Final Review
Intermediate 1
PROBLEMS
Pr. 3-178—Adjusting entries and account classification.
Selected amounts from Trent Company's trial balance of 12/31/10 appear below:
1. Accounts Payable
€ 160,000
2. Accounts Receivable
150,000
3. Accumulated Depreciation—Equipment
200,000
4. Allowance for Doubtful Accounts
20,000
5. Bonds Payable
500,000
6. Cash
150,000
7. Equipment
840,000
8. Insurance Expense
30,000
9. Interest Expense
10,000
10. Merchandise Inventory
300,000
11. Notes Payable (due 6/1/11)
200,000
12. Prepaid Rent
150,000
13. Retained Earnings
818,000
14. Salaries and Wages Expense
328,000
15. Share Capital–Ordinary
60,000
(All of the above accounts have their standard or normal debit or credit balance.)
Part A.
Prepare adjusting journal entries at year end, December 31, 2010, based on the
following supplemental information.
a. The equipment has a useful life of 15 years with no salvage value. (Straight-line method being
used.)
b. Interest accrued on the bonds payable is €15,000 as of 12/31/10.
c. Expired insurance at 12/31/10 is €20,000.
d. The rent payment of €150,000 covered the six months from November 30, 2010 through May
31, 2011.
e. Salaries and wages earned but unpaid at 12/31/10, €22,000.
Part B.
a.
b.
c.
d.
e.
Indicate the proper statement of financial position classification of each of the 15
numbered accounts in the 12/31/10 trial balance before adjustments by placing
appropriate numbers after each of the following classifications. If the account title would
appear on the income statement, do not put the number in any of the classifications.
Property, plant, and equipment
Current assets
Equity
Non-current liabilities
Current liabilities
Solution 3-178
Part A.
a. Depreciation Expense—Equipment (€840,000 – 0)  15 ...............
Accumulated Depreciation—Equipment .............................
56,000
56,000
b. Interest Expense ...........................................................................
Interest Payable .................................................................
15,000
Page 1 of 33
Ehab Abdou (97672930)
15,000
Final Review
Intermediate 1
c. Prepaid Insurance .........................................................................
Insurance Expense (€30,000 - €20,000) ............................
10,000
d. Rent Expense (€150,000  6).........................................................
Prepaid Rent .....................................................................
25,000
e. Salaries and Wages Expense .......................................................
Salaries and Wages Payable .............................................
22,000
10,000
25,000
22,000
Part B.
a. Property, plant, and equipment—3, 7
b. Current assets—2, 4, 6, 10, 12
c. Equity—13, 15
d. Non-current liabilities—5
e. Current liabilities—1, 11
Pr. 3-180—Adjusting and closing entries.
The following trial balance was taken from the books of Fisk Corporation on December 31, 2010.
Account
Debit
Credit
Cash
$ 12,000
Accounts Receivable
40,000
Note Receivable
7,000
Allowance for Doubtful Accounts
$ 1,800
Merchandise Inventory
44,000
Prepaid Insurance
4,800
Furniture and Equipment
125,000
Accumulated Depreciation--F. & E.
15,000
Accounts Payable
10,800
Share Capital–Ordinary
44,000
Retained Earnings
55,000
Sales
280,000
Cost of Goods Sold
111,000
Salaries Expense
50,000
Rent Expense
12,800
Totals
$406,600
$406,600
At year end, the following items have not yet been recorded.
a. Insurance expired during the year, $2,000.
b. Estimated bad debts, 1% of gross sales.
c. Depreciation on furniture and equipment, 10% per year.
d. Interest at 6% is receivable on the note for one full year.
*e. Rent paid in advance at December 31, $5,400 (originally charged to expense).
f. Accrued salaries at December 31, $5,800.
Instructions
(a) Prepare the necessary adjusting entries.
(b) Prepare the necessary closing entries.
Solution 3-180
(a) Adjusting Entries
a. Insurance Expense ...............................................................
Prepaid Insurance ........................................................
b. Bad Debt Expense ................................................................
Allowance for Doubtful Accounts ..................................
c. Depreciation Expense ..........................................................
Page 2 of 33
2,000
2,000
2,800
2,800
12,500
Ehab Abdou (97672930)
Final Review
Intermediate 1
Accumulated Depreciation--F. & E. ..............................
d. Interest Receivable ...............................................................
Interest Revenue .........................................................
*e. Prepaid Rent ........................................................................
Rent Expense ..............................................................
f. Salaries Expense ..................................................................
Salaries Payable ..........................................................
12,500
5,400
(b) Closing Entries
Sales ...........................................................................................
Interest Revenue .........................................................................
Income Summary ..............................................................
280,000
420
420
420
5,400
5,800
5,800
280,420
Income Summary .........................................................................
Salaries Expense ...............................................................
Rent Expense ....................................................................
Depreciation Expense ........................................................
Bad Debt Expense .............................................................
Insurance Expense ............................................................
Cost of Goods Sold ............................................................
191,500
Income Summary .........................................................................
Retained Earnings .............................................................
88,920
55,800
7,400
12,500
2,800
2,000
111,000
88,920
Ex. 3-170—Adjusting entries.
Present, in journal form, the adjustments that would be made on July 31, 2011, the end of the fiscal
year, for each of the following.
1. The supplies inventory on August 1, 2010 was €7,350. Supplies costing €20,150 were acquired
during the year and charged to the supplies inventory. A count on July 31, 2011 indicated
supplies on hand of €8,810.
2. On April 30, a ten-month, 9% note for €20,000 was received from a customer.
*3. On March 1, €12,000 was collected as rent for one year and a nominal account was credited.
Solution 3-170
1. Supplies Expense ...................................................................
Supplies ........................................................................
18,690
2. Interest Receivable .................................................................
Interest Revenue ..........................................................
450
*3. Rent Revenue .........................................................................
Unearned Revenue ......................................................
7,000
Page 3 of 33
18,690
450
7,000
Ehab Abdou (97672930)
Final Review
Intermediate 1
PROBLEMS
Pr. 4-146—Income statement.
Presented below is information (in thousands) related to Chen Company.
Retained earnings, December 31, 2010
¥ 650,000
Sales
1,400,000
Selling and administrative expenses
240,000
Loss on disposal of component (pre-tax)
290,000
Cash dividends declared on common stock
33,600
Cost of goods sold
780,000
Gain resulting from computation error on depreciation charge in 2009 (pre-tax)
520,000
Rent revenue
120,000
Impairment loss
90,000
Interest expense
10,000
Instructions
Prepare in good form an income statement for the year 2011. Assume a 30% tax rate and that
there were 80,000 ordinary shares outstanding during the year.
Solution 4-146
Chen Company
INCOME STATEMENT
For the Year Ended December 31, 2011
Sales
Cost of goods sold
Gross profit
Selling and administrative expenses
Other income and expense
Impairment loss
Income from operations
Interest expense
Income before taxes
Income taxes
Income from continuing operations
Discontinued operations, net of applicable income taxes of ¥87,000
Net income
Per share—
Income from continuing operating
Discontinued operations net of tax
Net income
Page 4 of 33
¥1,400,000
780,000
620,000
240,000
120,000
90,000
410,000
10,000
400,000
(120,000)
280,000
(203,000)
¥ 77,000
¥ 3.50
(2.54)
¥ 0.96
Ehab Abdou (97672930)
Final Review
Intermediate 1
Pr. 4-147—Income statement form.
Wilcox Corporation had income from continuing operations of $800,000 (after taxes) in 2011. In
addition, the following information has not been considered.
1. A machine was sold for $140,000 cash during the year at a time when its book value was
$110,000. (Depreciation has been properly recorded.) The company often sells machinery of
this type.
2. Wilcox decided to discontinue its stereo division in 2011. During the current year, the loss on
the disposal of this component of the business was $150,000 less applicable taxes.
Instructions
Present in good form the income statement of Wilcox Corporation for 2011 starting with "income
from continuing operations." Assume that Wilcox's tax rate is 30% and 200,000 ordinary shares
were outstanding during the year.
Solution 4-147
Wilcox Corporation
Partial Income Statement
For the Year Ended December 31, 2011
Income from continuing operations
Discontinued operations
Loss on disposal of a component of a business,
$150,000, less applicable income taxes, $45,000
Net income
Per share—Income from cont. operations
Discontinued operations, net of tax
Net income
*Income from cont. operations (unadjusted)
Gain on sale of machinery (after tax)
Income from cont. operations (adjusted)
Page 5 of 33
$821,000*
(105,000)
$716,000
$4.11
(0.53)
$3.58
$800,000
21,000
$821,000
Ehab Abdou (97672930)
Final Review
Intermediate 1
Pr. 4-148—Income statement.
Shown below is an income statement for 2011 that was prepared by a poorly trained bookkeeper
of Howell Corporation.
Howell Corporation
INCOME STATEMENT
December 31, 2011
Sales revenue
Investment revenue
Cost of merchandise sold
Selling expenses
Administrative expense
Interest expense
Income before special item
Special item
Loss on disposal of a component of the business
Net income tax liability
Net income
$945,000
19,500
(408,500)
(145,000)
(215,000)
(13,000)
183,000
(30,000)
(45,900)
$107,100
Instructions
Prepare a multiple-step income statement for 2011 for Howell Corporation that is presented in
accordance with IFRS (including format and terminology). Howell Corporation has 50,000 ordinary
shares outstanding and has a 30% income tax rate on all tax related items. Round all earnings per
share figures to the nearest cent.
Solution 4-148
Howell Corporation
INCOME STATEMENT
For the Year Ended December 31, 2011
Sales
Cost of goods sold
Gross profit
Selling expenses
$145,000
Administrative expenses
215,000
Other income: Investment revenue
Income from operations
Interest expense
Income before income taxes
Income taxes
Income from continuing operations
Loss from discontinued operations, net of applicable income tax of $9,000
Net income
Per share of share—
Income from continuing operations
Discontinued operations loss net of tax
Net income
Page 6 of 33
$945,000
408,500
536,500
360,000
19,500
196,000
13,000
183,000
54,900
128,100
21,000
$107,100
$2.56
(0.42)
$2.14
Ehab Abdou (97672930)
Final Review
Intermediate 1
Pr. 4-149—Income statement.
Presented below is an income statement for Kinder Company for the year ended December 31,
2011.
Kinder Company
Income Statement
For the Year Ended December 31, 2011
Net sales
Costs and expenses:
Cost of goods sold
Selling, general, and administrative expenses
Other, net
Income before income taxes
Income taxes
Net income
$800,000
640,000
70,000
20,000
730,000
70,000
21,000
$ 49,000
Additional information:
1. "Selling, general, and administrative expenses" included a charge of $7,000 for impairment of
intangibles.
2. "Other, net" consisted of interest expense, $10,000, and a discontinued operations loss of
$10,000 before taxes. If the loss had not occurred, income taxes for 2011 would have been
$24,000 instead of $21,000.
3. Kinder had 20,000 ordinary shares outstanding during 2011.
Instructions
Prepare a corrected income statement, including the appropriate per share disclosures.
Page 7 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Solution 4-149
Kinder Company
Income Statement
For the Year Ended December 31, 2011
Net sales
Cost of goods sold
Gross profit
Selling, general, and administrative expenses
Other income and expense
Loss on impairment
Income from operations
Interest expense
Income before taxes
Income taxes
Income from continuing operations
Discontinued operations
Loss on disposal of component
Less applicable taxes
Net income
Per share—
Income from continuing operations
Discontinued operations, net of tax
Net income
Page 8 of 33
$800,000
640,000
$160,000
63,000
7,000
90,000
10,000
80,000
24,000
56,000
10,000
3,000
7,000
$ 49,000
$2.80
(0.35)
$2.45
Ehab Abdou (97672930)
Final Review
Intermediate 1
Pr. 4-150—Income statement and retained earnings statement.
Wang Corporation's capital structure consists of 50,000 ordinary shares. At December 31, 2011 an
analysis of the accounts and discussions with company officials revealed the following information:
Sales
Purchase discounts
Purchases
Loss on discontinued operations (net of tax)
Selling expenses
Cash
Accounts receivable
Share capital
Accumulated depreciation
Dividend revenue
Inventory, January 1, 2011
Inventory, December 31, 2011
Unearned service revenue
Accrued interest payable
Land
Patents
Retained earnings, January 1, 2011
Interest expense
General and administrative expenses
Dividends declared
Allowance for doubtful accounts
Notes payable (maturity 7/1/14)
Machinery and equipment
Materials and supplies
Accounts payable
¥1,100,000
18,000
642,000
42,000
128,000
60,000
90,000
200,000
180,000
8,000
152,000
125,000
4,400
1,000
370,000
100,000
290,000
17,000
150,000
29,000
5,000
200,000
450,000
40,000
60,000
The amount of income taxes applicable to ordinary income was ¥48,600, excluding the tax effect of
the discontinued operations loss which amounted to ¥18,000.
Instructions
(a) Prepare an income statement.
(b) Prepare a retained earnings statement.
Page 9 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Solution 4-150
Wang Corporation
INCOME STATEMENT
For the Year Ended December 31, 2011
Sales
Cost of goods sold:
Merchandise inventory, Jan. 1
Purchases
Less purchase discounts
Net purchases
Merchandise available for sale
Less merchandise inv., Dec. 31
Cost of goods sold
¥1,100,000
¥152,000
¥642,000
18,000
Gross profit
Selling expenses
General and administrative expenses
Other income and expense:
Dividend revenue
Income from operations
Interest expense
Income before income taxes
Income taxes
Income from continuing operations
Discontinued operations
Loss on disposal, less applicable taxes of $18,000
Net income
Per share of share capital—
Income from continuing operations
Discontinued operations,
Net income
624,000
776,000
125,000
651,000
449,000
128,000
150,000
278,000
8,000
179,000
17,000
162,000
48,600
113,400
¥
42,000
71,400
¥2.27
(0.84)
¥1.43
Wang Corporation
RETAINED EARNINGS STATEMENT
For the Year Ended December 31, 2011
Retained earnings, January 1, 2011
Add: Net income
Deduct: Dividends declared
Retained earnings, December 31, 2011
Page 10 of 33
¥290,000
¥71,400
29,000
42,400
¥332,400
Ehab Abdou (97672930)
Final Review
Intermediate 1
PROBLEMS
Pr. 5-130—Statement of financial position presentation.
The following statement of financial position was prepared by the bookkeeper for Kraus Company
as of December 31, 2012.
Kraus Company
Statement of Financial Position
as of December 31, 2012
Investments
Equipment (net)
Patents
Inventories
Accounts receivable (net)
Cash
£ 76,300
96,000
32,000
57,000
52,200
80,000
£393,500
Shareholders' equity
Non-current liabilities
Accounts payable
£218,500
100,000
75,000
£393,500
The following additional information is provided:
1. Cash includes the cash surrender value of a life insurance policy £9,400, and a bank overdraft
of £2,500 has been deducted.
2. The net accounts receivable balance includes:
(a) accounts receivable—debit balances £60,000;
(b) accounts receivable—credit balances £4,000;
(c) allowance for doubtful accounts £3,800.
3. Inventories do not include goods costing £3,000 shipped out on consignment. Receivables of
£3,000 were recorded on these goods.
4. Investments include investments in share capital–ordinary, trading £19,000 and available-forsale £48,300, and franchises £9,000.
5. Equipment costing £5,000 with accumulated depreciation £4,000 is no longer used and is held
for sale. Accumulated depreciation on the other equipment is £40,000.
Instructions
Prepare a statement of financial position in good form (shareholders' equity details can be
omitted.)
Page 11 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Solution 5-130
Kraus Company
Statement of Financial Position
As of December 31, 2012
Assets
Investments
Available-for-sale securities
Cash surrender value
£48,300
9,400
Property, plant, and equipment
Equipment
Less accumulated depreciation
135,000
40,000
Intangible assets
Patents
Franchises
Current assets
*Equipment held for sale
Inventories
Accounts receivable
Less: Allowance for doubtful accounts
Trading securities
Cash
Total current assets
Total assets
(5)
95,000
32,000
9,000
£ 57,000 (2)
3,800
41,000
1,000
60,000
(4)
(3)
53,200
19,000
73,100
(1)
Equity and Liabilities
Shareholders' equity
Non-current liabilities
£100,000
Current liabilities
Accounts payable
£ 79,000 (6)
Bank overdraft
2,500
Total current liabilities
81,500
Total liabilities
Total liabilities and shareholders' equity
(1)
(2)
(3)
(4)
(5)
(6)
£57,700
206,300
£400,000
£ 218,500
181,500
£400,000
(£80,000 – £9,400 + £2,500)
(6£0,000 – £3,000)
(£57,000 + £3,000)
(£5,000 – £4,000)
(£96,000 + £40,000 – £5,000 + £4,000)
(£75,000 + £4,000)
*An alternative is to show it as an other asset.
Page 12 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Pr. 5-131—Statement of financial position presentation.
Given the following account information for Leong Corporation, prepare a statement of financial
position in report form for the company as of December 31, 2012. All accounts have normal
balances.
Equipment
Interest Expense
Interest Payable
Retained Earnings
Dividends
Land
Inventory
Bonds Payable
Notes Payable (due in 6 months)
Share capital–ordinary
Accumulated Depreciation - Eq.
Prepaid Advertising
Revenue
Buildings
Supplies
Taxes Payable
Utilities Expense
Advertising Expense
Salary Expense
Salaries Payable
Accumulated Depr. - Bld.
Cash
Depreciation Expense,
Building & Equipment
Page 13 of 33
¥ 40,000
2,400
600
?
50,400
137,320
102,000
78,000
14,400
60,000
10,000
5,000
331,400
80,400
1,860
3,000
1,320
1,560
53,040
900
15,000
30,000
8,000
Ehab Abdou (97672930)
Final Review
Intermediate 1
Solution 5-131
Leong Corporation
Statement of Financial Position
December 31, 2012
Assets
Property, Plant and Equipment
Land
Building
Accumulated depreciation - building
Equipment
Accumulated depreciation -equipment
Total Property, Plant and Equipment
Current Assets
Inventory
Supplies
Prepaid advertising
Cash
Total Current Assets
Total assets
Equity & Liabilities
Equity
Share capital-ordinary
Retained earnings (¥265,080*- ¥50,400)
Total shareholders' equity
Non-current liabilities
Bond payable
Current Liabilities
Notes payable
Taxes payable
Salaries payable
Interest payable
Total current liabilities
Total liabilities
Total liabilities & stockholders' equity
¥137,320
¥ 80,400
(15,000)
40,000
(10,000)
65,400
30,000
¥232,720
102,000
1,860
5,000
30,000
138,860
¥ 371,580
¥60,000
214,680
¥ 274,680
78,000
¥ 14,400
3,000
900
600
18,900
96,900
¥ 371,580
*¥331,400 - ¥53,040 - ¥8,000 - ¥2,400 - ¥1,560 - ¥1,320
Page 14 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Pr. 5-132—Statement of cash flows preparation.
Selected financial statement information and additional data for Stanislaus Co. is presented below.
Prepare a statement of cash flows for the year ending December 31, 2012
December 31
2011
2012
Land
€ 58,800
Equipment .............................................. 504,000
Inventory ................................................ 168,000
Accounts receivable (net) ....................... 84,000
Cash....................................................... 42,000
TOTAL ........................................ €856,800
€
Share capital–ordinary............................ €420,000
Retained earnings .................................. 67,200
Notes payable - Long-term ..................... 168,000
Notes payable - Short-term .................... 67,200
Accounts payable ................................... 50,400
Accumulated depreciation ...................... 84,000
TOTAL ........................................ €856,800
€ 487,200
205,800
302,400
29,400
86,000
115,600
€1,226,400
21,000
789,600
201,600
151,200
63,000
€1,226,400
Additional data for 2012:
1. Net income was €235,200.
2. Depreciation was €31,600.
3. Land was sold at its original cost.
4. Dividends of €96,600 were paid.
5. Equipment was purchased for €84,000 cash.
6. A long-term note for €201,600 was used to pay for an equipment purchase.
7. Share capital–ordinary was issued to pay a €67,200 long-term note payable.
Page 15 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Solution 5-132
Stanislaus Co.
Statement of Cash Flows
For the year ended December 31, 2012
Net Income
Cash flow from operating activities
Depreciation expense
Increase in accounts receivable
Increase in inventory
Increase in accounts payable
Decrease in short-term notes payable
Net cash provided by operating activities
Cash flow from investing activities
Purchase equipment
Sale of land
Net cash used by investing activities
Cash flow from financing activities
Payment of cash dividend
Net increase in cash
Cash at beginning of year
Cash at end of the year
€235,200
€31,600
(67,200)
(33,600)
35,600
(37,800)
(71,400)
163,800
(84,000)
37,800
(46,200)
(96,600)
21,000
42,000
€63,000
Noncash investing and financing activities
Payment of long-term note payable with issuance of €67,200 of share capital–ordinary
Long-term note issued as payment of equipment purchase, €201,600
Page 16 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Pr. 5-133—Statement of cash flows preparation.
Selected financial statement information and additional data for Johnston Enterprises is presented
below. Prepare a statement of cash flows for the year ending December 31, 2012
Johnston Enterprises
Statement of Financial Position and Income Statement Data
December 31,
December 31,
2012
2011___
Property, Plant, and Equipment
HK$1,241,000
HK$1,122,000
Less: Accumulated Depreciation
(476,000)
(442,000)
765,000
680,000
Current Assets:
Inventory
391,000
340,000
Accounts Receivable
238,000
306,000
Cash
153,000
119,000
Total Current Assets
782,000
765,000
Total Assets
HK$1,547,000
HK$1,445,000
Shareholders' Equity:
Share capital–ordinary
Retained Earnings
Total Shareholders' Equity
HK$ 510,000
374,000
884,000
HK$ 467,500
340,000
807,500
Non-Current Liabilities:
Bonds Payable
340,000
391,000
Current Liabilities:
Accounts Payable
Notes Payable
Income Tax Payable
Total Current Liabilities
187,000
51,000
85,000
323,000
102,000
68,000
76,500
246,500
Total Liabilities
663,000
637,500
Total Liabilities & Shareholders' Equity
HK$1,547,000
HK$1,445,000
Sales
Less Cost of Goods Sold
Gross Profit
Expenses:
Depreciation Expense
Salary Expense
Interest Expense
Loss on Sale of Equipment
Income Before Taxes
Less Income Tax Expense
Net Income
HK$1,615,000
731,000
884,000
HK$1,513,000
731,000
782,000
153,000
391,000
34,000
17,000
289,000
119,000
HK$ 170,000
136,000
357,000
34,000
0
255,000
102,000
HK$ 153,000
Additional Information:
During the year, Johnston sold equipment with an original cost of HK$153,000 and accumulated
depreciation of HK$119,000 and purchased new equipment for HK$272,000.
Page 17 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Solution 5-133
Johnston Enterprises
Statement of Cash Flows
For the Year Ended December 31, 2012
Net Income
HK$ 170,000
Cash flow from operating activities
Depreciation expense
HK$153,000
Loss on sale of equipment
17,000
Decrease in accounts receivable
68,000
Increase in inventory
(51,000)
Increase in accounts payable
85,000
Decrease in notes payable
(17,000)
Increase in tax payable
8,500
Net cash provided by operating activities
263,500
433,500
Cash flow from investing activities
Sale of equipment
Purchase of equipment
Net cash used by investing activities
(255,000)
Cash flow from financing activities
Retirement of bonds payable
Issuance of share capital–ordinary
Payment of dividends
Net cash used by financing activities
Net increase in cash
Beginning cash
Cash at end of year
17,000
(272,000)
(51,000)
42,500
(136,000)**
(144,500)
34,000
119,000
HK$153,000
**Beginning R/E  Net income  Dividends  Ending R/E
HK$340,000  HK$170,000  Dividends  HK$374,000
Dividends  HK$136,000
Page 18 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
PROBLEMS
Pr. 7-159—Entries for bad debt expense.
The trial balance before adjustment of Risen Company reports the following balances:
Accounts receivable
Allowance for doubtful accounts
Sales (all on credit)
Sales returns and allowances
Dr.
$100,000
Cr.
$ 2,500
750,000
40,000
Instructions
(a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to
be (1) 6% of gross accounts receivable and (2) 1% of net sales.
(b) Assume that all the information above is the same, except that the Allowance for Doubtful
Accounts has a debit balance of $2,500 instead of a credit balance. How will this difference
affect the journal entries in part (a)?
Solution 7-159
(a)
(1)
(2)
(b)
Bad Debt Expense .........................................................
Allowance for Doubtful Accounts ........................
Gross receivables
$100,000
Rate
6%
Total allowance needed
6,000
Present allowance
(2,500)
Bad debt expense
$ 3,500
3,500
Bad Debt Expense .........................................................
Allowance for Doubtful Accounts ........................
Sales
$750,000
Sales returns and allowances
(40,000)
Net sales
710,000
Rate
1%
Bad debt expense
$ 7,100
7,100
3,500
7,100
The percentage of receivables approach would be affected as follows:
Gross receivables
$100,000
Rate
6%
Total allowance needed
6,000
Present allowance
2,500
Additional amount required
$ 8,500
The journal entry is therefore as follows:
Bad Debt Expense .........................................................
Allowance for Doubtful Accounts ........................
Page 19 of 33
8,500
8,500
Ehab Abdou (97672930)
Final Review
Intermediate 1
Pr. 7-160—Amortization of discount on note.
On December 31, 2010, Green Company finished consultation services and accepted in exchange
a promissory note with a face value of $400,000, a due date of December 31, 2013, and a stated
rate of 5%, with interest receivable at the end of each year. The fair value of the services is not
readily determinable and the note is not readily marketable. Under the circumstances, the note is
considered to have an appropriate imputed rate of interest of 10%.
The following interest factors are provided:
Interest Rate
5%
10%
1.15763
1.33100
.86384
.75132
3.15250
3.31000
2.72325
2.48685
Table Factors For Three Periods
Future Value of 1
Present Value of 1
Future Value of Ordinary Annuity of 1
Present Value of Ordinary Annuity of 1
Instructions
(a) Determine the present value of the note.
(b) Prepare a Schedule of Note Discount Amortization for Green Company under the effective
interest method. (Round to whole dollars.)
Solution 7-160
(a) Present value of interest
Present value of maturity value
=
=
$20,000 × 2.48685
$400,000 × .75132
=
=
$ 49,737
300,528
$350,265
(b) Green Company
Schedule of Note Discount Amortization
Effective Interest Method
5% Note Discounted at 10% (Imputed)
Date
12/31/10
12/31/11
12/31/12
12/31/13
Cash
Interest
(5%)
Effective
Interest
(10%)
$20,000
20,000
20,000
$60,000
$ 35,027
36,529
38,179*
$109,735
Discount
Amortized
$15,027
16,529
18,179
$49,735
Unamortized
Discount
Balance
$49,735
34,708
18,179
0
Present
Value
of Note
$350,265
365,292
381,821
400,000
*$3 adjustment to compensate for rounding.
Pr. 7-161—Accounts receivable assigned.
Prepare journal entries for Mars Co. for:
(a) Accounts receivable in the amount of $500,000 were assigned to Utley Finance Co. by Mars as
security for a loan of $425,000. Utley charged a 3% commission on the accounts; the interest
rate on the note is 12%.
(b) During the first month, Mars collected $200,000 on assigned accounts after deducting $450 of
discounts. Mars wrote off a $530 assigned account.
(c) Mars paid to Utley the amount collected plus one month's interest on the note.
Page 20 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Solution 7-161
(a) Cash .......................................................................................
Finance Charge.........................................................................
Notes Payable ...............................................................
410,000
15,000
(b) Cash .......................................................................................
Sales Discounts ........................................................................
Allowance for Doubtful Accounts ...............................................
Accounts Receivable .....................................................
200,000
450
530
(c) Notes Payable ...........................................................................
Interest Expense .......................................................................
Cash ..............................................................................
200,000
4,250
Page 21 of 33
425,000
200,980
204,250
Ehab Abdou (97672930)
Final Review
Intermediate 1
Pr. 7-162—Factoring Accounts Receivable.
On May 1, Dexter, Inc. factored $800,000 of accounts receivable with Quick Finance on a without
recourse basis. Under the arrangement, Dexter was to handle disputes concerning service, and
Quick Finance was to make the collections, handle the sales discounts, and absorb the credit
losses. Quick Finance assessed a finance charge of 6% of the total accounts receivable factored
and retained an amount equal to 2% of the total receivables to cover sales discounts.
Instructions
(a) Prepare the journal entry required on Dexter's books on May 1.
(b) Prepare the journal entry required on Quick Finance’s books on May 1.
(c) Assume Dexter factors the $800,000 of accounts receivable with Quick Finance on a with
recourse basis instead. Prepare the journal entry required on Dexter’s books on May 1.
Solution 7-162
(a) Cash .............................................................................................
Due from Factor (2% × $800,000).................................................
Loss on Sale of Receivables (6% × $800,000) .............................
Accounts Receivable ....................................................
736,000
16,000
48,000
(b) Accounts Receivable ....................................................................
Due to Dexter .....................................................................
Financing Revenue .............................................................
Cash ..................................................................................
800,000
(c) Cash .............................................................................................
Due from Factor ..........................................................................
Finance Charge.. ..........................................................................
Accounts Receivable ..........................................................
736,000
16,000
48,000
Page 22 of 33
800,000
16,000
48,000
736,000
800,000
Ehab Abdou (97672930)
Final Review
Intermediate 1
Ex. 8-173—FIFO and Average Cost Mitchell Company’s record of transactions for the month of
June was as follows.
Purchases
June 1 (balance on hand)
4
8
13
21
29
600 @ $3.00
1,500 @ 3.04
800 @ 3.20
1,200 @ 3.25
700 @ 3.30
500 @ 3.13
5,300
Sales
June 3 (balance on hand)
9
11
23
27
500 @ $5.00
1,300 @ 5.00
600 @ 5.50
1,200 @ 5.50
900 @ 6.00
4,500
Instructions
(a) Assuming that periodic inventory records are kept, compute the inventory at
June 30 using (1) FIFO and (2) average cost.
(b) Assuming that perpetual inventory records are kept in both units and dollars, determine the
inventory at June 30 using (1) FIFO and (2) average cost.
Solution 8-173
(a) 1.
2.
FIFO
500 @ 3.13 = $1,565
300 @ 3.30 =
990
$2,555
Average Cost
Total cost
Total units
=
800 @ 3.15
=
*Units
600
1,500
800
1,200
700
500
5,300
Page 23 of 33
@
@
@
@
@
@
$16,695* = $3.15 average cost per unit
5,300
$2,520
Price
$3.00
$3.04
$3.20
$3.25
$3.30
$3.13
=
=
=
=
=
=
Total Cost
$1,800
4,560
2,560
3,900
2,310
1,565
$16,695
Ehab Abdou (97672930)
Final Review
Intermediate 1
Solution 8-173 (Continued)
(b) 1.
2.
FIFO
500 @ 3.13 = $1,565
300 @ 3.30 =
990
$2,555
Average Cost
Purchase
No. of Unit
units cost
Date
June 1
3
4 1,500 $3.04
8 800 3.20
9
11
13 1,200 3.25
21 700 3.30
23
27
29 500 3.13
Sold
No. of Unit
units cost
500 $3.000
1,300
600
3.0917
3.0917
1,200
900
3.2317
3.2317
No. of
units
600
100
1,600
2,400
1,100
500
1,700
2,400
1,200
300
800
Balance
Unit
cost
Amount
$3.0000
$1,800
3.0000
300
3.0375
4,860
3.0917
7,420
3.0917
3,401
3.0917
1,546
3.2035
5,446
3.2317
7,756
3.2317
3,878
3.2317
969
3.1675
2,534
Inventory June 30 is $2,534
PROBLEMS
Pr. 8-178—Inventory cut-off.
Vogts Company sells TVs. The perpetual inventory was stated as $28,500 on the books at
December 31, 2010. At the close of the year, a new approach for compiling inventory was used
and apparently a satisfactory cut-off for preparation of financial statements was not made. Some
events that occurred are as follows.
1. TVs shipped to a customer January 2, 2011, costing $5,000 were included in inventory at
December 31, 2010. The sale was recorded in 2011.
2. TVs costing $12,000 received December 30, 2010, were recorded as received on January 2,
2011.
3. TVs received during 2010 costing $4,600 were recorded twice in the inventory account.
4. TVs shipped to a customer December 28, 2010, f.o.b. shipping point, which cost $10,000, were
not received by the customer until January, 2011. The TVs were included in the ending
inventory.
5. TVs on hand that cost $6,100 were never recorded on the books.
Instructions
Compute the correct inventory at December 31, 2010.
Page 24 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Solution 8-178
Inventory per books
Add: Shipment received 12/30/10
TVs on hand
$28,500
$12,000
6,100
Deduct:
TVs recorded twice
TVs shipped 12/28/10
Correct inventory 12/31/10
4,600
10,000
18,100
46,600
14,600
$32,000
Pr. 8-179—Analysis of errors.
(All sales and purchases are on credit.)
Indicate in each of the spaces provided the effect of the described errors on the various elements
of a company's financial statements. Use the following codes: O = amount is overstated; U =
amount is understated; NE = no effect. Assume a periodic inventory system.
Accounts
Receivable
EXAMPLE: Excluded goods in rented
warehouse from inventory
count.
NE
Inventory
U
Accounts
Payable Sales
NE
NE
Cost of
Goods Sold
O
___________________________________________________________________________
1. Goods in transit shipped "f.o.b.
destination" by supplier were
recorded as a purchase but were
excluded from ending inventory.
___________________________________________________________________________
2. Goods held on consignment were
included in inventory count and
recorded as a purchase.
___________________________________________________________________________
3. Goods in transit shipped "f.o.b.
shipping point" were not recorded
as a sale and were included in
ending inventory.
___________________________________________________________________________
4. Goods were shipped and appropriately excluded from ending
inventory but sale was not
recorded.
___________________________________________________________________________
Solution 8-179
1.
2.
3.
4.
NE
NE
U
U
Page 25 of 33
NE
O
O
NE
O
O
NE
NE
NE
NE
U
U
O
NE
U
NE
Ehab Abdou (97672930)
Final Review
Intermediate 1
Ex. 9-145—Lower-of-cost-or-net realizable value.
The December 31, 2010 inventory of Gwynn Company consisted of four products, for which certain
information is provided below.
Product
A
B
C
D
Original Cost
$25
$42
$120
$18
Estimated
Completion Cost
$6
$12
$25
$3
Expected
Selling Price
$40
$58
$150
$26
Estimated
Cost to sell
$4
$8
$15
$2
Instructions
Using the lower-of-cost-or-net realizable value approach applied on an individual-item basis,
compute the inventory valuation that should be reported for each product on December 31, 2010.
Solution 9-145
Net Real.
Value
$30
Cost
$25
Lower-ofCost-orNRV
$25
B
$38
$42
$38
C
$110
$120
$110
D
$21
$18
$18
Product
A
Ex. 9-146—LCNRV
Pinkel Company uses the LCNRV method, on an individual-item basis, in pricing its inventory
items. The inventory at December 31, 2011, consists of products D,E,F,G,H, and I, Relavant perunit data for these products appear below.
Estimated selling price
Cost
Cost to complete
Selling costs
Item
D
€180
110
45
15
Item
E
€165
120
45
27
Item
F
€140
120
35
15
Item
G
€135
120
50
30
Item
H
€165
75
45
15
Item
I
€135
54
45
30
Instructions
Using the LCNRV rule, determine the proper unit value for statement of financial position reporting
purposes at December 31, 2011, for each of the inventory items above.
Page 26 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Solution 9-146
Item
D
Net
Realizable.
Value
€120*
Cost
€110
LCNRV
€110
E
93
120
93
F
90
120
90
G
55
120
55
H
105
75
75
1
60
54
54
*Estimated selling price – Estimated selling costs and cost to
complete = €180 – €45 – €15 = €120.
Ex. 9-147—LCNRV—Journal Entries
Dover Company began operations in 2010 and determined its ending inventory at cost and at a
LCNRV at December 31, 2010, and December 31, 2011. This information is presented below.
Cost
Net Realizable Value
12/31/10
£520,000
£485,000
12/31/11
615,000
585,000
Instructions
(a) Prepare the journal entries required at December 31, 2010, and December 31, 2011,
assuming that the inventory is recorded at LCNRV, using a perpetual inventory system and
the cost-of-goods-sold method.
(b) Prepare the journal entries required at December 31, 2010, and December 31, 2011,
assuming that the inventory is recorded at cost, using a perpetual system and the loss
method.
(c) Which of the two methods above provides the higher net income in each year?
Solution 9-147
(a) 12/31/10 Cost of Goods Sold …………………………………35,000
Allowance to Reduce
Inventory to NRV……………………..
12/31/11 Allowance to Reduce
Inventory to NRV……………………………..5,000
Costs of Goods Sold…………………
₤35,000 – (₤615,000 – ₤585,000)
(b) 12/31/10 Loss Due to Decline of
Inventory to NRV……………………………35,000
Allowance to Reduce
Inventory to NRV…………..
Page 27 of 33
35,000
5,000
35,000
Ehab Abdou (97672930)
Final Review
Intermediate 1
Solution 9-147 cont.
12/31/11 Allowance to Reduce
Inventory to NRV……………………………..5,000
Recovery or Inventory Loss…………
5,000
(c) Both methods provide the same net income.
Ex. 9-150—Gross profit method.
An inventory taken the morning after a large theft discloses $60,000 of goods on hand as of March
12. The following additional data is available from the books:
Inventory on hand, March 1
Purchases received, March 1 – 11
Sales (goods delivered to customers)
$ 84,000
63,000
120,000
Past records indicate that sales are made at 50% above cost.
Instructions
Estimate the inventory of goods on hand at the close of business on March 11 by the gross profit
method and determine the amount of the theft loss. Show appropriate titles for all amounts in your
presentation.
Solution 9-150
Beginning Inventory
Purchases
Goods Available
Goods Sold ($120,000 ÷ 150%)
Estimated Ending Inventory
Physical Inventory
Theft Loss
Page 28 of 33
$ 84,000
63,000
147,000
80,000
67,000
60,000
$ 7,000
Ehab Abdou (97672930)
Final Review
Intermediate 1
Ex. 9-151—Gross profit method.
On January 1, a store had inventory of $48,000. January purchases were $46,000 and January
sales were $90,000. On February 1 a fire destroyed most of the inventory. The rate of gross profit
was 25% of cost. Merchandise with a selling price of $5,000 remained undamaged after the fire.
Compute the amount of the fire loss, assuming the store had no insurance coverage. Label all
figures.
Solution 9-151
Beginning Inventory
Purchases
Goods available
Cost of sale ($90,000 ÷ 125%)
Estimated ending inventory
Cost of undamaged inventory ($5,000 ÷ 125%)
Estimated fire loss
$ 48,000
46,000
94,000
(72,000)
22,000
(4,000)
$18,000
Ex. 9-152—Gross profit method.
Utley Co. prepares monthly income statements. Inventory is counted only at year end; thus, monthend inventories must be estimated. All sales are made on account. The rate of mark-up on cost is
20%. The following information relates to the month of May.
Accounts receivable, May 1
Accounts receivable, May 31
Collections of accounts during May
Inventory, May 1
Purchases during May
$21,000
27,000
90,000
45,000
58,000
Instructions
Calculate the estimated cost of the inventory on May 31.
Solution 9-152
Collections of accounts
Add accounts receivable, May 31
Deduct accounts receivable, May 1
Sales during May
$ 90,000
27,000
(21,000)
$ 96,000
Inventory, May 1
Purchases during May
Goods available
Cost of sales ($96,000 ÷ 120%)
Estimated cost of inventory, May 31
$ 45,000
58,000
103,000
(80,000)
$ 23,000
Page 29 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Ex. 9-153—Retail Inventory Method.
Presented below is information related to Kuchinsky Company.
Beginning inventory
Purchases
Cost
Retail
€ 280,000
€ 390,000
1,820,000
3,000,000
Markups
130,000
Markup cancellations
20,000
Markdowns
47,000
Markdown cancellations
7,000
Sales
3,150,000
Instructions
Compute the inventory by the conventional retail inventory method.
Solution 9-153
Beginning inventory…………………………….
Purchases……………………………………….
Totals………………………………………..
Add: Net marksups
Markups……………………………………….
Markup cancellations…………………………
Totals………………………………………………
Cost
€ 280,000
1,820,000
2,100,000
€ 130,000
(20,000)
€2,100,000
Deduct: Net markdowns
Markdowns……………………………………
Markup cancellations…………………………
Sales price of goods available…………………..
Deduct: Sales……………………………………..
Ending Inventory ay retail………………………..
Cost-to-retail ratio =
Retail
€ 390,000
3,000,000
3,390,000
47,000
(7,000)
110,000
3,500,000
40,000
3,460,000
3,150,000
€ 310,000
€2,100,000
 60%
€3,500,000
Ending inventory at cost = 60% × €310,000 = €186,000
Page 30 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Pr. 9-155—Gross profit method.
On December 31, 2010 Felt Company's inventory burned. Sales and purchases for the year had
been $1,400,000 and $980,000, respectively. The beginning inventory (Jan. 1, 2010) was
$170,000; in the past Felt's gross profit has averaged 40% of selling price.
Instructions
Compute the estimated cost of inventory burned, and give entries as of December 31, 2010 to
close merchandise accounts.
Solution 9-155
Beginning inventory
Add: Purchases
Cost of goods available
Sales
Less 40%
Estimated inventory lost
$ 170,000
980,000
1,150,000
$1,400,000
(560,000)
840,000
$ 310,000
Sales............................................................................................... 1,400,000
Income Summary ................................................................
Cost of Goods Sold .........................................................................
Fire Loss .........................................................................................
Inventory .............................................................................
Purchases ...........................................................................
1,400,000
840,000
310,000
170,000
980,000
Pr. 9-156—Retail inventory method.
When you undertook the preparation of the financial statements for Telfer Company at January 31,
2011, the following data were available:
At Cost
At Retail
Inventory, February 1, 2010
$70,800
$ 98,500
Markdowns
35,000
Markups
63,000
Markdown cancellations
20,000
Markup cancellations
10,000
Purchases
219,500
294,000
Sales
345,000
Purchases returns and allowances
4,300
5,500
Sales returns and allowances
10,000
Instructions
Compute the ending inventory at cost as of January 31, 2011, using the retail method which
approximates lower of cost or net realizable value. Your solution should be in good form with
amounts clearly labeled.
Page 31 of 33
Ehab Abdou (97672930)
Final Review
Intermediate 1
Solution 9-156
At Cost
Beginning inventory, 2/1/10
$ 70,800
Purchases
$219,500
Less purchase returns
4,300
215,200
Totals
$286,000
Add markups (net)
Totals
Deduct markdowns (net)
Sales price of goods available
Sales less sales returns
Ending inventory, 1/31/11 at retail
Ending inventory at cost: Ratio of cost to retail =
$286,000 ÷ $440,000 = 65%;
$90,000 × 65% = $58,500
$ 58,500
Page 32 of 33
At Retail
$ 98,500
$294,000
5,500
288,500
387,000
53,000
440,000
15,000
425,000
335,000
$ 90,000
Ehab Abdou (97672930)
Final Review
Intermediate 1
Pr. 9-157—Retail inventory method.
Presented below is information related to Carpenter Inc.
Cost
$375,000
1,369,000
90,000
27,000
–
–
–
–
–
Inventory, 12/31/10
Purchases
Purchase returns
Purchase discounts
Gross sales (after employee discounts)
Sales returns
Markups
Markup cancellations
Markdowns
Markdown cancellations
Freight-in
Employee discounts granted
Loss from breakage (normal)
Retail
$ 550,000
2,050,000
120,000
–
2,110,000
145,000
180,000
60,000
65,000
30,000
–
12,000
8,000
63,000
–
–
Instructions
Assuming that carpenter Inc. uses the conventional retail inventory method, compute the cost of its
ending inventory at December 31, 2011.
Solution 9-157
Beginning Inventory……………………..
Purchases………………………………..
Purchase returns…………………………
Purchase discounts………………………
Freight-in…………………………………..
Markups……………………………………
Markup cancellations…………………….
Totals………………………………….
Markdowns………………………………..
Markdown cancellations…………………
Sales……………………………………….
Sales returns………………………………
Inventory losses due to breakage……….
Employee discounts………………………
Ending inventory at retail…………………
Cost-to-retail ratio =
$
Cost
375,000
1,369,000
(90,000)
(27,000)
63,000
$
180,000
(60,000)
$1,690,000
(65,000)
30,000
(2,110,000)
145,000
Retail
$ 550,000
2,050,000
(120,000)
–
–
–
120,000
2,600,000
–
(35,000)
–
(1,965,000)
(8,000)
(12,000)
$ 580,000
$1,690,500
 65%
$2,600,000
Ending inventory at cost: $580,000 x 65% = $377,000
Page 33 of 33
Ehab Abdou (97672930)