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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
1. an asset and a liability. therefore.000. By increasing both sides of the equation. and increasing a liability. by increasing one and decreasing another the equation holds true: Assets + 75.000 We are increasing an asset.000 Upon signing the loan.000 Both the Equipment account and the Cash account are assets. therefore. we increase the asset account Cash. therefore. The journal entry to record the loan would be: Cash Bank Loan 100. that is.000 (d) = Liabilities +10. they will take on a liability to pay back the bank the $100.000 + Equity The company then uses cash to purchase equipment that costs $75. our equation stays in balance: Assets + 100.000.000 = Liabilities + Equity (e) The same company is a little short on cash and has to take out a loan from its bank. our equation holds true: Assets + 10. Furthermore. The journal entry would be: Inventory Accounts Payable 5.000 worth of inventory on account.000 cash.000 + Equity . they do not pay cash but take on an account payable with the supplier.000. the company would receive $100.000 100.000 5.000 75.Introductory Financial Accounting. The loan is for $100.75.000 . The journal entry would be: Equipment Cash 75.1 Page 5 (c) That same company then purchases an additional $5. v.000 = Liabilities +100.
If we continue with our examples… (f) Say that the company from the above example has $30. At the end of each year. If Expenses are greater than Revenues. Conversely. 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. the income and expense accounts are closed out to zero.1. The journal entry would be: Cash Sales Revenue 30.000 = Liabilities + Equity +30. For example.000 .000 The accounting equation is maintained since Assets are increased and Equity is increased: Assets + 30.000 30. the company will have generated a net loss and a net Debit balance to Retained Earnings will result. v.1 Page 6 Transactions that impact the Statement of Income The above examples used accounts that appear on the Statement of Financial Position. and the resulting debit or credit is either added or subtracted to an account called Retained Earnings. Income Statement accounts will consist of Revenue accounts or Expense accounts. All revenue and expense accounts are temporary accounts in the sense that we start the year with a zero balance in the account. when a revenue account is increased we credit the account. which is part of the Shareholders’ Equity section of the Statement of Financial Position. Revenue accounts normally have a credit balance. i.Introductory Financial Accounting. If Revenues are greater than Expenses during a period. the company will have generated a net income and a net Credit entry to Retained Earnings will result. via the Retained Earnings Account.000 in sales in its first month. an expense account’s normal balance is a debit balance. 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.e.
the company sold all $15. and all other assets and liabilities are classified as non-current.15. 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 15. and both are divided into current and non-current based on their liquidity. The accounting equation remains in balance: Assets .000 worth of its inventory. basically. as they no longer have it on hand to sell. 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. Note that Cost of Goods Sold is an expense account.000 = Liabilities + Equity -15.Introductory Financial Accounting.1 Page 7 (g) To incur these sales. v. .000 Note that this entry removes the inventory from the company’s accounts. The journal entry to record that would be: Cost of Goods Sold Inventory 15.1.000 The Statement of Financial Position The Statement of Financial Position is a snapshot of a company’s financial position at a particular point in time. as are liabilities. The Statement of Financial Position (also called the Balance Sheet) is.
A more detailed discussion of this account will take place Chapter 4. More on this in Chapter 5. Accounts Receivable is normally reported net of an Allowance for Uncollectible Accounts (discussed further in Chapter 3). this account includes all currency and equivalents (bank drafts. Typical accounts you will see on the Statement of Financial Position are: Current Assets: Cash – the most liquid of all assets. 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. For example.000 and the agreement with the bank is that you will be required to pay $50.000 would be classified as a long-term liability. money orders etc.000 would be classified as a current liability and the remaining $150. Prepaid Expenses – this account represents amounts that have been paid in cash for expenses that have not been incurred by the company. v. but is a listing of all equipment owned and used by the company. Because the policy has not yet expired. ready for resale.1.Introductory Financial Accounting. The inventory can either be purchased. Land – this account is a listing of all land held by the company. and classify the remainder as non-current. The classic example of this is breaking out the current portion of the long-term debt of a company. For example. In this case. complete.1 Page 8 Note. we normally pay the annual premium the day the policy takes effect. The associated Accumulated Amortization contra account is normally shown directly below the asset account. that in some cases you may have an asset or a liability that is partly current and partly non-current. other companies or special funds. Long-term investments – these are investments that are to be held for many years.). and includes investments in bonds. Note that amortization is never taken on land. Inventory – this account is a listing of all of the items that the company normally sells in its day-to-day activities. this $50.000 of this balance within the next year. . you would break out the current portion and classify it as such. and the asset is therefore shown net of accumulated amortization. Accounts Receivable – the account is the sum total of all outstanding invoices which are owed to the company by its customers. the cost of the policy will be classified as a prepaid expense. or manufactured by the company itself. when we take out an insurance policy. if your loan balance is $200. stocks.
The retained earnings account reconciliation from the beginning of year to end of year balance is as follows: Retained Earnings. Current Liabilities: Accounts payable – a listing of all accounts that will be due to suppliers which are expected to be repaid within one year or one accounting cycle. trademarks and copyrights would be classified as longterm assets. beginning balance Add Net Income for the year or deduct the Net Loss for the year Less Dividends declared to shareholders Retained Earnings. Retained Earnings – this account represents the cumulative total of the net income of a company that has not been distributed to shareholders. Note that the wages payable account is normally the result of an adjusting entry.1 Page 9 Intangible assets such as patents.1. Wages payable – a listing of all wages due to employees within one year or one accounting cycle. end of year XXX ± XXX . The retained earnings account is adjusted at the end of each year to account for a company’s net income or loss. It is when the amount is due back to the lender that differentiates between current and non-current debt. 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.XXX XXX . v. Shareholders’ Equity: Contributed Capital – this account contains any amounts which have been invested in the company by the company’s shareholders.Introductory Financial Accounting. Taxes payable – a listing of all taxes due within one year or one accounting cycle.
000 (25.000 (60.1 Page 10 The Income Statement The income statement is a statement that shows how a company performed during one period. however. v.000 3.000) 15. typically the fiscal year of the company. For example: The Miller Company Income Statement For the Period ended December 31. most companies tend to use some form of a multi-step statement.000 . and for the above company would look like the following: The Miller Company Income Statement For the Period ended December 31.000) $10. It takes the reader from total Revenues to Net Income.000 The multi-step statement has multiple subtotals.1.000) $10. 20x8 Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Income Interest Income Net Income before Taxes Income Tax Expense Net Income $100. the amount left over after all relevant expenses have been taken into account. 20x8 Sales Interest Income Cost of Goods Sold Operating Expenses Income Tax Expense Net Income $100.000 (8.000 (60.000) 40.000 18.000) (8.000 3. The single step statement lists all revenues and then all expenses without breaking out any further subtotals.Introductory Financial Accounting. Income statements can take on one of two formats: single step and multi-step.000) (25. Either one is acceptable under GAAP.
1 Page 11 The T-Account Named for its shape. a T-account is a tool used by accountants to keep track of entries that are made to individual accounts.Introductory Financial Accounting. Thus. When a credit is made.1. Accounts Receivable Debit Credit The following represent how increases and decreases in accounts get recorded: Liabilities & Shareholders’ Equity Assets + Expenses - Revenues + + - - + . v. it is placed on the right hand sand. When an entry is made and an account is to be debited. for every entry the lefthand entry must equal the right-hand entry in order for the Accounting Equation to hold true. which resembles a capital “T”. an entry is placed on the left-hand side of the T.
7. into the company upon incorporation. 11.1 Page 12 Comprehensive Example Ian has worked at a music store for the last 20 years. He paid cash. 20x7. the annual rate is 10%. Ian invested $175. More inventory was purchased on account June 1. That is.000 The company took out a loan for $200. 20x7.000. An outside storage facility has been rented to fill this need. 20x7.Introductory Financial Accounting. Opened for business in a local mall. 20x7. he has decided he is ready to go out on his own. are for 5 years. Rent is $1.760 cash. 20x7. Credit sales .000 was purchased on account. 4. The terms of the loan. (Record the payments made from March to November only.000.. which covered the period of January 2. 3.000.000 of the accounts receivable were collected throughout the year. 6. 20x8. is located in the Meadowvale Mall. and was rented on a month-to-month basis. Ian’s Incredible Instruments Inc. v. Ian’s Incredible Instruments. 9.$430.000 common shares of the Corporation. however. The lease is in effect from January 2. 20x7: 1. (Record the February rental payment only. 10. 20x7. 20x7 through December 31. A total of $280.) Inventory of $120. which was taken out on June 1.) 2. but is not large enough to store any extra inventory. Ian signed a two-year lease with monthly rent of $8. An insurance policy. Inc. The mall location is suitable for Ian’s retail needs. After years of planning and saving. He received 1. Ian purchased furniture and fixtures for the store at an auction for $30. interest payments are due every 6 months. Ian’s Incredible Instruments Inc. 8. his entire life savings.000 due on the first of each month. The lessor required Ian to pay the first and last month’s rent on January 2. January 2. January 2. He only rented the outside facility to the end of November.200 per month. . 5.000. and was able to give up his off-site storage facility. 20x7 through December 31. 20x7.’s Sales for the first year were as follows: Cash sales . Ian was able to convince his landlord at the mall to give him additional storage space (at no extra cost). Having proven himself a good tenant. Ian’s Incredible Instruments Inc. with 10% annual interest due semiannually. 20x7 for $350.000. beginning February 1. was purchased for $5. The following transactions took place during the fiscal year ended December 31.1.$310.
v.000 10. To record the rent paid on the outside storage facility in February for one month.000 120.200 4.1 Page 13 12. and therefore it is an expense in this fiscal period.000. To record Ian’s initial investment into the company. The total cost of the inventory sold during the year was $300. 175.000 To record the payment of first and last month’s rent on the lease.000 $446.000 120. Inventory Accounts Payable 120.000 23.000 3. For each of the above.1.000 (note that a dividend is debited against retained earnings).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. 14.000 .000 175.000 88. To record the purchase of inventory on account. Rent Expense Cash 1.000 8. However.Introductory Financial Accounting. We know that the first month’s rent will be “used up” in this year. the deposit for the last month won’t be used until 2 years from now. Cash Contributed Capital 2. Ian declared and paid a dividend of $60.000 40. the appropriate journal entries would look like this: 1.200 1.000 13. Prepaid Rent Rent Expense Cash 8. This is what we call a prepaid expense.
To record the purchase of furniture and fixtures. they will get $200. Cash Bank Loan 200. the credit to the Accounts Receivable account. Note that because it expires December 31. 20x7.200/month x 9 months = $10.000 8.000 10.000 11. However.000 7. we must remove the receivable from our books.000 9. for the purposes of this example we will be entering them in one journal entry.000 310. for which cash was paid. $1. Insurance Expense Cash 5.800 . To record the rental expense incurred from March through November.Introductory Financial Accounting. (Remember.000 cash from the bank. v. as they are no longer due to us. To record the collection of accounts receivable throughout the year. Rent Expense Cash 10.1 Page 14 5.760 5. To record purchase and payment of the insurance policy.1. second. We will deal with the interest expense incurred on the loan in a separate entry. To record the purchase of inventory on account. To record sales for the first year. First.760 6. two things will happen to Ian’s Incredible Instruments Inc.000 200.000 350. Upon receiving the loan. sales are recorded individually as they are made. Furniture and Fixtures Cash 30.000 740. Note that as we collect the cash.800.000 280.000 30. Cash Accounts Receivable 280. we already recorded the initial payment in February). the entire amount applies to the current fiscal year and therefore there is no prepaid portion. Note that in reality. Inventory Accounts Payable 350. Hence.800 10. Cash Accounts Receivable Sales 430. they will have an outstanding loan for the same amount.
000 x (10% x year) = $10.000 23.000 446.000 Interest on bank loan . To remove the inventory which was sold from the inventory account and record the resulting Cost of Goods Sold expense.1.000 120.000 10.000 88.000 Wages & Salaries Expense Rent Expense Advertising Expense Miscellaneous Expenses Accounts Payable Interest Expense Cash 165. To record the various other cash disbursements made throughout the year. Retained Earnings Cash 60.000 40. v. Cost of Goods Sold Inventory 300.000 13. Note the following supporting calculations: Rent Expense – 11 months x $8. To record the dividend paid.$200.000 300.000/month = $88.000 60.1 Page 15 12.000 .000 14.Introductory Financial Accounting.
000 7 Rent 2 3 11 12 8.000 170.000 108.000 200.000 300.000 8 515.000 60.1.000 1.000 .000 13 6 Furniture & Fixtures 30.000 16.760 30.000 350.000 30.000 350.000 Expenses INCOME STATEMENT Revenues Sales 740.200 10.800 88.000 120.000 280.000 Cost of Goods Sold 13 300.000 1.000 12 Accounts Payable 120.000 2 3 5 6 11 12 13 2 Prepaid Rent 8.000 1 Retained Earnings 13 60.200 5.000 Misc.000 350.760 Wages & Salaries Expense 12 165.000 10.000 5 Insurance 5. v.000 430.000 280.240 Inventory 4 9 120.800 446. Expenses 12 23.1 Page 16 The recording of the above journal entries in T-Accounts would be as follows: Assets BALANCE SHEET Liabilities & Equity Cash 1 7 8 10 175.000 12 Interest Expense 10.000 Contributed Capital 175.000 12 Advertising Expense 40.Introductory Financial Accounting.000 10 Bank Loan 200.000 4 9 Accounts Receivable 7 310.
000 60.000 200.000 Credit $350.000 108.1 Page 17 A trial balance of all of the closing balances of the above accounts would look like this: Ian’s Incredible Instruments Inc.000 $1.760 165.240 30.000 10.000 175.Introductory Financial Accounting.000 $1. v.000 170.000 5.000 740.465.1.000 300.000 23.000 .000 40.465. 20x7 Cash Accounts Receivable Inventory Prepaid Rent Furniture and fixtures Accounts Payable Bank Loan Contributed Capital Retained earnings Sales Cost of Goods Sold Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Interest Expense Miscellaneous Expenses Debit $515.000 8.000 30. Trial Balance As at December 31.
v.760 165.000 40.000 5.000 88.000 10.240 $740.000 5. would look like this: Ian’s Incredible Instruments Inc.000 $88.000 440.000 23.760 165.000 300.1 Page 18 A multi-step income statement for Ian’s Incredible Instruments Inc.760 98. As such.1.000 40. 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.000 300.240 .000 341. 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 23. and the offsetting amount is the net income (or loss) that gets recorded to retained earnings. At the end of the year.Introductory Financial Accounting.000 108. they are referred to as temporary accounts. all balances get returned to zero.240 10.000 108. Income Statement for the year ending December 31.
000 28.240 (60.000 550.000 . 20x7 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures $515.000) $ 28. December 31.240 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Long-term liabilities Bank loan Shareholders’ Equity Contributed Capital Retained earnings 200.000 170.1.240 $753.000 723.000 $753.240 30. January 1.240 203. 20x7 0 88.240 $ We can now prepare a Statement of Financial Position for Ian’s Incredible Instruments: Ian’s Incredible Instruments Inc.240 350.1 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. Statement of Retained Earnings for the year ending December 31. 20x7 Retained Earnings.240 30. v. Statement of Financial Position as at December 31.000 175.Introductory Financial Accounting.000 8. 20x7 Net income Dividends Retained Earnings.
Utilities Expense Revenues Unearned Revenue – Cash is received and a liabilitiy is recorded. As the company earns the revenue.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.Introductory Financial Accounting. performs the service or delivers the goods. The adjusting entry sets up an asset. but will not be paid in the current period. Interest Expense. Interest Receivable . but not yet paid in cash. v. but cash has not been paid or received. then both the liability and the expense are recorded in the amount relating to the current period. the receivable is removed. we will Debit the liability and Credit cash to record the payment. office supplies. a receivable.e. an adjusting entry is made to remove the liability and record the revenue. Accrued Revenues – These entries are used then revenue has been earned. deposits on orders.1. Income taxes. Accured Expenses – When an expense has been incurred. Expenses Prepaid Expenses – Cash is paid and an asset is recorded before it is used. and records the revenue. Examples: Credit sales. Examples: Rent collected in advance. As the liability is paid in future periods. Examples: Payroll. subscriptions collected in advance and gift certificates sold. Examples: Prepaid rent/insurance. As cash is received in payment in future periods. The asset will then be allocated to future periods using adjusting entries. plant & equipment Accrual – Event has occurred. i. Rent Revenue.
On January 1.000 for an insurance policy that will cover the next 12 months. 20x5 reveals that you have $5.000 The balance that remains in the prepaid insurance account of $7.000 At the end of the year you will have 7 months remaining on the policy.200 ???? Supplies Expense As the T-Account shows. 3. On August 1.000 does not equal 5. i. 2.1.e. 20x7 you pay $12. and therefore should be an expense of the current period.800 + 13. However. Therefore.200 of supplies on hand. it might be helpful to look at the T-Account for Office Supplies for the year: Supplies Inventory Opening Balance Purchases Ending Balance $ 3. and what we have left at the end of the year.600.000 $ 5.800 in your office supplies inventory account. What would be the adjusting entry on December 31. we know our opening balance.Introductory Financial Accounting. 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. what was purchased during the year. The adjusting entry would be: Insurance Expense Prepaid Insurance 5.1 Page 21 Example In examples 1-5. During the year you purchased an additional $13. assume that the company’s year-end is December 31.000 12. v. that will expire in 20x8.800 13. .000 represents the portion of the insurance policy that is unexpired. 20x5 you had $3. 1. 20x5? To answer this question. solving the equation. the missing credit or Supplies Expense has to be 11. A physical count of the supplies on December 31.000 5.200. This means that 5 months have been used in the current period. The missing piece to the puzzle is the amount of supplies that were used during the year.000 of office supplies.
000 Because the Accumulated Amortization account is applied as a reduction of the related asset account. will appear on the Statement of Financial Position as a reduction of the related asset account.600 You purchase new office furniture for a cost of $100. the revenue to be recorded for the year would be 8 months x $800/month = $6. 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. You estimate that the furniture will last 10 years and have no salvage value at the end of its useful life.400.000 on January 1. What is your adjusting entry? On May 1. You received payment for the full year on May 1. 11. 4.000 per year for the next 10 years. we will take $10. or $10.000 10. Each and every year.600 11. Therefore.Introductory Financial Accounting.e. there would still be 4 months of unearned . You own an apartment building and have a tenant whose parents have paid their rent for the entire year in advance. instead of taking the full $100. on the other hand. The apartment rents for $800/month. when you received the revenue.1. i. v.000 Note that the amortization expense account will appear on the income statement as an operating expense for the year.000 per year for the life of the furniture.600 9.000) $ 90. office furniture in this case.600 As of December 31. Furthermore. It is now December 31.000 as an expense this year. The Accumulated Amortization account. 20x6. 20x8.000 (10. the adjusting journal entry would be: Amortization Expense Accumulated Amortization 10. 20x8. 20x5 would be: Supplies Expense Office Supplies 3. you would have recorded an entry of: Cash ($800 x 12) Unearned Rental Revenue 9. 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 earned 8 of the 12 months of revenue. we call it a contra account to the Office Furniture account.1 Page 22 The adjusting entry on December 31. 20x8. Therefore. 20x6.
400 6.333 3. and furthermore.200. 3. the loan has not been outstanding for the full 12 months. 5. 20x3 you take out a loan for $100. Your average weekly payroll is $80. Our employees worked 4 days from the time of their last payday until the end of the year.000. The adjusting entry would be: Wages Expense Wages Payable 64.1 Page 23 revenue left.000 64. and our employees work 5 days a week.000 x 4 days = $64. 20x6 (a Monday).1.400 = $3. This reconciles to our calculation above. The adjusting entry would be: Interest Expense Interest Payable 6.000 x 8% = $8.000 .000/5 = $16. 20x3.200. 20x8 would be: Unearned Rental Revenue Rental Revenue 6.000 x 5/12 = $3. The loan agreement states that interest will be charged at a rate of 8% annually. only 5 months of interest pertain to the current period.000. the accrued wages payable will be $16.000. However. That is. What is the adjusting entry? To calculate the adjusting entry. 20x3.000. the balance in the Unearned Rental Revenue account will be equal to $9. The loan has been outstanding for 5 months. The balance in the Unearned Rental Revenue Account would have 4 months x $800/month = $3. It is December 31. and interest and the principal will be due August 1. v. as of December 31. that is.400 According to the journal entries above.000/week. 20x4.333. 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. then our daily payroll rate can be calculated as $80. The adjusting entry on December 31. and therefore. interest expense for 20x3 would be $8. What is your adjusting entry to record interest expense for the year? Looking at the terms of the loan.600 – 6. On August 1.333 You last paid your employees on March 27. It is March 31 (Friday). we can calculate that the annual interest on the loan will be equal to $100. we have to first figure out how much needs to be accrued.000. therefore.Introductory Financial Accounting. your year-end. no cash has been paid for the interest expense.
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. assume that we make a sale of $1. and • all associated costs can be estimated. the following transactions are related: • Sales Returns: whenever customers return merchandise for refund. This can become an issue for goods that are in transit around the company’s year-end. Sales and Sales Contra Accounts Whenever a sale is made. If the goods are shipped under the terms FOB Destination. instead of debiting the sales account. If the goods are shipped to the customer under the terms FOB1 Shipping. second. For most sales. This allows the company to keep track of all sales returns separately from the original sale. then they belong to the customer only when they are delivered and therefore the revenue recognition point is when the goods are shipped.Introductory Financial Accounting. a 5-year warranty is provided with the product. • the revenue must be earned (all significant acts must be completed). this means that the cost of the goods sold become an expense the day the sale is made. But. it gets onto our books the expense that we have incurred during the last 4 days of the period. However. this can get complicated when say. In the case of a simple sale. we debit an account called ‘sales returns’. the revenue recognition point takes place when the transaction takes place. v.1. then the goods belong to the customer the minute they are loaded on the truck and revenue can be recognized immediately. whenever the discount is taken. • collectibility is reasonably assured. as we will see later. • Sales Discounts: if early payment discounts are offered to customers. We MUST record all expenses relevant to the current period.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. we credit the Sales account. If the customer pays 1 FOB stands for ‘Free on Board’ .000 and we offer a discount of 2% if the invoice is paid within 10 days. 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. Just because you don’t pay cash for something does not mean that the expense wasn’t incurred. For example. whether we have paid for them or not. Revenue Recognition and the Matching Principle For a firm to recognize revenue. then the amount of the discount gets debited to the Sales Discounts account. In this case. it gets onto our books the liability that we owe to our employees.
500 1. The selling price is $40.1 Page 25 • within 10 days.500 is returned to the company Sales returns Accounts receivable 1. • merchandise is shipped FOB Shipping to a customer.000 $40. a 2 % discount is offered if payment is made within 10 days.000 merchandise whose sales price was $1. The $20 discount will get debited to the Sales Discount account. 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. Terms of payment are 2/10. A credit is granted to the customer. they will pay us $980. These three accounts are considered contra accounts to the Sales account and.000.1. that is. otherwise the full amount is payable in 30 days.500 . but the customer keeps the merchandise. when reported on the income statements. n30. Sales Allowances are when merchandise is sold to a customer which is slightly defective. Accounts receivable Sales • $40. v. would be netted out against the Sales account.Introductory Financial Accounting.
280 720 36. These problems must be dealt with in an organized and consistent manner.Introductory Financial Accounting. interest. Cash Sales discounts Accounts receivable 35. v. Accountants are continuously faced with new situations and business innovations that present accounting and reporting problems. It would be impossible for financial statements to meet the needs of all users of financial statements. such as dividends. 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. the focus of financial statements is to meet the needs of creditors and shareholders. and • what is the fallback position: does the company have sufficient assets to satisfy its liabilities? To summarize. Sales Allowances Accounts Receivable 2. Consequently. or similar decisions.280 is received. 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). the objectives of financial reporting are as follows: • to provide information useful to present and potential users in making investment.000 The Conceptual Framework A strong theoretical foundation is essential if accounting practice is to keep pace with a changing business environment. The conceptual framework plays a vital role in the development of new standards and in the revision of previously issued standards. • to provide information to help in assessing cash flows. and so on. claims on those resources. loan repayments. This does not imply that there are no other users of financial statements. and changes in those resources to help in assessing cash flows. payment of $35. and • to provide information about the economic resources of a firm.1 Page 26 • some of the merchandise was slightly damaged during before it was shipped.500 is granted to the customer. A credit of $2. principal and dividend payments?.1.500 • on the 9th day after the sale. credit. since these needs could conflict. .500 2.
accounting information should meet the following criteria: • verifiability – accounting professionals. • feedback value – information presented today helps confirm previous decisions. Secondary qualitative characteristics – the following two characteristics (neutrality and comparability are qualified as secondary because they are desirable qualities of accounting information. accounting information should meet the following criteria: • predictive value – information should be useful in predicting future outcomes. If a company purchased a parcel of land in 1856 for $100. • timeliness – information should be available to the users as quickly as possible. The $100 is an established transaction and is reliable. .000 is far more relevant.000. For example. For example. From a shareholders’ perspective the value of $10. consider the application of the historical cost principle which states that assets should get recorded at their original cost. This implies that the information provided should be useful to the users. One could argue that regardless of what you call this security. • representational faithfulness – accounting information should portray the substance of transactions over their form. the concept of relevance and reliability conflict. assume a company issues a new type of security called a ‘Special Preferred Share’ which has a limited life (i. The rationale is that income from recurring items is a best predictor of future income. For example. when establishing the validity of an accounting estimate should come to a consensus. Reliability wins in this case. the income statement is generally structured by segregating recurring items against non-recurring items. v.1. the representational faithfulness principle would argue that it meets all the characteristics of long-term debt and should be classified as such.1 Page 27 Qualitative Characteristics of Accounting Information There are two primary qualitative characteristics of accounting information: relevance and reliability. To be relevant. 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. Verifiability implies that independent measures using the same measurement method should yield approximately the same result. At times. For example. that land is recorded on the company’s books at $100 regardless of the fact that it may well be worth $10. gets refunded in a pre-specified number of years) and pays a fixed rate of interest.000 today.Introductory Financial Accounting. To be reliable.e. Reliability implies that the accounting information can be depended upon. 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.000. but are not as important as relevance and reliability.
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). Consistency implies that accounting principles are applied from period to period in the same manner. That’s not to say that accounting principles cannot be changed. but changes should occur infrequently and only for valid reasons. v. we must estimate which accounts receivable are likely to become uncollectible in the future and establish an allowance for doubtful accounts. Here is an example of an accounting rule that could lead to dysfunctional economic decision making. For example. The principle of timeliness implies that the financial statements should be in the hands of users as soon as possible. but should be used as a way of thinking. Thus. 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. the project has a significantly positive net present value). Also.e.000. When accountants can choose between two equally acceptable accounting principles. the company would have to show a large loss on disposal. changes in accounting principles require retroactive adjustment and restatement of prior period financial statements. When introducing an accounting principle.000 would not be significantly affected if they were misstated by say. For example. the financial statements of a company with net income of $10. Materiality implies that financial statements are not precise but are accurate enough that any potential errors of misstatements would not affect any user. 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.1. Conservatism is an effort to ensure that the risk or uncertainty inherent in business situations is adequately considered. Modifying concepts Conservatism means that it is generally preferable that any possible errors be in the direction of understatement of net income.000. The principle of conservatism also leads to the recognition of contingent losses but does not recognize any contingent gains. For example. it may be . $100. as we will see in Lesson 4. The concept of materiality can play against the concept of timeliness. Information benefits vs. information costs. Assume that existing equipment is technologically obsolete and a net present value analysis shows that if the equipment were to be replaced.Introductory Financial Accounting. The only problem is that if the asset were to be disposed of. Cost/benefit analysis is very difficult to quantify since most costs and benefits are intangible. Accounting rules should not provide the motivation for dysfunctional decisions. the principle of conservatism implies that the one with the least favourable impact on net income should be the one chosen. when companies sell depreciable assets.1 Page 28 Freedom from bias (neutrality) – accounting information should be even-handed with respect to the impact of accounting information on users’ behaviour. a gain or loss arises when the proceeds on disposal differ from the net book value of the asset sold. the company would benefit economically from it (i.
Monetary unit principle assumes that the value of the dollar does not change . Going concern principle assumes that the entity will continue operating in the future. v. This assumption allows us to record long-term assets at their depreciable cost.e. This principle will be invoked when dealing with leases and intercorporate investments in later lessons. Revenue Recognition Principle states that revenues should only be recorded when earned. Consequently. This omission is justified on the basis of materiality. we can add assets together even if they were purchased in different years. all associated expenses related to the recognition of these revenues are recorded also. 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. Also refer to the definition of an asset (later in this section). Other Principles Economic entity principle states that the financial statements of an entity should report all assets and liabilities under its control.1. .i.1 Page 29 possible that additional invoices are received after the financial statements are issued. months…) and report income and prepare a balance sheet for each of these periods. a 1925 dollar is equivalent to a dollar today.Introductory Financial Accounting. Matching principle assumes that when we record revenues. Periodicity assumes that we can breakup the life of a business in separate reporting periods (years. the measurability of such revenues are reasonably certain and collectibility is reasonably assured. otherwise they would have to be recorded at the lower of their depreciable cost or liquidation value. 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. This is probably one of the most flawed principles.
v. singly or in combination with other assets. Assets have three essential characteristics: (a) they embody a future benefit that involves a capacity. or on demand. for example. While equity of a profit oriented enterprise in total is a residual.1. (b) the entity can control access to the benefit. contributed surplus and retained earnings. Equity is the ownership interest in the assets of a profit oriented enterprise after deducting its liabilities. Revenues of entities normally arise from the sale of goods. Liabilities have three essential characteristics: (a) they embody a duty or responsibility to others that entails settlement by future transfer or use of assets. and (c) the transaction or event giving rise to the entity's right to.Introductory Financial Accounting. the benefit has already occurred. many not-for-profit organizations receive a significant proportion of their revenues from donations. the settlement of which may result in the transfer or use of assets. provision of services or other yielding of economic benefits. (b) the duty or responsibility obligates the entity. Liabilities are obligations of an entity arising from past transactions or events. 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. in the case of not-for-profit organizations. resulting from an entity's ordinary revenue generating or service delivery activities. resulting from the ordinary activities of an entity. or control of. royalties or dividends. on occurrence of a specified event. interest. government grants and other contributions. the rendering of services or the use by others of entity resources yielding rent. to provide services. either by way of outflows or reductions of assets or incurrences of liabilities. and (c) the transaction or event obligating the entity has already occurred. thereby leaving it little or no discretion to avoid it. In addition. either by way of inflows or enhancements of assets or reductions of liabilities.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. Expenses are decreases in economic resources. types of share capital. . in the case of profit oriented enterprises. to contribute directly or indirectly to future net cash flows. at a specified or determinable date. provision of services or other yielding of economic benefits in the future. and. it includes specific categories of items. Revenues are increases in economic resources.
. and from all other transactions. events and circumstances affecting the entity except those that result from expenses or distributions of equity / net assets.1. events and circumstances affecting the entity except those that result from revenues or equity / net assets contributions.Introductory Financial Accounting. v.1 Page 31 Gains are increases in equity / net assets from peripheral or incidental transactions and events affecting an entity. and from all other transactions. Losses are decreases in equity / net assets from peripheral or incidental transactions and events affecting an entity.
Existence of the lawsuit was reported in the notes to Fastrac’s financial statements. 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. even though the floor covering has an estimated useful life of 5 years. assumption. The party sued Fastrac for damages that could exceed Fastrac’s insurance coverage.1 Page 32 Problems with Solutions Problem 1-1 Multiple Choice Questions 1. assumption or constraint is being applied in this situation? a) Full-disclosure principle b) Conservatism principle c) Matching principle d) Unit-of-measure assumption . assumption. 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) Materiality constraint d) Separate entity assumption 2. or constraint was violated? a) Continuity assumption b) Matching principle c) Cost principle d) Time period assumption 3. v. The cost of the floor covering for the company offices was expensed. He paid for the computer by writing a cheque on the company chequing account and charged the “Office Equipment” account. While making a delivery. Nimto Inc. What accounting principle.Introductory Financial Accounting.1. The proprietor of Front Street Drugs bought a computer for his personal use. What accounting principle.
20x9. ABC Ltd.000 personal residence as an asset on the balance sheet of his company. 20x8. after correcting for the inventory error? a) $ 40. d) Under accrual accounting. Which of the following statements is true? a) Under cash basis accounting. financial statements. there will be a balance of $20.999 d) $1. showed Total assets of $999.000 in the Prepaid insurance account on December 31. the Insurance expense for the period ending December 31. 20x5.000 worth of inventory in the company’s December 31. c) Under cash basis accounting. What generally accepted accounting principle does this contradict? a) Time period principle b) Cost principle c) Going concern principle d) Business entity principle 7. Shaw’s Rent-all. 20x5. failed to include $40.000. financial statements should be prepared using which of the following? a) Fair market values b) Historic costs c) Future values d) Replacement costs .000 b) $ 959.000 c) $ 999. purchased a 4-year insurance policy and paid a premium of $40. M. there will be a balance of $25. According to generally accepted accounting principles. Harry.999.999 6. the bookkeeper for Ytwok. inventory count.000. ABC has a December 31 year end. Total liabilities of $500. 20x5. will be $5. v.1.999. The December 31. 20x9. b) Under accrual accounting. What would be the balance for Total assets on December 31. In the rush to make it to a New Year’s party.000. On July 1. 20x8. Shaw included a $200.1 Page 33 4. there will be a balance of $35.039. 5. which included this error.000 in the Prepaid insurance account on December 31. and Total shareholders’ equity of $499.Introductory Financial Accounting.000 in the Prepaid insurance account on December 31. 20x8.
1. K. 20x8.Introductory Financial Accounting. Smart presented land and buildings on her company’s balance sheet based on the appraised value of these assets at December 31. v.1 Page 34 8. What generally accepted accounting principle does this contradict? a) Time period principle b) Revenue recognition principle c) Objectivity principle d) Business entity principle .
1. You and several other shareholders invested $20.000 Sales on account .$190.1 Page 35 Problem 1-2 On July 2. 4. A bank loan in the amount of $20. 8. .e. 20x2. The first and last month’s rent are due upon signing of the lease on July 2. v. 3. 1. 2.000 was obtained on August 1. 20x2 and expires on June 30.000 per month. 20x3). 7. Interest payments are due on the 1st of each month. the company’s year end. 20x2 were: Cash sales .000 in return for shares in the company.200 cash. The annual interest rate is 9%. The lease agreement is for one year.000.Introductory Financial Accounting. you decided to start up a new business – Heavenly Books Inc. 9. on June 30. 20x3. The loan agreement calls for repayments of $4.000 every 4 months with the first payment due November 1. 20x2. 20x2. 20x2 to October 31. Books and supplies of $50. The following are summary transactions for the period July 2. An insurance policy was purchased for $1. Furniture and fixtures are purchased at a cost of $15. These are purchased for cash. A suitable location is found and rent is $1.000 of the sales made on account were collected.$6. Sales for the period ended October 31. an offcampus bookstore where students can purchase textbooks and supplies at reduced prices. 5. 20x2. In addition to the monthly rent. An additional $120. 6. The policy takes effect on July 2.000 of inventory was purchased on account.. an annual charge equal to 1% of sales is due at the end of the year (i.000 A total of $4. 20x2.000 was purchased on account.
000 2. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . 13. Enter all the above transactions in T-Accounts.Introductory Financial Accounting. 16. Credit Accrued Liabilities. An inventory count shows that a total of $25. c.1 Page 36 10. 14. b. Credit Accrued Liabilities. The expected income tax rate is 30%. Books costing $15.000 1. 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. Credit Accrued Liabilities.800 The following adjustments at year end must be made: 11. 15.000 300 130. 17. Credit Accrued Liabilities. 19.000 $182. 12. The interest payable on the bank loan. Adjustment for rent payable. The straight line method is to be used.1. Employees are owed a total of $600. v. The adjustment for insurance expense.000 3.000 were returned to the publishers. 18. The furniture and fixtures are expected to last a total of 10 years with no salvage value.000 of inventory is on hand. Required – a.500 10.
000 84.100 2.1. 20x8 Cash Capital stock Cost of goods sold Amortization expense Dividends declared Interest expense Income tax expense Insurance expense Inventory Income taxes payable Office equipment Prepaid insurance Rent expense Salary expense Salaries payable Sales Sales returns Supplies Supplies expense Telephone expense Required – Prepare the following for the year ended/as at December 31.600 2. A statement of financial position.000 4.1 Page 37 Problem 1-3 On January 1. On December 31. c. b.600 4. Global Production.Introductory Financial Accounting. 20x6: a. A multi-step income statement. A statement of retained earnings.400 2.100 3.800 2.100 50. v. the accounting records contained the following selected amounts: Accounts payable Accounts receivable Accumulated amortization – Office Equipment Bank loan.200 1. $ 7.100 3.500 157. 20x6.000 1.500 . 20x6.300 18.300 44.100 14.. was started with $50. Inc.000 24.000 1.000 25.500 4.100 21. due December 31.900 ? 40.000 invested by the owners as capital stock.
on a yearly basis for the fee of $24/year.000 on June 1st and again on December 1st for providing these services for one year. record the journal entry to record the receipt of the subscription fee in January. It is now your year-end. $4.300 worth of services. June.1 Page 38 Problem 1-4 For each of the following isolated situations. you bought a piece of machinery for $50. You are a consultant. ahead of time. stated that they would pay you $6. Today is the end of the accounting period. which was signed June 1. your year-end. Issues come out in March. with no salvage value estimated at that time. for their monthly staff meetings. Part of your new lease agreement required you to pay your first month’s rent. 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) . but you will not be billing Big Al until next month. You have provided $2. The contract. v. prepare the appropriate adjusting entry. a) On June 1. Your daily salary expense is $600. and you have provided your services Big Al’s Used Cars for the past month.1. What is the appropriate adjusting entry? You have a contract to provide catering services for a local company.750. INC Inc.Introductory Financial Accounting.000 for your annual property insurance policy eight months ago. You sell subscriptions to your magazine. It is now December 31.. A new customer purchases a subscription in January. Your year-end is June 30th. What is the adjusting entry required if your year-end is December 31st? Your company is moving into a new office on July 1st. First.000. You signed the agreement and wrote the cheque on June 30th. and then record the adjusting entry for the end of April. Kittens Quarterly. your year-end. Record the adjusting entry for amortization for the year. September and December. What adjusting entry must be recorded to account for the unpaid salaries? You paid $5. It is now April 30. The estimated useful life of the machine is 8 years. What would the adjusting entry be? You pay weekly salaries to your staff and your accounting period end falls on a Wednesday.
The note was recorded as follows: Sep 1. 10 percent.000 b. Doby Company borrowed $3. the company collected $440 for subscriptions two years in advance. On September 1. 20x6. The $440 collection was recorded as follows: Oct 1. d.000 $1. note payable.000 cash and gave a oneyear. On July 1. 20x5 a tenant renting some office space from Doby Company had not paid the rent of $500 for December. On December 31.1 Page 39 Problem 1-5 Below are four transactions that were completed during 20x5 by Doby Company. v.Introductory Financial Accounting.1. Coverage of the insurance policy starts on July 1. You are to provide the 20x5 adjusting entries required for Doby Company.000 $3. 20x5. The annual accounting period ends on December 31. Each transaction will require an adjusting entry at December 31. Doby Company paid for a two-year insurance premium for a policy on its equipment. August 31. Assume Doby Company publishes a monthly magazine. 20x5 Cash Unearned subscription revenues $440 $440 . a. On October 1. The subscription start on October 1. 20x5. 20x5.000 c. 20x5. The total interest of $300 is payable on the due date. 20x5 Prepaid Insurance Cash $1. This transaction was recorded as follows: Jul 1. 20x5 Cash Note payable $3. 20x5. 20x5.
000 units of inventory for $20 per unit. Wild Corporation purchases a warehouse for $300. What is total shareholders’ equity at this point? On April 2. What are the total assets of Wild Corporation immediately after it has been formed and the shares sold? 2. What are the total liabilities of Wild Corporation after this transaction? 12. 4.1.1 Page 40 Problem 1-6 For the next set of questions. 7. v. 20x6. What is total shareholders’ equity after this transaction? On April 5. The purchase is made “on account” with the company agreeing to pay for the goods within 30 days. The company used the perpetual inventory method. Wild Corporation sells 200 units of inventory for $50 per unit. 20x6. What are the total liabilities of Wild Corporation after this transaction? 9. What are the total assets of Wild Corporation after this transaction? 5. 20x6. What are the total liabilities of Wild Corporation at this point? 3. What are the total liabilities of Wild Corporation after this transaction? 6. 20x6. What are the total assets of Wild Corporation after this transaction? 11. The customer pays cash.Introductory Financial Accounting. 1.000 cash. What is total shareholders’ equity after this transaction? (CGA Canada Adapted) . 10. What are the total assets of Wild Corporation after this transaction? 8. Assume Wild Corporation uses a Perpetual Inventory System. What is total shareholders’ equity after this transaction? On April 3.000 common shares at $10 per share cash. Initial financing comes from the sale of 100. Wild Corporation is formed on April 1. ensure your answer reflects the cumulative impact of all prior parts. Wild Corporation purchases 1.
000 1-year.000 90-day. (CGA Canada Heavily Adapted) . 7% note payable from the seller.1 Page 41 Problem 1-7 The following information was extracted from You Read Magazines Co. liabilities. Received from Smith a $10. Received $2. Purchased new equipment by obtaining a $200. The company requires that customers pay the annual subscription fee for the magazine in advance. General Ledger Account Subscriptions Received in Advance Dr Cr Balance January1. 2. Purchased for $500 cash an insurance policy for the following year. 20x7 128. 3. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x6? 3. Example: Shareholders’ Equity -500 Net Income -500 Assets Interest accrued on notes payable was $500 NC Liabilities +500 Required – 1.000 cash injection from one of the owners of the company.000 120. 7.000. 6% interest note in exchange for extending the due date on a receivable.400.Introductory Financial Accounting. Received a $50. Interest accrued on note receivable was $1. What was the subscription revenue earned during 20x7? 2.000 from a customer for an outstanding invoice. 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. v. 6.000 Entries during 20x7 Required – 1. 5. decreases by a minus. 4. Show increases by a plus. Interest accrued on the note payable was $1. shareholders’ equity and net income.000 Entries during 20x7 80. and no change by NC.1. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x7? 4.
2. Net income and Profit margin for 20x6 and 20x7.000 35. Based on the above.000 had not yet been received. An amount of $5.000.000 and $5.000 40. Required 1.66% 20x7 $70.1. Other expenses in 20x7 included $1.000 16.000 was received in 20x7 and was included in cash received for sales in 20x7. 2.000 which was a deposit on goods that were to be purchased in 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. Cash paid for purchases in 20x6 included an amount of $2. the proprietor of Error Margin was excited to learn about profit margin analysis and immediately applied his knowledge to evaluate his business.000 $21. (CGA Canada) . Purchases.000 $10.Introductory Financial Accounting. 5.000 received in 20x6 pertained to a sale made in 20x5. Identify any two generally accepted accounting principles that were violated in Mr. Cost of goods sold. v. Cash. 4. At the end of 20x6 and 20x7. Cash’s personal expenses. respectively. accounts receivable for sales made to customers totaling $20. using the accrual method of accounting. There was no money due from customers at the end of 20x7. 3. Ronald found the following: 1. 6.000 10.000 30% On examination. At the end of 20x6.1 Page 42 Problem 1-9 Mr. He was perplexed that the profit margin had improved in spite of his intuition to the contrary. calculate Sales.000 14. there were goods in inventory costing $3. Cash’s analysis. The $20.000 of Mr.
It normally takes about 15 years for a tree to grow to a suitable size. operates a tree farming business. Use the criteria for revenue recognition to explain when revenue should be recognized for this tree farming business. pruning and maintaining the trees be accounted for? Explain. How should the annual cost of fertilizing. maintains. primarily during the Christmas season.1 Page 43 Problem 1-10 Evergreen Inc. v. . pruning and maintaining the trees over the 15-year period. and harvests evergreen trees. b. Required a. It plants. It sells the trees for cash.1. in parking lots at select locations in major urban areas. The largest cost of this business is the cost of fertilizing.Introductory Financial Accounting.
. 13 Dec. Purchased the office furniture and equipment of a retiring architect for $4. to V.1 Page 44 Problem 1-11 V. 17 Dec.000. 13. v. 31 Dec. 31 Issued 100 common shares of the new company. Required – a. Paid $1.1. Strait Ltd. 31 Dec.000 in cash and agreeing to pay the balance in six months. V. 1 Dec. Prepare journal entries for the above transactions What is operating income for V.000 for rental of office space for December rent.875. Strait Ltd. Completed work for JP Developers and sent them an invoice for $1. Strait opened an architecture company.Introductory Financial Accounting.300 cash to the office secretary for December’s wages. Dec. 7 Dec. Completed work for a client and immediately collected $680 in cash for the work done.875 from JP Developers for the work completed on Dec. 20x6? (CGA Canada Adapted) . Paid $1. which revealed that $200 of the $300 worth of office supplies purchased on December 17 were still on hand. Received $1. Performed a count of office supplies. paying $1.000 cash. 28 Dec. Purchased office supplies on credit for $300. Strait in exchange for $6. 3 Dec. for the month ending December 31. the following transactions were completed during December 20x6. b.
1 Page 45 Problem 1-12 The following summarized transactions (in thousands of dollars) occurred during the year ended December 31. 20x2. The principal on the remaining notes is payable on May 1. Merchandise inventory purchased on account was $520. p. For depreciation . . computed as 40% of pretax income of $50. h. For the interest on the note receivable. To employees for wages. r. $189. which were all paid in cash. $15 Total income tax expense for 20x2 is $20. Post all of the above transactions in T-Accounts. q. To the insurance company for a new three-year fire insurance policy effective September 1. The principal on the current notes was collected on May 1. l. utilities and supplies. 20x2. December 31. i. Wages earned but unpaid. c. For new equipment acquired on July 1. $193. 2. The notes receivables are from a major supplier of vitamins. Required 1. m. To Revenue Canada for income taxes. $500. d. The rate is 12% per annum. j. 20x2: n. $36. statement of retained earnings and balance sheet for 20x2. k. To trade creditors. $74. b. The merchandise inventory as at December 31. advertising. 20x2. e. Cash disbursements were: g. f. $19. o. 20x2 was $240. 20x5.1. 20x2 for Ruiz Pharmacy: a.Introductory Financial Accounting. Total sales were $900. Interest for twelve months on all notes was collected on May 1. Prepare an income statement.depreciation expense for 20x2 was $30. Collections from credit customers were $700. The board of directors declared cash dividends of $26 on December 15 to be paid on January 21. v. For insurance. For miscellaneous expenses such as store rents. of which 80% were on credit. The following adjustments were made on December 31. 20x2.
Peter has been in business for five years. Sales during the year were $1. The following information has been obtained about the fiscal year just ended: 1. 6.500 It is now mid-September 20x5. Cash sales were $775.500 by Peter.000 -40. Peter paid salaries and commissions to employees of $200.000 260. Peter collected $375.500 14. Peter’s balance sheet for August 31. Peter purchased appliances from suppliers for $850. The cost of the appliances sold during fiscal 20x5 was $745. .Introductory Financial Accounting. Peter uses the financial statements mainly for tax purposes and to show the holders of the long-term notes. Peter's Appliances Shop Ltd.000.000.000 $763.000 20. v. Ottkancester’s largest independent household appliance store. At year end the accountant estimates that Peter owes an additional $12. During fiscal 20x5 Peter paid $15.1. 7. 4.000. 20x4 Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures Accumulated amortization $ 30. 2.000 123.350. 20x5. mainly to builders. 20x5.000 $763. The remainder was on account.000 446. All purchases were made on account. Balance Sheet As at August 31.000 110. 5. the company's year end. employees were owed $7. Peter supplies appliances to retail customers as well as to builders of the many new homes and apartments that are going up in the community.000 during the year from customers who purchased on credit.000 8. Peter paid suppliers $600.. is shown below. On August 31.000 in taxes.000 for appliances it purchased on credit.000 190.1 Page 46 Problem 1-13 Peter is the owner and operator of Peter's Appliance Shop Ltd.500 100. During the year Peter paid the taxes it owed at the end of fiscal 20x4.000 in installments on its taxes.500 Liabilities and shareholders' equity Accounts payable Taxes payable Interest payable Long-term notes payable Capital stock Retained earnings $265.000. 3.000. 20x4. Peter needs to prepare its financial statements for the year ended August 31.
For accounting purposes. Peter must pay 2% of annual sales to the property owner 60 days after the year end. a statement of retained earnings and a balance sheet and a statement of cash flow for Peter's Appliance Shop Ltd. In addition. During 20x5 Peter purchased new capital assets (furniture and fixtures) for $25.Introductory Financial Accounting.500 a month in rent.000 in deposits from customers who wanted a guarantee that their appliances would be delivered when they needed them. During the year Peter paid $8.500 from the store and installed them in his new kitchen. The terms of the lease require that rent be paid six months in advance on January 1 and July 1 of each year. 20x5 Peter pays $4. Interest is paid annually on September 1.1.000 a month for the rent of its store. v. stove. Amortization expense for 20x5 is $22. for the year ended August 31. treat this as a dividend. and microwave that cost $4. 20x5 Peter paid $3. The prepaid rent at the beginning of the year represented 4 months of prepaid rent at the old location. Peter accepted $10. The deposits pertained to a particularly hard-to-get appliance.000 in cash for other expenses related to operating the business in fiscal 20x5. The interest rate on the notes is 8. 10. Peter paid $225. . Required – Prepare an income statement. Peter paid $20. 13.500 in interest to the holders of the long-term notes.000 on September 1. Peter expects that the appliances will be delivered in early November 20x5. Beginning July 1. 9. 12.000 cash. These deposits were not included as part of cash sales. 11. 20x4 to reduce the balance owed on the long-term notes.5%.000. Peter recently redecorated his kitchen at home. 14.1 Page 47 8. In addition to the interest payment. 20x5. He took a refrigerator. Before July 1.
bank accounts. cash generally means any cash on hand. The balance showing on the bank statement needs to be reconciled to the balance shown in the company’s cash account. 5.Introductory Financial Accounting. Prepare a list of cheques that were written but that have not yet cleared the bank account (outstanding cheques). For example. and Prepare a list of deposits that were made in the cash account but were not yet recorded on the bank statement (outstanding deposits). 4. Compare all deposits recorded on the bank statement to those recorded in the cash account.. petty cash and any foreign currency on hand. 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. bank service charges. Ensure that all cheques returned correspond to the amount entered into the cash account. The bank statement is a running total of all transactions that were made in the account since the last bank statement was produced. cheques deposited that are returned due to insufficient funds (NSF cheques). 2. etc.1 Page 48 2. Prepare journal entries to record these items and post to the general ledger. Identify any transactions that appear on the bank statement that have not been recorded in the cash account. The bank reconciliation starts with the balance per the bank statement. v. Typically. 3. every 30 days a company will receive a bank statement from the bank. Accompanying the bank statement are all the cheques that have cleared the bank account.1. It starts with the opening bank balance and ends with the ending balance. Cash Cash and Investments For accounting purposes.
The next step will be to calculate the revised cash balance: Cash balance.644 .1.673 3. August 31. Cash ($332 – 323) Accounts payable To record the error in recording cheque # 345.545 was not recorded on the bank statement • the general ledger cash account shows a balance of $43. • the total outstanding cheques amount to $6.644 $156 $156 788 788 9 9 Finally. v.579 (156) (788) 9 $42.574 • a deposit made on August 31 in the amount of $3.673 • 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.545 (6. before adjustments Less bank service charges Less NSF Cheque Add error on cheque # 345 Cash balance after adjustments $43.579 (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.574) $42. The correct amount is $323. 20x7 $45. 20x7 Add outstanding deposits Less outstanding cheques Cash per books. 20x7 shows the following: • ending balance of $45.Introductory Financial Accounting. August 31. we prepare the bank reconciliation: Cash per bank. The cheque was incorrectly written in the cash disbursement journal as $332. Accounts receivable Cash To record the returned cheque.1 Page 49 Example – The Parkes Company’s bank statement dated Aug 31.
• . The classification of available for sale investments as current or long-term assets depends on management intent. Regardless of how they are classified. there is no difference in the accounting for these 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. operational or financial policies. they are classified as current assets. consist of passive investments in the shares of another company. Available for sale investments also occur whenever debt securities are acquired with the intent of liquidating them before their maturity.Introductory Financial Accounting. By their very nature. Where the two methods differ is on how the adjustment to fair market value is recorded. For both types of investments. If management intends to hold these for a period of less than one year. the investments are carried at fair market value. • available for sale investments: any unrealized gains or losses are charged to Other Comprehensive Income. trading investments: all gains. Non-strategic investments. Strategic investments occur when we take a significant equity position in another company and are in a position to either control the other company or significantly influence its strategic. Other Comprehensive Income becomes part of Shareholders' Equity. 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.1. and balance sheet valuation is the same: interest accrued or dividends declared are recorded as investment income. They would normally be classified as current assets. v. otherwise they are classified as long-term assets. whether realized or unrealized. They are therefore specifically held for purposes of resale and are designated by management as such. Any realized gains or losses are charged to Net Income. These investments will either be classified as held for trading or available for sale securities. the subject of this chapter.1 Page 50 Non Strategic Investments Investments in the shares of another corporation can broadly be classified as non-strategic or strategic investments. are charged to Net Income. the accounting for investment income. strategic investments are classified as long-term investments. at the balance sheet date.
On February 12.900. 20x5 we receive a dividend cheque for these shares in the amount of $600.500 If the investment has been classified as a trading investment. $15.000.500 1. On October 15. then the following journal entries would have been recorded: Jun 30. 20x5.500 1. 20x5 Dec 31. 20x5 Available for Sale Investments Cash Cash Investment income Available for Sale Investments Unrealized holding gain $15. 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.000 600 600 1. The investment is classified as an available for sale investment. 20x5 At December 31.000 $15.1 Page 51 Example . the fair market value of the shares is $16.500 Oct 15. The following journal entries will be recorded with regards to this investment: Jun 30.Introductory Financial Accounting.500.900 1. v.500 $16. 20x5 . 20x6 Cash Unrealized holding gain Gain on sale of investments Available for Sale Investments XXXX XXXX $1.900 $16. At December 31.000 600 600 1.on June 30. 20x5 you purchase the shares of another company for $15.500 Oct 15.000 $15. you sell the investment for $16. 20x5 Dec 31. 20x6.1. 20x5 (the balance sheet date).500 1. the unrealized gain will be part of Other Comprehensive Income and will be part of Shareholders' Equity: Shareholders Equity: Common Shares Retained Earnings Other Comprehensive Income Unrealized holding gains Feb 12.
1 Page 52 Feb 12.Introductory Financial Accounting.1. 20x6 Cash Realized trading gain Temporary Investments $16. v.500 .900 400 $16.
The May bank statement listed the deposit at $512. 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 2.200 What amount should be reported as cash in the current asset section of Swiss Company’s balance sheet at December 31. An analysis of the cash account for Swiss Company at December 31. 20x8? a) $15.595 . 20x8 revealed the following details: Balance in bank account Customer cheques dated December 31.Introductory Financial Accounting.095 d) $31. During May.1 Page 53 Problems with Solution Problem 2-1 1. and it was deposited on May 18.1. on hand but not yet deposited Swiss Company cheques that have not cleared the bank account $15. a company received a cheque from a customer in payment of the related account receivable.095 b) $21.595 c) $25. The cheque was written for the correct amount of $152.095 9. 20x8. v.700 3.
Cash balance per books. The ending balance on the May bank statement is shown as $4.225. b.312 d) $4. December 1 Cash received during December Cash payments made during December Cash balance per bank statement. December 31 Cheques outstanding.327 $15 48 63 34 Problem 2-2 The following information for the month of December 20x6.700 77. Prepare any adjusting journal entries that would result from the December 2006 bank reconciliation. deducted from Sarg’s account in error by the bank A $1.1 Page 54 3.548 6.Introductory Financial Accounting.700 580 1. A company is preparing its May bank reconciliation.000 77.288 c) $4. was gathered by Sarg Ltd. v.020 . Prepare the December 20x6 bank reconciliation for Sarg.200 cheque received from a customer on December 13 in payment of an account receivable was incorrectly recorded as Required a. $ 3. 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. with respect to cash activities.279 b) $4.300 52 1.’s bookkeeper.300 5.1. At the end of the month. December 31 Bank service charges for December Deposits in transit at December 31 Cheque issued by Sparg Ltd.
1 Page 55 Problem 2-3 The March 31. 20x7. e) A $530 payment on account received from a customer was incorrectly recorded in the books of Focus Ltd. Prepare the necessary journal entry(ies) to bring Focus Ltd. d) Cheque #521 issued by Focus Ltd. 20x7: #501 for $780 and #533 for $1.’s cash account up to date at March 31. showed a balance of $480.915.200 had not been received by the bank in time to be included in the December bank statement. In preparing the bank reconciliation. 20x7. 20x7. had been incorrectly recorded in the books of Focus Ltd. bank statement for Focus Ltd.Introductory Financial Accounting. 2. the following information was determined: a) The following cheques are outstanding at March 31. c) Bank service charges for December amounted to $35 and had not yet been recorded by Focus Ltd. deposit of $6. 20x7. for the cash purchase of office equipment. Prepare a bank reconciliation for Focus Ltd. (CGA Canada) . in the amount of $620. at March 31. v. as $350. as $260. b) The March 31.200.1. f) The balance in Focus Ltd.’s cash account according to its accounting records was $4. Required – 1.
000 26. b) On January 10. 20x0.000 20.000 45. Assuming these investments are classified as held for sale investments. Support your answers with calculations.000 28.000.000 51.1 Page 56 Problem 2-4 During 20x0.000 10. advise management of two alternative methods of accounting for temporary investments and indicate the effect each has on balance sheet and income statement information. 20x0 $ 72. v.Introductory Financial Accounting. Holdco Ltd.000 $234. Management is quite unfamiliar with these different methods and has approached you for this information. write the journal entries to record the two sales.000 44.000 7. 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 31.000 30.000 Recent discussions have brought to management's attention that there are different methods of accounting for temporary investments. all the XYZ Computer shares are sold for $75.000 5. Required a) As chief accountant for Holdco.000 9.000 63.'s temporary investments at December 31. decided to invest in the shares of a number of "Hi-tech" companies.000 51. 20x1.1.000 $226.000 $ 70.000. and all the Strategic Air Defence Systems shares are sold for $35. The data on Holdco Ltd. .
Assuming these investments are classified as trading investments.000 10.000 $66.000 $57. v. calculate the amount of unrealized trading gain or loss for each year.800 $60.500 29.000 20x2 $16.000 28.300 20x1 $19.000 32.000 20x0 $18.000 14.Introductory Financial Accounting.500 31.500 $62. .000 12.1.500 Required a) b) Assuming these investments are classified as available for sale.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. calculate the balance in Other Comprehensive Income at the end of each year.500 14.
whereby we estimate the amount of bad debt expense on the income statement.000 Based on past experience. 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. Accounts receivable are. and the income statement approach.Introductory Financial Accounting. 8% of accounts between 61-90 days and 40% of accounts over 90 days.000 x 3% 120.000 x 8% 50. the aggregate of the unpaid invoices at any point in time.600 20.000 and that the aging of accounts receivable is as follows: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750. v. an account receivable is created.000 50.500 8. assume the total receivables add up to $1. where the allowance for doubtful accounts is estimated directly. which is equal to the net amount of outstanding invoices the firm expects to recover.000 120.1.000 $45. 3% of accounts between 31-60 days. Accounts Receivable Whenever credit is extended to customers for the provision of goods or services. Accounts receivable are reported on the statement of financial position at their net realizable value (NRV). 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. There are two approaches to calculating the allowance for doubtful accounts: the balance sheet approach. For example.000 x 1% 280. Aging of the accounts receivable listing This involves grouping all outstanding receivables based on how long these have been outstanding.000 x 40% $ 7.1 Page 58 3. the company estimates that 1% of current accounts will eventually become uncollectible. There are generally three approaches to estimating the allowance for doubtful accounts directly (balance sheet approach): 1.400 9.500 .200.200.000 280.000 $1. therefore.
Any accounts written off are written off against the allowance for doubtful accounts: Dr. it would not be meaningful to age the accounts receivable listing. Specific account identification When a company has accounts receivable from a limited number of customers and has an intimate knowledge of these customers. For example. Note that this approach does not estimate the allowance for doubtful accounts. The sum of the estimated uncollectible accounts at any point in time will form the allowance for doubtful accounts. but estimates the amount of bad debt expense. we first reverse the journal entry made to write off the account: Dr. Bad Debt Expense 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.200.200. The journal entry to record bad debt expense under either the balance sheet or income statement approaches is: Dr. if the ending accounts receivable balance is $1.1 Page 59 2. In this case. Accounts Receivable Recording recoveries of accounts written off When an account that was previously written off is subsequently recovered.1. The income statement approach is used whenever a company offers their customers revolving credit facilities (i.000 and the company estimates that 5% of these accounts will eventually become uncollectible. a department store which offers their customers a credit card).000.Introductory Financial Accounting. it may be able to identify which specific accounts may become uncollectible. 3. Allowance for Doubtful Accounts . Allowance for Doubtful Accounts Cr. Accounts Receivable Cr. or (2) the amount is small and the cost of recovering the account is greater than the balance owed.e. 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. then the allowance for doubtful accounts at the end of the year will be $1.000 x 5% = $60. so we estimate the bad debt expense as a percentage of credit sales. v.
000 $50.Introductory Financial Accounting. v. Accounts Receivable Example – The Jasmine Company’s accounts receivable at the end of the year totaled $2.1 Page 60 We then record the collection on the recovered accounts receivable: Dr.000. During the year.000 debit balance in the Allowance for Doubtful Accounts: Allowance for Doubtful Accounts Write-offs $75. the following transactions took place: • • accounts totaling $75.000 Beginning Bal Recoveries Ending balance before adjustment . The journal entry to record the accounts written off will be: Allowance for doubtful accounts Accounts receivable $75.000.800.000 10.1.000 $15.000 $75. previously written off accounts totaling $10. The balance in the allowance for doubtful accounts at the beginning of the year was $50. Cash Cr.000 $10.000 were written off.000 were recovered.000 We then record the cash receipt on the accounts receivable: Cash Accounts Receivable $10.000 The journal entry to record the recovery will first be to reverse the entry initially made when these accounts were written off: Accounts receivable Allowance for doubtful accounts $10.000 $10.000 This will result in a $15.
000 600.000 $83.000 .000 The allowance for doubtful accounts is estimated to be: (1.1 Page 61 In order to calculate the bad debt expense for the year.000 3. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $83. Using specific identification of accounts.500 since this is the entry required in the Allowance for Doubtful Accounts account to bring the account to a credit balance of $79. The allowance for doubtful account should be established at $2.000 250. we will assume four independent scenarios: 1.000 x 15.000 x 2.500 The bad debt expense will be $94.800.0% Management estimates that 2.5% 2.5% 6.800.Introductory Financial Accounting.000 x 6.800.000 x 2.000.0%) = $79. v.0% 15.5%) + (250. The accounts receivable aging is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days 1.75% of the accounts receivable balance will be uncollectible. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $92.800.500 Estimated % Uncollectible 1.000.000 x 1.500: Bad Debt Expense Allowance for Doubtful Accounts 2.000 $2.500 $94.5%) + (600. management estimates that the allowance for doubtful accounts should be $68.000 $92.75% = $77. $94.000 150.0%) + (150.1.
1. Management estimates that bad debt expense will be equal to 1.000 $90.000.000 cr.Introductory Financial Accounting. Bad debt expense will then be equal to $6.5% of total credit sales.5% = $90.000 x 1.000. + $90. we were estimating the Allowance for Doubtful Accounts with the residual being bad debt expense. = $75.000 This will cause the allowance for doubtful accounts to have a credit balance of $15.000.000 dr.000. Total credit sales for the year amounted to $6. we are effectively estimating the bad debt expense for the year and the residual becomes the Allowance for Doubtful Accounts. Note that when using this approach. . The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $90. In approaches 1-3. v.000.1 Page 62 4.
1 Page 63 Problems with Solutions Problem 3-1 – Multiple Choice Questions 1.900 c) $6. v.000 d) $13. A company estimated the needed balance in its account “allowance for doubtful accounts” by aging the accounts receivable. At the end of 20x8.000 b) $4. At the end of 20x9. 20x8 a) $4.1. A company reported the following items for 20x8: Accounts receivable balance.400. the aging schedule indicated that the balance of the allowance account should be $6.000 20.600 d) $6.000 360.000 Experience indicates that 4% of the uncollected accounts receivable at the end of each year ultimately will be uncollectible.900 2.800 c) $7.000.600 b) $1. What should be the adjusting entry amount for doubtful accounts at December 31.000 e) $13.800 .Introductory Financial Accounting. January 1. 20x8 Allowance for doubtful accounts balance. 20x8 (credit) Total credit sales during 20x8 Total collections on accounts receivable during 20x8 Uncollectible accounts written off during 20x8 $80.000) 400. the balance of the allowance account was $5. the company wrote off $500 and collected a $300 receivable that had been previously written off as uncollectible. January 1. What is bad debt expense for 20x9? a) $1. During 20x9.000 (11.
assuming the allowance method is used and management estimates the allowance to be 3% of the closing Accounts Receivable balance.1 Page 64 3. v.000.000 11.875 $3.000 After $2.095 a) b) c) d) Problem 3-2 The following information relates to Merit Ltd. What were the net realizable values of the accounts receivable as shown by the accounting records before and after the write-off? Before $2. 2004 Allowance for doubtful accounts.200. assuming the allowance method is used to account for uncollectible accounts.000 800.875 $2.000. just prior to writing off as uncollectible an account receivable of $30. January 1. b. Provide the journal entry to write off actual accounts receivable determined to be uncollectible and recoveries. assuming the allowance method is used and uncollectible accounts are estimated to be of 1% of credit sales. 2004 adjusting journal entry to record bad debts. 2004 adjusting journal entry to record bad debts. c.000 55. 2004 Required – a. 63.Introductory Financial Accounting.1.000 1.000 $3.900.000 14.000 dr.970 $3.975 $2.000 3. for the year ended December 31. January 1. A company had accounts receivable of $3. Provide the December 31. 2004: Total sales Cash sales Credit sales Cash collections from credit customers Actual accounts receivable determined to be uncollectible and written off during the year Recoveries of previously written off accounts receivable Accounts receivable.000 cr.000 and an allowance for doubtful accounts of $125. $ 15.875 $2. . Provide the December 31.
000 60.000 80. 20x1 and 20x0: 20x1 Credit Sales Collections (excluding recoveries) Accounts written off Recovery of accounts previously written off Days Past Invoice at December 31 0 – 30 31 – 60 61 – 90 Over 90 Required – Prepare all journal entries to record the above transactions $3.000.000 .000 90.400.000 27.000 45.000 - 277. v.1.000 7.000 15. 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 31.000 234.000 16.000 2.Introductory Financial Accounting.915. 20x0.000 2.1 Page 65 Problem 3-3 Sigma Company began operations on January 1.000 20x0 $2.000 25.800.
began operations on January 1. 20x6 there was a $2.000 credit balance in the allowance for doubtful accounts account and a $40. The promissory note bears an interest rate of 12%. to record bad debt expense for the year and accrue interest on the promissory note. EED Ltd. prepare the journal entries. On December 1. decided that an allowance equal to 5% of total accounts receivable would be sufficient to cover uncollectible accounts.000 debit balance in the accounts receivable account. Suppose now that instead. 3. Based on industry averages and its experience in 20x6. required at December 31. required at December 31. Sold merchandise on credit for $500. if any. if any. prepare journal entries.1 Page 66 Problem 3-4 EED Ltd. 20x7.Introductory Financial Accounting. The company uses the allowance method of accounting for bad debt expense. Received cash of $400. EED Ltd. 20x7 to record bad debt expense for the year. Required 1.000 in payment of outstanding accounts receivable. expects 2% of credit sales to be uncollectable. Prepare journal entries to record the above transactions on the books of EED Ltd. Wrote off uncollectible accounts receivable in the amount of $1. v.000 was converted to a 6-month promissory note to allow a cash-strapped customer some time to meet his obligations. In addition. 2. (CGA Canada adapted) 2. On December 31.1. 20x7.000. 20x6. an accounts receivable in the amount of $3. . With all other data being the same from above. 4.500. During 20x7 the following summarized transactions occurred: 1.
paying cash. .000 worth of inventory to a customer for $6. What that means is that inventory is tracked constantly in a real-time basis. Inventory Accounts Payable 10. From time to time. and then evaluate the different valuation methods a company can chose to determine the cost of inventory. Each item that is purchased for resale gets debited to the inventory account.000 cash. The Perpetual Inventory System The term perpetual means continuing without interruptions. We still increase the inventory account by the amount of the purchase. we just create a payable instead of reducing our cash account. or never ending. Little Company purchases $5. Little Company purchases an additional $10. this time on account.000 Note that even though we are not paying cash.000 worth of inventory. is the inventory system that it chooses. We will begin by looking at two fundamentally different types of systems. After two weeks of business. 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. Inventory A key part of determining the cost of the items that a company sells to its customers.1 Page 67 4. Furthermore. The journal entry would be: Inventory Cash 5. They sell $4. and any adjustments that are needed will be made to the inventory account. the amount the company generally receives from its customer should always be greater than the value of the inventory.000 5. as well as valuing the items that it has on hand to resell at any point in time.Introductory Financial Accounting. When we talk about a perpetual inventory system. Note that unless a company is offering a discount to get rid of inventory or for some other reason.000 of inventory. Little Company makes its first big sale. Example: It is Little Company’s first year of business. we mean an inventory system that has no interruptions. v.000 10. the effect on the inventory account is the same as the above journal entry.1. On the first day.000 The next day. a physical count of inventory will be taken to ensure accuracy of the perpetual records.
000 6.000 4. These are: . To do this. which we will now turn our attention to. Instead. the journal entry would be: Cash Sales Revenue 6. the journal entry would be: Cost of Goods Sold Inventory 4. under a periodic inventory system.000 At this point. is used to keep track of all of the costs of all of the items a company sells in one period. we have recorded the sale and the receipt of cash.1. Cost of Goods Sold (COGS).1 Page 68 To record the sale. nor do we keep a running total of COGS. So what do we do with the purchases of inventory we make throughout the year? Throughout the year. This varies significantly from the Periodic Inventory System. however. Continuing with the example above.000 5. First. v. Purchases has several contra accounts that track other expenses or discounts that may be associated with the purchases. Second.Introductory Financial Accounting. Under the Perpetual system the COGS is a running total.000 cash would be recorded. as purchases are made of inventory they are tracked in a temporary account called “Purchases”. that first purchase of inventory for $5. However. we have not removed the items that were sold from our inventory account.000 This journal entry does two very important things.000 worth of inventory from our Inventory Asset account. This expense account. it removes the $4. as is the inventory account. as: Purchases Cash 5. it records the expense of the items that were sold. we do not keep a “running total” of inventory.000 The Purchases account keeps a running total for the year of all purchases of inventory made. The Periodic Inventory System Under the Periodic Inventory System. 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”.
Purchases of $5. v. and that at the end of the year a physical count of the inventory revealed that there was $11.000 and $10. the inventory account is adjusted to the appropriate ending balance.1. the opening inventory was $0.000 worth of inventory on hand. To calculated COGS: .000 Let us suppose that those were the only purchases made during the year.Introductory Financial Accounting. the Purchase account and all contra accounts are closed out to zero. At the end of the year.000 5.000 were made. based on the physical count.000 10. If you remember.000 10. The amount needed to balance the equation is the Cost of Goods Sold. 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. as this is a new business.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 new journal entries would be: Purchases Cash Purchases Accounts Payable 5. At the same time.
Furthermore. 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 increase) Purchases (close account) Transportation-in (close account) 2.000 11.000 and it should be.000 36.000 2.476.700.1.000 – 27.000 – 175.000 – 48.000 Note that the Inventory balance given of $175.000 185.476.000 would be the ending inventory balance from last year. in order to get the balance in the inventory account to $360.000 (360.000 27. Inventory Purchases Transportation-in Purchase returns and allowances Purchase discounts 48. A year-end count reveals that the ending inventory balance should be $360.Ending Inventory (as per count) = Cost of Goods Sold $ 0 15.000 2.000 + 36.000 = $185.000.000 Tetrie uses a periodic inventory system. the Purchases account and all of the associated contra accounts have been set back to $0.000 48.Introductory Financial Accounting.000) $2.000.661.000) = Cost of Goods Available for Sale .1 Page 70 Beginning Inventory + Purchases ($5.000) . $175. $360. Cost of goods sold can be independently calculated as follows: Beginning Inventory + Purchases (2.700.Ending Inventory (as per count) = Cost of Goods Sold $175.000 we must increase it (or debit it) by $185.000.700. according to our count.000 $4.000 27.000 36.000 Cr.836.000 + 10. Therefore. v.000 2. They are ready for the next fiscal year.000 Example 2 – Tetrie Company shows the following balances at the end of the year: Dr.000 2.000 . The balance is sitting at $175.
it is possible to track each item in inventory separately. Conversely. . the COGS is equal to the opening inventory + earlier purchases. Specific Item Valuation This method is used when inventory items can be specifically identified. perpetual inventory systems dealt with how we track the inventory and purchases that flow through a company. Some examples of situations where this method would be possible are: when items have specific serial numbers.1 Page 71 Inventory Valuation Methods The above discussion of periodic vs. That is. both the COGS and the ending inventory cost will be the same under the FIFO valuation method. that is at what cost do we record the inventory and COGS.Introductory Financial Accounting. v. 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. therefore. Cost-Flow Assumption This method is used when items cannot be differentiated from one another. the ending inventory is equal to the most recent purchases. In this case. or when the value of the items is so small that it does not warrant the cost of tracking the specific item value. That is to say. that inventory is mixed all together and. we assume that the “First In = First Out”.1. FIFO Under the FIFO method. when the item is sold. Under this method we can make one of two assumptions: that the first inventory that arrived is the first inventory that was sold (FIFO Method). We will now discuss how we attach value to the inventory. Note that regardless if a company is using a periodic or perpetual system. like a car dealership. we remove its specific cost from inventory and debit COGS at the carrying amount. we don’t know specifically which items are being sold so we use an average of some sort to determine cost. like a jeweler.
They purchased these units for $1. we sold .015 Secondly. v. 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 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.Introductory Financial Accounting. This is not a coincidence – both approaches always provide the same result.20 1.25 1.25 = $125 Total value of ending inventory = $330 + 125 = $455 Using the FIFO perpetual method. we know that we sold a total of 700 + 200 = 900 units. Lainey Company has 400 units in its opening inventory.25 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.10 each Sold 200 units Under the FIFO periodic method. using the cost of goods sold equation: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.000 $400 640 1.070 1.00 each. Cost of goods sold can be calculated in two ways. First.25 each Sold 700 units Purchased 300 units @ $1.20 1.20 each Purchased 400 units @ $1. Throughout the period.1 Page 72 Example – On January 1.10 = $330 January 5 purchase = 100 units x $1.470 (455) $1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.10 1.25 $240 500 (400) (240) (125) 330 (250) Balance Units Total Cost 400 600 1.00 1. Under FIFO.1.
20 = 300 units @ $1. Lainey Company has 400 units in its opening inventory.25 = 900units $ 400 $ 240 $ 375 $1. Using this method.1 Page 73 the units in opening inventory plus the first of the purchases we made through the year. 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 1.10 each Sold 200 units Under the annual Weighted Average method.25 each Sold 700 units Purchased 300 units @ $1. Annual Weighted-Average – Periodic Systems Under a periodic system. and one is used when you have a perpetual system.20 each Purchased 400 units @ $1. that is. We then close out the purchase account and the associated contra accounts to determine what the COGS is.Introductory Financial Accounting. 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.015 Weighted-Average Method There are two versions of this method.1. Opening Inventory January 3 purchase January 5 purchase COGS 400 units @ $1. The annual weighted-average for periodic systems uses a similar methodology. They purchased these units for $1. v.00 each. one is used when you have a periodic system. So COGS would be calculated as the cost of the first 900 units. we calculate the average cost of inventory as follows: . the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1. you will remember that we do an inventory count once a year to determine the ending inventory balance.00 = 200 units @ $1.
470/1.13077/unit = $1.300 units = $1. Subsequently. Unit Cost = Cost of all goods on hand/number of units on hand. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1. whatever the unit cost is at the time of a sale.25 each) January 19 Purchase (300 units @ $1.018 Alternatively. we are keeping a running total in the inventory account.470 Units 400 200 400 300 1.1.Introductory Financial Accounting. As such. when we make a purchase we debit the inventory account for the amount of the purchase.070 1.300 Average unit cost = Cost of Goods Available for Sale/Units Available for Sale = $1.470 (452) $1.00 each) January 3 Purchase (200 units @ $1.13077/unit = $452 COGS = # units sold x unit cost = 900 units x $1. . then that is the unit cost used to determine the COGS for that sale.1 Page 74 Cost of Goods Available for Sale Opening Inventory (400 units @ $1.20 each) January 5 Purchase (400 units @ $1. that is the unit cost after the last purchase previous to the sale.018 Moving Weighted-Average – Perpetual Systems You will remember that under a perpetual inventory system. Under this system. v.13077/unit Ending Inventory = # units in inventory x unit cost = 400 units x $1. The moving weighted-average system of inventory valuation takes this into account. the average unit cost is recalculated every time a purchase is made.10 each) $ $400 240 500 330 $1.
14000 1.1 Page 75 Example – On January 1.070 1.470 (448) $1.066671 640 2 1.20 each Purchased 400 units @ $1.1.12000 672 448 Units 200 400 (700) 300 (200) Unit Cost $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. Unit Cost = Cost of all goods on hand/number of units on hand.Introductory Financial Accounting.25 each Sold 700 units Purchased 300 units @ $1.10000 1.00000 $400 1.000 3 Unit Cost = $672 / 600 Cost of goods sold is equal to the cost of goods sold for the two sales: $798 + 224 = $1. They purchased these units for $1.00 each.25000 1.022 .14000 1.140 342 3 1. v. under this system we recalculate the unit cost each and every time we make a purchase.12000 Unit Cost = $640 / 600 Unit Cost = $1.022 Alternatively. Throughout the period.20000 1. Lainey Company has 400 units in its opening inventory. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.140 / 1.10 each Sold 200 units Remember.000 300 600 400 Unit Cost Total Cost $1.
We do this by creating a contra account to inventory called ‘Allowance for decrease in value of inventory’.000 = $36.1 Page 76 Application of Lower of Cost or Market Rule At the balance sheet date a company must compare the aggregate cost of its inventory to its aggregate market value.000 – 14.Introductory Financial Accounting. is showing an ending inventory balance of $50.000 – ($40. The net inventory balance that will be reported on the statement of financial position is $50. then the inventory must be written down to market value. 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.000.000 At present. First of all.000 = $36. Furthermore. next year. This account operates much like the Allowance for doubtful accounts in that it gets adjusted to the desired balance at year end. If.000. At the balance sheet date. Inventory Loss Allowance for decrease in value of inventory 14.1. . If the market value is less than cost. then the allowance will be debited by $14.000 X 10%) = $40. Show the journal entry to record the proper carrying value of the inventory. the accountant determines that they could sell this inventory for $40. the inventory account has a balance of $50. the analysis reveals that no allowance is required.000 14. the credit will be to income. The net realizable value of this inventory is: = Selling Price – Commission = $40.000.000 to bring it to a zero balance.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. Example –VenTure Ltd. v. commissions of 10% would have to be paid to the sales team on any sale of this inventory.000. we must determine that the inventory’s net realizable value. 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.000 – 4.
for whatever reason.000.000 The estimated ending inventory is: $350.000 400.000 and Gross Profit is $400.000 x 60% = $600. If we did not have the COGS number.000 Opening Inventory + 860.000 x (1 – 40%) = $1.000 350. we could estimate COGS by using the following formula: Gross Profit = Sales x Gross Profit Ratio = $1.200. v.1.000 x (1 – 25%) = $1.1 Page 77 Gross Profit Method The Gross Profit Method of inventory valuation is used to estimate inventory when other data is not available to use one of the previous methods discussed.000. Example – Assume the following: Sales Cost of Goods Sold Gross Profit 1. To understand the application of this method.000 100% 60% 40% In the above example.000 $1.200. 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. the Gross Profit Ratio = 40%.Introductory Financial Accounting.000 600.000 Ending Inventory = $310.000.200. we must first understand how to calculate the Gross Profit %. but we did have the Gross Profit Ratio.000 If Sales are $1.000 25% .000 x 75% = $900.000 Purchases .000 x 40% = $400.000 860.000.000.000.000 Example – The Gennissen Company’s inventory were destroyed by a fire and you need to estimate the ending inventory.900. then we can estimate COGS as follows: COGS = Sales x (1 – gross profit ratio = $1.
000 instead of the correct balance of $1.000 d) $523. b) Assets would be understated by $200. What was cost of goods sold for the year ending December 31.600. the company returned merchandise costing $10. d) Shareholders’ equity is overstated by $6.1 Page 78 Problems with Solutions Problem 4-1 – Multiple Choice Questions 1. During the year the company purchased $500.000.000.000 worth of inventory and took advantage of purchase discounts amounting to $6. After completing its inventory count and making the appropriate adjusting journal entries. .000 in shipping charges on merchandise purchased during the period.000.000. Which of the following statements is true with respect to the impact of this error on the December 31.000 computer purchased for the chief financial officer on December 27 had been recorded incorrectly as an inventory purchase. Ltd. Which of the following statements correctly describes the effect of incorrectly recording the computer purchase on the financial statements? a) Inventory is overstated by $6.000 b) $503.000. Fri. 20x4.000. 20x8. The December 31. financial statements. On January 1.1.000. A year-end inventory count revealed merchandise on hand in the amount of $66. c) Shareholders’ equity is understated by $6.400. discovered that a $6.000 to suppliers and incurred $25. v. 20x4.000 c) $515. a) Liabilities would be overstated by $200. d) Owners’ equity would be understated by $200. 20x8? a) $478.000. financial statements of Confu Ltd.Introductory Financial Accounting. c) Cost of goods sold would be understated by $200.000. In addition.000.000. 3. Owl Enterprises had merchandise inventory on hand amounting to $60.000.000 2. included an adding error in the inventory count that resulted in ending inventory of $1. b) Inventory is understated by $6.
e. e.000. Required – Prepare the journal entries required to record the above events and transactions. Czech Ltd.000. 20x9. All other sales made during the month were collected in the month with all customers taking advantage of the sales discount offered. The sale was recorded by Czech on January 2. 20x9. b) Income for 20x9 is overstated by $42.000. The customer received the goods on January 6. All of the merchandise purchased during the month was paid for with Cozy taking advantage of the purchase discount offered. n/30.000. e. The company uses a perpetual inventory system.000 for the goods and uses the periodic method to account for its inventory. Sales totaled $80. One customer returned goods with a sales value of $500 and was issued a credit note. for the month of July 2006. FOB destination. CIF destination. e. Czech had paid $42. a shoe wholesaler.000..1 Page 79 4. Cozy sets the selling price on its shoes so that the cost of sales is equal to 70% of the selling price. d) Revenues for 20x8 are understated by $57. 20x8.1. Which of the following statements with respect to this transaction is true? a) Income for 20x8 is understated by $42. n/45. Merchandise was purchased at a cost of $50. v. The selling price of the goods was $57. . c) Income for 20x9 is understated by $15. all of which were made on credit with terms 2/10. FOB Shipping.Introductory Financial Accounting. e. Transportation out paid on delivery of goods sold during the month equaled $1.200. shipped goods to a customer on December 30.000 during the month with terms 1/10. Problem 4-2 The following summarized transactions relate to Cozy Co.000.
500 Date May 1 May 5 May 14 May 21 May 29 Totals Sales Beginning inventory Purchase Sale Purchase Sale 20 @ $20.00 = $ 400 Anvil Rock uses a perpetual inventory system.000 2.Introductory Financial Accounting. 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. assuming a weighted-average cost flow method is used. Prepare the journal entries to record the May 29 sale on account.100 125 $ 1.1. Beginning Inventory/ Purchases 30 @ $10. first-out (FIFO) cost flow method is used.00 = $ 300 60 @ $11.000 Price/Cost $12 18 30 23 33 . c. assuming a firstin.00 = 1.000 2. Calculate the cost of ending inventory for May.000 2.410 70 $ 1. b. Required – a.1 Page 80 Problem 4-3 Anvil Rock Company had the following inventory and purchases for the month of May. Calculate the cost of ending inventory for May.00 = 420 50 @ $22. Problem 4-4 The following information concerns one of a company’s products. v.500 3. assuming a FIFO cost flow system is used.50 = 690 35 @ $12.
under each of the following assumptions: a.000 52. The loss is to be determined based on the cost of the inventory in accordance with generally accepted accounting principles. Required – Assuming the company uses a periodic inventory system.000 units at $58 each $50. .000 units at $50 each 1. (Banff) sells skiing and hiking equipment to retailers. the Music Store had 400 MP3 players in inventory with a cost of $48 per unit.000 30.000 units at $52 each 1.000 615. 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 $150.000 15. The store had an excellent Christmas season with the result that only 70 MP3 players were left in inventory on December 31. Banff lost all of its hiking equipment in a fire in March 20x8. Corporate records disclose the following: Inventory — January 1. It accounts for its inventory using a periodic inventory system. 20x5. Costs are assigned to inventory and cost of goods sold on a weighted average basis.000 8. Fortunately.000 440.1.000 Banff normally realizes a gross profit of 30% on its sales. (CGA Canada) Problem 4-6 Banff Mountain Equipment Ltd.000 58. 20x5.000 Due to competitive pressures. the company was unable to pass on price increases to customers and thus maintained a selling price of $100 per unit throughout the year. 20x5 June 15. After a very successful ski season and just as it was about to commence shipping its hiking equipment for the upcoming season. Costs are assigned to inventory and cost of goods sold on a FIFO basis. 20x5 1. During 20x5 the company made the following purchases of MP3 players: February 21.000 580. 20x5.000 480. b.1 Page 81 Problem 4-5 On January 1. calculate gross profit for the year ending December 31.Introductory Financial Accounting. 20x5 October 15. v. the company’s insurance policy will cover 80% of the loss suffered in this fire.
Calculate December 31. Show your calculations. taking advantage of the sales discount. 20x7 Purchases — June 7. 20x7 20 units @ $900 each 440 units @ $950 each 200 units @ $1. Show all your calculations. The cost of the merchandise inventory sold was $15.000. 2. Saret Ltd. inventory for 20x7: Beginning inventory. the company sold 600 units at an average price of $2. The company uses a periodic inventory system. (CGA Adapted) Problem 4-7 During June 20x8. 20x7 Purchases — February 20.000 of merchandise on account with credit terms of 2/10.Introductory Financial Accounting.100 per unit. Saret purchased merchandise inventory costing $42. performed the following transactions. 20x7.000 on account. $30. Show all your calculations. inventory value using the Weighted Average . Required 1. January 1.1.050 each During the year. Required – Prepare journal entries for the above transactions. Calculate the cost of goods available for sale. n/60. The cost of the merchandise inventory returned was $5.000. June 2 June 9 June 12 The company uses a perpetual inventory system. Whinr returned $10. Whinr paid the balance due on the June 1 sale. Problem 4-8 The following information relates to Mejewel Ltd. June 1 Sold Whinr Ltd. 3.000 of the merchandise inventory claiming it did not meet its needs. 20x7.1 Page 82 Required – Calculate the net loss from the fire. n/30. Ending inventory consisted of 60 units. The supplier provided purchase credit terms of 1/15. Calculate December 31. v. inventory value using the FIFO inventory pricing method.
Introductory Financial Accounting.000 and a count of inventory on December 31. iii) iv) Required a. Show all your calculations.000 credit purchase. which has a negative impact on the company’s cash flow. 20x7. v. Briefly explain the benefits. n30.000 in cash for freight charges on merchandise purchased during the month. you have made it a policy to ensure that all purchase discounts are taken advantage of. (CGA Canada) c.000 under credit terms of 3/15.1. i) ii) Purchased merchandise on account from Hirwin Toys for $80. Toyjoy had not yet paid for the merchandise. which was paid within the discount period of 3/15. 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 $150.500. .1 Page 83 inventory pricing method. for the month of December 20x7. Toyjoy paid $3.000. revealed merchandise inventory on hand of $30. n30. Received a $1. The payment of $48.500 represented payment of a $50. 20x7. Prepare journal entries for each of the above summarized transactions. The company uses the periodic inventory method and the gross method of recording purchases. Prepare a schedule of the cost of goods sold section of the income statement. amounted to $48. As the new controller. assuming merchandise inventory on December 1. b. Cash payments on merchandise purchased from Patel Inc. (CGA Canada adapted) Problem 4-9 The following is a summary of selected transactions for Toyjoy Ltd.200 credit memorandum from a supplier on defective merchandise Toyjoy had purchased and returned. FOB shipping point.
goods costing $5. indicate the dollar amount of the overstatement (O) or understatement (U) in 20x6 Cost of Goods Sold. and included in the year end inventory count. and for 20x7 Cost of Goods Sold. ii) iii) Required For each error. then state so.1. 20x6. 20x6 Ending Inventory. 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).000. There were no errors in the December 31. A $6. i) A company failed to include in its December 31. v. a company received. 20x6.000 worth of goods which were in an off-site storage location.000 computer purchased on December 28.1 Page 84 Problem 4-10 The following is a list of inventory errors which occurred in 20x6. If the error has no effect (NE). inventory count $10. On December 28. for use by the sales manager was incorrectly accounted for as an inventory purchase. 20x6. 20x7 inventory count. 20x7. The company failed to record the purchase of these goods until January 15.Introductory Financial Accounting. Use the following format in answering this question. There were no errors in the December 31. Error 20x6 Cost of Goods Sold 20x6 Ending Inventory 20x6 Retained 20x7 Cost of Earnings Goods Sold (CGA Canada) . 20x6 Retained Earnings. 20x6 inventory count. Assume the companies involved used a periodic inventory system and treat each situation independently.
000 $ 10. 20x7 Inventory stored at another location. Assume that the transactions occurred in the order given. at January 13. perpetual inventory system . FIFO. the accounting records were kept in a separate location and the company was able to reconstruct the following information: Inventory at January 1. Weighted-average.Introductory Financial Accounting. periodic inventory system d. v.500 For each assumption given.000 $ 60.500 8. Luckily. FIFO. 2 (at $26) Required 6. 20x7 Sales from January 1 to January 13 Purchases from January 1 to January 13 Gross profit percentage on sales Required – Calculate the cost of inventory destroyed by the fire. periodic inventory system b.000 7. the Bamboo Brush store was destroyed in a fire. (CGA Canada) $100.40 9. perpetual system c.00 Units Beginning inventory Purchase No. calculate the total dollar amount for ending inventory and cost of goods sold. 2 Sale No.1 Page 85 Problem 4-11 On January 13. 20x7. Moving weighted average. 1 (at $24) Purchase No.000 40% Problem 4-12 The records of Egypt Company showed the following data relative to one of the major items being sold.000 6.95 8.000 5.000 $ 5. a. Unit Cost $7. 1 Sale No.1.
the shares or the long-term debt of another company).1. any costs of transportation to get the asset to its location and any installation costs.000 for land and a building. the cost of acquiring these assets needs to be allocated based on the relative fair market value of the assets acquired.e. copyrights and trademarks. These include. • buildings. 2. 3.000 375.000 % 25% 75% Allocation of Purchase Price $125.000 respectively. 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. The acquisition cost would be allocated to land and building as follows: Individual Fair Market Value per Appraisal Land Building $150. land and building). equipment. How do we account for the disposal of long-term assets. We will only focus on the accounting for those long-term assets that are not investments in financial instruments. buildings. 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. furniture and fixtures and intangible assets. When on-going expenditures are made in order to keep the asset in operable condition. equipment and furniture and fixtures. namely land.1 Page 86 5. If you pay one price to acquire a group of assets (i. An independent appraisal of the land and building are $150. and 4.Introductory Financial Accounting.e. The essential accounting issues in accounting for long-term assets can be summarized as follows: 1. 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 $600. • long-term investments in financial instruments (i. When a long-term asset is acquired.000 450.000 $500. but are not limited to. and • intangible assets such as patents. These generally comprise of: • land. what constitutes the cost of this asset.000 . For example. assume that you pay $500. the acquisition cost of asset. v.000 and $450. how do we account for these expenditures.
1. The underlying assumption is that this asset generated revenues that are. Consequently. Straight-line method. iii. the useful life of the asset is extended.000 $500. The annual amortization expense is calculated as follows: (Cost – Salvage Value) / Useful Life . then we would likely increase the useful life of the truck. in which case the expenditure should be expensed to the income statement. A determination has to be made whether the expenditure is required to maintain the asset in operable condition. 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. such as oil changes or brake replacements. if we were to replace the truck’s engine. This method allocates the cost of the asset over its estimated useful life in equal amounts. more or less. equal over its useful life. For an expenditure to be considered a betterment it must meet one of the following four criteria: i.000 Accounting for on-going expenditures Once a long-term asset has been acquired. the matching principle requires that the cost of long-term assets should be spread over the periods that the asset generated revenues. we often incur ongoing expenditures in order to maintain the asset. v. There are three general approaches to amortizing capital assets: 1. ii. However. the rate of output of the asset is increased. 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 expenditure enhanced the quality of the asset in a substantive way. any costs to maintain a truck. would generally be considered to be repairs and would be expensed. or iv. For example. the operating costs of the asset are decreased.1 Page 87 The journal entry to record this transaction would be as follows: Land Building Cash $125. The process by which this is done is amortization of long-term assets. We would therefore capitalize the cost of the new engine to the asset account.000 375.Introductory Financial Accounting.
The asset’s useful life can also be measured in terms of total machine hours of 150.000 – 35. i. This assumes that the use can be measured.e. This method allocates the cost of the asset over its estimated useful life based on the use made of the asset. Declining balance method. Units of production method.125 . a truck rental company that bases rental charges on the mileage driven.125 The journal entry to record amortization expense will be as follows: Amortization Expense Accumulated Amortization $31. The rate used for DDB is twice the straight-line rate. For example. if you are told that an asset has a useful life of 10 years. 3.000.1 Page 88 The cost less the salvage value is called the amortizable base of the asset.000 hours. v.000. The underlying assumption is that the asset generates revenues based on usage. 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.e. machine hours.125 $31. then the straight-line rate is 1/10 and the DDB rate is 1/10 x 2 = 20%. i. The asset’s estimated useful life is 8 years and the estimated salvage value of the asset is $35. 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. 2. 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: 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). 1. mileage. 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.1. the annual amortization charge will be: ($300.000) / 8 = $31. We deduct the salvage value since we do not want to write down the asset below its salvage value. Under the straight-line method.
000 56.562 94.1.922 71. If we had taken $10. Under the units of production method.250 42.756 = $53.000.750 126. The net book value at the end of any given year can be calculated directly as follows: Original Cost of Asset x (1 – a)n Where a = amortization rate n = number of years since acquisition For example.000 Year 1 2 3 4 5 6 7 8 Note that the year 8 amortization is not equal to $40.348 5.000 hours = $1. Assume that the total number of hours of use in the first year is 18.191 53.640 23.393 40.7667 per hour.011. Under the declining balance method.045 Amortization Expense @ 25% $75.Introductory Financial Accounting. Note that we will assume double declining balance amortization at the rate of 1/8 x 2 = 25% per year. v.7667 = $31.000 hours x $1. the amortization charges for the 8 years will be as follows.393 40.798 13.000) / 150. the net book value at the end of the 6th year is: $300. the amortization charge per hour would be: ($300.045 Net Book Value End of Year $225.000 x 0. .750 126. Net Book Value Beginning of Year $300.191 53.393. 3.011 of amortization in year 8.045 35.000 225.000 168.045 x 25% = $10.1 Page 89 2.011 or the amortization amount needed to bring the net book value down to the asset’s salvage value. the amortization taken in year 8 is the lesser of the calculated amortization of $10. then the amortization charge would be 18.922 71.188 31.562 94. 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.000 168.731 17.801. Recall that we do not depreciate the asset below its salvage value.000 – 35. Therefore.
20x1.000. an asset costing $100.000 $250. For example. v.000.000 161.000 – 20. The asset is sold at the end of 20x9 for $100. The net book value of the asset at the end of 20x9 is: Original cost Less Accumulated amortization ($250.000 89. The difference will be equal to the gain or loss on disposal.000. For example. In 20x5.000) / 10 = $23.000 $11.000 $100.000/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. assume that an asset was purchased on January 2. we compare the net book value of the asset sold to the proceeds on disposal.000 250.000) $89.000 11.1.000 (161. 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. the changes in estimates are applied prospectively from the date of the change in estimate onwards. Assume straight-line amortization.000 Changes in estimates If the estimates of the useful life and/or the salvage value of an asset change subsequent to its acquisition. .Introductory Financial Accounting. the asset’s useful life was expected to be 10 years with an estimated salvage value of $20.000 was purchased on January 2. 20x3 for $250.000.1 Page 90 Disposals of Long-Term Assets On the date of disposal. The asset’s useful life was expected to be 10 years and the salvage value was estimated to be $20. At the time.
273 per year Intangible Assets Intangible assets are those assets that do not possess a physical quality (i.000) / 11 remaining years = $5. Note that only expenditures incurred by the company can be capitalized as intangible assets.000. This need not coincide with the asset’s legal life. i. if you look at Coca-Cola’s Statement of Financial Position. For example. The accounting for intangible assets depends on whether these assets have limited or an unlimited life. they are expected to provide future benefits. was developed internally. are the result of a past transaction and are under the control of the company.000 This net book value will then be amortized over the remaining useful life of the asset. • patents – a legal right ensuring the company’s exclusive right to a product or process.000) / 10 = $8.1 Page 91 The net book value at the beginning of 20x5 is: Original cost Less Accumulated amortization ($100. The patent’s legal life is 17 years but it is expected that emerging technologies will make this . Intangible assets whose life is limited should be amortized on a straight-line basis over their estimated useful lives.000) $68.000 – 10. • franchises – the exclusive rights to sell products or perform services. assume that a patent is granted to a company at a cost of $100.1.000/year x 4 years $100. v. location or superior products. typical within a certain geographical area • goodwill – the added value of a business attributable to factors such as reputation. the trademark ‘Coca-Cola’ was never purchased by the Coca-Cola Company but rather. musical compositions and works of art. For example.e. Examples of intangible assets are: • trademarks – a name or symbol that identifies a company or a product.Introductory Financial Accounting.e. Annual amortization charges for 20x5 and future years will be: (68. • copyrights – the protection of writings. you cannot touch them or see them) and yet they represent costs incurred that meet the definition of an asset.000 – 20.000 (32. Consequently. you will not see the value of its trademark listed as an asset. Internally developed intangible assets cannot be capitalized on the Statement of Financial Position.
. goodwill) are not amortized but instead subject to an annual impairment test. Intangible assets whose life is unlimited (i.1 Page 92 patent obsolete by the end of the 5th year. we would amortize the patent over 5 years.e. In this case. v. 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. some franchises.1. That is.Introductory Financial Accounting. Any impairment losses cannot be subsequently reversed if the fair market value of the asset subsequently is recovered. then the asset must be written down to the fair market value.
000 c) $19.705.000 10 years $5.500. Sinha. v.000 and spent $5.88 b) $5. The room was completed on June 30.1.00 c) $8.000 3. A small room was built on the back of the building at a cost of $12. 2.000.500 b) $5.000.000 c) Income will decrease by $1. What will be the annual amortization expense for patents? a) $4.1 Page 93 Problem with Solutions Problem 5-1 – Multiple Choice Questions 1.000 150. and was used as office space commencing July 1. What is the amount of depreciation expense on the building for 20x8? a) $4.000 b) Income will decrease by $6.000. 1998.000 in legal costs defending it.500 d) $20.00 Use the following information to answer questions 2 and 3: The Jasper Company has an old building which requires frequent repairs and constant maintenance.Introductory Financial Accounting. Brown and Das obtained a patent for their earnings forecasting software at a cost of $80. What is the impact of this expenditure on income before taxes for 1998? a) Income will decrease by $12.200 d) Income will decrease by $632 e) Income will decrease by $600 . At the beginning of 20x8. the situation was as follows: Building cost Accumulated depreciation — building Estimated remaining useful life Estimated salvage value at end of useful life $200.00 d) $8.000 Jasper uses the straight-line method for calculating depreciation expense. The patent is valid for 17 years and has an estimated life of 10 years.
Ireland Company purchased a machine that cost $20. 20x7.1. What is amortization expense for 20x7 under the productive output method? a) $4. was $18.015. The Amortization expense for 20x6.000 units.000. During 20x7.000.000 c) $77.1 Page 94 4. 20x6? a) $67. The machine is expected to be used for a total of 1. what would be the balance reported for the net book value of the machine at December 31.000 5. At what amount should the land be reported on the balance sheet? a) $1. A land site was acquired for $1.000.Introductory Financial Accounting.000 b) $1. using the straight-line method.500 b) $5.075.000 .000. Stone and Wall Company bought equipment for $100.000 7.500 b) $72. what would be the balance reported for the net book value of the equipment at December 31.060. On January 1. and a 10% residual value.000 d) $1. Costs of $15.000 c) $1.000 b) $42.500 d) $80.735 6. 20x7. a $60. 20x6. It has an estimated 4-year life. Yaari and Yosha Company bought a machine for $85.000 c) $5. v. it was used 430 hours. production was 20.160 d) $5.000. To acquire the land. If the company uses the double-declining-balance method for amortization. On January 1.000 units.750 d) $65. The equipment is expected to have a 5-year life and produce a total of 80. 20x7? a) $40. On July 1.500 productive hours over the next 4 years. If the company were to use the units-ofproduction method instead of the straight-line method.500 c) $63.000.000. During 20x6.000 were incurred to clear the land in preparation for construction of an office building.000 with an estimated life of 4 years and a salvage value of $5.000 commission was paid to a real estate agent.
Prepare the adjusting journal entry to record amortization expense for the year ended December 31.Introductory Financial Accounting. management of the company decided that.000 kilometers during the year. assuming the company uses the doubledeclining-balance method of amortization. At the end of its useful life. d.000 and was expected to have a useful life of 5 years or 200. assuming the company uses the units-of-production method of amortization and that the van was driven 55. 20x7 and 20x8. assuming the company uses the straight-line method of amortization. assuming the company used the straight-line method of amortization. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. Required – a. v. 20x7. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. 20x7. b.000 at the end of its useful life. 20x7. During 20x8. 2008. The van cost $65. as a result of heavy usage. In addition. the total life of the van would only be 4 years instead of the original estimate of 5 years.000. it was estimated that the van could be sold for $5. .000 kilometers. Resort Ltd.1 Page 95 Problem 5-2 On January 1. c. purchased a van to transport guests between the resort and a nearby airport.1. management felt that the van could only be sold for $2. Prepare the adjusting journal entry to record amortization expense for the year ended December 31.
20x4 Apr 31.Introductory Financial Accounting. 20x6 Sep 30. Dec 31. The estimated useful life of the asset is expected to be 5 years with a $10. Recorded amortization expense.000 salvage value. The equipment was completely overhauled at a cost of $20.000 were made to the equipment. 20x8 Required – Record all of the above transactions assuming that the company uses the straight-line method. This increased the quality of the asset’s output but did not change its useful life or the estimate of salvage value. 20x7 Dec 31.000. This increased the useful life of the asset by three years. 20x4 Dec 31. 20x3: Jan 2. Recorded amortization expense. 20x7 Aug 31. Recorded amortization expense. Routine repairs costing $600 were made to the equipment. 20x3 Aug 31. 20x5 Dec 31. Recorded amortization expense. 20x5 Dec 31.000. Recorded amortization expense. . 20x3 Purchased equipment for $60. The original estimate of salvage value holds. Sold the asset for $25. Expenditures totaling $2.000.1. v.1 Page 96 Problem 5-3 The Connor Company had the following transactions over the life of an asset purchased on January 2.
000 to install the machine.000 cash. 20x6. and the repair cost for it amounted to $500.000. Assume a straight-line method of amortization. v. Prepare the journal entry to record the amortization expense on December 31.000. Prepare the journal entry to record the sale of the machine on January 1. 3.000 38. ABC Ltd. Required – 1. Market value of old asset on June 30.000 cash. The following additional information is available: Original cost of the old asset Accumulated amortization at June 30. Show. ABC had to spend $2.Introductory Financial Accounting.500 108.000 15. (CGA Canada) . which included freight charges of $1. (CGA Canada.500 Problem 5-5 On July 1.1. 20x7. 20x8. adapted) $ 50. purchased a machine at a cost of $25. the machine was sold for $20. The machine was expected to have a life of 4 years and a salvage value of $3. 4. 2.000. bought a state of the art numerically-controlled lathe from GPL by trading in a dissimilar asset and paying $90. 20x7 Price of new lathe. how the machine will be presented in the assets section of the balance sheet at December 31. in good form. 20x6. During the installation there was minor damage to the frame. On January 1. 20x7. Prepare the journal entry to record the asset acquisition on July 1. 20x6. MNO Co.1 Page 97 Problem 5-4 On June 30. 20x8. 20x7 Required – Prepare the journal entry to record the purchase of the lathe.
Prepare the journal entry to record the sale assuming the company uses the: i) straight-line method ii) units-of-production method $120. On January 1.000 units were produced. the equipment was sold for $75.1 Page 98 Problem 5-6 The following information pertains to the equipment acquired by Xie Co. 20x8. the estimates were revised. assuming the company uses the: i) straight-line method ii) units-of-production method On January 1.000. 20x6. In 20x7. . due to a preventative maintenance system that had been implemented.000 units 9. 12. and (c).000 4 years 40. on January 1.1. Use this information to answer parts (a). assuming the company uses the: i) straight-line method ii) units-of-production method c.000 units. (b). Determine the amortization expense for the year ending December 31. 20x6. Accordingly. No change in estimated residual value was anticipated.000 units b. Determine the amortization expense for the year ending December 31. management felt that the total estimated life of the equipment would be 5 years with a total estimated production of 50.Introductory Financial Accounting. 20x7. 20x7. Cost Estimated residual value Estimated life Estimated production 20x6 actual production Required a.000 $ 20. v.
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.000 cash. purchased Machine No. * this means that is we pay within 10 days. Machine No. Prepare the journal entry to record the sale assuming the straight-line method of amortization was used. German intends to use the machine for 8 years and hopes to sell it for $15. Compute amortization expense for 20x3 using the straight-line method.000 on this loan during 20x3.000 2/10. income can be minimized in 20x3. The following information relates to this machine: Invoice price Credit terms* Customs and duty costs Preparation and installation costs $ 140. n/30 $ 5. 20x3.000 $ 14. 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.000 to pay for the machine within the discount period and take advantage of the cash discount.000 at that time. 103 on January 2.1. we have to pay the full invoice price within 30 days. 103 has a physical life expectancy of 10 years with a salvage value of zero. In this way. However. v. Required – a.800 The company borrowed $150. . c. It incurred interest costs of $12. Assume that the machine is sold on January 1.1 Page 99 Problem 5-7 German Ltd. b. Otherwise. 20x6. we get a 2% discount. for $100.
For example.000. the entry would be: Wage Expense (4 days x $1.000 Note that we are debiting the Wage Expense for $3. If the average daily wage expense is $1.000 to the new period. which represents the three days of work (3 x $1.1.Introductory Financial Accounting. whichever is longer.000 2. v.000 Wages/Salaries Payable – these are wages/salaries that are due to employees for hours worked. We have already covered several of these when we did adjusting entries. however.000 with the terms set at 6% interest due annually.000/day) Wages Payable (to remove the adjusting entry) Cash 4. the only time we see this account set up is at the end of a fiscal period when an adjusting entry must be made. a company has a fiscal year end of March 31st. The entry would be: Office Supplies Accounts Payable 2.000 on account.000 to last period and $4.000. the adjusting entry made March 31st would be: Wage Expense Wages Payable 3. and will not be paid again until April 4th.000 7. assuming the employees worked the full 7 days in the week.000/day) that were performed in the period but not paid for. 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). we will go over the main types of current liabilities. . Accounts Payable – these are liabilities that were incurred to purchase goods. Typically. $3. it is split appropriately and applied to the correct periods. services or supplies for the operation of the company.000 3.000 3. a company takes out a loan on January 1st for $10. 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. Employees were last paid on March 28th. Interest and Principal payments are due December 31st of each year. On April 4th.1 Page 100 6. a company purchases office supplies from a supplier for $2.000/day. but have not been paid.000 This way. For example. Current Liabilities A current liability is one that will be settled within one year or the business cycle of the firm. The principal must be repaid equally over 5 years. $7. when the payment is made for the full week.
000 The debt is split into the portion that is due within the year. CPP. and a balance in the Long-Term Liabilities section of $6. The entry to record payroll for the month would be: Wages Expense Employee Withholdings Payable ($27. a company pays its employees monthly.1. v. $8. 27. the journal entry would be as follows: Cash Long-term debt 10. CPP and EI from employee’s paycheques.000 If a Statement of Financial Position were prepared on the January 1.4 times the employee deduction for EI.Introductory Financial Accounting.000. For example. and pays 1. the interest expense for the year would be $600 ($10.000) Cash 100.000.500 + 8. we will now show a balance in the Current Liabilities section of $2.000 600 8.000 10.000 8.500 . This ensures accurate reflection of the financial obligations of the company on the Statement of Financial Position.000 42. we would split the long-term debt as follows: Current liabilities Current portion of long-term debt Long-term liabilities Long-term debt $2.1 Page 101 When the company takes out the loan. $7. Not only must the company submit the employee’s portion. Employee Withholdings Payable – Employers are responsible for deducting income taxes. Wages total $100. Deductions for each month are due on the 15th day of the following month.000. but they also must submit the employer portion of CPP and EI. and that which is due later than one year.000 On the Statement of Financial Position. and the employer ducted the following amounts from its employees’ cheques: Income Taxes.000 x 6%). At December 31st. The journal entry would be as follows: Long-term debt Interest Expense Cash 2.500 57.500. EI. The employer matches the employee’s contribution for CPP.000.000.000 + 7.
1 Page 102 At the same time. as done above. the company pays the government: Employee Withholdings Payable ($42.500 11.500 x 100%) EI Expense ($8. and b) the loss can be reasonably estimated. your company is being sued for $400.700) Cash 61.000 x 1. then they must disclose it when they know about it. or simply lumped in with Wages Expense. On the 15th of the next month.000.40) Employee Withholdings Payable 7.700 Note that CPP Expense and EI Expense could be tracked separately.200 61. The journal entry would be: Unrecognized Loss on lawsuit Contingent Liability – lawsuit 400. and therefore a loss of some kind to the company.1. A contingent loss should be recognized only when: a) it is likely that a future event will confirm the loss.200 18. The justification is that the financial statements should not be misleading or give false hope or information to any reader. then it has to be disclosed through a note in the financial statements. 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. the company would record its portion of payroll expenses due to the government: CPP Expense ($7. 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. You would record or recognize the FULL amount. One of the resulting GAAP rules that stems from this idea of conservatism is the establishment of contingent liabilities. but it does not have to be recognized. If a company knows that there will be a liability. Contingent liabilities are those liabilities which are likely to be incurred in the future.000 400. For example.500 + 18. If a contingency meets the first criteria but not the second. but have not yet come to be. This principle states that. v.000 .Introductory Financial Accounting.200 Contingent Liabilities One of the guiding principles of accounting is the idea of conservatism.
the company pays $10. The journal entry would be: Warranty Liability Cash/Inventory/Wages 10. a company sells vacuum cleaners that come with a 2-year warranty. then you do not have to do anything because you do not meet either of the criteria for recording a contingent liability. on average. Again. your lawyer felt you would win. You would simply write a note in the financial statements disclosing the lawsuit. but it also sets up a liability that will be drawn down as actual expenses are incurred over the life of the warranty. in the same scenario. When a company sells a product that has a warranty.000. we must record the associated expense in the period when the .000 12. If. Continuing on with the same example. all expenses related to those revenues should be recorded at the same time. The company estimates that warranty expense. 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. Total Sales for the year totaled $300.000 10.000 Premium liabilities come to be when a company offers its customers some product or service through the redemption of coupons or some other device whereby the customer can receive goods/services in the future based on current sales. Warranties & Premiums Another of the guiding principles of accounting is the matching principle.000 x 4%) Warranty Liability 12. v. This principle states that for all revenues generated in a specific period. This principle is the one that guides us when making adjusting entries at the end of the year with regards to expenses. let’s assume that during the next year. but there was no legal precedent for the amount that would be awarded and therefore are unable to estimate the future loss. that have been incurred but not paid. For example. The warranty expense is normally determined through evaluating historical data and coming up with a % of sales that represents the future warranty costs.000 This entry not only matches the expense to the period when the revenues were generated.1 Page 103 If.000 to repair various vacuum cleaners that are under warranty. Another example of matching has to do with warranties.1. in order to adhere to the matching principle. your lawyer felt you would lose. such as wages.Introductory Financial Accounting. in the same scenario. and the fact that you were likely to lose. but you would not have to record the loss or the liability. The journal entry to record warranty expense for the year would be: Warranty Expense ($300. is 4% of sales.
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.Introductory Financial Accounting. pensions and other more complicated longterm liabilities in this section. notes payable. the premium liability account is drawn down. the greater the “discount” or decrease in the dollar value will be. you have determined that only 40% of your customers will redeem their coupons. They can then redeem 10 coupons for a watch valued at $10.000 32. The farther in the future you are to receive the funds. The combination of these two facts results in a dollar today being worth more than a dollar received in the future.000 Whenever coupons are redeemed.000 coupons x 40% = $32. To record the premium liability at the end of the year. we are trying the calculate the present value of $1. for every $10 your customers spend. one of the most frequently used financing instruments in business. 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. We will not get into a discussion of leases. These typically include long-term bonds. . or a year from now.000/$10 = 80. they receive 1 coupon.1. longterm leases and pension obligations.000 to be received in 5 years from now at an interest rate of 6%. you are taking on the risk that the money might not be repaid at all. v. Based on past redemption data. Long-term Liabilities Long-term liabilities are defined as liabilities that would not be reasonably expected to be liquidated within a year. For example. or ten years from now. If you are going to be receiving money in the future. The premise behind this is that a dollar today is not worth the same as a dollar received tomorrow. Furthermore. We will instead focus on long-term bonds.000 32.1 Page 104 original sale is made.000. then you are missing out on the opportunity to invest that money today and earn interest on it. Your sales for the year were $800. the journal entry would be: Premium Expense* Premium Liability * $800.
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.26.000 will you have to set aside in order to set up this annuity? N 30 I/Y 7 PV X= $744. how much of the $1.000 per year for the next 30 years.1.000 from your mother 5 years from now.Assume you are going to receive $10. in this case PV the answer provided is -747.1 Page 105 With the Texas Instruments BA II Plus.000 worth in “today’s dollars”? N 5 I/Y 6 PV 7. Calculating the Present Value of a Future Single Sum .47 PMT 60000 FV Enter Compute .58 PMT FV 10000 Enter Compute Present Value of an Annuity . If the current and expected future rate of return is 6%.Introductory Financial Accounting.26 today (money out of pocket and therefore the negative sign) and invest it for 5 years at 6% compounded annually. v. 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. This means that if you were to invest $747.000 from your favorite uncle.542. what is that $10. You want to be able to withdraw $60. the amount would grow to $1. Assume you inherit $1. press CPT and the TVM register you are attempting to solve for.000.000.472.An annuity is defined as a series of identical cash flows that end at a specified time.000. enter the numbers above in the TVM memory registers to solve. If i=7%.
Coupon – the amount of semi-annual interest payments to be made on the bond.000.5% on a 36-month loan. Also called the market rate. The manufacturer is offering you financing at a rate of 6. The market takes this into consideration. as well as make interest payments on the stated amount.1 Page 106 Annuity Payment Calculation . 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). What is your monthly payment to the manufacturer going to be? N 3 I/Y 6.992. If the YTM > Coupon Rate.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.10 FV Enter Compute Your company is purchasing a piece of equipment costing $80.1. 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.5 PV 80000 PMT X= $30. Assume the rate is 7%. v.You have retired with $675. You expect to live another 25 years. if you issue a bond with a coupon rate of 5% and the YTM is 6%.Introductory Financial Accounting.000 in the bank.206. If the YTM < Coupon Rate. then the bond will sell at a discount. It is rare that the yield-to-maturity rate and coupon rate are the same. Coupon Rate – the stated interest rate to be paid on the face value. For example. This is because the buyer of the bond gets a higher return by investing in the bonds. 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%. then the bond will sell at a premium. and therefore is willing . Coupon rate = Annual Coupon Payments/Face value Yield-to-maturity (YTM) – the rate of return that bondholders expect on the bond given its risk. and the bonds will sell for a value less than the face value of the bond. how much can you withdraw each year? N 25 I/Y 7 PV 675000 PMT X= $57.
As such.1.000 coupon payment. 20x8 you issue $2.5% $2.829. We have already calculated that we will be writing a cheque for $58. YTM = 7%. this $58. Interest will be paid semiannually on June 30 and December 31. or the amount that we would have received in proceeds would be equal to $1. The PMT & FV remain the same.8% is less than the market rate of 7%. However.Introductory Financial Accounting.On January 1. because PMT is equal to the payment made every six months. The Present Value of the bonds. not the number of years.000 of bonds.829.000 x 5.000.451.451 1.000. How much would be raised through this bond issuance? N 20 I/Y 3.451 .8% and they mature in 10 years. the YTM is normally expressed as an annual rate. In order to attract investors. N will equal the number of coupon payments left. v. therefore it will have to be cut in to reflect the situation.000 to cover our coupon obligation.451 PMT 580002 FV 2000000 Enter Compute 1 2 YTM of 7% / 2 = 3.000. 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.8% x = $58. we must adjust the other factors in the formula to a “6-month” basis.000 is not our interest expense. Furthermore. This is less than the face value of $2. 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. Example .51 PV X= $1.000. 1. This is because our coupon rate of 5.829. we have to sell our bonds at a discount.1 Page 107 to pay more than face value for the bonds in order to reap this benefit. The Coupon Rate = 5. every 6 months.
000 After all 20 interest payments have been made. on June 30th.000. the journal entry will be: Bonds Payable Cash 2. 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.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.451 + 6.Introductory Financial Accounting.482.482 x 7% x Bonds Payable Cash ) 64. the balance in the Bonds Payable account will have been written up to $2.451 x 7% x Bonds Payable Cash ) 64.1.835. give or a take a few dollars for rounding.000.000 . you would record the following journal entry: Interest Expense (1.242 6.835. Continuing our example.301 credit to Bonds Payable increases the carrying value of the bond payable account to (1.301) $1.000 2.000.000 Note that the $6. At the time of settlement.242 58. the entry for interest expense would be: Interest Expense (1.829. therefore.000.829. This will be the amount used to calculate the interest expense on December 31st.031 6. v. On December 31st.031 58.
000 iv) The bond was issued at a discount a) b) c) d) iv) only i) and iii) i) and ii) ii) and iv) . Which of the following 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. 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 2.1 Page 109 Problems with Solutions Problem 6-1 – Multiple Choice Questions 1.000 iii) The interest expense for the year will be less than $800. 20x7.Introductory Financial Accounting. 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. v. Issued $10 million face value.1. On January 1. Gallaghar Ltd. 10 year 8% bonds priced to yield 6%.
(2) a oneyear operating cycle. the coupons being redeemable for a premium.Introductory Financial Accounting. Each premium costs the company $2. In an effort to increase sales.300 b) $8. For the 6 months ended December 31. even though the amount of the loss cannot be reasonably estimated 5. 20x8. How should any liability for the warranty be reported? a) It should be reported as a long-term liability. b) It should be reported as a current liability. a company inaugurated a sales promotional campaign on June 30. When should a contingent liability be accrued? a) When it is certain that funds are available to settle the disputed amount b) When an asset may have been impaired c) When the amount of the loss can be reasonably estimated. (3) a relatively stable pattern of annual sales. The company estimated that only 30% of the coupons issued would be redeemed. whereby it placed a coupon in each package of product sold. 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. Assume that a manufacturing corporation has (1) good quality control.00 and 5 coupons must be presented by a customer to receive a premium.500 What is the estimated liability for premium claims outstanding at December 31.000 23.1.1 Page 110 4.000 10. v. 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. 20x8? a) $4.000 e) $20. 6.000 .600 c) $9. 20x8.400 d) $18. c) It should be reported as part current liability and part long-term liability. the following information is available: Packages Sold Premiums Purchased Coupons Redeemed 150. d) It need not be disclosed.
000. 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.Introductory Financial Accounting. In order to increase customer loyalty in this fiercely competitive environment you have started a coupon program. then receive 1 coupon.000 22.000.000 and it is estimated that the warranty expense is equal to 5% of sales.000 40.1 Page 111 Problem 6-2 You run a computer repair company. For each $10 your customers spend. They can redeem 15 coupons for a $25 iTunes gift card.500 coupons Problem 6-3 Company X provides a 3-year warranty on all of the products it sells. What is the balance in the warranty liability account at the end of the year? .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. You have been running this program for several years. The warranty liability at the beginning of the year was $165.1. v. Required – Prepare all journal entries related to the warranty for the current year. Sales for the current year were $3.
20x6..000 Opening balance Total credits during the year Required – 1. Assume that the Kaplan Corporation as a December 31 year end.1 Page 112 Problem 6-4 On July 1. Problem 6-5 The Kaplan Corporation issued $10. 4. what was the estimated liability for future warranties? (CGA Canada) . The yield to maturity on December 31 was 8%. 20x1 and the first two interest payments.000.1.800 Total debits during the year $6. v. What is the dollar value of warranty repairs performed in 20x7? What is the warranty expense for the year 20x7? At December 31. for the year 20x7. Required – Prepare all journal entries with regards to this bond for the years 20x4 and 20x5. what is the estimated liability for future warranties? At December 31. 20x4.5% coupon bonds on December 31. 20x1 is 8%. 20x1. Problem 6-6 The following is the general ledger account for estimated warranties of McNeil and Grace Ltd. Required – Prepare the journal entries to record the issue of the bonds on July 1. Gamma Corporation issued bonds with a face value of $500.Introductory Financial Accounting.200 5. Coupon payment dates are June 30 and Dec 31 of every year.000 of 8. The bonds mature in 15 years. 20x7.000 and a coupon rate of 10%. The company issues warranty agreements immediately upon the sale of an automobile. The bonds pay interest semi-annually on December 31 and June 30 and are due in five years. 2. 3. Assume that the going market interest rate for similar bonds on July 1. automobile dealers. Warranty Liability Dr Cr $10.
uses the effective interest method to calculate interest expense on these bonds. 3. and pays interest on July 1 and January 1.1 Page 113 Problem 6-7 GHI Company issued $500. Required Prepare all journal entries for the life of this bond issue. The bonds were issued at a discount for $897. Required If Adrdalan and Baker Inc. 2. The Interest Expense will be the same every year. a. Prepare the journal entry(ies) to record interest expense for the period ending December 31. The cash outflow towards interest on the bonds will be more than $80. 9% bonds on January 1. 20x7. issued $1 million face value. indicate whether each of the following statements would be true or false.591. 10-year.000. c. 20x6.171.000 face value. 20x7. The bonds were sold at a yield of 8%.Introductory Financial Accounting. Show how the $1. face value. 4. b. Prepare the journal entry(ies) to record interest expense and coupon payment on June 30.171. v. Alpha Beta Ltd. The Interest Expense for the 1997 year will be less than $100. (CGA Adapted) Problem 6-8 On July 1.591 was calculated. Prepare the journal entry to record the issue of the bonds at July 1. issued $1 million semi-annual. 20x6. 20 year. 20x6. They were issued at a price of $1. 20x6. d. 8% bonds.000. (CGA Canada adapted) .000. 12% coupon bonds. as the market rate was 10%. Required – 1. to yield 10%. GHI’s year end is December 31. (CGA Canada adapted) Problem 6-9 On January 1.1. Ardalan and Baker Inc. three-year. The Interest Expense for the 1997 year will be more than $80.000. Interest on the bonds is paid semi-annually on December 31 and June 30.
Common shares can be issued for cash or any other asset.000 cash.000. the shares must be cancelled (i.000 $100. If the book value per share is greater than the cash paid out to retire the shares.000 When common shares are repurchased. Shareholders’ Equity As mentioned in Chapter 1.e.Introductory Financial Accounting. For example. we credit an account called Contributed Surplus for the difference. Contributed capital comprises of the investment made in the corporation by its shareholders. The corporation is under no obligation to provide a financial return to common shareholders. and then re-sell them). the journal entry would be: Land Common shares $250. Retained earnings represent the cumulative earnings of the corporation less any dividend distributions to its shareholders. Shareholder investments will result in the company issuing shares to the investors – these shares can take the form of preferred shares or common shares. that is.000 If common shares are issued in exchange for a parcel of land whose fair market value is $250.000 $250. . The debit to the common shares account is equal to the weighted average book value per share times the number of shares retired. a company cannot purchase its own common shares. any cash remaining after all obligations have been settled revert back to common shareholders. 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. then the journal entry would be: Cash Common shares $100. any dividend declarations are at the sole discretion of the company’s board of directors.1 Page 114 7. hold them. meaning they never become due. it can be drawn down. • upon liquidation of the company. if common shares are issued for $100.1. v. Dividends become a liability of the corporation only when the board of directors declares them. Shareholders’ Equity is fundamentally made up of two elements: contributed capital and retained earnings. and • they are a perpetuity. Common Shares Common shares typically have the following features: • they provide the right to vote at annual meetings.
000 1.000 321. v.500.000 shares outstanding Retained earnings The following transactions took place during the year: Jan 15 Mar 18 Apr 30 Jun 16 Aug 18 Issued 100.09 7.000 + 1.500. 1.000 Retired 20.000 + 2.000 + 100.000 $2.000 12.1 Page 115 • any remainder gets debited to Retained Earnings.500.000.000 Mar 18 Apr 30 Balance in common share account: = $15.000 common shares for $7.091) Contributed surplus Cash 1 $2.500.500.000.100 280.500.612) Contributed surplus Retained earnings Cash Aug 18 .000 $15.800 61.100 61.500. Example – The Noor Company’s shareholders’ equity section at December 31.000.000 = $18.000.000 Number of common shares outstanding: = 1.800 32.000.000 cash Issued 50.000 = $16.000 1.150. 20x6 was as follows: Common shares.000 common shares for $2.1.Introductory Financial Accounting.000 186.500.000 + 50.500.800 260.000 x $16.000 The journal entries to record the above transactions are as follows: Jan 15 Cash Common shares Land Common shares Common shares (20.000 / 1.000 common shares at a total cost of $260.000.000 7.000 Issued 250.000 = 1.000 Jun 16 Cash Common shares Common shares (10.000.000 cash Retired 10.000.000.000 common shares in exchange for land valued at $1.150.000 x $18.000 common shares at a total cost of $280.000 Book Value per common share: = $18.
000 Next.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).800 + 7.380.00. 20x3.000 shares x $8. the preferred dividends in arrears for 20x4 and 20x5 will have to be paid: 100.000 shares outstanding Retained earnings $35. Dividends become a liability of the corporation only when the board of directors declares them.Introductory Financial Accounting. any dividend declarations are at the sole discretion of the company’s board of directors. • like common shares. any dividends in arrears due to preferred shareholders must be paid before any dividends can be paid to common shareholders. the corporation is under no obligation to provide a financial return to common shareholders.678. However.200 Number of common shares outstanding: = 1.200/ 1.000 The preferred share dividends were last paid on December 31.000.000 – 321. 100. Example – The Jarvis Corporation’s shareholders’ equity as at December 31.00 x 2 years = $1. cumulative. It is now December 1. in most cases preferred shares are cumulative.150.000. First. the preferred dividends for the year 20x6 must be paid: 100.500. 1.000 40. 20x5 is as follows: Common shares. they are a perpetuity. • they carry a stated dividend per share. 20x6 and management wants to pay a dividend of $5 per common shares.500.000 – 20.000 = $25.000 = $18.00 x 1 year = $800. $8.000. This means that if dividends are missed.600.000 = 1.000 + 250.000 .000.000 10.000 shares outstanding Preferred shares.678.1.000 shares x $8. that is. v.000 Book Value per common share: = $25.380. Like common shares.1 Page 116 2 Balance in common share account: = $18.
1.Introductory Financial Accounting. .000 The total dividend to be declared will be: $1.000 + 5.000. this same shareholder will receive an additional 1. a 2:1 split means that the number of shares outstanding will double.000 shares of shares before the split. the dividend to common shareholders can be paid: 1. 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. v.000 = $7. This will result in the share price dropping by half. There is NO journal entry required when a stock split is declared.000.000 shares x $5 = $5. All that happens is that the number of shares issued changes. If a shareholder owns 1.000 shares as a result of the stock split resulting in a total of 2. In order to reduce the share price.000 Stock Splits When the stock price of a corporation is high. the company will split the stock. Any premiums paid on retirement of shares are also charged to retained earnings. Dividends On the date a dividend is declared it becomes a legal liability of the company and the following journal entry is made: Retained earnings Dividends payable On the date of payment.000. the stock may become unattractive to small shareholders who have to disburse larger sums in order to acquire shares of the corporation.400.000 + 800. For example.1 Page 117 Finally.600.000 shares.
end of year $ XXX -XXX ±XXX -XXX $ XXX . 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.Introductory Financial Accounting.
000 common shares outstanding. The shares were selling at $30 each when management announced a three-for-two stock split.1 Page 119 Problems with Solutions Problem 7-1 – Multiple Choice Questions 1.1. c) The number of common shares outstanding will be 225. XYZ Corporation has 150.500. Which of the following statements will be true when the stock split is accounted for? a) Retained earnings will be reduced by $4. d) The number of common shares outstanding will be 250. v.000. .000.000.Introductory Financial Accounting. b) Shareholders’ equity will increase by $3.000.000.
Introductory Financial Accounting.000 common shares. to issue 10.000 $6 non-cumulative preferred shares and 100.000. Hilary and Sam Corporation completed the following transactions: February 2 February 10 February 15 February 26 February 27 February 28 Issued 9. Declared cash dividends on the preferred shares. Prepare the shareholders’ equity section of the Payne and Papineau Inc. 2. Issued 400 preferred shares to acquire a patent with a market value of $40. Declared cash dividends on the common shares in the amount of $0. a new company.32 per share. In its first month.1 Page 120 Problem 7-2 The articles of incorporation authorize Hilary and Sam Corporation. balance sheet as at February 28.1. Record the transactions in journal entry form.000 common shares to Hilary and 12.000.000 shares to Sam in return for cash equal to the shares’ market value of $6 per share. Net income for the month was $56. v.000 . Declared a 2 for 1 stock split. Required 1.000 common shares for cash of $12. Issued 2.
v.1.000. .000 common shares and 50. b. f.000 preferred shares at $20 each. Declared and paid a $5. Prepare the shareholders’ equity section of the Statement of Financial Position.000 common shares at $115 per share. Declared a cash dividend on preferred shares. During the first year of operations the following events occurred: a. c. Net income was $64.000 for the year.Introductory Financial Accounting.500 common shares at $120 each.00.000 and book value of $53. $1. cumulative preferred shares. Issued 1. Issued 1. Required 1. The equipment had a fair market value of $40. e.000. Issued 1. Provide the journal entries for each transaction above.00 common share dividend h. 2. The convertible bonds were issued earlier in the year. is authorized to issue 100.000 preferred shares in exchange for equipment.000 were converted into 500 common shares. Issued 2. g. Paid the preferred dividend. d.1 Page 121 Problem 7-3 M-F Inc. Convertible bonds with a face value of $50.
There is no new material.1 Page 122 8.Introductory Financial Accounting.1. the only materials in this chapter are the problems with solutions. v. just the integration of previously covered materials. Enjoy! . Therefore. 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.
Coupon payment dates are on June 30 and Dec 31. The company provides a one year warranty on its products.000 145.000 1.000 34.400 40. 20x5 was as follows: Dr.600 150. 2. There are 10. 5.000 13.1 Page 123 Problem 8-1 The Haider Corporation’s post-closing trial balance at December 31.1. The patent remaining useful life at December 31. the coupon rate is 6.400 Cr.000 419. 20x5 is 8 years. v. 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 $36.000 320. The bonds were issued on January 2. 8.000. The equipment is being amortized using the double declining balance method. 3.000 176. 6.000 $23. 20x1.052.600 12. 20x6. The building is being amortized on a straight-line basis over 40 years.052.000 300. The face value of the bonds is $400. The prepaid insurance is for a one year policy taken out in 20x5 that expires on March 1. The company uses a FIFO periodic inventory system.5% of sales. Warranty expense is estimated at 1.400 Additional information 1.000 shares of common stock outstanding.000 144. .000 5. $1. 4.000 38.000 120.000 127. 20x20. 7. The bonds mature on December 31.5% and the yield to maturity at the time the bonds were issued was 6%.Introductory Financial Accounting.200 $1. The average useful life of equipment is 10 years.
The inventory was counted on December 31. Cash collections on accounts receivable totaled $1. Inventory costing $16.000 320. 14 15. 20x6 and the total cost of the inventory was determined to be $378.000. 11. 5. The warranty expense for the year is accrued.000 30.400 130. 19. 6. 9. Inventory purchased on account totaled $960. Estimated % Uncollectible 3% 7% 20% 50% An adjustment is made for insurance expense.1.000 was returned to suppliers.000 40.000 $222.000 common shares on Aug 23 Insurance policy taken out on March 1 – one year policy.000 common shares were issued for $75.000 2. Operating expenses paid $945.000 18.1 Page 124 The following transactions took place during the year: 1.000.000. 21.000 12.000 26.000. 4.000. Amortization expense on the building.000 22. 13.000 25. 3. . On March15. 16. 7. Total sales on account were $1. The accounts receivable aging schedule is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $144. Accounts written off totaled $34.520. 10. Payments on accounts payable Payments for salaries Interest payments on bonds payable Purchase of equipment on January 2 Warranty repairs made to products sold Payments to the Canada Revenue Agency for income taxes Repurchase of 1. 20.000 23. 12.000 43.Introductory Financial Accounting. The aggregate net realizable value of the inventory was determined to be $365. v. Cash disbursements were as follows: 8.600. 2.000. an additional 3.000. equipment and patents.000 The following adjustments need to be made at year-end: 17.000. Recoveries of previously written off accounts receivable totaled $5.
20x6 amount to $6. b. Prepare journal entries for the above transactions and enter all the above transactions in T-Accounts. Dividends of $80.700.1. 20x6. v. 24. 23. Required – a. c.1 Page 125 22.Introductory Financial Accounting. Salaries payable at December 31. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . The income tax expense is 40%.000 were declared and paid on December 15.
e. The company paid a two-year insurance premium in advance on April 1. Credit sales for the year amounted to $320. The company purchased a patent on January 1. 20x5.1. 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. g. Unpaid and unrecorded wages incurred at December 31 amounted to $4. 20x5. b. for one year. The note is payable on March 31. It is now December 31. amounting to $9.900. which was debited to rent expense. The patent has an estimated useful life of 17 years and no residual value.700. Use straight-line amortization. The sales have been recorded.000. $4. the principal plus the interest is payable one year later. Machine A. for the face amount plus interest for one year. which cost $80.900. The company rented a warehouse on June 1. No warranty expense has been recognized.1 Page 126 Problem 8-2 Pacific Company adjusts and closes its books each December 31. v. During the year.000. supplies of $21. The note was dated September 1. e. i. On that date. On January 1. the patent account was debited and cash credited for $11.000 units of a product that was subject to a warranty. is to be depreciated for the full year. On that date.900 were purchased and debited to supplies expense. Past history indicates that 3% of units sold require repairs at an average cost of $40 per unit. 20x5. you do not need to provide the original entry): a.500. costs incurred for the warranty to date. 20x6. Pacific Corporation had a supplies inventory of $4.200 was on hand. c. cash was debited and notes payable credited for $60. the company signed a $60.000. During the year.800. September 1. The estimated loss rate on bad debts is 3% of sales.000. totalling $8. It had to pay the full amount of rent one year in advance on June 1. and the residual value.000. inventory of $9. and the adjusting entries are to be made.Introductory Financial Accounting. 20x5. The company received from a customer a 9% note with a face amount of $12.600. i. 20x5. At the end of the year. On April 1. 20x5. The estimated useful life is 10 years.000. and sales revenue was credited on the date of sale.600. f. were debited to warranty liability when paid. pacific Company sold 10. d. 20x5. . h. j. which was debited to prepaid insurance. Notes receivable was debited. amounting to $9. at a cost of $11. 10% note payable.
Introductory Financial Accounting.000 after all the above adjustments. ABC Corporation wrote off a $16. v. l. Assume an average income tax rate of 30%.000 bad debt. Pre-tax income has been computed to be $80.1 Page 127 k.1. .
Introductory Financial Accounting.500 22.800 5. Sales have increased 30%. 1. 20x2. 20x2.600 2. Baking materials Rent Salaries and wages Maintenance Utilities Insurance premium Equipment Principal and interest payment on bank loan Advertising $14.400 1.320 2.000 312 424 $31.500 110 4. for the first five months of 20x2 and a balance sheet as of May 31. The following amounts were disbursed through May 31. Spier incorporated this business as MAS Inc. 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. Anne Spier is the principal shareholder of MAS Inc. on January 1. Kelowna Bank & Trust has asked Spier to submit an income statement for MAS Inc.880 $33.500.000 1. 20x2.000 shares of common share for $2. Spier assembled the following information from the corporation's cash basis records for use in preparing the financial statements requested by the bank. Sale of common shares Cash sales Rebates from purchases Collections on credit sales Bank loan proceeds $ 2.466 .1.1 Page 128 Problem 8-3 Anne Spier has prepared baked goods for resale for several years now. annually since operations began at the present location.920 3. v. The bank statement showed the following 20x2 deposits through May 3l. Spier wishes to purchase some additional baking equipment and to finance the equipment through a long-term note from a commercial bank.770 130 5. with an initial shares issue of 1.
prepare for MAS Inc. 20x2. New display cases and equipment costing $3. The note evidencing the 3-year bank loan is dated January 1. 20x2 (b) A balance sheet as of May 31.1 Page 129 3. These are the only fixed assets currently used in the business.1. and January 1 consisting of equal principal payments plus accrued interest since the last payment. Customer records showed uncollected sales of $4. Baking materials costing $1. May 25. and states a simple interest rate of 10%. and no cash was transferred from the unincorporated business to the corporation. 20x2. Payments and collections pertaining to the unincorporated business through December 31. The other employees had been paid through Friday. 5. 9.840 were on hand at May 31. 11. Unpaid invoices at May 31. Baking materials Utilities $ 256 270 $ 526 4. 20x2 MAS Inc. July 1.226 at May 31. 10. The loan requires quarterly payments on April 1. A one-year insurance policy was purchased on January 2. 20x2. 6. 20x1 were not included in the corporation's records.: (a) An income statement for the five months ended May 31. is subject to an income tax rate of 20%. Straight line amortization is to be used for book purposes. No materials were on hand or in process and no finished goods were on hand at January 1. 20x2. and have an estimated useful life of five years. 20x2. v. 20x2. and were due an additional $240 on May 31. There were no materials in process or finished goods on hand at that date.000 were purchased on January 2. Rent was paid for six months in advance on January 2. October 1. 8. were as follows. 12. 20x2. Required Using the accrual basis of accounting. 20x2. . 20x2. 7.Introductory Financial Accounting. Anne Spier receives a salary of $750 on the last day of each month. 20x2.
b) Cash balance in cheque book.000 and $20.000 was declared and is to be paid in January 20x3.000 of its common shares for $25 per share.000 for unpaid purchases of merchandise on December 31. $20. 20x2.600 have accrued but have not been paid. Retained earnings at the beginning of 20x2 totalled $63. was on hand. During the fourth quarter of 20x2. There have been no other common share transactions. The uncollected receivables were written off as miscellaneous expenses in 20x2.000 $180. 20x2.000.000. All equipment is depreciated on a straight-line basis over ten years with no estimated salvage value.000.000 was recognized.000 5. Prepare an income statement for the year ended December 31.000 $406. sales salaries of $1.1 Page 130 Problem 8-4 Morrow Wholesale has kept limited records and has never had an audit until 20x2. and a balance sheet at December 31. 20x2. During 20x2 these shares were exchanged for land and a gain of $4.000 5.000.000 10.Introductory Financial Accounting. The income tax rate is 30 percent. v. 20x2. In 20x2 Morrow began selling on a cash-only basis. December 31.000) Cheques written during 20x2: Purchases of merchandise Salaries Advertising (to be run in 20x3) Miscellaneous expenses $ 24. payable annually Customer collections Proceeds on sale of fully depreciated equipment (original cost.000 5. Receivables at the beginning of 20x2 totalled $ 155.500 $205. a cash dividend of $10. At the beginning of 20x2. As the senior auditor in charge of the audit. respectively. for Morrow Wholesale. The sale of equipment was made on December 30. The inventory at the beginning of 20x2 was $80. . Morrow's cost of goods sold is 80 percent of sales.000 $250.000 note issued on July 1 and bearing interest at 12%. Morrow's only other asset at the beginning of 20x2 was an investment in Honeydew common shares.000 146.000 10. At the end of 20x2. equipment with a cost and accumulated depreciation of $80.20x1 Deposits during 20x2: Cash sales Proceeds of $5. you have been presented with the following information: a) Morrow is incorporated and initially sold 11.1.500 c) d) e) f) g) h) i) j) Morrow had no outstanding payables at the beginning of 20x2 but owes creditors $36.
000 650. If a company retires shares.000 were declared and paid to shareholders during the year. v. this generates cash.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 $ 400.1. If a company issues new debt. Components of the Statement of Cash Flow There are three sections to the statement of cash flow: Cash from Operations – this section shows how much cash is generated or used up by the firm in its daily operating business.000 150. Most of what we do. Some students find the statement of cash flow to be a challenge because they are still thinking with an “accrual” mind. Both methods will be covered later in this section.Introductory Financial Accounting. and shows how a company’s actions have affected its net cash position throughout the period. Try to keep in mind that when you are working with this statement. .000 215.000 20x7 $ 250. If a company issues new shares. as accountants. GAAP suggests a preference for the direct method. this uses cash Example . This statement is broken into three distinct sections. if a company pays off or retires debt this uses cash.000 Additional information: Dividends of $150. There are two distinct methods in presenting cash flow from operations: the direct and the indirect method. If a company pays dividends. is based on the accrual system. however.000 450.000 300. 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. this generates cash. The Statement of Cash Flow The statement of cash flow shows a company’s inflows and outflows of cash during a particular period.1 Page 131 9.000 180. then this uses cash. either the direct or indirect methods can be used. your main concern is incoming and outgoing cash.
000 + Net Income . we know that retained earnings increased by a net of $85.Introductory Financial Accounting.000) 0 .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 $ 350.000 (30.1 Page 132 The cash flow from financing can be calculated as follows: Proceeds on issuance of bonds payable Cash paid to reduce mortgage payable Proceeds on issuance of common shares Cash dividends paid $ 150.000 (170.000 + dividends of $150. and the NBV (cost – accumulated amortization) is recorded as a gain/loss on sale.000 Alternatively. Often.1. we can calculate the Net Income. Rearranging the formula. Remember. we remove the asset and all associated accumulated amortization.000 (180.000) 100.000) $ 170.$150.000) 75. Example .Dividends = Closing Retained Earnings In the above case.000 = $235. Cash flow from Investing Activities – this section discloses cash that was generated or used through the sale or purchase of long-term assets. we know all numbers in this formula except Net Income.000) 100.000 (150.000.000 (10. and changes in them from one period to the next. the net income for the year is $85. or cash we receive.000) 200. when dealing with this section. The difference between the proceeds. we have to reconcile the long-term asset accounts. when a sale of a long-term asset is made.000 = $300. Given that dividends decrease retained earnings.000. v.000 (60.000 20x7 $ 300. $215.000 Net Income = $235.000 To calculate the company’s net income for 20x8. we analyze at the Retained Earnings Account: Opening Retained Earnings + Net Income .
and essentially takes each income statement item and converts it into cash. • the original fixtures. then the cash proceeds on the sale of fixtures would have to be $15.Introductory Financial Accounting.000. All non-cash transactions are by definition excluded from the statement of cash flow. there can be as many as you want): Cash collected from Customers (Sales ± changes in Accounts Receivable) Cash paid out to Suppliers & for Operating Expenses (Cost of goods sold + Operating Expenses ± changes in inventory and prepaid expenses ± changes in non-cash current liabilities.000 and the accumulated amortization was $60. were sold at a gain of $10.1 Page 133 Additional Information: • $50.000 = $25.1. If the gain on sale was $10. • the land was obtained through issuing $100.000 + 10.000) 25.000 cash. Cash Flow from Operations – Direct Method This method of determining cash flow from operations uses the income statement as its starting point. excluding interest payable.000 giving a net book value of $15.000) ($125.000 (100. v. Note that because no cash exchanged hands for the purchase of the land.000 with a NBV of $15.000. 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) . • new fixtures were purchased for $100. There are a minimum of four main sub-sections in determining the cash flow from operations (note that these are a minimum.000.000.000) * The cost of the fixtures was $75. costing $75. it does not appear in this section.000.000 worth of common shares to the supplier.000 worth of equipment was purchased for cash during the year. The cash flow from investing section of the Statement of Cash Flow would be as follows: Purchase of Equipment Proceeds on sale of Fixtures* Purchase of Fixtures ($50.
000) 135.000 1.000 46.000 62. Jack’s Joke Shop Inc.000) $172.000 82.000 231.000 3. Comparative Unclassified Statement of Financial Position As at December 31.000 5.000 2.000 $135.000 23.000 2.000 20x6 $42.000 89.000 $172. 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.Introductory Financial Accounting. 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. v.000 14.000 (25.000 325.400 .000 10.1 Page 134 Example – Calculate cash flow from operations – direct method. Income Statement For the Year ended December 31.000 (20.000 8.000 82.000 21.000 12.000 5.1.000 120.000 68.000 80.000 104.000 27.000 10.000 73.000 $660.000 104.000 200.000 429.000 24.000 50.000 15.000 21.000 39.600 $ 67.
we accrued more sales than we collected. if accounts receivable decreased. 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. we can simply analyze the difference.000 (6. These comprise all of the expense items on the statement of financial position with the exception of amortization expense. Conversely.000 2.000 $553. which is a non-cash item and interest and income tax expense which will be dealt with separately. and office & administrative salaries. salaries expense.1. However. Therefore. 20x7. because we are told the balance at December 31.000 (2.000) $231. .1 Page 135 Cash collected from customers: Sales Less increase in accounts receivable $660.000 Why did we subtract the $6. Cash paid to suppliers & for operating expenses: Cost of goods sold Plus increase in inventory Plus Decrease in accounts payable Salaries expense Less increase in salaries payable Office & Administration Expenses $200.000 2.Introductory Financial Accounting.000 Note that the starting point for each calculation is the following expense items: cost of goods sold. the amount of our Inventory account increased by $2. This means that we purchased additional inventory that is now sitting in our warehouse.000 increase in Accounts Receivable. then we collected more than we accrued and this would be added to sales.000 120. 20x6 and the balance at December 31. In this case. and which are made on credit.000) $654. therefore we reduce sales to calculate cash collected from customers. nor are we told how much of the 20x6 accounts receivable balance have been collected.000 235. v.000 198.000. then this means that sales have not yet been collected – that is. waiting to be sold. We are not told what percentage of the total sales are made for cash. The first thing we do is adjust it to obtain the purchases made during the period. Note also that although we combined all three expense items in one single calculation. If accounts receivable increased.
If there is no such account. is subtracted from the expense to get to the total cash paid. we have to add the $2. interest payable went up which means that we accrued more interest than we paid. In this example.000 In this case.000 (1.000 from our Interest Tax Expense to get the total cash paid for taxes. as in the case of Office & Administration Expenses above. Cash paid for taxes: Income tax expense Less increase in income taxes payable $21. other than interest and taxes. any increase in the Income Tax Payable account would be subtracted from the expense to get to the total cash paid. Therefore. like salaries payable. 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) $9. are treated in the manner that the Salaries Expense was treated above. and any decrease in liabilities is added.600 The treatment for taxes is the same as for interest. you start with the Income Statement amount and then account for any changes in the associated statement of financial position account(s). v.000) $14.Introductory Financial Accounting.600 (12. Again. That is.000 ($231. That is. Purchases for the year in this case would be $233. inventory decreased.000 + 2. and any decrease would be added.000 increase to COGS. on the other hand. like it did in the above example. In dealing with the change in accounts payable. If. so we deduce the increase in interest payable to interest expense. All other expenses.000 more this December 31st than we did last.1. Note. there appears to be no associated statement of financial position account. then we have paid more to our suppliers than the purchases. . we will subtract the $12. we owe $12. Any increase in liabilities. then you simply include the full expense amount as the cash paid for that expense. we would have subtracted the amount from COGS to get total money paid to suppliers. This is why we add back the $2. if the Accounts Payable account decreases.000.1 Page 136 to calculate purchases. should the opposite have occurred. Cash paid for interest: Interest expense Less increase in interest payable $15.000).
000) 2.000) (2.400 . Increases (decreases) in current assets are cash outflows (inflows. inventory. 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. we start with the bottom line .000 (6.1. We then add or subtract any changes in the non-cash current asset and liability accounts.Introductory Financial Accounting.600) $ 77.000 12. as well as all current payable accounts. This would include changes in accounts receivable.000 $77.400 5.000) (2.400 Cash from Operations – Indirect Method Under the Indirect Method. The most common of these are amortization expense and gains/losses on the sale of capital assets. We then add back any non-cash items that may appear on the income statement. v.Net Income.000) (9.000 1.000) (14.1 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. Increases (decreases) in current liabilities are cash inflows (outflows).000 (553.
000 $ 76.000 = 66.400 – 24. term deposits and any highly liquid assets (i.000 + 67.1. . v.400 + 0 – 43.1 Page 138 To continue the example.000 42. This includes cash.400) (43.000) (66. the term ‘cash’ is defined as ‘cash and cash equivalents’.Introductory Financial Accounting. 20x6 Ending Cash Balance – December 31. let’s finish with the cash flow statement. 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 ($23.400) Opening Cash Balance – December 31.e.000 (7. 20x7 30.400) Net Change in Cash ($77. readily convertible to cash) subject to an insignificant risk of change in value.000 Definition of Cash For purposes of the statement of cash flow.400) 34.
000 80.Introductory Financial Accounting.000 450. Ginger’s Cookies Ltd.000 207.900 . Income Statement for the Year ended December 31.1 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.100 $146.000 79.000) 15.000 243.000) 226. v. 20x6 Sales Revenue Cost of Goods Sold Gross Margin Operating Expenses: Salaries expense Amortization expense Other Operating income Interest expense Gain on Sale of Capital Assets Net Income before taxes Income tax Expense Net Income (32.000 $750.000 120.000 7.1.000 (17.000 300.
Ginger’s paid cash for the equipment.000 10.200 80.000 (40.000.500 50.000 10. 20x6 20x6 ASSETS Cash Accounts Receivable Inventory Capital assets Less Accumulated amortization LIABILITIES Accounts Payable Salaries Payable Interest Payable Taxes Payable Bonds Payable SHAREHOLDERS’ EQUITY Common Stock Retained Earnings 50.000 0 33.000 117.000 $144.1. was replaced by a new piece of machinery costing $125.200 $ 20.100 $ 14.000 45. Comparative Unclassified Statement of Financial Position as at December 31.200 $ 27. 20x6.1 Page 140 Ginger’s Cookies Ltd.000) $144.000 108.400 6.000 47. Prepare a Statement of Cash Flow using the Direct Method.200 20x5 Additional Information: on January 2.500 $ 19.000) $275.000 7. v.000. costing $45. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.Introductory Financial Accounting.000 40.100 30.000 61.000 (7. the only piece of equipment. Required – a.000 125.500 90. .000 43.000 111.400 $275. b.800 2.400 158.
000 43.000 1. are shown below.695.041.326.000 888.000 119.000.093.000 800.343.060.000 45.000 $ 909.000 1.854.000 450.000 82.000 700.000) 1.000 $ 4.000 5.000 2.000 30.000 184.108.40.2061.000 $ 4.212.000 999.000 2.000 319.000 $ 4.000 1.000 850.000 28. MCDUFF LTD.000 1.842. Statement of Financial Position December 31 20x3 Current assets Cash Accounts receivable Merchandise inventory Prepaid expenses $ 319.000 5.000 1.000 (3.060.054.000 3.000 (3.000 1.358.1 Page 141 Problem 9-2 The comparative statements of financial position of McDuff Ltd.000 2.000 $ 4.000 32.000 1.000) 1.045.000 Capital assets Accumulated amortization Bonds payable Mortgage payable Shareholders’ equity Common shares Retained earnings .091.429.000 508.000 Current liabilities Accounts payable Salaries and wages payable Interest payable Income taxes payable $ 897.000 20x2 $ 353.019.711.Introductory Financial Accounting.869. v.000 1.500.
000 700.000 550.400. with a book value of $87.000) (67.000. 20x3.000 (7.000. 20x3. b.000 $239. Prepare a cash flow statement for the year ending December 31.000 2.000. Use the indirect method to report the operating activities.000) 489.1 Page 142 MCDUFF LTD. On April 15.000 were retired for $487.Introductory Financial Accounting. Required a. 3.000. 2. bonds with a net book value of $500.000 Additional information 1. v.1. Prepare the cash flow from operations section using the direct method.500. Amortization expense is included in Operating expenses. 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. Income Statement For the year ended December 31.000 (61. .000 850. for $80. McDuff sold capital assets that cost $158.000) $4.000 250. 20x3. On August 31.
800 7. 20x5 and 20x4 reveal the following: 20x5 Cash Accounts receivable Inventory Prepaid insurance Accounts payable Salaries and wages payable Long-term loan payable Interest payable Required Prepare the cash flow from operations section as it would appear on the Statement of Cash Flow using… (a) The indirect method (b) The direct method (CGA Canada.300 5.300 1.400) Comparative partial balance sheets at December 31. 20x5 Sales Expenses: Cost of goods sold Salaries expense Insurance expense Depreciation expense Rent expense Interest expense Net loss $ 218. HHC LTD.1. Income Statement for the year ended December 31.000 500 .300 2.700 4.800 5.000 5.800 7.400 $ (3. v.000 $ 165.1 Page 143 Problem 9-3 The following data are available for HHC Ltd.300 600 5.200 221.700 500 5.Introductory Financial Accounting.000 1.700 8.000 39. adapted) $ 4.000 1.000 600 20x4 $4.300 10.
000) $ 900.000 0 85.000 Net Change $ 24. 20x6 are as follows: TORAM LTD.000 $ 40.000 43.000 $ (18.000) $ 57.000 $ 65.000) (22. 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 (12.000 0 0 58. and its income statement for the year ended December 31.1 Page 144 Problem 9-4 Toram Ltd.000 144.000 $ 100.000 $ 699. Balance Sheets Dec. 31 20x6 $ 50. Income Statement for the year ended December 31.000 85.000) $ 681. v.000 Dec.000 475.000 200.000 4.000) $ 624.Introductory Financial Accounting. 31 20x5 $ 26.000 (123.000 92.000 (18.’s comparative balance sheets at December 31.000 463.000 300.000) 0 (12.000 0 80.000 600.000 18.000 86.000 423.000 80.000 (101.000 87.000 $634.1.000 .000 25. 20x5 and 20x6.000 423.000 Liabilities and Shareholders’ Equity Accounts payable Bonds payable Preferred shares Common shares Retained earnings $ 22.000 32.000 Assets Cash Accounts receivable Inventory Long-term investment Land Buildings and equipment Accumulated amortization TORAM Ltd.000 53.000 39.000) 25.000 119.
for $30.000 cash.000 of accumulated amortization. 4. (CGA Canada adapted) .000 and had $21. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method. Sold equipment for $7. 2. Sold the long-term investment on January 1.000 cash that had originally cost $32. 3. the following transactions occurred: 1.1 Page 145 During 20x6.000 cash dividend.000 of bonds payable at face value. v. Issued $25. Declared and paid a $50. b. 20x6.Introductory Financial Accounting. Required – a. 5.000. Purchased equipment for $20.1. Prepare a Statement of Cash Flow using the Direct Method.
The limitations of using historical information must. v. sinking fund provisions. Net cash flows from future operations. Management's attitude toward future cash dividend policy. Future cash flows from changes in the levels of investments made by shareholders and creditors.1. In order to predict the company's future dividend policy. 4. the investor must predict those things that affect dividend policy. from activities considered incidental to the firm's main function. repayment of principal. However. The amount of cash expected to be invested in the firm's long lived assets as well as in working capital. published financial statements are historical in nature and do not provide the information we have just outlined. Expected non-operating cash flows. Nonetheless. Vertical and Percentage (common size) analysis . The following are the variables that affect a firm's future dividend policy: 1. historical information can be used to make projections and is sometimes extremely useful in this respect.. which the investor would like to predict. 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. 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. 2. The nature of the analysis of financial statement information is primarily in the form of ratios. 5. i. Each of these eight variables that affect future dividend policy is in turn affected by others.. 8. interest payments.e. of course. Financial Analysis Techniques 1. 3. etc.1 Page 146 10. Published financial statements are the sources of information generally available to users. 6. The amount of future cash flow to service debt requirements. The amount of future cash flow from random events such as windfall gain or casualties. i. Horizontal (trend).e. be recognized.Introductory Financial Accounting. 7.
For example.073 354 $719 .975 7.546 1.1 Page 147 Horizontal analysis expresses financial data in terms of a single designated base period.509 7.500 10.Introductory Financial Accounting. or as compared to an amount of the preceding period.1.673 827 273 $554 20x6 $13.369 606 200 $406 20x4 $8. 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. v.882 627 207 $420 20x5 $11.619 12.
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
1.000 c) $367. If current liabilities exceed current assets.000 of inventory and had sales of $600.0 c) 6.000. 20x7. What were R’s total net sales for 20x8? a) $227. Net cash sales for 20x8 were $32.500.5 b) 5. R Company’s net accounts receivable were $50. 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. The accounts receivable turnover for 20x8 was 7.0 d) 8.000 2.000 at December 31. 20x8. and $55. a corporation purchased $540. The beginning inventory for 20x8 was $30.500 b) $335.000 at December 31. During 20x8.Introductory Financial Accounting.0 .0.000 and the ending inventory for 20x8 was $120. 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 4.500 d) $400. v. What was the inventory turnover for 20x8? a) 4.1 Page 152 Problems with Solutions Problem 10-1 – Multiple Choice Questions 1.000.
Introductory Financial Accounting, v.1.1
If current assets exceed current liabilities, a payment of an account payable has what effect on working capital and the current ratio? Working Capital No effect No effect No effect Increase Decrease Current Ratio Increase No effect Decrease Decrease Decrease
a) b) c) d) e)
Assuming stable business conditions, which of the following is consistent with a decline in the number of days’ sales outstanding in a company’s accounts receivable at year end from one year to the next? a) A tightening of the company’s credit policies b) The second year’s sales were made at lower prices than the first year’s sales c) A longer discount period and a more distant due date were extended to customers in the second year d) A significant decrease in the volume of sales of the second year
When should an average amount be used for the numerator in computing a financial ratio? a) When both the numerator and denominator are balance sheet items b) When the numerator is an income statement item and the denominator is a balance sheet item c) When the numerator is a balance sheet item and the denominator is an income statement item d) When both the numerator and the denominator are income statement items
Introductory Financial Accounting, v.1.1
A company disclosed the following information for the year ended December 31, 20x8: Net cash sales Net credit sales Inventory at beginning of year Inventory at end of year Net income Accounts receivable at beginning of year Accounts receivable at end of year What is this company’s days sales in accounts receivable for 20x8? a) 182 days b) 94 days c) 65 days d) 57 days $ 75,000 125,000 50,000 62,500 12,500 40,000 22,500
During 20x8, a company purchased $320,000 of inventory. The cost of goods sold for 20x8 was $300,000, and the ending inventory at December 31, 20x8, was $60,000. What was the inventory turnover for 20x8? a) 5.0 times b) 5.3 times c) 6.0 times d) 6.4 times
Introductory Financial Accounting, v.1.1
Problem 10-2 The comparative financial statements for the Kuehl Company are as follows. Kuehl Company Balance Sheets as at December 31 … 20x5 ASSETS Current Assets Cash Accounts receivable Inventory $12,000 275,000 425,000 712,000 1,450,000 $2,162,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $379,000 920,000 1,299,000 300,000 563,000 863,000 $2,162,000 $371,000 850,000 1,221,000 300,000 493,000 793,000 $2,014,000 350,000 800,000 1,150,000 300,000 425,000 725,000 $1,875,000 $34,000 220,000 340,000 594,000 1,420,000 $25,000 200,000 350,000 575,000 1,300,000 20x4 20x3
Fixed Assets – net
Introductory Financial Accounting, v.1.1
Kuehl Company Income Statements for the year ended December 31 … 20x5 Sales Cost of goods sold Gross margin Operating expenses Depreciation expense Operating Income Interest expense Net income before taxes Income taxes Net income Required – Prepare a full financial statement analysis for 20x4 and 20x5 for Kuehl Company. $2,300,000 1,400,000 900,000 550,000 120,000 230,000 60,000 170,000 60,000 $110,000 20x4 $1,900,000 1,200,000 700,000 400,000 100,000 200,000 50,000 150,000 52,000 $98,000
1 Page 157 Problem 10-3 The comparative financial statements for Rocky Mountain Camping Equipment Ltd.000 485.000 1.000 800.000 2.Introductory Financial Accounting.000 $24.789.000 2.000 $3.003.000 809.979.928. Balance Sheets as at December 31 … 20x7 ASSETS Current Assets Cash Accounts receivable Inventory $37.114.000 524.000 2.000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $560.000 820.000 700.628.000 1.000 300.956. Rocky Mountain Camping Equipment Ltd.000 $4.808.000 700.000 $3.000 $480.999.380.889.000 20x6 20x5 Fixed Assets – net $4.000 $3.000 .000 2.1.000 1.180.679.000 1.000 $524.000 1.000 650.324.576.167.000 1. are as follows.000 2.000 480. v.003.000 700.000 700.808.000 $3.000 1.876.000 $20.000 570.000 2.956.000 1.
000 $51.100.000 81. Income Statements for the year ended December 31 … 20x7 Sales Cost of goods sold Gross margin Operating expenses Depreciation expense Operating Income Interest expense Net income before taxes Income taxes Net income (loss) Required – Prepare a full financial statement analysis for 20x6 and 20x7 for Rocky Mountain Camping Equipment Ltd.000 20x6 $1.000 .Introductory Financial Accounting.1.000 100.000 30.000 700.000 5.000 463. $2.000 65.1 Page 158 Rocky Mountain Camping Equipment Ltd.000.000 1.000 2.000 100.000 $3.000 60.300.000 137.000 1.000 800. v.700.000 56.000 635.
SOLUTION TO PROBLEMS Problem 1-1 1. 2.1.000 $999.039.Introductory Financial Accounting. 7.000 = $1.000/4 years x 6/12) = $35. 8. 3.1 Page 159 11. 5. v.999 .999 + 40.000 – ($40. 4. d b a d d d b c $40. 6.
1 Page 160 Problem 1-2 Part (a) Assets Cash 20.Introductory Financial Accounting.800 33.000 1 3 Furn.000 20.000 BALANCE SHEET Accts.000 15.000 120.000 4.000 1 4 7 8 B 2 3 6 7 B 8 10 14 5 9 B 2 Prepaid Rent 1.000 190.000 13 16 17 18 19 B 6 B Prepaid Insurance 1.367 8.000 25.200 4.000 50.000 182. & Fixtures 15.000 Acc.000 1.000 2.000 Accrued Liabilities 150 700 600 1. Receivable 6.000 Common Stock 20.000 2.200 400 800 12 4 15 Inventory 25.000 15. v.777 Bank Loan 20.1.960 5.000 Liabilities & Equity Accounts Payable 130. Amortization 500 11 10 Retained Earnings 10.000 .
000 5 9 B 15 15 14 B 7 15 11 Amortization 500 10 13 B 10 17 B Wages and Salaries 36.960 Interest 300 150 450 Advertising 10 2.000 600 36.1.1 Page 161 Expenses Purchases 50.000 INCOME STATEMENT Purchase Returns 15.000 1.000 Revenues Sales 196.960 5.000 170.000 3.367 .600 Insurance 400 12 10 16 B Miscellaneous 1.000 120.000 15.Introductory Financial Accounting.000 0 Rent 2 10 18 B 1.000 0 Cost of Goods Sold 130. v.200 19 Income Taxes 5.500 700 2.
000 15.000 36.1 Page 162 Journal Entries – 1.000 6.000 120. 3.000 1.000 15.800 500 500 2. 4.1.000 3. 9. 10.000 300 130.200 1. .000 50.000 / 10 years x 4/12 $20. 8.000 182.000 1. 5.Introductory Financial Accounting.000 2.000 2.000 4.000 $20.000 1.000 20.000 120. 7. 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. v.000 1.000 20.000 196.500 10.200 190. 6.000 4. 11.000 50.
000 130. 5.000 700 700 600 600 1.000 x 1% Income tax expense Accrued liabilities Net income before taxes = $17.1. v.890 Income tax expense = $17.000 170.000 25.367 5.890 x 30% = 400 400 13. 19. 16. 150 150 14.000 15.960 1. 18.000 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. 17.Introductory Financial Accounting. Insurance expense Prepaid insurance $1.200 / 12 months x 4 months expired Interest expense Accrued liabilities Accrual for the month of October: $20.1 Page 163 12.367 . 15.000 15.960 15.
277 $270. v.1.000 10.000 25.367 $270.200 5.000 5.600 2.000 130.1 Page 164 b.000 15.000 8.000 20.000 Credit $ 500 25.000 196.960 500 450 36. Inc.000 400 2.Introductory Financial Accounting.777 20.000 800 1. 20x2 Cash Accounts receivable Inventory Prepaid Insurance Prepaid rent Furniture and fixtures Accumulated amortization Accounts payable Accrued liabilities Bank loan Capital Stock Retained earnings Sales Cost of goods sold Rent Amortization Interest Wages and salaries Advertising Insurance Miscellaneous Income taxes Debit $33.000 2. Heavenly Books.277 . Trial Balance As at October 31.
660 18. Inc.960 500 36.000 66. 20x2 Sales Cost of goods sold Gross profit Operating expenses Rent Amortization Wages and salaries Advertising Insurance Miscellaneous Operating income Interest expense Net income before taxes Income tax expense Net income $196.523 Heavenly Books.1. 20x2 Retained earnings. Inc.523 .Introductory Financial Accounting.890 5.000 400 2.000) $2. Statement of Retained Earnings for the four months ended October 31.600 2.1 Page 165 c.523 (10. v. Income Statement for the four months ended October 31.367 $12. July 2.000 130.340 450 17.200 47.000 5. 20x2 Net income Dividends Retained earnings. October 31. Heavenly Books. 20x2 $0 12.
777 8.000 500 $33.000 61. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance Prepaid rent Furniture and fixtures Less accumulated amortization $15.777 12.500 $76.1. v.523 $76.Introductory Financial Accounting.523 22. Statement of Financial Position as at October 31.000 53.000 800 1.000 25.777 20.1 Page 166 Heavenly Books. Inc.300 .800 14.300 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Accrued liabilities Current portion of bank loan Bank loan Shareholders’ Equity Capital stock Retained earnings $25.000 2.000 2.000 8.000 45.
200 3.000 17.1 Page 167 Problem 1-3 Global Productions Inc.500 Global Productions Inc.600 – 2.300 18. v.800 2.500 $155.1. Statement of Retained Earnings for year ended December 31.200 84.100 $9.beginning Net income Dividends Retained Earnings .100 3. Income Statement for year ended December 31.600 13.600 4.400) 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 4.200 54.300 21.ending $0 9.Introductory Financial Accounting. 20x6 Net sales ($157. 20x6 Retained Earnings .500 (2.000 71.000 4.100) $7.400 .
200 $107.800 $25.600 40.100 1.500 1.000 .400 57.1 Page 168 Global Productions Inc.000 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Bank loan Shareholders' Equity Capital Stock Retained earnings $7.100 87.500 1.000 7.Introductory Financial Accounting.000 4.000 49.1.600 50.800 19. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Supplies Prepaid insurance Office equipment Accumulated amortization 24.400 $107. Statement of Financial Position as at December 31.200 2.000 9.100 14.900 44. v.
v. you must record them as an expense of that period. as these expenses were incurred during the period. you would have debited Prepaid Insurance and credited Cash for the full amount of $5. $24 X = $6.250 X 7/12 = $3.1. you would have earned of the revenue. the full amount would be recorded as an Unearned Revenue liability. You have used 8/12 of the policy. To do this you would set up a receivable.300 2. Therefore.800.250/year. it is appropriate for you to record it in this period. you will have accumulated 3 days worth of salaries that have not been paid.333 . The journal entry would be: Unearned Revenue Subscription Revenue c) 6 6 You have earned the $2. we will record salaries expense and the accompanying salaries payable of $1. Salary Expense Salaries Payable 1.1 Page 169 Problem 1-4 a) Annual amortization expense for the machinery would be = $50.800 e) When you purchased the policy. due from Big Al.800 1.333 3. However. therefore.300 revenue this accounting period. in the amount of revenue earned during the period.646 for the current period.000/8 years = $6. However. Amortization Expense Accumulated Amortization b) 3. Therefore. Accounts Receivable Consulting Revenue 2. you only had the machine in use for 7 months.000 X 8/12 = 3. your amortization expense would be = $6. you would have sent out 1 of the 4 magazines in the subscription.300 d) As of Wednesday.333 from Prepaid Insurance and record it as Insurance Expense for the period.000.646 3. Insurance Expense Prepaid Insurance 3.646 When you received the cash in January. Therefore. Cash Unearned Revenue 24 24 As of April 30. therefore you will remove $5.Introductory Financial Accounting.
and therefore you would have incurred one month worth of Rent Expense. Therefore. Unearned Revenue Catering Revenue 1. Rent Expense Prepaid Rent 4. you would have debited Cash and credited Unearned Revenue by $6.000 each.750 you paid on June 30th represents Prepaid Rent. The first payment that you received on June 1st would cover the catering for June – November.1. and would be recorded as an asset on your accounts for the June30th period end. or $1.1 Page 170 f) Each of the payments for $6.e. You will have to adjust for that fact that 5/6 of the payment has not been earned i.000 is unearned. You would remove the Prepaid Rent account to reflect that fact that you have “used up” the rent. the second payment that you received on December 1st covers the period of December – May.750 As of July 31st.000 covers a 6-month period.000 1.750 4.750 .000 g) The $4.000 X 5/6 = $5. On December 1st.000 has been earned and should be included in revenue for this period. Prepaid Rent Cash 4. v. you would have been in the premises for 1 month. $6. that full amount would have been earned and recorded as revenue during the period.750 4. No adjustment is needed for this.. However.Introductory Financial Accounting.
000 $0 $1.000.000 Problem 1-7 1. The opening balance in the Subscription Received in Advance account = $80. 3. the offsetting credit would be to Subscriptions Revenue.000.000 $1.Introductory Financial Accounting. Dec 31.000 = $48. Total amount received as revenue of $128. 12.020. 6.000 x $20 (accounts payable) = $20. 4. 3.026.000 + 300.000 $0 $1.000 = $72.000 $1.000. Dec 31.000 $1.000 1.000. 8. 20x5 55 55 Problem 1-6 1. 2. 5. 11.000 + (1.000 $1.006. 20x5 Insurance expense Prepaid expense $1. 20x5 500 500 100 100 c.000.1 Page 171 Problem 1-5 a.000 (sales) – 4. 9.000 + (200 x $50)(cash) – (200 x $20)(inventory) = $1.000 – 128.000 $1.000.1. v.000. Dec 31.000 + 120.000 (bldg) – 300. .000 x $10 = $1. 10.000 (the ending balance in the account).000 (COGS) = $1.000.000 (cash) = $1. 4. Debit to Subscriptions Received in Advance = $180.000. 7. Dec 31. 100. $80.000 less the revenue earned for subscription fees received in the previous year of 80.000.000. 20x5 d.000 + 10.000 x $20)(inventory) = $1. 2.020.000 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.000 $20.
Introductory Financial Accounting, v.1.1
Problem 1-8 Shareholders’ Equity Net Income
+10,000 NC NC NC -10,000 Remove the receivable from A/R, and add a short-term note receivable.
+50,000 NC +50,000 NC An increase in the cash account and an increase in the contributed capital account. +2,000 NC NC NC -2,000 An increase in the cash account and a decrease in the accounts receivable account. +500 NC NC NC -500 An increase in the prepaid insurance account and a decrease in the cash account. +200,000 +200,000 NC NC An increase in the equipment account and an increase in the notes payable account. NC +1,400 -1,400 -1,400 An increase in the interest payable account and an increase in the interest expense account, therefore, the decrease in net income. +1,000 NC +1,000 +1,000 An increase in the interest receivable account and an increase in interest revenue, and therefore both net income and retained earnings (part of shareholders’ equity)
Introductory Financial Accounting, v.1.1
Problem 1-9 1. Sales Cash received for sales Less cash received for previous year sales Plus Sales not paid for in current year Sales – accrual basis Purchases Cash paid for purchases Less advance payment Plus prepaid purchases Purchases – accrual basis Cost of Goods Sold Beginning inventory Plus purchases Cost of goods available for sale Less ending inventory 20x6 $ 60,000 (5,000) 20,000 $ 75,000 20x7 $ 70,000 (20,000) 0 $ 50,000
$ 40,000 (2,000) 0 $ 38,000
$ 35,000 0 2,000 $ 37,000
0 38,000 38,000 (3,000) $ 35,000
$ 3,000 37,000 40,000 (5,000) $ 35,000
Revised Income Statement Sales Less Cost of Goods Sold Gross margin Other expenses Operating income Profit Margin (30,000/75,000) (2,000/50,000) * 14,000 – 1,000 personal expenses 2. Revenue recognition principle – revenue must be recorded when earned, it can be measured, and the collectability is reasonably assured, not when cash payment is received. Mr. Cash violated this by recording “sales” on a cash basis. Matching principle – all expenses must be recorded in the same period as the revenue that the expenses were incurred to generate. Mr. Cash violated this principle by simply using cash paid for purchases instead of calculating the proper COGS. Economic entity principle – a business should only report on transactions that are under its control. By including his own personal expenses Mr. Cash crossed the line between “personal” and “business” and violated this principle. $ 75,000 35,000 40,000 10,000 $ 30,000 40% $ 50,000 35,000 15,000 *13,000 $ 2,000 4%
Introductory Financial Accounting, v.1.1
Problem 1-10 a. Revenue should be recognized when the trees are sold to the customer during the Christmas season because that is when the benefits and risks of ownership pass from the company to the customer. Until then, the company does not know whether any customers will buy their trees, or how much the customer will pay for the trees (measurement of amount). There is so much competition and one never knows how many trees will be sold. Some trees may have to be discarded if they do not sell. Also, at the time of the sale, cash is collected so there is no uncertainty as to collectability. The company has little or no risk once the tree is sold because it is very unlikely that the tree will be returned. The annual cost of fertilizing, pruning and maintaining the trees should be capitalized as a cost of inventory. In effect, the trees are like work-in-process inventory. Then, when the trees are sold, all of these costs will be expensed as cost of goods sold. This is an example of the matching principle and the point of sale recognition method.
Introductory Financial Accounting, v.1.1
Problem 1-11 a. Dec 1 Cash Capital Stock Furniture and equipment Cash Note payable Cash Revenues Accounts Receivable Revenues Office supplies Accounts Payable Cash Accounts Receivable Wage expense Cash Rent expense Cash Office supplies expense Office supplies $6,000 $6,000 4,000 1,000 3,000 680 680 1,875 1,875 300 300 1,875 1,875 1,300 1,300 1,000 1,000 100 100
Operating income for the month ending December 31, 20x6 would be: = $680 Sales + 1,875 Sales – 1,300 Wages Expense - 1,000 Rent Expense - 100 Supplies Expense = $155
Introductory Financial Accounting, v.1.1
Assets BALANCE SHEET Accounts Receivable 100 700 720 120 Note Rec - Cur 100 100 Liabilities & Equity Accounts Payable 500 100 520 120 Wages Payable 8 8 15 15 Inventory 160 440 520 240 Interest Receivable 16 16 8 8 Prepaid Fire Ins. 3 3 36 4 32 Retained Earnings 26 322 Capital Stock 110 Inc Taxes Payable 4 4 5 5 Dividends Payable 26
B b d e f
Cash 21 500 180 193 700 189 24 74 100 36 19 14
g h i j k l
B b E
B a E
B q E
B a E Equipment 110 74 184 Acc Dep 66 30 96 Note Rec - LT 100
B r E
B j E
B n E
B p E
B k E
Introductory Financial Accounting, v.1.1
Expenses COGS 440
INCOME STATEMENT Salaries and Wages 185 15 200 Insurance 3 4 7 Income Taxes 15 5 20
Revenues Sales 900
h q E
o o E
Interest Revenue 8 8 16
e n E
l r E
Introductory Financial Accounting, v.1.1
Ruiz Pharmacy Income Statement for year ended December 31, 20x2 (000's) Sales Cost of goods sold Gross margin Operating expenses Salaries and wages Miscellaneous Insurance Depreciation Operating income Interest revenue Net income before taxes Income tax expense Net income 200 189 7 30 $900 440 460
426 34 16 50 20 $30
Ruiz Pharmacy Statement of Retained Earnings for year ended December 31, 20x2 (000's) Retained Earnings - beginning Net income Dividends Retained Earnings - ending $322 30 (26) $326
20x2 (000's) ASSETS Current Assets Cash Accounts receivable Accrued interest receivable Merchandise inventory Prepaid fire insurance Noncurrent assets Note receivable Equipment Accumulated depreciation $14 120 8 240 32 414 100 184 (96) 88 188 $602 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Accrued wages payable Accrued income taxes payable Dividends payable Shareholders' Equity Paid-in Capital Retained earnings $120 15 5 26 166 110 326 436 $602 . v.1.Introductory Financial Accounting.1 Page 179 Ruiz Pharmacy Balance Sheet as at December 31.
000 12.000 62.000 14.1 Page 180 Problem 1-13 Assets Cash 30.000 215.000 Prepaids 14.000 Interest Payable 8.000 25.000 25.000 775.500 B 9 E Furniture & Fixtures 190.000 BALANCE SHEET Accounts Rec.000 Capital Stock 110.500 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. 7.000 600.800 Sal.500 745.000 B E B 10 Retained Earnings 4. v.000 16.000 323.000 200.000 21. 123.000 31.800 6.Introductory Financial Accounting.000 Taxes Payable 20.500 260.00 515.000 850.500 6.000 Liabilities & Equity Accounts Pay 600. Depreciation 40. Pay.000 16.1.000 Inventory 446.000 575.000 850.500 8.000 375.000 225.000 80. And Com.500 547.000 20.000 10.000 100.000 4.000 12.000 15.000 8.000 20.000 22.500 20.000 375.000 9 13 Long-Term Notes Payable 20.000 Acc.000 8 Rent Payable 27.000 24.000 B .000 265.
000 13 14 Other 225. v.1.500 Revenues 3 COGS 345.000 21.000 .000 4 2 9 9 9 9 E Rent 14.000 8.000 27.800 12 Depreciation 22.350.000 12.000 7 7 E Income Tax 15.Introductory Financial Accounting.000 Interest 6.000 70.1 Page 181 Expenses INCOME STATEMENT Salaries and Commissions 207.000 Sales 1.000 27.
1 Page 182 Peter’s Appliance Shop Ltd. Aug 31.000 225.000 $46.500 80.800 73. 20x5 Retained Earnings. v. 20x5 $260.350.000 524. Income Statement for the year ended August 31.000 207. Statement of Changes in Retained Earnings for the year ended August 31.000 22.000 745.700 Peter’s Appliance Shop Ltd.200 .700 -4.1.000 605.500 6.500 $302.500 70. 20x4 Net income Dividends Retained Earnings.Introductory Financial Accounting. 20x5 Sales Cost of goods sold Gross margin Operating expenses Salaries and commissions Rent Amortization Other Operating income Interest expense Net income before taxes Income tax expense Net income $1.000 46.700 27. Sep 1.
070.200 $1.000 16.300 110.800 27.000 $1.000 917.000 -62.Introductory Financial Accounting.070.000 7. 20x5 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Fixed Assets Furniture and fixtures Less accumulated amortization $ 31.500 323.000 153.500 215.000 302.000 547.000 658. v.1.300 80.500 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 $515.000 10. Balance Sheet as at August 31.000 578.500 .500 6.1 Page 183 Peter’s Appliance Shop Ltd.200 412.000 12.
152 (52) 180 $3.300 580 1.020) Adjusted cash balance per books.280 $6. Cash Accounts receivable Bank service charges Cash $180 $180 52 52 $3.1.288 Problem 2-2 a.700 (5. 2. v. $15.000 (77.225 63 $4.1 Page 184 Problem 2-1 1.$1.200 = $21. before adjustments Less bank service charges Add error in recording cheque ($1.Introductory Financial Accounting.095 + 9.200 .548) 3.300) $3. Dec 31 Cash balance per bank.280 .700 – 3. Cash balance per books. Dec 31. c b b The balance on the bank statement will be overstated by $360.595 Balance per bank statement Add deposits in transit Balance per books $4. 3. Dec 1 Add cash received during December Less cash payments made during December Cash balance per books.700 77. December 31 Add Sparg cheque deducted in error Add deposits in transit Less outstanding cheques Cash balance per books b.
980) $4. Cash balance. $ 480 6.915 180 (35) (360) $4.200 $780 1.700 (1. Cash Accounts Receivable To record error in deposit made ($530 – 350 = $180).Introductory Financial Accounting. 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. v. Bank service charges Cash To record bank service charges for the month.200 $4. March 31. 20x7 Add outstanding deposits Less outstanding cheques # 201 # 533 Cash per books. March 31. Office equipment Cash To correct error made in recording of purchase of office equipment: $620 – 260 = $360.1 Page 185 Problem 2-3 1.700 $180 $180 35 35 360 360 . 20x7 2.1.
Either way.000 3. v.000) 12.000 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.000 3. 20x0: Unrealized gain (loss) ($2. b) Cash Other Comprehensive Income Temporary investments . then the net unrealized gain will be part of the Other Comprehensive Income section of Shareholders' Equity.XYZ Computer Gain on sale of investments Cash Other Comprehensive Income Temporary investments .000 70.000 3.000 31. 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 $2.1 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. Trading investments are those that are held for re-sale as part of a portfolio of managed securities held for a short-term.000) $ 8.1.000 $35.000 .Introductory Financial Accounting. If the securities are classified as available for sale. then the net unrealized gain flows through net income.000 (4.000) (1. If the securities are classified as trading investments. Available for sale securities are defined by what they are not: they are not long-term investments nor are they trading investments.000 7.
4.700 will be charged to net income. an unrealized holding loss of $4. v. an unrealized holding gain of $1.700 . .500) (1.1.500) ($4.000) will be credited to net income.000) 20x2 ($4.200) ($5.Introductory Financial Accounting. In 20x1.000 – 8.000) (3. In 20x2.000) (1.000) ($8.1 Page 187 Problem 2-5 a) Security A Security B Security C 20x0 ($2.500) b) In 20x0.700) 20x1 ($500) 0 (3.500) will be charged to net income. an unrealized holding loss of $5.500 ($4.700 ($5.500) (2.
20x8.000 cr.000 3.000 3.000 3.900. Adjustment $13.000 Sales – 360.000 A/R Begin + 400. Write-Offs + 3.000 Before: $3. 2004: $1.1 Page 188 Problem 3-1 1.000 Write offs) = $100. a Balance in allowance account at the end of 20x9 before adjustment for bad debts: $5.000 cr. $3.000 – 30) – (125 – 30) = $2. .000 dr.000 cr. Recoveries Adjustment required Bad debt expense Allowance for doubtful accounts 86. December 31.000 x 3% $97. Dec 31.350 cr.000 c. Beginning Bal – 20. before adjustment $11.800 Bad debt expense = $6.600 Balance in Allowance for Doubtful Accounts. Write offs $9.200.000 Collections – 55. Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable b. v.000 x 0. 11.000 x 4% 4.000 cr.000 Beg Bal + 14.5%) Allowance for doubtful accounts Accounts receivable balance.000 71. Required balance at December 31: ($80.000 dr.1. a Problem 3-2 a. Bad debt expense ($14.000.000 71.800 = $1. December 31.Introductory Financial Accounting.245.000 cr.875 After: ($3.000 dr.350 cr. d 3. $86. Beg Bal + 55.400 – 4.000 Credit Sales – 11.000 – 125 = $2.000 Collections – 20.350 86.000 3.200.000 Write-offs Allowance for doubtful accounts.875 2.000 $55.350 $55.000 – 500 + 300 = $4. 2004 Balance in allowance before adjustment $63.
800.840 cr.915.290 .000.770 cr.000.1 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 7.480 3.000 16.000 7.000 2.000 43.000 7.000 3.000 2. v. (Schedule) $2.000 27.000 2.000 2.000 $2.800.Introductory Financial Accounting.290 31.000 31.400.915.480 43.000 16.1.000 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 27.400.
000 $442.000 442.000 $27.000 7.340 4.000 25.000 16.000 $384.000 12.1 Page 190 20x0 Bal 20x1 Accounts Receivable 2.770 .000 384.000 Allowance for Doubtful Accounts 16.000 1% 5% 20% 80% $ 2.000 90.480 27.Introductory Financial Accounting.000 45.770 20x0 Bal 20x1 Bal Bal Schedule – Calculation of the Allowance for Doubtful Accounts December 31.000 60. 20x0 0 – 30 31 – 60 61 – 90 Over 90 $234.915. v. 20x1 0 – 30 31 – 60 61 – 90 Over 90 $277.770 4.480 27.1.000 2.290 38.000 43.000 15.500 9.000 31.000.000 27.000 20.800.000 7.000 80.000 3.840 December 31.000 1% 5% 20% 80% $ 2.000 12.000 $38.000 2.400.000 7.
500 1.000 Note Receivable 3.Introductory Financial Accounting.275 30 30 2.500 Write-offs .000 Credit Sales – 1. .000 x 12% x 1/12) 6.000 500.000 Beg Bal + 500.000 400.000 Collections – 3.000 3.275 cr. December 31.1. Bad debt expense** Allowance for doubtful accounts **($500. 20x7 Balance in allowance before adjustment: $2. Beg Bal + 1.000 x 2%) 10.500 x 5% $6. Write-offs Adjustment required Bad debt expense Allowance for doubtful accounts Interest receivable Interest income* *(3. 20x7: $40.400.500 dr. v.500 400. 6.1 Page 191 Problem 3-4 1.000 10. 31.000 $135.000 cr.775 cr. $6.000 500.500. Accounts receivable Sales Allowance for doubtful accounts Accounts receivable Cash Accounts receivable Note receivable Accounts receivable Accounts receivable balance. Allowance for doubtful accounts.275 500 cr. Dec.000 = $10.000 Note: The allowance account will now be $500 + $10.000 1.
000 50.000 56.1.500 50. b Opening Inventory Purchases – net: $500.000 50. c c d Czech should have recorded this sale in 20x8 since the goods were shipped FOB Shipping. 4. v. Delivery expense Cash Sales returns and allowances Accounts receivable Inventory ($500 x 70%) Cost of goods sold Cash ($79. . Inventory Accounts payable Accounts payable Cash ($50.000 49.000 (66.590 79.500 x 98%) Sales discounts Accounts receivable d.000 509.000 x 99%) Inventory $80. Accounts receivable Sales Cost of goods sold ($80. Problem 4-2 a.200 1.Introductory Financial Accounting.000 2.200 500 500 350 350 77.000 $80.000 1. e. 3.000 – 10.000 – 6.000 56.000 x 70%) Inventory b.000) $503.910 1.000 Ending inventory Cost of goods sold $60.1 Page 192 Problem 4-1 1.500 500 c.000 + 25.
1.000) Unit Cost Total Cost 18.500 units 1.000 33.000 48.3333 $300 990 770 1. Date May 1 May 5 May 14 May 21 May 29 c. Purchases (Sales) Units 60 (20) 35 (50) Unit Cost Total Cost $11.500 1.00 $12.500 b.190 623 Accounts receivable Sales Cost of goods sold Inventory (10 units x $10) + (40 units x $11. v.000 Units 1.000 44.000 .100 560 560 Problem 4-4 a. b.50 11.00 23.000 3.50) $1.100 $1.3333 $690 (220) 420 (567) Units 30 90 70 105 55 Balance Unit Cost Total Cost $10.00) + (20 units x $11.000 500 3.000 (2.00 16. Ending balance = 1.000 (40.00 12.500 units x $23 = $34.00 11. Ending inventory = 55 units (35 units x $12.00 22.500 Balance Unit Cost Total Cost $12.500) 3.00 11.000 (2. Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Purchases (Sales) Units 2.Introductory Financial Accounting.000 77.00 11.000) 69.00 16.1 Page 193 Problem 4-3 a.50) = $650 Note that the results for FIFO periodic are the same as for FIFO perpetual.00 22.00 36.000 8.
Introductory Financial Accounting. 20x5 Units sold during year FIFO Sales COGS 3.000 52.929 .000 x $52 1.000 x $50 1. Weighted Average Sales COGS * Gross Profit 3.400 = $ 52.000 $ 179.140 $ 157.929 $ 159. January 1.000 x $52 930 x $58 $ 333.1 Page 194 Problem 4-5 a.000 $ 19.071 *400 x $48 1.000 3. 20x5 Purchases Goods Available for Sale Less Ending Inventory.000 x $58 3. December 31.7059/unit Cost of Goods Sold = 3.330 x $ 52.330 x $100 400 x $48 1.1.000 52.200 50.330 x $100 $ 333.400 70 3.200 = $179.400 Weighted Average Cost per unit $ 19.200 50. v.7059 = $ 173. Beginning Inventory.200/3.000 173.940 Units 400 3.000 x $50 1.000 53.330 Gross profit 175.000 58.860 b.
000 608.000 42.000 5.000 Purchase Returns + 8.000 458.1 Page 195 Problem 4-6 Net Sales = $615. v.000 Sales Returns Estimated cost of goods sold Opening Inventory Net purchases: $480.1.000 15.000 10.Introductory Financial Accounting.000 19.000 10.000 x 70% $420.000 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 – 30.000 $188.000 $37.600 June 1 Accounts receivable Sales Cost of goods sold Inventory 30.600 400 20.000 $150.000 x 20% Problem 4-7 $600.000 30.000 42.000 5.000 x 2%) Accounts receivable Inventory Accounts payable June 12 .000 – 15.000 June 2 Sales returns Accounts receivable Inventory Cost of goods sold June 9 Cash Sales discount ($20.000 15.000 420.
000 3.000 2. Ending inventory – Weighted Average Average unit cost = Cost of goods available for sale/Units available for sale Average unit cost = $646.79/unit x 60 units Ending inventory = $58.050 each = = = $ 18. Cost of goods available for sale: 20 units x $900 each 440 units x $950 each 200 units x $1.1 Page 196 Problem 4-8 1.Introductory Financial Accounting.727 .000/660 units Average unit cost = $978.000 210.050 each = $ 63.000 $ 646.1. v.000/(20+440+200) Average unit cost = $646.000 418.79/unit Ending inventory = $978. Ending inventory – FIFO: 60 units X $1.
December 1. The savings generated by purchase discounts generally make it worthwhile to borrow to take advantage of the purchase discount.Introductory Financial Accounting.000 (1. the full amount of $50.3).500 on a base amount of $48.300 c.000 50. If payment was not made within the discount period.000 48. . For example.000 $ 150. much higher than the 10% borrowing rate.000 would need to be paid on the due date.300 30. It would be equivalent to interest of $1. There are 24.000 3.09 24.000 ii) Accounts Payable Cash Purchase Discounts iii) Accounts Payable Purchase Returns iv) Transportation-In Cash b.300 230.300 3. Cost of Goods Sold Schedule for the month ended December 31.09% (3.500 1.000 80. 20x7 Merchandise inventory. it may cost a company 10% to borrow the funds.500 by paying 15 days early.200) (1. i) Purchases Accounts Payable 80.000 80.500 1. whereas the purchase discount may generate a savings which would equate to an effective interest rate much higher than 10%.1 Page 197 Problem 4-9 a. thus giving an annual percentage cost of missing the discount of 75. v. 20x7 Purchases Less: Purchase returns and allowances Less: Purchase discounts Net Purchases Add: Transportation-In Cost of goods available for sale Less: Merchandise inventory. discounts taken under a term of 3/15.3 15-day periods in a year (365/15).000 $200.500) 77.500 (3. In December. TOYJOY LTD. n30 generated savings of $1.200 3. December 31.1.09%) for a 15day period (30 days – 15 days).200 1. 20x7 Cost of goods sold $ 80.
000 – 36.000 **74.60 = $36.000 U N/A 5.40% = 60%.000 O Problem 4-11 Sales.000 U N/A N/A 20x6 Retained Earnings 10.000 = $74.000 .1.000 110. Therefore.000 10. January 1 to January 13 Cost of goods available for sale Less estimated ending inventory.000 x .1 Page 198 Problem 4-10 Error i) ii) iii) 20x6 Cost of Goods Sold 10. 20x7 Purchases. January 13.000 U 5.Introductory Financial Accounting.000 U 6. January 1 to January 13 Inventory. 20x7 Estimated Cost of Goods Sold* Estimated Gross Profit ($60. estimated COGS = $60.40) $ 60.000 36.000 Cost of goods available for sale – COGS = Ending Inventory $110.000 x .000 O 20x7 Cost of Goods Sold 10.000 * ** If Gross Profit = 40%.000 O 5. v. then COGS = 100% . January 1.000 O 6.000 U 20x6 Ending Inventory 10.000 $ 100.000 $24.
000 8.200) 72.600 126.700 106.Introductory Financial Accounting.500 14.000 = $8.800 (53.000 Balance Unit Cost $7.700 106.000 (5.500) Purchases (Sales) Unit Cost $8.00) = $178. Ending inventory = 6.400 d.500 9.000 (47.1 Page 199 Problem 4-12 a.500 58.500 Total Cost $47.509 = 100.00 From Purchase # 1: 1.40 .500 Units available for sale = 6.250 + 47.40 Ending Inventory Cost of goods sold Cost of goods available for sale Less ending inventory $72.800 54.000 = 21.250 125.000 8.400) $ 98.000 Unit cost = $178.19231 8.000 Cost of goods available for sale = (6.000 (6.000 x $8. Units 7.000 units @ $9.50 = $76.500 + 8.500 COGS = 12.000 (6.250) 72.000 units @ $8. Units 7.000 + 7.000) (500) 8.500 53.100 Balance Total Cost $58.000 13.000 – 5.50 Ending inventory = 9.95 8.000 7.000 x $7.500 (80.95000 8.759 c.1.000 6.000 6.509) Units 6. From Purchase # 2: 8.000 13.63793 Total Cost $47.500 = 9.400 $80.40000 9.50 = $102.40 9.000 + 7.000 (46.800 (47.00000 Total Cost $58.000 14.500) 8.250 77.000 x $9.500 / 21.700) (4.00 8.741 COGS = $53.600 80. v.000 b.400 $178.000 x $8.40) + (8.000 x $8.000 + 8.000 (5.000 – 6.200) Units 6.95) + (7.500) Purchases (Sales) Unit Cost $8.40 7.
000/80.000 + 5. and not the legal life of 17 years.500 x 430 = $5.075.000 – ($85.000 – 150.000 x . d) ($80. Depreciation expense = $12.000/year) = $10. Estimated salvage value = $100.160 To move to the units-of-production method.000) / 10 = $4. 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. 6. we must first know the salvage value of the machinery inherent in the problem.000 – 5.000 – 10.1 Page 200 Problem 5-1 1.750 .000 / 9.5 x 6/12) Net book value = $63.000 ($20.Introductory Financial Accounting.000 + 15.5 x = $600 $1. v. a d ($200.000)] Net book value = $77. 3.000 + 60.000.000)/10 = $8. Note that we use the estimated useful life of the patent.000 Net book value = $100. d c c Net book value = $85. 2. c Double-declining-balance rate = x 2 = 50% 4.1.000 x 90%) / 1.000 – [($100.500/year.000 = $1. 5.500 7.000 – (5 years x $18.500 It is assumed that the addition should be capitalized and depreciated since it qualifies as a capital asset.000) x (20.
000 – 5.000 b. Amortization expense for 20x8 = ($53.000) / 5 years 20x7 Amortization expense Accumulated amortization $65.000 x 55.000 17.000 20x8 15. Amortization expense Accumulated amortization ($65.1.000 .000 Net book value = $65.000 Amortization expense Accumulated amortization 17.000 x 40% (1/5 x 2 = 40%) Amortization expense Accumulated amortization ($65.000 16.600 c.000 26.1 Page 201 Problem 5-2 a. Amortization expense Accumulated amortization ($65.500 d.000 – 26.000 – 5.500 16. 26.000) / 200.Introductory Financial Accounting.600 15.000 – 12.000 = $53. v.000) / 3 = $17.000 – 2.000 $12.000) x 40% $12.
000 9.000 55.000 10. 20x5 Dec 31. v. 20x7 20.000 = $10.1 Page 202 Problem 5-3 (a) Jan 2.656 25. 20x3 Aug 31.656 4.286 82. 20x4 600 600 10.500 10.000 20. 20x7 Aug 31.714 1.000 2.808 9.750 Oct 31.500 Dec 31.000 10. 20x6 10.000 2. 20x5 Dec 31.000 / 32 months remaining = $62. 20x4 Apr 31. 20x5: $2.750 10.000 10.000 .Introductory Financial Accounting.000 Dec 31.000 $60.50 x 12 months) Equipment Cash Amortization expense Accumulated amortization See Schedule 1 Amortization expense Accumulated amortization $582 x 8 months Cash Accumulated amortization Loss on disposal of equipment Equipment $60.1.000) / 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. 20x3 Equipment Cash Amortization expense Accumulated amortization (60.808 Dec 31.500 Amortization expense Accumulated amortization $10.000 10.000 + ($62. 20x7 4.50 / month x 8 months = $500 + 10.
000 (10.500) $105.750) (8.500 50. 20x5 Less Amortization expense 20x3 20x4 20x5 20x6 20x7 to Sep 30: $10.500) (10.000 $108. v.1.688 + 20.000 $18.1 Page 203 Schedule 1 Amortization expense for 20x7 Net book value of asset at Sep 30.500) Acquisition price of new lathe ** NBV of asset at time of exchange = $50.500 $11.000 2.750 x 9/12 $60.000 – 38.Introductory Financial Accounting.000 Less fair market value of asset traded in (15.000 – 90.688 Amortization expense – Sep 30 to Dec 31. 20x7 ($12.500 38.000) (10.000 .746 Total amortization expense for 20x7 = $8.500 Market value of asset Gain on sale (2.000 * Price of new lathe Less trade-in value less fair market value of asset traded in: Trade in value: $108.746 = $9.000 90.000 – 10.000 4.000) (10. 20x7 Original cost of asset Capitalization made on April 1.062 + 1.500 $ 4.500 15.000) / 39 months = $582 per month x 3 months = $1.062) $12.808 Problem 5-4 Equipment (new lathe)* Accumulated amortization (old equipment) Equipment (old equipment) Cash Gain on sale of asset** 105.
000 3.000 9.Machinery **($27. 2.Introductory Financial Accounting.000) $18.000 Installation Charges = $27.000 The cost plus installation.000* 27. Machinery Cash 27.1 Page 204 Problem 5-5 1. Machinery Less: accumulated amortization $27.000 2.000/year $6. The freight is included in the cost but the repair is not to be capitalized.000** 3.000 x 6/12 = $3.000 Cost of machine + 2. Amortization expense Accumulated amortization .000 (9.000 – $3.000 *25.000)/4 = $6.1. Cash Accumulated amortization – Machinery Machinery Gain on sale of assets .000 for 6-month period 3.000 4. v.000 27.000 20.
250 $120. i.000 + 18.000 x 12.500 – 20.000 – 20.000 – 20. v. i.750 1.000 b.000 Units-of-production method = (120.000 43.000 $=75.000)/(5-1) = $18. Straight-line method = (120.000 45.183 183 120.000 = $22.500 Straight-line method = (120. c.683 Cash Accumulated depreciation ($25. ii.000) / 41.750 Units-of-production method = (120.500 + 23.1.000)/4 = $25.000 – 20.000 – 25.683) Gain on disposal of equipment Equipment $75. ii. ii.Introductory Financial Accounting.000 = $22.000 – 22.1 Page 205 Problem 5-6 a.750) Loss on disposal of equipment Equipment Cash Accumulated depreciation ($22. i.000 x 9. .000)/40.
c.750 .1 Page 206 Problem 5-7 a. i.e.000 Depreciation expense: ($157.$140.000 – 15.750 Note that the interest charge of $12.750 x 3 years Net book value Less proceeds on disposal Loss Cash Accumulated amortization Loss on disposal Machine $100.800) 5.000) $ 3.Introductory Financial Accounting. A double-declining-balance amortization method could be used to abide by the president’s request. if the machine generates less revenues as it gets older. then this method should not be used.000 cannot be capitalized to the asset since the asset was purchased and not self-constructed. Costs capitalized: Invoice price Less discount .000 $157.. Under this method.000 x 2% Customs and duty costs Preparation and installation costs b.000 (53. Cost Less accumulated depreciation: $17.750 (100.800 $157.750 157.000 53.000 14.000 (2.1. $140. amortization is high in the first year and decreases in amount as years go by. If the machine does not provide decreasing benefits.000) / 8 = $17.250 3.250) 103. This method is acceptable under GAAP if it properly reflects the pattern of benefits received from using the machine. v.
375 The journal entry to record the actual costs incurred during the year would be: Premium Liability ((22. 2.500 .321 4.000 (9.000 / 5 x $2 x 30% Premium redemptions: 23.Introductory Financial Accounting. a b b) PV of bonds at issue: PMT=800.472.600 Problem 6-2 The premium expense would calculated as follows: $375.000. 6.1 Page 207 Problem 6-1 1.000.375 The journal entry to record the premium expense would be: Premium Expense Premium Liability 34. FV=10. c c b Premium expense: 150.500 / 5 x $2 $18. N=10.375 34. v.500 37. 3. Interest expense for the year = $11.018. 5.472.000 /10 coupons /15 redemption ratio x $25 x 55% = $34.000 PV=$11.018 x 6% = $688.500/15) x $25/card) Cash 37.1.400) $ 8. I=6%.
000 $150.554 .554 PMT 25000 FV 500000 Enter Compute The journal entry to record the issuance of these bonds is as follows: July 1. v.000.1. 20x2 would be as follows: Jun 30. Problem 6-4 The value of the bond issue will be as follows: N 10 I/Y 4 PV X= 540.378) x 4% Bonds payable Cash 21.622 3.000 The warranty liability at the end of the year will be $165.000 The journal entry to record the interest payment of Jun 30. A/P. 20x1 Interest expense (540.000 130.000 Warranty Expense – 130.000 Opening Balance + 150.554 The journal entry to record the interest payments using the effective interest method of amortization is as follows: Dec 31. Inventory 130.513 25. 20x1 Cash Bonds payable $540.1 Page 208 Problem 6-3 The journal entry to record warranty expense is: Warranty expense ($3.554 $540.000 $150. 20x2 Interest expense (540.000 .000.000 Warranty Costs Incurred = $185.000 x 5%) Warranty Liability The journal entry to record actual warranty costs incurred is: Warranty Liability Cash.3.554 x 4%) Bonds payable Cash 21.378 25.487 3.Introductory Financial Accounting.
I = 4.000.708 425.Introductory Financial Accounting. The journal entry to record repairs as performed is debit Warranty liability. 20x5 Problem 6-6 1.984 8.000 417.301 $432.301 x 4%) Premium on Bonds Payable Cash Interest expense* Premium on Bonds Payable Cash * (10.1.000. 20x5 Dec 31.800 = $10. v.000 + 5. $10.292 7.000.1 Page 209 Problem 6-5 PV of bond issue: N = 30.432. FV = 10.000 $10. PMT = 425. 20x4 Cash Premium on Bonds Payable Bonds payable Interest expense ($10.016 425. Therefore.800. 4. credit cash/inventory/etc.200 – 6.301 – 7.301 Dec 31. $6. the total credits to the account for the year is the warranty expense for the year.000. 3. .200 2.432. Solve for PV = $10.432. the total debits to the account for the year is the total cost of repairs made during the year.432. Therefore.708) x 4% $10.000.301 10.000 416. $5.000 Jun 30. The journal entry to record warranty expense is debit warranty expense credit warranty liability.
20x6 20.097 20.1.714 – 2.Introductory Financial Accounting.445 20. 20x7 Jul 1.500 Jan 1.403 x 4% Interest payable $513.937 – 2.074 – 2. 20x6 Dec 31.500 FV 500.223 = $504.129 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $511.129 – 2.524 1.074 x 4% Bonds payable Cash Interest expense $509.1 Page 210 Problem 6-7 Proceeds on bond issue: N 6 I/Y 4 PV $513. 20x8 20.137 = $506.277 2.500 Dec 31.363 2.277 20.937 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $506.500 Dec 31.445 20.500 Jul 1.097 .223 22.976 = $511.137 22.105 $513.976 22.105 20.105 PMT 22.055 22.714 x 4% Bonds payable Cash Interest expense $504. 20x6 Cash Bonds Payable Interest expense ($513.277 20.000 Enter Compute Jan 1. 20x8 20.311 = $502. 20x7 20.105 – 1.311 22.500 Jan 1.445 2.055 = $509. 20x7 20. v. 20x8 Jul 1.189 2.105 x 4%) Bonds payable Cash Interest expense $513.
June 30.591 PMT 60000 FV 1000000 2.171.591 x 5%) Bonds payable Cash (1.420 60.Introductory Financial Accounting. v.000 3. Enter Compute N 40 I/Y 5 PV X= $1.171.591 $1.000.000. July 1.000 x 12% x 1/2) *Bonds payable balance as of June 30.491 60.591 58.1.1 Page 211 Jan 1.000 500.591 – 1. 20x7 .171.000 Problem 6-8 1.171.000 58. 20x6 Cash Bonds payable Interest expense (1.500 500. 20x9 Interest payable Bonds payable Cash Bonds payable Cash 20. 20x6 4.509 1.403 22.420) $1.171* x 5%) Bonds payable Cash (220.127.116.110 1.000 x 12% x 1/2) Interest expense (1.097 2. 20x7 ($1. Dec 31.
c. b.000 + 4.000 True.093 = $89. The cash outflow is $80.093 5. v.1.000 $45.000 x 10% x ) Bonds payable Cash ($1.943 False False.000 exactly.850) x 10% x Bonds payable Cash ($1.000.Introductory Financial Accounting.850 + 45.850 40. .000 x 8% x ) a.850 4. Interest expense for 20x7 = $44. $44.000. d.093 40. 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. The interest expense will increase every year since the book value of the bonds payable will also increase.
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 26 126.000 2. $6.000 21.000 February 10 February 15 February 26 12.000 x $0. Problem 7-2 1.080 14.080 2.400 2.$14.400 14. 44.000 40.32 $14.000 2.080 February 27 February 28 21.000 40.400 .000 . c 150.520 $217.1. non cumulative.000 shares outstanding after the split.000 126.000 shares issued and outstanding Preferred Shares. v.080) Total Shareholders’ Equity $ 138.000 12.520 .1 Page 213 Problem 7-1 1.000 shares x 3/2 = 225.000 44.Introductory Financial Accounting. 400 shares issued and outstanding Retained Earnings ($0 + $56.000 39. Shareholders’ Equity Common Shares.000 40.$2.
000 3.000 3.000 Net Income – 15. e. 2.000 3. f.000 53.500 Dividends) $348.000 180. h. issued and outstanding 3. a.500 50.500 $456.000 48.000 20.000 12.1.Introductory Financial Accounting.000 b.000 40.000 Retained Earnings ($64.000 $115.1 Page 214 Problem 7-3 1.000 40.000. issued and outstanding 3. v.000 3. Shareholders’ Equity Common Shares. g.000.000 60.000 20. cumulative – authorized 50. d.500 . c.000 3. 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. authorized 100.500 12.000 Preferred Shares.000 180.
1.000 960. 3.000 25.600.000 1.600 x 3%) Bonds payable Cash ($400.000 5. .000 16.000 16. 8.600.400 320.520.576 424 13.1 Page 215 Problem 8-1 a.000 5. 7.000 x 6.588 412 13.000 945.1.000 2.5% / 2) Interest expense ($419.000 1. 10.000 945. Purchases Accounts payable Accounts Payable Purchase returns Cash Common stock Accounts payable Cash Salaries payable Salaries expense Cash Interest expense ($419.000 5.520.000 75.600 – 412) x 3% Bonds payable Cash ($400.5% / 2) 11. 4. 9.000 5. 6.000 25.000 12.000 34.000 $1. Accounts receivable Sales Cash Accounts receivable Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable 5. Equipment Cash Warranty liability Cash $1.000 34.000 5. v.000 12.000 x 6.Introductory Financial Accounting.000 960.000 75.000 30.000 30.600 314. 12.
000 dr.400 2.400 130. 2. $4. $23.000 130.400 3.000 + 3. 18. 17.400 Balance required: $2.930 16.000 + 75.000 40. Income taxes payable Cash Common shares (1. + 34. + 5.690 22.1.000 17.000 dr.000 14.320 3.000 cr.000 x $17. = The balance in the allowance for doubtful accounts should be: $144.31 Prepaid insurance Cash Operating expenses Cash Bad debt expense Allowance for doubtful accounts The balance in the allowance for doubtful accounts is: $23.930 dr.310 4.000 23.31*) Retained earnings Cash * Average book value per share = $150.930 cr.400 + 2. v.400 $3.400 x 2/12 Insurance expense 3.000 17. $6.000 cr. Insurance expense Prepaid insurance Balance in prepaid insurance account: $1.000 / (10.400 .010 4.930 23.000) = $17.000 x 20% 12.000 x 50% Bad debt expense 40.000 x 7% 23.600 6. 15.000 x 3% 43.Introductory Financial Accounting.1 Page 216 13.800 400 $3.
000 – 16. amortization – building* Acc. Amortization expense Acc.000 24.000 24.Introductory Financial Accounting.000) $886. Warranty expense Warranty liability $1.000 1.250 39.000 / 8 = 4.702 23. Cost of goods sold Inventory ($378.000 80.000 16.000 – 320.400 *** $34.700 80.000 13.000) Purchase returns Purchases Check: Opening inventory Purchases – net ($960.000 x 1.264.600. amortization – equipment** Patents*** * $300.000 13.000 Purchase) = $137.150 7.500 27.1 Page 217 19.400 4.000 – 38. v.000 960.5% Salaries expense Salaries payable Retained earnings Cash Income tax expense Income taxes payable $134.000 944.500 ** ($145.000 (378. 24.250 20.000 53. 6.702 22.000 NBV Beg + 30.000) Cost of goods available for sale Less ending inventory Cost of goods sold Inventory loss Allowance for decline in value of inventory 886.702 53.700 6.000 $320.256 x 40% = 53.000 / 40 = $7.000 58. .000 x 20% = $27.1.000 21.
000 25.250 29.000 2.000 Land 40.400 Allowance for Decline in Value of Inventory 13.930 17.000 945.1.000 5.000 5.000 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 24.400 2.520.000 127.000 75.Introductory Financial Accounting.700 6.000 Liabilities & Equity Accounts Payable 16.000 23.000 12.500 127.000 23.Equip 38.400 400 Building 300.000 207.000 5.000 5.700 B 22 E E B 20 E Prepaid Insurance 1.000 1.Bldg 120.000 40.000 13.600 6.000 59.000 4.500 Acc Amort .1 Page 218 Part (b) Assets Cash 36. v.702 25.000 222.702 Warranty Liability 25.000 75.200 80.000 30.000 7.000 126.000 945.600 BALANCE SHEET Accts Receivable 176.000 378.310 150.000 22.000 13 Inc Taxes Payable 40.000 12.000 1.000 Bonds Payable 412 419.600 5.690 B 24 B 15 E 18 B 12 B 21 B Acc Amort .520.000 B 19 E 10 10 B B 11 E Equipment 145.000 80.000 960.750 19 20 14 23 Retained Earnings 4.000 58.400 65.600.764 Common Stock 17.000 30.000 34.000 53.000 13.000 175.930 Inventory 320.000 1.000 B 19 14 B 7 E B E Patents 34.000 13.510 B E .690 144.000 Allow/Doubt Accts 34.000 27.000 15.400 3.000 320.400 130.600 424 418.
000 1 20 Cost of Goods Sold 886.000 17 Bad Debt Expense 23.000 960.702 20 Inventory Loss 13.000 INCOME STATEMENT Purchase Returns 16.576 25. 39. 53. v.000 .Introductory Financial Accounting.150 24 Income Tax Exp.100 Warranty expense 24.700 321.588 12.930 19 Amortization exp.600.000 16.000 Revenues Sales 5 20 20 6 1.1 Page 219 Expenses Purchases 960.400 6.400 21 18 16 Operating expenses 130.164 Insurance 3.1.000 9 22 E Salaries 314.000 10 10 E Interest 12.
000 65.400 130.196 Cr.930 39.000 23.1.930 378.150 13.600 222.000 127.196 $2. .600.000 3.000 $17.000 300.000 418.680.702 $2.000 321.680.000 6.000 53. v.000 400 40.690 59.000 886. 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. Haider Corporation Trial Balance As at December 31.400 29.1 Page 220 c. 20x6 Dr.510 1.000 13.164 24.750 126.100 25.702 12.500 175.Introductory Financial Accounting.764 207.700 25.
554 Haider Corporation Statement of Retained Earnings for the year ended December 31.702 $80. 20x6 $144. 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 $1.100 24.690) (80.580 159.1.420 25. v. 20x6 Net income Premium on redemption of common shares Dividends Retained earnings.000 321.1 Page 221 d.150 130.256 53.000 39. 20x6 Retained earnings.Introductory Financial Accounting.400 23.000 554.000 3.064 . Haider Corporation Income Statement for the year ended December 31.000) $140.000 714. January 1.200 80.000 886.930 13. December 31.164 134.600.554 (4.
v.400) 172.600 204.754 $936.000 (65.000 (127.702 12.500 109.166 207.750 351.070 365.920 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Shareholders’ Equity Capital stock Retained earnings $126.920 Land Building Less accumulated amortization Equipment Less accumulated amortization Patents – net .064 347.690 140.402 418.500) 175.700 25.1 Page 222 Haider Corporation Statement of Financial Position as at December 31.000 170.Introductory Financial Accounting.600 29. 20x6 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance $ 15.070 40.000 $300.1.850 $936.764 589.000 6.000 400 585.
12.600 x 9/24 Amortization expense Accumulated Amortization ($80.000 x 10% x 9/12 Amortization expense ($11.500 Warranty expense Warranty liability 10.800 3.000 – 4.000) / 10 Prepaid rent Rent expense $9.000 k. .600 e. 4.500 4.900 / 17) Patents or Accumulated Amortization – Patents Supplies inventory Supplies expense Increase in inventory = $9.600 x 5/12 Interest receivable Interest revenue $12.000 24. j. 16.600 $9.000 24.000 f.600 3.000 12. Bad debt expense Allowance for doubtful accounts $320. 4.000 l.1 Page 223 Problem 8-2 a.600 b.000 x 3% Wages expense Wages payable Insurance expense Prepaid insurance $9.700 4. 4.700 i.000 4.000 x 3% x $40 Allowance for doubtful accounts Accounts receivable Income tax expense Income taxes payable $9. v.600 c. 7. 360 360 g.000 16.1.600 7.800 4.Introductory Financial Accounting. 700 700 4.500 h.000 x 9% x 4/12 Interest expense Interest payable $60. d.200 – 4.
20x2 Sales (22.420 1.880 .270 800 424 250 13.770 Cash Sales + 5.630 1.1.800 .500 5.880 x 10% x 3/12 Principal payment.640 $44 .1 Page 224 Problem 8-3 MAS Inc.400 Baking Materials Purchases .2. v.920 .1.130 Rebate + 256 Payable .320 Collections on Credit Sales + 4.536 116 6.226 Uncollected Sales) Cost of goods sold Purchases (14.686 19.120 Prepaid) Advertising Depreciation (3.420 x 20%) Net income 1 Loan payment Less interest: $2.640 x 10% x 2/12 $312 72 240 2.500 + 240 Payable) Maintenance Utilities (4.000 + 270 Payable) Insurance (1.Introductory Financial Accounting. 20x2 (2.240) Interest April & May .840 Ending Inventory) Gross margin Operating Expenses Rent (1. 20x2 Loan balance.1.316 12. April 1. Income Statement for the five months ending May 31.284 $5.000 / 5 x 5/12) $32. April 1.300 Prepaid) Salaries and wages (5.136 Operating Income Interest (72 + 44)1 Net income before taxes Provision for income taxes (6.740 110 4.094 6.
640 .466) Accounts receivable Inventory Prepaid insurance Prepaid rent Fixed Assets Equipment Accumulated depreciation $2.960) Shareholder's Equity Common Stock Retained earnings $526 240 1.1.750 $12.600 .Introductory Financial Accounting.1 Page 225 MAS Inc.134 4.636 $12.734 2.680 4.000 -250 2.840 1.620 3.226 1.500 5. Balance Sheet as at May 31. 20x2 ASSETS Current Assets Cash (33.370 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 (2.31.284 44 960 3.136 7.370 .054 1. v.120 300 9.
20x1 ASSETS Current Assets Cash Marketable securities* Accounts receivable Inventory Noncurrent assets Equipment Accumulated depreciation $24.1 Page 226 Problem 8-4 Morrow Wholesale Balance Sheet as at December 31.000 155.000 80. $275.000 $338.000 63.000 SHAREHODLERS' EQUITY Shareholders' Equity Common stock Retained earnings * Plug to balance.Introductory Financial Accounting. v.1.000 19.000) 60.000 80.000 $338.000 .000 (20.000 278.
1.220 63.000 24.100 15.1 Page 227 Morrow Wholesale Income Statement and Statement of Retained Earnings for the year ended December 31. 20x2 Sales Cost of goods sold ($250.000) Miscellaneous Operating income Interest expense ($5.000 9.600 7. beginning of year Dividends Retained earnings.600 8.Introductory Financial Accounting.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.146.000 + 1.000 34.900 (300) 5.600) Depreciation (80.000 .000 x 80%) Gross margin Operating expenses Salaries (10.000 ÷ 10) Bad debts (155.000 50.000 200.000 4.220 . end of year 11.000 5.500 $250.000) $70. v.380 17.000 (10.
000 36. v.000) Accumulated depreciation (20.20.000 60.600 5.000 $216.000 70.500) Inventory (Note 1) Prepaid advertising Noncurrent assets Land (19.000 (96.000 $80.000 330.000 .380 60.000 .000 + 406.500 Note 1 .000) 52.000 (8.Introductory Financial Accounting.000 300 10.000 216.000 + 4.000) Equipment (80.280 275.500 96. 20x2 ASSETS Current Assets Cash (24.500 SHAREHODLERS' EQUITY Current liabilities Accounts payable Accrued wages payable Note payable Interest payable Dividends payable Income taxes payable Shareholders' Equity Common stock Retained earnings $36.000 .000 7.Inventory Purchases of merchandise A/P .20.1 Page 228 Morrow Wholesale Balance Sheet as at December 31.220 345.ending Purchases Cost of goods sold = Opening inventory Purchases Less ending inventory $180.000 $405.000 + 8.000) $224.000 10.000) $200.000 .220 $405.500 23.000 1.1.205.
12.000 15.600 Increase in Salaries Payable) Cash paid out for other operating expenses Cash paid out for interest ($32.500 .000 – 69.000 Sales .800 Cash flow from investing Proceeds on sale of equipment (Note 1) Purchase of equipment 20. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($45.1.000) 175.000 COGS + 7.10.000 Increase in Inventory .400 – 61.300 19.000) $ 5.500 Increase in cash ($175. Statement of Cash Flow for the Year ended December 31.900 47.000 Increase in Interest Payable) Cash paid out for income taxes ($79.000 $146. 20x6 Cash flow from operations Cash collected from customers ($7500.7.000 Interest expense .000 (125.000) (46.200 Increase in AP) Cash paid out for salaries ($120.1.500) Cash.000) Cash flow from financing Issue of bonds payable Dividends paid (Note 2) 30.000) Gain on sale Proceeds Note 2 – Dividends paid Net income Less increase in Retained Earnings ($108.100 Income tax expense – 33.Introductory Financial Accounting.000 Increase in A/R) Cash paid out to suppliers ($300. v.800) (112.100 Increase in Income Taxes Payable) $740.500) (69.000 (294. beginning Cash.000 $20.000) (105.000 Salaries Expense .000 – 40.200 $20.000) (31.400) (80.800 – 105.000 (99. Ginger’s Cookies Ltd.500) 1.400 $ 99.1 Page 229 Problem 9-1 a.
900 7.200 7.600 1.000 (15.100 $175.000) 12.Introductory Financial Accounting.000) (10.1 Page 230 b.800 .000) (7. Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Gain on sale of capital assets Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Increase in Accounts Payable Increase in Salaries Payable Increase in Interest Payable Increase in Income Taxes Payable $146. v.000 33.1.
000 (543.000) 353. end of year 1 Accumulated Amortization.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. beginning of year Amortization expense Accumulated Amortization on disposal: $158.1. end of year Amortization expense = $218.000) (37.000) (37. beginning of year Cash.000 .000 $3.Introductory Financial Accounting. v.000 Decrease in cash Cash.000 218.000) (11.000) 17.000) $3.000 $319. Statement of Cash Flow for the year ended December 31.000) (12.000) 7.000) (34.000 Accumulated Amortization.000) (5.1 Page 231 Problem 9-2 a.000) (463.000 ? (71.842.000 111.000 Cash flow from investing Proceeds on sale of assets Purchase of capital assets2 80.000) 350.695.000 – 87.000 (13. 20x3 Cash flow from operations Net income Adjust for non-cash items: Amortization expense1 Gain on retirement of bonds Loss on disposal of assets Adjust for changes in non-cash working capital items: Decrease in accounts receivable Increase in merchandise inventory Increase in prepaid expenses Decrease in accounts payable Decrease in salaries and wages payable Decrease in interest payable Increase in income taxes payable $239.000 (48.000 150. McDuff Ltd.000 466.000 (50.
000 Increase in Income Taxes Payable) $4.Introductory Financial Accounting.000 Salaries and Wages Expense + 37.000 Decrease in Salaries and Wages Payable) Cash paid out for interest ($67.000 Sales + 111.000 Income tax expense – 17.000) (233.500. beginning of year Add net income Less dividends Retained Earnings.000 Decrease in A/R) Cash paid out to suppliers ($2.000 3 Retained Earnings. ending Additions to capital assets = $543.000 Increase in Prepaid Expenses) Cash paid out for salaries and wages ($850.000 $5. end of year Dividends = $50.000 b.460.000 Decrease in Interest Payable) Cash paid out for income taxes ($250.326.611.000 Amortization Expense + 11.000) $466.000 ? $508.000 Interest expense + 5.000 .711.000 239. beginning Additions Disposals Capital Assets.000 (2.000) (72. Cash flow from operations – Direct Cash collected from customers ($4. v.400.000) (887.000 COGS + 48.000) (493.000) $5.000 Decrease in AP) Cash paid out for operating expenses ($700.000 Increase in Inventory + 12.000 – 218.000 ? (158.000 $319.1.1 Page 232 2 Capital Assets.
000 COGS + 1.300) (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 $ (3.500 (166.700) (2. v.200 – 100 Increase in Interest Payable) $216.500) $ 900 (b) Cash Flow from Operating Activities Cash collections from customers ($218. Cash Flow Statement for the year ended December 31.600) (39.600 Increase in Inventory) Cash paid to employees ($39.100) $900 .600) (100) (400) 100 (3.300 + 400 Decrease in Salaries and Wages Payable) Cash paid for insurance ($2.400) 7.900) (5.1 Page 233 Problem 9-3 (a) HHC LTD.800 $ (1.Introductory Financial Accounting.500) (1.000 Sales – 1.1.500 Increase in Accounts Receivable) Cash paid to suppliers ($165.800 + 100 Increase in Prepaid Insurance) Cash paid for rent Cash paid for interest ($1.
000 Cash flow from financing Issue of bonds payable Dividends paid 25.000) (25.000 Decrease in AP) Cash paid out for other operating expenses Cash paid out for interest Cash paid out for income taxes $847. beginning Cash.000 (650.000 30.000 + 17.000 Increase in cash ($32.000 .000) Cash.000 26.000 Cash flow from investing Proceeds on sale of equipment (Note 1) Proceeds on sale of long-term investment (Note 2) Purchase of equipment 7. Toram Ltd.000 (20.1.000 Sales .000) 17. 20x6 Cash flow from operations Cash collected from customers ($900.000 Note 2 – Proceeds on sale of long-term investment Net book value of investment Gain on sale Proceeds $ 18.000) Loss on sale Proceeds $ 11.1 Page 234 Problem 9-4 a.000 Increase in Inventory + 18.000) 0 0 32.000) (165. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($32.Introductory Financial Accounting.000 (50.000 – 21.000) $7.000 30.000 Increase in A/R) Cash paid out to suppliers ($600.53.000 (4.000 $50.000) 24.000 12. Statement of Cash Flow for the Year ended December 31.000 COGS + 32.000 – 25. v.
000) (18.1.Introductory Financial Accounting.000) $32.000 (12.000) (32.1 Page 235 b.000 4. v.000 43.000 .000) (53. Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Loss on sale of capital assets Gain on sale of long-term investment Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Decrease in Accounts Payable $100.
000 Inventory turnover = $300.000.000) / 2 = $50.000 = $450.000 COGS) Beginning inventory = $60.000 ($320. 4. 7.Introductory Financial Accounting.250 Days sales in A/R = $32.000 / 80.000 Average inventory = ($60.000 / 50.000 – 20.$80.000.1.000 / 70.000 is made.000 No impact on working capital since the decrease in cash is equal to the decrease in accounts payable. 5.000 + 40.000 = 6.500 Total net sales = $367. then CL = 230.$300. current liabilities . c c Average inventory = ($30.000 = 1.000 / 75.000 Inventory turnover = $450.000) / 2 = $52. a c b Average receivables = ($40.500 x 7 = $367. c .8.250 / ($125.000 + 540. d 3.000 / 365) = 94 days Inventory increased by $20.000 + 120.500 = $400.000 = 1.000 then the current ratio is 0.000 and CA = 180.78. a 6. Assume that CL = 250.000) / 2 = $75.500 Net credit sales for 20x8 = $52.29 and working capital stays the same.000.500) / 2 = $31.25. v.000 – 120.500 + 32.000 COGS = $30. 8.000 + 55.000 purchased .1 Page 236 Problem 10-1 1.000. Assume that a payment of $10. If the invoice paid is $20. 2. d Average receivables = ($50. the current ratio becomes $90.000 = $40.000 = 6 Assume an initial amounts as follows: current assets . current ratio = $100.000 + 22.000 and CA = 200. Impact is on the current ratio. the current ratio drops to 0.$100.0 times 9.
000 / 50.60 (34.1.000 + 400.000 = 1.000 / 863.76 (12.000) ÷ (1.Introductory Financial Accounting.00 Times Interest Earned 230.7 days 20x4 594.400.000) / 379.000) ÷ (1.000 = 0.68 (34.000 = 0.000 = 1.000 / 379.07 200. v.000 / 60.000 = 4.000 + 275.000 / 371.000 + 220.88 (12.000 + 275.5 days Solvency Analysis: 20x5 Debt-to-Equity Ratio* 920.000 + 275.83 * debt is defined as long-term debt in this case .000 = 1.000) / 371.200.000_ / 365 = 70.000) / 365 = 53.1 Page 237 Problem 10-2 Liquidity Analysis: 20x5 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 712.000 + 550.07 20x4 850.000 = 1.000 / 793.000 = 3.
000 + 200.000 / 1.000 / [(863.000 + 2.000) / 2] = 13.3% 200.000 / [(793.3% 98.2 days 2.8% 230.000 / [(340. v.000 = 10.Introductory Financial Accounting.000) / 2] = 1.014.300.000 + 340.000) / 2] / (1.000 / 1.1 Page 238 Profitability Analysis 20x5 Gross Profit Percentage Return on Sales Return on Assets $900.000 + 1.9% Return on Equity Asset Management (Activity Ratios) 20x5 Inventory turnover $1.000 + 220.162.000 + 2.300.200.875.000 = 10% 230.48 [(220.98 Days Sales in Accounts Receivable Total asset turnover .014.000 / 2.000 + 793.000 + 1.000) / 2] / (2.000 / 2.900.162.000 = 39.900.000) / 2] = 12.000) / 2] = 11% 110.400.000 / [(2.000 = 36.300.66 [(275.000 / 365) = 40.3 days 1.000 / [(2.000) / 2] = 3.000 / 365) = 39.300.000 / [(425.014.000 + 725.014.900.875.900.1.000 + 350.000) / 2] = 10.1% 20x4 $700.000) / 2] = 3.10 20x4 $1.000) / 2] = .000 / [(2.5% 200.000 / [(2.
000 = 2.Introductory Financial Accounting.32 20x6 800.000 = 1.000 + 524.000 = 0.000 = 0.000) ÷ (1.000 + 635.000 = 0.1 Page 239 Problem 10-3 Liquidity Analysis: 20x7 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 1.000 / 2.000 / 60.45 Times Interest Earned 65.72 days Solvency Analysis: 20x7 Debt-to-Equity Ratio* 820.000 + 463.000 / 560.000 + 480.13 (20.000) / 365 = 97.08 (37.08 * debt is defined as long-term debt in this case .000 = 1.000.000 / 2.000 / 56.000 / 524.000) / 365 = 135.300.000) / 560.04 (20.167.000 + 524.000 = 2.52 days 20x6 1.114.30 137.1.92 (37.000) / 524.000) ÷ (1. v.679.000 + 480.000 = 2.576.
000 + 3.000 = 41.679.000) / 2] = 0.1% 65.000) / 2] = 2.003.000 / [(570.700.6% 3.000 / 2.000) / 2] = 0.000 + 2.000 + 485.000 / 365) = 88.808.Introductory Financial Accounting.700.1 Page 240 Profitability Analysis 20x7 Gross Profit Percentage Return on Sales Return on Assets $800.1% 137.000 / 365) = 87.000 / [(2.5% 51.000 = 38.000 + 4.44 Days Sales in Accounts Receivable Total asset turnover .576.956.000) / 2] = 1.9% Return on Equity Asset Management (Activity Ratios) 20x7 Inventory turnover $1.000) / 2] / (1.000 / 1.000 / [(4.700.000 / [(4.000 + 524.956.1% 20x6 $700.100.000 / [(3.000) / 2] = 1.628.700.000) / 2] = 3.1.000 + 4.000) / 2] = 1.000 = 8.000.000 + 570.000 + 300.808.300.90 [(524.000) / 2] = 0.13 [(480.003.1% 137.000 + 2.52 20x6 $1.000 / [(3.100.003.000 / 2.000 / [(650.100.003.679.100.5 days 1. v.000 / 1.3 days 2.000 = 3.2% 65.000 / [(2.000) / 2] / (2.000 + 3.
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