Professional Documents
Culture Documents
3.2
Net income equals cash inflows minus cash outflows from operating,
investing, and non-owner (that is, debt servicing) financing activities. If the
period were long enough, then sales of goods and services (revenue under the
accrual basis) and cash receipts from customers (revenue under the cash
basis) would both occur in the same long-enough time period. Revenues
would therefore not differ between the cash and accrual basis. Likewise,
costs incurred to generated revenues (expenses under the accrual basis) and
cash expenditures for goods and services consumed (expenses under the
cash basis) would both occur in the same period. Expenses would also not
differ between the cash and accrual basis. With the same amounts of
revenues and expenses, net income on an accrual basis would equal net
income on a cash basis.
3.3
The amount of revenue recognized equals the amount of cash the firm
expects to collect from customers. The firm does not necessarily recognize
the revenue, however, at the time it receives the cash. It typically
recognizes revenue at the time of sale even though it has not yet collected
cash from customers. Likewise, the amount of expense recognized equals
the cash disbursement made for equipment, materials, labor, and so forth.
However, the firm recognizes the expense when it consumes the services of
these factor inputs, not when it makes the cash expenditure.
3.4
Revenues measure the inflow of net assets from operating activities and
expenses measure the outflow of net assets consumed in the process of
generating revenues. Thus, recognizing revenues and expenses always
involves a simultaneous entry in an asset and/or liability account. Likewise,
adjusting entries almost always involve an entry in at least one income
statement and one balance sheet account.
3.5
Cost is the economic sacrifice made to acquire goods or services. When the
good or service acquired has measurable future benefits to a firm, the cost is
an unexpired cost, or an asset. When the firm consumes the good or service,
the cost is an expired cost, or expense.
3-1
Solutions
3.6
3.7
3.8
3.9
(Microsoft Corporation;
(Amounts in Millions)
analyzing
changes
in accounts
receivable.)
$
5,129
32,120
(?)
$ 5,196
8,565
?
(63,072)
$ 9,247
Solutions
3-2
3.11
180.1
?
(633.5)
$ 185.5
52.0
638.9
(?)
57.1
$
$
721
8,392
(?)
705
$ 23,066
?
(3,092)
$ 26,571
3.15
(Radio Shack; computing income tax expenses and income taxes paid.)
(Amounts in Millions)
Income Taxes Payable, Beginning of Year 13 .................................
Plus Income Tax Expense for Year 13 (.38 X $424.9)....................
Less Income Taxes Paid during Year 13...........................................
Income Taxes Payable, End of Year 13............................................
$
$
78.1
161.5
(?)
60.1
3-3
Solutions
3.16
Liabilities
300
300
Shareholders'
Equity
(Class.)
+300
IncSt RE
The required balance in the Prepaid Rent account on December 31, Year 12,
is $1,500, which equals one-twelfth of the $18,000 payment for the period
February 1, Year 12, through January 31, Year 13. The Prepaid Rent
account had a balance of $1,200 on January 1, Year 12, and the firm made
no entry affecting this account during Year 12. Thus, the entry above
increases the balance from $1,200 to $1,500. The entry made on February
1, Year 12, decreased retained earnings (rent expense) by $18,000. Rent
expense for Year 12 should be $17,700 [= $1,200 + (11/12 X $18,000)]. The
entry above reduces the expenses (that is, increases retained earnings) from
$18,000 to $17,700.
3.17
Liabilities
Liabilities
Shareholders'
Equity
Solutions
Liabilities
Shareholders'
Equity
(Class.)
4,000
IncSt RE
3-4
20,000
20,000
(Class.)
20,000
Shareholders'
Equity
(Class.)
20,000
IncSt RE
Correct Entries:
Equipment ..............................................................................
Cash.....................................................................................
Assets =
20,000
+20,000
20,000
4,000
4,000
3.17 continued.
Correcting Entry:
Equipment ..............................................................................
Depreciation Expense...........................................................
Equipment Expense .........................................................
Accumulated Depreciation..............................................
Assets =
+20,000
4,000
3.18
20,000
4,000
Shareholders'
Equity
(Class.)
4,000
IncSt RE
+20,000
IncSt RE
3.19
Liabilities
20,000
4,000
February
---
March
-$
$39,200
2,160
April
$ 800
--
--
---
d.
--
$ 59,400
e.
--
9,000
$ 9,000
f.
--
9,000
$ 9,000
(Revenue recognition.)
a. No. (One might argue that receipt of the order and completion of
manufacturing are sufficient to justify recognition of revenue. However,
the purchaser may reject the T-shirts when received. Furthermore, the
concert may not take place and the purchaser would fail to pay for the
T-shirts. Thus, sufficient uncertainties remain to justify delaying
revenue recognition until at least the time of delivery.)
b. Yes (the firm has provided the services).
c.
No (the baseball games will not take place until next year).
d.
e.
f.
3-5
Solutions
3.20
a.
July
$ 15,000
August
$ 15,000
--
--
b. $ 4,560
c.
d.
5,800
600
600
$ 6,300
$
600
e.
--
--
--
f.
--
--
$ 4,500
--
--
g.
3.21
--
$ 6,600
3.22
Solutions
c.
$2,000 (= $24,000/12).
d.
e.
$1,200 (the repair does not extend the life beyond that originally
expected).
f.
None (the firm will include the deposit in the acquisition cost of the land).
g.
b.
c.
d.
e.
3-6
3.22 continued.
f.
g.
h. Either Insurance Expense increases (period expense) or Work-inProcess Inventory increases (product cost) as a result of an adjusting
entry.
i.
j.
Assets increase for the amount of the cash or goods received from
supplier.
(Corner Grocery Stores; journal entries for notes receivable and notes
payable.)
a. Year 12
Dec. 1
Cash................................................................................... 100,000
Notes Payable.............................................................
Assets = Liabilities +
+100,000
+100,000
Shareholders'
Equity
(Class.)
Dec. 31
Interest Expense ($100,000 X .06 X 30/360).............
Interest Payable.........................................................
Assets
= Liabilities +
+500
100,000
500
500
Shareholders'
Equity
(Class.)
500
IncSt RE
3-7
Solutions
3.23 a. continued.
Year 13
March 1
Note Payable ................................................................... 100,000
Interest Payable .............................................................
500
Interest Expense.............................................................
1,000
Cash..............................................................................
Assets = Liabilities +
101,500
100,000
500
Shareholders'
Equity
(Class.)
1,000
IncSt RE
b. Year 12
Dec. 1
Notes Receivable ............................................................ 100,000
Cash..............................................................................
Assets = Liabilities +
+100,000
100,000
= Liabilities +
500
Solutions
500
Shareholders'
Equity
(Class.)
+500
IncSt RE
Year 13
March 1
Cash................................................................................... 101,500
Note Receivable..........................................................
Interest Receivable....................................................
Interest Revenue........................................................
Assets = Liabilities +
+101,500
100,000
500
100,000
Shareholders'
Equity
(Class.)
Dec. 31
Interest Receivable ........................................................
Interest Revenue........................................................
Assets
+500
101,500
Shareholders'
Equity
(Class.)
+1,000
IncSt RE
3-8
100,000
500
1,000
3.24
Liabilities
+4,368
Shareholders'
Equity
Liabilities
3.25
Liabilities
4,349
4,376
4,376
Shareholders'
Equity
(Class.)
4,376
IncSt RE
4,368
(Class.)
4,368
Shareholders'
Equity
4,349
4,349
(Class.)
Liabilities
Shareholders'
Equity
Liabilities
3,600
(Class.)
3,600
1,200
1,200
Shareholders'
Equity
(Class.)
1,200
IncSt RE
3-9
Solutions
3.25 continued.
September 1, Year 13
Prepaid Insurance..................................................................
Cash......................................................................................
Assets
+4,800
4,800
Liabilities
Shareholders'
Equity
3.26
4,000
4,000
Shareholders'
Equity
(Class.)
4,000
IncSt RE
a.
b.
c.
d.
e.
f.
3.27
Liabilities
4,800
(Class.)
4,800
Liabilities
NO
U/S $ 1,200
NO
NO
U/S $ 1,500
O/S $11,600
Shareholders'
Equity
U/S $ 6,000
O/S $ 1,200
U/S $ 4,600
O/S $ 250
O/S $ 1,500
U/S $11,600
Solutions
= Liabilities +
Shareholders'
Equity
(Class.)
+1,400
IncSt RE
3-10
1,400
1,400
3.27 a. continued.
Correct Entry:
Cash...................................................................................
Advance from Customer...........................................
Assets
+1,400
= Liabilities +
+1,400
1,400
1,400
Shareholders'
Equity
(Class.)
= Liabilities +
= Liabilities +
= Liabilities +
5,000
5,000
Shareholders'
Equity
(Class.)
5,000
Shareholders'
Equity
(Class.)
5,000
IncSt RE
Correct Entries:
Machine.............................................................................
Cash..............................................................................
Assets
+5,000
5,000
5,000
500
500
Shareholders'
Equity
(Class.)
500
IncSt RE
Actual Entry:
None for accrued interest.
3-11
Solutions
3.27 c. continued.
Correct Entry:
Interest Receivable ($2,000 X .12 X 60/360).............
Interest Revenue........................................................
Assets
+40
= Liabilities +
40
40
Shareholders'
Equity
(Class.)
+40
IncSt RE
e.
Actual Entry:
None for declared dividend.
Correct Entry:
Retained Earnings ..........................................................
Dividend Payable........................................................
Assets
= Liabilities +
+1,500
1,500
1,500
Shareholders'
Equity
(Class.)
1,500
Dividend
Actual Entries:
Machinery.........................................................................
Accounts Payable ......................................................
Assets
+50,000
= Liabilities +
+50,000
Solutions
= Liabilities +
50,000
50,000
Shareholders'
Equity
(Class.)
Accounts Payable...........................................................
Cash..............................................................................
Miscellaneous Revenue.............................................
Assets
49,000
50,000
Shareholders'
Equity
(Class.)
+1,000
IncSt RE
3-12
50,000
49,000
1,000
3.27 f. continued.
Maintenance Expense....................................................
Cash..............................................................................
Assets
4,000
= Liabilities +
= Liabilities +
+50,000
= Liabilities +
50,000
50,000
49,000
1,000
Shareholders'
Equity
(Class.)
Machinery.........................................................................
Cash..............................................................................
Assets
+4,000
4,000
50,000
Shareholders'
Equity
(Class.)
Accounts Payable...........................................................
Cash..............................................................................
Machinery....................................................................
Assets = Liabilities +
49,000
50,000
1,000
4,000
Shareholders'
Equity
(Class.)
4,000
IncSt RE
Correct Entries:
Machinery.........................................................................
Accounts Payable ......................................................
Assets
+50,000
4,000
4,000
4,000
Shareholders'
Equity
(Class.)
3-13
Solutions
3.28
Sales Revenue.............................................................
Less Expenses:
Cost of Merchandise Sold .....................................
Payments on Merchandise Purchased ..............
Depreciation Expense ...........................................
Payments on Equipment Purchased .................
Utilities Expense....................................................
Salaries Expense....................................................
Rent Expense..........................................................
Insurance Expense................................................
Interest Expense....................................................
Total Expenses...................................................
Net Income (Loss)......................................................
a.
Accrual
Basis
$ 69,500a
b.
Cash
Basis
$ 61,200b
$ 43,200c
-1,000d
-1,010e
4,760f
3,000
100
200g
$ (53,270)
$ 16,230
-$ 44,800
-36,000
750
3,500
6,000
1,200
-$ (92,250)
$ (31,050)
Solutions
3-14
3.29
Consulting Revenue...................................................
Less Expenses:
Rental Expense ......................................................
Depreciation Expense ...........................................
Payments on Equipment Purchased .................
Utilities Expense....................................................
Salaries Expense....................................................
Supplies Expense...................................................
Interest Expense....................................................
Total Expenses...................................................
Net Income (Loss)......................................................
a.
Accrual
Basis
$ 135,000
b.
Cash
Basis
$ 109,000
7,500
2,000a
-4,040b
109,800c
3,630d
2,000e
$ 128,970
$ 6,030
7,500
-24,000
3,460
98,500
2,790
-$ 136,250
$ (27,250)
(Hansen Retail Store; preparing income statement and balance sheet using
accrual basis.)
a.
3-15
$ 169,000
(109,600)
(36,600)
(2,780)
(2,000)
(4,000)
$ 14,020
(5,608)
$ 8,412
Solutions
3.30 continued.
b.
3,500
61,300
15,400
$ 80,200
58,000
$ 138,200
Accounts Payable..................................................
Notes Payable....................................................
Assets
(2)
= Liabilities +
+6,000
6,000
= Liabilities +
+50
6,000
6,000
Shareholders'
Equity
(Class.)
Assets
Solutions
$ 27,600
2,400
180
5,608
4,000
40,000
$ 79,788
$ 50,000
8,412
$ 58,412
$ 138,200
Shareholders'
Equity
(Class.)
50
IncSt RE
3-16
50
50
3.31 continued.
b. (1)
Cash..........................................................................
Advances from Customers..............................
Assets
+18,000
(2)
(1)
(1)
= Liabilities +
= Liabilities +
40,000
2,250
2,250
24,000
24,000
Shareholders'
Equity
(Class.)
Assets
3,500
40,000
Shareholders'
Equity
(Class.)
2,250
IncSt RE
Automobile ..............................................................
Cash.....................................................................
Assets
+24,000
24,000
(2)
= Liabilities +
3,000
Shareholders'
Equity
(Class.)
Assets
2,250
d.
= Liabilities +
3,000
Shareholders'
Equity
(Class.)
+3,000
IncSt RE
Equipment...............................................................
Cash.....................................................................
Assets
+40,000
40,000
(2)
= Liabilities +
3,000
18,000
Shareholders'
Equity
(Class.)
Assets
c.
= Liabilities +
+18,000
18,000
3,500
3,500
Shareholders'
Equity
(Class.)
3,500
IncSt RE
3-17
Solutions
3.31 continued.
e.
(1)
Assets
+12,000
12,000
(2)
(1)
7,000
5,000
5,000
5,500
5,500
Shareholders'
Equity
(Class.)
5,500
IncSt RE
Cash..........................................................................
Rental Fees Received in Advance..................
Assets
+48,000
Solutions
= Liabilities +
7,000
Shareholders'
Equity
(Class.)
Assets
5,500
3.32
= Liabilities +
5,000
4,000
Shareholders'
Equity
(Class.)
Accounts Payable..................................................
Cash.....................................................................
Assets
5,000
(2)
= Liabilities +
+7,000
4,000
Shareholders'
Equity
(Class.)
4,000
IncSt RE
Assets
+7,000
(1)
= Liabilities +
12,000
Shareholders'
Equity
(Class.)
Rent Expense..........................................................
Prepaid Rent.......................................................
Assets
4,000
f.
= Liabilities +
12,000
= Liabilities +
+48,000
Shareholders'
Equity
(Class.)
3-18
48,000
48,000
3.32 a. continued.
(2)
Assets
b. (1)
(1)
= Liabilities +
= Liabilities +
50
50
6,600
6,600
Shareholders'
Equity
(Class.)
Assets
3,250
10,000
Shareholders'
Equity
(Class.)
+50
IncSt RE
Prepaid Insurance..................................................
Cash.....................................................................
Assets
+6,600
6,600
(2)
= Liabilities +
10,000
Shareholders'
Equity
(Class.)
Assets
+50
c.
= Liabilities +
12,000
Shareholders'
Equity
(Class.)
+12,000
IncSt RE
Assets
+10,000
10,000
(2)
= Liabilities +
12,000
12,000
3,250
3,250
Shareholders'
Equity
(Class.)
3,250
IncSt RE
3-19
Solutions
3.32 c. continued.
Alternate entries for Part c. are:
(1)
Assets
+6,100
6,600
(2)
(1)
(1)
= Liabilities +
14,900
14,900
200
200
Shareholders'
Equity
(Class.)
200
IncSt RE
Equipment............................................................... 200,000
Cash.....................................................................
Assets = Liabilities +
+200,000
200,000
Solutions
2,750
Shareholders'
Equity
(Class.)
14,900
IncSt RE
Assets
200
e.
= Liabilities +
2,750
Shareholders'
Equity
(Class.)
2,750
IncSt RE
Assets
14,900
(2)
= Liabilities +
6,600
Shareholders'
Equity
(Class.)
500
IncSt RE
Assets
2,750
d.
= Liabilities +
500
6,100
Shareholders'
Equity
(Class.)
3-20
200,000
3.32 e. continued.
(2)
Assets
9,000
f.
(1)
3.33
= Liabilities +
9,000
Shareholders'
Equity
(Class.)
9,000
IncSt RE
Assets
12,000
(2)
= Liabilities +
9,000
12,000
12,000
Shareholders'
Equity
(Class.)
12,000
IncSt RE
T-accounts.
Cash (A)
343,000
1,400,000
950,000
625,000
82,400
85,600
(1)
Inventory (A)
275,000
1,100,000 1,200,000
175,000
(4)
(5)
(6)
(7)
(2)
(3)
Land (A)
50,000
Building (A)
450,000
50,000
450,000
3-21
(9)
Solutions
3.33 a. continued.
Equipment (A)
80,000
80,000
(5)
34,000 (10)
34,000
(1)
(8)
300,000
800,000
(2)
61,560 (12)
61,560
Solutions
(3)
(7)
(8)
3-22
(7)
41,040 (11)
41,040
(12)
Selling and
Administrative Expense (SE)
(6)
625,000
625,000 (12)
(9)
3.33 a. continued.
(10)
(11)
MOULTON CORPORATION
Income Statement
For Year 13
Sales Revenue ..........................................................................
Expenses:
Cost of Goods Sold...............................................................
Selling and Administrative Expenses..............................
Insurance..............................................................................
Depreciation .........................................................................
Interest ($2,400 + $24,000)..............................................
Total Expenses................................................................
Net Income before Income Taxes.........................................
Income Tax Expense at 40 Percent.....................................
Net Income................................................................................
3-23
$ 2,000,000
$ 1,200,000
625,000
12,000
34,000
26,400
$ 1,897,400
$ 102,600
(41,040)
$
61,560
Solutions
3.33 a. continued.
Transactions spreadsheet.
Balance Sheet Accounts
ASSETS
Current Assets:
Cash
Accounts Receivable
Inventory
Prepaid Insurance
Total Current Assets
Noncurrent Assets:
Land
Building
Equipment
Accumulated
Depreciation
Total Noncurrent Assets
Total Assets
Recog.
COGS
Collect
Accts. Rec.
343,000
2,000,000
275,000 1,100,000
12,000
630,000
Pay
Pay S&A Repay Recog. Recog. Recog. Recog. Balance:
Accts. Expenses Note
Int. on Insur. Depre. Inc. Tax End of
Pay.
Payable Bank Expired
Exp. Period
Loan
5
6
7
8
9
10
11
85,600
600,000
175,000
0
860,600
-1,200,000
-12,000
50,000
450,000
80,000
50,000
450,000
80,000
-34,000
(34,000)
546,000
1,406,600
580,000
1,210,000
30,000 1,100,000
80,000
110,000
180,000
24,000
41,040
245,040
300,000
300,000
300,000
410,000
300,000
545,040
-80,000
24,000
41,040
800,000
2,000,000 -1,200,000
-625,000
800,000
61,560
800,000
861,560
1,210,000
1,406,600
Income Statement
Accounts
Solutions
-950,000
Sales
Rev.
3-24
COGS
3.33 continued.
c.
MOULTON CORPORATION
Comparative Balance Sheet
December 31,
Year 12
December 31,
Year 13
$ 343,000
0
275,000
12,000
$ 630,000
$
50,000
450,000
80,000
0
$ 580,000
$ 1,210,000
Assets
Cash ...................................................................
Accounts Receivable.......................................
Inventories........................................................
Prepaid Insurance ...........................................
Total Current Assets .................................
Land (at Cost) ..................................................
Building ..............................................................
Equipment.........................................................
Less Accumulated Depreciation...................
Land, Building, and Equipment (Net) ..........
Total Assets.................................................
85,600
600,000
175,000
0
$ 860,600
$
50,000
450,000
80,000
(34,000)
$ 546,000
$ 1,406,600
30,000
80,000
0
0
110,000
300,000
410,000
800,000
0
800,000
$ 180,000
0
24,000
41,040
$ 245,040
300,000
$ 545,040
$ 800,000
61,560
$ 861,560
$ 1,210,000
$ 1,406,600
$
$
$
$
(3a)
(6)
Cash (A)
247,200
62,900
32,400
84,600
2,700
205,800
29,000
124,800
(4)
(5)
(7a)
(7b)
3-25
(3a)
110,000
Solutions
3.34 a. continued.
Inventory (A)
188,800
217,900
162,400
4,200
240,100
(2)
(3b)
(7a)
(12)
11,000
Accumulated Depreciation (XA)
0
1,500 (10)
1,500
(7a)
(7b)
Solutions
(2)
30,000
(1)
Equipment (A)
0
90,000
90,000
Patent (A)
24,000
400 (13)
23,600
Note Payable (L)
0
90,000
90,000
(1)
6,700
(8)
6,700
(9)
(14)
500,000
3-26
5,610 (15)
5,610
13,090 (16)
13,090
3.34 a. continued.
(16)
(3a)
(4)
(8)
(10)
(12)
(14)
3-27
(3b)
(5)
(9)
(11)
Patent
Amortization Expense (SE)
(13)
400
400 (16)
(15)
Solutions
3.34 a. continued.
Transactions spreadsheet.
Balance Sheet
Transactions, By Number and Description
Accounts
Balance: Purchase Acquire
Sell
Recog.
Paid
Paid Collects
Pay
Pay
Recog. Recog. Recog. Recog. Recog. Recog. Recog. Recog. Balance:
BeginEquip. Merchan. Mer. For COGS Compen. Utilities Accts.
Accts.
Accts. Unpaid Unpaid Depre.
Rent
Insur.
Patent Int. Exp. Inc. Tax End of
ning of with Loan On Acct. Cash &
To Emp.
Rec. Pay. With Pay. W/O Comp. Util. Exp. Exp.
Exp.
Exp.
Amort.
Exp.
Period
Period
on Acct.
Discount Discount Exp.
1
2
3a
3b
4
5
6
7a
7b
8
9
10
11
12
13
14
15
ASSETS
Current Assets:
Cash
247,200
62,900
-32,400 -2,700 84,600 -205,800 -29,000
124,800
Accounts Receivable
194,600
-84,600
110,000
Merchandise
-162,400
-4,200
240,100
Inventories
188,800
217,900
Prepaid Rent
60,000
-30,000
30,000
Prepaid Insurance
12,000
-1,000
11,000
Total Current Assets
508,000
515,900
Noncurrent Assets:
Equipment
90,000
90,000
Accumulated
(1,500)
Depreciation
-1,500
Patent
24,000
-400
23,600
Total Noncurrent
Assets
24,000
112,100
Total Assets
532,000
628,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable
32,000
Note Payable
Compensation Payable
Utilities Payable
Interest Payable
Income Tax Payable
Total Current Liabilities
32,000
Noncurrent Liabilities:
Total Noncurrent
Liabilities
Total Liabilities
32,000
Shareholders' Equity:
Common Stock
500,000
Retained Earnings
Total Shareholders'
Equity
500,000
Total Liabilities and
Shareholders' Equity
532,000
Imbalance, if Any
217,900
6,700
800
900
5,610
257,500 -162,400
-32,400 -2,700
-6,700
-800
-1,500 -30,000
-1,000
-400
-900
-5,610
500,000
13,090
513,090
628,000
Sales
Rev.
3-28
10,900
90,000
6,700
800
900
5,610
114,910
114,910
Income Statement
Accounts
Solutions
-210,000 -29,000
90,000
COGS
Comp.
Exp.
Utility
Exp.
Comp.
Exp.
Utility
Exp.
Depre.
Exp.
Rent
Exp.
Insur.
Exp.
Amort.
Exp.
Int.
Exp.
Income
Tax Exp.
3.34 continued.
b.
3-29
Ps257,500
Ps162,400
39,100
3,500
1,500
1,000
400
900
Ps238,800
Ps 18,700
(5,610)
Ps 13,090
Solutions
3.34 continued.
c.
February 28,
Year 8
Assets
Cash ...................................................................
Accounts Receivable.......................................
Inventories........................................................
Prepaid Rent.....................................................
Prepaid Insurance ...........................................
Total Current Assets .................................
Equipment (at Cost) .......................................
Less Accumulated Depreciation...................
Equipment (Net)..............................................
Patent ...............................................................
Total Noncurrent Assets...........................
Total Assets.................................................
Ps 247,200
0
188,800
60,000
12,000
Ps 508,000
Ps
0
0
Ps
0
24,000
Ps 24,000
Ps 532,000
Ps 124,800
110,000
240,100
30,000
11,000
Ps 515,900
Ps 90,000
(1,500)
Ps 88,500
23,600
Ps 112,100
Ps 628,000
Ps
32,000
0
0
0
0
0
Ps 32,000
Ps 500,000
0
Ps 500,000
Ps
10,900
90,000
6,700
800
900
5,610
Ps 114,910
Ps 500,000
13,090
Ps 513,090
Ps 532,000
Ps 628,000
(6)
Solutions
Cash (A)
47,150
1,206,000
2,400
235,000
710,000
305,750
(1)
(5)
(7)
3-30
95,000
3.35 a. continued.
(3)
(2)
(1)
(6)
(11)
Land (A)
80,000
80,000
Building (A)
280,000
Equipment (A)
97,750
280,000
97,750
Patent (A)
28,000
27,550
2,500
(9)
2,500
(7)
(8)
450 (10)
(2)
(3)
4,500
0
(12)
124,114 (13)
124,114
3-31
Solutions
3.35 a. continued.
Mortgage Payable (L)
53,000
53,000
450,000
(14)
Solutions
180,000
(3)
(5)
Selling and
Administrative Expense (SE)
235,000
235,000 (14)
(9)
(11)
(13)
3-32
186,171 (14)
186,171
(4)
(8)
(12)
3.35 a. continued.
Transactions spreadsheet.
Balance Sheet Accounts
ASSETS
Current Assets:
Cash
Marketable Securities
Accounts Receivable
Receivable from Supplier
Merchandise Inventories
Prepaid Rent
Prepaid Insurance
Total Current Assets
Noncurrent Assets:
Land
Building
Equipment
Accumulated
Depreciation
Patent
Total Noncurrent Assets
Total Assets
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
Accounts Payable
Advance from Customer
Interest Payable
Income Tax Payable
Total Current Liabilities
Noncurrent Liabilities:
Mortgage Payable
Total Noncurrent
Liabilities
Total Liabilities
Shareholders' Equity:
Common Stock
Additional Paid-in Capital
Retained Earnings
[Insert Rows as Needed]
Total Shareholders'
Equity
Total Liabilities and
Shareholders' Equity
47,150
95,000
Sell Mer.
Inv. On
Acct.
3
Recog.
Pays
Collect
Pays Recog. Recog. Recog.
COGS S&A Exp. Cash from Sup. For Rent Depre. Patent
Cust.
Pur. On Exp.
Exp. Amort.
Acct.
4
5
6
7
8
9
10
-2,400
Recog.
Int. Exp.
11
12
Recog. Balance:
Inc. Tax End of
Exp.
Period
13
1,455
70,945
1,400
Recog.
Insur.
Exp.
-1,455
1,050,000
305,750
95,000
289,500
170,945
2,300
863,495
-1,206,000
-950,000
-1,400
2,400
-100
215,950
80,000
280,000
97,750
80,000
280,000
97,750
(2,500)
-2,500
28,000
485,750
701,700
-450
14,200
4,500
1,048,545
27,550
482,800
1,346,295
-710,000
18,700
352,745
265
124,114
477,124
53,000
53,000
53,000
71,700
53,000
530,124
450,000
180,000
450,000
180,000
186,171
816,171
-4,500
265
124,114
-1,400 -2,500
-450
-100
-265 -124,114
630,000
1,346,295
701,700
Imbalance, if Any
Income Statement
Accounts
Sales
Rev.
3-33
COGS
Solutions
S&A Exp.
Rent
Exp.
Int. Exp.
Inc. Tax
Exp.
3.35 continued.
b.
PATTERSON CORPORATION
Income Statement
For the Month of February, Year 13
Sales Revenue..........................................................................
Expenses:
Cost of Goods Sold...............................................................
Selling and Administrative Expenses .............................
Rent .......................................................................................
1,400
Depreciation.........................................................................
Amortization........................................................................
Insurance..............................................................................
Interest .................................................................................
Total Expenses................................................................
Net Income before Income Taxes ........................................
Income Tax Expense at 40 Percent.....................................
Net Income ...............................................................................
Solutions
3-34
$ 1,500,000
$
950,000
235,000
2,500
450
100
265
$ 1,189,715
$ 310,285
(124,114)
$ 186,171
3.35 continued.
c.
PATTERSON CORPORATION
Comparative Balance Sheet
January 31,
Year 13
February 28,
Year 13
Assets
Cash ...................................................................
Marketable Securities ....................................
Accounts Receivable.......................................
Receivable from Supplier...............................
Merchandise Inventories................................
Prepaid Rent.....................................................
Prepaid Insurance ...........................................
Total Current Assets .................................
Land (at Cost) ..................................................
Building (at Cost).............................................
Equipment (at Cost) .......................................
Less Accumulated Depreciation...................
Land, Building, and Equipment (Net) ..........
Patent (Net)......................................................
Total Noncurrent Assets...........................
Total Assets.................................................
$
$
$
$
$
47,150
95,000
0
1,455
70,945
1,400
0
215,950
80,000
280,000
97,750
0
457,750
28,000
485,750
701,700
$ 305,750
95,000
289,500
0
170,945
0
2,300
$ 863,495
$
80,000
280,000
97,750
(2,500)
$ 455,250
27,550
$ 482,800
$ 1,346,295
3-35
14,200
4,500
0
0
18,700
53,000
71,700
450,000
180,000
0
630,000
$ 352,745
0
265
124,114
$ 477,124
53,000
$ 530,124
$ 450,000
180,000
186,171
$ 816,171
$ 701,700
$ 1,346,295
$
$
$
$
Solutions
3.36
Cash (A)
25,000
20,000
30,000
4,000
24,600
10,000
142,400
8,000
850
16,700
139,800
24,350
(3)
(4)
(5)
(6)
(11)
(12)
5,800
(7)
(6)
(3)
(4)
(5)
8,000
Equipment (A)
4,000
10,000
14,000
(9)
(12)
(7)
(2)
30,000
850
(14)
900
Solutions
(8)
3-36
3.36 a. continued.
Common Stock (SE)
25,000
(1)
25,000
(20)
(11)
(15)
(19)
1,980
(8)
(20)
(8)
(14)
3-37
Solutions
3.36 a. continued.
Transactions spreadsheet.
Balance Sheet
Transactions, By Number and Description
Accounts
Balance:
Issue
Obtain Pay Rent Acquire Acquire
Make
Pur.
Sell
Recog. Return Collect
Pay
BeginCommon Bank
in
Book- Compu- Deposit Books
Books
COGS Unsold
Cash Compenning of
Stock for Loan Advance shelves ters for
with
on Acct. for Cash
Books
from
sation to
Period
Cash
for Cash Cash Supplier
and on
Credit
Emp.
Acct.
Sales
1
2
3
4
5
6
7
8a
8b
9
10
11
ASSETS
Current Assets:
Cash
25,000 30,000 -20,000 -4,000 -10,000
-8,000
24,600
142,400 -16,700
Accounts Receivable
148,200
-142,400
Merchandise
Inventories
160,000
-140,000 -14,600
Prepaid Rent
20,000
Deposit with Suppliers
8,000
Total Current Assets
Noncurrent Assets:
Equipment
4,000 10,000
Accumulated
Depreciation
Total Noncurrent
Assets
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable
Note Payable
Advances from
Customers
Interest Payable
Income Tax Payable
Total Current Liabilities
Noncurrent Liabilities:
Total Noncurrent
Liabilities
Total Liabilities
Shareholders' Equity:
Common Stock
Retained Earnings
Total Shareholders'
Equity
Total Liabilities and
Shareholders' Equity
Imbalance, if Any
160,000
12
13
-139,800
14
Recog.
Rent
Exp.
15
Recog.
Recog.
Recog. Balance:
Depre. Depre. On Inc. Tax End of
On
Comp.
Exp. Period
Bookshelves
16
17
18
850
24,350
5,800
5,400
10,000
8,000
53,550
-10,000
14,000
-400
-1,500
(1,900)
12,100
65,650
-139,800
5,600
30,000
30,000
850
850
900
1,320
38,670
38,670
900
1,320
25,000
172,800 -140,000
-16,700
-900 -10,000
-400
-1,500
-1,320
25,000
1,980
26,980
65,650
Income Statement
Accounts
Solutions
-14,600
Sales
Rev.
3-38
COGS
- Comp.
Exp.
Int.
Exp.
Rent
Exp.
Depre.
Exp.
Depre.
Exp.
Inc. Tax
Exp.
3.36 continued.
b.
ZEALOCK BOOKSTORE
Income Statement
For the Six Months Ending December 31, Year 10
Sales Revenue...............................................................................
Less Expenses:
Cost of Goods Sold....................................................................
Compensation Expense..........................................................
Interest Expense......................................................................
Rent Expense............................................................................
Depreciation Expense .............................................................
Income Tax Expense...............................................................
Total Expenses.....................................................................
Net Income ....................................................................................
c.
$ 172,800
$ 140,000
16,700
900
10,000
1,900
1,320
$ 170,820
$ 1,980
ZEALOCK BOOKSTORE
Balance Sheet
December 31, Year 10
Assets
Current Assets:
Cash......................................................................................
Accounts Receivable.........................................................
Merchandise Inventories..................................................
Prepaid Rent .......................................................................
Deposit with Suppliers......................................................
Total Current Assets....................................................
Equipment...........................................................................
Less Accumulated Depreciation.....................................
Equipment (Net) ................................................................
Total Assets....................................................................
3-39
$
$
$
$
24,350
5,800
5,400
10,000
8,000
53,550
14,000
(1,900)
12,100
65,650
Solutions
3.36 c. continued.
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts Payable..............................................................
Note Payable ......................................................................
Advances from Customers ..............................................
Interest Payable ................................................................
Income Tax Payable..........................................................
Total Current Liabilities...............................................
Shareholders' Equity:
Common Stock...................................................................
Retained Earnings .............................................................
Total Shareholders' Equity ..........................................
Total Liabilities and Shareholders' Equity................
d.
3.37
$
$
$
$
5,600
30,000
850
900
1,320
38,670
25,000
1,980
26,980
65,650
Net income was positive, which is unusual for a new business in its first
year.
The profit margin, however, is only 1.1 percent (=
$1,980/$172,800). This small margin does not leave much room for
unexpected events. Current Assets exceed Current Liabilities by a
comfortable margin. The firm sells its inventory quickly and collects its
accounts receivable soon after sale. It must also pay its suppliers
quickly.
preparation
of
a. T-accounts.
(3)
(4)
(7)
(9)
Solutions
Cash (A)
24,350
75,000
1,320
8,000
31,800
24,900
20,000
320,600
29,400
281,100
4,000
85,230
(1)
(2)
(5)
(10)
(11)
(12)
3-40
(7)
13,150
3.37 a. continued.
Merchandise Inventory (A)
5,400
310,000
286,400
(7)
22,700
(8)
6,300
(6)
(4)
800 (14)
3,000 (15)
5,700
(8)
(11)
(2)
(18)
(6)
(5)
10,000
Equipment (A)
14,000
14,000
(2)
(3)
75,000
(7)
850
(16)
25,000
(12)
4,000
6,120 (18)
4,100
(7)
3-41
(1)
(7)
1,320
4,080 (17)
4,080
Solutions
3.37 a. continued.
(10)
(13)
(17)
Solutions
(18)
3-42
(2)
(16)
3.37 a. continued.
Transactions spreadsheet.
Balance Sheet Accounts
Balance:
Beginning of
Period
ASSETS
Current Assets:
Cash
Accounts Receivable
Merchandise Inventories
Prepaid Rent
Deposit with Suppliers
Total Current Assets
Noncurrent Assets:
Equipment
Accumulated
Depreciation
Total Noncurrent Assets
Total Assets
24,350
5,800
5,400
10,000
8,000
53,550
Repay
Bank
Loan
with Int.
Obtain
Bank
Loan
Rec.
Refund
of Sec.
Dep.
Pay
Annual
Rent
-1,320 -31,800
75,000
Pur.
Sells
Recog.
Books
Books
COGS
on Acct. for Cash
and on
Acct.
6
7a
7b
8,000 -20,000
Return
Unsold
Books
24,900
327,950
310,000
Collect
Pay
Pay Sup. Dec. Rec. Int. Recog.
Cash
Emp.
and
Exp.
Rent
from Compen.
Pay Div.
Exp.
Credit
Sales
9
10
11
12
13
14
320,600
-320,600
-29,400 -281,100
Recog.
Depre.
On
Bookshelves
15
17
-4,000
85,230
13,150
6,300
10,000
114,680
-286,400 -22,700
20,000
-20,000
-8,000
14,000
14,000
-1,900
12,100
65,650
Pay Yr.
10 Inc.
Tax
-800
310,000
-30,000
-22,700
-3,000
(5,700)
8,300
122,980
-281,100
11,800
75,000
75,000
-850
-900
3,000
-1,320
4,080
3,000
4,080
93,880
93,880
-900
353,700 -286,400
-29,400
-4,000
-3,000 -20,000
-800
-3,000
-4,080
25,000
4,100
29,100
122,980
Income Statement
Accounts
Int. Exp.
3-43
Sales
Rev.
Solutions
COGS
Comp.
Exp.
Depre.
Exp.
Depre.
Exp.
Inc. Tax
Exp.
3.37 continued.
b.
ZEALOCK BOOKSTORE
Comparative Income Statement
For Year 10 and Year 11
Sales Revenue.....................................................
Less Expenses:
Cost of Goods Sold..........................................
Compensation Expense................................
Interest Expense............................................
Rent Expense..................................................
Depreciation Expense ...................................
Income Tax Expense.....................................
Total Expenses...........................................
Net Income ..........................................................
c.
Year 10
$ 172,800
Year 11
$ 353,700
$ 140,000
16,700
900
10,000
1,900
1,320
$ 170,820
$ 1,980
$ 286,400
29,400
3,900
20,000
3,800
4,080
$ 347,580
$ 6,120
ZEALOCK BOOKSTORE
Comparative Balance Sheet
December 31, Year 10 and Year 11
Year 10
Year 11
$ 24,350
5,800
5,400
10,000
8,000
$ 53,550
$ 85,230
13,150
6,300
10,000
-$ 114,680
$ 14,000
(1,900)
$ 12,100
$ 65,650
$ 14,000
(5,700)
$ 8,300
$ 122,980
Assets
Current Assets:
Cash..................................................................
Accounts Receivable.....................................
Merchandise Inventories..............................
Prepaid Rent ...................................................
Deposit with Suppliers..................................
Total Current Assets................................
Noncurrent Assets:
Equipment.......................................................
Less Accumulated Depreciation.................
Equipment (Net) ............................................
Total Assets................................................
Solutions
3-44
3.37 c. continued.
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts Payable..........................................
Note Payable ..................................................
Advances from Customers ..........................
Interest Payable ............................................
Income Tax Payable......................................
Total Current Liabilities...........................
Shareholders' Equity:
Common Stock...............................................
Retained Earnings .........................................
Total Shareholders' Equity ......................
Total Liabilities and Shareholders'
Equity......................................................
d.
5,600
30,000
850
900
1,320
$ 38,670
$ 11,800
75,000
-3,000
4,080
$ 93,880
$ 25,000
1,980
$ 26,980
$ 25,000
4,100
$ 29,100
$ 65,650
$ 122,980
3-45
Solutions
3.37 d. continued.
SCHEDULE 1
Financial Ratios for Zealock Bookstore
3.38
Sales .............................................................................
Cost of Goods Sold......................................................
Compensation Expense............................................
Interest Expense........................................................
Rent Expense..............................................................
Depreciation Expense ...............................................
Income Tax Expense.................................................
Net Income..................................................................
Year 10
100.0%
(81.0)
(9.7)
(.5)
(5.8)
(1.1)
(.8)
1.1%
Year 11
100.0%
(81.0)
(8.3)
(1.1)
(5.7)
(1.1)
(1.1)
1.7%
1.4
58.9%
1.2
76.3%
Bal.
Cash
11,700
47,000
128,000
150,000
49,000
7,500
1,200
5,000
8,000
10,000
(p)
(10)
Bal.
Accounts Receivable
22,000
153,000
150,000
25,000
(p)
(4)
Bal.
Prepayments for
Miscellaneous Services
1,700
49,000
47,700
3,000
(p)
(1)
(2)
Solutions
(3)
(4)
(5)
(6)
(7)
(8)
(p)
(8)
Bal.
(2)
Marketable Securities
12,000
8,000
20,000
Merchandise Inventory
(p)
33,000
(9)
127,000
130,000 (11)
Bal.
30,000
(p)
(14)
3-46
Bal.
40,000
3.38 continued.
(3)
(5)
Accounts Payable
(for Merchandise)
26,000
128,000
127,000
25,000
(p)
(9)
Bal.
Taxes Payable
3,500
7,500
8,000
4,000
Interest Payable
300 (p)
1,200
1,200 (15)
300 Bal.
(6)
Note Payable
20,000
(p)
(13)
Bal.
20,000 Bal.
Accumulated Depreciation
12,000
(p)
4,000 (12)
16,000 Bal.
(7)
Retained Earnings
8,600
(p)
5,000
9,100 (16c)
12,700 Bal.
(p)
Common Stock
50,000
(p)
50,000 Bal.
Sales
(16c)
200,000
47,000 (1)
153,000 (10)
(11)
(12)
Depreciation Expense
4,000
4,000 (16c)
(13)
Tax Expense
8,000
8,000 (16c)
(14)
(15)
Interest Expense
1,200
1,200 (16c)
3-47
Solutions
3.38 continued.
Transactions spreadsheet.
Balance Sheet
Accounts
Balance:
Beginning of
Period
ASSETS
Current Assets:
Cash
Marketable Securities
Accounts Receivable
Merchandise Inventory
Prepayments for
Miscellaneous Ser.
Total Current Assets
Noncurrent Assets:
Land, Building, & Equip.
Accumulated
Depreciation
Total Noncurrent
Assets
Total Assets
Income Statement
Accounts
Solutions
Recog.
COGS
Recog.
Oper.
Exp.
10
-7,500 -49,000
1,700
80,400
12
13
14
-1,200
-5,000
-8,000
8,000
49,000 -47,700
10,000
20,000
25,000
30,000
3,000
88,000
40,000
40,000
-12,000
-4,000
(16,000)
28,000
108,400
24,000
112,000
Recog.
Pur. Of
Merchn.
Sales
Rev.
3-48
127,000
-128,000
1,200
8,000
25,000
300
4,000
29,300
-1,200
-7,500
20,000
20,000
49,300
-130,000
-4,000
-8,000
-47,700
-1,200
50,000
12,700
-5,000
62,700
112,000
-
COGS
Depre.
Exp.
Tax Exp.
Ot. Op.
Exp.
Int. Exp.
3.38 continued.
PRIMA COMPANY
Balance Sheet
As of January 1, Year 2
Assets
Cash..............................................................................
Marketable Securities...............................................
Accounts Receivable.................................................
Merchandise Inventory.............................................
Prepayments ..............................................................
Total Current Assets.........................................
Land, Buildings, and Equipment .............................
Less Accumulated Depreciation.............................
Total Assets.........................................................
$ 11,700
12,000
22,000
33,000
1,700
$ 80,400
$ 40,000
(12,000)
28,000
$ 108,400
$ 26,000
300
3,500
$ 29,800
20,000
$ 49,800
$ 50,000
8,600
$ 58,600
$ 108,400
3-49
Solutions
3.39 continued.
Bal.
(7)
Cash
20,000
85,000
Bal.
(1)
2,000
81,000
3,000
10,000
Bal.
Bal.
(8p)
Bal.
Bal.
Bal.
Bal.
(3)
Bal.
(9)
(10)
(11)
(12)
9,000
Bal.
Merchandise Inventory
45,000
65,000
50,000
60,000
Bal.
(2)
Bal.
Bal.
(2)
Bal.
40,000
Interest Expense
0
3,000
Accumulated Depreciation
16,000 Bal.
2,000
(4)
18,000 Bal.
(10p)
Solutions
51,000
Prepayments
2,000
1,000
1,000
(5)
3,000
Accounts Payable
30,000
81,000
26,000
65,000
40,000
Accounts Receivable
36,000
100,000
85,000 (7p)
Bal.
(6)
(8)
Bal.
3-50
(9p)
(11p)
Interest Payable
1,000 Bal.
2,000
3,000 (3)
2,000 Bal.
Mortgage Payable
20,000 Bal.
3,000
17,000 Bal.
3.39 continued.
Common Stock
50,000
Bal.
50,000
Bal.
0
100,000
100,000
Bal.
(1)
Bal.
(12p)
Retained Earnings
26,000 Bal.
10,000
16,000 Bal.
Sales
3-51
Solutions
3.39 continued.
Transactions spreadsheet.
Balance Sheet
Transactions, By Number and Description
Accounts
Balance: Recog.
Cash
Recog. Pur. Of
Cash
Recog. Int. Paid Recog. Recog.
BeginSales on Collect. COGS Mer. On Pay. For Int. Exp.
Depre. Of Oper.
ning of
Acct.
From
Acct.
Merchn.
Exp.
Exp.
Period
Cus.
1
2
3
4
5
6
7
8
8
ASSETS
Current Assets:
Cash
20,000
85,000
-55,000
-2,000
Accounts Receivable
36,000 100,000 -85,000
Merchandise Inventory
45,000
-50,000 65,000
Prepayments
2,000
-27,000
Total Current Assets
103,000
Noncurrent Assets:
Land, Buildings, &
Equip.
40,000
Accumulated
Depreciation
-16,000
-2,000
Total Noncurrent
Assets
24,000
Total Assets
127,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Interest Payable
1,000
Accounts Payable
30,000
Total Current Liabilities
31,000
Noncurrent Liabilities:
Mortgage Payable
20,000
Total Noncurrent
Liabilities
20,000
Total Liabilities
51,000
Shareholders' Equity:
Common Stock
50,000
Retained Earnings
26,000 100,000
Total Shareholders'
Equity
76,000
Total Liabilities and
Shareholders' Equity
127,000
Imbalance, if Any
Income Statement
Accounts
Solutions
Sales
Rev.
3-52
3,000
Cash
Paid for
Prepay.
9
-26,000
-3,000 -10,000
26,000
-2,000
65,000 -55,000
-3,000
-50,000
COGS
-3,000
Int. Exp.
-2,000 -27,000
-10,000
9,000
51,000
60,000
1,000
121,000
9,000
51,000
60,000
1,000
121,000
40,000
40,000
-18,000
(18,000)
22,000
143,000
22,000
143,000
2,000
40,000
42,000
2,000
40,000
42,000
17,000
17,000
17,000
59,000
17,000
59,000
50,000
34,000
50,000
34,000
84,000
84,000
143,000
143,000
3.39 continued.
SECUNDA COMPANY
Cash Receipts and Disbursements Schedule
Receipts:
Collections from Customers.............................
Disbursements:
Suppliers of Merchandise and Other Services..................................................................
Mortgage...............................................................
Dividends ..............................................................
Interest.................................................................
Total Disbursements.....................................
Decrease in Cash .......................................................
Cash Balance, January 1.........................................
Cash Balance, December 31 ...................................
3.40
$85,000
$81,000
3,000
10,000
2,000
96,000
$11,000
20,000
$ 9,000
Bal.
(1)
(2)
(3)
Bal.
Cash
40,000
144,000
114,000
63,000
5,000
1,000
500
57,500
1,200
2,000
67,800
(4)
(5)
(6)
(7)
(8)
(9)
3-53
Bal.
(10p)
Bal.
Accounts and
Notes Receivable
36,000
149,000
144,000
(1)
41,000
Solutions
3.40 continued.
Bal.
(14)
Bal.
Merchandise Inventory
55,000
121,000
126,500 (15p)
49,500
(8)
(5)
(9)
(15)
Solutions
Bal.
(11p)
Bal.
Interest Receivable
1,000
700
1,000
700
Bal.
Building, Machinery,
and Equipment
47,000
Bal.
Mortgage Payable
35,000
5,000
30,000
47,000
Accounts Payable
(Merchandise)
34,000 Bal.
114,000
121,000 (14p)
41,000 Bal.
(4)
(3)
Accumulated Depreciation
10,000 Bal.
2,000 (17p)
12,000 Bal.
Bal.
Common Stock
25,000 Bal.
Bal.
25,000 Bal.
Retained Earnings
76,000 Bal.
2,000
25,200 (18p)
99,200 Bal.
Cost of Goods Sold
126,500
126,500 (18c)
3-54
Sales
63,000 (2)
149,000 (10)
(18c)
212,000
(6)
Interest Expense
500
500 (18c)
3.40 continued.
(18c)
(16)
Interest Revenue
700
700
(11)
3-55
(12)
(13)
Miscellaneous Expenses
56,300
500
56,800 (18c)
(17)
Depreciation Expense
2,000
2,000 (18c)
Solutions
3.40 continued.
Transactions spreadsheet.
Balance Sheet
Accounts
Balance:
Beginning of
Period
ASSETS
Current Assets:
Cash
Accounts & Notes Rec.
Merchandise Inventory
Interest Receivable
Prepaid Misc. Services
Total Current Assets
Noncurrent Assets:
Bldg., Mach., &
Equipment
Accumulated
Depreciation
Total Noncurrent
Assets
Total Assets
Recog.
Sales
Rev.
3b
1,000
Pur. Of
Merchn.
Recog.
COGS
-114,000
-5,000
-500
10
11
-57,500
12
13
-1,200
14
-2,000
121,000 -126,500
-1,000
700
1,200
47,000
-10,000
-2,000
37,000
173,000
Income Statement
Accounts
Solutions
3a
-56,300
-114,000 121,000
-1,200
1,700
-5,000
212,000
700
-126,500
-500
-56,800
-1,700
-2,000
-2,000
67,800
41,000
49,500
700
5,200
164,200
67,800
41,000
49,500
700
5,200
164,200
47,000
47,000
-12,000
(12,000)
35,000
199,200
35,000
199,200
2,500
2,500
41,000
1,500
45,000
41,000
1,500
45,000
30,000
30,000
30,000
75,000
30,000
75,000
25,000
99,200
25,000
99,200
124,200
199,200
Sales
Rev.
3-56
56,800
Check on Balance:
Ending End of
Bal.
Period
Sheet
Amts.
15
Int. Rev.
COGS
Int. Exp.
Mis. Ser.
Exp.
Prop. Tax
Exp.
Depre.
Exp.
3.40 continued.
TERTIA COMPANY
Statement of Income and Retained Earnings
Revenues:
Sales......................................................................
Interest Revenue................................................
Total Revenues...............................................
Expenses:
Cost of Goods Sold ..............................................
Property Tax Expense.......................................
Depreciation Expense........................................
Interest Expense ................................................
Miscellaneous Expenses....................................
Total Expenses...............................................
Net Income..................................................................
Less Dividends............................................................
Increase in Retained Earnings................................
Retained Earnings, Beginning of Year ...................
Retained Earnings, End of Year..............................
3.41
$ 212,000
700
$ 212,700
$ 126,500
1,700
2,000
500
56,800
187,500
$ 25,200
(2,000)
$ 23,200
76,000
$ 99,200
(4)
(14)
Cash
18,600
10,900
4,800
210,000
115,000
3,000
85,000
27,000
4,700
Notes Receivable
10,000
10,000
0
(3)
(5)
(10)
(17)
(19)
(15)
(4)
3-57
Accounts Receivable
33,000
228,000
210,000 (14)
51,000
Interest Receivable
600
600
0
(4)
Solutions
3.41 continued.
(6)
(7)
Merchandise Inventory
22,000
95,000
88,000
11,000
40,000
(17)
Advances to Employees
0
4,000
4,000
(8)
1,500
(19)
Prepaid Taxes
0
3,000
3,000
(1)
78,000
Accumulated Depreciation
Computer System
26,000
13,000 (13)
39,000
(9)
Delivery Trucks
0
60,000
60,000
Accumulated Depreciation
Delivery Trucks
0
4,500 (12)
4,500
(5)
Accounts Payable
36,000
115,000
95,000
16,000
Interest Payable
0
2,000
2,000
(17)
Solutions
Prepaid Insurance
4,500
3,000
Salaries Payable
6,500
6,500
1,300
1,300
Notes Payable
(6)
(11)
(3)
(19)
(18)
3-58
0
60,000
60,000
(9)
Dividend Payable
1,800
4,800
6,000
3,000
(2)
Taxes Payable
10,000
10,000
4,000 (20)
4,000
3.41 continued.
Consulting Fee Payable
0
4,800 (21)
4,800
(16)
600
1,400 (15)
1,400
Common Stock
40,000
11,000
51,000
(7)
(15)
(16)
(22)
(22)
Sales Revenue
226,600
227,200
600
(8)
(22)
(12)
(13)
Depreciation Expense
4,500
13,000
17,500 (22)
(17)
(18)
Salary Expense
74,500
1,300
75,800
(22)
(19)
(20)
Tax Expense
14,000
4,000
18,000 (22)
(1)
Insurance Expense
3,000
3,000
(22)
(21)
Consulting Expense
4,800
4,800 (22)
(10)
(11)
Interest Expense
3,000
2,000
5,000
(22)
3-59
(2)
Retained Earnings
45,800
6,000
15,400 (22)
55,200
Interest Revenue
300
300
(4)
Solutions
3.41 continued.
Transactions spreadsheet.
Balance Sheet
Accounts
Balance:
Beginning of
Period
ASSETS
Current Assets:
Cash
Accounts Receivable
Notes Receivable
Interest Receivable
Merchandise Inventory
Prepaid Insurance
Advances to Employees
Prepaid Property Taxes
Total Current Assets
Noncurrent Assets:
Computer System
Delivery Trucks
Accum. Depre.:
Comp. Sys.
Accum. Depre.:
Del. Trucks
Total Noncurrent
Assets
Total Assets
LIABILITIES AND SHAREHOLDERS EQUITY
Current Liabilities:
Accounts Payable
Dividend Payable
Salaries Payable
Taxes Payable
Advances from
Customers
Interest Payable
Consulting Services
Pay.
Total Current Liabilities
Noncurrent Liabilities:
Note Payable
Total Noncurrent
Liabilities
Total Liabilities
Shareholders' Equity:
Common Stock
Retained Earnings
Total Shareholders'
Equity
Total Liabilities and
Shareholders' Equity
Imbalance, if Any
Income Statement
Accounts
Solutions
18,600
33,000
10,000
600
22,000
4,500
-1,800
-3,000
10,900
-115,000
-3,000
Cash
Col.
From
Cust.
Record Recog.
Cash
Recog.
Cash
Sales Sales on Paid to Unpaid Paid for
from
Acct.
Emp. Sal. Exp. Taxes
Cus.
Adv.
7b
7c
8a
8b
9a
7a
210,000
-208,600
-85,000
10
-27,000
4,700
51,000
40,000
1,500
4,000
3,000
104,200
226,600
-10,000
-600
11,000
95,000 -88,000
-3,000
4,000
3,000
88,700
78,000
78,000
60,000
60,000
-26,000
-13,000
(39,000)
-4,500
(4,500)
52,000
140,700
94,500
198,700
36,000
1,800
6,500
10,000
-115,000 95,000
-1,800
16,000
3,000
1,300
4,000
3,000
-6,500
1,300
-10,000
600
1,400
4,000
-600
1,400
2,000
2,000
4,800
54,900
60,000
60,000
54,900
40,000
45,800
4,800
32,500
60,000
92,500
11,000
-3,000
-6,000
300
-88,000
-5,000
-4,500 -13,000
-1,300 -14,000
-4,000
-4,800
51,000
55,200
85,800
106,200
140,700
198,700
Insur.
Exp.
3-60
Int. Rev.
COGS
Depre.
Exp.
Sales
Rev.
Sales
Rev.
3.41 continued.
PORTOBELLO CO.
Income Statement
For the Year Ended December 31, Year 10
Revenues:
Sales .................................................................................................
Interest ............................................................................................
Total Revenues ..........................................................................
Expenses:
Cost of Goods Sold..........................................................................
Depreciation....................................................................................
Salaries ............................................................................................
Taxes ................................................................................................
Insurance.........................................................................................
Consulting........................................................................................
Interest ............................................................................................
Total Expenses...........................................................................
Net Income .....................................................................................
3-61
$ 227,200
300
$ 227,500
$ 88,000
17,500
75,800
18,000
3,000
4,800
5,000
$ 212,100
$ 15,400
Solutions
3.41 continued.
PORTOBELLO CO.
Balance Sheet
December 31, Year 10
Assets
Current Assets:
Cash..................................................................
Accounts Receivable .....................................
Merchandise Inventories ..............................
Prepaid Insurance..........................................
Advances to Employees................................
Prepaid Property Taxes ................................
Total Current Assets ................................
Noncurrent Assets:
Computer Systemat Cost........................
Less Accumulated Depreciation .................
Delivery Trucks ..............................................
Less Accumulated Depreciation .................
Total Noncurrent Assets..........................
Total Assets................................................
4,700
51,000
40,000
1,500
4,000
3,000
$ 104,200
$ 78,000
(39,000)
$ 60,000
(4,500)
$ 39,000
55,500
$ 94,500
$ 198,700
Solutions
3-62
$ 16,000
2,000
3,000
1,300
4,000
4,800
1,400
$ 32,500
60,000
$ 92,500
$ 51,000
55,200
$ 106,200
$ 198,700
3.42
Cash
15,600
37,500
164,600
151,500
21,000
3,388
4,800
6,000
4,812
(E)
Inventory
46,700
172,100
158,100
60,700
(A)
(B)
(D)
(G)
(H)
(I)
(J)
(F)
(C)
(G)
59,700
(J)
6,000
65,700
(G)
(H)
Common Stock
50,000
50,000
3-63
(B)
40,300
Prepayments
1,500
300
1,800
Accumulated Depreciation
2,800
3,300 (K)
6,100
Accounts PayableMerchandise
37,800
(D)
164,600
172,100
(E)
45,300
Accounts Receivable
32,100
159,700
151,500
(I)
(L)
(M)
Solutions
3.42 a. continued.
Sales
(M)
(G)
(I)
Solutions
197,200
37,500
159,700
(A)
(C)
Selling and
Administrative Expense
19,000
19,000 (M)
Interest Expense
4,000
4,000
(M)
3-64
(F)
(M)
(K)
Depreciation Expense
3,300
3,300 (M)
(L)
(M)
3.42 a. continued.
Transactions spreadsheet.
Balance Sheet
Accounts
Balance:
Beginning of
Period
Recog. Pay. To
Sales on Mer.
Acct.
Sup.
1
ASSETS
Current Assets:
Cash
Accounts Receivable
Inventories
Prepayments
Total Current Assets
Noncurrent Assets:
Prop., Plant, &
Equipment
Accumulated
Depreciation
Total Noncurrent
Assets
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Acct. Pay.Merchan.
Income Tax Payable
Other Current
Liabilities
Total Current
Liabilities
Noncurrent Liabilities:
Mortgage Payable
Total Noncurrent
Liabilities
Total Liabilities
Shareholders' Equity:
Common Stock
Retained Earnings
Total Shareholders'
Equity
Total Liabilities and
Shareholders' Equity
Imbalance, if Any
Income Statement
Accounts
Recog.
Merch.
Pur. On
Acct.
Recog.
COGS
Pay
Pay
Emp. & Income
Prov. Of Taxes
S&A
Serv.
6
7
15,600 189,000
-164,600
-21,000
32,100 -151,500 159,700
46,700
172,100 -158,100
1,500
300
95,900
-3,388
10
-4,800
59,700
-2,800
Acq.
Equip.
Recog. Balance:
Inc. Tax End of
Exp. Period
11
-6,000
4,812
40,300
60,700
1,800
107,612
6,000
65,700
-3,300
(6,100)
56,900
152,800
59,600
167,212
37,800
3,388
-164,600 172,100
-3,388
2,900
3,584
-1,700
1,200
44,088
50,084
50,000
-800
49,200
50,000
94,088
50,000
8,712
45,300
3,584
49,200
99,284
37,500 159,700
-158,100 -19,000
-3,300
-4,000
-3,584
50,000
17,928
58,712
67,928
152,800
167,212
3-65
COGS
S&A Exp.
Solutions
Depre.
Exp.
Int.
Exp.
Inc. Tax
Exp.
3.42 a. continued.
COMPUTER NEEDS, INC.
Income Statement
For the Years Ended December 31
Year 8
Amounts
Solutions
3-66
Year 9
Percentages
Amounts
Percentages
100.0%
(76.2)
$ 197,200
(158,100)
100.0%
(80.2)
(11.4)
(1.9)
(2.6)
(2.2)
5.7%
(19,000)
(3,300)
(4,000)
(3,584)
$ 9,216
(9.6)
(1.7)
(2.0)
(1.8)
4.7%
3.42 a. continued.
COMPUTER NEEDS, INC.
Balance Sheet
December 31
Year 8
Assets
Cash.......................................
Accounts Receivable..........
Inventories ...........................
Prepayments .......................
Total Current Assets.....
Property, Plant and
Equipment:
At Cost...........................
Less Accumulated
Depreciation...............
Net..................................
Total Assets.....................
Liabilities and Shareholders Equity
Accounts Payable
Merchandise.....................
Income Tax Payable...........
Other Current Liabilities...
Total Current Liabilities .................................
Mortgage Payable...............
Total Liabilities ...............
Common Stock....................
Retained Earnings ..............
Total Shareholders
Equity.............................
Total Liabilities and
Shareholders Equity...
Year 9
Amounts
Percentages
$ 15,600
32,100
46,700
1,500
$ 95,900
10.2%
21.0
30.6
1.0
62.8%
4,812
40,300
60,700
1,800
$ 107,612
2.9%
24.1
36.3
1.1
64.4%
$ 59,700
39.0%
$ 65,700
39.3%
(2,800)
(1.8)
$ 56,900
37.2%
$ 152,800 100.0%
(6,100)
$ 59,600
$ 167,212
(3.7)
35.6%
100.0%
$ 37,800
3,388
2,900
24.8%
2.2
1.9
$ 45,300
3,584
1,200
27.1%
2.2
.7
$ 44,088
50,000
$ 94,088
$ 50,000
8,712
28.9%
32.7
61.6%
32.7%
5.7
$ 50,084
49,200
$ 99,284
$ 50,000
17,928
30.0%
29.4
59.4%
29.9%
10.7
$ 58,712
38.4%
$ 67,928
40.6%
$ 152,800
100.0%
$ 167,212
100.0%
3-67
Amounts
Percentages
Solutions
3.42 continued.
b. Although sales increased between Year 8 and Year 9, net income as a
percentage of sales declined from 5.7% to 4.7%. The decline occurs
primarily as a result of an increase in the cost of goods sold to sales
percentage. The increased percentage might suggest (1) increased
competition, which forced Computer Needs, Inc. to lower its prices, (2)
increased cost of merchandise, which Computer Needs, Inc. could not or
chose not to pass on to customers, or (3) a shift in product mix to lower
margin products. The percentage is also affected by the estimates
made for the December 31, Year 9 balances in Accounts Receivable,
Inventories, and Accounts Payable. The following summarizes the
effects of an overstatement (O/S), understatement (U/S), or no effect
(NO) of each of these three accounts, assuming the other two accounts
are correctly stated, on the cost of goods sold to sales percentage.
Effect on Cost of Goods Sold
December 31, Year 9
to Sales Percentage
Balance Is:
Numerator Denominator Net Effect
Accounts Receivable Overstated....
NO
O/S
U/S
Accounts Receivable Understated .
NO
U/S
O/S
Inventories Overstated.....................
U/S
NO
U/S
Inventories Understated...................
O/S
NO
O/S
Accounts Payable Overstated.........
O/S
NO
O/S
Accounts Payable Understated ......
U/S
NO
U/S
Of course, there could be compounding or offsetting errors in each of
these three accounts.
The selling and administrative expense to sales percentage declined.
Compensation of employees is largely a fixed cost, so the increased sales
should permit Computer Needs, Inc. to spread this cost over the larger
sales base. The estimate of Accounts Receivable and Other Current
Liabilities on December 31, Year 9 also can affect this percentage.
The reduced expense percentage for depreciation reflects the
spreading of this fixed cost over a larger sales base.
Although
depreciation expense increased between Year 8 and Year 9, sales
increased by a higher percentage.
The reduced expense percentage for interest likewise results from
spreading this fixed cost over a larger sales base. Note that interest
expense was the same amount in Year 8 and Year 9. Given that the
amount of the loan outstanding decreased, the interest rate on the loan
must have increased.
The decreased income tax percentage results from a lower income
before taxes to sales percentage. The income tax rate was 28 percent in
both years.
Solutions
3-68
3.42 b. continued.
Year 8
Amounts
Year 9
Percentages
Amounts
Percentages
100.0%
(28.0)
72.0%
$ 12,800
(3,584)
$ 9,216
100.0%
(28.0)
72.0%
d.
The explanation in Part b. applies here as well. The GAP includes its
promotion costs in selling and administrative expenses, whereas more of
those of The Limited appear in cost of goods sold.
3-69
Solutions
3.43 continued.
e.
The interest expense to sales percentage decreased for The GAP and
increased for The Limited. One possible explanation is The GAP reduced
the amount of debt outstanding or grew it at a slower pace than that of
The Limited. Another possibility is that the market viewed The GAP as
increasingly less risky, permitting it to borrow at lower interest rates.
On the other hand, the market viewed The Limited as more risky and
required it to pay a higher interest rate. These two possibilities are not
independent. Perhaps The GAP was able to borrow at a lower rate
because it reduced the amount of debt in its capital structure. The
higher interest rate for The Limited may reflect increased risk from an
increased proportion of debt in its capital structure.
f.
The Limited
Year 8
Year 9
Year 10
12.4%
14.6%
16.3%
(4.2)
8.2%
(5.5)
9.1%
33.9%
37.7%
Year 8
Year 9
Year 10
5.8%
6.5%
6.9%
(6.6)
9.7%
(2.0)
3.8%
(2.3)
4.2%
(2.4)
4.5%
40.5%
34.5%
35.4%
34.8%
The income tax expense to income before income taxes percentages for
The GAP continually increased while those of The Limited remained
relatively stable. One possible explanation is that The GAP expanded
its operations into other countries and perhaps experienced higher
income tax rates in those countries than it experiences in the United
States.
g.
Solutions
The profit margins of The Limited are just slightly larger than that for
Wal-Mart in Exhibit 3.8. One would expect specialty retailers to
differentiate their products and services more than Wal-Mart and
achieve a higher profit margin percentage. The question is: How much
higher? The GAP achieves profit margins similar to those for Kellogg
(branded foods) and Omnicom Group (creative marketing services).
Extensive competition characterizes specialty apparel retailing, which
dampens profit margins. However, new fashions and trends stimulate
demand and permit higher profit margins. One might, therefore, expect
an average profit margin for specialty retailers somewhere between
3-70
3.43 g. continued.
that of The Limited and The GAP. The Limited appears to have
performed worse during this period than one might expect and The GAP
performed better.
3.44
b.
3-71
Solutions
3.44 continued.
c.
d.
Coca-Cola Company
Year 10
35.8%
PepsiCo
Year 11
Year 12
Year 10
Year 11
Year 12
32.3%
28.1%
17.5%
18.8%
20.3%
(9.6)
22.7%
(7.8)
20.3%
(5.6)
11.9%
(6.4)
12.4%
(6.5)
13.8%
29.7%
27.8%
32.0%
34.0%
32.0%
Cokes tax burden by this measure is less than that of PepsiCo in Year
11 and Year 12. The income tax is a tax on income before taxes and not
on sales. Thus, this measure more accurately reflects the income tax
burden. The larger income tax expense to sales percentages for Coke
results from Coke having higher income before taxes to sales
percentages.
e.
3.45
Solutions
3-72
3.45 continued.
terest expense to sales percentage also favorably affected the profit margin.
Nokia may have reduced the amount of debt in its capital structure or
replaced debt with a higher interest rate with debt carrying a lower interest
rate. It is also possible that Nokia grew its debt but at a less rapid pace
than the growth in sales, permitting the interest expense to sales
percentage to decline.
Offsetting these favorable effects on the profit margin percentage is a
reduction in the other revenues percentage. We have no information to
interpret this change. The income tax expense to sales percentage
increased, the result in part of an increase in net income before income
taxes. The average income tax rate also increased, as the following analysis
shows.
3.46
Year 7
Year 8
Year 9
15.7%
(4.0)
11.7%
18.3%
(5.7)
12.6%
18.9%
(6.1)
12.8%
(2)/(1) .........................................................
25.5%
31.1%
32.3%
Year 11
Year 12
21.8%
(7.1)
14.7%
20.3%
(6.4)
13.9%
16.7%
(5.0)
11.7%
(2)/(1) .........................................................
32.6%
31.5%
29.9%
3-73
Solutions
3.47
3.48
Solutions
3-74
3.48 a. continued.
Prepaid Rent....................................................................
Rent Expense..............................................................
Assets
+16,000
= Liabilities +
16,000
16,000
Shareholders'
Equity
(Class.)
+16,000
IncSt RE
b. The Prepaid Rent account on the balance sheet for the end of Year 3
should represent eight months of prepayments. The rent per month is
$2,500 (= $30,000/12), so the required balance in the Prepaid Rent
account is $20,000 (= 8 X $2,500). The balance in that account is
already $16,000, so the adjusting entry must increase it by $4,000 (=
$20,000 $16,000).
Prepaid Rent....................................................................
Rent Expense..............................................................
Assets
+4,000
= Liabilities +
4,000
4,000
Shareholders'
Equity
(Class.)
+4,000
IncSt RE
The Rent Expense account will have a balance at the end of Year 3
before closing entries of $26,000 (= $30,000 $4,000). This amount
comprises $16,000 (= $2,000 X 8) for rent from January through August
and $10,000 (= $2,500 X 4) for rent from September through December.
c.
The Prepaid Rent account on the balance sheet at the end of Year 4
should represent two months of prepayments. The rent per month is
$3,000 (= $18,000/6), so the required balance in the Prepaid Rent
account is $6,000 (= 2 X $3,000). The balance in that account is
$20,000, so the adjusting entry must reduce it by $14,000 (= $20,000
$6,000).
3-75
Solutions
3.48 c. continued.
Rent Expense ..................................................................
Prepaid Rent..............................................................
Assets
14,000
= Liabilities +
14,000
14,000
Shareholders'
Equity
(Class.)
14,000
IncSt RE
The Rent Expense account will have a balance at the end of Year 4
before closing entries of $32,000 (= $18,000 + $14,000). This amount
comprises $20,000 (= $2,500 X 8) for rent from January through August
and $12,000 (= $3,000 X 4) for rent from September through December.
d.
= Liabilities +
1,000
1,000
1,000
Shareholders'
Equity
(Class.)
+1,000
IncSt RE
= Liabilities +
Shareholders'
Equity
(Class.)
750
IncSt RE
Solutions
3-76
750
750
3.48 continued.
f.
= Liabilities +
+5,000
5,000
5,000
Shareholders'
Equity
(Class.)
5,000
IncSt RE
= Liabilities +
10,000
2,000
8,000
Shareholders'
Equity
(Class.)
+8,000
IncSt RE
3-77
Solutions
3.49
Solutions
3-78