This action might not be possible to undo. Are you sure you want to continue?
Jacques Maurice, MBA, CA, CMA, FCMA Rebecca Renfroe, B.Comm, B. Ed, CMA
Introductory Financial Accounting, v.1.1
Table of Contents
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
The Accounting Cycle – Income Statement and Statement of Financial Position Cash and Investments Accounts Receivable Inventory Long-term Assets Liabilities Shareholders’ Equity The Accounting Cycle Revisited The Statement of Cash Flow Financial Statement Analysis Solutions to Problems
3 48 58 67 86 100 114 122 131 146 159
Introductory Financial Accounting, v.1.1
The Accounting Cycle – Income Statement and Balance Sheet
The Accounting Equation To begin any discussion about accounting, the Accounting Equation is a critical starting point. The key components of the accounting equation are Assets, Liabilities and Shareholders’ Equity. The definition of an asset is a probable future economic benefit obtained or controlled by a particular entity as a result of a past transaction or event. There are three key components to this definition: a) the asset will provide some probable, future benefit to the company, b) the asset is under the control of the company; and, c) the asset has come into the company’s control through some past transaction or event. Examples of assets are Cash, Accounts Receivable, Inventory and Capital Assets. A liabilitiy, on the other hand, is an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. Examples of liabilities are accounts payable and accrued liabilities, bank loans and long-term debt. If you were to liquidate all of the assets of a company and pay off all liabilities with the proceeds, any amount left over would be the Equity in the company. Shareholders’ Equity, as it is sometimes called, is a numerical representation of the shareholders’ interest in a company. The Accounting Equation is as follows:
Assets = Liabilities + Shareholders’ Equity
The equation must hold true at all times. How we manage this is through balanced entries. That is, each time we record an event within a company’s accounting life, if we affect one side of the equation, we must also affect the other, OR we can both increase and decrease the same side of the equation to keep it in balance. Hence, we have our second truth of accounting: Debits = Credits The normal balances of the above accounts are as follows: Assets - Debit Liabilities - Credit Shareholders’ Equity - Credit
Introductory Financial Accounting, v.1.1
Let’s look at a few examples of manipulating the Accounting Equation. Recall the accounting equation:
Assets = Liabilities + Shareholders’ Equity
Example (a) When an owner invests their own cash in starting up a company, this will have two effects. First, the cash account (an asset) will increase, and the Contributed Capital account will also increase. The Contributed Capital account is part of Shareholders’ Equity and comprises of all contributions made by the shareholders to the company. Say an owner invests $50,000 of their own money to start a company. The journal entry would be: Cash Contributed Capital 50,000 50,000
The cash account gets debited (dr.) and the Contributed Capital Account gets credited (cr.). Note the convention above: • when writing journal entries, the account label that gets debited is flush against the left margin and the account label that gets credited is tabbed in; • the debit dollar amount is in the first column whereby the credit dollar amount is in the second column. The equation stays in balance as we are increasing both sides of the equation: Assets + 50,000 = Liabilities + Equity +50,000
That same company then uses some of that cash to purchase inventory to resell. That inventory costs $10,000. The journal entry would be: Inventory Cash 10,000 10,000
Note that both of these are asset accounts, but our equation stays balanced because we are increasing one asset (inventory), but decreasing another (cash): Assets + 10,000 - 10,000 = Liabilities + Equity
by increasing one and decreasing another the equation holds true: Assets + 75.000 75.000 (d) = Liabilities +10. The journal entry would be: Equipment Cash 75. The journal entry would be: Inventory Accounts Payable 5. By increasing both sides of the equation. The journal entry to record the loan would be: Cash Bank Loan 100.Introductory Financial Accounting. the company would receive $100. we increase the asset account Cash. therefore. Furthermore.000 . they do not pay cash but take on an account payable with the supplier. our equation stays in balance: Assets + 100.000 Both the Equipment account and the Cash account are assets.1.000. an asset and a liability.000.000 Upon signing the loan. therefore. they will take on a liability to pay back the bank the $100.000 + Equity The company then uses cash to purchase equipment that costs $75.000 5. that is. v.1 Page 5 (c) That same company then purchases an additional $5.000 + Equity . our equation holds true: Assets + 10. therefore.000 = Liabilities +100.000 worth of inventory on account.000 100.75. and increasing a liability.000.000 We are increasing an asset.000 = Liabilities + Equity (e) The same company is a little short on cash and has to take out a loan from its bank.000 cash. The loan is for $100.
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. i. when a revenue account is increased we credit the account. 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 company will have generated a net income and a net Credit entry to Retained Earnings will result.1. If Expenses are greater than Revenues.000 = Liabilities + Equity +30. Conversely. an expense account’s normal balance is a debit balance. At the end of each year.000 30. For example.1 Page 6 Transactions that impact the Statement of Income The above examples used accounts that appear on the Statement of Financial Position.000 in sales in its first month. v.000 The accounting equation is maintained since Assets are increased and Equity is increased: Assets + 30. 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.Introductory Financial Accounting. via the Retained Earnings Account. which is part of the Shareholders’ Equity section of the Statement of Financial Position. Income Statement accounts will consist of Revenue accounts or Expense accounts. Revenue accounts normally have a credit balance. If Revenues are greater than Expenses during a period. and the resulting debit or credit is either added or subtracted to an account called Retained Earnings. All revenue and expense accounts are temporary accounts in the sense that we start the year with a zero balance in the account.e. the company will have generated a net loss and a net Debit balance to Retained Earnings will result. the income and expense accounts are closed out to zero.000 .
Introductory Financial Accounting.1. and all other assets and liabilities are classified as non-current. Note that Cost of Goods Sold is an expense account. .000 Note that this entry removes the inventory from the company’s accounts.000 = Liabilities + Equity -15. as they no longer have it on hand to sell. The Statement of Financial Position (also called the Balance Sheet) is. The journal entry to record that would be: Cost of Goods Sold Inventory 15. and both are divided into current and non-current based on their liquidity.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. v. as are liabilities.000 15.15. the company sold all $15.1 Page 7 (g) To incur these sales.000 worth of its inventory. 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. an expanded form of the accounting equation: The Statement of Financial Position Assets = Liabilities & Shareholders’ Equity Liabilities Current Liabilities Current Assets Non-Current Liabilities Shareholders’ Equity Contributed Capital Non-Current Assets Retained Earnings Assets are listed from most liquid to least liquid. The accounting equation remains in balance: Assets . basically.
The inventory can either be purchased. v. and classify the remainder as non-current. the cost of the policy will be classified as a prepaid expense. Accounts Receivable – the account is the sum total of all outstanding invoices which are owed to the company by its customers. . if your loan balance is $200.000 and the agreement with the bank is that you will be required to pay $50. complete. For example. Non-current Assets: Buildings – this account is a listing of all depreciable buildings owned by the company. For example.Introductory Financial Accounting. A more detailed discussion of this account will take place Chapter 4. The classic example of this is breaking out the current portion of the long-term debt of a company. Prepaid Expenses – this account represents amounts that have been paid in cash for expenses that have not been incurred by the company. Long-term investments – these are investments that are to be held for many years. More on this in Chapter 5.). ready for resale. Note that amortization is never taken on land. Equipment – this account is treated in the same manner as the Buildings account. or manufactured by the company itself. we normally pay the annual premium the day the policy takes effect. The associated Accumulated Amortization contra account is normally shown directly below the asset account. Land – this account is a listing of all land held by the company. other companies or special funds.000 of this balance within the next year. this $50.000 would be classified as a long-term liability. stocks. Accounts Receivable is normally reported net of an Allowance for Uncollectible Accounts (discussed further in Chapter 3). but is a listing of all equipment owned and used by the company. In this case. when we take out an insurance policy.1. that in some cases you may have an asset or a liability that is partly current and partly non-current. this account includes all currency and equivalents (bank drafts.000 would be classified as a current liability and the remaining $150. and the asset is therefore shown net of accumulated amortization. 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. Because the policy has not yet expired. money orders etc.1 Page 8 Note. you would break out the current portion and classify it as such. Inventory – this account is a listing of all of the items that the company normally sells in its day-to-day activities.
Retained Earnings – this account represents the cumulative total of the net income of a company that has not been distributed to shareholders. trademarks and copyrights would be classified as longterm assets.1. Note that the wages payable account is normally the result of an adjusting entry. It is when the amount is due back to the lender that differentiates between current and non-current debt. end of year XXX ± XXX .XXX XXX . The retained earnings account reconciliation from the beginning of year to end of year balance is as follows: Retained Earnings. 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. v. Wages payable – a listing of all wages due to employees within one year or one accounting cycle. Current Liabilities: Accounts payable – a listing of all accounts that will be due to suppliers which are expected to be repaid within one year or one accounting cycle. 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. Shareholders’ Equity: Contributed Capital – this account contains any amounts which have been invested in the company by the company’s shareholders.1 Page 9 Intangible assets such as patents. The retained earnings account is adjusted at the end of each year to account for a company’s net income or loss.Introductory Financial Accounting.
000) (8.000 3.000 The multi-step statement has multiple subtotals. the amount left over after all relevant expenses have been taken into account.000 . 20x8 Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Income Interest Income Net Income before Taxes Income Tax Expense Net Income $100.Introductory Financial Accounting.1 Page 10 The Income Statement The income statement is a statement that shows how a company performed during one period.000) $10. most companies tend to use some form of a multi-step statement. Income statements can take on one of two formats: single step and multi-step.000) 40.000 (60.000 (8. Either one is acceptable under GAAP.000 (60. however. It takes the reader from total Revenues to Net Income.000 18. 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) $10.1.000) (25. 20x8 Sales Interest Income Cost of Goods Sold Operating Expenses Income Tax Expense Net Income $100. typically the fiscal year of the company.000 3. and for the above company would look like the following: The Miller Company Income Statement For the Period ended December 31. v.000 (25.000) 15.
When an entry is made and an account is to be debited. When a credit is made. for every entry the lefthand entry must equal the right-hand entry in order for the Accounting Equation to hold true.1. v.1 Page 11 The T-Account Named for its shape. an entry is placed on the left-hand side of the T. which resembles a capital “T”. Accounts Receivable Debit Credit The following represent how increases and decreases in accounts get recorded: Liabilities & Shareholders’ Equity Assets + Expenses - Revenues + + - - + .Introductory Financial Accounting. it is placed on the right hand sand. Thus. a T-account is a tool used by accountants to keep track of entries that are made to individual accounts.
6. That is. Inc.’s Sales for the first year were as follows: Cash sales . 11. beginning February 1. The lessor required Ian to pay the first and last month’s rent on January 2.000. 20x8. Ian signed a two-year lease with monthly rent of $8.000. was purchased for $5. he has decided he is ready to go out on his own. 20x7. 20x7. with 10% annual interest due semiannually. which covered the period of January 2. (Record the February rental payment only.$430. 3. A total of $280. Ian’s Incredible Instruments Inc.$310. v. (Record the payments made from March to November only. 20x7 through December 31. Having proven himself a good tenant.1 Page 12 Comprehensive Example Ian has worked at a music store for the last 20 years. are for 5 years. 7. An outside storage facility has been rented to fill this need.000 of the accounts receivable were collected throughout the year. Ian’s Incredible Instruments Inc.000. 5. his entire life savings. and was able to give up his off-site storage facility. 8. He only rented the outside facility to the end of November.. however. 20x7. Credit sales . Opened for business in a local mall. interest payments are due every 6 months.000. but is not large enough to store any extra inventory.000 due on the first of each month. January 2. the annual rate is 10%. into the company upon incorporation. 20x7: 1. Ian’s Incredible Instruments. is located in the Meadowvale Mall. After years of planning and saving. 10.000 was purchased on account. 20x7 through December 31. An insurance policy. He received 1. Rent is $1. 20x7. Ian purchased furniture and fixtures for the store at an auction for $30. . The terms of the loan.000 common shares of the Corporation. 20x7. More inventory was purchased on account June 1.000. 20x7 for $350. 20x7. 9.1. 20x7. which was taken out on June 1.) 2. Ian was able to convince his landlord at the mall to give him additional storage space (at no extra cost). Ian’s Incredible Instruments Inc.200 per month.) Inventory of $120. The lease is in effect from January 2. The following transactions took place during the fiscal year ended December 31. The mall location is suitable for Ian’s retail needs. 4. He paid cash. Ian invested $175. and was rented on a month-to-month basis.000 The company took out a loan for $200. January 2.760 cash.Introductory Financial Accounting.
000 10. Prepaid Rent Rent Expense Cash 8. 14. To record the purchase of inventory on account. To record the rent paid on the outside storage facility in February for one month. Cash Contributed Capital 2.Introductory Financial Accounting.1 Page 13 12.000 8. v. This is what we call a prepaid expense.200 4. For each of the above.000 3. Rent Expense Cash 1.000 88. We know that the first month’s rent will be “used up” in this year. and therefore it is an expense in this fiscal period.000 (note that a dividend is debited against retained earnings).000 23.000 . 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 13.000 40.000 To record the payment of first and last month’s rent on the lease. Inventory Accounts Payable 120. Ian declared and paid a dividend of $60.000 16.000 120. To record Ian’s initial investment into the company. The total cost of the inventory sold during the year was $300.200 1.000 175.1. the deposit for the last month won’t be used until 2 years from now. the appropriate journal entries would look like this: 1. However. 175.000 120.000.000 $446.
800. To record the collection of accounts receivable throughout the year. However. Cash Accounts Receivable Sales 430. the credit to the Accounts Receivable account.000 10. second. To record the rental expense incurred from March through November. To record the purchase of inventory on account. Note that as we collect the cash. Note that because it expires December 31. v. they will have an outstanding loan for the same amount. To record purchase and payment of the insurance policy. they will get $200. sales are recorded individually as they are made.760 6. Insurance Expense Cash 5. Note that in reality. Cash Accounts Receivable 280. for the purposes of this example we will be entering them in one journal entry. 20x7.000 11.000 200.000 30. for which cash was paid. two things will happen to Ian’s Incredible Instruments Inc.000 7. (Remember.000 280.1.760 5.000 310.Introductory Financial Accounting.000 9.000 740.1 Page 14 5.000 8.000 cash from the bank.200/month x 9 months = $10. Upon receiving the loan. the entire amount applies to the current fiscal year and therefore there is no prepaid portion. We will deal with the interest expense incurred on the loan in a separate entry. Hence.800 10. To record the purchase of furniture and fixtures. Rent Expense Cash 10. To record sales for the first year. Inventory Accounts Payable 350. First.800 . we must remove the receivable from our books. Cash Bank Loan 200. as they are no longer due to us.000 350. Furniture and Fixtures Cash 30. $1. we already recorded the initial payment in February).
000 120. To record the various other cash disbursements made throughout the year.000 14. To record the dividend paid.000 88.000 . Retained Earnings Cash 60.000/month = $88.000 23.1 Page 15 12.1.000 300.000 Interest on bank loan . Note the following supporting calculations: Rent Expense – 11 months x $8.000 446.000 x (10% x year) = $10. To remove the inventory which was sold from the inventory account and record the resulting Cost of Goods Sold expense. Cost of Goods Sold Inventory 300.Introductory Financial Accounting.$200.000 60.000 Wages & Salaries Expense Rent Expense Advertising Expense Miscellaneous Expenses Accounts Payable Interest Expense Cash 165. v.000 40.000 13.000 10.
Expenses 12 23.Introductory Financial Accounting.000 350.1.1 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 Expenses INCOME STATEMENT Revenues Sales 740.000 350.000 120.800 88.000 16.000 300.000 60.000 280.000 170.000 7 Rent 2 3 11 12 8.000 1 Retained Earnings 13 60.000 1.000 5 Insurance 5.760 30.000 4 9 Accounts Receivable 7 310.000 12 Interest Expense 10.000 430.000 .000 Contributed Capital 175.000 12 Accounts Payable 120.000 Misc.000 12 Advertising Expense 40.000 10.760 Wages & Salaries Expense 12 165.000 30. v.240 Inventory 4 9 120.000 280.000 350.200 5.000 108.000 2 3 5 6 11 12 13 2 Prepaid Rent 8.000 10 Bank Loan 200.800 446.000 8 515.000 13 6 Furniture & Fixtures 30.000 200.200 10.000 1.000 Cost of Goods Sold 13 300.
240 30.000 40.000 10.000 175.000 170.000 740.000 30.000 $1.000 5.000 . 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 $515.760 165.000 Credit $350.465. Trial Balance As at December 31.000 23. v.000 60.000 300.465.000 200.1.000 $1.Introductory Financial Accounting.000 108.1 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 8.
Introductory Financial Accounting. all balances get returned to zero. 20x7 Sales Cost of Goods Sold Gross Profit Operating Expenses Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Miscellaneous Expenses Operating income Interest Expense Net income Closing Accounts All revenue and expense accounts are closed out to zero at the end of each fiscal period.240 $740. v.000 88.000 300.000 341.000 440. Income Statement for the year ending December 31.000 $88.240 .000 108.1. and the offsetting amount is the net income (or loss) that gets recorded to retained earnings.1 Page 18 A multi-step income statement for Ian’s Incredible Instruments Inc. As such.000 23. The closing entry for Ian’s Incredible Instruments is as follows: Sales Cost of Goods Sold Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Interest Expense Miscellaneous Expenses Retained Earnings 740.000 40.240 10.000 23.760 165.000 5.000 5.000 10.000 108. they are referred to as temporary accounts. would look like this: Ian’s Incredible Instruments Inc.760 98. At the end of the year.000 40.000 300.760 165.
000 8. December 31.000 723.1 Page 19 The Statement of Retained Earnings outlines the changes in the Retained Earnings account from the beginning of the year balance to the ending balance: Ian’s Incredible Instruments Inc. 20x7 Retained Earnings. 20x7 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures $515. Statement of Retained Earnings for the year ending December 31.240 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Long-term liabilities Bank loan Shareholders’ Equity Contributed Capital Retained earnings 200.240 30.1. v. January 1. Statement of Financial Position as at December 31.240 $753.000 $753.240 (60.000 170.000 175.240 203.000 28.240 30.000 .000 550.240 $ We can now prepare a Statement of Financial Position for Ian’s Incredible Instruments: Ian’s Incredible Instruments Inc. 20x7 0 88.240 350.000) $ 28.Introductory Financial Accounting. 20x7 Net income Dividends Retained Earnings.
v. office supplies. Accured Expenses – When an expense has been incurred. The adjusting entry sets up an asset. but cash has not been paid or received.Introductory Financial Accounting. The asset will then be allocated to future periods using adjusting entries. subscriptions collected in advance and gift certificates sold. Examples: Prepaid rent/insurance. As cash is received in payment in future periods.1. As the liability is paid in future periods. but not yet paid in cash. Interest Expense. Rent Revenue.e. deposits on orders. but will not be paid in the current period. a receivable.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. performs the service or delivers the goods. 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. then both the liability and the expense are recorded in the amount relating to the current period. As the company earns the revenue. Examples: Payroll. i. an adjusting entry is made to remove the liability and record the revenue. the receivable is removed. Income taxes. plant & equipment Accrual – Event has occurred. Interest Receivable . Accrued Revenues – These entries are used then revenue has been earned. Examples: Rent collected in advance. Examples: Credit sales. and records the revenue. we will Debit the liability and Credit cash to record the payment.
v.000 for an insurance policy that will cover the next 12 months. that will expire in 20x8. 3. 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. and what we have left at the end of the year. 20x5 reveals that you have $5. . The adjusting entry would be: Insurance Expense Prepaid Insurance 5. The missing piece to the puzzle is the amount of supplies that were used during the year.800 in your office supplies inventory account. the missing credit or Supplies Expense has to be 11. solving the equation. On August 1.600. Therefore. During the year you purchased an additional $13.000 12.800 + 13. we know our opening balance.000 $ 5.000 5. On January 1. 20x5? To answer this question. This means that 5 months have been used in the current period.200 of supplies on hand.000 The balance that remains in the prepaid insurance account of $7.1.000 At the end of the year you will have 7 months remaining on the policy.000 of office supplies.200. However. it might be helpful to look at the T-Account for Office Supplies for the year: Supplies Inventory Opening Balance Purchases Ending Balance $ 3. What would be the adjusting entry on December 31. A physical count of the supplies on December 31. 1. 2.e.800 13.1 Page 21 Example In examples 1-5. what was purchased during the year.Introductory Financial Accounting. i. and therefore should be an expense of the current period.200 ???? Supplies Expense As the T-Account shows. 20x5 you had $3.000 does not equal 5. assume that the company’s year-end is December 31. 20x7 you pay $12.000 represents the portion of the insurance policy that is unexpired.
You own an apartment building and have a tenant whose parents have paid their rent for the entire year in advance. It is now December 31. the adjusting journal entry would be: Amortization Expense Accumulated Amortization 10.000 Because the Accumulated Amortization account is applied as a reduction of the related asset account. the revenue to be recorded for the year would be 8 months x $800/month = $6.000 as an expense this year. 20x8. What would be your amortization expense and what would be the adjusting entry to record it? The cost of the furniture needs to be spread out over its entire useful life. there would still be 4 months of unearned . You received payment for the full year on May 1. we call it a contra account to the Office Furniture account. 20x6. i. when you received the revenue.000 Note that the amortization expense account will appear on the income statement as an operating expense for the year. The long-term asset section of the Statement of Financial Position would be as follows: Office Furniture Less accumulated amortization $100. It is now December 31. Furthermore. instead of taking the full $100. we will take $10. you would have earned 8 of the 12 months of revenue.1. 4. on the other hand.000 per year for the next 10 years. you would have recorded an entry of: Cash ($800 x 12) Unearned Rental Revenue 9. office furniture in this case. will appear on the Statement of Financial Position as a reduction of the related asset account. or $10.e.600 9.1 Page 22 The adjusting entry on December 31.000 10.000 on January 1. The Accumulated Amortization account.000) $ 90.600 11.600 As of December 31. Therefore. 20x6. Each and every year. 20x8.400. 20x5 would be: Supplies Expense Office Supplies 3.600 You purchase new office furniture for a cost of $100. v. What is your adjusting entry? On May 1. 20x8.000 per year for the life of the furniture. 11.000 (10. Therefore. The apartment rents for $800/month.Introductory Financial Accounting. You estimate that the furniture will last 10 years and have no salvage value at the end of its useful life.
It is December 31. we can calculate that the annual interest on the loan will be equal to $100. 20x3 you take out a loan for $100. we have to first figure out how much needs to be accrued. That is. The adjusting entry on December 31. no cash has been paid for the interest expense. how much do we owe to our employees for the 4 days that we haven’t paid them? If the average weekly payroll is $80. that is. the balance in the Unearned Rental Revenue account will be equal to $9. What is your adjusting entry to record interest expense for the year? Looking at the terms of the loan. However. the accrued wages payable will be $16. as of December 31. 20x8 would be: Unearned Rental Revenue Rental Revenue 6.000 x 4 days = $64.000. 20x3. It is March 31 (Friday). your year-end. The loan agreement states that interest will be charged at a rate of 8% annually.400 = $3. The loan has been outstanding for 5 months. 20x6 (a Monday).1 Page 23 revenue left. The adjusting entry would be: Interest Expense Interest Payable 6. v. only 5 months of interest pertain to the current period. The balance in the Unearned Rental Revenue Account would have 4 months x $800/month = $3.000/week. Our employees worked 4 days from the time of their last payday until the end of the year. the loan has not been outstanding for the full 12 months. and interest and the principal will be due August 1.000.000.200. then our daily payroll rate can be calculated as $80.000.000 x 8% = $8. and our employees work 5 days a week. 5.400 6.000 .000 x 5/12 = $3.400 According to the journal entries above. On August 1.333.000.1. What is the adjusting entry? To calculate the adjusting entry.000/5 = $16. The adjusting entry would be: Wages Expense Wages Payable 64. and furthermore.200. therefore.000 64. Your average weekly payroll is $80. This reconciles to our calculation above. interest expense for 20x3 would be $8.333 You last paid your employees on March 27.333 3. and therefore. 3. 20x3.600 – 6.Introductory Financial Accounting. 20x4.
v. This allows the company to keep track of all sales returns separately from the original sale. If the goods are shipped to the customer under the terms FOB1 Shipping. 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. and • all associated costs can be estimated. For most sales. then the goods belong to the customer the minute they are loaded on the truck and revenue can be recognized immediately. In this case. However. Just because you don’t pay cash for something does not mean that the expense wasn’t incurred.1 Page 24 Note that this adjusting entry does two things: First. whenever the discount is taken. the following transactions are related: • Sales Returns: whenever customers return merchandise for refund. For example. assume that we make a sale of $1. this can get complicated when say. • collectibility is reasonably assured. then the amount of the discount gets debited to the Sales Discounts account. second. Sales and Sales Contra Accounts Whenever a sale is made. Revenue Recognition and the Matching Principle For a firm to recognize revenue.Introductory Financial Accounting. it gets onto our books the expense that we have incurred during the last 4 days of the period. 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. as we will see later. This can become an issue for goods that are in transit around the company’s year-end. But. whether we have paid for them or not. instead of debiting the sales account.1. • the revenue must be earned (all significant acts must be completed).000 and we offer a discount of 2% if the invoice is paid within 10 days. it gets onto our books the liability that we owe to our employees. this means that the cost of the goods sold become an expense the day the sale is made. the revenue recognition point takes place when the transaction takes place. If the customer pays 1 FOB stands for ‘Free on Board’ . we debit an account called ‘sales returns’. • Sales Discounts: if early payment discounts are offered to customers. then they belong to the customer only when they are delivered and therefore the revenue recognition point is when the goods are shipped. We MUST record all expenses relevant to the current period. a 5-year warranty is provided with the product. In the case of a simple sale. we credit the Sales account. 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. If the goods are shipped under the terms FOB Destination.
but the customer keeps the merchandise.500 . v. Sales Allowances are when merchandise is sold to a customer which is slightly defective. otherwise the full amount is payable in 30 days. The $20 discount will get debited to the Sales Discount account. A credit is granted to the customer.Introductory Financial Accounting.1 Page 25 • within 10 days.000 merchandise whose sales price was $1. a 2 % discount is offered if payment is made within 10 days.1. Accounts receivable Sales • $40. they will pay us $980. The selling price is $40.500 is returned to the company Sales returns Accounts receivable 1.000 $40. n30.000. would be netted out against the Sales account. These three accounts are considered contra accounts to the Sales account and. • merchandise is shipped FOB Shipping to a customer. when reported on the income statements. that is.500 1. Terms of payment are 2/10. 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.
such as dividends. the focus of financial statements is to meet the needs of creditors and shareholders. the objectives of financial reporting are as follows: • to provide information useful to present and potential users in making investment. or similar decisions.500 • on the 9th day after the sale.1 Page 26 • some of the merchandise was slightly damaged during before it was shipped.Introductory Financial Accounting.1. and • what is the fallback position: does the company have sufficient assets to satisfy its liabilities? To summarize. claims on those resources.280 is received. Sales Allowances Accounts Receivable 2. Accountants are continuously faced with new situations and business innovations that present accounting and reporting problems. It would be impossible for financial statements to meet the needs of all users of financial statements. loan repayments. . and • to provide information about the economic resources of a firm. Cash Sales discounts Accounts receivable 35. interest. These problems must be dealt with in an organized and consistent manner. principal and dividend payments?. 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). 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. A credit of $2. and so on. This does not imply that there are no other users of financial statements. payment of $35. v. Consequently. since these needs could conflict.500 is granted to the customer. credit. • to provide information to help in assessing cash flows.280 720 36. 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. The conceptual framework plays a vital role in the development of new standards and in the revision of previously issued standards.500 2.
Reliability wins in this case. 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. the concept of relevance and reliability conflict. The $100 is an established transaction and is reliable. accounting information should meet the following criteria: • predictive value – information should be useful in predicting future outcomes. If a company purchased a parcel of land in 1856 for $100.1 Page 27 Qualitative Characteristics of Accounting Information There are two primary qualitative characteristics of accounting information: relevance and reliability. For example.000. v. To be relevant. One could argue that regardless of what you call this security. Verifiability implies that independent measures using the same measurement method should yield approximately the same result. • timeliness – information should be available to the users as quickly as possible. This implies that the information provided should be useful to the users. • representational faithfulness – accounting information should portray the substance of transactions over their form. Reliability implies that the accounting information can be depended upon. that land is recorded on the company’s books at $100 regardless of the fact that it may well be worth $10. but are not as important as relevance and reliability. Secondary qualitative characteristics – the following two characteristics (neutrality and comparability are qualified as secondary because they are desirable qualities of accounting information. . From a shareholders’ perspective the value of $10. consider the application of the historical cost principle which states that assets should get recorded at their original cost. For example. Relevance implies that accounting information can make a difference when making a decision – the user of financial statements is better off having the information than not having it. To be reliable.e.000 today. gets refunded in a pre-specified number of years) and pays a fixed rate of interest. the income statement is generally structured by segregating recurring items against non-recurring items.Introductory Financial Accounting.1. At times. the representational faithfulness principle would argue that it meets all the characteristics of long-term debt and should be classified as such. accounting information should meet the following criteria: • verifiability – accounting professionals. For example. For example. The rationale is that income from recurring items is a best predictor of future income. • feedback value – information presented today helps confirm previous decisions. assume a company issues a new type of security called a ‘Special Preferred Share’ which has a limited life (i.000 is far more relevant. when establishing the validity of an accounting estimate should come to a consensus.000.
e. Assume that existing equipment is technologically obsolete and a net present value analysis shows that if the equipment were to be replaced.1. Here is an example of an accounting rule that could lead to dysfunctional economic decision making. Materiality implies that financial statements are not precise but are accurate enough that any potential errors of misstatements would not affect any user. it may be .000. 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. information costs. v. 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.1 Page 28 Freedom from bias (neutrality) – accounting information should be even-handed with respect to the impact of accounting information on users’ behaviour. Information benefits vs. The principle of conservatism also leads to the recognition of contingent losses but does not recognize any contingent gains.000 would not be significantly affected if they were misstated by say.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. 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). as we will see in Lesson 4. The principle of timeliness implies that the financial statements should be in the hands of users as soon as possible. the company would benefit economically from it (i. the project has a significantly positive net present value). a gain or loss arises when the proceeds on disposal differ from the net book value of the asset sold. Modifying concepts Conservatism means that it is generally preferable that any possible errors be in the direction of understatement of net income. Thus. Conservatism is an effort to ensure that the risk or uncertainty inherent in business situations is adequately considered. $100. When introducing an accounting principle. the company would have to show a large loss on disposal. but changes should occur infrequently and only for valid reasons. Accounting rules should not provide the motivation for dysfunctional decisions. For example. when companies sell depreciable assets. When accountants can choose between two equally acceptable accounting principles. the financial statements of a company with net income of $10. Also. For example.000. The only problem is that if the asset were to be disposed of. For example. changes in accounting principles require retroactive adjustment and restatement of prior period financial statements. we must estimate which accounts receivable are likely to become uncollectible in the future and establish an allowance for doubtful accounts. the principle of conservatism implies that the one with the least favourable impact on net income should be the one chosen. Consistency implies that accounting principles are applied from period to period in the same manner. but should be used as a way of thinking. That’s not to say that accounting principles cannot be changed.
Introductory Financial Accounting.1 Page 29 possible that additional invoices are received after the financial statements are issued. Going concern principle assumes that the entity will continue operating in the future. . Also refer to the definition of an asset (later in this section). Periodicity assumes that we can breakup the life of a business in separate reporting periods (years. the measurability of such revenues are reasonably certain and collectibility is reasonably assured. 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. Monetary unit principle assumes that the value of the dollar does not change . all associated expenses related to the recognition of these revenues are recorded also.e. quarters. Other Principles Economic entity principle states that the financial statements of an entity should report all assets and liabilities under its control. 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. Consequently. months…) and report income and prepare a balance sheet for each of these periods. This principle will be invoked when dealing with leases and intercorporate investments in later lessons. Matching principle assumes that when we record revenues.1. This omission is justified on the basis of materiality.i. v. 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. we can add assets together even if they were purchased in different years. This is probably one of the most flawed principles. a 1925 dollar is equivalent to a dollar today. This assumption allows us to record long-term assets at their depreciable cost.
Revenues of entities normally arise from the sale of goods. in the case of profit oriented enterprises. in the case of not-for-profit organizations. Expenses are decreases in economic resources. (b) the duty or responsibility obligates the entity. . or on demand.1. Assets have three essential characteristics: (a) they embody a future benefit that involves a capacity. resulting from an entity's ordinary revenue generating or service delivery activities. the settlement of which may result in the transfer or use of assets.Introductory Financial Accounting. to contribute directly or indirectly to future net cash flows. and (c) the transaction or event obligating the entity has already occurred.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. royalties or dividends. for example. singly or in combination with other assets. and (c) the transaction or event giving rise to the entity's right to. Equity is the ownership interest in the assets of a profit oriented enterprise after deducting its liabilities. provision of services or other yielding of economic benefits in the future. government grants and other contributions. either by way of inflows or enhancements of assets or reductions of liabilities. While equity of a profit oriented enterprise in total is a residual. In addition. the rendering of services or the use by others of entity resources yielding rent. many not-for-profit organizations receive a significant proportion of their revenues from donations. types of share capital. thereby leaving it little or no discretion to avoid it. provision of services or other yielding of economic benefits. Revenues are increases in economic resources. 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. at a specified or determinable date. resulting from the ordinary activities of an entity. it includes specific categories of items. to provide services. Liabilities are obligations of an entity arising from past transactions or events. contributed surplus and retained earnings. and. interest. on occurrence of a specified event. either by way of outflows or reductions of assets or incurrences of liabilities. (b) the entity can control access to the benefit. the benefit has already occurred. or control of. v. Liabilities have three essential characteristics: (a) they embody a duty or responsibility to others that entails settlement by future transfer or use of assets.
1. Losses are decreases in equity / net assets from peripheral or incidental transactions and events affecting an entity.Introductory Financial Accounting. events and circumstances affecting the entity except those that result from expenses or distributions of equity / net assets. v. and from all other transactions. events and circumstances affecting the entity except those that result from revenues or equity / net assets contributions. and from all other transactions.1 Page 31 Gains are increases in equity / net assets from peripheral or incidental transactions and events affecting an entity. .
assumption. The proprietor of Front Street Drugs bought a computer for his personal use. He paid for the computer by writing a cheque on the company chequing account and charged the “Office Equipment” account. Existence of the lawsuit was reported in the notes to Fastrac’s financial statements. What accounting principle. or constraint was violated? a) Continuity assumption b) Matching principle c) Materiality constraint d) Separate entity assumption 2. What accounting principle. or constraint was violated? a) Continuity assumption b) Matching principle c) Cost principle d) Time period assumption 3. What accounting principle. Nimto Inc. The cost of the floor covering for the company offices was expensed. v.Introductory Financial Accounting. assumption. The party sued Fastrac for damages that could exceed Fastrac’s insurance coverage. even though the floor covering has an estimated useful life of 5 years. the driver of Fastrac Courier collided with another vehicle causing both property damage and personal injury.1. While making a delivery. assumption or constraint is being applied in this situation? a) Full-disclosure principle b) Conservatism principle c) Matching principle d) Unit-of-measure assumption . 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.1 Page 32 Problems with Solutions Problem 1-1 Multiple Choice Questions 1.
20x5.000. the Insurance expense for the period ending December 31.999. and Total shareholders’ equity of $499.000. 20x8. will be $5.Introductory Financial Accounting.1 Page 33 4. inventory count. According to generally accepted accounting principles. c) Under cash basis accounting. failed to include $40. v. 20x5. financial statements should be prepared using which of the following? a) Fair market values b) Historic costs c) Future values d) Replacement costs . On July 1.999 6. ABC has a December 31 year end. there will be a balance of $35. 5. 20x8.000 in the Prepaid insurance account on December 31. Shaw’s Rent-all. Total liabilities of $500. after correcting for the inventory error? a) $ 40. 20x5. there will be a balance of $20. Shaw included a $200. the bookkeeper for Ytwok.000 in the Prepaid insurance account on December 31. showed Total assets of $999. there will be a balance of $25.000 personal residence as an asset on the balance sheet of his company.999.000 worth of inventory in the company’s December 31. M. b) Under accrual accounting. d) Under accrual accounting. 20x8.1.000 b) $ 959. The December 31. 20x9. Which of the following statements is true? a) Under cash basis accounting.999 d) $1.039. which included this error. 20x9. ABC Ltd. What would be the balance for Total assets on December 31. What generally accepted accounting principle does this contradict? a) Time period principle b) Cost principle c) Going concern principle d) Business entity principle 7.000 c) $ 999. purchased a 4-year insurance policy and paid a premium of $40. financial statements. Harry.000.000 in the Prepaid insurance account on December 31. In the rush to make it to a New Year’s party.
Introductory Financial Accounting.1 Page 34 8. 20x8. What generally accepted accounting principle does this contradict? a) Time period principle b) Revenue recognition principle c) Objectivity principle d) Business entity principle . v. Smart presented land and buildings on her company’s balance sheet based on the appraised value of these assets at December 31.1. K.
A bank loan in the amount of $20.$190. on June 30.000 per month.1. 9. These are purchased for cash. 5. 6. 20x3. 20x2. 7. 8. an annual charge equal to 1% of sales is due at the end of the year (i. 3. you decided to start up a new business – Heavenly Books Inc.. .200 cash.000 A total of $4. 20x2. The loan agreement calls for repayments of $4. Sales for the period ended October 31.Introductory Financial Accounting.000 every 4 months with the first payment due November 1.1 Page 35 Problem 1-2 On July 2. 20x2 were: Cash sales . Interest payments are due on the 1st of each month.000 Sales on account . an offcampus bookstore where students can purchase textbooks and supplies at reduced prices. You and several other shareholders invested $20. v. In addition to the monthly rent. 2. The first and last month’s rent are due upon signing of the lease on July 2. An additional $120. 20x2.000 of inventory was purchased on account. Books and supplies of $50. An insurance policy was purchased for $1.000. the company’s year end.000 in return for shares in the company.000 of the sales made on account were collected. 4.000 was purchased on account. Furniture and fixtures are purchased at a cost of $15. 20x2 and expires on June 30.$6. 20x2. 20x2 to October 31.000 was obtained on August 1. The following are summary transactions for the period July 2. 1. The policy takes effect on July 2. The annual interest rate is 9%. A suitable location is found and rent is $1. The lease agreement is for one year. 20x3). 20x2.e.
v. b.000 1. Required – a. Enter all the above transactions in T-Accounts. Additional cash disbursements for the year were as follows: Wages and salaries Rent Advertising Miscellaneous expenses Dividends to shareholders Interest on bank loan Payments on account re: purchases of inventory $36. Credit Accrued Liabilities. 19. 15. Invoices received but not yet paid amount to $700 for miscellaneous expenses. Credit Accrued Liabilities.000 2.500 10. The interest payable on the bank loan.000 $182. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . The adjustment for insurance expense.000 were returned to the publishers. 12.000 of inventory is on hand.Introductory Financial Accounting.000 3. The straight line method is to be used. Books costing $15. Credit Accrued Liabilities. An inventory count shows that a total of $25. The furniture and fixtures are expected to last a total of 10 years with no salvage value.800 The following adjustments at year end must be made: 11.000 300 130. 17. Credit Accrued Liabilities. 18. 13. The expected income tax rate is 30%. Adjustment for rent payable.1. c. 14. Employees are owed a total of $600. 16.1 Page 36 10.
000 1. $ 7.800 2. was started with $50. b.100 3.. On December 31. due December 31. A statement of retained earnings.200 1.100 3. v.400 2.000 25. the accounting records contained the following selected amounts: Accounts payable Accounts receivable Accumulated amortization – Office Equipment Bank loan. Inc. c.000 24.000 1.1.600 2.1 Page 37 Problem 1-3 On January 1.000 invested by the owners as capital stock. 20x6: a.500 157. A multi-step income statement.Introductory Financial Accounting.500 . Global Production.100 21.300 44. A statement of financial position.900 ? 40.100 2.100 50. 20x6.500 4.000 4.000 84.600 4. 20x8 Cash Capital stock Cost of goods sold Amortization expense Dividends declared Interest expense Income tax expense Insurance expense Inventory Income taxes payable Office equipment Prepaid insurance Rent expense Salary expense Salaries payable Sales Sales returns Supplies Supplies expense Telephone expense Required – Prepare the following for the year ended/as at December 31.100 14.300 18. 20x6.
your year-end. First. with no salvage value estimated at that time. The estimated useful life of the machine is 8 years.750. Kittens Quarterly. on a yearly basis for the fee of $24/year. for their monthly staff meetings..Introductory Financial Accounting.000. and you have provided your services Big Al’s Used Cars for the past month. v. Your year-end is June 30th. What adjusting entry must be recorded to account for the unpaid salaries? You paid $5.1. Today is the end of the accounting period. What is the adjusting entry required if your year-end is December 31st? Your company is moving into a new office on July 1st. your year-end. Your daily salary expense is $600. It is now December 31. You sell subscriptions to your magazine. record the journal entry to record the receipt of the subscription fee in January. 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) . Issues come out in March. You have provided $2. a) On June 1. and then record the adjusting entry for the end of April.300 worth of services.000 for your annual property insurance policy eight months ago. A new customer purchases a subscription in January. It is now April 30. ahead of time. INC Inc. prepare the appropriate adjusting entry. $4. but you will not be billing Big Al until next month. which was signed June 1. you bought a piece of machinery for $50.000 on June 1st and again on December 1st for providing these services for one year. It is now your year-end. June. September and December.1 Page 38 Problem 1-4 For each of the following isolated situations. Record the adjusting entry for amortization for the year. What is the appropriate adjusting entry? You have a contract to provide catering services for a local company. You signed the agreement and wrote the cheque on June 30th. You are a consultant. Part of your new lease agreement required you to pay your first month’s rent. The contract. stated that they would pay you $6. What would the adjusting entry be? You pay weekly salaries to your staff and your accounting period end falls on a Wednesday.
Coverage of the insurance policy starts on July 1. d. You are to provide the 20x5 adjusting entries required for Doby Company.000 b. Doby Company paid for a two-year insurance premium for a policy on its equipment. On October 1. The total interest of $300 is payable on the due date.000 cash and gave a oneyear. The $440 collection was recorded as follows: Oct 1. 20x5.Introductory Financial Accounting.000 $3. 20x5. Assume Doby Company publishes a monthly magazine.000 c. 20x5 Cash Note payable $3. The annual accounting period ends on December 31. 20x5. a. On September 1. The note was recorded as follows: Sep 1.1. This transaction was recorded as follows: Jul 1. 20x6. Doby Company borrowed $3. note payable. the company collected $440 for subscriptions two years in advance. On December 31. 20x5. 20x5 a tenant renting some office space from Doby Company had not paid the rent of $500 for December.1 Page 39 Problem 1-5 Below are four transactions that were completed during 20x5 by Doby Company. v. On July 1.000 $1. The subscription start on October 1. 10 percent. Each transaction will require an adjusting entry at December 31. 20x5. 20x5. 20x5 Prepaid Insurance Cash $1. 20x5 Cash Unearned subscription revenues $440 $440 . August 31.
Introductory Financial Accounting. Assume Wild Corporation uses a Perpetual Inventory System. The purchase is made “on account” with the company agreeing to pay for the goods within 30 days. Wild Corporation sells 200 units of inventory for $50 per unit. What are the total liabilities of Wild Corporation after this transaction? 9. The customer pays cash.1 Page 40 Problem 1-6 For the next set of questions. 4. The company used the perpetual inventory method. Initial financing comes from the sale of 100. 20x6. What are the total liabilities of Wild Corporation after this transaction? 12. 20x6. ensure your answer reflects the cumulative impact of all prior parts. What are the total assets of Wild Corporation after this transaction? 5. Wild Corporation purchases a warehouse for $300. What are the total assets of Wild Corporation immediately after it has been formed and the shares sold? 2. 1. What are the total assets of Wild Corporation after this transaction? 11. What is total shareholders’ equity after this transaction? On April 3. 20x6. 10. Wild Corporation purchases 1. What are the total assets of Wild Corporation after this transaction? 8. What is total shareholders’ equity after this transaction? On April 5.000 units of inventory for $20 per unit. Wild Corporation is formed on April 1. What are the total liabilities of Wild Corporation at this point? 3.000 cash.000 common shares at $10 per share cash.1. What is total shareholders’ equity after this transaction? (CGA Canada Adapted) . v. What are the total liabilities of Wild Corporation after this transaction? 6. 20x6. 7. What is total shareholders’ equity at this point? On April 2.
Received from Smith a $10. v.400. 5. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x7? 4. 7. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x6? 3.000 Entries during 20x7 80. Show increases by a plus.Introductory Financial Accounting.000 90-day. What was the subscription revenue earned during 20x7? 2.000.1 Page 41 Problem 1-7 The following information was extracted from You Read Magazines Co. General Ledger Account Subscriptions Received in Advance Dr Cr Balance January1. Interest accrued on the note payable was $1. Interest accrued on note receivable was $1. 7% note payable from the seller.000 1-year. Purchased new equipment by obtaining a $200. Received $2. shareholders’ equity and net income. 3. 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. (CGA Canada Heavily Adapted) . 2.000 Entries during 20x7 Required – 1. 4. Purchased for $500 cash an insurance policy for the following year. Example: Shareholders’ Equity -500 Net Income -500 Assets Interest accrued on notes payable was $500 NC Liabilities +500 Required – 1. liabilities. 6% interest note in exchange for extending the due date on a receivable. 20x7 128. The company requires that customers pay the annual subscription fee for the magazine in advance. 6. and no change by NC.000 120.1. Received a $50.000 from a customer for an outstanding invoice. decreases by a minus.000 cash injection from one of the owners of the company.
6.000 14. At the end of 20x6 and 20x7. Ronald found the following: 1.000 had not yet been received.Introductory Financial Accounting.000 35. An amount of $5. the proprietor of Error Margin was excited to learn about profit margin analysis and immediately applied his knowledge to evaluate his business.000 was received in 20x7 and was included in cash received for sales in 20x7. 2.000 16. At the end of 20x6. Based on the above. Cash’s analysis.000 $10. there were goods in inventory costing $3. 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. accounts receivable for sales made to customers totaling $20. Identify any two generally accepted accounting principles that were violated in Mr.000 10. respectively. The $20.1 Page 42 Problem 1-9 Mr. v.000 of Mr. Purchases.000 and $5. Cash paid for purchases in 20x6 included an amount of $2.1. using the accrual method of accounting. There was no money due from customers at the end of 20x7. Cost of goods sold. Net income and Profit margin for 20x6 and 20x7. Other expenses in 20x7 included $1. 5.000 $21. 4.000 which was a deposit on goods that were to be purchased in 20x7. Cash.66% 20x7 $70. calculate Sales. 3.000.000 40. (CGA Canada) . 2. Required 1.000 30% On examination. He was perplexed that the profit margin had improved in spite of his intuition to the contrary. Cash’s personal expenses.000 received in 20x6 pertained to a sale made in 20x5.
in parking lots at select locations in major urban areas. pruning and maintaining the trees over the 15-year period. maintains.1.1 Page 43 Problem 1-10 Evergreen Inc. It plants. It normally takes about 15 years for a tree to grow to a suitable size. It sells the trees for cash. pruning and maintaining the trees be accounted for? Explain. operates a tree farming business. The largest cost of this business is the cost of fertilizing. How should the annual cost of fertilizing. b. primarily during the Christmas season. and harvests evergreen trees. Use the criteria for revenue recognition to explain when revenue should be recognized for this tree farming business.Introductory Financial Accounting. . v. Required a.
Strait Ltd.875 from JP Developers for the work completed on Dec.1. Received $1. Strait in exchange for $6. 1 Dec. 31 Issued 100 common shares of the new company.875. 13 Dec. Required – a. 17 Dec. Dec. for the month ending December 31. Purchased office supplies on credit for $300. which revealed that $200 of the $300 worth of office supplies purchased on December 17 were still on hand. v. 28 Dec. b. 31 Dec. 31 Dec. the following transactions were completed during December 20x6.000 cash.000 in cash and agreeing to pay the balance in six months. V.300 cash to the office secretary for December’s wages. Completed work for a client and immediately collected $680 in cash for the work done. 13. 3 Dec. Performed a count of office supplies. 20x6? (CGA Canada Adapted) .. Purchased the office furniture and equipment of a retiring architect for $4. to V.000.000 for rental of office space for December rent. Completed work for JP Developers and sent them an invoice for $1. Prepare journal entries for the above transactions What is operating income for V. paying $1. Strait opened an architecture company.Introductory Financial Accounting. 7 Dec. Strait Ltd. Paid $1.1 Page 44 Problem 1-11 V. Paid $1.
1 Page 45 Problem 1-12 The following summarized transactions (in thousands of dollars) occurred during the year ended December 31. For new equipment acquired on July 1. e. The principal on the current notes was collected on May 1. d. k. Collections from credit customers were $700. i. To trade creditors.depreciation expense for 20x2 was $30. v. Wages earned but unpaid. advertising. Cash disbursements were: g. l. o. Post all of the above transactions in T-Accounts. c. which were all paid in cash. 20x2 was $240. For depreciation . 2. The board of directors declared cash dividends of $26 on December 15 to be paid on January 21.Introductory Financial Accounting. . 20x2 for Ruiz Pharmacy: a. 20x5. $500. $193. $36. m. Interest for twelve months on all notes was collected on May 1. Total sales were $900. To employees for wages. $74. To Revenue Canada for income taxes. Prepare an income statement. $15 Total income tax expense for 20x2 is $20. f. of which 80% were on credit. December 31. p. utilities and supplies. Merchandise inventory purchased on account was $520. For the interest on the note receivable. computed as 40% of pretax income of $50. 20x2. The merchandise inventory as at December 31. The rate is 12% per annum. To the insurance company for a new three-year fire insurance policy effective September 1. For miscellaneous expenses such as store rents. 20x2. The principal on the remaining notes is payable on May 1. j. q. The notes receivables are from a major supplier of vitamins. r. $189. 20x2: n. 20x2. For insurance. statement of retained earnings and balance sheet for 20x2.1. $19. The following adjustments were made on December 31. b. h. Required 1. 20x2.
3. .000 during the year from customers who purchased on credit.000 8. v. 5. 20x4 Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures Accumulated amortization $ 30.000 $763.350. 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.Introductory Financial Accounting. During fiscal 20x5 Peter paid $15. Peter's Appliances Shop Ltd.000.000. The cost of the appliances sold during fiscal 20x5 was $745. 4.000 190.000 20. Peter’s balance sheet for August 31. Peter paid salaries and commissions to employees of $200.000 in taxes. mainly to builders.000 260.000 for appliances it purchased on credit.000 -40. employees were owed $7. At year end the accountant estimates that Peter owes an additional $12.500 14. the company's year end. 2.. 7. is shown below.000 446.000 in installments on its taxes. On August 31. Peter collected $375.000 123. 20x5. Peter needs to prepare its financial statements for the year ended August 31. Balance Sheet As at August 31.1 Page 46 Problem 1-13 Peter is the owner and operator of Peter's Appliance Shop Ltd. Sales during the year were $1. 20x4. Peter has been in business for five years. Peter uses the financial statements mainly for tax purposes and to show the holders of the long-term notes. Cash sales were $775. 6. 20x5.000. Peter paid suppliers $600.500 Liabilities and shareholders' equity Accounts payable Taxes payable Interest payable Long-term notes payable Capital stock Retained earnings $265.000.500 100. All purchases were made on account. During the year Peter paid the taxes it owed at the end of fiscal 20x4. The following information has been obtained about the fiscal year just ended: 1. Peter purchased appliances from suppliers for $850.000 110.1.000. Ottkancester’s largest independent household appliance store.000 $763.500 by Peter.500 It is now mid-September 20x5. The remainder was on account.
and microwave that cost $4. 20x4 to reduce the balance owed on the long-term notes. Peter paid $20. Beginning July 1. The interest rate on the notes is 8. Peter accepted $10. . Before July 1. The terms of the lease require that rent be paid six months in advance on January 1 and July 1 of each year. stove.1. For accounting purposes. In addition. 10. 9.000 cash.500 from the store and installed them in his new kitchen.000.000 on September 1. Interest is paid annually on September 1. In addition to the interest payment. 14. Peter must pay 2% of annual sales to the property owner 60 days after the year end. Peter paid $225. He took a refrigerator. During the year Peter paid $8. Peter recently redecorated his kitchen at home. 11. Required – Prepare an income statement. 20x5. 13.000 in cash for other expenses related to operating the business in fiscal 20x5.500 in interest to the holders of the long-term notes. 12. a statement of retained earnings and a balance sheet and a statement of cash flow for Peter's Appliance Shop Ltd. 20x5 Peter paid $3.500 a month in rent. During 20x5 Peter purchased new capital assets (furniture and fixtures) for $25. 20x5 Peter pays $4.Introductory Financial Accounting.000 in deposits from customers who wanted a guarantee that their appliances would be delivered when they needed them. Peter expects that the appliances will be delivered in early November 20x5. The deposits pertained to a particularly hard-to-get appliance. The prepaid rent at the beginning of the year represented 4 months of prepaid rent at the old location. Amortization expense for 20x5 is $22.1 Page 47 8. v.5%. treat this as a dividend. for the year ended August 31.000 a month for the rent of its store. These deposits were not included as part of cash sales.
For example. v. Cash Cash and Investments For accounting purposes. The bank statement is a running total of all transactions that were made in the account since the last bank statement was produced. 4. This process is as follows: 1. Accompanying the bank statement are all the cheques that have cleared the bank account. bank accounts. The bank reconciliation starts with the balance per the bank statement. etc. It starts with the opening bank balance and ends with the ending balance. 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 .1 Page 48 2. Ensure that all cheques returned correspond to the amount entered into the cash account. Identify any transactions that appear on the bank statement that have not been recorded in the cash account. Prepare journal entries to record these items and post to the general ledger. 2.. cheques deposited that are returned due to insufficient funds (NSF cheques). The balance showing on the bank statement needs to be reconciled to the balance shown in the company’s cash account. Compare all deposits recorded on the bank statement to those recorded in the cash account. Prepare a list of cheques that were written but that have not yet cleared the bank account (outstanding cheques). petty cash and any foreign currency on hand. cash generally means any cash on hand. every 30 days a company will receive a bank statement from the bank.1. 5. 3.Introductory Financial Accounting. Typically. bank service charges. and Prepare a list of deposits that were made in the cash account but were not yet recorded on the bank statement (outstanding deposits).
20x7 shows the following: • ending balance of $45. Accounts receivable Cash To record the returned cheque. • the total outstanding cheques amount to $6.574) $42.579 (before any adjustments above) The first thing we do is make adjustments to the cash account for items on the bank statement that have not yet been recorded: Bank service charges Cash To record the bank service charges for the month of August. August 31.673 • 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. we prepare the bank reconciliation: Cash per bank.545 (6. August 31. The correct amount is $323.673 3. before adjustments Less bank service charges Less NSF Cheque Add error on cheque # 345 Cash balance after adjustments $43.644 .1 Page 49 Example – The Parkes Company’s bank statement dated Aug 31. 20x7 $45.1.574 • a deposit made on August 31 in the amount of $3. The next step will be to calculate the revised cash balance: Cash balance.644 $156 $156 788 788 9 9 Finally. v.545 was not recorded on the bank statement • the general ledger cash account shows a balance of $43. Cash ($332 – 323) Accounts payable To record the error in recording cheque # 345. 20x7 Add outstanding deposits Less outstanding cheques Cash per books. The cheque was incorrectly written in the cash disbursement journal as $332.579 (156) (788) 9 $42.Introductory Financial Accounting.
By their very nature. whether realized or unrealized. • . are charged to Net Income. consist of passive investments in the shares of another company. Other Comprehensive Income becomes part of Shareholders' Equity. 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. trading investments: all gains. the subject of this chapter. there is no difference in the accounting for these investments. 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 Page 50 Non Strategic Investments Investments in the shares of another corporation can broadly be classified as non-strategic or strategic investments. The classification of available for sale investments as current or long-term assets depends on management intent. These investments will either be classified as held for trading or available for sale securities. otherwise they are classified as long-term assets.Introductory Financial Accounting. they are classified as current assets.1. and balance sheet valuation is the same: interest accrued or dividends declared are recorded as investment income. v. the investments are carried at fair market value. Where the two methods differ is on how the adjustment to fair market value is recorded. the accounting for investment income. Held for trading investments are acquired or incurred principally for the purpose of selling or repurchasing it in the near term and are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking. For both types of investments. Available for sale investments also occur whenever debt securities are acquired with the intent of liquidating them before their maturity. operational or financial policies. Non-strategic investments. • available for sale investments: any unrealized gains or losses are charged to Other Comprehensive Income. at the balance sheet date. They are therefore specifically held for purposes of resale and are designated by management as such. They would normally be classified as current assets. strategic investments are classified as long-term investments. Regardless of how they are classified. If management intends to hold these for a period of less than one year. Any realized gains or losses are charged to Net Income.
The investment is classified as an available for sale investment. 20x5 Available for Sale Investments Cash Cash Investment income Available for Sale Investments Unrealized holding gain $15.1. 20x6.000 600 600 1. then the following journal entries would have been recorded: Jun 30. 20x5 . v.1 Page 51 Example .900 $16.000. 20x5.500 1.500 Oct 15.000 600 600 1.900 1.500 1.500 1. 20x5 Dec 31.500 $16. 20x5 Dec 31.Introductory Financial Accounting.000 $15.on June 30.500. At December 31. On October 15. On February 12.000 $15. 20x6 Cash Unrealized holding gain Gain on sale of investments Available for Sale Investments XXXX XXXX $1. The following journal entries will be recorded with regards to this investment: Jun 30. 20x5 At December 31. 20x5 you purchase the shares of another company for $15. $15.900. you sell the investment for $16. 20x5 we receive a dividend cheque for these shares in the amount of $600.500 If the investment has been classified as a trading investment. the unrealized gain will be part of Other Comprehensive Income and will be part of Shareholders' Equity: Shareholders Equity: Common Shares Retained Earnings Other Comprehensive Income Unrealized holding gains Feb 12. 20x5 Held for Trading Investments Cash Cash Investment income Held for Trading Investments Unrealized trading gain Note: the difference is that the unrealized trading gain is part of net income and gets closed out to retained earnings. 20x5 (the balance sheet date).500 Oct 15. the fair market value of the shares is $16.
v.900 400 $16. 20x6 Cash Realized trading gain Temporary Investments $16.1 Page 52 Feb 12.Introductory Financial Accounting.1.500 .
Introductory Financial Accounting.095 9.095 b) $21. The cheque was written for the correct amount of $152.595 c) $25. 20x8? a) $15. and it was deposited on May 18. 20x8.595 . a company received a cheque from a customer in payment of the related account receivable.200 What amount should be reported as cash in the current asset section of Swiss Company’s balance sheet at December 31. on hand but not yet deposited Swiss Company cheques that have not cleared the bank account $15.1. 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 2.1 Page 53 Problems with Solution Problem 2-1 1.095 d) $31. 20x8 revealed the following details: Balance in bank account Customer cheques dated December 31. v. An analysis of the cash account for Swiss Company at December 31. During May.700 3. The May bank statement listed the deposit at $512.
300 52 1. The ending balance on the May bank statement is shown as $4.200 cheque received from a customer on December 13 in payment of an account receivable was incorrectly recorded as Required a. $ 3.1. December 1 Cash received during December Cash payments made during December Cash balance per bank statement.327 $15 48 63 34 Problem 2-2 The following information for the month of December 20x6.020 .279 b) $4. A company is preparing its May bank reconciliation. December 31 Bank service charges for December Deposits in transit at December 31 Cheque issued by Sparg Ltd. b.548 6.Introductory Financial Accounting. Prepare any adjusting journal entries that would result from the December 2006 bank reconciliation. Cash balance per books. December 31 Cheques outstanding. with respect to cash activities. 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) $4.312 d) $4. deducted from Sarg’s account in error by the bank A $1.225. v.000 77.’s bookkeeper.1 Page 54 3. Prepare the December 20x6 bank reconciliation for Sarg.700 580 1. was gathered by Sarg Ltd.700 77.288 c) $4. At the end of the month.300 5.
v. bank statement for Focus Ltd.1 Page 55 Problem 2-3 The March 31. as $350. 20x7. c) Bank service charges for December amounted to $35 and had not yet been recorded by Focus Ltd. In preparing the bank reconciliation. (CGA Canada) . as $260. had been incorrectly recorded in the books of Focus Ltd.915. e) A $530 payment on account received from a customer was incorrectly recorded in the books of Focus Ltd. Prepare the necessary journal entry(ies) to bring Focus Ltd.200. 20x7: #501 for $780 and #533 for $1.Introductory Financial Accounting. in the amount of $620. 20x7. Prepare a bank reconciliation for Focus Ltd.200 had not been received by the bank in time to be included in the December bank statement. Required – 1. b) The March 31. 20x7. 20x7. the following information was determined: a) The following cheques are outstanding at March 31. showed a balance of $480. deposit of $6.’s cash account according to its accounting records was $4. d) Cheque #521 issued by Focus Ltd. for the cash purchase of office equipment.’s cash account up to date at March 31. f) The balance in Focus Ltd. at March 31.1. 2.
Management is quite unfamiliar with these different methods and has approached you for this information.000 $ 70.000 31. Support your answers with calculations.000 44.000 63. all the XYZ Computer shares are sold for $75. 20x0 $ 72.000. 20x1.000 Recent discussions have brought to management's attention that there are different methods of accounting for temporary investments. 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. Assuming these investments are classified as held for sale investments. advise management of two alternative methods of accounting for temporary investments and indicate the effect each has on balance sheet and income statement information.000 7.'s temporary investments at December 31.000 5.000 10. Holdco Ltd.1.1 Page 56 Problem 2-4 During 20x0.000 45.Introductory Financial Accounting. The data on Holdco Ltd. and all the Strategic Air Defence Systems shares are sold for $35.000 $234.000 26. v.000 51.000 9.000 $226.000 51. Required a) As chief accountant for Holdco. b) On January 10. write the journal entries to record the two sales.000 20. decided to invest in the shares of a number of "Hi-tech" companies. 20x0. .000.000 28.000 30.
000 12.500 31.500 $62. .000 $57.1.500 29.000 10.000 32.000 28. Assuming these investments are classified as trading investments.000 14. calculate the balance in Other Comprehensive Income at the end of each year.500 Required a) b) Assuming these investments are classified as available for sale.Introductory Financial Accounting.300 20x1 $19.1 Page 57 Problem 2-5 Mable Company has a portfolio of temporary investments consisting of the following (all investments were purchased in 20x0): December 31 Market Value Cost Security A B C $20.000 20x2 $16.800 $60.000 $66.000 20x0 $18.500 14. calculate the amount of unrealized trading gain or loss for each year. v.
whereby we estimate the amount of bad debt expense on the income statement. Aging of the accounts receivable listing This involves grouping all outstanding receivables based on how long these have been outstanding. Accounts Receivable Whenever credit is extended to customers for the provision of goods or services.000 x 1% 280.000 50.000 Based on past experience.000 x 8% 50. 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. therefore. Accounts receivable are reported on the statement of financial position at their net realizable value (NRV). 3% of accounts between 31-60 days.000 x 3% 120.200.500 8.500 .1 Page 58 3. There are generally three approaches to estimating the allowance for doubtful accounts directly (balance sheet approach): 1.600 20.200. the company estimates that 1% of current accounts will eventually become uncollectible.Introductory Financial Accounting. the aggregate of the unpaid invoices at any point in time. an account receivable is created. The net realizable value is equal to: Gross Accounts Receivable Less Allowance for Doubtful Accounts Calculating the Allowance for Doubtful Accounts The allowance for doubtful accounts normally has a credit balance and is equal to the amount of accounts receivable that are expected to not be collected.1. For example. which is equal to the net amount of outstanding invoices the firm expects to recover. v.000 x 40% $ 7. assume the total receivables add up to $1.400 9. where the allowance for doubtful accounts is estimated directly. Accounts receivable are.000 $45. There are two approaches to calculating the allowance for doubtful accounts: the balance sheet approach. and the income statement approach. 8% of accounts between 61-90 days and 40% of accounts over 90 days.000 and that the aging of accounts receivable is as follows: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750.000 280.000 120.000 $1.
e.1 Page 59 2. or (2) the amount is small and the cost of recovering the account is greater than the balance owed.200.000. it would not be meaningful to age the accounts receivable listing. For example. The sum of the estimated uncollectible accounts at any point in time will form the allowance for doubtful accounts. a department store which offers their customers a credit card). Allowance for Doubtful Accounts . it may be able to identify which specific accounts may become uncollectible. The journal entry to record bad debt expense under either the balance sheet or income statement approaches is: Dr. The income statement approach is used whenever a company offers their customers revolving credit facilities (i. Bad Debt Expense Cr.000 x 5% = $60. Accounts Receivable Cr. but estimates the amount of bad debt expense.200.Introductory Financial Accounting. As a percentage of the ending accounts receivable balance This approach simply takes then ending accounts receivable balance and multiplies it by a percentage. Accounts Receivable Recording recoveries of accounts written off When an account that was previously written off is subsequently recovered. Any accounts written off are written off against the allowance for doubtful accounts: Dr. Allowance for Doubtful Accounts Cr. v. if the ending accounts receivable balance is $1. 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.000 and the company estimates that 5% of these accounts will eventually become uncollectible. In this case. 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. Specific account identification When a company has accounts receivable from a limited number of customers and has an intimate knowledge of these customers.1. 3. Note that this approach does not estimate the allowance for doubtful accounts. then the allowance for doubtful accounts at the end of the year will be $1.
1.000 This will result in a $15.800.000.000.000 $10.1 Page 60 We then record the collection on the recovered accounts receivable: Dr. During the year.Introductory Financial Accounting.000 were recovered. Cash Cr. previously written off accounts totaling $10.000 $15.000 were written off.000 The journal entry to record the recovery will first be to reverse the entry initially made when these accounts were written off: Accounts receivable Allowance for doubtful accounts $10.000 10.000 $50.000 $10. the following transactions took place: • • accounts totaling $75. Accounts Receivable Example – The Jasmine Company’s accounts receivable at the end of the year totaled $2.000 We then record the cash receipt on the accounts receivable: Cash Accounts Receivable $10. v.000 Beginning Bal Recoveries Ending balance before adjustment .000 $75. The journal entry to record the accounts written off will be: Allowance for doubtful accounts Accounts receivable $75.000 debit balance in the Allowance for Doubtful Accounts: Allowance for Doubtful Accounts Write-offs $75. The balance in the allowance for doubtful accounts at the beginning of the year was $50.
500 since this is the entry required in the Allowance for Doubtful Accounts account to bring the account to a credit balance of $79. $94.000 x 15.000 The allowance for doubtful accounts is estimated to be: (1.800. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $83.0%) = $79. Using specific identification of accounts.5%) + (600.0%) + (150.0% 15.5% 2. management estimates that the allowance for doubtful accounts should be $68.500: Bad Debt Expense Allowance for Doubtful Accounts 2.000 x 6.000 $83.000 x 1. v.000 . The allowance for doubtful account should be established at $2.75% = $77. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $92.000 150.1 Page 61 In order to calculate the bad debt expense for the year.800.000.000 3.Introductory Financial Accounting. The accounts receivable aging is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days 1.800.000 600.500 The bad debt expense will be $94.000.500 $94.000 $92.800.000 x 2.000 $2.0% Management estimates that 2.75% of the accounts receivable balance will be uncollectible.500 Estimated % Uncollectible 1.000 x 2.1. we will assume four independent scenarios: 1.000 250.5% 6.5%) + (250.
.000.000 dr. Management estimates that bad debt expense will be equal to 1. v. we are effectively estimating the bad debt expense for the year and the residual becomes the Allowance for Doubtful Accounts.000 x 1.000. = $75. Note that when using this approach.000.000 This will cause the allowance for doubtful accounts to have a credit balance of $15. we were estimating the Allowance for Doubtful Accounts with the residual being bad debt expense. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $90. In approaches 1-3. Total credit sales for the year amounted to $6.Introductory Financial Accounting.000 $90.5% = $90. Bad debt expense will then be equal to $6.000. + $90.000.5% of total credit sales.1 Page 62 4.000 cr.1.
20x8 a) $4.800 .000 Experience indicates that 4% of the uncollected accounts receivable at the end of each year ultimately will be uncollectible.000) 400.1. the aging schedule indicated that the balance of the allowance account should be $6. A company estimated the needed balance in its account “allowance for doubtful accounts” by aging the accounts receivable. January 1. What should be the adjusting entry amount for doubtful accounts at December 31. What is bad debt expense for 20x9? a) $1.900 2. the balance of the allowance account was $5.000 20.Introductory Financial Accounting. At the end of 20x9. v.800 c) $7.000 b) $4. 20x8 Allowance for doubtful accounts balance. A company reported the following items for 20x8: Accounts receivable balance.000. During 20x9.600 b) $1. January 1.000 360.000 e) $13. At the end of 20x8.900 c) $6. the company wrote off $500 and collected a $300 receivable that had been previously written off as uncollectible.600 d) $6.000 (11.000 d) $13. 20x8 (credit) Total credit sales during 20x8 Total collections on accounts receivable during 20x8 Uncollectible accounts written off during 20x8 $80.1 Page 63 Problems with Solutions Problem 3-1 – Multiple Choice Questions 1.400.
000 $3.875 $3.875 $2. Provide the December 31.000 14.000 55. What were the net realizable values of the accounts receivable as shown by the accounting records before and after the write-off? Before $2.875 $2.000.000.900.000 dr. assuming the allowance method is used to account for uncollectible accounts. 2004 adjusting journal entry to record bad debts. January 1.000 1.1 Page 64 3. 2004 adjusting journal entry to record bad debts. 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. $ 15. for the year ended December 31.000 After $2.000 and an allowance for doubtful accounts of $125. 2004 Allowance for doubtful accounts.095 a) b) c) d) Problem 3-2 The following information relates to Merit Ltd. assuming the allowance method is used and uncollectible accounts are estimated to be of 1% of credit sales. b.200. .000 800.000 cr. v. c. A company had accounts receivable of $3.1.Introductory Financial Accounting. Provide the December 31. Provide the journal entry to write off actual accounts receivable determined to be uncollectible and recoveries.000 11. assuming the allowance method is used and management estimates the allowance to be 3% of the closing Accounts Receivable balance.970 $3. January 1.975 $2. 2004 Required – a. 63.000 3. just prior to writing off as uncollectible an account receivable of $30.
000 45.000 .000 15.000 234.000 25.1 Page 65 Problem 3-3 Sigma Company began operations on January 1.000 90.000 7.000.000 16.000 20x0 $2.Introductory Financial Accounting.000 80. v.000 - 277.000 2. 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 31.915. 20x0.400.000 60.1.000 27.800.000 2. 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.
2. Based on industry averages and its experience in 20x6. EED Ltd.500. 20x7. The company uses the allowance method of accounting for bad debt expense. In addition. Sold merchandise on credit for $500. Required 1. EED Ltd.Introductory Financial Accounting.000 debit balance in the accounts receivable account. On December 31. During 20x7 the following summarized transactions occurred: 1. prepare journal entries.1. 20x7.000 in payment of outstanding accounts receivable. 20x6 there was a $2.000. . The promissory note bears an interest rate of 12%. 20x7 to record bad debt expense for the year. With all other data being the same from above. 20x6. decided that an allowance equal to 5% of total accounts receivable would be sufficient to cover uncollectible accounts. expects 2% of credit sales to be uncollectable. Received cash of $400. 3. (CGA Canada adapted) 2. On December 1.000 was converted to a 6-month promissory note to allow a cash-strapped customer some time to meet his obligations. if any. Suppose now that instead. an accounts receivable in the amount of $3. began operations on January 1. v.000 credit balance in the allowance for doubtful accounts account and a $40. 4. Prepare journal entries to record the above transactions on the books of EED Ltd. required at December 31.1 Page 66 Problem 3-4 EED Ltd. to record bad debt expense for the year and accrue interest on the promissory note. required at December 31. if any. Wrote off uncollectible accounts receivable in the amount of $1. prepare the journal entries.
000 The next day. Note that unless a company is offering a discount to get rid of inventory or for some other reason. The Perpetual Inventory System The term perpetual means continuing without interruptions.000 10. Little Company makes its first big sale. From time to time. and then evaluate the different valuation methods a company can chose to determine the cost of inventory. Little Company purchases $5. we mean an inventory system that has no interruptions. Inventory Accounts Payable 10. We will begin by looking at two fundamentally different types of systems.1.000 of inventory. and any adjustments that are needed will be made to the inventory account.000 worth of inventory. When we talk about a perpetual inventory system.000 Note that even though we are not paying cash. is the inventory system that it chooses. the effect on the inventory account is the same as the above journal entry. or never ending. each time an item is sold is removed directly from the inventory account by crediting the inventory account and debiting the Cost of Goods Sold account.000 worth of inventory to a customer for $6.1 Page 67 4. v. Inventory A key part of determining the cost of the items that a company sells to its customers. Example: It is Little Company’s first year of business. Furthermore. the amount the company generally receives from its customer should always be greater than the value of the inventory. We still increase the inventory account by the amount of the purchase. The journal entry would be: Inventory Cash 5. . as well as valuing the items that it has on hand to resell at any point in time.Introductory Financial Accounting.000 5. we just create a payable instead of reducing our cash account. What that means is that inventory is tracked constantly in a real-time basis.000 cash. this time on account. paying cash. Each item that is purchased for resale gets debited to the inventory account. They sell $4. a physical count of inventory will be taken to ensure accuracy of the perpetual records. Little Company purchases an additional $10. On the first day. After two weeks of business.
which we will now turn our attention to.000 worth of inventory from our Inventory Asset account. This expense account. it removes the $4.000 4. under a periodic inventory system.000 This journal entry does two very important things.Introductory Financial Accounting. v. Instead. This varies significantly from the Periodic Inventory System. To do this. Cost of Goods Sold (COGS). we do a physical count of inventory at the end of the year to determine the amount to include on the Statement of Financial Position under “Inventory”. as: Purchases Cash 5. Under the Perpetual system the COGS is a running total.000 The Purchases account keeps a running total for the year of all purchases of inventory made.000 6.1.000 5.1 Page 68 To record the sale. we have not removed the items that were sold from our inventory account. the journal entry would be: Cash Sales Revenue 6.000 cash would be recorded. that first purchase of inventory for $5. So what do we do with the purchases of inventory we make throughout the year? Throughout the year. however. the journal entry would be: Cost of Goods Sold Inventory 4. These are: . as is the inventory account. nor do we keep a running total of COGS. However. it records the expense of the items that were sold. Continuing with the example above. Second. we do not keep a “running total” of inventory. First. we have recorded the sale and the receipt of cash. as purchases are made of inventory they are tracked in a temporary account called “Purchases”. The Periodic Inventory System Under the Periodic Inventory System.000 At this point. is used to keep track of all of the costs of all of the items a company sells in one period. Purchases has several contra accounts that track other expenses or discounts that may be associated with the purchases.
If you remember.000 10. At the end of the year. the Purchase account and all contra accounts are closed out to zero. v.000 10.1 Page 69 Purchases Normal debit balance Transportation – In Freight charges Purchase Discounts Early payment discounts Purchase Returns Merchandise returned Purchase Allowances We keep merchandise but are given a credit Running totals are kept in each of the above accounts for the year. The Cost of Goods Sold Equation is as follows: Beginning Inventory + Purchases (net of contra accounts) = Cost of Goods Available for Sale Ending Inventory = Cost of Goods Sold Example 1 – Let us use the Little Company example from above.000 worth of inventory on hand.Introductory Financial Accounting. At the same time.000 Let us suppose that those were the only purchases made during the year. and that at the end of the year a physical count of the inventory revealed that there was $11. To calculated COGS: .000 were made.1.000 and $10. based on the physical count. The new journal entries would be: Purchases Cash Purchases Accounts Payable 5. the inventory account is adjusted to the appropriate ending balance. the opening inventory was $0. The amount needed to balance the equation is the Cost of Goods Sold.000 5. Purchases of $5. as this is a new business.
000 2. Therefore.000) .000 2.000 – 27. in order to get the balance in the inventory account to $360.000 $4.1.000 36.476.000) = Cost of Goods Available for Sale . Furthermore.000 = $185.700.Ending Inventory (as per count) = Cost of Goods Sold $ 0 15.Ending Inventory (as per count) = Cost of Goods Sold $175.000 would be the ending inventory balance from last year.000 185.836.000 – 175.000.000.000 48.000 (360.000 + 10.000. 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. Inventory Purchases Transportation-in Purchase returns and allowances Purchase discounts 48. A year-end count reveals that the ending inventory balance should be $360.000 Example 2 – Tetrie Company shows the following balances at the end of the year: Dr.000 increase) Purchases (close account) Transportation-in (close account) 2. The balance is sitting at $175.700.661.000 + 36.000 Cr.000 27.000 Tetrie uses a periodic inventory system.Introductory Financial Accounting.000 2.700. according to our count.000) $2.000 . $360.000 Note that the Inventory balance given of $175.1 Page 70 Beginning Inventory + Purchases ($5.000 – 48. v.000 36.476.000 2. They are ready for the next fiscal year. the Purchases account and all of the associated contra accounts have been set back to $0. Cost of goods sold can be independently calculated as follows: Beginning Inventory + Purchases (2.000 11.000 we must increase it (or debit it) by $185. $175.000 27.000 and it should be.
. That is to say. it is possible to track each item in inventory separately. when the item is sold. like a car dealership. we remove its specific cost from inventory and debit COGS at the carrying amount. perpetual inventory systems dealt with how we track the inventory and purchases that flow through a company. v. we assume that the “First In = First Out”. In this case. Cost-Flow Assumption This method is used when items cannot be differentiated from one another. Some examples of situations where this method would be possible are: when items have specific serial numbers. like a jeweler. the COGS is equal to the opening inventory + earlier purchases. we don’t know specifically which items are being sold so we use an average of some sort to determine cost. Conversely. or when a company has relatively few items in inventory that have a specific cost associated with them. Note that regardless if a company is using a periodic or perpetual system.1. 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). therefore. both the COGS and the ending inventory cost will be the same under the FIFO valuation 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 ending inventory is equal to the most recent purchases. or when the value of the items is so small that it does not warrant the cost of tracking the specific item value. that inventory is mixed all together and. That is.1 Page 71 Inventory Valuation Methods The above discussion of periodic vs. Specific Item Valuation This method is used when inventory items can be specifically identified. We will now discuss how we attach value to the inventory. that is at what cost do we record the inventory and COGS. FIFO Under the FIFO method.Introductory Financial Accounting.
25 $240 500 (400) (240) (125) 330 (250) Balance Units Total Cost 400 600 1.20 1.1.25 1. Under FIFO.25 = $125 Total value of ending inventory = $330 + 125 = $455 Using the FIFO perpetual method.25 each Sold 700 units Purchased 300 units @ $1.25 1.000 $400 640 1.140 Jan 19 Jan 25 300 600 400 375 705 455 Note that the ending inventory result under FIFO is the same under both the periodic and perpetual methods.470 (455) $1.10 each Sold 200 units Under the FIFO periodic method.10 = $330 January 5 purchase = 100 units x $1.Introductory Financial Accounting. we sold .10 1. we first calculate the number of units in ending inventory = 400 units and then look at the most recent purchases in order to cost out the ending inventory: January 19 purchase = 300 units x $1. v. First. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1. Cost of goods sold can be calculated in two ways.070 1. This is not a coincidence – both approaches always provide the same result. Lainey Company has 400 units in its opening inventory.015 Secondly. we know that we sold a total of 700 + 200 = 900 units.00 1. using the cost of goods sold equation: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1. the ending inventory is calculated as follows: Purchases (Sales) Date Jan 1 Jan 3 Jan 5 Jan 10 Units 200 400 (400) (200) (100) 300 (200) Unit Cost Total Cost $1.00 each. Throughout the period.20 1.20 each Purchased 400 units @ $1. They purchased these units for $1.1 Page 72 Example – On January 1.
you will remember that we do an inventory count once a year to determine the ending inventory balance. Throughout the period.10 each Sold 200 units Under the annual Weighted Average method. that is.Introductory Financial Accounting.25 each Sold 700 units Purchased 300 units @ $1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.1. We then close out the purchase account and the associated contra accounts to determine what the COGS is. and one is used when you have a perpetual system.00 = 200 units @ $1. The annual weighted-average for periodic systems uses a similar methodology. v. 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 1.20 each Purchased 400 units @ $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. one is used when you have a periodic system. Annual Weighted-Average – Periodic Systems Under a periodic system.20 = 300 units @ $1.00 each. So COGS would be calculated as the cost of the first 900 units.25 = 900units $ 400 $ 240 $ 375 $1. Lainey Company has 400 units in its opening inventory. we calculate the average cost of inventory as follows: . They purchased these units for $1.1 Page 73 the units in opening inventory plus the first of the purchases we made through the year. Using this method. Opening Inventory January 3 purchase January 5 purchase COGS 400 units @ $1.015 Weighted-Average Method There are two versions of this method.
Under this system.470 (452) $1. v.20 each) January 5 Purchase (400 units @ $1.10 each) $ $400 240 500 330 $1. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1. we are keeping a running total in the inventory account.Introductory Financial Accounting.070 1.470 Units 400 200 400 300 1.1.25 each) January 19 Purchase (300 units @ $1. Subsequently. when we make a purchase we debit the inventory account for the amount of the purchase. . whatever the unit cost is at the time of a sale.13077/unit = $1. then that is the unit cost used to determine the COGS for that sale.300 Average unit cost = Cost of Goods Available for Sale/Units Available for Sale = $1. that is the unit cost after the last purchase previous to the sale.470/1.13077/unit Ending Inventory = # units in inventory x unit cost = 400 units x $1.1 Page 74 Cost of Goods Available for Sale Opening Inventory (400 units @ $1.13077/unit = $452 COGS = # units sold x unit cost = 900 units x $1. Unit Cost = Cost of all goods on hand/number of units on hand.300 units = $1. As such.018 Alternatively. The moving weighted-average system of inventory valuation takes this into account.018 Moving Weighted-Average – Perpetual Systems You will remember that under a perpetual inventory system.00 each) January 3 Purchase (200 units @ $1. the average unit cost is recalculated every time a purchase is made.
1 Page 75 Example – On January 1.10 each Sold 200 units Remember.Introductory Financial Accounting. under this system we recalculate the unit cost each and every time we make a purchase.00 each.140 342 3 1.20000 1.022 . Lainey Company has 400 units in its opening inventory.140 / 1.000 3 Unit Cost = $672 / 600 Cost of goods sold is equal to the cost of goods sold for the two sales: $798 + 224 = $1. v.25000 1.00000 $400 1.000 300 600 400 Unit Cost Total Cost $1. They purchased these units for $1.066671 640 2 1.070 1.022 Alternatively. Unit Cost = Cost of all goods on hand/number of units on hand. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 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. Throughout the period.470 (448) $1.14000 1.20 each Purchased 400 units @ $1.12000 Unit Cost = $640 / 600 Unit Cost = $1.25 each Sold 700 units Purchased 300 units @ $1.10000 1.14000 1.12000 672 448 Units 200 400 (700) 300 (200) Unit Cost $1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.1.
000 – 4. First of all. commissions of 10% would have to be paid to the sales team on any sale of this inventory.1. Show the journal entry to record the proper carrying value of the inventory. the accountant determines that they could sell this inventory for $40. This account operates much like the Allowance for doubtful accounts in that it gets adjusted to the desired balance at year end. the credit will be to income. Furthermore. The net realizable value of this inventory is: = Selling Price – Commission = $40.000. The net inventory balance that will be reported on the statement of financial position is $50.000 to bring it to a zero balance. the analysis reveals that no allowance is required. Market value is defined as the net realizable value of the inventory – the sales price of the inventory item less any costs incurred to sell it.000 X 10%) = $40. is showing an ending inventory balance of $50. then the allowance will be debited by $14. This rule ensures that companies will not overstate their inventory balances by keeping on record at cost inventory which may have decreased in value in the marketplace.000 – 14. We do this by creating a contra account to inventory called ‘Allowance for decrease in value of inventory’.000 = $36.Introductory Financial Accounting. next year.000 Note that the Inventory Loss account will appear on the Income Statement and be registered as a loss for the company in this period.000 – ($40.000. If. then the inventory must be written down to market value. If the market value is less than cost. .000. v. Inventory Loss Allowance for decrease in value of inventory 14.000.000 = $36.000 At present. Example –VenTure Ltd. we must determine that the inventory’s net realizable value. At the balance sheet date.1 Page 76 Application of Lower of Cost or Market Rule At the balance sheet date a company must compare the aggregate cost of its inventory to its aggregate market value. the inventory account has a balance of $50.000 14.
000 x (1 – 40%) = $1.000 Example – The Gennissen Company’s inventory were destroyed by a fire and you need to estimate the ending inventory.000 The estimated ending inventory is: $350.1. If we did not have the COGS number.000 350.000 and Gross Profit is $400.000 x 75% = $900.000.000 x 60% = $600. the Gross Profit Ratio = 40%.200.000 x (1 – 25%) = $1.000 $1. then we can estimate COGS as follows: COGS = Sales x (1 – gross profit ratio = $1.900.000 Purchases .1 Page 77 Gross Profit Method The Gross Profit Method of inventory valuation is used to estimate inventory when other data is not available to use one of the previous methods discussed.000.000 400. You are given the following information: Sales to the date of the fire Opening inventory Purchases to the date of the fire Gross Profit Ratio The estimated cost of goods sold = $1. for whatever reason.000.200.000 If Sales are $1. Example – Assume the following: Sales Cost of Goods Sold Gross Profit 1. To understand the application of this method.000 Ending Inventory = $310. v. but we did have the Gross Profit Ratio.000.000 Opening Inventory + 860.000 860. we could estimate COGS by using the following formula: Gross Profit = Sales x Gross Profit Ratio = $1.Introductory Financial Accounting.000 100% 60% 40% In the above example. we must first understand how to calculate the Gross Profit %.000 x 40% = $400.000 600.000.000 25% .000.200.
000.000 to suppliers and incurred $25. v. included an adding error in the inventory count that resulted in ending inventory of $1. discovered that a $6.400. 20x4. financial statements.000 worth of inventory and took advantage of purchase discounts amounting to $6.1 Page 78 Problems with Solutions Problem 4-1 – Multiple Choice Questions 1. After completing its inventory count and making the appropriate adjusting journal entries. financial statements of Confu Ltd. b) Inventory is understated by $6. b) Assets would be understated by $200.000 c) $515. d) Owners’ equity would be understated by $200. Which of the following statements is true with respect to the impact of this error on the December 31.000 in shipping charges on merchandise purchased during the period.000. 20x8? a) $478.000. The December 31.000. c) Cost of goods sold would be understated by $200. During the year the company purchased $500.000.000.000 instead of the correct balance of $1. 3. 20x8. d) Shareholders’ equity is overstated by $6.000. c) Shareholders’ equity is understated by $6. Ltd.000.000.000. a) Liabilities would be overstated by $200.000. Owl Enterprises had merchandise inventory on hand amounting to $60.000 b) $503. the company returned merchandise costing $10.Introductory Financial Accounting. In addition. A year-end inventory count revealed merchandise on hand in the amount of $66. What was cost of goods sold for the year ending December 31.000 d) $523.1. 20x4.000 2.000. Fri.000 computer purchased for the chief financial officer on December 27 had been recorded incorrectly as an inventory purchase.600. Which of the following statements correctly describes the effect of incorrectly recording the computer purchase on the financial statements? a) Inventory is overstated by $6. On January 1. .
all of which were made on credit with terms 2/10. n/45. The company uses a perpetual inventory system. c) Income for 20x9 is understated by $15.000. The customer received the goods on January 6. Required – Prepare the journal entries required to record the above events and transactions. The sale was recorded by Czech on January 2. 20x8.000. 20x9.000. v. e. shipped goods to a customer on December 30. a shoe wholesaler. d) Revenues for 20x8 are understated by $57.000 during the month with terms 1/10. Cozy sets the selling price on its shoes so that the cost of sales is equal to 70% of the selling price. FOB destination. One customer returned goods with a sales value of $500 and was issued a credit note. e. All other sales made during the month were collected in the month with all customers taking advantage of the sales discount offered. b) Income for 20x9 is overstated by $42. Sales totaled $80.000. CIF destination. 20x9. e. Merchandise was purchased at a cost of $50. Problem 4-2 The following summarized transactions relate to Cozy Co. e. Czech Ltd.000.200.Introductory Financial Accounting. The selling price of the goods was $57..1 Page 79 4. n/30. Czech had paid $42. for the month of July 2006.000. Transportation out paid on delivery of goods sold during the month equaled $1.000 for the goods and uses the periodic method to account for its inventory. . Which of the following statements with respect to this transaction is true? a) Income for 20x8 is understated by $42. e. All of the merchandise purchased during the month was paid for with Cozy taking advantage of the purchase discount offered.1. FOB Shipping.
1. Beginning Inventory/ Purchases 30 @ $10.000 Price/Cost $12 18 30 23 33 .000 2. Problem 4-4 The following information concerns one of a company’s products. Calculate the cost of ending inventory for May. b.00 = $ 300 60 @ $11.410 70 $ 1. Required – a.00 = 420 50 @ $22. assuming a FIFO cost flow system is used. Calculate the cost of ending inventory for May. first-out (FIFO) cost flow method is used.000 2.100 125 $ 1.500 Date May 1 May 5 May 14 May 21 May 29 Totals Sales Beginning inventory Purchase Sale Purchase Sale 20 @ $20. assuming a firstin. the Hawkeye: Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Required – Calculate the value of the ending inventory assuming the company uses: (a) (b) periodic FIFO perpetual moving average Transaction Beginning Inventory Purchase Sale Purchase Sale Quantity 1.00 = 1. v.50 = 690 35 @ $12.000 2.1 Page 80 Problem 4-3 Anvil Rock Company had the following inventory and purchases for the month of May.500 3.00 = $ 400 Anvil Rock uses a perpetual inventory system.Introductory Financial Accounting. Prepare the journal entries to record the May 29 sale on account. assuming a weighted-average cost flow method is used. c.
.000 58. Costs are assigned to inventory and cost of goods sold on a FIFO basis.000 8. Banff lost all of its hiking equipment in a fire in March 20x8.1 Page 81 Problem 4-5 On January 1. The store had an excellent Christmas season with the result that only 70 MP3 players were left in inventory on December 31. Required – Assuming the company uses a periodic inventory system.000 15. 20x5 1.000 units at $58 each $50. During 20x5 the company made the following purchases of MP3 players: February 21. The loss is to be determined based on the cost of the inventory in accordance with generally accepted accounting principles. the company’s insurance policy will cover 80% of the loss suffered in this fire. 20x5 October 15. Costs are assigned to inventory and cost of goods sold on a weighted average basis.000 52.Introductory Financial Accounting.000 440. the company was unable to pass on price increases to customers and thus maintained a selling price of $100 per unit throughout the year. After a very successful ski season and just as it was about to commence shipping its hiking equipment for the upcoming season. the Music Store had 400 MP3 players in inventory with a cost of $48 per unit. Corporate records disclose the following: Inventory — January 1.000 units at $52 each 1. calculate gross profit for the year ending December 31. 20x5. 20x5 June 15.000 480. (CGA Canada) Problem 4-6 Banff Mountain Equipment Ltd.000 Due to competitive pressures.000 units at $50 each 1. under each of the following assumptions: a.000 30. v.000 Banff normally realizes a gross profit of 30% on its sales. 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 $150.1.000 615. b. 20x5. It accounts for its inventory using a periodic inventory system.000 580. (Banff) sells skiing and hiking equipment to retailers. Fortunately. 20x5.
Whinr paid the balance due on the June 1 sale. Problem 4-8 The following information relates to Mejewel Ltd. The supplier provided purchase credit terms of 1/15. 20x7 Purchases — February 20. June 2 June 9 June 12 The company uses a perpetual inventory system.100 per unit.000 of the merchandise inventory claiming it did not meet its needs. inventory for 20x7: Beginning inventory. 20x7. 20x7. $30. 3.050 each During the year. Saret Ltd. (CGA Adapted) Problem 4-7 During June 20x8. 20x7 20 units @ $900 each 440 units @ $950 each 200 units @ $1.000 on account.Introductory Financial Accounting.000 of merchandise on account with credit terms of 2/10. The company uses a periodic inventory system. n/60. Calculate the cost of goods available for sale. Calculate December 31.000. Ending inventory consisted of 60 units. Required – Prepare journal entries for the above transactions.1 Page 82 Required – Calculate the net loss from the fire. Whinr returned $10. Saret purchased merchandise inventory costing $42. performed the following transactions. the company sold 600 units at an average price of $2. 20x7 Purchases — June 7. The cost of the merchandise inventory sold was $15. Show all your calculations. 2. inventory value using the Weighted Average . taking advantage of the sales discount. Show your calculations. n/30. June 1 Sold Whinr Ltd.000. v. inventory value using the FIFO inventory pricing method. Required 1. January 1.1. Calculate December 31. Show all your calculations. The cost of the merchandise inventory returned was $5.
200 credit memorandum from a supplier on defective merchandise Toyjoy had purchased and returned.000 and a count of inventory on December 31. revealed merchandise inventory on hand of $30. amounted to $48.500. iii) iv) Required a. Prepare a schedule of the cost of goods sold section of the income statement.Introductory Financial Accounting. n30. 20x7. The payment of $48. Toyjoy had not yet paid for the merchandise. 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. Received a $1. Cash payments on merchandise purchased from Patel Inc. v.000 under credit terms of 3/15. Toyjoy paid $3. FOB shipping point. n30. Briefly explain the benefits. 20x7. i) ii) Purchased merchandise on account from Hirwin Toys for $80. for the month of December 20x7. you have made it a policy to ensure that all purchase discounts are taken advantage of. (CGA Canada adapted) Problem 4-9 The following is a summary of selected transactions for Toyjoy Ltd. which has a negative impact on the company’s cash flow.1.1 Page 83 inventory pricing method. which was paid within the discount period of 3/15. Show all your calculations.000 in cash for freight charges on merchandise purchased during the month. b. The company uses the periodic inventory method and the gross method of recording purchases.500 represented payment of a $50.000. amounted to $150. (CGA Canada) c.000 credit purchase. assuming merchandise inventory on December 1. Prepare journal entries for each of the above summarized transactions. As the new controller. .
a company received.000 worth of goods which were in an off-site storage location. ii) iii) Required For each error. 20x7 inventory count.000.1 Page 84 Problem 4-10 The following is a list of inventory errors which occurred in 20x6. Assume the companies involved used a periodic inventory system and treat each situation independently. for use by the sales manager was incorrectly accounted for as an inventory purchase. There were no errors in the December 31.Introductory Financial Accounting. 20x6 inventory count. 20x6. then state so. The company failed to record the purchase of these goods until January 15. and for 20x7 Cost of Goods Sold.000 computer purchased on December 28. On December 28. indicate the dollar amount of the overstatement (O) or understatement (U) in 20x6 Cost of Goods Sold. A $6. 20x6 Retained Earnings. 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). 20x7. 20x6 Ending Inventory. and included in the year end inventory count. v. Error 20x6 Cost of Goods Sold 20x6 Ending Inventory 20x6 Retained 20x7 Cost of Earnings Goods Sold (CGA Canada) . If the error has no effect (NE). 20x6. Use the following format in answering this question. There were no errors in the December 31. i) A company failed to include in its December 31.1. inventory count $10. goods costing $5. 20x6.
20x7. Assume that the transactions occurred in the order given.1.000 6.40 9. perpetual inventory system . Luckily.000 $ 5.95 8. FIFO. (CGA Canada) $100. calculate the total dollar amount for ending inventory and cost of goods sold. the accounting records were kept in a separate location and the company was able to reconstruct the following information: Inventory at January 1.000 $ 60. v. a.Introductory Financial Accounting.00 Units Beginning inventory Purchase No. 2 Sale No.500 For each assumption given. FIFO.000 5.500 8. 20x7 Sales from January 1 to January 13 Purchases from January 1 to January 13 Gross profit percentage on sales Required – Calculate the cost of inventory destroyed by the fire. periodic inventory system b. perpetual system c. 1 (at $24) Purchase No. the Bamboo Brush store was destroyed in a fire. periodic inventory system d.1 Page 85 Problem 4-11 On January 13. Unit Cost $7. at January 13.000 7. Moving weighted average. 20x7 Inventory stored at another location.000 $ 10. 1 Sale No.000 40% Problem 4-12 The records of Egypt Company showed the following data relative to one of the major items being sold. 2 (at $26) Required 6. Weighted-average.
but are not limited to. We will only focus on the accounting for those long-term assets that are not investments in financial instruments. For example. These include.1 Page 86 5. how do we account for these expenditures.Introductory Financial Accounting. and 4. the shares or the long-term debt of another company).000 $500. any costs of transportation to get the asset to its location and any installation costs. The acquisition cost would be allocated to land and building as follows: Individual Fair Market Value per Appraisal Land Building $150. v.e. namely land. The essential accounting issues in accounting for long-term assets can be summarized as follows: 1. When on-going expenditures are made in order to keep the asset in operable condition.000 and $450.000 . equipment and furniture and fixtures. what constitutes the cost of this asset. copyrights and trademarks. 3. 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.000 450. land and building). buildings. When a long-term asset is acquired.000 for land and a building.1. These generally comprise of: • land. the cost of acquiring these assets needs to be allocated based on the relative fair market value of the assets acquired. the acquisition cost of asset. • buildings.000 % 25% 75% Allocation of Purchase Price $125.000 respectively. furniture and fixtures and intangible assets. An independent appraisal of the land and building are $150. • long-term investments in financial instruments (i.000 375. 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. How do we allocate the cost of long-term assets over the periods these long-term assets are put to use in the business. equipment. and • intangible assets such as patents.000 $600.e. 2. If you pay one price to acquire a group of assets (i. assume that you pay $500. How do we account for the disposal of long-term assets.
Introductory Financial Accounting. ii.1 Page 87 The journal entry to record this transaction would be as follows: Land Building Cash $125. or iv.000 375. We would therefore capitalize the cost of the new engine to the asset account. 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 useful life of the asset is extended. equal over its useful life. the rate of output of the asset is increased. The process by which this is done is amortization of long-term assets. There are three general approaches to amortizing capital assets: 1. The underlying assumption is that this asset generated revenues that are. we often incur ongoing expenditures in order to maintain the asset. the matching principle requires that the cost of long-term assets should be spread over the periods that the asset generated revenues. Straight-line method. This method allocates the cost of the asset over its estimated useful life in equal amounts. iii. v. would generally be considered to be repairs and would be expensed.1. then we would likely increase the useful life of the truck. However. A determination has to be made whether the expenditure is required to maintain the asset in operable condition. any costs to maintain a truck. For example. such as oil changes or brake replacements. the operating costs of the asset are decreased. Consequently. 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.000 $500.000 Accounting for on-going expenditures Once a long-term asset has been acquired. more or less. the expenditure enhanced the quality of the asset in a substantive way. The annual amortization expense is calculated as follows: (Cost – Salvage Value) / Useful Life . in which case the expenditure should be expensed to the income statement. For an expenditure to be considered a betterment it must meet one of the following four criteria: i. if we were to replace the truck’s engine.
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. Units of production method. 2. Under the straight-line method. v. For example.1. The underlying assumption is that the asset generates revenues based on usage. the annual amortization charge will be: ($300.125 The journal entry to record amortization expense will be as follows: Amortization Expense Accumulated Amortization $31. The annual amortization expense is calculated as follows: (Cost – Salvage Value) / Useful Life in units of production x Units of production expended during the period Example – Assume that an asset is purchased at a cost of $300.000 hours. 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. 1. i.e.1 Page 88 The cost less the salvage value is called the amortizable base of the asset. if you are told that an asset has a useful life of 10 years. i.125 .000 – 35.000. Declining balance method.125 $31.000. a truck rental company that bases rental charges on the mileage driven. The amortization rate can either be given or you may be told that the company uses the double declining balance (DDB) method of amortization. This assumes that the use can be measured.e. mileage. 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). then the straight-line rate is 1/10 and the DDB rate is 1/10 x 2 = 20%. The asset’s estimated useful life is 8 years and the estimated salvage value of the asset is $35.000) / 8 = $31. The asset’s useful life can also be measured in terms of total machine hours of 150. machine hours.Introductory Financial Accounting. 3. The rate used for DDB is twice the straight-line rate. We deduct the salvage value since we do not want to write down the asset below its salvage value.
393 40. 3. Recall that we do not depreciate the asset below its salvage value.750 126. .000 168.731 17.562 94.011 of amortization in year 8.000 168.045 Amortization Expense @ 25% $75.750 126. Under the declining balance method.000 hours = $1.000 hours x $1. The net book value at the end of any given year can be calculated directly as follows: Original Cost of Asset x (1 – a)n Where a = amortization rate n = number of years since acquisition For example.393 40. v.000) / 150.348 5.011 or the amortization amount needed to bring the net book value down to the asset’s salvage value.1 Page 89 2. then the amortization charge would be 18. Therefore. the amortization charge per hour would be: ($300.922 71. 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.1.Introductory Financial Accounting.191 53. Under the units of production method. the net book value at the end of the 6th year is: $300.7667 = $31.801.756 = $53.000 – 35.922 71.393.640 23.000 Year 1 2 3 4 5 6 7 8 Note that the year 8 amortization is not equal to $40. Note that we will assume double declining balance amortization at the rate of 1/8 x 2 = 25% per year.7667 per hour.000.798 13.045 Net Book Value End of Year $225.191 53.000 x 0.000 56. If we had taken $10.011. the amortization charges for the 8 years will be as follows. Net Book Value Beginning of Year $300.250 42.562 94. the amortization taken in year 8 is the lesser of the calculated amortization of $10. Assume that the total number of hours of use in the first year is 18.188 31.045 35.000 225.045 x 25% = $10.
At the time.000 $100. The difference will be equal to the gain or loss on disposal. The asset’s useful life was expected to be 10 years and the salvage value was estimated to be $20. The asset is sold at the end of 20x9 for $100.000 250.000) / 10 = $23. the changes in estimates are applied prospectively from the date of the change in estimate onwards.000) $89. an asset costing $100.000 $250.000 – 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 Changes in estimates If the estimates of the useful life and/or the salvage value of an asset change subsequent to its acquisition. .Introductory Financial Accounting.000 11. The net book value of the asset at the end of 20x9 is: Original cost Less Accumulated amortization ($250.000 was purchased on January 2. For example. assume that an asset was purchased on January 2. we compare the net book value of the asset sold to the proceeds on disposal. Assume straight-line amortization.000 (161. For example. v. 20x3 for $250. 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 $10.1 Page 90 Disposals of Long-Term Assets On the date of disposal.000.000. 20x1. In 20x5.000 89.000.1.000.000 $11. the asset’s useful life was expected to be 10 years with an estimated salvage value of $20.000 161.000.
• patents – a legal right ensuring the company’s exclusive right to a product or process.000) / 10 = $8.e. you cannot touch them or see them) and yet they represent costs incurred that meet the definition of an asset. For example. they are expected to provide future benefits. assume that a patent is granted to a company at a cost of $100.000.000 (32.e.1 Page 91 The net book value at the beginning of 20x5 is: Original cost Less Accumulated amortization ($100.000) $68.000/year x 4 years $100. Note that only expenditures incurred by the company can be capitalized as intangible assets. Consequently.273 per year Intangible Assets Intangible assets are those assets that do not possess a physical quality (i. Internally developed intangible assets cannot be capitalized on the Statement of Financial Position. the trademark ‘Coca-Cola’ was never purchased by the Coca-Cola Company but rather. The patent’s legal life is 17 years but it is expected that emerging technologies will make this . location or superior products. musical compositions and works of art. For example. Annual amortization charges for 20x5 and future years will be: (68. you will not see the value of its trademark listed as an asset. • franchises – the exclusive rights to sell products or perform services. i. v. Examples of intangible assets are: • trademarks – a name or symbol that identifies a company or a product.000) / 11 remaining years = $5. This need not coincide with the asset’s legal life. if you look at Coca-Cola’s Statement of Financial Position.Introductory Financial Accounting.000 This net book value will then be amortized over the remaining useful life of the asset. • copyrights – the protection of writings.000 – 20.1. was developed internally. typical within a certain geographical area • goodwill – the added value of a business attributable to factors such as reputation. The accounting for intangible assets depends on whether these assets have limited or an unlimited life.000 – 10. Intangible assets whose life is limited should be amortized on a straight-line basis over their estimated useful lives. are the result of a past transaction and are under the control of the company.
Intangible assets whose life is unlimited (i.1. If the fair market value is lower than book value and is not expected to recover.Introductory Financial Accounting. some franchises.1 Page 92 patent obsolete by the end of the 5th year. goodwill) are not amortized but instead subject to an annual impairment test.e. we would amortize the patent over 5 years. the book value of the intangible asset is compared to its fair market value. v. That is. 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. In this case. .
The room was completed on June 30.000. At the beginning of 20x8.000 150.00 d) $8.200 d) Income will decrease by $632 e) Income will decrease by $600 .Introductory Financial Accounting.000. Brown and Das obtained a patent for their earnings forecasting software at a cost of $80. and was used as office space commencing July 1.000.705. v. A small room was built on the back of the building at a cost of $12.000 10 years $5.500 d) $20. The patent is valid for 17 years and has an estimated life of 10 years. 1998. What is the amount of depreciation expense on the building for 20x8? a) $4.88 b) $5. the situation was as follows: Building cost Accumulated depreciation — building Estimated remaining useful life Estimated salvage value at end of useful life $200. What is the impact of this expenditure on income before taxes for 1998? a) Income will decrease by $12. 2.1 Page 93 Problem with Solutions Problem 5-1 – Multiple Choice Questions 1.000 Jasper uses the straight-line method for calculating depreciation expense.00 Use the following information to answer questions 2 and 3: The Jasper Company has an old building which requires frequent repairs and constant maintenance. Sinha.000 and spent $5.000 3.1.000 in legal costs defending it.000 c) Income will decrease by $1.000 b) Income will decrease by $6.500.00 c) $8.500 b) $5.000 c) $19. What will be the annual amortization expense for patents? a) $4.
It has an estimated 4-year life.Introductory Financial Accounting.500 b) $72.000 with an estimated life of 4 years and a salvage value of $5. During 20x6. Stone and Wall Company bought equipment for $100.000 c) $5.015. During 20x7. Ireland Company purchased a machine that cost $20. Costs of $15.750 d) $65. If the company were to use the units-ofproduction method instead of the straight-line method.500 b) $5. On January 1. and a 10% residual value. Yaari and Yosha Company bought a machine for $85. what would be the balance reported for the net book value of the equipment at December 31. 20x7.000 7. 20x7? a) $40. On January 1.000 5.500 productive hours over the next 4 years.000 c) $1.000. 20x7. production was 20.1. The machine is expected to be used for a total of 1.000 units.000. 20x6? a) $67.000.000 commission was paid to a real estate agent.000 c) $77. what would be the balance reported for the net book value of the machine at December 31.735 6.500 d) $80. using the straight-line method. On July 1.000 units.000.160 d) $5. v. The Amortization expense for 20x6. To acquire the land.500 c) $63.000 . What is amortization expense for 20x7 under the productive output method? a) $4. 20x6.060. The equipment is expected to have a 5-year life and produce a total of 80.000 d) $1.000.000.000 b) $42. At what amount should the land be reported on the balance sheet? a) $1. If the company uses the double-declining-balance method for amortization. it was used 430 hours.1 Page 94 4. a $60.075. A land site was acquired for $1.000. was $18.000 b) $1.000 were incurred to clear the land in preparation for construction of an office building.
purchased a van to transport guests between the resort and a nearby airport. At the end of its useful life. the total life of the van would only be 4 years instead of the original estimate of 5 years. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. as a result of heavy usage. 20x7. Prepare the adjusting journal entry to record amortization expense for the year ended December 31.000 at the end of its useful life. assuming the company uses the doubledeclining-balance method of amortization. 20x7 and 20x8.Introductory Financial Accounting. The van cost $65. 20x7. v. d. management felt that the van could only be sold for $2.1 Page 95 Problem 5-2 On January 1.000 and was expected to have a useful life of 5 years or 200. c. In addition. During 20x8. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. 2008. it was estimated that the van could be sold for $5. assuming the company uses the units-of-production method of amortization and that the van was driven 55. assuming the company used the straight-line method of amortization. management of the company decided that.000 kilometers during the year. 20x7. .000 kilometers. assuming the company uses the straight-line method of amortization.1.000. Required – a. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. b. Resort Ltd.
Routine repairs costing $600 were made to the equipment.1. Recorded amortization expense. 20x3 Aug 31. 20x8 Required – Record all of the above transactions assuming that the company uses the straight-line method. 20x3: Jan 2. This increased the quality of the asset’s output but did not change its useful life or the estimate of salvage value. . 20x7 Dec 31. 20x4 Dec 31.Introductory Financial Accounting.000 were made to the equipment. Dec 31. 20x3 Purchased equipment for $60. Recorded amortization expense. The original estimate of salvage value holds. Recorded amortization expense. Expenditures totaling $2. Recorded amortization expense. This increased the useful life of the asset by three years.000. 20x6 Sep 30. v.000. The estimated useful life of the asset is expected to be 5 years with a $10. 20x4 Apr 31.000 salvage value. Sold the asset for $25. The equipment was completely overhauled at a cost of $20. 20x7 Aug 31.000.1 Page 96 Problem 5-3 The Connor Company had the following transactions over the life of an asset purchased on January 2. Recorded amortization expense. 20x5 Dec 31. 20x5 Dec 31.
adapted) $ 50.1. Prepare the journal entry to record the amortization expense on December 31.000. 4. bought a state of the art numerically-controlled lathe from GPL by trading in a dissimilar asset and paying $90. MNO Co. During the installation there was minor damage to the frame. 2.500 Problem 5-5 On July 1.000.000 38.000 15. 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. Assume a straight-line method of amortization. Market value of old asset on June 30. 20x6. and the repair cost for it amounted to $500.000 cash. 20x6. 20x6. 20x8.000 cash.500 108. Prepare the journal entry to record the asset acquisition on July 1. Prepare the journal entry to record the sale of the machine on January 1. 20x7. 20x7 Required – Prepare the journal entry to record the purchase of the lathe. in good form. 3. Required – 1.000. On January 1. how the machine will be presented in the assets section of the balance sheet at December 31. Show. which included freight charges of $1. 20x7 Price of new lathe. 20x8. the machine was sold for $20.000 to install the machine. ABC Ltd. 20x7. v. (CGA Canada. ABC had to spend $2. purchased a machine at a cost of $25. The following additional information is available: Original cost of the old asset Accumulated amortization at June 30. (CGA Canada) .Introductory Financial Accounting.
20x6. the estimates were revised. 12.000 units were produced. 20x7. In 20x7. Determine the amortization expense for the year ending December 31. management felt that the total estimated life of the equipment would be 5 years with a total estimated production of 50. No change in estimated residual value was anticipated. assuming the company uses the: i) straight-line method ii) units-of-production method c. Use this information to answer parts (a). 20x8.000 units 9. on January 1.000.000 units.Introductory Financial Accounting. Accordingly. 20x7. Prepare the journal entry to record the sale assuming the company uses the: i) straight-line method ii) units-of-production method $120. 20x6. (b).1 Page 98 Problem 5-6 The following information pertains to the equipment acquired by Xie Co. On January 1. v. due to a preventative maintenance system that had been implemented. assuming the company uses the: i) straight-line method ii) units-of-production method On January 1.000 4 years 40. the equipment was sold for $75. Determine the amortization expense for the year ending December 31.1. . Cost Estimated residual value Estimated life Estimated production 20x6 actual production Required a. and (c).000 $ 20.000 units b.
000 to pay for the machine within the discount period and take advantage of the cash discount. 20x6. 20x3. Assume that the machine is sold on January 1. v. The following information relates to this machine: Invoice price Credit terms* Customs and duty costs Preparation and installation costs $ 140.000 on this loan during 20x3.800 The company borrowed $150. b.000 $ 14. 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. c. German intends to use the machine for 8 years and hopes to sell it for $15. * this means that is we pay within 10 days. n/30 $ 5. In this way. Required – a. It incurred interest costs of $12.000 2/10. 103 on January 2.1 Page 99 Problem 5-7 German Ltd. 103 has a physical life expectancy of 10 years with a salvage value of zero. for $100.1. purchased Machine No.Introductory Financial Accounting. Machine No.000 cash. we have to pay the full invoice price within 30 days. income can be minimized in 20x3. . What amortization method could be used to abide by the president’s request? Is this method acceptable under generally accepted accounting principles? Explain. we get a 2% discount. However. Prepare the journal entry to record the sale assuming the straight-line method of amortization was used. Compute amortization expense for 20x3 using the straight-line method. Otherwise.000 at that time.
Introductory Financial Accounting.000 to the new period. a company has a fiscal year end of March 31st.000/day) that were performed in the period but not paid for. which represents the three days of work (3 x $1. but have not been paid. $7. The entry would be: Office Supplies Accounts Payable 2. a company purchases office supplies from a supplier for $2. services or supplies for the operation of the company. the entry would be: Wage Expense (4 days x $1.000.000.000 with the terms set at 6% interest due annually. We have already covered several of these when we did adjusting entries.000 This way. assuming the employees worked the full 7 days in the week. If the average daily wage expense is $1.000 2. we will go over the main types of current liabilities. . The principal must be repaid equally over 5 years. however.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). v. when the payment is made for the full week.000 on account. Employees were last paid on March 28th.000/day. a company takes out a loan on January 1st for $10.1 Page 100 6.000/day) Wages Payable (to remove the adjusting entry) Cash 4.000 to last period and $4. For example. On April 4th. the only time we see this account set up is at the end of a fiscal period when an adjusting entry must be made. whichever is longer. Typically. Interest and Principal payments are due December 31st of each year. the adjusting entry made March 31st would be: Wage Expense Wages Payable 3.000 Wages/Salaries Payable – these are wages/salaries that are due to employees for hours worked. For example.000 7. and will not be paid again until April 4th. Accounts Payable – these are liabilities that were incurred to purchase goods.000 3. 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. $3.000 3. For example. Current Liabilities A current liability is one that will be settled within one year or the business cycle of the firm. it is split appropriately and applied to the correct periods.000 Note that we are debiting the Wage Expense for $3.
The employer matches the employee’s contribution for CPP.000.4 times the employee deduction for EI.500 + 8.500 .000. For example. $7. and a balance in the Long-Term Liabilities section of $6. Not only must the company submit the employee’s portion.000 10. EI. 27. Employee Withholdings Payable – Employers are responsible for deducting income taxes.500 57.Introductory Financial Accounting.500. The entry to record payroll for the month would be: Wages Expense Employee Withholdings Payable ($27.000 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: Long-term debt Interest Expense Cash 2. CPP. and pays 1. we would split the long-term debt as follows: Current liabilities Current portion of long-term debt Long-term liabilities Long-term debt $2. Deductions for each month are due on the 15th day of the following month. v.000) Cash 100.1. but they also must submit the employer portion of CPP and EI.000 8.000 + 7.000 600 8. the journal entry would be as follows: Cash Long-term debt 10. 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. and the employer ducted the following amounts from its employees’ cheques: Income Taxes.000 On the Statement of Financial Position. and that which is due later than one year. the interest expense for the year would be $600 ($10.000 42. CPP and EI from employee’s paycheques.000. This ensures accurate reflection of the financial obligations of the company on the Statement of Financial Position. Wages total $100.000. At December 31st.000 x 6%).1 Page 101 When the company takes out the loan.000. $8.
700 Note that CPP Expense and EI Expense could be tracked separately. If a company knows that there will be a liability. then it has to be disclosed through a note in the financial statements.200 Contingent Liabilities One of the guiding principles of accounting is the idea of conservatism. or simply lumped in with Wages Expense. On the 15th of the next month. the company would record its portion of payroll expenses due to the government: CPP Expense ($7. Your lawyer says that previous case law in similar matters is not in your favor and you will likely lose and the judge will award the full amount to the plaintiff.40) Employee Withholdings Payable 7. v. but have not yet come to be. but it does not have to be recognized. One of the resulting GAAP rules that stems from this idea of conservatism is the establishment of contingent liabilities.200 18. The journal entry would be: Unrecognized Loss on lawsuit Contingent Liability – lawsuit 400. A contingent loss should be recognized only when: a) it is likely that a future event will confirm the loss. For example. as done above.700) Cash 61. The justification is that the financial statements should not be misleading or give false hope or information to any reader.500 x 100%) EI Expense ($8.000 400.000 x 1. This principle states that.1 Page 102 At the same time.500 11.000. the company pays the government: Employee Withholdings Payable ($42.000 .1.500 + 18. and therefore a loss of some kind to the company. You would record or recognize the FULL amount.Introductory Financial Accounting. If a contingency meets the first criteria but not the second.200 61. Contingent liabilities are those liabilities which are likely to be incurred in the future. and b) the loss can be reasonably estimated. then they must disclose it when they know about it. 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. your company is being sued for $400.
Total Sales for the year totaled $300. but you would not have to record the loss or the liability. that have been incurred but not paid. Another example of matching has to do with warranties.000 12. the company pays $10. but it also sets up a liability that will be drawn down as actual expenses are incurred over the life of the warranty. The warranty expense is normally determined through evaluating historical data and coming up with a % of sales that represents the future warranty costs. your lawyer felt you would lose. Warranties & Premiums Another of the guiding principles of accounting is the matching principle.Introductory Financial Accounting. a company sells vacuum cleaners that come with a 2-year warranty. Continuing on with the same example. is 4% of sales. This principle is the one that guides us when making adjusting entries at the end of the year with regards to expenses. all expenses related to those revenues should be recorded at the same time. in the same scenario. You would simply write a note in the financial statements disclosing the lawsuit. v. then you do not have to do anything because you do not meet either of the criteria for recording a contingent liability. The journal entry would be: Warranty Liability Cash/Inventory/Wages 10.000. but there was no legal precedent for the amount that would be awarded and therefore are unable to estimate the future loss.000 x 4%) Warranty Liability 12. your lawyer felt you would win.000 10. such as wages. If. in the same scenario.1. let’s assume that during the next year. For example.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. in order to adhere to the matching principle. 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. we must record the associated expense in the period when the .000 to repair various vacuum cleaners that are under warranty. The journal entry to record warranty expense for the year would be: Warranty Expense ($300. Again. This principle states that for all revenues generated in a specific period.000 This entry not only matches the expense to the period when the revenues were generated.1 Page 103 If. The company estimates that warranty expense. When a company sells a product that has a warranty. and the fact that you were likely to lose. on average.
pensions and other more complicated longterm liabilities in this section. they receive 1 coupon. The premise behind this is that a dollar today is not worth the same as a dollar received tomorrow. Long-term Liabilities Long-term liabilities are defined as liabilities that would not be reasonably expected to be liquidated within a year. We will instead focus on long-term bonds. We will not get into a discussion of leases. or a year from now.000 coupons x 40% = $32. the journal entry would be: Premium Expense* Premium Liability * $800. you have determined that only 40% of your customers will redeem their coupons.000 32.000 to be received in 5 years from now at an interest rate of 6%. Based on past redemption data. The farther in the future you are to receive the funds. for every $10 your customers spend. The combination of these two facts results in a dollar today being worth more than a dollar received in the future. we are trying the calculate the present value of $1. one of the most frequently used financing instruments in business. .000/$10 = 80.Introductory Financial Accounting. v. 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. you are taking on the risk that the money might not be repaid at all.1 Page 104 original sale is made. The format for solutions using a financial calculator is as follows: N 5 I/Y 6 PV X PMT FV 1000 Enter Compute In the above example. the premium liability account is drawn down. Furthermore. To record the premium liability at the end of the year.1. Your sales for the year were $800. For example. longterm leases and pension obligations.000. If you are going to be receiving money in the future. then you are missing out on the opportunity to invest that money today and earn interest on it.000 32. the greater the “discount” or decrease in the dollar value will be. They can then redeem 10 coupons for a watch valued at $10.000 Whenever coupons are redeemed. These typically include long-term bonds. or ten years from now. notes payable.
000.An annuity is defined as a series of identical cash flows that end at a specified time. press CPT and the TVM register you are attempting to solve for.472. Calculating the Present Value of a Future Single Sum . in this case PV the answer provided is -747. how much of the $1. the amount would grow to $1.000 per year for the next 30 years.000 from your favorite uncle.542. enter the numbers above in the TVM memory registers to solve.000. what is that $10.Introductory Financial Accounting. v.000 worth in “today’s dollars”? N 5 I/Y 6 PV 7.000.1 Page 105 With the Texas Instruments BA II Plus.58 PMT FV 10000 Enter Compute Present Value of an Annuity .1.000 from your mother 5 years from now. you need to do the following: set the calculator to accept one payment per year as follows: 1 2ND N You only need to do this once. If i=7%.26 today (money out of pocket and therefore the negative sign) and invest it for 5 years at 6% compounded annually. 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.47 PMT 60000 FV Enter Compute . You want to be able to withdraw $60.000 will you have to set aside in order to set up this annuity? N 30 I/Y 7 PV X= $744.26. This means that if you were to invest $747.Assume you are going to receive $10. If the current and expected future rate of return is 6%. Assume you inherit $1.
1 Page 106 Annuity Payment Calculation . The manufacturer is offering you financing at a rate of 6. then in order to sell your bonds you will have to sell them at less than face value because investors would be willing to pay face value if they could get a return of 6%. and therefore is willing . If the YTM > Coupon Rate.Introductory Financial Accounting. This is because the buyer of the bond gets a higher return by investing in the bonds.000 in the bank. The market takes this into consideration.5 PV 80000 PMT X= $30. if you issue a bond with a coupon rate of 5% and the YTM is 6%.000. For example.You have retired with $675.992. What is your monthly payment to the manufacturer going to be? N 3 I/Y 6.06 FV Enter Compute Bonds A bond is a financial instrument that is a contractual obligation by a company to pay a stated amount of money at some stated time in the future. Coupon – the amount of semi-annual interest payments to be made on the bond. v. If the YTM < Coupon Rate. how much can you withdraw each year? N 25 I/Y 7 PV 675000 PMT X= $57. Coupon rate = Annual Coupon Payments/Face value Yield-to-maturity (YTM) – the rate of return that bondholders expect on the bond given its risk. Also called the market rate. It is rare that the yield-to-maturity rate and coupon rate are the same.10 FV Enter Compute Your company is purchasing a piece of equipment costing $80. Coupon Rate – the stated interest rate to be paid on the face value. 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).206. as well as make interest payments on the stated amount. 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. Assume the rate is 7%. then the bond will sell at a discount. You expect to live another 25 years. then the bond will sell at a premium.5% on a 36-month loan.1. and the bonds will sell for a value less than the face value of the bond.
829. This is less than the face value of $2. How much would be raised through this bond issuance? N 20 I/Y 3. we must adjust the other factors in the formula to a “6-month” basis. therefore it will have to be cut in to reflect the situation. The Coupon Rate = 5.000.000 is not our interest expense.829. However.5% $2.000 of bonds. or the amount that we would have received in proceeds would be equal to $1. not the number of years.451 1. 1.451. Example . We have already calculated that we will be writing a cheque for $58.000 to cover our coupon obligation.451 PMT 580002 FV 2000000 Enter Compute 1 2 YTM of 7% / 2 = 3. the YTM is normally expressed as an annual rate.451 .On January 1.000. every 6 months.1 Page 107 to pay more than face value for the bonds in order to reap this benefit. this $58. because PMT is equal to the payment made every six months. 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. Interest will be paid semiannually on June 30 and December 31.51 PV X= $1.000 coupon payment.Introductory Financial Accounting. v. In order to attract investors. The Present Value of the bonds. we have to sell our bonds at a discount. 20x8 you issue $2.000. N will equal the number of coupon payments left.8% is less than the market rate of 7%. 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.829. The PMT & FV remain the same. As such. Furthermore.829. YTM = 7%.000 x 5.8% and they mature in 10 years.8% x = $58.000. This is because our coupon rate of 5.1.
242 6.000. On December 31st. you would record the following journal entry: Interest Expense (1.000. the entry for interest expense would be: Interest Expense (1. the journal entry will be: Bonds Payable Cash 2. 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.829.000.835.000 . Continuing our example.000.451 x 7% x Bonds Payable Cash ) 64. This will be the amount used to calculate the interest expense on December 31st.000 Note that the $6.Introductory Financial Accounting. on June 30th. At the time of settlement.000 After all 20 interest payments have been made.000 2.482 x 7% x Bonds Payable Cash ) 64.451 + 6.031 6. the balance in the Bonds Payable account will have been written up to $2. v.829.031 58.301 credit to Bonds Payable increases the carrying value of the bond payable account to (1.301) $1.242 58.1.835.482.1 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. give or a take a few dollars for rounding. therefore.
v. 10 year 8% bonds priced to yield 6%. Issued $10 million face value. On January 1.000 iv) The bond was issued at a discount a) b) c) d) iv) only i) and iii) i) and ii) ii) and iv) . Which of the following items is not a contingent liability? a) Premiums offered to customers b) A risk of loss to uninsured property due to fire or other casualty c) Additional wages that may be payable on a dispute now being arbitrated d) Estimated claims under a service warranty on products sold 3. Which of the following statements is correct? i) The bond was issued at a premium ii) The interest expense for the year will be more than $800. 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. 20x7. Gallaghar Ltd.000 iii) The interest expense for the year will be less than $800.Introductory Financial Accounting.1 Page 109 Problems with Solutions Problem 6-1 – Multiple Choice Questions 1.
00 and 5 coupons must be presented by a customer to receive a premium.1 Page 110 4. 6. v.500 What is the estimated liability for premium claims outstanding at December 31. even though the amount of the loss cannot be reasonably estimated 5. 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.400 d) $18. Each premium costs the company $2. the following information is available: Packages Sold Premiums Purchased Coupons Redeemed 150. How should any liability for the warranty be reported? a) It should be reported as a long-term liability.Introductory Financial Accounting. (2) a oneyear operating cycle. The company estimated that only 30% of the coupons issued would be redeemed. d) It need not be disclosed. Assume that a manufacturing corporation has (1) good quality control.000 e) $20. 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. 20x8. 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. (3) a relatively stable pattern of annual sales. whereby it placed a coupon in each package of product sold. a company inaugurated a sales promotional campaign on June 30. In an effort to increase sales.600 c) $9. b) It should be reported as a current liability. For the 6 months ended December 31. the coupons being redeemable for a premium.300 b) $8. 20x8.000 10.000 .000 23.1. c) It should be reported as part current liability and part long-term liability. 20x8? a) $4.
000 22.500 coupons Problem 6-3 Company X provides a 3-year warranty on all of the products it sells. Required – Prepare all journal entries related to the warranty for the current year. You have been running this program for several years. In order to increase customer loyalty in this fiercely competitive environment you have started a coupon program. The warranty liability at the beginning of the year was $165. They can redeem 15 coupons for a $25 iTunes gift card. v.1. For each $10 your customers spend.000 and it is estimated that the warranty expense is equal to 5% of sales. What is the balance in the warranty liability account at the end of the year? .000 40.000 and actual costs incurred to service warranties during the year amounted to $130.1 Page 111 Problem 6-2 You run a computer repair company. 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. and data shows that approximately 55% of your customers redeem their coupons. then receive 1 coupon. Sales for the current year were $3.000.Introductory Financial Accounting.000.
20x1 is 8%. 4. Gamma Corporation issued bonds with a face value of $500. The company issues warranty agreements immediately upon the sale of an automobile. 20x7. The bonds mature in 15 years.200 5. Problem 6-6 The following is the general ledger account for estimated warranties of McNeil and Grace Ltd. for the year 20x7.5% coupon bonds on December 31.000 of 8. 3.000 and a coupon rate of 10%. v. 20x1 and the first two interest payments. 2. 20x6. 20x1. what is the estimated liability for future warranties? At December 31. Coupon payment dates are June 30 and Dec 31 of every year. The bonds pay interest semi-annually on December 31 and June 30 and are due in five years. Problem 6-5 The Kaplan Corporation issued $10.. what was the estimated liability for future warranties? (CGA Canada) . Warranty Liability Dr Cr $10. The yield to maturity on December 31 was 8%. What is the dollar value of warranty repairs performed in 20x7? What is the warranty expense for the year 20x7? At December 31.1 Page 112 Problem 6-4 On July 1.000 Opening balance Total credits during the year Required – 1.Introductory Financial Accounting.1. 20x4. automobile dealers. Required – Prepare the journal entries to record the issue of the bonds on July 1.800 Total debits during the year $6. Required – Prepare all journal entries with regards to this bond for the years 20x4 and 20x5.000. Assume that the going market interest rate for similar bonds on July 1. Assume that the Kaplan Corporation as a December 31 year end.
Ardalan and Baker Inc.171. c. 20 year. issued $1 million semi-annual. Show how the $1.1. three-year. The bonds were issued at a discount for $897. Prepare the journal entry(ies) to record interest expense for the period ending December 31.000 face value.000. 12% coupon bonds. d. Alpha Beta Ltd. 20x6. (CGA Adapted) Problem 6-8 On July 1.1 Page 113 Problem 6-7 GHI Company issued $500. uses the effective interest method to calculate interest expense on these bonds. Prepare the journal entry(ies) to record interest expense and coupon payment on June 30. 8% bonds. The bonds were sold at a yield of 8%.Introductory Financial Accounting. a. 9% bonds on January 1. The Interest Expense will be the same every year.000.000. (CGA Canada adapted) Problem 6-9 On January 1. and pays interest on July 1 and January 1. They were issued at a price of $1. 3. (CGA Canada adapted) . The Interest Expense for the 1997 year will be more than $80. Required – 1. b. 10-year. 4. Required Prepare all journal entries for the life of this bond issue. Prepare the journal entry to record the issue of the bonds at July 1. 20x7.000. Required If Adrdalan and Baker Inc. face value. to yield 10%. Interest on the bonds is paid semi-annually on December 31 and June 30. v. The cash outflow towards interest on the bonds will be more than $80. 20x6.171.591. indicate whether each of the following statements would be true or false. issued $1 million face value. 2. 20x7. 20x6. as the market rate was 10%. GHI’s year end is December 31. 20x6.591 was calculated. The Interest Expense for the 1997 year will be less than $100.
any cash remaining after all obligations have been settled revert back to common shareholders. Shareholder investments will result in the company issuing shares to the investors – these shares can take the form of preferred shares or common shares. Dividends become a liability of the corporation only when the board of directors declares them. 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. any dividend declarations are at the sole discretion of the company’s board of directors.1. meaning they never become due.000 $100. • upon liquidation of the company.e. If the book value per share is greater than the cash paid out to retire the shares. Contributed capital comprises of the investment made in the corporation by its shareholders. Shareholders’ Equity As mentioned in Chapter 1. Retained earnings represent the cumulative earnings of the corporation less any dividend distributions to its shareholders. a company cannot purchase its own common shares. Common shares can be issued for cash or any other asset. and • they are a perpetuity. it can be drawn down.000 cash. and then re-sell them). we credit an account called Contributed Surplus for the difference. v. then the journal entry would be: Cash Common shares $100. . The debit to the common shares account is equal to the weighted average book value per share times the number of shares retired. the journal entry would be: Land Common shares $250. If the book value per share is less than the cash paid out to retire the shares. if common shares are issued for $100.1 Page 114 7.000 $250. hold them. For example.000 If common shares are issued in exchange for a parcel of land whose fair market value is $250. Common Shares Common shares typically have the following features: • they provide the right to vote at annual meetings. the shares must be cancelled (i. Shareholders’ Equity is fundamentally made up of two elements: contributed capital and retained earnings.000 When common shares are repurchased.Introductory Financial Accounting. that is.000.
100 61.500.612) Contributed surplus Retained earnings Cash Aug 18 .000 x $18.000 Book Value per common share: = $18.800 61.000 186.000 x $16.500.150.000 Jun 16 Cash Common shares Common shares (10.000 shares outstanding Retained earnings The following transactions took place during the year: Jan 15 Mar 18 Apr 30 Jun 16 Aug 18 Issued 100.1 Page 115 • any remainder gets debited to Retained Earnings.000.1.500.500.000 7.000.000 common shares at a total cost of $260.000 Mar 18 Apr 30 Balance in common share account: = $15.091) Contributed surplus Cash 1 $2.500. 20x6 was as follows: Common shares.150.000.000.Introductory Financial Accounting.800 260.000 12.000 1.000 common shares for $2. 1.000.000 Retired 20. Example – The Noor Company’s shareholders’ equity section at December 31.500.500.000 common shares in exchange for land valued at $1.000 The journal entries to record the above transactions are as follows: Jan 15 Cash Common shares Land Common shares Common shares (20.000 cash Retired 10.000 Issued 250.000 = $16.000 $2.000.000 $15.000.000 1.500. v.000.000 + 50.000 common shares at a total cost of $280.000 + 100.000 = $18.000 common shares for $7.000.500.000 321.000 / 1.800 32.000 + 2.100 280.000 + 1.000 cash Issued 50.09 7.000 Number of common shares outstanding: = 1.000 = 1.
the corporation is under no obligation to provide a financial return to common shareholders.000 + 250.1.000 shares outstanding Preferred shares. 20x3.000 shares outstanding Retained earnings $35. Like common shares.000 Next. 100. 20x5 is as follows: Common shares. • like common shares. the preferred dividends for the year 20x6 must be paid: 100. First.600.000 shares x $8.200 Number of common shares outstanding: = 1. However. the preferred dividends in arrears for 20x4 and 20x5 will have to be paid: 100.000 10.1 Page 116 2 Balance in common share account: = $18.000 = 1. This means that if dividends are missed. • they carry a stated dividend per share. in most cases preferred shares are cumulative.380. Dividends become a liability of the corporation only when the board of directors declares them.000 = $18.000 – 20. any dividends in arrears due to preferred shareholders must be paid before any dividends can be paid to common shareholders.00 x 2 years = $1. v.150. cumulative. It is now December 1.00.500.000 Book Value per common share: = $25. any dividend declarations are at the sole discretion of the company’s board of directors.000 .000 = $25. they are a perpetuity.500.678.000.00 x 1 year = $800.Introductory Financial Accounting.000 – 321.000. that is.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).000 The preferred share dividends were last paid on December 31.000 shares x $8. 20x6 and management wants to pay a dividend of $5 per common shares.678. $8.800 + 7. Example – The Jarvis Corporation’s shareholders’ equity as at December 31.000.000.000 40.200/ 1. 1.380.
Any premiums paid on retirement of shares are also charged to retained earnings. If a shareholder owns 1.000.000. a 2:1 split means that the number of shares outstanding will double. .000 shares x $5 = $5. the stock may become unattractive to small shareholders who have to disburse larger sums in order to acquire shares of the corporation. For example.000 + 800.000 = $7. the dividend to common shareholders can be paid: 1.Introductory Financial Accounting. the following entry is made: Dividends payable Cash XXX XXX XXX XXX Retained Earnings Retained earnings represents the accumulated earnings of the corporation net of any dividends paid.000 shares as a result of the stock split resulting in a total of 2. All that happens is that the number of shares issued changes.000 Stock Splits When the stock price of a corporation is high.600. There is NO journal entry required when a stock split is declared.000 shares of shares before the split. 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. This will result in the share price dropping by half.000. In order to reduce the share price. v.000 The total dividend to be declared will be: $1.000 shares.000 + 5.1.1 Page 117 Finally. this same shareholder will receive an additional 1. the company will split the stock.400.
Introductory Financial Accounting.1 Page 118 The statement of retained earnings is as follows: Retained earnings. end of year $ XXX -XXX ±XXX -XXX $ XXX . v. beginning of year Premium on redemption of shares Net income (loss) for the year Dividends Retained earnings.1.
d) The number of common shares outstanding will be 250. Which of the following statements will be true when the stock split is accounted for? a) Retained earnings will be reduced by $4. c) The number of common shares outstanding will be 225.000.Introductory Financial Accounting.000.500.000. .1. b) Shareholders’ equity will increase by $3. v.1 Page 119 Problems with Solutions Problem 7-1 – Multiple Choice Questions 1.000. The shares were selling at $30 each when management announced a three-for-two stock split.000. XYZ Corporation has 150.000 common shares outstanding.
Hilary and Sam Corporation completed the following transactions: February 2 February 10 February 15 February 26 February 27 February 28 Issued 9. Issued 2. Declared cash dividends on the preferred shares.000.000 common shares. Record the transactions in journal entry form. to issue 10.000 shares to Sam in return for cash equal to the shares’ market value of $6 per share. Net income for the month was $56.1 Page 120 Problem 7-2 The articles of incorporation authorize Hilary and Sam Corporation. v.Introductory Financial Accounting.32 per share. Declared cash dividends on the common shares in the amount of $0. In its first month.000 common shares for cash of $12.000 common shares to Hilary and 12. Prepare the shareholders’ equity section of the Payne and Papineau Inc. a new company. 2. Required 1. Declared a 2 for 1 stock split.1.000.000 $6 non-cumulative preferred shares and 100. Issued 400 preferred shares to acquire a patent with a market value of $40. balance sheet as at February 28.000 .
000.000 and book value of $53. cumulative preferred shares. Declared and paid a $5. The convertible bonds were issued earlier in the year. Issued 1. e. During the first year of operations the following events occurred: a.00. v. Issued 1. Issued 1.1.Introductory Financial Accounting.000 were converted into 500 common shares. f. g. b. Issued 2. Paid the preferred dividend.500 common shares at $120 each. Declared a cash dividend on preferred shares. Required 1. Prepare the shareholders’ equity section of the Statement of Financial Position. c.1 Page 121 Problem 7-3 M-F Inc. is authorized to issue 100.000 for the year.000 preferred shares at $20 each. The equipment had a fair market value of $40.000 common shares at $115 per share. Provide the journal entries for each transaction above. Net income was $64.000 common shares and 50. $1.000. .000 preferred shares in exchange for equipment.00 common share dividend h. 2. d. Convertible bonds with a face value of $50.
just the integration of previously covered materials. the only materials in this chapter are the problems with solutions. Enjoy! .1 Page 122 8. 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. Therefore. v.Introductory Financial Accounting. There is no new material.1.
6. $1.000 1. 7.5% and the yield to maturity at the time the bonds were issued was 6%. 20x20. The bonds were issued on January 2. The patent remaining useful life at December 31. The bonds mature on December 31.000 176.400 40.000 419. There are 10.000 320. .000 300.052.1 Page 123 Problem 8-1 The Haider Corporation’s post-closing trial balance at December 31.000.000 127.000 $23. 20x1.400 Additional information 1.000 144. 20x5 is 8 years. 3. 8. Coupon payment dates are on June 30 and Dec 31. The average useful life of equipment is 10 years. the coupon rate is 6. The company provides a one year warranty on its products. The equipment is being amortized using the double declining balance method.400 Cr. 4. 20x5 was as follows: Dr. The company uses a FIFO periodic inventory system. The prepaid insurance is for a one year policy taken out in 20x5 that expires on March 1.000 145. Warranty expense is estimated at 1.600 12.600 150.052.000 120. 5.1. Cash Accounts receivable Allowance for doubtful accounts Inventory Prepaid insurance Land Building Accumulated amortization – building Equipment Accumulated amortization – equipment Patents Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Common stock Retained Earnings $36.200 $1. 2. The building is being amortized on a straight-line basis over 40 years.5% of sales. v.000 5.000 34.000 shares of common stock outstanding.Introductory Financial Accounting.000 38. 20x6. The face value of the bonds is $400.000 13.
20.000 30. Total sales on account were $1. equipment and patents. 12.000 18.000. 7.000 $222. 19. The aggregate net realizable value of the inventory was determined to be $365.000 The following adjustments need to be made at year-end: 17. Cash collections on accounts receivable totaled $1. 11. Recoveries of previously written off accounts receivable totaled $5. Cash disbursements were as follows: 8. 2.000. Payments on accounts payable Payments for salaries Interest payments on bonds payable Purchase of equipment on January 2 Warranty repairs made to products sold Payments to the Canada Revenue Agency for income taxes Repurchase of 1. 9. an additional 3. 10. v. 3. 4.000 320.400 130. Inventory purchased on account totaled $960.000 26.600. On March15.000 2.000 40. 6.520.000.000.000 common shares were issued for $75. The inventory was counted on December 31.000. Amortization expense on the building.000 12.Introductory Financial Accounting. 13. Accounts written off totaled $34. 20x6 and the total cost of the inventory was determined to be $378. The warranty expense for the year is accrued.000 common shares on Aug 23 Insurance policy taken out on March 1 – one year policy. 21.000 43.000 was returned to suppliers. Operating expenses paid $945.000 23.1 Page 124 The following transactions took place during the year: 1. 14 15. .1. Inventory costing $16.000 22. The accounts receivable aging schedule is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $144.000.000.000. 5. Estimated % Uncollectible 3% 7% 20% 50% An adjustment is made for insurance expense. 16.000 25.
23. The income tax expense is 40%. 20x6 amount to $6.1 Page 125 22. Required – a. Prepare journal entries for the above transactions and enter all the above transactions in T-Accounts. Dividends of $80.Introductory Financial Accounting. 24. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . Salaries payable at December 31. 20x6.000 were declared and paid on December 15.1. b. c.700. v.
you do not need to provide the original entry): a.000. The patent has an estimated useful life of 17 years and no residual value. At the end of the year.200 was on hand. amounting to $9. The company rented a warehouse on June 1. The company received from a customer a 9% note with a face amount of $12. 20x5. for the face amount plus interest for one year.000. During the year. Credit sales for the year amounted to $320. amounting to $9. On that date. The note was dated September 1.600. It had to pay the full amount of rent one year in advance on June 1. which was debited to prepaid insurance. It is now December 31. The note is payable on March 31. . the principal plus the interest is payable one year later.Introductory Financial Accounting. During the year. Machine A. v.e. The estimated loss rate on bad debts is 3% of sales. No warranty expense has been recognized. On April 1. h. 20x5. On that date.900. supplies of $21.900. Pacific Corporation had a supplies inventory of $4. cash was debited and notes payable credited for $60.700. for one year. which was debited to rent expense. inventory of $9.1.000. i. and the adjusting entries are to be made. On January 1. is to be depreciated for the full year.000 units of a product that was subject to a warranty.000. The sales have been recorded. Notes receivable was debited. 20x5. b. 20x5. the company signed a $60. 20x6.000. and the residual value. i. the patent account was debited and cash credited for $11.500. September 1. c. 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. were debited to warranty liability when paid. Use straight-line amortization.1 Page 126 Problem 8-2 Pacific Company adjusts and closes its books each December 31. 10% note payable. d. The company purchased a patent on January 1. Unpaid and unrecorded wages incurred at December 31 amounted to $4. pacific Company sold 10. The estimated useful life is 10 years. g. The company paid a two-year insurance premium in advance on April 1. and sales revenue was credited on the date of sale. at a cost of $11. j.600. 20x5.900 were purchased and debited to supplies expense. $4. costs incurred for the warranty to date. Past history indicates that 3% of units sold require repairs at an average cost of $40 per unit.800.000. 20x5. 20x5. totalling $8. e. which cost $80. f.
Assume an average income tax rate of 30%.1 Page 127 k. Pre-tax income has been computed to be $80.Introductory Financial Accounting.000 bad debt. . ABC Corporation wrote off a $16. l. v.000 after all the above adjustments.1.
with an initial shares issue of 1. The bank statement showed the following 20x2 deposits through May 3l.Introductory Financial Accounting. Sales have increased 30%. 20x2. Sale of common shares Cash sales Rebates from purchases Collections on credit sales Bank loan proceeds $ 2.500. 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. 20x2.400 1. Spier incorporated this business as MAS Inc.880 $33.770 130 5. She started a baking business in her home and has been operating in a rented building with a storefront. and additional equipment is needed to accommodate expected continued growth. Baking materials Rent Salaries and wages Maintenance Utilities Insurance premium Equipment Principal and interest payment on bank loan Advertising $14.600 2. annually since operations began at the present location.000 1. 20x2.1 Page 128 Problem 8-3 Anne Spier has prepared baked goods for resale for several years now. Anne Spier is the principal shareholder of MAS Inc.920 3.466 .500 110 4. Spier assembled the following information from the corporation's cash basis records for use in preparing the financial statements requested by the bank.000 312 424 $31. Kelowna Bank & Trust has asked Spier to submit an income statement for MAS Inc. for the first five months of 20x2 and a balance sheet as of May 31.500 22. v. The following amounts were disbursed through May 31.320 2.800 5.1. 1. on January 1.
were as follows. These are the only fixed assets currently used in the business.226 at May 31. July 1.: (a) An income statement for the five months ended May 31. May 25. Baking materials costing $1. 20x2. 20x2 (b) A balance sheet as of May 31. 20x1 were not included in the corporation's records. There were no materials in process or finished goods on hand at that date. The loan requires quarterly payments on April 1. Anne Spier receives a salary of $750 on the last day of each month. Required Using the accrual basis of accounting. 20x2. 11. Rent was paid for six months in advance on January 2. 12. 6. New display cases and equipment costing $3. v. and were due an additional $240 on May 31. 20x2. Unpaid invoices at May 31. No materials were on hand or in process and no finished goods were on hand at January 1. prepare for MAS Inc. is subject to an income tax rate of 20%. . 20x2. 8. Payments and collections pertaining to the unincorporated business through December 31. 9. 20x2. 5.Introductory Financial Accounting. 20x2.840 were on hand at May 31. The note evidencing the 3-year bank loan is dated January 1. 7. Customer records showed uncollected sales of $4. 20x2. and no cash was transferred from the unincorporated business to the corporation. and have an estimated useful life of five years. October 1.1. Straight line amortization is to be used for book purposes.000 were purchased on January 2. Baking materials Utilities $ 256 270 $ 526 4. 20x2 MAS Inc. 20x2.1 Page 129 3. and January 1 consisting of equal principal payments plus accrued interest since the last payment. A one-year insurance policy was purchased on January 2. 10. and states a simple interest rate of 10%. 20x2. The other employees had been paid through Friday. 20x2.
000 and $20.20x1 Deposits during 20x2: Cash sales Proceeds of $5. was on hand.000 of its common shares for $25 per share. The uncollected receivables were written off as miscellaneous expenses in 20x2. Morrow's only other asset at the beginning of 20x2 was an investment in Honeydew common shares. 20x2.000. During 20x2 these shares were exchanged for land and a gain of $4.000. Receivables at the beginning of 20x2 totalled $ 155. 20x2.000 5.000 for unpaid purchases of merchandise on December 31. you have been presented with the following information: a) Morrow is incorporated and initially sold 11.000 146. equipment with a cost and accumulated depreciation of $80. There have been no other common share transactions.000 $250.1.000 was recognized. At the beginning of 20x2.500 c) d) e) f) g) h) i) j) Morrow had no outstanding payables at the beginning of 20x2 but owes creditors $36. . In 20x2 Morrow began selling on a cash-only basis. 20x2. During the fourth quarter of 20x2. Morrow's cost of goods sold is 80 percent of sales. As the senior auditor in charge of the audit.000 was declared and is to be paid in January 20x3.000 $180. The sale of equipment was made on December 30.Introductory Financial Accounting. v. December 31. Retained earnings at the beginning of 20x2 totalled $63. b) Cash balance in cheque book. for Morrow Wholesale.000 10. payable annually Customer collections Proceeds on sale of fully depreciated equipment (original cost. sales salaries of $1. Prepare an income statement for the year ended December 31.000 10.600 have accrued but have not been paid. At the end of 20x2.1 Page 130 Problem 8-4 Morrow Wholesale has kept limited records and has never had an audit until 20x2.000 5. The inventory at the beginning of 20x2 was $80.000. $20. All equipment is depreciated on a straight-line basis over ten years with no estimated salvage value. a cash dividend of $10.000 note issued on July 1 and bearing interest at 12%.500 $205.000 $406. respectively. and a balance sheet at December 31. The income tax rate is 30 percent.000. 20x2.000 5.000) Cheques written during 20x2: Purchases of merchandise Salaries Advertising (to be run in 20x3) Miscellaneous expenses $ 24.
v. this generates 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.000 650.1 Page 131 9. your main concern is incoming and outgoing cash. however.000 180.000 300.Introductory Financial Accounting. and shows how a company’s actions have affected its net cash position throughout the period.000 Additional information: Dividends of $150. as accountants. GAAP suggests a preference for the direct method. The Statement of Cash Flow The statement of cash flow shows a company’s inflows and outflows of cash during a particular period.000 215. this uses cash Example . Both methods will be covered later in this section.000 were declared and paid to shareholders during the year. this generates cash.1. If a company pays dividends. There are two distinct methods in presenting cash flow from operations: the direct and the indirect method. Most of what we do. 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.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. if a company pays off or retires debt this uses cash.000 20x7 $ 250. If a company issues new shares. Some students find the statement of cash flow to be a challenge because they are still thinking with an “accrual” mind.000 450.000 150. either the direct or indirect methods can be used. If a company issues new debt. . This statement is broken into three distinct sections. If a company retires shares. Try to keep in mind that when you are working with this statement. is based on the accrual system. then this uses cash.
000) 0 .Dividends = Closing Retained Earnings In the above case. we know that retained earnings increased by a net of $85. or cash we receive. Example . and the NBV (cost – accumulated amortization) is recorded as a gain/loss on sale.A company is showing the following data regarding its last two fiscal periods: Partial Statement of Financial Position 20x8 Non-Current assets Equipment Accumulated Amortization Furniture & Fixtures Accumulated Amortization Land $ 350. we can calculate the Net Income. we know all numbers in this formula except Net Income. Often. Remember. and changes in them from one period to the next.000) 100.000 (180.000. Given that dividends decrease retained earnings.Introductory Financial Accounting. we remove the asset and all associated accumulated amortization.1.000.000) 75.1 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 = $235.000 To calculate the company’s net income for 20x8.000 (170.000 + dividends of $150.000 (150. we analyze at the Retained Earnings Account: Opening Retained Earnings + Net Income .000 (10.000 = $300.000) 100.000 20x7 $ 300.000 Alternatively.000 (60. when dealing with this section. Cash flow from Investing Activities – this section discloses cash that was generated or used through the sale or purchase of long-term assets. we have to reconcile the long-term asset accounts.$150. The difference between the proceeds.000 Net Income = $235.000 + Net Income .000) $ 170.000 (30. the net income for the year is $85. v. Rearranging the formula. $215.000) 200. when a sale of a long-term asset is made.
000.000) * The cost of the fixtures was $75.000.000. The cash flow from investing section of the Statement of Cash Flow would be as follows: Purchase of Equipment Proceeds on sale of Fixtures* Purchase of Fixtures ($50.1.000 + 10.000.000 worth of common shares to the supplier. Note that because no cash exchanged hands for the purchase of the land. If the gain on sale was $10. excluding interest payable. then the cash proceeds on the sale of fixtures would have to be $15. • new fixtures were purchased for $100.000. 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) ($125. • the original fixtures.000 giving a net book value of $15.000) 25.000 with a NBV of $15. Cash Flow from Operations – Direct Method This method of determining cash flow from operations uses the income statement as its starting point. income taxes payable and dividends payable) Cash paid for Interest (Interest Expense ± changes in interest payable) Cash paid for Income Taxes (Income Tax Expense ± changes in income taxes payable) . v. costing $75.000 cash.1 Page 133 Additional Information: • $50. There are a minimum of four main sub-sections in determining the cash flow from operations (note that these are a minimum.000 worth of equipment was purchased for cash during the year. • the land was obtained through issuing $100.000 (100.000 and the accumulated amortization was $60. were sold at a gain of $10. All non-cash transactions are by definition excluded from the statement of cash flow. it does not appear in this section.Introductory Financial Accounting. and essentially takes each income statement item and converts it into cash.000 = $25.
000 (20. Income Statement For the Year ended December 31.000 15. Jack’s Joke Shop Inc.000 2.000 24.000 46.000 68.000 104.000 200. 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 82.000 21. v.000 231.000 $172.000 21. 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 $76.1 Page 134 Example – Calculate cash flow from operations – direct method.000 2.000 82.000 $135.000 12.000 73.000 89.000 $660.000 62. Comparative Unclassified Statement of Financial Position As at December 31.1.000 120.400 .000 (25.000 429.000 10.000 80.000 27.000 1.000 325.000 20x6 $42.000 39.000) $172.600 $ 67.000 23.000 50.000 104.000 5.000 5.Introductory Financial Accounting.000) 135.000 3.000 10.000 14.000 8.
we can simply analyze the difference.000 198. 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. 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 which are made on credit.1.000 $553.1 Page 135 Cash collected from customers: Sales Less increase in accounts receivable $660. 20x7.000 Why did we subtract the $6.Introductory Financial Accounting.000 235. Conversely.000 increase in Accounts Receivable. the amount of our Inventory account increased by $2.000.000 2. and office & administrative salaries. waiting to be sold. v. then this means that sales have not yet been collected – that is. if accounts receivable decreased. Therefore. This means that we purchased additional inventory that is now sitting in our warehouse. We are not told what percentage of the total sales are made for cash. because we are told the balance at December 31. which is a non-cash item and interest and income tax expense which will be dealt with separately. we accrued more sales than we collected. If accounts receivable increased. nor are we told how much of the 20x6 accounts receivable balance have been collected. Note also that although we combined all three expense items in one single calculation. .000) $654. However.000 Note that the starting point for each calculation is the following expense items: cost of goods sold. then we collected more than we accrued and this would be added to sales. therefore we reduce sales to calculate cash collected from customers. 20x6 and the balance at December 31.000 2. salaries expense.000 (2.000 (6. In this case. These comprise all of the expense items on the statement of financial position with the exception of amortization expense.000 120. The first thing we do is adjust it to obtain the purchases made during the period.000) $231.
we would have subtracted the amount from COGS to get total money paid to suppliers. we have to add the $2. If. That is. so we deduce the increase in interest payable to interest expense. any increase in the Income Tax Payable account would be subtracted from the expense to get to the total cash paid. then you simply include the full expense amount as the cash paid for that expense. That is. are treated in the manner that the Salaries Expense was treated above. and any decrease in liabilities is added. In this example.000 (1. as in the case of Office & Administration Expenses above. Cash paid for interest: Interest expense Less increase in interest payable $15.600 The treatment for taxes is the same as for interest. should the opposite have occurred.000. In dealing with the change in accounts payable. Any increase in liabilities. you start with the Income Statement amount and then account for any changes in the associated statement of financial position account(s). we will subtract the $12.000 + 2. inventory decreased. . there appears to be no associated statement of financial position account. other than interest and taxes.600 (12. like it did in the above example.000) $9. we owe $12. if the Accounts Payable account decreases. Cash paid for taxes: Income tax expense Less increase in income taxes payable $21. This is why we add back the $2. like salaries payable. then this means that we would have purchased less than what was sold and we would have decreased COGS in order to obtain purchases. and any decrease would be added.000 from our Interest Tax Expense to get the total cash paid for taxes. If there is no such account. on the other hand. then we have paid more to our suppliers than the purchases.000 increase to COGS. is subtracted from the expense to get to the total cash paid. interest payable went up which means that we accrued more interest than we paid.Introductory Financial Accounting. All other expenses.000 more this December 31st than we did last. Note.1. Therefore.000 In this case.000).1 Page 136 to calculate purchases.000) $14. Purchases for the year in this case would be $233. Again.000 ($231. v.
000 12. We then add back any non-cash items that may appear on the income statement.400 Cash from Operations – Indirect Method Under the Indirect Method.Introductory Financial Accounting. we start with the bottom line .400 5.000) (2. Increases (decreases) in current liabilities are cash inflows (outflows).000 1.000) (14. Increases (decreases) in current assets are cash outflows (inflows.000) 2.000) (9.1. 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 $77. as well as all current payable accounts.000) (2. inventory. v.000 (553.1 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 $654.600) $ 77.Net Income.000 (6. The most common of these are amortization expense and gains/losses on the sale of capital assets.400 . We then add or subtract any changes in the non-cash current asset and liability accounts. This would include changes in accounts receivable.
. v.e. This includes cash.Introductory Financial Accounting.400 – 24. let’s finish with the cash flow statement. 20x7 30. 20x6 Ending Cash Balance – December 31.400) 34.400 + 0 – 43.1.400) Net Change in Cash ($77.000 + 67.000 $ 76.000) (66. Cash from Investing Activities No activity $0 Cash from Financing Activities Proceeds from issuance of Common Stock Payment on Bonds Payable Payment of Dividend* *Opening R/E + Net Income – Closing R/E = Dividends paid ($23.1 Page 138 To continue the example. the term ‘cash’ is defined as ‘cash and cash equivalents’.000 Definition of Cash For purposes of the statement of cash flow.000 (7.400) (43.000 42.000 = 66. readily convertible to cash) subject to an insignificant risk of change in value. term deposits and any highly liquid assets (i.400) Opening Cash Balance – December 31.
20x6 Sales Revenue Cost of Goods Sold Gross Margin Operating Expenses: Salaries expense Amortization expense Other Operating income Interest expense Gain on Sale of Capital Assets Net Income before taxes Income tax Expense Net Income (32.000) 226.000 $750.1.1 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.Introductory Financial Accounting.000 450. Ginger’s Cookies Ltd. Income Statement for the Year ended December 31.000 120. v.000 (17.000 243.900 .000 80.000 79.000 300.000 7.100 $146.000 207.000) 15.
Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.Introductory Financial Accounting.500 $ 19.000 45.200 $ 27.400 $275.000 0 33.000 40.000 43.100 30. v.000 111.000 47.1 Page 140 Ginger’s Cookies Ltd.000 (7.000 117.000 10.200 80.200 $ 20.000 (40. the only piece of equipment.400 6. costing $45. was replaced by a new piece of machinery costing $125.800 2.500 50.000.000) $144. Ginger’s paid cash for the equipment.400 158.1. Prepare a Statement of Cash Flow using the Direct Method.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 50.000 $144. b.000. Comparative Unclassified Statement of Financial Position as at December 31.200 20x5 Additional Information: on January 2.000 108. .100 $ 14. 20x6. Required – a.500 90.000 7.000 10.000 61.000) $275.
000 508. v.631.091.Introductory Financial Accounting.000 (3.060.000 700.000 850.000 2.000 1.000 2.000 800. MCDUFF LTD.000 1.000 28.695.000 319.000 82.054.1.000 30.000 43.000 $ 4.842.045.000 999. Statement of Financial Position December 31 20x3 Current assets Cash Accounts receivable Merchandise inventory Prepaid expenses $ 319.000 3. are shown below.000) 1.000 1.060.000 32.000 119.000 1.019.000 Current liabilities Accounts payable Salaries and wages payable Interest payable Income taxes payable $ 897.869.711.000 1.000 45.000 2.000 (3.000 888.000 35.500.212.854.212.000 $ 4.000 5.429.000 Capital assets Accumulated amortization Bonds payable Mortgage payable Shareholders’ equity Common shares Retained earnings .358.1 Page 141 Problem 9-2 The comparative statements of financial position of McDuff Ltd.000 20x2 $ 353.000 $ 4.000.000 $ 4.000) 1.000 1.000 5.000 1.000 $ 909.000 1.093.041.000 450.326.343.
Prepare a cash flow statement for the year ending December 31.000 550.000 (7. 20x3.000 were retired for $487. v. Amortization expense is included in Operating expenses. On August 31.000 $239.000 850. Income Statement For the year ended December 31.000 Additional information 1. with a book value of $87.1 Page 142 MCDUFF LTD.000. Prepare the cash flow from operations section using the direct method.000) (67. Use the indirect method to report the operating activities. McDuff sold capital assets that cost $158. Required a. 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.Introductory Financial Accounting. . bonds with a net book value of $500.000) 489.400. On April 15. 20x3.000.000.000. 20x3.000) $4.000 700. b.1. for $80.000 250. 3.000 2.500.000 (61. 2.
1 Page 143 Problem 9-3 The following data are available for HHC Ltd.700 4.Introductory Financial Accounting.400) Comparative partial balance sheets at December 31.000 5.200 221.300 2.000 1.1.000 600 20x4 $4.800 5.800 7.800 7. Income Statement for the year ended December 31.000 $ 165.400 $ (3.700 500 5. v. HHC LTD.300 1.000 1. 20x5 and 20x4 reveal the following: 20x5 Cash Accounts receivable Inventory Prepaid insurance Accounts payable Salaries and wages payable Long-term loan payable Interest payable Required Prepare the cash flow from operations section as it would appear on the Statement of Cash Flow using… (a) The indirect method (b) The direct method (CGA Canada.300 10.300 5.000 500 .000 39.700 8. adapted) $ 4. 20x5 Sales Expenses: Cost of goods sold Salaries expense Insurance expense Depreciation expense Rent expense Interest expense Net loss $ 218.300 600 5.
000 (18.000 423.000 53. 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. Balance Sheets Dec.000 300.1. 31 20x5 $ 26.000 475.000 92.000 Net Change $ 24.000) $ 57.’s comparative balance sheets at December 31.000 Dec.000 80.000 119.000 144.000 39.000) 25.000 600.000 18.000 $ (18.000) $ 900.000 463.000 (101.000 0 80.000 4.000 0 0 58.000 85.000 Assets Cash Accounts receivable Inventory Long-term investment Land Buildings and equipment Accumulated amortization TORAM Ltd. and its income statement for the year ended December 31.000 $ 40.000 Liabilities and Shareholders’ Equity Accounts payable Bonds payable Preferred shares Common shares Retained earnings $ 22.Introductory Financial Accounting.000) $ 624.000 423.000 25. 20x5 and 20x6.000) 0 (12.000 87. Income Statement for the year ended December 31.000 . 20x6 are as follows: TORAM LTD.1 Page 144 Problem 9-4 Toram Ltd.000 (12. v.000 86.000 200. 31 20x6 $ 50.000 32.000 43.000) $ 681.000 0 85.000 $634.000 (123.000 $ 100.000 $ 699.000) (22.000 $ 65.
000 and had $21.000 cash dividend. 5. b. (CGA Canada adapted) . Declared and paid a $50. the following transactions occurred: 1. Required – a.000 cash that had originally cost $32. 4. Prepare a Statement of Cash Flow using the Direct Method. for $30. Purchased equipment for $20. 2. 20x6. Issued $25.000 cash. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method. Sold the long-term investment on January 1. Sold equipment for $7.000.Introductory Financial Accounting.000 of accumulated amortization. v.000 of bonds payable at face value. 3.1 Page 145 During 20x6.1.
3. Management's attitude toward future cash dividend policy.Introductory Financial Accounting. Published financial statements are the sources of information generally available to users. 7. etc. Each of these eight variables that affect future dividend policy is in turn affected by others. The amount of future cash flow from random events such as windfall gain or casualties.1. Nonetheless. interest payments.1 Page 146 10. 5. Horizontal (trend).e. the investor must predict those things that affect dividend policy. Expected non-operating cash flows. from activities considered incidental to the firm's main function. Net cash flows from future operations. of course. In order to predict the company's future dividend policy. The amount of future cash flow to service debt requirements. The limitations of using historical information must. published financial statements are historical in nature and do not provide the information we have just outlined. 2. sinking fund provisions. 8. 4. 6. The amount of cash expected to be invested in the firm's long lived assets as well as in working capital. repayment of principal. i. which the investor would like to predict. However. Financial Analysis Techniques 1. The nature of the analysis of financial statement information is primarily in the form of ratios. 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. historical information can be used to make projections and is sometimes extremely useful in this respect. Vertical and Percentage (common size) analysis . v. be recognized.e. The firm's future policy regarding the holding of cash balances (for precautionary and liquidity reasons) in excess of those required to maintain the expected level of operations.. i.. The following are the variables that affect a firm's future dividend policy: 1. Future cash flows from changes in the levels of investments made by shareholders and creditors.
619 12.975 7.1.Introductory Financial Accounting.546 1. or as compared to an amount of the preceding period.509 7.882 627 207 $420 20x5 $11. v.500 10. 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 $7.369 606 200 $406 20x4 $8.673 827 273 $554 20x6 $13.1 Page 147 Horizontal analysis expresses financial data in terms of a single designated base period. For example.073 354 $719 .
Introductory Financial Accounting, v.1.1
Horizontal analysis of the data as a percentage of the year 20x3 amounts: 20x3 Revenue Expenses Net income before taxes Income taxes Net income 100% 100% 100% 100% 100% 20x4 107% 107% 103% 104% 103% 20x5 144% 145% 136% 137% 136% 20x6 171% 170% 177% 177% 177%
Horizontal analysis of the data as a percentage of the previous year's amounts: 20x3 Revenue Expenses Net income before taxes Income taxes Net income 100% 100% 100% 100% 100% 20x4 107% 107% 103% 104% 103% 20x5 135% 135% 132% 132% 132% 20x6 118% 118% 130% 130% 130%
Vertical Analysis (also referred to as common size financial statements), presents all the data in a financial statement as a percentage of a single line item. Generally, when performing vertical analysis on a balance sheet, all numbers are expressed as a percentage of total assets; on the income statement as a percentage of sales. Vertical analysis of the above data is as follows: 20x3 Revenue Expenses Net income before taxes Income taxes Net income 100% 92% 8% 3% 5% 20x4 100% 93% 7% 2% 5% 20x5 100% 93% 7% 2% 5% 20x6 100% 92% 8% 3% 5%
Ratio analysis is performed in order to evaluate the firm's liquidity, solvency, profitability and asset management: • liquidity: assessment of the firm's ability to meet current liabilities as they come due, • solvency: ability of the firm to pay both current and long-term debt, • profitability: evaluation of manager's abilities in generating returns to capital providers, • asset management (or activity ratios): how well are the firm's assets managed.
Introductory Financial Accounting, v.1.1
Liquidity Analysis - the following ratios are typically used in assessing the liquidity of a firm: Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio Current Assets ÷ Current Liabilities (Cash + Accounts Receivable + Temporary Investments) ÷ Current Liabilities (Cash + Accounts Receivable + Temporary Investments) ÷ (Cash operating expenses ÷ 365) Where Cash operating expenses = Cost of Goods Sold + Operating Expenses - Depreciation The current ratio tells us how much current assets there are relative to current liabilities. The quick ratio tells us how much liquid current assets there are relative to current liabilities. The defensive interval tells us, all other things remaining equal, how many days the firm can survive without any cash inflow. Solvency Analysis - the following ratios are typically used in assessing the solvency of a firm: Debt-to-Equity Ratio Times Interest Earned Long-term Debt ÷ Shareholders' Equity
Income before Interest and Taxes ÷ Interest expense
The debt-to-equity ratio must be compared (1) to the firm's historical data (interperiod) and/or (2) to other companies operating in the same industry or industry averages (interfirm). As Lesson 12 will show, it is wrong to say that the lower the debt-to-equity ratio, the better off the firm is. All firms have a theoretical optimal debt-to-equity ratio they should be aiming for. Firms whose debt-to-equity ratio is optimal will maximize the value of the firm and minimize their weighted average cost of capital. The problem is that the finance literature does not provide us with a mechanism to establish this optimal debtto equity ratio. We tend to use the industry average as a surrogate for the optimal debt-toequity ratio. Take the following two firms: Company A 0 Company B 2.5 Industry Average 3.0
Although, Company A is clearly more solvent than Company B, one could argue that Company B is better off than Company A since it's weighted average cost of capital should be lower.
Introductory Financial Accounting, v.1.1
The times interest earned ratio is a good judge of a firm's solvency. A firm with a times interest earned ratio of 2.0 is generating operating income that is only twice as high as interest charges. Such a firm's exposure to fluctuations in interest rates is high.
Profitability Analysis - the following ratios are typically used in assessing the profitability of a firm: Return on Sales Return on Assets Return on Equity Operating Income ÷ Sales Operating Income ÷ Average total assets Net Income ÷ Average shareholders' equity
The rationale for using operating income for the return on assets ratio is that this ratio is used to compare how well firms use their assets regardless of how the assets are financed. When comparing two firms with different capital structures, the return on assets will be comparable. Using operating income also removes unusual items, extraordinary items, discontinued operations and income tax expense from the ratio. Also note that we are using averages in the denominators. This is the theoretically correct way to calculate the ratios. Whenever you divide an income statement number into a balance sheet number (or vice-versa), the balance sheet number must always be an average. However, there are times where this may be either impossible or impractical to do. In situations where you only have one year of data, it is impossible. When you have two years of data, you can calculate the ratios for one year only and you do not have any comparatives. In these situations, one can assume that the year-end balances are good surrogates for the average and simply use the year end balances. Note that multiple choice exams will always assume you use averages. Asset Management Ratios (activity ratios) - the following ratios are typically used in assessing the solvency of a firm: Inventory turnover Days Sales in Accounts Receivable Total asset turnover Cost of goods sold ÷ Average Inventory Average Accounts Receivable ÷ (Net Credit Sales ÷ 365)
Sales ÷ Average total assets
The inventory turnover measures the number of times the inventory rolls over within a year. The days sales in accounts receivable tells us what the average number of days our accounts receivable have been outstanding. The total asset turnover tells us how many sales dollars are generated by each dollar of asset invested.
Introductory Financial Accounting, v.1.1
Often in an examination setting, you will be presented with a company's financial statements and the industry average accounts receivable and inventory turnover ratios. Given these, it is possible to perform some comparative analysis and, more importantly, determine how much cash could be generated by the company if it were able to reduce its accounts receivable and inventory balances. (More often than not, the question mentions that the company is cash strapped.) Limitations of Financial Statement Analysis Changes in ratios can only be interpreted by understanding the underlying economic events. For example a sudden increase in the current ratio may simply be due to the fact that a short-term bank loan was converted to a long-term loan. Ratios may change as a result of non-economic events that affect the financial statements e.g., change in accounting method or estimate Comparisons of a company’s ratios with another company’s or with industry averages involve certain restrictive assumptions: that all companies being compared are: • structurally similar • use the same (or similar) accounting principles • experience a common set of external influences
1. v.000 c) $367.Introductory Financial Accounting.500 d) $400.000 and the ending inventory for 20x8 was $120. 20x8. R Company’s net accounts receivable were $50. 20x7.000 at December 31.0 d) 8. Net cash sales for 20x8 were $32.0.500.000 2. 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. If current liabilities exceed current assets. What were R’s total net sales for 20x8? a) $227. The beginning inventory for 20x8 was $30.0 c) 6. The accounts receivable turnover for 20x8 was 7.0 . what effect will a payment to a creditor (account payable) on the last day of the month have? a) It will increase the current ratio b) It will decrease working capital c) It will increase working capital d) It will decrease the current ratio 3.000. and $55.000. a corporation purchased $540.1 Page 152 Problems with Solutions Problem 10-1 – Multiple Choice Questions 1. During 20x8.000 at December 31.500 b) $335.000 of inventory and had sales of $600.5 b) 5. What was the inventory turnover for 20x8? a) 4.
Introductory Financial Accounting, v.1.1
If current assets exceed current liabilities, a payment of an account payable has what effect on working capital and the current ratio? Working Capital No effect No effect No effect Increase Decrease Current Ratio Increase No effect Decrease Decrease Decrease
a) b) c) d) e)
Assuming stable business conditions, which of the following is consistent with a decline in the number of days’ sales outstanding in a company’s accounts receivable at year end from one year to the next? a) A tightening of the company’s credit policies b) The second year’s sales were made at lower prices than the first year’s sales c) A longer discount period and a more distant due date were extended to customers in the second year d) A significant decrease in the volume of sales of the second year
When should an average amount be used for the numerator in computing a financial ratio? a) When both the numerator and denominator are balance sheet items b) When the numerator is an income statement item and the denominator is a balance sheet item c) When the numerator is a balance sheet item and the denominator is an income statement item d) When both the numerator and the denominator are income statement items
Introductory Financial Accounting, v.1.1
A company disclosed the following information for the year ended December 31, 20x8: Net cash sales Net credit sales Inventory at beginning of year Inventory at end of year Net income Accounts receivable at beginning of year Accounts receivable at end of year What is this company’s days sales in accounts receivable for 20x8? a) 182 days b) 94 days c) 65 days d) 57 days $ 75,000 125,000 50,000 62,500 12,500 40,000 22,500
During 20x8, a company purchased $320,000 of inventory. The cost of goods sold for 20x8 was $300,000, and the ending inventory at December 31, 20x8, was $60,000. What was the inventory turnover for 20x8? a) 5.0 times b) 5.3 times c) 6.0 times d) 6.4 times
Introductory Financial Accounting, v.1.1
Problem 10-2 The comparative financial statements for the Kuehl Company are as follows. Kuehl Company Balance Sheets as at December 31 … 20x5 ASSETS Current Assets Cash Accounts receivable Inventory $12,000 275,000 425,000 712,000 1,450,000 $2,162,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $379,000 920,000 1,299,000 300,000 563,000 863,000 $2,162,000 $371,000 850,000 1,221,000 300,000 493,000 793,000 $2,014,000 350,000 800,000 1,150,000 300,000 425,000 725,000 $1,875,000 $34,000 220,000 340,000 594,000 1,420,000 $25,000 200,000 350,000 575,000 1,300,000 20x4 20x3
Fixed Assets – net
Introductory Financial Accounting, v.1.1
Kuehl Company Income Statements for the year ended December 31 … 20x5 Sales Cost of goods sold Gross margin Operating expenses Depreciation expense Operating Income Interest expense Net income before taxes Income taxes Net income Required – Prepare a full financial statement analysis for 20x4 and 20x5 for Kuehl Company. $2,300,000 1,400,000 900,000 550,000 120,000 230,000 60,000 170,000 60,000 $110,000 20x4 $1,900,000 1,200,000 700,000 400,000 100,000 200,000 50,000 150,000 52,000 $98,000
979.114.628.889.000 $3.000 20x6 20x5 Fixed Assets – net $4.167.1.000 $3.000 700.000 700.000 700.324. v.876.000 1.000 $3.000 1.Introductory Financial Accounting.000 $4.380.000 809.000 2.1 Page 157 Problem 10-3 The comparative financial statements for Rocky Mountain Camping Equipment Ltd.000 820.000 1.000 $24.180.000 800.000 650.003. Balance Sheets as at December 31 … 20x7 ASSETS Current Assets Cash Accounts receivable Inventory $37.000 2.000 570.808. Rocky Mountain Camping Equipment Ltd.576.956.000 1.000 $524.000 700.000 485.000 2.000 1. are as follows.000 $3.000 480.679.000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $560.000 1.000 $20.956.000 524.003.808.000 300.000 1.999.789.000 $480.928.000 1.000 .000 2.000 2.000 2.
000 463.1 Page 158 Rocky Mountain Camping Equipment Ltd.000 5.000 137.000 $51.000 $3.000 81.000 1.000 100.000 20x6 $1.000 .000 100.000 800. v.000 30.1.000 60. Income Statements for the year ended December 31 … 20x7 Sales Cost of goods sold Gross margin Operating expenses Depreciation expense Operating Income Interest expense Net income before taxes Income taxes Net income (loss) Required – Prepare a full financial statement analysis for 20x6 and 20x7 for Rocky Mountain Camping Equipment Ltd.000 2. $2.700.000 56.000 1.300.000 700.000.Introductory Financial Accounting.100.000 635.000 65.
999 + 40. SOLUTION TO PROBLEMS Problem 1-1 1.999 .000/4 years x 6/12) = $35.1 Page 159 11.039.Introductory Financial Accounting. 6.000 $999. 7. 3. 5.000 = $1. d b a d d d b c $40.000 – ($40.1. 8. 2. 4. v.
000 25.000 182.000 . Receivable 6.000 1.200 400 800 12 4 15 Inventory 25.000 50. & Fixtures 15.1.000 Common Stock 20.000 15.000 13 16 17 18 19 B 6 B Prepaid Insurance 1.000 Accrued Liabilities 150 700 600 1.000 1 3 Furn.000 1 4 7 8 B 2 3 6 7 B 8 10 14 5 9 B 2 Prepaid Rent 1.1 Page 160 Problem 1-2 Part (a) Assets Cash 20.960 5.777 Bank Loan 20.367 8. Amortization 500 11 10 Retained Earnings 10.Introductory Financial Accounting.000 BALANCE SHEET Accts.000 15.000 4.000 20. v.000 2.000 Liabilities & Equity Accounts Payable 130.000 120.200 4.000 Acc.000 190.000 2.800 33.
600 Insurance 400 12 10 16 B Miscellaneous 1.000 3.000 5 9 B 15 15 14 B 7 15 11 Amortization 500 10 13 B 10 17 B Wages and Salaries 36.000 0 Cost of Goods Sold 130.000 INCOME STATEMENT Purchase Returns 15.000 120.500 700 2.960 Interest 300 150 450 Advertising 10 2.000 170.000 600 36.000 Revenues Sales 196.367 .000 15. v.1.200 19 Income Taxes 5.Introductory Financial Accounting.000 1.1 Page 161 Expenses Purchases 50.960 5.000 0 Rent 2 10 18 B 1.
8.200 190.000 1. 11.000 1. 5.800 500 500 2. 6.000 / 10 years x 4/12 $20.Introductory Financial Accounting. 9.000 2. 10.000 15. v.000 20.000 120.000 50.000 196. 7.000 2. 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 20.000 182.000 120.000 1.200 1.000 15.000 4.000 50.000 300 130.000 1.500 10.000 3.000 36.000 $20.1.1 Page 162 Journal Entries – 1.000 4. 4. 3. .000 6.
960 15. 15.000 170.367 . 5.000 25. 17.1 Page 163 12.890 Income tax expense = $17.000 700 700 600 600 1.000 x 1% Income tax expense Accrued liabilities Net income before taxes = $17.000 15. 18. Insurance expense Prepaid insurance $1. 19.367 5. 150 150 14. v.890 x 30% = 400 400 13.Introductory Financial Accounting.000 15.1.200 / 12 months x 4 months expired Interest expense Accrued liabilities Accrual for the month of October: $20. 16.960 1.000 x 9% x 1/12 Accounts payable Purchase returns Cost of goods sold Inventory Purchase returns Purchases Miscellaneous expenses Accrued liabilities Salaries and wages Accrued liabilities Rent expense Accrued liabilities $196.000 130.
277 .000 20.000 400 2.777 20.000 25. v.000 2. Heavenly Books. Inc.000 196.600 2.1 Page 164 b.Introductory Financial Accounting.367 $270.960 500 450 36.200 5.000 15.000 5.000 8.277 $270.000 Credit $ 500 25.1.000 130. Trial Balance As at October 31. 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 10.000 800 1.
367 $12. 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.Introductory Financial Accounting. Statement of Retained Earnings for the four months ended October 31. Heavenly Books. 20x2 $0 12.1.890 5. October 31.523 .000) $2.523 Heavenly Books. Inc. 20x2 Net income Dividends Retained earnings.340 450 17.600 2.000 66. Income Statement for the four months ended October 31.000 130.1 Page 165 c.000 5.960 500 36. v. Inc.523 (10. 20x2 Retained earnings. July 2.660 18.000 400 2.200 47.
000 45.000 500 $33.500 $76.777 8.1 Page 166 Heavenly Books. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance Prepaid rent Furniture and fixtures Less accumulated amortization $15.300 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Accrued liabilities Current portion of bank loan Bank loan Shareholders’ Equity Capital stock Retained earnings $25.000 800 1. Inc.800 14.1.000 8.000 61. Statement of Financial Position as at October 31.000 25.777 20.777 12.000 53.Introductory Financial Accounting.000 2.300 .000 2.523 $76. v.523 22.
600 – 2.100) $7.100 3. 20x6 Net sales ($157.300 18.500 $155.1 Page 167 Problem 1-3 Global Productions Inc.200 3.000 4.000 17. 20x6 Retained Earnings . v.600 13.400) 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 4.500 Global Productions Inc.400 .Introductory Financial Accounting.500 (2.100 $9.600 4.800 2.300 21. Income Statement for year ended December 31.000 71. Statement of Retained Earnings for year ended December 31.1.200 84.ending $0 9.beginning Net income Dividends Retained Earnings .200 54.
600 40.1.400 $107.000 9.1 Page 168 Global Productions Inc.100 14.000 49.100 87.500 1.600 50.Introductory Financial Accounting.100 1.000 4. Statement of Financial Position as at December 31. v.900 44.400 57. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Supplies Prepaid insurance Office equipment Accumulated amortization 24.800 $25.000 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Bank loan Shareholders' Equity Capital Stock Retained earnings $7.800 19.500 1.200 $107.000 .200 2.000 7.
To do this you would set up a receivable. you would have sent out 1 of the 4 magazines in the subscription. you would have debited Prepaid Insurance and credited Cash for the full amount of $5.300 d) As of Wednesday. therefore you will remove $5. due from Big Al. Cash Unearned Revenue 24 24 As of April 30.Introductory Financial Accounting.800 e) When you purchased the policy. However.1 Page 169 Problem 1-4 a) Annual amortization expense for the machinery would be = $50. as these expenses were incurred during the period. Accounts Receivable Consulting Revenue 2.333 from Prepaid Insurance and record it as Insurance Expense for the period.333 .646 for the current period.333 3.000.250 X 7/12 = $3. you must record them as an expense of that period.800 1.646 When you received the cash in January. your amortization expense would be = $6. Therefore. The journal entry would be: Unearned Revenue Subscription Revenue c) 6 6 You have earned the $2. you would have earned of the revenue. However.1. Amortization Expense Accumulated Amortization b) 3. we will record salaries expense and the accompanying salaries payable of $1. v. Therefore. Salary Expense Salaries Payable 1. the full amount would be recorded as an Unearned Revenue liability.646 3. it is appropriate for you to record it in this period. Therefore.300 2. Insurance Expense Prepaid Insurance 3.300 revenue this accounting period. You have used 8/12 of the policy.000 X 8/12 = 3. in the amount of revenue earned during the period. you only had the machine in use for 7 months. you will have accumulated 3 days worth of salaries that have not been paid. $24 X = $6.000/8 years = $6. therefore.800.250/year.
You would remove the Prepaid Rent account to reflect that fact that you have “used up” the rent.000 X 5/6 = $5.750 4.750 you paid on June 30th represents Prepaid Rent.e. you would have debited Cash and credited Unearned Revenue by $6. v.000 g) The $4. and therefore you would have incurred one month worth of Rent Expense. the second payment that you received on December 1st covers the period of December – May. No adjustment is needed for this.1. You will have to adjust for that fact that 5/6 of the payment has not been earned i. Rent Expense Prepaid Rent 4.750 As of July 31st. Prepaid Rent Cash 4.Introductory Financial Accounting.000 has been earned and should be included in revenue for this period.750 . or $1.000 covers a 6-month period. $6..000 each.1 Page 170 f) Each of the payments for $6. and would be recorded as an asset on your accounts for the June30th period end. that full amount would have been earned and recorded as revenue during the period.000 is unearned. On December 1st. Unearned Revenue Catering Revenue 1. However.000 1. The first payment that you received on June 1st would cover the catering for June – November. you would have been in the premises for 1 month. Therefore.750 4.
000 x $10 = $1. Dec 31.020.000.000. 20x5 500 500 100 100 c. Dec 31.000 $0 $1. The opening balance in the Subscription Received in Advance account = $80.000.026.006.000 less the revenue earned for subscription fees received in the previous year of 80.000 (cash) = $1.000 $1. 4. v. 20x5 Insurance expense Prepaid expense $1.000 x 6/24 = $250 Rent receivable (or accounts rec) Rent income Interest expense Interest payable $300 x 4/12 = $100 Unearned subscription revenues Subscription revenues $440 x 3/24 = $55 $250 $250 b.1.000 $1. 9. Dec 31. 20x5 d.020.000 (sales) – 4.000 Problem 1-7 1. Debit to Subscriptions Received in Advance = $180.000 + (1. 6.Introductory Financial Accounting. 8. the offsetting credit would be to Subscriptions Revenue.000 (the ending balance in the account). 100.000 $0 $1. 12. 2. 11. 3. 2. 7.000 x $20 (accounts payable) = $20. $80.000.000 (COGS) = $1.000.1 Page 171 Problem 1-5 a. Dec 31. 10.000 (bldg) – 300.000.000.000.000 = $72.000 $20. . 3.000.000 + (200 x $50)(cash) – (200 x $20)(inventory) = $1.000 + 300.000 $1. Total amount received as revenue of $128.000 1. 5.000 $1.000.000 + 120.000 x $20)(inventory) = $1. 4.000.000 – 128.000 + 10.000 $1.000 = $48. 20x5 55 55 Problem 1-6 1.
Introductory Financial Accounting, v.1.1
Problem 1-8 Shareholders’ Equity Net Income
+10,000 NC NC NC -10,000 Remove the receivable from A/R, and add a short-term note receivable.
+50,000 NC +50,000 NC An increase in the cash account and an increase in the contributed capital account. +2,000 NC NC NC -2,000 An increase in the cash account and a decrease in the accounts receivable account. +500 NC NC NC -500 An increase in the prepaid insurance account and a decrease in the cash account. +200,000 +200,000 NC NC An increase in the equipment account and an increase in the notes payable account. NC +1,400 -1,400 -1,400 An increase in the interest payable account and an increase in the interest expense account, therefore, the decrease in net income. +1,000 NC +1,000 +1,000 An increase in the interest receivable account and an increase in interest revenue, and therefore both net income and retained earnings (part of shareholders’ equity)
Introductory Financial Accounting, v.1.1
Problem 1-9 1. Sales Cash received for sales Less cash received for previous year sales Plus Sales not paid for in current year Sales – accrual basis Purchases Cash paid for purchases Less advance payment Plus prepaid purchases Purchases – accrual basis Cost of Goods Sold Beginning inventory Plus purchases Cost of goods available for sale Less ending inventory 20x6 $ 60,000 (5,000) 20,000 $ 75,000 20x7 $ 70,000 (20,000) 0 $ 50,000
$ 40,000 (2,000) 0 $ 38,000
$ 35,000 0 2,000 $ 37,000
0 38,000 38,000 (3,000) $ 35,000
$ 3,000 37,000 40,000 (5,000) $ 35,000
Revised Income Statement Sales Less Cost of Goods Sold Gross margin Other expenses Operating income Profit Margin (30,000/75,000) (2,000/50,000) * 14,000 – 1,000 personal expenses 2. Revenue recognition principle – revenue must be recorded when earned, it can be measured, and the collectability is reasonably assured, not when cash payment is received. Mr. Cash violated this by recording “sales” on a cash basis. Matching principle – all expenses must be recorded in the same period as the revenue that the expenses were incurred to generate. Mr. Cash violated this principle by simply using cash paid for purchases instead of calculating the proper COGS. Economic entity principle – a business should only report on transactions that are under its control. By including his own personal expenses Mr. Cash crossed the line between “personal” and “business” and violated this principle. $ 75,000 35,000 40,000 10,000 $ 30,000 40% $ 50,000 35,000 15,000 *13,000 $ 2,000 4%
Introductory Financial Accounting, v.1.1
Problem 1-10 a. Revenue should be recognized when the trees are sold to the customer during the Christmas season because that is when the benefits and risks of ownership pass from the company to the customer. Until then, the company does not know whether any customers will buy their trees, or how much the customer will pay for the trees (measurement of amount). There is so much competition and one never knows how many trees will be sold. Some trees may have to be discarded if they do not sell. Also, at the time of the sale, cash is collected so there is no uncertainty as to collectability. The company has little or no risk once the tree is sold because it is very unlikely that the tree will be returned. The annual cost of fertilizing, pruning and maintaining the trees should be capitalized as a cost of inventory. In effect, the trees are like work-in-process inventory. Then, when the trees are sold, all of these costs will be expensed as cost of goods sold. This is an example of the matching principle and the point of sale recognition method.
Introductory Financial Accounting, v.1.1
Problem 1-11 a. Dec 1 Cash Capital Stock Furniture and equipment Cash Note payable Cash Revenues Accounts Receivable Revenues Office supplies Accounts Payable Cash Accounts Receivable Wage expense Cash Rent expense Cash Office supplies expense Office supplies $6,000 $6,000 4,000 1,000 3,000 680 680 1,875 1,875 300 300 1,875 1,875 1,300 1,300 1,000 1,000 100 100
Operating income for the month ending December 31, 20x6 would be: = $680 Sales + 1,875 Sales – 1,300 Wages Expense - 1,000 Rent Expense - 100 Supplies Expense = $155
Introductory Financial Accounting, v.1.1
Assets BALANCE SHEET Accounts Receivable 100 700 720 120 Note Rec - Cur 100 100 Liabilities & Equity Accounts Payable 500 100 520 120 Wages Payable 8 8 15 15 Inventory 160 440 520 240 Interest Receivable 16 16 8 8 Prepaid Fire Ins. 3 3 36 4 32 Retained Earnings 26 322 Capital Stock 110 Inc Taxes Payable 4 4 5 5 Dividends Payable 26
B b d e f
Cash 21 500 180 193 700 189 24 74 100 36 19 14
g h i j k l
B b E
B a E
B q E
B a E Equipment 110 74 184 Acc Dep 66 30 96 Note Rec - LT 100
B r E
B j E
B n E
B p E
B k E
Introductory Financial Accounting, v.1.1
Expenses COGS 440
INCOME STATEMENT Salaries and Wages 185 15 200 Insurance 3 4 7 Income Taxes 15 5 20
Revenues Sales 900
h q E
o o E
Interest Revenue 8 8 16
e n E
l r E
Introductory Financial Accounting, v.1.1
Ruiz Pharmacy Income Statement for year ended December 31, 20x2 (000's) Sales Cost of goods sold Gross margin Operating expenses Salaries and wages Miscellaneous Insurance Depreciation Operating income Interest revenue Net income before taxes Income tax expense Net income 200 189 7 30 $900 440 460
426 34 16 50 20 $30
Ruiz Pharmacy Statement of Retained Earnings for year ended December 31, 20x2 (000's) Retained Earnings - beginning Net income Dividends Retained Earnings - ending $322 30 (26) $326
v. 20x2 (000's) ASSETS Current Assets Cash Accounts receivable Accrued interest receivable Merchandise inventory Prepaid fire insurance Noncurrent assets Note receivable Equipment Accumulated depreciation $14 120 8 240 32 414 100 184 (96) 88 188 $602 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Accrued wages payable Accrued income taxes payable Dividends payable Shareholders' Equity Paid-in Capital Retained earnings $120 15 5 26 166 110 326 436 $602 .1 Page 179 Ruiz Pharmacy Balance Sheet as at December 31.1.Introductory Financial Accounting.
1.000 12.000 14.000 Inventory 446.000 575.000 Taxes Payable 20.000 600.500 547.000 Interest Payable 8.000 215.000 62.500 6.000 15.500 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.Introductory Financial Accounting.500 745.000 775.000 Liabilities & Equity Accounts Pay 600.000 16.000 200.000 375.000 265.000 323.000 4. Pay.500 B 9 E Furniture & Fixtures 190.500 8.000 8 Rent Payable 27. v.00 515.000 25.000 375.000 Prepaids 14.000 20.000 B E B 10 Retained Earnings 4.000 850.000 8. And Com.000 225.000 80. 123.500 260.000 100.000 31.000 850.000 Acc.000 12.800 6.000 BALANCE SHEET Accounts Rec.000 Capital Stock 110.000 24.1 Page 180 Problem 1-13 Assets Cash 30.000 B .000 20.000 25.000 16.500 20.000 22.000 21.000 10. 7.000 9 13 Long-Term Notes Payable 20.800 Sal. Depreciation 40.
v.500 Revenues 3 COGS 345.800 12 Depreciation 22.000 21.1.000 Interest 6.1 Page 181 Expenses INCOME STATEMENT Salaries and Commissions 207.350.000 13 14 Other 225.000 70.000 .000 Sales 1.000 8.000 4 2 9 9 9 9 E Rent 14.Introductory Financial Accounting.000 12.000 27.000 27.000 7 7 E Income Tax 15.
500 $302.000 225.000 745.500 70.700 -4.1.000 22. v. Income Statement for the year ended August 31.700 Peter’s Appliance Shop Ltd.000 $46. Statement of Changes in Retained Earnings for the year ended August 31. Sep 1.000 605. 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. 20x5 Retained Earnings.800 73.1 Page 182 Peter’s Appliance Shop Ltd.700 27.350.500 6. 20x5 $260.200 .500 80.Introductory Financial Accounting.000 524. 20x4 Net income Dividends Retained Earnings. Aug 31.000 207.000 46.
000 12.000 658.000 547.000 $1. Balance Sheet as at August 31.000 153.500 323.000 302.500 6.200 $1.1.000 16.800 27. 20x5 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Fixed Assets Furniture and fixtures Less accumulated amortization $ 31.Introductory Financial Accounting.200 412.000 578.500 215.300 110.000 917.000 10.300 80.1 Page 183 Peter’s Appliance Shop Ltd.500 .070.000 7.000 -62.500 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. v.070.
095 + 9. December 31 Add Sparg cheque deducted in error Add deposits in transit Less outstanding cheques Cash balance per books b.280 $6.225 63 $4.700 (5.1. 3.020) Adjusted cash balance per books.Introductory Financial Accounting. before adjustments Less bank service charges Add error in recording cheque ($1. Dec 31.280 .200 .300) $3. 2.152 (52) 180 $3. v. Cash Accounts receivable Bank service charges Cash $180 $180 52 52 $3.$1.000 (77. c b b The balance on the bank statement will be overstated by $360. Cash balance per books.548) 3.288 Problem 2-2 a.595 Balance per bank statement Add deposits in transit Balance per books $4.1 Page 184 Problem 2-1 1. Dec 31 Cash balance per bank. Dec 1 Add cash received during December Less cash payments made during December Cash balance per books.700 – 3.300 580 1.200 = $21. $15.700 77.
20x7 Add outstanding deposits Less outstanding cheques # 201 # 533 Cash per books.700 (1. v.980) $4. Office equipment Cash To correct error made in recording of purchase of office equipment: $620 – 260 = $360. March 31. 20x7 2.Introductory Financial Accounting. Cash balance. $ 480 6.1.200 $4. Cash Accounts Receivable To record error in deposit made ($530 – 350 = $180).700 $180 $180 35 35 360 360 .200 $780 1. before adjustments Add error in cash receipt Less bank service charges Less error on cheque # 521 Cash balance after adjustments Bank reconciliation Cash per bank. March 31.915 180 (35) (360) $4.1 Page 185 Problem 2-3 1. Bank service charges Cash To record bank service charges for the month.
Strategic Air Defence Gain on sale of Investments $75. then the net unrealized gain flows through net income.Introductory Financial Accounting.000) 12. v.000 .000 70.1 Page 186 Problem 2-4 a) The accounting for temporary investments depends on whether the company designates the investments as available for sale investments or trading investments.000) $ 8. then the net unrealized gain will be part of the Other Comprehensive Income section of Shareholders' Equity.000) (1.000 (4. 20x0: Unrealized gain (loss) ($2.000 3. Trading investments are those that are held for re-sale as part of a portfolio of managed securities held for a short-term.000 3.000 $2. b) Cash Other Comprehensive Income Temporary investments . If the securities are classified as 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 available for sale. Either way. Available for sale securities are defined by what they are not: they are not long-term investments nor are they trading investments.000 $35.000 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 31.XYZ Computer Gain on sale of investments Cash Other Comprehensive Income Temporary investments .000 7.1.
000 – 8.500) ($4.500) b) In 20x0. .000) (1.500) will be charged to net income.000) 20x2 ($4.200) ($5.700 . v.000) ($8.4.500 ($4. In 20x2. an unrealized holding gain of $1.500) (2. In 20x1.1 Page 187 Problem 2-5 a) Security A Security B Security C 20x0 ($2.700 ($5.700) 20x1 ($500) 0 (3. an unrealized holding loss of $4.000) will be credited to net income.Introductory Financial Accounting. an unrealized holding loss of $5.000) (3.1.500) (1.700 will be charged to net income.
Write-Offs + 3. .000 Beg Bal + 14. Beginning Bal – 20. Required balance at December 31: ($80.000 dr. December 31.000 – 125 = $2.000 71. 2004: $1.000 x 0.000 c. Write offs $9.000 x 4% 4.000 Collections – 20.000 Sales – 360.900.000 cr.000 Credit Sales – 11. $86.000 3.000 – 30) – (125 – 30) = $2.245.800 Bad debt expense = $6. December 31.350 cr.600 Balance in Allowance for Doubtful Accounts. v. a Problem 3-2 a. d 3.000 – 500 + 300 = $4.400 – 4. a Balance in allowance account at the end of 20x9 before adjustment for bad debts: $5.000 cr.800 = $1. Bad debt expense ($14.000 Before: $3.200.350 $55.5%) Allowance for doubtful accounts Accounts receivable balance.Introductory Financial Accounting. Adjustment $13.1.000 3.000 3.1 Page 188 Problem 3-1 1. Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable b. Beg Bal + 55.875 After: ($3.000 $55. before adjustment $11. Dec 31.000 Write offs) = $100.000.350 cr.000 Collections – 55.000 cr.000 dr. Recoveries Adjustment required Bad debt expense Allowance for doubtful accounts 86.875 2.000 x 3% $97. 11. 2004 Balance in allowance before adjustment $63. $3.000 71.200.000 Write-offs Allowance for doubtful accounts.000 dr.000 A/R Begin + 400.000 cr. 20x8.000 3.000 cr.350 86.
000 2.800.000 $2.000 7.840 cr. v.915.000 2.000 3.290 31.000 2.000 2.000 27.000 31.000.770 cr. (Schedule) $2.915.000 16.400.000.000 7.480 43.000 27.800.1.000 16. (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 43.000 7.400.000 7.Introductory Financial Accounting.480 3.1 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 $27.290 .
000 20.000 $442.000 43.000 384.1.770 .000 2.000 1% 5% 20% 80% $ 2.000 90.000 16.000.915.770 20x0 Bal 20x1 Bal Bal Schedule – Calculation of the Allowance for Doubtful Accounts December 31.340 4.800.1 Page 190 20x0 Bal 20x1 Accounts Receivable 2.290 38. 20x1 0 – 30 31 – 60 61 – 90 Over 90 $277.000 $27.000 1% 5% 20% 80% $ 2. v.000 $38.000 80.500 9.000 3.480 27.000 25.400.000 Allowance for Doubtful Accounts 16.000 7.000 7.770 4.000 2.000 27.000 12.000 7.000 442.480 27. 20x0 0 – 30 31 – 60 61 – 90 Over 90 $234.840 December 31.000 45.Introductory Financial Accounting.000 31.000 $384.000 60.000 15.000 12.
Dec.500 1.400. 20x7 Balance in allowance before adjustment: $2. . December 31.Introductory Financial Accounting.500 Write-offs .000 Beg Bal + 500.1.000 Credit Sales – 1.000 cr. 31.775 cr.500 400.000 500. Allowance for doubtful accounts.275 500 cr. Bad debt expense** Allowance for doubtful accounts **($500.500 x 5% $6.000 500. Accounts receivable Sales Allowance for doubtful accounts Accounts receivable Cash Accounts receivable Note receivable Accounts receivable Accounts receivable balance.000 = $10. Write-offs Adjustment required Bad debt expense Allowance for doubtful accounts Interest receivable Interest income* *(3.1 Page 191 Problem 3-4 1.000 $135. $6.275 cr.000 1. Beg Bal + 1.000 3. 6.000 x 2%) 10.500 dr.000 x 12% x 1/12) 6.000 Note: The allowance account will now be $500 + $10.000 10. 20x7: $40.000 400.000 Note Receivable 3.275 30 30 2. v.500.000 Collections – 3.
000 1. c c d Czech should have recorded this sale in 20x8 since the goods were shipped FOB Shipping. Delivery expense Cash Sales returns and allowances Accounts receivable Inventory ($500 x 70%) Cost of goods sold Cash ($79.000 56.1.000 (66.200 500 500 350 350 77.000 2.000 49.200 1.500 50.500 500 c.000 + 25.000 $80. v.000 x 70%) Inventory b.000 – 6.000 Ending inventory Cost of goods sold $60.000 509.000 50. Accounts receivable Sales Cost of goods sold ($80.000 56.000) $503. 4.000 – 10.000 50.Introductory Financial Accounting.000 x 99%) Inventory $80. Inventory Accounts payable Accounts payable Cash ($50. .500 x 98%) Sales discounts Accounts receivable d.910 1.590 79. e. 3.1 Page 192 Problem 4-1 1. b Opening Inventory Purchases – net: $500. Problem 4-2 a.
000 (2.Introductory Financial Accounting.1 Page 193 Problem 4-3 a.000 Units 1.000) 69.00 11. v.500) 3.000 77.00 22.000 .000 48.000 (40.100 $1.500 units x $23 = $34. Date May 1 May 5 May 14 May 21 May 29 c.00) + (20 units x $11. Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Purchases (Sales) Units 2.00 16.000 500 3.1.000 3. Ending inventory = 55 units (35 units x $12.500 units 1.500 Balance Unit Cost Total Cost $12.50 11. Purchases (Sales) Units 60 (20) 35 (50) Unit Cost Total Cost $11.000) Unit Cost Total Cost 18.000 33.500 b.00 22.500 1.50) $1.3333 $300 990 770 1.100 560 560 Problem 4-4 a.000 8.000 44.00 12.00 $12.50) = $650 Note that the results for FIFO periodic are the same as for FIFO perpetual.00 11.190 623 Accounts receivable Sales Cost of goods sold Inventory (10 units x $10) + (40 units x $11.000 (2.00 16.00 23.00 11. b. Ending balance = 1.3333 $690 (220) 420 (567) Units 30 90 70 105 55 Balance Unit Cost Total Cost $10.00 36.
330 x $ 52. January 1.1. v.071 *400 x $48 1.000 52. Beginning Inventory.7059 = $ 173.929 .000 58.400 70 3. December 31.860 b. Weighted Average Sales COGS * Gross Profit 3.330 x $100 400 x $48 1.200 50.000 x $50 1.000 173.200/3.000 x $52 930 x $58 $ 333.000 $ 19.400 = $ 52.929 $ 159.940 Units 400 3.330 x $100 $ 333.400 Weighted Average Cost per unit $ 19.000 $ 179.000 53.1 Page 194 Problem 4-5 a.000 3.140 $ 157.000 x $52 1.Introductory Financial Accounting.200 = $179.000 x $58 3. 20x5 Purchases Goods Available for Sale Less Ending Inventory.000 52.7059/unit Cost of Goods Sold = 3.000 x $50 1.330 Gross profit 175. 20x5 Units sold during year FIFO Sales COGS 3.200 50.
000 608.600 400 20. v.000 – 30.1.000 19.Introductory Financial Accounting.000 – 15.000 5.000 $188.000 x 20% Problem 4-7 $600.000 5.000 15.000 $150.000 x 70% $420.000 420.000 x 2%) Accounts receivable Inventory Accounts payable June 12 .000 458.000 10.000 June 2 Sales returns Accounts receivable Inventory Cost of goods sold June 9 Cash Sales discount ($20.000 Sales Returns Estimated cost of goods sold Opening Inventory Net purchases: $480.000 42.000 15.600 June 1 Accounts receivable Sales Cost of goods sold Inventory 30.000 $37.000 30.1 Page 195 Problem 4-6 Net Sales = $615.000 10.000 Customs and Duty Cost of goods available for sale Less Cost of goods sold Estimated value of ending inventory Net loss from fire = $188.000 42.000 Purchase Returns + 8.
v. Ending inventory – Weighted Average Average unit cost = Cost of goods available for sale/Units available for sale Average unit cost = $646.79/unit x 60 units Ending inventory = $58.050 each = = = $ 18.050 each = $ 63.1 Page 196 Problem 4-8 1.000 $ 646.000 210.000 418.79/unit Ending inventory = $978. Cost of goods available for sale: 20 units x $900 each 440 units x $950 each 200 units x $1.1.000/660 units Average unit cost = $978.000 3.000 2. Ending inventory – FIFO: 60 units X $1.727 .000/(20+440+200) Average unit cost = $646.Introductory Financial Accounting.
3).000 48. There are 24.500 by paying 15 days early.300 3. December 31. .000 ii) Accounts Payable Cash Purchase Discounts iii) Accounts Payable Purchase Returns iv) Transportation-In Cash b. If payment was not made within the discount period.000 $200. much higher than the 10% borrowing rate.3 15-day periods in a year (365/15).1 Page 197 Problem 4-9 a. n30 generated savings of $1.500) 77.000 $ 150.500 1.200 3.200) (1.000 3.09% (3. Cost of Goods Sold Schedule for the month ended December 31. It would be equivalent to interest of $1. In December. TOYJOY LTD. thus giving an annual percentage cost of missing the discount of 75. whereas the purchase discount may generate a savings which would equate to an effective interest rate much higher than 10%.000 (1.200 1. i) Purchases Accounts Payable 80. The savings generated by purchase discounts generally make it worthwhile to borrow to take advantage of the purchase discount.1. v.500 1.000 50.300 c. 20x7 Cost of goods sold $ 80.000 80. 20x7 Merchandise inventory. 20x7 Purchases Less: Purchase returns and allowances Less: Purchase discounts Net Purchases Add: Transportation-In Cost of goods available for sale Less: Merchandise inventory. December 1.000 80.500 on a base amount of $48. the full amount of $50.000 would need to be paid on the due date. For example.300 30. discounts taken under a term of 3/15.Introductory Financial Accounting.300 230. it may cost a company 10% to borrow the funds.500 (3.09 24.09%) for a 15day period (30 days – 15 days).
000 $ 100.000 Cost of goods available for sale – COGS = Ending Inventory $110.Introductory Financial Accounting.60 = $36.000 x .40) $ 60.000 O 5.000 O 6.000 – 36.000 = $74.1. Therefore.000 U 6.000 10.000 U 5.000 110. January 13.40% = 60%.000 $24. v. 20x7 Estimated Cost of Goods Sold* Estimated Gross Profit ($60.000 * ** If Gross Profit = 40%. January 1 to January 13 Inventory.000 O 20x7 Cost of Goods Sold 10.000 U N/A N/A 20x6 Retained Earnings 10.000 x . then COGS = 100% .000 O Problem 4-11 Sales.1 Page 198 Problem 4-10 Error i) ii) iii) 20x6 Cost of Goods Sold 10. 20x7 Purchases.000 36. January 1. January 1 to January 13 Cost of goods available for sale Less estimated ending inventory.000 U N/A 5.000 **74.000 .000 U 20x6 Ending Inventory 10. estimated COGS = $60.
1 Page 199 Problem 4-12 a.200) Units 6.40 7.95) + (7.500 Total Cost $47.000 = 21.95 8.40 Ending Inventory Cost of goods sold Cost of goods available for sale Less ending inventory $72.000 Balance Unit Cost $7.000 (6.40) + (8.250 + 47.63793 Total Cost $47.250 125.50 Ending inventory = 9.000 14.700 106.000 6.500 (80.000 + 7.40 .95000 8.500 14.000 Cost of goods available for sale = (6.000 b.250 77.500) Purchases (Sales) Unit Cost $8.759 c.1.800 (47.000 13.000 = $8.500 9.800 54.509 = 100.600 80.000 + 7.509) Units 6.500) 8.000 7.000 units @ $8. Units 7.000 (6.400 $178.500 = 9.40000 9.700 106.500 COGS = 12.000 units @ $9. Units 7.000 + 8.200) 72.250) 72.000) (500) 8.500) Purchases (Sales) Unit Cost $8.40 9.000 (47.Introductory Financial Accounting.700) (4.400 $80.00 8.000 x $7.000 x $8.000 x $8.500 58.000 x $8.500 Units available for sale = 6.50 = $76.00 From Purchase # 1: 1.000 Unit cost = $178.800 (53.000 – 5.000 (5.500 / 21.00) = $178.500 53.600 126.000 – 6.000 8.000 (5.741 COGS = $53.00000 Total Cost $58.50 = $102. v.400) $ 98.000 x $9. From Purchase # 2: 8.000 13.000 8.19231 8. Ending inventory = 6.000 (46.400 d.000 6.100 Balance Total Cost $58.500 + 8.
500/year.000.5 x = $600 $1. Note that we use the estimated useful life of the patent. 5.000 – 5. Depreciation expense = $12.075.000 – (5 years x $18. 3.500 x 430 = $5.160 To move to the units-of-production method.000 – ($85.1.000 – 10. Estimated salvage value = $100. 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.000/80.Introductory Financial Accounting.000 + 5.000)] Net book value = $77. 2. v. c Double-declining-balance rate = x 2 = 50% 4. d c c Net book value = $85. d) ($80.750 .000) x (20. 6.000 + 15.000 – 150.500 It is assumed that the addition should be capitalized and depreciated since it qualifies as a capital asset. a d ($200.000) / 10 = $4.000)/10 = $8.500 7. and not the legal life of 17 years.000 ($20.000 / 9.000 – [($100. we must first know the salvage value of the machinery inherent in the problem.000 x 90%) / 1.000 = $1.000 + 60.1 Page 200 Problem 5-1 1.000 x .000 Net book value = $100.000/year) = $10.5 x 6/12) Net book value = $63.
000 26.000 – 5.500 d.000 Net book value = $65.000 20x8 15.000 x 40% (1/5 x 2 = 40%) Amortization expense Accumulated amortization ($65.000 – 5.000 .000 17.500 16.600 c.000 – 2.000 – 26. v.000 Amortization expense Accumulated amortization 17.000 $12.000) / 3 = $17. 26. Amortization expense for 20x8 = ($53.000) x 40% $12. Amortization expense Accumulated amortization ($65.000 – 12.1.600 15.Introductory Financial Accounting. Amortization expense Accumulated amortization ($65.000) / 5 years 20x7 Amortization expense Accumulated amortization $65.000 x 55.000 16.000 = $53.1 Page 201 Problem 5-2 a.000) / 200.000 b.
Introductory Financial Accounting.286 82.1 Page 202 Problem 5-3 (a) Jan 2. 20x3 Aug 31. 20x7 4.714 1.750 10.500 Dec 31.000 Dec 31.656 25.000 + ($62.808 9.000 10.000) / 5 Repairs and maintenance expense Cash Amortization expense Accumulated amortization Equipment Cash Amortization expense Accumulated amortization Original amount + amortization on amount capitalized on April 31.000 20. 20x7 20.50 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. 20x6 10.750 Oct 31.000 55.000 10.000 2. 20x4 Apr 31.000 / 32 months remaining = $62.000 10.1.50 / month x 8 months = $500 + 10. 20x7 Aug 31.000 = $10.000 $60.656 4. 20x5 Dec 31. 20x5 Dec 31.000 10.808 Dec 31.000 – 10.000 9. v. 20x3 Equipment Cash Amortization expense Accumulated amortization (60.000 2. 20x4 600 600 10.500 Amortization expense Accumulated amortization $10.500 10.000 . 20x5: $2.
20x5 Less Amortization expense 20x3 20x4 20x5 20x6 20x7 to Sep 30: $10.500 38.500 $ 4.000 2.500) $105. 20x7 Original cost of asset Capitalization made on April 1. v.746 Total amortization expense for 20x7 = $8.000 . 20x7 ($12.750) (8.500) (10.000 (10.688 + 20.750 x 9/12 $60.062) $12.000 – 38.000 $108.808 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) Acquisition price of new lathe ** NBV of asset at time of exchange = $50.062 + 1.000 Less fair market value of asset traded in (15.Introductory Financial Accounting.1 Page 203 Schedule 1 Amortization expense for 20x7 Net book value of asset at Sep 30.000) / 39 months = $582 per month x 3 months = $1.000 90.000) (10.688 Amortization expense – Sep 30 to Dec 31.500 $11.500 15.000 – 10.000 * Price of new lathe Less trade-in value less fair market value of asset traded in: Trade in value: $108.000 – 90.000 4.000) (10.746 = $9.1.500 50.000 $18.
Machinery Less: accumulated amortization $27.1 Page 204 Problem 5-5 1.000/year $6.000 for 6-month period 3. v.000) $18.000 Installation Charges = $27. The freight is included in the cost but the repair is not to be capitalized.000)/4 = $6. Amortization expense Accumulated amortization .000 3.1.000 9. Cash Accumulated amortization – Machinery Machinery Gain on sale of assets .Introductory Financial Accounting.000 27.Machinery **($27.000 4.000* 27.000 *25.000 20.000 2.000 The cost plus installation.000 – $3. Machinery Cash 27.000 (9.000 Cost of machine + 2.000 x 6/12 = $3.000** 3. 2.
000 – 20.000) / 41.000 – 20.000 = $22.500 Straight-line method = (120. ii.000 – 25.000 – 22.000 x 9.1.183 183 120. i.000)/4 = $25.750) Loss on disposal of equipment Equipment Cash Accumulated depreciation ($22. ii.000 + 18.1 Page 205 Problem 5-6 a. ii.000 – 20.500 + 23.Introductory Financial Accounting.000)/(5-1) = $18.500 – 20.000 45.683) Gain on disposal of equipment Equipment $75. Straight-line method = (120. v.750 Units-of-production method = (120.000 $=75.000 Units-of-production method = (120.000 b. i.000 43. .000 = $22. i.683 Cash Accumulated depreciation ($25.250 $120. c.000 x 12.000)/40.750 1.
if the machine generates less revenues as it gets older..000 – 15.000 (2.250) 103.750 x 3 years Net book value Less proceeds on disposal Loss Cash Accumulated amortization Loss on disposal Machine $100.800 $157.000 14.800) 5. Under this method.1. amortization is high in the first year and decreases in amount as years go by. 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.e. If the machine does not provide decreasing benefits. then this method should not be used. v.000 (53.000 x 2% Customs and duty costs Preparation and installation costs b.Introductory Financial Accounting.750 157.1 Page 206 Problem 5-7 a. $140.000) $ 3. i. Costs capitalized: Invoice price Less discount .000 $157. A double-declining-balance amortization method could be used to abide by the president’s request.000) / 8 = $17. Cost Less accumulated depreciation: $17. c.000 Depreciation expense: ($157.250 3.750 (100.000 53.000 cannot be capitalized to the asset since the asset was purchased and not self-constructed.$140.750 .
1 Page 207 Problem 6-1 1.375 The journal entry to record the premium expense would be: Premium Expense Premium Liability 34.600 Problem 6-2 The premium expense would calculated as follows: $375.Introductory Financial Accounting.000 PV=$11. 6. Interest expense for the year = $11.000.375 34.321 4. 2. 5.500 / 5 x $2 $18. a b b) PV of bonds at issue: PMT=800.018.018 x 6% = $688.000 /10 coupons /15 redemption ratio x $25 x 55% = $34.375 The journal entry to record the actual costs incurred during the year would be: Premium Liability ((22. c c b Premium expense: 150.000 (9.472.1. N=10.000 / 5 x $2 x 30% Premium redemptions: 23.500/15) x $25/card) Cash 37.472. 3.500 37.500 .000. I=6%. FV=10. v.400) $ 8.
3.1.378 25.487 3. 20x2 Interest expense (540. 20x2 would be as follows: Jun 30.000.1 Page 208 Problem 6-3 The journal entry to record warranty expense is: Warranty expense ($3.554 x 4%) Bonds payable Cash 21.000 Warranty Expense – 130.000 x 5%) Warranty Liability The journal entry to record actual warranty costs incurred is: Warranty Liability Cash.513 25.554 The journal entry to record the interest payments using the effective interest method of amortization is as follows: Dec 31. 20x1 Interest expense (540. 20x1 Cash Bonds payable $540.Introductory Financial Accounting.622 3.378) x 4% Bonds payable Cash 21. A/P.000 $150.554 $540.000 Warranty Costs Incurred = $185.000 The journal entry to record the interest payment of Jun 30.000 $150.000 The warranty liability at the end of the year will be $165.554 PMT 25000 FV 500000 Enter Compute The journal entry to record the issuance of these bonds is as follows: July 1.000 130. v.000 Opening Balance + 150.554 .000 . Problem 6-4 The value of the bond issue will be as follows: N 10 I/Y 4 PV X= 540. Inventory 130.000.
301 $432.000 416.708 425.000. The journal entry to record repairs as performed is debit Warranty liability. $10. Therefore.000. I = 4. FV = 10. 3. v. PMT = 425. the total debits to the account for the year is the total cost of repairs made during the year.301 Dec 31. Therefore.292 7.301 x 4%) Premium on Bonds Payable Cash Interest expense* Premium on Bonds Payable Cash * (10.000 $10.301 10. The journal entry to record warranty expense is debit warranty expense credit warranty liability. $6.1.016 425.000.000 Jun 30. 4. 20x5 Dec 31. credit cash/inventory/etc.432. 20x5 Problem 6-6 1. .000 + 5.984 8.Introductory Financial Accounting.800 = $10.200 – 6.200 2.1 Page 209 Problem 6-5 PV of bond issue: N = 30. $5.301 – 7.432.432.000 417.432.000.800. the total credits to the account for the year is the warranty expense for the year. Solve for PV = $10. 20x4 Cash Premium on Bonds Payable Bonds payable Interest expense ($10.000.708) x 4% $10.
277 20.189 2.055 = $509.500 Dec 31.500 Jan 1.1 Page 210 Problem 6-7 Proceeds on bond issue: N 6 I/Y 4 PV $513. 20x7 20.976 = $511.500 Jan 1.500 Dec 31.714 x 4% Bonds payable Cash Interest expense $504.937 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $506. 20x6 Dec 31.055 22. 20x7 20.105 20.445 20.097 20.500 Jul 1.445 20.074 – 2.1.445 2.105 – 1.311 = $502.403 x 4% Interest payable $513.105 x 4%) Bonds payable Cash Interest expense $513.223 22.500 FV 500.105 $513.074 x 4% Bonds payable Cash Interest expense $509.097 .524 1.223 = $504.311 22.129 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $511.105 PMT 22.976 22.714 – 2. 20x8 Jul 1.129 – 2. 20x8 20.137 = $506.Introductory Financial Accounting.363 2.937 – 2. 20x6 Cash Bonds Payable Interest expense ($513.000 Enter Compute Jan 1. 20x6 20.277 2. 20x7 Jul 1.137 22. v.277 20. 20x8 20.
000.Introductory Financial Accounting.171. June 30.591 PMT 60000 FV 1000000 2. Dec 31.591 58. Enter Compute N 40 I/Y 5 PV X= $1.591 $1.171.591 x 5%) Bonds payable Cash (1.491 60. 20x7 .420 60.170.000 500. 20x7 ($1.000 3.000 x 12% x 1/2) Interest expense (1.171. 20x6 Cash Bonds payable Interest expense (1.000 58.1.500 500.1 Page 211 Jan 1. 20x6 4.171* x 5%) Bonds payable Cash (1.420) $1.097 2.171. 20x9 Interest payable Bonds payable Cash Bonds payable Cash 20. July 1.403 22.580 1. v.000 Problem 6-8 1.171.591 – 1.000.000 x 12% x 1/2) *Bonds payable balance as of June 30.509 1.
093 5. c.850) x 10% x Bonds payable Cash ($1.093 40.850 40.000 $45. Interest expense for 20x7 = $44.000. The cash outflow is $80. b. The interest expense will increase every year since the book value of the bonds payable will also increase.000.943 False False.850 4.000 x 8% x ) 2nd half of 20x7: Interest expense ($897. d.Introductory Financial Accounting.850 + 45. v.000 x 8% x ) a.1. False.1 Page 212 Problem 6-9 The journal entries to record interest expense for 20x7 would be as follows: 1st half of 20x7: Interest expense ($897.000 True.000 exactly.000 x 10% x ) Bonds payable Cash ($1. .093 = $89.000 + 4. $44.
520 .000 2.000 x $0.1.000 44.400 14. Shareholders’ Equity Common Shares.000 12. 400 shares issued and outstanding Retained Earnings ($0 + $56.080 2. v.$2. c 150.000 39.000 21.000 shares issued and outstanding Preferred Shares.000 .000 40. $6.000 February 10 February 15 February 26 12.000 shares outstanding after the split.000 2. non cumulative.Introductory Financial Accounting. 44.080 February 27 February 28 21. Problem 7-2 1.1 Page 213 Problem 7-1 1.400 .000 126. 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.$14.32 $14.400 2.520 $217.080 14.000 40.080) Total Shareholders’ Equity $ 138.000 shares x 3/2 = 225.000 40.
h.1.000 Net Income – 15. 2.1 Page 214 Problem 7-3 1.000 3.000 20.000 3.000.000 180. v. e.000 Preferred Shares.000 60.000.000 180. a. issued and outstanding 3.000 $115.000 20.000 3.000 53.Introductory Financial Accounting.000 b.500 12.500 .500 Dividends) $348.000 40.500 50. cumulative – authorized 50.000 Retained Earnings ($64.000 3. g. Cash Common Shares Equipment Preferred shares Cash Preferred shares Dividends (or Retained Earnings) Preferred Dividends Payable Cash Common shares Preferred Dividends Payable Cash Retained earnings Cash Bonds payable Premium on bonds payable Common shares $115. Shareholders’ Equity Common Shares.000 48.000 3.500 $456.000 12. issued and outstanding 3.000 40. f. d. c. authorized 100.
Introductory Financial Accounting. 12. 9.600 314.400 320. .000 12. 8.000 25.5% / 2) Interest expense ($419.600.000 75.588 412 13.000 30.000 1.000 25.000 5.000 75. 1.000 945.576 424 13.600 x 3%) Bonds payable Cash ($400.000 16.000 2.1 Page 215 Problem 8-1 a.000 12. Equipment Cash Warranty liability Cash $1.000 960. 4.520.000 $1.000 34. 3.000 945.000 5. v.000 34. Purchases Accounts payable Accounts Payable Purchase returns Cash Common stock Accounts payable Cash Salaries payable Salaries expense Cash Interest expense ($419.000 1. 7.000 5.600 – 412) x 3% Bonds payable Cash ($400.000 16. Accounts receivable Sales Cash Accounts receivable Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable 5.000 x 6.000 960.000 30.520.000 x 6. 6.000 5.5% / 2) 11.000 5.600.1. 10.
= The balance in the allowance for doubtful accounts should be: $144.400 + 2.400 Balance required: $2.000 x 7% 23.000 x 20% 12.1 Page 216 13.600 6. 18. + 34.690 22. Insurance expense Prepaid insurance Balance in prepaid insurance account: $1.31 Prepaid insurance Cash Operating expenses Cash Bad debt expense Allowance for doubtful accounts The balance in the allowance for doubtful accounts is: $23.800 400 $3. $23.930 23.000 x $17.000 cr.400 $3.400 130.000 17.000 cr.000 / (10. 15.000 40.310 4.930 dr. $4.000 x 50% Bad debt expense 40.000 dr.000 23.930 16.400 3. 2.31*) Retained earnings Cash * Average book value per share = $150.000 14. $6. v.010 4.000 17.1. Income taxes payable Cash Common shares (1.000) = $17.000 x 3% 43.400 .320 3. + 5. 17.000 + 3.400 x 2/12 Insurance expense 3.Introductory Financial Accounting.000 130.400 2.000 + 75.930 cr.000 dr.
000 13.700 80.400 4.000 13.000 24.000 80.256 x 40% = 53. Cost of goods sold Inventory ($378.000 – 320. amortization – equipment** Patents*** * $300.000) Purchase returns Purchases Check: Opening inventory Purchases – net ($960.000 16. 24.000 24.000) Cost of goods available for sale Less ending inventory Cost of goods sold Inventory loss Allowance for decline in value of inventory 886.000 58.000 $320.250 20.Introductory Financial Accounting.702 53.500 27.400 *** $34.1 Page 217 19.000 Purchase) = $137.702 22.000 53.000 / 8 = 4.1.000 21.700 6.250 39.264.000 NBV Beg + 30.000) $886.000 x 20% = $27. 6.000 – 16. v. amortization – building* Acc. Amortization expense Acc.600.150 7. .5% Salaries expense Salaries payable Retained earnings Cash Income tax expense Income taxes payable $134.000 960.000 944.000 1.702 23.500 ** ($145.000 / 40 = $7. Warranty expense Warranty liability $1.000 x 1.000 (378.000 – 38.
500 Acc Amort .700 6.400 3.400 65.600 BALANCE SHEET Accts Receivable 176.930 17.000 Bonds Payable 412 419.Equip 38.000 1.000 13 Inc Taxes Payable 40.000 175.000 40.000 25.000 B 19 E 10 10 B B 11 E Equipment 145.000 30.600 424 418.702 25.000 30.000 53.700 B 22 E E B 20 E Prepaid Insurance 1.520.Bldg 120.250 29.510 B E .600 6.000 Land 40.750 19 20 14 23 Retained Earnings 4.000 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 Allow/Doubt Accts 34.000 15.000 378.200 80.000 23.520.000 Liabilities & Equity Accounts Payable 16.000 4.690 144.000 27.600 5.690 B 24 B 15 E 18 B 12 B 21 B Acc Amort .000 945.000 2.310 150.000 5.000 13.702 Warranty Liability 25.500 127.930 Inventory 320.000 24.400 2.000 34.000 12.764 Common Stock 17.000 207.000 960.1.000 126.000 80. v.000 13.000 75.000 58.400 Allowance for Decline in Value of Inventory 13.1 Page 218 Part (b) Assets Cash 36.000 23.000 1.000 75.000 B 19 14 B 7 E B E Patents 34.Introductory Financial Accounting.000 320.000 222.000 5.000 59.400 130.000 5.000 5.000 12.000 13.400 400 Building 300.000 22.600.000 945.000 1.000 7.000 127.
39.150 24 Income Tax Exp.600.000 10 10 E Interest 12.100 Warranty expense 24.000 9 22 E Salaries 314. 53.400 6.000 INCOME STATEMENT Purchase Returns 16.702 20 Inventory Loss 13.000 1 20 Cost of Goods Sold 886.400 21 18 16 Operating expenses 130.000 960.000 Revenues Sales 5 20 20 6 1.700 321.000 .164 Insurance 3.1.Introductory Financial Accounting.000 16.1 Page 219 Expenses Purchases 960.588 12.576 25.930 19 Amortization exp. v.000 17 Bad Debt Expense 23.
1.600 222.500 175.150 13. 20x6 Dr.702 12.930 378. .000 886.1 Page 220 c.000 65.000 3. 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 $15.680.690 59.164 24.000 $17.000 400 40.000 13.000 321.510 1.750 126.600.196 Cr.000 6.400 29.Introductory Financial Accounting.400 130. Haider Corporation Trial Balance As at December 31. v.000 53.000 418.100 25.764 207.000 23.702 $2.196 $2.000 300.700 25.930 39.680.000 127.
Haider Corporation Income Statement for the year ended December 31.554 (4.150 130. 20x6 Retained earnings.400 23.554 Haider Corporation Statement of Retained Earnings for the year ended December 31. v.000 554.1 Page 221 d.000 3. 20x6 $144.702 $80.Introductory Financial Accounting.000 39.000 321.600.200 80. 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 $1.420 25.580 159.100 24.164 134.256 53. January 1.064 .930 13.000) $140.000 886.1. December 31.000 714. 20x6 Net income Premium on redemption of common shares Dividends Retained earnings.690) (80.
400) 172.850 $936.070 365.754 $936.600 29.000 (65.702 12.166 207.402 418. v.1 Page 222 Haider Corporation Statement of Financial Position as at December 31.1.600 204.Introductory Financial Accounting.500) 175. 20x6 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance $ 15.764 589.690 140.750 351.000 $300.070 40.000 400 585.500 109.064 347.700 25.000 (127.000 170.920 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Shareholders’ Equity Capital stock Retained earnings $126.000 6.920 Land Building Less accumulated amortization Equipment Less accumulated amortization Patents – net .
000 24.800 4.600 $9. 4. 7.000 x 9% x 4/12 Interest expense Interest payable $60.000 k.000 l. 12.000 – 4.000 12.000 f.600 c.800 3. v.500 Warranty expense Warranty liability 10. . j.000 24.500 4. Bad debt expense Allowance for doubtful accounts $320.000 x 3% Wages expense Wages payable Insurance expense Prepaid insurance $9. d.000 16.600 3.Introductory Financial Accounting.600 x 9/24 Amortization expense Accumulated Amortization ($80.000) / 10 Prepaid rent Rent expense $9. 700 700 4.000 x 3% x $40 Allowance for doubtful accounts Accounts receivable Income tax expense Income taxes payable $9. 4.600 x 5/12 Interest receivable Interest revenue $12. 360 360 g.500 h.000 4.1. 4.600 e.600 b.900 / 17) Patents or Accumulated Amortization – Patents Supplies inventory Supplies expense Increase in inventory = $9.200 – 4.700 4.600 7.700 i. 16.000 x 10% x 9/12 Amortization expense ($11.1 Page 223 Problem 8-2 a.
630 1.2.1. 20x2 (2. April 1.120 Prepaid) Advertising Depreciation (3.000 / 5 x 5/12) $32.094 6.740 110 4. 20x2 Loan balance.1.240) Interest April & May .226 Uncollected Sales) Cost of goods sold Purchases (14.880 .500 + 240 Payable) Maintenance Utilities (4.420 x 20%) Net income 1 Loan payment Less interest: $2.880 x 10% x 3/12 Principal payment.686 19. v.270 800 424 250 13.536 116 6. Income Statement for the five months ending May 31.840 Ending Inventory) Gross margin Operating Expenses Rent (1.800 .500 5.640 $44 .Introductory Financial Accounting.284 $5.640 x 10% x 2/12 $312 72 240 2. April 1.316 12.920 .770 Cash Sales + 5.130 Rebate + 256 Payable . 20x2 Sales (22.000 + 270 Payable) Insurance (1.320 Collections on Credit Sales + 4.1 Page 224 Problem 8-3 MAS Inc.1.400 Baking Materials Purchases .300 Prepaid) Salaries and wages (5.420 1.136 Operating Income Interest (72 + 44)1 Net income before taxes Provision for income taxes (6.
370 . Balance Sheet as at May 31.370 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 (2.226 1. v.600 .31.680 4.Introductory Financial Accounting.500 5.840 1.640 .1 Page 225 MAS Inc. 20x2 ASSETS Current Assets Cash (33.636 $12.1.466) Accounts receivable Inventory Prepaid insurance Prepaid rent Fixed Assets Equipment Accumulated depreciation $2.960) Shareholder's Equity Common Stock Retained earnings $526 240 1.284 44 960 3.136 7.734 2.134 4.000 -250 2.620 3.120 300 9.054 1.750 $12.
000 $338. 20x1 ASSETS Current Assets Cash Marketable securities* Accounts receivable Inventory Noncurrent assets Equipment Accumulated depreciation $24.000 19.000 SHAREHODLERS' EQUITY Shareholders' Equity Common stock Retained earnings * Plug to balance.Introductory Financial Accounting.000 63.1.000 80.000 155.000 278.000 $338.000 .1 Page 226 Problem 8-4 Morrow Wholesale Balance Sheet as at December 31. v.000) 60.000 80.000 (20. $275.
000 34. v.000 + 1.000 24. beginning of year Dividends Retained earnings.000) Miscellaneous Operating income Interest expense ($5.600 7.1 Page 227 Morrow Wholesale Income Statement and Statement of Retained Earnings for the year ended December 31.000 50.600) Depreciation (80.220 63.000 x 80%) Gross margin Operating expenses Salaries (10.900 (300) 5.000 4.220 .000 200.000 (10. 20x2 Sales Cost of goods sold ($250. end of year 11.000 ÷ 10) Bad debts (155.Introductory Financial Accounting.100 15.000) $70.146.000 9.1.000 5.000 x 12% x 6/12) Gain on sale of equipment Gain on sale of securities Net income before taxes Income tax expense (30%) Net income Retained earnings.000 .380 17.500 $250.600 8.
ending Purchases Cost of goods sold = Opening inventory Purchases Less ending inventory $180.500 SHAREHODLERS' EQUITY Current liabilities Accounts payable Accrued wages payable Note payable Interest payable Dividends payable Income taxes payable Shareholders' Equity Common stock Retained earnings $36.000 70.000 36.000 216.205.000 330.20.000 (8.Inventory Purchases of merchandise A/P .000 .000) $200.000 1.000 7.000 $216.000 .000 $80.500) Inventory (Note 1) Prepaid advertising Noncurrent assets Land (19.220 345.000 .000) $224.500 23.600 5.000) Accumulated depreciation (20.20.000 300 10.000 + 4.Introductory Financial Accounting.000) Equipment (80.220 $405.000 + 406.000 $405.000 + 8.280 275.000 (96.1 Page 228 Morrow Wholesale Balance Sheet as at December 31. v.000 10. 20x2 ASSETS Current Assets Cash (24.380 60.500 Note 1 .1.000 .000) 52.500 96.000 60.
1.000 COGS + 7.800 Cash flow from investing Proceeds on sale of equipment (Note 1) Purchase of equipment 20.800 – 105.12.500 Increase in cash ($175.000 – 69.200 $20. Ginger’s Cookies Ltd.400 – 61. 20x6 Cash flow from operations Cash collected from customers ($7500. beginning Cash.000) 175.800) (112.000) Gain on sale Proceeds Note 2 – Dividends paid Net income Less increase in Retained Earnings ($108.000 Salaries Expense .000 (99.500) Cash.400 $ 99.000 Interest expense .000 (294.000 Increase in Inventory .10.1 Page 229 Problem 9-1 a.300 19.900 47.000) (105.000 $146.000 15.000 Increase in Interest Payable) Cash paid out for income taxes ($79.000 Sales . ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($45.000) (46.600 Increase in Salaries Payable) Cash paid out for other operating expenses Cash paid out for interest ($32.500) (69.100 Income tax expense – 33.500) 1.000 Increase in A/R) Cash paid out to suppliers ($300.000 – 40.7.000 (125.1. v.000) $ 5.100 Increase in Income Taxes Payable) $740.500 .400) (80. Statement of Cash Flow for the Year ended December 31.000) Cash flow from financing Issue of bonds payable Dividends paid (Note 2) 30.Introductory Financial Accounting.000) (31.200 Increase in AP) Cash paid out for salaries ($120.000 $20.
800 .000) (10.1 Page 230 b.Introductory Financial Accounting.1.000 (15.900 7.100 $175.200 7. v. 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 $146.600 1.000) 12.000) (7.000 33.
842. 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 $239.695.000 466.000 $3.000) (37. beginning of year Amortization expense Accumulated Amortization on disposal: $158.000 ? (71. beginning of year Cash.Introductory Financial Accounting. end of year 1 Accumulated Amortization.000) (37.000 (50. v.000 (48.000) (11. Statement of Cash Flow for the year ended December 31. end of year Amortization expense = $218.000) Cash flow from financing Redemption of bonds payable Proceeds on issue of mortgage payable Proceeds on issue of common shares Cash dividends paid3 (487.000 218.1.000 Decrease in cash Cash.000) 7.000 (13.000 $319.000 150.000) 350.000 111.000 (543.000) 353.000) 17.000) $3.000) (5.000) (34.000 .000) (463. McDuff Ltd.000 Accumulated Amortization.000) (12.000 – 87.1 Page 231 Problem 9-2 a.000 Cash flow from investing Proceeds on sale of assets Purchase of capital assets2 80.
000 Income tax expense – 17.000 Decrease in Interest Payable) Cash paid out for income taxes ($250.000 ? (158. Cash flow from operations – Direct Cash collected from customers ($4.400.000) $466.500.000 b.000 COGS + 48.000 $319.000 (2.711.000 Amortization Expense + 11.000 Decrease in AP) Cash paid out for operating expenses ($700.000 Salaries and Wages Expense + 37.000) $5.000 Decrease in Salaries and Wages Payable) Cash paid out for interest ($67.460.000 Sales + 111.000 Increase in Prepaid Expenses) Cash paid out for salaries and wages ($850.000 Interest expense + 5. v.000) (493.000 3 Retained Earnings.1. ending Additions to capital assets = $543.000) (72.Introductory Financial Accounting.000 239.1 Page 232 2 Capital Assets.326.000 – 218. beginning of year Add net income Less dividends Retained Earnings.000 Increase in Inventory + 12.611.000) (233. end of year Dividends = $50.000 Decrease in A/R) Cash paid out to suppliers ($2.000 $5.000) (887.000 Increase in Income Taxes Payable) $4. beginning Additions Disposals Capital Assets.000 ? $508.000 .
800 $ (1.300) (1.Introductory Financial Accounting.600 Increase in Inventory) Cash paid to employees ($39. 20x5 Cash Flow from Operating Activities Net Loss Adjust for non-cash items Depreciation Add (deduct) adjustments to non-cash current assets and liabilities: Increase in accounts receivable Increase in inventory Increase in prepaid Insurance Decrease in salaries and wages payable Increase in interest payable $ (3.500) (1.1 Page 233 Problem 9-3 (a) HHC LTD. Cash Flow Statement for the year ended December 31.100) $900 .000 COGS + 1.200 – 100 Increase in Interest Payable) $216.700) (2.900) (5.500) $ 900 (b) Cash Flow from Operating Activities Cash collections from customers ($218.300 + 400 Decrease in Salaries and Wages Payable) Cash paid for insurance ($2.000 Sales – 1.800 + 100 Increase in Prepaid Insurance) Cash paid for rent Cash paid for interest ($1.500 (166.400) 7.600) (39.1.500 Increase in Accounts Receivable) Cash paid to suppliers ($165. v.600) (100) (400) 100 (3.
000 Increase in A/R) Cash paid out to suppliers ($600.000 12.000 Increase in Inventory + 18.000 + 17.000 $50. beginning Cash.000 (50. Statement of Cash Flow for the Year ended December 31.000 (20.000) (165.000 Cash flow from financing Issue of bonds payable Dividends paid 25. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($32.000 30. Toram Ltd.000 26.000 (4.000 Note 2 – Proceeds on sale of long-term investment Net book value of investment Gain on sale Proceeds $ 18.000 COGS + 32.000 30.53.000) (25.000 .1 Page 234 Problem 9-4 a. v.000) 24.000) 17.000) Loss on sale Proceeds $ 11.Introductory Financial Accounting.000 Increase in cash ($32.000 – 25. 20x6 Cash flow from operations Cash collected from customers ($900.000) $7.000) Cash.000 Sales .000 (650.000 – 21.1.000) 0 0 32.000 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 Decrease in AP) Cash paid out for other operating expenses Cash paid out for interest Cash paid out for income taxes $847.
1 Page 235 b.000) (18.000) $32.000) (32.000) (53.000 (12.000 4.Introductory Financial Accounting.000 43. v.000 . Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Loss on sale of capital assets Gain on sale of long-term investment Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Decrease in Accounts Payable $100.1.
000 No impact on working capital since the decrease in cash is equal to the decrease in accounts payable.000 purchased .25. current liabilities . d Average receivables = ($50.000 / 50.000.000 = 1.29 and working capital stays the same. 5. 2. then CL = 230.000 / 75.000 – 20.$100.000 / 70.1.000 and CA = 200.78.500 = $400.1 Page 236 Problem 10-1 1. Impact is on the current ratio.000 = 1.000 + 120. c .250 Days sales in A/R = $32.8.000 – 120.000.000 Inventory turnover = $300. a c b Average receivables = ($40.000 is made.000 / 365) = 94 days Inventory increased by $20. 8. v.000 = 6 Assume an initial amounts as follows: current assets .000. current ratio = $100.000 ($320.000 = $40.000 = 6.$300.500) / 2 = $31.000 + 540. a 6.000 + 40.000 Inventory turnover = $450.$80. the current ratio becomes $90. c c Average inventory = ($30. Assume that a payment of $10. If the invoice paid is $20.250 / ($125.000 + 55.500 Net credit sales for 20x8 = $52.000 + 22.000 and CA = 180.000 COGS) Beginning inventory = $60. 4. d 3.000 Average inventory = ($60.000) / 2 = $50.500 x 7 = $367.000. the current ratio drops to 0.500 + 32.500 Total net sales = $367. 7.000 / 80.000) / 2 = $75.0 times 9.Introductory Financial Accounting.000 = $450. Assume that CL = 250.000) / 2 = $52.000 COGS = $30.000 then the current ratio is 0.
5 days Solvency Analysis: 20x5 Debt-to-Equity Ratio* 920.000 + 550.000 + 275.000 = 1.000 / 371.000) ÷ (1.07 20x4 850.000 + 275.000 = 4.000_ / 365 = 70.000 + 275.000 / 793.07 200.000 = 0.000 + 220.60 (34.00 Times Interest Earned 230.000) / 365 = 53.000 / 50.000) / 371.000 = 0.000 = 1.68 (34.1 Page 237 Problem 10-2 Liquidity Analysis: 20x5 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 712.76 (12.200.000 / 379.000 = 1.000) / 379.7 days 20x4 594. v.000 = 1.000 / 60.83 * debt is defined as long-term debt in this case .000 / 863.000 + 400.000) ÷ (1.000 = 3.88 (12.Introductory Financial Accounting.400.1.
98 Days Sales in Accounts Receivable Total asset turnover .900.000 = 10% 230.300.014.10 20x4 $1.Introductory Financial Accounting.000 / 2.000 / 2.1 Page 238 Profitability Analysis 20x5 Gross Profit Percentage Return on Sales Return on Assets $900.200.900. v.000 / [(863.000 + 793.1% 20x4 $700.000) / 2] = 10.9% Return on Equity Asset Management (Activity Ratios) 20x5 Inventory turnover $1.000) / 2] = 3.5% 200.875.162.014.000 + 725.000 / [(2.3% 98.000 = 10.900.000) / 2] = 13.000 / [(2.000 / 365) = 40.8% 230.300.1.000 + 220.000 + 2.000 + 350.000 = 39.000) / 2] = 12.400.000) / 2] = .000) / 2] = 1.000) / 2] = 3.000 + 1.000) / 2] / (2.000 + 2.000 + 1.48 [(220.162.3% 200.900.000 + 340.000 / 1.000 / [(793.000 / [(340.000 / [(425.000 / 365) = 39.000) / 2] / (1.2 days 2.300.3 days 1.000 / 1.000 / [(2.014.300.000) / 2] = 11% 110.000 / [(2.66 [(275.000 = 36.000 + 200.875.014.
000 + 480.679.52 days 20x6 1.167.000 + 480.000 + 635.000 + 524.000) / 560.000) / 365 = 97.000) ÷ (1.000 = 2.000 = 1.1 Page 239 Problem 10-3 Liquidity Analysis: 20x7 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 1.000 = 2.13 (20.114. v.32 20x6 800.000 = 2.000 + 463.72 days Solvency Analysis: 20x7 Debt-to-Equity Ratio* 820.300.08 * debt is defined as long-term debt in this case .Introductory Financial Accounting.1.000 = 0.000 / 56.000 + 524.000 / 524.576.000 = 0.08 (37.000 = 1.000 / 60.000.000 / 560.30 137.000 = 0.45 Times Interest Earned 65.000 / 2.000) ÷ (1.04 (20.92 (37.000) / 524.000 / 2.000) / 365 = 135.
000) / 2] / (1.000 / [(3.000 + 2.000 / [(4.000 / 2.1% 137.000 + 485.52 20x6 $1.Introductory Financial Accounting.003.000 = 38.000 / 1.000 + 4.000) / 2] = 0.700.1 Page 240 Profitability Analysis 20x7 Gross Profit Percentage Return on Sales Return on Assets $800.003.000 + 300.000 / 365) = 87.000) / 2] = 3.000 + 570.000) / 2] = 1.1% 20x6 $700.44 Days Sales in Accounts Receivable Total asset turnover .628.000 / [(2.000 + 524.576.000) / 2] = 2.5% 51.000 / [(2.000 / 1.000 + 2.003.700.003.6% 3.808.000 + 3.100.1.000 / [(650.000) / 2] = 1.956.000) / 2] / (2.000 = 8.100.000) / 2] = 1.5 days 1.679.100.000) / 2] = 0.13 [(480.956.000 / [(4.100.000 = 41.000 / [(3.2% 65.808.3 days 2.000 / [(570.679.1% 65.000 / 2.1% 137.000 / 365) = 88.700. v.000) / 2] = 0.000 + 3.000 + 4.90 [(524.000.000 = 3.9% Return on Equity Asset Management (Activity Ratios) 20x7 Inventory turnover $1.700.300.
This action might not be possible to undo. Are you sure you want to continue?
Lo hemos llevado donde lee en su other device.