This action might not be possible to undo. Are you sure you want to continue?
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
75.000 + Equity .000. The journal entry to record the loan would be: Cash Bank Loan 100.1 Page 5 (c) That same company then purchases an additional $5. by increasing one and decreasing another the equation holds true: Assets + 75. The journal entry would be: Inventory Accounts Payable 5.000 75.Introductory Financial Accounting. v.000 We are increasing an asset. an asset and a liability. Furthermore. therefore.000.000 . our equation stays in balance: Assets + 100.000 5. therefore.000 cash.000 100. The journal entry would be: Equipment Cash 75. the company would receive $100. By increasing both sides of the equation. therefore. we increase the asset account Cash.000 = Liabilities + Equity (e) The same company is a little short on cash and has to take out a loan from its bank. they will take on a liability to pay back the bank the $100. our equation holds true: Assets + 10. they do not pay cash but take on an account payable with the supplier. The loan is for $100.000 (d) = Liabilities +10.1.000 + Equity The company then uses cash to purchase equipment that costs $75.000.000 Both the Equipment account and the Cash account are assets.000 Upon signing the loan.000 = Liabilities +100.000 worth of inventory on account. and increasing a liability. that is.
when a revenue account is increased we credit the account.000 = Liabilities + Equity +30.1 Page 6 Transactions that impact the Statement of Income The above examples used accounts that appear on the Statement of Financial Position. an expense account’s normal balance is a debit balance. the company will have generated a net income and a net Credit entry to Retained Earnings will result. If Revenues are greater than Expenses during a period. i. which is part of the Shareholders’ Equity section of the Statement of Financial Position.e. and the resulting debit or credit is either added or subtracted to an account called Retained Earnings.000 30. v. For example. If we continue with our examples… (f) Say that the company from the above example has $30. the company will have generated a net loss and a net Debit balance to Retained Earnings will result.000 .000 The accounting equation is maintained since Assets are increased and Equity is increased: Assets + 30. Income Statement accounts will consist of Revenue accounts or Expense accounts.Introductory Financial Accounting. All revenue and expense accounts are temporary accounts in the sense that we start the year with a zero balance in the account. The journal entry would be: Cash Sales Revenue 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. If Expenses are greater than Revenues. via the Retained Earnings Account.000 in sales in its first month. Revenue accounts normally have a credit balance.1. If you remember that Income and Expense accounts get closed to Retained Earnings (which we will discuss in further detail later) then you can see how recording sales and expenses will still keep the accounting equation in balance. Conversely. the income and expense accounts are closed out to zero. At the end of each year.
as are liabilities. as they no longer have it on hand to sell. The Statement of Financial Position (also called the Balance Sheet) is. and all other assets and liabilities are classified as non-current.Introductory Financial Accounting.1 Page 7 (g) To incur these sales. The journal entry to record that would be: Cost of Goods Sold Inventory 15. Note that Cost of Goods Sold is an expense account.000 Note that this entry removes the inventory from the company’s accounts.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.1. and both are divided into current and non-current based on their liquidity. 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.15. Assets and liabilities that will come due or have to be settled within 12 months or one accounting cycle (whichever is longest) are classified as current. . the company sold all $15.000 worth of its inventory. The accounting equation remains in balance: Assets . basically.000 15.000 = Liabilities + Equity -15. v.
For example. or manufactured by the company itself. Accounts Receivable – the account is the sum total of all outstanding invoices which are owed to the company by its customers. and includes investments in bonds. For example. and classify the remainder as non-current. Because the policy has not yet expired. stocks. The classic example of this is breaking out the current portion of the long-term debt of a company. other companies or special funds. In this case. the cost of the policy will be classified as a prepaid expense. v.Introductory Financial Accounting. complete. this $50. Land – this account is a listing of all land held by the company.000 would be classified as a current liability and the remaining $150. The associated Accumulated Amortization contra account is normally shown directly below the asset account.000 would be classified as a long-term liability.000 of this balance within the next year. A more detailed discussion of this account will take place Chapter 4. and the asset is therefore shown net of accumulated amortization. Prepaid Expenses – this account represents amounts that have been paid in cash for expenses that have not been incurred by the company. if your loan balance is $200. money orders etc. Non-current Assets: Buildings – this account is a listing of all depreciable buildings owned by the company. you would break out the current portion and classify it as such. we normally pay the annual premium the day the policy takes effect. Long-term investments – these are investments that are to be held for many years. The inventory can either be purchased.1 Page 8 Note. but is a listing of all equipment owned and used by the company. Equipment – this account is treated in the same manner as the Buildings account. .1. Typical accounts you will see on the Statement of Financial Position are: Current Assets: Cash – the most liquid of all assets. Note that amortization is never taken on land. that in some cases you may have an asset or a liability that is partly current and partly non-current. Inventory – this account is a listing of all of the items that the company normally sells in its day-to-day activities. this account includes all currency and equivalents (bank drafts. More on this in Chapter 5.000 and the agreement with the bank is that you will be required to pay $50. ready for resale. when we take out an insurance policy. Accounts Receivable is normally reported net of an Allowance for Uncollectible Accounts (discussed further in Chapter 3).).
beginning balance Add Net Income for the year or deduct the Net Loss for the year Less Dividends declared to shareholders Retained Earnings.1 Page 9 Intangible assets such as patents. 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. 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. Non-current liabilities: Long-term debt including bonds and notes payable – this account is a listing of all debt which the company has incurred which is not due within one year or one accounting cycle.1. Taxes payable – a listing of all taxes due within one year or one accounting cycle. Shareholders’ Equity: Contributed Capital – this account contains any amounts which have been invested in the company by the company’s shareholders. Wages payable – a listing of all wages due to employees within one year or one accounting cycle. trademarks and copyrights would be classified as longterm assets. The retained earnings account is adjusted at the end of each year to account for a company’s net income or loss.XXX XXX .Introductory Financial Accounting. It is when the amount is due back to the lender that differentiates between current and non-current debt. The retained earnings account reconciliation from the beginning of year to end of year balance is as follows: Retained Earnings. end of year XXX ± XXX .
For example: The Miller Company Income Statement For the Period ended December 31.000) $10.000 3. 20x8 Sales Interest Income Cost of Goods Sold Operating Expenses Income Tax Expense Net Income $100. typically the fiscal year of the company.000 18.000 The multi-step statement has multiple subtotals. It takes the reader from total Revenues to Net Income.000) 40. the amount left over after all relevant expenses have been taken into account.000 (8.000 (60.1.000 3.000 (60.000) (25.000 . most companies tend to use some form of a multi-step statement.000 (25.000) $10.1 Page 10 The Income Statement The income statement is a statement that shows how a company performed during one period. v.Introductory Financial Accounting.000) (8.000) 15. The single step statement lists all revenues and then all expenses without breaking out any further subtotals. however. Either one is acceptable under GAAP. and for the above company would look like the following: The Miller Company Income Statement For the Period ended December 31. Income statements can take on one of two formats: single step and multi-step. 20x8 Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Income Interest Income Net Income before Taxes Income Tax Expense Net Income $100.
1. Accounts Receivable Debit Credit The following represent how increases and decreases in accounts get recorded: Liabilities & Shareholders’ Equity Assets + Expenses - Revenues + + - - + . an entry is placed on the left-hand side of the T. for every entry the lefthand entry must equal the right-hand entry in order for the Accounting Equation to hold true.Introductory Financial Accounting. Thus. v.1 Page 11 The T-Account Named for its shape. a T-account is a tool used by accountants to keep track of entries that are made to individual accounts. it is placed on the right hand sand. When a credit is made. which resembles a capital “T”. When an entry is made and an account is to be debited.
000. which covered the period of January 2. Rent is $1. 20x7.) Inventory of $120.Introductory Financial Accounting. are for 5 years.1 Page 12 Comprehensive Example Ian has worked at a music store for the last 20 years. The lease is in effect from January 2.000 The company took out a loan for $200. he has decided he is ready to go out on his own. January 2. That is. 3. After years of planning and saving. 11. Credit sales . Inc. 7.) 2. 4. with 10% annual interest due semiannually.000 common shares of the Corporation. A total of $280. The following transactions took place during the fiscal year ended December 31. however. 20x7: 1.1. 20x8. He paid cash. 9.$310. Ian invested $175.200 per month. 20x7 for $350.000 due on the first of each month. Ian’s Incredible Instruments Inc. 6. He only rented the outside facility to the end of November. Ian’s Incredible Instruments Inc. into the company upon incorporation. Ian signed a two-year lease with monthly rent of $8. . v. (Record the payments made from March to November only.$430.000. which was taken out on June 1.000.000 was purchased on account. The lessor required Ian to pay the first and last month’s rent on January 2. The terms of the loan.000 of the accounts receivable were collected throughout the year.’s Sales for the first year were as follows: Cash sales . Opened for business in a local mall.000. 20x7. 10. Having proven himself a good tenant. Ian was able to convince his landlord at the mall to give him additional storage space (at no extra cost). (Record the February rental payment only. interest payments are due every 6 months. Ian purchased furniture and fixtures for the store at an auction for $30. the annual rate is 10%. beginning February 1. An outside storage facility has been rented to fill this need. 20x7 through December 31. An insurance policy. 5. He received 1. 20x7. The mall location is suitable for Ian’s retail needs. 20x7. his entire life savings. and was able to give up his off-site storage facility.000. More inventory was purchased on account June 1. but is not large enough to store any extra inventory. Ian’s Incredible Instruments Inc. is located in the Meadowvale Mall. Ian’s Incredible Instruments. was purchased for $5. 20x7 through December 31.. 20x7.760 cash. January 2. 20x7. 8. 20x7. and was rented on a month-to-month basis.
the deposit for the last month won’t be used until 2 years from now. To record Ian’s initial investment into the company.000 120.000 40.000 $446.000 120.000 10.000. Ian declared and paid a dividend of $60.000 16. To record the purchase of inventory on account. the appropriate journal entries would look like this: 1.000 88. This is what we call a prepaid expense. 175.000 13. Cash Contributed Capital 2.000 To record the payment of first and last month’s rent on the lease.Introductory Financial Accounting.200 4.000 23.000 (note that a dividend is debited against retained earnings).1.1 Page 13 12.000 8. Inventory Accounts Payable 120.000 175. Prepaid Rent Rent Expense Cash 8. For each of the above.200 1. We know that the first month’s rent will be “used up” in this year.000 . v.000 3. To record the rent paid on the outside storage facility in February for one month. Additional cash disbursements for the year were as follows: Wages & salaries Rent Advertising Miscellaneous expenses Payments of accounts payable Interest on bank loan $165. However. Rent Expense Cash 1. and therefore it is an expense in this fiscal period. The total cost of the inventory sold during the year was $300. 14.
000 10. we already recorded the initial payment in February).800. as they are no longer due to us.000 350. To record sales for the first year. v.800 10. Cash Accounts Receivable 280. two things will happen to Ian’s Incredible Instruments Inc.000 200. Upon receiving the loan. they will get $200. Note that as we collect the cash.000 11.Introductory Financial Accounting. Cash Bank Loan 200. To record the purchase of furniture and fixtures. sales are recorded individually as they are made. To record the collection of accounts receivable throughout the year.000 cash from the bank. First. Insurance Expense Cash 5.000 740. second. they will have an outstanding loan for the same amount.760 5.760 6. Rent Expense Cash 10.000 7. the credit to the Accounts Receivable account. for which cash was paid.800 . To record the rental expense incurred from March through November. Note that in reality. Note that because it expires December 31. Hence. (Remember. Cash Accounts Receivable Sales 430. However. we must remove the receivable from our books. We will deal with the interest expense incurred on the loan in a separate entry.000 9. To record the purchase of inventory on account. Furniture and Fixtures Cash 30.000 30.000 8. Inventory Accounts Payable 350.000 280.000 310. $1.200/month x 9 months = $10.1. 20x7. To record purchase and payment of the insurance policy.1 Page 14 5. for the purposes of this example we will be entering them in one journal entry. the entire amount applies to the current fiscal year and therefore there is no prepaid portion.
1. Note the following supporting calculations: Rent Expense – 11 months x $8.000 Wages & Salaries Expense Rent Expense Advertising Expense Miscellaneous Expenses Accounts Payable Interest Expense Cash 165.000 10.000 23.000 300.000 13.1 Page 15 12.000 40.Introductory Financial Accounting. To record the various other cash disbursements made throughout the year.000 .000 60.000 120.000 x (10% x year) = $10.000 14.000 446. Cost of Goods Sold Inventory 300. To record the dividend paid. To remove the inventory which was sold from the inventory account and record the resulting Cost of Goods Sold expense. v.$200.000 Interest on bank loan . Retained Earnings Cash 60.000/month = $88.000 88.
200 5.000 60.000 1.000 1 Retained Earnings 13 60.000 430.000 12 Interest Expense 10.000 13 6 Furniture & Fixtures 30.1.800 88.000 Expenses INCOME STATEMENT Revenues Sales 740.Introductory Financial Accounting.000 280.000 108.000 Misc.000 5 Insurance 5.000 7 Rent 2 3 11 12 8.000 30.000 350.000 12 Advertising Expense 40.000 8 515.000 4 9 Accounts Receivable 7 310. Expenses 12 23.000 280.000 .800 446.000 120.240 Inventory 4 9 120.000 2 3 5 6 11 12 13 2 Prepaid Rent 8. v.1 Page 16 The recording of the above journal entries in T-Accounts would be as follows: Assets BALANCE SHEET Liabilities & Equity Cash 1 7 8 10 175.000 Cost of Goods Sold 13 300.760 Wages & Salaries Expense 12 165.000 350.000 10 Bank Loan 200.000 10.000 200.000 12 Accounts Payable 120.000 Contributed Capital 175.760 30.000 300.200 10.000 16.000 1.000 170.000 350.
000 $1. 20x7 Cash Accounts Receivable Inventory Prepaid Rent Furniture and fixtures Accounts Payable Bank Loan Contributed Capital Retained earnings Sales Cost of Goods Sold Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Interest Expense Miscellaneous Expenses Debit $515.1 Page 17 A trial balance of all of the closing balances of the above accounts would look like this: Ian’s Incredible Instruments Inc.000 Credit $350.Introductory Financial Accounting.000 .000 170.000 60.000 $1.465. v.760 165.000 23.000 10.000 40.000 30.000 300.000 175.000 5.000 8.240 30.000 740. Trial Balance As at December 31.000 200.000 108.1.465.
1 Page 18 A multi-step income statement for Ian’s Incredible Instruments Inc.760 165.000 341.000 5.000 5.000 300.000 $88. all balances get returned to zero. 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 740.760 98.000 40. 20x7 Sales Cost of Goods Sold Gross Profit Operating Expenses Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Miscellaneous Expenses Operating income Interest Expense Net income Closing Accounts All revenue and expense accounts are closed out to zero at the end of each fiscal period. Income Statement for the year ending December 31.Introductory Financial Accounting.000 88.760 165.1.000 10. would look like this: Ian’s Incredible Instruments Inc.240 $740. they are referred to as temporary accounts.000 23.000 440.000 23. At the end of the year.240 . v.240 10. As such. and the offsetting amount is the net income (or loss) that gets recorded to retained earnings.000 108.000 108.000 40.000 300.
000 175.240 30. 20x7 0 88.240 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Long-term liabilities Bank loan Shareholders’ Equity Contributed Capital Retained earnings 200.000 28.000 8.240 30. December 31.000 170.1.000 550. v. Statement of Financial Position as at December 31. 20x7 Retained Earnings.240 350.240 203.240 $ We can now prepare a Statement of Financial Position for Ian’s Incredible Instruments: Ian’s Incredible Instruments Inc.000) $ 28. Statement of Retained Earnings for the year ending December 31.000 723. 20x7 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures $515.240 $753.000 $753.000 . January 1.1 Page 19 The Statement of Retained Earnings outlines the changes in the Retained Earnings account from the beginning of the year balance to the ending balance: Ian’s Incredible Instruments Inc. 20x7 Net income Dividends Retained Earnings.Introductory Financial Accounting.240 (60.
Income taxes. Accured Expenses – When an expense has been incurred. but not yet paid in cash. Interest Receivable . Examples: Prepaid rent/insurance. As cash is received in payment in future periods. Accrued Revenues – These entries are used then revenue has been earned. and records the revenue. deposits on orders. plant & equipment Accrual – Event has occurred. Examples: Credit sales. Examples: Rent collected in advance.Introductory Financial Accounting. The adjusting entry sets up an asset. i. Expenses Prepaid Expenses – Cash is paid and an asset is recorded before it is used.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. then both the liability and the expense are recorded in the amount relating to the current period. the receivable is removed. v.1.e. Interest Expense. but cash has not been paid or received. Rent Revenue. As the company earns the revenue. As the liability is paid in future periods. an adjusting entry is made to remove the liability and record the revenue. Utilities Expense Revenues Unearned Revenue – Cash is received and a liabilitiy is recorded. The asset will then be allocated to future periods using adjusting entries. office supplies. but will not be paid in the current period. subscriptions collected in advance and gift certificates sold. performs the service or delivers the goods. Examples: Payroll. a receivable. we will Debit the liability and Credit cash to record the payment.
200 ???? Supplies Expense As the T-Account shows. and what we have left at the end of the year.000 represents the portion of the insurance policy that is unexpired. . During the year you purchased an additional $13. assume that the company’s year-end is December 31. what was purchased during the year. 2. 1.000 for an insurance policy that will cover the next 12 months.000 5. v. that will expire in 20x8. the missing credit or Supplies Expense has to be 11. 20x7 you pay $12.000 does not equal 5.800 + 13. 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 12.200 of supplies on hand.000 At the end of the year you will have 7 months remaining on the policy. However. 20x5 reveals that you have $5. it might be helpful to look at the T-Account for Office Supplies for the year: Supplies Inventory Opening Balance Purchases Ending Balance $ 3. The missing piece to the puzzle is the amount of supplies that were used during the year.000 $ 5. i.1 Page 21 Example In examples 1-5. This means that 5 months have been used in the current period. solving the equation.e.600. and therefore should be an expense of the current period. we know our opening balance.Introductory Financial Accounting.800 13.000 12. A physical count of the supplies on December 31.200. 20x5 you had $3. 20x5? To answer this question.000 of office supplies. What would be the adjusting entry on December 31. On August 1. 3. Therefore.800 in your office supplies inventory account.1. On January 1. The adjusting entry would be: Insurance Expense Prepaid Insurance 5.000 The balance that remains in the prepaid insurance account of $7.
You estimate that the furniture will last 10 years and have no salvage value at the end of its useful life.000 10. What is your adjusting entry? On May 1. v.600 11. or $10. It is now December 31.600 9.1 Page 22 The adjusting entry on December 31. when you received the revenue.000 (10. office furniture in this case. The Accumulated Amortization account.Introductory Financial Accounting. there would still be 4 months of unearned . will appear on the Statement of Financial Position as a reduction of the related asset account. the adjusting journal entry would be: Amortization Expense Accumulated Amortization 10.000) $ 90.000 per year for the life of the furniture.400. 20x5 would be: Supplies Expense Office Supplies 3.600 As of December 31. 11. you would have earned 8 of the 12 months of revenue. we call it a contra account to the Office Furniture account. What would be your amortization expense and what would be the adjusting entry to record it? The cost of the furniture needs to be spread out over its entire useful life.1. instead of taking the full $100. Therefore. the revenue to be recorded for the year would be 8 months x $800/month = $6. Therefore. 20x8.000 Because the Accumulated Amortization account is applied as a reduction of the related asset account. you would have recorded an entry of: Cash ($800 x 12) Unearned Rental Revenue 9. You received payment for the full year on May 1. Each and every year. we will take $10. Furthermore. 4. on the other hand. 20x6.000 as an expense this year. The long-term asset section of the Statement of Financial Position would be as follows: Office Furniture Less accumulated amortization $100. The apartment rents for $800/month. 20x6.e. i.000 per year for the next 10 years.000 on January 1.600 You purchase new office furniture for a cost of $100. It is now December 31. You own an apartment building and have a tenant whose parents have paid their rent for the entire year in advance.000 Note that the amortization expense account will appear on the income statement as an operating expense for the year. 20x8. 20x8.
only 5 months of interest pertain to the current period. and our employees work 5 days a week. therefore.000 x 4 days = $64.000 64. What is the adjusting entry? To calculate the adjusting entry.000.333 3. and interest and the principal will be due August 1. The loan has been outstanding for 5 months. The adjusting entry would be: Interest Expense Interest Payable 6. 3. your year-end. It is December 31.000 .400 According to the journal entries above. It is March 31 (Friday). 20x6 (a Monday). The adjusting entry on December 31. 20x8 would be: Unearned Rental Revenue Rental Revenue 6.000. we can calculate that the annual interest on the loan will be equal to $100. The loan agreement states that interest will be charged at a rate of 8% annually. The adjusting entry would be: Wages Expense Wages Payable 64.600 – 6.000.200. the balance in the Unearned Rental Revenue account will be equal to $9.000 x 5/12 = $3.000. 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. On August 1.1.400 = $3. What is your adjusting entry to record interest expense for the year? Looking at the terms of the loan. 20x3.400 6. 20x4.Introductory Financial Accounting. Our employees worked 4 days from the time of their last payday until the end of the year. the loan has not been outstanding for the full 12 months.1 Page 23 revenue left.000/5 = $16. then our daily payroll rate can be calculated as $80. we have to first figure out how much needs to be accrued.333. v. as of December 31.000 x 8% = $8. the accrued wages payable will be $16. 5. 20x3 you take out a loan for $100. no cash has been paid for the interest expense. Your average weekly payroll is $80. That is. This reconciles to our calculation above. that is. However.000/week.333 You last paid your employees on March 27. interest expense for 20x3 would be $8.000. The balance in the Unearned Rental Revenue Account would have 4 months x $800/month = $3. and therefore. and furthermore.200. 20x3.
and • all associated costs can be estimated. Revenue Recognition and the Matching Principle For a firm to recognize revenue. we debit an account called ‘sales returns’. But. • collectibility is reasonably assured. Just because you don’t pay cash for something does not mean that the expense wasn’t incurred.Introductory Financial Accounting.1. second. In this case. as we will see later. then the goods belong to the customer the minute they are loaded on the truck and revenue can be recognized immediately. If the goods are shipped under the terms FOB Destination. this can get complicated when say. If the goods are shipped to the customer under the terms FOB1 Shipping. a 5-year warranty is provided with the product. This allows the company to keep track of all sales returns separately from the original sale. v.000 and we offer a discount of 2% if the invoice is paid within 10 days. the company must estimate the total warranty expense that will be expended on this product and accrue the full amount in the year of sale. This can become an issue for goods that are in transit around the company’s year-end. then they belong to the customer only when they are delivered and therefore the revenue recognition point is when the goods are shipped. For example. If the customer pays 1 FOB stands for ‘Free on Board’ . However. We MUST record all expenses relevant to the current period. • Sales Discounts: if early payment discounts are offered to customers. the following criteria must be met (with regards to the amount of revenue that is to be recognized): • the amount of revenue must be determinable. it gets onto our books the liability that we owe to our employees. this means that the cost of the goods sold become an expense the day the sale is made. it gets onto our books the expense that we have incurred during the last 4 days of the period. In the case of a simple sale. The matching principle is related to the revenue recognition principle and states that all costs incurred to earn the revenue recognized must be recorded at the same time as the related revenues. the revenue recognition point takes place when the transaction takes place. For most sales. whether we have paid for them or not. assume that we make a sale of $1. whenever the discount is taken. • the revenue must be earned (all significant acts must be completed). the following transactions are related: • Sales Returns: whenever customers return merchandise for refund. we credit the Sales account. then the amount of the discount gets debited to the Sales Discounts account. Sales and Sales Contra Accounts Whenever a sale is made.1 Page 24 Note that this adjusting entry does two things: First. instead of debiting the sales account.
500 .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. otherwise the full amount is payable in 30 days. Sales Allowances are when merchandise is sold to a customer which is slightly defective.000 $40.000 merchandise whose sales price was $1.Introductory Financial Accounting. 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. when reported on the income statements. v. Accounts receivable Sales • $40. that is. but the customer keeps the merchandise. Terms of payment are 2/10. The selling price is $40. The $20 discount will get debited to the Sales Discount account. A credit is granted to the customer. they will pay us $980. • merchandise is shipped FOB Shipping to a customer.1 Page 25 • within 10 days.500 1. These three accounts are considered contra accounts to the Sales account and. n30.1.000.
000 The Conceptual Framework A strong theoretical foundation is essential if accounting practice is to keep pace with a changing business environment. These two groups are most likely to have the following primary needs: • forecast future cash flows: will the company have sufficient future cash flows to meet future interest. Cash Sales discounts Accounts receivable 35. Accountants are continuously faced with new situations and business innovations that present accounting and reporting problems. Sales Allowances Accounts Receivable 2.500 2. and • what is the fallback position: does the company have sufficient assets to satisfy its liabilities? To summarize. This does not imply that there are no other users of financial statements.Introductory Financial Accounting. and changes in those resources to help in assessing cash flows. principal and dividend payments?. payment of $35. or similar decisions. A credit of $2. v. the focus of financial statements is to meet the needs of creditors and shareholders. loan repayments. It would be impossible for financial statements to meet the needs of all users of financial statements. interest. and • to provide information about the economic resources of a firm. Consequently.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).1. such as dividends. and so on.280 720 36. the objectives of financial reporting are as follows: • to provide information useful to present and potential users in making investment.500 is granted to the customer.280 is received. These problems must be dealt with in an organized and consistent manner.500 • on the 9th day after the sale. credit. • to provide information to help in assessing cash flows. The conceptual framework plays a vital role in the development of new standards and in the revision of previously issued standards. since these needs could conflict. claims on those resources. .
accounting information should meet the following criteria: • verifiability – accounting professionals. For example.000 is far more relevant. Reliability wins in this case.000. • feedback value – information presented today helps confirm previous decisions. consider the application of the historical cost principle which states that assets should get recorded at their original cost. If a company purchased a parcel of land in 1856 for $100. but are not as important as relevance and reliability.1. To be relevant. The rationale is that income from recurring items is a best predictor of future income. For example. the income statement is generally structured by segregating recurring items against non-recurring items. This implies that the information provided should be useful to the users. Relevance implies that accounting information can make a difference when making a decision – the user of financial statements is better off having the information than not having it.000. For example. that land is recorded on the company’s books at $100 regardless of the fact that it may well be worth $10. • representational faithfulness – accounting information should portray the substance of transactions over their form. the concept of relevance and reliability conflict. For example. Secondary qualitative characteristics – the following two characteristics (neutrality and comparability are qualified as secondary because they are desirable qualities of accounting information. • timeliness – information should be available to the users as quickly as possible. accounting information should meet the following criteria: • predictive value – information should be useful in predicting future outcomes. the rationale for providing interim reporting to shareholders is in part based on the timeliness principle: it is better to provide information on a quarterly basis as opposed to waiting for the annual results. Verifiability implies that independent measures using the same measurement method should yield approximately the same result. the representational faithfulness principle would argue that it meets all the characteristics of long-term debt and should be classified as such. .1 Page 27 Qualitative Characteristics of Accounting Information There are two primary qualitative characteristics of accounting information: relevance and reliability.e.000 today. Reliability implies that the accounting information can be depended upon. From a shareholders’ perspective the value of $10. The $100 is an established transaction and is reliable. when establishing the validity of an accounting estimate should come to a consensus. At times. gets refunded in a pre-specified number of years) and pays a fixed rate of interest. v. To be reliable. One could argue that regardless of what you call this security.Introductory Financial Accounting. assume a company issues a new type of security called a ‘Special Preferred Share’ which has a limited life (i.
1 Page 28 Freedom from bias (neutrality) – accounting information should be even-handed with respect to the impact of accounting information on users’ behaviour. accounting policy makers should weigh the cost of implementing the accounting principle against the benefits that the implementation of such an accounting principle will provide users.000 would not be significantly affected if they were misstated by say. The principle of timeliness implies that the financial statements should be in the hands of users as soon as possible. the financial statements of a company with net income of $10. as we will see in Lesson 4. Assume that existing equipment is technologically obsolete and a net present value analysis shows that if the equipment were to be replaced. when companies sell depreciable assets.Introductory Financial Accounting. Thus. the company would have to show a large loss on disposal. 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 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. but changes should occur infrequently and only for valid reasons. For example. Cost/benefit analysis is very difficult to quantify since most costs and benefits are intangible. but should be used as a way of thinking. changes in accounting principles require retroactive adjustment and restatement of prior period financial statements. For example. Materiality implies that financial statements are not precise but are accurate enough that any potential errors of misstatements would not affect any user. The principle of conservatism also leads to the recognition of contingent losses but does not recognize any contingent gains. The only problem is that if the asset were to be disposed of. For example.1. Conservatism is an effort to ensure that the risk or uncertainty inherent in business situations is adequately considered. Accounting rules should not provide the motivation for dysfunctional decisions. the project has a significantly positive net present value). it may be . Information benefits vs. When introducing an accounting principle. information costs. Also. When accountants can choose between two equally acceptable accounting principles. v.e. Modifying concepts Conservatism means that it is generally preferable that any possible errors be in the direction of understatement of net income.000.000. Consistency implies that accounting principles are applied from period to period in the same manner. Here is an example of an accounting rule that could lead to dysfunctional economic decision making. we must estimate which accounts receivable are likely to become uncollectible in the future and establish an allowance for doubtful accounts. the principle of conservatism implies that the one with the least favourable impact on net income should be the one chosen. 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 concept of materiality can play against the concept of timeliness. That’s not to say that accounting principles cannot be changed. $100.
we can add assets together even if they were purchased in different years. 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. months…) and report income and prepare a balance sheet for each of these periods. a 1925 dollar is equivalent to a dollar today.Introductory Financial Accounting. 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. otherwise they would have to be recorded at the lower of their depreciable cost or liquidation value.e.1. This omission is justified on the basis of materiality. . all associated expenses related to the recognition of these revenues are recorded also. Periodicity assumes that we can breakup the life of a business in separate reporting periods (years. This principle will be invoked when dealing with leases and intercorporate investments in later lessons. Revenue Recognition Principle states that revenues should only be recorded when earned. This is probably one of the most flawed principles. Also refer to the definition of an asset (later in this section). This assumption allows us to record long-term assets at their depreciable cost. the measurability of such revenues are reasonably certain and collectibility is reasonably assured. Matching principle assumes that when we record revenues. Other Principles Economic entity principle states that the financial statements of an entity should report all assets and liabilities under its control.1 Page 29 possible that additional invoices are received after the financial statements are issued. Consequently. quarters. Going concern principle assumes that the entity will continue operating in the future. v. Monetary unit principle assumes that the value of the dollar does not change .i.
resulting from the ordinary activities of an entity. the settlement of which may result in the transfer or use of assets. either by way of inflows or enhancements of assets or reductions of liabilities. (b) the entity can control access to the benefit. Expenses are decreases in economic resources. in the case of profit oriented enterprises. in the case of not-for-profit organizations. In addition. Assets have three essential characteristics: (a) they embody a future benefit that involves a capacity. Revenues are increases in economic resources.1 Page 30 Elements of Financial Statements The following definitions of the elements of financial statements are drawn from Section 1000 of the CICA Handbook.1. or on demand. either by way of outflows or reductions of assets or incurrences of liabilities. to contribute directly or indirectly to future net cash flows. resulting from an entity's ordinary revenue generating or service delivery activities. at a specified or determinable date. and (c) the transaction or event obligating the entity has already occurred. to provide services. it includes specific categories of items. . types of share capital. on occurrence of a specified event.Introductory Financial Accounting. provision of services or other yielding of economic benefits. the benefit has already occurred. Liabilities have three essential characteristics: (a) they embody a duty or responsibility to others that entails settlement by future transfer or use of assets. Liabilities are obligations of an entity arising from past transactions or events. and. the rendering of services or the use by others of entity resources yielding rent. v. 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. singly or in combination with other assets. or control of. interest. While equity of a profit oriented enterprise in total is a residual. (b) the duty or responsibility obligates the entity. contributed surplus and retained earnings. thereby leaving it little or no discretion to avoid it. government grants and other contributions. provision of services or other yielding of economic benefits in the future. Revenues of entities normally arise from the sale of goods. royalties or dividends. many not-for-profit organizations receive a significant proportion of their revenues from donations. and (c) the transaction or event giving rise to the entity's right to. Equity is the ownership interest in the assets of a profit oriented enterprise after deducting its liabilities. for example.
1. and from all other transactions.1 Page 31 Gains are increases in equity / net assets from peripheral or incidental transactions and events affecting an entity. events and circumstances affecting the entity except those that result from expenses or distributions of equity / net assets.Introductory Financial Accounting. Losses are decreases in equity / net assets from peripheral or incidental transactions and events affecting an entity. v. and from all other transactions. . events and circumstances affecting the entity except those that result from revenues or equity / net assets contributions.
What accounting principle. The proprietor of Front Street Drugs bought a computer for his personal use. Nimto Inc. While making a delivery. or constraint was violated? a) Continuity assumption b) Matching principle c) Cost principle d) Time period assumption 3. The party sued Fastrac for damages that could exceed Fastrac’s insurance coverage. the driver of Fastrac Courier collided with another vehicle causing both property damage and personal injury. recently completed construction on a new 12-storey office building that will be used partly for its own head office and partly for renting to three other tenants. even though the floor covering has an estimated useful life of 5 years.1. assumption. The cost of the floor covering for the company offices was expensed. What accounting principle.1 Page 32 Problems with Solutions Problem 1-1 Multiple Choice Questions 1. or constraint was violated? a) Continuity assumption b) Matching principle c) Materiality constraint d) Separate entity assumption 2. assumption. assumption or constraint is being applied in this situation? a) Full-disclosure principle b) Conservatism principle c) Matching principle d) Unit-of-measure assumption . He paid for the computer by writing a cheque on the company chequing account and charged the “Office Equipment” account. Existence of the lawsuit was reported in the notes to Fastrac’s financial statements.Introductory Financial Accounting. What accounting principle. v.
20x9. What generally accepted accounting principle does this contradict? a) Time period principle b) Cost principle c) Going concern principle d) Business entity principle 7. v. which included this error. 20x8. after correcting for the inventory error? a) $ 40.000 worth of inventory in the company’s December 31. In the rush to make it to a New Year’s party. d) Under accrual accounting. Which of the following statements is true? a) Under cash basis accounting. b) Under accrual accounting.999 d) $1.999. Shaw included a $200. will be $5.000 c) $ 999. 20x5. there will be a balance of $20.999 6.000.039.000 b) $ 959. there will be a balance of $35. ABC has a December 31 year end. The December 31. Harry. 20x5. the bookkeeper for Ytwok. 20x8. What would be the balance for Total assets on December 31.000 in the Prepaid insurance account on December 31. 20x5. Total liabilities of $500.999. financial statements should be prepared using which of the following? a) Fair market values b) Historic costs c) Future values d) Replacement costs . ABC Ltd.000. showed Total assets of $999.Introductory Financial Accounting.000 personal residence as an asset on the balance sheet of his company.1 Page 33 4. purchased a 4-year insurance policy and paid a premium of $40. the Insurance expense for the period ending December 31. M. Shaw’s Rent-all. 20x8.1. financial statements.000 in the Prepaid insurance account on December 31.000 in the Prepaid insurance account on December 31. and Total shareholders’ equity of $499. On July 1. 5. inventory count. 20x9.000. failed to include $40. According to generally accepted accounting principles. c) Under cash basis accounting. there will be a balance of $25.
Smart presented land and buildings on her company’s balance sheet based on the appraised value of these assets at December 31.1.1 Page 34 8. 20x8. K. What generally accepted accounting principle does this contradict? a) Time period principle b) Revenue recognition principle c) Objectivity principle d) Business entity principle . v.Introductory Financial Accounting.
. A suitable location is found and rent is $1. The following are summary transactions for the period July 2.1 Page 35 Problem 1-2 On July 2. 8.$6.000 every 4 months with the first payment due November 1. Interest payments are due on the 1st of each month.000. 5. 20x2. An insurance policy was purchased for $1. an offcampus bookstore where students can purchase textbooks and supplies at reduced prices. Sales for the period ended October 31. 20x3). 20x2. An additional $120. A bank loan in the amount of $20. an annual charge equal to 1% of sales is due at the end of the year (i. 9.200 cash. The annual interest rate is 9%. 20x2.000 of inventory was purchased on account. 2. You and several other shareholders invested $20. In addition to the monthly rent. Furniture and fixtures are purchased at a cost of $15. 1. 20x2 were: Cash sales .e.. 4. 20x2. 20x2 and expires on June 30. 6. 20x3.000 Sales on account . 3. The first and last month’s rent are due upon signing of the lease on July 2. Books and supplies of $50. on June 30. 20x2.1. v.000 of the sales made on account were collected.000 was obtained on August 1. These are purchased for cash. 20x2 to October 31. The lease agreement is for one year.Introductory Financial Accounting. you decided to start up a new business – Heavenly Books Inc.000 A total of $4. the company’s year end.000 was purchased on account. The loan agreement calls for repayments of $4. The policy takes effect on July 2.000 in return for shares in the company.000 per month.$190. 7.
13. Adjustment for rent payable.500 10. 12. Books costing $15. The straight line method is to be used.1 Page 36 10. 15. 19.Introductory Financial Accounting. Credit Accrued Liabilities. v. Enter all the above transactions in T-Accounts. The expected income tax rate is 30%. Credit Accrued Liabilities. Invoices received but not yet paid amount to $700 for miscellaneous expenses.000 of inventory is on hand. Credit Accrued Liabilities. c. Employees are owed a total of $600.1. The furniture and fixtures are expected to last a total of 10 years with no salvage value. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . 16.000 300 130. 18. The interest payable on the bank loan.000 1. 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 2. Credit Accrued Liabilities. Required – a. b.000 $182.000 3. The adjustment for insurance expense.000 were returned to the publishers. 14.800 The following adjustments at year end must be made: 11. 17. An inventory count shows that a total of $25.
Inc.100 3.. c.000 24.500 157.500 4. 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 31.400 2.300 44.000 84.200 1.Introductory Financial Accounting. b.1.000 1. 20x6: a.600 2. Global Production.100 3.800 2.500 . A multi-step income statement. was started with $50. $ 7.000 1.100 14.600 4. the accounting records contained the following selected amounts: Accounts payable Accounts receivable Accumulated amortization – Office Equipment Bank loan.000 25. 20x6.000 4.000 invested by the owners as capital stock. A statement of retained earnings.900 ? 40.1 Page 37 Problem 1-3 On January 1. due December 31.300 18. A statement of financial position. 20x6. On December 31.100 2.100 21. v.100 50.
000. but you will not be billing Big Al until next month. It is now your year-end. A new customer purchases a subscription in January.300 worth of services. You have provided $2. It is now December 31. What is the adjusting entry required if your year-end is December 31st? Your company is moving into a new office on July 1st. stated that they would pay you $6. The estimated useful life of the machine is 8 years. which was signed June 1. Record the adjusting entry for amortization for the year. Kittens Quarterly. and then record the adjusting entry for the end of April.1. a) On June 1.1 Page 38 Problem 1-4 For each of the following isolated situations.. First. on a yearly basis for the fee of $24/year. v. You are a consultant. What adjusting entry must be recorded to account for the unpaid salaries? You paid $5.750. record the journal entry to record the receipt of the subscription fee in January. $4. The contract. your year-end. and you have provided your services Big Al’s Used Cars for the past month. June.000 on June 1st and again on December 1st for providing these services for one year. you bought a piece of machinery for $50. Part of your new lease agreement required you to pay your first month’s rent. for their monthly staff meetings. What is the appropriate adjusting entry? You have a contract to provide catering services for a local company.000 for your annual property insurance policy eight months ago. Your daily salary expense is $600.Introductory Financial Accounting. with no salvage value estimated at that time. What would the adjusting entry be? You pay weekly salaries to your staff and your accounting period end falls on a Wednesday. Issues come out in March. your year-end. You sell subscriptions to your magazine. 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) . Today is the end of the accounting period. ahead of time. It is now April 30. You signed the agreement and wrote the cheque on June 30th. INC Inc. September and December. prepare the appropriate adjusting entry. Your year-end is June 30th.
The total interest of $300 is payable on the due date. 20x6. 20x5. Doby Company borrowed $3.1 Page 39 Problem 1-5 Below are four transactions that were completed during 20x5 by Doby Company.000 b. 20x5 a tenant renting some office space from Doby Company had not paid the rent of $500 for December.000 $1. 20x5 Cash Note payable $3. 20x5 Prepaid Insurance Cash $1.Introductory Financial Accounting. On October 1. Coverage of the insurance policy starts on July 1.000 cash and gave a oneyear. 20x5. the company collected $440 for subscriptions two years in advance. On December 31. Each transaction will require an adjusting entry at December 31. 10 percent. The subscription start on October 1. 20x5. You are to provide the 20x5 adjusting entries required for Doby Company.1. note payable. 20x5 Cash Unearned subscription revenues $440 $440 .000 c. The annual accounting period ends on December 31. On September 1. 20x5. On July 1. a. This transaction was recorded as follows: Jul 1. d. 20x5. Doby Company paid for a two-year insurance premium for a policy on its equipment. August 31. Assume Doby Company publishes a monthly magazine. v. The $440 collection was recorded as follows: Oct 1. The note was recorded as follows: Sep 1.000 $3. 20x5.
What are the total assets of Wild Corporation immediately after it has been formed and the shares sold? 2. What is total shareholders’ equity after this transaction? (CGA Canada Adapted) .000 cash. Assume Wild Corporation uses a Perpetual Inventory System.1. The company used the perpetual inventory method. What are the total liabilities of Wild Corporation after this transaction? 12. 20x6.000 common shares at $10 per share cash. The customer pays cash. Wild Corporation purchases 1. ensure your answer reflects the cumulative impact of all prior parts. 10. What are the total liabilities of Wild Corporation at this point? 3. 20x6. What is total shareholders’ equity at this point? On April 2. The purchase is made “on account” with the company agreeing to pay for the goods within 30 days.000 units of inventory for $20 per unit. Wild Corporation is formed on April 1. 7. What is total shareholders’ equity after this transaction? On April 5.1 Page 40 Problem 1-6 For the next set of questions.Introductory Financial Accounting. 4. 20x6. What are the total liabilities of Wild Corporation after this transaction? 9. 1. What is total shareholders’ equity after this transaction? On April 3. v. What are the total liabilities of Wild Corporation after this transaction? 6. What are the total assets of Wild Corporation after this transaction? 8. What are the total assets of Wild Corporation after this transaction? 5. Wild Corporation sells 200 units of inventory for $50 per unit. What are the total assets of Wild Corporation after this transaction? 11. Wild Corporation purchases a warehouse for $300. Initial financing comes from the sale of 100. 20x6.
1. 4. 7.000 90-day. 6% interest note in exchange for extending the due date on a receivable. 7% note payable from the seller. Received from Smith a $10. Purchased new equipment by obtaining a $200. Purchased for $500 cash an insurance policy for the following year.400.1 Page 41 Problem 1-7 The following information was extracted from You Read Magazines Co.Introductory Financial Accounting.000 Entries during 20x7 80. Received $2. decreases by a minus. General Ledger Account Subscriptions Received in Advance Dr Cr Balance January1. 20x7 128. v. The company requires that customers pay the annual subscription fee for the magazine in advance. and no change by NC.000 Entries during 20x7 Required – 1. shareholders’ equity and net income.000 1-year. Show increases by a plus. 2. 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. liabilities. 5.000 cash injection from one of the owners of the company. 3. (CGA Canada Heavily Adapted) . What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x7? 4. Received a $50. Interest accrued on the note payable was $1. Interest accrued on note receivable was $1. Example: Shareholders’ Equity -500 Net Income -500 Assets Interest accrued on notes payable was $500 NC Liabilities +500 Required – 1. What was the subscription revenue earned during 20x7? 2.000 from a customer for an outstanding invoice.000 120. 6. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x6? 3.
Cash paid for purchases in 20x6 included an amount of $2. 4. Required 1.Introductory Financial Accounting. Identify any two generally accepted accounting principles that were violated in Mr. there were goods in inventory costing $3. 6. Other expenses in 20x7 included $1. Cash’s personal expenses.000.000 14.000 $10. He was perplexed that the profit margin had improved in spite of his intuition to the contrary.000 and $5. Based on the above. 2.000 had not yet been received. The $20.000 40. At the end of 20x6. At the end of 20x6 and 20x7. An amount of $5.000 16. Cost of goods sold. 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. (CGA Canada) .000 10. Cash. Purchases. accounts receivable for sales made to customers totaling $20. using the accrual method of accounting.66% 20x7 $70.1. the proprietor of Error Margin was excited to learn about profit margin analysis and immediately applied his knowledge to evaluate his business. Cash’s analysis.000 was received in 20x7 and was included in cash received for sales in 20x7.000 received in 20x6 pertained to a sale made in 20x5.1 Page 42 Problem 1-9 Mr. v. There was no money due from customers at the end of 20x7. 5.000 30% On examination. Ronald found the following: 1.000 35. Net income and Profit margin for 20x6 and 20x7.000 $21. calculate Sales.000 of Mr. 3. 2. respectively.000 which was a deposit on goods that were to be purchased in 20x7.
pruning and maintaining the trees over the 15-year period. primarily during the Christmas season. The largest cost of this business is the cost of fertilizing.1 Page 43 Problem 1-10 Evergreen Inc. It normally takes about 15 years for a tree to grow to a suitable size.1. pruning and maintaining the trees be accounted for? Explain. operates a tree farming business. v. Required a.Introductory Financial Accounting. Use the criteria for revenue recognition to explain when revenue should be recognized for this tree farming business. maintains. . in parking lots at select locations in major urban areas. How should the annual cost of fertilizing. b. and harvests evergreen trees. It plants. It sells the trees for cash.
Strait in exchange for $6. 31 Dec. 20x6? (CGA Canada Adapted) .000 in cash and agreeing to pay the balance in six months. Paid $1. Completed work for a client and immediately collected $680 in cash for the work done. 31 Dec. 13. v. Purchased office supplies on credit for $300. Prepare journal entries for the above transactions What is operating income for V. V. which revealed that $200 of the $300 worth of office supplies purchased on December 17 were still on hand. Required – a. Completed work for JP Developers and sent them an invoice for $1. Paid $1. Dec.. 3 Dec. Strait Ltd.1 Page 44 Problem 1-11 V. Purchased the office furniture and equipment of a retiring architect for $4.875 from JP Developers for the work completed on Dec.875. 7 Dec.000 for rental of office space for December rent. Strait Ltd.000 cash. Received $1.1. for the month ending December 31. b. Strait opened an architecture company. 28 Dec. to V. the following transactions were completed during December 20x6.Introductory Financial Accounting. Performed a count of office supplies.000. 13 Dec. 17 Dec. 31 Issued 100 common shares of the new company. 1 Dec. paying $1.300 cash to the office secretary for December’s wages.
Prepare an income statement. c. p. The merchandise inventory as at December 31. Cash disbursements were: g. Wages earned but unpaid. $193. For insurance. of which 80% were on credit. 2. 20x2. utilities and supplies. $189. l. To Revenue Canada for income taxes. To the insurance company for a new three-year fire insurance policy effective September 1. To trade creditors. j. computed as 40% of pretax income of $50. $74. m. q. Post all of the above transactions in T-Accounts. 20x5.Introductory Financial Accounting. f. h. statement of retained earnings and balance sheet for 20x2. $36. 20x2. The principal on the remaining notes is payable on May 1. e. The principal on the current notes was collected on May 1. 20x2 for Ruiz Pharmacy: a. Merchandise inventory purchased on account was $520. o. Required 1. To employees for wages. b. $500. For new equipment acquired on July 1. For miscellaneous expenses such as store rents. The following adjustments were made on December 31. The rate is 12% per annum. For the interest on the note receivable. r. 20x2: n. Interest for twelve months on all notes was collected on May 1. Collections from credit customers were $700. $15 Total income tax expense for 20x2 is $20. which were all paid in cash. For depreciation . i. December 31. . v. 20x2.depreciation expense for 20x2 was $30. advertising.1 Page 45 Problem 1-12 The following summarized transactions (in thousands of dollars) occurred during the year ended December 31. Total sales were $900. d. The notes receivables are from a major supplier of vitamins. k. 20x2 was $240. $19.1. 20x2. The board of directors declared cash dividends of $26 on December 15 to be paid on January 21.
mainly to builders.Introductory Financial Accounting. Peter collected $375. Peter paid salaries and commissions to employees of $200.500 Liabilities and shareholders' equity Accounts payable Taxes payable Interest payable Long-term notes payable Capital stock Retained earnings $265. 3. On August 31.000 260. . the company's year end. During the year Peter paid the taxes it owed at the end of fiscal 20x4. The cost of the appliances sold during fiscal 20x5 was $745.. Peter’s balance sheet for August 31.000 during the year from customers who purchased on credit.000 in taxes.000 $763. Peter has been in business for five years. 2. 20x4.1.000 20.000 123. The remainder was on account. Peter uses the financial statements mainly for tax purposes and to show the holders of the long-term notes. 7. 20x5.500 100. At year end the accountant estimates that Peter owes an additional $12.000 8.500 14. All purchases were made on account. Peter paid suppliers $600. Balance Sheet As at August 31. Cash sales were $775. Sales during the year were $1.000 for appliances it purchased on credit.000. Peter purchased appliances from suppliers for $850. The following information has been obtained about the fiscal year just ended: 1.000 $763. Ottkancester’s largest independent household appliance store. 20x4 Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures Accumulated amortization $ 30.1 Page 46 Problem 1-13 Peter is the owner and operator of Peter's Appliance Shop Ltd.500 It is now mid-September 20x5.000 in installments on its taxes. 6.000. v. is shown below.000 110.500 by Peter. 20x5.000 446. During fiscal 20x5 Peter paid $15.350.000 -40.000 190. Peter supplies appliances to retail customers as well as to builders of the many new homes and apartments that are going up in the community.000.000. Peter needs to prepare its financial statements for the year ended August 31. Peter's Appliances Shop Ltd.000. 5. 4. employees were owed $7.
20x5 Peter pays $4. Beginning July 1. 20x5. 10.500 from the store and installed them in his new kitchen. Peter expects that the appliances will be delivered in early November 20x5. The interest rate on the notes is 8. The terms of the lease require that rent be paid six months in advance on January 1 and July 1 of each year.5%. and microwave that cost $4.Introductory Financial Accounting. Required – Prepare an income statement. In addition to the interest payment. Interest is paid annually on September 1. 13. stove.500 a month in rent.000 in deposits from customers who wanted a guarantee that their appliances would be delivered when they needed them. Peter paid $225. . 20x5 Peter paid $3. For accounting purposes.500 in interest to the holders of the long-term notes. 9. The deposits pertained to a particularly hard-to-get appliance.000 on September 1. Peter paid $20. Before July 1. Amortization expense for 20x5 is $22. v.1. These deposits were not included as part of cash sales. During the year Peter paid $8. He took a refrigerator. 14. Peter recently redecorated his kitchen at home. 12. During 20x5 Peter purchased new capital assets (furniture and fixtures) for $25.000. a statement of retained earnings and a balance sheet and a statement of cash flow for Peter's Appliance Shop Ltd. In addition. Peter must pay 2% of annual sales to the property owner 60 days after the year end.000 cash. 20x4 to reduce the balance owed on the long-term notes. Peter accepted $10. 11. The prepaid rent at the beginning of the year represented 4 months of prepaid rent at the old location.000 in cash for other expenses related to operating the business in fiscal 20x5.1 Page 47 8. treat this as a dividend. for the year ended August 31.000 a month for the rent of its store.
and Prepare a list of deposits that were made in the cash account but were not yet recorded on the bank statement (outstanding deposits). petty cash and any foreign currency on hand. Prepare a list of cheques that were written but that have not yet cleared the bank account (outstanding cheques). 5. 3. The bank statement is a running total of all transactions that were made in the account since the last bank statement was produced. Typically. bank accounts. For example. every 30 days a company will receive a bank statement from the bank. 2. Compare all deposits recorded on the bank statement to those recorded in the cash account. bank service charges. v. This process is as follows: 1.1. etc. The bank reconciliation starts with the balance per the bank statement. cash generally means any cash on hand.1 Page 48 2. Prepare journal entries to record these items and post to the general ledger. It starts with the opening bank balance and ends with the ending balance. Cash Cash and Investments For accounting purposes. 4. The balance showing on the bank statement needs to be reconciled to the balance shown in the company’s cash account. Identify any transactions that appear on the bank statement that have not been recorded in the cash account. Ensure that all cheques returned correspond to the amount entered into the cash account. 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 ..Introductory Financial Accounting. Accompanying the bank statement are all the cheques that have cleared the bank account. cheques deposited that are returned due to insufficient funds (NSF cheques).
The correct amount is $323. The cheque was incorrectly written in the cash disbursement journal as $332.673 3. 20x7 shows the following: • ending balance of $45. The next step will be to calculate the revised cash balance: Cash balance.Introductory Financial Accounting.1 Page 49 Example – The Parkes Company’s bank statement dated Aug 31.644 $156 $156 788 788 9 9 Finally. we prepare the bank reconciliation: Cash per bank.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.574 • a deposit made on August 31 in the amount of $3. • the total outstanding cheques amount to $6. August 31.644 . August 31. Cash ($332 – 323) Accounts payable To record the error in recording cheque # 345.579 (156) (788) 9 $42.574) $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 Add outstanding deposits Less outstanding cheques Cash per books.1. v. before adjustments Less bank service charges Less NSF Cheque Add error on cheque # 345 Cash balance after adjustments $43. Accounts receivable Cash To record the returned cheque.545 (6. 20x7 $45.545 was not recorded on the bank statement • the general ledger cash account shows a balance of $43.
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. Regardless of how they are classified. Available for sale investments also occur whenever debt securities are acquired with the intent of liquidating them before their maturity. are charged to Net Income. the accounting for investment income. • available for sale investments: any unrealized gains or losses are charged to Other Comprehensive Income. These investments will either be classified as held for trading or available for sale securities. • . whether realized or unrealized.1 Page 50 Non Strategic Investments Investments in the shares of another corporation can broadly be classified as non-strategic or strategic investments. An available for sale investment occurs whenever companies invests in equity securities that are not classified as held for trading and are not strategic investments. Non-strategic investments. strategic investments are classified as long-term investments. Other Comprehensive Income becomes part of Shareholders' Equity. Where the two methods differ is on how the adjustment to fair market value is recorded. They are therefore specifically held for purposes of resale and are designated by management as such.1.Introductory Financial Accounting. otherwise they are classified as long-term assets. They would normally be classified as current assets. v. operational or financial policies. 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. The classification of available for sale investments as current or long-term assets depends on management intent. If management intends to hold these for a period of less than one year. they are classified as current assets. the investments are carried at fair market value. at the balance sheet date. and balance sheet valuation is the same: interest accrued or dividends declared are recorded as investment income. the subject of this chapter. For both types of investments. Any realized gains or losses are charged to Net Income. By their very nature. consist of passive investments in the shares of another company. trading investments: all gains. there is no difference in the accounting for these investments.
000 600 600 1.900 1.000 600 600 1. 20x5 (the balance sheet date). 20x5 Dec 31.900.000 $15. 20x5 Dec 31.500 1. 20x5.1 Page 51 Example . 20x6. then the following journal entries would have been recorded: Jun 30. 20x5 At December 31.000.500 1. v. you sell the investment for $16. At December 31.on June 30.900 $16.500 $16.500 1.500 Oct 15.000 $15. On February 12. 20x5 Available for Sale Investments Cash Cash Investment income Available for Sale Investments Unrealized holding gain $15. The investment is classified as an available for sale investment. On October 15.500 If the investment has been classified as a trading investment.Introductory Financial Accounting.500. 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. the unrealized gain will be part of Other Comprehensive Income and will be part of Shareholders' Equity: Shareholders Equity: Common Shares Retained Earnings Other Comprehensive Income Unrealized holding gains Feb 12. 20x5 we receive a dividend cheque for these shares in the amount of $600. $15. 20x5 . 20x5 you purchase the shares of another company for $15. The following journal entries will be recorded with regards to this investment: Jun 30.1. the fair market value of the shares is $16. 20x6 Cash Unrealized holding gain Gain on sale of investments Available for Sale Investments XXXX XXXX $1.500 Oct 15.
1. 20x6 Cash Realized trading gain Temporary Investments $16.Introductory Financial Accounting.900 400 $16. v.1 Page 52 Feb 12.500 .
095 d) $31. a company received a cheque from a customer in payment of the related account receivable. The May bank statement listed the deposit at $512.700 3. 20x8.1.200 What amount should be reported as cash in the current asset section of Swiss Company’s balance sheet at December 31.595 c) $25. on hand but not yet deposited Swiss Company cheques that have not cleared the bank account $15.1 Page 53 Problems with Solution Problem 2-1 1. During May. v. 20x8? a) $15.595 . 20x8 revealed the following details: Balance in bank account Customer cheques dated December 31.095 b) $21. An analysis of the cash account for Swiss Company at December 31.Introductory Financial Accounting.095 9. The cheque was written for the correct amount of $152. 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. and it was deposited on May 18.
At the end of the month.288 c) $4. with respect to cash activities.020 .1. Prepare any adjusting journal entries that would result from the December 2006 bank reconciliation. b.279 b) $4. A company is preparing its May bank reconciliation.225.1 Page 54 3. December 31 Cheques outstanding. $ 3.300 5.548 6.Introductory Financial Accounting.300 52 1.700 77. deducted from Sarg’s account in error by the bank A $1.700 580 1.312 d) $4. December 1 Cash received during December Cash payments made during December Cash balance per bank statement. December 31 Bank service charges for December Deposits in transit at December 31 Cheque issued by Sparg Ltd. Cash balance per books.000 77. The ending balance on the May bank statement is shown as $4. was gathered by Sarg Ltd. 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. v.200 cheque received from a customer on December 13 in payment of an account receivable was incorrectly recorded as Required a.’s bookkeeper.327 $15 48 63 34 Problem 2-2 The following information for the month of December 20x6. Prepare the December 20x6 bank reconciliation for Sarg.
for the cash purchase of office equipment. v. 20x7. had been incorrectly recorded in the books of Focus Ltd.1. (CGA Canada) . 20x7.Introductory Financial Accounting.915.’s cash account up to date at March 31. in the amount of $620.’s cash account according to its accounting records was $4. c) Bank service charges for December amounted to $35 and had not yet been recorded by Focus Ltd. e) A $530 payment on account received from a customer was incorrectly recorded in the books of Focus Ltd. Prepare a bank reconciliation for Focus Ltd. d) Cheque #521 issued by Focus Ltd.200. In preparing the bank reconciliation. at March 31. the following information was determined: a) The following cheques are outstanding at March 31. 20x7. b) The March 31.200 had not been received by the bank in time to be included in the December bank statement. deposit of $6. 20x7: #501 for $780 and #533 for $1. Prepare the necessary journal entry(ies) to bring Focus Ltd. 2. bank statement for Focus Ltd. f) The balance in Focus Ltd. as $350. showed a balance of $480.1 Page 55 Problem 2-3 The March 31. 20x7. as $260. Required – 1.
's temporary investments at December 31. 20x0. .000 $234.000 51. Required a) As chief accountant for Holdco.000 28. Assuming these investments are classified as held for sale investments. write the journal entries to record the two sales.000 20.000 Recent discussions have brought to management's attention that there are different methods of accounting for temporary investments.000 9.Introductory Financial Accounting.000 51.000 44.000 10.000 45.000 7.000 $ 70.000 $226.000 26.1. 20x1. Support your answers with calculations.1 Page 56 Problem 2-4 During 20x0.000 31.000 30. all the XYZ Computer shares are sold for $75. decided to invest in the shares of a number of "Hi-tech" companies. and all the Strategic Air Defence Systems shares are sold for $35.000. is shown below: Temporary Investments Company Name XYZ Computer Satellite Systems Strategic Air Defence Systems Generic Engineering Cellulose Telephone Cost Number of Shares Market Value as at December 31.000. b) On January 10. Management is quite unfamiliar with these different methods and has approached you for this information. 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 63. The data on Holdco Ltd. Holdco Ltd.000 5. 20x0 $ 72. v.
v.500 Required a) b) Assuming these investments are classified as available for sale.1 Page 57 Problem 2-5 Mable Company has a portfolio of temporary investments consisting of the following (all investments were purchased in 20x0): December 31 Market Value Cost Security A B C $20.000 $66.000 12.500 31.000 $57. .800 $60. Assuming these investments are classified as trading investments.300 20x1 $19.000 20x0 $18.000 14.500 $62. calculate the balance in Other Comprehensive Income at the end of each year.000 28.Introductory Financial Accounting.000 20x2 $16.500 29.500 14.1.000 10. calculate the amount of unrealized trading gain or loss for each year.000 32.
000 x 3% 120. whereby we estimate the amount of bad debt expense on the income statement.600 20. where the allowance for doubtful accounts is estimated directly. an account receivable is created. assume the total receivables add up to $1. the company estimates that 1% of current accounts will eventually become uncollectible.Introductory Financial Accounting.500 8.1.000 50. There are generally three approaches to estimating the allowance for doubtful accounts directly (balance sheet approach): 1. 8% of accounts between 61-90 days and 40% of accounts over 90 days.000 280.000 $1. v. For example.000 $45.500 . Accounts receivable are.1 Page 58 3. 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.200. the aggregate of the unpaid invoices at any point in time. 3% of accounts between 31-60 days. which is equal to the net amount of outstanding invoices the firm expects to recover. therefore. 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. Accounts Receivable Whenever credit is extended to customers for the provision of goods or services.200.400 9. There are two approaches to calculating the allowance for doubtful accounts: the balance sheet approach. and the income statement approach.000 x 1% 280.000 x 40% $ 7.000 120.000 Based on past experience. Accounts receivable are reported on the statement of financial position at their net realizable value (NRV).000 and that the aging of accounts receivable is as follows: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750.000 x 8% 50. Aging of the accounts receivable listing This involves grouping all outstanding receivables based on how long these have been outstanding.
it may be able to identify which specific accounts may become uncollectible. 3. Any accounts written off are written off against the allowance for doubtful accounts: Dr. Allowance for Doubtful Accounts .1 Page 59 2. or (2) the amount is small and the cost of recovering the account is greater than the balance owed. but estimates the amount of bad debt expense. Accounts Receivable Recording recoveries of accounts written off When an account that was previously written off is subsequently recovered. As a percentage of the ending accounts receivable balance This approach simply takes then ending accounts receivable balance and multiplies it by a percentage. The journal entry to record bad debt expense under either the balance sheet or income statement approaches is: Dr.Introductory Financial Accounting.000 x 5% = $60. Note that this approach does not estimate the allowance for doubtful accounts.000.000 and the company estimates that 5% of these accounts will eventually become uncollectible. In this case. Specific account identification When a company has accounts receivable from a limited number of customers and has an intimate knowledge of these customers. v. Accounts Receivable Cr. Allowance for Doubtful Accounts Cr. 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. we first reverse the journal entry made to write off the account: Dr.200.e. Allowance for Doubtful Accounts Recording accounts written off An account will generally be written off when (1) you receive a notice from a Trustee in Bankruptcy that you will receive an amount that is less than the amount owed. Bad Debt Expense Cr. The sum of the estimated uncollectible accounts at any point in time will form the allowance for doubtful accounts.1. if the ending accounts receivable balance is $1. so we estimate the bad debt expense as a percentage of credit sales. it would not be meaningful to age the accounts receivable listing. For example.200. a department store which offers their customers a credit card).
Cash Cr. v.000 Beginning Bal Recoveries Ending balance before adjustment .000 10.000 The journal entry to record the recovery will first be to reverse the entry initially made when these accounts were written off: Accounts receivable Allowance for doubtful accounts $10. During the year.000 We then record the cash receipt on the accounts receivable: Cash Accounts Receivable $10. The journal entry to record the accounts written off will be: Allowance for doubtful accounts Accounts receivable $75.000 $75.1.000 This will result in a $15.000 $10.800.000 were recovered.000 were written off.000 debit balance in the Allowance for Doubtful Accounts: Allowance for Doubtful Accounts Write-offs $75. The balance in the allowance for doubtful accounts at the beginning of the year was $50.000 $15.000 $10.1 Page 60 We then record the collection on the recovered accounts receivable: Dr.000. the following transactions took place: • • accounts totaling $75.000 $50.Introductory Financial Accounting. Accounts Receivable Example – The Jasmine Company’s accounts receivable at the end of the year totaled $2. previously written off accounts totaling $10.000.
500 since this is the entry required in the Allowance for Doubtful Accounts account to bring the account to a credit balance of $79. The allowance for doubtful account should be established at $2.75% of the accounts receivable balance will be uncollectible. The accounts receivable aging is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days 1. v.5%) + (250.1 Page 61 In order to calculate the bad debt expense for the year.500 $94.000 x 2.75% = $77.0% Management estimates that 2.800.000 x 6. $94.800.000.000 3.Introductory Financial Accounting.800.5%) + (600.1.5% 2.500 The bad debt expense will be $94.000 x 1. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $83.000 $2.0%) + (150.800. we will assume four independent scenarios: 1.000 250. Using specific identification of accounts.0% 15.000 600.500 Estimated % Uncollectible 1.500: Bad Debt Expense Allowance for Doubtful Accounts 2.000 x 2.000 150.000 .0%) = $79.000 The allowance for doubtful accounts is estimated to be: (1.000 $83.000.5% 6. management estimates that the allowance for doubtful accounts should be $68.000 $92.000 x 15. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $92.
000 dr. + $90. Management estimates that bad debt expense will be equal to 1. In approaches 1-3. we were estimating the Allowance for Doubtful Accounts with the residual being bad debt expense.1 Page 62 4.000.000.Introductory Financial Accounting.000 This will cause the allowance for doubtful accounts to have a credit balance of $15. Note that when using this approach.000.1. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $90. Bad debt expense will then be equal to $6. v. = $75.000.000 x 1. we are effectively estimating the bad debt expense for the year and the residual becomes the Allowance for Doubtful Accounts.5% = $90.000.000 cr.5% of total credit sales. .000 $90. Total credit sales for the year amounted to $6.
the aging schedule indicated that the balance of the allowance account should be $6.900 c) $6.900 2. 20x8 Allowance for doubtful accounts balance.800 c) $7.800 . the balance of the allowance account was $5. At the end of 20x8.Introductory Financial Accounting.000 Experience indicates that 4% of the uncollected accounts receivable at the end of each year ultimately will be uncollectible.000) 400.600 d) $6.600 b) $1.000. A company reported the following items for 20x8: Accounts receivable balance.000 d) $13. During 20x9. A company estimated the needed balance in its account “allowance for doubtful accounts” by aging the accounts receivable. At the end of 20x9.000 (11. v. January 1. 20x8 a) $4. January 1.400. What is bad debt expense for 20x9? a) $1. the company wrote off $500 and collected a $300 receivable that had been previously written off as uncollectible. 20x8 (credit) Total credit sales during 20x8 Total collections on accounts receivable during 20x8 Uncollectible accounts written off during 20x8 $80.000 20. What should be the adjusting entry amount for doubtful accounts at December 31.1.1 Page 63 Problems with Solutions Problem 3-1 – Multiple Choice Questions 1.000 b) $4.000 e) $13.000 360.
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 and management estimates the allowance to be 3% of the closing Accounts Receivable balance.000 55. 2004 Allowance for doubtful accounts. 2004 Required – a.000 800. A company had accounts receivable of $3.000 dr. Provide the journal entry to write off actual accounts receivable determined to be uncollectible and recoveries. Provide the December 31.000 and an allowance for doubtful accounts of $125.095 a) b) c) d) Problem 3-2 The following information relates to Merit Ltd.000 After $2. assuming the allowance method is used and uncollectible accounts are estimated to be of 1% of credit sales.970 $3. 2004 adjusting journal entry to record bad debts.875 $2. 2004 adjusting journal entry to record bad debts. . Provide the December 31. for the year ended December 31.000 cr. What were the net realizable values of the accounts receivable as shown by the accounting records before and after the write-off? Before $2.1.000 $3.1 Page 64 3. b. c.000 1. assuming the allowance method is used to account for uncollectible accounts. just prior to writing off as uncollectible an account receivable of $30. 63.000 3. January 1.875 $2. January 1.975 $2.875 $3.Introductory Financial Accounting. $ 15.200.000 14. v.000.000.900.000 11.
The Sigma Company calculates its allowance for doubtful accounts by aging the accounts receivable based on the following percentages: Days Past Invoice Date 0 – 30 31 – 60 61 – 90 Over 90 Percent Estimated To be Uncollectible 1% 5% 20% 80% The following additional information relates to the years ended December 31.000 25.1.400.800.000 2.000 27.Introductory Financial Accounting.000 90.000 - 277. 20x0.000 .000 80.000 20x0 $2.000 234.915.000 15.000 7.000 60.000. 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. v.000 16.000 2.000 45.1 Page 65 Problem 3-3 Sigma Company began operations on January 1.
Required 1. required at December 31. prepare the journal entries. The promissory note bears an interest rate of 12%. an accounts receivable in the amount of $3.Introductory Financial Accounting. if any.000 in payment of outstanding accounts receivable. expects 2% of credit sales to be uncollectable.1 Page 66 Problem 3-4 EED Ltd. 20x7.1. During 20x7 the following summarized transactions occurred: 1. 4. decided that an allowance equal to 5% of total accounts receivable would be sufficient to cover uncollectible accounts. On December 1. (CGA Canada adapted) 2. v.000. Suppose now that instead. In addition. began operations on January 1. to record bad debt expense for the year and accrue interest on the promissory note. On December 31. EED Ltd. prepare journal entries. EED Ltd. Based on industry averages and its experience in 20x6. 20x6 there was a $2. 20x7. 20x6. Received cash of $400.500. if any.000 debit balance in the accounts receivable account. The company uses the allowance method of accounting for bad debt expense. 2. 3. Wrote off uncollectible accounts receivable in the amount of $1. Prepare journal entries to record the above transactions on the books of EED Ltd. Sold merchandise on credit for $500. . 20x7 to record bad debt expense for the year.000 credit balance in the allowance for doubtful accounts account and a $40. required at December 31. With all other data being the same from above.000 was converted to a 6-month promissory note to allow a cash-strapped customer some time to meet his obligations.
Each item that is purchased for resale gets debited to the inventory account. Example: It is Little Company’s first year of business.000 10.000 Note that even though we are not paying cash. Note that unless a company is offering a discount to get rid of inventory or for some other reason. 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. and any adjustments that are needed will be made to the inventory account. and then evaluate the different valuation methods a company can chose to determine the cost of inventory. v. We will begin by looking at two fundamentally different types of systems. a physical count of inventory will be taken to ensure accuracy of the perpetual records. the amount the company generally receives from its customer should always be greater than the value of the inventory. On the first day. is the inventory system that it chooses. When we talk about a perpetual inventory system. paying cash.000 5.000 of inventory.1.Introductory Financial Accounting. or never ending. we just create a payable instead of reducing our cash account. Little Company makes its first big sale. Little Company purchases an additional $10.000 worth of inventory.000 The next day. We still increase the inventory account by the amount of the purchase. Little Company purchases $5. . The Perpetual Inventory System The term perpetual means continuing without interruptions. Inventory A key part of determining the cost of the items that a company sells to its customers. this time on account. the effect on the inventory account is the same as the above journal entry. What that means is that inventory is tracked constantly in a real-time basis. The journal entry would be: Inventory Cash 5. Furthermore. They sell $4. After two weeks of business.1 Page 67 4. From time to time.000 cash.000 worth of inventory to a customer for $6. as well as valuing the items that it has on hand to resell at any point in time. we mean an inventory system that has no interruptions. Inventory Accounts Payable 10.
Introductory Financial Accounting. However. Instead. it removes the $4.000 6. The Periodic Inventory System Under the Periodic Inventory System. So what do we do with the purchases of inventory we make throughout the year? Throughout the year. as purchases are made of inventory they are tracked in a temporary account called “Purchases”.000 5. Under the Perpetual system the COGS is a running total. we do not keep a “running total” of inventory.000 At this point. as: Purchases Cash 5.000 4. Second. Cost of Goods Sold (COGS). v. it records the expense of the items that were sold. Continuing with the example above. we have recorded the sale and the receipt of cash. This varies significantly from the Periodic Inventory System. First. as is the inventory account. however. 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”. under a periodic inventory system. 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. the journal entry would be: Cost of Goods Sold Inventory 4. This expense account. is used to keep track of all of the costs of all of the items a company sells in one period. that first purchase of inventory for $5. nor do we keep a running total of COGS.1 Page 68 To record the sale. Purchases has several contra accounts that track other expenses or discounts that may be associated with the purchases. we have not removed the items that were sold from our inventory account.000 worth of inventory from our Inventory Asset account.000 cash would be recorded. These are: .1. which we will now turn our attention to. To do this.000 This journal entry does two very important things.
as this is a new business.Introductory Financial Accounting.000 5. 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.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 inventory account is adjusted to the appropriate ending balance. Purchases of $5. based on the physical count. v. At the end of the year.000 Let us suppose that those were the only purchases made during the year.1. If you remember. and that at the end of the year a physical count of the inventory revealed that there was $11. To calculated COGS: . the Purchase account and all contra accounts are closed out to zero.000 were made. The amount needed to balance the equation is the Cost of Goods Sold. At the same time. The new journal entries would be: Purchases Cash Purchases Accounts Payable 5. the opening inventory was $0.000 worth of inventory on hand.000 and $10.000 10.000 10.
000.000 – 27.836. according to our count.000 increase) Purchases (close account) Transportation-in (close account) 2.000 36. Inventory Purchases Transportation-in Purchase returns and allowances Purchase discounts 48.476.700.000. Furthermore.000 would be the ending inventory balance from last year.000 2.1.000 .000 and it should be.476.000 + 10.000 we must increase it (or debit it) by $185.000 36.000) = Cost of Goods Available for Sale .000 – 175. Cost of goods sold can be independently calculated as follows: Beginning Inventory + Purchases (2. the Purchases account and all of the associated contra accounts have been set back to $0.000 (360. $175.000 27.000 2. Therefore. They are ready for the next fiscal year.700.000 2.700.000 48. The balance is sitting at $175. in order to get the balance in the inventory account to $360.000 2.000 = $185. v.000 27. $360. A year-end count reveals that the ending inventory balance should be $360.000 $4.000) $2.000 Cr.Ending Inventory (as per count) = Cost of Goods Sold $175.Introductory Financial Accounting.000 Example 2 – Tetrie Company shows the following balances at the end of the year: Dr. 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 11.000 Tetrie uses a periodic inventory system.000 185.000 – 48.1 Page 70 Beginning Inventory + Purchases ($5.000) .000 Note that the Inventory balance given of $175.000.000 + 36.661.Ending Inventory (as per count) = Cost of Goods Sold $ 0 15.
when the item is sold. or when the value of the items is so small that it does not warrant the cost of tracking the specific item value.Introductory Financial Accounting. Conversely. or when a company has relatively few items in inventory that have a specific cost associated with them. the ending inventory is equal to the most recent purchases. the COGS is equal to the opening inventory + earlier purchases. Cost-Flow Assumption This method is used when items cannot be differentiated from one another. In this case. like a jeweler. both the COGS and the ending inventory cost will be the same under the FIFO valuation method. that inventory is mixed all together and. Note that regardless if a company is using a periodic or perpetual system. we remove its specific cost from inventory and debit COGS at the carrying amount. That is. That is to say. FIFO Under the FIFO method. like a car dealership. perpetual inventory systems dealt with how we track the inventory and purchases that flow through a company. There are two different valuation methods that can be used to calculate the value of inventory: specific item valuation or cost flow assumption. 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). Specific Item Valuation This method is used when inventory items can be specifically identified. it is possible to track each item in inventory separately. We will now discuss how we attach value to the inventory. that is at what cost do we record the inventory and COGS. v. . we don’t know specifically which items are being sold so we use an average of some sort to determine cost. we assume that the “First In = First Out”.1 Page 71 Inventory Valuation Methods The above discussion of periodic vs. Some examples of situations where this method would be possible are: when items have specific serial numbers.1. therefore.
1.25 1.20 1. First.Introductory Financial Accounting.000 $400 640 1.00 1.20 each Purchased 400 units @ $1. Under FIFO.070 1. v. we sold . the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1. Throughout the period. Cost of goods sold can be calculated in two ways. They purchased these units for $1. we first calculate the number of units in ending inventory = 400 units and then look at the most recent purchases in order to cost out the ending inventory: January 19 purchase = 300 units x $1.10 1.10 = $330 January 5 purchase = 100 units x $1.20 1.25 1.10 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. Lainey Company has 400 units in its opening inventory. This is not a coincidence – both approaches always provide the same result.470 (455) $1. we know that we sold a total of 700 + 200 = 900 units.00 each.25 each Sold 700 units Purchased 300 units @ $1.1 Page 72 Example – On January 1.25 = $125 Total value of ending inventory = $330 + 125 = $455 Using the FIFO perpetual method.140 Jan 19 Jan 25 300 600 400 375 705 455 Note that the ending inventory result under FIFO is the same under both the periodic and perpetual methods.25 $240 500 (400) (240) (125) 330 (250) Balance Units Total Cost 400 600 1.015 Secondly. using the cost of goods sold equation: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.
1 Page 73 the units in opening inventory plus the first of the purchases we made through the year. We then close out the purchase account and the associated contra accounts to determine what the COGS is.25 each Sold 700 units Purchased 300 units @ $1.Introductory Financial Accounting.20 each Purchased 400 units @ $1. we calculate the average cost of inventory as follows: . v. that is.25 = 900units $ 400 $ 240 $ 375 $1.015 Weighted-Average Method There are two versions of this method.10 each Sold 200 units Under the annual Weighted Average method. Opening Inventory January 3 purchase January 5 purchase COGS 400 units @ $1. They purchased these units for $1. Throughout the period. you will remember that we do an inventory count once a year to determine the ending inventory balance. and one is used when you have a perpetual system.1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1. one is used when you have a periodic system. 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. The annual weighted-average for periodic systems uses a similar methodology. 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. So COGS would be calculated as the cost of the first 900 units.00 each. Using this method.20 = 300 units @ $1. Lainey Company has 400 units in its opening inventory. Annual Weighted-Average – Periodic Systems Under a periodic system.00 = 200 units @ $1.
13077/unit = $452 COGS = # units sold x unit cost = 900 units x $1.25 each) January 19 Purchase (300 units @ $1.20 each) January 5 Purchase (400 units @ $1.13077/unit Ending Inventory = # units in inventory x unit cost = 400 units x $1.300 Average unit cost = Cost of Goods Available for Sale/Units Available for Sale = $1. when we make a purchase we debit the inventory account for the amount of the purchase. The moving weighted-average system of inventory valuation takes this into account.470 (452) $1. Unit Cost = Cost of all goods on hand/number of units on hand.470/1. Under this system. then that is the unit cost used to determine the COGS for that sale.300 units = $1.1 Page 74 Cost of Goods Available for Sale Opening Inventory (400 units @ $1.018 Alternatively.018 Moving Weighted-Average – Perpetual Systems You will remember that under a perpetual inventory system.00 each) January 3 Purchase (200 units @ $1. Subsequently. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.470 Units 400 200 400 300 1. v.13077/unit = $1.070 1.Introductory Financial Accounting. the average unit cost is recalculated every time a purchase is made. .1.10 each) $ $400 240 500 330 $1. we are keeping a running total in the inventory account. As such. that is the unit cost after the last purchase previous to the sale. whatever the unit cost is at the time of a sale.
066671 640 2 1.14000 1. Lainey Company has 400 units in its opening inventory.25 each Sold 700 units Purchased 300 units @ $1.022 .070 1.00000 $400 1. under this system we recalculate the unit cost each and every time we make a purchase.10 each Sold 200 units Remember.00 each. v.20000 1. Purchases (Sales) Date Jan 1 Jan 3 Jan 5 Jan 10 Jan 19 Jan 25 1 2 Balance Total Cost $240 500 (798) 330 (224) Units 400 600 1.000 3 Unit Cost = $672 / 600 Cost of goods sold is equal to the cost of goods sold for the two sales: $798 + 224 = $1.25000 1.022 Alternatively.470 (448) $1.Introductory Financial Accounting.12000 672 448 Units 200 400 (700) 300 (200) Unit Cost $1. They purchased these units for $1. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.000 300 600 400 Unit Cost Total Cost $1.1 Page 75 Example – On January 1. Unit Cost = Cost of all goods on hand/number of units on hand.140 / 1.20 each Purchased 400 units @ $1.140 342 3 1.14000 1. Throughout the period. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.10000 1.12000 Unit Cost = $640 / 600 Unit Cost = $1.1.
000 – 14.000 14.000 to bring it to a zero balance.000.000. If the market value is less than cost. the accountant determines that they could sell this inventory for $40. the credit will be to income. . then the allowance will be debited by $14. v.000 – ($40. then the inventory must be written down to market value. is showing an ending inventory balance of $50.000 At present.000 X 10%) = $40. the inventory account has a balance of $50. If. The net realizable value of this inventory is: = Selling Price – Commission = $40. we must determine that the inventory’s net realizable value. commissions of 10% would have to be paid to the sales team on any sale of this inventory. This rule ensures that companies will not overstate their inventory balances by keeping on record at cost inventory which may have decreased in value in the marketplace. We do this by creating a contra account to inventory called ‘Allowance for decrease in value of inventory’. Inventory Loss Allowance for decrease in value of inventory 14.000. Example –VenTure Ltd.000 – 4.000 = $36.000 = $36. At the balance sheet date. Furthermore. First of all.1. Show the journal entry to record the proper carrying value of the inventory. Market value is defined as the net realizable value of the inventory – the sales price of the inventory item less any costs incurred to sell it. next year.000 Note that the Inventory Loss account will appear on the Income Statement and be registered as a loss for the company in this period. This account operates much like the Allowance for doubtful accounts in that it gets adjusted to the desired balance at year end.000. The net inventory balance that will be reported on the statement of financial position is $50.Introductory Financial Accounting.1 Page 76 Application of Lower of Cost or Market Rule At the balance sheet date a company must compare the aggregate cost of its inventory to its aggregate market value. the analysis reveals that no allowance is required.
000 Example – The Gennissen Company’s inventory were destroyed by a fire and you need to estimate the ending inventory.000.000 350.000 25% . v. If we did not have the COGS number.000. the Gross Profit Ratio = 40%. for whatever reason.200.000 860.1.000.000 If Sales are $1.1 Page 77 Gross Profit Method The Gross Profit Method of inventory valuation is used to estimate inventory when other data is not available to use one of the previous methods discussed.000 x 40% = $400.900.000 x (1 – 40%) = $1.200. Example – Assume the following: Sales Cost of Goods Sold Gross Profit 1.000 Ending Inventory = $310.000 Purchases .000 and Gross Profit is $400. You are given the following information: Sales to the date of the fire Opening inventory Purchases to the date of the fire Gross Profit Ratio The estimated cost of goods sold = $1.000 100% 60% 40% In the above example.Introductory Financial Accounting.000. but we did have the Gross Profit Ratio.000 $1. 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. we could estimate COGS by using the following formula: Gross Profit = Sales x Gross Profit Ratio = $1.000 Opening Inventory + 860. we must first understand how to calculate the Gross Profit %.000.000.000 600.000 x (1 – 25%) = $1.000 400.000 x 75% = $900.200. To understand the application of this method.
000 instead of the correct balance of $1. a) Liabilities would be overstated by $200.400. Ltd. 20x4. The December 31. d) Shareholders’ equity is overstated by $6.000 b) $503.000 c) $515.000 2.000 computer purchased for the chief financial officer on December 27 had been recorded incorrectly as an inventory purchase. 3.000. financial statements.000.000. What was cost of goods sold for the year ending December 31.000 in shipping charges on merchandise purchased during the period. 20x8? a) $478. 20x4. 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. On January 1.1.1 Page 78 Problems with Solutions Problem 4-1 – Multiple Choice Questions 1. During the year the company purchased $500. . included an adding error in the inventory count that resulted in ending inventory of $1.600. c) Shareholders’ equity is understated by $6. b) Inventory is understated by $6. Which of the following statements is true with respect to the impact of this error on the December 31. Owl Enterprises had merchandise inventory on hand amounting to $60.000.000.000. c) Cost of goods sold would be understated by $200.Introductory Financial Accounting.000. 20x8. Fri. After completing its inventory count and making the appropriate adjusting journal entries.000.000.000 worth of inventory and took advantage of purchase discounts amounting to $6. financial statements of Confu Ltd.000 to suppliers and incurred $25.000. discovered that a $6. b) Assets would be understated by $200.000. the company returned merchandise costing $10. In addition. d) Owners’ equity would be understated by $200. A year-end inventory count revealed merchandise on hand in the amount of $66.000. v.000 d) $523.
000 during the month with terms 1/10. 20x8. One customer returned goods with a sales value of $500 and was issued a credit note.000.Introductory Financial Accounting. FOB destination. The customer received the goods on January 6. e. e. v. n/45. FOB Shipping. Cozy sets the selling price on its shoes so that the cost of sales is equal to 70% of the selling price. n/30. CIF destination.1 Page 79 4.200.000. 20x9. e. Czech Ltd. The selling price of the goods was $57. Problem 4-2 The following summarized transactions relate to Cozy Co. The sale was recorded by Czech on January 2. all of which were made on credit with terms 2/10. 20x9. d) Revenues for 20x8 are understated by $57. Which of the following statements with respect to this transaction is true? a) Income for 20x8 is understated by $42. a shoe wholesaler. e.. All other sales made during the month were collected in the month with all customers taking advantage of the sales discount offered.000. The company uses a perpetual inventory system. Required – Prepare the journal entries required to record the above events and transactions.1. Transportation out paid on delivery of goods sold during the month equaled $1. All of the merchandise purchased during the month was paid for with Cozy taking advantage of the purchase discount offered. Sales totaled $80. b) Income for 20x9 is overstated by $42. e. shipped goods to a customer on December 30. Merchandise was purchased at a cost of $50.000.000. c) Income for 20x9 is understated by $15. . Czech had paid $42. for the month of July 2006.000.000 for the goods and uses the periodic method to account for its inventory.
000 2.00 = $ 300 60 @ $11.000 2. assuming a FIFO cost flow system is used. Calculate the cost of ending inventory for May.00 = 1.00 = $ 400 Anvil Rock uses a perpetual inventory system. assuming a firstin. v.00 = 420 50 @ $22.100 125 $ 1.1.1 Page 80 Problem 4-3 Anvil Rock Company had the following inventory and purchases for the month of May.000 Price/Cost $12 18 30 23 33 . Beginning Inventory/ Purchases 30 @ $10. c. Required – a. Problem 4-4 The following information concerns one of a company’s products. Prepare the journal entries to record the May 29 sale on account. assuming a weighted-average cost flow method is used. first-out (FIFO) cost flow method is used. Calculate the cost of ending inventory for May.000 2.Introductory Financial Accounting.500 3. 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 1.50 = 690 35 @ $12.500 Date May 1 May 5 May 14 May 21 May 29 Totals Sales Beginning inventory Purchase Sale Purchase Sale 20 @ $20.410 70 $ 1. b.
Corporate records disclose the following: Inventory — January 1.000 580. 20x5.000 480. (Banff) sells skiing and hiking equipment to retailers. the company was unable to pass on price increases to customers and thus maintained a selling price of $100 per unit throughout the year. Costs are assigned to inventory and cost of goods sold on a FIFO basis.1 Page 81 Problem 4-5 On January 1. During 20x5 the company made the following purchases of MP3 players: February 21.000 8.000 15.000 52. .000 30.000 units at $58 each $50. the company’s insurance policy will cover 80% of the loss suffered in this fire. 20x5 1. 20x5 October 15. the Music Store had 400 MP3 players in inventory with a cost of $48 per unit. (CGA Canada) Problem 4-6 Banff Mountain Equipment Ltd. v.000 440. Required – Assuming the company uses a periodic inventory system.1. It accounts for its inventory using a periodic inventory system. b. Fortunately. The store had an excellent Christmas season with the result that only 70 MP3 players were left in inventory on December 31.000 Banff normally realizes a gross profit of 30% on its sales. Banff lost all of its hiking equipment in a fire in March 20x8. calculate gross profit for the year ending December 31. under each of the following assumptions: a.000 units at $50 each 1. The loss is to be determined based on the cost of the inventory in accordance with generally accepted accounting principles. Costs are assigned to inventory and cost of goods sold on a weighted average basis.000 units at $52 each 1. After a very successful ski season and just as it was about to commence shipping its hiking equipment for the upcoming season. 20x5.000 Due to competitive pressures.000 58.000 615. 20x5 June 15. 20x5. 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.Introductory Financial Accounting.
inventory value using the Weighted Average . Required – Prepare journal entries for the above transactions. January 1. v.000.1 Page 82 Required – Calculate the net loss from the fire.050 each During the year. June 1 Sold Whinr Ltd. Calculate the cost of goods available for sale. $30.1. inventory for 20x7: Beginning inventory. Ending inventory consisted of 60 units. The company uses a periodic inventory system. Show your calculations. taking advantage of the sales discount.000.000 of the merchandise inventory claiming it did not meet its needs. 20x7. The supplier provided purchase credit terms of 1/15. Calculate December 31. Required 1.000 on account. n/30. n/60. Problem 4-8 The following information relates to Mejewel Ltd. June 2 June 9 June 12 The company uses a perpetual inventory system. The cost of the merchandise inventory returned was $5. Whinr returned $10. 20x7.000 of merchandise on account with credit terms of 2/10. the company sold 600 units at an average price of $2. Show all your calculations. 20x7 20 units @ $900 each 440 units @ $950 each 200 units @ $1. Show all your calculations.Introductory Financial Accounting. 20x7 Purchases — June 7. (CGA Adapted) Problem 4-7 During June 20x8. Saret Ltd. Calculate December 31. Saret purchased merchandise inventory costing $42. performed the following transactions.100 per unit. 3. Whinr paid the balance due on the June 1 sale. 2. 20x7 Purchases — February 20. The cost of the merchandise inventory sold was $15. inventory value using the FIFO inventory pricing method.
amounted to $48. Cash payments on merchandise purchased from Patel Inc.000. you have made it a policy to ensure that all purchase discounts are taken advantage of. Toyjoy had not yet paid for the merchandise. i) ii) Purchased merchandise on account from Hirwin Toys for $80. The president has asked you to explain the benefits of taking advantage of purchase discounts because it often results in the company paying for merchandise before it has been sold. FOB shipping point. Show all your calculations. n30.500 represented payment of a $50. Prepare a schedule of the cost of goods sold section of the income statement.000 under credit terms of 3/15. b.Introductory Financial Accounting. (CGA Canada adapted) Problem 4-9 The following is a summary of selected transactions for Toyjoy Ltd. which has a negative impact on the company’s cash flow.1 Page 83 inventory pricing method.000 in cash for freight charges on merchandise purchased during the month. revealed merchandise inventory on hand of $30.1. . assuming merchandise inventory on December 1. which was paid within the discount period of 3/15. (CGA Canada) c. iii) iv) Required a. Prepare journal entries for each of the above summarized transactions. The company uses the periodic inventory method and the gross method of recording purchases. The payment of $48.000 credit purchase. for the month of December 20x7. amounted to $150.000 and a count of inventory on December 31. v. 20x7.200 credit memorandum from a supplier on defective merchandise Toyjoy had purchased and returned. Received a $1. Toyjoy paid $3. As the new controller. n30.500. Briefly explain the benefits. 20x7.
A $6. for use by the sales manager was incorrectly accounted for as an inventory purchase. 20x7 inventory count. ii) iii) Required For each error. If the error has no effect (NE). and included in the year end inventory count. 20x6 inventory count. 20x7.000. inventory count $10. On December 28. There were no errors in the December 31. The company failed to record the purchase of these goods until January 15. 20x6 Ending Inventory. None of the errors were explicitly discovered or corrected in 20x6 or 20x7 (some of the errors would automatically be corrected if normal accounting procedures were followed in 20x7). Use the following format in answering this question. and for 20x7 Cost of Goods Sold. v. 20x6 Retained Earnings.1 Page 84 Problem 4-10 The following is a list of inventory errors which occurred in 20x6. There were no errors in the December 31. i) A company failed to include in its December 31. a company received.000 worth of goods which were in an off-site storage location. Error 20x6 Cost of Goods Sold 20x6 Ending Inventory 20x6 Retained 20x7 Cost of Earnings Goods Sold (CGA Canada) .1. 20x6. Assume the companies involved used a periodic inventory system and treat each situation independently.000 computer purchased on December 28. 20x6. indicate the dollar amount of the overstatement (O) or understatement (U) in 20x6 Cost of Goods Sold. then state so.Introductory Financial Accounting. goods costing $5. 20x6.
the Bamboo Brush store was destroyed in a fire.1 Page 85 Problem 4-11 On January 13. 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.500 For each assumption given. Weighted-average.000 6.000 $ 10. calculate the total dollar amount for ending inventory and cost of goods sold. 1 (at $24) Purchase No. Unit Cost $7.000 7. the accounting records were kept in a separate location and the company was able to reconstruct the following information: Inventory at January 1. 2 Sale No. periodic inventory system d. 20x7. 2 (at $26) Required 6. v.95 8. a. 20x7 Inventory stored at another location.000 40% Problem 4-12 The records of Egypt Company showed the following data relative to one of the major items being sold. perpetual system c.000 $ 60.40 9.1. FIFO.500 8. (CGA Canada) $100. perpetual inventory system .Introductory Financial Accounting. periodic inventory system b. 1 Sale No.000 5. Moving weighted average. Assume that the transactions occurred in the order given. at January 13. FIFO. Luckily.000 $ 5.00 Units Beginning inventory Purchase No.
the shares or the long-term debt of another company).e. any costs of transportation to get the asset to its location and any installation costs. • buildings. 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. equipment and furniture and fixtures. what constitutes the cost of this asset. We will only focus on the accounting for those long-term assets that are not investments in financial instruments.1. v. and 4. equipment.000 % 25% 75% Allocation of Purchase Price $125. An independent appraisal of the land and building are $150. For example. These generally comprise of: • land.000 $600.e. When a long-term asset is acquired. how do we account for these expenditures. assume that you pay $500. namely land.000 375.000 and $450. copyrights and trademarks. but are not limited to. buildings. • long-term investments in financial instruments (i. The acquisition cost would be allocated to land and building as follows: Individual Fair Market Value per Appraisal Land Building $150. land and building). When on-going expenditures are made in order to keep the asset in operable condition.000 450. If you pay one price to acquire a group of assets (i.000 $500. 2. the acquisition cost of asset. How do we account for the disposal of long-term assets. These include.000 for land and a building.000 respectively. furniture and fixtures and intangible assets. 3.1 Page 86 5.Introductory Financial Accounting. How do we allocate the cost of long-term assets over the periods these long-term assets are put to use in the business. 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. and • intangible assets such as patents. The essential accounting issues in accounting for long-term assets can be summarized as follows: 1.000 .
For an expenditure to be considered a betterment it must meet one of the following four criteria: i.000 $500. the rate of output of the asset is increased. iii. A determination has to be made whether the expenditure is required to maintain the asset in operable condition. The annual amortization expense is calculated as follows: (Cost – Salvage Value) / Useful Life . the matching principle requires that the cost of long-term assets should be spread over the periods that the asset generated revenues. the useful life of the asset is extended. We would therefore capitalize the cost of the new engine to the asset account. any costs to maintain a truck. the operating costs of the asset are decreased. equal over its useful life. For example. or iv. we often incur ongoing expenditures in order to maintain the asset. in which case the expenditure should be expensed to the income statement. However. more or less. The process by which this is done is amortization of long-term assets. or whether the expenditure is a betterment of the asset and therefore needs to be capitalized to the cost of the asset on the Statement of Financial Position.000 375. 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.1 Page 87 The journal entry to record this transaction would be as follows: Land Building Cash $125. This method allocates the cost of the asset over its estimated useful life in equal amounts. the expenditure enhanced the quality of the asset in a substantive way. The underlying assumption is that this asset generated revenues that are. v. then we would likely increase the useful life of the truck. There are three general approaches to amortizing capital assets: 1.000 Accounting for on-going expenditures Once a long-term asset has been acquired. Consequently.1. if we were to replace the truck’s engine. would generally be considered to be repairs and would be expensed.Introductory Financial Accounting. Straight-line method. ii. such as oil changes or brake replacements.
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.000 hours.e. We deduct the salvage value since we do not want to write down the asset below its salvage value. This method allocates the cost of the asset over its estimated useful life based on the use made of the asset. Under the straight-line method. Declining balance method.000 – 35. machine hours. The asset’s estimated useful life is 8 years and the estimated salvage value of the asset is $35. if you are told that an asset has a useful life of 10 years. 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. i. a truck rental company that bases rental charges on the mileage driven. The asset’s useful life can also be measured in terms of total machine hours of 150.125 $31. then the straight-line rate is 1/10 and the DDB rate is 1/10 x 2 = 20%. 3.e.125 . The annual amortization expense is calculated as follows: Net book value of asset x Amortization Rate (%) The net book value of the asset is equal to the asset’s original cost less the total amortization taken on the asset to date (accumulated amortization).125 The journal entry to record amortization expense will be as follows: Amortization Expense Accumulated Amortization $31. the annual amortization charge will be: ($300.000.Introductory Financial Accounting. This assumes that the use can be measured.1 Page 88 The cost less the salvage value is called the amortizable base of the asset. i. The annual amortization expense is calculated as follows: (Cost – Salvage Value) / Useful Life in units of production x Units of production expended during the period Example – Assume that an asset is purchased at a cost of $300. 1.000) / 8 = $31. Units of production method. The rate used for DDB is twice the straight-line rate. The underlying assumption is that the asset generates revenues based on usage. 2. v. For example.000.1. mileage. The amortization rate can either be given or you may be told that the company uses the double declining balance (DDB) method of amortization.
562 94.191 53.000 hours = $1. Under the units of production method.011 of amortization in year 8. the amortization taken in year 8 is the lesser of the calculated amortization of $10.011 or the amortization amount needed to bring the net book value down to the asset’s salvage value.1.393 40.000 hours x $1. Assume that the total number of hours of use in the first year is 18. the net book value at the end of the 6th year is: $300.000 Year 1 2 3 4 5 6 7 8 Note that the year 8 amortization is not equal to $40.393.562 94.000 168.250 42.7667 per hour. 3.011. Note that we will assume double declining balance amortization at the rate of 1/8 x 2 = 25% per year.756 = $53.798 13.000) / 150.000 x 0.922 71. Recall that we do not depreciate the asset below its salvage value. The net book value at the end of any given year can be calculated directly as follows: Original Cost of Asset x (1 – a)n Where a = amortization rate n = number of years since acquisition For example.000 168.922 71.045 x 25% = $10.348 5. If we had taken $10. Under the declining balance method.191 53.Introductory Financial Accounting.000.045 35.045 Net Book Value End of Year $225. Net Book Value Beginning of Year $300.045 Amortization Expense @ 25% $75.750 126.750 126. Therefore.731 17. the amortization charges for the 8 years will be as follows.1 Page 89 2. the amortization charge per hour would be: ($300.188 31. this would have resulted in a net book value at the end of the year that would be lower than the asset’s salvage value.000 225.393 40. v.7667 = $31.801. then the amortization charge would be 18.000 56.000 – 35. .640 23.
000. the asset’s useful life was expected to be 10 years with an estimated salvage value of $20.000 $100.000.000 was purchased on January 2.000 – 20. we compare the net book value of the asset sold to the proceeds on disposal.1.000 89.000/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. 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.000) / 10 = $23. For example. 20x3 for $250. The asset’s useful life was expected to be 10 years and the salvage value was estimated to be $20.000.000 $250. The difference will be equal to the gain or loss on disposal. For example. The asset is sold at the end of 20x9 for $100. .Introductory Financial Accounting.000 $11. v.000.000 161. assume that an asset was purchased on January 2. In 20x5. Assume straight-line amortization. At the time.000.1 Page 90 Disposals of Long-Term Assets On the date of disposal. an asset costing $100. 20x1. The net book value of the asset at the end of 20x9 is: Original cost Less Accumulated amortization ($250.000 (161.000) $89.000 250.000 11. the changes in estimates are applied prospectively from the date of the change in estimate onwards.
are the result of a past transaction and are under the control of the company.000 – 10. Internally developed intangible assets cannot be capitalized on the Statement of Financial Position.1.000) / 10 = $8. was developed internally. they are expected to provide future benefits. typical within a certain geographical area • goodwill – the added value of a business attributable to factors such as reputation.000 This net book value will then be amortized over the remaining useful life of the asset. • copyrights – the protection of writings.000 – 20. assume that a patent is granted to a company at a cost of $100. This need not coincide with the asset’s legal life.e. Annual amortization charges for 20x5 and future years will be: (68.000) / 11 remaining years = $5. location or superior products. if you look at Coca-Cola’s Statement of Financial Position. Note that only expenditures incurred by the company can be capitalized as intangible assets. • patents – a legal right ensuring the company’s exclusive right to a product or process. Examples of intangible assets are: • trademarks – a name or symbol that identifies a company or a product. • franchises – the exclusive rights to sell products or perform services.000) $68.1 Page 91 The net book value at the beginning of 20x5 is: Original cost Less Accumulated amortization ($100. Consequently. Intangible assets whose life is limited should be amortized on a straight-line basis over their estimated useful lives. i. the trademark ‘Coca-Cola’ was never purchased by the Coca-Cola Company but rather. For example. The patent’s legal life is 17 years but it is expected that emerging technologies will make this . v. For example.000/year x 4 years $100.000.273 per year Intangible Assets Intangible assets are those assets that do not possess a physical quality (i. you cannot touch them or see them) and yet they represent costs incurred that meet the definition of an asset.e.Introductory Financial Accounting. The accounting for intangible assets depends on whether these assets have limited or an unlimited life.000 (32. musical compositions and works of art. you will not see the value of its trademark listed as an asset.
In this case. some franchises. then the asset must be written down to the fair market value.e. we would amortize the patent over 5 years. . Any impairment losses cannot be subsequently reversed if the fair market value of the asset subsequently is recovered. If the fair market value is lower than book value and is not expected to recover.1. Intangible assets whose life is unlimited (i. v. That is.1 Page 92 patent obsolete by the end of the 5th year. goodwill) are not amortized but instead subject to an annual impairment test. the book value of the intangible asset is compared to its fair market value.Introductory Financial Accounting.
000 in legal costs defending it.500 b) $5.1.000 and spent $5.000 150.705.000. Brown and Das obtained a patent for their earnings forecasting software at a cost of $80.500 d) $20.000 c) $19.000 10 years $5. What will be the annual amortization expense for patents? a) $4.000 Jasper uses the straight-line method for calculating depreciation expense.000. Sinha.000 b) Income will decrease by $6. What is the impact of this expenditure on income before taxes for 1998? a) Income will decrease by $12. 2.000 c) Income will decrease by $1.200 d) Income will decrease by $632 e) Income will decrease by $600 . The room was completed on June 30. the situation was as follows: Building cost Accumulated depreciation — building Estimated remaining useful life Estimated salvage value at end of useful life $200. 1998.1 Page 93 Problem with Solutions Problem 5-1 – Multiple Choice Questions 1.000 3.00 Use the following information to answer questions 2 and 3: The Jasper Company has an old building which requires frequent repairs and constant maintenance.88 b) $5.500.00 c) $8. v. A small room was built on the back of the building at a cost of $12.Introductory Financial Accounting. and was used as office space commencing July 1. What is the amount of depreciation expense on the building for 20x8? a) $4.000.00 d) $8. The patent is valid for 17 years and has an estimated life of 10 years. At the beginning of 20x8.
000 c) $5. On January 1.000 .000. Yaari and Yosha Company bought a machine for $85.000.000 were incurred to clear the land in preparation for construction of an office building.735 6. During 20x7.500 b) $72. On January 1. it was used 430 hours. 20x6? a) $67. During 20x6.000 7. 20x7. If the company were to use the units-ofproduction method instead of the straight-line method. Stone and Wall Company bought equipment for $100.075. 20x7.000 with an estimated life of 4 years and a salvage value of $5. Costs of $15. was $18.000 commission was paid to a real estate agent. To acquire the land. v.000. The equipment is expected to have a 5-year life and produce a total of 80. what would be the balance reported for the net book value of the equipment at December 31.1.750 d) $65.000 units.500 productive hours over the next 4 years. 20x7? a) $40.500 c) $63. and a 10% residual value.000 b) $1. A land site was acquired for $1.060. On July 1. what would be the balance reported for the net book value of the machine at December 31.000 units. production was 20.015.000.160 d) $5.000. It has an estimated 4-year life.500 d) $80. What is amortization expense for 20x7 under the productive output method? a) $4.1 Page 94 4.000 c) $1.Introductory Financial Accounting. If the company uses the double-declining-balance method for amortization.000 b) $42. using the straight-line method.000 d) $1. Ireland Company purchased a machine that cost $20.500 b) $5.000 5. At what amount should the land be reported on the balance sheet? a) $1. The machine is expected to be used for a total of 1.000. a $60.000 c) $77.000. 20x6. The Amortization expense for 20x6.
the total life of the van would only be 4 years instead of the original estimate of 5 years. it was estimated that the van could be sold for $5. 20x7. At the end of its useful life. assuming the company uses the units-of-production method of amortization and that the van was driven 55. 20x7 and 20x8.Introductory Financial Accounting.000.000 kilometers during the year.1 Page 95 Problem 5-2 On January 1. management felt that the van could only be sold for $2. as a result of heavy usage. During 20x8. 20x7. 2008. c.000 kilometers.000 and was expected to have a useful life of 5 years or 200. management of the company decided that. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. Required – a. d. assuming the company uses the doubledeclining-balance method of amortization. Resort Ltd. b. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. .1.000 at the end of its useful life. purchased a van to transport guests between the resort and a nearby airport. assuming the company uses the straight-line method of amortization. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. v. 20x7. The van cost $65. In addition. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. assuming the company used the straight-line method of amortization.
000 salvage value.000. Expenditures totaling $2. This increased the useful life of the asset by three years. The estimated useful life of the asset is expected to be 5 years with a $10.Introductory Financial Accounting.000 were made to the equipment. Recorded amortization expense. . 20x5 Dec 31. Dec 31. 20x7 Aug 31. The original estimate of salvage value holds. 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. 20x4 Apr 31. 20x3: Jan 2. Routine repairs costing $600 were made to the equipment. The equipment was completely overhauled at a cost of $20. 20x3 Purchased equipment for $60. 20x5 Dec 31.000.1.000. v. 20x3 Aug 31. Recorded amortization expense. Sold the asset for $25. 20x4 Dec 31. Recorded amortization expense. Recorded amortization expense. 20x8 Required – Record all of the above transactions assuming that the company uses the straight-line method. 20x7 Dec 31.1 Page 96 Problem 5-3 The Connor Company had the following transactions over the life of an asset purchased on January 2. Recorded amortization expense.
20x7 Price of new lathe. 20x7 Required – Prepare the journal entry to record the purchase of the lathe. (CGA Canada.000 cash.1 Page 97 Problem 5-4 On June 30. bought a state of the art numerically-controlled lathe from GPL by trading in a dissimilar asset and paying $90.000 38.000. Show. During the installation there was minor damage to the frame.1. Prepare the journal entry to record the amortization expense on December 31.Introductory Financial Accounting. Required – 1. 20x6. The machine was expected to have a life of 4 years and a salvage value of $3. Prepare the journal entry to record the asset acquisition on July 1. The following additional information is available: Original cost of the old asset Accumulated amortization at June 30. On January 1. (CGA Canada) . purchased a machine at a cost of $25. adapted) $ 50.000 cash. 3.000. in good form. 20x8. the machine was sold for $20. Prepare the journal entry to record the sale of the machine on January 1. 20x7.500 Problem 5-5 On July 1.000. 20x7.000 to install the machine. 4. and the repair cost for it amounted to $500. MNO Co. 2. 20x6. 20x6. Assume a straight-line method of amortization. which included freight charges of $1. v. ABC had to spend $2. Market value of old asset on June 30.500 108. ABC Ltd.000 15. 20x8. how the machine will be presented in the assets section of the balance sheet at December 31.
due to a preventative maintenance system that had been implemented. 20x7.Introductory Financial Accounting. No change in estimated residual value was anticipated.1 Page 98 Problem 5-6 The following information pertains to the equipment acquired by Xie Co.000 4 years 40. 20x6. Use this information to answer parts (a). management felt that the total estimated life of the equipment would be 5 years with a total estimated production of 50. . Accordingly.000 $ 20. and (c). Cost Estimated residual value Estimated life Estimated production 20x6 actual production Required a. the estimates were revised.000 units were produced. 20x6.1. the equipment was sold for $75. assuming the company uses the: i) straight-line method ii) units-of-production method c. 20x7.000 units 9. on January 1. v. Determine the amortization expense for the year ending December 31. On January 1. Prepare the journal entry to record the sale assuming the company uses the: i) straight-line method ii) units-of-production method $120.000 units b. In 20x7. Determine the amortization expense for the year ending December 31. 20x8. assuming the company uses the: i) straight-line method ii) units-of-production method On January 1.000. (b).000 units. 12.
It incurred interest costs of $12.000 2/10. German intends to use the machine for 8 years and hopes to sell it for $15.000 $ 14. Assume that the machine is sold on January 1. Machine No. for $100. 103 has a physical life expectancy of 10 years with a salvage value of zero. c.800 The company borrowed $150.000 cash. purchased Machine No.000 on this loan during 20x3. 20x6. Otherwise. * this means that is we pay within 10 days. The following information relates to this machine: Invoice price Credit terms* Customs and duty costs Preparation and installation costs $ 140.Introductory Financial Accounting. .000 to pay for the machine within the discount period and take advantage of the cash discount. 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. income can be minimized in 20x3. v. Compute amortization expense for 20x3 using the straight-line method. However. we get a 2% discount.000 at that time. we have to pay the full invoice price within 30 days. b. Required – a. In this way. Prepare the journal entry to record the sale assuming the straight-line method of amortization was used.1 Page 99 Problem 5-7 German Ltd.1. 103 on January 2. 20x3. n/30 $ 5. What amortization method could be used to abide by the president’s request? Is this method acceptable under generally accepted accounting principles? Explain.
000 Wages/Salaries Payable – these are wages/salaries that are due to employees for hours worked.000. The principal must be repaid equally over 5 years. Interest and Principal payments are due December 31st of each year.000 Note that we are debiting the Wage Expense for $3. If the average daily wage expense is $1. and will not be paid again until April 4th. Current Portion of Long-term Debt – This is a current liability that is incurred when a company has long-term debt that requires a certain amount to be repaid within the next year year. For example. v.000 to the new period.000 This way.000/day) Wages Payable (to remove the adjusting entry) Cash 4. when the payment is made for the full week.000/day) that were performed in the period but not paid for. For example. Typically.000 7. a company purchases office supplies from a supplier for $2. assuming the employees worked the full 7 days in the week. services or supplies for the operation of the company.000 with the terms set at 6% interest due annually. the entry would be: Wage Expense (4 days x $1. which represents the three days of work (3 x $1.000 3. . For example. the adjusting entry made March 31st would be: Wage Expense Wages Payable 3.000 2. Employees were last paid on March 28th.000. On April 4th. a company has a fiscal year end of March 31st. the only time we see this account set up is at the end of a fiscal period when an adjusting entry must be made.000 on account. The entry would be: Office Supplies Accounts Payable 2.000 3. We have already covered several of these when we did adjusting entries. Accounts Payable – these are liabilities that were incurred to purchase goods. it is split appropriately and applied to the correct periods. 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). but have not been paid. $7. a company takes out a loan on January 1st for $10. we will go over the main types of current liabilities. Current Liabilities A current liability is one that will be settled within one year or the business cycle of the firm.000/day.Introductory Financial Accounting. whichever is longer.1. however. $3.000 to last period and $4.1 Page 100 6.
For example. we would split the long-term debt as follows: Current liabilities Current portion of long-term debt Long-term liabilities Long-term debt $2. The entry to record payroll for the month would be: Wages Expense Employee Withholdings Payable ($27.1 Page 101 When the company takes out the loan. The journal entry would be as follows: Long-term debt Interest Expense Cash 2.500 57. Employee Withholdings Payable – Employers are responsible for deducting income taxes.Introductory Financial Accounting.000. CPP. Wages total $100. Not only must the company submit the employee’s portion. $7.500 + 8.000) Cash 100.500. This ensures accurate reflection of the financial obligations of the company on the Statement of Financial Position.000.000.4 times the employee deduction for EI.000 + 7. EI.000 600 8. a company pays its employees monthly. At December 31st. Deductions for each month are due on the 15th day of the following month. and pays 1. The employer matches the employee’s contribution for CPP. and the employer ducted the following amounts from its employees’ cheques: Income Taxes.000 The debt is split into the portion that is due within the year.500 .000. CPP and EI from employee’s paycheques.000 x 6%). the journal entry would be as follows: Cash Long-term debt 10.1.000.000 10. $8. v.000 42. 27. and that which is due later than one year. but they also must submit the employer portion of CPP and EI. and a balance in the Long-Term Liabilities section of $6.000 On the Statement of Financial Position.000 If a Statement of Financial Position were prepared on the January 1.000 8. the interest expense for the year would be $600 ($10. we will now show a balance in the Current Liabilities section of $2.
then it has to be disclosed through a note in the financial statements.000 x 1.200 Contingent Liabilities One of the guiding principles of accounting is the idea of conservatism. 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. the company pays the government: Employee Withholdings Payable ($42.Introductory Financial Accounting. and therefore a loss of some kind to the company. If a company knows that there will be a liability.000 . and b) the loss can be reasonably estimated. v. but it does not have to be recognized.500 + 18.700 Note that CPP Expense and EI Expense could be tracked separately.1.500 x 100%) EI Expense ($8. You would record or recognize the FULL amount. but have not yet come to be.200 61. The journal entry would be: Unrecognized Loss on lawsuit Contingent Liability – lawsuit 400.200 18.40) Employee Withholdings Payable 7.000 400. Contingent liabilities are those liabilities which are likely to be incurred in the future.1 Page 102 At the same time.500 11.700) Cash 61. One of the resulting GAAP rules that stems from this idea of conservatism is the establishment of contingent liabilities. On the 15th of the next month. For example. 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. 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. then they must disclose it when they know about it. the company would record its portion of payroll expenses due to the government: CPP Expense ($7. If a contingency meets the first criteria but not the second. as done above. This principle states that.000. The justification is that the financial statements should not be misleading or give false hope or information to any reader. or simply lumped in with Wages Expense.
000 x 4%) Warranty Liability 12. in order to adhere to the matching principle.000 This entry not only matches the expense to the period when the revenues were generated. v. the company pays $10. When a company sells a product that has a warranty. Again. we must record the associated expense in the period when the .000 10.000 12. in the same scenario.1. in the same scenario. a company sells vacuum cleaners that come with a 2-year warranty.Introductory Financial Accounting. Another example of matching has to do with warranties. The company estimates that warranty expense. The journal entry to record warranty expense for the year would be: Warranty Expense ($300. your lawyer felt you would lose. but you would not have to record the loss or the liability. then you do not have to do anything because you do not meet either of the criteria for recording a contingent liability. your lawyer felt you would win. The warranty expense is normally determined through evaluating historical data and coming up with a % of sales that represents the future warranty costs. but there was no legal precedent for the amount that would be awarded and therefore are unable to estimate the future loss. on average. let’s assume that during the next year. You would simply write a note in the financial statements disclosing the lawsuit.000 to repair various vacuum cleaners that are under warranty. 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. If. The journal entry would be: Warranty Liability Cash/Inventory/Wages 10. This principle states that for all revenues generated in a specific period. Total Sales for the year totaled $300. such as wages. For example. This principle is the one that guides us when making adjusting entries at the end of the year with regards to expenses. all expenses related to those revenues should be recorded at the same time. is 4% of sales.000. 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.1 Page 103 If. Warranties & Premiums Another of the guiding principles of accounting is the matching principle. Continuing on with the same example. that have been incurred but not paid. and the fact that you were likely to lose.
1. The format for solutions using a financial calculator is as follows: N 5 I/Y 6 PV X PMT FV 1000 Enter Compute In the above example. pensions and other more complicated longterm liabilities in this section. The farther in the future you are to receive the funds. . you have determined that only 40% of your customers will redeem their coupons. To record the premium liability at the end of the year. If you are going to be receiving money in the future. For example. The premise behind this is that a dollar today is not worth the same as a dollar received tomorrow. they receive 1 coupon. They can then redeem 10 coupons for a watch valued at $10. We will not get into a discussion of leases.000 32. Long-term Liabilities Long-term liabilities are defined as liabilities that would not be reasonably expected to be liquidated within a year. or a year from now.1 Page 104 original sale is made. Your sales for the year were $800. we are trying the calculate the present value of $1. for every $10 your customers spend. longterm leases and pension obligations.000 to be received in 5 years from now at an interest rate of 6%.000 Whenever coupons are redeemed. Furthermore. you are taking on the risk that the money might not be repaid at all.000 32. These typically include long-term bonds.000. v.000 coupons x 40% = $32. We will instead focus on long-term bonds. Based on past redemption data.Introductory Financial Accounting. the premium liability account is drawn down. notes payable. one of the most frequently used financing instruments in business.000/$10 = 80. then you are missing out on the opportunity to invest that money today and earn interest on it. or ten years from now. the greater the “discount” or decrease in the dollar value will be. the journal entry would be: Premium Expense* Premium Liability * $800. The Time Value of Money Before we begin our analysis of accounting for bonds we must first discuss the concept of time value of money. The combination of these two facts results in a dollar today being worth more than a dollar received in the future.
Introductory Financial Accounting. v. you need to do the following: set the calculator to accept one payment per year as follows: 1 2ND N You only need to do this once. the amount would grow to $1. Assume you inherit $1.1 Page 105 With the Texas Instruments BA II Plus.000 from your mother 5 years from now.000 from your favorite uncle.000. what is that $10.26.542.000 per year for the next 30 years. You want to be able to withdraw $60. how much of the $1.000. This means that if you were to invest $747. 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. press CPT and the TVM register you are attempting to solve for.An annuity is defined as a series of identical cash flows that end at a specified time.472.26 today (money out of pocket and therefore the negative sign) and invest it for 5 years at 6% compounded annually.Assume you are going to receive $10.1.58 PMT FV 10000 Enter Compute Present Value of an Annuity .000.47 PMT 60000 FV Enter Compute . If the current and expected future rate of return is 6%.000 will you have to set aside in order to set up this annuity? N 30 I/Y 7 PV X= $744. Calculating the Present Value of a Future Single Sum . If i=7%. in this case PV the answer provided is -747. enter the numbers above in the TVM memory registers to solve.000 worth in “today’s dollars”? N 5 I/Y 6 PV 7.
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. and the bonds will sell for a value less than the face value of the bond. This is because the buyer of the bond gets a higher return by investing in the bonds. For example.000 in the bank. Coupon rate = Annual Coupon Payments/Face value Yield-to-maturity (YTM) – the rate of return that bondholders expect on the bond given its risk. as well as make interest payments on the stated amount. Also called the market rate. It is rare that the yield-to-maturity rate and coupon rate are the same. then the bond will sell at a premium. Coupon Rate – the stated interest rate to be paid on the face value. What is your monthly payment to the manufacturer going to be? N 3 I/Y 6.5 PV 80000 PMT X= $30.Introductory Financial Accounting. The market takes this into consideration.10 FV Enter Compute Your company is purchasing a piece of equipment costing $80.1. then the bond will sell at a discount.000.992. if you issue a bond with a coupon rate of 5% and the YTM is 6%. A few definitions: Face Value – the stated amount of the bond and is equal to the redemption value of the bond on its maturity date.206. 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%. and therefore is willing . Assume the rate is 7%. v. If the YTM > Coupon Rate. If the YTM < Coupon Rate. Coupon – the amount of semi-annual interest payments to be made on the bond.You have retired with $675.1 Page 106 Annuity Payment Calculation . This is because the buyer of the bond could get a higher rate on the open market (the YTM) than they can from investing in the bond (the Coupon Rate).5% on a 36-month loan. how much can you withdraw each year? N 25 I/Y 7 PV 675000 PMT X= $57. The manufacturer is offering you financing at a rate of 6. You expect to live another 25 years.
Example . The Present Value of the bonds.1. therefore it will have to be cut in to reflect the situation. 1.829. we have to sell our bonds at a discount.451 . the YTM is normally expressed as an annual rate.829.829. N will equal the number of coupon payments left.000 of bonds. not the number of years. this $58. Furthermore.451 1. 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. v.000 coupon payment. The Coupon Rate = 5. 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. We have already calculated that we will be writing a cheque for $58. or the amount that we would have received in proceeds would be equal to $1. This is less than the face value of $2.000.829.000 is not our interest expense. This is because our coupon rate of 5.000. 20x8 you issue $2. because PMT is equal to the payment made every six months.000. The PMT & FV remain the same.Introductory Financial Accounting. we must adjust the other factors in the formula to a “6-month” basis.5% $2. In order to attract investors. Interest will be paid semiannually on June 30 and December 31.On January 1. However.8% and they mature in 10 years.8% x = $58.000 x 5. How much would be raised through this bond issuance? N 20 I/Y 3.000 to cover our coupon obligation.451 PMT 580002 FV 2000000 Enter Compute 1 2 YTM of 7% / 2 = 3.1 Page 107 to pay more than face value for the bonds in order to reap this benefit.000.8% is less than the market rate of 7%. As such. every 6 months.51 PV X= $1. YTM = 7%.451.
therefore.000. At the time of settlement.835.301) $1.000 2.451 x 7% x Bonds Payable Cash ) 64.000 Note that the $6. the entry for interest expense would be: Interest Expense (1.031 6.000 After all 20 interest payments have been made.000 . you would record the following journal entry: Interest Expense (1. On December 31st.482 x 7% x Bonds Payable Cash ) 64. This will be the amount used to calculate the interest expense on December 31st.482.242 58. Continuing our example.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.Introductory Financial Accounting. v.000.1.031 58.451 + 6. the journal entry will be: Bonds Payable Cash 2.000.000. on June 30th. give or a take a few dollars for rounding.835.829.242 6.301 credit to Bonds Payable increases the carrying value of the bond payable account to (1. the balance in the Bonds Payable account will have been written up to $2.829. 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.
Introductory Financial Accounting.1 Page 109 Problems with Solutions Problem 6-1 – Multiple Choice Questions 1. Which of the following statements is correct? i) The bond was issued at a premium ii) The interest expense for the year will be more than $800.1. Gallaghar Ltd. On January 1. 10 year 8% bonds priced to yield 6%. 20x7. Which of the following items is not a contingent liability? a) Premiums offered to customers b) A risk of loss to uninsured property due to fire or other casualty c) Additional wages that may be payable on a dispute now being arbitrated d) Estimated claims under a service warranty on products sold 3. Which of the following is a characteristic of a contingent liability? a) It definitely exists as a liability but its amount and due date are indeterminable b) It is accrued even though not reasonably estimated c) It is not disclosed in the financial statements d) It is the result of a loss contingency 2.000 iii) The interest expense for the year will be less than $800.000 iv) The bond was issued at a discount a) b) c) d) iv) only i) and iii) i) and ii) ii) and iv) . Issued $10 million face value. v.
a company inaugurated a sales promotional campaign on June 30.000 e) $20.00 and 5 coupons must be presented by a customer to receive a premium. 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. whereby it placed a coupon in each package of product sold.000 . 6. 20x8? a) $4. 20x8.1 Page 110 4. d) It need not be disclosed. Each premium costs the company $2. 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. v.Introductory Financial Accounting.000 23. c) It should be reported as part current liability and part long-term liability.500 What is the estimated liability for premium claims outstanding at December 31. How should any liability for the warranty be reported? a) It should be reported as a long-term liability. the following information is available: Packages Sold Premiums Purchased Coupons Redeemed 150.1. the coupons being redeemable for a premium. (2) a oneyear operating cycle.400 d) $18. Assume that a manufacturing corporation has (1) good quality control.300 b) $8. even though the amount of the loss cannot be reasonably estimated 5. In an effort to increase sales. (3) a relatively stable pattern of annual sales.000 10. When should a contingent liability be accrued? a) When it is certain that funds are available to settle the disputed amount b) When an asset may have been impaired c) When the amount of the loss can be reasonably estimated. 20x8. The company estimated that only 30% of the coupons issued would be redeemed. For the 6 months ended December 31.600 c) $9. b) It should be reported as a current liability.
000 40.000. and data shows that approximately 55% of your customers redeem their coupons. You have been running this program for several years.1.000. Required – Prepare all journal entries related to the warranty for the current year.000 and actual costs incurred to service warranties during the year amounted to $130. Sales for the current year were $3.500 coupons Problem 6-3 Company X provides a 3-year warranty on all of the products it sells. 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.1 Page 111 Problem 6-2 You run a computer repair company.000 and it is estimated that the warranty expense is equal to 5% of sales.Introductory Financial Accounting. then receive 1 coupon. v. In order to increase customer loyalty in this fiercely competitive environment you have started a coupon program. 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 22. They can redeem 15 coupons for a $25 iTunes gift card.
The bonds pay interest semi-annually on December 31 and June 30 and are due in five years.000. Gamma Corporation issued bonds with a face value of $500.000 and a coupon rate of 10%. Assume that the going market interest rate for similar bonds on July 1. 20x7. 20x6. Coupon payment dates are June 30 and Dec 31 of every year. 20x1 and the first two interest payments.1 Page 112 Problem 6-4 On July 1. 2.800 Total debits during the year $6. Problem 6-6 The following is the general ledger account for estimated warranties of McNeil and Grace Ltd. Required – Prepare all journal entries with regards to this bond for the years 20x4 and 20x5. The company issues warranty agreements immediately upon the sale of an automobile.000 of 8. What is the dollar value of warranty repairs performed in 20x7? What is the warranty expense for the year 20x7? At December 31. 3. The bonds mature in 15 years.1. what is the estimated liability for future warranties? At December 31. automobile dealers. for the year 20x7. v. Assume that the Kaplan Corporation as a December 31 year end.. 20x4. 20x1.Introductory Financial Accounting. Problem 6-5 The Kaplan Corporation issued $10. Warranty Liability Dr Cr $10.5% coupon bonds on December 31. Required – Prepare the journal entries to record the issue of the bonds on July 1.000 Opening balance Total credits during the year Required – 1. The yield to maturity on December 31 was 8%.200 5. 4. what was the estimated liability for future warranties? (CGA Canada) . 20x1 is 8%.
The Interest Expense for the 1997 year will be more than $80.591. They were issued at a price of $1. uses the effective interest method to calculate interest expense on these bonds.000. indicate whether each of the following statements would be true or false. Required Prepare all journal entries for the life of this bond issue. GHI’s year end is December 31. 4. The cash outflow towards interest on the bonds will be more than $80.000 face value.000. 9% bonds on January 1. issued $1 million face value. Interest on the bonds is paid semi-annually on December 31 and June 30.000.1. (CGA Adapted) Problem 6-8 On July 1. (CGA Canada adapted) Problem 6-9 On January 1. 20x6. 12% coupon bonds. b. v. 2.171. c. 8% bonds. issued $1 million semi-annual. Required – 1. 3. 20x7. 20 year. 20x6.591 was calculated. to yield 10%.171.1 Page 113 Problem 6-7 GHI Company issued $500. as the market rate was 10%. Alpha Beta Ltd. The Interest Expense will be the same every year. Show how the $1. Required If Adrdalan and Baker Inc. d. three-year. 20x7. Ardalan and Baker Inc. Prepare the journal entry(ies) to record interest expense and coupon payment on June 30. Prepare the journal entry to record the issue of the bonds at July 1. (CGA Canada adapted) .Introductory Financial Accounting. The bonds were issued at a discount for $897. 20x6. face value.000. The Interest Expense for the 1997 year will be less than $100. 20x6. Prepare the journal entry(ies) to record interest expense for the period ending December 31. and pays interest on July 1 and January 1. 10-year. a. The bonds were sold at a yield of 8%.
000 When common shares are repurchased. a company cannot purchase its own common shares.000 cash. Dividends become a liability of the corporation only when the board of directors declares them. Common Shares Common shares typically have the following features: • they provide the right to vote at annual meetings. The corporation is under no obligation to provide a financial return to common shareholders.000 $250. the journal entry would be: Land Common shares $250.000. it can be drawn down. Shareholders’ Equity As mentioned in Chapter 1.Introductory Financial Accounting. v.e.000 $100. then the journal entry would be: Cash Common shares $100. Retained earnings represent the cumulative earnings of the corporation less any dividend distributions to its shareholders. the shares must be cancelled (i. Contributed capital comprises of the investment made in the corporation by its shareholders. if common shares are issued for $100. If the book value per share is less than the cash paid out to retire the shares. meaning they never become due.000 If common shares are issued in exchange for a parcel of land whose fair market value is $250.1. . and then re-sell them). Common shares can be issued for cash or any other asset. 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 greater than the cash paid out to retire the shares. The debit to the common shares account is equal to the weighted average book value per share times the number of shares retired. then the debit required to balance the journal entry is allocated as follows: • if there is any Contributed Surplus relative to common shares.1 Page 114 7. For example. we credit an account called Contributed Surplus for the difference. hold them. and • they are a perpetuity. • upon liquidation of the company. that is. any cash remaining after all obligations have been settled revert back to common shareholders. Shareholders’ Equity is fundamentally made up of two elements: contributed capital and retained earnings. any dividend declarations are at the sole discretion of the company’s board of directors.
800 32.500.000.000 321.000 common shares in exchange for land valued at $1. 20x6 was as follows: Common shares.000 $2.000.500.800 260.000 Jun 16 Cash Common shares Common shares (10.000 + 1.500.000 Book Value per common share: = $18.000 Mar 18 Apr 30 Balance in common share account: = $15. Example – The Noor Company’s shareholders’ equity section at December 31.000 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 Issued 250.500.000 1.000 + 2.150.000 common shares for $2.500.000.000.500.000 common shares at a total cost of $260.Introductory Financial Accounting.000 / 1.09 7.000 = 1.000 186.500.000 x $16.000 = $18.091) Contributed surplus Cash 1 $2.150.500.1 Page 115 • any remainder gets debited to Retained Earnings.612) Contributed surplus Retained earnings Cash Aug 18 .000 common shares for $7.000 1.000.100 280.000 7.1.000.000 The journal entries to record the above transactions are as follows: Jan 15 Cash Common shares Land Common shares Common shares (20. v.000 common shares at a total cost of $280.000 + 50.100 61.000 $15.000 12. 1.000.500.000 Number of common shares outstanding: = 1.800 61.000 x $18.000.000 + 100.000 cash Retired 10.000 = $16.000 Retired 20.000 cash Issued 50.000.
150.000 = $25.000 . the corporation is under no obligation to provide a financial return to common shareholders.000 = 1.000 – 321.1 Page 116 2 Balance in common share account: = $18.500. It is now December 1. the preferred dividends for the year 20x6 must be paid: 100.600. • like common shares.380. First. they are a perpetuity.000 Next.000 The preferred share dividends were last paid on December 31.000.000 = $18.000 shares x $8.800 + 7. Dividends become a liability of the corporation only when the board of directors declares them.678. 1. $8.678. 20x6 and management wants to pay a dividend of $5 per common shares.000 – 20.000 40.000 shares outstanding Retained earnings $35.000 10. cumulative.Introductory Financial Accounting. v.500.200 Number of common shares outstanding: = 1.000 Book Value per common share: = $25.1.00 x 2 years = $1.000. However. in most cases preferred shares are cumulative. any dividends in arrears due to preferred shareholders must be paid before any dividends can be paid to common shareholders.000.00 x 1 year = $800.000 shares outstanding Preferred shares. 20x5 is as follows: Common shares. This means that if dividends are missed.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). 100. that is.000.000 + 250. Like common shares. any dividend declarations are at the sole discretion of the company’s board of directors.200/ 1. the preferred dividends in arrears for 20x4 and 20x5 will have to be paid: 100. 20x3. Example – The Jarvis Corporation’s shareholders’ equity as at December 31.380.000 shares x $8. • they carry a stated dividend per share.00.
.Introductory Financial Accounting.000 + 800. the dividend to common shareholders can be paid: 1. For example.000 The total dividend to be declared will be: $1.000 shares.000 shares of shares before the split. In order to reduce the share price.000. v. Any premiums paid on retirement of shares are also charged to retained earnings.1. There is NO journal entry required when a stock split is declared. the company will split the stock.1 Page 117 Finally.000 + 5. 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 shares x $5 = $5.000.000 shares as a result of the stock split resulting in a total of 2. the following entry is made: Dividends payable Cash XXX XXX XXX XXX Retained Earnings Retained earnings represents the accumulated earnings of the corporation net of any dividends paid. All that happens is that the number of shares issued changes.000. this same shareholder will receive an additional 1. the stock may become unattractive to small shareholders who have to disburse larger sums in order to acquire shares of the corporation.000 = $7. a 2:1 split means that the number of shares outstanding will double.000 Stock Splits When the stock price of a corporation is high.600. If a shareholder owns 1. This will result in the share price dropping by half.400.
beginning of year Premium on redemption of shares Net income (loss) for the year Dividends Retained earnings. end of year $ XXX -XXX ±XXX -XXX $ XXX .1 Page 118 The statement of retained earnings is as follows: Retained earnings. v.Introductory Financial Accounting.1.
1. XYZ Corporation has 150.000 common shares outstanding. v. d) The number of common shares outstanding will be 250.1 Page 119 Problems with Solutions Problem 7-1 – Multiple Choice Questions 1. Which of the following statements will be true when the stock split is accounted for? a) Retained earnings will be reduced by $4. .000. The shares were selling at $30 each when management announced a three-for-two stock split. c) The number of common shares outstanding will be 225. b) Shareholders’ equity will increase by $3.000.000.Introductory Financial Accounting.000.500.000.
000 common shares. a new company. Hilary and Sam Corporation completed the following transactions: February 2 February 10 February 15 February 26 February 27 February 28 Issued 9. Declared a 2 for 1 stock split. Declared cash dividends on the preferred shares. 2. Prepare the shareholders’ equity section of the Payne and Papineau Inc.1.000 shares to Sam in return for cash equal to the shares’ market value of $6 per share. v.000 common shares for cash of $12.000 $6 non-cumulative preferred shares and 100. Record the transactions in journal entry form.000. to issue 10. Issued 400 preferred shares to acquire a patent with a market value of $40. Required 1.Introductory Financial Accounting.32 per share.000 common shares to Hilary and 12. Issued 2.1 Page 120 Problem 7-2 The articles of incorporation authorize Hilary and Sam Corporation.000. balance sheet as at February 28. Net income for the month was $56. Declared cash dividends on the common shares in the amount of $0.000 . In its first month.
Provide the journal entries for each transaction above. is authorized to issue 100. Required 1.000.000 common shares at $115 per share. b. Issued 1. Issued 2. . The equipment had a fair market value of $40. During the first year of operations the following events occurred: a. $1. 2.00 common share dividend h. Declared a cash dividend on preferred shares. Prepare the shareholders’ equity section of the Statement of Financial Position. Issued 1.000.000 common shares and 50. g. cumulative preferred shares. The convertible bonds were issued earlier in the year.500 common shares at $120 each. Issued 1. d. c.000 preferred shares at $20 each.000 and book value of $53. Declared and paid a $5.000 for the year. v. Convertible bonds with a face value of $50.000 were converted into 500 common shares. Paid the preferred dividend.1 Page 121 Problem 7-3 M-F Inc.00. f.1.000 preferred shares in exchange for equipment. Net income was $64.Introductory Financial Accounting. e.
just the integration of previously covered materials. Therefore.1 Page 122 8. There is no new material.Introductory Financial Accounting.1. Enjoy! . 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. the only materials in this chapter are the problems with solutions. v.
7. 2.052. .000 176. The building is being amortized on a straight-line basis over 40 years.1 Page 123 Problem 8-1 The Haider Corporation’s post-closing trial balance at December 31. 20x5 is 8 years.5% of sales.600 150.000 1. The company provides a one year warranty on its products.000 34.400 Additional information 1.000 $23. The patent remaining useful life at December 31. The face value of the bonds is $400. the coupon rate is 6.400 40. 5.1. The prepaid insurance is for a one year policy taken out in 20x5 that expires on March 1. The equipment is being amortized using the double declining balance method. The average useful life of equipment is 10 years. The bonds were issued on January 2.5% and the yield to maturity at the time the bonds were issued was 6%.000 shares of common stock outstanding. 20x6.600 12.000 300.000 127. 20x1. The bonds mature on December 31.000 145. 4. Coupon payment dates are on June 30 and Dec 31. The company uses a FIFO periodic inventory system. 6.400 Cr. There are 10. v.000 320.Introductory Financial Accounting.000 5.000 419. 8. Cash Accounts receivable Allowance for doubtful accounts Inventory Prepaid insurance Land Building Accumulated amortization – building Equipment Accumulated amortization – equipment Patents Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Common stock Retained Earnings $36.000 120.000. 3.052.000 38.200 $1.000 144.000 13. Warranty expense is estimated at 1. 20x20. 20x5 was as follows: Dr. $1.
000.000 26. Total sales on account were $1. 20.000 was returned to suppliers. 4. 12. 5.000 The following adjustments need to be made at year-end: 17.600.000 22.400 130.000 23. Operating expenses paid $945.000 43. The inventory was counted on December 31. .000 30. 6.000 12. 11. 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. Estimated % Uncollectible 3% 7% 20% 50% An adjustment is made for insurance expense. equipment and patents.000. 21. 20x6 and the total cost of the inventory was determined to be $378.000 common shares on Aug 23 Insurance policy taken out on March 1 – one year policy.000.000.000 2. 7. The warranty expense for the year is accrued.000.1 Page 124 The following transactions took place during the year: 1.000 40.000 320.Introductory Financial Accounting.000. Accounts written off totaled $34.000. 9. 14 15.000 $222. The aggregate net realizable value of the inventory was determined to be $365. 13. an additional 3. 3.520. Inventory costing $16. On March15. 16. The accounts receivable aging schedule is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $144. 10. Amortization expense on the building. Inventory purchased on account totaled $960.1. Recoveries of previously written off accounts receivable totaled $5. 2. Cash disbursements were as follows: 8. 19.000 25.000 common shares were issued for $75.000 18. Cash collections on accounts receivable totaled $1.000.
b. Dividends of $80. Salaries payable at December 31. The income tax expense is 40%. Prepare journal entries for the above transactions and enter all the above transactions in T-Accounts.000 were declared and paid on December 15.1.1 Page 125 22. c. 24. Required – a. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . 20x6. 20x6 amount to $6. v.Introductory Financial Accounting.700. 23.
. were debited to warranty liability when paid. Past history indicates that 3% of units sold require repairs at an average cost of $40 per unit. pacific Company sold 10. 20x5. During the year. b. h. The note is payable on March 31. which cost $80. 20x5. You are requested to prepare the adjusting entry that should be made for each of the following items (note that the original entries have been made.500. $4. d. c. The estimated loss rate on bad debts is 3% of sales. The company purchased a patent on January 1. g. supplies of $21. On January 1. The company received from a customer a 9% note with a face amount of $12. j. 20x5. you do not need to provide the original entry): a. totalling $8. Credit sales for the year amounted to $320. i. At the end of the year. the company signed a $60. Unpaid and unrecorded wages incurred at December 31 amounted to $4.e. The estimated useful life is 10 years. f. v. for one year. 10% note payable. On April 1. the patent account was debited and cash credited for $11.000. The sales have been recorded. which was debited to rent expense.000.600.900.Introductory Financial Accounting. 20x5.600. Pacific Corporation had a supplies inventory of $4. 20x6. for the face amount plus interest for one year.000.000.000. The company paid a two-year insurance premium in advance on April 1. and sales revenue was credited on the date of sale. e. On that date.700.1 Page 126 Problem 8-2 Pacific Company adjusts and closes its books each December 31. at a cost of $11. cash was debited and notes payable credited for $60. amounting to $9.1. The company rented a warehouse on June 1. Use straight-line amortization. amounting to $9.200 was on hand. No warranty expense has been recognized.900 were purchased and debited to supplies expense. 20x5. Machine A. The note was dated September 1. The patent has an estimated useful life of 17 years and no residual value. is to be depreciated for the full year.900. September 1. 20x5. inventory of $9. 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. During the year. i.000. costs incurred for the warranty to date.000 units of a product that was subject to a warranty. and the residual value. Notes receivable was debited. which was debited to prepaid insurance.800. 20x5. On that date. and the adjusting entries are to be made. It is now December 31.
ABC Corporation wrote off a $16. .1. v. l.000 after all the above adjustments.1 Page 127 k.Introductory Financial Accounting.000 bad debt. Pre-tax income has been computed to be $80. Assume an average income tax rate of 30%.
Sales have increased 30%. 20x2.500 22.1 Page 128 Problem 8-3 Anne Spier has prepared baked goods for resale for several years now. Spier assembled the following information from the corporation's cash basis records for use in preparing the financial statements requested by the bank.500. on January 1.000 1.800 5. Spier incorporated this business as MAS Inc.000 shares of common share for $2.1. Kelowna Bank & Trust has asked Spier to submit an income statement for MAS Inc.Introductory Financial Accounting.880 $33. Spier wishes to purchase some additional baking equipment and to finance the equipment through a long-term note from a commercial bank.920 3.770 130 5. 20x2. Anne Spier is the principal shareholder of MAS Inc. and additional equipment is needed to accommodate expected continued growth. 20x2.600 2. annually since operations began at the present location. with an initial shares issue of 1. v. 1. Sale of common shares Cash sales Rebates from purchases Collections on credit sales Bank loan proceeds $ 2.320 2. Baking materials Rent Salaries and wages Maintenance Utilities Insurance premium Equipment Principal and interest payment on bank loan Advertising $14. She started a baking business in her home and has been operating in a rented building with a storefront.400 1. for the first five months of 20x2 and a balance sheet as of May 31.500 110 4.466 . The following amounts were disbursed through May 31.000 312 424 $31. The bank statement showed the following 20x2 deposits through May 3l.
. 20x2. 20x2 (b) A balance sheet as of May 31. and no cash was transferred from the unincorporated business to the corporation. The other employees had been paid through Friday. 20x1 were not included in the corporation's records. 20x2.226 at May 31.1 Page 129 3. 20x2. 8.Introductory Financial Accounting. prepare for MAS Inc. Anne Spier receives a salary of $750 on the last day of each month. 20x2. Rent was paid for six months in advance on January 2.000 were purchased on January 2. There were no materials in process or finished goods on hand at that date. New display cases and equipment costing $3. 20x2. 20x2. A one-year insurance policy was purchased on January 2. Customer records showed uncollected sales of $4. Required Using the accrual basis of accounting. 10. October 1. No materials were on hand or in process and no finished goods were on hand at January 1. 20x2. and have an estimated useful life of five years. 5. 6.840 were on hand at May 31. 20x2.1. is subject to an income tax rate of 20%. 11. May 25. Baking materials Utilities $ 256 270 $ 526 4. July 1. The loan requires quarterly payments on April 1. 12. 7.: (a) An income statement for the five months ended May 31. Baking materials costing $1. 9. Payments and collections pertaining to the unincorporated business through December 31. and were due an additional $240 on May 31. were as follows. These are the only fixed assets currently used in the business. The note evidencing the 3-year bank loan is dated January 1. v. and states a simple interest rate of 10%. 20x2. and January 1 consisting of equal principal payments plus accrued interest since the last payment. Unpaid invoices at May 31. 20x2. 20x2 MAS Inc. Straight line amortization is to be used for book purposes.
for Morrow Wholesale. 20x2. respectively.000 146. During 20x2 these shares were exchanged for land and a gain of $4.000. b) Cash balance in cheque book.20x1 Deposits during 20x2: Cash sales Proceeds of $5.000 and $20. At the beginning of 20x2.500 $205.000.1 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.000 of its common shares for $25 per share.500 c) d) e) f) g) h) i) j) Morrow had no outstanding payables at the beginning of 20x2 but owes creditors $36.600 have accrued but have not been paid. The inventory at the beginning of 20x2 was $80. Morrow's cost of goods sold is 80 percent of sales.000.000 $406.000 was recognized.1.000 for unpaid purchases of merchandise on December 31.000 note issued on July 1 and bearing interest at 12%. Prepare an income statement for the year ended December 31.000 $250. At the end of 20x2. and a balance sheet at December 31. . v. was on hand.000) Cheques written during 20x2: Purchases of merchandise Salaries Advertising (to be run in 20x3) Miscellaneous expenses $ 24. During the fourth quarter of 20x2. The uncollected receivables were written off as miscellaneous expenses in 20x2. In 20x2 Morrow began selling on a cash-only basis.000 5. As the senior auditor in charge of the audit. a cash dividend of $10. There have been no other common share transactions.000 10.000 $180.000 5. 20x2.000 5. you have been presented with the following information: a) Morrow is incorporated and initially sold 11. The sale of equipment was made on December 30.000. sales salaries of $1. 20x2. 20x2. Retained earnings at the beginning of 20x2 totalled $63.000 10.000 was declared and is to be paid in January 20x3. $20. All equipment is depreciated on a straight-line basis over ten years with no estimated salvage value.Introductory Financial Accounting. payable annually Customer collections Proceeds on sale of fully depreciated equipment (original cost. equipment with a cost and accumulated depreciation of $80. December 31. Receivables at the beginning of 20x2 totalled $ 155. Morrow's only other asset at the beginning of 20x2 was an investment in Honeydew common shares.
Try to keep in mind that when you are working with this statement.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 were declared and paid to shareholders during the year. This statement is broken into three distinct sections. this generates cash. If a company issues new debt.000 300. is based on the accrual system.000 450. GAAP suggests a preference for the direct method. and shows how a company’s actions have affected its net cash position throughout the period.000 180.000 20x7 $ 250. however. Components of the Statement of Cash Flow There are three sections to the statement of cash flow: Cash from Operations – this section shows how much cash is generated or used up by the firm in its daily operating business. either the direct or indirect methods can be used. this uses cash Example . as accountants. Cash from Financing Activities – this section looks at any changes in the long-term liability and shareholders’ equity section of the Statement of Financial Position.000 650. If a company retires shares.Introductory Financial Accounting. If a company pays dividends.000 150. There are two distinct methods in presenting cash flow from operations: the direct and the indirect method. The Statement of Cash Flow The statement of cash flow shows a company’s inflows and outflows of cash during a particular period. your main concern is incoming and outgoing cash. this generates cash. Some students find the statement of cash flow to be a challenge because they are still thinking with an “accrual” mind. Both methods will be covered later in this section. if a company pays off or retires debt this uses cash. v. . If a company issues new shares.000 215.000 Additional information: Dividends of $150. Most of what we do.1 Page 131 9. then this uses cash.1.
and changes in them from one period to the next. $215. we remove the asset and all associated accumulated amortization.000 Net Income = $235. Example .000 (10.000 (150. we know that retained earnings increased by a net of $85.000 (60.000 To calculate the company’s net income for 20x8. and the NBV (cost – accumulated amortization) is recorded as a gain/loss on sale.000 + dividends of $150.000 (170. we can calculate the Net Income. the net income for the year is $85.000 (180. Cash flow from Investing Activities – this section discloses cash that was generated or used through the sale or purchase of long-term assets. The difference between the proceeds.000 = $235. Often.000.000 Alternatively. we analyze at the Retained Earnings Account: Opening Retained Earnings + Net Income .000) 100. Rearranging the formula.Introductory Financial Accounting. Given that dividends decrease retained earnings.000) $ 170.Dividends = Closing Retained Earnings In the above case.000 = $300.000) 0 .000. we know all numbers in this formula except Net Income. Remember.$150.000 20x7 $ 300.1.1 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. when dealing with this section.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. we have to reconcile the long-term asset accounts. when a sale of a long-term asset is made. v.000) 200.000) 100. or cash we receive.000 + Net Income .000) 75.000 (30.
000 worth of equipment was purchased for cash during the year.000 with a NBV of $15.000 cash.000 (100.000 and the accumulated amortization was $60. If the gain on sale was $10.000 worth of common shares to the supplier. and essentially takes each income statement item and converts it into cash.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. it does not appear in this section. v.1 Page 133 Additional Information: • $50. then the cash proceeds on the sale of fixtures would have to be $15. 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) . All non-cash transactions are by definition excluded from the statement of cash flow.000) * The cost of the fixtures was $75. • new fixtures were purchased for $100. excluding interest payable.000. Note that because no cash exchanged hands for the purchase of the land.000 = $25. costing $75.000.000.000 giving a net book value of $15.000 + 10.000) 25. Cash Flow from Operations – Direct Method This method of determining cash flow from operations uses the income statement as its starting point. • the land was obtained through issuing $100. There are a minimum of four main sub-sections in determining the cash flow from operations (note that these are a minimum.000.1.000) ($125. • the original fixtures.000. were sold at a gain of $10. The cash flow from investing section of the Statement of Cash Flow would be as follows: Purchase of Equipment Proceeds on sale of Fixtures* Purchase of Fixtures ($50.
000 89.000 $135.400 .000 2.000 120.000 (20.000 20x6 $42.000 39.000 104.000 200.000 27. 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 10.000 21.000 23.000 (25.1.000 21.000 429.000 24.000 62.000 82.000 80.1 Page 134 Example – Calculate cash flow from operations – direct method. Comparative Unclassified Statement of Financial Position As at December 31.600 $ 67.000 15.000 46.000) 135.000 10.000 73. 20x7 20x7 ASSETS Cash Accounts Receivable Inventory Capital assets Less accumulated amortization LIABILITIES Accounts Payable Salaries Payable Interest Payable Taxes Payable Bonds Payable SHAREHOLDERS’ EQUITY Common Stock Retained Earnings $76.000 82.Introductory Financial Accounting.000 14.000 5.000 325.000 231.000 50.000 68.000 104. v.000 1.000 $172.000) $172.000 2.000 $660.000 12.000 8.000 5. Income Statement For the Year ended December 31.000 3. Jack’s Joke Shop Inc.
000 (6. Note also that although we combined all three expense items in one single calculation. and office & administrative salaries. 20x7. 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. then we collected more than we accrued and this would be added to sales.000 120. In this case.000) $231. we can simply analyze the difference. This means that we purchased additional inventory that is now sitting in our warehouse. Therefore. salaries expense. Conversely.000 Why did we subtract the $6.000 increase in Accounts Receivable. 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. we accrued more sales than we collected.1 Page 135 Cash collected from customers: Sales Less increase in accounts receivable $660.000 (2.1.000 2. We are not told what percentage of the total sales are made for cash. if accounts receivable decreased.000.000 198. therefore we reduce sales to calculate cash collected from customers.000 235. 20x6 and the balance at December 31. v. nor are we told how much of the 20x6 accounts receivable balance have been collected. However.000 $553. .000 Note that the starting point for each calculation is the following expense items: cost of goods sold. the amount of our Inventory account increased by $2. because we are told the balance at December 31. If accounts receivable increased.Introductory Financial Accounting. and which are made on credit. The first thing we do is adjust it to obtain the purchases made during the period. waiting to be sold.000) $654.000 2. then this means that sales have not yet been collected – that is. 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.
. any increase in the Income Tax Payable account would be subtracted from the expense to get to the total cash paid. Purchases for the year in this case would be $233.000) $9. Cash paid for interest: Interest expense Less increase in interest payable $15. Cash paid for taxes: Income tax expense Less increase in income taxes payable $21. If there is no such account. we owe $12. In this example.000 more this December 31st than we did last. This is why we add back the $2.000 ($231.000 + 2. like salaries payable. then this means that we would have purchased less than what was sold and we would have decreased COGS in order to obtain purchases.000).000 increase to COGS. and any decrease in liabilities is added. All other expenses. is subtracted from the expense to get to the total cash paid. should the opposite have occurred. if the Accounts Payable account decreases. there appears to be no associated statement of financial position account. then you simply include the full expense amount as the cash paid for that expense.1. If. are treated in the manner that the Salaries Expense was treated above. we would have subtracted the amount from COGS to get total money paid to suppliers.Introductory Financial Accounting. on the other hand.000. v. interest payable went up which means that we accrued more interest than we paid.600 The treatment for taxes is the same as for interest. and any decrease would be added.000 (1.1 Page 136 to calculate purchases. so we deduce the increase in interest payable to interest expense.600 (12. Note. we have to add the $2. then we have paid more to our suppliers than the purchases. In dealing with the change in accounts payable. we will subtract the $12. Again. as in the case of Office & Administration Expenses above. you start with the Income Statement amount and then account for any changes in the associated statement of financial position account(s). That is. other than interest and taxes. That is. like it did in the above example.000 from our Interest Tax Expense to get the total cash paid for taxes. Therefore. inventory decreased.000 In this case. Any increase in liabilities.000) $14.
600) $ 77.000 1.000) (9. The most common of these are amortization expense and gains/losses on the sale of capital assets.000 (6.000) 2.000) (2. We then add back any non-cash items that may appear on the income statement. 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. v. as well as all current payable accounts.Introductory Financial Accounting. Increases (decreases) in current liabilities are cash inflows (outflows).000) (2.400 . inventory.1.000 (553.000 $77.400 Cash from Operations – Indirect Method Under the Indirect Method.400 5. This would include changes in accounts receivable.000 12.Net Income. We then add or subtract any changes in the non-cash current asset and liability accounts.000) (14. we start with the bottom line .1 Page 137 To sum up: Cash flow from operations Cash collected from customers Cash paid to suppliers & for operating expenses Cash paid for interest Cash paid for taxes $654. Increases (decreases) in current assets are cash outflows (inflows.
v. term deposits and any highly liquid assets (i.400) Opening Cash Balance – December 31.Introductory Financial Accounting.000 Definition of Cash For purposes of the statement of cash flow.400) 34. readily convertible to cash) subject to an insignificant risk of change in value. let’s finish with the cash flow statement.1.400) Net Change in Cash ($77.000 + 67.400 + 0 – 43.000 $ 76. .000) (66. Cash from Investing Activities No activity $0 Cash from Financing Activities Proceeds from issuance of Common Stock Payment on Bonds Payable Payment of Dividend* *Opening R/E + Net Income – Closing R/E = Dividends paid ($23.000 (7.000 42.1 Page 138 To continue the example. 20x6 Ending Cash Balance – December 31.400 – 24. 20x7 30.400) (43.000 = 66.e. This includes cash. the term ‘cash’ is defined as ‘cash and cash equivalents’.
100 $146.000 450.000) 226.Introductory Financial Accounting.000 $750.000 80.000 79.000 (17.900 . Income Statement for the Year ended December 31.000 120.000 207.000 243. 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 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. v. Ginger’s Cookies Ltd.000 300.000) 15.000 7.1.
000 10.500 90.000 108.800 2.000 0 33.000 111. Required – a.Introductory Financial Accounting.200 $ 20.000 10.200 $ 27.400 158.000 40.000.000) $144.500 $ 19. b.000 61.400 6.000 45.200 80. costing $45. Prepare a Statement of Cash Flow using the Direct Method. was replaced by a new piece of machinery costing $125.000) $275.100 30. Ginger’s paid cash for the equipment.000 $144. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method. the only piece of equipment.000 (40.500 50. 20x6 20x6 ASSETS Cash Accounts Receivable Inventory Capital assets Less Accumulated amortization LIABILITIES Accounts Payable Salaries Payable Interest Payable Taxes Payable Bonds Payable SHAREHOLDERS’ EQUITY Common Stock Retained Earnings 50.000 47.100 $ 14.000 (7.400 $275.1 Page 140 Ginger’s Cookies Ltd. . v. Comparative Unclassified Statement of Financial Position as at December 31.000 117.000. 20x6.200 20x5 Additional Information: on January 2.1.000 7.000 125.000 43.
000 119.869.000 28.000 Current liabilities Accounts payable Salaries and wages payable Interest payable Income taxes payable $ 897.000 1.695.060.045.000.429.358.1 Page 141 Problem 9-2 The comparative statements of financial position of McDuff Ltd.000 82.091.000 Capital assets Accumulated amortization Bonds payable Mortgage payable Shareholders’ equity Common shares Retained earnings .000 (3.000 $ 4.000 1.000 20x2 $ 353.093.631.343. Statement of Financial Position December 31 20x3 Current assets Cash Accounts receivable Merchandise inventory Prepaid expenses $ 319.000 $ 4.000 2. are shown below.000) 1.000 3.000 5.000 $ 4.000 2.000 1.000 800.000 1.000 700.000 30.000 1.000 35.854.000 45.000 (3.000) 1.000 999.000 1.000 $ 4.000 508.000 $ 909.000 43.Introductory Financial Accounting.711.019.212.041.000 1.842.000 888.326.000 850. MCDUFF LTD.212.000 1. v.000 319.000 32.000 450.000 2.500.054.000 5.1.060.
000 700. 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. Amortization expense is included in Operating expenses. 20x3.000) $4. 20x3. for $80. Prepare the cash flow from operations section using the direct method.Introductory Financial Accounting. with a book value of $87.000 (61. b. Prepare a cash flow statement for the year ending December 31. v. .500. 3.000 were retired for $487. On August 31.000 550.000 2.1.000) (67.000) 489.000. McDuff sold capital assets that cost $158.400.1 Page 142 MCDUFF LTD. On April 15.000.000 (7. Use the indirect method to report the operating activities.000 250. Required a.000 Additional information 1.000. 20x3.000 $239. bonds with a net book value of $500.000.000 850. Income Statement For the year ended December 31. 2.
Income Statement for the year ended December 31.800 5.700 500 5.400 $ (3.000 600 20x4 $4.Introductory Financial Accounting.800 7. 20x5 and 20x4 reveal the following: 20x5 Cash Accounts receivable Inventory Prepaid insurance Accounts payable Salaries and wages payable Long-term loan payable Interest payable Required Prepare the cash flow from operations section as it would appear on the Statement of Cash Flow using… (a) The indirect method (b) The direct method (CGA Canada.000 1.800 7.700 4. v.300 2.000 39.000 5.1 Page 143 Problem 9-3 The following data are available for HHC Ltd.400) Comparative partial balance sheets at December 31.300 600 5.000 $ 165. 20x5 Sales Expenses: Cost of goods sold Salaries expense Insurance expense Depreciation expense Rent expense Interest expense Net loss $ 218.300 5.200 221.300 10.000 500 .300 1.1.000 1.700 8. HHC LTD. adapted) $ 4.
000 (101.’s comparative balance sheets at December 31.000 $ 40.000 92.000 423.000) $ 900.000 600.000 43.000) 25.000 32.000 Dec.1.000 18. 31 20x5 $ 26. 20x6 are as follows: TORAM LTD.000 $ 65.1 Page 144 Problem 9-4 Toram Ltd.000 4.000 $ 100.000 423.000) $ 681.000 80.000 39.000 300. and its income statement for the year ended December 31.000 Assets Cash Accounts receivable Inventory Long-term investment Land Buildings and equipment Accumulated amortization TORAM Ltd.000 119.000 (123.000) (22.000 $634.000 475.Introductory Financial Accounting.000 $ 699. v.000 0 85.000 0 0 58.000 (18.000 86.000 53.000 87. Income Statement for the year ended December 31.000 200. 20x5 and 20x6. Balance Sheets Dec.000 Net Change $ 24. 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 $ (18.000 144.000 Liabilities and Shareholders’ Equity Accounts payable Bonds payable Preferred shares Common shares Retained earnings $ 22.000 25.000 .000 85.000) $ 57.000) 0 (12. 31 20x6 $ 50.000 (12.000 463.000) $ 624.000 0 80.
for $30.000 and had $21.000 cash dividend. 3.1 Page 145 During 20x6. 5.000 of accumulated amortization. Issued $25. v.000 cash.000.1. b. 4. 20x6. (CGA Canada adapted) .000 of bonds payable at face value. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method. Purchased equipment for $20. the following transactions occurred: 1. Prepare a Statement of Cash Flow using the Direct Method.Introductory Financial Accounting. Required – a.000 cash that had originally cost $32. Declared and paid a $50. 2. Sold equipment for $7. Sold the long-term investment on January 1.
etc. i. The amount of cash expected to be invested in the firm's long lived assets as well as in working capital. 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. repayment of principal. The nature of the analysis of financial statement information is primarily in the form of ratios. Management's attitude toward future cash dividend policy.Introductory Financial Accounting. of course. 5. The amount of future cash flow to service debt requirements. Expected non-operating cash flows.. 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. Nonetheless.. The amount of future cash flow from random events such as windfall gain or casualties. historical information can be used to make projections and is sometimes extremely useful in this respect. 4. interest payments. from activities considered incidental to the firm's main function. the investor must predict those things that affect dividend policy. 8. However. sinking fund provisions. published financial statements are historical in nature and do not provide the information we have just outlined. Future cash flows from changes in the levels of investments made by shareholders and creditors.e.1. 2. be recognized. Financial Analysis Techniques 1.1 Page 146 10.e. i. Published financial statements are the sources of information generally available to users. v. Vertical and Percentage (common size) analysis . which the investor would like to predict. The limitations of using historical information must. 3. 6. 7. Net cash flows from future operations. Each of these eight variables that affect future dividend policy is in turn affected by others. The following are the variables that affect a firm's future dividend policy: 1. Horizontal (trend). In order to predict the company's future dividend policy.
369 606 200 $406 20x4 $8.073 354 $719 .673 827 273 $554 20x6 $13.882 627 207 $420 20x5 $11. the historical financial performance data for a company for the years 20x3 to 20x6 (all data is in millions of dollars) 20x3 Revenue Expenses Net income before taxes Income taxes Net income $7.509 7.546 1.975 7. or as compared to an amount of the preceding period.619 12.500 10.Introductory Financial Accounting. For example. v.1.1 Page 147 Horizontal analysis expresses financial data in terms of a single designated base period.
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
During 20x8.0 d) 8. 20x8. The beginning inventory for 20x8 was $30. v.000 c) $367. what effect will a payment to a creditor (account payable) on the last day of the month have? a) It will increase the current ratio b) It will decrease working capital c) It will increase working capital d) It will decrease the current ratio 3.000.Introductory Financial Accounting.500 b) $335. What were R’s total net sales for 20x8? a) $227.0. 20x7.500.000 at December 31.000 and the ending inventory for 20x8 was $120.1 Page 152 Problems with Solutions Problem 10-1 – Multiple Choice Questions 1. Net cash sales for 20x8 were $32. R Company’s net accounts receivable were $50.0 c) 6.500 d) $400.000 of inventory and had sales of $600.0 . If current liabilities exceed current assets. and $55.000 2.000. Which of the following ratios measures long-term solvency? a) Quick Ratio b) Days sales in accounts receivable c) Debt to equity ratio d) Current ratio 4.1. What was the inventory turnover for 20x8? a) 4.5 b) 5.000 at December 31. a corporation purchased $540. The accounts receivable turnover for 20x8 was 7.
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
000 700.000 1.000 700.000 $24.999.000 $3. v.000 1.956.380. are as follows.789.000 $20.808.000 2.324.000 $524.003.000 570.000 20x6 20x5 Fixed Assets – net $4.979.000 1.000 485.808.000 2.000 700.000 1.628.000 700.000 480.576.000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $560.114.000 1.000 .000 2.000 1.167.1 Page 157 Problem 10-3 The comparative financial statements for Rocky Mountain Camping Equipment Ltd.000 2. Balance Sheets as at December 31 … 20x7 ASSETS Current Assets Cash Accounts receivable Inventory $37.000 1.000 2.180.1.Introductory Financial Accounting.928.000 1.000 $3.889.000 $3.000 $4.000 800.000 650. Rocky Mountain Camping Equipment Ltd.679.000 809.000 524.000 2.000 $480.876.003.000 300.000 $3.000 820.956.
000 20x6 $1.000 100.000 463.100.000 65.000 5.000 $51.1.000 800.000.000 2.000 1.000 30. $2.000 635.Introductory Financial Accounting.000 $3.000 .000 100.000 137.000 1.000 81. v.000 700.700.000 56.300.000 60. 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.1 Page 158 Rocky Mountain Camping Equipment Ltd.
SOLUTION TO PROBLEMS Problem 1-1 1.039. 4.000 $999. 5.000 = $1.000/4 years x 6/12) = $35.Introductory Financial Accounting.000 – ($40. 6. v.999 + 40. 2. 3.1 Page 159 11. d b a d d d b c $40.999 .1. 8. 7.
800 33.000 Common Stock 20.000 BALANCE SHEET Accts.000 50.200 4.000 15.000 1.Introductory Financial Accounting.000 2.200 400 800 12 4 15 Inventory 25.000 .000 182.000 4.000 25. & Fixtures 15. Receivable 6.000 15.1.000 2.000 Acc. v.777 Bank Loan 20.000 1 3 Furn.000 190.1 Page 160 Problem 1-2 Part (a) Assets Cash 20.367 8.000 20. Amortization 500 11 10 Retained Earnings 10.000 Liabilities & Equity Accounts Payable 130.000 Accrued Liabilities 150 700 600 1.000 13 16 17 18 19 B 6 B Prepaid Insurance 1.000 1 4 7 8 B 2 3 6 7 B 8 10 14 5 9 B 2 Prepaid Rent 1.960 5.000 120.
960 5.500 700 2.000 3.960 Interest 300 150 450 Advertising 10 2.Introductory Financial Accounting.200 19 Income Taxes 5.000 INCOME STATEMENT Purchase Returns 15.000 5 9 B 15 15 14 B 7 15 11 Amortization 500 10 13 B 10 17 B Wages and Salaries 36.1.000 Revenues Sales 196.000 120.000 600 36.367 .000 170.000 0 Rent 2 10 18 B 1.600 Insurance 400 12 10 16 B Miscellaneous 1.000 1.000 15.1 Page 161 Expenses Purchases 50. v.000 0 Cost of Goods Sold 130.
.200 190.000 196.000 4.000 182. 4.000 300 130.000 36. 11.200 1.000 / 10 years x 4/12 $20.000 6.000 1.000 $20.000 3.500 10. 5.000 2. 3.000 4.000 20. 10.000 120.1.1 Page 162 Journal Entries – 1. 7. 8.000 1.800 500 500 2.000 2.000 120.000 15.Introductory Financial Accounting. 6. 9.000 20.000 50.000 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 $15.000 15.000 1.000 50. v.
000 x 1% Income tax expense Accrued liabilities Net income before taxes = $17.890 Income tax expense = $17.960 1. 15. 5. Insurance expense Prepaid insurance $1.000 700 700 600 600 1.1.960 15.367 5.000 130. 16. 150 150 14.367 .Introductory Financial Accounting.1 Page 163 12.000 15. 18. v.890 x 30% = 400 400 13. 17.000 15.000 170.000 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. 19.200 / 12 months x 4 months expired Interest expense Accrued liabilities Accrual for the month of October: $20.000 25.
000 130. v.000 25.000 15. Inc.Introductory Financial Accounting.000 8.000 2. Trial Balance As at October 31.277 $270.960 500 450 36.367 $270.000 Credit $ 500 25.600 2.000 10. Heavenly Books.000 5.1.000 800 1.777 20.000 20.000 400 2.1 Page 164 b.000 196.277 . 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 $33.200 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 $196.960 500 36. 20x2 $0 12. Heavenly Books.890 5. July 2.Introductory Financial Accounting. Inc.600 2.200 47.523 .367 $12.000 400 2. Income Statement for the four months ended October 31. 20x2 Net income Dividends Retained earnings. Inc.523 Heavenly Books. October 31. Statement of Retained Earnings for the four months ended October 31. 20x2 Retained earnings.1 Page 165 c.1.000 5.523 (10.340 450 17.000 66.000 130. v.000) $2.660 18.
000 61.300 .500 $76.000 53.1 Page 166 Heavenly Books. v.777 12.000 45. Statement of Financial Position as at October 31. Inc.523 22.Introductory Financial Accounting.000 25.000 2.777 20. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance Prepaid rent Furniture and fixtures Less accumulated amortization $15.000 800 1.300 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Accrued liabilities Current portion of bank loan Bank loan Shareholders’ Equity Capital stock Retained earnings $25.000 2.1.777 8.800 14.523 $76.000 500 $33.000 8.
500 $155.200 84.100 $9.1.beginning Net income Dividends Retained Earnings .100 3.600 4. 20x6 Retained Earnings . v.1 Page 167 Problem 1-3 Global Productions Inc.400) Cost of goods sold Gross margin Operating expenses Amortization Insurance Rent Salaries Supplies Telephone Operating income Interest expense Net income before taxes Income tax expense Net income 4.300 18.600 – 2.ending $0 9.200 3.400 .Introductory Financial Accounting.200 54.000 17.100) $7. 20x6 Net sales ($157. Income Statement for year ended December 31.600 13.800 2.000 4.300 21.500 (2. Statement of Retained Earnings for year ended December 31.000 71.500 Global Productions Inc.
800 19.800 $25.000 7. v.Introductory Financial Accounting.100 1.1.500 1.200 2.400 57.100 14.000 4.600 40.1 Page 168 Global Productions Inc.900 44. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Supplies Prepaid insurance Office equipment Accumulated amortization 24.000 49.100 87.500 1.400 $107. Statement of Financial Position as at December 31.000 9.600 50.200 $107.000 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Bank loan Shareholders' Equity Capital Stock Retained earnings $7.000 .
1 Page 169 Problem 1-4 a) Annual amortization expense for the machinery would be = $50.300 2.646 3.300 d) As of Wednesday. you would have earned of the revenue. $24 X = $6. you would have debited Prepaid Insurance and credited Cash for the full amount of $5.333 from Prepaid Insurance and record it as Insurance Expense for the period. However. you would have sent out 1 of the 4 magazines in the subscription. v.Introductory Financial Accounting.800 e) When you purchased the policy.300 revenue this accounting period. Amortization Expense Accumulated Amortization b) 3.250/year. Cash Unearned Revenue 24 24 As of April 30. Therefore. Therefore.800.000 X 8/12 = 3. as these expenses were incurred during the period. due from Big Al.646 for the current period. Insurance Expense Prepaid Insurance 3. you must record them as an expense of that period. it is appropriate for you to record it in this period.000/8 years = $6. therefore you will remove $5. in the amount of revenue earned during the period. therefore. Salary Expense Salaries Payable 1. To do this you would set up a receivable. the full amount would be recorded as an Unearned Revenue liability. your amortization expense would be = $6.250 X 7/12 = $3.1. The journal entry would be: Unearned Revenue Subscription Revenue c) 6 6 You have earned the $2.800 1.646 When you received the cash in January. However.333 . you only had the machine in use for 7 months. You have used 8/12 of the policy. Therefore. you will have accumulated 3 days worth of salaries that have not been paid. Accounts Receivable Consulting Revenue 2. we will record salaries expense and the accompanying salaries payable of $1.000.333 3.
000 covers a 6-month period. You will have to adjust for that fact that 5/6 of the payment has not been earned i. Therefore.750 4.000 is unearned..750 4.e.000 has been earned and should be included in revenue for this period.750 As of July 31st. or $1. you would have debited Cash and credited Unearned Revenue by $6.000 g) The $4.750 . You would remove the Prepaid Rent account to reflect that fact that you have “used up” the rent.000 1.1 Page 170 f) Each of the payments for $6. v. and therefore you would have incurred one month worth of Rent Expense. On December 1st. $6.Introductory Financial Accounting.750 you paid on June 30th represents Prepaid Rent.000 X 5/6 = $5. The first payment that you received on June 1st would cover the catering for June – November.000 each. that full amount would have been earned and recorded as revenue during the period. Rent Expense Prepaid Rent 4. Prepaid Rent Cash 4. Unearned Revenue Catering Revenue 1. and would be recorded as an asset on your accounts for the June30th period end. the second payment that you received on December 1st covers the period of December – May. you would have been in the premises for 1 month. However.1. No adjustment is needed for this.
8.000 + 10. 10.000 $1. 6.000 (sales) – 4.000 1.000 x $20 (accounts payable) = $20.000 = $48. 100. $80.000 less the revenue earned for subscription fees received in the previous year of 80. 2.000 x $10 = $1.020.000 + 120.000 + (1.000 (bldg) – 300.000. 20x5 Insurance expense Prepaid expense $1.000. 3.020. 2.000 $1. 12.000 (the ending balance in the account). 9. Total amount received as revenue of $128. 20x5 500 500 100 100 c.000 = $72. Dec 31.000.006. the offsetting credit would be to Subscriptions Revenue.000 Problem 1-7 1.000 – 128.000 $0 $1.000.000 $0 $1. 20x5 d. v.1 Page 171 Problem 1-5 a. 5.000 $1.000 + 300. 4.000.000 x $20)(inventory) = $1. The opening balance in the Subscription Received in Advance account = $80.000. .000 $1. Debit to Subscriptions Received in Advance = $180.000 + (200 x $50)(cash) – (200 x $20)(inventory) = $1.000 x 6/24 = $250 Rent receivable (or accounts rec) Rent income Interest expense Interest payable $300 x 4/12 = $100 Unearned subscription revenues Subscription revenues $440 x 3/24 = $55 $250 $250 b. 11. 20x5 55 55 Problem 1-6 1.000.1.Introductory Financial Accounting.000. 4.000 $20. Dec 31.000. 7.026.000 (cash) = $1.000.000 $1. Dec 31.000. Dec 31. 3.000 (COGS) = $1.
Introductory Financial Accounting, v.1.1
Problem 1-8 Shareholders’ Equity Net Income
+10,000 NC NC NC -10,000 Remove the receivable from A/R, and add a short-term note receivable.
+50,000 NC +50,000 NC An increase in the cash account and an increase in the contributed capital account. +2,000 NC NC NC -2,000 An increase in the cash account and a decrease in the accounts receivable account. +500 NC NC NC -500 An increase in the prepaid insurance account and a decrease in the cash account. +200,000 +200,000 NC NC An increase in the equipment account and an increase in the notes payable account. NC +1,400 -1,400 -1,400 An increase in the interest payable account and an increase in the interest expense account, therefore, the decrease in net income. +1,000 NC +1,000 +1,000 An increase in the interest receivable account and an increase in interest revenue, and therefore both net income and retained earnings (part of shareholders’ equity)
Introductory Financial Accounting, v.1.1
Problem 1-9 1. Sales Cash received for sales Less cash received for previous year sales Plus Sales not paid for in current year Sales – accrual basis Purchases Cash paid for purchases Less advance payment Plus prepaid purchases Purchases – accrual basis Cost of Goods Sold Beginning inventory Plus purchases Cost of goods available for sale Less ending inventory 20x6 $ 60,000 (5,000) 20,000 $ 75,000 20x7 $ 70,000 (20,000) 0 $ 50,000
$ 40,000 (2,000) 0 $ 38,000
$ 35,000 0 2,000 $ 37,000
0 38,000 38,000 (3,000) $ 35,000
$ 3,000 37,000 40,000 (5,000) $ 35,000
Revised Income Statement Sales Less Cost of Goods Sold Gross margin Other expenses Operating income Profit Margin (30,000/75,000) (2,000/50,000) * 14,000 – 1,000 personal expenses 2. Revenue recognition principle – revenue must be recorded when earned, it can be measured, and the collectability is reasonably assured, not when cash payment is received. Mr. Cash violated this by recording “sales” on a cash basis. Matching principle – all expenses must be recorded in the same period as the revenue that the expenses were incurred to generate. Mr. Cash violated this principle by simply using cash paid for purchases instead of calculating the proper COGS. Economic entity principle – a business should only report on transactions that are under its control. By including his own personal expenses Mr. Cash crossed the line between “personal” and “business” and violated this principle. $ 75,000 35,000 40,000 10,000 $ 30,000 40% $ 50,000 35,000 15,000 *13,000 $ 2,000 4%
Introductory Financial Accounting, v.1.1
Problem 1-10 a. Revenue should be recognized when the trees are sold to the customer during the Christmas season because that is when the benefits and risks of ownership pass from the company to the customer. Until then, the company does not know whether any customers will buy their trees, or how much the customer will pay for the trees (measurement of amount). There is so much competition and one never knows how many trees will be sold. Some trees may have to be discarded if they do not sell. Also, at the time of the sale, cash is collected so there is no uncertainty as to collectability. The company has little or no risk once the tree is sold because it is very unlikely that the tree will be returned. The annual cost of fertilizing, pruning and maintaining the trees should be capitalized as a cost of inventory. In effect, the trees are like work-in-process inventory. Then, when the trees are sold, all of these costs will be expensed as cost of goods sold. This is an example of the matching principle and the point of sale recognition method.
Introductory Financial Accounting, v.1.1
Problem 1-11 a. Dec 1 Cash Capital Stock Furniture and equipment Cash Note payable Cash Revenues Accounts Receivable Revenues Office supplies Accounts Payable Cash Accounts Receivable Wage expense Cash Rent expense Cash Office supplies expense Office supplies $6,000 $6,000 4,000 1,000 3,000 680 680 1,875 1,875 300 300 1,875 1,875 1,300 1,300 1,000 1,000 100 100
Operating income for the month ending December 31, 20x6 would be: = $680 Sales + 1,875 Sales – 1,300 Wages Expense - 1,000 Rent Expense - 100 Supplies Expense = $155
Introductory Financial Accounting, v.1.1
Assets BALANCE SHEET Accounts Receivable 100 700 720 120 Note Rec - Cur 100 100 Liabilities & Equity Accounts Payable 500 100 520 120 Wages Payable 8 8 15 15 Inventory 160 440 520 240 Interest Receivable 16 16 8 8 Prepaid Fire Ins. 3 3 36 4 32 Retained Earnings 26 322 Capital Stock 110 Inc Taxes Payable 4 4 5 5 Dividends Payable 26
B b d e f
Cash 21 500 180 193 700 189 24 74 100 36 19 14
g h i j k l
B b E
B a E
B q E
B a E Equipment 110 74 184 Acc Dep 66 30 96 Note Rec - LT 100
B r E
B j E
B n E
B p E
B k E
Introductory Financial Accounting, v.1.1
Expenses COGS 440
INCOME STATEMENT Salaries and Wages 185 15 200 Insurance 3 4 7 Income Taxes 15 5 20
Revenues Sales 900
h q E
o o E
Interest Revenue 8 8 16
e n E
l r E
Introductory Financial Accounting, v.1.1
Ruiz Pharmacy Income Statement for year ended December 31, 20x2 (000's) Sales Cost of goods sold Gross margin Operating expenses Salaries and wages Miscellaneous Insurance Depreciation Operating income Interest revenue Net income before taxes Income tax expense Net income 200 189 7 30 $900 440 460
426 34 16 50 20 $30
Ruiz Pharmacy Statement of Retained Earnings for year ended December 31, 20x2 (000's) Retained Earnings - beginning Net income Dividends Retained Earnings - ending $322 30 (26) $326
v.Introductory Financial Accounting.1 Page 179 Ruiz Pharmacy Balance Sheet as at December 31.1. 20x2 (000's) ASSETS Current Assets Cash Accounts receivable Accrued interest receivable Merchandise inventory Prepaid fire insurance Noncurrent assets Note receivable Equipment Accumulated depreciation $14 120 8 240 32 414 100 184 (96) 88 188 $602 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Accrued wages payable Accrued income taxes payable Dividends payable Shareholders' Equity Paid-in Capital Retained earnings $120 15 5 26 166 110 326 436 $602 .
000 21.500 8.000 215.000 15. 123.500 B 9 E Furniture & Fixtures 190.000 Prepaids 14.000 22.000 Interest Payable 8.800 6.000 100.000 8.000 20.000 200.000 BALANCE SHEET Accounts Rec.000 225.500 6.000 775.1.000 375.800 Sal.000 16.000 323.000 80.000 24.500 745.000 850.000 20.000 12.000 14.000 Capital Stock 110.000 265.000 16.000 62.000 Acc.000 850.000 4.Introductory Financial Accounting.500 547.000 Liabilities & Equity Accounts Pay 600.000 31.000 12.000 575.000 Taxes Payable 20.500 20.000 B E B 10 Retained Earnings 4.000 10.500 260. Pay. Depreciation 40. And Com.000 375.000 600.000 9 13 Long-Term Notes Payable 20.000 8 Rent Payable 27.00 515.000 B .000 Inventory 446.500 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 10.1 Page 180 Problem 1-13 Assets Cash 30.000 25. 7. v.000 25.
000 .000 27.1 Page 181 Expenses INCOME STATEMENT Salaries and Commissions 207. v.000 21.000 70.000 Sales 1.800 12 Depreciation 22.000 13 14 Other 225.000 Interest 6.000 4 2 9 9 9 9 E Rent 14.000 8.1.Introductory Financial Accounting.000 27.000 7 7 E Income Tax 15.500 Revenues 3 COGS 345.000 12.350.
800 73.500 80.000 46.000 524.000 $46.000 22.500 $302.500 6. Sep 1. v. Statement of Changes in Retained Earnings for the year ended August 31.500 70.Introductory Financial Accounting. 20x4 Net income Dividends Retained Earnings.200 .000 225. 20x5 Retained Earnings.700 27. 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 $1.1.000 605.000 745.1 Page 182 Peter’s Appliance Shop Ltd. Aug 31.350.000 207. 20x5 $260.700 Peter’s Appliance Shop Ltd.700 -4. Income Statement for the year ended August 31.
20x5 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Fixed Assets Furniture and fixtures Less accumulated amortization $ 31.000 153.200 $1.300 110.500 6.000 302.000 7.500 323.070.500 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 $515.000 658.070.500 215.1 Page 183 Peter’s Appliance Shop Ltd. v.1.000 547.000 10.000 16.500 .Introductory Financial Accounting.800 27.300 80.000 917.000 -62.000 578.000 12.000 $1.200 412. Balance Sheet as at August 31.
095 + 9.200 = $21.300) $3.1 Page 184 Problem 2-1 1. c b b The balance on the bank statement will be overstated by $360. Dec 1 Add cash received during December Less cash payments made during December Cash balance per books. December 31 Add Sparg cheque deducted in error Add deposits in transit Less outstanding cheques Cash balance per books b. before adjustments Less bank service charges Add error in recording cheque ($1.700 77.152 (52) 180 $3.548) 3.1.280 $6. Dec 31 Cash balance per bank.Introductory Financial Accounting.700 (5.300 580 1.288 Problem 2-2 a. $15.700 – 3.225 63 $4. Dec 31. 3.000 (77.280 . Cash Accounts receivable Bank service charges Cash $180 $180 52 52 $3. v. Cash balance per books. 2.$1.020) Adjusted cash balance per books.595 Balance per bank statement Add deposits in transit Balance per books $4.200 .
200 $4. v.1.700 $180 $180 35 35 360 360 . Bank service charges Cash To record bank service charges for the month. March 31. Cash Accounts Receivable To record error in deposit made ($530 – 350 = $180).200 $780 1. Cash balance. 20x7 2. 20x7 Add outstanding deposits Less outstanding cheques # 201 # 533 Cash per books. March 31.1 Page 185 Problem 2-3 1.Introductory Financial Accounting. before adjustments Add error in cash receipt Less bank service charges Less error on cheque # 521 Cash balance after adjustments Bank reconciliation Cash per bank.980) $4.700 (1. Office equipment Cash To correct error made in recording of purchase of office equipment: $620 – 260 = $360. $ 480 6.915 180 (35) (360) $4.
000 (4. If the securities are classified as trading investments. then the net unrealized gain flows through net income.000 $2.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. the securities have to be recorded at fair market value on the balance sheet at December 31.000 70. b) Cash Other Comprehensive Income Temporary investments .1.Strategic Air Defence Gain on sale of Investments $75.000) $ 8.000 $35.000 3. then the net unrealized gain will be part of the Other Comprehensive Income section of Shareholders' Equity.000) (1. 20x0: Unrealized gain (loss) ($2. Trading investments are those that are held for re-sale as part of a portfolio of managed securities held for a short-term. Either way.000 .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. If the securities are classified as available for sale. Available for sale securities are defined by what they are not: they are not long-term investments nor are they trading investments.000 7.000 31.000 3.000 3.000) 12.Introductory Financial Accounting. v.
700 . an unrealized holding gain of $1. an unrealized holding loss of $5.000) will be credited to net income. In 20x1.500) (1.000) ($8.500) ($4.700) 20x1 ($500) 0 (3.000 – 8.500) will be charged to net income.1 Page 187 Problem 2-5 a) Security A Security B Security C 20x0 ($2.000) (3. .Introductory Financial Accounting. v.500 ($4. an unrealized holding loss of $4.500) (2.1.000) 20x2 ($4.700 ($5.4.000) (1.200) ($5.500) b) In 20x0. In 20x2.700 will be charged to net income.
000 3.000 Sales – 360.000 c. 20x8.875 After: ($3. Beg Bal + 55.000 Collections – 20. 11.350 $55.000 x 3% $97.800 Bad debt expense = $6.000 cr.800 = $1.000 Write-offs Allowance for doubtful accounts.1 Page 188 Problem 3-1 1.000 $55.000 cr.350 cr. Required balance at December 31: ($80. v.000 71.000 Write offs) = $100. Write-Offs + 3. a Problem 3-2 a. 2004 Balance in allowance before adjustment $63.000 Credit Sales – 11.000 cr. a Balance in allowance account at the end of 20x9 before adjustment for bad debts: $5. Bad debt expense ($14.5%) Allowance for doubtful accounts Accounts receivable balance.000 Beg Bal + 14. d 3.000 dr.000 – 125 = $2.200. $86.000 3.900.000 – 500 + 300 = $4.000 x 4% 4. Recoveries Adjustment required Bad debt expense Allowance for doubtful accounts 86.400 – 4. Adjustment $13.Introductory Financial Accounting. Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable b.000 3.875 2.000 dr.000 71.600 Balance in Allowance for Doubtful Accounts. before adjustment $11.000 – 30) – (125 – 30) = $2. December 31.000.200. December 31. Write offs $9.350 86.000 x 0. .000 dr. Dec 31. 2004: $1.1.000 Collections – 55.000 Before: $3.350 cr.000 A/R Begin + 400.245.000 cr.000 3.000 cr. Beginning Bal – 20. $3.
000 3.000 16.400.000 $2.840 cr.915.480 43.000 27.Introductory Financial Accounting.000 31.000 7.400.800.290 31.1.000 27.000 16.800.000 7.000 2.000 7.000 7.000 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 2.770 cr.000.1 Page 189 Problem 3-3 20x0 Accounts receivable Sales To record credit sales for 20x0 Cash Accounts receivable To record cash collections for 20x0 Allowance for doubtful accounts Accounts receivable To record accounts written off for 20x0 Bad debt expense Allowance for doubtful accounts To adjust the allowance for doubtful accounts to an ending balance of $27.000 2.000 43.915.000.480 3. (Schedule) $2.290 . v.
000 45.840 December 31.000 $384.915.000.000 7. 20x1 0 – 30 31 – 60 61 – 90 Over 90 $277.770 .000 12. 20x0 0 – 30 31 – 60 61 – 90 Over 90 $234.000 384.000 60.000 2.000 7.500 9.000 442.000 31.000 Allowance for Doubtful Accounts 16.800.770 20x0 Bal 20x1 Bal Bal Schedule – Calculation of the Allowance for Doubtful Accounts December 31.480 27.000 1% 5% 20% 80% $ 2.Introductory Financial Accounting.340 4.000 2.000 43.000 1% 5% 20% 80% $ 2.000 16.000 $442.000 27.000 3.1 Page 190 20x0 Bal 20x1 Accounts Receivable 2.400.000 90.290 38.000 $27.000 80.000 15.000 $38.000 12. v.480 27.000 25.000 20.1.770 4.000 7.
20x7: $40.500 Write-offs . 31.000 x 2%) 10.500. Accounts receivable Sales Allowance for doubtful accounts Accounts receivable Cash Accounts receivable Note receivable Accounts receivable Accounts receivable balance.1.000 3. 6. 20x7 Balance in allowance before adjustment: $2. v.000 Collections – 3.000 x 12% x 1/12) 6. Bad debt expense** Allowance for doubtful accounts **($500.1 Page 191 Problem 3-4 1. Beg Bal + 1.400.000 = $10.000 Beg Bal + 500.275 cr.500 dr.275 500 cr.000 1. December 31.000 Credit Sales – 1.500 x 5% $6.500 400.275 30 30 2.000 cr. Dec. $6.000 Note Receivable 3.500 1.000 400.000 10.Introductory Financial Accounting.000 Note: The allowance account will now be $500 + $10. Write-offs Adjustment required Bad debt expense Allowance for doubtful accounts Interest receivable Interest income* *(3.000 500.775 cr.000 $135. .000 500. Allowance for doubtful accounts.
590 79.000 509.500 500 c. Problem 4-2 a.000 2.000 – 10. 3.200 500 500 350 350 77.000 $80.000 (66. v. c c d Czech should have recorded this sale in 20x8 since the goods were shipped FOB Shipping. Delivery expense Cash Sales returns and allowances Accounts receivable Inventory ($500 x 70%) Cost of goods sold Cash ($79.000 50.000 x 99%) Inventory $80. e.1 Page 192 Problem 4-1 1.000 1.1.000 + 25. b Opening Inventory Purchases – net: $500. Inventory Accounts payable Accounts payable Cash ($50.000 50. 4.000 56.000 56. .Introductory Financial Accounting.000 49.000 x 70%) Inventory b.200 1.000 Ending inventory Cost of goods sold $60.000) $503.500 x 98%) Sales discounts Accounts receivable d.500 50.910 1. Accounts receivable Sales Cost of goods sold ($80.000 – 6.
Purchases (Sales) Units 60 (20) 35 (50) Unit Cost Total Cost $11.1.000 Units 1.50) = $650 Note that the results for FIFO periodic are the same as for FIFO perpetual.00) + (20 units x $11.00 $12.500 units 1. Ending inventory = 55 units (35 units x $12.00 11.000 44.190 623 Accounts receivable Sales Cost of goods sold Inventory (10 units x $10) + (40 units x $11.3333 $690 (220) 420 (567) Units 30 90 70 105 55 Balance Unit Cost Total Cost $10.100 $1.50) $1.500 b.000 3. v.00 22.00 12.500 Balance Unit Cost Total Cost $12.000 . b.500 1.1 Page 193 Problem 4-3 a.000 33.000) 69.00 16.50 11.000 8.00 16.000 77.00 11.00 36.00 22.000 (2. Ending balance = 1.00 23.00 11.100 560 560 Problem 4-4 a. Date May 1 May 5 May 14 May 21 May 29 c.Introductory Financial Accounting.000 (40. Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Purchases (Sales) Units 2.000 48.000 500 3.000 (2.000) Unit Cost Total Cost 18.500) 3.500 units x $23 = $34.3333 $300 990 770 1.
000 x $52 1.330 x $100 400 x $48 1. Beginning Inventory. v.1.000 x $52 930 x $58 $ 333.400 = $ 52. Weighted Average Sales COGS * Gross Profit 3.140 $ 157.000 3.000 52.400 70 3.7059/unit Cost of Goods Sold = 3.330 x $100 $ 333.000 $ 19.7059 = $ 173.330 Gross profit 175.000 x $50 1.330 x $ 52. 20x5 Units sold during year FIFO Sales COGS 3.000 173.000 58.Introductory Financial Accounting.400 Weighted Average Cost per unit $ 19.200 50.1 Page 194 Problem 4-5 a. 20x5 Purchases Goods Available for Sale Less Ending Inventory.200 50.940 Units 400 3.929 . December 31.860 b. January 1.200 = $179.200/3.929 $ 159.000 $ 179.000 52.000 x $50 1.000 x $58 3.071 *400 x $48 1.000 53.
000 $150.000 42.000 – 15.000 608.000 – 30.000 19.000 10.600 400 20.000 $37.000 15.000 June 2 Sales returns Accounts receivable Inventory Cost of goods sold June 9 Cash Sales discount ($20.000 Sales Returns Estimated cost of goods sold Opening Inventory Net purchases: $480.000 30.600 June 1 Accounts receivable Sales Cost of goods sold Inventory 30.000 Purchase Returns + 8.000 x 2%) Accounts receivable Inventory Accounts payable June 12 .1 Page 195 Problem 4-6 Net Sales = $615.000 5.000 10.000 $188.Introductory Financial Accounting.000 5.000 x 70% $420.000 420.000 x 20% Problem 4-7 $600.000 42.000 Customs and Duty Cost of goods available for sale Less Cost of goods sold Estimated value of ending inventory Net loss from fire = $188.000 15.000 458.1. v.
050 each = = = $ 18.000 210.Introductory Financial Accounting.000/660 units Average unit cost = $978.1 Page 196 Problem 4-8 1.050 each = $ 63. Ending inventory – Weighted Average Average unit cost = Cost of goods available for sale/Units available for sale Average unit cost = $646.000 $ 646.727 .000 418.79/unit x 60 units Ending inventory = $58.000 3.000 2. v.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. Ending inventory – FIFO: 60 units X $1.1.79/unit Ending inventory = $978.
300 3. discounts taken under a term of 3/15.200 3.000 3.500) 77.300 230. Cost of Goods Sold Schedule for the month ended December 31. the full amount of $50.3 15-day periods in a year (365/15).1 Page 197 Problem 4-9 a.000 80. If payment was not made within the discount period.000 $ 150. It would be equivalent to interest of $1.500 1. In December.000 48.000 ii) Accounts Payable Cash Purchase Discounts iii) Accounts Payable Purchase Returns iv) Transportation-In Cash b.09% (3.200 1. There are 24. The savings generated by purchase discounts generally make it worthwhile to borrow to take advantage of the purchase discount.500 1. n30 generated savings of $1.09%) for a 15day period (30 days – 15 days).500 (3.000 $200. December 31. i) Purchases Accounts Payable 80. thus giving an annual percentage cost of missing the discount of 75.300 c.200) (1.3). it may cost a company 10% to borrow the funds. 20x7 Purchases Less: Purchase returns and allowances Less: Purchase discounts Net Purchases Add: Transportation-In Cost of goods available for sale Less: Merchandise inventory.09 24. whereas the purchase discount may generate a savings which would equate to an effective interest rate much higher than 10%. For example. 20x7 Cost of goods sold $ 80. .1.000 (1.300 30.500 by paying 15 days early. v. TOYJOY LTD.000 would need to be paid on the due date.500 on a base amount of $48. 20x7 Merchandise inventory. December 1.Introductory Financial Accounting. much higher than the 10% borrowing rate.000 80.000 50.
January 13. January 1 to January 13 Inventory.000 .000 * ** If Gross Profit = 40%.000 = $74.000 10. Therefore. January 1.000 U N/A 5.60 = $36.000 x .000 O Problem 4-11 Sales.40% = 60%.000 – 36.000 U 6. 20x7 Estimated Cost of Goods Sold* Estimated Gross Profit ($60. then COGS = 100% .000 O 6.1.000 $ 100.000 $24.000 O 20x7 Cost of Goods Sold 10.000 **74.000 x .000 110.000 U 5. January 1 to January 13 Cost of goods available for sale Less estimated ending inventory. 20x7 Purchases.1 Page 198 Problem 4-10 Error i) ii) iii) 20x6 Cost of Goods Sold 10. v.000 U N/A N/A 20x6 Retained Earnings 10.Introductory Financial Accounting.000 36.000 U 20x6 Ending Inventory 10.40) $ 60.000 Cost of goods available for sale – COGS = Ending Inventory $110.000 O 5. estimated COGS = $60.
000 x $7.000 Unit cost = $178.000 14.500 14.95000 8.95 8.000 + 7.500 (80.500) Purchases (Sales) Unit Cost $8.000 b.500 = 9.40 7.00) = $178.00000 Total Cost $58. Units 7.000 = 21.700 106.400 $80.000 + 7.000 x $8. From Purchase # 2: 8.700 106.800 (47.Introductory Financial Accounting.000 (6.500 / 21.50 Ending inventory = 9.600 126.000 x $8.500 COGS = 12.500 + 8.000 x $9.000 + 8.759 c.000 Cost of goods available for sale = (6.800 54.000 8.500 53.40 Ending Inventory Cost of goods sold Cost of goods available for sale Less ending inventory $72.200) Units 6. Ending inventory = 6.500) Purchases (Sales) Unit Cost $8.000 6.250 125.1 Page 199 Problem 4-12 a.500 9.000 x $8.400 d.500) 8. Units 7.250 77.95) + (7.500 Total Cost $47.250 + 47. v.500 Units available for sale = 6.40 .000 13.000 (6.000 – 5.000 (47.000 13.600 80.000 = $8.40) + (8.400 $178.741 COGS = $53.509) Units 6.00 8.509 = 100.00 From Purchase # 1: 1.500 58.400) $ 98.000 units @ $9.000 7.63793 Total Cost $47.000 (5.000 Balance Unit Cost $7.200) 72.000 8.100 Balance Total Cost $58.000 (5.19231 8.000 (46.40 9.40000 9.700) (4.800 (53.000 6.250) 72.000 units @ $8.000 – 6.000) (500) 8.50 = $76.1.50 = $102.
075. 6. 2.1.000/80.000) / 10 = $4.000) x (20. v.5 x 6/12) Net book value = $63.500 x 430 = $5.000 / 9.000)] Net book value = $77. and not the legal life of 17 years.1 Page 200 Problem 5-1 1.000)/10 = $8. because the purpose of amortization is to expense the cost of an asset of the period of time it is in use by the company.000 – 5. a d ($200.Introductory Financial Accounting.000 – 150.500 7.750 .000 x . we must first know the salvage value of the machinery inherent in the problem.000 = $1.500 It is assumed that the addition should be capitalized and depreciated since it qualifies as a capital asset. Depreciation expense = $12.160 To move to the units-of-production method.5 x = $600 $1.000 – 10.000.000 Net book value = $100. c Double-declining-balance rate = x 2 = 50% 4.000 – ($85. Estimated salvage value = $100.000 + 60.000 – (5 years x $18. Note that we use the estimated useful life of the patent. d) ($80. 3.000/year) = $10.000 + 5. 5.000 + 15.000 – [($100.000 ($20. d c c Net book value = $85.500/year.000 x 90%) / 1.
000 20x8 15.000 – 2.600 15.000 .000 26.000 17.000) / 3 = $17.000 – 5.600 c.000 x 40% (1/5 x 2 = 40%) Amortization expense Accumulated amortization ($65. v. Amortization expense Accumulated amortization ($65.000 Net book value = $65.000 b. 26.500 d.000 – 5.1.Introductory Financial Accounting. Amortization expense Accumulated amortization ($65.000 = $53.000 16.000 – 12.1 Page 201 Problem 5-2 a.000 Amortization expense Accumulated amortization 17.500 16.000) / 5 years 20x7 Amortization expense Accumulated amortization $65.000) / 200.000) x 40% $12.000 – 26. Amortization expense for 20x8 = ($53.000 $12.000 x 55.
000 20.000) / 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. 20x7 Aug 31.000 55.808 Dec 31.656 4. 20x4 600 600 10.656 25.000 $60. 20x3 Equipment Cash Amortization expense Accumulated amortization (60.750 10.000 = $10.000 – 10.000 10.000 10. v.000 10.1. 20x5 Dec 31. 20x6 10.286 82. 20x7 20.000 2. 20x7 4.000 10.500 Dec 31.50 / month x 8 months = $500 + 10.1 Page 202 Problem 5-3 (a) Jan 2.000 9.500 Amortization expense Accumulated amortization $10. 20x4 Apr 31.000 Dec 31.000 .Introductory Financial Accounting.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 $60.000 / 32 months remaining = $62.500 10.808 9.000 2.750 Oct 31. 20x3 Aug 31. 20x5: $2.000 + ($62. 20x5 Dec 31.714 1.
500 Market value of asset Gain on sale (2.000 Less fair market value of asset traded in (15.688 + 20.000 * Price of new lathe Less trade-in value less fair market value of asset traded in: Trade in value: $108.500 $ 4.500 50.500 $11.500) $105.000) (10.Introductory Financial Accounting.000 $108.000) (10. 20x7 ($12.062 + 1.746 Total amortization expense for 20x7 = $8. v.000) / 39 months = $582 per month x 3 months = $1. 20x7 Original cost of asset Capitalization made on April 1.062) $12.500 15.688 Amortization expense – Sep 30 to Dec 31.500) (10.000 90.750) (8.1.746 = $9.750 x 9/12 $60.500 38.000 .000 – 10.500) Acquisition price of new lathe ** NBV of asset at time of exchange = $50.1 Page 203 Schedule 1 Amortization expense for 20x7 Net book value of asset at Sep 30.000 2. 20x5 Less Amortization expense 20x3 20x4 20x5 20x6 20x7 to Sep 30: $10.000 (10.808 Problem 5-4 Equipment (new lathe)* Accumulated amortization (old equipment) Equipment (old equipment) Cash Gain on sale of asset** 105.000 $18.000 – 38.000 4.000 – 90.
000 The cost plus installation.000 Installation Charges = $27.000 x 6/12 = $3. Amortization expense Accumulated amortization .Introductory Financial Accounting.000 (9.000/year $6.000 2.000* 27.1 Page 204 Problem 5-5 1.000 – $3.000 4.000)/4 = $6.000 Cost of machine + 2. Machinery Cash 27.000** 3.1.000 *25.000 20. v. Machinery Less: accumulated amortization $27. 2.000 3.000 27.000 9.000) $18. The freight is included in the cost but the repair is not to be capitalized.Machinery **($27. Cash Accumulated amortization – Machinery Machinery Gain on sale of assets .000 for 6-month period 3.
000)/(5-1) = $18.000) / 41.500 – 20.000 – 20. ii.1.000 x 9.000 – 20.000 x 12. i.500 Straight-line method = (120. c. .750 Units-of-production method = (120.000 + 18. Straight-line method = (120.683 Cash Accumulated depreciation ($25.000)/40. i.183 183 120. i.000 – 25.000 = $22.750) Loss on disposal of equipment Equipment Cash Accumulated depreciation ($22.750 1. v.683) Gain on disposal of equipment Equipment $75.000 = $22.1 Page 205 Problem 5-6 a.000 Units-of-production method = (120.500 + 23. ii.000 45.Introductory Financial Accounting.000 $=75.250 $120.000)/4 = $25. ii.000 – 22.000 b.000 – 20.000 43.
A double-declining-balance amortization method could be used to abide by the president’s request.e.000 Depreciation expense: ($157.750 .000 (2.750 Note that the interest charge of $12.800 $157. $140. Cost Less accumulated depreciation: $17. If the machine does not provide decreasing benefits.000 53. amortization is high in the first year and decreases in amount as years go by. v.000) $ 3.250) 103.000) / 8 = $17.$140.750 (100.750 x 3 years Net book value Less proceeds on disposal Loss Cash Accumulated amortization Loss on disposal Machine $100.000 cannot be capitalized to the asset since the asset was purchased and not self-constructed. then this method should not be used.000 $157..000 (53.750 157.1. c. Under this method.Introductory Financial Accounting.800) 5.000 14. i. Costs capitalized: Invoice price Less discount .250 3. if the machine generates less revenues as it gets older.1 Page 206 Problem 5-7 a.000 – 15. This method is acceptable under GAAP if it properly reflects the pattern of benefits received from using the machine.000 x 2% Customs and duty costs Preparation and installation costs b.
2. FV=10. a b b) PV of bonds at issue: PMT=800.500/15) x $25/card) Cash 37.472.375 34.000 /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 34.321 4.000. 6.1.500 37.000.472. 5. I=6%.000 / 5 x $2 x 30% Premium redemptions: 23.500 .400) $ 8.018 x 6% = $688. 3. N=10.500 / 5 x $2 $18.000 PV=$11.600 Problem 6-2 The premium expense would calculated as follows: $375.000 (9. v.375 The journal entry to record the actual costs incurred during the year would be: Premium Liability ((22. c c b Premium expense: 150.1 Page 207 Problem 6-1 1.018.Introductory Financial Accounting. Interest expense for the year = $11.
1 Page 208 Problem 6-3 The journal entry to record warranty expense is: Warranty expense ($3.000 130.000 x 5%) Warranty Liability The journal entry to record actual warranty costs incurred is: Warranty Liability Cash.554 x 4%) Bonds payable Cash 21.378 25.554 $540.1.622 3.000 $150.378) x 4% Bonds payable Cash 21.554 PMT 25000 FV 500000 Enter Compute The journal entry to record the issuance of these bonds is as follows: July 1.513 25.3.000 $150.000. A/P.000 Opening Balance + 150.000 The warranty liability at the end of the year will be $165. Inventory 130. 20x1 Interest expense (540.000 The journal entry to record the interest payment of Jun 30.487 3. Problem 6-4 The value of the bond issue will be as follows: N 10 I/Y 4 PV X= 540. 20x2 Interest expense (540.000 Warranty Expense – 130. 20x1 Cash Bonds payable $540. v. 20x2 would be as follows: Jun 30.000 .554 The journal entry to record the interest payments using the effective interest method of amortization is as follows: Dec 31.000 Warranty Costs Incurred = $185.Introductory Financial Accounting.000.554 .
Therefore.432. credit cash/inventory/etc.000 417.301 $432. The journal entry to record warranty expense is debit warranty expense credit warranty liability.200 2.200 – 6. 20x5 Problem 6-6 1.000 + 5. FV = 10. .000 $10. I = 4.800. 4.000 416. $6.1 Page 209 Problem 6-5 PV of bond issue: N = 30.301 – 7. the total credits to the account for the year is the warranty expense for the year.800 = $10. 20x5 Dec 31.292 7. the total debits to the account for the year is the total cost of repairs made during the year.708 425.000.432.301 10.000 Jun 30.301 Dec 31.984 8.016 425.000. The journal entry to record repairs as performed is debit Warranty liability. Solve for PV = $10. PMT = 425. v. $10. Therefore.432.301 x 4%) Premium on Bonds Payable Cash Interest expense* Premium on Bonds Payable Cash * (10. 3.Introductory Financial Accounting.1.708) x 4% $10. $5.432. 20x4 Cash Premium on Bonds Payable Bonds payable Interest expense ($10.000.000.000.
20x7 20.223 22.129 – 2.223 = $504.074 – 2.445 20.714 – 2.500 Jan 1. 20x6 Dec 31.500 FV 500.105 20.055 = $509. v.137 = $506.403 x 4% Interest payable $513.129 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $511.524 1.500 Jan 1.000 Enter Compute Jan 1.074 x 4% Bonds payable Cash Interest expense $509.1 Page 210 Problem 6-7 Proceeds on bond issue: N 6 I/Y 4 PV $513.976 = $511. 20x6 20.097 .277 20.277 20.500 Dec 31. 20x7 20.105 PMT 22.137 22.937 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $506. 20x8 20.445 20.445 2.277 2.311 22.363 2. 20x6 Cash Bonds Payable Interest expense ($513.055 22.189 2.097 20. 20x8 20.1.105 – 1.Introductory Financial Accounting. 20x7 Jul 1.976 22.105 $513.311 = $502.500 Jul 1. 20x8 Jul 1.714 x 4% Bonds payable Cash Interest expense $504.105 x 4%) Bonds payable Cash Interest expense $513.937 – 2.500 Dec 31.
171. 20x7 .Introductory Financial Accounting. July 1.171.509 1. v.000 58. 20x6 Cash Bonds payable Interest expense (1.591 – 1.591 x 5%) Bonds payable Cash (1.591 PMT 60000 FV 1000000 2.580 1.500 500.591 $1.000 x 12% x 1/2) *Bonds payable balance as of June 30.000 3.420) $1.097 2.591 58.000 500.000 x 12% x 1/2) Interest expense (1. 20x7 ($1.000.171. June 30. Dec 31.171* x 5%) Bonds payable Cash (1.1 Page 211 Jan 1.000.420 60.171.170. Enter Compute N 40 I/Y 5 PV X= $1.171.403 22.1.000 Problem 6-8 1. 20x9 Interest payable Bonds payable Cash Bonds payable Cash 20.491 60. 20x6 4.
000 x 8% x ) 2nd half of 20x7: Interest expense ($897.1.1 Page 212 Problem 6-9 The journal entries to record interest expense for 20x7 would be as follows: 1st half of 20x7: Interest expense ($897.000 x 10% x ) Bonds payable Cash ($1. .000 + 4. c.000 exactly.000.093 = $89. $44.093 5.Introductory Financial Accounting. False.850) x 10% x Bonds payable Cash ($1. d.850 + 45. The cash outflow is $80. Interest expense for 20x7 = $44. b. v.000 True.850 4.000.943 False False.000 x 8% x ) a. The interest expense will increase every year since the book value of the bonds payable will also increase.093 40.000 $45.850 40.
non cumulative.400 2.32 $14. Shareholders’ Equity Common Shares.000 2.000 40. $6.000 21. v.520 .1.080) Total Shareholders’ Equity $ 138.000 39. 400 shares issued and outstanding Retained Earnings ($0 + $56.Introductory Financial Accounting.000 12.000 40.080 14.000 40. February 2 Cash Common Shares Patent Preferred Shares No entry Cash Common Shares Dividends or R/E Cash Dividends or R/E Cash Number of common shares: Issued on Feb 2 Stock Split on Feb 15 Issues on Feb 26 126.000 2.080 2.$2.1 Page 213 Problem 7-1 1.000 . 44.000 x $0.400 14.080 February 27 February 28 21.$14.000 shares x 3/2 = 225.000 shares issued and outstanding Preferred Shares.520 $217.000 44. c 150.000 February 10 February 15 February 26 12.000 126.400 . Problem 7-2 1.000 shares outstanding after the split.
000 60.000 20.1.000 40.1 Page 214 Problem 7-3 1. h. issued and outstanding 3. Shareholders’ Equity Common Shares. g.000 180.000 20.500 Dividends) $348. f.000 53.500 .000 Retained Earnings ($64. d. a.000 40.000 3. Cash Common Shares Equipment Preferred shares Cash Preferred shares Dividends (or Retained Earnings) Preferred Dividends Payable Cash Common shares Preferred Dividends Payable Cash Retained earnings Cash Bonds payable Premium on bonds payable Common shares $115.Introductory Financial Accounting.000. issued and outstanding 3.000 3. cumulative – authorized 50.000 3.000 3. authorized 100.500 $456. c. e.000 b.500 50.000 48.000.000 180.000 12.000 Net Income – 15.000 $115. v.500 12. 2.000 Preferred Shares.000 3.
000 16.000 34.000 16.000 34. 4.000 25.5% / 2) 11.000 30.588 412 13.000 960.600 – 412) x 3% Bonds payable Cash ($400.000 75.000 945.000 12. 7. 6.1 Page 215 Problem 8-1 a.600. 12. Equipment Cash Warranty liability Cash $1.400 320.000 5.520.000 5.000 x 6. Accounts receivable Sales Cash Accounts receivable Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable 5.5% / 2) Interest expense ($419.000 x 6.000 5. 8. 1.1.000 945.000 25.600.Introductory Financial Accounting.576 424 13.000 12.000 30.000 $1.000 2.000 5. 9. v.520.000 75.000 960. .000 5. Purchases Accounts payable Accounts Payable Purchase returns Cash Common stock Accounts payable Cash Salaries payable Salaries expense Cash Interest expense ($419. 10.000 1.600 x 3%) Bonds payable Cash ($400.600 314. 3.000 1.
000 40.000 x 20% 12. 17. Insurance expense Prepaid insurance Balance in prepaid insurance account: $1.400 2.000) = $17.400 x 2/12 Insurance expense 3.000 cr.000 cr. v.400 .400 Balance required: $2.600 6.000 17. 18.400 130.800 400 $3.010 4.930 dr.400 $3.000 17.000 x 50% Bad debt expense 40. $23.31*) Retained earnings Cash * Average book value per share = $150.930 23.31 Prepaid insurance Cash Operating expenses Cash Bad debt expense Allowance for doubtful accounts The balance in the allowance for doubtful accounts is: $23.000 + 75.000 dr.000 14. = The balance in the allowance for doubtful accounts should be: $144.000 x 7% 23.000 23.1 Page 216 13. 15.400 3.310 4. $4.000 x 3% 43.1.690 22. $6.000 130.000 x $17. Income taxes payable Cash Common shares (1.400 + 2. 2.000 / (10. + 34.320 3.Introductory Financial Accounting.000 dr.930 16.000 + 3.930 cr. + 5.
000 – 16.000 $320.264.000 x 1. Cost of goods sold Inventory ($378.1 Page 217 19.Introductory Financial Accounting.000 944.400 4.000 24.000 / 40 = $7.000 – 320. Warranty expense Warranty liability $1.000 Purchase) = $137.5% Salaries expense Salaries payable Retained earnings Cash Income tax expense Income taxes payable $134.000 13.000 NBV Beg + 30.1.000 80.000 58.000 – 38.000 (378.000 24.256 x 40% = 53.000 21.000) Purchase returns Purchases Check: Opening inventory Purchases – net ($960. .702 23.700 6.000 1.000 13. 6.000 x 20% = $27.000) $886.500 ** ($145.500 27. Amortization expense Acc.150 7.600. v.702 53. amortization – equipment** Patents*** * $300.700 80.000) Cost of goods available for sale Less ending inventory Cost of goods sold Inventory loss Allowance for decline in value of inventory 886.000 960.250 39.400 *** $34.702 22. 24.000 16.250 20.000 53. amortization – building* Acc.000 / 8 = 4.
000 2.000 80.000 175.1 Page 218 Part (b) Assets Cash 36.000 25.000 23.000 Land 40.500 127.000 4.000 34.000 15. v.000 B 19 14 B 7 E B E Patents 34.000 945.000 945.000 30.Introductory Financial Accounting.000 12.000 126.000 59.000 13.000 5.700 6.702 Warranty Liability 25.000 Liabilities & Equity Accounts Payable 16.310 150.000 53.000 1.600 5.400 130.000 75.700 B 22 E E B 20 E Prepaid Insurance 1.000 7.000 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 27.000 1.702 25.000 24.690 B 24 B 15 E 18 B 12 B 21 B Acc Amort .1.400 65.200 80.000 378.520.400 Allowance for Decline in Value of Inventory 13.000 207.000 40.000 13 Inc Taxes Payable 40.000 22.Equip 38.510 B E .000 5.000 5.000 Allow/Doubt Accts 34.000 75.750 19 20 14 23 Retained Earnings 4.000 Bonds Payable 412 419.000 23.600 424 418.000 12.600 BALANCE SHEET Accts Receivable 176.000 13.000 30.690 144.764 Common Stock 17.600.520.000 222.000 1.400 400 Building 300.000 960.500 Acc Amort .000 13.000 127.250 29.000 5.000 58.000 B 19 E 10 10 B B 11 E Equipment 145.400 2.000 320.930 17.Bldg 120.400 3.930 Inventory 320.600 6.
702 20 Inventory Loss 13.000 9 22 E Salaries 314.700 321.000 1 20 Cost of Goods Sold 886.1. 53.000 960.150 24 Income Tax Exp.000 10 10 E Interest 12.400 21 18 16 Operating expenses 130.164 Insurance 3. 39.000 17 Bad Debt Expense 23.000 .600.930 19 Amortization exp.400 6.576 25.1 Page 219 Expenses Purchases 960.000 16.000 Revenues Sales 5 20 20 6 1.100 Warranty expense 24.588 12.Introductory Financial Accounting. v.000 INCOME STATEMENT Purchase Returns 16.
000 3.000 65. Haider Corporation Trial Balance As at December 31. v.164 24.1.600 222.690 59.930 39. . Cash Accounts receivable Allowance for doubtful accounts Inventory Allowance for decline in value of inventory Prepaid insurance Land Building Accumulated amortization – building Equipment Accumulated amortization – equipment Patents Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Common stock Retained Earnings Sales Cost of goods sold Salaries Interest Warranty expense Insurance expense Operating expenses Bad debt expense Amortization expense Inventory loss Income tax expense $15.000 300.764 207.500 175.000 418.Introductory Financial Accounting.400 29.000 321.930 378.000 $17.000 400 40.702 $2.750 126.150 13.680.700 25.196 Cr.000 6.196 $2.680.600.000 23.510 1.400 130.1 Page 220 c.000 13.000 127.702 12.000 53.000 886. 20x6 Dr.100 25.
20x6 Retained earnings.000 714.200 80.1 Page 221 d. January 1.000 321.256 53.000 39.Introductory Financial Accounting.164 134. 20x6 Sales Cost of goods sold Gross profit Operating expenses Salaries Warranty Insurance Bad debts Inventory loss Amortization Other operating expenses Operating income Interest expense Net income before taxes Income tax expense Net income $1.000 554. Haider Corporation Income Statement for the year ended December 31.000) $140.000 886. 20x6 $144. 20x6 Net income Premium on redemption of common shares Dividends Retained earnings.600. December 31.400 23.930 13.554 Haider Corporation Statement of Retained Earnings for the year ended December 31. v.420 25.554 (4.690) (80.702 $80.150 130.100 24.064 .000 3.1.580 159.
400) 172. v.000 $300.600 204.000 (65.064 347.Introductory Financial Accounting. 20x6 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance $ 15.750 351.850 $936.600 29.702 12.070 40.000 6.690 140.764 589.000 (127.166 207.920 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Shareholders’ Equity Capital stock Retained earnings $126.754 $936.1.700 25.1 Page 222 Haider Corporation Statement of Financial Position as at December 31.402 418.920 Land Building Less accumulated amortization Equipment Less accumulated amortization Patents – net .000 400 585.500 109.070 365.500) 175.000 170.
000 l. 12.700 4.000 16. 4.600 7.600 3. 4.600 b.Introductory Financial Accounting. 16.800 3.800 4.000 12.200 – 4.000 x 9% x 4/12 Interest expense Interest payable $60.600 $9. v.000 k.000 24. 7. j.000 – 4. 4.1.600 x 5/12 Interest receivable Interest revenue $12. 700 700 4. d.000 x 3% x $40 Allowance for doubtful accounts Accounts receivable Income tax expense Income taxes payable $9.500 Warranty expense Warranty liability 10. 360 360 g. Bad debt expense Allowance for doubtful accounts $320.000 x 3% Wages expense Wages payable Insurance expense Prepaid insurance $9.000) / 10 Prepaid rent Rent expense $9.600 e.600 x 9/24 Amortization expense Accumulated Amortization ($80.000 24.500 4.600 c.000 4.700 i.1 Page 223 Problem 8-2 a. .000 f.500 h.900 / 17) Patents or Accumulated Amortization – Patents Supplies inventory Supplies expense Increase in inventory = $9.000 x 10% x 9/12 Amortization expense ($11.
130 Rebate + 256 Payable .840 Ending Inventory) Gross margin Operating Expenses Rent (1.270 800 424 250 13.640 x 10% x 2/12 $312 72 240 2.880 x 10% x 3/12 Principal payment.000 + 270 Payable) Insurance (1.640 $44 .226 Uncollected Sales) Cost of goods sold Purchases (14. April 1.1 Page 224 Problem 8-3 MAS Inc.800 .400 Baking Materials Purchases .500 + 240 Payable) Maintenance Utilities (4. Income Statement for the five months ending May 31.630 1.920 .1. 20x2 Sales (22.136 Operating Income Interest (72 + 44)1 Net income before taxes Provision for income taxes (6.686 19.740 110 4.Introductory Financial Accounting. 20x2 (184.108.40.2066 116 6. 20x2 Loan balance.284 $5. v.770 Cash Sales + 5.420 1.500 5.120 Prepaid) Advertising Depreciation (3.000 / 5 x 5/12) $32.320 Collections on Credit Sales + 4.880 . April 1.094 6.420 x 20%) Net income 1 Loan payment Less interest: $2.240) Interest April & May .1.300 Prepaid) Salaries and wages (5.316 12.
1 Page 225 MAS Inc.640 .636 $12.960) Shareholder's Equity Common Stock Retained earnings $526 240 1. v. 20x2 ASSETS Current Assets Cash (33.500 5.734 2.226 1.000 -250 2.136 7.1.750 $12.600 .620 3.Introductory Financial Accounting.680 4.134 4.840 1.31. Balance Sheet as at May 31.054 1.466) Accounts receivable Inventory Prepaid insurance Prepaid rent Fixed Assets Equipment Accumulated depreciation $2.284 44 960 3.370 .370 LIABILITIES & SHAREHOLDER'S EQUITY Current Liabilities Accounts payable Salaries payable Income taxes payable Interest payable Current portion of note payable ($240 x 4) Note payable (2.120 300 9.
000 $338.000 80. $275.Introductory Financial Accounting.000 19.000) 60.000 155.000 278.000 $338.1.000 80.000 (20. v.1 Page 226 Problem 8-4 Morrow Wholesale Balance Sheet as at December 31. 20x1 ASSETS Current Assets Cash Marketable securities* Accounts receivable Inventory Noncurrent assets Equipment Accumulated depreciation $24.000 SHAREHODLERS' EQUITY Shareholders' Equity Common stock Retained earnings * Plug to balance.000 .000 63.
000 x 80%) Gross margin Operating expenses Salaries (10.000) Miscellaneous Operating income Interest expense ($5.600) Depreciation (80. beginning of year Dividends Retained earnings.000 + 1.146.000 ÷ 10) Bad debts (155.000 x 12% x 6/12) Gain on sale of equipment Gain on sale of securities Net income before taxes Income tax expense (30%) Net income Retained earnings.1 Page 227 Morrow Wholesale Income Statement and Statement of Retained Earnings for the year ended December 31.500 $250.600 8.220 63.000) $70.600 7.220 .000 (10.380 17. end of year 11.000 4.Introductory Financial Accounting.000 9.000 5.000 .000 24.100 15. 20x2 Sales Cost of goods sold ($250.000 200.1.000 50.900 (300) 5.000 34. v.
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 + 4.600 5.000) $200.000 $216.1 Page 228 Morrow Wholesale Balance Sheet as at December 31.500 Note 1 .000) Accumulated depreciation (20.280 275. v.20.000 1.205.000 + 406.000 70.500 23.Inventory Purchases of merchandise A/P .20. 20x2 ASSETS Current Assets Cash (24.000) $224.000) Equipment (80.Introductory Financial Accounting.500) Inventory (Note 1) Prepaid advertising Noncurrent assets Land (19.000 7.000 + 8.000 300 10.000 $405.000) 52.000 .000 36.000 216.000 (96.000 $80.500 96.000 10.ending Purchases Cost of goods sold = Opening inventory Purchases Less ending inventory $180.000 60.220 345.000 330.000 .1.220 $405.380 60.000 .000 (8.
000 COGS + 7.000 Increase in A/R) Cash paid out to suppliers ($300.500) Cash.000 (99. 20x6 Cash flow from operations Cash collected from customers ($7500.000) Gain on sale Proceeds Note 2 – Dividends paid Net income Less increase in Retained Earnings ($108.000 – 69.000 Increase in Inventory .300 19.600 Increase in Salaries Payable) Cash paid out for other operating expenses Cash paid out for interest ($32.100 Income tax expense – 33.000 15.000) $ 5.10.000 Sales .000) (46.1 Page 229 Problem 9-1 a.000 (294.400) (80.1. v.000) (31.000 Increase in Interest Payable) Cash paid out for income taxes ($79.000 (125.800) (112.800 – 105. beginning Cash.000) Cash flow from financing Issue of bonds payable Dividends paid (Note 2) 30.100 Increase in Income Taxes Payable) $740.1.400 $ 99.000 – 40.000 $20.200 Increase in AP) Cash paid out for salaries ($120.000) (105.400 – 61. Ginger’s Cookies Ltd.Introductory Financial Accounting.12.000 Salaries Expense .800 Cash flow from investing Proceeds on sale of equipment (Note 1) Purchase of equipment 20.000) 175. Statement of Cash Flow for the Year ended December 31.000 $146. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($45.500) (69.900 47.500 .500 Increase in cash ($175.7.500) 1.200 $20.000 Interest expense .
600 1.1 Page 230 b.000) (10.100 $175.1.900 7.Introductory Financial Accounting. v.000 (15.000 33.200 7.000) (7.800 . Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Gain on sale of capital assets Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Increase in Accounts Payable Increase in Salaries Payable Increase in Interest Payable Increase in Income Taxes Payable $146.000) 12.
000) 353.000) (463.000 Accumulated Amortization. beginning of year Amortization expense Accumulated Amortization on disposal: $158. v.000 (50.000) 7.000) 350.000 466.000 $319.000) 17.000 150.1. McDuff Ltd.000 (48. end of year 1 Accumulated Amortization.000 .000) (12.000) (5. Statement of Cash Flow for the year ended December 31.000) 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) (34.1 Page 231 Problem 9-2 a.000 – 87.000 Cash flow from investing Proceeds on sale of assets Purchase of capital assets2 80.000 (13.695.000 111. beginning of year Cash.000 218.000) $3.842.000 (543.Introductory Financial Accounting.000 $3. end of year Amortization expense = $218.000) (37. 20x3 Cash flow from operations Net income Adjust for non-cash items: Amortization expense1 Gain on retirement of bonds Loss on disposal of assets Adjust for changes in non-cash working capital items: Decrease in accounts receivable Increase in merchandise inventory Increase in prepaid expenses Decrease in accounts payable Decrease in salaries and wages payable Decrease in interest payable Increase in income taxes payable $239.000 ? (71.000) (37.000 Decrease in cash Cash.000) (11.
000 b.400.000 Amortization Expense + 11.000 Salaries and Wages Expense + 37.000 COGS + 48.000 (2.460.000) (233.000 Increase in Inventory + 12.326.000 Interest expense + 5.711.000 3 Retained Earnings.000) (72.000 $5.000 ? (158. ending Additions to capital assets = $543.000 Increase in Prepaid Expenses) Cash paid out for salaries and wages ($850.000 Decrease in AP) Cash paid out for operating expenses ($700.1 Page 232 2 Capital Assets. v. beginning Additions Disposals Capital Assets.000 ? $508.000) $5.000 Decrease in Interest Payable) Cash paid out for income taxes ($250.000 Increase in Income Taxes Payable) $4. Cash flow from operations – Direct Cash collected from customers ($4.000 .500.Introductory Financial Accounting.1.000 Income tax expense – 17. end of year Dividends = $50.000 – 218.000 $319.000 239. beginning of year Add net income Less dividends Retained Earnings.000 Decrease in A/R) Cash paid out to suppliers ($2.611.000 Decrease in Salaries and Wages Payable) Cash paid out for interest ($67.000) (493.000 Sales + 111.000) (887.000) $466.
100) $900 .200 – 100 Increase in Interest Payable) $216. 20x5 Cash Flow from Operating Activities Net Loss Adjust for non-cash items Depreciation Add (deduct) adjustments to non-cash current assets and liabilities: Increase in accounts receivable Increase in inventory Increase in prepaid Insurance Decrease in salaries and wages payable Increase in interest payable $ (3.1.Introductory Financial Accounting. v.500 Increase in Accounts Receivable) Cash paid to suppliers ($165.900) (5.700) (2.000 COGS + 1.500) $ 900 (b) Cash Flow from Operating Activities Cash collections from customers ($218.000 Sales – 1.600 Increase in Inventory) Cash paid to employees ($39.600) (100) (400) 100 (3.300 + 400 Decrease in Salaries and Wages Payable) Cash paid for insurance ($2.300) (1. Cash Flow Statement for the year ended December 31.1 Page 233 Problem 9-3 (a) HHC LTD.600) (39.500 (166.500) (1.800 + 100 Increase in Prepaid Insurance) Cash paid for rent Cash paid for interest ($1.800 $ (1.400) 7.
000 Increase in cash ($32.000 Increase in A/R) Cash paid out to suppliers ($600.1 Page 234 Problem 9-4 a.000) (165.000 Cash flow from investing Proceeds on sale of equipment (Note 1) Proceeds on sale of long-term investment (Note 2) Purchase of equipment 7.1.000) $7.000 30.000 Cash flow from financing Issue of bonds payable Dividends paid 25.000 (4.53.000 12. v.000 + 17. 20x6 Cash flow from operations Cash collected from customers ($900.000 Increase in Inventory + 18.000) 17.000 $50.000 Sales . Toram Ltd. beginning Cash. Statement of Cash Flow for the Year ended December 31.000 – 21.000 (20.000) 24.000) 0 0 32.000 26.000) Loss on sale Proceeds $ 11.000 Decrease in AP) Cash paid out for other operating expenses Cash paid out for interest Cash paid out for income taxes $847.000 (650.000 30.000) Cash.000 . ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($32.000 – 25.000 COGS + 32.000 (50.000) (25.000 Note 2 – Proceeds on sale of long-term investment Net book value of investment Gain on sale Proceeds $ 18.Introductory Financial Accounting.
000) (32.000) (53.000) $32.1. Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Loss on sale of capital assets Gain on sale of long-term investment Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Decrease in Accounts Payable $100.000 4. v.1 Page 235 b.000 43.000 .000) (18.Introductory Financial Accounting.000 (12.
500 Total net sales = $367.000. current liabilities .000 Average inventory = ($60. Assume that CL = 250.000) / 2 = $75.0 times 9. v.000 + 22.500 + 32. 5.Introductory Financial Accounting.000 + 540.000 Inventory turnover = $450.500 x 7 = $367.000 / 80.8.000 = 6 Assume an initial amounts as follows: current assets . Assume that a payment of $10.29 and working capital stays the same.000 = 1. the current ratio drops to 0.000 – 20.000 purchased .000.$80.000 No impact on working capital since the decrease in cash is equal to the decrease in accounts payable.1.000 = 1.000.000 COGS) Beginning inventory = $60.000 Inventory turnover = $300.000 + 120.500 Net credit sales for 20x8 = $52.000) / 2 = $50.000.250 / ($125. c .500 = $400.$300.500) / 2 = $31. 7. a c b Average receivables = ($40.250 Days sales in A/R = $32.$100. 2.000 and CA = 180. then CL = 230. c c Average inventory = ($30. d 3.000 + 40. the current ratio becomes $90. 4.000 / 365) = 94 days Inventory increased by $20.000) / 2 = $52.000 COGS = $30. If the invoice paid is $20.000 is made. a 6. 8.25.1 Page 236 Problem 10-1 1.000 then the current ratio is 0.000 / 75.000 ($320. current ratio = $100.000 and CA = 200.000 = $450. d Average receivables = ($50.000 / 50. Impact is on the current ratio.000 = $40.000 = 6.000 + 55.78.000 / 70.000 – 120.
000 + 400.000 / 371.000 + 275.1.000 / 50.000 = 4.5 days Solvency Analysis: 20x5 Debt-to-Equity Ratio* 920.000 = 0.200.400.76 (12.000) / 379.000 + 220.000 / 379.000) / 365 = 53.00 Times Interest Earned 230.07 200.83 * debt is defined as long-term debt in this case .60 (34.7 days 20x4 594.68 (34.000 = 3.000 + 275.000 = 1. v.000 = 0.Introductory Financial Accounting.07 20x4 850.88 (12.000) ÷ (1.000 = 1.000_ / 365 = 70.000 / 60.000) / 371.1 Page 237 Problem 10-2 Liquidity Analysis: 20x5 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 712.000 / 793.000) ÷ (1.000 + 275.000 + 550.000 / 863.000 = 1.000 = 1.
000 / [(793.000 / [(2.000 + 220.300.48 [(220.000 + 793.900.000) / 2] = 13.000 / 1.000 / [(340.000 + 1.300.3 days 1.1.000 + 350.162.000) / 2] = 10.3% 200.400.000) / 2] = 3.000 = 10.000 + 2.162.000) / 2] = 3.000 / [(2.200.000 / 2.000) / 2] / (2.014.000) / 2] = 1.300.000 / 365) = 39.000 + 200.000 = 36.5% 200.1% 20x4 $700.8% 230.000 / 2.000 = 10% 230.014.014.000 / 365) = 40.300.98 Days Sales in Accounts Receivable Total asset turnover .014.900.1 Page 238 Profitability Analysis 20x5 Gross Profit Percentage Return on Sales Return on Assets $900.875.000 / [(425.000 / 1.66 [(275.2 days 2.000 + 2.Introductory Financial Accounting.3% 98.000 + 725.000 / [(2.9% Return on Equity Asset Management (Activity Ratios) 20x5 Inventory turnover $1. v.000 + 1.000) / 2] = 12.000 / [(863.000 = 39.000 / [(2.000) / 2] = 11% 110.875.900.000) / 2] = .000 + 340.10 20x4 $1.900.000) / 2] / (1.
000 + 524.72 days Solvency Analysis: 20x7 Debt-to-Equity Ratio* 820.000 + 463.000 / 60.000 / 56.000 = 1.32 20x6 800.000) / 524.000 = 2.1.000 / 524.000. v.45 Times Interest Earned 65.000 + 635.679.000 + 480.000 = 0.000 = 0.000 / 2.000 = 0.000) / 365 = 97.000) ÷ (1.576.000 / 560.1 Page 239 Problem 10-3 Liquidity Analysis: 20x7 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 1.000 / 2.08 * debt is defined as long-term debt in this case .000) / 365 = 135.52 days 20x6 1.000) ÷ (1.000 = 1.000 = 2.000 = 2.300.92 (37.114.000) / 560.04 (20.30 137.13 (20.167.08 (37.000 + 524.Introductory Financial Accounting.000 + 480.
000 / [(2.44 Days Sales in Accounts Receivable Total asset turnover .000 + 485.5 days 1.000 = 8.956.000) / 2] = 3.808.000 / [(4.003.100.3 days 2.576.000 + 2.5% 51.000 + 4.000) / 2] = 1.000 + 3.003.808.300.000 / 2.700.956.000 / 1.2% 65.000 = 41.000 / 2.679.700.000 + 300.000 + 4.000) / 2] / (2.000 / 1.679.000 / [(3.100.9% Return on Equity Asset Management (Activity Ratios) 20x7 Inventory turnover $1.1% 65.000 = 3.000) / 2] = 2.000) / 2] / (1.000) / 2] = 1.1% 137.1.628.000 + 524.000 / [(4.000 / [(2.000 / [(3.003.000) / 2] = 0.000) / 2] = 1.700.52 20x6 $1.100.000 + 3.000 = 38.000 + 570.1% 20x6 $700.1 Page 240 Profitability Analysis 20x7 Gross Profit Percentage Return on Sales Return on Assets $800.13 [(480.000.000 / [(650.000 + 2.700. v.000) / 2] = 0.6% 3.000 / [(570.Introductory Financial Accounting.000 / 365) = 87.000) / 2] = 0.100.003.1% 137.000 / 365) = 88.90 [(524.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.