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

an asset and a liability.000 + Equity .000 5. our equation stays in balance: Assets + 100. and increasing a liability. the company would receive $100.000 We are increasing an asset.000 Both the Equipment account and the Cash account are assets.Introductory Financial Accounting.000 100. The journal entry would be: Equipment Cash 75.000 . that is. we increase the asset account Cash.000.1 Page 5 (c) That same company then purchases an additional $5.000 Upon signing the loan. Furthermore. by increasing one and decreasing another the equation holds true: Assets + 75.000. The loan is for $100. therefore.000 + Equity The company then uses cash to purchase equipment that costs $75.000 worth of inventory on account. The journal entry to record the loan would be: Cash Bank Loan 100. they do not pay cash but take on an account payable with the supplier. The journal entry would be: Inventory Accounts Payable 5.000 75. our equation holds true: Assets + 10.000 = Liabilities +100. they will take on a liability to pay back the bank the $100. therefore.000 cash.75.000.000 = Liabilities + Equity (e) The same company is a little short on cash and has to take out a loan from its bank. therefore. By increasing both sides of the equation. v.1.000 (d) = Liabilities +10.

the income and expense accounts are closed out to zero.000 30.000 in sales in its first month. If Revenues are greater than Expenses during a period.000 = Liabilities + Equity +30. For example.Introductory Financial Accounting. Income Statement accounts will consist of Revenue accounts or Expense accounts. 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. The journal entry would be: Cash Sales Revenue 30. If we continue with our examples… (f) Say that the company from the above example has $30.1 Page 6 Transactions that impact the Statement of Income The above examples used accounts that appear on the Statement of Financial Position. If you remember that Income and Expense accounts get closed to Retained Earnings (which we will discuss in further detail later) then you can see how recording sales and expenses will still keep the accounting equation in balance.000 The accounting equation is maintained since Assets are increased and Equity is increased: Assets + 30. an expense account’s normal balance is a debit balance. 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.000 . the company will have generated a net loss and a net Debit balance to Retained Earnings will result.1.e. when a revenue account is increased we credit the account. Revenue accounts normally have a credit balance. All revenue and expense accounts are temporary accounts in the sense that we start the year with a zero balance in the account. via the Retained Earnings Account. If Expenses are greater than Revenues. which is part of the Shareholders’ Equity section of the Statement of Financial Position. i. the company will have generated a net income and a net Credit entry to Retained Earnings will result.

15.000 15.000 The Statement of Financial Position The Statement of Financial Position is a snapshot of a company’s financial position at a particular point in time. as are liabilities. Assets and liabilities that will come due or have to be settled within 12 months or one accounting cycle (whichever is longest) are classified as current.000 = Liabilities + Equity -15. an expanded form of the accounting equation: The Statement of Financial Position Assets = Liabilities & Shareholders’ Equity Liabilities Current Liabilities Current Assets Non-Current Liabilities Shareholders’ Equity Contributed Capital Non-Current Assets Retained Earnings Assets are listed from most liquid to least liquid.1 Page 7 (g) To incur these sales.1.000 worth of its inventory. The accounting equation remains in balance: Assets .000 Note that this entry removes the inventory from the company’s accounts. and both are divided into current and non-current based on their liquidity. Note that Cost of Goods Sold is an expense account. basically.Introductory Financial Accounting. the company sold all $15. . The journal entry to record that would be: Cost of Goods Sold Inventory 15. and all other assets and liabilities are classified as non-current. The Statement of Financial Position (also called the Balance Sheet) is. v. as they no longer have it on hand to sell.

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

Wages payable – a listing of all wages due to employees within one year or one accounting cycle. v. The retained earnings account reconciliation from the beginning of year to end of year balance is as follows: Retained Earnings. Shareholders’ Equity: Contributed Capital – this account contains any amounts which have been invested in the company by the company’s shareholders. end of year XXX ± XXX .Introductory Financial Accounting. 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. trademarks and copyrights would be classified as longterm assets. Note that the wages payable account is normally the result of an adjusting entry. The retained earnings account is adjusted at the end of each year to account for a company’s net income or loss. It is when the amount is due back to the lender that differentiates between current and non-current debt.1 Page 9 Intangible assets such as patents.1. Retained Earnings – this account represents the cumulative total of the net income of a company that has not been distributed to shareholders. Current Liabilities: Accounts payable – a listing of all accounts that will be due to suppliers which are expected to be repaid within one year or one accounting cycle.XXX XXX . beginning balance Add Net Income for the year or deduct the Net Loss for the year Less Dividends declared to shareholders Retained Earnings. Taxes payable – a listing of all taxes due within one year or one accounting cycle.

000 18.000 The multi-step statement has multiple subtotals.000) 15.1 Page 10 The Income Statement The income statement is a statement that shows how a company performed during one period.000 (25.1.000) $10.000 (8.000 . v.000) 40. the amount left over after all relevant expenses have been taken into account.000 (60. and for the above company would look like the following: The Miller Company Income Statement For the Period ended December 31. Income statements can take on one of two formats: single step and multi-step.000) $10.Introductory Financial Accounting. 20x8 Sales Interest Income Cost of Goods Sold Operating Expenses Income Tax Expense Net Income $100.000) (25. however.000 3. Either one is acceptable under GAAP. For example: The Miller Company Income Statement For the Period ended December 31. The single step statement lists all revenues and then all expenses without breaking out any further subtotals.000 (60. It takes the reader from total Revenues to Net Income. 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) (8. most companies tend to use some form of a multi-step statement. typically the fiscal year of the company.000 3.

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

are for 5 years. An outside storage facility has been rented to fill this need. 20x7 for $350. Ian’s Incredible Instruments.000 The company took out a loan for $200. He only rented the outside facility to the end of November. beginning February 1. The lease is in effect from January 2.000.) 2. Ian purchased furniture and fixtures for the store at an auction for $30. Opened for business in a local mall.000 was purchased on account. into the company upon incorporation. Inc. v.’s Sales for the first year were as follows: Cash sales . He paid cash. January 2.. but is not large enough to store any extra inventory.000 of the accounts receivable were collected throughout the year.200 per month. He received 1. is located in the Meadowvale Mall.000. Rent is $1. 20x7 through December 31. Ian’s Incredible Instruments Inc. 20x7. The following transactions took place during the fiscal year ended December 31. and was rented on a month-to-month basis. the annual rate is 10%. 9. his entire life savings. Ian invested $175. Ian’s Incredible Instruments Inc. 20x7. The lessor required Ian to pay the first and last month’s rent on January 2. 20x7. 4. 5. 3. 10. 8. After years of planning and saving. 20x7. The mall location is suitable for Ian’s retail needs. he has decided he is ready to go out on his own. (Record the payments made from March to November only. Having proven himself a good tenant. which was taken out on June 1.000. 20x7 through December 31. interest payments are due every 6 months. 6. 20x7. was purchased for $5.760 cash.$430. and was able to give up his off-site storage facility. Credit sales . 20x7. 20x7: 1. 20x7.000 due on the first of each month.1 Page 12 Comprehensive Example Ian has worked at a music store for the last 20 years. More inventory was purchased on account June 1. Ian’s Incredible Instruments Inc. 7. 11. A total of $280. Ian was able to convince his landlord at the mall to give him additional storage space (at no extra cost). which covered the period of January 2. The terms of the loan.Introductory Financial Accounting.) Inventory of $120. January 2. . with 10% annual interest due semiannually.000. An insurance policy. (Record the February rental payment only. That is. however.000 common shares of the Corporation.000. Ian signed a two-year lease with monthly rent of $8. 20x8.1.$310.

000 8.000 16.000 13. the appropriate journal entries would look like this: 1.200 1. For each of the above.1. To record the purchase of inventory on account.1 Page 13 12. Rent Expense Cash 1. 175. To record the rent paid on the outside storage facility in February for one month.000 . Prepaid Rent Rent Expense Cash 8. Inventory Accounts Payable 120. the deposit for the last month won’t be used until 2 years from now. 14.000 120.000 40.Introductory Financial Accounting.000 23. v.000 To record the payment of first and last month’s rent on the lease. Additional cash disbursements for the year were as follows: Wages & salaries Rent Advertising Miscellaneous expenses Payments of accounts payable Interest on bank loan $165.000 88. and therefore it is an expense in this fiscal period.000.000 $446.000 3. The total cost of the inventory sold during the year was $300. To record Ian’s initial investment into the company. However.000 10. We know that the first month’s rent will be “used up” in this year.000 120.200 4.000 175.000 (note that a dividend is debited against retained earnings). Ian declared and paid a dividend of $60. This is what we call a prepaid expense. Cash Contributed Capital 2.

the entire amount applies to the current fiscal year and therefore there is no prepaid portion. To record the purchase of inventory on account.000 740. 20x7.760 6.000 10. Furniture and Fixtures Cash 30.800 . Cash Accounts Receivable Sales 430. However. To record the purchase of furniture and fixtures. we already recorded the initial payment in February). Upon receiving the loan.000 280.Introductory Financial Accounting. Rent Expense Cash 10.000 cash from the bank. (Remember.000 310. Insurance Expense Cash 5. for the purposes of this example we will be entering them in one journal entry.000 9. Inventory Accounts Payable 350. $1. second. sales are recorded individually as they are made. as they are no longer due to us.000 200. two things will happen to Ian’s Incredible Instruments Inc. Note that because it expires December 31.1 Page 14 5. To record the collection of accounts receivable throughout the year. To record sales for the first year. Hence.000 8. they will have an outstanding loan for the same amount. First. v. Note that in reality.200/month x 9 months = $10. To record the rental expense incurred from March through November. for which cash was paid.000 7. they will get $200.800. Cash Accounts Receivable 280.000 30.800 10. We will deal with the interest expense incurred on the loan in a separate entry. Note that as we collect the cash. Cash Bank Loan 200.000 11. we must remove the receivable from our books. To record purchase and payment of the insurance policy.1.760 5.000 350. the credit to the Accounts Receivable account.

000 23.000 10. Retained Earnings Cash 60.000 Interest on bank loan . To record the dividend paid.000 446.000 Wages & Salaries Expense Rent Expense Advertising Expense Miscellaneous Expenses Accounts Payable Interest Expense Cash 165.000 120.Introductory Financial Accounting.000/month = $88.1 Page 15 12.1.$200. Cost of Goods Sold Inventory 300.000 14. v. To record the various other cash disbursements made throughout the year.000 60.000 300.000 x (10% x year) = $10. Note the following supporting calculations: Rent Expense – 11 months x $8.000 88.000 40.000 .000 13. To remove the inventory which was sold from the inventory account and record the resulting Cost of Goods Sold expense.

000 12 Interest Expense 10.000 350.000 8 515. v.000 30.200 10.000 108.1 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 10 175.000 350.240 Inventory 4 9 120.000 12 Advertising Expense 40.000 2 3 5 6 11 12 13 2 Prepaid Rent 8.800 446.000 60.000 5 Insurance 5.200 5.000 280.1.000 1.000 Misc.760 30.000 4 9 Accounts Receivable 7 310.000 1 Retained Earnings 13 60.000 280.000 300.000 120.000 Cost of Goods Sold 13 300.Introductory Financial Accounting.000 13 6 Furniture & Fixtures 30.000 Expenses INCOME STATEMENT Revenues Sales 740. Expenses 12 23.000 .000 12 Accounts Payable 120.000 Contributed Capital 175.000 7 Rent 2 3 11 12 8.000 10.000 430.760 Wages & Salaries Expense 12 165.000 10 Bank Loan 200.000 170.000 16.000 200.800 88.000 1.000 350.

000 .Introductory Financial Accounting. Trial Balance As at December 31.000 Credit $350. v.000 40.240 30.000 $1.000 30.1 Page 17 A trial balance of all of the closing balances of the above accounts would look like this: Ian’s Incredible Instruments Inc.000 108.465.465.000 175.000 200.000 23.000 $1.000 8.000 60.000 740. 20x7 Cash Accounts Receivable Inventory Prepaid Rent Furniture and fixtures Accounts Payable Bank Loan Contributed Capital Retained earnings Sales Cost of Goods Sold Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Interest Expense Miscellaneous Expenses Debit $515.000 170.760 165.000 300.000 10.1.000 5.

The closing entry for Ian’s Incredible Instruments is as follows: Sales Cost of Goods Sold Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Interest Expense Miscellaneous Expenses Retained Earnings 740.1.000 23.000 300.760 98. Income Statement for the year ending December 31. v.Introductory Financial Accounting.000 440.000 108. they are referred to as temporary accounts.000 88. and the offsetting amount is the net income (or loss) that gets recorded to retained earnings.000 23.000 341.000 $88. would look like this: Ian’s Incredible Instruments Inc. all balances get returned to zero. As such.000 5. 20x7 Sales Cost of Goods Sold Gross Profit Operating Expenses Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Miscellaneous Expenses Operating income Interest Expense Net income Closing Accounts All revenue and expense accounts are closed out to zero at the end of each fiscal period.760 165.000 5.240 10. At the end of the year.760 165.000 300.240 $740.000 40.000 40.1 Page 18 A multi-step income statement for Ian’s Incredible Instruments Inc.000 10.240 .000 108.

20x7 Net income Dividends Retained Earnings. Statement of Retained Earnings for the year ending December 31.000 28. 20x7 Retained Earnings.000 .1 Page 19 The Statement of Retained Earnings outlines the changes in the Retained Earnings account from the beginning of the year balance to the ending balance: Ian’s Incredible Instruments Inc.240 203.000 175. 20x7 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures $515.240 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Long-term liabilities Bank loan Shareholders’ Equity Contributed Capital Retained earnings 200.240 $753. December 31.000 $753. 20x7 0 88.1.000 723.000 8. January 1. v.000) $ 28.240 30.240 (60.000 170.240 $ We can now prepare a Statement of Financial Position for Ian’s Incredible Instruments: Ian’s Incredible Instruments Inc.240 350.Introductory Financial Accounting.240 30. Statement of Financial Position as at December 31.000 550.

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

The missing piece to the puzzle is the amount of supplies that were used during the year. that will expire in 20x8. The adjusting entry would be: Insurance Expense Prepaid Insurance 5. . i.800 13.000 12. assume that the company’s year-end is December 31. and therefore should be an expense of the current period. On January 1.000 for an insurance policy that will cover the next 12 months. 20x5? To answer this question. On August 1.200 of supplies on hand. and what we have left at the end of the year.600. 20x5 you had $3.000 $ 5. the missing credit or Supplies Expense has to be 11.000 The balance that remains in the prepaid insurance account of $7.000 does not equal 5. During the year you purchased an additional $13.800 + 13.000 5. 20x5 reveals that you have $5.000 of office supplies. A physical count of the supplies on December 31. What would be the adjusting entry on December 31. we know our opening balance. solving the equation. v.1.e. 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. 20x7 you pay $12.200.000 represents the portion of the insurance policy that is unexpired. 2.Introductory Financial Accounting.200 ???? Supplies Expense As the T-Account shows. what was purchased during the year. it might be helpful to look at the T-Account for Office Supplies for the year: Supplies Inventory Opening Balance Purchases Ending Balance $ 3.800 in your office supplies inventory account.000 At the end of the year you will have 7 months remaining on the policy. Therefore.1 Page 21 Example In examples 1-5. This means that 5 months have been used in the current period. 1. 3. However.

you would have recorded an entry of: Cash ($800 x 12) Unearned Rental Revenue 9. The apartment rents for $800/month. 20x8. 20x5 would be: Supplies Expense Office Supplies 3. office furniture in this case. You received payment for the full year on May 1.600 As of December 31. will appear on the Statement of Financial Position as a reduction of the related asset account. The Accumulated Amortization account. we call it a contra account to the Office Furniture account. you would have earned 8 of the 12 months of revenue. or $10.400. when you received the revenue.1 Page 22 The adjusting entry on December 31. What is your adjusting entry? On May 1. we will take $10.000 per year for the life of the furniture. It is now December 31. It is now December 31.600 9. the adjusting journal entry would be: Amortization Expense Accumulated Amortization 10. on the other hand. 20x8. You estimate that the furniture will last 10 years and have no salvage value at the end of its useful life. You own an apartment building and have a tenant whose parents have paid their rent for the entire year in advance.600 11.000 on January 1.000 per year for the next 10 years.000 Note that the amortization expense account will appear on the income statement as an operating expense for the year.000 Because the Accumulated Amortization account is applied as a reduction of the related asset account.Introductory Financial Accounting. Therefore.1. Each and every year. The long-term asset section of the Statement of Financial Position would be as follows: Office Furniture Less accumulated amortization $100. 11. 20x8. 20x6. i.000) $ 90. there would still be 4 months of unearned . Furthermore.600 You purchase new office furniture for a cost of $100.e.000 (10. 20x6. v. 4.000 as an expense this year.000 10. the revenue to be recorded for the year would be 8 months x $800/month = $6. Therefore. 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. instead of taking the full $100.

no cash has been paid for the interest expense.000. On August 1.333 3.333.000 . and furthermore. The loan agreement states that interest will be charged at a rate of 8% annually. This reconciles to our calculation above.000.000 x 8% = $8.000. Our employees worked 4 days from the time of their last payday until the end of the year. 20x4.200. the accrued wages payable will be $16. as of December 31. The adjusting entry on December 31. 20x6 (a Monday). 5. interest expense for 20x3 would be $8.000. However. The adjusting entry would be: Wages Expense Wages Payable 64. 20x3.000. What is the adjusting entry? To calculate the adjusting entry.Introductory Financial Accounting.000/week. and interest and the principal will be due August 1. we can calculate that the annual interest on the loan will be equal to $100. we have to first figure out how much needs to be accrued. 20x8 would be: Unearned Rental Revenue Rental Revenue 6.400 According to the journal entries above. What is your adjusting entry to record interest expense for the year? Looking at the terms of the loan. That is. the balance in the Unearned Rental Revenue account will be equal to $9.1.000 x 5/12 = $3.333 You last paid your employees on March 27. Your average weekly payroll is $80. therefore.000/5 = $16.1 Page 23 revenue left. that is. v. The balance in the Unearned Rental Revenue Account would have 4 months x $800/month = $3.000 x 4 days = $64.200. 20x3. 3. and our employees work 5 days a week.000 64. the loan has not been outstanding for the full 12 months. only 5 months of interest pertain to the current period.600 – 6. 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. your year-end.400 6. The adjusting entry would be: Interest Expense Interest Payable 6. then our daily payroll rate can be calculated as $80.400 = $3. The loan has been outstanding for 5 months. It is March 31 (Friday). It is December 31. and therefore. 20x3 you take out a loan for $100.

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

that is. but the customer keeps the merchandise. n30. otherwise the full amount is payable in 30 days. when reported on the income statements. A credit is granted to the customer. 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.1 Page 25 • within 10 days.000 $40. These three accounts are considered contra accounts to the Sales account and. would be netted out against the Sales account. v.500 .500 1. they will pay us $980.500 is returned to the company Sales returns Accounts receivable 1. • merchandise is shipped FOB Shipping to a customer. Terms of payment are 2/10.000 merchandise whose sales price was $1.000. Sales Allowances are when merchandise is sold to a customer which is slightly defective. The selling price is $40.Introductory Financial Accounting. Accounts receivable Sales • $40. The $20 discount will get debited to the Sales Discount account.1. a 2 % discount is offered if payment is made within 10 days.

Users and their needs Financial accounting standard setters have narrowed down the users of financial information to two broad groups: creditors and shareholders (both present and potential). The conceptual framework plays a vital role in the development of new standards and in the revision of previously issued standards. principal and dividend payments?. and • to provide information about the economic resources of a firm. and so on. the focus of financial statements is to meet the needs of creditors and shareholders. interest. and • what is the fallback position: does the company have sufficient assets to satisfy its liabilities? To summarize. Consequently. claims on those resources. .1. A credit of $2. 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. These problems must be dealt with in an organized and consistent manner. It would be impossible for financial statements to meet the needs of all users of financial statements. credit. This does not imply that there are no other users of financial statements.500 • on the 9th day after the sale.Introductory Financial Accounting.500 is granted to the customer. and changes in those resources to help in assessing cash flows.000 The Conceptual Framework A strong theoretical foundation is essential if accounting practice is to keep pace with a changing business environment.1 Page 26 • some of the merchandise was slightly damaged during before it was shipped. or similar decisions. v. Accountants are continuously faced with new situations and business innovations that present accounting and reporting problems. payment of $35.500 2. since these needs could conflict.280 720 36. loan repayments. Sales Allowances Accounts Receivable 2. • to provide information to help in assessing cash flows. Cash Sales discounts Accounts receivable 35. the objectives of financial reporting are as follows: • to provide information useful to present and potential users in making investment. such as dividends.280 is received.

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

For example. Comparability implies that accounting information is comparable with previous periods (interperiod comparability or consistency) and comparable to other firms operating in the same industry (interfirm comparability). Materiality implies that financial statements are not precise but are accurate enough that any potential errors of misstatements would not affect any user.Introductory Financial Accounting. Cost/benefit analysis is very difficult to quantify since most costs and benefits are intangible. The concept of materiality can play against the concept of timeliness. 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.000. the principle of conservatism implies that the one with the least favourable impact on net income should be the one chosen. the company would have to show a large loss on disposal.000. Modifying concepts Conservatism means that it is generally preferable that any possible errors be in the direction of understatement of net income. Accounting rules should not provide the motivation for dysfunctional decisions. For example. Information benefits vs. Also. Assume that existing equipment is technologically obsolete and a net present value analysis shows that if the equipment were to be replaced. The only problem is that if the asset were to be disposed of. $100. the financial statements of a company with net income of $10. That’s not to say that accounting principles cannot be changed. information costs. 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. The principle of timeliness implies that the financial statements should be in the hands of users as soon as possible. we must estimate which accounts receivable are likely to become uncollectible in the future and establish an allowance for doubtful accounts. the project has a significantly positive net present value).000 would not be significantly affected if they were misstated by say. the company would benefit economically from it (i. v. The principle of conservatism also leads to the recognition of contingent losses but does not recognize any contingent gains. Here is an example of an accounting rule that could lead to dysfunctional economic decision making.e.1. it may be . For example. but should be used as a way of thinking. a gain or loss arises when the proceeds on disposal differ from the net book value of the asset sold. changes in accounting principles require retroactive adjustment and restatement of prior period financial statements. When introducing an accounting principle. Consistency implies that accounting principles are applied from period to period in the same manner. Thus. as we will see in Lesson 4. when companies sell depreciable assets. but changes should occur infrequently and only for valid reasons.1 Page 28 Freedom from bias (neutrality) – accounting information should be even-handed with respect to the impact of accounting information on users’ behaviour. When accountants can choose between two equally acceptable accounting principles. Conservatism is an effort to ensure that the risk or uncertainty inherent in business situations is adequately considered.

Monetary unit principle assumes that the value of the dollar does not change . Also refer to the definition of an asset (later in this section). otherwise they would have to be recorded at the lower of their depreciable cost or liquidation value. Revenue Recognition Principle states that revenues should only be recorded when earned.1. quarters.1 Page 29 possible that additional invoices are received after the financial statements are issued. all associated expenses related to the recognition of these revenues are recorded also. This assumption allows us to record long-term assets at their depreciable cost. the measurability of such revenues are reasonably certain and collectibility is reasonably assured. Consequently. we can add assets together even if they were purchased in different years. Matching principle assumes that when we record revenues. months…) and report income and prepare a balance sheet for each of these periods. a 1925 dollar is equivalent to a dollar today.e. This omission is justified on the basis of materiality. 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. 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.i. . This is probably one of the most flawed principles.Introductory Financial Accounting. Periodicity assumes that we can breakup the life of a business in separate reporting periods (years. Going concern principle assumes that the entity will continue operating in the future. Other Principles Economic entity principle states that the financial statements of an entity should report all assets and liabilities under its control. This principle will be invoked when dealing with leases and intercorporate investments in later lessons. v.

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

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

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

What would be the balance for Total assets on December 31.000 personal residence as an asset on the balance sheet of his company.000 c) $ 999.999. 20x8. 20x5. The December 31.1 Page 33 4. 5. there will be a balance of $20.000 in the Prepaid insurance account on December 31. purchased a 4-year insurance policy and paid a premium of $40. 20x5. 20x8. 20x9. inventory count.000.000. On July 1. financial statements should be prepared using which of the following? a) Fair market values b) Historic costs c) Future values d) Replacement costs . financial statements.000 worth of inventory in the company’s December 31. b) Under accrual accounting. 20x9. Which of the following statements is true? a) Under cash basis accounting. M. ABC Ltd.999 d) $1. and Total shareholders’ equity of $499.1. the Insurance expense for the period ending December 31. According to generally accepted accounting principles. d) Under accrual accounting. will be $5. 20x5. there will be a balance of $35. c) Under cash basis accounting. the bookkeeper for Ytwok. What generally accepted accounting principle does this contradict? a) Time period principle b) Cost principle c) Going concern principle d) Business entity principle 7.999.Introductory Financial Accounting. there will be a balance of $25. which included this error. In the rush to make it to a New Year’s party. v. failed to include $40. Shaw included a $200.039. 20x8.000 b) $ 959.000 in the Prepaid insurance account on December 31. ABC has a December 31 year end.000 in the Prepaid insurance account on December 31.000. Harry. after correcting for the inventory error? a) $ 40. showed Total assets of $999. Total liabilities of $500. Shaw’s Rent-all.999 6.

Introductory Financial Accounting. What generally accepted accounting principle does this contradict? a) Time period principle b) Revenue recognition principle c) Objectivity principle d) Business entity principle . Smart presented land and buildings on her company’s balance sheet based on the appraised value of these assets at December 31. v. K. 20x8.1.1 Page 34 8.

6.e. 3.000 in return for shares in the company. 9. An additional $120. 5. 4. 20x2 to October 31.$190. on June 30. 8. The annual interest rate is 9%. 7. 20x2 were: Cash sales . In addition to the monthly rent.000 of the sales made on account were collected. The first and last month’s rent are due upon signing of the lease on July 2. 20x2. A bank loan in the amount of $20. 2. an annual charge equal to 1% of sales is due at the end of the year (i.000 was purchased on account. Interest payments are due on the 1st of each month.1 Page 35 Problem 1-2 On July 2. 20x3). 20x2. Furniture and fixtures are purchased at a cost of $15.1. the company’s year end. . The following are summary transactions for the period July 2. The lease agreement is for one year. The policy takes effect on July 2.000 was obtained on August 1. 20x3.000 every 4 months with the first payment due November 1. you decided to start up a new business – Heavenly Books Inc.000. v.. These are purchased for cash. An insurance policy was purchased for $1.Introductory Financial Accounting.000 per month. 20x2. You and several other shareholders invested $20.$6. Books and supplies of $50. The loan agreement calls for repayments of $4. Sales for the period ended October 31. 20x2. 1.000 of inventory was purchased on account. 20x2.200 cash. 20x2 and expires on June 30.000 A total of $4.000 Sales on account . A suitable location is found and rent is $1. an offcampus bookstore where students can purchase textbooks and supplies at reduced prices.

000 1.000 300 130.1 Page 36 10.800 The following adjustments at year end must be made: 11. c. 16. Credit Accrued Liabilities. Invoices received but not yet paid amount to $700 for miscellaneous expenses.000 were returned to the publishers.000 $182. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . 19. 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. The expected income tax rate is 30%. b.1. Books costing $15. 13. Enter all the above transactions in T-Accounts. An inventory count shows that a total of $25. 12. Credit Accrued Liabilities. 18.000 of inventory is on hand. The furniture and fixtures are expected to last a total of 10 years with no salvage value.000 3.Introductory Financial Accounting. v. Credit Accrued Liabilities. Employees are owed a total of $600. 15. The straight line method is to be used. Adjustment for rent payable.500 10. Required – a. Credit Accrued Liabilities.000 2. 14. The interest payable on the bank loan. 17. The adjustment for insurance expense.

500 4. 20x6: a.000 invested by the owners as capital stock.000 1.900 ? 40.1. On December 31.100 2.1 Page 37 Problem 1-3 On January 1. A statement of financial position. $ 7.800 2.300 44.600 4.100 3. b.500 .000 25.000 4.300 18. Global Production.100 21. c.000 84.200 1. the accounting records contained the following selected amounts: Accounts payable Accounts receivable Accumulated amortization – Office Equipment Bank loan.100 14. 20x8 Cash Capital stock Cost of goods sold Amortization expense Dividends declared Interest expense Income tax expense Insurance expense Inventory Income taxes payable Office equipment Prepaid insurance Rent expense Salary expense Salaries payable Sales Sales returns Supplies Supplies expense Telephone expense Required – Prepare the following for the year ended/as at December 31. 20x6.000 24.100 3. A multi-step income statement..100 50. 20x6. Inc.Introductory Financial Accounting.500 157.400 2. was started with $50.000 1. A statement of retained earnings.600 2. v. due December 31.

Issues come out in March.750. v. and you have provided your services Big Al’s Used Cars for the past month. $4. on a yearly basis for the fee of $24/year. prepare the appropriate adjusting entry. for their monthly staff meetings.1 Page 38 Problem 1-4 For each of the following isolated situations. It is now April 30. but you will not be billing Big Al until next month. Part of your new lease agreement required you to pay your first month’s rent. with no salvage value estimated at that time. You are a consultant. You signed the agreement and wrote the cheque on June 30th. First. Record the adjusting entry for amortization for the year. It is now your year-end. a) On June 1. Your daily salary expense is $600. You sell subscriptions to your magazine. It is now December 31. and then record the adjusting entry for the end of April. The estimated useful life of the machine is 8 years.300 worth of services. What would the adjusting entry be? You pay weekly salaries to your staff and your accounting period end falls on a Wednesday.000. ahead of time. Your year-end is June 30th. your year-end. The contract. What adjusting entry must be recorded to account for the unpaid salaries? You paid $5.000 on June 1st and again on December 1st for providing these services for one year. stated that they would pay you $6. INC Inc. June. What is the appropriate adjusting entry? You have a contract to provide catering services for a local company.. which was signed June 1.1.Introductory Financial Accounting. your year-end. 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) . Kittens Quarterly. A new customer purchases a subscription in January. You have provided $2. you bought a piece of machinery for $50. record the journal entry to record the receipt of the subscription fee in January. Today is the end of the accounting period.000 for your annual property insurance policy eight months ago. September and December. What is the adjusting entry required if your year-end is December 31st? Your company is moving into a new office on July 1st.

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. 20x5. The total interest of $300 is payable on the due date. Doby Company borrowed $3. On September 1. 20x6. August 31. This transaction was recorded as follows: Jul 1. Each transaction will require an adjusting entry at December 31. The annual accounting period ends on December 31. the company collected $440 for subscriptions two years in advance. 20x5. Coverage of the insurance policy starts on July 1. 20x5 Cash Note payable $3. a.Introductory Financial Accounting.000 c.000 b. The $440 collection was recorded as follows: Oct 1.000 $1.000 $3. 10 percent. You are to provide the 20x5 adjusting entries required for Doby Company.1 Page 39 Problem 1-5 Below are four transactions that were completed during 20x5 by Doby Company.000 cash and gave a oneyear. 20x5. 20x5. 20x5. v. Doby Company paid for a two-year insurance premium for a policy on its equipment. 20x5 Cash Unearned subscription revenues $440 $440 . The note was recorded as follows: Sep 1. On October 1.1. Assume Doby Company publishes a monthly magazine. d. On December 31. On July 1. 20x5. note payable. 20x5 Prepaid Insurance Cash $1.

000 units of inventory for $20 per unit. 7. What is total shareholders’ equity after this transaction? On April 3. The purchase is made “on account” with the company agreeing to pay for the goods within 30 days. 20x6. 1. What are the total assets of Wild Corporation immediately after it has been formed and the shares sold? 2. v. What are the total liabilities of Wild Corporation at this point? 3. 20x6. Wild Corporation is formed on April 1. What is total shareholders’ equity at this point? On April 2. What are the total assets of Wild Corporation after this transaction? 8.000 cash. What are the total liabilities of Wild Corporation after this transaction? 9. Initial financing comes from the sale of 100. Assume Wild Corporation uses a Perpetual Inventory System. 20x6.Introductory Financial Accounting.1. The customer pays cash. ensure your answer reflects the cumulative impact of all prior parts. Wild Corporation purchases 1. 20x6. What are the total liabilities of Wild Corporation after this transaction? 6. What are the total assets of Wild Corporation after this transaction? 11. The company used the perpetual inventory method. Wild Corporation sells 200 units of inventory for $50 per unit. What are the total liabilities of Wild Corporation after this transaction? 12. What are the total assets of Wild Corporation after this transaction? 5. What is total shareholders’ equity after this transaction? On April 5.1 Page 40 Problem 1-6 For the next set of questions. 4. What is total shareholders’ equity after this transaction? (CGA Canada Adapted) .000 common shares at $10 per share cash. Wild Corporation purchases a warehouse for $300. 10.

000 from a customer for an outstanding invoice.000 120. The company requires that customers pay the annual subscription fee for the magazine in advance. 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. 7. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x7? 4. v. and no change by NC. Purchased for $500 cash an insurance policy for the following year. 4. 7% note payable from the seller.000 cash injection from one of the owners of the company. Show increases by a plus.400.Introductory Financial Accounting. Interest accrued on note receivable was $1. liabilities.000 1-year.000 90-day.000 Entries during 20x7 Required – 1. Interest accrued on the note payable was $1. Received a $50. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x6? 3.000. General Ledger Account Subscriptions Received in Advance Dr Cr Balance January1.000 Entries during 20x7 80. 20x7 128. What was the subscription revenue earned during 20x7? 2. shareholders’ equity and net income. Received $2. 6.1 Page 41 Problem 1-7 The following information was extracted from You Read Magazines Co. decreases by a minus. 5. 2.1. 6% interest note in exchange for extending the due date on a receivable. (CGA Canada Heavily Adapted) . Purchased new equipment by obtaining a $200. Example: Shareholders’ Equity -500 Net Income -500 Assets Interest accrued on notes payable was $500 NC Liabilities +500 Required – 1. 3. Received from Smith a $10.

calculate Sales.000 10. Ronald found the following: 1.000 $21. 2. Cash’s personal expenses. 3. Net income and Profit margin for 20x6 and 20x7.1 Page 42 Problem 1-9 Mr. Cost of goods sold. using the accrual method of accounting.66% 20x7 $70.000 16. (CGA Canada) .000 received in 20x6 pertained to a sale made in 20x5. 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.Introductory Financial Accounting.000 40. accounts receivable for sales made to customers totaling $20. 6.1. Required 1. 4. The $20.000 $10.000 had not yet been received. Identify any two generally accepted accounting principles that were violated in Mr.000 30% On examination. v. Cash’s analysis. respectively.000. 2. Other expenses in 20x7 included $1. 5. there were goods in inventory costing $3. Cash paid for purchases in 20x6 included an amount of $2. the proprietor of Error Margin was excited to learn about profit margin analysis and immediately applied his knowledge to evaluate his business. An amount of $5.000 was received in 20x7 and was included in cash received for sales in 20x7. At the end of 20x6 and 20x7.000 of Mr. He was perplexed that the profit margin had improved in spite of his intuition to the contrary. Purchases. There was no money due from customers at the end of 20x7.000 and $5.000 35. Based on the above. Cash.000 14. At the end of 20x6.000 which was a deposit on goods that were to be purchased in 20x7.

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

v. 17 Dec.875 from JP Developers for the work completed on Dec. Dec. 31 Dec.000 in cash and agreeing to pay the balance in six months. 7 Dec. the following transactions were completed during December 20x6. to V. Purchased office supplies on credit for $300.. 20x6? (CGA Canada Adapted) .875.Introductory Financial Accounting. 28 Dec. for the month ending December 31. Received $1. 13 Dec. Paid $1.000. 31 Dec. 1 Dec. 13. Strait opened an architecture company.1.000 cash.1 Page 44 Problem 1-11 V. Strait in exchange for $6. Completed work for a client and immediately collected $680 in cash for the work done. Required – a. Prepare journal entries for the above transactions What is operating income for V. b. Performed a count of office supplies. V. Strait Ltd.300 cash to the office secretary for December’s wages. 31 Issued 100 common shares of the new company.000 for rental of office space for December rent. which revealed that $200 of the $300 worth of office supplies purchased on December 17 were still on hand. Strait Ltd. Paid $1. Purchased the office furniture and equipment of a retiring architect for $4. paying $1. Completed work for JP Developers and sent them an invoice for $1. 3 Dec.

of which 80% were on credit. December 31.1 Page 45 Problem 1-12 The following summarized transactions (in thousands of dollars) occurred during the year ended December 31. d. The merchandise inventory as at December 31. To the insurance company for a new three-year fire insurance policy effective September 1. For new equipment acquired on July 1. l. computed as 40% of pretax income of $50. For the interest on the note receivable. q. The notes receivables are from a major supplier of vitamins. utilities and supplies.Introductory Financial Accounting. $19.depreciation expense for 20x2 was $30. $15 Total income tax expense for 20x2 is $20. $189. Wages earned but unpaid. For insurance. r. The principal on the remaining notes is payable on May 1. $500. advertising. k. 2. Interest for twelve months on all notes was collected on May 1. $74. To Revenue Canada for income taxes. Required 1. Collections from credit customers were $700. v. 20x2. For depreciation . The rate is 12% per annum. 20x2. m. . 20x2 for Ruiz Pharmacy: a. b. j. $193. 20x2 was $240. i. o. The following adjustments were made on December 31. 20x2: n. 20x2. which were all paid in cash. The board of directors declared cash dividends of $26 on December 15 to be paid on January 21. Cash disbursements were: g. h. statement of retained earnings and balance sheet for 20x2. f. 20x2. 20x5. p. e. To trade creditors. The principal on the current notes was collected on May 1. For miscellaneous expenses such as store rents. $36. c. To employees for wages. Total sales were $900. Prepare an income statement. Post all of the above transactions in T-Accounts.1. Merchandise inventory purchased on account was $520.

Peter supplies appliances to retail customers as well as to builders of the many new homes and apartments that are going up in the community.000 20.000 446. 5. Peter's Appliances Shop Ltd. is shown below. Ottkancester’s largest independent household appliance store.000 for appliances it purchased on credit. Balance Sheet As at August 31.000. At year end the accountant estimates that Peter owes an additional $12. 20x5. 3. Peter needs to prepare its financial statements for the year ended August 31.000 -40. The following information has been obtained about the fiscal year just ended: 1. 6. 20x5. employees were owed $7.500 100. The cost of the appliances sold during fiscal 20x5 was $745.500 14. Peter’s balance sheet for August 31.1. During the year Peter paid the taxes it owed at the end of fiscal 20x4. Peter paid suppliers $600.000.500 by Peter.350. 4. Peter uses the financial statements mainly for tax purposes and to show the holders of the long-term notes. The remainder was on account. 2. Peter collected $375.000.000 in installments on its taxes. Cash sales were $775. Peter has been in business for five years. the company's year end.500 It is now mid-September 20x5.000 123. Peter purchased appliances from suppliers for $850. mainly to builders. 20x4 Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures Accumulated amortization $ 30.000 8.000 190.500 Liabilities and shareholders' equity Accounts payable Taxes payable Interest payable Long-term notes payable Capital stock Retained earnings $265.000 110.000 $763. . Sales during the year were $1.Introductory Financial Accounting..000 $763. 7. All purchases were made on account. Peter paid salaries and commissions to employees of $200. On August 31.000 during the year from customers who purchased on credit. During fiscal 20x5 Peter paid $15. v. 20x4.000 in taxes.000.000 260.1 Page 46 Problem 1-13 Peter is the owner and operator of Peter's Appliance Shop Ltd.000.

He took a refrigerator. The deposits pertained to a particularly hard-to-get appliance.000 in cash for other expenses related to operating the business in fiscal 20x5. 10. Amortization expense for 20x5 is $22. treat this as a dividend.500 from the store and installed them in his new kitchen. Peter paid $225.1 Page 47 8. These deposits were not included as part of cash sales. 20x4 to reduce the balance owed on the long-term notes. for the year ended August 31. . Beginning July 1. Peter must pay 2% of annual sales to the property owner 60 days after the year end.500 in interest to the holders of the long-term notes.000 in deposits from customers who wanted a guarantee that their appliances would be delivered when they needed them. 9. stove. Peter recently redecorated his kitchen at home. 11. 14. 20x5. v.5%.Introductory Financial Accounting. Before July 1. Required – Prepare an income statement.000 cash. In addition. and microwave that cost $4. Peter accepted $10. Peter expects that the appliances will be delivered in early November 20x5. 20x5 Peter paid $3. In addition to the interest payment.000. During the year Peter paid $8. For accounting purposes. a statement of retained earnings and a balance sheet and a statement of cash flow for Peter's Appliance Shop Ltd. Interest is paid annually on September 1. The prepaid rent at the beginning of the year represented 4 months of prepaid rent at the old location. During 20x5 Peter purchased new capital assets (furniture and fixtures) for $25.1. 20x5 Peter pays $4. The interest rate on the notes is 8.500 a month in rent. Peter paid $20. 13. The terms of the lease require that rent be paid six months in advance on January 1 and July 1 of each year. 12.000 on September 1.000 a month for the rent of its store.

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

574) $42.644 $156 $156 788 788 9 9 Finally.579 (156) (788) 9 $42.545 was not recorded on the bank statement • the general ledger cash account shows a balance of $43.673 3.574 • a deposit made on August 31 in the amount of $3.579 (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.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.1. The correct amount is $323. Cash ($332 – 323) Accounts payable To record the error in recording cheque # 345. 20x7 shows the following: • ending balance of $45.Introductory Financial Accounting. August 31.644 . 20x7 $45.1 Page 49 Example – The Parkes Company’s bank statement dated Aug 31. August 31. • the total outstanding cheques amount to $6. The cheque was incorrectly written in the cash disbursement journal as $332. before adjustments Less bank service charges Less NSF Cheque Add error on cheque # 345 Cash balance after adjustments $43. v. Accounts receivable Cash To record the returned cheque.545 (6. we prepare the bank reconciliation: Cash per bank. The next step will be to calculate the revised cash balance: Cash balance. 20x7 Add outstanding deposits Less outstanding cheques Cash per books.

Other Comprehensive Income becomes part of Shareholders' Equity. 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.1. strategic investments are classified as long-term investments. otherwise they are classified as long-term assets. The classification of available for sale investments as current or long-term assets depends on management intent. 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. consist of passive investments in the shares of another company. the investments are carried at fair market value. • available for sale investments: any unrealized gains or losses are charged to Other Comprehensive Income.1 Page 50 Non Strategic Investments Investments in the shares of another corporation can broadly be classified as non-strategic or strategic investments. operational or financial policies. they are classified as current assets. They are therefore specifically held for purposes of resale and are designated by management as such. • . If management intends to hold these for a period of less than one year. and balance sheet valuation is the same: interest accrued or dividends declared are recorded as investment income. Regardless of how they are classified. 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. These investments will either be classified as held for trading or available for sale securities.Introductory Financial Accounting. For both types of investments. the accounting for investment income. v. By their very nature. the subject of this chapter. trading investments: all gains. They would normally be classified as current assets. Available for sale investments also occur whenever debt securities are acquired with the intent of liquidating them before their maturity. Any realized gains or losses are charged to Net Income. Where the two methods differ is on how the adjustment to fair market value is recorded. there is no difference in the accounting for these investments. at the balance sheet date. whether realized or unrealized. are charged to Net Income.

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. On October 15.500 1.900. The investment is classified as an available for sale investment.000 $15.500 Oct 15. 20x5 Available for Sale Investments Cash Cash Investment income Available for Sale Investments Unrealized holding gain $15.on June 30. 20x5 Dec 31. 20x5 you purchase the shares of another company for $15.1 Page 51 Example .Introductory Financial Accounting.900 1. 20x5 At December 31.500 1.1. v.500 If the investment has been classified as a trading investment. 20x6 Cash Unrealized holding gain Gain on sale of investments Available for Sale Investments XXXX XXXX $1. 20x5 Dec 31. $15. At December 31. 20x6.500.000 600 600 1. the fair market value of the shares is $16. 20x5.000. 20x5 . The following journal entries will be recorded with regards to this investment: Jun 30.500 1. On February 12. 20x5 we receive a dividend cheque for these shares in the amount of $600. 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. then the following journal entries would have been recorded: Jun 30.000 600 600 1.900 $16. 20x5 (the balance sheet date). you sell the investment for $16.500 $16.000 $15.500 Oct 15.

900 400 $16. 20x6 Cash Realized trading gain Temporary Investments $16.500 .1.1 Page 52 Feb 12. v.Introductory Financial Accounting.

700 3. on hand but not yet deposited Swiss Company cheques that have not cleared the bank account $15. v.095 9. 20x8? a) $15. The cheque was written for the correct amount of $152.200 What amount should be reported as cash in the current asset section of Swiss Company’s balance sheet at December 31. and it was deposited on May 18. a company received a cheque from a customer in payment of the related account receivable.595 c) $25. During May.095 d) $31.095 b) $21. The May bank statement listed the deposit at $512. An analysis of the cash account for Swiss Company at December 31.Introductory Financial Accounting.595 . 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. 20x8 revealed the following details: Balance in bank account Customer cheques dated December 31.1. 20x8.1 Page 53 Problems with Solution Problem 2-1 1.

Prepare the December 20x6 bank reconciliation for Sarg.200 cheque received from a customer on December 13 in payment of an account receivable was incorrectly recorded as Required a.Introductory Financial Accounting. b.1 Page 54 3.327 $15 48 63 34 Problem 2-2 The following information for the month of December 20x6. A company is preparing its May bank reconciliation. December 1 Cash received during December Cash payments made during December Cash balance per bank statement.225.548 6.’s bookkeeper.700 580 1.288 c) $4. the following information was provided by company records and the monthly bank statement: Bank service charges shown on the bank statement NSF cheques from customers shown on the bank statement Deposits in transit at the end of the month determined by the company’s bookkeeper A cheque for $43 (the correct amount) written by the company was recorded in the books at What is the correct cash balance shown on the bank reconciliation? a) $4.000 77. deducted from Sarg’s account in error by the bank A $1. 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 $4.020 . December 31 Cheques outstanding. December 31 Bank service charges for December Deposits in transit at December 31 Cheque issued by Sparg Ltd.700 77.300 52 1. At the end of the month. Cash balance per books.1.279 b) $4. v. $ 3.300 5. was gathered by Sarg Ltd.312 d) $4. with respect to cash activities.

e) A $530 payment on account received from a customer was incorrectly recorded in the books of Focus Ltd. 20x7.1.915. b) The March 31. Prepare a bank reconciliation for Focus Ltd.’s cash account up to date at March 31. bank statement for Focus Ltd. (CGA Canada) . Prepare the necessary journal entry(ies) to bring Focus Ltd. at March 31. Required – 1. 20x7.Introductory Financial Accounting. 20x7: #501 for $780 and #533 for $1.200 had not been received by the bank in time to be included in the December bank statement. as $260. f) The balance in Focus Ltd. v.200. d) Cheque #521 issued by Focus Ltd. the following information was determined: a) The following cheques are outstanding at March 31. for the cash purchase of office equipment. 20x7. showed a balance of $480. had been incorrectly recorded in the books of Focus Ltd.1 Page 55 Problem 2-3 The March 31. deposit of $6. 2. In preparing the bank reconciliation. in the amount of $620. c) Bank service charges for December amounted to $35 and had not yet been recorded by Focus Ltd. 20x7. as $350.’s cash account according to its accounting records was $4.

000 45.000 28.1 Page 56 Problem 2-4 During 20x0.000 51.000 $ 70.000 20.000 $234. . and all the Strategic Air Defence Systems shares are sold for $35.000 31. 20x0.000 $226.000 5.000. is shown below: Temporary Investments Company Name XYZ Computer Satellite Systems Strategic Air Defence Systems Generic Engineering Cellulose Telephone Cost Number of Shares Market Value as at December 31.000 63.000. Support your answers with calculations.000 44.000 7.000 9.Introductory Financial Accounting.000 10.000 26. Holdco Ltd. Management is quite unfamiliar with these different methods and has approached you for this information. advise management of two alternative methods of accounting for temporary investments and indicate the effect each has on balance sheet and income statement information. all the XYZ Computer shares are sold for $75.000 51. 20x0 $ 72. Assuming these investments are classified as held for sale investments.'s temporary investments at December 31.000 30. The data on Holdco Ltd.000 Recent discussions have brought to management's attention that there are different methods of accounting for temporary investments. b) On January 10.1. 20x1. write the journal entries to record the two sales. decided to invest in the shares of a number of "Hi-tech" companies. v. Required a) As chief accountant for Holdco.

000 14.000 10. calculate the amount of unrealized trading gain or loss for each year.500 29.1. v.Introductory Financial Accounting.000 20x0 $18.500 31.300 20x1 $19.500 $62.000 32.800 $60.000 $57.000 12.500 Required a) b) Assuming these investments are classified as available for sale.000 28. .000 $66.500 14. Assuming these investments are classified as trading investments. calculate the balance in Other Comprehensive Income at the end of each year.000 20x2 $16.1 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.

where the allowance for doubtful accounts is estimated directly.000 x 3% 120. 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.000 x 40% $ 7.000 120.1 Page 58 3.200.000 280.000 $45. the aggregate of the unpaid invoices at any point in time. 3% of accounts between 31-60 days. therefore. and the income statement approach.Introductory Financial Accounting. Accounts Receivable Whenever credit is extended to customers for the provision of goods or services. whereby we estimate the amount of bad debt expense on the income statement.500 .000 50. Accounts receivable are reported on the statement of financial position at their net realizable value (NRV). assume the total receivables add up to $1. There are generally three approaches to estimating the allowance for doubtful accounts directly (balance sheet approach): 1. Accounts receivable are.600 20.000 and that the aging of accounts receivable is as follows: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750. the company estimates that 1% of current accounts will eventually become uncollectible. v. which is equal to the net amount of outstanding invoices the firm expects to recover. an account receivable is created. The allowance for doubtful accounts at the end of the year will be: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750. Aging of the accounts receivable listing This involves grouping all outstanding receivables based on how long these have been outstanding.000 Based on past experience. There are two approaches to calculating the allowance for doubtful accounts: the balance sheet approach.000 x 1% 280. 8% of accounts between 61-90 days and 40% of accounts over 90 days.000 $1.200. For example.500 8.1.000 x 8% 50.400 9.

it would not be meaningful to age the accounts receivable listing.000. then the allowance for doubtful accounts at the end of the year will be $1. Note that this approach does not estimate the allowance for doubtful accounts. Specific account identification When a company has accounts receivable from a limited number of customers and has an intimate knowledge of these customers. we first reverse the journal entry made to write off the account: Dr. so we estimate the bad debt expense as a percentage of credit sales. if the ending accounts receivable balance is $1.200. Accounts Receivable Recording recoveries of accounts written off When an account that was previously written off is subsequently recovered. The income statement approach is used whenever a company offers their customers revolving credit facilities (i.200. v.000 and the company estimates that 5% of these accounts will eventually become uncollectible. Allowance for Doubtful Accounts Cr. a department store which offers their customers a credit card). Bad Debt Expense Cr. 3. In this case. or (2) the amount is small and the cost of recovering the account is greater than the balance owed.Introductory Financial Accounting. Allowance for Doubtful Accounts .e. but estimates the amount of bad debt expense. As a percentage of the ending accounts receivable balance This approach simply takes then ending accounts receivable balance and multiplies it by a percentage. Any accounts written off are written off against the allowance for doubtful accounts: Dr.1. The journal entry to record bad debt expense under either the balance sheet or income statement approaches is: Dr.000 x 5% = $60. Accounts Receivable Cr. The sum of the estimated uncollectible accounts at any point in time will form the allowance for doubtful accounts.1 Page 59 2. it may be able to identify which specific accounts may become uncollectible. For example. Allowance for Doubtful Accounts Recording accounts written off An account will generally be written off when (1) you receive a notice from a Trustee in Bankruptcy that you will receive an amount that is less than the amount owed.

000 Beginning Bal Recoveries Ending balance before adjustment .800.000 $10. the following transactions took place: • • accounts totaling $75.000.000 $75.000. During the year.000 $15.1.Introductory Financial Accounting. v.000 were recovered. previously written off accounts totaling $10.000 This will result in a $15. Cash Cr.000 debit balance in the Allowance for Doubtful Accounts: Allowance for Doubtful Accounts Write-offs $75.1 Page 60 We then record the collection on the recovered accounts receivable: Dr.000 10. Accounts Receivable Example – The Jasmine Company’s accounts receivable at the end of the year totaled $2.000 $10.000 The journal entry to record the recovery will first be to reverse the entry initially made when these accounts were written off: Accounts receivable Allowance for doubtful accounts $10. The balance in the allowance for doubtful accounts at the beginning of the year was $50.000 $50.000 We then record the cash receipt on the accounts receivable: Cash Accounts Receivable $10.000 were written off. The journal entry to record the accounts written off will be: Allowance for doubtful accounts Accounts receivable $75.

800.800.0%) + (150.000 The allowance for doubtful accounts is estimated to be: (1. The allowance for doubtful account should be established at $2.000 x 2.5% 6. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $83.000 $92. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $92.500 since this is the entry required in the Allowance for Doubtful Accounts account to bring the account to a credit balance of $79. The accounts receivable aging is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days 1.5%) + (600.500 The bad debt expense will be $94.1 Page 61 In order to calculate the bad debt expense for the year. v.Introductory Financial Accounting. $94.75% of the accounts receivable balance will be uncollectible.0% 15.500 Estimated % Uncollectible 1.000 x 6.500: Bad Debt Expense Allowance for Doubtful Accounts 2.000 600.0%) = $79.000 3.000 250.500 $94.800.000 $2.5% 2.000 x 15.000 x 1.800. Using specific identification of accounts.0% Management estimates that 2.5%) + (250. management estimates that the allowance for doubtful accounts should be $68.000 150.000 .1. we will assume four independent scenarios: 1.000.75% = $77.000.000 $83.000 x 2.

= $75. Bad debt expense will then be equal to $6.000 cr.000.000 This will cause the allowance for doubtful accounts to have a credit balance of $15.5% = $90.1 Page 62 4.000.000. we are effectively estimating the bad debt expense for the year and the residual becomes the Allowance for Doubtful Accounts. + $90.000. we were estimating the Allowance for Doubtful Accounts with the residual being bad debt expense.000 $90. . Management estimates that bad debt expense will be equal to 1.000 x 1.000 dr.1. Note that when using this approach.000. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $90. v.Introductory Financial Accounting. In approaches 1-3. Total credit sales for the year amounted to $6.5% of total credit sales.

At the end of 20x8.000 d) $13.1.1 Page 63 Problems with Solutions Problem 3-1 – Multiple Choice Questions 1. v. What is bad debt expense for 20x9? a) $1.000 360.000 b) $4. the aging schedule indicated that the balance of the allowance account should be $6.800 c) $7.000) 400.400. During 20x9. January 1. 20x8 (credit) Total credit sales during 20x8 Total collections on accounts receivable during 20x8 Uncollectible accounts written off during 20x8 $80. What should be the adjusting entry amount for doubtful accounts at December 31.600 b) $1. 20x8 a) $4.000 e) $13.600 d) $6.900 c) $6.000. the company wrote off $500 and collected a $300 receivable that had been previously written off as uncollectible.000 (11.000 Experience indicates that 4% of the uncollected accounts receivable at the end of each year ultimately will be uncollectible.000 20. January 1. A company reported the following items for 20x8: Accounts receivable balance. the balance of the allowance account was $5.900 2.Introductory Financial Accounting. A company estimated the needed balance in its account “allowance for doubtful accounts” by aging the accounts receivable. 20x8 Allowance for doubtful accounts balance. At the end of 20x9.800 .

January 1. .Introductory Financial Accounting. January 1.095 a) b) c) d) Problem 3-2 The following information relates to Merit Ltd.000 3. 2004 Required – a. for the year ended December 31. Provide the December 31. 2004 adjusting journal entry to record bad debts.000 14. 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.900. Provide the December 31. 63.000 11. assuming the allowance method is used to account for uncollectible accounts.1. b. What were the net realizable values of the accounts receivable as shown by the accounting records before and after the write-off? Before $2.000 $3.000 55. just prior to writing off as uncollectible an account receivable of $30.000 dr. v.000.875 $2. $ 15.000 800. assuming the allowance method is used and management estimates the allowance to be 3% of the closing Accounts Receivable balance.000 1. assuming the allowance method is used and uncollectible accounts are estimated to be of 1% of credit sales. c.000 cr.975 $2.970 $3. Provide the journal entry to write off actual accounts receivable determined to be uncollectible and recoveries.000 and an allowance for doubtful accounts of $125. A company had accounts receivable of $3.875 $3. 2004 Allowance for doubtful accounts.875 $2.200.1 Page 64 3. 2004 adjusting journal entry to record bad debts.000.000 After $2.

915.000 25.000 16.000 234.000 80.000 27.000 20x0 $2.1 Page 65 Problem 3-3 Sigma Company began operations on January 1. v.000 7.000 45.000 .000 90.000.000 15.400.000 2.000 60. 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.Introductory Financial Accounting.000 - 277. 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. 20x0.000 2.1.800.

required at December 31. began operations on January 1. 3. 20x7. Sold merchandise on credit for $500. Suppose now that instead. (CGA Canada adapted) 2. 20x7. decided that an allowance equal to 5% of total accounts receivable would be sufficient to cover uncollectible accounts. Required 1. Received cash of $400. if any. 20x6 there was a $2. On December 1. v.000 debit balance in the accounts receivable account. Prepare journal entries to record the above transactions on the books of EED Ltd. expects 2% of credit sales to be uncollectable. . 2. Based on industry averages and its experience in 20x6.000 was converted to a 6-month promissory note to allow a cash-strapped customer some time to meet his obligations. to record bad debt expense for the year and accrue interest on the promissory note.000 credit balance in the allowance for doubtful accounts account and a $40. 20x7 to record bad debt expense for the year. With all other data being the same from above. In addition. Wrote off uncollectible accounts receivable in the amount of $1.500.Introductory Financial Accounting. prepare journal entries. During 20x7 the following summarized transactions occurred: 1.000. 20x6. an accounts receivable in the amount of $3. On December 31. if any.1 Page 66 Problem 3-4 EED Ltd. required at December 31.000 in payment of outstanding accounts receivable.1. 4. The promissory note bears an interest rate of 12%. prepare the journal entries. EED Ltd. EED Ltd. The company uses the allowance method of accounting for bad debt expense.

this time on account. we just create a payable instead of reducing our cash account.1.1 Page 67 4. The journal entry would be: Inventory Cash 5. Inventory Accounts Payable 10. Furthermore. What that means is that inventory is tracked constantly in a real-time basis. We will begin by looking at two fundamentally different types of systems.000 worth of inventory to a customer for $6. is the inventory system that it chooses. a physical count of inventory will be taken to ensure accuracy of the perpetual records. We still increase the inventory account by the amount of the purchase. the effect on the inventory account is the same as the above journal entry. They sell $4. After two weeks of business. Little Company makes its first big sale. The Perpetual Inventory System The term perpetual means continuing without interruptions. 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. Example: It is Little Company’s first year of business. paying cash. and then evaluate the different valuation methods a company can chose to determine the cost of inventory. the amount the company generally receives from its customer should always be greater than the value of the inventory. v. From time to time. On the first day. When we talk about a perpetual inventory system.000 The next day.000 cash. Note that unless a company is offering a discount to get rid of inventory or for some other reason.000 5.000 Note that even though we are not paying cash. or never ending. Little Company purchases $5. we mean an inventory system that has no interruptions.000 of inventory. Each item that is purchased for resale gets debited to the inventory account. .000 10. Inventory A key part of determining the cost of the items that a company sells to its customers.Introductory Financial Accounting. as well as valuing the items that it has on hand to resell at any point in time. Little Company purchases an additional $10. and any adjustments that are needed will be made to the inventory account.000 worth of inventory.

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

000 Let us suppose that those were the only purchases made during the year. The Cost of Goods Sold Equation is as follows: Beginning Inventory + Purchases (net of contra accounts) = Cost of Goods Available for Sale Ending Inventory = Cost of Goods Sold Example 1 – Let us use the Little Company example from above. v. the Purchase account and all contra accounts are closed out to zero.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 opening inventory was $0. To calculated COGS: . The new journal entries would be: Purchases Cash Purchases Accounts Payable 5.000 5.Introductory Financial Accounting. At the end of the year. as this is a new business. Purchases of $5.000 worth of inventory on hand. At the same time. the inventory account is adjusted to the appropriate ending balance.1.000 10.000 and $10.000 10. based on the physical count.000 were made. and that at the end of the year a physical count of the inventory revealed that there was $11. The amount needed to balance the equation is the Cost of Goods Sold. If you remember.

000 11.476.000 would be the ending inventory balance from last year.000 27.000) .000 185.000 2.700.000 2.000) = Cost of Goods Available for Sale . Inventory Purchases Transportation-in Purchase returns and allowances Purchase discounts 48.700. $175. Therefore.661.000 + 36. in order to get the balance in the inventory account to $360.000 = $185.000 Cr.000 .Ending Inventory (as per count) = Cost of Goods Sold $175.Ending Inventory (as per count) = Cost of Goods Sold $ 0 15.000 we must increase it (or debit it) by $185.1.700.000.000 (360.000 48.000 36.476. according to our count.Introductory Financial Accounting.1 Page 70 Beginning Inventory + Purchases ($5.000 increase) Purchases (close account) Transportation-in (close account) 2.000.000) $2.000 Example 2 – Tetrie Company shows the following balances at the end of the year: Dr. They are ready for the next fiscal year. Furthermore. The balance is sitting at $175.000 – 27.000 $4.000 2.000 + 10. $360.000 36.000 and it should be.836.000 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 ($360.000 – 48.000 2. v. A year-end count reveals that the ending inventory balance should be $360.000 – 175. 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. Cost of goods sold can be independently calculated as follows: Beginning Inventory + Purchases (2.000 Tetrie uses a periodic inventory system.000.

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

the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1. This is not a coincidence – both approaches always provide the same result.470 (455) $1. Cost of goods sold can be calculated in two ways. Under FIFO.25 1.000 $400 640 1.070 1.25 = $125 Total value of ending inventory = $330 + 125 = $455 Using the FIFO perpetual method.015 Secondly.1 Page 72 Example – On January 1.20 1.10 each Sold 200 units Under the FIFO periodic method. we know that we sold a total of 700 + 200 = 900 units.10 = $330 January 5 purchase = 100 units x $1. using the cost of goods sold equation: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.00 1. we sold .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.1.Introductory Financial Accounting. we first calculate the number of units in ending inventory = 400 units and then look at the most recent purchases in order to cost out the ending inventory: January 19 purchase = 300 units x $1. First. Lainey Company has 400 units in its opening inventory.25 each Sold 700 units Purchased 300 units @ $1.20 1.25 $240 500 (400) (240) (125) 330 (250) Balance Units Total Cost 400 600 1.20 each Purchased 400 units @ $1.25 1.00 each. They purchased these units for $1. v. Throughout the period. 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 $1.10 1.

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

that is the unit cost after the last purchase previous to the sale. Unit Cost = Cost of all goods on hand/number of units on hand.070 1. Subsequently. we are keeping a running total in the inventory account.00 each) January 3 Purchase (200 units @ $1. Under this system. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.470/1.25 each) January 19 Purchase (300 units @ $1.20 each) January 5 Purchase (400 units @ $1. As such. v.1.470 (452) $1. .13077/unit = $452 COGS = # units sold x unit cost = 900 units x $1.13077/unit = $1.10 each) $ $400 240 500 330 $1.300 units = $1. then that is the unit cost used to determine the COGS for that sale.018 Alternatively. whatever the unit cost is at the time of a sale. The moving weighted-average system of inventory valuation takes this into account.1 Page 74 Cost of Goods Available for Sale Opening Inventory (400 units @ $1.Introductory Financial Accounting.300 Average unit cost = Cost of Goods Available for Sale/Units Available for Sale = $1. when we make a purchase we debit the inventory account for the amount of the purchase.13077/unit Ending Inventory = # units in inventory x unit cost = 400 units x $1. the average unit cost is recalculated every time a purchase is made.018 Moving Weighted-Average – Perpetual Systems You will remember that under a perpetual inventory system.470 Units 400 200 400 300 1.

Throughout the period.14000 1.1 Page 75 Example – On January 1.14000 1. v. They purchased these units for $1.022 Alternatively.00000 $400 1.25000 1.12000 672 448 Units 200 400 (700) 300 (200) Unit Cost $1.20000 1.140 / 1.066671 640 2 1.25 each Sold 700 units Purchased 300 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 1.10 each Sold 200 units Remember. Unit Cost = Cost of all goods on hand/number of units on hand.20 each Purchased 400 units @ $1.12000 Unit Cost = $640 / 600 Unit Cost = $1.00 each.10000 1.070 1.000 300 600 400 Unit Cost Total Cost $1.022 .1.Introductory Financial Accounting.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. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.470 (448) $1. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.140 342 3 1. under this system we recalculate the unit cost each and every time we make a purchase. Lainey Company has 400 units in its opening inventory.

000. .000. commissions of 10% would have to be paid to the sales team on any sale of this inventory. we must determine that the inventory’s net realizable value. If the market value is less than cost. the analysis reveals that no allowance is required.000.000 – 14. is showing an ending inventory balance of $50.000 Note that the Inventory Loss account will appear on the Income Statement and be registered as a loss for the company in this period. then the allowance will be debited by $14. the inventory account has a balance of $50. At the balance sheet date. v. If. Show the journal entry to record the proper carrying value of the inventory.000 X 10%) = $40. then the inventory must be written down to market value.000. The net realizable value of this inventory is: = Selling Price – Commission = $40.1 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. Example –VenTure Ltd. the credit will be to income. This account operates much like the Allowance for doubtful accounts in that it gets adjusted to the desired balance at year end.000 At present. We do this by creating a contra account to inventory called ‘Allowance for decrease in value of inventory’. Furthermore.000 = $36. Inventory Loss Allowance for decrease in value of inventory 14. Market value is defined as the net realizable value of the inventory – the sales price of the inventory item less any costs incurred to sell it.1. the accountant determines that they could sell this inventory for $40.000 to bring it to a zero balance. next year.000 14. First of all.000 – 4.000 = $36. 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. The net inventory balance that will be reported on the statement of financial position is $50.000 – ($40.Introductory Financial Accounting.

000 350.000 x (1 – 25%) = $1. the Gross Profit Ratio = 40%.000 x 40% = $400.000.1.000 Purchases .000 Ending Inventory = $310. for whatever reason.000 x 75% = $900.200.000.000.000 If Sales are $1.000 Example – The Gennissen Company’s inventory were destroyed by a fire and you need to estimate the ending inventory. we could estimate COGS by using the following formula: Gross Profit = Sales x Gross Profit Ratio = $1. then we can estimate COGS as follows: COGS = Sales x (1 – gross profit ratio = $1. If we did not have the COGS number.200.000.000 600.000 860.000 x (1 – 40%) = $1. but we did have the Gross Profit Ratio.000 25% . v.000 100% 60% 40% In the above example.200.Introductory Financial Accounting.900.000 and Gross Profit is $400.1 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. Example – Assume the following: Sales Cost of Goods Sold Gross Profit 1.000 The estimated ending inventory is: $350.000 x 60% = $600.000 400.000. we must first understand how to calculate the Gross Profit %. To understand the application of this method.000 Opening Inventory + 860.000 $1. You are given the following information: Sales to the date of the fire Opening inventory Purchases to the date of the fire Gross Profit Ratio The estimated cost of goods sold = $1.000.

discovered that a $6. Ltd. A year-end inventory count revealed merchandise on hand in the amount of $66.000 to suppliers and incurred $25.Introductory Financial Accounting.000 c) $515.000.000. In addition. financial statements of Confu Ltd. During the year the company purchased $500. 20x8? a) $478. What was cost of goods sold for the year ending December 31.000. v.600. . c) Shareholders’ equity is understated by $6.000 2.000 instead of the correct balance of $1.000. 20x8. 20x4.1 Page 78 Problems with Solutions Problem 4-1 – Multiple Choice Questions 1.000.000.000. Which of the following statements is true with respect to the impact of this error on the December 31. On January 1.400. financial statements. 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. The December 31.000. c) Cost of goods sold would be understated by $200. b) Inventory is understated by $6.000 d) $523. Owl Enterprises had merchandise inventory on hand amounting to $60.000 computer purchased for the chief financial officer on December 27 had been recorded incorrectly as an inventory purchase. 20x4.000 in shipping charges on merchandise purchased during the period.000. After completing its inventory count and making the appropriate adjusting journal entries. 3. d) Shareholders’ equity is overstated by $6. Fri.1.000. d) Owners’ equity would be understated by $200.000 b) $503. a) Liabilities would be overstated by $200. b) Assets would be understated by $200. the company returned merchandise costing $10. included an adding error in the inventory count that resulted in ending inventory of $1.000 worth of inventory and took advantage of purchase discounts amounting to $6.000.000.

FOB Shipping. n/30. 20x8. for the month of July 2006. Transportation out paid on delivery of goods sold during the month equaled $1. b) Income for 20x9 is overstated by $42. c) Income for 20x9 is understated by $15. All other sales made during the month were collected in the month with all customers taking advantage of the sales discount offered. 20x9. e.000 during the month with terms 1/10. The customer received the goods on January 6. Required – Prepare the journal entries required to record the above events and transactions. v.. CIF destination. The selling price of the goods was $57.000.1 Page 79 4. Which of the following statements with respect to this transaction is true? a) Income for 20x8 is understated by $42.Introductory Financial Accounting.1.000 for the goods and uses the periodic method to account for its inventory. The company uses a perpetual inventory system. Sales totaled $80. 20x9. Czech Ltd. The sale was recorded by Czech on January 2. Cozy sets the selling price on its shoes so that the cost of sales is equal to 70% of the selling price. Problem 4-2 The following summarized transactions relate to Cozy Co. e. . Merchandise was purchased at a cost of $50. e. FOB destination. All of the merchandise purchased during the month was paid for with Cozy taking advantage of the purchase discount offered.000. n/45.000. Czech had paid $42.000. e. One customer returned goods with a sales value of $500 and was issued a credit note.200. all of which were made on credit with terms 2/10.000. a shoe wholesaler. d) Revenues for 20x8 are understated by $57.000. shipped goods to a customer on December 30. e.

Required – a.000 2. assuming a weighted-average cost flow method is used.1. 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 1.000 2. Beginning Inventory/ Purchases 30 @ $10.000 2.000 Price/Cost $12 18 30 23 33 .500 Date May 1 May 5 May 14 May 21 May 29 Totals Sales Beginning inventory Purchase Sale Purchase Sale 20 @ $20. assuming a FIFO cost flow system is used.00 = 1.1 Page 80 Problem 4-3 Anvil Rock Company had the following inventory and purchases for the month of May. Problem 4-4 The following information concerns one of a company’s products.500 3. b.50 = 690 35 @ $12.00 = $ 400 Anvil Rock uses a perpetual inventory system. Calculate the cost of ending inventory for May. c. Calculate the cost of ending inventory for May. Prepare the journal entries to record the May 29 sale on account.00 = $ 300 60 @ $11.100 125 $ 1. assuming a firstin.410 70 $ 1. v.00 = 420 50 @ $22. first-out (FIFO) cost flow method is used.Introductory Financial Accounting.

(CGA Canada) Problem 4-6 Banff Mountain Equipment Ltd.000 units at $50 each 1.000 580. the company’s insurance policy will cover 80% of the loss suffered in this fire. b. the company was unable to pass on price increases to customers and thus maintained a selling price of $100 per unit throughout the year. 20x5 1. 20x5. under each of the following assumptions: a.000 units at $52 each 1. It accounts for its inventory using a periodic inventory system.000 15.000 58. . 20x5.000 Due to competitive pressures.000 480.1 Page 81 Problem 4-5 On January 1. the Music Store had 400 MP3 players in inventory with a cost of $48 per unit.000 30. 20x5 October 15.Introductory Financial Accounting. Banff lost all of its hiking equipment in a fire in March 20x8. After a very successful ski season and just as it was about to commence shipping its hiking equipment for the upcoming season. v. 20x5.000 52.000 units at $58 each $50. During 20x5 the company made the following purchases of MP3 players: February 21. 20x8 Purchases (all on credit) during 20x8 Purchase returns Payments to suppliers for purchases Customs and duty on purchases Sales (all on credit) at retail price Sales returns at retail price Cash collected from accounts receivable $150. calculate gross profit for the year ending December 31. Costs are assigned to inventory and cost of goods sold on a weighted average basis. Corporate records disclose the following: Inventory — January 1.000 615. Required – Assuming the company uses a periodic inventory system. (Banff) sells skiing and hiking equipment to retailers.1. Fortunately. 20x5 June 15. The store had an excellent Christmas season with the result that only 70 MP3 players were left in inventory on December 31.000 440. Costs are assigned to inventory and cost of goods sold on a FIFO basis.000 Banff normally realizes a gross profit of 30% on its sales.000 8. The loss is to be determined based on the cost of the inventory in accordance with generally accepted accounting principles.

Whinr paid the balance due on the June 1 sale. The supplier provided purchase credit terms of 1/15.Introductory Financial Accounting. Saret Ltd. Problem 4-8 The following information relates to Mejewel Ltd.000. n/60.000 of the merchandise inventory claiming it did not meet its needs. Required 1. Show all your calculations.1. Calculate December 31. 20x7 Purchases — June 7. June 2 June 9 June 12 The company uses a perpetual inventory system. taking advantage of the sales discount. 3. 20x7 Purchases — February 20. Calculate December 31. inventory value using the FIFO inventory pricing method. 2.1 Page 82 Required – Calculate the net loss from the fire. 20x7 20 units @ $900 each 440 units @ $950 each 200 units @ $1. Ending inventory consisted of 60 units. inventory value using the Weighted Average . inventory for 20x7: Beginning inventory. June 1 Sold Whinr Ltd. Calculate the cost of goods available for sale. 20x7. performed the following transactions. (CGA Adapted) Problem 4-7 During June 20x8.100 per unit. n/30. January 1. $30.000 of merchandise on account with credit terms of 2/10. the company sold 600 units at an average price of $2. The cost of the merchandise inventory sold was $15.050 each During the year. The cost of the merchandise inventory returned was $5. The company uses a periodic inventory system. 20x7. Show your calculations. Show all your calculations.000. Whinr returned $10. Required – Prepare journal entries for the above transactions. v.000 on account. Saret purchased merchandise inventory costing $42.

assuming merchandise inventory on December 1. Briefly explain the benefits. you have made it a policy to ensure that all purchase discounts are taken advantage of. Toyjoy paid $3. b.000 credit purchase.500 represented payment of a $50.000 under credit terms of 3/15.Introductory Financial Accounting. n30. which was paid within the discount period of 3/15. (CGA Canada) c. which has a negative impact on the company’s cash flow. The company uses the periodic inventory method and the gross method of recording purchases. (CGA Canada adapted) Problem 4-9 The following is a summary of selected transactions for Toyjoy Ltd. 20x7. i) ii) Purchased merchandise on account from Hirwin Toys for $80.500.000 and a count of inventory on December 31.1. amounted to $150.000. for the month of December 20x7. v. The president has asked you to explain the benefits of taking advantage of purchase discounts because it often results in the company paying for merchandise before it has been sold. n30. amounted to $48. Show all your calculations. FOB shipping point. Prepare journal entries for each of the above summarized transactions. revealed merchandise inventory on hand of $30. As the new controller.000 in cash for freight charges on merchandise purchased during the month. Prepare a schedule of the cost of goods sold section of the income statement.200 credit memorandum from a supplier on defective merchandise Toyjoy had purchased and returned. Toyjoy had not yet paid for the merchandise. . iii) iv) Required a. The payment of $48.1 Page 83 inventory pricing method. 20x7. Cash payments on merchandise purchased from Patel Inc. Received a $1.

Use the following format in answering this question. a company received. 20x7 inventory count. inventory count $10. The company failed to record the purchase of these goods until January 15. There were no errors in the December 31. 20x6. A $6. for use by the sales manager was incorrectly accounted for as an inventory purchase. If the error has no effect (NE). 20x6 Ending Inventory. and included in the year end inventory count. 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). i) A company failed to include in its December 31. 20x6 Retained Earnings. then state so. v.1 Page 84 Problem 4-10 The following is a list of inventory errors which occurred in 20x6.Introductory Financial Accounting.1. 20x6 inventory count.000 computer purchased on December 28. 20x6. There were no errors in the December 31. On December 28. indicate the dollar amount of the overstatement (O) or understatement (U) in 20x6 Cost of Goods Sold. Assume the companies involved used a periodic inventory system and treat each situation independently. 20x7. 20x6.000. goods costing $5.000 worth of goods which were in an off-site storage location. Error 20x6 Cost of Goods Sold 20x6 Ending Inventory 20x6 Retained 20x7 Cost of Earnings Goods Sold (CGA Canada) . ii) iii) Required For each error. and for 20x7 Cost of Goods Sold.

Introductory Financial Accounting. Moving weighted average. a. 1 (at $24) Purchase No. (CGA Canada) $100. 20x7. 2 (at $26) Required 6.500 8. 1 Sale No. periodic inventory system d.1 Page 85 Problem 4-11 On January 13. FIFO.1.000 $ 10. periodic inventory system b.000 $ 60. 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. calculate the total dollar amount for ending inventory and cost of goods sold.000 $ 5.000 6. the Bamboo Brush store was destroyed in a fire.000 40% Problem 4-12 The records of Egypt Company showed the following data relative to one of the major items being sold.500 For each assumption given. Luckily. 20x7 Inventory stored at another location. Unit Cost $7.000 7. Weighted-average. 2 Sale No. v. Assume that the transactions occurred in the order given. the accounting records were kept in a separate location and the company was able to reconstruct the following information: Inventory at January 1.95 8. perpetual system c.000 5.40 9.00 Units Beginning inventory Purchase No. at January 13. perpetual inventory system .

When on-going expenditures are made in order to keep the asset in operable condition. and • intangible assets such as patents.000 375. How do we allocate the cost of long-term assets over the periods these long-term assets are put to use in the business. furniture and fixtures and intangible assets. land and building). We will only focus on the accounting for those long-term assets that are not investments in financial instruments. the cost of acquiring these assets needs to be allocated based on the relative fair market value of the assets acquired. An independent appraisal of the land and building are $150.Introductory Financial Accounting.000 respectively. equipment and furniture and fixtures.000 . the acquisition cost of asset. and 4. These generally comprise of: • land. namely land. buildings. The acquisition cost would be allocated to land and building as follows: Individual Fair Market Value per Appraisal Land Building $150. but are not limited to.000 % 25% 75% Allocation of Purchase Price $125.000 for land and a building.000 450. 3. the shares or the long-term debt of another company). These include. any costs of transportation to get the asset to its location and any installation costs.000 and $450. what constitutes the cost of this asset. When a long-term asset is acquired. v. 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. copyrights and trademarks.000 $500.e. If you pay one price to acquire a group of assets (i.1. For example. assume that you pay $500. The essential accounting issues in accounting for long-term assets can be summarized as follows: 1. How do we account for the disposal of long-term assets. 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. equipment.e.1 Page 86 5. • buildings. 2.000 $600. how do we account for these expenditures. • long-term investments in financial instruments (i.

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

The rate used for DDB is twice the straight-line rate.000 – 35.125 $31. if you are told that an asset has a useful life of 10 years.000. Declining balance method.e. The asset’s estimated useful life is 8 years and the estimated salvage value of the asset is $35.Introductory Financial Accounting.000.000) / 8 = $31. i. The asset’s useful life can also be measured in terms of total machine hours of 150. This method allocates the cost of the asset over its estimated useful life by taking higher amortization charges at the beginning of the asset’s useful life and lower amortization charges in the later years of the estimated useful life. This assumes that the use can be measured. This method allocates the cost of the asset over its estimated useful life based on the use made of the asset. 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. Under the straight-line method. mileage.1. v. i. then the straight-line rate is 1/10 and the DDB rate is 1/10 x 2 = 20%. We deduct the salvage value since we do not want to write down the asset below its salvage value. 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. For example.125 The journal entry to record amortization expense will be as follows: Amortization Expense Accumulated Amortization $31. machine hours. The amortization rate can either be given or you may be told that the company uses the double declining balance (DDB) method of amortization. Units of production method. The underlying assumption is that the asset generates revenues based on usage. 2. the annual amortization charge will be: ($300.125 .e. 1. a truck rental company that bases rental charges on the mileage driven.1 Page 88 The cost less the salvage value is called the amortizable base of the asset. 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). 3.000 hours.

7667 = $31.562 94.000 x 0.1.393 40. the amortization taken in year 8 is the lesser of the calculated amortization of $10.045 x 25% = $10.000) / 150. Therefore. Under the units of production method.7667 per hour.393.045 35.011 of amortization in year 8.000 Year 1 2 3 4 5 6 7 8 Note that the year 8 amortization is not equal to $40.640 23.000 225. v. the amortization charge per hour would be: ($300.Introductory Financial Accounting.000 56. Recall that we do not depreciate the asset below its salvage value.393 40.011. 3. Note that we will assume double declining balance amortization at the rate of 1/8 x 2 = 25% per year.011 or the amortization amount needed to bring the net book value down to the asset’s salvage value.000 hours = $1.188 31.1 Page 89 2.731 17.000 – 35.000.045 Net Book Value End of Year $225.348 5.756 = $53.191 53.000 hours x $1.000 168.922 71. 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. the amortization charges for the 8 years will be as follows. Net Book Value Beginning of Year $300.562 94. this would have resulted in a net book value at the end of the year that would be lower than the asset’s salvage value.801.000 168. Assume that the total number of hours of use in the first year is 18.191 53.250 42.922 71.750 126. If we had taken $10.045 Amortization Expense @ 25% $75.798 13.750 126. the net book value at the end of the 6th year is: $300. . Under the declining balance method. then the amortization charge would be 18.

000 161.000 Changes in estimates If the estimates of the useful life and/or the salvage value of an asset change subsequent to its acquisition.000. For example. The net book value of the asset at the end of 20x9 is: Original cost Less Accumulated amortization ($250.000 (161.1.1 Page 90 Disposals of Long-Term Assets On the date of disposal. Assume straight-line amortization. these estimates were revised as follows: the total estimated useful life of the asset is expected to be 15 years and the salvage value is expected to be $10. the changes in estimates are applied prospectively from the date of the change in estimate onwards. .000 – 20.Introductory Financial Accounting. For example. v. The asset is sold at the end of 20x9 for $100.000 250.000 $11. assume that an asset was purchased on January 2. The difference will be equal to the gain or loss on disposal.000) / 10 = $23.000. we compare the net book value of the asset sold to the proceeds on disposal. In 20x5.000 89. At the time. The asset’s useful life was expected to be 10 years and the salvage value was estimated to be $20. 20x3 for $250. 20x1.000.000 11.000 $100.000.000.000 $250. an asset costing $100.000) $89. the asset’s useful life was expected to be 10 years with an estimated salvage value of $20.000/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 was purchased on January 2.

This need not coincide with the asset’s legal life. you will not see the value of its trademark listed as an asset. you cannot touch them or see them) and yet they represent costs incurred that meet the definition of an asset.1. Consequently. typical within a certain geographical area • goodwill – the added value of a business attributable to factors such as reputation.e. • franchises – the exclusive rights to sell products or perform services.000) / 11 remaining years = $5. location or superior products. Annual amortization charges for 20x5 and future years will be: (68.000. i. v.273 per year Intangible Assets Intangible assets are those assets that do not possess a physical quality (i. Intangible assets whose life is limited should be amortized on a straight-line basis over their estimated useful lives.000) / 10 = $8.000 – 10.000 – 20. For example.000/year x 4 years $100.1 Page 91 The net book value at the beginning of 20x5 is: Original cost Less Accumulated amortization ($100. • patents – a legal right ensuring the company’s exclusive right to a product or process. assume that a patent is granted to a company at a cost of $100. Examples of intangible assets are: • trademarks – a name or symbol that identifies a company or a product. Internally developed intangible assets cannot be capitalized on the Statement of Financial Position. musical compositions and works of art. they are expected to provide future benefits. the trademark ‘Coca-Cola’ was never purchased by the Coca-Cola Company but rather. The accounting for intangible assets depends on whether these assets have limited or an unlimited life.000 (32. if you look at Coca-Cola’s Statement of Financial Position. Note that only expenditures incurred by the company can be capitalized as intangible assets. For example.e. The patent’s legal life is 17 years but it is expected that emerging technologies will make this . are the result of a past transaction and are under the control of the company.000 This net book value will then be amortized over the remaining useful life of the asset.000) $68. • copyrights – the protection of writings. was developed internally.Introductory Financial Accounting.

In this case.1. v. 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. then the asset must be written down to the fair market value.Introductory Financial Accounting.1 Page 92 patent obsolete by the end of the 5th year. If the fair market value is lower than book value and is not expected to recover. some franchises. the book value of the intangible asset is compared to its fair market value. Intangible assets whose life is unlimited (i. we would amortize the patent over 5 years. That is.e.

000. What will be the annual amortization expense for patents? a) $4.000. the situation was as follows: Building cost Accumulated depreciation — building Estimated remaining useful life Estimated salvage value at end of useful life $200. Brown and Das obtained a patent for their earnings forecasting software at a cost of $80.500 d) $20.000.000 c) Income will decrease by $1. A small room was built on the back of the building at a cost of $12. At the beginning of 20x8.000 Jasper uses the straight-line method for calculating depreciation expense. Sinha.000 in legal costs defending it. The patent is valid for 17 years and has an estimated life of 10 years. and was used as office space commencing July 1.500.1. What is the impact of this expenditure on income before taxes for 1998? a) Income will decrease by $12.200 d) Income will decrease by $632 e) Income will decrease by $600 . 1998. The room was completed on June 30.1 Page 93 Problem with Solutions Problem 5-1 – Multiple Choice Questions 1. 2.Introductory Financial Accounting.000 3.00 d) $8.00 c) $8.000 b) Income will decrease by $6.000 and spent $5.88 b) $5.000 c) $19.705.00 Use the following information to answer questions 2 and 3: The Jasper Company has an old building which requires frequent repairs and constant maintenance.000 10 years $5.500 b) $5.000 150. v. What is the amount of depreciation expense on the building for 20x8? a) $4.

production was 20.1. 20x6? a) $67. Stone and Wall Company bought equipment for $100.000 c) $77. If the company were to use the units-ofproduction method instead of the straight-line method. During 20x7. During 20x6. On January 1. To acquire the land. it was used 430 hours. On July 1.000.000 c) $5. a $60. Ireland Company purchased a machine that cost $20. The machine is expected to be used for a total of 1.000.160 d) $5.500 productive hours over the next 4 years. What is amortization expense for 20x7 under the productive output method? a) $4. what would be the balance reported for the net book value of the machine at December 31. If the company uses the double-declining-balance method for amortization. 20x7.000 units.500 b) $5. The Amortization expense for 20x6.000 with an estimated life of 4 years and a salvage value of $5. 20x7? a) $40. The equipment is expected to have a 5-year life and produce a total of 80.000.000 were incurred to clear the land in preparation for construction of an office building.500 d) $80.000.015.000 commission was paid to a real estate agent.000.000 . At what amount should the land be reported on the balance sheet? a) $1. and a 10% residual value.000 units. was $18.000 b) $1. what would be the balance reported for the net book value of the equipment at December 31.000.500 b) $72. 20x6. Costs of $15.000 d) $1.735 6. using the straight-line method.000 7.060.500 c) $63.000 5.Introductory Financial Accounting.000 b) $42. On January 1.075. v. 20x7. It has an estimated 4-year life.1 Page 94 4. A land site was acquired for $1.000 c) $1.000. Yaari and Yosha Company bought a machine for $85.750 d) $65.

assuming the company uses the units-of-production method of amortization and that the van was driven 55. assuming the company uses the straight-line method of amortization.Introductory Financial Accounting. assuming the company uses the doubledeclining-balance method of amortization. . management of the company decided that. Required – a. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. it was estimated that the van could be sold for $5. d. v. In addition.1 Page 95 Problem 5-2 On January 1. The van cost $65. purchased a van to transport guests between the resort and a nearby airport. c.000 at the end of its useful life.1. 20x7. 2008. as a result of heavy usage. 20x7. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. 20x7.000 kilometers.000 and was expected to have a useful life of 5 years or 200. At the end of its useful life. 20x7 and 20x8. During 20x8. assuming the company used the straight-line method of amortization. the total life of the van would only be 4 years instead of the original estimate of 5 years. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. management felt that the van could only be sold for $2.000 kilometers during the year. b.000. Resort Ltd.

Sold the asset for $25.1.Introductory Financial Accounting. 20x4 Dec 31. This increased the useful life of the asset by three years. The original estimate of salvage value holds. 20x7 Dec 31. Recorded amortization expense. 20x5 Dec 31. 20x7 Aug 31. . 20x3 Aug 31.1 Page 96 Problem 5-3 The Connor Company had the following transactions over the life of an asset purchased on January 2.000 were made to the equipment. 20x3 Purchased equipment for $60. 20x6 Sep 30. Routine repairs costing $600 were made to the equipment. 20x5 Dec 31.000 salvage value. The equipment was completely overhauled at a cost of $20.000. This increased the quality of the asset’s output but did not change its useful life or the estimate of salvage value. Recorded amortization expense. Dec 31. 20x3: Jan 2. Recorded amortization expense. 20x8 Required – Record all of the above transactions assuming that the company uses the straight-line method. v. 20x4 Apr 31.000. The estimated useful life of the asset is expected to be 5 years with a $10. Recorded amortization expense.000. Recorded amortization expense. Expenditures totaling $2.

000 cash. 20x7. On January 1. the machine was sold for $20.000. 20x8. Required – 1. bought a state of the art numerically-controlled lathe from GPL by trading in a dissimilar asset and paying $90. how the machine will be presented in the assets section of the balance sheet at December 31. adapted) $ 50. and the repair cost for it amounted to $500. in good form. ABC Ltd. The following additional information is available: Original cost of the old asset Accumulated amortization at June 30. 2.000.1. (CGA Canada) . The machine was expected to have a life of 4 years and a salvage value of $3.1 Page 97 Problem 5-4 On June 30. Prepare the journal entry to record the sale of the machine on January 1.000 to install the machine. 3. Market value of old asset on June 30. 20x7 Price of new lathe. Assume a straight-line method of amortization. Show. During the installation there was minor damage to the frame. MNO Co.Introductory Financial Accounting.500 108. ABC had to spend $2. Prepare the journal entry to record the amortization expense on December 31. which included freight charges of $1. 20x6. 20x8. (CGA Canada. Prepare the journal entry to record the asset acquisition on July 1.000 cash. 20x7 Required – Prepare the journal entry to record the purchase of the lathe. 20x7. 4. 20x6.500 Problem 5-5 On July 1.000. v.000 38.000 15. purchased a machine at a cost of $25. 20x6.

1. 20x6. v. assuming the company uses the: i) straight-line method ii) units-of-production method c. Prepare the journal entry to record the sale assuming the company uses the: i) straight-line method ii) units-of-production method $120. .000 units 9. the equipment was sold for $75.000 4 years 40. 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. and (c).000.000 units.Introductory Financial Accounting. No change in estimated residual value was anticipated.1 Page 98 Problem 5-6 The following information pertains to the equipment acquired by Xie Co. On January 1. on January 1. assuming the company uses the: i) straight-line method ii) units-of-production method On January 1.000 units were produced.000 $ 20. Accordingly. Determine the amortization expense for the year ending December 31. In 20x7. the estimates were revised. 20x7. 20x8. due to a preventative maintenance system that had been implemented. (b). 12. Determine the amortization expense for the year ending December 31. 20x6.000 units b. 20x7. Cost Estimated residual value Estimated life Estimated production 20x6 actual production Required a.

we have to pay the full invoice price within 30 days.000 to pay for the machine within the discount period and take advantage of the cash discount. income can be minimized in 20x3.Introductory Financial Accounting. b. In this way. German intends to use the machine for 8 years and hopes to sell it for $15. we get a 2% discount. Prepare the journal entry to record the sale assuming the straight-line method of amortization was used. Otherwise. However. * this means that is we pay within 10 days. Required – a.000 $ 14. What amortization method could be used to abide by the president’s request? Is this method acceptable under generally accepted accounting principles? Explain. The following information relates to this machine: Invoice price Credit terms* Customs and duty costs Preparation and installation costs $ 140. 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. n/30 $ 5.000 at that time. Compute amortization expense for 20x3 using the straight-line method. c.000 cash. purchased Machine No. It incurred interest costs of $12. 20x3. Machine No.800 The company borrowed $150.1 Page 99 Problem 5-7 German Ltd. 20x6. 103 on January 2.1. 103 has a physical life expectancy of 10 years with a salvage value of zero. Assume that the machine is sold on January 1. . v.000 on this loan during 20x3. for $100.000 2/10.

Interest and Principal payments are due December 31st of each year.000 3. services or supplies for the operation of the company. Accounts Payable – these are liabilities that were incurred to purchase goods. Current Liabilities A current liability is one that will be settled within one year or the business cycle of the firm. but have not been paid.000 with the terms set at 6% interest due annually. For example. If the average daily wage expense is $1. Liabilities To begin our discussion about liabilities we have to first differentiate between those liabilities that will come due within on year or accounting period (current liabilities) and those liabilities that will come due at a later point in time (long-term liabilities). a company has a fiscal year end of March 31st.1. it is split appropriately and applied to the correct periods.000 to the new period.000 to last period and $4.000/day) that were performed in the period but not paid for. whichever is longer. . Typically.000 Wages/Salaries Payable – these are wages/salaries that are due to employees for hours worked.000 7.000 2. The principal must be repaid equally over 5 years.000 on account.000/day) Wages Payable (to remove the adjusting entry) Cash 4. which represents the three days of work (3 x $1.000/day.Introductory Financial Accounting. the only time we see this account set up is at the end of a fiscal period when an adjusting entry must be made. On April 4th. For example. We have already covered several of these when we did adjusting entries.1 Page 100 6. 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.000. For example. and will not be paid again until April 4th. however. $3. a company purchases office supplies from a supplier for $2. assuming the employees worked the full 7 days in the week.000 3. Employees were last paid on March 28th.000 This way. The entry would be: Office Supplies Accounts Payable 2. $7. the entry would be: Wage Expense (4 days x $1. v. when the payment is made for the full week.000 Note that we are debiting the Wage Expense for $3. we will go over the main types of current liabilities.000. the adjusting entry made March 31st would be: Wage Expense Wages Payable 3. a company takes out a loan on January 1st for $10.

500 + 8. the interest expense for the year would be $600 ($10.500 57. we will now show a balance in the Current Liabilities section of $2.000 The debt is split into the portion that is due within the year. At December 31st. The journal entry would be as follows: Long-term debt Interest Expense Cash 2. 27. Wages total $100.1 Page 101 When the company takes out the loan.000.1.000 On the Statement of Financial Position.000 + 7. For example.000. $7. and that which is due later than one year.000 600 8. CPP and EI from employee’s paycheques.000 x 6%).500 . we would split the long-term debt as follows: Current liabilities Current portion of long-term debt Long-term liabilities Long-term debt $2. The entry to record payroll for the month would be: Wages Expense Employee Withholdings Payable ($27. This ensures accurate reflection of the financial obligations of the company on the Statement of Financial Position. The employer matches the employee’s contribution for CPP. and pays 1.000. and a balance in the Long-Term Liabilities section of $6.000. $8.500.4 times the employee deduction for EI.000 8. and the employer ducted the following amounts from its employees’ cheques: Income Taxes. Employee Withholdings Payable – Employers are responsible for deducting income taxes.000.000 42.000 If a Statement of Financial Position were prepared on the January 1. a company pays its employees monthly. the journal entry would be as follows: Cash Long-term debt 10. Deductions for each month are due on the 15th day of the following month.000) Cash 100.000 10. v. EI. Not only must the company submit the employee’s portion. CPP.Introductory Financial Accounting. but they also must submit the employer portion of CPP and EI.

v. The justification is that the financial statements should not be misleading or give false hope or information to any reader. but have not yet come to be. the company pays the government: Employee Withholdings Payable ($42. Contingent liabilities are those liabilities which are likely to be incurred in the future. your company is being sued for $400. then it has to be disclosed through a note in the financial statements. the company would record its portion of payroll expenses due to the government: CPP Expense ($7.200 61. For example.1. and b) the loss can be reasonably estimated.000 400.500 11. If a contingency meets the first criteria but not the second.000 .1 Page 102 At the same time.200 Contingent Liabilities One of the guiding principles of accounting is the idea of conservatism. On the 15th of the next month.500 x 100%) EI Expense ($8. 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.700 Note that CPP Expense and EI Expense could be tracked separately. If a company knows that there will be a liability.40) Employee Withholdings Payable 7. A contingent loss should be recognized only when: a) it is likely that a future event will confirm the loss. The journal entry would be: Unrecognized Loss on lawsuit Contingent Liability – lawsuit 400.000 x 1.700) Cash 61. 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. but it does not have to be recognized. This principle states that. as done above.000. and therefore a loss of some kind to the company. One of the resulting GAAP rules that stems from this idea of conservatism is the establishment of contingent liabilities.Introductory Financial Accounting.500 + 18. You would record or recognize the FULL amount. then they must disclose it when they know about it.200 18. or simply lumped in with Wages Expense.

Another example of matching has to do with warranties. all expenses related to those revenues should be recorded at the same time. This principle is the one that guides us when making adjusting entries at the end of the year with regards to expenses. Total Sales for the year totaled $300. let’s assume that during the next year. The journal entry to record warranty expense for the year would be: Warranty Expense ($300. This principle states that for all revenues generated in a specific period.1 Page 103 If. For example.000 x 4%) Warranty Liability 12. a company sells vacuum cleaners that come with a 2-year warranty. Again.000 12. When a company sells a product that has a warranty.000 to repair various vacuum cleaners that are under warranty. 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 win.000 10. in the same scenario. but it also sets up a liability that will be drawn down as actual expenses are incurred over the life of the warranty. the company pays $10. Warranties & Premiums Another of the guiding principles of accounting is the matching principle. then you do not have to do anything because you do not meet either of the criteria for recording a contingent liability.1. in the same scenario.Introductory Financial Accounting. The journal entry would be: Warranty Liability Cash/Inventory/Wages 10.000 Premium liabilities come to be when a company offers its customers some product or service through the redemption of coupons or some other device whereby the customer can receive goods/services in the future based on current sales. we must record the associated expense in the period when the . The warranty expense is normally determined through evaluating historical data and coming up with a % of sales that represents the future warranty costs. such as wages.000 This entry not only matches the expense to the period when the revenues were generated. v. If.000. your lawyer felt you would lose. but you would not have to record the loss or the liability. The company estimates that warranty expense. on average. You would simply write a note in the financial statements disclosing the lawsuit. and the fact that you were likely to lose. 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. Continuing on with the same example. is 4% of sales. that have been incurred but not paid.

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. They can then redeem 10 coupons for a watch valued at $10. the greater the “discount” or decrease in the dollar value will be. If you are going to be receiving money in the future. v. The combination of these two facts results in a dollar today being worth more than a dollar received in the future. The premise behind this is that a dollar today is not worth the same as a dollar received tomorrow. longterm leases and pension obligations. 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.000 32. we are trying the calculate the present value of $1. Your sales for the year were $800. you are taking on the risk that the money might not be repaid at all.000.000 32. .000/$10 = 80. you have determined that only 40% of your customers will redeem their coupons. the premium liability account is drawn down. for every $10 your customers spend. Furthermore. These typically include long-term bonds. pensions and other more complicated longterm liabilities in this section. The farther in the future you are to receive the funds.1. one of the most frequently used financing instruments in business. they receive 1 coupon. then you are missing out on the opportunity to invest that money today and earn interest on it. Based on past redemption data. or ten years from now. notes payable.000 Whenever coupons are redeemed. We will not get into a discussion of leases.000 coupons x 40% = $32. or a year from now. the journal entry would be: Premium Expense* Premium Liability * $800. We will instead focus on long-term bonds. Long-term Liabilities Long-term liabilities are defined as liabilities that would not be reasonably expected to be liquidated within a year.Introductory Financial Accounting. For example.000 to be received in 5 years from now at an interest rate of 6%. To record the premium liability at the end of the year.1 Page 104 original sale is made.

000 will you have to set aside in order to set up this annuity? N 30 I/Y 7 PV X= $744.000.542.000 per year for the next 30 years. press CPT and the TVM register you are attempting to solve for.000 from your favorite uncle.000 worth in “today’s dollars”? N 5 I/Y 6 PV 7.An annuity is defined as a series of identical cash flows that end at a specified time. If the current and expected future rate of return is 6%. Calculating the Present Value of a Future Single Sum . 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. enter the numbers above in the TVM memory registers to solve.000. what is that $10.58 PMT FV 10000 Enter Compute Present Value of an Annuity . v.Introductory Financial Accounting. how much of the $1.47 PMT 60000 FV Enter Compute . This means that if you were to invest $747.472. the amount would grow to $1. Assume you inherit $1.26.000. in this case PV the answer provided is -747.1 Page 105 With the Texas Instruments BA II Plus.000 from your mother 5 years from now.26 today (money out of pocket and therefore the negative sign) and invest it for 5 years at 6% compounded annually. You want to be able to withdraw $60.Assume you are going to receive $10. If i=7%.1. 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.

Coupon Rate – the stated interest rate to be paid on the face value. Also called the market rate.206. Assume the rate is 7%. Coupon – the amount of semi-annual interest payments to be made on the bond. The manufacturer is offering you financing at a rate of 6. how much can you withdraw each year? N 25 I/Y 7 PV 675000 PMT X= $57.You have retired with $675.1. v.000 in the bank.5% on a 36-month loan. as well as make interest payments on the stated amount.5 PV 80000 PMT X= $30.992.10 FV Enter Compute Your company is purchasing a piece of equipment costing $80. The market takes this into consideration. What is your monthly payment to the manufacturer going to be? N 3 I/Y 6. and the bonds will sell for a value less than the face value of the bond. 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). if you issue a bond with a coupon rate of 5% and the YTM is 6%. Coupon rate = Annual Coupon Payments/Face value Yield-to-maturity (YTM) – the rate of return that bondholders expect on the bond given its risk. then the bond will sell at a premium. If the YTM > Coupon Rate. This is because the buyer of the bond gets a higher return by investing in the bonds. then in order to sell your bonds you will have to sell them at less than face value because investors would be willing to pay face value if they could get a return of 6%. then the bond will sell at a discount. It is rare that the yield-to-maturity rate and coupon rate are the same. 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. If the YTM < Coupon Rate.1 Page 106 Annuity Payment Calculation . You expect to live another 25 years.000.06 FV Enter Compute Bonds A bond is a financial instrument that is a contractual obligation by a company to pay a stated amount of money at some stated time in the future. and therefore is willing . For example.Introductory Financial Accounting.

451 . We have already calculated that we will be writing a cheque for $58. In order to attract investors. YTM = 7%. Interest will be paid semiannually on June 30 and December 31.1.5% $2.000 x 5. we must adjust the other factors in the formula to a “6-month” basis.8% and they mature in 10 years.000 to cover our coupon obligation. As such. 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. v.On January 1.829. therefore it will have to be cut in to reflect the situation. we have to sell our bonds at a discount.829.451 1. Furthermore.451.451 PMT 580002 FV 2000000 Enter Compute 1 2 YTM of 7% / 2 = 3. every 6 months.8% is less than the market rate of 7%. The Coupon Rate = 5.000 coupon payment.51 PV X= $1. the YTM is normally expressed as an annual rate. 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. Example .000.1 Page 107 to pay more than face value for the bonds in order to reap this benefit. 20x8 you issue $2. or the amount that we would have received in proceeds would be equal to $1. not the number of years. How much would be raised through this bond issuance? N 20 I/Y 3. This is less than the face value of $2.829. 1. This is because our coupon rate of 5.8% x = $58.Introductory Financial Accounting. because PMT is equal to the payment made every six months.000 of bonds. However.829.000. The PMT & FV remain the same.000. The Present Value of the bonds. N will equal the number of coupon payments left.000 is not our interest expense.000. this $58.

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. v.031 6. the journal entry will be: Bonds Payable Cash 2. give or a take a few dollars for rounding.482 x 7% x Bonds Payable Cash ) 64.835. the balance in the Bonds Payable account will have been written up to $2.1.242 58.451 + 6.835.301) $1.301 credit to Bonds Payable increases the carrying value of the bond payable account to (1.Introductory Financial Accounting.451 x 7% x Bonds Payable Cash ) 64.000.829.000 Note that the $6. At the time of settlement.829. you would record the following journal entry: Interest Expense (1.242 6.482. On December 31st.031 58.000. the entry for interest expense would be: Interest Expense (1.000.000 2.000 . This will be the amount used to calculate the interest expense on December 31st. therefore.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. on June 30th. Continuing our example.000 After all 20 interest payments have been made.000.

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 2.1 Page 109 Problems with Solutions Problem 6-1 – Multiple Choice Questions 1. Which of the following statements is correct? i) The bond was issued at a premium ii) The interest expense for the year will be more than $800. On January 1. Issued $10 million face value.Introductory Financial Accounting. Gallaghar Ltd. 10 year 8% bonds priced to yield 6%.000 iv) The bond was issued at a discount a) b) c) d) iv) only i) and iii) i) and ii) ii) and iv) . Which of the following items is not a contingent liability? a) Premiums offered to customers b) A risk of loss to uninsured property due to fire or other casualty c) Additional wages that may be payable on a dispute now being arbitrated d) Estimated claims under a service warranty on products sold 3.000 iii) The interest expense for the year will be less than $800.1. v.

How should any liability for the warranty be reported? a) It should be reported as a long-term liability. a company inaugurated a sales promotional campaign on June 30.300 b) $8. whereby it placed a coupon in each package of product sold. b) It should be reported as a current liability. 20x8. (2) a oneyear operating cycle.00 and 5 coupons must be presented by a customer to receive a premium. Each premium costs the company $2.000 10.1 Page 110 4. even though the amount of the loss cannot be reasonably estimated 5. (3) a relatively stable pattern of annual sales. the following information is available: Packages Sold Premiums Purchased Coupons Redeemed 150. 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. the coupons being redeemable for a premium.000 23. and it is likely that an asset has been impaired or a liability incurred d) When it is likely that an asset has been impaired or a liability incurred.000 e) $20.500 What is the estimated liability for premium claims outstanding at December 31. Assume that a manufacturing corporation has (1) good quality control. c) It should be reported as part current liability and part long-term liability.000 . 20x8? a) $4. 20x8. 6.400 d) $18.1. d) It need not be disclosed.600 c) $9. 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. v. The company estimated that only 30% of the coupons issued would be redeemed.Introductory Financial Accounting. In an effort to increase sales. For the 6 months ended December 31.

For each $10 your customers spend. then receive 1 coupon.000. In order to increase customer loyalty in this fiercely competitive environment you have started a coupon program.1 Page 111 Problem 6-2 You run a computer repair company.1. v. The warranty liability at the beginning of the year was $165.000 40. What is the balance in the warranty liability account at the end of the year? . Sales for the current year were $3.000. They can redeem 15 coupons for a $25 iTunes gift card.000 22. Required – Prepare all journal entries related to the warranty for the current 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.Introductory Financial Accounting. You have been running this program for several years. and data shows that approximately 55% of your customers redeem their coupons.500 coupons Problem 6-3 Company X provides a 3-year warranty on all of the products it sells.000 and actual costs incurred to service warranties during the year amounted to $130.

Assume that the going market interest rate for similar bonds on July 1. 20x1 and the first two interest payments.1. Assume that the Kaplan Corporation as a December 31 year end. 4.5% coupon bonds on December 31. The bonds mature in 15 years.000 Opening balance Total credits during the year Required – 1. 20x1. what was the estimated liability for future warranties? (CGA Canada) .1 Page 112 Problem 6-4 On July 1. 3. Warranty Liability Dr Cr $10. 20x1 is 8%.800 Total debits during the year $6.200 5.Introductory Financial Accounting.000 of 8. Required – Prepare the journal entries to record the issue of the bonds on July 1. The bonds pay interest semi-annually on December 31 and June 30 and are due in five years. The yield to maturity on December 31 was 8%. Problem 6-5 The Kaplan Corporation issued $10. what is the estimated liability for future warranties? At December 31.000 and a coupon rate of 10%. Gamma Corporation issued bonds with a face value of $500. for the year 20x7. automobile dealers. What is the dollar value of warranty repairs performed in 20x7? What is the warranty expense for the year 20x7? At December 31. Coupon payment dates are June 30 and Dec 31 of every year. 2. 20x4. v. 20x6. 20x7. Required – Prepare all journal entries with regards to this bond for the years 20x4 and 20x5.000. Problem 6-6 The following is the general ledger account for estimated warranties of McNeil and Grace Ltd. The company issues warranty agreements immediately upon the sale of an automobile..

20x7.000. GHI’s year end is December 31.000. The cash outflow towards interest on the bonds will be more than $80.000. Required Prepare all journal entries for the life of this bond issue. They were issued at a price of $1. issued $1 million face value. and pays interest on July 1 and January 1. The bonds were sold at a yield of 8%. 9% bonds on January 1. v. Prepare the journal entry(ies) to record interest expense for the period ending December 31. 20 year. three-year. (CGA Canada adapted) .171.000.1. The bonds were issued at a discount for $897. Show how the $1. 12% coupon bonds. face value. c.171. Prepare the journal entry(ies) to record interest expense and coupon payment on June 30. indicate whether each of the following statements would be true or false. 20x6. Interest on the bonds is paid semi-annually on December 31 and June 30. The Interest Expense will be the same every year. Alpha Beta Ltd. b. Required If Adrdalan and Baker Inc. d.1 Page 113 Problem 6-7 GHI Company issued $500. 8% bonds. to yield 10%. Ardalan and Baker Inc.000 face value. (CGA Adapted) Problem 6-8 On July 1. a. 3. The Interest Expense for the 1997 year will be less than $100. The Interest Expense for the 1997 year will be more than $80. Prepare the journal entry to record the issue of the bonds at July 1. issued $1 million semi-annual. (CGA Canada adapted) Problem 6-9 On January 1. uses the effective interest method to calculate interest expense on these bonds.591 was calculated.Introductory Financial Accounting. Required – 1. 4. 2. 20x6.591. 20x6. 20x7. 10-year. 20x6. as the market rate was 10%.

Shareholders’ Equity As mentioned in Chapter 1.1. any cash remaining after all obligations have been settled revert back to common shareholders. Contributed capital comprises of the investment made in the corporation by its shareholders. Retained earnings represent the cumulative earnings of the corporation less any dividend distributions to its shareholders. Shareholders’ Equity is fundamentally made up of two elements: contributed capital and retained earnings.000 If common shares are issued in exchange for a parcel of land whose fair market value is $250. If the book value per share is greater than the cash paid out to retire the shares. Common Shares Common shares typically have the following features: • they provide the right to vote at annual meetings.1 Page 114 7.000 $100. and then re-sell them). • upon liquidation of the company. we credit an account called Contributed Surplus for the difference.000. For example.e. any dividend declarations are at the sole discretion of the company’s board of directors. the journal entry would be: Land Common shares $250. The corporation is under no obligation to provide a financial return to common shareholders. then the debit required to balance the journal entry is allocated as follows: • if there is any Contributed Surplus relative to common shares.000 When common shares are repurchased. and • they are a perpetuity. hold them. it can be drawn down. the shares must be cancelled (i. v. that is.Introductory Financial Accounting. If the book value per share is less than the cash paid out to retire the shares. then the journal entry would be: Cash Common shares $100. a company cannot purchase its own common shares. .000 cash. if common shares are issued for $100. Common shares can be issued for cash or any other asset. Shareholder investments will result in the company issuing shares to the investors – these shares can take the form of preferred shares or common shares. The debit to the common shares account is equal to the weighted average book value per share times the number of shares retired.000 $250. meaning they never become due. Dividends become a liability of the corporation only when the board of directors declares them.

612) Contributed surplus Retained earnings Cash Aug 18 .000 + 50.500.500.000 cash Issued 50.800 61.000 186.000.800 32.000 + 1.000 7. 1.000 x $18.000.500.000 Retired 20.000.1.000.000 Book Value per common share: = $18.000 x $16.000 12. Example – The Noor Company’s shareholders’ equity section at December 31.000 Number of common shares outstanding: = 1.000 common shares at a total cost of $260.Introductory Financial Accounting.000 1.500.000 = 1.000 common shares for $2. v.000 321.000.1 Page 115 • any remainder gets debited to Retained Earnings.000 + 2.000 common shares for $7.000 common shares in exchange for land valued at $1.000 / 1.000 Issued 250.000 The journal entries to record the above transactions are as follows: Jan 15 Cash Common shares Land Common shares Common shares (20.000 Mar 18 Apr 30 Balance in common share account: = $15.000.100 61.100 280.000.000 = $16.000 = $18.000 shares outstanding Retained earnings The following transactions took place during the year: Jan 15 Mar 18 Apr 30 Jun 16 Aug 18 Issued 100.000.500.09 7.000 cash Retired 10.500.000 Jun 16 Cash Common shares Common shares (10.500.500.091) Contributed surplus Cash 1 $2.000 1.000 $15.000.000 common shares at a total cost of $280.800 260.150.150.500. 20x6 was as follows: Common shares.000 $2.000 + 100.

678. $8. the preferred dividends in arrears for 20x4 and 20x5 will have to be paid: 100. 100.000 shares outstanding Preferred shares. • they carry a stated dividend per share.000 Book Value per common share: = $25.00.00 x 2 years = $1. they are a perpetuity. Example – The Jarvis Corporation’s shareholders’ equity as at December 31. 20x6 and management wants to pay a dividend of $5 per common shares. 1.678.000 – 321.000 10. any dividends in arrears due to preferred shareholders must be paid before any dividends can be paid to common shareholders. any dividend declarations are at the sole discretion of the company’s board of directors.000 = $25. It is now December 1.800 + 7. This means that if dividends are missed. However.000 = 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). • like common shares.600.000 The preferred share dividends were last paid on December 31.380.1.150. that is.380. Like common shares. 20x3.000 = $18. the corporation is under no obligation to provide a financial return to common shareholders. Dividends become a liability of the corporation only when the board of directors declares them.000. v.000 shares x $8.000 shares x $8.000 – 20.200 Number of common shares outstanding: = 1.000.000 + 250. the preferred dividends for the year 20x6 must be paid: 100.200/ 1.00 x 1 year = $800.Introductory Financial Accounting.000. 20x5 is as follows: Common shares.000 Next.500. cumulative.000 shares outstanding Retained earnings $35.1 Page 116 2 Balance in common share account: = $18.000 .000. in most cases preferred shares are cumulative.000 40.500. First.

000 + 5.400.000 + 800. Dividends On the date a dividend is declared it becomes a legal liability of the company and the following journal entry is made: Retained earnings Dividends payable On the date of payment.000 The total dividend to be declared will be: $1. this same shareholder will receive an additional 1.1 Page 117 Finally. There is NO journal entry required when a stock split is declared.000 = $7. In order to reduce the share price.000. the company will split the stock.1.000 shares as a result of the stock split resulting in a total of 2. If a shareholder owns 1.000 shares x $5 = $5. the dividend to common shareholders can be paid: 1.000 Stock Splits When the stock price of a corporation is high.000 shares of shares before the split.Introductory Financial Accounting.600.000 shares. the stock may become unattractive to small shareholders who have to disburse larger sums in order to acquire shares of the corporation. Any premiums paid on retirement of shares are also charged to retained earnings. a 2:1 split means that the number of shares outstanding will double. v.000.000. . the following entry is made: Dividends payable Cash XXX XXX XXX XXX Retained Earnings Retained earnings represents the accumulated earnings of the corporation net of any dividends paid. This will result in the share price dropping by half. For example. All that happens is that the number of shares issued changes.

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

.000 common shares outstanding. d) The number of common shares outstanding will be 250.000.500.000. XYZ Corporation has 150.Introductory Financial Accounting. c) The number of common shares outstanding will be 225.000.1 Page 119 Problems with Solutions Problem 7-1 – Multiple Choice Questions 1.000.1.000. v. Which of the following statements will be true when the stock split is accounted for? a) Retained earnings will be reduced by $4. The shares were selling at $30 each when management announced a three-for-two stock split. b) Shareholders’ equity will increase by $3.

000 common shares to Hilary and 12. Net income for the month was $56. Issued 2.1 Page 120 Problem 7-2 The articles of incorporation authorize Hilary and Sam Corporation. 2.000 common shares for cash of $12.32 per share.000 common shares. Declared a 2 for 1 stock split. Record the transactions in journal entry form.000 . Prepare the shareholders’ equity section of the Payne and Papineau Inc. to issue 10. a new company.Introductory Financial Accounting.000 shares to Sam in return for cash equal to the shares’ market value of $6 per share.000 $6 non-cumulative preferred shares and 100.000.1. In its first month. Issued 400 preferred shares to acquire a patent with a market value of $40.000. Declared cash dividends on the preferred shares. v. Hilary and Sam Corporation completed the following transactions: February 2 February 10 February 15 February 26 February 27 February 28 Issued 9. Declared cash dividends on the common shares in the amount of $0. Required 1. balance sheet as at February 28.

Paid the preferred dividend.1 Page 121 Problem 7-3 M-F Inc.000 preferred shares at $20 each. Prepare the shareholders’ equity section of the Statement of Financial Position.500 common shares at $120 each. Issued 1. 2. v.Introductory Financial Accounting.000 were converted into 500 common shares. e. During the first year of operations the following events occurred: a. Issued 2.00 common share dividend h.000 for the year.000.000 common shares and 50. f. The equipment had a fair market value of $40.1.000 common shares at $115 per share.000 preferred shares in exchange for equipment. Declared and paid a $5. Provide the journal entries for each transaction above.000 and book value of $53. $1. . is authorized to issue 100. The convertible bonds were issued earlier in the year. Issued 1. d. b. c. cumulative preferred shares. Net income was $64. Required 1. Issued 1. Declared a cash dividend on preferred shares. Convertible bonds with a face value of $50.00. g.000.

Enjoy! . There is no new material. v.1.Introductory Financial Accounting.1 Page 122 8. just the integration of previously covered materials. Therefore. the only materials in this chapter are the problems with solutions. 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.

2.000 419.000 127.000 145.000 34. 20x5 was as follows: Dr. The company uses a FIFO periodic inventory system.000 176. The bonds were issued on January 2.600 150. 5.400 Cr.000 320. 20x5 is 8 years. 7.400 40. 20x1.000 $23. 20x6.1. the coupon rate is 6.000 5. $1. .200 $1. The average useful life of equipment is 10 years.000 144. v. The face value of the bonds is $400.000.000 shares of common stock outstanding.000 300. The building is being amortized on a straight-line basis over 40 years. 3.1 Page 123 Problem 8-1 The Haider Corporation’s post-closing trial balance at December 31. Coupon payment dates are on June 30 and Dec 31.000 13. 6.5% and the yield to maturity at the time the bonds were issued was 6%. The prepaid insurance is for a one year policy taken out in 20x5 that expires on March 1.5% of sales. Warranty expense is estimated at 1. The equipment is being amortized using the double declining balance method.052.400 Additional information 1.052. 4. The bonds mature on December 31.000 120.Introductory Financial Accounting. The patent remaining useful life at December 31.000 38. 8.000 1.600 12. 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. There are 10. 20x20. The company provides a one year warranty on its products.

Total sales on account were $1. Accounts written off totaled $34. 21.000. 9. 2. The warranty expense for the year is accrued.000. 12. Amortization expense on the building.000. an additional 3. Estimated % Uncollectible 3% 7% 20% 50% An adjustment is made for insurance expense.600. Recoveries of previously written off accounts receivable totaled $5. 19.000 22.1 Page 124 The following transactions took place during the year: 1.000 12. v.000 40. equipment and patents.000.000 23.000.520.000 320. 14 15.000 was returned to suppliers.000 common shares on Aug 23 Insurance policy taken out on March 1 – one year policy.000. Inventory costing $16.400 130. Inventory purchased on account totaled $960. 20.000 The following adjustments need to be made at year-end: 17.000. Operating expenses paid $945.000 26. Payments on accounts payable Payments for salaries Interest payments on bonds payable Purchase of equipment on January 2 Warranty repairs made to products sold Payments to the Canada Revenue Agency for income taxes Repurchase of 1.000 25. 5.000.000 18.000 43. 3.000 30. The inventory was counted on December 31. The aggregate net realizable value of the inventory was determined to be $365. 6. 10. 11. Cash disbursements were as follows: 8. 16.1. 13. .Introductory Financial Accounting. The accounts receivable aging schedule is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $144.000 $222. 20x6 and the total cost of the inventory was determined to be $378.000 2. Cash collections on accounts receivable totaled $1. On March15. 7.000 common shares were issued for $75. 4.

Required – a. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position .1 Page 125 22. 20x6 amount to $6. c. 20x6. 24.700. v. Prepare journal entries for the above transactions and enter all the above transactions in T-Accounts.1.000 were declared and paid on December 15. Dividends of $80.Introductory Financial Accounting. Salaries payable at December 31. 23. b. The income tax expense is 40%.

costs incurred for the warranty to date. amounting to $9. g. amounting to $9. During the year. It is now December 31.1 Page 126 Problem 8-2 Pacific Company adjusts and closes its books each December 31. totalling $8. is to be depreciated for the full year. On that date. 20x5. c. On that date. d. The estimated useful life is 10 years.200 was on hand.000. 20x5.600. 20x5. The note is payable on March 31. On April 1. you do not need to provide the original entry): a. supplies of $21. cash was debited and notes payable credited for $60. 20x5.800.e. The company purchased a patent on January 1. 20x5. The sales have been recorded. at a cost of $11. and the residual value. i. September 1. At the end of the year. The company paid a two-year insurance premium in advance on April 1.900.000.600. Notes receivable was debited.000. The company received from a customer a 9% note with a face amount of $12. which was debited to rent expense. inventory of $9. The estimated loss rate on bad debts is 3% of sales. j. On January 1.500. for one year.000. were debited to warranty liability when paid. The note was dated September 1. During the year. i. Pacific Corporation had a supplies inventory of $4. f. 20x6. Credit sales for the year amounted to $320. Use straight-line amortization. Unpaid and unrecorded wages incurred at December 31 amounted to $4. It had to pay the full amount of rent one year in advance on June 1. 10% note payable. $4. for the face amount plus interest for one year. and the adjusting entries are to be made.900 were purchased and debited to supplies expense. h.900. b. 20x5. No warranty expense has been recognized. . which was debited to prepaid insurance. which cost $80.Introductory Financial Accounting.000 units of a product that was subject to a warranty. Machine A.700. The patent has an estimated useful life of 17 years and no residual value. the principal plus the interest is payable one year later. e. pacific Company sold 10. the company signed a $60.000. The company rented a warehouse on June 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. 20x5. v. the patent account was debited and cash credited for $11.000. Past history indicates that 3% of units sold require repairs at an average cost of $40 per unit.1. and sales revenue was credited on the date of sale.

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

Sale of common shares Cash sales Rebates from purchases Collections on credit sales Bank loan proceeds $ 2. 20x2. 20x2.1 Page 128 Problem 8-3 Anne Spier has prepared baked goods for resale for several years now. v.920 3. and additional equipment is needed to accommodate expected continued growth.400 1. 20x2. Kelowna Bank & Trust has asked Spier to submit an income statement for MAS Inc.320 2.880 $33. Baking materials Rent Salaries and wages Maintenance Utilities Insurance premium Equipment Principal and interest payment on bank loan Advertising $14. 1. She started a baking business in her home and has been operating in a rented building with a storefront.Introductory Financial Accounting.000 312 424 $31.466 .600 2.1. with an initial shares issue of 1. annually since operations began at the present location. Anne Spier is the principal shareholder of MAS Inc. Spier wishes to purchase some additional baking equipment and to finance the equipment through a long-term note from a commercial bank.000 shares of common share for $2. Spier incorporated this business as MAS Inc.800 5.500 110 4.500 22. on January 1. for the first five months of 20x2 and a balance sheet as of May 31. Spier assembled the following information from the corporation's cash basis records for use in preparing the financial statements requested by the bank. The bank statement showed the following 20x2 deposits through May 3l.500. The following amounts were disbursed through May 31.000 1.770 130 5. Sales have increased 30%.

20x2. 20x2. Required Using the accrual basis of accounting.226 at May 31. 20x2. 9. There were no materials in process or finished goods on hand at that date. 20x2. and no cash was transferred from the unincorporated business to the corporation. A one-year insurance policy was purchased on January 2.1. and have an estimated useful life of five years. 12. Customer records showed uncollected sales of $4. 20x2. Payments and collections pertaining to the unincorporated business through December 31. and January 1 consisting of equal principal payments plus accrued interest since the last payment. May 25. 20x2 MAS Inc. 20x2.000 were purchased on January 2. were as follows. 8. The other employees had been paid through Friday. 20x2 (b) A balance sheet as of May 31. 10. . Unpaid invoices at May 31. Anne Spier receives a salary of $750 on the last day of each month. and states a simple interest rate of 10%. 20x2. prepare for MAS Inc. These are the only fixed assets currently used in the business. 20x2. October 1. The loan requires quarterly payments on April 1. New display cases and equipment costing $3.: (a) An income statement for the five months ended May 31.Introductory Financial Accounting. No materials were on hand or in process and no finished goods were on hand at January 1. 20x1 were not included in the corporation's records. 20x2. Rent was paid for six months in advance on January 2. 11. Baking materials Utilities $ 256 270 $ 526 4. is subject to an income tax rate of 20%. v.840 were on hand at May 31. 20x2. July 1. Straight line amortization is to be used for book purposes. and were due an additional $240 on May 31. 5.1 Page 129 3. The note evidencing the 3-year bank loan is dated January 1. 7. Baking materials costing $1. 6.

As the senior auditor in charge of the audit.000 146.20x1 Deposits during 20x2: Cash sales Proceeds of $5. was on hand. a cash dividend of $10. In 20x2 Morrow began selling on a cash-only basis.000 10.000 $180.000 was declared and is to be paid in January 20x3. 20x2.500 $205. $20.000) Cheques written during 20x2: Purchases of merchandise Salaries Advertising (to be run in 20x3) Miscellaneous expenses $ 24. 20x2. Retained earnings at the beginning of 20x2 totalled $63.000.000 10. 20x2. Receivables at the beginning of 20x2 totalled $ 155. Morrow's only other asset at the beginning of 20x2 was an investment in Honeydew common shares. The uncollected receivables were written off as miscellaneous expenses in 20x2.000 for unpaid purchases of merchandise on December 31.000. you have been presented with the following information: a) Morrow is incorporated and initially sold 11.1 Page 130 Problem 8-4 Morrow Wholesale has kept limited records and has never had an audit until 20x2. equipment with a cost and accumulated depreciation of $80. v.000 $406. At the beginning of 20x2. for Morrow Wholesale. During the fourth quarter of 20x2. All equipment is depreciated on a straight-line basis over ten years with no estimated salvage value. December 31. Morrow's cost of goods sold is 80 percent of sales.600 have accrued but have not been paid. At the end of 20x2.000. sales salaries of $1.000 5. b) Cash balance in cheque book.1. There have been no other common share transactions.000 5.000 note issued on July 1 and bearing interest at 12%.000 of its common shares for $25 per share. Prepare an income statement for the year ended December 31. The inventory at the beginning of 20x2 was $80. During 20x2 these shares were exchanged for land and a gain of $4.000 and $20. . and a balance sheet at December 31.000 $250.500 c) d) e) f) g) h) i) j) Morrow had no outstanding payables at the beginning of 20x2 but owes creditors $36.Introductory Financial Accounting.000 was recognized. respectively. 20x2. payable annually Customer collections Proceeds on sale of fully depreciated equipment (original cost.000 5. The sale of equipment was made on December 30. The income tax rate is 30 percent.000.

this generates cash.000 650. Cash from Financing Activities – this section looks at any changes in the long-term liability and shareholders’ equity section of the Statement of Financial Position. this uses cash Example . either the direct or indirect methods can be used. There are two distinct methods in presenting cash flow from operations: the direct and the indirect method. Most of what we do.000 20x7 $ 250. Both methods will be covered later in this section.000 215. GAAP suggests a preference for the direct method. Try to keep in mind that when you are working with this statement.000 Additional information: Dividends of $150. This statement is broken into three distinct sections. then this uses cash. Components of the Statement of Cash Flow There are three sections to the statement of cash flow: Cash from Operations – this section shows how much cash is generated or used up by the firm in its daily operating business.000 180. If a company issues new debt. If a company pays dividends. . and shows how a company’s actions have affected its net cash position throughout the period. Some students find the statement of cash flow to be a challenge because they are still thinking with an “accrual” mind. If a company issues new shares. however. is based on the accrual system.000 150.Introductory Financial Accounting. v.1. If a company retires shares. The Statement of Cash Flow The statement of cash flow shows a company’s inflows and outflows of cash during a particular period. as accountants.1 Page 131 9. if a company pays off or retires debt this uses cash.A company reports the following partial data from the previous year: Partial Statement of Financial Position 20x8 Non-Current liabilities Bonds payable Mortgage payable Shareholders’ Equity Common shares Retained earnings $ 400. your main concern is incoming and outgoing cash.000 were declared and paid to shareholders during the year. this generates cash.000 450.000 300.

when a sale of a long-term asset is made.000) 100. v.000 20x7 $ 300.000 Alternatively. we analyze at the Retained Earnings Account: Opening Retained Earnings + Net Income . Given that dividends decrease retained earnings.000 (60. $215.000. Cash flow from Investing Activities – this section discloses cash that was generated or used through the sale or purchase of long-term assets.000 (30. Remember. and the NBV (cost – accumulated amortization) is recorded as a gain/loss on sale.000) 0 .000) 75.000 (180.A company is showing the following data regarding its last two fiscal periods: Partial Statement of Financial Position 20x8 Non-Current assets Equipment Accumulated Amortization Furniture & Fixtures Accumulated Amortization Land $ 350. we have to reconcile the long-term asset accounts.000 (150.000 (170. Rearranging the formula. Example .000) $ 170.000 To calculate the company’s net income for 20x8. we remove the asset and all associated accumulated amortization.000) 100. the net income for the year is $85. we know that retained earnings increased by a net of $85. we can calculate the Net Income.000.000 = $300.000 + dividends of $150. and changes in them from one period to the next. we know all numbers in this formula except Net Income.1.Introductory Financial Accounting.Dividends = Closing Retained Earnings In the above case.000 (10.000) 200. The difference between the proceeds.$150.000 = $235.1 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 Net Income = $235. or cash we receive. when dealing with this section.000 + Net Income . Often.

000.000 (100. • the land was obtained through issuing $100. There are a minimum of four main sub-sections in determining the cash flow from operations (note that these are a minimum. If the gain on sale was $10. were sold at a gain of $10. Cash Flow from Operations – Direct Method This method of determining cash flow from operations uses the income statement as its starting point.000. it does not appear in this section.Introductory Financial Accounting.000. v. excluding interest payable. • the original fixtures.000. costing $75.000 + 10. then the cash proceeds on the sale of fixtures would have to be $15.000 = $25.000 cash. All non-cash transactions are by definition excluded from the statement of cash flow.000 and the accumulated amortization was $60. there can be as many as you want): Cash collected from Customers (Sales ± changes in Accounts Receivable) Cash paid out to Suppliers & for Operating Expenses (Cost of goods sold + Operating Expenses ± changes in inventory and prepaid expenses ± changes in non-cash current liabilities.000 worth of equipment was purchased for cash during the year. Note that because no cash exchanged hands for the purchase of the land.000) 25.000. and essentially takes each income statement item and converts it into cash.1 Page 133 Additional Information: • $50.000 worth of common shares to the supplier.000 with a NBV of $15.000 giving a net book value of $15.000) ($125. 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. • new fixtures were purchased for $100.1.000) * The cost of the fixtures was $75. income taxes payable and dividends payable) Cash paid for Interest (Interest Expense ± changes in interest payable) Cash paid for Income Taxes (Income Tax Expense ± changes in income taxes payable) .

000 80.000 15.000 23.000 10.000 200. 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 3.000 5.000 $172.000 82.000 120.000 20x6 $42.000 46.000 68.600 $ 67.000 21. Jack’s Joke Shop Inc.000 21.000 1.1. 20x7 Sales revenue Cost of Goods Sold Gross Margin Operating Expenses: Salaries Expense Amortization Expense Office and Administration Expenses Operating income Interest Expense Net Income before taxes Income tax Expense Net Income Jack’s Joke Shop Inc.000 325.000 231.400 . v.000 5.000 10.000 104.000 82.000 50.000 73.000 2.000) $172.000 62.000 8.000 89.000 24.000 (25. Comparative Unclassified Statement of Financial Position As at December 31.1 Page 134 Example – Calculate cash flow from operations – direct method.000 27.Introductory Financial Accounting.000 $660.000 104.000 14.000 $135. Income Statement For the Year ended December 31.000 39.000 (20.000 2.000 12.000) 135.000 429.

We are not told what percentage of the total sales are made for cash.000 120.1 Page 135 Cash collected from customers: Sales Less increase in accounts receivable $660. Therefore. nor are we told how much of the 20x6 accounts receivable balance have been collected. we can simply analyze the difference. and which are made on credit. then we collected more than we accrued and this would be added to sales. which is a non-cash item and interest and income tax expense which will be dealt with separately. because we are told the balance at December 31.000) $231.000 2. v. 20x6 and the balance at December 31. waiting to be sold. if accounts receivable decreased.000. 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) $654. therefore we reduce sales to calculate cash collected from customers.000 increase in Accounts Receivable. However.000 $553. This means that we purchased additional inventory that is now sitting in our warehouse.000 235.000 Why did we subtract the $6. Note also that although we combined all three expense items in one single calculation. The first thing we do is adjust it to obtain the purchases made during the period.000 2. Cash paid to suppliers & for operating expenses: Cost of goods sold Plus increase in inventory Plus Decrease in accounts payable Salaries expense Less increase in salaries payable Office & Administration Expenses $200. and office & administrative salaries. Conversely. then this means that sales have not yet been collected – that is.Introductory Financial Accounting.000 Note that the starting point for each calculation is the following expense items: cost of goods sold.000 (6. These comprise all of the expense items on the statement of financial position with the exception of amortization expense. . 20x7.1. In this case. If accounts receivable increased. salaries expense.000 (2. the amount of our Inventory account increased by $2.000 198. we accrued more sales than we collected.

That is.000 ($231. are treated in the manner that the Salaries Expense was treated above. Note. you start with the Income Statement amount and then account for any changes in the associated statement of financial position account(s). and any decrease in liabilities is added.000 + 2. then this means that we would have purchased less than what was sold and we would have decreased COGS in order to obtain purchases. In dealing with the change in accounts payable. Purchases for the year in this case would be $233. we will subtract the $12. other than interest and taxes.000) $14.000 (1. v. Cash paid for interest: Interest expense Less increase in interest payable $15. inventory decreased.000 from our Interest Tax Expense to get the total cash paid for taxes. we have to add the $2. any increase in the Income Tax Payable account would be subtracted from the expense to get to the total cash paid. we owe $12.000 In this case. Again. like it did in the above example. there appears to be no associated statement of financial position account. All other expenses.000 more this December 31st than we did last. .1. That is. If.000.000 increase to COGS. In this example.600 (12. then we have paid more to our suppliers than the purchases. Cash paid for taxes: Income tax expense Less increase in income taxes payable $21. if the Accounts Payable account decreases.600 The treatment for taxes is the same as for interest. Therefore. on the other hand. If there is no such account. Any increase in liabilities. so we deduce the increase in interest payable to interest expense.000) $9. then you simply include the full expense amount as the cash paid for that expense.Introductory Financial Accounting.000). should the opposite have occurred. interest payable went up which means that we accrued more interest than we paid. is subtracted from the expense to get to the total cash paid. like salaries payable. and any decrease would be added. as in the case of Office & Administration Expenses above. This is why we add back the $2. we would have subtracted the amount from COGS to get total money paid to suppliers.1 Page 136 to calculate purchases.

This would include changes in accounts receivable. as well as all current payable accounts.400 Cash from Operations – Indirect Method Under the Indirect Method.400 5.000 1. v.000 (553.Net Income. 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 $ 67.000) (2. The most common of these are amortization expense and gains/losses on the sale of capital assets.000 $77.000 (6.000 12.1 Page 137 To sum up: Cash flow from operations Cash collected from customers Cash paid to suppliers & for operating expenses Cash paid for interest Cash paid for taxes $654. Increases (decreases) in current assets are cash outflows (inflows.000) 2.400 .1. we start with the bottom line . inventory.Introductory Financial Accounting. We then add or subtract any changes in the non-cash current asset and liability accounts. Increases (decreases) in current liabilities are cash inflows (outflows).000) (14.000) (9.000) (2. We then add back any non-cash items that may appear on the income statement.600) $ 77.

e. This includes cash.000 = 66.400) 34. the term ‘cash’ is defined as ‘cash and cash equivalents’.400) Net Change in Cash ($77.1.000 + 67.400 – 24. v.000 (7.000 $ 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 + 0 – 43. term deposits and any highly liquid assets (i. 20x6 Ending Cash Balance – December 31. 20x7 30. . let’s finish with the cash flow statement.000 Definition of Cash For purposes of the statement of cash flow.Introductory Financial Accounting.000 42.000) (66.400) (43.400) Opening Cash Balance – December 31. readily convertible to cash) subject to an insignificant risk of change in value.1 Page 138 To continue the example.

1. Income Statement for the Year ended December 31.000 300. 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.Introductory Financial Accounting.000) 226.100 $146.1 Page 139 Problems with Solutions Problem 9-1 The following is the Income Statement and comparative Statement of Financial Position for Ginger’s Cookies Ltd.000 450.000 243.000) 15.900 . v.000 $750.000 (17.000 79.000 7.000 207. Ginger’s Cookies Ltd.000 120.000 80.

20x6.500 $ 19.200 $ 20. Required – a.Introductory Financial Accounting.400 6.000 125. 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. Comparative Unclassified Statement of Financial Position as at December 31.1.500 50.000 7.000 43.000 117. Prepare a Statement of Cash Flow using the Direct Method. the only piece of equipment.000.400 $275.000 47. was replaced by a new piece of machinery costing $125.200 20x5 Additional Information: on January 2.000 10.200 80.000 40.1 Page 140 Ginger’s Cookies Ltd.000 $144.000 10.000 108.000 0 33.000 61.000) $144.000 (40.500 90. costing $45.000 45. v. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.800 2.000 (7.100 30. Ginger’s paid cash for the equipment.000.000 111.000) $275.400 158. b. .200 $ 27.100 $ 14.

000 1.358.000 1. Statement of Financial Position December 31 20x3 Current assets Cash Accounts receivable Merchandise inventory Prepaid expenses $ 319. v.326.000 3.041.000) 1.000 28.019.000 1.000 1. MCDUFF LTD.054.212.842.000 1.711.000 $ 4.000 999.000 $ 4.000 1.000 $ 4.000 700.000 32.854.000) 1.1 Page 141 Problem 9-2 The comparative statements of financial position of McDuff Ltd.091.000 1.695.343.000 5.000 508.000 $ 909.060.000 (3.429.869.000.000 119.212.000 2.000 319.060.000 45.000 30.000 2.000 800.000 5.000 $ 4.1. are shown below.000 888.000 Capital assets Accumulated amortization Bonds payable Mortgage payable Shareholders’ equity Common shares Retained earnings .000 2.000 43.000 35.000 1.000 850.631.000 (3.093.500.000 450.000 20x2 $ 353.Introductory Financial Accounting.000 Current liabilities Accounts payable Salaries and wages payable Interest payable Income taxes payable $ 897.045.000 82.

000) (67.000 550.000.500. v.000 2.000 250.000. 3.000) 489.000 (61. 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. On April 15. Use the indirect method to report the operating activities. Prepare the cash flow from operations section using the direct method. b. Prepare a cash flow statement for the year ending December 31. 2. for $80. bonds with a net book value of $500.000 (7. 20x3. 20x3.000 Additional information 1. McDuff sold capital assets that cost $158. with a book value of $87.000.000. On August 31. . Amortization expense is included in Operating expenses. Income Statement For the year ended December 31.000 700.400.000 $239. 20x3.1 Page 142 MCDUFF LTD.Introductory Financial Accounting.1.000 were retired for $487.000 850.000) $4. Required a.

300 1.000 500 .000 39.800 7. adapted) $ 4.000 5. HHC LTD.800 7.400 $ (3.000 600 20x4 $4.300 2.000 1.1 Page 143 Problem 9-3 The following data are available for HHC Ltd. v.700 4.1. Income Statement for the year ended December 31.300 600 5.300 5.800 5. 20x5 and 20x4 reveal the following: 20x5 Cash Accounts receivable Inventory Prepaid insurance Accounts payable Salaries and wages payable Long-term loan payable Interest payable Required Prepare the cash flow from operations section as it would appear on the Statement of Cash Flow using… (a) The indirect method (b) The direct method (CGA Canada.700 8.400) Comparative partial balance sheets at December 31.200 221.300 10.000 1.000 $ 165. 20x5 Sales Expenses: Cost of goods sold Salaries expense Insurance expense Depreciation expense Rent expense Interest expense Net loss $ 218.Introductory Financial Accounting.700 500 5.

000 200.000 144.000 423.1.000 92. and its income statement for the year ended December 31.000 25.000 80. 31 20x5 $ 26.000) $ 57.000 475.000) 0 (12.000 0 85.000 119.000 $ 40.000 4.000 86.000 . 20x6 are as follows: TORAM LTD.Introductory Financial Accounting.000 (12.000) (22.000 39.000 (123. Balance Sheets Dec.000 (101.000 300.000) 25.000 $ 100.000 Net Change $ 24.’s comparative balance sheets at December 31.000) $ 624.000 $ 699. 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) $ 681.000) $ 900.000 600.000 Assets Cash Accounts receivable Inventory Long-term investment Land Buildings and equipment Accumulated amortization TORAM Ltd.000 85.000 Liabilities and Shareholders’ Equity Accounts payable Bonds payable Preferred shares Common shares Retained earnings $ 22.000 0 80. v.000 $ (18.1 Page 144 Problem 9-4 Toram Ltd.000 53.000 0 0 58.000 423. 20x5 and 20x6. Income Statement for the year ended December 31.000 18.000 463.000 Dec.000 87.000 32. 31 20x6 $ 50.000 (18.000 43.000 $ 65.000 $634.

4. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method. Purchased equipment for $20.1 Page 145 During 20x6. Declared and paid a $50.000. Prepare a Statement of Cash Flow using the Direct Method. b. Issued $25. 5. 2.000 cash dividend. 20x6. the following transactions occurred: 1. Required – a. 3. Sold the long-term investment on January 1.000 of accumulated amortization. (CGA Canada adapted) . v. Sold equipment for $7.000 cash that had originally cost $32.1.Introductory Financial Accounting.000 and had $21.000 cash.000 of bonds payable at face value. for $30.

Vertical and Percentage (common size) analysis . v. 6. The following are the variables that affect a firm's future dividend policy: 1. 4. Nonetheless. However. be recognized. Future cash flows from changes in the levels of investments made by shareholders and creditors. 5.1. The amount of future cash flow from random events such as windfall gain or casualties.. of course. Horizontal (trend). Published financial statements are the sources of information generally available to users. 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. which the investor would like to predict. The limitations of using historical information must. etc. 8. historical information can be used to make projections and is sometimes extremely useful in this respect. 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. The amount of cash expected to be invested in the firm's long lived assets as well as in working capital. repayment of principal. In order to predict the company's future dividend policy. sinking fund provisions. i.e. The nature of the analysis of financial statement information is primarily in the form of ratios. interest payments. Financial Analysis Techniques 1. the investor must predict those things that affect dividend policy. Each of these eight variables that affect future dividend policy is in turn affected by others.e.. from activities considered incidental to the firm's main function. Net cash flows from future operations. 7. i. 2. Management's attitude toward future cash dividend policy. Expected non-operating cash flows.1 Page 146 10. 3. The amount of future cash flow to service debt requirements. published financial statements are historical in nature and do not provide the information we have just outlined.Introductory Financial Accounting.

673 827 273 $554 20x6 $13. For example.1 Page 147 Horizontal analysis expresses financial data in terms of a single designated base period.500 10.073 354 $719 .509 7. 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 $7.975 7. v.546 1.1.619 12.Introductory Financial Accounting.882 627 207 $420 20x5 $11. or as compared to an amount of the preceding period.369 606 200 $406 20x4 $8.

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

What was the inventory turnover for 20x8? a) 4. The beginning inventory for 20x8 was $30.500. Net cash sales for 20x8 were $32.0.000 at December 31.000 of inventory and had sales of $600.500 d) $400. v. 20x7.000 at December 31. and $55. What were R’s total net sales for 20x8? a) $227. The accounts receivable turnover for 20x8 was 7.000.1 Page 152 Problems with Solutions Problem 10-1 – Multiple Choice Questions 1.1.000.500 b) $335. If current liabilities exceed current assets. 20x8.000 and the ending inventory for 20x8 was $120.000 c) $367.5 b) 5.0 d) 8.Introductory Financial Accounting.0 c) 6. a corporation purchased $540.000 2. During 20x8. 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. Which of the following ratios measures long-term solvency? a) Quick Ratio b) Days sales in accounts receivable c) Debt to equity ratio d) Current ratio 4. R Company’s net accounts receivable were $50.0 .

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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

000 300.000 $524.000 800.000 524.000 700.000 2. v.000 2.1.000 1.000 820.679. Rocky Mountain Camping Equipment Ltd.000 $3.000 $3.979.167.000 700.114. are as follows.000 $480.000 1.000 1.628.000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $560.003.000 809.956.000 2.889.Introductory Financial Accounting.000 $4.000 1.003.000 2.324.000 480.999.576.000 $3.180.928.000 700.000 2.000 $3.876.808.000 1.380.000 650.000 570. Balance Sheets as at December 31 … 20x7 ASSETS Current Assets Cash Accounts receivable Inventory $37.000 $24.000 20x6 20x5 Fixed Assets – net $4.000 1.000 .000 485.808.000 $20.000 2.000 700.789.956.1 Page 157 Problem 10-3 The comparative financial statements for Rocky Mountain Camping Equipment Ltd.000 1.000 1.

000 30.000 65.000 100.000 . 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.300.000 1.000 463.000 20x6 $1.000.000 $3.000 2.000 60.000 $51.Introductory Financial Accounting.000 100.000 800.000 5.000 137.000 1.000 81.1 Page 158 Rocky Mountain Camping Equipment Ltd. $2.000 635.1.000 700.000 56.100. v.700.

000 – ($40.1. 5.000/4 years x 6/12) = $35. 6. 7. v.1 Page 159 11.999 . d b a d d d b c $40.Introductory Financial Accounting.000 $999.999 + 40. 3. SOLUTION TO PROBLEMS Problem 1-1 1. 8.039.000 = $1. 4. 2.

000 .000 120.000 BALANCE SHEET Accts.367 8.200 400 800 12 4 15 Inventory 25.777 Bank Loan 20.000 50. Receivable 6.000 1.000 Accrued Liabilities 150 700 600 1.000 1 3 Furn.000 13 16 17 18 19 B 6 B Prepaid Insurance 1.000 25. v.000 Acc.200 4.000 2.000 2.000 190.000 15. & Fixtures 15.1 Page 160 Problem 1-2 Part (a) Assets Cash 20. Amortization 500 11 10 Retained Earnings 10.000 15.000 182.000 Common Stock 20.000 4.1.800 33.000 1 4 7 8 B 2 3 6 7 B 8 10 14 5 9 B 2 Prepaid Rent 1.000 Liabilities & Equity Accounts Payable 130.960 5.Introductory Financial Accounting.000 20.

000 0 Cost of Goods Sold 130.000 15.600 Insurance 400 12 10 16 B Miscellaneous 1.000 600 36.000 170.960 Interest 300 150 450 Advertising 10 2.Introductory Financial Accounting.1 Page 161 Expenses Purchases 50.000 5 9 B 15 15 14 B 7 15 11 Amortization 500 10 13 B 10 17 B Wages and Salaries 36. v.000 Revenues Sales 196.960 5.000 1.000 120.367 .000 3.200 19 Income Taxes 5.000 INCOME STATEMENT Purchase Returns 15.500 700 2.000 0 Rent 2 10 18 B 1.1.

000 36. v. . 10.000 4.1. 4. 11.000 196.000 120. 9.800 500 500 2.1 Page 162 Journal Entries – 1.000 20.000 3.200 1.000 1.000 15.000 15.000 50.000 4. 5.500 10.200 190.000 1.000 1. 6.Introductory Financial Accounting.000 2. 7.000 50.000 6.000 20. 3.000 182.000 1.000 / 10 years x 4/12 $20. 8.000 120.000 2.000 300 130. Cash Common Stock Prepaid rent Rent expense Cash Furniture and fixtures Cash Cash Bank Loan Purchases Accounts Payable Prepaid Insurance Cash Cash Accounts receivable Sales Cash Accounts receivable Purchases Accounts payable Wages and salaries Rent Advertising Miscellaneous expenses Retained earnings Interest Accounts payable Cash Amortization expense Accumulated amortization $15.000 $20.

000 15.000 x 1% Income tax expense Accrued liabilities Net income before taxes = $17. Insurance expense Prepaid insurance $1. 19. 15. 5.890 x 30% = 400 400 13.960 1. 16. v.890 Income tax expense = $17. 18.367 .367 5.000 x 9% x 1/12 Accounts payable Purchase returns Cost of goods sold Inventory Purchase returns Purchases Miscellaneous expenses Accrued liabilities Salaries and wages Accrued liabilities Rent expense Accrued liabilities $196.000 700 700 600 600 1.1. 150 150 14.200 / 12 months x 4 months expired Interest expense Accrued liabilities Accrual for the month of October: $20.000 25.000 15.1 Page 163 12.000 170.000 130.Introductory Financial Accounting.960 15. 17.

000 130.777 20.000 800 1.277 .000 196.000 20. v. Inc.1 Page 164 b.000 2.960 500 450 36.000 10.000 400 2.367 $270.277 $270.200 5.1. Trial Balance As at October 31.000 8.Introductory Financial Accounting.000 5.000 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 25.600 2. Heavenly Books.000 Credit $ 500 25.

523 (10. Statement of Retained Earnings for the four months ended October 31.Introductory Financial Accounting. 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. Inc.000 66. October 31. v.660 18.523 Heavenly Books. 20x2 Retained earnings.960 500 36.000 130.367 $12.890 5.340 450 17.1.000) $2.000 400 2. Heavenly Books. Inc. 20x2 $0 12. Income Statement for the four months ended October 31.600 2. 20x2 Net income Dividends Retained earnings. July 2.1 Page 165 c.523 .000 5.200 47.

000 25.Introductory Financial Accounting.000 45.777 8.000 500 $33.523 $76.777 20.000 8.000 53.000 2.777 12. Inc.1 Page 166 Heavenly Books.523 22.300 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Accrued liabilities Current portion of bank loan Bank loan Shareholders’ Equity Capital stock Retained earnings $25.000 2.500 $76.1.300 .800 14. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance Prepaid rent Furniture and fixtures Less accumulated amortization $15. Statement of Financial Position as at October 31.000 800 1. v.000 61.

beginning Net income Dividends Retained Earnings .200 84.200 54.100 $9. 20x6 Retained Earnings . Income Statement for year ended December 31.600 4.100 3.800 2. 20x6 Net sales ($157. Statement of Retained Earnings for year ended December 31.300 18.100) $7.ending $0 9.1.500 (2.000 71.600 – 2.1 Page 167 Problem 1-3 Global Productions Inc.000 4.300 21.600 13.000 17.400) 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. v.500 $155.500 Global Productions Inc.200 3.Introductory Financial Accounting.400 .

v.500 1.800 19.800 $25.1 Page 168 Global Productions Inc.200 2.400 57.1.600 50.000 49.000 7.000 9.100 87.Introductory Financial Accounting.500 1.900 44.100 14.000 .600 40.100 1.400 $107. Statement of Financial Position as at December 31.200 $107. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Supplies Prepaid insurance Office equipment Accumulated amortization 24.000 4.000 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Bank loan Shareholders' Equity Capital Stock Retained earnings $7.

it is appropriate for you to record it in this period.800 e) When you purchased the policy.1 Page 169 Problem 1-4 a) Annual amortization expense for the machinery would be = $50.300 revenue this accounting period. Therefore. The journal entry would be: Unearned Revenue Subscription Revenue c) 6 6 You have earned the $2.646 for the current period. Insurance Expense Prepaid Insurance 3.Introductory Financial Accounting.646 3. $24 X = $6. your amortization expense would be = $6.800 1. as these expenses were incurred during the period.250 X 7/12 = $3. you would have earned of the revenue. However.250/year.333 from Prepaid Insurance and record it as Insurance Expense for the period.300 d) As of Wednesday. Therefore. therefore you will remove $5. Accounts Receivable Consulting Revenue 2.000/8 years = $6. due from Big Al. you will have accumulated 3 days worth of salaries that have not been paid. To do this you would set up a receivable.1.333 3. You have used 8/12 of the policy.333 . therefore.646 When you received the cash in January. Salary Expense Salaries Payable 1. Therefore. Amortization Expense Accumulated Amortization b) 3.800.300 2. the full amount would be recorded as an Unearned Revenue liability. However. v. you would have debited Prepaid Insurance and credited Cash for the full amount of $5. in the amount of revenue earned during the period. you would have sent out 1 of the 4 magazines in the subscription. Cash Unearned Revenue 24 24 As of April 30.000 X 8/12 = 3. we will record salaries expense and the accompanying salaries payable of $1. you must record them as an expense of that period.000. you only had the machine in use for 7 months.

$6.1.750 4.000 1. you would have been in the premises for 1 month. Prepaid Rent Cash 4. You will have to adjust for that fact that 5/6 of the payment has not been earned i.Introductory Financial Accounting.000 X 5/6 = $5. the second payment that you received on December 1st covers the period of December – May. or $1. The first payment that you received on June 1st would cover the catering for June – November. No adjustment is needed for this.750 4. However.1 Page 170 f) Each of the payments for $6.000 is unearned. you would have debited Cash and credited Unearned Revenue by $6. that full amount would have been earned and recorded as revenue during the period. Therefore. On December 1st. v.000 g) The $4. Rent Expense Prepaid Rent 4.750 As of July 31st. and would be recorded as an asset on your accounts for the June30th period end. You would remove the Prepaid Rent account to reflect that fact that you have “used up” the rent.000 has been earned and should be included in revenue for this period..000 each. and therefore you would have incurred one month worth of Rent Expense.750 .750 you paid on June 30th represents Prepaid Rent.e.000 covers a 6-month period. Unearned Revenue Catering Revenue 1.

7.1 Page 171 Problem 1-5 a.006.000 $1.000. Dec 31.000 $1. 9. 11. 10. Dec 31.020. 4. 4.000 + (200 x $50)(cash) – (200 x $20)(inventory) = $1. Total amount received as revenue of $128.000 $1. 2. 6. Debit to Subscriptions Received in Advance = $180.000.000 = $48.000 $0 $1.000.000 = $72.000 $20.000.000 + 300. 3. 8. v.000 x $20 (accounts payable) = $20. . 20x5 55 55 Problem 1-6 1.000 x $10 = $1.000 $0 $1. 20x5 500 500 100 100 c. 20x5 d.000 x $20)(inventory) = $1.000 (sales) – 4.1.000 (cash) = $1. 3.000.000 + (1.020.000 x 6/24 = $250 Rent receivable (or accounts rec) Rent income Interest expense Interest payable $300 x 4/12 = $100 Unearned subscription revenues Subscription revenues $440 x 3/24 = $55 $250 $250 b.000 1. 20x5 Insurance expense Prepaid expense $1.000 + 10. Dec 31.000 Problem 1-7 1. $80. 5. the offsetting credit would be to Subscriptions Revenue.000 $1.000.000.000 $1. 12.Introductory Financial Accounting.026.000 – 128.000 less the revenue earned for subscription fees received in the previous year of 80. 100. The opening balance in the Subscription Received in Advance account = $80.000 (bldg) – 300.000 + 120. 2. Dec 31.000 (the ending balance in the account).000 (COGS) = $1.000.000.000.000.

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

000 B E B 10 Retained Earnings 4.000 600.000 Acc.000 62.000 375.Introductory Financial Accounting.000 265.000 B .000 100.000 20.000 375.000 24.500 260.000 BALANCE SHEET Accounts Rec.000 16.800 6.500 8.000 Inventory 446.500 B 9 E Furniture & Fixtures 190.500 6.00 515. Depreciation 40.000 12.500 745. And Com.000 215.000 Capital Stock 110. v.000 20. 123.000 15.000 Interest Payable 8.000 16.000 25.000 12.000 323.1 Page 180 Problem 1-13 Assets Cash 30.500 547.000 200.000 31.000 Taxes Payable 20.000 80.000 Liabilities & Equity Accounts Pay 600.000 4.000 10.500 20.000 21.000 14. 7.500 B 2 5 8 4 6 7 7 9 9 11 13 13 14 B 2 E 5 6 B 1 E B 1 E 3 10 7 B 7 E E 9 13 B 13 E B 11 E B 12 E 4 Customer Deposits 10.000 8 Rent Payable 27.000 25.800 Sal.1.000 225.000 850.000 22.000 850.000 775.000 575. Pay.000 9 13 Long-Term Notes Payable 20.000 8.000 Prepaids 14.

000 8.000 12.000 .000 21.000 27.1.000 4 2 9 9 9 9 E Rent 14.000 Sales 1.500 Revenues 3 COGS 345.000 27.350.000 7 7 E Income Tax 15.800 12 Depreciation 22. v.000 Interest 6.000 70.1 Page 181 Expenses INCOME STATEMENT Salaries and Commissions 207.Introductory Financial Accounting.000 13 14 Other 225.

500 $302.000 46.000 $46. 20x5 Sales Cost of goods sold Gross margin Operating expenses Salaries and commissions Rent Amortization Other Operating income Interest expense Net income before taxes Income tax expense Net income $1. v.500 70.500 6.800 73.700 Peter’s Appliance Shop Ltd. Income Statement for the year ended August 31. 20x5 $260.500 80.1 Page 182 Peter’s Appliance Shop Ltd.000 225.200 . 20x5 Retained Earnings.000 524.1.700 -4. Sep 1.000 22. Statement of Changes in Retained Earnings for the year ended August 31. Aug 31.000 745.700 27. 20x4 Net income Dividends Retained Earnings.000 605.Introductory Financial Accounting.350.000 207.

000 16.000 10.200 $1.800 27.000 547.1. Balance Sheet as at August 31.500 6.000 578.000 153.000 7.070.500 215.300 80.000 12.500 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 $515.300 110.500 . v.000 917.1 Page 183 Peter’s Appliance Shop Ltd.000 302.000 658.000 -62.500 323.070. 20x5 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Fixed Assets Furniture and fixtures Less accumulated amortization $ 31.000 $1.200 412.Introductory Financial Accounting.

$1. 3. v.200 = $21. c b b The balance on the bank statement will be overstated by $360. 2.288 Problem 2-2 a.548) 3.000 (77.700 – 3. Cash balance per books.280 $6.595 Balance per bank statement Add deposits in transit Balance per books $4. Dec 31.Introductory Financial Accounting.300) $3.152 (52) 180 $3.280 . before adjustments Less bank service charges Add error in recording cheque ($1. Dec 1 Add cash received during December Less cash payments made during December Cash balance per books.200 .1 Page 184 Problem 2-1 1.225 63 $4.095 + 9. $15. Cash Accounts receivable Bank service charges Cash $180 $180 52 52 $3.700 (5. December 31 Add Sparg cheque deducted in error Add deposits in transit Less outstanding cheques Cash balance per books b.300 580 1.1.700 77.020) Adjusted cash balance per books. Dec 31 Cash balance per bank.

915 180 (35) (360) $4. v.Introductory Financial Accounting. Cash Accounts Receivable To record error in deposit made ($530 – 350 = $180). Bank service charges Cash To record bank service charges for the month.200 $780 1.200 $4.700 (1.980) $4. $ 480 6. March 31. Office equipment Cash To correct error made in recording of purchase of office equipment: $620 – 260 = $360. Cash balance.1. 20x7 Add outstanding deposits Less outstanding cheques # 201 # 533 Cash per books. March 31.1 Page 185 Problem 2-3 1.700 $180 $180 35 35 360 360 . 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. 20x7 2.

000 3.000 .000) 12.000 (4. Either way. 20x0: Unrealized gain (loss) ($2. then the net unrealized gain flows through net income.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. the securities have to be recorded at fair market value on the balance sheet at December 31. If the securities are classified as trading investments.000) (1.000 $2. b) Cash Other Comprehensive Income Temporary investments .000 31.000 XYZ Computer Satellite Systems Strategic Air Defence Systems Generic Engineering Cellulose Telephone The difference in accounting treatment lies with how the net unrealized gain will be recorded.000 3.000 7. then the net unrealized gain will be part of the Other Comprehensive Income section of Shareholders' Equity.1.Strategic Air Defence Gain on sale of Investments $75.000) $ 8. If the securities are classified as available for sale.000 3.Introductory Financial Accounting. Trading investments are those that are held for re-sale as part of a portfolio of managed securities held for a short-term.XYZ Computer Gain on sale of investments Cash Other Comprehensive Income Temporary investments .000 70. Available for sale securities are defined by what they are not: they are not long-term investments nor are they trading investments.000 $35. v.

.4.700 will be charged to net income.500) will be charged to net income.000) (3.500) (2. In 20x2. v.1.500 ($4. an unrealized holding loss of $5.500) ($4.1 Page 187 Problem 2-5 a) Security A Security B Security C 20x0 ($2.Introductory Financial Accounting.000 – 8.000) 20x2 ($4. an unrealized holding loss of $4.000) (1.700) 20x1 ($500) 0 (3.700 ($5. an unrealized holding gain of $1.700 .000) ($8.200) ($5.500) b) In 20x0. In 20x1.000) will be credited to net income.500) (1.

800 = $1.000 Beg Bal + 14.000 dr. Beginning Bal – 20.000 3.000 cr. $86.350 $55.900.000 Before: $3.000 cr.000 – 30) – (125 – 30) = $2.000 Credit Sales – 11. . a Balance in allowance account at the end of 20x9 before adjustment for bad debts: $5.000 c. December 31.350 cr. Bad debt expense ($14.000 dr. December 31.000 cr. 20x8. $3.000 Collections – 55.350 86. before adjustment $11. d 3. a Problem 3-2 a.000 – 500 + 300 = $4.600 Balance in Allowance for Doubtful Accounts.000 Collections – 20.000 Sales – 360.245.000 dr.800 Bad debt expense = $6.000 3. v.000 x 0. 2004: $1.000. Write-Offs + 3.000 Write offs) = $100. Write offs $9.875 After: ($3. Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable b. Beg Bal + 55.000 cr.400 – 4.1 Page 188 Problem 3-1 1.000 Write-offs Allowance for doubtful accounts.200. Required balance at December 31: ($80. 2004 Balance in allowance before adjustment $63. 11.000 3. Dec 31.000 71.5%) Allowance for doubtful accounts Accounts receivable balance. Adjustment $13.000 $55.000 cr.000 A/R Begin + 400.200.000 71.350 cr.000 x 4% 4.000 x 3% $97.1. Recoveries Adjustment required Bad debt expense Allowance for doubtful accounts 86.Introductory Financial Accounting.000 – 125 = $2.000 3.875 2.

000 43.000 3.290 31.290 .000 7.000 31.000.1.000 7.000 2.1 Page 189 Problem 3-3 20x0 Accounts receivable Sales To record credit sales for 20x0 Cash Accounts receivable To record cash collections for 20x0 Allowance for doubtful accounts Accounts receivable To record accounts written off for 20x0 Bad debt expense Allowance for doubtful accounts To adjust the allowance for doubtful accounts to an ending balance of $27.000.000 27.840 cr.000 2.400.480 43.800. (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 7.000 16.000 27.000 $2.480 3. v.770 cr.000 7.400.000 2.000 16.000 2.915. (Schedule) $2.915.800.Introductory Financial Accounting.

000 27.000 $27.000 12. 20x0 0 – 30 31 – 60 61 – 90 Over 90 $234.000 $384.000.000 43.840 December 31.000 2.000 1% 5% 20% 80% $ 2.000 45.800.000 31.Introductory Financial Accounting.400.340 4.000 $38.000 20. v.000 90.000 2.000 3.915.000 25.770 .000 7. 20x1 0 – 30 31 – 60 61 – 90 Over 90 $277.480 27.290 38.770 4.000 15.000 7.000 12.500 9.000 442.480 27.1 Page 190 20x0 Bal 20x1 Accounts Receivable 2.1.000 7.000 1% 5% 20% 80% $ 2.000 Allowance for Doubtful Accounts 16.770 20x0 Bal 20x1 Bal Bal Schedule – Calculation of the Allowance for Doubtful Accounts December 31.000 $442.000 60.000 16.000 384.000 80.

500 dr. Dec. 20x7 Balance in allowance before adjustment: $2.275 cr. Beg Bal + 1.000 cr.000 10. Allowance for doubtful accounts.500. $6.400. 20x7: $40.500 400. v.500 x 5% $6.000 $135.000 Note: The allowance account will now be $500 + $10.000 Note Receivable 3.000 Credit Sales – 1. 6.1.000 x 12% x 1/12) 6.000 Collections – 3.275 30 30 2.500 Write-offs . Write-offs Adjustment required Bad debt expense Allowance for doubtful accounts Interest receivable Interest income* *(3.000 500.275 500 cr.775 cr. 31.1 Page 191 Problem 3-4 1.500 1.000 = $10. . Accounts receivable Sales Allowance for doubtful accounts Accounts receivable Cash Accounts receivable Note receivable Accounts receivable Accounts receivable balance.000 x 2%) 10. Bad debt expense** Allowance for doubtful accounts **($500. December 31.Introductory Financial Accounting.000 1.000 500.000 Beg Bal + 500.000 400.000 3.

000 509.000 50. Delivery expense Cash Sales returns and allowances Accounts receivable Inventory ($500 x 70%) Cost of goods sold Cash ($79.590 79.000 49.000 $80.000 x 99%) Inventory $80.000) $503. v. 4.1. . Accounts receivable Sales Cost of goods sold ($80. e.000 x 70%) Inventory b. c c d Czech should have recorded this sale in 20x8 since the goods were shipped FOB Shipping.000 – 10.200 1.000 56.000 (66. 3.000 56.500 500 c.000 – 6.200 500 500 350 350 77.000 Ending inventory Cost of goods sold $60.Introductory Financial Accounting.000 1.000 50.1 Page 192 Problem 4-1 1. Inventory Accounts payable Accounts payable Cash ($50. b Opening Inventory Purchases – net: $500. Problem 4-2 a.910 1.000 2.500 50.000 + 25.500 x 98%) Sales discounts Accounts receivable d.

500 units 1.000) 69.3333 $300 990 770 1. b.Introductory Financial Accounting.500 Balance Unit Cost Total Cost $12.500 b.00 12.50) = $650 Note that the results for FIFO periodic are the same as for FIFO perpetual.00 36.000 500 3.000 77.500 1.000 (2.000 48.1.000 (2.00 16.000 .100 560 560 Problem 4-4 a.00 16.100 $1.00 11. Date May 1 May 5 May 14 May 21 May 29 c.500) 3.00) + (20 units x $11.000 8.00 23.000) Unit Cost Total Cost 18.1 Page 193 Problem 4-3 a.00 11.00 11. Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Purchases (Sales) Units 2.000 3. v.000 (40.000 33.00 22.500 units x $23 = $34.00 $12.000 44.50) $1. Ending balance = 1.00 22.3333 $690 (220) 420 (567) Units 30 90 70 105 55 Balance Unit Cost Total Cost $10. Purchases (Sales) Units 60 (20) 35 (50) Unit Cost Total Cost $11. Ending inventory = 55 units (35 units x $12.000 Units 1.50 11.190 623 Accounts receivable Sales Cost of goods sold Inventory (10 units x $10) + (40 units x $11.

400 Weighted Average Cost per unit $ 19. 20x5 Purchases Goods Available for Sale Less Ending Inventory.330 x $ 52.940 Units 400 3.929 .929 $ 159.000 173. Beginning Inventory.200 = $179.1.000 x $50 1. December 31.000 3.200 50.200/3.7059/unit Cost of Goods Sold = 3.200 50.000 $ 19.400 = $ 52.400 70 3. v.330 Gross profit 175.860 b.140 $ 157. 20x5 Units sold during year FIFO Sales COGS 3.330 x $100 400 x $48 1.000 52.071 *400 x $48 1.000 x $52 1.7059 = $ 173.000 x $50 1.000 x $58 3.000 58.000 52.000 $ 179.330 x $100 $ 333. Weighted Average Sales COGS * Gross Profit 3.1 Page 194 Problem 4-5 a.000 53.000 x $52 930 x $58 $ 333.Introductory Financial Accounting. January 1.

000 June 2 Sales returns Accounts receivable Inventory Cost of goods sold June 9 Cash Sales discount ($20.Introductory Financial Accounting.000 608.000 Sales Returns Estimated cost of goods sold Opening Inventory Net purchases: $480.000 $37.000 $150.000 x 20% Problem 4-7 $600.000 42.000 x 70% $420.000 15.1 Page 195 Problem 4-6 Net Sales = $615.000 Purchase Returns + 8.000 5.000 10.000 x 2%) Accounts receivable Inventory Accounts payable June 12 .000 458.000 15.000 19.600 400 20. v.000 5.1.000 420.000 10.000 42.000 – 15.000 30.000 $188.600 June 1 Accounts receivable Sales Cost of goods sold Inventory 30.000 – 30.000 Customs and Duty Cost of goods available for sale Less Cost of goods sold Estimated value of ending inventory Net loss from fire = $188.

1.1 Page 196 Problem 4-8 1.050 each = = = $ 18. Cost of goods available for sale: 20 units x $900 each 440 units x $950 each 200 units x $1. v. Ending inventory – Weighted Average Average unit cost = Cost of goods available for sale/Units available for sale Average unit cost = $646.000 2. Ending inventory – FIFO: 60 units X $1.000/(20+440+200) Average unit cost = $646.Introductory Financial Accounting.050 each = $ 63.000 $ 646.000 3.79/unit x 60 units Ending inventory = $58.727 .79/unit Ending inventory = $978.000 418.000/660 units Average unit cost = $978.000 210.

20x7 Cost of goods sold $ 80. There are 24.200 3. 20x7 Purchases Less: Purchase returns and allowances Less: Purchase discounts Net Purchases Add: Transportation-In Cost of goods available for sale Less: Merchandise inventory.500 1. December 31.000 80.300 230.09 24. much higher than the 10% borrowing rate.500) 77.200) (1. The savings generated by purchase discounts generally make it worthwhile to borrow to take advantage of the purchase discount.300 3.200 1. whereas the purchase discount may generate a savings which would equate to an effective interest rate much higher than 10%.500 1. December 1. For example.1.300 c.000 $ 150. the full amount of $50. If payment was not made within the discount period. i) Purchases Accounts Payable 80. 20x7 Merchandise inventory.000 50.09%) for a 15day period (30 days – 15 days). TOYJOY LTD.09% (3. it may cost a company 10% to borrow the funds. discounts taken under a term of 3/15.500 on a base amount of $48. Cost of Goods Sold Schedule for the month ended December 31.000 ii) Accounts Payable Cash Purchase Discounts iii) Accounts Payable Purchase Returns iv) Transportation-In Cash b. thus giving an annual percentage cost of missing the discount of 75.000 (1.1 Page 197 Problem 4-9 a.000 48.3).000 would need to be paid on the due date.500 (3.300 30. .000 3. n30 generated savings of $1. v.000 80.3 15-day periods in a year (365/15).Introductory Financial Accounting. In December.500 by paying 15 days early.000 $200. It would be equivalent to interest of $1.

000 110. 20x7 Estimated Cost of Goods Sold* Estimated Gross Profit ($60. 20x7 Purchases.000 U 5.000 O 5.60 = $36.40) $ 60.000 x . estimated COGS = $60.000 U 6. then COGS = 100% .1.000 U N/A 5.000 * ** If Gross Profit = 40%.000 Cost of goods available for sale – COGS = Ending Inventory $110. Therefore.000 36.000 **74.1 Page 198 Problem 4-10 Error i) ii) iii) 20x6 Cost of Goods Sold 10.000 U 20x6 Ending Inventory 10. January 1 to January 13 Inventory.000 $24.000 O Problem 4-11 Sales.000 O 6.000 – 36. January 1 to January 13 Cost of goods available for sale Less estimated ending inventory.000 O 20x7 Cost of Goods Sold 10. January 13.000 10.000 $ 100. January 1.40% = 60%.000 .000 U N/A N/A 20x6 Retained Earnings 10.Introductory Financial Accounting.000 = $74. v.000 x .

50 Ending inventory = 9.700 106.000 (5.500 Units available for sale = 6.00 From Purchase # 1: 1.000 x $8.95 8.000 units @ $8.000 Balance Unit Cost $7.000 8.000 13.500 COGS = 12.500 / 21.200) Units 6.250 125.Introductory Financial Accounting.400 $80.00) = $178.40000 9.000 + 8.500 9.40 7.800 (53.800 54.400 d.000 x $8. v.000 7.600 80.509) Units 6.500 53.000 6.000 (6.500) Purchases (Sales) Unit Cost $8.000 x $7.500 (80. Units 7.000 x $8.000 units @ $9.50 = $76.500 14.800 (47. Ending inventory = 6.000 – 6.63793 Total Cost $47.40) + (8.400) $ 98.1.40 .00000 Total Cost $58.500 58.200) 72.40 9.700 106.19231 8.000 Cost of goods available for sale = (6.400 $178.1 Page 199 Problem 4-12 a.000 = 21.250 + 47. From Purchase # 2: 8.000 x $9.000 = $8.000 (5.741 COGS = $53.000 Unit cost = $178.000 + 7.000 b.000 (46.00 8.509 = 100.000 – 5.600 126.250) 72.000 8.000 14.700) (4.000 (6.250 77.500 = 9.95) + (7.500) Purchases (Sales) Unit Cost $8.500 Total Cost $47.50 = $102.000 (47.000 13.000 6. Units 7.000) (500) 8.759 c.100 Balance Total Cost $58.40 Ending Inventory Cost of goods sold Cost of goods available for sale Less ending inventory $72.95000 8.000 + 7.500 + 8.500) 8.

5.000 Net book value = $100.000/year) = $10.000 + 60. a d ($200. c Double-declining-balance rate = x 2 = 50% 4.Introductory Financial Accounting.000 + 5.000/80.750 .500/year.1.000 / 9.000 – (5 years x $18.500 7. and not the legal life of 17 years.000) / 10 = $4.1 Page 200 Problem 5-1 1.160 To move to the units-of-production method. d c c Net book value = $85.5 x 6/12) Net book value = $63. Note that we use the estimated useful life of the patent. we must first know the salvage value of the machinery inherent in the problem.000 – 5.000 x 90%) / 1.000 – 150. Depreciation expense = $12.000 – 10.5 x = $600 $1.000 = $1.000 + 15.500 x 430 = $5.000)] Net book value = $77. 3.000 ($20.500 It is assumed that the addition should be capitalized and depreciated since it qualifies as a capital asset. v. because the purpose of amortization is to expense the cost of an asset of the period of time it is in use by the company.000 – ($85. 6. d) ($80. Estimated salvage value = $100.000)/10 = $8. 2.000.075.000 – [($100.000 x .000) x (20.

000 Net book value = $65.000 – 2.000 .000 b.000) / 200.000 Amortization expense Accumulated amortization 17.600 c. v.000 = $53.000 20x8 15.000) x 40% $12.000 – 5.Introductory Financial Accounting.000 $12. Amortization expense Accumulated amortization ($65.500 d.1 Page 201 Problem 5-2 a.600 15. 26.000 16.000 – 12.000 26.000) / 5 years 20x7 Amortization expense Accumulated amortization $65.000 17.000 x 40% (1/5 x 2 = 40%) Amortization expense Accumulated amortization ($65. Amortization expense for 20x8 = ($53.000 – 26. Amortization expense Accumulated amortization ($65.000 x 55.000 – 5.1.500 16.000) / 3 = $17.

714 1.000 9.750 10.000 10.000 2. 20x3 Equipment Cash Amortization expense Accumulated amortization (60.656 25.000 .808 Dec 31.000) / 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 55.000 $60.000 10.000 10.000 Dec 31. 20x7 20.500 Dec 31.000 = $10. 20x6 10.000 20. 20x5 Dec 31.50 x 12 months) Equipment Cash Amortization expense Accumulated amortization See Schedule 1 Amortization expense Accumulated amortization $582 x 8 months Cash Accumulated amortization Loss on disposal of equipment Equipment $60.1.000 – 10. 20x7 4.000 / 32 months remaining = $62.000 10.000 2.500 10. 20x4 600 600 10.Introductory Financial Accounting.656 4.50 / month x 8 months = $500 + 10.808 9. 20x5 Dec 31.000 + ($62. 20x5: $2. 20x7 Aug 31.1 Page 202 Problem 5-3 (a) Jan 2. 20x4 Apr 31.286 82.500 Amortization expense Accumulated amortization $10. 20x3 Aug 31.750 Oct 31. v.

000 – 10. 20x5 Less Amortization expense 20x3 20x4 20x5 20x6 20x7 to Sep 30: $10.000 – 90.000 4.500 15.500 $11. 20x7 Original cost of asset Capitalization made on April 1.062) $12.688 + 20.746 = $9.500 50.000 90.500) (10.000 $108.750) (8.1.746 Total amortization expense for 20x7 = $8.000 (10.1 Page 203 Schedule 1 Amortization expense for 20x7 Net book value of asset at Sep 30.000 $18. v.808 Problem 5-4 Equipment (new lathe)* Accumulated amortization (old equipment) Equipment (old equipment) Cash Gain on sale of asset** 105.500 Market value of asset Gain on sale (2.500) $105.500 $ 4.000) / 39 months = $582 per month x 3 months = $1.000) (10.Introductory Financial Accounting.688 Amortization expense – Sep 30 to Dec 31.000 Less fair market value of asset traded in (15. 20x7 ($12.000 * Price of new lathe Less trade-in value less fair market value of asset traded in: Trade in value: $108.500) Acquisition price of new lathe ** NBV of asset at time of exchange = $50.500 38.000 – 38.062 + 1.000 .000 2.000) (10.750 x 9/12 $60.

000 27.Machinery **($27. Machinery Less: accumulated amortization $27.000 – $3.000** 3. Machinery Cash 27.000)/4 = $6. Amortization expense Accumulated amortization . v.000 (9.000) $18.000 4.000 *25. 2.000 x 6/12 = $3.000* 27.Introductory Financial Accounting.000 The cost plus installation.000/year $6. Cash Accumulated amortization – Machinery Machinery Gain on sale of assets .000 9.1 Page 204 Problem 5-5 1.000 for 6-month period 3.1.000 2. The freight is included in the cost but the repair is not to be capitalized.000 20.000 3.000 Installation Charges = $27.000 Cost of machine + 2.

1 Page 205 Problem 5-6 a.500 + 23.683 Cash Accumulated depreciation ($25. c. ii.000 x 9.000 $=75.000 – 20. v.1.750) Loss on disposal of equipment Equipment Cash Accumulated depreciation ($22.250 $120.000 – 20.000 43.000 x 12.000 + 18. i.000 b. .Introductory Financial Accounting.000 45.000)/40.183 183 120.000 – 25. Straight-line method = (120.500 Straight-line method = (120.000)/4 = $25.750 Units-of-production method = (120. i. ii.683) Gain on disposal of equipment Equipment $75.000 – 22.000 – 20.000) / 41.000 = $22. i. ii.000)/(5-1) = $18.750 1.000 = $22.000 Units-of-production method = (120.500 – 20.

If the machine does not provide decreasing benefits. $140.1.000 x 2% Customs and duty costs Preparation and installation costs b. then this method should not be used.800 $157. c.000) $ 3.750 (100.750 x 3 years Net book value Less proceeds on disposal Loss Cash Accumulated amortization Loss on disposal Machine $100. Cost Less accumulated depreciation: $17.000 – 15.e. Costs capitalized: Invoice price Less discount . v.000 53.000 14.000 $157.250) 103.750 157.000 Depreciation expense: ($157.250 3. A double-declining-balance amortization method could be used to abide by the president’s request.000) / 8 = $17.000 (2.Introductory Financial Accounting.000 cannot be capitalized to the asset since the asset was purchased and not self-constructed. This method is acceptable under GAAP if it properly reflects the pattern of benefits received from using the machine.750 Note that the interest charge of $12.000 (53.1 Page 206 Problem 5-7 a.750 .. if the machine generates less revenues as it gets older. i. Under this method. amortization is high in the first year and decreases in amount as years go by.$140.800) 5.

500 / 5 x $2 $18.000 (9.000 / 5 x $2 x 30% Premium redemptions: 23. 6.500 . Interest expense for the year = $11.375 34.375 The journal entry to record the actual costs incurred during the year would be: Premium Liability ((22. c c b Premium expense: 150.600 Problem 6-2 The premium expense would calculated as follows: $375.375 The journal entry to record the premium expense would be: Premium Expense Premium Liability 34. 5.000.321 4.472.472. 3. a b b) PV of bonds at issue: PMT=800.400) $ 8.500/15) x $25/card) Cash 37.018 x 6% = $688.Introductory Financial Accounting. 2.500 37.1. FV=10. I=6%.000 PV=$11.1 Page 207 Problem 6-1 1.000 /10 coupons /15 redemption ratio x $25 x 55% = $34.018. v.000. N=10.

20x1 Interest expense (540.1 Page 208 Problem 6-3 The journal entry to record warranty expense is: Warranty expense ($3.000.554 PMT 25000 FV 500000 Enter Compute The journal entry to record the issuance of these bonds is as follows: July 1.554 x 4%) Bonds payable Cash 21.378 25. A/P. Problem 6-4 The value of the bond issue will be as follows: N 10 I/Y 4 PV X= 540. 20x2 would be as follows: Jun 30.1.000 The journal entry to record the interest payment of Jun 30.554 The journal entry to record the interest payments using the effective interest method of amortization is as follows: Dec 31. 20x1 Cash Bonds payable $540.622 3.513 25.000 $150.000 .554 $540.000 Opening Balance + 150.000 x 5%) Warranty Liability The journal entry to record actual warranty costs incurred is: Warranty Liability Cash. Inventory 130.000 Warranty Expense – 130.000 Warranty Costs Incurred = $185.000 The warranty liability at the end of the year will be $165. 20x2 Interest expense (540.000. v.Introductory Financial Accounting.487 3.554 .000 $150.000 130.378) x 4% Bonds payable Cash 21.3.

000.708) x 4% $10.800 = $10.000 + 5.432. 3. the total credits to the account for the year is the warranty expense for the year.Introductory Financial Accounting. Therefore. 20x5 Problem 6-6 1.000.301 10.200 2.200 – 6.000 416.000. The journal entry to record warranty expense is debit warranty expense credit warranty liability. The journal entry to record repairs as performed is debit Warranty liability.016 425.000.301 x 4%) Premium on Bonds Payable Cash Interest expense* Premium on Bonds Payable Cash * (10. the total debits to the account for the year is the total cost of repairs made during the year. $5.800. Therefore. v.000 Jun 30.708 425. 20x5 Dec 31.000 417.292 7. . FV = 10. $10.301 $432.301 Dec 31.432. 4.000 $10.1. Solve for PV = $10.000.301 – 7.432. PMT = 425. 20x4 Cash Premium on Bonds Payable Bonds payable Interest expense ($10. $6.984 8. credit cash/inventory/etc.432. I = 4.1 Page 209 Problem 6-5 PV of bond issue: N = 30.

500 Dec 31.105 20.1.976 22.074 – 2.714 – 2.223 = $504.500 Jan 1.277 20.363 2.937 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $506.1 Page 210 Problem 6-7 Proceeds on bond issue: N 6 I/Y 4 PV $513. 20x8 20.524 1.500 Jul 1.Introductory Financial Accounting.189 2.500 FV 500.500 Jan 1. 20x8 20.000 Enter Compute Jan 1.105 PMT 22.277 2. 20x7 20.311 = $502.105 x 4%) Bonds payable Cash Interest expense $513. v. 20x7 Jul 1.445 20.137 22. 20x8 Jul 1.223 22.937 – 2.714 x 4% Bonds payable Cash Interest expense $504.074 x 4% Bonds payable Cash Interest expense $509.105 – 1. 20x6 Cash Bonds Payable Interest expense ($513.097 20. 20x7 20. 20x6 Dec 31.129 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $511.129 – 2.311 22.403 x 4% Interest payable $513.277 20.137 = $506.500 Dec 31.445 20.445 2.976 = $511. 20x6 20.055 22.097 .105 $513.055 = $509.

171.509 1. 20x7 ($1.000. July 1.591 – 1.591 PMT 60000 FV 1000000 2.000 500. June 30.171* x 5%) Bonds payable Cash (1.403 22.500 500.171.000 Problem 6-8 1.591 x 5%) Bonds payable Cash (1. 20x6 Cash Bonds payable Interest expense (1.000 58.171. 20x7 .000 3.171. Enter Compute N 40 I/Y 5 PV X= $1.420 60.000.591 $1.491 60.580 1.1. Dec 31.591 58. v.Introductory Financial Accounting. 20x6 4.170.171.000 x 12% x 1/2) Interest expense (1.000 x 12% x 1/2) *Bonds payable balance as of June 30.097 2. 20x9 Interest payable Bonds payable Cash Bonds payable Cash 20.420) $1.1 Page 211 Jan 1.

The interest expense will increase every year since the book value of the bonds payable will also increase. .000 x 10% x ) Bonds payable Cash ($1. b. Interest expense for 20x7 = $44.093 = $89. The cash outflow is $80.000 exactly.000 + 4.850 40.000 x 8% x ) 2nd half of 20x7: Interest expense ($897.1 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.Introductory Financial Accounting.850 4.093 40. v. False.943 False False.850 + 45. $44.1.000 $45.093 5. c.850) x 10% x Bonds payable Cash ($1.000 x 8% x ) a.000.000. d.000 True.

000 2.000 x $0.1.$2.000 shares issued and outstanding Preferred Shares.000 39.000 40.000 44.000 2. February 2 Cash Common Shares Patent Preferred Shares No entry Cash Common Shares Dividends or R/E Cash Dividends or R/E Cash Number of common shares: Issued on Feb 2 Stock Split on Feb 15 Issues on Feb 26 126.$14.000 21.520 .080) Total Shareholders’ Equity $ 138.000 . Shareholders’ Equity Common Shares.000 126.080 14.1 Page 213 Problem 7-1 1. Problem 7-2 1.080 2.000 shares outstanding after the split. non cumulative.Introductory Financial Accounting. v. c 150.520 $217.080 February 27 February 28 21.32 $14.000 February 10 February 15 February 26 12.400 14.000 12.400 2.400 . 44.000 40. $6.000 40.000 shares x 3/2 = 225. 400 shares issued and outstanding Retained Earnings ($0 + $56.

e.Introductory Financial Accounting.000 40.000 60.000 12.000 20. h.000 180.000 40. c.000 3.000 Net Income – 15. d. a.000 3. Shareholders’ Equity Common Shares.000.1 Page 214 Problem 7-3 1.000 Retained Earnings ($64. cumulative – authorized 50.000 48. issued and outstanding 3.000 3. 2. f.500 Dividends) $348. v.1.000.000 53.500 12.000 20.500 .000 3. authorized 100.000 $115.500 $456.000 180. 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 $115.500 50.000 3.000 b. g.000 Preferred Shares. issued and outstanding 3.

8.000 960. 4.000 12.400 320.000 5.000 1.000 945.600 314.5% / 2) Interest expense ($419.000 75. Purchases Accounts payable Accounts Payable Purchase returns Cash Common stock Accounts payable Cash Salaries payable Salaries expense Cash Interest expense ($419. Equipment Cash Warranty liability Cash $1. . 6.000 16.5% / 2) 11.520.000 $1.000 34.000 5.576 424 13.000 12.000 25.000 30.000 75.600.588 412 13. Accounts receivable Sales Cash Accounts receivable Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable 5.000 x 6.000 5.000 16.600 x 3%) Bonds payable Cash ($400.000 25.000 30.600.600 – 412) x 3% Bonds payable Cash ($400.520.000 x 6. 12.Introductory Financial Accounting.000 960.000 34. 3.000 1. 9.000 2.1 Page 215 Problem 8-1 a. 7. 10.000 5. v. 1.000 945.000 5.1.

2.000 x 20% 12.800 400 $3. Income taxes payable Cash Common shares (1.000 x 3% 43.31*) Retained earnings Cash * Average book value per share = $150.400 Balance required: $2.010 4.000 cr. 18.000 17.400 $3. Insurance expense Prepaid insurance Balance in prepaid insurance account: $1.400 130. $4.930 23.000 130. + 5.400 x 2/12 Insurance expense 3. 15.000 x 7% 23. $23.930 dr. = The balance in the allowance for doubtful accounts should be: $144.000 dr.000 14. 17.930 cr.1.31 Prepaid insurance Cash Operating expenses Cash Bad debt expense Allowance for doubtful accounts The balance in the allowance for doubtful accounts is: $23. + 34.930 16.600 6.400 .Introductory Financial Accounting.690 22.1 Page 216 13.000 dr.000 17.310 4.000 + 3.400 2.000 / (10.400 + 2. v.400 3.000 40.000 23.000 x 50% Bad debt expense 40.000 cr.320 3. $6.000) = $17.000 x $17.000 + 75.

500 ** ($145.1.702 22.264.000 13. amortization – equipment** Patents*** * $300.700 6.000 – 320.000 – 16.000 24.000 (378.000 21.000) $886. amortization – building* Acc.000 / 8 = 4.000 960.250 20.400 4.702 23.000 13.000 944.000 Purchase) = $137.700 80.000 $320.702 53.000 x 20% = $27.000 – 38.000) Purchase returns Purchases Check: Opening inventory Purchases – net ($960. Warranty expense Warranty liability $1.000 80.000) Cost of goods available for sale Less ending inventory Cost of goods sold Inventory loss Allowance for decline in value of inventory 886.000 x 1.250 39. 6. Cost of goods sold Inventory ($378.000 16.000 24.Introductory Financial Accounting. .000 1.600.000 / 40 = $7.500 27. v.5% Salaries expense Salaries payable Retained earnings Cash Income tax expense Income taxes payable $134.256 x 40% = 53.1 Page 217 19.000 53.000 NBV Beg + 30.400 *** $34.150 7.000 58. 24. Amortization expense Acc.

600 BALANCE SHEET Accts Receivable 176.000 2.000 B 19 E 10 10 B B 11 E Equipment 145.400 400 Building 300.600 424 418.600 6.500 Acc Amort .000 13.000 30.000 13.000 34.000 207.000 Land 40.702 Warranty Liability 25.400 Allowance for Decline in Value of Inventory 13.400 65.000 30.000 Allow/Doubt Accts 34.310 150.500 127.1. v.000 75.000 5.200 80.000 23.000 126.000 1.Equip 38.000 Liabilities & Equity Accounts Payable 16.000 5.000 40.000 378.400 3.000 25.000 13 Inc Taxes Payable 40.000 23.000 27.000 B 2 4 7 8 9 10 10 11 12 13 14 15 23 B 1 4 E 2 3 4 6 8 B 5 3 B 4 17 E 9 Salaries Payable 5.000 12.000 960.000 4.000 945.000 5.600.930 17.000 127.000 13.930 Inventory 320.400 130.250 29.000 B 19 14 B 7 E B E Patents 34.400 2.000 945.000 1.000 58.600 5.000 53.000 12.000 59.510 B E .000 22.000 Bonds Payable 412 419.000 1.000 15.000 75.700 6.764 Common Stock 17.700 B 22 E E B 20 E Prepaid Insurance 1.1 Page 218 Part (b) Assets Cash 36.Bldg 120.000 7.000 175.690 B 24 B 15 E 18 B 12 B 21 B Acc Amort .000 24.Introductory Financial Accounting.690 144.000 5.000 80.000 320.750 19 20 14 23 Retained Earnings 4.000 222.702 25.520.520.

000 9 22 E Salaries 314.150 24 Income Tax Exp.1 Page 219 Expenses Purchases 960.000 INCOME STATEMENT Purchase Returns 16.000 10 10 E Interest 12.000 960. v. 39.930 19 Amortization exp.400 6.000 Revenues Sales 5 20 20 6 1.Introductory Financial Accounting.000 17 Bad Debt Expense 23.100 Warranty expense 24.000 1 20 Cost of Goods Sold 886. 53.1.000 16.600.164 Insurance 3.576 25.000 .400 21 18 16 Operating expenses 130.700 321.588 12.702 20 Inventory Loss 13.

196 $2.100 25.000 65. v.196 Cr.600 222. Haider Corporation Trial Balance As at December 31.Introductory Financial Accounting.702 12.702 $2.1 Page 220 c.400 29.000 53.1.150 13.000 6.500 175.750 126.000 127. 20x6 Dr.000 $17.000 13. . Cash Accounts receivable Allowance for doubtful accounts Inventory Allowance for decline in value of inventory Prepaid insurance Land Building Accumulated amortization – building Equipment Accumulated amortization – equipment Patents Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Common stock Retained Earnings Sales Cost of goods sold Salaries Interest Warranty expense Insurance expense Operating expenses Bad debt expense Amortization expense Inventory loss Income tax expense $15.000 886.600.000 418.000 321.164 24.930 39.930 378.510 1.000 400 40.000 23.680.400 130.690 59.680.000 300.764 207.000 3.700 25.

v. 20x6 Net income Premium on redemption of common shares Dividends Retained earnings.064 .420 25.000 3. Haider Corporation Income Statement for the year ended December 31.Introductory Financial Accounting.930 13.000 321.554 (4.580 159.000 554.600.000) $140. 20x6 Retained earnings.256 53. 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. January 1.400 23.100 24.000 886.702 $80.554 Haider Corporation Statement of Retained Earnings for the year ended December 31.200 80.690) (80.000 39.150 130.1. December 31.1 Page 221 d.000 714. 20x6 $144.164 134.

v.400) 172.750 351.064 347.850 $936.600 204.690 140. 20x6 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance $ 15.600 29.000 (65.000 $300.000 6.000 (127.1.402 418.Introductory Financial Accounting.1 Page 222 Haider Corporation Statement of Financial Position as at December 31.500) 175.070 40.166 207.764 589.000 170.500 109.000 400 585.920 Land Building Less accumulated amortization Equipment Less accumulated amortization Patents – net .702 12.700 25.754 $936.070 365.920 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Shareholders’ Equity Capital stock Retained earnings $126.

4.600 e.500 Warranty expense Warranty liability 10.800 4.Introductory Financial Accounting.000 x 3% Wages expense Wages payable Insurance expense Prepaid insurance $9.900 / 17) Patents or Accumulated Amortization – Patents Supplies inventory Supplies expense Increase in inventory = $9. d.000 l. Bad debt expense Allowance for doubtful accounts $320.000 16.000 24.000 12.700 4.000 24. 7. 4.500 4.600 c.000 x 9% x 4/12 Interest expense Interest payable $60. 360 360 g.600 x 5/12 Interest receivable Interest revenue $12.200 – 4. 12. 4. j.800 3.000 f.500 h.600 $9.700 i.000 k.1. v.600 3.000 4.1 Page 223 Problem 8-2 a. 700 700 4.600 7.600 b.000 x 3% x $40 Allowance for doubtful accounts Accounts receivable Income tax expense Income taxes payable $9.600 x 9/24 Amortization expense Accumulated Amortization ($80.000 – 4. .000 x 10% x 9/12 Amortization expense ($11.000) / 10 Prepaid rent Rent expense $9. 16.

770 Cash Sales + 5.800 . Income Statement for the five months ending May 31.284 $5.226 Uncollected Sales) Cost of goods sold Purchases (14.1.740 110 4.316 12. 20x2 Loan balance.840 Ending Inventory) Gross margin Operating Expenses Rent (1.270 800 424 250 13.Introductory Financial Accounting.630 1.536 116 6.000 + 270 Payable) Insurance (1.094 6.420 1.640 x 10% x 2/12 $312 72 240 2. 20x2 Sales (22.880 x 10% x 3/12 Principal payment.880 .686 19.1 Page 224 Problem 8-3 MAS Inc.400 Baking Materials Purchases . 20x2 (2.000 / 5 x 5/12) $32.130 Rebate + 256 Payable .2.920 .136 Operating Income Interest (72 + 44)1 Net income before taxes Provision for income taxes (6. v. April 1.500 + 240 Payable) Maintenance Utilities (4.640 $44 .1.1.120 Prepaid) Advertising Depreciation (3.300 Prepaid) Salaries and wages (5. April 1.240) Interest April & May .420 x 20%) Net income 1 Loan payment Less interest: $2.320 Collections on Credit Sales + 4.500 5.

840 1.1.134 4.500 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 (2.466) Accounts receivable Inventory Prepaid insurance Prepaid rent Fixed Assets Equipment Accumulated depreciation $2.136 7.636 $12.680 4.054 1.640 .284 44 960 3.370 . 20x2 ASSETS Current Assets Cash (33.620 3.600 .31.120 300 9.000 -250 2. Balance Sheet as at May 31.734 2.1 Page 225 MAS Inc.226 1.960) Shareholder's Equity Common Stock Retained earnings $526 240 1.Introductory Financial Accounting.750 $12. v.

000 $338.000 . v.000 80.Introductory Financial Accounting. $275.000 (20.000) 60.000 155. 20x1 ASSETS Current Assets Cash Marketable securities* Accounts receivable Inventory Noncurrent assets Equipment Accumulated depreciation $24.1.000 80.1 Page 226 Problem 8-4 Morrow Wholesale Balance Sheet as at December 31.000 $338.000 19.000 278.000 63.000 SHAREHODLERS' EQUITY Shareholders' Equity Common stock Retained earnings * Plug to balance.

000 4.500 $250. beginning of year Dividends Retained earnings.1 Page 227 Morrow Wholesale Income Statement and Statement of Retained Earnings for the year ended December 31.600) Depreciation (80.900 (300) 5.000) $70.380 17.000 + 1.Introductory Financial Accounting.000) Miscellaneous Operating income Interest expense ($5.000 34.600 8.100 15.000 (10.220 .000 . 20x2 Sales Cost of goods sold ($250.000 ÷ 10) Bad debts (155.000 200.000 9.220 63.600 7.000 50.000 24.146. end of year 11.1.000 x 80%) Gross margin Operating expenses Salaries (10.000 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. v.000 5.

Inventory Purchases of merchandise A/P .000 70.600 5.220 345.000 $80.000 $216.380 60.500 Note 1 .000 .000) $224.000 36.500 SHAREHODLERS' EQUITY Current liabilities Accounts payable Accrued wages payable Note payable Interest payable Dividends payable Income taxes payable Shareholders' Equity Common stock Retained earnings $36.20.000 + 4.20.500 23.000) Equipment (80.500 96.000) 52.000 + 8.280 275.000) Accumulated depreciation (20.000 300 10.000 216.Introductory Financial Accounting.000 330.000 .000 (96.1 Page 228 Morrow Wholesale Balance Sheet as at December 31.000 60.500) Inventory (Note 1) Prepaid advertising Noncurrent assets Land (19.000) $200.1.000 (8.000 .000 1. 20x2 ASSETS Current Assets Cash (24.ending Purchases Cost of goods sold = Opening inventory Purchases Less ending inventory $180.000 10.000 7.000 + 406.220 $405.000 $405.205.000 . v.

1.000 Increase in A/R) Cash paid out to suppliers ($300.000) (105.000 (294.100 Income tax expense – 33.800) (112.12.500) Cash.000 – 69.Introductory Financial Accounting.1 Page 229 Problem 9-1 a.000) $ 5.000 $20.900 47.300 19.10.500 Increase in cash ($175.1.000 COGS + 7.000 Interest expense .000) (31.100 Increase in Income Taxes Payable) $740.400 $ 99.000) 175.000 Increase in Interest Payable) Cash paid out for income taxes ($79.000 (125.500) 1.000 Salaries Expense .400 – 61.200 Increase in AP) Cash paid out for salaries ($120.000) (46. v.7. Ginger’s Cookies Ltd. 20x6 Cash flow from operations Cash collected from customers ($7500.800 Cash flow from investing Proceeds on sale of equipment (Note 1) Purchase of equipment 20. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($45.200 $20.000 – 40.000 Increase in Inventory .500) (69.500 .000) Cash flow from financing Issue of bonds payable Dividends paid (Note 2) 30.000 (99.000 15. Statement of Cash Flow for the Year ended December 31.000) Gain on sale Proceeds Note 2 – Dividends paid Net income Less increase in Retained Earnings ($108.000 Sales . beginning Cash.400) (80.600 Increase in Salaries Payable) Cash paid out for other operating expenses Cash paid out for interest ($32.000 $146.800 – 105.

600 1.000) (10. v.1.000 33.Introductory Financial Accounting.900 7.000 (15.1 Page 230 b.800 .200 7.000) (7. Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Gain on sale of capital assets Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Increase in Accounts Payable Increase in Salaries Payable Increase in Interest Payable Increase in Income Taxes Payable $146.000) 12.100 $175.

Introductory Financial Accounting.000 150.000) 7. Statement of Cash Flow for the year ended December 31. end of year 1 Accumulated Amortization.695.000 218.000) 353.000) $3. end of year Amortization expense = $218.000 ? (71. beginning of year Cash.1 Page 231 Problem 9-2 a.000) (12.000 (13.000) (34.000 Decrease in cash Cash.000) (37.000 (50.842.000 111.000 $3. McDuff Ltd.000 .000) (463.000) (37.000) 17.000 466. 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. beginning of year Amortization expense Accumulated Amortization on disposal: $158.000 (543.000 $319. v.000) Cash flow from financing Redemption of bonds payable Proceeds on issue of mortgage payable Proceeds on issue of common shares Cash dividends paid3 (487.000) 350.000) (11.000 Accumulated Amortization.000) (5.000 – 87.000 Cash flow from investing Proceeds on sale of assets Purchase of capital assets2 80.1.000 (48.

000 COGS + 48.000 Increase in Prepaid Expenses) Cash paid out for salaries and wages ($850.000 (2.000) $5. ending Additions to capital assets = $543. beginning Additions Disposals Capital Assets.000) (887. end of year Dividends = $50.000 Salaries and Wages Expense + 37.611.000 .500.000 Decrease in Interest Payable) Cash paid out for income taxes ($250.400.000) $466.000 ? $508.000 ? (158.000 Decrease in AP) Cash paid out for operating expenses ($700. v.000 239.000 Decrease in A/R) Cash paid out to suppliers ($2.000 $5.000 Interest expense + 5. beginning of year Add net income Less dividends Retained Earnings.000 Sales + 111.000 Increase in Income Taxes Payable) $4.000 – 218.000 3 Retained Earnings.1 Page 232 2 Capital Assets.460.000) (72.Introductory Financial Accounting.000 Income tax expense – 17.326.711.000) (233.000 b.1.000 $319.000 Decrease in Salaries and Wages Payable) Cash paid out for interest ($67.000) (493.000 Increase in Inventory + 12. Cash flow from operations – Direct Cash collected from customers ($4.000 Amortization Expense + 11.

1 Page 233 Problem 9-3 (a) HHC LTD.000 Sales – 1.600 Increase in Inventory) Cash paid to employees ($39.500) (1.900) (5.400) 7.600) (39.800 $ (1.000 COGS + 1.700) (2.500) $ 900 (b) Cash Flow from Operating Activities Cash collections from customers ($218.200 – 100 Increase in Interest Payable) $216.500 Increase in Accounts Receivable) Cash paid to suppliers ($165.Introductory Financial Accounting. 20x5 Cash Flow from Operating Activities Net Loss Adjust for non-cash items Depreciation Add (deduct) adjustments to non-cash current assets and liabilities: Increase in accounts receivable Increase in inventory Increase in prepaid Insurance Decrease in salaries and wages payable Increase in interest payable $ (3.1. v.100) $900 .300) (1.500 (166. Cash Flow Statement for the year ended December 31.800 + 100 Increase in Prepaid Insurance) Cash paid for rent Cash paid for interest ($1.600) (100) (400) 100 (3.300 + 400 Decrease in Salaries and Wages Payable) Cash paid for insurance ($2.

000 (50.000 12.000 COGS + 32. Toram Ltd. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($32.000 – 21.000 .000 Sales .000) $7. beginning Cash.000) Cash.000 Decrease in AP) Cash paid out for other operating expenses Cash paid out for interest Cash paid out for income taxes $847.000 Increase in A/R) Cash paid out to suppliers ($600.000 (20.000) 24. 20x6 Cash flow from operations Cash collected from customers ($900. Statement of Cash Flow for the Year ended December 31.000) 17.000 Cash flow from investing Proceeds on sale of equipment (Note 1) Proceeds on sale of long-term investment (Note 2) Purchase of equipment 7.000) Loss on sale Proceeds $ 11.53.000 – 25.000 Cash flow from financing Issue of bonds payable Dividends paid 25.000 (4.000) 0 0 32.000 26.000 $50.1 Page 234 Problem 9-4 a.000 Note 2 – Proceeds on sale of long-term investment Net book value of investment Gain on sale Proceeds $ 18.1.000) (165.000 Increase in Inventory + 18.000) (25.000 30.000 Increase in cash ($32.000 30.Introductory Financial Accounting. v.000 + 17.000 (650.

000 (12.000 4.000) (32.000) (18. v.1. Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Loss on sale of capital assets Gain on sale of long-term investment Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Decrease in Accounts Payable $100.000 .Introductory Financial Accounting.1 Page 235 b.000 43.000) $32.000) (53.

Assume that a payment of $10.500 x 7 = $367. 2.$100.25.000 Average inventory = ($60.500 Total net sales = $367.000 and CA = 200.000 + 55.000 Inventory turnover = $450.500 Net credit sales for 20x8 = $52. d Average receivables = ($50. the current ratio becomes $90. 8. Impact is on the current ratio.000 / 75.000. 4.000 / 80.000.1.000 is made. a 6.000 COGS = $30. c c Average inventory = ($30.000 then the current ratio is 0.000 = 1.Introductory Financial Accounting.000 + 540.000) / 2 = $50.000) / 2 = $75.250 / ($125.000.000 / 70.000 = $450.78. d 3.$80.000 No impact on working capital since the decrease in cash is equal to the decrease in accounts payable. the current ratio drops to 0.500 + 32. current liabilities .000 – 120.000 = 1.000 = 6 Assume an initial amounts as follows: current assets .000 = $40. current ratio = $100.000 / 50.000) / 2 = $52. 7.000 / 365) = 94 days Inventory increased by $20.8.000 Inventory turnover = $300.$300.000.1 Page 236 Problem 10-1 1. v.0 times 9.000 + 120. c . then CL = 230. a c b Average receivables = ($40.000 + 40.500 = $400.000 – 20.29 and working capital stays the same.000 + 22.250 Days sales in A/R = $32. 5.000 and CA = 180.000 purchased . Assume that CL = 250. If the invoice paid is $20.000 = 6.000 COGS) Beginning inventory = $60.500) / 2 = $31.000 ($320.

00 Times Interest Earned 230.000) ÷ (1.000 / 379.76 (12.000 / 50.000 / 60.07 200.000 + 220.000 + 275.000) / 365 = 53.200.000_ / 365 = 70.000 = 0.000 = 4.000 + 400.000 = 3.Introductory Financial Accounting.000 + 550.000 = 1. v.1 Page 237 Problem 10-2 Liquidity Analysis: 20x5 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 712.88 (12.83 * debt is defined as long-term debt in this case .5 days Solvency Analysis: 20x5 Debt-to-Equity Ratio* 920.07 20x4 850.000 = 1.1.000) ÷ (1.60 (34.7 days 20x4 594.000 = 1.000 = 1.000) / 371.000 + 275.000 = 0.000 / 371.000 / 863.000 + 275.68 (34.000 / 793.400.000) / 379.

000) / 2] = .000 / 2.000 / [(863.000 + 220.014.300.98 Days Sales in Accounts Receivable Total asset turnover .014.66 [(275.9% Return on Equity Asset Management (Activity Ratios) 20x5 Inventory turnover $1.3% 200.300.10 20x4 $1.000 / [(2.000) / 2] = 1.000 / [(793.48 [(220.000 + 725.000 / [(2.000 / [(2.900.000) / 2] = 13.000 = 10% 230.000 + 2.000 = 10.300.1.000 + 340.000 + 793.000 / [(425.000) / 2] = 3.900.300.2 days 2.000 + 350.000 = 39.875.000 + 1.000 / 1.3 days 1.000 + 200.014.000) / 2] = 10.000) / 2] / (2.1 Page 238 Profitability Analysis 20x5 Gross Profit Percentage Return on Sales Return on Assets $900.5% 200.000 / 2.000) / 2] = 12.014.8% 230. v.000 + 1.000 / [(340.000) / 2] = 11% 110.000 + 2.000) / 2] = 3.000) / 2] / (1.162.000 / 1.000 / 365) = 39.3% 98.900.200.400.162.Introductory Financial Accounting.000 / 365) = 40.000 / [(2.000 = 36.900.875.1% 20x4 $700.

v.000 = 0.1 Page 239 Problem 10-3 Liquidity Analysis: 20x7 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 1.000 + 524.000 + 463.08 (37.000 = 2.000 + 480.45 Times Interest Earned 65.30 137.000 = 1.000 / 60.000) / 365 = 97.32 20x6 800.000 + 635.000 = 2.08 * debt is defined as long-term debt in this case .000 / 56.000 + 524.000 / 560.52 days 20x6 1.576.000) / 560.167.04 (20.Introductory Financial Accounting.13 (20.000 = 2.000 / 2.000 / 2.300.000 = 0.000 = 0.000.114.000) ÷ (1.679.1.000 / 524.000) / 365 = 135.72 days Solvency Analysis: 20x7 Debt-to-Equity Ratio* 820.000 + 480.000 = 1.92 (37.000) / 524.000) ÷ (1.

1% 20x6 $700.000 / [(3.1.003.000) / 2] = 0.000 + 300.000 / 1.000 = 41.44 Days Sales in Accounts Receivable Total asset turnover .000) / 2] = 0.100.000) / 2] / (2.000 + 3.000 + 4.000 / [(2.100.13 [(480.5 days 1.9% Return on Equity Asset Management (Activity Ratios) 20x7 Inventory turnover $1.000) / 2] = 2.1 Page 240 Profitability Analysis 20x7 Gross Profit Percentage Return on Sales Return on Assets $800.000 = 3.000.956.679.000) / 2] = 1.1% 137.000 / [(2.300.000 / [(570.100.003.576.808.000 + 3.52 20x6 $1.000 + 524.5% 51.000 / 365) = 88.2% 65.000 / [(4.003.000 + 2.000) / 2] = 0.Introductory Financial Accounting.003.700.000 / [(3.3 days 2.000 + 570.1% 65.90 [(524.000 + 2.000 / 2.000 / [(4.700.000) / 2] = 1.000 + 4.679.6% 3.956.700.000 = 8.000 = 38.100. v.700.000 / [(650.000) / 2] = 1.000 / 2.000 / 365) = 87.000) / 2] / (1.1% 137.000) / 2] = 3.628.808.000 + 485.000 / 1.

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