INTRODUCTORY FINANCIAL ACCOUNTING

Jacques Maurice, MBA, CA, CMA, FCMA Rebecca Renfroe, B.Comm, B. Ed, CMA

Introductory Financial Accounting, v.1.1

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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

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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

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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

(b)

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

Furthermore. The journal entry would be: Inventory Accounts Payable 5.000 worth of inventory on account.000 = Liabilities +100.000 + Equity .000 100. therefore. that is. and increasing a liability. therefore. v.Introductory Financial Accounting.000 We are increasing an asset. The journal entry would be: Equipment Cash 75. by increasing one and decreasing another the equation holds true: Assets + 75.75.000. our equation stays in balance: Assets + 100.000.000 + Equity The company then uses cash to purchase equipment that costs $75. we increase the asset account Cash.1. an asset and a liability. our equation holds true: Assets + 10.000 = Liabilities + Equity (e) The same company is a little short on cash and has to take out a loan from its bank.1 Page 5 (c) That same company then purchases an additional $5.000.000 . the company would receive $100.000 Upon signing the loan. By increasing both sides of the equation.000 75.000 cash.000 Both the Equipment account and the Cash account are assets. The loan is for $100. they will take on a liability to pay back the bank the $100.000 5. they do not pay cash but take on an account payable with the supplier.000 (d) = Liabilities +10. therefore. The journal entry to record the loan would be: Cash Bank Loan 100.

the income and expense accounts are closed out to zero. Revenue accounts normally have a credit balance. the company will have generated a net income and a net Credit entry to Retained Earnings will result.000 in sales in its first month. If you remember that Income and Expense accounts get closed to Retained Earnings (which we will discuss in further detail later) then you can see how recording sales and expenses will still keep the accounting equation in balance. which is part of the Shareholders’ Equity section of the Statement of Financial Position. The journal entry would be: Cash Sales Revenue 30.000 = Liabilities + Equity +30.000 30. i. an debit entry to an expense account is viewed as a reduction of Equity and a credit entry to a revenue account is viewed as an increase in Equity. via the Retained Earnings Account. If Revenues are greater than Expenses during a period. Conversely. At the end of each year. v. and the resulting debit or credit is either added or subtracted to an account called Retained Earnings. For example. an expense account’s normal balance is a debit balance.1 Page 6 Transactions that impact the Statement of Income The above examples used accounts that appear on the Statement of Financial Position.1.Introductory Financial Accounting. Income Statement accounts will consist of Revenue accounts or Expense accounts.000 The accounting equation is maintained since Assets are increased and Equity is increased: Assets + 30. the company will have generated a net loss and a net Debit balance to Retained Earnings will result. when a revenue account is increased we credit the account. If we continue with our examples… (f) Say that the company from the above example has $30. All revenue and expense accounts are temporary accounts in the sense that we start the year with a zero balance in the account. If Expenses are greater than Revenues.e.000 .

1 Page 7 (g) To incur these sales. as are liabilities. Note that Cost of Goods Sold is an expense account. The journal entry to record that would be: Cost of Goods Sold Inventory 15.1. as they no longer have it on hand to sell. and all other assets and liabilities are classified as non-current.Introductory Financial Accounting.15. The Statement of Financial Position (also called the Balance Sheet) is. .000 Note that this entry removes the inventory from the company’s accounts.000 15.000 = Liabilities + Equity -15.000 worth of its inventory.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. the company sold all $15. Assets and liabilities that will come due or have to be settled within 12 months or one accounting cycle (whichever is longest) are classified as current. The accounting equation remains in balance: Assets . basically. v. and both are divided into current and non-current based on their liquidity. an expanded form of the accounting equation: The Statement of Financial Position Assets = Liabilities & Shareholders’ Equity Liabilities Current Liabilities Current Assets Non-Current Liabilities Shareholders’ Equity Contributed Capital Non-Current Assets Retained Earnings Assets are listed from most liquid to least liquid.

000 and the agreement with the bank is that you will be required to pay $50. other companies or special funds. Accounts Receivable – the account is the sum total of all outstanding invoices which are owed to the company by its customers. v. stocks. Because the policy has not yet expired. The inventory can either be purchased. Long-term investments – these are investments that are to be held for many years. The classic example of this is breaking out the current portion of the long-term debt of a company.000 would be classified as a current liability and the remaining $150. complete. Note that amortization is never taken on land.1 Page 8 Note. More on this in Chapter 5. and includes investments in bonds. this account includes all currency and equivalents (bank drafts. you would break out the current portion and classify it as such. we normally pay the annual premium the day the policy takes effect. Accounts Receivable is normally reported net of an Allowance for Uncollectible Accounts (discussed further in Chapter 3). and classify the remainder as non-current.). if your loan balance is $200. money orders etc. Equipment – this account is treated in the same manner as the Buildings account.000 would be classified as a long-term liability. The associated Accumulated Amortization contra account is normally shown directly below the asset account. but is a listing of all equipment owned and used by the company. when we take out an insurance policy. Non-current Assets: Buildings – this account is a listing of all depreciable buildings owned by the company. Prepaid Expenses – this account represents amounts that have been paid in cash for expenses that have not been incurred by the company. Land – this account is a listing of all land held by the company.1. that in some cases you may have an asset or a liability that is partly current and partly non-current. For example. Inventory – this account is a listing of all of the items that the company normally sells in its day-to-day activities. and the asset is therefore shown net of accumulated amortization. or manufactured by the company itself. this $50. A more detailed discussion of this account will take place Chapter 4.Introductory Financial Accounting. For example. . In this case. the cost of the policy will be classified as a prepaid expense. ready for resale.000 of this balance within the next year. Typical accounts you will see on the Statement of Financial Position are: Current Assets: Cash – the most liquid of all assets.

trademarks and copyrights would be classified as longterm assets. The retained earnings account reconciliation from the beginning of year to end of year balance is as follows: Retained Earnings. end of year XXX ± XXX .Introductory Financial Accounting. The retained earnings account is adjusted at the end of each year to account for a company’s net income or loss.1.1 Page 9 Intangible assets such as patents. It is when the amount is due back to the lender that differentiates between current and non-current debt. 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. Taxes payable – a listing of all taxes due within one year or one accounting cycle.XXX XXX . Note that the wages payable account is normally the result of an adjusting entry. v. beginning balance Add Net Income for the year or deduct the Net Loss for the year Less Dividends declared to shareholders Retained Earnings. Retained Earnings – this account represents the cumulative total of the net income of a company that has not been distributed to shareholders. Shareholders’ Equity: Contributed Capital – this account contains any amounts which have been invested in the company by the company’s shareholders. Non-current liabilities: Long-term debt including bonds and notes payable – this account is a listing of all debt which the company has incurred which is not due within one year or one accounting cycle. Wages payable – a listing of all wages due to employees within one year or one accounting cycle.

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 The multi-step statement has multiple subtotals. and for the above company would look like the following: The Miller Company Income Statement For the Period ended December 31. however.000 (60.000) (25.000) $10. most companies tend to use some form of a multi-step statement. v. the amount left over after all relevant expenses have been taken into account.000 18. Either one is acceptable under GAAP.000 3. typically the fiscal year of the company.000) (8.1.000 (8. It takes the reader from total Revenues to Net Income. Income statements can take on one of two formats: single step and multi-step. The single step statement lists all revenues and then all expenses without breaking out any further subtotals.000) 15.000 .000) 40.Introductory Financial Accounting. For example: The Miller Company Income Statement For the Period ended December 31.000 (25.000 (60.000 3.1 Page 10 The Income Statement The income statement is a statement that shows how a company performed during one period.000) $10. 20x8 Sales Interest Income Cost of Goods Sold Operating Expenses Income Tax Expense Net Income $100.

Accounts Receivable Debit Credit The following represent how increases and decreases in accounts get recorded: Liabilities & Shareholders’ Equity Assets + Expenses - Revenues + + - - + .1. an entry is placed on the left-hand side of the T.1 Page 11 The T-Account Named for its shape. which resembles a capital “T”. When a credit is made. it is placed on the right hand sand. When an entry is made and an account is to be debited. for every entry the lefthand entry must equal the right-hand entry in order for the Accounting Equation to hold true. v.Introductory Financial Accounting. a T-account is a tool used by accountants to keep track of entries that are made to individual accounts. Thus.

’s Sales for the first year were as follows: Cash sales . 10. The mall location is suitable for Ian’s retail needs. (Record the February rental payment only. . he has decided he is ready to go out on his own. was purchased for $5. 4. but is not large enough to store any extra inventory. 20x7. January 2. An outside storage facility has been rented to fill this need.. Ian signed a two-year lease with monthly rent of $8. 20x7.1. 20x8. 20x7 through December 31. which was taken out on June 1.1 Page 12 Comprehensive Example Ian has worked at a music store for the last 20 years. The lease is in effect from January 2. 20x7.$310. That is. 8. 20x7.000 was purchased on account.200 per month. 11. into the company upon incorporation. He received 1. the annual rate is 10%. The terms of the loan. Ian purchased furniture and fixtures for the store at an auction for $30. He paid cash.000 due on the first of each month. 9. The following transactions took place during the fiscal year ended December 31. He only rented the outside facility to the end of November.) Inventory of $120.000 The company took out a loan for $200. Ian’s Incredible Instruments Inc. is located in the Meadowvale Mall. with 10% annual interest due semiannually. 20x7. 3. After years of planning and saving. Opened for business in a local mall. 6. and was able to give up his off-site storage facility. 20x7. Inc. Ian invested $175. 5. v.Introductory Financial Accounting.000 of the accounts receivable were collected throughout the year.000. A total of $280. interest payments are due every 6 months. More inventory was purchased on account June 1. his entire life savings. The lessor required Ian to pay the first and last month’s rent on January 2. and was rented on a month-to-month basis. which covered the period of January 2. Having proven himself a good tenant.$430. Ian’s Incredible Instruments.000. Ian’s Incredible Instruments Inc. Ian’s Incredible Instruments Inc. beginning February 1.000. 20x7: 1. An insurance policy. however. Rent is $1. 7. (Record the payments made from March to November only. Credit sales .000. 20x7 through December 31. 20x7.000 common shares of the Corporation. January 2. 20x7 for $350.) 2. Ian was able to convince his landlord at the mall to give him additional storage space (at no extra cost).000. are for 5 years.760 cash.

Introductory Financial Accounting.000 40. For each of the above.200 1.000 120. the deposit for the last month won’t be used until 2 years from now. To record the rent paid on the outside storage facility in February for one month. Cash Contributed Capital 2.000 To record the payment of first and last month’s rent on the lease. v.000 120.1 Page 13 12. Rent Expense Cash 1.000 16. 14.000 3.000 8. Ian declared and paid a dividend of $60.000 10.000 (note that a dividend is debited against retained earnings). To record the purchase of inventory on account.000 88. Additional cash disbursements for the year were as follows: Wages & salaries Rent Advertising Miscellaneous expenses Payments of accounts payable Interest on bank loan $165. This is what we call a prepaid expense.000 23. and therefore it is an expense in this fiscal period. However. Inventory Accounts Payable 120.000 13.000 $446. The total cost of the inventory sold during the year was $300. Prepaid Rent Rent Expense Cash 8. To record Ian’s initial investment into the company. 175.1.000. We know that the first month’s rent will be “used up” in this year.000 175. the appropriate journal entries would look like this: 1.200 4.000 .

20x7. Note that because it expires December 31.1 Page 14 5.000 200. Cash Accounts Receivable 280. we already recorded the initial payment in February). we must remove the receivable from our books. Inventory Accounts Payable 350.000 280. for which cash was paid.800 .000 30. second. Insurance Expense Cash 5. two things will happen to Ian’s Incredible Instruments Inc. First. sales are recorded individually as they are made. Rent Expense Cash 10.760 5. To record the purchase of inventory on account. To record the collection of accounts receivable throughout the year. for the purposes of this example we will be entering them in one journal entry.760 6. they will get $200. the credit to the Accounts Receivable account. as they are no longer due to us.000 350.000 9.000 11.000 310. v. To record sales for the first year.000 10. the entire amount applies to the current fiscal year and therefore there is no prepaid portion. To record the rental expense incurred from March through November. We will deal with the interest expense incurred on the loan in a separate entry. Upon receiving the loan. Note that as we collect the cash.000 8. Hence. To record the purchase of furniture and fixtures.000 cash from the bank. Note that in reality.1.800 10. To record purchase and payment of the insurance policy. Cash Bank Loan 200.000 7. Furniture and Fixtures Cash 30. However. they will have an outstanding loan for the same amount.800.000 740. Cash Accounts Receivable Sales 430.Introductory Financial Accounting. $1.200/month x 9 months = $10. (Remember.

000 300.000 120.000 60.1 Page 15 12.000 .Introductory Financial Accounting. To record the various other cash disbursements made throughout the year. To record the dividend paid.000 Interest on bank loan .1. To remove the inventory which was sold from the inventory account and record the resulting Cost of Goods Sold expense.000 14.000/month = $88.000 x (10% x year) = $10. Retained Earnings Cash 60.000 13.000 88. Cost of Goods Sold Inventory 300.000 40.000 446.$200.000 23.000 Wages & Salaries Expense Rent Expense Advertising Expense Miscellaneous Expenses Accounts Payable Interest Expense Cash 165. v.000 10. Note the following supporting calculations: Rent Expense – 11 months x $8.

000 12 Interest Expense 10.760 30.000 5 Insurance 5.200 5.000 2 3 5 6 11 12 13 2 Prepaid Rent 8.000 7 Rent 2 3 11 12 8.760 Wages & Salaries Expense 12 165.000 8 515.Introductory Financial Accounting.000 .000 60.000 30.000 10.000 430.000 280.000 16.000 350.000 120.000 Cost of Goods Sold 13 300.000 10 Bank Loan 200.000 Misc.000 1.000 Expenses INCOME STATEMENT Revenues Sales 740.000 170.000 200.000 13 6 Furniture & Fixtures 30.1 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 10 175.000 108.000 350.1.000 12 Advertising Expense 40.800 446.000 4 9 Accounts Receivable 7 310.000 1 Retained Earnings 13 60.800 88.000 Contributed Capital 175.000 280.200 10.000 1.000 350.000 12 Accounts Payable 120. v.240 Inventory 4 9 120. Expenses 12 23.000 300.

000 60.000 300.000 40.000 200. Trial Balance As at December 31.000 10.000 23.000 Credit $350.Introductory Financial Accounting. v.000 170.760 165.000 30.000 175.000 108.000 740.000 5.1 Page 17 A trial balance of all of the closing balances of the above accounts would look like this: Ian’s Incredible Instruments Inc. 20x7 Cash Accounts Receivable Inventory Prepaid Rent Furniture and fixtures Accounts Payable Bank Loan Contributed Capital Retained earnings Sales Cost of Goods Sold Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Interest Expense Miscellaneous Expenses Debit $515.465.240 30.000 8.000 $1.1.000 $1.465.000 .

all balances get returned to zero.000 23.760 165.000 5.000 23.000 40. would look like this: Ian’s Incredible Instruments Inc.Introductory Financial Accounting.240 10.000 108. Income Statement for the year ending December 31.000 40. and the offsetting amount is the net income (or loss) that gets recorded to retained earnings. 20x7 Sales Cost of Goods Sold Gross Profit Operating Expenses Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Miscellaneous Expenses Operating income Interest Expense Net income Closing Accounts All revenue and expense accounts are closed out to zero at the end of each fiscal period.000 $88.000 440.760 165.1 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 740.240 . As such.000 300. they are referred to as temporary accounts.000 10.000 341. At the end of the year.000 300.760 98.000 88.000 108.240 $740.1.000 5. v.

240 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Long-term liabilities Bank loan Shareholders’ Equity Contributed Capital Retained earnings 200. January 1.000 175. 20x7 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures $515.000 550.000 .240 $ We can now prepare a Statement of Financial Position for Ian’s Incredible Instruments: Ian’s Incredible Instruments Inc. December 31.240 $753.000) $ 28. Statement of Retained Earnings for the year ending December 31.240 203.1.240 350. 20x7 Retained Earnings. Statement of Financial Position as at 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. 20x7 0 88.240 30.000 28.000 723.000 170.000 8. 20x7 Net income Dividends Retained Earnings. v.000 $753.Introductory Financial Accounting.240 30.240 (60.

Introductory Financial Accounting. v. a receivable. As the company earns the revenue.1 Page 20 Adjusting Entries Most adjusting entries can be classified in one of two ways: Prepayments – Cash is paid out or received before event occurs. plant & equipment Accrual – Event has occurred. but not yet paid in cash. an adjusting entry is made to remove the liability and record the revenue. Interest Expense. and records the revenue. The adjusting entry sets up an asset. As the liability is paid in future periods. the receivable is removed. i. As cash is received in payment in future periods. but will not be paid in the current period. Income taxes. Expenses Prepaid Expenses – Cash is paid and an asset is recorded before it is used. performs the service or delivers the goods.e. Examples: Prepaid rent/insurance. then both the liability and the expense are recorded in the amount relating to the current period. we will Debit the liability and Credit cash to record the payment. Utilities Expense Revenues Unearned Revenue – Cash is received and a liabilitiy is recorded. but cash has not been paid or received. Interest Receivable . Rent Revenue. deposits on orders. Examples: Credit sales. office supplies. Examples: Payroll. Accrued Revenues – These entries are used then revenue has been earned. Examples: Rent collected in advance. The asset will then be allocated to future periods using adjusting entries. Accured Expenses – When an expense has been incurred. subscriptions collected in advance and gift certificates sold.1.

1.200 of supplies on hand.000 The balance that remains in the prepaid insurance account of $7. Therefore. 20x5 reveals that you have $5.800 + 13.000 5.200 ???? Supplies Expense As the T-Account shows. The adjusting entry would be: Insurance Expense Prepaid Insurance 5.000 for an insurance policy that will cover the next 12 months.200. 1. and therefore should be an expense of the current period. the missing credit or Supplies Expense has to be 11.Introductory Financial Accounting.1 Page 21 Example In examples 1-5. On January 1. 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. However. and what we have left at the end of the year.000 12.000 represents the portion of the insurance policy that is unexpired. 20x5? To answer this question. During the year you purchased an additional $13. . solving the equation.000 $ 5. What would be the adjusting entry on December 31.800 13.600. what was purchased during the year. 20x5 you had $3. v. On August 1. we know our opening balance. This means that 5 months have been used in the current period. that will expire in 20x8. 20x7 you pay $12. assume that the company’s year-end is December 31.000 At the end of the year you will have 7 months remaining on the policy. i.e.800 in your office supplies inventory account. A physical count of the supplies on December 31. 2.000 of office supplies. The missing piece to the puzzle is the amount of supplies that were used during the year.000 does not equal 5. 3. it might be helpful to look at the T-Account for Office Supplies for the year: Supplies Inventory Opening Balance Purchases Ending Balance $ 3.

000 as an expense this year. you would have earned 8 of the 12 months of revenue.000 per year for the next 10 years. the revenue to be recorded for the year would be 8 months x $800/month = $6.000 on January 1.000 Because the Accumulated Amortization account is applied as a reduction of the related asset account. Therefore. 20x8. It is now December 31.000 Note that the amortization expense account will appear on the income statement as an operating expense for the year. office furniture in this case.000 per year for the life of the furniture.1. The long-term asset section of the Statement of Financial Position would be as follows: Office Furniture Less accumulated amortization $100.e. 20x8. when you received the revenue. The Accumulated Amortization account. Each and every year. 20x6. you would have recorded an entry of: Cash ($800 x 12) Unearned Rental Revenue 9. 20x6.000) $ 90. 4. there would still be 4 months of unearned . You received payment for the full year on May 1.Introductory Financial Accounting.600 11. Therefore.600 9.1 Page 22 The adjusting entry on December 31.000 10. or $10.600 You purchase new office furniture for a cost of $100. 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. v. The apartment rents for $800/month. we call it a contra account to the Office Furniture account. the adjusting journal entry would be: Amortization Expense Accumulated Amortization 10. What is your adjusting entry? On May 1. You estimate that the furniture will last 10 years and have no salvage value at the end of its useful life.400. instead of taking the full $100. 20x8. Furthermore. we will take $10. 20x5 would be: Supplies Expense Office Supplies 3. It is now December 31. will appear on the Statement of Financial Position as a reduction of the related asset account. i. on the other hand. You own an apartment building and have a tenant whose parents have paid their rent for the entire year in advance.000 (10. 11.600 As of December 31.

333 You last paid your employees on March 27.Introductory Financial Accounting.1 Page 23 revenue left. as of December 31.333 3. 5.400 = $3. Your average weekly payroll is $80. 20x3. how much do we owe to our employees for the 4 days that we haven’t paid them? If the average weekly payroll is $80.000 x 5/12 = $3. 3. v. then our daily payroll rate can be calculated as $80. the accrued wages payable will be $16. and therefore.333. that is. What is your adjusting entry to record interest expense for the year? Looking at the terms of the loan. 20x3 you take out a loan for $100. interest expense for 20x3 would be $8. This reconciles to our calculation above. the loan has not been outstanding for the full 12 months. 20x4.1.400 6.000. the balance in the Unearned Rental Revenue account will be equal to $9. and our employees work 5 days a week. The loan agreement states that interest will be charged at a rate of 8% annually.600 – 6. However. What is the adjusting entry? To calculate the adjusting entry. and interest and the principal will be due August 1.000.000. The adjusting entry would be: Interest Expense Interest Payable 6. The adjusting entry on December 31.000.200.000 x 4 days = $64. Our employees worked 4 days from the time of their last payday until the end of the year. your year-end. 20x8 would be: Unearned Rental Revenue Rental Revenue 6. The adjusting entry would be: Wages Expense Wages Payable 64. The loan has been outstanding for 5 months. no cash has been paid for the interest expense. 20x3.000 x 8% = $8. That is.000. It is December 31.200. we have to first figure out how much needs to be accrued.400 According to the journal entries above. we can calculate that the annual interest on the loan will be equal to $100. On August 1. only 5 months of interest pertain to the current period. 20x6 (a Monday). The balance in the Unearned Rental Revenue Account would have 4 months x $800/month = $3.000/week. therefore.000 .000/5 = $16. and furthermore. It is March 31 (Friday).000 64.

the revenue recognition point takes place when the transaction takes place. we debit an account called ‘sales returns’. In the case of a simple sale.1. Sales and Sales Contra Accounts Whenever a sale is made. v. and • all associated costs can be estimated. then the amount of the discount gets debited to the Sales Discounts account. 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. If the goods are shipped to the customer under the terms FOB1 Shipping. If the customer pays 1 FOB stands for ‘Free on Board’ . whether we have paid for them or not. second. a 5-year warranty is provided with the product. We MUST record all expenses relevant to the current period. Just because you don’t pay cash for something does not mean that the expense wasn’t incurred. this can get complicated when say. whenever the discount is taken. • Sales Discounts: if early payment discounts are offered to customers. But.000 and we offer a discount of 2% if the invoice is paid within 10 days. this means that the cost of the goods sold become an expense the day the sale is made.1 Page 24 Note that this adjusting entry does two things: First. Revenue Recognition and the Matching Principle For a firm to recognize revenue.Introductory Financial Accounting. assume that we make a sale of $1. • the revenue must be earned (all significant acts must be completed). as we will see later. 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. This can become an issue for goods that are in transit around the company’s year-end. However. instead of debiting the sales account. For most sales. • collectibility is reasonably assured. If the goods are shipped under the terms FOB Destination. 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. For example. it gets onto our books the liability that we owe to our employees. we credit the Sales account. then they belong to the customer only when they are delivered and therefore the revenue recognition point is when the goods are shipped. In this case. then the goods belong to the customer the minute they are loaded on the truck and revenue can be recognized immediately. the following transactions are related: • Sales Returns: whenever customers return merchandise for refund. it gets onto our books the expense that we have incurred during the last 4 days of the period.

The $20 discount will get debited to the Sales Discount account. Sales Allowances are when merchandise is sold to a customer which is slightly defective. but the customer keeps the merchandise. a 2 % discount is offered if payment is made within 10 days. when reported on the income statements. that is. Sales Normal credit Balance Sales returns Merchandise returned Sales Discounts Early payment discounts Sales Allowances Customer keeps merchandise but is given a discount Example – Assume the following transactions. A credit is granted to the customer.500 1. Accounts receivable Sales • $40. n30. • merchandise is shipped FOB Shipping to a customer. Terms of payment are 2/10. These three accounts are considered contra accounts to the Sales account and.1 Page 25 • within 10 days.500 .000. they will pay us $980.Introductory Financial Accounting. would be netted out against the Sales account. The selling price is $40.000 $40.000 merchandise whose sales price was $1. otherwise the full amount is payable in 30 days.1. v.500 is returned to the company Sales returns Accounts receivable 1.

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.1. Sales Allowances Accounts Receivable 2. and • what is the fallback position: does the company have sufficient assets to satisfy its liabilities? To summarize. . Consequently. loan repayments. Accountants are continuously faced with new situations and business innovations that present accounting and reporting problems. or similar decisions. the objectives of financial reporting are as follows: • to provide information useful to present and potential users in making investment.500 • on the 9th day after the sale.Introductory Financial Accounting. It would be impossible for financial statements to meet the needs of all users of financial statements.500 is granted to the customer. and • to provide information about the economic resources of a firm.1 Page 26 • some of the merchandise was slightly damaged during before it was shipped. These problems must be dealt with in an organized and consistent manner. claims on those resources. and changes in those resources to help in assessing cash flows.280 720 36. • to provide information to help in assessing cash flows. such as dividends. and so on. v. credit. 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). principal and dividend payments?. interest. Cash Sales discounts Accounts receivable 35.000 The Conceptual Framework A strong theoretical foundation is essential if accounting practice is to keep pace with a changing business environment.500 2. payment of $35.280 is received. since these needs could conflict. A credit of $2. 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. the focus of financial statements is to meet the needs of creditors and shareholders.

000 today.000 is far more relevant. From a shareholders’ perspective the value of $10. accounting information should meet the following criteria: • verifiability – accounting professionals. assume a company issues a new type of security called a ‘Special Preferred Share’ which has a limited life (i.000. accounting information should meet the following criteria: • predictive value – information should be useful in predicting future outcomes. gets refunded in a pre-specified number of years) and pays a fixed rate of interest. To be relevant. Verifiability implies that independent measures using the same measurement method should yield approximately the same result. the representational faithfulness principle would argue that it meets all the characteristics of long-term debt and should be classified as such. The $100 is an established transaction and is reliable.1 Page 27 Qualitative Characteristics of Accounting Information There are two primary qualitative characteristics of accounting information: relevance and reliability. Secondary qualitative characteristics – the following two characteristics (neutrality and comparability are qualified as secondary because they are desirable qualities of accounting information. that land is recorded on the company’s books at $100 regardless of the fact that it may well be worth $10. For example. but are not as important as relevance and reliability. This implies that the information provided should be useful to the users. One could argue that regardless of what you call this security.000.1. To be reliable. • feedback value – information presented today helps confirm previous decisions. v.e. . 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. If a company purchased a parcel of land in 1856 for $100. The rationale is that income from recurring items is a best predictor of future income. Reliability implies that the accounting information can be depended upon. 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. At times. the concept of relevance and reliability conflict. the income statement is generally structured by segregating recurring items against non-recurring items. For example. For example. when establishing the validity of an accounting estimate should come to a consensus. Reliability wins in this case. For example. • representational faithfulness – accounting information should portray the substance of transactions over their form. • timeliness – information should be available to the users as quickly as possible.Introductory Financial Accounting. consider the application of the historical cost principle which states that assets should get recorded at their original cost.

Thus. v.000. the principle of conservatism implies that the one with the least favourable impact on net income should be the one chosen. but should be used as a way of thinking.Introductory Financial Accounting. we must estimate which accounts receivable are likely to become uncollectible in the future and establish an allowance for doubtful accounts. Conservatism is an effort to ensure that the risk or uncertainty inherent in business situations is adequately considered. as we will see in Lesson 4. a gain or loss arises when the proceeds on disposal differ from the net book value of the asset sold. Also. Here is an example of an accounting rule that could lead to dysfunctional economic decision making.000. when companies sell depreciable assets. Cost/benefit analysis is very difficult to quantify since most costs and benefits are intangible.1 Page 28 Freedom from bias (neutrality) – accounting information should be even-handed with respect to the impact of accounting information on users’ behaviour. Assume that existing equipment is technologically obsolete and a net present value analysis shows that if the equipment were to be replaced. For example.e. For example. The manager responsible for making the decision may have a bias to not replace the equipment so that the loss does not appear on the financial statements. The concept of materiality can play against the concept of timeliness. The principle of conservatism also leads to the recognition of contingent losses but does not recognize any contingent gains. When introducing an accounting principle. The principle of timeliness implies that the financial statements should be in the hands of users as soon as possible. it may be . the financial statements of a company with net income of $10.000 would not be significantly affected if they were misstated by say. the company would benefit economically from it (i. Modifying concepts Conservatism means that it is generally preferable that any possible errors be in the direction of understatement of net income. the company would have to show a large loss on disposal. Information benefits vs. the project has a significantly positive net present value). 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. Accounting rules should not provide the motivation for dysfunctional decisions. When accountants can choose between two equally acceptable accounting principles. $100.1. 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). information costs. Materiality implies that financial statements are not precise but are accurate enough that any potential errors of misstatements would not affect any user. The only problem is that if the asset were to be disposed of. That’s not to say that accounting principles cannot be changed. 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. changes in accounting principles require retroactive adjustment and restatement of prior period financial statements.

we can add assets together even if they were purchased in different years. otherwise they would have to be recorded at the lower of their depreciable cost or liquidation value. all associated expenses related to the recognition of these revenues are recorded also. Matching principle assumes that when we record revenues. Monetary unit principle assumes that the value of the dollar does not change . 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. Periodicity assumes that we can breakup the life of a business in separate reporting periods (years. This omission is justified on the basis of materiality. This is probably one of the most flawed principles. months…) and report income and prepare a balance sheet for each of these periods. Consequently.1. .e. Other Principles Economic entity principle states that the financial statements of an entity should report all assets and liabilities under its control. 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. Going concern principle assumes that the entity will continue operating in the future.i. 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. Also refer to the definition of an asset (later in this section). quarters.Introductory Financial Accounting. the measurability of such revenues are reasonably certain and collectibility is reasonably assured. This assumption allows us to record long-term assets at their depreciable cost. This principle will be invoked when dealing with leases and intercorporate investments in later lessons. a 1925 dollar is equivalent to a dollar today.

Expenses are decreases in economic resources. either by way of inflows or enhancements of assets or reductions of liabilities. thereby leaving it little or no discretion to avoid it. (b) the entity can control access to the benefit. the benefit has already occurred. provision of services or other yielding of economic benefits. and (c) the transaction or event giving rise to the entity's right to. Liabilities have three essential characteristics: (a) they embody a duty or responsibility to others that entails settlement by future transfer or use of assets.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. v. at a specified or determinable date. in the case of not-for-profit organizations. Revenues are increases in economic resources. to contribute directly or indirectly to future net cash flows. and.1. provision of services or other yielding of economic benefits in the future. the settlement of which may result in the transfer or use of assets. Equity is the ownership interest in the assets of a profit oriented enterprise after deducting its liabilities. interest. (b) the duty or responsibility obligates the entity. While equity of a profit oriented enterprise in total is a residual. either by way of outflows or reductions of assets or incurrences of liabilities. on occurrence of a specified event.Introductory Financial Accounting. Revenues of entities normally arise from the sale of goods. in the case of profit oriented enterprises. for example. resulting from the ordinary activities of an entity. Liabilities are obligations of an entity arising from past transactions or events. Assets have three essential characteristics: (a) they embody a future benefit that involves a capacity. In addition. many not-for-profit organizations receive a significant proportion of their revenues from donations. Assets are economic resources controlled by an entity as a result of past transactions or events and from which future economic benefits may be obtained. singly or in combination with other assets. government grants and other contributions. and (c) the transaction or event obligating the entity has already occurred. types of share capital. it includes specific categories of items. the rendering of services or the use by others of entity resources yielding rent. royalties or dividends. contributed surplus and retained earnings. to provide services. resulting from an entity's ordinary revenue generating or service delivery activities. or on demand. or control of. .

and from all other transactions. v.1. Losses are decreases in equity / net assets from peripheral or incidental transactions and events affecting an entity. events and circumstances affecting the entity except those that result from revenues or equity / net assets contributions. and from all other transactions. .1 Page 31 Gains are increases in equity / net assets from peripheral or incidental transactions and events affecting an entity.Introductory Financial Accounting. events and circumstances affecting the entity except those that result from expenses or distributions of equity / net assets.

1. What accounting principle. The cost of the floor covering for the company offices was expensed. v. Nimto Inc. Existence of the lawsuit was reported in the notes to Fastrac’s financial statements. What accounting principle. assumption.1 Page 32 Problems with Solutions Problem 1-1 Multiple Choice Questions 1. assumption. or constraint was violated? a) Continuity assumption b) Matching principle c) Materiality constraint d) Separate entity assumption 2.Introductory Financial Accounting. assumption or constraint is being applied in this situation? a) Full-disclosure principle b) Conservatism principle c) Matching principle d) Unit-of-measure assumption . While making a delivery. What accounting principle. or constraint was violated? a) Continuity assumption b) Matching principle c) Cost principle d) Time period assumption 3. He paid for the computer by writing a cheque on the company chequing account and charged the “Office Equipment” account. The party sued Fastrac for damages that could exceed Fastrac’s insurance coverage. recently completed construction on a new 12-storey office building that will be used partly for its own head office and partly for renting to three other tenants. even though the floor covering has an estimated useful life of 5 years. the driver of Fastrac Courier collided with another vehicle causing both property damage and personal injury. The proprietor of Front Street Drugs bought a computer for his personal use.

Total liabilities of $500.999 6. The December 31. there will be a balance of $35. there will be a balance of $20.000.000 c) $ 999. inventory count. the Insurance expense for the period ending December 31. 20x5. c) Under cash basis accounting. On July 1. and Total shareholders’ equity of $499. 20x5.000 in the Prepaid insurance account on December 31. Shaw included a $200. purchased a 4-year insurance policy and paid a premium of $40. M.999.1. According to generally accepted accounting principles. failed to include $40.1 Page 33 4. 20x5. 20x9. 20x8. d) Under accrual accounting.999 d) $1.000 in the Prepaid insurance account on December 31. showed Total assets of $999. will be $5. there will be a balance of $25. 20x8.000 in the Prepaid insurance account on December 31. financial statements should be prepared using which of the following? a) Fair market values b) Historic costs c) Future values d) Replacement costs . What would be the balance for Total assets on December 31. financial statements. after correcting for the inventory error? a) $ 40. Which of the following statements is true? a) Under cash basis accounting.999.000 worth of inventory in the company’s December 31. In the rush to make it to a New Year’s party. What generally accepted accounting principle does this contradict? a) Time period principle b) Cost principle c) Going concern principle d) Business entity principle 7. 20x8. b) Under accrual accounting. Harry.039. ABC has a December 31 year end. which included this error.000 personal residence as an asset on the balance sheet of his company. 5.Introductory Financial Accounting. v.000 b) $ 959.000.000. Shaw’s Rent-all. 20x9. the bookkeeper for Ytwok. ABC Ltd.

20x8.Introductory Financial Accounting.1. Smart presented land and buildings on her company’s balance sheet based on the appraised value of these assets at December 31. K.1 Page 34 8. v. What generally accepted accounting principle does this contradict? a) Time period principle b) Revenue recognition principle c) Objectivity principle d) Business entity principle .

you decided to start up a new business – Heavenly Books Inc. 20x2 and expires on June 30.000 every 4 months with the first payment due November 1.Introductory Financial Accounting. You and several other shareholders invested $20. v.$190. 20x2.000 per month. A suitable location is found and rent is $1. The loan agreement calls for repayments of $4. The lease agreement is for one year. An additional $120.1 Page 35 Problem 1-2 On July 2. The annual interest rate is 9%. 20x2. 20x2 to October 31.000. 9. In addition to the monthly rent.000 Sales on account .000 was purchased on account. Books and supplies of $50.e. an offcampus bookstore where students can purchase textbooks and supplies at reduced prices. 2.1. 20x2 were: Cash sales . 3. Furniture and fixtures are purchased at a cost of $15.000 was obtained on August 1. 20x3.000 in return for shares in the company. 5. 4.. Sales for the period ended October 31.000 A total of $4. An insurance policy was purchased for $1. 6. . 7. on June 30. 20x3). 1. the company’s year end. 20x2. A bank loan in the amount of $20.$6.000 of inventory was purchased on account. The following are summary transactions for the period July 2. 20x2. The first and last month’s rent are due upon signing of the lease on July 2. 20x2.000 of the sales made on account were collected. 8.200 cash. Interest payments are due on the 1st of each month. The policy takes effect on July 2. an annual charge equal to 1% of sales is due at the end of the year (i. These are purchased for cash.

The adjustment for insurance expense. c. Adjustment for rent payable.000 1.Introductory Financial Accounting. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . Employees are owed a total of $600. Invoices received but not yet paid amount to $700 for miscellaneous expenses. 12.000 $182. An inventory count shows that a total of $25.1. Books costing $15. Credit Accrued Liabilities. Credit Accrued Liabilities. 18.000 300 130. 19.500 10. 16. 14.000 of inventory is on hand. Credit Accrued Liabilities.800 The following adjustments at year end must be made: 11. v. The straight line method is to be used. 17. b.000 were returned to the publishers. 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. Required – a. The expected income tax rate is 30%. 13.000 3. 15.1 Page 36 10. Enter all the above transactions in T-Accounts.000 2. The interest payable on the bank loan. Credit Accrued Liabilities. The furniture and fixtures are expected to last a total of 10 years with no salvage value.

600 2.100 2.100 14. 20x6: a.000 25. v.400 2. due December 31.000 84. A statement of financial position.100 21. A statement of retained earnings. c.300 18. $ 7.000 4.100 3.1 Page 37 Problem 1-3 On January 1.600 4.300 44.000 invested by the owners as capital stock.500 4. the accounting records contained the following selected amounts: Accounts payable Accounts receivable Accumulated amortization – Office Equipment Bank loan.800 2.500 157.000 1..100 50. b. 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. On December 31. Global Production.000 1.1. 20x6. A multi-step income statement.Introductory Financial Accounting.000 24.100 3.500 . Inc. 20x6. was started with $50.200 1.900 ? 40.

with no salvage value estimated at that time. The estimated useful life of the machine is 8 years. It is now December 31. Record the adjusting entry for amortization for the year. v. A new customer purchases a subscription in January. What is the adjusting entry required if your year-end is December 31st? Your company is moving into a new office on July 1st. It is now April 30. Kittens Quarterly. on a yearly basis for the fee of $24/year.1. You have provided $2. The contract. Your daily salary expense is $600. INC Inc. September and December.000 on June 1st and again on December 1st for providing these services for one year. and you have provided your services Big Al’s Used Cars for the past month. you bought a piece of machinery for $50. You signed the agreement and wrote the cheque on June 30th. record the journal entry to record the receipt of the subscription fee in January.000 for your annual property insurance policy eight months ago. $4.1 Page 38 Problem 1-4 For each of the following isolated situations.000. Part of your new lease agreement required you to pay your first month’s rent. stated that they would pay you $6. It is now your year-end.750. and then record the adjusting entry for the end of April. your year-end. Today is the end of the accounting period. prepare the appropriate adjusting entry.300 worth of services. Issues come out in March. your year-end. June.. which was signed June 1.Introductory Financial Accounting. First. What would the adjusting entry be? You pay weekly salaries to your staff and your accounting period end falls on a Wednesday. a) On June 1. Your year-end is June 30th. 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) . ahead of time. You sell subscriptions to your magazine. What is the appropriate adjusting entry? You have a contract to provide catering services for a local company. for their monthly staff meetings. What adjusting entry must be recorded to account for the unpaid salaries? You paid $5. You are a consultant. but you will not be billing Big Al until next month.

000 cash and gave a oneyear. This transaction was recorded as follows: Jul 1. 20x5. 20x5 Cash Note payable $3.000 $3.Introductory Financial Accounting. the company collected $440 for subscriptions two years in advance. note payable.000 c. The subscription start on October 1. 20x5 a tenant renting some office space from Doby Company had not paid the rent of $500 for December. Doby Company borrowed $3. Doby Company paid for a two-year insurance premium for a policy on its equipment. You are to provide the 20x5 adjusting entries required for Doby Company. 20x6. August 31. Each transaction will require an adjusting entry at December 31.000 b. Coverage of the insurance policy starts on July 1. 20x5 Prepaid Insurance Cash $1. On September 1. 20x5. On July 1.000 $1. v. On October 1. 20x5. Assume Doby Company publishes a monthly magazine. 10 percent. The $440 collection was recorded as follows: Oct 1.1 Page 39 Problem 1-5 Below are four transactions that were completed during 20x5 by Doby Company. 20x5. 20x5. a. 20x5 Cash Unearned subscription revenues $440 $440 . 20x5.1. d. The note was recorded as follows: Sep 1. The annual accounting period ends on December 31. On December 31. The total interest of $300 is payable on the due date.

What are the total liabilities of Wild Corporation after this transaction? 9. 20x6. 20x6. What are the total liabilities of Wild Corporation after this transaction? 12. Assume Wild Corporation uses a Perpetual Inventory System. What is total shareholders’ equity after this transaction? On April 3. What are the total liabilities of Wild Corporation after this transaction? 6. What is total shareholders’ equity after this transaction? (CGA Canada Adapted) . v. The customer pays cash. What are the total assets of Wild Corporation after this transaction? 8. 20x6. The purchase is made “on account” with the company agreeing to pay for the goods within 30 days. What are the total assets of Wild Corporation immediately after it has been formed and the shares sold? 2. Initial financing comes from the sale of 100.1. ensure your answer reflects the cumulative impact of all prior parts.000 cash. What are the total assets of Wild Corporation after this transaction? 5. Wild Corporation sells 200 units of inventory for $50 per unit. What are the total liabilities of Wild Corporation at this point? 3. 1. Wild Corporation purchases 1. What is total shareholders’ equity at this point? On April 2. 10. 4. What are the total assets of Wild Corporation after this transaction? 11. Wild Corporation is formed on April 1. The company used the perpetual inventory method. Wild Corporation purchases a warehouse for $300. What is total shareholders’ equity after this transaction? On April 5. 7.Introductory Financial Accounting.000 common shares at $10 per share cash.000 units of inventory for $20 per unit. 20x6.1 Page 40 Problem 1-6 For the next set of questions.

Example: Shareholders’ Equity -500 Net Income -500 Assets Interest accrued on notes payable was $500 NC Liabilities +500 Required – 1.400. liabilities.000.000 120. What was the subscription revenue earned during 20x7? 2. Purchased new equipment by obtaining a $200.000 from a customer for an outstanding invoice.000 cash injection from one of the owners of the company. decreases by a minus. 7% note payable from the seller. Interest accrued on the note payable was $1. Received from Smith a $10. Received a $50.000 Entries during 20x7 80. 6% interest note in exchange for extending the due date on a receivable. 3. (CGA Canada Heavily Adapted) . 7. Show increases by a plus.1 Page 41 Problem 1-7 The following information was extracted from You Read Magazines Co. 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. Received $2.000 Entries during 20x7 Required – 1. v.1.000 1-year. 20x7 128. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x6? 3. and no change by NC.000 90-day. Purchased for $500 cash an insurance policy for the following year. The company requires that customers pay the annual subscription fee for the magazine in advance. 6. Interest accrued on note receivable was $1. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x7? 4. shareholders’ equity and net income. General Ledger Account Subscriptions Received in Advance Dr Cr Balance January1.Introductory Financial Accounting. 4. 2. 5.

respectively. Cost of goods sold. accounts receivable for sales made to customers totaling $20. There was no money due from customers at the end of 20x7. Ronald found the following: 1. Cash’s analysis. Cash.000 and $5. Net income and Profit margin for 20x6 and 20x7.000 16. He asked his friend Ronald to have a look at his analysis as follows: 20x6 Cash received for sales Cash paid for purchases Other Expenses Net income Profit margin $60.000 received in 20x6 pertained to a sale made in 20x5. Cash’s personal expenses.000 was received in 20x7 and was included in cash received for sales in 20x7.000 10. Based on the above. 5. Other expenses in 20x7 included $1.000 35. calculate Sales. Purchases. using the accrual method of accounting.000 40. At the end of 20x6 and 20x7.1. the proprietor of Error Margin was excited to learn about profit margin analysis and immediately applied his knowledge to evaluate his business. Required 1.000 which was a deposit on goods that were to be purchased in 20x7. At the end of 20x6. 3. (CGA Canada) . there were goods in inventory costing $3.000 $21. 2. 2.000 of Mr.000 14.000 30% On examination.000 $10.000. v. 6. Identify any two generally accepted accounting principles that were violated in Mr. Cash paid for purchases in 20x6 included an amount of $2. 4. An amount of $5.1 Page 42 Problem 1-9 Mr. The $20.Introductory Financial Accounting.66% 20x7 $70.000 had not yet been received. He was perplexed that the profit margin had improved in spite of his intuition to the contrary.

Use the criteria for revenue recognition to explain when revenue should be recognized for this tree farming business. v. primarily during the Christmas season. maintains. . in parking lots at select locations in major urban areas. It plants. and harvests evergreen trees. pruning and maintaining the trees over the 15-year period. It normally takes about 15 years for a tree to grow to a suitable size.1 Page 43 Problem 1-10 Evergreen Inc. It sells the trees for cash.Introductory Financial Accounting. pruning and maintaining the trees be accounted for? Explain. The largest cost of this business is the cost of fertilizing.1. Required a. b. operates a tree farming business. How should the annual cost of fertilizing.

Prepare journal entries for the above transactions What is operating income for V. Strait opened an architecture company. 7 Dec. 31 Dec. Strait Ltd.300 cash to the office secretary for December’s wages. Completed work for a client and immediately collected $680 in cash for the work done. b. v. Received $1. Required – a. to V. V. the following transactions were completed during December 20x6. Purchased the office furniture and equipment of a retiring architect for $4. Strait Ltd..875.1 Page 44 Problem 1-11 V.000 in cash and agreeing to pay the balance in six months. 13. paying $1.000 cash. Dec. 31 Issued 100 common shares of the new company.Introductory Financial Accounting. for the month ending December 31. 31 Dec. Completed work for JP Developers and sent them an invoice for $1. Paid $1. Performed a count of office supplies.000. which revealed that $200 of the $300 worth of office supplies purchased on December 17 were still on hand. 13 Dec. 17 Dec.1. 20x6? (CGA Canada Adapted) . Strait in exchange for $6.875 from JP Developers for the work completed on Dec. Paid $1. Purchased office supplies on credit for $300. 1 Dec. 3 Dec. 28 Dec.000 for rental of office space for December rent.

20x2. which were all paid in cash. For miscellaneous expenses such as store rents. $19. b. 20x2 for Ruiz Pharmacy: a. $74.1 Page 45 Problem 1-12 The following summarized transactions (in thousands of dollars) occurred during the year ended December 31. To Revenue Canada for income taxes. For new equipment acquired on July 1. $189. e. For insurance. The rate is 12% per annum. d. $193. Cash disbursements were: g. 2. l. 20x2: n. 20x5. statement of retained earnings and balance sheet for 20x2. The board of directors declared cash dividends of $26 on December 15 to be paid on January 21. h. p. 20x2 was $240. Prepare an income statement. utilities and supplies. The principal on the current notes was collected on May 1. q. . The merchandise inventory as at December 31. advertising. c. For depreciation . computed as 40% of pretax income of $50. k. The principal on the remaining notes is payable on May 1. i. of which 80% were on credit. m. The notes receivables are from a major supplier of vitamins. 20x2. Collections from credit customers were $700. To the insurance company for a new three-year fire insurance policy effective September 1. To trade creditors. o. Total sales were $900. $15 Total income tax expense for 20x2 is $20. j. v. Interest for twelve months on all notes was collected on May 1. Wages earned but unpaid. December 31. $36. 20x2. f. Post all of the above transactions in T-Accounts. For the interest on the note receivable. 20x2. The following adjustments were made on December 31. r. Required 1.1. To employees for wages.Introductory Financial Accounting. $500.depreciation expense for 20x2 was $30. Merchandise inventory purchased on account was $520.

000 in taxes. The remainder was on account.000 $763. Peter’s balance sheet for August 31.000. Ottkancester’s largest independent household appliance store. Sales during the year were $1.500 It is now mid-September 20x5. 20x5. 20x4 Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures Accumulated amortization $ 30..000 190.000 110.1 Page 46 Problem 1-13 Peter is the owner and operator of Peter's Appliance Shop Ltd. 20x5.000 20. v.000 for appliances it purchased on credit.000 8. Peter paid suppliers $600.Introductory Financial Accounting.000. 5. At year end the accountant estimates that Peter owes an additional $12. The cost of the appliances sold during fiscal 20x5 was $745.000. Peter uses the financial statements mainly for tax purposes and to show the holders of the long-term notes.000.500 Liabilities and shareholders' equity Accounts payable Taxes payable Interest payable Long-term notes payable Capital stock Retained earnings $265.000.000 $763.000 during the year from customers who purchased on credit. 2.1. mainly to builders. On August 31.000 446. Peter's Appliances Shop Ltd. During fiscal 20x5 Peter paid $15.350. All purchases were made on account. 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. 3.500 by Peter. Peter has been in business for five years. 20x4.500 14. 6. 4. During the year Peter paid the taxes it owed at the end of fiscal 20x4. Peter collected $375. The following information has been obtained about the fiscal year just ended: 1.500 100. 7. the company's year end. is shown below. employees were owed $7.000 in installments on its taxes. Peter needs to prepare its financial statements for the year ended August 31.000 260. Peter paid salaries and commissions to employees of $200.000 -40.000 123. Balance Sheet As at August 31. Peter purchased appliances from suppliers for $850. Cash sales were $775. .

11. Peter must pay 2% of annual sales to the property owner 60 days after the year end. During 20x5 Peter purchased new capital assets (furniture and fixtures) for $25.5%.500 a month in rent. Peter recently redecorated his kitchen at home. 9. Peter paid $225. 13. stove. Before July 1. For accounting purposes.500 in interest to the holders of the long-term notes. The prepaid rent at the beginning of the year represented 4 months of prepaid rent at the old location. a statement of retained earnings and a balance sheet and a statement of cash flow for Peter's Appliance Shop Ltd. and microwave that cost $4. The deposits pertained to a particularly hard-to-get appliance.000 cash. These deposits were not included as part of cash sales. Required – Prepare an income statement. The terms of the lease require that rent be paid six months in advance on January 1 and July 1 of each year. The interest rate on the notes is 8. Peter accepted $10.Introductory Financial Accounting. During the year Peter paid $8.000 in deposits from customers who wanted a guarantee that their appliances would be delivered when they needed them.1 Page 47 8.1. Interest is paid annually on September 1. 20x5.000 a month for the rent of its store. for the year ended August 31. . 12. 20x5 Peter paid $3. 10. 14. 20x4 to reduce the balance owed on the long-term notes. Amortization expense for 20x5 is $22. Peter expects that the appliances will be delivered in early November 20x5.000 in cash for other expenses related to operating the business in fiscal 20x5. 20x5 Peter pays $4. In addition. treat this as a dividend.000 on September 1.500 from the store and installed them in his new kitchen.000. v. He took a refrigerator. Beginning July 1. Peter paid $20. In addition to the interest payment.

Prepare a list of cheques that were written but that have not yet cleared the bank account (outstanding cheques). For example. Ensure that all cheques returned correspond to the amount entered into the cash account. Identify any transactions that appear on the bank statement that have not been recorded in the cash account.Introductory Financial Accounting. The bank reconciliation starts with the balance per the bank statement. 2. It starts with the opening bank balance and ends with the ending balance. etc.. and Prepare a list of deposits that were made in the cash account but were not yet recorded on the bank statement (outstanding deposits). v. bank accounts. 3. Compare all deposits recorded on the bank statement to those recorded in the cash account. Typically. The bank statement is a running total of all transactions that were made in the account since the last bank statement was produced. Cash Cash and Investments For accounting purposes.1 Page 48 2. The balance showing on the bank statement needs to be reconciled to the balance shown in the company’s cash account. cash generally means any cash on hand. cheques deposited that are returned due to insufficient funds (NSF cheques). Accompanying the bank statement are all the cheques that have cleared the bank account. petty cash and any foreign currency on hand. 4. every 30 days a company will receive a bank statement from the bank.1. 5. This process is as follows: 1. Prepare journal entries to record these items and post to the general ledger. 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 . bank service charges.

673 • bank service charges not yet recorded by the company of $156 • returned cheque (NSF) from a customer in the amount of $788 • cheque # 345 was written for $323 and cleared the back for that amount.574 • a deposit made on August 31 in the amount of $3. Cash ($332 – 323) Accounts payable To record the error in recording cheque # 345.545 was not recorded on the bank statement • the general ledger cash account shows a balance of $43.644 . The next step will be to calculate the revised cash balance: Cash balance. 20x7 Add outstanding deposits Less outstanding cheques Cash per books. 20x7 shows the following: • ending balance of $45.Introductory Financial Accounting. v.1.673 3. we prepare the bank reconciliation: Cash per bank.1 Page 49 Example – The Parkes Company’s bank statement dated Aug 31. 20x7 $45. The cheque was incorrectly written in the cash disbursement journal as $332.574) $42. The correct amount is $323.579 (before any adjustments above) The first thing we do is make adjustments to the cash account for items on the bank statement that have not yet been recorded: Bank service charges Cash To record the bank service charges for the month of August. Accounts receivable Cash To record the returned cheque.644 $156 $156 788 788 9 9 Finally. August 31.579 (156) (788) 9 $42. before adjustments Less bank service charges Less NSF Cheque Add error on cheque # 345 Cash balance after adjustments $43. • the total outstanding cheques amount to $6.545 (6. August 31.

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.Introductory Financial Accounting. strategic investments are classified as long-term investments. Other Comprehensive Income becomes part of Shareholders' Equity. are charged to Net Income. Where the two methods differ is on how the adjustment to fair market value is recorded. trading investments: all gains. These investments will either be classified as held for trading or available for sale securities.1. By their very nature. the subject of this chapter. whether realized or unrealized. and balance sheet valuation is the same: interest accrued or dividends declared are recorded as investment income. the accounting for investment income. at the balance sheet date. They would normally be classified as current assets. they are classified as current assets. consist of passive investments in the shares of another company. operational or financial policies. Available for sale investments also occur whenever debt securities are acquired with the intent of liquidating them before their maturity. The classification of available for sale investments as current or long-term assets depends on management intent. They are therefore specifically held for purposes of resale and are designated by management as such. Regardless of how they are classified. If management intends to hold these for a period of less than one year. • . For both types of investments. v. 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. Any realized gains or losses are charged to Net Income. • available for sale investments: any unrealized gains or losses are charged to Other Comprehensive Income. the investments are carried at fair market value. there is no difference in the accounting for these investments. otherwise they are classified as long-term assets.1 Page 50 Non Strategic Investments Investments in the shares of another corporation can broadly be classified as non-strategic or strategic investments. Non-strategic investments. An available for sale investment occurs whenever companies invests in equity securities that are not classified as held for trading and are not strategic investments.

20x5 Dec 31.on June 30.500 1. On February 12. The following journal entries will be recorded with regards to this investment: Jun 30.Introductory Financial Accounting. The investment is classified as an available for sale investment. At December 31.500 $16. 20x5 we receive a dividend cheque for these shares in the amount of $600. 20x5 Available for Sale Investments Cash Cash Investment income Available for Sale Investments Unrealized holding gain $15.1 Page 51 Example . then the following journal entries would have been recorded: Jun 30.000 600 600 1.500 Oct 15.000.500 1. On October 15. $15.000 $15. 20x5.500 Oct 15. 20x5 (the balance sheet date). 20x5 Dec 31. 20x6. 20x6 Cash Unrealized holding gain Gain on sale of investments Available for Sale Investments XXXX XXXX $1. 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.900 $16.900 1.000 $15. 20x5 you purchase the shares of another company for $15.1. v. 20x5 .500 If the investment has been classified as a trading investment. you sell the investment for $16. 20x5 At December 31.500.900. the fair market value of the shares is $16.500 1. the unrealized gain will be part of Other Comprehensive Income and will be part of Shareholders' Equity: Shareholders Equity: Common Shares Retained Earnings Other Comprehensive Income Unrealized holding gains Feb 12.000 600 600 1.

1. v.500 .1 Page 52 Feb 12. 20x6 Cash Realized trading gain Temporary Investments $16.Introductory Financial Accounting.900 400 $16.

095 b) $21.700 3.1. 20x8? a) $15. 20x8 revealed the following details: Balance in bank account Customer cheques dated December 31. and it was deposited on May 18.200 What amount should be reported as cash in the current asset section of Swiss Company’s balance sheet at December 31.095 9.1 Page 53 Problems with Solution Problem 2-1 1. on hand but not yet deposited Swiss Company cheques that have not cleared the bank account $15. An analysis of the cash account for Swiss Company at December 31. The cheque was written for the correct amount of $152. a company received a cheque from a customer in payment of the related account receivable. 20x8.595 c) $25. 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. The May bank statement listed the deposit at $512. v.095 d) $31.Introductory Financial Accounting. During May.595 .

A company is preparing its May bank reconciliation. Cash balance per books.312 d) $4.700 77. December 31 Cheques outstanding.548 6.279 b) $4. with respect to cash activities.Introductory Financial Accounting. b. Prepare the December 20x6 bank reconciliation for Sarg. December 31 Bank service charges for December Deposits in transit at December 31 Cheque issued by Sparg Ltd. was gathered by Sarg Ltd. Prepare any adjusting journal entries that would result from the December 2006 bank reconciliation. The ending balance on the May bank statement is shown as $4.200 cheque received from a customer on December 13 in payment of an account receivable was incorrectly recorded as Required a.300 5. deducted from Sarg’s account in error by the bank A $1.327 $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. v.225.700 580 1.1 Page 54 3. $ 3.288 c) $4. At the end of the month. the following information was provided by company records and the monthly bank statement: Bank service charges shown on the bank statement NSF cheques from customers shown on the bank statement Deposits in transit at the end of the month determined by the company’s bookkeeper A cheque for $43 (the correct amount) written by the company was recorded in the books at What is the correct cash balance shown on the bank reconciliation? a) $4.020 .’s bookkeeper.000 77.300 52 1.1.

Prepare a bank reconciliation for Focus Ltd. the following information was determined: a) The following cheques are outstanding at March 31. 20x7. 20x7. showed a balance of $480. as $350. Required – 1. deposit of $6.915. d) Cheque #521 issued by Focus Ltd. f) The balance in Focus Ltd.200 had not been received by the bank in time to be included in the December bank statement. c) Bank service charges for December amounted to $35 and had not yet been recorded by Focus Ltd.200. b) The March 31.’s cash account up to date at March 31. had been incorrectly recorded in the books of Focus Ltd.1. 2. in the amount of $620.Introductory Financial Accounting. In preparing the bank reconciliation. v. as $260. Prepare the necessary journal entry(ies) to bring Focus Ltd. 20x7. 20x7. bank statement for Focus Ltd.1 Page 55 Problem 2-3 The March 31.’s cash account according to its accounting records was $4. 20x7: #501 for $780 and #533 for $1. at March 31. (CGA Canada) . e) A $530 payment on account received from a customer was incorrectly recorded in the books of Focus Ltd. for the cash purchase of office equipment.

b) On January 10.000 51.000 31.000 26.000 Recent discussions have brought to management's attention that there are different methods of accounting for temporary investments.000 10.Introductory Financial Accounting. v.1 Page 56 Problem 2-4 During 20x0.000 7. 20x0. Holdco Ltd. .000 $226.000 45.000 44. The data on Holdco Ltd. Support your answers with calculations.000 63.000 $234. decided to invest in the shares of a number of "Hi-tech" companies.000 $ 70. write the journal entries to record the two sales.000 9. all the XYZ Computer shares are sold for $75.000 51.000 20.000 5.000.000 30. Management is quite unfamiliar with these different methods and has approached you for this information.1. 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.'s temporary investments at December 31. Required a) As chief accountant for Holdco.000. 20x0 $ 72. Assuming these investments are classified as held for sale investments. advise management of two alternative methods of accounting for temporary investments and indicate the effect each has on balance sheet and income statement information.000 28. and all the Strategic Air Defence Systems shares are sold for $35. 20x1.

000 10.500 31.000 20x2 $16.500 Required a) b) Assuming these investments are classified as available for sale.000 14.000 $66.300 20x1 $19.000 12.000 32.500 29.500 $62.500 14.1.000 $57.000 28. .000 20x0 $18.Introductory Financial Accounting. Assuming these investments are classified as trading investments.800 $60. calculate the balance in Other Comprehensive Income at the end of each year. calculate the amount of unrealized trading gain or loss for each year. v.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.

3% of accounts between 31-60 days. Accounts receivable are reported on the statement of financial position at their net realizable value (NRV).000 280. an account receivable is created.000 120.000 $45.000 50.500 8. Accounts receivable are. For example.000 x 8% 50.600 20.1. There are generally three approaches to estimating the allowance for doubtful accounts directly (balance sheet approach): 1. The allowance for doubtful accounts at the end of the year will be: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750. 8% of accounts between 61-90 days and 40% of accounts over 90 days. 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.1 Page 58 3. therefore.200.400 9. where the allowance for doubtful accounts is estimated directly.500 .000 Based on past experience. Aging of the accounts receivable listing This involves grouping all outstanding receivables based on how long these have been outstanding.200. the company estimates that 1% of current accounts will eventually become uncollectible. There are two approaches to calculating the allowance for doubtful accounts: the balance sheet approach. Accounts Receivable Whenever credit is extended to customers for the provision of goods or services. which is equal to the net amount of outstanding invoices the firm expects to recover. v. the aggregate of the unpaid invoices at any point in time.000 and that the aging of accounts receivable is as follows: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750.Introductory Financial Accounting.000 x 3% 120. assume the total receivables add up to $1.000 x 1% 280.000 x 40% $ 7.000 $1. and the income statement approach. whereby we estimate the amount of bad debt expense on the income statement.

1. As a percentage of the ending accounts receivable balance This approach simply takes then ending accounts receivable balance and multiplies it by a percentage. but estimates the amount of bad debt expense.000 and the company estimates that 5% of these accounts will eventually become uncollectible. so we estimate the bad debt expense as a percentage of credit sales. 3.1 Page 59 2. Allowance for Doubtful Accounts . For example. The sum of the estimated uncollectible accounts at any point in time will form the allowance for doubtful accounts. v. if the ending accounts receivable balance is $1.000. Note that this approach does not estimate the allowance for doubtful accounts. Bad Debt Expense Cr. Specific account identification When a company has accounts receivable from a limited number of customers and has an intimate knowledge of these customers. The journal entry to record bad debt expense under either the balance sheet or income statement approaches is: Dr.200. then the allowance for doubtful accounts at the end of the year will be $1.000 x 5% = $60. a department store which offers their customers a credit card). Accounts Receivable Recording recoveries of accounts written off When an account that was previously written off is subsequently recovered. Accounts Receivable Cr.200. it would not be meaningful to age the accounts receivable listing. we first reverse the journal entry made to write off the account: Dr. 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.e. Allowance for Doubtful Accounts Recording accounts written off An account will generally be written off when (1) you receive a notice from a Trustee in Bankruptcy that you will receive an amount that is less than the amount owed.Introductory Financial Accounting. The income statement approach is used whenever a company offers their customers revolving credit facilities (i. Allowance for Doubtful Accounts Cr. In this case. it may be able to identify which specific accounts may become uncollectible.

000 This will result in a $15. During the year.000 The journal entry to record the recovery will first be to reverse the entry initially made when these accounts were written off: Accounts receivable Allowance for doubtful accounts $10.000.000 $75.1.000 were written off.000 $10.000 debit balance in the Allowance for Doubtful Accounts: Allowance for Doubtful Accounts Write-offs $75. v.000 $10. the following transactions took place: • • accounts totaling $75.800.000.000 were recovered. The journal entry to record the accounts written off will be: Allowance for doubtful accounts Accounts receivable $75.000 Beginning Bal Recoveries Ending balance before adjustment .000 $50.000 10. Accounts Receivable Example – The Jasmine Company’s accounts receivable at the end of the year totaled $2.000 $15.1 Page 60 We then record the collection on the recovered accounts receivable: Dr. The balance in the allowance for doubtful accounts at the beginning of the year was $50. Cash Cr. previously written off accounts totaling $10.Introductory Financial Accounting.000 We then record the cash receipt on the accounts receivable: Cash Accounts Receivable $10.

000 The allowance for doubtful accounts is estimated to be: (1.000 x 2.000 x 6.500 $94.500 since this is the entry required in the Allowance for Doubtful Accounts account to bring the account to a credit balance of $79.000 3. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $83. $94.0%) = $79.000 x 1.1. The accounts receivable aging is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days 1.5% 2.000 $83.0%) + (150.500 Estimated % Uncollectible 1.5%) + (600.1 Page 61 In order to calculate the bad debt expense for the year.000 $92. Using specific identification of accounts.000.5%) + (250.000 x 15.500 The bad debt expense will be $94.800.000 600. management estimates that the allowance for doubtful accounts should be $68.000 x 2. v.800.000 150.0% 15.000. The allowance for doubtful account should be established at $2.800. we will assume four independent scenarios: 1.0% Management estimates that 2.000 .Introductory Financial Accounting.5% 6. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $92.75% of the accounts receivable balance will be uncollectible.75% = $77.500: Bad Debt Expense Allowance for Doubtful Accounts 2.800.000 $2.000 250.

5% of total credit sales. we were estimating the Allowance for Doubtful Accounts with the residual being bad debt expense.5% = $90.000.000 cr.000. Note that when using this approach. In approaches 1-3.000.Introductory Financial Accounting. v. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $90.000 This will cause the allowance for doubtful accounts to have a credit balance of $15. . Bad debt expense will then be equal to $6. = $75.000 dr.000.000 x 1. Total credit sales for the year amounted to $6.1 Page 62 4. Management estimates that bad debt expense will be equal to 1.000. + $90. we are effectively estimating the bad debt expense for the year and the residual becomes the Allowance for Doubtful Accounts.000 $90.1.

900 c) $6.000 e) $13.800 .000. January 1. January 1.000 d) $13. What should be the adjusting entry amount for doubtful accounts at December 31.Introductory Financial Accounting. 20x8 a) $4.600 b) $1.600 d) $6. 20x8 Allowance for doubtful accounts balance. A company reported the following items for 20x8: Accounts receivable balance.900 2. A company estimated the needed balance in its account “allowance for doubtful accounts” by aging the accounts receivable. v.1. the aging schedule indicated that the balance of the allowance account should be $6.000) 400.1 Page 63 Problems with Solutions Problem 3-1 – Multiple Choice Questions 1.800 c) $7.000 b) $4.000 (11.000 360.400. During 20x9. At the end of 20x8.000 Experience indicates that 4% of the uncollected accounts receivable at the end of each year ultimately will be uncollectible. 20x8 (credit) Total credit sales during 20x8 Total collections on accounts receivable during 20x8 Uncollectible accounts written off during 20x8 $80. At the end of 20x9. the balance of the allowance account was $5. What is bad debt expense for 20x9? a) $1.000 20. the company wrote off $500 and collected a $300 receivable that had been previously written off as uncollectible.

Provide the December 31. January 1.000 14.875 $3.900. Provide the December 31. assuming the allowance method is used to account for uncollectible accounts. 2004 adjusting journal entry to record bad debts.Introductory Financial Accounting.000 3.000 $3. January 1.000 55. 2004 adjusting journal entry to record bad debts. Provide the journal entry to write off actual accounts receivable determined to be uncollectible and recoveries. c.000. A company had accounts receivable of $3.000 1.000 dr.975 $2. assuming the allowance method is used and management estimates the allowance to be 3% of the closing Accounts Receivable balance. $ 15. v.000.1 Page 64 3.095 a) b) c) d) Problem 3-2 The following information relates to Merit Ltd.000 cr.1.970 $3.000 and an allowance for doubtful accounts of $125. 2004 Required – a.000 800. . 2004: Total sales Cash sales Credit sales Cash collections from credit customers Actual accounts receivable determined to be uncollectible and written off during the year Recoveries of previously written off accounts receivable Accounts receivable. assuming the allowance method is used and uncollectible accounts are estimated to be of 1% of credit sales.000 After $2. just prior to writing off as uncollectible an account receivable of $30.000 11. What were the net realizable values of the accounts receivable as shown by the accounting records before and after the write-off? Before $2.875 $2.875 $2. 63. 2004 Allowance for doubtful accounts. b. for the year ended December 31.200.

20x0.1 Page 65 Problem 3-3 Sigma Company began operations on January 1.000 25.000 15.000 90.000 45.400. v.000 7.Introductory Financial Accounting.000 .000 2.000 234.800.000 16. 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 80. 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 20x0 $2.000 2.000.000 60.000 27.000 - 277.1.915.

Based on industry averages and its experience in 20x6. Wrote off uncollectible accounts receivable in the amount of $1.1 Page 66 Problem 3-4 EED Ltd. prepare journal entries. With all other data being the same from above.000 in payment of outstanding accounts receivable. Required 1. required at December 31. v. 3. EED Ltd.000 credit balance in the allowance for doubtful accounts account and a $40.000. Received cash of $400. to record bad debt expense for the year and accrue interest on the promissory note.1. In addition. On December 31. 20x6 there was a $2. (CGA Canada adapted) 2.500. if any.000 was converted to a 6-month promissory note to allow a cash-strapped customer some time to meet his obligations. if any. . 20x7. prepare the journal entries.Introductory Financial Accounting. began operations on January 1. EED Ltd. 20x7 to record bad debt expense for the year.000 debit balance in the accounts receivable account. During 20x7 the following summarized transactions occurred: 1. The promissory note bears an interest rate of 12%. 20x6. 4. Suppose now that instead. decided that an allowance equal to 5% of total accounts receivable would be sufficient to cover uncollectible accounts. The company uses the allowance method of accounting for bad debt expense. On December 1. 20x7. 2. an accounts receivable in the amount of $3. expects 2% of credit sales to be uncollectable. Prepare journal entries to record the above transactions on the books of EED Ltd. required at December 31. Sold merchandise on credit for $500.

On the first day. a physical count of inventory will be taken to ensure accuracy of the perpetual records.Introductory Financial Accounting. Each item that is purchased for resale gets debited to the inventory account.000 cash. What that means is that inventory is tracked constantly in a real-time basis. this time on account.000 10. The Perpetual Inventory System The term perpetual means continuing without interruptions. Little Company makes its first big sale. v.1. Little Company purchases $5.1 Page 67 4. After two weeks of business. Example: It is Little Company’s first year of business. is the inventory system that it chooses. 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.000 of inventory. we just create a payable instead of reducing our cash account.000 The next day. and then evaluate the different valuation methods a company can chose to determine the cost of inventory. paying cash. They sell $4.000 5. Furthermore. Little Company purchases an additional $10. the effect on the inventory account is the same as the above journal entry. The journal entry would be: Inventory Cash 5.000 worth of inventory to a customer for $6. or never ending.000 Note that even though we are not paying cash. Note that unless a company is offering a discount to get rid of inventory or for some other reason. Inventory A key part of determining the cost of the items that a company sells to its customers. the amount the company generally receives from its customer should always be greater than the value of the inventory. we mean an inventory system that has no interruptions. When we talk about a perpetual inventory system. and any adjustments that are needed will be made to the inventory account. We will begin by looking at two fundamentally different types of systems.000 worth of inventory. Inventory Accounts Payable 10. . From time to time. as well as valuing the items that it has on hand to resell at any point in time. We still increase the inventory account by the amount of the purchase.

we do not keep a “running total” of inventory. Instead. as purchases are made of inventory they are tracked in a temporary account called “Purchases”.1 Page 68 To record the sale. Continuing with the example above. Cost of Goods Sold (COGS).000 6. that first purchase of inventory for $5. nor do we keep a running total of COGS. as is the inventory account. However. as: Purchases Cash 5. These are: . 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”. it removes the $4. under a periodic inventory system. 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. To do this.000 The Purchases account keeps a running total for the year of all purchases of inventory made.000 5.000 This journal entry does two very important things. This expense account. This varies significantly from the Periodic Inventory System.000 4.000 At this point.1.000 cash would be recorded. we have recorded the sale and the receipt of cash. First. is used to keep track of all of the costs of all of the items a company sells in one period. Under the Perpetual system the COGS is a running total. it records the expense of the items that were sold. the journal entry would be: Cash Sales Revenue 6.Introductory Financial Accounting. the journal entry would be: Cost of Goods Sold Inventory 4. v. however. So what do we do with the purchases of inventory we make throughout the year? Throughout the year.000 worth of inventory from our Inventory Asset account. The Periodic Inventory System Under the Periodic Inventory System. Second. we have not removed the items that were sold from our inventory account.

000 and $10. the inventory account is adjusted to the appropriate ending balance. the Purchase account and all contra accounts are closed out to zero. At the same time. as this is a new business. Purchases of $5.1 Page 69 Purchases Normal debit balance Transportation – In Freight charges Purchase Discounts Early payment discounts Purchase Returns Merchandise returned Purchase Allowances We keep merchandise but are given a credit Running totals are kept in each of the above accounts for the year. The new journal entries would be: Purchases Cash Purchases Accounts Payable 5.Introductory Financial Accounting. To calculated COGS: . based on the physical count.000 10. The Cost of Goods Sold Equation is as follows: Beginning Inventory + Purchases (net of contra accounts) = Cost of Goods Available for Sale Ending Inventory = Cost of Goods Sold Example 1 – Let us use the Little Company example from above.1.000 worth of inventory on hand.000 were made.000 Let us suppose that those were the only purchases made during the year.000 10. and that at the end of the year a physical count of the inventory revealed that there was $11.000 5. If you remember. The amount needed to balance the equation is the Cost of Goods Sold. the opening inventory was $0. v. At the end of the year.

000 – 48.000 and it should be. in order to get the balance in the inventory account to $360.000 48.836.000 36.000 36.000 11. Cost of goods sold can be independently calculated as follows: Beginning Inventory + Purchases (2.000 we must increase it (or debit it) by $185.000 + 10.000 2. the Purchases account and all of the associated contra accounts have been set back to $0.000 Note that the Inventory balance given of $175.Ending Inventory (as per count) = Cost of Goods Sold $175.000 = $185. The balance is sitting at $175. according to our count. Therefore.000 $4.000 would be the ending inventory balance from last year.000 – 175.000 27.000) $2.1. They are ready for the next fiscal year. A year-end count reveals that the ending inventory balance should be $360.000.000 (360.000 + 36.000) = Cost of Goods Available for Sale . $175.476.000 2.700.1 Page 70 Beginning Inventory + Purchases ($5. v.000 Cr.Ending Inventory (as per count) = Cost of Goods Sold $ 0 15.000.000 Tetrie uses a periodic inventory system.000 185.000 Example 2 – Tetrie Company shows the following balances at the end of the year: Dr.661.476.000 increase) Purchases (close account) Transportation-in (close account) 2.000 .000 2.700.000 2. Furthermore. Inventory Purchases Transportation-in Purchase returns and allowances Purchase discounts 48.000.700.Introductory Financial Accounting. $360.000) .000 – 27.000 27. 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.

Cost-Flow Assumption This method is used when items cannot be differentiated from one another.Introductory Financial Accounting. the COGS is equal to the opening inventory + earlier purchases.1 Page 71 Inventory Valuation Methods The above discussion of periodic vs. We will now discuss how we attach value to the inventory. FIFO Under the FIFO method. or when the value of the items is so small that it does not warrant the cost of tracking the specific item value. like a car dealership. Under this method we can make one of two assumptions: that the first inventory that arrived is the first inventory that was sold (FIFO Method). that inventory is mixed all together and. In this case. That is to say.1. Specific Item Valuation This method is used when inventory items can be specifically identified. we remove its specific cost from inventory and debit COGS at the carrying amount. the ending inventory is equal to the most recent purchases. v. There are two different valuation methods that can be used to calculate the value of inventory: specific item valuation or cost flow assumption. it is possible to track each item in inventory separately. both the COGS and the ending inventory cost will be the same under the FIFO valuation method. Note that regardless if a company is using a periodic or perpetual system. or when a company has relatively few items in inventory that have a specific cost associated with them. therefore. Conversely. when the item is sold. That is. perpetual inventory systems dealt with how we track the inventory and purchases that flow through a company. we assume that the “First In = First Out”. Some examples of situations where this method would be possible are: when items have specific serial numbers. . we don’t know specifically which items are being sold so we use an average of some sort to determine cost. like a jeweler. that is at what cost do we record the inventory and COGS.

000 $400 640 1.25 each Sold 700 units Purchased 300 units @ $1.20 each Purchased 400 units @ $1. 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 $1.140 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.10 each Sold 200 units Under the FIFO periodic method.1 Page 72 Example – On January 1. Cost of goods sold can be calculated in two ways. using the cost of goods sold equation: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.00 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. Lainey Company has 400 units in its opening inventory.1.25 $240 500 (400) (240) (125) 330 (250) Balance Units Total Cost 400 600 1. First.20 1.25 1. we sold . the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.10 1.Introductory Financial Accounting.470 (455) $1. we know that we sold a total of 700 + 200 = 900 units. Under FIFO.20 1.25 1.10 = $330 January 5 purchase = 100 units x $1. This is not a coincidence – both approaches always provide the same result.015 Secondly. v. They purchased these units for $1.25 = $125 Total value of ending inventory = $330 + 125 = $455 Using the FIFO perpetual method.070 1.00 each.

one is used when you have a periodic system.015 Weighted-Average Method There are two versions of this method. 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. Throughout the period.00 each. Using this method. we calculate the average cost of inventory as follows: . Opening Inventory January 3 purchase January 5 purchase COGS 400 units @ $1. So COGS would be calculated as the cost of the first 900 units.1 Page 73 the units in opening inventory plus the first of the purchases we made through the year.1. you will remember that we do an inventory count once a year to determine the ending inventory balance. The annual weighted-average for periodic systems uses a similar methodology. Lainey Company has 400 units in its opening inventory. that is. We then close out the purchase account and the associated contra accounts to determine what the COGS is.Introductory Financial Accounting.25 = 900units $ 400 $ 240 $ 375 $1.10 each Sold 200 units Under the annual Weighted Average method.25 each Sold 700 units Purchased 300 units @ $1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1. v. They purchased these units for $1. Annual Weighted-Average – Periodic Systems Under a periodic system.20 each Purchased 400 units @ $1.00 = 200 units @ $1. and one is used when you have a perpetual system. the total sum of the year’s activities are taken into account at the end of the year to make the determination of the value of inventory.20 = 300 units @ $1.

10 each) $ $400 240 500 330 $1. when we make a purchase we debit the inventory account for the amount of the purchase. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.070 1.13077/unit = $452 COGS = # units sold x unit cost = 900 units x $1. the average unit cost is recalculated every time a purchase is made.13077/unit Ending Inventory = # units in inventory x unit cost = 400 units x $1. Unit Cost = Cost of all goods on hand/number of units on hand. .1 Page 74 Cost of Goods Available for Sale Opening Inventory (400 units @ $1.00 each) January 3 Purchase (200 units @ $1.300 Average unit cost = Cost of Goods Available for Sale/Units Available for Sale = $1. As such.20 each) January 5 Purchase (400 units @ $1.13077/unit = $1. then that is the unit cost used to determine the COGS for that sale.1. we are keeping a running total in the inventory account.470 (452) $1. Subsequently.018 Moving Weighted-Average – Perpetual Systems You will remember that under a perpetual inventory system.Introductory Financial Accounting.470/1. Under this system.25 each) January 19 Purchase (300 units @ $1. whatever the unit cost is at the time of a sale.018 Alternatively. v.300 units = $1.470 Units 400 200 400 300 1. The moving weighted-average system of inventory valuation takes this into account. that is the unit cost after the last purchase previous to the sale.

v. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.1.00 each. under this system we recalculate the unit cost each and every time we make a purchase.25000 1.20 each Purchased 400 units @ $1.00000 $400 1.022 .070 1.10 each Sold 200 units Remember.12000 672 448 Units 200 400 (700) 300 (200) Unit Cost $1.20000 1.000 300 600 400 Unit Cost Total Cost $1.12000 Unit Cost = $640 / 600 Unit Cost = $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 = $1.14000 1. Throughout the period.25 each Sold 700 units Purchased 300 units @ $1. Lainey Company has 400 units in its opening inventory.066671 640 2 1.14000 1.140 / 1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1. Purchases (Sales) Date Jan 1 Jan 3 Jan 5 Jan 10 Jan 19 Jan 25 1 2 Balance Total Cost $240 500 (798) 330 (224) Units 400 600 1.1 Page 75 Example – On January 1.470 (448) $1.022 Alternatively.10000 1. Unit Cost = Cost of all goods on hand/number of units on hand.Introductory Financial Accounting. They purchased these units for $1.140 342 3 1.

is showing an ending inventory balance of $50. the inventory account has a balance of $50.000 X 10%) = $40. the credit will be to income. This rule ensures that companies will not overstate their inventory balances by keeping on record at cost inventory which may have decreased in value in the marketplace. Show the journal entry to record the proper carrying value of the inventory. This account operates much like the Allowance for doubtful accounts in that it gets adjusted to the desired balance at year end. Inventory Loss Allowance for decrease in value of inventory 14. we must determine that the inventory’s net realizable value. Market value is defined as the net realizable value of the inventory – the sales price of the inventory item less any costs incurred to sell it. We do this by creating a contra account to inventory called ‘Allowance for decrease in value of inventory’.000. then the inventory must be written down to market value. First of all. The net realizable value of this inventory is: = Selling Price – Commission = $40.000 = $36. v. next year.1. If.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.000 to bring it to a zero balance.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 = $36.000.000 – ($40. The net inventory balance that will be reported on the statement of financial position is $50.000 – 4.000. . then the allowance will be debited by $14.000.000 – 14. Furthermore.000 At present. the analysis reveals that no allowance is required.000 14. Example –VenTure Ltd. At the balance sheet date.Introductory Financial Accounting. the accountant determines that they could sell this inventory for $40. If the market value is less than cost. commissions of 10% would have to be paid to the sales team on any sale of this inventory.

200.200. then we can estimate COGS as follows: COGS = Sales x (1 – gross profit ratio = $1.200.000 and Gross Profit is $400.000 Purchases . we could estimate COGS by using the following formula: Gross Profit = Sales x Gross Profit Ratio = $1.1.000 x (1 – 40%) = $1.000 x (1 – 25%) = $1.000 x 75% = $900. Example – Assume the following: Sales Cost of Goods Sold Gross Profit 1.000 Opening Inventory + 860.000 x 60% = $600.000 350.000 Example – The Gennissen Company’s inventory were destroyed by a fire and you need to estimate the ending inventory. v. but we did have the Gross Profit Ratio.000 The estimated ending inventory is: $350. the Gross Profit Ratio = 40%.Introductory Financial Accounting.000.1 Page 77 Gross Profit Method The Gross Profit Method of inventory valuation is used to estimate inventory when other data is not available to use one of the previous methods discussed.000.000 100% 60% 40% In the above example.900.000 400.000 Ending Inventory = $310.000. If we did not have the COGS number.000.000 If Sales are $1.000 600. we must first understand how to calculate the Gross Profit %.000 25% . for whatever reason.000.000 $1.000 860.000. To understand the application of this method.000 x 40% = $400. You are given the following information: Sales to the date of the fire Opening inventory Purchases to the date of the fire Gross Profit Ratio The estimated cost of goods sold = $1.

c) Cost of goods sold would be understated by $200. Owl Enterprises had merchandise inventory on hand amounting to $60. During the year the company purchased $500. In addition.000. 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 31.000.000 to suppliers and incurred $25. After completing its inventory count and making the appropriate adjusting journal entries. Which of the following statements is true with respect to the impact of this error on the December 31.000. 20x4.1. c) Shareholders’ equity is understated by $6. Fri. v.000. . financial statements of Confu Ltd.000 instead of the correct balance of $1. 3. 20x8? a) $478. The December 31.000 2. 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 $6.000 in shipping charges on merchandise purchased during the period. b) Assets would be understated by $200. On January 1. the company returned merchandise costing $10.000 computer purchased for the chief financial officer on December 27 had been recorded incorrectly as an inventory purchase.400. a) Liabilities would be overstated by $200.000 d) $523.000.600. financial statements.000.1 Page 78 Problems with Solutions Problem 4-1 – Multiple Choice Questions 1. 20x8.000.000. Ltd. d) Owners’ equity would be understated by $200. included an adding error in the inventory count that resulted in ending inventory of $1.000. d) Shareholders’ equity is overstated by $6.000. 20x4.Introductory Financial Accounting.000.000. b) Inventory is understated by $6. discovered that a $6.000 c) $515.000 b) $503.

d) Revenues for 20x8 are understated by $57. v. for the month of July 2006. Cozy sets the selling price on its shoes so that the cost of sales is equal to 70% of the selling price. The company uses a perpetual inventory system. 20x9. CIF destination. One customer returned goods with a sales value of $500 and was issued a credit note.1. The sale was recorded by Czech on January 2.000 during the month with terms 1/10. e. Problem 4-2 The following summarized transactions relate to Cozy Co. e. n/45.200. c) Income for 20x9 is understated by $15.000. Merchandise was purchased at a cost of $50. Sales totaled $80. e.000.000 for the goods and uses the periodic method to account for its inventory. b) Income for 20x9 is overstated by $42. 20x8. . All other sales made during the month were collected in the month with all customers taking advantage of the sales discount offered. All of the merchandise purchased during the month was paid for with Cozy taking advantage of the purchase discount offered.000. shipped goods to a customer on December 30.1 Page 79 4.. Czech Ltd. all of which were made on credit with terms 2/10. Transportation out paid on delivery of goods sold during the month equaled $1.000. 20x9.000. n/30. The selling price of the goods was $57. Czech had paid $42.000. FOB Shipping. Required – Prepare the journal entries required to record the above events and transactions.Introductory Financial Accounting. e. a shoe wholesaler. The customer received the goods on January 6. FOB destination. e. Which of the following statements with respect to this transaction is true? a) Income for 20x8 is understated by $42.

Problem 4-4 The following information concerns one of a company’s products.000 2. assuming a firstin.1 Page 80 Problem 4-3 Anvil Rock Company had the following inventory and purchases for the month of May.100 125 $ 1. c. assuming a weighted-average cost flow method is used.000 2. Calculate the cost of ending inventory for May. first-out (FIFO) cost flow method is used. Required – a. Beginning Inventory/ Purchases 30 @ $10. Prepare the journal entries to record the May 29 sale on account. assuming a FIFO cost flow system is used.500 Date May 1 May 5 May 14 May 21 May 29 Totals Sales Beginning inventory Purchase Sale Purchase Sale 20 @ $20.50 = 690 35 @ $12.500 3.1.00 = $ 400 Anvil Rock uses a perpetual inventory system. v.000 2.000 Price/Cost $12 18 30 23 33 . Calculate the cost of ending inventory for May.410 70 $ 1.00 = $ 300 60 @ $11. b.Introductory Financial Accounting.00 = 420 50 @ $22. the Hawkeye: Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Required – Calculate the value of the ending inventory assuming the company uses: (a) (b) periodic FIFO perpetual moving average Transaction Beginning Inventory Purchase Sale Purchase Sale Quantity 1.00 = 1.

000 15. 20x5. the company’s insurance policy will cover 80% of the loss suffered in this fire. v.000 Due to competitive pressures. 20x5. 20x5 1.000 Banff normally realizes a gross profit of 30% on its sales.000 units at $58 each $50.000 480. Costs are assigned to inventory and cost of goods sold on a FIFO basis.000 units at $50 each 1.000 615. b.1. Fortunately. the company was unable to pass on price increases to customers and thus maintained a selling price of $100 per unit throughout the year. Banff lost all of its hiking equipment in a fire in March 20x8. the Music Store had 400 MP3 players in inventory with a cost of $48 per unit.000 8. It accounts for its inventory using a periodic inventory system. The loss is to be determined based on the cost of the inventory in accordance with generally accepted accounting principles. under each of the following assumptions: a. 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 30. 20x5 June 15.1 Page 81 Problem 4-5 On January 1. Costs are assigned to inventory and cost of goods sold on a weighted average basis. (Banff) sells skiing and hiking equipment to retailers. 20x5.000 52.000 units at $52 each 1. (CGA Canada) Problem 4-6 Banff Mountain Equipment Ltd.000 580. 20x5 October 15. After a very successful ski season and just as it was about to commence shipping its hiking equipment for the upcoming season. calculate gross profit for the year ending December 31.Introductory Financial Accounting.000 58. During 20x5 the company made the following purchases of MP3 players: February 21. Corporate records disclose the following: Inventory — January 1. . Required – Assuming the company uses a periodic inventory system. The store had an excellent Christmas season with the result that only 70 MP3 players were left in inventory on December 31.000 440.

Saret Ltd. Calculate December 31. taking advantage of the sales discount.Introductory Financial Accounting. inventory value using the Weighted Average . Show all your calculations. Ending inventory consisted of 60 units. June 1 Sold Whinr Ltd.050 each During the year. n/30. The company uses a periodic inventory system.100 per unit. Required – Prepare journal entries for the above transactions. 20x7 20 units @ $900 each 440 units @ $950 each 200 units @ $1. Problem 4-8 The following information relates to Mejewel Ltd. Show your calculations. Calculate the cost of goods available for sale.000.000. Whinr returned $10.000 on account. n/60. Show all your calculations. Calculate December 31. performed the following transactions. v. 20x7. (CGA Adapted) Problem 4-7 During June 20x8. 20x7. 2. inventory value using the FIFO inventory pricing method. The supplier provided purchase credit terms of 1/15. 20x7 Purchases — February 20.000 of merchandise on account with credit terms of 2/10. The cost of the merchandise inventory returned was $5.1. the company sold 600 units at an average price of $2. January 1.000 of the merchandise inventory claiming it did not meet its needs. inventory for 20x7: Beginning inventory. 3. 20x7 Purchases — June 7. Whinr paid the balance due on the June 1 sale. June 2 June 9 June 12 The company uses a perpetual inventory system. $30. Saret purchased merchandise inventory costing $42. Required 1.1 Page 82 Required – Calculate the net loss from the fire. The cost of the merchandise inventory sold was $15.

The president has asked you to explain the benefits of taking advantage of purchase discounts because it often results in the company paying for merchandise before it has been sold. The payment of $48. 20x7. for the month of December 20x7. Show all your calculations.000 and a count of inventory on December 31. iii) iv) Required a. Briefly explain the benefits. you have made it a policy to ensure that all purchase discounts are taken advantage of.200 credit memorandum from a supplier on defective merchandise Toyjoy had purchased and returned. Toyjoy paid $3. FOB shipping point.000 in cash for freight charges on merchandise purchased during the month.1. amounted to $150. (CGA Canada adapted) Problem 4-9 The following is a summary of selected transactions for Toyjoy Ltd.000 under credit terms of 3/15. Received a $1.000. amounted to $48. The company uses the periodic inventory method and the gross method of recording purchases.000 credit purchase. Toyjoy had not yet paid for the merchandise. As the new controller. which has a negative impact on the company’s cash flow. which was paid within the discount period of 3/15. (CGA Canada) c. assuming merchandise inventory on December 1. . v. Prepare a schedule of the cost of goods sold section of the income statement. 20x7. Prepare journal entries for each of the above summarized transactions.Introductory Financial Accounting. revealed merchandise inventory on hand of $30. Cash payments on merchandise purchased from Patel Inc.500. n30.500 represented payment of a $50.1 Page 83 inventory pricing method. i) ii) Purchased merchandise on account from Hirwin Toys for $80. n30. b.

Introductory Financial Accounting. There were no errors in the December 31. 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). The company failed to record the purchase of these goods until January 15. goods costing $5.000 computer purchased on December 28. 20x7. A $6. and included in the year end inventory count. 20x6. v. Use the following format in answering this question. There were no errors in the December 31. On December 28. and for 20x7 Cost of Goods Sold. If the error has no effect (NE). 20x6 Ending Inventory. ii) iii) Required For each error. i) A company failed to include in its December 31.000. then state so. 20x7 inventory count. Assume the companies involved used a periodic inventory system and treat each situation independently. Error 20x6 Cost of Goods Sold 20x6 Ending Inventory 20x6 Retained 20x7 Cost of Earnings Goods Sold (CGA Canada) .1. 20x6 inventory count. inventory count $10.000 worth of goods which were in an off-site storage location. 20x6. 20x6 Retained Earnings. for use by the sales manager was incorrectly accounted for as an inventory purchase.1 Page 84 Problem 4-10 The following is a list of inventory errors which occurred in 20x6. a company received. indicate the dollar amount of the overstatement (O) or understatement (U) in 20x6 Cost of Goods Sold. 20x6.

1 Sale No. 2 Sale No. periodic inventory system d. 20x7 Inventory stored at another location.000 6. Luckily.500 8. Moving weighted average. a. Assume that the transactions occurred in the order given. perpetual inventory system . 20x7. v. perpetual system c.000 5.95 8. FIFO. Weighted-average.000 7. 1 (at $24) Purchase No. the Bamboo Brush store was destroyed in a fire. at January 13.000 $ 10.00 Units Beginning inventory Purchase No.000 $ 5. calculate the total dollar amount for ending inventory and cost of goods sold. Unit Cost $7.500 For each assumption given.000 $ 60. the accounting records were kept in a separate location and the company was able to reconstruct the following information: Inventory at January 1. periodic inventory system b.1 Page 85 Problem 4-11 On January 13.Introductory Financial Accounting. 2 (at $26) Required 6.000 40% Problem 4-12 The records of Egypt Company showed the following data relative to one of the major items being sold.40 9. FIFO. 20x7 Sales from January 1 to January 13 Purchases from January 1 to January 13 Gross profit percentage on sales Required – Calculate the cost of inventory destroyed by the fire.1. (CGA Canada) $100.

3. buildings.000 for land and a building. furniture and fixtures and intangible assets. land and building). When on-going expenditures are made in order to keep the asset in operable condition. For example. Cost of Long-Term Assets The cost of a long-term asset is generally equal to all costs incurred in order to put the asset into productive use. but are not limited to.e. the cost of acquiring these assets needs to be allocated based on the relative fair market value of the assets acquired.e. how do we account for these expenditures. assume that you pay $500. How do we allocate the cost of long-term assets over the periods these long-term assets are put to use in the business. The essential accounting issues in accounting for long-term assets can be summarized as follows: 1.1.Introductory Financial Accounting.1 Page 86 5. equipment and furniture and fixtures. We will only focus on the accounting for those long-term assets that are not investments in financial instruments. These generally comprise of: • land. v. The acquisition cost would be allocated to land and building as follows: Individual Fair Market Value per Appraisal Land Building $150.000 .000 450. any costs of transportation to get the asset to its location and any installation costs. what constitutes the cost of this asset. • long-term investments in financial instruments (i. copyrights and trademarks. When a long-term asset is acquired. 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. namely land. An independent appraisal of the land and building are $150. These include.000 and $450. the acquisition cost of asset.000 % 25% 75% Allocation of Purchase Price $125. and 4.000 $600. and • intangible assets such as patents. 2. How do we account for the disposal of long-term assets.000 $500. equipment. If you pay one price to acquire a group of assets (i. • buildings.000 respectively.000 375. the shares or the long-term debt of another company).

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. then we would likely increase the useful life of the truck. Straight-line method. if we were to replace the truck’s engine.000 375. However. We would therefore capitalize the cost of the new engine to the asset account. such as oil changes or brake replacements. the useful life of the asset is extended. Consequently. iii. This method allocates the cost of the asset over its estimated useful life in equal amounts. the rate of output of the asset is increased. the operating costs of the asset are decreased. any costs to maintain a truck. we often incur ongoing expenditures in order to maintain the asset. For example. For an expenditure to be considered a betterment it must meet one of the following four criteria: i. equal over its useful life. v. The process by which this is done is amortization of long-term assets. 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. or iv. The annual amortization expense is calculated as follows: (Cost – Salvage Value) / Useful Life . more or less.Introductory Financial Accounting.1. A determination has to be made whether the expenditure is required to maintain the asset in operable condition.000 Accounting for on-going expenditures Once a long-term asset has been acquired. ii. the expenditure enhanced the quality of the asset in a substantive way.000 $500. the matching principle requires that the cost of long-term assets should be spread over the periods that the asset generated revenues. There are three general approaches to amortizing capital assets: 1. in which case the expenditure should be expensed to the income statement. The underlying assumption is that this asset generated revenues that are.1 Page 87 The journal entry to record this transaction would be as follows: Land Building Cash $125. would generally be considered to be repairs and would be expensed.

000) / 8 = $31. 3. The underlying assumption is that the asset generates revenues based on usage. machine hours. mileage. This method allocates the cost of the asset over its estimated useful life based on the use made of the asset.1 Page 88 The cost less the salvage value is called the amortizable base of the asset.000. For example. Units of production method.125 The journal entry to record amortization expense will be as follows: Amortization Expense Accumulated Amortization $31.125 $31. 2. We deduct the salvage value since we do not want to write down the asset below its salvage value.000. The asset’s useful life can also be measured in terms of total machine hours of 150. 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 by taking higher amortization charges at the beginning of the asset’s useful life and lower amortization charges in the later years of the estimated useful life. The asset’s estimated useful life is 8 years and the estimated salvage value of the asset is $35. The amortization rate can either be given or you may be told that the company uses the double declining balance (DDB) method of amortization.e. 1. i. if you are told that an asset has a useful life of 10 years. The rate used for DDB is twice the straight-line rate.1. the annual amortization charge will be: ($300. The underlying assumption is that the asset generates higher revenues at the beginning of its life and that these revenues gradually decline as the asset is used up.000 – 35. Declining balance method. Under the straight-line method.Introductory Financial Accounting. 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 $300.125 . v. 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). a truck rental company that bases rental charges on the mileage driven. i. This assumes that the use can be measured.e.000 hours.

the amortization charge per hour would be: ($300.750 126.011 or the amortization amount needed to bring the net book value down to the asset’s salvage value.191 53.756 = $53.011. Therefore.1 Page 89 2.000 168. Net Book Value Beginning of Year $300.000 hours = $1.011 of amortization in year 8.191 53.000 225.045 x 25% = $10.640 23. Recall that we do not depreciate the asset below its salvage value.000) / 150.562 94. 3.000 56. 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.Introductory Financial Accounting.348 5. 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.801. Note that we will assume double declining balance amortization at the rate of 1/8 x 2 = 25% per year.731 17.922 71.000 168.000 hours x $1.798 13.000 – 35.393 40.7667 = $31. Assume that the total number of hours of use in the first year is 18. If we had taken $10.045 35. v. Under the declining balance method.393 40.1. the net book value at the end of the 6th year is: $300.393. then the amortization charge would be 18.188 31.000. the amortization charges for the 8 years will be as follows. .000 x 0.250 42.562 94.922 71.000 Year 1 2 3 4 5 6 7 8 Note that the year 8 amortization is not equal to $40.750 126.045 Amortization Expense @ 25% $75.7667 per hour.045 Net Book Value End of Year $225. Under the units of production method. the amortization taken in year 8 is the lesser of the calculated amortization of $10.

000.1 Page 90 Disposals of Long-Term Assets On the date of disposal.000 250. an asset costing $100. At the time.000) / 10 = $23. The net book value of the asset at the end of 20x9 is: Original cost Less Accumulated amortization ($250. assume that an asset was purchased on January 2. . The asset is sold at the end of 20x9 for $100.000 $11.000. For example. 20x3 for $250.Introductory Financial Accounting. The difference will be equal to the gain or loss on disposal. v. the changes in estimates are applied prospectively from the date of the change in estimate onwards.000 was purchased on January 2.000 $100.1. In 20x5. 20x1.000 (161. The asset’s useful life was expected to be 10 years and the salvage value was estimated to be $20.000 $250.000 – 20.000 11.000/year x 7 years Net book value The gain on disposal of this asset is: Proceeds on disposal Less net book value Gain on disposal The journal entry to record the disposal of the asset is as follows: Cash Accumulated amortization Asset Gain in disposal $100.000.000) $89.000 89. these estimates were revised as follows: the total estimated useful life of the asset is expected to be 15 years and the salvage value is expected to be $10.000 Changes in estimates If the estimates of the useful life and/or the salvage value of an asset change subsequent to its acquisition. the asset’s useful life was expected to be 10 years with an estimated salvage value of $20. For example.000 161.000.000. Assume straight-line amortization. we compare the net book value of the asset sold to the proceeds on disposal.

e. Examples of intangible assets are: • trademarks – a name or symbol that identifies a company or a product.Introductory Financial Accounting. the trademark ‘Coca-Cola’ was never purchased by the Coca-Cola Company but rather. assume that a patent is granted to a company at a cost of $100. Internally developed intangible assets cannot be capitalized on the Statement of Financial Position. they are expected to provide future benefits. Annual amortization charges for 20x5 and future years will be: (68.000) $68.1 Page 91 The net book value at the beginning of 20x5 is: Original cost Less Accumulated amortization ($100.000 (32. The patent’s legal life is 17 years but it is expected that emerging technologies will make this . v. if you look at Coca-Cola’s Statement of Financial Position. you cannot touch them or see them) and yet they represent costs incurred that meet the definition of an asset. i. was developed internally.000) / 11 remaining years = $5. location or superior products. Intangible assets whose life is limited should be amortized on a straight-line basis over their estimated useful lives. For example. you will not see the value of its trademark listed as an asset. • patents – a legal right ensuring the company’s exclusive right to a product or process.000/year x 4 years $100.000 – 20.000 – 10.000) / 10 = $8. • franchises – the exclusive rights to sell products or perform services.000 This net book value will then be amortized over the remaining useful life of the asset.e. are the result of a past transaction and are under the control of the company.1. • copyrights – the protection of writings. For example.273 per year Intangible Assets Intangible assets are those assets that do not possess a physical quality (i. typical within a certain geographical area • goodwill – the added value of a business attributable to factors such as reputation. The accounting for intangible assets depends on whether these assets have limited or an unlimited life.000. This need not coincide with the asset’s legal life. musical compositions and works of art. Consequently. Note that only expenditures incurred by the company can be capitalized as intangible assets.

1. goodwill) are not amortized but instead subject to an annual impairment test. Any impairment losses cannot be subsequently reversed if the fair market value of the asset subsequently is recovered. v. .1 Page 92 patent obsolete by the end of the 5th year. Intangible assets whose life is unlimited (i. In this case. If the fair market value is lower than book value and is not expected to recover. we would amortize the patent over 5 years.e. the book value of the intangible asset is compared to its fair market value.Introductory Financial Accounting. That is. then the asset must be written down to the fair market value. some franchises.

the situation was as follows: Building cost Accumulated depreciation — building Estimated remaining useful life Estimated salvage value at end of useful life $200.200 d) Income will decrease by $632 e) Income will decrease by $600 .500 d) $20. The patent is valid for 17 years and has an estimated life of 10 years.1 Page 93 Problem with Solutions Problem 5-1 – Multiple Choice Questions 1. A small room was built on the back of the building at a cost of $12.000 c) Income will decrease by $1. and was used as office space commencing July 1.1. At the beginning of 20x8.88 b) $5.Introductory Financial Accounting.500.000 in legal costs defending it.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. 1998. Sinha.000 3.00 d) $8. Brown and Das obtained a patent for their earnings forecasting software at a cost of $80.000 c) $19.500 b) $5. What will be the annual amortization expense for patents? a) $4. What is the impact of this expenditure on income before taxes for 1998? a) Income will decrease by $12. 2.000 150.000.00 c) $8.000 Jasper uses the straight-line method for calculating depreciation expense. The room was completed on June 30.000 and spent $5.000.000 10 years $5. What is the amount of depreciation expense on the building for 20x8? a) $4. v.000.705.000 b) Income will decrease by $6.

A land site was acquired for $1. Ireland Company purchased a machine that cost $20.075.000 . On January 1. On January 1.000 were incurred to clear the land in preparation for construction of an office building. The machine is expected to be used for a total of 1. The equipment is expected to have a 5-year life and produce a total of 80.000. Yaari and Yosha Company bought a machine for $85.1 Page 94 4.000.1.000.500 b) $5. a $60. it was used 430 hours. 20x7.500 c) $63. What is amortization expense for 20x7 under the productive output method? a) $4.000. If the company were to use the units-ofproduction method instead of the straight-line method. what would be the balance reported for the net book value of the machine at December 31. During 20x7.500 productive hours over the next 4 years. 20x6? a) $67.000 c) $5. and a 10% residual value. 20x7.000 c) $77. using the straight-line method. At what amount should the land be reported on the balance sheet? a) $1.500 d) $80. On July 1. 20x7? a) $40. The Amortization expense for 20x6.000 commission was paid to a real estate agent.000. During 20x6. Stone and Wall Company bought equipment for $100.000 c) $1.000.000 with an estimated life of 4 years and a salvage value of $5.750 d) $65.000 7. production was 20. If the company uses the double-declining-balance method for amortization.500 b) $72. was $18. To acquire the land.000 5.160 d) $5. It has an estimated 4-year life. v.000 d) $1.000 units. Costs of $15.015.000 units.060.000 b) $42.735 6.000 b) $1. what would be the balance reported for the net book value of the equipment at December 31. 20x6.Introductory Financial Accounting.000.

as a result of heavy usage.1. At the end of its useful life. The van cost $65. Prepare the adjusting journal entry to record amortization expense for the year ended December 31.000. 20x7. it was estimated that the van could be sold for $5. 20x7. 20x7 and 20x8. c. d. 2008. In addition. During 20x8. 20x7. management of the company decided that.000 at the end of its useful life. the total life of the van would only be 4 years instead of the original estimate of 5 years. assuming the company uses the units-of-production method of amortization and that the van was driven 55. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. purchased a van to transport guests between the resort and a nearby airport. assuming the company uses the straight-line method of amortization.000 and was expected to have a useful life of 5 years or 200.Introductory Financial Accounting. 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. assuming the company uses the doubledeclining-balance method of amortization.000 kilometers during the year. v.000 kilometers. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. Resort Ltd.1 Page 95 Problem 5-2 On January 1. Required – a. management felt that the van could only be sold for $2. b.

20x6 Sep 30. . Recorded amortization expense.000. 20x5 Dec 31. 20x5 Dec 31. Recorded amortization expense. Dec 31. Expenditures totaling $2.000 were made to the equipment.000.1. Recorded amortization expense. 20x3: Jan 2.000 salvage value. v. Routine repairs costing $600 were made to the equipment. Recorded amortization expense. The estimated useful life of the asset is expected to be 5 years with a $10.Introductory Financial Accounting.000. 20x8 Required – Record all of the above transactions assuming that the company uses the straight-line method. The original estimate of salvage value holds. The equipment was completely overhauled at a cost of $20. 20x7 Dec 31. This increased the useful life of the asset by three years. 20x3 Aug 31. Recorded amortization expense. 20x4 Dec 31. 20x3 Purchased equipment for $60. Sold the asset for $25. 20x4 Apr 31.1 Page 96 Problem 5-3 The Connor Company had the following transactions over the life of an asset purchased on January 2. 20x7 Aug 31. This increased the quality of the asset’s output but did not change its useful life or the estimate of salvage value.

ABC Ltd. Prepare the journal entry to record the sale of the machine on January 1. Market value of old asset on June 30. 2. The machine was expected to have a life of 4 years and a salvage value of $3.000. 20x7.1. 20x6. Prepare the journal entry to record the amortization expense on December 31. On January 1.000 to install the machine. 20x7 Required – Prepare the journal entry to record the purchase of the lathe. The following additional information is available: Original cost of the old asset Accumulated amortization at June 30. Required – 1. MNO Co.500 Problem 5-5 On July 1. and the repair cost for it amounted to $500. During the installation there was minor damage to the frame. 20x8. 4. the machine was sold for $20.1 Page 97 Problem 5-4 On June 30. 20x6. bought a state of the art numerically-controlled lathe from GPL by trading in a dissimilar asset and paying $90. which included freight charges of $1. ABC had to spend $2. Show.Introductory Financial Accounting. 20x7. adapted) $ 50.000 cash. (CGA Canada) . 20x6. (CGA Canada. how the machine will be presented in the assets section of the balance sheet at December 31. 20x8.500 108. Prepare the journal entry to record the asset acquisition on July 1.000 cash. 20x7 Price of new lathe. purchased a machine at a cost of $25.000.000 38.000. 3. Assume a straight-line method of amortization. in good form. v.000 15.

000 units 9.000 units b. due to a preventative maintenance system that had been implemented.000 $ 20. Cost Estimated residual value Estimated life Estimated production 20x6 actual production Required a. 20x7. 20x8. Prepare the journal entry to record the sale assuming the company uses the: i) straight-line method ii) units-of-production method $120. In 20x7.000. (b). . On January 1. 20x6. 20x6. the estimates were revised.000 units were produced. v. 20x7. Determine the amortization expense for the year ending December 31. assuming the company uses the: i) straight-line method ii) units-of-production method On January 1. Determine the amortization expense for the year ending December 31.1. on January 1. Use this information to answer parts (a). management felt that the total estimated life of the equipment would be 5 years with a total estimated production of 50.1 Page 98 Problem 5-6 The following information pertains to the equipment acquired by Xie Co. and (c). No change in estimated residual value was anticipated.000 units.000 4 years 40. Accordingly. assuming the company uses the: i) straight-line method ii) units-of-production method c.Introductory Financial Accounting. 12. the equipment was sold for $75.

Prepare the journal entry to record the sale assuming the straight-line method of amortization was used. Otherwise. we get a 2% discount. . for $100. purchased Machine No. Required – a.000 to pay for the machine within the discount period and take advantage of the cash discount.000 cash. 20x3.000 at that time. 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. we have to pay the full invoice price within 30 days.800 The company borrowed $150.1. 20x6. * this means that is we pay within 10 days.000 2/10. 103 on January 2.Introductory Financial Accounting. Compute amortization expense for 20x3 using the straight-line method. Machine No. It incurred interest costs of $12.000 on this loan during 20x3.1 Page 99 Problem 5-7 German Ltd. What amortization method could be used to abide by the president’s request? Is this method acceptable under generally accepted accounting principles? Explain. c.000 $ 14. German intends to use the machine for 8 years and hopes to sell it for $15. 103 has a physical life expectancy of 10 years with a salvage value of zero. Assume that the machine is sold on January 1. income can be minimized in 20x3. However. In this way. v. b. The following information relates to this machine: Invoice price Credit terms* Customs and duty costs Preparation and installation costs $ 140. n/30 $ 5.

the entry would be: Wage Expense (4 days x $1. We have already covered several of these when we did adjusting entries. a company has a fiscal year end of March 31st. For example. assuming the employees worked the full 7 days in the week. $3. a company purchases office supplies from a supplier for $2. whichever is longer.000/day) that were performed in the period but not paid for.000 Note that we are debiting the Wage Expense for $3. 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). and will not be paid again until April 4th. For example. 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 3.1 Page 100 6. Current Liabilities A current liability is one that will be settled within one year or the business cycle of the firm. The principal must be repaid equally over 5 years. it is split appropriately and applied to the correct periods. On April 4th. v.000 to last period and $4.000.000/day) Wages Payable (to remove the adjusting entry) Cash 4. but have not been paid. a company takes out a loan on January 1st for $10.1.000 7. Accounts Payable – these are liabilities that were incurred to purchase goods. which represents the three days of work (3 x $1. $7.000 2.000 to the new period.000 3. Employees were last paid on March 28th. If the average daily wage expense is $1. . Interest and Principal payments are due December 31st of each year. services or supplies for the operation of the company. 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. Typically.000 on account. The entry would be: Office Supplies Accounts Payable 2. however. the adjusting entry made March 31st would be: Wage Expense Wages Payable 3. we will go over the main types of current liabilities.000 with the terms set at 6% interest due annually.000 Wages/Salaries Payable – these are wages/salaries that are due to employees for hours worked.Introductory Financial Accounting.000 This way. when the payment is made for the full week.000/day. For example.000.

000 10.000. The entry to record payroll for the month would be: Wages Expense Employee Withholdings Payable ($27. and pays 1. Not only must the company submit the employee’s portion. but they also must submit the employer portion of CPP and EI.Introductory Financial Accounting. EI.500 + 8.1. Wages total $100.000 600 8.000 8. and that which is due later than one year.000 + 7.000) Cash 100.500. the journal entry would be as follows: Cash Long-term debt 10. This ensures accurate reflection of the financial obligations of the company on the Statement of Financial Position.000.1 Page 101 When the company takes out the loan. and a balance in the Long-Term Liabilities section of $6. $8.000.000 The debt is split into the portion that is due within the year.000 x 6%). The employer matches the employee’s contribution for CPP.500 57. v. we would split the long-term debt as follows: Current liabilities Current portion of long-term debt Long-term liabilities Long-term debt $2. we will now show a balance in the Current Liabilities section of $2.000. a company pays its employees monthly. and the employer ducted the following amounts from its employees’ cheques: Income Taxes. Deductions for each month are due on the 15th day of the following month. For example. At December 31st.4 times the employee deduction for EI. 27. The journal entry would be as follows: Long-term debt Interest Expense Cash 2. the interest expense for the year would be $600 ($10.000 42.000.000 If a Statement of Financial Position were prepared on the January 1. $7.500 . CPP. CPP and EI from employee’s paycheques. Employee Withholdings Payable – Employers are responsible for deducting income taxes.000 On the Statement of Financial Position.

500 x 100%) EI Expense ($8.200 61. v.200 18. but it does not have to be recognized.700) Cash 61. 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.500 + 18. or simply lumped in with Wages Expense.000 400. One of the resulting GAAP rules that stems from this idea of conservatism is the establishment of contingent liabilities. If a company knows that there will be a liability. A contingent loss should be recognized only when: a) it is likely that a future event will confirm the loss. 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. Contingent liabilities are those liabilities which are likely to be incurred in the future. This principle states that. and therefore a loss of some kind to the company. You would record or recognize the FULL amount. For example.000. but have not yet come to be. as done above. and b) the loss can be reasonably estimated.500 11.000 x 1. If a contingency meets the first criteria but not the second.1 Page 102 At the same time. On the 15th of the next month. the company pays the government: Employee Withholdings Payable ($42.000 . your company is being sued for $400. the company would record its portion of payroll expenses due to the government: CPP Expense ($7.40) Employee Withholdings Payable 7.1.200 Contingent Liabilities One of the guiding principles of accounting is the idea of conservatism. The journal entry would be: Unrecognized Loss on lawsuit Contingent Liability – lawsuit 400. The justification is that the financial statements should not be misleading or give false hope or information to any reader.700 Note that CPP Expense and EI Expense could be tracked separately. then it has to be disclosed through a note in the financial statements. then they must disclose it when they know about it.Introductory Financial Accounting.

on average. This principle states that for all revenues generated in a specific period.000. the company pays $10. Continuing on with the same example. we must record the associated expense in the period when the . let’s assume that during the next year. If. The journal entry would be: Warranty Liability Cash/Inventory/Wages 10. your lawyer felt you would win. but you would not have to record the loss or the liability. all expenses related to those revenues should be recorded at the same time. 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. in order to adhere to the matching principle.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.000 to repair various vacuum cleaners that are under warranty. Again.Introductory Financial Accounting.000 This entry not only matches the expense to the period when the revenues were generated. This principle is the one that guides us when making adjusting entries at the end of the year with regards to expenses. such as wages. You would simply write a note in the financial statements disclosing the lawsuit. When a company sells a product that has a warranty. a company sells vacuum cleaners that come with a 2-year warranty. in the same scenario. is 4% of sales. The warranty expense is normally determined through evaluating historical data and coming up with a % of sales that represents the future warranty costs. Total Sales for the year totaled $300. For example. then you do not have to do anything because you do not meet either of the criteria for recording a contingent liability. The company estimates that warranty expense. but it also sets up a liability that will be drawn down as actual expenses are incurred over the life of the warranty.1. that have been incurred but not paid. v. but there was no legal precedent for the amount that would be awarded and therefore are unable to estimate the future loss. your lawyer felt you would lose. in the same scenario. and the fact that you were likely to lose.000 x 4%) Warranty Liability 12. Warranties & Premiums Another of the guiding principles of accounting is the matching principle.1 Page 103 If.000 10. Another example of matching has to do with warranties. The journal entry to record warranty expense for the year would be: Warranty Expense ($300.000 12.

or ten years from now. To record the premium liability at the end of the year. Your sales for the year were $800. for every $10 your customers spend. they receive 1 coupon. Furthermore. the journal entry would be: Premium Expense* Premium Liability * $800. notes payable. v. you are taking on the risk that the money might not be repaid at all. you have determined that only 40% of your customers will redeem their coupons.000 32. These typically include long-term bonds. The farther in the future you are to receive the funds.1.000 coupons x 40% = $32. . the greater the “discount” or decrease in the dollar value will be. one of the most frequently used financing instruments in business. Long-term Liabilities Long-term liabilities are defined as liabilities that would not be reasonably expected to be liquidated within a year. the premium liability account is drawn down. They can then redeem 10 coupons for a watch valued at $10. or a year from now. The format for solutions using a financial calculator is as follows: N 5 I/Y 6 PV X PMT FV 1000 Enter Compute In the above example. pensions and other more complicated longterm liabilities in this section. then you are missing out on the opportunity to invest that money today and earn interest on it.1 Page 104 original sale is made. We will instead focus on long-term bonds.000/$10 = 80. We will not get into a discussion of leases.000 Whenever coupons are redeemed. The combination of these two facts results in a dollar today being worth more than a dollar received in the future. Based on past redemption data. The premise behind this is that a dollar today is not worth the same as a dollar received tomorrow.000 to be received in 5 years from now at an interest rate of 6%. longterm leases and pension obligations. For example. we are trying the calculate the present value of $1.000.000 32. 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. If you are going to be receiving money in the future.Introductory Financial Accounting.

000.542.000 per year for the next 30 years.000. v.47 PMT 60000 FV Enter Compute .000 will you have to set aside in order to set up this annuity? N 30 I/Y 7 PV X= $744.Assume you are going to receive $10. you need to do the following: set the calculator to accept one payment per year as follows: 1 2ND N You only need to do this once. the amount would grow to $1. in this case PV the answer provided is -747.000 from your favorite uncle. This means that if you were to invest $747. If i=7%. what is that $10.472.1. press CPT and the TVM register you are attempting to solve for.Introductory Financial Accounting. 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.000 worth in “today’s dollars”? N 5 I/Y 6 PV 7. how much of the $1. enter the numbers above in the TVM memory registers to solve.000. If the current and expected future rate of return is 6%.26 today (money out of pocket and therefore the negative sign) and invest it for 5 years at 6% compounded annually.An annuity is defined as a series of identical cash flows that end at a specified time.26.000 from your mother 5 years from now.1 Page 105 With the Texas Instruments BA II Plus. You want to be able to withdraw $60. Calculating the Present Value of a Future Single Sum .58 PMT FV 10000 Enter Compute Present Value of an Annuity . Assume you inherit $1.

how much can you withdraw each year? N 25 I/Y 7 PV 675000 PMT X= $57. If the YTM < Coupon Rate. then the bond will sell at a discount. If the YTM > Coupon Rate. Coupon – the amount of semi-annual interest payments to be made on the bond.5 PV 80000 PMT X= $30.Introductory Financial Accounting. What is your monthly payment to the manufacturer going to be? N 3 I/Y 6.000. You expect to live another 25 years.You have retired with $675. and therefore is willing . Assume the rate is 7%. The market takes this into consideration. then the bond will sell at a premium. Also called the market rate.1.206. Coupon Rate – the stated interest rate to be paid on the face value. The manufacturer is offering you financing at a rate of 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%.06 FV Enter Compute Bonds A bond is a financial instrument that is a contractual obligation by a company to pay a stated amount of money at some stated time in the future. For example.992. This is because the buyer of the bond gets a higher return by investing in the bonds. v. as well as make interest payments on the stated amount. if you issue a bond with a coupon rate of 5% and the YTM is 6%.5% on a 36-month loan. 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).1 Page 106 Annuity Payment Calculation . It is rare that the yield-to-maturity rate and coupon rate are the same. Coupon rate = Annual Coupon Payments/Face value Yield-to-maturity (YTM) – the rate of return that bondholders expect on the bond given its risk.000 in the bank. and the bonds will sell for a value less than the face value of the bond. 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.10 FV Enter Compute Your company is purchasing a piece of equipment costing $80.

000 coupon payment.000 x 5.451.8% x = $58. This is less than the face value of $2.On January 1. we have to sell our bonds at a discount. 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.451 . not the number of years.829.829.000 to cover our coupon obligation. We have already calculated that we will be writing a cheque for $58.000.451 PMT 580002 FV 2000000 Enter Compute 1 2 YTM of 7% / 2 = 3. therefore it will have to be cut in to reflect the situation.8% and they mature in 10 years. we must adjust the other factors in the formula to a “6-month” basis. However. 1. To calculate the value of a bond at any point in time: N = Number of periods left until maturity I = YTM or Market Interest Rate (note that the YTM needs to be divided by two since the coupon payments are made semi-annually) PMT = the semi annual coupon Payment FV = the Face Value of the bond Solve for PV It is important to remember that bonds pay coupon payments semi-annually. How much would be raised through this bond issuance? N 20 I/Y 3.Introductory Financial Accounting.829. N will equal the number of coupon payments left. or the amount that we would have received in proceeds would be equal to $1.51 PV X= $1. As such. this $58.1 Page 107 to pay more than face value for the bonds in order to reap this benefit.1.829.000 is not our interest expense. 20x8 you issue $2.000 of bonds.8% is less than the market rate of 7%.000. This is because our coupon rate of 5. the YTM is normally expressed as an annual rate. In order to attract investors. Interest will be paid semiannually on June 30 and December 31. YTM = 7%. The Present Value of the bonds. v.000. because PMT is equal to the payment made every six months. Furthermore. Example . every 6 months. The PMT & FV remain the same.5% $2.000.451 1. The Coupon Rate = 5.

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 entry for interest expense would be: Interest Expense (1. At the time of settlement.Introductory Financial Accounting. This will be the amount used to calculate the interest expense on December 31st. on June 30th.1 Page 108 The interest expense for a given period of time is calculated by multiplying the carrying value of the bonds for the period times the market interest rate or YTM.451 + 6.000.1.301 credit to Bonds Payable increases the carrying value of the bond payable account to (1. therefore.031 58. Continuing our example. you would record the following journal entry: Interest Expense (1.000. v. give or a take a few dollars for rounding.000. On December 31st.835.000 .835.301) $1.000 2.482.242 58.000 After all 20 interest payments have been made.482 x 7% x Bonds Payable Cash ) 64.242 6.000.000 Note that the $6.829.031 6.451 x 7% x Bonds Payable Cash ) 64. the balance in the Bonds Payable account will have been written up to $2.829. the journal entry will be: Bonds Payable Cash 2.

Gallaghar Ltd.Introductory Financial Accounting. Which of the following statements is correct? i) The bond was issued at a premium ii) The interest expense for the year will be more than $800. v. 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 iv) The bond was issued at a discount a) b) c) d) iv) only i) and iii) i) and ii) ii) and iv) .1. 10 year 8% bonds priced to yield 6%.1 Page 109 Problems with Solutions Problem 6-1 – Multiple Choice Questions 1.000 iii) The interest expense for the year will be less than $800. Issued $10 million face value. On January 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.

a company inaugurated a sales promotional campaign on June 30. Each premium costs the company $2. 20x8. even though the amount of the loss cannot be reasonably estimated 5.1 Page 110 4. How should any liability for the warranty be reported? a) It should be reported as a long-term liability. the following information is available: Packages Sold Premiums Purchased Coupons Redeemed 150.400 d) $18. 20x8.600 c) $9. whereby it placed a coupon in each package of product sold. c) It should be reported as part current liability and part long-term liability.500 What is the estimated liability for premium claims outstanding at December 31. Assume that a manufacturing corporation has (1) good quality control. 20x8? a) $4.300 b) $8. 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. (3) a relatively stable pattern of annual sales.000 e) $20.000 23. the coupons being redeemable for a premium. In an effort to increase sales. 6.000 . 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.Introductory Financial Accounting. For the 6 months ended December 31.00 and 5 coupons must be presented by a customer to receive a premium.1. The company estimated that only 30% of the coupons issued would be redeemed. b) It should be reported as a current liability. (2) a oneyear operating cycle.000 10. When should a contingent liability be accrued? a) When it is certain that funds are available to settle the disputed amount b) When an asset may have been impaired c) When the amount of the loss can be reasonably estimated. d) It need not be disclosed. v.

Sales for the current year were $3. then receive 1 coupon.Introductory Financial Accounting.1. The warranty liability at the beginning of the year was $165. and data shows that approximately 55% of your customers redeem their coupons.000 22. Required – Prepare all journal entries related to the warranty for the current year.000 40.000. In order to increase customer loyalty in this fiercely competitive environment you have started a coupon program.000 and actual costs incurred to service warranties during the year amounted to $130.500 coupons Problem 6-3 Company X provides a 3-year warranty on all of the products it sells. What is the balance in the warranty liability account at the end of the year? . The following data relate to the past year: Sales Premium Liability Account – Opening Balance Coupons Actually Redeemed during the year Required – What would be the journal entries to record the premium expense and the actual premium costs incurred? $375.000 and it is estimated that the warranty expense is equal to 5% of sales. They can redeem 15 coupons for a $25 iTunes gift card. v. For each $10 your customers spend.1 Page 111 Problem 6-2 You run a computer repair company.000. You have been running this program for several years.

1 Page 112 Problem 6-4 On July 1. what was the estimated liability for future warranties? (CGA Canada) . 20x1. Problem 6-5 The Kaplan Corporation issued $10. 20x1 and the first two interest payments. 20x6.000 Opening balance Total credits during the year Required – 1. v.Introductory Financial Accounting.200 5.000 of 8. The yield to maturity on December 31 was 8%. what is the estimated liability for future warranties? At December 31. Problem 6-6 The following is the general ledger account for estimated warranties of McNeil and Grace Ltd.000 and a coupon rate of 10%. The company issues warranty agreements immediately upon the sale of an automobile. 20x1 is 8%..800 Total debits during the year $6.000. The bonds mature in 15 years. 4. 2. Assume that the going market interest rate for similar bonds on July 1. Warranty Liability Dr Cr $10. Required – Prepare the journal entries to record the issue of the bonds on July 1. 20x4.5% coupon bonds on December 31. What is the dollar value of warranty repairs performed in 20x7? What is the warranty expense for the year 20x7? At December 31. automobile dealers. Required – Prepare all journal entries with regards to this bond for the years 20x4 and 20x5. Coupon payment dates are June 30 and Dec 31 of every year. The bonds pay interest semi-annually on December 31 and June 30 and are due in five years. Gamma Corporation issued bonds with a face value of $500. for the year 20x7. 20x7. 3. Assume that the Kaplan Corporation as a December 31 year end.1.

d. 8% bonds. Required Prepare all journal entries for the life of this bond issue.171. 20x6. Prepare the journal entry(ies) to record interest expense and coupon payment on June 30. Prepare the journal entry to record the issue of the bonds at July 1.000 face value. Interest on the bonds is paid semi-annually on December 31 and June 30.Introductory Financial Accounting.591. Prepare the journal entry(ies) to record interest expense for the period ending December 31. 3. and pays interest on July 1 and January 1. three-year. as the market rate was 10%. a. 9% bonds on January 1. The bonds were sold at a yield of 8%. The cash outflow towards interest on the bonds will be more than $80. c.591 was calculated. face value.000. issued $1 million semi-annual. Required If Adrdalan and Baker Inc. 20x6. The bonds were issued at a discount for $897. Alpha Beta Ltd. 4. 20x6. The Interest Expense for the 1997 year will be more than $80. 20x7. (CGA Canada adapted) Problem 6-9 On January 1.000. uses the effective interest method to calculate interest expense on these bonds. They were issued at a price of $1. 20x7. issued $1 million face value.000. The Interest Expense will be the same every year. GHI’s year end is December 31. v. The Interest Expense for the 1997 year will be less than $100. indicate whether each of the following statements would be true or false. 10-year.171. (CGA Canada adapted) . 20 year. Ardalan and Baker Inc. 2. b. to yield 10%. Required – 1. 12% coupon bonds. 20x6.1 Page 113 Problem 6-7 GHI Company issued $500.000. Show how the $1. (CGA Adapted) Problem 6-8 On July 1.1.

then the journal entry would be: Cash Common shares $100. any cash remaining after all obligations have been settled revert back to common shareholders. . The corporation is under no obligation to provide a financial return to common shareholders.1. then the debit required to balance the journal entry is allocated as follows: • if there is any Contributed Surplus relative to common shares.000 cash.Introductory Financial Accounting. and • they are a perpetuity.000 If common shares are issued in exchange for a parcel of land whose fair market value is $250. and then re-sell them).000 $100. any dividend declarations are at the sole discretion of the company’s board of directors. a company cannot purchase its own common shares. If the book value per share is less than the cash paid out to retire the shares. The debit to the common shares account is equal to the weighted average book value per share times the number of shares retired. meaning they never become due. Common shares can be issued for cash or any other asset. Dividends become a liability of the corporation only when the board of directors declares them.000. it can be drawn down.1 Page 114 7.e. Common Shares Common shares typically have the following features: • they provide the right to vote at annual meetings. Shareholders’ Equity is fundamentally made up of two elements: contributed capital and retained earnings. Shareholder investments will result in the company issuing shares to the investors – these shares can take the form of preferred shares or common shares. • upon liquidation of the company. that is. v. hold them. we credit an account called Contributed Surplus for the difference. the journal entry would be: Land Common shares $250. Contributed capital comprises of the investment made in the corporation by its shareholders. Shareholders’ Equity As mentioned in Chapter 1.000 When common shares are repurchased. if common shares are issued for $100. For example.000 $250. Retained earnings represent the cumulative earnings of the corporation less any dividend distributions to its shareholders. the shares must be cancelled (i. If the book value per share is greater than the cash paid out to retire the shares.

Introductory Financial Accounting.000 Mar 18 Apr 30 Balance in common share account: = $15.000 Number of common shares outstanding: = 1. 1.150.000.100 280.000. Example – The Noor Company’s shareholders’ equity section at December 31.000.000 Jun 16 Cash Common shares Common shares (10.000.000 = $16.500.000 Issued 250.000 + 2.1 Page 115 • any remainder gets debited to Retained Earnings.000 x $18.800 61.500.000.000 common shares in exchange for land valued at $1.800 260.1.000 shares outstanding Retained earnings The following transactions took place during the year: Jan 15 Mar 18 Apr 30 Jun 16 Aug 18 Issued 100.000.091) Contributed surplus Cash 1 $2.500.000 1.000 common shares at a total cost of $280.000 = 1.500.000 Book Value per common share: = $18. 20x6 was as follows: Common shares.000 cash Retired 10.000 / 1.000.000 Retired 20.800 32.500.000 186.000 x $16.500.000 321.612) Contributed surplus Retained earnings Cash Aug 18 .000 + 1.000 + 50.500.000 1.500.100 61.000.000 The journal entries to record the above transactions are as follows: Jan 15 Cash Common shares Land Common shares Common shares (20. v.000.000 12.000 cash Issued 50.000 common shares for $7.150.000 $15.09 7.000 = $18.000 common shares for $2.000 + 100.000 $2.500.000 common shares at a total cost of $260.000 7.

20x6 and management wants to pay a dividend of $5 per common shares. $8. the preferred dividends for the year 20x6 must be paid: 100. v.000 = 1. Example – The Jarvis Corporation’s shareholders’ equity as at December 31.500.1 Page 116 2 Balance in common share account: = $18. However.00 x 2 years = $1. any dividend declarations are at the sole discretion of the company’s board of directors.678.000.00. any dividends in arrears due to preferred shareholders must be paid before any dividends can be paid to common shareholders.000 = $25.380. • like common shares. 20x5 is as follows: Common shares.600.000 Book Value per common share: = $25. 100.000 = $18.200/ 1. they are a perpetuity. Dividends become a liability of the corporation only when the board of directors declares them.000 shares outstanding Preferred shares.500.00 x 1 year = $800.000 – 20.000 + 250.150.000 – 321. This means that if dividends are missed.000 shares x $8. 1.61 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: 100.000.Introductory Financial Accounting.000 .800 + 7.000 Next. • they carry a stated dividend per share.000 The preferred share dividends were last paid on December 31.000.000 40. Like common shares. the corporation is under no obligation to provide a financial return to common shareholders. First.000 10. in most cases preferred shares are cumulative.1.000 shares x $8.000. It is now December 1.000 shares outstanding Retained earnings $35. cumulative.380.678.200 Number of common shares outstanding: = 1. that is. 20x3.

a 2:1 split means that the number of shares outstanding will double. . This will result in the share price dropping by half.000. the stock may become unattractive to small shareholders who have to disburse larger sums in order to acquire shares of the corporation. the company will split the stock.400. Any premiums paid on retirement of shares are also charged to retained earnings.000 The total dividend to be declared will be: $1. the dividend to common shareholders can be paid: 1.000 shares of shares before the split.000.000 shares as a result of the stock split resulting in a total of 2. If a shareholder owns 1.000 + 5. All that happens is that the number of shares issued changes.000 shares x $5 = $5.000 Stock Splits When the stock price of a corporation is high.000 shares.000. For example.000 + 800.Introductory Financial Accounting. 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.600.000 = $7. v. 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. In order to reduce the share price.1. this same shareholder will receive an additional 1.

Introductory Financial Accounting.1 Page 118 The statement of retained earnings is as follows: Retained earnings. end of year $ XXX -XXX ±XXX -XXX $ XXX .1. beginning of year Premium on redemption of shares Net income (loss) for the year Dividends Retained earnings. v.

000.1 Page 119 Problems with Solutions Problem 7-1 – Multiple Choice Questions 1. The shares were selling at $30 each when management announced a three-for-two stock split. v.000.1. b) Shareholders’ equity will increase by $3. .Introductory Financial Accounting.000.500. c) The number of common shares outstanding will be 225.000 common shares outstanding. d) The number of common shares outstanding will be 250.000.000. Which of the following statements will be true when the stock split is accounted for? a) Retained earnings will be reduced by $4. XYZ Corporation has 150.

000 common shares.000 common shares for cash of $12.000 $6 non-cumulative preferred shares and 100.1 Page 120 Problem 7-2 The articles of incorporation authorize Hilary and Sam Corporation. 2. Issued 2. v.000 common shares to Hilary and 12.Introductory Financial Accounting. Net income for the month was $56.000.000. a new company. In its first month.000 shares to Sam in return for cash equal to the shares’ market value of $6 per share. Required 1. Issued 400 preferred shares to acquire a patent with a market value of $40. to issue 10.1. Declared cash dividends on the common shares in the amount of $0. balance sheet as at February 28.32 per share. Declared cash dividends on the preferred shares.000 . Record the transactions in journal entry form. Declared a 2 for 1 stock split. Prepare the shareholders’ equity section of the Payne and Papineau Inc. Hilary and Sam Corporation completed the following transactions: February 2 February 10 February 15 February 26 February 27 February 28 Issued 9.

000 preferred shares in exchange for equipment. Required 1.500 common shares at $120 each. Declared a cash dividend on preferred shares.000 were converted into 500 common shares. f. . Provide the journal entries for each transaction above.000 common shares at $115 per share. Paid the preferred dividend.000 common shares and 50. Issued 1. Issued 1.000. The equipment had a fair market value of $40.1.000 preferred shares at $20 each.000 for the year. v. Declared and paid a $5. Net income was $64.Introductory Financial Accounting. The convertible bonds were issued earlier in the year. c. cumulative preferred shares. During the first year of operations the following events occurred: a. Convertible bonds with a face value of $50.000 and book value of $53. Issued 1.00. e. Issued 2. is authorized to issue 100. 2. g.1 Page 121 Problem 7-3 M-F Inc.000. d. b.00 common share dividend h. $1. Prepare the shareholders’ equity section of the Statement of Financial Position.

1. There is no new material. just the integration of previously covered materials.1 Page 122 8.Introductory Financial Accounting. Enjoy! . The Accounting Cycle Revisited The purpose of this chapter is to bring all of the accounting issues discussed in the previous chapters together in the form of integrative problems. the only materials in this chapter are the problems with solutions. Therefore. v.

The face value of the bonds is $400. 7. The patent remaining useful life at December 31.400 Additional information 1. The bonds were issued on January 2. 6.Introductory Financial Accounting. Coupon payment dates are on June 30 and Dec 31. 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 $36.000.400 40.5% of sales. 20x5 is 8 years. The company provides a one year warranty on its products.600 150. The average useful life of equipment is 10 years. the coupon rate is 6.000 300.600 12.000 5. 20x20.000 144.400 Cr. Warranty expense is estimated at 1. .000 145.1 Page 123 Problem 8-1 The Haider Corporation’s post-closing trial balance at December 31.000 38. 20x1.052.000 13. The bonds mature on December 31.000 419.000 shares of common stock outstanding.000 $23. 20x6. 4.000 34. 20x5 was as follows: Dr. 3. The equipment is being amortized using the double declining balance method.000 120. v.5% and the yield to maturity at the time the bonds were issued was 6%.200 $1.000 127. The company uses a FIFO periodic inventory system. The building is being amortized on a straight-line basis over 40 years. 2. 5.052.000 176. The prepaid insurance is for a one year policy taken out in 20x5 that expires on March 1. $1.000 1. 8.000 320. There are 10.1.

000 26. On March15. 13. The aggregate net realizable value of the inventory was determined to be $365.000 40. 21.000 25. Estimated % Uncollectible 3% 7% 20% 50% An adjustment is made for insurance expense.1. Inventory costing $16.000 common shares were issued for $75. 11. equipment and patents. 9.000 23.000.400 130. v.000. 14 15.000 was returned to suppliers.000.000.520.000 18.000. 5. an additional 3.000 320.000 2.1 Page 124 The following transactions took place during the year: 1. 2. Accounts written off totaled $34. 12.000.000 common shares on Aug 23 Insurance policy taken out on March 1 – one year policy. The warranty expense for the year is accrued. Inventory purchased on account totaled $960.000.000 12.Introductory Financial Accounting.000 $222. The inventory was counted on December 31. 4.000 30. Operating expenses paid $945.600.000 22.000 The following adjustments need to be made at year-end: 17. Total sales on account were $1. The accounts receivable aging schedule is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $144. 16. Cash disbursements were as follows: 8.000 43. 10. 6. Recoveries of previously written off accounts receivable totaled $5. 7. 19. . 20. Amortization expense on the building. 3.000. 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. Cash collections on accounts receivable totaled $1. 20x6 and the total cost of the inventory was determined to be $378.

1 Page 125 22. 24.1. The income tax expense is 40%.000 were declared and paid on December 15. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . Prepare journal entries for the above transactions and enter all the above transactions in T-Accounts.700. 20x6 amount to $6. c. Salaries payable at December 31. 23. b. Required – a. 20x6. Dividends of $80.Introductory Financial Accounting. v.

200 was on hand. September 1. which cost $80. amounting to $9. 20x6. 20x5. amounting to $9. $4.000. at a cost of $11. e. The company paid a two-year insurance premium in advance on April 1.000. which was debited to prepaid insurance. i. the company signed a $60. During the year. It had to pay the full amount of rent one year in advance on June 1. the principal plus the interest is payable one year later.600.800. The company rented a warehouse on June 1. .000 units of a product that was subject to a warranty. costs incurred for the warranty to date. and sales revenue was credited on the date of sale. The company received from a customer a 9% note with a face amount of $12. Past history indicates that 3% of units sold require repairs at an average cost of $40 per unit. The estimated useful life is 10 years. The note was dated September 1. Use straight-line amortization. i.000. 20x5. No warranty expense has been recognized. On that date.000.600. which was debited to rent expense. f. Pacific Corporation had a supplies inventory of $4.500. v. The sales have been recorded. The company purchased a patent on January 1.900.1 Page 126 Problem 8-2 Pacific Company adjusts and closes its books each December 31. At the end of the year. The estimated loss rate on bad debts is 3% of sales. Credit sales for the year amounted to $320. inventory of $9. d. c. and the residual value.1. Unpaid and unrecorded wages incurred at December 31 amounted to $4. 20x5. supplies of $21. The note is payable on March 31.000. During the year. 10% note payable.000. the patent account was debited and cash credited for $11. you do not need to provide the original entry): a. for one year. and the adjusting entries are to be made.Introductory Financial Accounting. were debited to warranty liability when paid. 20x5. Machine A. pacific Company sold 10.700. j. On January 1. You are requested to prepare the adjusting entry that should be made for each of the following items (note that the original entries have been made. cash was debited and notes payable credited for $60. On April 1. It is now December 31. totalling $8.900 were purchased and debited to supplies expense. 20x5. h. for the face amount plus interest for one year. 20x5. b. Notes receivable was debited.900. On that date. is to be depreciated for the full year. 20x5.e. The patent has an estimated useful life of 17 years and no residual value. g.

Introductory Financial Accounting.1.000 after all the above adjustments.1 Page 127 k. l. v. Pre-tax income has been computed to be $80. .000 bad debt. ABC Corporation wrote off a $16. Assume an average income tax rate of 30%.

Baking materials Rent Salaries and wages Maintenance Utilities Insurance premium Equipment Principal and interest payment on bank loan Advertising $14.400 1. Spier incorporated this business as MAS Inc. Spier assembled the following information from the corporation's cash basis records for use in preparing the financial statements requested by the bank.770 130 5.320 2. She started a baking business in her home and has been operating in a rented building with a storefront.500. 20x2.920 3. v. 1.000 1.880 $33.000 312 424 $31. Kelowna Bank & Trust has asked Spier to submit an income statement for MAS Inc. with an initial shares issue of 1.500 110 4.600 2.1. Spier wishes to purchase some additional baking equipment and to finance the equipment through a long-term note from a commercial bank.466 . Anne Spier is the principal shareholder of MAS Inc.000 shares of common share for $2. Sale of common shares Cash sales Rebates from purchases Collections on credit sales Bank loan proceeds $ 2.500 22. for the first five months of 20x2 and a balance sheet as of May 31.Introductory Financial Accounting. The following amounts were disbursed through May 31.1 Page 128 Problem 8-3 Anne Spier has prepared baked goods for resale for several years now. The bank statement showed the following 20x2 deposits through May 3l. Sales have increased 30%. annually since operations began at the present location. 20x2. 20x2. on January 1.800 5. and additional equipment is needed to accommodate expected continued growth.

20x2.: (a) An income statement for the five months ended May 31. 20x2 MAS Inc. 6. and states a simple interest rate of 10%. Unpaid invoices at May 31. Anne Spier receives a salary of $750 on the last day of each month. October 1. prepare for MAS Inc. 9. were as follows. The other employees had been paid through Friday. 7. 20x2 (b) A balance sheet as of May 31. The note evidencing the 3-year bank loan is dated January 1. 20x2. and were due an additional $240 on May 31.1 Page 129 3. and January 1 consisting of equal principal payments plus accrued interest since the last payment. Rent was paid for six months in advance on January 2. No materials were on hand or in process and no finished goods were on hand at January 1. The loan requires quarterly payments on April 1. Payments and collections pertaining to the unincorporated business through December 31. 20x2. 5. and no cash was transferred from the unincorporated business to the corporation. 8. New display cases and equipment costing $3. July 1. Customer records showed uncollected sales of $4.1. and have an estimated useful life of five years.Introductory Financial Accounting. 20x2. 20x2. 20x2. . v. There were no materials in process or finished goods on hand at that date. 20x2.000 were purchased on January 2. 20x2. 20x2. Baking materials Utilities $ 256 270 $ 526 4. is subject to an income tax rate of 20%. A one-year insurance policy was purchased on January 2. 12. Required Using the accrual basis of accounting. 20x1 were not included in the corporation's records. 11. 20x2. These are the only fixed assets currently used in the business. Baking materials costing $1. Straight line amortization is to be used for book purposes. May 25.226 at May 31. 10.840 were on hand at May 31.

Introductory Financial Accounting. In 20x2 Morrow began selling on a cash-only basis. Receivables at the beginning of 20x2 totalled $ 155. $20.000 5.1.000 5. During the fourth quarter of 20x2. you have been presented with the following information: a) Morrow is incorporated and initially sold 11. sales salaries of $1.000. v.600 have accrued but have not been paid. 20x2. payable annually Customer collections Proceeds on sale of fully depreciated equipment (original cost.000 5.500 c) d) e) f) g) h) i) j) Morrow had no outstanding payables at the beginning of 20x2 but owes creditors $36. December 31. and a balance sheet at December 31. was on hand.500 $205.000 10. As the senior auditor in charge of the audit.000. All equipment is depreciated on a straight-line basis over ten years with no estimated salvage value. During 20x2 these shares were exchanged for land and a gain of $4. equipment with a cost and accumulated depreciation of $80. Morrow's cost of goods sold is 80 percent of sales.20x1 Deposits during 20x2: Cash sales Proceeds of $5. Morrow's only other asset at the beginning of 20x2 was an investment in Honeydew common shares. The inventory at the beginning of 20x2 was $80. There have been no other common share transactions. At the end of 20x2. 20x2.000 of its common shares for $25 per share. At the beginning of 20x2.000.000 $250.000 for unpaid purchases of merchandise on December 31. a cash dividend of $10.000 and $20. respectively. . The sale of equipment was made on December 30.000 $180.1 Page 130 Problem 8-4 Morrow Wholesale has kept limited records and has never had an audit until 20x2. for Morrow Wholesale.000. The uncollected receivables were written off as miscellaneous expenses in 20x2.000 was declared and is to be paid in January 20x3. b) Cash balance in cheque book. 20x2. Prepare an income statement for the year ended December 31. 20x2.000 10.000 note issued on July 1 and bearing interest at 12%.000 was recognized.000 146. Retained earnings at the beginning of 20x2 totalled $63.000 $406. The income tax rate is 30 percent.000) Cheques written during 20x2: Purchases of merchandise Salaries Advertising (to be run in 20x3) Miscellaneous expenses $ 24.

then this uses cash. If a company issues new shares. if a company pays off or retires debt this uses cash. GAAP suggests a preference for the direct method.000 450. If a company issues new debt. This statement is broken into three distinct sections.000 were declared and paid to shareholders during the year. v. and shows how a company’s actions have affected its net cash position throughout the period. this generates cash. 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.1 Page 131 9. If a company pays dividends. is based on the accrual system. either the direct or indirect methods can be used. Some students find the statement of cash flow to be a challenge because they are still thinking with an “accrual” mind.000 650.000 150. . 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. If a company retires shares.000 180.000 300.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. this uses cash Example . Most of what we do. however.000 Additional information: Dividends of $150. this generates cash. The Statement of Cash Flow The statement of cash flow shows a company’s inflows and outflows of cash during a particular period. There are two distinct methods in presenting cash flow from operations: the direct and the indirect method. your main concern is incoming and outgoing cash.Introductory Financial Accounting.000 215. Try to keep in mind that when you are working with this statement. as accountants.000 20x7 $ 250.1.

Remember. we have to reconcile the long-term asset accounts.000 (60.000) 200.000 + dividends of $150.1.000 To calculate the company’s net income for 20x8. the net income for the year is $85.000 + Net Income .000 (30. and changes in them from one period to the next.000 (10. The difference between the proceeds. we know all numbers in this formula except Net Income.000) 0 .000) 100. we analyze at the Retained Earnings Account: Opening Retained Earnings + Net Income .000 (150. Given that dividends decrease retained earnings.000 Net Income = $235.$150.000.Dividends = Closing Retained Earnings In the above case.000) $ 170. $215.1 Page 132 The cash flow from financing can be calculated as follows: Proceeds on issuance of bonds payable Cash paid to reduce mortgage payable Proceeds on issuance of common shares Cash dividends paid $ 150.000 20x7 $ 300.000.000 = $300. we remove the asset and all associated accumulated amortization. or cash we receive. when dealing with this section. 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. we can calculate the Net Income. Often.Introductory Financial Accounting.000 Alternatively.000 = $235. v.000) 100. Cash flow from Investing Activities – this section discloses cash that was generated or used through the sale or purchase of long-term assets. and the NBV (cost – accumulated amortization) is recorded as a gain/loss on sale. Rearranging the formula. we know that retained earnings increased by a net of $85.000 (180.000 (170.000) 75. when a sale of a long-term asset is made.

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. and essentially takes each income statement item and converts it into cash.000) * The cost of the fixtures was $75. it does not appear in this section.000 giving a net book value of $15. All non-cash transactions are by definition excluded from the statement of cash flow. were sold at a gain of $10. If the gain on sale was $10.000 + 10. income taxes payable and dividends payable) Cash paid for Interest (Interest Expense ± changes in interest payable) Cash paid for Income Taxes (Income Tax Expense ± changes in income taxes payable) . v. • new fixtures were purchased for $100.1.000) 25. Cash Flow from Operations – Direct Method This method of determining cash flow from operations uses the income statement as its starting point.000.Introductory Financial Accounting. then the cash proceeds on the sale of fixtures would have to be $15.000 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 ($50.000 with a NBV of $15.000 (100.000. • the land was obtained through issuing $100. • the original fixtures. costing $75.000.000 cash.000 worth of equipment was purchased for cash during the year.000.000 = $25. Note that because no cash exchanged hands for the purchase of the land.000.1 Page 133 Additional Information: • $50.000) ($125.000 worth of common shares to the supplier. There are a minimum of four main sub-sections in determining the cash flow from operations (note that these are a minimum. excluding interest payable.

000 $172.000 200.000 80.000 14.1 Page 134 Example – Calculate cash flow from operations – direct method.000 120. 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 12.000 104.000 68.000 1.000 82.000 46.000) $172.000 21.000 (25.000 2.Introductory Financial Accounting.000 21.000 50.000 10. Income Statement For the Year ended December 31. Comparative Unclassified Statement of Financial Position As at December 31.000 104.000 $135.000 429.000 2.000 73. 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.000 231.000 325.000 62.000 82.000 (20.000 3.400 .000 10.000 89.000 15.000 $660.000 39.000 27.000 24.1.000 20x6 $42. v.600 $ 67. Jack’s Joke Shop Inc.000 8.000 5.000 23.000) 135.000 5.

1. 20x7. 20x6 and the balance at December 31.000 increase in Accounts Receivable. . and office & administrative salaries. In this case.000 235.000 Note that the starting point for each calculation is the following expense items: cost of goods sold. the amount of our Inventory account increased by $2. Conversely. The first thing we do is adjust it to obtain the purchases made during the period. Note also that although we combined all three expense items in one single calculation. Cash paid to suppliers & for operating expenses: Cost of goods sold Plus increase in inventory Plus Decrease in accounts payable Salaries expense Less increase in salaries payable Office & Administration Expenses $200.000 198.000 (2.000. We are not told what percentage of the total sales are made for cash.000 Why did we subtract the $6. If accounts receivable increased.000) $231.000 120.000) $654. waiting to be sold. These comprise all of the expense items on the statement of financial position with the exception of amortization expense. therefore we reduce sales to calculate cash collected from customers. if accounts receivable decreased. Therefore. However. then we collected more than we accrued and this would be added to sales. nor are we told how much of the 20x6 accounts receivable balance have been collected.000 (6. we can simply analyze the difference.000 2. This means that we purchased additional inventory that is now sitting in our warehouse.Introductory Financial Accounting. which is a non-cash item and interest and income tax expense which will be dealt with separately. then this means that sales have not yet been collected – that is. v. we accrued more sales than we collected. 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.000 $553.000 2. salaries expense.1 Page 135 Cash collected from customers: Sales Less increase in accounts receivable $660. because we are told the balance at December 31. and which are made on credit.

Any increase in liabilities.000. as in the case of Office & Administration Expenses above.000 increase to COGS. . are treated in the manner that the Salaries Expense was treated above. Purchases for the year in this case would be $233. In dealing with the change in accounts payable.600 (12. and any decrease in liabilities is added.000 ($231. we will subtract the $12. inventory decreased.000 from our Interest Tax Expense to get the total cash paid for taxes. on the other hand. interest payable went up which means that we accrued more interest than we paid.Introductory Financial Accounting. any increase in the Income Tax Payable account would be subtracted from the expense to get to the total cash paid. if the Accounts Payable account decreases. v. That is. If. Note. and any decrease would be added.000 In this case. then this means that we would have purchased less than what was sold and we would have decreased COGS in order to obtain purchases. All other expenses. This is why we add back the $2.000) $9. like it did in the above example. Therefore.000) $14. Cash paid for taxes: Income tax expense Less increase in income taxes payable $21. we owe $12. other than interest and taxes. That is. so we deduce the increase in interest payable to interest expense. then we have paid more to our suppliers than the purchases. should the opposite have occurred.1.000). you start with the Income Statement amount and then account for any changes in the associated statement of financial position account(s). there appears to be no associated statement of financial position account. we would have subtracted the amount from COGS to get total money paid to suppliers.600 The treatment for taxes is the same as for interest.000 more this December 31st than we did last. Cash paid for interest: Interest expense Less increase in interest payable $15. Again. is subtracted from the expense to get to the total cash paid.000 (1. If there is no such account.1 Page 136 to calculate purchases. then you simply include the full expense amount as the cash paid for that expense.000 + 2. like salaries payable. In this example. we have to add the $2.

Increases (decreases) in current liabilities are cash inflows (outflows).Net Income. We then add or subtract any changes in the non-cash current asset and liability accounts.000) (9.1. Increases (decreases) in current assets are cash outflows (inflows.000) (2.400 Cash from Operations – Indirect Method Under the Indirect Method. We then add back any non-cash items that may appear on the income statement. we start with the bottom line . inventory.000 $77. v.000 (553.000 1. The most common of these are amortization expense and gains/losses on the sale of capital assets.400 5.Introductory Financial Accounting.1 Page 137 To sum up: Cash flow from operations Cash collected from customers Cash paid to suppliers & for operating expenses Cash paid for interest Cash paid for taxes $654.000) (14.000) (2.400 .600) $ 77.000) 2. This would include changes in accounts receivable.000 (6.000 12. 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. as well as all current payable accounts.

Introductory Financial Accounting.000 = 66. 20x7 30.000 Definition of Cash For purposes of the statement of cash flow.000 + 67.000) (66. 20x6 Ending Cash Balance – December 31. let’s finish with the cash flow statement. This includes cash.e. . v.1.400) Opening Cash Balance – December 31. readily convertible to cash) subject to an insignificant risk of change in value. the term ‘cash’ is defined as ‘cash and cash equivalents’.000 42.400) 34.400) Net Change in Cash ($77. term deposits and any highly liquid assets (i.400) (43.1 Page 138 To continue the example.000 $ 76. 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 – 24.400 + 0 – 43.000 (7.

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. Income Statement for the Year ended December 31.000 7.Introductory Financial Accounting. v.000 $750.000 300.000 243.000 120.000 79.000 80.1.000 (17.000) 15. Ginger’s Cookies Ltd.000 450. 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 (32.100 $146.000 207.900 .000) 226.

400 6.000) $275.Introductory Financial Accounting.400 158.500 $ 19.000 10.1.500 50.000 111. 20x6.000 125.400 $275.000 61. costing $45.000 7.000 43. Prepare a Statement of Cash Flow using the Direct Method.000 45.200 20x5 Additional Information: on January 2. the only piece of equipment. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.200 $ 20.000 (7.000 0 33. .000 108. was replaced by a new piece of machinery costing $125. 20x6 20x6 ASSETS Cash Accounts Receivable Inventory Capital assets Less Accumulated amortization LIABILITIES Accounts Payable Salaries Payable Interest Payable Taxes Payable Bonds Payable SHAREHOLDERS’ EQUITY Common Stock Retained Earnings 50.000 117.200 $ 27.000 40.1 Page 140 Ginger’s Cookies Ltd.200 80.000 (40.000) $144.100 $ 14. Required – a.000 10. b.000.000 $144.500 90. Comparative Unclassified Statement of Financial Position as at December 31.800 2. Ginger’s paid cash for the equipment.000 47.100 30.000. v.

000 5.842.1.000 850.000 32.000 28.000 43.212.000 800.041.000 1.060.000 3.695.000 999.000 888.000 1.000 1.019.Introductory Financial Accounting.093.060.000 5.000 $ 4.000 $ 4.000 82.500.000 1.000 119.000) 1.000 2.091.000) 1.358.000 35.000 45.000 2.000 $ 4.000 2.000 1.000 (3.000 20x2 $ 353.869.000 Capital assets Accumulated amortization Bonds payable Mortgage payable Shareholders’ equity Common shares Retained earnings .711.212.000 1.000 319.000 700.326.1 Page 141 Problem 9-2 The comparative statements of financial position of McDuff Ltd.631.000 $ 909.429.000 $ 4.000 30.000 (3.000 1.854.000 508.000 1.054.000 Current liabilities Accounts payable Salaries and wages payable Interest payable Income taxes payable $ 897.343.000. v. MCDUFF LTD. Statement of Financial Position December 31 20x3 Current assets Cash Accounts receivable Merchandise inventory Prepaid expenses $ 319.045. are shown below.000 450.

20x3. b.000 (7. bonds with a net book value of $500.000 850.000.000 Additional information 1. On April 15. McDuff sold capital assets that cost $158.500. 3. Amortization expense is included in Operating expenses. v.000) $4.000) 489.000 $239. Prepare the cash flow from operations section using the direct method.000 700.000 (61. with a book value of $87.000 250. Income Statement For the year ended December 31. 2. . 20x3. 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 $ 13.1.000. Prepare a cash flow statement for the year ending December 31.000) (67. Required a.000 were retired for $487.400. for $80.000. 20x3.000 550.000 2.1 Page 142 MCDUFF LTD. Use the indirect method to report the operating activities.Introductory Financial Accounting.000. On August 31.

300 600 5.800 7.800 5.000 1.200 221.400) Comparative partial balance sheets at December 31.000 600 20x4 $4. adapted) $ 4.Introductory Financial Accounting. HHC LTD. Income Statement for the year ended December 31.300 1.700 4. 20x5 Sales Expenses: Cost of goods sold Salaries expense Insurance expense Depreciation expense Rent expense Interest expense Net loss $ 218.300 10.1.000 $ 165.300 2.300 5.700 8.1 Page 143 Problem 9-3 The following data are available for HHC Ltd.700 500 5.000 500 .800 7.000 5.000 1.400 $ (3.000 39. 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. v.

000 (123.000 (18.000) $ 900.000 39.000 119.000) 25.000 80.000 .000 25. 31 20x6 $ 50.000 86. 20x6 are as follows: TORAM LTD.000 423.000 (101.000 85.000) 0 (12.000 Liabilities and Shareholders’ Equity Accounts payable Bonds payable Preferred shares Common shares Retained earnings $ 22.000 144.000 $ (18.000 463. and its income statement for the year ended December 31. 20x6 Sales Cost of goods sold Gross profit Operating expenses Amortization expense Loss on sale of equipment Gain on sale of long-term investment Net Income $ 165.000 0 80.000 200.000 92.000 0 85.000 4.000 $634.000 $ 65.000 $ 699.000 423.000 87.000 43.Introductory Financial Accounting.000 $ 40.000 53.000 32.000) $ 624. Balance Sheets Dec.000 (12.000 600.000 Dec.000 $ 100.000 300.1 Page 144 Problem 9-4 Toram Ltd. v. 20x5 and 20x6.000) $ 57. Income Statement for the year ended December 31.000) (22.000 18.000 475.000 Net Change $ 24.000 0 0 58.’s comparative balance sheets at December 31. 31 20x5 $ 26.1.000) $ 681.000 Assets Cash Accounts receivable Inventory Long-term investment Land Buildings and equipment Accumulated amortization TORAM Ltd.

3. Issued $25. Required – a. Purchased equipment for $20. for $30. Sold equipment for $7. the following transactions occurred: 1. 5.000 and had $21.000 cash.000 of bonds payable at face value.000 of accumulated amortization.000 cash dividend. Sold the long-term investment on January 1. 4. Declared and paid a $50. Prepare a Statement of Cash Flow using the Direct Method. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.000 cash that had originally cost $32.Introductory Financial Accounting. (CGA Canada adapted) .1 Page 145 During 20x6. v. b. 20x6.1. 2.000.

repayment of principal.e. from activities considered incidental to the firm's main function. Expected non-operating cash flows. Published financial statements are the sources of information generally available to users.1.e. 4. Nonetheless.. i. v. The amount of cash expected to be invested in the firm's long lived assets as well as in working capital. Net cash flows from future operations. The following are the variables that affect a firm's future dividend policy: 1. Future cash flows from changes in the levels of investments made by shareholders and creditors. 5. sinking fund provisions. published financial statements are historical in nature and do not provide the information we have just outlined. the investor must predict those things that affect dividend policy. interest payments. of course. 6. 8. historical information can be used to make projections and is sometimes extremely useful in this respect. Management's attitude toward future cash dividend policy. which the investor would like to predict. 3. In order to predict the company's future dividend policy.Introductory Financial Accounting. The nature of the analysis of financial statement information is primarily in the form of ratios. 7. Vertical and Percentage (common size) analysis .1 Page 146 10. The firm's future policy regarding the holding of cash balances (for precautionary and liquidity reasons) in excess of those required to maintain the expected level of operations.. i. The amount of future cash flow to service debt requirements. Financial Analysis Techniques 1. etc. The limitations of using historical information must. 2. be recognized. Horizontal (trend). The amount of future cash flow from random events such as windfall gain or casualties. Each of these eight variables that affect future dividend policy is in turn affected by others. However. 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.

509 7.619 12.Introductory Financial Accounting.073 354 $719 . the historical financial performance data for a company for the years 20x3 to 20x6 (all data is in millions of dollars) 20x3 Revenue Expenses Net income before taxes Income taxes Net income $7. v.1.500 10.546 1.882 627 207 $420 20x5 $11.369 606 200 $406 20x4 $8.975 7.1 Page 147 Horizontal analysis expresses financial data in terms of a single designated base period.673 827 273 $554 20x6 $13. For example. or as compared to an amount of the preceding period.

Introductory Financial Accounting, v.1.1

Page 148

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%

2.

Ratio Analysis

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.

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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

Debt-to-equity Ratio

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.

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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.

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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 c) 6.000 of inventory and had sales of $600.000 at December 31. Net cash sales for 20x8 were $32.5 b) 5. 20x7. What was the inventory turnover for 20x8? a) 4.500 b) $335.0 d) 8. v. 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 4.000 and the ending inventory for 20x8 was $120.000 at December 31.Introductory Financial Accounting.0.1 Page 152 Problems with Solutions Problem 10-1 – Multiple Choice Questions 1. 20x8.000.0 . R Company’s net accounts receivable were $50. and $55.500. During 20x8. What were R’s total net sales for 20x8? a) $227. The accounts receivable turnover for 20x8 was 7. The beginning inventory for 20x8 was $30. what effect will a payment to a creditor (account payable) on the last day of the month have? a) It will increase the current ratio b) It will decrease working capital c) It will increase working capital d) It will decrease the current ratio 3.000 2.500 d) $400.1.000 c) $367. a corporation purchased $540. If current liabilities exceed current assets.000.

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5.

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)

6.

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

7.

When should an average amount be used for the numerator in computing a financial ratio? a) When both the numerator and denominator are balance sheet items b) When the numerator is an income statement item and the denominator is a balance sheet item c) When the numerator is a balance sheet item and the denominator is an income statement item d) When both the numerator and the denominator are income statement items

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8.

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

9.

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

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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

$2,014,000 $1,875,000

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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

Balance Sheets as at December 31 … 20x7 ASSETS Current Assets Cash Accounts receivable Inventory $37. Rocky Mountain Camping Equipment Ltd.000 1.000 $20.000 480.000 2.000 $3.000 800.000 650.003.000 $24.808.000 $4.003.000 1.000 809. are as follows.808.999.576.000 20x6 20x5 Fixed Assets – net $4.000 300.000 $3.000 700.324.000 $3.000 1.000 570.000 700.889.000 1.000 2.000 2.000 $480.380.000 .000 524.679.628.928.000 1.000 $3.167.000 2.000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $560.956.000 1.000 700.000 700.Introductory Financial Accounting.1 Page 157 Problem 10-3 The comparative financial statements for Rocky Mountain Camping Equipment Ltd.1.000 2.789.956.000 485.979.000 820.876.180. v.000 1.114.000 2.000 1.000 $524.

000 $51.1 Page 158 Rocky Mountain Camping Equipment Ltd.000 2.000 $3.Introductory Financial Accounting.000 81.000 1.000 635. v. 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.000 100.700.000 56.000 5.000 137.000 800.000 30.300.000 100. $2.000 1.000 65.000 700.000 463.1.000 60.000 .000.100.000 20x6 $1.

000 – ($40.1 Page 159 11. d b a d d d b c $40. 7. 6. 4.999 + 40. 3. v.1. 8. 5. SOLUTION TO PROBLEMS Problem 1-1 1.039.000 = $1.000 $999.000/4 years x 6/12) = $35. 2.Introductory Financial Accounting.999 .

1.000 25. v.000 15. Amortization 500 11 10 Retained Earnings 10.000 20.000 2.000 Acc.1 Page 160 Problem 1-2 Part (a) Assets Cash 20.000 1. & Fixtures 15.000 Accrued Liabilities 150 700 600 1.Introductory Financial Accounting.000 120.000 4.200 4.000 15.960 5.800 33.000 Liabilities & Equity Accounts Payable 130.000 2.000 182.777 Bank Loan 20.000 .200 400 800 12 4 15 Inventory 25.367 8.000 190.000 Common Stock 20. Receivable 6.000 1 4 7 8 B 2 3 6 7 B 8 10 14 5 9 B 2 Prepaid Rent 1.000 BALANCE SHEET Accts.000 13 16 17 18 19 B 6 B Prepaid Insurance 1.000 1 3 Furn.000 50.

000 1.Introductory Financial Accounting.500 700 2.000 0 Rent 2 10 18 B 1.000 170.367 .1.000 Revenues Sales 196.000 3.000 15.000 600 36.000 120.000 INCOME STATEMENT Purchase Returns 15.1 Page 161 Expenses Purchases 50.000 0 Cost of Goods Sold 130.960 5.960 Interest 300 150 450 Advertising 10 2.000 5 9 B 15 15 14 B 7 15 11 Amortization 500 10 13 B 10 17 B Wages and Salaries 36.600 Insurance 400 12 10 16 B Miscellaneous 1. v.200 19 Income Taxes 5.

Cash Common Stock Prepaid rent Rent expense Cash Furniture and fixtures Cash Cash Bank Loan Purchases Accounts Payable Prepaid Insurance Cash Cash Accounts receivable Sales Cash Accounts receivable Purchases Accounts payable Wages and salaries Rent Advertising Miscellaneous expenses Retained earnings Interest Accounts payable Cash Amortization expense Accumulated amortization $15.200 1.000 2. 7.000 4. v.000 1.200 190.000 3.500 10.000 1. 4.000 300 130.000 20. 10. 9.000 20.000 120.000 1.1 Page 162 Journal Entries – 1.000 15.1.000 15.000 4. 8.000 $20.000 196.000 182.000 / 10 years x 4/12 $20.000 50.000 36.000 6. .Introductory Financial Accounting. 6.000 2. 3. 5.800 500 500 2. 11.000 50.000 120.000 1.

960 1. 16. 5.000 170.200 / 12 months x 4 months expired Interest expense Accrued liabilities Accrual for the month of October: $20.367 . v. Insurance expense Prepaid insurance $1. 150 150 14.Introductory Financial Accounting.000 15.000 15.000 700 700 600 600 1.000 130. 17.890 Income tax expense = $17.960 15.1 Page 163 12.890 x 30% = 400 400 13.000 25. 18.1. 15.367 5.000 x 1% Income tax expense Accrued liabilities Net income before taxes = $17. 19.000 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.

Trial Balance As at October 31.600 2.000 8.000 5.000 Credit $ 500 25.367 $270. Inc.000 20.1.000 15. 20x2 Cash Accounts receivable Inventory Prepaid Insurance Prepaid rent Furniture and fixtures Accumulated amortization Accounts payable Accrued liabilities Bank loan Capital Stock Retained earnings Sales Cost of goods sold Rent Amortization Interest Wages and salaries Advertising Insurance Miscellaneous Income taxes Debit $33.000 130.000 196.000 25.277 $270.960 500 450 36. Heavenly Books.277 .000 400 2.000 800 1.777 20.000 2.200 5.Introductory Financial Accounting. v.1 Page 164 b.000 10.

890 5. 20x2 $0 12. Income Statement for the four months ended October 31.1.523 .000 66.000) $2.000 5.Introductory Financial Accounting.1 Page 165 c.660 18. Inc. October 31.000 400 2. 20x2 Retained earnings. Statement of Retained Earnings for the four months ended October 31. Inc.523 Heavenly Books.340 450 17. v. July 2. 20x2 Net income Dividends Retained earnings. Heavenly Books.600 2.000 130.523 (10.367 $12.200 47.960 500 36. 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.

000 500 $33.1 Page 166 Heavenly Books.000 25.777 12.300 .000 53.000 45.500 $76.000 2. v.300 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Accrued liabilities Current portion of bank loan Bank loan Shareholders’ Equity Capital stock Retained earnings $25.523 $76.777 20. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance Prepaid rent Furniture and fixtures Less accumulated amortization $15.000 8.523 22. Statement of Financial Position as at October 31.800 14.Introductory Financial Accounting.000 2. Inc.000 61.1.777 8.000 800 1.

200 54.beginning Net income Dividends Retained Earnings .Introductory Financial Accounting.100 $9.300 18.200 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 4.1.600 13.500 (2.100) $7.1 Page 167 Problem 1-3 Global Productions Inc.400 .500 Global Productions Inc.600 4.000 71. Statement of Retained Earnings for year ended December 31.500 $155.300 21.600 – 2.200 3.000 4.800 2. Income Statement for year ended December 31.000 17. 20x6 Net sales ($157.ending $0 9.100 3. v. 20x6 Retained Earnings .

800 19.000 49.100 14.200 $107.1 Page 168 Global Productions Inc.000 9.500 1.600 50.900 44.400 $107.800 $25.100 87.600 40.000 4.1.000 7. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Supplies Prepaid insurance Office equipment Accumulated amortization 24.400 57.000 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Bank loan Shareholders' Equity Capital Stock Retained earnings $7. v.200 2.500 1.100 1.Introductory Financial Accounting.000 . Statement of Financial Position as at December 31.

Salary Expense Salaries Payable 1. it is appropriate for you to record it in this period.800.646 3.000. you would have debited Prepaid Insurance and credited Cash for the full amount of $5.000/8 years = $6. Insurance Expense Prepaid Insurance 3. Therefore. the full amount would be recorded as an Unearned Revenue liability. Accounts Receivable Consulting Revenue 2. you will have accumulated 3 days worth of salaries that have not been paid.1. Amortization Expense Accumulated Amortization b) 3. in the amount of revenue earned during the period. you only had the machine in use for 7 months. Therefore. your amortization expense would be = $6. due from Big Al. as these expenses were incurred during the period. Cash Unearned Revenue 24 24 As of April 30. you would have sent out 1 of the 4 magazines in the subscription. However. you would have earned of the revenue. Therefore. $24 X = $6.Introductory Financial Accounting.800 1.250 X 7/12 = $3. we will record salaries expense and the accompanying salaries payable of $1.1 Page 169 Problem 1-4 a) Annual amortization expense for the machinery would be = $50.646 for the current period. you must record them as an expense of that period.800 e) When you purchased the policy.250/year.300 2.000 X 8/12 = 3. v. However. therefore. therefore you will remove $5. To do this you would set up a receivable. You have used 8/12 of the policy.333 .646 When you received the cash in January. The journal entry would be: Unearned Revenue Subscription Revenue c) 6 6 You have earned the $2.300 d) As of Wednesday.333 from Prepaid Insurance and record it as Insurance Expense for the period.300 revenue this accounting period.333 3.

750 . On December 1st.750 As of July 31st. or $1. that full amount would have been earned and recorded as revenue during the period..000 g) The $4. v.000 is unearned. Rent Expense Prepaid Rent 4.750 you paid on June 30th represents Prepaid Rent. Therefore. You would remove the Prepaid Rent account to reflect that fact that you have “used up” the rent. you would have been in the premises for 1 month. $6. However. the second payment that you received on December 1st covers the period of December – May.000 each. and would be recorded as an asset on your accounts for the June30th period end. The first payment that you received on June 1st would cover the catering for June – November.000 1. No adjustment is needed for this.1.000 covers a 6-month period. you would have debited Cash and credited Unearned Revenue by $6.000 has been earned and should be included in revenue for this period.Introductory Financial Accounting.750 4. Prepaid Rent Cash 4.1 Page 170 f) Each of the payments for $6.000 X 5/6 = $5.e. You will have to adjust for that fact that 5/6 of the payment has not been earned i.750 4. Unearned Revenue Catering Revenue 1. and therefore you would have incurred one month worth of Rent Expense.

1.000 + (1. $80.006. v.000 (bldg) – 300. 3.000 x $10 = $1.000 (the ending balance in the account).000 $20.000 (cash) = $1.000 $1.020.000.000 x 6/24 = $250 Rent receivable (or accounts rec) Rent income Interest expense Interest payable $300 x 4/12 = $100 Unearned subscription revenues Subscription revenues $440 x 3/24 = $55 $250 $250 b.000.000.000.000.000 $0 $1. Dec 31.000.000 – 128.000. 5.000.000. 6. 8. . 7.000 = $48.026.000 + 300. 20x5 d.000 $1. 12.000 = $72. 3.000 + (200 x $50)(cash) – (200 x $20)(inventory) = $1. Dec 31. Debit to Subscriptions Received in Advance = $180. 20x5 500 500 100 100 c.000 $0 $1.000 Problem 1-7 1.000 x $20 (accounts payable) = $20. Total amount received as revenue of $128. 20x5 Insurance expense Prepaid expense $1.000 x $20)(inventory) = $1.Introductory Financial Accounting.1 Page 171 Problem 1-5 a.000 + 120.000. 4.000. 2. 11. Dec 31.000 less the revenue earned for subscription fees received in the previous year of 80. 9.000 + 10. 10. Dec 31. 2. 4.000 (COGS) = $1.000 $1.000 1.000 $1. the offsetting credit would be to Subscriptions Revenue. 100. 20x5 55 55 Problem 1-6 1.000 $1.020.000 (sales) – 4. The opening balance in the Subscription Received in Advance account = $80.

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Problem 1-8 Shareholders’ Equity Net Income

Assets 1.

Liabilities

+10,000 NC NC NC -10,000 Remove the receivable from A/R, and add a short-term note receivable.

2.

+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)

3.

4.

5.

6.

7.

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Problem 1-9 1. Sales Cash received for sales Less cash received for previous year sales Plus Sales not paid for in current year Sales – accrual basis Purchases Cash paid for purchases Less advance payment Plus prepaid purchases Purchases – accrual basis Cost of Goods Sold Beginning inventory Plus purchases Cost of goods available for sale Less ending inventory 20x6 $ 60,000 (5,000) 20,000 $ 75,000 20x7 $ 70,000 (20,000) 0 $ 50,000

$ 40,000 (2,000) 0 $ 38,000

$ 35,000 0 2,000 $ 37,000

0 38,000 38,000 (3,000) $ 35,000

$

$ 3,000 37,000 40,000 (5,000) $ 35,000

Revised Income Statement Sales Less Cost of Goods Sold Gross margin Other expenses Operating income Profit Margin (30,000/75,000) (2,000/50,000) * 14,000 – 1,000 personal expenses 2. Revenue recognition principle – revenue must be recorded when earned, it can be measured, and the collectability is reasonably assured, not when cash payment is received. Mr. Cash violated this by recording “sales” on a cash basis. Matching principle – all expenses must be recorded in the same period as the revenue that the expenses were incurred to generate. Mr. Cash violated this principle by simply using cash paid for purchases instead of calculating the proper COGS. Economic entity principle – a business should only report on transactions that are under its control. By including his own personal expenses Mr. Cash crossed the line between “personal” and “business” and violated this principle. $ 75,000 35,000 40,000 10,000 $ 30,000 40% $ 50,000 35,000 15,000 *13,000 $ 2,000 4%

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Problem 1-10 a. Revenue should be recognized when the trees are sold to the customer during the Christmas season because that is when the benefits and risks of ownership pass from the company to the customer. Until then, the company does not know whether any customers will buy their trees, or how much the customer will pay for the trees (measurement of amount). There is so much competition and one never knows how many trees will be sold. Some trees may have to be discarded if they do not sell. Also, at the time of the sale, cash is collected so there is no uncertainty as to collectability. The company has little or no risk once the tree is sold because it is very unlikely that the tree will be returned. The annual cost of fertilizing, pruning and maintaining the trees should be capitalized as a cost of inventory. In effect, the trees are like work-in-process inventory. Then, when the trees are sold, all of these costs will be expensed as cost of goods sold. This is an example of the matching principle and the point of sale recognition method.

b.

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Problem 1-11 a. Dec 1 Cash Capital Stock Furniture and equipment Cash Note payable Cash Revenues Accounts Receivable Revenues Office supplies Accounts Payable Cash Accounts Receivable Wage expense Cash Rent expense Cash Office supplies expense Office supplies $6,000 $6,000 4,000 1,000 3,000 680 680 1,875 1,875 300 300 1,875 1,875 1,300 1,300 1,000 1,000 100 100

Dec 3

Dec 7

Dec 13

Dec 17

Dec 28

Dec 31

Dec 31

Dec 31

b.

Operating income for the month ending December 31, 20x6 would be: = $680 Sales + 1,875 Sales – 1,300 Wages Expense - 1,000 Rent Expense - 100 Supplies Expense = $155

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Problem 1-12
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

d

g

B a E

B E

f

h

B q E

B a E Equipment 110 74 184 Acc Dep 66 30 96 Note Rec - LT 100

c

l

B r E

B j E

B n E

e

m

B p E

B k E

o o

B

B

m

B

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Expenses COGS 440

INCOME STATEMENT Salaries and Wages 185 15 200 Insurance 3 4 7 Income Taxes 15 5 20

Revenues Sales 900

c

h q E

b

i

Miscellaneous 189

o o E

Interest Revenue 8 8 16

e n E

p

Depreciation 30

l r E

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Ruiz Pharmacy Income Statement for year ended December 31, 20x2 (000's) Sales Cost of goods sold Gross margin Operating expenses Salaries and wages Miscellaneous Insurance Depreciation Operating income Interest revenue Net income before taxes Income tax expense Net income 200 189 7 30 $900 440 460

426 34 16 50 20 $30

Ruiz Pharmacy Statement of Retained Earnings for year ended December 31, 20x2 (000's) Retained Earnings - beginning Net income Dividends Retained Earnings - ending $322 30 (26) $326

1. v.1 Page 179 Ruiz Pharmacy Balance Sheet as at December 31. 20x2 (000's) ASSETS Current Assets Cash Accounts receivable Accrued interest receivable Merchandise inventory Prepaid fire insurance Noncurrent assets Note receivable Equipment Accumulated depreciation $14 120 8 240 32 414 100 184 (96) 88 188 $602 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Accrued wages payable Accrued income taxes payable Dividends payable Shareholders' Equity Paid-in Capital Retained earnings $120 15 5 26 166 110 326 436 $602 .Introductory Financial Accounting.

000 20.000 8.Introductory Financial Accounting. 123.500 260.000 80.000 Liabilities & Equity Accounts Pay 600.000 62.000 16.500 20.000 14.000 215.000 16.000 B .000 100.000 25. 7. v.000 24.000 21.500 547.1 Page 180 Problem 1-13 Assets Cash 30.000 Prepaids 14.000 225.000 Capital Stock 110.000 575.000 10.000 850.000 Interest Payable 8. And Com.000 12.00 515.000 265.000 8 Rent Payable 27.000 31.000 4.800 6.000 B E B 10 Retained Earnings 4.000 BALANCE SHEET Accounts Rec.500 B 9 E Furniture & Fixtures 190.500 8.500 6.000 323.000 850.000 9 13 Long-Term Notes Payable 20.000 12.000 Acc.1.000 375.000 600.000 775.500 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 10.500 745.000 22.000 200.000 375.000 15.000 Inventory 446. Pay. Depreciation 40.000 25.800 Sal.000 Taxes Payable 20.000 20.

000 7 7 E Income Tax 15.000 8.1 Page 181 Expenses INCOME STATEMENT Salaries and Commissions 207.000 70.000 27.000 .000 12.000 Sales 1.1.000 21.000 13 14 Other 225.Introductory Financial Accounting. v.500 Revenues 3 COGS 345.350.000 Interest 6.800 12 Depreciation 22.000 27.000 4 2 9 9 9 9 E Rent 14.

000 524.500 6. v.000 225. Aug 31. Income Statement for the year ended August 31.000 207.500 $302.000 745. Sep 1.000 22.1 Page 182 Peter’s Appliance Shop Ltd.700 -4. 20x5 Retained Earnings.800 73.000 605.200 .700 Peter’s Appliance Shop Ltd. 20x4 Net income Dividends Retained Earnings.500 80.700 27.500 70.1.000 46. Statement of Changes in Retained Earnings for the year ended August 31.000 $46. 20x5 $260.Introductory Financial Accounting. 20x5 Sales Cost of goods sold Gross margin Operating expenses Salaries and commissions Rent Amortization Other Operating income Interest expense Net income before taxes Income tax expense Net income $1.350.

500 215.000 302.070.000 12.000 16.000 7.000 917.500 6. Balance Sheet as at August 31.1.000 $1.500 .000 10.500 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 $515.500 323.200 $1.000 578.1 Page 183 Peter’s Appliance Shop Ltd.000 547.Introductory Financial Accounting.300 80. 20x5 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Fixed Assets Furniture and fixtures Less accumulated amortization $ 31.000 -62.300 110.000 658. v.800 27.070.000 153.200 412.

280 . Cash Accounts receivable Bank service charges Cash $180 $180 52 52 $3.300) $3.200 = $21. c b b The balance on the bank statement will be overstated by $360.000 (77.280 $6.1.700 (5.288 Problem 2-2 a.$1.548) 3.595 Balance per bank statement Add deposits in transit Balance per books $4. $15. Cash balance per books.020) Adjusted cash balance per books. Dec 1 Add cash received during December Less cash payments made during December Cash balance per books. 2.1 Page 184 Problem 2-1 1.152 (52) 180 $3.225 63 $4.200 .700 – 3. 3.300 580 1.700 77. before adjustments Less bank service charges Add error in recording cheque ($1. December 31 Add Sparg cheque deducted in error Add deposits in transit Less outstanding cheques Cash balance per books b.095 + 9. v. Dec 31.Introductory Financial Accounting. Dec 31 Cash balance per bank.

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 $4.1. March 31.1 Page 185 Problem 2-3 1. v.915 180 (35) (360) $4. Bank service charges Cash To record bank service charges for the month.Introductory Financial Accounting.200 $780 1.700 $180 $180 35 35 360 360 . $ 480 6. Office equipment Cash To correct error made in recording of purchase of office equipment: $620 – 260 = $360. 20x7 2. 20x7 Add outstanding deposits Less outstanding cheques # 201 # 533 Cash per books.700 (1.980) $4. Cash balance. Cash Accounts Receivable To record error in deposit made ($530 – 350 = $180). March 31.

000 3. the securities have to be recorded at fair market value on the balance sheet at December 31.000) (1.XYZ Computer Gain on sale of investments Cash Other Comprehensive Income Temporary investments .1 Page 186 Problem 2-4 a) The accounting for temporary investments depends on whether the company designates the investments as available for sale investments or trading investments.Strategic Air Defence Gain on sale of Investments $75.Introductory Financial Accounting. then the net unrealized gain will be part of the Other Comprehensive Income section of Shareholders' Equity. If the securities are classified as available for sale.000 (4.000 31. 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. Available for sale securities are defined by what they are not: they are not long-term investments nor are they trading investments.000 70.000 7. 20x0: Unrealized gain (loss) ($2.000 $2.000 3.000 3. Trading investments are those that are held for re-sale as part of a portfolio of managed securities held for a short-term.000) 12.000 . then the net unrealized gain flows through net income.1. If the securities are classified as trading investments. Either way.000) $ 8.000 $35. v.

an unrealized holding loss of $4.700 .000 – 8.000) (3.4. In 20x2. v.000) will be credited to net income.500) (1.500) b) In 20x0.500 ($4. .Introductory Financial Accounting. an unrealized holding gain of $1.700) 20x1 ($500) 0 (3.000) ($8. an unrealized holding loss of $5.500) (2.200) ($5.700 will be charged to net income.500) ($4. In 20x1.000) (1.500) will be charged to net income.1 Page 187 Problem 2-5 a) Security A Security B Security C 20x0 ($2.000) 20x2 ($4.1.700 ($5.

a Problem 3-2 a.200.000 c.1.350 86.000 cr. 11. Write-Offs + 3. $3.000 Sales – 360. Recoveries Adjustment required Bad debt expense Allowance for doubtful accounts 86.245.000 3. Beg Bal + 55.900.000 3.000 Collections – 20. Required balance at December 31: ($80.800 Bad debt expense = $6.000 Write offs) = $100.000 – 500 + 300 = $4.000 dr. 2004: $1.350 $55.350 cr.800 = $1.000 A/R Begin + 400.000 Collections – 55.000.000 Credit Sales – 11. December 31. $86.000 cr.875 2.000 x 4% 4.000 – 30) – (125 – 30) = $2. Adjustment $13.Introductory Financial Accounting.000 x 3% $97. December 31.5%) Allowance for doubtful accounts Accounts receivable balance. a Balance in allowance account at the end of 20x9 before adjustment for bad debts: $5. Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable b. 20x8.000 3.000 Before: $3.1 Page 188 Problem 3-1 1.000 x 0.200.400 – 4.000 $55.000 dr. before adjustment $11.000 71. 2004 Balance in allowance before adjustment $63.000 3. Bad debt expense ($14.350 cr.000 cr.000 dr.000 cr.000 Write-offs Allowance for doubtful accounts. Beginning Bal – 20.600 Balance in Allowance for Doubtful Accounts.000 – 125 = $2. Write offs $9. .000 cr.875 After: ($3.000 71. Dec 31. v.000 Beg Bal + 14. d 3.

000 7.1 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 $27.800. v.290 .915.290 31.000 16.000 43.000 7.000 31.000 7. (Schedule) $2.000 3.915.000.480 43.840 cr.000 27.000 27.000 2.770 cr.400.400.000 7.480 3. (Schedule) 20x1 Accounts Receivable Sales To record credit sales for 20x1 Cash Accounts receivable To record cash collections for 20x1 Allowance for doubtful accounts Accounts receivable To record accounts written off for 20x1 Accounts receivable Allowance for doubtful accounts To record recoveries for 20x1 Cash Accounts receivable To record cash collections for 20x1 Bad debt expense Allowance for doubtful accounts To adjust the allowance for doubtful accounts to an ending balance of $38.000 2.000 $2.000 2.1.Introductory Financial Accounting.000 2.000 16.000.800.

000 2.000 27.000 1% 5% 20% 80% $ 2.000 43.000 1% 5% 20% 80% $ 2.000 45.000 25.1.000 7.290 38.000.000 60.000 2.500 9.000 $38.800.770 4.000 20.000 7.000 16.340 4.000 80.915.000 12.000 $27.000 12.770 .000 3.000 90.770 20x0 Bal 20x1 Bal Bal Schedule – Calculation of the Allowance for Doubtful Accounts December 31.000 442.000 Allowance for Doubtful Accounts 16.000 7.840 December 31.000 $384.480 27.400.Introductory Financial Accounting.000 31. 20x1 0 – 30 31 – 60 61 – 90 Over 90 $277.000 384. v.000 15. 20x0 0 – 30 31 – 60 61 – 90 Over 90 $234.480 27.000 $442.1 Page 190 20x0 Bal 20x1 Accounts Receivable 2.

6.000 Note: The allowance account will now be $500 + $10.1 Page 191 Problem 3-4 1.400.275 30 30 2.275 500 cr. $6.500 Write-offs . Bad debt expense** Allowance for doubtful accounts **($500. Write-offs Adjustment required Bad debt expense Allowance for doubtful accounts Interest receivable Interest income* *(3. 20x7 Balance in allowance before adjustment: $2.000 Credit Sales – 1.Introductory Financial Accounting. Dec.000 500. 20x7: $40.000 Note Receivable 3. Allowance for doubtful accounts.500.275 cr.775 cr.500 1.000 cr.000 500.500 400.000 400. Accounts receivable Sales Allowance for doubtful accounts Accounts receivable Cash Accounts receivable Note receivable Accounts receivable Accounts receivable balance.000 Beg Bal + 500. 31. v.000 x 2%) 10. .500 x 5% $6.000 10.1. December 31.000 1.000 x 12% x 1/12) 6.000 = $10.000 $135. Beg Bal + 1.000 Collections – 3.500 dr.000 3.

000 50. Problem 4-2 a.200 500 500 350 350 77.1.000 56.000 – 6. Inventory Accounts payable Accounts payable Cash ($50.200 1.000 (66.590 79. Delivery expense Cash Sales returns and allowances Accounts receivable Inventory ($500 x 70%) Cost of goods sold Cash ($79.000 56.000) $503.000 50. c c d Czech should have recorded this sale in 20x8 since the goods were shipped FOB Shipping.1 Page 192 Problem 4-1 1.000 x 99%) Inventory $80.000 $80. 4.500 500 c.910 1.000 – 10.Introductory Financial Accounting. .000 2. e. 3.500 50. b Opening Inventory Purchases – net: $500.000 Ending inventory Cost of goods sold $60. v.000 x 70%) Inventory b.000 1.000 + 25.000 49.500 x 98%) Sales discounts Accounts receivable d.000 509. Accounts receivable Sales Cost of goods sold ($80.

00 22.000) 69.500 b. Purchases (Sales) Units 60 (20) 35 (50) Unit Cost Total Cost $11.000 3. Date May 1 May 5 May 14 May 21 May 29 c.00 16.00 23.100 560 560 Problem 4-4 a.00 11.Introductory Financial Accounting.50 11.000 (40.000 . Ending inventory = 55 units (35 units x $12.000 8.000 48.100 $1.000 33.190 623 Accounts receivable Sales Cost of goods sold Inventory (10 units x $10) + (40 units x $11.00) + (20 units x $11.000 (2.00 12.000) Unit Cost Total Cost 18.00 $12.50) $1.3333 $300 990 770 1.00 11.00 22.1 Page 193 Problem 4-3 a.00 11.500 1.3333 $690 (220) 420 (567) Units 30 90 70 105 55 Balance Unit Cost Total Cost $10.500 Balance Unit Cost Total Cost $12. v.50) = $650 Note that the results for FIFO periodic are the same as for FIFO perpetual.500 units x $23 = $34.000 Units 1.000 500 3.000 (2.000 44.500) 3.500 units 1.000 77.00 16. b.1.00 36. Ending balance = 1. Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Purchases (Sales) Units 2.

Weighted Average Sales COGS * Gross Profit 3.200 = $179. v.940 Units 400 3.200 50.7059 = $ 173.000 58. 20x5 Units sold during year FIFO Sales COGS 3.929 $ 159.330 Gross profit 175.Introductory Financial Accounting.200/3.400 70 3.1.000 52.000 x $50 1.000 173.140 $ 157.200 50.000 x $52 930 x $58 $ 333.929 .000 x $52 1. 20x5 Purchases Goods Available for Sale Less Ending Inventory.860 b.000 52.330 x $ 52.400 Weighted Average Cost per unit $ 19.330 x $100 $ 333.000 x $58 3.330 x $100 400 x $48 1.000 $ 179.1 Page 194 Problem 4-5 a.000 x $50 1. December 31.400 = $ 52.000 $ 19.000 53.000 3. Beginning Inventory.071 *400 x $48 1. January 1.7059/unit Cost of Goods Sold = 3.

Introductory Financial Accounting.600 400 20.000 5.000 x 70% $420.000 Sales Returns Estimated cost of goods sold Opening Inventory Net purchases: $480.000 Purchase Returns + 8.000 – 15.000 15.000 x 20% Problem 4-7 $600.000 30.600 June 1 Accounts receivable Sales Cost of goods sold Inventory 30.000 10.000 5.1.000 x 2%) Accounts receivable Inventory Accounts payable June 12 .000 – 30. v.000 19.000 420.1 Page 195 Problem 4-6 Net Sales = $615.000 608.000 15.000 10.000 $150.000 458.000 June 2 Sales returns Accounts receivable Inventory Cost of goods sold June 9 Cash Sales discount ($20.000 $188.000 Customs and Duty Cost of goods available for sale Less Cost of goods sold Estimated value of ending inventory Net loss from fire = $188.000 42.000 $37.000 42.

050 each = = = $ 18. Cost of goods available for sale: 20 units x $900 each 440 units x $950 each 200 units x $1. v.79/unit x 60 units Ending inventory = $58. Ending inventory – Weighted Average Average unit cost = Cost of goods available for sale/Units available for sale Average unit cost = $646.000 3.000 2. Ending inventory – FIFO: 60 units X $1.1.Introductory Financial Accounting.79/unit Ending inventory = $978.050 each = $ 63.000/(20+440+200) Average unit cost = $646.000/660 units Average unit cost = $978.727 .000 418.000 210.000 $ 646.1 Page 196 Problem 4-8 1.

3 15-day periods in a year (365/15).000 48.000 80. v.000 3.000 50.000 $ 150.1 Page 197 Problem 4-9 a.500 1. December 1.200 3.300 c. It would be equivalent to interest of $1. For example.500) 77.Introductory Financial Accounting.300 230. Cost of Goods Sold Schedule for the month ended December 31.500 1.200 1. 20x7 Purchases Less: Purchase returns and allowances Less: Purchase discounts Net Purchases Add: Transportation-In Cost of goods available for sale Less: Merchandise inventory.000 (1. much higher than the 10% borrowing rate. 20x7 Cost of goods sold $ 80. the full amount of $50. thus giving an annual percentage cost of missing the discount of 75.300 3. There are 24. n30 generated savings of $1. .09%) for a 15day period (30 days – 15 days). If payment was not made within the discount period.3). whereas the purchase discount may generate a savings which would equate to an effective interest rate much higher than 10%.000 ii) Accounts Payable Cash Purchase Discounts iii) Accounts Payable Purchase Returns iv) Transportation-In Cash b. In December.200) (1.09 24.1. i) Purchases Accounts Payable 80.000 80. TOYJOY LTD.500 on a base amount of $48. 20x7 Merchandise inventory. it may cost a company 10% to borrow the funds.09% (3. December 31. discounts taken under a term of 3/15. The savings generated by purchase discounts generally make it worthwhile to borrow to take advantage of the purchase discount.500 (3.000 would need to be paid on the due date.500 by paying 15 days early.000 $200.300 30.

000 Cost of goods available for sale – COGS = Ending Inventory $110.000 $ 100. estimated COGS = $60. January 1 to January 13 Inventory.000 $24.000 10.000 = $74.000 U N/A N/A 20x6 Retained Earnings 10.000 **74.000 – 36.Introductory Financial Accounting. January 1 to January 13 Cost of goods available for sale Less estimated ending inventory.000 . v. then COGS = 100% .000 36.000 O 5.000 O 20x7 Cost of Goods Sold 10.000 * ** If Gross Profit = 40%.60 = $36.000 U N/A 5.000 x .000 O Problem 4-11 Sales. January 1.000 U 6.000 U 20x6 Ending Inventory 10.1 Page 198 Problem 4-10 Error i) ii) iii) 20x6 Cost of Goods Sold 10. 20x7 Purchases.1.000 110.40) $ 60.000 U 5. Therefore. 20x7 Estimated Cost of Goods Sold* Estimated Gross Profit ($60.000 O 6. January 13.40% = 60%.000 x .

759 c.000 (47.000 13.000 x $8.000 x $8.00 From Purchase # 1: 1.00) = $178.700) (4.000 x $8.50 = $102.00000 Total Cost $58.500 14.40 Ending Inventory Cost of goods sold Cost of goods available for sale Less ending inventory $72. Ending inventory = 6.000 (6.95 8.500 / 21.500 Total Cost $47.19231 8.000 6.000 + 7.000 Cost of goods available for sale = (6.1.50 Ending inventory = 9.000 = $8.600 126.000 (5.800 (53.000 6.500 9.Introductory Financial Accounting.250 77.000 units @ $9. v.000 (46.000 8.000 – 5.000 7.250 125.000 14.500 (80.741 COGS = $53.500 53.95) + (7.200) Units 6.400 d.000 x $7.50 = $76.500 58. Units 7. From Purchase # 2: 8.1 Page 199 Problem 4-12 a.500) Purchases (Sales) Unit Cost $8.500 = 9.800 54.500) 8.509 = 100.500) Purchases (Sales) Unit Cost $8.600 80. Units 7.000 = 21.400) $ 98.000 + 7.000 x $9.000 13.00 8.000 8.800 (47.250) 72.400 $178.500 + 8.500 Units available for sale = 6.000 Unit cost = $178.40 .95000 8.40) + (8.40000 9.40 7.700 106.000 (5.000 Balance Unit Cost $7.000 (6.700 106.250 + 47.63793 Total Cost $47.100 Balance Total Cost $58.000 b.200) 72.000) (500) 8.000 units @ $8.000 + 8.40 9.509) Units 6.500 COGS = 12.000 – 6.400 $80.

000/year) = $10.500 It is assumed that the addition should be capitalized and depreciated since it qualifies as a capital asset. d c c Net book value = $85.000 / 9.000 – 5.000 ($20.000 = $1.000) / 10 = $4. Note that we use the estimated useful life of the patent.5 x 6/12) Net book value = $63.000 Net book value = $100.Introductory Financial Accounting. Depreciation expense = $12.500/year.000 – 150.1. d) ($80. 2. c Double-declining-balance rate = x 2 = 50% 4.000 + 60.5 x = $600 $1. 6. 3.000)] Net book value = $77.000) x (20. Estimated salvage value = $100.500 7.000 + 5. we must first know the salvage value of the machinery inherent in the problem.500 x 430 = $5.000 – ($85. and not the legal life of 17 years.000 – [($100.000 – (5 years x $18. v.000/80.160 To move to the units-of-production method.000 – 10.000 x 90%) / 1.000 + 15.000 x . 5.750 .000)/10 = $8. because the purpose of amortization is to expense the cost of an asset of the period of time it is in use by the company.1 Page 200 Problem 5-1 1. a d ($200.075.000.

000) / 5 years 20x7 Amortization expense Accumulated amortization $65. 26.600 c.1.000 – 12.000 17.000) / 200.000 – 26.000) x 40% $12.000 x 40% (1/5 x 2 = 40%) Amortization expense Accumulated amortization ($65.000 $12.000 b. Amortization expense Accumulated amortization ($65. v.000 – 2.000 = $53.000 – 5.1 Page 201 Problem 5-2 a. Amortization expense for 20x8 = ($53.000) / 3 = $17.500 16.000 16.Introductory Financial Accounting.000 – 5. Amortization expense Accumulated amortization ($65.500 d.000 20x8 15.000 Amortization expense Accumulated amortization 17.000 26.600 15.000 .000 Net book value = $65.000 x 55.

656 25.000 20.000 10.750 10. 20x5 Dec 31. 20x7 20.000 10.808 Dec 31. 20x7 4. 20x3 Aug 31.000 .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 55.808 9. 20x3 Equipment Cash Amortization expense Accumulated amortization (60.000 – 10.1 Page 202 Problem 5-3 (a) Jan 2. 20x6 10. 20x5: $2.656 4. 20x5 Dec 31. v.000) / 5 Repairs and maintenance expense Cash Amortization expense Accumulated amortization Equipment Cash Amortization expense Accumulated amortization Original amount + amortization on amount capitalized on April 31.000 = $10. 20x7 Aug 31.000 / 32 months remaining = $62.750 Oct 31.500 Amortization expense Accumulated amortization $10.50 / month x 8 months = $500 + 10. 20x4 Apr 31.000 + ($62.286 82.000 2.000 10.Introductory Financial Accounting.000 2.1.714 1.500 Dec 31.500 10.000 9.000 10.000 $60. 20x4 600 600 10.000 Dec 31.

1.000 – 90.746 Total amortization expense for 20x7 = $8.000 * Price of new lathe Less trade-in value less fair market value of asset traded in: Trade in value: $108. v. 20x7 Original cost of asset Capitalization made on April 1.1 Page 203 Schedule 1 Amortization expense for 20x7 Net book value of asset at Sep 30.500 $ 4.500 50.500) (10.500 Market value of asset Gain on sale (2.000) (10.500) Acquisition price of new lathe ** NBV of asset at time of exchange = $50.000 – 10.500 $11.000 .000 2.000) / 39 months = $582 per month x 3 months = $1. 20x5 Less Amortization expense 20x3 20x4 20x5 20x6 20x7 to Sep 30: $10.000 (10.746 = $9.Introductory Financial Accounting.750) (8.500 38. 20x7 ($12.000 4.000 $108.688 + 20.000 – 38.500 15.750 x 9/12 $60.062) $12.000 $18.808 Problem 5-4 Equipment (new lathe)* Accumulated amortization (old equipment) Equipment (old equipment) Cash Gain on sale of asset** 105.062 + 1.000 90.000) (10.688 Amortization expense – Sep 30 to Dec 31.500) $105.000 Less fair market value of asset traded in (15.

000 4. Machinery Less: accumulated amortization $27.000 9.Introductory Financial Accounting.000 (9.000)/4 = $6. The freight is included in the cost but the repair is not to be capitalized.1. Amortization expense Accumulated amortization .1 Page 204 Problem 5-5 1.000 2.000 – $3.000 Installation Charges = $27. v.000 27.000 Cost of machine + 2.Machinery **($27. 2.000* 27.000 x 6/12 = $3.000 *25.000) $18. Cash Accumulated amortization – Machinery Machinery Gain on sale of assets .000 The cost plus installation. Machinery Cash 27.000 20.000/year $6.000 for 6-month period 3.000** 3.000 3.

000) / 41.000 – 20. i. Straight-line method = (120.000 + 18. ii.000 x 9.000 = $22.750 Units-of-production method = (120.1 Page 205 Problem 5-6 a.500 + 23.000)/(5-1) = $18.000)/4 = $25.000 = $22.750) Loss on disposal of equipment Equipment Cash Accumulated depreciation ($22. ii.000 43.750 1.000 – 22.000 $=75. ii.183 183 120. . v. c.1.000 – 20.000 x 12.000 – 25.000 b. i.250 $120.683 Cash Accumulated depreciation ($25. i.500 Straight-line method = (120.000 – 20.500 – 20.000 Units-of-production method = (120.683) Gain on disposal of equipment Equipment $75.000)/40.000 45.Introductory Financial Accounting.

Under this method. i. A double-declining-balance amortization method could be used to abide by the president’s request.1 Page 206 Problem 5-7 a.000 cannot be capitalized to the asset since the asset was purchased and not self-constructed.750 .000 (2.250) 103.000 (53.000 x 2% Customs and duty costs Preparation and installation costs b.Introductory Financial Accounting..e. v.000 – 15.750 Note that the interest charge of $12.750 x 3 years Net book value Less proceeds on disposal Loss Cash Accumulated amortization Loss on disposal Machine $100. c.000 14.000 Depreciation expense: ($157.$140. This method is acceptable under GAAP if it properly reflects the pattern of benefits received from using the machine.250 3. $140.000) / 8 = $17. Cost Less accumulated depreciation: $17. amortization is high in the first year and decreases in amount as years go by.750 (100.800 $157. Costs capitalized: Invoice price Less discount .000 $157. if the machine generates less revenues as it gets older. If the machine does not provide decreasing benefits.000) $ 3.1. then this method should not be used.800) 5.750 157.000 53.

472. FV=10. 5.375 34.000 (9.500 .000 PV=$11.500/15) x $25/card) Cash 37.1. I=6%.375 The journal entry to record the premium expense would be: Premium Expense Premium Liability 34.000 /10 coupons /15 redemption ratio x $25 x 55% = $34.375 The journal entry to record the actual costs incurred during the year would be: Premium Liability ((22. c c b Premium expense: 150. 3.600 Problem 6-2 The premium expense would calculated as follows: $375.000.400) $ 8. N=10.000 / 5 x $2 x 30% Premium redemptions: 23.321 4.Introductory Financial Accounting.1 Page 207 Problem 6-1 1. 6.018 x 6% = $688. v.500 / 5 x $2 $18. Interest expense for the year = $11.000. a b b) PV of bonds at issue: PMT=800. 2.500 37.018.472.

000.554 The journal entry to record the interest payments using the effective interest method of amortization is as follows: Dec 31.000. 20x2 Interest expense (540.554 .Introductory Financial Accounting.000 The warranty liability at the end of the year will be $165.000 Warranty Costs Incurred = $185. A/P.000 .554 x 4%) Bonds payable Cash 21. Inventory 130. 20x2 would be as follows: Jun 30.000 $150.1.000 130.000 $150.000 Opening Balance + 150.487 3.000 Warranty Expense – 130.000 x 5%) Warranty Liability The journal entry to record actual warranty costs incurred is: Warranty Liability Cash. Problem 6-4 The value of the bond issue will be as follows: N 10 I/Y 4 PV X= 540.378) x 4% Bonds payable Cash 21.000 The journal entry to record the interest payment of Jun 30.513 25.378 25. 20x1 Cash Bonds payable $540.554 PMT 25000 FV 500000 Enter Compute The journal entry to record the issuance of these bonds is as follows: July 1.3. v. 20x1 Interest expense (540.622 3.554 $540.1 Page 208 Problem 6-3 The journal entry to record warranty expense is: Warranty expense ($3.

$5. The journal entry to record warranty expense is debit warranty expense credit warranty liability. PMT = 425.301 Dec 31.Introductory Financial Accounting. Solve for PV = $10.432.000. v.000 + 5. 3.301 – 7.1.432. the total credits to the account for the year is the warranty expense for the year. $6.301 $432.708) x 4% $10.000.292 7.000. Therefore. credit cash/inventory/etc. 20x5 Dec 31.000 416. FV = 10. 20x5 Problem 6-6 1. 4.708 425.000 $10.984 8.432.301 x 4%) Premium on Bonds Payable Cash Interest expense* Premium on Bonds Payable Cash * (10. Therefore.432.000.800.000 Jun 30. The journal entry to record repairs as performed is debit Warranty liability.301 10. the total debits to the account for the year is the total cost of repairs made during the year.200 – 6.000 417.000. . I = 4.1 Page 209 Problem 6-5 PV of bond issue: N = 30.800 = $10.016 425. $10.200 2. 20x4 Cash Premium on Bonds Payable Bonds payable Interest expense ($10.

129 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $511.311 22.097 .500 Jan 1.500 Dec 31.714 – 2.500 Jan 1.500 FV 500. 20x8 20.1. 20x8 20.097 20.074 – 2. 20x7 Jul 1.000 Enter Compute Jan 1.137 22.500 Dec 31.714 x 4% Bonds payable Cash Interest expense $504. v.105 PMT 22.445 2.277 2.105 $513.129 – 2.1 Page 210 Problem 6-7 Proceeds on bond issue: N 6 I/Y 4 PV $513. 20x8 Jul 1. 20x6 Cash Bonds Payable Interest expense ($513.Introductory Financial Accounting.074 x 4% Bonds payable Cash Interest expense $509.189 2. 20x7 20.937 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $506.937 – 2.277 20.445 20.223 = $504.055 = $509.524 1. 20x6 20.311 = $502.363 2.105 20.105 x 4%) Bonds payable Cash Interest expense $513.500 Jul 1.277 20.403 x 4% Interest payable $513.137 = $506.976 22.223 22. 20x6 Dec 31.976 = $511.445 20.105 – 1.055 22. 20x7 20.

420 60.403 22.000. Dec 31.171.500 500.097 2.591 – 1.509 1. 20x9 Interest payable Bonds payable Cash Bonds payable Cash 20.Introductory Financial Accounting. Enter Compute N 40 I/Y 5 PV X= $1.000 x 12% x 1/2) Interest expense (1.491 60.000 x 12% x 1/2) *Bonds payable balance as of June 30.171.000 500. 20x7 ($1.171.000 Problem 6-8 1.171* x 5%) Bonds payable Cash (1.580 1.591 58.171. July 1.420) $1.591 $1. v.171.591 PMT 60000 FV 1000000 2. 20x6 Cash Bonds payable Interest expense (1.591 x 5%) Bonds payable Cash (1.1 Page 211 Jan 1.000.000 58. 20x7 . 20x6 4. June 30.000 3.1.170.

Interest expense for 20x7 = $44.000 x 10% x ) Bonds payable Cash ($1.Introductory Financial Accounting. b. v. $44. .850) x 10% x Bonds payable Cash ($1.1 Page 212 Problem 6-9 The journal entries to record interest expense for 20x7 would be as follows: 1st half of 20x7: Interest expense ($897.000 True. c.000 + 4.000 $45. False.850 4.000 exactly.093 5.093 40.000. The interest expense will increase every year since the book value of the bonds payable will also increase.850 + 45.093 = $89.000 x 8% x ) a.1.000 x 8% x ) 2nd half of 20x7: Interest expense ($897. The cash outflow is $80.943 False False.000.850 40. d.

c 150.000 126.000 21.000 40. non cumulative. $6.000 x $0.000 40.520 $217.32 $14.1 Page 213 Problem 7-1 1.080 2.000 shares outstanding after the split. v.000 44.000 2.080) Total Shareholders’ Equity $ 138.000 February 10 February 15 February 26 12.1. 400 shares issued and outstanding Retained Earnings ($0 + $56.400 2.$2.080 14. Problem 7-2 1. 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.$14.000 39.000 40.000 shares issued and outstanding Preferred Shares.000 12.400 14.000 .000 shares x 3/2 = 225.Introductory Financial Accounting.000 2. 44.080 February 27 February 28 21.400 . Shareholders’ Equity Common Shares.520 .

000 3.1 Page 214 Problem 7-3 1. c.000 180.000 3. e.000 Net Income – 15.000 40.000 3. g.000 48.500 Dividends) $348.500 $456. Shareholders’ Equity Common Shares. d.000 180. 2.000 53.000 $115.000 20. a. issued and outstanding 3.000 Retained Earnings ($64.1.000 20. Cash Common Shares Equipment Preferred shares Cash Preferred shares Dividends (or Retained Earnings) Preferred Dividends Payable Cash Common shares Preferred Dividends Payable Cash Retained earnings Cash Bonds payable Premium on bonds payable Common shares $115. cumulative – authorized 50.000 3.500 12.000. issued and outstanding 3. h.000 60.000 3.500 .000 40.000 b.000. authorized 100. v. f.000 Preferred Shares.500 50.Introductory Financial Accounting.000 12.

12. 8.600.000 $1.000 12.600 x 3%) Bonds payable Cash ($400.Introductory Financial Accounting.000 34.588 412 13.520.000 75.000 75.000 16.000 x 6.000 945. 1.000 5.576 424 13.000 16. 10.1 Page 215 Problem 8-1 a.000 25.5% / 2) Interest expense ($419. Equipment Cash Warranty liability Cash $1.000 34.000 30. 7. Accounts receivable Sales Cash Accounts receivable Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable 5.000 30.000 945.5% / 2) 11. 6.600 – 412) x 3% Bonds payable Cash ($400. v.400 320.000 25.600.000 5. .000 5.000 1.000 960.000 12.1.000 2. 3.000 1.600 314.000 x 6.000 960.000 5. 9.000 5. Purchases Accounts payable Accounts Payable Purchase returns Cash Common stock Accounts payable Cash Salaries payable Salaries expense Cash Interest expense ($419. 4.520.

000 cr.31*) Retained earnings Cash * Average book value per share = $150.930 cr.400 3.400 .400 2.000 23.000 x 50% Bad debt expense 40. 2.600 6.000 40. $4. v. 17.000 130.000 x 20% 12.930 16.310 4.400 + 2.320 3.400 Balance required: $2.31 Prepaid insurance Cash Operating expenses Cash Bad debt expense Allowance for doubtful accounts The balance in the allowance for doubtful accounts is: $23.000 cr.000 x 3% 43.000 dr.400 130. $23. + 5. Income taxes payable Cash Common shares (1.930 dr. = The balance in the allowance for doubtful accounts should be: $144. + 34. $6.690 22.000 + 75.930 23.Introductory Financial Accounting.000) = $17.1 Page 216 13.000 17.1.000 / (10. 18.400 $3. 15.000 + 3.010 4.000 17.800 400 $3. Insurance expense Prepaid insurance Balance in prepaid insurance account: $1.000 x $17.000 14.400 x 2/12 Insurance expense 3.000 x 7% 23.000 dr.

400 4. amortization – equipment** Patents*** * $300.000 x 1.000 58. amortization – building* Acc.000) Purchase returns Purchases Check: Opening inventory Purchases – net ($960.000 $320. Cost of goods sold Inventory ($378.000 80.Introductory Financial Accounting.700 6.5% Salaries expense Salaries payable Retained earnings Cash Income tax expense Income taxes payable $134.000 13.000 24.400 *** $34.256 x 40% = 53.000 16.500 ** ($145.702 53.000) Cost of goods available for sale Less ending inventory Cost of goods sold Inventory loss Allowance for decline in value of inventory 886.000 Purchase) = $137. Amortization expense Acc.000 960.000 13.250 39.000 x 20% = $27. v.000 (378.000 1.000 – 16. .500 27.000 NBV Beg + 30.1 Page 217 19.250 20. 6.000 / 40 = $7.000 21.700 80.000) $886.000 / 8 = 4. 24.1.000 53.702 23.000 – 38.000 24.600.000 944.150 7.702 22. Warranty expense Warranty liability $1.000 – 320.264.

000 23.702 Warranty Liability 25.500 Acc Amort .000 53.000 5.930 17.250 29.000 23.000 5.000 378.000 Bonds Payable 412 419.000 945.Equip 38.000 5.000 22.000 58.000 4.520.000 1.000 13.000 1.000 13.000 30.000 59.1 Page 218 Part (b) Assets Cash 36.400 65.000 30.000 12.Introductory Financial Accounting.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 5.600 BALANCE SHEET Accts Receivable 176.000 13 Inc Taxes Payable 40.000 13.400 400 Building 300.000 Liabilities & Equity Accounts Payable 16.000 27.702 25.000 75.000 945.000 B 19 14 B 7 E B E Patents 34.000 175.000 80.500 127.000 207.200 80.000 34.690 144. v.000 25.600.000 Land 40.700 B 22 E E B 20 E Prepaid Insurance 1.000 Allow/Doubt Accts 34.000 126.000 75.000 40.310 150.400 2.1.400 3.000 7.600 424 418.000 960.000 B 19 E 10 10 B B 11 E Equipment 145.690 B 24 B 15 E 18 B 12 B 21 B Acc Amort .600 6.000 12.000 24.700 6.510 B E .400 Allowance for Decline in Value of Inventory 13.000 2.000 15.400 130.Bldg 120.000 1.000 222.600 5.764 Common Stock 17.930 Inventory 320.520.000 5.000 127.000 320.750 19 20 14 23 Retained Earnings 4.

400 21 18 16 Operating expenses 130.000 16.1 Page 219 Expenses Purchases 960. v.000 Revenues Sales 5 20 20 6 1.Introductory Financial Accounting.588 12. 53.930 19 Amortization exp.164 Insurance 3. 39.000 960.700 321.000 INCOME STATEMENT Purchase Returns 16.150 24 Income Tax Exp.600.702 20 Inventory Loss 13.000 .400 6.100 Warranty expense 24.000 17 Bad Debt Expense 23.000 9 22 E Salaries 314.1.000 10 10 E Interest 12.576 25.000 1 20 Cost of Goods Sold 886.

v.000 $17.400 130.930 378. 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 $15.400 29.680.702 $2.000 53.196 $2.000 127.1 Page 220 c.000 418.510 1.100 25.690 59.500 175.150 13.764 207.680. 20x6 Dr.000 321.196 Cr.750 126.000 6.930 39. Haider Corporation Trial Balance As at December 31.000 300.000 13.702 12.000 886.000 3.000 400 40.000 65. .700 25.1.600.Introductory Financial Accounting.164 24.000 23.600 222.

000 321. January 1.1 Page 221 d.554 Haider Corporation Statement of Retained Earnings for the year ended December 31.000 886.000 39.164 134.702 $80.400 23.000 3. v.000 714. 20x6 Retained earnings.554 (4. Haider Corporation Income Statement for the year ended December 31.Introductory Financial Accounting.150 130.600.690) (80.580 159. 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. December 31.064 .420 25.200 80.256 53.000 554. 20x6 $144.1. 20x6 Net income Premium on redemption of common shares Dividends Retained earnings.000) $140.930 13.100 24.

750 351.070 40.702 12.600 29.000 (65.166 207.Introductory Financial Accounting.764 589. v.700 25.500 109.1 Page 222 Haider Corporation Statement of Financial Position as at December 31.690 140.1. 20x6 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance $ 15.402 418.754 $936.000 170.000 (127.070 365.400) 172.000 6.500) 175.920 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Shareholders’ Equity Capital stock Retained earnings $126.000 $300.600 204.850 $936.064 347.920 Land Building Less accumulated amortization Equipment Less accumulated amortization Patents – net .000 400 585.

600 $9.000 k.700 4. 4.800 4.000 4.600 x 5/12 Interest receivable Interest revenue $12.000 x 10% x 9/12 Amortization expense ($11.Introductory Financial Accounting.600 x 9/24 Amortization expense Accumulated Amortization ($80. j.000 12.700 i.000 – 4. v.500 4.000 24. 12.000 l.000 f.900 / 17) Patents or Accumulated Amortization – Patents Supplies inventory Supplies expense Increase in inventory = $9.600 c.600 b.000 x 3% x $40 Allowance for doubtful accounts Accounts receivable Income tax expense Income taxes payable $9. 16. 4.600 3.1.000 x 9% x 4/12 Interest expense Interest payable $60.600 e. 360 360 g. Bad debt expense Allowance for doubtful accounts $320.000) / 10 Prepaid rent Rent expense $9.000 16.500 h.600 7. 4.500 Warranty expense Warranty liability 10. d. 700 700 4. .200 – 4.000 24.1 Page 223 Problem 8-2 a.000 x 3% Wages expense Wages payable Insurance expense Prepaid insurance $9. 7.800 3.

320 Collections on Credit Sales + 4.300 Prepaid) Salaries and wages (5.1.740 110 4.630 1. April 1.136 Operating Income Interest (72 + 44)1 Net income before taxes Provision for income taxes (6.770 Cash Sales + 5.120 Prepaid) Advertising Depreciation (3.536 116 6.640 x 10% x 2/12 $312 72 240 2. 20x2 Loan balance. v.Introductory Financial Accounting.1.686 19.880 x 10% x 3/12 Principal payment.400 Baking Materials Purchases .1. Income Statement for the five months ending May 31.270 800 424 250 13.000 / 5 x 5/12) $32. April 1.500 5.316 12. 20x2 Sales (22.2.880 .284 $5.420 x 20%) Net income 1 Loan payment Less interest: $2.920 .640 $44 .226 Uncollected Sales) Cost of goods sold Purchases (14.500 + 240 Payable) Maintenance Utilities (4.800 .840 Ending Inventory) Gross margin Operating Expenses Rent (1. 20x2 (2.000 + 270 Payable) Insurance (1.094 6.420 1.1 Page 224 Problem 8-3 MAS Inc.240) Interest April & May .130 Rebate + 256 Payable .

284 44 960 3.750 $12.600 .1.734 2. 20x2 ASSETS Current Assets Cash (33.620 3.226 1.960) Shareholder's Equity Common Stock Retained earnings $526 240 1.640 .500 5.370 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 (2.054 1.1 Page 225 MAS Inc. v.840 1.120 300 9.680 4. Balance Sheet as at May 31.136 7.636 $12.31.370 .000 -250 2.466) Accounts receivable Inventory Prepaid insurance Prepaid rent Fixed Assets Equipment Accumulated depreciation $2.134 4.Introductory Financial Accounting.

000 $338.000 278. 20x1 ASSETS Current Assets Cash Marketable securities* Accounts receivable Inventory Noncurrent assets Equipment Accumulated depreciation $24.000 63.000 SHAREHODLERS' EQUITY Shareholders' Equity Common stock Retained earnings * Plug to balance.000 80.1. v.000 80.1 Page 226 Problem 8-4 Morrow Wholesale Balance Sheet as at December 31.000) 60.000 155. $275.Introductory Financial Accounting.000 .000 (20.000 $338.000 19.

000 200.000 ÷ 10) Bad debts (155. v.Introductory Financial Accounting.000 9.000 4. beginning of year Dividends Retained earnings.000 34.000 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.900 (300) 5. end of year 11.000 + 1.000) $70.100 15.000 .220 63.1.600 8.500 $250.1 Page 227 Morrow Wholesale Income Statement and Statement of Retained Earnings for the year ended December 31.000 5.000 50.000) Miscellaneous Operating income Interest expense ($5.000 (10.380 17.000 x 80%) Gross margin Operating expenses Salaries (10.220 .000 24.600 7.600) Depreciation (80.146. 20x2 Sales Cost of goods sold ($250.

220 345.500 23.000 330. v.000 7.ending Purchases Cost of goods sold = Opening inventory Purchases Less ending inventory $180.500 SHAREHODLERS' EQUITY Current liabilities Accounts payable Accrued wages payable Note payable Interest payable Dividends payable Income taxes payable Shareholders' Equity Common stock Retained earnings $36.1 Page 228 Morrow Wholesale Balance Sheet as at December 31.000 70.Inventory Purchases of merchandise A/P .500 Note 1 .000 (96.000 + 4.000 $80.220 $405.000 .000 1.1.000 .20.600 5.000) Equipment (80.000) $200.Introductory Financial Accounting.500) Inventory (Note 1) Prepaid advertising Noncurrent assets Land (19.000 + 406.000 300 10.205.000) $224.000 (8.000 $405.000 .20. 20x2 ASSETS Current Assets Cash (24.000 216.000) 52.000 36.000 .280 275.000 10.380 60.000 + 8.000 $216.000 60.000) Accumulated depreciation (20.500 96.

000) Cash flow from financing Issue of bonds payable Dividends paid (Note 2) 30.000 Salaries Expense .000 (125. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($45.000) Gain on sale Proceeds Note 2 – Dividends paid Net income Less increase in Retained Earnings ($108.300 19.800) (112.100 Income tax expense – 33.000 (99.000 – 40.000 $20.000 $146.400 $ 99.400) (80.000 COGS + 7.000 Increase in Inventory .000 – 69.200 Increase in AP) Cash paid out for salaries ($120.900 47.500) Cash.000) (31.000 Interest expense .000 Sales . Statement of Cash Flow for the Year ended December 31.000 Increase in Interest Payable) Cash paid out for income taxes ($79.000 (294. v.000 Increase in A/R) Cash paid out to suppliers ($300.100 Increase in Income Taxes Payable) $740.800 Cash flow from investing Proceeds on sale of equipment (Note 1) Purchase of equipment 20.000) 175.10.1.500) 1. Ginger’s Cookies Ltd.000) $ 5.Introductory Financial Accounting.1 Page 229 Problem 9-1 a.000) (46.000 15.200 $20. 20x6 Cash flow from operations Cash collected from customers ($7500.000) (105.7.600 Increase in Salaries Payable) Cash paid out for other operating expenses Cash paid out for interest ($32.800 – 105.400 – 61.500 Increase in cash ($175. beginning Cash.500) (69.12.500 .1.

900 7.000 (15.600 1.000) 12.000) (7.100 $175. v.200 7. Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Gain on sale of capital assets Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Increase in Accounts Payable Increase in Salaries Payable Increase in Interest Payable Increase in Income Taxes Payable $146.1 Page 230 b.800 .1.000 33.000) (10.Introductory Financial Accounting.

000) 350.000 Decrease in cash Cash. v.000 .842.000) (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. Statement of Cash Flow for the year ended December 31.000) 17. end of year 1 Accumulated Amortization. beginning of year Amortization expense Accumulated Amortization on disposal: $158. end of year Amortization expense = $218.695.000) (37.000 (543.000) (12.000) (5.000) (11.1 Page 231 Problem 9-2 a.000) $3. beginning of year Cash.Introductory Financial Accounting.000 ? (71.000 466.000 $319.000 111.000) (463.000) 353.000 (13.000 Accumulated Amortization.1.000 Cash flow from investing Proceeds on sale of assets Purchase of capital assets2 80.000 $3.000 (48.000 218.000 – 87. McDuff Ltd.000) 7.000) (34.000 (50. 20x3 Cash flow from operations Net income Adjust for non-cash items: Amortization expense1 Gain on retirement of bonds Loss on disposal of assets Adjust for changes in non-cash working capital items: Decrease in accounts receivable Increase in merchandise inventory Increase in prepaid expenses Decrease in accounts payable Decrease in salaries and wages payable Decrease in interest payable Increase in income taxes payable $239.000 150.

000 ? $508. beginning Additions Disposals Capital Assets.000 239.000 Increase in Prepaid Expenses) Cash paid out for salaries and wages ($850.000) $466.500.000) (493.000 b.000 Increase in Income Taxes Payable) $4.000 Salaries and Wages Expense + 37.000 – 218. Cash flow from operations – Direct Cash collected from customers ($4.000 COGS + 48.326.711. end of year Dividends = $50.Introductory Financial Accounting.000 Decrease in Salaries and Wages Payable) Cash paid out for interest ($67.1.000 ? (158.000 (2.000 Increase in Inventory + 12. beginning of year Add net income Less dividends Retained Earnings.000 Interest expense + 5.000 Decrease in Interest Payable) Cash paid out for income taxes ($250. ending Additions to capital assets = $543.000) (887.000 Decrease in A/R) Cash paid out to suppliers ($2.400.000 $5.000 $319.460.000 Decrease in AP) Cash paid out for operating expenses ($700.000) $5.000 .000) (233.000 Sales + 111.000 Income tax expense – 17.000) (72. v.611.000 Amortization Expense + 11.1 Page 232 2 Capital Assets.000 3 Retained Earnings.

600) (100) (400) 100 (3.800 $ (1.500 (166.1 Page 233 Problem 9-3 (a) HHC LTD.200 – 100 Increase in Interest Payable) $216. 20x5 Cash Flow from Operating Activities Net Loss Adjust for non-cash items Depreciation Add (deduct) adjustments to non-cash current assets and liabilities: Increase in accounts receivable Increase in inventory Increase in prepaid Insurance Decrease in salaries and wages payable Increase in interest payable $ (3.500) $ 900 (b) Cash Flow from Operating Activities Cash collections from customers ($218.900) (5.500 Increase in Accounts Receivable) Cash paid to suppliers ($165.000 Sales – 1.300) (1.Introductory Financial Accounting.800 + 100 Increase in Prepaid Insurance) Cash paid for rent Cash paid for interest ($1. Cash Flow Statement for the year ended December 31.600) (39.600 Increase in Inventory) Cash paid to employees ($39.400) 7.300 + 400 Decrease in Salaries and Wages Payable) Cash paid for insurance ($2.100) $900 .700) (2.500) (1.000 COGS + 1.1. v.

000 – 25. Statement of Cash Flow for the Year ended December 31.000) (165.000 12.000 – 21.000 Decrease in AP) Cash paid out for other operating expenses Cash paid out for interest Cash paid out for income taxes $847.1 Page 234 Problem 9-4 a.000 Cash flow from financing Issue of bonds payable Dividends paid 25.000 26. 20x6 Cash flow from operations Cash collected from customers ($900. Toram Ltd.000 Increase in Inventory + 18.000) 17.000 (50. beginning Cash.000 Sales .000 30.000 COGS + 32.000) 0 0 32.000 (650.000) $7.53.Introductory Financial Accounting.000 .000 Note 2 – Proceeds on sale of long-term investment Net book value of investment Gain on sale Proceeds $ 18.000 $50.000 30.000 (4.000) (25.000 Cash flow from investing Proceeds on sale of equipment (Note 1) Proceeds on sale of long-term investment (Note 2) Purchase of equipment 7.1. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($32. v.000 Increase in cash ($32.000 + 17.000 Increase in A/R) Cash paid out to suppliers ($600.000) 24.000) Loss on sale Proceeds $ 11.000 (20.000) Cash.

000) (32.000 (12.000) $32.000) (18. 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 $100.1.000 .Introductory Financial Accounting.000) (53. v.1 Page 235 b.000 43.000 4.

000 = $40.000 and CA = 180.000 = $450. c .000 COGS) Beginning inventory = $60. 2. v.000 and CA = 200.1 Page 236 Problem 10-1 1. the current ratio drops to 0.000 – 120.500) / 2 = $31. c c Average inventory = ($30.000 – 20. a c b Average receivables = ($40. 7. If the invoice paid is $20.000) / 2 = $50.000 = 6.000 then the current ratio is 0.000 COGS = $30.000) / 2 = $75.000 is made. Assume that CL = 250.000. d Average receivables = ($50.000 + 120.000. current ratio = $100.000 + 540.000 ($320.000 + 55.500 + 32.000. Assume that a payment of $10.$80. the current ratio becomes $90.000 / 80. 5.000 Average inventory = ($60.000 + 22.$300.0 times 9. Impact is on the current ratio.250 Days sales in A/R = $32.000) / 2 = $52.8.000 / 70. current liabilities .500 x 7 = $367.000 No impact on working capital since the decrease in cash is equal to the decrease in accounts payable.000 / 50. 4.$100. then CL = 230. a 6. 8.500 Net credit sales for 20x8 = $52.000.000 + 40.250 / ($125.1.000 purchased .Introductory Financial Accounting.500 = $400.000 = 1.500 Total net sales = $367. d 3.25.000 / 365) = 94 days Inventory increased by $20.000 = 6 Assume an initial amounts as follows: current assets .78.29 and working capital stays the same.000 Inventory turnover = $450.000 / 75.000 = 1.000 Inventory turnover = $300.

000 + 275.400.000 / 379.000) ÷ (1.000 + 275.000 = 0.000 = 4.000 = 1.83 * debt is defined as long-term debt in this case .000_ / 365 = 70.000 + 550.07 200.1 Page 237 Problem 10-2 Liquidity Analysis: 20x5 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 712.000 + 400.76 (12.68 (34.000 / 863.000 = 1.1.000 / 793.5 days Solvency Analysis: 20x5 Debt-to-Equity Ratio* 920.07 20x4 850.200. v.000 + 220.000 = 1.000) ÷ (1.000) / 379.000 / 50.000 + 275.60 (34.000 = 0.000) / 371.7 days 20x4 594.000 / 371.00 Times Interest Earned 230.000) / 365 = 53.000 = 1.000 / 60.88 (12.Introductory Financial Accounting.000 = 3.

300.000 + 2.3 days 1.8% 230.000 / [(2.300.000 / [(863.2 days 2.000 / 365) = 40.875.000 / [(2.000) / 2] / (1.000 / 1.000 + 1.3% 98.300.000 / 2.10 20x4 $1.875.1 Page 238 Profitability Analysis 20x5 Gross Profit Percentage Return on Sales Return on Assets $900. v.000 / [(793.98 Days Sales in Accounts Receivable Total asset turnover .48 [(220.000 = 10.000) / 2] = 11% 110.000 + 350.900.3% 200.400.000 = 39.014.000) / 2] = 3.014.014.000 / [(425.000) / 2] = 1.1.Introductory Financial Accounting.300.66 [(275.162.900.900.000) / 2] = .000 / 2.000) / 2] = 10.000 / 365) = 39.162.000 = 10% 230.000 + 1.000) / 2] / (2.5% 200.014.900.000 / 1.000 = 36.000 + 200.000 + 725.000 + 340.000) / 2] = 12.9% Return on Equity Asset Management (Activity Ratios) 20x5 Inventory turnover $1.000 / [(340.000 + 793.000 + 220.000 + 2.000 / [(2.200.1% 20x4 $700.000 / [(2.000) / 2] = 13.000) / 2] = 3.

08 (37.000 = 0.000) / 365 = 135.13 (20.167.000 + 524.000) / 524.000) ÷ (1.000 = 2.Introductory Financial Accounting.000 = 2.04 (20.1.576.000 = 1.000 / 524.000 / 560.52 days 20x6 1.000) / 560.1 Page 239 Problem 10-3 Liquidity Analysis: 20x7 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 1.000 = 2.114.000 = 0.000 + 480.679.08 * debt is defined as long-term debt in this case .000 / 56.45 Times Interest Earned 65.000 = 0.32 20x6 800.000 + 463.92 (37.300.000 + 480.30 137.000) ÷ (1.000) / 365 = 97.000 = 1.000.000 + 524.000 / 60.000 / 2.72 days Solvency Analysis: 20x7 Debt-to-Equity Ratio* 820.000 / 2. v.000 + 635.

6% 3.100.000 / [(4.1% 65.000 / 365) = 88.000) / 2] / (2.700.000 / 365) = 87.100.000) / 2] = 0.000 + 2.44 Days Sales in Accounts Receivable Total asset turnover .000 / 1.003.90 [(524.956.679.576.5 days 1.000 / 1.300.628.2% 65.000 + 524.000 / 2.5% 51.000) / 2] = 2.000) / 2] = 1.000 / [(2.13 [(480.679.000 / [(3.100.000 + 4.9% Return on Equity Asset Management (Activity Ratios) 20x7 Inventory turnover $1.000 + 570.000 = 3.003.003.000 + 2.700.Introductory Financial Accounting.1% 20x6 $700.000) / 2] = 0.52 20x6 $1. v.808.003.000 + 3.808.000 + 4.1 Page 240 Profitability Analysis 20x7 Gross Profit Percentage Return on Sales Return on Assets $800.000) / 2] = 1.956.000 + 300.000 / [(3.000 / [(2.000 / [(570.000 = 38.000) / 2] = 0.100.1% 137.000) / 2] = 1.000 / [(650.000 = 8.1% 137.1.3 days 2.700.000 / 2.700.000 + 485.000.000) / 2] / (1.000) / 2] = 3.000 = 41.000 / [(4.000 + 3.

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