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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
they will take on a liability to pay back the bank the $100.000 = Liabilities + Equity (e) The same company is a little short on cash and has to take out a loan from its bank.000.000. The journal entry would be: Inventory Accounts Payable 5.000 We are increasing an asset.000 Upon signing the loan. The journal entry to record the loan would be: Cash Bank Loan 100. therefore. therefore.000 Both the Equipment account and the Cash account are assets.000 = Liabilities +100. our equation holds true: Assets + 10.000 5.000. therefore. The loan is for $100. that is. they do not pay cash but take on an account payable with the supplier. our equation stays in balance: Assets + 100.000 (d) = Liabilities +10.1. The journal entry would be: Equipment Cash 75.000 + Equity The company then uses cash to purchase equipment that costs $75. Furthermore. an asset and a liability.000 + Equity . the company would receive $100. v. By increasing both sides of the equation. by increasing one and decreasing another the equation holds true: Assets + 75.1 Page 5 (c) That same company then purchases an additional $5.Introductory Financial Accounting. we increase the asset account Cash.75.000 cash.000 .000 worth of inventory on account.000 100. and increasing a liability.000 75.
the income and expense accounts are closed out to zero. If Expenses are greater than Revenues. an expense account’s normal balance is a debit balance. If we continue with our examples… (f) Say that the company from the above example has $30. 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. Conversely. the company will have generated a net income and a net Credit entry to Retained Earnings will result. Revenue accounts normally have a credit balance.000 The accounting equation is maintained since Assets are increased and Equity is increased: Assets + 30.e. v. when a revenue account is increased we credit the account.000 30. the company will have generated a net loss and a net Debit balance to Retained Earnings will result.1.Introductory Financial Accounting.000 . All revenue and expense accounts are temporary accounts in the sense that we start the year with a zero balance in the account.000 = Liabilities + Equity +30. and the resulting debit or credit is either added or subtracted to an account called Retained Earnings. via the Retained Earnings Account.1 Page 6 Transactions that impact the Statement of Income The above examples used accounts that appear on the Statement of Financial Position. 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. which is part of the Shareholders’ Equity section of the Statement of Financial Position. The journal entry would be: Cash Sales Revenue 30. Income Statement accounts will consist of Revenue accounts or Expense accounts. At the end of each year. If Revenues are greater than Expenses during a period. i. For example.000 in sales in its first month.
1. and both are divided into current and non-current based on their liquidity. v. Note that Cost of Goods Sold is an expense account.Introductory Financial Accounting. as are liabilities.15. basically. as they no longer have it on hand to sell.1 Page 7 (g) To incur these sales. Assets and liabilities that will come due or have to be settled within 12 months or one accounting cycle (whichever is longest) are classified as current. The Statement of Financial Position (also called the Balance Sheet) is.000 worth of its inventory.000 15.000 Note that this entry removes the inventory from the company’s accounts. and all other assets and liabilities are classified as non-current. the company sold all $15.000 = Liabilities + Equity -15. an expanded form of the accounting equation: The Statement of Financial Position Assets = Liabilities & Shareholders’ Equity Liabilities Current Liabilities Current Assets Non-Current Liabilities Shareholders’ Equity Contributed Capital Non-Current Assets Retained Earnings Assets are listed from most liquid to least liquid. . The accounting equation remains in balance: Assets . The journal entry to record that would be: Cost of Goods Sold Inventory 15.000 The Statement of Financial Position The Statement of Financial Position is a snapshot of a company’s financial position at a particular point in time.
this $50. Because the policy has not yet expired.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. For example. stocks. and the asset is therefore shown net of accumulated amortization.1 Page 8 Note. that in some cases you may have an asset or a liability that is partly current and partly non-current.000 would be classified as a current liability and the remaining $150. Typical accounts you will see on the Statement of Financial Position are: Current Assets: Cash – the most liquid of all assets. we normally pay the annual premium the day the policy takes effect. you would break out the current portion and classify it as such. if your loan balance is $200. and classify the remainder as non-current. More on this in Chapter 5. when we take out an insurance policy. other companies or special funds. In this case. Prepaid Expenses – this account represents amounts that have been paid in cash for expenses that have not been incurred by the company. v. money orders etc. complete. A more detailed discussion of this account will take place Chapter 4. Long-term investments – these are investments that are to be held for many years. and includes investments in bonds. Land – this account is a listing of all land held by the company. For example.1.). Note that amortization is never taken on land. the cost of the policy will be classified as a prepaid expense. Inventory – this account is a listing of all of the items that the company normally sells in its day-to-day activities. Accounts Receivable – the account is the sum total of all outstanding invoices which are owed to the company by its customers. The associated Accumulated Amortization contra account is normally shown directly below the asset account. Non-current Assets: Buildings – this account is a listing of all depreciable buildings owned by the company. The classic example of this is breaking out the current portion of the long-term debt of a company.Introductory Financial Accounting. or manufactured by the company itself. Accounts Receivable is normally reported net of an Allowance for Uncollectible Accounts (discussed further in Chapter 3).000 of this balance within the next year. this account includes all currency and equivalents (bank drafts. The inventory can either be purchased. but is a listing of all equipment owned and used by the company. ready for resale. Equipment – this account is treated in the same manner as the Buildings account. .
v. Note that the wages payable account is normally the result of an adjusting entry. Retained Earnings – this account represents the cumulative total of the net income of a company that has not been distributed to shareholders.Introductory Financial Accounting. It is when the amount is due back to the lender that differentiates between current and non-current debt. end of year XXX ± XXX . beginning balance Add Net Income for the year or deduct the Net Loss for the year Less Dividends declared to shareholders Retained Earnings. Shareholders’ Equity: Contributed Capital – this account contains any amounts which have been invested in the company by the company’s shareholders.XXX XXX .1 Page 9 Intangible assets such as patents. Wages payable – a listing of all wages due to employees within one year or one accounting cycle.1. The retained earnings account is adjusted at the end of each year to account for a company’s net income or loss. trademarks and copyrights would be classified as longterm assets. The retained earnings account reconciliation from the beginning of year to end of year balance is as follows: Retained Earnings. Taxes payable – a listing of all taxes due within one year or one accounting cycle. 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. 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.
000 (60.1.000 . Either one is acceptable under GAAP.000 (60. The single step statement lists all revenues and then all expenses without breaking out any further subtotals. the amount left over after all relevant expenses have been taken into account.000) $10.000 (25.1 Page 10 The Income Statement The income statement is a statement that shows how a company performed during one period. 20x8 Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Income Interest Income Net Income before Taxes Income Tax Expense Net Income $100. however.000) $10. It takes the reader from total Revenues to Net Income. Income statements can take on one of two formats: single step and multi-step.000 18.000 The multi-step statement has multiple subtotals. 20x8 Sales Interest Income Cost of Goods Sold Operating Expenses Income Tax Expense Net Income $100.000) (25. most companies tend to use some form of a multi-step statement.000 3.000) (8.Introductory Financial Accounting.000 3. v. typically the fiscal year of the company.000) 40. and for the above company would look like the following: The Miller Company Income Statement For the Period ended December 31. For example: The Miller Company Income Statement For the Period ended December 31.000 (8.000) 15.
When an entry is made and an account is to be debited.1. for every entry the lefthand entry must equal the right-hand entry in order for the Accounting Equation to hold true. it is placed on the right hand sand. which resembles a capital “T”. v. an entry is placed on the left-hand side of the T.Introductory Financial Accounting. a T-account is a tool used by accountants to keep track of entries that are made to individual accounts. Accounts Receivable Debit Credit The following represent how increases and decreases in accounts get recorded: Liabilities & Shareholders’ Equity Assets + Expenses - Revenues + + - - + . Thus. When a credit is made.1 Page 11 The T-Account Named for its shape.
000. 6.000 common shares of the Corporation. Ian signed a two-year lease with monthly rent of $8. 20x7. Ian’s Incredible Instruments Inc. but is not large enough to store any extra inventory.’s Sales for the first year were as follows: Cash sales . Ian purchased furniture and fixtures for the store at an auction for $30. That is. Ian’s Incredible Instruments Inc. Opened for business in a local mall. The terms of the loan.1 Page 12 Comprehensive Example Ian has worked at a music store for the last 20 years. beginning February 1. and was able to give up his off-site storage facility. was purchased for $5. He received 1.000 due on the first of each month.Introductory Financial Accounting. January 2. He paid cash. 20x7. After years of planning and saving. 9.760 cash. his entire life savings. 20x7 through December 31. however.000. The lease is in effect from January 2.000 of the accounts receivable were collected throughout the year. Ian’s Incredible Instruments. The lessor required Ian to pay the first and last month’s rent on January 2. Having proven himself a good tenant.000 was purchased on account. 20x7. 20x7. 20x7: 1. The mall location is suitable for Ian’s retail needs. which was taken out on June 1. Credit sales . which covered the period of January 2.$310. 20x7 through December 31. 20x7.) Inventory of $120. A total of $280. are for 5 years. 8. (Record the February rental payment only. 10. with 10% annual interest due semiannually.$430. 5. 20x8.000. Ian’s Incredible Instruments Inc. Ian invested $175. is located in the Meadowvale Mall. interest payments are due every 6 months. The following transactions took place during the fiscal year ended December 31. An outside storage facility has been rented to fill this need. 4. he has decided he is ready to go out on his own. Rent is $1. Inc. 20x7. and was rented on a month-to-month basis.1.. . v. 3. He only rented the outside facility to the end of November. 11. An insurance policy.000 The company took out a loan for $200.200 per month. into the company upon incorporation. (Record the payments made from March to November only.000. 20x7 for $350.) 2. January 2. More inventory was purchased on account June 1. Ian was able to convince his landlord at the mall to give him additional storage space (at no extra cost). the annual rate is 10%.000. 7. 20x7.
1.000 (note that a dividend is debited against retained earnings). This is what we call a prepaid expense.000 13.000 .000 175.000 40.000 88.000 120. Prepaid Rent Rent Expense Cash 8. Additional cash disbursements for the year were as follows: Wages & salaries Rent Advertising Miscellaneous expenses Payments of accounts payable Interest on bank loan $165.000 10.000 $446. 175. To record Ian’s initial investment into the company.000.Introductory Financial Accounting.000 8. Rent Expense Cash 1. We know that the first month’s rent will be “used up” in this year. and therefore it is an expense in this fiscal period. 14.000 16. However.000 120. the appropriate journal entries would look like this: 1. To record the rent paid on the outside storage facility in February for one month.1 Page 13 12. The total cost of the inventory sold during the year was $300.200 4. Ian declared and paid a dividend of $60. To record the purchase of inventory on account. Cash Contributed Capital 2.000 23. the deposit for the last month won’t be used until 2 years from now.000 To record the payment of first and last month’s rent on the lease.200 1. For each of the above. Inventory Accounts Payable 120.000 3. v.
we must remove the receivable from our books. v. sales are recorded individually as they are made.Introductory Financial Accounting. Furniture and Fixtures Cash 30. Rent Expense Cash 10. We will deal with the interest expense incurred on the loan in a separate entry.200/month x 9 months = $10.1 Page 14 5. Hence. as they are no longer due to us. two things will happen to Ian’s Incredible Instruments Inc. Cash Accounts Receivable Sales 430.000 350.000 30.760 5. Cash Bank Loan 200. Upon receiving the loan.800 10. To record the purchase of furniture and fixtures. To record the collection of accounts receivable throughout the year. First.000 280. However.800 . To record the rental expense incurred from March through November.000 9. the credit to the Accounts Receivable account. Note that in reality.000 11. Inventory Accounts Payable 350. second. To record the purchase of inventory on account. Insurance Expense Cash 5.760 6.000 cash from the bank. for the purposes of this example we will be entering them in one journal entry. Note that because it expires December 31. To record purchase and payment of the insurance policy.000 8. 20x7. they will get $200.800.000 310. for which cash was paid. Note that as we collect the cash.1. To record sales for the first year.000 740.000 7. they will have an outstanding loan for the same amount. Cash Accounts Receivable 280. (Remember. the entire amount applies to the current fiscal year and therefore there is no prepaid portion.000 200. we already recorded the initial payment in February).000 10. $1.
000/month = $88.000 x (10% x year) = $10.Introductory Financial Accounting. To record the various other cash disbursements made throughout the year. v.1 Page 15 12.000 13.000 Interest on bank loan .000 300.000 23. Retained Earnings Cash 60.000 446.000 40.$200. To remove the inventory which was sold from the inventory account and record the resulting Cost of Goods Sold expense.000 Wages & Salaries Expense Rent Expense Advertising Expense Miscellaneous Expenses Accounts Payable Interest Expense Cash 165.000 . Note the following supporting calculations: Rent Expense – 11 months x $8.000 10.000 88.000 60. Cost of Goods Sold Inventory 300. To record the dividend paid.000 14.1.000 120.
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 10 175.240 Inventory 4 9 120.000 108. Expenses 12 23.000 1.200 10.000 280.200 5.000 1 Retained Earnings 13 60.000 Contributed Capital 175.000 Cost of Goods Sold 13 300.000 60.000 13 6 Furniture & Fixtures 30.760 Wages & Salaries Expense 12 165.000 120.000 10.000 30.000 7 Rent 2 3 11 12 8.760 30.000 8 515.Introductory Financial Accounting.000 5 Insurance 5.1.000 1.000 12 Interest Expense 10.000 12 Accounts Payable 120.000 Misc.800 88.000 2 3 5 6 11 12 13 2 Prepaid Rent 8. v.000 350.000 Expenses INCOME STATEMENT Revenues Sales 740.000 .000 350.000 170.000 430.000 350.000 300.800 446.000 16.000 12 Advertising Expense 40.000 4 9 Accounts Receivable 7 310.000 200.000 10 Bank Loan 200.000 280.
v.000 $1.000 5.000 200.000 .000 8.760 165.000 40. Trial Balance As at December 31.000 Credit $350.000 175.000 60.000 10.000 300.465.000 23.240 30.1 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 $1.000 30. 20x7 Cash Accounts Receivable Inventory Prepaid Rent Furniture and fixtures Accounts Payable Bank Loan Contributed Capital Retained earnings Sales Cost of Goods Sold Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Interest Expense Miscellaneous Expenses Debit $515.465.Introductory Financial Accounting.000 170.000 740.1.000 108.
000 341. and the offsetting amount is the net income (or loss) that gets recorded to retained earnings.000 300.000 40.240 . they are referred to as temporary accounts.240 $740.000 5.760 98.000 $88. all balances get returned to zero. 20x7 Sales Cost of Goods Sold Gross Profit Operating Expenses Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Miscellaneous Expenses Operating income Interest Expense Net income Closing Accounts All revenue and expense accounts are closed out to zero at the end of each fiscal period.000 40.000 5. Income Statement for the year ending December 31.000 88.1 Page 18 A multi-step income statement for Ian’s Incredible Instruments Inc.000 300.000 23. v.760 165.760 165. As such. 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 740.000 440. would look like this: Ian’s Incredible Instruments Inc.000 23.Introductory Financial Accounting. At the end of the year.1.000 108.000 108.000 10.240 10.
Statement of Financial Position as at December 31.240 203.240 30.1 Page 19 The Statement of Retained Earnings outlines the changes in the Retained Earnings account from the beginning of the year balance to the ending balance: Ian’s Incredible Instruments Inc.000 175.240 $753. Statement of Retained Earnings for the year ending December 31.240 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Long-term liabilities Bank loan Shareholders’ Equity Contributed Capital Retained earnings 200. 20x7 0 88.240 350. January 1.000 723.000 550.000 8.000 170.240 30.000 28.1. 20x7 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures $515. v.240 (60.Introductory Financial Accounting.000 $753. December 31. 20x7 Net income Dividends Retained Earnings.240 $ We can now prepare a Statement of Financial Position for Ian’s Incredible Instruments: Ian’s Incredible Instruments Inc.000 .000) $ 28. 20x7 Retained Earnings.
Examples: Prepaid rent/insurance. The asset will then be allocated to future periods using adjusting entries.1. then both the liability and the expense are recorded in the amount relating to the current period. Interest Expense. subscriptions collected in advance and gift certificates sold. v. Income taxes. we will Debit the liability and Credit cash to record the payment. but not yet paid in cash. The adjusting entry sets up an asset.Introductory Financial Accounting. plant & equipment Accrual – Event has occurred. As the liability is paid in future periods. Utilities Expense Revenues Unearned Revenue – Cash is received and a liabilitiy is recorded. Rent Revenue. the receivable is removed. Examples: Rent collected in advance. and records the revenue. performs the service or delivers the goods. but will not be paid in the current period. an adjusting entry is made to remove the liability and record 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. As cash is received in payment in future periods. Expenses Prepaid Expenses – Cash is paid and an asset is recorded before it is used. i. Examples: Payroll. office supplies. Accrued Revenues – These entries are used then revenue has been earned. deposits on orders. Interest Receivable . Accured Expenses – When an expense has been incurred. Examples: Credit sales.e. As the company earns the revenue. a receivable. but cash has not been paid or received.
20x7 you pay $12.000 At the end of the year you will have 7 months remaining on the policy. 20x5 reveals that you have $5. The adjusting entry would be: Insurance Expense Prepaid Insurance 5.800 in your office supplies inventory account. v. 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. On January 1.1 Page 21 Example In examples 1-5.200 ???? Supplies Expense As the T-Account shows.000 of office supplies.600.000 does not equal 5. we know our opening balance.200 of supplies on hand. 20x5 you had $3. and therefore should be an expense of the current period. and what we have left at the end of the year. During the year you purchased an additional $13. i.1. that will expire in 20x8.800 + 13.e. Therefore. solving the equation. What would be the adjusting entry on December 31. what was purchased during the year. 2.000 $ 5. The missing piece to the puzzle is the amount of supplies that were used during the year.Introductory Financial Accounting. A physical count of the supplies on December 31.000 represents the portion of the insurance policy that is unexpired. However. .000 for an insurance policy that will cover the next 12 months.000 5.000 The balance that remains in the prepaid insurance account of $7.800 13. 3. it might be helpful to look at the T-Account for Office Supplies for the year: Supplies Inventory Opening Balance Purchases Ending Balance $ 3. 1. This means that 5 months have been used in the current period. 20x5? To answer this question. the missing credit or Supplies Expense has to be 11. On August 1. assume that the company’s year-end is December 31.200.000 12.
20x8. the revenue to be recorded for the year would be 8 months x $800/month = $6. the adjusting journal entry would be: Amortization Expense Accumulated Amortization 10. office furniture in this case.000 Note that the amortization expense account will appear on the income statement as an operating expense for the year. 20x8. 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. 20x5 would be: Supplies Expense Office Supplies 3.000 per year for the life of the furniture.600 9. Therefore. Therefore. you would have earned 8 of the 12 months of revenue. v.000 (10. will appear on the Statement of Financial Position as a reduction of the related asset account. we will take $10.000 as an expense this year. instead of taking the full $100. The long-term asset section of the Statement of Financial Position would be as follows: Office Furniture Less accumulated amortization $100. You received payment for the full year on May 1. You estimate that the furniture will last 10 years and have no salvage value at the end of its useful life. or $10. The apartment rents for $800/month. 20x6.600 As of December 31. It is now December 31.000 Because the Accumulated Amortization account is applied as a reduction of the related asset account.1.000 per year for the next 10 years. Each and every year.e. we call it a contra account to the Office Furniture account. You own an apartment building and have a tenant whose parents have paid their rent for the entire year in advance.000) $ 90. you would have recorded an entry of: Cash ($800 x 12) Unearned Rental Revenue 9.000 10. Furthermore. 20x8. when you received the revenue.600 You purchase new office furniture for a cost of $100. 11. The Accumulated Amortization account. What is your adjusting entry? On May 1. there would still be 4 months of unearned . It is now December 31.Introductory Financial Accounting. on the other hand.1 Page 22 The adjusting entry on December 31.400. 20x6. i. 4.000 on January 1.600 11.
only 5 months of interest pertain to the current period.600 – 6.400 6. 20x8 would be: Unearned Rental Revenue Rental Revenue 6. It is March 31 (Friday). the loan has not been outstanding for the full 12 months. 5. The adjusting entry would be: Wages Expense Wages Payable 64. no cash has been paid for the interest expense. That is. the balance in the Unearned Rental Revenue account will be equal to $9. that is.000 x 8% = $8. and furthermore.333 3. and therefore. The loan has been outstanding for 5 months. However.000 x 5/12 = $3.200. your year-end. The adjusting entry would be: Interest Expense Interest Payable 6. 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/week. It is December 31. interest expense for 20x3 would be $8. how much do we owe to our employees for the 4 days that we haven’t paid them? If the average weekly payroll is $80. as of December 31. and our employees work 5 days a week. 3. The loan agreement states that interest will be charged at a rate of 8% annually.200.000 64. then our daily payroll rate can be calculated as $80.000. 20x3 you take out a loan for $100.Introductory Financial Accounting. the accrued wages payable will be $16.400 According to the journal entries above.000 x 4 days = $64.000/5 = $16. 20x6 (a Monday).000.400 = $3.000.000.000 .000. therefore.1 Page 23 revenue left. The adjusting entry on December 31. and interest and the principal will be due August 1. v. On August 1.333 You last paid your employees on March 27. 20x3. 20x4.333. What is your adjusting entry to record interest expense for the year? Looking at the terms of the loan. we have to first figure out how much needs to be accrued. we can calculate that the annual interest on the loan will be equal to $100. The balance in the Unearned Rental Revenue Account would have 4 months x $800/month = $3. What is the adjusting entry? To calculate the adjusting entry.1. This reconciles to our calculation above. 20x3.
But. If the customer pays 1 FOB stands for ‘Free on Board’ . 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.1 Page 24 Note that this adjusting entry does two things: First. This allows the company to keep track of all sales returns separately from the original sale.Introductory Financial Accounting. second. a 5-year warranty is provided with the product. • Sales Discounts: if early payment discounts are offered to customers. it gets onto our books the liability that we owe to our employees. For most sales. then the goods belong to the customer the minute they are loaded on the truck and revenue can be recognized immediately.000 and we offer a discount of 2% if the invoice is paid within 10 days. v. the following transactions are related: • Sales Returns: whenever customers return merchandise for refund. this can get complicated when say. whenever the discount is taken. • the revenue must be earned (all significant acts must be completed). If the goods are shipped to the customer under the terms FOB1 Shipping. For example. it gets onto our books the expense that we have incurred during the last 4 days of the period. We MUST record all expenses relevant to the current period. Sales and Sales Contra Accounts Whenever a sale is made. this means that the cost of the goods sold become an expense the day the sale is made. This can become an issue for goods that are in transit around the company’s year-end.1. In the case of a simple sale. instead of debiting the sales account. If the goods are shipped under the terms FOB Destination. as we will see later. then the amount of the discount gets debited to the Sales Discounts account. and • all associated costs can be estimated. Just because you don’t pay cash for something does not mean that the expense wasn’t incurred. we debit an account called ‘sales returns’. 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. 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. assume that we make a sale of $1. then they belong to the customer only when they are delivered and therefore the revenue recognition point is when the goods are shipped. • collectibility is reasonably assured. Revenue Recognition and the Matching Principle For a firm to recognize revenue. However. In this case. whether we have paid for them or not. we credit the Sales account. the revenue recognition point takes place when the transaction takes place.
500 . The selling price is $40. v.1. Sales Allowances are when merchandise is sold to a customer which is slightly defective. Terms of payment are 2/10. Accounts receivable Sales • $40. they will pay us $980.500 is returned to the company Sales returns Accounts receivable 1. would be netted out against the Sales account. a 2 % discount is offered if payment is made within 10 days.1 Page 25 • within 10 days. • merchandise is shipped FOB Shipping to a customer. otherwise the full amount is payable in 30 days. 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.Introductory Financial Accounting. when reported on the income statements. that is.500 1. A credit is granted to the customer.000 $40. The $20 discount will get debited to the Sales Discount account. but the customer keeps the merchandise. n30. These three accounts are considered contra accounts to the Sales account and.000 merchandise whose sales price was $1.000.
Consequently.000 The Conceptual Framework A strong theoretical foundation is essential if accounting practice is to keep pace with a changing business environment. It would be impossible for financial statements to meet the needs of all users of financial statements. Accountants are continuously faced with new situations and business innovations that present accounting and reporting problems.1 Page 26 • some of the merchandise was slightly damaged during before it was shipped. 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). A credit of $2. . interest. v. These problems must be dealt with in an organized and consistent manner.500 is granted to the customer. principal and dividend payments?. or similar decisions. Sales Allowances Accounts Receivable 2. payment of $35. claims on those resources.Introductory Financial Accounting.280 is received.500 • on the 9th day after the sale. 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. and • to provide information about the economic resources of a firm. Cash Sales discounts Accounts receivable 35. such as dividends. and changes in those resources to help in assessing cash flows. 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. This does not imply that there are no other users of financial statements. 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. loan repayments. the objectives of financial reporting are as follows: • to provide information useful to present and potential users in making investment. since these needs could conflict.1.500 2. credit. and so on.280 720 36.
Reliability implies that the accounting information can be depended upon.000 today. accounting information should meet the following criteria: • predictive value – information should be useful in predicting future outcomes. From a shareholders’ perspective the value of $10.1 Page 27 Qualitative Characteristics of Accounting Information There are two primary qualitative characteristics of accounting information: relevance and reliability. gets refunded in a pre-specified number of years) and pays a fixed rate of interest.1. The $100 is an established transaction and is reliable. • timeliness – information should be available to the users as quickly as possible.000 is far more relevant. Verifiability implies that independent measures using the same measurement method should yield approximately the same result. For example. The rationale is that income from recurring items is a best predictor of future income. when establishing the validity of an accounting estimate should come to a consensus. the income statement is generally structured by segregating recurring items against non-recurring items. the representational faithfulness principle would argue that it meets all the characteristics of long-term debt and should be classified as such. . To be relevant. For example. • feedback value – information presented today helps confirm previous decisions. Reliability wins in this case. accounting information should meet the following criteria: • verifiability – accounting professionals. Secondary qualitative characteristics – the following two characteristics (neutrality and comparability are qualified as secondary because they are desirable qualities of accounting information. • representational faithfulness – accounting information should portray the substance of transactions over their form. the concept of relevance and reliability conflict.000. that land is recorded on the company’s books at $100 regardless of the fact that it may well be worth $10.000. This implies that the information provided should be useful to the users. At times. but are not as important as relevance and reliability. If a company purchased a parcel of land in 1856 for $100.Introductory Financial Accounting.e. v. One could argue that regardless of what you call this security. To be reliable. consider the application of the historical cost principle which states that assets should get recorded at their original cost. Relevance implies that accounting information can make a difference when making a decision – the user of financial statements is better off having the information than not having it. For example. For example. assume a company issues a new type of security called a ‘Special Preferred Share’ which has a limited life (i. 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.
Cost/benefit analysis is very difficult to quantify since most costs and benefits are intangible. but should be used as a way of thinking. as we will see in Lesson 4. For example. Information benefits vs. the project has a significantly positive net present value).000.e. when companies sell depreciable assets. v. Also.000. That’s not to say that accounting principles cannot be changed.1 Page 28 Freedom from bias (neutrality) – accounting information should be even-handed with respect to the impact of accounting information on users’ behaviour. Assume that existing equipment is technologically obsolete and a net present value analysis shows that if the equipment were to be replaced. it may be . When accountants can choose between two equally acceptable accounting principles. the company would have to show a large loss on disposal. Consistency implies that accounting principles are applied from period to period in the same manner. Conservatism is an effort to ensure that the risk or uncertainty inherent in business situations is adequately considered. Thus. information costs. 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). The only problem is that if the asset were to be disposed of. the financial statements of a company with net income of $10. The manager responsible for making the decision may have a bias to not replace the equipment so that the loss does not appear on the financial statements. The principle of conservatism also leads to the recognition of contingent losses but does not recognize any contingent gains.1. the company would benefit economically from it (i. a gain or loss arises when the proceeds on disposal differ from the net book value of the asset sold. Here is an example of an accounting rule that could lead to dysfunctional economic decision making.000 would not be significantly affected if they were misstated by say. The concept of materiality can play against the concept of timeliness. but changes should occur infrequently and only for valid reasons. For example. The principle of timeliness implies that the financial statements should be in the hands of users as soon as possible. Materiality implies that financial statements are not precise but are accurate enough that any potential errors of misstatements would not affect any user. Modifying concepts Conservatism means that it is generally preferable that any possible errors be in the direction of understatement of net income. the principle of conservatism implies that the one with the least favourable impact on net income should be the one chosen. Accounting rules should not provide the motivation for dysfunctional decisions. $100. we must estimate which accounts receivable are likely to become uncollectible in the future and establish an allowance for doubtful accounts. For example.Introductory Financial Accounting. changes in accounting principles require retroactive adjustment and restatement of prior period financial statements. accounting policy makers should weigh the cost of implementing the accounting principle against the benefits that the implementation of such an accounting principle will provide users. When introducing an accounting principle.
This omission is justified on the basis of materiality. This assumption allows us to record long-term assets at their depreciable cost. Consequently.1 Page 29 possible that additional invoices are received after the financial statements are issued.1. Monetary unit principle assumes that the value of the dollar does not change . Matching principle assumes that when we record revenues. Also refer to the definition of an asset (later in this section). v.Introductory Financial Accounting. otherwise they would have to be recorded at the lower of their depreciable cost or liquidation value. Going concern principle assumes that the entity will continue operating in the future. Other Principles Economic entity principle states that the financial statements of an entity should report all assets and liabilities under its control. the measurability of such revenues are reasonably certain and collectibility is reasonably assured. we can add assets together even if they were purchased in different years. months…) and report income and prepare a balance sheet for each of these periods. This principle will be invoked when dealing with leases and intercorporate investments in later lessons. quarters. .i. 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. Revenue Recognition Principle states that revenues should only be recorded when earned. a 1925 dollar is equivalent to a dollar today.e. Periodicity assumes that we can breakup the life of a business in separate reporting periods (years. all associated expenses related to the recognition of these revenues are recorded also. 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.
types of share capital. at a specified or determinable date. for example. (b) the entity can control access to the benefit. resulting from the ordinary activities of an entity. Liabilities are obligations of an entity arising from past transactions or events. interest. . either by way of inflows or enhancements of assets or reductions of liabilities. thereby leaving it little or no discretion to avoid it. and. resulting from an entity's ordinary revenue generating or service delivery activities. Liabilities have three essential characteristics: (a) they embody a duty or responsibility to others that entails settlement by future transfer or use of assets. While equity of a profit oriented enterprise in total is a residual.1. either by way of outflows or reductions of assets or incurrences of liabilities. In addition. the rendering of services or the use by others of entity resources yielding rent. government grants and other contributions. (b) the duty or responsibility obligates the entity. to contribute directly or indirectly to future net cash flows. Revenues of entities normally arise from the sale of goods. Assets have three essential characteristics: (a) they embody a future benefit that involves a capacity. Revenues are increases in economic resources. in the case of profit oriented enterprises. in the case of not-for-profit organizations. it includes specific categories of items. or on demand. and (c) the transaction or event giving rise to the entity's right to. on occurrence of a specified event. provision of services or other yielding of economic benefits in the future. and (c) the transaction or event obligating the entity has already occurred. 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. royalties or dividends. v. singly or in combination with other assets. to provide services. Expenses are decreases in economic resources. provision of services or other yielding of economic benefits. Equity is the ownership interest in the assets of a profit oriented enterprise after deducting its liabilities. many not-for-profit organizations receive a significant proportion of their revenues from donations. contributed surplus and retained earnings.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. or control of. the benefit has already occurred. the settlement of which may result in the transfer or use of assets.Introductory Financial Accounting.
.1. events and circumstances affecting the entity except those that result from expenses or distributions of equity / net assets. and from all other transactions. Losses are decreases in equity / net assets from peripheral or incidental transactions and events affecting an entity.Introductory Financial Accounting.1 Page 31 Gains are increases in equity / net assets from peripheral or incidental transactions and events affecting an entity. and from all other transactions. events and circumstances affecting the entity except those that result from revenues or equity / net assets contributions. v.
While making a delivery. The party sued Fastrac for damages that could exceed Fastrac’s insurance coverage. assumption. What accounting principle. The proprietor of Front Street Drugs bought a computer for his personal use.1 Page 32 Problems with Solutions Problem 1-1 Multiple Choice Questions 1. Nimto Inc. What accounting principle. He paid for the computer by writing a cheque on the company chequing account and charged the “Office Equipment” account. the driver of Fastrac Courier collided with another vehicle causing both property damage and personal injury.Introductory Financial Accounting. The cost of the floor covering for the company offices was expensed. What accounting principle. even though the floor covering has an estimated useful life of 5 years.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. Existence of the lawsuit was reported in the notes to Fastrac’s financial statements. or constraint was violated? a) Continuity assumption b) Matching principle c) Materiality constraint d) Separate entity assumption 2. or constraint was violated? a) Continuity assumption b) Matching principle c) Cost principle d) Time period assumption 3. v. 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.
5. Total liabilities of $500. On July 1. M. Shaw included a $200. Which of the following statements is true? a) Under cash basis accounting. the Insurance expense for the period ending December 31.000. after correcting for the inventory error? a) $ 40.039.999 d) $1. The December 31. What would be the balance for Total assets on December 31.000 c) $ 999.000 personal residence as an asset on the balance sheet of his company.000 b) $ 959.000 in the Prepaid insurance account on December 31.1 Page 33 4. financial statements should be prepared using which of the following? a) Fair market values b) Historic costs c) Future values d) Replacement costs . 20x8. showed Total assets of $999. In the rush to make it to a New Year’s party. What generally accepted accounting principle does this contradict? a) Time period principle b) Cost principle c) Going concern principle d) Business entity principle 7.Introductory Financial Accounting. b) Under accrual accounting.000 in the Prepaid insurance account on December 31. According to generally accepted accounting principles. 20x9.999 6. Shaw’s Rent-all.1. 20x5. purchased a 4-year insurance policy and paid a premium of $40.000 worth of inventory in the company’s December 31. 20x9. will be $5. there will be a balance of $20. which included this error. there will be a balance of $35. 20x5. and Total shareholders’ equity of $499. the bookkeeper for Ytwok. c) Under cash basis accounting. ABC has a December 31 year end. there will be a balance of $25.999. Harry. 20x5. inventory count. 20x8.000. 20x8. v.000 in the Prepaid insurance account on December 31. d) Under accrual accounting.000. ABC Ltd. financial statements. failed to include $40.999.
K. v.Introductory Financial Accounting.1 Page 34 8. Smart presented land and buildings on her company’s balance sheet based on the appraised value of these assets at December 31. 20x8.1. What generally accepted accounting principle does this contradict? a) Time period principle b) Revenue recognition principle c) Objectivity principle d) Business entity principle .
000. Books and supplies of $50. 3.000 A total of $4.200 cash. you decided to start up a new business – Heavenly Books Inc. The loan agreement calls for repayments of $4. The lease agreement is for one year. v. . Interest payments are due on the 1st of each month. 20x2. 6.000 was obtained on August 1. A suitable location is found and rent is $1. The following are summary transactions for the period July 2.000 of the sales made on account were collected. An insurance policy was purchased for $1.1. The policy takes effect on July 2.1 Page 35 Problem 1-2 On July 2. An additional $120.Introductory Financial Accounting. 20x2 and expires on June 30. 20x2.. Furniture and fixtures are purchased at a cost of $15. In addition to the monthly rent. an offcampus bookstore where students can purchase textbooks and supplies at reduced prices. 20x3.000 every 4 months with the first payment due November 1.$190. 20x2 to October 31.$6. 7. 20x2. 2. on June 30. 20x3). 20x2. 20x2 were: Cash sales .000 was purchased on account. 9. 4.000 of inventory was purchased on account. Sales for the period ended October 31. The first and last month’s rent are due upon signing of the lease on July 2. 8. A bank loan in the amount of $20. The annual interest rate is 9%. the company’s year end. 5. an annual charge equal to 1% of sales is due at the end of the year (i. 20x2. You and several other shareholders invested $20.e.000 in return for shares in the company. These are purchased for cash.000 per month. 1.000 Sales on account .
15. Credit Accrued Liabilities. 16. 14. Enter all the above transactions in T-Accounts. b. The interest payable on the bank loan. An inventory count shows that a total of $25. Books costing $15.000 2. The expected income tax rate is 30%. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position .1 Page 36 10.500 10. Employees are owed a total of $600. c.000 were returned to the publishers. Required – a. Adjustment for rent payable.Introductory Financial Accounting. Credit Accrued Liabilities. Additional cash disbursements for the year were as follows: Wages and salaries Rent Advertising Miscellaneous expenses Dividends to shareholders Interest on bank loan Payments on account re: purchases of inventory $36.000 $182. The adjustment for insurance expense. Invoices received but not yet paid amount to $700 for miscellaneous expenses.000 300 130.000 of inventory is on hand. Credit Accrued Liabilities. v. The furniture and fixtures are expected to last a total of 10 years with no salvage value. 19.000 1. 13.000 3.1. 18. 12. Credit Accrued Liabilities.800 The following adjustments at year end must be made: 11. The straight line method is to be used. 17.
600 4.600 2.100 50.500 4.200 1.Introductory Financial Accounting. Inc.1.000 25.800 2. Global Production.000 84. 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. 20x6: a.1 Page 37 Problem 1-3 On January 1. On December 31. 20x6.900 ? 40. A statement of financial position.000 1.100 2.000 24. the accounting records contained the following selected amounts: Accounts payable Accounts receivable Accumulated amortization – Office Equipment Bank loan.300 18.100 3..000 invested by the owners as capital stock. A statement of retained earnings. 20x6. $ 7. b. A multi-step income statement.400 2.100 3. v.000 4. due December 31.500 157.100 14. was started with $50.100 21.300 44. c.500 .000 1.
It is now April 30.300 worth of services. you bought a piece of machinery for $50. which was signed June 1. What would the adjusting entry be? You pay weekly salaries to your staff and your accounting period end falls on a Wednesday.000. Kittens Quarterly. You signed the agreement and wrote the cheque on June 30th. Today is the end of the accounting period.. A new customer purchases a subscription in January. You have provided $2. What is the adjusting entry required if your year-end is December 31st? Your company is moving into a new office on July 1st.Introductory Financial Accounting. your year-end. your year-end. and then record the adjusting entry for the end of April. and you have provided your services Big Al’s Used Cars for the past month. $4. You are a consultant. It is now your year-end. a) On June 1. for their monthly staff meetings. prepare the appropriate adjusting entry. INC Inc. What is the appropriate adjusting entry? You have a contract to provide catering services for a local company. record the journal entry to record the receipt of the subscription fee in January. v. First.000 for your annual property insurance policy eight months ago. What adjusting entry must be recorded to account for the unpaid salaries? You paid $5.1.000 on June 1st and again on December 1st for providing these services for one year. September and December.750. The contract. Your year-end is June 30th. June. but you will not be billing Big Al until next month. It is now December 31. You sell subscriptions to your magazine.1 Page 38 Problem 1-4 For each of the following isolated situations. Your daily salary expense is $600. The estimated useful life of the machine is 8 years. Part of your new lease agreement required you to pay your first month’s rent. stated that they would pay you $6. Issues come out in March. ahead of time. 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) . on a yearly basis for the fee of $24/year. Record the adjusting entry for amortization for the year. with no salvage value estimated at that time.
20x5. Coverage of the insurance policy starts on July 1. d. 20x6. a. Doby Company borrowed $3. On September 1.000 $1. 20x5. The $440 collection was recorded as follows: Oct 1. 20x5 Cash Unearned subscription revenues $440 $440 . The subscription start on October 1. Each transaction will require an adjusting entry at December 31. 20x5 Prepaid Insurance Cash $1. the company collected $440 for subscriptions two years in advance. The annual accounting period ends on December 31. The note was recorded as follows: Sep 1. August 31. 20x5 Cash Note payable $3. 10 percent. 20x5. Doby Company paid for a two-year insurance premium for a policy on its equipment. 20x5 a tenant renting some office space from Doby Company had not paid the rent of $500 for December.000 $3.1. Assume Doby Company publishes a monthly magazine. On December 31.000 b.000 c. This transaction was recorded as follows: Jul 1.Introductory Financial Accounting. You are to provide the 20x5 adjusting entries required for Doby Company. On July 1. v. 20x5. note payable. 20x5.1 Page 39 Problem 1-5 Below are four transactions that were completed during 20x5 by Doby Company. 20x5. The total interest of $300 is payable on the due date. On October 1.000 cash and gave a oneyear.
The company used the perpetual inventory method. What are the total liabilities of Wild Corporation after this transaction? 12. ensure your answer reflects the cumulative impact of all prior parts. 7. Assume Wild Corporation uses a Perpetual Inventory System. What are the total assets of Wild Corporation after this transaction? 8. What are the total liabilities of Wild Corporation after this transaction? 6.1. The purchase is made “on account” with the company agreeing to pay for the goods within 30 days. 10.000 cash. The customer pays cash. 20x6. 20x6. 20x6. What are the total assets of Wild Corporation after this transaction? 11. 1. What are the total assets of Wild Corporation immediately after it has been formed and the shares sold? 2.Introductory Financial Accounting. Wild Corporation sells 200 units of inventory for $50 per unit. What is total shareholders’ equity after this transaction? (CGA Canada Adapted) .1 Page 40 Problem 1-6 For the next set of questions.000 units of inventory for $20 per unit. What is total shareholders’ equity at this point? On April 2. Initial financing comes from the sale of 100. 20x6.000 common shares at $10 per share cash. Wild Corporation purchases a warehouse for $300. What is total shareholders’ equity after this transaction? On April 3. Wild Corporation purchases 1. What are the total assets of Wild Corporation after this transaction? 5. What is total shareholders’ equity after this transaction? On April 5. What are the total liabilities of Wild Corporation after this transaction? 9. What are the total liabilities of Wild Corporation at this point? 3. v. Wild Corporation is formed on April 1. 4.
000 cash injection from one of the owners of the company. 3. 6. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x7? 4. 2. liabilities.000 120. 5. 6% interest note in exchange for extending the due date on a receivable. Example: Shareholders’ Equity -500 Net Income -500 Assets Interest accrued on notes payable was $500 NC Liabilities +500 Required – 1. and no change by NC. 20x7 128. Purchased for $500 cash an insurance policy for the following year.1 Page 41 Problem 1-7 The following information was extracted from You Read Magazines Co. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x6? 3. v.000. decreases by a minus. Received $2. General Ledger Account Subscriptions Received in Advance Dr Cr Balance January1.000 Entries during 20x7 Required – 1. What is the subscription revenue to be earned in 20x8 for which the subscription fee had been received in 20x7? (CGA Canada) Problem 1-8 Identify the net effect of independent transactions (1) through (7) on assets.000 from a customer for an outstanding invoice. What was the subscription revenue earned during 20x7? 2. Show increases by a plus.000 Entries during 20x7 80.000 1-year. Received from Smith a $10. Interest accrued on the note payable was $1.1. 7% note payable from the seller. Purchased new equipment by obtaining a $200. The company requires that customers pay the annual subscription fee for the magazine in advance. shareholders’ equity and net income. Interest accrued on note receivable was $1. Received a $50. (CGA Canada Heavily Adapted) .000 90-day. 4.Introductory Financial Accounting.400. 7.
He was perplexed that the profit margin had improved in spite of his intuition to the contrary.000 of Mr.000.000 40. 3.000 was received in 20x7 and was included in cash received for sales 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. At the end of 20x6 and 20x7. 6. 4. Purchases. there were goods in inventory costing $3.000 received in 20x6 pertained to a sale made in 20x5. Required 1. Other expenses in 20x7 included $1.000 had not yet been received. Based on the above. Cash paid for purchases in 20x6 included an amount of $2. v. Cash. 2.000 and $5. Cash’s analysis. Cash’s personal expenses.000 30% On examination. Identify any two generally accepted accounting principles that were violated in Mr. The $20.000 $10. An amount of $5. accounts receivable for sales made to customers totaling $20.1 Page 42 Problem 1-9 Mr.000 14.1. Net income and Profit margin for 20x6 and 20x7. At the end of 20x6. Cost of goods sold. Ronald found the following: 1. There was no money due from customers at the end of 20x7.66% 20x7 $70.Introductory Financial Accounting. 2. calculate Sales. using the accrual method of accounting.000 10. (CGA Canada) .000 $21. the proprietor of Error Margin was excited to learn about profit margin analysis and immediately applied his knowledge to evaluate his business.000 which was a deposit on goods that were to be purchased in 20x7. 5.000 35.000 16. respectively.
pruning and maintaining the trees be accounted for? Explain. The largest cost of this business is the cost of fertilizing. Required a. It normally takes about 15 years for a tree to grow to a suitable size. Use the criteria for revenue recognition to explain when revenue should be recognized for this tree farming business. . v. maintains. in parking lots at select locations in major urban areas.Introductory Financial Accounting. It sells the trees for cash. How should the annual cost of fertilizing. and harvests evergreen trees.1 Page 43 Problem 1-10 Evergreen Inc. primarily during the Christmas season.1. operates a tree farming business. It plants. b. pruning and maintaining the trees over the 15-year period.
875 from JP Developers for the work completed on Dec. 13 Dec.000. for the month ending December 31.875.Introductory Financial Accounting.000 in cash and agreeing to pay the balance in six months. 20x6? (CGA Canada Adapted) .1. Completed work for a client and immediately collected $680 in cash for the work done. 1 Dec. the following transactions were completed during December 20x6.000 for rental of office space for December rent. to V. Prepare journal entries for the above transactions What is operating income for V. 13. Strait in exchange for $6. Completed work for JP Developers and sent them an invoice for $1. 3 Dec. Required – a. 7 Dec. Purchased office supplies on credit for $300.300 cash to the office secretary for December’s wages. Strait opened an architecture company. 28 Dec. 31 Dec. 31 Issued 100 common shares of the new company. b. which revealed that $200 of the $300 worth of office supplies purchased on December 17 were still on hand. V. Purchased the office furniture and equipment of a retiring architect for $4. paying $1. Strait Ltd. Dec. 31 Dec.1 Page 44 Problem 1-11 V.000 cash. Strait Ltd. Paid $1. 17 Dec. Performed a count of office supplies. Paid $1.. Received $1. v.
o. . which were all paid in cash. Total sales were $900. The principal on the current notes was collected on May 1. Prepare an income statement. 20x2 was $240. The principal on the remaining notes is payable on May 1. utilities and supplies. For insurance.depreciation expense for 20x2 was $30.1. Wages earned but unpaid. $19. The merchandise inventory as at December 31. For the interest on the note receivable. 20x2 for Ruiz Pharmacy: a. Required 1. $500.Introductory Financial Accounting. $15 Total income tax expense for 20x2 is $20. 20x2. The following adjustments were made on December 31. k. The notes receivables are from a major supplier of vitamins. 2. statement of retained earnings and balance sheet for 20x2. i. To trade creditors. f. To Revenue Canada for income taxes. b.1 Page 45 Problem 1-12 The following summarized transactions (in thousands of dollars) occurred during the year ended December 31. The rate is 12% per annum. computed as 40% of pretax income of $50. To the insurance company for a new three-year fire insurance policy effective September 1. 20x5. of which 80% were on credit. 20x2. v. December 31. $189. $74. $193. l. c. $36. j. For new equipment acquired on July 1. r. m. 20x2. advertising. h. q. For depreciation . To employees for wages. Interest for twelve months on all notes was collected on May 1. Collections from credit customers were $700. Post all of the above transactions in T-Accounts. p. The board of directors declared cash dividends of $26 on December 15 to be paid on January 21. d. e. 20x2: n. For miscellaneous expenses such as store rents. 20x2. Merchandise inventory purchased on account was $520. Cash disbursements were: g.
000 190. Ottkancester’s largest independent household appliance store.000 in installments on its taxes. On August 31.000. During fiscal 20x5 Peter paid $15. 20x4.000.000 8.1. v. Cash sales were $775.500 14.000 20.. Peter purchased appliances from suppliers for $850. Peter paid suppliers $600.000 $763.000 during the year from customers who purchased on credit.1 Page 46 Problem 1-13 Peter is the owner and operator of Peter's Appliance Shop Ltd. All purchases were made on account.000 260. The following information has been obtained about the fiscal year just ended: 1.500 It is now mid-September 20x5. Peter uses the financial statements mainly for tax purposes and to show the holders of the long-term notes. The cost of the appliances sold during fiscal 20x5 was $745. 6.350. is shown below. Sales during the year were $1.000 in taxes.000 for appliances it purchased on credit. mainly to builders.500 Liabilities and shareholders' equity Accounts payable Taxes payable Interest payable Long-term notes payable Capital stock Retained earnings $265. Peter’s balance sheet for August 31. .000 123.000 446. The remainder was on account.500 by Peter.500 100. employees were owed $7. 4. At year end the accountant estimates that Peter owes an additional $12. Peter's Appliances Shop Ltd. 3. Peter paid salaries and commissions to employees of $200. During the year Peter paid the taxes it owed at the end of fiscal 20x4.Introductory Financial Accounting. 20x4 Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures Accumulated amortization $ 30. the company's year end.000 110.000 $763. 7. 20x5. 2.000. 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. Peter collected $375. Peter needs to prepare its financial statements for the year ended August 31.000. Peter has been in business for five years.000 -40. 20x5.000. Balance Sheet As at August 31. 5.
Interest is paid annually on September 1. During 20x5 Peter purchased new capital assets (furniture and fixtures) for $25. 11. 20x5 Peter paid $3. Peter recently redecorated his kitchen at home.000 in deposits from customers who wanted a guarantee that their appliances would be delivered when they needed them. Peter paid $20.500 in interest to the holders of the long-term notes. 20x4 to reduce the balance owed on the long-term notes. Peter must pay 2% of annual sales to the property owner 60 days after the year end. The deposits pertained to a particularly hard-to-get appliance. Amortization expense for 20x5 is $22. Peter expects that the appliances will be delivered in early November 20x5. He took a refrigerator.000 on September 1. Before July 1.000 in cash for other expenses related to operating the business in fiscal 20x5. For accounting purposes. In addition. Required – Prepare an income statement. The interest rate on the notes is 8. The prepaid rent at the beginning of the year represented 4 months of prepaid rent at the old location.000 a month for the rent of its store.Introductory Financial Accounting.000. In addition to the interest payment. 10. Peter paid $225. These deposits were not included as part of cash sales. Beginning July 1.1 Page 47 8. 12. . 20x5.500 a month in rent. The terms of the lease require that rent be paid six months in advance on January 1 and July 1 of each year. 14.5%. 13. and microwave that cost $4. stove. v.1. 20x5 Peter pays $4. a statement of retained earnings and a balance sheet and a statement of cash flow for Peter's Appliance Shop Ltd.500 from the store and installed them in his new kitchen. treat this as a dividend. 9. for the year ended August 31. Peter accepted $10.000 cash. During the year Peter paid $8.
The bank reconciliation starts with the balance per the bank statement. and Prepare a list of deposits that were made in the cash account but were not yet recorded on the bank statement (outstanding deposits). Typically. Accompanying the bank statement are all the cheques that have cleared the bank account. Compare all deposits recorded on the bank statement to those recorded in the cash account. bank accounts. 4.. every 30 days a company will receive a bank statement from the bank. Cash Cash and Investments For accounting purposes.1. bank service charges.1 Page 48 2. petty cash and any foreign currency on hand. It starts with the opening bank balance and ends with the ending balance. 5.Introductory Financial Accounting. v. cheques deposited that are returned due to insufficient funds (NSF cheques). For example. etc. 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. 3. 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 . cash generally means any cash on hand. 2. This process is as follows: 1. Prepare a list of cheques that were written but that have not yet cleared the bank account (outstanding cheques). The bank statement is a running total of all transactions that were made in the account since the last bank statement was produced. The balance showing on the bank statement needs to be reconciled to the balance shown in the company’s cash account. Ensure that all cheques returned correspond to the amount entered into the cash account.
574 • a deposit made on August 31 in the amount of $3.574) $42.579 (before any adjustments above) The first thing we do is make adjustments to the cash account for items on the bank statement that have not yet been recorded: Bank service charges Cash To record the bank service charges for the month of August. 20x7 shows the following: • ending balance of $45.673 3. August 31. 20x7 $45. we prepare the bank reconciliation: Cash per bank. • the total outstanding cheques amount to $6. The cheque was incorrectly written in the cash disbursement journal as $332.1 Page 49 Example – The Parkes Company’s bank statement dated Aug 31.545 (6. v. Cash ($332 – 323) Accounts payable To record the error in recording cheque # 345.644 $156 $156 788 788 9 9 Finally. August 31.579 (156) (788) 9 $42. The correct amount is $323.673 • 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.644 . before adjustments Less bank service charges Less NSF Cheque Add error on cheque # 345 Cash balance after adjustments $43. 20x7 Add outstanding deposits Less outstanding cheques Cash per books.Introductory Financial Accounting. Accounts receivable Cash To record the returned cheque. The next step will be to calculate the revised cash balance: Cash balance.545 was not recorded on the bank statement • the general ledger cash account shows a balance of $43.1.
• available for sale investments: any unrealized gains or losses are charged to Other Comprehensive Income. strategic investments are classified as long-term investments. v. They are therefore specifically held for purposes of resale and are designated by management as such. are charged to Net Income. 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. Other Comprehensive Income becomes part of Shareholders' Equity. Where the two methods differ is on how the adjustment to fair market value is recorded.Introductory Financial Accounting. 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. 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.1. the investments are carried at fair market value. The classification of available for sale investments as current or long-term assets depends on management intent. Regardless of how they are classified.1 Page 50 Non Strategic Investments Investments in the shares of another corporation can broadly be classified as non-strategic or strategic investments. operational or financial policies. • . trading investments: all gains. the accounting for investment income. By their very nature. Non-strategic investments. Any realized gains or losses are charged to Net Income. Held for trading investments are acquired or incurred principally for the purpose of selling or repurchasing it in the near term and are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking. 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. otherwise they are classified as long-term assets. there is no difference in the accounting for these investments. whether realized or unrealized. at the balance sheet date. the subject of this chapter. For both types of investments. they are classified as current assets. If management intends to hold these for a period of less than one year. These investments will either be classified as held for trading or available for sale securities.
1 Page 51 Example .900. On February 12.on June 30.500.000 600 600 1.900 $16.500 Oct 15. 20x6 Cash Unrealized holding gain Gain on sale of investments Available for Sale Investments XXXX XXXX $1. v.500 If the investment has been classified as a trading investment. 20x5 . 20x6.500 Oct 15. The following journal entries will be recorded with regards to this investment: Jun 30. 20x5 Held for Trading Investments Cash Cash Investment income Held for Trading Investments Unrealized trading gain Note: the difference is that the unrealized trading gain is part of net income and gets closed out to retained earnings. 20x5 At December 31. 20x5 Dec 31.Introductory Financial Accounting. 20x5 you purchase the shares of another company for $15.500 1.000.500 $16. On October 15. The investment is classified as an available for sale investment.500 1. 20x5 (the balance sheet date).000 $15.000 $15. 20x5 we receive a dividend cheque for these shares in the amount of $600.900 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 12.000 600 600 1. 20x5 Dec 31.500 1. 20x5. 20x5 Available for Sale Investments Cash Cash Investment income Available for Sale Investments Unrealized holding gain $15. $15. you sell the investment for $16. the fair market value of the shares is $16.1. At December 31. then the following journal entries would have been recorded: Jun 30.
500 . v.900 400 $16.1 Page 52 Feb 12. 20x6 Cash Realized trading gain Temporary Investments $16.1.Introductory Financial Accounting.
a company received a cheque from a customer in payment of the related account receivable.095 b) $21.595 .095 9. 20x8.200 What amount should be reported as cash in the current asset section of Swiss Company’s balance sheet at December 31.1 Page 53 Problems with Solution Problem 2-1 1. v. and it was deposited on May 18. During May. The cheque was written for the correct amount of $152.700 3. An analysis of the cash account for Swiss Company at December 31. 20x8 revealed the following details: Balance in bank account Customer cheques dated December 31. 20x8? a) $15. on hand but not yet deposited Swiss Company cheques that have not cleared the bank account $15.595 c) $25. The May bank statement listed the deposit at $512.1.Introductory Financial Accounting. 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 2.095 d) $31.
700 580 1.279 b) $4. with respect to cash activities. The ending balance on the May bank statement is shown as $4. 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. December 31 Cheques outstanding. was gathered by Sarg Ltd.288 c) $4.700 77.225.1 Page 54 3. deducted from Sarg’s account in error by the bank A $1.300 5.’s bookkeeper. v.200 cheque received from a customer on December 13 in payment of an account receivable was incorrectly recorded as Required a.327 $15 48 63 34 Problem 2-2 The following information for the month of December 20x6. At the end of the month.000 77. December 1 Cash received during December Cash payments made during December Cash balance per bank statement. Cash balance per books. b.548 6. $ 3. Prepare any adjusting journal entries that would result from the December 2006 bank reconciliation.020 .1. Prepare the December 20x6 bank reconciliation for Sarg.300 52 1. December 31 Bank service charges for December Deposits in transit at December 31 Cheque issued by Sparg Ltd. A company is preparing its May bank reconciliation.312 d) $4.Introductory Financial Accounting.
v. (CGA Canada) . Prepare the necessary journal entry(ies) to bring Focus Ltd. as $260. had been incorrectly recorded in the books of Focus Ltd. 20x7. In preparing the bank reconciliation. showed a balance of $480. c) Bank service charges for December amounted to $35 and had not yet been recorded by Focus Ltd. at March 31.’s cash account according to its accounting records was $4. e) A $530 payment on account received from a customer was incorrectly recorded in the books of Focus Ltd. 20x7: #501 for $780 and #533 for $1.915. Prepare a bank reconciliation for Focus Ltd. 20x7. 2. f) The balance in Focus Ltd. deposit of $6. 20x7.’s cash account up to date at March 31. for the cash purchase of office equipment.200 had not been received by the bank in time to be included in the December bank statement.1 Page 55 Problem 2-3 The March 31. in the amount of $620. the following information was determined: a) The following cheques are outstanding at March 31. bank statement for Focus Ltd. 20x7.Introductory Financial Accounting.200. Required – 1. as $350. b) The March 31. d) Cheque #521 issued by Focus Ltd.1.
000.000 44.'s temporary investments at December 31.000 30. 20x0.1 Page 56 Problem 2-4 During 20x0.000 51.000 45.Introductory Financial Accounting. Holdco Ltd.000 31. b) On January 10.000 51.000. 20x1. The data on Holdco Ltd.000 26. Support your answers with calculations.000 20. . Assuming these investments are classified as held for sale investments.1.000 28. Management is quite unfamiliar with these different methods and has approached you for this information.000 5. is shown below: Temporary Investments Company Name XYZ Computer Satellite Systems Strategic Air Defence Systems Generic Engineering Cellulose Telephone Cost Number of Shares Market Value as at December 31. advise management of two alternative methods of accounting for temporary investments and indicate the effect each has on balance sheet and income statement information.000 10. and all the Strategic Air Defence Systems shares are sold for $35. Required a) As chief accountant for Holdco.000 $ 70.000 $226.000 $234. write the journal entries to record the two sales. decided to invest in the shares of a number of "Hi-tech" companies.000 9.000 63. all the XYZ Computer shares are sold for $75. v. 20x0 $ 72.000 7.000 Recent discussions have brought to management's attention that there are different methods of accounting for temporary investments.
000 10.000 $57.500 29.1 Page 57 Problem 2-5 Mable Company has a portfolio of temporary investments consisting of the following (all investments were purchased in 20x0): December 31 Market Value Cost Security A B C $20.000 20x0 $18.000 14. calculate the balance in Other Comprehensive Income at the end of each year. calculate the amount of unrealized trading gain or loss for each year.300 20x1 $19. v.500 31.Introductory Financial Accounting.000 12.500 $62.500 14.800 $60. Assuming these investments are classified as trading investments. .000 28.500 Required a) b) Assuming these investments are classified as available for sale.000 32.000 20x2 $16.1.000 $66.
000 x 8% 50.000 x 3% 120.200. For example. Accounts receivable are reported on the statement of financial position at their net realizable value (NRV).000 x 40% $ 7. 3% of accounts between 31-60 days. the company estimates that 1% of current accounts will eventually become uncollectible. where the allowance for doubtful accounts is estimated directly.000 280.000 $45. Aging of the accounts receivable listing This involves grouping all outstanding receivables based on how long these have been outstanding.200.500 8. There are generally three approaches to estimating the allowance for doubtful accounts directly (balance sheet approach): 1.000 and that the aging of accounts receivable is as follows: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750.600 20. Accounts receivable are.000 $1. There are two approaches to calculating the allowance for doubtful accounts: the balance sheet approach. whereby we estimate the amount of bad debt expense on the income statement.000 x 1% 280.1. 8% of accounts between 61-90 days and 40% of accounts over 90 days.400 9.1 Page 58 3. the aggregate of the unpaid invoices at any point in time. and the income statement approach. Accounts Receivable Whenever credit is extended to customers for the provision of goods or services.000 120. v. which is equal to the net amount of outstanding invoices the firm expects to recover. therefore.Introductory Financial Accounting.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.500 .000 50. assume the total receivables add up to $1. The allowance for doubtful accounts at the end of the year will be: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750. an account receivable is created.
As a percentage of the ending accounts receivable balance This approach simply takes then ending accounts receivable balance and multiplies it by a percentage. or (2) the amount is small and the cost of recovering the account is greater than the balance owed. Allowance for Doubtful Accounts Cr.000. Bad Debt Expense Cr. For example. Note that this approach does not estimate the allowance for doubtful accounts. The journal entry to record bad debt expense under either the balance sheet or income statement approaches is: Dr. v. so we estimate the bad debt expense as a percentage of credit sales. it would not be meaningful to age the accounts receivable listing. if the ending accounts receivable balance is $1. Specific account identification When a company has accounts receivable from a limited number of customers and has an intimate knowledge of these customers.200. then the allowance for doubtful accounts at the end of the year will be $1. The income statement approach is used whenever a company offers their customers revolving credit facilities (i.Introductory Financial Accounting.1. we first reverse the journal entry made to write off the account: Dr. but estimates the amount of bad debt expense. Any accounts written off are written off against the allowance for doubtful accounts: Dr. 3.1 Page 59 2.e. The sum of the estimated uncollectible accounts at any point in time will form the allowance for doubtful accounts. In this case.200. Allowance for Doubtful Accounts .000 and the company estimates that 5% of these accounts will eventually become uncollectible. it may be able to identify which specific accounts may become uncollectible.000 x 5% = $60. Accounts Receivable Cr. Allowance for Doubtful Accounts Recording accounts written off An account will generally be written off when (1) you receive a notice from a Trustee in Bankruptcy that you will receive an amount that is less than the amount owed. a department store which offers their customers a credit card). Accounts Receivable Recording recoveries of accounts written off When an account that was previously written off is subsequently recovered.
The balance in the allowance for doubtful accounts at the beginning of the year was $50.000 Beginning Bal Recoveries Ending balance before adjustment . previously written off accounts totaling $10.800.000. During the year.Introductory Financial Accounting.1. Cash Cr. the following transactions took place: • • accounts totaling $75.000 $10. The journal entry to record the accounts written off will be: Allowance for doubtful accounts Accounts receivable $75.000 $15.1 Page 60 We then record the collection on the recovered accounts receivable: Dr.000.000 debit balance in the Allowance for Doubtful Accounts: Allowance for Doubtful Accounts Write-offs $75. Accounts Receivable Example – The Jasmine Company’s accounts receivable at the end of the year totaled $2.000 $75.000 were written off.000 $10.000 We then record the cash receipt on the accounts receivable: Cash Accounts Receivable $10.000 10.000 were recovered.000 $50.000 This will result in a $15.000 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. v.
500 $94.000 $2.000 $92.800.000 x 2.75% of the accounts receivable balance will be uncollectible.1.000 x 2.5% 6.5% 2.000 .000.000 x 15.500 The bad debt expense will be $94.000 x 1.000 x 6.000 3.000.500 Estimated % Uncollectible 1.800.0% 15.5%) + (600.75% = $77.000 $83. The accounts receivable aging is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days 1. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $92.0%) = $79.0% Management estimates that 2.0%) + (150.5%) + (250. Using specific identification of accounts.800. management estimates that the allowance for doubtful accounts should be $68. we will assume four independent scenarios: 1.Introductory Financial Accounting. The allowance for doubtful account should be established at $2.800.1 Page 61 In order to calculate the bad debt expense for the year. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $83. v.000 600.500 since this is the entry required in the Allowance for Doubtful Accounts account to bring the account to a credit balance of $79.500: Bad Debt Expense Allowance for Doubtful Accounts 2.000 250.000 150.000 The allowance for doubtful accounts is estimated to be: (1. $94.
000. .000 x 1. In approaches 1-3. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $90.Introductory Financial Accounting. v.000 This will cause the allowance for doubtful accounts to have a credit balance of $15.000. Total credit sales for the year amounted to $6.1 Page 62 4. + $90. Bad debt expense will then be equal to $6.000.000.000.5% = $90. = $75.1.5% of total credit sales.000 dr.000 cr. we were estimating the Allowance for Doubtful Accounts with the residual being bad debt expense.000 $90. Management estimates that bad debt expense will be equal to 1. 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.
800 c) $7. v. At the end of 20x9.Introductory Financial Accounting.600 d) $6.000 Experience indicates that 4% of the uncollected accounts receivable at the end of each year ultimately will be uncollectible.000 d) $13.1. January 1.000 (11.400.000 360.1 Page 63 Problems with Solutions Problem 3-1 – Multiple Choice Questions 1. 20x8 a) $4.900 c) $6.000 b) $4.600 b) $1. A company reported the following items for 20x8: Accounts receivable balance.900 2. What is bad debt expense for 20x9? a) $1. the balance of the allowance account was $5. 20x8 Allowance for doubtful accounts balance.000) 400. A company estimated the needed balance in its account “allowance for doubtful accounts” by aging the accounts receivable.000.000 e) $13. What should be the adjusting entry amount for doubtful accounts at December 31. 20x8 (credit) Total credit sales during 20x8 Total collections on accounts receivable during 20x8 Uncollectible accounts written off during 20x8 $80. At the end of 20x8. January 1.000 20. the aging schedule indicated that the balance of the allowance account should be $6. During 20x9.800 . the company wrote off $500 and collected a $300 receivable that had been previously written off as uncollectible.
000 cr. c.200.000 3. 2004 Required – a. 2004 Allowance for doubtful accounts.000 dr. . just prior to writing off as uncollectible an account receivable of $30.000 $3. January 1. Provide the December 31. $ 15.000 11. What were the net realizable values of the accounts receivable as shown by the accounting records before and after the write-off? Before $2.875 $2.000. 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. assuming the allowance method is used to account for uncollectible accounts. 63.000 After $2.975 $2. 2004 adjusting journal entry to record bad debts.000 55.000 14.000 and an allowance for doubtful accounts of $125. assuming the allowance method is used and management estimates the allowance to be 3% of the closing Accounts Receivable balance.875 $3.000 1. b.095 a) b) c) d) Problem 3-2 The following information relates to Merit Ltd. Provide the December 31.000.000 800.900. Provide the journal entry to write off actual accounts receivable determined to be uncollectible and recoveries. 2004 adjusting journal entry to record bad debts.1.970 $3.875 $2. assuming the allowance method is used and uncollectible accounts are estimated to be of 1% of credit sales.1 Page 64 3. v. January 1. for the year ended December 31. A company had accounts receivable of $3.Introductory Financial Accounting.
20x1 and 20x0: 20x1 Credit Sales Collections (excluding recoveries) Accounts written off Recovery of accounts previously written off Days Past Invoice at December 31 0 – 30 31 – 60 61 – 90 Over 90 Required – Prepare all journal entries to record the above transactions $3.000 2.915.1 Page 65 Problem 3-3 Sigma Company began operations on January 1.000 80.000 - 277. 20x0.1.000.800.000 90.000 .000 45.000 20x0 $2.000 2.000 27.000 25.000 7. v.Introductory Financial Accounting.000 16.000 60.400.000 15.000 234. 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.
2. to record bad debt expense for the year and accrue interest on the promissory note. Suppose now that instead. With all other data being the same from above.000 in payment of outstanding accounts receivable. The company uses the allowance method of accounting for bad debt expense. 4. During 20x7 the following summarized transactions occurred: 1. EED Ltd. On December 1. prepare journal entries. decided that an allowance equal to 5% of total accounts receivable would be sufficient to cover uncollectible accounts. Received cash of $400.500.Introductory Financial Accounting. Based on industry averages and its experience in 20x6.1. prepare the journal entries.1 Page 66 Problem 3-4 EED Ltd. 20x6 there was a $2. 20x6. required at December 31. Sold merchandise on credit for $500.000 debit balance in the accounts receivable account. (CGA Canada adapted) 2. EED Ltd. required at December 31.000. if any. an accounts receivable in the amount of $3. 20x7. 20x7 to record bad debt expense for the year. Required 1.000 was converted to a 6-month promissory note to allow a cash-strapped customer some time to meet his obligations.000 credit balance in the allowance for doubtful accounts account and a $40. expects 2% of credit sales to be uncollectable. On December 31. began operations on January 1. Prepare journal entries to record the above transactions on the books of EED Ltd. 20x7. v. . if any. The promissory note bears an interest rate of 12%. Wrote off uncollectible accounts receivable in the amount of $1. 3. In addition.
000 10. Example: It is Little Company’s first year of business. Little Company purchases an additional $10. or never ending. and any adjustments that are needed will be made to the inventory account. Little Company purchases $5. paying cash.1.000 worth of inventory. 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. the amount the company generally receives from its customer should always be greater than the value of the inventory. Inventory Accounts Payable 10. Note that unless a company is offering a discount to get rid of inventory or for some other reason. the effect on the inventory account is the same as the above journal entry. Each item that is purchased for resale gets debited to the inventory account. From time to time. The Perpetual Inventory System The term perpetual means continuing without interruptions.000 The next day. The journal entry would be: Inventory Cash 5. and then evaluate the different valuation methods a company can chose to determine the cost of inventory. Furthermore.000 worth of inventory to a customer for $6. Little Company makes its first big sale. After two weeks of business. . We still increase the inventory account by the amount of the purchase. this time on account. They sell $4. v. we mean an inventory system that has no interruptions. a physical count of inventory will be taken to ensure accuracy of the perpetual records. Inventory A key part of determining the cost of the items that a company sells to its customers.000 cash.000 5. When we talk about a perpetual inventory system.000 of inventory. we just create a payable instead of reducing our cash account. What that means is that inventory is tracked constantly in a real-time basis.Introductory Financial Accounting. We will begin by looking at two fundamentally different types of systems. as well as valuing the items that it has on hand to resell at any point in time. On the first day.1 Page 67 4.000 Note that even though we are not paying cash. is the inventory system that it chooses.
nor do we keep a running total of COGS. we do a physical count of inventory at the end of the year to determine the amount to include on the Statement of Financial Position under “Inventory”.000 5.1 Page 68 To record the sale. as is the inventory account. as purchases are made of inventory they are tracked in a temporary account called “Purchases”. Continuing with the example above.000 cash would be recorded. Purchases has several contra accounts that track other expenses or discounts that may be associated with the purchases. First. However. These are: . To do this. Under the Perpetual system the COGS is a running total.000 worth of inventory from our Inventory Asset account. it removes the $4. under a periodic inventory system.Introductory Financial Accounting. Instead. This varies significantly from the Periodic Inventory System.000 6. we have recorded the sale and the receipt of cash. the journal entry would be: Cash Sales Revenue 6.000 The Purchases account keeps a running total for the year of all purchases of inventory made. which we will now turn our attention to. Second. as: Purchases Cash 5. is used to keep track of all of the costs of all of the items a company sells in one period. it records the expense of the items that were sold. The Periodic Inventory System Under the Periodic Inventory System. Cost of Goods Sold (COGS). we do not keep a “running total” of inventory. the journal entry would be: Cost of Goods Sold Inventory 4. This expense account.000 4.1. we have not removed the items that were sold from our inventory account. So what do we do with the purchases of inventory we make throughout the year? Throughout the year. however. that first purchase of inventory for $5.000 This journal entry does two very important things.000 At this point. v.
At the same time. based on the physical count.Introductory Financial Accounting. the inventory account is adjusted to the appropriate ending balance. the opening inventory was $0. as this is a new business. To calculated COGS: . v.000 worth of inventory on hand. At the end of the year.000 5.000 10.1.000 and $10. the Purchase account and all contra accounts are closed out to zero. The amount needed to balance the equation is the Cost of Goods Sold.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 Cost of Goods Sold Equation is as follows: Beginning Inventory + Purchases (net of contra accounts) = Cost of Goods Available for Sale Ending Inventory = Cost of Goods Sold Example 1 – Let us use the Little Company example from above.000 were made.000 Let us suppose that those were the only purchases made during the year. If you remember.000 10. Purchases of $5. and that at the end of the year a physical count of the inventory revealed that there was $11. The new journal entries would be: Purchases Cash Purchases Accounts Payable 5.
000 2.000 . Cost of goods sold can be independently calculated as follows: Beginning Inventory + Purchases (2.1.000) . Furthermore.700.700. $175. 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 – 27.000 2. in order to get the balance in the inventory account to $360.836.000 Note that the Inventory balance given of $175.000 36.000 Cr.000 36.000 Example 2 – Tetrie Company shows the following balances at the end of the year: Dr.000 2.000 Tetrie uses a periodic inventory system.700.Introductory Financial Accounting.000 = $185. A year-end count reveals that the ending inventory balance should be $360.000 27.476.000) $2.000 48. The balance is sitting at $175.000. the Purchases account and all of the associated contra accounts have been set back to $0.000 27. v.1 Page 70 Beginning Inventory + Purchases ($5.000 185.000 11.476.Ending Inventory (as per count) = Cost of Goods Sold $175.000 + 36.000 2.000 – 48.000 increase) Purchases (close account) Transportation-in (close account) 2.000 would be the ending inventory balance from last year.Ending Inventory (as per count) = Cost of Goods Sold $ 0 15.000 we must increase it (or debit it) by $185.000 and it should be.000 (360. $360. Therefore.000.661. according to our count.000.000 – 175.000 + 10.000 $4.000) = Cost of Goods Available for Sale . Inventory Purchases Transportation-in Purchase returns and allowances Purchase discounts 48. They are ready for the next fiscal year.
That is to say. we don’t know specifically which items are being sold so we use an average of some sort to determine cost.1 Page 71 Inventory Valuation Methods The above discussion of periodic vs. v. perpetual inventory systems dealt with how we track the inventory and purchases that flow through a company. therefore. There are two different valuation methods that can be used to calculate the value of inventory: specific item valuation or cost flow assumption. that inventory is mixed all together and. like a car dealership. that is at what cost do we record the inventory and COGS. Conversely. it is possible to track each item in inventory separately. That is. . Under this method we can make one of two assumptions: that the first inventory that arrived is the first inventory that was sold (FIFO Method). when the item is sold. Some examples of situations where this method would be possible are: when items have specific serial numbers. or when a company has relatively few items in inventory that have a specific cost associated with them. we remove its specific cost from inventory and debit COGS at the carrying amount. the ending inventory is equal to the most recent purchases. We will now discuss how we attach value to the inventory.1. Cost-Flow Assumption This method is used when items cannot be differentiated from one another. In this case. the COGS is equal to the opening inventory + earlier purchases. FIFO Under the FIFO method.Introductory Financial Accounting. we assume that the “First In = First Out”. or when the value of the items is so small that it does not warrant the cost of tracking the specific item value. like a jeweler. both the COGS and the ending inventory cost will be the same under the FIFO valuation method. Specific Item Valuation This method is used when inventory items can be specifically identified. Note that regardless if a company is using a periodic or perpetual system.
25 each Sold 700 units Purchased 300 units @ $1.25 1.00 each. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.25 = $125 Total value of ending inventory = $330 + 125 = $455 Using the FIFO perpetual method.10 each Sold 200 units Under the FIFO periodic method. 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.Introductory Financial Accounting. 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 $1.00 1.20 1. v.015 Secondly. Lainey Company has 400 units in its opening inventory. Cost of goods sold can be calculated in two ways. They purchased these units for $1.000 $400 640 1.470 (455) $1. First.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. Under FIFO.10 1. we sold .10 = $330 January 5 purchase = 100 units x $1.070 1. using the cost of goods sold equation: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1. This is not a coincidence – both approaches always provide the same result. Throughout the period.1. we know that we sold a total of 700 + 200 = 900 units.25 $240 500 (400) (240) (125) 330 (250) Balance Units Total Cost 400 600 1.25 1.20 1.20 each Purchased 400 units @ $1.1 Page 72 Example – On January 1.
and one is used when you have a perpetual system.10 each Sold 200 units Under the annual Weighted Average method. The annual weighted-average for periodic systems uses a similar methodology.00 each. Annual Weighted-Average – Periodic Systems Under a periodic system.015 Weighted-Average Method There are two versions of this method.00 = 200 units @ $1.1 Page 73 the units in opening inventory plus the first of the purchases we made through the year.20 = 300 units @ $1.20 each Purchased 400 units @ $1.25 = 900units $ 400 $ 240 $ 375 $1.1. We then close out the purchase account and the associated contra accounts to determine what the COGS is. Opening Inventory January 3 purchase January 5 purchase COGS 400 units @ $1. the unit cost of inventory items is determined using the following formula: Unit Cost = Cost of Goods Available for Sale/Units Available for Sale Example – On January 1. the total sum of the year’s activities are taken into account at the end of the year to make the determination of the value of inventory. you will remember that we do an inventory count once a year to determine the ending inventory balance. we calculate the average cost of inventory as follows: . Lainey Company has 400 units in its opening inventory. that is. They purchased these units for $1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.Introductory Financial Accounting. v. So COGS would be calculated as the cost of the first 900 units.25 each Sold 700 units Purchased 300 units @ $1. Using this method. Throughout the period. one is used when you have a periodic system.
13077/unit = $1. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1. we are keeping a running total in the inventory account.070 1.20 each) January 5 Purchase (400 units @ $1.300 Average unit cost = Cost of Goods Available for Sale/Units Available for Sale = $1. Subsequently.13077/unit Ending Inventory = # units in inventory x unit cost = 400 units x $1.00 each) January 3 Purchase (200 units @ $1.10 each) $ $400 240 500 330 $1.1. Unit Cost = Cost of all goods on hand/number of units on hand.018 Alternatively.300 units = $1.470 (452) $1. The moving weighted-average system of inventory valuation takes this into account. that is the unit cost after the last purchase previous to the sale. when we make a purchase we debit the inventory account for the amount of the purchase.470/1.470 Units 400 200 400 300 1.018 Moving Weighted-Average – Perpetual Systems You will remember that under a perpetual inventory system.1 Page 74 Cost of Goods Available for Sale Opening Inventory (400 units @ $1. v. Under this system.25 each) January 19 Purchase (300 units @ $1. As such. then that is the unit cost used to determine the COGS for that sale.Introductory Financial Accounting. .13077/unit = $452 COGS = # units sold x unit cost = 900 units x $1. the average unit cost is recalculated every time a purchase is made. whatever the unit cost is at the time of a sale.
12000 Unit Cost = $640 / 600 Unit Cost = $1.14000 1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $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 1.12000 672 448 Units 200 400 (700) 300 (200) Unit Cost $1.20000 1.00000 $400 1. They purchased these units for $1.14000 1. Throughout the period.022 Alternatively. v.Introductory Financial Accounting.000 300 600 400 Unit Cost Total Cost $1. Unit Cost = Cost of all goods on hand/number of units on hand.25 each Sold 700 units Purchased 300 units @ $1.25000 1.070 1.470 (448) $1.00 each.000 3 Unit Cost = $672 / 600 Cost of goods sold is equal to the cost of goods sold for the two sales: $798 + 224 = $1.022 .1.10 each Sold 200 units Remember. under this system we recalculate the unit cost each and every time we make a purchase. Lainey Company has 400 units in its opening inventory.066671 640 2 1. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.20 each Purchased 400 units @ $1.10000 1.140 / 1.1 Page 75 Example – On January 1.140 342 3 1.
000 At present. First of all. Example –VenTure Ltd. If. . commissions of 10% would have to be paid to the sales team on any sale of this inventory.000. the inventory account has a balance of $50.000 X 10%) = $40.000 = $36.000.000 – 4. At the balance sheet date.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. the credit will be to income. The net realizable value of this inventory is: = Selling Price – Commission = $40. If the market value is less than cost. Inventory Loss Allowance for decrease in value of inventory 14. 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 to bring it to a zero balance. the accountant determines that they could sell this inventory for $40.000.000. next year. The net inventory balance that will be reported on the statement of financial position is $50. then the allowance will be debited by $14.Introductory Financial Accounting.1. 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. Show the journal entry to record the proper carrying value of the inventory. the analysis reveals that no allowance is required. is showing an ending inventory balance of $50.1 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. we must determine that the inventory’s net realizable value.000 = $36. This account operates much like the Allowance for doubtful accounts in that it gets adjusted to the desired balance at year end. We do this by creating a contra account to inventory called ‘Allowance for decrease in value of inventory’. Furthermore. v.000 – 14. then the inventory must be written down to market value.000 – ($40.000 14.
000 If Sales are $1.000.1 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.000 400.Introductory Financial Accounting.000 x 75% = $900.200.000. we could estimate COGS by using the following formula: Gross Profit = Sales x Gross Profit Ratio = $1.000 Example – The Gennissen Company’s inventory were destroyed by a fire and you need to estimate the ending inventory.000.000 860. 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 = $1.900.000. we must first understand how to calculate the Gross Profit %.200.000 600. To understand the application of this method.000. v.000 Purchases .000 and Gross Profit is $400.000 350.000 $1.000 25% . then we can estimate COGS as follows: COGS = Sales x (1 – gross profit ratio = $1.000 The estimated ending inventory is: $350.000 x 60% = $600.000 Opening Inventory + 860.000 x 40% = $400.000 Ending Inventory = $310.000. for whatever reason.000 x (1 – 25%) = $1. but we did have the Gross Profit Ratio. the Gross Profit Ratio = 40%. Example – Assume the following: Sales Cost of Goods Sold Gross Profit 1.000 x (1 – 40%) = $1.000 100% 60% 40% In the above example. If we did not have the COGS number.200.1.
What was cost of goods sold for the year ending December 31. the company returned merchandise costing $10. In addition.000. v. a) Liabilities would be overstated by $200.000. Fri. .000 to suppliers and incurred $25.000 2. c) Shareholders’ equity is understated by $6. 20x8? a) $478. c) Cost of goods sold would be understated by $200.000. 20x4.000. discovered that a $6.600.000.000 computer purchased for the chief financial officer on December 27 had been recorded incorrectly as an inventory purchase. b) Assets would be understated by $200.1.000 b) $503. financial statements.000 worth of inventory and took advantage of purchase discounts amounting to $6.000. Which of the following statements is true with respect to the impact of this error on the December 31. included an adding error in the inventory count that resulted in ending inventory of $1.000. During the year the company purchased $500. b) Inventory is understated by $6. 20x4. Owl Enterprises had merchandise inventory on hand amounting to $60. 3.1 Page 78 Problems with Solutions Problem 4-1 – Multiple Choice Questions 1. A year-end inventory count revealed merchandise on hand in the amount of $66. 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.Introductory Financial Accounting. d) Owners’ equity would be understated by $200. 20x8.000 instead of the correct balance of $1.000. Ltd. On January 1.000.400.000 in shipping charges on merchandise purchased during the period. The December 31.000 c) $515.000 d) $523. financial statements of Confu Ltd.000.000. After completing its inventory count and making the appropriate adjusting journal entries. d) Shareholders’ equity is overstated by $6.
b) Income for 20x9 is overstated by $42. Transportation out paid on delivery of goods sold during the month equaled $1.000. Sales totaled $80. Czech Ltd.000.000 during the month with terms 1/10. Czech had paid $42.200. One customer returned goods with a sales value of $500 and was issued a credit note. v. a shoe wholesaler.1.000. 20x9. FOB Shipping. FOB destination. e. The company uses a perpetual inventory system. All other sales made during the month were collected in the month with all customers taking advantage of the sales discount offered. 20x8.000. c) Income for 20x9 is understated by $15. e. .. d) Revenues for 20x8 are understated by $57. Required – Prepare the journal entries required to record the above events and transactions.1 Page 79 4.000. n/45. shipped goods to a customer on December 30. The selling price of the goods was $57. n/30. for the month of July 2006.000 for the goods and uses the periodic method to account for its inventory.000. 20x9. Merchandise was purchased at a cost of $50.Introductory Financial Accounting. Cozy sets the selling price on its shoes so that the cost of sales is equal to 70% of the selling price. All of the merchandise purchased during the month was paid for with Cozy taking advantage of the purchase discount offered. CIF destination. Which of the following statements with respect to this transaction is true? a) Income for 20x8 is understated by $42. e. e. all of which were made on credit with terms 2/10. The sale was recorded by Czech on January 2. e. The customer received the goods on January 6. Problem 4-2 The following summarized transactions relate to Cozy Co.
1 Page 80 Problem 4-3 Anvil Rock Company had the following inventory and purchases for the month of May.00 = $ 400 Anvil Rock uses a perpetual inventory system.500 Date May 1 May 5 May 14 May 21 May 29 Totals Sales Beginning inventory Purchase Sale Purchase Sale 20 @ $20.000 2.000 2.000 Price/Cost $12 18 30 23 33 .00 = 420 50 @ $22.100 125 $ 1. Beginning Inventory/ Purchases 30 @ $10.Introductory Financial Accounting. Required – a. c. assuming a firstin. assuming a FIFO cost flow system is used. Prepare the journal entries to record the May 29 sale on account.500 3. b. Problem 4-4 The following information concerns one of a company’s products. 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. Calculate the cost of ending inventory for May. Calculate the cost of ending inventory for May. assuming a weighted-average cost flow method is used.00 = $ 300 60 @ $11. v.410 70 $ 1.1.50 = 690 35 @ $12.00 = 1. first-out (FIFO) cost flow method is used.000 2.
The loss is to be determined based on the cost of the inventory in accordance with generally accepted accounting principles. 20x5. Banff lost all of its hiking equipment in a fire in March 20x8.1 Page 81 Problem 4-5 On January 1.000 58.000 30.000 480.000 units at $52 each 1. Corporate records disclose the following: Inventory — January 1.000 Banff normally realizes a gross profit of 30% on its sales. Required – Assuming the company uses a periodic inventory system.000 580. The store had an excellent Christmas season with the result that only 70 MP3 players were left in inventory on December 31. the Music Store had 400 MP3 players in inventory with a cost of $48 per unit. (Banff) sells skiing and hiking equipment to retailers. calculate gross profit for the year ending December 31. 20x5 1. Costs are assigned to inventory and cost of goods sold on a FIFO basis.000 440.000 8. under each of the following assumptions: a.000 615.000 15. the company was unable to pass on price increases to customers and thus maintained a selling price of $100 per unit throughout the year.000 units at $58 each $50. 20x5 October 15. It accounts for its inventory using a periodic inventory system.Introductory Financial Accounting.1.000 Due to competitive pressures. the company’s insurance policy will cover 80% of the loss suffered in this fire. 20x5. During 20x5 the company made the following purchases of MP3 players: February 21. 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. b. Costs are assigned to inventory and cost of goods sold on a weighted average basis. 20x5 June 15. Fortunately. .000 52. 20x5. After a very successful ski season and just as it was about to commence shipping its hiking equipment for the upcoming season.000 units at $50 each 1. v. (CGA Canada) Problem 4-6 Banff Mountain Equipment Ltd.
20x7. June 2 June 9 June 12 The company uses a perpetual inventory system. Calculate the cost of goods available for sale. Required – Prepare journal entries for the above transactions.1 Page 82 Required – Calculate the net loss from the fire.100 per unit. Ending inventory consisted of 60 units. Saret purchased merchandise inventory costing $42.000 of merchandise on account with credit terms of 2/10. June 1 Sold Whinr Ltd. performed the following transactions.000 on account. 20x7 Purchases — June 7. inventory value using the FIFO inventory pricing method. Calculate December 31. 20x7 20 units @ $900 each 440 units @ $950 each 200 units @ $1. The cost of the merchandise inventory sold was $15. Calculate December 31. n/30.000. v. n/60.Introductory Financial Accounting. January 1. $30.050 each During the year.1. Show all your calculations. Required 1. 2. the company sold 600 units at an average price of $2. (CGA Adapted) Problem 4-7 During June 20x8. The cost of the merchandise inventory returned was $5. Whinr returned $10.000. 20x7 Purchases — February 20. The company uses a periodic inventory system. The supplier provided purchase credit terms of 1/15. Whinr paid the balance due on the June 1 sale. inventory for 20x7: Beginning inventory.000 of the merchandise inventory claiming it did not meet its needs. Problem 4-8 The following information relates to Mejewel Ltd. Show your calculations. Saret Ltd. taking advantage of the sales discount. 20x7. 3. Show all your calculations. inventory value using the Weighted Average .
iii) iv) Required a.000 and a count of inventory on December 31. revealed merchandise inventory on hand of $30. Show all your calculations.000. Toyjoy paid $3. 20x7. As the new controller. which has a negative impact on the company’s cash flow.1 Page 83 inventory pricing method. Prepare a schedule of the cost of goods sold section of the income statement. n30.000 under credit terms of 3/15. i) ii) Purchased merchandise on account from Hirwin Toys for $80.Introductory Financial Accounting. n30.1. Prepare journal entries for each of the above summarized transactions. (CGA Canada) c. 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. b. assuming merchandise inventory on December 1. FOB shipping point.500 represented payment of a $50.000 in cash for freight charges on merchandise purchased during the month. for the month of December 20x7.200 credit memorandum from a supplier on defective merchandise Toyjoy had purchased and returned. Cash payments on merchandise purchased from Patel Inc. The payment of $48. you have made it a policy to ensure that all purchase discounts are taken advantage of. The company uses the periodic inventory method and the gross method of recording purchases. (CGA Canada adapted) Problem 4-9 The following is a summary of selected transactions for Toyjoy Ltd. amounted to $48.500. v. 20x7. which was paid within the discount period of 3/15. . Toyjoy had not yet paid for the merchandise.000 credit purchase. amounted to $150. Briefly explain the benefits. Received a $1.
ii) iii) Required For each error.1 Page 84 Problem 4-10 The following is a list of inventory errors which occurred in 20x6. Assume the companies involved used a periodic inventory system and treat each situation independently.Introductory Financial Accounting. 20x6 Retained Earnings. 20x6. There were no errors in the December 31. On December 28.000 computer purchased on December 28. If the error has no effect (NE). 20x6. Error 20x6 Cost of Goods Sold 20x6 Ending Inventory 20x6 Retained 20x7 Cost of Earnings Goods Sold (CGA Canada) . A $6. 20x7 inventory count. for use by the sales manager was incorrectly accounted for as an inventory purchase. then state so. indicate the dollar amount of the overstatement (O) or understatement (U) in 20x6 Cost of Goods Sold. 20x6 inventory count.1. a company received. Use the following format in answering this question. 20x7. v.000. There were no errors in the December 31. goods costing $5. inventory count $10. The company failed to record the purchase of these goods until January 15. None of the errors were explicitly discovered or corrected in 20x6 or 20x7 (some of the errors would automatically be corrected if normal accounting procedures were followed in 20x7). and for 20x7 Cost of Goods Sold.000 worth of goods which were in an off-site storage location. i) A company failed to include in its December 31. 20x6 Ending Inventory. and included in the year end inventory count. 20x6.
perpetual inventory system .000 $ 60. 1 (at $24) Purchase No. FIFO.95 8. 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. 1 Sale No.000 7. Assume that the transactions occurred in the order given. 20x7 Inventory stored at another location. Unit Cost $7. FIFO.40 9.500 For each assumption given.Introductory Financial Accounting. (CGA Canada) $100.00 Units Beginning inventory Purchase No. 2 (at $26) Required 6. 20x7. 2 Sale No.500 8. Moving weighted average. the Bamboo Brush store was destroyed in a fire.000 40% Problem 4-12 The records of Egypt Company showed the following data relative to one of the major items being sold. a. Weighted-average. v. the accounting records were kept in a separate location and the company was able to reconstruct the following information: Inventory at January 1. Luckily. calculate the total dollar amount for ending inventory and cost of goods sold.1 Page 85 Problem 4-11 On January 13. periodic inventory system d.000 $ 5. perpetual system c. at January 13.1.000 6.000 $ 10. periodic inventory system b.000 5.
000 $600. These generally comprise of: • land. How do we account for the disposal of long-term assets. equipment and furniture and fixtures.000 and $450.000 450. How do we allocate the cost of long-term assets over the periods these long-term assets are put to use in the business. v.e.Introductory Financial Accounting. 2. The essential accounting issues in accounting for long-term assets can be summarized as follows: 1. We will only focus on the accounting for those long-term assets that are not investments in financial instruments.000 $500. 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. For example. Cost of Long-Term Assets The cost of a long-term asset is generally equal to all costs incurred in order to put the asset into productive use. the cost of acquiring these assets needs to be allocated based on the relative fair market value of the assets acquired. equipment. copyrights and trademarks. The acquisition cost would be allocated to land and building as follows: Individual Fair Market Value per Appraisal Land Building $150. the acquisition cost of asset.000 % 25% 75% Allocation of Purchase Price $125. 3.1. buildings. When on-going expenditures are made in order to keep the asset in operable condition. When a long-term asset is acquired.e.000 . • long-term investments in financial instruments (i. An independent appraisal of the land and building are $150. any costs of transportation to get the asset to its location and any installation costs. what constitutes the cost of this asset. These include.000 375. furniture and fixtures and intangible assets. land and building). but are not limited to.000 for land and a building. If you pay one price to acquire a group of assets (i.000 respectively. and 4. assume that you pay $500.1 Page 86 5. the shares or the long-term debt of another company). how do we account for these expenditures. and • intangible assets such as patents. • buildings. namely land.
Introductory Financial Accounting. such as oil changes or brake replacements. ii. in which case the expenditure should be expensed to the income statement. would generally be considered to be repairs and would be expensed. the useful life of the asset is extended. if we were to replace the truck’s engine. The underlying assumption is that this asset generated revenues that are. the matching principle requires that the cost of long-term assets should be spread over the periods that the asset generated revenues. For example. The process by which this is done is amortization of long-term assets.000 $500. Straight-line method.000 375. the rate of output of the asset is increased. any costs to maintain a truck. However. The annual amortization expense is calculated as follows: (Cost – Salvage Value) / Useful Life . This method allocates the cost of the asset over its estimated useful life in equal amounts. we often incur ongoing expenditures in order to maintain the asset. For an expenditure to be considered a betterment it must meet one of the following four criteria: i. We would therefore capitalize the cost of the new engine to the asset account.1. 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. 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. v.000 Accounting for on-going expenditures Once a long-term asset has been acquired. then we would likely increase the useful life of the truck. Consequently. the expenditure enhanced the quality of the asset in a substantive way. or iv. There are three general approaches to amortizing capital assets: 1. iii.1 Page 87 The journal entry to record this transaction would be as follows: Land Building Cash $125. equal over its useful life. the operating costs of the asset are decreased. more or less.
For example.000. i.000 hours.125 $31.Introductory Financial Accounting. Under the straight-line method. 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). The underlying assumption is that the asset generates revenues based on usage.000.1. i. Declining balance method. We deduct the salvage value since we do not want to write down the asset below its salvage value.125 The journal entry to record amortization expense will be as follows: Amortization Expense Accumulated Amortization $31.125 . The asset’s useful life can also be measured in terms of total machine hours of 150. 3. the annual amortization charge will be: ($300. 2.000) / 8 = $31. v.1 Page 88 The cost less the salvage value is called the amortizable base of the asset. a truck rental company that bases rental charges on the mileage driven. Units of production method. then the straight-line rate is 1/10 and the DDB rate is 1/10 x 2 = 20%. The rate used for DDB is twice the straight-line rate. This assumes that the use can be measured. 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. This method allocates the cost of the asset over its estimated useful life by taking higher amortization charges at the beginning of the asset’s useful life and lower amortization charges in the later years of the estimated useful life. The amortization rate can either be given or you may be told that the company uses the double declining balance (DDB) method of amortization. The asset’s estimated useful life is 8 years and the estimated salvage value of the asset is $35.000 – 35. This method allocates the cost of the asset over its estimated useful life based on the use made of the asset. machine hours. 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.e. 1. if you are told that an asset has a useful life of 10 years.e. mileage.
045 x 25% = $10.7667 per hour.393.1 Page 89 2.801.922 71. the amortization charge per hour would be: ($300. then the amortization charge would be 18.798 13. Therefore. Under the units of production method.045 Net Book Value End of Year $225.000 x 0.7667 = $31.188 31.640 23.922 71. v.000 225.000 – 35.000 hours x $1.000 56.750 126.393 40. the amortization taken in year 8 is the lesser of the calculated amortization of $10. Assume that the total number of hours of use in the first year is 18.Introductory Financial Accounting.562 94.000.731 17.191 53. The net book value at the end of any given year can be calculated directly as follows: Original Cost of Asset x (1 – a)n Where a = amortization rate n = number of years since acquisition For example.250 42.191 53.011. Under the declining balance method. 3. Recall that we do not depreciate the asset below its salvage value.045 Amortization Expense @ 25% $75. .1. the net book value at the end of the 6th year is: $300.011 of amortization in year 8.000 168.393 40.000 Year 1 2 3 4 5 6 7 8 Note that the year 8 amortization is not equal to $40.011 or the amortization amount needed to bring the net book value down to the asset’s salvage value. 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.045 35. Note that we will assume double declining balance amortization at the rate of 1/8 x 2 = 25% per year.000) / 150.348 5. the amortization charges for the 8 years will be as follows.756 = $53. If we had taken $10.000 hours = $1.562 94.750 126.000 168. Net Book Value Beginning of Year $300.
000 $250. 20x3 for $250. For example. The asset is sold at the end of 20x9 for $100.000 – 20. The net book value of the asset at the end of 20x9 is: Original cost Less Accumulated amortization ($250. The difference will be equal to the gain or loss on disposal. v. At the time. .000 250.000 $100. 20x1.000 (161. For example.000. we compare the net book value of the asset sold to the proceeds on disposal. Assume straight-line amortization. these estimates were revised as follows: the total estimated useful life of the asset is expected to be 15 years and the salvage value is expected to be $10.000 Changes in estimates If the estimates of the useful life and/or the salvage value of an asset change subsequent to its acquisition. assume that an asset was purchased on January 2.000 161.000 11.000) $89.000. In 20x5. the asset’s useful life was expected to be 10 years with an estimated salvage value of $20. the changes in estimates are applied prospectively from the date of the change in estimate onwards. The asset’s useful life was expected to be 10 years and the salvage value was estimated to be $20.000) / 10 = $23.000 was purchased on January 2.000/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 89.000.000.000. an asset costing $100.Introductory Financial Accounting.1.1 Page 90 Disposals of Long-Term Assets On the date of disposal.000 $11.
000. assume that a patent is granted to a company at a cost of $100. • patents – a legal right ensuring the company’s exclusive right to a product or process. the trademark ‘Coca-Cola’ was never purchased by the Coca-Cola Company but rather. v.000/year x 4 years $100. Examples of intangible assets are: • trademarks – a name or symbol that identifies a company or a product. • copyrights – the protection of writings. Intangible assets whose life is limited should be amortized on a straight-line basis over their estimated useful lives. • franchises – the exclusive rights to sell products or perform services.000) $68.000 – 20. Annual amortization charges for 20x5 and future years will be: (68. if you look at Coca-Cola’s Statement of Financial Position.000) / 11 remaining years = $5.Introductory Financial Accounting. was developed internally. you cannot touch them or see them) and yet they represent costs incurred that meet the definition of an asset. musical compositions and works of art. The patent’s legal life is 17 years but it is expected that emerging technologies will make this .273 per year Intangible Assets Intangible assets are those assets that do not possess a physical quality (i.000 This net book value will then be amortized over the remaining useful life of the asset. Note that only expenditures incurred by the company can be capitalized as intangible assets. are the result of a past transaction and are under the control of the company. Consequently. Internally developed intangible assets cannot be capitalized on the Statement of Financial Position. location or superior products. typical within a certain geographical area • goodwill – the added value of a business attributable to factors such as reputation.000 (32.000) / 10 = $8.1.1 Page 91 The net book value at the beginning of 20x5 is: Original cost Less Accumulated amortization ($100.000 – 10. This need not coincide with the asset’s legal life.e. For example. you will not see the value of its trademark listed as an asset. The accounting for intangible assets depends on whether these assets have limited or an unlimited life. i.e. For example. they are expected to provide future benefits.
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.e. v. That is. we would amortize the patent over 5 years. some franchises.1 Page 92 patent obsolete by the end of the 5th year.1. then the asset must be written down to the fair market value. goodwill) are not amortized but instead subject to an annual impairment test. . Any impairment losses cannot be subsequently reversed if the fair market value of the asset subsequently is recovered. In this case. Intangible assets whose life is unlimited (i.Introductory Financial Accounting.
200 d) Income will decrease by $632 e) Income will decrease by $600 . What is the impact of this expenditure on income before taxes for 1998? a) Income will decrease by $12.000.000.500. The patent is valid for 17 years and has an estimated life of 10 years.000 and spent $5.705. What is the amount of depreciation expense on the building for 20x8? a) $4.Introductory Financial Accounting.000 Jasper uses the straight-line method for calculating depreciation expense. 2. At the beginning of 20x8.000 in legal costs defending it. What will be the annual amortization expense for patents? a) $4. and was used as office space commencing July 1.00 d) $8. 1998. the situation was as follows: Building cost Accumulated depreciation — building Estimated remaining useful life Estimated salvage value at end of useful life $200.000 c) $19.000 b) Income will decrease by $6.00 c) $8.000 c) Income will decrease by $1.1 Page 93 Problem with Solutions Problem 5-1 – Multiple Choice Questions 1.88 b) $5.000 150. Brown and Das obtained a patent for their earnings forecasting software at a cost of $80. Sinha.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. The room was completed on June 30.500 d) $20.500 b) $5. A small room was built on the back of the building at a cost of $12.000 3.000 10 years $5.000. v.1.
000 units. At what amount should the land be reported on the balance sheet? a) $1.750 d) $65. Stone and Wall Company bought equipment for $100. What is amortization expense for 20x7 under the productive output method? a) $4.735 6. what would be the balance reported for the net book value of the machine at December 31.000.015.060.500 b) $72.000.075.000 commission was paid to a real estate agent. what would be the balance reported for the net book value of the equipment at December 31.160 d) $5.000 7. On July 1.000 with an estimated life of 4 years and a salvage value of $5.Introductory Financial Accounting.000 d) $1.000 c) $77.000 b) $1.000.000.500 productive hours over the next 4 years. 20x6? a) $67.000 were incurred to clear the land in preparation for construction of an office building. To acquire the land. was $18. On January 1.000 b) $42. On January 1. Ireland Company purchased a machine that cost $20. During 20x7. If the company uses the double-declining-balance method for amortization. v.000 5.1 Page 94 4.500 d) $80. If the company were to use the units-ofproduction method instead of the straight-line method.500 c) $63.000.000 c) $5. The machine is expected to be used for a total of 1. During 20x6. Yaari and Yosha Company bought a machine for $85. 20x7. The equipment is expected to have a 5-year life and produce a total of 80. 20x7? a) $40. Costs of $15. It has an estimated 4-year life.000. A land site was acquired for $1.500 b) $5.1. and a 10% residual value. The Amortization expense for 20x6.000 c) $1. it was used 430 hours.000 units. using the straight-line method.000.000 . a $60. production was 20. 20x6. 20x7.
purchased a van to transport guests between the resort and a nearby airport. 20x7. assuming the company used the straight-line method of amortization. In addition. Resort Ltd. as a result of heavy usage. the total life of the van would only be 4 years instead of the original estimate of 5 years.000 kilometers during the year.000. 20x7 and 20x8. Required – a. . Prepare the adjusting journal entry to record amortization expense for the year ended December 31. At the end of its useful life.000 at the end of its useful life. 20x7. During 20x8. b. c. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. assuming the company uses the straight-line method of amortization. The van cost $65. Prepare the adjusting journal entry to record amortization expense for the year ended December 31.Introductory Financial Accounting. 20x7. v.000 kilometers.1 Page 95 Problem 5-2 On January 1.000 and was expected to have a useful life of 5 years or 200. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. management felt that the van could only be sold for $2. management of the company decided that. assuming the company uses the doubledeclining-balance method of amortization. 2008. assuming the company uses the units-of-production method of amortization and that the van was driven 55.1. it was estimated that the van could be sold for $5. d.
Recorded amortization expense. . This increased the useful life of the asset by three years. 20x4 Dec 31. Recorded amortization expense. Sold the asset for $25. The equipment was completely overhauled at a cost of $20. Dec 31.000 salvage value.1. 20x7 Aug 31.1 Page 96 Problem 5-3 The Connor Company had the following transactions over the life of an asset purchased on January 2.000. 20x8 Required – Record all of the above transactions assuming that the company uses the straight-line method. 20x4 Apr 31.Introductory Financial Accounting. Routine repairs costing $600 were made to the equipment. Recorded amortization expense. Recorded amortization expense. Recorded amortization expense.000. 20x7 Dec 31.000. The original estimate of salvage value holds. 20x5 Dec 31. 20x3 Aug 31. 20x3 Purchased equipment for $60. The estimated useful life of the asset is expected to be 5 years with a $10.000 were made to the equipment. v. 20x3: Jan 2. 20x5 Dec 31. This increased the quality of the asset’s output but did not change its useful life or the estimate of salvage value. 20x6 Sep 30. Expenditures totaling $2.
000.500 Problem 5-5 On July 1. The machine was expected to have a life of 4 years and a salvage value of $3. 2. 20x7. in good form. bought a state of the art numerically-controlled lathe from GPL by trading in a dissimilar asset and paying $90. 20x8. v. 20x6. The following additional information is available: Original cost of the old asset Accumulated amortization at June 30. and the repair cost for it amounted to $500. the machine was sold for $20. ABC had to spend $2. 3. Required – 1.500 108. (CGA Canada) . ABC Ltd. Prepare the journal entry to record the asset acquisition on July 1. 20x7. (CGA Canada. adapted) $ 50.1. During the installation there was minor damage to the frame.000. Prepare the journal entry to record the amortization expense on December 31.000 cash.000. MNO Co. Market value of old asset on June 30.1 Page 97 Problem 5-4 On June 30. 20x6.000 to install the machine. which included freight charges of $1. Show. how the machine will be presented in the assets section of the balance sheet at December 31.000 cash. 20x7 Required – Prepare the journal entry to record the purchase of the lathe. Assume a straight-line method of amortization. Prepare the journal entry to record the sale of the machine on January 1.Introductory Financial Accounting. 4. 20x8. purchased a machine at a cost of $25. 20x7 Price of new lathe. On January 1.000 15. 20x6.000 38.
due to a preventative maintenance system that had been implemented. Cost Estimated residual value Estimated life Estimated production 20x6 actual production Required a. 20x6.000 units were produced. 20x6. Use this information to answer parts (a). 12.1. v. assuming the company uses the: i) straight-line method ii) units-of-production method c.000 units b.1 Page 98 Problem 5-6 The following information pertains to the equipment acquired by Xie Co. on January 1. management felt that the total estimated life of the equipment would be 5 years with a total estimated production of 50.Introductory Financial Accounting.000. Prepare the journal entry to record the sale assuming the company uses the: i) straight-line method ii) units-of-production method $120.000 units. Determine the amortization expense for the year ending December 31. On January 1. Accordingly. assuming the company uses the: i) straight-line method ii) units-of-production method On January 1. the estimates were revised. . In 20x7.000 units 9. and (c). 20x8. 20x7. 20x7. No change in estimated residual value was anticipated. Determine the amortization expense for the year ending December 31. the equipment was sold for $75.000 $ 20.000 4 years 40. (b).
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. Compute amortization expense for 20x3 using the straight-line method.800 The company borrowed $150.000 $ 14. we have to pay the full invoice price within 30 days. Prepare the journal entry to record the sale assuming the straight-line method of amortization was used. c.1 Page 99 Problem 5-7 German Ltd. * this means that is we pay within 10 days. What amortization method could be used to abide by the president’s request? Is this method acceptable under generally accepted accounting principles? Explain. purchased Machine No. The following information relates to this machine: Invoice price Credit terms* Customs and duty costs Preparation and installation costs $ 140. b. for $100. Machine No. 103 has a physical life expectancy of 10 years with a salvage value of zero.Introductory Financial Accounting.000 2/10.000 on this loan during 20x3. Otherwise. Assume that the machine is sold on January 1. we get a 2% discount. 20x3. German intends to use the machine for 8 years and hopes to sell it for $15. n/30 $ 5. However. In this way.000 cash. .1. 20x6.000 at that time. It incurred interest costs of $12. 103 on January 2. v. income can be minimized in 20x3.000 to pay for the machine within the discount period and take advantage of the cash discount. Required – a.
Current Liabilities A current liability is one that will be settled within one year or the business cycle of the firm. and will not be paid again until April 4th. however. assuming the employees worked the full 7 days in the week. . For example.000. whichever is longer. services or supplies for the operation of the company. which represents the three days of work (3 x $1. We have already covered several of these when we did adjusting entries. If the average daily wage expense is $1. it is split appropriately and applied to the correct periods.000/day) Wages Payable (to remove the adjusting entry) Cash 4.000/day.000 Wages/Salaries Payable – these are wages/salaries that are due to employees for hours worked. the entry would be: Wage Expense (4 days x $1. but have not been paid.000 on account.000 3.000 2. Employees were last paid on March 28th.000 This way. $7.000 to last period and $4.000 to the new period.000 with the terms set at 6% interest due annually.1 Page 100 6. a company purchases office supplies from a supplier for $2. $3. the adjusting entry made March 31st would be: Wage Expense Wages Payable 3. v. For example.Introductory Financial Accounting. Liabilities To begin our discussion about liabilities we have to first differentiate between those liabilities that will come due within on year or accounting period (current liabilities) and those liabilities that will come due at a later point in time (long-term liabilities).000.000 Note that we are debiting the Wage Expense for $3. On April 4th. For example. 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. a company has a fiscal year end of March 31st.000/day) that were performed in the period but not paid for. Typically.000 3.000 7. Interest and Principal payments are due December 31st of each year. the only time we see this account set up is at the end of a fiscal period when an adjusting entry must be made. The principal must be repaid equally over 5 years.1. Accounts Payable – these are liabilities that were incurred to purchase goods. a company takes out a loan on January 1st for $10. The entry would be: Office Supplies Accounts Payable 2. we will go over the main types of current liabilities. when the payment is made for the full week.
000 x 6%).4 times the employee deduction for EI. For example.000 600 8.000 8. but they also must submit the employer portion of CPP and EI.500 + 8. and a balance in the Long-Term Liabilities section of $6.000 10.1 Page 101 When the company takes out the loan.000.000 On the Statement of Financial Position.000 The debt is split into the portion that is due within the year.000. the journal entry would be as follows: Cash Long-term debt 10.000.000) Cash 100. CPP. and the employer ducted the following amounts from its employees’ cheques: Income Taxes. we would split the long-term debt as follows: Current liabilities Current portion of long-term debt Long-term liabilities Long-term debt $2. v.Introductory Financial Accounting. CPP and EI from employee’s paycheques. the interest expense for the year would be $600 ($10.000 42. and that which is due later than one year. This ensures accurate reflection of the financial obligations of the company on the Statement of Financial Position.000 If a Statement of Financial Position were prepared on the January 1. The journal entry would be as follows: Long-term debt Interest Expense Cash 2. Deductions for each month are due on the 15th day of the following month.000.000.000 + 7.1. $8. The entry to record payroll for the month would be: Wages Expense Employee Withholdings Payable ($27. and pays 1. The employer matches the employee’s contribution for CPP. Not only must the company submit the employee’s portion.500. a company pays its employees monthly.500 .500 57. EI. At December 31st. 27. Wages total $100. Employee Withholdings Payable – Employers are responsible for deducting income taxes. $7. we will now show a balance in the Current Liabilities section of $2.
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. as done above. v. This principle states that.500 x 100%) EI Expense ($8.1. If a contingency meets the first criteria but not the second.700) Cash 61. One of the resulting GAAP rules that stems from this idea of conservatism is the establishment of contingent liabilities.000 .Introductory Financial Accounting. Your lawyer says that previous case law in similar matters is not in your favor and you will likely lose and the judge will award the full amount to the plaintiff.200 Contingent Liabilities One of the guiding principles of accounting is the idea of conservatism.000 x 1. For example. but have not yet come to be. The justification is that the financial statements should not be misleading or give false hope or information to any reader.200 61. then it has to be disclosed through a note in the financial statements. You would record or recognize the FULL amount. If a company knows that there will be a liability. A contingent loss should be recognized only when: a) it is likely that a future event will confirm the loss. your company is being sued for $400.000.200 18. then they must disclose it when they know about it. or simply lumped in with Wages Expense. and b) the loss can be reasonably estimated.000 400.500 + 18.700 Note that CPP Expense and EI Expense could be tracked separately.40) Employee Withholdings Payable 7.1 Page 102 At the same time. The journal entry would be: Unrecognized Loss on lawsuit Contingent Liability – lawsuit 400. the company would record its portion of payroll expenses due to the government: CPP Expense ($7. Contingent liabilities are those liabilities which are likely to be incurred in the future. On the 15th of the next month. and therefore a loss of some kind to the company. but it does not have to be recognized. the company pays the government: Employee Withholdings Payable ($42.500 11.
that have been incurred but not paid. in the same scenario. your lawyer felt you would lose.1. such as wages.000 10.000 This entry not only matches the expense to the period when the revenues were generated. but it also sets up a liability that will be drawn down as actual expenses are incurred over the life of the warranty.000 Premium liabilities come to be when a company offers its customers some product or service through the redemption of coupons or some other device whereby the customer can receive goods/services in the future based on current sales. If. but there was no legal precedent for the amount that would be awarded and therefore are unable to estimate the future loss. all expenses related to those revenues should be recorded at the same time.000. When a company sells a product that has a warranty.000 to repair various vacuum cleaners that are under warranty. in order to adhere to the matching principle. This principle states that for all revenues generated in a specific period. Continuing on with the same example.1 Page 103 If. Again. a company sells vacuum cleaners that come with a 2-year warranty. For example. The warranty expense is normally determined through evaluating historical data and coming up with a % of sales that represents the future warranty costs. Total Sales for the year totaled $300. on average. and the fact that you were likely to lose. but you would not have to record the loss or the liability.Introductory Financial Accounting. is 4% of sales. The company estimates that warranty expense. let’s assume that during the next year.000 12.000 x 4%) Warranty Liability 12. your lawyer felt you would win. the company pays $10. v. You would simply write a note in the financial statements disclosing the lawsuit. Warranties & Premiums Another of the guiding principles of accounting is the matching principle. then you do not have to do anything because you do not meet either of the criteria for recording a contingent liability. 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. The journal entry would be: Warranty Liability Cash/Inventory/Wages 10. The journal entry to record warranty expense for the year would be: Warranty Expense ($300. This principle is the one that guides us when making adjusting entries at the end of the year with regards to expenses. in the same scenario. we must record the associated expense in the period when the . Another example of matching has to do with warranties.
000 to be received in 5 years from now at an interest rate of 6%. Based on past redemption data. v. Long-term Liabilities Long-term liabilities are defined as liabilities that would not be reasonably expected to be liquidated within a year. . one of the most frequently used financing instruments in business. These typically include long-term bonds. or ten years from now.000 32.000 coupons x 40% = $32. or a year from now.Introductory Financial Accounting.1 Page 104 original sale is made. We will instead focus on long-term bonds.000/$10 = 80.1. To record the premium liability at the end of the year. you are taking on the risk that the money might not be repaid at all. The Time Value of Money Before we begin our analysis of accounting for bonds we must first discuss the concept of time value of money. The 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. the journal entry would be: Premium Expense* Premium Liability * $800.000 32. Furthermore. notes payable. you have determined that only 40% of your customers will redeem their coupons. We will not get into a discussion of leases.000. The combination of these two facts results in a dollar today being worth more than a dollar received in the future. The premise behind this is that a dollar today is not worth the same as a dollar received tomorrow. The farther in the future you are to receive the funds. the premium liability account is drawn down. They can then redeem 10 coupons for a watch valued at $10. longterm leases and pension obligations. the greater the “discount” or decrease in the dollar value will be. Your sales for the year were $800.000 Whenever coupons are redeemed. then you are missing out on the opportunity to invest that money today and earn interest on it. for every $10 your customers spend. we are trying the calculate the present value of $1. pensions and other more complicated longterm liabilities in this section. If you are going to be receiving money in the future. For example. they receive 1 coupon.
the amount would grow to $1.26.000. You want to be able to withdraw $60. v. 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. enter the numbers above in the TVM memory registers to solve. how much of the $1. Calculating the Present Value of a Future Single Sum .1.47 PMT 60000 FV Enter Compute . 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. If the current and expected future rate of return is 6%.000 from your favorite uncle.Assume you are going to receive $10. what is that $10.472.58 PMT FV 10000 Enter Compute Present Value of an Annuity . If i=7%. press CPT and the TVM register you are attempting to solve for.26 today (money out of pocket and therefore the negative sign) and invest it for 5 years at 6% compounded annually.000 will you have to set aside in order to set up this annuity? N 30 I/Y 7 PV X= $744.000 worth in “today’s dollars”? N 5 I/Y 6 PV 7.000.000.542.An annuity is defined as a series of identical cash flows that end at a specified time. Assume you inherit $1.000 from your mother 5 years from now.1 Page 105 With the Texas Instruments BA II Plus. This means that if you were to invest $747.Introductory Financial Accounting. in this case PV the answer provided is -747.000 per year for the next 30 years.
This is because the buyer of the bond could get a higher rate on the open market (the YTM) than they can from investing in the bond (the Coupon Rate). then in order to sell your bonds you will have to sell them at less than face value because investors would be willing to pay face value if they could get a return of 6%.1 Page 106 Annuity Payment Calculation . For example.10 FV Enter Compute Your company is purchasing a piece of equipment costing $80. This is because the buyer of the bond gets a higher return by investing in the bonds. The manufacturer is offering you financing at a rate of 6. and therefore is willing . The market takes this into consideration. If the YTM > Coupon Rate. how much can you withdraw each year? N 25 I/Y 7 PV 675000 PMT X= $57.Introductory Financial Accounting. then the bond will sell at a premium. v. You expect to live another 25 years. as well as make interest payments on the stated amount.You have retired with $675. Coupon rate = Annual Coupon Payments/Face value Yield-to-maturity (YTM) – the rate of return that bondholders expect on the bond given its risk. Coupon – the amount of semi-annual interest payments to be made on the bond. It is rare that the yield-to-maturity rate and coupon rate are the same.1.992. 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.000 in the bank. and the bonds will sell for a value less than the face value of the bond. Coupon Rate – the stated interest rate to be paid on the face value. Also called the market rate. What is your monthly payment to the manufacturer going to be? N 3 I/Y 6. Assume the rate is 7%.5 PV 80000 PMT X= $30.206.06 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.000. If the YTM < Coupon Rate. then the bond will sell at a discount.5% on a 36-month loan. if you issue a bond with a coupon rate of 5% and the YTM is 6%.
8% is less than the market rate of 7%. YTM = 7%.451.000 coupon payment. As such.829. every 6 months.8% and they mature in 10 years. We have already calculated that we will be writing a cheque for $58.000 x 5.5% $2.1 Page 107 to pay more than face value for the bonds in order to reap this benefit. Example .000.829. or the amount that we would have received in proceeds would be equal to $1. 20x8 you issue $2. However.000. N will equal the number of coupon payments left. not the number of years.829.451 1.000 to cover our coupon obligation. this $58.451 PMT 580002 FV 2000000 Enter Compute 1 2 YTM of 7% / 2 = 3.Introductory Financial Accounting.000 is not our interest expense.451 . 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. This is because our coupon rate of 5. Interest will be paid semiannually on June 30 and December 31. therefore it will have to be cut in to reflect the situation.On January 1. we have to sell our bonds at a discount. because PMT is equal to the payment made every six months.000 of bonds.000. In order to attract investors. This is less than the face value of $2. v. the YTM is normally expressed as an annual rate. The PMT & FV remain the same. How much would be raised through this bond issuance? N 20 I/Y 3. 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.8% x = $58. 1. The Present Value of the bonds. Furthermore. we must adjust the other factors in the formula to a “6-month” basis.829. The Coupon Rate = 5.000.51 PV X= $1.1.
482 x 7% x Bonds Payable Cash ) 64. This will be the amount used to calculate the interest expense on December 31st.Introductory Financial Accounting.482.000. therefore.000 2.451 x 7% x Bonds Payable Cash ) 64.835. on June 30th.451 + 6. the balance in the Bonds Payable account will have been written up to $2.835.301 credit to Bonds Payable increases the carrying value of the bond payable account to (1. give or a take a few dollars for rounding.242 6.031 58. the entry for interest expense would be: Interest Expense (1.829.000. the journal entry will be: Bonds Payable Cash 2.301) $1. 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. Continuing our example.000 After all 20 interest payments have been made.000.242 58.829. v.031 6.000 .000. At the time of settlement.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. you would record the following journal entry: Interest Expense (1.000 Note that the $6. On December 31st.1.
Introductory Financial Accounting. Issued $10 million face value. Which of the following items is not a contingent liability? a) Premiums offered to customers b) A risk of loss to uninsured property due to fire or other casualty c) Additional wages that may be payable on a dispute now being arbitrated d) Estimated claims under a service warranty on products sold 3.000 iii) The interest expense for the year will be less than $800. v. On January 1. 20x7.1 Page 109 Problems with Solutions Problem 6-1 – Multiple Choice Questions 1.1. Which of the following is a characteristic of a contingent liability? a) It definitely exists as a liability but its amount and due date are indeterminable b) It is accrued even though not reasonably estimated c) It is not disclosed in the financial statements d) It is the result of a loss contingency 2. 10 year 8% bonds priced to yield 6%.000 iv) The bond was issued at a discount a) b) c) d) iv) only i) and iii) i) and ii) ii) and iv) . Gallaghar Ltd. 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.
even though the amount of the loss cannot be reasonably estimated 5.000 e) $20.500 What is the estimated liability for premium claims outstanding at December 31. In an effort to increase sales. 6. (3) a relatively stable pattern of annual sales. 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. the coupons being redeemable for a premium. whereby it placed a coupon in each package of product sold.300 b) $8. 20x8.600 c) $9.000 23. (2) a oneyear operating cycle. b) It should be reported as a current liability. How should any liability for the warranty be reported? a) It should be reported as a long-term liability. The company estimated that only 30% of the coupons issued would be redeemed.Introductory Financial Accounting.000 . v. a company inaugurated a sales promotional campaign on June 30. For the 6 months ended December 31. 20x8? a) $4.00 and 5 coupons must be presented by a customer to receive a premium.1. c) It should be reported as part current liability and part long-term liability. Each premium costs the company $2.1 Page 110 4. the following information is available: Packages Sold Premiums Purchased Coupons Redeemed 150. 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. d) It need not be disclosed. Assume that a manufacturing corporation has (1) good quality control.400 d) $18. and it is likely that an asset has been impaired or a liability incurred d) When it is likely that an asset has been impaired or a liability incurred.000 10.
000 and actual costs incurred to service warranties during the year amounted to $130.Introductory Financial Accounting. 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. For each $10 your customers spend. v.000. You have been running this program for several years.1 Page 111 Problem 6-2 You run a computer repair company. Sales for the current year were $3.000 22.1.000 40. In order to increase customer loyalty in this fiercely competitive environment you have started a coupon program. then receive 1 coupon. 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. and data shows that approximately 55% of your customers redeem their coupons. What is the balance in the warranty liability account at the end of the year? . The warranty liability at the beginning of the year was $165.000. Required – Prepare all journal entries related to the warranty for the current year.000 and it is estimated that the warranty expense is equal to 5% of sales.
20x1 and the first two interest payments.. Assume that the Kaplan Corporation as a December 31 year end. Gamma Corporation issued bonds with a face value of $500.000 Opening balance Total credits during the year Required – 1. Required – Prepare all journal entries with regards to this bond for the years 20x4 and 20x5. 20x6. Required – Prepare the journal entries to record the issue of the bonds on July 1. The company issues warranty agreements immediately upon the sale of an automobile. 3.1. Problem 6-6 The following is the general ledger account for estimated warranties of McNeil and Grace Ltd.1 Page 112 Problem 6-4 On July 1. The bonds pay interest semi-annually on December 31 and June 30 and are due in five years. 20x1.000.5% coupon bonds on December 31. Coupon payment dates are June 30 and Dec 31 of every year. automobile dealers. 2. The bonds mature in 15 years. The yield to maturity on December 31 was 8%. 20x7. What is the dollar value of warranty repairs performed in 20x7? What is the warranty expense for the year 20x7? At December 31. Problem 6-5 The Kaplan Corporation issued $10. v. what was the estimated liability for future warranties? (CGA Canada) .800 Total debits during the year $6.000 and a coupon rate of 10%.000 of 8. Warranty Liability Dr Cr $10. 4. what is the estimated liability for future warranties? At December 31. Assume that the going market interest rate for similar bonds on July 1. for the year 20x7.200 5. 20x4.Introductory Financial Accounting. 20x1 is 8%.
171. to yield 10%. Prepare the journal entry to record the issue of the bonds at July 1. issued $1 million face value. 3.Introductory Financial Accounting. Required – 1.000. GHI’s year end is December 31. 20x6. three-year. The bonds were sold at a yield of 8%. (CGA Canada adapted) . c. Required If Adrdalan and Baker Inc. face value.1 Page 113 Problem 6-7 GHI Company issued $500. b. The Interest Expense for the 1997 year will be less than $100. The Interest Expense will be the same every year. issued $1 million semi-annual. 9% bonds on January 1. Interest on the bonds is paid semi-annually on December 31 and June 30. Alpha Beta Ltd. Prepare the journal entry(ies) to record interest expense for the period ending December 31. Show how the $1.000. Prepare the journal entry(ies) to record interest expense and coupon payment on June 30.591 was calculated. (CGA Canada adapted) Problem 6-9 On January 1. and pays interest on July 1 and January 1. indicate whether each of the following statements would be true or false. The cash outflow towards interest on the bonds will be more than $80. They were issued at a price of $1. 2. d. (CGA Adapted) Problem 6-8 On July 1.000.000. 12% coupon bonds. 20x6. 20x7. 20x6. v.1. 20x7. The bonds were issued at a discount for $897. a. uses the effective interest method to calculate interest expense on these bonds. 20x6. Required Prepare all journal entries for the life of this bond issue. as the market rate was 10%. 20 year. Ardalan and Baker Inc. The Interest Expense for the 1997 year will be more than $80. 8% bonds. 4.000 face value.171. 10-year.591.
1. Retained earnings represent the cumulative earnings of the corporation less any dividend distributions to its shareholders. Common shares can be issued for cash or any other asset. Contributed capital comprises of the investment made in the corporation by its shareholders.000 $100. that is. it can be drawn down.000 $250. then the journal entry would be: Cash Common shares $100. For example. Shareholder investments will result in the company issuing shares to the investors – these shares can take the form of preferred shares or common shares. If the book value per share is less than the cash paid out to retire the shares. . Common Shares Common shares typically have the following features: • they provide the right to vote at annual meetings.000 When common shares are repurchased. and then re-sell them). a company cannot purchase its own common shares.000 If common shares are issued in exchange for a parcel of land whose fair market value is $250. any cash remaining after all obligations have been settled revert back to common shareholders.1 Page 114 7. v. then the debit required to balance the journal entry is allocated as follows: • if there is any Contributed Surplus relative to common shares. any dividend declarations are at the sole discretion of the company’s board of directors. meaning they never become due. The corporation is under no obligation to provide a financial return to common shareholders.e. the journal entry would be: Land Common shares $250. Dividends become a liability of the corporation only when the board of directors declares them. and • they are a perpetuity.000. If the book value per share is greater than the cash paid out to retire the shares. • upon liquidation of the company.000 cash.Introductory Financial Accounting. The debit to the common shares account is equal to the weighted average book value per share times the number of shares retired. Shareholders’ Equity As mentioned in Chapter 1. if common shares are issued for $100. we credit an account called Contributed Surplus for the difference. Shareholders’ Equity is fundamentally made up of two elements: contributed capital and retained earnings. the shares must be cancelled (i. hold them.
000 7.000 cash Retired 10.000 The journal entries to record the above transactions are as follows: Jan 15 Cash Common shares Land Common shares Common shares (20.1.000.Introductory Financial Accounting.500.500.000 common shares for $2. v.000 186.000 common shares in exchange for land valued at $1.000 321.000.000 shares outstanding Retained earnings The following transactions took place during the year: Jan 15 Mar 18 Apr 30 Jun 16 Aug 18 Issued 100.000 x $18.500.612) Contributed surplus Retained earnings Cash Aug 18 .000 1.000.000 $15.000 common shares at a total cost of $280. 20x6 was as follows: Common shares.500. Example – The Noor Company’s shareholders’ equity section at December 31.000.000 Jun 16 Cash Common shares Common shares (10.000 + 1.000 = 1.000.000 $2.000 cash Issued 50.100 61.500.000 + 100.000.000 x $16.000 = $16.000 + 2.150.800 260.000 / 1.500.000.000 Mar 18 Apr 30 Balance in common share account: = $15.800 32.000 common shares at a total cost of $260.000 Number of common shares outstanding: = 1.1 Page 115 • any remainder gets debited to Retained Earnings.000 + 50. 1.000 Book Value per common share: = $18.091) Contributed surplus Cash 1 $2.09 7.000 Issued 250.000 = $18.000 12.500.000.100 280.000.000 common shares for $7.150.500.500.000 Retired 20.800 61.000 1.
100.800 + 7. 20x6 and management wants to pay a dividend of $5 per common shares.000 40. $8.000 The preferred share dividends were last paid on December 31.000 shares outstanding Retained earnings $35.000 + 250. It is now December 1. the preferred dividends for the year 20x6 must be paid: 100. First.500.678.000. 1. Dividends become a liability of the corporation only when the board of directors declares them. they are a perpetuity.000 .000 shares outstanding Preferred shares.1. any dividend declarations are at the sole discretion of the company’s board of directors.000 shares x $8.000.200 Number of common shares outstanding: = 1.150.678.000 = $25.00 x 1 year = $800.000 = 1. • they carry a stated dividend per share. 20x3. cumulative.380.61 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). Example – The Jarvis Corporation’s shareholders’ equity as at December 31. that is.200/ 1.Introductory Financial Accounting. However. the corporation is under no obligation to provide a financial return to common shareholders.000 shares x $8. This means that if dividends are missed.000 Book Value per common share: = $25. 20x5 is as follows: Common shares.000.000 = $18. Like common shares.380.1 Page 116 2 Balance in common share account: = $18.000 Next. any dividends in arrears due to preferred shareholders must be paid before any dividends can be paid to common shareholders.000.500.000 10.00 x 2 years = $1.00. the preferred dividends in arrears for 20x4 and 20x5 will have to be paid: 100. • like common shares. in most cases preferred shares are cumulative.000 – 20. v.600.000 – 321.
400.000.000 shares. v. the stock may become unattractive to small shareholders who have to disburse larger sums in order to acquire shares of the corporation.000 = $7.000.000 shares as a result of the stock split resulting in a total of 2.1. Any premiums paid on retirement of shares are also charged to retained earnings.1 Page 117 Finally. This will result in the share price dropping by half. . the dividend to common shareholders can be paid: 1. There is NO journal entry required when a stock split is declared.600. this same shareholder will receive an additional 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. In order to reduce the share price.Introductory Financial Accounting. If a shareholder owns 1. a 2:1 split means that the number of shares outstanding will double.000 shares x $5 = $5.000.000 The total dividend to be declared will be: $1.000 + 800. the company will split the stock. All that happens is that the number of shares issued changes. 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 Stock Splits When the stock price of a corporation is high.000 + 5.000 shares of shares before the split. For example.
1.1 Page 118 The statement of retained earnings is as follows: Retained earnings. 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.Introductory Financial Accounting. v.
b) Shareholders’ equity will increase by $3.500.Introductory Financial Accounting.1.000. d) The number of common shares outstanding will be 250.000. v.000. The shares were selling at $30 each when management announced a three-for-two stock split. .000 common shares outstanding.000. Which of the following statements will be true when the stock split is accounted for? a) Retained earnings will be reduced by $4. XYZ Corporation has 150.1 Page 119 Problems with Solutions Problem 7-1 – Multiple Choice Questions 1. c) The number of common shares outstanding will be 225.000.
v. balance sheet as at February 28. Issued 2.000 common shares for cash of $12. Record the transactions in journal entry form.Introductory Financial Accounting.000 common shares to Hilary and 12. 2.32 per share.000 . In its first month. Declared cash dividends on the common shares in the amount of $0. Declared a 2 for 1 stock split. Hilary and Sam Corporation completed the following transactions: February 2 February 10 February 15 February 26 February 27 February 28 Issued 9.1 Page 120 Problem 7-2 The articles of incorporation authorize Hilary and Sam Corporation. Declared cash dividends on the preferred shares.000.000 shares to Sam in return for cash equal to the shares’ market value of $6 per share. a new company.000 $6 non-cumulative preferred shares and 100.000. Net income for the month was $56. Prepare the shareholders’ equity section of the Payne and Papineau Inc. Required 1.000 common shares.1. to issue 10. Issued 400 preferred shares to acquire a patent with a market value of $40.
Net income was $64. c.Introductory Financial Accounting. During the first year of operations the following events occurred: a.000 for the year. Prepare the shareholders’ equity section of the Statement of Financial Position. The equipment had a fair market value of $40. cumulative preferred shares. b. Convertible bonds with a face value of $50. d. Declared and paid a $5. 2. f.000 were converted into 500 common shares. Provide the journal entries for each transaction above. $1.1 Page 121 Problem 7-3 M-F Inc.000 common shares at $115 per share.00.000 preferred shares in exchange for equipment. Issued 1. v. The convertible bonds were issued earlier in the year.500 common shares at $120 each. Paid the preferred dividend.00 common share dividend h.000 common shares and 50.000 preferred shares at $20 each.1. . Required 1. Issued 2.000. is authorized to issue 100.000 and book value of $53. Issued 1. Issued 1. e. Declared a cash dividend on preferred shares. g.000.
1. just the integration of previously covered materials.Introductory Financial Accounting. 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. Enjoy! . v.1 Page 122 8. There is no new material. the only materials in this chapter are the problems with solutions. Therefore.
Coupon payment dates are on June 30 and Dec 31.600 150. 20x5 was as follows: Dr. 20x6. 20x20.000 145.000 5. The company uses a FIFO periodic inventory system. Warranty expense is estimated at 1. The company provides a one year warranty on its products. The bonds mature on December 31.Introductory Financial Accounting. 20x5 is 8 years. 20x1.5% of sales. The prepaid insurance is for a one year policy taken out in 20x5 that expires on March 1. There are 10.000 320. 5.052.000 120. The equipment is being amortized using the double declining balance method. 3. The patent remaining useful life at December 31. v.1 Page 123 Problem 8-1 The Haider Corporation’s post-closing trial balance at December 31.000 34. The bonds were issued on January 2.000 144.600 12.000 shares of common stock outstanding.052. The average useful life of equipment is 10 years.200 $1. .5% and the yield to maturity at the time the bonds were issued was 6%. The building is being amortized on a straight-line basis over 40 years. $1. The face value of the bonds is $400. 4.000 419.1.000 38.000 $23. 8. the coupon rate is 6.400 Cr. 6.000 13.000 176.000 1. 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 $36.400 40.000 300. 7.400 Additional information 1.000.000 127. 2.
000 26.Introductory Financial Accounting.600.000 common shares were issued for $75. 6. Accounts written off totaled $34. 16. 7.400 130. 5. On March15.000 43. 2.000 40.000 18. Amortization expense on the building.000. 13. Total sales on account were $1.000.000.000.520.000.000 common shares on Aug 23 Insurance policy taken out on March 1 – one year policy. Recoveries of previously written off accounts receivable totaled $5. Operating expenses paid $945. Inventory costing $16.000 2. 9.000 12. 11.000 23.000.000 was returned to suppliers. 19. The inventory was counted on December 31.1 Page 124 The following transactions took place during the year: 1.000 The following adjustments need to be made at year-end: 17.000 30.1. The accounts receivable aging schedule is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $144. 3. 20. The aggregate net realizable value of the inventory was determined to be $365. Estimated % Uncollectible 3% 7% 20% 50% An adjustment is made for insurance expense. The warranty expense for the year is accrued.000 22. an additional 3. 10. 12.000 25.000. equipment and patents.000 $222. 21. 20x6 and the total cost of the inventory was determined to be $378. Cash disbursements were as follows: 8.000 320. Cash collections on accounts receivable totaled $1. v. Payments on accounts payable Payments for salaries Interest payments on bonds payable Purchase of equipment on January 2 Warranty repairs made to products sold Payments to the Canada Revenue Agency for income taxes Repurchase of 1.000. 4. Inventory purchased on account totaled $960. 14 15. .
700. Required – a. 20x6 amount to $6. b. 23. 20x6. Prepare journal entries for the above transactions and enter all the above transactions in T-Accounts. Salaries payable at December 31. v.1 Page 125 22. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position .Introductory Financial Accounting.1.000 were declared and paid on December 15. 24. c. The income tax expense is 40%. Dividends of $80.
10% note payable.900. No warranty expense has been recognized. During the year. It had to pay the full amount of rent one year in advance on June 1. the principal plus the interest is payable one year later. e. the patent account was debited and cash credited for $11. 20x6. the company signed a $60. The sales have been recorded. and the adjusting entries are to be made. g. 20x5.800. Pacific Corporation had a supplies inventory of $4. At the end of the year. Unpaid and unrecorded wages incurred at December 31 amounted to $4. $4. 20x5. pacific Company sold 10.Introductory Financial Accounting. September 1.000. and sales revenue was credited on the date of sale.000. Past history indicates that 3% of units sold require repairs at an average cost of $40 per unit. inventory of $9. The estimated loss rate on bad debts is 3% of sales. d. f.000.000. The company rented a warehouse on June 1. totalling $8. 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. for one year.1 Page 126 Problem 8-2 Pacific Company adjusts and closes its books each December 31. It is now December 31. The note was dated September 1.600. for the face amount plus interest for one year. i. which was debited to rent expense. The company received from a customer a 9% note with a face amount of $12. Machine A. were debited to warranty liability when paid. cash was debited and notes payable credited for $60. .900. which was debited to prepaid insurance.000 units of a product that was subject to a warranty.000. is to be depreciated for the full year. i. costs incurred for the warranty to date. During the year. On April 1. amounting to $9. b.e. at a cost of $11.500.600. The company paid a two-year insurance premium in advance on April 1. j. The note is payable on March 31.700. Use straight-line amortization. 20x5. The estimated useful life is 10 years. v. h. you do not need to provide the original entry): a. amounting to $9. 20x5. The company purchased a patent on January 1. The patent has an estimated useful life of 17 years and no residual value. and the residual value. On January 1. On that date.900 were purchased and debited to supplies expense.200 was on hand. Notes receivable was debited. 20x5.000. On that date. 20x5.1. c. which cost $80. 20x5. Credit sales for the year amounted to $320. supplies of $21.
000 bad debt. v.000 after all the above adjustments.1. l. ABC Corporation wrote off a $16. . Pre-tax income has been computed to be $80. Assume an average income tax rate of 30%.Introductory Financial Accounting.1 Page 127 k.
Spier incorporated this business as MAS Inc.500 22.920 3. 1. Baking materials Rent Salaries and wages Maintenance Utilities Insurance premium Equipment Principal and interest payment on bank loan Advertising $14.600 2. She started a baking business in her home and has been operating in a rented building with a storefront. Sales have increased 30%. 20x2.Introductory Financial Accounting. Sale of common shares Cash sales Rebates from purchases Collections on credit sales Bank loan proceeds $ 2. The following amounts were disbursed through May 31.000 312 424 $31. Kelowna Bank & Trust has asked Spier to submit an income statement for MAS Inc.500. Spier wishes to purchase some additional baking equipment and to finance the equipment through a long-term note from a commercial bank.320 2. and additional equipment is needed to accommodate expected continued growth.1 Page 128 Problem 8-3 Anne Spier has prepared baked goods for resale for several years now. The bank statement showed the following 20x2 deposits through May 3l. 20x2. v. for the first five months of 20x2 and a balance sheet as of May 31.880 $33. on January 1. 20x2.400 1.770 130 5.000 shares of common share for $2.000 1. Anne Spier is the principal shareholder of MAS Inc.800 5.466 . Spier assembled the following information from the corporation's cash basis records for use in preparing the financial statements requested by the bank. annually since operations began at the present location.500 110 4. with an initial shares issue of 1.1.
20x2. New display cases and equipment costing $3. and were due an additional $240 on May 31. 20x2.: (a) An income statement for the five months ended May 31. 9.1. Customer records showed uncollected sales of $4. 11. 20x2. 5. 8. .226 at May 31. 20x2.Introductory Financial Accounting. 20x2. 20x2 (b) A balance sheet as of May 31. 10. 12. 20x2. Rent was paid for six months in advance on January 2. Straight line amortization is to be used for book purposes. 20x2. The note evidencing the 3-year bank loan is dated January 1. prepare for MAS Inc. and no cash was transferred from the unincorporated business to the corporation. No materials were on hand or in process and no finished goods were on hand at January 1. 20x2. 20x2. Baking materials Utilities $ 256 270 $ 526 4. 20x1 were not included in the corporation's records. July 1. and states a simple interest rate of 10%. Anne Spier receives a salary of $750 on the last day of each month. There were no materials in process or finished goods on hand at that date.840 were on hand at May 31. Payments and collections pertaining to the unincorporated business through December 31. The loan requires quarterly payments on April 1. 7. A one-year insurance policy was purchased on January 2. May 25. 20x2. and have an estimated useful life of five years. 6. is subject to an income tax rate of 20%. October 1. 20x2 MAS Inc. Unpaid invoices at May 31. were as follows. and January 1 consisting of equal principal payments plus accrued interest since the last payment.000 were purchased on January 2. The other employees had been paid through Friday. Required Using the accrual basis of accounting.1 Page 129 3. Baking materials costing $1. v. These are the only fixed assets currently used in the business.
000 5. b) Cash balance in cheque book.600 have accrued but have not been paid. $20.000 10. The uncollected receivables were written off as miscellaneous expenses in 20x2.000 $406.000 5.000 was recognized.500 c) d) e) f) g) h) i) j) Morrow had no outstanding payables at the beginning of 20x2 but owes creditors $36. and a balance sheet at December 31.000. Retained earnings at the beginning of 20x2 totalled $63. payable annually Customer collections Proceeds on sale of fully depreciated equipment (original cost. In 20x2 Morrow began selling on a cash-only basis.000 146. At the end of 20x2. Morrow's only other asset at the beginning of 20x2 was an investment in Honeydew common shares. 20x2.000 note issued on July 1 and bearing interest at 12%. During 20x2 these shares were exchanged for land and a gain of $4.000 10. Morrow's cost of goods sold is 80 percent of sales. All equipment is depreciated on a straight-line basis over ten years with no estimated salvage value.20x1 Deposits during 20x2: Cash sales Proceeds of $5. equipment with a cost and accumulated depreciation of $80. sales salaries of $1.000) Cheques written during 20x2: Purchases of merchandise Salaries Advertising (to be run in 20x3) Miscellaneous expenses $ 24.000 was declared and is to be paid in January 20x3.000.000 for unpaid purchases of merchandise on December 31. you have been presented with the following information: a) Morrow is incorporated and initially sold 11.000 and $20. At the beginning of 20x2. Receivables at the beginning of 20x2 totalled $ 155. a cash dividend of $10. 20x2.000 $250.000 $180. During the fourth quarter of 20x2. . December 31. The sale of equipment was made on December 30. for Morrow Wholesale.Introductory Financial Accounting. respectively.000. 20x2.1. was on hand. The inventory at the beginning of 20x2 was $80.000 of its common shares for $25 per share.000 5.000.1 Page 130 Problem 8-4 Morrow Wholesale has kept limited records and has never had an audit until 20x2. The income tax rate is 30 percent.500 $205. Prepare an income statement for the year ended December 31. v. 20x2. There have been no other common share transactions. As the senior auditor in charge of the audit.
GAAP suggests a preference for the direct method. Most of what we do.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 $ 400.000 215. If a company pays dividends. . This statement is broken into three distinct sections. is based on the accrual system. Both methods will be covered later in this section.000 were declared and paid to shareholders during the year. your main concern is incoming and outgoing cash.000 150. this uses cash Example . as accountants.1 Page 131 9. this generates cash. then this uses cash. and shows how a company’s actions have affected its net cash position throughout the period. if a company pays off or retires debt this uses cash. either the direct or indirect methods can be used. this generates cash. If a company retires shares. 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. If a company issues new shares. There are two distinct methods in presenting cash flow from operations: the direct and the indirect method.Introductory Financial Accounting.1. The Statement of Cash Flow The statement of cash flow shows a company’s inflows and outflows of cash during a particular period. If a company issues new debt. however.000 650.000 450.000 20x7 $ 250. v. Some students find the statement of cash flow to be a challenge because they are still thinking with an “accrual” mind.000 Additional information: Dividends of $150.000 300. 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. Try to keep in mind that when you are working with this statement.000 180.
000 + dividends of $150.000 (180. when a sale of a long-term asset is made.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. v. we know that retained earnings increased by a net of $85. the net income for the year is $85. Rearranging the formula. $215.000) 75.000 (60.Dividends = Closing Retained Earnings In the above case. and the NBV (cost – accumulated amortization) is recorded as a gain/loss on sale. Example .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) 0 .000) 100. we analyze at the Retained Earnings Account: Opening Retained Earnings + Net Income .1. and changes in them from one period to the next. we have to reconcile the long-term asset accounts.000 To calculate the company’s net income for 20x8.000 Alternatively.000 (10. Cash flow from Investing Activities – this section discloses cash that was generated or used through the sale or purchase of long-term assets. Often. Remember.000 Net Income = $235. we can calculate the Net Income.$150.000 (170. Given that dividends decrease retained earnings. The difference between the proceeds.000) 200.000 = $235.000. we know all numbers in this formula except Net Income.000 + Net Income .000 20x7 $ 300.000.000 (30.000) 100. we remove the asset and all associated accumulated amortization.000 = $300.000 (150. or cash we receive.Introductory Financial Accounting.000) $ 170. when dealing with this section.
If the gain on sale was $10.1.000. Note that because no cash exchanged hands for the purchase of the land. • the land was obtained through issuing $100.000.000 worth of equipment was purchased for cash during the year. were sold at a gain of $10. 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) . then the cash proceeds on the sale of fixtures would have to be $15.000 (100. • new fixtures were purchased for $100. 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.Introductory Financial Accounting. 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 with a NBV of $15. There are a minimum of four main sub-sections in determining the cash flow from operations (note that these are a minimum.000 + 10. Cash Flow from Operations – Direct Method This method of determining cash flow from operations uses the income statement as its starting point. v.000.000.000) ($125.000 = $25.000) 25. and essentially takes each income statement item and converts it into cash.000 giving a net book value of $15. excluding interest payable. All non-cash transactions are by definition excluded from the statement of cash flow.000 worth of common shares to the supplier.1 Page 133 Additional Information: • $50.000.000 and the accumulated amortization was $60. it does not appear in this section.000) * The cost of the fixtures was $75.000 cash. • the original fixtures. costing $75.
000 5.000 8.Introductory Financial Accounting.000 80.000 231.000 5.000 73.000 39.000 (20.000 82.000) $172.000 23. 20x7 20x7 ASSETS Cash Accounts Receivable Inventory Capital assets Less accumulated amortization LIABILITIES Accounts Payable Salaries Payable Interest Payable Taxes Payable Bonds Payable SHAREHOLDERS’ EQUITY Common Stock Retained Earnings $76.000 2. Income Statement For the Year ended December 31.000 2.000 21.600 $ 67.000 104.1. Comparative Unclassified Statement of Financial Position As at December 31.000 21.000 (25.000 68.000 62.000) 135.000 12.000 20x6 $42.000 429.000 $135.000 46.000 120. v.000 325.000 50.000 1.000 27.400 .000 10.000 14.000 $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.000 3.000 82.000 15.000 104. Jack’s Joke Shop Inc.1 Page 134 Example – Calculate cash flow from operations – direct method.000 10.000 $660.000 200.000 89.000 24.
20x7. we can simply analyze the difference.000 2.1.000) $654. and office & administrative salaries.000 Why did we subtract the $6. Note also that although we combined all three expense items in one single calculation. Therefore.000. then we collected more than we accrued and this would be added to sales.1 Page 135 Cash collected from customers: Sales Less increase in accounts receivable $660. waiting to be sold.000 198. salaries expense.000 (2.000) $231.000 235. and which are made on credit.000 120.000 2. 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. This means that we purchased additional inventory that is now sitting in our warehouse. if accounts receivable decreased. v.000 Note that the starting point for each calculation is the following expense items: cost of goods sold.000 increase in Accounts Receivable. Conversely. therefore we reduce sales to calculate cash collected from customers. . However. In this case. 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. then this means that sales have not yet been collected – that is. because we are told the balance at December 31. These comprise all of the expense items on the statement of financial position with the exception of amortization expense. which is a non-cash item and interest and income tax expense which will be dealt with separately. the amount of our Inventory account increased by $2. we accrued more sales than we collected. The first thing we do is adjust it to obtain the purchases made during the period. 20x6 and the balance at December 31. We are not told what percentage of the total sales are made for cash.Introductory Financial Accounting. nor are we told how much of the 20x6 accounts receivable balance have been collected.000 $553. If accounts receivable increased.000 (6.
1. Purchases for the year in this case would be $233. That is.000 from our Interest Tax Expense to get the total cash paid for taxes.000 increase to COGS. other than interest and taxes. we have to add the $2. and any decrease in liabilities is added. Cash paid for taxes: Income tax expense Less increase in income taxes payable $21.000). if the Accounts Payable account decreases.000) $14. then we have paid more to our suppliers than the purchases. In dealing with the change in accounts payable. interest payable went up which means that we accrued more interest than we paid. v. That is. inventory decreased. . Again. Note. then you simply include the full expense amount as the cash paid for that expense. you start with the Income Statement amount and then account for any changes in the associated statement of financial position account(s). then this means that we would have purchased less than what was sold and we would have decreased COGS in order to obtain purchases. All other expenses.000) $9. as in the case of Office & Administration Expenses above. If. we will subtract the $12. This is why we add back the $2. we owe $12. In this example.000 more this December 31st than we did last. Therefore.000. and any decrease would be added. we would have subtracted the amount from COGS to get total money paid to suppliers. any increase in the Income Tax Payable account would be subtracted from the expense to get to the total cash paid. is subtracted from the expense to get to the total cash paid.600 The treatment for taxes is the same as for interest.600 (12. like salaries payable. like it did in the above example.Introductory Financial Accounting. on the other hand. so we deduce the increase in interest payable to interest expense.000 ($231.000 In this case.1 Page 136 to calculate purchases. there appears to be no associated statement of financial position account.000 + 2. Any increase in liabilities.000 (1. should the opposite have occurred. Cash paid for interest: Interest expense Less increase in interest payable $15. are treated in the manner that the Salaries Expense was treated above. If there is no such account.
000) (2. inventory. We then add back any non-cash items that may appear on the income statement. as well as all current payable accounts. Cash flow from Operations: Net Income Add back items not requiring a cash outlay Amortization expense Adjust for non-cash working capital items: Increase in Accounts Receivable Increase in Inventory Decrease in Accounts Payable Increase in Salaries Payable Increase in Interest Payable Increase in Taxes Payable $ 67.400 Cash from Operations – Indirect Method Under the Indirect Method.000 1. The most common of these are amortization expense and gains/losses on the sale of capital assets.000) (14.600) $ 77.1. This would include changes in accounts receivable.Net Income.1 Page 137 To sum up: Cash flow from operations Cash collected from customers Cash paid to suppliers & for operating expenses Cash paid for interest Cash paid for taxes $654.000 12.400 5.000) 2. Increases (decreases) in current assets are cash outflows (inflows. v.400 .Introductory Financial Accounting.000) (9.000) (2.000 (553. We then add or subtract any changes in the non-cash current asset and liability accounts. Increases (decreases) in current liabilities are cash inflows (outflows).000 (6.000 $77. we start with the bottom line .
This includes cash.000 + 67.400) Opening Cash Balance – December 31. 20x7 30.000 = 66.000 $ 76.1 Page 138 To continue the example.Introductory Financial Accounting.000) (66.400) Net Change in Cash ($77.400) 34. 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. readily convertible to cash) subject to an insignificant risk of change in value.1.000 (7.400 – 24.000 42.400 + 0 – 43. the term ‘cash’ is defined as ‘cash and cash equivalents’. . v.400) (43. 20x6 Ending Cash Balance – December 31. term deposits and any highly liquid assets (i.000 Definition of Cash For purposes of the statement of cash flow. let’s finish with the cash flow statement.e.
900 .1 Page 139 Problems with Solutions Problem 9-1 The following is the Income Statement and comparative Statement of Financial Position for Ginger’s Cookies Ltd.000) 226.000) 15.Introductory Financial Accounting.000 7.000 $750. 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 (32.1.000 79.000 243.100 $146.000 300.000 (17. Income Statement for the Year ended December 31. Ginger’s Cookies Ltd.000 120.000 450.000 207. v.000 80.
000 0 33.000.000 10.200 $ 20.000 10. v. 20x6.000) $275.500 90.000 (40.000 40.000 111.000 $144. the only piece of equipment.500 $ 19.800 2.000 47. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method. b.000 (7.100 30.500 50.000 61. Ginger’s paid cash for the equipment. was replaced by a new piece of machinery costing $125.000) $144.1 Page 140 Ginger’s Cookies Ltd.200 80. 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. Comparative Unclassified Statement of Financial Position as at December 31. costing $45.000 125.200 $ 27.100 $ 14. .000 108. Required – a.400 6. Prepare a Statement of Cash Flow using the Direct Method.000 43.000 7.Introductory Financial Accounting.000 45.400 158.200 20x5 Additional Information: on January 2.000 117.1.400 $275.000.
060.711.358.000 82.000 508. Statement of Financial Position December 31 20x3 Current assets Cash Accounts receivable Merchandise inventory Prepaid expenses $ 319.000 1.000 45.000 2.000 35. are shown below.000 1.000) 1.631.000 1.000 450.000 700.000 2.093.000 20x2 $ 353.000 1.Introductory Financial Accounting.000.000 Current liabilities Accounts payable Salaries and wages payable Interest payable Income taxes payable $ 897.000 28.000 888.000 5.695.1 Page 141 Problem 9-2 The comparative statements of financial position of McDuff Ltd.000 1.000 850.000 $ 4.842.000 $ 4.041.000 43.000 $ 4.000 (3. v.000 119.019.091.000 $ 909.000 800.326. MCDUFF LTD.000 1.045.000 3.212.212.000 $ 4.869.000 Capital assets Accumulated amortization Bonds payable Mortgage payable Shareholders’ equity Common shares Retained earnings .000 1.500.000 999.000 2.343.854.000 1.060.000 (3.000 30.000 5.000 32.000 319.000) 1.054.429.1.
000. 20x3. 3. 20x3 Revenues Cost of goods sold Operating expenses Salaries and wages expense Operating income Gain on retirement of bonds payable Loss on disposal of assets Interest expense Net income before taxes Income tax expense Net income $ 13. Prepare a cash flow statement for the year ending December 31.000 (7. .1.000.1 Page 142 MCDUFF LTD.000 (61.000 2.000 $239.000 250. Amortization expense is included in Operating expenses.000 850.Introductory Financial Accounting.000 550.000 700.000) 489. v. Income Statement For the year ended December 31. McDuff sold capital assets that cost $158. 20x3.000. with a book value of $87. On August 31.000 were retired for $487. Required a.000) (67. 2. On April 15. bonds with a net book value of $500. Use the indirect method to report the operating activities. for $80. Prepare the cash flow from operations section using the direct method.000. 20x3. b.000 Additional information 1.400.000) $4.500.
20x5 Sales Expenses: Cost of goods sold Salaries expense Insurance expense Depreciation expense Rent expense Interest expense Net loss $ 218.300 10.000 5.300 600 5. 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.700 4. HHC LTD.300 2.200 221.700 500 5.1.000 600 20x4 $4.000 500 .400) Comparative partial balance sheets at December 31. v.400 $ (3.000 1.000 1.Introductory Financial Accounting.000 $ 165.800 7.000 39. Income Statement for the year ended December 31.1 Page 143 Problem 9-3 The following data are available for HHC Ltd.700 8.300 1.300 5. adapted) $ 4.800 7.800 5.
v. 20x5 and 20x6.000 475.000 (101.000) (22.000 53.000 423.000) $ 681.000 300.000) $ 57.000 39.000 423.000 600.000 463.000 4.Introductory Financial Accounting.000 $634.000 0 85.000 119. Income Statement for the year ended December 31.000 87.000 25.000 92.1 Page 144 Problem 9-4 Toram Ltd.000 Net Change $ 24.000 0 80.000 $ 699.000 86.000 $ 40.000 $ (18.000) 25.000 144.000) 0 (12.000 Dec.000 Assets Cash Accounts receivable Inventory Long-term investment Land Buildings and equipment Accumulated amortization TORAM Ltd.000 32.000 0 0 58. and its income statement for the year ended December 31. 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 $ 165.000 200.000 .000) $ 900.1. 31 20x5 $ 26.000 $ 65. Balance Sheets Dec.000 (123.000 43.000 (18.000 18. 31 20x6 $ 50.000 $ 100.000 Liabilities and Shareholders’ Equity Accounts payable Bonds payable Preferred shares Common shares Retained earnings $ 22.000 (12.000 85. 20x6 are as follows: TORAM LTD.000 80.’s comparative balance sheets at December 31.000) $ 624.
the following transactions occurred: 1. Declared and paid a $50. (CGA Canada adapted) .1 Page 145 During 20x6.000 cash. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method. Issued $25.000.1. 4.000 of bonds payable at face value.000 and had $21. Prepare a Statement of Cash Flow using the Direct Method.000 cash dividend. Sold equipment for $7. Required – a. for $30. 2. Sold the long-term investment on January 1.000 cash that had originally cost $32. 20x6.000 of accumulated amortization. Purchased equipment for $20.Introductory Financial Accounting. 5. 3. b. v.
Financial Analysis Techniques 1. of course. 7. 8. v. The limitations of using historical information must. published financial statements are historical in nature and do not provide the information we have just outlined. the investor must predict those things that affect dividend policy. The amount of cash expected to be invested in the firm's long lived assets as well as in working capital. 2.e. The firm's future policy regarding the holding of cash balances (for precautionary and liquidity reasons) in excess of those required to maintain the expected level of operations. i. Net cash flows from future operations. 3. Each of these eight variables that affect future dividend policy is in turn affected by others. Financial Statement Analysis The broad purpose of financial statement analysis is to enable a user to make predictions about the firm that will assist his/her decision making. be recognized. 6. etc. Nonetheless. interest payments. The amount of future cash flow to service debt requirements.1.e. In order to predict the company's future dividend policy. sinking fund provisions. Published financial statements are the sources of information generally available to users. The amount of future cash flow from random events such as windfall gain or casualties. Vertical and Percentage (common size) analysis . historical information can be used to make projections and is sometimes extremely useful in this respect. Management's attitude toward future cash dividend policy.. The following are the variables that affect a firm's future dividend policy: 1.1 Page 146 10. Horizontal (trend).. 4. The nature of the analysis of financial statement information is primarily in the form of ratios. 5. repayment of principal. However. from activities considered incidental to the firm's main function. which the investor would like to predict.Introductory Financial Accounting. Expected non-operating cash flows. Future cash flows from changes in the levels of investments made by shareholders and creditors. i.
Introductory Financial Accounting. the historical financial performance data for a company for the years 20x3 to 20x6 (all data is in millions of dollars) 20x3 Revenue Expenses Net income before taxes Income taxes Net income $7.509 7.369 606 200 $406 20x4 $8. or as compared to an amount of the preceding period.1.1 Page 147 Horizontal analysis expresses financial data in terms of a single designated base period.619 12.546 1.673 827 273 $554 20x6 $13.882 627 207 $420 20x5 $11.975 7. v.073 354 $719 . For example.500 10.
Introductory Financial Accounting, v.1.1
Horizontal analysis of the data as a percentage of the year 20x3 amounts: 20x3 Revenue Expenses Net income before taxes Income taxes Net income 100% 100% 100% 100% 100% 20x4 107% 107% 103% 104% 103% 20x5 144% 145% 136% 137% 136% 20x6 171% 170% 177% 177% 177%
Horizontal analysis of the data as a percentage of the previous year's amounts: 20x3 Revenue Expenses Net income before taxes Income taxes Net income 100% 100% 100% 100% 100% 20x4 107% 107% 103% 104% 103% 20x5 135% 135% 132% 132% 132% 20x6 118% 118% 130% 130% 130%
Vertical Analysis (also referred to as common size financial statements), presents all the data in a financial statement as a percentage of a single line item. Generally, when performing vertical analysis on a balance sheet, all numbers are expressed as a percentage of total assets; on the income statement as a percentage of sales. Vertical analysis of the above data is as follows: 20x3 Revenue Expenses Net income before taxes Income taxes Net income 100% 92% 8% 3% 5% 20x4 100% 93% 7% 2% 5% 20x5 100% 93% 7% 2% 5% 20x6 100% 92% 8% 3% 5%
Ratio analysis is performed in order to evaluate the firm's liquidity, solvency, profitability and asset management: • liquidity: assessment of the firm's ability to meet current liabilities as they come due, • solvency: ability of the firm to pay both current and long-term debt, • profitability: evaluation of manager's abilities in generating returns to capital providers, • asset management (or activity ratios): how well are the firm's assets managed.
Introductory Financial Accounting, v.1.1
Liquidity Analysis - the following ratios are typically used in assessing the liquidity of a firm: Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio Current Assets ÷ Current Liabilities (Cash + Accounts Receivable + Temporary Investments) ÷ Current Liabilities (Cash + Accounts Receivable + Temporary Investments) ÷ (Cash operating expenses ÷ 365) Where Cash operating expenses = Cost of Goods Sold + Operating Expenses - Depreciation The current ratio tells us how much current assets there are relative to current liabilities. The quick ratio tells us how much liquid current assets there are relative to current liabilities. The defensive interval tells us, all other things remaining equal, how many days the firm can survive without any cash inflow. Solvency Analysis - the following ratios are typically used in assessing the solvency of a firm: Debt-to-Equity Ratio Times Interest Earned Long-term Debt ÷ Shareholders' Equity
Income before Interest and Taxes ÷ Interest expense
The debt-to-equity ratio must be compared (1) to the firm's historical data (interperiod) and/or (2) to other companies operating in the same industry or industry averages (interfirm). As Lesson 12 will show, it is wrong to say that the lower the debt-to-equity ratio, the better off the firm is. All firms have a theoretical optimal debt-to-equity ratio they should be aiming for. Firms whose debt-to-equity ratio is optimal will maximize the value of the firm and minimize their weighted average cost of capital. The problem is that the finance literature does not provide us with a mechanism to establish this optimal debtto equity ratio. We tend to use the industry average as a surrogate for the optimal debt-toequity ratio. Take the following two firms: Company A 0 Company B 2.5 Industry Average 3.0
Although, Company A is clearly more solvent than Company B, one could argue that Company B is better off than Company A since it's weighted average cost of capital should be lower.
Introductory Financial Accounting, v.1.1
The times interest earned ratio is a good judge of a firm's solvency. A firm with a times interest earned ratio of 2.0 is generating operating income that is only twice as high as interest charges. Such a firm's exposure to fluctuations in interest rates is high.
Profitability Analysis - the following ratios are typically used in assessing the profitability of a firm: Return on Sales Return on Assets Return on Equity Operating Income ÷ Sales Operating Income ÷ Average total assets Net Income ÷ Average shareholders' equity
The rationale for using operating income for the return on assets ratio is that this ratio is used to compare how well firms use their assets regardless of how the assets are financed. When comparing two firms with different capital structures, the return on assets will be comparable. Using operating income also removes unusual items, extraordinary items, discontinued operations and income tax expense from the ratio. Also note that we are using averages in the denominators. This is the theoretically correct way to calculate the ratios. Whenever you divide an income statement number into a balance sheet number (or vice-versa), the balance sheet number must always be an average. However, there are times where this may be either impossible or impractical to do. In situations where you only have one year of data, it is impossible. When you have two years of data, you can calculate the ratios for one year only and you do not have any comparatives. In these situations, one can assume that the year-end balances are good surrogates for the average and simply use the year end balances. Note that multiple choice exams will always assume you use averages. Asset Management Ratios (activity ratios) - the following ratios are typically used in assessing the solvency of a firm: Inventory turnover Days Sales in Accounts Receivable Total asset turnover Cost of goods sold ÷ Average Inventory Average Accounts Receivable ÷ (Net Credit Sales ÷ 365)
Sales ÷ Average total assets
The inventory turnover measures the number of times the inventory rolls over within a year. The days sales in accounts receivable tells us what the average number of days our accounts receivable have been outstanding. The total asset turnover tells us how many sales dollars are generated by each dollar of asset invested.
Introductory Financial Accounting, v.1.1
Often in an examination setting, you will be presented with a company's financial statements and the industry average accounts receivable and inventory turnover ratios. Given these, it is possible to perform some comparative analysis and, more importantly, determine how much cash could be generated by the company if it were able to reduce its accounts receivable and inventory balances. (More often than not, the question mentions that the company is cash strapped.) Limitations of Financial Statement Analysis Changes in ratios can only be interpreted by understanding the underlying economic events. For example a sudden increase in the current ratio may simply be due to the fact that a short-term bank loan was converted to a long-term loan. Ratios may change as a result of non-economic events that affect the financial statements e.g., change in accounting method or estimate Comparisons of a company’s ratios with another company’s or with industry averages involve certain restrictive assumptions: that all companies being compared are: • structurally similar • use the same (or similar) accounting principles • experience a common set of external influences
and $55.Introductory Financial Accounting. a corporation purchased $540.000 of inventory and had sales of $600. 20x8. v.1. The beginning inventory for 20x8 was $30. The accounts receivable turnover for 20x8 was 7.1 Page 152 Problems with Solutions Problem 10-1 – Multiple Choice Questions 1.500 b) $335.500 d) $400.000 2.000 at December 31.0.5 b) 5.000. If current liabilities exceed current assets. During 20x8. What were R’s total net sales for 20x8? a) $227.000 c) $367.000 and the ending inventory for 20x8 was $120.0 c) 6.0 d) 8. What was the inventory turnover for 20x8? a) 4.000 at December 31.0 .000. Net cash sales for 20x8 were $32. 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. R Company’s net accounts receivable were $50.500. 20x7. 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.
Introductory Financial Accounting, v.1.1
If current assets exceed current liabilities, a payment of an account payable has what effect on working capital and the current ratio? Working Capital No effect No effect No effect Increase Decrease Current Ratio Increase No effect Decrease Decrease Decrease
a) b) c) d) e)
Assuming stable business conditions, which of the following is consistent with a decline in the number of days’ sales outstanding in a company’s accounts receivable at year end from one year to the next? a) A tightening of the company’s credit policies b) The second year’s sales were made at lower prices than the first year’s sales c) A longer discount period and a more distant due date were extended to customers in the second year d) A significant decrease in the volume of sales of the second year
When should an average amount be used for the numerator in computing a financial ratio? a) When both the numerator and denominator are balance sheet items b) When the numerator is an income statement item and the denominator is a balance sheet item c) When the numerator is a balance sheet item and the denominator is an income statement item d) When both the numerator and the denominator are income statement items
Introductory Financial Accounting, v.1.1
A company disclosed the following information for the year ended December 31, 20x8: Net cash sales Net credit sales Inventory at beginning of year Inventory at end of year Net income Accounts receivable at beginning of year Accounts receivable at end of year What is this company’s days sales in accounts receivable for 20x8? a) 182 days b) 94 days c) 65 days d) 57 days $ 75,000 125,000 50,000 62,500 12,500 40,000 22,500
During 20x8, a company purchased $320,000 of inventory. The cost of goods sold for 20x8 was $300,000, and the ending inventory at December 31, 20x8, was $60,000. What was the inventory turnover for 20x8? a) 5.0 times b) 5.3 times c) 6.0 times d) 6.4 times
Introductory Financial Accounting, v.1.1
Problem 10-2 The comparative financial statements for the Kuehl Company are as follows. Kuehl Company Balance Sheets as at December 31 … 20x5 ASSETS Current Assets Cash Accounts receivable Inventory $12,000 275,000 425,000 712,000 1,450,000 $2,162,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $379,000 920,000 1,299,000 300,000 563,000 863,000 $2,162,000 $371,000 850,000 1,221,000 300,000 493,000 793,000 $2,014,000 350,000 800,000 1,150,000 300,000 425,000 725,000 $1,875,000 $34,000 220,000 340,000 594,000 1,420,000 $25,000 200,000 350,000 575,000 1,300,000 20x4 20x3
Fixed Assets – net
Introductory Financial Accounting, v.1.1
Kuehl Company Income Statements for the year ended December 31 … 20x5 Sales Cost of goods sold Gross margin Operating expenses Depreciation expense Operating Income Interest expense Net income before taxes Income taxes Net income Required – Prepare a full financial statement analysis for 20x4 and 20x5 for Kuehl Company. $2,300,000 1,400,000 900,000 550,000 120,000 230,000 60,000 170,000 60,000 $110,000 20x4 $1,900,000 1,200,000 700,000 400,000 100,000 200,000 50,000 150,000 52,000 $98,000
000 700.Introductory Financial Accounting.000 650.808.000 2.000 524.000 $3.1.000 1.380.000 .000 2.324.876.000 20x6 20x5 Fixed Assets – net $4.000 $480.000 700. are as follows. v.114.928.000 2.000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $560.000 300.808.003.000 2.000 $20.000 $3.000 $3.628.000 700.979.000 1.679.000 485.167.000 700. Balance Sheets as at December 31 … 20x7 ASSETS Current Assets Cash Accounts receivable Inventory $37.576.000 1.003.000 1.000 1.000 $24.956.000 1.000 2.000 $3.789.000 $524.000 1.000 1.999.000 570.956.000 809.000 820.180.889. Rocky Mountain Camping Equipment Ltd.000 $4.000 480.000 2.000 800.1 Page 157 Problem 10-3 The comparative financial statements for Rocky Mountain Camping Equipment Ltd.
000 1.000 2.000 700. $2.700.000 $51.000 463.000 30.000 .1.1 Page 158 Rocky Mountain Camping Equipment Ltd.000 56.000.100.300.000 5.000 20x6 $1.000 137.000 81.000 100.000 60. v.000 1.000 635. 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.000 800.000 100.000 $3.Introductory Financial Accounting.000 65.
1. SOLUTION TO PROBLEMS Problem 1-1 1.999 . 7.000/4 years x 6/12) = $35.000 – ($40.999 + 40. d b a d d d b c $40. 3.000 $999.039. v. 8. 2.Introductory Financial Accounting.1 Page 159 11. 4.000 = $1. 5. 6.
000 4.000 Acc.1.000 2.000 2. Receivable 6.800 33.200 400 800 12 4 15 Inventory 25.200 4.367 8.000 1 4 7 8 B 2 3 6 7 B 8 10 14 5 9 B 2 Prepaid Rent 1.960 5.000 190.000 1.000 20.000 15.000 120.000 BALANCE SHEET Accts.000 1 3 Furn.777 Bank Loan 20.000 Accrued Liabilities 150 700 600 1.000 . v.000 50.000 13 16 17 18 19 B 6 B Prepaid Insurance 1.1 Page 160 Problem 1-2 Part (a) Assets Cash 20.000 Common Stock 20.000 Liabilities & Equity Accounts Payable 130.000 15. Amortization 500 11 10 Retained Earnings 10.000 182.Introductory Financial Accounting.000 25. & Fixtures 15.
000 Revenues Sales 196.000 0 Cost of Goods Sold 130.000 3.Introductory Financial Accounting.000 1.000 0 Rent 2 10 18 B 1.367 .200 19 Income Taxes 5.960 Interest 300 150 450 Advertising 10 2.000 170.000 15.000 600 36.000 120.600 Insurance 400 12 10 16 B Miscellaneous 1.1.000 INCOME STATEMENT Purchase Returns 15. v.500 700 2.960 5.000 5 9 B 15 15 14 B 7 15 11 Amortization 500 10 13 B 10 17 B Wages and Salaries 36.1 Page 161 Expenses Purchases 50.
000 50.000 15.1. v.000 1.000 2.000 20.000 1. 3.000 3.1 Page 162 Journal Entries – 1.000 36.000 2.000 4.000 15. 9.Introductory Financial Accounting.000 182.000 4.000 120. 7.000 120.000 196.000 6.000 1.200 1.000 50. 4.000 1. Cash Common Stock Prepaid rent Rent expense Cash Furniture and fixtures Cash Cash Bank Loan Purchases Accounts Payable Prepaid Insurance Cash Cash Accounts receivable Sales Cash Accounts receivable Purchases Accounts payable Wages and salaries Rent Advertising Miscellaneous expenses Retained earnings Interest Accounts payable Cash Amortization expense Accumulated amortization $15.200 190. 10. 8.000 300 130. .000 / 10 years x 4/12 $20. 6.500 10.000 20.000 $20.800 500 500 2. 11. 5.
19. v. 17. 18.000 25.890 x 30% = 400 400 13.200 / 12 months x 4 months expired Interest expense Accrued liabilities Accrual for the month of October: $20.1.000 x 1% Income tax expense Accrued liabilities Net income before taxes = $17. 150 150 14.960 1.000 15.Introductory Financial Accounting.367 5.000 170. 15.000 700 700 600 600 1.960 15.000 x 9% x 1/12 Accounts payable Purchase returns Cost of goods sold Inventory Purchase returns Purchases Miscellaneous expenses Accrued liabilities Salaries and wages Accrued liabilities Rent expense Accrued liabilities $196.000 130.1 Page 163 12.890 Income tax expense = $17. 16. 5. Insurance expense Prepaid insurance $1.367 .000 15.
Introductory Financial Accounting.000 20.000 15.1 Page 164 b. Inc.000 10. v. Trial Balance As at October 31.000 130.000 400 2.1.000 5.200 5. 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 25.000 8.277 .777 20. Heavenly Books.000 Credit $ 500 25.000 2.277 $270.960 500 450 36.600 2.367 $270.000 196.000 800 1.
000 5.000 130.367 $12.523 Heavenly Books.960 500 36.000 400 2. Income Statement for the four months ended October 31.1 Page 165 c. 20x2 $0 12. v. 20x2 Retained earnings.523 .340 450 17.000) $2. July 2.523 (10. 20x2 Net income Dividends Retained earnings. October 31.1.660 18. Inc. Heavenly Books. Statement of Retained Earnings for the four months ended October 31.600 2.Introductory Financial Accounting. Inc.890 5. 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 $196.200 47.000 66.
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. Inc.300 .000 8.000 800 1.000 25.500 $76.523 22.Introductory Financial Accounting.000 2.1 Page 166 Heavenly Books. v.000 53.000 45.523 $76.777 8. Statement of Financial Position as at October 31.000 2.800 14.777 20.1. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance Prepaid rent Furniture and fixtures Less accumulated amortization $15.777 12.000 61.000 500 $33.
200 54.000 17. 20x6 Net sales ($157.600 4.ending $0 9.100 3.beginning Net income Dividends Retained Earnings .000 71. Statement of Retained Earnings for year ended December 31.500 $155.400) 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.Introductory Financial Accounting.300 18.400 . v.100 $9.800 2.200 3.500 (2. Income Statement for year ended December 31.600 13. 20x6 Retained Earnings .300 21.200 84.600 – 2.000 4.100) $7.1.500 Global Productions Inc.1 Page 167 Problem 1-3 Global Productions Inc.
200 $107.000 9.400 57.000 4. v.800 19.000 7.Introductory Financial Accounting.400 $107.200 2.000 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Bank loan Shareholders' Equity Capital Stock Retained earnings $7.100 87.100 1. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Supplies Prepaid insurance Office equipment Accumulated amortization 24.600 40.500 1.500 1. Statement of Financial Position as at December 31.100 14.800 $25.600 50.000 49.000 .1 Page 168 Global Productions Inc.900 44.1.
due from Big Al. However.646 for the current period.646 3. You have used 8/12 of the policy. Amortization Expense Accumulated Amortization b) 3. we will record salaries expense and the accompanying salaries payable of $1.333 3. therefore. Accounts Receivable Consulting Revenue 2.300 revenue this accounting period. in the amount of revenue earned during the period. Salary Expense Salaries Payable 1. To do this you would set up a receivable. you would have earned of the revenue. Therefore. it is appropriate for you to record it in this period. The journal entry would be: Unearned Revenue Subscription Revenue c) 6 6 You have earned the $2. Cash Unearned Revenue 24 24 As of April 30. Therefore.250 X 7/12 = $3. therefore you will remove $5. your amortization expense would be = $6. Insurance Expense Prepaid Insurance 3. you would have debited Prepaid Insurance and credited Cash for the full amount of $5.646 When you received the cash in January. you only had the machine in use for 7 months. you will have accumulated 3 days worth of salaries that have not been paid. $24 X = $6.000 X 8/12 = 3.800 e) When you purchased the policy.000/8 years = $6.000.300 d) As of Wednesday. the full amount would be recorded as an Unearned Revenue liability.800. v.333 from Prepaid Insurance and record it as Insurance Expense for the period.250/year. Therefore.1 Page 169 Problem 1-4 a) Annual amortization expense for the machinery would be = $50.300 2.800 1.333 . you would have sent out 1 of the 4 magazines in the subscription. as these expenses were incurred during the period.1. However. you must record them as an expense of that period.Introductory Financial Accounting.
750 4. you would have debited Cash and credited Unearned Revenue by $6. Unearned Revenue Catering Revenue 1. and therefore you would have incurred one month worth of Rent Expense.Introductory Financial Accounting.750 4. Therefore.000 each. On December 1st.000 1. and would be recorded as an asset on your accounts for the June30th period end.000 X 5/6 = $5. No adjustment is needed for this. v. you would have been in the premises for 1 month. Rent Expense Prepaid Rent 4.000 is unearned.e. Prepaid Rent Cash 4.1 Page 170 f) Each of the payments for $6. that full amount would have been earned and recorded as revenue during the period.000 has been earned and should be included in revenue for this period..000 g) The $4. You will have to adjust for that fact that 5/6 of the payment has not been earned i.1. However.750 .750 you paid on June 30th represents Prepaid Rent.000 covers a 6-month period. You would remove the Prepaid Rent account to reflect that fact that you have “used up” the rent. The first payment that you received on June 1st would cover the catering for June – November. $6. or $1. the second payment that you received on December 1st covers the period of December – May.750 As of July 31st.
.1 Page 171 Problem 1-5 a.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 $1. Dec 31.006.000. 2.000. 8.000 = $48.000. v.000 $1. 12.000.020.020. 10.000.026. 6. Debit to Subscriptions Received in Advance = $180. 4.000 (cash) = $1.000 – 128.000 $1.000.000 $20.000 x $20 (accounts payable) = $20. 11. 100.000. 7.000 + 120.000 (sales) – 4.000 Problem 1-7 1.000 (bldg) – 300.000 (the ending balance in the account). 9.000 x $20)(inventory) = $1.000 + (1. 3. 20x5 500 500 100 100 c.000 $1.000 = $72.000 $0 $1. 20x5 Insurance expense Prepaid expense $1.000.000 (COGS) = $1.000 $1.000 less the revenue earned for subscription fees received in the previous year of 80.Introductory Financial Accounting.000.000. 2.000 1. The opening balance in the Subscription Received in Advance account = $80. Dec 31. 20x5 55 55 Problem 1-6 1.000 + (200 x $50)(cash) – (200 x $20)(inventory) = $1. 5. 20x5 d.000 $0 $1. Dec 31. the offsetting credit would be to Subscriptions Revenue.000 + 10.000 x $10 = $1.1.000 + 300. 3. Total amount received as revenue of $128. Dec 31.000. $80. 4.
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 .Introductory Financial Accounting. v.1.1 Page 179 Ruiz Pharmacy Balance Sheet as at December 31.
000 8 Rent Payable 27. Depreciation 40.000 16.000 Prepaids 14.000 80.000 Inventory 446.000 20.000 9 13 Long-Term Notes Payable 20. v.000 Liabilities & Equity Accounts Pay 600. 123.800 Sal.000 4.000 12.000 24.000 323.000 100.500 B 2 5 8 4 6 7 7 9 9 11 13 13 14 B 2 E 5 6 B 1 E B 1 E 3 10 7 B 7 E E 9 13 B 13 E B 11 E B 12 E 4 Customer Deposits 10.000 Capital Stock 110.000 25.000 850. 7.500 B 9 E Furniture & Fixtures 190.000 B .1 Page 180 Problem 1-13 Assets Cash 30.000 16.000 200.Introductory Financial Accounting.000 Interest Payable 8.1.000 12.000 215.000 775. And Com.000 10.000 22.000 375.500 20.000 Acc.500 745.000 375.000 14.500 260.000 600.500 547.000 850.000 225.000 B E B 10 Retained Earnings 4.000 575.000 21.000 25.000 Taxes Payable 20.000 265.500 8.000 15.800 6.000 62.00 515.000 31.500 6.000 20.000 8.000 BALANCE SHEET Accounts Rec. Pay.
350.000 21.1 Page 181 Expenses INCOME STATEMENT Salaries and Commissions 207.000 27.000 Sales 1.000 70.000 Interest 6.000 7 7 E Income Tax 15.000 13 14 Other 225.800 12 Depreciation 22.000 8.000 4 2 9 9 9 9 E Rent 14.000 . v.000 27.Introductory Financial Accounting.500 Revenues 3 COGS 345.1.000 12.
20x5 Retained Earnings. 20x5 $260. 20x4 Net income Dividends Retained Earnings.000 225.000 22.500 70.000 745.000 207.700 Peter’s Appliance Shop Ltd.350. 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. Statement of Changes in Retained Earnings for the year ended August 31. Income Statement for the year ended August 31. Aug 31.000 46.500 80.Introductory Financial Accounting.1 Page 182 Peter’s Appliance Shop Ltd.000 605.700 27. v.200 .1.500 6. Sep 1.000 524.700 -4.000 $46.500 $302.800 73.
20x5 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Fixed Assets Furniture and fixtures Less accumulated amortization $ 31.000 16. v.300 110.000 $1.500 215.200 $1.000 12.800 27.500 6.300 80.Introductory Financial Accounting.000 578.000 658.000 153.000 917.1 Page 183 Peter’s Appliance Shop Ltd.070.000 10.500 .200 412.000 -62.500 323.000 547.000 7.070.1. Balance Sheet as at August 31.500 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 $515.000 302.
225 63 $4.$1.288 Problem 2-2 a. December 31 Add Sparg cheque deducted in error Add deposits in transit Less outstanding cheques Cash balance per books b.300) $3.700 77.1.595 Balance per bank statement Add deposits in transit Balance per books $4. before adjustments Less bank service charges Add error in recording cheque ($1.700 – 3.152 (52) 180 $3. $15. Cash Accounts receivable Bank service charges Cash $180 $180 52 52 $3. v.020) Adjusted cash balance per books.Introductory Financial Accounting.200 = $21.280 . Dec 31.1 Page 184 Problem 2-1 1. c b b The balance on the bank statement will be overstated by $360.000 (77. Cash balance per books.548) 3.200 .280 $6. 3.700 (5. Dec 31 Cash balance per bank.300 580 1. 2. Dec 1 Add cash received during December Less cash payments made during December Cash balance per books.095 + 9.
$ 480 6.200 $4. Cash Accounts Receivable To record error in deposit made ($530 – 350 = $180).200 $780 1.700 $180 $180 35 35 360 360 . Cash balance. 20x7 2.Introductory Financial Accounting. March 31. 20x7 Add outstanding deposits Less outstanding cheques # 201 # 533 Cash per books. v.980) $4. March 31. Office equipment Cash To correct error made in recording of purchase of office equipment: $620 – 260 = $360.700 (1. Bank service charges Cash To record bank service charges for the month.1.1 Page 185 Problem 2-3 1. before adjustments Add error in cash receipt Less bank service charges Less error on cheque # 521 Cash balance after adjustments Bank reconciliation Cash per bank.915 180 (35) (360) $4.
Trading investments are those that are held for re-sale as part of a portfolio of managed securities held for a short-term.000 70. Either way.1.Introductory Financial Accounting.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. Available for sale securities are defined by what they are not: they are not long-term investments nor are they trading investments.000 3. b) Cash Other Comprehensive Income Temporary investments . 20x0: Unrealized gain (loss) ($2.000 3. the securities have to be recorded at fair market value on the balance sheet at December 31.XYZ Computer Gain on sale of investments Cash Other Comprehensive Income Temporary investments .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 $35.000) (1.000 31. If the securities are classified as trading investments. If the securities are classified as available for sale.000 3.000 .000 (4.000) 12.000) $ 8. v. then the net unrealized gain flows through net income. then the net unrealized gain will be part of the Other Comprehensive Income section of Shareholders' Equity.Strategic Air Defence Gain on sale of Investments $75.000 $2.000 7.
700) 20x1 ($500) 0 (3. In 20x2.200) ($5. an unrealized holding loss of $4.700 will be charged to net income.700 .500) (2.000 – 8.1.4. .000) 20x2 ($4.Introductory Financial Accounting.000) ($8.700 ($5. an unrealized holding gain of $1.500) (1. In 20x1.500) ($4. an unrealized holding loss of $5.000) (1.000) (3.000) will be credited to net income.1 Page 187 Problem 2-5 a) Security A Security B Security C 20x0 ($2.500 ($4. v.500) will be charged to net income.500) b) In 20x0.
000 dr. Dec 31. v.000 x 3% $97. 2004: $1.000 Credit Sales – 11.000 A/R Begin + 400. 11.000 71.800 = $1.875 2. 20x8.600 Balance in Allowance for Doubtful Accounts.000 cr.000 71.350 $55.350 cr.350 cr.000 c.000. 2004 Balance in allowance before adjustment $63.000 cr. before adjustment $11. Beg Bal + 55.900. Required balance at December 31: ($80. Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable b.000 cr. Bad debt expense ($14.000 – 500 + 300 = $4. Adjustment $13.200. a Balance in allowance account at the end of 20x9 before adjustment for bad debts: $5.5%) Allowance for doubtful accounts Accounts receivable balance. $86.000 3. Beginning Bal – 20.400 – 4. Write-Offs + 3.000 dr.000 Write offs) = $100.000 3. Recoveries Adjustment required Bad debt expense Allowance for doubtful accounts 86. $3.1.350 86. Write offs $9.000 3.200.000 dr.000 x 4% 4.000 – 125 = $2.875 After: ($3.000 Write-offs Allowance for doubtful accounts.000 – 30) – (125 – 30) = $2.000 Sales – 360.000 Collections – 20.000 $55.000 Collections – 55.000 Before: $3. . a Problem 3-2 a.000 x 0.800 Bad debt expense = $6.Introductory Financial Accounting.000 cr. d 3.000 cr.245.1 Page 188 Problem 3-1 1. December 31.000 3. December 31.000 Beg Bal + 14.
1.000 31.000 43. (Schedule) $2.400.000 16.840 cr.480 3.Introductory Financial Accounting.000 $2.1 Page 189 Problem 3-3 20x0 Accounts receivable Sales To record credit sales for 20x0 Cash Accounts receivable To record cash collections for 20x0 Allowance for doubtful accounts Accounts receivable To record accounts written off for 20x0 Bad debt expense Allowance for doubtful accounts To adjust the allowance for doubtful accounts to an ending balance of $27.000 27.800.000 2.000.800.000 2. (Schedule) 20x1 Accounts Receivable Sales To record credit sales for 20x1 Cash Accounts receivable To record cash collections for 20x1 Allowance for doubtful accounts Accounts receivable To record accounts written off for 20x1 Accounts receivable Allowance for doubtful accounts To record recoveries for 20x1 Cash Accounts receivable To record cash collections for 20x1 Bad debt expense Allowance for doubtful accounts To adjust the allowance for doubtful accounts to an ending balance of $38.000 27.400. v.000 7.000 16.915.000 7.915.480 43.000 2.000 3.290 31.000 7.290 .770 cr.000 2.000 7.000.
000 12. v.000 384.480 27.800.290 38.1 Page 190 20x0 Bal 20x1 Accounts Receivable 2.000 $442.000 45.000 $27.000 20.000 15.1.000 80.000 7.000 1% 5% 20% 80% $ 2.480 27. 20x0 0 – 30 31 – 60 61 – 90 Over 90 $234.000 $384.000 60.Introductory Financial Accounting.840 December 31.000 43.770 .000 90.000 31.000 16.000 442.340 4.000 1% 5% 20% 80% $ 2.770 4. 20x1 0 – 30 31 – 60 61 – 90 Over 90 $277.000 7.000 $38.000 2.000 12.500 9.915.000 7.000 27.000.000 3.400.000 2.000 25.000 Allowance for Doubtful Accounts 16.770 20x0 Bal 20x1 Bal Bal Schedule – Calculation of the Allowance for Doubtful Accounts December 31.
500 Write-offs . Bad debt expense** Allowance for doubtful accounts **($500.275 30 30 2.500 1.000 500.000 1.1 Page 191 Problem 3-4 1.275 500 cr.500 400.1.000 x 2%) 10. 31.Introductory Financial Accounting. Write-offs Adjustment required Bad debt expense Allowance for doubtful accounts Interest receivable Interest income* *(3.500 x 5% $6.000 500.500. $6.000 Beg Bal + 500.000 10. Beg Bal + 1. 20x7: $40.000 Note: The allowance account will now be $500 + $10. 20x7 Balance in allowance before adjustment: $2.000 3.775 cr. December 31. Allowance for doubtful accounts.000 Collections – 3.000 x 12% x 1/12) 6.000 cr.000 $135.400.000 Credit Sales – 1. v. Accounts receivable Sales Allowance for doubtful accounts Accounts receivable Cash Accounts receivable Note receivable Accounts receivable Accounts receivable balance.500 dr. 6. . Dec.275 cr.000 = $10.000 Note Receivable 3.000 400.
500 500 c.000 $80. 4. Inventory Accounts payable Accounts payable Cash ($50.000 49. v.000 509.000 (66.1 Page 192 Problem 4-1 1.000 – 6.000 1. b Opening Inventory Purchases – net: $500. .000 Ending inventory Cost of goods sold $60.000 2.000 50.1.000 + 25.500 x 98%) Sales discounts Accounts receivable d.000 x 70%) Inventory b.590 79.000 56.000 – 10. 3.Introductory Financial Accounting. c c d Czech should have recorded this sale in 20x8 since the goods were shipped FOB Shipping.000 50.200 500 500 350 350 77.000 56. Delivery expense Cash Sales returns and allowances Accounts receivable Inventory ($500 x 70%) Cost of goods sold Cash ($79.000 x 99%) Inventory $80.000) $503. e.500 50. Problem 4-2 a. Accounts receivable Sales Cost of goods sold ($80.200 1.910 1.
00 11.3333 $690 (220) 420 (567) Units 30 90 70 105 55 Balance Unit Cost Total Cost $10.000) 69.00 36.000 (40.3333 $300 990 770 1.00 11.000 500 3.000 44.1.000 3.00) + (20 units x $11.500 1. b. Ending inventory = 55 units (35 units x $12.00 12.190 623 Accounts receivable Sales Cost of goods sold Inventory (10 units x $10) + (40 units x $11.100 560 560 Problem 4-4 a.1 Page 193 Problem 4-3 a.00 23.000 .000 8.00 16.100 $1.000 77.500) 3.00 16.000 Units 1. Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Purchases (Sales) Units 2.500 units 1. v. Ending balance = 1.00 22.Introductory Financial Accounting.00 11.000 33. Date May 1 May 5 May 14 May 21 May 29 c.50 11. Purchases (Sales) Units 60 (20) 35 (50) Unit Cost Total Cost $11.00 22.000 48.500 Balance Unit Cost Total Cost $12.50) = $650 Note that the results for FIFO periodic are the same as for FIFO perpetual.000) Unit Cost Total Cost 18.000 (2.000 (2.00 $12.500 units x $23 = $34.50) $1.500 b.
Introductory Financial Accounting.400 Weighted Average Cost per unit $ 19. 20x5 Purchases Goods Available for Sale Less Ending Inventory.000 x $50 1.071 *400 x $48 1.200 50.7059/unit Cost of Goods Sold = 3.000 x $58 3.7059 = $ 173.330 Gross profit 175.330 x $100 400 x $48 1.929 .000 53.200 50.200 = $179.400 = $ 52.000 3.000 $ 179.000 x $50 1.000 173.940 Units 400 3.929 $ 159.400 70 3. v.1. Beginning Inventory. January 1. 20x5 Units sold during year FIFO Sales COGS 3.000 52.1 Page 194 Problem 4-5 a.330 x $100 $ 333. December 31.000 x $52 1.000 58.000 $ 19.860 b.200/3.140 $ 157. Weighted Average Sales COGS * Gross Profit 3.000 x $52 930 x $58 $ 333.000 52.330 x $ 52.
000 458.000 Customs and Duty Cost of goods available for sale Less Cost of goods sold Estimated value of ending inventory Net loss from fire = $188.600 June 1 Accounts receivable Sales Cost of goods sold Inventory 30.000 19.1. v.000 $188.000 42.000 Purchase Returns + 8.000 608.1 Page 195 Problem 4-6 Net Sales = $615.000 June 2 Sales returns Accounts receivable Inventory Cost of goods sold June 9 Cash Sales discount ($20.000 – 30.000 42.000 10.000 420.000 5.000 $150.000 x 2%) Accounts receivable Inventory Accounts payable June 12 .000 x 70% $420.000 30.000 – 15.000 15.000 15.Introductory Financial Accounting.000 Sales Returns Estimated cost of goods sold Opening Inventory Net purchases: $480.600 400 20.000 $37.000 10.000 5.000 x 20% Problem 4-7 $600.
050 each = $ 63.79/unit x 60 units Ending inventory = $58. v.000 210. Ending inventory – Weighted Average Average unit cost = Cost of goods available for sale/Units available for sale Average unit cost = $646.000 3.000 $ 646.727 .1 Page 196 Problem 4-8 1.000/(20+440+200) Average unit cost = $646. Cost of goods available for sale: 20 units x $900 each 440 units x $950 each 200 units x $1.1.000/660 units Average unit cost = $978. Ending inventory – FIFO: 60 units X $1.000 418.79/unit Ending inventory = $978.000 2.Introductory Financial Accounting.050 each = = = $ 18.
500 (3.000 would need to be paid on the due date. It would be equivalent to interest of $1. 20x7 Cost of goods sold $ 80.3). .000 80.000 80. There are 24. it may cost a company 10% to borrow the funds. If payment was not made within the discount period. 20x7 Merchandise inventory.200 1.300 3.09% (3.500 1. v. thus giving an annual percentage cost of missing the discount of 75.1 Page 197 Problem 4-9 a. December 31. whereas the purchase discount may generate a savings which would equate to an effective interest rate much higher than 10%.000 ii) Accounts Payable Cash Purchase Discounts iii) Accounts Payable Purchase Returns iv) Transportation-In Cash b.200) (1.000 $ 150.000 48. the full amount of $50.09 24.Introductory Financial Accounting.3 15-day periods in a year (365/15). TOYJOY LTD.000 (1. discounts taken under a term of 3/15.300 c. i) Purchases Accounts Payable 80. much higher than the 10% borrowing rate.500 by paying 15 days early.500 1. For example.1. 20x7 Purchases Less: Purchase returns and allowances Less: Purchase discounts Net Purchases Add: Transportation-In Cost of goods available for sale Less: Merchandise inventory.200 3.000 50.000 3.000 $200.500) 77.300 30.300 230. The savings generated by purchase discounts generally make it worthwhile to borrow to take advantage of the purchase discount. December 1. Cost of Goods Sold Schedule for the month ended December 31.500 on a base amount of $48.09%) for a 15day period (30 days – 15 days). In December. n30 generated savings of $1.
000 – 36. January 1.000 Cost of goods available for sale – COGS = Ending Inventory $110.Introductory Financial Accounting.000 O 20x7 Cost of Goods Sold 10. then COGS = 100% . estimated COGS = $60.000 O Problem 4-11 Sales.000 * ** If Gross Profit = 40%. January 1 to January 13 Inventory.000 $ 100. 20x7 Estimated Cost of Goods Sold* Estimated Gross Profit ($60.40) $ 60.000 36.40% = 60%.000 = $74. January 13.000 $24. 20x7 Purchases.000 U N/A 5.000 **74.000 U 5.1 Page 198 Problem 4-10 Error i) ii) iii) 20x6 Cost of Goods Sold 10. Therefore.000 O 5. January 1 to January 13 Cost of goods available for sale Less estimated ending inventory.000 .000 10.000 U N/A N/A 20x6 Retained Earnings 10.000 110.1.000 U 6.000 x .60 = $36.000 x .000 U 20x6 Ending Inventory 10.000 O 6. v.
100 Balance Total Cost $58.800 (47.000 units @ $8.250) 72.500 9.500) Purchases (Sales) Unit Cost $8. From Purchase # 2: 8.000 = 21.600 126.759 c.000 14.741 COGS = $53.500 / 21.40000 9.200) 72.40 7.400 $178. Units 7.00 8.000) (500) 8.000 + 7.000 x $8.000 x $9.800 (53.40 9.1 Page 199 Problem 4-12 a.700) (4.600 80.000 6.000 x $8.50 = $76.000 + 7.000 (6.95 8.00000 Total Cost $58.95) + (7.500 58.000 units @ $9.000 + 8.500 Total Cost $47.509) Units 6.400) $ 98.000 8.63793 Total Cost $47.000 (5.500 14.500 + 8.000 (6.000 x $8.000 Cost of goods available for sale = (6.250 + 47.250 125.000 (5.509 = 100.40 .500 Units available for sale = 6.000 x $7.000 – 6.700 106.19231 8. v.000 Unit cost = $178.800 54.400 d.000 – 5.40) + (8.500 53.400 $80.1.000 6.200) Units 6.500 = 9. Ending inventory = 6.000 Balance Unit Cost $7.50 Ending inventory = 9.50 = $102.700 106.40 Ending Inventory Cost of goods sold Cost of goods available for sale Less ending inventory $72.00 From Purchase # 1: 1.000 13.500) 8.000 (46.000 13.000 8.00) = $178.500 (80.000 b. Units 7.250 77.95000 8.500 COGS = 12.500) Purchases (Sales) Unit Cost $8.Introductory Financial Accounting.000 (47.000 = $8.000 7.
000 – (5 years x $18. a d ($200.000 / 9.000 + 15.000)] Net book value = $77.075.1.000 Net book value = $100.000) / 10 = $4. and not the legal life of 17 years.000 = $1. Estimated salvage value = $100. d) ($80. d c c Net book value = $85. 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. v.500/year.000. we must first know the salvage value of the machinery inherent in the problem.160 To move to the units-of-production method.5 x = $600 $1.000 – ($85.000/80.000 ($20. 3.000 + 60.500 It is assumed that the addition should be capitalized and depreciated since it qualifies as a capital asset. 6.000 – [($100.1 Page 200 Problem 5-1 1.000 – 150.750 .000) x (20.000 x 90%) / 1.500 x 430 = $5.Introductory Financial Accounting.000 x .000 – 10. Depreciation expense = $12.000 – 5. 5.000/year) = $10. c Double-declining-balance rate = x 2 = 50% 4. Note that we use the estimated useful life of the patent.500 7.5 x 6/12) Net book value = $63. 2.000)/10 = $8.000 + 5.
000 17.000 x 40% (1/5 x 2 = 40%) Amortization expense Accumulated amortization ($65.500 16.1 Page 201 Problem 5-2 a.000 x 55.000 16.000 26.000 – 12. Amortization expense Accumulated amortization ($65.000 Net book value = $65.000) x 40% $12.000 – 5.000 – 2.000 20x8 15.000) / 5 years 20x7 Amortization expense Accumulated amortization $65. v. 26.000 – 5.000) / 200.Introductory Financial Accounting.000 = $53.000 Amortization expense Accumulated amortization 17.000) / 3 = $17.000 $12. Amortization expense for 20x8 = ($53. Amortization expense Accumulated amortization ($65.500 d.000 b.000 .000 – 26.1.600 c.600 15.
1.000 10. 20x7 4.656 25. 20x3 Equipment Cash Amortization expense Accumulated amortization (60.808 Dec 31.750 10.500 10. 20x3 Aug 31.50 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. 20x7 Aug 31. 20x5 Dec 31. v.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. 20x4 600 600 10. 20x4 Apr 31.000 2.000 $60.50 / month x 8 months = $500 + 10.1 Page 202 Problem 5-3 (a) Jan 2.000 10.000 55.000 + ($62.000 10.000 = $10.000 20.656 4.714 1.000 / 32 months remaining = $62.000 2. 20x7 20.Introductory Financial Accounting. 20x6 10.000 10.750 Oct 31.500 Dec 31.500 Amortization expense Accumulated amortization $10.808 9.000 . 20x5 Dec 31.000 9.000 Dec 31.286 82. 20x5: $2.
688 Amortization expense – Sep 30 to Dec 31.000 .750 x 9/12 $60. 20x7 ($12.000) (10.750) (8. v.746 = $9.000 4.062) $12.746 Total amortization expense for 20x7 = $8.000) / 39 months = $582 per month x 3 months = $1.000) (10.000 (10.000 $18.000 $108.500 $11.500 50.688 + 20.000 – 90.500 Market value of asset Gain on sale (2.000 2.062 + 1.000 Less fair market value of asset traded in (15.500 15.500) $105. 20x7 Original cost of asset Capitalization made on April 1.500 $ 4.1 Page 203 Schedule 1 Amortization expense for 20x7 Net book value of asset at Sep 30.500 38.1.500) Acquisition price of new lathe ** NBV of asset at time of exchange = $50.808 Problem 5-4 Equipment (new lathe)* Accumulated amortization (old equipment) Equipment (old equipment) Cash Gain on sale of asset** 105.000 * Price of new lathe Less trade-in value less fair market value of asset traded in: Trade in value: $108.000 – 10.500) (10.000 90.000 – 38. 20x5 Less Amortization expense 20x3 20x4 20x5 20x6 20x7 to Sep 30: $10.Introductory Financial Accounting.
000 2.000 x 6/12 = $3.000 (9.000 The cost plus installation.000 – $3. v.Machinery **($27.000 Installation Charges = $27. 2. Amortization expense Accumulated amortization .000 *25.000 for 6-month period 3. The freight is included in the cost but the repair is not to be capitalized. Cash Accumulated amortization – Machinery Machinery Gain on sale of assets .000 27.000/year $6.000** 3.000* 27.1.000 3.Introductory Financial Accounting.000)/4 = $6.000 Cost of machine + 2. Machinery Less: accumulated amortization $27.000) $18.000 4. Machinery Cash 27.1 Page 204 Problem 5-5 1.000 9.000 20.
000 – 20.000)/40.1 Page 205 Problem 5-6 a.000)/4 = $25.683 Cash Accumulated depreciation ($25.750) Loss on disposal of equipment Equipment Cash Accumulated depreciation ($22.750 Units-of-production method = (120.000 + 18. ii. c.500 – 20.500 + 23.000 – 22.Introductory Financial Accounting. ii.000 = $22.000 43.000 x 12.000 $=75. . Straight-line method = (120. ii.000 – 20.750 1.000 Units-of-production method = (120. v.000) / 41.000)/(5-1) = $18.683) Gain on disposal of equipment Equipment $75.000 45.000 = $22.000 b.000 x 9.1.500 Straight-line method = (120.000 – 20. i.250 $120.000 – 25. i. i.183 183 120.
This method is acceptable under GAAP if it properly reflects the pattern of benefits received from using the machine. amortization is high in the first year and decreases in amount as years go by.800) 5.1 Page 206 Problem 5-7 a. i.750 .000 (53.Introductory Financial Accounting. Cost Less accumulated depreciation: $17.000 Depreciation expense: ($157.250 3..000 14.000 – 15.000) $ 3.000 (2.000) / 8 = $17. If the machine does not provide decreasing benefits.750 157. Costs capitalized: Invoice price Less discount .1. A double-declining-balance amortization method could be used to abide by the president’s request.250) 103.000 $157. if the machine generates less revenues as it gets older.e.$140. $140. then this method should not be used.750 Note that the interest charge of $12.000 x 2% Customs and duty costs Preparation and installation costs b.000 53.750 (100. c. v.000 cannot be capitalized to the asset since the asset was purchased and not self-constructed. Under this method.750 x 3 years Net book value Less proceeds on disposal Loss Cash Accumulated amortization Loss on disposal Machine $100.800 $157.
472. a b b) PV of bonds at issue: PMT=800. FV=10.600 Problem 6-2 The premium expense would calculated as follows: $375.500 37.000.Introductory Financial Accounting. N=10. 6.500 / 5 x $2 $18.000 /10 coupons /15 redemption ratio x $25 x 55% = $34.375 The journal entry to record the premium expense would be: Premium Expense Premium Liability 34.000 (9. c c b Premium expense: 150.018 x 6% = $688.1 Page 207 Problem 6-1 1. 2.375 34. I=6%.472.375 The journal entry to record the actual costs incurred during the year would be: Premium Liability ((22.321 4. 5.000 PV=$11.018. Interest expense for the year = $11. v.000 / 5 x $2 x 30% Premium redemptions: 23.500 . 3.1.000.500/15) x $25/card) Cash 37.400) $ 8.
Problem 6-4 The value of the bond issue will be as follows: N 10 I/Y 4 PV X= 540.622 3.000 . 20x2 would be as follows: Jun 30.000 Opening Balance + 150.000 130.378) x 4% Bonds payable Cash 21.000 $150.513 25.554 $540.554 The journal entry to record the interest payments using the effective interest method of amortization is as follows: Dec 31. A/P.000 The journal entry to record the interest payment of Jun 30.554 .378 25. v.000 x 5%) Warranty Liability The journal entry to record actual warranty costs incurred is: Warranty Liability Cash.554 x 4%) Bonds payable Cash 21.000 Warranty Expense – 130.000 Warranty Costs Incurred = $185.554 PMT 25000 FV 500000 Enter Compute The journal entry to record the issuance of these bonds is as follows: July 1.000.000.000 $150. 20x2 Interest expense (540.000 The warranty liability at the end of the year will be $165.Introductory Financial Accounting. Inventory 130.1.1 Page 208 Problem 6-3 The journal entry to record warranty expense is: Warranty expense ($3. 20x1 Cash Bonds payable $540. 20x1 Interest expense (540.487 3.3.
the total debits to the account for the year is the total cost of repairs made during the year.301 – 7. v.000. 4.000.800 = $10. credit cash/inventory/etc.1.301 10. The journal entry to record repairs as performed is debit Warranty liability.708 425.432.016 425.000. PMT = 425.000 Jun 30.200 – 6.432.432. 3. $6.000 + 5.432.708) x 4% $10. the total credits to the account for the year is the warranty expense for the year.000 416. . The journal entry to record warranty expense is debit warranty expense credit warranty liability.Introductory Financial Accounting. 20x5 Problem 6-6 1. Therefore. $10. FV = 10. 20x4 Cash Premium on Bonds Payable Bonds payable Interest expense ($10. Therefore.000. 20x5 Dec 31.301 x 4%) Premium on Bonds Payable Cash Interest expense* Premium on Bonds Payable Cash * (10.800.1 Page 209 Problem 6-5 PV of bond issue: N = 30.301 $432.000 $10.200 2.301 Dec 31.000 417. I = 4.292 7. $5. Solve for PV = $10.984 8.000.
714 – 2.277 20.189 2. 20x6 Dec 31.445 20.500 FV 500.129 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $511. 20x7 20.311 22. 20x8 20.937 – 2.055 = $509. 20x7 20.1 Page 210 Problem 6-7 Proceeds on bond issue: N 6 I/Y 4 PV $513.500 Jan 1.105 x 4%) Bonds payable Cash Interest expense $513. 20x6 Cash Bonds Payable Interest expense ($513.137 22.311 = $502.129 – 2.500 Dec 31.105 20.500 Jul 1.223 22.976 22.1. 20x6 20.223 = $504.500 Jan 1.105 $513.105 – 1.363 2.714 x 4% Bonds payable Cash Interest expense $504.277 2.074 x 4% Bonds payable Cash Interest expense $509. 20x8 20. 20x8 Jul 1.055 22.097 .524 1. v. 20x7 Jul 1.074 – 2.277 20.976 = $511.445 2.137 = $506.445 20.403 x 4% Interest payable $513.000 Enter Compute Jan 1.500 Dec 31.Introductory Financial Accounting.105 PMT 22.937 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $506.097 20.
420) $1.000 500.1. 20x9 Interest payable Bonds payable Cash Bonds payable Cash 20. v.171.000.171.591 – 1.591 PMT 60000 FV 1000000 2.171. Dec 31.591 x 5%) Bonds payable Cash (1.000 58.1 Page 211 Jan 1.491 60.509 1.420 60.580 1. June 30. 20x6 Cash Bonds payable Interest expense (1.000 x 12% x 1/2) Interest expense (1. July 1.Introductory Financial Accounting.171.500 500. 20x7 .000. 20x7 ($1. Enter Compute N 40 I/Y 5 PV X= $1.403 22.000 x 12% x 1/2) *Bonds payable balance as of June 30.097 2.000 3.591 58.171.000 Problem 6-8 1.170.171* x 5%) Bonds payable Cash (1.591 $1. 20x6 4.
d.000 x 8% x ) a.Introductory Financial Accounting.000.1. v.943 False False.093 5. Interest expense for 20x7 = $44.850 + 45.000 exactly.000. .000 x 8% x ) 2nd half of 20x7: Interest expense ($897.000 $45.850 4.850 40.093 40. False. c. The cash outflow is $80. $44.1 Page 212 Problem 6-9 The journal entries to record interest expense for 20x7 would be as follows: 1st half of 20x7: Interest expense ($897.850) x 10% x Bonds payable Cash ($1. The interest expense will increase every year since the book value of the bonds payable will also increase.093 = $89.000 x 10% x ) Bonds payable Cash ($1. b.000 True.000 + 4.
$6.1 Page 213 Problem 7-1 1.000 12.$14.000 2.000 126.000 February 10 February 15 February 26 12.000 shares x 3/2 = 225.080) Total Shareholders’ Equity $ 138.000 shares outstanding after the split.000 44.000 40.000 x $0. Problem 7-2 1.400 14. Shareholders’ Equity Common Shares. c 150.520 .080 February 27 February 28 21.1.000 40.400 2. 400 shares issued and outstanding Retained Earnings ($0 + $56.080 2.000 shares issued and outstanding Preferred Shares.000 .Introductory Financial Accounting. non cumulative.400 .000 39.$2. 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 40.32 $14. v.000 2. 44.520 $217.080 14.000 21.
500 .000 180.000 48.000 40.000 40.000 3.500 50.000 Net Income – 15.000 3.000 60.500 $456.000 b. issued and outstanding 3.1.000 20. g.000 Preferred Shares.000 53. c.000 Retained Earnings ($64.000. f.Introductory Financial Accounting. 2.000 20.000 $115.000 180.000 12. d.000 3. a.1 Page 214 Problem 7-3 1.000 3. issued and outstanding 3. v. Shareholders’ Equity Common Shares. h.000 3.500 12. authorized 100. cumulative – authorized 50.500 Dividends) $348. e. 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 $115.000.
000 x 6.000 960.000 $1.000 5.000 2. .000 12.000 945.600.000 x 6. 6.000 960. 10.000 75. 4.000 75.520. Equipment Cash Warranty liability Cash $1.588 412 13.600 314. 1.000 5. 8.000 25.000 30.000 945.000 25.000 34.600 x 3%) Bonds payable Cash ($400.520.400 320.1 Page 215 Problem 8-1 a.Introductory Financial Accounting. Accounts receivable Sales Cash Accounts receivable Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable 5.000 12.000 1.000 30.600 – 412) x 3% Bonds payable Cash ($400.000 16. 7.000 1. Purchases Accounts payable Accounts Payable Purchase returns Cash Common stock Accounts payable Cash Salaries payable Salaries expense Cash Interest expense ($419.5% / 2) 11.000 5.1.000 34. v.576 424 13.000 16.600.000 5.000 5. 12. 9. 3.5% / 2) Interest expense ($419.
000 x 7% 23.400 130. $4.000 cr.400 2.930 23.400 + 2. + 5.31 Prepaid insurance Cash Operating expenses Cash Bad debt expense Allowance for doubtful accounts The balance in the allowance for doubtful accounts is: $23.000 17.1.000) = $17. 2.400 x 2/12 Insurance expense 3. $23.930 cr.400 3.000 + 75.010 4.600 6.000 x $17. 18. Insurance expense Prepaid insurance Balance in prepaid insurance account: $1.400 .31*) Retained earnings Cash * Average book value per share = $150.000 130. 17.930 dr.000 / (10.Introductory Financial Accounting.000 14. $6. + 34.320 3.000 40.000 x 3% 43.000 cr.000 17.400 $3.000 dr.310 4.930 16.1 Page 216 13. 15.000 + 3.800 400 $3.000 x 20% 12.000 23.690 22.000 x 50% Bad debt expense 40. v. = The balance in the allowance for doubtful accounts should be: $144. Income taxes payable Cash Common shares (1.400 Balance required: $2.000 dr.
700 80.Introductory Financial Accounting. 6.000 – 16.500 27.250 39.000 1.264.000 – 38.000 (378.700 6.000) Cost of goods available for sale Less ending inventory Cost of goods sold Inventory loss Allowance for decline in value of inventory 886.000 / 40 = $7. 24.000 58.000 $320.5% Salaries expense Salaries payable Retained earnings Cash Income tax expense Income taxes payable $134.000 Purchase) = $137.000 24.000 960. .702 22.400 4.1.600.000 – 320. amortization – building* Acc. Cost of goods sold Inventory ($378.000 x 1.000) Purchase returns Purchases Check: Opening inventory Purchases – net ($960.702 23.000 53.1 Page 217 19.400 *** $34. Warranty expense Warranty liability $1. v.000 13.000 13.000 80.000 944.500 ** ($145. amortization – equipment** Patents*** * $300.000 / 8 = 4.256 x 40% = 53.000) $886.000 24.250 20.000 21.000 NBV Beg + 30.000 x 20% = $27. Amortization expense Acc.150 7.702 53.000 16.
250 29.400 2.500 Acc Amort .000 960.400 400 Building 300.000 13.000 1.1.400 65.700 6.000 59.764 Common Stock 17.Equip 38.000 222.000 34.000 22.000 58.000 5.000 378.600 6.000 23.200 80.000 2.600 5.400 Allowance for Decline in Value of Inventory 13.000 13 Inc Taxes Payable 40.000 12.702 Warranty Liability 25.000 207.000 40.400 3.000 80.600.000 5.000 15.750 19 20 14 23 Retained Earnings 4.930 17.000 1.000 13.000 Liabilities & Equity Accounts Payable 16.000 30.000 25.000 127.520.000 945.000 Land 40.000 12.600 BALANCE SHEET Accts Receivable 176.000 B 19 E 10 10 B B 11 E Equipment 145.000 4. v.000 75.000 175.000 13.1 Page 218 Part (b) Assets Cash 36.000 126.400 130.000 Bonds Payable 412 419.000 320.600 424 418.510 B E .000 30.702 25.700 B 22 E E B 20 E Prepaid Insurance 1.520.000 5.500 127.000 1.310 150.690 B 24 B 15 E 18 B 12 B 21 B Acc Amort .000 B 19 14 B 7 E B E Patents 34.000 75.Bldg 120.000 7.000 53.000 Allow/Doubt Accts 34.000 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.Introductory Financial Accounting.930 Inventory 320.000 27.690 144.000 945.000 23.
100 Warranty expense 24.000 Revenues Sales 5 20 20 6 1.588 12. 53.930 19 Amortization exp.000 16.700 321.164 Insurance 3.000 .1 Page 219 Expenses Purchases 960.000 10 10 E Interest 12.400 6.400 21 18 16 Operating expenses 130.000 960.000 1 20 Cost of Goods Sold 886.000 9 22 E Salaries 314.000 17 Bad Debt Expense 23.600.Introductory Financial Accounting. 39.000 INCOME STATEMENT Purchase Returns 16.1.576 25.702 20 Inventory Loss 13.150 24 Income Tax Exp. v.
164 24.700 25.680.930 39. v.100 25.510 1.400 29.702 $2.702 12.680.000 400 40.000 23.600 222.000 886.196 Cr. 20x6 Dr.000 127.000 6.Introductory Financial Accounting. .750 126.690 59.000 13.000 321.000 65.000 300.000 3.196 $2. 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 $15.764 207.000 418.000 $17.1.400 130.150 13. Haider Corporation Trial Balance As at December 31.930 378.1 Page 220 c.500 175.000 53.600.
554 Haider Corporation Statement of Retained Earnings for the year ended December 31.554 (4. 20x6 $144.Introductory Financial Accounting.200 80.000 886. Haider Corporation Income Statement for the year ended December 31.000 554.930 13.000 321.164 134. December 31.690) (80.580 159.000 39.000 3.064 .000) $140.400 23. 20x6 Retained earnings. January 1.100 24. 20x6 Sales Cost of goods sold Gross profit Operating expenses Salaries Warranty Insurance Bad debts Inventory loss Amortization Other operating expenses Operating income Interest expense Net income before taxes Income tax expense Net income $1. v.000 714.600.150 130.256 53.420 25.702 $80.1. 20x6 Net income Premium on redemption of common shares Dividends Retained earnings.1 Page 221 d.
000 (127.850 $936.070 365.000 170.600 29.400) 172.600 204. 20x6 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance $ 15.402 418.1 Page 222 Haider Corporation Statement of Financial Position as at December 31.1.500 109.920 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Shareholders’ Equity Capital stock Retained earnings $126.690 140.000 6.500) 175.750 351.920 Land Building Less accumulated amortization Equipment Less accumulated amortization Patents – net . v.702 12.000 400 585.064 347.000 (65.166 207.Introductory Financial Accounting.000 $300.754 $936.700 25.764 589.070 40.
d.900 / 17) Patents or Accumulated Amortization – Patents Supplies inventory Supplies expense Increase in inventory = $9. 4.000 k. 12. 4.000 – 4.600 7. 16. 4.000 x 10% x 9/12 Amortization expense ($11.800 3. .600 b.000 x 3% Wages expense Wages payable Insurance expense Prepaid insurance $9.1 Page 223 Problem 8-2 a.600 e.700 i.000 24.000 16. 360 360 g.500 h.000 12.000 x 9% x 4/12 Interest expense Interest payable $60.600 x 5/12 Interest receivable Interest revenue $12.000 l.200 – 4.1.700 4. 700 700 4. Bad debt expense Allowance for doubtful accounts $320.000 24.000 f.600 3.000 4.600 $9.800 4.000 x 3% x $40 Allowance for doubtful accounts Accounts receivable Income tax expense Income taxes payable $9.500 4. j. 7.Introductory Financial Accounting.600 c.000) / 10 Prepaid rent Rent expense $9.600 x 9/24 Amortization expense Accumulated Amortization ($80. v.500 Warranty expense Warranty liability 10.
1.136 Operating Income Interest (72 + 44)1 Net income before taxes Provision for income taxes (6.316 12.500 + 240 Payable) Maintenance Utilities (4.270 800 424 250 13.640 x 10% x 2/12 $312 72 240 2.094 6.420 x 20%) Net income 1 Loan payment Less interest: $2.640 $44 .740 110 4. April 1. 20x2 Sales (22.1.536 116 6.630 1.800 .226 Uncollected Sales) Cost of goods sold Purchases (14.Introductory Financial Accounting.320 Collections on Credit Sales + 4.130 Rebate + 256 Payable .000 + 270 Payable) Insurance (1.500 5.300 Prepaid) Salaries and wages (5.840 Ending Inventory) Gross margin Operating Expenses Rent (1.686 19.284 $5. v.1. Income Statement for the five months ending May 31.920 .2.1 Page 224 Problem 8-3 MAS Inc.400 Baking Materials Purchases .120 Prepaid) Advertising Depreciation (3.420 1. 20x2 (2.000 / 5 x 5/12) $32.880 . 20x2 Loan balance.770 Cash Sales + 5.880 x 10% x 3/12 Principal payment. April 1.240) Interest April & May .
500 5.680 4. 20x2 ASSETS Current Assets Cash (22.214.171.124 7.284 44 960 3.054 1. Balance Sheet as at May 31.226 1.370 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 (2.000 -250 2.466) Accounts receivable Inventory Prepaid insurance Prepaid rent Fixed Assets Equipment Accumulated depreciation $2.636 $12. v.620 3.750 $12.1 Page 225 MAS Inc.370 .600 .960) Shareholder's Equity Common Stock Retained earnings $526 240 1.840 1.Introductory Financial Accounting.134 4.120 300 9.640 .734 2.
000 155.000 $338.Introductory Financial Accounting. 20x1 ASSETS Current Assets Cash Marketable securities* Accounts receivable Inventory Noncurrent assets Equipment Accumulated depreciation $24. $275.000 $338.1 Page 226 Problem 8-4 Morrow Wholesale Balance Sheet as at December 31.000 278.000 80.000) 60.000 63.000 80. v.000 (20.000 19.000 .000 SHAREHODLERS' EQUITY Shareholders' Equity Common stock Retained earnings * Plug to balance.1.
Introductory Financial Accounting.000 34.220 63.000 . v.500 $250.000 4.380 17.000 50. end of year 11. beginning of year Dividends Retained earnings.000 ÷ 10) Bad debts (155.000 5.000 24.1.600 7.100 15.000 x 12% x 6/12) Gain on sale of equipment Gain on sale of securities Net income before taxes Income tax expense (30%) Net income Retained earnings.000 + 1.220 .900 (300) 5.000 (10.600 8.146. 20x2 Sales Cost of goods sold ($250.000 x 80%) Gross margin Operating expenses Salaries (10.1 Page 227 Morrow Wholesale Income Statement and Statement of Retained Earnings for the year ended December 31.000 200.600) Depreciation (80.000) Miscellaneous Operating income Interest expense ($5.000 9.000) $70.
20.000 1.000 (8.380 60.500 Note 1 .000 330.20.ending Purchases Cost of goods sold = Opening inventory Purchases Less ending inventory $180.000) Equipment (80.000 300 10.000 216.000 + 4.000 (96.500 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 70.000) 52.220 345.000 $405.500 23.000 .000 + 8.000) Accumulated depreciation (20.Introductory Financial Accounting.000 .Inventory Purchases of merchandise A/P .500) Inventory (Note 1) Prepaid advertising Noncurrent assets Land (19.000 $80.220 $405.1.600 5.000) $224.000 36.000 60.000 10.000 $216.280 275. v.1 Page 228 Morrow Wholesale Balance Sheet as at December 31. 20x2 ASSETS Current Assets Cash (24.500 96.000 7.000) $200.000 + 406.205.000 .
10. Ginger’s Cookies Ltd.000 (125.900 47.000) 175.000 $20.500) (69.600 Increase in Salaries Payable) Cash paid out for other operating expenses Cash paid out for interest ($32.000 Interest expense .400 – 61. Statement of Cash Flow for the Year ended December 31.100 Income tax expense – 33.200 $20.000) 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 ($108.400) (80.200 Increase in AP) Cash paid out for salaries ($120.000 15.12.1 Page 229 Problem 9-1 a.1.100 Increase in Income Taxes Payable) $740.000 (99.000) (31. v. beginning Cash.000 COGS + 7.000 Increase in Inventory .000) $ 5.000 – 69.000 Increase in A/R) Cash paid out to suppliers ($300.500 . ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($45.000) (105.500) 1.400 $ 99.000 $146.500) Cash.500 Increase in cash ($175.000 Sales .7.800) (112.800 – 105.300 19.Introductory Financial Accounting.000 Increase in Interest Payable) Cash paid out for income taxes ($79.000 – 40.000 Salaries Expense . 20x6 Cash flow from operations Cash collected from customers ($7500.000) (46.000 (294.800 Cash flow from investing Proceeds on sale of equipment (Note 1) Purchase of equipment 20.1.
000) 12.800 .1 Page 230 b.1.000 (15.600 1.100 $175.000 33.000) (7.900 7.200 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) (10.Introductory Financial Accounting.
000) (12.000) (34. end of year 1 Accumulated Amortization.000 Accumulated Amortization.000 218. Statement of Cash Flow for the year ended December 31.695.000) 350.000) (463.000 (48.000) (11.000 (50. 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. McDuff Ltd.Introductory Financial Accounting.000 (13.000 .000 111.000) (5. beginning of year Amortization expense Accumulated Amortization on disposal: $158.000) (37.000) 7.000 Decrease in cash Cash.000) Cash flow from financing Redemption of bonds payable Proceeds on issue of mortgage payable Proceeds on issue of common shares Cash dividends paid3 (487.000 ? (71.000 $319.000) 17.000 Cash flow from investing Proceeds on sale of assets Purchase of capital assets2 80.000 150.000 466.000) 353.842.000) $3. beginning of year Cash.000 $3. end of year Amortization expense = $218.1 Page 231 Problem 9-2 a.000 – 87.000) (37.1.000 (543. v.
beginning of year Add net income Less dividends Retained Earnings.000 . v.1.000 Decrease in Interest Payable) Cash paid out for income taxes ($250.Introductory Financial Accounting.000 Increase in Inventory + 12.000 ? $508.000 Increase in Income Taxes Payable) $4.000) (72.000) $466.000 Decrease in A/R) Cash paid out to suppliers ($2.000 Decrease in AP) Cash paid out for operating expenses ($700.000 Income tax expense – 17.000) (233. beginning Additions Disposals Capital Assets.000 COGS + 48.000 (2.611.000) (887.000 Increase in Prepaid Expenses) Cash paid out for salaries and wages ($850.500.000 Decrease in Salaries and Wages Payable) Cash paid out for interest ($67. Cash flow from operations – Direct Cash collected from customers ($4.000 – 218.000) (493.400. end of year Dividends = $50.000 $319.000 b.000 Sales + 111.460.000) $5.000 Interest expense + 5.326.000 239.000 Amortization Expense + 11. ending Additions to capital assets = $543.000 ? (158.1 Page 232 2 Capital Assets.000 $5.711.000 3 Retained Earnings.000 Salaries and Wages Expense + 37.
v.Introductory Financial Accounting.600 Increase in Inventory) Cash paid to employees ($39.800 $ (1. 20x5 Cash Flow from Operating Activities Net Loss Adjust for non-cash items Depreciation Add (deduct) adjustments to non-cash current assets and liabilities: Increase in accounts receivable Increase in inventory Increase in prepaid Insurance Decrease in salaries and wages payable Increase in interest payable $ (3.500 Increase in Accounts Receivable) Cash paid to suppliers ($165.000 Sales – 1.800 + 100 Increase in Prepaid Insurance) Cash paid for rent Cash paid for interest ($1.500) $ 900 (b) Cash Flow from Operating Activities Cash collections from customers ($218.400) 7.600) (100) (400) 100 (3.200 – 100 Increase in Interest Payable) $216.1.100) $900 .000 COGS + 1.500) (1.700) (2.1 Page 233 Problem 9-3 (a) HHC LTD.300) (1.600) (39.300 + 400 Decrease in Salaries and Wages Payable) Cash paid for insurance ($2.900) (5. Cash Flow Statement for the year ended December 31.500 (166.
000) 0 0 32.000 – 21.000 + 17.000) 24.000 26.000 (4. 20x6 Cash flow from operations Cash collected from customers ($900.000 (50.53.000 Note 2 – Proceeds on sale of long-term investment Net book value of investment Gain on sale Proceeds $ 18.000 .000 Increase in Inventory + 18. Statement of Cash Flow for the Year ended December 31.1.000) (165.1 Page 234 Problem 9-4 a.000) 17.000 Increase in A/R) Cash paid out to suppliers ($600.000) Cash.000) $7.000 (650. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($32.000) (25.000 Increase in cash ($32. v.000 Sales .000 Cash flow from financing Issue of bonds payable Dividends paid 25.000 Decrease in AP) Cash paid out for other operating expenses Cash paid out for interest Cash paid out for income taxes $847. Toram Ltd. beginning Cash.000 $50.000 (20.000 30.000 Cash flow from investing Proceeds on sale of equipment (Note 1) Proceeds on sale of long-term investment (Note 2) Purchase of equipment 7.000) Loss on sale Proceeds $ 11.000 30.Introductory Financial Accounting.000 – 25.000 12.000 COGS + 32.
Introductory Financial Accounting.1.000 4.1 Page 235 b.000) (32.000 43.000 (12.000) (18.000 . v.000) $32.000) (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 COGS) Beginning inventory = $60. c . 2.$100. d 3.000 = 1.000 No impact on working capital since the decrease in cash is equal to the decrease in accounts payable.1.000 – 20.25. Assume that CL = 250. current liabilities .000 / 365) = 94 days Inventory increased by $20.250 / ($125.500 + 32.000.000 / 50.$300.000 Inventory turnover = $450. Assume that a payment of $10.000 + 120. then CL = 230.500 Total net sales = $367.000 COGS = $30. d Average receivables = ($50. v.000 + 55.000 + 540.1 Page 236 Problem 10-1 1.000) / 2 = $52. current ratio = $100.000 / 70.78.000 = $40.000 – 120. a c b Average receivables = ($40. If the invoice paid is $20.000 purchased .000 + 22. the current ratio becomes $90.000 / 80.29 and working capital stays the same.000. c c Average inventory = ($30. a 6.$80.000 + 40.000.000 then the current ratio is 0.000 and CA = 200.000) / 2 = $50.000) / 2 = $75.0 times 9.000 ($320.000.000 = 1.000 Average inventory = ($60.Introductory Financial Accounting.8. 5.500 x 7 = $367.500 = $400.000 = $450.000 Inventory turnover = $300. 4.000 = 6. Impact is on the current ratio.000 and CA = 180.000 = 6 Assume an initial amounts as follows: current assets . the current ratio drops to 0.000 / 75. 8.000 is made. 7.250 Days sales in A/R = $32.500 Net credit sales for 20x8 = $52.500) / 2 = $31.
000 + 220.76 (12. v.000 / 60.000 = 1.000 + 400.400.7 days 20x4 594.000 / 379.000 = 1.000 = 1.000_ / 365 = 70.Introductory Financial Accounting.5 days Solvency Analysis: 20x5 Debt-to-Equity Ratio* 920.83 * debt is defined as long-term debt in this case .000 + 275.000 + 275.000 = 1.000) / 365 = 53.000 + 275.000 / 371.07 20x4 850.000 = 0.000) ÷ (1.000) / 379.60 (34.000 / 793.00 Times Interest Earned 230.1.000 / 50.1 Page 237 Problem 10-2 Liquidity Analysis: 20x5 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 712.000) / 371.88 (12.000) ÷ (1.000 = 4.200.68 (34.000 + 550.07 200.000 = 0.000 / 863.000 = 3.
000) / 2] = .000 / [(793.875.000 = 10. v.10 20x4 $1.98 Days Sales in Accounts Receivable Total asset turnover .000) / 2] = 13.1 Page 238 Profitability Analysis 20x5 Gross Profit Percentage Return on Sales Return on Assets $900.1.300.014.014.000) / 2] = 1.5% 200.000 = 10% 230.900.48 [(220.000 / [(425.Introductory Financial Accounting.900.9% Return on Equity Asset Management (Activity Ratios) 20x5 Inventory turnover $1.000 = 39.000 / 1.000 / [(2.000 + 2.000) / 2] / (2.900.000 / 2.000 / 2.000 + 200.000 + 793.162.000 / 1.000 + 220.014.300.3% 98.000 / [(2.66 [(275.000 / 365) = 39.000) / 2] / (1.000) / 2] = 11% 110.2 days 2.900.400.000 / 365) = 40.000 + 2.000 + 1.3% 200.1% 20x4 $700.000 + 350.000 / [(863.875.8% 230.000) / 2] = 3.000) / 2] = 10.000 + 1.000 + 340.000 / [(2.014.000) / 2] = 12.000 / [(340.300.000 = 36.000 / [(2.3 days 1.200.300.162.000 + 725.000) / 2] = 3.
08 (37.000 = 0.08 * debt is defined as long-term debt in this case .000 = 2.167.000) / 560.000 + 524.000 / 560.000.32 20x6 800.576.000 / 60.52 days 20x6 1.1.000) / 524.000) / 365 = 135.13 (20.72 days Solvency Analysis: 20x7 Debt-to-Equity Ratio* 820.000 + 480.1 Page 239 Problem 10-3 Liquidity Analysis: 20x7 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 1.000 = 0. v.000 = 2.000 / 524.000 + 524.000 + 480.000 = 1.45 Times Interest Earned 65.000 + 635.000 / 2.30 137.679.Introductory Financial Accounting.000) ÷ (1.000) / 365 = 97.000) ÷ (1.000 = 0.300.000 = 2.000 = 1.000 / 2.000 + 463.92 (37.114.000 / 56.04 (20.
000 + 4.1 Page 240 Profitability Analysis 20x7 Gross Profit Percentage Return on Sales Return on Assets $800.000 + 485.808.1% 65.000 + 570.5% 51.700.000) / 2] = 3.000 = 38.576.000 / 1.2% 65.000) / 2] = 0.000 + 2.000) / 2] = 1.000) / 2] = 0.000 / [(570.003.100.000 = 41.000 / [(2.1.000 / 1.003.1% 20x6 $700.700.000 + 3.000 / 2.000 / [(2.000 + 4.000 + 2.100.000) / 2] = 0.13 [(480.000 / [(4.000 / 2.Introductory Financial Accounting.000 / [(3. v.9% Return on Equity Asset Management (Activity Ratios) 20x7 Inventory turnover $1.628.000 + 524.000) / 2] = 2.679.700.000) / 2] = 1.000 / 365) = 88.000 / [(3.000 = 8.000 / [(650.808.000) / 2] / (1.700.000 / [(4.6% 3.956.679.003.90 [(524.100.100.000 + 300.000.000) / 2] = 1.000 + 3.000) / 2] / (2.3 days 2.1% 137.44 Days Sales in Accounts Receivable Total asset turnover .000 / 365) = 87.52 20x6 $1.003.1% 137.000 = 3.300.956.5 days 1.
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