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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.Introductory Financial Accounting.000 + Equity The company then uses cash to purchase equipment that costs $75. therefore. the company would receive $100. that is.1. our equation holds true: Assets + 10.000 + Equity .000 = Liabilities +100.000 75.000 Both the Equipment account and the Cash account are assets.000 We are increasing an asset.000 5.000 (d) = Liabilities +10. The journal entry would be: Inventory Accounts Payable 5. by increasing one and decreasing another the equation holds true: Assets + 75. The journal entry to record the loan would be: Cash Bank Loan 100.000 . they do not pay cash but take on an account payable with the supplier. and increasing a liability.75.000 = Liabilities + Equity (e) The same company is a little short on cash and has to take out a loan from its bank.000 100.000 cash.1 Page 5 (c) That same company then purchases an additional $5. they will take on a liability to pay back the bank the $100. we increase the asset account Cash.000. an asset and a liability. v. our equation stays in balance: Assets + 100. The journal entry would be: Equipment Cash 75. therefore. The loan is for $100. therefore.000. By increasing both sides of the equation.000 Upon signing the loan.000 worth of inventory on account. Furthermore.
v.000 in sales in its first month. when a revenue account is increased we credit the account. which is part of the Shareholders’ Equity section of the Statement of Financial Position. via the Retained Earnings Account. All revenue and expense accounts are temporary accounts in the sense that we start the year with a zero balance in the account. an expense account’s normal balance is a debit balance.000 . Revenue accounts normally have a credit balance.000 = Liabilities + Equity +30.000 The accounting equation is maintained since Assets are increased and Equity is increased: Assets + 30. At the end of each year. the company will have generated a net income and a net Credit entry to Retained Earnings will result. For example. 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 Expenses are greater than Revenues. and the resulting debit or credit is either added or subtracted to an account called Retained Earnings.e. If Revenues are greater than Expenses during a period.Introductory Financial Accounting. Income Statement accounts will consist of Revenue accounts or Expense accounts.1 Page 6 Transactions that impact the Statement of Income The above examples used accounts that appear on the Statement of Financial Position. Conversely.1. the company will have generated a net loss and a net Debit balance to Retained Earnings will result. the income and expense accounts are closed out to zero.000 30. 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. If we continue with our examples… (f) Say that the company from the above example has $30. The journal entry would be: Cash Sales Revenue 30.
000 = Liabilities + Equity -15. v. . as are liabilities.1. as they no longer have it on hand to sell.000 worth of its inventory.000 15. an expanded form of the accounting equation: The Statement of Financial Position Assets = Liabilities & Shareholders’ Equity Liabilities Current Liabilities Current Assets Non-Current Liabilities Shareholders’ Equity Contributed Capital Non-Current Assets Retained Earnings Assets are listed from most liquid to least liquid. The journal entry to record that would be: Cost of Goods Sold Inventory 15. the company sold all $15.15.000 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. and both are divided into current and non-current based on their liquidity.Introductory Financial Accounting. The accounting equation remains in balance: Assets . The Statement of Financial Position (also called the Balance Sheet) is. Note that Cost of Goods Sold is an expense account. and all other assets and liabilities are classified as non-current.1 Page 7 (g) To incur these sales. Assets and liabilities that will come due or have to be settled within 12 months or one accounting cycle (whichever is longest) are classified as current.000 Note that this entry removes the inventory from the company’s accounts. basically.
that in some cases you may have an asset or a liability that is partly current and partly non-current. . Accounts Receivable – the account is the sum total of all outstanding invoices which are owed to the company by its customers. More on this in Chapter 5. Prepaid Expenses – this account represents amounts that have been paid in cash for expenses that have not been incurred by the company.000 would be classified as a long-term liability.). and classify the remainder as non-current. you would break out the current portion and classify it as such. and includes investments in bonds.000 would be classified as a current liability and the remaining $150. if your loan balance is $200.1 Page 8 Note. 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. Note that amortization is never taken on land.000 of this balance within the next year. or manufactured by the company itself. the cost of the policy will be classified as a prepaid expense. Accounts Receivable is normally reported net of an Allowance for Uncollectible Accounts (discussed further in Chapter 3). Inventory – this account is a listing of all of the items that the company normally sells in its day-to-day activities. Equipment – this account is treated in the same manner as the Buildings account. Non-current Assets: Buildings – this account is a listing of all depreciable buildings owned by the company. other companies or special funds. stocks. but is a listing of all equipment owned and used by the company. In this case. we normally pay the annual premium the day the policy takes effect. and the asset is therefore shown net of accumulated amortization. Typical accounts you will see on the Statement of Financial Position are: Current Assets: Cash – the most liquid of all assets. For example. A more detailed discussion of this account will take place Chapter 4. ready for resale. complete. this $50. money orders etc. Land – this account is a listing of all land held by the company. v. For example. The associated Accumulated Amortization contra account is normally shown directly below the asset account.000 and the agreement with the bank is that you will be required to pay $50. The inventory can either be purchased.1. Because the policy has not yet expired. Long-term investments – these are investments that are to be held for many years.Introductory Financial Accounting. this account includes all currency and equivalents (bank drafts.
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.Introductory Financial Accounting. The retained earnings account is adjusted at the end of each year to account for a company’s net income or loss. 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. Wages payable – a listing of all wages due to employees within one year or one accounting cycle. beginning balance Add Net Income for the year or deduct the Net Loss for the year Less Dividends declared to shareholders Retained Earnings. Shareholders’ Equity: Contributed Capital – this account contains any amounts which have been invested in the company by the company’s shareholders. Retained Earnings – this account represents the cumulative total of the net income of a company that has not been distributed to shareholders. end of year XXX ± XXX . Taxes payable – a listing of all taxes due within one year or one accounting cycle. v.1. trademarks and copyrights would be classified as longterm assets. It is when the amount is due back to the lender that differentiates between current and non-current debt.XXX XXX . Note that the wages payable account is normally the result of an adjusting entry. The retained earnings account reconciliation from the beginning of year to end of year balance is as follows: Retained Earnings.1 Page 9 Intangible assets such as patents.
the amount left over after all relevant expenses have been taken into account. v.000 18.000) $10. typically the fiscal year of the company.Introductory Financial Accounting.000 (8.000 .000 The multi-step statement has multiple subtotals.000 (60. Income statements can take on one of two formats: single step and multi-step.000 3.000) $10.000 3. 20x8 Sales Interest Income Cost of Goods Sold Operating Expenses Income Tax Expense Net Income $100. and for the above company would look like the following: The Miller Company Income Statement For the Period ended December 31.000) 15. most companies tend to use some form of a multi-step statement.000) (25.1 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.000) 40. It takes the reader from total Revenues to Net Income. The single step statement lists all revenues and then all expenses without breaking out any further subtotals. For example: The Miller Company Income Statement For the Period ended December 31.1.000) (8. however.000 (25.000 (60. 20x8 Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Income Interest Income Net Income before Taxes Income Tax Expense Net Income $100.
v. Accounts Receivable Debit Credit The following represent how increases and decreases in accounts get recorded: Liabilities & Shareholders’ Equity Assets + Expenses - Revenues + + - - + . which resembles a capital “T”. it is placed on the right hand sand. a T-account is a tool used by accountants to keep track of entries that are made to individual accounts. Thus.1 Page 11 The T-Account Named for its shape. When an entry is made and an account is to be debited. an entry is placed on the left-hand side of the T.Introductory Financial Accounting. for every entry the lefthand entry must equal the right-hand entry in order for the Accounting Equation to hold true.1. When a credit is made.
(Record the payments made from March to November only.000 of the accounts receivable were collected throughout the year. 20x7. 20x7 through December 31. 20x8.) Inventory of $120. The lessor required Ian to pay the first and last month’s rent on January 2. and was able to give up his off-site storage facility. Ian’s Incredible Instruments Inc. with 10% annual interest due semiannually. An outside storage facility has been rented to fill this need.1 Page 12 Comprehensive Example Ian has worked at a music store for the last 20 years. More inventory was purchased on account June 1. After years of planning and saving. Having proven himself a good tenant. 20x7. v. Ian was able to convince his landlord at the mall to give him additional storage space (at no extra cost). 10.000. beginning February 1. Ian signed a two-year lease with monthly rent of $8. which was taken out on June 1. into the company upon incorporation. 8. 4. 20x7 through December 31. Ian’s Incredible Instruments Inc. 20x7.000 due on the first of each month.Introductory Financial Accounting. 11. 3. He only rented the outside facility to the end of November. Credit sales . 7. and was rented on a month-to-month basis. 20x7. Ian invested $175.$310. January 2.’s Sales for the first year were as follows: Cash sales . are for 5 years.000. but is not large enough to store any extra inventory.000.200 per month. which covered the period of January 2. 20x7. The terms of the loan. his entire life savings.000 was purchased on account.000 common shares of the Corporation. The following transactions took place during the fiscal year ended December 31. That is. The mall location is suitable for Ian’s retail needs. Ian’s Incredible Instruments.. A total of $280.760 cash. Opened for business in a local mall. the annual rate is 10%. 20x7.000 The company took out a loan for $200. 6. Ian purchased furniture and fixtures for the store at an auction for $30. Ian’s Incredible Instruments Inc.) 2. He received 1. is located in the Meadowvale Mall. he has decided he is ready to go out on his own.$430. Inc. 20x7. 20x7 for $350. was purchased for $5. Rent is $1. 9.1. He paid cash. January 2. An insurance policy. 20x7: 1. (Record the February rental payment only. 5.000. . interest payments are due every 6 months. however.000. The lease is in effect from January 2.
1. v. Prepaid Rent Rent Expense Cash 8. To record the rent paid on the outside storage facility in February for one month.000 8.000 120. the appropriate journal entries would look like this: 1.000 To record the payment of first and last month’s rent on the lease.000 23.000 175. To record Ian’s initial investment into the company. Rent Expense Cash 1. We know that the first month’s rent will be “used up” in this year.200 4.000 16. Additional cash disbursements for the year were as follows: Wages & salaries Rent Advertising Miscellaneous expenses Payments of accounts payable Interest on bank loan $165. Cash Contributed Capital 2.000 3.000 88.000.200 1. This is what we call a prepaid expense. 14. To record the purchase of inventory on account.000 (note that a dividend is debited against retained earnings). and therefore it is an expense in this fiscal period. However.1 Page 13 12.000 .000 40.000 120.Introductory Financial Accounting.000 13. For each of the above. 175. Ian declared and paid a dividend of $60. the deposit for the last month won’t be used until 2 years from now. The total cost of the inventory sold during the year was $300. Inventory Accounts Payable 120.000 10.000 $446.
Furniture and Fixtures Cash 30. Note that because it expires December 31. we must remove the receivable from our books. Inventory Accounts Payable 350.000 8. we already recorded the initial payment in February). (Remember. the entire amount applies to the current fiscal year and therefore there is no prepaid portion.1 Page 14 5.Introductory Financial Accounting. they will have an outstanding loan for the same amount.000 740. for which cash was paid. To record the rental expense incurred from March through November. Cash Accounts Receivable Sales 430. Upon receiving the loan. v. We will deal with the interest expense incurred on the loan in a separate entry.800 . Rent Expense Cash 10.000 7. two things will happen to Ian’s Incredible Instruments Inc. Cash Accounts Receivable 280.000 9. the credit to the Accounts Receivable account.000 30. 20x7. Note that as we collect the cash.000 200.760 5. they will get $200. sales are recorded individually as they are made.000 10. First. second. as they are no longer due to us.760 6.000 cash from the bank. Note that in reality. Insurance Expense Cash 5.800 10. However.000 350. for the purposes of this example we will be entering them in one journal entry. Cash Bank Loan 200. To record the purchase of furniture and fixtures.000 310.800. Hence.000 11. $1. To record sales for the first year.200/month x 9 months = $10. To record the purchase of inventory on account. To record purchase and payment of the insurance policy.000 280.1. To record the collection of accounts receivable throughout the year.
000 88.000 446.000 40.000 300. Cost of Goods Sold Inventory 300.000 x (10% x year) = $10. To record the various other cash disbursements made throughout the year.000 14.000 10.1 Page 15 12. v.000 60. Note the following supporting calculations: Rent Expense – 11 months x $8.000 23. Retained Earnings Cash 60.1.000 Interest on bank loan .000 .Introductory Financial Accounting. To record the dividend paid.000 13.000 120.000 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/month = $88.$200.
760 30.000 13 6 Furniture & Fixtures 30.000 430.800 88. v.000 12 Interest Expense 10.000 10.000 108.000 10 Bank Loan 200.200 5.200 10.000 350.000 1.000 2 3 5 6 11 12 13 2 Prepaid Rent 8.000 300.000 16.000 Expenses INCOME STATEMENT Revenues Sales 740.000 200.1.000 30.000 8 515.000 12 Accounts Payable 120.000 5 Insurance 5. Expenses 12 23.000 7 Rent 2 3 11 12 8.000 Contributed Capital 175.000 170.000 12 Advertising Expense 40.000 280.000 1 Retained Earnings 13 60.800 446.000 350.1 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 10 175.000 350.000 Cost of Goods Sold 13 300.000 4 9 Accounts Receivable 7 310.000 280.000 Misc.240 Inventory 4 9 120.760 Wages & Salaries Expense 12 165.000 60.000 120.Introductory Financial Accounting.000 .000 1.
000 108.240 30.000 .000 23.000 200.000 10.000 $1.760 165.000 40.000 5. 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 $515.1 Page 17 A trial balance of all of the closing balances of the above accounts would look like this: Ian’s Incredible Instruments Inc.465.Introductory Financial Accounting.000 30.000 60.000 $1.1.465.000 740.000 175.000 Credit $350.000 8.000 170. v.000 300. Trial Balance As at December 31.
760 98.000 23.000 341.240 10. and the offsetting amount is the net income (or loss) that gets recorded to retained earnings. The closing entry for Ian’s Incredible Instruments is as follows: Sales Cost of Goods Sold Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Interest Expense Miscellaneous Expenses Retained Earnings 740.000 300. all balances get returned to zero. v.000 108.760 165.000 5.240 $740.000 40.000 10. Income Statement for the year ending December 31. would look like this: Ian’s Incredible Instruments Inc. At the end of the year.1 Page 18 A multi-step income statement for Ian’s Incredible Instruments Inc. As such.000 5.000 440.000 $88.240 .760 165.Introductory Financial Accounting.000 108.000 300. 20x7 Sales Cost of Goods Sold Gross Profit Operating Expenses Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Miscellaneous Expenses Operating income Interest Expense Net income Closing Accounts All revenue and expense accounts are closed out to zero at the end of each fiscal period.000 88.1. they are referred to as temporary accounts.000 23.000 40.
000) $ 28.240 30. December 31.1 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.000 175. 20x7 Retained Earnings. Statement of Financial Position as at December 31.Introductory Financial Accounting.000 $753.240 30.240 $ We can now prepare a Statement of Financial Position for Ian’s Incredible Instruments: Ian’s Incredible Instruments Inc.000 723. Statement of Retained Earnings for the year ending December 31. 20x7 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures $515.000 8. 20x7 0 88.000 28. v.240 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Long-term liabilities Bank loan Shareholders’ Equity Contributed Capital Retained earnings 200.240 (60.000 550.240 350.000 . January 1.240 203.000 170.1. 20x7 Net income Dividends Retained Earnings.240 $753.
subscriptions collected in advance and gift certificates sold. As cash is received in payment in future periods. but not yet paid in cash. Examples: Rent collected in advance. we will Debit the liability and Credit cash to record the payment. then both the liability and the expense are recorded in the amount relating to the current period. As the company earns the revenue. Utilities Expense Revenues Unearned Revenue – Cash is received and a liabilitiy is recorded. The asset will then be allocated to future periods using adjusting entries. Expenses Prepaid Expenses – Cash is paid and an asset is recorded before it is used.1. Rent Revenue. Accrued Revenues – These entries are used then revenue has been earned. Examples: Prepaid rent/insurance. Accured Expenses – When an expense has been incurred.Introductory Financial Accounting. i. Interest Expense. Examples: Credit sales. v. an adjusting entry is made to remove the liability and record the revenue. The adjusting entry sets up an asset. a receivable. office supplies. but cash has not been paid or received. deposits on orders. the receivable is removed. Interest Receivable . Income taxes. but will not be paid in the current period. and records the revenue. Examples: Payroll. plant & equipment Accrual – Event has occurred.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. As the liability is paid in future periods.e. performs the service or delivers the goods.
The missing piece to the puzzle is the amount of supplies that were used during the year.200 of supplies on hand. During the year you purchased an additional $13. The adjusting entry would be: Insurance Expense Prepaid Insurance 5.600. solving the equation. 20x5 you had $3. 3.e.1. 2. However. On August 1. 20x5? To answer this question. On January 1.000 The balance that remains in the prepaid insurance account of $7. what was purchased during the year.000 of office supplies.000 $ 5. 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. and therefore should be an expense of the current period. .800 + 13.000 At the end of the year you will have 7 months remaining on the policy. 20x5 reveals that you have $5. and what we have left at the end of the year. What would be the adjusting entry on December 31. assume that the company’s year-end is December 31. 20x7 you pay $12.000 does not equal 5.200. v.000 represents the portion of the insurance policy that is unexpired.800 13. we know our opening balance.000 5. that will expire in 20x8.200 ???? Supplies Expense As the T-Account shows.1 Page 21 Example In examples 1-5. A physical count of the supplies on December 31.000 for an insurance policy that will cover the next 12 months. it might be helpful to look at the T-Account for Office Supplies for the year: Supplies Inventory Opening Balance Purchases Ending Balance $ 3. i. This means that 5 months have been used in the current period. the missing credit or Supplies Expense has to be 11. Therefore.000 12.800 in your office supplies inventory account.Introductory Financial Accounting. 1.
000 per year for the life of the furniture. 20x5 would be: Supplies Expense Office Supplies 3. the adjusting journal entry would be: Amortization Expense Accumulated Amortization 10. the revenue to be recorded for the year would be 8 months x $800/month = $6. 20x6. office furniture in this case. Therefore. You estimate that the furniture will last 10 years and have no salvage value at the end of its useful life.600 9. there would still be 4 months of unearned . we will take $10. you would have earned 8 of the 12 months of revenue. when you received the revenue.000) $ 90.000 10.000 Because the Accumulated Amortization account is applied as a reduction of the related asset account. It is now December 31. What is your adjusting entry? On May 1. You own an apartment building and have a tenant whose parents have paid their rent for the entire year in advance. 11.000 as an expense this year. v.e. Therefore. on the other hand. 20x8.000 Note that the amortization expense account will appear on the income statement as an operating expense for the year. or $10. The long-term asset section of the Statement of Financial Position would be as follows: Office Furniture Less accumulated amortization $100. It is now December 31.000 on January 1.600 11. You received payment for the full year on May 1.400.000 (10. 20x8. we call it a contra account to the Office Furniture account. 4.000 per year for the next 10 years.600 You purchase new office furniture for a cost of $100.600 As of December 31. The apartment rents for $800/month. i. instead of taking the full $100.1 Page 22 The adjusting entry on December 31.Introductory Financial Accounting. will appear on the Statement of Financial Position as a reduction of the related asset account. The Accumulated Amortization account. 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. you would have recorded an entry of: Cash ($800 x 12) Unearned Rental Revenue 9. Furthermore. Each and every year. 20x6. 20x8.1.
That is.000 . The adjusting entry on December 31. as of December 31. no cash has been paid for the interest expense. that is. your year-end. 5. 20x3 you take out a loan for $100.400 = $3. only 5 months of interest pertain to the current period.000. Our employees worked 4 days from the time of their last payday until the end of the year. we can calculate that the annual interest on the loan will be equal to $100. Your average weekly payroll is $80. then our daily payroll rate can be calculated as $80. and therefore.000.1. However. interest expense for 20x3 would be $8. 20x6 (a Monday). therefore.000 x 5/12 = $3.000.000 x 4 days = $64. and furthermore.333 You last paid your employees on March 27.1 Page 23 revenue left. The adjusting entry would be: Wages Expense Wages Payable 64. the loan has not been outstanding for the full 12 months. It is December 31. how much do we owe to our employees for the 4 days that we haven’t paid them? If the average weekly payroll is $80.600 – 6. the accrued wages payable will be $16. This reconciles to our calculation above.000. On August 1.Introductory Financial Accounting. the balance in the Unearned Rental Revenue account will be equal to $9. 20x8 would be: Unearned Rental Revenue Rental Revenue 6. The loan has been outstanding for 5 months.200. 3. What is your adjusting entry to record interest expense for the year? Looking at the terms of the loan. 20x4. 20x3.333 3.400 According to the journal entries above. 20x3.333. v. we have to first figure out how much needs to be accrued.000/week.000/5 = $16. The adjusting entry would be: Interest Expense Interest Payable 6. The balance in the Unearned Rental Revenue Account would have 4 months x $800/month = $3.000. and interest and the principal will be due August 1. It is March 31 (Friday).000 x 8% = $8.000 64. The loan agreement states that interest will be charged at a rate of 8% annually.400 6. What is the adjusting entry? To calculate the adjusting entry.200. and our employees work 5 days a week.
For most sales. Revenue Recognition and the Matching Principle For a firm to recognize revenue. But.000 and we offer a discount of 2% if the invoice is paid within 10 days. whenever the discount is taken. This allows the company to keep track of all sales returns separately from the original sale. instead of debiting the sales account. this can get complicated when say. For example. whether we have paid for them or not. a 5-year warranty is provided with the product. second.Introductory Financial Accounting. it gets onto our books the expense that we have incurred during the last 4 days of the period. • the revenue must be earned (all significant acts must be completed). We MUST record all expenses relevant to the current period. and • all associated costs can be estimated. 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. it gets onto our books the liability that we owe to our employees. then the goods belong to the customer the minute they are loaded on the truck and revenue can be recognized immediately.1. If the goods are shipped under the terms FOB Destination. If the customer pays 1 FOB stands for ‘Free on Board’ . we credit the Sales account. we debit an account called ‘sales returns’. However. then they belong to the customer only when they are delivered and therefore the revenue recognition point is when the goods are shipped. the revenue recognition point takes place when the transaction takes place. • Sales Discounts: if early payment discounts are offered to customers. If the goods are shipped to the customer under the terms FOB1 Shipping.1 Page 24 Note that this adjusting entry does two things: First. 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. this means that the cost of the goods sold become an expense the day the 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. In this case. Sales and Sales Contra Accounts Whenever a sale is made. then the amount of the discount gets debited to the Sales Discounts account. assume that we make a sale of $1. as we will see later. This can become an issue for goods that are in transit around the company’s year-end. • collectibility is reasonably assured. v. In the case of a simple sale. Just because you don’t pay cash for something does not mean that the expense wasn’t incurred. the following transactions are related: • Sales Returns: whenever customers return merchandise for refund.
The selling price is $40. v.1. These three accounts are considered contra accounts to the Sales account and. otherwise the full amount is payable in 30 days.000 merchandise whose sales price was $1. Sales Allowances are when merchandise is sold to a customer which is slightly defective. n30. that is.500 1. A credit is granted to the customer.000. when reported on the income statements.500 is returned to the company Sales returns Accounts receivable 1. they will pay us $980. • merchandise is shipped FOB Shipping to a customer.Introductory Financial Accounting. Terms of payment are 2/10. 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. a 2 % discount is offered if payment is made within 10 days. would be netted out against the Sales account. but the customer keeps the merchandise. Accounts receivable Sales • $40. The $20 discount will get debited to the Sales Discount account.500 .000 $40.1 Page 25 • within 10 days.
and changes in those resources to help in assessing cash flows.1. Consequently.500 • on the 9th day after the sale. since these needs could conflict.1 Page 26 • some of the merchandise was slightly damaged during before it was shipped. the objectives of financial reporting are as follows: • to provide information useful to present and potential users in making investment. It would be impossible for financial statements to meet the needs of all users of financial statements. loan repayments. • to provide information to help in assessing cash flows. and so on. payment of $35. and • what is the fallback position: does the company have sufficient assets to satisfy its liabilities? To summarize. . These problems must be dealt with in an organized and consistent manner.Introductory Financial Accounting. This does not imply that there are no other users of financial statements.000 The Conceptual Framework A strong theoretical foundation is essential if accounting practice is to keep pace with a changing business environment. the focus of financial statements is to meet the needs of creditors and shareholders. credit. Sales Allowances Accounts Receivable 2. Accountants are continuously faced with new situations and business innovations that present accounting and reporting problems. claims on those resources.280 is received. or similar decisions. A credit of $2. The conceptual framework plays a vital role in the development of new standards and in the revision of previously issued standards.500 2. interest. v. and • to provide information about the economic resources of a firm. such as dividends.280 720 36.500 is granted to the customer. principal and dividend payments?. 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. Cash Sales discounts Accounts receivable 35. 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).
v. • timeliness – information should be available to the users as quickly as possible. consider the application of the historical cost principle which states that assets should get recorded at their original cost. • representational faithfulness – accounting information should portray the substance of transactions over their form. Verifiability implies that independent measures using the same measurement method should yield approximately the same result. To be relevant. accounting information should meet the following criteria: • verifiability – accounting professionals. 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. Secondary qualitative characteristics – the following two characteristics (neutrality and comparability are qualified as secondary because they are desirable qualities of accounting information.1. To be reliable. This implies that the information provided should be useful to the users.000. 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. At times. If a company purchased a parcel of land in 1856 for $100. 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 concept of relevance and reliability conflict. • feedback value – information presented today helps confirm previous decisions. when establishing the validity of an accounting estimate should come to a consensus.1 Page 27 Qualitative Characteristics of Accounting Information There are two primary qualitative characteristics of accounting information: relevance and reliability. Reliability implies that the accounting information can be depended upon.000. One could argue that regardless of what you call this security. The $100 is an established transaction and is reliable. For example. the representational faithfulness principle would argue that it meets all the characteristics of long-term debt and should be classified as such. For example. For example. For example. gets refunded in a pre-specified number of years) and pays a fixed rate of interest.000 today. accounting information should meet the following criteria: • predictive value – information should be useful in predicting future outcomes.e. . but are not as important as relevance and reliability. assume a company issues a new type of security called a ‘Special Preferred Share’ which has a limited life (i. From a shareholders’ perspective the value of $10. The rationale is that income from recurring items is a best predictor of future income.000 is far more relevant. the income statement is generally structured by segregating recurring items against non-recurring items. Reliability wins in this case.
a gain or loss arises when the proceeds on disposal differ from the net book value of the asset sold. Accounting rules should not provide the motivation for dysfunctional decisions. The principle of timeliness implies that the financial statements should be in the hands of users as soon as possible. Assume that existing equipment is technologically obsolete and a net present value analysis shows that if the equipment were to be replaced. 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). For example. but should be used as a way of thinking. Conservatism is an effort to ensure that the risk or uncertainty inherent in business situations is adequately considered. the financial statements of a company with net income of $10. 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. That’s not to say that accounting principles cannot be changed. the company would benefit economically from it (i. it may be .000. as we will see in Lesson 4. but changes should occur infrequently and only for valid reasons.000. changes in accounting principles require retroactive adjustment and restatement of prior period financial statements. Information benefits vs.000 would not be significantly affected if they were misstated by say.e. the company would have to show a large loss on disposal. Here is an example of an accounting rule that could lead to dysfunctional economic decision making.Introductory Financial Accounting. The principle of conservatism also leads to the recognition of contingent losses but does not recognize any contingent gains. the principle of conservatism implies that the one with the least favourable impact on net income should be the one chosen. Consistency implies that accounting principles are applied from period to period in the same manner. When introducing an accounting principle. The only problem is that if the asset were to be disposed of. information costs. The concept of materiality can play against the concept of timeliness.1 Page 28 Freedom from bias (neutrality) – accounting information should be even-handed with respect to the impact of accounting information on users’ behaviour. we must estimate which accounts receivable are likely to become uncollectible in the future and establish an allowance for doubtful accounts. For example. Materiality implies that financial statements are not precise but are accurate enough that any potential errors of misstatements would not affect any user. Also. For example. v. the project has a significantly positive net present value). when companies sell depreciable assets. Thus. $100.1. Modifying concepts Conservatism means that it is generally preferable that any possible errors be in the direction of understatement of net income. accounting policy makers should weigh the cost of implementing the accounting principle against the benefits that the implementation of such an accounting principle will provide users. When accountants can choose between two equally acceptable accounting principles. Cost/benefit analysis is very difficult to quantify since most costs and benefits are intangible.
Also refer to the definition of an asset (later in this section).e. the measurability of such revenues are reasonably certain and collectibility is reasonably assured. Revenue Recognition Principle states that revenues should only be recorded when earned.1 Page 29 possible that additional invoices are received after the financial statements are issued. v. Historical Cost Principle is an extension of the conservatism principle and states that assets should be recorded at their original cost and never be subsequently written-up to their market values. otherwise they would have to be recorded at the lower of their depreciable cost or liquidation value. we can add assets together even if they were purchased in different years. . Going concern principle assumes that the entity will continue operating in the future. all associated expenses related to the recognition of these revenues are recorded also.i. This is probably one of the most flawed principles. a 1925 dollar is equivalent to a dollar today. Other Principles Economic entity principle states that the financial statements of an entity should report all assets and liabilities under its control. 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. quarters. Periodicity assumes that we can breakup the life of a business in separate reporting periods (years. Consequently. This principle will be invoked when dealing with leases and intercorporate investments in later lessons.Introductory Financial Accounting. This assumption allows us to record long-term assets at their depreciable cost. Monetary unit principle assumes that the value of the dollar does not change . Matching principle assumes that when we record revenues. months…) and report income and prepare a balance sheet for each of these periods. This omission is justified on the basis of materiality.1.
Liabilities are obligations of an entity arising from past transactions or events. contributed surplus and retained earnings. the rendering of services or the use by others of entity resources yielding rent. in the case of profit oriented enterprises. for example. Revenues of entities normally arise from the sale of goods. and (c) the transaction or event giving rise to the entity's right to. types of share capital. provision of services or other yielding of economic benefits. the settlement of which may result in the transfer or use of assets. at a specified or determinable date. government grants and other contributions. or on demand. provision of services or other yielding of economic benefits in the future. on occurrence of a specified event. it includes specific categories of items. the benefit has already occurred. either by way of inflows or enhancements of assets or reductions of liabilities. 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. resulting from the ordinary activities of an entity. or control of. thereby leaving it little or no discretion to avoid it.Introductory Financial Accounting. v. While equity of a profit oriented enterprise in total is a residual. Liabilities have three essential characteristics: (a) they embody a duty or responsibility to others that entails settlement by future transfer or use of assets. to contribute directly or indirectly to future net cash flows. either by way of outflows or reductions of assets or incurrences of liabilities. . to provide services. Assets have three essential characteristics: (a) they embody a future benefit that involves a capacity. (b) the duty or responsibility obligates the entity. (b) the entity can control access to the benefit. many not-for-profit organizations receive a significant proportion of their revenues from donations. interest. and (c) the transaction or event obligating the entity has already occurred. Equity is the ownership interest in the assets of a profit oriented enterprise after deducting its liabilities. in the case of not-for-profit organizations. singly or in combination with other assets. and. Expenses are decreases in economic resources.1. Revenues are increases in economic resources.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. resulting from an entity's ordinary revenue generating or service delivery activities. In addition. royalties or dividends.
Losses are decreases in equity / net assets from peripheral or incidental transactions and events affecting an entity.Introductory Financial Accounting.1 Page 31 Gains are increases in equity / net assets from peripheral or incidental transactions and events affecting an entity. events and circumstances affecting the entity except those that result from revenues or equity / net assets contributions. events and circumstances affecting the entity except those that result from expenses or distributions of equity / net assets. v.1. and from all other transactions. and from all other transactions. .
The cost of the floor covering for the company offices was expensed.1 Page 32 Problems with Solutions Problem 1-1 Multiple Choice Questions 1.Introductory Financial Accounting. 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. The party sued Fastrac for damages that could exceed Fastrac’s insurance coverage. assumption. v. Nimto Inc. 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. What accounting principle. What accounting principle. He paid for the computer by writing a cheque on the company chequing account and charged the “Office Equipment” account. assumption. assumption or constraint is being applied in this situation? a) Full-disclosure principle b) Conservatism principle c) Matching principle d) Unit-of-measure assumption . Existence of the lawsuit was reported in the notes to Fastrac’s financial statements. or constraint was violated? a) Continuity assumption b) Matching principle c) Materiality constraint d) Separate entity assumption 2. the driver of Fastrac Courier collided with another vehicle causing both property damage and personal injury. What accounting principle. or constraint was violated? a) Continuity assumption b) Matching principle c) Cost principle d) Time period assumption 3. While making a delivery.1.
there will be a balance of $35.000 c) $ 999. What generally accepted accounting principle does this contradict? a) Time period principle b) Cost principle c) Going concern principle d) Business entity principle 7. 20x5.000 in the Prepaid insurance account on December 31. showed Total assets of $999. which included this error.999. there will be a balance of $20. d) Under accrual accounting. will be $5.000 worth of inventory in the company’s December 31.Introductory Financial Accounting. Shaw’s Rent-all. 20x9. In the rush to make it to a New Year’s party.999 6. financial statements should be prepared using which of the following? a) Fair market values b) Historic costs c) Future values d) Replacement costs . 20x8. the Insurance expense for the period ending December 31. financial statements. 20x5.000. failed to include $40. ABC has a December 31 year end. 20x5. there will be a balance of $25. Which of the following statements is true? a) Under cash basis accounting. Total liabilities of $500. and Total shareholders’ equity of $499.000 personal residence as an asset on the balance sheet of his company. M. Harry. purchased a 4-year insurance policy and paid a premium of $40. According to generally accepted accounting principles. the bookkeeper for Ytwok. v. The December 31. c) Under cash basis accounting. 20x8. 20x9.000 in the Prepaid insurance account on December 31. after correcting for the inventory error? a) $ 40. On July 1. What would be the balance for Total assets on December 31.999. 20x8. 5.000 in the Prepaid insurance account on December 31.000.1 Page 33 4. ABC Ltd.000 b) $ 959.000.999 d) $1. b) Under accrual accounting. inventory count.039. Shaw included a $200.1.
What generally accepted accounting principle does this contradict? a) Time period principle b) Revenue recognition principle c) Objectivity principle d) Business entity principle . Smart presented land and buildings on her company’s balance sheet based on the appraised value of these assets at December 31.Introductory Financial Accounting. v.1. K. 20x8.1 Page 34 8.
1.000 of the sales made on account were collected.1. An additional $120. The annual interest rate is 9%. 20x2. 20x3). an annual charge equal to 1% of sales is due at the end of the year (i. These are purchased for cash. 7. 20x2 to October 31. In addition to the monthly rent.$190.. 3.000 in return for shares in the company. Furniture and fixtures are purchased at a cost of $15. Interest payments are due on the 1st of each month. 2.000 of inventory was purchased on account. you decided to start up a new business – Heavenly Books Inc.000. 20x2 were: Cash sales . on June 30. v. 20x2.1 Page 35 Problem 1-2 On July 2. 20x2.000 every 4 months with the first payment due November 1. 20x2. 20x2 and expires on June 30.000 per month. . 4. The following are summary transactions for the period July 2.200 cash.$6. You and several other shareholders invested $20.000 was obtained on August 1. The lease agreement is for one year. 6. the company’s year end. The first and last month’s rent are due upon signing of the lease on July 2. Sales for the period ended October 31.000 A total of $4.000 was purchased on account. A suitable location is found and rent is $1. Books and supplies of $50. 9. An insurance policy was purchased for $1. 8.Introductory Financial Accounting. 5. an offcampus bookstore where students can purchase textbooks and supplies at reduced prices. The loan agreement calls for repayments of $4.e.000 Sales on account . 20x2. 20x3. The policy takes effect on July 2. A bank loan in the amount of $20.
000 $182. Employees are owed a total of $600.000 of inventory is on hand. Credit Accrued Liabilities. 17. 19. c.500 10. Required – a. The adjustment for insurance expense. 18.000 300 130. An inventory count shows that a total of $25. Books costing $15.1. 12.800 The following adjustments at year end must be made: 11. 13. Invoices received but not yet paid amount to $700 for miscellaneous expenses. 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. The straight line method is to be used.000 1.000 3. Credit Accrued Liabilities.000 2. Credit Accrued Liabilities. Credit Accrued Liabilities. 16. v. b. The furniture and fixtures are expected to last a total of 10 years with no salvage value.1 Page 36 10. 15. The interest payable on the bank loan.000 were returned to the publishers. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . 14.Introductory Financial Accounting. Adjustment for rent payable. Enter all the above transactions in T-Accounts. The expected income tax rate is 30%.
A statement of financial position. 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 31.1 Page 37 Problem 1-3 On January 1.900 ? 40.000 1.400 2.100 3. 20x6.500 157.300 44. $ 7.000 84.Introductory Financial Accounting. Inc.000 invested by the owners as capital stock. v. A statement of retained earnings.100 2.1. b. On December 31.100 3.000 24.600 4. c.500 .100 50. was started with $50.500 4. due December 31.000 1.600 2.000 25.100 14.800 2.300 18.200 1. A multi-step income statement. 20x6.. the accounting records contained the following selected amounts: Accounts payable Accounts receivable Accumulated amortization – Office Equipment Bank loan. Global Production.100 21. 20x6: a.000 4.
a) On June 1. record the journal entry to record the receipt of the subscription fee in January.1. which was signed June 1. 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) . for their monthly staff meetings. Record the adjusting entry for amortization for the year. stated that they would pay you $6. INC Inc.000. You have provided $2. It is now your year-end. Issues come out in March. Your year-end is June 30th. The contract.750. What is the appropriate adjusting entry? You have a contract to provide catering services for a local company. A new customer purchases a subscription in January. What would the adjusting entry be? You pay weekly salaries to your staff and your accounting period end falls on a Wednesday.000 on June 1st and again on December 1st for providing these services for one year.000 for your annual property insurance policy eight months ago. your year-end. v. You sell subscriptions to your magazine. June. Your daily salary expense is $600. It is now December 31. Part of your new lease agreement required you to pay your first month’s rent.1 Page 38 Problem 1-4 For each of the following isolated situations. Kittens Quarterly. but you will not be billing Big Al until next month. and you have provided your services Big Al’s Used Cars for the past month. September and December. with no salvage value estimated at that time. First. ahead of time. It is now April 30. What adjusting entry must be recorded to account for the unpaid salaries? You paid $5. $4. you bought a piece of machinery for $50. and then record the adjusting entry for the end of April. prepare the appropriate adjusting entry.. The estimated useful life of the machine is 8 years. You are a consultant. What is the adjusting entry required if your year-end is December 31st? Your company is moving into a new office on July 1st.300 worth of services. Today is the end of the accounting period. on a yearly basis for the fee of $24/year. your year-end.Introductory Financial Accounting. You signed the agreement and wrote the cheque on June 30th.
20x5.Introductory Financial Accounting.000 cash and gave a oneyear. Each transaction will require an adjusting entry at December 31. 20x5. August 31. This transaction was recorded as follows: Jul 1. The total interest of $300 is payable on the due date. 20x5.000 c. 20x5. On September 1. Assume Doby Company publishes a monthly magazine.1 Page 39 Problem 1-5 Below are four transactions that were completed during 20x5 by Doby Company. 10 percent. 20x6. The $440 collection was recorded as follows: Oct 1. 20x5 Prepaid Insurance Cash $1. Doby Company paid for a two-year insurance premium for a policy on its equipment. a. On July 1. Doby Company borrowed $3. On October 1. 20x5. 20x5 Cash Note payable $3. You are to provide the 20x5 adjusting entries required for Doby Company. d. The subscription start on October 1. 20x5 Cash Unearned subscription revenues $440 $440 . note payable.000 $3. 20x5 a tenant renting some office space from Doby Company had not paid the rent of $500 for December. The annual accounting period ends on December 31. the company collected $440 for subscriptions two years in advance. On December 31.1. Coverage of the insurance policy starts on July 1.000 $1. 20x5. The note was recorded as follows: Sep 1. v.000 b.
What is total shareholders’ equity after this transaction? On April 5. What are the total liabilities of Wild Corporation at this point? 3. Wild Corporation is formed on April 1. 10. Wild Corporation purchases 1. 20x6.Introductory Financial Accounting.1 Page 40 Problem 1-6 For the next set of questions. What are the total liabilities of Wild Corporation after this transaction? 12. What is total shareholders’ equity after this transaction? On April 3. 20x6. 7. What are the total liabilities of Wild Corporation after this transaction? 6.000 units of inventory for $20 per unit. 20x6. 4. 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. Assume Wild Corporation uses a Perpetual Inventory System. What are the total assets of Wild Corporation after this transaction? 11. 1.000 cash.1. Initial financing comes from the sale of 100.000 common shares at $10 per share cash. The customer pays cash. 20x6. What is total shareholders’ equity at this point? On April 2. What are the total liabilities of Wild Corporation after this transaction? 9. ensure your answer reflects the cumulative impact of all prior parts. What is total shareholders’ equity after this transaction? (CGA Canada Adapted) . v. What are the total assets of Wild Corporation immediately after it has been formed and the shares sold? 2. What are the total assets of Wild Corporation after this transaction? 8. The company used the perpetual inventory method. Wild Corporation sells 200 units of inventory for $50 per unit. What are the total assets of Wild Corporation after this transaction? 5.
20x7 128. shareholders’ equity and net income. General Ledger Account Subscriptions Received in Advance Dr Cr Balance January1. Purchased new equipment by obtaining a $200. and no change by NC. 2.1 Page 41 Problem 1-7 The following information was extracted from You Read Magazines Co. 3. Show increases by a plus.1. liabilities. Example: Shareholders’ Equity -500 Net Income -500 Assets Interest accrued on notes payable was $500 NC Liabilities +500 Required – 1. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x6? 3. 6. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x7? 4. Received a $50. Purchased for $500 cash an insurance policy for the following year.000 1-year.000 Entries during 20x7 80. 7. (CGA Canada Heavily Adapted) .400. decreases by a minus.Introductory Financial Accounting.000 from a customer for an outstanding invoice. Received $2. 7% note payable from the seller. 5. Received from Smith a $10. Interest accrued on note receivable was $1.000 cash injection from one of the owners of the company. The company requires that customers pay the annual subscription fee for the magazine in advance.000 Entries during 20x7 Required – 1. v. Interest accrued on the note payable 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. 6% interest note in exchange for extending the due date on a receivable.000 90-day. 4.000.000 120. What was the subscription revenue earned during 20x7? 2.
Ronald found the following: 1. An amount of $5. Other expenses in 20x7 included $1. There was no money due from customers at the end of 20x7. 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 $60.000 10. 2. At the end of 20x6. calculate Sales.000 14. The $20. He was perplexed that the profit margin had improved in spite of his intuition to the contrary. accounts receivable for sales made to customers totaling $20. Cash’s analysis. respectively. 3.000.000 30% On examination.1.000 16. 5.000 which was a deposit on goods that were to be purchased in 20x7. Required 1.000 40.000 35. Cash. Purchases. (CGA Canada) .000 and $5.000 had not yet been received.000 $10.000 received in 20x6 pertained to a sale made in 20x5.1 Page 42 Problem 1-9 Mr. At the end of 20x6 and 20x7. using the accrual method of accounting. Identify any two generally accepted accounting principles that were violated in Mr. Cash’s personal expenses. 6.Introductory Financial Accounting. the proprietor of Error Margin was excited to learn about profit margin analysis and immediately applied his knowledge to evaluate his business. there were goods in inventory costing $3. Net income and Profit margin for 20x6 and 20x7.000 was received in 20x7 and was included in cash received for sales in 20x7. Based on the above. 2. Cost of goods sold.000 of Mr.66% 20x7 $70. Cash paid for purchases in 20x6 included an amount of $2. v.000 $21. 4.
1 Page 43 Problem 1-10 Evergreen Inc. primarily during the Christmas season. It plants. and harvests evergreen trees. v. b. in parking lots at select locations in major urban areas. It normally takes about 15 years for a tree to grow to a suitable size. . pruning and maintaining the trees be accounted for? Explain. maintains. The largest cost of this business is the cost of fertilizing.Introductory Financial Accounting. Use the criteria for revenue recognition to explain when revenue should be recognized for this tree farming business. It sells the trees for cash. Required a. How should the annual cost of fertilizing. pruning and maintaining the trees over the 15-year period. operates a tree farming business.1.
13. for the month ending December 31. the following transactions were completed during December 20x6. Required – a. Paid $1. 28 Dec. V.300 cash to the office secretary for December’s wages. Strait Ltd. Received $1. 3 Dec. Strait opened an architecture company. 7 Dec.000. Dec.1. Purchased office supplies on credit for $300.875. 20x6? (CGA Canada Adapted) . 31 Issued 100 common shares of the new company.000 for rental of office space for December rent. Strait Ltd. paying $1. 13 Dec. Paid $1. 31 Dec.000 cash. Performed a count of office supplies. Completed work for JP Developers and sent them an invoice for $1. Purchased the office furniture and equipment of a retiring architect for $4. Prepare journal entries for the above transactions What is operating income for V. to V. which revealed that $200 of the $300 worth of office supplies purchased on December 17 were still on hand. b.875 from JP Developers for the work completed on Dec.Introductory Financial Accounting. 31 Dec.000 in cash and agreeing to pay the balance in six months. 1 Dec.. 17 Dec. v.1 Page 44 Problem 1-11 V. Completed work for a client and immediately collected $680 in cash for the work done. Strait in exchange for $6.
which were all paid in cash. For the interest on the note receivable. $36. $74. $189. $15 Total income tax expense for 20x2 is $20. The principal on the current notes was collected on May 1. The following adjustments were made on December 31. q. Total sales were $900. For depreciation . advertising. d. The principal on the remaining notes is payable on May 1. The board of directors declared cash dividends of $26 on December 15 to be paid on January 21. computed as 40% of pretax income of $50. Required 1. $193. h. Post all of the above transactions in T-Accounts. The rate is 12% per annum. 20x2. m. 20x2: n. For insurance. 20x2. utilities and supplies. 20x2. The merchandise inventory as at December 31. statement of retained earnings and balance sheet for 20x2. 20x5. 2. l. 20x2 was $240.1 Page 45 Problem 1-12 The following summarized transactions (in thousands of dollars) occurred during the year ended December 31. To the insurance company for a new three-year fire insurance policy effective September 1. Cash disbursements were: g. For new equipment acquired on July 1. 20x2. b. o. Wages earned but unpaid. 20x2 for Ruiz Pharmacy: a. Prepare an income statement. i. f. c. To Revenue Canada for income taxes. e. p. Merchandise inventory purchased on account was $520. v. k. To trade creditors. Interest for twelve months on all notes was collected on May 1. The notes receivables are from a major supplier of vitamins.Introductory Financial Accounting. of which 80% were on credit.1. . r. j. $19. December 31. To employees for wages. Collections from credit customers were $700.depreciation expense for 20x2 was $30. For miscellaneous expenses such as store rents. $500.
000 123.000 446. mainly to builders. The cost of the appliances sold during fiscal 20x5 was $745. 7. 20x4 Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures Accumulated amortization $ 30.500 It is now mid-September 20x5. 5. During fiscal 20x5 Peter paid $15.000 190. is shown below.500 100. the company's year end.500 by Peter.500 Liabilities and shareholders' equity Accounts payable Taxes payable Interest payable Long-term notes payable Capital stock Retained earnings $265.000. Peter paid suppliers $600. During the year Peter paid the taxes it owed at the end of fiscal 20x4. Peter paid salaries and commissions to employees of $200. Peter's Appliances Shop Ltd. Cash sales were $775. Peter collected $375. Balance Sheet As at August 31.350.000 in installments on its taxes. employees were owed $7. 6. Sales during the year were $1. Peter needs to prepare its financial statements for the year ended August 31.000 $763. 3. 20x5.000 20.000 8. All purchases were made on account.500 14. The remainder was on account. Peter uses the financial statements mainly for tax purposes and to show the holders of the long-term notes.1 Page 46 Problem 1-13 Peter is the owner and operator of Peter's Appliance Shop Ltd. 20x4.000 in taxes. The following information has been obtained about the fiscal year just ended: 1. 20x5.000.000 260.000.000. Ottkancester’s largest independent household appliance store.000. v. Peter purchased appliances from suppliers for $850. Peter’s balance sheet for August 31. 2.1. Peter has been in business for five years. .000 110.000 $763. 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.. At year end the accountant estimates that Peter owes an additional $12.000 -40.000 during the year from customers who purchased on credit. 4.Introductory Financial Accounting.000 for appliances it purchased on credit. On August 31.
5%. 13. 9. He took a refrigerator. 20x4 to reduce the balance owed on the long-term notes.500 in interest to the holders of the long-term notes. Peter paid $20. Peter paid $225. . Peter recently redecorated his kitchen at home. Peter must pay 2% of annual sales to the property owner 60 days after the year end. Interest is paid annually on September 1. v. These deposits were not included as part of cash sales. 20x5.000 on September 1. In addition. In addition to the interest payment. Peter accepted $10. For accounting purposes. 12.1 Page 47 8. Peter expects that the appliances will be delivered in early November 20x5.000. During 20x5 Peter purchased new capital assets (furniture and fixtures) for $25. Beginning July 1. 20x5 Peter pays $4. 14. for the year ended August 31. Before July 1. 11.000 in cash for other expenses related to operating the business in fiscal 20x5. The interest rate on the notes is 8. The deposits pertained to a particularly hard-to-get appliance. 20x5 Peter paid $3. treat this as a dividend.500 from the store and installed them in his new kitchen. 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. a statement of retained earnings and a balance sheet and a statement of cash flow for Peter's Appliance Shop Ltd. stove. During the year Peter paid $8. Amortization expense for 20x5 is $22.500 a month in rent. 10.000 in deposits from customers who wanted a guarantee that their appliances would be delivered when they needed them.Introductory Financial Accounting.000 cash. The terms of the lease require that rent be paid six months in advance on January 1 and July 1 of each year. and microwave that cost $4. Required – Prepare an income statement.1.
4. The bank statement is a running total of all transactions that were made in the account since the last bank statement was produced.1. 5.. The bank reconciliation starts with the balance per the bank statement. The balance showing on the bank statement needs to be reconciled to the balance shown in the company’s cash account. It starts with the opening bank balance and ends with the ending balance. Accompanying the bank statement are all the cheques that have cleared the bank account. etc. For example. Cash Cash and Investments For accounting purposes. cheques deposited that are returned due to insufficient funds (NSF cheques). adds the outstanding deposits and deducts the outstanding cheques to arrive at the balance per books: Balance per bank statement Add outstanding deposits Less outstanding cheques Balance per books $XXX XXX -XXX $XXX . This process is as follows: 1. Compare all deposits recorded on the bank statement to those recorded in the cash account. Typically. petty cash and any foreign currency on hand. every 30 days a company will receive a bank statement from the bank. and Prepare a list of deposits that were made in the cash account but were not yet recorded on the bank statement (outstanding deposits). cash generally means any cash on hand. Identify any transactions that appear on the bank statement that have not been recorded in the cash account.Introductory Financial Accounting. Prepare journal entries to record these items and post to the general ledger. 2. v. bank service charges. 3. Prepare a list of cheques that were written but that have not yet cleared the bank account (outstanding cheques). bank accounts.1 Page 48 2. Ensure that all cheques returned correspond to the amount entered into the cash account.
Introductory Financial Accounting. before adjustments Less bank service charges Less NSF Cheque Add error on cheque # 345 Cash balance after adjustments $43. August 31.644 .1.579 (156) (788) 9 $42.673 • bank service charges not yet recorded by the company of $156 • returned cheque (NSF) from a customer in the amount of $788 • cheque # 345 was written for $323 and cleared the back for that amount. August 31. Cash ($332 – 323) Accounts payable To record the error in recording cheque # 345. The next step will be to calculate the revised cash balance: Cash balance.545 (6. v. • the total outstanding cheques amount to $6. 20x7 shows the following: • ending balance of $45. 20x7 Add outstanding deposits Less outstanding cheques Cash per books.1 Page 49 Example – The Parkes Company’s bank statement dated Aug 31. we prepare the bank reconciliation: Cash per bank.644 $156 $156 788 788 9 9 Finally.574) $42.545 was not recorded on the bank statement • the general ledger cash account shows a balance of $43.574 • a deposit made on August 31 in the amount of $3. 20x7 $45. The cheque was incorrectly written in the cash disbursement journal as $332.579 (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. Accounts receivable Cash To record the returned cheque.673 3. The correct amount is $323.
otherwise they are classified as long-term assets. at the balance sheet date. Regardless of how they are classified. If management intends to hold these for a period of less than one year. and balance sheet valuation is the same: interest accrued or dividends declared are recorded as investment income. the subject of this chapter. Other Comprehensive Income becomes part of Shareholders' Equity. By their very nature. Where the two methods differ is on how the adjustment to fair market value is recorded.1. Available for sale investments also occur whenever debt securities are acquired with the intent of liquidating them before their maturity. 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. operational or financial policies. they are classified as current assets. are charged to Net Income. The classification of available for sale investments as current or long-term assets depends on management intent.1 Page 50 Non Strategic Investments Investments in the shares of another corporation can broadly be classified as non-strategic or strategic investments.Introductory Financial Accounting. These investments will either be classified as held for trading or available for sale securities. the accounting for investment income. the investments are carried at fair market value. Any realized gains or losses are charged to Net Income. strategic investments are classified as long-term investments. whether realized or unrealized. They are therefore specifically held for purposes of resale and are designated by management as such. v. They would normally be classified as current assets. For both types of investments. trading investments: all gains. • . consist of passive investments in the shares of another company. 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. Non-strategic investments. 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. there is no difference in the accounting for these investments.
500 1. 20x5 .500. 20x5 you purchase the shares of another company for $15.500 $16.500 Oct 15.900 1.500 1.000 600 600 1. 20x5 (the balance sheet date). 20x6 Cash Unrealized holding gain Gain on sale of investments Available for Sale Investments XXXX XXXX $1.000. the fair market value of the shares is $16. 20x5 Available for Sale Investments Cash Cash Investment income Available for Sale Investments Unrealized holding gain $15. v. The following journal entries will be recorded with regards to this investment: Jun 30.000 $15.000 $15.500 If the investment has been classified as a trading investment. then the following journal entries would have been recorded: Jun 30.500 Oct 15. 20x5 Dec 31.1.Introductory Financial Accounting. On October 15. On February 12. 20x5 At December 31.900 $16. At December 31. 20x5 we receive a dividend cheque for these shares in the amount of $600. 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. The investment is classified as an available for sale investment. 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. 20x5.1 Page 51 Example . 20x6.000 600 600 1.900.on June 30. $15. you sell the investment for $16.500 1.
20x6 Cash Realized trading gain Temporary Investments $16.1 Page 52 Feb 12.Introductory Financial Accounting.900 400 $16.500 . v.1.
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 2.1 Page 53 Problems with Solution Problem 2-1 1.095 d) $31.200 What amount should be reported as cash in the current asset section of Swiss Company’s balance sheet at December 31.700 3. The May bank statement listed the deposit at $512. The cheque was written for the correct amount of $152. During May. 20x8? a) $15. and it was deposited on May 18.095 9. 20x8 revealed the following details: Balance in bank account Customer cheques dated December 31.Introductory Financial Accounting. on hand but not yet deposited Swiss Company cheques that have not cleared the bank account $15. 20x8.1.595 .595 c) $25. An analysis of the cash account for Swiss Company at December 31.095 b) $21. v.
was gathered by Sarg Ltd. December 1 Cash received during December Cash payments made during December Cash balance per bank statement. The ending balance on the May bank statement is shown as $4. Prepare the December 20x6 bank reconciliation for Sarg.700 77.1.Introductory Financial Accounting.300 5.327 $15 48 63 34 Problem 2-2 The following information for the month of December 20x6. Cash balance per books.279 b) $4. $ 3.288 c) $4. At the end of the month.548 6. b.700 580 1. 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) $4.020 . Prepare any adjusting journal entries that would result from the December 2006 bank reconciliation. December 31 Bank service charges for December Deposits in transit at December 31 Cheque issued by Sparg Ltd. A company is preparing its May bank reconciliation.312 d) $4.’s bookkeeper.200 cheque received from a customer on December 13 in payment of an account receivable was incorrectly recorded as Required a. December 31 Cheques outstanding. with respect to cash activities.225. v. deducted from Sarg’s account in error by the bank A $1.1 Page 54 3.000 77.300 52 1.
Required – 1.1.200 had not been received by the bank in time to be included in the December bank statement.’s cash account up to date at March 31. (CGA Canada) . e) A $530 payment on account received from a customer was incorrectly recorded in the books of Focus Ltd. In preparing the bank reconciliation. in the amount of $620. 20x7. 20x7: #501 for $780 and #533 for $1. v. as $260. Prepare a bank reconciliation for Focus Ltd. showed a balance of $480. d) Cheque #521 issued by Focus Ltd. 2. 20x7. bank statement for Focus Ltd. c) Bank service charges for December amounted to $35 and had not yet been recorded by Focus Ltd.’s cash account according to its accounting records was $4. b) The March 31. had been incorrectly recorded in the books of Focus Ltd. as $350.1 Page 55 Problem 2-3 The March 31. 20x7. 20x7. f) The balance in Focus Ltd. Prepare the necessary journal entry(ies) to bring Focus Ltd. deposit of $6. for the cash purchase of office equipment. the following information was determined: a) The following cheques are outstanding at March 31.200.915.Introductory Financial Accounting. at March 31.
Introductory Financial Accounting.'s temporary investments at December 31.000 44.000 26. 20x1.000. 20x0.000 20.000 63. advise management of two alternative methods of accounting for temporary investments and indicate the effect each has on balance sheet and income statement information. and all the Strategic Air Defence Systems shares are sold for $35.1.000 Recent discussions have brought to management's attention that there are different methods of accounting for temporary investments.1 Page 56 Problem 2-4 During 20x0.000 5. 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 31.000 $226.000 30.000 $ 70.000 $234. Management is quite unfamiliar with these different methods and has approached you for this information. The data on Holdco Ltd.000 9.000 51.000. write the journal entries to record the two sales.000 31.000 7. 20x0 $ 72. b) On January 10. Support your answers with calculations.000 51. v. Holdco Ltd.000 45. Assuming these investments are classified as held for sale investments.000 28.000 10. . Required a) As chief accountant for Holdco. all the XYZ Computer shares are sold for $75. decided to invest in the shares of a number of "Hi-tech" companies.
800 $60. Assuming these investments are classified as trading investments. calculate the balance in Other Comprehensive Income at the end of each year.500 14.500 29. v.000 12.000 20x0 $18.000 32.1 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 $20.300 20x1 $19.500 $62.000 14. .000 20x2 $16.000 $66.500 31.1.000 $57.000 28.000 10. calculate the amount of unrealized trading gain or loss for each year.500 Required a) b) Assuming these investments are classified as available for sale.Introductory Financial Accounting.
1 Page 58 3.200.500 .000 and that the aging of accounts receivable is as follows: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750. assume the total receivables add up to $1. the company estimates that 1% of current accounts will eventually become uncollectible.000 x 40% $ 7.000 x 8% 50. Accounts receivable are. therefore. For example. v. which is equal to the net amount of outstanding invoices the firm expects to recover. and the income statement approach.1.000 Based on past experience.Introductory Financial Accounting. the aggregate of the unpaid invoices at any point in time. whereby we estimate the amount of bad debt expense on the income statement. There are generally three approaches to estimating the allowance for doubtful accounts directly (balance sheet approach): 1.000 280. There are two approaches to calculating the allowance for doubtful accounts: the balance sheet approach.000 x 3% 120. where the allowance for doubtful accounts is estimated directly.500 8.000 x 1% 280. Aging of the accounts receivable listing This involves grouping all outstanding receivables based on how long these have been outstanding.200. Accounts Receivable Whenever credit is extended to customers for the provision of goods or services.400 9.000 $1. 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.000 120.000 $45.000 50. 8% of accounts between 61-90 days and 40% of accounts over 90 days. The allowance for doubtful accounts at the end of the year will be: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750. an account receivable is created.600 20. 3% of accounts between 31-60 days. Accounts receivable are reported on the statement of financial position at their net realizable value (NRV).
000 and the company estimates that 5% of these accounts will eventually become uncollectible.1 Page 59 2. The income statement approach is used whenever a company offers their customers revolving credit facilities (i.1. Accounts Receivable Cr. it may be able to identify which specific accounts may become uncollectible. For example. Allowance for Doubtful Accounts .200. so we estimate the bad debt expense as a percentage of credit sales. but estimates the amount of bad debt expense. or (2) the amount is small and the cost of recovering the account is greater than the balance owed. Note that this approach does not estimate the allowance for doubtful accounts. Bad Debt Expense Cr. Accounts Receivable Recording recoveries of accounts written off When an account that was previously written off is subsequently recovered. The journal entry to record bad debt expense under either the balance sheet or income statement approaches is: Dr. v. 3. we first reverse the journal entry made to write off the account: Dr. it would not be meaningful to age the accounts receivable listing. Allowance for Doubtful Accounts Cr. As a percentage of the ending accounts receivable balance This approach simply takes then ending accounts receivable balance and multiplies it by a percentage.000 x 5% = $60. In this case. if the ending accounts receivable balance is $1. The sum of the estimated uncollectible accounts at any point in time will form the allowance for doubtful accounts.000. 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. a department store which offers their customers a credit card). Any accounts written off are written off against the allowance for doubtful accounts: Dr.Introductory Financial Accounting. Specific account identification When a company has accounts receivable from a limited number of customers and has an intimate knowledge of these customers.200.e. then the allowance for doubtful accounts at the end of the year will be $1.
800.000 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 Beginning Bal Recoveries Ending balance before adjustment .Introductory Financial Accounting.000 were written off. During the year.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 $75.1 Page 60 We then record the collection on the recovered accounts receivable: Dr. v.000. previously written off accounts totaling $10.000 $10.000.000 were recovered. The balance in the allowance for doubtful accounts at the beginning of the year was $50.000 $15.000 $10.000 This will result in a $15. Cash Cr.000 10.1. Accounts Receivable Example – The Jasmine Company’s accounts receivable at the end of the year totaled $2.000 debit balance in the Allowance for Doubtful Accounts: Allowance for Doubtful Accounts Write-offs $75.000 $75.000 $50. the following transactions took place: • • accounts totaling $75.
000 .000 150.800. v.800.0% Management estimates that 2.500: Bad Debt Expense Allowance for Doubtful Accounts 2.5%) + (600.500 since this is the entry required in the Allowance for Doubtful Accounts account to bring the account to a credit balance of $79.000 $2.500 $94.5% 2.000 x 6.000 $83.000. The accounts receivable aging is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days 1.800. The allowance for doubtful account should be established at $2. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $83. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $92.000.000 x 2.75% of the accounts receivable balance will be uncollectible. $94. Using specific identification of accounts.5%) + (250.5% 6.Introductory Financial Accounting.500 Estimated % Uncollectible 1.000 $92.0%) = $79.000 3. we will assume four independent scenarios: 1.75% = $77.0% 15.000 x 15.500 The bad debt expense will be $94.800.000 x 2.000 250.000 The allowance for doubtful accounts is estimated to be: (1.000 x 1.0%) + (150.1. management estimates that the allowance for doubtful accounts should be $68.000 600.1 Page 61 In order to calculate the bad debt expense for the year.
1.000.000 This will cause the allowance for doubtful accounts to have a credit balance of $15.000. v.000. = $75. In approaches 1-3.000 dr. we were estimating the Allowance for Doubtful Accounts with the residual being bad debt expense. + $90.Introductory Financial Accounting.000. we are effectively estimating the bad debt expense for the year and the residual becomes the Allowance for Doubtful Accounts.000 x 1.5% of total credit sales.5% = $90. . Bad debt expense will then be equal to $6. Management estimates that bad debt expense will be equal to 1.1 Page 62 4. Note that when using this approach.000.000 $90. Total credit sales for the year amounted to $6.000 cr. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $90.
800 . January 1. What is bad debt expense for 20x9? a) $1. During 20x9.1.600 d) $6.800 c) $7. 20x8 a) $4. January 1.000 (11.900 c) $6.000) 400.000 b) $4.1 Page 63 Problems with Solutions Problem 3-1 – Multiple Choice Questions 1. 20x8 Allowance for doubtful accounts balance.000 20. the company wrote off $500 and collected a $300 receivable that had been previously written off as uncollectible. A company reported the following items for 20x8: Accounts receivable balance. the aging schedule indicated that the balance of the allowance account should be $6.Introductory Financial Accounting.000.600 b) $1. At the end of 20x8. the balance of the allowance account was $5. A company estimated the needed balance in its account “allowance for doubtful accounts” by aging the accounts receivable.000 360.900 2. 20x8 (credit) Total credit sales during 20x8 Total collections on accounts receivable during 20x8 Uncollectible accounts written off during 20x8 $80. v. What should be the adjusting entry amount for doubtful accounts at December 31. At the end of 20x9.000 e) $13.400.000 d) $13.000 Experience indicates that 4% of the uncollected accounts receivable at the end of each year ultimately will be uncollectible.
000 $3.000 cr. v. 63.975 $2. Provide the journal entry to write off actual accounts receivable determined to be uncollectible and recoveries. 2004 adjusting journal entry to record bad debts. for the year ended December 31. A company had accounts receivable of $3. Provide the December 31. Provide the December 31. 2004 Allowance for doubtful accounts.1.000 3. 2004 Required – a. c.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.200. January 1. What were the net realizable values of the accounts receivable as shown by the accounting records before and after the write-off? Before $2. just prior to writing off as uncollectible an account receivable of $30.000.000 800.875 $2. b. assuming the allowance method is used to account for uncollectible accounts. $ 15. 2004 adjusting journal entry to record bad debts.875 $3.875 $2.000 14.1 Page 64 3. January 1. assuming the allowance method is used and uncollectible accounts are estimated to be of 1% of credit sales. .Introductory Financial Accounting. assuming the allowance method is used and management estimates the allowance to be 3% of the closing Accounts Receivable balance.000.000 55.000 dr.000 After $2.000 1.970 $3.095 a) b) c) d) Problem 3-2 The following information relates to Merit Ltd.000 11.000 and an allowance for doubtful accounts of $125.
800.000 7.Introductory Financial Accounting. 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 $3.1. 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 15.000 80.000 - 277. v.000 90.000 2.400.000.000 2.000 25.000 20x0 $2.000 60.000 45.000 234.000 27.000 16.1 Page 65 Problem 3-3 Sigma Company began operations on January 1.915.000 .
decided that an allowance equal to 5% of total accounts receivable would be sufficient to cover uncollectible accounts.000 in payment of outstanding accounts receivable. required at December 31. Suppose now that instead.1. began operations on January 1. During 20x7 the following summarized transactions occurred: 1. required at December 31. 2. expects 2% of credit sales to be uncollectable. to record bad debt expense for the year and accrue interest on the promissory note. With all other data being the same from above.1 Page 66 Problem 3-4 EED Ltd. Received cash of $400. 3. Prepare journal entries to record the above transactions on the books of EED Ltd. In addition. (CGA Canada adapted) 2. The company uses the allowance method of accounting for bad debt expense. an accounts receivable in the amount of $3. 20x6. 20x6 there was a $2.000 credit balance in the allowance for doubtful accounts account and a $40. 20x7 to record bad debt expense for the year.000 was converted to a 6-month promissory note to allow a cash-strapped customer some time to meet his obligations. EED Ltd. 4. 20x7. EED Ltd. if any. prepare the journal entries. prepare journal entries. Wrote off uncollectible accounts receivable in the amount of $1. Based on industry averages and its experience in 20x6. . 20x7.000 debit balance in the accounts receivable account. On December 1. Sold merchandise on credit for $500.Introductory Financial Accounting. The promissory note bears an interest rate of 12%.500. Required 1. On December 31.000. if any. v.
the amount the company generally receives from its customer should always be greater than the value of the inventory.000 10. They sell $4. On the first day. we just create a payable instead of reducing our cash account. From time to time. We still increase the inventory account by the amount of the purchase. Little Company makes its first big sale.000 of inventory. Inventory Accounts Payable 10. and then evaluate the different valuation methods a company can chose to determine the cost of inventory. is the inventory system that it chooses.000 5. we mean an inventory system that has no interruptions. What that means is that inventory is tracked constantly in a real-time basis. and any adjustments that are needed will be made to the inventory account. Example: It is Little Company’s first year of business. v.000 Note that even though we are not paying cash. this time on account.000 cash. Furthermore. Little Company purchases $5. After two weeks of business.1. or never ending. Note that unless a company is offering a discount to get rid of inventory or for some other reason.000 The next day.1 Page 67 4. a physical count of inventory will be taken to ensure accuracy of the perpetual records.000 worth of inventory. When we talk about a perpetual inventory system. The journal entry would be: Inventory Cash 5.000 worth of inventory to a customer for $6. . We will begin by looking at two fundamentally different types of systems.Introductory Financial Accounting. the effect on the inventory account is the same as the above journal entry. Inventory A key part of determining the cost of the items that a company sells to its customers. Little Company purchases an additional $10. paying cash. 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. Each item that is purchased for resale gets debited to the inventory account. as well as valuing the items that it has on hand to resell at any point in time. The Perpetual Inventory System The term perpetual means continuing without interruptions.
000 The Purchases account keeps a running total for the year of all purchases of inventory made. Second. we do not keep a “running total” of inventory. nor do we keep a running total of COGS. we have recorded the sale and the receipt of cash.000 4. However. The Periodic Inventory System Under the Periodic Inventory System. Under the Perpetual system the COGS is a running total. First. This expense account.000 worth of inventory from our Inventory Asset account. Cost of Goods Sold (COGS). the journal entry would be: Cash Sales Revenue 6.000 This journal entry does two very important things.1. we have not removed the items that were sold from our inventory account. as: Purchases Cash 5.Introductory Financial Accounting. it removes the $4. as purchases are made of inventory they are tracked in a temporary account called “Purchases”. 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”. This varies significantly from the Periodic Inventory System. Purchases has several contra accounts that track other expenses or discounts that may be associated with the purchases.000 5. the journal entry would be: Cost of Goods Sold Inventory 4. which we will now turn our attention to. as is the inventory account. that first purchase of inventory for $5. v. it records the expense of the items that were sold.1 Page 68 To record the sale.000 At this point. These are: . however.000 cash would be recorded. Continuing with the example above. So what do we do with the purchases of inventory we make throughout the year? Throughout the year. is used to keep track of all of the costs of all of the items a company sells in one period. under a periodic inventory system. Instead.000 6. To do this.
000 worth of inventory on hand.000 Let us suppose that those were the only purchases made during the year.1.1 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. The amount needed to balance the equation is the Cost of Goods Sold.000 and $10. Purchases of $5.000 were made. as this is a new business.000 10. based on the physical count. the Purchase account and all contra accounts are closed out to zero. If you remember. To calculated COGS: . The new journal entries would be: Purchases Cash Purchases Accounts Payable 5.000 10. 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. At the end of the year. and that at the end of the year a physical count of the inventory revealed that there was $11. v. the inventory account is adjusted to the appropriate ending balance.000 5. At the same time. the opening inventory was $0.Introductory Financial Accounting.
476. A year-end count reveals that the ending inventory balance should be $360.700.000. Furthermore.000 Example 2 – Tetrie Company shows the following balances at the end of the year: Dr.000 185. $360. in order to get the balance in the inventory account to $360. Cost of goods sold can be independently calculated as follows: Beginning Inventory + Purchases (2.000 increase) Purchases (close account) Transportation-in (close account) 2.000 2.000 2.1 Page 70 Beginning Inventory + Purchases ($5. Therefore.000 11.000 2.700.000 – 48.661. the Purchases account and all of the associated contra accounts have been set back to $0. according to our count.000 2.000) .000 48.1. The journal entry to record Cost of Goods sold at the end of the year would be as follows: Cost of Goods Sold (calculate to balance) Purchase returns and allowances (close account) Purchase discounts (close account) Inventory ($360.000 $4.000 and it should be.000 36.700.476. v.000 = $185.836.000 Cr.000 we must increase it (or debit it) by $185.000 27.Introductory Financial Accounting.000 Tetrie uses a periodic inventory system.Ending Inventory (as per count) = Cost of Goods Sold $ 0 15.000 + 36.000 + 10. $175.000 . The balance is sitting at $175.000 (360.000 36.000) $2.000.000 27.000. Inventory Purchases Transportation-in Purchase returns and allowances Purchase discounts 48.000 would be the ending inventory balance from last year.000 – 27.000) = Cost of Goods Available for Sale .Ending Inventory (as per count) = Cost of Goods Sold $175.000 Note that the Inventory balance given of $175.000 – 175. They are ready for the next fiscal year.
1 Page 71 Inventory Valuation Methods The above discussion of periodic vs. Some examples of situations where this method would be possible are: when items have specific serial numbers. v. That is. like a car dealership. 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). when the item is sold. In this case. it is possible to track each item in inventory separately. we assume that the “First In = First Out”.1. therefore. There are two different valuation methods that can be used to calculate the value of inventory: specific item valuation or cost flow assumption. or when a company has relatively few items in inventory that have a specific cost associated with them. FIFO Under the FIFO method. . That is to say. We will now discuss how we attach value to the inventory. Conversely. that is at what cost do we record the inventory and COGS. the COGS is equal to the opening inventory + earlier purchases. Note that regardless if a company is using a periodic or perpetual system. we don’t know specifically which items are being sold so we use an average of some sort to determine cost. Specific Item Valuation This method is used when inventory items can be specifically identified. both the COGS and the ending inventory cost will be the same under the FIFO valuation method. Cost-Flow Assumption This method is used when items cannot be differentiated from one another. or when the value of the items is so small that it does not warrant the cost of tracking the specific item value. we remove its specific cost from inventory and debit COGS at the carrying amount. the ending inventory is equal to the most recent purchases. perpetual inventory systems dealt with how we track the inventory and purchases that flow through a company.Introductory Financial Accounting. that inventory is mixed all together and. like a jeweler.
using the cost of goods sold equation: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1. Cost of goods sold can be calculated in two ways. we know that we sold a total of 700 + 200 = 900 units.1.000 $400 640 1.20 each Purchased 400 units @ $1. v.00 1. Throughout the period.10 1.10 = $330 January 5 purchase = 100 units x $1. First.20 1.10 each Sold 200 units Under the FIFO periodic method. Lainey Company has 400 units in its opening inventory. 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. we sold .Introductory Financial Accounting.015 Secondly.470 (455) $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. They purchased these units for $1.25 each Sold 700 units Purchased 300 units @ $1.25 $240 500 (400) (240) (125) 330 (250) Balance Units Total Cost 400 600 1.25 = $125 Total value of ending inventory = $330 + 125 = $455 Using the FIFO perpetual method.1 Page 72 Example – On January 1. This is not a coincidence – both approaches always provide the same result.25 1.20 1.00 each.070 1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.25 1. Under FIFO. 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.
20 = 300 units @ $1. Using this method. Opening Inventory January 3 purchase January 5 purchase COGS 400 units @ $1. the total sum of the year’s activities are taken into account at the end of the year to make the determination of the value of inventory. So COGS would be calculated as the cost of the first 900 units. v. and one is used when you have a perpetual system.10 each Sold 200 units Under the annual Weighted Average method. we calculate the average cost of inventory as follows: .00 each. Annual Weighted-Average – Periodic Systems Under a periodic system.00 = 200 units @ $1. one is used when you have a periodic system.1 Page 73 the units in opening inventory plus the first of the purchases we made through the year.015 Weighted-Average Method There are two versions of this method. We then close out the purchase account and the associated contra accounts to determine what the COGS is. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1. that is. Lainey Company has 400 units in its opening inventory.Introductory Financial Accounting.1. Throughout the period. 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 1.25 = 900units $ 400 $ 240 $ 375 $1.20 each Purchased 400 units @ $1. you will remember that we do an inventory count once a year to determine the ending inventory balance. They purchased these units for $1. The annual weighted-average for periodic systems uses a similar methodology.25 each Sold 700 units Purchased 300 units @ $1.
13077/unit Ending Inventory = # units in inventory x unit cost = 400 units x $1.300 Average unit cost = Cost of Goods Available for Sale/Units Available for Sale = $1. we are keeping a running total in the inventory account. Subsequently.13077/unit = $1. Under this system. The moving weighted-average system of inventory valuation takes this into account.018 Moving Weighted-Average – Perpetual Systems You will remember that under a perpetual inventory system. whatever the unit cost is at the time of a sale. the average unit cost is recalculated every time a purchase is made. when we make a purchase we debit the inventory account for the amount of the purchase.20 each) January 5 Purchase (400 units @ $1.018 Alternatively.470/1. v.Introductory Financial Accounting.300 units = $1.1 Page 74 Cost of Goods Available for Sale Opening Inventory (400 units @ $1. As such.470 Units 400 200 400 300 1. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.00 each) January 3 Purchase (200 units @ $1.25 each) January 19 Purchase (300 units @ $1.470 (452) $1. .1. Unit Cost = Cost of all goods on hand/number of units on hand.070 1. then that is the unit cost used to determine the COGS for that sale.13077/unit = $452 COGS = # units sold x unit cost = 900 units x $1.10 each) $ $400 240 500 330 $1. that is the unit cost after the last purchase previous to the sale.
v.140 342 3 1.14000 1.1 Page 75 Example – On January 1.25000 1.000 300 600 400 Unit Cost Total Cost $1.Introductory Financial Accounting. under this system we recalculate the unit cost each and every time we make a purchase.20 each Purchased 400 units @ $1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.140 / 1.022 .070 1.20000 1.14000 1.12000 672 448 Units 200 400 (700) 300 (200) Unit Cost $1. Lainey Company has 400 units in its opening inventory.25 each Sold 700 units Purchased 300 units @ $1.1.470 (448) $1. Unit Cost = Cost of all goods on hand/number of units on hand.10 each Sold 200 units Remember.00000 $400 1.12000 Unit Cost = $640 / 600 Unit Cost = $1.022 Alternatively.000 3 Unit Cost = $672 / 600 Cost of goods sold is equal to the cost of goods sold for the two sales: $798 + 224 = $1.10000 1.066671 640 2 1. Purchases (Sales) Date Jan 1 Jan 3 Jan 5 Jan 10 Jan 19 Jan 25 1 2 Balance Total Cost $240 500 (798) 330 (224) Units 400 600 1. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1. Throughout the period.00 each. They purchased these units for $1.
The net realizable value of this inventory is: = Selling Price – Commission = $40. Example –VenTure Ltd. .Introductory Financial Accounting.000 At present.000 = $36.000 – 14.000 – ($40. If. the accountant determines that they could sell this inventory for $40.000. then the inventory must be written down to market value. the analysis reveals that no allowance is required. If the market value is less than cost. the credit will be to income. commissions of 10% would have to be paid to the sales team on any sale of this inventory. v.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. At the balance sheet date. Inventory Loss Allowance for decrease in value of inventory 14. Furthermore.000. Show the journal entry to record the proper carrying value of the inventory.000 14.000 to bring it to a zero balance.000. First of all. 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.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.1. next year. The net inventory balance that will be reported on the statement of financial position is $50.000 = $36.000 X 10%) = $40.000.000 – 4. 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. We do this by creating a contra account to inventory called ‘Allowance for decrease in value of inventory’. Market value is defined as the net realizable value of the inventory – the sales price of the inventory item less any costs incurred to sell it. we must determine that the inventory’s net realizable value. then the allowance will be debited by $14. is showing an ending inventory balance of $50.
000 350.000 x 60% = $600. we must first understand how to calculate the Gross Profit %. we could estimate COGS by using the following formula: Gross Profit = Sales x Gross Profit Ratio = $1.200.900.000 Ending Inventory = $310. the Gross Profit Ratio = 40%.000. but we did have the Gross Profit Ratio. v. You are given the following information: Sales to the date of the fire Opening inventory Purchases to the date of the fire Gross Profit Ratio The estimated cost of goods sold = $1.000.000 Example – The Gennissen Company’s inventory were destroyed by a fire and you need to estimate the ending inventory.200.000 Opening Inventory + 860.000 25% . Example – Assume the following: Sales Cost of Goods Sold Gross Profit 1.000 400.000 Purchases .000 and Gross Profit is $400.000 x (1 – 40%) = $1. for whatever reason.1.000 x (1 – 25%) = $1.000. If we did not have the COGS number.000.Introductory Financial Accounting.000 If Sales are $1.000 $1.000.200.000.000 The estimated ending inventory is: $350.000 x 75% = $900.1 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.000 860. To understand the application of this method.000 600.000 x 40% = $400. then we can estimate COGS as follows: COGS = Sales x (1 – gross profit ratio = $1.000 100% 60% 40% In the above example.
included an adding error in the inventory count that resulted in ending inventory of $1. 3. financial statements.000. After completing its inventory count and making the appropriate adjusting journal entries. The December 31.000. b) Assets would be understated by $200.000.000 2.600.000 in shipping charges on merchandise purchased during the period. Ltd.1 Page 78 Problems with Solutions Problem 4-1 – Multiple Choice Questions 1.000. b) Inventory is understated by $6.000 b) $503. . Owl Enterprises had merchandise inventory on hand amounting to $60. v. c) Cost of goods sold would be understated by $200.000 to suppliers and incurred $25. 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. the company returned merchandise costing $10.Introductory Financial Accounting. Fri. 20x8. Which of the following statements is true with respect to the impact of this error on the December 31. a) Liabilities would be overstated by $200.000.000.000.400.000 worth of inventory and took advantage of purchase discounts amounting to $6. On January 1.000 computer purchased for the chief financial officer on December 27 had been recorded incorrectly as an inventory purchase. What was cost of goods sold for the year ending December 31. d) Shareholders’ equity is overstated by $6.000. In addition. d) Owners’ equity would be understated by $200. A year-end inventory count revealed merchandise on hand in the amount of $66. 20x4.000 instead of the correct balance of $1.000.000 d) $523.000 c) $515.000.1. 20x4. During the year the company purchased $500. c) Shareholders’ equity is understated by $6. 20x8? a) $478.000. financial statements of Confu Ltd.000. discovered that a $6.
1 Page 79 4. Problem 4-2 The following summarized transactions relate to Cozy Co. The company uses a perpetual inventory system. .1.Introductory Financial Accounting. CIF destination. Cozy sets the selling price on its shoes so that the cost of sales is equal to 70% of the selling price.000.. c) Income for 20x9 is understated by $15. shipped goods to a customer on December 30. n/45. One customer returned goods with a sales value of $500 and was issued a credit note. The sale was recorded by Czech on January 2. b) Income for 20x9 is overstated by $42. FOB destination. The selling price of the goods was $57. All other sales made during the month were collected in the month with all customers taking advantage of the sales discount offered. e. 20x8. Required – Prepare the journal entries required to record the above events and transactions. a shoe wholesaler.000 for the goods and uses the periodic method to account for its inventory. e. All of the merchandise purchased during the month was paid for with Cozy taking advantage of the purchase discount offered. e. d) Revenues for 20x8 are understated by $57.000. Transportation out paid on delivery of goods sold during the month equaled $1. FOB Shipping. 20x9. The customer received the goods on January 6. Czech had paid $42. for the month of July 2006. e. Merchandise was purchased at a cost of $50.000. Czech Ltd.000. all of which were made on credit with terms 2/10.200. e. Which of the following statements with respect to this transaction is true? a) Income for 20x8 is understated by $42. n/30.000. v. 20x9.000 during the month with terms 1/10.000. Sales totaled $80.
000 2. Problem 4-4 The following information concerns one of a company’s products. Calculate the cost of ending inventory for May.1 Page 80 Problem 4-3 Anvil Rock Company had the following inventory and purchases for the month of May.00 = $ 300 60 @ $11.100 125 $ 1.50 = 690 35 @ $12. 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 1.00 = $ 400 Anvil Rock uses a perpetual inventory system.1.000 2. assuming a firstin.000 Price/Cost $12 18 30 23 33 .500 Date May 1 May 5 May 14 May 21 May 29 Totals Sales Beginning inventory Purchase Sale Purchase Sale 20 @ $20.000 2.00 = 420 50 @ $22. c.410 70 $ 1.Introductory Financial Accounting. b. Beginning Inventory/ Purchases 30 @ $10. Prepare the journal entries to record the May 29 sale on account. first-out (FIFO) cost flow method is used. assuming a weighted-average cost flow method is used. Calculate the cost of ending inventory for May. Required – a. v.500 3.00 = 1. assuming a FIFO cost flow system is used.
calculate gross profit for the year ending December 31. (Banff) sells skiing and hiking equipment to retailers.000 30. Required – Assuming the company uses a periodic inventory system. under each of the following assumptions: a. The loss is to be determined based on the cost of the inventory in accordance with generally accepted accounting principles. 20x5 October 15. It accounts for its inventory using a periodic inventory system. . 20x5 1.Introductory Financial Accounting. Banff lost all of its hiking equipment in a fire in March 20x8. v. (CGA Canada) Problem 4-6 Banff Mountain Equipment Ltd.000 580.000 15. 20x5.000 58.000 Banff normally realizes a gross profit of 30% on its sales.1 Page 81 Problem 4-5 On January 1.000 units at $50 each 1.000 52.1. During 20x5 the company made the following purchases of MP3 players: February 21. 20x5 June 15. The store had an excellent Christmas season with the result that only 70 MP3 players were left in inventory on December 31.000 units at $58 each $50. the company was unable to pass on price increases to customers and thus maintained a selling price of $100 per unit throughout the year. Corporate records disclose the following: Inventory — January 1. Costs are assigned to inventory and cost of goods sold on a FIFO basis.000 8. After a very successful ski season and just as it was about to commence shipping its hiking equipment for the upcoming season. b.000 units at $52 each 1. 20x8 Purchases (all on credit) during 20x8 Purchase returns Payments to suppliers for purchases Customs and duty on purchases Sales (all on credit) at retail price Sales returns at retail price Cash collected from accounts receivable $150. Fortunately.000 480. Costs are assigned to inventory and cost of goods sold on a weighted average basis. the company’s insurance policy will cover 80% of the loss suffered in this fire. the Music Store had 400 MP3 players in inventory with a cost of $48 per unit.000 440. 20x5.000 615. 20x5.000 Due to competitive pressures.
20x7 20 units @ $900 each 440 units @ $950 each 200 units @ $1. The company uses a periodic inventory system.1 Page 82 Required – Calculate the net loss from the fire. Saret Ltd. n/60. taking advantage of the sales discount. Problem 4-8 The following information relates to Mejewel Ltd. Required 1.1. Calculate the cost of goods available for sale. 20x7. Show all your calculations. Show all your calculations. n/30.000. inventory value using the Weighted Average . the company sold 600 units at an average price of $2. The supplier provided purchase credit terms of 1/15.050 each During the year.000 of the merchandise inventory claiming it did not meet its needs. Calculate December 31. The cost of the merchandise inventory returned was $5.100 per unit.000 of merchandise on account with credit terms of 2/10. January 1. Whinr returned $10. $30. v. Show your calculations.000 on account. inventory value using the FIFO inventory pricing method. 20x7 Purchases — February 20. Whinr paid the balance due on the June 1 sale. inventory for 20x7: Beginning inventory. June 1 Sold Whinr Ltd.000. 20x7. 3. Saret purchased merchandise inventory costing $42. Calculate December 31. June 2 June 9 June 12 The company uses a perpetual inventory system. The cost of the merchandise inventory sold was $15. 2.Introductory Financial Accounting. Required – Prepare journal entries for the above transactions. (CGA Adapted) Problem 4-7 During June 20x8. 20x7 Purchases — June 7. Ending inventory consisted of 60 units. performed the following transactions.
000 and a count of inventory on December 31. which has a negative impact on the company’s cash flow. Toyjoy paid $3. v. Prepare a schedule of the cost of goods sold section of the income statement.200 credit memorandum from a supplier on defective merchandise Toyjoy had purchased and returned. 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. amounted to $48.000 credit purchase.500 represented payment of a $50. Prepare journal entries for each of the above summarized transactions. you have made it a policy to ensure that all purchase discounts are taken advantage of.000 under credit terms of 3/15. Toyjoy had not yet paid for the merchandise. n30. Cash payments on merchandise purchased from Patel Inc. 20x7. 20x7. revealed merchandise inventory on hand of $30.000 in cash for freight charges on merchandise purchased during the month. assuming merchandise inventory on December 1. Show all your calculations. Briefly explain the benefits. FOB shipping point.000. for the month of December 20x7.1. (CGA Canada) c. As the new controller. iii) iv) Required a. i) ii) Purchased merchandise on account from Hirwin Toys for $80. n30. b.Introductory Financial Accounting. Received a $1. amounted to $150. The company uses the periodic inventory method and the gross method of recording purchases.500.1 Page 83 inventory pricing method. (CGA Canada adapted) Problem 4-9 The following is a summary of selected transactions for Toyjoy Ltd. The payment of $48. which was paid within the discount period of 3/15. .
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).Introductory Financial Accounting.000. i) A company failed to include in its December 31. then state so. If the error has no effect (NE). Use the following format in answering this question. a company received. 20x6. There were no errors in the December 31. Assume the companies involved used a periodic inventory system and treat each situation independently. 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. and included in the year end inventory count. 20x7 inventory count. 20x6. indicate the dollar amount of the overstatement (O) or understatement (U) in 20x6 Cost of Goods Sold. 20x6 inventory count. 20x6 Retained Earnings. v. inventory count $10. 20x6.1. for use by the sales manager was incorrectly accounted for as an inventory purchase. On December 28. 20x6 Ending Inventory. and for 20x7 Cost of Goods Sold.000 computer purchased on December 28. goods costing $5. Error 20x6 Cost of Goods Sold 20x6 Ending Inventory 20x6 Retained 20x7 Cost of Earnings Goods Sold (CGA Canada) .000 worth of goods which were in an off-site storage location. 20x7. A $6. ii) iii) Required For each error. The company failed to record the purchase of these goods until January 15.
500 8.500 For each assumption given. perpetual inventory system . (CGA Canada) $100.95 8.1 Page 85 Problem 4-11 On January 13. periodic inventory system d.1.000 $ 60. periodic inventory system b. 1 (at $24) Purchase No. perpetual system c. 2 (at $26) Required 6. at January 13.000 6. 20x7.000 $ 10. the Bamboo Brush store was destroyed in a fire.40 9. the accounting records were kept in a separate location and the company was able to reconstruct the following information: Inventory at January 1. Luckily. FIFO. FIFO.Introductory Financial Accounting.000 $ 5. Weighted-average.000 40% Problem 4-12 The records of Egypt Company showed the following data relative to one of the major items being sold.00 Units Beginning inventory Purchase No. calculate the total dollar amount for ending inventory and cost of goods sold.000 5. v. 20x7 Inventory stored at another location. Moving weighted average. Assume that the transactions occurred in the order given.000 7. a. Unit Cost $7. 1 Sale No. 2 Sale No. 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.
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. 2. the cost of acquiring these assets needs to be allocated based on the relative fair market value of the assets acquired. For example. but are not limited to.000 and $450.1. furniture and fixtures and intangible assets. copyrights and trademarks.000 375. the shares or the long-term debt of another company). buildings. 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 for land and a building. equipment. what constitutes the cost of this asset. When a long-term asset is acquired. any costs of transportation to get the asset to its location and any installation costs.000 $600.000 $500. These generally comprise of: • land. namely land. We will only focus on the accounting for those long-term assets that are not investments in financial instruments. These include.000 respectively.e. 3. The acquisition cost would be allocated to land and building as follows: Individual Fair Market Value per Appraisal Land Building $150. assume that you pay $500.000 . and • intangible assets such as patents. 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. land and building). how do we account for these expenditures. If you pay one price to acquire a group of assets (i. • long-term investments in financial instruments (i.1 Page 86 5.000 450. equipment and furniture and fixtures. v. the acquisition cost of asset. How do we account for the disposal of long-term assets.e. • buildings. An independent appraisal of the land and building are $150. and 4. The essential accounting issues in accounting for long-term assets can be summarized as follows: 1.Introductory Financial Accounting. When on-going expenditures are made in order to keep the asset in operable condition.000 % 25% 75% Allocation of Purchase Price $125.
the useful life of the asset is extended.000 $500. v.1. the expenditure enhanced the quality of the asset in a substantive way. However. 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. The process by which this is done is amortization of long-term assets. For example. 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. The annual amortization expense is calculated as follows: (Cost – Salvage Value) / Useful Life . The underlying assumption is that this asset generated revenues that are. ii. A determination has to be made whether the expenditure is required to maintain the asset in operable condition. such as oil changes or brake replacements. equal over its useful life. or iv. iii.000 375.000 Accounting for on-going expenditures Once a long-term asset has been acquired. any costs to maintain a truck. Consequently. we often incur ongoing expenditures in order to maintain the asset. This method allocates the cost of the asset over its estimated useful life in equal amounts. 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. There are three general approaches to amortizing capital assets: 1.Introductory Financial Accounting. We would therefore capitalize the cost of the new engine to the asset account. the rate of output of the asset is increased.1 Page 87 The journal entry to record this transaction would be as follows: Land Building Cash $125. Straight-line method. in which case the expenditure should be expensed to the income statement. would generally be considered to be repairs and would be expensed. the operating costs of the asset are decreased. more or less. For an expenditure to be considered a betterment it must meet one of the following four criteria: i. then we would likely increase the useful life of the truck.
2. 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). 3. For example. 1. Units of production method. Under the straight-line method.e. We deduct the salvage value since we do not want to write down the asset below its salvage value. if you are told that an asset has a useful life of 10 years.000.000 hours. i. 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. This assumes that the use can be measured.1. v. then the straight-line rate is 1/10 and the DDB rate is 1/10 x 2 = 20%. The amortization rate can either be given or you may be told that the company uses the double declining balance (DDB) method of amortization.Introductory Financial Accounting. a truck rental company that bases rental charges on the mileage driven. The asset’s estimated useful life is 8 years and the estimated salvage value of the asset is $35. 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. 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. mileage.000 – 35.125 . machine hours. This method allocates the cost of the asset over its estimated useful life based on the use made of the asset. The rate used for DDB is twice the straight-line rate. the annual amortization charge will be: ($300. The asset’s useful life can also be measured in terms of total machine hours of 150. i.e.000. Declining balance method.125 $31.000) / 8 = $31. The underlying assumption is that the asset generates revenues based on usage.1 Page 88 The cost less the salvage value is called the amortizable base of the asset.125 The journal entry to record amortization expense will be as follows: Amortization Expense Accumulated Amortization $31.
798 13.562 94.045 35. this would have resulted in a net book value at the end of the year that would be lower than the asset’s salvage value. Note that we will assume double declining balance amortization at the rate of 1/8 x 2 = 25% per year.1.393 40. . v.000 56.188 31.731 17.000 hours x $1.7667 per hour. 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. Under the declining balance method.045 x 25% = $10.011 of amortization in year 8. Assume that the total number of hours of use in the first year is 18. Net Book Value Beginning of Year $300.000 x 0.562 94. Therefore. If we had taken $10. 3. the net book value at the end of the 6th year is: $300. the amortization taken in year 8 is the lesser of the calculated amortization of $10.045 Net Book Value End of Year $225.191 53.000 – 35. Recall that we do not depreciate the asset below its salvage value.393 40.393.Introductory Financial Accounting.011 or the amortization amount needed to bring the net book value down to the asset’s salvage value.922 71.801.000 Year 1 2 3 4 5 6 7 8 Note that the year 8 amortization is not equal to $40.011.1 Page 89 2.922 71. the amortization charge per hour would be: ($300.348 5. the amortization charges for the 8 years will be as follows.045 Amortization Expense @ 25% $75.756 = $53.7667 = $31.640 23.000.000 225.750 126.191 53.000 168.000 168.000 hours = $1.750 126.000) / 150.250 42. Under the units of production method. then the amortization charge would be 18.
The difference will be equal to the gain or loss on disposal. At the time.000 Changes in estimates If the estimates of the useful life and/or the salvage value of an asset change subsequent to its acquisition. The net book value of the asset at the end of 20x9 is: Original cost Less Accumulated amortization ($250.000 $100. assume that an asset was purchased on January 2. the asset’s useful life was expected to be 10 years with an estimated salvage value of $20.000.000.000/year x 7 years Net book value The gain on disposal of this asset is: Proceeds on disposal Less net book value Gain on disposal The journal entry to record the disposal of the asset is as follows: Cash Accumulated amortization Asset Gain in disposal $100.000.000 89.000 161.000 11.000 250.000. an asset costing $100. 20x1.000.1. For example. the changes in estimates are applied prospectively from the date of the change in estimate onwards. 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 $10.000) / 10 = $23.000 was purchased on January 2. The asset’s useful life was expected to be 10 years and the salvage value was estimated to be $20.000 (161. Assume straight-line amortization.000) $89. 20x3 for $250.000 $250. v. For example. The asset is sold at the end of 20x9 for $100. we compare the net book value of the asset sold to the proceeds on disposal.000 $11. .000 – 20. In 20x5.Introductory Financial Accounting.1 Page 90 Disposals of Long-Term Assets On the date of disposal.
was developed internally. Annual amortization charges for 20x5 and future years will be: (68. musical compositions and works of art.000) / 11 remaining years = $5.000 (32. you will not see the value of its trademark listed as an asset. For example.000. • franchises – the exclusive rights to sell products or perform services.1 Page 91 The net book value at the beginning of 20x5 is: Original cost Less Accumulated amortization ($100.000) $68.000 – 10. • copyrights – the protection of writings. v. are the result of a past transaction and are under the control of the company. For example. Note that only expenditures incurred by the company can be capitalized as intangible assets. if you look at Coca-Cola’s Statement of Financial Position.000 – 20. assume that a patent is granted to a company at a cost of $100. Examples of intangible assets are: • trademarks – a name or symbol that identifies a company or a product.Introductory Financial Accounting. they are expected to provide future benefits. location or superior products.e.000) / 10 = $8. Intangible assets whose life is limited should be amortized on a straight-line basis over their estimated useful lives. • patents – a legal right ensuring the company’s exclusive right to a product or process. you cannot touch them or see them) and yet they represent costs incurred that meet the definition of an asset.000/year x 4 years $100. the trademark ‘Coca-Cola’ was never purchased by the Coca-Cola Company but rather. typical within a certain geographical area • goodwill – the added value of a business attributable to factors such as reputation.000 This net book value will then be amortized over the remaining useful life of the asset.e. The patent’s legal life is 17 years but it is expected that emerging technologies will make this .273 per year Intangible Assets Intangible assets are those assets that do not possess a physical quality (i.1. This need not coincide with the asset’s legal life. i. The accounting for intangible assets depends on whether these assets have limited or an unlimited life. Internally developed intangible assets cannot be capitalized on the Statement of Financial Position. Consequently.
then the asset must be written down to the fair market value.e. Intangible assets whose life is unlimited (i. . In this case. goodwill) are not amortized but instead subject to an annual impairment test.1. we would amortize the patent over 5 years. some franchises. the book value of the intangible asset is compared to its fair market value. If the fair market value is lower than book value and is not expected to recover. That is. v.Introductory Financial Accounting. Any impairment losses cannot be subsequently reversed if the fair market value of the asset subsequently is recovered.1 Page 92 patent obsolete by the end of the 5th year.
200 d) Income will decrease by $632 e) Income will decrease by $600 .000 in legal costs defending it.000 10 years $5.00 c) $8.000. Sinha. The patent is valid for 17 years and has an estimated life of 10 years. 2.1.500 d) $20. and was used as office space commencing July 1.000 and spent $5.000 3.Introductory Financial Accounting.500.00 Use the following information to answer questions 2 and 3: The Jasper Company has an old building which requires frequent repairs and constant maintenance. Brown and Das obtained a patent for their earnings forecasting software at a cost of $80. 1998.000 150.00 d) $8. What will be the annual amortization expense for patents? a) $4. v.000 b) Income will decrease by $6.000.000. What is the impact of this expenditure on income before taxes for 1998? a) Income will decrease by $12. The room was completed on June 30. What is the amount of depreciation expense on the building for 20x8? a) $4. the situation was as follows: Building cost Accumulated depreciation — building Estimated remaining useful life Estimated salvage value at end of useful life $200.500 b) $5. At the beginning of 20x8. A small room was built on the back of the building at a cost of $12.1 Page 93 Problem with Solutions Problem 5-1 – Multiple Choice Questions 1.000 c) Income will decrease by $1.000 c) $19.705.88 b) $5.000 Jasper uses the straight-line method for calculating depreciation expense.
During 20x7.1.000 were incurred to clear the land in preparation for construction of an office building.000 7.000 units. production was 20. The equipment is expected to have a 5-year life and produce a total of 80. 20x7.000.075.000.000 commission was paid to a real estate agent. If the company uses the double-declining-balance method for amortization. Ireland Company purchased a machine that cost $20. Costs of $15. It has an estimated 4-year life. On July 1. v. it was used 430 hours. On January 1.015. On January 1.000 d) $1.500 c) $63. At what amount should the land be reported on the balance sheet? a) $1.000 .500 d) $80.000 b) $42. If the company were to use the units-ofproduction method instead of the straight-line method. what would be the balance reported for the net book value of the equipment at December 31. Stone and Wall Company bought equipment for $100. and a 10% residual value.160 d) $5.000. what would be the balance reported for the net book value of the machine at December 31.000 with an estimated life of 4 years and a salvage value of $5.000 b) $1.735 6.1 Page 94 4.Introductory Financial Accounting.000. using the straight-line method. 20x7? a) $40. 20x6.000 5.000 c) $1.500 productive hours over the next 4 years. 20x7. The Amortization expense for 20x6.000.750 d) $65.000 c) $5. 20x6? a) $67. Yaari and Yosha Company bought a machine for $85. The machine is expected to be used for a total of 1. a $60. To acquire the land.500 b) $5.000.500 b) $72.000 units.060. During 20x6.000. What is amortization expense for 20x7 under the productive output method? a) $4. A land site was acquired for $1.000 c) $77. was $18.
Prepare the adjusting journal entry to record amortization expense for the year ended December 31. 20x7. assuming the company uses the doubledeclining-balance method of amortization.000 kilometers during the year. b. 20x7.1.Introductory Financial Accounting. the total life of the van would only be 4 years instead of the original estimate of 5 years.000 kilometers. management felt that the van could only be sold for $2.1 Page 95 Problem 5-2 On January 1.000.000 and was expected to have a useful life of 5 years or 200. assuming the company uses the straight-line method of amortization. management of the company decided that.000 at the end of its useful life. Resort Ltd. . Prepare the adjusting journal entry to record amortization expense for the year ended December 31. 2008. Required – a. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. The van cost $65. assuming the company uses the units-of-production method of amortization and that the van was driven 55. In addition. it was estimated that the van could be sold for $5. d. 20x7 and 20x8. assuming the company used the straight-line method of amortization. During 20x8. purchased a van to transport guests between the resort and a nearby airport. At the end of its useful life. 20x7. c. as a result of heavy usage. v. Prepare the adjusting journal entry to record amortization expense for the year ended December 31.
The original estimate of salvage value holds. Recorded amortization expense. . 20x5 Dec 31. Recorded amortization expense. The equipment was completely overhauled at a cost of $20. 20x6 Sep 30.Introductory Financial Accounting. 20x3 Purchased equipment for $60. Sold the asset for $25. 20x3: Jan 2. Recorded amortization expense. 20x4 Dec 31.000 salvage value. v. The estimated useful life of the asset is expected to be 5 years with a $10. 20x4 Apr 31.1. 20x7 Dec 31. Expenditures totaling $2. Dec 31. 20x3 Aug 31.000.000 were made to the equipment. Routine repairs costing $600 were made to the equipment. This increased the quality of the asset’s output but did not change its useful life or the estimate of salvage value.000. Recorded amortization expense. 20x8 Required – Record all of the above transactions assuming that the company uses the straight-line method.000. This increased the useful life of the asset by three years. Recorded amortization expense.1 Page 96 Problem 5-3 The Connor Company had the following transactions over the life of an asset purchased on January 2. 20x5 Dec 31. 20x7 Aug 31.
1. Market value of old asset on June 30. During the installation there was minor damage to the frame. Required – 1. adapted) $ 50.000 38.000. 20x6. On January 1. 20x6. Assume a straight-line method of amortization. MNO Co. (CGA Canada. ABC had to spend $2. Prepare the journal entry to record the sale of the machine on January 1. The following additional information is available: Original cost of the old asset Accumulated amortization at June 30. how the machine will be presented in the assets section of the balance sheet at December 31. v. Show. and the repair cost for it amounted to $500. 4.1 Page 97 Problem 5-4 On June 30.000 cash. bought a state of the art numerically-controlled lathe from GPL by trading in a dissimilar asset and paying $90.000 cash.000. 3.000 15. 20x8. (CGA Canada) . in good form. 20x7. 20x7 Required – Prepare the journal entry to record the purchase of the lathe. 20x8. Prepare the journal entry to record the asset acquisition on July 1. purchased a machine at a cost of $25.500 Problem 5-5 On July 1.500 108. Prepare the journal entry to record the amortization expense on December 31.Introductory Financial Accounting. 20x7. ABC Ltd. 20x6. 2. the machine was sold for $20.000 to install the machine. The machine was expected to have a life of 4 years and a salvage value of $3. which included freight charges of $1.000. 20x7 Price of new lathe.
Determine the amortization expense for the year ending December 31.1. 20x6.Introductory Financial Accounting. 20x6.000 units b. In 20x7. Prepare the journal entry to record the sale assuming the company uses the: i) straight-line method ii) units-of-production method $120. Use this information to answer parts (a). the equipment was sold for $75. On January 1. v.000 units 9. . management felt that the total estimated life of the equipment would be 5 years with a total estimated production of 50. 12. assuming the company uses the: i) straight-line method ii) units-of-production method On January 1.000 $ 20. the estimates were revised. 20x8. assuming the company uses the: i) straight-line method ii) units-of-production method c. Cost Estimated residual value Estimated life Estimated production 20x6 actual production Required a. and (c).000 units were produced. Determine the amortization expense for the year ending December 31.000.1 Page 98 Problem 5-6 The following information pertains to the equipment acquired by Xie Co.000 4 years 40.000 units. No change in estimated residual value was anticipated. due to a preventative maintenance system that had been implemented. (b). 20x7. Accordingly. on January 1. 20x7.
000 cash. Assume that the machine is sold on January 1.000 2/10. for $100. The following information relates to this machine: Invoice price Credit terms* Customs and duty costs Preparation and installation costs $ 140. In this way. Machine No. It incurred interest costs of $12. . 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.1.Introductory Financial Accounting. What amortization method could be used to abide by the president’s request? Is this method acceptable under generally accepted accounting principles? Explain. n/30 $ 5. purchased Machine No. v. Required – a. 103 has a physical life expectancy of 10 years with a salvage value of zero. income can be minimized in 20x3. we get a 2% discount. we have to pay the full invoice price within 30 days. b. However.000 at that time. Compute amortization expense for 20x3 using the straight-line method.1 Page 99 Problem 5-7 German Ltd.000 $ 14. Otherwise. German intends to use the machine for 8 years and hopes to sell it for $15. 20x6. * this means that is we pay within 10 days.000 on this loan during 20x3. 20x3. Prepare the journal entry to record the sale assuming the straight-line method of amortization was used. 103 on January 2.000 to pay for the machine within the discount period and take advantage of the cash discount. c.800 The company borrowed $150.
a company has a fiscal year end of March 31st. For example. a company takes out a loan on January 1st for $10.000 with the terms set at 6% interest due annually. a company purchases office supplies from a supplier for $2. assuming the employees worked the full 7 days in the week. services or supplies for the operation of the company. v.000 2.000 3. $7. The entry would be: Office Supplies Accounts Payable 2.1 Page 100 6. Accounts Payable – these are liabilities that were incurred to purchase goods. $3.1. which represents the three days of work (3 x $1.000. Employees were last paid on March 28th.000/day) Wages Payable (to remove the adjusting entry) Cash 4.000 to the new period. we will go over the main types of current liabilities. If the average daily wage expense is $1.000 on account. The principal must be repaid equally over 5 years. Interest and Principal payments are due December 31st of each year. Typically. 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. For example. but have not been paid. 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). however. and will not be paid again until April 4th.000 3. Current Liabilities A current liability is one that will be settled within one year or the business cycle of the firm.000 to last period and $4.000/day.000 Wages/Salaries Payable – these are wages/salaries that are due to employees for hours worked. the adjusting entry made March 31st would be: Wage Expense Wages Payable 3.000. the entry would be: Wage Expense (4 days x $1. On April 4th.000 7.000 This way.Introductory Financial Accounting. the only time we see this account set up is at the end of a fiscal period when an adjusting entry must be made. For example. We have already covered several of these when we did adjusting entries.000 Note that we are debiting the Wage Expense for $3. when the payment is made for the full week.000/day) that were performed in the period but not paid for. . it is split appropriately and applied to the correct periods. whichever is longer.
000. and the employer ducted the following amounts from its employees’ cheques: Income Taxes.500 . For example. $8. we would split the long-term debt as follows: Current liabilities Current portion of long-term debt Long-term liabilities Long-term debt $2. This ensures accurate reflection of the financial obligations of the company on the Statement of Financial Position. The entry to record payroll for the month would be: Wages Expense Employee Withholdings Payable ($27. Employee Withholdings Payable – Employers are responsible for deducting income taxes.000 10.500 + 8. the interest expense for the year would be $600 ($10. At December 31st.500.500 57.000 On the Statement of Financial Position. CPP and EI from employee’s paycheques.000.000 + 7. $7. we will now show a balance in the Current Liabilities section of $2.000 8. but they also must submit the employer portion of CPP and EI. EI. and that which is due later than one year.000 If a Statement of Financial Position were prepared on the January 1.000. the journal entry would be as follows: Cash Long-term debt 10. and pays 1. Wages total $100.1 Page 101 When the company takes out the loan. Deductions for each month are due on the 15th day of the following month.1. and a balance in the Long-Term Liabilities section of $6.000 42.000 The debt is split into the portion that is due within the year.4 times the employee deduction for EI.000 600 8. 27. a company pays its employees monthly. Not only must the company submit the employee’s portion.000.000) Cash 100. The journal entry would be as follows: Long-term debt Interest Expense Cash 2.000. CPP. v. The employer matches the employee’s contribution for CPP.Introductory Financial Accounting.000 x 6%).
1. 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. or simply lumped in with Wages Expense. The justification is that the financial statements should not be misleading or give false hope or information to any reader.500 + 18. but it does not have to be recognized. If a company knows that there will be a liability. the company would record its portion of payroll expenses due to the government: CPP Expense ($7. For example.Introductory Financial Accounting. Contingent liabilities are those liabilities which are likely to be incurred in the future.500 11. and therefore a loss of some kind to the company. 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.700 Note that CPP Expense and EI Expense could be tracked separately.700) Cash 61. but have not yet come to be. You would record or recognize the FULL amount. and b) the loss can be reasonably estimated.200 18. On the 15th of the next month. then it has to be disclosed through a note in the financial statements. If a contingency meets the first criteria but not the second.000 400.500 x 100%) EI Expense ($8. then they must disclose it when they know about it. One of the resulting GAAP rules that stems from this idea of conservatism is the establishment of contingent liabilities. as done above. your company is being sued for $400.200 Contingent Liabilities One of the guiding principles of accounting is the idea of conservatism.000. A contingent loss should be recognized only when: a) it is likely that a future event will confirm the loss. v.1 Page 102 At the same time.000 . the company pays the government: Employee Withholdings Payable ($42.000 x 1.200 61. This principle states that. The journal entry would be: Unrecognized Loss on lawsuit Contingent Liability – lawsuit 400.40) Employee Withholdings Payable 7.
000 x 4%) Warranty Liability 12. in order to adhere to the matching principle.000 to repair various vacuum cleaners that are under warranty. your lawyer felt you would win. The journal entry would be: Warranty Liability Cash/Inventory/Wages 10.000 10. in the same scenario. in the same scenario.1 Page 103 If. then you do not have to do anything because you do not meet either of the criteria for recording a contingent liability. Another example of matching has to do with warranties. v. Continuing on with the same example.000 This entry not only matches the expense to the period when the revenues were generated.1.Introductory Financial Accounting. You would simply write a note in the financial statements disclosing the lawsuit. is 4% of sales. Total Sales for the year totaled $300. that have been incurred but not paid.000. Again. For example. The journal entry to record warranty expense for the year would be: Warranty Expense ($300.000 12. This principle is the one that guides us when making adjusting entries at the end of the year with regards to expenses. If. a company sells vacuum cleaners that come with a 2-year warranty. but there was no legal precedent for the amount that would be awarded and therefore are unable to estimate the future loss. we must record the associated expense in the period when the . let’s assume that during the next year. your lawyer felt you would lose. all expenses related to those revenues should be recorded at the same time. The company estimates that warranty expense. Warranties & Premiums Another of the guiding principles of accounting is the matching principle. This principle states that for all revenues generated in a specific period. but you would not have to record the loss or the liability. but it also sets up a liability that will be drawn down as actual expenses are incurred over the life of the warranty. When a company sells a product that has a warranty. the company pays $10. such as wages. 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.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. The warranty expense is normally determined through evaluating historical data and coming up with a % of sales that represents the future warranty costs. and the fact that you were likely to lose. on average.
They can then redeem 10 coupons for a watch valued at $10. Furthermore.000 coupons x 40% = $32. The premise behind this is that a dollar today is not worth the same as a dollar received tomorrow. The format for solutions using a financial calculator is as follows: N 5 I/Y 6 PV X PMT FV 1000 Enter Compute In the above example. we are trying the calculate the present value of $1. The combination of these two facts results in a dollar today being worth more than a dollar received in the future. the journal entry would be: Premium Expense* Premium Liability * $800. 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.1. Your sales for the year were $800.Introductory Financial Accounting. you are taking on the risk that the money might not be repaid at all.000 32. . If you are going to be receiving money in the future. pensions and other more complicated longterm liabilities in this section. v.000 Whenever coupons are redeemed. then you are missing out on the opportunity to invest that money today and earn interest on it. or ten years from now. For example. We will instead focus on long-term bonds. Long-term Liabilities Long-term liabilities are defined as liabilities that would not be reasonably expected to be liquidated within a year.000 to be received in 5 years from now at an interest rate of 6%. for every $10 your customers spend. or a year from now. To record the premium liability at the end of the year.1 Page 104 original sale is made.000 32. notes payable. longterm leases and pension obligations. The farther in the future you are to receive the funds. one of the most frequently used financing instruments in business. you have determined that only 40% of your customers will redeem their coupons. the premium liability account is drawn down. they receive 1 coupon.000/$10 = 80.000. Based on past redemption data. These typically include long-term bonds. We will not get into a discussion of leases. the greater the “discount” or decrease in the dollar value will be.
You want to be able to withdraw $60.1.000 per year for the next 30 years. If i=7%.542.000.000.An annuity is defined as a series of identical cash flows that end at a specified time.1 Page 105 With the Texas Instruments BA II Plus.000 worth in “today’s dollars”? N 5 I/Y 6 PV 7.472.000. enter the numbers above in the TVM memory registers to solve.000 will you have to set aside in order to set up this annuity? N 30 I/Y 7 PV X= $744. Calculating the Present Value of a Future Single Sum .Introductory Financial Accounting.47 PMT 60000 FV Enter Compute .58 PMT FV 10000 Enter Compute Present Value of an Annuity . This means that if you were to invest $747.000 from your favorite uncle. If the current and expected future rate of return is 6%. press CPT and the TVM register you are attempting to solve for. the amount would grow to $1.Assume you are going to receive $10.26 today (money out of pocket and therefore the negative sign) and invest it for 5 years at 6% compounded annually. v. Assume you inherit $1. in this case PV the answer provided is -747.000 from your mother 5 years from now.26. 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 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. how much of the $1. what is that $10.
Coupon Rate – the stated interest rate to be paid on the face value. 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. 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). 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%. If the YTM > Coupon Rate. and therefore is willing . Coupon – the amount of semi-annual interest payments to be made on the bond. v. Assume the rate is 7%. If the YTM < Coupon Rate. Also called the market rate.1 Page 106 Annuity Payment Calculation .5% on a 36-month loan.000 in the bank. Coupon rate = Annual Coupon Payments/Face value Yield-to-maturity (YTM) – the rate of return that bondholders expect on the bond given its risk. then the bond will sell at a discount. It is rare that the yield-to-maturity rate and coupon rate are the same. if you issue a bond with a coupon rate of 5% and the YTM is 6%. 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.Introductory Financial Accounting.You have retired with $675. The market takes this into consideration.206.000. You expect to live another 25 years.992.5 PV 80000 PMT X= $30.10 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. For example. as well as make interest payments on the stated amount. how much can you withdraw each year? N 25 I/Y 7 PV 675000 PMT X= $57.1. then the bond will sell at a premium. The manufacturer is offering you financing at a rate of 6. This is because the buyer of the bond gets a higher return by investing in the bonds.
or the amount that we would have received in proceeds would be equal to $1.Introductory Financial Accounting.451 PMT 580002 FV 2000000 Enter Compute 1 2 YTM of 7% / 2 = 3. YTM = 7%.5% $2.829. Example . This is because our coupon rate of 5. Interest will be paid semiannually on June 30 and December 31. every 6 months. N will equal the number of coupon payments left.000 is not our interest expense. We have already calculated that we will be writing a cheque for $58. this $58.451 1. v. the YTM is normally expressed as an annual rate.451 . 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.829.451. The PMT & FV remain the same. The Coupon Rate = 5. we have to sell our bonds at a discount.On January 1.000 to cover our coupon obligation. How much would be raised through this bond issuance? N 20 I/Y 3. This is less than the face value of $2.829.000.8% and they mature in 10 years. 20x8 you issue $2.000 of bonds.829. As such.51 PV X= $1.1. because PMT is equal to the payment made every six months. Furthermore. The Present Value of the bonds. not the number of years.000.8% is less than the market rate of 7%. we must adjust the other factors in the formula to a “6-month” basis. However.000 x 5.000. therefore it will have to be cut in to reflect the situation.000 coupon payment. 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. In order to attract investors.1 Page 107 to pay more than face value for the bonds in order to reap this benefit. 1.8% x = $58.000.
This will be the amount used to calculate the interest expense on December 31st.829. the journal entry will be: Bonds Payable Cash 2.835. v.Introductory Financial Accounting.482 x 7% x Bonds Payable Cash ) 64. the balance in the Bonds Payable account will have been written up to $2.000 After all 20 interest payments have been made.000. you would record the following journal entry: Interest Expense (1.1.000.242 58.000 Note that the $6. Continuing our example.000 . At the time of settlement.835.031 6.000 2. On December 31st.000.451 + 6. the entry for interest expense would be: Interest Expense (1.451 x 7% x Bonds Payable Cash ) 64. on June 30th.242 6. The difference between the Interest Expense and the Coupon Payment is either debited or credited to the Bonds Payable account depending on whether the bond was issued at a premium or a discount. therefore.031 58.000.301 credit to Bonds Payable increases the carrying value of the bond payable account to (1.301) $1.1 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.482.829. give or a take a few dollars for rounding.
000 iv) The bond was issued at a discount a) b) c) d) iv) only i) and iii) i) and ii) ii) and iv) .1. On January 1. 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 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%.Introductory Financial Accounting. Gallaghar Ltd.000 iii) The interest expense for the year will be less than $800. 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 $800.1 Page 109 Problems with Solutions Problem 6-1 – Multiple Choice Questions 1. 20x7. Issued $10 million face value.
20x8? a) $4. How should any liability for the warranty be reported? a) It should be reported as a long-term liability. Assume that a manufacturing corporation has (1) good quality control.00 and 5 coupons must be presented by a customer to receive a premium.000 e) $20. 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. (2) a oneyear operating cycle.000 23.000 . 6. Each premium costs the company $2. whereby it placed a coupon in each package of product sold. c) It should be reported as part current liability and part long-term liability. v.600 c) $9.1 Page 110 4. a company inaugurated a sales promotional campaign on June 30. even though the amount of the loss cannot be reasonably estimated 5. 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. the following information is available: Packages Sold Premiums Purchased Coupons Redeemed 150. d) It need not be disclosed. 20x8. (3) a relatively stable pattern of annual sales. For the 6 months ended December 31.000 10. 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. b) It should be reported as a current liability.300 b) $8.1. 20x8.400 d) $18.Introductory Financial Accounting.500 What is the estimated liability for premium claims outstanding at December 31. the coupons being redeemable for a premium. In an effort to increase sales.
What is the balance in the warranty liability account at the end of the year? .1 Page 111 Problem 6-2 You run a computer repair company. For each $10 your customers spend. then receive 1 coupon. You have been running this program for several years. In order to increase customer loyalty in this fiercely competitive environment you have started a coupon program.000 40.000.Introductory Financial Accounting. Sales for the current year were $3.000. v. The warranty liability at the beginning of the year was $165.1. Required – Prepare all journal entries related to the warranty for the current year. 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? $375.000 and actual costs incurred to service warranties during the year amounted to $130. and data shows that approximately 55% of your customers redeem their coupons.500 coupons Problem 6-3 Company X provides a 3-year warranty on all of the products it sells. They can redeem 15 coupons for a $25 iTunes gift card.000 22.000 and it is estimated that the warranty expense is equal to 5% of sales.
20x6. 20x1 is 8%..1. Assume that the Kaplan Corporation as a December 31 year end. for the year 20x7. Problem 6-6 The following is the general ledger account for estimated warranties of McNeil and Grace Ltd. 20x4. Problem 6-5 The Kaplan Corporation issued $10.1 Page 112 Problem 6-4 On July 1. The yield to maturity on December 31 was 8%. 3. 20x7.200 5.000 Opening balance Total credits during the year Required – 1. v. Assume that the going market interest rate for similar bonds on July 1.000. The bonds pay interest semi-annually on December 31 and June 30 and are due in five years.5% coupon bonds on December 31.Introductory Financial Accounting. Required – Prepare the journal entries to record the issue of the bonds on July 1. what is the estimated liability for future warranties? At December 31. 20x1. Warranty Liability Dr Cr $10. 20x1 and the first two interest payments.800 Total debits during the year $6. Required – Prepare all journal entries with regards to this bond for the years 20x4 and 20x5. The bonds mature in 15 years. What is the dollar value of warranty repairs performed in 20x7? What is the warranty expense for the year 20x7? At December 31. 4.000 of 8. automobile dealers. 2. The company issues warranty agreements immediately upon the sale of an automobile. Gamma Corporation issued bonds with a face value of $500. what was the estimated liability for future warranties? (CGA Canada) . Coupon payment dates are June 30 and Dec 31 of every year.000 and a coupon rate of 10%.
as the market rate was 10%. GHI’s year end is December 31. 4. to yield 10%. b.1 Page 113 Problem 6-7 GHI Company issued $500. 8% bonds.000. The bonds were sold at a yield of 8%. The Interest Expense for the 1997 year will be less than $100. 20x6. The Interest Expense will be the same every year. 10-year. 20x7. Ardalan and Baker Inc.000.171. (CGA Adapted) Problem 6-8 On July 1. 12% coupon bonds. The cash outflow towards interest on the bonds will be more than $80. 20 year.1. three-year.000 face value. The Interest Expense for the 1997 year will be more than $80.171. 20x6. Prepare the journal entry(ies) to record interest expense for the period ending December 31.000. face value. (CGA Canada adapted) .591 was calculated. Required – 1. issued $1 million semi-annual. uses the effective interest method to calculate interest expense on these bonds. Prepare the journal entry(ies) to record interest expense and coupon payment on June 30. Interest on the bonds is paid semi-annually on December 31 and June 30. They were issued at a price of $1.Introductory Financial Accounting.000. Required If Adrdalan and Baker Inc. Alpha Beta Ltd. issued $1 million face value. and pays interest on July 1 and January 1. 20x6. Required Prepare all journal entries for the life of this bond issue. 20x7. 3.591. (CGA Canada adapted) Problem 6-9 On January 1. v. indicate whether each of the following statements would be true or false. d. c. 20x6. a. 2. Prepare the journal entry to record the issue of the bonds at July 1. Show how the $1. 9% bonds on January 1. The bonds were issued at a discount for $897.
1. it can be drawn down. Shareholder investments will result in the company issuing shares to the investors – these shares can take the form of preferred shares or common shares. If the book value per share is less than the cash paid out to retire the shares. then the debit required to balance the journal entry is allocated as follows: • if there is any Contributed Surplus relative to common shares.1 Page 114 7. any cash remaining after all obligations have been settled revert back to common shareholders. If the book value per share is greater than the cash paid out to retire the shares. the journal entry would be: Land Common shares $250. a company cannot purchase its own common shares. • upon liquidation of the company.000 If common shares are issued in exchange for a parcel of land whose fair market value is $250.000 $100. 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. we credit an account called Contributed Surplus for the difference. Common shares can be issued for cash or any other asset. meaning they never become due. The debit to the common shares account is equal to the weighted average book value per share times the number of shares retired. hold them. Shareholders’ Equity As mentioned in Chapter 1.Introductory Financial Accounting. Shareholders’ Equity is fundamentally made up of two elements: contributed capital and retained earnings. v. and • they are a perpetuity. Contributed capital comprises of the investment made in the corporation by its shareholders. Dividends become a liability of the corporation only when the board of directors declares them. Common Shares Common shares typically have the following features: • they provide the right to vote at annual meetings. Retained earnings represent the cumulative earnings of the corporation less any dividend distributions to its shareholders.000 $250.000 cash. any dividend declarations are at the sole discretion of the company’s board of directors. and then re-sell them).000 When common shares are repurchased. then the journal entry would be: Cash Common shares $100. For example.000.e. . that is.
091) Contributed surplus Cash 1 $2.150.000 x $16.000 common shares at a total cost of $260.000 7.000.09 7.000 cash Issued 50.500.150.500.000.000 common shares at a total cost of $280. v. Example – The Noor Company’s shareholders’ equity section at December 31.000 Jun 16 Cash Common shares Common shares (10.000 186.000 + 1.000.000 / 1.000.000 321.500.000 Mar 18 Apr 30 Balance in common share account: = $15.800 61.100 280.000 $2.000 common shares for $2.000.000 Issued 250.612) Contributed surplus Retained earnings Cash Aug 18 .000 Number of common shares outstanding: = 1.000 cash Retired 10.500.000 The journal entries to record the above transactions are as follows: Jan 15 Cash Common shares Land Common shares Common shares (20. 1.000 + 2.000 $15.1.000.000 + 100.000 shares outstanding Retained earnings The following transactions took place during the year: Jan 15 Mar 18 Apr 30 Jun 16 Aug 18 Issued 100.000 = $18.000 + 50.100 61.500.000 = 1.000 12.000.800 32.500.000.000 Book Value per common share: = $18.1 Page 115 • any remainder gets debited to Retained Earnings.000 Retired 20.000 x $18.000 1.500.Introductory Financial Accounting.000 common shares in exchange for land valued at $1.000.000 = $16.800 260.500.000 1.500.000 common shares for $7. 20x6 was as follows: Common shares.
20x5 is as follows: Common shares. 20x6 and management wants to pay a dividend of $5 per common shares.000 shares outstanding Preferred shares.000 Book Value per common share: = $25.500.00 x 2 years = $1.000 .000 shares x $8. Example – The Jarvis Corporation’s shareholders’ equity as at December 31. the preferred dividends for the year 20x6 must be paid: 100.380.1. It is now December 1.000 = $25.000.678.00 x 1 year = $800. cumulative.000 The preferred share dividends were last paid on December 31.Introductory Financial Accounting. This means that if dividends are missed.600. 100.1 Page 116 2 Balance in common share account: = $18. v.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).000.000 = 1. 20x3. they are a perpetuity.500. First.200 Number of common shares outstanding: = 1. any dividends in arrears due to preferred shareholders must be paid before any dividends can be paid to common shareholders. • like common shares. Dividends become a liability of the corporation only when the board of directors declares them. the corporation is under no obligation to provide a financial return to common shareholders. the preferred dividends in arrears for 20x4 and 20x5 will have to be paid: 100. Like common shares. any dividend declarations are at the sole discretion of the company’s board of directors.000.000 – 20.000 shares x $8.000 shares outstanding Retained earnings $35. 1.000 10.678.200/ 1.000. However. in most cases preferred shares are cumulative.150.000 – 321.380.000 + 250.000 = $18.800 + 7. $8. that is.000 Next.00.000 40. • they carry a stated dividend per share.
000 + 800. the stock may become unattractive to small shareholders who have to disburse larger sums in order to acquire shares of the corporation. There is NO journal entry required when a stock split is declared.000 Stock Splits When the stock price of a corporation is high.000 shares x $5 = $5. If a shareholder owns 1. the company will split the stock.000 = $7. v.600.000 The total dividend to be declared will be: $1. For example.000. a 2:1 split means that the number of shares outstanding will double.1 Page 117 Finally.1. the dividend to common shareholders can be paid: 1.000 + 5.400.000 shares as a result of the stock split resulting in a total of 2. . 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. This will result in the share price dropping by half.Introductory Financial Accounting. In order to reduce the share price.000 shares. this same shareholder will receive an additional 1. 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. Any premiums paid on retirement of shares are also charged to retained earnings.000 shares of shares before the split.000.000.
end of year $ XXX -XXX ±XXX -XXX $ XXX .1.Introductory Financial Accounting. beginning of year Premium on redemption of shares Net income (loss) for the year Dividends Retained earnings.1 Page 118 The statement of retained earnings is as follows: Retained earnings. v.
1 Page 119 Problems with Solutions Problem 7-1 – Multiple Choice Questions 1. Which of the following statements will be true when the stock split is accounted for? a) Retained earnings will be reduced by $4.000. b) Shareholders’ equity will increase by $3.Introductory Financial Accounting. v. The shares were selling at $30 each when management announced a three-for-two stock split.000 common shares outstanding. c) The number of common shares outstanding will be 225. XYZ Corporation has 150.000.000. .000.1.500. d) The number of common shares outstanding will be 250.000.
a new company.000. Issued 2. Issued 400 preferred shares to acquire a patent with a market value of $40.000 . Record the transactions in journal entry form.32 per share.000 $6 non-cumulative preferred shares and 100. Required 1. balance sheet as at February 28. Prepare the shareholders’ equity section of the Payne and Papineau Inc. to issue 10.Introductory Financial Accounting. Declared a 2 for 1 stock split. Hilary and Sam Corporation completed the following transactions: February 2 February 10 February 15 February 26 February 27 February 28 Issued 9. v. Declared cash dividends on the common shares in the amount of $0.000 common shares for cash of $12.1 Page 120 Problem 7-2 The articles of incorporation authorize Hilary and Sam Corporation.000 shares to Sam in return for cash equal to the shares’ market value of $6 per share.1. Net income for the month was $56.000 common shares to Hilary and 12.000 common shares. 2.000. Declared cash dividends on the preferred shares. In its first month.
$1. b. Convertible bonds with a face value of $50.00 common share dividend h. Issued 1.000 were converted into 500 common shares. Required 1.000 and book value of $53. Issued 1. Declared a cash dividend on preferred shares. g. d. Prepare the shareholders’ equity section of the Statement of Financial Position. cumulative preferred shares. 2. During the first year of operations the following events occurred: a. .1 Page 121 Problem 7-3 M-F Inc. Provide the journal entries for each transaction above.000 preferred shares at $20 each. Issued 1. Net income was $64. c.000.500 common shares at $120 each. is authorized to issue 100.000 common shares at $115 per share. Paid the preferred dividend. v.000 preferred shares in exchange for equipment. f. The equipment had a fair market value of $40. Issued 2. e.Introductory Financial Accounting.000 common shares and 50.000 for the year.000. Declared and paid a $5.00. The convertible bonds were issued earlier in the year.1.
The Accounting Cycle Revisited The purpose of this chapter is to bring all of the accounting issues discussed in the previous chapters together in the form of integrative problems. v.1 Page 122 8. Enjoy! .1. just the integration of previously covered materials. Therefore. There is no new material. the only materials in this chapter are the problems with solutions.Introductory Financial Accounting.
Coupon payment dates are on June 30 and Dec 31. The average useful life of equipment is 10 years. The patent remaining useful life at December 31. The equipment is being amortized using the double declining balance method. 5.5% and the yield to maturity at the time the bonds were issued was 6%.000 34. The bonds mature on December 31.400 Additional information 1.000 5. 20x6. 7.200 $1. The face value of the bonds is $400. 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. 6.400 40. .000 144.000.400 Cr.000 shares of common stock outstanding.052. 20x1.600 150.Introductory Financial Accounting.1 Page 123 Problem 8-1 The Haider Corporation’s post-closing trial balance at December 31. The building is being amortized on a straight-line basis over 40 years. 20x5 was as follows: Dr.000 419. The company uses a FIFO periodic inventory system. v. The prepaid insurance is for a one year policy taken out in 20x5 that expires on March 1.000 176.000 120. the coupon rate is 6. 8.000 $23. 2.000 13. 4. 20x5 is 8 years.000 300.000 1.000 127.1. The company provides a one year warranty on its products. $1.000 145. 3.5% of sales.000 320.052.000 38. The bonds were issued on January 2. Warranty expense is estimated at 1.600 12. There are 10. 20x20.
Introductory Financial Accounting. 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. Accounts written off totaled $34. Total sales on account were $1. 21.000.400 130.000 was returned to suppliers. 10.000 The following adjustments need to be made at year-end: 17. 14 15. equipment and patents.000. Inventory purchased on account totaled $960.000.000 30. The warranty expense for the year is accrued. an additional 3. Recoveries of previously written off accounts receivable totaled $5. 20.000. Estimated % Uncollectible 3% 7% 20% 50% An adjustment is made for insurance expense.000 22.000 26.000 18. . 20x6 and the total cost of the inventory was determined to be $378.000 $222. On March15.000.000 23. The accounts receivable aging schedule is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $144. 5. Cash collections on accounts receivable totaled $1. 7.000.520. 12. 13. v.000 43.000 40.000 common shares were issued for $75.600. 4. 3.000 common shares on Aug 23 Insurance policy taken out on March 1 – one year policy. 6.000. 11.1. Inventory costing $16. 9.000 12.1 Page 124 The following transactions took place during the year: 1. The inventory was counted on December 31.000 2.000 320. 16. Cash disbursements were as follows: 8.000. Operating expenses paid $945. Amortization expense on the building. 2. 19. The aggregate net realizable value of the inventory was determined to be $365.000 25.
The income tax expense is 40%. 20x6.1 Page 125 22.700. Prepare journal entries for the above transactions and enter all the above transactions in T-Accounts. 20x6 amount to $6. 23.Introductory Financial Accounting. c. b. 24.000 were declared and paid on December 15. Required – a. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position .1. v. Dividends of $80. Salaries payable at December 31.
$4.e. i. 20x5. the patent account was debited and cash credited for $11. The sales have been recorded. 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. the principal plus the interest is payable one year later. f. for one year.700. cash was debited and notes payable credited for $60. which was debited to prepaid insurance.Introductory Financial Accounting. you do not need to provide the original entry): a. which cost $80. The company received from a customer a 9% note with a face amount of $12. is to be depreciated for the full year. costs incurred for the warranty to date. The note was dated September 1. It is now December 31.000 units of a product that was subject to a warranty. h. pacific Company sold 10. During the year. 20x6. v. totalling $8. It had to pay the full amount of rent one year in advance on June 1. Past history indicates that 3% of units sold require repairs at an average cost of $40 per unit. 20x5. which was debited to rent expense. amounting to $9. The estimated loss rate on bad debts is 3% of sales. c. amounting to $9. On that date. j.000. Notes receivable was debited. 20x5. and the residual value. On January 1.1.900 were purchased and debited to supplies expense. Unpaid and unrecorded wages incurred at December 31 amounted to $4.900. September 1. The company paid a two-year insurance premium in advance on April 1.1 Page 126 Problem 8-2 Pacific Company adjusts and closes its books each December 31.000. supplies of $21. . The company purchased a patent on January 1.900. the company signed a $60.600. inventory of $9. Pacific Corporation had a supplies inventory of $4. Use straight-line amortization.000. d. During the year. Machine A. 10% note payable. were debited to warranty liability when paid.000. The patent has an estimated useful life of 17 years and no residual value.000.200 was on hand.600. On April 1. The estimated useful life is 10 years. 20x5. 20x5.500. g. b. and the adjusting entries are to be made. 20x5. At the end of the year. Credit sales for the year amounted to $320. No warranty expense has been recognized. and sales revenue was credited on the date of sale. The note is payable on March 31. The company rented a warehouse on June 1. e. at a cost of $11. 20x5. i.000. On that date. for the face amount plus interest for one year.800.
Pre-tax income has been computed to be $80. .1 Page 127 k.000 after all the above adjustments.000 bad debt. ABC Corporation wrote off a $16.Introductory Financial Accounting. v.1. l. Assume an average income tax rate of 30%.
Sale of common shares Cash sales Rebates from purchases Collections on credit sales Bank loan proceeds $ 2.500.920 3. Baking materials Rent Salaries and wages Maintenance Utilities Insurance premium Equipment Principal and interest payment on bank loan Advertising $14. She started a baking business in her home and has been operating in a rented building with a storefront. and additional equipment is needed to accommodate expected continued growth. for the first five months of 20x2 and a balance sheet as of May 31.000 312 424 $31.466 . The following amounts were disbursed through May 31. 20x2. Sales have increased 30%.1. Spier incorporated this business as MAS Inc.000 1. 20x2. Spier wishes to purchase some additional baking equipment and to finance the equipment through a long-term note from a commercial bank.800 5.400 1.000 shares of common share for $2.320 2.Introductory Financial Accounting. 1.1 Page 128 Problem 8-3 Anne Spier has prepared baked goods for resale for several years now.600 2.500 22. Anne Spier is the principal shareholder of MAS Inc. v.770 130 5. annually since operations began at the present location. 20x2. on January 1.880 $33.500 110 4. with an initial shares issue of 1. The bank statement showed the following 20x2 deposits through May 3l. Spier assembled the following information from the corporation's cash basis records for use in preparing the financial statements requested by the bank. Kelowna Bank & Trust has asked Spier to submit an income statement for MAS Inc.
New display cases and equipment costing $3. and no cash was transferred from the unincorporated business to the corporation. No materials were on hand or in process and no finished goods were on hand at January 1. 20x1 were not included in the corporation's records. Customer records showed uncollected sales of $4. and were due an additional $240 on May 31. July 1. Baking materials Utilities $ 256 270 $ 526 4. and states a simple interest rate of 10%.1. prepare for MAS Inc.1 Page 129 3. 20x2 (b) A balance sheet as of May 31. 20x2 MAS Inc. 10. 7. 6. 20x2. and have an estimated useful life of five years. 20x2.840 were on hand at May 31. and January 1 consisting of equal principal payments plus accrued interest since the last payment. v. The note evidencing the 3-year bank loan is dated January 1. 20x2.226 at May 31. Required Using the accrual basis of accounting. 20x2. May 25. 20x2. 12.000 were purchased on January 2. 8. 20x2. 9.: (a) An income statement for the five months ended May 31.Introductory Financial Accounting. Payments and collections pertaining to the unincorporated business through December 31. were as follows. 5. Straight line amortization is to be used for book purposes. 20x2. Baking materials costing $1. is subject to an income tax rate of 20%. 20x2. Rent was paid for six months in advance on January 2. Anne Spier receives a salary of $750 on the last day of each month. October 1. Unpaid invoices at May 31. 11. These are the only fixed assets currently used in the business. 20x2. The other employees had been paid through Friday. 20x2. The loan requires quarterly payments on April 1. A one-year insurance policy was purchased on January 2. . There were no materials in process or finished goods on hand at that date.
000 of its common shares for $25 per share. Receivables at the beginning of 20x2 totalled $ 155. There have been no other common share transactions. 20x2. The sale of equipment was made on December 30. Retained earnings at the beginning of 20x2 totalled $63.500 $205. December 31. payable annually Customer collections Proceeds on sale of fully depreciated equipment (original cost. Morrow's only other asset at the beginning of 20x2 was an investment in Honeydew common shares.000 was recognized. During 20x2 these shares were exchanged for land and a gain of $4.20x1 Deposits during 20x2: Cash sales Proceeds of $5.000 for unpaid purchases of merchandise on December 31. .000) Cheques written during 20x2: Purchases of merchandise Salaries Advertising (to be run in 20x3) Miscellaneous expenses $ 24. The income tax rate is 30 percent.1.000 was declared and is to be paid in January 20x3. you have been presented with the following information: a) Morrow is incorporated and initially sold 11.000 5. equipment with a cost and accumulated depreciation of $80.000 10.000.Introductory Financial Accounting. In 20x2 Morrow began selling on a cash-only basis. During the fourth quarter of 20x2. b) Cash balance in cheque book. was on hand. Morrow's cost of goods sold is 80 percent of sales. respectively. for Morrow Wholesale. As the senior auditor in charge of the audit. and a balance sheet at December 31.000.000 note issued on July 1 and bearing interest at 12%. 20x2. v. At the end of 20x2. $20.000.1 Page 130 Problem 8-4 Morrow Wholesale has kept limited records and has never had an audit until 20x2.000 10.000 and $20. All equipment is depreciated on a straight-line basis over ten years with no estimated salvage value. a cash dividend of $10. Prepare an income statement for the year ended December 31.000 $180. 20x2.000 $406.500 c) d) e) f) g) h) i) j) Morrow had no outstanding payables at the beginning of 20x2 but owes creditors $36. 20x2.600 have accrued but have not been paid. At the beginning of 20x2. The uncollected receivables were written off as miscellaneous expenses in 20x2.000 5.000 5.000 $250. sales salaries of $1.000 146.000. The inventory at the beginning of 20x2 was $80.
Most of what we do.000 Additional information: Dividends of $150. if a company pays off or retires debt this uses cash. this generates cash. This statement is broken into three distinct sections. Try to keep in mind that when you are working with this statement.Introductory Financial Accounting.000 300. is based on the accrual system. The Statement of Cash Flow The statement of cash flow shows a company’s inflows and outflows of cash during a particular period. this generates cash. There are two distinct methods in presenting cash flow from operations: the direct and the indirect method.1 Page 131 9. . Both methods will be covered later in this section. 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.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. however.000 650. GAAP suggests a preference for the direct method. If a company retires shares. v.000 180. your main concern is incoming and outgoing cash. If a company pays dividends.000 20x7 $ 250.000 450. Some students find the statement of cash flow to be a challenge because they are still thinking with an “accrual” mind.000 215. 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. and shows how a company’s actions have affected its net cash position throughout the period.1. If a company issues new shares. then this uses cash.000 were declared and paid to shareholders during the year. this uses cash Example . either the direct or indirect methods can be used. as accountants. If a company issues new debt.000 150.
000) 100.000 (30. The difference between the proceeds.Introductory Financial Accounting.000 (170. we analyze at the Retained Earnings Account: Opening Retained Earnings + Net Income . Remember.000 20x7 $ 300.Dividends = Closing Retained Earnings In the above case.000 (180. Example . we know that retained earnings increased by a net of $85.000 = $300.000) 200.000 (10.000 + Net Income . when a sale of a long-term asset is made.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.$150. we have to reconcile the long-term asset accounts.000 (150. we know all numbers in this formula except Net Income.000 Alternatively.000 + dividends of $150.000) $ 170. and changes in them from one period to the next.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. we can calculate the Net Income. the net income for the year is $85.000. Given that dividends decrease retained earnings. 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. Rearranging the formula. Often.000) 100.000. when dealing with this section.1.000 (60. or cash we receive.000) 0 .000 Net Income = $235.000 To calculate the company’s net income for 20x8. we remove the asset and all associated accumulated amortization. $215. and the NBV (cost – accumulated amortization) is recorded as a gain/loss on sale.000 = $235. v.
000.000. then the cash proceeds on the sale of fixtures would have to be $15.000 worth of equipment was purchased for cash during the year. If the gain on sale was $10.000 (100.000 + 10. • new fixtures were purchased for $100. Note that because no cash exchanged hands for the purchase of the land.000) * The cost of the fixtures was $75.000 with a NBV of $15. v. excluding interest payable. costing $75.000) 25.000 worth of common shares to the supplier.1.000 giving a net book value of $15. • the original fixtures. Cash Flow from Operations – Direct Method This method of determining cash flow from operations uses the income statement as its starting point.000 cash.000.Introductory Financial Accounting.000. There are a minimum of four main sub-sections in determining the cash flow from operations (note that these are a minimum.1 Page 133 Additional Information: • $50. 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. it does not appear in this section. 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. All non-cash transactions are by definition excluded from the statement of cash flow. 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. were sold at a gain of $10.000 = $25.000) ($125. and essentially takes each income statement item and converts it into cash. • the land was obtained through issuing $100.000 and the accumulated amortization was $60.
000 8.000 1.000) $172.000 200.000 231.000 10.000 14.000 $660.000 80.000 20x6 $42.000 24.000 104.000 46.000 $135.000 27.000 2.000 23.000 120.000 2. Income Statement For the Year ended December 31.000 5.1.000 15.000 68.000 21.000 429.Introductory Financial Accounting.000 (25.000 3. 20x7 20x7 ASSETS Cash Accounts Receivable Inventory Capital assets Less accumulated amortization LIABILITIES Accounts Payable Salaries Payable Interest Payable Taxes Payable Bonds Payable SHAREHOLDERS’ EQUITY Common Stock Retained Earnings $76.000 82.000 104.000 (20.000 50. 20x7 Sales revenue Cost of Goods Sold Gross Margin Operating Expenses: Salaries Expense Amortization Expense Office and Administration Expenses Operating income Interest Expense Net Income before taxes Income tax Expense Net Income Jack’s Joke Shop Inc.000) 135.000 12.000 21.000 89.000 10.000 82.1 Page 134 Example – Calculate cash flow from operations – direct method.000 5.000 62. Jack’s Joke Shop Inc. v.000 325.000 73.600 $ 67. Comparative Unclassified Statement of Financial Position As at December 31.000 $172.400 .000 39.
However.000 2. waiting to be sold.000. In this case.000 120. the amount of our Inventory account increased by $2. nor are we told how much of the 20x6 accounts receivable balance have been collected. 20x7. If accounts receivable increased.000 (2.1 Page 135 Cash collected from customers: Sales Less increase in accounts receivable $660.000 increase in Accounts Receivable.000 (6. Note also that although we combined all three expense items in one single calculation. Therefore. v. 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. and which are made on credit. we can simply analyze the difference. therefore we reduce sales to calculate cash collected from customers.000 Why did we subtract the $6. 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. Conversely.000 2. salaries expense. We are not told what percentage of the total sales are made for cash. which is a non-cash item and interest and income tax expense which will be dealt with separately. and office & administrative salaries. These comprise all of the expense items on the statement of financial position with the exception of amortization expense.000 235. .1.000) $654.000) $231. then we collected more than we accrued and this would be added to sales.000 198. because we are told the balance at December 31. then this means that sales have not yet been collected – that is.000 $553.000 Note that the starting point for each calculation is the following expense items: cost of goods sold. The first thing we do is adjust it to obtain the purchases made during the period. if accounts receivable decreased.Introductory Financial Accounting. This means that we purchased additional inventory that is now sitting in our warehouse. 20x6 and the balance at December 31. we accrued more sales than we collected.
so we deduce the increase in interest payable to interest expense. should the opposite have occurred.000 more this December 31st than we did last. Note.600 (12.000). Cash paid for interest: Interest expense Less increase in interest payable $15. then you simply include the full expense amount as the cash paid for that expense. inventory decreased. and any decrease would be added. if the Accounts Payable account decreases. any increase in the Income Tax Payable account would be subtracted from the expense to get to the total cash paid.000 increase to COGS.000 (1.000) $14. . other than interest and taxes.000 ($231.000) $9. That is. is subtracted from the expense to get to the total cash paid. then we have paid more to our suppliers than the purchases. If. v.000. we have to add the $2. and any decrease in liabilities is added. as in the case of Office & Administration Expenses above. you start with the Income Statement amount and then account for any changes in the associated statement of financial position account(s). This is why we add back the $2. That is. we will subtract the $12.1 Page 136 to calculate purchases.1. on the other hand.000 In this case. Purchases for the year in this case would be $233. like it did in the above example. we owe $12.Introductory Financial Accounting. interest payable went up which means that we accrued more interest than we paid. we would have subtracted the amount from COGS to get total money paid to suppliers.600 The treatment for taxes is the same as for interest. there appears to be no associated statement of financial position account. Any increase in liabilities. are treated in the manner that the Salaries Expense was treated above. If there is no such account. In dealing with the change in accounts payable.000 from our Interest Tax Expense to get the total cash paid for taxes. Cash paid for taxes: Income tax expense Less increase in income taxes payable $21. All other expenses. then this means that we would have purchased less than what was sold and we would have decreased COGS in order to obtain purchases.000 + 2. Again. In this example. Therefore. like salaries payable.
This would include changes in accounts receivable. 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 $ 67.400 5. we start with the bottom line .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.Introductory Financial Accounting.000 (553.000 12. as well as all current payable accounts. Increases (decreases) in current assets are cash outflows (inflows.000) (14.000) (9.000 $77.Net Income. v. inventory. We then add or subtract any changes in the non-cash current asset and liability accounts.400 . Increases (decreases) in current liabilities are cash inflows (outflows). We then add back any non-cash items that may appear on the income statement. The most common of these are amortization expense and gains/losses on the sale of capital assets.000) 2.400 Cash from Operations – Indirect Method Under the Indirect Method.600) $ 77.000) (2.000 1.000 (6.1.000) (2.
000 Definition of Cash For purposes of the statement of cash flow.000 42.000 + 67.000) (66.400) (43. term deposits and any highly liquid assets (i. .400) Net Change in Cash ($77.1. 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. This includes cash. the term ‘cash’ is defined as ‘cash and cash equivalents’.Introductory Financial Accounting.1 Page 138 To continue the example. let’s finish with the cash flow statement.e. v.000 $ 76. readily convertible to cash) subject to an insignificant risk of change in value.400 + 0 – 43.000 = 66. 20x7 30.000 (7.400) Opening Cash Balance – December 31.400) 34. 20x6 Ending Cash Balance – December 31.400 – 24.
000 7.000 79.000 243. v.000) 15. Ginger’s Cookies Ltd.000 120.Introductory Financial Accounting.100 $146.000) 226.1 Page 139 Problems with Solutions Problem 9-1 The following is the Income Statement and comparative Statement of Financial Position for Ginger’s Cookies Ltd.000 $750.000 300.000 (17.000 450.000 80.1.000 207. 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. Income Statement for the Year ended December 31.900 .
000 7.1. Prepare a Statement of Cash Flow using the Direct Method.000 108.500 50. . v. b.500 90.500 $ 19. costing $45.200 80. 20x6. Ginger’s paid cash for the equipment.1 Page 140 Ginger’s Cookies Ltd.200 20x5 Additional Information: on January 2.000 0 33.000 117.100 $ 14.400 $275.Introductory Financial Accounting. Required – a.000 10.200 $ 27.000 45.000 10.000 125.000 (40.100 30.000 61.000) $144.000 (7. Comparative Unclassified Statement of Financial Position as at December 31. was replaced by a new piece of machinery costing $125.000 $144.200 $ 20.000 111.000) $275.000 40. 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 50.400 6.000.400 158.000.800 2. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method. the only piece of equipment.000 47.000 43.
000 43.000.000 $ 4.631.000 319.212.000 1.000 800.000 2.000 20x2 $ 353.000 $ 909.1.000 1.000 999.045.000 82.000 1.000 1.854.000 32.500.000 Capital assets Accumulated amortization Bonds payable Mortgage payable Shareholders’ equity Common shares Retained earnings .000 5.054. are shown below.000 35.212.000 45.000) 1.060.000 508.429.000 850.Introductory Financial Accounting.000 450.842.000 3.093. MCDUFF LTD.000 Current liabilities Accounts payable Salaries and wages payable Interest payable Income taxes payable $ 897.000 1.358.019.000 (3.000) 1.000 1.326.000 1.091.343.000 $ 4.1 Page 141 Problem 9-2 The comparative statements of financial position of McDuff Ltd.695.000 28. v.000 1.000 700.000 $ 4.000 30.000 5.869.000 2.000 $ 4.000 888.060.711. Statement of Financial Position December 31 20x3 Current assets Cash Accounts receivable Merchandise inventory Prepaid expenses $ 319.000 (3.041.000 119.000 2.
000) 489. Use the indirect method to report the operating activities.000 Additional information 1. b. McDuff sold capital assets that cost $158.000) $4. On April 15. 20x3.000 550.400.000.1. 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. bonds with a net book value of $500. Amortization expense is included in Operating expenses.500. .000 700. 2.000 (7.000 (61.1 Page 142 MCDUFF LTD. Prepare the cash flow from operations section using the direct method.000. 3.000 2.Introductory Financial Accounting.000 were retired for $487. for $80.000 $239. 20x3. Prepare a cash flow statement for the year ending December 31.000. v.000 250. 20x3.000 850. On August 31.000. Income Statement For the year ended December 31. with a book value of $87. Required a.000) (67.
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.800 7.800 5.300 5. 20x5 Sales Expenses: Cost of goods sold Salaries expense Insurance expense Depreciation expense Rent expense Interest expense Net loss $ 218.1 Page 143 Problem 9-3 The following data are available for HHC Ltd. HHC LTD. v.000 5.200 221.300 600 5.000 1.400) Comparative partial balance sheets at December 31.700 500 5. adapted) $ 4.000 1.700 8.000 500 .000 600 20x4 $4.700 4. Income Statement for the year ended December 31.300 2.300 10.Introductory Financial Accounting.800 7.300 1.400 $ (3.000 39.000 $ 165.1.
000 80.000 Liabilities and Shareholders’ Equity Accounts payable Bonds payable Preferred shares Common shares Retained earnings $ 22.000 87.000 $ 699.000 $ 100.000) 0 (12.000 0 0 58.000 Assets Cash Accounts receivable Inventory Long-term investment Land Buildings and equipment Accumulated amortization TORAM Ltd.000) 25.000) (22.000 0 80.000 53.000 43.1.000 (12. Income Statement for the year ended December 31.000 92.000 475.000 $ (18.000 $634. 31 20x6 $ 50.000 423.000 Dec.Introductory Financial Accounting.000 423. v.000) $ 681. 20x5 and 20x6.000 86. 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 $ 165.000 300.1 Page 144 Problem 9-4 Toram Ltd.000 $ 40.000 .000 200.000 (101.000 463.000 39. 20x6 are as follows: TORAM LTD.000 (18.000 600.000 85. 31 20x5 $ 26.000 18.000 4.000 144.000) $ 900.000 25.000 119.000 $ 65.000) $ 624.’s comparative balance sheets at December 31.000) $ 57. and its income statement for the year ended December 31.000 Net Change $ 24. Balance Sheets Dec.000 32.000 0 85.000 (123.
000 cash dividend.000. Issued $25. Declared and paid a $50. (CGA Canada adapted) .000 of bonds payable at face value.000 cash that had originally cost $32. Sold equipment for $7. 2. b. Sold the long-term investment on January 1.000 and had $21. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method. Purchased equipment for $20. 4.1 Page 145 During 20x6. 3.1. Prepare a Statement of Cash Flow using the Direct Method. for $30.Introductory Financial Accounting. v.000 cash. 20x6. the following transactions occurred: 1. 5.000 of accumulated amortization. Required – a.
e. be recognized. repayment of principal. Net cash flows from future operations. 8. Future cash flows from changes in the levels of investments made by shareholders and creditors. of course.1.. from activities considered incidental to the firm's main function. However. published financial statements are historical in nature and do not provide the information we have just outlined. The amount of future cash flow to service debt requirements. i. historical information can be used to make projections and is sometimes extremely useful in this respect. Financial Analysis Techniques 1. the investor must predict those things that affect dividend policy. sinking fund provisions.Introductory Financial Accounting. 4. 5. Financial Statement Analysis The broad purpose of financial statement analysis is to enable a user to make predictions about the firm that will assist his/her decision making. which the investor would like to predict. Management's attitude toward future cash dividend policy. The limitations of using historical information must. 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. The amount of cash expected to be invested in the firm's long lived assets as well as in working capital. 3. 2.1 Page 146 10. The following are the variables that affect a firm's future dividend policy: 1. 7. i. 6. Published financial statements are the sources of information generally available to users.e. Expected non-operating cash flows. Vertical and Percentage (common size) analysis . The nature of the analysis of financial statement information is primarily in the form of ratios. interest payments. In order to predict the company's future dividend policy. Nonetheless. v. Each of these eight variables that affect future dividend policy is in turn affected by others.. etc. The amount of future cash flow from random events such as windfall gain or casualties. Horizontal (trend).
509 7.673 827 273 $554 20x6 $13.1 Page 147 Horizontal analysis expresses financial data in terms of a single designated base period.546 1.619 12.1. v.073 354 $719 . or as compared to an amount of the preceding period.975 7.369 606 200 $406 20x4 $8.882 627 207 $420 20x5 $11.Introductory Financial Accounting. the historical financial performance data for a company for the years 20x3 to 20x6 (all data is in millions of dollars) 20x3 Revenue Expenses Net income before taxes Income taxes Net income $7. For example.500 10.
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
If current liabilities exceed current assets.000 2.500.000 at December 31.0. 20x7. During 20x8. R Company’s net accounts receivable were $50.0 .000.Introductory Financial Accounting. Which of the following ratios measures long-term solvency? a) Quick Ratio b) Days sales in accounts receivable c) Debt to equity ratio d) Current ratio 4.5 b) 5.000 at December 31.1.500 b) $335. The accounts receivable turnover for 20x8 was 7. 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. What were R’s total net sales for 20x8? a) $227. Net cash sales for 20x8 were $32. and $55. The beginning inventory for 20x8 was $30. a corporation purchased $540.500 d) $400. v.0 c) 6. What was the inventory turnover for 20x8? a) 4.000 c) $367. 20x8.0 d) 8.000 and the ending inventory for 20x8 was $120.000 of inventory and had sales of $600.1 Page 152 Problems with Solutions Problem 10-1 – Multiple Choice Questions 1.000.
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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
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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 1.000 $480.380.000 1.576.000 700.000 700.808.999.003.956.000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $560.000 2.956.000 809.1 Page 157 Problem 10-3 The comparative financial statements for Rocky Mountain Camping Equipment Ltd.324.000 650.000 524.000 1.000 $24.000 1.000 300.876.000 485.808. Balance Sheets as at December 31 … 20x7 ASSETS Current Assets Cash Accounts receivable Inventory $37.679.000 1.114.000 $3.789.Introductory Financial Accounting. Rocky Mountain Camping Equipment Ltd.180.000 2.000 $524.928.000 2.000 700.000 1.003.000 20x6 20x5 Fixed Assets – net $4.000 480.000 $20.000 800.000 2.000 $4.628.000 820. are as follows.000 1. v.167.889.979.1.000 570.000 $3.000 $3.000 $3.000 2.000 2.000 .000 700.000 1.
000 20x6 $1.000 100. 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.300.000 60. $2.Introductory Financial Accounting.700. v.000 65.000 81.000 1.1.000 30.000 800.000 100.1 Page 158 Rocky Mountain Camping Equipment Ltd.000 1.100.000 2.000 463.000 700.000 .000 137.000 $51.000 $3.000 56.000 635.000 5.000.
Introductory Financial Accounting.999 + 40. 2. 5. 7. d b a d d d b c $40.1 Page 159 11. 4.000 = $1. 6. SOLUTION TO PROBLEMS Problem 1-1 1.000/4 years x 6/12) = $35.000 $999. 3. v.039. 8.000 – ($40.999 .1.
000 2.000 Liabilities & Equity Accounts Payable 130.000 4.777 Bank Loan 20.000 2.800 33. & Fixtures 15.000 20.000 Acc.000 182.000 15.000 .000 15. Receivable 6.1 Page 160 Problem 1-2 Part (a) Assets Cash 20.000 Accrued Liabilities 150 700 600 1.000 1 3 Furn.000 50.000 120.200 4.000 1 4 7 8 B 2 3 6 7 B 8 10 14 5 9 B 2 Prepaid Rent 1.Introductory Financial Accounting.1.200 400 800 12 4 15 Inventory 25.000 1.367 8. v. Amortization 500 11 10 Retained Earnings 10.960 5.000 BALANCE SHEET Accts.000 190.000 25.000 Common Stock 20.000 13 16 17 18 19 B 6 B Prepaid Insurance 1.
367 .500 700 2. v.200 19 Income Taxes 5.000 120.Introductory Financial Accounting.1 Page 161 Expenses Purchases 50.960 Interest 300 150 450 Advertising 10 2.000 15.000 INCOME STATEMENT Purchase Returns 15.000 Revenues Sales 196.600 Insurance 400 12 10 16 B Miscellaneous 1.000 5 9 B 15 15 14 B 7 15 11 Amortization 500 10 13 B 10 17 B Wages and Salaries 36.960 5.1.000 170.000 1.000 3.000 0 Rent 2 10 18 B 1.000 0 Cost of Goods Sold 130.000 600 36.
7.000 4.000 50.200 190.000 2.000 196. 4.000 2.000 20. 10.000 4. 8.000 $20.1. 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 $15.500 10.1 Page 162 Journal Entries – 1.000 182.000 36. 5. 6. .000 / 10 years x 4/12 $20.000 20.200 1. 11.000 6.Introductory Financial Accounting.000 120. 9.000 15.000 120.000 3.000 1. 3. v.800 500 500 2.000 15.000 1.000 1.000 300 130.000 1.000 50.
000 15. 19. 16. 5.1 Page 163 12.1. 150 150 14.Introductory Financial Accounting.367 .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. 15.960 15.200 / 12 months x 4 months expired Interest expense Accrued liabilities Accrual for the month of October: $20. 17.000 130. 18. Insurance expense Prepaid insurance $1.000 170.000 15.000 25. v.890 x 30% = 400 400 13.960 1.000 700 700 600 600 1.000 x 1% Income tax expense Accrued liabilities Net income before taxes = $17.367 5.890 Income tax expense = $17.
000 15.600 2. Trial Balance As at October 31.777 20.000 800 1.000 20.000 25.000 2.1 Page 164 b. Heavenly Books.960 500 450 36.277 .000 Credit $ 500 25. 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 $33.367 $270.200 5.000 8.000 130.1.000 10. Inc.277 $270.000 196.000 5. v.000 400 2.Introductory Financial Accounting.
000 66.367 $12.Introductory Financial Accounting.000 130. July 2. 20x2 Net income Dividends Retained earnings.890 5. Income Statement for the four months ended October 31.000 5.200 47.523 (10.523 Heavenly Books. v.000) $2.1. Statement of Retained Earnings for the four months ended October 31.340 450 17.660 18. 20x2 Retained earnings.1 Page 165 c. 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. Inc.600 2.523 . 20x2 $0 12. Inc.000 400 2.960 500 36. October 31. Heavenly Books.
523 22.000 53. Inc.000 800 1.000 8.Introductory Financial Accounting.777 12.000 61.000 45.300 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Accrued liabilities Current portion of bank loan Bank loan Shareholders’ Equity Capital stock Retained earnings $25.000 2.777 8.000 25.523 $76.1 Page 166 Heavenly Books.800 14.777 20.000 2.000 500 $33. Statement of Financial Position as at October 31.300 .1.500 $76. v. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance Prepaid rent Furniture and fixtures Less accumulated amortization $15.
600 4.200 54.600 13.100 $9.100 3.beginning Net income Dividends Retained Earnings .200 3. 20x6 Net sales ($157. Statement of Retained Earnings for year ended December 31.800 2.000 4. 20x6 Retained Earnings .300 21.000 71.400 .1 Page 167 Problem 1-3 Global Productions Inc.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. v.Introductory Financial Accounting.300 18.1.500 Global Productions Inc. Income Statement for year ended December 31.500 (2.100) $7.000 17.500 $155.200 84.600 – 2.ending $0 9.
Statement of Financial Position as at December 31.000 49.800 $25.1.600 50.500 1.Introductory Financial Accounting.400 57.100 1.500 1. v.100 14.000 .1 Page 168 Global Productions Inc.000 9.000 4.200 2.000 7.900 44.600 40.100 87.200 $107.000 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Bank loan Shareholders' Equity Capital Stock Retained earnings $7.800 19. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Supplies Prepaid insurance Office equipment Accumulated amortization 24.400 $107.
800 e) When you purchased the policy.333 3. therefore. you would have sent out 1 of the 4 magazines in the subscription. Therefore. Insurance Expense Prepaid Insurance 3. The journal entry would be: Unearned Revenue Subscription Revenue c) 6 6 You have earned the $2. Cash Unearned Revenue 24 24 As of April 30. v.300 revenue this accounting period. Salary Expense Salaries Payable 1. you would have earned of the revenue.000/8 years = $6. due from Big Al.1 Page 169 Problem 1-4 a) Annual amortization expense for the machinery would be = $50. you would have debited Prepaid Insurance and credited Cash for the full amount of $5. You have used 8/12 of the policy. Therefore.300 2.1. therefore you will remove $5. you must record them as an expense of that period.000 X 8/12 = 3. However.333 .333 from Prepaid Insurance and record it as Insurance Expense for the period.646 for the current period.Introductory Financial Accounting.000. Therefore. in the amount of revenue earned during the period. it is appropriate for you to record it in this period. Accounts Receivable Consulting Revenue 2. as these expenses were incurred during the period.646 When you received the cash in January. However. To do this you would set up a receivable.646 3.300 d) As of Wednesday.250 X 7/12 = $3. you only had the machine in use for 7 months.800 1. your amortization expense would be = $6. we will record salaries expense and the accompanying salaries payable of $1.250/year.800. Amortization Expense Accumulated Amortization b) 3. you will have accumulated 3 days worth of salaries that have not been paid. $24 X = $6. the full amount would be recorded as an Unearned Revenue liability.
000 is unearned. Therefore. On December 1st. v.750 4.1 Page 170 f) Each of the payments for $6. Rent Expense Prepaid Rent 4.750 you paid on June 30th represents Prepaid Rent. Unearned Revenue Catering Revenue 1. you would have been in the premises for 1 month.000 covers a 6-month period.1. and would be recorded as an asset on your accounts for the June30th period end. 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.000 g) The $4.000 has been earned and should be included in revenue for this period. $6. No adjustment is needed for this.750 4.000 X 5/6 = $5..750 As of July 31st. or $1.e. you would have debited Cash and credited Unearned Revenue by $6.Introductory Financial Accounting.750 .000 each. The first payment that you received on June 1st would cover the catering for June – November.000 1. the second payment that you received on December 1st covers the period of December – May. However. Prepaid Rent Cash 4. and therefore you would have incurred one month worth of Rent Expense. You would remove the Prepaid Rent account to reflect that fact that you have “used up” the rent.
000.000 x $10 = $1. 11.000 (cash) = $1. 20x5 d. 9.000 $1. 20x5 Insurance expense Prepaid expense $1. 7.000. 20x5 500 500 100 100 c.000 1.1.000 $0 $1.000 – 128.000. the offsetting credit would be to Subscriptions Revenue. 100.020. 12. Dec 31.000 $1. Dec 31.000 x $20)(inventory) = $1. 6.1 Page 171 Problem 1-5 a. 5. Total amount received as revenue of $128. 2.000 $1.000 (COGS) = $1. Dec 31.000 $0 $1.000 $1. 8.000 (sales) – 4.000 (bldg) – 300. The opening balance in the Subscription Received in Advance account = $80.Introductory Financial Accounting. 3.000.000.000 Problem 1-7 1.026.000 = $72.000 + (1. 20x5 55 55 Problem 1-6 1.000.006.000 + 10. 4.000.000.000 + (200 x $50)(cash) – (200 x $20)(inventory) = $1.000 $1.000 + 300.020. 3.000.000 + 120. 10. $80.000 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. Dec 31.000 (the ending balance in the account). Debit to Subscriptions Received in Advance = $180. 4. .000.000 = $48.000. v.000 $20. 2.000 less the revenue earned for subscription fees received in the previous year of 80.000 x $20 (accounts payable) = $20.
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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)
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Problem 1-9 1. Sales Cash received for sales Less cash received for previous year sales Plus Sales not paid for in current year Sales – accrual basis Purchases Cash paid for purchases Less advance payment Plus prepaid purchases Purchases – accrual basis Cost of Goods Sold Beginning inventory Plus purchases Cost of goods available for sale Less ending inventory 20x6 $ 60,000 (5,000) 20,000 $ 75,000 20x7 $ 70,000 (20,000) 0 $ 50,000
$ 40,000 (2,000) 0 $ 38,000
$ 35,000 0 2,000 $ 37,000
0 38,000 38,000 (3,000) $ 35,000
$ 3,000 37,000 40,000 (5,000) $ 35,000
Revised Income Statement Sales Less Cost of Goods Sold Gross margin Other expenses Operating income Profit Margin (30,000/75,000) (2,000/50,000) * 14,000 – 1,000 personal expenses 2. Revenue recognition principle – revenue must be recorded when earned, it can be measured, and the collectability is reasonably assured, not when cash payment is received. Mr. Cash violated this by recording “sales” on a cash basis. Matching principle – all expenses must be recorded in the same period as the revenue that the expenses were incurred to generate. Mr. Cash violated this principle by simply using cash paid for purchases instead of calculating the proper COGS. Economic entity principle – a business should only report on transactions that are under its control. By including his own personal expenses Mr. Cash crossed the line between “personal” and “business” and violated this principle. $ 75,000 35,000 40,000 10,000 $ 30,000 40% $ 50,000 35,000 15,000 *13,000 $ 2,000 4%
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Problem 1-10 a. Revenue should be recognized when the trees are sold to the customer during the Christmas season because that is when the benefits and risks of ownership pass from the company to the customer. Until then, the company does not know whether any customers will buy their trees, or how much the customer will pay for the trees (measurement of amount). There is so much competition and one never knows how many trees will be sold. Some trees may have to be discarded if they do not sell. Also, at the time of the sale, cash is collected so there is no uncertainty as to collectability. The company has little or no risk once the tree is sold because it is very unlikely that the tree will be returned. The annual cost of fertilizing, pruning and maintaining the trees should be capitalized as a cost of inventory. In effect, the trees are like work-in-process inventory. Then, when the trees are sold, all of these costs will be expensed as cost of goods sold. This is an example of the matching principle and the point of sale recognition method.
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Problem 1-11 a. Dec 1 Cash Capital Stock Furniture and equipment Cash Note payable Cash Revenues Accounts Receivable Revenues Office supplies Accounts Payable Cash Accounts Receivable Wage expense Cash Rent expense Cash Office supplies expense Office supplies $6,000 $6,000 4,000 1,000 3,000 680 680 1,875 1,875 300 300 1,875 1,875 1,300 1,300 1,000 1,000 100 100
Operating income for the month ending December 31, 20x6 would be: = $680 Sales + 1,875 Sales – 1,300 Wages Expense - 1,000 Rent Expense - 100 Supplies Expense = $155
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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
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Expenses COGS 440
INCOME STATEMENT Salaries and Wages 185 15 200 Insurance 3 4 7 Income Taxes 15 5 20
Revenues Sales 900
h q E
o o E
Interest Revenue 8 8 16
e n E
l r E
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Ruiz Pharmacy Income Statement for year ended December 31, 20x2 (000's) Sales Cost of goods sold Gross margin Operating expenses Salaries and wages Miscellaneous Insurance Depreciation Operating income Interest revenue Net income before taxes Income tax expense Net income 200 189 7 30 $900 440 460
426 34 16 50 20 $30
Ruiz Pharmacy Statement of Retained Earnings for year ended December 31, 20x2 (000's) Retained Earnings - beginning Net income Dividends Retained Earnings - ending $322 30 (26) $326
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 .1 Page 179 Ruiz Pharmacy Balance Sheet as at December 31. v.1.Introductory Financial Accounting.
000 14. Depreciation 40.00 515.000 850.000 15.000 575.000 Acc.000 Liabilities & Equity Accounts Pay 600.000 265.000 8 Rent Payable 27.000 Taxes Payable 20.500 745.000 B E B 10 Retained Earnings 4.000 16.000 24.000 25.000 375.500 260. v.000 Interest Payable 8.000 Prepaids 14.000 200.000 22.500 8.000 323. 123.000 12.000 62.000 31.000 80.000 850.000 21.500 547.000 20.000 Inventory 446.000 375.1.Introductory Financial Accounting. And Com.500 6.000 215.000 12.000 16. 7.800 6.000 Capital Stock 110.500 20.000 9 13 Long-Term Notes Payable 20.000 8.800 Sal.500 B 9 E Furniture & Fixtures 190. Pay.000 25.1 Page 180 Problem 1-13 Assets Cash 30.000 600.000 B .000 4.500 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 BALANCE SHEET Accounts Rec.000 225.000 775.000 10.000 100.000 20.
000 27.000 12.000 27.000 13 14 Other 225.350.Introductory Financial Accounting.000 21.000 .1 Page 181 Expenses INCOME STATEMENT Salaries and Commissions 207.000 Interest 6. v.000 7 7 E Income Tax 15.000 Sales 1.500 Revenues 3 COGS 345.000 8.000 70.800 12 Depreciation 22.1.000 4 2 9 9 9 9 E Rent 14.
000 $46.700 27.Introductory Financial Accounting.000 46.500 6.500 $302. Sep 1.700 -4. v.1.000 225. Income Statement for the year ended August 31.350.200 . 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 $1.000 605. 20x5 $260. 20x4 Net income Dividends Retained Earnings.500 80.800 73.000 745.500 70.700 Peter’s Appliance Shop Ltd.000 524. 20x5 Retained Earnings. Statement of Changes in Retained Earnings for the year ended August 31.000 22. Aug 31.000 207.1 Page 182 Peter’s Appliance Shop Ltd.
000 917.500 323.Introductory Financial Accounting.1.500 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 $515.200 $1.500 6.000 -62.000 7.300 110.000 12.200 412. v.000 10.000 658. 20x5 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Fixed Assets Furniture and fixtures Less accumulated amortization $ 31.500 . Balance Sheet as at August 31.000 153.000 547.800 27.500 215.000 $1.000 302.300 80.000 16.070.1 Page 183 Peter’s Appliance Shop Ltd.000 578.070.
200 = $21.548) 3.288 Problem 2-2 a.700 – 3. Dec 31 Cash balance per bank.020) Adjusted cash balance per books.595 Balance per bank statement Add deposits in transit Balance per books $4.225 63 $4.280 $6. before adjustments Less bank service charges Add error in recording cheque ($1. $15.1 Page 184 Problem 2-1 1.000 (77. Cash Accounts receivable Bank service charges Cash $180 $180 52 52 $3.700 (5. 2. v.152 (52) 180 $3.700 77. December 31 Add Sparg cheque deducted in error Add deposits in transit Less outstanding cheques Cash balance per books b. Dec 31.200 . Cash balance per books.300 580 1.1. 3.095 + 9.300) $3.$1.Introductory Financial Accounting. c b b The balance on the bank statement will be overstated by $360.280 . Dec 1 Add cash received during December Less cash payments made during December Cash balance per books.
$ 480 6.700 $180 $180 35 35 360 360 . 20x7 Add outstanding deposits Less outstanding cheques # 201 # 533 Cash per books.1. Office equipment Cash To correct error made in recording of purchase of office equipment: $620 – 260 = $360. v. Bank service charges Cash To record bank service charges for the month. March 31. March 31.200 $4.200 $780 1. 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.915 180 (35) (360) $4. Cash balance.980) $4.Introductory Financial Accounting.1 Page 185 Problem 2-3 1.700 (1. Cash Accounts Receivable To record error in deposit made ($530 – 350 = $180). 20x7 2.
If the securities are classified as trading investments. 20x0: Unrealized gain (loss) ($2. the securities have to be recorded at fair market value on the balance sheet at December 31.Strategic Air Defence Gain on sale of Investments $75.000 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. v. Either way. then the net unrealized gain flows through net income.000 7. b) Cash Other Comprehensive Income Temporary investments .1 Page 186 Problem 2-4 a) The accounting for temporary investments depends on whether the company designates the investments as available for sale investments or trading investments.Introductory Financial Accounting.000 (4. If the securities are classified as available for sale. Available for sale securities are defined by what they are not: they are not long-term investments nor are they trading investments.000 31.000 $35.1.000 3. then the net unrealized gain will be part of the Other Comprehensive Income section of Shareholders' Equity. Trading investments are those that are held for re-sale as part of a portfolio of managed securities held for a short-term.XYZ Computer Gain on sale of investments Cash Other Comprehensive Income Temporary investments .000 3.000) (1.000) 12.000 3.000) $ 8.000 $2.000 .000 70.
500) b) In 20x0. .700 ($5. In 20x1.500 ($4. an unrealized holding loss of $5. In 20x2.000) 20x2 ($4.000 – 8.4.700 will be charged to net income.1. v.000) ($8. an unrealized holding loss of $4.000) will be credited to net income.200) ($5.1 Page 187 Problem 2-5 a) Security A Security B Security C 20x0 ($2.000) (1.500) will be charged to net income.Introductory Financial Accounting.700) 20x1 ($500) 0 (3. an unrealized holding gain of $1.700 .500) (2.000) (3.500) ($4.500) (1.
$3. v.000 x 3% $97. Bad debt expense ($14. December 31.000 Sales – 360.1. Write offs $9. Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable b.000 71. 2004: $1.000 cr.000 c.800 Bad debt expense = $6. December 31. Dec 31. Required balance at December 31: ($80.000 71.Introductory Financial Accounting.000 Beg Bal + 14.350 cr.000 A/R Begin + 400. Beginning Bal – 20.245.000 3.350 cr.000 3. Beg Bal + 55.1 Page 188 Problem 3-1 1.000.000 – 125 = $2.000 dr.000 cr.000 Before: $3.000 Write offs) = $100.000 – 30) – (125 – 30) = $2.000 Collections – 20.000 Collections – 55.000 – 500 + 300 = $4.800 = $1.000 Credit Sales – 11.000 cr.200.000 3. a Balance in allowance account at the end of 20x9 before adjustment for bad debts: $5.000 cr.350 86. 2004 Balance in allowance before adjustment $63.000 dr. Write-Offs + 3.000 $55.350 $55. Recoveries Adjustment required Bad debt expense Allowance for doubtful accounts 86.000 x 4% 4.875 2. $86. 20x8.000 dr.000 3.200. d 3.400 – 4. Adjustment $13. .875 After: ($3.000 Write-offs Allowance for doubtful accounts. before adjustment $11.900.000 cr.5%) Allowance for doubtful accounts Accounts receivable balance.600 Balance in Allowance for Doubtful Accounts. a Problem 3-2 a. 11.000 x 0.
770 cr.000 7.400. (Schedule) $2.915.915.000 2.000 7.000 2.800.290 .000 16.000 7.480 43.000 3.1 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 27.800. v.000 27.000 7. (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 $2.480 3.000.000 31.Introductory Financial Accounting.000 43.1.000 16.000.000 2.290 31.000 2.840 cr.400.
20x1 0 – 30 31 – 60 61 – 90 Over 90 $277.000 442.000 1% 5% 20% 80% $ 2.340 4.000 43.000 $384.000 $38.500 9.480 27. v.770 .000 45.000 80.000 60.000 2.000 7.000 $442.1 Page 190 20x0 Bal 20x1 Accounts Receivable 2.000 12.480 27.000 Allowance for Doubtful Accounts 16.000 1% 5% 20% 80% $ 2.000.000 27.770 4.800.000 15.1.400.Introductory Financial Accounting.000 31.000 384.290 38.000 $27.000 3.915.000 2.000 25.000 90.000 12.000 16.000 20.770 20x0 Bal 20x1 Bal Bal Schedule – Calculation of the Allowance for Doubtful Accounts December 31. 20x0 0 – 30 31 – 60 61 – 90 Over 90 $234.000 7.840 December 31.000 7.
000 500. 31.775 cr. 6. Beg Bal + 1.000 Credit Sales – 1.000 = $10.000 x 12% x 1/12) 6. $6. December 31.000 400. Write-offs Adjustment required Bad debt expense Allowance for doubtful accounts Interest receivable Interest income* *(3.Introductory Financial Accounting.500 x 5% $6. 20x7 Balance in allowance before adjustment: $2.1 Page 191 Problem 3-4 1.500 Write-offs .275 cr.500.275 30 30 2.500 1.000 10. Bad debt expense** Allowance for doubtful accounts **($500. Accounts receivable Sales Allowance for doubtful accounts Accounts receivable Cash Accounts receivable Note receivable Accounts receivable Accounts receivable balance.400. .1.000 1.000 cr.500 dr.000 Note Receivable 3.000 Beg Bal + 500.500 400. Dec.000 Note: The allowance account will now be $500 + $10.000 Collections – 3.275 500 cr.000 x 2%) 10.000 500. 20x7: $40.000 3. v.000 $135. Allowance for doubtful accounts.
000 56. v.000 1.000 (66.200 500 500 350 350 77.000 2.000 x 70%) Inventory b. e.000 – 6.500 50. c c d Czech should have recorded this sale in 20x8 since the goods were shipped FOB Shipping.000 50.1 Page 192 Problem 4-1 1.200 1.000 $80. 3.Introductory Financial Accounting. 4.910 1.000 – 10.000) $503.000 56. Accounts receivable Sales Cost of goods sold ($80. Delivery expense Cash Sales returns and allowances Accounts receivable Inventory ($500 x 70%) Cost of goods sold Cash ($79. b Opening Inventory Purchases – net: $500. .000 Ending inventory Cost of goods sold $60. Problem 4-2 a.000 50.000 49.000 + 25.500 x 98%) Sales discounts Accounts receivable d.000 x 99%) Inventory $80.500 500 c. Inventory Accounts payable Accounts payable Cash ($50.000 509.1.590 79.
000 500 3.00 16.000 (2.50 11.000 3.1 Page 193 Problem 4-3 a.500 Balance Unit Cost Total Cost $12.50) = $650 Note that the results for FIFO periodic are the same as for FIFO perpetual.000) Unit Cost Total Cost 18.000 (2.3333 $690 (220) 420 (567) Units 30 90 70 105 55 Balance Unit Cost Total Cost $10.000 (40.00 12. Ending inventory = 55 units (35 units x $12.3333 $300 990 770 1.000) 69.000 77.000 8.500 units x $23 = $34.000 44. Purchases (Sales) Units 60 (20) 35 (50) Unit Cost Total Cost $11.00 16. Ending balance = 1.500 1.000 33.000 .00 11.500 b. v. Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Purchases (Sales) Units 2.00 $12.500) 3.00 11.500 units 1.000 48.000 Units 1.00 11.100 560 560 Problem 4-4 a.100 $1.00 23.00 22.190 623 Accounts receivable Sales Cost of goods sold Inventory (10 units x $10) + (40 units x $11.Introductory Financial Accounting. b.50) $1.00 22.00) + (20 units x $11. Date May 1 May 5 May 14 May 21 May 29 c.1.00 36.
330 Gross profit 175.330 x $100 400 x $48 1.000 x $52 1.7059/unit Cost of Goods Sold = 3.000 52.200 50. v.000 x $58 3.1 Page 194 Problem 4-5 a.330 x $ 52.000 x $52 930 x $58 $ 333.929 $ 159.7059 = $ 173. January 1.071 *400 x $48 1.000 53.940 Units 400 3.400 Weighted Average Cost per unit $ 19.000 x $50 1. Weighted Average Sales COGS * Gross Profit 3. December 31.000 $ 179.200/3.1.200 = $179.000 x $50 1.400 70 3. 20x5 Purchases Goods Available for Sale Less Ending Inventory.000 52.000 3.200 50.140 $ 157. 20x5 Units sold during year FIFO Sales COGS 3.330 x $100 $ 333.Introductory Financial Accounting.000 58.860 b.000 173.400 = $ 52.929 . Beginning Inventory.000 $ 19.
000 x 2%) Accounts receivable Inventory Accounts payable June 12 .000 608.000 – 30.000 Sales Returns Estimated cost of goods sold Opening Inventory Net purchases: $480. v.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 $37.000 42.000 5.600 400 20.000 $188.1 Page 195 Problem 4-6 Net Sales = $615.000 30.000 Purchase Returns + 8.000 10.Introductory Financial Accounting.000 – 15.000 15.1.000 10.000 June 2 Sales returns Accounts receivable Inventory Cost of goods sold June 9 Cash Sales discount ($20.000 x 70% $420.000 19.600 June 1 Accounts receivable Sales Cost of goods sold Inventory 30.000 5.000 420.000 x 20% Problem 4-7 $600.000 15.000 42.000 458.000 $150.
050 each = $ 63. Ending inventory – FIFO: 60 units X $1.000 210.000 $ 646.000 3. Cost of goods available for sale: 20 units x $900 each 440 units x $950 each 200 units x $1.050 each = = = $ 18.000/(20+440+200) Average unit cost = $646. v.Introductory Financial Accounting.727 .79/unit x 60 units Ending inventory = $58.1 Page 196 Problem 4-8 1.000/660 units Average unit cost = $978.000 418.79/unit Ending inventory = $978.1. Ending inventory – Weighted Average Average unit cost = Cost of goods available for sale/Units available for sale Average unit cost = $646.000 2.
If payment was not made within the discount period.1 Page 197 Problem 4-9 a.500 1.500) 77. December 1. .000 (1.000 48.Introductory Financial Accounting. The savings generated by purchase discounts generally make it worthwhile to borrow to take advantage of the purchase discount.200) (1.3). whereas the purchase discount may generate a savings which would equate to an effective interest rate much higher than 10%.09%) for a 15day period (30 days – 15 days). 20x7 Merchandise inventory. thus giving an annual percentage cost of missing the discount of 75. it may cost a company 10% to borrow the funds. 20x7 Cost of goods sold $ 80.000 ii) Accounts Payable Cash Purchase Discounts iii) Accounts Payable Purchase Returns iv) Transportation-In Cash b. December 31. Cost of Goods Sold Schedule for the month ended December 31.300 c.500 by paying 15 days early. For example. There are 24.3 15-day periods in a year (365/15).1.000 $ 150. It would be equivalent to interest of $1.200 1. the full amount of $50.300 30.500 on a base amount of $48.300 230.000 3.500 (3.000 80.500 1.000 $200.200 3.09% (3.000 80.000 would need to be paid on the due date. TOYJOY LTD.000 50. i) Purchases Accounts Payable 80.300 3. n30 generated savings of $1. 20x7 Purchases Less: Purchase returns and allowances Less: Purchase discounts Net Purchases Add: Transportation-In Cost of goods available for sale Less: Merchandise inventory.09 24. discounts taken under a term of 3/15. v. In December. much higher than the 10% borrowing rate.
then COGS = 100% .000 O 20x7 Cost of Goods Sold 10.1 Page 198 Problem 4-10 Error i) ii) iii) 20x6 Cost of Goods Sold 10.000 U N/A 5. Therefore.000 U 6.000 x .000 O 6. January 1 to January 13 Inventory. 20x7 Estimated Cost of Goods Sold* Estimated Gross Profit ($60. v. estimated COGS = $60.000 $24.000 36.000 O Problem 4-11 Sales.000 10.000 U 5.000 U 20x6 Ending Inventory 10.000 – 36.000 O 5.000 **74.1.000 U N/A N/A 20x6 Retained Earnings 10.000 110. January 1 to January 13 Cost of goods available for sale Less estimated ending inventory.000 * ** If Gross Profit = 40%.000 $ 100. January 13.40% = 60%. January 1.000 = $74.000 .40) $ 60.000 Cost of goods available for sale – COGS = Ending Inventory $110. 20x7 Purchases.Introductory Financial Accounting.000 x .60 = $36.
500 + 8.000 13.500 9.40 7.00000 Total Cost $58.200) 72.700 106.400) $ 98.95 8.500 (80.000 + 7.000 (5.800 54.600 80.000 = $8.400 $178.500 58.000 – 5.741 COGS = $53.500) Purchases (Sales) Unit Cost $8.63793 Total Cost $47. Units 7.95) + (7.250) 72.500 COGS = 12.500 53.500 14.250 125.400 $80. From Purchase # 2: 8.250 + 47.000 x $8.000) (500) 8.000 13.500 / 21.000 = 21.000 (6.000 + 7.000 8.250 77.800 (47.40 Ending Inventory Cost of goods sold Cost of goods available for sale Less ending inventory $72.000 x $8.700) (4.000 x $7. Ending inventory = 6.509) Units 6.000 x $8.000 units @ $9.759 c.50 = $102.000 + 8.509 = 100.500 = 9.40 .000 x $9.19231 8.00) = $178.800 (53.00 From Purchase # 1: 1.1 Page 199 Problem 4-12 a.000 (47.000 6.400 d.000 units @ $8.50 Ending inventory = 9.000 (5.500 Total Cost $47.000 7.50 = $76.40) + (8.200) Units 6.000 Cost of goods available for sale = (6.40 9.000 14.Introductory Financial Accounting.500) 8.000 b.000 8.000 (6.00 8.500) Purchases (Sales) Unit Cost $8.000 (46.600 126.000 – 6.000 Unit cost = $178.40000 9.000 Balance Unit Cost $7.700 106.500 Units available for sale = 6.000 6.1.95000 8. v. Units 7.100 Balance Total Cost $58.
000 – 10.1 Page 200 Problem 5-1 1. d) ($80.000 – 150.000 x 90%) / 1.500 7.500/year.000 + 60. 2. 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 + 15.500 x 430 = $5. Estimated salvage value = $100.000) x (20.000 x .160 To move to the units-of-production method.500 It is assumed that the addition should be capitalized and depreciated since it qualifies as a capital asset.075.000 – 5.000 = $1.000 – (5 years x $18.000)/10 = $8. Depreciation expense = $12.000)] Net book value = $77. 6. and not the legal life of 17 years.1.000 / 9. we must first know the salvage value of the machinery inherent in the problem.000 + 5. Note that we use the estimated useful life of the patent. 3.000 Net book value = $100.000 – [($100.750 .000/year) = $10.5 x 6/12) Net book value = $63. d c c Net book value = $85.000 ($20. 5.000 – ($85.5 x = $600 $1. c Double-declining-balance rate = x 2 = 50% 4.000.000/80.Introductory Financial Accounting.000) / 10 = $4. v. a d ($200.
000 x 40% (1/5 x 2 = 40%) Amortization expense Accumulated amortization ($65.000 20x8 15.000 – 26.600 c.000 17.000) / 3 = $17.Introductory Financial Accounting.1.000 Amortization expense Accumulated amortization 17.000 – 12. v.000 – 5.000 – 2.000 b.000 26.000) x 40% $12. 26.000 Net book value = $65.000 = $53.000) / 200.500 d.000 16. Amortization expense Accumulated amortization ($65. Amortization expense Accumulated amortization ($65.600 15.000 x 55. Amortization expense for 20x8 = ($53.000 $12.1 Page 201 Problem 5-2 a.000 .000) / 5 years 20x7 Amortization expense Accumulated amortization $65.500 16.000 – 5.
750 Oct 31.500 Dec 31.1 Page 202 Problem 5-3 (a) Jan 2.500 10.500 Amortization expense Accumulated amortization $10. 20x5 Dec 31.000 55.714 1.000 Dec 31.000 9. 20x4 Apr 31.1.286 82.50 / month x 8 months = $500 + 10.000 10. 20x4 600 600 10.000 = $10.000 .000 20.000 10. 20x6 10.656 25.808 9. 20x7 Aug 31. 20x3 Equipment Cash Amortization expense Accumulated amortization (60.000 2.656 4.000 $60.000 + ($62.Introductory Financial Accounting. 20x7 20.000 2.50 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. 20x5: $2.808 Dec 31.000 10.750 10.000 10. v. 20x3 Aug 31.000) / 5 Repairs and maintenance expense Cash Amortization expense Accumulated amortization Equipment Cash Amortization expense Accumulated amortization Original amount + amortization on amount capitalized on April 31.000 – 10. 20x5 Dec 31. 20x7 4.000 / 32 months remaining = $62.
000 4.500 $ 4.000 $18.000 90.000) / 39 months = $582 per month x 3 months = $1.500 38. 20x7 ($12.688 Amortization expense – Sep 30 to Dec 31.500 $11.746 Total amortization expense for 20x7 = $8.000) (10.000 – 90.500 15.000 .1.750 x 9/12 $60. 20x5 Less Amortization expense 20x3 20x4 20x5 20x6 20x7 to Sep 30: $10.500 50.062 + 1.000 $108.1 Page 203 Schedule 1 Amortization expense for 20x7 Net book value of asset at Sep 30.000 * Price of new lathe Less trade-in value less fair market value of asset traded in: Trade in value: $108.500) $105.808 Problem 5-4 Equipment (new lathe)* Accumulated amortization (old equipment) Equipment (old equipment) Cash Gain on sale of asset** 105.500) (10.000 (10.000) (10.746 = $9.500 Market value of asset Gain on sale (2.000 Less fair market value of asset traded in (15.062) $12.750) (8.000 2.500) Acquisition price of new lathe ** NBV of asset at time of exchange = $50.000 – 10.000 – 38. 20x7 Original cost of asset Capitalization made on April 1.688 + 20.Introductory Financial Accounting. v.
000* 27.Machinery **($27.000 Cost of machine + 2.000 4.000 x 6/12 = $3.000 The cost plus installation. Machinery Less: accumulated amortization $27.000 3.000)/4 = $6. Machinery Cash 27.000** 3.000 *25.1 Page 204 Problem 5-5 1.1. Amortization expense Accumulated amortization .000 for 6-month period 3.000 27.Introductory Financial Accounting.000 (9.000/year $6.000 – $3.000 9. Cash Accumulated amortization – Machinery Machinery Gain on sale of assets .000 Installation Charges = $27. v.000 20. The freight is included in the cost but the repair is not to be capitalized.000) $18.000 2. 2.
500 + 23.000 – 20.000 – 20. ii.000 + 18.000)/40. v.000)/4 = $25.000 – 25.000 – 20.000 = $22.500 Straight-line method = (120.000 = $22.000 b. i.750) Loss on disposal of equipment Equipment Cash Accumulated depreciation ($22.750 1. i.000 Units-of-production method = (120. ii. Straight-line method = (120.000 45.Introductory Financial Accounting.000)/(5-1) = $18.000 $=75.683 Cash Accumulated depreciation ($25.000) / 41. .1.1 Page 205 Problem 5-6 a.000 x 9.000 43.500 – 20.000 – 22.750 Units-of-production method = (120. ii. c.683) Gain on disposal of equipment Equipment $75.000 x 12.183 183 120. i.250 $120.
750 (100. If the machine does not provide decreasing benefits.1 Page 206 Problem 5-7 a.000 x 2% Customs and duty costs Preparation and installation costs b. v. This method is acceptable under GAAP if it properly reflects the pattern of benefits received from using the machine.000 (2.250) 103.000 (53.000 14. Under this method. then this method should not be used. c. Cost Less accumulated depreciation: $17.$140.800 $157.750 .e. A double-declining-balance amortization method could be used to abide by the president’s request.000 $157. amortization is high in the first year and decreases in amount as years go by.750 157.750 x 3 years Net book value Less proceeds on disposal Loss Cash Accumulated amortization Loss on disposal Machine $100.000) $ 3. $140.000 53.250 3..1.Introductory Financial Accounting.000 Depreciation expense: ($157. if the machine generates less revenues as it gets older. i.000 cannot be capitalized to the asset since the asset was purchased and not self-constructed.000 – 15.750 Note that the interest charge of $12. Costs capitalized: Invoice price Less discount .800) 5.000) / 8 = $17.
375 The journal entry to record the premium expense would be: Premium Expense Premium Liability 34. 6. 2. v.600 Problem 6-2 The premium expense would calculated as follows: $375.1 Page 207 Problem 6-1 1. FV=10. c c b Premium expense: 150.500/15) x $25/card) Cash 37.000.018.500 37. 3. 5.500 .400) $ 8.018 x 6% = $688.000 (9.Introductory Financial Accounting.472.500 / 5 x $2 $18. I=6%.000 / 5 x $2 x 30% Premium redemptions: 23.000.375 34. N=10.1.000 PV=$11. Interest expense for the year = $11. a b b) PV of bonds at issue: PMT=800.472.375 The journal entry to record the actual costs incurred during the year would be: Premium Liability ((22.321 4.000 /10 coupons /15 redemption ratio x $25 x 55% = $34.
378 25. Problem 6-4 The value of the bond issue will be as follows: N 10 I/Y 4 PV X= 540.554 $540.Introductory Financial Accounting.513 25. Inventory 130.000 The warranty liability at the end of the year will be $165.000 130.000 The journal entry to record the interest payment of Jun 30.000 $150.000 $150. 20x1 Interest expense (540.1.000 Opening Balance + 150.487 3. 20x1 Cash Bonds payable $540.000.554 PMT 25000 FV 500000 Enter Compute The journal entry to record the issuance of these bonds is as follows: July 1.000 Warranty Costs Incurred = $185.554 x 4%) Bonds payable Cash 21.1 Page 208 Problem 6-3 The journal entry to record warranty expense is: Warranty expense ($3. A/P.378) x 4% Bonds payable Cash 21. 20x2 would be as follows: Jun 30.622 3.000 x 5%) Warranty Liability The journal entry to record actual warranty costs incurred is: Warranty Liability Cash. 20x2 Interest expense (540.000. v.3.554 .000 .000 Warranty Expense – 130.554 The journal entry to record the interest payments using the effective interest method of amortization is as follows: Dec 31.
20x5 Dec 31.000 Jun 30.432.301 – 7.000 + 5.708 425. 20x5 Problem 6-6 1. FV = 10.1 Page 209 Problem 6-5 PV of bond issue: N = 30.301 Dec 31.708) x 4% $10. 3. PMT = 425.301 x 4%) Premium on Bonds Payable Cash Interest expense* Premium on Bonds Payable Cash * (10.432.200 – 6.016 425. $10. .1. 4.000. Therefore.000 417. The journal entry to record warranty expense is debit warranty expense credit warranty liability.984 8. 20x4 Cash Premium on Bonds Payable Bonds payable Interest expense ($10.000.800 = $10. the total credits to the account for the year is the warranty expense for the year.301 $432.800. Therefore. $5. The journal entry to record repairs as performed is debit Warranty liability.432. v. I = 4.301 10.000 $10.000 416.Introductory Financial Accounting. credit cash/inventory/etc.292 7.432. Solve for PV = $10.000. the total debits to the account for the year is the total cost of repairs made during the year.000.000. $6.200 2.
20x7 Jul 1.277 20.055 = $509.445 20.500 Jul 1.097 20.1. 20x8 20.137 = $506. 20x8 Jul 1.074 x 4% Bonds payable Cash Interest expense $509.937 – 2.500 Jan 1.223 = $504.000 Enter Compute Jan 1. 20x7 20.055 22.714 – 2.445 20.129 – 2.500 Dec 31.074 – 2.277 2.105 x 4%) Bonds payable Cash Interest expense $513. 20x6 Cash Bonds Payable Interest expense ($513.500 Jan 1.105 $513.223 22.097 . 20x7 20. 20x6 Dec 31.105 20.937 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $506.129 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $511.976 = $511. 20x8 20.105 – 1.500 Dec 31.189 2.445 2.976 22.311 22.524 1.403 x 4% Interest payable $513.1 Page 210 Problem 6-7 Proceeds on bond issue: N 6 I/Y 4 PV $513.137 22.311 = $502.Introductory Financial Accounting.500 FV 500. 20x6 20.277 20.714 x 4% Bonds payable Cash Interest expense $504. v.105 PMT 22.363 2.
20x7 .1 Page 211 Jan 1.403 22.500 500.591 $1.000.591 PMT 60000 FV 1000000 2.000 x 12% x 1/2) Interest expense (1. v.491 60.171.1. 20x9 Interest payable Bonds payable Cash Bonds payable Cash 20. July 1. 20x6 4. Enter Compute N 40 I/Y 5 PV X= $1. June 30.420 60.591 x 5%) Bonds payable Cash (1.171.509 1.171.170. 20x6 Cash Bonds payable Interest expense (1.591 58. 20x7 ($1.000.580 1.171* x 5%) Bonds payable Cash (1.Introductory Financial Accounting.171.591 – 1.000 x 12% x 1/2) *Bonds payable balance as of June 30.000 Problem 6-8 1.000 58.420) $1.000 500.097 2. Dec 31.171.000 3.
093 = $89.000 x 8% x ) a.000.000 $45.000 True.000 exactly. False.943 False False.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 ($897.000 x 8% x ) 2nd half of 20x7: Interest expense ($897.850) x 10% x Bonds payable Cash ($1.000 x 10% x ) Bonds payable Cash ($1.850 + 45. d.850 40.850 4.000 + 4. The interest expense will increase every year since the book value of the bonds payable will also increase. . c.Introductory Financial Accounting.093 5.093 40. v. Interest expense for 20x7 = $44.1. b. The cash outflow is $80.000. $44.
000 126.080 2. 400 shares issued and outstanding Retained Earnings ($0 + $56. v.000 February 10 February 15 February 26 12. c 150.520 .Introductory Financial Accounting.000 40. 44. non cumulative.000 2.000 shares outstanding after the split.1.400 14. 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. Shareholders’ Equity Common Shares.000 39.000 40.080 February 27 February 28 21.000 shares issued and outstanding Preferred Shares.520 $217.000 40. Problem 7-2 1.400 .080) Total Shareholders’ Equity $ 138.000 .400 2.000 12.000 shares x 3/2 = 225.000 2.$2. $6.1 Page 213 Problem 7-1 1.$14.000 44.000 21.000 x $0.32 $14.080 14.
000 3. issued and outstanding 3.000 Retained Earnings ($64.Introductory Financial Accounting.000 12. v.000 b. authorized 100. g. issued and outstanding 3. f. c.000 40.500 Dividends) $348.000 $115.000 20. Cash Common Shares Equipment Preferred shares Cash Preferred shares Dividends (or Retained Earnings) Preferred Dividends Payable Cash Common shares Preferred Dividends Payable Cash Retained earnings Cash Bonds payable Premium on bonds payable Common shares $115. h.000 20.000 180.500 $456.000 48. Shareholders’ Equity Common Shares. 2.1 Page 214 Problem 7-3 1.000 3.000.000 53. e.000 60. d.000 3.1.500 12.000 180.000 Preferred Shares. a.000.500 .000 40.000 3.000 Net Income – 15.500 50.000 3. cumulative – authorized 50.
000 12.000 30.520.000 75.000 1.000 5. Purchases Accounts payable Accounts Payable Purchase returns Cash Common stock Accounts payable Cash Salaries payable Salaries expense Cash Interest expense ($419.000 960.000 16.400 320.000 5.1. 3. Equipment Cash Warranty liability Cash $1.000 5.000 $1.600.000 75.Introductory Financial Accounting. 12. 1.600.000 12. 8. 7. 10.576 424 13.000 5.000 25.588 412 13.600 314.000 x 6. Accounts receivable Sales Cash Accounts receivable Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable 5.000 5.600 x 3%) Bonds payable Cash ($400.000 25.5% / 2) Interest expense ($419.000 16.000 34.000 960.600 – 412) x 3% Bonds payable Cash ($400.1 Page 215 Problem 8-1 a. .000 34.000 x 6.000 945.5% / 2) 11. 6.000 1.520. 4. 9.000 2.000 945.000 30. v.
000 17. 2. Insurance expense Prepaid insurance Balance in prepaid insurance account: $1.000 23.000 14.400 .000 40.930 16.000 17.000 x 3% 43.000 cr.000 x $17.000 x 50% Bad debt expense 40.31*) Retained earnings Cash * Average book value per share = $150.000 dr.31 Prepaid insurance Cash Operating expenses Cash Bad debt expense Allowance for doubtful accounts The balance in the allowance for doubtful accounts is: $23.000 cr.010 4.000) = $17. Income taxes payable Cash Common shares (1.400 3. $4.320 3.310 4.000 130. = The balance in the allowance for doubtful accounts should be: $144.400 x 2/12 Insurance expense 3.400 Balance required: $2.930 23.000 x 20% 12.000 + 75.Introductory Financial Accounting. 18.400 $3. 15.1 Page 216 13.400 130.000 x 7% 23.930 dr.1.930 cr. $6.000 / (10.400 + 2.000 dr.600 6. $23. v. 17.000 + 3. + 5.800 400 $3.400 2.690 22. + 34.
24. amortization – equipment** Patents*** * $300.000 x 1.400 *** $34.400 4.600.250 39.000 13.000 Purchase) = $137.Introductory Financial Accounting.000) Cost of goods available for sale Less ending inventory Cost of goods sold Inventory loss Allowance for decline in value of inventory 886.256 x 40% = 53.000 (378.1.000 – 38.000 80.000 / 8 = 4.000 1.000 960.000 – 320.264. amortization – building* Acc.700 80.500 ** ($145. Cost of goods sold Inventory ($378.1 Page 217 19.702 22.000 24.000 53.000 944.000 58.000 – 16.702 23.000 / 40 = $7.000) Purchase returns Purchases Check: Opening inventory Purchases – net ($960.702 53. Amortization expense Acc.000 NBV Beg + 30. Warranty expense Warranty liability $1.5% Salaries expense Salaries payable Retained earnings Cash Income tax expense Income taxes payable $134. . 6.000 24.250 20. v.500 27.000) $886.150 7.000 $320.700 6.000 13.000 21.000 16.000 x 20% = $27.
600 424 418.000 75. v.520.500 Acc Amort .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 5.690 144.000 13.000 Allow/Doubt Accts 34.750 19 20 14 23 Retained Earnings 4.000 22.764 Common Stock 17.310 150.000 945.600 BALANCE SHEET Accts Receivable 176.000 34.500 127.400 65.400 130.000 126.400 2.000 30.930 17.930 Inventory 320.Equip 38.000 13.690 B 24 B 15 E 18 B 12 B 21 B Acc Amort .000 945.000 4.000 222.Bldg 120.702 25.700 6.000 175.000 7.520.600 6.000 207.000 2.700 B 22 E E B 20 E Prepaid Insurance 1.400 400 Building 300.000 320.000 1.1.000 13 Inc Taxes Payable 40.600 5.000 12.250 29.000 960.702 Warranty Liability 25.000 5.000 378.000 40.Introductory Financial Accounting.000 127.000 5.510 B E .000 53.000 30.000 1.000 B 19 14 B 7 E B E Patents 34.000 23.000 13.000 12.400 3.000 25.200 80.600.000 B 19 E 10 10 B B 11 E Equipment 145.000 5.000 24.000 27.400 Allowance for Decline in Value of Inventory 13.000 Land 40.000 23.000 59.000 80.1 Page 218 Part (b) Assets Cash 36.000 15.000 58.000 1.000 Bonds Payable 412 419.000 75.000 Liabilities & Equity Accounts Payable 16.
000 9 22 E Salaries 314. v.400 21 18 16 Operating expenses 130. 53.702 20 Inventory Loss 13.Introductory Financial Accounting.576 25.000 Revenues Sales 5 20 20 6 1.930 19 Amortization exp.000 16.1.400 6.000 10 10 E Interest 12.1 Page 219 Expenses Purchases 960.000 1 20 Cost of Goods Sold 886.600.000 960.000 17 Bad Debt Expense 23.588 12.000 .100 Warranty expense 24.150 24 Income Tax Exp.164 Insurance 3.700 321.000 INCOME STATEMENT Purchase Returns 16. 39.
196 Cr.000 53.000 418. .702 $2. v.Introductory Financial Accounting.690 59.000 $17.000 23.930 39.702 12. 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 $15.000 65.100 25.680. Haider Corporation Trial Balance As at December 31.1 Page 220 c.750 126.700 25.000 127.400 130.510 1.680.164 24.600 222.930 378.000 3.000 6.000 13.1.150 13.000 400 40.196 $2.500 175.000 300.000 321.600.000 886.764 207.400 29. 20x6 Dr.
000 321.600.1 Page 221 d.690) (80. 20x6 $144. December 31.200 80.000 886.164 134. 20x6 Net income Premium on redemption of common shares Dividends Retained earnings.702 $80. January 1.000 39.100 24.400 23.Introductory Financial Accounting.256 53.1.554 (4.000) $140.580 159.554 Haider Corporation Statement of Retained Earnings for the year ended December 31.420 25. Haider Corporation Income Statement for the year ended December 31.150 130. 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. v.000 714.000 554.064 .000 3. 20x6 Retained earnings.930 13.
764 589.070 40.754 $936.000 400 585.920 Land Building Less accumulated amortization Equipment Less accumulated amortization Patents – net .750 351.700 25.702 12.000 170.1.690 140.402 418.500 109.000 (127.000 (65. v.000 6.Introductory Financial Accounting.500) 175.850 $936.600 204.064 347.1 Page 222 Haider Corporation Statement of Financial Position as at December 31.166 207. 20x6 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance $ 15.400) 172.000 $300.070 365.920 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Shareholders’ Equity Capital stock Retained earnings $126.600 29.
000 f.1.000 k. 700 700 4.700 i.600 $9. d.700 4. 4.000 x 9% x 4/12 Interest expense Interest payable $60.500 4. 4.000 x 3% x $40 Allowance for doubtful accounts Accounts receivable Income tax expense Income taxes payable $9.000) / 10 Prepaid rent Rent expense $9.000 x 10% x 9/12 Amortization expense ($11.000 – 4. j. Bad debt expense Allowance for doubtful accounts $320.900 / 17) Patents or Accumulated Amortization – Patents Supplies inventory Supplies expense Increase in inventory = $9. 360 360 g.000 24.600 e.000 4.600 x 9/24 Amortization expense Accumulated Amortization ($80.000 12.200 – 4.000 24.600 3.000 16.500 Warranty expense Warranty liability 10.Introductory Financial Accounting.600 7.800 3.600 x 5/12 Interest receivable Interest revenue $12. 16. 7. .600 b.000 l.600 c.800 4.1 Page 223 Problem 8-2 a. 12. v. 4.000 x 3% Wages expense Wages payable Insurance expense Prepaid insurance $9.500 h.
740 110 4.2.136 Operating Income Interest (72 + 44)1 Net income before taxes Provision for income taxes (6.880 .316 12.Introductory Financial Accounting.300 Prepaid) Salaries and wages (5.400 Baking Materials Purchases .536 116 6.240) Interest April & May .630 1.094 6. 20x2 Loan balance.500 + 240 Payable) Maintenance Utilities (4.284 $5.800 .770 Cash Sales + 5. v. April 1. 20x2 Sales (22.1.640 $44 .130 Rebate + 256 Payable .420 x 20%) Net income 1 Loan payment Less interest: $2.226 Uncollected Sales) Cost of goods sold Purchases (14.640 x 10% x 2/12 $312 72 240 2.840 Ending Inventory) Gross margin Operating Expenses Rent (1.120 Prepaid) Advertising Depreciation (3.420 1.920 .1.1 Page 224 Problem 8-3 MAS Inc.270 800 424 250 13.000 + 270 Payable) Insurance (1.000 / 5 x 5/12) $32.1. Income Statement for the five months ending May 31. April 1.320 Collections on Credit Sales + 4.500 5.880 x 10% x 3/12 Principal payment.686 19. 20x2 (2.
Introductory Financial Accounting.136 7.840 1. v.000 -250 2.600 .466) Accounts receivable Inventory Prepaid insurance Prepaid rent Fixed Assets Equipment Accumulated depreciation $2.500 5.636 $12.31.750 $12.054 1.134 4.734 2.120 300 9.226 1. 20x2 ASSETS Current Assets Cash (33.284 44 960 3.370 .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 (2.680 4.1 Page 225 MAS Inc.620 3.960) Shareholder's Equity Common Stock Retained earnings $526 240 1. Balance Sheet as at May 31.640 .1.
000 (20.000 19.000 80. v. 20x1 ASSETS Current Assets Cash Marketable securities* Accounts receivable Inventory Noncurrent assets Equipment Accumulated depreciation $24.000 $338.000 SHAREHODLERS' EQUITY Shareholders' Equity Common stock Retained earnings * Plug to balance. $275.1 Page 226 Problem 8-4 Morrow Wholesale Balance Sheet as at December 31.000 155.000 63.000) 60.000 80.1.Introductory Financial Accounting.000 $338.000 278.000 .
000 4.000 (10.000 50.220 .500 $250.600) Depreciation (80.1 Page 227 Morrow Wholesale Income Statement and Statement of Retained Earnings for the year ended December 31.Introductory Financial Accounting.000 9.000 + 1.220 63.600 8. v.000 24.146.000 ÷ 10) Bad debts (155. beginning of year Dividends Retained earnings.000 5. end of year 11.000 34.600 7.380 17.000) $70.000 .100 15.000) Miscellaneous Operating income Interest expense ($5.000 200.900 (300) 5.1. 20x2 Sales Cost of goods sold ($250.000 x 80%) Gross margin Operating expenses Salaries (10.000 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.
ending Purchases Cost of goods sold = Opening inventory Purchases Less ending inventory $180.000 $216.000 + 4.000 60.000 $80.000 216.000 + 406.000 (96.000 + 8.Inventory Purchases of merchandise A/P .600 5.205.000) 52.000 .500 Note 1 .500 96.000 10. v.000 330.20.000 7.000 300 10.000 .000 70.220 $405.500) Inventory (Note 1) Prepaid advertising Noncurrent assets Land (19.500 23.000 1.000 .000 $405.000 36.000) $224.380 60.000) $200.000 (8.1 Page 228 Morrow Wholesale Balance Sheet as at December 31.1.220 345.500 SHAREHODLERS' EQUITY Current liabilities Accounts payable Accrued wages payable Note payable Interest payable Dividends payable Income taxes payable Shareholders' Equity Common stock Retained earnings $36.280 275. 20x2 ASSETS Current Assets Cash (24.000) Equipment (80.Introductory Financial Accounting.20.000) Accumulated depreciation (20.000 .
600 Increase in Salaries Payable) Cash paid out for other operating expenses Cash paid out for interest ($32.500 .000 $146.000 $20.000 COGS + 7. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($45.100 Income tax expense – 33.500) 1.300 19.800) (112.7.000) (105.800 Cash flow from investing Proceeds on sale of equipment (Note 1) Purchase of equipment 20.200 $20.000 Increase in Inventory .000 – 69.10. Statement of Cash Flow for the Year ended December 31.500) (69.000) (46.Introductory Financial Accounting.400 $ 99.000 – 40.400 – 61.12.000 (294.100 Increase in Income Taxes Payable) $740.000) Gain on sale Proceeds Note 2 – Dividends paid Net income Less increase in Retained Earnings ($108.800 – 105.000) Cash flow from financing Issue of bonds payable Dividends paid (Note 2) 30. v.1.000 Sales .400) (80.000 Increase in Interest Payable) Cash paid out for income taxes ($79.200 Increase in AP) Cash paid out for salaries ($120. 20x6 Cash flow from operations Cash collected from customers ($7500.000 (125.500 Increase in cash ($175.000) $ 5.900 47.000) (31.500) Cash.000 (99.000 Increase in A/R) Cash paid out to suppliers ($300.1 Page 229 Problem 9-1 a.000 Salaries Expense . Ginger’s Cookies Ltd.000 Interest expense .000 15.1. beginning Cash.000) 175.
v.1 Page 230 b.000) (7.000 33.600 1.800 .000 (15.Introductory Financial Accounting.100 $175. Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Gain on sale of capital assets Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Increase in Accounts Payable Increase in Salaries Payable Increase in Interest Payable Increase in Income Taxes Payable $146.000) (10.1.000) 12.200 7.900 7.
v.000) 350.000) (463.000) (5.000) (34.000) (12.000) (11.842.000) $3.1 Page 231 Problem 9-2 a. beginning of year Cash. end of year Amortization expense = $218.1.000 150.000 .000) 17.000 Decrease in cash Cash.000 (48.000 ? (71. McDuff Ltd.000 (50.000 (13.000 (543.Introductory Financial Accounting. 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 $239.695.000 111.000) (37. Statement of Cash Flow for the year ended December 31.000) (37.000) 353. beginning of year Amortization expense Accumulated Amortization on disposal: $158.000 $319.000 218. end of year 1 Accumulated Amortization.000 Accumulated Amortization.000 466.000) 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) 7.000 Cash flow from investing Proceeds on sale of assets Purchase of capital assets2 80.000 $3.000 – 87.
1 Page 232 2 Capital Assets.000 (2. end of year Dividends = $50.400. Cash flow from operations – Direct Cash collected from customers ($4.326.000 Increase in Prepaid Expenses) Cash paid out for salaries and wages ($850.000 Increase in Income Taxes Payable) $4.711.000) (493.000 Decrease in Salaries and Wages Payable) Cash paid out for interest ($67.000) $5.000 ? $508.000 Sales + 111.000 239.000 Income tax expense – 17.500. v.000 .000 – 218.000 Decrease in AP) Cash paid out for operating expenses ($700.000 Salaries and Wages Expense + 37.000 COGS + 48.000 $5. ending Additions to capital assets = $543.000) (233.000 Decrease in Interest Payable) Cash paid out for income taxes ($250.000) $466.000 Increase in Inventory + 12.000) (72.000) (887.Introductory Financial Accounting.1.611.000 3 Retained Earnings.000 Interest expense + 5.000 ? (158.000 Amortization Expense + 11.000 b. beginning of year Add net income Less dividends Retained Earnings. beginning Additions Disposals Capital Assets.000 Decrease in A/R) Cash paid out to suppliers ($2.000 $319.460.
500) (1.200 – 100 Increase in Interest Payable) $216.1.900) (5.000 COGS + 1.600) (100) (400) 100 (3.Introductory Financial Accounting.800 + 100 Increase in Prepaid Insurance) Cash paid for rent Cash paid for interest ($1.800 $ (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 $ (3.1 Page 233 Problem 9-3 (a) HHC LTD.300) (1. Cash Flow Statement for the year ended December 31.600) (39. v.500 Increase in Accounts Receivable) Cash paid to suppliers ($165.400) 7.300 + 400 Decrease in Salaries and Wages Payable) Cash paid for insurance ($2.700) (2.500) $ 900 (b) Cash Flow from Operating Activities Cash collections from customers ($218.100) $900 .500 (166.000 Sales – 1.600 Increase in Inventory) Cash paid to employees ($39.
000) 0 0 32.Introductory Financial Accounting.000) $7.000) (165.000) (25.000 (4.000 Increase in Inventory + 18.000 Sales .000 Cash flow from financing Issue of bonds payable Dividends paid 25.000 Increase in cash ($32.000 (650. v.000 – 25.000 COGS + 32.000 $50.000 (50.000 Note 2 – Proceeds on sale of long-term investment Net book value of investment Gain on sale Proceeds $ 18. 20x6 Cash flow from operations Cash collected from customers ($900.000) 24.000 (20.000 30.000) Loss on sale Proceeds $ 11.000 . Toram Ltd.1. Statement of Cash Flow for the Year ended December 31.000 30.000 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 – 21.000) Cash.53.000 26.000) 17.1 Page 234 Problem 9-4 a.000 12.000 Increase in A/R) Cash paid out to suppliers ($600. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($32.000 + 17. beginning Cash.000 Decrease in AP) Cash paid out for other operating expenses Cash paid out for interest Cash paid out for income taxes $847.
000 . Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Loss on sale of capital assets Gain on sale of long-term investment Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Decrease in Accounts Payable $100.1 Page 235 b. v.000 (12.000 43.000) (18.000 4.000) $32.1.000) (53.Introductory Financial Accounting.000) (32.
250 / ($125.000. then CL = 230.000 – 120.000 / 70. 5. 4.000 = 6 Assume an initial amounts as follows: current assets .0 times 9.000 / 365) = 94 days Inventory increased by $20.000 – 20.000 / 75.500 + 32.500 Net credit sales for 20x8 = $52.000 COGS) Beginning inventory = $60.000 No impact on working capital since the decrease in cash is equal to the decrease in accounts payable.000 and CA = 200. c c Average inventory = ($30. a 6.000. 7.000 Inventory turnover = $450. c .000) / 2 = $50.000) / 2 = $75. Assume that CL = 250.000 = $450.500 Total net sales = $367.250 Days sales in A/R = $32.500 = $400. current ratio = $100.000. the current ratio becomes $90.000 is made.000) / 2 = $52.000 = $40.000 Average inventory = ($60.29 and working capital stays the same.1 Page 236 Problem 10-1 1.000 and CA = 180. a c b Average receivables = ($40.Introductory Financial Accounting. the current ratio drops to 0.$300.1.000 Inventory turnover = $300.500 x 7 = $367.$80. 8.000 = 1. Impact is on the current ratio.000 COGS = $30.000 + 540.78.000 then the current ratio is 0.000 ($320.8.000 + 40.000 = 1. v.500) / 2 = $31.25. Assume that a payment of $10.000 = 6.$100.000 purchased . If the invoice paid is $20. 2.000 / 50.000 + 55.000 / 80.000. d 3. current liabilities .000 + 22. d Average receivables = ($50.000 + 120.
000) ÷ (1.000 + 275.000 = 1.76 (12.000 = 1.000 + 275.000 / 60. v.000 / 50.000) / 365 = 53.000) / 371.7 days 20x4 594.200.000 / 863.000_ / 365 = 70.000 = 3.000 = 1.000 / 793.400.000 / 371.000 + 220.Introductory Financial Accounting.88 (12.000 = 0.00 Times Interest Earned 230.68 (34.000 + 400.000) / 379.000 / 379.000 + 550.5 days Solvency Analysis: 20x5 Debt-to-Equity Ratio* 920.000) ÷ (1.000 = 0.07 200.60 (34.000 = 1.000 + 275.07 20x4 850.1 Page 237 Problem 10-2 Liquidity Analysis: 20x5 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 712.000 = 4.83 * debt is defined as long-term debt in this case .1.
000) / 2] / (2.000) / 2] = 11% 110.000 + 725.000) / 2] = 3.000 / [(863.9% Return on Equity Asset Management (Activity Ratios) 20x5 Inventory turnover $1.1 Page 238 Profitability Analysis 20x5 Gross Profit Percentage Return on Sales Return on Assets $900.900.10 20x4 $1.000 / 365) = 39.000 / [(425.000 / [(2.66 [(275.000) / 2] = 3.900.300.000 + 793.000 / [(2.162.014.5% 200.8% 230.000 + 220.000 + 350.3% 98.000) / 2] = 12.000 = 10% 230.300.000) / 2] / (1.900.400.000) / 2] = 1.000 + 340.000 / [(2.875.000 + 1.000 / 2.000 = 39.300.300.162.1% 20x4 $700.48 [(220.000 + 2.200.3 days 1.900.000 = 10.014.000 / 1.014.000) / 2] = 10. v.000 + 2.000) / 2] = 13.000 / [(2.014.000) / 2] = .000 + 200.000 = 36.000 / 365) = 40.Introductory Financial Accounting.875.000 / [(340.2 days 2.3% 200.000 / 1.000 / [(793.000 + 1.1.000 / 2.98 Days Sales in Accounts Receivable Total asset turnover .
000 / 2. v.1.679.30 137.000 + 480.1 Page 239 Problem 10-3 Liquidity Analysis: 20x7 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 1.000 / 60.000 / 56.000 / 524.000 + 480.000 / 560.000 + 463.000) / 365 = 97.000 + 524.000 + 635.000) / 365 = 135.04 (20.167.000 = 0.300.576.000) / 524.000 = 1.000) ÷ (1.000 = 2.000 / 2.114.52 days 20x6 1.000 = 0.000 = 2.000) / 560.92 (37.000 = 2.08 (37.32 20x6 800.000 = 1.13 (20.000) ÷ (1.45 Times Interest Earned 65.08 * debt is defined as long-term debt in this case .Introductory Financial Accounting.72 days Solvency Analysis: 20x7 Debt-to-Equity Ratio* 820.000.000 = 0.000 + 524.
000 / 2.3 days 2.000 + 2.90 [(524.100.1% 20x6 $700.000 + 570.000 + 300.000 / 1.808.000) / 2] = 3.000 + 4.000 / 365) = 88.000 / [(3.700.000 / 2.000 + 2.13 [(480.000.000 / [(650.003.700.628.000 = 41.000 + 485.956.5 days 1.1 Page 240 Profitability Analysis 20x7 Gross Profit Percentage Return on Sales Return on Assets $800.000) / 2] = 1.000 / [(3. v.1.003.000) / 2] = 0.000 = 8.956.000 / [(2.5% 51.000 = 3.000 / [(570.003.100.300.000) / 2] / (1.100.000 + 524.000 / [(4.000) / 2] = 0.000 = 38.000) / 2] = 2.6% 3.000) / 2] = 1.000) / 2] = 0.000) / 2] / (2.808.000 / [(4.576.100.000 / 365) = 87.52 20x6 $1.003.700.679.000 + 4.2% 65.Introductory Financial Accounting.000 / [(2.000 / 1.000 + 3.1% 137.1% 65.000 + 3.679.44 Days Sales in Accounts Receivable Total asset turnover .700.1% 137.000) / 2] = 1.9% Return on Equity Asset Management (Activity Ratios) 20x7 Inventory turnover $1.
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