would be: Unearned Rental Revenue Rental Revenue 6. 3. What is your adjusting entry to record interest expense for the year? Looking at the terms of the loan. The adjusting entry would be: Interest Expense Interest Payable 6. 20x4.400 According to the journal entries above. only 5 months of interest pertain to the current period. and therefore.000.000. The adjusting entry on December 31.200. and interest and the principal will be due August 1.1. the loan has not been outstanding for the full 12 months. 20x3. It is December 31. 20x6 (a Monday). and furthermore.200.
In this case. Sales and Sales Contra Accounts Whenever a sale is made. 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.1. this means that the cost of the goods sold become an expense the day the sale is made.1 Page 24 Note that this adjusting entry does two things: First. Revenue Recognition and the Matching Principle For a firm to recognize revenue. then the amount of the discount gets debited to the Sales Discounts account. a 5-year warranty is provided with the product. and • all associated costs can be estimated. 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. 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. we debit an account called ‘sales returns’. we credit the Sales account. If the goods are shipped under the terms FOB Destination. Just because you don’t pay cash for something does not mean that the expense wasn’t incurred. In the case of a simple sale. • Sales Discounts: if early payment discounts are offered to customers. But.Introductory Financial Accounting. We MUST record all expenses relevant to the current period. this can get complicated when say. For most sales.000 and we offer a discount of 2% if the invoice is paid within 10 days. the following transactions are related: • Sales Returns: whenever customers return merchandise for refund. If the customer pays 1 FOB stands for ‘Free on Board’ . instead of debiting the sales account. whenever the discount is taken. For example. then they belong to the customer only when they are delivered and therefore the revenue recognition point is when the goods are shipped. However. whether we have paid for them or not. then the goods belong to the customer the minute they are loaded on the truck and revenue can be recognized immediately. This allows the company to keep track of all sales returns separately from the original sale. v. as we will see later. • the revenue must be earned (all significant acts must be completed). assume that we make a sale of $1. it gets onto our books the expense that we have incurred during the last 4 days of the period. the revenue recognition point takes place when the transaction takes place. If the goods are shipped to the customer under the terms FOB1 Shipping. second. it gets onto our books the liability that we owe to our employees. • collectibility is reasonably assured.
but the customer keeps the merchandise. Accounts receivable Sales • $40.500 .1 Page 25 • within 10 days.000 merchandise whose sales price was $1. when reported on the income statements.000 $40. Sales Allowances are when merchandise is sold to a customer which is slightly defective. Terms of payment are 2/10. otherwise the full amount is payable in 30 days. These three accounts are considered contra accounts to the Sales account and. 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.1. The $20 discount will get debited to the Sales Discount account. • merchandise is shipped FOB Shipping to a customer. they will pay us $980. The selling price is $40. a 2 % discount is offered if payment is made within 10 days.500 1.Introductory Financial Accounting. A credit is granted to the customer. v.000. that is. n30. would be netted out against the Sales account.500 is returned to the company Sales returns Accounts receivable 1.
These problems must be dealt with in an organized and consistent manner.500 • on the 9th day after the sale. This does not imply that there are no other users of financial statements. payment of $35. the focus of financial statements is to meet the needs of creditors and shareholders.500 is granted to the customer. . the objectives of financial reporting are as follows: • to provide information useful to present and potential users in making investment. principal and dividend payments?. A credit of $2. Cash Sales discounts Accounts receivable 35. • to provide information to help in assessing cash flows. It would be impossible for financial statements to meet the needs of all users of financial statements. 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. loan repayments. and so on. or similar decisions. Sales Allowances Accounts Receivable 2.500 2. Consequently. 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). such as dividends. and changes in those resources to help in assessing cash flows.1 Page 26 • some of the merchandise was slightly damaged during before it was shipped.1.Introductory Financial Accounting. The conceptual framework plays a vital role in the development of new standards and in the revision of previously issued standards. and • to provide information about the economic resources of a firm. claims on those resources.280 is received. credit. Accountants are continuously faced with new situations and business innovations that present accounting and reporting problems. since these needs could conflict. and • what is the fallback position: does the company have sufficient assets to satisfy its liabilities? To summarize.280 720 36. interest. v.000 The Conceptual Framework A strong theoretical foundation is essential if accounting practice is to keep pace with a changing business environment.
accounting information should meet the following criteria: • predictive value – information should be useful in predicting future outcomes. Reliability wins in this case. This implies that the information provided should be useful to the users. . the concept of relevance and reliability conflict. The rationale is that income from recurring items is a best predictor of future income. Secondary qualitative characteristics – the following two characteristics (neutrality and comparability are qualified as secondary because they are desirable qualities of accounting information. For example. Verifiability implies that independent measures using the same measurement method should yield approximately the same result.e.000. From a shareholders’ perspective the value of $10. 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. • timeliness – information should be available to the users as quickly as possible. For example. For example.1 Page 27 Qualitative Characteristics of Accounting Information There are two primary qualitative characteristics of accounting information: relevance and reliability. One could argue that regardless of what you call this security. accounting information should meet the following criteria: • verifiability – accounting professionals.1. the income statement is generally structured by segregating recurring items against non-recurring items. For example. At times. the representational faithfulness principle would argue that it meets all the characteristics of long-term debt and should be classified as such.000. To be reliable. To be relevant. • feedback value – information presented today helps confirm previous decisions. v. but are not as important as relevance and reliability. when establishing the validity of an accounting estimate should come to a consensus. Reliability implies that the accounting information can be depended upon. consider the application of the historical cost principle which states that assets should get recorded at their original cost.000 today. If a company purchased a parcel of land in 1856 for $100.000 is far more relevant. • representational faithfulness – accounting information should portray the substance of transactions over their form. gets refunded in a pre-specified number of years) and pays a fixed rate of interest. The $100 is an established transaction and is reliable. assume a company issues a new type of security called a ‘Special Preferred Share’ which has a limited life (i. that land is recorded on the company’s books at $100 regardless of the fact that it may well be worth $10.Introductory Financial Accounting. 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.
but changes should occur infrequently and only for valid reasons. information costs. Also. changes in accounting principles require retroactive adjustment and restatement of prior period financial statements. the project has a significantly positive net present value). the financial statements of a company with net income of $10. Consistency implies that accounting principles are applied from period to period in the same manner. When accountants can choose between two equally acceptable accounting principles. the principle of conservatism implies that the one with the least favourable impact on net income should be the one chosen. The principle of conservatism also leads to the recognition of contingent losses but does not recognize any contingent gains. For example. Here is an example of an accounting rule that could lead to dysfunctional economic decision making. For example. the company would benefit economically from it (i. Modifying concepts Conservatism means that it is generally preferable that any possible errors be in the direction of understatement of net income. as we will see in Lesson 4. when companies sell depreciable assets. we must estimate which accounts receivable are likely to become uncollectible in the future and establish an allowance for doubtful accounts. Cost/benefit analysis is very difficult to quantify since most costs and benefits are intangible. 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. v. Assume that existing equipment is technologically obsolete and a net present value analysis shows that if the equipment were to be replaced.e. a gain or loss arises when the proceeds on disposal differ from the net book value of the asset sold. it may be . For example.Introductory Financial Accounting.1 Page 28 Freedom from bias (neutrality) – accounting information should be even-handed with respect to the impact of accounting information on users’ behaviour. 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. That’s not to say that accounting principles cannot be changed. the company would have to show a large loss on disposal. but should be used as a way of thinking. The principle of timeliness implies that the financial statements should be in the hands of users as soon as possible. Information benefits vs.000. The concept of materiality can play against the concept of timeliness. Thus.1. The only problem is that if the asset were to be disposed of. When introducing an accounting principle. Materiality implies that financial statements are not precise but are accurate enough that any potential errors of misstatements would not affect any user. Accounting rules should not provide the motivation for dysfunctional decisions.000.000 would not be significantly affected if they were misstated by say. Conservatism is an effort to ensure that the risk or uncertainty inherent in business situations is adequately considered. 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.
This is probably one of the most flawed principles. This omission is justified on the basis of materiality. the measurability of such revenues are reasonably certain and collectibility is reasonably assured. 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. This principle will be invoked when dealing with leases and intercorporate investments in later lessons. Consequently. v. Going concern principle assumes that the entity will continue operating in the future. Also refer to the definition of an asset (later in this section). .Introductory Financial Accounting. quarters. months…) and report income and prepare a balance sheet for each of these periods. Other Principles Economic entity principle states that the financial statements of an entity should report all assets and liabilities under its control.e. a 1925 dollar is equivalent to a dollar today. 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. Matching principle assumes that when we record revenues. we can add assets together even if they were purchased in different years. This assumption allows us to record long-term assets at their depreciable cost. otherwise they would have to be recorded at the lower of their depreciable cost or liquidation value.1 Page 29 possible that additional invoices are received after the financial statements are issued. Monetary unit principle assumes that the value of the dollar does not change .i. Revenue Recognition Principle states that revenues should only be recorded when earned.1. Periodicity assumes that we can breakup the life of a business in separate reporting periods (years. all associated expenses related to the recognition of these revenues are recorded also.
resulting from the ordinary activities of an entity. thereby leaving it little or no discretion to avoid it. on occurrence of a specified event. the benefit has already occurred. royalties or dividends.1. resulting from an entity's ordinary revenue generating or service delivery activities. at a specified or determinable date. Liabilities have three essential characteristics: (a) they embody a duty or responsibility to others that entails settlement by future transfer or use of assets. v. contributed surplus and retained earnings. and (c) the transaction or event obligating the entity has already occurred. to contribute directly or indirectly to future net cash flows. provision of services or other yielding of economic benefits. interest. types of share capital. While equity of a profit oriented enterprise in total is a residual. in the case of not-for-profit organizations. or on demand. provision of services or other yielding of economic benefits in the future. the settlement of which may result in the transfer or use of assets. Liabilities are obligations of an entity arising from past transactions or events. in the case of profit oriented enterprises. singly or in combination with other assets. to provide services. many not-for-profit organizations receive a significant proportion of their revenues from donations. . Revenues are increases in economic resources. and (c) the transaction or event giving rise to the entity's right to. (b) the entity can control access to the benefit. government grants and other contributions. (b) the duty or responsibility obligates the entity. for example. Assets have three essential characteristics: (a) they embody a future benefit that involves a capacity. it includes specific categories of items. or control of.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. Equity is the ownership interest in the assets of a profit oriented enterprise after deducting its liabilities. the rendering of services or the use by others of entity resources yielding rent. Revenues of entities normally arise from the sale of goods.Introductory Financial Accounting. either by way of inflows or enhancements of assets or reductions of liabilities. either by way of outflows or reductions of assets or incurrences of liabilities. In addition. and. 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. Expenses are decreases in economic resources.
events and circumstances affecting the entity except those that result from expenses or distributions of equity / net assets.1 Page 31 Gains are increases in equity / net assets from peripheral or incidental transactions and events affecting an entity. and from all other transactions. events and circumstances affecting the entity except those that result from revenues or equity / net assets contributions.Introductory Financial Accounting. v. Losses are decreases in equity / net assets from peripheral or incidental transactions and events affecting an entity. . and from all other transactions.1.
The proprietor of Front Street Drugs bought a computer for his personal use. even though the floor covering has an estimated useful life of 5 years.1. What accounting principle. The cost of the floor covering for the company offices was expensed. What accounting principle. Nimto Inc. assumption. What accounting principle.Introductory Financial Accounting. Existence of the lawsuit was reported in the notes to Fastrac’s financial statements. While making a delivery. 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.1 Page 32 Problems with Solutions Problem 1-1 Multiple Choice Questions 1. or constraint was violated? a) Continuity assumption b) Matching principle c) Materiality constraint d) Separate entity assumption 2. The party sued Fastrac for damages that could exceed Fastrac’s insurance coverage. assumption or constraint is being applied in this situation? a) Full-disclosure principle b) Conservatism principle c) Matching principle d) Unit-of-measure assumption . assumption. He paid for the computer by writing a cheque on the company chequing account and charged the “Office Equipment” account. 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) Cost principle d) Time period assumption 3. v.
According to generally accepted accounting principles. What generally accepted accounting principle does this contradict? a) Time period principle b) Cost principle c) Going concern principle d) Business entity principle 7. there will be a balance of $35. On July 1.1. What would be the balance for Total assets on December 31. 20x8.999. M. Harry.000 in the Prepaid insurance account on December 31.000 personal residence as an asset on the balance sheet of his company. there will be a balance of $20.999.999 6.000 worth of inventory in the company’s December 31. inventory count. In the rush to make it to a New Year’s party. 20x8.999 d) $1. 20x5.000. The December 31. will be $5. Total liabilities of $500. there will be a balance of $25. 5. c) Under cash basis accounting. failed to include $40. financial statements. b) Under accrual accounting. Shaw’s Rent-all. purchased a 4-year insurance policy and paid a premium of $40.000.000 b) $ 959. after correcting for the inventory error? a) $ 40. showed Total assets of $999.000 in the Prepaid insurance account on December 31.1 Page 33 4. v.000. d) Under accrual accounting. Shaw included a $200. 20x5.000 in the Prepaid insurance account on December 31. financial statements should be prepared using which of the following? a) Fair market values b) Historic costs c) Future values d) Replacement costs . 20x9. ABC has a December 31 year end.039. the bookkeeper for Ytwok. and Total shareholders’ equity of $499. Which of the following statements is true? a) Under cash basis accounting. which included this error. the Insurance expense for the period ending December 31. ABC Ltd. 20x8.000 c) $ 999. 20x9.Introductory Financial Accounting. 20x5.
K. 20x8.1.Introductory Financial Accounting. Smart presented land and buildings on her company’s balance sheet based on the appraised value of these assets at December 31. v.1 Page 34 8. What generally accepted accounting principle does this contradict? a) Time period principle b) Revenue recognition principle c) Objectivity principle d) Business entity principle .
Furniture and fixtures are purchased at a cost of $15. The lease agreement is for one year. an offcampus bookstore where students can purchase textbooks and supplies at reduced prices.200 cash. The following are summary transactions for the period July 2. The policy takes effect on July 2.Introductory Financial Accounting.. Interest payments are due on the 1st of each month. 3. 5. 20x2.000 was obtained on August 1. 20x2. . 20x2. 6. 20x2. The loan agreement calls for repayments of $4.000 per month. 1.000 in return for shares in the company. These are purchased for cash.000 A total of $4.000 every 4 months with the first payment due November 1. an annual charge equal to 1% of sales is due at the end of the year (i. Books and supplies of $50.000 was purchased on account.1 Page 35 Problem 1-2 On July 2.e. 20x3). 7. the company’s year end. 20x2 to October 31. 9. You and several other shareholders invested $20.000 of the sales made on account were collected.000. v. The first and last month’s rent are due upon signing of the lease on July 2. 4. 20x3.000 Sales on account . 2.$190. An insurance policy was purchased for $1.$6. on June 30. A suitable location is found and rent is $1.000 of inventory was purchased on account. Sales for the period ended October 31. you decided to start up a new business – Heavenly Books Inc. In addition to the monthly rent. An additional $120. 20x2. 20x2 and expires on June 30. A bank loan in the amount of $20. 8. The annual interest rate is 9%. 20x2 were: Cash sales .1.
An inventory count shows that a total of $25. Credit Accrued Liabilities. Invoices received but not yet paid amount to $700 for miscellaneous expenses. c. The adjustment for insurance expense. 13. Adjustment for rent payable. 12. Credit Accrued Liabilities. The straight line method is to be used.000 300 130. v. The interest payable on the bank loan.000 3. b. Required – a. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . Credit Accrued Liabilities.1 Page 36 10. Enter all the above transactions in T-Accounts. Credit Accrued Liabilities. 15. 18. 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 $182.000 of inventory is on hand. The expected income tax rate is 30%.800 The following adjustments at year end must be made: 11.000 1. 14. 17. Books costing $15. 19.000 2. Employees are owed a total of $600.1.500 10.Introductory Financial Accounting. 16.000 were returned to the publishers. The furniture and fixtures are expected to last a total of 10 years with no salvage value.
300 44.600 2.000 84. A multi-step income statement. Global Production.000 24.100 3. A statement of retained earnings..000 1. 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 14.1 Page 37 Problem 1-3 On January 1. 20x6. Inc.100 2. A statement of financial position.500 157.Introductory Financial Accounting.500 4. v. due December 31.500 .000 1.1.200 1.100 21.400 2.900 ? 40.000 4. c. the accounting records contained the following selected amounts: Accounts payable Accounts receivable Accumulated amortization – Office Equipment Bank loan. On December 31. b.600 4. 20x6: a. $ 7.000 25.100 50.000 invested by the owners as capital stock. 20x6.100 3.300 18.800 2. was started with $50.
You signed the agreement and wrote the cheque on June 30th. September and December. You sell subscriptions to your magazine. A new customer purchases a subscription in January. What is the adjusting entry required if your year-end is December 31st? Your company is moving into a new office on July 1st.1 Page 38 Problem 1-4 For each of the following isolated situations. 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) . record the journal entry to record the receipt of the subscription fee in January. June. Record the adjusting entry for amortization for the year.1. What is the appropriate adjusting entry? You have a contract to provide catering services for a local company. It is now your year-end. for their monthly staff meetings.300 worth of services. First.000.. and then record the adjusting entry for the end of April.000 on June 1st and again on December 1st for providing these services for one year. It is now April 30. which was signed June 1.750. your year-end. Kittens Quarterly. your year-end. you bought a piece of machinery for $50. ahead of time. Your daily salary expense is $600. but you will not be billing Big Al until next month. It is now December 31. and you have provided your services Big Al’s Used Cars for the past month. Your year-end is June 30th. $4. You have provided $2.000 for your annual property insurance policy eight months ago. Part of your new lease agreement required you to pay your first month’s rent. What adjusting entry must be recorded to account for the unpaid salaries? You paid $5. with no salvage value estimated at that time. The estimated useful life of the machine is 8 years.Introductory Financial Accounting. What would the adjusting entry be? You pay weekly salaries to your staff and your accounting period end falls on a Wednesday. prepare the appropriate adjusting entry. You are a consultant. on a yearly basis for the fee of $24/year. stated that they would pay you $6. Issues come out in March. a) On June 1. Today is the end of the accounting period. INC Inc. v. The contract.
The $440 collection was recorded as follows: Oct 1. The annual accounting period ends on December 31. Coverage of the insurance policy starts on July 1. August 31.1. 20x5 Cash Note payable $3.000 cash and gave a oneyear. 20x5. 20x5. Assume Doby Company publishes a monthly magazine. This transaction was recorded as follows: Jul 1. The note was recorded as follows: Sep 1. 20x5 Prepaid Insurance Cash $1.Introductory Financial Accounting. Doby Company borrowed $3.000 $3. Each transaction will require an adjusting entry at December 31.000 b. 20x5. 10 percent. You are to provide the 20x5 adjusting entries required for Doby Company. 20x5. Doby Company paid for a two-year insurance premium for a policy on its equipment. On December 31. The subscription start on October 1. d.000 c.1 Page 39 Problem 1-5 Below are four transactions that were completed during 20x5 by Doby Company. v. The total interest of $300 is payable on the due date. 20x5. On July 1. 20x6. 20x5. 20x5 a tenant renting some office space from Doby Company had not paid the rent of $500 for December. On October 1. note payable. a. On September 1. the company collected $440 for subscriptions two years in advance. 20x5 Cash Unearned subscription revenues $440 $440 .000 $1.
What is total shareholders’ equity after this transaction? (CGA Canada Adapted) . ensure your answer reflects the cumulative impact of all prior parts. 4.1. 20x6. What are the total liabilities of Wild Corporation at this point? 3. What is total shareholders’ equity at this point? On April 2. What are the total liabilities of Wild Corporation after this transaction? 9.000 units of inventory for $20 per unit.000 common shares at $10 per share cash. What are the total assets of Wild Corporation after this transaction? 5. 7. What are the total assets of Wild Corporation immediately after it has been formed and the shares sold? 2. Assume Wild Corporation uses a Perpetual Inventory System. The company used the perpetual inventory method. 20x6. 20x6. v.Introductory Financial Accounting.000 cash. 1. Initial financing comes from the sale of 100. What are the total liabilities of Wild Corporation after this transaction? 12. 10. What are the total assets of Wild Corporation after this transaction? 11. Wild Corporation purchases 1. Wild Corporation is formed on April 1.1 Page 40 Problem 1-6 For the next set of questions. What are the total liabilities of Wild Corporation after this transaction? 6. What is total shareholders’ equity after this transaction? On April 5. The customer pays cash. What are the total assets of Wild Corporation after this transaction? 8. What is total shareholders’ equity after this transaction? On April 3. Wild Corporation sells 200 units of inventory for $50 per unit. The purchase is made “on account” with the company agreeing to pay for the goods within 30 days. Wild Corporation purchases a warehouse for $300. 20x6.
1.400. 3. 5.000 Entries during 20x7 80. Received a $50. Interest accrued on the note payable was $1. 7. The company requires that customers pay the annual subscription fee for the magazine in advance. Show increases by a plus. General Ledger Account Subscriptions Received in Advance Dr Cr Balance January1.1 Page 41 Problem 1-7 The following information was extracted from You Read Magazines Co.000 1-year. Interest accrued on note receivable was $1. 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.Introductory Financial Accounting. shareholders’ equity and net income. 6% interest note in exchange for extending the due date on a receivable. What was the subscription revenue earned during 20x7? 2. decreases by a minus. Received from Smith a $10. Purchased for $500 cash an insurance policy for the following year. Received $2. 4.000 from a customer for an outstanding invoice. v. (CGA Canada Heavily Adapted) .000 90-day. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x7? 4. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x6? 3. and no change by NC. 6.000 120.000.000 Entries during 20x7 Required – 1.000 cash injection from one of the owners of the company. 2. liabilities. Purchased new equipment by obtaining a $200. 20x7 128. 7% note payable from the seller. Example: Shareholders’ Equity -500 Net Income -500 Assets Interest accrued on notes payable was $500 NC Liabilities +500 Required – 1.
there were goods in inventory costing $3.000 $10. accounts receivable for sales made to customers totaling $20.000 40.000 $21. An amount of $5. (CGA Canada) . Based on the above. 2. At the end of 20x6 and 20x7.000 had not yet been received. 3. using the accrual method of accounting. 6. respectively.66% 20x7 $70. 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. Net income and Profit margin for 20x6 and 20x7.1. Cash paid for purchases in 20x6 included an amount of $2. The $20. 5.000 was received in 20x7 and was included in cash received for sales in 20x7. Other expenses in 20x7 included $1.000 16. Cash.000 14.000 of Mr.1 Page 42 Problem 1-9 Mr.000 which was a deposit on goods that were to be purchased in 20x7.000 35.Introductory Financial Accounting. Cost of goods sold. Ronald found the following: 1. Identify any two generally accepted accounting principles that were violated in Mr. Purchases. There was no money due from customers at the end of 20x7. v. Required 1.000.000 received in 20x6 pertained to a sale made in 20x5. calculate Sales.000 30% On examination. He was perplexed that the profit margin had improved in spite of his intuition to the contrary. the proprietor of Error Margin was excited to learn about profit margin analysis and immediately applied his knowledge to evaluate his business. Cash’s personal expenses. 2.000 and $5. Cash’s analysis. 4. At the end of 20x6.000 10.
operates a tree farming business. pruning and maintaining the trees be accounted for? Explain.1 Page 43 Problem 1-10 Evergreen Inc.Introductory Financial Accounting. How should the annual cost of fertilizing. . It plants. pruning and maintaining the trees over the 15-year period. maintains.1. Required a. Use the criteria for revenue recognition to explain when revenue should be recognized for this tree farming business. primarily during the Christmas season. 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. It sells the trees for cash. b. The largest cost of this business is the cost of fertilizing. and harvests evergreen trees.
Completed work for JP Developers and sent them an invoice for $1.1 Page 44 Problem 1-11 V. Paid $1.. Strait Ltd. 31 Issued 100 common shares of the new company.000 in cash and agreeing to pay the balance in six months. Required – a. 28 Dec. 31 Dec. Paid $1. paying $1. Dec. Strait opened an architecture company.000. Prepare journal entries for the above transactions What is operating income for V. 1 Dec. b.300 cash to the office secretary for December’s wages. for the month ending December 31. 20x6? (CGA Canada Adapted) . which revealed that $200 of the $300 worth of office supplies purchased on December 17 were still on hand. 13 Dec.1.000 for rental of office space for December rent. Received $1. 13. the following transactions were completed during December 20x6. v. V. 31 Dec.875. Completed work for a client and immediately collected $680 in cash for the work done. 17 Dec.Introductory Financial Accounting. Strait in exchange for $6. Purchased the office furniture and equipment of a retiring architect for $4.000 cash. 3 Dec. Purchased office supplies on credit for $300. Performed a count of office supplies. Strait Ltd.875 from JP Developers for the work completed on Dec. to V. 7 Dec.
For insurance. advertising. Merchandise inventory purchased on account was $520. Post all of the above transactions in T-Accounts. r. Interest for twelve months on all notes was collected on May 1. statement of retained earnings and balance sheet for 20x2. 20x2. l. Collections from credit customers were $700. computed as 40% of pretax income of $50. h. Total sales were $900. q. of which 80% were on credit. 20x2. 2. The notes receivables are from a major supplier of vitamins.1. 20x2. The board of directors declared cash dividends of $26 on December 15 to be paid on January 21. To trade creditors.Introductory Financial Accounting. $189. Prepare an income statement. $500. $74. Wages earned but unpaid. To the insurance company for a new three-year fire insurance policy effective September 1. j. For new equipment acquired on July 1. 20x2. o. $193. For the interest on the note receivable. Cash disbursements were: g. For miscellaneous expenses such as store rents. k. For depreciation . To Revenue Canada for income taxes. v. The principal on the remaining notes is payable on May 1. which were all paid in cash. 20x5. m. $36. The merchandise inventory as at December 31. $19. 20x2 was $240. The rate is 12% per annum. 20x2 for Ruiz Pharmacy: a.1 Page 45 Problem 1-12 The following summarized transactions (in thousands of dollars) occurred during the year ended December 31. i. $15 Total income tax expense for 20x2 is $20. To employees for wages. 20x2: n. d. b. f. The following adjustments were made on December 31.depreciation expense for 20x2 was $30. c. p. The principal on the current notes was collected on May 1. e. Required 1. December 31. utilities and supplies. .
2. Peter has been in business for five years. mainly to builders. Peter needs to prepare its financial statements for the year ended August 31.500 by Peter. Peter collected $375.000 $763. Balance Sheet As at August 31.000 446. Peter's Appliances Shop Ltd.000. All purchases were made on account. The remainder was on account. 20x4 Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures Accumulated amortization $ 30.000.000 in installments on its taxes. 5. During fiscal 20x5 Peter paid $15. . Peter’s balance sheet for August 31. v.500 100. During the year Peter paid the taxes it owed at the end of fiscal 20x4. Peter paid suppliers $600.500 It is now mid-September 20x5..000.500 14.000 20. employees were owed $7. Cash sales were $775.000 8.000 190.000 $763.1 Page 46 Problem 1-13 Peter is the owner and operator of Peter's Appliance Shop Ltd. 4. Ottkancester’s largest independent household appliance store.000. At year end the accountant estimates that Peter owes an additional $12.350. the company's year end. 20x5. 3.000 during the year from customers who purchased on credit. The cost of the appliances sold during fiscal 20x5 was $745.000 in taxes. 20x5. Peter paid salaries and commissions to employees of $200. 6. On August 31.000 -40. 7. Peter purchased appliances from suppliers for $850.000 260.500 Liabilities and shareholders' equity Accounts payable Taxes payable Interest payable Long-term notes payable Capital stock Retained earnings $265. Peter uses the financial statements mainly for tax purposes and to show the holders of the long-term notes. is shown below. The following information has been obtained about the fiscal year just ended: 1.000.1. Sales during the year were $1. 20x4. 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.000 123.000 110.Introductory Financial Accounting.000 for appliances it purchased on credit.
and microwave that cost $4. . 10.500 a month in rent. 20x4 to reduce the balance owed on the long-term notes. 13.500 in interest to the holders of the long-term notes. Peter accepted $10.1. Peter must pay 2% of annual sales to the property owner 60 days after the year end. These deposits were not included as part of cash sales. Required – Prepare an income statement. a statement of retained earnings and a balance sheet and a statement of cash flow for Peter's Appliance Shop Ltd. 11. Interest is paid annually on September 1. treat this as a dividend.500 from the store and installed them in his new kitchen.000 in cash for other expenses related to operating the business in fiscal 20x5. 12. Amortization expense for 20x5 is $22. The terms of the lease require that rent be paid six months in advance on January 1 and July 1 of each year. Beginning July 1. In addition to the interest payment. Peter recently redecorated his kitchen at home.000 in deposits from customers who wanted a guarantee that their appliances would be delivered when they needed them. 20x5 Peter paid $3. for the year ended August 31. 14.1 Page 47 8. For accounting purposes. Peter expects that the appliances will be delivered in early November 20x5. During 20x5 Peter purchased new capital assets (furniture and fixtures) for $25.5%. Peter paid $225.000 cash. The prepaid rent at the beginning of the year represented 4 months of prepaid rent at the old location.000 a month for the rent of its store. The deposits pertained to a particularly hard-to-get appliance. stove. During the year Peter paid $8.Introductory Financial Accounting. v. 20x5.000 on September 1. He took a refrigerator. 9. The interest rate on the notes is 8. 20x5 Peter pays $4. Peter paid $20. Before July 1.000. In addition.
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 . 4. cheques deposited that are returned due to insufficient funds (NSF cheques). bank accounts. and Prepare a list of deposits that were made in the cash account but were not yet recorded on the bank statement (outstanding deposits).. Ensure that all cheques returned correspond to the amount entered into the cash account. Cash Cash and Investments For accounting purposes. 5. bank service charges. Typically. It starts with the opening bank balance and ends with the ending balance.1 Page 48 2. Prepare journal entries to record these items and post to the general ledger. cash generally means any cash on hand. The balance showing on the bank statement needs to be reconciled to the balance shown in the company’s cash account.1. etc. 3. v. Accompanying the bank statement are all the cheques that have cleared the bank account. Compare all deposits recorded on the bank statement to those recorded in the cash account. 2. petty cash and any foreign currency on hand. Identify any transactions that appear on the bank statement that have not been recorded in the cash account. Prepare a list of cheques that were written but that have not yet cleared the bank account (outstanding cheques).Introductory Financial Accounting. The bank reconciliation starts with the balance per the bank statement. every 30 days a company will receive a bank statement from the bank. This process is as follows: 1. For example. The bank statement is a running total of all transactions that were made in the account since the last bank statement was produced.
545 (6.Introductory Financial Accounting. Cash ($332 – 323) Accounts payable To record the error in recording cheque # 345. v. The next step will be to calculate the revised cash balance: Cash balance.1.644 $156 $156 788 788 9 9 Finally. 20x7 $45. August 31.574 • a deposit made on August 31 in the amount of $3.579 (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. 20x7 shows the following: • ending balance of $45.673 • 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. • the total outstanding cheques amount to $6.574) $42. The correct amount is $323.545 was not recorded on the bank statement • the general ledger cash account shows a balance of $43.673 3. 20x7 Add outstanding deposits Less outstanding cheques Cash per books.644 . The cheque was incorrectly written in the cash disbursement journal as $332. August 31. Accounts receivable Cash To record the returned cheque. before adjustments Less bank service charges Less NSF Cheque Add error on cheque # 345 Cash balance after adjustments $43. we prepare the bank reconciliation: Cash per bank.579 (156) (788) 9 $42.1 Page 49 Example – The Parkes Company’s bank statement dated Aug 31.
The classification of available for sale investments as current or long-term assets depends on management intent. Where the two methods differ is on how the adjustment to fair market value is recorded. Non-strategic investments. at the balance sheet date. For both types of investments. These investments will either be classified as held for trading or available for sale securities. By their very nature. otherwise they are classified as long-term assets. 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. • available for sale investments: any unrealized gains or losses are charged to Other Comprehensive 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. Available for sale investments also occur whenever debt securities are acquired with the intent of liquidating them before their maturity. Other Comprehensive Income becomes part of Shareholders' Equity. are charged to Net Income. • . Any realized gains or losses are charged to Net Income. trading investments: all gains. strategic investments are classified as long-term investments. consist of passive investments in the shares of another company. the investments are carried at fair market value.Introductory Financial Accounting. v. whether realized or unrealized. there is no difference in the accounting for these investments. 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. and balance sheet valuation is the same: interest accrued or dividends declared are recorded as investment income. Regardless of how they are classified.1 Page 50 Non Strategic Investments Investments in the shares of another corporation can broadly be classified as non-strategic or strategic investments. They are therefore specifically held for purposes of resale and are designated by management as such. the accounting for investment income. they are classified as current assets. operational or financial policies. They would normally be classified as current assets. the subject of this chapter. If management intends to hold these for a period of less than one year.1.
you sell the investment for $16. 20x5 Available for Sale Investments Cash Cash Investment income Available for Sale Investments Unrealized holding gain $15. 20x5 you purchase the shares of another company for $15.500.000 $15.000.500 $16.900 $16. $15.500 1.1.500 Oct 15. 20x5 .000 600 600 1.on June 30.Introductory Financial Accounting.900. v.000 600 600 1. 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. 20x5 Dec 31. At December 31. 20x5 we receive a dividend cheque for these shares in the amount of $600.000 $15. 20x6. 20x6 Cash Unrealized holding gain Gain on sale of investments Available for Sale Investments XXXX XXXX $1. 20x5. The investment is classified as an available for sale investment.1 Page 51 Example . On February 12. The following journal entries will be recorded with regards to this investment: Jun 30.900 1. 20x5 (the balance sheet date).500 1. 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. 20x5 Dec 31.500 If the investment has been classified as a trading investment. 20x5 At December 31.500 Oct 15. the fair market value of the shares is $16. On October 15.500 1. then the following journal entries would have been recorded: Jun 30.
v. 20x6 Cash Realized trading gain Temporary Investments $16.1 Page 52 Feb 12.900 400 $16.Introductory Financial Accounting.1.500 .
20x8. 20x8? a) $15.595 c) $25.700 3.200 What amount should be reported as cash in the current asset section of Swiss Company’s balance sheet at December 31. a company received a cheque from a customer in payment of the related account receivable. 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. on hand but not yet deposited Swiss Company cheques that have not cleared the bank account $15. and it was deposited on May 18. 20x8 revealed the following details: Balance in bank account Customer cheques dated December 31. v. The May bank statement listed the deposit at $512.095 d) $31.1 Page 53 Problems with Solution Problem 2-1 1.Introductory Financial Accounting. The cheque was written for the correct amount of $152. During May.1.095 b) $21.595 . An analysis of the cash account for Swiss Company at December 31.095 9.
A company is preparing its May bank reconciliation. Cash balance per books. was gathered by Sarg Ltd.548 6.1.288 c) $4. b. $ 3.000 77.1 Page 54 3. December 31 Bank service charges for December Deposits in transit at December 31 Cheque issued by Sparg Ltd.300 52 1.312 d) $4. December 1 Cash received during December Cash payments made during December Cash balance per bank statement.300 5.Introductory Financial Accounting. Prepare the December 20x6 bank reconciliation for Sarg. Prepare any adjusting journal entries that would result from the December 2006 bank reconciliation.200 cheque received from a customer on December 13 in payment of an account receivable was incorrectly recorded as Required a.020 . with respect to cash activities. deducted from Sarg’s account in error by the bank A $1.700 77. 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. At the end of the month. The ending balance on the May bank statement is shown as $4.327 $15 48 63 34 Problem 2-2 The following information for the month of December 20x6.279 b) $4.225. December 31 Cheques outstanding. v.700 580 1.’s bookkeeper.
Required – 1. Prepare a bank reconciliation for Focus Ltd. 20x7. c) Bank service charges for December amounted to $35 and had not yet been recorded by Focus Ltd. as $350.’s cash account according to its accounting records was $4. f) The balance in Focus Ltd. 20x7. Prepare the necessary journal entry(ies) to bring Focus Ltd.Introductory Financial Accounting. d) Cheque #521 issued by Focus Ltd. had been incorrectly recorded in the books of Focus Ltd. for the cash purchase of office equipment.1.200 had not been received by the bank in time to be included in the December bank statement. bank statement for Focus Ltd.1 Page 55 Problem 2-3 The March 31. at March 31. 20x7. 2. b) The March 31. v. as $260. showed a balance of $480.’s cash account up to date at March 31. the following information was determined: a) The following cheques are outstanding at March 31. 20x7: #501 for $780 and #533 for $1. e) A $530 payment on account received from a customer was incorrectly recorded in the books of Focus Ltd. 20x7. In preparing the bank reconciliation.915.200. in the amount of $620. deposit of $6. (CGA Canada) .
000 Recent discussions have brought to management's attention that there are different methods of accounting for temporary investments. .000. 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.'s temporary investments at December 31. Holdco Ltd. all the XYZ Computer shares are sold for $75. and all the Strategic Air Defence Systems shares are sold for $35.000 28. v. Management is quite unfamiliar with these different methods and has approached you for this information.000 63.1. Assuming these investments are classified as held for sale investments. Support your answers with calculations.000.000 $234.000 9. advise management of two alternative methods of accounting for temporary investments and indicate the effect each has on balance sheet and income statement information. The data on Holdco Ltd.000 7. 20x1.000 26.000 $226.000 31.Introductory Financial Accounting.000 30.1 Page 56 Problem 2-4 During 20x0. write the journal entries to record the two sales. 20x0 $ 72.000 51. 20x0.000 5. decided to invest in the shares of a number of "Hi-tech" companies.000 44.000 45.000 10. b) On January 10.000 20. Required a) As chief accountant for Holdco.000 $ 70.000 51.
000 $57.500 31.300 20x1 $19.500 14.1 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 $20.000 32.000 14.000 12.500 29.000 20x0 $18.500 $62. v. calculate the amount of unrealized trading gain or loss for each year. Assuming these investments are classified as trading investments.Introductory Financial Accounting. calculate the balance in Other Comprehensive Income at the end of each year.1.500 Required a) b) Assuming these investments are classified as available for sale. .000 10.800 $60.000 28.000 20x2 $16.000 $66.
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. and the income statement approach. There are generally three approaches to estimating the allowance for doubtful accounts directly (balance sheet approach): 1.Introductory Financial Accounting.1 Page 58 3.000 x 40% $ 7.000 50.000 $45. therefore.000 Based on past experience.000 $1. Accounts receivable are. Accounts receivable are reported on the statement of financial position at their net realizable value (NRV).000 x 8% 50. whereby we estimate the amount of bad debt expense on the income statement.000 120. Aging of the accounts receivable listing This involves grouping all outstanding receivables based on how long these have been outstanding. 3% of accounts between 31-60 days.200. where the allowance for doubtful accounts is estimated directly.000 x 1% 280.600 20. 8% of accounts between 61-90 days and 40% of accounts over 90 days. an account receivable is created.000 and that the aging of accounts receivable is as follows: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750. Accounts Receivable Whenever credit is extended to customers for the provision of goods or services. assume the total receivables add up to $1. v. the company estimates that 1% of current accounts will eventually become uncollectible. The allowance for doubtful accounts at the end of the year will be: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750.400 9. the aggregate of the unpaid invoices at any point in time. which is equal to the net amount of outstanding invoices the firm expects to recover.500 8.000 280.500 .1. There are two approaches to calculating the allowance for doubtful accounts: the balance sheet approach.200.000 x 3% 120. For example.
The income statement approach is used whenever a company offers their customers revolving credit facilities (i. Allowance for Doubtful Accounts Cr. v. Specific account identification When a company has accounts receivable from a limited number of customers and has an intimate knowledge of these customers.1.200.Introductory Financial Accounting.e. 3. The sum of the estimated uncollectible accounts at any point in time will form the allowance for doubtful accounts. The journal entry to record bad debt expense under either the balance sheet or income statement approaches is: Dr.000 and the company estimates that 5% of these accounts will eventually become uncollectible. Allowance for Doubtful Accounts . Accounts Receivable Recording recoveries of accounts written off When an account that was previously written off is subsequently recovered. so we estimate the bad debt expense as a percentage of credit sales.200. it may be able to identify which specific accounts may become uncollectible. 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. In this case. Any accounts written off are written off against the allowance for doubtful accounts: Dr.000. then the allowance for doubtful accounts at the end of the year will be $1. Note that this approach does not estimate the allowance for doubtful accounts. but estimates the amount of bad debt expense. 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). For example.1 Page 59 2. or (2) the amount is small and the cost of recovering the account is greater than the balance owed. we first reverse the journal entry made to write off the account: Dr. if the ending accounts receivable balance is $1. it would not be meaningful to age the accounts receivable listing.000 x 5% = $60. Bad Debt Expense Cr. Accounts Receivable Cr.
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 were written off.000 $75.000 Beginning Bal Recoveries Ending balance before adjustment .000.000.000 This will result in a $15.000 debit balance in the Allowance for Doubtful Accounts: Allowance for Doubtful Accounts Write-offs $75. Accounts Receivable Example – The Jasmine Company’s accounts receivable at the end of the year totaled $2. The balance in the allowance for doubtful accounts at the beginning of the year was $50.000 $10.000 were recovered.000 We then record the cash receipt on the accounts receivable: Cash Accounts Receivable $10. The journal entry to record the accounts written off will be: Allowance for doubtful accounts Accounts receivable $75.800. the following transactions took place: • • accounts totaling $75.000 $15.1 Page 60 We then record the collection on the recovered accounts receivable: Dr.1. Cash Cr. previously written off accounts totaling $10.000 10.000 $10. v. During the year.Introductory Financial Accounting.000 $50.
5%) + (250.800. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $92.0% Management estimates that 2.5% 6.000 150.000 $92.000 3.75% of the accounts receivable balance will be uncollectible.000 250. The accounts receivable aging is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days 1. we will assume four independent scenarios: 1.800. The allowance for doubtful account should be established at $2.000 The allowance for doubtful accounts is estimated to be: (1.500 since this is the entry required in the Allowance for Doubtful Accounts account to bring the account to a credit balance of $79.000 x 6. Using specific identification of accounts.000 x 15.5% 2.0% 15.500 Estimated % Uncollectible 1.Introductory Financial Accounting.000 x 2.500 $94. $94.0%) = $79.000 .000.000.000 600.000 $83.75% = $77.500: Bad Debt Expense Allowance for Doubtful Accounts 2. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $83.0%) + (150.1 Page 61 In order to calculate the bad debt expense for the year.1.000 $2.000 x 2.500 The bad debt expense will be $94.800.000 x 1. management estimates that the allowance for doubtful accounts should be $68.5%) + (600.800. v.
5% = $90.000. Total credit sales for the year amounted to $6. Bad debt expense will then be equal to $6. .000.000 This will cause the allowance for doubtful accounts to have a credit balance of $15.000. v.000 cr.000 dr.5% of total credit sales. Note that when using this approach.000 x 1. + $90.1 Page 62 4. we were estimating the Allowance for Doubtful Accounts with the residual being bad debt expense. In approaches 1-3.000 $90.000.Introductory Financial Accounting. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $90.1. Management estimates that bad debt expense will be equal to 1. = $75. we are effectively estimating the bad debt expense for the year and the residual becomes the Allowance for Doubtful Accounts.000.
900 2. the aging schedule indicated that the balance of the allowance account should be $6.1. 20x8 Allowance for doubtful accounts balance.000 Experience indicates that 4% of the uncollected accounts receivable at the end of each year ultimately will be uncollectible.1 Page 63 Problems with Solutions Problem 3-1 – Multiple Choice Questions 1. What is bad debt expense for 20x9? a) $1. January 1.000 b) $4.Introductory Financial Accounting. 20x8 a) $4.000 (11.000 20. the balance of the allowance account was $5.000 e) $13. 20x8 (credit) Total credit sales during 20x8 Total collections on accounts receivable during 20x8 Uncollectible accounts written off during 20x8 $80. January 1. A company estimated the needed balance in its account “allowance for doubtful accounts” by aging the accounts receivable.000 360. v.600 d) $6.000) 400.800 . At the end of 20x8. What should be the adjusting entry amount for doubtful accounts at December 31.000. During 20x9. the company wrote off $500 and collected a $300 receivable that had been previously written off as uncollectible.400.000 d) $13. A company reported the following items for 20x8: Accounts receivable balance.900 c) $6.800 c) $7. At the end of 20x9.600 b) $1.
v.095 a) b) c) d) Problem 3-2 The following information relates to Merit Ltd. 2004 adjusting journal entry to record bad debts.000 14.000. for the year ended December 31. January 1.000 $3.000 800.000 dr.1. just prior to writing off as uncollectible an account receivable of $30. b. A company had accounts receivable of $3. . January 1. $ 15. Provide the December 31.975 $2.1 Page 64 3.200. 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 After $2.875 $3. Provide the journal entry to write off actual accounts receivable determined to be uncollectible and recoveries.000 55.900. 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. 2004 Allowance for doubtful accounts.000 cr. 2004 Required – a.000 and an allowance for doubtful accounts of $125. Provide the December 31. 2004 adjusting journal entry to record bad debts.000 1.970 $3.875 $2. assuming the allowance method is used and uncollectible accounts are estimated to be of 1% of credit sales.Introductory Financial Accounting.000 11.000.000 3. c. 63. assuming the allowance method is used and management estimates the allowance to be 3% of the closing Accounts Receivable balance. assuming the allowance method is used to account for uncollectible accounts.875 $2.
000 15.000 27.000 25.000 7.800.000 16.000 2. 20x0. 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 .000 - 277.000 2.400.Introductory Financial Accounting.1. v.1 Page 65 Problem 3-3 Sigma Company began operations on January 1.000 234.000 80. 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 90.000 45.000.000 60.000 20x0 $2.915.
Introductory Financial Accounting. Wrote off uncollectible accounts receivable in the amount of $1.1 Page 66 Problem 3-4 EED Ltd. 20x7 to record bad debt expense for the year. EED Ltd. if any. On December 1. Suppose now that instead. an accounts receivable in the amount of $3. prepare the journal entries. expects 2% of credit sales to be uncollectable. prepare journal entries. In addition. The company uses the allowance method of accounting for bad debt expense. The promissory note bears an interest rate of 12%. began operations on January 1. (CGA Canada adapted) 2.000 in payment of outstanding accounts receivable.1. . With all other data being the same from above. Received cash of $400.000 was converted to a 6-month promissory note to allow a cash-strapped customer some time to meet his obligations.000 credit balance in the allowance for doubtful accounts account and a $40. Prepare journal entries to record the above transactions on the books of EED Ltd. v. Sold merchandise on credit for $500. EED Ltd. Required 1. 20x7. Based on industry averages and its experience in 20x6. 20x7. required at December 31. 3. 4. if any. 20x6.000 debit balance in the accounts receivable account. decided that an allowance equal to 5% of total accounts receivable would be sufficient to cover uncollectible accounts. required at December 31. On December 31. During 20x7 the following summarized transactions occurred: 1.500. 20x6 there was a $2. to record bad debt expense for the year and accrue interest on the promissory note. 2.000.
They sell $4. We will begin by looking at two fundamentally different types of systems.000 10. as well as valuing the items that it has on hand to resell at any point in time.1 Page 67 4. We still increase the inventory account by the amount of the purchase. and any adjustments that are needed will be made to the inventory account. Little Company purchases an additional $10. When we talk about a perpetual inventory system. On the first day. 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. we just create a payable instead of reducing our cash account.000 5. the amount the company generally receives from its customer should always be greater than the value of the inventory.000 worth of inventory to a customer for $6. Furthermore. paying cash. or never ending. Little Company makes its first big sale. we mean an inventory system that has no interruptions.1. is the inventory system that it chooses. From time to time.000 of inventory. a physical count of inventory will be taken to ensure accuracy of the perpetual records. this time on account. Note that unless a company is offering a discount to get rid of inventory or for some other reason. The journal entry would be: Inventory Cash 5. After two weeks of business. Example: It is Little Company’s first year of business. Little Company purchases $5. Inventory A key part of determining the cost of the items that a company sells to its customers. the effect on the inventory account is the same as the above journal entry. . Each item that is purchased for resale gets debited to the inventory account. Inventory Accounts Payable 10.000 Note that even though we are not paying cash. The Perpetual Inventory System The term perpetual means continuing without interruptions. What that means is that inventory is tracked constantly in a real-time basis.Introductory Financial Accounting.000 cash.000 The next day. and then evaluate the different valuation methods a company can chose to determine the cost of inventory.000 worth of inventory. v.
we have not removed the items that were sold from our inventory account. the journal entry would be: Cost of Goods Sold Inventory 4.000 6. that first purchase of inventory for $5.000 5. we do not keep a “running total” of inventory. Second. however.000 worth of inventory from our Inventory Asset account. nor do we keep a running total of COGS. 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”. which we will now turn our attention to.000 This journal entry does two very important things. Instead. The Periodic Inventory System Under the Periodic Inventory System.1. Continuing with the example above. However.Introductory Financial Accounting.000 At this point. This varies significantly from the Periodic Inventory System. First. Purchases has several contra accounts that track other expenses or discounts that may be associated with the purchases. This expense account. Under the Perpetual system the COGS is a running total. as is the inventory account.1 Page 68 To record the sale. as purchases are made of inventory they are tracked in a temporary account called “Purchases”. it removes the $4. the journal entry would be: Cash Sales Revenue 6. is used to keep track of all of the costs of all of the items a company sells in one period. v. These are: .000 cash would be recorded. we have recorded the sale and the receipt of cash. as: Purchases Cash 5. it records the expense of the items that were sold. under a periodic inventory system. Cost of Goods Sold (COGS).000 4.000 The Purchases account keeps a running total for the year of all purchases of inventory made. To do this. So what do we do with the purchases of inventory we make throughout the year? Throughout the year.
Introductory Financial Accounting.000 10.000 Let us suppose that those were the only purchases made during the year. To calculated COGS: . 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 and $10. the inventory account is adjusted to the appropriate ending balance. and that at the end of the year a physical count of the inventory revealed that there was $11.000 were made.1.000 5. The new journal entries would be: Purchases Cash Purchases Accounts Payable 5. If you remember. The amount needed to balance the equation is the Cost of Goods Sold. the Purchase account and all contra accounts are closed out to zero.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. v. based on the physical count. At the end of the year.000 10. the opening inventory was $0.000 worth of inventory on hand. At the same time. Purchases of $5. as this is a new business.
000 Cr.000 increase) Purchases (close account) Transportation-in (close account) 2.476.000 Note that the Inventory balance given of $175.000 (360.000) = Cost of Goods Available for Sale .700.000 36.700.000 + 10.000 2.000 – 27.1 Page 70 Beginning Inventory + Purchases ($5.000 11. the Purchases account and all of the associated contra accounts have been set back to $0.000 2. according to our count.700.000 48.000) . $360.000 – 175.000 would be the ending inventory balance from last year. v.476. A year-end count reveals that the ending inventory balance should be $360.Ending Inventory (as per count) = Cost of Goods Sold $ 0 15.000 27. Cost of goods sold can be independently calculated as follows: Beginning Inventory + Purchases (2.000 185.000 we must increase it (or debit it) by $185.000 – 48. Inventory Purchases Transportation-in Purchase returns and allowances Purchase discounts 48.000 = $185.000 .000 27.000. in order to get the balance in the inventory account to $360.000 Tetrie uses a periodic inventory system.000 $4.000. The balance is sitting at $175.000 and it should be.000 36.1.Introductory Financial Accounting.000 2.000.000) $2.000 + 36. Furthermore.000 Example 2 – Tetrie Company shows the following balances at the end of the year: Dr.661. They are ready for the next fiscal year.Ending Inventory (as per count) = Cost of Goods Sold $175. Therefore. 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 ($360.836.000 2. $175.
or when the value of the items is so small that it does not warrant the cost of tracking the specific item value. There are two different valuation methods that can be used to calculate the value of inventory: specific item valuation or cost flow assumption. we don’t know specifically which items are being sold so we use an average of some sort to determine cost.1. Conversely. That is. Specific Item Valuation This method is used when inventory items can be specifically identified.1 Page 71 Inventory Valuation Methods The above discussion of periodic vs. perpetual inventory systems dealt with how we track the inventory and purchases that flow through a company. That is to say. we assume that the “First In = First Out”. when the item is sold.Introductory Financial Accounting. Cost-Flow Assumption This method is used when items cannot be differentiated from one another. Note that regardless if a company is using a periodic or perpetual system. that inventory is mixed all together and. . 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). FIFO Under the FIFO method. or when a company has relatively few items in inventory that have a specific cost associated with them. like a jeweler. the COGS is equal to the opening inventory + earlier purchases. both the COGS and the ending inventory cost will be the same under the FIFO valuation method. v. we remove its specific cost from inventory and debit COGS at the carrying amount. that is at what cost do we record the inventory and COGS. Some examples of situations where this method would be possible are: when items have specific serial numbers. In this case. it is possible to track each item in inventory separately. the ending inventory is equal to the most recent purchases. like a car dealership. We will now discuss how we attach value to the inventory. therefore.
Introductory Financial Accounting.20 1.015 Secondly.20 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 1.10 = $330 January 5 purchase = 100 units x $1. we sold .25 $240 500 (400) (240) (125) 330 (250) Balance Units Total Cost 400 600 1.25 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. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.00 1.25 each Sold 700 units Purchased 300 units @ $1. Throughout the period.00 each. Lainey Company has 400 units in its opening inventory.10 each Sold 200 units Under the FIFO periodic method.070 1.25 = $125 Total value of ending inventory = $330 + 125 = $455 Using the FIFO perpetual method. This is not a coincidence – both approaches always provide the same result.20 each Purchased 400 units @ $1.1 Page 72 Example – On January 1. we know that we sold a total of 700 + 200 = 900 units. using the cost of goods sold equation: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.140 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.000 $400 640 1. v.470 (455) $1. First. They purchased these units for $1.1. Cost of goods sold can be calculated in two ways. Under FIFO.10 1.
Annual Weighted-Average – Periodic Systems Under a periodic system.1 Page 73 the units in opening inventory plus the first of the purchases we made through the year. one is used when you have a periodic system. Lainey Company has 400 units in its opening inventory.20 = 300 units @ $1.015 Weighted-Average Method There are two versions of this method.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. that is. So COGS would be calculated as the cost of the first 900 units.00 each.Introductory Financial Accounting. Throughout the period. The annual weighted-average for periodic systems uses a similar methodology. you will remember that we do an inventory count once a year to determine the ending inventory balance. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1. and one is used when you have a perpetual system. Opening Inventory January 3 purchase January 5 purchase COGS 400 units @ $1. We then close out the purchase account and the associated contra accounts to determine what the COGS is. 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.20 each Purchased 400 units @ $1. v. we calculate the average cost of inventory as follows: .00 = 200 units @ $1.25 = 900units $ 400 $ 240 $ 375 $1. They purchased these units for $1.25 each Sold 700 units Purchased 300 units @ $1. Using this method.10 each Sold 200 units Under the annual Weighted Average method.
.470 (452) $1. then that is the unit cost used to determine the COGS for that sale.018 Moving Weighted-Average – Perpetual Systems You will remember that under a perpetual inventory system. The moving weighted-average system of inventory valuation takes this into account.1.Introductory Financial Accounting. the average unit cost is recalculated every time a purchase is made.13077/unit = $452 COGS = # units sold x unit cost = 900 units x $1.13077/unit Ending Inventory = # units in inventory x unit cost = 400 units x $1. that is the unit cost after the last purchase previous to the sale.470 Units 400 200 400 300 1. when we make a purchase we debit the inventory account for the amount of the purchase. Subsequently. As such. v. Under this system.13077/unit = $1. Unit Cost = Cost of all goods on hand/number of units on hand.25 each) January 19 Purchase (300 units @ $1.1 Page 74 Cost of Goods Available for Sale Opening Inventory (400 units @ $1.470/1.018 Alternatively. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.300 Average unit cost = Cost of Goods Available for Sale/Units Available for Sale = $1.20 each) January 5 Purchase (400 units @ $1.300 units = $1.00 each) January 3 Purchase (200 units @ $1. whatever the unit cost is at the time of a sale.10 each) $ $400 240 500 330 $1. we are keeping a running total in the inventory account.070 1.
25 each Sold 700 units Purchased 300 units @ $1. Lainey Company has 400 units in its opening inventory.10 each Sold 200 units Remember. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.066671 640 2 1.20 each Purchased 400 units @ $1.20000 1.25000 1. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.12000 672 448 Units 200 400 (700) 300 (200) Unit Cost $1. v.022 Alternatively.00 each.000 300 600 400 Unit Cost Total Cost $1.140 342 3 1.070 1.470 (448) $1.Introductory Financial Accounting.10000 1. Unit Cost = Cost of all goods on hand/number of units on hand. 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 3 Unit Cost = $672 / 600 Cost of goods sold is equal to the cost of goods sold for the two sales: $798 + 224 = $1.022 .1 Page 75 Example – On January 1.1.14000 1.00000 $400 1.140 / 1. They purchased these units for $1. under this system we recalculate the unit cost each and every time we make a purchase. Throughout the period.14000 1.12000 Unit Cost = $640 / 600 Unit Cost = $1.
the inventory account has a balance of $50. This account operates much like the Allowance for doubtful accounts in that it gets adjusted to the desired balance at year end. 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. We do this by creating a contra account to inventory called ‘Allowance for decrease in value of inventory’.000 At present. the analysis reveals that no allowance is required. Show the journal entry to record the proper carrying value of the inventory. The net realizable value of this inventory is: = Selling Price – Commission = $40. 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. Example –VenTure Ltd. commissions of 10% would have to be paid to the sales team on any sale of this inventory.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.Introductory Financial Accounting.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. v. Inventory Loss Allowance for decrease in value of inventory 14. If the market value is less than cost.000.1.000. then the allowance will be debited by $14.000 = $36. next year.000 – 14.000. then the inventory must be written down to market value. Furthermore.000 14.000 X 10%) = $40. the credit will be to income.000 = $36. . At the balance sheet date.000 – ($40. The net inventory balance that will be reported on the statement of financial position is $50.000 to bring it to a zero balance. First of all.000 – 4.000. If. is showing an ending inventory balance of $50. the accountant determines that they could sell this inventory for $40. we must determine that the inventory’s net realizable value.
000 Opening Inventory + 860.000 and Gross Profit is $400.000.000.900.000 25% .000 x (1 – 25%) = $1. we must first understand how to calculate the Gross Profit %. If we did not have the COGS number. To understand the application of this method.000 Ending Inventory = $310.000 600.000 860.000 Example – The Gennissen Company’s inventory were destroyed by a fire and you need to estimate the ending inventory. the Gross Profit Ratio = 40%.000 100% 60% 40% In the above example.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.000 350. then we can estimate COGS as follows: COGS = Sales x (1 – gross profit ratio = $1.200.000.000.000 Purchases .000 x (1 – 40%) = $1.200.1.000 x 75% = $900.000 400.000 The estimated ending inventory is: $350.000. 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 $1. for whatever reason. but we did have the Gross Profit Ratio. we could estimate COGS by using the following formula: Gross Profit = Sales x Gross Profit Ratio = $1. Example – Assume the following: Sales Cost of Goods Sold Gross Profit 1.000 x 60% = $600.Introductory Financial Accounting.200. v.000 x 40% = $400.000 If Sales are $1.000.
On January 1. What was cost of goods sold for the year ending December 31. During the year the company purchased $500.1 Page 78 Problems with Solutions Problem 4-1 – Multiple Choice Questions 1.000.600. . 20x4. b) Assets would be understated by $200.000. 3.000 worth of inventory and took advantage of purchase discounts amounting to $6.000 in shipping charges on merchandise purchased during the period. financial statements of Confu Ltd.000. In addition. v. the company returned merchandise costing $10. 20x8? a) $478.400. a) Liabilities would be overstated by $200. included an adding error in the inventory count that resulted in ending inventory of $1.000 to suppliers and incurred $25. 20x8.000 computer purchased for the chief financial officer on December 27 had been recorded incorrectly as an inventory purchase.000. After completing its inventory count and making the appropriate adjusting journal entries.000. financial statements. discovered that a $6.000 2. c) Shareholders’ equity is understated by $6. 20x4. A year-end inventory count revealed merchandise on hand in the amount of $66. The December 31. d) Owners’ equity would be understated by $200. Owl Enterprises had merchandise inventory on hand amounting to $60.000 d) $523.000. d) Shareholders’ equity is overstated by $6.000 b) $503. Which of the following statements is true with respect to the impact of this error on the December 31.000.000.000 c) $515.000.1.000 instead of the correct balance of $1.000. Ltd.000.000. b) Inventory is understated by $6.Introductory Financial Accounting. c) Cost of goods sold would be understated by $200. Fri. 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.
e. shipped goods to a customer on December 30. Czech had paid $42. for the month of July 2006.1.1 Page 79 4.000. Merchandise was purchased at a cost of $50.000. a shoe wholesaler. Required – Prepare the journal entries required to record the above events and transactions. The selling price of the goods was $57.000 for the goods and uses the periodic method to account for its inventory.000. One customer returned goods with a sales value of $500 and was issued a credit note. FOB Shipping. c) Income for 20x9 is understated by $15. e. Cozy sets the selling price on its shoes so that the cost of sales is equal to 70% of the selling price. d) Revenues for 20x8 are understated by $57. n/45. FOB destination. Which of the following statements with respect to this transaction is true? a) Income for 20x8 is understated by $42. 20x9. e. e. The customer received the goods on January 6. CIF destination. All of the merchandise purchased during the month was paid for with Cozy taking advantage of the purchase discount offered. 20x8.000. Transportation out paid on delivery of goods sold during the month equaled $1. n/30.. Sales totaled $80.000. b) Income for 20x9 is overstated by $42.200.Introductory Financial Accounting. Problem 4-2 The following summarized transactions relate to Cozy Co.000.000 during the month with terms 1/10. all of which were made on credit with terms 2/10. The sale was recorded by Czech on January 2. All other sales made during the month were collected in the month with all customers taking advantage of the sales discount offered. v. e. The company uses a perpetual inventory system. Czech Ltd. 20x9. .
100 125 $ 1. assuming a FIFO cost flow system is used.50 = 690 35 @ $12.Introductory Financial Accounting. assuming a firstin. 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 1.500 3. Beginning Inventory/ Purchases 30 @ $10.410 70 $ 1.00 = 1. first-out (FIFO) cost flow method is used. c.000 2.00 = $ 400 Anvil Rock uses a perpetual inventory system.00 = $ 300 60 @ $11.500 Date May 1 May 5 May 14 May 21 May 29 Totals Sales Beginning inventory Purchase Sale Purchase Sale 20 @ $20.000 2. v.00 = 420 50 @ $22.1.000 2. Problem 4-4 The following information concerns one of a company’s products. assuming a weighted-average cost flow method is used.1 Page 80 Problem 4-3 Anvil Rock Company had the following inventory and purchases for the month of May. b. Calculate the cost of ending inventory for May. Calculate the cost of ending inventory for May. Prepare the journal entries to record the May 29 sale on account.000 Price/Cost $12 18 30 23 33 . Required – a.
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. Fortunately. During 20x5 the company made the following purchases of MP3 players: February 21.000 units at $52 each 1. The loss is to be determined based on the cost of the inventory in accordance with generally accepted accounting principles.000 480.000 units at $58 each $50.000 Banff normally realizes a gross profit of 30% on its sales. (CGA Canada) Problem 4-6 Banff Mountain Equipment Ltd.1.000 52.000 58. (Banff) sells skiing and hiking equipment to retailers.000 580. v. under each of the following assumptions: a. Banff lost all of its hiking equipment in a fire in March 20x8.Introductory Financial Accounting. It accounts for its inventory using a periodic inventory system. 20x5. The store had an excellent Christmas season with the result that only 70 MP3 players were left in inventory on December 31. Costs are assigned to inventory and cost of goods sold on a weighted average basis. 20x5.1 Page 81 Problem 4-5 On January 1.000 30.000 440.000 615.000 15. Required – Assuming the company uses a periodic inventory system. 20x5 June 15. .000 Due to competitive pressures.000 units at $50 each 1. the Music Store had 400 MP3 players in inventory with a cost of $48 per unit. the company was unable to pass on price increases to customers and thus maintained a selling price of $100 per unit throughout the year. 20x5 October 15. 20x5. Costs are assigned to inventory and cost of goods sold on a FIFO basis. b.000 8. the company’s insurance policy will cover 80% of the loss suffered in this fire. Corporate records disclose the following: Inventory — January 1. 20x5 1. After a very successful ski season and just as it was about to commence shipping its hiking equipment for the upcoming season. calculate gross profit for the year ending December 31.
Introductory Financial Accounting. The supplier provided purchase credit terms of 1/15. Required – Prepare journal entries for the above transactions. Calculate December 31.000 on account. January 1. Ending inventory consisted of 60 units. Show all your calculations. taking advantage of the sales discount. $30. Saret purchased merchandise inventory costing $42. inventory value using the Weighted Average . Show all your calculations. inventory value using the FIFO inventory pricing method. Required 1. The company uses a periodic inventory system. 20x7. v. Calculate the cost of goods available for sale.000. Saret Ltd. The cost of the merchandise inventory returned was $5. Calculate December 31. 3. Problem 4-8 The following information relates to Mejewel Ltd.100 per unit. Show your calculations. (CGA Adapted) Problem 4-7 During June 20x8.050 each During the year. 20x7 Purchases — February 20. Whinr returned $10.000.000 of the merchandise inventory claiming it did not meet its needs. 20x7 20 units @ $900 each 440 units @ $950 each 200 units @ $1. The cost of the merchandise inventory sold was $15.1 Page 82 Required – Calculate the net loss from the fire. June 2 June 9 June 12 The company uses a perpetual inventory system.1. June 1 Sold Whinr Ltd. n/30. the company sold 600 units at an average price of $2. 2. 20x7. 20x7 Purchases — June 7.000 of merchandise on account with credit terms of 2/10. Whinr paid the balance due on the June 1 sale. inventory for 20x7: Beginning inventory. n/60. performed the following transactions.
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. you have made it a policy to ensure that all purchase discounts are taken advantage of. n30. FOB shipping point. As the new controller. Cash payments on merchandise purchased from Patel Inc.000 under credit terms of 3/15.000 and a count of inventory on December 31. b. i) ii) Purchased merchandise on account from Hirwin Toys for $80.500.200 credit memorandum from a supplier on defective merchandise Toyjoy had purchased and returned.000. Show all your calculations.500 represented payment of a $50.1 Page 83 inventory pricing method.Introductory Financial Accounting. for the month of December 20x7. revealed merchandise inventory on hand of $30. .1. Prepare journal entries for each of the above summarized transactions. iii) iv) Required a. which was paid within the discount period of 3/15. n30. Prepare a schedule of the cost of goods sold section of the income statement. assuming merchandise inventory on December 1. amounted to $48. The payment of $48. amounted to $150. (CGA Canada adapted) Problem 4-9 The following is a summary of selected transactions for Toyjoy Ltd. Toyjoy had not yet paid for the merchandise.000 in cash for freight charges on merchandise purchased during the month. 20x7. The company uses the periodic inventory method and the gross method of recording purchases. (CGA Canada) c.000 credit purchase. Received a $1. v. Briefly explain the benefits. which has a negative impact on the company’s cash flow. 20x7. Toyjoy paid $3.
v. 20x6. and for 20x7 Cost of Goods Sold.1. Use the following format in answering this question. a company received. i) A company failed to include in its December 31. Assume the companies involved used a periodic inventory system and treat each situation independently. 20x6. Error 20x6 Cost of Goods Sold 20x6 Ending Inventory 20x6 Retained 20x7 Cost of Earnings Goods Sold (CGA Canada) . A $6. 20x6. indicate the dollar amount of the overstatement (O) or understatement (U) in 20x6 Cost of Goods Sold.000 worth of goods which were in an off-site storage location. On December 28. 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). The company failed to record the purchase of these goods until January 15. then state so.000. 20x7.000 computer purchased on December 28. inventory count $10. There were no errors in the December 31.1 Page 84 Problem 4-10 The following is a list of inventory errors which occurred in 20x6. goods costing $5. for use by the sales manager was incorrectly accounted for as an inventory purchase.Introductory Financial Accounting. There were no errors in the December 31. 20x6 inventory count. 20x6 Ending Inventory. ii) iii) Required For each error. 20x6 Retained Earnings. 20x7 inventory count. If the error has no effect (NE). and included in the year end inventory count.
00 Units Beginning inventory Purchase No. Unit Cost $7. FIFO. at January 13.000 $ 60. FIFO. 20x7 Inventory stored at another location.000 5. periodic inventory system b. 1 Sale No.1 Page 85 Problem 4-11 On January 13. calculate the total dollar amount for ending inventory and cost of goods sold.000 40% Problem 4-12 The records of Egypt Company showed the following data relative to one of the major items being sold.40 9.000 7.000 6. periodic inventory system d. 20x7.500 For each assumption given.Introductory Financial Accounting. Luckily. (CGA Canada) $100. v. 2 (at $26) Required 6. the Bamboo Brush store was destroyed in a fire. Assume that the transactions occurred in the order given. 1 (at $24) Purchase No.500 8. perpetual inventory system . 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. the accounting records were kept in a separate location and the company was able to reconstruct the following information: Inventory at January 1.000 $ 10.1. 2 Sale No. perpetual system c. a.95 8. Moving weighted average.000 $ 5. Weighted-average.
The acquisition cost would be allocated to land and building as follows: Individual Fair Market Value per Appraisal Land Building $150. and • intangible assets such as patents.e. 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. • long-term investments in financial instruments (i. v. When a long-term asset is acquired.000 respectively. 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.1.000 $500. any costs of transportation to get the asset to its location and any installation costs. equipment and furniture and fixtures. • buildings.000 . 2. How do we account for the disposal of long-term assets.000 $600.e. what constitutes the cost of this asset.Introductory Financial Accounting. assume that you pay $500. These include.000 and $450. buildings.000 375. When on-going expenditures are made in order to keep the asset in operable condition. equipment.1 Page 86 5. copyrights and trademarks. If you pay one price to acquire a group of assets (i. the cost of acquiring these assets needs to be allocated based on the relative fair market value of the assets acquired. An independent appraisal of the land and building are $150. For example. the acquisition cost of asset.000 450. These generally comprise of: • land. 3. 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. and 4. how do we account for these expenditures.000 for land and a building. namely land. but are not limited to. land and building).000 % 25% 75% Allocation of Purchase Price $125. We will only focus on the accounting for those long-term assets that are not investments in financial instruments. furniture and fixtures and intangible assets. How do we allocate the cost of long-term assets over the periods these long-term assets are put to use in the business.
000 Accounting for on-going expenditures Once a long-term asset has been acquired.000 $500. the operating costs of the asset are decreased. The annual amortization expense is calculated as follows: (Cost – Salvage Value) / Useful Life . There are three general approaches to amortizing capital assets: 1. equal over its useful life. the useful life of the asset is extended. The underlying assumption is that this asset generated revenues that are. For an expenditure to be considered a betterment it must meet one of the following four criteria: i.1 Page 87 The journal entry to record this transaction would be as follows: Land Building Cash $125. more or less. ii. Consequently.Introductory Financial Accounting. iii. any costs to maintain a truck.1. if we were to replace the truck’s engine. the matching principle requires that the cost of long-term assets should be spread over the periods that the asset generated revenues. then we would likely increase the useful life of the truck. the rate of output of the asset is increased. For example. 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. We would therefore capitalize the cost of the new engine to the asset account. or iv. such as oil changes or brake replacements. The process by which this is done is amortization of long-term assets. 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. we often incur ongoing expenditures in order to maintain the asset. v.000 375. However. Straight-line method. This method allocates the cost of the asset over its estimated useful life in equal amounts. the expenditure enhanced the quality of the asset in a substantive way. A determination has to be made whether the expenditure is required to maintain the asset in operable condition. would generally be considered to be repairs and would be expensed. in which case the expenditure should be expensed to the income statement.
Declining balance method.e. Units of production method. i. a truck rental company that bases rental charges on the mileage driven. 3. machine hours. i. 1. 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 $300.1 Page 88 The cost less the salvage value is called the amortizable base of the asset.000 – 35.000) / 8 = $31. mileage. The asset’s useful life can also be measured in terms of total machine hours of 150.000 hours. Under the straight-line method. We deduct the salvage value since we do not want to write down the asset below its salvage value. This method allocates the cost of the asset over its estimated useful life based on the use made of the asset.000.000. The amortization rate can either be given or you may be told that the company uses the double declining balance (DDB) method of amortization. if you are told that an asset has a useful life of 10 years. The asset’s estimated useful life is 8 years and the estimated salvage value of the asset is $35. The rate used for DDB is twice the straight-line rate. v. 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).125 .125 $31. 2. the annual amortization charge will be: ($300. For example. This assumes that the use can be measured. 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. then the straight-line rate is 1/10 and the DDB rate is 1/10 x 2 = 20%.Introductory Financial Accounting. The underlying assumption is that the asset generates revenues based on usage.1. 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.125 The journal entry to record amortization expense will be as follows: Amortization Expense Accumulated Amortization $31.e.
000 hours = $1.562 94.922 71.045 Net Book Value End of Year $225.750 126. .000) / 150.562 94.393.7667 per hour.045 35.011 or the amortization amount needed to bring the net book value down to the asset’s salvage value.7667 = $31.000.640 23.045 Amortization Expense @ 25% $75.000 168.250 42. Recall that we do not depreciate the asset below its salvage value. the amortization taken in year 8 is the lesser of the calculated amortization of $10. v.000 hours x $1.756 = $53.750 126. 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. Therefore.191 53. then the amortization charge would be 18.000 x 0.011.045 x 25% = $10. If we had taken $10. the amortization charge per hour would be: ($300.188 31.Introductory Financial Accounting. the net book value at the end of the 6th year is: $300. Assume that the total number of hours of use in the first year is 18.000 – 35.801.798 13.922 71. Under the units of production method. Note that we will assume double declining balance amortization at the rate of 1/8 x 2 = 25% per year.011 of amortization in year 8.000 Year 1 2 3 4 5 6 7 8 Note that the year 8 amortization is not equal to $40. Net Book Value Beginning of Year $300. 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.000 168.000 225.1.393 40.393 40. Under the declining balance method. 3.000 56.348 5. the amortization charges for the 8 years will be as follows.1 Page 89 2.191 53.731 17.
The difference will be equal to the gain or loss on disposal. 20x3 for $250. The asset’s useful life was expected to be 10 years and the salvage value was estimated to be $20. The asset is sold at the end of 20x9 for $100. assume that an asset was purchased on January 2.000 11.1. At the time.000.000. 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 $10.1 Page 90 Disposals of Long-Term Assets On the date of disposal.000 $100. In 20x5.000) $89.000.000 Changes in estimates If the estimates of the useful life and/or the salvage value of an asset change subsequent to its acquisition.000) / 10 = $23.000 $250.000.000.000 250. For example.000 – 20. v. . the changes in estimates are applied prospectively from the date of the change in estimate onwards. the asset’s useful life was expected to be 10 years with an estimated salvage value of $20.000 89.000 was purchased on January 2.000 $11.000 161. an asset costing $100.000 (161. 20x1. The net book value of the asset at the end of 20x9 is: Original cost Less Accumulated amortization ($250. Assume straight-line amortization.Introductory Financial Accounting. For example.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. we compare the net book value of the asset sold to the proceeds on disposal.
000/year x 4 years $100. typical within a certain geographical area • goodwill – the added value of a business attributable to factors such as reputation. location or superior products. you cannot touch them or see them) and yet they represent costs incurred that meet the definition of an asset. if you look at Coca-Cola’s Statement of Financial Position.000 (32. Internally developed intangible assets cannot be capitalized on the Statement of Financial Position.000 – 20.Introductory Financial Accounting. Examples of intangible assets are: • trademarks – a name or symbol that identifies a company or a product. For example. assume that a patent is granted to a company at a cost of $100. the trademark ‘Coca-Cola’ was never purchased by the Coca-Cola Company but rather. • patents – a legal right ensuring the company’s exclusive right to a product or process. Annual amortization charges for 20x5 and future years will be: (68.1 Page 91 The net book value at the beginning of 20x5 is: Original cost Less Accumulated amortization ($100.000) $68.000 – 10.1. i.000. musical compositions and works of art. you will not see the value of its trademark listed as an asset.e. Note that only expenditures incurred by the company can be capitalized as intangible assets. The patent’s legal life is 17 years but it is expected that emerging technologies will make this .000) / 11 remaining years = $5.000 This net book value will then be amortized over the remaining useful life of the asset.273 per year Intangible Assets Intangible assets are those assets that do not possess a physical quality (i. The accounting for intangible assets depends on whether these assets have limited or an unlimited life. they are expected to provide future benefits. Intangible assets whose life is limited should be amortized on a straight-line basis over their estimated useful lives. For example. was developed internally. are the result of a past transaction and are under the control of the company. • copyrights – the protection of writings. Consequently. • franchises – the exclusive rights to sell products or perform services.000) / 10 = $8.e. This need not coincide with the asset’s legal life. v.
1. some franchises. then the asset must be written down to the fair market value.e. we would amortize the patent over 5 years. That is. Intangible assets whose life is unlimited (i. Any impairment losses cannot be subsequently reversed if the fair market value of the asset subsequently is recovered. goodwill) are not amortized but instead subject to an annual impairment test. v. In this case.Introductory Financial Accounting. . If the fair market value is lower than book value and is not expected to recover.1 Page 92 patent obsolete by the end of the 5th year. the book value of the intangible asset is compared to its fair market value.
Introductory Financial Accounting.000 3. 2. The patent is valid for 17 years and has an estimated life of 10 years.000.000 b) Income will decrease by $6.1. and was used as office space commencing July 1.500 d) $20.705.000 c) Income will decrease by $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. At the beginning of 20x8. v.000 150.000 and spent $5.500.000 10 years $5. 1998. What is the impact of this expenditure on income before taxes for 1998? a) Income will decrease by $12. Sinha.00 d) $8.000 c) $19.000. Brown and Das obtained a patent for their earnings forecasting software at a cost of $80. A small room was built on the back of the building at a cost of $12. The room was completed on June 30. What will be the annual amortization expense for patents? a) $4.000 in legal costs defending it.00 c) $8.1 Page 93 Problem with Solutions Problem 5-1 – Multiple Choice Questions 1.000. What is the amount of depreciation expense on the building for 20x8? a) $4.000 Jasper uses the straight-line method for calculating depreciation expense. the situation was as follows: Building cost Accumulated depreciation — building Estimated remaining useful life Estimated salvage value at end of useful life $200.88 b) $5.500 b) $5.200 d) Income will decrease by $632 e) Income will decrease by $600 .
During 20x7.735 6.000. The Amortization expense for 20x6.060.000 units. On January 1.000 5.1. A land site was acquired for $1. The machine is expected to be used for a total of 1. At what amount should the land be reported on the balance sheet? a) $1. it was used 430 hours.000 commission was paid to a real estate agent.Introductory Financial Accounting.000 with an estimated life of 4 years and a salvage value of $5.500 productive hours over the next 4 years. 20x7. 20x6? a) $67. On July 1.000 c) $5. production was 20. using the straight-line method. During 20x6. a $60. 20x6.000 b) $1.000. If the company were to use the units-ofproduction method instead of the straight-line method.160 d) $5. 20x7. Yaari and Yosha Company bought a machine for $85.000 were incurred to clear the land in preparation for construction of an office building.500 d) $80.000 b) $42.000 7. Ireland Company purchased a machine that cost $20.000 c) $1. To acquire the land.000 .000 d) $1. and a 10% residual value. what would be the balance reported for the net book value of the equipment at December 31. What is amortization expense for 20x7 under the productive output method? a) $4. 20x7? a) $40. Costs of $15.500 b) $5.000.000.000.1 Page 94 4.000 units. v. It has an estimated 4-year life. If the company uses the double-declining-balance method for amortization.750 d) $65.000 c) $77. was $18. what would be the balance reported for the net book value of the machine at December 31.500 b) $72. On January 1. Stone and Wall Company bought equipment for $100.000.075.500 c) $63. The equipment is expected to have a 5-year life and produce a total of 80.000.015.
The van cost $65. b. assuming the company uses the doubledeclining-balance method of amortization. During 20x8.000. In addition. 20x7. c. .1 Page 95 Problem 5-2 On January 1. assuming the company uses the units-of-production method of amortization and that the van was driven 55. it was estimated that the van could be sold for $5. 20x7 and 20x8. 20x7.000 at the end of its useful life.Introductory Financial Accounting. assuming the company used the straight-line method of amortization. d. At the end of its useful life.000 kilometers. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. Resort Ltd. 20x7. as a result of heavy usage. v. management felt that the van could only be sold for $2. Prepare the adjusting journal entry to record amortization expense for the year ended December 31.000 and was expected to have a useful life of 5 years or 200. purchased a van to transport guests between the resort and a nearby airport. assuming the company uses the straight-line method of amortization. management of the company decided that.000 kilometers during the year. Required – a. the total life of the van would only be 4 years instead of the original estimate of 5 years. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. 2008.1. Prepare the adjusting journal entry to record amortization expense for the year ended December 31.
Introductory Financial Accounting. . 20x5 Dec 31. Dec 31.1. Recorded amortization expense. 20x4 Apr 31. This increased the quality of the asset’s output but did not change its useful life or the estimate of salvage value. 20x4 Dec 31. 20x7 Aug 31. Recorded amortization expense.000. Sold the asset for $25. 20x6 Sep 30.000 salvage value. The equipment was completely overhauled at a cost of $20. This increased the useful life of the asset by three years. v.1 Page 96 Problem 5-3 The Connor Company had the following transactions over the life of an asset purchased on January 2.000. The estimated useful life of the asset is expected to be 5 years with a $10. 20x7 Dec 31. 20x8 Required – Record all of the above transactions assuming that the company uses the straight-line method. 20x3 Aug 31. Recorded amortization expense. The original estimate of salvage value holds. 20x3: Jan 2. Routine repairs costing $600 were made to the equipment.000 were made to the equipment. 20x3 Purchased equipment for $60. Recorded amortization expense. Recorded amortization expense.000. 20x5 Dec 31. Expenditures totaling $2.
v. 20x8.000 cash.1. 20x7. and the repair cost for it amounted to $500. the machine was sold for $20. Prepare the journal entry to record the sale of the machine on January 1. On January 1. in good form.500 Problem 5-5 On July 1. ABC Ltd.000 38. purchased a machine at a cost of $25.000 15.000. 20x7 Required – Prepare the journal entry to record the purchase of the lathe. 20x7 Price of new lathe. (CGA Canada. The machine was expected to have a life of 4 years and a salvage value of $3. which included freight charges of $1.000.Introductory Financial Accounting.000 to install the machine. adapted) $ 50. 20x7. MNO Co. Assume a straight-line method of amortization. ABC had to spend $2. Prepare the journal entry to record the amortization expense on December 31. 2. Prepare the journal entry to record the asset acquisition on July 1. 20x6. During the installation there was minor damage to the frame.1 Page 97 Problem 5-4 On June 30. 20x6. 3. 20x6.500 108. bought a state of the art numerically-controlled lathe from GPL by trading in a dissimilar asset and paying $90. (CGA Canada) .000. Required – 1. 4.000 cash. 20x8. The following additional information is available: Original cost of the old asset Accumulated amortization at June 30. Show. how the machine will be presented in the assets section of the balance sheet at December 31. Market value of old asset on June 30.
due to a preventative maintenance system that had been implemented. Cost Estimated residual value Estimated life Estimated production 20x6 actual production Required a. assuming the company uses the: i) straight-line method ii) units-of-production method c. 12. Determine the amortization expense for the year ending December 31. v. 20x6.000 units. the equipment was sold for $75. On January 1. In 20x7. 20x8.000.000 units b. on January 1. 20x7.000 $ 20. Accordingly. 20x7.000 units 9. . (b). Determine the amortization expense for the year ending December 31.Introductory Financial Accounting.000 4 years 40. the estimates were revised. No change in estimated residual value was anticipated. Prepare the journal entry to record the sale assuming the company uses the: i) straight-line method ii) units-of-production method $120. and (c). 20x6. assuming the company uses the: i) straight-line method ii) units-of-production method On January 1. management felt that the total estimated life of the equipment would be 5 years with a total estimated production of 50. Use this information to answer parts (a).000 units were produced.1.1 Page 98 Problem 5-6 The following information pertains to the equipment acquired by Xie Co.
1. v. n/30 $ 5.000 at that time. Prepare the journal entry to record the sale assuming the straight-line method of amortization was used. The following information relates to this machine: Invoice price Credit terms* Customs and duty costs Preparation and installation costs $ 140. It incurred interest costs of $12. we get a 2% discount. we have to pay the full invoice price within 30 days. Machine No. 20x6.000 to pay for the machine within the discount period and take advantage of the cash discount. Assume that the machine is sold on January 1. 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. However. What amortization method could be used to abide by the president’s request? Is this method acceptable under generally accepted accounting principles? Explain. * this means that is we pay within 10 days.Introductory Financial Accounting. Compute amortization expense for 20x3 using the straight-line method.000 on this loan during 20x3.000 2/10.1 Page 99 Problem 5-7 German Ltd. In this way. purchased Machine No. for $100.000 $ 14. c. 103 on January 2. 20x3.000 cash. 103 has a physical life expectancy of 10 years with a salvage value of zero. German intends to use the machine for 8 years and hopes to sell it for $15. b. Required – a. Otherwise.800 The company borrowed $150. income can be minimized in 20x3. .
000 3. Current Liabilities A current liability is one that will be settled within one year or the business cycle of the firm. The entry would be: Office Supplies Accounts Payable 2. $7. which represents the three days of work (3 x $1. For example. On April 4th. however.000 to last period and $4. it is split appropriately and applied to the correct periods. The principal must be repaid equally over 5 years.000 to the new period.000 2.1.000 3. the entry would be: Wage Expense (4 days x $1. We have already covered several of these when we did adjusting entries.000 with the terms set at 6% interest due annually. when the payment is made for the full week. and will not be paid again until April 4th.000 7. assuming the employees worked the full 7 days in the week.000/day.000 Wages/Salaries Payable – these are wages/salaries that are due to employees for hours worked.1 Page 100 6. For example. Accounts Payable – these are liabilities that were incurred to purchase goods. v.000/day) Wages Payable (to remove the adjusting entry) Cash 4. Typically. services or supplies for the operation of the company. .000.000/day) that were performed in the period but not paid for.000 on account. If the average daily wage expense is $1. For example.000 Note that we are debiting the Wage Expense for $3.000 This way. but have not been paid. a company purchases office supplies from a supplier for $2. Employees were last paid on March 28th.Introductory Financial Accounting. 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. we will go over the main types of current liabilities. a company takes out a loan on January 1st for $10. whichever is longer. 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. the adjusting entry made March 31st would be: Wage Expense Wages Payable 3. 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). a company has a fiscal year end of March 31st. $3. Interest and Principal payments are due December 31st of each year.
Not only must the company submit the employee’s portion. The employer matches the employee’s contribution for CPP.000.000 10. Deductions for each month are due on the 15th day of the following month. $8.4 times the employee deduction for EI. and that which is due later than one year. the interest expense for the year would be $600 ($10. CPP.000 + 7. This ensures accurate reflection of the financial obligations of the company on the Statement of Financial Position. Wages total $100.Introductory Financial Accounting.1 Page 101 When the company takes out the loan. we will now show a balance in the Current Liabilities section of $2.000 x 6%).000 On the Statement of Financial Position. 27. but they also must submit the employer portion of CPP and EI. EI.000 8. v. we would split the long-term debt as follows: Current liabilities Current portion of long-term debt Long-term liabilities Long-term debt $2.000 If a Statement of Financial Position were prepared on the January 1. and the employer ducted the following amounts from its employees’ cheques: Income Taxes.000 600 8. a company pays its employees monthly. $7.000.000 42. and pays 1. At December 31st.500 .500. Employee Withholdings Payable – Employers are responsible for deducting income taxes.000.500 57.000 The debt is split into the portion that is due within the year. the journal entry would be as follows: Cash Long-term debt 10. For example. The journal entry would be as follows: Long-term debt Interest Expense Cash 2. CPP and EI from employee’s paycheques.1.500 + 8.000) Cash 100.000.000. and a balance in the Long-Term Liabilities section of $6. The entry to record payroll for the month would be: Wages Expense Employee Withholdings Payable ($27.
1. the company would record its portion of payroll expenses due to the government: CPP Expense ($7. v. One of the resulting GAAP rules that stems from this idea of conservatism is the establishment of contingent liabilities.700 Note that CPP Expense and EI Expense could be tracked separately.500 11. On the 15th of the next month. and b) the loss can be reasonably estimated. 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.Introductory Financial Accounting.500 x 100%) EI Expense ($8. If a contingency meets the first criteria but not the second. your company is being sued for $400. The justification is that the financial statements should not be misleading or give false hope or information to any reader. then it has to be disclosed through a note in the financial statements. 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.000 . You would record or recognize the FULL amount. or simply lumped in with Wages Expense.000 400. Contingent liabilities are those liabilities which are likely to be incurred in the future. The journal entry would be: Unrecognized Loss on lawsuit Contingent Liability – lawsuit 400. the company pays the government: Employee Withholdings Payable ($42. and therefore a loss of some kind to the company.500 + 18. as done above. but have not yet come to be.40) Employee Withholdings Payable 7.200 Contingent Liabilities One of the guiding principles of accounting is the idea of conservatism.200 61.000. but it does not have to be recognized.000 x 1. For example. If a company knows that there will be a liability.700) Cash 61. A contingent loss should be recognized only when: a) it is likely that a future event will confirm the loss.1 Page 102 At the same time. This principle states that. then they must disclose it when they know about it.200 18.
The company estimates that warranty expense. This principle states that for all revenues generated in a specific period. 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.1 Page 103 If. let’s assume that during the next year. is 4% of sales. The journal entry to record warranty expense for the year would be: Warranty Expense ($300.000. all expenses related to those revenues should be recorded at the same time. If. Warranties & Premiums Another of the guiding principles of accounting is the matching principle. that have been incurred but not paid.000 This entry not only matches the expense to the period when the revenues were generated. v. such as wages. For example. The warranty expense is normally determined through evaluating historical data and coming up with a % of sales that represents the future warranty costs. Total Sales for the year totaled $300.000 to repair various vacuum cleaners that are under warranty.Introductory Financial Accounting. Again. You would simply write a note in the financial statements disclosing the lawsuit. on average. in order to adhere to the matching principle. Continuing on with the same example. your lawyer felt you would win. This principle is the one that guides us when making adjusting entries at the end of the year with regards to expenses. but you would not have to record the loss or the liability. in the same scenario. The journal entry would be: Warranty Liability Cash/Inventory/Wages 10. and the fact that you were likely to lose. but it also sets up a liability that will be drawn down as actual expenses are incurred over the life of the warranty. but there was no legal precedent for the amount that would be awarded and therefore are unable to estimate the future loss. Another example of matching has to do with warranties.1.000 10. we must record the associated expense in the period when the . a company sells vacuum cleaners that come with a 2-year warranty. your lawyer felt you would lose. When a company sells a product that has a warranty.000 x 4%) Warranty Liability 12. in the same scenario.000 12. then you do not have to do anything because you do not meet either of the criteria for recording a contingent liability. the company pays $10.000 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.
Your sales for the year were $800. or a year from now. If you are going to be receiving money in the future. To record the premium liability at the end of the year.1 Page 104 original sale is made. then you are missing out on the opportunity to invest that money today and earn interest on it. We will instead focus on long-term bonds. or ten years from now. you have determined that only 40% of your customers will redeem their coupons.000 Whenever coupons are redeemed. you are taking on the risk that the money might not be repaid at all. we are trying the calculate the present value of $1.000 coupons x 40% = $32. 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. The farther in the future you are to receive the funds. Furthermore. Based on past redemption data.000/$10 = 80. 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. pensions and other more complicated longterm liabilities in this section. the premium liability account is drawn down. They can then redeem 10 coupons for a watch valued at $10. they receive 1 coupon. v.000 32.000. These typically include long-term bonds. .000 to be received in 5 years from now at an interest rate of 6%.000 32. Long-term Liabilities Long-term liabilities are defined as liabilities that would not be reasonably expected to be liquidated within a year.Introductory Financial Accounting.1. The premise behind this is that a dollar today is not worth the same as a dollar received tomorrow. the greater the “discount” or decrease in the dollar value will be. For example. longterm leases and pension obligations. the journal entry would be: Premium Expense* Premium Liability * $800. one of the most frequently used financing instruments in business. for every $10 your customers spend. We will not get into a discussion of leases. notes payable. The combination of these two facts results in a dollar today being worth more than a dollar received in the future.
enter the numbers above in the TVM memory registers to solve. If i=7%. press CPT and the TVM register you are attempting to solve for.1 Page 105 With the Texas Instruments BA II Plus. Assume you inherit $1.000 from your favorite uncle.1.26.000. This means that if you were to invest $747.47 PMT 60000 FV Enter Compute . v.000.000 worth in “today’s dollars”? N 5 I/Y 6 PV 7.58 PMT FV 10000 Enter Compute Present Value of an Annuity . If the current and expected future rate of return is 6%. 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. what is that $10. the amount would grow to $1. Calculating the Present Value of a Future Single Sum .000 from your mother 5 years from now.000.An annuity is defined as a series of identical cash flows that end at a specified time.Assume you are going to receive $10.000 will you have to set aside in order to set up this annuity? N 30 I/Y 7 PV X= $744.Introductory Financial Accounting. in this case PV the answer provided is -747.26 today (money out of pocket and therefore the negative sign) and invest it for 5 years at 6% compounded annually. how much of the $1.000 per year for the next 30 years. 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. You want to be able to withdraw $60.472.542.
as well as make interest payments on the stated amount. You expect to live another 25 years. This is because the buyer of the bond gets a higher return by investing in the bonds. and the bonds will sell for a value less than the face value of the bond. What is your monthly payment to the manufacturer going to be? N 3 I/Y 6.992. Coupon Rate – the stated interest rate to be paid on the face value.206.10 FV Enter Compute Your company is purchasing a piece of equipment costing $80.06 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. 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. 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.You have retired with $675.1.5 PV 80000 PMT X= $30. 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). If the YTM < Coupon Rate. then the bond will sell at a premium. It is rare that the yield-to-maturity rate and coupon rate are the same. Also called the market rate.1 Page 106 Annuity Payment Calculation . Assume the rate is 7%. Coupon rate = Annual Coupon Payments/Face value Yield-to-maturity (YTM) – the rate of return that bondholders expect on the bond given its risk.5% on a 36-month loan. if you issue a bond with a coupon rate of 5% and the YTM is 6%.000 in the bank. v. and therefore is willing . then the bond will sell at a discount.Introductory Financial Accounting. Coupon – the amount of semi-annual interest payments to be made on the bond. how much can you withdraw each year? N 25 I/Y 7 PV 675000 PMT X= $57. The manufacturer is offering you financing at a rate of 6. The market takes this into consideration. If the YTM > Coupon Rate. For example.
This is less than the face value of $2.451.829.000 of bonds.000 is not our interest expense. The Coupon Rate = 5. As such.8% x = $58.5% $2.451 PMT 580002 FV 2000000 Enter Compute 1 2 YTM of 7% / 2 = 3.000 coupon payment. Example .000.000.Introductory Financial Accounting. we have to sell our bonds at a discount. this $58.1 Page 107 to pay more than face value for the bonds in order to reap this benefit.829.1.451 1. How much would be raised through this bond issuance? N 20 I/Y 3. because PMT is equal to the payment made every six months.On January 1. However. 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 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. 1. YTM = 7%.000. 20x8 you issue $2.000.829.000 to cover our coupon obligation. This is because our coupon rate of 5. In order to attract investors.8% is less than the market rate of 7%. We have already calculated that we will be writing a cheque for $58. every 6 months.451 . the YTM is normally expressed as an annual rate. not the number of years. The PMT & FV remain the same. Furthermore.51 PV X= $1.000 x 5. Interest will be paid semiannually on June 30 and December 31. N will equal the number of coupon payments left. v. or the amount that we would have received in proceeds would be equal to $1. The Present Value of the bonds.8% and they mature in 10 years. therefore it will have to be cut in to reflect the situation. we must adjust the other factors in the formula to a “6-month” basis.829.
v.482 x 7% x Bonds Payable Cash ) 64.829.000 After all 20 interest payments have been made. This will be the amount used to calculate the interest expense on December 31st.451 + 6. on June 30th. 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. therefore. the balance in the Bonds Payable account will have been written up to $2.1 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.1.000.301) $1.242 6.000 Note that the $6. the entry for interest expense would be: Interest Expense (1. give or a take a few dollars for rounding. the journal entry will be: Bonds Payable Cash 2.000.451 x 7% x Bonds Payable Cash ) 64.242 58.000 .482. At the time of settlement.000.835. Continuing our example. you would record the following journal entry: Interest Expense (1.301 credit to Bonds Payable increases the carrying value of the bond payable account to (1. On December 31st.829.000.835.031 58.Introductory Financial Accounting.000 2.031 6.
v. 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. 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 $800.000 iii) The interest expense for the year will be less than $800. 20x7.1 Page 109 Problems with Solutions Problem 6-1 – Multiple Choice Questions 1. Gallaghar Ltd.000 iv) The bond was issued at a discount a) b) c) d) iv) only i) and iii) i) and ii) ii) and iv) .Introductory Financial Accounting.1. On January 1. Issued $10 million face value. 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. 10 year 8% bonds priced to yield 6%.
1 Page 110 4. the following information is available: Packages Sold Premiums Purchased Coupons Redeemed 150. b) It should be reported as a current liability.000 10. even though the amount of the loss cannot be reasonably estimated 5. c) It should be reported as part current liability and part long-term liability. 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.000 23. a company inaugurated a sales promotional campaign on June 30. 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. The company estimated that only 30% of the coupons issued would be redeemed. How should any liability for the warranty be reported? a) It should be reported as a long-term liability. v.00 and 5 coupons must be presented by a customer to receive a premium. 6.000 .Introductory Financial Accounting.1. 20x8.600 c) $9. the coupons being redeemable for a premium.400 d) $18. whereby it placed a coupon in each package of product sold. 20x8. d) It need not be disclosed. 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. Each premium costs the company $2. 20x8? a) $4.000 e) $20.500 What is the estimated liability for premium claims outstanding at December 31. (2) a oneyear operating cycle. For the 6 months ended December 31. Assume that a manufacturing corporation has (1) good quality control. In an effort to increase sales. (3) a relatively stable pattern of annual sales.300 b) $8.
v.Introductory Financial Accounting. You have been running this program for several years.1 Page 111 Problem 6-2 You run a computer repair company. 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? $375.500 coupons Problem 6-3 Company X provides a 3-year warranty on all of the products it sells.000 40.000 and it is estimated that the warranty expense is equal to 5% of sales. They can redeem 15 coupons for a $25 iTunes gift card. Required – Prepare all journal entries related to the warranty for the current year. and data shows that approximately 55% of your customers redeem their coupons.1. The warranty liability at the beginning of the year was $165.000 and actual costs incurred to service warranties during the year amounted to $130.000 22.000. then receive 1 coupon. For each $10 your customers spend. Sales for the current year were $3. What is the balance in the warranty liability account at the end of the year? .000. In order to increase customer loyalty in this fiercely competitive environment you have started a coupon program.
20x1 is 8%. 20x6. Problem 6-5 The Kaplan Corporation issued $10. Assume that the Kaplan Corporation as a December 31 year end. Gamma Corporation issued bonds with a face value of $500. 20x1 and the first two interest payments. Coupon payment dates are June 30 and Dec 31 of every year. what is the estimated liability for future warranties? At December 31. The yield to maturity on December 31 was 8%.Introductory Financial Accounting.800 Total debits during the year $6.000. 4. Problem 6-6 The following is the general ledger account for estimated warranties of McNeil and Grace Ltd. Warranty Liability Dr Cr $10.1. The bonds mature in 15 years. The company issues warranty agreements immediately upon the sale of an automobile.000 of 8. 20x4. What is the dollar value of warranty repairs performed in 20x7? What is the warranty expense for the year 20x7? At December 31. for the year 20x7.000 Opening balance Total credits during the year Required – 1. 20x7. The bonds pay interest semi-annually on December 31 and June 30 and are due in five years. 20x1.1 Page 112 Problem 6-4 On July 1. 2. Required – Prepare all journal entries with regards to this bond for the years 20x4 and 20x5. automobile dealers.5% coupon bonds on December 31. what was the estimated liability for future warranties? (CGA Canada) . Assume that the going market interest rate for similar bonds on July 1.000 and a coupon rate of 10%. v.200 5. 3. Required – Prepare the journal entries to record the issue of the bonds on July 1..
4. 3.1.000. b. as the market rate was 10%. (CGA Canada adapted) Problem 6-9 On January 1. The bonds were sold at a yield of 8%. indicate whether each of the following statements would be true or false. 2.591 was calculated. 20x6. d. (CGA Canada adapted) . 20x6. uses the effective interest method to calculate interest expense on these bonds. c. Prepare the journal entry(ies) to record interest expense for the period ending December 31. 12% coupon bonds. 10-year. face value. Required – 1. to yield 10%. issued $1 million semi-annual.171. Required Prepare all journal entries for the life of this bond issue. Prepare the journal entry to record the issue of the bonds at July 1. (CGA Adapted) Problem 6-8 On July 1. The cash outflow towards interest on the bonds will be more than $80.000.171. 20x6. 20x6. Prepare the journal entry(ies) to record interest expense and coupon payment on June 30. They were issued at a price of $1. Required If Adrdalan and Baker Inc. GHI’s year end is December 31. 20x7. Interest on the bonds is paid semi-annually on December 31 and June 30.000 face value. The bonds were issued at a discount for $897. 8% bonds. three-year. 20x7. The Interest Expense will be the same every year. The Interest Expense for the 1997 year will be less than $100.Introductory Financial Accounting. Show how the $1. Ardalan and Baker Inc. a. Alpha Beta Ltd. issued $1 million face value. 20 year.591.000. and pays interest on July 1 and January 1. v.000. 9% bonds on January 1. The Interest Expense for the 1997 year will be more than $80.1 Page 113 Problem 6-7 GHI Company issued $500.
the journal entry would be: Land Common shares $250.1 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.000 When common shares are repurchased. Shareholders’ Equity is fundamentally made up of two elements: contributed capital and retained earnings.e. For example. it can be drawn down. we credit an account called Contributed Surplus for the difference.Introductory Financial Accounting. then the journal entry would be: Cash Common shares $100. v. any cash remaining after all obligations have been settled revert back to common shareholders. Dividends become a liability of the corporation only when the board of directors declares them. Shareholders’ Equity As mentioned in Chapter 1. any dividend declarations are at the sole discretion of the company’s board of directors.1.000 $250. and then re-sell them).000 $100. If the book value per share is less than the cash paid out to retire the shares. The debit to the common shares account is equal to the weighted average book value per share times the number of shares retired.000 If common shares are issued in exchange for a parcel of land whose fair market value is $250. Shareholder investments will result in the company issuing shares to the investors – these shares can take the form of preferred shares or common shares. a company cannot purchase its own common shares. If the book value per share is greater than the cash paid out to retire the shares.000. • upon liquidation of the company. Common Shares Common shares typically have the following features: • they provide the right to vote at annual meetings. the shares must be cancelled (i. The corporation is under no obligation to provide a financial return to common shareholders. if common shares are issued for $100. and • they are a perpetuity. . hold them.000 cash. meaning they never become due. that is. Retained earnings represent the cumulative earnings of the corporation less any dividend distributions to its shareholders. Contributed capital comprises of the investment made in the corporation by its shareholders. Common shares can be issued for cash or any other asset.
000 x $18.091) Contributed surplus Cash 1 $2.100 61.800 61.500.000. 1.000 12.500.500.000 $15.150.000 x $16.000.000 1.000.000 + 50. Example – The Noor Company’s shareholders’ equity section at December 31.000 Jun 16 Cash Common shares Common shares (10.000 cash Issued 50.500.500.000.000.000 / 1.000 Number of common shares outstanding: = 1.500.000 = 1.09 7.000 common shares for $7.000.000 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: = $18.000.000 shares outstanding Retained earnings The following transactions took place during the year: Jan 15 Mar 18 Apr 30 Jun 16 Aug 18 Issued 100.800 260.612) Contributed surplus Retained earnings Cash Aug 18 .000 $2.1 Page 115 • any remainder gets debited to Retained Earnings.000 1.000 common shares at a total cost of $260.500. 20x6 was as follows: Common shares.500.000 7.100 280.000 Issued 250.000 common shares at a total cost of $280.000 321. v.000 = $16.000 common shares in exchange for land valued at $1.000 + 1.000.000 186.500.1.000.Introductory Financial Accounting.000 + 2.000 common shares for $2.000 = $18.000 cash Retired 10.800 32.000 + 100.000 Mar 18 Apr 30 Balance in common share account: = $15.000 Retired 20.150.
000 Book Value per common share: = $25.500.800 + 7. the corporation is under no obligation to provide a financial return to common shareholders.Introductory Financial Accounting.000. 20x6 and management wants to pay a dividend of $5 per common shares.000.000. 20x3.678.000 – 321.150.000 The preferred share dividends were last paid on December 31. that is.000 Next. • like common shares.500.000 + 250. Like common shares.000 shares x $8. 1. 100.1.000 shares x $8. It is now December 1.000 = $18.000 = $25. First.1 Page 116 2 Balance in common share account: = $18.200/ 1.00 x 2 years = $1. the preferred dividends in arrears for 20x4 and 20x5 will have to be paid: 100.678. in most cases preferred shares are cumulative.000.000 .200 Number of common shares outstanding: = 1. v.000 shares outstanding Preferred shares. 20x5 is as follows: Common shares.000 40. they are a perpetuity. cumulative.380. Dividends become a liability of the corporation only when the board of directors declares them. This means that if dividends are missed. the preferred dividends for the year 20x6 must be paid: 100.600.00 x 1 year = $800. • they carry a stated dividend per share. However.000 = 1. Example – The Jarvis Corporation’s shareholders’ equity as at December 31.000 – 20.380. any dividends in arrears due to preferred shareholders must be paid before any dividends can be paid to common shareholders. $8.00.000 shares outstanding Retained earnings $35. any dividend declarations are at the sole discretion of the company’s board of directors.000 10.61 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).
This will result in the share price dropping by half. There is NO journal entry required when a stock split is declared.000 shares of shares before the split. v.000 + 800.000.Introductory Financial Accounting. the dividend to common shareholders can be paid: 1. In order to reduce the share price. the company will split the stock.600.1.000 shares.400. the stock may become unattractive to small shareholders who have to disburse larger sums in order to acquire shares of the corporation.1 Page 117 Finally.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. All that happens is that the number of shares issued changes. a 2:1 split means that the number of shares outstanding will double. this same shareholder will receive an additional 1. For example.000 shares as a result of the stock split resulting in a total of 2.000. 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.000 + 5.000. If a shareholder owns 1. .000 shares x $5 = $5.000 The total dividend to be declared will be: $1.000 = $7. Any premiums paid on retirement of shares are also charged to retained earnings.
Introductory Financial Accounting. end of year $ XXX -XXX ±XXX -XXX $ XXX .1 Page 118 The statement of retained earnings is as follows: Retained earnings. v.1. beginning of year Premium on redemption of shares Net income (loss) for the year Dividends Retained earnings.
000 common shares outstanding. b) Shareholders’ equity will increase by $3.1 Page 119 Problems with Solutions Problem 7-1 – Multiple Choice Questions 1.Introductory Financial Accounting.000. d) The number of common shares outstanding will be 250. XYZ Corporation has 150. .1.000.000. Which of the following statements will be true when the stock split is accounted for? a) Retained earnings will be reduced by $4. c) The number of common shares outstanding will be 225. v. The shares were selling at $30 each when management announced a three-for-two stock split.500.000.000.
000. Net income for the month was $56.000. Required 1. 2. to issue 10. In its first month.000 common shares for cash of $12.1 Page 120 Problem 7-2 The articles of incorporation authorize Hilary and Sam Corporation.000 . v.000 common shares.000 shares to Sam in return for cash equal to the shares’ market value of $6 per share.000 $6 non-cumulative preferred shares and 100. Declared cash dividends on the preferred shares. balance sheet as at February 28. Declared cash dividends on the common shares in the amount of $0.1. Issued 2. Hilary and Sam Corporation completed the following transactions: February 2 February 10 February 15 February 26 February 27 February 28 Issued 9.000 common shares to Hilary and 12.32 per share. a new company. Declared a 2 for 1 stock split. Record the transactions in journal entry form. Prepare the shareholders’ equity section of the Payne and Papineau Inc. Issued 400 preferred shares to acquire a patent with a market value of $40.Introductory Financial Accounting.
c. During the first year of operations the following events occurred: a.1 Page 121 Problem 7-3 M-F Inc. Convertible bonds with a face value of $50. Issued 1. The equipment had a fair market value of $40. Issued 1. The convertible bonds were issued earlier in the year. b. Issued 2. v. $1. Paid the preferred dividend.000 for the year.000 were converted into 500 common shares. Provide the journal entries for each transaction above. cumulative preferred shares. e.00 common share dividend h. f.000 and book value of $53. 2. Required 1. Issued 1.1.000 common shares and 50. Declared and paid a $5.Introductory Financial Accounting. Net income was $64.500 common shares at $120 each.000 common shares at $115 per share. . Prepare the shareholders’ equity section of the Statement of Financial Position. d. Declared a cash dividend on preferred shares.00. is authorized to issue 100.000 preferred shares in exchange for equipment.000 preferred shares at $20 each.000.000. g.
the only materials in this chapter are the problems with solutions.Introductory Financial Accounting. Enjoy! .1 Page 122 8. v. 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. Therefore. just the integration of previously covered materials. There is no new material.1.
000 38.1.052. v.400 40.5% of sales. 7. Warranty expense is estimated at 1. The equipment is being amortized using the double declining balance method. The building is being amortized on a straight-line basis over 40 years. 20x20.000 1. 20x6.052.000 144.000 34.000 $23.000 shares of common stock outstanding. the coupon rate is 6. 20x5 was as follows: Dr. The bonds were issued on January 2.000. The average useful life of equipment is 10 years.400 Cr.600 150.000 320. The face value of the bonds is $400.000 145.000 127.000 5.400 Additional information 1.Introductory Financial Accounting. The bonds mature on December 31. $1. 20x1. The company provides a one year warranty on its products. 20x5 is 8 years.000 176. 4. 8. The patent remaining useful life at December 31.1 Page 123 Problem 8-1 The Haider Corporation’s post-closing trial balance at December 31.000 120.000 13.600 12. The company uses a FIFO periodic inventory system. 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. 6. . The prepaid insurance is for a one year policy taken out in 20x5 that expires on March 1. 5.000 300.200 $1. 2. There are 10. 3.000 419.5% and the yield to maturity at the time the bonds were issued was 6%. Coupon payment dates are on June 30 and Dec 31.
000 40. 14 15. 16. 5.000 320. an additional 3.000 26. 6. 10. 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 1.000.000 $222.000.000 common shares on Aug 23 Insurance policy taken out on March 1 – one year policy. 12. The warranty expense for the year is accrued. Amortization expense on the building.000 common shares were issued for $75. 11. Inventory purchased on account totaled $960.000.000 25. Inventory costing $16. The accounts receivable aging schedule is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $144. On March15. Estimated % Uncollectible 3% 7% 20% 50% An adjustment is made for insurance expense. equipment and patents.000 22.1 Page 124 The following transactions took place during the year: 1. The aggregate net realizable value of the inventory was determined to be $365. 13. 21. 2. Total sales on account were $1. . 9.1. Accounts written off totaled $34.000 43.000 The following adjustments need to be made at year-end: 17.000 2.Introductory Financial Accounting.000.000 30.000. Recoveries of previously written off accounts receivable totaled $5.000 was returned to suppliers. 3. The inventory was counted on December 31.000. Cash collections on accounts receivable totaled $1. Cash disbursements were as follows: 8.000. 20. 19. 20x6 and the total cost of the inventory was determined to be $378. v. 7. 4.000 18.000.400 130.600. Operating expenses paid $945.000 12.000 23.520.
The income tax expense is 40%. 20x6.1.700. 20x6 amount to $6. 24. v.1 Page 125 22. 23. c. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position .000 were declared and paid on December 15. b. Dividends of $80. Required – a.Introductory Financial Accounting. Prepare journal entries for the above transactions and enter all the above transactions in T-Accounts. Salaries payable at December 31.
for one year. 20x5. you do not need to provide the original entry): a. 20x5. v. c. which was debited to rent expense. and the adjusting entries are to be made. The note was dated September 1.1.Introductory Financial Accounting.600. On that date. On April 1.e. 20x5. 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. and the residual value.000. Pacific Corporation had a supplies inventory of $4. $4. During the year. The company received from a customer a 9% note with a face amount of $12. which was debited to prepaid insurance. the patent account was debited and cash credited for $11. b. pacific Company sold 10.500. The estimated useful life is 10 years. costs incurred for the warranty to date. It had to pay the full amount of rent one year in advance on June 1. inventory of $9. . were debited to warranty liability when paid. The note is payable on March 31. 10% note payable. Unpaid and unrecorded wages incurred at December 31 amounted to $4. On that date. The company rented a warehouse on June 1.000. September 1.600. at a cost of $11. 20x5.800. cash was debited and notes payable credited for $60. i. h. supplies of $21. 20x5. The company paid a two-year insurance premium in advance on April 1.000. The company purchased a patent on January 1. totalling $8. No warranty expense has been recognized. On January 1. and sales revenue was credited on the date of sale.000. for the face amount plus interest for one year. 20x6. Past history indicates that 3% of units sold require repairs at an average cost of $40 per unit.700. d. the principal plus the interest is payable one year later.000. i.900. Machine A. 20x5. Notes receivable was debited. which cost $80.1 Page 126 Problem 8-2 Pacific Company adjusts and closes its books each December 31.900. is to be depreciated for the full year. During the year. The sales have been recorded. e.000 units of a product that was subject to a warranty. 20x5. j.200 was on hand.000. amounting to $9.900 were purchased and debited to supplies expense. Credit sales for the year amounted to $320. the company signed a $60. The estimated loss rate on bad debts is 3% of sales. f. At the end of the year. amounting to $9. The patent has an estimated useful life of 17 years and no residual value. g. Use straight-line amortization. It is now December 31.
000 bad debt.Introductory Financial Accounting.000 after all the above adjustments. v.1. Assume an average income tax rate of 30%. . l. Pre-tax income has been computed to be $80. ABC Corporation wrote off a $16.1 Page 127 k.
1. Sales have increased 30%.800 5. Spier incorporated this business as MAS Inc.880 $33.920 3. and additional equipment is needed to accommodate expected continued growth.000 1.500.500 110 4. 20x2.500 22. 20x2. Baking materials Rent Salaries and wages Maintenance Utilities Insurance premium Equipment Principal and interest payment on bank loan Advertising $14. Spier assembled the following information from the corporation's cash basis records for use in preparing the financial statements requested by the bank.400 1. for the first five months of 20x2 and a balance sheet as of May 31. Sale of common shares Cash sales Rebates from purchases Collections on credit sales Bank loan proceeds $ 2. The following amounts were disbursed through May 31. on January 1.Introductory Financial Accounting.000 shares of common share for $2. The bank statement showed the following 20x2 deposits through May 3l.1 Page 128 Problem 8-3 Anne Spier has prepared baked goods for resale for several years now.600 2. Kelowna Bank & Trust has asked Spier to submit an income statement for MAS Inc. 1.000 312 424 $31. Spier wishes to purchase some additional baking equipment and to finance the equipment through a long-term note from a commercial bank.466 . with an initial shares issue of 1. v. annually since operations began at the present location.320 2.770 130 5. Anne Spier is the principal shareholder of MAS Inc. She started a baking business in her home and has been operating in a rented building with a storefront. 20x2.
226 at May 31. 20x2.000 were purchased on January 2. 20x1 were not included in the corporation's records. These are the only fixed assets currently used in the business. were as follows. Customer records showed uncollected sales of $4. 20x2. A one-year insurance policy was purchased on January 2. is subject to an income tax rate of 20%. July 1. 10. May 25.840 were on hand at May 31. October 1. and have an estimated useful life of five years. The other employees had been paid through Friday.1 Page 129 3. v. 7. and states a simple interest rate of 10%. Rent was paid for six months in advance on January 2.: (a) An income statement for the five months ended May 31. and no cash was transferred from the unincorporated business to the corporation.Introductory Financial Accounting. Baking materials costing $1. 9. 6. 20x2. Anne Spier receives a salary of $750 on the last day of each month. 20x2 MAS Inc. 20x2. Payments and collections pertaining to the unincorporated business through December 31. 11. Baking materials Utilities $ 256 270 $ 526 4. The note evidencing the 3-year bank loan is dated January 1. 20x2. New display cases and equipment costing $3. Unpaid invoices at May 31. 8. and were due an additional $240 on May 31. and January 1 consisting of equal principal payments plus accrued interest since the last payment.1. 20x2. There were no materials in process or finished goods on hand at that date. Required Using the accrual basis of accounting. 20x2 (b) A balance sheet as of May 31. 5. 12. 20x2. 20x2. . No materials were on hand or in process and no finished goods were on hand at January 1. The loan requires quarterly payments on April 1. Straight line amortization is to be used for book purposes. 20x2. prepare for MAS Inc. 20x2.
000 note issued on July 1 and bearing interest at 12%. All equipment is depreciated on a straight-line basis over ten years with no estimated salvage value.000 $406.000) Cheques written during 20x2: Purchases of merchandise Salaries Advertising (to be run in 20x3) Miscellaneous expenses $ 24.000. Morrow's cost of goods sold is 80 percent of sales.1.000 $250.500 c) d) e) f) g) h) i) j) Morrow had no outstanding payables at the beginning of 20x2 but owes creditors $36. As the senior auditor in charge of the audit.000 was declared and is to be paid in January 20x3.000 10.000 $180.000.000 5. was on hand. December 31. At the end of 20x2.000.000 146. In 20x2 Morrow began selling on a cash-only basis. . Retained earnings at the beginning of 20x2 totalled $63. During 20x2 these shares were exchanged for land and a gain of $4. There have been no other common share transactions. and a balance sheet at December 31. sales salaries of $1.000 was recognized.000 of its common shares for $25 per share.000. The income tax rate is 30 percent. you have been presented with the following information: a) Morrow is incorporated and initially sold 11.1 Page 130 Problem 8-4 Morrow Wholesale has kept limited records and has never had an audit until 20x2. 20x2.20x1 Deposits during 20x2: Cash sales Proceeds of $5. During the fourth quarter of 20x2. Morrow's only other asset at the beginning of 20x2 was an investment in Honeydew common shares.500 $205. b) Cash balance in cheque book. for Morrow Wholesale. The inventory at the beginning of 20x2 was $80. respectively. The sale of equipment was made on December 30. a cash dividend of $10. 20x2. At the beginning of 20x2.000 10.000 5. The uncollected receivables were written off as miscellaneous expenses in 20x2. Receivables at the beginning of 20x2 totalled $ 155. Prepare an income statement for the year ended December 31. v. $20.000 and $20.600 have accrued but have not been paid.Introductory Financial Accounting. payable annually Customer collections Proceeds on sale of fully depreciated equipment (original cost. equipment with a cost and accumulated depreciation of $80. 20x2. 20x2.000 for unpaid purchases of merchandise on December 31.000 5.
If a company pays dividends. GAAP suggests a preference for the direct method.Introductory Financial Accounting. If a company issues new debt.1. Try to keep in mind that when you are working with this statement. and shows how a company’s actions have affected its net cash position throughout the period. if a company pays off or retires debt this uses cash. this generates cash.000 650. 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 issues new shares.000 were declared and paid to shareholders during the year. If a company retires shares. v. either the direct or indirect methods can be used. Both methods will be covered later in this section. 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. There are two distinct methods in presenting cash flow from operations: the direct and the indirect method.000 300. This statement is broken into three distinct sections. this generates cash. Most of what we do.000 180. however. 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 20x7 $ 250. then this uses cash.1 Page 131 9.000 Additional information: Dividends of $150. is based on the accrual system.000 150. your main concern is incoming and outgoing cash. 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. as accountants.000 215. this uses cash Example .000 450.
000) 200. the net income for the year is $85. we have to reconcile the long-term asset accounts.000 (60.000 (150.000) 0 . and changes in them from one period to the next.Dividends = Closing Retained Earnings In the above case.000 = $300.000 To calculate the company’s net income for 20x8.000 20x7 $ 300. when dealing with this section. Rearranging the formula.000 Net Income = $235.000 (30.000.000 + Net Income . when a sale of a long-term asset is made.000) $ 170.000) 100.000 = $235.1 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 $ 150.000 (170. Remember.000 Alternatively. Often.000) 100. we know that retained earnings increased by a net of $85. or cash we receive. Example .000 + dividends of $150. we remove the asset and all associated accumulated amortization.000 (10. we can calculate the Net Income. we analyze at the Retained Earnings Account: Opening Retained Earnings + Net Income . The difference between the proceeds.1.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. and the NBV (cost – accumulated amortization) is recorded as a gain/loss on sale. we know all numbers in this formula except Net Income.Introductory Financial Accounting. Cash flow from Investing Activities – this section discloses cash that was generated or used through the sale or purchase of long-term assets.000) 75. Given that dividends decrease retained earnings.$150.000 (180. $215. v.000.
000 worth of common shares to the supplier.000 (100. 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) .000.000 worth of equipment was purchased for cash during the year.1.Introductory Financial Accounting. • new fixtures were purchased for $100.000.000 and the accumulated amortization was $60.000 + 10. If the gain on sale was $10.1 Page 133 Additional Information: • $50. • the original fixtures.000 cash. Note that because no cash exchanged hands for the purchase of the land. were sold at a gain of $10. There are a minimum of four main sub-sections in determining the cash flow from operations (note that these are a minimum.000.000 = $25. it does not appear in this section.000 with a NBV of $15. excluding interest payable.000) ($125. All non-cash transactions are by definition excluded from the statement of cash flow.000) * The cost of the fixtures was $75. 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. then the cash proceeds on the sale of fixtures would have to be $15.000) 25.000 giving a net book value of $15.000. costing $75. v. 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. Cash Flow from Operations – Direct Method This method of determining cash flow from operations uses the income statement as its starting point. • the land was obtained through issuing $100. and essentially takes each income statement item and converts it into cash.
000 80.000 46. Jack’s Joke Shop Inc.000 104.000 82.000 23.Introductory Financial Accounting.000 5.000 21.000 (25.000 73.000 24.000 27.000 14.000 104.000 62.600 $ 67.000) 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. 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 2.000 89.000 $660.000 200.000 39. Comparative Unclassified Statement of Financial Position As at December 31.000 $172.000 15.000 2.000 21.000 10.000 5.000 120. Income Statement For the Year ended December 31.000 $135.1 Page 134 Example – Calculate cash flow from operations – direct method.1.000 68. v.000 8.000 50.000 20x6 $42.000 12.000 3.000 1.000 429.400 .000 (20.000 325.000 231.000 10.000) $172.000 82.
waiting to be sold. Therefore. .000) $654. therefore we reduce sales to calculate cash collected from customers. nor are we told how much of the 20x6 accounts receivable balance have been collected. and which are made on credit.000 Note that the starting point for each calculation is the following expense items: cost of goods sold. Conversely.000 (6. v.1 Page 135 Cash collected from customers: Sales Less increase in accounts receivable $660. we accrued more sales than we collected.1. 20x6 and the balance at December 31. the amount of our Inventory account increased by $2. The first thing we do is adjust it to obtain the purchases made during the period.000 2.000 Why did we subtract the $6. In this case. which is a non-cash item and interest and income tax expense which will be dealt with separately. because we are told the balance at December 31.000 2. and office & administrative salaries.Introductory Financial Accounting. then this means that sales have not yet been collected – that is. This means that we purchased additional inventory that is now sitting in our warehouse.000 increase in Accounts Receivable.000 120. if accounts receivable decreased.000 198. We are not told what percentage of the total sales are made for cash.000) $231. salaries expense. then we collected more than we accrued and this would be added to sales.000 235. 20x7.000 $553.000.000 (2. These comprise all of the expense items on the statement of financial position with the exception of amortization expense. we can simply analyze the difference. If accounts receivable increased. 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. However. 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. Note also that although we combined all three expense items in one single calculation.
like salaries payable. Cash paid for interest: Interest expense Less increase in interest payable $15. Note. we would have subtracted the amount from COGS to get total money paid to suppliers.000 In this case. on the other hand. Any increase in liabilities. like it did in the above example. and any decrease in liabilities is added. we owe $12.000). should the opposite have occurred.1 Page 136 to calculate purchases. inventory decreased. 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. is subtracted from the expense to get to the total cash paid. then you simply include the full expense amount as the cash paid for that expense.Introductory Financial Accounting.600 The treatment for taxes is the same as for interest. then this means that we would have purchased less than what was sold and we would have decreased COGS in order to obtain purchases.1. Therefore. Cash paid for taxes: Income tax expense Less increase in income taxes payable $21. and any decrease would be added. Purchases for the year in this case would be $233. In this example.600 (12. are treated in the manner that the Salaries Expense was treated above.000.000 increase to COGS. All other expenses.000) $14.000 more this December 31st than we did last. other than interest and taxes. as in the case of Office & Administration Expenses above.000 (1. That is. .000) $9.000 ($231. v. If. This is why we add back the $2.000 + 2. Again. there appears to be no associated statement of financial position account.000 from our Interest Tax Expense to get the total cash paid for taxes. so we deduce the increase in interest payable to interest expense. If there is no such account. we will subtract the $12. we have to add the $2. if the Accounts Payable account decreases. That is. interest payable went up which means that we accrued more interest than we paid. then we have paid more to our suppliers than the purchases. you start with the Income Statement amount and then account for any changes in the associated statement of financial position account(s).
This would include changes in accounts receivable.000) (9.Introductory Financial Accounting.000) (2.000 (553. 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 12. Increases (decreases) in current assets are cash outflows (inflows.000) 2. v.1.400 . as well as all current payable accounts. We then add back any non-cash items that may appear on the income statement.000 (6.600) $ 77.000) (2.400 5. inventory.000 $77.400 Cash from Operations – Indirect Method Under the Indirect Method.Net Income. we start with the bottom line .000 1. 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) (14.
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.e.000 (7.000 = 66. readily convertible to cash) subject to an insignificant risk of change in value.Introductory Financial Accounting.400) 34. let’s finish with the cash flow statement.400) (43. v. term deposits and any highly liquid assets (i.400 + 0 – 43.000 42. the term ‘cash’ is defined as ‘cash and cash equivalents’. 20x7 30. This includes cash.000 Definition of Cash For purposes of the statement of cash flow.000 $ 76.000) (66.1.1 Page 138 To continue the example. 20x6 Ending Cash Balance – December 31.400) Net Change in Cash ($77.400) Opening Cash Balance – December 31.400 – 24.000 + 67. .
000 (17. Income Statement for the Year ended December 31.000) 226. Ginger’s Cookies Ltd.000 79.000 120.000 450.1.000 207. 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 (32.100 $146.000 300.000 $750.1 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.900 .000) 15.000 80.000 7.000 243.Introductory Financial Accounting. v.
20x6.Introductory Financial Accounting.000 (40. .800 2.000 125.1. Required – a.000 40.500 $ 19.000 10.000 108.000 10.000 0 33. Prepare a Statement of Cash Flow using the Direct Method. 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 50.000 (7.000) $144.100 $ 14. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.000) $275.500 50. costing $45.100 30. b.1 Page 140 Ginger’s Cookies Ltd.200 $ 20. v.400 158. the only piece of equipment.000 117.000 61.000.200 $ 27.200 20x5 Additional Information: on January 2.000 45. Comparative Unclassified Statement of Financial Position as at December 31.400 6. was replaced by a new piece of machinery costing $125.000 7.500 90.000 $144.200 80.000 43.400 $275.000 47.000. Ginger’s paid cash for the equipment.000 111.
019.000 $ 4.854.000.000) 1.000) 1.000 1.000 800.1 Page 141 Problem 9-2 The comparative statements of financial position of McDuff Ltd.000 Current liabilities Accounts payable Salaries and wages payable Interest payable Income taxes payable $ 897.093.000 700.000 1.000 45. Statement of Financial Position December 31 20x3 Current assets Cash Accounts receivable Merchandise inventory Prepaid expenses $ 319.842.711.000 82.000 1.212.000 20x2 $ 353.000 1.000 1.000 850.000 Capital assets Accumulated amortization Bonds payable Mortgage payable Shareholders’ equity Common shares Retained earnings .000 508.000 2.045.000 3.000 1.000 999.Introductory Financial Accounting.000 (3.054.343.000 888.000 (3.869. are shown below.000 35.000 2.000 30.000 119.000 32.358.429.326.000 43.091. v.000 2.000 5.000 $ 4. MCDUFF LTD.000 450.060.631.1.000 28.000 $ 4.000 $ 4.041.000 5.000 $ 909.060.000 319.000 1.500.695.212.000 1.
000 (7. bonds with a net book value of $500.000 850.000 (61.Introductory Financial Accounting. Prepare a cash flow statement for the year ending December 31. Use the indirect method to report the operating activities.000 2. On August 31.000 700. for $80.500.000.1 Page 142 MCDUFF LTD. McDuff sold capital assets that cost $158.000 Additional information 1.000. b. Required a. . On April 15. Income Statement For the year ended December 31.000) (67.000 250. with a book value of $87.000 550. 20x3. 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 $ 13.000 were retired for $487. 2. Amortization expense is included in Operating expenses.1. 3.000. v.000) 489. Prepare the cash flow from operations section using the direct method.400. 20x3.000) $4.000 $239. 20x3.000.
700 8.1 Page 143 Problem 9-3 The following data are available for HHC Ltd.000 500 . Income Statement for the year ended December 31. 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.1.000 1.700 4.000 5.300 1.800 7.300 600 5.200 221.Introductory Financial Accounting. adapted) $ 4.000 1. 20x5 Sales Expenses: Cost of goods sold Salaries expense Insurance expense Depreciation expense Rent expense Interest expense Net loss $ 218. v.400 $ (3.800 5.000 $ 165.700 500 5.000 39.300 10.300 2.300 5.000 600 20x4 $4. HHC LTD.400) Comparative partial balance sheets at December 31.800 7.
31 20x5 $ 26.000 80.000 18.000 92.000 119.000) $ 624.000 600. 20x5 and 20x6.000 39.000) $ 900.000 (123.000 4.000 423.000 86.000) 25.000 Liabilities and Shareholders’ Equity Accounts payable Bonds payable Preferred shares Common shares Retained earnings $ 22.’s comparative balance sheets at December 31.000) (22. v.000 475. 20x6 are as follows: TORAM LTD.1 Page 144 Problem 9-4 Toram Ltd. Income Statement for the year ended December 31.000 144.000 $ 65.000 $ 40.000 0 0 58.000 300.000 0 85.Introductory Financial Accounting. 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 87.000) $ 681.000 $ 699.000 $ (18.000 25.000 $634.000 Net Change $ 24. 31 20x6 $ 50.000 463.000 85.000 (18. and its income statement for the year ended December 31.000 (12. Balance Sheets Dec.000 Dec.1.000 (101.000) 0 (12.000 $ 100.000 Assets Cash Accounts receivable Inventory Long-term investment Land Buildings and equipment Accumulated amortization TORAM Ltd.000 .000 32.000 43.000) $ 57.000 200.000 53.000 423.000 0 80.
000 of accumulated amortization. Purchased equipment for $20. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.1.1 Page 145 During 20x6. Sold equipment for $7. 4. 2. Declared and paid a $50. the following transactions occurred: 1.000 and had $21.000 cash dividend. Prepare a Statement of Cash Flow using the Direct Method. v.000 cash that had originally cost $32.000.000 cash. 20x6. Issued $25. Sold the long-term investment on January 1.Introductory Financial Accounting. for $30. 3.000 of bonds payable at face value. Required – a. b. 5. (CGA Canada adapted) .
repayment of principal. be recognized.. Financial Analysis Techniques 1. 5. Net cash flows from future operations. sinking fund provisions. 7. The amount of future cash flow from random events such as windfall gain or casualties. The nature of the analysis of financial statement information is primarily in the form of ratios. of course. Expected non-operating cash flows.e. 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. from activities considered incidental to the firm's main function. Each of these eight variables that affect future dividend policy is in turn affected by others. which the investor would like to predict. 8. However. v. The limitations of using historical information must. Nonetheless. Vertical and Percentage (common size) analysis . etc. The amount of future cash flow to service debt requirements.1 Page 146 10. The amount of cash expected to be invested in the firm's long lived assets as well as in working capital. 3. 6. Horizontal (trend). Management's attitude toward future cash dividend policy. i.1. historical information can be used to make projections and is sometimes extremely useful in this respect. Future cash flows from changes in the levels of investments made by shareholders and creditors. 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. published financial statements are historical in nature and do not provide the information we have just outlined.Introductory Financial Accounting. interest payments. In order to predict the company's future dividend policy. The following are the variables that affect a firm's future dividend policy: 1. 4. i. Published financial statements are the sources of information generally available to users.e. 2.. the investor must predict those things that affect dividend policy.
500 10.975 7. For example. v.882 627 207 $420 20x5 $11. 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 $7.509 7.1 Page 147 Horizontal analysis expresses financial data in terms of a single designated base period.Introductory Financial Accounting. or as compared to an amount of the preceding period.073 354 $719 .619 12.1.369 606 200 $406 20x4 $8.673 827 273 $554 20x6 $13.546 1.
Introductory Financial Accounting, v.1.1
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%
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.
Introductory Financial Accounting, v.1.1
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
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.
Introductory Financial Accounting, v.1.1
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.
Introductory Financial Accounting, v.1.1
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
a corporation purchased $540.000. 20x8. 20x7.0 c) 6. What were R’s total net sales for 20x8? a) $227.000 at December 31.0 .0 d) 8.500. The accounts receivable turnover for 20x8 was 7. During 20x8.000 and the ending inventory for 20x8 was $120.500 d) $400.500 b) $335.Introductory Financial Accounting. 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 c) $367. R Company’s net accounts receivable were $50. 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 4.1 Page 152 Problems with Solutions Problem 10-1 – Multiple Choice Questions 1.000 2.000. and $55.1.0. Net cash sales for 20x8 were $32. If current liabilities exceed current assets.5 b) 5. What was the inventory turnover for 20x8? a) 4. The beginning inventory for 20x8 was $30.000 of inventory and had sales of $600. v.000 at December 31.
Introductory Financial Accounting, v.1.1
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)
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
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
Introductory Financial Accounting, v.1.1
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
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
Introductory Financial Accounting, v.1.1
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
Introductory Financial Accounting, v.1.1
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
000 480.789.000 $24.000 1.114.000 809.000 2.956.1.889.000 1.Introductory Financial Accounting.000 $3.000 $3.000 $480.000 2.1 Page 157 Problem 10-3 The comparative financial statements for Rocky Mountain Camping Equipment Ltd.167. Rocky Mountain Camping Equipment Ltd.000 1.000 20x6 20x5 Fixed Assets – net $4.576.679.876.000 $20.324.000 800.003.000 300.000 $4.808.003.000 2.000 2.000 1.000 1.000 $3.000 700.000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $560.000 1.380.628. v.000 2. Balance Sheets as at December 31 … 20x7 ASSETS Current Assets Cash Accounts receivable Inventory $37.000 820.000 700.180.979.808.999.956.000 1.000 700.000 $3.000 650.000 $524.000 485.000 700.000 570.000 2.000 1. are as follows.928.000 .000 524.
1 Page 158 Rocky Mountain Camping Equipment Ltd.000 5.000 137.000 1.000 $3.000 635.000 60.000 . v.000 20x6 $1.100.000 463.000 100.Introductory Financial Accounting.000 $51.700.300.000 100.000 700.000 30. $2.000 56.000 65. 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 2.000 1.1.000 800.000 81.000.
5.000/4 years x 6/12) = $35. 6. 4. 8. d b a d d d b c $40. v.039. SOLUTION TO PROBLEMS Problem 1-1 1.999 .000 $999.1. 3. 7.999 + 40.1 Page 159 11.Introductory Financial Accounting.000 – ($40.000 = $1. 2.
000 20.000 25.777 Bank Loan 20.367 8.000 Acc.000 15.000 Accrued Liabilities 150 700 600 1. Amortization 500 11 10 Retained Earnings 10.Introductory Financial Accounting.000 1 3 Furn.000 50. Receivable 6.000 BALANCE SHEET Accts.1 Page 160 Problem 1-2 Part (a) Assets Cash 20.800 33. & Fixtures 15.000 Liabilities & Equity Accounts Payable 130.000 120.000 190.200 4. v.000 13 16 17 18 19 B 6 B Prepaid Insurance 1.000 4.000 15.200 400 800 12 4 15 Inventory 25.000 182.000 2.000 Common Stock 20.000 .000 1.000 1 4 7 8 B 2 3 6 7 B 8 10 14 5 9 B 2 Prepaid Rent 1.960 5.1.000 2.
000 120.960 5.000 0 Rent 2 10 18 B 1.000 INCOME STATEMENT Purchase Returns 15.000 0 Cost of Goods Sold 130.960 Interest 300 150 450 Advertising 10 2.000 600 36.000 5 9 B 15 15 14 B 7 15 11 Amortization 500 10 13 B 10 17 B Wages and Salaries 36.1 Page 161 Expenses Purchases 50.000 15.000 1.200 19 Income Taxes 5.Introductory Financial Accounting.000 3. v.500 700 2.1.600 Insurance 400 12 10 16 B Miscellaneous 1.000 Revenues Sales 196.367 .000 170.
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 $15.000 300 130.000 2.500 10. 3. 10.000 15.000 120. 6.000 36. .000 6.000 1.000 2.000 182. 7.000 120.000 20.200 190.000 50. 4.000 20. 9.Introductory Financial Accounting. 11. 8.800 500 500 2.1.1 Page 162 Journal Entries – 1.000 / 10 years x 4/12 $20.000 4. 5. v.000 1.000 4.000 196.000 3.000 1.200 1.000 $20.000 1.000 50.000 15.
Introductory Financial Accounting.890 Income tax expense = $17. v. 5.960 15.000 25. 18. 17.960 1. 16.890 x 30% = 400 400 13.000 15.000 130.000 700 700 600 600 1.367 .1 Page 163 12.000 15.200 / 12 months x 4 months expired Interest expense Accrued liabilities Accrual for the month of October: $20.000 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 = $17.000 170. Insurance expense Prepaid insurance $1. 19. 150 150 14. 15.367 5.1.
000 400 2.367 $270.1.000 25.000 2.000 130.000 10. 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. v.277 $270.000 20.600 2.000 8.000 196.200 5.960 500 450 36.277 . Inc.777 20.000 Credit $ 500 25.000 800 1. Trial Balance As at October 31.000 5.1 Page 164 b.Introductory Financial Accounting.000 15. Heavenly Books.
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 $196.367 $12. 20x2 Retained earnings. Inc. Statement of Retained Earnings for the four months ended October 31.600 2. v.Introductory Financial Accounting. Inc.660 18.200 47.890 5.000) $2.000 130. October 31. 20x2 Net income Dividends Retained earnings.340 450 17.000 400 2.960 500 36.000 5. 20x2 $0 12.523 . Heavenly Books.1. Income Statement for the four months ended October 31. July 2.523 (10.523 Heavenly Books.1 Page 165 c.000 66.
1.000 800 1.523 $76.000 61.000 2.300 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Accrued liabilities Current portion of bank loan Bank loan Shareholders’ Equity Capital stock Retained earnings $25.500 $76. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance Prepaid rent Furniture and fixtures Less accumulated amortization $15.000 2.777 12. Statement of Financial Position as at October 31.000 53.777 20.000 45.800 14. v.777 8.000 8.000 25.Introductory Financial Accounting. Inc.000 500 $33.1 Page 166 Heavenly Books.300 .523 22.
000 17.100 $9.000 71. v.600 – 2.ending $0 9.500 $155.600 4.1.800 2.100) $7.400 .100 3.300 21.500 (2. Statement of Retained Earnings for year ended December 31.600 13.200 3.000 4.200 54.300 18. Income Statement for year ended December 31.200 84. 20x6 Net sales ($157.beginning Net income Dividends Retained Earnings .1 Page 167 Problem 1-3 Global Productions Inc.500 Global Productions Inc.Introductory Financial Accounting. 20x6 Retained Earnings .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.
000 4.600 50.100 87.1.100 1.000 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Bank loan Shareholders' Equity Capital Stock Retained earnings $7.900 44.600 40. v.000 49.800 $25.1 Page 168 Global Productions Inc. Statement of Financial Position as at December 31.800 19.000 9.200 $107.400 $107. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Supplies Prepaid insurance Office equipment Accumulated amortization 24.200 2.Introductory Financial Accounting.000 .100 14.000 7.500 1.400 57.500 1.
Therefore. Accounts Receivable Consulting Revenue 2. your amortization expense would be = $6. $24 X = $6.800 e) When you purchased the policy. Therefore. we will record salaries expense and the accompanying salaries payable of $1.646 When you received the cash in January. due from Big Al. you would have sent out 1 of the 4 magazines in the subscription. You have used 8/12 of the policy. However.333 3. the full amount would be recorded as an Unearned Revenue liability. in the amount of revenue earned during the period.333 from Prepaid Insurance and record it as Insurance Expense for the period. you must record them as an expense of that period.250/year.300 revenue this accounting period.800 1.646 for the current period. Cash Unearned Revenue 24 24 As of April 30. Salary Expense Salaries Payable 1. you will have accumulated 3 days worth of salaries that have not been paid.300 2.1 Page 169 Problem 1-4 a) Annual amortization expense for the machinery would be = $50. Amortization Expense Accumulated Amortization b) 3. it is appropriate for you to record it in this period.800.1. The journal entry would be: Unearned Revenue Subscription Revenue c) 6 6 You have earned the $2. you would have debited Prepaid Insurance and credited Cash for the full amount of $5. To do this you would set up a receivable.Introductory Financial Accounting.000 X 8/12 = 3.333 .000. v.250 X 7/12 = $3.646 3. therefore. Insurance Expense Prepaid Insurance 3.000/8 years = $6. as these expenses were incurred during the period.300 d) As of Wednesday. you would have earned of the revenue. you only had the machine in use for 7 months. However. Therefore. therefore you will remove $5.
or $1.750 you paid on June 30th represents Prepaid Rent.750 .000 has been earned and should be included in revenue for this period. Rent Expense Prepaid Rent 4. $6..000 is unearned.000 each. v.Introductory Financial Accounting. The first payment that you received on June 1st would cover the catering for June – November. Prepaid Rent Cash 4.e.000 g) The $4.000 1. On December 1st.000 covers a 6-month period.1. Therefore.000 X 5/6 = $5. and therefore you would have incurred one month worth of Rent Expense.750 4. Unearned Revenue Catering Revenue 1.750 4. you would have been in the premises for 1 month. No adjustment is needed for this. You would remove the Prepaid Rent account to reflect that fact that you have “used up” the rent. you would have debited Cash and credited Unearned Revenue by $6.1 Page 170 f) Each of the payments for $6. and would be recorded as an asset on your accounts for the June30th period end.750 As of July 31st. However. the second payment that you received on December 1st covers the period of December – May. that full amount would have been earned and recorded as revenue during the period. You will have to adjust for that fact that 5/6 of the payment has not been earned i.
3.000 – 128.000 (the ending balance in the account).000 $1. 100. 3. v.000 (COGS) = $1.000 + 300.000 $20.000 x $20)(inventory) = $1. The opening balance in the Subscription Received in Advance account = $80.000 + 10.000. 4. Total amount received as revenue of $128.000 $1.000 Problem 1-7 1.000.000.000 $1.000.000 $0 $1. .000 = $48. 12.000 + 120. Debit to Subscriptions Received in Advance = $180.000.000 $0 $1. Dec 31. 10.000.000 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. 5. the offsetting credit would be to Subscriptions Revenue. 2.000 + (1.000 $1.000 + (200 x $50)(cash) – (200 x $20)(inventory) = $1. $80.000 less the revenue earned for subscription fees received in the previous year of 80.Introductory Financial Accounting.000. Dec 31.020. 8.000.000 (bldg) – 300. 6. 7. 9. 20x5 d.000 x $20 (accounts payable) = $20.000 1. Dec 31. 11.000 (sales) – 4.000. 20x5 55 55 Problem 1-6 1.000. 4.1 Page 171 Problem 1-5 a.000 = $72.000 $1.020.000.000 x $10 = $1. 2.1. Dec 31. 20x5 500 500 100 100 c. 20x5 Insurance expense Prepaid expense $1.006.026.000 (cash) = $1.
Introductory Financial Accounting, v.1.1
Problem 1-8 Shareholders’ Equity Net Income
+10,000 NC NC NC -10,000 Remove the receivable from A/R, and add a short-term note receivable.
+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)
Introductory Financial Accounting, v.1.1
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%
Introductory Financial Accounting, v.1.1
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.
Introductory Financial Accounting, v.1.1
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
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
Introductory Financial Accounting, v.1.1
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
B a E
B q E
B a E Equipment 110 74 184 Acc Dep 66 30 96 Note Rec - LT 100
B r E
B j E
B n E
B p E
B k E
Introductory Financial Accounting, v.1.1
Expenses COGS 440
INCOME STATEMENT Salaries and Wages 185 15 200 Insurance 3 4 7 Income Taxes 15 5 20
Revenues Sales 900
h q E
o o E
Interest Revenue 8 8 16
e n E
l r E
Introductory Financial Accounting, v.1.1
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.1.1 Page 179 Ruiz Pharmacy Balance Sheet as at December 31. v. 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 .
000 9 13 Long-Term Notes Payable 20.000 12.000 100. 7.500 260.000 10.500 20.000 375.000 15.000 850.000 375. 123.1 Page 180 Problem 1-13 Assets Cash 30.000 8.000 850. v.500 8.000 B .000 Prepaids 14.1.000 22.000 80.500 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 Liabilities & Equity Accounts Pay 600.000 600.800 6.000 215.Introductory Financial Accounting.000 323.000 Capital Stock 110.000 25.000 B E B 10 Retained Earnings 4.000 225.000 16.000 200.000 62.500 6.000 Inventory 446.000 4.000 Acc. Pay.000 16.000 265.00 515.000 31.000 575. Depreciation 40.000 8 Rent Payable 27.000 20.500 547.500 745.000 Taxes Payable 20.000 775.000 Interest Payable 8.000 14.000 20.000 12.500 B 9 E Furniture & Fixtures 190.000 21.000 25. And Com.000 BALANCE SHEET Accounts Rec.800 Sal.000 24.
000 8.500 Revenues 3 COGS 345.Introductory Financial Accounting.000 21.1 Page 181 Expenses INCOME STATEMENT Salaries and Commissions 207.000 Sales 1.000 12.000 27.800 12 Depreciation 22.1.000 .000 4 2 9 9 9 9 E Rent 14.000 Interest 6.000 13 14 Other 225.000 70.000 7 7 E Income Tax 15.350.000 27. v.
700 Peter’s Appliance Shop Ltd.500 6.000 $46.500 80.000 745. v.1. Aug 31.500 $302. 20x5 Retained Earnings. Income Statement for the year ended August 31.700 -4.000 22.500 70.200 . 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 $1.000 524.1 Page 182 Peter’s Appliance Shop Ltd. 20x5 $260.000 207. Sep 1.000 605. Statement of Changes in Retained Earnings for the year ended August 31.000 46.350.700 27.000 225. 20x4 Net income Dividends Retained Earnings.Introductory Financial Accounting.800 73.
000 547.500 323.000 7.070.000 153.070.000 -62.500 6. Balance Sheet as at August 31.000 658.000 578. 20x5 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Fixed Assets Furniture and fixtures Less accumulated amortization $ 31.300 110.300 80.000 10.000 $1.000 302.1 Page 183 Peter’s Appliance Shop Ltd.000 16. v.500 .500 215.500 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 $515.800 27.1.000 917.000 12.Introductory Financial Accounting.200 $1.200 412.
December 31 Add Sparg cheque deducted in error Add deposits in transit Less outstanding cheques Cash balance per books b. before adjustments Less bank service charges Add error in recording cheque ($1. Dec 31 Cash balance per bank. $15.595 Balance per bank statement Add deposits in transit Balance per books $4.Introductory Financial Accounting.000 (77.200 .548) 3. Dec 31.152 (52) 180 $3.200 = $21.$1.700 – 3.095 + 9.280 . 2.020) Adjusted cash balance per books.700 (5. Cash balance per books.280 $6.1. c b b The balance on the bank statement will be overstated by $360.225 63 $4.300 580 1. 3. v.300) $3.288 Problem 2-2 a.700 77.1 Page 184 Problem 2-1 1. Dec 1 Add cash received during December Less cash payments made during December Cash balance per books. Cash Accounts receivable Bank service charges Cash $180 $180 52 52 $3.
March 31.1. March 31.915 180 (35) (360) $4.200 $4. Bank service charges Cash To record bank service charges for the month. 20x7 2.200 $780 1. v.Introductory Financial Accounting. $ 480 6. Office equipment Cash To correct error made in recording of purchase of office equipment: $620 – 260 = $360.980) $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. Cash balance.700 (1. Cash Accounts Receivable To record error in deposit made ($530 – 350 = $180).700 $180 $180 35 35 360 360 .1 Page 185 Problem 2-3 1. 20x7 Add outstanding deposits Less outstanding cheques # 201 # 533 Cash per books.
If the securities are classified as trading investments. If the securities are classified as available for sale. b) Cash Other Comprehensive Income Temporary investments .000 3.1.000 3.Strategic Air Defence Gain on sale of Investments $75.000) (1.000 $2. Either way. Available for sale securities are defined by what they are not: they are not long-term investments nor are they trading investments.000 $35.000 7. 20x0: Unrealized gain (loss) ($2.000) 12.000 3.000 31.1 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.000 (4.000 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. then the net unrealized gain will be part of the Other Comprehensive Income section of Shareholders' Equity.Introductory Financial Accounting.000 . the securities have to be recorded at fair market value on the balance sheet at December 31.XYZ Computer Gain on sale of investments Cash Other Comprehensive Income Temporary investments . v.000 70. Trading investments are those that are held for re-sale as part of a portfolio of managed securities held for a short-term.000) $ 8. then the net unrealized gain flows through net income.
500) b) In 20x0.500) (2.500) will be charged to net income. an unrealized holding loss of $4. . an unrealized holding loss of $5.000) 20x2 ($4.000) will be credited to net income.700 will be charged to net income.1 Page 187 Problem 2-5 a) Security A Security B Security C 20x0 ($2. In 20x2. v.500) ($4.1.700 ($5.4.Introductory Financial Accounting. In 20x1.000) (3.500) (1.200) ($5.700) 20x1 ($500) 0 (3.700 .000) (1. an unrealized holding gain of $1.500 ($4.000) ($8.000 – 8.
350 cr. $86.000 $55. 2004 Balance in allowance before adjustment $63.350 $55.800 Bad debt expense = $6. Recoveries Adjustment required Bad debt expense Allowance for doubtful accounts 86.000 Beg Bal + 14. v. d 3.1. a Problem 3-2 a.000 Collections – 55.245. Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable b.400 – 4.000 cr.000 cr.000 x 4% 4.000 cr.000 3.000 Credit Sales – 11. December 31.000 c. a Balance in allowance account at the end of 20x9 before adjustment for bad debts: $5.000 x 3% $97.000 x 0.000 – 125 = $2.000 – 500 + 300 = $4. Write-Offs + 3.000 Write-offs Allowance for doubtful accounts.000 – 30) – (125 – 30) = $2.200.000 dr.875 After: ($3. Required balance at December 31: ($80.5%) Allowance for doubtful accounts Accounts receivable balance. 2004: $1.1 Page 188 Problem 3-1 1. Beg Bal + 55.000 Write offs) = $100.000 71.350 86.350 cr. Write offs $9. Beginning Bal – 20. . before adjustment $11. $3.000 dr.900.600 Balance in Allowance for Doubtful Accounts. Dec 31. 11.875 2.Introductory Financial Accounting.000 cr.800 = $1. Bad debt expense ($14. December 31.000 3.000 Before: $3.000.000 dr.000 71.200.000 Collections – 20. Adjustment $13.000 A/R Begin + 400.000 Sales – 360.000 3. 20x8.000 cr.000 3.
000 27.000 2.1.290 31.000 2.000 7.800.400.290 .915.1 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 $27.000.000 $2. (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 31.480 43. v.000 16.000 7. (Schedule) $2.000 2.840 cr.480 3.000 7.800.400.000 16.000.000 27.770 cr.915.000 7.000 43.000 3.000 2.Introductory Financial Accounting.
000 1% 5% 20% 80% $ 2.000 60.500 9.Introductory Financial Accounting.000 Allowance for Doubtful Accounts 16.480 27.000 90.000 25.000 31.000 $38.000 80.840 December 31.000 16.000 $27. v.000 45.000 12. 20x1 0 – 30 31 – 60 61 – 90 Over 90 $277.800.000 7.000 7.000.000 384.000 27.770 4.000 20.000 2.000 43.000 442.915.000 3.1 Page 190 20x0 Bal 20x1 Accounts Receivable 2.000 12.770 20x0 Bal 20x1 Bal Bal Schedule – Calculation of the Allowance for Doubtful Accounts December 31. 20x0 0 – 30 31 – 60 61 – 90 Over 90 $234.480 27.000 $442.000 2.290 38.000 7.000 $384.770 .000 1% 5% 20% 80% $ 2.1.400.340 4.000 15.
$6.400.000 3.500 400.500 x 5% $6. Accounts receivable Sales Allowance for doubtful accounts Accounts receivable Cash Accounts receivable Note receivable Accounts receivable Accounts receivable balance.000 cr. 20x7: $40. December 31. 6.775 cr.000 Credit Sales – 1.Introductory Financial Accounting.000 x 12% x 1/12) 6. Allowance for doubtful accounts.000 = $10.000 Note: The allowance account will now be $500 + $10.275 500 cr.000 400.000 10.500.500 dr. 20x7 Balance in allowance before adjustment: $2.000 500.000 Collections – 3.275 30 30 2. v.000 $135.000 Beg Bal + 500. 31.000 x 2%) 10.1.000 Note Receivable 3. Dec.500 Write-offs .000 1. Write-offs Adjustment required Bad debt expense Allowance for doubtful accounts Interest receivable Interest income* *(3. .275 cr. Bad debt expense** Allowance for doubtful accounts **($500.1 Page 191 Problem 3-4 1. Beg Bal + 1.500 1.000 500.
000 56.000 50.500 x 98%) Sales discounts Accounts receivable d.000 49.000 – 6.000 x 70%) Inventory b.000 x 99%) Inventory $80.000 2.Introductory Financial Accounting.000 1.000 + 25.000 50. e.000 $80.500 500 c.200 500 500 350 350 77.000 509. . c c d Czech should have recorded this sale in 20x8 since the goods were shipped FOB Shipping. 4.1 Page 192 Problem 4-1 1.910 1.000 (66. 3. Accounts receivable Sales Cost of goods sold ($80.500 50.200 1. Inventory Accounts payable Accounts payable Cash ($50.1. Delivery expense Cash Sales returns and allowances Accounts receivable Inventory ($500 x 70%) Cost of goods sold Cash ($79.000) $503. v.590 79.000 Ending inventory Cost of goods sold $60.000 – 10. b Opening Inventory Purchases – net: $500.000 56. Problem 4-2 a.
000 500 3. v. Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Purchases (Sales) Units 2.1 Page 193 Problem 4-3 a. Ending balance = 1.000 (40.000 3.000 Units 1.000 .500 b.00 $12.00 22.000 8. Ending inventory = 55 units (35 units x $12.00 16.000 48.Introductory Financial Accounting.000 (2.3333 $300 990 770 1.00 11.100 $1.000 (2.00 12.00 23. b.3333 $690 (220) 420 (567) Units 30 90 70 105 55 Balance Unit Cost Total Cost $10.500) 3.00 11.00 16.00 11. Date May 1 May 5 May 14 May 21 May 29 c.1.00 36.500 units x $23 = $34.000 44.000) 69.50 11.000) Unit Cost Total Cost 18. Purchases (Sales) Units 60 (20) 35 (50) Unit Cost Total Cost $11.500 units 1.000 77.500 Balance Unit Cost Total Cost $12.50) = $650 Note that the results for FIFO periodic are the same as for FIFO perpetual.00 22.00) + (20 units x $11.500 1.190 623 Accounts receivable Sales Cost of goods sold Inventory (10 units x $10) + (40 units x $11.000 33.100 560 560 Problem 4-4 a.50) $1.
1.000 $ 179.7059/unit Cost of Goods Sold = 3.000 $ 19.200/3.940 Units 400 3.929 .400 70 3.000 58.000 173. v.000 x $52 930 x $58 $ 333. Beginning Inventory.200 50.000 52.330 x $100 400 x $48 1.Introductory Financial Accounting.200 50. 20x5 Purchases Goods Available for Sale Less Ending Inventory.140 $ 157.7059 = $ 173. December 31.000 53.000 x $50 1.400 Weighted Average Cost per unit $ 19.860 b.400 = $ 52. 20x5 Units sold during year FIFO Sales COGS 3.000 52.000 x $52 1.929 $ 159.330 Gross profit 175.071 *400 x $48 1.200 = $179.1 Page 194 Problem 4-5 a. January 1.330 x $100 $ 333.000 x $58 3.330 x $ 52.000 3.000 x $50 1. Weighted Average Sales COGS * Gross Profit 3.
000 $150.000 458.000 10.000 x 20% Problem 4-7 $600.000 June 2 Sales returns Accounts receivable Inventory Cost of goods sold June 9 Cash Sales discount ($20.600 400 20.000 – 15.1 Page 195 Problem 4-6 Net Sales = $615.Introductory Financial Accounting.000 x 70% $420.000 30.000 $37.000 5.000 42.000 10.000 15.000 $188.000 5. v.000 42.000 608.000 Sales Returns Estimated cost of goods sold Opening Inventory Net purchases: $480.000 420.000 19.600 June 1 Accounts receivable Sales Cost of goods sold Inventory 30.000 15.1.000 – 30.000 Purchase Returns + 8.000 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 .
79/unit x 60 units Ending inventory = $58.000 $ 646. Ending inventory – Weighted Average Average unit cost = Cost of goods available for sale/Units available for sale Average unit cost = $646.727 .000 210.79/unit Ending inventory = $978.000/660 units Average unit cost = $978.Introductory Financial Accounting.000/(20+440+200) Average unit cost = $646.000 3. Ending inventory – FIFO: 60 units X $1.1 Page 196 Problem 4-8 1.000 418. v.000 2.1.050 each = = = $ 18. Cost of goods available for sale: 20 units x $900 each 440 units x $950 each 200 units x $1.050 each = $ 63.
20x7 Merchandise inventory. 20x7 Cost of goods sold $ 80.300 3. i) Purchases Accounts Payable 80. December 31.3 15-day periods in a year (365/15).000 ii) Accounts Payable Cash Purchase Discounts iii) Accounts Payable Purchase Returns iv) Transportation-In Cash b.000 50. 20x7 Purchases Less: Purchase returns and allowances Less: Purchase discounts Net Purchases Add: Transportation-In Cost of goods available for sale Less: Merchandise inventory. There are 24. The savings generated by purchase discounts generally make it worthwhile to borrow to take advantage of the purchase discount.09% (3.000 (1.200 1.000 80. In December.000 $200.1 Page 197 Problem 4-9 a. the full amount of $50. Cost of Goods Sold Schedule for the month ended December 31. It would be equivalent to interest of $1.200) (1.500) 77. TOYJOY LTD.000 80.300 30.200 3.Introductory Financial Accounting. whereas the purchase discount may generate a savings which would equate to an effective interest rate much higher than 10%.000 48.000 would need to be paid on the due date.1.300 230. . n30 generated savings of $1. discounts taken under a term of 3/15.500 1. v.000 3. it may cost a company 10% to borrow the funds.500 (3. December 1.500 by paying 15 days early.3).300 c.500 on a base amount of $48.09 24. For example.09%) for a 15day period (30 days – 15 days). much higher than the 10% borrowing rate.500 1. thus giving an annual percentage cost of missing the discount of 75. If payment was not made within the discount period.000 $ 150.
000 U 6.000 $24.000 .000 * ** If Gross Profit = 40%.000 x .000 O 6. estimated COGS = $60. January 1 to January 13 Inventory. January 1 to January 13 Cost of goods available for sale Less estimated ending inventory.000 $ 100.1. 20x7 Purchases.000 – 36.000 = $74.000 10.60 = $36.000 U N/A 5. v.000 **74.000 x .000 U 5.1 Page 198 Problem 4-10 Error i) ii) iii) 20x6 Cost of Goods Sold 10. January 1.000 Cost of goods available for sale – COGS = Ending Inventory $110.000 U 20x6 Ending Inventory 10.000 36.000 110. Therefore.Introductory Financial Accounting.000 O 20x7 Cost of Goods Sold 10.40% = 60%. January 13. then COGS = 100% .000 U N/A N/A 20x6 Retained Earnings 10.000 O Problem 4-11 Sales.40) $ 60.000 O 5. 20x7 Estimated Cost of Goods Sold* Estimated Gross Profit ($60.
000 Balance Unit Cost $7.400) $ 98.200) Units 6.400 $80.700) (4.100 Balance Total Cost $58.000 (5.000 x $8.000 Unit cost = $178.000 8.759 c. Units 7.40) + (8.95) + (7.000 x $8.500 = 9.500 / 21.000 (46.600 80. Units 7.000 7.000 x $8.000 8.500 14.00 8.40000 9.50 = $76.000 = 21.40 .509) Units 6.000 + 7. v.700 106.000 b.000 14.500 9.50 Ending inventory = 9.40 7.1.500 COGS = 12.700 106.40 Ending Inventory Cost of goods sold Cost of goods available for sale Less ending inventory $72.000 + 7.600 126.500 58.250) 72.95 8.000 Cost of goods available for sale = (6.250 125.000 13.500 (80.00000 Total Cost $58.250 + 47.500) 8.500 53.1 Page 199 Problem 4-12 a.000 13.000 x $7.000 (6.500 Units available for sale = 6.500) Purchases (Sales) Unit Cost $8.000 – 5. Ending inventory = 6.000 units @ $8.250 77.000 (5.400 d.800 (53.000 = $8.800 54.500) Purchases (Sales) Unit Cost $8.63793 Total Cost $47.200) 72.000 6.500 + 8.509 = 100.500 Total Cost $47.19231 8.Introductory Financial Accounting.800 (47.741 COGS = $53.000 (6.000 6.50 = $102.400 $178. From Purchase # 2: 8.000 x $9.00) = $178.000) (500) 8.00 From Purchase # 1: 1.95000 8.000 – 6.000 + 8.000 units @ $9.40 9.000 (47.
d) ($80. a d ($200.500 x 430 = $5.000)] Net book value = $77.000) / 10 = $4.500 It is assumed that the addition should be capitalized and depreciated since it qualifies as a capital asset.1 Page 200 Problem 5-1 1. 3.000 – 150. 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 + 60.000 – 5.000/80. Estimated salvage value = $100. c Double-declining-balance rate = x 2 = 50% 4.000 = $1.000 + 15.000 ($20.000. 6. and not the legal life of 17 years.000/year) = $10.Introductory Financial Accounting.5 x = $600 $1.000)/10 = $8. 5.000) x (20.500 7. 2.000 x .000 / 9.500/year.000 Net book value = $100.750 . we must first know the salvage value of the machinery inherent in the problem.000 – 10. d c c Net book value = $85.000 – ($85. Note that we use the estimated useful life of the patent. v.000 + 5.160 To move to the units-of-production method.000 – (5 years x $18.1.5 x 6/12) Net book value = $63.075. Depreciation expense = $12.000 – [($100.000 x 90%) / 1.
1.600 c.000 – 12.000 $12.000 .500 d.000 = $53.000) x 40% $12. Amortization expense Accumulated amortization ($65.000 – 26.000 20x8 15.Introductory Financial Accounting.000 x 55.000 x 40% (1/5 x 2 = 40%) Amortization expense Accumulated amortization ($65.000) / 3 = $17. v.000 b.000 Net book value = $65.000 – 5. 26.000 17. Amortization expense Accumulated amortization ($65.600 15.1 Page 201 Problem 5-2 a.000) / 5 years 20x7 Amortization expense Accumulated amortization $65.000) / 200. Amortization expense for 20x8 = ($53.000 26.000 – 5.000 – 2.000 Amortization expense Accumulated amortization 17.500 16.000 16.
20x4 600 600 10.50 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 $60.1 Page 202 Problem 5-3 (a) Jan 2.000 2.000 Dec 31.000 / 32 months remaining = $62. 20x6 10.000 – 10.000 10.000 $60.000 10. 20x3 Aug 31.000 10. 20x5 Dec 31.000 20.000 10.808 9.000 9.656 25. 20x3 Equipment Cash Amortization expense Accumulated amortization (60.000 + ($62.1.714 1.000 = $10.000 .000 55. v.808 Dec 31.750 10.286 82.500 10.500 Amortization expense Accumulated amortization $10.000 2.Introductory Financial Accounting. 20x4 Apr 31. 20x5: $2.50 / month x 8 months = $500 + 10. 20x5 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 31.750 Oct 31. 20x7 Aug 31.656 4. 20x7 20. 20x7 4.500 Dec 31.
746 Total amortization expense for 20x7 = $8.000 2.688 + 20. v.750) (8.1 Page 203 Schedule 1 Amortization expense for 20x7 Net book value of asset at Sep 30. 20x7 Original cost of asset Capitalization made on April 1.500 Market value of asset Gain on sale (2.000 – 10.062) $12.500) $105.500 38.1.500) (10.000 $108.000 4.500 $ 4. 20x7 ($12.000 $18.500 15.500 50.500 $11.000 Less fair market value of asset traded in (15.000 – 90.000) (10.000) (10.500) Acquisition price of new lathe ** NBV of asset at time of exchange = $50.Introductory Financial Accounting.000 – 38.750 x 9/12 $60.062 + 1.000 * Price of new lathe Less trade-in value less fair market value of asset traded in: Trade in value: $108.808 Problem 5-4 Equipment (new lathe)* Accumulated amortization (old equipment) Equipment (old equipment) Cash Gain on sale of asset** 105.000 .746 = $9.000 (10.688 Amortization expense – Sep 30 to Dec 31. 20x5 Less Amortization expense 20x3 20x4 20x5 20x6 20x7 to Sep 30: $10.000) / 39 months = $582 per month x 3 months = $1.000 90.
000 27.000 x 6/12 = $3.Introductory Financial Accounting.1 Page 204 Problem 5-5 1. Machinery Cash 27.000 Cost of machine + 2.000 *25.1.000 – $3.000 Installation Charges = $27.000)/4 = $6.Machinery **($27.000/year $6.000** 3.000 9. Machinery Less: accumulated amortization $27.000 2.000* 27.000 20.000 The cost plus installation.000) $18. Amortization expense Accumulated amortization .000 for 6-month period 3.000 4.000 (9. v. The freight is included in the cost but the repair is not to be capitalized.000 3. Cash Accumulated amortization – Machinery Machinery Gain on sale of assets . 2.
500 Straight-line method = (120.000 – 22.000 – 20.000)/4 = $25.750 Units-of-production method = (120.750) Loss on disposal of equipment Equipment Cash Accumulated depreciation ($22.1 Page 205 Problem 5-6 a. i.750 1.000 + 18.683) Gain on disposal of equipment Equipment $75.000 45.Introductory Financial Accounting.500 + 23. c.000 x 9.000 = $22.000 b.000)/40.000 – 25.000 $=75. i.183 183 120.1. ii. i.500 – 20.000 – 20. Straight-line method = (120.000 43.000)/(5-1) = $18.000 x 12.000 = $22.250 $120.000 Units-of-production method = (120.000 – 20. ii.000) / 41. . v. ii.683 Cash Accumulated depreciation ($25.
000 $157. Costs capitalized: Invoice price Less discount . A double-declining-balance amortization method could be used to abide by the president’s request.1.000 – 15.000 Depreciation expense: ($157.e.750 x 3 years Net book value Less proceeds on disposal Loss Cash Accumulated amortization Loss on disposal Machine $100.750 .000 14. $140. c..750 157. i.Introductory Financial Accounting.800) 5.000 cannot be capitalized to the asset since the asset was purchased and not self-constructed.000) / 8 = $17. Under this method.250) 103.000 (2.000) $ 3. v.000 x 2% Customs and duty costs Preparation and installation costs b. Cost Less accumulated depreciation: $17. This method is acceptable under GAAP if it properly reflects the pattern of benefits received from using the machine. then this method should not be used. If the machine does not provide decreasing benefits.$140.800 $157.1 Page 206 Problem 5-7 a.750 Note that the interest charge of $12.000 53.000 (53.750 (100. if the machine generates less revenues as it gets older. amortization is high in the first year and decreases in amount as years go by.250 3.
000.000 / 5 x $2 x 30% Premium redemptions: 23.500 . 6. FV=10. N=10.000 PV=$11.472. Interest expense for the year = $11.000 /10 coupons /15 redemption ratio x $25 x 55% = $34.500/15) x $25/card) Cash 37.472.375 34.400) $ 8. 2.Introductory Financial Accounting. a b b) PV of bonds at issue: PMT=800.018. v.375 The journal entry to record the actual costs incurred during the year would be: Premium Liability ((22.1.018 x 6% = $688. c c b Premium expense: 150.1 Page 207 Problem 6-1 1. I=6%.000. 3. 5.321 4.375 The journal entry to record the premium expense would be: Premium Expense Premium Liability 34.000 (9.600 Problem 6-2 The premium expense would calculated as follows: $375.500 37.500 / 5 x $2 $18.
20x2 would be as follows: Jun 30.622 3. A/P.554 x 4%) Bonds payable Cash 21.000 Warranty Expense – 130.000 130.487 3.554 $540.1 Page 208 Problem 6-3 The journal entry to record warranty expense is: Warranty expense ($3.000 Opening Balance + 150.378 25.513 25.554 The journal entry to record the interest payments using the effective interest method of amortization is as follows: Dec 31. 20x1 Interest expense (540. Problem 6-4 The value of the bond issue will be as follows: N 10 I/Y 4 PV X= 540.000. 20x1 Cash Bonds payable $540.000 Warranty Costs Incurred = $185.554 .000 x 5%) Warranty Liability The journal entry to record actual warranty costs incurred is: Warranty Liability Cash.1.000 .Introductory Financial Accounting.000 $150. 20x2 Interest expense (540.000 The journal entry to record the interest payment of Jun 30.000 The warranty liability at the end of the year will be $165.000.000 $150. Inventory 130.378) x 4% Bonds payable Cash 21.3. v.554 PMT 25000 FV 500000 Enter Compute The journal entry to record the issuance of these bonds is as follows: July 1.
301 10. 20x5 Dec 31. the total debits to the account for the year is the total cost of repairs made during the year.000 + 5. v.432.292 7.000. The journal entry to record repairs as performed is debit Warranty liability. I = 4.301 – 7. 3.301 x 4%) Premium on Bonds Payable Cash Interest expense* Premium on Bonds Payable Cash * (10. The journal entry to record warranty expense is debit warranty expense credit warranty liability.1 Page 209 Problem 6-5 PV of bond issue: N = 30. credit cash/inventory/etc.432.432.708) x 4% $10.Introductory Financial Accounting. Therefore.000 417.200 – 6.432.1.000 416. 20x5 Problem 6-6 1.301 Dec 31.000. $5. .708 425.800 = $10.016 425.000. Therefore. 4.800.200 2.000.000 $10. FV = 10.000 Jun 30. the total credits to the account for the year is the warranty expense for the year.301 $432. PMT = 425.000. $10. Solve for PV = $10. $6.984 8. 20x4 Cash Premium on Bonds Payable Bonds payable Interest expense ($10.
500 Jan 1.524 1.714 x 4% Bonds payable Cash Interest expense $504.403 x 4% Interest payable $513. 20x7 20.097 . 20x6 Cash Bonds Payable Interest expense ($513.074 – 2.Introductory Financial Accounting.055 = $509.105 20.937 – 2. 20x7 Jul 1.055 22.500 Dec 31.311 22.074 x 4% Bonds payable Cash Interest expense $509.500 FV 500.105 $513.097 20.129 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $511. 20x6 20.976 = $511. 20x7 20.189 2.445 20.500 Jan 1.105 x 4%) Bonds payable Cash Interest expense $513.000 Enter Compute Jan 1.500 Jul 1. v.223 22. 20x8 Jul 1.445 20.311 = $502.223 = $504.137 = $506.976 22.937 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $506. 20x6 Dec 31.105 PMT 22.445 2.363 2. 20x8 20.1 Page 210 Problem 6-7 Proceeds on bond issue: N 6 I/Y 4 PV $513.277 2.714 – 2.277 20.137 22.277 20.500 Dec 31.129 – 2.105 – 1.1. 20x8 20.
Dec 31.591 x 5%) Bonds payable Cash (1.171.591 PMT 60000 FV 1000000 2.591 58.000 58. 20x6 4. June 30.170.000.403 22.000 Problem 6-8 1.580 1. 20x6 Cash Bonds payable Interest expense (1.1.171. July 1.000 x 12% x 1/2) Interest expense (1.000.171. 20x7 .491 60.591 – 1.000 500.420 60.1 Page 211 Jan 1. v.500 500.171.000 3.171.Introductory Financial Accounting.591 $1.097 2.000 x 12% x 1/2) *Bonds payable balance as of June 30.420) $1.171* x 5%) Bonds payable Cash (1.509 1. Enter Compute N 40 I/Y 5 PV X= $1. 20x9 Interest payable Bonds payable Cash Bonds payable Cash 20. 20x7 ($1.
Introductory Financial Accounting.850 4.850 40. . v.000 exactly.000.000 + 4.093 5. False.000 x 10% x ) Bonds payable Cash ($1.000 $45.850) x 10% x Bonds payable Cash ($1.000 x 8% x ) a. b.000 True.093 40.093 = $89. The cash outflow is $80. c.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. $44.1.943 False False.000.000 x 8% x ) 2nd half of 20x7: Interest expense ($897. d. The interest expense will increase every year since the book value of the bonds payable will also increase. Interest expense for 20x7 = $44.850 + 45.
000 February 10 February 15 February 26 12.000 x $0.000 39.400 .000 shares issued and outstanding Preferred Shares.000 12.000 40.000 40.000 . non cumulative. 44.000 shares x 3/2 = 225.1 Page 213 Problem 7-1 1.$2. $6. Shareholders’ Equity Common Shares.000 40. 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 26 126.32 $14.520 $217.000 2.Introductory Financial Accounting. Problem 7-2 1.000 44. v. 400 shares issued and outstanding Retained Earnings ($0 + $56.000 21.1.080 2.080) Total Shareholders’ Equity $ 138.000 126.400 2.400 14.000 2.$14.520 .000 shares outstanding after the split.080 February 27 February 28 21.080 14. c 150.
000 180.1.000 53. Shareholders’ Equity Common Shares.000 12. a.500 Dividends) $348.000 3.000 40.000 Net Income – 15.000 40.000 3. issued and outstanding 3. g. 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. issued and outstanding 3.000 3.000 3.000 Preferred Shares. c.000 b.000 20.500 $456. d. v. 2.000 20.000 180.000 60. e.500 . authorized 100.000 $115. cumulative – authorized 50.000 Retained Earnings ($64.000 48.000.1 Page 214 Problem 7-3 1.Introductory Financial Accounting. f. h.000.500 12.000 3.
000 x 6. 6.600.600 314.000 16. 4.5% / 2) Interest expense ($419. 7.000 12. 8.000 1.000 30.600.400 320. 12. 1. v.000 25.Introductory Financial Accounting.000 5.600 – 412) x 3% Bonds payable Cash ($400. 10.000 x 6.000 945. Purchases Accounts payable Accounts Payable Purchase returns Cash Common stock Accounts payable Cash Salaries payable Salaries expense Cash Interest expense ($419.000 945.000 $1.520.000 25. 3.000 16.000 75. Equipment Cash Warranty liability Cash $1.000 34.000 5.520.000 960.000 5.588 412 13.000 960.600 x 3%) Bonds payable Cash ($400.1 Page 215 Problem 8-1 a.576 424 13.000 34.000 30.000 75.000 5. .000 1. 9.000 2.1.000 5.5% / 2) 11.000 12. Accounts receivable Sales Cash Accounts receivable Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable 5.
000 17. $4.010 4. 2.000 cr.000 dr.800 400 $3. + 34.1. $6.000 130.000 x 50% Bad debt expense 40. 18.400 2. = The balance in the allowance for doubtful accounts should be: $144. Insurance expense Prepaid insurance Balance in prepaid insurance account: $1.000 17.400 $3.000 x 20% 12.400 3. v. Income taxes payable Cash Common shares (1.000 40.400 Balance required: $2.930 16.400 130.930 23.000 / (10.Introductory Financial Accounting.310 4.000 23.000 + 75.320 3.930 dr.31*) Retained earnings Cash * Average book value per share = $150. 15.690 22. + 5.000 x 7% 23.000 cr.000 14. 17.000 x 3% 43.000 x $17.400 .000) = $17.1 Page 216 13.31 Prepaid insurance Cash Operating expenses Cash Bad debt expense Allowance for doubtful accounts The balance in the allowance for doubtful accounts is: $23.400 x 2/12 Insurance expense 3.930 cr.000 dr. $23.000 + 3.600 6.400 + 2.
000 NBV Beg + 30.Introductory Financial Accounting.000 (378. amortization – building* Acc.000 / 40 = $7. 6.000 $320.700 80.000 13.000 x 1. Amortization expense Acc.702 53.000 16.000 21.250 39.250 20.000 944.5% Salaries expense Salaries payable Retained earnings Cash Income tax expense Income taxes payable $134.1. v.000 53.000 24.600.400 *** $34.000 80.264.000) $886.000 13.000 / 8 = 4.000 Purchase) = $137.500 ** ($145.000 960.000) Purchase returns Purchases Check: Opening inventory Purchases – net ($960. 24. amortization – equipment** Patents*** * $300. Cost of goods sold Inventory ($378.150 7.000 x 20% = $27.700 6.702 22.000 58.1 Page 217 19.000 – 320.000 – 38.000 1.702 23.000 24.500 27.000 – 16.256 x 40% = 53. .000) Cost of goods available for sale Less ending inventory Cost of goods sold Inventory loss Allowance for decline in value of inventory 886.400 4. Warranty expense Warranty liability $1.
000 75.000 15.000 945.000 7.Equip 38.000 945.000 320.702 25.000 30.000 13.000 13.000 34.930 Inventory 320.200 80.Introductory Financial Accounting.000 Liabilities & Equity Accounts Payable 16.000 53.1.600 BALANCE SHEET Accts Receivable 176.000 Land 40.700 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 5.000 75.000 23.310 150.400 Allowance for Decline in Value of Inventory 13.764 Common Stock 17.000 12.400 130.000 58.750 19 20 14 23 Retained Earnings 4.000 B 19 E 10 10 B B 11 E Equipment 145.000 12.600.690 B 24 B 15 E 18 B 12 B 21 B Acc Amort .000 Allow/Doubt Accts 34.000 175.600 5.000 4.000 24.000 5.600 6.000 1.702 Warranty Liability 25.000 13.000 22.510 B E .000 5.000 1.500 127.500 Acc Amort .000 126.Bldg 120.000 5.600 424 418.1 Page 218 Part (b) Assets Cash 36.400 400 Building 300.520.400 65.000 Bonds Payable 412 419.000 23.000 2.000 222.520.000 378.000 13 Inc Taxes Payable 40.700 B 22 E E B 20 E Prepaid Insurance 1.000 207. v.930 17.000 25.000 960.250 29.690 144.000 B 19 14 B 7 E B E Patents 34.000 80.000 1.000 30.400 2.000 5.400 3.000 27.000 59.000 127.000 40.
v.1 Page 219 Expenses Purchases 960.000 10 10 E Interest 12.000 17 Bad Debt Expense 23.576 25.000 1 20 Cost of Goods Sold 886.000 960. 39.000 9 22 E Salaries 314.702 20 Inventory Loss 13.1. 53.000 .000 16.100 Warranty expense 24.400 21 18 16 Operating expenses 130.150 24 Income Tax Exp.700 321.Introductory Financial Accounting.000 Revenues Sales 5 20 20 6 1.164 Insurance 3.588 12.600.400 6.000 INCOME STATEMENT Purchase Returns 16.930 19 Amortization exp.
000 3. v.500 175.750 126.000 321.196 Cr.690 59.600.702 $2.000 6.680.000 $17. .1. Haider Corporation Trial Balance As at December 31.400 29.930 378.000 418.510 1. 20x6 Dr.000 886.000 13.000 53.930 39.164 24.000 65.Introductory Financial Accounting.150 13.1 Page 220 c.400 130.764 207. 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 $15.702 12.196 $2.000 400 40.000 127.600 222.000 300.000 23.700 25.680.100 25.
400 23.554 (4.1.000 3.420 25. 20x6 Retained earnings.000 714.164 134.702 $80. Haider Corporation Income Statement for the year ended December 31.000 886.1 Page 221 d.600.930 13.580 159.000 554. 20x6 $144.690) (80.554 Haider Corporation Statement of Retained Earnings for the year ended December 31.256 53.064 .000 39.150 130.100 24.Introductory Financial Accounting. January 1.000) $140.000 321. 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 $1.200 80. 20x6 Net income Premium on redemption of common shares Dividends Retained earnings. December 31. v.
850 $936.700 25.500 109.000 (65.000 (127.500) 175. 20x6 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance $ 15.000 400 585.000 170.1 Page 222 Haider Corporation Statement of Financial Position as at December 31.920 Land Building Less accumulated amortization Equipment Less accumulated amortization Patents – net .Introductory Financial Accounting.1.070 40.000 6.064 347.690 140.402 418.702 12.166 207.000 $300.764 589.600 29.754 $936.920 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Shareholders’ Equity Capital stock Retained earnings $126.070 365.400) 172. v.600 204.750 351.
000) / 10 Prepaid rent Rent expense $9.600 3.000 – 4.500 h.000 16.800 4.000 x 10% x 9/12 Amortization expense ($11.600 $9. 12.500 Warranty expense Warranty liability 10.000 24.900 / 17) Patents or Accumulated Amortization – Patents Supplies inventory Supplies expense Increase in inventory = $9.000 k.700 i. v.600 x 9/24 Amortization expense Accumulated Amortization ($80.800 3.700 4.600 b.1 Page 223 Problem 8-2 a. 16. j.500 4. 4. 4. d.000 x 9% x 4/12 Interest expense Interest payable $60.600 c. 360 360 g.000 24.000 x 3% x $40 Allowance for doubtful accounts Accounts receivable Income tax expense Income taxes payable $9.000 x 3% Wages expense Wages payable Insurance expense Prepaid insurance $9.000 12.600 x 5/12 Interest receivable Interest revenue $12.000 f. 700 700 4.000 l.000 4. . 4.600 e. Bad debt expense Allowance for doubtful accounts $320.Introductory Financial Accounting.1. 7.600 7.200 – 4.
316 12.420 1.284 $5.740 110 4.536 116 6.800 . 20x2 (2.120 Prepaid) Advertising Depreciation (3.226 Uncollected Sales) Cost of goods sold Purchases (14.686 19.320 Collections on Credit Sales + 4.130 Rebate + 256 Payable .500 5.630 1.Introductory Financial Accounting.240) Interest April & May .500 + 240 Payable) Maintenance Utilities (4. April 1.640 $44 .880 . v.094 6.1 Page 224 Problem 8-3 MAS Inc. 20x2 Loan balance.640 x 10% x 2/12 $312 72 240 2.420 x 20%) Net income 1 Loan payment Less interest: $2.1.400 Baking Materials Purchases . Income Statement for the five months ending May 31.300 Prepaid) Salaries and wages (5.000 + 270 Payable) Insurance (1.136 Operating Income Interest (72 + 44)1 Net income before taxes Provision for income taxes (6.000 / 5 x 5/12) $32.880 x 10% x 3/12 Principal payment.270 800 424 250 13.2.770 Cash Sales + 5.840 Ending Inventory) Gross margin Operating Expenses Rent (1. April 1.920 .1.1. 20x2 Sales (22.
000 -250 2.1.226 1. Balance Sheet as at May 31.Introductory Financial Accounting.600 .054 1. v.370 .284 44 960 3.840 1.680 4.370 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. 20x2 ASSETS Current Assets Cash (33.136 7.750 $12.960) Shareholder's Equity Common Stock Retained earnings $526 240 1.31.640 .620 3.734 2.466) Accounts receivable Inventory Prepaid insurance Prepaid rent Fixed Assets Equipment Accumulated depreciation $2.120 300 9.1 Page 225 MAS Inc.636 $12.500 5.134 4.
000 $338.Introductory Financial Accounting.000 155.000 278.000 80.000 (20.000 80.000 19.000 $338.000 SHAREHODLERS' EQUITY Shareholders' Equity Common stock Retained earnings * Plug to balance.1 Page 226 Problem 8-4 Morrow Wholesale Balance Sheet as at December 31.000 . 20x1 ASSETS Current Assets Cash Marketable securities* Accounts receivable Inventory Noncurrent assets Equipment Accumulated depreciation $24. v.000 63. $275.000) 60.1.
600 7.Introductory Financial Accounting.220 .100 15.380 17.000 24.000 x 80%) Gross margin Operating expenses Salaries (10. beginning of year Dividends Retained earnings.000 50.146.1.000 .220 63.000 ÷ 10) Bad debts (155.000 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.000 34. 20x2 Sales Cost of goods sold ($250. end of year 11.000) $70.600 8.000 200.000 9.000 (10.900 (300) 5.600) Depreciation (80.1 Page 227 Morrow Wholesale Income Statement and Statement of Retained Earnings for the year ended December 31.000 5. v.500 $250.000 + 1.000) Miscellaneous Operating income Interest expense ($5.000 4.
000 60.000 .205.500) Inventory (Note 1) Prepaid advertising Noncurrent assets Land (19.280 275.500 SHAREHODLERS' EQUITY Current liabilities Accounts payable Accrued wages payable Note payable Interest payable Dividends payable Income taxes payable Shareholders' Equity Common stock Retained earnings $36.000 $80.ending Purchases Cost of goods sold = Opening inventory Purchases Less ending inventory $180.000 $405.000) 52.500 23.000 .000 1.000 7.20.000 70.000 + 8.000) Accumulated depreciation (20.000 216.000 330.Introductory Financial Accounting.Inventory Purchases of merchandise A/P . 20x2 ASSETS Current Assets Cash (24.000 300 10.000 + 4.000 10.000 (8.000 .220 345. v.1 Page 228 Morrow Wholesale Balance Sheet as at December 31.600 5.220 $405.000 36.500 96.20.000 .000) $224.500 Note 1 .000) Equipment (80.000 + 406.1.000 (96.380 60.000 $216.000) $200.
500 . v.000 – 69.500) Cash.200 $20.1.000 15. 20x6 Cash flow from operations Cash collected from customers ($7500.600 Increase in Salaries Payable) Cash paid out for other operating expenses Cash paid out for interest ($32.200 Increase in AP) Cash paid out for salaries ($120.000 (125.000 Increase in A/R) Cash paid out to suppliers ($300.500) (69.000 Sales .800) (112.000) Cash flow from financing Issue of bonds payable Dividends paid (Note 2) 30.900 47.000 Increase in Inventory .000 Salaries Expense .000 (294. Statement of Cash Flow for the Year ended December 31.7.800 Cash flow from investing Proceeds on sale of equipment (Note 1) Purchase of equipment 20.100 Increase in Income Taxes Payable) $740. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($45.000 Interest expense . Ginger’s Cookies Ltd. beginning Cash.000) 175.12.1 Page 229 Problem 9-1 a.000 COGS + 7.000 $20.000) $ 5.500) 1.000 (99.400) (80.000 $146.400 – 61.000 Increase in Interest Payable) Cash paid out for income taxes ($79.400 $ 99.000) (105.10.500 Increase in cash ($175.000) (31.1.100 Income tax expense – 33.300 19.000) Gain on sale Proceeds Note 2 – Dividends paid Net income Less increase in Retained Earnings ($108.800 – 105.000 – 40.Introductory Financial Accounting.000) (46.
600 1.000 33.100 $175.Introductory Financial Accounting. v.1 Page 230 b.000) (10.200 7.000) (7.000 (15. 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) 12.1.800 .900 7.
000 Cash flow from investing Proceeds on sale of assets Purchase of capital assets2 80.000) (37.842.1. beginning of year Cash.000) 350.Introductory Financial Accounting. McDuff Ltd.000) (11.000) (12.000 Accumulated Amortization.695.000 111.000 (50. end of year Amortization expense = $218.000 ? (71.000 466.000) 7.000) 353.000) (5.000 (48.000 $319. 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 – 87.000 218.000 Decrease in cash Cash.1 Page 231 Problem 9-2 a. Statement of Cash Flow for the year ended December 31.000 (543.000 (13.000) 17.000) (463.000) (37.000 $3.000) $3. end of year 1 Accumulated Amortization. v. beginning of year Amortization expense Accumulated Amortization on disposal: $158.000 .000) (34.000 150.
500.000) (72.711.000 $319.400.000 Increase in Income Taxes Payable) $4.611.000 Decrease in AP) Cash paid out for operating expenses ($700.000 Amortization Expense + 11.000) (233.000 239. beginning Additions Disposals Capital Assets.000 Increase in Prepaid Expenses) Cash paid out for salaries and wages ($850.000 Interest expense + 5.000 Income tax expense – 17.000 b.000 – 218.000 (2.000 Decrease in A/R) Cash paid out to suppliers ($2.000 Decrease in Interest Payable) Cash paid out for income taxes ($250.326.000 Sales + 111.000) $466.000) $5.000 3 Retained Earnings.000) (493.Introductory Financial Accounting.000 Salaries and Wages Expense + 37. Cash flow from operations – Direct Cash collected from customers ($4.000 ? $508.000 ? (158. beginning of year Add net income Less dividends Retained Earnings.000 Decrease in Salaries and Wages Payable) Cash paid out for interest ($67.000 COGS + 48.460.1.000 .1 Page 232 2 Capital Assets.000) (887. end of year Dividends = $50.000 $5. ending Additions to capital assets = $543. v.000 Increase in Inventory + 12.
600 Increase in Inventory) Cash paid to employees ($39.700) (2.1 Page 233 Problem 9-3 (a) HHC LTD.500 Increase in Accounts Receivable) Cash paid to suppliers ($165.000 COGS + 1.300) (1.400) 7.300 + 400 Decrease in Salaries and Wages Payable) Cash paid for insurance ($2.Introductory Financial Accounting.800 $ (1. v.200 – 100 Increase in Interest Payable) $216.500 (166. Cash Flow Statement for the year ended December 31.500) (1.1.100) $900 .900) (5.500) $ 900 (b) Cash Flow from Operating Activities Cash collections from customers ($218.000 Sales – 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 $ (3.600) (100) (400) 100 (3.600) (39.800 + 100 Increase in Prepaid Insurance) Cash paid for rent Cash paid for interest ($1.
Toram Ltd.000 (50.000) 17.000 12.000 Note 2 – Proceeds on sale of long-term investment Net book value of investment Gain on sale Proceeds $ 18.000 COGS + 32.000 Increase in Inventory + 18. 20x6 Cash flow from operations Cash collected from customers ($900.000 .000 Increase in A/R) Cash paid out to suppliers ($600.000 30.000 30.000) 0 0 32.000 Cash flow from financing Issue of bonds payable Dividends paid 25.000) (165.000 – 25. v.000 Decrease in AP) Cash paid out for other operating expenses Cash paid out for interest Cash paid out for income taxes $847.000 (4.000 (650. Statement of Cash Flow for the Year ended December 31.000 (20.Introductory Financial Accounting.000) Cash.000) 24. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($32.000 Sales . beginning Cash.000 26.000 Increase in cash ($32.000 + 17.000) (25.000 – 21.000 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) Loss on sale Proceeds $ 11.1 Page 234 Problem 9-4 a.000) $7.53.1.000 $50.
000 .Introductory Financial Accounting.000) $32.000) (53.1. v.000) (32. 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 $100.000) (18.000 43.000 (12.1 Page 235 b.000 4.
000 purchased .000) / 2 = $50.000 = $40. current ratio = $100.000 / 50.500 + 32.000 = $450.000 No impact on working capital since the decrease in cash is equal to the decrease in accounts payable. If the invoice paid is $20.000 / 80.250 / ($125. a 6.000.000) / 2 = $75. 4. 8.Introductory Financial Accounting.000 + 22.000 – 20.000 / 75. a c b Average receivables = ($40.000 + 55.000 + 120. d 3.29 and working capital stays the same. the current ratio becomes $90.500 Total net sales = $367.$300. the current ratio drops to 0.000 – 120.1 Page 236 Problem 10-1 1.25.500 x 7 = $367.000 = 6.000 and CA = 200.000 is made. current liabilities .1. 2. 7.250 Days sales in A/R = $32.0 times 9.000 COGS = $30.000 and CA = 180.000.000 / 365) = 94 days Inventory increased by $20. v. then CL = 230.000 = 6 Assume an initial amounts as follows: current assets .500 Net credit sales for 20x8 = $52.000. Impact is on the current ratio.000 + 540.000 ($320.000 then the current ratio is 0. Assume that a payment of $10.000 COGS) Beginning inventory = $60.000) / 2 = $52.000 Inventory turnover = $300. c .000 Inventory turnover = $450. Assume that CL = 250.000 = 1.$80.000 + 40.000.8.78.000 / 70.500) / 2 = $31. d Average receivables = ($50.$100.000 = 1. 5. c c Average inventory = ($30.500 = $400.000 Average inventory = ($60.
07 200.000 / 379.83 * debt is defined as long-term debt in this case .000) ÷ (1.400.07 20x4 850.000) / 365 = 53.000 / 863.Introductory Financial Accounting. v.000_ / 365 = 70.000 / 371.000) / 379.68 (34.7 days 20x4 594.000 = 0.000 + 275.000 / 60.000 + 275.000 = 1.000 + 275.200.000 / 793.000) ÷ (1.000 = 1.000 = 1.000 + 400.000) / 371.76 (12.000 + 550.000 = 3.5 days Solvency Analysis: 20x5 Debt-to-Equity Ratio* 920.00 Times Interest Earned 230.000 / 50.000 = 1.88 (12.000 = 4.1.1 Page 237 Problem 10-2 Liquidity Analysis: 20x5 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 712.60 (34.000 = 0.000 + 220.
300.98 Days Sales in Accounts Receivable Total asset turnover .48 [(220.900.000 / [(793.014.400.000) / 2] = 12. v.000 / [(2.000 = 10.000) / 2] = 1.000) / 2] = 3.000 = 36.000 = 39.200.000 + 220.162.000 + 1.000) / 2] = 13.000 / 365) = 39.10 20x4 $1.1 Page 238 Profitability Analysis 20x5 Gross Profit Percentage Return on Sales Return on Assets $900.5% 200.000 / [(2.014.900.000 / [(2.000 / 1.000) / 2] = 11% 110.9% Return on Equity Asset Management (Activity Ratios) 20x5 Inventory turnover $1.000 + 340.66 [(275.300.900.000) / 2] = 3.014.3% 98.1% 20x4 $700.000 + 793.300.000 + 2.000 + 200.000) / 2] = 10.000 / [(340.000 / 365) = 40.1.000 / [(425.000 / [(2.3% 200.3 days 1.000 / 1.000 / [(863.900.8% 230.000) / 2] = .000 / 2.000 / 2.000 + 725.2 days 2.000 + 2.162.875.014.300.000) / 2] / (1.Introductory Financial Accounting.000 + 1.875.000) / 2] / (2.000 = 10% 230.000 + 350.
1.300.000.08 (37.72 days Solvency Analysis: 20x7 Debt-to-Equity Ratio* 820.45 Times Interest Earned 65. v.000 = 0.000 / 560.000 / 524.000) / 524.679.92 (37.08 * debt is defined as long-term debt in this case .000 + 463.167.000 = 2.13 (20.000 / 56.000) / 365 = 97.000 = 0.000 = 2.000 = 2.000 + 480.000 = 1.32 20x6 800.000) / 560.000) / 365 = 135.52 days 20x6 1.114.000 / 60.000 = 1.000 / 2.30 137.000 + 480.000) ÷ (1.000 / 2.000 + 635.04 (20.Introductory Financial Accounting.576.000) ÷ (1.000 + 524.000 = 0.000 + 524.1 Page 239 Problem 10-3 Liquidity Analysis: 20x7 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 1.
44 Days Sales in Accounts Receivable Total asset turnover .003.000 / [(650.000 + 2.000 + 524.000 / 1.000 / 365) = 87.000) / 2] = 1.100.5 days 1.000) / 2] = 0.1% 137.000 = 41.000 = 8.100.3 days 2.000 + 3.000 / [(4.000 = 38.100.000) / 2] = 0.003.000 / [(2.1% 65.6% 3.000 + 570.52 20x6 $1.000) / 2] = 2.700.700.1% 20x6 $700.000 / [(2. v.000 / [(3.000) / 2] = 1.Introductory Financial Accounting.13 [(480.000) / 2] = 3.679.000 + 300.300.003.1 Page 240 Profitability Analysis 20x7 Gross Profit Percentage Return on Sales Return on Assets $800.9% Return on Equity Asset Management (Activity Ratios) 20x7 Inventory turnover $1.003.000 + 2.700.000) / 2] = 0.5% 51.000 + 4.000 = 3.000 / [(3.000) / 2] = 1.1% 137.576.000 / 2.000 + 4.000 / 2.000 / 365) = 88.000 / [(4.000 / [(570.956.1.808.628.000 + 485.000) / 2] / (2.808.700.000 / 1.000) / 2] / (1.2% 65.679.100.90 [(524.000.956.000 + 3.
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