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Jacques Maurice, MBA, CA, CMA, FCMA Rebecca Renfroe, B.Comm, B. Ed, CMA
Introductory Financial Accounting, v.1.1
Table of Contents
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
The Accounting Cycle – Income Statement and Statement of Financial Position Cash and Investments Accounts Receivable Inventory Long-term Assets Liabilities Shareholders’ Equity The Accounting Cycle Revisited The Statement of Cash Flow Financial Statement Analysis Solutions to Problems
3 48 58 67 86 100 114 122 131 146 159
Introductory Financial Accounting, v.1.1
The Accounting Cycle – Income Statement and Balance Sheet
The Accounting Equation To begin any discussion about accounting, the Accounting Equation is a critical starting point. The key components of the accounting equation are Assets, Liabilities and Shareholders’ Equity. The definition of an asset is a probable future economic benefit obtained or controlled by a particular entity as a result of a past transaction or event. There are three key components to this definition: a) the asset will provide some probable, future benefit to the company, b) the asset is under the control of the company; and, c) the asset has come into the company’s control through some past transaction or event. Examples of assets are Cash, Accounts Receivable, Inventory and Capital Assets. A liabilitiy, on the other hand, is an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. Examples of liabilities are accounts payable and accrued liabilities, bank loans and long-term debt. If you were to liquidate all of the assets of a company and pay off all liabilities with the proceeds, any amount left over would be the Equity in the company. Shareholders’ Equity, as it is sometimes called, is a numerical representation of the shareholders’ interest in a company. The Accounting Equation is as follows:
Assets = Liabilities + Shareholders’ Equity
The equation must hold true at all times. How we manage this is through balanced entries. That is, each time we record an event within a company’s accounting life, if we affect one side of the equation, we must also affect the other, OR we can both increase and decrease the same side of the equation to keep it in balance. Hence, we have our second truth of accounting: Debits = Credits The normal balances of the above accounts are as follows: Assets - Debit Liabilities - Credit Shareholders’ Equity - Credit
Introductory Financial Accounting, v.1.1
Let’s look at a few examples of manipulating the Accounting Equation. Recall the accounting equation:
Assets = Liabilities + Shareholders’ Equity
Example (a) When an owner invests their own cash in starting up a company, this will have two effects. First, the cash account (an asset) will increase, and the Contributed Capital account will also increase. The Contributed Capital account is part of Shareholders’ Equity and comprises of all contributions made by the shareholders to the company. Say an owner invests $50,000 of their own money to start a company. The journal entry would be: Cash Contributed Capital 50,000 50,000
The cash account gets debited (dr.) and the Contributed Capital Account gets credited (cr.). Note the convention above: • when writing journal entries, the account label that gets debited is flush against the left margin and the account label that gets credited is tabbed in; • the debit dollar amount is in the first column whereby the credit dollar amount is in the second column. The equation stays in balance as we are increasing both sides of the equation: Assets + 50,000 = Liabilities + Equity +50,000
That same company then uses some of that cash to purchase inventory to resell. That inventory costs $10,000. The journal entry would be: Inventory Cash 10,000 10,000
Note that both of these are asset accounts, but our equation stays balanced because we are increasing one asset (inventory), but decreasing another (cash): Assets + 10,000 - 10,000 = Liabilities + Equity
1 Page 5 (c) That same company then purchases an additional $5.000.000 (d) = Liabilities +10. therefore.000 + Equity .000 Both the Equipment account and the Cash account are assets.000 worth of inventory on account. The journal entry would be: Equipment Cash 75. they do not pay cash but take on an account payable with the supplier. v. and increasing a liability.000 = Liabilities +100.000.Introductory Financial Accounting.000 + Equity The company then uses cash to purchase equipment that costs $75.000 We are increasing an asset.000 Upon signing the loan.000 cash. they will take on a liability to pay back the bank the $100.000 . therefore. The loan is for $100. our equation holds true: Assets + 10. The journal entry would be: Inventory Accounts Payable 5.000 75. By increasing both sides of the equation. we increase the asset account Cash. therefore. an asset and a liability.000 100. Furthermore. The journal entry to record the loan would be: Cash Bank Loan 100. our equation stays in balance: Assets + 100.000.1.000 5. that is. the company would receive $100.000 = Liabilities + Equity (e) The same company is a little short on cash and has to take out a loan from its bank. by increasing one and decreasing another the equation holds true: Assets + 75.75.
1.Introductory Financial Accounting. The journal entry would be: Cash Sales Revenue 30. an debit entry to an expense account is viewed as a reduction of Equity and a credit entry to a revenue account is viewed as an increase in Equity. Revenue accounts normally have a credit balance. the income and expense accounts are closed out to zero.000 30. For example.000 in sales in its first month.000 . i. when a revenue account is increased we credit the account. which is part of the Shareholders’ Equity section of the Statement of Financial Position.000 The accounting equation is maintained since Assets are increased and Equity is increased: Assets + 30. Income Statement accounts will consist of Revenue accounts or Expense accounts. At the end of each year. via the Retained Earnings Account.e. v. If we continue with our examples… (f) Say that the company from the above example has $30. 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. If Revenues are greater than Expenses during a period. All revenue and expense accounts are temporary accounts in the sense that we start the year with a zero balance in the account.1 Page 6 Transactions that impact the Statement of Income The above examples used accounts that appear on the Statement of Financial Position. the company will have generated a net income and a net Credit entry to Retained Earnings will result. an expense account’s normal balance is a debit balance.000 = Liabilities + Equity +30. Conversely. If Expenses are greater than Revenues. the company will have generated a net loss and a net Debit balance to Retained Earnings will result. and the resulting debit or credit is either added or subtracted to an account called Retained Earnings.
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.15. Assets and liabilities that will come due or have to be settled within 12 months or one accounting cycle (whichever is longest) are classified as current. as they no longer have it on hand to sell. v.000 Note that this entry removes the inventory from the company’s accounts. an expanded form of the accounting equation: The Statement of Financial Position Assets = Liabilities & Shareholders’ Equity Liabilities Current Liabilities Current Assets Non-Current Liabilities Shareholders’ Equity Contributed Capital Non-Current Assets Retained Earnings Assets are listed from most liquid to least liquid.000 15.1 Page 7 (g) To incur these sales. The Statement of Financial Position (also called the Balance Sheet) is. Note that Cost of Goods Sold is an expense account. The journal entry to record that would be: Cost of Goods Sold Inventory 15.Introductory Financial Accounting. The accounting equation remains in balance: Assets .1. and both are divided into current and non-current based on their liquidity.000 worth of its inventory. as are liabilities. and all other assets and liabilities are classified as non-current.000 = Liabilities + Equity -15. the company sold all $15. basically. .
but is a listing of all equipment owned and used by the company. The inventory can either be purchased. Equipment – this account is treated in the same manner as the Buildings account. we normally pay the annual premium the day the policy takes effect.Introductory Financial Accounting. and includes investments in bonds.000 would be classified as a long-term liability. Land – this account is a listing of all land held by the company.). . this account includes all currency and equivalents (bank drafts.000 and the agreement with the bank is that you will be required to pay $50. v. Accounts Receivable is normally reported net of an Allowance for Uncollectible Accounts (discussed further in Chapter 3). other companies or special funds. complete. Accounts Receivable – the account is the sum total of all outstanding invoices which are owed to the company by its customers. Long-term investments – these are investments that are to be held for many years. when we take out an insurance policy. Non-current Assets: Buildings – this account is a listing of all depreciable buildings owned by the company. For example. that in some cases you may have an asset or a liability that is partly current and partly non-current. The classic example of this is breaking out the current portion of the long-term debt of a company. the cost of the policy will be classified as a prepaid expense. and classify the remainder as non-current. money orders etc. Inventory – this account is a listing of all of the items that the company normally sells in its day-to-day activities.000 would be classified as a current liability and the remaining $150. More on this in Chapter 5.1. if your loan balance is $200. ready for resale.000 of this balance within the next year. In this case. you would break out the current portion and classify it as such. this $50. A more detailed discussion of this account will take place Chapter 4. For example. or manufactured by the company itself. The associated Accumulated Amortization contra account is normally shown directly below the asset account.1 Page 8 Note. Note that amortization is never taken on land. and the asset is therefore shown net of accumulated amortization. Because the policy has not yet expired. Prepaid Expenses – this account represents amounts that have been paid in cash for expenses that have not been incurred by the company. stocks. Typical accounts you will see on the Statement of Financial Position are: Current Assets: Cash – the most liquid of all assets.
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. 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. Wages payable – a listing of all wages due to employees within one year or one accounting cycle. The retained earnings account reconciliation from the beginning of year to end of year balance is as follows: Retained Earnings. trademarks and copyrights would be classified as longterm assets. Note that the wages payable account is normally the result of an adjusting entry.1. Taxes payable – a listing of all taxes due within one year or one accounting cycle. It is when the amount is due back to the lender that differentiates between current and non-current debt. Retained Earnings – this account represents the cumulative total of the net income of a company that has not been distributed to shareholders. The retained earnings account is adjusted at the end of each year to account for a company’s net income or loss. v. beginning balance Add Net Income for the year or deduct the Net Loss for the year Less Dividends declared to shareholders Retained Earnings. end of year XXX ± XXX .Introductory Financial Accounting.XXX XXX .1 Page 9 Intangible assets such as patents. Shareholders’ Equity: Contributed Capital – this account contains any amounts which have been invested in the company by the company’s shareholders.
most companies tend to use some form of a multi-step statement. The single step statement lists all revenues and then all expenses without breaking out any further subtotals. the amount left over after all relevant expenses have been taken into account.000 (60.000) $10.000 . and for the above company would look like the following: The Miller Company Income Statement For the Period ended December 31. however.000 (25.1 Page 10 The Income Statement The income statement is a statement that shows how a company performed during one period.Introductory Financial Accounting. It takes the reader from total Revenues to Net Income. For example: The Miller Company Income Statement For the Period ended December 31.000) $10.000 (8. 20x8 Sales Interest Income Cost of Goods Sold Operating Expenses Income Tax Expense Net Income $100.000) 40.000 18.000 3. Income statements can take on one of two formats: single step and multi-step.000 The multi-step statement has multiple subtotals.000 3.000) (8. 20x8 Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Income Interest Income Net Income before Taxes Income Tax Expense Net Income $100.000) (25.000 (60. v.000) 15. typically the fiscal year of the company.1. Either one is acceptable under GAAP.
which resembles a capital “T”. When an entry is made and an account is to be debited. it is placed on the right hand sand. v. Thus.Introductory Financial Accounting. an entry is placed on the left-hand side of the T.1 Page 11 The T-Account Named for its shape. for every entry the lefthand entry must equal the right-hand entry in order for the Accounting Equation to hold true. When a credit is made.1. Accounts Receivable Debit Credit The following represent how increases and decreases in accounts get recorded: Liabilities & Shareholders’ Equity Assets + Expenses - Revenues + + - - + . a T-account is a tool used by accountants to keep track of entries that are made to individual accounts.
An outside storage facility has been rented to fill this need. January 2. After years of planning and saving. but is not large enough to store any extra inventory. 20x7. That is. 6. He only rented the outside facility to the end of November.200 per month. 9.$310. 20x7. A total of $280. Ian’s Incredible Instruments Inc. The lease is in effect from January 2. 20x7 through December 31. He received 1. Ian invested $175.1. The lessor required Ian to pay the first and last month’s rent on January 2. The following transactions took place during the fiscal year ended December 31.$430. was purchased for $5. 10. 20x7 for $350. Ian’s Incredible Instruments Inc. 20x7: 1.000.’s Sales for the first year were as follows: Cash sales .000 was purchased on account. The mall location is suitable for Ian’s retail needs. 20x7. The terms of the loan.000 common shares of the Corporation. (Record the payments made from March to November only. however. Credit sales . the annual rate is 10%. . interest payments are due every 6 months. and was able to give up his off-site storage facility. Rent is $1. Inc. Ian’s Incredible Instruments. 20x7. An insurance policy.000 due on the first of each month.000. January 2. 8. 4. 3.000. 20x7.000 of the accounts receivable were collected throughout the year. is located in the Meadowvale Mall. More inventory was purchased on account June 1. 20x7.000. Ian signed a two-year lease with monthly rent of $8. 7.760 cash. Having proven himself a good tenant. into the company upon incorporation. Ian purchased furniture and fixtures for the store at an auction for $30. 20x8. 11. (Record the February rental payment only. and was rented on a month-to-month basis. his entire life savings. beginning February 1. Ian’s Incredible Instruments Inc. are for 5 years. Ian was able to convince his landlord at the mall to give him additional storage space (at no extra cost).000. with 10% annual interest due semiannually. he has decided he is ready to go out on his own. 20x7. 20x7 through December 31. v.) 2.1 Page 12 Comprehensive Example Ian has worked at a music store for the last 20 years. which was taken out on June 1.) Inventory of $120. 5. Opened for business in a local mall. He paid cash..000 The company took out a loan for $200. which covered the period of January 2.Introductory Financial Accounting.
Additional cash disbursements for the year were as follows: Wages & salaries Rent Advertising Miscellaneous expenses Payments of accounts payable Interest on bank loan $165. To record Ian’s initial investment into the company.000 3.000 175. To record the purchase of inventory on account.000 10. and therefore it is an expense in this fiscal period. Ian declared and paid a dividend of $60.1 Page 13 12.000 16. We know that the first month’s rent will be “used up” in this year.000 120.200 4.200 1. The total cost of the inventory sold during the year was $300.000. the deposit for the last month won’t be used until 2 years from now.Introductory Financial Accounting.000 23.000 . This is what we call a prepaid expense. However. Inventory Accounts Payable 120.000 40.000 (note that a dividend is debited against retained earnings). For each of the above.000 $446. v. 175. Cash Contributed Capital 2.000 120. 14. To record the rent paid on the outside storage facility in February for one month.000 8. Rent Expense Cash 1.000 To record the payment of first and last month’s rent on the lease. the appropriate journal entries would look like this: 1.1. Prepaid Rent Rent Expense Cash 8.000 88.000 13.
800 10. To record the purchase of inventory on account. Note that in reality.760 6. Cash Accounts Receivable 280.000 350. First. we already recorded the initial payment in February).800. To record purchase and payment of the insurance policy. Rent Expense Cash 10. for which cash was paid. Cash Bank Loan 200.000 7.000 11. Cash Accounts Receivable Sales 430. Note that as we collect the cash. We will deal with the interest expense incurred on the loan in a separate entry. Note that because it expires December 31.1 Page 14 5. the entire amount applies to the current fiscal year and therefore there is no prepaid portion. they will get $200. To record the rental expense incurred from March through November. we must remove the receivable from our books. Upon receiving the loan. Inventory Accounts Payable 350. 20x7.000 10. To record the collection of accounts receivable throughout the year. Insurance Expense Cash 5.000 310. $1.000 740.1.760 5. To record the purchase of furniture and fixtures. as they are no longer due to us. they will have an outstanding loan for the same amount. second.000 cash from the bank. Hence.000 8. for the purposes of this example we will be entering them in one journal entry.000 9.000 30.000 280.200/month x 9 months = $10. v. the credit to the Accounts Receivable account.800 . However. (Remember. Furniture and Fixtures Cash 30. sales are recorded individually as they are made. two things will happen to Ian’s Incredible Instruments Inc.Introductory Financial Accounting. To record sales for the first year.000 200.
000 .000 23. To remove the inventory which was sold from the inventory account and record the resulting Cost of Goods Sold expense. To record the various other cash disbursements made throughout the year.000 10. v.000 x (10% x year) = $10.Introductory Financial Accounting.1.000 88.000 300.000/month = $88. Cost of Goods Sold Inventory 300.000 13.000 120.000 14. Retained Earnings Cash 60.000 40.000 Interest on bank loan .1 Page 15 12.000 Wages & Salaries Expense Rent Expense Advertising Expense Miscellaneous Expenses Accounts Payable Interest Expense Cash 165.000 60.000 446.$200. Note the following supporting calculations: Rent Expense – 11 months x $8. To record the dividend paid.
000 280.000 120.000 Contributed Capital 175.000 12 Interest Expense 10.000 13 6 Furniture & Fixtures 30.000 108.000 12 Advertising Expense 40.000 12 Accounts Payable 120.Introductory Financial Accounting.800 88.240 Inventory 4 9 120.000 300.760 Wages & Salaries Expense 12 165. v.000 60.000 8 515.000 16.000 2 3 5 6 11 12 13 2 Prepaid Rent 8.000 7 Rent 2 3 11 12 8. Expenses 12 23.000 350.000 280.000 Expenses INCOME STATEMENT Revenues Sales 740.000 1 Retained Earnings 13 60.760 30.800 446.200 10.000 Misc.000 Cost of Goods Sold 13 300.000 350.000 350.000 200.000 4 9 Accounts Receivable 7 310.000 10.000 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 5 Insurance 5.000 10 Bank Loan 200.000 30.000 170.000 430.200 5.1.000 .000 1.
000 Credit $350.000 200.Introductory Financial Accounting.000 60. 20x7 Cash Accounts Receivable Inventory Prepaid Rent Furniture and fixtures Accounts Payable Bank Loan Contributed Capital Retained earnings Sales Cost of Goods Sold Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Interest Expense Miscellaneous Expenses Debit $515.1 Page 17 A trial balance of all of the closing balances of the above accounts would look like this: Ian’s Incredible Instruments Inc.1. Trial Balance As at December 31.000 170.000 5.000 30.000 10.000 8. v.000 $1.000 .000 300.000 175.760 165.000 740.000 $1.465.000 40.240 30.000 108.465.000 23.
all balances get returned to zero.760 165.1.000 23.000 23.000 300.240 .000 5.240 $740.000 88. Income Statement for the year ending December 31. At the end of the year.000 108.000 10.Introductory Financial Accounting.240 10. they are referred to as temporary accounts.000 440.760 165.1 Page 18 A multi-step income statement for Ian’s Incredible Instruments Inc.000 341. would look like this: Ian’s Incredible Instruments Inc. v.000 300.000 5. As such. 20x7 Sales Cost of Goods Sold Gross Profit Operating Expenses Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Miscellaneous Expenses Operating income Interest Expense Net income Closing Accounts All revenue and expense accounts are closed out to zero at the end of each fiscal period.000 40.000 $88.000 40. and the offsetting amount is the net income (or loss) that gets recorded to retained earnings. The closing entry for Ian’s Incredible Instruments is as follows: Sales Cost of Goods Sold Rent Expense Insurance Expense Wages & Salaries Expense Advertising Expense Interest Expense Miscellaneous Expenses Retained Earnings 740.760 98.000 108.
December 31.1.000 723.000 8. 20x7 Net income Dividends Retained Earnings. 20x7 0 88.000 175.000 .240 203.000 28.240 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Long-term liabilities Bank loan Shareholders’ Equity Contributed Capital Retained earnings 200.240 (60. 20x7 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures $515.000 $753.000 550. 20x7 Retained Earnings.240 $753.240 30.1 Page 19 The Statement of Retained Earnings outlines the changes in the Retained Earnings account from the beginning of the year balance to the ending balance: Ian’s Incredible Instruments Inc.240 350.Introductory Financial Accounting. Statement of Financial Position as at December 31.000 170.240 $ We can now prepare a Statement of Financial Position for Ian’s Incredible Instruments: Ian’s Incredible Instruments Inc.240 30.000) $ 28. v. January 1. Statement of Retained Earnings for the year ending December 31.
i.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. Interest Receivable . As the company earns the revenue. deposits on orders. Expenses Prepaid Expenses – Cash is paid and an asset is recorded before it is used. subscriptions collected in advance and gift certificates sold. but cash has not been paid or received. and records the revenue. performs the service or delivers the goods. Utilities Expense Revenues Unearned Revenue – Cash is received and a liabilitiy is recorded. Examples: Prepaid rent/insurance. Interest Expense. office supplies. plant & equipment Accrual – Event has occurred. Examples: Credit sales. The asset will then be allocated to future periods using adjusting entries. Accured Expenses – When an expense has been incurred. Rent Revenue.e. v. Accrued Revenues – These entries are used then revenue has been earned. an adjusting entry is made to remove the liability and record the revenue. we will Debit the liability and Credit cash to record the payment. The adjusting entry sets up an asset. the receivable is removed. then both the liability and the expense are recorded in the amount relating to the current period. As cash is received in payment in future periods. but will not be paid in the current period. As the liability is paid in future periods. Examples: Payroll.Introductory Financial Accounting. Examples: Rent collected in advance. Income taxes. a receivable.1. but not yet paid in cash.
20x5 you had $3.000 represents the portion of the insurance policy that is unexpired. i. Therefore. The missing piece to the puzzle is the amount of supplies that were used during the year. v.600. During the year you purchased an additional $13. 20x5? To answer this question.Introductory Financial Accounting. On January 1. what was purchased during the year.200 ???? Supplies Expense As the T-Account shows. 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 12.000 for an insurance policy that will cover the next 12 months. the missing credit or Supplies Expense has to be 11. 2.000 The balance that remains in the prepaid insurance account of $7. 3.800 in your office supplies inventory account.1. assume that the company’s year-end is December 31. that will expire in 20x8. we know our opening balance.000 At the end of the year you will have 7 months remaining on the policy.000 12. 1.000 5. The adjusting entry would be: Insurance Expense Prepaid Insurance 5. solving the equation.000 does not equal 5. and therefore should be an expense of the current period. On August 1. and what we have left at the end of the year. 20x5 reveals that you have $5. However. This means that 5 months have been used in the current period.800 + 13.e.200.000 $ 5. 20x7 you pay $12. .800 13.200 of supplies on hand.000 of office supplies. A physical count of the supplies on December 31. it might be helpful to look at the T-Account for Office Supplies for the year: Supplies Inventory Opening Balance Purchases Ending Balance $ 3.1 Page 21 Example In examples 1-5. What would be the adjusting entry on December 31.
or $10.400. You estimate that the furniture will last 10 years and have no salvage value at the end of its useful life.000 per year for the life of the furniture. The long-term asset section of the Statement of Financial Position would be as follows: Office Furniture Less accumulated amortization $100.600 9. 20x8.600 11. i.600 As of December 31. 4. v. 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.000 as an expense this year. Each and every year. 20x6. What is your adjusting entry? On May 1.000 Note that the amortization expense account will appear on the income statement as an operating expense for the year.600 You purchase new office furniture for a cost of $100.000) $ 90.000 (10. when you received the revenue. we call it a contra account to the Office Furniture account. office furniture in this case. you would have recorded an entry of: Cash ($800 x 12) Unearned Rental Revenue 9. You received payment for the full year on May 1. It is now December 31.000 on January 1. you would have earned 8 of the 12 months of revenue. instead of taking the full $100. there would still be 4 months of unearned . Therefore. The apartment rents for $800/month. on the other hand. the revenue to be recorded for the year would be 8 months x $800/month = $6. 20x8. 20x8. The Accumulated Amortization account. Furthermore. the adjusting journal entry would be: Amortization Expense Accumulated Amortization 10.1 Page 22 The adjusting entry on December 31. we will take $10.000 Because the Accumulated Amortization account is applied as a reduction of the related asset account.Introductory Financial Accounting.000 per year for the next 10 years. 20x6.000 10. It is now December 31. 20x5 would be: Supplies Expense Office Supplies 3. You own an apartment building and have a tenant whose parents have paid their rent for the entire year in advance. 11.1.e. will appear on the Statement of Financial Position as a reduction of the related asset account. Therefore.
20x3. then our daily payroll rate can be calculated as $80. The loan has been outstanding for 5 months. 20x3 you take out a loan for $100. What is your adjusting entry to record interest expense for the year? Looking at the terms of the loan.Introductory Financial Accounting. 5. the accrued wages payable will be $16. However. Your average weekly payroll is $80.200. as of December 31. That is.000. interest expense for 20x3 would be $8. 3.333.000. 20x3. your year-end. we have to first figure out how much needs to be accrued. 20x6 (a Monday). and our employees work 5 days a week.000 .000/5 = $16.000. It is March 31 (Friday).600 – 6. that is. no cash has been paid for the interest expense. The adjusting entry would be: Interest Expense Interest Payable 6.000 x 5/12 = $3.333 3.1 Page 23 revenue left.333 You last paid your employees on March 27. and furthermore.000.200. The adjusting entry on December 31. we can calculate that the annual interest on the loan will be equal to $100. This reconciles to our calculation above.1. What is the adjusting entry? To calculate the adjusting entry. the balance in the Unearned Rental Revenue account will be equal to $9.000 x 4 days = $64.400 6. 20x4. On August 1. and interest and the principal will be due August 1. v. the loan has not been outstanding for the full 12 months. and therefore.400 According to the journal entries above.000 64.000/week. The loan agreement states that interest will be charged at a rate of 8% annually. therefore. 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. The adjusting entry would be: Wages Expense Wages Payable 64. only 5 months of interest pertain to the current period.000. It is December 31.000 x 8% = $8. 20x8 would be: Unearned Rental Revenue Rental Revenue 6. Our employees worked 4 days from the time of their last payday until the end of the year. The balance in the Unearned Rental Revenue Account would have 4 months x $800/month = $3.400 = $3.
In the case of a simple sale. it gets onto our books the liability that we owe to our employees. For most sales. However. instead of debiting the sales account. • the revenue must be earned (all significant acts must be completed). If the goods are shipped to the customer under the terms FOB1 Shipping. the revenue recognition point takes place when the transaction takes place. whenever the discount is taken. Sales and Sales Contra Accounts Whenever a sale is made. assume that we make a sale of $1. For example. Revenue Recognition and the Matching Principle For a firm to recognize revenue. • collectibility is reasonably assured. a 5-year warranty is provided with the product. In this case. second. v. Just because you don’t pay cash for something does not mean that the expense wasn’t incurred. it gets onto our books the expense that we have incurred during the last 4 days of the period. this can get complicated when say. then they belong to the customer only when they are delivered and therefore the revenue recognition point is when the goods are shipped. this means that the cost of the goods sold become an expense the day the sale is made. then the amount of the discount gets debited to the Sales Discounts account. the company must estimate the total warranty expense that will be expended on this product and accrue the full amount in the year of sale. This allows the company to keep track of all sales returns separately from the original sale. If the customer pays 1 FOB stands for ‘Free on Board’ . we credit the Sales account. as we will see later. We MUST record all expenses relevant to the current period. This can become an issue for goods that are in transit around the company’s year-end. the following transactions are related: • Sales Returns: whenever customers return merchandise for refund. • Sales Discounts: if early payment discounts are offered to customers. If the goods are shipped under the terms FOB Destination.Introductory Financial Accounting. But. then the goods belong to the customer the minute they are loaded on the truck and revenue can be recognized immediately. and • all associated costs can be estimated. whether we have paid for them or not. we debit an account called ‘sales returns’.000 and we offer a discount of 2% if the invoice is paid within 10 days. 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. 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.1 Page 24 Note that this adjusting entry does two things: First.1.
n30. a 2 % discount is offered if payment is made within 10 days.000.500 .500 is returned to the company Sales returns Accounts receivable 1.000 $40. 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. that is.Introductory Financial Accounting.1. The $20 discount will get debited to the Sales Discount account.500 1. they will pay us $980.000 merchandise whose sales price was $1. • merchandise is shipped FOB Shipping to a customer. The selling price is $40. but the customer keeps the merchandise. when reported on the income statements. v. would be netted out against the Sales account.1 Page 25 • within 10 days. otherwise the full amount is payable in 30 days. A credit is granted to the customer. These three accounts are considered contra accounts to the Sales account and. Terms of payment are 2/10. Accounts receivable Sales • $40. Sales Allowances are when merchandise is sold to a customer which is slightly defective.
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. and • what is the fallback position: does the company have sufficient assets to satisfy its liabilities? To summarize. It would be impossible for financial statements to meet the needs of all users of financial statements. the objectives of financial reporting are as follows: • to provide information useful to present and potential users in making investment. v.1 Page 26 • some of the merchandise was slightly damaged during before it was shipped. payment of $35. and so on. interest. Cash Sales discounts Accounts receivable 35. credit. claims on those resources.280 is received. 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). since these needs could conflict. Accountants are continuously faced with new situations and business innovations that present accounting and reporting problems. Sales Allowances Accounts Receivable 2. principal and dividend payments?.Introductory Financial Accounting. The conceptual framework plays a vital role in the development of new standards and in the revision of previously issued standards. and changes in those resources to help in assessing cash flows. .500 2. This does not imply that there are no other users of financial statements. and • to provide information about the economic resources of a firm.500 is granted to the customer.500 • on the 9th day after the sale. loan repayments. such as dividends. • to provide information to help in assessing cash flows. the focus of financial statements is to meet the needs of creditors and shareholders. Consequently. or similar decisions.1.000 The Conceptual Framework A strong theoretical foundation is essential if accounting practice is to keep pace with a changing business environment.280 720 36. These problems must be dealt with in an organized and consistent manner. A credit of $2.
Reliability wins in this case. • representational faithfulness – accounting information should portray the substance of transactions over their form. If a company purchased a parcel of land in 1856 for $100. the concept of relevance and reliability conflict. assume a company issues a new type of security called a ‘Special Preferred Share’ which has a limited life (i. • timeliness – information should be available to the users as quickly as possible. For example. consider the application of the historical cost principle which states that assets should get recorded at their original cost. At times. For example. Secondary qualitative characteristics – the following two characteristics (neutrality and comparability are qualified as secondary because they are desirable qualities of accounting information.000. One could argue that regardless of what you call this security. but are not as important as relevance and reliability.000.1 Page 27 Qualitative Characteristics of Accounting Information There are two primary qualitative characteristics of accounting information: relevance and reliability. For example. From a shareholders’ perspective the value of $10. the representational faithfulness principle would argue that it meets all the characteristics of long-term debt and should be classified as such. This implies that the information provided should be useful to the users. Reliability implies that the accounting information can be depended upon. v. the rationale for providing interim reporting to shareholders is in part based on the timeliness principle: it is better to provide information on a quarterly basis as opposed to waiting for the annual results.1. accounting information should meet the following criteria: • predictive value – information should be useful in predicting future outcomes. accounting information should meet the following criteria: • verifiability – accounting professionals. .Introductory Financial Accounting.000 is far more relevant. To be reliable. To be relevant. Verifiability implies that independent measures using the same measurement method should yield approximately the same result. the income statement is generally structured by segregating recurring items against non-recurring items.e. Relevance implies that accounting information can make a difference when making a decision – the user of financial statements is better off having the information than not having it. • feedback value – information presented today helps confirm previous decisions.000 today. For example. when establishing the validity of an accounting estimate should come to a consensus. that land is recorded on the company’s books at $100 regardless of the fact that it may well be worth $10. The $100 is an established transaction and is reliable. gets refunded in a pre-specified number of years) and pays a fixed rate of interest. The rationale is that income from recurring items is a best predictor of future income.
e.Introductory Financial Accounting. 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. 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 also leads to the recognition of contingent losses but does not recognize any contingent gains. Cost/benefit analysis is very difficult to quantify since most costs and benefits are intangible.1 Page 28 Freedom from bias (neutrality) – accounting information should be even-handed with respect to the impact of accounting information on users’ behaviour. v. For example.000. the financial statements of a company with net income of $10. The only problem is that if the asset were to be disposed of. Thus. When introducing an accounting principle. Information benefits vs. Conservatism is an effort to ensure that the risk or uncertainty inherent in business situations is adequately considered. a gain or loss arises when the proceeds on disposal differ from the net book value of the asset sold. changes in accounting principles require retroactive adjustment and restatement of prior period financial statements. Accounting rules should not provide the motivation for dysfunctional decisions. For example. The principle of timeliness implies that the financial statements should be in the hands of users as soon as possible. but changes should occur infrequently and only for valid reasons.1.000. The concept of materiality can play against the concept of timeliness. it may be . as we will see in Lesson 4. Assume that existing equipment is technologically obsolete and a net present value analysis shows that if the equipment were to be replaced. the principle of conservatism implies that the one with the least favourable impact on net income should be the one chosen. information costs. Here is an example of an accounting rule that could lead to dysfunctional economic decision making. 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. when companies sell depreciable assets. the project has a significantly positive net present value). the company would benefit economically from it (i. $100. Consistency implies that accounting principles are applied from period to period in the same manner. the company would have to show a large loss on disposal. but should be used as a way of thinking. Materiality implies that financial statements are not precise but are accurate enough that any potential errors of misstatements would not affect any user.000 would not be significantly affected if they were misstated by say. Modifying concepts Conservatism means that it is generally preferable that any possible errors be in the direction of understatement of net income. When accountants can choose between two equally acceptable accounting principles. 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). That’s not to say that accounting principles cannot be changed. Also. For example.
. Revenue Recognition Principle states that revenues should only be recorded when earned. a 1925 dollar is equivalent to a dollar today. This assumption allows us to record long-term assets at their depreciable cost. Also refer to the definition of an asset (later in this section). Matching principle assumes that when we record revenues.1 Page 29 possible that additional invoices are received after the financial statements are issued. otherwise they would have to be recorded at the lower of their depreciable cost or liquidation value. 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. the measurability of such revenues are reasonably certain and collectibility is reasonably assured. v. months…) and report income and prepare a balance sheet for each of these periods. Other Principles Economic entity principle states that the financial statements of an entity should report all assets and liabilities under its control. we can add assets together even if they were purchased in different years.1. all associated expenses related to the recognition of these revenues are recorded also. Periodicity assumes that we can breakup the life of a business in separate reporting periods (years. This omission is justified on the basis of materiality. 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.e. Consequently. Monetary unit principle assumes that the value of the dollar does not change .i. quarters.Introductory Financial Accounting. This principle will be invoked when dealing with leases and intercorporate investments in later lessons. This is probably one of the most flawed principles. Going concern principle assumes that the entity will continue operating in the future.
or on demand. the benefit has already occurred. either by way of inflows or enhancements of assets or reductions of liabilities. v. Revenues are increases in economic resources. resulting from an entity's ordinary revenue generating or service delivery activities. thereby leaving it little or no discretion to avoid it. and (c) the transaction or event giving rise to the entity's right to. and (c) the transaction or event obligating the entity has already occurred.Introductory Financial Accounting. Equity is the ownership interest in the assets of a profit oriented enterprise after deducting its liabilities. either by way of outflows or reductions of assets or incurrences of liabilities. on occurrence of a specified event. (b) the entity can control access to the benefit. royalties or dividends. in the case of profit oriented enterprises. it includes specific categories of items. to provide services. contributed surplus and retained earnings. government grants and other contributions. or control of. singly or in combination with other assets. Revenues of entities normally arise from the sale of goods. the settlement of which may result in the transfer or use of assets. the rendering of services or the use by others of entity resources yielding rent. While equity of a profit oriented enterprise in total is a residual.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. 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. interest. at a specified or determinable date. in the case of not-for-profit organizations. Assets have three essential characteristics: (a) they embody a future benefit that involves a capacity. Expenses are decreases in economic resources. many not-for-profit organizations receive a significant proportion of their revenues from donations. . resulting from the ordinary activities of an entity. Liabilities are obligations of an entity arising from past transactions or events. 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. In addition. for example. (b) the duty or responsibility obligates the entity. provision of services or other yielding of economic benefits in the future. provision of services or other yielding of economic benefits. and. to contribute directly or indirectly to future net cash flows. types of share capital.
v.Introductory Financial Accounting. 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.1. events and circumstances affecting the entity except those that result from revenues or equity / net assets contributions. Losses are decreases in equity / net assets from peripheral or incidental transactions and events affecting an entity. and from all other transactions. events and circumstances affecting the entity except those that result from expenses or distributions of equity / net assets. .
The cost of the floor covering for the company offices was expensed. assumption. assumption. The party sued Fastrac for damages that could exceed Fastrac’s insurance coverage. What accounting principle. the driver of Fastrac Courier collided with another vehicle causing both property damage and personal injury. even though the floor covering has an estimated useful life of 5 years. 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.Introductory Financial Accounting. While making a delivery. What accounting principle.1 Page 32 Problems with Solutions Problem 1-1 Multiple Choice Questions 1. or constraint was violated? a) Continuity assumption b) Matching principle c) Materiality constraint d) Separate entity assumption 2. The proprietor of Front Street Drugs bought a computer for his personal use. What accounting principle. v. He paid for the computer by writing a cheque on the company chequing account and charged the “Office Equipment” account. Nimto Inc. or constraint was violated? a) Continuity assumption b) Matching principle c) Cost principle d) Time period assumption 3. Existence of the lawsuit was reported in the notes to Fastrac’s financial statements. assumption or constraint is being applied in this situation? a) Full-disclosure principle b) Conservatism principle c) Matching principle d) Unit-of-measure assumption .
there will be a balance of $25. 20x9.Introductory Financial Accounting.000 personal residence as an asset on the balance sheet of his company. showed Total assets of $999.039. the Insurance expense for the period ending December 31.1 Page 33 4.000 in the Prepaid insurance account on December 31. On July 1.000. M. 20x9. Shaw included a $200. failed to include $40.000 in the Prepaid insurance account on December 31. purchased a 4-year insurance policy and paid a premium of $40.000. Which of the following statements is true? a) Under cash basis accounting. ABC Ltd. there will be a balance of $20. after correcting for the inventory error? a) $ 40. c) Under cash basis accounting.999. d) Under accrual accounting. According to generally accepted accounting principles. ABC has a December 31 year end.000 b) $ 959.000 worth of inventory in the company’s December 31. 20x5. 20x5. inventory count. The December 31.000 in the Prepaid insurance account on December 31. and Total shareholders’ equity of $499. In the rush to make it to a New Year’s party.999. there will be a balance of $35. 20x8. financial statements. 5. the bookkeeper for Ytwok. 20x8. which included this error. 20x8. financial statements should be prepared using which of the following? a) Fair market values b) Historic costs c) Future values d) Replacement costs .999 d) $1.1. Total liabilities of $500. What would be the balance for Total assets on December 31. v. b) Under accrual accounting. will be $5. 20x5.000.999 6.000 c) $ 999. What generally accepted accounting principle does this contradict? a) Time period principle b) Cost principle c) Going concern principle d) Business entity principle 7. Harry. Shaw’s Rent-all.
1 Page 34 8. K. v. What generally accepted accounting principle does this contradict? a) Time period principle b) Revenue recognition principle c) Objectivity principle d) Business entity principle .Introductory Financial Accounting.1. 20x8. Smart presented land and buildings on her company’s balance sheet based on the appraised value of these assets at December 31.
The first and last month’s rent are due upon signing of the lease on July 2. 20x2. An insurance policy was purchased for $1. The lease agreement is for one year. Furniture and fixtures are purchased at a cost of $15.1. You and several other shareholders invested $20. 8. An additional $120. A suitable location is found and rent is $1. The following are summary transactions for the period July 2. on June 30.000 of the sales made on account were collected. 20x2. Interest payments are due on the 1st of each month.000 in return for shares in the company. The policy takes effect on July 2. 4. 1. 5. Books and supplies of $50. 20x3).$190. 20x3. 9. Sales for the period ended October 31. an annual charge equal to 1% of sales is due at the end of the year (i. These are purchased for cash.000 was obtained on August 1. 20x2. 20x2 to October 31.1 Page 35 Problem 1-2 On July 2. the company’s year end. In addition to the monthly rent. 6.000. v.Introductory Financial Accounting.. 3.000 A total of $4.000 per month. The annual interest rate is 9%. 20x2. 2.$6. you decided to start up a new business – Heavenly Books Inc. 20x2 were: Cash sales . 7. 20x2. an offcampus bookstore where students can purchase textbooks and supplies at reduced prices.000 every 4 months with the first payment due November 1.000 Sales on account .e.200 cash. A bank loan in the amount of $20. The loan agreement calls for repayments of $4.000 was purchased on account.000 of inventory was purchased on account. . 20x2 and expires on June 30.
19. 17.000 300 130. Employees are owed a total of $600. 16.000 3.000 2. 12. Books costing $15. 15. Credit Accrued Liabilities. Required – a.000 1. Credit Accrued Liabilities.Introductory Financial Accounting.000 of inventory is on hand. b. Invoices received but not yet paid amount to $700 for miscellaneous expenses. The furniture and fixtures are expected to last a total of 10 years with no salvage value. An inventory count shows that a total of $25.000 were returned to the publishers. Adjustment for rent payable. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . 13. Enter all the above transactions in T-Accounts.1. Credit Accrued Liabilities. 14. Credit Accrued Liabilities. The interest payable on the bank loan.000 $182. 18.500 10. The straight line method is to be used. The expected income tax rate is 30%. c. The adjustment for insurance expense.1 Page 36 10. 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. v.800 The following adjustments at year end must be made: 11.
000 invested by the owners as capital stock.000 24. A multi-step income statement.100 50. v.600 4.600 2.000 4.1.000 25. c.900 ? 40. Inc.200 1. b. 20x6.500 4.500 . 20x6.100 14. $ 7.100 2.400 2. 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 31.800 2.100 21. the accounting records contained the following selected amounts: Accounts payable Accounts receivable Accumulated amortization – Office Equipment Bank loan..000 84.Introductory Financial Accounting. 20x6: a. A statement of financial position. was started with $50.300 18.1 Page 37 Problem 1-3 On January 1.000 1.100 3.300 44.000 1.500 157. A statement of retained earnings. due December 31. Global Production. On December 31.100 3.
It is now April 30. and then record the adjusting entry for the end of April. You sell subscriptions to your magazine. What adjusting entry must be recorded to account for the unpaid salaries? You paid $5. your year-end.1. ahead of time. The contract. First. Kittens Quarterly. a) On June 1. but you will not be billing Big Al until next month. What is the appropriate adjusting entry? You have a contract to provide catering services for a local company. and you have provided your services Big Al’s Used Cars for the past month. INC Inc. 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) . The estimated useful life of the machine is 8 years. Issues come out in March. What would the adjusting entry be? You pay weekly salaries to your staff and your accounting period end falls on a Wednesday. Record the adjusting entry for amortization for the year.1 Page 38 Problem 1-4 For each of the following isolated situations.000. prepare the appropriate adjusting entry. your year-end.000 on June 1st and again on December 1st for providing these services for one year.750.300 worth of services. which was signed June 1. It is now your year-end. with no salvage value estimated at that time. for their monthly staff meetings. stated that they would pay you $6. It is now December 31.000 for your annual property insurance policy eight months ago. Today is the end of the accounting period. You are a consultant. A new customer purchases a subscription in January. Your year-end is June 30th. Your daily salary expense is $600. June. you bought a piece of machinery for $50.. You have provided $2. $4. v. You signed the agreement and wrote the cheque on June 30th. on a yearly basis for the fee of $24/year. Part of your new lease agreement required you to pay your first month’s rent.Introductory Financial Accounting. What is the adjusting entry required if your year-end is December 31st? Your company is moving into a new office on July 1st. record the journal entry to record the receipt of the subscription fee in January. September and December.
On July 1. 20x5. On September 1. 10 percent. The $440 collection was recorded as follows: Oct 1. 20x5.000 $3. Assume Doby Company publishes a monthly magazine. The total interest of $300 is payable on the due date. v. 20x6.000 c. The annual accounting period ends on December 31.Introductory Financial Accounting. Coverage of the insurance policy starts on July 1. Doby Company borrowed $3. Doby Company paid for a two-year insurance premium for a policy on its equipment. 20x5 Cash Unearned subscription revenues $440 $440 . 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. Each transaction will require an adjusting entry at December 31. 20x5. 20x5. This transaction was recorded as follows: Jul 1. 20x5. The subscription start on October 1. 20x5.000 $1.000 cash and gave a oneyear. August 31. a. d.1. On October 1. On December 31. 20x5 Prepaid Insurance Cash $1. the company collected $440 for subscriptions two years in advance. You are to provide the 20x5 adjusting entries required for Doby Company. 20x5 Cash Note payable $3. note payable. The note was recorded as follows: Sep 1.000 b.
The company used the perpetual inventory method.000 common shares at $10 per share cash.1. Initial financing comes from the sale of 100. What is total shareholders’ equity after this transaction? (CGA Canada Adapted) . v. 20x6. 20x6. Wild Corporation is formed on April 1. 1.000 cash. What are the total liabilities of Wild Corporation after this transaction? 9. The customer pays cash. 10. What is total shareholders’ equity after this transaction? On April 3. Wild Corporation purchases a warehouse for $300. What are the total liabilities of Wild Corporation after this transaction? 6. 20x6. What are the total liabilities of Wild Corporation at this point? 3.Introductory Financial Accounting.000 units of inventory for $20 per unit. What is total shareholders’ equity at this point? On April 2. Wild Corporation sells 200 units of inventory for $50 per unit. 20x6. What is total shareholders’ equity after this transaction? On April 5. What are the total assets of Wild Corporation after this transaction? 5. What are the total liabilities of Wild Corporation after this transaction? 12. 7. ensure your answer reflects the cumulative impact of all prior parts. What are the total assets of Wild Corporation after this transaction? 11. Wild Corporation purchases 1.1 Page 40 Problem 1-6 For the next set of questions. 4. The purchase is made “on account” with the company agreeing to pay for the goods within 30 days. What are the total assets of Wild Corporation immediately after it has been formed and the shares sold? 2. Assume Wild Corporation uses a Perpetual Inventory System. What are the total assets of Wild Corporation after this transaction? 8.
decreases by a minus. 3.000 Entries during 20x7 80. Interest accrued on the note payable was $1. 5. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x7? 4. 7% note payable from the seller. 6. 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. Purchased new equipment by obtaining a $200. General Ledger Account Subscriptions Received in Advance Dr Cr Balance January1. (CGA Canada Heavily Adapted) . 2. liabilities. The company requires that customers pay the annual subscription fee for the magazine in advance. 20x7 128.000 90-day.1 Page 41 Problem 1-7 The following information was extracted from You Read Magazines Co.000 from a customer for an outstanding invoice. What was the subscription revenue earned during 20x7 for which the subscription fee was received in 20x6? 3. 6% interest note in exchange for extending the due date on a receivable.1. What was the subscription revenue earned during 20x7? 2. Received from Smith a $10.000 cash injection from one of the owners of the company. 7.000.000 Entries during 20x7 Required – 1.000 120. v. 4. and no change by NC.400. Example: Shareholders’ Equity -500 Net Income -500 Assets Interest accrued on notes payable was $500 NC Liabilities +500 Required – 1. Interest accrued on note receivable was $1.Introductory Financial Accounting.000 1-year. Show increases by a plus. Purchased for $500 cash an insurance policy for the following year. Received a $50. Received $2. shareholders’ equity and net income.
there were goods in inventory costing $3. 4. 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. v.1 Page 42 Problem 1-9 Mr. (CGA Canada) . Cash’s personal expenses. 6. Cash’s analysis. Based on the above. An amount of $5. calculate Sales.000 which was a deposit on goods that were to be purchased in 20x7.000 14. 3.000 of Mr. 5.000 35. The $20. He was perplexed that the profit margin had improved in spite of his intuition to the contrary. respectively. At the end of 20x6. using the accrual method of accounting. Purchases. Ronald found the following: 1.000 40.000 30% On examination.Introductory Financial Accounting. Cost of goods sold. There was no money due from customers at the end of 20x7.66% 20x7 $70.000 $21.000 16. 2.1.000 received in 20x6 pertained to a sale made in 20x5. accounts receivable for sales made to customers totaling $20.000 10. Net income and Profit margin for 20x6 and 20x7.000 $10. Cash.000 and $5. Identify any two generally accepted accounting principles that were violated in Mr. Required 1.000 was received in 20x7 and was included in cash received for sales in 20x7. Other expenses in 20x7 included $1. 2. the proprietor of Error Margin was excited to learn about profit margin analysis and immediately applied his knowledge to evaluate his business.000. Cash paid for purchases in 20x6 included an amount of $2. At the end of 20x6 and 20x7.000 had not yet been received.
The largest cost of this business is the cost of fertilizing. How should the annual cost of fertilizing. Required a. v. primarily during the Christmas season.1. . b. pruning and maintaining the trees over the 15-year period. It plants.1 Page 43 Problem 1-10 Evergreen Inc. in parking lots at select locations in major urban areas. operates a tree farming business.Introductory Financial Accounting. It normally takes about 15 years for a tree to grow to a suitable size. maintains. and harvests evergreen trees. Use the criteria for revenue recognition to explain when revenue should be recognized for this tree farming business. It sells the trees for cash. pruning and maintaining the trees be accounted for? Explain.
13 Dec. paying $1. Received $1. Required – a. 20x6? (CGA Canada Adapted) .. Strait Ltd. 7 Dec.000 for rental of office space for December rent. 1 Dec.1 Page 44 Problem 1-11 V. Strait in exchange for $6.000 cash. Dec.000 in cash and agreeing to pay the balance in six months. 17 Dec. Strait opened an architecture company. to V. Paid $1.300 cash to the office secretary for December’s wages. 31 Dec. 13.000. v. Completed work for JP Developers and sent them an invoice for $1.875 from JP Developers for the work completed on Dec. 31 Issued 100 common shares of the new company. Strait Ltd.Introductory Financial Accounting.875. Performed a count of office supplies. Prepare journal entries for the above transactions What is operating income for V. b. the following transactions were completed during December 20x6. 28 Dec. Purchased the office furniture and equipment of a retiring architect for $4. Purchased office supplies on credit for $300. 3 Dec. which revealed that $200 of the $300 worth of office supplies purchased on December 17 were still on hand. Paid $1. for the month ending December 31. Completed work for a client and immediately collected $680 in cash for the work done.1. 31 Dec. V.
j. Merchandise inventory purchased on account was $520. o. Cash disbursements were: g. For the interest on the note receivable. $189. of which 80% were on credit. v. f. $193. 20x2: n. 20x2. Prepare an income statement. $15 Total income tax expense for 20x2 is $20. The notes receivables are from a major supplier of vitamins. The following adjustments were made on December 31.1 Page 45 Problem 1-12 The following summarized transactions (in thousands of dollars) occurred during the year ended December 31. Required 1. e. The principal on the remaining notes is payable on May 1. $36. For miscellaneous expenses such as store rents. Wages earned but unpaid. For insurance. To the insurance company for a new three-year fire insurance policy effective September 1. $500. 2. r. l. To Revenue Canada for income taxes. 20x2. which were all paid in cash. h. The board of directors declared cash dividends of $26 on December 15 to be paid on January 21. $74. p. statement of retained earnings and balance sheet for 20x2. . 20x5. b.depreciation expense for 20x2 was $30. i. $19. The principal on the current notes was collected on May 1. Interest for twelve months on all notes was collected on May 1. To employees for wages. December 31. 20x2 for Ruiz Pharmacy: a. k. d. q. m. To trade creditors.Introductory Financial Accounting. The merchandise inventory as at December 31. utilities and supplies. 20x2. The rate is 12% per annum. 20x2 was $240.1. For depreciation . computed as 40% of pretax income of $50. Total sales were $900. 20x2. For new equipment acquired on July 1. c. Collections from credit customers were $700. advertising. Post all of the above transactions in T-Accounts.
000 110. Cash sales were $775.500 by Peter.1.000 $763. Peter's Appliances Shop Ltd.000.000. Peter’s balance sheet for August 31. 20x4.000 for appliances it purchased on credit. Peter needs to prepare its financial statements for the year ended August 31.Introductory Financial Accounting. The remainder was on account.000.000 in installments on its taxes. 20x5.. During the year Peter paid the taxes it owed at the end of fiscal 20x4. Peter uses the financial statements mainly for tax purposes and to show the holders of the long-term notes. 6. On August 31. The following information has been obtained about the fiscal year just ended: 1.000 123. 4. The cost of the appliances sold during fiscal 20x5 was $745.000 446. At year end the accountant estimates that Peter owes an additional $12. Ottkancester’s largest independent household appliance store.000 $763.000 -40. All purchases were made on account. 5. Peter collected $375.500 It is now mid-September 20x5. Peter paid salaries and commissions to employees of $200.000 8.000 260. v.000 in taxes. Peter has been in business for five years. 3.000 during the year from customers who purchased on credit. employees were owed $7. Sales during the year were $1.000. 7. 20x5.500 14.350. 2. 20x4 Assets Cash Accounts receivable Inventory Prepaid rent Furniture and fixtures Accumulated amortization $ 30. the company's year end.000 190.000 20. Balance Sheet As at August 31. mainly to builders.500 100. Peter purchased appliances from suppliers for $850. During fiscal 20x5 Peter paid $15. Peter supplies appliances to retail customers as well as to builders of the many new homes and apartments that are going up in the community.1 Page 46 Problem 1-13 Peter is the owner and operator of Peter's Appliance Shop Ltd.000.500 Liabilities and shareholders' equity Accounts payable Taxes payable Interest payable Long-term notes payable Capital stock Retained earnings $265. Peter paid suppliers $600. . is shown below.
13. 20x5.000 in cash for other expenses related to operating the business in fiscal 20x5.5%. Peter accepted $10. Before July 1. For accounting purposes. a statement of retained earnings and a balance sheet and a statement of cash flow for Peter's Appliance Shop Ltd.500 in interest to the holders of the long-term notes.Introductory Financial Accounting. The interest rate on the notes is 8.000. Interest is paid annually on September 1. for the year ended August 31. 20x5 Peter pays $4. 11. The prepaid rent at the beginning of the year represented 4 months of prepaid rent at the old location. He took a refrigerator. v. treat this as a dividend. The terms of the lease require that rent be paid six months in advance on January 1 and July 1 of each year.500 from the store and installed them in his new kitchen. In addition. 12.000 in deposits from customers who wanted a guarantee that their appliances would be delivered when they needed them. The deposits pertained to a particularly hard-to-get appliance. and microwave that cost $4.1 Page 47 8.000 on September 1. Peter must pay 2% of annual sales to the property owner 60 days after the year end. 20x5 Peter paid $3. Peter expects that the appliances will be delivered in early November 20x5. Beginning July 1. During 20x5 Peter purchased new capital assets (furniture and fixtures) for $25.1. 10. .500 a month in rent. Peter paid $225. In addition to the interest payment.000 a month for the rent of its store. Amortization expense for 20x5 is $22. Peter paid $20. 20x4 to reduce the balance owed on the long-term notes.000 cash. 9. These deposits were not included as part of cash sales. stove. Peter recently redecorated his kitchen at home. Required – Prepare an income statement. During the year Peter paid $8. 14.
petty cash and any foreign currency on hand. bank accounts. Cash Cash and Investments For accounting purposes. 3. The balance showing on the bank statement needs to be reconciled to the balance shown in the company’s cash account. This process is as follows: 1.1.Introductory Financial Accounting. Ensure that all cheques returned correspond to the amount entered into the cash account. 4. cash generally means any cash on hand. etc. Compare all deposits recorded on the bank statement to those recorded in the cash account. Identify any transactions that appear on the bank statement that have not been recorded in the cash account. Accompanying the bank statement are all the cheques that have cleared the bank account. every 30 days a company will receive a bank statement from the bank. and Prepare a list of deposits that were made in the cash account but were not yet recorded on the bank statement (outstanding deposits). The bank statement is a running total of all transactions that were made in the account since the last bank statement was produced. cheques deposited that are returned due to insufficient funds (NSF cheques). 5. The bank reconciliation starts with the balance per the bank statement. bank service charges.. It starts with the opening bank balance and ends with the ending balance. Prepare journal entries to record these items and post to the general ledger.1 Page 48 2. Typically. For example. v. 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 . 2. Prepare a list of cheques that were written but that have not yet cleared the bank account (outstanding cheques).
Introductory Financial Accounting.545 (6.574 • a deposit made on August 31 in the amount of $3. Cash ($332 – 323) Accounts payable To record the error in recording cheque # 345.644 . 20x7 Add outstanding deposits Less outstanding cheques Cash per books. • the total outstanding cheques amount to $6. The cheque was incorrectly written in the cash disbursement journal as $332.579 (156) (788) 9 $42.545 was not recorded on the bank statement • the general ledger cash account shows a balance of $43. August 31. Accounts receivable Cash To record the returned cheque.1. The correct amount is $323. before adjustments Less bank service charges Less NSF Cheque Add error on cheque # 345 Cash balance after adjustments $43. v. 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. 20x7 shows the following: • ending balance of $45.1 Page 49 Example – The Parkes Company’s bank statement dated Aug 31. The next step will be to calculate the revised cash balance: Cash balance.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.644 $156 $156 788 788 9 9 Finally. 20x7 $45.673 3. we prepare the bank reconciliation: Cash per bank.
otherwise they are classified as long-term assets. They are therefore specifically held for purposes of resale and are designated by management as such. and balance sheet valuation is the same: interest accrued or dividends declared are recorded as investment income. Any realized gains or losses are charged to Net Income. whether realized or unrealized. the investments are carried at fair market value. trading investments: all gains. v. For both types of investments.1 Page 50 Non Strategic Investments Investments in the shares of another corporation can broadly be classified as non-strategic or strategic investments. consist of passive investments in the shares of another company. are charged to Net Income. They would normally be classified as current assets. Available for sale investments also occur whenever debt securities are acquired with the intent of liquidating them before their maturity. the subject of this chapter. the accounting for investment income. Non-strategic investments. Where the two methods differ is on how the adjustment to fair market value is recorded. 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. • available for sale investments: any unrealized gains or losses are charged to Other Comprehensive Income.1. Other Comprehensive Income becomes part of Shareholders' Equity. These investments will either be classified as held for trading or available for sale securities. The classification of available for sale investments as current or long-term assets depends on management intent. 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. they are classified as current assets.Introductory Financial Accounting. If management intends to hold these for a period of less than one year. at the balance sheet date. Regardless of how they are classified. By their very nature. there is no difference in the accounting for these investments. • . operational or financial policies. 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. strategic investments are classified as long-term investments.
20x5 At December 31.000 600 600 1. On October 15. then the following journal entries would have been recorded: Jun 30.900 $16. 20x5 we receive a dividend cheque for these shares in the amount of $600.900.000 $15. On February 12. 20x5 Available for Sale Investments Cash Cash Investment income Available for Sale Investments Unrealized holding gain $15.on June 30. the fair market value of the shares is $16. 20x6 Cash Unrealized holding gain Gain on sale of investments Available for Sale Investments XXXX XXXX $1. 20x5. v. 20x5 you purchase the shares of another company for $15. $15.500 If the investment has been classified as a trading investment. At December 31.500. 20x5 (the balance sheet date).500 1.500 1.000 600 600 1. 20x6.900 1.000 $15.1 Page 51 Example . The following journal entries will be recorded with regards to this investment: Jun 30.500 $16.500 Oct 15.1. you sell the investment for $16.500 Oct 15. 20x5 . 20x5 Held for Trading Investments Cash Cash Investment income Held for Trading Investments Unrealized trading gain Note: the difference is that the unrealized trading gain is part of net income and gets closed out to retained earnings. The investment is classified as an available for sale investment.Introductory Financial Accounting. 20x5 Dec 31. 20x5 Dec 31.000. 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 12.500 1.
500 . 20x6 Cash Realized trading gain Temporary Investments $16.900 400 $16.Introductory Financial Accounting.1.1 Page 52 Feb 12. v.
595 . The cheque was written for the correct amount of $152.1.095 9. An analysis of the cash account for Swiss Company at December 31.700 3.200 What amount should be reported as cash in the current asset section of Swiss Company’s balance sheet at December 31. During May.095 d) $31. 20x8? a) $15. 20x8.1 Page 53 Problems with Solution Problem 2-1 1.595 c) $25. on hand but not yet deposited Swiss Company cheques that have not cleared the bank account $15. a company received a cheque from a customer in payment of the related account receivable. The May bank statement listed the deposit at $512. v. and it was deposited on May 18. How should this error be corrected on the May bank reconciliation? a) Add $360 to the bank balance b) Add $360 to the book balance c) Subtract $360 from the bank balance d) Subtract $360 from the book balance 2.095 b) $21.Introductory Financial Accounting. 20x8 revealed the following details: Balance in bank account Customer cheques dated December 31.
200 cheque received from a customer on December 13 in payment of an account receivable was incorrectly recorded as Required a. was gathered by Sarg Ltd.1 Page 54 3.288 c) $4.225. December 1 Cash received during December Cash payments made during December Cash balance per bank statement. Prepare the December 20x6 bank reconciliation for Sarg.Introductory Financial Accounting. At the end of the month.700 77. v.1. A company is preparing its May bank reconciliation.327 $15 48 63 34 Problem 2-2 The following information for the month of December 20x6. December 31 Bank service charges for December Deposits in transit at December 31 Cheque issued by Sparg Ltd. Cash balance per books.312 d) $4. the following information was provided by company records and the monthly bank statement: Bank service charges shown on the bank statement NSF cheques from customers shown on the bank statement Deposits in transit at the end of the month determined by the company’s bookkeeper A cheque for $43 (the correct amount) written by the company was recorded in the books at What is the correct cash balance shown on the bank reconciliation? a) $4. The ending balance on the May bank statement is shown as $4.279 b) $4. December 31 Cheques outstanding.300 5.000 77. b. Prepare any adjusting journal entries that would result from the December 2006 bank reconciliation.’s bookkeeper.300 52 1. $ 3. with respect to cash activities.020 . deducted from Sarg’s account in error by the bank A $1.548 6.700 580 1.
2. (CGA Canada) . Prepare a bank reconciliation for Focus Ltd.’s cash account according to its accounting records was $4.915. Prepare the necessary journal entry(ies) to bring Focus Ltd.Introductory Financial Accounting. the following information was determined: a) The following cheques are outstanding at March 31. deposit of $6. as $260. In preparing the bank reconciliation. 20x7. c) Bank service charges for December amounted to $35 and had not yet been recorded by Focus Ltd. d) Cheque #521 issued by Focus Ltd.1 Page 55 Problem 2-3 The March 31. e) A $530 payment on account received from a customer was incorrectly recorded in the books of Focus Ltd. 20x7.200. showed a balance of $480. 20x7: #501 for $780 and #533 for $1. v. for the cash purchase of office equipment. in the amount of $620. had been incorrectly recorded in the books of Focus Ltd. f) The balance in Focus Ltd. b) The March 31. bank statement for Focus Ltd. at March 31. as $350.1.200 had not been received by the bank in time to be included in the December bank statement. Required – 1. 20x7.’s cash account up to date at March 31. 20x7.
Introductory Financial Accounting. 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 $226.000 31. v.000 5.000 26.000. 20x1. decided to invest in the shares of a number of "Hi-tech" companies.000 $234.1 Page 56 Problem 2-4 During 20x0. Management is quite unfamiliar with these different methods and has approached you for this information.000 10.000 51.000 63. The data on Holdco Ltd.000 45. Required a) As chief accountant for Holdco. Support your answers with calculations.000 44.1.000 9. Holdco Ltd. 20x0 $ 72.000 51. b) On January 10. and all the Strategic Air Defence Systems shares are sold for $35.000 7.000. 20x0.000 20. write the journal entries to record the two sales.000 Recent discussions have brought to management's attention that there are different methods of accounting for temporary investments.'s temporary investments at December 31. 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. all the XYZ Computer shares are sold for $75. Assuming these investments are classified as held for sale investments.000 $ 70.000 30.000 28.
500 31. v. calculate the amount of unrealized trading gain or loss for each year.500 Required a) b) Assuming these investments are classified as available for sale.000 $66.000 32.Introductory Financial Accounting. .300 20x1 $19.000 $57.1. Assuming these investments are classified as trading investments.000 10.000 12.500 29.500 14.000 14.800 $60.1 Page 57 Problem 2-5 Mable Company has a portfolio of temporary investments consisting of the following (all investments were purchased in 20x0): December 31 Market Value Cost Security A B C $20.000 28.000 20x0 $18.000 20x2 $16. calculate the balance in Other Comprehensive Income at the end of each year.500 $62.
000 $45.200. 3% of accounts between 31-60 days.600 20. the company estimates that 1% of current accounts will eventually become uncollectible. Aging of the accounts receivable listing This involves grouping all outstanding receivables based on how long these have been outstanding. the aggregate of the unpaid invoices at any point in time.500 . therefore.Introductory Financial Accounting. 8% of accounts between 61-90 days and 40% of accounts over 90 days.400 9. Accounts receivable are. 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. For example. v.000 x 3% 120.000 x 8% 50. which is equal to the net amount of outstanding invoices the firm expects to recover.000 x 40% $ 7.500 8. where the allowance for doubtful accounts is estimated directly.200. 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. There are two approaches to calculating the allowance for doubtful accounts: the balance sheet approach. an account receivable is created. and the income statement approach.000 50.1 Page 58 3.000 Based on past experience. assume the total receivables add up to $1. Accounts Receivable Whenever credit is extended to customers for the provision of goods or services. Accounts receivable are reported on the statement of financial position at their net realizable value (NRV).000 120.000 $1.000 x 1% 280.000 and that the aging of accounts receivable is as follows: 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $750. whereby we estimate the amount of bad debt expense on the income statement.000 280.1. There are generally three approaches to estimating the allowance for doubtful accounts directly (balance sheet approach): 1.
000 and the company estimates that 5% of these accounts will eventually become uncollectible.200.000 x 5% = $60. it would not be meaningful to age the accounts receivable listing. it may be able to identify which specific accounts may become uncollectible. but estimates the amount of bad debt expense. The journal entry to record bad debt expense under either the balance sheet or income statement approaches is: Dr.1. Any accounts written off are written off against the allowance for doubtful accounts: Dr. The income statement approach is used whenever a company offers their customers revolving credit facilities (i. we first reverse the journal entry made to write off the account: Dr. Allowance for Doubtful Accounts Cr.200. Bad Debt Expense Cr. Accounts Receivable Recording recoveries of accounts written off When an account that was previously written off is subsequently recovered. The sum of the estimated uncollectible accounts at any point in time will form the allowance for doubtful accounts.000. Note that this approach does not estimate the allowance for doubtful accounts.1 Page 59 2. v.Introductory Financial Accounting. then the allowance for doubtful accounts at the end of the year will be $1. Accounts Receivable Cr. As a percentage of the ending accounts receivable balance This approach simply takes then ending accounts receivable balance and multiplies it by a percentage. so we estimate the bad debt expense as a percentage of credit sales. For example. if the ending accounts receivable balance is $1. 3.e. Allowance for Doubtful Accounts Recording accounts written off An account will generally be written off when (1) you receive a notice from a Trustee in Bankruptcy that you will receive an amount that is less than the amount owed. In this case. a department store which offers their customers a credit card). Specific account identification When a company has accounts receivable from a limited number of customers and has an intimate knowledge of these customers. Allowance for Doubtful Accounts . or (2) the amount is small and the cost of recovering the account is greater than the balance owed.
000 debit balance in the Allowance for Doubtful Accounts: Allowance for Doubtful Accounts Write-offs $75.000 $15. previously written off accounts totaling $10. the following transactions took place: • • accounts totaling $75.000.000 $10.000 were written off.000 were recovered.000 The journal entry to record the recovery will first be to reverse the entry initially made when these accounts were written off: Accounts receivable Allowance for doubtful accounts $10. The journal entry to record the accounts written off will be: Allowance for doubtful accounts Accounts receivable $75.800. The balance in the allowance for doubtful accounts at the beginning of the year was $50.Introductory Financial Accounting. v. During the year.1.000.000 We then record the cash receipt on the accounts receivable: Cash Accounts Receivable $10.1 Page 60 We then record the collection on the recovered accounts receivable: Dr.000 $75. Cash Cr. Accounts Receivable Example – The Jasmine Company’s accounts receivable at the end of the year totaled $2.000 $10.000 This will result in a $15.000 $50.000 10.000 Beginning Bal Recoveries Ending balance before adjustment .
75% of the accounts receivable balance will be uncollectible.000 x 2.75% = $77.800.000 600.500 The bad debt expense will be $94.0%) = $79.500 since this is the entry required in the Allowance for Doubtful Accounts account to bring the account to a credit balance of $79. The accounts receivable aging is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days 1.000 x 1.000 .500: Bad Debt Expense Allowance for Doubtful Accounts 2. $94.000 $92.0%) + (150. we will assume four independent scenarios: 1.0% 15.1 Page 61 In order to calculate the bad debt expense for the year.000.000 The allowance for doubtful accounts is estimated to be: (1.000 $2. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $92.000 150.500 $94.800.800. Using specific identification of accounts.0% Management estimates that 2.000 x 2.000 3.5% 6.000.000 x 6.000 x 15.5% 2.Introductory Financial Accounting.800.5%) + (600.500 Estimated % Uncollectible 1. The allowance for doubtful account should be established at $2.5%) + (250. v. management estimates that the allowance for doubtful accounts should be $68.000 250.1. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $83.000 $83.
5% of total credit sales.5% = $90. In approaches 1-3.000 This will cause the allowance for doubtful accounts to have a credit balance of $15.Introductory Financial Accounting.1 Page 62 4. we were estimating the Allowance for Doubtful Accounts with the residual being bad debt expense.000 dr.000 cr.000 $90. Bad debt expense will then be equal to $6.000.000. . Total credit sales for the year amounted to $6.000. v.000. we are effectively estimating the bad debt expense for the year and the residual becomes the Allowance for Doubtful Accounts.000 x 1. Note that when using this approach. The journal entry to record bad debt expense will be: Bad Debt Expense Allowance for Doubtful Accounts $90.1.000. = $75. + $90. Management estimates that bad debt expense will be equal to 1.
Introductory Financial Accounting.000) 400. 20x8 (credit) Total credit sales during 20x8 Total collections on accounts receivable during 20x8 Uncollectible accounts written off during 20x8 $80.400. 20x8 Allowance for doubtful accounts balance.000 b) $4.000 e) $13. What is bad debt expense for 20x9? a) $1.1. A company reported the following items for 20x8: Accounts receivable balance.800 .800 c) $7. the aging schedule indicated that the balance of the allowance account should be $6. the company wrote off $500 and collected a $300 receivable that had been previously written off as uncollectible.000 (11. January 1. A company estimated the needed balance in its account “allowance for doubtful accounts” by aging the accounts receivable.000 d) $13. the balance of the allowance account was $5. What should be the adjusting entry amount for doubtful accounts at December 31. v.000 20.000.600 b) $1. January 1.900 2. 20x8 a) $4.000 Experience indicates that 4% of the uncollected accounts receivable at the end of each year ultimately will be uncollectible. During 20x9. At the end of 20x8.1 Page 63 Problems with Solutions Problem 3-1 – Multiple Choice Questions 1.000 360.900 c) $6.600 d) $6. At the end of 20x9.
January 1.975 $2. Provide the December 31.000 cr.000 1. b.1.000 14.200. Provide the journal entry to write off actual accounts receivable determined to be uncollectible and recoveries.970 $3.900. January 1. just prior to writing off as uncollectible an account receivable of $30. c.1 Page 64 3. 63.000 dr.000 and an allowance for doubtful accounts of $125. assuming the allowance method is used to account for uncollectible accounts.095 a) b) c) d) Problem 3-2 The following information relates to Merit Ltd.000.000 3. 2004 adjusting journal entry to record bad debts. 2004 adjusting journal entry to record bad debts. . $ 15.000.875 $3. for the year ended December 31.000 55. 2004 Required – a. assuming the allowance method is used and management estimates the allowance to be 3% of the closing Accounts Receivable balance. 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.000 After $2. v.Introductory Financial Accounting. assuming the allowance method is used and uncollectible accounts are estimated to be of 1% of credit sales. What were the net realizable values of the accounts receivable as shown by the accounting records before and after the write-off? Before $2.000 11.000 800.000 $3. A company had accounts receivable of $3. 2004 Allowance for doubtful accounts.875 $2.875 $2. Provide the December 31.
v.000 90.000 16.000 234.1 Page 65 Problem 3-3 Sigma Company began operations on January 1.000 - 277.000 25.000 45. 20x1 and 20x0: 20x1 Credit Sales Collections (excluding recoveries) Accounts written off Recovery of accounts previously written off Days Past Invoice at December 31 0 – 30 31 – 60 61 – 90 Over 90 Required – Prepare all journal entries to record the above transactions $3.000 80.000 15.000 2.400.Introductory Financial Accounting.000 .1.000 27.915.000 60. The Sigma Company calculates its allowance for doubtful accounts by aging the accounts receivable based on the following percentages: Days Past Invoice Date 0 – 30 31 – 60 61 – 90 Over 90 Percent Estimated To be Uncollectible 1% 5% 20% 80% The following additional information relates to the years ended December 31.000 7.000 20x0 $2.000 2.000.800. 20x0.
000 debit balance in the accounts receivable account.1.Introductory Financial Accounting.1 Page 66 Problem 3-4 EED Ltd. On December 31. Suppose now that instead. v. EED Ltd. 20x6 there was a $2. In addition. Wrote off uncollectible accounts receivable in the amount of $1. if any. 20x7. During 20x7 the following summarized transactions occurred: 1. 20x7 to record bad debt expense for the year. if any. On December 1. 20x6. prepare journal entries. 2. 20x7.000 was converted to a 6-month promissory note to allow a cash-strapped customer some time to meet his obligations.000 in payment of outstanding accounts receivable. The company uses the allowance method of accounting for bad debt expense. required at December 31. 4.000.500. EED Ltd. required at December 31. to record bad debt expense for the year and accrue interest on the promissory note. Required 1. The promissory note bears an interest rate of 12%. . expects 2% of credit sales to be uncollectable. Based on industry averages and its experience in 20x6. began operations on January 1. prepare the journal entries. 3. decided that an allowance equal to 5% of total accounts receivable would be sufficient to cover uncollectible accounts. an accounts receivable in the amount of $3.000 credit balance in the allowance for doubtful accounts account and a $40. Prepare journal entries to record the above transactions on the books of EED Ltd. With all other data being the same from above. Sold merchandise on credit for $500. Received cash of $400. (CGA Canada adapted) 2.
The Perpetual Inventory System The term perpetual means continuing without interruptions.1. Furthermore. They sell $4.000 of inventory. From time to time.000 The next day. 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. this time on account.000 cash. the effect on the inventory account is the same as the above journal entry. as well as valuing the items that it has on hand to resell at any point in time. Note that unless a company is offering a discount to get rid of inventory or for some other reason. v. Little Company purchases an additional $10.000 Note that even though we are not paying cash. Inventory A key part of determining the cost of the items that a company sells to its customers. and any adjustments that are needed will be made to the inventory account. paying cash.000 worth of inventory to a customer for $6. we mean an inventory system that has no interruptions. Example: It is Little Company’s first year of business. Little Company makes its first big sale.Introductory Financial Accounting. a physical count of inventory will be taken to ensure accuracy of the perpetual records. or never ending.000 10. is the inventory system that it chooses. We will begin by looking at two fundamentally different types of systems.1 Page 67 4. and then evaluate the different valuation methods a company can chose to determine the cost of inventory. When we talk about a perpetual inventory system. we just create a payable instead of reducing our cash account. On the first day.000 worth of inventory. the amount the company generally receives from its customer should always be greater than the value of the inventory. . What that means is that inventory is tracked constantly in a real-time basis. We still increase the inventory account by the amount of the purchase. Little Company purchases $5.000 5. After two weeks of business. Each item that is purchased for resale gets debited to the inventory account. Inventory Accounts Payable 10. The journal entry would be: Inventory Cash 5.
Second. This varies significantly from the Periodic Inventory System. However. as: Purchases Cash 5. So what do we do with the purchases of inventory we make throughout the year? Throughout the year. v.000 4. Instead.Introductory Financial Accounting. These are: .000 The Purchases account keeps a running total for the year of all purchases of inventory made. as purchases are made of inventory they are tracked in a temporary account called “Purchases”. the journal entry would be: Cost of Goods Sold Inventory 4. 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”. Cost of Goods Sold (COGS). we have not removed the items that were sold from our inventory account. This expense account. we do not keep a “running total” of inventory.000 worth of inventory from our Inventory Asset account. it removes the $4.1. it records the expense of the items that were sold. that first purchase of inventory for $5. Under the Perpetual system the COGS is a running total.1 Page 68 To record the sale.000 At this point. the journal entry would be: Cash Sales Revenue 6. To do this. Continuing with the example above. is used to keep track of all of the costs of all of the items a company sells in one period. we have recorded the sale and the receipt of cash. however. under a periodic inventory system.000 6. Purchases has several contra accounts that track other expenses or discounts that may be associated with the purchases. as is the inventory account. nor do we keep a running total of COGS. which we will now turn our attention to.000 5. First.000 cash would be recorded.000 This journal entry does two very important things. The Periodic Inventory System Under the Periodic Inventory System.
Introductory Financial Accounting. as this is a new business. the opening inventory was $0.000 5. At the same time. The amount needed to balance the equation is the Cost of Goods Sold.000 and $10. Purchases of $5.000 Let us suppose that those were the only purchases made during the year. the inventory account is adjusted to the appropriate ending balance. and that at the end of the year a physical count of the inventory revealed that there was $11.1 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. If you remember. 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. the Purchase account and all contra accounts are closed out to zero.000 worth of inventory on hand. v. To calculated COGS: .1.000 were made.000 10.000 10. At the end of the year. based on the physical count. The new journal entries would be: Purchases Cash Purchases Accounts Payable 5.
700.000 27.000 48. Therefore. Inventory Purchases Transportation-in Purchase returns and allowances Purchase discounts 48.000) $2.000 11. $360. v. the Purchases account and all of the associated contra accounts have been set back to $0.000 Tetrie uses a periodic inventory system. according to our count. $175.1 Page 70 Beginning Inventory + Purchases ($5.000 = $185.000 Example 2 – Tetrie Company shows the following balances at the end of the year: Dr.700.000 – 48.000. in order to get the balance in the inventory account to $360.661.000 we must increase it (or debit it) by $185.000 Note that the Inventory balance given of $175.000 185.Ending Inventory (as per count) = Cost of Goods Sold $ 0 15. Cost of goods sold can be independently calculated as follows: Beginning Inventory + Purchases (2.000) = Cost of Goods Available for Sale .000 2.000 .700.000 increase) Purchases (close account) Transportation-in (close account) 2.000 $4.000 27.000 2.Ending Inventory (as per count) = Cost of Goods Sold $175.000 – 27.000 – 175.Introductory Financial Accounting.000 + 36.000 36.000 2.476.000 and it should be.000 36.1.000 would be the ending inventory balance from last year.000) .836.000.000. The balance is sitting at $175. They are ready for the next fiscal year. 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. A year-end count reveals that the ending inventory balance should be $360. Furthermore.000 + 10.000 2.000 (360.476.000 Cr.
we assume that the “First In = First Out”. v. FIFO Under the FIFO method. that is at what cost do we record the inventory and COGS. it is possible to track each item in inventory separately. We will now discuss how we attach value to the inventory.Introductory Financial Accounting. Cost-Flow Assumption This method is used when items cannot be differentiated from one another. like a jeweler. . when the item is sold. we don’t know specifically which items are being sold so we use an average of some sort to determine cost. or when a company has relatively few items in inventory that have a specific cost associated with them. the COGS is equal to the opening inventory + earlier purchases. we remove its specific cost from inventory and debit COGS at the carrying amount. That is.1. That is to say. Note that regardless if a company is using a periodic or perpetual system.1 Page 71 Inventory Valuation Methods The above discussion of periodic vs. or when the value of the items is so small that it does not warrant the cost of tracking the specific item value. like a car dealership. the ending inventory is equal to the most recent purchases. perpetual inventory systems dealt with how we track the inventory and purchases that flow through a company. There are two different valuation methods that can be used to calculate the value of inventory: specific item valuation or cost flow assumption. both the COGS and the ending inventory cost will be the same under the FIFO valuation method. In this case. Conversely. that inventory is mixed all together and. Some examples of situations where this method would be possible are: when items have specific serial numbers. Specific Item Valuation This method is used when inventory items can be specifically identified. therefore. 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).
we sold .140 Jan 19 Jan 25 300 600 400 375 705 455 Note that the ending inventory result under FIFO is the same under both the periodic and perpetual methods.470 (455) $1.20 1. we know that we sold a total of 700 + 200 = 900 units.00 1.Introductory Financial Accounting. Throughout the period.070 1.00 each. They purchased these units for $1.1. Cost of goods sold can be calculated in two ways.1 Page 72 Example – On January 1.10 = $330 January 5 purchase = 100 units x $1.25 1.25 = $125 Total value of ending inventory = $330 + 125 = $455 Using the FIFO perpetual method.015 Secondly. 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. This is not a coincidence – both approaches always provide the same result. Lainey Company has 400 units in its opening inventory. Under FIFO.10 1. using the cost of goods sold equation: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1.25 each Sold 700 units Purchased 300 units @ $1.20 1. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.25 $240 500 (400) (240) (125) 330 (250) Balance Units Total Cost 400 600 1. First.20 each Purchased 400 units @ $1. v.25 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 $1.10 each Sold 200 units Under the FIFO periodic method.000 $400 640 1.
we calculate the average cost of inventory as follows: . They purchased these units for $1. Throughout the period.25 = 900units $ 400 $ 240 $ 375 $1.1. So COGS would be calculated as the cost of the first 900 units. Opening Inventory January 3 purchase January 5 purchase COGS 400 units @ $1.015 Weighted-Average Method There are two versions of this method. one is used when you have a periodic system. v.10 each Sold 200 units Under the annual Weighted Average method.1 Page 73 the units in opening inventory plus the first of the purchases we made through the year. 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. Annual Weighted-Average – Periodic Systems Under a periodic system. Lainey Company has 400 units in its opening inventory.Introductory Financial Accounting. that is. The annual weighted-average for periodic systems uses a similar methodology. and one is used when you have a perpetual system.20 = 300 units @ $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. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.25 each Sold 700 units Purchased 300 units @ $1.00 each. you will remember that we do an inventory count once a year to determine the ending inventory balance. We then close out the purchase account and the associated contra accounts to determine what the COGS is. Using this method.00 = 200 units @ $1.
018 Alternatively. we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1. that is the unit cost after the last purchase previous to the sale. The moving weighted-average system of inventory valuation takes this into account.13077/unit = $452 COGS = # units sold x unit cost = 900 units x $1.300 Average unit cost = Cost of Goods Available for Sale/Units Available for Sale = $1.470/1.1 Page 74 Cost of Goods Available for Sale Opening Inventory (400 units @ $1.300 units = $1. then that is the unit cost used to determine the COGS for that sale.470 (452) $1. when we make a purchase we debit the inventory account for the amount of the purchase.10 each) $ $400 240 500 330 $1.25 each) January 19 Purchase (300 units @ $1.20 each) January 5 Purchase (400 units @ $1. v. Unit Cost = Cost of all goods on hand/number of units on hand.070 1. Under this system. .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.13077/unit Ending Inventory = # units in inventory x unit cost = 400 units x $1. we are keeping a running total in the inventory account.470 Units 400 200 400 300 1. whatever the unit cost is at the time of a sale. As such.13077/unit = $1. Subsequently.1.Introductory Financial Accounting.
we can calculate COGS using the equation approach: Opening inventory Purchases Cost of goods available for sale Less ending inventory $ 400 1. Unit Cost = Cost of all goods on hand/number of units on hand.14000 1. under this system we recalculate the unit cost each and every time we make a purchase.000 300 600 400 Unit Cost Total Cost $1.000 3 Unit Cost = $672 / 600 Cost of goods sold is equal to the cost of goods sold for the two sales: $798 + 224 = $1.20 each Purchased 400 units @ $1. Throughout the period.066671 640 2 1.1. They purchased these units for $1.1 Page 75 Example – On January 1.25 each Sold 700 units Purchased 300 units @ $1. Purchases (Sales) Date Jan 1 Jan 3 Jan 5 Jan 10 Jan 19 Jan 25 1 2 Balance Total Cost $240 500 (798) 330 (224) Units 400 600 1.140 / 1.470 (448) $1.070 1. Lainey Company has 400 units in its opening inventory. the following transactions took place: January 3 January 5 January 10 January 19 January 25 Purchased 200 units @ $1.25000 1.022 .12000 672 448 Units 200 400 (700) 300 (200) Unit Cost $1.Introductory Financial Accounting.10000 1. v.12000 Unit Cost = $640 / 600 Unit Cost = $1.022 Alternatively.20000 1.14000 1.00 each.00000 $400 1.140 342 3 1.10 each Sold 200 units Remember.
the accountant determines that they could sell this inventory for $40.000 = $36.Introductory Financial Accounting.1 Page 76 Application of Lower of Cost or Market Rule At the balance sheet date a company must compare the aggregate cost of its inventory to its aggregate market value.000 14. This account operates much like the Allowance for doubtful accounts in that it gets adjusted to the desired balance at year end. then the allowance will be debited by $14.000 – 4. Furthermore.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. we must determine that the inventory’s net realizable value. At the balance sheet date. is showing an ending inventory balance of $50. the inventory account has a balance of $50. Show the journal entry to record the proper carrying value of the inventory.000. If. Example –VenTure Ltd. . v. The net realizable value of this inventory is: = Selling Price – Commission = $40.000.000. If the market value is less than cost.000 = $36. The net inventory balance that will be reported on the statement of financial position is $50.000. the credit will be to income. commissions of 10% would have to be paid to the sales team on any sale of this inventory.000 to bring it to a zero balance. the analysis reveals that no allowance is required. next year. then the inventory must be written down to market value.1. First of all.000 At present. Inventory Loss Allowance for decrease in value of inventory 14.000 – ($40. We do this by creating a contra account to inventory called ‘Allowance for decrease in value of inventory’.000 – 14.000 X 10%) = $40. 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. 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 (1 – 25%) = $1.000 Ending Inventory = $310.000 x 40% = $400.000 600.000.000 860. the Gross Profit Ratio = 40%.000 Purchases . we must first understand how to calculate the Gross Profit %.900.200.200. 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 = $1.200. To understand the application of this method.000 The estimated ending inventory is: $350.000.Introductory Financial Accounting. v.000 x 60% = $600.000 x 75% = $900.000 Example – The Gennissen Company’s inventory were destroyed by a fire and you need to estimate the ending inventory.000 100% 60% 40% In the above example.1 Page 77 Gross Profit Method The Gross Profit Method of inventory valuation is used to estimate inventory when other data is not available to use one of the previous methods discussed.000 x (1 – 40%) = $1.000. for whatever reason.000 and Gross Profit is $400.000 Opening Inventory + 860.1.000 If Sales are $1.000 350. but we did have the Gross Profit Ratio.000. then we can estimate COGS as follows: COGS = Sales x (1 – gross profit ratio = $1.000 400. we could estimate COGS by using the following formula: Gross Profit = Sales x Gross Profit Ratio = $1.000 $1.000. Example – Assume the following: Sales Cost of Goods Sold Gross Profit 1.000. If we did not have the COGS number.000 25% .
b) Assets would be understated by $200.1. What was cost of goods sold for the year ending December 31.Introductory Financial Accounting. Which of the following statements correctly describes the effect of incorrectly recording the computer purchase on the financial statements? a) Inventory is overstated by $6.000.000.000 b) $503. d) Owners’ equity would be understated by $200. During the year the company purchased $500.000.000 c) $515. A year-end inventory count revealed merchandise on hand in the amount of $66. Ltd. Fri. a) Liabilities would be overstated by $200.000.000. 20x4. . b) Inventory is understated by $6. After completing its inventory count and making the appropriate adjusting journal entries.000 to suppliers and incurred $25. 3. On January 1.000 2. In addition. c) Cost of goods sold would be understated by $200. financial statements. d) Shareholders’ equity is overstated by $6.000.000.000 instead of the correct balance of $1. 20x8? a) $478. The December 31.000 in shipping charges on merchandise purchased during the period.000 worth of inventory and took advantage of purchase discounts amounting to $6.000.600.000. 20x4. 20x8.1 Page 78 Problems with Solutions Problem 4-1 – Multiple Choice Questions 1. Owl Enterprises had merchandise inventory on hand amounting to $60. Which of the following statements is true with respect to the impact of this error on the December 31.000 computer purchased for the chief financial officer on December 27 had been recorded incorrectly as an inventory purchase.400. v.000 d) $523. c) Shareholders’ equity is understated by $6.000. financial statements of Confu Ltd.000. the company returned merchandise costing $10.000. discovered that a $6. included an adding error in the inventory count that resulted in ending inventory of $1.
000 for the goods and uses the periodic method to account for its inventory. FOB Shipping. e.000. CIF destination. e. All of the merchandise purchased during the month was paid for with Cozy taking advantage of the purchase discount offered. Merchandise was purchased at a cost of $50.Introductory Financial Accounting. . e. 20x8.000. all of which were made on credit with terms 2/10. d) Revenues for 20x8 are understated by $57. The customer received the goods on January 6.1 Page 79 4. Czech had paid $42. One customer returned goods with a sales value of $500 and was issued a credit note. c) Income for 20x9 is understated by $15.. 20x9. Sales totaled $80.000. shipped goods to a customer on December 30. n/30.000. b) Income for 20x9 is overstated by $42. a shoe wholesaler. Problem 4-2 The following summarized transactions relate to Cozy Co.000. Required – Prepare the journal entries required to record the above events and transactions. for the month of July 2006. v. Cozy sets the selling price on its shoes so that the cost of sales is equal to 70% of the selling price. e. The selling price of the goods was $57. The sale was recorded by Czech on January 2. All other sales made during the month were collected in the month with all customers taking advantage of the sales discount offered. n/45. The company uses a perpetual inventory system.000 during the month with terms 1/10.000. Which of the following statements with respect to this transaction is true? a) Income for 20x8 is understated by $42.200. Transportation out paid on delivery of goods sold during the month equaled $1.1. Czech Ltd. 20x9. e. FOB destination.
Prepare the journal entries to record the May 29 sale on account.000 2.500 Date May 1 May 5 May 14 May 21 May 29 Totals Sales Beginning inventory Purchase Sale Purchase Sale 20 @ $20. Beginning Inventory/ Purchases 30 @ $10. assuming a firstin. first-out (FIFO) cost flow method is used.000 Price/Cost $12 18 30 23 33 . v. Calculate the cost of ending inventory for May.00 = $ 300 60 @ $11. b.Introductory Financial Accounting.500 3.100 125 $ 1. the Hawkeye: Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Required – Calculate the value of the ending inventory assuming the company uses: (a) (b) periodic FIFO perpetual moving average Transaction Beginning Inventory Purchase Sale Purchase Sale Quantity 1. Calculate the cost of ending inventory for May. Required – a. c. Problem 4-4 The following information concerns one of a company’s products.1 Page 80 Problem 4-3 Anvil Rock Company had the following inventory and purchases for the month of May. assuming a FIFO cost flow system is used.50 = 690 35 @ $12.00 = 1.000 2.410 70 $ 1.1. assuming a weighted-average cost flow method is used.00 = 420 50 @ $22.00 = $ 400 Anvil Rock uses a perpetual inventory system.000 2.
000 580. The store had an excellent Christmas season with the result that only 70 MP3 players were left in inventory on December 31. the company was unable to pass on price increases to customers and thus maintained a selling price of $100 per unit throughout the year. the Music Store had 400 MP3 players in inventory with a cost of $48 per unit.000 440.000 Banff normally realizes a gross profit of 30% on its sales. Costs are assigned to inventory and cost of goods sold on a weighted average basis.1. 20x5. During 20x5 the company made the following purchases of MP3 players: February 21. Required – Assuming the company uses a periodic inventory system.000 615.000 480. v. Costs are assigned to inventory and cost of goods sold on a FIFO basis. After a very successful ski season and just as it was about to commence shipping its hiking equipment for the upcoming season.000 units at $58 each $50.000 58. 20x5 1. 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. 20x5. 20x5 October 15. Fortunately. 20x5 June 15. the company’s insurance policy will cover 80% of the loss suffered in this fire. (CGA Canada) Problem 4-6 Banff Mountain Equipment Ltd.000 15. under each of the following assumptions: a.1 Page 81 Problem 4-5 On January 1. The loss is to be determined based on the cost of the inventory in accordance with generally accepted accounting principles. (Banff) sells skiing and hiking equipment to retailers. Banff lost all of its hiking equipment in a fire in March 20x8. Corporate records disclose the following: Inventory — January 1. 20x5. calculate gross profit for the year ending December 31.000 30.000 Due to competitive pressures.000 8.Introductory Financial Accounting. It accounts for its inventory using a periodic inventory system.000 units at $52 each 1.000 52. .000 units at $50 each 1. b.
taking advantage of the sales discount.1. the company sold 600 units at an average price of $2. Show all your calculations. Saret Ltd. Saret purchased merchandise inventory costing $42. Required 1. Whinr paid the balance due on the June 1 sale.100 per unit. The supplier provided purchase credit terms of 1/15. Required – Prepare journal entries for the above transactions. The cost of the merchandise inventory returned was $5. Show your calculations. The cost of the merchandise inventory sold was $15.000 on account. n/30. 2. n/60. The company uses a periodic inventory system. 3. Calculate the cost of goods available for sale.Introductory Financial Accounting. inventory value using the Weighted Average .000. Ending inventory consisted of 60 units. Whinr returned $10. Calculate December 31.000 of merchandise on account with credit terms of 2/10. inventory for 20x7: Beginning inventory. $30.050 each During the year.000.000 of the merchandise inventory claiming it did not meet its needs. v. Show all your calculations. Problem 4-8 The following information relates to Mejewel Ltd. (CGA Adapted) Problem 4-7 During June 20x8. 20x7 Purchases — June 7. 20x7. 20x7 Purchases — February 20. 20x7 20 units @ $900 each 440 units @ $950 each 200 units @ $1. January 1. 20x7. inventory value using the FIFO inventory pricing method.1 Page 82 Required – Calculate the net loss from the fire. June 1 Sold Whinr Ltd. performed the following transactions. June 2 June 9 June 12 The company uses a perpetual inventory system. Calculate December 31.
(CGA Canada adapted) Problem 4-9 The following is a summary of selected transactions for Toyjoy Ltd. revealed merchandise inventory on hand of $30.000 under credit terms of 3/15.Introductory Financial Accounting. Briefly explain the benefits. 20x7. which was paid within the discount period of 3/15. FOB shipping point.1 Page 83 inventory pricing method. (CGA Canada) c. amounted to $150. b. 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. assuming merchandise inventory on December 1.1. Received a $1.500 represented payment of a $50.000. i) ii) Purchased merchandise on account from Hirwin Toys for $80.000 in cash for freight charges on merchandise purchased during the month. . 20x7. iii) iv) Required a. amounted to $48.000 and a count of inventory on December 31. Cash payments on merchandise purchased from Patel Inc. for the month of December 20x7. Prepare journal entries for each of the above summarized transactions. n30. n30. Toyjoy had not yet paid for the merchandise. The company uses the periodic inventory method and the gross method of recording purchases.200 credit memorandum from a supplier on defective merchandise Toyjoy had purchased and returned. v. which has a negative impact on the company’s cash flow.000 credit purchase. As the new controller. Prepare a schedule of the cost of goods sold section of the income statement. Show all your calculations.500. you have made it a policy to ensure that all purchase discounts are taken advantage of. Toyjoy paid $3. The payment of $48.
Introductory Financial Accounting. v. 20x6 Ending Inventory. 20x7. inventory count $10. 20x6 inventory count. goods costing $5. ii) iii) Required For each error. Error 20x6 Cost of Goods Sold 20x6 Ending Inventory 20x6 Retained 20x7 Cost of Earnings Goods Sold (CGA Canada) . indicate the dollar amount of the overstatement (O) or understatement (U) in 20x6 Cost of Goods Sold. 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). a company received. 20x6 Retained Earnings.000 worth of goods which were in an off-site storage location. On December 28. and included in the year end inventory count. 20x6. then state so. If the error has no effect (NE). Use the following format in answering this question. 20x6.000 computer purchased on December 28. A $6. 20x6.000. and for 20x7 Cost of Goods Sold. There were no errors in the December 31.1 Page 84 Problem 4-10 The following is a list of inventory errors which occurred in 20x6.1. The company failed to record the purchase of these goods until January 15. for use by the sales manager was incorrectly accounted for as an inventory purchase. Assume the companies involved used a periodic inventory system and treat each situation independently. There were no errors in the December 31. 20x7 inventory count. i) A company failed to include in its December 31.
perpetual system c.000 $ 60. at January 13. FIFO.000 5.500 8. 2 Sale No. Assume that the transactions occurred in the order given. the accounting records were kept in a separate location and the company was able to reconstruct the following information: Inventory at January 1. a. periodic inventory system d. 20x7 Inventory stored at another location. 20x7. 2 (at $26) Required 6.000 $ 5. Weighted-average. perpetual inventory system .1 Page 85 Problem 4-11 On January 13.00 Units Beginning inventory Purchase No. 1 Sale No. v.95 8.40 9. (CGA Canada) $100. the Bamboo Brush store was destroyed in a fire. FIFO.000 6.000 $ 10. Moving weighted average.1.500 For each assumption given.Introductory Financial Accounting. 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. Luckily.000 7. Unit Cost $7.000 40% Problem 4-12 The records of Egypt Company showed the following data relative to one of the major items being sold. calculate the total dollar amount for ending inventory and cost of goods sold. periodic inventory system b. 1 (at $24) Purchase No.
Introductory Financial Accounting.1 Page 86 5.000 and $450.e. namely land. How do we allocate the cost of long-term assets over the periods these long-term assets are put to use in the business. how do we account for these expenditures. assume that you pay $500. The acquisition cost would be allocated to land and building as follows: Individual Fair Market Value per Appraisal Land Building $150. 2. and 4.000 $500. The essential accounting issues in accounting for long-term assets can be summarized as follows: 1. These generally comprise of: • land. When on-going expenditures are made in order to keep the asset in operable condition. • buildings. 3. If you pay one price to acquire a group of assets (i. For example. but are not limited to. the cost of acquiring these assets needs to be allocated based on the relative fair market value of the assets acquired. equipment.000 375.1. and • intangible assets such as patents. An independent appraisal of the land and building are $150. what constitutes the cost of this asset.000 % 25% 75% Allocation of Purchase Price $125. We will only focus on the accounting for those long-term assets that are not investments in financial instruments. any costs of transportation to get the asset to its location and any installation costs. 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 $600. the acquisition cost of asset.000 . These include. • long-term investments in financial instruments (i.000 for land and a building. the shares or the long-term debt of another company). equipment and furniture and fixtures.000 450. buildings.e. copyrights and trademarks. 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. land and building). furniture and fixtures and intangible assets.000 respectively. When a long-term asset is acquired. How do we account for the disposal of long-term assets. v.
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. ii.000 375.000 Accounting for on-going expenditures Once a long-term asset has been acquired. in which case the expenditure should be expensed to the income statement.1 Page 87 The journal entry to record this transaction would be as follows: Land Building Cash $125. equal over its useful life. 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. This method allocates the cost of the asset over its estimated useful life in equal amounts. we often incur ongoing expenditures in order to maintain the asset. The process by which this is done is amortization of long-term assets. the rate of output of the asset is increased.Introductory Financial Accounting. v. There are three general approaches to amortizing capital assets: 1. The underlying assumption is that this asset generated revenues that are. or iv. Consequently. the expenditure enhanced the quality of the asset in a substantive way. such as oil changes or brake replacements. For an expenditure to be considered a betterment it must meet one of the following four criteria: i. the matching principle requires that the cost of long-term assets should be spread over the periods that the asset generated revenues. any costs to maintain a truck. if we were to replace the truck’s engine. the useful life of the asset is extended. Straight-line method.000 $500. For example. more or less.1. would generally be considered to be repairs and would be expensed. then we would likely increase the useful life of the truck. The annual amortization expense is calculated as follows: (Cost – Salvage Value) / Useful Life . the operating costs of the asset are decreased. However. iii. A determination has to be made whether the expenditure is required to maintain the asset in operable condition. We would therefore capitalize the cost of the new engine to the asset account.
e. Under the straight-line method. We deduct the salvage value since we do not want to write down the asset below its salvage value. Units of production method. a truck rental company that bases rental charges on the mileage driven.000. The underlying assumption is that the asset generates revenues based on usage. i. if you are told that an asset has a useful life of 10 years. This assumes that the use can be measured. the annual amortization charge will be: ($300. v. The asset’s estimated useful life is 8 years and the estimated salvage value of the asset is $35. The asset’s useful life can also be measured in terms of total machine hours of 150. 3. The rate used for DDB is twice the straight-line rate.1 Page 88 The cost less the salvage value is called the amortizable base of the asset. mileage. then the straight-line rate is 1/10 and the DDB rate is 1/10 x 2 = 20%.000) / 8 = $31. Declining balance method. machine hours. This method allocates the cost of the asset over its estimated useful life based on the use made of the asset. 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. i.e.125 $31.000 – 35.000.000 hours. 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. For example. 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.Introductory Financial Accounting. 1.125 .125 The journal entry to record amortization expense will be as follows: Amortization Expense Accumulated Amortization $31. 2. 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).1. The amortization rate can either be given or you may be told that the company uses the double declining balance (DDB) method of amortization.
922 71. Recall that we do not depreciate the asset below its salvage value. Assume that the total number of hours of use in the first year is 18.000) / 150.000 x 0.640 23.188 31. the amortization charges for the 8 years will be as follows.750 126. v. the amortization taken in year 8 is the lesser of the calculated amortization of $10.750 126.000 225. 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.562 94.1. .000 168. 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.7667 = $31. Under the units of production method. If we had taken $10. the amortization charge per hour would be: ($300.191 53.000 hours x $1.922 71.756 = $53.011.000.393.045 Net Book Value End of Year $225.731 17.000 56.045 x 25% = $10.000 Year 1 2 3 4 5 6 7 8 Note that the year 8 amortization is not equal to $40.011 or the amortization amount needed to bring the net book value down to the asset’s salvage value. Note that we will assume double declining balance amortization at the rate of 1/8 x 2 = 25% per year. Net Book Value Beginning of Year $300.7667 per hour.000 hours = $1.011 of amortization in year 8.250 42.000 – 35.801.191 53.562 94. then the amortization charge would be 18.393 40. 3. Therefore.Introductory Financial Accounting.000 168. the net book value at the end of the 6th year is: $300.393 40.045 35.1 Page 89 2. Under the declining balance method.348 5.045 Amortization Expense @ 25% $75.798 13.
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. .000) $89. At the time. these estimates were revised as follows: the total estimated useful life of the asset is expected to be 15 years and the salvage value is expected to be $10.000 $11.000/year x 7 years Net book value The gain on disposal of this asset is: Proceeds on disposal Less net book value Gain on disposal The journal entry to record the disposal of the asset is as follows: Cash Accumulated amortization Asset Gain in disposal $100. For example.000 11.000 (161.1 Page 90 Disposals of Long-Term Assets On the date of disposal. the changes in estimates are applied prospectively from the date of the change in estimate onwards.000) / 10 = $23.000 – 20. the asset’s useful life was expected to be 10 years with an estimated salvage value of $20.000.1.Introductory Financial Accounting. 20x3 for $250.000 250. The asset is sold at the end of 20x9 for $100.000 $250.000.000 161. The asset’s useful life was expected to be 10 years and the salvage value was estimated to be $20. v. we compare the net book value of the asset sold to the proceeds on disposal. assume that an asset was purchased on January 2.000 89.000 $100. an asset costing $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. In 20x5.000.000. The difference will be equal to the gain or loss on disposal. 20x1. Assume straight-line amortization.000. For example.
Intangible assets whose life is limited should be amortized on a straight-line basis over their estimated useful lives. i. you cannot touch them or see them) and yet they represent costs incurred that meet the definition of an asset. musical compositions and works of art.000 – 10. The accounting for intangible assets depends on whether these assets have limited or an unlimited life. The patent’s legal life is 17 years but it is expected that emerging technologies will make this .000) / 10 = $8. v.Introductory Financial Accounting. location or superior products. are the result of a past transaction and are under the control of the company. This need not coincide with the asset’s legal life. Internally developed intangible assets cannot be capitalized on the Statement of Financial Position.000 – 20.e. • copyrights – the protection of writings.000) $68.000 (32.000/year x 4 years $100. • patents – a legal right ensuring the company’s exclusive right to a product or process. For example. Note that only expenditures incurred by the company can be capitalized as intangible assets. For example.273 per year Intangible Assets Intangible assets are those assets that do not possess a physical quality (i. if you look at Coca-Cola’s Statement of Financial Position. • franchises – the exclusive rights to sell products or perform services. the trademark ‘Coca-Cola’ was never purchased by the Coca-Cola Company but rather. they are expected to provide future benefits.000. was developed internally.1 Page 91 The net book value at the beginning of 20x5 is: Original cost Less Accumulated amortization ($100.000 This net book value will then be amortized over the remaining useful life of the asset. Examples of intangible assets are: • trademarks – a name or symbol that identifies a company or a product. you will not see the value of its trademark listed as an asset.000) / 11 remaining years = $5. typical within a certain geographical area • goodwill – the added value of a business attributable to factors such as reputation. Annual amortization charges for 20x5 and future years will be: (68. assume that a patent is granted to a company at a cost of $100.e.1. Consequently.
If the fair market value is lower than book value and is not expected to recover.Introductory Financial Accounting.1. goodwill) are not amortized but instead subject to an annual impairment test. Any impairment losses cannot be subsequently reversed if the fair market value of the asset subsequently is recovered. In this case. the book value of the intangible asset is compared to its fair market value.e. . Intangible assets whose life is unlimited (i. That is.1 Page 92 patent obsolete by the end of the 5th year. then the asset must be written down to the fair market value. we would amortize the patent over 5 years. some franchises. v.
000 10 years $5. 2.1.00 d) $8. What will be the annual amortization expense for patents? a) $4. the situation was as follows: Building cost Accumulated depreciation — building Estimated remaining useful life Estimated salvage value at end of useful life $200. v. Brown and Das obtained a patent for their earnings forecasting software at a cost of $80. What is the impact of this expenditure on income before taxes for 1998? a) Income will decrease by $12.000.00 c) $8.000 and spent $5.000 3.000 b) Income will decrease by $6.000 in legal costs defending it. What is the amount of depreciation expense on the building for 20x8? a) $4.705.000 c) $19.88 b) $5.00 Use the following information to answer questions 2 and 3: The Jasper Company has an old building which requires frequent repairs and constant maintenance. The room was completed on June 30. Sinha. A small room was built on the back of the building at a cost of $12.000 c) Income will decrease by $1. The patent is valid for 17 years and has an estimated life of 10 years.Introductory Financial Accounting. 1998.500 b) $5.500 d) $20.000 150.000.000 Jasper uses the straight-line method for calculating depreciation expense.500. and was used as office space commencing July 1. At the beginning of 20x8.000.1 Page 93 Problem with Solutions Problem 5-1 – Multiple Choice Questions 1.200 d) Income will decrease by $632 e) Income will decrease by $600 .
During 20x6.060. 20x7? a) $40.000 with an estimated life of 4 years and a salvage value of $5.000 c) $1. a $60. To acquire the land.000. using the straight-line method.000 . 20x6? a) $67.500 b) $72. Yaari and Yosha Company bought a machine for $85. and a 10% residual value. A land site was acquired for $1.000 5.000 c) $5.000 b) $1. On July 1.000. On January 1.000 b) $42. production was 20. The equipment is expected to have a 5-year life and produce a total of 80.000.015. The machine is expected to be used for a total of 1.000 were incurred to clear the land in preparation for construction of an office building.500 productive hours over the next 4 years.160 d) $5. If the company were to use the units-ofproduction method instead of the straight-line method. v.735 6.000.750 d) $65.000 commission was paid to a real estate agent. what would be the balance reported for the net book value of the machine at December 31. On January 1. If the company uses the double-declining-balance method for amortization.000 7. was $18. it was used 430 hours.075.500 c) $63. 20x7. During 20x7.000. At what amount should the land be reported on the balance sheet? a) $1.000 units.Introductory Financial Accounting. 20x7.000.000. It has an estimated 4-year life. Ireland Company purchased a machine that cost $20. what would be the balance reported for the net book value of the equipment at December 31.000 c) $77.500 d) $80.000 d) $1. Costs of $15.1. 20x6.500 b) $5.000 units.1 Page 94 4. Stone and Wall Company bought equipment for $100. The Amortization expense for 20x6. What is amortization expense for 20x7 under the productive output method? a) $4.
as a result of heavy usage. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. At the end of its useful life. 2008. . assuming the company used the straight-line method of amortization. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. 20x7.1. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. purchased a van to transport guests between the resort and a nearby airport.000 kilometers.000 at the end of its useful life. assuming the company uses the doubledeclining-balance method of amortization.1 Page 95 Problem 5-2 On January 1. the total life of the van would only be 4 years instead of the original estimate of 5 years. During 20x8. Required – a. assuming the company uses the units-of-production method of amortization and that the van was driven 55.000. d.Introductory Financial Accounting. 20x7. assuming the company uses the straight-line method of amortization.000 kilometers during the year. it was estimated that the van could be sold for $5. c. 20x7. The van cost $65. management of the company decided that. Prepare the adjusting journal entry to record amortization expense for the year ended December 31. v. management felt that the van could only be sold for $2. Resort Ltd. b. In addition. 20x7 and 20x8.000 and was expected to have a useful life of 5 years or 200.
.000 were made to the equipment. The original estimate of salvage value holds. 20x5 Dec 31. Recorded amortization expense.000. 20x8 Required – Record all of the above transactions assuming that the company uses the straight-line method. 20x6 Sep 30. Dec 31. 20x3: Jan 2. Recorded amortization expense. Expenditures totaling $2. The estimated useful life of the asset is expected to be 5 years with a $10. This increased the quality of the asset’s output but did not change its useful life or the estimate of salvage value. The equipment was completely overhauled at a cost of $20. 20x7 Dec 31. v. This increased the useful life of the asset by three years. 20x4 Dec 31. 20x3 Aug 31. Recorded amortization expense. Recorded amortization expense.000 salvage value.000.1 Page 96 Problem 5-3 The Connor Company had the following transactions over the life of an asset purchased on January 2.1. 20x4 Apr 31. 20x3 Purchased equipment for $60. Routine repairs costing $600 were made to the equipment. 20x5 Dec 31. 20x7 Aug 31.000. Sold the asset for $25. Recorded amortization expense.Introductory Financial Accounting.
The following additional information is available: Original cost of the old asset Accumulated amortization at June 30. During the installation there was minor damage to the frame. ABC Ltd. (CGA Canada.1. 20x7 Required – Prepare the journal entry to record the purchase of the lathe. 4. 20x7.000. and the repair cost for it amounted to $500. adapted) $ 50.500 108.500 Problem 5-5 On July 1.000. 2.000 cash. in good form.1 Page 97 Problem 5-4 On June 30. 20x6. v. Market value of old asset on June 30.000 cash. Prepare the journal entry to record the asset acquisition on July 1. Required – 1. Prepare the journal entry to record the amortization expense on December 31.000 38.Introductory Financial Accounting. 20x6. 20x8. how the machine will be presented in the assets section of the balance sheet at December 31. (CGA Canada) . 20x8. 3. which included freight charges of $1. On January 1.000. Prepare the journal entry to record the sale of the machine on January 1. 20x7 Price of new lathe. ABC had to spend $2. Assume a straight-line method of amortization. 20x6. The machine was expected to have a life of 4 years and a salvage value of $3. Show. MNO Co. bought a state of the art numerically-controlled lathe from GPL by trading in a dissimilar asset and paying $90. purchased a machine at a cost of $25. the machine was sold for $20.000 15. 20x7.000 to install the machine.
000 4 years 40.1. 20x6. assuming the company uses the: i) straight-line method ii) units-of-production method On January 1. 20x7.Introductory Financial Accounting. Accordingly.000. 20x8. Cost Estimated residual value Estimated life Estimated production 20x6 actual production Required a.000 $ 20. and (c). assuming the company uses the: i) straight-line method ii) units-of-production method c.1 Page 98 Problem 5-6 The following information pertains to the equipment acquired by Xie Co. 20x7. On January 1. 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. Prepare the journal entry to record the sale assuming the company uses the: i) straight-line method ii) units-of-production method $120. Determine the amortization expense for the year ending December 31. Use this information to answer parts (a). due to a preventative maintenance system that had been implemented. In 20x7. the equipment was sold for $75. Determine the amortization expense for the year ending December 31.000 units. the estimates were revised. (b). 12. on January 1.000 units were produced. . 20x6.000 units b. v.000 units 9.
000 to pay for the machine within the discount period and take advantage of the cash discount. we get a 2% discount. b. What amortization method could be used to abide by the president’s request? Is this method acceptable under generally accepted accounting principles? Explain. for $100.000 on this loan during 20x3. purchased Machine No. 103 has a physical life expectancy of 10 years with a salvage value of zero. 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.000 2/10. * this means that is we pay within 10 days. income can be minimized in 20x3. Compute amortization expense for 20x3 using the straight-line method. 20x3. Assume that the machine is sold on January 1. we have to pay the full invoice price within 30 days. It incurred interest costs of $12. v.800 The company borrowed $150. Required – a. 103 on January 2. 20x6.1.000 cash. Prepare the journal entry to record the sale assuming the straight-line method of amortization was used.000 $ 14.000 at that time. Machine No. In this way. German intends to use the machine for 8 years and hopes to sell it for $15.Introductory Financial Accounting. c. . The following information relates to this machine: Invoice price Credit terms* Customs and duty costs Preparation and installation costs $ 140. n/30 $ 5. Otherwise.1 Page 99 Problem 5-7 German Ltd. However.
a company purchases office supplies from a supplier for $2.1 Page 100 6. For example.1. 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. it is split appropriately and applied to the correct periods. the only time we see this account set up is at the end of a fiscal period when an adjusting entry must be made. If the average daily wage expense is $1.000 3. The entry would be: Office Supplies Accounts Payable 2.000 to the new period. Liabilities To begin our discussion about liabilities we have to first differentiate between those liabilities that will come due within on year or accounting period (current liabilities) and those liabilities that will come due at a later point in time (long-term liabilities).000 7. Interest and Principal payments are due December 31st of each year. v.000 with the terms set at 6% interest due annually. Typically. the entry would be: Wage Expense (4 days x $1.000/day) Wages Payable (to remove the adjusting entry) Cash 4.000/day) that were performed in the period but not paid for. On April 4th. services or supplies for the operation of the company.Introductory Financial Accounting.000 on account.000.000.000 This way. $7.000 2. The principal must be repaid equally over 5 years.000 3. a company has a fiscal year end of March 31st.000 Note that we are debiting the Wage Expense for $3. $3.000/day. whichever is longer. however.000 to last period and $4. Employees were last paid on March 28th. when the payment is made for the full week. assuming the employees worked the full 7 days in the week. and will not be paid again until April 4th. We have already covered several of these when we did adjusting entries. the adjusting entry made March 31st would be: Wage Expense Wages Payable 3. For example. Accounts Payable – these are liabilities that were incurred to purchase goods. Current Liabilities A current liability is one that will be settled within one year or the business cycle of the firm. a company takes out a loan on January 1st for $10. . but have not been paid. which represents the three days of work (3 x $1.000 Wages/Salaries Payable – these are wages/salaries that are due to employees for hours worked. For example. we will go over the main types of current liabilities.
500 57. and pays 1.000 The debt is split into the portion that is due within the year. and a balance in the Long-Term Liabilities section of $6.000 42. a company pays its employees monthly. v.000. The journal entry would be as follows: Long-term debt Interest Expense Cash 2. CPP. This ensures accurate reflection of the financial obligations of the company on the Statement of Financial Position. Not only must the company submit the employee’s portion.000 On the Statement of Financial Position. and that which is due later than one year.1 Page 101 When the company takes out the loan.000. For example. the journal entry would be as follows: Cash Long-term debt 10.4 times the employee deduction for EI.000. the interest expense for the year would be $600 ($10. $8.000 x 6%). and the employer ducted the following amounts from its employees’ cheques: Income Taxes. EI.000. but they also must submit the employer portion of CPP and EI.000 8. CPP and EI from employee’s paycheques.000.500. Deductions for each month are due on the 15th day of the following month. 27.500 . The entry to record payroll for the month would be: Wages Expense Employee Withholdings Payable ($27.000 + 7.000 600 8.000) Cash 100.1. we would split the long-term debt as follows: Current liabilities Current portion of long-term debt Long-term liabilities Long-term debt $2.000 If a Statement of Financial Position were prepared on the January 1. Employee Withholdings Payable – Employers are responsible for deducting income taxes. The employer matches the employee’s contribution for CPP.Introductory Financial Accounting.500 + 8. Wages total $100. At December 31st.000 10. we will now show a balance in the Current Liabilities section of $2. $7.
the company pays the government: Employee Withholdings Payable ($42. The journal entry would be: Unrecognized Loss on lawsuit Contingent Liability – lawsuit 400. and therefore a loss of some kind to the company.500 x 100%) EI Expense ($8.1 Page 102 At the same time.500 11.200 61. The justification is that the financial statements should not be misleading or give false hope or information to any reader. For example.Introductory Financial Accounting. but it does not have to be recognized.000.700) Cash 61. as done above.700 Note that CPP Expense and EI Expense could be tracked separately. and b) the loss can be reasonably estimated.200 18.000 . v.500 + 18. when there are multiple options or positions or courses of action available to present financial statements or financial data that the most conservative approach should be taken. but have not yet come to be. If a company knows that there will be a liability. the company would record its portion of payroll expenses due to the government: CPP Expense ($7.200 Contingent Liabilities One of the guiding principles of accounting is the idea of conservatism. Contingent liabilities are those liabilities which are likely to be incurred in the future. If a contingency meets the first criteria but not the second. On the 15th of the next month. your company is being sued for $400. You would record or recognize the FULL amount. This principle states that.000 400. 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. then it has to be disclosed through a note in the financial statements.000 x 1. One of the resulting GAAP rules that stems from this idea of conservatism is the establishment of contingent liabilities. A contingent loss should be recognized only when: a) it is likely that a future event will confirm the loss. then they must disclose it when they know about it. or simply lumped in with Wages Expense.1.40) Employee Withholdings Payable 7.
but there was no legal precedent for the amount that would be awarded and therefore are unable to estimate the future loss. v. You would simply write a note in the financial statements disclosing the lawsuit. The journal entry to record warranty expense for the year would be: Warranty Expense ($300. but it also sets up a liability that will be drawn down as actual expenses are incurred over the life of the warranty.Introductory Financial Accounting. When a company sells a product that has a warranty.000 10.000 to repair various vacuum cleaners that are under warranty. Again. The journal entry would be: Warranty Liability Cash/Inventory/Wages 10. in order to adhere to the matching principle.000 12. Warranties & Premiums Another of the guiding principles of accounting is the matching principle. such as wages. is 4% of sales. the company pays $10. that have been incurred but not paid. This principle is the one that guides us when making adjusting entries at the end of the year with regards to expenses. Continuing on with the same example. we must record the associated expense in the period when the . This principle states that for all revenues generated in a specific period. then you do not have to do anything because you do not meet either of the criteria for recording a contingent liability. your lawyer felt you would lose. let’s assume that during the next year. on average.1. in the same scenario. in the same scenario. a company sells vacuum cleaners that come with a 2-year warranty. they should try and estimate what the total warranty expense will be so that it can be matched and recorded in the period when the revenue was generated. The company estimates that warranty expense. Another example of matching has to do with warranties.000 This entry not only matches the expense to the period when the revenues were generated. The warranty expense is normally determined through evaluating historical data and coming up with a % of sales that represents the future warranty costs. all expenses related to those revenues should be recorded at the same time. and the fact that you were likely to lose.000 Premium liabilities come to be when a company offers its customers some product or service through the redemption of coupons or some other device whereby the customer can receive goods/services in the future based on current sales.1 Page 103 If. your lawyer felt you would win. Total Sales for the year totaled $300. For example. but you would not have to record the loss or the liability.000 x 4%) Warranty Liability 12. If.000.
you are taking on the risk that the money might not be repaid at all. The combination of these two facts results in a dollar today being worth more than a dollar received in the future. For example. 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. Furthermore. for every $10 your customers spend.000 32. notes payable. The premise behind this is that a dollar today is not worth the same as a dollar received tomorrow.000 Whenever coupons are redeemed. To record the premium liability at the end of the year.1. they receive 1 coupon. you have determined that only 40% of your customers will redeem their coupons. pensions and other more complicated longterm liabilities in this section. These typically include long-term bonds.000 32.1 Page 104 original sale is made.000. Long-term Liabilities Long-term liabilities are defined as liabilities that would not be reasonably expected to be liquidated within a year. the journal entry would be: Premium Expense* Premium Liability * $800. Your sales for the year were $800. or a year from now.000 coupons x 40% = $32. the greater the “discount” or decrease in the dollar value will be.Introductory Financial Accounting. v. They can then redeem 10 coupons for a watch valued at $10.000/$10 = 80. we are trying the calculate the present value of $1. the premium liability account is drawn down. We will not get into a discussion of leases. We will instead focus on long-term bonds. then you are missing out on the opportunity to invest that money today and earn interest on it. If you are going to be receiving money in the future. or ten years from now. Based on past redemption data.000 to be received in 5 years from now at an interest rate of 6%. one of the most frequently used financing instruments in business. longterm leases and pension obligations. The format for solutions using a financial calculator is as follows: N 5 I/Y 6 PV X PMT FV 1000 Enter Compute In the above example. . The farther in the future you are to receive the funds.
the amount would grow to $1.58 PMT FV 10000 Enter Compute Present Value of an Annuity . press CPT and the TVM register you are attempting to solve for. If the current and expected future rate of return is 6%. what is that $10.000 per year for the next 30 years.000 from your favorite uncle.26 today (money out of pocket and therefore the negative sign) and invest it for 5 years at 6% compounded annually. Assume you inherit $1. 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.Introductory Financial Accounting.1.26.000 from your mother 5 years from now.000.An annuity is defined as a series of identical cash flows that end at a specified time. Calculating the Present Value of a Future Single Sum .000. If i=7%.472. in this case PV the answer provided is -747.47 PMT 60000 FV Enter Compute .000. enter the numbers above in the TVM memory registers to solve. This means that if you were to invest $747.000 worth in “today’s dollars”? N 5 I/Y 6 PV 7.Assume you are going to receive $10. how much of the $1. clear the Time Value of Money memory as follows: 2ND FV You should do this every time you do a time value of money calculation.1 Page 105 With the Texas Instruments BA II Plus.000 will you have to set aside in order to set up this annuity? N 30 I/Y 7 PV X= $744. v. You want to be able to withdraw $60.542.
The market takes this into consideration. What is your monthly payment to the manufacturer going to be? N 3 I/Y 6. Coupon rate = Annual Coupon Payments/Face value Yield-to-maturity (YTM) – the rate of return that bondholders expect on the bond given its risk.10 FV Enter Compute Your company is purchasing a piece of equipment costing $80. if you issue a bond with a coupon rate of 5% and the YTM is 6%.000 in the bank. The manufacturer is offering you financing at a rate of 6.06 FV Enter Compute Bonds A bond is a financial instrument that is a contractual obligation by a company to pay a stated amount of money at some stated time in the future. 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%. as well as make interest payments on the stated amount. For example. how much can you withdraw each year? N 25 I/Y 7 PV 675000 PMT X= $57.206. This is because the buyer of the bond gets a higher return by investing in the bonds. 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. and the bonds will sell for a value less than the face value of the bond.Introductory Financial Accounting.1 Page 106 Annuity Payment Calculation .992. Coupon – the amount of semi-annual interest payments to be made on the bond. then the bond will sell at a discount. Also called the market rate.5 PV 80000 PMT X= $30.You have retired with $675. Assume the rate is 7%. If the YTM > Coupon Rate. It is rare that the yield-to-maturity rate and coupon rate are the same. You expect to live another 25 years. If the YTM < Coupon Rate.1. v.5% on a 36-month loan.000. Coupon Rate – the stated interest rate to be paid on the face value. then the bond will sell at a premium. and therefore is willing . This is because the buyer of the bond could get a higher rate on the open market (the YTM) than they can from investing in the bond (the Coupon Rate).
1 Page 107 to pay more than face value for the bonds in order to reap this benefit. N will equal the number of coupon payments left.On January 1.000 x 5.000.829.Introductory Financial Accounting.5% $2. 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. 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.000 to cover our coupon obligation. This is less than the face value of $2. the YTM is normally expressed as an annual rate. not the number of years.829. or the amount that we would have received in proceeds would be equal to $1. every 6 months. we must adjust the other factors in the formula to a “6-month” basis.000 of bonds.000 is not our interest expense. In order to attract investors. However.8% x = $58.000. Example .451 PMT 580002 FV 2000000 Enter Compute 1 2 YTM of 7% / 2 = 3. Furthermore. Interest will be paid semiannually on June 30 and December 31. This is because our coupon rate of 5. therefore it will have to be cut in to reflect the situation. we have to sell our bonds at a discount. YTM = 7%. The PMT & FV remain the same. 1.829. The Coupon Rate = 5.451 1. v. As such.451 . 20x8 you issue $2. The Present Value of the bonds.8% and they mature in 10 years.000. this $58. because PMT is equal to the payment made every six months.000 coupon payment.8% is less than the market rate of 7%.1.000.51 PV X= $1. We have already calculated that we will be writing a cheque for $58. How much would be raised through this bond issuance? N 20 I/Y 3.451.829.
242 58. the balance in the Bonds Payable account will have been written up to $2. give or a take a few dollars for rounding.829.835.000.1 Page 108 The interest expense for a given period of time is calculated by multiplying the carrying value of the bonds for the period times the market interest rate or YTM.000. Continuing our example.301 credit to Bonds Payable increases the carrying value of the bond payable account to (1.000 2.482. On December 31st.031 6. the entry for interest expense would be: Interest Expense (1. v.451 x 7% x Bonds Payable Cash ) 64.000 . on June 30th. This will be the amount used to calculate the interest expense on December 31st. 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. therefore.031 58.451 + 6.829. At the time of settlement.Introductory Financial Accounting.835.301) $1.242 6.000.000 After all 20 interest payments have been made.482 x 7% x Bonds Payable Cash ) 64.000 Note that the $6.1.000. the journal entry will be: Bonds Payable Cash 2. you would record the following journal entry: Interest Expense (1.
v. 10 year 8% bonds priced to yield 6%. Issued $10 million face value. Gallaghar Ltd.1 Page 109 Problems with Solutions Problem 6-1 – Multiple Choice Questions 1.Introductory Financial Accounting. 20x7. 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 $800.000 iv) The bond was issued at a discount a) b) c) d) iv) only i) and iii) i) and ii) ii) and iv) .000 iii) The interest expense for the year will be less than $800.1. Which of the following items is not a contingent liability? a) Premiums offered to customers b) A risk of loss to uninsured property due to fire or other casualty c) Additional wages that may be payable on a dispute now being arbitrated d) Estimated claims under a service warranty on products sold 3. 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. On January 1.
the coupons being redeemable for a premium. 20x8. Assume that a manufacturing corporation has (1) good quality control. 20x8? a) $4. b) It should be reported as a current liability. even though the amount of the loss cannot be reasonably estimated 5. 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.00 and 5 coupons must be presented by a customer to receive a premium. 6. The company estimated that only 30% of the coupons issued would be redeemed.1.500 What is the estimated liability for premium claims outstanding at December 31. In an effort to increase sales.1 Page 110 4. a company inaugurated a sales promotional campaign on June 30. How should any liability for the warranty be reported? a) It should be reported as a long-term liability.000 23.000 . (2) a oneyear operating cycle.400 d) $18. v.300 b) $8. Each premium costs the company $2. 20x8. and it is likely that an asset has been impaired or a liability incurred d) When it is likely that an asset has been impaired or a liability incurred.000 e) $20. (3) a relatively stable pattern of annual sales. 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. whereby it placed a coupon in each package of product sold. For the 6 months ended December 31. d) It need not be disclosed.Introductory Financial Accounting.600 c) $9. the following information is available: Packages Sold Premiums Purchased Coupons Redeemed 150. c) It should be reported as part current liability and part long-term liability.000 10.
In order to increase customer loyalty in this fiercely competitive environment you have started a coupon program.000 and actual costs incurred to service warranties during the year amounted to $130. and data shows that approximately 55% of your customers redeem their coupons. Sales for the current year were $3.1.1 Page 111 Problem 6-2 You run a computer repair company.000 22. What is the balance in the warranty liability account at the end of the year? . They can redeem 15 coupons for a $25 iTunes gift card.Introductory Financial Accounting.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.000 40.000 and it is estimated that the warranty expense is equal to 5% of sales. v. then receive 1 coupon. For each $10 your customers spend. You have been running this program for several years. The following data relate to the past year: Sales Premium Liability Account – Opening Balance Coupons Actually Redeemed during the year Required – What would be the journal entries to record the premium expense and the actual premium costs incurred? $375.000.000. The warranty liability at the beginning of the year was $165.
20x6..000 and a coupon rate of 10%.000. v. What is the dollar value of warranty repairs performed in 20x7? What is the warranty expense for the year 20x7? At December 31. for the year 20x7. 3. The bonds mature in 15 years.1. The company issues warranty agreements immediately upon the sale of an automobile. Gamma Corporation issued bonds with a face value of $500. Assume that the going market interest rate for similar bonds on July 1. 20x4. Coupon payment dates are June 30 and Dec 31 of every year. Required – Prepare the journal entries to record the issue of the bonds on July 1.800 Total debits during the year $6. Problem 6-5 The Kaplan Corporation issued $10. what is the estimated liability for future warranties? At December 31. 20x7. Warranty Liability Dr Cr $10. automobile dealers. 2. 20x1 and the first two interest payments.Introductory Financial Accounting.1 Page 112 Problem 6-4 On July 1.000 of 8. 20x1. Assume that the Kaplan Corporation as a December 31 year end. what was the estimated liability for future warranties? (CGA Canada) .000 Opening balance Total credits during the year Required – 1. The yield to maturity on December 31 was 8%. Problem 6-6 The following is the general ledger account for estimated warranties of McNeil and Grace Ltd. The bonds pay interest semi-annually on December 31 and June 30 and are due in five years. Required – Prepare all journal entries with regards to this bond for the years 20x4 and 20x5. 20x1 is 8%.200 5.5% coupon bonds on December 31. 4.
20x7. 20x6. Prepare the journal entry(ies) to record interest expense for the period ending December 31.591. and pays interest on July 1 and January 1. 20x6. 2. The Interest Expense for the 1997 year will be more than $80. as the market rate was 10%.000 face value.000. 3. three-year. (CGA Canada adapted) Problem 6-9 On January 1. Required Prepare all journal entries for the life of this bond issue.1 Page 113 Problem 6-7 GHI Company issued $500. The bonds were issued at a discount for $897.000. 20x7. Prepare the journal entry(ies) to record interest expense and coupon payment on June 30. 4. 20x6.591 was calculated. They were issued at a price of $1. Required If Adrdalan and Baker Inc.000. a. (CGA Adapted) Problem 6-8 On July 1. 20 year. (CGA Canada adapted) . The cash outflow towards interest on the bonds will be more than $80. Show how the $1.Introductory Financial Accounting. issued $1 million face value. 20x6. Required – 1.171.171. 8% bonds. The Interest Expense will be the same every year.1.000. to yield 10%. Alpha Beta Ltd. Prepare the journal entry to record the issue of the bonds at July 1. uses the effective interest method to calculate interest expense on these bonds. 9% bonds on January 1. indicate whether each of the following statements would be true or false. The Interest Expense for the 1997 year will be less than $100. 12% coupon bonds. issued $1 million semi-annual. The bonds were sold at a yield of 8%. Interest on the bonds is paid semi-annually on December 31 and June 30. v. 10-year. c. GHI’s year end is December 31. b. face value. Ardalan and Baker Inc. d.
that is. any cash remaining after all obligations have been settled revert back to common shareholders. and • they are a perpetuity. Dividends become a liability of the corporation only when the board of directors declares them. Shareholders’ Equity is fundamentally made up of two elements: contributed capital and retained earnings.000 $100. v. Shareholder investments will result in the company issuing shares to the investors – these shares can take the form of preferred shares or common shares. then the debit required to balance the journal entry is allocated as follows: • if there is any Contributed Surplus relative to common shares. then the journal entry would be: Cash Common shares $100. Contributed capital comprises of the investment made in the corporation by its shareholders. . it can be drawn down. we credit an account called Contributed Surplus for the difference. The debit to the common shares account is equal to the weighted average book value per share times the number of shares retired. Shareholders’ Equity As mentioned in Chapter 1. if common shares are issued for $100. a company cannot purchase its own common shares.1 Page 114 7. the shares must be cancelled (i. • upon liquidation of the company. and then re-sell them). The corporation is under no obligation to provide a financial return to common shareholders.000 If common shares are issued in exchange for a parcel of land whose fair market value is $250. Common shares can be issued for cash or any other asset. the journal entry would be: Land Common shares $250.000 cash. Common Shares Common shares typically have the following features: • they provide the right to vote at annual meetings.000.1.000 $250. If the book value per share is greater than the cash paid out to retire the shares. meaning they never become due. hold them. Retained earnings represent the cumulative earnings of the corporation less any dividend distributions to its shareholders. any dividend declarations are at the sole discretion of the company’s board of directors. If the book value per share is less than the cash paid out to retire the shares.Introductory Financial Accounting.000 When common shares are repurchased.e. For example.
500.500.000 Retired 20.000 + 1.000.000 = $18.000. Example – The Noor Company’s shareholders’ equity section at December 31. 20x6 was as follows: Common shares.500.000.000 The journal entries to record the above transactions are as follows: Jan 15 Cash Common shares Land Common shares Common shares (20.100 61.000 $15.500.000 1.000.000 cash Retired 10.000 Book Value per common share: = $18.000 common shares at a total cost of $260.000 cash Issued 50.500.100 280.150.000 $2.000 / 1.000 Number of common shares outstanding: = 1.000 1. v.150.000 Mar 18 Apr 30 Balance in common share account: = $15.091) Contributed surplus Cash 1 $2. 1.000.1 Page 115 • any remainder gets debited to Retained Earnings.800 260.000 321.000.000 shares outstanding Retained earnings The following transactions took place during the year: Jan 15 Mar 18 Apr 30 Jun 16 Aug 18 Issued 100.000 common shares at a total cost of $280.000 + 2.500.000 12.000.000 + 100.000 Issued 250.09 7.500.000 + 50.000 x $18.500.800 61.1.000 = 1.000 common shares in exchange for land valued at $1.500.000 186.800 32.000.000 Jun 16 Cash Common shares Common shares (10.Introductory Financial Accounting.612) Contributed surplus Retained earnings Cash Aug 18 .000 common shares for $7.000 x $16.000 common shares for $2.000 7.000 = $16.000.
00 x 1 year = $800. the preferred dividends in arrears for 20x4 and 20x5 will have to be paid: 100. the corporation is under no obligation to provide a financial return to common shareholders. • like common shares. First.000.Introductory Financial Accounting.000 shares outstanding Preferred shares. any dividend declarations are at the sole discretion of the company’s board of directors. It is now December 1.00 x 2 years = $1.000 shares outstanding Retained earnings $35.678.000 – 321. that is. Like common shares.1 Page 116 2 Balance in common share account: = $18.200/ 1. Example – The Jarvis Corporation’s shareholders’ equity as at December 31.500.600.000 10. $8.000 40.61 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). Dividends become a liability of the corporation only when the board of directors declares them.380.678.150. any dividends in arrears due to preferred shareholders must be paid before any dividends can be paid to common shareholders.000.000. the preferred dividends for the year 20x6 must be paid: 100.000 shares x $8.000 = $18.000 + 250.00.000 The preferred share dividends were last paid on December 31.000 = $25. v.000 .000 – 20. • they carry a stated dividend per share.000 Next. 20x5 is as follows: Common shares. they are a perpetuity.800 + 7. This means that if dividends are missed. 20x3. However. 100.380.000 Book Value per common share: = $25. 1.500.000.000 = 1. cumulative.1.000 shares x $8. 20x6 and management wants to pay a dividend of $5 per common shares. in most cases preferred shares are cumulative.200 Number of common shares outstanding: = 1.
Any premiums paid on retirement of shares are also charged to retained earnings.000 The total dividend to be declared will be: $1.1.1 Page 117 Finally. 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. If a shareholder owns 1.000.000 shares. a 2:1 split means that the number of shares outstanding will double. the stock may become unattractive to small shareholders who have to disburse larger sums in order to acquire shares of the corporation. the company will split the stock. . In order to reduce the share price.400.000 shares as a result of the stock split resulting in a total of 2. v.000 + 800.Introductory Financial Accounting.000.000 Stock Splits When the stock price of a corporation is high.000 shares x $5 = $5. This will result in the share price dropping by half.000.600. the dividend to common shareholders can be paid: 1. 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 of shares before the split.000 = $7. For example.000 + 5. All that happens is that the number of shares issued changes. this same shareholder will receive an additional 1. There is NO journal entry required when a stock split is declared.
1 Page 118 The statement of retained earnings is as follows: Retained earnings. beginning of year Premium on redemption of shares Net income (loss) for the year Dividends Retained earnings. v.Introductory Financial Accounting. end of year $ XXX -XXX ±XXX -XXX $ XXX .1.
1 Page 119 Problems with Solutions Problem 7-1 – Multiple Choice Questions 1.500. b) Shareholders’ equity will increase by $3.000.1. The shares were selling at $30 each when management announced a three-for-two stock split. Which of the following statements will be true when the stock split is accounted for? a) Retained earnings will be reduced by $4.000.Introductory Financial Accounting.000. v. . d) The number of common shares outstanding will be 250. c) The number of common shares outstanding will be 225.000 common shares outstanding. XYZ Corporation has 150.000.000.
Required 1.Introductory Financial Accounting. Record the transactions in journal entry form. a new company. In its first month. Issued 2. to issue 10.000 common shares to Hilary and 12. Hilary and Sam Corporation completed the following transactions: February 2 February 10 February 15 February 26 February 27 February 28 Issued 9.000.1. Declared cash dividends on the preferred shares. Declared cash dividends on the common shares in the amount of $0.000 shares to Sam in return for cash equal to the shares’ market value of $6 per share.32 per share. 2. Issued 400 preferred shares to acquire a patent with a market value of $40. Declared a 2 for 1 stock split. Net income for the month was $56. v.1 Page 120 Problem 7-2 The articles of incorporation authorize Hilary and Sam Corporation.000 $6 non-cumulative preferred shares and 100.000 common shares.000.000 . balance sheet as at February 28.000 common shares for cash of $12. Prepare the shareholders’ equity section of the Payne and Papineau Inc.
000 preferred shares at $20 each. f. c.000 preferred shares in exchange for equipment. Provide the journal entries for each transaction above.Introductory Financial Accounting. Required 1. v.00 common share dividend h. g.500 common shares at $120 each. . Net income was $64. The equipment had a fair market value of $40. is authorized to issue 100.000. Issued 1.000 were converted into 500 common shares. Paid the preferred dividend.000 and book value of $53. Issued 1. e. 2. Issued 1.000 common shares and 50. The convertible bonds were issued earlier in the year. d. cumulative preferred shares.00.000 for the year. During the first year of operations the following events occurred: a. Declared a cash dividend on preferred shares.000. b. Declared and paid a $5. Prepare the shareholders’ equity section of the Statement of Financial Position. Issued 2. Convertible bonds with a face value of $50.1.000 common shares at $115 per share.1 Page 121 Problem 7-3 M-F Inc. $1.
v.1 Page 122 8.1. just the integration of previously covered materials.Introductory Financial Accounting. Enjoy! . The Accounting Cycle Revisited The purpose of this chapter is to bring all of the accounting issues discussed in the previous chapters together in the form of integrative problems. Therefore. There is no new material. the only materials in this chapter are the problems with solutions.
2.000 300. The equipment is being amortized using the double declining balance method.400 Additional information 1. 6. The bonds were issued on January 2. 20x5 was as follows: Dr. 20x1.000 320.5% of sales. The face value of the bonds is $400.600 12.000 176. 7.000 34.000 127. The average useful life of equipment is 10 years.5% and the yield to maturity at the time the bonds were issued was 6%. Coupon payment dates are on June 30 and Dec 31.000 145.000 144.Introductory Financial Accounting.000 419.200 $1. The company provides a one year warranty on its products. the coupon rate is 6.600 150.000 13.000 1.400 Cr. The company uses a FIFO periodic inventory system.000. 20x20.000 shares of common stock outstanding.052. The bonds mature on December 31. .000 120. 8. 3.1.400 40. The patent remaining useful life at December 31. $1. 5. 20x6.052. 20x5 is 8 years.000 5. Warranty expense is estimated at 1. 4. v. There are 10. The building is being amortized on a straight-line basis over 40 years. 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. The prepaid insurance is for a one year policy taken out in 20x5 that expires on March 1.000 38.000 $23.1 Page 123 Problem 8-1 The Haider Corporation’s post-closing trial balance at December 31.
21.Introductory Financial Accounting. 7. equipment and patents. 11. 2.000 The following adjustments need to be made at year-end: 17. Payments on accounts payable Payments for salaries Interest payments on bonds payable Purchase of equipment on January 2 Warranty repairs made to products sold Payments to the Canada Revenue Agency for income taxes Repurchase of 1.000 40.000 was returned to suppliers.000 12.000. Total sales on account were $1. 19.000 common shares on Aug 23 Insurance policy taken out on March 1 – one year policy.000 $222.000. The warranty expense for the year is accrued.000 18.000 43. Estimated % Uncollectible 3% 7% 20% 50% An adjustment is made for insurance expense. 20x6 and the total cost of the inventory was determined to be $378.000.000. 5.600.000. 4. 13.000. v. 10.1.000 26. The accounts receivable aging schedule is as follows: Accounts Receivable 0 – 30 days 31 – 60 days 61 – 90 days 90 + days $144.000 common shares were issued for $75.000 25. Operating expenses paid $945. . On March15.520. The inventory was counted on December 31.1 Page 124 The following transactions took place during the year: 1.000. 16. 20. 6. Inventory purchased on account totaled $960. 3. Accounts written off totaled $34. Inventory costing $16.000 2. Cash collections on accounts receivable totaled $1. 12.000 30.400 130.000. The aggregate net realizable value of the inventory was determined to be $365.000 320. 9. Amortization expense on the building. an additional 3.000 22. Cash disbursements were as follows: 8. 14 15.000 23. Recoveries of previously written off accounts receivable totaled $5.
Introductory Financial Accounting. v. Prepare journal entries for the above transactions and enter all the above transactions in T-Accounts. Salaries payable at December 31.1 Page 125 22. 23. c. Dividends of $80. b. The income tax expense is 40%. 20x6 amount to $6.700. Prepare a trial balance Prepare the following statements: Income Statement Statement of Retained Earnings Statement of Financial Position . 24. Required – a. 20x6.1.000 were declared and paid on December 15.
1 Page 126 Problem 8-2 Pacific Company adjusts and closes its books each December 31. for the face amount plus interest for one year. On that date. d. 20x5. the company signed a $60. During the year. 20x5. amounting to $9. g. were debited to warranty liability when paid. cash was debited and notes payable credited for $60.000. amounting to $9. September 1. The patent has an estimated useful life of 17 years and no residual value. At the end of the year. h. and sales revenue was credited on the date of sale.000 units of a product that was subject to a warranty. and the residual value. The company received from a customer a 9% note with a face amount of $12. 20x5.000.900.Introductory Financial Accounting.900.000.200 was on hand. j. e. On April 1. The estimated useful life is 10 years. Past history indicates that 3% of units sold require repairs at an average cost of $40 per unit.000. pacific Company sold 10.800. Credit sales for the year amounted to $320. On that date.500. which was debited to rent expense. c.000. The note is payable on March 31. i. It had to pay the full amount of rent one year in advance on June 1. 10% note payable. It is now December 31. is to be depreciated for the full year. The note was dated September 1.900 were purchased and debited to supplies expense.700. The sales have been recorded. 20x5. costs incurred for the warranty to date. the patent account was debited and cash credited for $11. The estimated loss rate on bad debts is 3% of sales. 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. During the year. f. 20x6. Use straight-line amortization. which cost $80. you do not need to provide the original entry): a. at a cost of $11. v. i. Pacific Corporation had a supplies inventory of $4. inventory of $9. The company paid a two-year insurance premium in advance on April 1. Notes receivable was debited. 20x5. totalling $8. 20x5. The company purchased a patent on January 1.600.e. supplies of $21.1. Machine A.600. for one year. No warranty expense has been recognized. The company rented a warehouse on June 1.000. $4. On January 1. 20x5. the principal plus the interest is payable one year later. which was debited to prepaid insurance. b. and the adjusting entries are to be made. . Unpaid and unrecorded wages incurred at December 31 amounted to $4.
l.000 after all the above adjustments. . Assume an average income tax rate of 30%.Introductory Financial Accounting.1.1 Page 127 k. v. Pre-tax income has been computed to be $80.000 bad debt. ABC Corporation wrote off a $16.
annually since operations began at the present location.320 2. Spier assembled the following information from the corporation's cash basis records for use in preparing the financial statements requested by the bank.Introductory Financial Accounting. with an initial shares issue of 1.466 . Baking materials Rent Salaries and wages Maintenance Utilities Insurance premium Equipment Principal and interest payment on bank loan Advertising $14.400 1.800 5. 1.000 shares of common share for $2.000 1.880 $33. She started a baking business in her home and has been operating in a rented building with a storefront.1.000 312 424 $31. v.500 22. Sales have increased 30%. Anne Spier is the principal shareholder of MAS Inc. 20x2.770 130 5.920 3. Sale of common shares Cash sales Rebates from purchases Collections on credit sales Bank loan proceeds $ 2.1 Page 128 Problem 8-3 Anne Spier has prepared baked goods for resale for several years now. Spier wishes to purchase some additional baking equipment and to finance the equipment through a long-term note from a commercial bank.600 2. and additional equipment is needed to accommodate expected continued growth. 20x2.500 110 4. 20x2. for the first five months of 20x2 and a balance sheet as of May 31. The bank statement showed the following 20x2 deposits through May 3l. Spier incorporated this business as MAS Inc.500. on January 1. The following amounts were disbursed through May 31. Kelowna Bank & Trust has asked Spier to submit an income statement for MAS Inc.
No materials were on hand or in process and no finished goods were on hand at January 1. The other employees had been paid through Friday. 20x2 (b) A balance sheet as of May 31. and have an estimated useful life of five years. 20x2. The note evidencing the 3-year bank loan is dated January 1. Payments and collections pertaining to the unincorporated business through December 31. Customer records showed uncollected sales of $4. These are the only fixed assets currently used in the business.000 were purchased on January 2. prepare for MAS Inc. Required Using the accrual basis of accounting. 6. Straight line amortization is to be used for book purposes. There were no materials in process or finished goods on hand at that date. 7. 20x2. 9.1. July 1. Rent was paid for six months in advance on January 2. and states a simple interest rate of 10%. 10. 5. May 25.226 at May 31. Baking materials costing $1. is subject to an income tax rate of 20%. A one-year insurance policy was purchased on January 2. were as follows. . The loan requires quarterly payments on April 1. 12. Baking materials Utilities $ 256 270 $ 526 4. 20x1 were not included in the corporation's records. 20x2. and were due an additional $240 on May 31. New display cases and equipment costing $3. and January 1 consisting of equal principal payments plus accrued interest since the last payment. October 1. 20x2. Anne Spier receives a salary of $750 on the last day of each month. 20x2. 20x2. 20x2 MAS Inc. 20x2. 20x2. 20x2. and no cash was transferred from the unincorporated business to the corporation.1 Page 129 3. v.: (a) An income statement for the five months ended May 31. Unpaid invoices at May 31. 8. 20x2. 11.Introductory Financial Accounting.840 were on hand at May 31.
000 5.000. At the end of 20x2.000. was on hand. December 31. . In 20x2 Morrow began selling on a cash-only basis. Morrow's only other asset at the beginning of 20x2 was an investment in Honeydew common shares.000 $250.000 5. Morrow's cost of goods sold is 80 percent of sales. v.600 have accrued but have not been paid. sales salaries of $1.000 was recognized.000 of its common shares for $25 per share. Prepare an income statement for the year ended December 31.500 c) d) e) f) g) h) i) j) Morrow had no outstanding payables at the beginning of 20x2 but owes creditors $36.000 was declared and is to be paid in January 20x3. 20x2. 20x2.000 for unpaid purchases of merchandise on December 31. for Morrow Wholesale.000 $180.000 10. During 20x2 these shares were exchanged for land and a gain of $4.000 5. The inventory at the beginning of 20x2 was $80. There have been no other common share transactions. As the senior auditor in charge of the audit.Introductory Financial Accounting.000.000 and $20. payable annually Customer collections Proceeds on sale of fully depreciated equipment (original cost.000 note issued on July 1 and bearing interest at 12%. All equipment is depreciated on a straight-line basis over ten years with no estimated salvage value. b) Cash balance in cheque book.500 $205.1.000 $406.000 146. respectively. equipment with a cost and accumulated depreciation of $80. During the fourth quarter of 20x2.000. $20. a cash dividend of $10. Retained earnings at the beginning of 20x2 totalled $63. Receivables at the beginning of 20x2 totalled $ 155. The uncollected receivables were written off as miscellaneous expenses in 20x2. you have been presented with the following information: a) Morrow is incorporated and initially sold 11.000) Cheques written during 20x2: Purchases of merchandise Salaries Advertising (to be run in 20x3) Miscellaneous expenses $ 24.000 10. The sale of equipment was made on December 30. The income tax rate is 30 percent. 20x2. At the beginning of 20x2. and a balance sheet at December 31.1 Page 130 Problem 8-4 Morrow Wholesale has kept limited records and has never had an audit until 20x2. 20x2.20x1 Deposits during 20x2: Cash sales Proceeds of $5.
however. then this uses cash. Try to keep in mind that when you are working with this statement.A company reports the following partial data from the previous year: Partial Statement of Financial Position 20x8 Non-Current liabilities Bonds payable Mortgage payable Shareholders’ Equity Common shares Retained earnings $ 400. 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. this generates cash. If a company retires shares. Both methods will be covered later in this section. . either the direct or indirect methods can be used.000 150. this uses cash Example . your main concern is incoming and outgoing cash. Some students find the statement of cash flow to be a challenge because they are still thinking with an “accrual” mind.000 180. The Statement of Cash Flow The statement of cash flow shows a company’s inflows and outflows of cash during a particular period. This statement is broken into three distinct sections. Most of what we do. is based on the accrual system. and shows how a company’s actions have affected its net cash position throughout the period.000 215.000 Additional information: Dividends of $150.1 Page 131 9.000 650. as accountants.Introductory Financial Accounting.000 450. If a company pays dividends.000 300.000 20x7 $ 250. this generates cash. If a company issues new debt. Cash from Financing Activities – this section looks at any changes in the long-term liability and shareholders’ equity section of the Statement of Financial Position.1.000 were declared and paid to shareholders during the year. v. If a company issues new shares. if a company pays off or retires debt this uses cash. GAAP suggests a preference for the direct method. There are two distinct methods in presenting cash flow from operations: the direct and the indirect method.
we can calculate the Net Income.000 (30.000) 75. when dealing with this section. Given that dividends decrease retained earnings.000.000) 100.000 20x7 $ 300.000.000 + Net Income .000 To calculate the company’s net income for 20x8. we analyze at the Retained Earnings Account: Opening Retained Earnings + Net Income .000 (170.000 Alternatively.000 Net Income = $235. and changes in them from one period to the next.1.000) $ 170. Remember.Dividends = Closing Retained Earnings In the above case. $215.000 (150. Often. we have to reconcile the long-term asset accounts.000 = $235.000) 200. when a sale of a long-term asset is made.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 (60. or cash we receive. we know that retained earnings increased by a net of $85. Rearranging the formula.000 = $300.000) 0 .000 + dividends of $150. The difference between the proceeds.000 (180.$150. v. the net income for the year is $85.000) 100. Cash flow from Investing Activities – this section discloses cash that was generated or used through the sale or purchase of long-term assets.000 (10.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.Introductory Financial Accounting. Example . we know all numbers in this formula except Net Income. and the NBV (cost – accumulated amortization) is recorded as a gain/loss on sale. we remove the asset and all associated accumulated amortization.
000 worth of equipment was purchased for cash during the year.1.000.000 with a NBV of $15.000 (100. Cash Flow from Operations – Direct Method This method of determining cash flow from operations uses the income statement as its starting point.000) * The cost of the fixtures was $75. it does not appear in this section. and essentially takes each income statement item and converts it into cash. Note that because no cash exchanged hands for the purchase of the land. • new fixtures were purchased for $100. If the gain on sale was $10.000.000. There are a minimum of four main sub-sections in determining the cash flow from operations (note that these are a minimum. costing $75.000) ($125.000.1 Page 133 Additional Information: • $50.000) 25. were sold at a gain of $10. The cash flow from investing section of the Statement of Cash Flow would be as follows: Purchase of Equipment Proceeds on sale of Fixtures* Purchase of Fixtures ($50. • the original fixtures. excluding interest payable. income taxes payable and dividends payable) Cash paid for Interest (Interest Expense ± changes in interest payable) Cash paid for Income Taxes (Income Tax Expense ± changes in income taxes payable) .000 = $25.000 giving a net book value of $15. All non-cash transactions are by definition excluded from the statement of cash flow.Introductory Financial Accounting.000. v.000 cash.000 and the accumulated amortization was $60. then the cash proceeds on the sale of fixtures would have to be $15.000 + 10. 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. • the land was obtained through issuing $100.000 worth of common shares to the supplier.
600 $ 67.1 Page 134 Example – Calculate cash flow from operations – direct method.000) 135.000 $660. Income Statement For the Year ended December 31.000 2.000 23.000 12.000) $172.000 80.000 429.000 (25.000 3.000 68.000 2.000 (20. 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 46.000 15.000 24.000 104. v.000 231.000 21. Comparative Unclassified Statement of Financial Position As at December 31.000 $135.000 62.000 82.000 1.000 39.000 20x6 $42.000 27.000 73. Jack’s Joke Shop Inc. 20x7 20x7 ASSETS Cash Accounts Receivable Inventory Capital assets Less accumulated amortization LIABILITIES Accounts Payable Salaries Payable Interest Payable Taxes Payable Bonds Payable SHAREHOLDERS’ EQUITY Common Stock Retained Earnings $76.000 10.400 .000 14.000 200.000 5.000 21.000 104.000 325.000 8.1.000 50.000 120.000 5.000 89.Introductory Financial Accounting.000 $172.000 10.
20x6 and the balance at December 31. and which are made on credit.000 (6. and office & administrative salaries. nor are we told how much of the 20x6 accounts receivable balance have been collected. The first thing we do is adjust it to obtain the purchases made during the period. salaries expense. These comprise all of the expense items on the statement of financial position with the exception of amortization expense. 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.1.000) $654. Conversely. We are not told what percentage of the total sales are made for cash. which is a non-cash item and interest and income tax expense which will be dealt with separately.1 Page 135 Cash collected from customers: Sales Less increase in accounts receivable $660.000 (2.000 $553. .000 198.000 2. the amount of our Inventory account increased by $2. In this case. we accrued more sales than we collected. then we collected more than we accrued and this would be added to sales. waiting to be sold. because we are told the balance at December 31.000.000 120. Therefore. v. then this means that sales have not yet been collected – that is. 20x7.000 2. Cash paid to suppliers & for operating expenses: Cost of goods sold Plus increase in inventory Plus Decrease in accounts payable Salaries expense Less increase in salaries payable Office & Administration Expenses $200. If accounts receivable increased.000 235.000) $231. Note also that although we combined all three expense items in one single calculation. However.Introductory Financial Accounting.000 Note that the starting point for each calculation is the following expense items: cost of goods sold.000 increase in Accounts Receivable.000 Why did we subtract the $6. if accounts receivable decreased. This means that we purchased additional inventory that is now sitting in our warehouse. therefore we reduce sales to calculate cash collected from customers. we can simply analyze the difference.
000 ($231. we will subtract the $12.600 (12.1. are treated in the manner that the Salaries Expense was treated above. as in the case of Office & Administration Expenses above. Again. That is. if the Accounts Payable account decreases. Any increase in liabilities.000 more this December 31st than we did last. inventory decreased.000 from our Interest Tax Expense to get the total cash paid for taxes.000) $9. we owe $12. v. like salaries payable. we would have subtracted the amount from COGS to get total money paid to suppliers. so we deduce the increase in interest payable to interest expense. there appears to be no associated statement of financial position account.000) $14. like it did in the above example. we have to add the $2.000.000 + 2. Cash paid for interest: Interest expense Less increase in interest payable $15. on the other hand. and any decrease would be added. other than interest and taxes.600 The treatment for taxes is the same as for interest. Purchases for the year in this case would be $233. then you simply include the full expense amount as the cash paid for that expense.000 increase to COGS. If there is no such account. In dealing with the change in accounts payable.1 Page 136 to calculate purchases. Therefore. .000 (1.000).000 In this case. In this example. Cash paid for taxes: Income tax expense Less increase in income taxes payable $21.Introductory Financial Accounting. Note. you start with the Income Statement amount and then account for any changes in the associated statement of financial position account(s). If. any increase in the Income Tax Payable account would be subtracted from the expense to get to the total cash paid. That is. and any decrease in liabilities is added. All other expenses. This is why we add back the $2. is subtracted from the expense to get to the total cash paid. then we have paid more to our suppliers than the purchases. then this means that we would have purchased less than what was sold and we would have decreased COGS in order to obtain purchases. interest payable went up which means that we accrued more interest than we paid. should the opposite have occurred.
000 (6.000 $77. Increases (decreases) in current liabilities are cash inflows (outflows).600) $ 77.000) 2. Cash flow from Operations: Net Income Add back items not requiring a cash outlay Amortization expense Adjust for non-cash working capital items: Increase in Accounts Receivable Increase in Inventory Decrease in Accounts Payable Increase in Salaries Payable Increase in Interest Payable Increase in Taxes Payable $ 67.Net Income.000) (9. Increases (decreases) in current assets are cash outflows (inflows.1. we start with the bottom line . The most common of these are amortization expense and gains/losses on the sale of capital assets. inventory.000) (2.Introductory Financial Accounting.000) (14.400 Cash from Operations – Indirect Method Under the Indirect Method. as well as all current payable accounts.400 .000 12. We then add or subtract any changes in the non-cash current asset and liability accounts.000 (553. This would include changes in accounts receivable.000) (2.400 5. v.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. We then add back any non-cash items that may appear on the income statement.000 1.
400) Net Change in Cash ($77. the term ‘cash’ is defined as ‘cash and cash equivalents’. This includes cash.000 42. Cash from Investing Activities No activity $0 Cash from Financing Activities Proceeds from issuance of Common Stock Payment on Bonds Payable Payment of Dividend* *Opening R/E + Net Income – Closing R/E = Dividends paid ($23.1. .400 + 0 – 43. let’s finish with the cash flow statement.400) Opening Cash Balance – December 31.400) 34.000) (66.000 = 66. 20x7 30. 20x6 Ending Cash Balance – December 31. term deposits and any highly liquid assets (i.000 (7.Introductory Financial Accounting.000 $ 76. v.400) (43.e. readily convertible to cash) subject to an insignificant risk of change in value.400 – 24.1 Page 138 To continue the example.000 Definition of Cash For purposes of the statement of cash flow.000 + 67.
100 $146. v.1.000 120. 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 (17. Income Statement for the Year ended December 31.000 450. Ginger’s Cookies Ltd.000 79.000) 226.000) 15.000 $750.000 80.Introductory Financial Accounting.900 .000 243.1 Page 139 Problems with Solutions Problem 9-1 The following is the Income Statement and comparative Statement of Financial Position for Ginger’s Cookies Ltd.000 207.000 7.000 300.
800 2.000 47. Required – a. 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 50.200 $ 20.200 20x5 Additional Information: on January 2. .400 $275.500 $ 19. Prepare a Statement of Cash Flow using the Direct Method.000 7.000 108. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method.1.400 158.Introductory Financial Accounting.000 0 33.000) $275. 20x6.500 50.000) $144. Comparative Unclassified Statement of Financial Position as at December 31. costing $45.000 43.100 $ 14.000 125. v. Ginger’s paid cash for the equipment.100 30.000 10.000 45.000.000 61. was replaced by a new piece of machinery costing $125.200 80.000 $144.000 (7.000 (40.200 $ 27.000 10.400 6. b.500 90.1 Page 140 Ginger’s Cookies Ltd.000 111.000.000 40.000 117. the only piece of equipment.
631. MCDUFF LTD.000 2.000 1.000 888.869.000 30.000 $ 4.000 $ 4.000 700.000 45.000 (3.000 800.000 35.000 3.000 319.1.1 Page 141 Problem 9-2 The comparative statements of financial position of McDuff Ltd.045.000) 1.429.041. v.000 999.000 Capital assets Accumulated amortization Bonds payable Mortgage payable Shareholders’ equity Common shares Retained earnings .358.842. Statement of Financial Position December 31 20x3 Current assets Cash Accounts receivable Merchandise inventory Prepaid expenses $ 319.854.054.000 1.000 32.695.326.000.000 1.000 82.000 850.500.000 508.000 2.711.093.060.000 $ 4.Introductory Financial Accounting.000 2.000 Current liabilities Accounts payable Salaries and wages payable Interest payable Income taxes payable $ 897.000 5.019.000 5.343.000 $ 909.000 $ 4.060.212.000 1.000 119.000 (3.000 1.000 1.000 28.000 450.212. are shown below.000 1.091.000) 1.000 1.000 43.000 20x2 $ 353.
400.000 550. 20x3. Prepare the cash flow from operations section using the direct method.000 850.000. Amortization expense is included in Operating expenses. 2. 20x3. with a book value of $87.000) $4.000 250. On August 31. On April 15. 20x3 Revenues Cost of goods sold Operating expenses Salaries and wages expense Operating income Gain on retirement of bonds payable Loss on disposal of assets Interest expense Net income before taxes Income tax expense Net income $ 13.1. v.000 (7.000. b.000 $239. Required a.000) 489. . Use the indirect method to report the operating activities.000.Introductory Financial Accounting. Income Statement For the year ended December 31.000 were retired for $487.000 Additional information 1.000 700.000 (61. McDuff sold capital assets that cost $158.500. Prepare a cash flow statement for the year ending December 31. 20x3. bonds with a net book value of $500.000) (67. for $80.000 2.000. 3.1 Page 142 MCDUFF LTD.
700 4.000 1.800 7.400) Comparative partial balance sheets at December 31.700 8.1 Page 143 Problem 9-3 The following data are available for HHC Ltd.300 5.1.200 221.300 10.300 2.000 500 .000 1. HHC LTD.000 5. 20x5 Sales Expenses: Cost of goods sold Salaries expense Insurance expense Depreciation expense Rent expense Interest expense Net loss $ 218.800 5.000 600 20x4 $4.400 $ (3. Income Statement for the year ended December 31.300 600 5.300 1. adapted) $ 4.000 39.Introductory Financial Accounting.800 7. v.000 $ 165.700 500 5. 20x5 and 20x4 reveal the following: 20x5 Cash Accounts receivable Inventory Prepaid insurance Accounts payable Salaries and wages payable Long-term loan payable Interest payable Required Prepare the cash flow from operations section as it would appear on the Statement of Cash Flow using… (a) The indirect method (b) The direct method (CGA Canada.
and its income statement for the year ended December 31.000 0 80.000 $ (18. 20x6 Sales Cost of goods sold Gross profit Operating expenses Amortization expense Loss on sale of equipment Gain on sale of long-term investment Net Income $ 165.000 25.’s comparative balance sheets at December 31. Income Statement for the year ended December 31.000) $ 624.000 200.000 119. 20x6 are as follows: TORAM LTD.000 39.000 (18.000 $ 699.000 32.000 85.000 Net Change $ 24.000 423.000 Liabilities and Shareholders’ Equity Accounts payable Bonds payable Preferred shares Common shares Retained earnings $ 22.000 600.000 423.000 43.000) $ 900. 20x5 and 20x6.000 $ 40.000 0 0 58.000 Dec.000) (22.000 18.000 475.000 0 85.000 53. 31 20x5 $ 26.000) 25.000) $ 681.000 4.000 300.000 (101.000 (123.000 $ 65.000 87.000) 0 (12.000 144. Balance Sheets Dec.000 .000 463.000 Assets Cash Accounts receivable Inventory Long-term investment Land Buildings and equipment Accumulated amortization TORAM Ltd.000 92.1.000 80. v.1 Page 144 Problem 9-4 Toram Ltd. 31 20x6 $ 50.000 $634.000) $ 57.000 $ 100.000 (12.Introductory Financial Accounting.000 86.
3. Prepare the Operations section of the Statement of Cash Flow using the Indirect Method. Required – a.1. Issued $25. 20x6.000 of accumulated amortization. 4.1 Page 145 During 20x6. b. 2.000 cash dividend. Prepare a Statement of Cash Flow using the Direct Method. 5.000 and had $21. Purchased equipment for $20.Introductory Financial Accounting. Sold equipment for $7. (CGA Canada adapted) .000 cash.000 of bonds payable at face value. for $30.000 cash that had originally cost $32. v. the following transactions occurred: 1. Sold the long-term investment on January 1.000. Declared and paid a $50.
historical information can be used to make projections and is sometimes extremely useful in this respect. interest payments. v.1 Page 146 10. the investor must predict those things that affect dividend policy. sinking fund provisions. etc. 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. 5.1. be recognized. 2. from activities considered incidental to the firm's main function. 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. Each of these eight variables that affect future dividend policy is in turn affected by others. Management's attitude toward future cash dividend policy. Net cash flows from future operations. of course. i. 7. Financial Analysis Techniques 1. However.Introductory Financial Accounting. which the investor would like to predict. Vertical and Percentage (common size) analysis . The limitations of using historical information must. The amount of future cash flow from random events such as windfall gain or casualties. Published financial statements are the sources of information generally available to users. 3. The nature of the analysis of financial statement information is primarily in the form of ratios.. i. 6.e. repayment of principal. 8. In order to predict the company's future dividend policy.. The amount of cash expected to be invested in the firm's long lived assets as well as in working capital. The following are the variables that affect a firm's future dividend policy: 1. 4.e. Future cash flows from changes in the levels of investments made by shareholders and creditors. published financial statements are historical in nature and do not provide the information we have just outlined. Nonetheless. Horizontal (trend). Expected non-operating cash flows. The amount of future cash flow to service debt requirements.
1.619 12.073 354 $719 .546 1.Introductory Financial Accounting.882 627 207 $420 20x5 $11.1 Page 147 Horizontal analysis expresses financial data in terms of a single designated base period. For example. v.509 7.500 10.975 7.369 606 200 $406 20x4 $8. 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. or as compared to an amount of the preceding period.673 827 273 $554 20x6 $13.
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
000 c) $367.1 Page 152 Problems with Solutions Problem 10-1 – Multiple Choice Questions 1. The beginning inventory for 20x8 was $30. 20x7.000 at December 31. and $55.5 b) 5.0 c) 6.000 2. 20x8.000 of inventory and had sales of $600.1.0 . R Company’s net accounts receivable were $50.000. The accounts receivable turnover for 20x8 was 7. what effect will a payment to a creditor (account payable) on the last day of the month have? a) It will increase the current ratio b) It will decrease working capital c) It will increase working capital d) It will decrease the current ratio 3.500 d) $400.500. a corporation purchased $540. 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. What was the inventory turnover for 20x8? a) 4.500 b) $335. Net cash sales for 20x8 were $32. What were R’s total net sales for 20x8? a) $227. During 20x8.000.000 at December 31.0.0 d) 8.Introductory Financial Accounting. v.000 and the ending inventory for 20x8 was $120. If current liabilities exceed current assets.
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
v.000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Long-term debt Shareholders’ Equity Common stock Retained earnings $560.003.000 1.000 2.000 1.679.000 809.889.000 480.000 $3.000 $480.167.000 $24.808.000 1.000 300.000 700.324.956. are as follows.000 2.000 485.000 $524.000 820.000 2.003.000 1.000 $4.000 524.000 20x6 20x5 Fixed Assets – net $4.114.000 $3.380.000 1.000 2.1 Page 157 Problem 10-3 The comparative financial statements for Rocky Mountain Camping Equipment Ltd.1.180.000 2.979.000 $3.000 $20.876.000 2.000 800.000 1.576.628.789. Rocky Mountain Camping Equipment Ltd.956.928.000 650.000 $3.Introductory Financial Accounting. Balance Sheets as at December 31 … 20x7 ASSETS Current Assets Cash Accounts receivable Inventory $37.000 700.000 700.000 1.000 700.999.000 .000 1.000 570.808.
000 $3.000 2.000 100.000 60.100.000 .000 463.000 20x6 $1.1.000.000 56.000 30.000 $51.000 1.000 137.000 635.000 81. 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 1.1 Page 158 Rocky Mountain Camping Equipment Ltd.000 65.Introductory Financial Accounting.700. $2.000 700.000 5.300. v.000 800.000 100.
000 $999.999 + 40.000 = $1.Introductory Financial Accounting. v.000 – ($40. 7. 3. 4. d b a d d d b c $40.999 . 5. 8.1. SOLUTION TO PROBLEMS Problem 1-1 1. 6.000/4 years x 6/12) = $35.039. 2.1 Page 159 11.
000 182.Introductory Financial Accounting.000 50.000 25. Amortization 500 11 10 Retained Earnings 10.000 Common Stock 20.000 2.800 33.000 1.000 Liabilities & Equity Accounts Payable 130.000 BALANCE SHEET Accts.000 1 3 Furn.367 8.000 15.000 15.200 4.000 1 4 7 8 B 2 3 6 7 B 8 10 14 5 9 B 2 Prepaid Rent 1. & Fixtures 15.000 .000 Acc.000 Accrued Liabilities 150 700 600 1.000 20. Receivable 6.000 2.1. v.960 5.000 120.000 13 16 17 18 19 B 6 B Prepaid Insurance 1.200 400 800 12 4 15 Inventory 25.777 Bank Loan 20.1 Page 160 Problem 1-2 Part (a) Assets Cash 20.000 4.000 190.
367 .1 Page 161 Expenses Purchases 50.960 Interest 300 150 450 Advertising 10 2.000 120.500 700 2.200 19 Income Taxes 5.000 1.Introductory Financial Accounting.000 15.000 3.600 Insurance 400 12 10 16 B Miscellaneous 1.000 170.000 0 Cost of Goods Sold 130.960 5.000 0 Rent 2 10 18 B 1.000 Revenues Sales 196.1.000 5 9 B 15 15 14 B 7 15 11 Amortization 500 10 13 B 10 17 B Wages and Salaries 36. v.000 INCOME STATEMENT Purchase Returns 15.000 600 36.
000 1. Cash Common Stock Prepaid rent Rent expense Cash Furniture and fixtures Cash Cash Bank Loan Purchases Accounts Payable Prepaid Insurance Cash Cash Accounts receivable Sales Cash Accounts receivable Purchases Accounts payable Wages and salaries Rent Advertising Miscellaneous expenses Retained earnings Interest Accounts payable Cash Amortization expense Accumulated amortization $15.000 50.800 500 500 2.000 36. 10.000 50.000 300 130.000 120.000 20.Introductory Financial Accounting.000 1.000 20. 9.000 4. 7.200 1.000 / 10 years x 4/12 $20.000 15. v.000 4.000 1.000 3.1. 6.000 6. .1 Page 162 Journal Entries – 1. 8.000 2.000 2.000 120. 3. 5.000 182.000 $20. 11.000 1.200 190. 4.000 15.000 196.500 10.
960 1.000 25.000 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.Introductory Financial Accounting.890 Income tax expense = $17.200 / 12 months x 4 months expired Interest expense Accrued liabilities Accrual for the month of October: $20. 16.000 x 1% Income tax expense Accrued liabilities Net income before taxes = $17. 150 150 14. 17. 5.000 700 700 600 600 1.000 15.000 130.1 Page 163 12. 18.000 15.1.367 . 19. Insurance expense Prepaid insurance $1.890 x 30% = 400 400 13. v. 15.000 170.367 5.960 15.
20x2 Cash Accounts receivable Inventory Prepaid Insurance Prepaid rent Furniture and fixtures Accumulated amortization Accounts payable Accrued liabilities Bank loan Capital Stock Retained earnings Sales Cost of goods sold Rent Amortization Interest Wages and salaries Advertising Insurance Miscellaneous Income taxes Debit $33.1.000 15.000 800 1.777 20.000 25.000 196.367 $270.000 Credit $ 500 25. Trial Balance As at October 31. Heavenly Books.600 2.960 500 450 36.000 5.277 .000 10.277 $270. v.000 130.000 400 2.Introductory Financial Accounting.1 Page 164 b.000 20. Inc.000 8.200 5.000 2.
367 $12.1 Page 165 c.000 130.523 . Inc. 20x2 $0 12. v.000 400 2.000) $2. 20x2 Retained earnings.200 47.960 500 36.523 Heavenly Books. Heavenly Books. July 2.Introductory Financial Accounting. 20x2 Net income Dividends Retained earnings. 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 $196.660 18.600 2.1.523 (10.000 66. Statement of Retained Earnings for the four months ended October 31. Income Statement for the four months ended October 31.340 450 17. Inc.000 5.890 5. October 31.
777 20.000 25.000 53.000 61.000 8.000 2.523 $76. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance Prepaid rent Furniture and fixtures Less accumulated amortization $15. Inc.1.300 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Accrued liabilities Current portion of bank loan Bank loan Shareholders’ Equity Capital stock Retained earnings $25.000 2.000 800 1. v.500 $76.1 Page 166 Heavenly Books.777 8. Statement of Financial Position as at October 31.777 12.300 .523 22.000 500 $33.800 14.Introductory Financial Accounting.000 45.
600 13.1 Page 167 Problem 1-3 Global Productions Inc.000 71. 20x6 Net sales ($157.1.300 21.600 – 2.100 $9.100 3. v.300 18.beginning Net income Dividends Retained Earnings .600 4. Statement of Retained Earnings for year ended December 31.100) $7.Introductory Financial Accounting. Income Statement for year ended December 31.500 $155.000 4.500 Global Productions Inc.000 17.500 (2.ending $0 9.800 2.400 . 20x6 Retained Earnings .200 84.200 3.400) Cost of goods sold Gross margin Operating expenses Amortization Insurance Rent Salaries Supplies Telephone Operating income Interest expense Net income before taxes Income tax expense Net income 4.200 54.
Introductory Financial Accounting. Statement of Financial Position as at December 31.800 19.400 57.000 LIABILITIES AND SHAREHODLERS' EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Bank loan Shareholders' Equity Capital Stock Retained earnings $7.000 9.800 $25.600 40. 20x2 ASSETS Current Assets Cash Accounts receivable Inventory Supplies Prepaid insurance Office equipment Accumulated amortization 24.500 1.600 50.400 $107.1.500 1.900 44.200 $107.200 2.100 14. v.1 Page 168 Global Productions Inc.000 7.000 4.000 .100 87.000 49.100 1.
1 Page 169 Problem 1-4 a) Annual amortization expense for the machinery would be = $50. v. Cash Unearned Revenue 24 24 As of April 30. therefore you will remove $5.333 . Insurance Expense Prepaid Insurance 3. you would have earned of the revenue. your amortization expense would be = $6. you will have accumulated 3 days worth of salaries that have not been paid. Therefore. you only had the machine in use for 7 months.000 X 8/12 = 3.646 When you received the cash in January. However. we will record salaries expense and the accompanying salaries payable of $1. You have used 8/12 of the policy.1. Amortization Expense Accumulated Amortization b) 3. However.646 for the current period.333 from Prepaid Insurance and record it as Insurance Expense for the period.800.250 X 7/12 = $3.300 revenue this accounting period. due from Big Al. it is appropriate for you to record it in this period. in the amount of revenue earned during the period. Salary Expense Salaries Payable 1. Accounts Receivable Consulting Revenue 2.800 1. The journal entry would be: Unearned Revenue Subscription Revenue c) 6 6 You have earned the $2.300 2. you would have sent out 1 of the 4 magazines in the subscription. Therefore. therefore.300 d) As of Wednesday. $24 X = $6. you must record them as an expense of that period. the full amount would be recorded as an Unearned Revenue liability. as these expenses were incurred during the period.250/year.000. Therefore.Introductory Financial Accounting.800 e) When you purchased the policy. To do this you would set up a receivable. you would have debited Prepaid Insurance and credited Cash for the full amount of $5.646 3.333 3.000/8 years = $6.
Rent Expense Prepaid Rent 4.000 has been earned and should be included in revenue for this period. v. The first payment that you received on June 1st would cover the catering for June – November. and therefore you would have incurred one month worth of Rent Expense. or $1. you would have been in the premises for 1 month. However. Prepaid Rent Cash 4. and would be recorded as an asset on your accounts for the June30th period end.750 As of July 31st. Therefore. Unearned Revenue Catering Revenue 1. You will have to adjust for that fact that 5/6 of the payment has not been earned i.1. you would have debited Cash and credited Unearned Revenue by $6.000 1. the second payment that you received on December 1st covers the period of December – May. $6.000 covers a 6-month period. On December 1st. You would remove the Prepaid Rent account to reflect that fact that you have “used up” the rent.Introductory Financial Accounting..750 you paid on June 30th represents Prepaid Rent. No adjustment is needed for this. that full amount would have been earned and recorded as revenue during the period.e.000 g) The $4.000 each.000 X 5/6 = $5.750 4.000 is unearned.750 .750 4.1 Page 170 f) Each of the payments for $6.
Debit to Subscriptions Received in Advance = $180.000 + (1.000 (COGS) = $1.000 (sales) – 4. $80. 2.000 = $72.1. 20x5 d.000 + 300.020. Dec 31.026.000. Dec 31.000. Dec 31. 10.000 x $20 (accounts payable) = $20. The opening balance in the Subscription Received in Advance account = $80.1 Page 171 Problem 1-5 a.000 $1. 3. 20x5 55 55 Problem 1-6 1.000. . 5. Dec 31. 20x5 Insurance expense Prepaid expense $1.000. 4.000 $1.000 $20. 8. Total amount received as revenue of $128. 4.000. 9.000. 100. 6. 11.000.000 x $10 = $1. 7. 3.020.000 + 10.000 less the revenue earned for subscription fees received in the previous year of 80.000 $1.000 (cash) = $1.000 – 128.000 1.000. v.000 Problem 1-7 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.000 + 120. the offsetting credit would be to Subscriptions Revenue.006. 12. 2.000 $0 $1.000.000 $1.000 $0 $1. 20x5 500 500 100 100 c.Introductory Financial Accounting.000 $1.000 (the ending balance in the account).000.000 + (200 x $50)(cash) – (200 x $20)(inventory) = $1.000 = $48.000 x $20)(inventory) = $1.000 (bldg) – 300.000.
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
1.1 Page 179 Ruiz Pharmacy Balance Sheet as at December 31.Introductory Financial Accounting. 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 .
000 12.000 Prepaids 14.000 Capital Stock 110.000 8. 7.500 745.000 10.000 850.000 Taxes Payable 20.000 575.000 14.000 24.500 260.000 22.000 25.000 8 Rent Payable 27.000 B .Introductory Financial Accounting.000 16.000 21.000 215.000 Acc. Depreciation 40.500 20. Pay.00 515.1.000 15.000 BALANCE SHEET Accounts Rec.000 25.000 80.000 323.000 B E B 10 Retained Earnings 4.000 100.000 9 13 Long-Term Notes Payable 20.000 375.000 31.500 6.000 850. And Com.000 20.000 225.000 16.000 375.800 6.000 62.1 Page 180 Problem 1-13 Assets Cash 30.000 200. 123.000 600.000 Interest Payable 8.800 Sal.500 B 2 5 8 4 6 7 7 9 9 11 13 13 14 B 2 E 5 6 B 1 E B 1 E 3 10 7 B 7 E E 9 13 B 13 E B 11 E B 12 E 4 Customer Deposits 10.000 Liabilities & Equity Accounts Pay 600.500 8.000 265.000 Inventory 446.500 B 9 E Furniture & Fixtures 190.000 20.000 775.000 12. v.000 4.500 547.
000 27.000 8.500 Revenues 3 COGS 345.Introductory Financial Accounting.000 70.1 Page 181 Expenses INCOME STATEMENT Salaries and Commissions 207.000 27.800 12 Depreciation 22.000 12.000 13 14 Other 225. v.000 Interest 6.000 21.000 7 7 E Income Tax 15.000 4 2 9 9 9 9 E Rent 14.1.350.000 .000 Sales 1.
20x5 Retained Earnings.000 225.350. v.500 70. Aug 31.000 524.000 745.200 . Income Statement for the year ended August 31.700 Peter’s Appliance Shop Ltd.500 80.000 22.1. 20x5 $260. 20x4 Net income Dividends Retained Earnings.700 -4.000 605.500 $302.500 6. Sep 1.800 73.000 207.000 $46. Statement of Changes in Retained Earnings for the year ended August 31.1 Page 182 Peter’s Appliance Shop Ltd.Introductory Financial Accounting.700 27.000 46. 20x5 Sales Cost of goods sold Gross margin Operating expenses Salaries and commissions Rent Amortization Other Operating income Interest expense Net income before taxes Income tax expense Net income $1.
300 110. Balance Sheet as at August 31. v.1.070.500 6. 20x5 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid rent Fixed Assets Furniture and fixtures Less accumulated amortization $ 31.070.000 917.500 323.000 578.000 16.200 412.200 $1.1 Page 183 Peter’s Appliance Shop Ltd.000 153.000 -62.000 302.000 10.Introductory Financial Accounting.300 80.000 547.800 27.500 LIABILITIES & SHAREHOLDER’S EQUITY Current liabilities Accounts payable Taxes payable Salaries and commissions payable Interest payable Rent payable Customer deposits Long-term notes payable Shareholder’s equity Capital Stock Retained earnings $515.000 12.000 $1.500 .000 7.500 215.000 658.
1.700 (5. Dec 1 Add cash received during December Less cash payments made during December Cash balance per books. $15.000 (77. Cash balance per books. December 31 Add Sparg cheque deducted in error Add deposits in transit Less outstanding cheques Cash balance per books b.280 $6. Dec 31 Cash balance per bank.Introductory Financial Accounting. c b b The balance on the bank statement will be overstated by $360.548) 3.700 77. 3.300 580 1.300) $3.200 = $21.095 + 9. 2.200 .225 63 $4.152 (52) 180 $3.595 Balance per bank statement Add deposits in transit Balance per books $4.1 Page 184 Problem 2-1 1.700 – 3. v. Dec 31. before adjustments Less bank service charges Add error in recording cheque ($1.280 .$1. Cash Accounts receivable Bank service charges Cash $180 $180 52 52 $3.288 Problem 2-2 a.020) Adjusted cash balance per books.
$ 480 6.200 $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.200 $4. March 31. Cash balance. Office equipment Cash To correct error made in recording of purchase of office equipment: $620 – 260 = $360. March 31.700 (1.1. 20x7 2.Introductory Financial Accounting. Bank service charges Cash To record bank service charges for the month.980) $4. 20x7 Add outstanding deposits Less outstanding cheques # 201 # 533 Cash per books. Cash Accounts Receivable To record error in deposit made ($530 – 350 = $180).915 180 (35) (360) $4.1 Page 185 Problem 2-3 1.700 $180 $180 35 35 360 360 . v.
XYZ Computer Gain on sale of investments Cash Other Comprehensive Income Temporary investments . Available for sale securities are defined by what they are not: they are not long-term investments nor are they trading investments.000 3. then the net unrealized gain will be part of the Other Comprehensive Income section of Shareholders' Equity. If the securities are classified as trading investments. then the net unrealized gain flows through net income.000) $ 8.000 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. If the securities are classified as available for sale.000 (4. Trading investments are those that are held for re-sale as part of a portfolio of managed securities held for a short-term.000 31.Strategic Air Defence Gain on sale of Investments $75.000 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.1. Either way.000) 12. b) Cash Other Comprehensive Income Temporary investments . v.000 .000 7.000 $2.000) (1. the securities have to be recorded at fair market value on the balance sheet at December 31.Introductory Financial Accounting. 20x0: Unrealized gain (loss) ($2.000 3.000 3.000 $35.
500) (1.1 Page 187 Problem 2-5 a) Security A Security B Security C 20x0 ($2.700 ($5.Introductory Financial Accounting.500) will be charged to net income.200) ($5.1.000) ($8.4. . an unrealized holding loss of $4. In 20x2.000) 20x2 ($4. In 20x1.000) will be credited to net income.700 will be charged to net income.500) b) In 20x0.000) (3.700) 20x1 ($500) 0 (3.000 – 8. v.700 .500) ($4.500 ($4. an unrealized holding loss of $5.500) (2.000) (1. an unrealized holding gain of $1.
Recoveries Adjustment required Bad debt expense Allowance for doubtful accounts 86. $86.000 – 125 = $2.000 Write-offs Allowance for doubtful accounts. Write offs $9. before adjustment $11.000 cr.000 cr. $3.1 Page 188 Problem 3-1 1. 2004 Balance in allowance before adjustment $63.000 Before: $3. Required balance at December 31: ($80.350 cr.000 dr.600 Balance in Allowance for Doubtful Accounts.000 71.000 x 3% $97. Write-Offs + 3.000 3.000 cr. December 31.000 A/R Begin + 400.800 = $1.350 $55. Dec 31.000 cr. 2004: $1.800 Bad debt expense = $6. v. .000 $55.000 3. Beginning Bal – 20.350 86.000 Collections – 20.000 3. Beg Bal + 55. a Balance in allowance account at the end of 20x9 before adjustment for bad debts: $5.350 cr.000 71.000 dr.000 Credit Sales – 11.900.000 cr.000 Beg Bal + 14. d 3.000 3.000 – 30) – (125 – 30) = $2.875 2.000 x 4% 4.245.1.000 x 0. December 31.Introductory Financial Accounting.000 Write offs) = $100.200. 11.200. 20x8.000 Sales – 360. Adjustment $13. Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable b.000 Collections – 55.875 After: ($3.000.5%) Allowance for doubtful accounts Accounts receivable balance.000 dr.400 – 4.000 – 500 + 300 = $4. a Problem 3-2 a.000 c. Bad debt expense ($14.
000 2.000 2.400.000.000 43.1 Page 189 Problem 3-3 20x0 Accounts receivable Sales To record credit sales for 20x0 Cash Accounts receivable To record cash collections for 20x0 Allowance for doubtful accounts Accounts receivable To record accounts written off for 20x0 Bad debt expense Allowance for doubtful accounts To adjust the allowance for doubtful accounts to an ending balance of $27.000 27.000 3.Introductory Financial Accounting.480 43.915. (Schedule) $2.915.290 31.000 16.000 7. (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 $38.000.000 27. v.840 cr.400.770 cr.800.000 16.000 2.000 $2.000 7.480 3.1.290 .000 7.000 7.800.000 31.000 2.
000 80.000 $384.000 1% 5% 20% 80% $ 2.000 2.000 1% 5% 20% 80% $ 2. 20x1 0 – 30 31 – 60 61 – 90 Over 90 $277.000 60.000 442.000 20.000 25.770 .000 12.800.480 27.480 27.000 Allowance for Doubtful Accounts 16.000 $27.840 December 31.000 $38.000 $442.Introductory Financial Accounting.000 384.000 27.1.000.000 2. v.000 31.000 12.915.1 Page 190 20x0 Bal 20x1 Accounts Receivable 2.000 7.000 45.000 3.290 38.770 4.000 15.000 7.770 20x0 Bal 20x1 Bal Bal Schedule – Calculation of the Allowance for Doubtful Accounts December 31. 20x0 0 – 30 31 – 60 61 – 90 Over 90 $234.000 43.500 9.000 16.000 7.340 4.000 90.400.
v. 20x7 Balance in allowance before adjustment: $2.000 = $10. Write-offs Adjustment required Bad debt expense Allowance for doubtful accounts Interest receivable Interest income* *(3.275 cr.500 dr.275 30 30 2.000 $135. Accounts receivable Sales Allowance for doubtful accounts Accounts receivable Cash Accounts receivable Note receivable Accounts receivable Accounts receivable balance.000 500.Introductory Financial Accounting.775 cr.1 Page 191 Problem 3-4 1.500 400.000 Note Receivable 3. .000 10.000 x 2%) 10.275 500 cr. Dec.000 Note: The allowance account will now be $500 + $10.000 Credit Sales – 1. 6. December 31.000 1. 20x7: $40.000 Beg Bal + 500. Bad debt expense** Allowance for doubtful accounts **($500. Beg Bal + 1.500 x 5% $6.500 1. $6.400.000 cr.500.000 500.000 x 12% x 1/12) 6. 31.500 Write-offs . Allowance for doubtful accounts.1.000 3.000 400.000 Collections – 3.
000 – 10.000 56. e.000 Ending inventory Cost of goods sold $60. Delivery expense Cash Sales returns and allowances Accounts receivable Inventory ($500 x 70%) Cost of goods sold Cash ($79.000 509.200 1.Introductory Financial Accounting. c c d Czech should have recorded this sale in 20x8 since the goods were shipped FOB Shipping.000 50.000 50.000 $80.500 500 c.000 x 70%) Inventory b.000) $503. 4. 3.000 – 6.000 2.910 1.000 x 99%) Inventory $80.590 79.200 500 500 350 350 77.000 49.1. Accounts receivable Sales Cost of goods sold ($80. b Opening Inventory Purchases – net: $500. v.000 (66.1 Page 192 Problem 4-1 1. Inventory Accounts payable Accounts payable Cash ($50.000 + 25.000 56.500 x 98%) Sales discounts Accounts receivable d.000 1.500 50. Problem 4-2 a. .
500 b.50 11.100 $1.00) + (20 units x $11.00 16.000 48.000 44.500 units x $23 = $34.50) $1.00 22.1.1 Page 193 Problem 4-3 a.500) 3. v. Date May 1 May 5 May 14 May 21 May 29 c.00 23.00 16.3333 $690 (220) 420 (567) Units 30 90 70 105 55 Balance Unit Cost Total Cost $10.500 units 1.100 560 560 Problem 4-4 a.000 77.000 Units 1.000 (40.000) Unit Cost Total Cost 18. Ending balance = 1. b.00 11.500 Balance Unit Cost Total Cost $12.00 11.Introductory Financial Accounting.000 (2.00 11.000 8.000 . Purchases (Sales) Units 60 (20) 35 (50) Unit Cost Total Cost $11.190 623 Accounts receivable Sales Cost of goods sold Inventory (10 units x $10) + (40 units x $11. Ending inventory = 55 units (35 units x $12.3333 $300 990 770 1.000 33.000 3.00 22.00 $12.00 12.000) 69. Date Jan 1 Feb 5 Feb 20 Apr 2 Nov 4 Purchases (Sales) Units 2.000 (2.50) = $650 Note that the results for FIFO periodic are the same as for FIFO perpetual.500 1.000 500 3.00 36.
December 31.000 173.000 x $52 930 x $58 $ 333.7059/unit Cost of Goods Sold = 3.400 70 3. 20x5 Purchases Goods Available for Sale Less Ending Inventory. Weighted Average Sales COGS * Gross Profit 3.000 $ 179.200 50.000 52.200 = $179.400 = $ 52.000 x $50 1.860 b.000 58.940 Units 400 3. January 1.400 Weighted Average Cost per unit $ 19.000 x $58 3. v.330 x $ 52.7059 = $ 173.000 52.000 x $52 1.Introductory Financial Accounting.140 $ 157. Beginning Inventory.000 x $50 1.000 53.929 .1.330 Gross profit 175.1 Page 194 Problem 4-5 a. 20x5 Units sold during year FIFO Sales COGS 3.000 $ 19.929 $ 159.071 *400 x $48 1.000 3.330 x $100 $ 333.330 x $100 400 x $48 1.200/3.200 50.
000 $188.000 $150.000 – 15.000 – 30.000 x 70% $420.000 10.000 30.1 Page 195 Problem 4-6 Net Sales = $615.Introductory Financial Accounting.1.000 458.000 $37.000 x 20% Problem 4-7 $600.000 42.000 19.000 June 2 Sales returns Accounts receivable Inventory Cost of goods sold June 9 Cash Sales discount ($20.000 10.000 15. v.000 Sales Returns Estimated cost of goods sold Opening Inventory Net purchases: $480.000 5.000 x 2%) Accounts receivable Inventory Accounts payable June 12 .000 42.000 Purchase Returns + 8.600 June 1 Accounts receivable Sales Cost of goods sold Inventory 30.600 400 20.000 608.000 420.000 5.000 15.000 Customs and Duty Cost of goods available for sale Less Cost of goods sold Estimated value of ending inventory Net loss from fire = $188.
000 $ 646.000 418.Introductory Financial Accounting.000/660 units Average unit cost = $978. Ending inventory – FIFO: 60 units X $1.050 each = = = $ 18.050 each = $ 63.000/(20+440+200) Average unit cost = $646.000 2.000 210.79/unit x 60 units Ending inventory = $58. Cost of goods available for sale: 20 units x $900 each 440 units x $950 each 200 units x $1. v.1 Page 196 Problem 4-8 1.000 3.79/unit Ending inventory = $978.727 . Ending inventory – Weighted Average Average unit cost = Cost of goods available for sale/Units available for sale Average unit cost = $646.1.
000 $200. There are 24. In December.500 1.500 1. December 1.3). v. whereas the purchase discount may generate a savings which would equate to an effective interest rate much higher than 10%.300 3.1. discounts taken under a term of 3/15.000 (1.300 30. i) Purchases Accounts Payable 80.000 $ 150. The savings generated by purchase discounts generally make it worthwhile to borrow to take advantage of the purchase discount.500 (3.200) (1.09%) for a 15day period (30 days – 15 days). .1 Page 197 Problem 4-9 a.200 1.000 50. It would be equivalent to interest of $1.09% (3. 20x7 Merchandise inventory.09 24.000 80.000 80. For example. the full amount of $50. it may cost a company 10% to borrow the funds.500) 77.3 15-day periods in a year (365/15).000 48. n30 generated savings of $1.200 3.Introductory Financial Accounting.500 on a base amount of $48. If payment was not made within the discount period.000 ii) Accounts Payable Cash Purchase Discounts iii) Accounts Payable Purchase Returns iv) Transportation-In Cash b.300 230.300 c. thus giving an annual percentage cost of missing the discount of 75. much higher than the 10% borrowing rate. 20x7 Cost of goods sold $ 80. 20x7 Purchases Less: Purchase returns and allowances Less: Purchase discounts Net Purchases Add: Transportation-In Cost of goods available for sale Less: Merchandise inventory.500 by paying 15 days early.000 3. TOYJOY LTD. Cost of Goods Sold Schedule for the month ended December 31.000 would need to be paid on the due date. December 31.
000 .000 36.000 x .000 U N/A 5. January 1 to January 13 Inventory. v.40% = 60%.1 Page 198 Problem 4-10 Error i) ii) iii) 20x6 Cost of Goods Sold 10. Therefore.000 U 5.60 = $36.000 * ** If Gross Profit = 40%. then COGS = 100% . January 1.000 $ 100. estimated COGS = $60.40) $ 60.1. January 13.000 O 5. January 1 to January 13 Cost of goods available for sale Less estimated ending inventory.000 110. 20x7 Purchases.000 U N/A N/A 20x6 Retained Earnings 10.000 $24.000 10.000 U 20x6 Ending Inventory 10.000 **74.000 O 6.000 Cost of goods available for sale – COGS = Ending Inventory $110. 20x7 Estimated Cost of Goods Sold* Estimated Gross Profit ($60.000 O 20x7 Cost of Goods Sold 10.000 U 6.000 O Problem 4-11 Sales.000 x .000 = $74.Introductory Financial Accounting.000 – 36.
500 Units available for sale = 6. Ending inventory = 6.000 = $8.700 106.000 – 6.200) Units 6.250 125.500 14.400 $80.800 (53.000) (500) 8.250 + 47.500 (80.000 8.000 units @ $8.400) $ 98.000 + 8.40 .50 = $76.Introductory Financial Accounting.000 (46.1 Page 199 Problem 4-12 a.000 – 5.000 8.000 Unit cost = $178.000 x $8. v.400 d.000 13. Units 7.00 8.000 = 21.000 x $7.000 (6.40) + (8.000 + 7.000 x $9.000 6.000 6.500 = 9.40 Ending Inventory Cost of goods sold Cost of goods available for sale Less ending inventory $72.700 106.000 (47.500 / 21.000 x $8.40 7.800 54.000 (6.741 COGS = $53.500) 8.250) 72.95 8.50 Ending inventory = 9.509) Units 6.19231 8.40 9.500) Purchases (Sales) Unit Cost $8.600 126.500 Total Cost $47.000 (5.40000 9.00 From Purchase # 1: 1.95) + (7.000 13.500 58.000 14.700) (4. Units 7.000 7.000 (5.00) = $178.759 c.000 b.500 COGS = 12.800 (47.000 Balance Unit Cost $7.50 = $102.000 units @ $9.250 77.500 9.000 + 7.00000 Total Cost $58.1.509 = 100.000 Cost of goods available for sale = (6.95000 8.500) Purchases (Sales) Unit Cost $8.200) 72.000 x $8.400 $178.100 Balance Total Cost $58. From Purchase # 2: 8.500 53.500 + 8.63793 Total Cost $47.600 80.
c Double-declining-balance rate = x 2 = 50% 4. 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 + 15.000 x . v.000 + 5.500 x 430 = $5. 3.000/80.5 x = $600 $1.000 – ($85.000 = $1.750 .000 Net book value = $100. Depreciation expense = $12.000) x (20.000)/10 = $8.000 – [($100.000 – 150.000)] Net book value = $77.075. and not the legal life of 17 years.5 x 6/12) Net book value = $63.000 – 5. Estimated salvage value = $100. we must first know the salvage value of the machinery inherent in the problem.000 x 90%) / 1.Introductory Financial Accounting. Note that we use the estimated useful life of the patent. 6.000 – 10. 2.1 Page 200 Problem 5-1 1.000 – (5 years x $18.000/year) = $10. a d ($200. 5.000 / 9.500 7.000.500 It is assumed that the addition should be capitalized and depreciated since it qualifies as a capital asset. d c c Net book value = $85.1.000 ($20.000) / 10 = $4. d) ($80.160 To move to the units-of-production method.500/year.000 + 60.
26.600 c. Amortization expense Accumulated amortization ($65. Amortization expense Accumulated amortization ($65.000 Net book value = $65.000 17.000) / 200.500 d.000) / 5 years 20x7 Amortization expense Accumulated amortization $65.000 – 5. Amortization expense for 20x8 = ($53.000 = $53.000 x 55.000 .000 – 2.000 16.000 – 5.000 x 40% (1/5 x 2 = 40%) Amortization expense Accumulated amortization ($65.1.000 – 12.000 – 26.500 16.000) x 40% $12.000 20x8 15.000 $12.000 26.000 b.000 Amortization expense Accumulated amortization 17. v.1 Page 201 Problem 5-2 a.000) / 3 = $17.600 15.Introductory Financial Accounting.
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 31.50 / month x 8 months = $500 + 10.000 . 20x5 Dec 31.808 9. 20x5 Dec 31.000 20.500 Amortization expense Accumulated amortization $10. 20x4 600 600 10.286 82.1.Introductory Financial Accounting. 20x6 10.000 2. 20x3 Aug 31. 20x7 Aug 31.000 $60.750 Oct 31.000 2. 20x4 Apr 31.50 x 12 months) Equipment Cash Amortization expense Accumulated amortization See Schedule 1 Amortization expense Accumulated amortization $582 x 8 months Cash Accumulated amortization Loss on disposal of equipment Equipment $60.000 Dec 31. 20x5: $2.750 10.500 Dec 31. 20x7 20.000 – 10.000 10.656 4.000 55.000 + ($62.000 10.000 10.000 / 32 months remaining = $62. 20x3 Equipment Cash Amortization expense Accumulated amortization (60.714 1.808 Dec 31.500 10. 20x7 4. v.000 9.000 = $10.1 Page 202 Problem 5-3 (a) Jan 2.000 10.656 25.
000) / 39 months = $582 per month x 3 months = $1.000 (10.000 90.500 38. 20x7 Original cost of asset Capitalization made on April 1.000 * Price of new lathe Less trade-in value less fair market value of asset traded in: Trade in value: $108.000 – 90.808 Problem 5-4 Equipment (new lathe)* Accumulated amortization (old equipment) Equipment (old equipment) Cash Gain on sale of asset** 105.500 15.000 – 10.500 50.500) (10.062 + 1.746 = $9.000) (10.062) $12.000) (10.500) $105.Introductory Financial Accounting.000 – 38.500) Acquisition price of new lathe ** NBV of asset at time of exchange = $50.000 2.1 Page 203 Schedule 1 Amortization expense for 20x7 Net book value of asset at Sep 30.000 $18.000 4.688 Amortization expense – Sep 30 to Dec 31.750 x 9/12 $60.746 Total amortization expense for 20x7 = $8.500 Market value of asset Gain on sale (2.750) (8.500 $11.688 + 20.000 Less fair market value of asset traded in (15.500 $ 4.000 $108. 20x5 Less Amortization expense 20x3 20x4 20x5 20x6 20x7 to Sep 30: $10.000 .1. v. 20x7 ($12.
000 9.000)/4 = $6. The freight is included in the cost but the repair is not to be capitalized.000 3.000/year $6. Machinery Less: accumulated amortization $27.000 4.000) $18. v.000 Installation Charges = $27.Introductory Financial Accounting.000** 3.000 2.1.000 20.000 The cost plus installation.000 x 6/12 = $3. 2.Machinery **($27.000 – $3.000 Cost of machine + 2.000 27.000 (9. Amortization expense Accumulated amortization . Machinery Cash 27.1 Page 204 Problem 5-5 1. Cash Accumulated amortization – Machinery Machinery Gain on sale of assets .000* 27.000 for 6-month period 3.000 *25.
ii.500 Straight-line method = (120.000) / 41.000 – 20.000 + 18.000 – 25.000 – 20. ii.000 b.000 43.000 = $22.000 Units-of-production method = (120.750) Loss on disposal of equipment Equipment Cash Accumulated depreciation ($22.500 + 23.000)/(5-1) = $18.000 45.683 Cash Accumulated depreciation ($25.Introductory Financial Accounting. i.000 – 22.183 183 120.1 Page 205 Problem 5-6 a.500 – 20.000 – 20. i.750 1. . Straight-line method = (120. i.000)/40.000 x 9.1. ii.683) Gain on disposal of equipment Equipment $75.750 Units-of-production method = (120. v. c.000 = $22.000 $=75.000 x 12.250 $120.000)/4 = $25.
amortization is high in the first year and decreases in amount as years go by.000 14. A double-declining-balance amortization method could be used to abide by the president’s request.000 $157.750 . Under this method.000 – 15. if the machine generates less revenues as it gets older. Costs capitalized: Invoice price Less discount .000 (53.000 Depreciation expense: ($157.250) 103.750 157..000 53.1 Page 206 Problem 5-7 a. Cost Less accumulated depreciation: $17.800 $157.000 (2.750 (100.$140.Introductory Financial Accounting.000 x 2% Customs and duty costs Preparation and installation costs b. then this method should not be used.250 3. If the machine does not provide decreasing benefits. c. This method is acceptable under GAAP if it properly reflects the pattern of benefits received from using the machine.e.750 x 3 years Net book value Less proceeds on disposal Loss Cash Accumulated amortization Loss on disposal Machine $100.000) / 8 = $17.800) 5. v. i.000) $ 3.1.750 Note that the interest charge of $12.000 cannot be capitalized to the asset since the asset was purchased and not self-constructed. $140.
472.018.000 PV=$11. Interest expense for the year = $11.375 The journal entry to record the premium expense would be: Premium Expense Premium Liability 34.1 Page 207 Problem 6-1 1.500 .500 37.500/15) x $25/card) Cash 37.018 x 6% = $688.000 / 5 x $2 x 30% Premium redemptions: 23. I=6%. v.321 4.000.375 The journal entry to record the actual costs incurred during the year would be: Premium Liability ((22.Introductory Financial Accounting. 5.000 (9.000.375 34.000 /10 coupons /15 redemption ratio x $25 x 55% = $34.472. FV=10.500 / 5 x $2 $18.400) $ 8. 3. 6. a b b) PV of bonds at issue: PMT=800. c c b Premium expense: 150.1. 2.600 Problem 6-2 The premium expense would calculated as follows: $375. N=10.
20x2 Interest expense (540.000 Warranty Costs Incurred = $185. Inventory 130. Problem 6-4 The value of the bond issue will be as follows: N 10 I/Y 4 PV X= 540. v.000 130.1 Page 208 Problem 6-3 The journal entry to record warranty expense is: Warranty expense ($3.Introductory Financial Accounting. 20x1 Cash Bonds payable $540.554 $540.000 The journal entry to record the interest payment of Jun 30.000 Opening Balance + 150.000 The warranty liability at the end of the year will be $165. 20x1 Interest expense (540.000.1.554 PMT 25000 FV 500000 Enter Compute The journal entry to record the issuance of these bonds is as follows: July 1.000 . 20x2 would be as follows: Jun 30.554 x 4%) Bonds payable Cash 21.622 3.378 25.000 x 5%) Warranty Liability The journal entry to record actual warranty costs incurred is: Warranty Liability Cash.378) x 4% Bonds payable Cash 21.487 3. A/P.554 The journal entry to record the interest payments using the effective interest method of amortization is as follows: Dec 31.513 25.000.000 $150.3.000 $150.554 .000 Warranty Expense – 130.
708) x 4% $10.000 Jun 30.000. the total debits to the account for the year is the total cost of repairs made during the year.301 Dec 31. The journal entry to record repairs as performed is debit Warranty liability.000 417. 20x5 Problem 6-6 1.Introductory Financial Accounting. . Therefore.432. 4.1 Page 209 Problem 6-5 PV of bond issue: N = 30. The journal entry to record warranty expense is debit warranty expense credit warranty liability.1.000.200 2. v. I = 4.016 425.292 7. PMT = 425.432.200 – 6. 3.800. $10.301 – 7.432. credit cash/inventory/etc. 20x4 Cash Premium on Bonds Payable Bonds payable Interest expense ($10.000 + 5. 20x5 Dec 31.000. FV = 10.301 x 4%) Premium on Bonds Payable Cash Interest expense* Premium on Bonds Payable Cash * (10. Therefore.708 425.984 8.301 10. Solve for PV = $10.301 $432.000 416.800 = $10. the total credits to the account for the year is the warranty expense for the year.000.432.000 $10.000. $6. $5.
074 x 4% Bonds payable Cash Interest expense $509.311 = $502.129 – 2.311 22.524 1.105 $513.000 Enter Compute Jan 1.277 2.277 20.129 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $511. 20x7 Jul 1. 20x8 20.500 Jan 1.363 2.137 22.1. 20x6 Cash Bonds Payable Interest expense ($513. 20x8 20.714 – 2.714 x 4% Bonds payable Cash Interest expense $504.105 PMT 22. 20x6 20.137 = $506.500 Dec 31.055 22.105 20.500 FV 500.976 = $511. 20x7 20. 20x6 Dec 31.223 = $504.Introductory Financial Accounting.055 = $509.223 22. 20x8 Jul 1. 20x7 20.189 2.500 Jul 1.277 20.937 – 2.105 x 4%) Bonds payable Cash Interest expense $513.500 Jan 1.1 Page 210 Problem 6-7 Proceeds on bond issue: N 6 I/Y 4 PV $513.105 – 1.403 x 4% Interest payable $513.976 22.097 20.097 .445 2. v.074 – 2.937 x 4% Interest payable Interest payable Bonds payable Cash Interest expense $506.500 Dec 31.445 20.445 20.
171.097 2.171. Dec 31. June 30.500 500.171.420) $1.491 60.000. v.1 Page 211 Jan 1. 20x7 .000 x 12% x 1/2) *Bonds payable balance as of June 30.000.591 PMT 60000 FV 1000000 2.403 22.000 58.000 Problem 6-8 1.580 1.Introductory Financial Accounting.420 60. 20x7 ($1.591 188.8.131.521 – 1.171. 20x6 Cash Bonds payable Interest expense (1. 20x9 Interest payable Bonds payable Cash Bonds payable Cash 20.509 1.1. July 1.171* x 5%) Bonds payable Cash (1. 20x6 4.000 500.000 3. Enter Compute N 40 I/Y 5 PV X= $1.591 x 5%) Bonds payable Cash (1.591 $1.000 x 12% x 1/2) Interest expense (1.
943 False False.000 x 8% x ) 2nd half of 20x7: Interest expense ($897.850) x 10% x Bonds payable Cash ($1.000 exactly. c.1.850 4. 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. b.850 40.000 True.000. v. . The interest expense will increase every year since the book value of the bonds payable will also increase.000. The cash outflow is $80. d.000 x 8% x ) a. Interest expense for 20x7 = $44.093 5.093 40. $44.Introductory Financial Accounting.000 + 4.093 = $89.850 + 45.000 x 10% x ) Bonds payable Cash ($1.000 $45.
Introductory Financial Accounting.000 40.000 shares issued and outstanding Preferred Shares. Problem 7-2 1.000 44.000 2.000 shares x 3/2 = 225.080) Total Shareholders’ Equity $ 138.080 2.000 126.000 12.32 $14. Shareholders’ Equity Common Shares.000 .400 2.$2.000 x $0. $6.000 40. 400 shares issued and outstanding Retained Earnings ($0 + $56.520 .000 shares outstanding after the split.000 February 10 February 15 February 26 12.000 21.000 40. c 150. non cumulative. 44.080 February 27 February 28 21.080 14.000 39.1.000 2. v.1 Page 213 Problem 7-1 1.520 $217.$14. 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 26 126.400 14.400 .
g.000 53.000 12.000 Net Income – 15.1 Page 214 Problem 7-3 1.000 48.000 20. issued and outstanding 3.000 60.000 180.000 3. d.000 3. Shareholders’ Equity Common Shares.1.500 50.000 180.500 Dividends) $348.000 b.000 $115.000 3. a.000 40.000 3. e.500 .000 Preferred Shares.000 Retained Earnings ($64. issued and outstanding 3. h.000. v.500 12. authorized 100.Introductory Financial Accounting. 2.000 40.500 $456.000 20.000.000 3. cumulative – authorized 50. 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. f. c.
600 314.520.000 16.000 $1.000 960.000 1. Purchases Accounts payable Accounts Payable Purchase returns Cash Common stock Accounts payable Cash Salaries payable Salaries expense Cash Interest expense ($419.520. 12.000 34. 1. v.000 5.000 5.000 5.000 16. 9.5% / 2) Interest expense ($419. Accounts receivable Sales Cash Accounts receivable Allowance for doubtful accounts Accounts receivable Accounts receivable Allowance for doubtful accounts Cash Accounts receivable 5.000 34. 7. 3.000 30.000 25. 6.000 960.400 320.588 412 13.1 Page 215 Problem 8-1 a. .000 5. 10.000 75.600 – 412) x 3% Bonds payable Cash ($400.000 12.000 12.576 424 13.000 x 6. 4.000 945.000 5.5% / 2) 11.000 75.000 945.Introductory Financial Accounting. 8.000 x 6.000 2. Equipment Cash Warranty liability Cash $1.000 25.000 1.1.000 30.600 x 3%) Bonds payable Cash ($400.600.600.
400 + 2.000 17.400 x 2/12 Insurance expense 3.310 4. $6.400 3.31*) Retained earnings Cash * Average book value per share = $150.000 + 3. 2.800 400 $3.000 x 3% 43. + 5. + 34.000 + 75.Introductory Financial Accounting.400 Balance required: $2.320 3.400 130.000 40.000 x $17. 15. = The balance in the allowance for doubtful accounts should be: $144.000 / (10. 18.000 x 7% 23.1.000 17.000 23. $4. $23. 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. v.400 2.000 x 20% 12.000 130.400 .930 dr.010 4. Income taxes payable Cash Common shares (1.1 Page 216 13.000 14.000 dr.000 cr. 17.000 dr.930 16.000 x 50% Bad debt expense 40.600 6.930 23.690 22.000) = $17.000 cr.400 $3.930 cr.
v. amortization – equipment** Patents*** * $300.000 – 16.000 / 8 = 4.700 6. .000 – 38.500 27.000 80. 24. 6.400 4.000) Purchase returns Purchases Check: Opening inventory Purchases – net ($960.000 58.000) Cost of goods available for sale Less ending inventory Cost of goods sold Inventory loss Allowance for decline in value of inventory 886.000 $320.150 7.000 / 40 = $7.Introductory Financial Accounting.700 80.000 24.000 13.264.000 NBV Beg + 30.400 *** $34.702 22.500 ** ($145.000 – 320. Amortization expense Acc.000 960.000) $886.000 x 20% = $27.000 1.000 (378.000 Purchase) = $137. amortization – building* Acc.250 39.250 20.000 16.000 21.000 24.000 x 1. Cost of goods sold Inventory ($378.702 23.600.000 13.1 Page 217 19.000 53.702 53.256 x 40% = 53.000 944. Warranty expense Warranty liability $1.5% Salaries expense Salaries payable Retained earnings Cash Income tax expense Income taxes payable $134.1.
000 5.000 12.600.690 144.310 150.930 Inventory 320.000 320.700 B 22 E E B 20 E Prepaid Insurance 1.930 17.000 127.400 130.764 Common Stock 17.520.1.000 1.000 4.1 Page 218 Part (b) Assets Cash 36.000 5.000 24.000 13.000 B 19 14 B 7 E B E Patents 34.600 BALANCE SHEET Accts Receivable 176.250 29.700 6.690 B 24 B 15 E 18 B 12 B 21 B Acc Amort .000 5.702 25.520.000 53.400 Allowance for Decline in Value of Inventory 13.000 30.000 27.000 59.000 378.000 222.400 65.500 Acc Amort .000 7.000 126.702 Warranty Liability 25.000 175.000 Land 40.000 30.000 1.000 945.Equip 38.000 Allow/Doubt Accts 34.000 75.500 127.000 945.000 80.600 5.000 1.000 13 Inc Taxes Payable 40.400 3.000 13.000 13.600 6.000 2.400 400 Building 300.Bldg 120.200 80.000 Bonds Payable 412 419.600 424 418.000 25.000 58.000 12.000 23.000 Liabilities & Equity Accounts Payable 16.000 960.000 22.000 15.510 B E .Introductory Financial Accounting.000 75.000 5.000 B 19 E 10 10 B B 11 E Equipment 145.400 2. v.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 40.000 207.750 19 20 14 23 Retained Earnings 4.000 34.000 23.
Introductory Financial Accounting.000 INCOME STATEMENT Purchase Returns 16.000 10 10 E Interest 12.930 19 Amortization exp.600.702 20 Inventory Loss 13.576 25.150 24 Income Tax Exp. v.000 .000 Revenues Sales 5 20 20 6 1. 53.000 17 Bad Debt Expense 23.1.000 1 20 Cost of Goods Sold 886.400 6.700 321.000 9 22 E Salaries 314.1 Page 219 Expenses Purchases 960.588 12.000 16. 39.100 Warranty expense 24.000 960.400 21 18 16 Operating expenses 130.164 Insurance 3.
750 126.000 23.000 300.000 6.000 53.000 $17. v.000 65.196 Cr.000 3.764 207. Haider Corporation Trial Balance As at December 31.000 886.700 25.164 24.400 130.930 378.680.930 39.510 1.000 418.1.400 29.000 400 40.680.Introductory Financial Accounting.1 Page 220 c.150 13.000 127.690 59.000 321.100 25. . 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 $15.702 12.600.702 $2.600 222.500 175.000 13.196 $2. 20x6 Dr.
064 .400 23.200 80.580 159.000) $140.554 Haider Corporation Statement of Retained Earnings for the year ended December 31.150 130.600.690) (80. 20x6 Net income Premium on redemption of common shares Dividends Retained earnings.000 714.1. January 1.100 24.420 25. December 31.000 554.256 53.000 3. 20x6 Retained earnings. Haider Corporation Income Statement for the year ended December 31. 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 $1.930 13.702 $80.000 321. v.1 Page 221 d. 20x6 $144.000 39.Introductory Financial Accounting.554 (4.000 886.164 134.
700 25.Introductory Financial Accounting.1 Page 222 Haider Corporation Statement of Financial Position as at December 31.064 347.764 589. v.754 $936.600 204.500 109.000 $300.400) 172.402 418.1.000 (127.690 140.920 Land Building Less accumulated amortization Equipment Less accumulated amortization Patents – net .500) 175.920 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Salaries payable Income taxes payable Warranty liability Bonds payable Shareholders’ Equity Capital stock Retained earnings $126.000 6.850 $936.750 351. 20x6 ASSETS Current Assets Cash Accounts receivable Inventory Prepaid insurance $ 15.070 40.070 365.000 400 585.600 29.000 170.702 12.000 (65.166 207.
000 16.600 x 5/12 Interest receivable Interest revenue $12. 7.000 24. 16.1.600 b.600 7.000 x 10% x 9/12 Amortization expense ($11.700 4.500 Warranty expense Warranty liability 10.000 24.800 4.000 x 3% x $40 Allowance for doubtful accounts Accounts receivable Income tax expense Income taxes payable $9. 4.600 x 9/24 Amortization expense Accumulated Amortization ($80.000 12.000) / 10 Prepaid rent Rent expense $9.600 c.1 Page 223 Problem 8-2 a. .500 4.Introductory Financial Accounting.000 k. d.600 3.000 x 9% x 4/12 Interest expense Interest payable $60. 4.000 f. Bad debt expense Allowance for doubtful accounts $320. 360 360 g.600 e.200 – 4.000 – 4.900 / 17) Patents or Accumulated Amortization – Patents Supplies inventory Supplies expense Increase in inventory = $9. j. 12.700 i. v.500 h.800 3.600 $9.000 4. 700 700 4.000 x 3% Wages expense Wages payable Insurance expense Prepaid insurance $9. 4.000 l.
1.1.420 1.686 19.316 12.094 6. v.536 116 6.120 Prepaid) Advertising Depreciation (3.920 . Income Statement for the five months ending May 31. 20x2 Sales (22.500 5. 20x2 (2.640 $44 . April 1.770 Cash Sales + 5.240) Interest April & May .130 Rebate + 256 Payable .420 x 20%) Net income 1 Loan payment Less interest: $2.740 110 4.320 Collections on Credit Sales + 4.880 x 10% x 3/12 Principal payment.136 Operating Income Interest (72 + 44)1 Net income before taxes Provision for income taxes (6.000 / 5 x 5/12) $32.880 .400 Baking Materials Purchases .2.270 800 424 250 13.300 Prepaid) Salaries and wages (5.000 + 270 Payable) Insurance (1. 20x2 Loan balance.840 Ending Inventory) Gross margin Operating Expenses Rent (1.226 Uncollected Sales) Cost of goods sold Purchases (14.800 .1 Page 224 Problem 8-3 MAS Inc.1.500 + 240 Payable) Maintenance Utilities (4.Introductory Financial Accounting.630 1.640 x 10% x 2/12 $312 72 240 2. April 1.284 $5.
054 1.840 1.1 Page 225 MAS Inc.Introductory Financial Accounting.370 .466) Accounts receivable Inventory Prepaid insurance Prepaid rent Fixed Assets Equipment Accumulated depreciation $2.284 44 960 3.226 184.108.40.2066 $12.000 -250 2. v.734 2.680 4.134 4.960) Shareholder's Equity Common Stock Retained earnings $526 240 1. 20x2 ASSETS Current Assets Cash (33.600 .750 $12. Balance Sheet as at May 31.136 7.620 3.500 5.120 300 9.640 .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.
000) 60.000 SHAREHODLERS' EQUITY Shareholders' Equity Common stock Retained earnings * Plug to balance. 20x1 ASSETS Current Assets Cash Marketable securities* Accounts receivable Inventory Noncurrent assets Equipment Accumulated depreciation $24. v.1.000 19.000 63.000 278. $275.000 80.000 $338.000 $338.000 (20.Introductory Financial Accounting.000 .000 80.1 Page 226 Problem 8-4 Morrow Wholesale Balance Sheet as at December 31.000 155.
000) Miscellaneous Operating income Interest expense ($5.000 24.1 Page 227 Morrow Wholesale Income Statement and Statement of Retained Earnings for the year ended December 31. beginning of year Dividends Retained earnings.000 .600 7.000) $70.100 15.600 8.000 (10.000 ÷ 10) Bad debts (155.000 50. 20x2 Sales Cost of goods sold ($250.000 + 1.000 4.000 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 5.900 (300) 5.220 .000 x 80%) Gross margin Operating expenses Salaries (10.146.220 63.000 9.600) Depreciation (80.380 17. end of year 11.000 34.1.000 200.500 $250. v.Introductory Financial Accounting.
000 216.000 1.500 Note 1 .000 .000 .220 $405.500 96.000 7.20.000 $216.000) $224.220 345.000 300 10.280 275.000 (8. v.1.000 36.ending Purchases Cost of goods sold = Opening inventory Purchases Less ending inventory $180.20.000 60.000) Equipment (80.000 10.000 330.000 + 406.000 $405.500) Inventory (Note 1) Prepaid advertising Noncurrent assets Land (19.1 Page 228 Morrow Wholesale Balance Sheet as at December 31.000 70.000 + 4.500 23.000 + 8.000 .Introductory Financial Accounting.380 60.000 .000 $80.500 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 (96.000) $200.600 5.205.Inventory Purchases of merchandise A/P .000) Accumulated depreciation (20. 20x2 ASSETS Current Assets Cash (24.000) 52.
000 – 69. ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($45.000) (46.1 Page 229 Problem 9-1 a.000) (105.800 Cash flow from investing Proceeds on sale of equipment (Note 1) Purchase of equipment 20. v.000 (99.000 15. beginning Cash.000) Cash flow from financing Issue of bonds payable Dividends paid (Note 2) 30. 20x6 Cash flow from operations Cash collected from customers ($7500.400 – 61.600 Increase in Salaries Payable) Cash paid out for other operating expenses Cash paid out for interest ($32.400 $ 99. Statement of Cash Flow for the Year ended December 220.127.116.11 Increase in Income Taxes Payable) $740.Introductory Financial Accounting.000 $20.000 Interest expense .100 Income tax expense – 33.000 Salaries Expense .500 .000 (294.000 COGS + 7. Ginger’s Cookies Ltd.500) (69.500) Cash.000) (31.500) 1.10.300 19.400) (80.200 $20.500 Increase in cash ($175.000 Increase in Interest Payable) Cash paid out for income taxes ($79.000) $ 5.000 – 40.000 $146.800 – 105.900 47.7.000 Increase in Inventory .800) (112.000) 175.000 Increase in A/R) Cash paid out to suppliers ($300.000 Sales .12.200 Increase in AP) Cash paid out for salaries ($120.000 (125.000) Gain on sale Proceeds Note 2 – Dividends paid Net income Less increase in Retained Earnings ($108.
1.200 7.900 7. Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Gain on sale of capital assets Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Increase in Accounts Payable Increase in Salaries Payable Increase in Interest Payable Increase in Income Taxes Payable $146.100 $175. v.600 1.000) (10.1 Page 230 b.800 .Introductory Financial Accounting.000 (15.000) 12.000) (7.000 33.
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 (13.695.1 Page 231 Problem 9-2 a.000 Accumulated Amortization.000 (543. Statement of Cash Flow for the year ended December 31.000) (5.842.000 150.000 111.000 466.000) 353.000 (48. beginning of year Cash.Introductory Financial Accounting.000 Decrease in cash Cash.000 $3.000 Cash flow from investing Proceeds on sale of assets Purchase of capital assets2 80.000) 350.000) (37.000) (11.000 (50. end of year 1 Accumulated Amortization. v.000) 7. 20x3 Cash flow from operations Net income Adjust for non-cash items: Amortization expense1 Gain on retirement of bonds Loss on disposal of assets Adjust for changes in non-cash working capital items: Decrease in accounts receivable Increase in merchandise inventory Increase in prepaid expenses Decrease in accounts payable Decrease in salaries and wages payable Decrease in interest payable Increase in income taxes payable $239.000 – 87.000 ? (71.000 . McDuff Ltd.000 $319.1.000) $3.000) 17. end of year Amortization expense = $218.000) (463. beginning of year Amortization expense Accumulated Amortization on disposal: $158.000) (12.000) (37.000) (34.000 218.
711.000 – 218.000 Sales + 111.000 239.500.000) (233.000) (72.000 ? $508.000 .1 Page 232 2 Capital Assets.000 Decrease in Interest Payable) Cash paid out for income taxes ($250.Introductory Financial Accounting.000 ? (158.000) $466.000 b.000 3 Retained Earnings.000 $319.000 (2.460.000 Increase in Inventory + 12.000 Decrease in Salaries and Wages Payable) Cash paid out for interest ($67.1.000 Increase in Prepaid Expenses) Cash paid out for salaries and wages ($850.000 Income tax expense – 17.000 COGS + 48.000) (887.000 Salaries and Wages Expense + 37.000 Decrease in A/R) Cash paid out to suppliers ($2.000 Increase in Income Taxes Payable) $4. end of year Dividends = $50. ending Additions to capital assets = $543.000 Amortization Expense + 11.000) $5. Cash flow from operations – Direct Cash collected from customers ($4.000 $5. v. beginning Additions Disposals Capital Assets.326.611.000 Decrease in AP) Cash paid out for operating expenses ($700.000 Interest expense + 5.000) (493. beginning of year Add net income Less dividends Retained Earnings.400.
500) (1.600) (39.Introductory Financial Accounting.1 Page 233 Problem 9-3 (a) HHC LTD.600) (100) (400) 100 (3.300 + 400 Decrease in Salaries and Wages Payable) Cash paid for insurance ($2.500) $ 900 (b) Cash Flow from Operating Activities Cash collections from customers ($218.900) (5.700) (2.000 Sales – 1.500 Increase in Accounts Receivable) Cash paid to suppliers ($165.400) 7.300) (1.200 – 100 Increase in Interest Payable) $216.000 COGS + 1.1. Cash Flow Statement for the year ended December 31.500 (166.800 + 100 Increase in Prepaid Insurance) Cash paid for rent Cash paid for interest ($1. v.600 Increase in Inventory) Cash paid to employees ($39.100) $900 .800 $ (1. 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.
000 Increase in A/R) Cash paid out to suppliers ($600.000 30.000 (50.000 Sales .1.000 + 17.000 – 25.000 – 21. v.000 (4.000) Cash.000) 0 0 32.000) $7. Statement of Cash Flow for the Year ended December 31. 20x6 Cash flow from operations Cash collected from customers ($900.000 Note 2 – Proceeds on sale of long-term investment Net book value of investment Gain on sale Proceeds $ 18.000) 17.Introductory Financial Accounting.1 Page 234 Problem 9-4 a.53. beginning Cash.000 Decrease in AP) Cash paid out for other operating expenses Cash paid out for interest Cash paid out for income taxes $847.000 COGS + 32.000 Increase in Inventory + 18. Toram Ltd.000 $50.000 (650.000 Cash flow from investing Proceeds on sale of equipment (Note 1) Proceeds on sale of long-term investment (Note 2) Purchase of equipment 7.000 (20.000) (165.000) (25.000 26.000 Cash flow from financing Issue of bonds payable Dividends paid 25.000) 24.000 12.000 . ending Note 1 – Proceeds on sale of equipment Net book value of equipment ($32.000) Loss on sale Proceeds $ 11.000 Increase in cash ($32.000 30.
000 (12. Cash flow from operations – indirect Net income Adjust for noncash items Amortization expense Loss on sale of capital assets Gain on sale of long-term investment Adjust for changes in noncash working capital items Increase in Accounts Receivable Increase in Inventory Decrease in Accounts Payable $100.000) (53.1 Page 235 b.000 .000 43.000 4.000) (18.000) (32.Introductory Financial Accounting. v.000) $32.1.
000 = 1. c . current liabilities . d 3. Assume that a payment of $10.8.000 is made. 7.25.000 + 22.$100.1. then CL = 230.250 / ($125.000 + 120.000.000 and CA = 200. the current ratio drops to 0.000 – 20.000 No impact on working capital since the decrease in cash is equal to the decrease in accounts payable.1 Page 236 Problem 10-1 1.000 / 365) = 94 days Inventory increased by $20.000) / 2 = $52. If the invoice paid is $20. 4.000 Inventory turnover = $450.000 – 120.000 = $40.78.000 / 50. a c b Average receivables = ($40.000 / 70.000 and CA = 180. current ratio = $100. 5.Introductory Financial Accounting.000 ($320.000 = 1.000 Inventory turnover = $300. d Average receivables = ($50.$80.000 = $450. Assume that CL = 250.000.500 + 32.000 + 40.000) / 2 = $75.000.000 COGS) Beginning inventory = $60.000 = 6. 2.000 + 55. c c Average inventory = ($30. Impact is on the current ratio.500 Net credit sales for 20x8 = $52.0 times 9.000 = 6 Assume an initial amounts as follows: current assets . 8.000 + 540.250 Days sales in A/R = $32.500 = $400. a 6.500 Total net sales = $367. v.$300.000) / 2 = $50.500 x 7 = $367.000 purchased . the current ratio becomes $90.500) / 2 = $31.29 and working capital stays the same.000 Average inventory = ($60.000 COGS = $30.000 / 75.000 / 80.000.000 then the current ratio is 0.
000) / 379.000) ÷ (1.000 = 0.000 + 518.104.22.168 (12.5 days Solvency Analysis: 20x5 Debt-to-Equity Ratio* 920.000 / 371.000) ÷ (1.60 (34.00 Times Interest Earned 230.000 = 3.1 Page 237 Problem 10-2 Liquidity Analysis: 20x5 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 712.000) / 371.83 * debt is defined as long-term debt in this case .000 = 4.400.000 = 1. v.000_ / 365 = 70.7 days 20x4 594.000 + 400.000 + 275.000 / 379.000) / 365 = 53.07 20x4 850.000 + 275.000 + 220.000 = 1.000 / 793.000 / 60.000 = 1.000 = 0.000 + 275.Introductory Financial Accounting.000 = 1.68 (34.000 / 863.07 200.88 (12.000 / 50.
000) / 2] / (1.000 / [(863.000 + 725.10 20x4 $1.9% Return on Equity Asset Management (Activity Ratios) 20x5 Inventory turnover $1.48 [(220.000 + 350.300.3% 200.900.000 / [(2.000) / 2] / (2.000) / 2] = 13.400.000 / [(425.000 = 10.000 = 10% 230.000) / 2] = .000 / [(2.000 + 1.014.000 / 365) = 39.162.000 / [(793.875.000 / 1.000 + 200.000) / 2] = 3.000 + 220.1.66 [(275.200.000 / 2.014.300.900.300.Introductory Financial Accounting.000 / 2.900.000 + 340.000) / 2] = 1.000 = 39.000) / 2] = 12.900.014.000) / 2] = 3.3 days 1.1 Page 238 Profitability Analysis 20x5 Gross Profit Percentage Return on Sales Return on Assets $900.000 / [(2. v.000 + 2.5% 200.162.1% 20x4 $700.000 + 793.000 / [(340.014.875.000) / 2] = 10.000 = 36.300.000 + 2.2 days 2.000 / [(2.000 / 1.000) / 2] = 11% 110.000 / 365) = 40.000 + 1.8% 230.98 Days Sales in Accounts Receivable Total asset turnover .3% 98.
1.32 20x6 800.000 + 635.000) ÷ (1.000 + 480.000 = 0.000 / 2. v.000 = 2.000) / 560.45 Times Interest Earned 65.30 137.114.08 * debt is defined as long-term debt in this case .04 (20.000 / 2.167.000 = 0.000 = 1.1 Page 239 Problem 10-3 Liquidity Analysis: 20x7 Current Ratio Quick Ratio (Acid-Test Ratio) Defensive Interval Ratio 1.000) / 524.000.000 + 524.000 + 463.Introductory Financial Accounting.92 (37.000) / 365 = 135.000) / 365 = 97.000 / 524.000 / 56.000 = 2.08 (37.000 / 560.52 days 20x6 1.300.000 = 2.000) ÷ (1.000 + 524.679.000 = 1.72 days Solvency Analysis: 20x7 Debt-to-Equity Ratio* 820.000 / 60.576.000 + 480.13 (20.000 = 0.
576.679.5% 51.100.000 / [(4.1% 20x6 $700.000 = 3.000 / [(650.003.000 / 365) = 87.52 20x6 $1.000 / [(3.13 [(480.000 + 4.000 / 365) = 88.000 = 8.9% Return on Equity Asset Management (Activity Ratios) 20x7 Inventory turnover $1.956.000) / 2] = 2.000 + 300.700.000 / [(4.1% 65.100.1.000 / 2.000 / [(2.000 = 38.000 + 570.2% 65.003.6% 3.000) / 2] = 1.000.000 = 41.000) / 2] / (1.000) / 2] = 0.000) / 2] = 1.000) / 2] / (2.1% 137.000) / 2] = 0.000) / 2] = 0.628.100.3 days 2.000 / [(570.100. v.003.Introductory Financial Accounting.000 + 485.000 + 2.1 Page 240 Profitability Analysis 20x7 Gross Profit Percentage Return on Sales Return on Assets $800.000 + 3.000) / 2] = 1.679.000 + 2.000 + 524.000 / 2.003.000 / [(3.000 / [(2.700.000 / 1.5 days 1.000) / 2] = 3.700.300.000 + 3.44 Days Sales in Accounts Receivable Total asset turnover .90 [(524.808.000 + 4.956.700.808.000 / 1.1% 137.
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