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Jacques Maurice, MBA, CA, CMA, FCMA Rebecca Renfroe, B.Comm, B. Ed, CMA
Introductory Financial Accounting, v.1.1
Table of Contents
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
The Accounting Cycle – Income Statement and Statement of Financial Position Cash and Investments Accounts Receivable Inventory Long-term Assets Liabilities Shareholders’ Equity The Accounting Cycle Revisited The Statement of Cash Flow Financial Statement Analysis Solutions to Problems
3 48 58 67 86 100 114 122 131 146 159
Introductory Financial Accounting, v.1.1
The Accounting Cycle – Income Statement and Balance Sheet
The Accounting Equation To begin any discussion about accounting, the Accounting Equation is a critical starting point. The key components of the accounting equation are Assets, Liabilities and Shareholders’ Equity. The definition of an asset is a probable future economic benefit obtained or controlled by a particular entity as a result of a past transaction or event. There are three key components to this definition: a) the asset will provide some probable, future benefit to the company, b) the asset is under the control of the company; and, c) the asset has come into the company’s control through some past transaction or event. Examples of assets are Cash, Accounts Receivable, Inventory and Capital Assets. A liabilitiy, on the other hand, is an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. Examples of liabilities are accounts payable and accrued liabilities, bank loans and long-term debt. If you were to liquidate all of the assets of a company and pay off all liabilities with the proceeds, any amount left over would be the Equity in the company. Shareholders’ Equity, as it is sometimes called, is a numerical representation of the shareholders’ interest in a company. The Accounting Equation is as follows:
Assets = Liabilities + Shareholders’ Equity
The equation must hold true at all times. How we manage this is through balanced entries. That is, each time we record an event within a company’s accounting life, if we affect one side of the equation, we must also affect the other, OR we can both increase and decrease the same side of the equation to keep it in balance. Hence, we have our second truth of accounting: Debits = Credits The normal balances of the above accounts are as follows: Assets - Debit Liabilities - Credit Shareholders’ Equity - Credit
Introductory Financial Accounting, v.1.1
Let’s look at a few examples of manipulating the Accounting Equation. Recall the accounting equation:
Assets = Liabilities + Shareholders’ Equity
Example (a) When an owner invests their own cash in starting up a company, this will have two effects. First, the cash account (an asset) will increase, and the Contributed Capital account will also increase. The Contributed Capital account is part of Shareholders’ Equity and comprises of all contributions made by the shareholders to the company. Say an owner invests $50,000 of their own money to start a company. The journal entry would be: Cash Contributed Capital 50,000 50,000
The cash account gets debited (dr.) and the Contributed Capital Account gets credited (cr.). Note the convention above: • when writing journal entries, the account label that gets debited is flush against the left margin and the account label that gets credited is tabbed in; • the debit dollar amount is in the first column whereby the credit dollar amount is in the second column. The equation stays in balance as we are increasing both sides of the equation: Assets + 50,000 = Liabilities + Equity +50,000
That same company then uses some of that cash to purchase inventory to resell. That inventory costs $10,000. The journal entry would be: Inventory Cash 10,000 10,000
Note that both of these are asset accounts, but our equation stays balanced because we are increasing one asset (inventory), but decreasing another (cash): Assets + 10,000 - 10,000 = Liabilities + Equity
000.1 Page 5 (c) That same company then purchases an additional $5.000 cash.000 worth of inventory on account.000 = Liabilities +100.000.000 Upon signing the loan.75.000 Both the Equipment account and the Cash account are assets.000 . therefore. The journal entry would be: Equipment Cash 75.000 (d) = Liabilities +10.000. they do not pay cash but take on an account payable with the supplier. therefore.000 75. The journal entry to record the loan would be: Cash Bank Loan 100.000 = Liabilities + Equity (e) The same company is a little short on cash and has to take out a loan from its bank. that is. v. an asset and a liability.Introductory Financial Accounting. they will take on a liability to pay back the bank the $100.000 We are increasing an asset.000 + Equity The company then uses cash to purchase equipment that costs $75. our equation holds true: Assets + 10. we increase the asset account Cash.000 5. our equation stays in balance: Assets + 100.1.000 + Equity . Furthermore.000 100. therefore. by increasing one and decreasing another the equation holds true: Assets + 75. The loan is for $100. the company would receive $100. The journal entry would be: Inventory Accounts Payable 5. By increasing both sides of the equation. and increasing a liability.
The journal entry would be: Cash Sales Revenue 30. At the end of each year. Conversely.000 in sales in its first month. and the resulting debit or credit is either added or subtracted to an account called Retained Earnings.000 . Revenue accounts normally have a credit balance. If you remember that Income and Expense accounts get closed to Retained Earnings (which we will discuss in further detail later) then you can see how recording sales and expenses will still keep the accounting equation in balance.1 Page 6 Transactions that impact the Statement of Income The above examples used accounts that appear on the Statement of Financial Position.000 = Liabilities + Equity +30. If we continue with our examples… (f) Say that the company from the above example has $30. an expense account’s normal balance is a debit balance. which is part of the Shareholders’ Equity section of the Statement of Financial Position. via the Retained Earnings Account. All revenue and expense accounts are temporary accounts in the sense that we start the year with a zero balance in the account. when a revenue account is increased we credit the account. the income and expense accounts are closed out to zero.1. the company will have generated a net loss and a net Debit balance to Retained Earnings will result.e. 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 Revenues are greater than Expenses during a period.000 The accounting equation is maintained since Assets are increased and Equity is increased: Assets + 30.000 30. the company will have generated a net income and a net Credit entry to Retained Earnings will result.Introductory Financial Accounting. If Expenses are greater than Revenues. v. Income Statement accounts will consist of Revenue accounts or Expense accounts. For example. i.
v.15. the company sold all $15. and both are divided into current and non-current based on their liquidity.000 = Liabilities + Equity -15.000 The Statement of Financial Position The Statement of Financial Position is a snapshot of a company’s financial position at a particular point in time.1 Page 7 (g) To incur these sales. The journal entry to record that would be: Cost of Goods Sold Inventory 15.1. 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. as they no longer have it on hand to sell. and all other assets and liabilities are classified as non-current.000 worth of its inventory. The accounting equation remains in balance: Assets .000 Note that this entry removes the inventory from the company’s accounts. The Statement of Financial Position (also called the Balance Sheet) is. as are liabilities. an expanded form of the accounting equation: The Statement of Financial Position Assets = Liabilities & Shareholders’ Equity Liabilities Current Liabilities Current Assets Non-Current Liabilities Shareholders’ Equity Contributed Capital Non-Current Assets Retained Earnings Assets are listed from most liquid to least liquid. Note that Cost of Goods Sold is an expense account. . basically.000 15.Introductory Financial Accounting.
1. Equipment – this account is treated in the same manner as the Buildings account. Prepaid Expenses – this account represents amounts that have been paid in cash for expenses that have not been incurred by the company. More on this in Chapter 5. For example. money orders etc. Long-term investments – these are investments that are to be held for many years.000 and the agreement with the bank is that you will be required to pay $50. stocks.1 Page 8 Note. Accounts Receivable – the account is the sum total of all outstanding invoices which are owed to the company by its customers. For example. Accounts Receivable is normally reported net of an Allowance for Uncollectible Accounts (discussed further in Chapter 3). . this account includes all currency and equivalents (bank drafts. ready for resale. Non-current Assets: Buildings – this account is a listing of all depreciable buildings owned by the company. Inventory – this account is a listing of all of the items that the company normally sells in its day-to-day activities. and classify the remainder as non-current. The inventory can either be purchased. but is a listing of all equipment owned and used by the company. complete. when we take out an insurance policy.Introductory Financial Accounting. Land – this account is a listing of all land held by the company. and the asset is therefore shown net of accumulated amortization.000 of this balance within the next year. if your loan balance is $200.). other companies or special funds. Typical accounts you will see on the Statement of Financial Position are: Current Assets: Cash – the most liquid of all assets. The associated Accumulated Amortization contra account is normally shown directly below the asset account.000 would be classified as a long-term liability. or manufactured by the company itself. this $50. the cost of the policy will be classified as a prepaid expense.000 would be classified as a current liability and the remaining $150. Because the policy has not yet expired. we normally pay the annual premium the day the policy takes effect. In this case. A more detailed discussion of this account will take place Chapter 4. you would break out the current portion and classify it as such. Note that amortization is never taken on land. and includes investments in bonds. The classic example of this is breaking out the current portion of the long-term debt of a company. that in some cases you may have an asset or a liability that is partly current and partly non-current. v.
Introductory Financial Accounting. v. Retained Earnings – this account represents the cumulative total of the net income of a company that has not been distributed to shareholders. Current Liabilities: Accounts payable – a listing of all accounts that will be due to suppliers which are expected to be repaid within one year or one accounting cycle. trademarks and copyrights would be classified as longterm assets. Shareholders’ Equity: Contributed Capital – this account contains any amounts which have been invested in the company by the company’s shareholders. It is when the amount is due back to the lender that differentiates between current and non-current debt. The retained earnings account is adjusted at the end of each year to account for a company’s net income or loss. Taxes payable – a listing of all taxes due within one year or one accounting cycle. Note that the wages payable account is normally the result of an adjusting entry. Wages payable – a listing of all wages due to employees within one year or one accounting cycle. end of year XXX ± XXX . beginning balance Add Net Income for the year or deduct the Net Loss for the year Less Dividends declared to shareholders Retained Earnings.1 Page 9 Intangible assets such as patents. 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. The retained earnings account reconciliation from the beginning of year to end of year balance is as follows: Retained Earnings.XXX XXX .
000) 15.000 3.000 . Income statements can take on one of two formats: single step and multi-step. It takes the reader from total Revenues to Net Income. and for the above company would look like the following: The Miller Company Income Statement For the Period ended December 31.000 (8.000 The multi-step statement has multiple subtotals.000 (60. however. typically the fiscal year of the company.1 Page 10 The Income Statement The income statement is a statement that shows how a company performed during one period. 20x8 Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Income Interest Income Net Income before Taxes Income Tax Expense Net Income $100.000) $10.000 (60. Either one is acceptable under GAAP.000 18.000) (25.000) $10. the amount left over after all relevant expenses have been taken into account.000) 40.000) (8.000 (25.1. most companies tend to use some form of a multi-step statement. For example: The Miller Company Income Statement For the Period ended December 31. 20x8 Sales Interest Income Cost of Goods Sold Operating Expenses Income Tax Expense Net Income $100.000 3.Introductory Financial Accounting. The single step statement lists all revenues and then all expenses without breaking out any further subtotals. v.
When an entry is made and an account is to be debited. for every entry the lefthand entry must equal the right-hand entry in order for the Accounting Equation to hold true. When a credit is made.Introductory Financial Accounting. it is placed on the right hand sand.1 Page 11 The T-Account Named for its shape. v. an entry is placed on the left-hand side of the T. a T-account is a tool used by accountants to keep track of entries that are made to individual accounts.1. which resembles a capital “T”. Accounts Receivable Debit Credit The following represent how increases and decreases in accounts get recorded: Liabilities & Shareholders’ Equity Assets + Expenses - Revenues + + - - + . Thus.
20x7. Ian was able to convince his landlord at the mall to give him additional storage space (at no extra cost). which covered the period of January 2.) Inventory of $120. He paid cash. was purchased for $5. 20x7. An insurance policy. An outside storage facility has been rented to fill this need. Ian’s Incredible Instruments Inc. 9.000. He received 1. He only rented the outside facility to the end of November. into the company upon incorporation.000. 8. The terms of the loan. (Record the February rental payment only.1. Ian’s Incredible Instruments Inc. v.000 common shares of the Corporation. (Record the payments made from March to November only. January 2. and was rented on a month-to-month basis. 20x7. 20x7 for $350.1 Page 12 Comprehensive Example Ian has worked at a music store for the last 20 years. 7. Rent is $1. 20x7.$430. The mall location is suitable for Ian’s retail needs. Inc. is located in the Meadowvale Mall. 20x7 through December 31. Opened for business in a local mall.000 The company took out a loan for $200. his entire life savings.000 due on the first of each month. More inventory was purchased on account June 1. The lessor required Ian to pay the first and last month’s rent on January 2. with 10% annual interest due semiannually. 20x7. Credit sales . 10. Ian’s Incredible Instruments. 3. Ian invested $175. however. he has decided he is ready to go out on his own. the annual rate is 10%.$310. Ian purchased furniture and fixtures for the store at an auction for $30. are for 5 years. 11. 20x7. Having proven himself a good tenant.Introductory Financial Accounting. January 2.000.’s Sales for the first year were as follows: Cash sales . and was able to give up his off-site storage facility. 5. The lease is in effect from January 2. which was taken out on June 1.000.) 2. beginning February 1. . 6.760 cash. The following transactions took place during the fiscal year ended December 31. 20x7: 1. A total of $280. but is not large enough to store any extra inventory. 20x7. That is. Ian’s Incredible Instruments Inc. 20x7 through December 31. interest payments are due every 6 months. 20x8. After years of planning and saving. Ian signed a two-year lease with monthly rent of $8. 4.000.200 per month..000 was purchased on account.000 of the accounts receivable were collected throughout the year.
Prepaid Rent Rent Expense Cash 8. 14. For each of the above.000 10.000. Inventory Accounts Payable 120. We know that the first month’s rent will be “used up” in this year. 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. Additional cash disbursements for the year were as follows: Wages & salaries Rent Advertising Miscellaneous expenses Payments of accounts payable Interest on bank loan $165. 175.200 4.000 .000 3.000 $446.000 (note that a dividend is debited against retained earnings).200 1.000 120. Ian declared and paid a dividend of $60.Introductory Financial Accounting.000 23.1 Page 13 12.000 88.000 16. Cash Contributed Capital 2. To record the purchase of inventory on account.000 120.000 40.000 13.000 175. To record the rent paid on the outside storage facility in February for one month. However. v.1. To record Ian’s initial investment into the company. the appropriate journal entries would look like this: 1.000 To record the payment of first and last month’s rent on the lease. This is what we call a prepaid expense. the deposit for the last month won’t be used until 2 years from now.000 8.
000 7. To record the rental expense incurred from March through November. as they are no longer due to us. Note that as we collect the cash. Note that because it expires December 31. two things will happen to Ian’s Incredible Instruments Inc.800.760 5. To record the purchase of furniture and fixtures. we already recorded the initial payment in February).000 350. $1. Rent Expense Cash 10. To record the collection of accounts receivable throughout the year. Insurance Expense Cash 5.000 30.000 11. 20x7. Cash Bank Loan 200.1.000 280. the credit to the Accounts Receivable account. However. (Remember. To record purchase and payment of the insurance policy. To record sales for the first year.000 8. they will have an outstanding loan for the same amount.Introductory Financial Accounting. we must remove the receivable from our books. Cash Accounts Receivable Sales 430. for which cash was paid.800 10. sales are recorded individually as they are made.000 740. they will get $200. First.000 200.000 310. Upon receiving the loan.000 cash from the bank.1 Page 14 5. Note that in reality. Inventory Accounts Payable 350. We will deal with the interest expense incurred on the loan in a separate entry. the entire amount applies to the current fiscal year and therefore there is no prepaid portion. v. To record the purchase of inventory on account. Cash Accounts Receivable 280.800 . Hence.760 6.000 9. Furniture and Fixtures Cash 30. second.200/month x 9 months = $10. for the purposes of this example we will be entering them in one journal entry.000 10.
000 120. Retained Earnings Cash 60. To record the dividend paid.000 Wages & Salaries Expense Rent Expense Advertising Expense Miscellaneous Expenses Accounts Payable Interest Expense Cash 165.000 14.Introductory Financial Accounting. v.000 x (10% x year) = $10.000 446.000 .000 300.1 Page 15 12.000/month = $88.000 Interest on bank loan . Cost of Goods Sold Inventory 300.000 60. To remove the inventory which was sold from the inventory account and record the resulting Cost of Goods Sold expense. To record the various other cash disbursements made throughout the year.000 13.$200.000 88. Note the following supporting calculations: Rent Expense – 11 months x $8.000 23.000 10.000 40.1.
000 170.000 Misc.000 120.800 446.200 10.000 10 Bank Loan 200.000 300.000 1.000 10.000 60.760 Wages & Salaries Expense 12 165.000 2 3 5 6 11 12 13 2 Prepaid Rent 8. v.000 Expenses INCOME STATEMENT Revenues Sales 740.000 350.000 350.1.000 12 Interest Expense 10.000 350.000 4 9 Accounts Receivable 7 310.000 12 Accounts Payable 120.000 12 Advertising Expense 40.000 13 6 Furniture & Fixtures 30.000 200. Expenses 12 23.1 Page 16 The recording of the above journal entries in T-Accounts would be as follows: Assets BALANCE SHEET Liabilities & Equity Cash 1 7 8 10 175.000 430.000 1 Retained Earnings 13 60.800 88.000 5 Insurance 5.760 30.000 .000 16.000 7 Rent 2 3 11 12 8.000 Cost of Goods Sold 13 300.000 Contributed Capital 175.Introductory Financial Accounting.000 1.240 Inventory 4 9 120.200 5.000 280.000 30.000 108.000 8 515.000 280.
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.240 30.000 Credit $350.000 10.000 40.000 8. v.000 .000 740.760 165.465.1.465.000 23. 20x7 Cash Accounts Receivable Inventory Prepaid Rent Furniture and fixtures Accounts Payable Bank Loan Contributed Capital Retained earnings Sales Cost of Goods Sold Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Interest Expense Miscellaneous Expenses Debit $515.000 30.000 $1.000 $1.Introductory Financial Accounting.000 200.000 170.000 60. Trial Balance As at December 31.000 175.000 108.000 5.000 300.
000 40.000 108. As such.760 165. v. Income Statement for the year ending December 31.240 . all balances get returned to zero.000 5. 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.Introductory Financial Accounting. and the offsetting amount is the net income (or loss) that gets recorded to retained earnings.000 440.1 Page 18 A multi-step income statement for Ian’s Incredible Instruments Inc. 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 740.1. At the end of the year.000 23. would look like this: Ian’s Incredible Instruments Inc.000 10. they are referred to as temporary accounts.000 40.760 98.760 165.240 10.000 23.000 $88.000 300.000 300.000 88.000 108.000 5.000 341.240 $740.
1. v. Statement of Financial Position as at December 31. December 31. January 1.240 203.000 723.000 .240 (60.000 28. 20x7 0 88.240 $ We can now prepare a Statement of Financial Position for Ian’s Incredible Instruments: Ian’s Incredible Instruments Inc. Statement of Retained Earnings for the year ending December 31.1 Page 19 The Statement of Retained Earnings outlines the changes in the Retained Earnings account from the beginning of the year balance to the ending balance: Ian’s Incredible Instruments Inc.240 350.000) $ 28.000 175.Introductory Financial Accounting.000 170.240 30. 20x7 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures $515.000 550.240 30.000 8. 20x7 Retained Earnings.000 $753. 20x7 Net income Dividends Retained Earnings.240 $753.240 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Long-term liabilities Bank loan Shareholders’ Equity Contributed Capital Retained earnings 200.
As the liability is paid in future periods. Utilities Expense Revenues Unearned Revenue – Cash is received and a liabilitiy is recorded. Examples: Prepaid rent/insurance. As cash is received in payment in future periods.Introductory Financial Accounting.e. then both the liability and the expense are recorded in the amount relating to the current period. the receivable is removed. Examples: Payroll. Examples: Rent collected in advance.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. but cash has not been paid or received. performs the service or delivers the goods. but will not be paid in the current period. a receivable. Income taxes. we will Debit the liability and Credit cash to record the payment. office supplies. As the company earns the revenue. The adjusting entry sets up an asset. deposits on orders. Interest Expense. Interest Receivable . Examples: Credit sales. subscriptions collected in advance and gift certificates sold. Accrued Revenues – These entries are used then revenue has been earned. v. Rent Revenue. but not yet paid in cash. Accured Expenses – When an expense has been incurred. The asset will then be allocated to future periods using adjusting entries. and records the revenue. i.1. Expenses Prepaid Expenses – Cash is paid and an asset is recorded before it is used. plant & equipment Accrual – Event has occurred. an adjusting entry is made to remove the liability and record the revenue.
Therefore. 20x5 reveals that you have $5.000 12. 20x7 you pay $12. What would be the adjusting entry on December 31. During the year you purchased an additional $13. 2.000 5. The missing piece to the puzzle is the amount of supplies that were used during the year.000 $ 5.e. that will expire in 20x8. and therefore should be an expense of the current period. i. A physical count of the supplies on December 31. v. On August 1. 20x5 you had $3. assume that the company’s year-end is December 31. the missing credit or Supplies Expense has to be 11.800 + 13. 3.000 does not equal 5.800 13.800 in your office supplies inventory account. it might be helpful to look at the T-Account for Office Supplies for the year: Supplies Inventory Opening Balance Purchases Ending Balance $ 3. what was purchased during the year. 1. and what we have left at the end of the year. 20x5? To answer this question.000 The balance that remains in the prepaid insurance account of $7.200. The adjusting entry would be: Insurance Expense Prepaid Insurance 5. .1.000 of office supplies.200 ???? Supplies Expense As the T-Account shows. we know our opening balance.000 represents the portion of the insurance policy that is unexpired.200 of supplies on hand.000 At the end of the year you will have 7 months remaining on the policy. On January 1. This means that 5 months have been used in the current period.Introductory Financial Accounting.000 for an insurance policy that will cover the next 12 months.1 Page 21 Example In examples 1-5. What would be the journal entry to record the purchase of the policy? What would be the adjusting journal entry at the end of the year? To record the purchase of the policy: Prepaid Insurance Cash 12. solving the equation. However.600.
The Accumulated Amortization account. instead of taking the full $100.000 as an expense this year. What is your adjusting entry? On May 1.000 Because the Accumulated Amortization account is applied as a reduction of the related asset account.000 per year for the next 10 years.000 per year for the life of the furniture. 20x5 would be: Supplies Expense Office Supplies 3. we call it a contra account to the Office Furniture account.600 You purchase new office furniture for a cost of $100. office furniture in this case. 4. 11.Introductory Financial Accounting. 20x8. the revenue to be recorded for the year would be 8 months x $800/month = $6.600 9. on the other hand. 20x8. 20x8.400. we will take $10. will appear on the Statement of Financial Position as a reduction of the related asset account. 20x6. Therefore. v. The apartment rents for $800/month.000 (10.000 Note that the amortization expense account will appear on the income statement as an operating expense for the year. i.1.000) $ 90. there would still be 4 months of unearned . You estimate that the furniture will last 10 years and have no salvage value at the end of its useful life.000 on January 1. It is now December 31. you would have earned 8 of the 12 months of revenue. Each and every year. 20x6.000 10. you would have recorded an entry of: Cash ($800 x 12) Unearned Rental Revenue 9. It is now December 31. You received payment for the full year on May 1. when you received the revenue. Furthermore. or $10.e.1 Page 22 The adjusting entry on December 31.600 11. the adjusting journal entry would be: Amortization Expense Accumulated Amortization 10. 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. Therefore. You own an apartment building and have a tenant whose parents have paid their rent for the entire year in advance. The long-term asset section of the Statement of Financial Position would be as follows: Office Furniture Less accumulated amortization $100.600 As of December 31.
20x3. we have to first figure out how much needs to be accrued.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. that is. It is March 31 (Friday). 5. The adjusting entry on December 31. interest expense for 20x3 would be $8. This reconciles to our calculation above. and interest and the principal will be due August 1. as of December 31. That is.333 3.400 = $3. 20x3 you take out a loan for $100. the balance in the Unearned Rental Revenue account will be equal to $9. 20x4.000. What is the adjusting entry? To calculate the adjusting entry.000/week. The adjusting entry would be: Wages Expense Wages Payable 64. and our employees work 5 days a week. However. The loan has been outstanding for 5 months.000 64.000 x 4 days = $64. It is December 31. no cash has been paid for the interest expense.000 x 5/12 = $3.333 You last paid your employees on March 27. The loan agreement states that interest will be charged at a rate of 8% annually. Our employees worked 4 days from the time of their last payday until the end of the year. The adjusting entry would be: Interest Expense Interest Payable 6.200.000.000. What is your adjusting entry to record interest expense for the year? Looking at the terms of the loan. only 5 months of interest pertain to the current period. 20x8 would be: Unearned Rental Revenue Rental Revenue 6. 20x3.1.Introductory Financial Accounting.200. 3.400 6.000/5 = $16.400 According to the journal entries above. the accrued wages payable will be $16. On August 1. 20x6 (a Monday). the loan has not been outstanding for the full 12 months.1 Page 23 revenue left. and therefore. The balance in the Unearned Rental Revenue Account would have 4 months x $800/month = $3. and furthermore. v.000.333. therefore. then our daily payroll rate can be calculated as $80.000 . your year-end. we can calculate that the annual interest on the loan will be equal to $100. Your average weekly payroll is $80.600 – 6.000 x 8% = $8.
we credit the Sales account. Revenue Recognition and the Matching Principle For a firm to recognize revenue. then the goods belong to the customer the minute they are loaded on the truck and revenue can be recognized immediately. Sales and Sales Contra Accounts Whenever a sale is made. For most sales. • collectibility is reasonably assured.1 Page 24 Note that this adjusting entry does two things: First. then they belong to the customer only when they are delivered and therefore the revenue recognition point is when the goods are shipped. second. 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. then the amount of the discount gets debited to the Sales Discounts account. We MUST record all expenses relevant to the current period. In the case of a simple sale. v. Just because you don’t pay cash for something does not mean that the expense wasn’t incurred. whether we have paid for them or not. the following transactions are related: • Sales Returns: whenever customers return merchandise for refund. whenever the discount is taken.Introductory Financial Accounting. and • all associated costs can be estimated. assume that we make a sale of $1. instead of debiting the sales account. However. This allows the company to keep track of all sales returns separately from the original sale. 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 get complicated when say. This can become an issue for goods that are in transit around the company’s year-end. we debit an account called ‘sales returns’.000 and we offer a discount of 2% if the invoice is paid within 10 days. it gets onto our books the expense that we have incurred during the last 4 days of the period. But. • the revenue must be earned (all significant acts must be completed). 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.1. For example. If the customer pays 1 FOB stands for ‘Free on Board’ . • Sales Discounts: if early payment discounts are offered to customers. it gets onto our books the liability that we owe to our employees. If the goods are shipped under the terms FOB Destination. In this case. If the goods are shipped to the customer under the terms FOB1 Shipping. a 5-year warranty is provided with the product. as we will see later. this means that the cost of the goods sold become an expense the day the sale is made.
but the customer keeps the merchandise.500 1.Introductory Financial Accounting. The $20 discount will get debited to the Sales Discount account. Accounts receivable Sales • $40. The selling price is $40. n30.000 merchandise whose sales price was $1. Terms of payment are 2/10. v. that is.000. they will pay us $980. would be netted out against the Sales account.500 . when reported on the income statements. Sales Allowances are when merchandise is sold to a customer which is slightly defective.1 Page 25 • within 10 days. Sales Normal credit Balance Sales returns Merchandise returned Sales Discounts Early payment discounts Sales Allowances Customer keeps merchandise but is given a discount Example – Assume the following transactions.500 is returned to the company Sales returns Accounts receivable 1. A credit is granted to the customer. These three accounts are considered contra accounts to the Sales account and. a 2 % discount is offered if payment is made within 10 days.000 $40.1. otherwise the full amount is payable in 30 days. • merchandise is shipped FOB Shipping to a customer.
claims on those resources. 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).500 • on the 9th day after the sale. It would be impossible for financial statements to meet the needs of all users of financial statements.500 2. interest.280 720 36. and • what is the fallback position: does the company have sufficient assets to satisfy its liabilities? To summarize.Introductory Financial Accounting. Cash Sales discounts Accounts receivable 35. or similar decisions. since these needs could conflict.500 is granted to the customer. such as dividends. payment of $35.1. and so on. This does not imply that there are no other users of financial statements. The conceptual framework plays a vital role in the development of new standards and in the revision of previously issued standards.280 is received. These problems must be dealt with in an organized and consistent manner. These two groups are most likely to have the following primary needs: • forecast future cash flows: will the company have sufficient future cash flows to meet future interest. loan repayments. A credit of $2. and changes in those resources to help in assessing cash flows. Accountants are continuously faced with new situations and business innovations that present accounting and reporting problems. principal and dividend payments?.1 Page 26 • some of the merchandise was slightly damaged during before it was shipped. Consequently. . the focus of financial statements is to meet the needs of creditors and shareholders. Sales Allowances Accounts Receivable 2. • to provide information to help in assessing cash flows. and • to provide information about the economic resources of a firm. credit. the objectives of financial reporting are as follows: • to provide information useful to present and potential users in making investment.000 The Conceptual Framework A strong theoretical foundation is essential if accounting practice is to keep pace with a changing business environment. v.
the concept of relevance and reliability conflict. • feedback value – information presented today helps confirm previous decisions. For example. The rationale is that income from recurring items is a best predictor of future income. For example. consider the application of the historical cost principle which states that assets should get recorded at their original cost. From a shareholders’ perspective the value of $10.000. assume a company issues a new type of security called a ‘Special Preferred Share’ which has a limited life (i. At times. gets refunded in a pre-specified number of years) and pays a fixed rate of interest. This implies that the information provided should be useful to the users. One could argue that regardless of what you call this security. The $100 is an established transaction and is reliable. Verifiability implies that independent measures using the same measurement method should yield approximately the same result. • timeliness – information should be available to the users as quickly as possible. the representational faithfulness principle would argue that it meets all the characteristics of long-term debt and should be classified as such. accounting information should meet the following criteria: • verifiability – accounting professionals.000 today. v. Reliability wins in this case. . accounting information should meet the following criteria: • predictive value – information should be useful in predicting future outcomes.000.e. • representational faithfulness – accounting information should portray the substance of transactions over their form.Introductory Financial Accounting. the rationale for providing interim reporting to shareholders is in part based on the timeliness principle: it is better to provide information on a quarterly basis as opposed to waiting for the annual results.1. To be reliable. the income statement is generally structured by segregating recurring items against non-recurring items.000 is far more relevant. Secondary qualitative characteristics – the following two characteristics (neutrality and comparability are qualified as secondary because they are desirable qualities of accounting information. For example.1 Page 27 Qualitative Characteristics of Accounting Information There are two primary qualitative characteristics of accounting information: relevance and reliability. but are not as important as relevance and reliability. when establishing the validity of an accounting estimate should come to a consensus. that land is recorded on the company’s books at $100 regardless of the fact that it may well be worth $10. Reliability implies that the accounting information can be depended upon. For example. If a company purchased a parcel of land in 1856 for $100. 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. To be relevant.
changes in accounting principles require retroactive adjustment and restatement of prior period financial statements. Cost/benefit analysis is very difficult to quantify since most costs and benefits are intangible. we must estimate which accounts receivable are likely to become uncollectible in the future and establish an allowance for doubtful accounts. Information benefits vs.000. $100. a gain or loss arises when the proceeds on disposal differ from the net book value of the asset sold. the company would benefit economically from it (i.Introductory Financial Accounting. the principle of conservatism implies that the one with the least favourable impact on net income should be the one chosen. when companies sell depreciable assets. Thus. the financial statements of a company with net income of $10. For example. The principle of conservatism also leads to the recognition of contingent losses but does not recognize any contingent gains. That’s not to say that accounting principles cannot be changed. The principle of timeliness implies that the financial statements should be in the hands of users as soon as possible. v. When introducing an accounting principle. Also.e.1. Assume that existing equipment is technologically obsolete and a net present value analysis shows that if the equipment were to be replaced. Conservatism is an effort to ensure that the risk or uncertainty inherent in business situations is adequately considered. The only problem is that if the asset were to be disposed of. The concept of materiality can play against the concept of timeliness. the project has a significantly positive net present value). Materiality implies that financial statements are not precise but are accurate enough that any potential errors of misstatements would not affect any user. as we will see in Lesson 4. When accountants can choose between two equally acceptable accounting principles. it may be . but should be used as a way of thinking.000.1 Page 28 Freedom from bias (neutrality) – accounting information should be even-handed with respect to the impact of accounting information on users’ behaviour. For example. the company would have to show a large loss on disposal. Modifying concepts Conservatism means that it is generally preferable that any possible errors be in the direction of understatement of net income.000 would not be significantly affected if they were misstated by say. 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. 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. Here is an example of an accounting rule that could lead to dysfunctional economic decision making. information costs. Accounting rules should not provide the motivation for dysfunctional decisions. but changes should occur infrequently and only for valid reasons. Consistency implies that accounting principles are applied from period to period in the same manner. For example. 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).
. Monetary unit principle assumes that the value of the dollar does not change . Other Principles Economic entity principle states that the financial statements of an entity should report all assets and liabilities under its control. This principle will be invoked when dealing with leases and intercorporate investments in later lessons.Introductory Financial Accounting. This omission is justified on the basis of materiality. v. One of the basic assumptions when amortizing fixed assets over their useful lives is that the entity will be able to absorb future amortization charges. This assumption allows us to record long-term assets at their depreciable cost. months…) and report income and prepare a balance sheet for each of these periods. a 1925 dollar is equivalent to a dollar today.e. Revenue Recognition Principle states that revenues should only be recorded when earned.1 Page 29 possible that additional invoices are received after the financial statements are issued. Consequently. Periodicity assumes that we can breakup the life of a business in separate reporting periods (years. otherwise they would have to be recorded at the lower of their depreciable cost or liquidation value. we can add assets together even if they were purchased in different years. Matching principle assumes that when we record revenues. This is probably one of the most flawed principles. 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. all associated expenses related to the recognition of these revenues are recorded also.1.i. the measurability of such revenues are reasonably certain and collectibility is reasonably assured. quarters. Also refer to the definition of an asset (later in this section). Going concern principle assumes that the entity will continue operating in the future.
many not-for-profit organizations receive a significant proportion of their revenues from donations. or control of. Revenues of entities normally arise from the sale of goods. Assets have three essential characteristics: (a) they embody a future benefit that involves a capacity. to contribute directly or indirectly to future net cash flows. 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. the rendering of services or the use by others of entity resources yielding rent. and. and (c) the transaction or event obligating the entity has already occurred. or on demand. for example. v. provision of services or other yielding of economic benefits in the future. contributed surplus and retained earnings. the benefit has already occurred.Introductory Financial Accounting. to provide services. In addition. Expenses are decreases in economic resources. provision of services or other yielding of economic benefits. 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. it includes specific categories of items. royalties or dividends. (b) the duty or responsibility obligates the entity. resulting from the ordinary activities of an entity. singly or in combination with other assets. types of share capital. government grants and other contributions. thereby leaving it little or no discretion to avoid it. in the case of profit oriented enterprises. interest. (b) the entity can control access to the benefit. resulting from an entity's ordinary revenue generating or service delivery activities. While equity of a profit oriented enterprise in total is a residual. on occurrence of a specified event. either by way of outflows or reductions of assets or incurrences of liabilities. Liabilities are obligations of an entity arising from past transactions or events. . at a specified or determinable date. in the case of not-for-profit organizations. Liabilities have three essential characteristics: (a) they embody a duty or responsibility to others that entails settlement by future transfer or use of assets. and (c) the transaction or event giving rise to the entity's right to. Equity is the ownership interest in the assets of a profit oriented enterprise after deducting its liabilities. 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.
Losses are decreases in equity / net assets from peripheral or incidental transactions and events affecting an entity. . and from all other transactions.Introductory Financial Accounting.1 Page 31 Gains are increases in equity / net assets from peripheral or incidental transactions and events affecting an entity. v. events and circumstances affecting the entity except those that result from expenses or distributions of equity / net assets. and from all other transactions.1. events and circumstances affecting the entity except those that result from revenues or equity / net assets contributions.
Existence of the lawsuit was reported in the notes to Fastrac’s financial statements. While making a delivery.Introductory Financial Accounting. What accounting principle. even though the floor covering has an estimated useful life of 5 years. v. What accounting principle. assumption. What accounting principle. He paid for the computer by writing a cheque on the company chequing account and charged the “Office Equipment” account. 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. The cost of the floor covering for the company offices was expensed.1 Page 32 Problems with Solutions Problem 1-1 Multiple Choice Questions 1. or constraint was violated? a) Continuity assumption b) Matching principle c) Materiality constraint d) Separate entity assumption 2. or constraint was violated? a) Continuity assumption b) Matching principle c) Cost principle d) Time period assumption 3. Nimto Inc. The party sued Fastrac for damages that could exceed Fastrac’s insurance coverage. The proprietor of Front Street Drugs bought a computer for his personal use. assumption or constraint is being applied in this situation? a) Full-disclosure principle b) Conservatism principle c) Matching principle d) Unit-of-measure assumption .1. assumption. the driver of Fastrac Courier collided with another vehicle causing both property damage and personal injury.
20x8. In the rush to make it to a New Year’s party. c) Under cash basis accounting. Total liabilities of $500. and Total shareholders’ equity of $499.000 personal residence as an asset on the balance sheet of his company. there will be a balance of $25.000 in the Prepaid insurance account on December 31. the Insurance expense for the period ending December 31. 20x9. there will be a balance of $35.999 d) $1. What would be the balance for Total assets on December 31. v. financial statements. purchased a 4-year insurance policy and paid a premium of $40.039.999 6. ABC has a December 31 year end. 20x5.000 worth of inventory in the company’s December 31. According to generally accepted accounting principles.000 b) $ 959. The December 31. Shaw’s Rent-all.000 c) $ 999.000 in the Prepaid insurance account on December 31. will be $5. inventory count. ABC Ltd. Harry. there will be a balance of $20.000.1 Page 33 4. Which of the following statements is true? a) Under cash basis accounting. On July 1. which included this error.000 in the Prepaid insurance account on December 31. What generally accepted accounting principle does this contradict? a) Time period principle b) Cost principle c) Going concern principle d) Business entity principle 7. failed to include $40. after correcting for the inventory error? a) $ 40. d) Under accrual accounting.999.000. 20x5. showed Total assets of $999. 20x9. 20x8.000. 20x8. Shaw included a $200.1. M.999. 20x5. the bookkeeper for Ytwok. b) Under accrual accounting. 5.Introductory Financial Accounting. financial statements should be prepared using which of the following? a) Fair market values b) Historic costs c) Future values d) Replacement costs .
Smart presented land and buildings on her company’s balance sheet based on the appraised value of these assets at December 31. v. 20x8.1 Page 34 8. What generally accepted accounting principle does this contradict? a) Time period principle b) Revenue recognition principle c) Objectivity principle d) Business entity principle .1.Introductory Financial Accounting. K.
9. 20x2.1. The lease agreement is for one year.000 every 4 months with the first payment due November 1. 1.000 of inventory was purchased on account.000 was obtained on August 1. The loan agreement calls for repayments of $4. the company’s year end. 4. An additional $120.200 cash. An insurance policy was purchased for $1.000 was purchased on account. Books and supplies of $50. 20x3. 20x2. 20x3). 20x2.$6.000 A total of $4. 8.000 of the sales made on account were collected. The first and last month’s rent are due upon signing of the lease on July 2. In addition to the monthly rent.000 Sales on account . an offcampus bookstore where students can purchase textbooks and supplies at reduced prices. The policy takes effect on July 2. 20x2. 2.000 in return for shares in the company. Interest payments are due on the 1st of each month. 6. 20x2.1 Page 35 Problem 1-2 On July 2. You and several other shareholders invested $20. . an annual charge equal to 1% of sales is due at the end of the year (i.. A suitable location is found and rent is $1. The following are summary transactions for the period July 2. The annual interest rate is 9%. Sales for the period ended October 31. you decided to start up a new business – Heavenly Books Inc. A bank loan in the amount of $20. 5. 20x2 were: Cash sales .000. 7. 20x2 to October 31. Furniture and fixtures are purchased at a cost of $15.Introductory Financial Accounting.000 per month. on June 30.$190. These are purchased for cash. v. 3.e. 20x2 and expires on June 30.
000 $182.500 10.000 were returned to the publishers. c.1 Page 36 10. 19. 12. Credit Accrued Liabilities. Books costing $15.000 of inventory is on hand. b.Introductory Financial Accounting.000 300 130. 14. Additional cash disbursements for the year were as follows: Wages and salaries Rent Advertising Miscellaneous expenses Dividends to shareholders Interest on bank loan Payments on account re: purchases of inventory $36. Credit Accrued Liabilities. The expected income tax rate is 30%. An inventory count shows that a total of $25. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . 13. The straight line method is to be used. Required – a. 18. The interest payable on the bank loan. v. Adjustment for rent payable. Credit Accrued Liabilities. 15.000 3. The adjustment for insurance expense. 17. 16.1. Employees are owed a total of $600.800 The following adjustments at year end must be made: 11. The furniture and fixtures are expected to last a total of 10 years with no salvage value.000 2. Enter all the above transactions in T-Accounts.000 1. Invoices received but not yet paid amount to $700 for miscellaneous expenses. Credit Accrued Liabilities.
20x6. b.800 2.000 1.Introductory Financial Accounting.000 24.100 3.1 Page 37 Problem 1-3 On January 1. 20x6.000 84..000 1.000 invested by the owners as capital stock.500 . Inc.100 14.000 4.400 2.100 2.500 4. A multi-step income statement. was started with $50. c.100 50.900 ? 40.1.100 21. Global Production.200 1. 20x6: a. On December 31. A statement of retained earnings. 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. the accounting records contained the following selected amounts: Accounts payable Accounts receivable Accumulated amortization – Office Equipment Bank loan.500 157.600 2. v.000 25.300 44. $ 7.100 3.600 4. A statement of financial position. due December 31.300 18.
Issues come out in March. v.300 worth of services. your year-end. June. It is now December 31. 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) .1. record the journal entry to record the receipt of the subscription fee in January. a) On June 1. It is now April 30. It is now your year-end. you bought a piece of machinery for $50. for their monthly staff meetings. You sell subscriptions to your magazine. What would the adjusting entry be? You pay weekly salaries to your staff and your accounting period end falls on a Wednesday.750. Kittens Quarterly. What is the appropriate adjusting entry? You have a contract to provide catering services for a local company. Your year-end is June 30th. September and December. A new customer purchases a subscription in January. with no salvage value estimated at that time.Introductory Financial Accounting. INC Inc. The estimated useful life of the machine is 8 years. which was signed June 1. Today is the end of the accounting period. and you have provided your services Big Al’s Used Cars for the past month. You have provided $2. Your daily salary expense is $600. prepare the appropriate adjusting entry.000 on June 1st and again on December 1st for providing these services for one year.. on a yearly basis for the fee of $24/year. your year-end. $4. and then record the adjusting entry for the end of April. but you will not be billing Big Al until next month.000 for your annual property insurance policy eight months ago. The contract. You signed the agreement and wrote the cheque on June 30th. First. Record the adjusting entry for amortization for the year. You are a consultant. What adjusting entry must be recorded to account for the unpaid salaries? You paid $5.000. What is the adjusting entry required if your year-end is December 31st? Your company is moving into a new office on July 1st. Part of your new lease agreement required you to pay your first month’s rent.1 Page 38 Problem 1-4 For each of the following isolated situations. stated that they would pay you $6. ahead of time.
Doby Company borrowed $3. On September 1. On December 31. The $440 collection was recorded as follows: Oct 1. You are to provide the 20x5 adjusting entries required for Doby Company.1. d. Assume Doby Company publishes a monthly magazine. This transaction was recorded as follows: Jul 1. 10 percent. 20x5 Cash Note payable $3. 20x5. On October 1. Coverage of the insurance policy starts on July 1. On July 1. 20x5 Prepaid Insurance Cash $1. The total interest of $300 is payable on the due date. 20x5. The annual accounting period ends on December 31. 20x6.000 $1. the company collected $440 for subscriptions two years in advance.000 c. Doby Company paid for a two-year insurance premium for a policy on its equipment. The note was recorded as follows: Sep 1. 20x5. a.1 Page 39 Problem 1-5 Below are four transactions that were completed during 20x5 by Doby Company. Each transaction will require an adjusting entry at December 31.Introductory Financial Accounting. August 31. 20x5. 20x5. v.000 cash and gave a oneyear. 20x5. note payable.000 b. 20x5 Cash Unearned subscription revenues $440 $440 .000 $3. 20x5 a tenant renting some office space from Doby Company had not paid the rent of $500 for December. The subscription start on October 1.
ensure your answer reflects the cumulative impact of all prior parts. The company used the perpetual inventory method. 20x6. What are the total assets of Wild Corporation immediately after it has been formed and the shares sold? 2. The customer pays cash. What are the total liabilities of Wild Corporation after this transaction? 9. Wild Corporation sells 200 units of inventory for $50 per unit. What are the total liabilities of Wild Corporation after this transaction? 6.1. What are the total assets of Wild Corporation after this transaction? 8. What are the total liabilities of Wild Corporation at this point? 3. 20x6. What is total shareholders’ equity after this transaction? On April 3. Assume Wild Corporation uses a Perpetual Inventory System. Wild Corporation is formed on April 1. Wild Corporation purchases 1.1 Page 40 Problem 1-6 For the next set of questions. 20x6. v.000 units of inventory for $20 per unit. 20x6.000 common shares at $10 per share cash. What are the total assets of Wild Corporation after this transaction? 5.Introductory Financial Accounting. 10.000 cash. Wild Corporation purchases a warehouse for $300. The purchase is made “on account” with the company agreeing to pay for the goods within 30 days. What is total shareholders’ equity after this transaction? On April 5. 1. What are the total liabilities of Wild Corporation after this transaction? 12. What is total shareholders’ equity after this transaction? (CGA Canada Adapted) . What is total shareholders’ equity at this point? On April 2. Initial financing comes from the sale of 100. What are the total assets of Wild Corporation after this transaction? 11. 4. 7.
What was the subscription revenue earned during 20x7? 2.000 cash injection from one of the owners of the company.000 Entries during 20x7 80. 2. Interest accrued on the note payable was $1. 7.1.000 120. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x6? 3. 6% interest note in exchange for extending the due date on a receivable.000 1-year. The company requires that customers pay the annual subscription fee for the magazine in advance.000 from a customer for an outstanding invoice.Introductory Financial Accounting. Purchased for $500 cash an insurance policy for the following year. 20x7 128. decreases by a minus. 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. shareholders’ equity and net income. 5. v. Example: Shareholders’ Equity -500 Net Income -500 Assets Interest accrued on notes payable was $500 NC Liabilities +500 Required – 1. 4.000 90-day. Received a $50. (CGA Canada Heavily Adapted) . What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x7? 4.400. and no change by NC. Interest accrued on note receivable was $1. General Ledger Account Subscriptions Received in Advance Dr Cr Balance January1. 6. Purchased new equipment by obtaining a $200. liabilities. 3. Show increases by a plus. Received $2. Received from Smith a $10. 7% note payable from the seller.000 Entries during 20x7 Required – 1.000.1 Page 41 Problem 1-7 The following information was extracted from You Read Magazines Co.
Other expenses in 20x7 included $1. Ronald found the following: 1.000 had not yet been received.000 $21. there were goods in inventory costing $3.000 received in 20x6 pertained to a sale made in 20x5.000 and $5.000 16. Cash. calculate Sales. 2.000 was received in 20x7 and was included in cash received for sales in 20x7.000. 6. Cash’s analysis. using the accrual method of accounting.000 which was a deposit on goods that were to be purchased in 20x7.000 35. Net income and Profit margin for 20x6 and 20x7. the proprietor of Error Margin was excited to learn about profit margin analysis and immediately applied his knowledge to evaluate his business. There was no money due from customers at the end of 20x7. (CGA Canada) . 5. 3.000 30% On examination.1 Page 42 Problem 1-9 Mr. Cost of goods sold.000 of Mr.000 $10. v. respectively. At the end of 20x6.000 14. 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 $60.66% 20x7 $70. 2. He was perplexed that the profit margin had improved in spite of his intuition to the contrary.000 10. Based on the above. Identify any two generally accepted accounting principles that were violated in Mr. Purchases. accounts receivable for sales made to customers totaling $20.1. The $20. Required 1. Cash paid for purchases in 20x6 included an amount of $2.000 40. 4. At the end of 20x6 and 20x7. An amount of $5. Cash’s personal expenses.Introductory Financial Accounting.
. b. in parking lots at select locations in major urban areas. It sells the trees for cash. How should the annual cost of fertilizing. Required a. It normally takes about 15 years for a tree to grow to a suitable size. v. maintains. Use the criteria for revenue recognition to explain when revenue should be recognized for this tree farming business.Introductory Financial Accounting. pruning and maintaining the trees be accounted for? Explain. The largest cost of this business is the cost of fertilizing. operates a tree farming business. It plants. pruning and maintaining the trees over the 15-year period. and harvests evergreen trees. primarily during the Christmas season.1 Page 43 Problem 1-10 Evergreen Inc.1.
17 Dec. Prepare journal entries for the above transactions What is operating income for V.875. 3 Dec. Paid $1. 13 Dec. 31 Issued 100 common shares of the new company. 28 Dec. Paid $1. which revealed that $200 of the $300 worth of office supplies purchased on December 17 were still on hand.300 cash to the office secretary for December’s wages. 20x6? (CGA Canada Adapted) . 7 Dec. Performed a count of office supplies.000 for rental of office space for December rent. paying $1. the following transactions were completed during December 20x6. Dec. Strait opened an architecture company. Received $1. Purchased office supplies on credit for $300.. Strait Ltd.1. Strait Ltd. 31 Dec.875 from JP Developers for the work completed on Dec. Completed work for a client and immediately collected $680 in cash for the work done.1 Page 44 Problem 1-11 V.000 in cash and agreeing to pay the balance in six months.000 cash. 13. Required – a. Purchased the office furniture and equipment of a retiring architect for $4. for the month ending December 31. 1 Dec. V. 31 Dec. Completed work for JP Developers and sent them an invoice for $1.Introductory Financial Accounting.000. to V. b. Strait in exchange for $6. v.
d.1 Page 45 Problem 1-12 The following summarized transactions (in thousands of dollars) occurred during the year ended December 31. f. 20x2. $19. $36. k. v. . of which 80% were on credit. j. h. Collections from credit customers were $700.1. Wages earned but unpaid. Required 1. 20x2 for Ruiz Pharmacy: a. advertising. Prepare an income statement. 20x2 was $240.depreciation expense for 20x2 was $30. 20x2: n. l. p. To employees for wages. The following adjustments were made on December 31. To the insurance company for a new three-year fire insurance policy effective September 1. q. To trade creditors. Merchandise inventory purchased on account was $520. $500. Cash disbursements were: g. 20x5.Introductory Financial Accounting. 20x2. $15 Total income tax expense for 20x2 is $20. For the interest on the note receivable. m. e. b. The board of directors declared cash dividends of $26 on December 15 to be paid on January 21. computed as 40% of pretax income of $50. i. The notes receivables are from a major supplier of vitamins. 20x2. Total sales were $900. For new equipment acquired on July 1. c. statement of retained earnings and balance sheet for 20x2. Post all of the above transactions in T-Accounts. For insurance. The merchandise inventory as at December 31. December 31. The principal on the current notes was collected on May 1. utilities and supplies. 2. Interest for twelve months on all notes was collected on May 1. $193. o. 20x2. r. The principal on the remaining notes is payable on May 1. To Revenue Canada for income taxes. For depreciation . which were all paid in cash. For miscellaneous expenses such as store rents. $189. The rate is 12% per annum. $74.
000. 20x4 Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures Accumulated amortization $ 30. the company's year end. 20x4. Peter purchased appliances from suppliers for $850. 7.000 $763. Peter needs to prepare its financial statements for the year ended August 31. The remainder was on account.000. During the year Peter paid the taxes it owed at the end of fiscal 20x4.500 100.000 $763. During fiscal 20x5 Peter paid $15. 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. Ottkancester’s largest independent household appliance store. Peter paid salaries and commissions to employees of $200. is shown below. mainly to builders. Cash sales were $775. Peter's Appliances Shop Ltd. All purchases were made on account.000 446.500 by Peter. Peter collected $375. 5.500 14.350. .000 for appliances it purchased on credit. Peter paid suppliers $600. Peter uses the financial statements mainly for tax purposes and to show the holders of the long-term notes.000 8.000 260.000 during the year from customers who purchased on credit.1 Page 46 Problem 1-13 Peter is the owner and operator of Peter's Appliance Shop Ltd.. On August 31.000.000 20.000 -40. The following information has been obtained about the fiscal year just ended: 1. 3.000 in installments on its taxes. Peter has been in business for five years. Sales during the year were $1.500 It is now mid-September 20x5. 20x5. v.000. Peter’s balance sheet for August 31. 4.000 123. 20x5. At year end the accountant estimates that Peter owes an additional $12.500 Liabilities and shareholders' equity Accounts payable Taxes payable Interest payable Long-term notes payable Capital stock Retained earnings $265. 6. employees were owed $7.000 190.000 in taxes.000 110. Balance Sheet As at August 31. 2.Introductory Financial Accounting. The cost of the appliances sold during fiscal 20x5 was $745.1.000.
For accounting purposes.Introductory Financial Accounting. stove. . During the year Peter paid $8. Before July 1. 13. Peter accepted $10. These deposits were not included as part of cash sales. 20x5 Peter paid $3. 20x5 Peter pays $4.1 Page 47 8.000. Peter expects that the appliances will be delivered in early November 20x5. Required – Prepare an income statement. treat this as a dividend. v.5%.000 on September 1. He took a refrigerator. Beginning July 1.500 from the store and installed them in his new kitchen. Peter paid $20. During 20x5 Peter purchased new capital assets (furniture and fixtures) for $25. for the year ended August 31. Interest is paid annually on September 1. Amortization expense for 20x5 is $22. a statement of retained earnings and a balance sheet and a statement of cash flow for Peter's Appliance Shop Ltd. 9. In addition to the interest payment.1.000 in cash for other expenses related to operating the business in fiscal 20x5. 14. In addition. Peter must pay 2% of annual sales to the property owner 60 days after the year end. and microwave that cost $4. The deposits pertained to a particularly hard-to-get appliance. 10.000 a month for the rent of its store. Peter paid $225. 11. The prepaid rent at the beginning of the year represented 4 months of prepaid rent at the old location. The interest rate on the notes is 8. Peter recently redecorated his kitchen at home.500 in interest to the holders of the long-term notes.000 in deposits from customers who wanted a guarantee that their appliances would be delivered when they needed them. 12.500 a month in rent. 20x5.000 cash. The terms of the lease require that rent be paid six months in advance on January 1 and July 1 of each year. 20x4 to reduce the balance owed on the long-term notes.
bank accounts. 3. etc. This process is as follows: 1.1 Page 48 2. adds the outstanding deposits and deducts the outstanding cheques to arrive at the balance per books: Balance per bank statement Add outstanding deposits Less outstanding cheques Balance per books $XXX XXX -XXX $XXX . Cash Cash and Investments For accounting purposes. 4. Prepare a list of cheques that were written but that have not yet cleared the bank account (outstanding cheques). It starts with the opening bank balance and ends with the ending balance.1. Typically. The bank reconciliation starts with the balance per the bank statement.Introductory Financial Accounting.. The balance showing on the bank statement needs to be reconciled to the balance shown in the company’s cash account. The bank statement is a running total of all transactions that were made in the account since the last bank statement was produced. cash generally means any cash on hand. Identify any transactions that appear on the bank statement that have not been recorded in the cash account. 2. Prepare journal entries to record these items and post to the general ledger. For example. 5. bank service charges. v. petty cash and any foreign currency on hand. Accompanying the bank statement are all the cheques that have cleared the bank account. every 30 days a company will receive a bank statement from the bank. cheques deposited that are returned due to insufficient funds (NSF cheques). and Prepare a list of deposits that were made in the cash account but were not yet recorded on the bank statement (outstanding deposits). Compare all deposits recorded on the bank statement to those recorded in the cash account. Ensure that all cheques returned correspond to the amount entered into the cash account.
we prepare the bank reconciliation: Cash per bank.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. The next step will be to calculate the revised cash balance: Cash balance. Cash ($332 – 323) Accounts payable To record the error in recording cheque # 345.644 $156 $156 788 788 9 9 Finally. 20x7 Add outstanding deposits Less outstanding cheques Cash per books.579 (156) (788) 9 $42. 20x7 shows the following: • ending balance of $45.1.673 • 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. v. August 31. August 31. • the total outstanding cheques amount to $6.673 3.644 . Accounts receivable Cash To record the returned cheque.545 was not recorded on the bank statement • the general ledger cash account shows a balance of $43.574) $42. before adjustments Less bank service charges Less NSF Cheque Add error on cheque # 345 Cash balance after adjustments $43. The correct amount is $323. 20x7 $45.545 (6.1 Page 49 Example – The Parkes Company’s bank statement dated Aug 31.574 • a deposit made on August 31 in the amount of $3.Introductory Financial Accounting. The cheque was incorrectly written in the cash disbursement journal as $332.
They would normally be classified as current assets. If management intends to hold these for a period of less than one year. Regardless of how they are classified. 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.Introductory Financial Accounting. • available for sale investments: any unrealized gains or losses are charged to Other Comprehensive Income. they are classified as current assets. Other Comprehensive Income becomes part of Shareholders' Equity. the investments are carried at fair market value. and balance sheet valuation is the same: interest accrued or dividends declared are recorded as investment income. By their very nature. trading investments: all gains. the accounting for investment income. are charged to Net Income. there is no difference in the accounting for these investments. Available for sale investments also occur whenever debt securities are acquired with the intent of liquidating them before their maturity. operational or financial policies. For both types of investments. the subject of this chapter. whether realized or unrealized. strategic investments are classified as long-term investments. Non-strategic investments. consist of passive investments in the shares of another company. 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. v. Any realized gains or losses are charged to Net Income.1 Page 50 Non Strategic Investments Investments in the shares of another corporation can broadly be classified as non-strategic or strategic investments. They are therefore specifically held for purposes of resale and are designated by management as such. 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.1. otherwise they are classified as long-term assets. Where the two methods differ is on how the adjustment to fair market value is recorded. These investments will either be classified as held for trading or available for sale securities. at the balance sheet date.
1. On February 12. 20x5 . 20x5 Available for Sale Investments Cash Cash Investment income Available for Sale Investments Unrealized holding gain $15. you sell the investment for $16.000 600 600 1.900 1.000 $15. 20x5 Dec 31.500 1.500 Oct 15. the fair market value of the shares is $16.000 $15. The investment is classified as an available for sale investment.1 Page 51 Example .500 If the investment has been classified as a trading investment.on June 30. 20x5 At December 31.900 $16.000 600 600 1.500 $16. 20x5. 20x5 you purchase the shares of another company for $15. 20x6. 20x5 (the balance sheet date). The following journal entries will be recorded with regards to this investment: Jun 30.000. 20x6 Cash Unrealized holding gain Gain on sale of investments Available for Sale Investments XXXX XXXX $1. $15.Introductory Financial Accounting.500 1. v. 20x5 Dec 31.900. At December 31.500 1.500 Oct 15. 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. then the following journal entries would have been recorded: Jun 30.500. On October 15. 20x5 Held for Trading Investments Cash Cash Investment income Held for Trading Investments Unrealized trading gain Note: the difference is that the unrealized trading gain is part of net income and gets closed out to retained earnings. 20x5 we receive a dividend cheque for these shares in the amount of $600.
20x6 Cash Realized trading gain Temporary Investments $16.500 .1 Page 52 Feb 12. v.900 400 $16.Introductory Financial Accounting.1.
An analysis of the cash account for Swiss Company at December 31. 20x8. and it was deposited on May 18. 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. v. The May bank statement listed the deposit at $512. a company received a cheque from a customer in payment of the related account receivable.200 What amount should be reported as cash in the current asset section of Swiss Company’s balance sheet at December 31.1. During May. 20x8 revealed the following details: Balance in bank account Customer cheques dated December 31. 20x8? a) $15.095 b) $21.700 3.595 c) $25. The cheque was written for the correct amount of $152.1 Page 53 Problems with Solution Problem 2-1 1.595 . on hand but not yet deposited Swiss Company cheques that have not cleared the bank account $15.095 d) $31.Introductory Financial Accounting.095 9.
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) $4.327 $15 48 63 34 Problem 2-2 The following information for the month of December 20x6. December 1 Cash received during December Cash payments made during December Cash balance per bank statement.700 77.279 b) $4.1 Page 54 3.312 d) $4.288 c) $4. $ 3.548 6.1. Cash balance per books.700 580 1. with respect to cash activities. December 31 Cheques outstanding.Introductory Financial Accounting.000 77.200 cheque received from a customer on December 13 in payment of an account receivable was incorrectly recorded as Required a.300 52 1. December 31 Bank service charges for December Deposits in transit at December 31 Cheque issued by Sparg Ltd.300 5.225. A company is preparing its May bank reconciliation. Prepare any adjusting journal entries that would result from the December 2006 bank reconciliation. v. was gathered by Sarg Ltd.020 . The ending balance on the May bank statement is shown as $4. deducted from Sarg’s account in error by the bank A $1. Prepare the December 20x6 bank reconciliation for Sarg.’s bookkeeper. At the end of the month. b.
’s cash account according to its accounting records was $4. had been incorrectly recorded in the books of Focus Ltd. 20x7.1. showed a balance of $480. Prepare the necessary journal entry(ies) to bring Focus Ltd. In preparing the bank reconciliation. c) Bank service charges for December amounted to $35 and had not yet been recorded by Focus Ltd. as $260. (CGA Canada) . Required – 1. b) The March 31.’s cash account up to date at March 31. at March 31. 20x7. e) A $530 payment on account received from a customer was incorrectly recorded in the books of Focus Ltd. in the amount of $620. Prepare a bank reconciliation for Focus Ltd.Introductory Financial Accounting. f) The balance in Focus Ltd. the following information was determined: a) The following cheques are outstanding at March 31. v. 20x7: #501 for $780 and #533 for $1.200.915.200 had not been received by the bank in time to be included in the December bank statement.1 Page 55 Problem 2-3 The March 31. deposit of $6. 2. 20x7. as $350. 20x7. bank statement for Focus Ltd. for the cash purchase of office equipment. d) Cheque #521 issued by Focus Ltd.
000 20. Assuming these investments are classified as held for sale investments.000 30. Support your answers with calculations. decided to invest in the shares of a number of "Hi-tech" companies.000 26. all the XYZ Computer shares are sold for $75.000.'s temporary investments at December 31. Required a) As chief accountant for Holdco. write the journal entries to record the two sales. .000 51.000 31. Holdco Ltd.000 $234.000 9.000 7.Introductory Financial Accounting.000 Recent discussions have brought to management's attention that there are different methods of accounting for temporary investments. 20x0 $ 72. v. 20x1. 20x0.000 10.000.1 Page 56 Problem 2-4 During 20x0.000 45. advise management of two alternative methods of accounting for temporary investments and indicate the effect each has on balance sheet and income statement information. 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. Management is quite unfamiliar with these different methods and has approached you for this information.000 28.1. and all the Strategic Air Defence Systems shares are sold for $35.000 51.000 5.000 $ 70.000 44. b) On January 10. The data on Holdco Ltd.000 $226.000 63.
000 20x2 $16.000 $66.000 14.000 32.500 31.500 $62. calculate the amount of unrealized trading gain or loss for each year.500 14. calculate the balance in Other Comprehensive Income at the end of each year.000 20x0 $18.000 28.500 29.000 12. v. .300 20x1 $19.800 $60.1 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.Introductory Financial Accounting. Assuming these investments are classified as trading investments.1.000 $57.500 Required a) b) Assuming these investments are classified as available for sale.000 10.
000 and that the aging of accounts receivable is as follows: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750.000 Based on past experience. 8% of accounts between 61-90 days and 40% of accounts over 90 days. the company estimates that 1% of current accounts will eventually become uncollectible. 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. 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. Aging of the accounts receivable listing This involves grouping all outstanding receivables based on how long these have been outstanding.000 120.000 50.500 . the aggregate of the unpaid invoices at any point in time.200. For example. v. assume the total receivables add up to $1. where the allowance for doubtful accounts is estimated directly. an account receivable is created.000 $45. Accounts Receivable Whenever credit is extended to customers for the provision of goods or services.000 $1. Accounts receivable are reported on the statement of financial position at their net realizable value (NRV).000 x 40% $ 7.000 280.600 20.000 x 1% 280.Introductory Financial Accounting.1. whereby we estimate the amount of bad debt expense on the income statement.500 8.200.400 9. There are two approaches to calculating the allowance for doubtful accounts: the balance sheet approach. There are generally three approaches to estimating the allowance for doubtful accounts directly (balance sheet approach): 1. 3% of accounts between 31-60 days.000 x 3% 120. therefore.000 x 8% 50. and the income statement approach. Accounts receivable are.1 Page 58 3. which is equal to the net amount of outstanding invoices the firm expects to recover.
Introductory Financial Accounting. Allowance for Doubtful Accounts Cr. it may be able to identify which specific accounts may become uncollectible. The journal entry to record bad debt expense under either the balance sheet or income statement approaches is: Dr. 3.1 Page 59 2. or (2) the amount is small and the cost of recovering the account is greater than the balance owed. Any accounts written off are written off against the allowance for doubtful accounts: Dr. The income statement approach is used whenever a company offers their customers revolving credit facilities (i.000 x 5% = $60. For example. 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.000 and the company estimates that 5% of these accounts will eventually become uncollectible.1. Specific account identification When a company has accounts receivable from a limited number of customers and has an intimate knowledge of these customers. Note that this approach does not estimate the allowance for doubtful accounts. Accounts Receivable Recording recoveries of accounts written off When an account that was previously written off is subsequently recovered. a department store which offers their customers a credit card). then the allowance for doubtful accounts at the end of the year will be $1.200. if the ending accounts receivable balance is $1.200. Accounts Receivable Cr. Allowance for Doubtful Accounts .000. but estimates the amount of bad debt expense. As a percentage of the ending accounts receivable balance This approach simply takes then ending accounts receivable balance and multiplies it by a percentage. we first reverse the journal entry made to write off the account: Dr. it would not be meaningful to age the accounts receivable listing.e. v. Bad Debt Expense Cr. so we estimate the bad debt expense as a percentage of credit sales. The sum of the estimated uncollectible accounts at any point in time will form the allowance for doubtful accounts. In this case.
000 We then record the cash receipt on the accounts receivable: Cash Accounts Receivable $10.000 $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. Cash Cr.000 Beginning Bal Recoveries Ending balance before adjustment .000 $50.000 $10.Introductory Financial Accounting.000 debit balance in the Allowance for Doubtful Accounts: Allowance for Doubtful Accounts Write-offs $75. previously written off accounts totaling $10.000 were written off.000 $75. v.800. During the year.1 Page 60 We then record the collection on the recovered accounts receivable: Dr.1.000 10.000 $15.000. The balance in the allowance for doubtful accounts at the beginning of the year was $50. The journal entry to record the accounts written off will be: Allowance for doubtful accounts Accounts receivable $75.000 were recovered.000 This will result in a $15. the following transactions took place: • • accounts totaling $75.000. Accounts Receivable Example – The Jasmine Company’s accounts receivable at the end of the year totaled $2.
000 x 6.75% of the accounts receivable balance will be uncollectible.500 The bad debt expense will be $94. management estimates that the allowance for doubtful accounts should be $68.000 150.0% Management estimates that 2. v.000 x 2.000 x 15.1.000 x 1.5%) + (250. Using specific identification of accounts. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $92. $94.75% = $77.000 3.0%) + (150.1 Page 61 In order to calculate the bad debt expense for the year. we will assume four independent scenarios: 1.000 x 2.000 600.000 $83.0% 15.500 since this is the entry required in the Allowance for Doubtful Accounts account to bring the account to a credit balance of $79. The accounts receivable aging is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days 1.000 The allowance for doubtful accounts is estimated to be: (1.800.000 250.000 $2.500: Bad Debt Expense Allowance for Doubtful Accounts 2.Introductory Financial Accounting. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $83. The allowance for doubtful account should be established at $2.5%) + (600.000.5% 2.500 $94.500 Estimated % Uncollectible 1.000.800.800.0%) = $79.000 .5% 6.800.000 $92.
000 dr.000 $90. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $90. = $75. we were estimating the Allowance for Doubtful Accounts with the residual being bad debt expense.000. Bad debt expense will then be equal to $6.000 x 1.000. we are effectively estimating the bad debt expense for the year and the residual becomes the Allowance for Doubtful Accounts.1 Page 62 4.5% = $90. v.1.000. Note that when using this approach. In approaches 1-3. Total credit sales for the year amounted to $6.5% of total credit sales.000. .000 cr. Management estimates that bad debt expense will be equal to 1.000 This will cause the allowance for doubtful accounts to have a credit balance of $15.Introductory Financial Accounting. + $90.000.
1.000 20.000. v.900 c) $6. What is bad debt expense for 20x9? a) $1.000 360.600 b) $1. 20x8 (credit) Total credit sales during 20x8 Total collections on accounts receivable during 20x8 Uncollectible accounts written off during 20x8 $80.600 d) $6. At the end of 20x9. What should be the adjusting entry amount for doubtful accounts at December 31.400. A company estimated the needed balance in its account “allowance for doubtful accounts” by aging the accounts receivable. the aging schedule indicated that the balance of the allowance account should be $6. January 1.800 c) $7.000 d) $13. At the end of 20x8. the company wrote off $500 and collected a $300 receivable that had been previously written off as uncollectible. January 1.800 .000 e) $13.900 2.000 (11. During 20x9.000 Experience indicates that 4% of the uncollected accounts receivable at the end of each year ultimately will be uncollectible. 20x8 a) $4.000 b) $4. the balance of the allowance account was $5.Introductory Financial Accounting.000) 400. A company reported the following items for 20x8: Accounts receivable balance. 20x8 Allowance for doubtful accounts balance.1 Page 63 Problems with Solutions Problem 3-1 – Multiple Choice Questions 1.
2004 Required – a. January 1. 2004 adjusting journal entry to record bad debts.875 $2. .875 $2. What were the net realizable values of the accounts receivable as shown by the accounting records before and after the write-off? Before $2. 2004: 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. A company had accounts receivable of $3.000 After $2. assuming the allowance method is used to account for uncollectible accounts. 2004 Allowance for doubtful accounts.000.975 $2.900. b.000 and an allowance for doubtful accounts of $125. c. January 1. $ 15. Provide the December 31.000.970 $3.000 $3. assuming the allowance method is used and uncollectible accounts are estimated to be of 1% of credit sales. for the year ended December 31.000 11.000 14.200. 2004 adjusting journal entry to record bad debts.000 cr.1 Page 64 3.000 800.000 3.1. 63.000 dr.875 $3.095 a) b) c) d) Problem 3-2 The following information relates to Merit Ltd. Provide the December 31. assuming the allowance method is used and management estimates the allowance to be 3% of the closing Accounts Receivable balance.Introductory Financial Accounting. Provide the journal entry to write off actual accounts receivable determined to be uncollectible and recoveries.000 1. v. just prior to writing off as uncollectible an account receivable of $30.000 55.
000 7.000 45.000.000 .000 80.1.000 60. v.000 27. 20x0.800. 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 90. 20x1 and 20x0: 20x1 Credit Sales Collections (excluding recoveries) Accounts written off Recovery of accounts previously written off Days Past Invoice at December 31 0 – 30 31 – 60 61 – 90 Over 90 Required – Prepare all journal entries to record the above transactions $3.000 2.Introductory Financial Accounting.000 234.000 16.000 - 277.400.000 20x0 $2.1 Page 65 Problem 3-3 Sigma Company began operations on January 1.915.000 15.000 25.000 2.
if any. began operations on January 1. 20x6 there was a $2. EED Ltd. The promissory note bears an interest rate of 12%.1. Suppose now that instead.000 credit balance in the allowance for doubtful accounts account and a $40. During 20x7 the following summarized transactions occurred: 1. prepare journal entries. The company uses the allowance method of accounting for bad debt expense. 20x6.000. required at December 31. On December 31. Sold merchandise on credit for $500. 2. Based on industry averages and its experience in 20x6. 3. Required 1. to record bad debt expense for the year and accrue interest on the promissory note. v. if any. With all other data being the same from above. 20x7.000 debit balance in the accounts receivable account. 20x7 to record bad debt expense for the year. 20x7.1 Page 66 Problem 3-4 EED Ltd.000 in payment of outstanding accounts receivable. On December 1. EED Ltd. Prepare journal entries to record the above transactions on the books of EED Ltd.500. In addition. (CGA Canada adapted) 2. Received cash of $400. Wrote off uncollectible accounts receivable in the amount of $1.Introductory Financial Accounting. an accounts receivable in the amount of $3. 4. decided that an allowance equal to 5% of total accounts receivable would be sufficient to cover uncollectible accounts. expects 2% of credit sales to be uncollectable. prepare the journal entries. . required at December 31.000 was converted to a 6-month promissory note to allow a cash-strapped customer some time to meet his obligations.
Little Company purchases $5. When we talk about a perpetual inventory system. the amount the company generally receives from its customer should always be greater than the value of the inventory. Little Company makes its first big sale. We still increase the inventory account by the amount of the purchase. The Perpetual Inventory System The term perpetual means continuing without interruptions. v. Each item that is purchased for resale gets debited to the inventory account. a physical count of inventory will be taken to ensure accuracy of the perpetual records. we mean an inventory system that has no interruptions.000 10.000 Note that even though we are not paying cash.000 worth of inventory. this time on account. Inventory A key part of determining the cost of the items that a company sells to its customers. Furthermore. paying cash. We will begin by looking at two fundamentally different types of systems.Introductory Financial Accounting. What that means is that inventory is tracked constantly in a real-time basis.000 The next day.1. The journal entry would be: Inventory Cash 5. or never ending.000 of inventory. and any adjustments that are needed will be made to the inventory account. After two weeks of business. and then evaluate the different valuation methods a company can chose to determine the cost of inventory. They sell $4. On the first day.000 5. we just create a payable instead of reducing our cash account. From time to time. Inventory Accounts Payable 10.000 worth of inventory to a customer for $6. 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. is the inventory system that it chooses. as well as valuing the items that it has on hand to resell at any point in time.000 cash. the effect on the inventory account is the same as the above journal entry. . Example: It is Little Company’s first year of business.1 Page 67 4. Little Company purchases an additional $10. Note that unless a company is offering a discount to get rid of inventory or for some other reason.
1. The Periodic Inventory System Under the Periodic Inventory System. However. we do not keep a “running total” of inventory.Introductory Financial Accounting. These are: . Continuing with the example above. is used to keep track of all of the costs of all of the items a company sells in one period. Cost of Goods Sold (COGS). Purchases has several contra accounts that track other expenses or discounts that may be associated with the purchases. which we will now turn our attention to.000 The Purchases account keeps a running total for the year of all purchases of inventory made. under a periodic inventory system. First. Second. that first purchase of inventory for $5.000 cash would be recorded. Under the Perpetual system the COGS is a running total. it records the expense of the items that were sold. however. the journal entry would be: Cost of Goods Sold Inventory 4. nor do we keep a running total of COGS. To do this. Instead.000 This journal entry does two very important things.000 worth of inventory from our Inventory Asset account. as: Purchases Cash 5. v. as is the inventory account. we have not removed the items that were sold from our inventory account. This varies significantly from the Periodic Inventory System.000 6.000 4.000 5. This expense account. So what do we do with the purchases of inventory we make throughout the year? Throughout the year.1 Page 68 To record the sale. as purchases are made of inventory they are tracked in a temporary account called “Purchases”. we do a physical count of inventory at the end of the year to determine the amount to include on the Statement of Financial Position under “Inventory”. the journal entry would be: Cash Sales Revenue 6. it removes the $4. we have recorded the sale and the receipt of cash.000 At this point.
000 worth of inventory on hand. If you remember. the Purchase account and all contra accounts are closed out to zero. At the same time. The new journal entries would be: Purchases Cash Purchases Accounts Payable 5. v.1 Page 69 Purchases Normal debit balance Transportation – In Freight charges Purchase Discounts Early payment discounts Purchase Returns Merchandise returned Purchase Allowances We keep merchandise but are given a credit Running totals are kept in each of the above accounts for the year. The amount needed to balance the equation is the Cost of Goods Sold.000 Let us suppose that those were the only purchases made during the year.000 10. based on the physical count.000 5.Introductory Financial Accounting. the inventory account is adjusted to the appropriate ending balance. the opening inventory was $0.000 were made. as this is a new business. The Cost of Goods Sold Equation is as follows: Beginning Inventory + Purchases (net of contra accounts) = Cost of Goods Available for Sale Ending Inventory = Cost of Goods Sold Example 1 – Let us use the Little Company example from above.000 and $10. Purchases of $5. and that at the end of the year a physical count of the inventory revealed that there was $11.1. At the end of the year.000 10. To calculated COGS: .
v. Inventory Purchases Transportation-in Purchase returns and allowances Purchase discounts 48.Ending Inventory (as per count) = Cost of Goods Sold $ 0 15.000 Example 2 – Tetrie Company shows the following balances at the end of the year: Dr. the Purchases account and all of the associated contra accounts have been set back to $0.000 and it should be.000.000 Note that the Inventory balance given of $175.000 2.000 11. $360.Introductory Financial Accounting. Cost of goods sold can be independently calculated as follows: Beginning Inventory + Purchases (2.476.000) $2.000 $4.1 Page 70 Beginning Inventory + Purchases ($5. They are ready for the next fiscal year.000 48.000 185.000) = Cost of Goods Available for Sale .000 .000 + 36. Therefore.000 Cr.000 27.000 36.1. $175.000 2. 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 (360. A year-end count reveals that the ending inventory balance should be $360. in order to get the balance in the inventory account to $360.836. Furthermore.000 + 10.000. The balance is sitting at $175.661.000 27.700.000) .000 – 27.000 = $185.000.700.476.000 increase) Purchases (close account) Transportation-in (close account) 2.000 we must increase it (or debit it) by $185.000 2.000 – 48.Ending Inventory (as per count) = Cost of Goods Sold $175.000 – 175.700. according to our count.000 2.000 would be the ending inventory balance from last year.000 Tetrie uses a periodic inventory system.000 36.
That is to say. Conversely. that inventory is mixed all together and. the ending inventory is equal to the most recent purchases. Note that regardless if a company is using a periodic or perpetual system. we don’t know specifically which items are being sold so we use an average of some sort to determine cost. In this case. We will now discuss how we attach value to the inventory.Introductory Financial Accounting. like a car dealership. that is at what cost do we record the inventory and COGS. 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). There are two different valuation methods that can be used to calculate the value of inventory: specific item valuation or cost flow assumption. Some examples of situations where this method would be possible are: when items have specific serial numbers. like a jeweler. Specific Item Valuation This method is used when inventory items can be specifically identified. or when a company has relatively few items in inventory that have a specific cost associated with them. FIFO Under the FIFO method. That is.1. v. it is possible to track each item in inventory separately. we assume that the “First In = First Out”.1 Page 71 Inventory Valuation Methods The above discussion of periodic vs. Cost-Flow Assumption This method is used when items cannot be differentiated from one another. we remove its specific cost from inventory and debit COGS at the carrying amount. or when the value of the items is so small that it does not warrant the cost of tracking the specific item value. the COGS is equal to the opening inventory + earlier purchases. therefore. . perpetual inventory systems dealt with how we track the inventory and purchases that flow through a company. when the item is sold. both the COGS and the ending inventory cost will be the same under the FIFO valuation method.
20 1.25 $240 500 (400) (240) (125) 330 (250) Balance Units Total Cost 400 600 1.Introductory Financial Accounting.10 1. First.00 each. we know that we sold a total of 700 + 200 = 900 units.25 = $125 Total value of ending inventory = $330 + 125 = $455 Using the FIFO perpetual method. v.25 1.00 1.140 Jan 19 Jan 25 300 600 400 375 705 455 Note that the ending inventory result under FIFO is the same under both the periodic and perpetual methods. Throughout the period. They purchased these units for $1. we sold . 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 $1.25 1. This is not a coincidence – both approaches always provide the same result.000 $400 640 1.20 each Purchased 400 units @ $1.1 Page 72 Example – On January 1.10 = $330 January 5 purchase = 100 units x $1.10 each Sold 200 units Under the FIFO periodic method. Cost of goods sold can be calculated in two ways.470 (455) $1.1. 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. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1. Lainey Company has 400 units in its opening inventory. Under FIFO.25 each Sold 700 units Purchased 300 units @ $1.070 1.20 1. using the cost of goods sold equation: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.015 Secondly.
They purchased these units for $1.10 each Sold 200 units Under the annual Weighted Average method.1 Page 73 the units in opening inventory plus the first of the purchases we made through the year.00 = 200 units @ $1. Throughout the period. So COGS would be calculated as the cost of the first 900 units. the unit cost of inventory items is determined using the following formula: Unit Cost = Cost of Goods Available for Sale/Units Available for Sale Example – On January 1. the total sum of the year’s activities are taken into account at the end of the year to make the determination of the value of inventory.Introductory Financial Accounting. We then close out the purchase account and the associated contra accounts to determine what the COGS is. that is. 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. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1. Lainey Company has 400 units in its opening inventory.20 = 300 units @ $1. one is used when you have a periodic system.1. The annual weighted-average for periodic systems uses a similar methodology. Annual Weighted-Average – Periodic Systems Under a periodic system. Opening Inventory January 3 purchase January 5 purchase COGS 400 units @ $1. Using this method. we calculate the average cost of inventory as follows: .20 each Purchased 400 units @ $1.015 Weighted-Average Method There are two versions of this method. v.25 = 900units $ 400 $ 240 $ 375 $1.00 each.25 each Sold 700 units Purchased 300 units @ $1.
Subsequently.10 each) $ $400 240 500 330 $1.1 Page 74 Cost of Goods Available for Sale Opening Inventory (400 units @ $1. As such.070 1.018 Alternatively.00 each) January 3 Purchase (200 units @ $1.20 each) January 5 Purchase (400 units @ $1.13077/unit = $1.470/1. Unit Cost = Cost of all goods on hand/number of units on hand. Under this system.25 each) January 19 Purchase (300 units @ $1.018 Moving Weighted-Average – Perpetual Systems You will remember that under a perpetual inventory system.13077/unit = $452 COGS = # units sold x unit cost = 900 units x $1. . then that is the unit cost used to determine the COGS for that sale.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.Introductory Financial Accounting.300 units = $1. that is the unit cost after the last purchase previous to the sale.470 (452) $1. we are keeping a running total in the inventory account. whatever the unit cost is at the time of a sale.470 Units 400 200 400 300 1.1.13077/unit Ending Inventory = # units in inventory x unit cost = 400 units x $1. The moving weighted-average system of inventory valuation takes this into account. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1. the average unit cost is recalculated every time a purchase is made. v.
Purchases (Sales) Date Jan 1 Jan 3 Jan 5 Jan 10 Jan 19 Jan 25 1 2 Balance Total Cost $240 500 (798) 330 (224) Units 400 600 1. Unit Cost = Cost of all goods on hand/number of units on hand.20000 1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.000 300 600 400 Unit Cost Total Cost $1.00000 $400 1.00 each.12000 672 448 Units 200 400 (700) 300 (200) Unit Cost $1.Introductory Financial Accounting.1.10000 1.14000 1.1 Page 75 Example – On January 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 1.140 342 3 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 = $1.12000 Unit Cost = $640 / 600 Unit Cost = $1. under this system we recalculate the unit cost each and every time we make a purchase.25000 1.022 Alternatively.066671 640 2 1.14000 1.20 each Purchased 400 units @ $1.25 each Sold 700 units Purchased 300 units @ $1.10 each Sold 200 units Remember. v.022 .070 1.140 / 1. Throughout the period. Lainey Company has 400 units in its opening inventory.470 (448) $1.
This account operates much like the Allowance for doubtful accounts in that it gets adjusted to the desired balance at year end.Introductory Financial Accounting. we must determine that the inventory’s net realizable value. We do this by creating a contra account to inventory called ‘Allowance for decrease in value of inventory’. If. then the inventory must be written down to market value.000.000.000. the analysis reveals that no allowance is required.000.000 – 14. At the balance sheet date. the accountant determines that they could sell this inventory for $40.000 X 10%) = $40.000 = $36. The net realizable value of this inventory is: = Selling Price – Commission = $40.000 14.000 At present. Market value is defined as the net realizable value of the inventory – the sales price of the inventory item less any costs incurred to sell it.000 – ($40. Furthermore. Show the journal entry to record the proper carrying value of the inventory.000 – 4. This rule ensures that companies will not overstate their inventory balances by keeping on record at cost inventory which may have decreased in value in the marketplace.000 = $36. the credit will be to income. next year. commissions of 10% would have to be paid to the sales team on any sale of this inventory. The net inventory balance that will be reported on the statement of financial position is $50. the inventory account has a balance of $50. .000 Note that the Inventory Loss account will appear on the Income Statement and be registered as a loss for the company in this period.1. First of all.1 Page 76 Application of Lower of Cost or Market Rule At the balance sheet date a company must compare the aggregate cost of its inventory to its aggregate market value.000 to bring it to a zero balance. Inventory Loss Allowance for decrease in value of inventory 14. If the market value is less than cost. Example –VenTure Ltd. then the allowance will be debited by $14. v. is showing an ending inventory balance of $50.
v.000 100% 60% 40% In the above example.000. for whatever reason. but we did have the Gross Profit Ratio.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. To understand the application of this method.000.000 If Sales are $1. then we can estimate COGS as follows: COGS = Sales x (1 – gross profit ratio = $1.000 25% .000 Ending Inventory = $310. the Gross Profit Ratio = 40%.000 Example – The Gennissen Company’s inventory were destroyed by a fire and you need to estimate the ending inventory.000 x (1 – 40%) = $1.200.000 $1.1.000 Opening Inventory + 860. If we did not have the COGS number.000 Purchases . we must first understand how to calculate the Gross Profit %.200.Introductory Financial Accounting.900.000 and Gross Profit is $400. we could estimate COGS by using the following formula: Gross Profit = Sales x Gross Profit Ratio = $1. You are given the following information: Sales to the date of the fire Opening inventory Purchases to the date of the fire Gross Profit Ratio The estimated cost of goods sold = $1.000.000 350.200.000 600. Example – Assume the following: Sales Cost of Goods Sold Gross Profit 1.000 400.000.000 x 60% = $600.000 x (1 – 25%) = $1.000.000.000 860.000 x 75% = $900.000 The estimated ending inventory is: $350.000 x 40% = $400.
3.000.000 b) $503. 20x8? a) $478. Fri.Introductory Financial Accounting.000 to suppliers and incurred $25. c) Shareholders’ equity is understated by $6. v. financial statements of Confu Ltd. .000 in shipping charges on merchandise purchased during the period. the company returned merchandise costing $10. discovered that a $6. financial statements.000.000 instead of the correct balance of $1. 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. b) Assets would be understated by $200. On January 1.1 Page 78 Problems with Solutions Problem 4-1 – Multiple Choice Questions 1. included an adding error in the inventory count that resulted in ending inventory of $1. d) Owners’ equity would be understated by $200.400. During the year the company purchased $500.000. d) Shareholders’ equity is overstated by $6.000.000. a) Liabilities would be overstated by $200.000 c) $515. A year-end inventory count revealed merchandise on hand in the amount of $66. What was cost of goods sold for the year ending December 31.000 computer purchased for the chief financial officer on December 27 had been recorded incorrectly as an inventory purchase.1.000. 20x8. Which of the following statements correctly describes the effect of incorrectly recording the computer purchase on the financial statements? a) Inventory is overstated by $6.000 worth of inventory and took advantage of purchase discounts amounting to $6. 20x4. b) Inventory is understated by $6. 20x4.000.000.000 d) $523.600. After completing its inventory count and making the appropriate adjusting journal entries.000. Ltd.000.000. The December 31. In addition.000. c) Cost of goods sold would be understated by $200.000 2.
The company uses a perpetual inventory system. c) Income for 20x9 is understated by $15. e.1. Which of the following statements with respect to this transaction is true? a) Income for 20x8 is understated by $42.000. CIF destination.000. 20x9. n/30.1 Page 79 4. for the month of July 2006.. FOB Shipping. all of which were made on credit with terms 2/10. Merchandise was purchased at a cost of $50. d) Revenues for 20x8 are understated by $57. The selling price of the goods was $57.000. Required – Prepare the journal entries required to record the above events and transactions. n/45. 20x8. One customer returned goods with a sales value of $500 and was issued a credit note. 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. v. The customer received the goods on January 6. FOB destination.000. The sale was recorded by Czech on January 2.000. Sales totaled $80. . b) Income for 20x9 is overstated by $42. e.200. a shoe wholesaler. Czech had paid $42. Cozy sets the selling price on its shoes so that the cost of sales is equal to 70% of the selling price.Introductory Financial Accounting.000 during the month with terms 1/10. e. e. e.000 for the goods and uses the periodic method to account for its inventory. Problem 4-2 The following summarized transactions relate to Cozy Co. shipped goods to a customer on December 30. Czech Ltd.000. All other sales made during the month were collected in the month with all customers taking advantage of the sales discount offered. 20x9.
000 2. b. assuming a weighted-average cost flow method is used. v.000 2.500 3.00 = $ 300 60 @ $11. first-out (FIFO) cost flow method is used. Calculate the cost of ending inventory for May.1. c.000 2. Calculate the cost of ending inventory for May.00 = 420 50 @ $22. Problem 4-4 The following information concerns one of a company’s products.500 Date May 1 May 5 May 14 May 21 May 29 Totals Sales Beginning inventory Purchase Sale Purchase Sale 20 @ $20. 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 1.100 125 $ 1.000 Price/Cost $12 18 30 23 33 . Prepare the journal entries to record the May 29 sale on account.410 70 $ 1.Introductory Financial Accounting. Required – a.50 = 690 35 @ $12.1 Page 80 Problem 4-3 Anvil Rock Company had the following inventory and purchases for the month of May. assuming a firstin.00 = 1. Beginning Inventory/ Purchases 30 @ $10.00 = $ 400 Anvil Rock uses a perpetual inventory system. assuming a FIFO cost flow system is used.
the company’s insurance policy will cover 80% of the loss suffered in this fire. 20x5 June 15. (Banff) sells skiing and hiking equipment to retailers. 20x8 Purchases (all on credit) during 20x8 Purchase returns Payments to suppliers for purchases Customs and duty on purchases Sales (all on credit) at retail price Sales returns at retail price Cash collected from accounts receivable $150.000 8.Introductory Financial Accounting. b. Fortunately. under each of the following assumptions: a. Corporate records disclose the following: Inventory — January 1.000 440.000 Due to competitive pressures. the Music Store had 400 MP3 players in inventory with a cost of $48 per unit. 20x5.000 units at $50 each 1. During 20x5 the company made the following purchases of MP3 players: February 21. Required – Assuming the company uses a periodic inventory system.000 30. After a very successful ski season and just as it was about to commence shipping its hiking equipment for the upcoming season.000 580.000 15. calculate gross profit for the year ending December 31. 20x5 1. the company was unable to pass on price increases to customers and thus maintained a selling price of $100 per unit throughout the year. (CGA Canada) Problem 4-6 Banff Mountain Equipment Ltd.1. v.000 units at $58 each $50. 20x5.000 58.000 52. It accounts for its inventory using a periodic inventory system. Banff lost all of its hiking equipment in a fire in March 20x8. Costs are assigned to inventory and cost of goods sold on a weighted average basis.000 615.1 Page 81 Problem 4-5 On January 1. 20x5 October 15.000 Banff normally realizes a gross profit of 30% on its sales. Costs are assigned to inventory and cost of goods sold on a FIFO basis. The loss is to be determined based on the cost of the inventory in accordance with generally accepted accounting principles.000 480.000 units at $52 each 1. 20x5. . The store had an excellent Christmas season with the result that only 70 MP3 players were left in inventory on December 31.
the company sold 600 units at an average price of $2. The company uses a periodic inventory system. 2. inventory for 20x7: Beginning inventory. Whinr returned $10. 20x7 Purchases — June 7. performed the following transactions. 3. n/60. 20x7 20 units @ $900 each 440 units @ $950 each 200 units @ $1. January 1. v. Problem 4-8 The following information relates to Mejewel Ltd. 20x7 Purchases — February 20. $30. inventory value using the Weighted Average . 20x7. Saret purchased merchandise inventory costing $42. n/30. June 1 Sold Whinr Ltd.000. (CGA Adapted) Problem 4-7 During June 20x8. Calculate December 31. Calculate December 31. Show all your calculations. Show your calculations. The supplier provided purchase credit terms of 1/15. inventory value using the FIFO inventory pricing method. June 2 June 9 June 12 The company uses a perpetual inventory system. Required 1. Saret Ltd.1 Page 82 Required – Calculate the net loss from the fire.Introductory Financial Accounting.050 each During the year. Calculate the cost of goods available for sale.000 of merchandise on account with credit terms of 2/10. The cost of the merchandise inventory sold was $15.000.000 on account. Required – Prepare journal entries for the above transactions. The cost of the merchandise inventory returned was $5. Ending inventory consisted of 60 units. Whinr paid the balance due on the June 1 sale.000 of the merchandise inventory claiming it did not meet its needs. taking advantage of the sales discount. Show all your calculations.100 per unit.1. 20x7.
500 represented payment of a $50. As the new controller. FOB shipping point.000 and a count of inventory on December 31.000 credit purchase. you have made it a policy to ensure that all purchase discounts are taken advantage of.Introductory Financial Accounting. The company uses the periodic inventory method and the gross method of recording purchases. Prepare a schedule of the cost of goods sold section of the income statement. b. (CGA Canada adapted) Problem 4-9 The following is a summary of selected transactions for Toyjoy Ltd. The payment of $48.200 credit memorandum from a supplier on defective merchandise Toyjoy had purchased and returned. Cash payments on merchandise purchased from Patel Inc. Toyjoy paid $3. 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. n30. assuming merchandise inventory on December 1. Toyjoy had not yet paid for the merchandise. for the month of December 20x7. 20x7. Briefly explain the benefits. which has a negative impact on the company’s cash flow.1. 20x7.500.1 Page 83 inventory pricing method. revealed merchandise inventory on hand of $30. i) ii) Purchased merchandise on account from Hirwin Toys for $80. which was paid within the discount period of 3/15. (CGA Canada) c. Received a $1.000 in cash for freight charges on merchandise purchased during the month. amounted to $150. . v. iii) iv) Required a. amounted to $48.000.000 under credit terms of 3/15. Show all your calculations. n30. Prepare journal entries for each of the above summarized transactions.
20x7. v. Assume the companies involved used a periodic inventory system and treat each situation independently. 20x6. 20x6. indicate the dollar amount of the overstatement (O) or understatement (U) in 20x6 Cost of Goods Sold.000 worth of goods which were in an off-site storage location. 20x6. 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). 20x6 Ending Inventory. Use the following format in answering this question. On December 28.1 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. inventory count $10.Introductory Financial Accounting. 20x6 Retained Earnings. There were no errors in the December 31.1. for use by the sales manager was incorrectly accounted for as an inventory purchase. a company received. 20x6 inventory count. and included in the year end inventory count. If the error has no effect (NE). The company failed to record the purchase of these goods until January 15. then state so.000 computer purchased on December 28. goods costing $5. A $6. 20x7 inventory count. i) A company failed to include in its December 31.000. Error 20x6 Cost of Goods Sold 20x6 Ending Inventory 20x6 Retained 20x7 Cost of Earnings Goods Sold (CGA Canada) . and for 20x7 Cost of Goods Sold. ii) iii) Required For each error.
perpetual inventory system . 2 Sale No.500 For each assumption given.000 7.000 5. Assume that the transactions occurred in the order given.00 Units Beginning inventory Purchase No.1 Page 85 Problem 4-11 On January 13.40 9. 20x7. perpetual system c. 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.95 8. periodic inventory system b. 1 (at $24) Purchase No. the Bamboo Brush store was destroyed in a fire. 2 (at $26) Required 6. 1 Sale No. Luckily.000 40% Problem 4-12 The records of Egypt Company showed the following data relative to one of the major items being sold.1.500 8.000 $ 5. FIFO. periodic inventory system d.Introductory Financial Accounting. FIFO. a. Weighted-average.000 $ 60. calculate the total dollar amount for ending inventory and cost of goods sold. Unit Cost $7.000 $ 10. Moving weighted average. v. the accounting records were kept in a separate location and the company was able to reconstruct the following information: Inventory at January 1. at January 13. (CGA Canada) $100. 20x7 Inventory stored at another location.000 6.
When a long-term asset is acquired.1 Page 86 5. 2.000 . 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. • buildings. We will only focus on the accounting for those long-term assets that are not investments in financial instruments. any costs of transportation to get the asset to its location and any installation costs. equipment. namely land. furniture and fixtures and intangible assets. • long-term investments in financial instruments (i. but are not limited to. If you pay one price to acquire a group of assets (i.000 % 25% 75% Allocation of Purchase Price $125.000 450. These include. how do we account for these expenditures. buildings. assume that you pay $500. When on-going expenditures are made in order to keep the asset in operable condition. the cost of acquiring these assets needs to be allocated based on the relative fair market value of the assets acquired.000 $600.000 respectively. equipment and furniture and fixtures. How do we account for the disposal of long-term assets. How do we allocate the cost of long-term assets over the periods these long-term assets are put to use in the business. and 4.000 375. and • intangible assets such as patents.e. v. what constitutes the cost of this asset. The acquisition cost would be allocated to land and building as follows: Individual Fair Market Value per Appraisal Land Building $150. The essential accounting issues in accounting for long-term assets can be summarized as follows: 1. For example. These generally comprise of: • land.Introductory Financial Accounting.000 for land and a building.000 $500. land and building). 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. copyrights and trademarks. the acquisition cost of asset. 3.1. An independent appraisal of the land and building are $150. the shares or the long-term debt of another company).000 and $450.e.
in which case the expenditure should be expensed to the income statement. We would therefore capitalize the cost of the new engine to the asset account. or iv. any costs to maintain a truck.000 Accounting for on-going expenditures Once a long-term asset has been acquired. For example. The annual amortization expense is calculated as follows: (Cost – Salvage Value) / Useful Life . 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. would generally be considered to be repairs and would be expensed.1 Page 87 The journal entry to record this transaction would be as follows: Land Building Cash $125. For an expenditure to be considered a betterment it must meet one of the following four criteria: i. There are three general approaches to amortizing capital assets: 1. Straight-line method. if we were to replace the truck’s engine. However. Consequently. equal over its useful life. v. the rate of output of the asset is increased. ii. This method allocates the cost of the asset over its estimated useful life in equal amounts.000 375. The process by which this is done is amortization of long-term assets.1. The underlying assumption is that this asset generated revenues that are. we often incur ongoing expenditures in order to maintain the asset. 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. the operating costs of the asset are decreased. the matching principle requires that the cost of long-term assets should be spread over the periods that the asset generated revenues. iii.Introductory Financial Accounting.000 $500. A determination has to be made whether the expenditure is required to maintain the asset in operable condition. more or less. the expenditure enhanced the quality of the asset in a substantive way. such as oil changes or brake replacements. the useful life of the asset is extended. then we would likely increase the useful life of the truck.
e. 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. 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.125 The journal entry to record amortization expense will be as follows: Amortization Expense Accumulated Amortization $31. i. machine hours.000 hours. The rate used for DDB is twice the straight-line rate. the annual amortization charge will be: ($300. mileage.e.1. 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). v. The amortization rate can either be given or you may be told that the company uses the double declining balance (DDB) method of amortization.1 Page 88 The cost less the salvage value is called the amortizable base of the asset. The asset’s useful life can also be measured in terms of total machine hours of 150. Units of production method. 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 $300.000 – 35. This method allocates the cost of the asset over its estimated useful life by taking higher amortization charges at the beginning of the asset’s useful life and lower amortization charges in the later years of the estimated useful life. This assumes that the use can be measured. a truck rental company that bases rental charges on the mileage driven.000. For example.125 .000. We deduct the salvage value since we do not want to write down the asset below its salvage value. 1. Declining balance method. 3.Introductory Financial Accounting. The underlying assumption is that the asset generates revenues based on usage. then the straight-line rate is 1/10 and the DDB rate is 1/10 x 2 = 20%. This method allocates the cost of the asset over its estimated useful life based on the use made of the asset.125 $31. Under the straight-line method. i. 2.000) / 8 = $31.
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. .393 40. Assume that the total number of hours of use in the first year is 18.922 71.000. v.000 hours x $1. Under the units of production method.922 71.000 – 35.801.7667 per hour.562 94. Recall that we do not depreciate the asset below its salvage value.000 x 0. If we had taken $10.7667 = $31.393.731 17. the amortization taken in year 8 is the lesser of the calculated amortization of $10. Note that we will assume double declining balance amortization at the rate of 1/8 x 2 = 25% per year.011 or the amortization amount needed to bring the net book value down to the asset’s salvage value.000 168. the amortization charge per hour would be: ($300.045 35.045 Net Book Value End of Year $225.000 225.011. the amortization charges for the 8 years will be as follows.011 of amortization in year 8.756 = $53.000 hours = $1.750 126.798 13.000 Year 1 2 3 4 5 6 7 8 Note that the year 8 amortization is not equal to $40.188 31.000 56. the net book value at the end of the 6th year is: $300.000 168.191 53.393 40. Net Book Value Beginning of Year $300. Therefore. 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.191 53.000) / 150.562 94. then the amortization charge would be 18.045 Amortization Expense @ 25% $75.250 42.640 23.045 x 25% = $10.750 126.Introductory Financial Accounting.1 Page 89 2.348 5.1. Under the declining balance method. 3.
000 161.000 was purchased on January 2.000. the changes in estimates are applied prospectively from the date of the change in estimate onwards. the asset’s useful life was expected to be 10 years with an estimated salvage value of $20. At the time. v.000/year x 7 years Net book value The gain on disposal of this asset is: Proceeds on disposal Less net book value Gain on disposal The journal entry to record the disposal of the asset is as follows: Cash Accumulated amortization Asset Gain in disposal $100.000) $89.1 Page 90 Disposals of Long-Term Assets On the date of disposal.000 $250.000.000 – 20.000 11.000 89. For example. The asset is sold at the end of 20x9 for $100.000 $100. The difference will be equal to the gain or loss on disposal.000. The net book value of the asset at the end of 20x9 is: Original cost Less Accumulated amortization ($250. For example. The asset’s useful life was expected to be 10 years and the salvage value was estimated to be $20. 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 $10.000 250.1.000 Changes in estimates If the estimates of the useful life and/or the salvage value of an asset change subsequent to its acquisition. . assume that an asset was purchased on January 2.000.000 $11. an asset costing $100.Introductory Financial Accounting. we compare the net book value of the asset sold to the proceeds on disposal.000. Assume straight-line amortization.000 (161.000) / 10 = $23. 20x3 for $250. In 20x5. 20x1.
was developed internally. you cannot touch them or see them) and yet they represent costs incurred that meet the definition of an asset. v. Internally developed intangible assets cannot be capitalized on the Statement of Financial Position.000) $68. • copyrights – the protection of writings. The accounting for intangible assets depends on whether these assets have limited or an unlimited life.1 Page 91 The net book value at the beginning of 20x5 is: Original cost Less Accumulated amortization ($100.000 This net book value will then be amortized over the remaining useful life of the asset.Introductory Financial Accounting.000) / 11 remaining years = $5.000. assume that a patent is granted to a company at a cost of $100. Consequently.e. Intangible assets whose life is limited should be amortized on a straight-line basis over their estimated useful lives.e. you will not see the value of its trademark listed as an asset. Examples of intangible assets are: • trademarks – a name or symbol that identifies a company or a product. musical compositions and works of art. they are expected to provide future benefits. i.000 – 20. are the result of a past transaction and are under the control of the company. The patent’s legal life is 17 years but it is expected that emerging technologies will make this . location or superior products. Annual amortization charges for 20x5 and future years will be: (68.1.273 per year Intangible Assets Intangible assets are those assets that do not possess a physical quality (i. 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. For example. • franchises – the exclusive rights to sell products or perform services. For example.000 (32. This need not coincide with the asset’s legal life.000) / 10 = $8. typical within a certain geographical area • goodwill – the added value of a business attributable to factors such as reputation.000 – 10. the trademark ‘Coca-Cola’ was never purchased by the Coca-Cola Company but rather.000/year x 4 years $100. if you look at Coca-Cola’s Statement of Financial Position.
the book value of the intangible asset is compared to its fair market value.e. .1. Intangible assets whose life is unlimited (i. we would amortize the patent over 5 years.1 Page 92 patent obsolete by the end of the 5th year. then the asset must be written down to the fair market value. That is.Introductory Financial Accounting. v. goodwill) are not amortized but instead subject to an annual impairment test. If the fair market value is lower than book value and is not expected to recover. some franchises. Any impairment losses cannot be subsequently reversed if the fair market value of the asset subsequently is recovered. In this case.
000 c) Income will decrease by $1. 2.705.1 Page 93 Problem with Solutions Problem 5-1 – Multiple Choice Questions 1.1. The room was completed on June 30.00 c) $8. At the beginning of 20x8. 1998.000 b) Income will decrease by $6.00 Use the following information to answer questions 2 and 3: The Jasper Company has an old building which requires frequent repairs and constant maintenance. Sinha.00 d) $8.000 Jasper uses the straight-line method for calculating depreciation expense.000 3. the situation was as follows: Building cost Accumulated depreciation — building Estimated remaining useful life Estimated salvage value at end of useful life $200.000. v. What is the amount of depreciation expense on the building for 20x8? a) $4. and was used as office space commencing July 1.000.500. What is the impact of this expenditure on income before taxes for 1998? a) Income will decrease by $12.200 d) Income will decrease by $632 e) Income will decrease by $600 .000 10 years $5.000 c) $19.000 in legal costs defending it. The patent is valid for 17 years and has an estimated life of 10 years. What will be the annual amortization expense for patents? a) $4.500 d) $20.Introductory Financial Accounting. A small room was built on the back of the building at a cost of $12.000.000 150.88 b) $5.500 b) $5. Brown and Das obtained a patent for their earnings forecasting software at a cost of $80.000 and spent $5.
000. what would be the balance reported for the net book value of the equipment at December 31.000 commission was paid to a real estate agent.000 units.000 were incurred to clear the land in preparation for construction of an office building. If the company were to use the units-ofproduction method instead of the straight-line method.000. During 20x6.Introductory Financial Accounting.000 with an estimated life of 4 years and a salvage value of $5. and a 10% residual value.000 b) $1. The machine is expected to be used for a total of 1.000 c) $1. a $60. 20x7. Yaari and Yosha Company bought a machine for $85.500 b) $72. was $18.500 c) $63. Stone and Wall Company bought equipment for $100. v. The equipment is expected to have a 5-year life and produce a total of 80.750 d) $65. A land site was acquired for $1.000. Costs of $15.1.000 d) $1. production was 20.500 productive hours over the next 4 years.000.060. At what amount should the land be reported on the balance sheet? a) $1.000 5.000.000 units.000 7. If the company uses the double-declining-balance method for amortization. On January 1.500 b) $5. To acquire the land. it was used 430 hours.1 Page 94 4. using the straight-line method. On July 1. what would be the balance reported for the net book value of the machine at December 31.075. On January 1. Ireland Company purchased a machine that cost $20. 20x7.735 6. What is amortization expense for 20x7 under the productive output method? a) $4.000 c) $5. During 20x7. 20x6? a) $67. The Amortization expense for 20x6.000 b) $42.160 d) $5. 20x7? a) $40.000.000.000 c) $77.000 . It has an estimated 4-year life. 20x6.500 d) $80.015.
assuming the company used the straight-line method of amortization. Prepare the adjusting journal entry to record amortization expense for the year ended December 31.Introductory Financial Accounting. management felt that the van could only be sold for $2. 20x7. management of the company decided that. At the end of its useful life.1 Page 95 Problem 5-2 On January 1. . Prepare the adjusting journal entry to record amortization expense for the year ended December 31. c.1. the total life of the van would only be 4 years instead of the original estimate of 5 years. Required – a. assuming the company uses the doubledeclining-balance method of amortization. as a result of heavy usage.000 at the end of its useful life. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. assuming the company uses the straight-line method of amortization.000 kilometers. 2008. purchased a van to transport guests between the resort and a nearby airport.000 kilometers during the year. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. assuming the company uses the units-of-production method of amortization and that the van was driven 55. 20x7. In addition. b. Resort Ltd. v.000. The van cost $65. it was estimated that the van could be sold for $5. 20x7. d.000 and was expected to have a useful life of 5 years or 200. 20x7 and 20x8. During 20x8.
1 Page 96 Problem 5-3 The Connor Company had the following transactions over the life of an asset purchased on January 2.000 were made to the equipment. 20x8 Required – Record all of the above transactions assuming that the company uses the straight-line method. . 20x3: Jan 2. 20x4 Dec 31. Recorded amortization expense. 20x4 Apr 31. This increased the quality of the asset’s output but did not change its useful life or the estimate of salvage value. 20x5 Dec 31. The equipment was completely overhauled at a cost of $20. Routine repairs costing $600 were made to the equipment. The estimated useful life of the asset is expected to be 5 years with a $10. 20x7 Aug 31.000. v. 20x6 Sep 30.1. This increased the useful life of the asset by three years. 20x3 Aug 31. Expenditures totaling $2.000. Recorded amortization expense. 20x7 Dec 31. Sold the asset for $25. Recorded amortization expense. Recorded amortization expense.000.000 salvage value. The original estimate of salvage value holds. 20x5 Dec 31. 20x3 Purchased equipment for $60. Recorded amortization expense. Dec 31.Introductory Financial Accounting.
and the repair cost for it amounted to $500. the machine was sold for $20. 20x7 Required – Prepare the journal entry to record the purchase of the lathe.1 Page 97 Problem 5-4 On June 30.Introductory Financial Accounting. bought a state of the art numerically-controlled lathe from GPL by trading in a dissimilar asset and paying $90.000 cash. in good form.000. MNO Co.000 to install the machine.000 38. 20x8. 20x7. 2. ABC had to spend $2. purchased a machine at a cost of $25. 20x7 Price of new lathe.000. Assume a straight-line method of amortization. ABC Ltd.500 Problem 5-5 On July 1. The following additional information is available: Original cost of the old asset Accumulated amortization at June 30. Prepare the journal entry to record the amortization expense on December 31. (CGA Canada) . 3.000 15. 20x7. 20x8. Prepare the journal entry to record the asset acquisition on July 1. (CGA Canada. On January 1.000. 20x6. v. During the installation there was minor damage to the frame. Prepare the journal entry to record the sale of the machine on January 1. 4. 20x6.000 cash.500 108. how the machine will be presented in the assets section of the balance sheet at December 31.1. Market value of old asset on June 30. Show. Required – 1. which included freight charges of $1. adapted) $ 50. The machine was expected to have a life of 4 years and a salvage value of $3. 20x6.
20x7. 12.1 Page 98 Problem 5-6 The following information pertains to the equipment acquired by Xie Co. Cost Estimated residual value Estimated life Estimated production 20x6 actual production Required a. assuming the company uses the: i) straight-line method ii) units-of-production method c. Determine the amortization expense for the year ending December 31. Prepare the journal entry to record the sale assuming the company uses the: i) straight-line method ii) units-of-production method $120.000 4 years 40. Use this information to answer parts (a).000 units were produced.000 units. In 20x7. v.1. 20x7. 20x6. Determine the amortization expense for the year ending December 31. No change in estimated residual value was anticipated. On January 1. assuming the company uses the: i) straight-line method ii) units-of-production method On January 1. on January 1. due to a preventative maintenance system that had been implemented. and (c).000 $ 20.000 units b. the estimates were revised. the equipment was sold for $75. . 20x8. (b).Introductory Financial Accounting. Accordingly. 20x6.000 units 9.000. management felt that the total estimated life of the equipment would be 5 years with a total estimated production of 50.
German intends to use the machine for 8 years and hopes to sell it for $15. It incurred interest costs of $12. Required – a. * this means that is we pay within 10 days.000 at that time. purchased Machine No. Machine No. 20x6.000 cash. What amortization method could be used to abide by the president’s request? Is this method acceptable under generally accepted accounting principles? Explain. Assume that the machine is sold on January 1. v.1. 103 has a physical life expectancy of 10 years with a salvage value of zero. for $100. Compute amortization expense for 20x3 using the straight-line method. The following information relates to this machine: Invoice price Credit terms* Customs and duty costs Preparation and installation costs $ 140. Otherwise. we get a 2% discount.000 to pay for the machine within the discount period and take advantage of the cash discount. income can be minimized in 20x3. Prepare the journal entry to record the sale assuming the straight-line method of amortization was used. However.000 2/10. 20x3.000 $ 14.000 on this loan during 20x3. In this way.800 The company borrowed $150. 103 on January 2. we have to pay the full invoice price within 30 days. n/30 $ 5. c.Introductory Financial Accounting. . 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. b.1 Page 99 Problem 5-7 German Ltd.
000. Typically. services or supplies for the operation of the company. Accounts Payable – these are liabilities that were incurred to purchase goods. $7. 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/day) that were performed in the period but not paid for. it is split appropriately and applied to the correct periods. a company has a fiscal year end of March 31st.000/day.000 3.000 Wages/Salaries Payable – these are wages/salaries that are due to employees for hours worked. 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. Current Liabilities A current liability is one that will be settled within one year or the business cycle of the firm. v. For example.000 to last period and $4. we will go over the main types of current liabilities.000 2.000 on account. the entry would be: Wage Expense (4 days x $1.000. the adjusting entry made March 31st would be: Wage Expense Wages Payable 3.000 to the new period. a company takes out a loan on January 1st for $10. If the average daily wage expense is $1. Liabilities To begin our discussion about liabilities we have to first differentiate between those liabilities that will come due within on year or accounting period (current liabilities) and those liabilities that will come due at a later point in time (long-term liabilities).000 7.000/day) Wages Payable (to remove the adjusting entry) Cash 4. On April 4th.000 3.1 Page 100 6. For example. which represents the three days of work (3 x $1. a company purchases office supplies from a supplier for $2.000 with the terms set at 6% interest due annually. $3. whichever is longer.1. when the payment is made for the full week. Employees were last paid on March 28th.000 Note that we are debiting the Wage Expense for $3. For example. We have already covered several of these when we did adjusting entries. assuming the employees worked the full 7 days in the week.000 This way. The principal must be repaid equally over 5 years. .Introductory Financial Accounting. The entry would be: Office Supplies Accounts Payable 2. but have not been paid. Interest and Principal payments are due December 31st of each year. and will not be paid again until April 4th. however.
EI.500 + 8. and that which is due later than one year. the journal entry would be as follows: Cash Long-term debt 10. but they also must submit the employer portion of CPP and EI. Employee Withholdings Payable – Employers are responsible for deducting income taxes. This ensures accurate reflection of the financial obligations of the company on the Statement of Financial Position. a company pays its employees monthly. Not only must the company submit the employee’s portion. we would split the long-term debt as follows: Current liabilities Current portion of long-term debt Long-term liabilities Long-term debt $2.1 Page 101 When the company takes out the loan.000 600 8.000. and pays 1. $8.000 + 7.000 10. we will now show a balance in the Current Liabilities section of $2.000 8.000 The debt is split into the portion that is due within the year.500 . CPP and EI from employee’s paycheques. The employer matches the employee’s contribution for CPP.000 x 6%).000. Wages total $100.000 On the Statement of Financial Position. v.500 57.000. and the employer ducted the following amounts from its employees’ cheques: Income Taxes.000. CPP. The entry to record payroll for the month would be: Wages Expense Employee Withholdings Payable ($27. 27. For example. At December 31st.500. The journal entry would be as follows: Long-term debt Interest Expense Cash 2.Introductory Financial Accounting.000.000 42.1. and a balance in the Long-Term Liabilities section of $6.4 times the employee deduction for EI.000) Cash 100. $7.000 If a Statement of Financial Position were prepared on the January 1. Deductions for each month are due on the 15th day of the following month. the interest expense for the year would be $600 ($10.
500 11.000 . Contingent liabilities are those liabilities which are likely to be incurred in the future. but have not yet come to be. then it has to be disclosed through a note in the financial statements. Your lawyer says that previous case law in similar matters is not in your favor and you will likely lose and the judge will award the full amount to the plaintiff.40) Employee Withholdings Payable 7. as done above.700) Cash 61. For example. and b) the loss can be reasonably estimated. This principle states that. If a company knows that there will be a liability. One of the resulting GAAP rules that stems from this idea of conservatism is the establishment of contingent liabilities. the company pays the government: Employee Withholdings Payable ($42. A contingent loss should be recognized only when: a) it is likely that a future event will confirm the loss.700 Note that CPP Expense and EI Expense could be tracked separately. then they must disclose it when they know about it.000 400.200 18. the company would record its portion of payroll expenses due to the government: CPP Expense ($7.000.500 + 18. or simply lumped in with Wages Expense. your company is being sued for $400.500 x 100%) EI Expense ($8.200 Contingent Liabilities One of the guiding principles of accounting is the idea of conservatism. The justification is that the financial statements should not be misleading or give false hope or information to any reader.200 61. but it does not have to be recognized. On the 15th of the next month. You would record or recognize the FULL amount.Introductory Financial Accounting.000 x 1. 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.1 Page 102 At the same time. If a contingency meets the first criteria but not the second. v. The journal entry would be: Unrecognized Loss on lawsuit Contingent Liability – lawsuit 400.1. and therefore a loss of some kind to the company.
For example. but it also sets up a liability that will be drawn down as actual expenses are incurred over the life of the warranty. in the same scenario. The company estimates that warranty expense. but there was no legal precedent for the amount that would be awarded and therefore are unable to estimate the future loss.000 x 4%) Warranty Liability 12.000 12. When a company sells a product that has a warranty. Total Sales for the year totaled $300.000 This entry not only matches the expense to the period when the revenues were generated.000 10. your lawyer felt you would win. Warranties & Premiums Another of the guiding principles of accounting is the matching principle. is 4% of sales. If. 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. Again. let’s assume that during the next year.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. we must record the associated expense in the period when the . This principle states that for all revenues generated in a specific period.Introductory Financial Accounting. in order to adhere to the matching principle. and the fact that you were likely to lose. then you do not have to do anything because you do not meet either of the criteria for recording a contingent liability. but you would not have to record the loss or the liability. The journal entry would be: Warranty Liability Cash/Inventory/Wages 10. the company pays $10. You would simply write a note in the financial statements disclosing the lawsuit. all expenses related to those revenues should be recorded at the same time. your lawyer felt you would lose.1 Page 103 If. This principle is the one that guides us when making adjusting entries at the end of the year with regards to expenses.000. Continuing on with the same example. The warranty expense is normally determined through evaluating historical data and coming up with a % of sales that represents the future warranty costs. The journal entry to record warranty expense for the year would be: Warranty Expense ($300. such as wages. that have been incurred but not paid.1. in the same scenario. Another example of matching has to do with warranties. v. a company sells vacuum cleaners that come with a 2-year warranty.000 to repair various vacuum cleaners that are under warranty. on average.
or a year from now. you are taking on the risk that the money might not be repaid at all.1. The combination of these two facts results in a dollar today being worth more than a dollar received in the future.000 32. they receive 1 coupon. for every $10 your customers spend. one of the most frequently used financing instruments in business. These typically include long-term bonds. .000/$10 = 80.000 to be received in 5 years from now at an interest rate of 6%. The farther in the future you are to receive the funds. They can then redeem 10 coupons for a watch valued at $10. notes payable. then you are missing out on the opportunity to invest that money today and earn interest on it. v. Based on past redemption data. We will instead focus on long-term bonds. If you are going to be receiving money in the future. To record the premium liability at the end of the year. We will not get into a discussion of leases. the journal entry would be: Premium Expense* Premium Liability * $800. longterm leases and pension obligations. Furthermore.000 Whenever coupons are redeemed. we are trying the calculate the present value of $1. 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. Your sales for the year were $800. or ten years from now.000 coupons x 40% = $32. For example. you have determined that only 40% of your customers will redeem their coupons. 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. Long-term Liabilities Long-term liabilities are defined as liabilities that would not be reasonably expected to be liquidated within a year.1 Page 104 original sale is made. The premise behind this is that a dollar today is not worth the same as a dollar received tomorrow. the premium liability account is drawn down.000.000 32. the greater the “discount” or decrease in the dollar value will be.Introductory Financial Accounting. pensions and other more complicated longterm liabilities in this section.
000 will you have to set aside in order to set up this annuity? N 30 I/Y 7 PV X= $744.Introductory Financial Accounting.472. This means that if you were to invest $747.26.26 today (money out of pocket and therefore the negative sign) and invest it for 5 years at 6% compounded annually. press CPT and the TVM register you are attempting to solve for.58 PMT FV 10000 Enter Compute Present Value of an Annuity .An annuity is defined as a series of identical cash flows that end at a specified time. what is that $10.1 Page 105 With the Texas Instruments BA II Plus. If the current and expected future rate of return is 6%.000 per year for the next 30 years. Assume you inherit $1.000. you need to do the following: set the calculator to accept one payment per year as follows: 1 2ND N You only need to do this once. If i=7%. in this case PV the answer provided is -747. the amount would grow to $1. v.000 from your mother 5 years from now. Calculating the Present Value of a Future Single Sum .Assume you are going to receive $10.542.47 PMT 60000 FV Enter Compute . how much of the $1.000 from your favorite uncle.000. 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.1.000.000 worth in “today’s dollars”? N 5 I/Y 6 PV 7. enter the numbers above in the TVM memory registers to solve. You want to be able to withdraw $60.
The market takes this into consideration.1. 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).10 FV Enter Compute Your company is purchasing a piece of equipment costing $80. A few definitions: Face Value – the stated amount of the bond and is equal to the redemption value of the bond on its maturity date.5 PV 80000 PMT X= $30. If the YTM < Coupon Rate. how much can you withdraw each year? N 25 I/Y 7 PV 675000 PMT X= $57.06 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.992. and therefore is willing .You have retired with $675.1 Page 106 Annuity Payment Calculation .Introductory Financial Accounting. Coupon Rate – the stated interest rate to be paid on the face value. then the bond will sell at a premium. and the bonds will sell for a value less than the face value of the bond. If the YTM > Coupon Rate. Coupon – the amount of semi-annual interest payments to be made on the bond. Also called the market rate.000 in the bank.5% on a 36-month loan.206. What is your monthly payment to the manufacturer going to be? N 3 I/Y 6. then in order to sell your bonds you will have to sell them at less than face value because investors would be willing to pay face value if they could get a return of 6%. if you issue a bond with a coupon rate of 5% and the YTM is 6%.000. You expect to live another 25 years. as well as make interest payments on the stated amount. Assume the rate is 7%. It is rare that the yield-to-maturity rate and coupon rate are the same. For example. Coupon rate = Annual Coupon Payments/Face value Yield-to-maturity (YTM) – the rate of return that bondholders expect on the bond given its risk. v. The manufacturer is offering you financing at a rate of 6. then the bond will sell at a discount. This is because the buyer of the bond gets a higher return by investing in the bonds.
we must adjust the other factors in the formula to a “6-month” basis. N will equal the number of coupon payments left. The journal entry to record the sale would be as follows: Cash Bonds Payable Calculating Interest Expense on Bonds It is now June 30th and the first coupon payment is due. This is less than the face value of $2. However.451 . every 6 months. we have to sell our bonds at a discount. not the number of years. v.On January 1. Example .000 to cover our coupon obligation.8% x = $58. the YTM is normally expressed as an annual rate. Furthermore. 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.000 x 5.000. How much would be raised through this bond issuance? N 20 I/Y 3.8% is less than the market rate of 7%.451 PMT 580002 FV 2000000 Enter Compute 1 2 YTM of 7% / 2 = 3.829. As such.000 is not our interest expense. this $58.51 PV X= $1.829. The Coupon Rate = 5. We have already calculated that we will be writing a cheque for $58.000. 1.1.5% $2. or the amount that we would have received in proceeds would be equal to $1.Introductory Financial Accounting. therefore it will have to be cut in to reflect the situation.829.000 coupon payment. because PMT is equal to the payment made every six months.829. The PMT & FV remain the same.000. 20x8 you issue $2. In order to attract investors. This is because our coupon rate of 5.451 1. YTM = 7%.000 of bonds. Interest will be paid semiannually on June 30 and December 31. The Present Value of the bonds.000.8% and they mature in 10 years.1 Page 107 to pay more than face value for the bonds in order to reap this benefit.451.
031 58.000 After all 20 interest payments have been made. the entry for interest expense would be: Interest Expense (1.451 x 7% x Bonds Payable Cash ) 64.829.000. therefore.835. At the time of settlement.451 + 6.301) $1.835. Continuing our example. the journal entry will be: Bonds Payable Cash 2.829. This will be the amount used to calculate the interest expense on December 31st.000 Note that the $6.1 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.000.000 2.242 6. on June 30th. you would record the following journal entry: Interest Expense (1. v.000.242 58. On December 31st.000 .000.482.Introductory Financial Accounting.031 6. The difference between the Interest Expense and the Coupon Payment is either debited or credited to the Bonds Payable account depending on whether the bond was issued at a premium or a discount. the balance in the Bonds Payable account will have been written up to $2. give or a take a few dollars for rounding.482 x 7% x Bonds Payable Cash ) 64.1.301 credit to Bonds Payable increases the carrying value of the bond payable account to (1.
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. Issued $10 million face value. 10 year 8% bonds priced to yield 6%.1 Page 109 Problems with Solutions Problem 6-1 – Multiple Choice Questions 1. 20x7. 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. 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.Introductory Financial Accounting. v.1. Gallaghar Ltd. On January 1.000 iv) The bond was issued at a discount a) b) c) d) iv) only i) and iii) i) and ii) ii) and iv) .
The company estimated that only 30% of the coupons issued would be redeemed.400 d) $18.500 What is the estimated liability for premium claims outstanding at December 31. d) It need not be disclosed. When should a contingent liability be accrued? a) When it is certain that funds are available to settle the disputed amount b) When an asset may have been impaired c) When the amount of the loss can be reasonably estimated. (3) a relatively stable pattern of annual sales. How should any liability for the warranty be reported? a) It should be reported as a long-term liability. a company inaugurated a sales promotional campaign on June 30.Introductory Financial Accounting.1 Page 110 4. whereby it placed a coupon in each package of product sold. Assume that a manufacturing corporation has (1) good quality control. For the 6 months ended December 31. the following information is available: Packages Sold Premiums Purchased Coupons Redeemed 150. b) It should be reported as a current liability. (2) a oneyear operating cycle. 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.300 b) $8.000 23.000 .000 10. 6. c) It should be reported as part current liability and part long-term liability. the coupons being redeemable for a premium.000 e) $20. In an effort to increase sales. v. 20x8. 20x8? a) $4.00 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. even though the amount of the loss cannot be reasonably estimated 5. 20x8.600 c) $9.1.
Required – Prepare all journal entries related to the warranty for the current year. and data shows that approximately 55% of your customers redeem their coupons. For each $10 your customers spend.000 22. 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. then receive 1 coupon.000 and it is estimated that the warranty expense is equal to 5% of sales.Introductory Financial Accounting. In order to increase customer loyalty in this fiercely competitive environment you have started a coupon program.500 coupons Problem 6-3 Company X provides a 3-year warranty on all of the products it sells.1 Page 111 Problem 6-2 You run a computer repair company. You have been running this program for several years. v. What is the balance in the warranty liability account at the end of the year? . They can redeem 15 coupons for a $25 iTunes gift card. Sales for the current year were $3.000.1. The warranty liability at the beginning of the year was $165.000.000 40.000 and actual costs incurred to service warranties during the year amounted to $130.
Problem 6-5 The Kaplan Corporation issued $10.5% coupon bonds on December 31.800 Total debits during the year $6. What is the dollar value of warranty repairs performed in 20x7? What is the warranty expense for the year 20x7? At December 31. 20x4. v. automobile dealers.000. The bonds mature in 15 years. Gamma Corporation issued bonds with a face value of $500.Introductory Financial Accounting. 3. for the year 20x7.1. Warranty Liability Dr Cr $10. 2. what was the estimated liability for future warranties? (CGA Canada) . The yield to maturity on December 31 was 8%. 4. The company issues warranty agreements immediately upon the sale of an automobile.. Problem 6-6 The following is the general ledger account for estimated warranties of McNeil and Grace Ltd. Assume that the going market interest rate for similar bonds on July 1. what is the estimated liability for future warranties? At December 31. Coupon payment dates are June 30 and Dec 31 of every year.1 Page 112 Problem 6-4 On July 1.000 Opening balance Total credits during the year Required – 1. 20x6.000 of 8. Assume that the Kaplan Corporation as a December 31 year end. Required – Prepare the journal entries to record the issue of the bonds on July 1. 20x1. 20x7.200 5. 20x1 is 8%. Required – Prepare all journal entries with regards to this bond for the years 20x4 and 20x5.000 and a coupon rate of 10%. The bonds pay interest semi-annually on December 31 and June 30 and are due in five years. 20x1 and the first two interest payments.
Introductory Financial Accounting.000. Required – 1.000. 20x6. 8% bonds. The Interest Expense for the 1997 year will be less than $100.171. GHI’s year end is December 31. 4. Interest on the bonds is paid semi-annually on December 31 and June 30. 10-year. v. c. (CGA Canada adapted) . b. Alpha Beta Ltd. 3. The Interest Expense will be the same every year. Prepare the journal entry(ies) to record interest expense for the period ending December 31. 20x6. (CGA Canada adapted) Problem 6-9 On January 1. uses the effective interest method to calculate interest expense on these bonds. Prepare the journal entry(ies) to record interest expense and coupon payment on June 30. (CGA Adapted) Problem 6-8 On July 1. The bonds were sold at a yield of 8%. 20x7. issued $1 million face value. 20 year.591. 20x6. 20x6. The Interest Expense for the 1997 year will be more than $80. Required Prepare all journal entries for the life of this bond issue. The bonds were issued at a discount for $897.000. 12% coupon bonds. and pays interest on July 1 and January 1.1. three-year.000 face value.1 Page 113 Problem 6-7 GHI Company issued $500. issued $1 million semi-annual. 20x7. a. d. face value. 2. as the market rate was 10%. Prepare the journal entry to record the issue of the bonds at July 1.000. Required If Adrdalan and Baker Inc.171. indicate whether each of the following statements would be true or false. Ardalan and Baker Inc. Show how the $1. They were issued at a price of $1.591 was calculated. to yield 10%. 9% bonds on January 1. The cash outflow towards interest on the bonds will be more than $80.
and then re-sell them). If the book value per share is less than the cash paid out to retire the shares. . the shares must be cancelled (i.000. any dividend declarations are at the sole discretion of the company’s board of directors. Shareholder investments will result in the company issuing shares to the investors – these shares can take the form of preferred shares or common shares. The debit to the common shares account is equal to the weighted average book value per share times the number of shares retired. it can be drawn down.000 When common shares are repurchased. Shareholders’ Equity As mentioned in Chapter 1. if common shares are issued for $100.e. Dividends become a liability of the corporation only when the board of directors declares them. • upon liquidation of the company. Common shares can be issued for cash or any other asset. we credit an account called Contributed Surplus for the difference.000 cash. Retained earnings represent the cumulative earnings of the corporation less any dividend distributions to its shareholders. and • they are a perpetuity.1 Page 114 7. v. Common Shares Common shares typically have the following features: • they provide the right to vote at annual meetings.000 $100. the journal entry would be: Land Common shares $250. The corporation is under no obligation to provide a financial return to common shareholders. that is. Shareholders’ Equity is fundamentally made up of two elements: contributed capital and retained earnings. any cash remaining after all obligations have been settled revert back to common shareholders. a company cannot purchase its own common shares. If the book value per share is greater than the cash paid out to retire the shares.000 $250. Contributed capital comprises of the investment made in the corporation by its shareholders. then the debit required to balance the journal entry is allocated as follows: • if there is any Contributed Surplus relative to common shares. For example.Introductory Financial Accounting. 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. hold them. then the journal entry would be: Cash Common shares $100.
000 shares outstanding Retained earnings The following transactions took place during the year: Jan 15 Mar 18 Apr 30 Jun 16 Aug 18 Issued 100.000.000 + 1.000 Number of common shares outstanding: = 1.000 12.000 x $16.000 $2.000.000 common shares at a total cost of $280.000 / 1.000 1.000 = $16. Example – The Noor Company’s shareholders’ equity section at December 31.000 common shares for $7.100 61.000.000.000 Mar 18 Apr 30 Balance in common share account: = $15.000 cash Issued 50.000 $15.000 7.000 Retired 20.500.100 280.000.800 61.000 cash Retired 10.500.000 common shares at a total cost of $260.500.09 7.000.500.Introductory Financial Accounting.000 + 50.612) Contributed surplus Retained earnings Cash Aug 18 .000 321.091) Contributed surplus Cash 1 $2.000 The journal entries to record the above transactions are as follows: Jan 15 Cash Common shares Land Common shares Common shares (20. 1.500.000 Book Value per common share: = $18.500.000 + 100.000 = $18.000 1.800 260.000.150.000 186.000. v.000 common shares in exchange for land valued at $1.000 Issued 250.000.1.1 Page 115 • any remainder gets debited to Retained Earnings.800 32.000 Jun 16 Cash Common shares Common shares (10.500. 20x6 was as follows: Common shares.000 common shares for $2.000 = 1.000 + 2.500.500.150.000 x $18.
they are a perpetuity.380.000 – 321.000 = 1. any dividend declarations are at the sole discretion of the company’s board of directors.500.00. that is. • like common shares. cumulative.500.000 .1. However.000 = $18.380.150.200 Number of common shares outstanding: = 1. First.000 shares outstanding Retained earnings $35.000 shares x $8. $8.000. the preferred dividends for the year 20x6 must be paid: 100.000 The preferred share dividends were last paid on December 31. 20x6 and management wants to pay a dividend of $5 per common shares.000 40. It is now December 1. This means that if dividends are missed.00 x 1 year = $800. v. Like common shares. Example – The Jarvis Corporation’s shareholders’ equity as at December 31. the corporation is under no obligation to provide a financial return to common shareholders.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). the preferred dividends in arrears for 20x4 and 20x5 will have to be paid: 100.678.000 shares outstanding Preferred shares.1 Page 116 2 Balance in common share account: = $18.000 shares x $8.600.000.000 Book Value per common share: = $25. 20x5 is as follows: Common shares.000 – 20.000 10. 1. • they carry a stated dividend per share.000.000. 20x3. 100.00 x 2 years = $1.000 Next.000 + 250. any dividends in arrears due to preferred shareholders must be paid before any dividends can be paid to common shareholders.800 + 7. in most cases preferred shares are cumulative.Introductory Financial Accounting.000 = $25. Dividends become a liability of the corporation only when the board of directors declares them.200/ 1.678.
All that happens is that the number of shares issued changes.000 shares of shares before the split.000 The total dividend to be declared will be: $1.000 + 800. This will result in the share price dropping by half.600.400. If a shareholder owns 1.Introductory Financial Accounting. the company will split the stock. v. the dividend to common shareholders can be paid: 1.000 shares.000 Stock Splits When the stock price of a corporation is high.000. 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. There is NO journal entry required when a stock split is declared. 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.1 Page 117 Finally. . a 2:1 split means that the number of shares outstanding will double.000. For example. this same shareholder will receive an additional 1.000 shares x $5 = $5. Any premiums paid on retirement of shares are also charged to retained earnings.000 shares as a result of the stock split resulting in a total of 2.000 = $7.000 + 5. In order to reduce the share price.000. the stock may become unattractive to small shareholders who have to disburse larger sums in order to acquire shares of the corporation.1.
1. beginning of year Premium on redemption of shares Net income (loss) for the year Dividends Retained earnings. v. end of year $ XXX -XXX ±XXX -XXX $ XXX .1 Page 118 The statement of retained earnings is as follows: Retained earnings.Introductory Financial Accounting.
Introductory Financial Accounting.000.000. XYZ Corporation has 150.000 common shares outstanding. v. b) Shareholders’ equity will increase by $3.1 Page 119 Problems with Solutions Problem 7-1 – Multiple Choice Questions 1.500. Which of the following statements will be true when the stock split is accounted for? a) Retained earnings will be reduced by $4.000. c) The number of common shares outstanding will be 225. The shares were selling at $30 each when management announced a three-for-two stock split.1. . d) The number of common shares outstanding will be 250.000.000.
Record the transactions in journal entry form. Declared cash dividends on the common shares in the amount of $0. Prepare the shareholders’ equity section of the Payne and Papineau Inc.000.000 common shares.000 $6 non-cumulative preferred shares and 100. a new company. In its first month. Hilary and Sam Corporation completed the following transactions: February 2 February 10 February 15 February 26 February 27 February 28 Issued 9. Issued 400 preferred shares to acquire a patent with a market value of $40. balance sheet as at February 28. Required 1.000 common shares for cash of $12. Issued 2.000 shares to Sam in return for cash equal to the shares’ market value of $6 per share.000.000 common shares to Hilary and 12. v.1. Declared a 2 for 1 stock split.32 per share. to issue 10.000 .Introductory Financial Accounting. 2.1 Page 120 Problem 7-2 The articles of incorporation authorize Hilary and Sam Corporation. Declared cash dividends on the preferred shares. Net income for the month was $56.
1. c.1 Page 121 Problem 7-3 M-F Inc. The equipment had a fair market value of $40. The convertible bonds were issued earlier in the year. Issued 1. Required 1. Prepare the shareholders’ equity section of the Statement of Financial Position.500 common shares at $120 each.000. . b.000 and book value of $53.00.000 preferred shares at $20 each. Net income was $64. f.00 common share dividend h. e. Issued 1. Issued 2. cumulative preferred shares. Declared a cash dividend on preferred shares. During the first year of operations the following events occurred: a. v.000 were converted into 500 common shares.000 preferred shares in exchange for equipment. 2. Paid the preferred dividend. Declared and paid a $5.000 for the year. g. d.000 common shares at $115 per share.000 common shares and 50. Convertible bonds with a face value of $50.000.Introductory Financial Accounting. $1. is authorized to issue 100. Issued 1. Provide the journal entries for each transaction above.
Introductory Financial Accounting. v. just the integration of previously covered materials. There is no new material.1 Page 122 8.1. The Accounting Cycle Revisited The purpose of this chapter is to bring all of the accounting issues discussed in the previous chapters together in the form of integrative problems. the only materials in this chapter are the problems with solutions. Therefore. Enjoy! .
5.000 127.052. The bonds mature on December 31. 20x6. The prepaid insurance is for a one year policy taken out in 20x5 that expires on March 1. The company provides a one year warranty on its products.000 13. 8.600 150. The company uses a FIFO periodic inventory system. The average useful life of equipment is 10 years. There are 10.600 12.Introductory Financial Accounting.000 1.1 Page 123 Problem 8-1 The Haider Corporation’s post-closing trial balance at December 31.5% and the yield to maturity at the time the bonds were issued was 6%.000 145. 20x1.1.052.000 120. $1.000 176.400 40. The patent remaining useful life at December 31.000 300. 20x5 is 8 years.000 $23.200 $1. 7. The building is being amortized on a straight-line basis over 40 years. the coupon rate is 6.000 320.000 144. 20x20. Coupon payment dates are on June 30 and Dec 31.5% of sales. 4.000 5.400 Additional information 1. The face value of the bonds is $400.000 shares of common stock outstanding. v. Warranty expense is estimated at 1. Cash Accounts receivable Allowance for doubtful accounts Inventory Prepaid insurance Land Building Accumulated amortization – building Equipment Accumulated amortization – equipment Patents Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Common stock Retained Earnings $36.000 34. 6.000 419.000 38. 2.400 Cr. The equipment is being amortized using the double declining balance method. . 20x5 was as follows: Dr. 3. The bonds were issued on January 2.000.
1.1 Page 124 The following transactions took place during the year: 1. an additional 3. The warranty expense for the year is accrued. equipment and patents.000 43. The inventory was counted on December 31. 20x6 and the total cost of the inventory was determined to be $378. 4.000 26. Estimated % Uncollectible 3% 7% 20% 50% An adjustment is made for insurance expense. v.000 320. 9.000.000 18. Accounts written off totaled $34.000 22.000 common shares on Aug 23 Insurance policy taken out on March 1 – one year policy. 21. 6. The accounts receivable aging schedule is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $144.000 common shares were issued for $75.000.000 23. 14 15.000 $222.520.400 130.Introductory Financial Accounting. Cash disbursements were as follows: 8. Total sales on account were $1. 16.000.000 30. 10.000 12.000 The following adjustments need to be made at year-end: 17.000 was returned to suppliers. 19.000. Cash collections on accounts receivable totaled $1.600. 3.000. Operating expenses paid $945. Recoveries of previously written off accounts receivable totaled $5. 13. 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. Amortization expense on the building. . The aggregate net realizable value of the inventory was determined to be $365. 5.000 2.000. 2. 7. Inventory costing $16.000 40.000.000 25. Inventory purchased on account totaled $960. 12.000. 20. 11. On March15.
The income tax expense is 40%. 20x6. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position .700. v. Dividends of $80.000 were declared and paid on December 15. c. 24. Salaries payable at December 31.1. 20x6 amount to $6. b. 23.Introductory Financial Accounting. Prepare journal entries for the above transactions and enter all the above transactions in T-Accounts.1 Page 125 22. Required – a.
20x5. Use straight-line amortization. were debited to warranty liability when paid. which was debited to rent expense. inventory of $9.000. 20x5. the company signed a $60. The company paid a two-year insurance premium in advance on April 1. costs incurred for the warranty to date. 20x6. at a cost of $11. The estimated loss rate on bad debts is 3% of sales. 20x5.900 were purchased and debited to supplies expense.700. f.1 Page 126 Problem 8-2 Pacific Company adjusts and closes its books each December 31. which cost $80. No warranty expense has been recognized. 10% note payable. amounting to $9. for one year. and sales revenue was credited on the date of sale.000. g. The estimated useful life is 10 years.900. you do not need to provide the original entry): a. totalling $8. $4.000 units of a product that was subject to a warranty. the principal plus the interest is payable one year later.800. is to be depreciated for the full year. The company rented a warehouse on June 1. v. i. which was debited to prepaid insurance.000. The note is payable on March 31. On April 1. It is now December 31. d. It had to pay the full amount of rent one year in advance on June 1.600. . 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. Past history indicates that 3% of units sold require repairs at an average cost of $40 per unit. the patent account was debited and cash credited for $11. 20x5. j. 20x5. September 1. The company purchased a patent on January 1. The note was dated September 1.Introductory Financial Accounting. On that date.e. and the residual value.000. On January 1. Credit sales for the year amounted to $320. 20x5. amounting to $9. e. Pacific Corporation had a supplies inventory of $4. During the year. On that date. i. c. Notes receivable was debited.1. and the adjusting entries are to be made. During the year. pacific Company sold 10.600.000.000.500. The sales have been recorded. Machine A.900. 20x5. supplies of $21. cash was debited and notes payable credited for $60. The company received from a customer a 9% note with a face amount of $12. h. The patent has an estimated useful life of 17 years and no residual value.200 was on hand. At the end of the year. Unpaid and unrecorded wages incurred at December 31 amounted to $4. b. for the face amount plus interest for one year.
l. Assume an average income tax rate of 30%.000 bad debt.Introductory Financial Accounting. Pre-tax income has been computed to be $80.1 Page 127 k. ABC Corporation wrote off a $16.1. v.000 after all the above adjustments. .
400 1.500 22. The bank statement showed the following 20x2 deposits through May 3l.000 shares of common share for $2. with an initial shares issue of 1.770 130 5. Spier incorporated this business as MAS Inc. Baking materials Rent Salaries and wages Maintenance Utilities Insurance premium Equipment Principal and interest payment on bank loan Advertising $14. v. on January 1.1 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. 20x2. Sales have increased 30%.800 5. Spier wishes to purchase some additional baking equipment and to finance the equipment through a long-term note from a commercial bank. The following amounts were disbursed through May 31. annually since operations began at the present location.500 110 4.500. 20x2.320 2.Introductory Financial Accounting.000 1.466 . 20x2.600 2.000 312 424 $31. Anne Spier is the principal shareholder of MAS Inc. Sale of common shares Cash sales Rebates from purchases Collections on credit sales Bank loan proceeds $ 2. Kelowna Bank & Trust has asked Spier to submit an income statement for MAS Inc.920 3. and additional equipment is needed to accommodate expected continued growth. 1. for the first five months of 20x2 and a balance sheet as of May 31. She started a baking business in her home and has been operating in a rented building with a storefront.880 $33.1.
20x2. 12. October 1.000 were purchased on January 2. Rent was paid for six months in advance on January 2. May 25. 10. and have an estimated useful life of five years. were as follows. The other employees had been paid through Friday. Baking materials Utilities $ 256 270 $ 526 4.1 Page 129 3. 20x2.1. New display cases and equipment costing $3. July 1.226 at May 31. 20x2 (b) A balance sheet as of May 31. 20x2. 20x2 MAS Inc. 8. 20x2. and no cash was transferred from the unincorporated business to the corporation. 20x2. 7. is subject to an income tax rate of 20%. There were no materials in process or finished goods on hand at that date. 20x2.840 were on hand at May 31. Unpaid invoices at May 31. 5. A one-year insurance policy was purchased on January 2.: (a) An income statement for the five months ended May 31. These are the only fixed assets currently used in the business. Straight line amortization is to be used for book purposes. Anne Spier receives a salary of $750 on the last day of each month. 20x1 were not included in the corporation's records. Customer records showed uncollected sales of $4. prepare for MAS Inc. 20x2. and states a simple interest rate of 10%. 9. 6. 20x2. The loan requires quarterly payments on April 1. Required Using the accrual basis of accounting. 20x2. v. . The note evidencing the 3-year bank loan is dated January 1. Payments and collections pertaining to the unincorporated business through December 31. and January 1 consisting of equal principal payments plus accrued interest since the last payment. No materials were on hand or in process and no finished goods were on hand at January 1. 11. 20x2. and were due an additional $240 on May 31.Introductory Financial Accounting. Baking materials costing $1.
The income tax rate is 30 percent.000.000 of its common shares for $25 per share. respectively. At the beginning of 20x2.000 note issued on July 1 and bearing interest at 12%. Prepare an income statement for the year ended December 31.000 5.000 and $20.000 5.000 $250. December 31.600 have accrued but have not been paid.000 10. payable annually Customer collections Proceeds on sale of fully depreciated equipment (original cost.20x1 Deposits during 20x2: Cash sales Proceeds of $5. As the senior auditor in charge of the audit.000 $406. a cash dividend of $10. $20. The uncollected receivables were written off as miscellaneous expenses in 20x2.500 c) d) e) f) g) h) i) j) Morrow had no outstanding payables at the beginning of 20x2 but owes creditors $36. The sale of equipment was made on December 30.000 $180.1. you have been presented with the following information: a) Morrow is incorporated and initially sold 11.000 146.Introductory Financial Accounting.000 was declared and is to be paid in January 20x3.1 Page 130 Problem 8-4 Morrow Wholesale has kept limited records and has never had an audit until 20x2.000. sales salaries of $1. 20x2. Receivables at the beginning of 20x2 totalled $ 155.000. v. During the fourth quarter of 20x2. Retained earnings at the beginning of 20x2 totalled $63.000 5. During 20x2 these shares were exchanged for land and a gain of $4.500 $205. All equipment is depreciated on a straight-line basis over ten years with no estimated salvage value. 20x2. b) Cash balance in cheque book. 20x2.000. equipment with a cost and accumulated depreciation of $80. Morrow's only other asset at the beginning of 20x2 was an investment in Honeydew common shares.000) Cheques written during 20x2: Purchases of merchandise Salaries Advertising (to be run in 20x3) Miscellaneous expenses $ 24.000 was recognized. In 20x2 Morrow began selling on a cash-only basis. Morrow's cost of goods sold is 80 percent of sales. was on hand.000 10. and a balance sheet at December 31. 20x2. There have been no other common share transactions.000 for unpaid purchases of merchandise on December 31. for Morrow Wholesale. The inventory at the beginning of 20x2 was $80. . At the end of 20x2.
If a company retires shares.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 $ 400.000 300. and shows how a company’s actions have affected its net cash position throughout the period. this generates cash. This statement is broken into three distinct sections. your main concern is incoming and outgoing cash. Some students find the statement of cash flow to be a challenge because they are still thinking with an “accrual” mind.000 180. v. If a company issues new debt. There are two distinct methods in presenting cash flow from operations: the direct and the indirect method. if a company pays off or retires debt this uses cash. If a company issues new shares. then this uses cash. Try to keep in mind that when you are working with this statement. is based on the accrual system. . The Statement of Cash Flow The statement of cash flow shows a company’s inflows and outflows of cash during a particular period. If a company pays dividends.000 450.000 650.000 215. GAAP suggests a preference for the direct method. however.000 20x7 $ 250.1 Page 131 9. this uses cash Example . either the direct or indirect methods can be used. this generates cash.1.000 were declared and paid to shareholders during the year.000 150. Most of what we do. as accountants.Introductory Financial Accounting.000 Additional information: Dividends of $150. 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. Both methods will be covered later in this section. 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.
the net income for the year is $85. when dealing with this section. Given that dividends decrease retained earnings. The difference between the proceeds. we know that retained earnings increased by a net of $85.000 (10.Dividends = Closing Retained Earnings In the above case.000 Net Income = $235.000 (170.000 = $235. Cash flow from Investing Activities – this section discloses cash that was generated or used through the sale or purchase of long-term assets. Rearranging the formula.000) 0 .000) 200.000) 100.000 (60. Often. and changes in them from one period to the next.000 20x7 $ 300.000) $ 170. we remove the asset and all associated accumulated amortization.000 Alternatively.000 = $300.000 (150.000.$150. we know all numbers in this formula except Net Income.000) 100. Example .A company is showing the following data regarding its last two fiscal periods: Partial Statement of Financial Position 20x8 Non-Current assets Equipment Accumulated Amortization Furniture & Fixtures Accumulated Amortization Land $ 350.000 (30. we can calculate the Net Income. when a sale of a long-term asset is made.Introductory Financial Accounting. $215.000 To calculate the company’s net income for 20x8.000 (180.000) 75.000 + Net Income . and the NBV (cost – accumulated amortization) is recorded as a gain/loss on sale.000.000 + dividends of $150. v.1. we analyze at the Retained Earnings Account: Opening Retained Earnings + Net Income . or cash we receive.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. Remember. we have to reconcile the long-term asset accounts.
000.000. costing $75. excluding interest payable.000.000.000 = $25.000 and the accumulated amortization was $60. 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 ($50.1. • new fixtures were purchased for $100.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. v. All non-cash transactions are by definition excluded from the statement of cash flow.000 giving a net book value of $15.000 with a NBV of $15.000 cash.000 worth of equipment was purchased for cash during the year. • the original fixtures.000 (100. 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 $100.1 Page 133 Additional Information: • $50.000 worth of common shares to the supplier. Note that because no cash exchanged hands for the purchase of the land.000 + 10. were sold at a gain of $10. it does not appear in this section. and essentially takes each income statement item and converts it into cash.000. income taxes payable and dividends payable) Cash paid for Interest (Interest Expense ± changes in interest payable) Cash paid for Income Taxes (Income Tax Expense ± changes in income taxes payable) .000) * The cost of the fixtures was $75. then the cash proceeds on the sale of fixtures would have to be $15.000) ($125. There are a minimum of four main sub-sections in determining the cash flow from operations (note that these are a minimum. If the gain on sale was $10.000) 25.
000 104.000 5.000 68.000 231.000 10.000 $135.000 429.000 2.000 1.Introductory Financial Accounting. 20x7 20x7 ASSETS Cash Accounts Receivable Inventory Capital assets Less accumulated amortization LIABILITIES Accounts Payable Salaries Payable Interest Payable Taxes Payable Bonds Payable SHAREHOLDERS’ EQUITY Common Stock Retained Earnings $76.000) 135.000 $172.000 89.600 $ 67. Jack’s Joke Shop Inc.000 5.000 21. Income Statement For the Year ended December 31.000 14.000 23.000 46.000 24.400 .000 80.000) $172.000 73.000 (20.000 39.000 (25.000 2.000 50.000 8. v.000 20x6 $42.000 62.1 Page 134 Example – Calculate cash flow from operations – direct method.000 27.000 21.000 10.000 325.000 120.000 82.000 200.000 82.000 3.1. 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 $660.000 104. Comparative Unclassified Statement of Financial Position As at December 31.000 15.000 12.
If accounts receivable increased.1 Page 135 Cash collected from customers: Sales Less increase in accounts receivable $660. In this case. we accrued more sales than we collected.000 2. These comprise all of the expense items on the statement of financial position with the exception of amortization expense. v. therefore we reduce sales to calculate cash collected from customers.000 120. 20x6 and the balance at December 31. and office & administrative salaries.000 (2. it would have been correct to show these as three separate line items in the cash flow from operations section of the Statement of Cash Flow: Cash paid out to suppliers Cash paid out to employees Cash paid out for office and administrative expenses With regards to cash paid put to suppliers the starting point is cost of goods sold. we can simply analyze the difference. Therefore.000 (6. The first thing we do is adjust it to obtain the purchases made during the period.1. Conversely.000 235. then this means that sales have not yet been collected – that is. which is a non-cash item and interest and income tax expense which will be dealt with separately. 20x7. Note also that although we combined all three expense items in one single calculation. We are not told what percentage of the total sales are made for cash.000 $553. However. and which are made on credit. 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. salaries expense.000 increase in Accounts Receivable. then we collected more than we accrued and this would be added to sales. if accounts receivable decreased.000. the amount of our Inventory account increased by $2.000 Why did we subtract the $6. because we are told the balance at December 31.000 Note that the starting point for each calculation is the following expense items: cost of goods sold.000) $231. .000 198. nor are we told how much of the 20x6 accounts receivable balance have been collected.Introductory Financial Accounting.000) $654. waiting to be sold.000 2. This means that we purchased additional inventory that is now sitting in our warehouse.
000 from our Interest Tax Expense to get the total cash paid for taxes. we owe $12. That is. we will subtract the $12. and any decrease in liabilities is added. and any decrease would be added. That is. if the Accounts Payable account decreases. we have to add the $2.000). Therefore. any increase in the Income Tax Payable account would be subtracted from the expense to get to the total cash paid. there appears to be no associated statement of financial position account.000 more this December 31st than we did last. we would have subtracted the amount from COGS to get total money paid to suppliers. like it did in the above example. In dealing with the change in accounts payable. This is why we add back the $2. Purchases for the year in this case would be $233.000 ($231.000 In this case.Introductory Financial Accounting. other than interest and taxes. Again. 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 (1. If. as in the case of Office & Administration Expenses above.600 (12.000. . All other expenses. Note. In this example. interest payable went up which means that we accrued more interest than we paid. If there is no such account. are treated in the manner that the Salaries Expense was treated above. then you simply include the full expense amount as the cash paid for that expense.1.000) $9.000) $14. v.000 + 2. like salaries payable. on the other hand. then we have paid more to our suppliers than the purchases. so we deduce the increase in interest payable to interest expense. should the opposite have occurred. is subtracted from the expense to get to the total cash paid.600 The treatment for taxes is the same as for interest. Cash paid for taxes: Income tax expense Less increase in income taxes payable $21. Any increase in liabilities. inventory decreased.000 increase to COGS.1 Page 136 to calculate purchases. Cash paid for interest: Interest expense Less increase in interest payable $15. you start with the Income Statement amount and then account for any changes in the associated statement of financial position account(s).
This would include changes in accounts receivable. We then add or subtract any changes in the non-cash current asset and liability accounts. The most common of these are amortization expense and gains/losses on the sale of capital assets. 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.Net Income. v.000 1.Introductory Financial Accounting. We then add back any non-cash items that may appear on the income statement. inventory. Increases (decreases) in current liabilities are cash inflows (outflows). as well as all current payable accounts. Increases (decreases) in current assets are cash outflows (inflows.000) 2.600) $ 77. we start with the bottom line .000 $77.000) (14.1 Page 137 To sum up: Cash flow from operations Cash collected from customers Cash paid to suppliers & for operating expenses Cash paid for interest Cash paid for taxes $654.400 5.400 Cash from Operations – Indirect Method Under the Indirect Method.400 .000) (2.000 (6.000 12.000 (553.1.000) (9.000) (2.
400) Opening Cash Balance – December 31.1.000 42. Cash from Investing Activities No activity $0 Cash from Financing Activities Proceeds from issuance of Common Stock Payment on Bonds Payable Payment of Dividend* *Opening R/E + Net Income – Closing R/E = Dividends paid ($23.400) 34.Introductory Financial Accounting.000 + 67.400) (43. .000 = 66. This includes cash. term deposits and any highly liquid assets (i.000 Definition of Cash For purposes of the statement of cash flow.000 (7. 20x6 Ending Cash Balance – December 31.e.000) (66.400) Net Change in Cash ($77.400 + 0 – 43. the term ‘cash’ is defined as ‘cash and cash equivalents’.1 Page 138 To continue the example.000 $ 76. let’s finish with the cash flow statement.400 – 24. 20x7 30. readily convertible to cash) subject to an insignificant risk of change in value. v.
000) 15. Income Statement for the Year ended December 31.Introductory Financial Accounting.000 450.000 300.900 .1. 20x6 Sales Revenue Cost of Goods Sold Gross Margin Operating Expenses: Salaries expense Amortization expense Other Operating income Interest expense Gain on Sale of Capital Assets Net Income before taxes Income tax Expense Net Income (32.000 207.000 $750. v.000 120.000) 226.000 (17.1 Page 139 Problems with Solutions Problem 9-1 The following is the Income Statement and comparative Statement of Financial Position for Ginger’s Cookies Ltd.100 $146.000 243.000 80. Ginger’s Cookies Ltd.000 7.000 79.
1. was replaced by a new piece of machinery costing $125.500 90.000 47.000 10.500 $ 19. b.000.100 $ 14.000) $144.000 61. Prepare a Statement of Cash Flow using the Direct Method.000 10.400 158.400 $275.1 Page 140 Ginger’s Cookies Ltd. costing $45.000.000 125. the only piece of equipment.000 43.000 $144.200 $ 27.000 108.200 $ 20.000 (7. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.000 (40.500 50. Required – a.800 2. v. Ginger’s paid cash for the equipment.000 111. 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.Introductory Financial Accounting.200 20x5 Additional Information: on January 2.000 7.000) $275.100 30.000 40. . 20x6.000 117.000 45. Comparative Unclassified Statement of Financial Position as at December 31.200 80.400 6.000 0 33.
000 $ 4.000 700.358. v.000 999.000 850.695.000 $ 4.019.000 (3.500.000.000 20x2 $ 353.000 508.000 5.000 30.1 Page 141 Problem 9-2 The comparative statements of financial position of McDuff Ltd.343.000 $ 4.000 119.000 1.091.000 Current liabilities Accounts payable Salaries and wages payable Interest payable Income taxes payable $ 897.000 82.000 319.000) 1.000 1.060.000 450.045.842.060. MCDUFF LTD.212.854.000 888.000 1.000 2.000) 1.000 $ 4.000 2.000 $ 909.1.000 1.000 45.000 1. Statement of Financial Position December 31 20x3 Current assets Cash Accounts receivable Merchandise inventory Prepaid expenses $ 319.000 1.711.000 28.000 32.000 800.000 1.054.093.041.000 Capital assets Accumulated amortization Bonds payable Mortgage payable Shareholders’ equity Common shares Retained earnings .Introductory Financial Accounting.869.000 3.000 35.000 (3.429.000 5.326.212.000 2.631. are shown below.000 1.000 43.
400. 2.000. 3. 20x3 Revenues Cost of goods sold Operating expenses Salaries and wages expense Operating income Gain on retirement of bonds payable Loss on disposal of assets Interest expense Net income before taxes Income tax expense Net income $ 13. bonds with a net book value of $500. 20x3.500.000 were retired for $487. On August 31. 20x3. On April 15. Prepare the cash flow from operations section using the direct method. Prepare a cash flow statement for the year ending December 31.000) $4.000 2.1. Use the indirect method to report the operating activities.000 850. .000 (7.000 Additional information 1. with a book value of $87. McDuff sold capital assets that cost $158.000 550.Introductory Financial Accounting.000) 489. for $80.1 Page 142 MCDUFF LTD.000 (61.000.000) (67. v.000 $239. b. Income Statement For the year ended December 31. Amortization expense is included in Operating expenses. Required a.000 250.000 700.000. 20x3.000.
800 7.Introductory Financial Accounting. adapted) $ 4.200 221.000 1.300 5.700 8.300 10.700 500 5.000 500 . Income Statement for the year ended December 31.400 $ (3.700 4.400) Comparative partial balance sheets at December 31.000 5. 20x5 Sales Expenses: Cost of goods sold Salaries expense Insurance expense Depreciation expense Rent expense Interest expense Net loss $ 218. v.1 Page 143 Problem 9-3 The following data are available for HHC Ltd. HHC LTD.1.000 39.000 1.800 7.300 1. 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.000 600 20x4 $4.000 $ 165.300 600 5.800 5.300 2.
000 32. 31 20x5 $ 26.000 600.000 423.000 25.000) 25.000 200.000 475. Balance Sheets Dec.000 0 85.Introductory Financial Accounting.000 423.000 4.000 80.000 Net Change $ 24.000 53.000) $ 681.000 87.1.000 300.000) $ 900.1 Page 144 Problem 9-4 Toram Ltd.000 . 20x6 are as follows: TORAM LTD.000 $634.000 92. and its income statement for the year ended December 31.000 Dec.’s comparative balance sheets at December 31.000 86.000 144.000 $ (18. 31 20x6 $ 50.000 0 0 58.000 $ 40.000 119. 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 Assets Cash Accounts receivable Inventory Long-term investment Land Buildings and equipment Accumulated amortization TORAM Ltd.000 $ 65.000) $ 624.000) 0 (12.000 (101.000 39.000 $ 100.000 463.000 (18.000) $ 57.000 18.000 85.000 (123.000) (22.000 0 80. Income Statement for the year ended December 31. 20x5 and 20x6. v.000 Liabilities and Shareholders’ Equity Accounts payable Bonds payable Preferred shares Common shares Retained earnings $ 22.000 (12.000 $ 699.000 43.
Declared and paid a $50.1. 5. v. (CGA Canada adapted) . Issued $25.000.000 cash. Purchased equipment for $20.1 Page 145 During 20x6. the following transactions occurred: 1. 20x6. Sold the long-term investment on January 1.000 and had $21.000 of bonds payable at face value.Introductory Financial Accounting. 4. 3. Sold equipment for $7. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method. for $30. Prepare a Statement of Cash Flow using the Direct Method. 2. b.000 cash dividend.000 of accumulated amortization. Required – a.000 cash that had originally cost $32.
which the investor would like to predict. 8. Management's attitude toward future cash dividend policy. 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. of course. Financial Analysis Techniques 1. Nonetheless. 4. Each of these eight variables that affect future dividend policy is in turn affected by others. However.1. 3. 2. 7. Published financial statements are the sources of information generally available to users. interest payments.1 Page 146 10. from activities considered incidental to the firm's main function. repayment of principal. published financial statements are historical in nature and do not provide the information we have just outlined. Vertical and Percentage (common size) analysis .e. be recognized. Net cash flows from future operations. The nature of the analysis of financial statement information is primarily in the form of ratios. 5. The firm's future policy regarding the holding of cash balances (for precautionary and liquidity reasons) in excess of those required to maintain the expected level of operations. The limitations of using historical information must. etc. Horizontal (trend). In order to predict the company's future dividend policy. v.Introductory Financial Accounting.. The amount of cash expected to be invested in the firm's long lived assets as well as in working capital. Future cash flows from changes in the levels of investments made by shareholders and creditors.e. i. i. 6. The amount of future cash flow from random events such as windfall gain or casualties. The following are the variables that affect a firm's future dividend policy: 1.. the investor must predict those things that affect dividend policy. historical information can be used to make projections and is sometimes extremely useful in this respect. sinking fund provisions.
673 827 273 $554 20x6 $13. For example.509 7.619 12.369 606 200 $406 20x4 $8.073 354 $719 .1.Introductory Financial Accounting. or as compared to an amount of the preceding period.500 10.546 1. 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 $7.882 627 207 $420 20x5 $11.975 7. v.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
0. What was the inventory turnover for 20x8? a) 4. The accounts receivable turnover for 20x8 was 7.500 b) $335.0 .000.000 and the ending inventory for 20x8 was $120. 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 3.500. 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. a corporation purchased $540.000 c) $367.500 d) $400. 20x7. R Company’s net accounts receivable were $50.000 at December 31.000. During 20x8. What were R’s total net sales for 20x8? a) $227.5 b) 5.0 d) 8. v. Net cash sales for 20x8 were $32. 20x8.000 at December 31. The beginning inventory for 20x8 was $30.1 Page 152 Problems with Solutions Problem 10-1 – Multiple Choice Questions 1.1. If current liabilities exceed current assets. and $55.000 2.0 c) 6.Introductory Financial Accounting.000 of inventory and had sales of $600.
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If current assets exceed current liabilities, a payment of an account payable has what effect on working capital and the current ratio? Working Capital No effect No effect No effect Increase Decrease Current Ratio Increase No effect Decrease Decrease Decrease
a) b) c) d) e)
Assuming stable business conditions, which of the following is consistent with a decline in the number of days’ sales outstanding in a company’s accounts receivable at year end from one year to the next? a) A tightening of the company’s credit policies b) The second year’s sales were made at lower prices than the first year’s sales c) A longer discount period and a more distant due date were extended to customers in the second year d) A significant decrease in the volume of sales of the second year
When should an average amount be used for the numerator in computing a financial ratio? a) When both the numerator and denominator are balance sheet items b) When the numerator is an income statement item and the denominator is a balance sheet item c) When the numerator is a balance sheet item and the denominator is an income statement item d) When both the numerator and the denominator are income statement items
Introductory Financial Accounting, v.1.1
A company disclosed the following information for the year ended December 31, 20x8: Net cash sales Net credit sales Inventory at beginning of year Inventory at end of year Net income Accounts receivable at beginning of year Accounts receivable at end of year What is this company’s days sales in accounts receivable for 20x8? a) 182 days b) 94 days c) 65 days d) 57 days $ 75,000 125,000 50,000 62,500 12,500 40,000 22,500
During 20x8, a company purchased $320,000 of inventory. The cost of goods sold for 20x8 was $300,000, and the ending inventory at December 31, 20x8, was $60,000. What was the inventory turnover for 20x8? a) 5.0 times b) 5.3 times c) 6.0 times d) 6.4 times
Introductory Financial Accounting, v.1.1
Problem 10-2 The comparative financial statements for the Kuehl Company are as follows. Kuehl Company Balance Sheets as at December 31 … 20x5 ASSETS Current Assets Cash Accounts receivable Inventory $12,000 275,000 425,000 712,000 1,450,000 $2,162,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $379,000 920,000 1,299,000 300,000 563,000 863,000 $2,162,000 $371,000 850,000 1,221,000 300,000 493,000 793,000 $2,014,000 350,000 800,000 1,150,000 300,000 425,000 725,000 $1,875,000 $34,000 220,000 340,000 594,000 1,420,000 $25,000 200,000 350,000 575,000 1,300,000 20x4 20x3
Fixed Assets – net
Introductory Financial Accounting, v.1.1
Kuehl Company Income Statements for the year ended December 31 … 20x5 Sales Cost of goods sold Gross margin Operating expenses Depreciation expense Operating Income Interest expense Net income before taxes Income taxes Net income Required – Prepare a full financial statement analysis for 20x4 and 20x5 for Kuehl Company. $2,300,000 1,400,000 900,000 550,000 120,000 230,000 60,000 170,000 60,000 $110,000 20x4 $1,900,000 1,200,000 700,000 400,000 100,000 200,000 50,000 150,000 52,000 $98,000
000 $480.000 $20.114.628.000 524.000 $3.808.000 $3.000 2.876.000 $3.000 300.789.999. are as follows.000 2.000 2.000 1.167.000 2. v.003.000 1.000 $4.000 $24.000 700.000 700.000 1.576. Balance Sheets as at December 31 … 20x7 ASSETS Current Assets Cash Accounts receivable Inventory $37.000 20x6 20x5 Fixed Assets – net $4.928.000 $524.889.000 800.1 Page 157 Problem 10-3 The comparative financial statements for Rocky Mountain Camping Equipment Ltd.000 $3.000 480.180.000 650.000 700.000 .000 1.000 2.1.979.956.000 820.956.808.000 809. Rocky Mountain Camping Equipment Ltd.000 1.679.324.380.000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $560.000 1.000 700.000 485.000 2.003.000 1.Introductory Financial Accounting.000 570.000 1.
000 1.1.000 $51.700.000 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.000 $3.000 30.000 2. v.000 65.000 463.1 Page 158 Rocky Mountain Camping Equipment Ltd.100.000 5.000 635.000 1.000 20x6 $1.000 81.000 .000 800.000 700.300.Introductory Financial Accounting. $2.000 100.000 56.000 100.000.000 137.
3. 7. v. 8.999 + 40.039. d b a d d d b c $40.000 $999. 2. 5.1.000 = $1.000/4 years x 6/12) = $35. 4. 6.000 – ($40.999 .Introductory Financial Accounting.1 Page 159 11. SOLUTION TO PROBLEMS Problem 1-1 1.
000 120.000 Common Stock 20.367 8.000 20.000 1 3 Furn. Amortization 500 11 10 Retained Earnings 10.000 Accrued Liabilities 150 700 600 1.000 15.1 Page 160 Problem 1-2 Part (a) Assets Cash 20.200 4. v.000 1 4 7 8 B 2 3 6 7 B 8 10 14 5 9 B 2 Prepaid Rent 1.000 2.000 25.000 1.000 190. & Fixtures 15.000 .960 5.000 Liabilities & Equity Accounts Payable 130.800 33.000 Acc.000 4.200 400 800 12 4 15 Inventory 25.1.777 Bank Loan 20.000 2. Receivable 6.000 13 16 17 18 19 B 6 B Prepaid Insurance 1.000 50.000 BALANCE SHEET Accts.Introductory Financial Accounting.000 182.000 15.
000 120. v.1.500 700 2.000 5 9 B 15 15 14 B 7 15 11 Amortization 500 10 13 B 10 17 B Wages and Salaries 36.1 Page 161 Expenses Purchases 50.Introductory Financial Accounting.000 1.960 5.600 Insurance 400 12 10 16 B Miscellaneous 1.000 600 36.000 170.000 0 Rent 2 10 18 B 1.367 .000 INCOME STATEMENT Purchase Returns 15.960 Interest 300 150 450 Advertising 10 2.000 0 Cost of Goods Sold 130.000 15.000 Revenues Sales 196.000 3.200 19 Income Taxes 5.
200 190.000 1.000 120. 3. v.800 500 500 2. 8.000 2.000 15.000 6.000 196. 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 4.000 / 10 years x 4/12 $20. . 10.Introductory Financial Accounting.000 1. 11.000 15.000 20. 7. 5.000 3.000 1.000 36. 6.000 20.200 1.1 Page 162 Journal Entries – 1.000 50.000 182. 4.000 50.1.000 2.000 $20.000 120.000 300 130.500 10.000 4. 9.000 1.
1.367 5. 15. v. 19.1 Page 163 12. Insurance expense Prepaid insurance $1.890 Income tax expense = $17.000 x 1% Income tax expense Accrued liabilities Net income before taxes = $17.367 .000 15.960 15. 150 150 14.960 1. 5.Introductory Financial Accounting.000 130. 17.000 700 700 600 600 1.200 / 12 months x 4 months expired Interest expense Accrued liabilities Accrual for the month of October: $20. 16.000 15.000 25. 18.000 x 9% x 1/12 Accounts payable Purchase returns Cost of goods sold Inventory Purchase returns Purchases Miscellaneous expenses Accrued liabilities Salaries and wages Accrued liabilities Rent expense Accrued liabilities $196.000 170.890 x 30% = 400 400 13.
600 2.000 8. v.277 $270.1 Page 164 b. Heavenly Books.777 20. 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. Trial Balance As at October 31.Introductory Financial Accounting.000 130.277 .367 $270.000 15.000 400 2.000 196.000 20. Inc.1.000 Credit $ 500 25.200 5.000 5.000 2.000 25.960 500 450 36.000 10.000 800 1.
523 Heavenly Books.960 500 36.1 Page 165 c.890 5. 20x2 Sales Cost of goods sold Gross profit Operating expenses Rent Amortization Wages and salaries Advertising Insurance Miscellaneous Operating income Interest expense Net income before taxes Income tax expense Net income $196.523 . Inc. Statement of Retained Earnings for the four months ended October 31. 20x2 $0 12. October 31.367 $12.000) $2. 20x2 Net income Dividends Retained earnings.1. Heavenly Books. v.000 130.523 (10. Income Statement for the four months ended October 31. Inc.600 2. July 2.000 5.Introductory Financial Accounting.000 400 2.340 450 17. 20x2 Retained earnings.000 66.660 18.200 47.
777 12.300 .777 8.500 $76.523 $76.000 25.523 22.000 53.000 500 $33.300 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Accrued liabilities Current portion of bank loan Bank loan Shareholders’ Equity Capital stock Retained earnings $25.000 2.000 2.1 Page 166 Heavenly Books.800 14. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance Prepaid rent Furniture and fixtures Less accumulated amortization $15.000 8.000 61.Introductory Financial Accounting. v.000 800 1.000 45. Inc. Statement of Financial Position as at October 31.777 20.1.
beginning Net income Dividends Retained Earnings .500 (2.500 Global Productions Inc.800 2.1.600 – 2.200 84.400) Cost of goods sold Gross margin Operating expenses Amortization Insurance Rent Salaries Supplies Telephone Operating income Interest expense Net income before taxes Income tax expense Net income 4.200 3.000 71.000 17.100 $9.000 4.200 54.1 Page 167 Problem 1-3 Global Productions Inc.600 13. 20x6 Net sales ($157.600 4.500 $155.Introductory Financial Accounting.300 18.300 21.ending $0 9. 20x6 Retained Earnings . Statement of Retained Earnings for year ended December 31.100 3. v. Income Statement for year ended December 31.100) $7.400 .
100 1.400 $107. v. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Supplies Prepaid insurance Office equipment Accumulated amortization 24.500 1.000 7. Statement of Financial Position as at December 31.000 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Bank loan Shareholders' Equity Capital Stock Retained earnings $7.1.000 49.1 Page 168 Global Productions Inc.Introductory Financial Accounting.800 $25.200 $107.000 4.600 50.000 9.100 87.800 19.100 14.200 2.400 57.500 1.000 .600 40.900 44.
To do this you would set up a receivable. you would have earned of the revenue. due from Big Al. you would have debited Prepaid Insurance and credited Cash for the full amount of $5. The journal entry would be: Unearned Revenue Subscription Revenue c) 6 6 You have earned the $2. You have used 8/12 of the policy.300 revenue this accounting period. you only had the machine in use for 7 months.1 Page 169 Problem 1-4 a) Annual amortization expense for the machinery would be = $50.333 3. Therefore.000 X 8/12 = 3. Cash Unearned Revenue 24 24 As of April 30. $24 X = $6. as these expenses were incurred during the period.300 d) As of Wednesday.250/year.800 e) When you purchased the policy. Therefore.333 from Prepaid Insurance and record it as Insurance Expense for the period. Insurance Expense Prepaid Insurance 3. Amortization Expense Accumulated Amortization b) 3.646 When you received the cash in January. it is appropriate for you to record it in this period.1. Accounts Receivable Consulting Revenue 2.Introductory Financial Accounting.333 .800 1. therefore.000. therefore you will remove $5. in the amount of revenue earned during the period.646 for the current period. your amortization expense would be = $6. However. the full amount would be recorded as an Unearned Revenue liability. Therefore. we will record salaries expense and the accompanying salaries payable of $1. you will have accumulated 3 days worth of salaries that have not been paid.300 2.000/8 years = $6. Salary Expense Salaries Payable 1. However.646 3.800. you must record them as an expense of that period. you would have sent out 1 of the 4 magazines in the subscription. v.250 X 7/12 = $3.
You will have to adjust for that fact that 5/6 of the payment has not been earned i. The first payment that you received on June 1st would cover the catering for June – November.000 covers a 6-month period..750 .000 is unearned. the second payment that you received on December 1st covers the period of December – May. Therefore. $6.000 each. and would be recorded as an asset on your accounts for the June30th period end.1. On December 1st.e. you would have been in the premises for 1 month.750 4.750 4.750 As of July 31st. You would remove the Prepaid Rent account to reflect that fact that you have “used up” the rent. Unearned Revenue Catering Revenue 1. However.Introductory Financial Accounting.000 1.000 X 5/6 = $5. that full amount would have been earned and recorded as revenue during the period.000 g) The $4. and therefore you would have incurred one month worth of Rent Expense. Rent Expense Prepaid Rent 4.000 has been earned and should be included in revenue for this period. v. you would have debited Cash and credited Unearned Revenue by $6. Prepaid Rent Cash 4. or $1.750 you paid on June 30th represents Prepaid Rent.1 Page 170 f) Each of the payments for $6. No adjustment is needed for this.
000 $1. 4.000 x $10 = $1.000 – 128.020.000 Problem 1-7 1.000. 10.000 less the revenue earned for subscription fees received in the previous year of 80. 7. Dec 31.1. 3. .000.000 + 120.000 $1.000.000 (bldg) – 300.000 $1.000 + 300.1 Page 171 Problem 1-5 a. 12. Dec 31. 20x5 Insurance expense Prepaid expense $1. the offsetting credit would be to Subscriptions Revenue. 20x5 d.000. 20x5 500 500 100 100 c. 3.000 + 10.020.000 $0 $1.000 $1. 9.000 x $20 (accounts payable) = $20.000 (sales) – 4. $80.000 + (1.000 $0 $1. v. Dec 31.000.Introductory Financial Accounting.000 $1.000 (the ending balance in the account).000.006.000.000 = $48.026. 11. 5. 20x5 55 55 Problem 1-6 1. The opening balance in the Subscription Received in Advance account = $80.000 (cash) = $1.000 = $72. 2.000 (COGS) = $1.000 + (200 x $50)(cash) – (200 x $20)(inventory) = $1.000. Dec 31.000 x $20)(inventory) = $1.000. 6.000 1. 100.000 $20.000. Total amount received as revenue of $128. 8. Debit to Subscriptions Received in Advance = $180.000. 2.000 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. 4.
Introductory Financial Accounting, v.1.1
Problem 1-8 Shareholders’ Equity Net Income
+10,000 NC NC NC -10,000 Remove the receivable from A/R, and add a short-term note receivable.
+50,000 NC +50,000 NC An increase in the cash account and an increase in the contributed capital account. +2,000 NC NC NC -2,000 An increase in the cash account and a decrease in the accounts receivable account. +500 NC NC NC -500 An increase in the prepaid insurance account and a decrease in the cash account. +200,000 +200,000 NC NC An increase in the equipment account and an increase in the notes payable account. NC +1,400 -1,400 -1,400 An increase in the interest payable account and an increase in the interest expense account, therefore, the decrease in net income. +1,000 NC +1,000 +1,000 An increase in the interest receivable account and an increase in interest revenue, and therefore both net income and retained earnings (part of shareholders’ equity)
Introductory Financial Accounting, v.1.1
Problem 1-9 1. Sales Cash received for sales Less cash received for previous year sales Plus Sales not paid for in current year Sales – accrual basis Purchases Cash paid for purchases Less advance payment Plus prepaid purchases Purchases – accrual basis Cost of Goods Sold Beginning inventory Plus purchases Cost of goods available for sale Less ending inventory 20x6 $ 60,000 (5,000) 20,000 $ 75,000 20x7 $ 70,000 (20,000) 0 $ 50,000
$ 40,000 (2,000) 0 $ 38,000
$ 35,000 0 2,000 $ 37,000
0 38,000 38,000 (3,000) $ 35,000
$ 3,000 37,000 40,000 (5,000) $ 35,000
Revised Income Statement Sales Less Cost of Goods Sold Gross margin Other expenses Operating income Profit Margin (30,000/75,000) (2,000/50,000) * 14,000 – 1,000 personal expenses 2. Revenue recognition principle – revenue must be recorded when earned, it can be measured, and the collectability is reasonably assured, not when cash payment is received. Mr. Cash violated this by recording “sales” on a cash basis. Matching principle – all expenses must be recorded in the same period as the revenue that the expenses were incurred to generate. Mr. Cash violated this principle by simply using cash paid for purchases instead of calculating the proper COGS. Economic entity principle – a business should only report on transactions that are under its control. By including his own personal expenses Mr. Cash crossed the line between “personal” and “business” and violated this principle. $ 75,000 35,000 40,000 10,000 $ 30,000 40% $ 50,000 35,000 15,000 *13,000 $ 2,000 4%
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Problem 1-10 a. Revenue should be recognized when the trees are sold to the customer during the Christmas season because that is when the benefits and risks of ownership pass from the company to the customer. Until then, the company does not know whether any customers will buy their trees, or how much the customer will pay for the trees (measurement of amount). There is so much competition and one never knows how many trees will be sold. Some trees may have to be discarded if they do not sell. Also, at the time of the sale, cash is collected so there is no uncertainty as to collectability. The company has little or no risk once the tree is sold because it is very unlikely that the tree will be returned. The annual cost of fertilizing, pruning and maintaining the trees should be capitalized as a cost of inventory. In effect, the trees are like work-in-process inventory. Then, when the trees are sold, all of these costs will be expensed as cost of goods sold. This is an example of the matching principle and the point of sale recognition method.
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.1.Introductory Financial Accounting. 20x2 (000's) ASSETS Current Assets Cash Accounts receivable Accrued interest receivable Merchandise inventory Prepaid fire insurance Noncurrent assets Note receivable Equipment Accumulated depreciation $14 120 8 240 32 414 100 184 (96) 88 188 $602 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Accrued wages payable Accrued income taxes payable Dividends payable Shareholders' Equity Paid-in Capital Retained earnings $120 15 5 26 166 110 326 436 $602 .1 Page 179 Ruiz Pharmacy Balance Sheet as at December 31.
7.500 B 2 5 8 4 6 7 7 9 9 11 13 13 14 B 2 E 5 6 B 1 E B 1 E 3 10 7 B 7 E E 9 13 B 13 E B 11 E B 12 E 4 Customer Deposits 10.000 15.000 4.Introductory Financial Accounting.000 16.000 850.1 Page 180 Problem 1-13 Assets Cash 30.000 Liabilities & Equity Accounts Pay 600.000 265.000 31.000 25.800 6.000 80.500 B 9 E Furniture & Fixtures 190.500 260.000 Prepaids 14.000 375.00 515.000 200.000 Capital Stock 110.000 10. v.000 B E B 10 Retained Earnings 4.500 20.000 62.000 12.000 22.000 225.000 Interest Payable 8.000 8 Rent Payable 27.000 14.000 Taxes Payable 20.500 8.000 Inventory 446.000 8.000 BALANCE SHEET Accounts Rec. Pay.000 B .000 375.500 6.000 Acc.000 20. And Com.000 25.000 600.000 575.000 100.000 215.000 850.000 9 13 Long-Term Notes Payable 20.000 20.000 21. Depreciation 40.1.800 Sal.500 745.000 24.000 12. 123.500 547.000 16.000 323.000 775.
350.000 70.000 Interest 6.1.000 7 7 E Income Tax 15.000 27.000 8.000 . v.1 Page 181 Expenses INCOME STATEMENT Salaries and Commissions 207.500 Revenues 3 COGS 345.000 27.000 4 2 9 9 9 9 E Rent 14.Introductory Financial Accounting.000 12.000 21.000 Sales 1.800 12 Depreciation 22.000 13 14 Other 225.
000 605. Aug 31. Income Statement for the year ended August 31.700 -4.500 $302.000 $46. 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. Sep 1.000 207.000 22.000 524.000 745. 20x4 Net income Dividends Retained Earnings.000 225.700 27.700 Peter’s Appliance Shop Ltd. 20x5 $260.500 70.1.500 6.350.Introductory Financial Accounting. 20x5 Retained Earnings.200 .000 46. v.800 73.1 Page 182 Peter’s Appliance Shop Ltd. Statement of Changes in Retained Earnings for the year ended August 31.500 80.
300 110.1.000 16.000 -62.500 .070. 20x5 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Fixed Assets Furniture and fixtures Less accumulated amortization $ 31.200 412.000 658.000 12.000 578. v.200 $1.000 917.500 215.000 547.000 7.1 Page 183 Peter’s Appliance Shop Ltd.500 323.Introductory Financial Accounting.300 80. Balance Sheet as at August 31.000 153.500 6.800 27.000 10.000 302.000 $1.500 LIABILITIES & SHAREHOLDER’S EQUITY Current liabilities Accounts payable Taxes payable Salaries and commissions payable Interest payable Rent payable Customer deposits Long-term notes payable Shareholder’s equity Capital Stock Retained earnings $515.070.
200 = $21.280 .225 63 $4.020) Adjusted cash balance per books.700 77. 2.152 (52) 180 $3.1 Page 184 Problem 2-1 1. Dec 31.700 (5. v. Cash balance per books.200 . Dec 31 Cash balance per bank. 3. December 31 Add Sparg cheque deducted in error Add deposits in transit Less outstanding cheques Cash balance per books b.288 Problem 2-2 a.548) 3.095 + 9. c b b The balance on the bank statement will be overstated by $360.300) $3. before adjustments Less bank service charges Add error in recording cheque ($1.700 – 3.000 (77.595 Balance per bank statement Add deposits in transit Balance per books $4. Cash Accounts receivable Bank service charges Cash $180 $180 52 52 $3.Introductory Financial Accounting.$1.280 $6. Dec 1 Add cash received during December Less cash payments made during December Cash balance per books.1. $15.300 580 1.
915 180 (35) (360) $4.200 $4. Cash Accounts Receivable To record error in deposit made ($530 – 350 = $180). Office equipment Cash To correct error made in recording of purchase of office equipment: $620 – 260 = $360. March 31. March 31. Bank service charges Cash To record bank service charges for the month.Introductory Financial Accounting. 20x7 Add outstanding deposits Less outstanding cheques # 201 # 533 Cash per books. 20x7 2.1.980) $4.1 Page 185 Problem 2-3 1. Cash balance. 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.200 $780 1. $ 480 6.700 (1.700 $180 $180 35 35 360 360 . v.
v.1 Page 186 Problem 2-4 a) The accounting for temporary investments depends on whether the company designates the investments as available for sale investments or trading investments.000 $35.000) (1. b) Cash Other Comprehensive Income Temporary investments .000 XYZ Computer Satellite Systems Strategic Air Defence Systems Generic Engineering Cellulose Telephone The difference in accounting treatment lies with how the net unrealized gain will be recorded.000 3. 20x0: Unrealized gain (loss) ($2.000 3.XYZ Computer Gain on sale of investments Cash Other Comprehensive Income Temporary investments . Trading investments are those that are held for re-sale as part of a portfolio of managed securities held for a short-term.000 31. the securities have to be recorded at fair market value on the balance sheet at December 31. Either way.1.Introductory Financial Accounting. If the securities are classified as available for sale.000 $2. If the securities are classified as trading investments. Available for sale securities are defined by what they are not: they are not long-term investments nor are they trading investments. then the net unrealized gain flows through net income.000) 12.000 3.000 70.000 7.000) $ 8.000 (4.Strategic Air Defence Gain on sale of Investments $75.000 . then the net unrealized gain will be part of the Other Comprehensive Income section of Shareholders' Equity.
. In 20x1.1 Page 187 Problem 2-5 a) Security A Security B Security C 20x0 ($2.500) (2.500) b) In 20x0.500) (1.1.700 will be charged to net income.000) 20x2 ($4. an unrealized holding loss of $4.000) ($8. an unrealized holding gain of $1.000) (3.000) will be credited to net income. In 20x2.700) 20x1 ($500) 0 (3. an unrealized holding loss of $5.Introductory Financial Accounting.700 .000 – 8.700 ($5.500) ($4.500) will be charged to net income.500 ($4. v.000) (1.4.200) ($5.
a Balance in allowance account at the end of 20x9 before adjustment for bad debts: $5.000 71.000 Before: $3.900.1.350 86. 2004 Balance in allowance before adjustment $63.000 3. 11. Beg Bal + 55. Dec 31. Recoveries Adjustment required Bad debt expense Allowance for doubtful accounts 86.5%) Allowance for doubtful accounts Accounts receivable balance.000 Collections – 20.000 – 500 + 300 = $4.245. before adjustment $11.000 Beg Bal + 14. Write offs $9.000 dr.000 Credit Sales – 11.350 cr. d 3.000 x 3% $97.000 dr. Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable b.000 71. December 31.000 – 30) – (125 – 30) = $2.000 dr.000 Write offs) = $100.000 – 125 = $2.000 x 4% 4.000 3.000 cr.400 – 4.000 c.800 = $1.000 Collections – 55. 2004: $1.000 cr. $86. v. .800 Bad debt expense = $6.Introductory Financial Accounting.000 3.000 $55. Adjustment $13. December 31.000 Sales – 360. Write-Offs + 3.200. 20x8. Required balance at December 31: ($80.875 2. a Problem 3-2 a. Bad debt expense ($14.000 cr. Beginning Bal – 20.200.000 x 0.875 After: ($3.600 Balance in Allowance for Doubtful Accounts.000 3.350 $55.350 cr.1 Page 188 Problem 3-1 1.000 cr.000.000 Write-offs Allowance for doubtful accounts. $3.000 cr.000 A/R Begin + 400.
400.915. v.Introductory Financial Accounting.000 7.000 2.000 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 $38.800.800. (Schedule) $2.000 2.480 43.000.000 7.1.000 16.915.290 31.000 31.480 3.400.000 7.290 .000 16.000 2.1 Page 189 Problem 3-3 20x0 Accounts receivable Sales To record credit sales for 20x0 Cash Accounts receivable To record cash collections for 20x0 Allowance for doubtful accounts Accounts receivable To record accounts written off for 20x0 Bad debt expense Allowance for doubtful accounts To adjust the allowance for doubtful accounts to an ending balance of $27.000 27.000 3.000 7.770 cr.840 cr.000 27.000 43.000 $2.000.
000 384.000 $442.770 4.000 3.340 4.000 60.000 7.000 12. 20x0 0 – 30 31 – 60 61 – 90 Over 90 $234.000 $27.000 31.000 12.000 15.000 442.840 December 31.480 27.000 45.000 43.000 $384.1.000 20.Introductory Financial Accounting.000 90.000 Allowance for Doubtful Accounts 16.800.000 16.915.000 7. v.1 Page 190 20x0 Bal 20x1 Accounts Receivable 2.000 25.000 2.480 27.500 9.770 .000 1% 5% 20% 80% $ 2.770 20x0 Bal 20x1 Bal Bal Schedule – Calculation of the Allowance for Doubtful Accounts December 31.000 27.000 2.400.000 1% 5% 20% 80% $ 2.000.000 $38. 20x1 0 – 30 31 – 60 61 – 90 Over 90 $277.290 38.000 7.000 80.
000 Beg Bal + 500.000 400.1. 20x7 Balance in allowance before adjustment: $2. Accounts receivable Sales Allowance for doubtful accounts Accounts receivable Cash Accounts receivable Note receivable Accounts receivable Accounts receivable balance.000 $135.000 Note: The allowance account will now be $500 + $10.000 cr.000 10. 6. Dec.000 500.500 1. December 31.000 Note Receivable 3.000 x 2%) 10.500 400.275 500 cr.000 Credit Sales – 1. . v.000 = $10.275 30 30 2.275 cr.400.000 3.500.775 cr. 20x7: $40.500 dr. Write-offs Adjustment required Bad debt expense Allowance for doubtful accounts Interest receivable Interest income* *(3.000 500. Allowance for doubtful accounts.1 Page 191 Problem 3-4 1.000 Collections – 3.500 Write-offs . $6. Beg Bal + 1.500 x 5% $6.000 1. Bad debt expense** Allowance for doubtful accounts **($500.000 x 12% x 1/12) 6.Introductory Financial Accounting. 31.
200 500 500 350 350 77.000 – 6.000 (66. v.1 Page 192 Problem 4-1 1.200 1.000 56. Delivery expense Cash Sales returns and allowances Accounts receivable Inventory ($500 x 70%) Cost of goods sold Cash ($79.000 50.Introductory Financial Accounting.000 1.590 79. .500 50.000) $503.000 56.000 x 99%) Inventory $80.000 x 70%) Inventory b. c c d Czech should have recorded this sale in 20x8 since the goods were shipped FOB Shipping. 3.910 1.000 509. Inventory Accounts payable Accounts payable Cash ($50. Problem 4-2 a. e.000 – 10.000 Ending inventory Cost of goods sold $60. b Opening Inventory Purchases – net: $500.000 50.000 + 25.500 x 98%) Sales discounts Accounts receivable d. Accounts receivable Sales Cost of goods sold ($80.000 $80.1.000 49.500 500 c. 4.000 2.
000 33.000 3.000 (2.3333 $300 990 770 1.00 $12. b.000 77.000 8.00 22.500 units 1. Date May 1 May 5 May 14 May 21 May 29 c.00 16.000 500 3.3333 $690 (220) 420 (567) Units 30 90 70 105 55 Balance Unit Cost Total Cost $10.1.1 Page 193 Problem 4-3 a.00 36.00 11.000) Unit Cost Total Cost 18.00 16.000 48. v.00 11.000 Units 1.000 . Ending balance = 1.00) + (20 units x $11.500 1.00 22.00 23.500 Balance Unit Cost Total Cost $12.50 11.500 b.000 44.000 (40. Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Purchases (Sales) Units 2.190 623 Accounts receivable Sales Cost of goods sold Inventory (10 units x $10) + (40 units x $11.50) = $650 Note that the results for FIFO periodic are the same as for FIFO perpetual. Ending inventory = 55 units (35 units x $12. Purchases (Sales) Units 60 (20) 35 (50) Unit Cost Total Cost $11.50) $1.000) 69.100 560 560 Problem 4-4 a.500 units x $23 = $34.00 12.000 (2.Introductory Financial Accounting.100 $1.00 11.500) 3.
20x5 Purchases Goods Available for Sale Less Ending Inventory.860 b.330 Gross profit 175. 20x5 Units sold during year FIFO Sales COGS 3.000 52.330 x $100 $ 333.1.400 = $ 52.200 50.000 52. v.000 x $50 1.000 53.400 70 3.000 $ 19.000 x $50 1.000 58.330 x $100 400 x $48 1.000 x $52 1.7059 = $ 173.000 3.330 x $ 52.Introductory Financial Accounting.140 $ 157.000 x $52 930 x $58 $ 333.200 50. December 31.940 Units 400 3.071 *400 x $48 1.000 $ 179.1 Page 194 Problem 4-5 a.000 173. Beginning Inventory.000 x $58 3.200 = $179.929 $ 159.400 Weighted Average Cost per unit $ 19.200/3. January 1. Weighted Average Sales COGS * Gross Profit 3.929 .7059/unit Cost of Goods Sold = 3.
000 $188.600 400 20.600 June 1 Accounts receivable Sales Cost of goods sold Inventory 30.000 June 2 Sales returns Accounts receivable Inventory Cost of goods sold June 9 Cash Sales discount ($20.000 15.000 – 30.000 5.000 x 70% $420.000 608.000 10.000 15. v.000 Sales Returns Estimated cost of goods sold Opening Inventory Net purchases: $480.000 $37.000 420.000 x 20% Problem 4-7 $600.000 42.000 19.Introductory Financial Accounting.000 Purchase Returns + 8.000 5.000 $150.000 x 2%) Accounts receivable Inventory Accounts payable June 12 .000 10.000 458.000 42.1.000 30.1 Page 195 Problem 4-6 Net Sales = $615.000 – 15.000 Customs and Duty Cost of goods available for sale Less Cost of goods sold Estimated value of ending inventory Net loss from fire = $188.
79/unit Ending inventory = $978.000/660 units Average unit cost = $978.000 2.050 each = $ 63.000 $ 646. Ending inventory – FIFO: 60 units X $1.1.000 210.Introductory Financial Accounting.000 3. Cost of goods available for sale: 20 units x $900 each 440 units x $950 each 200 units x $1. Ending inventory – Weighted Average Average unit cost = Cost of goods available for sale/Units available for sale Average unit cost = $646.000 418.050 each = = = $ 18.000/(20+440+200) Average unit cost = $646.79/unit x 60 units Ending inventory = $58.1 Page 196 Problem 4-8 1.727 . v.
500 1.500 on a base amount of $48.200) (1.000 50.300 3.500 1.000 80.300 30.3 15-day periods in a year (365/15). thus giving an annual percentage cost of missing the discount of 75.500) 77.200 1. 20x7 Cost of goods sold $ 80. For example. n30 generated savings of $1. December 1. i) Purchases Accounts Payable 80.09%) for a 15day period (30 days – 15 days).1.200 3.000 ii) Accounts Payable Cash Purchase Discounts iii) Accounts Payable Purchase Returns iv) Transportation-In Cash b.09 24.500 by paying 15 days early.300 230. It would be equivalent to interest of $1. discounts taken under a term of 3/15.000 (1.000 80. whereas the purchase discount may generate a savings which would equate to an effective interest rate much higher than 10%.000 $200.Introductory Financial Accounting.000 $ 150. . it may cost a company 10% to borrow the funds.300 c. TOYJOY LTD. 20x7 Purchases Less: Purchase returns and allowances Less: Purchase discounts Net Purchases Add: Transportation-In Cost of goods available for sale Less: Merchandise inventory.000 48. 20x7 Merchandise inventory. much higher than the 10% borrowing rate.500 (3. Cost of Goods Sold Schedule for the month ended December 31. The savings generated by purchase discounts generally make it worthwhile to borrow to take advantage of the purchase discount. v.3). the full amount of $50.000 would need to be paid on the due date. If payment was not made within the discount period.000 3.09% (3. There are 24.1 Page 197 Problem 4-9 a. December 31. In December.
000 U 5. January 13.000 O 6.000 Cost of goods available for sale – COGS = Ending Inventory $110.40) $ 60.000 * ** If Gross Profit = 40%.000 36.1.000 U N/A 5.000 = $74.000 x . v. Therefore. January 1 to January 13 Cost of goods available for sale Less estimated ending inventory.000 – 36.000 **74.60 = $36.000 $24.000 110.000 $ 100. January 1.40% = 60%. January 1 to January 13 Inventory.000 O Problem 4-11 Sales.000 U N/A N/A 20x6 Retained Earnings 10.Introductory Financial Accounting. estimated COGS = $60.000 U 20x6 Ending Inventory 10.000 .000 U 6.1 Page 198 Problem 4-10 Error i) ii) iii) 20x6 Cost of Goods Sold 10. then COGS = 100% . 20x7 Purchases.000 O 20x7 Cost of Goods Sold 10.000 O 5.000 10. 20x7 Estimated Cost of Goods Sold* Estimated Gross Profit ($60.000 x .
00 From Purchase # 1: 1.250 125.500 Total Cost $47.500 COGS = 12.000 x $9.500 Units available for sale = 6.1.700 106.000 (6.000 13. From Purchase # 2: 8.000 8. v.19231 8.000 = 21.000 + 7.40000 9.000 units @ $8.000 (47.000 b.800 (53.400) $ 98.000 x $8.500 53.40 Ending Inventory Cost of goods sold Cost of goods available for sale Less ending inventory $72.00 8.000 6.000 (46.509 = 100.95) + (7.000 x $8.800 (47.500 / 21.000 (6.250) 72.700) (4.400 $178.000 Balance Unit Cost $7.95 8.100 Balance Total Cost $58.250 77.63793 Total Cost $47.50 = $76. Units 7.000 units @ $9.000 x $8.500 (80.400 $80.800 54.000 6.000 (5.000 – 5. Units 7.000 (5.000 7.000 14.400 d.50 Ending inventory = 9.509) Units 6.000 8.741 COGS = $53.000 + 7.40 7.600 126.40 9.500 = 9.95000 8.Introductory Financial Accounting.000 Unit cost = $178.200) 72.000 x $7.600 80.00000 Total Cost $58.500) Purchases (Sales) Unit Cost $8.000 + 8.40) + (8.200) Units 6.500 14.40 .000) (500) 8.1 Page 199 Problem 4-12 a.000 Cost of goods available for sale = (6.50 = $102.000 = $8.500) 8.000 – 6.500) Purchases (Sales) Unit Cost $8.500 + 8.250 + 47.500 58.00) = $178.700 106.759 c.500 9.000 13. Ending inventory = 6.
d c c Net book value = $85.500/year.000)] Net book value = $77. 5.750 . Note that we use the estimated useful life of the patent.000 – 10. c Double-declining-balance rate = x 2 = 50% 4.1 Page 200 Problem 5-1 1.000 + 5.000 – 5.000. 2. and not the legal life of 17 years.000 – ($85.500 x 430 = $5.000/year) = $10.Introductory Financial Accounting.160 To move to the units-of-production method.000 + 15. we must first know the salvage value of the machinery inherent in the problem.000 x 90%) / 1.000) x (20.000 ($20.000 – (5 years x $18. v.000 = $1.500 7. 6.000 x .500 It is assumed that the addition should be capitalized and depreciated since it qualifies as a capital asset.000 / 9.000)/10 = $8.000/80.5 x = $600 $1.000 – 150. Estimated salvage value = $100. d) ($80.075.1.000) / 10 = $4. 3. because the purpose of amortization is to expense the cost of an asset of the period of time it is in use by the company.000 + 60. Depreciation expense = $12.5 x 6/12) Net book value = $63. a d ($200.000 – [($100.000 Net book value = $100.
500 d. Amortization expense Accumulated amortization ($65.000 – 26.1.1 Page 201 Problem 5-2 a.000) / 200. Amortization expense Accumulated amortization ($65.000 26.600 15.000 Net book value = $65. 26.000 20x8 15.000 x 55.000 Amortization expense Accumulated amortization 17. v.000 – 5.000 – 12.000 $12.000) / 3 = $17.000 .000 – 5.000 17.600 c.000 16. Amortization expense for 20x8 = ($53.000) x 40% $12.500 16.000 b.Introductory Financial Accounting.000 x 40% (1/5 x 2 = 40%) Amortization expense Accumulated amortization ($65.000 = $53.000 – 2.000) / 5 years 20x7 Amortization expense Accumulated amortization $65.
656 4. 20x7 20.000 2.656 25. 20x3 Equipment Cash Amortization expense Accumulated amortization (60.50 / month x 8 months = $500 + 10.000 55.1.000 .000 9. 20x5: $2.500 Amortization expense Accumulated amortization $10. 20x6 10. 20x5 Dec 31.000 = $10.286 82. 20x7 Aug 31.000 10.000 / 32 months remaining = $62.000 + ($62.000 $60.1 Page 202 Problem 5-3 (a) Jan 2.500 10.808 Dec 31.500 Dec 31. 20x5 Dec 31. 20x4 Apr 31. 20x4 600 600 10.000 10.000) / 5 Repairs and maintenance expense Cash Amortization expense Accumulated amortization Equipment Cash Amortization expense Accumulated amortization Original amount + amortization on amount capitalized on April 31.000 – 10.000 10.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 10.000 2.750 10.000 20.808 9.714 1. 20x7 4. v.750 Oct 31. 20x3 Aug 31.000 Dec 31.
750 x 9/12 $60.062) $12.688 + 20.000 * Price of new lathe Less trade-in value less fair market value of asset traded in: Trade in value: $108.Introductory Financial Accounting.000) / 39 months = $582 per month x 3 months = $1.000 90.500) Acquisition price of new lathe ** NBV of asset at time of exchange = $50. v.500 15.1 Page 203 Schedule 1 Amortization expense for 20x7 Net book value of asset at Sep 30.000) (10. 20x7 Original cost of asset Capitalization made on April 1.000 (10.500 Market value of asset Gain on sale (2. 20x5 Less Amortization expense 20x3 20x4 20x5 20x6 20x7 to Sep 30: $10.808 Problem 5-4 Equipment (new lathe)* Accumulated amortization (old equipment) Equipment (old equipment) Cash Gain on sale of asset** 105.000 – 38.746 = $9. 20x7 ($12.000) (10.000 $18.000 $108.000 Less fair market value of asset traded in (15.000 .000 2.500 $ 4.500) (10.500 $11.746 Total amortization expense for 20x7 = $8.1.000 – 90.500 50.000 4.500) $105.688 Amortization expense – Sep 30 to Dec 31.062 + 1.750) (8.000 – 10.500 38.
Machinery Cash 27.000 *25. Cash Accumulated amortization – Machinery Machinery Gain on sale of assets .000 3.1. Amortization expense Accumulated amortization .000 2.Machinery **($27.000 x 6/12 = $3.000/year $6.1 Page 204 Problem 5-5 1.000 27.000** 3.000 for 6-month period 3.000* 27.000 – $3.000 Cost of machine + 2.000 9.000 The cost plus installation.000 20. The freight is included in the cost but the repair is not to be capitalized.Introductory Financial Accounting. v.000 4.000)/4 = $6.000 (9. Machinery Less: accumulated amortization $27.000) $18. 2.000 Installation Charges = $27.
000 – 20.000)/(5-1) = $18.000 Units-of-production method = (120.000 – 20.000) / 41. i.000 = $22.000 43.183 183 120. . Straight-line method = (120.1 Page 205 Problem 5-6 a. i.500 Straight-line method = (120.000 = $22.000 – 20. v.750 1.683 Cash Accumulated depreciation ($25.500 + 23. i.000 – 22.000 b. ii.750) Loss on disposal of equipment Equipment Cash Accumulated depreciation ($22.1.000 45. ii.Introductory Financial Accounting.000 x 12.000)/40.000)/4 = $25.250 $120.000 + 18.683) Gain on disposal of equipment Equipment $75.000 x 9. c.500 – 20. ii.000 $=75.000 – 25.750 Units-of-production method = (120.
800) 5. v. This method is acceptable under GAAP if it properly reflects the pattern of benefits received from using the machine.1.250) 103. amortization is high in the first year and decreases in amount as years go by.000 $157.000 53.000 cannot be capitalized to the asset since the asset was purchased and not self-constructed.750 (100.$140.000 Depreciation expense: ($157. Costs capitalized: Invoice price Less discount .750 x 3 years Net book value Less proceeds on disposal Loss Cash Accumulated amortization Loss on disposal Machine $100.750 Note that the interest charge of $12.000) $ 3..750 157. A double-declining-balance amortization method could be used to abide by the president’s request.000) / 8 = $17.Introductory Financial Accounting.800 $157.e.1 Page 206 Problem 5-7 a.250 3. then this method should not be used.000 (53.000 x 2% Customs and duty costs Preparation and installation costs b. If the machine does not provide decreasing benefits.750 .000 (2. $140. if the machine generates less revenues as it gets older. Under this method.000 14. Cost Less accumulated depreciation: $17. c. i.000 – 15.
N=10. Interest expense for the year = $11.375 34. 6.500 37.Introductory Financial Accounting.000.1. 3. a b b) PV of bonds at issue: PMT=800.472. 5.500 / 5 x $2 $18. I=6%.1 Page 207 Problem 6-1 1.472.000 PV=$11.400) $ 8.000 /10 coupons /15 redemption ratio x $25 x 55% = $34.321 4. FV=10.375 The journal entry to record the premium expense would be: Premium Expense Premium Liability 34.018.600 Problem 6-2 The premium expense would calculated as follows: $375.018 x 6% = $688.000 / 5 x $2 x 30% Premium redemptions: 23.000.500 .500/15) x $25/card) Cash 37.375 The journal entry to record the actual costs incurred during the year would be: Premium Liability ((22. c c b Premium expense: 150. 2.000 (9. v.
513 25.378) x 4% Bonds payable Cash 21. v.000 The warranty liability at the end of the year will be $165. 20x1 Interest expense (540.554 x 4%) Bonds payable Cash 21. Inventory 130.000 130. A/P.487 3. 20x2 Interest expense (540.000 . 20x1 Cash Bonds payable $540.000 The journal entry to record the interest payment of Jun 30.000.554 .622 3.000 $150.554 $540. 20x2 would be as follows: Jun 30.1.554 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 Warranty Expense – 130.000 $150.000 x 5%) Warranty Liability The journal entry to record actual warranty costs incurred is: Warranty Liability Cash.554 PMT 25000 FV 500000 Enter Compute The journal entry to record the issuance of these bonds is as follows: July 1.3.1 Page 208 Problem 6-3 The journal entry to record warranty expense is: Warranty expense ($3.000 Opening Balance + 150.378 25. Problem 6-4 The value of the bond issue will be as follows: N 10 I/Y 4 PV X= 540.000.
1 Page 209 Problem 6-5 PV of bond issue: N = 30.000.301 Dec 31.016 425.432. 20x4 Cash Premium on Bonds Payable Bonds payable Interest expense ($10.301 x 4%) Premium on Bonds Payable Cash Interest expense* Premium on Bonds Payable Cash * (10. the total debits to the account for the year is the total cost of repairs made during the year. $5. 20x5 Dec 31. Therefore.432.984 8.200 – 6.292 7.432. $10. . Therefore. The journal entry to record warranty expense is debit warranty expense credit warranty liability.708 425.708) x 4% $10.432. $6.800 = $10. v.301 – 7.301 $432.000.000 416.000 Jun 30.000. 4.000 417.000. I = 4. PMT = 425.1. credit cash/inventory/etc.800.000 $10. 3. Solve for PV = $10.000 + 5. The journal entry to record repairs as performed is debit Warranty liability. the total credits to the account for the year is the warranty expense for the year.301 10.Introductory Financial Accounting.000. 20x5 Problem 6-6 1. FV = 10.200 2.
105 20.129 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $511.074 – 2. 20x7 20.976 22.445 20.137 22.311 = $502.937 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $506.976 = $511.500 Jan 1.055 22. 20x6 Dec 31.363 2.1.500 Dec 31.223 = $504.277 20.937 – 2.500 FV 500.189 2. 20x8 20.000 Enter Compute Jan 1.129 – 2.105 PMT 22. 20x7 20.277 2.1 Page 210 Problem 6-7 Proceeds on bond issue: N 6 I/Y 4 PV $513.105 $513.223 22.097 .097 20.277 20.055 = $509.Introductory Financial Accounting.714 x 4% Bonds payable Cash Interest expense $504.445 20. v. 20x8 Jul 1.403 x 4% Interest payable $513.074 x 4% Bonds payable Cash Interest expense $509. 20x8 20.500 Jan 1. 20x6 Cash Bonds Payable Interest expense ($513.105 x 4%) Bonds payable Cash Interest expense $513.137 = $506.714 – 2.311 22.105 – 1.500 Jul 1.445 2.500 Dec 31. 20x6 20.524 1. 20x7 Jul 1.
171.000 x 12% x 1/2) Interest expense (1. June 30.000 x 12% x 1/2) *Bonds payable balance as of June 30.170.420) $1.420 60.403 22.000 3. 20x9 Interest payable Bonds payable Cash Bonds payable Cash 20.591 $1.171* x 5%) Bonds payable Cash (1.000 500.000.1 Page 211 Jan 1.000. 20x6 4.491 60.509 1.580 1.591 58.Introductory Financial Accounting.591 – 1.171.591 x 5%) Bonds payable Cash (1. 20x7 ($1. Dec 31.171. Enter Compute N 40 I/Y 5 PV X= $1.1. 20x6 Cash Bonds payable Interest expense (1. 20x7 .097 2.171.000 Problem 6-8 1.591 PMT 60000 FV 1000000 2.500 500.171. v.000 58. July 1.
1. Interest expense for 20x7 = $44.000 x 8% x ) 2nd half of 20x7: Interest expense ($897.000 True. The cash outflow is $80. $44.1 Page 212 Problem 6-9 The journal entries to record interest expense for 20x7 would be as follows: 1st half of 20x7: Interest expense ($897. . d.Introductory Financial Accounting.000 x 10% x ) Bonds payable Cash ($1.000 x 8% x ) a.093 = $89.000 $45. c.093 5.000 + 4. False.000.943 False False.850 4. b. The interest expense will increase every year since the book value of the bonds payable will also increase.850 + 45.000.000 exactly.850 40.093 40. v.850) x 10% x Bonds payable Cash ($1.
080 2.400 .520 .000 shares outstanding after the split.32 $14. 400 shares issued and outstanding Retained Earnings ($0 + $56. c 150.000 shares issued and outstanding Preferred Shares. 44.000 2.000 40.000 shares x 3/2 = 225.Introductory Financial Accounting.080 February 27 February 28 21.000 21.000 . non cumulative. Problem 7-2 1.000 12.000 x $0.1 Page 213 Problem 7-1 1.$14.400 2.080 14.000 126.000 44.400 14.$2.000 February 10 February 15 February 26 12.000 40.080) Total Shareholders’ Equity $ 138. Shareholders’ Equity Common Shares.000 2. February 2 Cash Common Shares Patent Preferred Shares No entry Cash Common Shares Dividends or R/E Cash Dividends or R/E Cash Number of common shares: Issued on Feb 2 Stock Split on Feb 15 Issues on Feb 26 126.520 $217.000 39.000 40.1. v. $6.
000 Net Income – 15. issued and outstanding 3. f. g. Cash Common Shares Equipment Preferred shares Cash Preferred shares Dividends (or Retained Earnings) Preferred Dividends Payable Cash Common shares Preferred Dividends Payable Cash Retained earnings Cash Bonds payable Premium on bonds payable Common shares $115.000 20. h.000 53.000 b.000. c.500 $456.000 40.000 40.000 12.000 180.000 3. d.Introductory Financial Accounting.000 48. cumulative – authorized 50.500 .000 3. issued and outstanding 3.000 3.000 3.1 Page 214 Problem 7-3 1.000 20.000. 2.000 60. authorized 100.000 Preferred Shares. a.000 Retained Earnings ($64.000 3.000 180.500 Dividends) $348.500 50.500 12.1.000 $115. Shareholders’ Equity Common Shares. e. v.
v. 7.000 34.000 34.000 75.600.000 16. 10. Purchases Accounts payable Accounts Payable Purchase returns Cash Common stock Accounts payable Cash Salaries payable Salaries expense Cash Interest expense ($419.000 30.576 424 13. 4.1 Page 215 Problem 8-1 a.000 1.000 75. 12.000 1.600 314. Equipment Cash Warranty liability Cash $1.000 30.000 960.000 960. 8. 9. Accounts receivable Sales Cash Accounts receivable Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable 5.588 412 13.000 $1.000 12.000 5.5% / 2) Interest expense ($419.600.000 945.000 12.000 5.Introductory Financial Accounting.600 – 412) x 3% Bonds payable Cash ($400.1.000 25.000 2.000 x 6.400 320.000 16.520.5% / 2) 11.000 5.520. 6. 3. .000 5.000 x 6.000 5. 1.000 945.600 x 3%) Bonds payable Cash ($400.000 25.
400 130.000 x 50% Bad debt expense 40.000 cr.000 x 7% 23.400 3.400 Balance required: $2. 18.000 x $17.000) = $17.310 4.000 / (10. Income taxes payable Cash Common shares (1. v.000 17.400 .31 Prepaid insurance Cash Operating expenses Cash Bad debt expense Allowance for doubtful accounts The balance in the allowance for doubtful accounts is: $23.010 4.1.930 cr.600 6.000 dr. = The balance in the allowance for doubtful accounts should be: $144.000 40. $4.800 400 $3. 2.Introductory Financial Accounting.930 16.000 dr.400 $3.31*) Retained earnings Cash * Average book value per share = $150.000 14. + 34.1 Page 216 13.000 x 20% 12.000 130. $23.000 + 75.000 17. 17. 15.400 + 2.000 x 3% 43.000 + 3.400 x 2/12 Insurance expense 3. + 5. $6.320 3.690 22. Insurance expense Prepaid insurance Balance in prepaid insurance account: $1.930 23.000 cr.000 23.930 dr.400 2.
6. amortization – equipment** Patents*** * $300. Amortization expense Acc.250 39.700 6.000 / 8 = 4.500 ** ($145. Cost of goods sold Inventory ($378.700 80.000) $886.Introductory Financial Accounting.500 27.000 1.000 $320.150 7.400 4.000 80.000 24.000 Purchase) = $137. .000 21.702 53. amortization – building* Acc.000 24.000 53.000 944.000 x 1.000 960.000 – 38.000 16.000 NBV Beg + 30.000 – 320.702 22. 24.000 13.1 Page 217 19.1.5% Salaries expense Salaries payable Retained earnings Cash Income tax expense Income taxes payable $134.250 20.000) Purchase returns Purchases Check: Opening inventory Purchases – net ($960.000) Cost of goods available for sale Less ending inventory Cost of goods sold Inventory loss Allowance for decline in value of inventory 886.000 – 16.600. Warranty expense Warranty liability $1.400 *** $34.000 (378.702 23.000 58. v.000 13.000 x 20% = $27.000 / 40 = $7.264.256 x 40% = 53.
700 B 22 E E B 20 E Prepaid Insurance 1.700 6.690 144.702 Warranty Liability 25.Equip 38.000 5.Introductory Financial Accounting.400 3.510 B E .520.000 Liabilities & Equity Accounts Payable 16.600 BALANCE SHEET Accts Receivable 176.000 53.000 B 19 14 B 7 E B E Patents 34.1 Page 218 Part (b) Assets Cash 36.000 5.000 1.000 207.000 13 Inc Taxes Payable 40.500 Acc Amort .400 Allowance for Decline in Value of Inventory 13.000 4.000 126.600 5. v.000 5.000 30.000 30.000 75.000 1.000 23.000 15.000 5.600 424 418.Bldg 120.400 65.000 12.250 29.000 22.750 19 20 14 23 Retained Earnings 4.000 27.000 175.000 13.1.000 7.000 960.000 13.000 12.000 222.400 400 Building 300.000 320.000 945.000 23.000 13.400 2.000 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 5.930 17.690 B 24 B 15 E 18 B 12 B 21 B Acc Amort .930 Inventory 320.000 40.000 58.500 127.520.702 25.310 150.000 127.000 1.000 Allow/Doubt Accts 34.000 59.000 34.200 80.600 6.400 130.000 24.000 75.000 378.000 B 19 E 10 10 B B 11 E Equipment 145.000 Bonds Payable 412 419.000 25.000 80.764 Common Stock 17.000 945.600.000 2.000 Land 40.
700 321.000 17 Bad Debt Expense 23. 53.588 12.000 INCOME STATEMENT Purchase Returns 16.1.576 25.100 Warranty expense 24.400 6.1 Page 219 Expenses Purchases 960.000 16.000 10 10 E Interest 12.702 20 Inventory Loss 13.150 24 Income Tax Exp.164 Insurance 3.000 Revenues Sales 5 20 20 6 1.600.Introductory Financial Accounting. 39.000 1 20 Cost of Goods Sold 886.930 19 Amortization exp.400 21 18 16 Operating expenses 130.000 9 22 E Salaries 314.000 960.000 . v.
600.000 23. 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 $15.750 126.1 Page 220 c. 20x6 Dr.930 39.702 $2.000 886.400 29. v.000 418.400 130.196 Cr.700 25.000 53.164 24.196 $2.702 12.600 222.000 127.1.150 13.000 13.000 300.930 378.000 321.000 6.000 400 40. .510 1.000 65. Haider Corporation Trial Balance As at December 31.000 3.500 175.Introductory Financial Accounting.000 $17.680.680.690 59.764 207.100 25.
400 23. December 31.420 25. Haider Corporation Income Statement for the year ended December 31.200 80.064 .930 13.702 $80.000 554. 20x6 $144.1.256 53.690) (80.000 39.164 134.554 Haider Corporation Statement of Retained Earnings for the year ended December 31.000 714.100 24.Introductory Financial Accounting. 20x6 Net income Premium on redemption of common shares Dividends Retained earnings. 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) $140. January 1. 20x6 Retained earnings.554 (4.600.000 886.1 Page 221 d. v.000 321.580 159.000 3.150 130.
000 170.1 Page 222 Haider Corporation Statement of Financial Position as at December 31.600 29.000 $300.000 6.764 589.702 12.920 Land Building Less accumulated amortization Equipment Less accumulated amortization Patents – net .750 351.402 418.064 347.1.500 109.070 40.850 $936.400) 172. 20x6 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance $ 15.000 (127.Introductory Financial Accounting.000 400 585.070 365.754 $936.920 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Shareholders’ Equity Capital stock Retained earnings $126.600 204.690 140. v.000 (65.700 25.166 207.500) 175.
4.600 3.500 h.000 k.000 x 9% x 4/12 Interest expense Interest payable $60.000 4. 360 360 g.600 b.000 16.800 4.000 12.600 7.000 24. Bad debt expense Allowance for doubtful accounts $320.000 l.700 i.000 – 4.600 $9.000 24.800 3.1.Introductory Financial Accounting.000) / 10 Prepaid rent Rent expense $9. 12.900 / 17) Patents or Accumulated Amortization – Patents Supplies inventory Supplies expense Increase in inventory = $9. v. 4.600 x 9/24 Amortization expense Accumulated Amortization ($80.200 – 4.1 Page 223 Problem 8-2 a.000 x 3% Wages expense Wages payable Insurance expense Prepaid insurance $9. d.500 Warranty expense Warranty liability 10.000 x 3% x $40 Allowance for doubtful accounts Accounts receivable Income tax expense Income taxes payable $9. .600 x 5/12 Interest receivable Interest revenue $12. 16. 7.500 4. 4.600 c.000 x 10% x 9/12 Amortization expense ($11.000 f. j.700 4.600 e. 700 700 4.
094 6.Introductory Financial Accounting.240) Interest April & May .640 $44 .536 116 6. 20x2 (2.2. 20x2 Loan balance.284 $5.1 Page 224 Problem 8-3 MAS Inc.300 Prepaid) Salaries and wages (5.920 .840 Ending Inventory) Gross margin Operating Expenses Rent (1.000 + 270 Payable) Insurance (1.400 Baking Materials Purchases . v.226 Uncollected Sales) Cost of goods sold Purchases (14.1. April 1.630 1.130 Rebate + 256 Payable .880 .500 5.800 .880 x 10% x 3/12 Principal payment.000 / 5 x 5/12) $32. April 1.120 Prepaid) Advertising Depreciation (3. Income Statement for the five months ending May 31.1.740 110 4.136 Operating Income Interest (72 + 44)1 Net income before taxes Provision for income taxes (6.420 x 20%) Net income 1 Loan payment Less interest: $2.1.320 Collections on Credit Sales + 4.420 1. 20x2 Sales (22.686 19.500 + 240 Payable) Maintenance Utilities (4.270 800 424 250 13.640 x 10% x 2/12 $312 72 240 2.316 12.770 Cash Sales + 5.
1. 20x2 ASSETS Current Assets Cash (33.120 300 9.226 1.466) Accounts receivable Inventory Prepaid insurance Prepaid rent Fixed Assets Equipment Accumulated depreciation $2.500 5.734 2.136 7. v.000 -250 2.960) Shareholder's Equity Common Stock Retained earnings $526 240 1.370 LIABILITIES & SHAREHOLDER'S EQUITY Current Liabilities Accounts payable Salaries payable Income taxes payable Interest payable Current portion of note payable ($240 x 4) Note payable (2.680 4. Balance Sheet as at May 31.600 .370 .640 .284 44 960 3.1 Page 225 MAS Inc.840 1.054 1.31.134 4.750 $12.Introductory Financial Accounting.620 3.636 $12.
1 Page 226 Problem 8-4 Morrow Wholesale Balance Sheet as at December 31.000 (20. v.1.000 19.000 $338.000 .000 155.000 80. $275.000 63.000 $338.000 278.000) 60.000 80. 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.Introductory Financial Accounting.
000 .600 7.000 200.000) $70.000 + 1. 20x2 Sales Cost of goods sold ($250.380 17.000 4.000 x 80%) Gross margin Operating expenses Salaries (10. end of year 11.1 Page 227 Morrow Wholesale Income Statement and Statement of Retained Earnings for the year ended December 31.1.000 34.100 15.Introductory Financial Accounting.146.600) Depreciation (80.000 50.000) Miscellaneous Operating income Interest expense ($5.000 (10.500 $250.000 24. beginning of year Dividends Retained earnings.220 .000 9.000 x 12% x 6/12) Gain on sale of equipment Gain on sale of securities Net income before taxes Income tax expense (30%) Net income Retained earnings.000 ÷ 10) Bad debts (155.000 5.600 8.900 (300) 5.220 63. v.
1 Page 228 Morrow Wholesale Balance Sheet as at December 31.500 23.000 10.000) $200.000 330.000 7.000) 52.000) Equipment (80.ending Purchases Cost of goods sold = Opening inventory Purchases Less ending inventory $180.1.000 $405.380 60.000 + 406.000 $80.500) Inventory (Note 1) Prepaid advertising Noncurrent assets Land (19.000 + 8.000 $216.205.20.000 . v.000 (8.000) Accumulated depreciation (20.20.000 (96.000 300 10.000 .500 96.000 70.000 .000 36.Introductory Financial Accounting.500 Note 1 .600 5.000 216.000 60.220 345. 20x2 ASSETS Current Assets Cash (24.000) $224.280 275.220 $405.000 1.000 .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.Inventory Purchases of merchandise A/P .000 + 4.
000) $ 5.1. v.12.000 Sales .000) Gain on sale Proceeds Note 2 – Dividends paid Net income Less increase in Retained Earnings ($108.000 (99.800) (112.500) Cash.000) (105. Statement of Cash Flow for the Year ended December 31.400 – 61.000 Interest expense .000 COGS + 7. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($45.100 Income tax expense – 33.7. Ginger’s Cookies Ltd.400) (80.000 (125. 20x6 Cash flow from operations Cash collected from customers ($7500.200 $20.900 47.000) (31.000 $146.300 19.000 $20.400 $ 99.000 Increase in A/R) Cash paid out to suppliers ($300.500) 1.800 Cash flow from investing Proceeds on sale of equipment (Note 1) Purchase of equipment 20.800 – 105.000 – 69.000) 175.000 Increase in Interest Payable) Cash paid out for income taxes ($79.10.000 Salaries Expense .1 Page 229 Problem 9-1 a.600 Increase in Salaries Payable) Cash paid out for other operating expenses Cash paid out for interest ($32.Introductory Financial Accounting.000 15.500) (69.000 Increase in Inventory .500 Increase in cash ($175.000 – 40. beginning Cash.500 .1.200 Increase in AP) Cash paid out for salaries ($120.000) Cash flow from financing Issue of bonds payable Dividends paid (Note 2) 30.100 Increase in Income Taxes Payable) $740.000) (46.000 (294.
100 $175.000 (15.000 33.600 1.1.000) (10. 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 $146.900 7.Introductory Financial Accounting.000) (7. v.200 7.800 .1 Page 230 b.000) 12.
000 466.000) $3. v.000 $319.000) (5.842.000 150.000) 17.000 $3. McDuff Ltd.000) (463.000 – 87.000 218. Statement of Cash Flow for the year ended December 31.Introductory Financial Accounting.000) (34.000) (11. end of year Amortization expense = $218.1.000 ? (71.000 (543.000 (48.000 (50.000 Accumulated Amortization.1 Page 231 Problem 9-2 a.000) 350.000 (13.000) (12.000) 7. beginning of year Amortization expense Accumulated Amortization on disposal: $158.000 .000 Cash flow from investing Proceeds on sale of assets Purchase of capital assets2 80.695. beginning of year Cash.000) 353. end of year 1 Accumulated Amortization. 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 $239.000 111.000 Decrease in cash Cash.000) (37.000) (37.000) 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 Decrease in AP) Cash paid out for operating expenses ($700.Introductory Financial Accounting.326. end of year Dividends = $50.000 – 218.000 $5.1 Page 232 2 Capital Assets.000 ? (158.000 Decrease in A/R) Cash paid out to suppliers ($2.000) (493.000 Amortization Expense + 11.000) (72. beginning of year Add net income Less dividends Retained Earnings.1.000 $319.500.000 b.000) $466.460.000 Salaries and Wages Expense + 37.000 Decrease in Interest Payable) Cash paid out for income taxes ($250.000 Increase in Prepaid Expenses) Cash paid out for salaries and wages ($850.711.000) (887.000 ? $508. beginning Additions Disposals Capital Assets.000 Decrease in Salaries and Wages Payable) Cash paid out for interest ($67.000) (233.400. Cash flow from operations – Direct Cash collected from customers ($4.000 Increase in Inventory + 12.611.000 Income tax expense – 17.000 3 Retained Earnings.000) $5. ending Additions to capital assets = $543.000 239.000 COGS + 48. v.000 Increase in Income Taxes Payable) $4.000 Interest expense + 5.000 Sales + 111.000 .000 (2.
500) $ 900 (b) Cash Flow from Operating Activities Cash collections from customers ($218.1 Page 233 Problem 9-3 (a) HHC LTD.800 + 100 Increase in Prepaid Insurance) Cash paid for rent Cash paid for interest ($1.600) (39. v.400) 7.500 Increase in Accounts Receivable) Cash paid to suppliers ($165.Introductory Financial Accounting.500) (1. Cash Flow Statement for the year ended December 31.000 Sales – 1.600) (100) (400) 100 (3.500 (166.000 COGS + 1.1.700) (2. 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 $ (3.800 $ (1.200 – 100 Increase in Interest Payable) $216.900) (5.100) $900 .600 Increase in Inventory) Cash paid to employees ($39.300 + 400 Decrease in Salaries and Wages Payable) Cash paid for insurance ($2.300) (1.
Introductory Financial Accounting.000) 0 0 32.000 (4.000 26.000 12.000 – 25. 20x6 Cash flow from operations Cash collected from customers ($900. Statement of Cash Flow for the Year ended December 31.000 Sales .000 Increase in Inventory + 18. v.000 + 17. Toram Ltd.000 (650.000 Cash flow from investing Proceeds on sale of equipment (Note 1) Proceeds on sale of long-term investment (Note 2) Purchase of equipment 7.000 Increase in A/R) Cash paid out to suppliers ($600.000) Loss on sale Proceeds $ 11.000 $50.000 Cash flow from financing Issue of bonds payable Dividends paid 25.000) 17.000 Note 2 – Proceeds on sale of long-term investment Net book value of investment Gain on sale Proceeds $ 18.000) (25.000 Decrease in AP) Cash paid out for other operating expenses Cash paid out for interest Cash paid out for income taxes $847. beginning Cash.000) Cash.1.000 – 21.000 (20.000 30.000 Increase in cash ($32.000 30.000 COGS + 32.000) 24.000) (165. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($32.000) $7.1 Page 234 Problem 9-4 a.000 .000 (50.53.
000) (32.1.000) $32.Introductory Financial Accounting.000) (53. Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Loss on sale of capital assets Gain on sale of long-term investment Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Decrease in Accounts Payable $100.1 Page 235 b.000 .000) (18.000 (12. v.000 4.000 43.
250 Days sales in A/R = $32. 2.500 Net credit sales for 20x8 = $52.000 + 540. c c Average inventory = ($30.8.000 = 6 Assume an initial amounts as follows: current assets .500 Total net sales = $367. Impact is on the current ratio.$80.000 + 120.250 / ($125.000) / 2 = $52.Introductory Financial Accounting. d Average receivables = ($50. then CL = 230.000 No impact on working capital since the decrease in cash is equal to the decrease in accounts payable. a 6. 8.000 + 22.500) / 2 = $31.000.$300. Assume that CL = 250.000 Average inventory = ($60.000 is made.000 ($320.000 / 50.$100.29 and working capital stays the same.500 = $400.000) / 2 = $50. If the invoice paid is $20.000 = $40.000.000 + 55.0 times 9.000 – 120.500 + 32.000 / 365) = 94 days Inventory increased by $20.000 Inventory turnover = $450.000 = 6. c .000 Inventory turnover = $300.000 then the current ratio is 0.000 / 70.000 = 1. a c b Average receivables = ($40. current ratio = $100.000 + 40.000) / 2 = $75. Assume that a payment of $10. v. d 3.000 purchased .78.000 COGS = $30.25.1. 4.000 and CA = 180.1 Page 236 Problem 10-1 1. current liabilities .000 = 1. the current ratio becomes $90.000 COGS) Beginning inventory = $60.000 / 80. 5.000 = $450.000. the current ratio drops to 0.500 x 7 = $367.000 – 20.000. 7.000 / 75.000 and CA = 200.
07 20x4 850.000 / 371.000 = 3.76 (12.60 (34.000 / 379.000 / 60. v.1.000 + 400.400.68 (34.000 + 275.000 = 0.1 Page 237 Problem 10-2 Liquidity Analysis: 20x5 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 712.7 days 20x4 594.000 / 50.000) / 371.000) ÷ (1.000 + 275.000 / 793.000 + 220.000 + 550.000 = 1.00 Times Interest Earned 230.88 (12.000_ / 365 = 70.000) ÷ (1.07 200.000 / 863.000 = 1.5 days Solvency Analysis: 20x5 Debt-to-Equity Ratio* 920.000 = 0.000 = 1.000) / 379.000 + 275.83 * debt is defined as long-term debt in this case .200.000) / 365 = 53.Introductory Financial Accounting.000 = 4.000 = 1.
900.98 Days Sales in Accounts Receivable Total asset turnover .3% 200.66 [(275.48 [(220.000) / 2] = 12.900.000 / [(425.000 / [(2.Introductory Financial Accounting.000 = 39.000) / 2] = 3.000 / 2.9% Return on Equity Asset Management (Activity Ratios) 20x5 Inventory turnover $1.000 / 1.000 = 10.000) / 2] / (2.300.000 = 36.10 20x4 $1.000 / 2.000 + 1.875.1% 20x4 $700.000 / 365) = 40.000 / [(2.000 + 2.3% 98.900.162.000 / [(340.000 / [(793.014.300.000 + 2.162.2 days 2.000) / 2] = 10.000 + 725.8% 230.000 + 200. v.000 / [(2.1.014.200.000 + 793.000 + 220.000 + 340.300.1 Page 238 Profitability Analysis 20x5 Gross Profit Percentage Return on Sales Return on Assets $900.000 / [(863.000 / 365) = 39.400.000 / 1.000) / 2] = .000) / 2] = 1.000) / 2] = 3.000 + 350.000 / [(2.000) / 2] = 13.875.300.000) / 2] / (1.3 days 1.900.000) / 2] = 11% 110.000 + 1.000 = 10% 230.5% 200.014.014.
000 + 463.000 + 524. v.000 = 0.08 * debt is defined as long-term debt in this case .04 (20.000 + 480.13 (20.Introductory Financial Accounting.000 / 560.000) ÷ (1.000 + 480.000) / 365 = 97.000 + 635.000) ÷ (1.000 / 524.679.08 (37.1 Page 239 Problem 10-3 Liquidity Analysis: 20x7 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 1.1.000) / 365 = 135.000) / 524.000 = 1.576.000 = 0.000 = 0.000.300.000 + 524.000 / 2.32 20x6 800.000 / 60.000) / 560.000 = 2.000 = 2.92 (37.000 / 56.52 days 20x6 1.167.000 = 2.114.72 days Solvency Analysis: 20x7 Debt-to-Equity Ratio* 820.000 = 1.000 / 2.45 Times Interest Earned 65.30 137.
300.6% 3.1% 137.000 / [(4.90 [(524.000 + 4.679.1% 137.000 / [(2.000 / 2.5 days 1.000 + 4.000 = 8.000 + 570.000 + 3.000) / 2] = 0.679.000 = 41.44 Days Sales in Accounts Receivable Total asset turnover .000 + 2.100.000 / 2.000 / [(650.003.000) / 2] = 1.000) / 2] = 0.000 = 3.9% Return on Equity Asset Management (Activity Ratios) 20x7 Inventory turnover $1.Introductory Financial Accounting.000 + 2.5% 51.1 Page 240 Profitability Analysis 20x7 Gross Profit Percentage Return on Sales Return on Assets $800.000 / 1.000 / [(3.2% 65.700.000 / [(2.000 / [(3. v.000) / 2] / (2.13 [(480.1% 20x6 $700.000 / 365) = 88.100.000) / 2] = 1.000 = 38.1.000 / 365) = 87.003.003.000 + 524.100.000 + 3.000 / 1.000) / 2] = 0.1% 65.956.576.000) / 2] / (1.700.003.000) / 2] = 1.628.700.100.000 / [(4.000) / 2] = 2.000 + 485.000 / [(570.000) / 2] = 3.700.956.808.808.000.3 days 2.52 20x6 $1.000 + 300.
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