EXERCISE 9-1
(a)
Under the cost principle, the acquisition cost for property, plant and
equipment includes all expenditures necessary to acquire the asset and
make it ready for its intended use. For example, the cost of factory
machinery includes the purchase price, freight costs paid by the
purchaser, insurance costs during transit, and installation costs.
(b)
1.
2.
3.
4.
expense
Delivery Truck
Delivery Truck
Licence Expense
Maintenance Expense
5.Prepaid Insurance
6.Land
7.Land provements
8.PropertyTax
EXERCISE 9-4
(a)
Type of Asset
Book value, January 1, 2004
Less: Salvage value
Amortizable cost
Building
$458,0001
62,000
$396,000
153
24
$ 26,400
$ 35,200
Revised remaining useful life in years
Revised annual amortization
Equipment
$74,0002
3,600
$70,400
1 $800,000
- $342,000 = $458,000
- $46,000 = $74,000
3 25 - 10 = 15
44 - 2 = 2
2 $120,000
(b)
Dec. 31
Amortization Expense—Building .........................
Accumulated Amortization—Building ..........
26,400
Amortization Expense—Equipment .....................
Accumulated Amortization—Equipment ......
35,200
Accumulated Amortization—Machinery ........................
Machinery .............................................................
62,000
Amortization Expense ...................................................
5,500
26,400
35,200
EXERCISE 9-6
Jan.
1
June 30
62,000
Accum. Amortization—Computer..........................
($33,000 X 1/3 X 6/12)
Dec. 31
31
5,500
Cash .............................................................................
Accumulated Amortization—Computer .........................
($33,000 X 2/3 = $22,000; $22,000 + $5,500)
Loss on Disposal [$5,000 - ($33,000 - $27,500)] ..........
Computer ......................................................
5,000
27,500
Amortization Expense ...................................................
Accumulated Amortization—Truck........................
[($27,000 - $3,000) X 1/5]
4,800
Cash .............................................................................
Accumulated Amortization—Truck ................................
[($27,000 - $3,000) X 4/5]
Gain on Disposal ..........................................
Truck.............................................................
9,000
19,200
500
33,000
4,800
1,200
27,000
EXERCISE 9-7
1.
Amortization is the process of allocating the cost of a long-lived asset to expense over the asset’s useful life.
Because the value of land generally does not decline with time and usage, its usefulness and revenue producing
ability does not decline. In addition, the useful life of land is indefinite. Therefore it would be incorrect for the
student to amortize the land.
2.
Goodwill is an intangible asset with an indefinite life. According to generally accepted accounting principles,
goodwill is not amortized but reviewed annually for impairment. If a permanent decline in value has occurred the
goodwill is written down and an impairment loss is recorded on the statement of earnings.
Therefore the
amortization entry should be reversed and no decline in value recorded until am impairment in value occurs.
1.
This is a violation of the cost principle. Because current market values are subjective and not reliable, they are not
used to increase the recorded value of an asset after acquisition. The appropriate accounting treatment is to leave
the building on the books at its zero book value.
2. EXERCISE 9-8
(a)
Jan.
April
July
2
1
1
Sept.
1
30
Patents .......................................................................
Cash.......................................................................
450,000
Goodwill .......................................................................
Cash.......................................................................
360,000
Franchise .......................................................................
Cash.......................................................................
250,000
Research Expense .........................................................
Cash.......................................................................
185,000
Development Expense ...................................................
Cash.......................................................................
50,000
450,000
360,000
250,000
185,000
50,000
(b)
Dec. 31
Amortization Expense–Patents
($450,000 ÷ 5) ........................................................
Amortization Expense–Franchise
[($250,000 ÷ 10) X 6/12] ........................................
Patents ...................................................................
Franchise ...............................................................
Ending balances, December 31, 2004:
Patent
Goodwill
Franchise
= $360,000 ($450,000 - $90,000)
= $360,000
= $237,500 ($250,000 - $12,500)
90,000
12,500
90,000
12,500
EXERCISE 9-9
(a)
Account
Accumulated Amortization –
Plant and
Buildings
Financial Statement
Section
Balance Sheet
Property,
Equipment
Accumulated Amortization –
Balance
Intangibles
Sheet
Finite-Life Intangible Assets
Accumulated Amortization –
Plant and
Machinery and Equipment
Balance Sheet
Property,
Equipment
Accumulated Amortization
Plant and
– Other Property, Plant and Equipment
Equipment
Balance Sheet
Property,
Accumulated Amortization –
Plant and
Telecommunication Assets
Equipment
Balance Sheet
Property,
Amortization Expense
Expenses
Statement of Earnings
Operating
Buildings
Plant and
Balance Sheet
Property,
Cash and Cash Equivalents
Assets
Balance Sheet
Current
Cash Paid for Capital Expenditures
Activities
Cash Flow Statement
Investing
Equipment
Common Shares
Shareholders’ Equity
Balance
Finite-Life Intangible Assets
Balance Sheet
Goodwill
Intangibles
Balance
Impairment Charge
Expenses
Statement of Earnings
Indefinite Life – Intangible Assets
Intangibles
Balance
Land
Plant and
Balance Sheet
Equipment
Sheet
Intangibles
Sheet
Other
Sheet
Property,
EXERCISE 9-9
(a)
(Continued)
Account
Section
Financial Statement
Machinery and Equipment
Plant and
Balance Sheet
Property,
Other Long-term Assets
term Assets
Balance Sheet
Long-
Other Property, Plant and Equipment
Plant and
Balance Sheet
Property,
Balance Sheet
Property,
Balance Sheet
Property,
Equipment
Equipment
Plant Under Construction
Plant and
Equipment
Telecommunications Assets
Plant and
Equipment
(b)
BCE Inc.
Balance Sheet (Partial)
December 31, 2002
(in millions)
Property, plant and equipment
Land ........................................................................................
Buildings ..................................................................................
Less: Accumulated amortization ..............................................
Plant under construction ..........................................................
Machinery and equipment ........................................................
Less: Accumulated amortization ..............................................
Telecommunications assets .....................................................
$
$2,585
1,307
$6,144
3,253
$34,573
99
1,278
1,743
2,891
Less: Accumulated amortization ..............................................
Other property, plant and equipment .......................................
Less: Accumulated amortization ..............................................
Total property, plant and equipment
Intangible assets
Finite-life intangible assets .......................................................
Less: Accumulated amortization ..............................................
Goodwill ...................................................................................
Indefinite-life intangible assets .................................................
Total intangible assets ....................................................
21,848
$357
139
$3,021
1,335
12,725
218
18,954
1,686
10,103
900
12,689
EXERCISE 9-10
(a) ($ in millions)
1.
Return on assets
$195.9
= 4.6%
($4,312.6  $4,254.3)  2
2.
Asset turnover
$9,926.5
= 2.3 times
($4,312.6  $4,254.3)  2
3.
(b)
Profit margin
$195.9
$9,926.5
= 2.0%
Profit Margin X Asset Turnover = Return on Assets
= 2.0% X 2.3 times = 4.6%
(c)
Asset turnover and profit margin vary considerably across industries. Therefore, when you have a diverse group
of businesses from several industry types combined into one company, such as in Empire Company, the ability
to compare these ratios to other businesses becomes very difficult. Empire Company would almost need to
calculate ratios for each of the separate industry segments to allow for a meaningful analysis.
EXERCISE 9-11
(a)
Year
2004
2005
(1)
Straight-Line
$12,833
12,833
Units-of-Activity
$13,090
11,550
Double
Declining-Balance
$29,667
19,775
Straight-Line Method
$89,000 - $12,000 = $12,833 per year
6 years
2004 and 2005 amortization expense = $12,833
(2)
Units-of-Activity Method
$89,000 - $12,000 = $7.70 per hour
10,000 hours
2004 amortization expense = 1,700 hours X $7.70 = $13,090
2005 amortization expense = 1,500 hours X $7.70 = $11,550
(3)
Declining-Balance Method
The declining-balance rate is 1/6 X 2 = 33⅓%
2004 amortization expense = $89,000 X 33⅓% = $29,667
Book value January 1, 2005 = $89,000 – $29,667 = $59,333
2005 amortization expense = $59,333 X 33⅓% = $19,775
(b) Straight line method results in the highest net earnings in 2004 and units-ofactivity results in the highest net earnings in 2005.
(c)
Cash flow is the same under all three methods. Amortization is an
allocation of the cost of a long-lived asset and not a cash expenditure.
PROBLEM 9-3A
(a) April 1
May
1
1
Land ........................................................ 2,630,000
Cash .................................................
630,000
Note Payable ....................................
2,000,000
Amortization Expense ..............................
Accumulated Amortization
—Equipment ($750,000 X 1/10 X 4/12)
25,000
Cash.........................................................
Accumulated Amortization—Equipment
($750,000 X 4/10 + $25,000) ...................
Loss on Disposal ......................................
Equipment ...................................
350,000
Cost
Accum. amort.—equipment
[($750,000 X 1/10) X 4 + $25,000)]
Book value
Cash proceeds
Loss on disposal
25,000
325,000
75,000
750,000
$750,000
325,000
425,000
350,000
$(75,000)
PROBLEM 9-3A (Continued)
(a) (Continued)
June 1
Cash......................................................... 1,800,000
Land ..................................................
300,000
Gain on Disposal ...............................
1,500,000
July
Equipment ................................................ 1,000,000
Cash ..................................................
Note Payable .....................................
1
Dec. 31
31
Amortization Expense ..............................
Accumulated Amortization
—Equipment ($470,000 X 1/10) ........
47,000
Accumulated Amortization—Equipment ...
Equipment ...................................
470,000
Cost
Accum. amort.—equipment
($470,000 X 1/10 X 10)
Gain (loss) on disposal
250,000
750,000
47,000
470,000
$470,000
470,000
$
0
PROBLEM 9-3A (Continued)
(b) Dec. 31
31
Amortization Expense ............................
Accumulated Amortization
—Buildings ($28,500,000 X 1/40) ....
712,500
712,500
Amortization Expense ............................ 4,728,000
Accumulated Amortization
—Equipment....................................
4,728,000
($46,780,000* X 1/10)
[($1,000,000 X 1/10) X 6/12]
$4,678,000
50,000
$4,728,000
*$48,000,000 - $750,000 - $470,000 = $46,780,000
31
Interest Expense ....................................
Interest Payable ..............................
($2,000,000 X 8% X 9/12)
($750,000 X 8% X 6/12)
(c)
150,000
150,000
$120,000
30,000
$150,000
YOUNT CORPORATION
Balance Sheet (Partial)
December 31, 2005
Property, plant and equipment*
Land .......................................................
Buildings ................................................. $28,500,000
Less: Accumulated amortization
—buildings .............................................. 11,400,000
Equipment .............................................. $47,780,000
Less: Accumulated amortization
—equipment ........................................... 39,005,000
Total property, plant and equipment ..
*See T accounts on the following page.
$ 6,330,000
17,100,000
8,775,000
$32,205,000
PROBLEM 9-3A (Continued)
(c) (Continued)
Land
Dec. 31, 2004
April 1, 2005
4,000,000
2,630,000
Dec. 31, 2005
Bal. 6,330,000
June 1, 2005
300,000
Buildings
Dec. 31, 2004
28,500,000
Dec. 31, 2005
Bal. 28,500,000
Equipment
Dec. 31, 2004
July 1, 2005
48,000,000
1,000,000
Dec. 31, 2005
Bal. 47,780,000
May 1, 2005
Dec. 31, 2005
750,000
470,000
Accumulated Amortization—Buildings
Dec. 31, 2004
Dec. 31, 2005
10,687,500
712,500
Dec. 31, 2005
Bal. 11,400,000
Accumulated Amortization—Equipment
May 1, 2005
Dec. 31, 2005
325,000
470,000
Dec. 31, 2004
May 1, 2005
Dec. 31, 2005
Dec. 31, 2005
35,000,000
25,000
47,000
4,728,000
Dec. 31, 2005
Bal. 39,005,000
(a) Jan. 2 Patent #1 ......................................
Cash ........................................
22,500
22,500
July 1 Research Expense ....................... 220,000
Cash ........................................
1 Patent #2 (Development Costs) ....
Cash ........................................
220,000
60,000
60,000
Sept. 1 Advertising Expense ..................... 110,000
Cash ........................................
110,000
Oct. 1 Copyright ...................................... 160,000
Cash ........................................
160,000
Dec. 31 Impairment Loss
($210,000 – $150,000)...........
Goodwill ...................................
(b) Dec. 31 Amortization Expense ...................
Patent #1 .................................
[($70,000 X 1/10) + ($22,500 X 1/9)]
60,000
60,000
9,500
9,500
31 Amortization Expense ...................
5,600
Copyright..................................
[($48,000 X 1/10) + ($160,000 X 1/50 X 3/12)]
5,600
31 Amortization Expense ...................
1,500
Patent #2 .................................
[($60,000 ÷ 20 years) x 6/12 = $1,500)
1,500
PROBLEM 9-8A (Continued)
(c)
Intangible Assets
Patents ($152,500 cost less $18,000 amort.) (1)
Copyright ($208,000 cost less $24,800 amort.) (2)
Goodwill................................................
Total Intangible Assets
$134,500
183,200
150,000
$467,700
(1)
Cost-Patent #1 ($70,000 + $22,500) + Patent #2 $60,000 = $152,500
Amortization-Patent #1 ($7,000 + $9,500) + Patent #2
$1,500 = $18,000
(2)
Cost-Copyright $48,000 + $160,000 = $208,000
Amortization-Copyright $19,200 + $5,600 = $24,800
PROBLEM 9-9A
(a)
($ in thousands)
Brewery
Profit margin
Sleeman Breweries ............ Big
$12,321
$157,053
= 7.8%
Rock
$1,218
$24,909
= 4.9%
Return on assets
$12,321
($220,081  $197,642) 2
= 5.9%
$1,218
($33,061  $31,346)  2
= 3.8%
Asset turnover
$157,053
($220,081  $197,642) 2
= 0.75 times
$24,909
($33,061  $31,346) 2
= 0.77 times
PROBLEM 9-9A (Continued)
(b) Based on profit margin we can see that Sleeman is slightly more
profitable than Big Rock. However, both retailers have profit
margins below the industry average of 9.2%, which indicates that
both Sleeman and Big Rock are less profitable than the average
brewery.
The return on assets ratio indicates that Sleeman is generating a
better return then Big Rock based on the amount of assets
invested in the business. However, again, based on the industry
average of 7.4% both companies are generating a lower return
on their assets than most other companies in the industry.
The asset turnover ratio measures how efficiently a company
uses its assets to generate sales. It shows the dollars of sales
generated by each dollar invested in assets. Sleeman’s asset
turnover ratio (0.75) was slightly lower than Big Rock’s (0.77) in
2002. Therefore, it could be concluded that Big Rock was more
efficient than Sleeman during 2002 in utilizing assets to generate
sales. Both companies are slightly lower than the industry
average of 0.8 times.
The ability to compare the two companies is complicated by the
fact that Sleeman Breweries is far larger than Big Rock Brewery.
Its size, and resulting economies of scale, may account for part
of Sleeman’s better profitability.
PROBLEM 9-10A
(a)
As evidenced by the high profit margin compared to the lower
asset turnover (when compared to other companies in the
industry), the company is focusing its efforts on maximizing
profits versus having a high volume of sales. The company
could be maximizing profits by either charging a higher selling
price for its products, by focusing on cost control or some
combination of both.
(b)
The company’s strategy appears to be to sell a lower number of
high-end computers with strong profit margins. It appears to be
willing to accept a lower volume of sales (as evidenced by the
lower asset turnover ratio) to achieve this sales objective.
Given the company’s high return on asset ratio, this strategy
appears to be very successful.
Note to instructors: Students may be interested to learn that the
company information produced here was taken from Microsoft
Corporation.
*PROBLEM 9-11A
(a)
STRAIGHT-LINE AMORTIZATION
Calculation
Amortizable
Book
Year
Value
Cost
b
Annual
Amortization Accumulated
Amortization
X
Rate
2005 $231,000a
2006 231,000
2007 231,000
2008 231,000
2009 231,000
a
End of Year
=
20%b
20%
20%
20%
20%
Expense
$46,200
46,200
46,200
46,200
46,200
Amortization
$ 46,200 $196,800
92,400 150,600
138,600 104,400
184,800
58,200
231,000
12,000
$243,000 – $12,000 = $231,000
1/5 = 20%
SINGLE-DECLINING-BALANCE AMORTIZATION
Calculation
Book Value
Beginning
Book
Year
Value
of Year
2005
2006
2007
2008
2009
$243,000
194,400
155,520
124,416
99,533
End of Year
Annual
Amortization Accumulated
Amortization
X
Rate
20%c
20%
20%
20%
20%
=
Expense
$48,600
38,880
31,104
24,883
87,533d
Amortization
$ 48,600 $194,400
87,480 155,520
118,584 124,416
143,467
99,533
231,000
12,000
c
d
1/5 = 20%
Adjusted so ending book value will equal salvage value
($231,000 - $143,467 = $87,533)
*PROBLEM 9-11A (Continued)
(b) Straight-line amortization provides the lower amount for 2005
amortization expense and, therefore, the higher 2005 earnings.
Over the five-year period, both methods result in the same total
amortization expense ($231,000) and, therefore, the same total
earnings.
Note to instructors: You might wish to point out to students that
although the single-declining-balance method is the most often
used method, it does result in large amounts of amortization at
the end of the asset’s useful life in order to adjust to salvage
value. Often, this is not done in practice. Instead, the asset
continues to be amortized as long as it is in use.
(c) Amortization is a noncash expense. Therefore cash flow would
be the same regardless of the method chosen.
*PROBLEM 9-12A
(a)
1.
STRAIGHT-LINE AMORTIZATION
Calculation
Amortizable
Book
Years
Value
Cost
1
2
3
$72,000*
,,72,000
,,20,000
End of Year
Annual
Amortization Accumulated
Amortization
X
Rate (1/3)
Expense
1/3
1/3
1/3
$ 24,000
24,000
24,000
Amortization
$ 24,000
48,000
72,000
$56,000
32,000
8,000
*$80,000 - $8,000 = $72,000
2.
UNITS-OF-ACTIVITY AMORTIZATION
Calculation
Units of Activity
Book
Year
X
Value
1
2
3
120,000
100,000
80,000
1
End of Year
Annual
Amortization Accumulated
Amortization
Cost/Unit1
$0.24
0.24
0.24
=
Expense
$28,800
24,000
19,200
Amortization
$28,800
52,800
72,000
Amortizable cost per unit = ($80,000 - $8,000) ÷ 300,000 km
= $0.24 per kilometre.
$51,200
27,200
8,000
*PROBLEM 9-12A (Continued)
(b)
1.
Cost ....................................................
Accum. amort. ....................................
Book value..........................................
Cash proceeds ...................................
Gain (loss) on disposal .......................
(i) Straight
Line
$80,000
48,000
32,000
25,000
$ (7,000)
(ii) Units-of
-Activity
$80,000
52,800
27,200
25,000
$ (2,200)
2.
Amortization expense .........................
Add: Loss on disposal .......................
Net expense .......................................
$48,000
7,000
$55,000
$52,800
2,200
$55,000
In total the effect on net earnings is the same under both
methods. This is because the method of amortization selected
only affects the timing of the expense recognition. In total over
the life of the asset the expense recognized is the same.
BRIEF EXERCISE 10-1
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Current liability
Current liability
Current liability
Current liability
Current liability
Current liability
Current asset
Not recorded
Current liability
Current liability
BRIEF EXERCISE 10-4
Property tax expense June 30 statement of earnings:
$25,200 X 6/12 months = $12,600
Prepaid property tax June 30 balance sheet:
$2,100 x 6 months = $12,600
Property tax payable June 30 balance sheet
$2,100 x 12 months = $25,200
PROBLEM 10-1A
(a) 1. Not on balance sheet
arrived after
FOB
destination
and
year-end
2. Current liabilities section
Bonus payable
3. Current liabilities section
Salaries payable
CPP payable
EI payable
Income tax payable
4. Current liabilities section
Unearned revenue
5. Current liabilities section
Environmental liability
6. Current liabilities section
Interest payable
7. Current Liabilities
4
5
$25,000
$250,0005
$1676
$25,000
Income Taxes Payable
$10,0007
Calculations:
($10,000 X 4/5) – (4.95% X $8,000) – (2.10% X $8,000) –
($3,000 x 4/5) = $5,036
3
$5,0361
7922
4033
2,4004
Note payable
1
2
$36,000
(4.95% X $8,000) X 2 = $792
(2.10% X $8,000) X 2.4 = $403
$3,000 x 4/5 = $2,400
Note: Because this contingent liability is likely and
estimable, it should be recorded in the accounts
6
7
(b)
$25,000 X 8% X 1/12 = $167
$240,000 - $250,000
The notes should disclose information on the Note Payable
including the interest rate and repayment term.
PROBLEM 10-7A
(a)
(A)
Cash
Payment
Period
April 1, 2004
March 31, 2005
March 31, 2006
March 31, 2007
March 31, 2008
March 31, 2009
Total
1
(B)
Interest
Expense
(D) X 10%
$ 26,380
26,380
26,380
26,380
26,380
$131,900
$10,000
8,362
6,560
4,578
2,4001
$31,900
(C)
Principal
Reduction
(A) - (B)
$ 16,380
18,018
19,820
21,802
23,980
$100,000
(D)
Balance
(D) - (C)
$100,000
83,620
65,602
45,782
23,980
0
difference of $2 due to rounding.
April 1/04
March 31/05
March 31/06
Cash ..........................................
Note Payable .......................
100,000
Note Payable ..............................
Interest Expense .........................
Cash ....................................
16,380
10,000
Note Payable ..............................
Interest Expense .........................
Cash ....................................
18,018
8,362
100,000
26,380
26,380
(b)
SKI HILL
Balance Sheet (Partial)
December 31, 2006
Current liabilities
Current portion of 10% notes payable
Long-term liabilities
Note payable, 10%, due in 2009
($65,602 - $19,820)
$19,820
45,782
BRIEF EXERCISE 10-8
Monthly
Interest
Period
(B)
Interest
Expense
(D) X 7% ÷ 12 mos.
(A)
Cash
Payment
(C)
Reduction of
Principal
(A)- (B)
(D)
Principal
Balance
(D) - (C)
Issue date
$10,000.00
1
$116.11
$58.33
$57.78
9,942.22
2
116.11
58.00
58.11
9,884.11
3
116.11
57.66
58.45
9,825.66
EXERCISE 10-8 (Continued)
(b)
Semi-annual
Interest
Period
(A)
Cash
Payment
Issue Date
June 30, 2005
Dec. 31, 2005
$7,578.52
7,578.52
01
(B)
Interest
Expense
(D) X 8% X
6/12
$6,000.00
5,936.86
(C)
Reduction
of Principal
(A) – (B)
$1,578.52
1,641.66
01476.73
(D)
Principal
Balance
(D) – (C)
$150,000.00
148,421.48
146,779.82
22,000
0
Issue of Note
2004
Dec.
31
Cash ..............................................................
Mortgage Note Payable .........................
150,000
150,000
First Instalment Payment
2005
June
30
Interest Expense
($150,000 X 8% X 6/12) .............................
Mortgage Note Payable ..................................
6,000.00
1,578.52
Cash ......................................................
7,578.52
Second Instalment Payment
Dec.
31
Interest Expense [($150,000
– $1,578.52) X 8% X 6/12] ..........................
Mortgage Note Payable ..................................
Cash ......................................................
5,936.86
1,641.66
7,578.52
EXERCISE 11-3
June 12
July 11
Oct. 1
Cash ...................................................................
Common Shares ........................................
375,000
Cash (1,000 X $105) ..........................................
Preferred Shares (1,000 X $105) ...............
105,000
Land ...................................................................
Common Shares ........................................
70,000
375,000
105,000
70,000
EXERCISE 11-4
May
2
10
Gain on Sale of Shares ......................................
Common Shares ........................................
144,000
Preferred Shares ................................................
Loss on Preferred Shares ..........................
600,000
144,000
600,000
EXERCISE 11-5
(a)
Apr.
1
June
July
Dec.
Dec.
(b)
15
10
1
15
Cash .......................................................................
Common Shares (5,000 X $10) ......................
50,000
Dividends(80,000 X $1) ..........................................
Dividends Payable .........................................
80,000
Dividends Payable ..................................................
Cash ...............................................................
80,000
Cash .......................................................................
Common Shares (3,000 X $12) ......................
36,000
50,000
80,000
80,000
Dividends (83,000* X $1.25) ................................... 103,750
Dividends Payable .........................................
* 75,000 + 5,000 + 3,000 = 83,000 shares
36,000
103,750
In the statement of retained earnings, dividends of $183,000 ($80,000 +
$103,750) will be deducted. In the balance sheet, Dividends Payable of
$103,750 will be reported as a current liability.
PROBLEM 11-5A
Date
(a)
Retained
Earnings
(b)
Shares
Issued
(c)
Mark's
Shares
(d)
(e)
Value of
Share Price Mark's Shares
July 1, 2004
$350,000
100,000
25,000
$25.00
$625,000
1.
Aug. 31, 2004
238,000
104,000
26,000
28.00
728,000
2.
Dec.1, 2004
238,000
124,000
31,000
30.00
930,000
3.
March 31, 2005:
pre-split
124,000
31,000
26.00
806,000
13.00
806,000
10.50
651,000
4.
238,000
March 31, 2005:
post-split
248,000
238,000
June 30, 2005
238,000
248,000
62,000
62,000
PROBLEM 11-6A
(a)
Retained Earnings
Oct.
Dec.
1
31
Cash Dividend
Stock Dividend
240,0001 Jan.
400,0002 Dec.
Dec.
1
31
31
Balance
Net Earnings
Balance
980,000
418,600
758,600
(b)
MAGGIO CORPORATION
Balance Sheet (Partial)
December 31, 2004
Shareholders’ equity
Share capital
Preferred shares ($10, no par value,
cumulative, an unlimited number of
shares authorized, 12,000 shares issued) .
$ 850,000
Common shares (no par value, an
unlimited number of shares authorized,
250,000 shares issued) ............................ $3,200,000
Common stock dividends distributable
(20,000 shares) .........................................
400,000 3,600,000
Total share capital ................................
4,450,000
Retained earnings (Note X) .................................
758,600
Total shareholders’ equity ..........................................
$5,208,600
Note X: Retained earnings restricted for plant expansion, $200,000.
1
12,000 X $10 = $120,000 (2003 dividend) + $120,000 (2004
dividend).
2
250,000 X 8% = 20,000 X $20 = $400,000
EXERCISE 13-1
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Noncash investing (purchase of assets) and financing (issue of note)
activities
Financing activities (cash provided)
Operating activities (cash provided)
Financing activities (cash used)
Investing activities (cash provided)
Financing activities (cash used)
Operating activities (cash used)
Noncash financing activity
EXERCISE 13-2
Indirect method assumed:
(a) Investing activity
(b) Financing activity
(c) Investing activity
(d) Noncash investing
(e) Operating activity
(f)
Financing activity
(g) Operating activity
(h) Financing activity
Direct method assumed:
(a) Investing activity
(b) Financing activity
(c) Investing activity
(d) Noncash investing
(e) No effect
(f)
Financing activity
(g) Operating activity
(h) Financing activity
(i)
(j)
Operating activity
Noncash investing activity (land);
financing (bonds) activity
(k) Operating activity
(l)
Noncash financing activity
(m) Operating activity (gain); investing activity
(cash proceeds from sale)
(n) Operating activity*
(i)
(j)
Operating activity
Noncash investing activity (land);
financing (bonds) activity
(k) Operating activity
(l)
Noncash financing activity
(m) No effect (gain); investing activity (cash
proceeds from sale of land)
(n) Operating activity*
* Note to instructors—this assumes that the dividends have been received from
equity investments recorded using the cost method. If the investment is recorded
using the equity method, the answer would change to an investing activity.
PROBLEM 13-3A
CORTINA LIMITED
Cash Flow Statement—Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings ..............................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization expense ......................................... $70,000
Loss on sale of equipment .................................
1,000
Gain on sale of land ...........................................
(5,000)
Increase in accounts receivable ......................... (13,000)
Increase in inventory .......................................... (52,000)
Decrease in prepaid expenses ...........................
4,400
Decrease in accounts payable ........................... (12,000)
Net cash provided by operating activities ..........................
Investing activities
Sale of land ($150,000 - $105,000 + $5,000) ............. $50,000
Sale of equipment ...................................................... 12,000
Purchase of equipment .............................................. (65,000)
Net cash used by investing activities .................................
$26,890
(6,600)
20,290
(3,000)
Financing activities
Payment of cash dividends ........................................
(44,290)
Net decrease in cash.........................................................
Cash, January 1 ................................................................
Cash, December 31 ..........................................................
(27,000)
57,000
$30,000
Note: Significant noncash investing and financing activities
Conversion of bonds by issue of shares ............................
PROBLEM 13-6A
(a)
NORWAY INC.
Cash Flow Statement —Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings ............................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization expense ....................................... $58,700
Gain on sale of property, plant and equipment . (8,750)
Increase in accounts receivable ....................... (53,800)
Increase in inventory ........................................ (19,250)
Increase in accounts payable ...........................
4,420
Decrease in accrued expenses payable ........... (6,730)
Net cash provided by operating activities ........................
$91,480
(25,410)
66,070
Investing activities
Sale of investments ................................................. $ 22,500
Sale of property, plant and equipment ..................... 15,550
Purchase of property, plant and equipment ............. (141,000)
Net cash used by investing activities ...............................
(102,950)
Financing activities
Sale of common shares ........................................... $50,000
Issue of bonds ......................................................... 70,000
Payment of cash dividends ...................................... (37,670)
Net cash provided by financing activities .........................
82,330
Net increase in cash ........................................................
Cash, January 1 ..............................................................
Cash, December 31 ........................................................
45,450
47,250
$92,700
PROBLEM 13-6A (Continued)
(b)
NORWAY INC.
Cash Flow Statement —Direct Method
Year Ended December 31, 2004
Operating activities
Cash receipts from customers (1) ...........................
Cash payments
To suppliers (2) ............................................... $114,290
For operating expenses (3) .............................
21,400
For Interest......................................................
2,940
For income taxes.............................................
39,000
Net cash provided by operating activities ........................
$243,700
177,630
66,070
Investing activities
Sale of investments ................................................. $ 22,500
Sale of property, plant and equipment ..................... 15,550
Purchase of property, plant and equipment ............. (141,000)
Net cash used by investing activities ...............................
(102,950)
Financing activities
Sale of common shares ........................................... $50,000
Issue of bonds ......................................................... 70,000
Payment of cash dividends ...................................... (37,670)
Net cash provided by financing activities .........................
82,330
Net increase in cash ........................................................
Cash, January 1 ..............................................................
Cash, December 31 ........................................................
45,450
47,250
$ 92,700
PROBLEM 13-6A (Continued)
(b)
(Continued)
Calculations
(1) Cash receipts from customers
Revenues ...................................................................
Less: Increase in accounts receivable .......................
Cash receipts from customers ....................................
$297,500
53,800
$243,700
(2) Cash payments to suppliers
Cost of goods sold ...................................................
Add: Increase in inventories ....................................
Cost of purchases ....................................................
Deduct: Increase in accounts payable .....................
Cash payments to suppliers .....................................
$ 99,460
19,250
118,710
4,420
$114,290
(3) Cash payments for operating expenses
Operating expenses ...................................................
Add: Decrease in accrued expenses payable ...........
Cash payments for operating expenses .....................
$14,670
6,730
$21,400
PROBLEM 13-7A
(a)
DESROCHES INC.
Statement of Earnings
Month Ended January 31, 2005
Sales ($2,500 + $15,000) .............................................
Expenses
Interest expense ($15,000 X 7% x 1/12) .................
Rent expense–space ..............................................
Insurance expense .................................................
Rent expense–equipment .......................................
Supplies expense ($1,000 - $300) ..........................
Operating expenses ...............................................
Salary expense .......................................................
Net earnings ..................................................................
$17,500
$ 88
1,000
100
750
700
2,000
500
5,138
$12,362
DESROCHES INC.
Cash Flow Statement—Direct Method
Month Ended January 31, 2005
Operating activities
Cash receipts from customers ($2,500 + $12,200) ..
Cash payments
To suppliers ........................................................... $ 800
For space rent ($1,000 X 3) ................................... 3,000
For equipment rent ................................................
750
For insurance......................................................... 1,200
For operating expenses ......................................... 2,000
Net cash provided by operating activities ......................
Financing activities
Borrowing from note payable ................................. $15,000
Sale of common shares ......................................... 5,000
Net cash provided by financing activities .......................
$ 14,700
7,750
6,950
20,000
Increase in cash during the year ...................................
$26,950
PROBLEM 13-7A (Continued)
(b) The accrual-based statement of earnings shows net earnings of
$12,362. The cash flow statement shows cash provided by
operating activities of $6,950 and total increase in cash of
$26,950. Some decision makers will find the accrual-based
statement of earnings more useful. Others will find the cash flow
statement more useful.
For example, shareholders investing in the company’s common
shares for the long-term will find the accrual-based statement of
earnings more useful as it provides a better indication of the
long-term profitability of the company. Short-term creditors will
find the cash flow statement more useful as it provides a better
indication of the company’s ability to generate cash and repay its
current obligations.
PROBLEM 13-8A
(a)
SEYMOR LIMITED
Cash Flow Statement—Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings.......................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization expense* ................................ $11,000
Increase in accounts receivable.................. (14,000)
Increase in inventory .................................. (13,000)
Decrease in accounts payable .................... (14,000)
Decrease in income taxes payable .............
(5,000)
Net cash provided by operating activities ...................
$36,000
(35,000)
1,000
Investing activities
Sale of equipment .............................................. $10,000
Purchase of equipment**....................................
(7,000)
Net cash provided by investing activities....................
3,000
Financing activities
Issue of bonds .................................................... $10,000
Payment of cash dividends ................................ (21,000)
Net cash used by financing activities .........................
(11,000)
Net decrease in cash .................................................
Cash, January 1 ........................................................
Cash, December 31 ...................................................
(7,000)
33,000
$26,000
* [$30,000 – ($24,000 - $5,000)] = $11,000
** $70,000 - $78,000 + $15,000 = $7,000
PROBLEM 13-8A (Continued)
(b)
SEYMOR LIMITED
Cash Flow Statement—Direct Method
Year Ended December 31, 2004
Operating activities
Cash receipts from customers (1) ...........................
$272,000
Cash payments
To suppliers (2) .................................................. $221,000
For operating expenses ($34,000 – $11,000) .....
23,000
For Interest.........................................................
7,000
For income taxes (3) ..........................................
20,000
271,000
Net cash provided by operating activities ...................
1,000
Investing activities
Sale of equipment .............................................. $10,000
Purchase of equipment* .....................................
(7,000)
Net cash provided by investing activities....................
3,000
Financing activities
Issue of bonds .................................................... $10,000
Payment of cash dividends ................................ (21,000)
Net cash used by financing activities .........................
(11,000)
Net decrease in cash .................................................
Cash, January 1 ........................................................
Cash, December 31 ...................................................
(7,000)
33,000
$26,000
* $70,000 - $78,000 + $15,000 = $7,000
PROBLEM 13-8A (Continued)
(b) (Continued)
Calculations
(1) Cash receipts from customers
Revenues ....................................................................
Less: Increase in accounts receivable ........................
Cash receipts from customers .....................................
$286,000
14,000
$272,000
(2) Cash payments to suppliers
Cost of goods sold ......................................................
Add: Increase in inventories .......................................
Cost of purchases .......................................................
Add: Decrease in accounts payable ...........................
Cash payments to suppliers ........................................
$194,000
13,000
207,000
14,000
$221,000
(3) Cash payments for income taxes
Income tax expense ...................................................
Add: Decrease in income taxes payable ....................
Cash payments for income taxes ................................
$15,000
5,000
$20,000