Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
CHAPTER 1
THE PURPOSE AND USE OF FINANCIAL
STATEMENTS
LEARNING OBJECTIVES
1.
2.
3.
4.
Identify the uses and users of accounting information.
Describe the primary forms of business organization.
Explain the three main types of business activity.
Describe the purpose and content of each of the financial statements.
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES
AND BLOOM’S TAXONOMY
Item LO
BT Item LO
BT Item LO BT Item LO
Questions
BT Item LO
BT
1.
1
K
6.
2
C
11.
3
C
16.
4
K
21.
4
C
2.
1
C
7.
2
C
12.
3
C
17.
4
AP
22.
4
C
3.
1
K
8.
2
C
13.
3
C
18.
4
C
23.
4
K
4.
1
C
9.
2
C
14.
3
C
19.
4
K
5.
1
C
10.
2
K
15.
4
K
20.
4
C
Brief Exercises
1.
1
C
3.
3
C
5.
4
AP
7.
4
K
9.
4
C
2.
2
K
4.
3
C
6.
4
AP
8.
4
K
10.
4
AN
Exercises
1.
1
C
4.
3
C
7.
4
AN
10.
4
AP
13.
4
AP
2.
2
C
5.
4
K
8.
4
AN
11.
4
AP
14.
4
AN
3.
3
K
6.
4
AP
9.
4
AP
12.
4
AP
Problems: Set A and B
1.
1
C
3.
3
C
5.
4
AP
7.
4
AP
9.
4
AN
2.
2
C
4.
4
K
6.
4
AN
8.
4
AN
10.
4
AN
7.
1,2,3,4
C
Cases
1.
4
AN
3.
4
AN
5.
4
AN
2.
4
AN
4.
1,2
C
6.
1
E
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
Legend: The following abbreviations will appear throughout the solutions manual
file.
LO
Learning objective
BT
Bloom's Taxonomy
K
Knowledge
C
Comprehension
AP Application
AN Analysis
S
Synthesis
E
Evaluation
Level of difficulty
S
Simple
M
Moderate
C
Complex
Difficulty:
Time:
Estimated time to prepare in minutes
AACSB
Association to Advance Collegiate Schools of Business
Communication
Communication
Ethics
Ethics
Analytic
Analytic
Technology
Tech.
Diversity
Diversity
Reflective Thinking
Reflec. Thinking
CPA Canada Competency
Ethics
Professional and Ethical Behaviour
PS and DM
Problem-Solving and Decision-Making
Comm.
Communication
Self-Mgt.
Self-Management
Team & Lead
Teamwork and Leadership
Reporting
Financial Reporting
Stat. & Gov.
Strategy and Governance
Mgt. Accounting
Management Accounting
Audit
Audit and Assurance
Finance
Finance
Tax
Taxation
CPA CM
cpa-e001
cpa-e002
cpa-e003
cpa-e004
cpa-e005
cpa-t001
cpa-t002
cpa-t003
cpa-t004
cpa-t005
cpa-t006
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
ANSWERS TO QUESTIONS
1.
Accounting is the information system that identifies and records the
economic events of an organization, and then communicates them to a
wide variety of interested users.
LO 1 BT: K Difficulty: S TIME: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting
2.
(a)
Internal users of accounting information work for the company and
include finance directors, marketing managers, human resource
personnel, production supervisors, and company officers. Internal
users have access to company information that is not available to
external users.
(b)
Some external users may be individuals who are employees of the
company but are not directly involved in managing the company.
External users of accounting information generally do not work for the
company. The primary external users are investors, lenders, and
other creditors. Other external users include labour unions,
customers, the Canada Revenue Agency (CRA), and securities
commissions.
LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
3.
Internal users may want the following questions answered:
• Is there enough cash to purchase a new piece of equipment?
• What price should we sell our product for to cover costs and to
maximize net income?
• How many employees can we afford to hire this year?
• Which product line is the most profitable?
• How much of a pay raise can the company afford to give me?
External users may want the following questions answered:
• Is the company earning enough to give me my required return on
investment?
• Will the company be able to repay its debts as the debts come due?
• Will the company stay in business long enough to service the products
I buy from it?
LO 1 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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4.
Financial Accounting, Seventh Canadian Edition
Primary users of accounting information include investors, lenders, and
creditors. These external users need to make decisions concerning their
ongoing business relationship with the company. They need to be able to
assess the company’s performance and financial health because they
intend to start, continue, or discontinue having transactions with the
company. Other decision makers who have specific needs for certain
financial information, such as the amount of taxes paid by the company,
are not considered primary users.
LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
5.
Decision makers rely on financial statement information and expect the
accounting information to have been prepared ethically. Without the
expectation of ethical behaviour, the information presented in the financial
statements would have no credibility for the users of the accounting
information. Without credibility, financial statement information would be
useless to financial statement users.
LO 1 BT: C Difficulty: M TIME: 5 min. AACSB: None Ethics CPA: cpa-t001 CM: Reporting and Ethics
6.
(a) Proprietorship: Proprietorships are easier to form (and dissolve) than
other types of business organizations. They are not taxed as separate
entities; rather, the proprietor pays personal income tax on the
company’s net income. Depending on the circumstances, this may be
an advantage or disadvantage.
Disadvantages of a proprietorship include unlimited liability (proprietors
are personally liable for all debts of the business) and difficulty in
obtaining financing compared to other forms of organization. In
addition, the life of the proprietorship is limited as it is dependent on the
willingness and capability of the proprietor to continue operations.
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
6. (continued)
(b) Partnership: Partnerships are easier to form (and dissolve) than a
corporation, although not as easy as a proprietorship. Similar to
proprietorships, partnerships are not taxed as separate entities. Instead,
the partners pay personal income tax on their share of income. Depending
on the circumstances, this may be an advantage or disadvantage.
Disadvantages of partnerships include unlimited liability (partners are
jointly and severally liable for all debts of the business) and difficulty in
obtaining financing compared to corporations. In addition, the life of a
partnership can be limited depending on the terms of the partnership
agreement and actions of the other partners.
(c) Private corporation: Advantages of a private corporation include limited
liability (shareholders not being personally liable for corporate debts),
indefinite life, and transferability of ownership. In many cases, depending
on the size of the corporation, a creditor such as a bank will ask for a
personal guarantee which will void the limited liability advantage. In
addition, transferability of ownership may be limited since shares are not
publicly traded.
Disadvantages of a private corporation include increased government
regulations and paperwork. The fact that corporations are taxed as a
separate legal entity may be an advantage or a disadvantage. Corporations
often receive more favourable income tax treatment than other forms of
business organizations. As mentioned above, depending on the size of the
corporation, many of the advantages of the corporate form are not available
to a small private corporation.
(d) Public corporation: The advantages of a public corporation include limited
liability, indefinite life, and transferability of ownership. These features
make it easier for publicly traded corporations to raise financing compared
to other forms of business organizations. Corporations often receive more
favourable income tax treatment than other forms of business
organizations.
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
6. (d) (continued)
Disadvantages include increased government regulations and
paperwork. In addition, because the shares of public companies are
listed and traded on Canadian or other exchanges such as the Toronto
Stock Exchange (TSX), these corporations are required to distribute
their financial statements to investors, lenders, creditors and other
interested parties, and the general public. This requirement involves
greater costs to the corporation.
LO 2 BT: C Difficulty: M TIME: 20 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax
7.
While both public and private corporations enjoy many of the same
advantages and disadvantages, one key difference is that public
corporations list their shares for sale to the public on Canadian or other
stock exchanges. In contrast, while private corporations issue shares, they
do not make them available to the general public or trade them on public
stock exchanges.
Private corporations may also not enjoy the advantages of limited liability
and ease of transfer of ownership that public corporations generally
experience because of their size and distribution of shares.
LO 2 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
8.
(a)
Public corporations must apply International Financial Reporting
Standards (IFRS). Private corporations can apply either IFRS or
Accounting Standards for Private Enterprises (ASPE).
(b)
The information needs of users of public corporations and private
corporations are different. Users of financial information of public
corporations require more extensive disclosure. They may also be
benefit from the enhanced comparability to global companies
provided by international standards. Since private corporations tend
to be smaller with easier access to company information, their users
do not require as extensive reporting.
LO 2 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
9.
A private company that has plans to grow significantly in the near future,
and that wishes to have access to large amounts of capital obtained from
external investors will want to go public. In order to go public, the company
would be required to have several years of past financial statements
prepared using IFRS. In addition, some businesses choose to follow IFRS
in order to be able to compare their performance with businesses in the
same industry that are public and whose financial information is readily
available.
LO 2 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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10.
Financial Accounting, Seventh Canadian Edition
The reporting entity concept means that economic activity of any business
organization or economic entity is kept separate and distinct from the
activities of the owner and all other economic entities. In the case of
corporations such as The North West Company Inc., it also means that
economic activities of related corporations that are owned or controlled by
one corporation are consolidated. The results of these individual
companies are also reported separately as separate economic entities.
LO 2 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
11.
(a)
(b)
(c)
(d)
(e)
Assets are what the company owns such as cash and equipment.
A liability is an amount the company owes such as accounts payable
and income tax payable.
Shareholders’ equity represents the residual interest (assets less
liabilities) of a company at a point in time and includes share capital
and retained earnings, in addition to other possible components.
Revenues are increases in a company’s economic resources from
operating activities such as the sale of a product.
Expenses are the cost of assets that are consumed or services that
are used in the process of generating revenues. Examples include
cost of goods sold, rent expense, and salaries expense.
LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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12.
Financial Accounting, Seventh Canadian Edition
Operating activities are the activities that the organization undertakes to
earn net income. They include the day-to-day activities that generate
revenues and cause expenses to be incurred. In order to earn net income,
a company must first purchase resources they need to operate. The
purchase of these resources (assets) is considered to be an investing
activity. Finally, the company must have sufficient funds to purchase assets
and to operate. While some of the necessary cash will be generated from
operations, often the company has to raise external funds by either issuing
shares or borrowing money. Financing activities involve the activities
undertaken by the company to raise cash externally.
LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
13.
(a)
Two examples of operating activities are revenue generated from
providing auto repair services (an inflow of cash) and the expenses
related to paying employee salaries (an outflow of cash).
(b)
Two examples of investing activities are the purchase of property,
plant, and equipment, such as a building (an outflow of cash), and the
sale of a long-term investment (an inflow of cash).
(c)
Two examples of financing activities for a corporation are borrowing
money (debt), which is an inflow of cash, and declaring and paying
dividends (equity), an outflow of cash
LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
14.
Local companies providing services and therefore generating service
revenue would include doctors, dentists, architects, engineers, law
practices, and accountants. The names of these businesses would likely
include the name of the practitioners or groups providing these services.
Local companies providing sales revenue would include farms that provide
produce or milk products and the retail stores selling the local produce to
customers.
LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
15.
A fiscal year is an accounting time period that is one year in length, but
does not have to end on December 31. Corporations can select their fiscal
year end based on when their operations are low or when inventory is low.
Selecting a fiscal year end when operations are low provides more time for
accounting staff to complete the year-end reporting requirements. If
inventories are low, this simplifies the inventory count and minimizes the
business disruption caused by counting the inventory.
LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
16.
Financial Accounting, Seventh Canadian Edition
The internal accounting records do use exact figures. However, for
presentation purposes, it is unlikely that the use of rounded figures would
change a decision made by the users of the financial statements. As well,
presenting the information in this manner makes the statements easier to
read and analyze thereby increasing their utility to the users. Rounding the
numbers to the nearest million does not have a material impact on
decision-making using the financial statements.
LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
17.
Assets = Liabilities + Shareholders’ Equity
$793,795 = $436,183 + $357,612 (amounts are in thousands of dollars)
LO 4 BT: AP Difficulty: M TIME: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
18.
A statement of changes in equity explains the changes in the components
of shareholders’ equity, such as share capital and retained earnings.
Examples of items that increase the components are issue of shares
(increases share capital) and net income (increases retained earnings).
Examples of items that decrease the components are repurchases of
shares (decreases share capital) and payment of dividends (decrease
retained earnings).
LO 4 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
19.
Financial Accounting, Seventh Canadian Edition
(a)
The primary purpose of the statement of cash flows is to provide
financial information about the cash receipts (inflows) and cash
payments (outflows) of a company for a specific period of time.
(b)
The three categories of the statement of cash flows are operating
activities, investing activities, and financing activities. These
categories represent the three principal types of business activities.
LO 4 BT: K Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
20.
The cash obtained from operating activities is not necessarily expected to
be positive in the early years of a company’s life. If a business offers credit
to its customers and needs to hold a significant amount of inventory to
satisfy customer demands, a large amount of working capital obtained from
selling goods will be tied up in accounts receivable and inventory. Creditors
on the other hand will have little leniency on a new business when
expecting to be paid. Consequently, the amount of cash from operating
activities could very likely be negative. For investing activities, a negative
cash outflow would also be expected as the business must invest in longlived assets needed for operations.
LO 4 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
21.
The statement of financial position is prepared as at a specific point in time
because it shows what the business owns (its assets) and what it owes (its
liabilities). These items are constantly changing. It is necessary to select
one point in time at which to present them. The other statements (income
statement, statement of changes in equity, and statement of cash flows)
cover a period of time as they report activities and measure performance
that takes place over time.
LO 4 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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22.
Financial Accounting, Seventh Canadian Edition
(a)
The income statement reports net income for the period. The net
income figure from the income statement is shown on the statement
of changes in equity as an addition to beginning retained earnings. If
there is a loss, it is deducted from beginning retained earnings.
(b)
The statement of changes in equity explains the change in the
balances of the components of shareholders’ equity (for example,
common shares and retained earnings) from one period to the next.
The ending balances are reported in the shareholders’ equity section
of the statement of financial position.
(c)
The statement of cash flows explains the change in the cash balance
from one period to the next. The ending balance of cash reported in
the statement of cash flows agrees with the ending cash balance
reported in the current assets section on the statement of financial
position.
LO 4 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
23.
(a)
Companies using IFRS must report an income statement, statement
of changes in equity, statement of financial position, and statement of
cash flows. In addition, companies using IFRS may also need to
prepare a statement of comprehensive income.
(b)
Companies using ASPE must report an income statement, statement
of retained earnings, balance sheet, and a statement of cash flows.
LO 4 BT: K Difficulty: S TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 1-1
Investor
Marketing manager
Creditor
Chief financial officer
Canada Revenue Agency
Labour union
(a) Type of Evaluation
(b) Type of User
5
4
1
6
2
3
External
Internal
External
Internal
External
External
LO 1 BT: C Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 1-2
(a)
(b)
(c)
(d)
(e)
1
4
3
2
4
Proprietorship
Private corporation
Public corporation
Partnership
Private corporation
LO 2 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 1-3
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
F
O
I
F
F
F
O
I
O
Inflow
Inflow
Inflow
Outflow
Inflow
Outflow
Outflow
Outflow
Outflow
Note to instructors: As we will learn later in Chapter 13, companies reporting under
IFRS have a choice in classifying dividends paid as an operating or financing
activity. We have chosen to classify dividends paid as financing activities in this
textbook.
LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 1-4
1.
2.
3.
4.
5.
6.
(a)
(b)
O
F
O
O
O
I
NE
+
+
-
LO 3 BT: C Difficulty: M TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 1-5
(a)
Total assets
=
=
=
Total liabilities + Shareholders’ equity
$55,000 + $120,000
$175,000
(Liabilities + Shareholders’ equity = Assets)
(b)
Total assets
=
=
=
Total liabilities + Shareholders’ equity
(share capital + retained earnings)
$170,000 + ($100,000 + $90,000)
$360,000
(Liabilities + Shareholders’ equity = Assets)
(c)
Total liabilities
=
=
=
Total assets – Shareholders’ equity
(share capital + retained earnings)
$150,000 – ($50,000 + $25,000)
$75,000
(Assets – Shareholders’ equity = Liabilities)
(d)
Shareholders’ equity
=
=
=
Total assets – Total liabilities
$500,000 – ($500,000 ÷ 2)
$250,000
(Assets – Liabilities = Shareholders’ equity)
LO 4 BT: AP Difficulty: M TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 1-6
Beginning of Year: Assets = Liabilities + Shareholders’ equity
Beginning of Year: $720,000 = $420,000 + Shareholders’ equity
Beginning of Year: Shareholders’ equity = $300,000
(a)
($720,000 + $250,000) = ($420,000 – $80,000) + Shareholders’ equity
Shareholders’ equity = $630,000
[(Assets ± Change in assets) – (Liabilities ± Change in liabilities) = Shareholders’
equity]
(b)
Assets = ($420,000 – $100,000) + ($300,000 + $90,000 + $125,000)
Assets = $835,000
[(Liabilities ± Change in liabilities) + (Shareholders’ equity ± Change in shareholders’
equity) = Assets]
(c)
($720,000 – $90,000) = Liabilities + ($300,000 + $120,000)
Liabilities = $210,000
[(Assets ± Change in assets) – (Shareholders’ equity ± Change in shareholders’ equity)
= Liabilities]
LO 4 BT: AP Difficulty: C TIME: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 1-7
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
IS
SFP
SCE
SCF
SFP
SCF
IS
SCE
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 1-8
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
L
A
L
L
A
A
A
SE
L
SE
A
LO 4 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 1-9
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Net income
Repayment of bank loan
Declared dividends
Issue of common shares
Cash
Repurchase of common shares
Net loss
Issue of long-term debt
Share
Capital
Retained
Earnings
Total
Shareholders'
Equity
NE
NE
NE
+
NE
NE
NE
+
NE
NE
NE
NE
NE
+
NE
+
NE
NE
LO 4 BT: C Difficulty: C TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 1-10
(a)
Beginning balance
Issue additional shares
Net income
Dividends declared
Ending balance
(b)
Beginning balance
Issue additional shares
Net loss
Ending balance
(1)
(2)
Common
Shares
$100,000
50,000
Retained
Earnings
$475,000
$150,000
75,000
(15,000)
$535,000
(1)
(2)
Common
Shares
$100,000
50,000
Retained
Earnings
$475,000
$150,000
(75,000)
$400,000
(3)
Total
Shareholders'
Equity
$575,000
50,000
75,000
(15,000)
$685,000
(3)
Total
Shareholders'
Equity
$575,000
50,000
(75,000)
$550,000
(Beginning equity ± Changes to equity = Ending equity)
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Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO EXERCISES
EXERCISE 1-1
(a)
Chief Financial Officer – Does Facebook generate enough cash to expand
its operations and purchase other businesses?
Human Resource Manager – What is Facebook’s annual salary expense?
(b)
Creditor – Does Facebook have enough cash available to make its monthly
debt payments?
Investor – How much did Facebook pay in dividends last year?
Other examples are also possible.
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-2
Proprietorship Partnership
1.
2.
3.
4.
5.
No personal liability
Owner(s) pay(s) personal
income tax on company
income
Generally easiest form of
organization to raise capital
Ownership indicated by
shares
Required to issue quarterly
financial statements
Public
Corporation
Private
Corporation
F
F
T
T
T
T
F
F
F
F
T
F
F
F
T
T
F
F
T
F
6.
Owned by one person
T
F
F
F
7.
Limited life
T
T
F
F
T
F
F
F
F
F
T
F
F
F
F
T
8.
9.
Usually easiest form of
organization to set up
Required to use IFRS as
its accounting standards
10. Shares are closely held
LO 2 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001, cpa-t006 CM: Reporting and Tax
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-3
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
O
I
O
F
F
F
O
O
O
F
LO 3 BT: K Difficulty: S TIME: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 1-4
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
(a)
O
F
I
F
I
I
O
O
I
F
F
O
(b)
+
+
+
+
+
-
LO 3 BT: C Difficulty: M TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-5
1.
2.
3.
4.
5.
6.
7.
8.
IS
SFP, SCF
SCF
IS
SCE, SFP
SCE
IS, SCE
SFP
9.
10.
11.
12.
13.
14.
15.
SFP
IS
IS
SCF
SFP
SCE, SFP
SFP
LO 4 BT: K Difficulty: S TIME: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 1-6
;
(a)
Assets – Liabilities = Shareholders’ equity
2017: $550,000 – $400,000 = $150,000
2018: $630,000 – $420,000 = $210,000
(Assets – Liabilities = Shareholders’ equity)
(b)
Change in shareholders’ equity $210,000 – $150,000 = $60,000 increase
(c)
1. Net income is $60,000 = the increase in shareholders’ equity
2. Net income is $70,000 = the increase in shareholders’ equity +
dividends declared of $10,000
3. Net income is $30,000 = the increase in shareholders’ equity –
common shares issued of $30,000
4. Net income is $50,000 = the increase in shareholders’ equity +
dividends declared of $10,000 – common shares issued of $20,000
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-7
[1]
Total revenues – Net income = Total expenses
$1,000,000 – $150,000 = $850,000
[2]
Common shares, end of year $100,000 = Beginning balance of common
shares + Issue of shares of $100,000
[3]
$150,000 equal to Net income given above
[4]
Beginning balance of retained earnings plus net income less dividends
declared = Ending balance of retained earnings.
$0 + $150,000 – Dividends declared = $100,000
Dividends declared = $50,000
[5]
Beginning balance in shareholders' equity + Issue of shares + Net income
– Dividends declared = Ending balance in shareholders’ equity
$0 + $100,000 + $150,000 – $50,000 = $200,000
[6]
Total assets – Total liabilities = total Shareholders’ equity
$1,050,000 – $850,000 = $200,000 or [5] above
[7]
Total revenues – Total expenses = Net income
Total revenues – $250,000 = $50,000
Total revenues = $300,000
[8]
Beginning balance of common shares + Issue of shares = Common
shares, end of year
$0 + Issue of shares = $20,000
Issue of shares = $20,000
[9]
$50,000 equal to Net income given above
[10]
Common shares, end of year + Retained Earnings, end of year
$20,000 + $40,000 = $60,000 Total shareholders’ equity, end of year
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EXERCISE 1-7 (CONTINUED)
[11]
Total liabilities + Total shareholders’ equity = Total assets
$150,000 + $60,000 (from [10]) = $210,000
[12]
$60,000 (from [10]) or $210,000 (from [11]) − $150,000 total liabilities =
$60,000 total shareholders’ equity
LO 4 BT: AN Difficulty: C TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
EXERCISE 1-8
[1]
Total expenses + Net income = Total revenues
$1,700,000 + $1,100,000 = $2,800,000
[2]
Common shares, end of year $200,000 = Beginning balance of common
shares (nil) + Issue of shares of $200,000
[3]
$1,100,000 equal to Net income given above
[4]
Beginning balance of retained earnings plus net income less dividends
declared + Beginning balance of common shares + Issue of shares =
Ending balance in shareholders’ equity.
$0 + $1,100,000 – $300,000 + $0 + $200,000 = $1,000,000
Ending balance in total shareholders’ equity = $1,000,000
[5]
Total liabilities + Total Shareholders’ equity = Total assets
$1,600,000 + $1,000,000 or [4] above = $2,600,000
[6]
[4] above $1,000,000
[7]
Total revenues – Net income = Total expenses
$3,200,000 – $1,500,000 = $1,700,000
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EXERCISE 1-8 (CONTINUED)
[8]
Beginning balance of common shares + Issue of shares = Common
shares, end of year
$0 + Issue of shares = $500,000
Common shares, end of year $500,000
[9]
$1,500,000 equal to Net income given above
[10]
Beginning balance of retained earnings plus net income less dividends
declared = Ending balance of retained earnings.
$0 + $1,500,000 – Dividends declared = $1,200,000
Dividends declared = $300,000
[11]
Common shares, end of year + Retained Earnings, end of year
$500,000 (from [8]) + $1,200,000 = $1,700,000 Total shareholders’
equity, end of year
[12]
Total assets – Total Shareholders’ equity = Total liabilities
$3,100,000 – $1,700,000 = $1,400,000
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-9
($ in thousands)
(a)
Assets – Liabilities = Shareholders’ equity
2015: $2,630,865 – $577,731 = $2,053,134
2014: $2,876,490 – $631,994 = $2,244,496
(b)
Assets = Liabilities + Shareholders’ equity
2015: $2,630,865 = $577,731 + $2,053,134
Assets = Liabilities + Shareholders’ equity
2014: $2,876,490 = $631,994 + $2,244,496
(c)
Change in shareholders’ equity $2,053,134 – $2,244,496= $191,362
decrease
(d)
Shareholders’ equity, Dec. 31, 2014
Add: Net income
Deduct: Dividends declared
Other shareholders’ equity items
Shareholders’ equity, Dec. 31, 2015
$2,244,496
?
44,668
188,274
$2,053,134
Solving for Net income: $2,053,134 + $188,274 + $44,668 − $2,244,496
= $41,580.
(Beginning equity ± Changes to equity = Ending equity)
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-10
(a)
L
A
L
A
A
SE
A
L
(b)
Accounts payable
Accounts receivable
Bank loan payable
Buildings
Cash
Common shares
Equipment
Income tax payable
A
A
inventory
L
SE
A
Land
IMerchandise
Mortgage payable
Retained earnings
Supplies
Note to instructors: Students may list the accounts in the following
statement in any order within the assets, liabilities, and shareholders’ equity
classifications as they have not yet learned how to classify/order accounts.
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-10 (CONTINUED)
AVENTURA INC.
Statement of Financial Position
November 30, 2018
Assets
Cash
Accounts receivable
Merchandise inventory
Supplies
Land
Buildings
Equipment
Total assets
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable
Income tax payable
Bank loan payable
Mortgage payable
Total liabilities
Shareholders’ equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$ 20,000
19,500
18,000
700
44,000
100,000
30,000
$232,200
$ 26,200
6,000
34,000
97,500
163,700
20,000
48,500
68,500
$232,200
(Assets = Liabilities + Shareholders’ equity)
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-11
(a)
E
E
NR
E
R
E
E
R
(b)
Administrative expenses
Cost of goods sold
Dividends declared
Finance expenses
Finance income
Income tax expense (recovery)
Selling and distribution expenses
Sales
REITMANS (Canada) Limited
Income Statement
Year Ended January 30, 2016
(in thousands)
Revenues
Sales
Finance income
Total revenues
Expenses
Selling and distribution expenses
Cost of goods sold
Administrative expenses
Finance expenses
Total expenses
Loss before income tax
Income tax recovery
Net loss
$937,155
7,998
945,153
$497,854
410,035
46,950
16,443
971,282
(26,129)
1,426
$ (24,703)
[Revenues – Expenses = Net income or (loss)]
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-12
KON INC.
Income Statement
Year Ended December 31, 2018
Revenues
Service revenue
Expenses
Salaries expense
Rent expense
Utilities expense
Office expense
Total expenses
Income before income tax
Income tax expense
Net income
$61,000
$30,000
12,400
2,400
1,600
46,400
14,600
3,000
$11,600
[Revenues – Expenses = Net income or (loss)]
KON INC.
Statement of Changes in Equity
Year Ended December 31, 2018
Balance, January 1
Issued common shares
Net income
Dividends declared
Balance, December 31
Common
Shares
$20,000
10,000
$30,000
Retained
Earnings
$58,000
11,600
(5,000)
$64,600
Total
Equity
$78,000
10,000
11,600
(5,000)
$94,600
(Beginning equity ± Changes to equity = Ending equity)
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-13
(a)
Camping revenue
Expenses
Operating expenses
Income tax expense
Net income
$283,000
$245,000
10,000
255,000
$ 28,000
[Revenues – Expenses = Net income or (loss)]
(b)
Balance, January 1
Issued common shares
Net Income
Dividends declared
Balance, December 31
SEA SURF CAMPGROUND INC.
Statement of Changes in Equity
Year Ended December 31, 2018
Common
Shares
$30,000
15,000
$45,000
Retained
Earnings
$18,000
28,000
(12,000)
$34,000
Total
Equity
$48,000
15,000
28,000
(12,000)
$79,000
(Beginning equity ± Changes to equity = Ending equity)
Note to instructors: Students may list the accounts in the following statement in
any order within the assets, liabilities, and shareholders’ equity classifications as
they have not yet learned how to classify/order accounts.
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-13 (CONTINUED)
(b) (continued)
SEA SURF CAMPGROUND INC.
Statement of Financial Position
December 31, 2018
Assets
Cash
Supplies
Equipment
Total assets
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable
Bank loan payable
Total liabilities
Shareholders’ equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
19,000
2,500
124,000
$145,500
$ 16,500
50,000
66,500
45,000
34,000
79,000
$145,500
(Assets = Liabilities + Shareholders’ equity)
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Financial Accounting, Seventh Canadian Edition
EXERCISE 1-14
1.
Yu Corporation is distributing nearly all of this year's net income as
dividends. This suggests that Yu is not pursuing rapid growth. Companies
that are pursuing opportunities for growth normally retain their net income
and pay low, or no dividends.
2.
Surya Corporation is not generating sufficient cash from operating activities
to fund its investing activities. The company is borrowing to finance its
investing activities. This is common for companies in their early years of
existence. It could also be in an expansion stage.
3.
Naguib Ltd. is financing its assets in a slightly higher proportion through
equity than through debt. The company has $450,000 ($200,000 +
$250,000) of total assets, which are funded 44.4% ($200,000 ÷ $450,000)
by liabilities and 55.6% ($250,000 ÷ $450,000) by equity. Since equity does
not have to be repaid and does not require interest payments, the company
appears to be in a healthy financial position.
4.
Rijo Inc. does not have any liabilities and its assets are completely financed
by equity. This places it in a very strong financial position since there are
no outside claims on the company’s assets. This also means that the
company is using its own funds to finance assets. While this reduces risk,
it may also reduce return if borrowed funds can be employed to generate
an internal return higher than the cost of borrowing.
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Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS
PROBLEM 1-1A
(a)
1. The South Face Inc. is an external user of accounting information in
assessing the creditworthiness of their customer.
2. An investor purchasing common shares of Orbite Online Inc. is an
external user.
3. In deciding whether to extend a loan, Caisse d’Économie Base Montréal
is an external user.
4. As an employee of Tech Toy Limited, the CFO is an internal user.
(b)
1. In deciding to extend credit, South Face would focus its attention on the
statement of financial position of the new customer. The terms of credit
they are extending require repayment in a short period of time. Funds to
repay the credit would come from cash on hand and other current
assets. The statement of financial position of the new customer will show
if the company has enough current assets to meet its current obligations.
2. Since the investor intends to hold the shares for a long period of time (at
least five years), s(he) should focus on the company’s income
statement. The income statement reports the company’s past
performance in terms of revenues, expenses, and net income. This is
generally regarded as a good indicator of the company’s future
performance.
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PROBLEM 1-1A (CONTINUED)
3. The Caisse is interested in two things—the ability of the company to
make interest payments on a monthly basis for the next three years and
the ability to repay the principal amount at the end of the three years. In
order to evaluate both of these factors, the focus should be on the
statement of cash flows. This statement provides information on the
cash the company generates from its operations on an ongoing basis. It
also tells whether the company is currently borrowing or repaying debt.
4. The CFO should focus on the statement of cash flows as this statement
clearly sets out the cash generated from operating activities and the
amount the company has spent in the past on purchasing equipment
and paying dividends.
Note to instructors: Other answers may be valid provided they are properly supported.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-2A
(a)
1.
The professors should incorporate their business as a private
corporation because of their concerns about legal liabilities. A
corporation is the only form of business that provides limited liability.
Since the professors do not need access to large amounts of
investment capital, a private corporation provides the limited liability
advantage the professors need.
2.
Joseph should run his bicycle rental shop as a proprietorship because
this is the simplest and least costly form of business organization to
establish and eventually dissolve. He is the only person involved in the
business and is planning to operate for a limited time.
3.
The size of the businesses is not given, but Robert and Tom should
likely form a public corporation, if possible, when they combine their
operations. This is the best form of business for them to choose
because they expect to raise funds in the coming year. A public
corporation will enable them to raise significant amounts of funds for
their manufacturing company. A corporation may also receive more
favourable income tax treatment. If they are not large businesses, then
Robert and Tom may choose to form a private corporation.
4.
A partnership would be the most likely form of business for Darcy, Ellen,
and Meg to choose. It is simpler to form than a corporation and less
costly.
5.
Hervé is most likely to select to operate his business as a private
corporation. This will assist him with the liability of storing goods for
others. He will also be able to raise funds to purchase equipment, rent
space in airports, and hire employees. It is easier to raise funds through
a private corporation rather than a proprietorship or partnership.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-2A (CONTINUED)
(b)
1.
2.
3.
4.
5.
ASPE
ASPE
IFRS
ASPE
ASPE
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-3A
(a)
Operating
(b)
Investing
Financing
Indigo Books &
Music
Sale of books
Purchase of store
equipment
Issue of shares
High Liner Foods
Payment for fish
Purchase of
production
equipment
Borrowing money
from a bank
Mountain Equipment
Co-op
Payment for
inventory
Purchase of store
fixtures
Borrowing money
from a bank
Ganong Bros.
Payment of
salaries and
benefits
Purchase of
production
equipment
Payment of
dividends to
shareholders
Royal Bank
Payment of
interest on
savings accounts
Purchase of office Issue of bonds
equipment
Financing
Issuing shares is common to all corporations. Issuing debt is common to most
corporations. Borrowing from a bank is common to most companies. Payment
of dividends is common to many, but not all, corporations. Issuing bonds is
common to large public corporations.
Investing
Purchasing property, plant, and equipment is common to most companies—the
types of assets would vary according to the nature of the business. Some types
of companies require a larger investment in long-lived assets. A new business
or expanding business would be more apt to be acquiring assets.
Operating
The general activities identified above would be common to most corporations
with the exception of the payment of interest on savings accounts. The source
of the cash receipt (for example, from the sale of books) and cash payment (for
example, for the payment for fish) would vary by the nature of the business.
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PROBLEM 1-4A
Accounts payable
Accounts receivable
Bank indebtedness
Bank loan payable
Cash
Common shares
Equipment
Goodwill
Income tax expense
Income tax payable
Interest expense
Office expense
Prepaid insurance
Rent expense
Repair and maintenance expense
Salaries payable
Service revenue
Supplies
Vehicles
(a)
(b)
L
A
L
L
A
SC
A
A
E
L
E
E
A
E
E
L
R
A
A
SFP
SFP
SFP
SFP
SFP
SFP, SCE
SFP
SFP
IS
SFP
IS
IS
SFP
IS
IS
SFP
IS
SFP
SFP
LO 4 BT: K Difficulty: S TIME: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-5A
(a) and (b)
(b)
Accounts payable
Accounts receivable
Bank loan payable
Cash
Common shares
Equipment
Income tax payable
Intangible assets
Interest payable
Inventory
Prepaid insurance
Retained earnings
Salaries payable
Supplies
Unearned revenue
Vehicles
Totals
$15,600
13,100
32,000
9,350
20,000
30,500
1,800
5,000
300
9,200
1,000
21,250
700
2,800
1,800
22,500
(a)
L
A
L
A
SE
A
L
A
L
A
A
SE
L
A
L
A
Assets
Liabilities
$ 15,600
Shareholders’
Equity
$13,100
32,000
9,350
$ 20,000
30,500
1,800
5,000
300
9,200
1,000
21,250
700
2,800
22,500
$93,450
1,800
______
$52,200
______
$41,250
Assets = Liabilities + SE
$93,450 = $52,200 + $41,250
(c)
Beginning balance in Retained Earnings + Revenues – Expenses –
Dividends declared = Ending balance in Retained Earnings
$18,000 + $296,750 – $278,500 – $15,000 = $21,250
LO 4 BT: AP Difficulty: M TIME 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-6A
(a)
(All amounts are in millions of dollars)
Sears
[1]
Total assets = Total liabilities + Total shareholders’ equity
Total assets = $1,203.3 + $570.8
Total assets = $1,774.1
[2]
Total liabilities = Total assets – Total shareholders’ equity
Total liabilities = $1,633.2 – $554.2
Total liabilities = $1,079.0
[3]
Shareholders’ equity, beginning of year + Total revenues – Total
expenses – Other increases in shareholders’ equity =
Shareholders’ equity, end of year
$570.8 + $3,145.7 – [3] + $51.3 = $554.2
[3] Total expenses = $3,213.6
Canadian Tire
[4]
Total liabilities = Total assets – Total shareholders’ equity
Total liabilities = $14,553.2 – $5,630.8
Total liabilities = $8,922.4
[5]
Total assets = Total liabilities + Total shareholders’ equity
Total assets = $9,198.1 + $5,789.7 [6]
Total assets = $14,987.8
[6]
Shareholders’ equity, beginning of year – Repurchase of shares –
Dividends declared + Total revenues – Total expenses + Other
increases in shareholders’ equity = Shareholders’ equity, end of
year
$5,630.8 − $434.6 – $162.4 + $12,279.6 – $11,543.7 + $20.0 =
$5,789.7
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-6A (CONTINUED)
(b)
At the end of the most recent fiscal year, Sears has a higher proportion of
debt financing and Canadian Tire has a higher proportion of equity
financing. Canadian Tire financed 38.6% ($5,789.7 million ÷ $14,987.8
million) of its assets with equity and 61.4% of its assets with debt ($9,198.1
million ÷ $14,987.8 million). For the equivalent fiscal year end, 33.9%
($554.2 million ÷ $1,633.2 million) of Sears’s assets were financed by
equity and 66.1% ($1,079.0 million ÷ $1,633.2 million) by debt. Sears is
riskier because more of its assets are financed by debt.
(c)
Both retailers typically have low inventories at the end of December and at
the end of January as a result of the Christmas sales, with little or no new
inventory purchased during the month of January so no major differences
in financial position at the end of December compared to January would be
anticipated. As long as there were no significant economic events that
affected one company more than the other in the intervening period
(January), it is unlikely that the different year-end dates would affect the
comparison in (b).
LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-7A
(a)
ONE PLANET COSMETICS CORP.
Income Statement
Month Ended June 30, 2018
Revenues
Service revenue
Expenses
Salaries expense
Office expense
Utilities expense
Supplies expense
Interest expense
Total expenses
Income before income tax
Income tax expense
Net income
$24,200
$5,700
1,500
1,500
2,100
800
11,600
12,600
700
$11,900
[Revenues – Expenses = Net income or (loss)]
ONE PLANET COSMETICS CORP.
Statement of Changes in Equity
Month Ended June 30, 2018
Balance, June 1
Issued common shares
Net income
11,900
Dividends declared
(1,000)
Balance, June 30
Common
Shares
$
0
36,000
Retained
Earnings
$
0
Total
Equity
$
0
36,000
11,900
(1,000)
$36,000
$10,900
$46,900
(Beginning equity ± Changes to equity = Ending equity)
Solutions Manual
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Chapter 1
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-7A (CONTINUED)
(a) (continued)
Note to instructors: Students may list the accounts in the following
statement in any order within the assets, liabilities, and shareholders’ equity
classifications as they have not yet learned how to classify/order accounts.
ONE PLANET COSMETICS CORP.
Statement of Financial Position
June 30, 2018
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
$ 15,000
9,000
1,200
52,000
$77,200
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable
Bank loan payable
Total liabilities
Shareholders’ equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$ 7,300
23,000
30,300
0
36,000
10,900
46,900
$77,200
(Assets – Liabilities = Shareholders’ equity)
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Chapter 1
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-7A (CONTINUED)
(b)
The financial statements must be prepared in the order of (1) income
statement, (2) statement of changes in equity, and (3) statement of
financial position. This is because each subsequent financial statement
depends on information contained in the previous statement. The net
income from the income statement flows to the retained earnings account
on the statement of changes in equity. The shareholders’ equity totals in
the statement of changes in equity (for example, for common shares and
retained earnings) then flow to the shareholders’ equity section of the
statement of financial position.
LO 4 BT: AP Difficulty: M TIME: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
(a)
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-8A
Cash dividends paid
Cash paid to purchase equipment
Cash payments for operating activities
Cash receipts from operating activities
Cash received from issue of long-term debt
Cash received from issue of shares
$ 10,000
35,000
120,000
140,000
20,000
20,000
Activity
financing
investing
operating
operating
financing
financing
(b)
MAISON CORPORATION
Statement of Cash Flows
Year Ended December 31, 2018
Operating activities
Cash receipts from operating activities
Cash payments for operating activities
Net cash provided by operating activities
$140,000
(120,000)
Investing activities
Purchase of equipment
Net cash used by investing activities
$(35,000)
Financing activities
Issue of long-term debt
Issue of shares
Payment of dividends
Net cash provided by financing activities
$ 20,000
20,000
(10,000)
Net increase in cash
Cash, January 1
Cash, December 31
$20,000
(35,000)
30,000
15,000
12,000
$27,000
(Cash flows from operating, investing, and financing activities = Net change in cash)
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-8A (CONTINUED)
(c)
The company is generating less cash from operating activities (+$20,000)
than it is using for its investing activities (–$35,000) and the payment of
dividends (–$10,000). The company, however, is making up for the
deficiency by generating cash from financing activities. Cash from financing
activities is not a renewable source of cash and usually entails future cash
payments in the form of interest on debt, principal repayment, and dividend
payments for shares.
LO 4 BT: AN Difficulty: M TIME: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-9A
(a)
[1]
Operating expenses = Service revenue – Income before income tax
Operating expenses = $225,000 – $45,000
Operating expenses = $180,000
[2]
Net income = Income before income tax – Income tax expense
Net income = $45,000 – $9,000
Net income = $36,000
[3]
Net income (from [2]) = $36,000
[4]
Ending retained earnings = Beginning retained earnings + Net
income – Dividends declared
Ending retained earnings = $0 + $36,000 (from [2]) – $15,000
Ending retained earnings = $21,000
[5]
Total issued common shares = $250,000
[6]
Net income = $36,000 (from [3])
[7]
Total equity = Beginning balance + Issued common shares + Net income –
Dividends declared
Total equity = $0 + $250,000 (from [5]) + $36,000 (from [6]) – $15,000
Total equity = $271,000
[8]
Land = Total assets (from [9]) – Cash – Accounts receivable –
Building – Equipment
Land = $964,000 – $22,000 – $34,000 – $390,000 – $218,000
Land = $300,000
[9]
Total assets = Total liabilities + Shareholders' equity
Total Assets = $964,000
[10]
Accounts payable = Total liabilities – Bank loan payable
Accounts payable = $693,000 – $600,000
Accounts payable = $93,000
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-9A (CONTINUED)
(b)
[11]
Common shares = $250,000 (from the Statement of Changes in Equity)
[12]
Retained earnings = $21,000 (from [4])
[13]
Total shareholders' equity = Common shares + Retained earnings
Total shareholders' equity = $250,000 (from [11]) + $21,000 (from
[12]) = $271,000 or (from [7])
(1)
In preparing the financial statements, the first statement to be
prepared is the income statement, followed by the statement of
changes in equity, and then the statement of financial position.
Note to instructors: While the statements must be prepared in this
sequence, these statements can be presented in a variety of orders.
Often the statement of financial position is presented first, as the most
“permanent” statement.
(2)
The reason the statements must be prepared in the order indicated
above is that each statement depends on information in the previously
prepared statement. For example, the net income figure from the
income statement is used in the statement of changes in equity to
calculate the ending balance of retained earnings. The shareholders’
equity section of the statement of financial position is then completed
using the ending balances of common shares and retained earnings,
as calculated in the statement of changes in equity.
LO 4 BT: AN Difficulty: C TIME: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-10A
(a)
1. Remove the boat from the listing of assets since it does not belong to the
corporation. Remove the boat loan payable from the listing of liabilities
since this is a personal loan of Guy Gélinas.
2. Remove the $10,000 outstanding receivable from Guy’s brother. This is
not a company receivable and should not be listed on the company’s
statement of financial position.
3. Correct the Common Shares account to remove the extra amount that
had been added to “balance”:
Remove accounts receivable
$10,000
Remove boat asset
24,000
Remove bank loan
(40,000)
Net adjustment to common shares
$ 6,000
Provide separate totals for liabilities and shareholders’ equity as the two
components that are financing the assets of the company.
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-10A (CONTINUED)
(b)
GG CORPORATION
Statement of Financial Position
July 31, 2018
Assets
Cash
Accounts receivable ($50,000 − $10,000)
Inventory
Total assets
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable
Total liabilities
Shareholders’ equity
Common shares [$50,000 + $6,000 (from (3) above)]
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$20,000
40,000
36,000
$96,000
$34,000
34,000
0
56,000
6,000
62,000
$96,000
(Assets – Liabilities = Shareholders’ equity)
(c)
As a private company, GG Corporation should also prepare an income
statement, a statement of retained earnings, and a statement of cash flows.
LO 4 BT: AN Difficulty: C TIME: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-1B
(a)
1. An investor purchasing common shares of Fight Fat Ltd. is an external
user.
2. As a potential creditor, Comeau Ltée is an external user.
3. The chief financial officer is an internal user.
4. As a potential creditor, Drummond Bank is an external user.
(b)
1. In making an investment in common shares, the Ontario investor is
becoming a partial owner (shareholder) of the company. In this case, the
investment will be held for at least three years. The information that will
be most relevant to him/her will be on the income statement. The income
statement reports the past performance of the company in terms of its
revenue, expenses, and net income. This is the best indicator of the
company’s future potential.
2. In deciding to extend credit to a new customer, Comeau would focus its
attention on the new customer's statement of financial position. The
terms of credit they are extending require repayment in a short period of
time. Funds to repay the credit would come from current assets. The
statement of financial position of the new customer will show whether
the company has enough current assets to meet its current obligations.
3. In order to determine whether the company is generating enough cash
to increase the amount of dividends paid to investors, the CFO of Private
Label needs information on the amount of cash generated and used in
various activities of the business. The statement of cash flows is the
most useful statement for this purpose. This statement presents the
amount of cash at the beginning and end of the period as well as the
details of the amount of cash generated by operating activities and the
amount spent on expanding operations (investing activities).
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-1B (CONTINUED)
4. In deciding whether to extend a loan, Drummond Bank is interested in
two things: the ability of the company to make its monthly interest
payments for the next five years and the ability to repay the principal
amount at the end of five years. In order to evaluate both of these factors
the focus should be on the statement of cash flows. This statement
provides information on the cash the company generates from its
operating activities on an ongoing basis. This will be the most important
factor in determining if the company will survive and be able to repay the
principal and interest on the loan.
Note to instructors: Other answers may be valid provided they are properly
supported.
LO 1 BT: C Difficulty: M TIME: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-2B
(a)
1. Dawn will likely operate her vegetable stand as a proprietorship because
she is planning on operating it for a short time period. A proprietorship is
the simplest and least costly business organization to form and dissolve.
2. Joseph and Sabra should form a private corporation when they combine
their operations. A private corporation will be easier and less expensive
to form than a public corporation. It will also be an easier type of
organization in which to raise funds than a proprietorship or partnership.
A corporation may also receive more favourable income tax treatment.
3. The professors should incorporate their business as a private corporation
because of their concerns about the legal liabilities. A corporation is the
only form of business that provides limited liability to its owners.
4. Abdul would likely form a public corporation because he needs to raise
funds to invest in inventories and property, plant, and equipment. He has
no savings or personal assets and it is normally easier to raise funds
through a corporation than through a proprietorship or partnership. A
public corporation will allow Abdul to raise larger amounts of funds by
selling shares to the public.
5. A partnership would be the most likely form of business for Mary, Richard,
and Jigme to choose. It is simpler to form than a corporation and less
costly.
(b)
1.
2.
3.
4.
5.
ASPE
ASPE
ASPE
IFRS
ASPE
LO 2 BT: C Difficulty: M TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-3B
(a)
Operating
Investing
Financing
WestJet Airlines
Payment for jet
fuel
Purchase of
airplanes
Issue of shares
University of Calgary
Students’ Union
Payment of
salaries and
benefits
Payment of
research
expenses
Payment for
facilities rentals
Purchase of
office
equipment
Purchase of
other
companies
Purchase of
equipment
Borrowing
money from a
bank
Issue of bonds
Receipt of
revenue from
sales of food
from Sobeys
Purchase of
real estate to
build Sobeys’
stores
Repaying money
to a bank
GlaxoSmithKline
Maple Leaf Sports &
Entertainment
Empire Company
(b)
Payment of
dividends to
shareholders
Financing
Issuing shares is common to all corporations. Borrowing from and repaying
money to a bank is common to most companies. Payment of dividends is
common to many, but not all, corporations. Issuing bonds is common to
large corporations.
Investing
Purchasing property, plant, and equipment would be common to most
companies—the types of assets would vary according to the type of
business. Some types of businesses require a larger investment in longlived assets. A new business or expanding business would be more likely
to engage in investing activities (for example, acquiring assets). The
purchase of other companies would not be common to all companies.
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-3B (CONTINUED)
Operating
The general activities identified above (sales and expenditures) would be
common to most businesses, although the service or product might
change.
LO 3 BT: C Difficulty: C TIME: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-4B
Accounts payable
Accounts receivable
Bank loan payable
Buildings
Cash
Common shares
Cost of goods sold
Equipment
Income tax expense
Income tax payable
Intangible assets
Interest expense
Land
Merchandise inventory
Mortgage payable
Office expense
Prepaid insurance
Retained earnings
Salaries payable
Sales
Unearned revenue
(a)
(b)
L
A
L
A
A
SE
E
A
E
L
A
E
A
A
L
E
A
SE
L
R
L
SFP
SFP
SFP
SFP
SFP
SFP, SCE
IS
SFP
IS
SFP
SFP
IS
SFP
SFP
SFP
IS
SFP
SFP, SCE
SFP
IS
SFP
LO 4 BT: K Difficulty: S TIME: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-5B
(a) and (b)
(b)
Accounts payable
Accounts receivable
Bank loan payable
Cash
Common shares
Equipment
Income tax payable
Interest payable
Inventory
Prepaid insurance
Retained earnings
Salaries payable
Supplies
Unearned revenue
Totals
$23,100
6,950
25,000
17,750
20,000
66,200
1,900
500
21,300
950
39,850
3,050
3,750
3,500
(a)
L
A
L
A
SE
A
L
L
A
A
SE
L
A
L
Assets
Liabilities
$23,100
Shareholders’
Equity
$ 6,950
25,000
17,750
$ 20,000
66,200
1,900
500
21,300
950
39,850
3,050
3,750
_______
$116,900
3,500
$57,050
_______
$59,850
Assets = Liabilities + Shareholders’ equity
$116,900 = $57,050 + $59,850
(c)
Beginning balance in Retained Earnings + Revenues – Expenses – Dividends
Declared = Ending balance in Retained Earnings
$8,850 + $365,000 – $333,000 – $1,000 = $39,850
LO 4 BT: AP Difficulty: M TIME: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
PROBLEM 1-6B
(a)
(All amounts are in U.S. millions of dollars)
Restaurant Brands
[1]
Total liabilities = Total assets – Total shareholders’ equity
Total liabilities = $21,343.0 – $7,636.8
Total liabilities = $13,706.2
[2]
Total shareholders' equity = Total assets – Total liabilities
Total shareholders' equity = $18,408.5 – $12,198.4
Total shareholders' equity = $6,210.1
[3]
Shareholders’ equity, beginning of year – Repurchase of shares –
Dividends declared + Total revenues – Total expenses – Other
decreases in shareholders’ equity = Shareholders’ equity, end of
year
$7,636.8 − $293.7 − $[3] + $4,052.2 – $3,540.5 − $1,167.8 =
$6,210.1
[3] Dividends declared = $476.9
Starbucks
[4]
Total assets = Total liabilities + Total shareholders’ equity
Total assets = $5,479.2 + $5,273.7
Total assets = $10,752.9
[5]
Total assets = Total liabilities + Total shareholders’ equity
Total assets = $6,626.3 + $5,038.4 (from [6])
Total assets = $11,664.7
[6]
Shareholders’ equity, beginning of year + Issuance of shares –
Dividends declared + Total revenues – Total expenses – Other
increases in shareholders’ equity = Shareholders’ equity, end of
year
$5,273.7 + $23.5 − $1,016.2 + $19,162.7 – $18,616.6 + $211.3 =
$5,038.4
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-6B (CONTINUED)
(b)
At the end of the most recent fiscal year, Restaurant Brands has a higher
proportion of debt financing and Starbucks has a higher proportion of
equity financing. Starbucks financed 43.2% (U.S. $5,038.4 million ÷ U.S.
$11,664.7 million) of its assets with equity and 56.8% of its assets with debt
(U.S. $6,626.3 million ÷ U.S. $11,664.7 million). For the same period,
33.7% ($6,210.1 million ÷ $18,408.5 million) of Restaurant Brands’ assets
were financed by equity and 66.3% ($12,198.4 million ÷ $18,408.5 million)
by debt. Restaurant Brands is riskier because more of its assets are
financed by debt.
(c)
As long as there are no unusual transactions or economic events that affect
one company differently than another during the intervening period of time
(October through December), or at each company’s year-end date, the
differing year ends should not have a significant impact on the assessment
of the financial position and performance for the two companies.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-7B
(a)
AERO FLYING SCHOOL LTD.
Income Statement
Month Ended May 31, 2018
Revenues
Service revenue
Expenses
Fuel expense
Rent expense
Office expense
Salaries expense
Repair and maintenance expense
Interest expense
Income before income tax
Income tax expense
Net income
$215,300
$85,400
12,100
12,700
36,600
40,900
12,500
200,200
15,100
2,800
$ 12,300
[Revenues – Expenses = Net income or (loss)]
AERO FLYING SCHOOL LTD.
Statement of Changes in Equity
Month Ended May 31, 2018
Balance, May 1
Issued common shares
180,000
Net income
12,300
Dividends declared
(2,700)
Balance, May 31
Common
Shares
$
0
180,000
Retained
Earnings
$
0
Total
Equity
$
0
12,300
(2,700)
$180,000
$9,600
$189,600
(Beginning equity ± Changes to equity = Ending equity)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-7B (CONTINUED)
(a) (continued)
Note to instructors: Students may list the accounts in the following
statement in any order within the assets, liabilities, and shareholders’ equity
classifications as they have not yet learned how to classify/order accounts.
AERO FLYING SCHOOL LTD.
Statement of Financial Position
May 31, 2018
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
$ 26,900
22,600
15,000
372,500
$ 437,000
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable
Bank loan payable
Total liabilities
Shareholders’ equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
6,400
241,000
247,400
180,000
9,600
189,600
$437,000
(Assets – Liabilities = Shareholders’ equity)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-7B (CONTINUED)
(b)
The financial statements must be prepared in the order of (1) income
statement, (2) statement of changes in equity, and (3) statement of
financial position. This is because each subsequent financial statement
depends on information contained in the previous statement. The net
income from the income statement flows to the retained earnings in the
statement of changes in equity. The shareholders’ equity totals (for
example, for common shares and retained earnings) in the statement of
changes in equity then flow to the shareholders’ equity section of the
statement of financial position.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-8B
(a)
Cash payments for operating activities
Cash paid for equipment
Repayment of long-term debt
Cash dividends paid
Cash receipts from operating activities
$109,000
40,000
15,000
13,000
158,000
Activity
operating
investing
financing
financing
operating
(b)
FURLOTTE CORPORATION
Statement of Cash Flows
Year Ended June 30, 2018
Operating activities
Cash receipts from operating activities
Cash payments for operating activities
Net cash provided by operating activities
$158,000
(109,000)
Investing activities
Cash paid to purchase equipment
Net cash used by investing activities
$(40,000)
Financing activities
Repayment of long-term debt
Cash dividends paid
Net cash used by financing activities
$(15,000)
(13,000)
Decrease in cash
Cash, July 1, 2017
Cash, June 30, 2018
$49,000
(40,000)
(28,000)
(19,000)
40,000
$21,000
(Cash flows from operating, investing, and financing activities = Net change in cash)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-8B (CONTINUED)
(c)
The company is not generating sufficient cash from its operating activities
($49,000) to pay for the total of its investing activities ($40,000) and dividend
payments ($13,000). If the company expects to continue to use cash for
investing activities and dividend payments in future years, it will either have
to generate more cash from its operating activities or from its financing
activities (for example, borrow money) as its ending cash balance will not
sustain this cash outflow on its own.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-9B
(a)
[1]
Operating expenses = Service revenue – Income before income tax
Operating expenses = $325,000 – $116,000
Operating expenses = $209,000
[2]
Net income = Income before income tax – Income tax expense
Net income = $116,000 – $23,000
Net income = $93,000
[3]
Net income = $93,000 (same as [2])
[4]
Dividends declared = Beginning retained earnings + Net income –
Ending retained earnings
Dividends declared = $440,000 + $93,000 – $521,000
Dividends declared = $12,000
[5]
Beginning total equity = Beginning common shares + Beginning
retained earnings
Beginning total equity = $250,000 + $440,000
Beginning total equity = $690,000
[6]
Total common shares issued = $60,000
[7]
Net income = $93,000 (same as [3])
[8]
Dividends declared = $12,000 (same as [4])
[9]
Ending total equity = Ending common shares + Ending retained earnings
Ending total equity = $310,000 + $521,000
Ending total equity = $831,000
[10]
Cash = Total assets – (Accounts receivable + Land + Buildings + Equipment)
Cash = $1,351,000 (from [11]) – ($34,000 + $310,000 +
$616,000 + $364,000)
Cash = $27,000
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Financial Accounting, Seventh Canadian Edition
PROBLEM 1-9B (CONTINUED)
(b)
[11]
Total assets = Total liabilities and shareholders’ equity
Total assets = $1,351,000
[12]
Common shares = $310,000 (as per statement of changes in equity)
[13]
Retained earnings = $521,000 (as per statement of changes in equity)
(1)
In preparing the financial statements, the first statement to be
prepared is the income statement, followed by the statement of
changes in equity, and then the statement of financial position. While
the statements must be prepared in this sequence, these statements
can be presented in a variety of orders. Often the statement of
financial position is presented first, as the most “permanent”
statement.
(2)
The reason the statements must be prepared in the order indicated
above is that each statement depends on information in the previously
prepared statement. For example, the net income figure in the income
statement is used in the statement of changes in equity to calculate
the ending balance of retained earnings. The shareholders’ equity
section of the statement of financial position is then completed using
the ending balances of the shareholders’ equity components (such as
common shares and retained earnings) as calculated in the statement
of changes in equity.
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PROBLEM 1-10B
(a)
(b)
Financial Accounting, Seventh Canadian Edition
1.
Remove
accounts
receivable
from the revenue section of the income statement since it is a
current asset and does not belong on the income statement.
2.
Remove the $3,000 of service revenue that has not yet been
earned.
3.
Remove the $12,000 rent expense. This is not an actual transaction
and cannot be listed on the company’s income statement.
4.
Remove the $4,000 vacation expense. This is not a business
expense but rather a personal expense of the business owner.
5.
Deduct expenses from revenues rather than adding them.
INDEPENDENT BOOK SHOP LTD.
Income Statement
Year Ended March 31, 2018
Revenues
Service revenue ($41,000 – $3,000)
Expenses
Office expense
Income before income tax
Income tax expense
Net income
$38,000
5,000
33,000
5,000
$28,000
[Revenues – Expenses = Net income or (loss)]
(c)
As a private company, Independent Book Shop should also prepare a
statement of financial position, a statement of retained earnings, and a
statement of cash flows.
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CT1-1
(a)
Financial Accounting, Seventh Canadian Edition
FINANCIAL REPORTING CASE
North West presents the following five financial statements: Statement
of Earnings (which we call income statement in the chapter), Statement
of Comprehensive Income, Balance Sheet (which we call statement of
financial position), Statement of Changes in Shareholders’ Equity (which
we call statement of changes in equity), and Statement of Cash Flows.
All of the above financial statements, except the Statement of
Comprehensive Income, were discussed in this chapter.
(b)
As demonstrated in the table below, North West’ sales and net income
increased in fiscal 2016.
($ in thousands)
Sales
Net income (net earnings)
2016
$1,796,035
69,779
2015
$1,624,400
62,883
Change
$171,635
6,896
Net income is affected by revenue and expenses incurred by a company
during the year. An increase in sales does not always translate into an
increase in net income. For North West, both revenue and net income
increased.
(c)
($ in thousands)
(1)
January 31, 2016
Total assets
Total liabilities
Total shareholders’ equity
$793,795
436,183
357,612
(2)
January 31, 2015
$724,299
395,016
329,283
(Assets = Liabilities + Shareholders’ equity)
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Financial Accounting, Seventh Canadian Edition
CT1-1 (CONTINUED)
(d)
($ in thousands)
Share capital
Retained earnings
January 31, 2016
$167,910
156,664
January 31, 2015
$167,460
140,527
Yes, the above balances taken from the statement of changes in equity
agree with the amounts reported in the shareholders’ equity section of the
balance sheet. Note that these do not comprise all of North West’s’
shareholders’ equity. Other shareholders’ equity items make up the
remainder of the total shareholders’ equity balances reported on both
statements as shown below.
($ in thousands)
Share capital
Contributed surplus
Retained earnings
Accumulated other
comprehensive income
Total shareholders’ equity
(e)
($ in thousands)
Cash
January 31, 2016
January 31, 2015
$167,910
2,620
156,664
$167,460
2,831
140,527
30,418
$357,612
18,465
$329,283
January 31, 2016
$37,243
January 31, 2015
$29,129
This information can be obtained on the balance sheet (statement of
financial position) or on the statement of cash flows.
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CT1-2
(a) and (b)
Financial Accounting, Seventh Canadian Edition
FINANCIAL ANALYSIS CASE
[North West ($ in thousands)]
1.
Assets
Liabilities
Shareholders’ equity
2.
Sales
Net income
2016
$793,795
436,183
357,612
2015
$724,299
395,016
329,283
% change
9.6%
10.4%
8.6%
2016
$1,796,035
69,779
2015
$1,624,400
62,883
% change
10.6%
11.0%
2016
$7,960.6
5,230.9
2,729.7
2015
$10,261.0
5,282.6
4,978.4
% change
(22.4)%
(1.0)%
(45.2)%
2016
$24,618.8
(2,119.2)
2015
$23,928.8
366.7
% change
2.9%
*
Sobeys ($ in millions)
1.
Assets
Liabilities
Shareholders’ equity
2.
Sales
Net income (loss)
*not meaningful
(c)
North West experienced growth in assets, liabilities, and shareholders’
equity. However, its liabilities grew at a faster pace than its assets which is
not always a positive sign. From a profitability standpoint, the 10.6%
increase in sales caused an increase in net income of 11% which
demonstrates a strong management of expenses.
Due to the nature of the goodwill impairment loss of just under $3 billion in
2016, both assets and equity decreased substantially for Sobeys. In
addition, the impairment did not affect increases in sales. The size of the
impairment loss removes the opportunity to assess profitability.
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Financial Accounting, Seventh Canadian Edition
CT1-2 (CONTINUED)
(d)
In 2016, Sobey’s fiscal year (May 3, 2015 through May 7, 2016) covers the
majority of the same period as North West’s fiscal year (Feb. 1, 2015
through January 31, 2016). The same is true for their previous fiscal years.
Consequently, unless there was a significant economic impact that
affected the stores in the non-overlapping period of three months (February
through April), I would have no concerns about the comparisons made in
(c) as they both cover a single fiscal year.
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CT1-3
(a)
Financial Accounting, Seventh Canadian Edition
FINANCIAL ANALYSIS CASE
Both North West and Sobeys declared and paid dividends in fiscal year
2016 as revealed in their respective statement of changes in equity, as
follows:
North West
Sobeys
(in thousands) (in millions)
Dividends
(b)
$58,210
$130.3
Both North West and Sobeys generated positive cash flows from their
operations as revealed in their respective statement of cash flows, as
follows:
North West
Sobeys
(in thousands) (in millions)
Cash from operating activities
(A)
$132,987
$837.7
Cash used in investing activities
(B)
75,813
631.4
175%
133%
A divided by B
Both companies are reinvesting cash from operations back into the
business.
(c)
Only Sobeys repaid long-term debt during the 2016 fiscal year as revealed
in their respective statement of cash flows, as follows:
North West
Sobeys
(in thousands) (in millions)
Repayment of long-term debt
nil
$594.4
Although it appears as if Sobeys paid off debt, this is really not the case
since new debt of $582.7 was obtained. Consequently, the two companies
have similar changes to long-term debt.
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Financial Accounting, Seventh Canadian Edition
CT1-3 (CONTINUED)
(d)
Only North West issued common shares during the 2016 fiscal year as
revealed in their respective statement of cash flows, as follows:
North West
Sobeys
(in thousands) (in millions)
Issuance of common shares
$115
nil
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CT1-4
(a)
Financial Accounting, Seventh Canadian Edition
PROFESSIONAL JUDGEMENT CASE
Both public and private companies are separate legal entities owned by
shareholders. One of the key differences between the two types of
companies is the availability of the shares. Shares of public companies are
traded on organized stock exchanges and are available to the general
public. In contrast, shares of a private company are not made available to
the general public, nor are they traded on a public stock exchange.
Another difference is access to capital. Since public companies are traded
on organized stock exchanges, they generally have more access to capital
than do private companies. Private companies tend to rely upon bank
financing for capital.
Public and private companies also differ in terms of the amount of
information they disclose publicly. Public companies are required to file
financial statements with the regulators of the stock exchange. This makes
their statements widely available. In contrast, private companies do not
have any requirement to make their financial statements publicly available.
(b)
The key users of public company financial statements are shareholders,
lenders and other creditors, regulators, analysts, and the general public. In
contrast, the key users of private company financial statements are
generally lenders and other creditors as well as private shareholders.
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Financial Accounting, Seventh Canadian Edition
CT1-4 (CONTINUED)
(c)
The key difference between the users of public and private financial
statements is the different areas of emphasis of the users’ objectives and
needs when reviewing the financial statements. Users of public company
financial statements can represent a wide range with varying levels of
understanding about the company and its operations. They tend to be a
broad group of users who benefit from detailed disclosure that will help
them make the appropriate financial decision to invest or to lend, etc. On
the other hand, users of private company financial statements tend to be a
small group, who usually have a high degree of understanding of the
company and its operations. They consist mostly of lenders and other
creditors and a small group of shareholders. These users tend to place a
greater emphasis on liquidity, solvency, and short-term cash flow planning.
(d)
One of the main reasons that Canada adopted IFRS is that these global
set of standards will be beneficial to investors, lenders, other creditors, and
other financial statement users by increasing the comparability and quality
of financial statements. In other words, users will be able to make an
“apples to apples” comparison. If Canadian public companies had a choice
of which GAAP to use, then it would entirely defeat the purpose of
increasing comparability among public companies.
(e)
Since most private companies in Canada are small to medium-sized
businesses, the Canadian Accounting Standards Board (AcSB) decided
that IFRS, with its extensive disclosure reporting requirements and
sophisticated reporting, was not appropriate for most of these companies.
However, since private companies can represent a wide range of
companies – from large multinationals to small local restaurants, the AcSB
decided it was best if private companies have a choice of which standard
to adopt. A company’s choice of which GAAP to adopt is generally driven
by users’ objectives and needs.
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CT1-5
Financial Accounting, Seventh Canadian Edition
FINANCIAL ANALYSIS CASE
Note to instructors: All of the material supplementing this group activity, including
a suggested solution, can be found in the Collaborative Learning section of the
Instructor Resource site accompanying this textbook as well as in the Prepare
and Present section of WileyPLUS.
(a) Divide revenue by the hourly rate charged to clients:
IMS: $1,020,000 ÷ $17 per hour = 60,000 hours
PCS: $900,000 ÷ $30 per hour = 30,000 hours
(b) Knowing the hours worked from the above, we can derive the hourly salary by
dividing total salary expense for each company by the hours worked as
follows:
IMS: $600,000 ÷ 60,000 hours = $10 per hour
PCS: $450,000 ÷ 30,000 hours = $15 per hour
(c) IMS uses larger facilities because its rent expense is higher. This makes sense
because they have larger types of cleaning equipment that will need to be
stored. Furthermore, the company has a larger staff given the size of its
operations and may need more office space.
(d) PCS has higher other operating expenses because that company owns and
operates vehicles.
(e) Given that both companies pay interest at the same rate, IMS has the larger
bank loan because its interest expense higher.
(f) The most significant factor that makes PCS more profitable is the fact that this
company charges its clients an hourly rate that is double the hourly wage rate
paid to its employees. IMS is not able to charge its clients at double the wage
rate.
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CT1-6
Financial Accounting, Seventh Canadian Edition
ETHICS CASE
(a)
The stakeholders in this situation are the new CEO and CFO, and the
creditors and investors who rely on the financial statements to make
business decisions.
(b)
The CEO and CFO should not sign the certification until they have taken
steps to assure themselves that the most recent reports accurately and
completely reflect the activities of the business. However, as the current
management of the company, they cannot refuse to sign the certification
just because they are new. They are the management team now and must
assume the responsibilities that go with these positions.
(c)
The CEO and CFO have no alternative other than to take the steps
necessary to assure themselves of the accuracy and completeness of the
financial information, and, if accurate, sign the certification. If the
information is not accurate or complete, they need to make the required
corrections to the financial information. The company may need to delay
issuing its financial statements.
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CT1-7
(a)
Financial Accounting, Seventh Canadian Edition
SERIAL CASE
Compu-Tech Consulting is a proprietorship. A proprietorship has the
advantage of lower administrative costs than a corporation—fewer
regulations and procedures to adhere to. Emily may also have more
flexibility in working for herself (or less depending on the demands of the
business). In addition, as a separate proprietorship, all of the income of the
business belongs to Emily. However, the disadvantage of a proprietorship
is that Emily has personal and unlimited liability for the debts of the
business. She may also have difficulty in raising capital to grow the
business.
Anthony Business Company Ltd. (ABC) is a private corporation. It has the
advantage of limited liability for the shareholders’ investments in the
business compared to a proprietorship. However, this advantage may be
negated by a demand from creditors (such as the bank) for a personal
guarantee by the shareholders. Another disadvantage is that if net income
is distributed by declaring dividends, it must be shared with all
shareholders in proportion to their shareholdings. More regulations and
paperwork are required for a corporation compared to that of a
proprietorship; however, more opportunities exist to share the
administrative burdens and to grow the business.
(b)
Given its current size, Compu-Tech Consulting likely has no requirements
to produce financial statements used by external creditors. It could choose
to follow Accounting Standards for Private Enterprises (ASPE) if it was
required to produce financial statements.
Anthony Business Company Ltd. would most likely use Accounting
Standards for Private Enterprises (ASPE) ) but could also, if it wished,
choose to use International Financial Reporting Standards (IFRS). We will
assume the former for the purpose of this case.
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Financial Accounting, Seventh Canadian Edition
CT1-7 (CONTINUED)
(c)
Emily will need information on the revenues and cost of the services
performed and the cost of products and accessories sold so she can
determine if new contracts are profitable. She will need this information
more often initially (for example, on a weekly basis) so she can monitor the
results of the contracts and their impact on the operations of the company.
She will also need forecasts of future services and product and accessory
sales to plan the work, estimate staffing and other costs, and determine
delivery schedules. Emily would also find financial statements useful to
better understand ABC’s business and identify financial issues as early as
possible. Monthly financial statements would be best as the more timely
the information is, the more useful it is for managing the business.
d)
The users of ABC’s accounting information include the existing
shareholders (Emily’s parents), potential shareholders such as Emily,
creditors such as the bank, and taxing authorities such as the CRA.
Emily’s parents are internal users and they need accounting information to
plan, organize, and run the company and determine if they can obtain the
financing to meet the increased demand. Emily needs accounting
information to determine if her parents’ business is a sound investment for
her and what her responsibilities as administrator would be.
Creditors and taxing authorities would be considered external users. The
bank and the CRA require financial statements—income statement,
statement of retained earnings (since it is assumed that ABC follows ASPE;
however, if it follows IFRS then it would be required to prepare a statement
of changes in equity), statement of financial position, statement of cash
flows, in addition to accompanying notes to the financial statements—to
assess the financial health of the company.
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Financial Accounting, Seventh Canadian Edition
CT1-7 (CONTINUED)
(e)
The following are examples of activities that ABC is likely to be engaged
in:
Operating activities include cash collection from revenue generated from
the sale of products and accessories and from providing business services.
Cash payments would be made for products, accessories, supplies,
salaries, utilities, and interest on bank loans.
Investing activities include the purchase of equipment or the sale of used
equipment no longer in use.
Financing activities include borrowing money from the bank (debt) and
paying dividends to shareholders (equity).
LO 1,2,3,4 BT: C Difficulty: M TIME: 50 min. AACSB: Comm. CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
Legal Notice
Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All
rights reserved.
The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.
The material provided herein may not be downloaded, reproduced, stored in a
retrieval system, modified, made available on a network, used to create derivative
works, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, scanning, or otherwise without the prior written
permission of John Wiley & Sons Canada, Ltd.
(MMXVII vi F2)
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Financial Accounting, Seventh Canadian Edition
CHAPTER 2
A FURTHER LOOK AT FINANCIAL STATEMENTS
LEARNING OBJECTIVES
1. Identify the sections of a classified statement of financial position.
2. Identify and calculate ratios for analyzing a company’s liquidity, solvency, and
profitability.
3. Describe the framework for the preparation and presentation of financial
statements.
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES
AND BLOOM’S TAXONOMY
Item LO
BT Item LO
BT Item LO BT Item LO
Questions
BT Item LO
BT
1.
1
K
7.
1
C
13.
2
C
19.
3
C
25.
3
C
2.
1
C
8.
1
K
14.
2
K
20.
3
C
26.
3
C
3.
1
C
9.
2
C
15.
2
C
21.
3
C
27.
3
K
4.
1
K
10.
2
C
16.
2
C
22.
3
C
28.
3
C
5.
1
C
11.
2
C
17.
2
K
23.
3
C
29.
3
C
6.
1
C
12.
2
C
18.
2
C
24.
3
C
Brief Exercises
1.
1
K
3.
1
AP
5.
2
AP
7.
2
AN
9.
3
C
2.
1
K
4.
1
AP
6.
2
AN
8.
3
K
10.
3
C
Exercises
1.
1
K
3.
1
AP
5.
1
AP
7.
2
AN
9.
3
K
2.
1
AP
4.
1
AP
6.
2
E
8.
2
AN
10.
3
C
Problems: Set A and B
1.
1
K
3.
1
AP
5.
2
AN
7.
2
AN
9.
3
E
2.
1
AP
4.
1
AP
6.
2
AN
8.
2
AN
10.
3
E
Cases
1.
1
K
3.
3
S
5.
3
E
2.
2
C
4.
1,2
AN
6.
2,3
E
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Financial Accounting, Seventh Canadian Edition
Legend: The following abbreviations will appear throughout the solutions manual file.
LO
Learning objective
BT
Bloom's Taxonomy
K
Knowledge
C
Comprehension
AP Application
AN Analysis
S
Synthesis
E
Evaluation
Difficulty:
Level of difficulty
S
Simple
M
Moderate
C
Complex
Time:
Estimated time to complete in minutes
AACSB
Association to Advance Collegiate Schools of Business
Communication
Communication
Ethics
Ethics
Analytic
Analytic
Technology
Tech.
Diversity
Diversity
Reflec. Thinking
Reflective Thinking
CPA CM
CPA Canada Competency Map
Ethics
Professional and Ethical Behaviour
PS and DM
Problem-Solving and Decision-Making
Comm.
Communication
Self-Mgt.
Self-Management
Team & Lead
Teamwork and Leadership
Reporting
Financial Reporting
Stat. & Gov.
Strategy and Governance
Mgt. Accounting
Management Accounting
Audit
Audit and Assurance
Finance
Finance
Tax
Taxation
cpa-e001
cpa-e002
cpa-e003
cpa-e004
cpa-e005
cpa-t001
cpa-t002
cpa-t003
cpa-t004
cpa-t005
cpa-t006
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Financial Accounting, Seventh Canadian Edition
ANSWERS TO QUESTIONS
1.
(a)
Current assets are assets that are expected to be converted into
cash, sold, or used up within one year of the company’s financial
statement date or its operating cycle, whichever is longer.
(b)
Examples of current assets include cash, accounts receivable,
inventory, and supplies. Current assets are listed in order of liquidity
in the current asset section of the statement of financial position.
LO 1 BT: K Difficulty: S Time: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting
2.
The term operating cycle stands for the average time it takes to go from
cash to cash in producing revenue. In a merchandising business, this
means the time it takes to purchase inventory on account, pay cash to
suppliers, sell the inventory on account, and then collect cash from
customers. In a service business, it stands for the time it takes to pay
employees, provide services on account, and then collect the cash from
customers.
LO 1 BT: C Difficulty: M Time: 3 min. AACSB: None CPA: cpa-t001 CM: Reporting
3.
(a)
Current assets are assets that are expected to be converted into
cash, sold, or used up within one year of the company’s financial
statement date or its operating cycle, whichever is longer. Noncurrent assets are assets that are not expected to be converted into
cash, sold, or used up by the business within one year of the financial
statement date or its operating cycle. In other words, non-current
assets are all assets that are not classified as current assets.
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Financial Accounting, Seventh Canadian Edition
(3) (continued)
(b)
Current assets are assets that are expected to be converted into
cash, sold, or used up within one year of the company’s financial
statement date or its operating cycle, whichever is longer. Current
liabilities are obligations that are to be paid or settled within one year
of the company’s financial statement date or its operating cycle,
whichever is longer. Ideally, current assets will exceed current
liabilities for a company.
Showing items as current in nature matters because doing so assists
the user of the financial statements to assess the business’s liquidity.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
4.
(a)
Current liabilities are obligations that are to be paid or settled within
one year of the company’s financial statement date or its operating
cycle, whichever is longer.
(b)
Examples of current liabilities include bank indebtedness, accounts
payable, accrued liabilities, and current maturities of long-term debt.
Current liabilities are listed in the order in which they are expected to
be paid, in the current liability section of the statement of financial
position.
LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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5.
(a)
Financial Accounting, Seventh Canadian Edition
The major differences between current liabilities and non-current
liabilities are:
Difference
Source of payment
Current Liabilities
Existing current assets
or other current liabilities
Non-Current Liabilities
Other than existing current
assets or other current
liabilities
Time of expected
payment
Within one year
Beyond one year
Nature of items
Debts pertaining to the
operating cycle and other
short-term debts
Mortgages, notes, loans,
bonds, and other noncurrent liabilities
(b)
Some liabilities, such as bank loans, appear on the statement of
financial position with a current and non-current portion. Included in
the balance of the bank loan payable are principal payments that will
be due in the next year. That amount must be shown as a current
liability as at the company’s financial statement date. The remaining
principal balance is classified as a non-current liability.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
6.
(a)
Contra accounts are accounts that offset the account to which they
relate. Contra accounts serve to keep track of and disclose the
amount of the reduction to the balance of the related account and
arrive at its carrying amount. An example is accumulated
depreciation, which is offset against the related asset account to
arrive at the asset’s carrying amount.
(b)
In the case of property, plant, and equipment, users find it useful to
know the historical cost of assets as well as the cumulative amount
of depreciation (contra account called accumulated depreciation)
that has been recorded to date on them. The difference between cost
and accumulated depreciation is referred to as the carrying amount,
also commonly known as net book value or just simply book value.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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7.
Financial Accounting, Seventh Canadian Edition
Current assets and liabilities are listed in the statement of financial position
in the order in which they are expected to be converted into cash, sold or
used up in the case of assets and paid or settled, in the case of liabilities;
that is, in their order of liquidity. Liquidity is enhanced when an asset can be
converted to cash more quickly than another asset. In the case of liabilities,
some liabilities will be paid more quickly than others and so they would be
deemed to be more liquid. Other assets are listed in the order of
permanency. Long-term assets, such as property, plant, and equipment, are
usually presented in order of permanence, with the most permanent (land)
being presented first.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
8.
(a)
The two components of shareholders' equity and the purpose of each
are: (1) Share capital is used to record investments of assets, i.e.
cash, in the business by the owners (shareholders). If there is only
one class of shares, it is known as common shares. (2) Retained
earnings is used to record accumulated profit, net of any losses and
dividends declared, retained in the company.
(b)
Under ASPE, the ending balances of share capital and retained
earnings would appear on the statement of financial position and the
ending balance of retained earnings would also appear on the
statement of retained earnings. Under IFRS, the presentation on the
statement of financial position would be the same, and both share
capital and retained earnings would appear on the statement of
changes in shareholders’ equity.
LO 1 BT: K Difficulty: S M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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9.
Financial Accounting, Seventh Canadian Edition
Intracompany ratio comparisons compare elements and ratios within the
same financial statements (example, current assets and current liabilities)
or between the income statement and the statement of financial position
(example, basic earnings per share) from the same company. Intracompany
ratio comparisons can also involve comparing elements or ratios in two or
more accounting periods for the same company.
Intercompany ratio comparisons compare elements or ratio results between
different companies.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
10.
(a)
Liquidity ratios measure a company’s short-term ability to pay its
current liabilities and meet its unexpected needs for cash. Examples
of liquidity ratios include working capital and current ratios.
(b)
Solvency ratios measure a company’s ability to survive over a long
period of time. An example of a solvency ratio is the debt to total
assets ratio.
(c)
Profitability ratios measure a company’s operating success for a
given period of time. Examples of profitability ratios include basic
earnings per share and the price-earnings ratio.
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 and cpa-t005 CM: Reporting and
Finance
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
11.
Financial Accounting, Seventh Canadian Edition
(a)
Working capital is arrived at by deducting current liabilities from
current assets.
(b)
Positive working capital means that there are more current assets
than current liabilities. Whenever there is positive working capital, the
current ratio is greater than 1:1.
(c)
Having positive working capital does not mean that a company has
lots of cash. It could mean the company has significant accounts
receivable or inventory. The working capital may be a very large
amount and yet the company may have no cash as it is instead
borrowing all of the necessary cash from the bank to make day-today payments to suppliers and employees.
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 and cpa-t005 CM: Reporting and
Finance
12.
The current ratio is a better measure of liquidity than working capital when
making comparisons between different businesses. The amount of working
capital is an absolute amount. It could vary tremendously depending on the
size of the operations of the business. The current ratio on the other hand
presents a relationship of current assets to current liabilities and is therefore
appropriate as a tool to compare the liquidity of different sized businesses.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
13.
Current assets include accounts receivable and inventory. These may have
increasing balances because of uncollectible receivables or slow-moving
inventory. This would cause the current ratio to increase. Even though the
current ratio may seem high, it is an artificial measure of liquidity if
receivables and inventory cannot be easily or quickly converted into cash.
Consequently, the current ratio alone does not provide a complete
assessment of liquidity.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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14.
Financial Accounting, Seventh Canadian Edition
Dong Corporation is more solvent as only 45% of its assets are financed by
debt whereas 55% of Du's assets are financed by debt. A company carrying
a higher proportion of debt has an increased likelihood of encountering
financial difficulties and is therefore considered less solvent.
LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 and cpa-t005 CM: Reporting and
Finance
15.
Raising money using debt adds more risk to a company than raising money
through equity because the terms of repayment of debt require cash
outflows for the payment of interest and repayment of principal. These
payments tap into cash balances that could hurt the company’s liquidity. In
contrast to debt, equity does not have to be repaid.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
16.
Basic earnings per share comparisons among different companies are
difficult due to variations in the financing structure of the companies and in
the number of shares issued. Hence, there is no industry average for basic
earnings per share. On the other hand, since the price-earnings ratio uses
basic earnings per share relative to the market price of the common shares,
the ratio can be compared among companies.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 and cpa-t005 CM: Reporting and
Finance
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
17.
Financial Accounting, Seventh Canadian Edition
Investors appear to favour TD Bank. Its higher price-earnings ratio indicates
that investors are willing to pay proportionately more for TD's shares and
have more favourable expectations of future growth.
LO 2 BT: K Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and
Finance
18.
Increases in the basic earnings per share, price-earnings ratio, and the
current ratio are considered to be signs of improvement because:
•
An increase in the basic earnings per share means that the amount
of net income per share is greater than in the previous period.
•
An increase in the price-earnings ratio means that the share price
has increased at a greater rate than the company’s basic earnings
per share, which implies the market believes future net income will
continue to increase.
•
An increase in the current ratio indicates that the company has more
current assets available to settle its current liabilities and is more
liquid (assuming the components of current assets (e.g., receivables
and inventory) are also liquid.
On the other hand, the debt to total assets ratio measures how much of the
company is financed by debt. The more debt a company has, the higher the
debt to total assets ratio. A company with a higher debt level has increased
financial risk due to higher fixed interest and principal repayments, and is
less solvent than a company with a lower level of debt.
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and
Finance
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19.
Financial Accounting, Seventh Canadian Edition
(a)
The conceptual framework is a coherent system of interrelated
objectives and fundamentals that can lead to consistent standards.
The framework prescribes the nature, function, and limits of financial
accounting statements. It guides choices about what to present in
financial statements, decisions about alternative ways of reporting
economic events, and the selection of appropriate ways of
communicating such information.
(b)
Internationally, the conceptual framework may vary from country to
country. Canadian companies use the same framework, whether
they are reporting under IFRS or under ASPE.
LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
20.
(a)
The primary objective of financial reporting is to provide information
useful to existing and potential investors, lenders, and other creditors
in making decisions about providing resources to the company.
(b)
The main users of financial reporting are investors, lenders, and
other creditors.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
21.
The going concern assumption states that the business will remain in
operation for the foreseeable future. The timing of when the asset will be
converted to cash or used in operations and when liabilities are to be paid
determines their classification on the statement of financial position. Since
the business is expected to remain in operation for the foreseeable future,
these elements can continue to be reported in accordance with their
respective current or non-current classifications. If the company were about
to be shut down, all of its assets and liabilities would be classified as current.
LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
22.
Financial Accounting, Seventh Canadian Edition
The fundamental qualitative characteristics are (1) relevance and (2) faithful
representation.
Relevant information will impact a user’s decision by having predictive
value, confirmatory value, or both. Faithful representation means that the
financial statements should reflect the economic reality of what really exists
or has happened. The information must be complete, neutral, and free from
material error.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
23.
Enhancing qualitative characteristics make useful financial information
more useful (i.e. they enhance its usefulness). To be useful, financial
information must reflect the two fundamental qualitative characteristics of
relevance and faithful representation. Enhancing characteristics bring more
specific support to the objectives achieved by using the fundamental
qualitative characteristics. Enhancing qualitative characteristics cannot
enhance the usefulness of financial information that is not useful (i.e.
information which does not reflect the fundamental qualitative
characteristics).
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
24.
Materiality is related to relevance in that they are both defined in terms of
what influences or makes a difference to the decision-maker. In order to be
relevant to a financial statement user, a transaction, a narrative explanation in
the notes to the financial statements, or an amount reported for an element must
make a difference to the user in the making of a decision. An item is considered
to be material if its omission or misstatement could influence the decision.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
25.
The four enhancing qualitative characteristics are (1) comparability, (2)
verifiability, (3) timeliness, and (4) understandability. There is no prescribed
order in applying these characteristics.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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26.
Financial Accounting, Seventh Canadian Edition
The cost constraint means that information will be presented only when the
benefit associated with it exceeds the cost of obtaining and providing it. In
attempting to fulfill a completeness objective when obtaining financial
information, one could expend considerable resources. The cost of this
search may greatly outweigh any benefit in achieving the completeness
objective. Consequently, the search for completeness will be restricted by
this constraint.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
27.
The elements of financial statements are broad categories or classes of
financial statement effects of transactions and other events. They include
assets, liabilities, equity, income (which includes revenues and gains), and
expenses (which include losses). The grouping is selected in accordance
with the economic characteristics of the transactions.
LO 3 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
28.
The two bases are historical cost and current value. The current value basis
of accounting is applied to those assets that are intended to be sold and
whose current value is readily available. Securities traded on the stock
exchanges would be a good example of assets reported at their current
value. The historical cost basis of accounting is used for most of the
remaining assets used by the business. Since in most cases the intention
is to use the assets to earn revenue, the current value of the asset is not as
relevant as its historical cost.
LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
29.
Financial Accounting, Seventh Canadian Edition
In order to be relevant for decision making, the measurement of elements
of financial statements need to reflect amounts that are reliable. For assets
that are intended to be sold, the current value of the assets becomes the
most relevant measurement as it approximates the current amount of cash
that could be obtained on the sale of the asset. On the other hand, for assets
held for use by the corporation, the value at resale is not as relevant to the
financial statement user. In that case, the historical cost of the assets is the
better measurement for reporting the financial statement element. An
example of a revenue generating asset is land used for a parking lot. It is
relevant to compare the actual cost of the land to the amount of the revenue
generated from its use. Using the historical cost basis of accounting gives
a faithful representation to the financial statement users.
LO 3 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 2-1
(a)
(b)
(c)
(d)
(e)
(f)
(g)
5
1
3
3
1
7
5
(h)
4
Accounts payable
Accounts receivable
Accumulated depreciation
Buildings
Cash
Common shares
Current portion of mortgage
Payable
Patents
(i)
(j)
(k)
(l)
(m)
(n)
(o)
8
5
2
3
1
1
6
(p)
(q)
1
5
Dividends declared
Income tax payable
Long-term Investments
Land
Inventory
Supplies
Mortgage payable, due in 20
years
Prepaid insurance
Unearned revenue
LO 1 BT: K Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 2-2
(a)
(b)
1
2
Accounts receivable
Accumulated depreciation
(i)
(j)
1
1
(c)
(d)
4
5
(k)
1
(e)
(f)
(g)
(h)
1
6
2
3
Bank indebtedness
Bank loan payable, due in
three years
Cash
Common shares
Equipment
Goodwill
Inventory
Notes receivable, due in six
months
Prepaid rent
(l)
(m)
(n)
(o)
(p)
(q)
6
4
1
4
1
4
Retained earnings
Salaries payable
Supplies
Unearned revenue
Prepaid insurance
Accounts payable
LO 1 BT: K Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 2-3
SHUM CORPORATION
Statement of Financial Position (Partial)
Assets
Current assets
Cash
Accounts receivable
Inventory
Supplies
Prepaid insurance
Total current assets
Property, plant, and equipment
Land
Buildings
Less: Accumulated depreciation—buildings
Equipment
Less: Accumulated depreciation—equipment
Total property, plant, and equipment
Total assets
$16,400
14,500
9,000
4,200
3,900
48,000
65,000
$110,000
33,000
$70,000
25,000
77,000
45,000
187,000
$235,000
(Assets = Liabilities + Shareholders’ equity)
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 2-4
HIRJIKAKA INC.
Statement of Financial Position (Partial)
Current liabilities
Accounts payable
Salaries payable
Interest payable
Income tax payable
Unearned revenue
Current portion of mortgage payable
Total current liabilities
$22,500
3,900
5,200
6,400
900
5,000
$43,900
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 2-5
(a)
($ in thousands)
2016
Working capital:
2015
Working capital:
$453,254 – $235,400 = $217,854 $421,955 – $223,239 = $198,716
Current Assets – Current Liabilities
Current ratio:
$453,254
$235,400
Current ratio:
= 1.9:1
$421,955
$223,239
= 1.9:1
Current Assets
Current Liabilities
(b)
The working capital increased slightly in 2016 and the current ratio
remained the same. Indigo's liquidity is slightly stronger in 2016 compared
with 2015.
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BRIEF EXERCISE 2-6
(a)
(in US$ millions)
2016
Debt to total assets ratio:
($2,705.5 + $4,554.8) = 59.0%
($2,934.8 + $9,369.1)
2015
Debt to total assets ratio:
($2,470.3 + $4,655.1) = 64.6%
($2,742.3 + $8,286.1)
Total Liabilities
Total Assets
(b)
The company’s solvency was stronger in 2016 compared with 2015
because total debt has decreased as a proportion of total assets.
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 2-7
(a)
($ in thousands)
2015
Basic earnings per share:
$76,629 = $1.08 per share
71,218
2014
Basic earnings per share:
$75,524 = $1.07 per share
70,899
Income available to common shareholders
Weighted average number of common shares
Price-earnings ratio:
$13.99 = 13.0 times
$ 1.08
Price-earnings ratio:
$17.31 = 16.2 times
$ 1.07
Market price per share
Basic earnings per share
(b)
The increase in net income and in the basic earnings per share during the
year would indicate that profitability has improved in 2015. In spite of the
increase in net income, investors appear to have less confidence in Leon’s
future income as indicated by the decrease in the price-earnings ratio in
2015.
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 2-8
(a)
(b)
(c)
(d)
(e)
(f)
Faithful representation
Verifiability
Understandability
Cost
Going concern
Current value
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BRIEF EXERCISE 2-9
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
10
5
13
8
12
9
1
2
4
3
11
6
7
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 2-10
(a)
Sosa Ltd. has purchased the land for sale and not for use. The current
value of the land becomes the more relevant measurement as it
approximates the current amount of cash that could be obtained on the
sale of the asset.
(b)
Mohawk has purchased land for use and not for sale. The current value
is not as relevant to the financial statement user in this case. The historical
cost of the land is the better measurement for reporting the land on the
statement of financial position.
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Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO EXERCISES
EXERCISE 2-1
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
5
1
3
3
7
5
5
4
5
1
1
3
6
1
Accounts payable and accrued liabilities
Accounts receivable
Accumulated depreciation
Buildings and leasehold improvements
Common shares
Current maturities of long-term debt
Dividends payable
Patents
Income and other taxes payable
Income and other taxes receivable
Inventories
Land
Long-term debt
Prepaid expenses
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Chapter 2
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EXERCISE 2-2
BIG ROCK BREWERY INC.
Statement of Financial Position (partial)
December 31, 2015
(in thousands)
Assets
Current assets
Cash
Accounts receivable
Inventories
Prepaid expenses and other
Total current assets
Property, plant, and equipment
Land
Buildings
Less: Accumulated depreciation
Machinery and equipment
Less: Accumulated depreciation
Mobile equipment
Less: Accumulated depreciation
Office furniture and equipment
Less: Accumulated depreciation
Total property, plant, and equipment
Intangible assets
Total assets
$ 540
2,221
4,935
1,573
$ 9,269
$ 8,377
$17,692
1,817
$24,860
10,122
$ 1,054
434
$ 1,286
516
15,875
14,738
620
770
40,380
456
$50,105
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EXERCISE 2-3
SAPUTO INC.
Statement of Financial Position (partial)
March 31, 2016
(in millions)
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities
Income taxes payable
Bank loans payable
Total current liabilities
Non-current liabilities
Long-term debt
Deferred income taxes payable
Other long-term liabilities
Total non-current liabilities
Total liabilities
Shareholders' equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders' equity
$ 896.6
37.1
423.1
$ 1,356.8
$1,208.3
475.6
61.8
1,745.7
3,102.5
$ 821.0
3,180.8
4,001.8
$7,104.3
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Financial Accounting, Seventh Canadian Edition
EXERCISE 2-4
(a)
Net income
= Revenues – Expenses
= $183,040 – $158,680– $4,550 – $5,200
= $14,610
Retained earnings = Beginning retained earnings + Net income
– Dividends declared
= $116,520 + $14,610 – $0
= $131,130
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EXERCISE 2-4 (CONTINUED)
(b)
SUMMIT LTD.
Statement of Financial Position
December 31, 2018
Assets
Current assets
Cash
Accounts receivable
Supplies
Prepaid insurance
Total current assets
Long-term investments
Property, plant, and equipment
Land
Buildings
$133,800
Less: Accumulated depreciation
50,600
Equipment
$ 66,100
Less: Accumulated depreciation
21,470
Total property, plant, and equipment
Total assets
$ 24,040
20,780
1,240
1,420
$47,480
28,970
$194,000
83,200
44,630
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable
$21,050
Interest payable
2,100
Current portion of mortgage payable
30,500
Total current liabilities
Mortgage payable ($104,000 – $30,500)
Total liabilities
Shareholders' equity
Common shares
$140,000
Retained earnings
131,130
Total shareholders’ equity
Total liabilities and shareholders' equity
321,830
$398,280
$ 53,650
73,500
127,150
271,130
$398,280
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EXERCISE 2-5
BATRA CORPORATION
Income Statement
Year Ended July 31, 2018
Revenues
Service revenue
Rent revenue
Total revenues
Expenses
Salaries expense
Operating expenses
Rent expense
Depreciation expense
Utilities expense
Interest expense
Supplies expense
Total expenses
Income before income tax
Income tax expense
Net Income
$113,600
18,500
132,100
$44,700
32,500
10,800
3,000
2,600
2,000
900
96,500
35,600
5,000
$30,600
[Revenues – Expenses = Net income or (loss)]
BATRA CORPORATION
Statement of Changes in Equity
Year Ended July 31, 2018
Balance, August 1, 2017
Issued common shares
Net income
Dividends declared
Balance, July 31, 2018
Common
Shares
Retained
Earnings
$ 15,000
10,000
$17,940
000 000
$25,000
30,600
(12,000)
$36,540
Total Equity
$32,940
10,000
30,600
(12,000)
$61,540
[Ending retained earnings = Beginning retained earnings ± Net income or (loss) –
dividends declared]
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Financial Accounting, Seventh Canadian Edition
EXERCISE 2-5 (CONTINUED)
BATRA CORPORATION
Statement of Financial Position
July 31, 2018
Assets
Current assets
Cash
Held for trading investments
Accounts receivable
Supplies
Total current assets
Property, plant, and equipment
Equipment
Less: Accumulated depreciation
Total property, plant, and equipment
Total assets
$ 5,060
20,000
17,100
1,500
$ 43,660
$62,900
6,000
56,900
$100,560
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable
Interest payable
Unearned revenue
Bank loan payable
Total liabilities
Shareholders' equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders' equity
$ 4,220
1,000
12,000
21,800
$ 39,020
$25,000
36,540
61,540
$100,560
(Assets = Liabilities + Shareholders’ equity)
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Financial Accounting, Seventh Canadian Edition
EXERCISE 2-6
(a)
Current ratio:
$60,000
$40,000
= 1.5:1
Current Assets
Current Liabilities
(b)
Current ratio:
($60,000 – $20,000) = 2:1
($40,000 – $20,000)
(c)
The request of the CFO to pay off an accounts payable ahead of the due
date is clearly done to manipulate the current ratio. His instructions to make
the payment came after he was presented with the calculation of the
current ratio. In this case the current ratio that is meant to show Padilla’s
liquidity position has been artificially altered by a simple payment on
account.
That said, it is not unethical to pay an account payable in advance of its
due date. Rather, it is the motivation for the transaction that would lead one
to conclude that the CFO is acting unethically.
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Financial Accounting, Seventh Canadian Edition
EXERCISE 2-7
(a)
(in thousands)
2015
2014
Working capital:
$167,816 – $158,120 = $9,696
Working capital:
$63,150 – $193,384 = $(130,234)
Current Assets – Current Liabilities
Current ratio:
$167,816 = 1.1:1
$158,120
$63,150 = 0.3:1
$193,384
Current Assets
Current Liabilities
Debt to total assets ratio:
($158,120 + $2,166,843) = 67.0%
($167,816 + 3,304,377)
($193,384 + $2,036,716) = 65.3%
($63,150 + $3,350,264)
Total Liabilities
Total Assets
(b)
Crombie REIT’s liquidity improved dramatically in 2015 when
compared to 2014, while at the same its solvency deteriorated slightly.
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EXERCISE 2-7 (CONTINUED)
(c)
2015
CT
Choice
Industry
$9,696 $(215,889)
1.1:1
0.1:1
67.0%
49.1%
$(416,879)
0.4:1
90.5%
n/a
0.3 :1
43.8%
Crombie
Working capital (in
thousands)
Current ratio
Debt to total assets ratio
Crombie
Working capital
(thousands)
Current ratio
Debt to total assets ratio
2014
CT
$(130,234) $(295,123)
0.3:1
0.0:1
65.3%
50.2%
Choice
Industry
$(142,356)
0.6:1
87.3%
n/a
0.4:1
45.9%
Based on working capital and the current ratio, Crombie’s liquidity is the
best (highest) of the three companies, as the current ratio far exceeds the
ratios for CT and Choice as well as the industry average. Compared to
2014, Crombie and CT improved working capital and the current ratio,
while both deteriorated for Choice. The industry average current ratio also
declined.
Based on the debt to total assets ratio, CT’s solvency is the best of the
three companies, but it is not as good as the industry average. Crombie’s
solvency deteriorated slightly. Choice’s solvency is the worst of the three
companies.
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Financial Accounting, Seventh Canadian Edition
EXERCISE 2-8
(a)
(in thousands)
2015
2014
Basic earnings per share:
Basic earnings per share:
$65,286 = $0.16 per share
395,793
$185,234
395,740
= $0.47 per share
Income available to common shareholders
Weighted average number of common shares
Price-earnings ratio:
$17.07
$0.16
= 106.7 times
Price-earnings ratio:
$18.62
$0.47
= 39.6 times
Market price per share
Basic earnings per share
(b)
The decrease in the basic earnings per share during the year would
indicate that profitability has deteriorated dramatically in 2015. However,
investors appear to have some confidence in Cameco's future profitability
as its share price has declined by only 8%.
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Financial Accounting, Seventh Canadian Edition
EXERCISE 2-9
(a)
(b)
(c)
(d)
(e)
(f)
7
10
11
3
2
8
(g)
(h)
(i)
(j)
(k)
(l)
1
6
4
5
9
12
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EXERCISE 2-10
1.
(a)
(b)
The historical cost basis of accounting is involved in this situation.
The historical cost basis of accounting has been violated. The land
was reported at its current value when it should have remained at
its historical cost.
2.
(a)
(b)
The current value basis of accounting is involved in this situation.
The principle has not been violated since the parcel of land is being
held for resale and not for use.
3.
(a)
The assumption involved in this situation is the going concern
assumption.
The going concern assumption has been violated. The elements on
the statement of financial position should have been classified
between current and non-current.
(b)
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SOLUTIONS TO PROBLEMS
PROBLEM 2-1A
Item
Accounts payable
Accounts receivable
Accumulated depreciation
Statement of Financial
Position Category
Cash
Common shares
Computer equipment
Current portion of long-term debt
Furniture and equipment
Goodwill
Land, buildings and improvements
Long-term debt
Prepaid expenses
Current liabilities
Current assets
Contra asset to property, plant,
and equipment
Current assets
Share capital
Property, plant, and equipment
Current liabilities
Property, plant, and equipment
Goodwill
Property, plant, and equipment
Non-current liabilities
Current assets
Unearned revenue
Current liabilities
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-2A
(a)
Item
Statement of Financial
Position Category
Accounts receivable
Accumulated depreciation—aircraft
Accumulated depreciation—buildings
Accumulated depreciation—ground,
property and equipment
Aircraft
Current assets
Property, plant, and equipment (contra account)
Property, plant, and equipment (contra account)
Property, plant, and equipment (contra account)
Buildings
Cash
Ground and other property and
equipment
Intangible assets
Inventory
Other assets
Prepaid expenses, deposits, and other
Property, plant, and equipment
Current assets
Property, plant, and equipment
Property, plant, and equipment
Intangible assets
Current assets
Other assets
Current assets
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PROBLEM 2-2A (CONTINUED)
(b)
WESTJET AIRLINES LTD.
Statement of Financial Position (partial)
December 31, 2015
(in thousands)
Assets
Current assets
Cash
Accounts receivable
Inventory
Prepaid expenses, deposits, and other
Total current assets
Property, plant, and equipment
Aircraft
Less: Accumulated depreciation
Ground and other property and equipment
Less: Accumulated depreciation
Buildings
Less: Accumulated depreciation
Total property, plant, and equipment
Intangible assets
Other assets
Total assets
$1,252,370
82,136
36,018
131,747
$1,502,271
$3,912,617
1,170,643
$ 821,753
196,829
$ 136,783
30,419
$2,741,974
624,924
106,364
3,473,262
63,549
89,942
$5,129,024
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PROBLEM 2-3A
(a)
Item
Accounts payable and accrued liabilities
Advance ticket sales
Current portion of long-term debt
Deferred income tax (long-term)
Long-term debt
Other current liabilities
Other long-term liabilities
Other shareholders’ equity items
Retained earnings
Share capital
Statement of Financial
Position Category
Current liabilities
Current liabilities
Current liabilities
Non-current liabilities
Non-current liabilities
Current liabilities
Non-current liabilities
Shareholders’ equity
Shareholders’ equity
Shareholders’ equity
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PROBLEM 2-3A (CONTINUED)
(b)
WESTJET AIRLINES LTD.
Statement of Financial Position (partial)
Liabilities and Shareholders' Equity
December 31, 2015
(in thousands)
Current liabilities
Accounts payable and accrued liabilities
Advanced ticket sales
Other current liabilities
Current portion of long-term debt
Total current liabilities
Non-current liabilities
Long-term debt
Other long-term liabilities
Deferred income tax
Total non-current liabilities
Total liabilities
Shareholders' equity
Share capital
Retained earnings
Other shareholders’ equity items
Total shareholders’ equity
Total liabilities and shareholders' equity
$545,438
620,216
158,880
227,391
$1,551,925
$1,276,475
13,603
327,028
1,617,106
3,169,031
$ 582,796
1,292,581
84,616
1.959.993
$5,129,024
(c) Yes, these two amounts agree. Assets of $5,129,024 thousand equal total
liabilities plus shareholders’ equity of the same amount.
LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-4A
(a)
MBONG CORPORATION
Income Statement
Year Ended December 31, 2018
Revenues
Service revenue
Interest revenue
Total revenues
Expenses
Salaries expense
Operating expense
Depreciation expense
Repair and maintenance expense
Insurance expense
Utilities expense
Interest expense
Supplies expense
Total expenses
Income before income tax
Income tax expense
Net income
$213,900
500
$214,400
$129,800
39,400
6,200
2,800
2,200
2,000
1,500
1,000
184,900
29,500
6,000
$23,500
[Revenues – Expenses = Net income or (loss)]
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-4A (CONTINUED)
MBONG CORPORATION
Statement of Changes in Equity
Year Ended December 31, 2018
Common
Shares
Balance, January 1
Issued common shares
Net income
Dividends declared
Balance, December 31
$30,000
4,200
_ _____
$34,200
Retained
Earnings
$221,000
23,500
(5,000)
$239,500
Total Equity
$251,000
4,200
23,500
(5,000)
$273,700
(Beginning equity ± Changes to equity = Ending equity)
[Ending retained earnings = Beginning retained earnings ± Net income or (loss) –
dividends declared]
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-4A (CONTINUED)
(a) (continued)
MBONG CORPORATION
Statement of Financial Position
December 31, 2018
Assets
Current assets
Cash
Held for trading investments
Accounts receivable
Supplies
Prepaid insurance
Total current assets
Property, plant, and equipment
Land
Buildings
$72,000
Less: Accumulated depreciation—buildings
18,000
Equipment
$66,000
Less: Accumulated depreciation—equipment
17,600
Total property, plant, and equipment
Total assets
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable
Salaries payable
Current portion of bank loan payable
Total current liabilities
Non-current liabilities
Bank loan payable ($15,000 - $1,500)
Total liabilities
Shareholders' equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders' equity
$ 11,900
20,000
14,200
200
2,000
$ 48,300
$156,000
54,000
48,400
258,400
$306,700
$15,000
3,000
1,500
$ 19,500
13,500
33,000
$ 34,200
239,500
273,700
$306,700
(Assets = Liabilities + Shareholders’ equity)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-4A (CONTINUED)
(b)
The income statement reports the net income or loss for the period. This
figure is then used in the statement of changes in equity, along with
dividends declared and any issues (or repurchases) of shares, to calculate
the balances in common shares and retained earnings at the end of the
period. These ending balances are then used in the statement of financial
position to determine shareholders’ equity and complete the accounting
equation.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-5A
(a)
1.
2.
Working capital
Current assets – Current liabilities
$ 446,900 – $142,500 = $304,400
Current ratio
Current assets
Current liabilities
$446,900
=
3.1 :1
$142,500
3.
Debt to total assets
Total liabilities
Total assets
$452,500
= 42.2%
$1,072,200
4.
5.
(b)
Basic earnings per
share
Price-earnings
ratio
Income available to common shareholders
Weighted average number of common shares
$160,000
= $4.00
40,000
Market price per share
Basic earnings per share
$35.00
= 8.8 times
$4.00
Johanssen’s liquidity has improved dramatically as the working capital is
greater in 2018 and the current ratio is almost double that of 2017. On the
other hand, the solvency has deteriorated as the debt to total assets ratio
is higher in 2018. Johanssen’s profitability has improved as the basic
earnings per share ratio has increased in 2018, as has investors’
expectations for future profitability as indicated by the increasing priceearnings ratio.
LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-6A
(a)
Working capital
Chen
Caissie
=
=
=
Current ratio
=
Current assets – Current liabilities
$407,200
– $166,325
=
$190,400
– $133,700
=
Current assets
Current liabilities
Chen
$407,200
$240,875
$56,700
Caissie
=
2.4 :1
$166,325
$190,400
=
1.4 :1
$133,700
Chen is significantly more liquid than Caissie. It has a higher current ratio
and more current assets available to pay current liabilities as they come
due.
(b)
Debt to total assets
=
Chen
($166,325 + $108,500)
($407,200 + $532,000)
Total liabilities
Total assets
Caissie
= 29.3%
($133,700 + $40,700)
=
52.8%
($190,400 + $139,700)
Caissie is considerably less solvent than Chen. Caissie's debt to total
assets ratio of 52.8% is almost double that of Chen’s ratio of 29.3%. The
lower the percentage of debt to total assets, the lower the risk that a
company may be unable to pay its debts as they come due.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-6A (CONTINUED)
(c)
Service revenue
Operating expenses
Interest expense
Income tax expense
Total expenses
Chen
$1,800,000
1,458,000
10,000
85,000
1,553,000
Caissie
$620,000
438,000
4,000
35,400
477,400
Net income
$ 247,000
$142,600
Basic earnings per share =
Income available to common shareholders
Weighted average number of common shares
Chen
Caissie
$247,000 = $3.25
76,000
Price-earnings ratio
Chen
$25.00
$3.25
= 7.7 times
$142,600
62,000
=
= $2.30
Market price per share
Basic earnings per share
Caissie
$15.00
$2.30
= 6.5 times
Based on the price-earnings ratio, investors believe that Chen will be more
profitable than Caissie in the future. It is not meaningful to compare basic
earnings per share between companies.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-7A
(a)
(in thousands)
Le Château
1.
(b)
Working capital
Reitmans
$116,724 – $36,038
= $80,686
$319,362 – $121,172
= $198,190
2.
Current ratio
$116,724
$36,038
= 3.2:1
$319,362
$121,172
= 2.6:1
3.
Debt to total assets
$108,136
$168,490
= 64.2%
$160,915
$542,083
= 29.7%
4.
Basic earnings per share
$(35,745)
29,964
= $(1.19)
$(24,703)
64,079
= $(0.39)
5.
Price-earnings ratio
= N/A
= N/A
Liquidity
With a current ratio of 3.2:1, Le Château is more liquid than Reitmans and
both companies have stronger ratios than the industry average of 1.8:1.
Solvency
Reitmans is more solvent than Le Château as evidenced by its lower debt
to total assets ratio, which is better than the industry average of 57%.
Profitability
Although the basic earnings per share ratio does not provide a basis for
comparison by investors, both companies have net losses for the year and
therefore negative earnings per share. Consequently, no price-earnings
ratio can be calculated to compare to each other or to the industry average.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-8A
(a)
The higher the amount of working capital, the better a company’ liquidity.
From 2016 to 2018 Pitka Corporation’s working capital deteriorated and
showed a constant downward trend over the three-year period.
A higher current ratio is evidence of better liquidity for a company
(assuming the components of the current assets are also liquid). Although
the current ratio stayed the same from 2016 to 2017, it deteriorated 2017
to 2018 and is low.
A smaller (lower) debt to total assets ratio shows evidence of better
solvency. The percentage of total liabilities to total assets increased from
2016 to 2017, showing deterioration in the solvency for Pitka. On the other
hand, the ratio improved substantially from 2017 to 2018.
The higher the basic earnings per share, the better the profitability.
Profitability decreased from 2016 to 2017, but improved from 2017 to 2018.
The investors appeared to have less confidence in the future net income of
Pitka as evidenced by Pitka's price-earnings ratio, which declined from
2016 to 2017. This view changed as demonstrated by the climb in the priceearnings ratio from 2017 to 2018.
(b)
Liquidity
Pitka’s current ratio, although steady in 2016 and 2017, declined slightly in
2018. This trend is of concern given the low level of liquidity the company
has with a current ratio of 1.1:1.
Solvency
Pitka’s debt to total assets ratio improved in the last year. It appears to be
reasonable in size, as does the solvency of the company in 2016.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-8A (CONTINUED)
(b) (continued)
Profitability
Pitka’s profitability declined and then recovered as is demonstrated by the
basic earnings per share ratio. The price-earnings ratio in 2018 indicates
expectations of improving profitability.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-9A
(a)
The objective of financial reporting is to provide information that is useful to
existing and potential investors, lenders, and other creditors in making
decisions about providing resources to the company. In this case, the
information will be used by the team’s bank. Bucky’s suggestions
concerning how elements should be reported on the financial statements
do not meet the objective of financial reporting. His suggestions would lead
to a violation of the fundamental basis on which financial statements are
prepared: accrual accounting. The suggested changes to the financial
statements would not portray economic reality and would not faithfully
represent the performance of the business and its financial position at
December 31, 2018. Bucky’s suggestions show bias and an attempt to
portray a financial picture that would be perceived as more favourable than
it is in reality.
(b)
1. Failing to include the estimated expenses for utilities and the
corresponding liability for the utilities already consumed by December
31, 2018 violates accrual accounting. The expense was incurred and
a liability exists, and although the exact amount is not known, a
reasonable estimate can be made as this type of expense occurs often.
The definitions of the elements have been met. Failing to include the
expense would represent an error of omission done on purpose to
increase the profitability and reduce the liabilities of the company at
December 31, 2018.
2. Unless the company uses the revaluation model for all of its long-lived
assets, increasing the value of the building to its current value would
violate the historical cost basis of accounting. It is likely far more
relevant to the financial statement user of this company to see the
original purchase price of the building rather than its current value as it
is unlikely to be resold soon. Assets and revenue (from the recording
of an unrealized gain from the increase in the value of the asset) would
be overstated if Bucky’s instructions were followed.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-8A (CONTINUED)
(b) (continued)
3. The signing bonus paid to Wayne Crosby does not represent an asset
at December 31, 2018. No future benefit can be derived from this
payment as it was not conditional upon the occurrence of a future
event. Consequently, the expenditure does not fit the definition of an
asset.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-10A
(a)
The advantage of the current value basis of accounting is that it represents
a more up-to-date measurement of the value of the asset reported.
Consequently, the amounts reported are more relevant to the financial
statement users. The disadvantage of the current value basis of accounting
and corresponding advantage of historical cost is that historical cost is
more reliable and shows the amount paid for the asset. The historical cost
might provide a more faithful representation because it can be easily
verified and is neutral.
(b)
The reason a company might choose to adopt the current value basis of
accounting for real estate is that assets reported on the statement of
financial position will have higher values than they would using the
historical cost basis. It is inherent in the nature of real estate that the land
will increase in value over time. Creditors will find the current value a more
relevant basis for making lending decisions. The increase in the assets will
have a corresponding increase in equity.
(c)
The reason a company might choose to adopt the historical cost basis of
accounting for real estate is that assets reported on the statement of
financial position will have more faithful representation because it reports
the actual cost of the asset when it was acquired and this measurement
can be easily verified and it is neutral. There is also a significant cost to
obtaining reliable current value information, on a regular basis, to be
reported in the financial statements.
(d)
When comparing real estate companies, the reader is well advised to read
the accounting policy note to the financial statements disclosing the
measurement policy used for the real estate property. One would need to
determine the corresponding current value for real estate for the company
that used the historical cost basis of accounting. In fact, this information is
required to be disclosed for real estate companies, even if they adopted
the historical cost basis of accounting, to improve comparability and
disclosure. Otherwise, trying to compare businesses that use different
bases of accounting would be very difficult.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-1B
Item
Accumulated amortization—patents and
trademarks
Accumulated depreciation—industrial
machinery and equipment
Bank overdraft
Cash
Common (ordinary) shares
Current borrowings and debts
Income tax payable (current)
Industrial machinery and equipment
Inventories
Land
Long-term investments
Non-current borrowings and debts
Patents and trademarks
Prepaid expenses
Trade accounts payable
Trade accounts receivable
Statement of Financial
Position Category
Intangible assets (contra
account)
Property, plant, and equipment
(contra account)
Current liabilities
Current assets
Share capital
Current liabilities
Current liabilities
Property, plant, and equipment
Current assets
Property, plant, and equipment
Non-current assets
Non-current liabilities
Intangible assets
Current assets
Current liabilities
Current assets
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-2B
(a)
Item
Accounts receivable
Accumulated depreciation—
buildings
Accumulated depreciation—
equipment
Buildings
Cash
Equipment
Goodwill
Held for trading investments
Inventory
Land
Patent
Prepaid expenses
Statement of Financial
Position Category
Current assets
Property, plant, and equipment (contra
account)
Property, plant, and equipment (contra
account)
Property, plant, and equipment
Current assets
Property, plant, and equipment
Goodwill (after intangibles)
Current assets
Current assets
Property, plant, and equipment
Intangible assets
Current assets
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-2B (CONTINUED)
(b)
DEVON LIMITED
Statement of Financial Position (partial)
December 31, 2018
Assets
Current assets
Cash
Held for trading investments
Accounts receivable
Inventory
Prepaid expenses
Total current assets
Property, plant, and equipment
Land
Buildings
$ 58,275
Less: Accumulated depreciation
27,595
Equipment
$287,400
Less: Accumulated depreciation
146,550
Total property, plant, and equipment
Intangible assets
Patent
Goodwill
Total assets
$100,460
52,520
13,345
105,320
13,950
$285,595
$207,290
30,680
140,850
378,820
20,225
39,590
$724,230
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-3B
(a)
Item
Accounts payable
Common shares
Current portion of mortgage payable
Mortgage payable
Retained earnings
Unearned revenue
Category
Current liabilities
Shareholders’ equity
Current liabilities
Non-current liabilities
Shareholders’ equity
Current liabilities
(b)
DEVON LIMITED
Statement of Financial Position (partial)
December 31, 2018
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable
Unearned revenue
Current portion of mortgage payable
Total current liabilities
Non-current liabilities
Mortgage payable
Total liabilities
Shareholders' equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders' equity
(c)
$ 13,100
14,180
29,000
$ 56,280
231,255
287,535
$115,400
321,295
436,695
$724,230
Yes, the total assets of $724,230 matches the total liabilities and
shareholders’ equity.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-4B
(a)
BEAULIEU LIMITED
Income Statement
Year Ended December 31, 2018
Revenues
Service revenue
Interest revenue
Total revenues
Expenses
Salaries expense
Interest expense
Depreciation expense
Utilities expense
Insurance expense
Total expenses
Income before income tax
Income tax expense
Net Income
$193,100
500
$193,600
$145,600
8,000
5,400
3,700
2,400
165,100
28,500
5,000
$23,500
[Revenues – Expenses = Net income or (loss)]
BEAULIEU LIMITED
Statement of Changes in Equity
Year Ended December 31, 2018
Common
Shares
Balance, January 1
Issued common shares
Net income
Dividends declared
Balance, December 31
$25,000
20,000
_ _____
$45,000
Retained
Earnings
$34,000
23,500
(3,500)
$54,000
Total Equity
$59,000
20,000
23,500
(3,500)
$99,000
(Beginning retained earnings ± Changes in retained earnings = Ending retained earnings)
[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared]
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-4B (CONTINUED)
(a) (continued)
BEAULIEU LIMITED
Statement of Financial Position
December 31, 2018
Assets
Current assets
Cash
Accounts receivable
Prepaid insurance
Total current assets
Long-term investments
Property, plant, and equipment
Land
Buildings
Less: Accumulated depreciation—buildings
Equipment
Less: Accumulated depreciation—equipment
Total property, plant, and equipment
Total assets
$11,170
7,500
250
$ 18,920
20,000
$145,800
$105,000
12,000
$ 32,000
19,200
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable
Salaries payable
Current portion of mortgage payable
Total current liabilities
Non-current liabilities
Mortgage payable ($175,800 - $35,100)
Total liabilities
Shareholders' equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders' equity
93,000
12,800
251,600
$290,520
$ 9,550
6,170
35,100
$ 50,820
140,700
191,520
$45,000
54,000
99,000
$290,520
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-4B (CONTINUED)
(b)
The income statement reports the net income or loss for the period. This
figure is then used in the statement of changes in equity, along with
dividends declared and issues (or repurchases) of shares to calculate the
balances in common shares and retained earnings at the end of the period.
These ending balances are then used in the statement of financial position,
to determine shareholders’ equity and complete the accounting equation.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-5B
(a)
Working capital
1.
2.
Current ratio
Current assets – Current liabilities
$253,850
– $156,550
=
$97,300
Current assets
Current liabilities
$253,850
=
1.6 :1
=
40.1%
$156,550
3.
Debt to total assets
Total liabilities
Total assets
$288,550
$719,150
Income available to common shareholders
4.
5.
Basic earnings per share
Price-earnings ratio
Weighted average number of common shares
$96,600
=
$2.42
40,000
Market price per share
Basic earnings per share
$30.00
=
12.4
$2.42
(b)
times
Fast’s liquidity has improved as the working capital is larger in 2018 and the
current ratio is greater than that of 2017. The solvency has improved as the
debt to total assets ratio is a smaller percentage in 2018 than in 2017. Fast’s
profitability has improved dramatically as the basic earnings per share ratio
has increased by a large amount in 2018, as has the price-earnings ratio,
suggesting that investors are excited about the company’s future prospects.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-6B
(a)
Working capital
Belliveau
Current assets – Current liabilities
$180,000
– $75,000
=
$700,000
– $300,000
=
=
=
=
Shields
Current ratio
Current assets
Current liabilities
=
Belliveau
$180,000
$105,000
$400,000
Shields
=
$700,000
2.4 :1
$75,000
=
2.3 :1
$300,000
Belliveau is slightly more liquid than Shields as it has a higher current ratio,
even though its absolute working capital amount is lower.
(b)
Debt to total assets
=
Total liabilities
Total assets
Belliveau
($75,000 + $190,000)
($180,000 + $600,000)
Shields
= 34.0%
($300,000 + $200,000)
($700,000 + $800,000)
= 33.3%
The debt to asset ratios are similar and both companies are solvent. The
lower the percentage of debt to total assets, the lower the risk that a
company may be unable to pay its debts as they come due.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-6B (CONTINUED)
(c)
Service revenue
Operating expenses
Interest expense
Income tax expense
Total expenses
Belliveau
$450,000
390,000
6,000
10,000
406,000
Shields
$890,000
679,000
10,000
65,000
754,000
Net income
$ 44,000
$136,000
Basic earnings per share =
Income available to common shareholders
Weighted average number of common shares
Belliveau
$44,000
200,000
Shields
= $0.22
Price-earnings ratio
Belliveau
$2.50
$0.22
= 11.4 times
$136,000
200,000
=
= $0.68
Market price per share
Basic earnings per share
Shields
$6.00
$0.68
= 8.8 times
Investors have higher expectations for Belliveau’s future profitability, as
evidenced by the price-earnings ratio. It is not useful to compare basic
earnings per share between companies.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-7B
(a)
(in US$ millions)
Walmart
1.
Working capital
2.
Current ratio
3.
Debt to total assets
4.
5.
(b)
Costco
$60,239 – $64,619
= $(4,380)
$60,239
$64,619
$17,299 – $16,540
= $759
= 0.9:1
$17,299
$16,540
= 1.0:1
$115,970
$199,581
= 58.1%
$22,597
$33,440
= 67.6%
Basic earnings per share
$14,694
3,207
= $4.58
$2,377
439
= $5.41
Price-earnings ratio
$65.39
$4.58
= 14.3 times
$133.58
$5.41
= 24.7 times
Liquidity
Both companies are not very liquid, with Walmart having a working capital
deficiency. Both Walmart and Costco have current ratios that are lower
(worse) than the industry average.
Solvency
Walmart is more solvent than Costco as evidenced by its lower debt to total
assets ratio. However, since both companies have a debt to total assets
ratio that is lower than the industry average, they are more solvent than the
average company in the industry.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-7B (CONTINUED)
(b) (continued)
Profitability
Although the basic earnings per share ratio does not provide a basis for
comparison, investors appear to have more confidence in the future net
income of Costco as evidenced by Costco’s price-earnings ratio. Both
Costco and Walmart have lower price-earnings ratios than the industry.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-8B
(a)
The higher the amount of working capital, the better a business’ liquidity.
From 2016 to 2017, Giasson Corporation’s working capital improved. It
then deteriorated from 2017 to 2018, decreasing by $17,000.
A higher current ratio is evidence of better liquidity for a business, assuming
all components of current assets are also liquid. The current ratio for
Giasson has been deteriorating steadily from 2016 to 2018. The
corporation remains liquid, as its current ratio was 1.5:1 in 2018.
A smaller debt to total assets ratio shows evidence of better solvency. The
percentage of total liabilities to total assets increased from 2016 to 2017,
showing deterioration in the solvency for Giasson. On the other hand, this
ratio improved from 2017 to 2018. Less than half of the company’s assets
have been financed using debt.
The higher the basic earnings per share, the better evidence of improved
profitability. Profitability increased from 2016 to 2017 but declined
significantly from 2017 to 2018 indicating poorer profitability.
The investors appear to have less confidence in the future profitability of
Giasson as evidenced by Giasson's price-earnings ratio which declined
from 2016 to 2018.
(b)
Liquidity
Giasson’s current ratio, although declining over the past two years,
demonstrates adequate liquidity. There is $1.50 of current assets
available to cover each $1 of current liabilities.
Solvency
Giasson’s debt to total assets ratio, although deteriorating from 2016 to
2018, remains modest in size and so the solvency of the company
continues to be good.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-8B (CONTINUED)
(b) (continued)
Profitability
Giasson’s profitability is declining steadily as is demonstrated by the basic
earnings per share ratio and the price-earnings ratio.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-9B
(a)
The objective of financial reporting is to provide information that is useful to
existing and potential investors, lenders, and other creditors in making
decisions about providing resources to the company. Virginia’s
suggestions concerning how elements should be reported on the financial
statements do not meet the objective of financial reporting. Two of her
suggestions would lead to a violation of the fundamental basis on which
financial statements are prepared: accrual accounting. The suggested
changes to the financial statements would not portray the economic reality
and would not faithfully represent the performance of the construction
company and the financial position at its year end. Virginia’s suggestions
show bias and an attempt to portray a financial picture that would be
perceived as more favourable than it is in reality.
(b)
1. Failing to include the estimated expense and the related liability for the
damages that have already occurred by the end of the year violates
accrual accounting. The expense was incurred and a liability exists that
can be estimated. The definitions of the elements have been met.
Failing to include the expense would represent an error of omission
done on purpose to increase the profitability and reduce the liabilities
of the construction company at its year end.
2. The suggestion of increasing the revenues from construction would
result not only in the recording of revenue but the recording of an
accounts receivable. The revenue from construction has not been
earned as no work has been performed. Furthermore, no account
receivable should be recorded because no asset exists yet. Because
revenue would be overstated if recorded, equity would also be
overstated if Virginia’s instructions were followed. Virginia’s
suggestions would not faithfully represent the reality of the
performance of Ace Construction Limited for the current fiscal year.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-9B (CONTINUED)
(b) (continued)
3. Although there are no fixed repayment terms for the bank overdraft,
the bank can require repayment on demand since no contract or
agreement has been entered into to delay the repayment of the
overdraft. For this reason, the classification of the bank overdraft as a
non-current liability would falsely portray the financial position of Ace
Construction Limited at the year end. When assessing the construction
company’s liquidity, the users of the financial statements would be
misinterpreting the financial position because of this misclassification.
Classifying the debt as non-current would not faithfully represent the
economic reality of the construction company’s liquidity position.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-10B
(a)
The advantage of the current value basis of accounting is that it represents
a more up-to-date measurement of the value of the asset reported.
Consequently, the amounts reported are more relevant to the financial
statement users. The disadvantage of the current value basis of accounting
and corresponding advantage of historical cost is that historical cost is
more reliable and shows the amount paid for the asset. The historical cost
might provide a more faithful representation because it can be easily
verified and is neutral.
(b)
The following is the recommended basis of measurement that should be
used for the following purchases:
1. Due the nature of the asset, a textbook purchase should be recorded
at the historical cost basis of accounting because of its intended use.
The objective of owning the asset is to use it and not to immediately
resell it at a profit.
2. In the case of an iPad, the use of the asset will be limited due to
technological obsolescence. Because of this obsolescence, the iPad
purchase should be recorded and reported using the historical cost
basis of accounting.
3. Software is very similar to the iPad of item 2 above in that it becomes
technologically obsolete very quickly. On the other hand, the
manufacturer has recognized this problem and has included in the sale
of the software, automatic upgrades to attempt to deal with the future
needs and demands of the purchaser. This asset is purchased for use
and not for resale at a gain and consequently, the historical cost basis
of accounting should be used for its recording and reporting.
4. If the purchase of the used car is for use in the business, the historical
cost basis of accounting should be used. On the other hand, if the
purchase is for resale, the current value basis of accounting should be
used.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 2-7B (CONTINUED)
(b) (continued)
5. Since the intention of the buyer of land is to eventually build a home on
the land, the purchase of the land should be recorded using the
historical cost basis of accounting. If the intention changes over the
years and the buyer decides to resell the property and intends to hold
the land for resale at a gain, the reporting of the asset should change
to the current value basis of accounting used for investments,
assuming the current value is readily available.
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Financial Accounting, Seventh Canadian Edition
CT2-1 FINANCIAL REPORTING CASE
(a)
Total current assets were $335,581,000 at January 31, 2016, and
$315,840,000 at January 31, 2015.
Total assets were $793,795,000 at January 31, 2016, and $724,299,000
at January 31, 2015.
(b)
Current assets are listed in the order of liquidity from most to least liquid.
Cash is the most liquid asset and is reported first. Non-current assets are
listed in order of permanency, with property, plant, and equipment listed
first.
(c)
The current liabilities total $155,501,000 at January 31, 2016, and
$146,275,000 at January 31, 2015. The total liabilities at January 31,
2016 and January 31, 2015 were $436,183,000 and $395,016,000,
respectively.
(d)
The current liabilities are listed in order of due date from those due first to
those due last, with accounts payable and accrued liabilities listed first. It
is not clear what order was chosen for non-current liabilities. Accounting
standards do not suggest any particular order for the presentation of noncurrent liabilities.
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CT2-2
Financial Accounting, Seventh Canadian Edition
FINANCIAL ANALYSIS CASE
(a)
North West
(in thousands)
1. Working
capital
Sobeys
(in millions)
$335,581 – $155,501 = $180,080 $2,581.4 – $2,707.4 = $(126.0)
2. Current ratio
$335,581
$155,501
= 2.2:1
$2,581.4
$2,707.4
= 1.0:1
3. Debt to
total assets
$436,183
$793,795
= 54.9%
$5,230.9
$7,960.6
= 65.7%
(b)
Liquidity: Working capital is not comparable, because of the differing sizes
of the two companies involved. However, using the current ratio to assess
liquidity, we can determine that North West is significantly more liquid than
Sobeys and well ahead of the industry average. Sobeys is in a difficult
position of having a working capital deficiency.
Solvency: The higher a company’s percentage of debt to total assets is, the
greater the risk that this company may be unable to meet its maturing
obligations. North West has a better ratio than the industry while Sobeys has
a worse ratio.
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CT2-3
(a)
Financial Accounting, Seventh Canadian Edition
FINANCIAL REPORTING CASE
McCain’s multinational structure means that accounting personnel from
various countries are involved with preparing financial statements. Since
IFRS is a global standard, most of the accounting personnel would be
familiar with IFRS. Also, by using one standard across all subsidiaries,
there is no need to make adjustments for various GAAP differences (this
was often the case for Canadian multinationals prior to the adoption of
IFRS). For McCain, it means that the company will reduce cost as well as
the chance for errors.
In addition, the users of McCain’s financial statements are located
throughout the world. Those located in countries using IFRS, or wishing to
compare McCain’s financial statements to other global public companies,
would better understand financial statements prepared using this standard.
(b)
Relevance – Researchers have found that companies who voluntarily
adopt IFRS find that IFRS’ accounting measures are better tools for
evaluating performance. Therefore, IFRS statements are more relevant to
McCain’s management. Also, when global lenders are looking at financial
statements prepared according to IFRS, they are no longer concerned
about differences in GAAP. This increases the relevance to lenders.
Faithful Representation – In comparison to ASPE, IFRS requires more
detailed information to be disclosed in the notes to the financial statements.
From a user’s perspective, more information and explanation is provided
to help understand the economic event being depicted.
Comparability - McCain Foods is a global company that competes against
various other global companies (most of whom follow IFRS). By adopting
IFRS, it is easier for McCain to compare its results to other similar
companies. This information would be useful to both internal users
(management) as well as external (lenders).
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Financial Accounting, Seventh Canadian Edition
CT2-3 (CONTINUED)
(b) (continued)
Understandability – When different accounting standards are used by
various companies within a corporate group, they are less understandable.
Furthermore, when users are not resident in the country where the head
office of the company is located, they often have a difficult time
understanding financial statements that are presented using standards that
they are not familiar with. For instance, a McCain manager in a United
States subsidiary that follows U.S. GAAP may have difficulty
understanding the statements of a McCain subsidiary located in the U.K.
(that follows IFRS).
(c)
The assumption that small companies would avoid IFRS can relate to many
things like:
i.
Not planning to take their company public in the future;
ii.
They like the simplicity and familiarity of ASPE;
iii.
They have many competitors, customers, and suppliers that use
ASPE which makes their financial statements comparable and
understandable.
Examples of why private companies may adopt IFRS:
i.
Private companies that plan to be public sometime in the near future
or who have foreign private investors, may choose to adopt IFRS.
ii.
Private companies that have global shareholders or lenders (who are
more familiar with IFRS). They may also want to provide financial
statements to customers.
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CT2-4
Financial Accounting, Seventh Canadian Edition
FINANCIAL ANALYSIS CASE
Note to instructors: All of the material supplementing this group activity, including
a suggested solution, can be found in the Collaborative Learning section of the
Instructor Resource site accompanying this textbook as well as in the Prepare
and Present section of WileyPLUS.
(a)
Sheila paid $25,000 for 10,000 common shares of Kenmare Architects Ltd.
(or $2.50 per share) when the company was formed. This amount is
reported as the balance in the Common Shares account on the statement
of financial position of December 31, 2017.
Sheila’s mother paid $10,000 for 1,000 common shares (or $10.00 per
share) in early 2018. This amount paid can be determined by calculating
the increase of $10,000 ($35,000 less $25,000) in the Common Shares
account on the statement of financial position of December 31, 2018.
(b)
By December 31, 2017, Uncle Harry wanted $8,000 of the loan paid off in
2018. This amount is classified as the current portion of the loan due at
December 31, 2017. The actual amount of principal paid in 2018 was
$30,000. This amount paid can be determined by calculating the total
decrease in the loan payable from December 31, 2017 to December 31,
2018: [($52,000 + $8,000) less ($26,000 + $4,000)]. During 2017, Uncle
Harry received only interest, in the amount of $3,600, as indicated in the
statement of income for interest expense. In 2018, Uncle Harry received
$32,700. This amount is equal to the principal repayment of $30,000 and
the interest of $2,700.
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Financial Accounting, Seventh Canadian Edition
CT2-4 (CONTINUED)
(c)
Current ratio
2018
$46,000
$33,580
= 1.4:1
2017
$31,000
$22,490
= 1.4:1
Although the current ratio is unchanged, we need to further examine the
account balances that make up the ratio. There has been deterioration in
liquidity due to the declining cash balance and a significant rise in accounts
receivable which may indicate difficulty in collecting amounts owed from
customers. This decreased cash flow from customers has probably caused
the increase in accounts payable, as the company seems to have delayed
payment to suppliers.
(d)
Debt to total
assets
2018
$59,580
$106,000
= 56.2%
2017
$74,490
$103,000
= 72.3%
Kenmare’s solvency improved significantly. The decrease in the ratio
occurred mainly because of changes in the numerator rather than in the
denominator. Total liabilities fell because of the large pay down of the loan
from the uncle even though accounts payable rose. This had an impact on
the income statement by lowering interest expense because of the lower
loan balance. Because Kenmare’s debt level is lower, the amount of
interest expense is also lower, making the business more profitable.
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Financial Accounting, Seventh Canadian Edition
CT2-4 (CONTINUED)
(e)
Basic earnings
per share
2018
$7,910
11,000
= $0.72
2017
$3,510
10,000
= $0.35
The basic earnings per share more than doubled because net income more
than doubled while there was only a 10% increase in the number of shares.
(f)
Sheila paid $2.50 per share for her shares ($25,000 ÷ 10,000). The amount
Sheila’s mother paid for her shares was $10.00 per share ($10,000 refer to
part (a) above ÷ 1,000).
2018
2017
Price-earnings ratio
$10.00
= 13.9 times
$2.50
= 7.1 times
$0.72
$0.35
The service revenue increased 20% from 2017 to 2018 [($120,000 –
$100,000) ÷ $100,000]. The net income increased by 125% from 2017 to
2018 [($7,910 – $3,510) ÷ $3,510]. Sheila’s salary increased by 25% from
2017 to 2018 [($74,000 – $59,000) ÷ $59,000].
The price-earnings ratio changed mostly because of the price difference
paid by the two shareholders. Sheila’s mother paid four times the price
Sheila paid for her shares. This increase is very dramatic, taking into
account other ratios for measurement of performance.
The fourfold increase in the share price is not justified by the financial
performance of the business. The future profitability of the business is
based on the amount of service revenue that can be generated by the
single employee, Sheila, and is therefore limited.
(g)
The likely reason for the sale in shares in 2018 was to obtain $10,000,
which was used to repay the debt to Uncle Harry earlier than originally
scheduled.
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CT2-5
(a)
Financial Accounting, Seventh Canadian Edition
ETHICS CASE
The stakeholders in this case are:
Kathy Onishi, controller
Redondo’s vice-president of finance
Users of the company's financial statements, including shareholders and
creditors
(b)
The ethical consideration in this situation is whether or not switching from
ASPE to IFRS would affect the decisions of the users of the financial
statements. Because Redondo Corporation is a private corporation, the
use of IFRS is not required. It is ethically preferable to disclose the most
financially relevant information to the users of the financial statements so
that they can make informed decisions. One should question the reasoning
of Redondo’s vice-president of finance, who is focusing on the effect of the
implementation on the net income for the year.
(c)
As the controller, by supporting the conversion from ASPE to IFRS, Kathy
could gain the trust and respect of the board of directors and the
shareholders in general. The users of the company’s financial statements
will find the information provided under IFRS to be more useful in making
comparisons with Redondo’s competitors. This in turn will lead to better
decisions being made by users of the financial statements.
LO 3 BT: E Difficulty: M Time: 15 min. AACSB: Ethics CPA: cpa-t001 and cpa-t005 CM: Reporting and
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CT2-6
(a)
Financial Accounting, Seventh Canadian Edition
SERIAL CASE
Software Solutions’ financial statements will include the statement of
financial position, income statement, statement of changes in equity, and
statement of cash flows. It may also include a statement of comprehensive
income. It will also include the notes to the financial statements.
The statement of financial position reports the assets, liabilities, and
shareholders’ equity at a specific date. The income statement presents the
revenues and expenses and resulting net income or loss for a specific
period of time. The statement of changes in equity summarizes the
changes in equity accounts, including common shares and retained
earnings, for a specific period of time. Finally, the statement of cash flows
provides information about the cash inflows and cash outflows provided or
used for operating, investing, and financing activities for a specific period
of time.
(b)
Because Software Solutions is a public company, it is required to have its
financial statements audited. The auditor’s report provides users with
assurance that the financial statements are fairly presented. As a public
company, Software Solutions is also required to file its financial statements
on a timely basis with the regulator of the stock exchange on which its
shares trade.
(c)
By looking at the statement of financial position and determining the
composition of Software Solutions’ current assets and current liabilities, we
can assess its ability to pay its short-term obligations. We can also
calculate liquidity ratios, such as working capital and the current ratio, for
the current and prior periods to help determine its ability to meet its current
obligations. This will not guarantee that Software Solutions is able to pay
ABC’s invoices in the future, but it will provide some assurance with respect
to how it has performed in the past. The statement of cash flows also
provides information to determine if Software Solutions generates positive
cash flows from its operating activities.
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Financial Accounting, Seventh Canadian Edition
CT2-6 (CONTINUED)
(d)
By looking at the types of revenues and expenses reported in the income
statement, we can determine if Software Solutions is profitable. If revenues
earned by Software Solutions exceed expenses incurred, then Software
Solutions is profitable. As well, profitability ratios that measure a company’s
ability to generate net income over a period of time can be determined.
These profitability ratios include basic earnings per share and the priceearnings ratio. The latter measures investors’ expectations about Software
Solutions’ future profitability.
(e)
By looking at the statement of financial position, we can determine
Software Solutions’ total liabilities, and the mix of current and non-current
debt. We can also calculate solvency ratios, such as the debt to total assets
ratio, to determine whether Software Solutions has the ability to repay its
total debt. Solvency ratios help measure a company’s ability to survive over
a long period of time.
Reviewing the company’s income statement and statement of cash flows
helps in determining whether Software Solutions is able to pay its interest
expense. The more profitable the company, the better able it is to make
the interest payments on its debt and generate sufficient cash to repay its
obligations.
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Financial Accounting, Seventh Canadian Edition
CT2-6 (CONTINUED)
(f)
Be aware that the financial statements of Software Solutions provide a
historical perspective of what has already taken place. The financial
statements may not prove to be the best indicator of what will happen in
the future. Consumer tastes change and as a result the demand for
Software Solutions’ products may also change.
As well, consider this business opportunity from your perspective. Ask
yourself if the price obtained for the hours worked is reasonable,
considering some of the risks involved. There is a risk that, by taking on
this obligation, additional opportunities cannot be pursued. Does Anthony
Business Company have the ability to meet the demands of Software
Solutions? Is it able to commit to providing 500 hours of service per month?
Does it have enough staff to enable the company to do so? Does it have
enough cash to pay for the staff that will be required, along with other
operating expenses, and wait 30 days from the date of the invoice to collect
from Software Solutions?
LO 2,3 BT: E Difficulty: M ime: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
Legal Notice
Copyright
Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All
rights reserved.
The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.
The material provided herein may not be downloaded, reproduced, stored in a
retrieval system, modified, made available on a network, used to create derivative
works, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, scanning, or otherwise without the prior written
permission of John Wiley & Sons Canada, Ltd.
(MMXVII vi F2)
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Financial Accounting, Seventh Canadian Edition
CHAPTER 3
THE ACCOUNTING INFORMATION SYSTEM
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
Analyze the effect of transactions on the accounting equation.
Explain how accounts, debits, and credits are used to record transactions.
Journalize transactions in the general journal.
Post transactions to the general ledger.
Prepare a trial balance.
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES
AND BLOOM’S TAXONOMY
Item LO
1.
2.
3.
4.
1
1
1
2
BT Item LO
C
C
C
C
5.
6.
7.
8.
2
2
3
3
BT Item LO BT Item LO
Questions
C
C
C
C
9.
10.
11.
12.
3,4
3,4
4
4
C
C
K
K
BT Item LO
BT
13.
14.
15.
16.
4
5
5
5
K
C
C
C
17. 1,3,4,5
C
13.
5
AN
Brief Exercises
1.
1
C
4.
2
AP
7.
3
AP
10.
4
AP
2.
1
AN
5.
1,2
AN
8.
3
AP
11.
4
AP
3.
2
AP
6.
3
AP
9.
4
AN
12.
5
AP
Exercises
1.
1
AN
4.
1,2
AN
7.
10.
4,5
AP
13.
5
AP
2.
1
AN
5.
3
AP
8.
1,2,3,4 AN
4
AP
11.
5
AP
14.
5
AP
3.
2
K
6.
3
AP
9.
4
AN
12.
5
AP
15.
5
AN
AP
Problems: Set A and B
1.
1
AN
4.
2
K
7.
3,4
AP
10.
5
2.
1
AN
5.
1,2,3
AN
8.
3,4,5
AP
11.
5
AP
3.
2
AP
6.
3
AP
9.
3,4,5
AP
12.
5
AN
Accounting Cycle Review
1.
3,4,5
AP
2.
3,4,5
AP
Cases
1.
1
AP
3.
3,4,5
E
5.
5
S
2.
1
AN
4.
5
AN
6.
3,4,5
AN
Solutions Manual
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
Legend: The following abbreviations will appear throughout the solutions manual
file.
LO
Learning objective
BT
Bloom's Taxonomy
K
Knowledge
C
Comprehension
AP Application
AN Analysis
S
Synthesis
E
Evaluation
Level of difficulty
S
Simple
M
Moderate
C
Complex
Estimated time to prepare in minutes
Association to Advance Collegiate Schools of Business
Communication
Communication
Ethics
Ethics
Analytic
Analytic
Technology
Tech.
Diversity
Diversity
Reflective Thinking
Reflec. Thinking
CPA Canada Competency
Ethics
Professional and Ethical Behaviour
PS and DM
Problem-Solving and Decision-Making
Comm.
Communication
Self-Mgt.
Self-Management
Team & Lead
Teamwork and Leadership
Reporting
Financial Reporting
Stat. & Gov.
Strategy and Governance
Mgt. Accounting
Management Accounting
Audit
Audit and Assurance
Finance
Finance
Tax
Taxation
Difficulty:
Time:
AACSB
CPA CM
cpa-e001
cpa-e002
cpa-e003
cpa-e004
cpa-e005
cpa-t001
cpa-t002
cpa-t003
cpa-t004
cpa-t005
cpa-t006
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
ANSWERS TO QUESTIONS
1.
(a)
(b)
Only events that cause a change in an asset, liability, or
shareholders’ equity account are recorded as accounting
transactions. Other events, such as the agreement to provide a
service, do not immediately impact an asset, liability, or
shareholder’s equity account and, therefore, are not considered an
accounting transaction.
Examples of events that would not be recorded include hiring
employees, signing a lease, and placing an order to purchase
services.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
2.
Accounting transactions that affect the accounting equation (assets =
liabilities + shareholders’ equity) should be recorded.
(a)
(b)
(c)
(d)
(e)
Winning an award is not an accounting transaction, as it does not
affect the accounting equation. The award did not involve the receipt
of an asset, such as cash.
Supplies purchased on account is an accounting transaction
because it affects the accounting equation (assets are increased
because supplies were received and liabilities are increased
because accounts payable were incurred).
A shareholder dying is not an accounting transaction, as it does not
affect the accounting equation.
Declaring and paying a cash dividend to shareholders is an
accounting transaction as it does affect the accounting equation
(shareholders’ equity is decreased and assets (cash) are
decreased).
The agreement to provide legal services to the company is not an
accounting transaction as it does not affect the accounting equation.
No expense has been incurred yet and no liabilities have been
affected as yet. Once the lawyer begins providing services and an
amount is paid or owed, then a transaction would be recorded.
LO 1 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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3.
Financial Accounting, Seventh Canadian Edition
Yes, a company can enter into a transaction in which only the left (assets)
side of the accounting equation is affected. An example would be a
transaction where an increase in one asset is offset by a decrease in
another asset. A decrease in the Accounts Receivable account which is
offset by an increase in the Cash account is a specific example (that is, a
customer paying for goods previously purchased on account).
LO 1 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
4.
The structure of the accounting equation matches the debit-credit rules in
accounting. Assets are shown on the left-hand side of the accounting
equation and debits are shown on the left-hand side of the accounting
equation and T accounts. Because of this, asset accounts have normal
debit balances. Liabilities and shareholders’ equity are shown on the
right-hand side of the accounting equation and credits are shown on the
right-hand side of the accounting equation and T accounts. Liabilities and
shareholders’ equity accounts (such as share capital and retained
earnings) have normal credit balances. Following the debit-credit rules
will ensure that the accounting equation will be consistently applied.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
5.
Shareholders' equity consists of different components, and they do not all
move in the same direction. Shareholders’ equity is usually comprised of
share capital (which is increased by credits) and retained earnings.
Retained earnings can be further subdivided into revenues and expenses
and dividends declared which are then added to opening retained
earnings in the case of revenues, and deducted from opening retained
earnings in the case of expenses and dividends. Revenues are increased
by credits while expenses and dividends declared are increased by
debits.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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6.
Financial Accounting, Seventh Canadian Edition
Emily is likely relating the term debit and credit to the normal balances of
accounts. Since assets have normal debit balances and, from a personal
standpoint, acquiring and possessing assets is viewed in a positive light,
it might follow in Emily’s mind that debits are favourable. On the other
hand, liabilities have a normal credit balance and might be viewed by
Emily in a negative light because debt is unfavourable from a personal
standpoint. However, Emily is incorrect. Debits mean nothing more than
the left side of accounts and credits the right side of the accounts. Neither
is favourable or unfavourable.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
7.
(a)
(b)
A general journal is a book of original entry, in which transactions
are recorded in chronological order.
The general journal facilitates the recording process by documenting
the debit and credit effects on specific accounts. The general journal
discloses the complete effect of a transaction in one place, including
an explanation and, where applicable, identification of the source
document. The general journal provides a chronological record of
transactions and it helps to prevent and locate errors, because the
debit and credit amounts for each entry can be quickly compared.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
8.
While the account title choices suggested by Meghan provide details of
the type of truck the company purchased, the title of the account used to
record the purchase should be more generic to include all types of trucks
and other vehicles that can be owned and used by the business.
Ambiguous or multiple account titles with similar names can lead to
incorrect financial reporting. The name of the account often used by
companies for purchases of this nature is Vehicles.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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9.
Financial Accounting, Seventh Canadian Edition
This would not be efficient because the journal provides a record that
shows both “sides” of the transaction along with a description of the
transaction. This information is vital to the understanding of the event. A
general ledger is not intended to be used to capture the recording of
transactions, but to tabulate the effects of transactions in separate
accounts. The balances arrived at in the ledger are then used to
communicate information to the users of the financial statements. If one
attempted to omit the use of journal entries, one could not retrace the
transactions as they originated in the journal. One would only see one
side of a transaction at a time by looking at an account in the ledger. It
would become very confusing and unruly to try to keep track of
transactions.
LO 3,4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
10.
Posting should be done on a timely basis, at least monthly, so that
account balances can be monitored and reconciled. This ensures that
any errors are identified as soon as possible.
LO 3,4 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
11.
(a)
(b)
The general ledger is the entire group of accounts maintained by a
company, including all the asset, liability, and shareholders' equity
accounts, including the share capital, retained earnings, dividends
declared, revenue, and expense accounts.
The general ledger is often arranged in the order in which accounts
are presented in the financial statements, beginning with the
statement of financial position accounts. The asset accounts come
first, followed by liability accounts, and then shareholders’ equity
accounts, including the share capital, retained earnings, dividends
declared, revenue, and expense accounts.
LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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12.
(a)
(b)
Financial Accounting, Seventh Canadian Edition
The chart of accounts is a list of a company’s accounts. The chart of
accounts is important, particularly for a company that has a large
number of accounts, because it helps organize the accounts and
identify their location in the general ledger.
Numbering the accounts helps identify and sort the accounts.
LO 4 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
13.
Cash, Accounts Receivable, Supplies, Prepaid Insurance, Accounts
Payable, Unearned Revenue, Common Shares, Dividends Declared,
Service Revenue, Salaries Expense, and Income Tax Expense.
LO 4 BT: K Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
14.
(a)
(b)
A trial balance is a list of accounts and their balances at a point in
time. The primary purpose of a trial balance is to prove the
mathematical equality of debits and credits after all journalized
transactions have been posted. A trial balance also facilitates the
discovery of errors in journalizing and posting. In addition, it is useful
in preparing financial statements.
While it does not matter in what order the accounts are listed in the
trial balance, it is usual for the accounts in the trial balance to be
listed in the same order as they are listed in the general ledger
(asset accounts, liability accounts, and shareholders’ equity
accounts, including the share capital, retained earnings, dividends
declared, revenue, and expense accounts). This makes it easier to
compare the trial balance accounts to the general ledger accounts,
as well as to prepare the financial statements from the trial balance.
LO 5 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
15.
Financial Accounting, Seventh Canadian Edition
The retained earnings account in the unadjusted trial balance shows the
beginning balance of the period (which is the same as the ending balance
of the prior period) as it has not yet been updated for the effect that the
revenues, expenses, and dividends declared have on retained earnings
for the current accounting period. (Note to instructors: This chapter only
includes references to an unadjusted and pre-closing trial balance; the
post-closing trial balance is not introduced until Chapter 4.)
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
16.
Claire, here are some tips to help you find the $100 difference in the trial
balance columns assuming it is a single error:
1.
2.
3.
4.
If the difference between the debit and credit totals is an amount
such as $1, $100, or $1,000, re-add the trial balance columns and
recalculate the account balances.
If the amount of the difference can be evenly divided by two, (which
it is in this case) scan the trial balance to see if a balance equal to
half the error has been entered in the wrong column.
If the amount of the difference can be evenly divided by nine, (which
it is not in this case) retrace the account balances on the trial
balance to see whether they have been incorrectly copied from the
ledger. For example, if a balance was $12 but was listed as $21, a
$9 error has been made. Reversing the order of numbers is called a
transposition error. A slide, which is adding or deducting one or
several zeros in a figure, has the same effect.
If the amount of the difference cannot be evenly divided by two or
nine, scan the ledger to see whether an account balance in the
amount of the error has been omitted from the trial balance. Scan
the journal to see whether a posting in the amount of the error has
been omitted.
When all else fails, all of the transactions should be carefully traced
through the process again.
LO 5 BT: C Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
17.
Financial Accounting, Seventh Canadian Edition
The first four steps in the accounting cycle are:
(a) (1) Analyze the business transactions and determine their effects
on the accounting equation and also determine when and how
to record the transactions.
(2) Journalize the transactions in the general journal to record the
effects of the transactions on the accounts involved in the
transactions.
(3) Post to the general ledger accounts to provide an accumulation
of the effect of several journalized transactions in the individual
accounts.
(4) Prepare a trial balance to prove that the sum of the debit
account balances equals the sum of the credit account balances
after posting.
(b) It does matter in which order the steps of the accounting cycle are
completed. Each step performed has been designed in the
sequence with the understanding that the previous step has been
performed. Failing to do so would result in incomplete and
inaccurate financial information.
LO 1,3,4,5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3-1
(a)
1.
2.
3.
4.
5.
(b)
Assets
(+) (-)
NE
NE
(+)
NE
=
Liabilities
NE
NE
NE
NE
NE
+
Shareholders’ Equity
NE
NE
NE
(+)
NE
Items 1 and 4 are accounting transactions that should be recorded in the
accounting records. Each of these transactions have an impact on the
accounting equation as shown in part (a).
Items 2, 3, and 5 should not be recorded in the accounting equation.
They do not yet impact the accounting equation.
LO 1 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-2
Assets
=
Liabilities
Shareholders’ Equity
Retained Earnings
+
=
Transaction
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Total
Cash
Accounts
Receivable
Supplies
+$250
Prepaid
Insurance
Accounts
Payable
+$250
Unearned
Revenue
Common
+ Shares
+$500
–$300
+5,000
–100
+500
−250
–100
+300
$5,050
+
Revenues
–
Expenses
–
Dividends
Declared
+$500
−$300
+$5,000
−$100
−500
−250
+$100
+ $0
TOTAL ASSETS = $5,400
+$250
+ $100 =
$0
+$300
−300
+ $0
+ $5,000
+300
+ $800
– $300
TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $5,400
LO 1 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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– $100
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-3
1. Accounts Payable
(a)
Basic
Type
Liability
(b)
Normal
Balance
Credit
(c)
Debit
Effect
decrease
(d)
Credit
Effect
increase
2. Accounts Receivable
Asset
Debit
increase
decrease
3. Cash
Asset
Debit
increase
decrease
4. Common Shares
Shareholder's
equity
Credit
decrease
increase
5. Dividends Declared
Shareholder's
equity
Debit
increase
decrease
Debit
increase
decrease
Debit
increase
decrease
Credit
decrease
increase
Credit
decrease
increase
Credit
decrease
increase
6. Equipment
7. Income Tax Expense
8. Retained Earnings
9. Service Revenue
10. Unearned Revenue
Asset
Shareholder's
equity
Shareholder's
equity
Shareholder's
equity
Liability
LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-4
(a)
Transaction
Basic Type
Account Debited
(b)
Specific
Account
(c)
Effect
Account Credited
(b)
Specific
Basic Type
Account
(a)
(c)
Effect
1.
Asset
Cash
Increase
Shareholders’
equity
Common
Shares
Increase
2.
Asset
Prepaid
Rent
Increase
Asset
Cash
Decrease
3.
Shareholders’
equity
Salaries
Expense
Increase
Asset
Cash
Decrease
4.
Asset
Accounts
Receivable
Increase
Shareholders’
equity
Service
Revenue
Increase
5.
Asset
Cash
Increase
Asset
Accounts
Receivable
Decrease
6.
Asset
Supplies
Increase
Liability
Accounts
Payable
Increase
7.
Liability
Accounts
Payable
Decrease
Asset
Cash
Decrease
8.
Asset
Cash
Increase
Liability
Bank Loan
Payable
Increase
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-5
Transaction 1
June 1: Issued common shares to shareholders in exchange
for $2,500 cash.
(a) Basic
Analysis
The asset account Cash is increased by $2,500; the
shareholders’ equity account Common Shares is increased by
$2,500.
(b) Equation
Analysis
Assets
=
Liabilities
+
Cash
+$2,500
Shareholders’
Equity
Common
Shares
+$2,500
(c) Debit−Credit
Analysis
Debits increase assets: debit Cash $2,500.
Credits increase share capital (shareholders’ equity): credit
Common Shares $2,500.
Transaction 2
June 4: Purchased supplies on account for $250.
(a) Basic
Analysis
The asset account Supplies is increased by $250; the liability
account Accounts Payable is increased by $250.
(b) Equation
Analysis
Assets
Supplies
+$250
(c) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Accounts
Payable
+$250
Debits increase assets: debit Supplies $250.
Credits increase liabilities: credit Accounts Payable $250.
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 3-5 (CONTINUED)
(a), (b), and (c) (continued)
Transaction 3
June 7: Billed J. Kronsnoble $300 for welding work done.
(a) Basic
Analysis
The asset account Accounts Receivable is increased by $300;
the revenue account Service Revenue is increased by $300.
(b) Equation
Analysis
Assets
=
Liabilities
+
Accounts
Receivable
+$300
Shareholders’
Equity
Service
Revenue
+$300
(c) Debit−Credit
Analysis
Debits increase assets; debit Accounts Receivable $300.
Credits increase revenues; credit Service Revenue $300.
Transaction 4
June 18: Received partial payment from J. Kronsnoble for work
billed on June 7.
(a) Basic
Analysis
The asset account Cash is increased by $200; the asset
account Accounts Receivable is decreased by $200.
(b) Equation
Analysis
Assets
=
Liabilities
+
Shareholders’
Equity
Cash
+$200
Accounts
Receivable
-$200
(c) Debit−Credit
Analysis
Debits increase assets: debit Cash $200.
Credits decrease assets: credit Accounts Receivable $200.
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BRIEF EXERCISE 3-5 (CONTINUED)
(a), (b), and (c) (continued)
Transaction 5
June 25: Hired new employee to start work on July 3.
(a) Basic
Analysis
An accounting transaction has not occurred. There is only an
agreement of employment to start on July 3.
Transaction 6
June 27: Received cash of $200 from Liu Controls Ltd. as a
deposit for welding work to be done in July.
(a) Basic
Analysis
The asset account Cash is increased by $200; the liability
account Unearned Revenue is increased by $200.
(b) Equation
Analysis
Assets
Cash
+$200
(c) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Unearned
Revenue
+$200
Debits increase assets: debit Cash $200.
Credits increase liabilities: credit Unearned Revenue $200.
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BRIEF EXERCISE 3-5 (CONTINUED)
(a), (b), and (c) (continued)
Transaction 7
June 28: Paid for supplies purchased on June 4.
(a) Basic
Analysis
The asset account Cash is decreased by $250; the liability
account Accounts Payable is decreased by $250.
(b) Equation
Analysis
Assets
=
Liabilities
+
Shareholders’
Equity
Accounts
Payable
-$250
Cash
-$250
(c) Debit−Credit
Analysis
Debits decrease liabilities: debit Accounts Payable $250.
Credits decrease assets: credit Cash $250.
Transaction 8
June 29: Paid $100 for monthly income tax instalment.
(a) Basic
Analysis
The expense account Income Tax Expense is increased by
$100; the asset account Cash is decreased by $100.
(b) Equation
Analysis
Assets
Cash
-$100
(c) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Income Tax
Expense
-$100
Debits increase expenses: debit Income Tax Expense $100.
Credits decrease assets: credit Cash $100.
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BRIEF EXERCISE 3-6
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Supplies .......................................................
Accounts Payable .................................
250
Accounts Receivable ...................................
Service Revenue ...................................
500
Salaries Expense .........................................
Cash ......................................................
300
Cash ............................................................
Common Shares ...................................
5,000
Dividends Declared ......................................
Cash ......................................................
100
Cash ............................................................
Accounts Receivable .............................
500
Accounts Payable .....................................
Cash ...................................................
250
Prepaid Insurance ........................................
Cash ...................................................
100
Cash ..........................................................
Unearned Revenue ............................
300
Unearned Revenue ....................................
Service Revenue ................................
300
250
500
300
5,000
100
500
250
100
300
300
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BRIEF EXERCISE 3-7
1.
2.
3.
4.
5.
6.
7.
8.
Cash ............................................................
Common Shares ...................................
5,000
Prepaid Rent ................................................
Cash ......................................................
2,100
Salaries Expense .........................................
Cash ......................................................
500
Accounts Receivable ...................................
Service Revenue ...................................
1,200
Cash ............................................................
Accounts Receivable .............................
900
Supplies .......................................................
Accounts Payable..................................
500
Accounts Payable ........................................
Cash ......................................................
500
Cash ............................................................
Bank Loan Payable ...............................
1,000
5,000
2,100
500
1,200
900
500
500
1,000
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BRIEF EXERCISE 3-8
June
1
4
7
18
Cash .......................................................
Common Shares..........................
2,500
Supplies .................................................
Accounts Payable ........................
250
Accounts Receivable ..............................
Service Revenue .........................
300
Cash .......................................................
Accounts Receivable ...................
200
2,500
250
300
200
25
No transaction – no asset, liability, or equity account affected
27
Cash .....................................................
Unearned Revenue ......................
200
Accounts Payable ..................................
Cash ............................................
250
Income Tax Expense .............................
Cash ............................................
100
28
29
200
250
100
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BRIEF EXERCISE 3-9
Accounts Receivable
Aug. 10 17,500
15 6,500
Aug. 23 (a) 15,000
Bal.
9,000
Sept. 5 (b) 4,000
Sept. 15
8,000
Bal.
5,000
Accounts Payable
Aug. 5 (c) 6,000
18
3,400
Aug. 29 5,800
Bal.
3,600
Sept. 12 7,700
Sept. 23 5,900
Bal. (d) 5,400
(a)
$17,500 + $6,500 – $9,000 = $15,000
(b)
$5,000 – $9,000 + $8,000 = $4,000
(c)
$3,600 + $5,800 – $3,400 = $6,000
(d)
$3,600 + $7,700 – $5,900 = $5,400
(e)
$50,000 – $500 + $45,000 = $94,500
(f)
$99,000 + $450 – $94,500 = $4,950
Service Revenue
Aug. 10 50,000
Aug. 12 500
15 45,000
Bal. (e) 94,500
Sept. 5 (f) 4,950
Sept. 25 450
Bal.
99,000
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BRIEF EXERCISE 3-10
June 1
June 18
June 27
Bal.
June 7
Bal.
June 4
June 28
June 29
Cash
2,500
June 28
200
June 29
200
2,550
Accounts Receivable
300
June 18
100
250
100
200
Supplies
250
Accounts Payable
250
June 4
Bal.
250
0
Unearned Revenue
June 27
200
Common Shares
June 1
2,500
Service Revenue
June 7
300
Income Tax Expense
100
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BRIEF EXERCISE 3-11
(a)
May 4
May 7
May 11
May 21
May 25
May 28
May 31
Billed clients $3,200 for services provided on account
Declared and paid dividends of $500
Collected $1,900 from a customer on account
Received $2,000 from client for services provided
Paid salaries of $2,500
Paid supplier $200 on account
Paid income tax of $750
(b)
Apr. 30
May 11
May 21
1,500
1,900
2,000
Bal.
1,450
Apr. 30
May 4
Bal.
May 28
Cash
May 7
May 25
May 28
May 31
Accounts Receivable
1,800
May 11
3,200
3,100
Accounts Payable
200
Apr. 30
Bal.
500
2,500
200
750
May 7
Service Revenue
May 4
May 21
Bal.
1,900
900
700
Dividends Declared
500
May 30
Income Tax Expense
750
May 25
Salaries Expense
2,500
3,200
2,000
5,200
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BRIEF EXERCISE 3-12
(a)
Account
Normal Balance
Accounts payable ............................................................
Credit
Accounts receivable ........................................................
Debit
Accumulated depreciation—equipment ...........................
Credit
Cash ................................................................................
Debit
Common shares ..............................................................
Credit
Dividends declared ..........................................................
Debit
Equipment .......................................................................
Debit
Held for trading investments............................................
Debit
Income tax expense ........................................................
Debit
Rent expense ..................................................................
Debit
Retained earnings ...........................................................
Credit
Salaries expense .............................................................
Debit
Service revenue ..............................................................
Credit
Unearned revenue ..........................................................
Credit
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BRIEF EXERCISE 3-12 (CONTINUED)
(b)
CARLAND INC.
Trial Balance
June 30, 2018
Debit
Cash
Accounts receivable
Held for trading investments
Equipment
Accumulated depreciation—equipment
Accounts payable
Unearned revenue
Common shares
Retained earnings
Dividends declared
Service revenue
Salaries expense
Rent expense
Income tax expense
Totals
Credit
$ 4,400
4,000
6,000
17,000
$ 3,600
3,000
150
10,000
12,650
200
7,600
4,000
1,000
400
$37,000
_
$37,000
(Total of debit account balances = Total of credit account balances)
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BRIEF EXERCISE 3-13
Error
1.
2.
3.
4.
5.
6.
(a)
In Balance
No
No
Yes
Yes
Yes
No
(b)
Difference
$ 900
1,000
N/A
N/A
N/A
1,000
(c)
Larger Column
Debit
Credit
N/A
N/A
N/A
Debit
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SOLUTIONS TO EXERCISES
EXERCISE 3-1
(a)
1.
Received cash of $1,000 from a customer as a deposit for work to be done
in the future.
2.
Purchased equipment for $5,000 paying cash $1,000 with the remaining
balance of $4,000 on account.
3.
Paid $750 for supplies.
4.
Performed services for $9,500 collecting cash of $4,100 and the remaining
balance on account of $5,400.
5.
Paid $2,000 to suppliers on account.
6.
Declared and paid dividends of $1,000.
7.
Paid for operating expenses of $4,800
8.
Collected $5,000 on account from customers.
9.
Paid interest expense of $300
10. Paid income tax expense of $880.
(b)
Service revenue
Less: Expenses
Operating expenses
Interest expense
Income tax expense
Total expenses
Net income
$9,500
$4,800
300
880
Retained earnings:
Beginning balance
Add: Net income
Less: Dividends declared
Ending balance
5,980
$3,520
$4,500
3,520
(1,000)
$7,020
[Revenues – Expenses = Net income or (loss)]
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EXERCISE 3-1 (CONTINUED)
(c)
=
Assets
Liabilities
Shareholders’ Equity
+
Retained Earnings
Cash
July 31 Bal.
Accounts
Receivable Supplies Equipment =
Unearned
Common
Revenue + Shares
$2,000
$5,000
Bal.
+
–
Revenues Expenses
(1)
$6,500
+1,000
(2)
−1,000
(3)
−750
(4)
+4,100
(5)
-2,000
(6)
-1,000
(7)
-4,800
(8)
+5,000
(9)
-300
-300
(10)
-880
-880
Aug. 31 Bal.
$5,870
$5,000
Accounts
Payable
–
Dividends
Declared
$4,500
+$1,000
+$5,000
+4,000
+$750
+5,400
+$9,500
-2,000
-$1,000
-$4,800
-5,000
+ $5,400
+ $750
TOTAL ASSETS = $17,020
+ $5,000 =
$4,000
+ $1,000
+ $5,000
+$4,500
+ $9,500
- $5,980
TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $17,020
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EXERCISE 3-2
Assets
Trans.
Apr. 30 Bal.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
May 31 Bal.
=
Liabilities
Bank
Loan
Payable
Accounts
Prepaid
Accounts
Cash
Receivable Insurance Equipment = Payable
+
$5,000
$6,000
$2,000
+$8,000
+8,000
−1,600
+3,800
−300
+20,000
+$20,000
−8,000
−8,000
−500
+$500
+3,000
−3,000
−500
−250
$16,850
+ $6,800
+ $500
+ $8,000 =
$2,000 + $20,000
TOTAL ASSETS = $32,150
Shareholders’ Equity
Retained Earnings
+
–
Common
+
–
Dividends
Shares Balance Revenues Expenses Declared
$5,000
$4,000
-$1,600
+$3,800
−300
−$500
+$5,000 +$4,000
+ $3,800
−250
– $2,150
TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $32,150
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EXERCISE 3-3
(a)
Type of Account
(b)
Normal Balance
Liabilities
Credit
Buildings
Assets
Debit
Cash
Assets
Debit
Depreciation expense
Expenses
Debit
Income Statement
Dividends declared
Dividends
Debit
Statement of Changes
in Equity
Finance income
Revenues
Credit
Income Statement
Furniture, machinery,
and equipment
Assets
Debit
Statement of Financial
Position
Income tax expense
Expenses
Debit
Income Statement
Income taxes payable
Liabilities
Credit
Statement of Financial
Position
Interest expense
Expenses
Debit
Income Statement
Inventories
Assets
Debit
Prepaid expenses
Assets
Debit
Receivables
Assets
Debit
Revenues
Credit
Account
Bank loans payable
Revenues
(c)
Financial Statement
Statement of Financial
Position
Statement of Financial
Position
Statement of Financial
Position
Statement of Financial
Position
Statement of Financial
Position
Statement of Financial
Position
Income Statement
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EXERCISE 3-4
Transaction 1
March 2: Issued common shares for $11,000 cash.
(a) Basic
Analysis
The asset account Cash is increased by $11,000; the shareholders’
equity account Common Shares is increased by $11,000.
(b) Equation
Analysis
Assets
=
Liabilities
+
Cash
+$11,000
Shareholders’
Equity
Common
Shares
+$11,000
(c) Debit−Credit
Analysis
Debits increase assets: debit Cash $11,000.
Credits increase share capital (shareholders’ equity): credit
Common Shares $11,000.
Transaction 2
March 4: Purchased used car for $1,000 cash and $9,000 on
account, for use in the business.
(a) Basic
Analysis
The asset account Vehicles is increased by $10,000; the liability
account Accounts Payable is increased by $9,000; the asset
account Cash is decreased by $1,000.
(b) Equation
Analysis
Assets
Cash
-$1,000
=
Liabilities
+
Shareholders’
Equity
Account
Payable
+$9,000
Vehicles
+$10,000
(c) Debit−Credit
Analysis
Debits increase assets: debit Vehicles $10,000.
Credits increase liabilities: credit Accounts Payable $9,000.
Credit decrease assets: credit Cash $1,000.
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EXERCISE 3-4 (CONTINUED)
(a), (b), and (c) (continued)
Transaction 3
March 10: Billed customers $2,300 for services performed.
(a) Basic
Analysis
The asset account Accounts Receivable is increased by $2,300;
the revenue account Service Revenue is increased by $2,300.
(b) Equation
Analysis
Assets
=
Liabilities
+
Accounts
Receivable
+$2,300
Shareholders’
Equity
Service
Revenue
+$2,300
(c) Debit−Credit
Analysis
Debits increase assets: debit Accounts Receivable $2,300.
Credits increase revenues: credit Service Revenue $2,300.
Transaction 4
March 13: Paid $225 cash to advertise business opening.
(a) Basic
Analysis
The expense account Advertising Expense is increased by $225;
the asset account Cash is decreased by $225.
(b) Equation
Analysis
Assets
Cash
-$225
(c) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Advertising
Expense
-$225
Debits increase expenses: debit Advertising Expense $225.
Credits decrease assets: credit Cash $225.
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EXERCISE 3-4 (CONTINUED)
(a), (b), and (c) (continued)
Transaction 5
March 25: Received $1,000 cash from customers billed on March
10.
(a) Basic
Analysis
(b) Equation
Analysis
The asset account Cash is increased by $1,000; the asset account
Accounts Receivable is decreased by $1,000.
Assets
=
Liabilities
+
Shareholders’
Equity
Cash
+$1,000
Accounts
Receivable
-$1,000
(c) Debit−Credit
Analysis
Debits increase assets: debit Cash $1,000.
Credits decrease assets: credit Accounts Receivable $1,000.
Transaction 6
March 27: Paid amount owing for used car purchased on March 4.
(a) Basic
Analysis
The liability account Accounts Payable is decreased by $9,000; the
asset account Cash is decreased by $9,000.
(b) Equation
Analysis
Assets
Cash
-$9,000
(c) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Accounts
Payable
-$9,000
Debits decrease liabilities: debit Accounts Payable $9,000.
Credits decrease assets: credit Cash $9,000.
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EXERCISE 3-4 (CONTINUED)
(a), (b), and (c) (continued)
Transaction 7
March 30: Received $700 cash from a customer for services to be
performed in April.
(a) Basic
Analysis
The asset account Cash is increased by $700; the liability account
Unearned Revenue is increased by $700.
(b) Equation
Analysis
Assets
=
Liabilities
+
Shareholders’
Equity
Unearned
Revenue
+$700
Cash
+$700
(c) Debit−Credit
Analysis
Debits increase assets: debit Cash $700.
Credits increase liabilities: credit Unearned Revenue $700.
Transaction 8
March 31: Declared and paid $300 of dividends to shareholders.
(a) Basic
Analysis
The asset account Cash is decreased by $300; the Dividends
Declared account is increased by $300.
(b) Equation
Analysis
Assets
Cash
-$300
(c) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Dividends
Declared
-$300
Debits increase dividends: debit Dividends Declared $300.
Credits decrease assets: credit Cash $300.
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EXERCISE 3-5
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Equipment ...............................
Accounts Payable...............
8,000
Rent Expense ..........................
Cash .................................
1,600
Accounts Receivable ...............
Service Revenue ..............
3,800
Utilities Expense ......................
Cash .................................
300
Cash ........................................
Bank Loan Payable ..........
20,000
Accounts Payable....................
Cash .................................
8,000
Prepaid Insurance ...................
Cash .................................
500
Cash ........................................
Accounts Receivable........
3,000
Dividends Declared .................
Cash .................................
500
Income Tax Expense...............
Cash .................................
250
8,000
1,600
3,800
300
20,000
8,000
500
3,000
500
250
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EXERCISE 3-6
Mar. 2
4
10
13
25
27
30
31
Cash ........................................
Common Shares.................
11,000
Vehicles ...................................
Cash ..................................
Accounts Payable .............
10,000
Accounts Receivable ...............
Service Revenue ..............
2,300
Advertising Expense ................
Cash .................................
225
Cash ........................................
Accounts Receivable ........
1,000
Accounts Payable ....................
Cash .................................
9,000
Cash ........................................
Unearned Revenue ..........
700
Dividends Declared .................
Cash .................................
300
11,000
1,000
9,000
2,300
225
1,000
9,000
700
300
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EXERCISE 3-7
Transaction 1
Sept. 1: Issued common shares for $20,000 cash.
(a) Basic
Analysis
The asset account Cash is increased by $20,000; the shareholders’
equity account Common Shares is increased by $20,000.
(b) Equation
Analysis
Assets
=
Liabilities
+
Cash
+$20,000
Shareholders’
Equity
Common
Shares
+$20,000
(c) Debit−Credit
Analysis
Debits increase assets: debit Cash $20,000.
Credits increase share capital (shareholders’ equity): credit
Common Shares $20,000.
Transaction 2
Sept. 2: Performed $9,000 of services on account for a customer.
(a) Basic
Analysis
The asset account Accounts Receivable is increased by $9,000;
the revenue account Service Revenue is increased by $9,000.
(b) Equation
Analysis
Assets
Accounts
Receivable
+$9,000
(c) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Service
Revenue
+$9,000
Debits increase assets; debit Accounts Receivable $9,000.
Credits increase revenues; credit Service Revenue $9,000.
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EXERCISE 3-7 (CONTINUED)
(a), (b), and (c) (continued)
Transaction 3
Sept. 4: Purchased equipment for $12,000 paying $5,000 in cash
and borrowing the balance from the bank.
(a) Basic
Analysis
The asset account Equipment is increased by $12,000; the asset
account Cash is decreased by $5,000 and the liability account
Bank Loan Payable increased by $7,000.
(b) Equation
Analysis
Assets
Cash
-$5,000
=
Liabilities
+
Shareholders’
Equity
Bank Loan
Payable
+$7,000
Equipment
+$12,000
(c) Debit−Credit
Analysis
Debits increase assets: debit Equipment $12,000.
Credits decrease assets: credit Cash $5,000
Credits increase liabilities: credit Bank Loan Payable $7,000.
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EXERCISE 3-7 (CONTINUED)
(a), (b), and (c) (continued)
Transaction 4
Sept. 10: Purchased $500 of supplies on account.
(a) Basic
Analysis
The asset account Supplies is increased by $500; the liability
account Accounts Payable is increased by $500.
(b) Equation
Analysis
Assets
=
+
Shareholders’
Equity
Accounts
Payable
+$500
Supplies
+$500
(c) Debit−Credit
Analysis
Liabilities
Debits increase assets: debit Supplies $500.
Credits increase liabilities: credit Accounts Payable $500.
Transaction 5
Sept. 25: Received $4,500 cash in advance for architectural
services to be provided next month.
(a) Basic
Analysis
The asset account Cash is increased by $4,500; the liability
account Unearned Revenue is increased by $4,500.
(b) Equation
Analysis
Assets
Cash
+$4,500
(c) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Unearned
Revenue
+$4,500
Debits increase assets: debit Cash $4,500.
Credits increase liabilities: credit Unearned Revenue $4,500.
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EXERCISE 3-7 (CONTINUED)
(a), (b), and (c) (continued)
Transaction 6
Sept. 30: Paid $300 on account in partial payment of amount owing
for supplies purchased Sept. 10.
(a) Basic
Analysis
The liability account Accounts Payable is decreased by $300; the
asset account Cash is decreased by $300.
(b) Equation
Analysis
Assets
=
Liabilities
Shareholders’
Equity
+
Accounts
Payable
-$300
Cash
-$300
(c) Debit−Credit
Analysis
Debits decrease liabilities: debit Accounts Payable $300.
Credits decrease assets: credit Cash $300.
Transaction 7
Sept. 30: Collected $5,000 on account owing from customer from
Sept. 2.
(a) Basic
Analysis
The asset account Cash is increased by $5,000; the asset account
Accounts Receivable is decreased by $5,000.
(b) Equation
Analysis
Assets
=
Liabilities
+
Shareholders’
Equity
Cash
+$5,000
Accounts
Receivable
-$5,000
(c) Debit−Credit
Analysis
Debits increase assets: debit Cash $5,000.
Credits decrease assets: credit Accounts Receivable $5,000.
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EXERCISE 3-7 (CONTINUED)
(d)
Sept. 1
2
4
10
25
30
30
Cash...................................................
Common Shares .........................
20,000
Accounts Receivable..........................
Service Revenue.........................
9,000
Equipment ..........................................
Cash ...........................................
Bank Loan Payable .....................
12,000
Supplies .............................................
Accounts Payable .......................
500
Cash...................................................
Unearned Revenue .....................
4,500
Accounts Payable ..............................
Cash ...........................................
300
Cash...................................................
Accounts Receivable ..................
5,000
20,000
9,000
5,000
7,000
500
4,500
300
5,000
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EXERCISE 3-7 (CONTINUED)
(e)
Sept. 1
Sept. 25
Sept. 30
Bal.
Cash
20,000 Sept. 4
4,500 Sept. 30
5,000
24,200
Sept. 2
Bal.
Accounts Receivable
9,000 Sept. 30
4,000
Sept. 10
Supplies
500
Sept. 4
Sept. 30
5,000
300
5,000
Equipment
12,000
Accounts Payable
300 Sept. 10
Bal.
500
200
Unearned Revenue
Sept. 25
4,500
Bank Loan Payable
Sept. 4
7,000
Common Shares
Sept. 1
20,000
Service Revenue
Sept. 2
9,000
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EXERCISE 3-8
Cash
Mar.
Mar.
2
11,000 Mar.
4
1,000
25
1,000
13
225
30
700
27
9,000
31
300
25
1,000
31 Bal.
2,175
Accounts Receivable
Mar.
10
2,300 Mar.
Mar.
31 Bal.
1,300
Vehicles
Mar.
4
10,000
Accounts Payable
Mar.
27
9,000 Mar.
Mar.
4
31 Bal.
9,000
0
Unearned Revenue
Mar. 30
700
Common Shares
Mar. 2
11,000
Dividends Declared
Mar. 31
300
Service Revenue
Mar. 10
2,300
Advertising Expense
Mar. 13
225
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EXERCISE 3-9
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Operating activity
Investing activity
Operating activity
Operating activity
Operating activity
Financing activity
Operating activity
Operating activity
Operating activity
Operating activity
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EXERCISE 3-10
(a) Aug. 7
Aug. 10
Aug. 14
Aug. 16
Aug. 28
Aug. 30
Aug. 31
Provided services and was paid cash
Purchased equipment with a down payment of $1,500 and the
balance from a bank loan payable
Performed services on account
Collected cash in advance of providing services
Received a collection from a customer on account
Paid salaries
Declared and paid dividends
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EXERCISE 3-10 (CONTINUED)
(b)
Cash
July 31 bal. 4,000
Aug. 7
1,800 Aug. 10
16
900
30
28
700
31
Bal.
3,400
Accounts Receivable
July 31 bal. 2,000
Aug. 14
1,450 Aug. 28
Bal.
2,750
Bank Loan Payable
Aug. 10
1,500
2,000
500
Unearned Revenue
Aug. 16
Common Shares
July 31 bal. 2,000
Retained Earnings
July 31 bal. 5,000
700
Equipment
July 31 bal. 2,500
Aug. 10
4,000
Bal.
6,500
Accounts Payable
July 31 bal.
2,500
Aug. 31
Dividends Declared
500
Service Revenue
Aug. 7
14
Bal.
1,500
Aug. 30
1,800
1,450
3,250
Salaries Expense
2,000
900
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EXERCISE 3-10 (CONTINUED)
(c)
KANG LTD.
Trial Balance
August 31
Debit
Cash
Accounts receivable
Equipment
Accounts payable
Unearned revenue
Bank loan payable
Common shares
Retained earnings
Dividends declared
Service revenue
Salaries expense
Totals
Credit
$ 3,400
2,750
6,500
$ 1,500
900
2,500
2,000
5,000
500
2,000
$15,150
3,250
_
$15,150
(Assets, dividends, and expense accounts have debit balances)
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EXERCISE 3-11
(a) Oct. 1
Oct. 2
Oct. 3
Oct. 4
Oct. 5
Oct. 9
Oct. 12
Oct. 16
Oct. 17
Oct. 22
Oct. 30
Oct. 31
Oct. 31
Issued common shares in exchange for cash
Purchased equipment using a bank loan payable
Performed services on account
Purchased advertising on account
Purchased supplies for cash
Received cash for services to be performed in the future
Made a partial payment on account
Declared and paid dividends
Received a collection on account
Performed services on account
Paid rent for the month of October
Paid salaries
Recorded income taxes owing
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EXERCISE 3-11 (CONTINUED)
(b)
After summing the debit and credits in each account, the following
net balances would result. Note that because the Supplies,
Equipment, Income Tax Payable, Bank Loan Payable, Unearned
Revenue, Common Shares, Dividends Declared, Salaries
Expense, Advertising Expense, Rent Expense, and Income Tax
Expense accounts have only one entry, there is no need to sum
these accounts.
Cash
Accounts receivable
Supplies
Equipment
Accounts payable
Income tax payable
Unearned revenue
Bank loan payable
Common shares
Dividends declared
Service revenue
Salaries expense
Advertising expense
Rent expense
Income tax expense
Balance
550
2,240
400
3,500
100
180
650
3,500
2,000
300
2,740
500
250
1,250
180
Debit or Credit
Debit
Debit
Debit
Debit
Credit
Credit
Credit
Credit
Credit
Debit
Credit
Debit
Debit
Debit
Debit
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EXERCISE 3-11 (CONTINUED)
(c)
HOLLY CORP.
Trial Balance
October 31
Debit
Cash
Accounts receivable
Supplies
Equipment
Accounts payable
Income tax payable
Unearned revenue
Bank loan payable
Common shares
Dividends declared
Service revenue
Salaries expense
Advertising expense
Rent expense
Income tax expense
Totals
Credit
$ 550
2,240
400
3,500
$
100
180
650
3,500
2,000
300
2,740
500
250
1,250
180
$9,170
0
$9,170
(Total of debit account balances = Total of credit account balances)
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EXERCISE 3-12
BOURQUE LTD.
Trial Balance
December 31, 2018
Debit
Cash
Accounts receivable
Supplies
Equipment
Accumulated depreciation—equipment
Accounts payable
Salaries payable
Unearned revenue
Common shares
Retained earnings
Dividends declared
Service revenue
Salaries expense
Office expense
Depreciation expense
Rent expense
Supplies expense
Income tax expense
Credit
$10,000
6,500
3,500
10,000
$ 4,000
1,500
3,000
2,200
5,000
16,000
4,500
22,000
9,100
4,400
2,000
2,000
1,200
500
$53,700
$53,700
(Liabilities, common shares, retained earnings, and revenue accounts have credit
balances)
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EXERCISE 3-13
BOURQUE LTD.
Income Statement
Year Ended December 31, 2018
Revenues
Service revenue
Expenses
Salaries expense
Office expense
Depreciation expense
Rent expense
Supplies expense
Total expenses
Income before income tax
Income tax expense
Net income
$22,000
$9,100
4,400
2,000
2,000
1,200
18,700
3,300
500
$ 2,800
BOURQUE LTD.
Statement of Changes in Equity
Year Ended December 31, 2018
Common
Shares
Balance, January 1, 2018
Net income
Dividends declared
Balance, December 31, 2018
$5,000
$5,000
Retained
Earnings
$16,000
2,800
(4,500)
$14,300
Total
Equity
$21,000
2,800
(4,500)
$19,300
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EXERCISE 3-13 (CONTINUED)
BOURQUE LTD.
Statement of Financial Position
December 31, 2018
Assets
Current assets
Cash
Accounts receivable
Supplies
Total current assets
Property, plant, and equipment
Equipment
Less: Accumulated depreciation
Total property, plant, and equipment
Total assets
$10,000
6,500
3,500
$20,000
$10,000
4,000
6,000
$26,000
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable
Salaries payable
3,000
Unearned revenue
2,200
Total liabilities
Shareholders' equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$ 1,500
6,700
$ 5,000
14,300
19,300
$26,000
[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends
declared]
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EXERCISE 3-14
(a)
SPEEDY SERVICE INC.
Trial Balance
July 31, 2018
Debit
Cash
Held for trading investments
Accounts receivable
Prepaid insurance
Equipment
Accumulated depreciation—equipment
Accounts payable
Salaries payable
Bank loan payable, due 2020
Common shares
Retained earnings
Dividends declared
Service revenue
Salaries expense
Depreciation expense
Rent expense
Repairs and maintenance expense
Interest expense
Insurance expense
Income tax expense
Totals
Credit
$ 8,000
20,000
14,000
200
99,000
$ 21,400
9,500
800
39,000
38,000
20,850
800
75,000
25,000
9,700
9,000
10,450
3,600
1,800
3,000
$204,550
0
$204,550
(Asset, dividends, and expense accounts have debit balances)
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EXERCISE 3-14 (CONTINUED)
(b)
SPEEDY SERVICE INC.
Income Statement
Year Ended July 31, 2018
Revenues
Service revenue
Expenses
Salaries expense
Repairs and maintenance expense
Depreciation expense
Rent expense
Interest expense
Insurance expense
Total expenses
Income before income tax
Income tax expense
Net income
$75,000
$25,000
10,450
9,700
9,000
3,600
1,800
59,550
15,450
3,000
$12,450
SPEEDY SERVICE INC.
Statement of Changes in Equity
Year Ended July 31, 2018
Balance, August 1, 2017
Issued common shares
Net income
Dividends declared
Balance, July 31, 2018
Common
Shares
Retained
Earnings
$27,000
11,000
$20,850
$38,000
12,450
(800)
$32,500
Total
Equity
$47,850
11,000
12,450
(800)
$70,500
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EXERCISE 3-14 (CONTINUED)
(b) (continued)
SPEEDY SERVICE INC.
Statement of Financial Position
July 31, 2018
Assets
Current assets
Cash
Held for trading investments
Accounts receivable
Prepaid insurance
Total current assets
Property, plant, and equipment
Equipment
Less: Accumulated depreciation
Total property, plant, and equipment
Total assets
$ 8,000
20,000
14,000
200
$ 42,200
$99,000
21,400
77,600
$119,800
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable
Salaries payable
Total current liabilities
Non-current liabilities
Bank loan payable, due 2020
Total liabilities
Shareholders' equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$9,500
800
$ 10,300
39,000
49,300
$38,000
32,500
70,500
$119,800
[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends
declared]
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EXERCISE 3-14 (CONTINUED)
(c)
If the amount of the retained earnings was not known, it would be
more difficult to prepare the three financial statements in part (b)
above. However, the beginning balance of retained earnings
could either be derived from the trial balance or worked
backwards by determining the ending retained earnings amount
from a complete (except for retained earnings) statement of
financial position and adjusting the ending amount by calculating
and deducting net income and adding dividends declared.
Remember that ending retained earnings = beginning retained
earnings + net income – dividends declared; so it follows
mathematically that beginning retained earnings = ending retained
earnings – net income + dividends declared
LO 5 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
EXERCISE 3-15
Error
(a)
In Balance
(b)
Difference
(c)
Larger Column
1.
2.
3.
4.
5.
6.
No
Yes
Yes
No
No
No
$400
0
0
500
225
9
Debit
n/a
n/a
Credit
Debit
Credit
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SOLUTIONS TO PROBLEMS
PROBLEM 3-1A
(a)
Assets
Transaction
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Apr. 30 Bal.
Cash
+$5,000
+20,000
–11,000
–1,200
–1,450
Accounts
Receivable
Supplies
=
Equipment
=
Liabilities
Accounts
Payable
Bank Loan
Payable
Shareholders’ Equity
Retained Earnings
+
+
Common
Shares
+$5,000
+
Revenues
+$20,000
+$11,000
–$1,200
+$1,450
–600
+$600
+2,000
–400
–2,000
–600
–100
–6,400
+12,000
–1,500
$14,350
–
Expenses
–
Dividends
Declared
+$16,000
+$18,000
–$400
–2,000
–600
–100
–6,400
–12,000
+ $4,000
+$1,450
+ $11,000 =
$0
+ $20,000
+ $5,000
+ $18,000
–1,500
–$11,800
–$400
PROBLEM 3-1A (CONTINUED)
(b)
TOTAL ASSETS = $30,800
TOTAL LIABILITIES + SHAREHOLDERS’ EQUITY = $20,000 + ($5,000 + $18,000 – $11,800 – $400) = $30,800
NET INCOME = $18,000 – $11,800 = $6,200
LO 1 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-2A
(a)
Assets
Shareholders’ Equity
Retained Earnings
Liabilities
Bank
Accounts
Loan
Accounts Common
Cash + Receivable +Supplies+Equipment= Payable + Payable + Shares +
Jul 31 Bal..
Aug. 2
3
6
7
13
17
17
20
22
24
28
31
Aug. 31 Bal.
$4,000
+1,200
+1,300
−2,700
+3,000
–400
–4,675
+3,500
–500
$1,500
–1,200
$500
$5,000
$4,100
$3,500
Balance
Dividends
+Revenues – Expenses– Declared
$3,400
+1,300
−2,700
+3,500
+$6,500
+1,200
+800
–$3,500
–900
–275
–3,500
–$500
+1,000
+1,000
+2,000
–500
$6,225
+$2,000
$1,300
$1,300
+
0 0
$500
00 00
$6,200
+
700 000
$2,000
+
+275
00 000
$2,475+
00 000
$4,800
00 000
$3,400
+
–275
−500
$5,450
00 000
$7,500
+
–
TOTAL ASSETS $14,225 = TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY $14,225
Note: The August 27th transaction does not affect the accounting equation and is therefore not recorded in the
accounting records.
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00 0
$500
–
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-2A (CONTINUED)
(b)
HILLS LEGAL SERVICES INC.
Income Statement
Month Ended August 31, 2018
Revenues
Service revenue
Expenses
Salaries expense
Rent expense
Advertising expense
Utilities expense
Total expenses
Income before income tax
Income tax expense
Net income
$7,500
$3,500
900
275
275
4,950
2,550
500
$2,050
[Revenues – Expenses = Net income or (loss)]
HILLS LEGAL SERVICES INC.
Statement of Changes in Equity
Month Ended August 31, 2018
Balance, August 1
Issued common shares
Net income
Dividends declared
Balance, August 31
Common
Shares
Retained
Earnings
$3,500
1,300
$3,400
00
$4,800
2,050
(500)
$4,950
Total Equity
$6,900
1,300
2,050
(500)
$9,750
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PROBLEM 3-2A (CONTINUED)
(b) (continued)
HILLS LEGAL SERVICES INC.
Statement of Financial Position
August 31, 2018
Assets
Current assets
Cash
Accounts receivable
Supplies
Total current assets
Property, plant, and equipment
Equipment
Total assets
$6,225
1,300
500
$ 8,025
6,200
$14,225
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable
Bank loan payable
Total liabilities
Shareholders' equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders' equity
$2,475
2,000
$ 4,475
$4,800
4,950
9,750
$14,225
(Assets = Liabilities + Shareholders’ equity)
LO 1 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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PROBLEM 3-3A
(a)
Account Debited
(2)
Specific
Basic Type
Account
(1)
Transaction
(3)
(1)
Effect
Basic Type
Account Credited
(2)
Specific
Account
(3)
Effect
Apr. 2
Shareholders’
equity
Rent
Expense
Increase
Assets
Cash
Decrease
Apr. 3
Assets
Accounts
Receivable
Increase
Shareholders’
equity
Sales
Increase
Apr. 5
Assets
Cash
Increase
Shareholders’
equity
Sales
Increase
Apr. 6
Assets
Equipment
Increase
Liabilities
Accounts
Payable
Cash
Increase
Assets
Decrease
Apr. 12
Assets
Cash
Increase
Assets
Accounts
Receivable
Decrease
Apr. 15
Shareholders’
equity
Dividends
Declared
Increase
Assets
Cash
Decrease
Apr. 16
Assets
Inventory
Increase
Liabilities
Accounts
Payable
Increase
PROBLEM 3-3A (CONTINUED)
(a) (continued)
Account Debited
Account Credited
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
(1)
Transaction
Apr. 19
Apr. 20
Apr. 25
Apr. 27
Apr. 30
Basic Type
(2)
Specific
Account
Financial Accounting, Seventh Canadian Edition
(3)
(1)
Basic Type
(2)
Specific
Account
Effect
(3)
Effect
Shareholders’
equity
Repairs and
Maintenance
Expense
Increase
Assets
Cash
Decrease
Assets
Accounts
Receivable
Increase
Shareholders’
equity
Sales
Increase
Liabilities
Accounts
Payable
Decrease
Assets
Cash
Decrease
Assets
Cash
Increase
Liabilities
Unearned
Revenue
Increase
Shareholders’
equity
Salaries
Expense
Increase
Assets
Cash
Decrease
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PROBLEM 3-3A (CONTINUED)
(b)
Normal
Balance
debit
Date
Apr. 2
Account
Rent Expense
Apr. 3, 12, 20
Accounts Receivable
debit
Apr. 3, 5, 20
Sales
credit
Apr. 2, 5, 6, 12, 15,
19, 25, 27, 30
Cash
debit
Apr. 6
Equipment
debit
Apr. 6, 16, 25
Accounts Payable
credit
Apr. 15
Dividends Declared
debit
Apr. 16
Inventory
debit
Apr. 19
Repairs and Maintenance Expense
debit
Apr. 27
Unearned Revenue
credit
Apr. 30
Salaries Expense
debit
LO 2 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-4A
(a)
Account
Accumulated depreciation
Administrative expenses
Buildings
Common shares, beginning of year
Cost of goods sold
Dividends declared
Finance income
Goodwill
Income tax expense
Income taxes recoverable
Inventories
Prepaid expenses
Retained earnings, beginning of year
Sales
Trade and other payables
Trade and other receivables
(1)
Increases
By
Credit
Debit
Debit
Credit
Debit
Debit
Credit
Debit
Debit
Debit
Debit
Debit
Credit
Credit
Credit
Debit
(2)
Normal
Balance
Credit
Debit
Debit
Credit
Debit
Debit
Credit
Debit
Debit
Debit
Debit
Debit
Credit
Credit
Credit
Debit
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PROBLEM 3-4A (CONTINUED)
(b)
Account
Accumulated depreciation
Administrative expenses
Buildings
Common shares, beginning of year
Cost of goods sold
Dividends declared
Finance income
Goodwill
Income tax expense
Income taxes recoverable
Inventories
Prepaid expenses
Retained earnings, beginning of year
Sales
Trade and other payables
Trade and other receivables
Financial Statement
Statement of Financial Position
Income Statement
Statement of Financial Position
Statement of Changes in Equity
Income Statement
Statement of Changes in Equity
Income Statement
Statement of Financial Position
Income Statement
Statement of Financial Position
Statement of Financial Position
Statement of Financial Position
Statement of Changes in Equity
Income Statement
Statement of Financial Position
Statement of Financial Position
Note: Beginning-of-the-year equity amounts such as opening common shares or
opening retained earnings balances are shown on the statement of changes in
equity and do not appear on the statement of financial position. Only end-of-year
amounts for equity accounts would appear on the statement of financial position.
(c)
Account
Accumulated depreciation
Buildings
Goodwill
Income taxes recoverable
Inventories
Prepaid expenses
Trade and other payables
Trade and other receivables
Classification
Non-current assets
Non-current assets
Non-current assets
Current assets
Current assets
Current assets
Current liabilities
Current assets
LO 2 BT: K Difficulty: S Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
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PROBLEM 3-5A
(a)
Transaction 1
Feb.2: Purchased supplies on account for $600.
(1) Basic
Analysis
The asset account Supplies is increased by $600; the liability
account Accounts Payable is increased by $600.
(2) Equation
Analysis
Assets
=
Liabilities
+
Shareholders’
Equity
Accounts
Payable
+$600
Supplies
+$600
(3) Debit−Credit
Analysis
Debits increase assets: debit Supplies $600.
Credits increase liabilities: credit Accounts Payable $600.
Transaction 2
Feb.3: Purchased equipment for $10,000 by signing a bank
loan due in three months.
(1) Basic
Analysis
The asset account Equipment is increased by $10,000; the
liability account Bank Loan Payable is increased by $10,000.
(2) Equation
Analysis
Assets
Equipment
+$10,000
(3) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Bank Loan
Payable
+$10,000
Debits increase assets: debit Equipment $10,000.
Credits increase liabilities: credit Bank Loan Payable $10,000.
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PROBLEM 3-5A (CONTINUED)
(a) (continued)
Transaction 3
Feb.6: Earned service revenue of $50,000. Of this amount,
$30,000 was received in cash. The balance was on account.
(1) Basic
Analysis
The asset account Cash is increased by $30,000; the asset
account Accounts Receivable is increased by $20,000; the
shareholders’ equity account Service Revenue is increased by
$50,000.
(2) Equation
Analysis
Assets
Cash
+$30,000
=
Liabilities
+
Shareholders’
Equity
Service
Revenue
+$50,000
Accounts
Receivable
+$20,000
(3) Debit−Credit
Analysis
Debits increase assets: debit Cash $30,000.
Debits increase assets: debit Accounts Receivable $20,000.
Credits increase revenues: credit Service Revenue $50,000.
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PROBLEM 3-5A (CONTINUED)
(a) (continued)
Transaction 4
Feb.13: Declared and paid dividends of $500 to shareholders.
(1) Basic
Analysis
The asset account Cash is decreased by $500; the Dividends
Declared account is increased by $500.
(2) Equation
Analysis
Assets
=
Liabilities
+
Cash
-$500
Shareholders’
Equity
Dividends
Declared
-$500
(3) Debit−Credit
Analysis
Debits increase dividends: debit Dividends Declared $500.
Credits decrease assets: credit Cash $500.
Transaction 5
Feb. 18: Received cash of $2,000 from a customer as a deposit for
services to be provided next month.
(1) Basic
Analysis
The asset account Cash is increased by $2,000; the liability
account Unearned Revenue is increased by $2,000.
(2) Equation
Analysis
Assets
=
Cash
+$2,000
(3) Debit−Credit
Analysis
Liabilities
+
Shareholders’
Equity
Unearned
Revenue
+$2,000
Debits increase assets: debit Cash $2,000.
Credits increase liabilities: credit Unearned Revenue $2,000.
PROBLEM 3-5A (CONTINUED)
(a) (continued)
Transaction 6
Feb. 20: Paid amount owing from the supplies purchased on Feb.
2.
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
(1) Basic
Analysis
(2) Equation
Analysis
The asset account Cash is decreased by $600; the liability account
Accounts Payable is decreased by $600.
Assets
Cash
-$600
(3) Debit−Credit
Analysis
Financial Accounting, Seventh Canadian Edition
=
Liabilities
+
Shareholders’
Equity
Accounts
Payable
-$600
Debits decrease liabilities: debit Accounts Payable $600.
Credits decrease assets: credit Cash $600.
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PROBLEM 3-5A (CONTINUED)
(a) (continued)
Transaction 7
Feb. 23: Collected $20,000 of the amount owing from the Feb. 6
transaction.
(1) Basic
Analysis
The asset account Cash is increased by $20,000; the asset
account Accounts Receivable is decreased by $20,000.
(2) Equation
Analysis
Assets
=
Liabilities
+
Shareholders’
Equity
Cash
+$20,000
Accounts
Receivable
-$20,000
(3) Debit−Credit
Analysis
Debits increase assets: debit Cash $20,000.
Credits decrease assets: credit Accounts Receivable $20,000.
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PROBLEM 3-5A (CONTINUED)
(a) (continued)
Transaction 8
Feb. 24: Paid office expenses for the month, $22,000.
(1) Basic
Analysis
The expense account Office Expense is increased by $22,000; the
asset account Cash is decreased by $22,000.
(2) Equation
Analysis
Assets
Cash
-$22,000
(3) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Office Expense
-$22,000
Debits increase expenses: debit Office Expense $22,000.
Credits decrease assets: credit Cash $22,000.
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PROBLEM 3-5A (CONTINUED)
(a) (continued)
Transaction 9
Feb.27: Recorded salaries due to employees for work performed
during the month, $14,000.
(1) Basic
Analysis
The expense account Salaries Expense is increased by $14,000;
the liability account Salaries Payable is increased by $14,000.
(2) Equation
Analysis
Assets
=
Liabilities
+
Salaries
Payable
+$14,000
Shareholders’
Equity
Salaries
Expense
-$14,000
(3) Debit−Credit
Analysis
Debits increase expenses: debit Salaries Expense $14,000.
Credits increase liabilities: credit Salaries Payable $14,000.
Transaction 10
Feb. 28: Paid interest of $50 on the bank loan signed on Feb. 3.
(1) Basic
Analysis
The expense account Interest Expense is increased by $50; the
asset account Cash is decreased by $50.
(2) Equation
Analysis
Assets
Cash
-$50
(3) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Interest
Expense
-$50
Debits increase expenses: debit Interest Expense $50.
Credits decrease assets: credit Cash $50.
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PROBLEM 3-5A (CONTINUED)
(b)
Feb. 2 Supplies...........................................................
Accounts Payable.....................................
600
600
3 Equipment .......................................................
Bank Loan Payable .................................
10,000
6 Cash ................................................................
Accounts Receivable ......................................
Service Revenue ......................................
30,000
20,000
13 Dividends Declared .........................................
Cash .........................................................
500
18 Cash ................................................................
Unearned Revenue ..................................
2,000
20 Accounts Payable ............................................
Cash .........................................................
600
23 Cash ................................................................
Accounts Receivable ................................
20,000
24 Office Expense ................................................
Cash .........................................................
22,000
27 Salaries Expense.............................................
Salaries Payable ......................................
14,000
28 Interest Expense..............................................
Cash .........................................................
50
10,000
0
50,000
500
2,000
600
20,000
22,000
14,000
50
LO 1,2,3 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-6A
May 1 Cash ................................................................
Common Shares ......................................
120,000
4 Land ................................................................
Buildings ..........................................................
Equipment .......................................................
Cash .........................................................
Mortgage Payable ....................................
125,000
100,000
45,000
4 Prepaid Insurance ...........................................
Cash .........................................................
1,500
5 Advertising Expense ........................................
Cash .........................................................
800
6 Equipment .......................................................
Accounts Payable ....................................
9,000
18 Cash ................................................................
Fees Earned.............................................
8,800
20 Dividends Declared .........................................
Cash .........................................................
500
22 Cash ................................................................
Unearned Revenue ..................................
1,200
29 Accounts Payable............................................
Cash .........................................................
9,000
30 Interest Expense .............................................
Cash .........................................................
800
120,000
70,000
200,000
1,500
800
9,000
8,800
500
1,200
9,000
800
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PROBLEM 3-6A (CONTINUED)
May 30 Salaries Expense ............................................
Cash .........................................................
3,400
3,400
(Each journal entry must balance and reflect the actual amount of the transaction)
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PROBLEM 3-7A
(a)
Apr. 1
Cash ................................................................
Equipment .......................................................
Common Shares.......................................
10,000
6,000
16,000
1 No entry. Not a transaction
2
3
10
13
20
21
23
25
27
Rent Expense ..................................................
Cash .........................................................
950
Supplies ...........................................................
Accounts Payable .....................................
1,900
Accounts Receivable .......................................
Service Revenue ......................................
1,200
Cash ................................................................
Unearned Revenue ..................................
800
Cash ................................................................
Service Revenue ......................................
2,500
Cash ................................................................
Accounts Receivable ................................
600
Utilities Expense ..............................................
Accounts Payable .....................................
135
Dividends Declared .........................................
Cash .........................................................
160
Accounts Payable ............................................
Cash .........................................................
950
950
1,900
1,200
800
2,500
600
135
160
950
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PROBLEM 3-7A (CONTINUED)
(a) (continued)
Apr., 30
30
Salaries Expense .............................................
Cash .........................................................
1,900
Income Tax Expense .......................................
Cash .........................................................
100
1,900
100
(b)
Apr. 1
Apr. 13
Apr. 20
Apr. 21
Bal.
Apr. 10
Bal.
Cash
10,000 Apr. 2
800 Apr. 25
2,500 Apr. 27
600 Apr. 30
Apr. 30
9,840
Accounts Receivable
1,200 Apr. 21
600
Apr. 3
Supplies
1,900
Apr. 1
Equipment
6,000
Apr. 27
Accounts Payable
950 Apr. 3
Apr. 23
Bal.
Unearned Revenue
Apr. 13
950
160
950
1,900
100
Common Shares
Apr. 1
Apr. 25
1,900
135
1,085
16,000
Dividends Declared
160
Service Revenue
Apr. 10
Apr. 20
Bal.
600
800
Apr. 30
Salaries Expense
1,900
Apr. 2
Rent Expense
950
Apr. 23
Utilities Expense
135
Apr. 30
Income Tax Expense
100
1,200
2,500
3,700
PROBLEM 3-7A (CONTINUED)
(c)
This suggestion is not a good idea. Journals are used to record
transactions. A general ledger is not intended to be used to capture the
recording of transactions, but to tabulate the effects of transactions in
separate accounts. The balances arrived at in the ledger are then used to
communicate information to the users of the financial statements. If one
attempted to omit the use of journal entries, one could not retrace the
transactions as they originated in the journal. One would only see one
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side of a transaction at a time by looking at an account in the ledger. It
would become very confusing and unruly to try to keep track of
transactions.
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PROBLEM 3-8A
(a)
Mar. 1
Rent Expense ..................................................
Accounts Payable .....................................
Cash .........................................................
2
No entry.
5
No entry.
12
27,000
17,000
10,000
Accounts Payable ...........................................
Cash .........................................................
17,000
Accounts Payable ...........................................
Cash .........................................................
12,000
Cash ................................................................
Fees Earned .............................................
25,500
Advertising Expense ........................................
Cash .........................................................
950
20
Rent Expense ..................................................
Cash .........................................................
3,000
23
Salaries Expense .............................................
Cash .........................................................
4,200
Mortgage Payable ............................................
Interest Expense ..............................................
Cash .........................................................
1,250
750
Income Tax Expense .......................................
Cash .........................................................
3,000
13
15
19
26
28
17,000
12,000
25,500
950
0
3,000
4,200
2,000
3,000
PROBLEM 3-8A (CONTINUED)
(a) (continued)
Mar.
30
31
Cash ................................................................
Accounts Receivable ($2,490 × ½) ..................
Concession Revenue ................................
1,245
1,245
Cash ................................................................
25,800
2,490
0
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Fees Earned .............................................
25,800
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PROBLEM 3-8A (CONTINUED)
(b)
Cash
Feb. 28 Bal. 15,000 Mar. 1
Mar. 15
25,500 Mar. 12
Mar. 30
1,245 Mar. 13
Mar. 31
25,800 Mar. 19
Mar. 20
Mar. 23
Mar. 26
Mar. 28
Bal.
15,395
Mar. 30
10,000
17,000
12,000
950
3,000
4,200
2,000
3,000
Buildings
Feb. 28 Bal. 77,000
Equipment
Feb. 28 Bal. 20,000
Mar. 26
Retained Earnings
Feb. 28 Bal.
27,000
Concession Revenue
Mar. 30
Land
Feb. 28 Bal. 85,000
Mar. 12
Mar. 13
40,000
Fees Earned
Mar. 15
Mar. 31
Bal.
Accounts Receivable
1,245
Accounts Payable
17,000 Feb. 28 Bal.
12,000 Mar. 2
Bal.
Common Shares
Feb. 28 Bal.
12,000
17,000
0
Mortgage Payable
1,250 Feb. 28 Bal. 118,000
Bal.
116,750
Mar. 1
Mar. 20
Bal.
Rent Expense
27,000
3,000
30,000
Mar. 23
Salaries Expense
4,200
Mar. 19
Advertising Expense
950
Mar. 26
Interest Expense
750
Mar. 28
Income Tax Expense
3,000
25,500
25,800
51,300
2,490
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PROBLEM 3-8A (CONTINUED)
(c)
STAR THEATRE INC.
Trial Balance
March 31, 2018
Cash
Accounts receivable
Land
Buildings
Equipment
Mortgage payable
Common shares
Retained earnings
Fees earned
Concession revenue
Rent expense
Salaries expense
Advertising expense
Interest expense
Income tax expense
Totals
Debit
$ 15,395
1,245
85,000
77,000
20,000
Credit
$116,750
40,000
27,000
51,300
2,490
30,000
4,200
950
750
3,000
$237,540
00
$237,540
[Liabilities (mortgage payable) and shareholders’ equity items such as common shares,
retained earnings, and revenue accounts (fees earned and concession revenue) have
credit balances]
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PROBLEM 3-9A
(a)
May 1
Rent Expense ..................................................
Cash .........................................................
1,000
Accounts Payable ............................................
Cash .........................................................
1,100
Cash ................................................................
Unearned Revenue ...................................
1,500
Cash ................................................................
Service Revenue ......................................
2,000
Salaries Expense .............................................
Cash .........................................................
1,200
Unearned Revenue .........................................
Service Revenue ......................................
700
18
Accounts Payable ............................................
Cash .........................................................
1,000
22
Supplies ...........................................................
Accounts Payable .....................................
700
Advertising Expense ........................................
Accounts Payable .....................................
500
Utilities Expense ..............................................
Cash .........................................................
400
Cash ................................................................
Service Revenue ......................................
2,100
4
7
15
15
17
24
25
28
1,000
1,100
1,500
2,000
1,200
700
0
1,000
700
500
400
2,100
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PROBLEM 3-9A (CONTINUED)
(a) (continued)
May
29
30
31
31
Unearned Revenue .........................................
Service Revenue......................................
600
Interest Expense .............................................
Cash ........................................................
50
Salaries Expense ............................................
Cash ........................................................
1,200
Income Tax Expense ......................................
Cash ........................................................
150
600
50
1,200
150
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PROBLEM 3-9A (CONTINUED)
(b)
Apr. 30
May 7
15
28
Cash
5,000 May
1,500
2,000
2,100
Bal.
4,500
Apr. 30
May 22
Bal.
Supplies
500
700
1,200
Apr. 30
Equipment
24,000
May 4
18
May 17
29
1
4
15
18
25
30
31
31
Accounts Payable
Apr. 30
1,100 May 22
1,000
24
Bal.
Unearned Revenue
700 Apr. 30
600 May 7
Bal.
Bank Loan Payable
Apr 30
1,000
1,100
1,200
1,000
400
50
1,200
150
Common Shares
Apr. 30
5,000
Retained Earnings
Apr. 30
11,400
Service Revenue
May 15
17
28
29
Bal.
2,000
700
2,100
600
5,400
Salaries Expense
May 15
1,200
31
1,200
Bal. 2,400
May 1
2,100
700
500
1,200
1,000
1,500
1,200
10,000
Rent Expense
1,000
Advertising Expense
May 24
500
May 25
Utilities Expense
400
May 30
Interest Expense
50
May 31
Income Tax Expense
150
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PROBLEM 3-9A (CONTINUED)
(c)
PAMPER ME SALON INC.
Trial Balance
May 31, 2018
Cash
Supplies
Equipment
Accounts payable
Unearned revenue
Bank loan payable
Common shares
Retained earnings
Service revenue
Salaries expense
Rent expense
Advertising expense
Utilities expense
Interest expense
Income tax expense
Totals
Debit
$ 4,500
1,200
24,000
Credit
$ 1,200
1,200
10,000
5,000
11,400
5,400
2,400
1,000
500
400
50
150
$34,200
$34,200
(Asset and expense accounts have debit balances)
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PROBLEM 3-10A
(a)
TAGGAR ENTERPRISES INC.
Trial Balance
June 30, 2018
Cash
Accounts receivable
Inventory
Prepaid insurance
Land
Buildings
Accumulated depreciation—buildings
Equipment
Accumulated depreciation—equipment
Long-term investments
Accounts payable
Income tax payable
Mortgage payable, due 2025
Common shares
Retained earnings
Dividends declared
Sales
Cost of goods sold
Office expense
Interest expense
Income tax expense
Totals
Debit
$ 1,800
3,000
5,100
900
7,400
15,000
Credit
$ 4,000
3,000
1,000
3,550
3,500
100
15,000
5,000
6,250
2,000
25,000
13,700
3,300
100
1,000
$59,850
$59,850
(Asset, dividends declared, and expense accounts have debit balances. Liability,
common shares, retained earnings, and revenue (sales) accounts have credit balances)
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PROBLEM 3-10A (CONTINUED)
(b)
When debits equal credits in a trial balance, there is some assurance that
certain types of errors were not made. However, there is no guarantee
that other types of errors do not exist because entries may have been
omitted completely, duplicated, or recorded to incorrect accounts.
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PROBLEM 3-11A
TAGGAR ENTERPRISES INC.
Income Statement
Year Ended June 30, 2018
Sales
Expenses
Cost of goods sold
Office expense
Interest expense
Total expenses
Income before income tax
Income tax expense
Net income
$25,000
$13,700
3,300
100
17,100
7,900
1,000
$ 6,900
TAGGAR ENTERPRISES INC.
Statement of Changes in Equity
Year Ended June 30, 2018
Balance, July 1, 2017
Issued common shares
Net income
Dividends declared
Balance, June 30, 2018
Common
Shares
Retained
Earnings
$3,000
2,000
$ 6,250
__ ___
$5,000
6,900
(2,000)
$11,150
Total Equity
$ 9,250
2,000
6,900
(2,000)
$16,150
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PROBLEM 3-11A (CONTINUED)
TAGGAR ENTERPRISES INC.
Statement of Financial Position
June 30, 2018
Assets
Current assets
Cash
Accounts receivable
Inventory
Prepaid insurance
Total current assets
Long-term investments
Property, plant, and equipment
Land
Buildings
Less: Accumulated depreciation
Equipment
Less: Accumulated depreciation
Total property, plant, and equipment
Total assets
$1,800
3,000
5,100
900
$10,800
3,550
$ 7,400
$15,000
4,000
$3,000
1,000
11,000
2,000
20,400
$34,750
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable
Income tax payable
Current portion of mortgage payable
Total current liabilities
Non-current liabilities
Mortgage payable
Total liabilities
Shareholders’ equity
Common shares
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
$3,500
100
1,250
$ 4,850
13,750
18,600
$ 5,000
11,150
16,150
$34,750
[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends
declared]
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-12A
(a) (1) General: Three accounts are listed in the wrong columns: Cash (debit),
Accumulated Depreciation (credit), and Unearned Revenue (credit).
(2)
1. The trial balance totals are not affected, only the amounts appearing
on the trial balance are affected. Cash would be understated by $180
($750 – $570) and Accounts Receivable overstated by the same
amount. Note that Cash was one of the accounts listed in the wrong
column (credit instead of debit). If Cash had not been corrected and
was still in the credit column, then the trial balance would still balance
but the total credits would be understated by $180 (since Cash is in
the credit column) and total debits would be understated by $180
(because of Accounts Receivable in the debit column).
2. The trial balance totals are not affected, only the accounts and
amounts appearing on the trial balance are affected. Equipment
would be understated by $360 and Supplies overstated by the same
amount.
3. Trial balance is out of balance because of the slide error (wrong
number of zeros/position of decimal spot). Service Revenue would be
understated by $801 ($890 – $89) and the total for the credit column
is lower by the same amount.
4. Trial balance is out of balance because of transposition error.
Salaries Expense is understated by $900 ($4,300 – $3,400) and the
total for the debit column is lower by the same amount.
5. The trial balance totals are not affected by this omission; only the
accounts and amounts appearing on the trial balance are affected.
Rent Expense would be understated by $1,000 (should be shown on
the trial balance) and Cash overstated by the same amount. Note
that Cash is one of the accounts listed in the wrong column (credit
instead of debit).
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PROBLEM 3-12A (CONTINUED)
(b)
CANTPOST LTD.
Trial Balance
June 30, 2018
Debit
Cash ($1,241 + $750 – $570 − $1,000)
Accounts receivable ($2,630 – $750 + $570)
Supplies ($860 – $360)
Equipment ($3,000 + $360)
Accumulated depreciation—equipment
Accounts payable
Unearned revenue
Common shares
Dividends declared
Service revenue ($8,440 – $89 + $890)
Salaries expense (given)
Rent expense
Office expense
Depreciation expense
Income tax expense
Totals
$
Credit
421
2,450
500
3,360
$
600
2,665
1,200
1,000
800
9,241
4,300
1,000
910
600
365
$14,706
0
$14,706
Note that the opening retained earnings balance is zero, as this is the
company’s first year of operations.
(Asset, dividends declared, and expense accounts have debit balances)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-1B
(a)
Assets
Trans.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
May 31 Bal.
Cash
+$8,000
–1,280
–4,000
A/R
Supplies
=
Equipment
=
Liabilities
A/P
Bank Loan
Payable
Shareholders’ Equity
Retained Earnings
+
Unearned
Revenue
Commo
+
+ n Shares Revenues
+$8,000
–
Dividends
Declared
–$1,280
+$16,000
+$12,000
+$700
+$700
+4,200
–700
–200
+$4,200
–700
–200
+$3,600
–2,000
+700
+1,600
–500
–80
–600
$5,140
–
Expenses
+3,600
–2,000
+$700
–1,600
–$500
+$2,000
+ $700
+ $16,000
=
$0
+ $12,000
+ $700
+
$8,000
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+ $7,800
–80
–600
–$4,160
–$500
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PROBLEM 3-1B (CONTINUED)
(b)
TOTAL ASSETS = $23,840
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY = ($12,000 + $700) + ($8,000 + $7,800 – $4,160 – $500) = $23,840
NET INCOME = $7,800 – $4,160 = $3,640
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PROBLEM 3-2B
(a)
Assets
Cash
Aug. 31 Bal.
Sept. 4
4
5
7
10
12
14
17
20
21
26
27
28
Sep. 30 Bal.
+
$4,500
–3,200
–1,200
+1,450
+2,300
–700
A/R
Shareholders’ Equity
Retained Earnings
Liabilities
+
$1,800
Supplies
+ Equip. =
$350
$6,500
A/P
Bank Loan Common
+ Payable + Shares +
$3,200
–3,200
$2,500
+
Rev. –
Exp.
Div.
$7,450
–$1,200
+2,300
+2,050
+1,350
+$500
–300
+2,500
+1,500
+4,500
–750
–175
+175
–500
–350
$6,750+
–
–1,450
+500
–300
+2,500
+3,000
–750
Bal.
0
$2,350 +
TOTAL ASSETS = $18,000
0
$350 +
0
$8,550 =
0
$1,525+
0
$2,500 +
0
$4,800 +
0
0
$7,450 + $5,000 –
–350
$2,775 –
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY = $18,00
Note: The transactions on September 6 (hired a part-time office assistant) and 18 (sent a statement) do not affect
the accounting equation and are therefore not recorded in the accounting records.
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–$500
0
$500
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-2B (CONTINUED)
(b)
CORSO CARE CORP.
Income Statement
Month Ended September 30, 2018
Service revenue
Expenses
Rent expense
Salaries expense
Advertising expense
Utilities expense
Total expenses
Income before income tax
Income tax expense
Net income
Revenues
$5,000
$1,200
750
300
175
0
2,425
2,575
350
$2,225
[Revenues – Expenses = Net income or (loss)]
CORSO CARE CORP.
Statement of Changes in Equity
Month Ended September 30, 2018
Common
Shares
Balance, September 1
Issued common shares
Net income
Dividends declared
Balance, September 30
$2,500
2,300
0
$4,800
Retained
Earnings
$7,450
2,225
(500)
$9,175
Total Equity
$ 9,950
2,300
2,225
(500)
$13,975
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PROBLEM 3-2B (CONTINUED)
(b) (continued)
CORSO CARE CORP.
Statement of Financial Position
September 30, 2018
Assets
Current assets
Cash
Accounts receivable
Supplies
Total current assets
Property, plant, and equipment
Equipment
Total assets
$6,750
2,350
350
$ 9,450
8,550
$18,000
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable
Bank loan payable
Total liabilities
Shareholders' equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders' equity
$1,525
2,500
$ 4,025
$4,800
9,175
13,975
$18,000
(Assets = Liabilities + Shareholders’ equity)
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PROBLEM 3-3B
(a)
Transaction
Account Debited
(1)
(2)
Specific
Basic Type
Account
(3)
(1)
Effect
Basic Type
Account Credited
(2)
Specific
Account
(3)
Effect
Mar. 1
Shareholders’
equity
Rent
Expense
Increase
Assets
Cash
Decrease
Mar. 3
Assets
Accounts
Receivable
Increase
Shareholders’
equity
Service
Revenue
Increase
Mar. 5
Assets
Cash
Increase
Shareholders’
equity
Sales
Increase
Mar. 8
Assets
Equipment
Increase
Liabilities
Bank Loan
Payable
Cash
Increase
Assets
Decrease
Mar. 12
Assets
Cash
Increase
Assets
Accounts
Receivable
Decrease
Mar. 15
Shareholders’
equity
Salaries
Expense
Increase
Assets
Cash
Decrease
Mar. 16
Assets
Supplies
Increase
Liabilities
Accounts
Payable
Increase
PROBLEM 3-3B (CONTINUED)
(a) (continued)
Account Debited
Account Credited
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(1)
Transaction
Basic Type
(2)
Specific
Account
Financial Accounting, Seventh Canadian Edition
(3)
(1)
Basic Type
(2)
Specific
Account
Effect
(3)
Effect
Mar. 20
Shareholders’
equity
Repairs and
Maintenance
Expense
Increase
Assets
Cash
Decrease
Mar. 22
Assets
Accounts
Receivable
Increase
Shareholders’
equity
Sales
Increase
Mar. 26
Liabilities
Bank Loan
Payable
Decrease
Assets
Cash
Decrease
Mar. 28
Assets
Cash
Increase
Liabilities
Unearned
Revenue
Increase
Mar. 31
Shareholders’
equity
Dividends
Declared
Increase
Assets
Cash
Decrease
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PROBLEM 3-3B (CONTINUED)
(b)
Normal
Balance
debit
Date
Mar. 1
Account
Rent Expense
Mar. 3, 12, 22
Accounts Receivable
debit
Mar. 3
Service Revenue
credit
Mar. 1, 5, 8, 12, 15,
20, 26, 28, 31
Cash
debit
Mar. 5, 22
Sales
credit
Mar. 8
Equipment
debit
Mar. 8, 26
Bank Loan Payable
credit
Mar. 15
Salaries Expense
debit
Mar. 16
Accounts Payable
credit
Mar. 16
Supplies
debit
Mar. 20
Repairs and Maintenance Expense
debit
Mar. 28
Unearned Revenue
credit
Mar. 31
Dividends Declared
debit
LO 2 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-4B
(a)
Account
Accounts payable
Accounts receivable
Bank loans payable (short-term)
Cash
Common shares, beginning of year
Dividends declared
Furniture, fixtures, and production equipment
Income taxes expense
Income taxes receivable
Interest expense
Inventories
Prepaid expenses
Retained earnings, beginning of year
Sales
Selling, general, and administrative expenses
(1)
Increases
with
Credit
Debit
Credit
Debit
Credit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Credit
Credit
Debit
(2)
Normal
Balance
Credit
Debit
Credit
Debit
Credit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Credit
Credit
Debit
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-4B (CONTINUED)
(b)
Account
Accounts payable
Accounts receivable
Bank loans payable (short-term)
Cash
Common shares, beginning of year
Dividends declared
Furniture, fixtures, and production equipment
Income taxes expense
Income taxes receivable
Interest expense
Inventories
Prepaid expenses
Retained earnings, beginning of year
Sales
Selling, general, and administrative expenses
Financial Statement
Statement of Financial Position
Statement of Financial Position
Statement of Financial Position
Statement of Financial Position
Statement of Changes in Equity
Statement of Changes in Equity
Statement of Financial Position
Income Statement
Statement of Financial Position
Income Statement
Statement of Financial Position
Statement of Financial Position
Statement of Changes in Equity
Income Statement
Income Statement
Note: Beginning-of-the-year equity amounts such as opening common shares
or opening retained earnings balances are shown on the statement of changes
in equity and do not appear on the statement of financial position as only endof-year amounts for equity accounts would appear on that statement.
(c)
Account
Accounts payable
Accounts receivable
Bank loans payable (short-term)
Cash
Furniture, fixtures, and production equipment
Income taxes receivable
Inventories
Prepaid expenses
Classification
Current liabilities
Current assets
Current liabilities
Current assets
Non-current assets
Current assets
Current assets
Current assets
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-5B
(a)
Transaction 1
Jan. 2: Issued $5,000 of common shares for cash.
(1) Basic
Analysis
The asset account Cash is increased by $5,000; the shareholders’
equity account Common Shares account is increased by $5,000.
(2) Equation
Analysis
Assets
=
Liabilities
+
Cash
+$5,000
Shareholders’
Equity
Common
Shares
+$5,000
(3) Debit−Credit
Analysis
Debits increase assets: debit Cash $5,000.
Credits increase share capital: credit Common Shares $5,000.
Transaction 2
Jan. 5: Provided services on account $2,500.
(1) Basic
Analysis
The asset account Accounts Receivable is increased by $2,500;
the revenue account Service Revenue is increased by $2,500.
(2) Equation
Analysis
Assets
Accounts
Receivable
+$2,500
(3) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Service
Revenue
+$2,500
Debits increase assets: debit Accounts Receivable $2,500.
Credits increase revenues: credit Service Revenue $2,500.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-5B (CONTINUED)
(a) (continued)
Transaction 3
Jan. 6: Obtained a bank loan for $30,000.
(1) Basic
Analysis
The asset account Cash is increased by $30,000; the liability
account Bank Loan Payable is increased by $30,000.
(2) Equation
Analysis
Assets
=
Liabilities
Shareholders’
Equity
+
Bank Loan
Payable
+$30,000
Cash
+$30,000
(3) Debit−Credit
Analysis
Debits increase assets: debit Cash $30,000.
Credits increase liabilities: credit Bank Loan Payable $30,000.
Transaction 4
Jan. 7: Paid $40,000 to purchase a hybrid car.
(1) Basic
Analysis
The asset account Vehicles is increased by $40,000; the asset
account Cash is decreased by $40,000.
(2) Equation
Analysis
Assets
=
Liabilities
+
Shareholders’
Equity
Cash
-$40,000
Vehicles
+$40,000
(3) Debit−Credit
Analysis
Debits increase assets: debit Vehicles $40,000.
Credits decrease assets: credit Cash $40,000.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-5B (CONTINUED)
(a) (continued)
Transaction 5
Jan. 9: Received a $5,000 deposit from a customer for services to
be performed in the future.
(1) Basic
Analysis
The asset account Cash is increased by $5,000; the liability
account Unearned Revenue is increased by $5,000.
(2) Equation
Analysis
Assets
=
Liabilities
+
Shareholders’
Equity
Unearned
Revenue
+$5,000
Cash
+$5,000
(3) Debit−Credit
Analysis
Debits increase assets: debit Cash $5,000.
Credits increase liabilities: credit Unearned Revenue $5,000.
Transaction 6
Jan. 12: Billed customers $20,000 for services performed during
the month.
(1) Basic
Analysis
The asset account Accounts Receivable is increased by $20,000;
the revenue account Service Revenue is increased by $20,000.
(2) Equation
Analysis
Assets
Accounts
Receivable
+$20,000
(3) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Service
Revenue
+$20,000
Debits increase assets: debit Accounts Receivable $20,000.
Credits increase revenues: credit Service Revenue $20,000.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-5B (CONTINUED)
(a) (continued)
Transaction 7
Jan. 19: Paid $500 to purchase supplies.
(1) Basic
Analysis
The asset account Supplies is increased by $500; the asset
account Cash is decreased by $500.
(2) Equation
Analysis
Assets
=
Liabilities
+
Shareholders’
Equity
Cash
-$500
Supplies
+$500
(3) Debit−Credit
Analysis
Debits increase assets: debit Supplies $500.
Credits decrease assets: credit Cash $500.
Transaction 8
Jan 20: Provided $1,500 of services for the customer who paid in
advance on January 9.
(1) Basic
Analysis
The liability account Unearned Revenue decreased by $1,500; the
revenue account Service Revenue is increased by $1,500.
(2) Equation
Analysis
Assets
=
Liabilities
Unearned
Revenue
-$1,500
(3) Debit−Credit
Analysis
+
Shareholders’
Equity
Service
Revenue
+$1,500
Debits decrease liabilities: debit Unearned Revenue $1,500.
Credits increase revenues: credit Service Revenue $1,500.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-5B (CONTINUED)
(a) (continued)
Transaction 9
Jan. 23: Collected $5,000 owing from customers from the January
12 transaction.
(1) Basic
Analysis
The asset account Cash is increased by $5,000; the asset account
Accounts Receivable is decreased by $5,000.
(2) Equation
Analysis
Assets
=
Liabilities
+
Shareholders’
Equity
Cash
+$5,000
Accounts
Receivable
-$5,000
(3) Debit−Credit
Analysis
Debits increase assets: debit Cash $5,000.
Credits decrease assets: credit Accounts Receivable $5,000.
Transaction 10
Jan 26: Received a bill for utilities of $125, due February 26.
(1) Basic
Analysis
The expense account Utilities Expense is increased by $125; the
liability account Accounts Payable is increased by $125.
(2) Equation
Analysis
Assets
=
Liabilities
Accounts
Payable
+$125
(3) Debit−Credit
Analysis
+
Shareholders’
Equity
Utilities
Expense
-$125
Debits increase expenses: debit Utilities Expense $125.
Credits increase liabilities: credit Accounts Payable $125.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-5B (CONTINUED)
(a) (continued)
Transaction 11
Jan. 29: Paid rent for the month, $1,500.
(1) Basic
Analysis
The expense account Rent Expense is increased by $1,500; the
asset account Cash is decreased by $1,500.
(2) Equation
Analysis
Assets
=
Liabilities
+
Cash
-$1,500
Shareholders’
Equity
Rent Expense
-$1,500
(3) Debit−Credit
Analysis
Debits increase expenses: debit Rent Expense $1,500.
Credits decrease assets: credit Cash $1,500.
Transaction 12
Jan. 31: Paid $4,000 of salaries to employees.
(1) Basic
Analysis
The expense account Salaries Expense is increased by $4,000; the
asset account Cash is decreased by $4,000.
(2) Equation
Analysis
Assets
Cash
-$4,000
(3) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Salaries
Expense
-$4,000
Debits increase expenses: debit Salaries Expense $4,000.
Credits decrease assets: credit Cash $4,000.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-5B (CONTINUED)
(a) (continued)
Transaction 13
Jan 31: Paid interest of $300 on the bank loan from the January 6
transaction.
(1) Basic
Analysis
The expense account Interest Expense is increased by $300; the
asset account Cash is decreased by $300.
(2) Equation
Analysis
Assets
=
Liabilities
+
Cash
-$300
Shareholders’
Equity
Interest
Expense
-$300
(3) Debit−Credit
Analysis
Debits increase expenses: debit Interest Expense $300.
Credits decrease assets: credit Cash $300.
Transaction14
Jan. 31: Paid income tax for the month, $3,600.
(1) Basic
Analysis
The expense account Income Tax Expense is increased by $3,600;
the asset account Cash is decreased by $3,600.
(2) Equation
Analysis
Assets
Cash
-$3,600
(3) Debit−Credit
Analysis
=
Liabilities
+
Shareholders’
Equity
Income Tax
Expense
-$3,600
Debits increase expenses: debit Income Tax Expense $3,600.
Credits decrease assets: credit Cash $3,600.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-5B (CONTINUED)
(b)
Jan. 2 Cash ................................................................
Common Shares ......................................
5,000
5,000
5 Accounts Receivable .......................................
Service Revenue ......................................
2,500
6 Cash ................................................................
Bank Loan Payable ..................................
30,000
7 Vehicles ...........................................................
Cash .........................................................
40,000
9 Cash ................................................................
Unearned Revenue ..................................
5,000
12 Accounts Receivable .......................................
Service Revenue ......................................
20,000
19 Supplies ..........................................................
Cash .........................................................
500
20 Unearned Revenue .........................................
Service Revenue ......................................
1,500
23 Cash ................................................................
Accounts Receivable ................................
5,000
26 Utilities Expense ..............................................
Accounts Payable ....................................
125
29 Rent Expense ..................................................
Cash .........................................................
1,500
2,500
30,000
40,000
5,000
20,000
500
1,500
5,000
125
1,500
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-5B (CONTINUED)
(b) (continued)
Jan. 31 Salaries Expense ............................................
Cash .........................................................
4,000
31 Interest Expense .............................................
Cash .........................................................
300
31 Income Tax Expense .......................................
Cash .........................................................
03,600
4,000
300
3,600
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-6B
Apr. 1 Cash ......................................................................
Common Shares ............................................
100,000
3 Land ......................................................................
Buildings ................................................................
Equipment .............................................................
Cash ...............................................................
Bank Loan Payable ........................................
204,000
121,000
45,000
8 Advertising Expense ..............................................
Accounts Payable ..........................................
1,800
10 Salaries Expense ..................................................
Cash ...............................................................
2,800
100,000
60,000
310,000
1,800
2,800
13 No entry as the accounting equation is not affected.
14 Prepaid Insurance ................................................
Cash ..............................................................
5,500
17 Dividends Declared ..............................................
Cash ..............................................................
600
20 Cash .....................................................................
Fees Earned..................................................
10,600
30 Accounts Payable.................................................
Cash ..............................................................
1,800
30 Interest Expense ..................................................
Cash ..............................................................
2,000
5,500
600
10,600
1,800
2,000
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-6B (CONTINUED)
Apr. 30 Income Tax Expense ............................................
Cash ..............................................................
800
800
(Each journal entry must balance and reflect the actual amount of the transaction)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-7B
(a)
May 1 Cash ........................................................................... 20,000
Common Shares ..................................................
1 Rent Expense .............................................................
Cash ....................................................................
20,000
950
950
4 No entry. Not an accounting transaction.
4 Supplies ..............................................................
Accounts Payable ........................................
750
11 Accounts Receivable ..........................................
Service Revenue .........................................
2,725
12 Cash ...................................................................
Unearned Revenue......................................
3,500
15 Cash ...................................................................
Service Revenue .........................................
2,350
20 Cash ...................................................................
Accounts Receivable ...................................
1,725
22 Accounts Payable ($750 × 1/3) ...........................
Cash ............................................................
250
25 Utilities Expense .................................................
Accounts Payable ........................................
275
29 Salaries Expense ................................................
Cash ............................................................
2,000
750
2,725
3,500
2,350
1,725
,
250
275
2,000
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-7B (CONTINUED)
(a) (continued)
May 29
29
Income Tax Expense ..........................................
Cash ............................................................
300
Dividends Declared .............................................
Cash ............................................................
250
300
250
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-7B (CONTINUED)
(b)
May 1
12
15
20
Bal.
Cash
20,000May 1
3,500
22
2,350
29
1,725
29
29
23,825
Accounts Receivable
May 11
2,725May 20
Bal.
1,000
May 4
May 22
950
250
2,000
300
250
Unearned Revenue
May 12
May 29
750
275
775
May 29
Salaries Expense
2,000
May 1
Rent Expense
950
May 25
Utilities Expense
275
May 29
Income Tax Expense
300
3,500
20,000
Dividends Declared
250
Service Revenue
May 11
15
Bal.
1,725
Supplies
750
Accounts Payable
250May 4
25
Bal.
Common Shares
May 1
2,725
2,350
5,075
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-7B (CONTINUED)
(c)
This suggestion is a good idea. Most companies use computerized
accounting systems, which speed up the process of recording in the
journals and subsequently use summarized transactions that are posted to
the general ledger. Systems such as these can reduce errors (from posting
or calculations) and provide timely information for decision-making.
However, computerized accounting systems cannot eliminate human
errors nor can they perform the analysis of transactions needed as a first
step before entries can be recorded in the accounting system. This aspect
of the cycle needs to be performed by a person who can interpret the
information and decide which accounts are affected.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-8B
(a)
Apr. 2 Rent Expense .............................................................
Cash ....................................................................
800
3 Advertising Expense ...................................................
Cash ....................................................................
620
800
620
5 No entry, not a transaction.
6 No entry, not a transaction.
15 Cash ...........................................................................
Fees Earned ........................................................
1,950
16 Mortgage Payable.......................................................
Interest Expense .........................................................
Cash ....................................................................
2,000
850
17 Accounts Payable .......................................................
Cash ....................................................................
2,800
19 Rent Expense .............................................................
Accounts Payable ................................................
750
20 Prepaid Rent ...............................................................
Cash ....................................................................
700
26 Salaries Expense ........................................................
Cash ....................................................................
2,900
27 Income Tax Expense ..................................................
Cash ....................................................................
1,000
1,950
2,850
2,800
750
700
2,900
1,000
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-8B (CONTINUED)
(a) (continued)
Apr. 30 Cash ...........................................................................
Accounts Receivable ..................................................
Concession Revenue (20% × $5,600) .................
560
560
30 Cash ...........................................................................
Fees Earned ........................................................
7,300
1,120
7,300
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-8B (CONTINUED)
(b)
Cash
Mar. 31 Bal. 6,000 Apr. 2
Apr. 15
1,950 Apr. 3
Apr. 30
560 Apr. 16
Apr. 30
7,300 Apr. 17
Apr. 20
Apr. 26
Apr. 27
Bal.
4,140
Apr. 30
Accounts Receivable
560
Apr. 20
Prepaid Rent
700
Land
Mar. 31 Bal. 100,000
Equipment
Mar. 31 Bal. 25,000
Apr. 17
Apr. 16
Retained Earnings
Mar. 31 Bal.31,000
Apr. 26
Buildings
Mar. 31 Bal. 80,000
Accounts Payable
Mar. 31 Bal.
2,800 Apr. 19
Bal.
Common Shares
Mar. 31 Bal. 50,000
800
620
2,850
2,800
700
2,900
1,000
5,000
750
2,950
Mortgage Payable
2,000 Mar. 31 Bal. 125,000
Bal.
123,000
Fees Earned
Apr. 15
Apr. 30
Bal.
1,950
7,300
9,250
Concession Revenue
Apr. 30
1,120
Salaries Expense
2,900
Apr. 2
Apr. 19
Bal.
Rent Expense
800
750
1,550
Apr. 3
Advertising Expense
620
Apr. 16
Interest Expense
850
Apr. 27
Income Tax Expense
1,000
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-8B (CONTINUED)
(c)
LAKE THEATRE INC.
Trial Balance
April 30, 2018
Debit
Cash
Accounts receivable
Prepaid rent
Land
Buildings
Equipment
Accounts payable
Mortgage payable
Common shares
Retained earnings
Fees earned
Concession revenue
Salaries expense
Rent expense
Advertising expense
Interest expense
Income tax expense
Totals
Credit
$
4,140
560
700
100,000
80,000
25,000
$ 2,950
123,000
50,000
31,000
9,250
1,120
2,900
1,550
620
850
1,000
$217,320
0000 000
$217,320
(Liability, common shares, retained earnings, and revenue (fees earned and concession
revenue) accounts have credit balances)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-9B
(a)
Apr.
2 Rent Expense .............................................................. 5,000
Cash .....................................................................
5,000
4 No entry. Not a transaction.
6 Advertising Expense ....................................................
Cash .....................................................................
500
9 Accounts Payable ........................................................
Cash .....................................................................
300
500
300
13 Salaries Expense ........................................................ 1,000
Cash .....................................................................
1,000
16 Rent Expense .............................................................. 5,000
Cash .....................................................................
5,000
18 Utilities Expense ..........................................................
Accounts Payable.................................................
100
19 Supplies Expense ........................................................
Cash .....................................................................
200
100
200
24 Cash ............................................................................ 2,200
Unearned Revenue ..............................................
25 Income Tax Expense ...................................................
Cash .....................................................................
880
27 Advertising Expense ....................................................
Cash .....................................................................
300
2,200
880
300
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-9B (CONTINUED)
(a) (continued)
Apr. 30 Salaries Expense ........................................................ 1,000
Cash .....................................................................
1,000
30 Unearned Revenue ..................................................... 17,500
Fees Earned .........................................................
17,500
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PROBLEM 3-9B (CONTINUED)
(b)
Cash
Mar. 31 Bal. 23,000 Apr. 2
Apr. 24
2,200 Apr. 6
Apr. 9
Apr. 13
Apr. 16
Apr. 19
Apr. 25
Apr. 27
Apr. 30
Bal.
11,020
5,000
500
300
1,000
5,000
200
880
300
1,000
Equipment
Mar. 31 Bal. 2,000
Apr. 9
Apr. 30
Accounts Payable
Mar. 31 Bal.
300 Apr. 18
Bal.
500
100
300
Unearned Revenue
Mar. 31 Bal. 17,500
17,500
Apr. 24
2,200
Bal.
2,200
Common Shares
Mar. 31 Bal. 1,000
Retained Earnings
Mar. 31 Bal. 6,000
Fees Earned
Apr. 30
Apr. 2
Apr. 16
Bal.
17,500
Rent Expense
5,000
5,000
10,000
Apr. 13
Apr. 30
Bal.
Salaries Expense
1,000
1,000
2,000
Apr. 6
27
Bal.
Advertising Expense
500
300
800
Apr. 19
Supplies Expense
200
Apr. 18
Utilities Expense
100
Apr. 25
Income Tax Expense
880
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-9B (CONTINUED)
(c)
KG SKATING SCHOOL INC.
Trial Balance
April 30, 2018
Debit
Cash
Equipment
Accounts payable
Unearned revenue
Common shares
Retained earnings
Fees earned
Rent expense
Salaries expense
Advertising expense
Supplies expense
Utilities expense
Income tax expense
Totals
Credit
$11,020
2,000
$
300
2,200
1,000
6,000
17,500
10,000
2,000
800
200
100
880
$27,000
_
$27,000
(Asset and expenses accounts have debit balances)
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PROBLEM 3-10B
(a)
ASIAN IMPORTERS LIMITED
Trial Balance
January 31, 2018
(thousands)
Debit
Cash
Accounts receivable
Inventory
Prepaid insurance
Land
Buildings
Accumulated depreciation—buildings
Equipment
Accumulated depreciation—equipment
Goodwill
Accounts payable
Other current liabilities
Bank loan payable (due 2021)
Mortgage payable
Common shares
Retained earnings
Dividends declared
Sales
Cost of goods sold
Office expense
Interest expense
Income tax expense
Totals
Credit
$ 10,000
30,200
74,250
3,950
42,500
39,500
$ 13,000
10,900
3,600
7,600
46,300
12,200
10,050
19,750
32,900
37,050
1,850
370,000
244,200
67,750
2,150
10,000
$544,850
00000 0
$544,850
(Asset, dividends declared, and expense accounts have debit balances. Liability,
common shares, retained earnings, and revenue (sales) accounts have credit balances)
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PROBLEM 3-10B (CONTINUED)
(b)
The following are some steps to help find the error(s) in a trial balance:
1.
2.
3.
4.
If the error (difference between the debit and credit totals) is an
amount such as $1, $100, or $1,000, re-add the trial balance
columns and recalculate the account balances.
If the error can be evenly divided by two, scan the trial balance to
see if a balance equal to half the error has been entered in the
wrong column.
If the error can be evenly divided by nine, retrace the account
balances on the trial balance to see whether they have been
incorrectly copied from the ledger. For example, if a balance was
$12 but was listed as $21, a $9 error has been made. Reversing the
order of numbers is called a transposition error. A slide, which is
adding or deducting one or several zeros in a figure, has the same
effect.
If the error cannot be evenly divided by two or nine, scan the ledger
to see whether an account balance in the amount of the error has
been omitted from the trial balance. Scan the journal to see whether
a posting in the amount of the error has been omitted.
When all else fails, all of the transactions should be carefully traced
through the process again.
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PROBLEM 3-11B
ASIAN IMPORTERS LIMITED
Income Statement
Year Ended January 31, 2018
(thousands)
Revenues
Sales
Expenses
Cost of goods sold
Office expense
Interest expense
Total expenses
Income before income tax
Income tax expense
Net income
$370,000
$244,200
67,750
2,150
314,100
55,900
10,000
$ 45,900
ASIAN IMPORTERS LIMITED
Statement of Changes in Equity
Year Ended January 31, 2018
Common
Shares
Balance, February 1, 2017
Issued common shares
Net income
Dividends declared
Balance, January 31, 2018
$20,000
12,900
000 000
$32,900
Retained
Earnings
$37,050
45,900
(1,850)
$81,100
Total Equity
$ 57,050
12,900
45,900
(1,850)
$114,000
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-11B (CONTINUED)
ASIAN IMPORTERS LIMITED
Statement of Financial Position
January 31, 2018
(thousands)
Assets
Current assets
Cash
Accounts receivable
Inventory
Prepaid expenses
Total current assets
Property, plant, and equipment
Land
Buildings
Less: Accumulated depreciation
Equipment
Less: Accumulated depreciation
Goodwill
Total assets
$10,000
30,200
74,250
3,950
$118,400
$42,500
$39,500
13,000
$10,900
3,600
26,500
7,300
76,300
7,600
$202,300
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-11B (CONTINUED)
(a) (continued)
Liabilities and Shareholders' Equity
Liabilities
Current liabilities
Accounts payable
Current portion of mortgage payable
Other current liabilities
Total current liabilities
Non-current liabilities
Mortgage payable ($19,750 − $6,300)
Bank loan payable
Total non-current liabilities
Total liabilities
Shareholders' equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$ 46,300
6,300
12,200
64,800
$13,450
10,050
23,500
88,300
$32,900
81,100
114,000
$202,300
[Ending retained earnings = Beginning retained earnings ± Net income or (loss) –
dividends declared]
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-12B
(a)
(1)
General: Eight accounts are listed in the wrong columns:
Accumulated depreciation (credit), Accounts payable (credit),
Common Shares (credit), and all five expense accounts (debit).
(2)
1.
Each of the Prepaid Insurance, Accounts Payable, and Income Tax
Expense accounts are understated by $100. Note also that the last
two accounts—Accounts Payable and Income Tax Expense—are
also listed in the wrong debit/credit column as described above in
(1). Before these errors were identified, the Prepaid Insurance
account was missing and each of the Accounts Payable and Income
Tax Expense accounts were in debit and credit columns,
respectively, and each understated $100 so one of the reasons the
trial balance did not balance was because the Prepaid Insurance
account had been omitted.
2.
The trial balance is out of balance by $270 ($14,529 – $14,259)
because of the transposition error. Service Revenue is overstated by
$270, as is the total for the credit column.
3.
The trial balance is not out of balance because of this recording
error. The Salaries Expense account is overstated by $750 and the
Dividends Declared account understated by the same amount. The
Dividends Declared account is not included in the incorrect trial
balance, so it needs to be included.
4.
The trial balance is out of balance because of this recording error.
The total for the debit column is lower by $120 (because the Cash
account is understated) and the credit column is lower by $120
(because the Accounts Payable account is understated). Recall that
the Accounts Payable account is one of the accounts listed in the
wrong column (debit instead of credit).
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Financial Accounting, Seventh Canadian Edition
PROBLEM 3-12B (CONTINUED)
(a) (continued)
5.
The trial balance is not out of balance because of this omission; only
the accounts and amounts appearing on the trial balance are
affected. The Equipment and Bank Loan Payable accounts are each
understated by $2,000.
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PROBLEM 3-12B (CONTINUED)
(b)
MESSED UP LTD.
Trial Balance
May 31, 2018
Debit
Cash ($2,997 + $120)
Accounts receivable
Prepaid insurance (+$100)
Equipment ($9,200 + $2,000)
Accumulated depreciation—equipment
Accounts payable ($4,600 + $100 + $120)
Bank loan payable (+$2,000)
Common shares
Dividends declared (+$750)
Service revenue ($14,529 –$14,529 + $14,259)
Salaries expense ($8,150 – $750)
Advertising expense
Depreciation expense
Insurance expense
Income tax expense ($400 + $100)
Totals
Credit
$ 3,117
2,630
100
11,200
$ 4,200
4,820
2,000
4,250
750
14,259
7,400
1,132
2,100
600
500
$29,529
0
$29,529
(Asset, dividends declared, and expense accounts have debit balances)
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ACR3-1 ACCOUNTING CYCLE REVIEW
(a)
Date
Account Titles
Ref.
Debit
Credit
Jan. 2 Cash .......................................................................................................................
100
65,000
Common Shares (1,000 × $65) ......................................................................
400
65,000
4 Rent Expense .........................................................................................................
740
3,000
Cash...............................................................................................................
100
3,000
5 Equipment ..............................................................................................................
200
40,000
Cash...............................................................................................................
100
10,000
Bank Loan Payable ........................................................................................
310
30,000
8 Advertising Expense ...............................................................................................
700
500
Cash...............................................................................................................
100
500
10 Supplies ..................................................................................................................
120
1,000
Accounts Payable ..........................................................................................
300
1,000
11 Advertising Expense ...............................................................................................
700
3,000
Cash...............................................................................................................
100
3,000
12 Salaries Expense ....................................................................................................
710
7,500
Cash...............................................................................................................
100
7,500
15 Accounts Receivable .............................................................................................
110
15,000
Service Revenue ............................................................................................
500
15,000
17 Office Expense ......................................................................................................
730
1,000
Cash ...............................................................................................................
100
1,000
19 Prepaid Insurance ..................................................................................................
130
6,000
Cash ...............................................................................................................
100
6,000
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Financial Accounting, Seventh Canadian Edition
ACR3-1 (CONTINUED)
(a) (continued)
Date
Account Titles
Ref.
Debit
Credit
Jan. 24 Cash ......................................................................................................................
100
10,000
Accounts Receivable ......................................................................................
110
10,000
25 Dividends Declared ................................................................................................
490
500
Cash ...............................................................................................................
100
500
26 Salaries Expense ....................................................................................................
710
7,500
Cash ...............................................................................................................
100
7,500
29 Accounts Receivable ...............................................................................................
110
18,000
Service Revenue ............................................................................................
500
18,000
30 Interest Expense .....................................................................................................
720
200
Bank Loan Payable .................................................................................................
310
700
Cash ...............................................................................................................
100
900
31 Income Tax Expense...............................................................................................
900
1,500
Cash ...............................................................................................................
100
1,500
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ACR3-1 (CONTINUED)
(b)
Jan.
Cash
65,000 Jan.
10,000
2
24
4
5
8
11
12
17
19
25
26
30
31
Jan. 31 Bal.
#100
3,000
10,000
500
3,000
7,500
1,000
6,000
500
7,500
900
1,500
33,600
Accounts Receivable
#110
Jan. 15
15,000 Jan. 24
10,000
29
18,000
Jan. 31 Bal. 23,000
Jan. 10
Jan. 19
Jan. 5
Jan. 30
Supplies
1,000
Prepaid Insurance
6,000
Equipment
40,000
#120
Common Shares
Jan. 2
Jan. 25
Jan. 8
11
Jan. 31
Bank Loan Payable
700 Jan. 5
Jan 31
Bal.
#310
30,000
29,300
Advertising Exepense
500
3,500
Bal. 3,500
Salaries Expense
Jan. 12
7,500
26
7,500
Jan. 31 Bal. 15,000
#490
#700
#710
Interest Expense
200
#720
Jan. 30
#730
Jan. 17
Office Expense
1,000
#740
Jan. 4
Rent Expense
3,000
#900
Jan. 31
Income Tax Expense
1,500
#200
$300
1,000
Dividends Declared
500
Service Revenue
#500
Jan. 15
15,000
29
18,000
Jan. 31 Bal. 33,000
#130
Accounts Payable
Jan. 10
#400
65,000
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ACR3-1 (CONTINUED)
(c)
100
110
120
130
200
300
310
400
490
500
700
710
720
730
740
900
SOFTWARE ADVISORS LIMITED
Trial Balance
January 31, 2018
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accounts payable
Bank loan payable
Common shares
Dividends declared
Service revenue
Advertising expense
Salaries expense
Interest expense
Office expense
Rent expense
Income tax expense
Debit
$ 33,600
23,000
1,000
6,000
40,000
Credit
$ 1,000
29,300
65,000
500
33,000
3,500
15,000
200
1,000
3,000
1,500
$128,300
0
$128,300
(Asset, dividends declared, and expense accounts have debit balances)
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ACR3-1 (CONTINUED)
(d) (1)
SOFTWARE ADVISORS LIMITED
Income Statement
Month Ended January 31, 2018
Revenues
Service revenue
Expenses
Salaries expense
Advertising expense
Rent expense
Office expense
Interest expense
Total expenses
Income before income tax
Income tax expense
Net income
$33,000
$15,000
3,500
3,000
1,000
200
22,700
10,300
1,500
$ 8,800
(d) (2)
SOFTWARE ADVISORS LIMITED
Statement of Changes in Equity
Month Ended January 31, 2018
Balance, January 1
Issued common shares
Net Income
Dividends declared
Balance, January 31
Common
Shares
$
0
65,000
0
$65,000
Retained
Earnings
$
0
8,800
(500)
$8,300
Total
Equity
$
0
65,000
8,800
(500)
$73,300
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ACR3-1 (CONTINUED)
(d) (3)
SOFTWARE ADVISORS LIMITED
Statement of Financial Position
January 31, 2018
Assets
Current assets
Cash
Accounts receivable
Supplies
Prepaid insurance
Property, plant, and equipment
Equipment
Total assets
$33,600
23,000
1,000
6,000
$63,600
40,000
$103,600
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable
Non-current liabilities
Bank loan payable
Total liabilities
Shareholders’ equity
Common shares
Retained earnings
Total liabilities and shareholders’ equity
$ 1,000
29,300
30,300
$65,000
8,300
73,300
$103,600
[Ending retained earnings = Beginning retained earnings ± Net income or (loss) –
dividends declared]
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ACR3-2 ACCOUNTING CYCLE REVIEW
(a)
Aug. 1 Advertising Expense ........................................
Cash .........................................................
250
250
2 Unearned Revenue .........................................
Service Revenue ......................................
1,260
3 Rent Expense ..................................................
Cash .........................................................
980
6 Cash ................................................................
Accounts Receivable ................................
1,200
1,260
980
1,200
7 No entry, not a transaction
10 Salaries Payable .............................................
Salaries Expense ............................................
Cash .........................................................
1,420
1,700
13 Cash ................................................................
Service Revenue ......................................
2,800
15 Equipment .......................................................
Bank Loan Payable ..................................
2,000
20 Accounts Payable ............................................
Cash .........................................................
2,000
22 Supplies ..........................................................
Accounts Payable ....................................
800
3,120
2,800
2,000
2,000
800
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ACR3-2 (CONTINUED)
(a) (continued)
Aug. 24 Salaries Expense ............................................
Cash .........................................................
2,900
27 Accounts Receivable .......................................
Service Revenue .....................................
3,760
29 Cash ................................................................
Unearned Revenue..................................
30 Bank Loan Payable .........................................
Interest Expense .............................................
Cash .........................................................
780
31 Income Tax Expense .......................................
Cash .........................................................
380
31 Dividends Declared .........................................
Cash .........................................................
0400
2,900
3,760
780
500
50
550
380
400
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ACR3-2 (CONTINUED)
(b)
Aug. 31
Cash
8,040 Aug. 1
1,200
3
2,800
10
780
24
30
31
31
2,240
July 31
27
Aug. 31
Accounts Receivable
3,200 Aug. 6
3,960
Bal. 5,760
July 31
Aug. 22
Aug. 31
Supplies
1,030
800
Bal. 1,830
July 31
Aug. 15
Aug. 31
Equipment
10,000
2,000
Bal. 12,000
July 31
Aug. 6
13
29
250
980
3,120
2,900
550
380
400
Aug. 30
Aug. 10
Aug. 31
14,000
Dividends Declared
400
Service Revenue
Aug. 2
1,260
Aug. 13
2,800
Aug. 27
3,760
Aug. 31 Bal. 7,820
Vehicles
25,000
Aug. 1
Aug. 3
Accounts Payable
July 31
2,300
2,000 Aug. 22
800
Aug. 31 Bal. 1,100
Salaries Payable
1,420 July 31
Aug. 31
4,000
2,000
Bal. 5,500
Retained Earnings
June 30
Bal.7,290
Accumulated Depreciation—Vehicles
July 31
5,000
Aug. 20
Bank Loan Payable
July 31
500
Aug. 15
Aug. 31
Common Shares
July 31
1,200
Accumulated Depreciation—Equipment
July 31
1,000
July 31
Aug. 2
Unearned Revenue
July 31
1,260
1,260
Aug. 29
780
Aug. 29 Bal. 780
1,420
Bal. 0
Advertising Expense
250
Rent Expense
980
Aug. 10
24
Aug. 31
Salaries Expense
1,700
2,9000
4,600
Aug. 30
Interest Expense
50
Aug. 31
Income Tax Expense
380
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ACR3-2 (CONTINUED)
(c)
B&B REPAIR SERVICES LTD.
Trial Balance
August 31, 2018
Cash
Accounts receivable
Supplies
Equipment
Accumulated depreciation—equipment
Vehicles
Accumulated depreciation—vehicles
Accounts payable
Unearned revenue
Bank loan payable
Common shares
Retained earnings
Dividends declared
Service revenue
Advertising expense
Rent expense
Salaries expense
Interest expense
Income tax expense
Debit
$ 2,240
5,760
1,830
12,000
Credit
$ 2,000
25,000
5,000
1,100
780
5,500
14,000
17,290
400
7,820
250
980
4,600
50
380
$53,490
$53,490
(Asset, dividends declared, and expense accounts have debit balances)
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ACR3-2 (CONTINUED)
(d)
B&B REPAIR SERVICES LTD.
Income Statement
Month Ended August 31, 2018
Revenues
Service revenue
Expenses
Salaries expense
Rent expense
Advertising expense
Interest expense
Total expenses
Income before income tax
Income tax expense
Net income
$7,820
$4,600
980
250
50
5,880
1,940
380
$1,560
B&B REPAIR SERVICES LTD.
Statement of Changes in Equity
Month Ended August 31, 2018
Common
Shares
Balance, July 31
Net income
Dividends declared
Balance, August 31
$14,000
0
$14,000
Retained
Earnings
$17,290
1,560
(400)
$18,450
Total
Equity
$31,290
1,560
(400)
$32,450
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Financial Accounting, Seventh Canadian Edition
ACR3-2 (CONTINUED)
(d) (continued)
B&B REPAIR SERVICES LTD.
Statement of Financial Position
August 31, 2018
Assets
Current assets
Cash
Accounts receivable
Supplies
Property, plant, and equipment
Equipment
Accumulated depreciation—equipment
Vehicles
Accumulated depreciation—vehicles
Total assets
$2,240
5,760
1,830
$12,000
2,000
$25,000
5,000
$ 9,830
$10,000
20,000
30,000
$39,830
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable
Unearned revenue
Non-current liabilities
Bank loan payable
Total liabilities
Shareholders’ equity
Common shares
Retained earnings
Total liabilities and shareholders’ equity
$1,100
780
$ 1,880
5,500
7,380
$14,000
18,450
32,450
$39,830
[Ending retained earnings = Beginning retained earnings ± Net income or (loss) – dividends declared]
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Financial Accounting, Seventh Canadian Edition
ACR3-2 (CONTINUED)
(e)
Payments:
Cash flow
Aug.
1
3
$ 250 Advertising
980 Rent
Operating
Operating
10
3,120 Salaries
Operating
20
2,000 On account to suppliers
Operating
24
2,900 Salaries
Operating
30
550 Loan principal $500
Loan interest $50
Financing
Operating
31
380 Income tax
Operating
31
400 Dividends declared and paid
Financing
Receipts:
Aug.
6
13
29
1,200 On account from customers
Operating
2,800 Revenue
Operating
780 Unearned revenue
Operating
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CT3-1
(a)
$793,795 =
Total Liabilities +
$436,183 +
Shareholder's Equity
$167,910 Share capital
156,664 Retained earnings
Other equity items (contributed surplus
$2,620 and accumulated other
33,038 comprehensive income $30,418)
$357,612
Sobeys ($ in millions)
Total Assets =
$7,960.6 =
(c)
FINANCIAL REPORTING CASE
North West ($ in thousands)
Total Assets =
(b)
Financial Accounting, Seventh Canadian Edition
Total Liabilities +
$5,230.9 +
Shareholder's Equity
$ 2,752.9 Capital stock
(172.1) Retained earnings (Deficit)
Other equity items (contributed surplus
$93, accumulated other comprehensive
loss $3.2, and non-controlling interest
148.9 $59.1)
$2,729.7
Sobeys has about 10 times the assets compared to North West ($7,960.6
million compared to $793.795 million). However, it also has 12 times the
liabilities ($5,230.9 million compared to $436.183 million) which is why its
shareholders’ equity is proportionately lower. Sobeys’s shareholders’
equity is less than 8 times the equity reported by North West ($2,729.7
million compared to $357.612 million).
North West’s share capital comprises about 47% of its total shareholders’
equity whereas Sobeys’s is more than 100% of its total equity. Of course,
this comparison is skewed because Sobeys reported a deficit (negative
retained earnings) rather than a positive retained earnings for its latest
fiscal year.
LO 1 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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CT3-2
Financial Accounting, Seventh Canadian Edition
FINANCIAL REPORTING CASE
(a)
Uber’s network of riders and drivers are resources available to the
business but are not assets owned or controlled by the business. Nor can
the company predict the future economic benefits to be contributed by a
person or measure the “value” of a person. Consequently, people are not
recorded in the accounting records.
(b)
Uber would likely report current assets such as cash, accounts
receivable, and supplies. Its non-current assets likely consist of property,
plant, and equipment such as office furniture and equipment and
computer systems including hardware and software. It also would report
intangible assets such as the software developed to run its ride-sharing
app. In addition, this category would include technology the company
purchased from Microsoft related to street imaging and 3-D views.
(c)
The valuation given by the market to Uber Technologies Inc. is not based
on the assets on its statement of financial position but on investors’
perception of its ability to produce growth and income in the future.
LO 1 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic and Tech. CPA: cpa-t001 CM: Reporting
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CT3-3
Financial Accounting, Seventh Canadian Edition
FINANCIAL ANALYSIS CASE
(a)
Assets
Cash
1.
2.
3.
4.
5.
6.
7.
8.
9.
Aug. 31
Bal.
Accounts
+ Receivable
=
Prepaid
+ Rent
Liabilities
Income
Accounts
Tax
= Payable + Payable
+
Retained Earnings
+
Unearned
Revenue.
+$10,000
+190,000
-45,500
-120,000
-32,400
+2,000
+
Common
Shares
+ Revenue
- Expenses
Div.
- Declared
+$10,000
+$229,400
-190,000
+$229,400
+$3,500
-$42,000
-120,000
-36,400
+$4,000
+$2,000
-1,000
00 0 000
00 000
0 00 00
+$6,200
0 00000
+$3,100
+$39,400
+$3,500
+$4,000
+$6,200
Total assets = $46,000
(b)
Shareholders' Equity
0 0 0 00
0 0 0000
+$2,000
+$10,000
0 0 0000
-6,200
00 0000
-$1,000
+$229,400
-$204,600
-$1,000
Total liabilities ($12,200) + shareholders’ equity ($33,800) = $46,000
A spreadsheet can help, in a small business like Bob’s Repairs, to organize information. However, it lacks
the date, specific account title for multiple expenses, and explanation for each entry that one would find in a
traditional general journal. It could assist in posting, although again it lacks any cross-referencing to allow
transactions to be traced back to the source, if required. Finally, use of a spreadsheet, while convenient for
very small businesses, would limit growth in the number of accounts and transactions.
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Financial Accounting, Seventh Canadian Edition
CT3-3 (CONTINUED)
(c)
BOB'S REPAIRS LTD.
Income Statement
Year Ended August 31, 2018
Service revenue
Expenses
Salaries expense
Rent expense
Office expense
Income before income tax
Income tax expense
Net income
$229,400
$120,000
42,000
36,400
198,400
31,000
6,200
$ 24,800
[Revenues – Expenses = Net income or (loss)]
BOB'S REPAIRS LTD.
Statement of Changes in Equity
Year Ended August 31, 2018
Balance, September 1
Issued common shares
Net income
Dividends declared
Balance, August 31
Common
Shares
$
0
10,000
00 0000
$10,000
Retained
Earnings
$
0
24,800
(1,000)
$23,800
Total
Equity
$
0
10,000
24,800
(1,000)
$33,800
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Financial Accounting, Seventh Canadian Edition
CT3-3 (CONTINUED)
(c) (continued)
BOB'S REPAIRS LTD.
Statement of Financial Position
August 31, 2018
Current assets
Cash
Accounts receivable
Prepaid rent
Total assets
Current liabilities
Accounts payable
Income tax payable
Unearned revenue
Total liabilities
Shareholders' equity
Common shares
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
(d)
$ 3,100
39,400
3,500
$46,000
$4,000
6,200
2,000
$12,200
$10,000
23,800
33,800
$46,000
Five of the cash transactions relate to operating activities:
Cash collected from customers
Payments to the landlord
Salaries paid
Payments for office expenses
Customer advances
Total effect on cash flow
$190,000
(45,500)
(120,000)
(32,400)
2,000
$ (5,900)
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Financial Accounting, Seventh Canadian Edition
CT3-3 (CONTINUED)
Uncle Bob would not be pleased to find out that operating cash flows
were not positive. This can often happen during the first year that a
company operates.
The other two cash transactions not shown above are financing activities:
the issue of common shares for $10,000 and the declaration and
payment of dividends for $1,000. The net increase to cash of $9,000
allowed the company to have a positive cash balance $3,100 (−$5,900 +
$9,000) at the end of the year.
(e)
The bank would want collateral for any loan given to the company.
Usually such collateral consists of property, plant, or equipment and this
company has none of these. It may be possible to secure a loan with
accounts receivable but the company did not have this type of asset
when it was first formed.
(f)
No, the company does not have enough cash to pay the income tax. The
company would have to collect some accounts receivable if it hoped to
pay the income tax.
(g)
The government levies income tax on corporations, which are considered
legal entities, separate from their shareholders. Uncle Bob would pay
income tax only on the dividends he received from the company.
LO 3,4,5 BT: E Difficulty: M Time: 55 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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CT3-4
(a)
Financial Accounting, Seventh Canadian Edition
STUDENT VIEW CASE
On September 1, 2018, my personal equity would be as follows:
Cash ................................................
Cell phone .......................................
Total assets .....................................
Less: student loan ...........................
Personal equity, Sept. 1, 2018 ........
(b)
$21,000
200
21,200
(9,000)
$12,200
Errors in the trial balance:
•
The cash amount should be the amount in the bank account at
December 15.
•
The computer was recorded at $100 rather than the actual cost of
$1,000.
•
The damage deposit of $400 for the residence has been omitted.
•
The travel costs are $450, not $540.
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Financial Accounting, Seventh Canadian Edition
CT3-4 (CONTINUED)
(b) (continued)
Personal Trial Balance
December 15, 2018
Debit
Cash .......................................................................
$ 7,400
Clothes ...................................................................
1,500
Cell phone ..............................................................
200
Computer ...............................................................
1,000
Damage deposit on residence ................................
400
Student loan ...........................................................
Personal equity ......................................................
Residence and meal plan fees ($1,100 per month)
4,400
Tuition for September to December .......................
3,500
Textbooks ..............................................................
600
Personal costs (personal items, entertainment, eating out)
1,500
Cellphone costs ......................................................
250
Travel to go home at Christmas .............................
450
$21,200
Credit
$ 9,000
12,200
____ __
$21,200
(Total of debit account balances = Total of credit account balances)
(c)
Expenses
Clothes.....................................................................
Residence and meal plan fees ($1,100 per month) .
Tuition for September to December .........................
Textbooks ...............................................................
Personal costs (personal items, entertainment, eating out)
Cellphone costs .......................................................
Travel to go home at Christmas ...............................
Total expenses September to December .................
Personal equity, September 1 ..................................
Total expenses.........................................................
Personal equity, December 15 .................................
By December 31, 2018, the personal equity is nil.
$ 1,500
4,400
3,500
600
1,500
250
450
$12,200
$12,200
(12,200)
$
0
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CT3-4 (CONTINUED)
(d)
Balance of cash December 15, 2018 .......................
Assumed expenses for second term same as first...
Shortfall in cash .......................................................
(e)
Personal expenses in the first term are far too high. Some expenses that
can be reduced in the second term include personal costs for
entertainment and eating out. If half as much is spent in the second term,
$750 can be saved. In addition, clothes expenses could be reduced to
$300, saving another $1,200. Travel to go home can be eliminated.
Finally, if the residence room is kept in good condition and with no
damages, $400 for the damage deposit will be returned in cash.
(f)
$ 7,400
(12,200)
$ 4,800
Personal expenses savings .....................................
Reduced clothing costs ............................................
Travel costs .............................................................
Return of residence damage deposit .......................
Additional cash made available ...............................
$ 750
1,200
450
400
$2,800
Cash shortfall ...........................................................
Additional cash from spending changes ..................
Ask parents for extra cash .......................................
$4,800
2,800
$2,000
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CT3-5
Financial Accounting, Seventh Canadian Edition
ETHICS CASE
Note to instructors: All of the material supplementing this group activity,
including a suggested solution, can be found in the Collaborative Learning
section of the Instructor Resource site accompanying this textbook as well as in
the Prepare and Present section of WileyPLUS.
(a)
Ron, here are some tips to help you find the $810 error in the trial
balance assuming it is a single error:
1.
2.
3.
4.
If the error is an amount such as $1, $100, or $1,000, re-add the trial
balance columns and recalculate the account balances. This tip
does not apply in this case because the difference between the debit
and credit columns is $810.
If the error can be evenly divided by two (which it can be in this case
$810 ÷ 2 = $405), scan the trial balance to see if a balance equal to
half the error has been entered in the wrong column.
If the error can be evenly divided by nine (which it can be in this
case $810 ÷ 9 = $90), retrace the account balances on the trial
balance to see whether they have been incorrectly copied from the
ledger. For example, if a balance was $12 but was listed as $21, a
$9 error has been made. Reversing the order of numbers is called a
transposition error. A slide, which is adding or deducting one or
several zeros in a figure, has the same effect.
If the error cannot be evenly divided by two or nine, scan the ledger
to see whether an account balance in the amount of the error has
been omitted from the trial balance. Scan the journal to see whether
a posting in the amount of the error has been omitted.
Note that these suggestions will not always work, especially if there is
more than one error and sometimes, the only way to find an error is to
retrace all of the work carefully.
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CT3-5 (CONTINUED)
(b)
The stakeholders in this situation are:
Ron Hollister
The other students in the group who will be graded for Ron’s work
The other students in the class
The professor
The College or University attended by Ron
Future employers of the graduates of the school
(c)
By adding $810 to the Salaries Expense account, the account total has
been deliberately misstated. By not locating the error causing the
imbalance, some other account or accounts may also be misstated by a
net amount of $810. Ron did not advise his fellow team members of the
action he has taken to avoid detection. While his motivation was most
likely to meet the deadline for handing in the assignment, he also “hoped
no one would notice the difference” so he made this change with
deliberate intent. It was inappropriate not to offer the other group
members an opportunity to find the error in one or more of their parts of
the assignment, or to take action without advising them. The entire group
will be affected by Ron’s actions and had no means of agreeing to the
strategy taken to address the problem. As an aside, it is important for
students to agree as a group on “behavioural norms” ahead of time to
help reduce the likelihood of unintended consequences affecting one or
more of the group.
The adding of the $810 to the Salaries Expense account is not by itself
unethical in a classroom situation but it does not adhere to the qualitative
characteristic of faithful representation of the numbers. The professor
would obviously catch this error and grade the assignment accordingly.
However, Ron’s failure to inform other group members that he was
changing amounts that they had prepared would be considered by many
to be both inappropriate and unethical.
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CT3-5 (CONTINUED)
(c) (continued)
Although the assignment will not affect external users of a real financial
report, it is important to understand that if this had been a real life
situation, Ron’s actions—both the changing of an account balance and
the failure to inform—would be considered to be unethical because
financial information was intentionally altered and done deliberately to
mislead users. [See also the answer to part (e).]
While Ron is not likely in breach of any rule or directive issued by the
school concerning academic integrity, the professor and the other group
members will not agree with the strategy used by Ron. They will wonder if
this is the type of action Ron would take while at a future job. Such
actions would then affect others who are not part of the school community
and the reputation of the school would be diminished. This in turn could
affect society’s opinion of the past and future graduates of the school.
(d)
Ron's alternatives are:
1. Discuss the situation with the teammates and reach a consensus
that it is better to miss the deadline but find the error causing the
imbalance and suffer the corresponding penalty for submitting the
assignment late.
2. Discuss the situation with teammates and reach a consensus to tell
the professor of the imbalance and ask for an extension of time or
suffer the consequences.
3. Discuss the situation with teammates and potentially get their
assistance to locate the error causing the imbalance as a team effort
so that the assignment can still submitted by the deadline.
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Financial Accounting, Seventh Canadian Edition
CT3-5 (CONTINUED)
(c) (continued)
(e)
External users of the financial information prepared by Ron could
potentially be affected by the errors that remain undetected. It is highly
likely that another account may also be wrong on the financial
statements. The consequences are more far reaching and so the
behaviour is more serious. Deliberate deception for this purpose would be
viewed as unethical.
LO 5 BT: S Difficulty: M Time: 20 min. AACSB: Analytic and Ethics CPA: cpa-t001, cpa-e001
CM: Reporting and Ethics
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CT3-6
Financial Accounting, Seventh Canadian Edition
SERIAL CASE
(a)
June 5 Supplies ........................................................................
2,500
Accounts Payable ....................................................
2,500
14 Equipment.....................................................................
2,520
Cash ........................................................................
2,520
16 Cash .............................................................................
1,000
Unearned Revenue ..................................................
1,000
19 Cash .............................................................................300
Unearned Revenue .......................................................100
Sales ........................................................................
400
21 Accounts Receivable ....................................................
2,040
Sales ........................................................................
2,040
27 Utilities Expense ...........................................................200
Accounts Payable ....................................................
200
29 No entry, not a transaction
30 Salaries Expense ..........................................................
3,250
Cash ........................................................................
3,250
30 Accounts Receivable ....................................................
2,550
Sales ........................................................................
2,550
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Financial Accounting, Seventh Canadian Edition
CT3-6 (CONTINUED)
(b)
June Bal.
16
19
Bal.
Cash
39,004 June 1
1,000
30
300
34,534
42,520
3,250
Accounts Receivable
June Bal.
5,900
21
2,040
30
2,550
Bal.
10,490
June Bal.
14
Bal.
Equipment
42,000
2,520
44,520
Accumulated Depreciation—Equipment
June Bal. 14,000
June Bal.
Vehicles
52,500
Accounts Payable
June Bal.
5
27
Bal.
3,540
2,500
200
6,240
Unearned Revenue
100 June Bal.
16
Bal.
100
1,000
1,000
Land
June Bal. 100,000
Bank Loan Payable
June Bal.
22,500
Buildings
June Bal. 165,000
Mortgage Payable
June Bal.
53,200
June Bal.
Inventory
16,250
June Bal.
5
Bal.
Supplies
1,875
2,500
4,375
June Bal.
Prepaid Insurance
12,000
Accumulated Depreciation—Buildings
June Bal. 137,500
June 19
Common Shares
June Bal.
300
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Financial Accounting, Seventh Canadian Edition
CT3-6 (CONTINUED)
(b) (continued)
Retained Earnings
June Bal. 146,788
June Bal.
Dividends Declared
30,000
Rent Revenue
June Bal.
Sales
June Bal.
19
21
30
Bal.
June Bal.
Cost of Goods Sold
102,386
June Bal.
30
Bal.
Salaries Expense
387,532
3,250
390,782
June Bal.
Office Expense
18,000
June Bal.
27
Bal.
Utilities Expense
12,000
200
12,200
6,000
633,768
400
2,040
2,550
638,758
Advertising Expense
June Bal.
9,000
Property Tax Expense
June Bal.
5,950
June Bal.
Interest Expense
5,299
Income Tax Expense
June Bal.
13,000
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Financial Accounting, Seventh Canadian Edition
CT3-6 (CONTINUED)
(c)
ANTHONY BUSINESS COMPANY LTD.
Trial Balance
June 30, 2017
Cash..................................................................
Accounts receivable ..........................................
Inventory ...........................................................
Supplies ............................................................
Prepaid insurance .............................................
Land ..................................................................
Buildings ...........................................................
Accumulated depreciation—buildings ...............
Equipment .........................................................
Accumulated depreciation—equipment.............
Vehicles ............................................................
Accounts payable ..............................................
Unearned revenue ............................................
Bank loan payable ............................................
Mortgage payable .............................................
Common shares................................................
Retained earnings .............................................
Dividends declared ...........................................
Rent revenue ....................................................
Sales .................................................................
Cost of goods sold ............................................
Salaries expense ..............................................
Office expense ..................................................
Utilities expense ................................................
Advertising expense ..........................................
Property tax expense ........................................
Interest expense ...............................................
Income tax expense ..........................................
Totals ................................................................
Debit
$ 34,534
10,490
16,250
4,375
12,000
100,000
165,000
Credit
$ 137,500
44,520
14,000
52,500
6,240
1,000
22,500
53,200
300
146,788
30,000
6,000
638,758
102,386
390,782
18,000
12,200
9,000
5,950
5,299
13,000
$1,026,286
00
$1,026,286
(Liabilities, common shares, retained earnings, and revenue (sales) accounts have credit balances)
LO 3,4,5 BT: AN Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
Legal Notice
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rights reserved.
The data contained in these files are protected by copyright. This manual is
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The material provided herein may not be downloaded, reproduced, stored in a
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derivative works, or transmitted in any form or by any means, electronic,
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Financial Accounting, Seventh Canadian Edition
CHAPTER 4
Accrual Accounting Concepts
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
Explain the accrual basis of accounting and the reasons for adjusting entries.
Prepare adjusting entries for prepayments.
Prepare adjusting entries for accruals.
Prepare an adjusted trial balance and financial statements.
Prepare closing entries and a post-closing trial balance.
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES
AND BLOOM’S TAXONOMY
Item LO
BT
Item LO
BT
Item LO BT
Questions
1.
1
C
6.
2
C
11.
2,3
2.
1
AP
7.
2
C
12.
3.
1
C
8.
2
C
13.
4.
1
C
9.
2
C
5.
2
C
10.
2,3
C
Item LO
BT
Item LO
BT
C
16.
4,5
C
21.
5
K
2,3
C
17.
4,5
C
22.
5
K
3
AN
18.
5
K
14.
4
C
19.
5
C
15.
2,3,4
C
20.
5
C
Brief Exercises
1.
1
K
4.
2
AP
7.
3
AN
10.
3
AP
13.
5
AP
2.
1
AP
5.
2,3
AP
8.
3
AP
11.
4
AP
14.
5
AP
3.
2
AP
6.
3
AP
9.
3
AN
12.
4
AP
15.
5
K
Exercises
1.
1
AP
4.
2
AP
7.
2,3
AP
10.
2,3,4
AP
13.
5
AP
2.
1
AP
5.
2
AP
8.
2,3
AP
11.
4
AP
14.
5
AP
3.
1
C
6.
3
AP
9.
2,3
AP
12.
4
AP
13.
5
AP
Problems: Set A and B
1.
2
AP
4.
2,3
AP
7.
1
AN
10.
5
AP
2.
3
AP
5.
2,3
AP
8.
2,3,4
AP
11.
4,5
AP
3.
2,3
AP
6. 1,2,3,4 AP
9.
2,3,4
AP
12.
2,3,4
AN
1. 2,3,4,5 AP
2. 2,3,4,5 AP
Accounting Cycle Review
Cases
1.
1,2
C
3.
2,3
AN
5.
2
C
2.
1
AP
4.
1,2,3
E
6.
2,3,4
AP
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Financial Accounting, Seventh Canadian Edition
Legend: The following abbreviations will appear throughout the solutions manual file.
LO
Learning objective
BT
Bloom's Taxonomy
K
Knowledge
C
Comprehension
AP Application
AN Analysis
S
Synthesis
E
Evaluation
Level of difficulty
S
Simple
M
Moderate
C
Complex
Estimated time to prepare in minutes
Association to Advance Collegiate Schools of Business
Communication
Communication
Ethics
Ethics
Analytic
Analytic
Technology
Tech.
Diversity
Diversity
Reflective Thinking
Reflec. Thinking
CPA Canada Competency
Ethics
Professional and Ethical Behaviour
PS and DM
Problem-Solving and Decision-Making
Comm.
Communication
Self-Mgt.
Self-Management
Team & Lead
Teamwork and Leadership
Reporting
Financial Reporting
Stat. & Gov.
Strategy and Governance
Mgt. Accounting
Management Accounting
Audit
Audit and Assurance
Finance
Finance
Tax
Taxation
Difficulty:
Time:
AACSB
CPA CM
cpa-e001
cpa-e002
cpa-e003
cpa-e004
cpa-e005
cpa-t001
cpa-t002
cpa-t003
cpa-t004
cpa-t005
cpa-t006
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Financial Accounting, Seventh Canadian Edition
ANSWERS TO QUESTIONS
1.
Adjusting entries are made to adjust the accounts at the end of the period to
ensure revenues and expenses are recorded when they are earned or incurred.
When revenues and expenses should be recognized in the accounting records
is dictated by recognition criteria. Revenue is recognized or recorded when an
increase in future economic benefits arising from an increase in an asset or a
decrease in a liability has occurred in the course of ordinary activities. In
general, revenue recognition occurs when or as the performance obligation has
been satisfied. In a service company, revenue is considered to be earned when
the service is provided. In a merchandising company, revenue is considered to
be earned when the merchandise is sold (normally at the point of sale).
Expenses are recognized in the accounting records when there is a decrease in
future economic benefits related to a decrease in an asset or an increase in a
liability in the course of ordinary activities.
Expense recognition is linked to revenue recognition in that expenses are
recognized, wherever possible, in the period in which a company makes efforts
to generate revenues. This gives rise to adjusting entries so that revenues and
expenses can be recorded in the proper period.
LO 1 BT: C Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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2.
(a)
Financial Accounting, Seventh Canadian Edition
The five-step process to use to measure and report revenue is:
1.
2.
3.
4.
(b)
Identify the contract with the client or customer.
Identify the performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the performance obligations in the
contract.
5. Recognize revenue when (or as) the company satisfies the
performance obligations.
For the law firm:
1. The contract was created in March between the law firm and the client
when the engagement was accepted by the law firm.
2. The performance obligation in the contract is to provide legal services.
3. The transaction price is $8,000.
4. There is a single task and so there are no other obligations in the
contract that need to be allocated.
5. The revenue is recognized by the law firm once it satisfies the
obligation under the engagement and performs the work for the client
in April.
LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
3.
Expenses of $4,500 should be deducted from the revenues in April because
that is when the expenses were incurred and the revenues earned.
LO 1 BT: C Difficulty: S Time: 2 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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4.
(a)
(b)
(c)
Financial Accounting, Seventh Canadian Edition
The accrual-basis financial statements provide reporting of assets,
liabilities, and shareholders’ equity as well as revenues and expenses.
They include receivables and payables to ensure that revenues are
recorded when earned and expenses recorded when incurred in the
period revenue is generated. Receivables and payables do not exist under
the cash basis of accounting.
The cash-basis financial statements provide reliable reporting of cash
receipts and cash disbursements. No estimates are required, as is the
case with accrual-basis financial statements.
Companies using IFRS or ASPE cannot choose between the cash and
accrual basis of accounting for financial reporting purposes because
generally accepted accounting principles require the accrual basis. In
addition, the cash basis could allow for the manipulation of income by
delaying or speeding up the timing of cash flow.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
5.
(a)
(b)
Prepaid expenses are assets because they have a future benefit since
they were paid for before they are used or consumed.
As the benefit of the prepayment expires, (often with the passage of time)
the asset must be reduced and an expense recognized. This requires an
adjustment at the end of each accounting period, to expense the portion of
the prepaid that has expired (been used up) during the period.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
6.
(a)
(b)
Unearned revenue arises when cash is received for goods or services to
be provided in the future. It represents a liability because the cash has not
yet been earned—the company has a future obligation to provide the
goods or services.
Unearned revenues must be adjusted at the end of an accounting period
to reflect any revenues that have been earned.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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7.
Financial Accounting, Seventh Canadian Edition
No. Depreciation is the process of allocating the cost of a long-lived asset to
expense over its useful life. Depreciation results in the presentation of the
carrying amount (cost less accumulated depreciation) of the asset, not its
current value.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
8.
(a)
Depreciation expense is an expense account with a normal debit balance
and is reported on the income statement as part of the operating
expenses. This account shows the portion of the cost of a long-lived asset
that has expired during the current accounting period.
Accumulated depreciation is a contra asset account with a normal credit
balance that is reported on the statement of financial position as a
reduction of a depreciable asset (such as building and equipment). The
balance in the accumulated depreciation account is the total depreciation
that has been recognized from the date of acquisition of the depreciable
asset to the statement of financial position date.
(b)
Cost is the original cost of the asset when purchased.
The carrying amount is the original cost of the asset less its related
accumulated depreciation, and represents the portion of the asset that has
not yet been depreciated.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
9.
A contra asset account is an account with a credit balance that is deducted
from the related asset account on the statement of financial position. Using a
contra asset account, such as Accumulated Depreciation, enables disclosure of
both the original cost of the asset and the total estimated cost that has expired
or been used up to date. This information is useful to the financial statement
user who can determine how long until the asset is fully depreciated.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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10.
Financial Accounting, Seventh Canadian Edition
Yes, I agree. A “simple” adjusting entry affects one statement of financial
position account and one income statement account. An adjusting entry
reallocates amounts between a statement of financial position account and an
income statement account. For example: to record the expiration of insurance
the following entry would be recorded; a debit to Insurance Expense (an
income statement account) and a credit to Prepaid Insurance (a statement of
financial position account). Compound adjusting journal entries are also
possible which would affect more accounts, but at least one statement of
financial position account and one income statement account are always
affected whether a simple adjusting entry or a compound adjusting entry is
made.
LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
11.
Disagree. Adjusting entries never involve the Cash account. In making
adjusting entries for prepayments, the cash has already been paid or received
and recorded. The adjusting journal entry is prepared to reflect the fact that a
portion of the unearned revenue or prepaid expense arising in the past when
the cash flow occurred is now earned or incurred. In making adjusting entries
for accruals, we record the fact that, although the cash has not been paid or
received, revenue has been earned or an expense has been incurred. Again,
there is no impact on the Cash account because cash has not yet been
received or paid but is expected to be subsequently.
LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
12.
To ensure that the adjusting entry is properly calculated and prepared, the
preparer of the adjusting entry must first properly understand the original cash
payment transaction that lead to the recording of the prepayment. For example,
if you are preparing an adjusting entry to record the supplies on hand, you must
know first how much is already recorded.
On the other hand, in the case of an accrual, there is no cash payment to look
up in the accounts. Consequently, there is no original entry to examine in the
process of preparing an adjusting entry related to an accrual.
LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
13.
(a)
Yes, it does matter whether the adjusting entry is made on December 31.
If the interest is not accrued on December 31, then expenses (interest
expense) and liabilities (interest payable) will both be understated in that
year’s financial statements. In addition, expenses (interest expense) will
be overstated in the subsequent year, when the expense is recorded
(incorrectly) when paid on January 1. By not making this journal entry,
expenses will not be matched with the period in which the loan was
available for use.
(b)
The correct journal entries are as follows:
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Financial Accounting, Seventh Canadian Edition
Dec. 31 Interest Expense ..............................
Interest Payable.........................
100
Jan. 1
100
Interest Payable ..............................
Cash ..........................................
100
100
If no entry is made on Dec. 31, and interest expense is recorded on
January 1 when paid, interest expense will be understated by $100 and
interest payable will be understated by the same amount for the year
ended December 31, 2018.
LO 3 BT: AN Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
14.
Financial statements can be prepared from an adjusted trial balance because
the balances of all accounts have been adjusted to show the effects of all
financial events that have occurred during the accounting period. An
unadjusted trial balance is not up to date for prepayments and accruals.
LO 4 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
15.
(a)
(b)
Financial Accounting, Seventh Canadian Edition
Original transaction entries are made throughout the accounting period
when transactions arise. Adjusting entries are only recorded at the end of
the accounting period, prior to the preparation of the financial statements.
As well, adjusting entries never affect the Cash account and always result
in an adjustment to a statement of financial position account and an
income statement account. Transaction entries often result in a debit or
credit to Cash and can affect any account on the statement of financial
position or the income statement (or both).
Closing entries are required to reset the revenue and expense (income
statement) and dividend declared accounts to zero and to update the
balance in Retained Earnings to the ending balance as shown in the
statement of changes in equity. Unlike adjusting entries, which are
prepared before the financial statements are prepared and could be
prepared more than once per year (for example, monthly, quarterly),
closing entries are only prepared and posted after the year-end financial
statements have been completed.
LO 2,3,4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
16.
The unadjusted, adjusted, and post-closing trial balances are similar in that
they prove the equality of the total debit and total credit balances. Another
similarity between the unadjusted and adjusted trial balances is that they are
prepared at the end of an accounting period.
Where trial balances differ is that the unadjusted trial balance is prepared
before any adjusting entries have been recorded or posted. An adjusted trial
balance is prepared after the adjusting entries have been posted to the
accounts. The financial statements are prepared from the adjusted trial
balance. After the financial statements have been prepared, closing entries are
prepared and posted. The post-closing trial balance is then prepared and used
to form the basis of the opening balances for the next accounting period. Unlike
the adjusted trial balance which will list temporary (revenue, expense, dividend
declared) account balances prior to recording the closing entries, a post-closing
trial balance will not list temporary account balances as these have now been
closed out to the Retained Earnings account.
16. (b) (continued)
Unadjusted and adjusted trial balances are prepared whenever financial
statements are prepared but a post-closing trial balance is prepared only at the
end of the year.
LO 4,5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
17.
The retained earnings balance on the unadjusted and adjusted trial balances
are the same since the account does not yet reflect the changes that arise from
the recording of closing entries. After the adjusted trial balance and financial
statements are prepared, closing entries are recorded. These will change the
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
retained earnings balance by updating it for the effect of any net income or loss
and dividends declared. Consequently, the retained earnings balance on the
post-closing trial balance will be different from the balance shown on the
adjusted trial balance.
LO 4,5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
18.
Closing entries are prepared to transfer temporary account balances to retained
earnings, a permanent account, so retained earnings will show an up-to-date
amount that includes the effect of revenues, expenses, and dividends declared
for the year. Secondly, closing entries produce a zero balance in each
temporary account so that the temporary accounts are ready for the next
accounting period, where only transactions relating to that period are recorded
in them.
LO 5 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
19.
The Dividends Declared account is not closed into the Income Summary
account along with the expense accounts because it is not an expense; it was
not incurred for the purpose of generating revenue and does not appear on the
income statement. Dividends Declared represent a distribution of retained
earnings and is reported on the statement of changes in equity. The Dividends
Declared account is also a temporary account and therefore requires a closing
entry.
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
20.
Financial Accounting, Seventh Canadian Edition
The Income Summary account is used in the closing process to avoid having
too much detail in the Retained Earnings account. Only the net result of the
revenues less expenses will be recorded as a closing entry from the Income
Summary account to the Retained Earnings account. Before closing the Income
Summary account, the net balance is compared to the income statement to
ensure that the amounts used in closing the revenue and expense temporary
accounts are complete and accurate.
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
21.
(a)
(1)
(2)
(3)
(4)
Net income:
(Dr) Individual revenue accounts and (Cr) Income Summary
(Dr) Income Summary and (Cr) Individual expense accounts
(Dr) Income Summary and (Cr) Retained Earnings
(Dr) Retained Earnings and (Cr) Dividends Declared
(b)
(1)
(2)
(3)
(4)
Net loss:
(Dr) Individual revenue accounts and (Cr) Income Summary
(Dr) Income Summary and (Cr) Individual expense accounts
(Dr) Retained Earnings and (Cr) Income Summary
(Dr) Retained Earnings and (Cr) Dividends Declared
Note that it is only step 3 that differs between the two situations shown in (a)
and (b) and the Income Summary is not involved in the fourth closing entry.
LO 5 BT: K Difficulty: S Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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22.
Financial Accounting, Seventh Canadian Edition
Steps in the accounting cycle that may be done on a daily basis include:
1. Analyzing business transactions
2. Journalizing the transactions
Steps in the accounting cycle that are done on a periodic basis include:
3. Posting to the general ledger accounts
4. Preparing a trial balance
5. Journalizing and posting adjusting entries (prepayments and accruals)
6. Preparing an adjusted trial balance
7. Preparing the financial statements: income statement, statement of
changes in equity, statement of financial position, and statement of cash
flows
Steps in the accounting cycle that are usually only done at the end of the
company’s accounting period include:
8. Journalizing and posting closing entries
9. Preparing a post-closing trial balance
LO 5 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 4-1
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
Cash
–$ 100
0
0
+800
–5,000
0
+1,000
0
+500
0
0
Net Income
$
0
–75
+1,000
0
0
–1,000
0
–50
0
+200
–250
LO 1 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 4-2
(a)
Accrual
Basis
1. Collected $200 cash from customers for
services provided in August.
$
(b)
Cash
Basis
0
$200
2. Collected $500 cash from customers
for services provided in September.
500
500
3. Billed customers $600 for services
provided in September.
600
0
4. Provided $100 of services to customers
who paid in advance in August.
100
0
0
100
$1,200
$800
5. Received $100 from customers in advance
for services to be provided in October.
Total revenue
LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 4-3
(a)
Jan. 11
Supplies .............................................
Accounts Payable........................
(b)
Supplies Used = $1,500 + $1,800 – $1,100 = $2,200
(c)
Jan. 31
Supplies Expense ..............................
Supplies ......................................
1,800
1,800
2,200
2,200
(d)
Open. Bal.
Jan. 11
Jan. 31 Bal.
Supplies
1,500
1,800
Jan. 31 Adj.
1,100
Supplies Expense
Jan. 31 Adj. 2,200
2,200
LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 4-4
(a)
(b)
Jan. 2
Vehicles.............................................
Cash ............................................
50,000
50,000
The journal entry for the years 2018 and 2019 will be the same:
Dec. 31
Depreciation Expense ........................
10,000
Accumulated Depreciation—Vehicles
($50,000 ÷ 5 = $10,000 per year)
10,000
(c)
CLAYMORE CORPORATION
Statement of Financial Position (partial)
December 31
2019
Property, plant, and equipment
Vehicles
Less: Accumulated depreciation
Carrying amount
$50,000
20,000
$30,000
2018
$50,000
10,000
$40,000
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 4-5
(a)
(1) Bere Ltd.
June
1
Prepaid Insurance .......................................
Cash...................................................
6,000
6,000
(2) Safety Insurance Corp.
June
(b)
1
Cash............................................................
Unearned Revenue ............................
6,000
6,000
Expired in 2018 = $6,000 × 7/12 = $3,500
Unexpired at December 31, 2018 = $6,000 × 5/12 = $2,500
(c)
(1) Bere Ltd.
Dec. 31
Insurance Expense .......................................
Prepaid Insurance ................................
3,500
3,500
(2) Safety Insurance Corp.
Dec. 31
Unearned Revenue .....................................
Insurance Revenue ............................
3,500
3,500
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BRIEF EXERCISE 4-5 (CONTINUED)
(d)
Bere Ltd.
Prepaid Insurance
6,000
Dec. 31 Adj. 3,500
Dec. 31 Bal. 2,500
June 1
Insurance Expense
Dec. 31 Adj. 3,500
Safety Insurance Corp.
Unearned Revenue
June 1
Dec. 31 Adj. 3,500
Dec. 31 Bal.
6,000
Insurance Revenue
Dec. 31 Adj.
3,500
2,500
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BRIEF EXERCISE 4-6
(a)
(b)
(c)
Oct. 27
Oct. 31
Nov. 3
Salaries Expense ..............................................
Cash .........................................................
5,000
Salaries Expense (Oct. 29-31: $1,000 × 3 days)
Salaries Payable ......................................
3,000
Salaries Expense (Nov. 1-2: $1,000 × 2 days) ..
Salaries Payable ...............................................
Cash .........................................................
2,000
3,000
5,000
3,000
5,000
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BRIEF EXERCISE 4-7
(a)
Nov. 30
Accounts Receivable.........................................
Service Revenue ......................................
375
375
(b)
No, Zieborg will not have to make a journal entry on December 1 when it
prepares the invoice because the November 30 adjusting entry already
recorded the amount.
(c)
Jan. 10
Cash .................................................................
Accounts Receivable ................................
375
375
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BRIEF EXERCISE 4-8
(a)
(b)
2018
July
1
2018
Dec. 31
2019
Dec. 31
(c)
2020
Jan.
1
Vehicles ...................................................
Bank Loan Payable .........................
Cash ...............................................
50,000
Interest Expense ($40,000 × 6% × 6/12)
Interest Payable ..............................
1,200
Interest Expense ($40,000 × 6%) .............
Interest Payable ..............................
2,400
Bank Loan Payable ..................................
Interest Payable ($1,200 + $2,400) ..........
Cash ................................................
40,000
3,600
40,000
10,000
1,200
2,400
43,600
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BRIEF EXERCISE 4-9
(a)
(b)
2018
July
1
2018
Dec. 31
2019
Dec. 31
(c)
(d)
2020
Jan.
1
Bank Loan Receivable .................................
Cash ...................................................
40,000
Interest Receivable ($40,000 × 6% × 6/12)
Interest Revenue .................................
1,200
Interest Receivable ($40,000 × 6%) .............
Interest Revenue .................................
2,400
Cash ............................................................
Interest Receivable ($1,200 + $2,400)
Bank Loan Receivable ........................
43,600
40,000
1,200
2,400
3,600
40,000
The total amount collected by the Canada Bank corresponds to the total paid
by Nahkooda. The total amount of interest revenue earned by the Canada Bank
is the same as the total interest expense incurred by Nahkooda. The primary
differences are that the Canada Bank records an asset (bank loan receivable
and interest receivable) and revenue (interest revenue) while Nahkooda
records a liability (bank loan payable and interest payable) and expense
(interest expense).
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BRIEF EXERCISE 4-10
(a)
$400 = $2,600 – $2,200
(b)
$3,500 = $400 (2016 payable balance) + $3,600 – $500. Notice how the
change in the payable each year indicates the difference between the expense
and the cash paid. In other words, in this year, the company had to pay off last
year’s tax of $400 but did not pay off $500 of this year’s tax. Since this year’s
tax was $3,600, only $3,100 of this was paid off. This $3,100 along with the
$400 relating to last year totals $3,500.
(c)
$4,400 = $4,200 – $500 (2017 payable balance) + $700 (2018 payable
balance). The $4,200 that was paid would have included $500 relating to the
prior year so the remainder of $3,700 would have related to the current year.
Since $700 of the current year’s tax is unpaid, the total tax expense for this
year must have been $3,700 + $700.
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BRIEF EXERCISE 4-11
OROMOCTO CORPORATION
Adjusted Trial Balance
February 28, 2018
Cash ..................................................................................
Accounts receivable ...........................................................
Supplies .............................................................................
Prepaid insurance ..............................................................
Equipment ..........................................................................
Accumulated depreciation—equipment ..............................
Accounts payable ...............................................................
Salaries payable.................................................................
Income tax payable ............................................................
Common shares .................................................................
Retained earnings ..............................................................
Dividends declared.............................................................
Fees earned .......................................................................
Salaries expense ................................................................
Rent expense .....................................................................
Depreciation expense ........................................................
Supplies expense ...............................................................
Insurance expense .............................................................
Utilities expense .................................................................
Income tax expense...........................................................
Totals ............................................................................
Debit
$ 18,000
28,000
1,000
2,500
23,450
Credit
$ 5,400
13,000
3,000
4,550
10,000
21,000
2,000
89,500
46,400
6,000
4,400
4,000
3,500
2,400
4,800
$146,450
0000 000
$146,450
(Total debits = Total credits)
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BRIEF EXERCISE 4-12
(a)
OROMOCTO CORPORATION
Income Statement
Year Ended February 28, 2018
Revenues
Fees earned .................................................... ....................
$89,500
Expenses
Salaries expense ................................................. ... $46,400
Rent expense ...................................................... ..... 6,000
Depreciation expense ......................................... ....... 4,400
Supplies expense ................................................ ... 4,000
Insurance expense .............................................. ... 3,500
Utilities expense .................................................. .... 2,400
Total expenses .......................................
Income before income tax ........................................
Income tax expense .................................................
Net income ...............................................................
66,700
22,800
4,800
$18,000
[Revenues – Expenses = Net income or (Loss)]
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BRIEF EXERCISE 4-12
(b)
OROMOCTO CORPORATION
Statement of Changes in Equity
Year Ended February 28, 2018
Common
Shares
Retained
Earnings
Balance, March 1, 2017 .................................................................
$ 5,000
$21,000
Issued common shares ..................................................................
5,000
Net income .....................................................................................
18,000
Dividends declared.........................................................................
000 000
(2,000)
Balance, February 28, 2018 ...........................................................
$10,000
$37,000
Total
Equity
$26,000
5,000
18,000
(2,000)
$47,000
(Beginning equity ± Changes to equity = Ending equity)
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BRIEF EXERCISE 4-12 (CONTINUED)
(c)
OROMOCTO CORPORATION
Statement of Financial Position
February 28, 2018
Assets
Current Assets
Cash .......................................................................
Accounts receivable ...............................................
Supplies ..................................................................
Prepaid insurance ..................................................
Total current assets .......................................
Property, plant, and equipment
Equipment ..............................................................
Less: Accumulated depreciation—equipment........
Total assets ....................................................................
$ 18,000
28,000
1,000
2,500
49,500
$23,450
5,400
18,050
$67,550
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ...................................................
Salaries payable .....................................................
Income tax payable ................................................
Total current liabilities ....................................
Shareholders’ equity
Common shares .....................................................
Retained earnings ..................................................
Total shareholders’ equity ..............................
Total liabilities and shareholders’ equity .........................
$13,000
3,000
4,550
20,550
$10,000
37,000
47,000
$67,550
(Assets = Liabilities + Shareholders’ equity)
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BRIEF EXERCISE 4-13
2018
Feb. 28 Fees Earned .................................................
Income Summary ...................................
89,500
28 Income Summary ..........................................
Salaries Expense ...................................
Rent Expense.........................................
Depreciation Expense ............................
Supplies Expense ..................................
Insurance Expense ................................
Utilities Expense.....................................
Income Tax Expense .............................
71,500
28 Income Summary ..........................................
Retained Earnings..................................
18,000
28 Retained Earnings ........................................
Dividends Declared ................................
2,000
89,500
46,400
6,000
4,400
4,000
3,500
2,400
4,800
18,000
2,000
(Income statement accounts are closed to the Income Summary account)
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BRIEF EXERCISE 4-14
(a)
Service revenue ............................................
Expenses
Salaries expense....................................
Repairs and maintenance expense ........
Supplies expense ...................................
Utilities expense .....................................
Income tax expense ...............................
Net income....................................................
$126,000
$65,000
15,000
6,000
2,000
5,700
93,700
$ 32,300
(Revenues increase net income and expenses decrease net income)
(b)
Nov. 30 Service Revenue ....................................
Income Summary ...................................
126,000
30 Income Summary ..........................................
Salaries Expense ...................................
Repairs and Maintenance Expense .......
Supplies Expense ..................................
Utilities Expense.....................................
Income Tax Expense .............................
93,700
30 Income Summary ..........................................
Retained Earnings..................................
32,300
30 Retained Earnings ........................................
Dividends Declared ................................
5,000
126,000
65,000
15,000
6,000
2,000
5,700
32,300
5,000
(Income statement accounts are closed to the Income Summary account)
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BRIEF EXERCISE 4-14 (CONTINUED)
(c)
Service Revenue
Nov 30 Bal. 126,000
Nov 30 CE1 126,000
Nov 30 Bal.
0
Salaries Expense
Nov 30 Bal. 65,000
Nov 30 CE2 65,000
Nov 30 Bal.
0
Supplies Expense
Nov 30 Bal. 6,000
Nov 30 CE2
Nov 30 Bal.
0
Utilities Expense
2,000
Nov 30 CE2
Nov 30 Bal.
0
6,000
Nov 30 Bal.
2,000
Income Tax Expense
Nov 30 Bal
5,700
Nov 30 CE2
Nov 30 Bal.
5,700
0
Dividends Declared
5,000
Nov 30 CE4
Nov 30 Bal.
5,000
0
Nov 30 Bal
Income Summary
Nov 30 CE2 93,700 Nov 30 CE1 126,000
Bal.
32,300
Nov 30 CE3 32,300
Nov 30 Bal.
0
Retained Earnings
Dec. 1
50,000
Nov 30 CE4 5,000 Nov 30 CE3 32,300
Nov 30 Bal. 77,300
Repairs and Maintenance Expense
Nov 30 Bal. 15,000
Nov 30 CE2 15,000
Nov 30 Bal.
0
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BRIEF EXERCISE 4-15
(a)
(c)
(e)
(g)
(i)
(k)
(m)
Yes
Yes
Yes
Yes
No
Yes
No
(b)
(d)
(f)
(h)
(j)
(l)
Yes
Yes
No
No
Yes
No
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SOLUTIONS TO EXERCISES
EXERCISE 4-1
1.
Since the performance by WestJet is not complete until the flight actually occurs,
revenue should not be recognized until December. WestJet should recognize the
revenue in December when the customer has been provided with the flight.
2.
Revenue should be recognized as each magazine is delivered (on a monthly basis).
3.
Revenue should be recognized on a per game basis over the season from April to
October, since that is when the games are provided to the fans.
4.
Interest revenue should be accrued and recognized by RBC Financial Group evenly
over the term of the loan.
5.
Revenue should be recognized when the sweater is shipped to the customer in
September.
(Revenues are recognized when they are earned and expenses are recognized when they are
incurred.)
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EXERCISE 4-2
Service revenue
Expenses
Operating expenses
Insurance expense
Income before income tax
Income tax expense
Net income
(c)
(a)
Accrual Basis
$52,000
(b)
Cash Basis
$44,000
31,000
1,000
32,000
27,500
2,000
29,500
20,000
3,000
$17,000
14,500
$14,500
The accrual basis of accounting provides more useful information for decision
makers because it recognizes revenue when earned and expenses when incurred.
This provides a better measurement of performance because it records what has
happened regardless of the movement of cash. This also enhances the predictive
ability of the income statement.
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EXERCISE 4-3
(a)
Transaction
Cash Basis
Accrual Basis
1
Revenue from services
Revenues are recorded
when they are collected
Revenues are recorded when
they are earned
2
Purchase equipment
Equipment is expensed
when the cash is paid out
Equipment is an asset that is
depreciated over its useful life
3
Pay insurance
Full amount expensed
when cash is paid
Insurance is a prepayment until
consumed and expensed
4
Employee salaries
Expensed when paid
Accrued when owed to
employees
The proper accrual accounting would include:
1.
2.
3.
4.
The recognition of revenue from providing consulting services when earned.
The recognition of equipment in the accounts when purchased, followed by recording
depreciation expense over the years of use of the equipment.
The recognition of the payment for insurance as Prepaid Insurance which will then
be allocated to Insurance Expense during the periods of benefit, over the next two
years.
Any unpaid salaries at the end of the accounting period are recognized as expenses
and as salaries payable.
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EXERCISE 4-3 (CONTINUED)
(b)
Due to the terms of payment offered to customers (90 days) and the timing of
payments for operating expenses, it is not surprising that the business has
experienced delays in cash inflows compared to cash outflows. In addition, when
prepayments are involved, large sums of cash are paid out for things like equipment
or for prepaid insurance, which require immediate payment but will become
expenses over several years. Consequently, it is highly probable, particularly at the
start of a new business, that net income is realized, while at same time, cash
resources are scarce. Quite often, new businesses require financing to cover cash
shortfalls until they have been able to accumulate sufficient cash to cover their
business activities.
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EXERCISE 4-4
(a)
2018
June
Aug.
Sept.
Nov.
Dec.
(b)
2018
Dec.
1
31
4
30
5
31
31
31
.
31
31
Prepaid Insurance .................................
Cash ............................................
1,800
Prepaid Rent .........................................
Cash ............................................
6,500
Cash .....................................................
Unearned Revenue .....................
3,600
Prepaid Services ...................................
Cash ............................................
2,000
Cash......................................................
Unearned Revenue .....................
1,500
Insurance Expense ...............................
Prepaid Insurance........................
($1,800 × 7/12 months = $1,050)
1,050
Rent Expense........................................
Prepaid Rent ................................
($6,500 × 4/5 months = $5,200)
5,200
Unearned Revenue ...............................
Sponsorship Revenue .................
($3,600 × 4/9 games = $1,600)
1,600
Repairs and Maintenance Expense ......
Prepaid Services..........................
1,000
1,800
6,500
3,600
2,000
1,500
1,050
5,200
1,600
Unearned Revenue ...............................
1,025
Sponsorship Revenue .................
($1,500 – $475 not played = $1,025 played)
1,000
1,025
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EXERCISE 4-4 (CONTINUED)
(c)
Prepaid Insurance
June 1
1,800
Dec. 31 Adj.
Dec. 31 Bal.
750
Aug. 31
Dec. 31 Bal.
Prepaid Rent
6,500
Dec. 31 Adj.
1,300
Unearned Revenue
Sept. 4
Dec. 5
Dec. 31 Adj.
1,600
Dec. 31 Adj.
1,025
Dec. 31 Bal.
Prepaid Services
2,000
Dec. 31 Adj.
Dec. 31 Bal.
1,000
Insurance Expense
Dec. 31 Adj.
1,050
1,050
Dec. 31 Adj.
Rent Expense
5,200
5,200
3,600
1,500
Sponsorship Revenue
Dec. 31 Adj.
Dec. 31 Adj.
1,600
1,025
Dec. 31 Bal.
2,625
2,475
Repairs and Maintenance Expense
Dec. 31 Adj.
1,000
Nov . 30
1,000
Note: The Cash account has not been included in this solution, as per the instructions.
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EXERCISE 4-5
(a)
2018
Dec. 31
31
Depreciation Expense ..........................................
Accumulated Depreciation—Vehicles ............
($33,000 ÷ 3 = $11,000 per year)
11,000
Depreciation Expense ..........................................
Accumulated Depreciation—Equipment ........
($15,000 ÷ 5 × 6/12 = $1,500)
1,500
11,000
1,500
(b)
Cost
Accumulated depreciation
$33,000 ÷ 3 × 2
$15,000 ÷ 5 × 6/12
Carrying amount
Vehicles
$33,000
Equipment
$15,000
22,000
000 000
$11,000
1,500
$13,500
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EXERCISE 4-6
(a)
2018
Dec.
31
31
31
31
31
(b)
2019
Jan.
21
7
1
4
2
Utilities Expense...................................................
Accounts Payable .......................................
425
Salaries Expense .................................................
Salaries Payable .........................................
($3,500 × 1/7 days = $500)
500
Interest Expense ..................................................
Interest Payable ..........................................
($45,000 × 5% × 1/12 months = $188 (rounded))
188
Accounts Receivable............................................
Fees Earned ...............................................
300
Accounts Receivable............................................
Rent Revenue ............................................
6,000
Accounts Payable ................................................
Cash ...........................................................
425
Salaries Payable ..................................................
Salaries Expense .................................................
Cash ...........................................................
500
3,000
Interest Payable ...................................................
Cash ...........................................................
188
Cash.....................................................................
Accounts Receivable ..................................
300
Cash.....................................................................
Accounts Receivable ..................................
6,000
425
500
188
300
6,000
425
3,500
188
300
6,000
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EXERCISE 4-7
(a)
July
2
7
14
15
21
28
(b)
July
31
31
31
31
Prepaid Rent ........................................................
Cash ...........................................................
1,500
Supplies ...............................................................
Accounts Payable .......................................
200
Cash ....................................................................
Accounts Receivable ..................................
($6,550  2)
3,275
Cash ....................................................................
Bank Loan Payable.....................................
1,000
Cash ....................................................................
Unearned Revenue.....................................
1,000
Accounts Receivable............................................
Service Revenue ........................................
1,500
Accounts Receivable............................................
Service Revenue ........................................
800
Rent Expense.......................................................
Prepaid Rent ...............................................
($1,500 ÷ 2 = $750)
750
Supplies Expense ................................................
Supplies ......................................................
($1,200 + $200 − $500 = $900)
900
Depreciation Expense ..........................................
Accumulated Depreciation—Equipment .....
($15,000 ÷ 5 x 1/12)
250
1,500
200
3,275
1,000
1,000
1,500
800
750
900
250
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EXERCISE 4-7 (CONTINUED
July
31
31
31
Interest Expense ..................................................
Interest Payable ..........................................
($1,000 × 5% × ½ x 1/12 months)
2
Salaries Expense .................................................
Salaries Payable..........................................
2,500
Unearned Revenue .............................................
Service Revenue .........................................
2,000
2
2,500
2,000
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EXERCISE 4-8
1.
2.
3.
4.
5.
6.
Mar. 031
31
31
31
31
31
Depreciation Expense ..........................................
Accumulated Depreciation—Equipment ......
($21,600 ÷ 4 × 3/12 months)
1,350
Unearned Revenue ..............................................
Rent Revenue ($9,600 × 2/3) ......................
6,400
Interest Expense ..................................................
Interest Payable ..........................................
($20,000 × 6% × 1/12 months)
100
Supplies Expense .................................................
Supplies ($2,800 – $850) ............................
1,950
Insurance Expense ..............................................
Prepaid Insurance .......................................
($14,400 × 3/12)
3,600
Income Tax Expense ............................................
Income Tax Payable ....................................
3,200
1,350
6,400
100
1,950
3,600
3,200
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EXERCISE 4-9
Net Income
Total Assets
Incorrect balances
$90,000
$170,000
Adjustments:
1. Salaries
2. Rent
3. Depreciation
(10,000)
4,000
(9,000)
(9,000)
Correct balances
$75,000
$161,000
Total Liabilities
$70,000
10,000
(4,000)
00000 0
$76,000
Total
Shareholders’
Equity
$100,000
(10,000)
4,000
(9,000)
$ 85,000
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EXERCISE 4-10
(a)
December entry: Cash .....................................................
Unearned Revenue ......................
1,600
January entry:
1,600
Unearned Revenue..............................
Service Revenue ..........................
Adj.
Unearned Revenue
Jan. 1 Bal.
1,600
Jan. 31 Bal.
1,600
1,600
2,350
750
The balance in Unearned Revenue on January 1, 2018 was $2,350
($750 + $1,600).
(b)
Journal entry to record depreciation:
Depreciation Expense...........................
Accumulated Depreciation ...........
120
120
1 month = $120; Annual depreciation = $1,440 ($120 × 12)
Number of months depreciated = accumulated depreciation ($3,000)  monthly
depreciation ($120) = 25 months or 2 years, 1 month
Therefore, the equipment is 2 years, 1 month old. It would have been purchased on
January 1, 2016.
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EXERCISE 4-10 (CONTINUED
(c)
Journal entry to adjust insurance: Insurance Expense.....
Prepaid Insurance .
400
400
Since the prepaid insurance is $1,200, we can assume that 3 months ($1,200 ÷ $400
= 4) of the policy remain. Consequently, if it expires at $400 per month, then the
policy is $3,600 ÷ $400 = 9 months old and it was purchased on May 1, 2017.
Prepaid Insurance
May 1, 2017
4,800 May 1 to
Dec. 31 Adj.
Dec. 31, 2017 Bal. 1,600
Jan. 31 Adj.
Jan. 31, 2018 Bal. 1,200
3,200
400
The original insurance policy premium was $4,800 ($400 × 12). The monthly
adjustments made May 1 through December 31 totalled $3,200 ($400 × 8).
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EXERCISE 4-10 (CONTINUED)
(d)
Journal entry to adjust supplies: Supplies Expense ......................
Supplies ..............................
Supplies Expense
Adj.
Jan. 31 Bal.
950
950
Jan. 1 Bal.
Purchase
Jan. 31 Bal.
950
950
Supplies
900
750 Adj.
700
950
Derive the balance by working backward up through the T account. Therefore,
the balance in Supplies on January 1 was $900 ($700 + $950 – $750).
(e)
Journal entry to record income tax payable:
Income Tax Expense ................
Income Tax Payable...........
Income Tax Expense
Adj.
Jan. 31 Bal.
100
100
150
Income Tax Payable
Jan. 1 Bal.
Payment
100 Adj.
Jan. 31 Bal.
150
150
100
150
Derive the balance by working backward up through the T account. The balance in Income
Tax Payable on January 1 was $150 ($150 − $100 + $100). It is assumed
that income tax instalments are paid monthly and that the balance owing at December 31
(January 1) was the adjustment required at year-end after the income tax return
was prepared. This balance owing must be paid within three months of the company’s yearend.
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EXERCISE 4-11
FRASER VALLEY SERVICES LTD.
Adjusted Trial Balance
August 31, 2018
Debit
Cash .................................................................................................
$ 11,430
Accounts receivable .........................................................................
18,225
Supplies ............................................................................................
3,400
Prepaid insurance.............................................................................
3,450
Equipment ........................................................................................
25,600
Accumulated depreciation—equipment ............................................
Accounts payable .............................................................................
Salaries payable ...............................................................................
Interest payable ................................................................................
Rent payable ....................................................................................
Income tax payable ..........................................................................
Unearned revenue ............................................................................
Bank loan payable, due 2021 ...........................................................
Common shares ...............................................................................
Retained earnings ............................................................................
Dividends declared ...........................................................................600
Service revenue................................................................................
Salaries expense ..............................................................................
19,200
Rent expense ...................................................................................
15,000
Depreciation expense .......................................................................
2,275
Supplies expense .............................................................................
1,750
Interest expense ...............................................................................
1,500
Insurance expense ...........................................................................
1,100
Income tax expense .........................................................................
2,000
Totals .....................................................................
$105,530
Credit
$ 5,905
2,800
2,200
1,500
1,250
1,500
700
25,000
5,000
5,400
54,275
000 0000
$105,530
(Total debits = Total credits)
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EXERCISE 4-12
(a)
FRASER VALLEY SERVICES LTD
Income Statement
Year Ended August 31, 2018
Revenues
Service revenue ....................................................................
Expenses
Salaries expense ..................................................................
Rent expense .......................................................................
Depreciation expense ...........................................................
Supplies expense .................................................................
Interest expense ...................................................................
Insurance expense ...............................................................
Total expenses ............................................................
Income before income tax .............................................................
Income tax expense ......................................................................
Net income ....................................................................................
$54,275
$19,200
15,000
2,275
1,750
1,500
1,100
40,825
13,450
2,000
$11,450
[Revenues – Expenses = Net income or (Loss)]
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EXERCISE 4-12 (CONTINUED
(b)
FRASER VALLEY SERVICES LTD.
Statement of Changes in Equity
Year Ended August 31, 2018
Balance, September 1, 2017.........................
Issued common shares .................................
Net income ....................................................
Dividends declared .......................................
Balance, August 31, 2018 .............................
Common
Shares
$4,000
1,000
00 000
$5,000
Retained
Earnings
$ 5,400
11,450
(600)
$16,250
Total
Equity
$ 9,400
1,000
11,450
(600)
$21,250
(Beginning equity ± Changes to equity = Ending equity)
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EXERCISE 4-12 (CONTINUED)
(c)
FRASER VALLEY SERVICES LTD.
Statement of Financial Position
August 31, 2018
Assets
Current assets
Cash ..............................................................................................
Accounts receivable.......................................................................
Supplies .........................................................................................
Prepaid insurance ..........................................................................
Total current assets ..............................................................
Property, plant, and equipment
Equipment ..................................................................
$25,600
Less: Accumulated depreciation—equipment............
5,905
Total assets ............................................................................................
$11,430
18,225
3,400
3,450
36,505
19,695
$56,200
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ..........................................................................
Salaries payable ............................................................................
Interest payable .............................................................................
Rent payable .................................................................................
Income tax payable........................................................................
Unearned revenue .........................................................................
Total current liabilities ...........................................................
Non-current liabilities
Bank loan payable .........................................................................
Total liabilities .......................................................................
Shareholders’ equity
Common shares .........................................................
$ 5,000
Retained earnings ......................................................
16,250
Total shareholders’ equity .....................................................
Total liabilities and shareholders’ equity .................................................
$ 2,800
2,200
1,500
1,250
1,500
700
9,950
25,000
34,950
21,250
$56,200
(Assets = Liabilities + Shareholders’ equity)
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EXERCISE 4-13
(a)
Dec.
31
31
31
31
Service Revenue ..............................................
Interest Revenue ..............................................
Income Summary ....................................
396,000
9,000
Income Summary..............................................
Salaries Expense .....................................
Office Expense ........................................
Depreciation Expense ..............................
Utilities Expense ......................................
Interest Expense ......................................
Income Tax Expense ...............................
330,400
Income Summary..............................................
Retained Earnings ...................................
74,600
Retained Earnings ............................................
Dividends Declared ..................................
10,500
405,000
240,000
21,500
20,000
19,000
11,250
18,650
74,600
10,500
(Income statement accounts are closed to the Income Summary account)
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EXERCISE 4-13 (CONTINUED
(b)
Income Summary
Dec. 31 CE2 330,400 Dec. 31 CE1
Bal.
Dec. 31 CE3 74,600
Dec. 31 Bal.
Retained Earnings
Jan. 1 Bal.
Dec. 31 CE4 10,500 Dec. 31 CE3
Dec. 31 Bal.
Dividends Declared
Dec. 31 Bal.
10,500
Dec. 31 CE4
Dec. 31 Bal.
0
Salaries Expense
Dec.31 Bal. 240,000
405,000
Dec. 31 CE2 240,000
74,600 Dec. 31 Bal.
0
Office Expense
0
Dec. 31 Bal.
21,500
Dec. 31 CE2 21,500
Dec. 31 Bal.
0
185,000
Depreciation Expense
74,600
Dec. 31 Bal.
20,000
249,100
Dec. 31 CE2 20,000
Dec. 31 Bal.
0
Dec. 31 Bal.
Service Revenue
Dec.31 Bal. 396,000
Dec. 31 CE1 396,000
Dec.31 Bal.
0
Interest Revenue
Dec. 31 Bal.
Dec 31 CE1 9,000
Dec.31 Bal.
Utilities Expense
10,500
19,000
Dec. 31 CE2
Dec. 31 Bal.
0
Interest Expense
Dec. 31 Bal.
11,250
Dec. 31 CE2
9,000
19,000
Dec. 31 Bal.
11,250
0
Income Tax Expense
0
Dec. 31 Bal.
18,650
Dec. 31 CE2
Dec. 31 Bal.
18,650
0
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EXERCISE 4-14
(a) 2018
Aug. 31
31
031
31
Service Revenue ......................................
Income Summary ............................
54,275
Income Summary ......................................
Salaries Expense .............................
Rent Expense ..................................
Depreciation Expense ......................
Supplies Expense ............................
Interest Expense ..............................
Insurance Expense ..........................
Income Tax Expense .......................
42,825
Income Summary ......................................
Retained Earnings ...........................
11,450
Retained Earnings ....................................
Dividends Declared ..........................
600
54,275
19,200
15,000
2,275
1,750
1,500
1,100
2,000
11,450
600
(Income statement accounts are closed to the Income Summary account)
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EXERCISE 4-14 (CONTINUED
(b)
FRASER VALLEY SERVICES LTD.
Post-Closing Trial Balance
August 31, 2018
Cash ..................................................................................
Accounts receivable ..........................................................
Supplies ............................................................................
Prepaid insurance .............................................................
Equipment .........................................................................
Accumulated depreciation—equipment .............................
Accounts payable ..............................................................
Salaries payable ................................................................
Interest payable .................................................................
Rent payable .....................................................................
Income tax payable ............................................................
Unearned revenue .............................................................
Bank loan payable .............................................................
Common shares ................................................................
Retained earnings .............................................................
Totals ............................................................................
Debit
$11,430
18,225
3,400
3,450
25,600
00000 0
$62,105
Credit
$ 5,905
2,800
2,200
1,500
1,250
1,500
700
25,000
5,000
16,250
$62,105
(Total debits = Total credits)
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SOLUTIONS TO PROBLEMS
PROBLEM 4-1A
1. (a)
(b)
2. (a)
(b)
3. (a)
(b)
4. (a)
(b)
5. (a)
(b)
Jan.
2 Supplies..................................................
Cash .................................................
4,100
Dec. 31 Supplies Expense ($4,100 – $700) ........
Supplies ............................................
3,400
Apr.
4,100
3,400
1 Vehicles ..................................................
Cash .................................................
Bank Loan Payable ...........................
45,000
Dec. 31 Depreciation Expense ............................
Accumulated Depreciation—Vehicles
($45,000 ÷ 5 years × 9/12 months)
6,750
Aug.
3,600
1 Prepaid Insurance ..................................
Cash .................................................
5,000
40,000
6,750
3,600
Dec. 31 Insurance Expense ($3,600 × 5/12 months)
Prepaid Insurance .............................
1,500
Nov.
9 Cash .......................................................
Unearned Revenue ...........................
1,600
Dec. 31 Unearned Revenue ($1,600 × ½) ...........
Service Revenue ..............................
800
Dec.
1,500
1,600
800
1 Prepaid Rent ..........................................
Cash .................................................
2,400
Dec. 31 Rent Expense .........................................
Prepaid Rent .....................................
1,200
2,400
1,200
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PROBLEM 4-2A
1. (a)
(b)
2. (a)
(b)
3. (a)
(b)
4. (a)
(b)
5. (a)
(b)
Mar. 31 Interest Expense ....................................
Interest Payable ................................
($12,000 × 6% × 1/12 months)
60
Apr. 1 Interest Payable .....................................
Cash...................................................
60
Mar. 31 Interest Receivable ................................
Interest Revenue ..............................
250
Apr. 1 Cash ......................................................
Interest Receivable ...........................
250
Mar. 31 Salaries Expense ..................................
Salaries Payable (5 × $200 × 5 days)
5,000
Apr. 2 Salaries Payable ...................................
Cash..................................................
5,000
Mar. 31 Utilities Expense ....................................
Accounts Payable ............................
750
Apr. 10 Accounts Payable ..................................
Cash..................................................
750
Mar. 31 Accounts Receivable .............................
Service Revenue ...............................
3,000
60
60
250
250
5,000
5,000
750
750
3,000
Apr. 4 No entry required
Apr. 30 Cash ......................................................
Accounts Receivable.........................
2,000
2,000
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PROBLEM 4-3A
1. (a) June 1, 2017
(b) Nov. 30, 2018
2. (a) Oct. 1, 2018
(b) Nov. 30, 2018
3. (a) Feb. 16, 2018
(b) Nov. 30, 2018
4. (a) June 1, 2018
(b) Nov. 30, 2018
(c) Dec. 1, 2018
5. (a) Nov. 2, 2018
Vehicles .....................................................
Cash ..................................................
80,000
Depreciation Expense................................
Accumulated Depreciation—Vehicles .
($80,000 ÷ 5 years × 6/12)
8,000
Cash (400 × $320) .....................................
Unearned Revenue ...........................
Unearned Revenue....................................
Ticket Revenue ($128,000 × 2/8 plays)
80,000
8,000
128,000
128,000
32,000
32,000
Supplies .....................................................
Cash ..................................................
2,100
Supplies Expense ($1,000 + $2,100 – $500)
Supplies ............................................
2,600
2,100
2,600
Cash ..........................................................
Bank Loan Payable ...........................
100,000
Interest Expense ........................................
Interest Payable ................................
($100,000 × 6% × 1/12 months)
500
Interest Payable ........................................
Cash ..................................................
500
Cash ..........................................................
Unearned Revenue ...........................
40
100,000
500
500
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40
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PROBLEM 4-3A (CONTINUED)
5. (b) Nov. 30, 2018
(c) Dec. 4, 2018
6. (b) Nov. 30, 2018
(c) Dec. 3, 2018
7. (b) Nov. 30, 2018
(c) Dec. 14, 2018
Unearned Revenue....................................
Accounts Receivable .................................
Rent Revenue ...................................
40
360
Cash ..........................................................
Accounts Receivable .........................
360
Salaries Expense .......................................
Salaries Payable [$7,000 × 6/7 days
(Sunday through Friday)]................
6,000
Salaries Payable (Sunday through Friday)
Salaries Expense (Saturday) .....................
Cash ..................................................
6,000
1,000
Income Tax Expense .................................
Income Tax Payable .........................
1,250
Income Tax Payable ..................................
Cash ..................................................
1,250
400
360
6,000
7,000
1,250
1,250
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PROBLEM 4-4A
(a)
1. June 30
2.
3.
4.
5.
6.
7.
30
30
30
30
30
30
Rent Revenue..........................................................
Unearned Rent Revenue .................................
57,000
Supplies Expense ($8,200 - $800) .........................
Supplies..........................................................
7,400
Insurance Expense ($14,400 x 3/12) ......................
Prepaid Insurance ..........................................
3,600
Advertising Expense ...............................................
Repairs and Maintenance Expense ........................
Utilities Expense .....................................................
Accounts Payable ...........................................
110
4,450
215
Salaries Expense ($300 x 4) ..................................
Salaries Payable.............................................
1,200
Interest Expense.....................................................
Interest Payable .............................................
1,875
Income Tax Expense ..............................................
Income Tax Payable .......................................
8,000
57,000
7,400
3,600
4,775
1,200
1,875
8,000
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PROBLEM 4-4A (CONTINUED)
(b)
ROADSIDE TRAVEL COURT LTD.
Income Statement
Quarter Ended June 30, 2018
Revenues
Rent revenue ($212,000 – $57,000) ...............................
Expenses
Salaries expense ($80,500 + $1,200) .............................
Repair and maintenance expense ($4,300 + $4,450) .....
Supplies expense ...........................................................
Advertising expense ($3,800 + $110) .............................
Insurance expense .........................................................
Depreciation expense .....................................................
Interest expense .............................................................
Utilities expense ($900 + $215) ......................................
Total expenses ......................................................
Income before income tax .......................................................
Income tax expense ................................................................
Net income ..............................................................................
$155,000
$81,700
8,750
7,400
3,910
3,600
2,700
1,875
1,115
111,050
43,950
8,000
$ 35,950
[Revenues – Expenses = Net Income or (Loss)]
LO 2,3 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-5A
(a)
Prepaid Insurance
1.
After 8 months of insurance coverage the balance in the Prepaid Insurance
account is $9,600. The remaining balance is for 16 months of coverage (24
months less 8 used in the previous fiscal year). $9,600 divided by 16
months equals $600 per month.
2.
The policy was taken out on December 1, 2016. When the company made
adjusting entries at the end of the prior fiscal year, on July 31, 2017,
insurance expense for the period December 1, 2016 to July 31, 2017,
which covers 8 months, would have been recorded. The entry would have
been in the amount of $600 × 8 = $4,800. This would have reduced the
Prepaid Insurance account to $9,600 ($14,400 – $4,800). During this past
fiscal year ended July 31, 2018, this balance would have remained
unchanged as no adjusting entries would have been prepared and
recorded.
3.
The insurance policy cost $14,400 and covers a 24-month period. The
original purchase price of the policy was $14,400 ($600 per month part 1.
above X 24 months).
4.
By July 31, 2018, the adjusted balance in the Prepaid Insurance account
will be $2,400 representing 4 months of insurance coverage from August 1
to November 30, 2018, the end of the term of the insurance policy.
Remaining Months of
Original
Period of
(3) Monthly
Policy at
Prepaid
Cost
Coverage
Cost
July 31, 2018
Insurance
(1)
(2)
(1) ÷ (2)
(4)
(3) × (4)
$14,400
24 months
(Dec. 1, 2016 to
Nov. 30, 2018)
$600
4 months
$2,400
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PROBLEM 4-5A (CONTINUED)
(b)
Depreciation Expense
1.
The annual depreciation expense on the building is calculated as follows:
($252,000 ÷ 30 years) = $ 8,400
2.
The purchase date of the building was September 1, 2014. From
September 1, 2014 to July 31, 2015, the depreciation expense recorded
would have been $8,400 x 11/12 or $7,700. For the fiscal years 2016 and
2017, the depreciation expense recorded would have been $16,800
($8,400 x 2). Consequently, the balance of the Accumulated Depreciation –
Buildings account (unadjusted) at July 31, 2018 would be $24,500 ($7,700
+ $16,800).
3.
After an additional year’s depreciation expense ($8,400) is recorded, the
adjusted balance of the Accumulated Depreciation–Buildings account
(unadjusted) at July 31, 2018 would be $32,900 ($24,500 + $8,400).
(c)
Unearned Revenue
1.
The amount of monthly revenue earned on digital magazine subscriptions
is calculated as follows: 1,000 subscriptions x $60 divided by 24 months =
$2,500
2.
By July 31, 2017, the company has earned 7 of the 24 months of
subscription revenue. This covers the period from January 1, 2017 to July
31, 2017. Initially the Unearned Revenue account received $60,000 from
the sale of subscriptions. Of this amount 7/24 had been earned and an
adjustment was made to reduce the balance by $17,500 ($2,500 x 7) and
so the adjusted balance of Unearned Revenue at July 31, 2017 was
$42,500, ($60,000 - $17,500). This balance represents 17 months at
$2,500 per month of subscription service remaining. During this past fiscal
year ended July 31, 2018, this balance would have remained unchanged
since adjusting entries are only made annually.
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PROBLEM 4-5A (CONTINUED)
(c) (continued)
3.
By July 31, 2018, the company has earned a further 12 of the 24 months of
subscription revenue or $30,000. Consequently, the adjusted balance in
the Unearned Revenue account is $12,500 ($42,500 - $30,000). This
balance represents 5 months of subscription service remaining at $2,500
per month for the period August 1 - December 31.
(d)
Salaries Payable
1.
The total salary paid on the last payday, Monday July 30 was in the amount
of:
6 × $625 =
$3,750
3 × $750 =
2,250
$6,000
2.
The amount of salaries expense to be accrued at July 31, 2018 for two
days (Monday and Tuesday) is:
6 × $625 × 2/5 =
$1,500
[3 × $750 × 2/5 =
900
$2,400
3.
The total salary that will be paid on Monday, August 6 will be the same as
that of Monday July 30, $6,000.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-5A (CONTINUED)
(e)
1.
2.
3.
4.
2018
July 31
31
31
31
Insurance Expense ($600 x 12).........................
Prepaid Insurance ....................................
7,200
Depreciation Expense .......................................
Accumulated Depreciation—Buildings......
8,400
Unearned Revenue ...........................................
Subscription Revenue ..............................
30,000
Salaries Expense ..............................................
Salaries Payable.......................................
2,400
7,200
8,400
30,000
2,400
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-6A
Cash Balance, December 31, 2018 = $177,600 cash receipts – $150,440
cash payments = $27,160.
(a)
(b) (1)
CREATIVE DESIGNS LTD.
Income Statement
Year Ended December 31, 2018
Revenues
Fees earned ($157,600 + $2,400) ...........................
Expenses
Salaries expense ($59,800 + $3,050) ......................
Rent expense ($20,000 – $2,000) ...........................
Supplies expense ($8,600 – $1,260) .......................
Advertising expense ................................................
Depreciation expense ($35,400 ÷ 6) ........................
Insurance expense ($3,840 × 11/12) ......................
Total expenses ...............................................
Income before income tax ................................................
Income tax expense ($6,000 + $7,000) ............................
Net income .......................................................................
$160,000
$62,850
18,000
7,340
6,800
5,900
3,520
104,410
55,590
13,000
$ 42,590
[Revenues – Expenses = Net income or (Loss)]
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-6A (CONTINUED)
(b) (2)
CREATIVE DESIGNS LTD.
Statement of Changes in Equity
Year Ended December 31, 2018
Common
Shares
Retained
Earnings
Balance, January 1 ........................................................................
$
0
$
0
Issued common shares .................................................................
20,000
Net income ........................................................
42,590
Dividends declared ........................................................................
000 000
(10,000)
Balance, December 31 ..................................................................
$20,000
$32,590
Total
Equity
$
0
20,000
42,590
(10,000)
$52,590
(Beginning equity ± Changes to equity = Ending equity)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-6A (CONTINUED)
(b) (3)
CREATIVE DESIGNS LTD.
Statement of Financial Position
December 31, 2018
Assets
Current assets
Cash ..................................................................
Accounts receivable .........................................
Supplies ............................................................
Prepaid rent.......................................................
Prepaid insurance ($3,840 – $3,520) ................
Total current assets ...................................
Property, plant, and equipment
Equipment ..........................................................
Less: Accumulated depreciation—equipment ....
Total assets .................................................................
$27,160
2,400
1,260
2,000
320
33,140
$35,400
5,900
Liabilities and Shareholders’ Equity
Current liabilities
Salaries payable .................................................
Income tax payable ............................................
Total current liabilities ................................
Shareholders’ equity
Common shares ................................................. $20,000
Retained earnings ..............................................
32,590
Total shareholders’ equity ..........................
Total liabilities and shareholders’ equity ......................
29,500
$62,640
$ 3,050
7,000
10,050
52,590
$62,640
(Assets = Liabilities + Shareholders’ equity)
LO 1,2,3,4 BT: AP Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-7A
(a)
Revenue (total fees collected) ......................
Expenses
Salaries expense ...................................
Equipment...............................................
Rent expense .........................................
Supplies expense ..................................
Advertising expense ...............................
Insurance expense .................................
Income tax expense ................................
Cash-based net income .................................
$157,600
$59,800
35,400
20,000
8,600
6,800
3,840
6,000
140,440
$ 17,160
(b)
Cash-based net income ..................................................
Accrual-based net income (from P4-6A) .........................
Difference .......................................................................
$ 17,160
42,590
$(25,430)
(c)
I recommend the accrual basis of reporting because the accrual-based
income statement fairly portrays the performance of the business, with
revenues and expenses measured in the financial period they were earned
and incurred.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-8A
(a)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
2018
Nov. 30
30
30
30
30
30
30
30
30
30
Insurance Expense ..................................................
Prepaid Insurance
($7,320 ÷ 12 × 8) ..............................................
4,880
Depreciation Expense .............................................
Accumulated Depreciation—Equipment
($13,440 ÷ 8 yrs). ..........................................
Accumulated Depreciation—Vehicles
($140,400 ÷ 6 yrs) ........................................
25,080
Supplies Expense ($965 – $300). ...........................
Supplies. .........................................................
665
Interest Expense ($54,000 × 7% × 1/12 months) ....
Interest Payable..............................................
315
Unearned Revenue .................................................
Fees Earned ($1,400 × 10 tours) ....................
14,000
Salaries Expense.....................................................
Salaries Payable.............................................
500
Accounts Receivable ...............................................
Fees Earned ...................................................
1,250
Advertising Expense ................................................
Accounts Payable ...........................................
260
Rent Expense ..........................................................
Prepaid Rent ($2,400 ÷ 2) .............................
1,200
Income Tax Expense ...............................................
Income Tax Payable .......................................
300
4,880
1,680
23,400
665
315
14,000
500
1,250
260
1,200
300
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-8A (CONTINUED)
(b)
Cash
Nov. 30 Bal. 15,800
Accumulated Depreciation – Equipment
Nov. 30 Bal. 3,360
Nov. 30 Adj. 1,680
Nov. 30 Bal. 5,040
Accounts Receivable
Nov. 30 Bal. 7,640
Nov. 30 Adj. 1,250
Nov. 30 Bal. 8,890
Nov. 30 Bal.
Nov. 30 Bal.
Nov. 30 Bal.
Nov. 30 Bal.
Supplies
965
Nov. 30 Adj.
300
Prepaid Rent
2,400
Nov. 30 Adj.
1,200
Prepaid Insurance
Nov. 30 Bal. 7,320
Nov. 30 Adj.
Nov. 30 Bal. 2,440
Equipment
Nov. 30 Bal. 13,440
Vehicles
Nov. 30 Bal. 140,400
665
1,200
Accumulated Depreciation—Vehicles
Nov. 30 Bal. 46,800
Nov. 30 Adj. 23,400
Nov. 30 Bal. 70,200
Accounts Payable
Nov. 30 Bal.
Nov. 30 Adj.
Nov. 30 Bal.
1,925
260
2,185
Bank Loan Payable
Nov. 30 Bal. 54,000
4,880
Interest Payable
Nov. 30 Adj.
315
Salaries Payable
Nov. 30 Adj.
500
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-8A (CONTINUED)
(b) (continued)
Income Tax Payable
Nov. 30 Adj.
300
Unearned Revenue
Nov. 30 Bal. 14,000
Nov. 30 Adj. 14,000
Nov. 30 Bal.
0
Common Shares
Nov. 30 Bal. 10,000
Retained Earnings
Nov. 30 Bal. 27,225
Fees Earned
Nov. 30 Bal. 130,575
Nov. 30 Adj. 14,000
Nov. 30 Adj. 1,250
Nov. 30 Bal. 145,825
Salaries Expense
Nov. 30 Bal. 69,560
Nov. 30 Adj.
500
Nov. 30 Bal. 70,060
Repairs and Maintenance Expense
Nov. 30 Bal. 11,170
Rent Expense
Nov. 30 Bal 13,200
Nov. 30 Adj. 1,200
Nov. 30 Bal 14,400
Interest Expense
Nov. 30 Bal 3,465
Nov. 30 Adj.
315
Nov. 30 Bal 3,780
Advertising Expense
Nov. 30 Bal.
825
Nov. 30 Adj.
260
Nov. 30 Bal
1,085
Depreciation Expense
Nov. 30 Adj. 25,080
Supplies Expense
Nov. 30 Adj.
665
Insurance Expense
Nov. 30 Adj. 4,880
Income Tax Expense
Nov. 30 Bal
1,700
Nov. 30 Adj.
300
Nov. 30 Bal. 2,000
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PROBLEM 4-9A (CONTINUED)
(b) and (d)
Cash
Nov. 1 Bal. 15,580
Nov. 13
5,000 Nov. 9
Nov. 13
12,400 Nov. 21
Nov. 19
11,400 Nov. 23
Nov. 30
1,100 Nov. 23
Nov. 28
Nov. 30 Bal. 35,180
2,200
4,600
600
2,400
500
Nov. 21
Nov. 9
Accounts Receivable
Nov. 1 Bal. 15,820
Nov. 27
3,800 Nov. 13
Nov. 30 Bal. 7,220
Nov. 1 Bal.
Nov. 20
Nov. 30 Bal.
Nov. 30 Bal.
Nov. 1 Bal.
Supplies
4,000
600
4,600
Nov. 30 Adj.
1,000
12,400
Accounts Payable
Nov. 1 Bal.
4,600 Nov. 20
Nov. 30 Bal.
Salaries Payable
Nov. 1 Bal.
1,000
Nov. 30 Bal.
Nov. 30 Adj.
Nov. 30 Bal.
Income Tax Payable
Nov. 30 Adj.
3,600
Equipment
18,000
Accumulated Depreciation—
Equipment
Nov. 1 Bal.
3,600
Nov. 30 Adj.
300
Nov. 30 Bal. 3,900
Unearned Revenue
Nov. 1 Bal.
Nov. 30
Nov. 30 Bal.
Nov. 30 Adj.
800
Nov. 30 Bal.
4,600
600
600
1,000
0
1,000
1,000
1,100
1,000
1,100
2,100
1,300
Common Shares
Nov. 1 Bal. 10,000
Nov. 13
5,000
Nov. 30 Bal. 15,000
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PROBLEM 4-9A CONTINUED)
(b) and (d) (Continued)
Retained Earnings
Nov. 1 Bal.
Nov. 28
33,200
Dividends Declared
500
Service Revenue
Nov. 19
11,400
Nov. 27
3,800
Nov. 30 Bal. 15,200
Nov. 30 Adj.
800
Nov. 30 Bal. 16,000
Nov. 23
Rent Expense
600
Income Tax Expense
Nov. 30 Adj. 1,100
Salaries Expense
Nov. 9
1,200
Nov. 23
2,400
Nov. 30 Bal. 3,600
Nov. 30 Adj. 1,000
Nov. 30 Bal. 4,600
Supplies Expense
Nov. 30 Adj. 3,600
Depreciation Expense
Nov. 30 Adj.
300
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-9A (CONTINUED)
(c)
ALOU EQUIPMENT REPAIR CORP.
Trial Balance
November 30, 2018
Cash............................................................................
Accounts receivable ....................................................
Supplies ......................................................................
Equipment ...................................................................
Accumulated depreciation—equipment.......................
Accounts payable ........................................................
Unearned revenue ......................................................
Common shares .........................................................
Retained earnings ......................................................
Dividends declared .....................................................
Service revenue ..........................................................
Salaries expense ........................................................
Rent expense ..............................................................
Totals ....................................................................
Debit
$35,180
7,220
4,600
18,000
500
Credit
$ 3,600
600
2,100
15,000
33,200
15,200
3,600
600
$69,700
0000 00
$69,700
(Total debits = Total credits)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-9A (CONTINUED)
(d)
2018
1. Nov. 30
2.
3.
4.
5.
30
30
30
30
Supplies Expense ..................................
Supplies ($4,600 – $1,000) ...........
3,600
Salaries Expense ...................................
Salaries Payable ...........................
1,000
3,600
1,000
Depreciation Expense ............................
300
Accumulated Depreciation—Equipment
($18,000 ÷ 5 years x 1/12 months)
Unearned Revenue ................................
Service Revenue ...........................
800
Income Tax Expense .............................
Income Tax Payable .....................
1,100
300
800
1,100
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-9A (CONTINUED)
(e)
ALOU EQUIPMENT REPAIR CORP.
Adjusted Trial Balance
November 30, 2018
Debit
Cash.............................................................................
Accounts receivable .....................................................
Supplies .......................................................................
Equipment ....................................................................
Accumulated depreciation—equipment........................
Accounts payable .........................................................
Salaries payable...........................................................
Income tax payable ......................................................
Unearned revenue .......................................................
Common shares ...........................................................
Retained earnings ........................................................
Dividends declared.......................................................
Service revenue ...........................................................
Salaries expense..........................................................
Rent expense ...............................................................
Supplies expense .........................................................
Income tax expense .....................................................
Depreciation expense ..................................................
Totals ........................................................................
Credit
$35,180
7,220
1,000
18,000
$ 3,900
600
1,000
1,100
1,300
15,000
33,200
500
16,000
4,600
600
3,600
1,100
300
$72,100
0,0
0
$72,100
(Total debits = Total credits)
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PROBLEM 4-9A (CONTINUED)
(f) (1)
ALOU EQUIPMENT REPAIR CORP.
Income Statement
Month Ended November 30, 2018
Revenues
Service revenue ................................................
Expenses
Salaries expense ..............................................
Supplies expense .............................................
Rent expense....................................................
Depreciation expense .......................................
Total expenses ........................................
Income before income tax .........................................
Income tax expense...................................................
Net income ................................................................
$16,000
$4,600
3,600
600
300
9,100
6,900
1,100
$ 5,800
[Revenues – Expenses = Net income or (Loss)]
(f) (2)
ALOU EQUIPMENT REPAIR CORP.
Statement of Changes in Equity
Month Ended November 30, 2018
Common
Shares
Retained
Earnings
Balance, November 1 ....................................................................
$10,000
$33,200
Issued common shares..................................................................
5,000
Net income .................................................
5,800
Dividends declared ........................................................................
000000
(500)
Balance, November 30 ..................................................................
$15,000
$38,500
Total
Equity
$43,200
5,000
5,800
(500)
$53,500
(Beginning equity ± Changes to equity = Ending equity)
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PROBLEM 4-9A (CONTINUED)
(f) (3)
ALOU EQUIPMENT REPAIR CORP.
Statement of Financial Position
November 30, 2018
Assets
Current assets
Cash .............................................................................
Accounts receivable ......................................................
Supplies ........................................................................
Total current assets .............................................
Property, plant, and equipment
Equipment.................................................
$18,000
Less: Accumulated depreciation ..............
3,900
Total assets ...........................................................................
$35,180
7,220
1,000
43,400
14,100
$57,500
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable .........................................................
Salaries payable ...........................................................
Income tax payable .......................................................
Unearned revenue ........................................................
Total current liabilities ..........................................
Shareholders’ equity
Common shares .......................................
$15,000
Retained earnings.....................................
38,500
Total shareholders’ equity ....................................
Total liabilities and shareholders’ equity ................................
$
600
1,000
1,100
1,300
4,000
53,500
$57,500
(Assets = Liabilities + Shareholders’ equity)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-10A
(a)
2018
Nov. 30
30
30
30
Service Revenue ..................................
Income Summary ........................
16,000
Income Summary .................................
Salaries Expense ........................
Supplies Expense .......................
Rent Expense..............................
Depreciation Expense .................
Income Tax Expense...................
10,200
Income Summary .................................
Retained Earnings .......................
5,800
Retained Earnings................................
Dividends Declared .....................
500
16,000
4,600
3,600
600
300
1,100
5,800
500
(Income statement accounts are closed to the Income Summary account)
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PROBLEM 4-10A (CONTINUED)
(b)
Cash
Nov. 1 Bal. 15,580
Nov. 13
5,000 Nov. 9
Nov. 13
12,400 Nov. 21
Nov. 19
11,400 Nov. 23
Nov. 30
1,100 Nov. 23
Nov. 28
Nov. 30 Bal. 35,180
Accounts Receivable
Nov. 1 Bal. 15,820
Nov. 27
3,800 Nov. 13
Nov. 30 Bal. 7,220
Supplies
4,000
600
4,600
Nov. 30 Adj.
1,000
Nov. 1 Bal.
Nov. 20
Nov. 30 Bal.
Nov. 30 Bal.
Nov. 1 Bal.
2,200
4,600
600
2,400
500
Nov. 21
Nov. 9
Accounts Payable
Nov. 1 Bal.
4,600 Nov. 20
Nov. 30 Bal.
Salaries Payable
Nov. 1 Bal.
1,000
Nov. 30 Bal.
Nov. 30 Adj.
Nov. 30 Bal.
4,600
600
600
1,000
0
1,000
1,000
12,400
Income Tax Payable
Nov. 30 Adj.
3,600
Equipment
18,000
Accumulated Depreciation—
Equipment
Nov. 1 Bal.
3,600
Nov. 30 Bal. 3,600
Nov. 30 Adj.
300
Nov. 30 Bal. 3,900
Unearned Revenue
Nov. 1 Bal.
Nov. 30
Nov. 30 Bal.
Nov. 30 Adj.
800
Nov. 30 Bal.
1,100
1,000
1,100
2,100
1,300
Common Shares
Nov. 1 Bal. 10,000
Nov. 13
5,000
Nov. 30 Bal. 15,000
Retained Earnings
Nov. 1 Bal. 33,200
Nov. 30 CE4
500 Nov. 30 CE3 5,800
Nov. 30 Bal. 38,500
PROBLEM 4-10A (CONTINUED)
(b) (Continued)
Nov. 30 CE4
Nov. 28
Dividends Declared
500
Nov. 30 Bal.
500
0
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Service Revenue
Salaries Expense
Nov. 19
11,400 Nov. 9
1,200
Nov. 27
3,800 Nov. 23
2,400
Nov. 30 Bal. 15,200 Nov. 30 Bal. 3,600
Nov. 30 Adj.
800 Nov. 30 Adj. 1,000
Nov. 30 Bal. 16,000 Nov. 30 Bal. 4,600
Nov. 30 CE1 16,000
Nov. 30 CE2
Nov. 30 Bal.
0 Nov. 30 Bal.
0
Rent Expense
Nov. 23
600
Nov. 30 CE2
Nov. 30 Bal.
0
Income Tax Expense
Nov. 30 Adj. 1,100
Nov. 30 CE2
Nov. 30 Bal.
0
Supplies Expense
Nov. 30 Adj. 3,600
600
Nov. 30 CE2
Nov. 30 Bal.
0
Depreciation Expense
Nov. 30 Adj.
300
Nov. 30 CE2
1,100 Nov. 30 Bal.
0
4,600
3,600
300
Income Summary
Nov. 30 CE2 10,200 Nov. 30 CE1 16,000
Bal.
5,800
Nov. 30 CE3 5,800
Nov. 30 Bal.
0
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PROBLEM 4-10A (CONTINUED)
(b)
ALOU EQUIPMENT REPAIR CORP.
Post-Closing Trial Balance
November 30, 2018
Debit
Cash.............................................................
Accounts receivable .....................................
Supplies .......................................................
Equipment ....................................................
Accumulated depreciation—equipment........
Accounts payable .........................................
Salaries payable ..........................................
Income tax payable ......................................
Unearned revenue .......................................
Common shares ...........................................
Retained earnings ........................................
Totals ......................................................
Credit
$35,180
7,220
1,000
18,000
00 0000
$61,400
$ 3,900
600
1,000
1,100
1,300
15,000
38,500
$61,400
(Total debits for permanent accounts = Total credits for permanent accounts)
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PROBLEM 4-11A
(a)
OZAKI CORP.
Adjusted Trial Balance
September 30, 2018
Debit
Cash ........................................................................................... $ 3,250
Accounts receivable ...................................................................
8,435
Supplies......................................................................................
1,265
Equipment .................................................................................. 15,040
Accumulated depreciation—equipment ......................................
Accounts payable .......................................................................
Salaries payable .........................................................................
Interest payable ..........................................................................
Income tax payable ....................................................................
Unearned revenue ......................................................................
Bank loan payable ......................................................................
Common shares .........................................................................
Retained earnings ......................................................................
Dividends declared .....................................................................
700
Fees earned ...............................................................................
Depreciation expense .................................................................
750
Interest expense .........................................................................
105
Rent expense .............................................................................
1,500
Salaries expense ....................................................................... 13,840
Supplies expense .......................................................................
485
Utilities expense .........................................................................
820
Income tax expense ...................................................................
600
Totals ................................................................................... $46,790
Credit
$
750
4,460
840
105
200
550
7,800
7,000
2,600
22,485
$46,790
(Total debits = Total credits)
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PROBLEM 4-11A (CONTINUED)
(b)
2018
Sept. 30
30
30
30
Fees Earned .................................................
Income Summary .................................
22,485
Income Summary ...........................................
Salaries Expense ..................................
Rent Expense .......................................
Utilities Expense ...................................
Depreciation Expense ...........................
Supplies Expense .................................
Interest Expense ...................................
Income Tax Expense ............................
18,100
Income Summary ...........................................
Retained Earnings ................................
4,385
Retained Earnings .........................................
Dividends Declared ...............................
700
22,485
13,840
1,500
820
750
485
105
600
4,385
700
(Income statement accounts are closed to the Income Summary account)
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PROBLEM 4-11A (CONTINUED)
(c)
OZAKI CORP.
Post-Closing Trial Balance
September 30, 2018
Debit
Cash ...................................................................................
Accounts receivable ...........................................................
Supplies .............................................................................
Equipment ..........................................................................
Accumulated depreciation—equipment ..............................
Accounts payable ...............................................................
Salaries payable .................................................................
Interest payable..................................................................
Income tax payable ............................................................
Unearned revenue .............................................................
Bank loan payable ..............................................................
Common shares .................................................................
Retained earnings ..............................................................
Totals.............................................................................
Credit
$ 3,250
8,435
1,265
15,040
$
0000 0
$27,990
750
4,460
840
105
200
550
7,800
7,000
6,285
$27,990
(Total debits for permanent accounts = Total credits for permanent accounts)
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PROBLEM 4-12A
(a)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
2018
May 31
31
31
31
31
31
31
31
31
31
31
Insurance Expense ....................................
Prepaid Insurance.............................
($10,920 ÷ 12 months)
910
Supplies Expense ......................................
Supplies ($4,880 – $1,340)...............
3,540
910
3,540
Depreciation Expense................................
($168,000 ÷ 20 years × 1/12 months)
Accumulated Depreciation—Buildings
700
Depreciation Expense................................
($33,600 ÷ 5 years × 1/12 months
Accumulated Depreciation—Furniture
560
700
560
Unearned Revenue (25 × $100) ................
Rent Revenue ...................................
2,500
Rent Revenue............................................
Unearned Revenue...........................
2,800
Accounts Receivable .................................
Rent Revenue ...................................
1,780
Salaries Expense .......................................
Salaries Payable ...............................
1,590
Interest Expense ........................................
Interest Payable ................................
735
Utilities Expense ........................................
Accounts Payable .............................
2,240
Income Tax Expense .................................
Income Tax Payable .........................
1,000
2,500
2,800
1,780
1,590
735
2,240
1,000
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PROBLEM 4-12A (CONTINUED)
(b)
May 31 Bal.
Cash
6,400
Accounts Receivable
May 31 Bal. 11,800
May 31 Adj. 1,780
May 31 Bal. 13,580
May 31 Bal.
May 31 Bal.
Supplies
4,880
May 31 Adj.
1,340
Prepaid Insurance
May 31 Bal. 4,550
May 31 Adj.
May 31 Bal. 3,640
3,540
Accounts Payable
May 31 Bal.
May 31 Adj.
May 31 Bal.
8,140
2,240
10,380
Salaries Payable
May 31 Adj.
1,590
Interest Payable
May 31 Adj.
735
Income Tax Payable
May 31 Adj.
1,000
910
Land
May 31 Bal. 106,370
Buildings
May 31 Bal. 168,000
Accumulated Depreciation—Buildings
May 31 Bal. 24,500
May 31 Adj.
700
May 31 Bal. 25,200
Furniture
May 31 Bal. 33,600
Accumulated Depreciation—Furniture
May 31 Bal. 19,600
May 31 Adj.
560
May 31 Bal. 20,160
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PROBLEM 4-12A (CONTINUED)
(b) (continued)
Unearned Revenue
May 31 Bal.
May 31 Adj. 2,500 May 31 Adj.
May 31 Bal.
17,500
2,800
17,800
Mortgage Payable
May 31 Bal. 126,000
Common Shares
May 31 Bal.
60,000
Retained Earnings
May 31 Bal.
41,580
Dividends Declared
May 31 Bal.
2,000
May 31 Adj.
Rent Revenue
May 31 Bal. 200,320
2,800 May 31 Adj.
2,500
May 31 Adj.
1,780
May 31 Bal. 201,800
Salaries Expense
May 31 Bal. 98,700
May 31 Adj. 1,590
May 31 Bal. 100,290
Utilities Expense
May 31 Bal. 23,870
May 31 Adj.
2,240
May 31 Bal. 26,110
Interest Expense
May 31 Bal. 9,240
May 31Adj.
735
May 31 Bal. 9,975
Insurance Expense
May 31 Bal. 6,370
May 31 Adj.
910
May 31 Bal. 7,280
Advertising Expense
May 31 Bal. 1,000
Supplies Expense
May 31 Adj. 3,540
Depreciation Expense
May 31 Bal. 13,860
May 31 Adj.
700
May 31 Adj.
560
May 31 Bal. 15,120
Income Tax Expense
May 31 Bal. 7,000
May 31 Adj. 1,000
May 31 Bal. 8,000
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PROBLEM 4-12A (CONTINUED)
(c)
RAINBOW LODGE LTD.
Adjusted Trial Balance
May 31, 2018
Debit
$ 6,400
13,580
1,340
3,640
106,370
168,000
Cash ..................................................................................
Accounts receivable...........................................................
Supplies .............................................................................
Prepaid insurance ..............................................................
Land ...................................................................................
Buildings ............................................................................
Accumulated depreciation—buildings ................................
Furniture ............................................................................
33,600
Accumulated depreciation—furniture .................................
Accounts payable ..............................................................
Salaries payable ................................................................
Interest payable .................................................................
Income tax payable............................................................
Unearned revenue .............................................................
Mortgage payable, due 2021 .............................................
Common shares ................................................................
Retained earnings..............................................................
Dividends declared ............................................................
2,000
Rent revenue .....................................................................
Salaries expense ............................................................... 100,290
Utilities expense.................................................................
26,110
Interest expense ................................................................
9,975
Insurance expense ............................................................
7,280
Advertising expense ..........................................................
1,000
Supplies expense ..............................................................
3,540
Depreciation expense ........................................................
15,120
Income tax expense ...........................................................
8,000
Totals ............................................................................ $506,245
Credit
$ 25,200
20,160
10,380
1,590
735
1,000
17,800
126,000
60,000
41,580
201,800
000000 0
$506,245
(Total debits = Total credits)
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PROBLEM 4-12A (CONTINUED)
(d) (1)
RAINBOW LODGE LTD.
Income Statement
Year Ended May 31, 2018
Revenues
Rent revenue ............................................
Expenses
Salaries expense ......................................
Utilities expense........................................
Depreciation expense ...............................
Interest expense .......................................
Insurance expense ...................................
Supplies expense .....................................
Advertising expense ................................
Total expenses ................................
Income before income tax .................................
Income tax expense...........................................
Net income ........................................................
$201,800
$100,290
26,110
15,120
9,975
7,280
3,540
1,000
163,315
38,485
8,000
$ 30,485
[Revenues – Expenses = Net income or (Loss)]
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PROBLEM 4-12A (CONTINUED)
(d) (2)
RAINBOW LODGE LTD.
Statement of Changes in Equity
Year Ended May 31, 2018
Common
Shares
Balance, June 1, 2017 ...................................................................
$56,000
Issued common shares ..................................................................
4,000
Net income ........................................................
Dividends declared ........................................................................
00 0000
Balance, May 31, 2018 ..................................................................
$60,000
Retained
Earnings
$41,580
30,485
(2,000)
$70,065
Total
Equity
$ 97,580
4,000
30,485
(2,000)
$130,065
(Beginning equity ± Changes to equity = Ending equity)
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PROBLEM 4-12A (CONTINUED)
(d) (3)
RAINBOW LODGE LTD.
Statement of Financial Position
May 31, 2018
Assets
Current assets
Cash .............................................................
Accounts receivable ......................................
Supplies ........................................................
Prepaid insurance .........................................
Total current assets ...................................
Property, plant, and equipment
Land ..............................................................
Buildings .......................................................
Less: Accumulated depreciation ..................
Furniture .......................................................
Less: Accumulated depreciation ..................
Total property, plant, and equipment .........
Total assets ...........................................................
$ 6,400
13,580
1,340
3,640
$ 24,960
$106,370
$168,000
25,200
$33,600
20,160
142,800
13,440
262,610
$287,570
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PROBLEM 4-12A (CONTINUED)
(d) (3) (continued)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ..........................................
Salaries payable ...........................................
Interest payable ............................................
Income tax payable .......................................
Unearned revenue ........................................
Total current liabilities ................................
Non-current liabilities
Mortgage payable .........................................
Total liabilities ............................................
Shareholders’ equity
Common shares............................................
Retained earnings .........................................
Total shareholders’ equity ........................
Total liabilities and shareholders’ equity ................
$10,380
1,590
735
1,000
17,800
$ 31,505
126,000
157,505
$60,000
70,065
130,065
$287,570
(Assets = Liabilities + Shareholders’ equity)
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PROBLEM 4-12A (CONTINUED)
(e)
The financial position and performance of a company can be evaluated in
terms of its liquidity, profitability, and solvency.
Liquidity
Rainbow Lodge does not appear at first glance to have a healthy liquidity
position. Although it has a positive cash balance of $6,400, the company
has a current ratio of only 0.8:1 ($24,960 ÷ $31,505). This seems to
indicate that there are insufficient current assets to repay the company’s
current liabilities. It should be noted that simply looking at the current ratio
does not tell the whole story and more investigation is required. For
example, accounts receivable comprise a substantial amount of current
assets—you would want to know if they are all expected to be collected.
More importantly, of the total current liabilities, 56% ($17,800 ÷ $31,505)
is made up of unearned revenue, which will not require the payment of
cash. Consequently, the current ratio is stronger than it first appears in
terms of measuring the company’s ability to repay its current liabilities.
Profitability
According to the income statement, Rainbow Lodge was profitable in
2018 with net income of $30,485. The lodge also has a positive balance
in retained earnings, which indicates it has been profitable in the past.
The company also declared dividends of $2,000 in the past year, which
may be of interest to your friend if your friend is considering an income
investment.
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PROBLEM 4-12A (CONTINUED)
(e) (continued)
Solvency
The company has a large mortgage, which is in line with the cost of the
property, plant, and equipment. Its total debt to assets is 54.8%
($157,505 ÷ $287,570). One would want to determine if that ratio is
comparable to Rainbow Lodge’s competitors and industry.
Overall, Rainbow Lodge appears to have a good financial position. Its
liquidity and profitability appear reasonable, but its solvency is not
significantly high. However, a more complete analysis should be
performed. Reviewing prior years’ financial statements and some industry
information would enable us to perform some comparative analysis to
better evaluate Rainbow’s financial health.
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PROBLEM 4-13A
(a)
May
31
31
31
31
Rent Revenue ................................................
Income Summary ..................................
201,800
Income Summary ...........................................
Salaries Expense ..................................
Utilities Expense ...................................
Interest Expense ...................................
Insurance Expense ...............................
Supplies Expense .................................
Depreciation Expense ...........................
Advertising Expense .............................
Income Tax Expense ............................
171,315
Income Summary...........................................
Retained Earnings ................................
30,485
Retained Earnings .........................................
Dividends Declared ...............................
2,000
201,800
100,290
26,110
9,975
7,280
3,540
15,120
1,000
8,000
30,485
2,000
(Income statement accounts are closed to the Income Summary account)
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PROBLEM 4-13A (CONTINUED)
(b)
May 31 Bal.
Furniture
May 31 Bal. 33,600
Cash
6,400
Accounts Receivable
May 31 Bal. 11,800
May 31 Adj. 1,780
May 31 Bal. 13,580
May 31 Bal.
May 31 Bal.
Supplies
4,880
May 31 Adj.
1,340
Prepaid Insurance
May 31 Bal. 4,550
May 31 Adj.
May 31 Bal. 3,640
Accumulated Depreciation—Furniture
May 31 Bal. 19,600
May 31 Adj.
560
May 31 Bal. 20,160
3,540
Accounts Payable
May 31 Bal.
May 31 Adj.
May 31 Bal.
8,140
2,240
10,380
Salaries Payable
May 31 Adj.
1,590
Interest Payable
May 31 Adj.
735
Income Tax Payable
May 31 Adj.
1,000
Unearned Revenue
May 31 Bal.
May 31 Adj. 2,500 May 31 Adj.
May 31 Bal.
17,500
2,800
17,800
910
Land
May 31 Bal. 106,370
Buildings
May 31 Bal. 168,000
Accumulated Depreciation—Buildings
May 31 Bal. 24,500
May 31 Adj.
700
May 31 Bal. 25,200
Mortgage Payable
May 31 Bal. 126,000
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PROBLEM 4-13A (CONTINUED)
(b)
(b) (continued)
(b)
Common Shares
May 31 Bal.
May 31 CE4
May 31 Bal.
May 31 Bal.
Retained Earnings
May 31 Bal.
2,000 May 31 CE3
May 31 Bal.
Dividends Declared
2,000
May 31CE4
0
Rent Revenue
May 31 Bal.
May 31 Adj. 2,800 ay 31 Adj.
May 31 Adj.
May 31 Bal.
May31CE1 201,800
May 31 Bal.
Salaries Expense
May 31 Bal. 98,700
May 31 Adj. 1,590
May 31 Bal. 100,290
May 31 CE2
May 31 Bal.
0
May 31 Bal.
May 31 Adj.
May 31 Bal.
60,000
41,580
30,485
70,065
2,000
200,320
2,500
1,780
201,800
0
May 31 Bal.
Utilities Expense
23,870
2,240
26,110
May 31 CE2 26,110
0
Interest Expense
9,240
735
9,975
May 31 CE2
May 31 Bal.
0
May 31 Bal.
May 31 Adj.
May 31 Bal
Insurance Expense
May 31 Bal. 6,370
May 31 Adj.
910
May 31 Bal. 7,280
May 31 CE2
May 31 Bal.
0
Advertising Expense
May 31 Bal. 1,000
May 31 CE2
May 31 Bal.
0
100,290
Supplies Expense
May 31 Adj. 3,540
May 31 CE2
May 31 Bal.
0
9,975
7,280
1,000
3,540
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PROBLEM 4-13A (CONTINUED)
(b)
(b) (continued)
Depreciation Expense
May 31 Bal. 13,860
May 31 Adj.
700
May 31 Adj.
560
May 31 Bal. 15,120
May 31 CE2 15,120
May 31 Bal.
0
Income Tax Expense
May 31 Bal. 7,000
May 31 Adj. 1,000
May 31 Bal. 8,000
May 31 CE2
May 31 Bal.
0
8,000
Income Summary
May 31 CE2 171,315 May 31 CE1 201,800
Bal.
30,485
May 31 CE3 30,485
May 31 Bal.
0
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PROBLEM 4-13A (CONTINUED)
(c)
RAINBOW LODGE LTD.
Post-Closing Trial Balance
May 31, 2018
Debit
Cash ..................................................................................
Accounts receivable ..........................................................
Supplies .............................................................................
Prepaid insurance..............................................................
Land ..................................................................................
Buildings ............................................................................
Accumulated depreciation—buildings................................
Furniture ............................................................................
Accumulated depreciation—furniture.................................
Accounts payable ..............................................................
Salaries payable ................................................................
Interest payable .................................................................
Income tax payable ...........................................................
Unearned revenue .............................................................
Mortgage payable ..............................................................
Common shares ................................................................
Retained earnings .............................................................
$ 6,400
13,580
1,340
3,640
106,370
168,000
Totals ........................................................................
$332,930
Credit
$ 25,200
33,600
20,160
10,380
1,590
735
1,000
17,800
126,000
60,000
70,065
$332,930
(Total debits for permanent accounts = Total credits for permanent accounts)
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PROBLEM 4-1B
1. (a) Jan.
2 Supplies .................................................
Cash .................................................
2,100
(b) Dec. 31 Supplies Expense ($2,100 – $550) ........
Supplies ...........................................
1,550
2. (a) Mar.
1 Equipment ..............................................
Cash .................................................
(b) Dec. 31 Depreciation Expense ............................
Accumulated Depreciation—Equipment
($20,000 ÷ 5 years × 10/12 months)
3. (a) June
1 Prepaid Insurance ..................................
Cash .................................................
(b) Dec. 31 Insurance Expense ($4,200 × 7/12 months)
Prepaid Insurance ............................
2,100
1,550
20,000
20,000
3,333
3,333
4,200
4,200
2,450
2,450
4. (a) Nov. 15 Cash .......................................................
Unearned Revenue ..........................
1,275
(b) Dec. 31 Unearned Revenue ($425 × 2) ...............
Revenue ...........................................
850
5. (a) Dec. 15 Prepaid Rent ..........................................
Cash .................................................
2,500
1,275
850
2,500
(b) Dec. 31 No entry required
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PROBLEM 4-2B
1. (a)
Nov. 30
Salaries Expense....................................... . 3,000
Salaries Payable ($6,000 × 5/10 days) .......... 3,000
(b)
Dec. 10
Salaries Payable........................................ . 3,000
Salaries Expense ...................................... . 3,000
Cash ..................................................... .......... 6,000
2. (a)
Nov. 30
Interest Expense........................................ .... 117
Interest Payable ................................... ..........
($20,000 × 7% × 1/12 months)
(b)
3. (a)
(b)
4. (a)
(b)
Dec.
1
Interest Payable......................................... .... 117
Cash ..................................................... ..........
117
117
Nov. 30
Accounts Receivable ................................. . 1,000
Service Revenue ................................. .......... 1,000
Dec.
No entry required
1
Dec. 21
Cash .......................................................... . 1,000
Accounts Receivable............................ .......... 1,000
Nov. 30
Interest Receivable .................................... ...... 10
Interest Revenue ................................. ..........
10
Cash .......................................................... ...... 10
Interest Receivable .............................. ..........
10
Dec.
1
5. (a)
Nov. 30
Income Tax Expense ................................. . 1,000
Income Tax Payable ........................... .......... 1,000
(b)
Dec. 18
Income Tax Payable .................................. . 1,000
Cash ..................................................... .......... 1,000
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PROBLEM 4-3B
1. (a)
(b)
2. (a)
(b)
3. (a)
(b)
4. (a)
(b)
(c)
5. (b)
(c)
Mar. 1, 2018
Dec. 31, 2018
Jan. 2, 2018
Dec. 31, 2018
Aug. 2, 2018
Dec. 31, 2018
June 1, 2018
Dec. 31, 2018
Jan. 1, 2019
Dec. 31, 2018
Jan. 4, 2019
Supplies...................................................
Cash .................................................
Supplies Expense
($1,500 + $4,250 – $1,000) .....................
Supplies ............................................
4,250
4,250
4,750
4,750
Vehicles ...................................................
Cash .................................................
120,000
Depreciation Expense ............................
Accumulated Depreciation—Vehicles
($120,000 ÷ 4 years)
30,000
Cash ........................................................
Unearned Revenue (600 × $360) .....
216,000
120,000
30,000
216,000
Unearned Revenue ($216,000 × 4/9) ......
96,000
Ticket Revenue .................................
96,000
Cash ........................................................
30,000
Bank Loan Payable ...........................
30,000
Interest Expense......................................
Interest Payable ($30,000 × 6% × 1/12)
150
Interest Payable.......................................
Cash .................................................
150
150
150
Salaries Expense.....................................
4,500
Salaries Payable ($9,000 × 3/6) .......
4,500
Salaries Expense.....................................
4,500
Salaries Payable......................................
4,500
Cash .................................................
9,000
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PROBLEM 4-3B (CONTINUED)
6. (b)
(c)
7. (b)
(c)
Dec. 31, 2018
Jan. 7, 2019
Dec. 31, 2018
Jan. 11, 2019
Accounts Receivable ...............................
Rent Revenue ...................................
600
Cash ........................................................
Accounts Receivable ........................
Unearned Revenue ...........................
1,200
Utilities Expense ......................................
Accounts Payable .............................
1,125
Accounts Payable ....................................
Cash .................................................
1,125
600
600
600
1,125
1,125
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PROBLEM 4-4B
(a)
1. Mar. 31
2.
3.
4.
5.
6.
7.
Service Revenue ........................................................
Unearned Revenue ............................................
20,000
Supplies Expense ($2,900 - $800) ..............................
Supplies .............................................................
2,100
Insurance Expense ($3,360 x 3/12) ............................
Prepaid Insurance ..............................................
840
Utilities Expense .........................................................
Accounts Payable ..............................................
210
Salaries Expense ($100 x 4 x 2) .................................
Salaries Payable ................................................
800
Interest Expense ($12,000 x 7% x 3/12) ....................
Interest Payable .................................................
210
Income Tax Expense ..................................................
Income Tax Payable ..........................................
1,990
20,000
2,100
840
210
800
210
1,990
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PROBLEM 4-4B (CONTINUED)
(b)
FLY RIGHT TRAVEL AGENCY LTD.
Income Statement
Quarter Ended March 31, 2018
Revenues
Service revenue ($50,000 - $20,000) ...................................
Expenses
Salaries expense ($11,000 + $800) ......................................
Office expense ......................................................................
Supplies expense .................................................................
Advertising expense .............................................................
Insurance expense ...............................................................
Utilities expense ($400 + $210) ............................................
Interest expense ...................................................................
Depreciation expense ...........................................................
Total expenses ............................................................
Income before income tax .............................................................
Income tax expense.......................................................................
Net income ....................................................................................
$30,000
$11,800
2,600
2,100
1,700
840
610
210
400
20,260
9,740
1,990
$ 7,750
[Revenues – Expenses = Net Income or (Loss)]
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PROBLEM 4-5B
(a)
1.
Prepaid Advertising
The monthly amount of advertising is calculated based on the annual contract
amount paid of $8,400 divided by 12 months = $700.
2.
The advertising contract for one year was paid by the business on Feb. 1, 2018,
for a period of 12 months starting March 1. The Prepaid Advertising account was
debited at that date for $8,400. The unadjusted balance would have remained
unchanged on October 31, 2018 as no adjusting entries would have been
prepared and recorded.
3.
By October 31, 2018, after adjusting entries are prepared and posted to recognize
the expiration of 8 months (8 ads running March 1 – October 1) of the contract
($8,400 x 8/12 = $5,600), the Prepaid Advertising account should have an
adjusted balance of $2,800 ($8,400 – $5,600). This balance represents 4 months
at $700 per month covering the period Nov. 1, 2018 to Feb. 1, 2019.
(b)
1.
Unearned Revenue
The Unearned Revenue account has a balance of $135,000 because all amounts
received during the year for leasing contracts were recorded into this account as
follows:
Month
Term
(in months)
Sept 1, 2018
6
Monthly
Rent
$4,500
Number of
Leases
Unearned
Revenue
5
$135,000
This balance would have remained unchanged as no adjusting entries would have
been prepared and recorded.
2.
By October 31, 2018, the company has earned $45,000 ($4,500 x 5 x 2).
Consequently, the adjusted balance in the Unearned Revenue account is $90,000
($135,000 - $45,000). This balance represents 4 months x 5 tenants at $4,500 per
month.
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PROBLEM 4-5B (CONTINUED)
(c)
Interest Expense
1.
The monthly interest incurred on the bank loan is calculated as follows:
$90,000 x 8% x 1/12 = $600
2.
Since the interest is payable at maturity, 7 months of interest have accrued to
October 31, 2018. The total is $4,200 ($600 x 7).
3.
By April 1, 2019 a full year of interest will have accrued and will be payable in the
amount of $7,200 ($600 x 12).
(d)
Depreciation Expense
1.
The annual depreciation expense on the vehicles is calculated as follows:
($39,000 ÷ 5 years) = $ 7,800
2.
The purchase date of the vehicles was April 1, 2017. From April 1, 2017 to
October 31, 2017, the depreciation expense recorded would have been $7,800 x
7/12 or $4,550. Consequently, the balance of the Accumulated Depreciation–
Vehicles account (unadjusted) at October 31, 2018 would be $4,550. During this
past fiscal year ended October 31, 2018, this balance would have remained
unchanged as no adjusting entries would have been prepared and recorded.
3.
An annual amount of $7,800 would be recorded to Depreciation Expense for the
year ended October 31, 2018. The adjusted balance of the Accumulated
Depreciation–Vehicles account at October 31, 2018 would be $12,350 ($4,550 +
$7,800).
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PROBLEM 4-5B (CONTINUED)
(e)
1.
2.
3.
4.
2018
Oct. 31
31
31
31
Advertising Expense ($700 x 8) .....................
Prepaid Advertising ..............................
5,600
5,600
Unearned Revenue ($4,500 x 5 x 2).............. 45,000
Rent Revenue.....................................
Interest Expense ($90,000 × 8% × 7/12) ..........
Interest Payable..................................
4,200
Depreciation Expense ($39,000 ÷ 5) .............
Accumulated Depreciation—Vehicles .
7,800
45,000
4,200
7,800
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PROBLEM 4-6B
Cash Balance, April 30, 2018 = $86,500 cash receipts – $80,920 cash payments
= $5,580.
(a)
(b) (1)
THE SHARP EDGE LTD.
Income Statement
Six Months Ended April 30, 2018
Revenues
Service revenue ($66,500 + $1,440)..............................
Expenses
Salaries expense ($14,200 + $4,240) ............................
Rent expense ($9,100 – $1,300) ...................................
Depreciation expense ($47,040 ÷ 8 × 6/12) ...................
Utilities expense .............................................................
Insurance expense ($2,760 × 6/12) ...............................
Advertising expense ......................................................
Total expenses......................................................
Income before income tax.......................................................
Income tax expense ($5,000 + $800) .....................................
Net income..............................................................................
$67,940
$18,440
7,800
2,940
1,900
1,380
920
33,380
34,560
5,800
$28,760
[Revenues – Expenses = Net income or (Loss)]
(b) (2)
THE SHARP EDGE LTD.
Statement of Changes in Equity
Six Months Ended April 30, 2018
Common
Shares
Balance, November 1, 2017 ...............................................
$
0
Issued common shares ......................................................
20,000
Net income ...............................................
0000 00
Balance, April 30, 2018 ......................................................
$20,000
Retained
Earnings
$
0
28,760
$28,760
Total
Equity
$
0
20,000
28,760
$48,760
(Beginning equity ± Changes to equity = Ending equity)
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PROBLEM 4-6B (CONTINUED)
(b) (3)
THE SHARP EDGE LTD.
Statement of Financial Position
April 30, 2018
Assets
Current assets
Cash ..............................................................
Accounts receivable ......................................
Prepaid insurance ($2,760 – $1,380) .............
Prepaid rent ...................................................
Total current assets ..............................
Property, plant, and equipment
Equipment......................................................
Less: Accumulated depreciation ...................
Total assets ............................................................
$ 5,580
1,440
1,380
1,300
9,700
$47,040
2,940
44,100
$53,800
Liabilities and Shareholders’ Equity
Current liabilities
Salaries payable ............................................
Income tax payable ........................................
Total current liabilities ...........................
Shareholders’ equity
Common shares ............................................
Retained earnings ..........................................
Total shareholders’ equity .....................
Total liabilities and shareholders’ equity .................
$ 4,240
800
5,040
$20,000
28,760
48,760
$53,800
(Assets = Liabilities + Shareholders’ equity)
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PROBLEM 4-7B
(a)
Total service revenue ......................................
Total expenses:
Repair equipment .....................................
Salaries expense ......................................
Rent expense ............................................
Utilities expense ........................................
Insurance expense ..................................
Advertising expense .................................
Income tax expense ..................................
Net loss on a cash basis ..................................
$ 66,500
$47,040
14,200
9,100
1,900
2,760
920
5,000
80,920
$(14,420)
(b)
Cash-based net loss .......................................
Accrual-based net income (from P4-6B) .........
Difference........................................................
$(14,420)
28,760
$ 43,180
(c)
I recommend the accrual basis of reporting because the accrual-based income
statement fairly portrays the performance of the business, with revenues and
expenses recorded in the period they were earned and incurred.
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PROBLEM 4-8B
(a)
2018
1.
Dec. 31
2.
3.
4.
5.
6.
7.
8.
9
10.
31
31
31
31
31
31
31
31
31
Insurance Expense .................................................
Prepaid Insurance .........................................
($3,600 × 10/12 months)
3,000
Supplies Expense ...................................................
Supplies ($2,500 – $570) ..............................
1,930
Depreciation Expense ............................................
Accumulated Depreciation—Vehicles.............
($58,000 ÷ 4 years)
14,500
Depreciation Expense ............................................
Accumulated Depreciation—Furniture
($16,000 ÷ 10)
1,600
Accounts Receivable ..............................................
Service Revenue ...........................................
1,750
Interest Expense.....................................................
Interest Payable..............................................
($27,475 × 7% × 3/12 months)
481
Unearned Revenue ................................................
Service Revenue ...........................................
($600 × 2 months)
1,200
Salaries Expense (3 × $200) ..................................
Salaries Payable ............................................
600
Rent Expense ......................................................
Prepaid Rent ..............................................
Income Tax Expense .............................................
Income Tax Payable ($2,850 – $2,000)
3,000
1,930
14,500
1,600
1,750
481
1,200
600
1,150
1,150
850
850
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PROBLEM 4-8B (CONTINUED)
(b)
Dec. 31 Bal.
Cash
4,600
Furniture
Dec. 31 Bal. 16,000
Accounts Receivable
Dec. 31 Bal. 8,220
Dec. 31 Adj. 1,750
Dec. 31 Bal. 9,970
Dec. 31 Bal.
Dec. 31 Bal.
Supplies
2,500
Dec. 31 Adj.
570
Prepaid Insurance
Dec. 31 Bal. 3,600
Dec. 31 Adj.
Dec. 31 Bal.
600
Dec. 31 Bal.
Dec. 31 Bal.
Prepaid Rent
2,300
Dec. 31 Adj.
1,150
Accumulated Depreciation—
Furniture
Dec. 31 Bal.
4,000
Dec. 31 Adj.
1,600
Dec. 31 Bal.
5,600
1,930
3,000
1,150
Vehicles
Dec. 31 Bal. 58,000
Accumulated Depreciation—
Vehicles
Dec. 31 Bal. 14,500
Dec. 31 Adj. 14,500
Dec. 31 Bal. 29,000
Salaries Payable
Dec. 31 Adj.
600
Interest Payable
Dec. 31 Adj.
481
Income Tax Payable
Dec. 31 Adj.
850
Unearned Revenue
Dec. 31 Bal.
Dec. 31 Adj. 1,200
Dec. 31 Bal.
3,600
2,400
Bank Loan Payable
Dec. 31 Bal.
27,475
Common Shares
Dec. 31 Bal.
5,000
Retained Earnings
Dec. 31 Bal.
7,600
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PROBLEM 4-8B (CONTINUED)
(b) (continued)
Dividends Declared
Dec. 31 Bal. 3,800
Service Revenue
Dec. 31 Bal.125,600
Dec. 31 Adj. 1,750
Dec. 31 Adj. 1,200
Dec. 31 Bal.128,550
Salaries Expense
Dec. 31 Bal. 67,000
Dec. 31 Adj.
600
Dec. 31 Bal. 67,600
Rent Expense
Dec. 31 Bal. 12,650
Dec. 31 Adj. 1,150
Dec. 31 Bal. 13,800
Repairs and Maintenance Expense
Dec. 31 Bal.
4,690
Interest Expense
Dec. 31 Bal. 2,415
Dec. 31 Adj.
481
Dec. 31 Bal. 2,896
Supplies Expense
Dec. 31 Adj. 1,930
Depreciation Expense
Dec. 31 Adj. 14,500
Dec. 31 Adj. 1,600
Dec. 31 Bal. 16,100
Insurance Expense
Dec. 31 Adj. 3,000
Income Tax Expense
Dec. 31 Bal. 2,000
Dec. 31 Adj.
850
Dec. 31 Bal. 2,850
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PROBLEM 4-8B (CONTINUED)
(c)
ORTEGA LIMO SERVICE LTD.
Adjusted Trial Balance
December 31, 2018
Debit
Cash .....................................................................................$ 4,600
Accounts receivable .............................................................. 9,970
Supplies ................................................................................
570
Prepaid insurance .................................................................
600
Prepaid rent .......................................................................... 1,150
Vehicles ................................................................................ 58,000
Accumulated depreciation—vehicles ....................................
Furniture ............................................................................... 16,000
Accumulated depreciation—furniture ....................................
Salaries payable ...................................................................
Interest payable ....................................................................
Income tax payable ...............................................................
Unearned revenue ................................................................
Bank loan payable, due September 1, 2021 .........................
Common shares....................................................................
Retained earnings .................................................................
Dividends declared ............................................................... 3,800
Service revenue ....................................................................
Salaries expense .................................................................. 67,600
Depreciation expense ........................................................... 16,100
Rent expense ........................................................................ 13,800
Repairs and maintenance expense....................................... 4,690
Insurance expense................................................................ 3,000
Supplies expense.................................................................. 1,930
Interest expense ................................................................... 2,896
Income tax expense .............................................................. 2,850
Totals.................................................................................
$207,556
Credit
$ 29,000
5,600
600
481
850
2,400
27,475
5,000
7,600
128,550
$207,556
(Total debits = Total credits)
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PROBLEM 4-9B
(a)
2018
Sept. 4
6
11
12
17
21
24
25
26
Salaries Payable ........................................................
1,400
Salaries Expense ..............................................................................
800
Cash .........................................................................................
2,200
Cash ..........................................................................
Accounts Receivable .........................................
5,400
5,400
Cash ..........................................................................
Service Revenue ...............................................
8,800
Cash ..........................................................................
Common Shares ...............................................
5,000
Supplies .....................................................................
Accounts Payable ..............................................
2,000
Accounts Payable.......................................................
Cash ..................................................................
7,000
Rent Expense .............................................................
Prepaid Rent ..............................................................
Cash ..................................................................
1,000
1,000
Salaries Expense .......................................................
Cash ..................................................................
2,200
Accounts Receivable ..................................................
Service Revenue ...............................................
1,600
8,800
5,000
2,000
7,000
2,000
2,200
1,600
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PROBLEM 4-9B (CONTINUED)
(a) (continued)
Sept. 27
28
28
Cash ..........................................................................
Unearned Revenue ...........................................
1,300
Dividends Declared ....................................................
Cash ..................................................................
500
Income Tax Expense ..................................................
Cash ..................................................................
600
1,300
500
600
(b) and (d)
Cash
Sept. 1 Bal. 9,760
Sept. 6
5,400 Sept. 4
Sept. 11
8,800 Sept. 21
Sept. 12
5,000 Sept. 24
Sept. 27
1,300 Sept. 25
Sept. 28
Sept. 28
Sept. 30 Bal. 15,760
Accounts Receivable
Sept. 1 Bal. 7,440
Sept. 26
1,600 Sept. 6
Sept. 30 Bal. 3,640
Sept. 30 Adj.
600
Sept. 30 Bal. 4,240
2,200
7,000
2,000
2,200
500
600
Supplies
Sept. 1 Bal. 1,600
Sept. 17
2,000
Sept. 30 Bal. 3,600
Sept. 30 Adj. 2,800
Sept. 30 Bal.
800
Sept. 24
Prepaid Rent
1,000
Equipment
Sept. 1 Bal. 30,000
5,400
Accumulated Depreciation - Equipment
Sept. 1 Bal. 3,000
Sept. 30 Adj.
250
Sept. 30 Bal. 3,250
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-9B (CONTINUED)
(b) and (d) (continued)
Sept. 21
Accounts Payable
Sept. 1 Bal.
7,000 Sept. 17
Sept. 30 Bal.
Unearned Revenue
Sept. 1 Bal.
Sept. 27
Sept. 30 Bal.
Sept. 30 Adj. 800
Sept. 30 Bal.
Sept. 4
800
1,300
2,100
1,300
Salaries Payable
Sept. 1 Bal.
1,400
1,400
Sept. 30 Bal.
0
Sept. 30 Adj. 1,600
Sept. 30 Bal. 1,600
Common Shares
Sept. 1 Bal. 20,000
Sept. 12
5,000
Sept. 30 Bal. 25,000
Retained Earnings
Sept. 1 Bal. 17,400
Sept. 28
Service Revenue
Sept. 11
8,800
Sept. 26
1,600
Sept. 30 Bal. 10,400
Sept. 30 Adj.
600
Sept. 30 Adj.
800
Sept. 30 Bal. 11,800
6,200
2,000
1,200
Depreciation Expense
Sept. 30 Adj.
250
Supplies Expense
Sept. 30 Adj. 2,800
Salaries Expense
Sept. 4
800
Sept. 25
2,200
Sept. 30 Bal. 3,000
Sept. 30 Adj. 1,600
Sept. 30 Bal. 4,600
Sept. 24
Rent Expense
1,000
Sept. 28
Income Tax Expense
600
Dividends Declared
500
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PROBLEM 4-9B (CONTINUED)
(c)
RIJO EQUIPMENT REPAIR CORP.
Trial Balance
September 30, 2018
Cash ...........................................................
Accounts receivable....................................
Supplies ......................................................
Prepaid rent ................................................
Equipment ..................................................
Accumulated depreciation—equipment ......
Accounts payable .......................................
Unearned revenue ......................................
Common shares .........................................
Retained earnings.......................................
Dividends declared .....................................
Service revenue ..........................................
Salaries expense ........................................
Rent expense .............................................
Income tax expense....................................
Totals ...................................................
Debit
$15,760
3,640
3,600
1,000
30,000
Credit
$ 3,000
1,200
2,100
25,000
17,400
500
10,400
3,000
1,000
600
$59,100
000 000
$59,100
(Total debits = Total credits)
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PROBLEM 4-9B (CONTINUED)
(d)
1.
2.
3.
4.
5.
2018
Sept. 30
30
30
30
30
Supplies Expense .....................................
Supplies ($3,600 – $800) .................
2,800
2,800
Salaries Expense ......................................
Salaries Payable ..............................
1,600
Accounts Receivable.................................
Service Revenue ..............................
600
Depreciation Expense ...............................
Accumulated Depreciation—Equipment
($30,000 ÷ 10 years ÷ 12 months)
250
Unearned Revenue ...................................
Service Revenue ..............................
800
1,600
600
250
800
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-9B (CONTINUED)
(e)
RIJO EQUIPMENT REPAIR CORP.
Adjusted Trial Balance
September 30, 2018
Cash ..........................................................................
Accounts receivable ..................................................
Supplies ....................................................................
Prepaid rent ...............................................................
Equipment .................................................................
Accumulated depreciation—equipment .....................
Accounts payable ......................................................
Unearned revenue.....................................................
Salaries payable ........................................................
Common shares ........................................................
Retained earnings .....................................................
Dividends declared ....................................................
Service revenue ........................................................
Salaries expense .......................................................
Supplies expense ......................................................
Rent expense ............................................................
Depreciation expense ................................................
Income tax expense ..................................................
Totals ..................................................................
Debit
$15,760
4,240
800
1,000
30,000
Credit
$ 3,250
1,200
1,300
1,600
25,000
17,400
500
11,800
4,600
2,800
1,000
250
600
$61,550
000 000
$61,550
(Total debits = Total credits)
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PROBLEM 4-9B (CONTINUED)
(f) (1)
RIJO EQUIPMENT REPAIR CORP.
Income Statement
Month Ended September 30, 2018
Service revenue .......................................................
Expenses
Salaries expense ............................................
Supplies expense............................................
Rent expense ..................................................
Depreciation expense .....................................
Total expenses .......................................
Income before income tax ........................................
Income tax expense .................................................
Net income ..............................................................
$11,800
$4,600
2,800
1,000
250
8,650
3,150
600
$ 2,550
[Revenues – Expenses = Net Income or (Loss)]
(f) (2)
RIJO EQUIPMENT REPAIR CORP.
Statement of Changes in Equity
Month Ended September 30, 2018
Common
Shares
Balance, September 1 ...............................................
$20,000
Issued common shares .............................................
5,000
Net income ................................................................
Dividends declared....................................................
00 0000
Balance, September 30 .............................................
$25,000
Retained
Earnings
$17,400
2,550
(500)
$19,450
Total
Equity
$37,400
5,000
2,550
(500)
$44,450
(Beginning equity ± Changes to equity = Ending equity)
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PROBLEM 4-9B (CONTINUED)
(f) (3)
RIJO EQUIPMENT REPAIR CORP.
Statement of Financial Position
September 30, 2018
Assets
Current assets
Cash .............................................................................
Accounts receivable ......................................................
Supplies ........................................................................
Prepaid rent ..................................................................
Total current assets..............................................
Property, plant, and equipment
Equipment ..................................................
$30,000
Less: Accumulated depreciation ...............
3,250
Total assets ...........................................................................
$15,760
4,240
800
1,000
21,800
26,750
$48,550
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ..........................................................
Salaries payable ...........................................................
Unearned revenue ........................................................
Total current liabilities ..........................................
Shareholders’ equity
Common shares.........................................
$25,000
Retained earnings ......................................
19,450
Total shareholders’ equity ....................................
Total liabilities and shareholders’ equity ................................
$ 1,200
1,600
1,300
4,100
44,450
$48,550
(Assets = Liabilities + Shareholders’ equity)
LO 2,3,4 BT: AP Difficulty: M Time: 80 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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PROBLEM 4-10B
(a)
2018
Sept.
30
30
30
30
Service Revenue .....................................
Income Summary ...........................
11,800
Income Summary ....................................
Salaries Expense ...........................
Supplies Expense ...........................
Rent Expense .................................
Depreciation Expense ....................
Income Tax Expense ......................
9,250
Income Summary ....................................
Retained Earnings ..........................
2,550
Retained Earnings ...................................
Dividends Declared ..........................
11,800
4,600
2,800
1,000
250
600
2,550
500
500
(Income statement accounts are closed to the Income Summary account)
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PROBLEM 4-10B (CONTINUED
(b)
Sept. 1 Bal.
Sept. 6
Sept. 11
Sept. 12
Sept. 27
Sept. 30 Bal.
Cash
9,760
5,400
8,800
5,000
1,300
Sept. 4
Sept. 21
Sept. 24
Sept. 25
Sept. 28
Sept. 28
Sept. 30 Bal.
Sept. 21
15,760
Accounts Receivable
Sept. 1 Bal.
7,440
Sept. 26
1,600 Sept. 6
Sept. 30 Bal.
3,640
Sept. 30 Adj.
600
Sept. 30 Bal.
4,240
Sept. 1 Bal.
Sept. 17
Sept. 30 Bal.
2,200
7,000
2,000
2,200
500
600
5,400
Supplies
1,600
2,000
3,600
Sept. 30 Adj. 2,800
800
Sept. 24
Prepaid Rent
1,000
Sept. 1 Bal.
Equipment
30,000
Accumulated Depreciation - Equipment
Sept. 1 Bal. 3,000
Sept. 30 Adj. 250
Sept. 30 Bal. 3,250
Accounts Payable
Sept. 1 Bal.
7,000 Sept. 17
Sept. 30 Bal.
Unearned Revenue
Sept. 1 Bal.
Sept. 27
Sept. 30 Bal.
Sept. 30 Adj.
800
Sept. 30 Bal.
Sept. 4
Salaries Payable
Sept. 1 Bal.
1,400
Sept. 30 Bal.
Sept. 30 Adj.
Sept. 30 Bal.
6,200
2,000
1,200
800
1,300
2,100
1,300
1,400
0
1,600
1,600
Common Shares
Sept. 1 Bal. 20,000
Sept. 12
5,000
Sept. 30 Bal. 25,000
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PROBLEM 4-10B (CONTINUED)
(b) (continued)
Retained Earnings
Sept. 1 Bal.
Sept. 30 Bal.
Sept. 30 CE4 500 Sept. 30 CE3
Sept. 30 Bal.
Dividends Declared
Sept. 28
500
Sept. 30 CE4
Sept. 30 Bal.
0
17,400
17,400
2,550
19,450
500
Service Revenue
Sept. 11
8,800
Sept. 26
1,600
Sept. 30 Bal. 10,400
Sept. 30 Adj.
600
Sept. 30 Adj.
800
Sept. 30 Bal. 11,800
Sept. 30 CE1 11,800
Sept. 30 Bal.
0
Depreciation Expense
Sept. 30 Adj.
250
Sept. 30 CE2
Sept. 30 Bal.
0
250
Income Tax Expense
600
Sept. 30 CE2
Sept. 30 Bal.
0
Sept. 28
600
Rent Expense
Sept. 24
1,000
Sept. 30 CE2 1,000
Sept. 30 Bal.
0
Salaries Expense
Sept. 4
800
Sept. 25
2,200
Sept. 30 Bal. 3,000
Sept. 30 Adj. 1,600
Sept. 30 Bal. 4,600
Sept. 30 CE 2 4,600
Sept. 30 Bal.
0
Income Summary
Sept. 30 CE2 9,250 Sept. 30 CE1 11,800
Bal.
2,550
Sept. 30 CE3 2,550
Sept. 30 Bal.
0
Supplies Expense
Sept. 30 Adj. 2,800
Sept. 30 CE2 2,800
Sept. 30 Bal.
0
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PROBLEM 4-10B (CONTINUED)
(c)
RIJO EQUIPMENT REPAIR CORP.
Post-Closing Trial Balance
September 30, 2018
Cash .............................................................
Accounts receivable .....................................
Supplies .......................................................
Prepaid rent..................................................
Equipment ....................................................
Accumulated depreciation—equipment ........
Accounts payable .........................................
Unearned revenue .......................................
Salaries payable ...........................................
Common shares ...........................................
Retained earnings ........................................
Totals.....................................................
Debit
$15,760
4,240
800
1,000
30,000
00 0000
$51,800
Credit
$ 3,250
1,200
1,300
1,600
25,000
19,450
$51,800
(Total debits for permanent accounts = Total credits for permanent accounts)
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PROBLEM 4-11B
(a)
GRANT ADVERTISING AGENCY LIMITED
Adjusted Trial Balance
December 31, 2018
Cash ....................................................................................
Held for trading investments................................................
Accounts receivable ............................................................
Supplies .............................................................................
Prepaid insurance ...............................................................
Equipment ...........................................................................
Accumulated depreciation—equipment ...............................
Accounts payable ...............................................................
Salaries payable..................................................................
Interest payable...................................................................
Unearned revenue ..............................................................
Income tax payable .............................................................
Bank loan payable ...............................................................
Common shares .................................................................
Retained earnings ...............................................................
Dividends declared..............................................................
Fees earned ........................................................................
Salaries expense .................................................................
Depreciation expense .........................................................
Rent expense .....................................................................
Supplies expense ...............................................................
Insurance expense ..............................................................
Interest expense..................................................................
Income tax expense ............................................................
Totals .........................................................................
Debit
$ 11,000
10,850
19,750
1,265
800
66,000
Credit
$ 39,600
4,800
1,625
700
6,200
4,000
10,000
20,000
10,400
2,000
60,600
13,625
13,200
7,200
5,935
1,600
700
4,000
$157,925
000 0 00
$157,925
(Total debits = Total credits)
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PROBLEM 4-11B (CONTINUED)
(b)
2018
Dec. 31
31
031
31
Fees Earned .............................................
Income Summary.............................
60,600
Income Summary .....................................
Salaries Expense .............................
Depreciation Expense ......................
Rent Expense ..................................
Supplies Expense ............................
Insurance Expense ..........................
Interest Expense ..............................
Income Tax Expense .......................
46,260
Income Summary .....................................
Retained Earnings ...........................
14,340
Retained Earnings ....................................
Dividends Declared..........................
2,000
60,600
13,625
13,200
7,200
5,935
1,600
700
4,000
14,340
2,000
(Income statement accounts are closed to the Income Summary account)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 4-11B (CONTINUED)
(c)
GRANT ADVERTISING AGENCY LIMITED
Post-Closing Trial Balance
December 31, 2018
Debit
Credit
Cash ..................................................................................$ 11,000
Held for trading investments .............................................. 10,850
Accounts receivable........................................................... 19,750
Supplies ............................................................................. 1,265
Prepaid insurance ..............................................................
800
Equipment ......................................................................... 66,000
Accumulated depreciation—equipment .............................
Accounts payable ..............................................................
Salaries payable ................................................................
Interest payable .................................................................
Unearned revenue .............................................................
Income tax payable............................................................
Bank loan payable .............................................................
Common shares ................................................................
Retained earnings..............................................................
00 000 0
Totals ............................................................................
$109,665
$ 39,600
4,800
1,625
700
6,200
4,000
10,000
20,000
22,740
$109,665
(Total debits = Total credits)
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PROBLEM 4-12B
(a)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
2018
Aug. 31
31
31
31
31
31
31
31
31
31
Insurance Expense ($12,720 × 3/12).............
Prepaid Insurance ................................
3,180
Supplies Expense ($6,990 – $1,380).............
Supplies ................................................
5,610
Depreciation Expense ...................................
($290,000 ÷ 50 years)
Accumulated Depreciation—Buildings .
5,800
Depreciation Expense ...................................
($57,200 ÷ 10 years)
Accumulated Depreciation—Furniture ..
5,720
Unearned Revenue .......................................
Rent Revenue .......................................
[(355 – 45) × $200]
62,000
Salaries Expense ...........................................
Salaries Payable ...................................
1,680
Utilities Expense ............................................
Accounts Payable .................................
3,120
Rent Revenue................................................
Unearned Revenue...............................
6,000
Interest Expense............................................
Interest Payable ....................................
700
Income Tax Expense .....................................
Income Tax Payable .............................
2,000
3,180
5,610
5,800
5,720
62,000
1,680
3,120
6,000
700
2,000
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PROBLEM 4-12B (CONTINUED)
(b)
Cash
Aug. 31 Bal. 38,820
Supplies
Aug. 31 Bal. 6,990
Aug. 31 Adj. 5,610
Aug. 31 Bal. 1,380
Prepaid Insurance
Aug. 31 Bal. 12,720
Aug. 31 Adj. 3,180
Aug. 31 Bal. 9,540
Land
Aug. 31 Bal. 70,000
Buildings
Aug.31 Bal. 290,000
Accumulated Depreciation—
Buildings
Aug. 31 Bal. 87,000
Aug. 31 Adj. 5,800
Aug. 31 Bal. 92,800
Furniture
Aug. 31 Bal. 57,200
Accumulated Depreciation—
Furniture
Aug. 31 Bal. 22,880
Aug. 31 Adj. 5,720
Aug. 31 Bal. 28,600
Accounts Payable
Aug. 31 Bal. 13,000
Aug. 31 Adj. 3,120
Aug. 31 Bal. 16,120
Unearned Revenue
Aug. 31 Bal. 71,000
Aug. 31 Adj. 62,000 Aug. 31 Adj. 6,000
Aug. 31 Bal. 15,000
Salaries Payable
Aug. 31 Adj.
1,680
Interest Payable
Aug. 31 Adj.
700
Income Tax Payable
Aug. 31 Adj.
2,000
Mortgage Payable
Aug. 31 Bal. 120,000
Common Shares
Aug. 31 Bal. 40,000
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PROBLEM 4-12B (CONTINUED)
(b) (continued)
Retained Earnings
Aug. 31 Bal. 72,000
Dividends Declared
Aug. 31 Bal. 10,000
Rent Revenue
Aug. 31 Adj. 6,000 Aug.31 Bal. 497,000
Aug. 31 Adj. 62,000
Aug. 31 Bal. 553,000
Salaries Expense
Aug. 31 Bal. 306,000
Aug. 31 Adj. 1,680
Aug. 31 Bal. 307,680
Utilities Expense
Aug. 31 Bal. 75,200
Aug. 31 Adj. 3,120
Aug. 31 Bal. 78,320
Repairs and Maintenance Expense
Aug. 31 Bal. 28,250
Insurance Expense
Aug. 31 Adj. 3,180
Supplies Expense
Aug. 31 Adj. 5,610
Depreciation Expense
Aug. 31 Adj. 5,800
Aug. 31 Adj. 5,720
Aug. 31 Bal. 11,520
Interest Expense
Aug. 31 Bal.
Aug. 31 Adj.
Aug. 31 Bal.
7,700
700
8,400
Income Tax Expense
Aug. 31 Bal. 20,000
Aug. 31 Adj.0 2,000
Aug. 31 Bal. 22,000
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PROBLEM 4-12B (CONTINUED)
(c)
ROCKY MOUNTAIN RESORT INC.
Adjusted Trial Balance
August 31, 2018
Cash ........................................................................
Supplies .......................................................................
Prepaid insurance ........................................................
Land.............................................................................
Buildings ......................................................................
Accumulated depreciation—buildings ..........................
Furniture ......................................................................
Accumulated depreciation—furniture ...........................
Accounts payable ........................................................
Salaries payable ..........................................................
Interest payable ...........................................................
Income tax payable......................................................
Unearned revenue .......................................................
Mortgage payable, due 2021 .......................................
Common shares ..........................................................
Retained earnings........................................................
Dividends declared ......................................................
Rent revenue ...............................................................
Salaries expense .........................................................
Utilities expense...........................................................
Repairs and maintenance expense .............................
Depreciation expense ..................................................
Interest expense ..........................................................
Supplies expense ........................................................
Insurance expense ......................................................
Income tax expense.....................................................
Totals ...............................................................
Debit
$ 38,820
1,380
9,540
70,000
290,000
Credit
$ 92,800
57,200
28,600
16,120
1,680
700
2,000
15,000
120,000
40,000
72,000
10,000
553,000
307,680
78,320
28,250
11,520
8,400
5,610
3,180
22,000
$941,900
,
000000 0
$941,900
(Total debits = Total credits)
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PROBLEM 4-12B (CONTINUED)
(d) (1)
ROCKY MOUNTAIN RESORT INC.
Income Statement
Year Ended August 31, 2018
Revenues
Rent revenue ...........................................
Expenses
Salaries expense .....................................
Utilities expense.......................................
Repairs and maintenance expense .........
Depreciation expense ..............................
Interest expense ......................................
Supplies expense ....................................
Insurance expense ..................................
Total expenses ...............................
Income before income tax ................................
Income tax expense..........................................
Net income ......................................................
$553,000
$307,680
78,320
28,250
11,520
8,400
5,610
3,180
442,960
110,040
22,000
$ 88,040
[Revenues – Expenses = Net income or (Loss)]
(d) (2)
ROCKY MOUNTAIN RESORT INC.
Statement of Changes in Equity
Year Ended August 31, 2018
Common
Shares
Retained
Earnings
Balance, September 1, 2017 ..........................................................
$35,000
$ 72,000
Issued common shares ..................................................................
5,000
Net income ........................................................
88,040
Dividends declared.........................................................................
0000 00
(10,000)
Balance, August 31, 2018 ..............................................................
$40,000
$150,040
Total
Equity
$107,000
5,000
88,040
(10,000)
$190,040
(Beginning equity ± Changes to equity = Ending equity)
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PROBLEM 4-12B (CONTINUED)
(d) (3)
ROCKY MOUNTAIN RESORT INC.
Statement of Financial Position
August 31, 2018
Assets
Current assets
Cash ........................................................
Supplies ...................................................
Prepaid insurance ....................................
Total current assets ...........................
Property, plant, and equipment
Land .........................................................
$ 70,000
Buildings .................................................. $290,000
Less: Accumulated depreciation .............
92,800 197,200
Furniture ..................................................
$57,200
Less: Accumulated depreciation .............
28,600
28,600
Total property, plant, and equipment
Total assets ........................................................
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ......................................
Salaries payable ........................................
Interest payable .........................................
Income tax payable ....................................
Unearned revenue .....................................
Total current liabilities .......................
Non-current liabilities
Mortgage payable ......................................
Total liabilities ...................................
Shareholders’ equity
Common shares ........................................
Retained earnings......................................
Total shareholders’ equity .................
Total liabilities and shareholders’ equity .............
$ 38,820
1,380
9,540
49,740
295,800
$345,540
$16,120
1,680
700
2,000
15,000
$ 35,500
120,000
155,500
$ 40,000
150,040
190,040
$345,540
(Assets = Liabilities + Shareholders’ equity)
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PROBLEM 4-12B (CONTINUED)
(e)
The financial position and performance of a company can be evaluated in
terms of its liquidity, profitability, and solvency.
Liquidity
Rocky Mountain Resort seems to being enjoying a strong liquidity
position. It has a large cash balance of $38,820. The company has a
positive current ratio of 1.4:1 ($49,740 ÷ $35,500) which would indicate
that there are more than enough current assets on hand to meet currently
maturing liabilities. It is also notable that current liabilities include a large
amount (42.3%) of unearned revenue, which will not require a cash
payment in future.
Profitability
According to the income statement, Rocky Mountain Resort was
profitable in 2018 with net income of $88,040. The resort also has a
positive balance in retained earnings, which indicates it has been
profitable in the past.
The company also declared dividends of $10,000 in the past year, which
may be of interest to your friend if your friend is considering an income
investment.
Solvency
The company has a large mortgage, but this represents less than half of
the value of the property, plant, and equipment so the bank should not be
worried about security for the loan. The company’s debt to assets ratio is
45% ($155,500 ÷ $345,540), so the level of debt held by the company is
not extremely high which mitigates the risk of not being able to make
interest payments. This, combined with strong liquidity and positive
income, indicates that the company is not experiencing any solvency
problems.
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PROBLEM 4-12B (CONTINUED)
(e) (Continued)
Overall, Rocky Mountain Resort appears to have a healthy financial
position. However, a more complete analysis should be performed before
investing. Reviewing prior years’ financial statements and industry
information would enable us to perform some comparative analysis to
better evaluate Rocky’s financial health.
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PROBLEM 4-13B
(a)
2018
Aug. 31
31
031
31
Rent Revenue .............................................
Income Summary ...............................
553,000
Income Summary ........................................
Salaries Expense ...............................
Utilities Expense ................................
Repairs and Maintenance Expense ...
Depreciation Expense ........................
Interest Expense ................................
Supplies Expense ..............................
Insurance Expense ............................
Income Tax Expense .........................
464,960
Income Summary ........................................
Retained Earnings .............................
88,040
Retained Earnings ......................................
Dividends Declared ............................
10,000
553,000
307,680
78,320
28,250
11,520
8,400
5,610
3,180
22,000
88,040
10,000
(Income statement accounts are closed to the Income Summary account)
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PROBLEM 4-13B (CONTINUED
(b)
Cash
Aug. 31 Bal. 38,820
Aug. 31 Bal.
Aug. 31 Bal.
Supplies
6,990
Aug. 31 Adj.
1,380
Prepaid Insurance
Aug. 31 Bal. 12,720
Aug. 31 Adj.
Aug. 31 Bal. 9,540
Accounts Payable
Aug. 31 Bal. 13,000
Aug. 31 Adj. 3,120
Aug. 31 Bal. 16,120
5,610
Unearned Revenue
Aug. 31 Bal. 71,000
Aug. 31 Adj. 62,000 Aug. 31 Adj. 6,000
Aug. 31 Bal. 15,000
3,180
Land
Aug. 31 Bal. 70,000
Buildings
Aug. 31 Bal.290,000
Accumulated Depreciation—
Buildings
Aug. 31 Bal. 87,000
Aug. 31 Adj. 5,800
Aug. 31 Bal. 92,800
Furniture
Aug. 31 Bal. 57,200
Accumulated Depreciation—
Furniture
Aug. 31 Bal. 22,880
Aug. 31 Adj. 5,720
Aug. 31 Bal. 28,600
Salaries Payable
Aug. 31 Adj.
1,680
Interest Payable
Aug. 31 Adj.
700
Income Tax Payable
Aug. 31 Adj.
2,000
Mortgage Payable
Aug. 31 Bal. 120,000
Common Shares
Aug. 31 Bal. 40,000
Retained Earnings
Aug. 31 Bal. 72,000
Aug. 31 CE4 10,000 Aug. 31 CE3 88,040
Aug. 31 Bal. 150,040
Dividends Declared
Aug. 31 Bal. 10,000
Aug. 31 CE4 10,000
Aug. 31 Bal.
0
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PROBLEM 4-13B (CONTINUED)
(b) (continued)
Rent Revenue
Aug. 31 Bal. 497,000
Aug. 31 Adj. 6,000 Aug. 31 Adj. 62,000
Aug. 31 Bal. 553,000
Aug.31 CE1 553,000
Aug. 31 Bal.
0
Salaries Expense
Aug. 31 Bal. 306,000
Aug. 31 Adj. 1,680
Aug. 31 Bal. 307,680
Aug.31 CE2
Aug. 31 Bal.
0
Aug. 31 Bal.
Aug. 31 Adj.
Aug. 31 Bal.
Aug. 31 Bal.
Utilities Expense
75,200
3,120
78,320
Aug. 31 CE2
0
5,610
Depreciation Expense
Aug. 31
5,800
Aug. 31 Adj. 5,720
Aug. 31 Bal. 11,520
Aug. 31 CE2 11,520
Aug. 31 Bal.
0
307,680
Interest Expense
Aug. 31 Bal.
Aug. 31 Adj.
Aug. 31 Bal.
7,700
700
8,400
Aug. 31 CE2
Aug. 31 Bal.
8,400
0
78,320
Repairs and Maintenance Expense
Aug. 31 Bal. 28,250
Aug. 31 CE2 28,250
Aug. 31 Bal.
0
Insurance Expense
3,180
Aug. 31 CE2
Aug. 31 Bal.
0
Supplies Expense
5,610
Aug. 31 CE2
Aug. 31 Bal.
0
Aug. 31 Adj.
Income Tax Expense
Aug. 31 Bal. 20,000
Aug. 31
2,000
Aug. 31 Bal. 22,000
Aug. 31 CE2 22,000
Aug. 31 Bal.
0
Income Summary
Aug. 31 Adj.
3,180
Aug.31 CE2 464,960 Aug.31 CE1 553,000
Bal.
88,040
Aug.31 CE3 88,040
Aug. 31 Bal.
0
PROBLEM 4-13B (CONTINUED
(c)
ROCKY MOUNTAIN RESORT INC.
Post-Closing Trial Balance
August 31, 2018
Debit
Cash...............................................................................$ 38,820
Credit
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Supplies ............................................................................. 1,380
Prepaid insurance .............................................................. 9,540
Land ...................................................................................70,000
Buildings ............................................................................
290,000
Accumulated depreciation—buildings ................................
Furniture.............................................................................57,200
Accumulated depreciation—furniture .................................
Accounts payable ...............................................................
Salaries payable.................................................................
Interest payable .................................................................
Income tax payable ............................................................
Unearned revenue .............................................................
Mortgage payable ..............................................................
Common shares .................................................................
Retained earnings ..............................................................
00 00000
Totals .........................................................................
$466,940
$ 92,800
28,600
16,120
1,680
700
2,000
15,000
120,000
40,000
150,040
$466,940
(Total debits for permanent accounts = Total credits for permanent accounts)
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ACR4-1 ACCOUNTING CYCLE REVIEW
(a)
Aug.
1
3
6
10
13
15
17
22
24
27
29
31
Prepaid Advertising ...................................................
Cash .................................................................
400
Prepaid Rent .............................................................
Cash .................................................................
380
Cash .........................................................................
Accounts Receivable ........................................
3,200
Salaries Expense ......................................................
Salaries Payable .......................................................
Cash .................................................................
1,700
1,420
Cash .........................................................................
Service Revenue ..............................................
3,800
Equipment .................................................................
Accounts Payable .............................................
2,000
Accounts Payable ......................................................
Cash .................................................................
2,000
Supplies ....................................................................
Accounts Payable .............................................
800
Salaries Expense ......................................................
Cash .................................................................
2,900
Accounts Receivable ................................................
Service Revenue ..............................................
4,760
Cash .........................................................................
Unearned Revenue ..........................................
780
Dividends Declared ...................................................
Cash .................................................................
500
400
380
3,200
3,120
3,800
2,000
2,000
800
2,900
4,760
780
500
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ACR4-1 (CONTINUED)
(b), (d), and (g)
Cash
Aug
Aug.
1 Bal.
6,020 Aug.
1
400
6
3,200
380
13
3,800
29
780
3
1
0
1
7
2
4
3
1
31 Bal.
Note Receivable
4,00
Aug. 1 Bal.
0
Interest Receivable
3,120
2,000
2,900
Aug. 1 Bal.
20
Aug. 31 Adj.
20
Aug. 31 Bal.
40
500
Equipment
4,500
Aug. 1 Bal. 10,000
Aug. 15
Accounts Receivable
Aug.
1 Bal. 4,310 Aug. 6
27
Aug.
3,200
2,000
Aug. 31 Bal. 12,000
4,760
Accumulated Depreciation—Equipment
31 Bal. 5,870
Aug. 1 Bal.
Aug. 31 Adj.
Prepaid Advertising
Aug.
Aug.
1
31 Bal.
400
Aug. 31 Adj.
20
0
Aug. 31 Bal
200
Supplies
Aug.
1 Bal.
Adj 87
1,030 Aug. 31 .
0
22
800
31 Bal.
960
Aug.
3
380 Aug. 31 Adj. 380
Aug.
31 Bal.
0
2,000 Aug. 1 Bal.
2,200
2,300
15
2,000
22
800
Aug. 31 Bal.
Aug. 10
Prepaid Rent
200
Accounts Payable
Aug. 17
Aug.
2,000
Salaries Payable
1,420 Aug. 1 Bal.
3,100
1,420
Aug. 31 Adj.
1,540
Aug. 31 Bal.
1,540
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ACR4-1 (CONTINUED)
(b), (d), and (g) (continued)
Interest Revenue
Income Tax Payable
Aug.
Aug. 31 Adj.
31 Adj.
300
Aug. 31 CE
20
20
Aug.31 Bal.
Unearned Revenue
Aug. 31 Adj.
800 Aug. 1 Bal.
29
Salaries Expense
1,260
Aug. 10
1,700
24
2,900
780
Aug. 31 Bal.
1,240
Common Shares
Aug. 1 Bal.
Aug. 31 Adj.
1,540
Aug. 31 Bal.
6,140
Aug. 31 CE2
12,000
Aug. 31 Bal.
Retained Earnings
0
6,400
1,290
Aug. 31 Adj.
380
Aug. 31 CE2
500
Aug. 31 Bal.
7,190
Aug. 31 Bal.
500 Aug. 31 CE4
Aug. 31 Bal.
380
0
Supplies Expense
Dividends Declared
Aug. 31
6,140
Rent Expense
Aug. 1 Bal.
Aug. 31 CE3
Aug. 31 CE4
0
500
Aug. 31 Adj.
870
Aug. 31 CE2
0
Aug. 31 Bal.
870
0
Service Revenue
Aug. 31 CE
Aug. 13
3,800
27
4,760
31 Adj.
800
Aug. 31 Bal.
9,360
Aug. 31 Bal.
0
Depreciation Expense
Aug.
31 Adj.
200
July 31 CE2
Aug. 31 Bal.
200
0
19,360
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ACR4-1 (CONTINUED)
(b), (d), and (g) (continued)
Income Tax Expense
Aug. 31 Adj.
300
Aug. 31 CE 2
Aug 31 CE2
Aug. 31 Bal.
Income Summary
8,090 Aug. 31 CE1
9,380
Aug. 31 Bal.
1,290
Aug. 31 Bal.
0
300
0
Aug. 31 CE 3
1,290
Advertising Expense
Aug. 31 Adj.
200
Aug 31
Aug. 31 Bal.
CE2
200
0
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ACR4-1 (CONTINUED)
(c)
TOBIQUE LTD.
Trial Balance
August 31, 2018
Cash ......................................................
Accounts receivable .............................
Prepaid advertising ...............................
Supplies ................................................
Prepaid rent ...........................................
Note receivable ......................................
Interest receivable .................................
Equipment .............................................
Accumulated depreciation—equipment .
Accounts payable .................................
Unearned revenue ................................
Common shares ...................................
Retained earnings .................................
Dividends declared ................................
Service revenue .....................................
Salaries expense ..................................
Totals ..............................................
Debit
$ 4,500
5,870
400
1,830
380
4,000
20
12,000
Credit
$ 2,000
3,100
2,040
12,000
6,400
500
8,560
4,600
$34,100
$34,100
(Total debits = Total credits)
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ACR4-1 (CONTINUED)
(d)
Aug. 31
31
31
31
31
31
31
31
Advertising Expense ..................................................
Prepaid Advertising ...................................................
($400 × 1/2)
200
Rent Expense ............................................................
Prepaid Rent ....................................................
380
Salaries Expense ......................................................
Salaries Payable ..............................................
1,540
Depreciation Expense ...............................................
Accumulated Depreciation—Equipment ....................
Supplies Expense......................................................
Supplies ($1,830 - $960) ..................................
200
Unearned Revenue ...................................................
Service Revenue ..............................................
800
Interest Receivable....................................................
Interest Revenue ..............................................
($4,000 × 6% × 1/12)
20
Income Tax Expense .................................................
Income Tax Payable .........................................
300
200
380
1,540
200
870
870
800
20
300
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ACR4-1 (CONTINUED)
(e)
TOBIQUE LTD.
Adjusted Trial Balance
August 31, 2018
Cash
Accounts receivable .......................................
Prepaid advertising .........................................
Supplies ..........................................................
Note receivable ................................................
Interest receivable ...........................................
Equipment .......................................................
Accumulated depreciation—equipment ...........
Accounts payable ...........................................
Salaries payable .............................................
Income tax payable ........................................
Unearned revenue ..........................................
Common shares .............................................
Retained earnings ..........................................
Dividends declared ..........................................
Service revenue ..............................................
Interest revenue ..............................................
Salaries expense ............................................
Rent expense .................................................
Supplies expense ...........................................
Depreciation expense .....................................
Advertising expense .......................................
Income tax expense .......................................
Totals ........................................................
Debit
$ 4,500
5,870
200
960
4,000
40
12,000
Credit
$ 2,200
3,100
1,540
300
1,240
12,000
6,400
500
9,360
20
6,140
380
870
200
200
300
$36,160
$36,160
(Total debits = Total credits)
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ACR4-1 (CONTINUED)
(f) (1)
TOBIQUE LTD.
Income Statement
Month Ended August 31, 2018
Revenues
Service revenue ..............................................
Interest revenue ..............................................
Expenses
Salaries expense ............................................
Supplies expense ............................................
Rent expense ..................................................
Advertising expense ........................................
Depreciation expense .....................................
Total expenses .......................................
Income before income tax ........................................
Income tax expense .................................................
Net income ...............................................................
$9,360
20
$9,380
$6,140
870
380
200
200
7,790
1,590
300
$1,290
[Revenues – Expenses = Net Income or (Loss)]
(f) (2)
TOBIQUE LTD.
Statement of Changes in Equity
Month Ended August 31, 2018
Common
Retained
Shares
Earnings
Balance, Aug. 1 ......................................................................
$12,000
$6,400
Net income..............................................................................
1,290
00 0000
Dividends declared .................................................................
__ ____
(500)
Balance, Aug. 31 ....................................................................
$12,000
$7,190
Total
Equity
$18,400
1,290
(500)
$19,190
(Beginning equity ± Changes to equity = Ending equity)
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(f) (3)
TOBIQUE LTD.
Statement of Financial Position
August 31, 2018
Assets
Current assets
Cash...........................................................
Accounts receivable ...................................
Note receivable, due October 31, 2018......
Interest receivable ......................................
Prepaid advertising ....................................
Supplies .....................................................
Total current assets...........................
Property, plant, and equipment
Equipment ..................................................
Less: Accumulated depreciation ................
Total assets.........................................................
$ 4,500
5,870
4,000
40
200
960
15,570
$12,000
2,200
9,800
$25,370
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable .......................................
Salaries payable ........................................
Income tax payable ....................................
Unearned revenue .....................................
Total liabilities .......................................
$3,100
1,540
300
1,240
Shareholders’ equity
Common shares .........................................
Retained earnings ......................................
Total shareholders’ equity .................
Total liabilities and shareholders’ equity .............
$12,000
7,190
$ 6,180
19,190
$25,370
(Assets = Liabilities + Shareholders’ equity)
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ACR4-1 (CONTINUED)
(g) Aug. 31 Service Revenue .......................................................
Interest Revenue .......................................................
Income Summary .............................................
9,360
20
31 Income Summary ......................................................
Salaries Expense .............................................
Rent Expense ...................................................
Supplies Expense .............................................
Depreciation Expense ......................................
Advertising Expense ..................................................
Income Tax Expense ........................................
8,090
31 Income Summary ......................................................
Retained Earnings ............................................
1,290
31 Retained Earnings .....................................................
Dividends Declared ..........................................
500
9,380
6,140
380
870
200
200
300
1,290
500
(Income statement accounts are closed to the Income Summary account)
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ACR4-1 (CONTINUED)
(h)
TOBIQUE LTD.
Post-closing Trial Balance
August 31, 2018
Cash ................................................................
Accounts receivable ........................................
Prepaid advertising .........................................
Supplies ..........................................................
Note receivable ................................................
Interest receivable ...........................................
Equipment
Accumulated depreciation—equipment ...........
Accounts payable ...........................................
Salaries payable .............................................
Income tax payable .........................................
Unearned revenue ..........................................
Common shares .............................................
Retained earnings ...........................................
Totals..........................................................
Debit
$ 4,500
5,870
200
960
4,000
40
12,000
000 000
$27,570
Credit
$ 2,200
3,100
1,540
300
1,240
12,000
7,190
$27,570
(Total debits for permanent accounts = Total credits for permanent accounts)
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ACR4-2 ACCOUNTING CYCLE REVIEW
(a)
July
3
4
5
6
6
Cash ..........................................................................
Common Shares ..............................................
10,000
Prepaid Insurance .....................................................
Cash .................................................................
3,600
Prepaid Rent .............................................................
Cash .................................................................
8,000
Supplies ....................................................................
Cash .................................................................
3,800
Equipment .................................................................
Cash .................................................................
Bank Loan Payable ..........................................
24,000
10,000
3,600
8,000
3,800
4,000
20,000
10
No entry required (consulting agreement)
12
Cash .........................................................................
Accounts Receivable ........................................
1,200
Unearned Revenue ...................................................
Fees Earned .....................................................
1,120
Salaries Expense ......................................................
Cash .................................................................
11,000
Accounts Payable......................................................
Cash .................................................................
400
13
16
17
1,200
1,120
11,000
400
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ACR4-2 (CONTINUED)
(a) (continued)
July 18
19
20
23
25
27
30
Cash .........................................................................
Unearned Revenue ..........................................
12,000
Accounts Receivable ................................................
Fees Earned .....................................................
28,000
Professional Fees Expense .......................................
Accounts Payable .............................................
Unearned Revenue ...................................................
Fees Earned .....................................................
2,200
12,000
28,000
2,200
10,000
10,000
Income Tax Expense .................................................
Income Tax Payable ..................................................
Cash .................................................................
1,200
500
Cash .........................................................................
Accounts Receivable ........................................
15,000
Dividends Declared ...................................................
Cash .................................................................
5,000
1,700
15,000
5,000
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ACR4-2 (CONTINUED)
(b), (d), and (g)
Cash
July
July
Equipment
1 Bal.
15,230 July
4
3,600
3
10,000
5
8,000
12
1,200
6
3,800
18
12,000
6
4,000
27
15,000
16
11,000
17
400
25
1,700
30
5,000
31 Bal.
July
6
24,000
Accumulated Depreciation—Equipment
July 31 Adj.
500
Accounts Payable
July 17
400 July 1 Bal.
20
15,930
400
2,200
31 Adj.
800
July 31 Bal.
3,000
Accounts Receivable
July
July
1 Bal.
1,200 July 12
19
28,000
31 Bal.
13,000
27
1,200
Interest Payable
15,000
July 31 Adj.
Prepaid Insurance
July
July
4
31 Bal.
3,600
July 31 Adj.
100
Salaries Payable
300
July 31 Adj.
11,000
3,300
Income Tax Payable
Supplies
July
July
1 Bal.
690
6
3,800
31 Bal.
3,240
July 25
July
5
31 Bal.
500
July 31 Bal.
0
July 31 Adj. 1,250
Unearned Revenue
Prepaid Rent
July
500 July 1 Bal.
8,000 July
31 Adj. 4,000
July 13
1,120
23
10,000
July 1 Bal.
1,120
18
12,000
July 31 Bal.
2,000
4,000
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ACR4-2 (CONTINUED)
(b), (d), and (g) (continued)
Rent Expense
Bank Loan Payable
20,000 July
July 6
31 Adj.
4,000
July 31 CE2
Common Shares
July 31 Bal.
July 1 Bal.
3,600
3
10,000
July 31 Bal.
0
Professional Fees Expense
13,600 July 20
2,200
July 31 CE2
Retained Earnings
July 1 Bal.
5,000 July 31 CE3
July 31 CE4
11,500
July 31 Bal.
Supplies Expense
July 31 Adj.
1,250
July 31 CE2
Dividends Declared
5,000 July
July 31 Bal.
31 CE4 5,000
July 31 Bal.
0
1,250
0
Utilities Expense
July 31 Adj.
Fees Earned
July
July
13
1,120
19
28,000
23
10,000
800
July 31 CE2
July 31 Bal.
Depreciation Expense
31 Bal. 39,120 July
31 Adj.
500
July 31
July 31 Bal.
0
July
31 Bal.
Salaries Expense
11,000
CE2
500
0
Insurance Expense
July
31 Adj.
300
July 31 Adj. 11,000
July 31
July 31 Bal. 22,000
800
0
July 31 CE1 39,120
July 16
2,200
0
6,770
July 31 Bal. 13,270
July 30
4,000
July
31 Bal.
CE2
300
0
July 31 CE2 22,000
July 31 Bal.
0
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ACR4-2 (CONTINUED)
(b), (d), and (g) (continued)
Income Summary
Interest Expense
July
31 Adj.
100
July 31 CE2
July 31
July 31 Bal.
CE2
32,350 July 31 CE1 39,120
100
0
Bal.
July 31 CE3
6,770
6,770
July 31
Bal.
0
Income Tax Expense
July 25
1,200
July 31 CE2
July 31 Bal.
1,200
0
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ACR4-2 (CONTINUED)
(c)
RIVER CONSULTANTS LTD.
Trial Balance
July 31, 2018
Cash ........................................................
Accounts receivable ................................
Prepaid insurance ....................................
Supplies ..................................................
Prepaid rent .............................................
Equipment ...............................................
Accounts payable ...................................
Unearned revenue ..................................
Bank loan payable ...................................
Common shares .....................................
Retained earnings ...................................
Dividends declared ..................................
Fees earned.............................................
Salaries expense .....................................
Professional fees expense .......................
Income tax expense .................................
Totals...............................................
Debit
$15,930
13,000
3,600
4,490
8,000
24,000
Credit
$ 2,200
2,000
20,000
13,600
11,500
5,000
39,120
11,000
2,200
1,200
$88,420
$88,420
(Total debits = Total credits)
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ACR4-2 (CONTINUED)
(d)
July 31
31
31
31
31
31
31
Insurance Expense....................................................
Prepaid Insurance ............................................
($3,600 × 1/12)
300
Rent Expense ............................................................
Prepaid Rent ....................................................
4,000
Supplies Expense......................................................
Supplies............................................................
1,250
Depreciation Expense ...............................................
Accumulated Depreciation—Equipment ...........
($24,000 ÷ 4 × 1/12)
500
Interest Expense .......................................................
Interest Payable ...............................................
($20,000 × 6% × 1/12)
100
Salaries Expense ......................................................
Salaries Payable ..............................................
11,000
Utilities Expense ........................................................
Accounts Payable .............................................
800
300
4,000
1,250
500
100
11,000
800
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ACR4-2 (CONTINUED)
(e)
RIVER CONSULTANTS LTD.
Adjusted Trial Balance
July 31, 2018
Cash .............................................................
Accounts receivable ......................................
Prepaid insurance .........................................
Supplies .......................................................
Prepaid rent ..................................................
Equipment .....................................................
Accumulated depreciation—equipment ........
Accounts payable .........................................
Interest payable ...........................................
Salaries payable ..........................................
Unearned revenue .......................................
Bank loan payable ........................................
Common shares ...........................................
Retained earnings ........................................
Dividends declared .......................................
Fees earned .................................................
Salaries expense .........................................
Rent expense ...............................................
Professional fees expense ...........................
Supplies expense .........................................
Utilities expense ...........................................
Depreciation expense ..................................
Insurance expense .......................................
Interest expense ..........................................
Income tax expense .....................................
Totals ........................................................
Debit
$ 15,930
13,000
3,300
3,240
4,000
24,000
Credit
$
500
3,000
100
11,000
2,000
20,000
13,600
11,500
5,000
39,120
22,000
4,000
2,200
1,250
800
500
300
100
1,200
$100,820
$100,820
(Total debits = Total credits)
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ACR4-2 (CONTINUED)
(f) (1)
RIVER CONSULTANTS LTD.
Income Statement
Month Ended July 31, 2018
Revenues
Fees earned ....................................................
Expenses
Salaries expense ............................................
Rent expense ..................................................
Professional fees expense ..............................
Supplies expense ............................................
Utilities expense ..............................................
Depreciation expense .....................................
Insurance expense ..........................................
Interest expense .............................................
Total expenses .......................................
Income before income tax ........................................
Income tax expense .................................................
Net income ...............................................................
$39,120
$22,000
4,000
2,200
1,250
800
500
300
100
31,150
7,970
1,200
$ 6,770
[Revenues – Expenses = Net income or (Loss)]
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ACR4-2 (CONTINUED)
(f) (2)
RIVER CONSULTANTS LTD.
Statement of Changes in Equity
Month Ended July 31, 2018
Common
Retained
Shares
Earnings
Balance, July 1 ...............................................................................
$ 3,600
$11,500
Issued common shares ..................................................................
10,000
Net income .....................................................................................
6,770
00 0000
Dividends declared .........................................................................
__ ____
(5,000)
Balance, July 31 .............................................................................
$13,600
$13,270
Total
Equity
$15,100
10,000
6,770
(5,000)
$26,870
(Beginning equity ± Changes to equity = Ending equity)
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ACR4-2 (CONTINUED)
(f) (3)
RIVER CONSULTANTS LTD.
Statement of Financial Position
July 31, 2018
Assets
Current assets
Cash...........................................................
Accounts receivable ...................................
Prepaid rent ...............................................
Prepaid insurance ......................................
Supplies .....................................................
Total current assets...........................
Property, plant, and equipment
Equipment ..................................................
Less: Accumulated depreciation ................
Total assets.........................................................
$15,930
13,000
4,000
3,300
3,240
39,470
$24,000
500
23,500
$62,970
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable .......................................
Salaries payable ........................................
Interest payable .........................................
Unearned revenue .....................................
Total current liabilities ...........................
Non-current liabilities
Bank loan payable .....................................
Total liabilities....................................
Shareholders’ equity
Common shares .........................................
Retained earnings ......................................
Total shareholders’ equity .................
Total liabilities and shareholders’ equity .............
$ 3,000
11,000
100
2,000
$16,100
20,000
36,100
$13,600
13,270
26,870
$62,970
(Assets = Liabilities + Shareholders’ equity)
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ACR4-2 (CONTINUED)
(g)
July 31
31
31
31
Fees Earned ..............................................................
Income Summary .............................................
39,120
Income Summary ......................................................
Salaries Expense .............................................
Rent Expense ...................................................
Professional Fees Expense ..............................
Supplies Expense .............................................
Utilities Expense ...............................................
Depreciation Expense ......................................
Insurance Expense ...........................................
Interest Expense ..............................................
Income Tax Expense ........................................
32,350
Income Summary ......................................................
Retained Earnings ............................................
6,770
Retained Earnings .....................................................
Dividends Declared ..........................................
5,000
39,120
22,000
4,000
2,200
1,250
800
500
300
100
1,200
6,770
5,000
(Income statement accounts are closed to the Income Summary account)
(h)
Current ratio
$39,470
$16,100
=
2.5:1
River Consultants has exceeded the benchmark of 2:1 for its current ratio.
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CT4-1
(a)
Financial Accounting, Seventh Canadian Edition
FINANCIAL REPORTING CASE
Accounts appearing on North West’s balance sheet that may have been
used in an adjusting entry for prepayments include:


Prepaid expenses
Property and equipment
The related statement of earnings accounts that most likely include
adjusting entries at the end of the year for prepayments include:

(b)
Selling, operating, and administrative expenses
o Depreciation expense (which North West calls
amortization expense) which would be part of selling,
operating, and administrative expenses
o Insurance expense included would be part of selling,
operating, and administrative expenses
o Other choices are also possible
Accounts appearing on North West’s balance sheet that may have been
used in an adjusting entry for accruals include:


Accounts payable and accrued liabilities
Income tax payable
The related statement of earnings accounts that most likely include
adjusting entries at the end of the year for accruals include:



Salaries expense which would be part of selling, operating,
and administrative expenses
Income tax expense
Other choices are also possible
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CT4-1 (CONTINUED)
(c)
The five-step process of revenue recognition includes:
1.
2.
3.
4.
Identify the contract with the client or customer.
Identify the performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the performance obligations in the
contract.
5. Recognize revenue when (or as) the company satisfies the
performance obligation.
For North West:
1. The contract is created when the customer selects goods in the
stores.
2. The performance obligation is the provision of goods.
3. The transaction price is labelled for each item in the stores.
4. The per item price fulfils the total performance obligation in the
contract.
5. The revenue is recognized when the customer goes though the cash
register system and pays for the purchase.
LO 1,2 BT: C Difficulty: M Time: 20 min. AACSB: Communication and Analytic CPA: cpa-t001 CM:
Reporting
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CT4-2
Financial Accounting, Seventh Canadian Edition
FINANCIAL REPORTING CASE
Revenue and expense criteria require that revenue be recognized when earned
and expenses when incurred. At the time of signing the three-year maintenance
contact, the customer has not received any services and no revenue has been
earned. Although $100,000 was collected at the time of signing the contract, the
full amount should be recorded to the Unearned Revenue account. As the
performance obligations of the contract (maintenance service) are delivered,
revenue from the services provided can be recognized and the related unearned
revenue reduced. This will ensure that the expenses incurred in the performance
of the contract will be matched to the revenues recognized.
The financial statements for 2017, 2018, and 2019 will be affected as follows:

For 2017, only statement of financial position accounts will be affected.
Cash and Unearned Revenue will increase.

For 2018, the income statement will be affected. Revenue earned from the
provision of the maintenance services will be recognized and there will be
a corresponding entry to reduce the unearned revenue created when the
cash was collected on Dec. 29, 2017. Related expenses will be
recognized and matched to the revenues in the same accounting period.
The second collection of $100,000 on Dec. 29, 2018 will affect the
statement of financial position. Cash and Unearned Revenue will increase.

For 2019, the same effect for the income statement and the statement of
financial position will occur as is described for 2018.
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CT4-3
Financial Accounting, Seventh Canadian Edition
PROFESSIONAL JUDGEMENT CASE
Note to instructors: All of the material supplementing this group activity, including
a suggested solution, can be found in the Collaborative Learning section of the
Instructor Resource site accompanying this textbook as well as in the Prepare
and Present section of WileyPLUS.
(a)
1.
To record the additional depreciation, the following would be recorded:
Depreciation Expense
Accumulated Depreciation—Furniture
2.
400,000
400,000
To increase the accrual for operating expenses by $80,000 ($230,000 –
$150,000) the following entry would be made:
Office Expense
Accounts Payable
(b)
300,000
To accrue the additional salary expense, the following would be recorded:
Salaries Expense
Salaries Payable
3.
300,000
80,000
Income before income tax as originally determined
Additional depreciation expense
Additional salaries expense
Additional office expense
Income before income tax revised
80,000
$2,800,000
(300,000)
(400,000)
(80,000)
$2,020,000
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CT4-3 (CONTINUED)
(c)
Anna suggested that the useful life of the furniture be lowered to increase
the amount of depreciation recorded in each year. This would lower
income before income tax and strengthen management’s argument that
the company could not afford to increase salaries.
(d)
In order to accrue an expense such as severance pay, it must have been
incurred. Since the decision to shut down the stores has not yet been
made, it would be inappropriate to record such an expense.
(e)
It is not unusual for a company to have to accrue amounts for utilities prior
to the invoice being received in order to record the expense in the
appropriate period. The company should be able to make a reasonable
estimate by calling the utility company and looking at past history.
However, increasing the estimate from $150,000 to $230,000 appears to
have been done without any adequate support or justification. This seems
like an attempt to lower the net income of the company prior to
negotiations with the union.
LO 2,3 BT: AN Difficulty: M Time: 30 min. AACSB: Ethics and Analytic CPA: cpa-t001, cpa-e001
CM: Reporting and Ethics
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CT4-4
(a)
Financial Accounting, Seventh Canadian Edition
ETHICS CASE
The stakeholders in this situation are:




Sundream’s controller
Sundream’s Chief Executive Officer
Sundream’s shareholders
Sundream’s creditors.
(b)
By adding $12,000 to sales revenue and reducing interest expense by
$3,000, net income increases by $15,000. Unearned revenue reduces by
$12,000 and interest payable reduces by $3,000. Consequently, the
current and total liabilities would reduce by $15,000 and the shareholders’
equity would increase by $15,000 on the statement of financial position.
The Sundream Travel Agency’s liquidity improves as a result of the
changes suggested by the CEO. The current ratio should be 1.9:1
($400,000 ÷ $210,000) but it is now increased to 2.1:1 [($400,000 ÷
($210,000 – $12,000 – $3,000)].
(c)
Intentionally misrepresenting the company’s financial condition and its
results of operations is unethical and is also illegal. It is obvious from the
request that the CEO’s intention is to manipulate the amount of the current
liabilities, to ensure that the current ratio conforms to the 2:1 requirement
of the bank loan.
(d)
Accounting standards are known and understood by the users and the
preparers of the financial statements. Those who prepare the financial
statements are bound by the accounting standards. An intentional breach
of these standards, as is suggested by the CEO in this case, cannot be
passed off as an oversight or ignorance of the fundamental rules of
accounting. Consequently, the CEO is aware of the breach in the
accounting standards when he suggests the changes to the controller. He
knows that his behaviour is unethical and his suggestions should be
challenged by his controller.
LO 1,2,3 BT: E Difficulty: M Time: 20 min. AACSB: Ethics and Analytic CPA: cpa-t001, cpa-e001
CM: Reporting and Ethics
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CT4-5
(a)
Financial Accounting, Seventh Canadian Edition
FINANCIAL REPORTING CASE
Since First Capital Realty Inc. is required to release financial statements
quarterly, it would need to post adjusting entries at least quarterly. Since
Skyline Group of Companies only releases financial statements annually,
it will need to prepare adjusting entries at least annually.
Although external financial statements are released on a quarterly basis
for First Capital and on an annual basis for Skyline, it is likely that
management of both companies would need monthly financial statements
so that they can assess the company’s performance on a timely basis.
For this reason, it is likely that the adjusting entries are prepared on a
monthly basis for each of the companies and that there are no significant
differences in the accounting cycle for each company.
(b)
The criteria for, and timing of, revenue recognition may differ between the
two companies, depending on their source of revenue. This is not likely
though given that the two companies are both REITs, but it is possible
depending on the terms of specific performance contracts.
In terms of financial reporting, Skyline would not be required to prepare a
statement of changes in equity, but rather would prepare a statement of
retained earnings. Skyline would also not report other comprehensive
income in the shareholders’ equity section of its statement of financial
position and it would not prepare a statement of comprehensive income
(we will learn more about comprehensive income in a later chapter). First
Capital Realty would prepare a statement of changes in equity and a
statement of comprehensive income (if it had any other comprehensive
income). Otherwise, the remaining financial statements would be the
same for each company. Compared with ASPE, additional disclosure is
required by companies reporting under IFRS in the notes to the financial
statements.
LO 2 BT: C Difficulty: M Time: 15 min. AACSB: Communication CPA: cpa-t001 CM: Reporting
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CT4-6
Financial Accounting, Seventh Canadian Edition
SERIAL CASE
(a)
1.
2.
3.
4.
5.
6.
7.
8.
June 30 Advertising Expense ................................................
Supplies .........................................................
600
30 Depreciation Expense .............................................
Accumulated Depreciation—Buildings
($165,000 ÷ 30 years)
5,500
30 Depreciation Expense .............................................
Accumulated Depreciation—Equipment. .........
7,070
30 Depreciation Expense .............................................
Accumulated Depreciation—Vehicles
4,200
30 Interest Expense .....................................................
Interest Payable ..............................................
50
30 Insurance Expense ($12,000 × 6/12 months) ..........
Prepaid Insurance ..........................................
6,000
30 Utilities Expense ......................................................
Accounts Payable ..........................................
1,025
30 Accounts Receivable ...............................................
Sales ...............................................................
1,600
30 Salaries Expense (2 × 20 × $25) .............................
Salaries Payable .............................................
1,000
30 Income Tax Expense ...............................................
Income Tax Payable .......................................
5,000
600
5,500
7,070
4,200
50
6,000
1,025
1,600
1,000
5,000
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Financial Accounting, Seventh Canadian Edition
CT4-6 (CONTINUED)
(b)
June Bal.
Note: June balances were taken from the answer to CT3-6.
Cash
34,534
June Bal.
Accounts Receivable
June Bal.
10,490
30 Adj.
1,600
June Bal.
12,090
June Bal.
June Bal.
June Bal.
June Bal.
June Bal.
Accumulated Depreciation-Equipment
June Bal.
14,000
30 Adj.
7,070
June Bal.
21,070
Vehicles
June Bal.
52,500
Inventory
16,250
Supplies
4,375
June 30 Adj.
3,775
Prepaid Insurance
12,000
June 30
6,000
Equipment
44,520
Accumulated Depreciation-Vehicles
June 30 Adj. 4,200
600
Accounts Payable
June Bal.
30 Adj.
June Bal.
6,240
1,025
7,265
6,000
Land
June Bal. 100,000
Buildings
June Bal. 165,000
Accumulated Depreciation-Buildings
June Bal. 137,500
30 Adj.
5,500
June Bal. 143,000
Unearned Revenue
June Bal.
1,000
Salaries Payable
June 30 Adj. 1,000
Interest Payable
June 30 Adj.
50
Income Tax Payable
June 30 Adj. 5,000
Bank Loan Payable
June Bal.
22,500
CT4-6 (CONTINUED)
(b) (continued)
Mortgage Payable
June Bal.
53,200
Common Shares
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
June Bal.
Financial Accounting, Seventh Canadian Edition
300
Retained Earnings
June Bal. 146,788
Dividends Declared
June Bal.
30,000
Rent Revenue
June Bal.
June Bal.
30 Adj.
June Bal.
9,600
Insurance Expense
June 30 Adj. 6,000
Property Tax Expense
June Bal.
5,950
6,000
Sales
June Bal.
638,758
30 Adj.
1,600
June Bal.
640,358
Cost of Goods Sold
June Bal. 102,386
June Bal.
June Bal.
30 Adj.
June Bal.
Interest Expense
5,299
50
5,349
Income Tax Expense
June Bal.
13,000
30 Adj.
5,000
June Bal.
18,000
Salaries Expense
390,782
1,000
391,782
Depreciation Expense
June 30 Adj. 5,500
30 Adj. 7,070
30 Adj. 4,200
June Bal.
16,770
June Bal.
Office Expense
18,000
Utilities Expense
June Bal.
12,200
30 Adj. 1,025
June Bal.
13,225
Advertising Expense
June Bal.
9,000
30 Adj.
600
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Financial Accounting, Seventh Canadian Edition
CT4-6 (CONTINUED)
(c)
ANTHONY BUSINESS COMPANY LTD.
Adjusted Trial Balance
June 30, 2017
Debit
Cash .........................................................................
Accounts receivable ..................................................
Inventory ...................................................................
Supplies ....................................................................
Prepaid insurance .....................................................
Land ..........................................................................
Buildings ...................................................................
Accumulated depreciation—buildings ........................
Equipment .................................................................
Accumulated depreciation—equipment .....................
Vehicles ....................................................................
Accumulated depreciation—vehicles .........................
Accounts payable ......................................................
Unearned revenue.....................................................
Salaries payable ........................................................
Interest payable .........................................................
Income tax payable ...................................................
Bank loan payable .....................................................
Mortgage payable .....................................................
Common shares ........................................................
Retained earnings .....................................................
Dividends declared ....................................................
Rent revenue.............................................................
Sales .........................................................................
Cost of goods sold.....................................................
Salaries expense .......................................................
Depreciation expense................................................
Office expense ..........................................................
Utilities expense ........................................................
Advertising expense ..................................................
Insurance expense ....................................................
Property tax expense ................................................
Interest expense ........................................................
Income tax expense ..................................................
Totals .....................................................................
(Total debits = Total credits)
$
Credit
34,534
12,090
16,250
3,775
6,000
100,000
165,000
$ 143,000
44,520
21,070
52,500
4,200
7,265
1,000
1,000
50
5,000
22,500
53,200
300
146,788
30,000
6,000
640,358
102,386
391,782
16,770
18,000
13,225
9,600
6,000
5,950
5,349
18,000
$1,051,731
000 0000
$1,051,731
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Financial Accounting, Seventh Canadian Edition
CT4-6 (CONTINUED)
(d)
Revenues:
Sales
Rent revenue
Expenses
Cost of goods sold
Salaries expense
Depreciation expense
Office expense
Utilities expense
Advertising expense
Insurance expense
Property tax expense
Interest expense
Income tax expense
Net income
Net income
Cash
Difference
$640,358
6,000
$102,386
391,782
16,770
18,000
13,225
9,600
6,000
5,950
5,349
18,000
$646,358
587,062
$ 59,296
$59,296
34,534
$24,762
LO 2,3,4 BT: AP Difficulty: M Time: 70 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
Legal Notice
Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All
rights reserved.
The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.
The material provided herein may not be downloaded, reproduced, stored in a
retrieval system, modified, made available on a network, used to create
derivative works, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, scanning, or otherwise without the prior
written permission of John Wiley & Sons Canada, Ltd.
(MMXVII vi F2)
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Financial Accounting, Seventh Canadian Edition
CHAPTER 5
MERCHANDISING OPERATIONS
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
6.
Identify the differences between service and merchandising companies.
Prepare entries for purchases under a perpetual inventory system.
Prepare entries for sales under a perpetual inventory system.
Prepare a single-step and a multiple-step income statement.
Calculate the gross profit margin and profit margin.
Account and report inventory in a periodic inventory system (Appendix 5A).
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND
BLOOM’S TAXONOMY
Item LO
1.
2.
3.
4.
5.
1
1
1
1
1
BT
Item
LO
BT
C
C
C
C
C
6.
7.
8.
9.
10.
2
2
2,3
2,3
2,3
C
AP
C
C
C
Item LO BT
Questions
11.
12.
13.
14.
15.
2,3
3
3
3
4
C
C
C
C
C
Item
LO
BT
Item
LO
BT
16.
17.
18.
19.
20.
4
4
4
4
5
K
C
C
C
C
21.
22.
23.
24.
25.
5
5
6
6
6
C
C
C
C
C
Brief Exercises
1.
2.
1
1
C
AN
5.
6.
2
3
AP
AP
9.
10.
4
4,5
C
AN
13.
14.
6
6
AP
AP
3.
4.
2
2,3
AP
AP
7.
8.
4
4
AP
C
11.
12.
5
6
AN
AP
15.
16.
6
6
AP
AP
1.
2.
3.
4.
1
2,3
2,3
2
C
AN
AP
AP
5.
6.
7.
8.
2
2
2,3,5
4
AP
AN
AP
C
9.
10.
11.
12.
13.
14.
15.
16.
5
6
2,3,6
6
AN
AP
AP
AN
17.
6
AN
1.
2.
3.
1
1,2,3
2,3
AN
AN
AP
4.
5.
6.
2,3
2,3,4
4
AP
AP
AN
5
1,6
6
AN
AN
AP
13.
14.
15.
6
5,6
6
AP
AP
AP
Exercises
4
4,5
4,5
4,6
AP
AN
AN
AN
Problems: Set A and B
7.
8.
9.
4
5
4,5
AP
AN
AN
10.
11.
12.
Accounting Cycle Review
1.
2,3,4
AP
1.
2.
1,4,5
5
AN
AN
Cases
3.
4.
4,5
2,3,5
E
E
5.
6.
2
4,5
C
AN
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Financial Accounting, Seventh Canadian Edition
Legend: The following abbreviations will appear throughout the solutions manual file.
LO
Learning objective
BT
Bloom's Taxonomy
K
Knowledge
C
Comprehension
AP Application
AN Analysis
S
Synthesis
E
Evaluation
Level of difficulty
S
Simple
M
Moderate
C
Complex
Estimated time to prepare in minutes
Difficulty:
Time:
AACSB
Association to Advance Collegiate Schools of Business
Communication
Communication
Ethics
Ethics
Analytic
Analytic
Technology
Tech.
Diversity
Diversity
Reflec. Thinking
Reflective Thinking
CPA CM
cpa-e001
cpa-e002
cpa-e003
cpa-e004
cpa-e005
cpa-t001
cpa-t002
cpa-t003
cpa-t004
cpa-t005
cpa-t006
CPA Canada Competency
Ethics
Professional and Ethical Behaviour
PS and DM
Problem-Solving and Decision-Making
Comm.
Communication
Self-Mgt.
Self-Management
Team & Lead
Teamwork and Leadership
Reporting
Financial Reporting
Stat. & Gov.
Strategy and Governance
Mgt. Accounting
Management Accounting
Audit
Audit and Assurance
Finance
Finance
Tax
Taxation
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Financial Accounting, Seventh Canadian Edition
ANSWERS TO QUESTIONS
1.
(a)
The operating cycle is the time it takes to go from cash to cash in
producing revenues.
(b)
The normal operating cycle for a merchandising company is likely to be
longer than that of a service company because, in a merchandising
company, inventory must first be purchased and sold, and then the
receivables must be collected whereas, in a service company, the services
only need to be provided (not purchased first and then stored until sold)
and then the receivables must be collected.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
2.
(a)
The income measurement process of a merchandising company is the
same as the service company in that net income is arrived at by deducting
expenses from revenues.
(b)
The income measurement process of a merchandising company differs
from that of a service company in that its revenue is derived from sales
revenue, not service revenue. In addition, cost of goods sold is deducted
from sales revenue to determine gross profit, before operating and other
expenses, similar to both types of companies, are deducted (or other
revenues are added).
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
3.
The company needs to compare the cost of the detailed record keeping
required in a perpetual inventory system to the benefits of having the additional
information about the inventory. One of the benefits of a perpetual inventory
system is the ability to answer questions from customers about merchandise
availability. In a used clothing business, this may not be of much benefit unless
each inventory item is unique. Another benefit is the monitoring of inventory
quantities in order to avoid running out of stock. Again, this may not be of benefit
since the company does not order recurring or similar merchandise, and may
not have a supplier to order from. But if the company is selling used clothing on
consignment, it will need to track each item in order to determine which
consignor to pay when an item is sold.
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Financial Accounting, Seventh Canadian Edition
3. (continued)
The company should carefully determine the cost of the detailed record keeping
required, in particular for a new company. A perpetual inventory system
requires more record keeping and therefore is more expensive to use. For
example, a perpetual inventory system usually requires an investment in a
point-of-sale system that is integrated with the inventory system.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
4.
A physical count is an important control feature. By using a perpetual inventory
system, a company knows what should be on hand. Performing a physical
count and checking it to the perpetual records is necessary to detect any errors
in record keeping and/or shortages in stock.
LO 1 BT: C Difficulty: M Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting
5.
The key distinction between a periodic inventory system and a perpetual
inventory system is whether or not information on inventory and cost of goods
sold (units and dollars) are always (perpetually) available or only known when
inventory counts are conducted (periodically). Because information on the cost
of goods sold is only known after an inventory count has been carried out under
the periodic system, no entry is made for the cost of goods sold at the time of
each sale. Instead, cost of goods sold is a residual number, determined by
subtracting ending inventory (as determined by the inventory account) from cost
of goods available for sale. This means that any goods not included in ending
inventory are assumed to have been sold. In order to arrive at the cost of goods
available for sale, separate accounts are set up in the general ledger to keep
track of the purchases, freight-in, purchase returns and allowances, and
purchase discounts. Under the periodic inventory system, management is not
able to look up in the general ledger accounts for the balance of inventory at a
particular point in time. In order to arrive at the inventory value, a physical count
of the inventory must be performed.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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6.
Financial Accounting, Seventh Canadian Edition
The reason for recording the purchase of merchandise for resale in a separate
account is to enable a company to determine its cost of goods sold and gross
profit. This information is useful in managing costs and setting prices.
LO 2 BT: C Difficulty: M Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting
7.
(a)
The value of the purchase discount to Butler’s Roofing is $480 ($48,000 ×
1%).
(b)
Failing to take advantage of the discount terms is like paying the supplier
an extra $480 in order to settle a $47,520 invoice 20 days later. This works
out to 1.01% [$480 ÷ $47,520] every 20 days. On an annual basis this
amounts to 18.4% [($480 ÷ $47,520 × (365 ÷ 20)]. Butler’s should take
advantage of the cash discount offered.
LO 2 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance
8.
(a)
Lebel Ltée should record the sale as revenue in June, when it is sold to a
customer. When the merchandise was purchased in April, it should be
recorded as an asset, inventory. It should be recorded as cost of goods
sold (an expense) in June when the inventory is sold and the revenue is
recognized. This is necessary in order to match the cost with the related
revenue
(b)
Lebel’s customer should recognize the purchase in June, when the
inventory is received.
LO 2,3 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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9.
Financial Accounting, Seventh Canadian Edition
(a)
FOB shipping point means that the goods are placed free on board by the
seller at the point of shipping. The buyer pays the freight costs from the
point of shipping to the buyer’s destination because title passes at
shipping point. FOB destination means the goods are delivered by the
seller to their destination, where the title passes. The seller pays for
shipping to the buyer’s destination.
(b)
FOB shipping point will result in a debit to the Inventory account by the
buyer because title has transferred at shipping point and the inventory is
now owned by the buyer. FOB destination will result in a debit to Freight
Out by the seller because they are paying for the freight.
LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
10.
In a perpetual inventory system, purchase returns are credited to Inventory
because the items purchased have been returned to the vendor and are no
longer available to be sold to customers. Sales returns are not debited directly
to the Sales account because this would not provide information about the
goods returned. This information can be useful in making decisions. Debiting
returns directly to sales may also cause problems in comparing sales for
different periods.
LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
11.
(a)
A quantity discount gives a reduction in the price according to the volume
of the purchase. A purchase discount is offered by a seller to a buyer for
early payment of an invoice. When the buyer pays the invoice within the
discount period, the amount of the discount decreases the Inventory
account. A sales discount is the same as a purchase discount but from the
seller’s point of view.
(b)
Quantity discounts are not recorded or accounted for separately but
become part of the recorded sales price. Buyers record purchase
discounts taken as a credit to Inventory under the perpetual system or to
Purchase Discounts when using the periodic system. The seller records a
sales discount as a debit to the Sales Discounts account, which is a contra
revenue account to Sales, when the invoice is paid within the discount
period.
LO 2,3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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12.
Financial Accounting, Seventh Canadian Edition
Contra accounts are used to reduce the account they are contra to, such as
accumulated depreciation reducing equipment. A debit (decrease) recorded
directly to Sales would make it more difficult for management to determine the
percentage of total sales that ends up being lost through sales returns and
allowances, so a contra revenue account (sales returns and allowances) is
used. Another example of a contra revenue account is sales discounts. This
account keeps track of the costs incurred for discounts taken by customers for
paying early, in accordance with the discount terms offered. The contra revenue
accounts reduce sales to net sales, reported on the income statement.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
13.
If the merchandise is not resaleable, it cannot be included in inventory since it
cannot be resold and it has no value. The cost remains in cost of goods sold
since it is a cost of doing business. If the merchandise is resaleable, it still has
value to the company. In this case, the cost of the merchandise is debited to
inventory again and cost of goods sold is credited.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
14.
The sales taxes are collected on behalf of the federal and provincial
governments, and must be periodically remitted to these authorities. Sales
taxes that are collected from selling a product or service are not recorded as
revenue, instead they are recorded as a liability until they are paid to the
government.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual
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15.
Financial Accounting, Seventh Canadian Edition
In a single-step income statement, all data are classified into two categories:
(1) revenues and (2) expenses. It is referred to as a single-step income
statement because only a single step—subtracting expenses from revenues—
is needed to determine income before income tax. A multiple-step income
statement requires several steps to determine income before income tax. First,
cost of goods sold is deducted from net sales to determine gross profit.
Operating expenses are then deducted to calculate income from operations.
Finally, other revenues and expenses are added or deducted to determine
income before income tax. The deduction of income tax to calculate net income
(loss) is the same under both formats. In addition, both formats produce the
same profit amount for the period.
LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
16.
North West Company uses a multiple-step income statement.
LO 4 BT: K Difficulty: S Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting
17.
(a)
When classifying expenses by their nature, they are reported in
accordance with their natural classification (for example, salaries,
deprecation, and so on). When classifying expenses by their function, they
are reported according to the activity (business function) for which they
were incurred (for example, cost of goods sold, administrative, selling).
(b)
It does not matter whether a single-step or multiple-step income statement
is prepared, expenses must be classified either by nature or by function.
LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
18.
Because the Overwaitea is a private enterprise, it can follow Accounting
Standards for Private Enterprises (ASPE). Companies following ASPE can
classify their expenses in whatever manner is useful to them. Loblaws, which
follows IFRS, must classify its expenses by their nature or their function.
LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual
5-8
Chapter 5
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
19.
Financial Accounting, Seventh Canadian Edition
Interest expense is a non-operating expense because it relates to how a
company’s operations are financed, not to the company’s main operations.
LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
20.
The difference between gross profit margin and profit margin is that the gross
profit margin measures the amount by which the selling price exceeds the cost
of goods sold while the profit margin measures the extent to which sales cover
all expenses (including the cost of goods sold).
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
21.
Factors affecting a company’s gross profit margin include the selling price and
the cost of the merchandise. Recall that gross profit = net sales  cost of goods
sold. Selling products with a higher price or “mark-up” or selling products with
a lower cost would result in an increased gross profit margin. Selling products
with a lower price (perhaps due to increased competition that results in lower
selling prices) or selling products with a higher cost (perhaps due to price
increases from suppliers and shippers) would result in a lower gross profit
margin.
LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
22.
High gross profit
Computer services and
such as
software companies
Pharmaceutical manufacturers
Luxury goods retailers
Low gross profit
Low-price retail
companies
Walmart
Grocery stores
Forestry and wood products
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
*23.
Accounts
Purchase Returns and Allowances
Purchase Discounts
Freight In
(a)
Added/Deducted
Deducted
Deducted
Added
(b)
Normal Balance
Credit
Credit
Debit
LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
*24.
Periodic System
Cost of Goods Sold = Beginning Inventory + Cost of Goods Purchased
(Purchases – Purchase Discounts – Purchase Returns and Allowances +
Freight In) – Ending Inventory
Ending inventory and cost of goods sold for the period are calculated at the end
of the period.
Perpetual System
Cost of Goods Sold = the cost of the item(s) sold
Cost of goods sold is calculated at the time of each sale and recorded as an
increase (debit) to the Cost of Goods Sold account and a decrease (credit) to
the Inventory account.
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*25.
Financial Accounting, Seventh Canadian Edition
The calculation of cost of goods sold is shown in detail in the income statement
of a company using the periodic system. In a perpetual system, it is one line
and amount only.
Periodic System
Cost of Goods Sold =
1. Add the cost of goods purchased (where the cost of goods purchased is
equal to purchases less purchases discounts, and purchases returns and
allowances plus freight in) to the cost of goods on hand at the beginning of
the period (beginning inventory). The result is the cost of goods available for
sale.
2. Subtract the cost of goods on hand at the end of the period (ending inventory)
from the cost of goods available for sale. The result is the cost of goods sold.
Perpetual System
Cost of Goods Sold = one number, which is the total of cost of goods sold as
previously determined and recorded for all sales.
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Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5-1
(a)
The company with the most efficient operating cycle is Company A as it uses
the fewest number of days in its cycle to obtain cash.
(b)
The company which is most likely a service company is Company A as it does
not have to manufacture or deliver inventory and consequently takes the fewest
number of days to obtain cash. Company C, with the highest number of days in
its operating cycle, is likely the manufacturing company, and the merchandising
company would be in the middle (Company B), with neither the highest nor the
lowest number of days in its operating cycle.
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BRIEF EXERCISE 5-2
(a)
[1] Income before tax = $100 – $65 = $35
[2] Net income = $35 (from [1]) – $9 = $26
[3] Cost of goods sold = $100 – $60 = $40
[4] Operating expenses = $60 – $35 = $25
[5] Income tax expense = $35 – $26 = $9
(b)
Company A is the service company, since it has no cost of goods sold.
Company B is the merchandising company, since it has cost of goods sold.
LO 1 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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BRIEF EXERCISE 5-3
Beginning Balance
Purchases
Inventory
55,000
220,000
26,000 Purchase returns
9,700 Purchase discounts
Freight in
2,700
218,000 Cost of goods sold
Ending Balance
24,000
Although not required, the following are the journal entries of the transactions.
Purchases
Inventory .................................................................. 220,000
Accounts Payable ...............................................
220,000
Purchase
Returns
Accounts Payable ....................................................
Inventory .............................................................
Purchase
Discounts
Accounts Payable ($220,000 – $26,000) ................. 194,000
Inventory ($194,000 × 5%) .................................
9,700
Cash ...................................................................
184,300
Freight In
Inventory ..................................................................
Accounts Payable ...............................................
Cost of
Sales
26,000
26,000
2,700
2,700
Cost of Goods Sold .................................................. 218,000
Inventory .............................................................
218,000
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 5-4
Pocras Corporation (Buyer):
Aug. 24
Inventory .................................................................
Accounts Payable ...............................................
32,000
Wydell Inc. (Seller):
Aug. 24
Accounts Receivable ................................................
Sales ...................................................................
32,000
24
Cost of Goods Sold ..................................................
Inventory .............................................................
32,000
32,000
14,400
14,400
LO 2,3 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5-5
Jan.
2
Inventory .................................................................
Accounts Payable ...............................................
45,000
45,000
5
No entry necessary – Freight costs paid by Fundy Corp.
6
Accounts Payable ....................................................
Inventory .............................................................
6,000
Accounts Payable ($45,000 - $6,000) ......................
Inventory ($39,000 × 2%) ...................................
Cash ...................................................................
39,000
11
6,000
780
38,220
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 5-6
Jan.
2
2
5
6
6
11
Accounts Receivable ................................................
Sales ...................................................................
45,000
Cost of Goods Sold ..................................................
Inventory .............................................................
25,200
Freight Out ...............................................................
Cash ...................................................................
900
Sales Returns and Allowances.................................
Accounts Receivable ..........................................
6,000
Inventory ..................................................................
Cost of Goods Sold .............................................
3,360
Cash .........................................................................
Sales Discounts ($39,000 × 2%) ..............................
Accounts Receivable ($45,000 - $6,000) ............
38,220
780
45,000
25,200
900
6,000
3,360
39,000
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 5-7
(a)
Sales ....................................................................
Less: Sales returns and allowances ...................
Sales discounts .........................................
Net sales ..............................................................
$1,110,000
$22,000
18,000
40,000
$1,070,000
(b)
Net sales .....................................................................
Less: Cost of goods sold ...........................................
Gross profit .................................................................
$1,070,000
658,000
$ 412,000
(c)
Gross profit .................................................................
Less: Administrative expenses ..................................
Selling expenses ..............................................
Income from operations ..............................................
$412,000
$160,000
110,000 270,000
$142,000
(d)
Income from operations ..............................................
Add: Other revenues ................................................
Less: Other expenses ................................................
Income before income tax...........................................
$142,000
$26,000
(35,000)_ (9,000)
$133,000
(e)
Income before income tax...........................................
Less: Income tax expense .........................................
Net income .................................................................
$133,000
27,000
$106,000
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BRIEF EXERCISE 5-8
As the name suggests, numerous steps are required in determining net income in a
multiple-step statement.
(a)
(b)
Item
Single-Step
Multiple-Step
Depreciation expense
Cost of goods sold
Freight out
Income tax expense
Interest expense
Interest revenue
Rent revenue
Salaries expense
Sales
Sales discounts
Sales returns and allowances
Expenses
Expenses
Expenses
Income tax expense
Expenses
Revenues
Revenues
Expenses
Revenues
Revenues
Revenues
Operating expenses
Cost of goods sold
Operating expenses
Income tax expense
Other revenues and expenses
Other revenues and expenses
Other revenues and expenses
Operating expenses
Sales revenue
Sales revenue
Sales revenue
LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5-9
(a)
The company is using a multiple-step form of income statement.
(b)
The company is classifying its expenses by their function. They are reported
according to the activity (business function) for which they were incurred (for
example, cost of goods sold, administrative, selling).
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BRIEF EXERCISE 5-10
(a)
Sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Other revenues
Income before income taxes
Income tax expense
Net income
2018
$250,000
137,500
112,500
50,000
62,500
______
62,500
20,000
$42,500
2017
$200,000
114,000
86,000
40,000
46,000
10,000
56,000
15,000
$41,000
(b)
2018
Gross profit
margin
Profit
margin
(c)
2017
$112,500
$250,000
= 45.0%
$86,000
$200,000
=
43.0%
$42,500
$250,000
= 17.0%
$41,000
=
20.5%
$200,000
Modder Corporation’s gross profit margin increased in 2018 indicating an
increase in the percentage mark-up, or a reduction in the cost of goods sold, or
both. On the other hand, in 2018, the company’s profit margin dropped. The
decrease in profit margin is caused by the other revenues in 2017 that were not
available in 2018. Operating expenses were 20% of sales in both years.
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 5-11
(a)
($ in millions)
Gross profit
margin
Profit
margin
(b)
2015
2014
$12,279.6 – $7,747.1
$12,279.6
=
36.9%
$12,462.9 – $8,033.2
$12,462.9
= 35.5%
$735.9
$12,279.6
=
6.0%
$639.3
$12,462.9
= 5.1%
Canadian Tire Corporation’s gross profit margin increased in 2015. Although
sales dropped 1.5%, [($12,279.6 - $12,462.9) ÷ $12,462.9] cost of goods sold
dropped 3.6% [($7,747.1 - $8,033.2) ÷ $8,033.2] which lead to the increased
gross profit margin. The profit margin also increased in 2015, but not as much.
Operating expenses or interest or income tax expense must have increased as
a percentage of sales.
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Finance
*BRIEF EXERCISE 5-12
Jan.
2
Purchases ................................................................
Accounts Payable ...............................................
45,000
45,000
5
No entry necessary - Freight costs paid by Fundy Corp.
6
Accounts Payable ....................................................
Purchase Returns and Allowances .....................
6,000
Accounts Payable ($45,000 - $6,000) ......................
Purchase Discounts ($39,000 × 2%) ..................
Cash ...................................................................
39,000
11
6,000
780
38,220
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*BRIEF EXERCISE 5-13
Jan.
2
Accounts Receivable ................................................
Sales ...................................................................
45,000
45,000
2
No cost of goods sold entry at time of sale
5
Freight Out ...............................................................
Cash ...................................................................
900
Sales Returns and Allowances.................................
Accounts Receivable ..........................................
6,000
6
6
11
900
6,000
No cost of goods sold entry at the time of sale
Cash .........................................................................
Sales Discounts ($39,000 × 2%) ..............................
Accounts Receivable ($45,000 - $6,000) ............
38,220
780
39,000
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*BRIEF EXERCISE 5-14
(a)
Sales .............................................................................
$1,860,000
Less: Sales returns and allowances ............................ $124,000
Sales discounts ..................................................
28,000
152,000
Net Sales ......................................................................
$1,708,000
(b)
Purchases .....................................................................
Less: Purchase returns and allowances ......................
Purchase discounts ............................................
Net purchases ...............................................................
$880,000
$13,000
14,000
27,000
$853,000
(c)
Net purchases ...............................................................
Add: Freight in ............................................................
Cost of goods purchased ..............................................
$853,000
16,000
$869,000
(d)
Beginning inventory ......................................................
Add: Cost of goods purchased ...................................
Cost of goods available for sale ....................................
Less: Ending inventory ................................................
Cost of goods sold ........................................................
$ 96,000
869,000
965,000
82,000
$883,000
(e)
Net sales .......................................................................
Less: Cost of goods sold ...............................................
Gross profit ...................................................................
$1,708,000
883,000
$825,000
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*BRIEF EXERCISE 5-15
(a)
(b)
Cost of goods sold
Beginning inventory ...........................................
$105,000
Purchases ..........................................................
Less: Purchase returns and allowances ............
Purchase discounts ..................................
Net purchases ....................................................
Add: Freight In ...................................................
Cost of goods purchased ...................................
Cost of goods available for sale .........................
Ending inventory ................................................
Cost of goods sold .............................................
$195,000
$ 6,600
20,400
27,000
168,000
5,250
173,250
278,250
120,000
$158,250
There would be no difference in the remainder of the income statement for
Halifax Limited whether the periodic or perpetual inventory systems were used.
Purchases – Purchase returns and allowances – Purchase discounts + Freight-in =
Cost of goods purchased
(Beginning inventory+ Cost of goods purchased – Ending inventory = Cost of goods
sold)
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*BRIEF EXERCISE 5-16
Dec. 31
Inventory (ending) .................................................... 68,000
Cost of Goods Sold .................................................. 401,000*
Purchase Discounts .................................................
6,000
Inventory (beginning) ..........................................
75,000
Purchases ...........................................................
388,000
Freight In.............................................................
12,000
* Cost of goods sold = Beginning inventory + Purchases  Purchase
discounts  Purchase returns and allowances + Freight in – Ending
inventory
Cost of goods sold = $75,000 + $388,000  $6,000 + $12,000 –
$68,000 = $401,000
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SOLUTIONS TO EXERCISES
EXERCISE 5-1
(a)
Toys “R” Us, Inc. is a merchandiser (retailer), Fasken Martineau LLP is a
service company, and Atlantic Grocery Distributors Ltd. is a merchandiser
(wholesaler).
(b)
The operating cycle of these three businesses will be different. The longest
operating cycle will be experienced by the retailer, as the sales of merchandise
will be the slowest. The organization with the shortest operating cycle will be
the service firm that does not sell inventory. The third company, the distributing
wholesaler, will have an operating cycle between that of the retailer and the law
firm because its inventory is more likely to sell faster and the law firm has no
inventory to sell.
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EXERCISE 5-2
Item
(a)
1. Asset
Account Debited
(b)
Inventory
(c)
(a)
+$3,500 Asset
Account Credited
(b)
(c)
Cash
–$3,500
–$750 Asset
Inventory
–$750
3. Asset
Accounts
Payable
Inventory
+$4,000 Liability
+$4,000
4. Asset
Inventory
+$400 Asset
Accounts
Payable
Cash
5. Liability
Accounts
Payable
Accounts
Receivable
–$3,500 Asset
Asset
+$10,000 Revenue
Cash
Inventory
Sales
–$3,430
–$70
+$10,000
Inventory
–$4,000
2. Liability
6. Asset
Expense Cost of Goods
Sold
7. Contra
Sales Returns
Sales
and Allowances
8. Expense Freight Out
9. Contra
Sales
Asset
10. Asset
Sales Returns
and Allowances
Inventory
Cash
+$4,000 Asset
–$400
+$750 Asset
Cash
–$750
+$600 Asset
Cash
–$600
+$1,000 Asset
+$400 Expense
+$6,000 Asset
Accounts
Receivable
–$1,000
Cost of
Goods
Sold
Accounts
Receivable
–$400
–$6,000
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EXERCISE 5-3
(a)
Sept.
2 Inventory (750 × $20)..................................................
Accounts Payable ..................................................
15,000
10 Accounts Payable (10 × $20) ......................................
Inventory................................................................
200
11 Accounts Receivable (260 × $30) ...............................
Sales .....................................................................
7,800
Cost of Goods Sold (260 × $20) .................................
Inventory................................................................
5,200
14 Sales Returns and Allowances (10 × $30) ..................
Accounts Receivable .............................................
300
Inventory (10 × $20)....................................................
Cost of Goods Sold ...............................................
200
21 Accounts Receivable (300 × $30) ...............................
Sales .....................................................................
9,000
Cost of Goods Sold (300 × $20) .................................
Inventory................................................................
6,000
29 Accounts Payable ($15,000 – $200) ...........................
Cash ......................................................................
14,800
30 Cash ($9,000 – $90) ...................................................
Sales Discounts ($9,000 × 1%)...................................
Accounts Receivable .............................................
8,910
90
15,000
200
7,800
5,200
300
200
9,000
6,000
14,800
9,000
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EXERCISE 5-3 (CONTINUED)
(b)
Sept. 1 Bal.
2
14
Sept. 30 Bal.
Inventory
2,000 Sept.10
15,000
11
200
21
5,800
Sept. 11
21
Sept. 30 Bal.
Cost of Goods Sold
5,200 Sept. 14
6,000
11,000
200
5,200
6,000
200
(c)
Ending Inventory:
Number of calculators at September 30: 100 + 750 – 10 – 260 + 10 – 300 = 290
Cost of calculators at September 30: 290 × $20 = $5,800
Cost of Goods Sold:
Number of calculators sold in September: 260 – 10 + 300 = 550
Cost of calculators sold in September: 550 x $20 = $11,000
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EXERCISE 5-4
(a)
April
3
6
7
8
30
(b)
April
12
Inventory........................................................
Accounts Payable ....................................
28,000
Inventory........................................................
Cash.........................................................
700
Supplies.........................................................
Accounts Payable ....................................
5,000
Accounts Payable ..........................................
Inventory ..................................................
3,500
Accounts Payable ($28,000 – $3,500) ..........
Cash ........................................................
24,500
Accounts Payable ($28,000 – $3,500) ..........
Cash ($24,500 – $245) ............................
Inventory ($24,500 × 1%) .........................
24,500
28,000
700
5,000
3,500
24,500
24,255
245
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EXERCISE 5-5
(a)
April
3
April
28,000
Cost of Goods Sold .......................................
Inventory ..................................................
19,000
28,000
19,000
6
No entry necessary - Freight costs paid by Olaf.
7
No entry necessary.
8
Sales Returns and Allowances ......................
Accounts Receivable................................
3,500
Inventory........................................................
Cost of Goods Sold ..................................
2,300
Cash ..............................................................
Accounts Receivable ($28,000 – $3,500)
24,500
Cash ($28,000  $3,500 – $245) ...................
Sales Discounts [($28,000 – $3,500) × 1%] ..
Accounts Receivable ($28,000 – $3,500)
24,255
245
30
(b)
Accounts Receivable .....................................
Sales ........................................................
12
3,500
2,300
24,500
24,500
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EXERCISE 5-6
Boyle should choose to borrow cash at 8% 10 days from the date of the invoice. The
amount borrowed could be as little as the amount of the invoice less the purchase
discount. This is the amount needed to settle the payment 10 days from the date of
the invoice and earn the purchase discount of 1%. The loan can then be repaid after
20 days, which would be the date the invoice would have been paid if the loan had not
been obtained. The relevant period is 20 days because this is the amount of time a
loan would be outstanding in order to make the choice to pay within the discount
period.
Converting a 1% discount for 20 days equals an annualized interest rate of 18.25%
calculated as follows (1% × 365 ÷ 20) = 18.25%. Paying 8% to the bank to receive
18.25% from the supplier is the more favourable procedure to follow.
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EXERCISE 5-7
(a)
Dec.
3 Accounts Receivable ..........................................
Sales .............................................................
68,000
3 Cost of Goods Sold .............................................
Inventory........................................................
36,000
68,000
36,000
7 No entry necessary.
(b)
Dec.
8 Sales Returns and Allowances ...........................
Accounts Receivable .....................................
2,100
Inventory .............................................................
Cost of Goods Sold .......................................
1,150
11 Cash ($65,900 – $1,318) ....................................
Sales Discounts [($68,000 – $2,100) × 2%]........
Accounts Receivable ($68,000 – $2,100) ......
64,582
1,318
3 Inventory .............................................................
Accounts Payable ..........................................
68,000
7 Inventory .............................................................
Cash ..............................................................
900
8 Accounts Payable ...............................................
Inventory........................................................
2,100
11 Accounts Payable ($68,000 – $2,100) ................
Inventory [($68,000 - $2,100) × 2%] ..............
Cash ($65,900 – $1,318) ...............................
65,900
2,100
1,150
65,900
68,000
900
2,100
1,318
64,582
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EXERCISE 5-7 (CONTINUED)
(c)
Sales ...................................................................................
Less: Sales returns and allowances ...................................
Sales discounts ........................................................
Net sales .............................................................................
Cost of goods sold ($36,000 – $1,150) ...............................
Gross profit .........................................................................
$68,000
$2,100
1,318
3,418
64,582
34,850
$29,732
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EXERCISE 5-8
Account
Statement
Classification
Accounts payable
Accounts receivable
Accumulated depreciation
Statement of financial position Current liabilities
Statement of financial position Current assets
Statement of financial position Property, plant, and
equipment (contra
account)
Administrative expenses
Income statement
Operating expenses
Buildings
Statement of financial position Property, plant, and
equipment
Cash
Statement of financial position Current assets
Common shares
Statement of financial position Shareholders’ equity
Equipment
Statement of financial position Property, plant, and
equipment
Income tax expense
Income statement
Income tax expenses
Interest expense
Income statement
Other revenues and
expenses
Interest payable
Statement of financial position Current liabilities
Inventory
Statement of financial position Current assets
Land
Statement of financial position Property, plant, and
equipment
Mortgage payable
Statement of financial position Non-current liabilities
Prepaid insurance
Statement of financial position Current assets
Property tax payable
Statement of financial position Current liabilities
Salaries payable
Statement of financial position Current liabilities
Sales
Income statement
Revenue
Sales discounts
Income statement
Revenue (contra
account)
Sales returns and allowances Income statement
Revenue (contra
account)
Unearned revenue
Statement of financial position Current liabilities
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EXERCISE 5-9
(a)
BLUE DOOR CORPORATION
Income Statement (Single-Step)
Year Ended December 31, 2018
Revenues
Sales .........................................................................
$2,650,000
Less: Sales returns and allowances ............ $41,000
Sales discounts .................................. 19,500
60,500
Net sales ...................................................................
2,589,500
Interest revenue .......................................................
30,000
Rent revenue ............................................................
24,000
Expenses
Cost of goods sold ....................................................
$1,172,000
Salaries expense .......................................................
705,000
Depreciation expense................................................
125,000
Interest expense ........................................................
62,000
Advertising expense ..................................................
55,000
Freight out .................................................................
25,000
Insurance expense ....................................................
23,000
.............................................................................
Income before income tax .............................................. .............................
Income tax expense .....................................................................................
Net income ...................................................................................................
$2,643,500
2,167,000
476,500
70,000
$ 406,500
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EXERCISE 5-9 (CONTINUED)
(b)
BLUE DOOR CORPORATION
Income Statement (Multiple-Step)
Year Ended December 31, 2018
Sales ........................................................................................................
Less: Sales returns and allowances .................................
$41,000
Sales discounts .......................................................
19,500
Net sales...................................................................................................
Cost of goods sold ....................................................................................
Gross profit ...............................................................................................
Operating expenses
Salaries expense ..........................................................
$705,000
Depreciation expense...................................................
125,000
Advertising expense .....................................................
55,000
Freight out ....................................................................
25,000
Insurance expense .......................................................
23,000
Total operating expenses ...............................................................
Income from operations ............................................................................
Other revenues and expenses
Interest revenue ..........................................................
$30,000
Rent revenue................................................................
24,000
Interest expense ...........................................................
(62,000)
Income before income tax ........................................................................
Income tax expense .................................................................................
Net income ...............................................................................................
$2,650,000
60,500
2,589,500
1,172,000
1,417,500
933,000
484,500
(8,000)
476,500
70,000
$ 406,500
(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from
operations)
(c)
Blue Door Corporation is classifying its expenses by nature, such as salaries,
depreciation, and advertising. There is no classification of expenses into
administrative or selling as would be the case if classifying expenses by
functional areas. For smaller companies such as this one, the difference
between classification of items on the income statement by function or nature
is not significant.
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EXERCISE 5-10
(a)
Young Ltd.
Sales ....................................................................................... $99,000
*Less: Sales returns and allowances [1] .................................
10,000
Net sales ................................................................................. $89,000
Net sales ................................................................................. $89,000
Less: Cost of goods sold .........................................................
58,750
*Gross profit [2] ....................................................................... $30,250
Gross profit.............................................................................. $30,250
Less: Operating expenses ......................................................
19,500
*Income from operations [3] .................................................... $10,750
Income from operations .......................................................... $10,750
Add: Other revenues ...............................................................
750
*Income before income tax [4]................................................. $11,500
Income before income tax ....................................................... $11,500
Less: Income tax expense ......................................................
2,300
*Net income [5]........................................................................ $ 9,200
Rioux Ltée
*Sales [6] ................................................................................. $105,000
Less: Sales returns and allowances ........................................
5,000
Net sales ................................................................................. $100,000
Net sales ................................................................................. $100,000
*Less: Cost of goods sold [7]...................................................
60,000
Gross profit.............................................................................. $ 40,000
Gross profit.............................................................................. $40,000
*Less: Operating expenses [8] ................................................
22,000
Income from operations .......................................................... $18,000
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EXERCISE 5-10 (CONTINUED)
(a) (continued)
Income from operations .......................................................... $18,000
Less: Other expenses .............................................................
2,000
*Income before income tax [9]................................................. $16,000
Income before income tax ....................................................... $16,000
*Less: Income tax expense [10] ..............................................
3,200
Net income .............................................................................. $12,800
* Indicates missing amount
(b)
Young
Rioux
Gross profit margin
$30,250 ÷ $89,000 =
34.0%
Profit margin
$9,200 ÷ $89,000 = 10.3%
$40,000 ÷ $100,000 = 40.0%
$12,800 ÷ $100,000 = 12.8%
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EXERCISE 5-11
(a)
Marchant Ltd.
Sales ..................................................................................... $1,460,000
Less: Sales returns and allowances .....................................
28,000
*Net sales [1] ......................................................................... $1,432,000
Net sales ............................................................................... $1,432,000
Less: Cost of goods sold .......................................................
657,000
*Gross profit [2] ..................................................................... $ 775,000
Gross profit............................................................................ $775,000
Less: Operating expenses ....................................................
580,000
*Income from operations [3] .................................................. $195,000
Income from operations ........................................................ $195,000
Add: Other revenues .............................................................
3,600
*Income before income tax [4]............................................... $198,600
Income before income tax ..................................................... $198,600
Less: Income tax expense ....................................................
38 600
*Net income [5]...................................................................... $160,000
Dueck Ltd.
*Sales [6] ............................................................................... $2,178,000
Less: Sales returns and allowances ......................................
48,000
Net sales ............................................................................... $2,130,000
Net sales ............................................................................... $2,130,000
*Less: Cost of goods sold [7]................................................. 1,172,000
Gross profit............................................................................ $ 958,000
Gross profit............................................................................ $958,000
*Less: Operating expenses [8] ..............................................
648,000
Income from operations ........................................................ $310,000
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EXERCISE 5-11 (CONTINUED)
(a) (continued)
Income from operations ........................................................ $310,000
Less: Other expenses ........................................................... _ 4,100
*Income before income tax [9]............................................... $305,900
Income before income tax ..................................................... $305,900
*Less: Income tax expense [10] ............................................
55,000
Net income ............................................................................ $250,900
* Indicates missing amount
(b)
Marchant
Dueck
Gross profit margin
$775,000 ÷ $1,432,000 = 54.1%
$958,000 ÷ $2,130,000 = 45.0%
Profit margin
$160,000 ÷ $1,432,000 = 11.2%
$250,900 ÷ $2,130,000 = 11.8%
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EXERCISE 5-12
(a)
MONTMORENCY LTÉE
Income Statement (Multiple-step)
Year Ended August 31, 2018
Sales ...............................................................................
$7,200,000
Less: Sales discounts .......................................................
110,000
Net sales................................................................................................... $7,090,000
Cost of goods sold .................................................................................... 4,030,000
Gross profit ............................................................................................... 3,060,000
Operating expenses
Administrative expenses ..............................................
$670,000
Selling expenses ..........................................................
260,000
Total operating expenses ...............................................................
930,000
Income from operations ............................................................................ 2,130,000
Other revenues and expenses
Interest expense ..................................................................................
270,000
Income before income tax ........................................................................ 1,860,000
Income tax expense .................................................................................
560,000
Net income ............................................................................................... $1,300,000
(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from
operations)
(b)
Expenses are classified by function (cost of goods sold, administrative, selling).
(c)
Gross profit margin
$3,060,000 ÷ $7,090,000 = 43.2%
Profit margin
$1,300,000 ÷ $7,090,000 = 18.3%
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EXERCISE 5-13
(in USD millions)
(a)
Gross profit margin
2016: ($39,528 – $30,334) ÷ $39,528 = 23.3%
2015: ($40,339 – $31,292) ÷ $40,339 = 22.4%
2014: ($40,611 – $31,212) ÷ $40,611 = 23.1%
Profit margin
2016:
2015:
2014:
(using net income)
$807 ÷ $39,528 = 2.0%
$1,246 ÷ $40,339 = 3.1%
$695 ÷ $40,611 = 1.7%
(b)
The gross profit margin has been holding steady, with a slight deterioration in
2015. The trend is the opposite for the profit margin, where the results of 2015
exceeded those of 2014 and 2016.
(c)
Profit margin (using income from operations)
2016: $1,375 ÷ $39,528 = 3.5%
2015: $1,450 ÷ $40,339 = 3.6%
2014: $1,144 ÷ $40,611 = 2.8%
The profit margin using income from operations has followed the same trend in
2014 and 2016 when compared to profit margin. On the other hand, profit
margin using net income increased dramatically in 2015 while profit margin
using income from operations increased only slightly for the same year. The
major elements that are in the calculation of the profit margin ratio but are not
in the profit margin using income from operations are other revenues and
expenses, and income tax expense. In 2015, there must have been a significant
other revenue, or possibly a gain that caused a substantial increase in profit
margin compared to the year before and after 2015.
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*EXERCISE 5-14
Olaf Corp. (Buyer)
(a) Apr. 3 Purchases ...................................................................
Accounts Payable ..................................................
28,000
6 Freight In.....................................................................
Cash ......................................................................
700
7 Supplies ......................................................................
Accounts Payable ..................................................
5,000
8 Accounts Payable .......................................................
Purchase Returns and Allowances ........................
3,500
30 Accounts Payable ($28,000 – $3,500) ........................
Cash .....................................................................
24,500
(b) Apr. 12 Accounts Payable ($28,000 – $3,500) ........................
Cash ($24,500 – $245) ..........................................
Purchase Discounts ($24,500 × 1%) .....................
24,500
28,000
700
5,000
3,500
24,500
24,255
245
DeVito Ltd. (Seller)
(a) Apr. 3 Accounts Receivable ..................................................
Sales .....................................................................
28,000
8 Sales Returns and Allowances ...................................
Accounts Receivable .............................................
3,500
30 Cash ..........................................................................
Accounts Receivable ($28,000 – $3,500) ..............
24,500
(b) Apr. 12 Cash ($24,500 – $245) ...............................................
Sales Discounts [($28,000 – $3,500) × 1%]................
Accounts Receivable ($28,000 – $3,500) ..............
24,255
245
28,000
3,500
24,500
24,500
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*EXERCISE 5-15
(a)
Duvall Ltd. (Seller)
(1) Perpetual Inventory System
June 10 Accounts Receivable ........................................
Sales ...........................................................
Cost of Goods Sold ...........................................
Inventory......................................................
5,000
5,000
3,000
3,000
11 No entry
12 Sales Returns and Allowances .........................
Accounts Receivable ...................................
500
19 Cash ($4,500 – $45) .........................................
Sales Discounts ($4,500 × 1%) ........................
Accounts Receivable ($5,000 – $500) .........
4,455
45
(2) Periodic Inventory System
June 10 Accounts Receivable ........................................
Sales ...........................................................
5,000
500
4,500
5,000
11 No entry
12 Sales Returns and Allowances .........................
Accounts Receivable ...................................
500
19 Cash ($4,500 – $45) .........................................
Sales Discounts ($4,500 × 1%) ........................
Accounts Receivable ($5,000 – $500) .........
4,455
45
500
4,500
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*EXERCISE 5-15 (CONTINUED)
(b)
Pele Ltd. (Buyer)
(1) Perpetual Inventory System
June 10 Inventory .............................................................
Accounts Payable ..........................................
5,000
5,000
11 Inventory (freight) ................................................
Cash ..............................................................
250
12 Accounts Payable ...............................................
Inventory (returns) .........................................
500
19 Accounts Payable ($5,000 – $500) .....................
Inventory ($4,500 × 1%) ................................
Cash ($4,500 – $45) ......................................
4,500
(2) Periodic Inventory System
June 10 Purchases .........................................................
Accounts Payable ........................................
250
500
45
4,455
5,000
5,000
11 Freight In...........................................................
Cash ............................................................
250
12 Accounts Payable .............................................
Purchase Returns and Allowances ..............
500
19 Accounts Payable ($5,000 – $500) ...................
Purchase Discounts ($4,500 × 1%) .............
Cash ($4,500 – $45) ....................................
4,500
250
500
45
4,455
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*EXERCISE 5-16
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
$1,420 =
$1,550 =
$1,750 =
$270 =
$270 =
$1,950 =
$230 =
$2,030 =
$1,950 =
($1,500 – $50 – $30)
($1,420 + $130)
($1,550 + $200)
($1,750 – $1,480)
[4] (same as ending, Yr 1)
($100 + $50 + $1,800)
($2,030 [8] – $1,800)
($2,300 – $270 [5])
($2,300 – $350)
[10]
[11]
[12]
[13]
[14]
[15]
[16]
[17]
[18]
$7,560 =
$590 =
$8,800 =
$7,550 =
$1,250 =
$8,050 =
$8,600 =
$9,850 =
$8,350 =
($7,210 + $150 + $200)
($7,800 – $7,210)
($1,000 + $7,800)
($8,800 [12]) – $1,250)
given (same as ending, Yr 1)
($8,550 – $400 – $100)
($8,050 [15] + $550)
($1,250 [14] + $8,600 [16])
($9,850 [17] – $1,500)
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*EXERCISE 5-17
(a)
LIVELY LIMITED
Income Statement
Year Ended February 28, 2018
Sales revenue
Sales
Less: Sales discounts
Sales returns and allowances
Net sales
Cost of goods sold
Inventory, beginning
Purchases
$273,000
Less: Purchase discounts
39,000
Purchase returns and allowances
20,800
Net purchases
213,200
Add: Freight in
8,450
Cost of goods purchased
Cost of goods available for sale
Less: Inventory, ending
Cost of goods sold
Gross profit
Operating expenses
Administrative expenses
Selling expenses
Total operating expenses
Income from operations
Other revenues and expenses
Interest expense
Income before income tax
Income tax expense
Net income
$435,500
$27,300
15,600
42,900
392,600
$ 54,600
221,650
276,250
79,300
196,950
195,650
$120,900
9,100
130,000
65,650
7,800
57,850
9,300
$ 48,550
(Beginning inventory + Net purchases + Freight-in = Cost of goods purchased)
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EXERCISE 5-17 (CONTINUED)
(b)
Feb. 28
Inventory (ending) .................................................... 79,300
Cost of Goods Sold .................................................. 196,950
Purchase Returns and Allowances .......................... 20,800
Purchase Discounts ................................................. 39,000
Inventory (beginning) ..........................................
54,600
Purchases ...........................................................
273,000
Freight In.............................................................
8,450
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SOLUTIONS TO PROBLEMS
PROBLEM 5-1A
(a)
A company’s operating cycle is the average time it takes to go from cash to
cash in producing revenues. The operating cycle for a merchandising company
covers the period of time between when you purchase your inventory, to when
you sell it, and to when you eventually collect the accounts receivable from a
sale.
The hair salon is having problems paying for its products because it purchases
a two-month supply, paying for it immediately, with cash flow from the current
month’s operations. There is an insufficient cash float available to purchase two
months of supply at one time, and to pay immediately rather than taking
advantage of the 30-day payment period.
The hair salon’s inventory is contributing to the problem of reduced cash flow
and gross profit because some items have been in stock for a long period of
time. This further extends the operating cycle for those items.
(b)
The physical inventory count comparison with the perpetual inventory record
has flagged discrepancies. There is an issue concerning the way in which the
perpetual record is being maintained and updated because staff members
sometimes forget to scan the products that they use on customers. There may
also be a possibility that goods are being stolen by customers or employees.
Accounting errors could also be the source of the discrepancy, in which case
the company’s procedures should be reviewed, and if necessary, internal
controls should be strengthened. Possible solutions could be having the system
require that items be scanned before a product sale can be rung in. In addition,
the procedures taken to perform the physical inventory count should be
reviewed to determine if the count is the source of the discrepancies. The count
should be performed more frequently, not necessarily for all inventory items but
particularly for those items that had discrepancies from the count performed at
the end of six months. The results of the more frequent counts should be
monitored to see if the discrepancies with the perpetual inventory records are
diminishing.
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PROBLEM 5-1A (CONTINUED)
(b) (continued)
The hair salon should use the perpetual inventory system to help determine
which inventory items are out-of-stock and which items are taking a long time
to sell. By managing what inventory is purchased, fewer markdowns of the
selling price will be required, and sales should increase as there will be less
chance for a stock-out. Finally, the full 30 days should be taken on the terms
with your supplier, in order to have more cash on hand when needed.
(c)
For control reasons, a physical inventory count must always be taken at least
once a year, and ideally more often under the perpetual inventory system. By
using a perpetual inventory system, a company knows what inventory should
be on hand. Performing a physical count and checking it to the perpetual
records is necessary to detect any errors in record keeping and/or shortages in
stock. The staff may be forgetting to scan intentionally. Enforcing the scanning
procedure will strengthen internal control over cash receipts. If staff can avoid
scanning product, they may also attempt to avoid recording a cash sale
altogether, pocketing the extra cash. This theft would lead to unrecorded
revenues and would reduce the gross profit performance of the salon.
LO 1 BT: AN Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting
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PROBLEM 5-2A
(a)
(b)
June
Phantom Book Warehouse Ltd. is a wholesaler. Its suppliers are publishers and
its customers are book stores.
1
3
5
8
9
11
12
17
Inventory (180 × $16) ...............................................
Accounts Payable ..........................................
2,880
Accounts Receivable (220 × $25) ............................
Sales .............................................................
5,500
Cost of Goods Sold (220 × $17)...............................
Inventory........................................................
3,740
Accounts Payable ....................................................
Inventory (10 × $16) ......................................
160
Accounts Receivable (80 × $22) ..............................
Sales .............................................................
1,760
Cost of Goods Sold (80 × $17).................................
Inventory........................................................
1,360
Sales Returns and Allowances.................................
Accounts Receivable (12 × $22)....................
264
Inventory (130 × $15) ...............................................
Accounts Payable ..........................................
1,950
Cash ($5,500 – $110) ..............................................
Sales Discounts ($5,500 × 2%) ................................
Accounts Receivable ....................................
5,390
110
Cash ($1,496 – $30) ................................................
Sales Discounts ($1,496 × 2%) ................................
Accounts Receivable ($1,760 – $264) ..........
1,466
30
2,880
5,500
3,740
160
1,760
1,360
264
1,950
5,500
1,496
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PROBLEM 5-2A (CONTINUED)
(b) (continued)
June
22
25
29
Accounts Receivable (125 × $25) ............................
Sales ................................................................
3,125
Cost of Goods Sold (125 × $17)...............................
Inventory ..........................................................
2,125
Sales Returns and Allowances.................................
Accounts Receivable (15 × $25) ......................
375
Inventory (15 × $17) .................................................
Cost of Goods Sold ..........................................
255
Accounts Payable ($2,880 – $160) ..........................
Cash.................................................................
2,720
3,125
2,125
375
255
2,720
(c)
May
31*
June
1
11
25
June 30 Bal.
* (250 × $18)
(d)
Inventory
4,500 June
3
7 720
2,880
5
1,950
8
255
22
2,200
3,740
160
1,360
2,125
Books on hand at June 30 = 250 + 180 – 220 – 10 – 80 + 130 – 125 + 15 = 140
Average cost per book
= $2,200  140 = $16
LO 1,2,3 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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PROBLEM 5-3A
(a)
Sept.
2
Equipment ............................................................
Accounts Payable ......................................
65,000
65,000
3
No entry necessary.
4
Supplies ...............................................................
Cash ..........................................................
4,000
Inventory ..............................................................
Accounts Payable ......................................
65,000
Inventory ..............................................................
Cash ..........................................................
1,600
Accounts Payable ................................................
Inventory....................................................
5,000
Accounts Receivable ............................................
Sales .........................................................
20,000
Cost of Goods Sold ..............................................
Inventory....................................................
15,000
Freight Out ...........................................................
Cash ..........................................................
375
6
65,000
7
8
9
10
17
20
4,000
1,600
5,000
20,000
15,000
375
Cash ($20,000 – $400) ..........................................
Sales Discounts ($20,000 × 2%) ............................
Accounts Receivable ...................................
19,600
Accounts Payable ($65,000 – $5,000) ...................
Cash ($60,000 – $600) ................................
Inventory ($60,000 × 1%) ............................
60,000
400
20,000
59,400
600
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PROBLEM 5-3A (CONTINUED)
(a) (continued)
Sept.
21
22
23
28
Inventory ................................................................
Cash ............................................................
6,000
Accounts Receivable ..............................................
Sales ...........................................................
27,000
Cost of Goods Sold ................................................
Inventory......................................................
No entry necessary.
20,000
Sales Returns and Allowances...............................
Accounts Receivable ...................................
10,000
Inventory ................................................................
Cost of Goods Sold .....................................
7,500
Accounts Payable ($65,000 – $5,000) ...................
Cash ...........................................................
60,000
6,000
27,000
20,000
10,000
7,500
(b)
Oct.
3
60,000
The cost of missing this purchase discount is the amount recorded as a reduction to
the Inventory account when the payment was made within the discount period.
($60,000 × 1%) = $600. Expressing this in terms of an annual interest rate, it would be
the equivalent of paying 24.6% ($600 ÷ $59,400 × 365/15) for the use of the money
for 15 days.
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PROBLEM 5-4A
(a)
April
3
5
7
9
11
14
16
17
20
Inventory ..................................................................
Accounts Payable ...........................................
3,200
Inventory ..................................................................
Cash ...............................................................
286
Accounts Receivable ...............................................
Sales ...............................................................
9,750
Cost of Goods Sold..................................................
Inventory .........................................................
5,850
Accounts Payable ....................................................
Inventory .........................................................
320
Accounts Payable ($3,200 – $320) ..........................
Inventory ($2,880 × 1%) .................................
Cash ($2,880 – $29) .......................................
2,880
Cash ........................................................................
Accounts Receivable ......................................
4,150
Inventory ..................................................................
Accounts Payable ...........................................
1,300
Accounts Payable ....................................................
Inventory .........................................................
100
3,200
286
9,750
5,850
320
29
2,851
4,150
1,300
100
Accounts Receivable ............................................... 11,100
Sales ...............................................................
Cost of Goods Sold..................................................
Inventory .........................................................
11,100
6,200
6,200
PROBLEM 5-4A (CONTINUED)
24
25
Accounts Payable ($1,300 – $100)..........................
Inventory ($1,200 × 2%) .................................
Cash ($1,200 – $24) .......................................
1,200
Cash ........................................................................
Accounts Receivable ......................................
4,375
24
1,176
4,375
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Financial Accounting, Seventh Canadian Edition
Sales Returns and Allowances ................................
Accounts Receivable ......................................
85
85
(b)
Apr. 1 Bal.
Apr. 14
Apr. 25
Apr. 30 Bal.
Cash
4,200 Apr. 5
4,150 Apr. 11
4,375 Apr. 24
8,412
Accounts Receivable
Apr. 7
9,750 Apr. 14
Apr. 20
11,100 Apr. 25
Apr. 27
Apr. 30 Bal. 12,240
Apr. 1 Bal.
Apr. 3
Apr. 5
Apr. 16
Apr. 30 Bal.
Inventory
19,500 Apr. 7
3,200 Apr. 9
286 Apr. 11
1,300 Apr. 17
Apr. 20
Apr. 24
11,763
Common Shares
Apr. 1 Bal.
Apr. 30 Bal.
286
2,851
1,176
Apr. 9
Apr. 11
Apr. 17
Apr. 24
Accounts Payable
320 Apr. 3
2,880 Apr. 16
100
1,200
Apr. 30 Bal.
12,000
12,000
0
Sales
Apr. 7
9,750
Apr. 20
11,100
Apr. 30 Bal. 20,850
4,150
4,375
85
5,850
320
29
100
6,200
24
3,200
1,300
Sales Returns and Allowances
Apr. 27
85
Apr. 30 Bal.
85
Cost of Goods Sold
Apr. 7
5,850
Apr. 20
6,200
Apr. 30 Bal. 12,050
Retained Earnings
Apr. 1 Bal.
Apr. 30 Bal.
11,700
11,700
(c)
IN THE PINES GOLF SHOP
Trial Balance
April 30, 2018
Debit
Cash .................................................................................. $ 8,412
Accounts receivable ..........................................................
12,240
Inventory ...........................................................................
11,763
Accounts payable ..............................................................
Common shares ................................................................
Retained earnings .............................................................
Sales .................................................................................
Sales returns and allowances ...........................................
85
Cost of goods sold ............................................................
12,050
$44,550
Credit
$12,000
11,700
20,850
00 0 00
$44,550
(Total debit account balances = Total credit account balances)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 5-5A
(a)
May
1
3
4
7
8
9
11
14
15
18
Inventory .........................................................
Accounts Payable ..................................
5,800
Inventory .........................................................
Cash.......................................................
145
Accounts Receivable.......................................
Sales ......................................................
3,500
Cost of Goods Sold .........................................
Inventory ................................................
2,100
Freight Out ......................................................
Cash.......................................................
90
Accounts Payable ...........................................
Inventory ................................................
200
Accounts Payable ($5,800 – $200) .................
Inventory ($5,600 × 1%) .........................
Cash.......................................................
5,600
Supplies ..........................................................
Cash.......................................................
400
Cash ($3,500 – $70) .......................................
Sales Discounts ($3,500 × 2%) .......................
Accounts Receivable..............................
3,430
70
Cash ...............................................................
Accounts Receivable..............................
1,000
Inventory .........................................................
Accounts Payable ..................................
2,000
5,800
145
3,500
2,100
90
200
56
5,544
400
3,500
1,000
2,000
PROBLEM 5-5A (CONTINUED)
(a) (continued)
May
21
No entry required (freight paid by Harlow)
22
Cash ...............................................................
Sales ......................................................
6,500
6,500
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29
31
Financial Accounting, Seventh Canadian Edition
Cost of Goods Sold .........................................
Inventory ................................................
3,900
Sales Returns and Allowances .......................
Cash.......................................................
100
Inventory .........................................................
Cost of Goods Sold ................................
60
Cost of Goods Sold .........................................
Inventory ................................................
($5,249* – $5,100 = $149 shortage)
149
3,900
100
60
149
* Unadjusted balance in Inventory account: $3,500 + $5,800 + $145 – $2,100 – $200 – $56 +
$2,000 – $3,900 + $60 = $5,249
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Financial Accounting, Seventh Canadian Edition
PROBLEM 5-5A (CONTINUED)
(b)
May 1 Bal.
May 14
May 15
May 22
May31 Bal.
Cash
7,000 May 3
3,430 May 7
1,000 May 9
6,500 May 11
May 29
11,651
Accounts Receivable
May 1 Bal.
1,500 May 14
May 4
3,500 May 15
May 31 Bal.
500
May 1 Bal.
May 1
May 3
May 18
May 29
May 31 Bal.
May 11
May 31 Bal.
May 8
May 9
Inventory
3,500 May 4
5,800 May 8
145 May 9
2,000 May 22
60 May 31
5,100
Sales
May 4
May 22
May 31 Bal.
145
90
5,544
400
100
3,500
6,500
10,000
Sales Returns and Allowances
May 29
100
May 31 Bal.
100
3,500
1,000
2,100
200
56
3,900
149
Supplies
400
400
Common Shares
May 1 Bal.
May 31 Bal.
8,000
8,000
Accounts Payable
200 May 1
5,600 May 18
May 31 Bal.
5,800
2,000
2,000
Sales Discounts
May 14
70
May 31 Bal.
70
May 7
May 31 Bal.
Freight Out
90
90
Cost of Goods Sold
May 4
2,100 May 29
May 22
3,900
May 31
149
May 31 Bal.
6,089
Retained Earnings
May 1 Bal.
May 31 Bal.
60
4,000
4,000
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PROBLEM 5-5A (CONTINUED)
(c)
EAGLE HARDWARE STORE LTD.
Income Statement (Partial)
Month Ended May 31, 2018
Sales ..........................................................................
Less: Sales returns and allowances ............................
Sales discounts .................................................
Net sales ......................................................................
Cost of goods sold .......................................................
Gross profit ..................................................................
$10,000
$100
70
170
9,830
6,089
$ 3,741
(d)
EAGLE HARDWARE STORE LTD.
Statement of Financial Position (Partial)
May 31, 2018
Assets
Current assets
Cash ..................................................................
Accounts receivable ..........................................
Inventory............................................................
Supplies.............................................................
Total current assets ................................
$11,651
500
5,100
400
$17,651
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PROBLEM 5-6A
(a)
CLUB CANADA WHOLESALE INC.
Income Statement (Single-step)
Year Ended December 31, 2018
Revenues
Sales ........................................................................................
Less: Sales returns and allowances ......................
$23,560
Sales discounts ...........................................
14,265
Net sales .................................................................................
Interest revenue ......................................................................
Expenses
Cost of goods sold...................................................................
Administrative expenses .........................................................
Selling expenses .....................................................................
Interest expense ......................................................................
Income before income tax...........................................................
Income tax expense ....................................................................
Net income..................................................................................
$1,099,200
37,825
1,061,375
2,400
$806,240
88,515
42,100
12,350
$1,063,775
949,205
114,570
17,200
$ 97,370
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Financial Accounting, Seventh Canadian Edition
PROBLEM 5-6A (CONTINUED)
(b)
CLUB CANADA WHOLESALE INC.
Income Statement (Multiple-step)
Year Ended December 31, 2018
Sales .....................................................................................
Less: Sales returns and allowances ...............................
Sales discounts .....................................................
Net sales ...........................................................................
Cost of goods sold ..................................................................
Gross profit .............................................................................
Operating expenses
Administrative expenses ..............................................
Selling expenses ..........................................................
Total operating expenses ........................................
Income from operations ..........................................................
Other revenues and expenses
Interest revenue ................................................................
Interest expense ................................................................
Income before income tax.......................................................
Income tax expense ................................................................
Net income..............................................................................
$1,099,200
$23,560
14,265
37,825
1,061,375
806,240
255,135
$88,515
42,100
0 130,615
124,520
$(2,400)
12,350
9,950
114,570
17,200
$ 97,370
(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from operations)
(Income from operations + Other revenues – Other expenses = Income before income taxes)
(c)
Both income statements result in the same amount of net income. The multiple-step
income statement provides the user with more information than does the single-step
income statement. The multiple-step income statement provides information on gross
profit and income from operations, which is not included on the single-step income
statement.
(d)
Club Canada Wholesale Inc. is classifying its expenses by their function. They are
reported according to the activity (business function) for which they were incurred (for
example, cost of goods sold, administrative, selling).
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Financial Accounting, Seventh Canadian Edition
PROBLEM 5-7A
(a)
Dec. 31
31
31
31
31
31
31
31
Insurance Expense ($3,000 × 11/12) .............................
Prepaid Insurance .................................................
2,750
Supplies Expense ...........................................................
Supplies ($2,940 – $750) ......................................
2,190
Depreciation Expense .....................................................
Accumulated Depreciation—Buildings ..................
Accumulated Depreciation—Equipment ...............
10,500
Salaries Expense ............................................................
Salaries Payable ..................................................
750
Interest Expense .............................................................
Interest Payable ....................................................
735
Unearned Revenue ($4,000 – $975) ...............................
Sales .....................................................................
3,025
Cost of Goods Sold .........................................................
Inventory ...............................................................
2,000
Income Tax Expense ......................................................
Income Tax Payable..............................................
500
2,750
2,190
6,000
4,500
750
735
3,025
2,000
Cost of Goods Sold .........................................................
2,950
Inventory ...............................................................
($28,750 – $2,000 = $26,750 – $23,800 = $2,950 shortage)
500
2,950
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PROBLEM 5-7A (CONTINUED)
(b)
Dec. 31
Dec.31 Bal.
Dec. 31
4,500
Dec. 31 Bal. 22,500
Cash
17,000
17,000
Accounts Payable
Dec. 31
Dec.31 Bal.
Accounts Receivable
Dec. 31
31,700
Dec.31 Bal.
31,700
Dec. 31
2,000
2,950
Dec. 31 Bal.
Inventory
28,750 Dec. 31
Dec. 31
23,800
Dec. 31
Dec. 31 Bal.
Supplies
2,940 Dec. 31
750
2,190
Dec.31
Dec. 31
Dec. 31 Bal.
Prepaid Insurance
3,000 Dec. 31
250
Dec. 31
Dec.31 Bal.
Land
30,000
30,000
Dec. 31
Dec.31 Bal.
Buildings
150,000
150,000
2,750
Unearned Revenue
3,025 Dec. 31
Dec.31 Bal.
33,735
33,735
4,000
975
Salaries Payable
Dec. 31
Dec. 31 Bal.
750
750
Interest Payable
Dec. 31
Dec. 31 Bal.
735
735
Income Tax Payable
Dec. 31
Dec. 31 Bal.
500
500
Bank Loan Payable
Dec. 31
Dec.31 Bal.
147,100
147,100
Accumulated Depreciation—
Buildings
Dec. 31
24,000
Dec. 31
6,000
Dec. 31
Bal.30,000
Dec. 31
Dec.31 Bal.
Equipment
45,000
45,000
Accumulated Depreciation—
Equipment
Dec. 31
18,000
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PROBLEM 5-7A (CONTINUED)
Depreciation Expense
Dec. 31
10,500
Dec. 31 Bal. 10,500
(b) continued)
Common Shares
Dec. 31
Dec.31 Bal.
Retained Earnings
Dec. 31
Dec.31 Bal.
Dividends Declared
Dec. 31
2,000
Dec. 31 Bal.
2,000
Utilities Expense
13,000
5,100
13,000 Dec. 31
Dec. 31 Bal.
5,100
Insurance Expense
31,425
Dec.
31
2,750
31,425
Dec. 31 Bal.
2,750
Supplies Expense
Dec. 31
2,190
Dec. 31 Bal.
2,190
Sales
Dec. 31
Dec. 31
Dec.31Bal.
Interest Expense
265,770
8,090
3,025 Dec. 31
Dec.
31
735
268,795
Dec. 31Bal.
8,825
Sales Returns and Allowances
Income Tax Expense
Dec. 31
2,500
Dec.31
5,500
Dec. 31 Bal.
2,500
Dec. 31
500
Dec.31 Bal.
6,000
Sales Discounts
Dec. 31
3,275
Dec. 31 Bal.
3,275
Dec. 31
Dec. 31
Dec. 31
Dec.31Bal.
Cost of Goods Sold
171,225
2,000
2,950
176,175
Salaries Expense
Dec. 31
30,950
Dec. 31
750
Dec. 31 Bal.
31,700
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PROBLEM 5-7A (CONTINUED)
(c)
MESA INC.
Adjusted Trial Balance
December 31, 2018
Cash........................................................................
Accounts receivable ...............................................
Inventory .................................................................
Supplies ..................................................................
Prepaid insurance ...................................................
Land ........................................................................
Buildings .................................................................
Accumulated depreciation—buildings .....................
Equipment ...............................................................
Accumulated depreciation—equipment...................
Accounts payable ....................................................
Uearned revenue ....................................................
Salaries payable .....................................................
Interest payable ......................................................
Income tax payable .................................................
Bank loan payable ..................................................
Common shares......................................................
Retained earnings ...................................................
Dividends declared .................................................
Sales .......................................................................
Sales returns and allowances .................................
Sales discounts .......................................................
Cost of goods sold ..................................................
Salaries expense ....................................................
Depreciation expense .............................................
Utilities expense ......................................................
Insurance expense ..................................................
Supplies expense ....................................................
Interest expense .....................................................
Income tax expense ................................................
Totals .....................................................................
Debit
$ 17,000
31,700
23,800
750
250
30,000
150,000
Credit
$ 30,000
45,000
22,500
33,735
975
750
735
500
147,100
13,000
31,425
2,000
268,795
2,500
3,275
176,175
31,700
10,500
5,100
2,750
2,190
8,825
6,000
$549,515
0000 000
$549,515
(Total debit account balances = Total credit account balances)
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PROBLEM 5-7A (CONTINUED)
(d)
MESA INC.
Income Statement
Year Ended December 31, 2018
Sales revenue
Sales..................................................................
Less: Sales returns and allowances .................
Sales discounts .......................................
Net sales............................................................
Cost of goods sold ......................................................
Gross profit .................................................................
Operating expenses
Salaries expense ...............................................
Depreciation expense ........................................
Utilities expense .................................................
Insurance expense .............................................
Supplies expense ..............................................
Total operating expenses ...................................
Income from operations ..............................................
Other revenues and expenses
Interest expense ................................................
Income before income tax ..........................................
Income tax expense ...................................................
Net income .................................................................
$268,795
$2,500
3,275
5,775
263,020
176,175
86,845
$31,700
10,500
5,100
2,750
2,190
52,240
34,605
8,825
25,780
6,000
$ 19,780
(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from operations)
(Income from operations + Other revenues – Other expenses = Income before income tax)
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PROBLEM 5-7A (CONTINUED)
(d) (continued)
MESA INC.
Statement of Changes in Equity
Year Ended December 31, 2018
Common
Shares
Balance, January 1
Issued common shares
Net income
Dividends declared
Balance, December 31
$10,000
3,000
0000 00
$13,000
Retained
Earnings
$31,425
19,780
(2,000)
$49,205
Total
Equity
$41,425
3,000
19,780
(2,000)
$62,205
(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)
MESA INC.
Statement of Financial Position
December 31, 2015
Assets
Current assets
Cash ................................................................................................ $17,000
Accounts receivable ..................................................................
31,700
Inventory .....................................................................................
23,800
Supplies ......................................................................................
750
Prepaid insurance ......................................................................
250
Total current assets ...........................................................
73,500
Property, plant, and equipment
Land........................................................
$ 30,000
Buildings ................................................. $150,000
Less: Accumulated depreciation .............
30,000 120,000
Equipment ..............................................
$45,000
Less: Accumulated depreciation .............
22,500
22,500
Total property, plant, and equipment
172,500
Total assets ............................................................................... $246,000
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PROBLEM 5-7A (CONTINUED)
(d) (continued)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ......................................................................
Unearned revenue .....................................................................
Salaries payable ........................................................................
Interest payable .........................................................................
Income tax payable ...................................................................
Current portion of bank loan payable .........................................
Total current liabilities ......................................................
Non-current liabilities
Bank loan payable ($147,100 – $9,800) ....................................
Total liabilities ...................................................................
Shareholders’ equity
Common shares .....................................................
$13,000
Retained earnings ..................................................
49,205
Total shareholders’ equity .................................................
62,205
Total liabilities and shareholders’ equity ....................................
$ 33,735
975
750
735
500
9,800
46,495
137,300
183,795
$246,000
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PROBLEM 5-8A
(a)
Gross profit margin
$255,135 ÷ $1,061,375 = 24.0%
Profit margin
$97,370 ÷ $1,061,375 = 9.2%
(b)
Net
Sales
Existing balances
Increase sales ($1,061,375 × 15%)
$1,061,375
Gross
Profit
Net
Income
$255,135
$97,370
27,000
27,000
159,206
Increase in gross profit
Increase in operating expenses
(13,500)
Increase in income tax expense
(2,700)
Revised amounts
(c)
Revised gross profit margin
Revised profit margin
$1,220,581
$282,135
$282,135 ÷ $1,220,581 =
$108,170
23.1%
$108,170 ÷ $1, 220,581 = 8.9%
Both the gross profit margin and the profit margin have decreased, but the
end result is an increase in net income, so the plan has merit.
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PROBLEM 5-9A
(a)
[1]
[8]
Sales
Accounts receivable
= $540,000 (given)
= Sales × 30% = $540,000 × 30% = $162,000
(b)
[2]
Cost of goods sold
[9]
Inventory
= 90% × inventory purchased = 90% ×
$300,000 = $270,000
= 10% × inventory purchased = 10% ×
$300,000 = $30,000 or purchases less cost of
goods sold = $300,000 less $270,000 =
$30,000
= 20% × inventory purchased = 20%
×$300,000 = $60,000
[10] Accounts payable
(c)
[3]
Gross profit
[4]
[5]
Operating expenses
Income before income taxes
(d)
[6]
Income tax expense
[7]
Net income
[11] Income tax payable
= Sales – Cost of goods sold
= $540,000 – $270,000 = $270,000
= $120,000 (given)
= Gross profit – Operating expenses =
$270,000 – $120,000 = $150,000
= Income before income taxes × 30% =
$150,000 × 30% = $45,000
= Income before income taxes – Income tax
expense = $150,000 – $45,000 = $105,000
= given as equal to income tax expense =
$45,000
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PROBLEM 5-9A (CONTINUED)
(e)
Gross profit margin
Profit margin
(e)
= $270,000 ÷ $540,000 = 50.0%
= $105,000 ÷ $540,000 = 19.4%
If Psang Inc. has a higher than average gross profit margin, it is either
because it is selling products at a higher price, (which is not the case), or
because its cost of goods sold as a percentage of sales is smaller than its
competitors. The resulting higher gross profit will be a contributing factor to
a higher than average profit margin ratio. Other factors that could
contribute to a higher than average profit margin ratio include lower than
average operating expenses.
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PROBLEM 5-10A
(a)
(in $ millions)
2015
Current
ratio
$990.8
$635.1
Gross
profit
margin
($3,925.3
– $2,780.8)
$3,925.3
Profit
margin
$91.9
$3,925.3
(b)
2014
= 1.6:1
= 29.2%
= 2.3%
$902.6
$425.9
($3,347.6
– $2,201.9)
$3,347.6
$221.8
$3,347.6
2013
=
$752.4
$440.5
2.1:1
= 34.2%
= 6.6%
($3,194.9
– $2,036.8)
$3,194.9
$250.5
$3,194.9
=
1.7:1
= 36.2%
= 7.8%
Canfor’s current ratio increased (improved) in 2014 but then decreased
(deteriorated) in 2015. Canfor’s gross profit experienced a constant
decrease (deterioration) over the three-year period as did the profit margin.
(c)
Current ratio
Gross profit margin
Profit margin
2015
Industry Average
1.2:1
20.8%
2.6%
2015
Canfor Corporation
1.6:1
29.2%
2.3%
Canfor’s current ratio and gross profit margin are both better than those of the
industry, and the profit margin is slightly worse than the industry.
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*PROBLEM 5-11A
(a)
June
1
3
5
8
9
11
12
17
22
25
29
Purchases (180 × $16) ............................................
Accounts Payable ...........................................
2,880
Accounts Receivable (220 × $25) ............................
Sales ...............................................................
5,500
Accounts Payable (10 × $16) ...................................
Purchase Returns and Allowances .................
160
Accounts Receivable (80 × $22) ..............................
Sales ...............................................................
1,760
Sales Returns and Allowances ................................
Accounts Receivable (12 × $22) .....................
264
Purchases (130 × $15) ............................................
Accounts Payable ...........................................
1,950
Cash ($5,500 – $110) ...........................................
Sales Discounts ($5,500 × 2%) ..............................
Accounts Receivable .............................................
5,390
110
Cash ($1,496 – $30) ...........................................
Sales Discounts ($1,496 × 2%) ..............................
Accounts Receivable ($1,760 – $264) ..................
1,466
30
Accounts Receivable (125 × $25) ..........................
Sales ...........................................................
3,125
Sales Returns and Allowances...............................
Accounts Receivable (15 × $25)..................
375
Accounts Payable ($2,880 – $160) ........................
Cash ............................................................
2,720
2,880
5,500
160
1,760
264
1,950
5,500
1,496
3,125
375
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*PROBLEM 5-11A (CONTINUED)
(b)
The advantages of the periodic inventory system are that it is simpler and
cheaper (in terms of equipment and systems) compared to a perpetual
inventory system. There are fewer accounting entries and cash registers
do not need to be able to read bar codes to apply the appropriate cost as
is required in the perpetual inventory system.
However, a perpetual inventory system enables management to monitor
purchases and sales to make the optimum use of the money available for
stocking inventory. Fewer stock-outs are experienced when using the
perpetual system as reductions in inventory levels can be quickly identified
and restocking done, possibly automatically, before the business runs out
of inventory. With the perpetual system, cost of goods sold can be reported
at any time and consequently, timely reporting of results can be achieved.
Perpetual systems allow management to quantify the cost of goods lost to
theft. When customers make inquiries concerning the availability of stock
from a merchant, a quick reply can be obtained and provided when a
perpetual inventory system is used. Finally, fewer inventory counts are
required, saving salary costs and minimizing lost sales from having to close
the business for inventory counts.
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*PROBLEM 5-12A
(a)
Sept.
2
Equipment ............................................................
Accounts Payable .......................................
65,000
65,000
3
No entry necessary.
4
Supplies ...............................................................
Cash ............................................................
4,000
Purchases ............................................................
Accounts Payable .......................................
65,000
Freight In ..............................................................
Cash ............................................................
1,600
Accounts Payable ................................................
Purchase Returns and Allowances .............
5,000
Accounts Receivable............................................
Sales ...........................................................
20,000
Freight Out ...........................................................
Cash ............................................................
375
Cash ($20,000 – $400) ........................................
Sales Discount ($20,000 × 2%)............................
Accounts Receivable ...................................
19,600
400
Accounts Payable ($65,000 – $5,000) .................
Cash ($60,000 – $600) ...............................
Purchase Discounts ($60,000 × 1%) ...........
60,000
Purchases ............................................................
Cash ............................................................
6,000
6
7
8
9
10
17
20
21
4,000
65,000
1,600
5,000
20,000
375
20,000
59,400
600
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6,000
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*PROBLEM 5-12A (CONTINUED)
(a) (continued)
22
Accounts Receivable................................................
Sales ...............................................................
27,000
27,000
23
No entry necessary.
28
Sales Returns and Allowances.................................
Accounts Receivable .......................................
10,000
Accounts Payable ($65,000 – $5,000) .....................
Cash .............................................................
60,000
10,000
(b)
Oct.
3
60,000
The cost of missing this purchase discount is the amount recorded in the
Purchase Discounts account when the payment was made within the discount
period ($60,000 × 1%) = $600. Expressing this in terms of an annual interest rate,
it would be the equivalent of paying 24.6% ($600 ÷ $59,400 × 365/15) for the use
of the money for 15 days.
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*PROBLEM 5-13A
(a)
Apr.
3
5
7
9
11
14
16
17
20
24
Purchases ......................................................................
Accounts Payable .................................................
3,200
Freight In ........................................................................
Cash ......................................................................
286
Accounts Receivable ......................................................
Sales .....................................................................
9,750
Accounts Payable ..........................................................
Purchase Returns and Allowances .......................
320
Accounts Payable ($3,200 – $320) ................................
Purchase Discounts ($2,880 × 1%) .......................
Cash ($2,880 – $29) .............................................
2,880
Cash ..............................................................................
Accounts Receivable.............................................
4,150
Purchases ......................................................................
Accounts Payable .................................................
1,300
Accounts Payable ..........................................................
Purchase Returns and Allowances .......................
100
Accounts Receivable ......................................................
Sales .....................................................................
11,100
Accounts Payable ($1,300 – $100) ................................
Purchase Discounts ($1,200 × 2%) .......................
Cash ($1,200 – $24) .............................................
1,200
3200
286
9,750
320
29
2,851
4,150
1,300
100
11,100
24
1,176
*PROBLEM 5-13A (CONTINUED)
(a) (continued)
25
Cash………………………………………………………….
Accounts Receivable………………………………...
4,375
4,375
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Sales Returns and Allowances ......................................
Accounts Receivable.............................................
85
85
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*PROBLEM 5-13A (CONTINUED)
(b)
Apr. 1 Bal.
Apr. 14
Apr. 25
Apr. 30 Bal.
Cash
4,200 Apr. 5
4,150 Apr. 11
4,375 Apr. 24
8,412
Accounts Receivable
Apr. 7
9,750 Apr. 14
Apr. 20
11,100 Apr. 25
Apr. 27
Apr. 30 Bal. 12,240
4,150
4,375
85
Accounts Payable
320 Apr. 3
2,880 Apr. 16
100
1,200
Apr. 30 Bal.
Sales Returns and Allowances
Apr. 27
85
Apr. 30
85
Apr. 3
Apr. 16
Apr. 30 Bal.
Inventory
Apr. 1 Bal. 19,500
Apr. 30 Bal. 19,500
Apr. 9
Apr. 11
Apr. 17
Apr. 24
Sales
Apr. 7
9,750
Apr. 20
11,100
Apr. 30 Bal. 20,850
286
2,851
1,176
3,200
1,300
0
Common Shares
Apr. 1 Bal. 12,000
Apr. 30 Bal. 12,000
Retained Earnings
Apr. 1 Bal. 11,700
Apr. 30 Bal. 11,700
Purchases
3,200
1,300
4,500
Purchase Returns and Allowances
Apr. 9
320
Apr. 17
100
Apr. 30 Bal.
420
Purchase Discounts
Apr. 11
Apr. 21
Apr. 30 Bal.
Apr. 5
Apr. 30 Bal.
29
24
53
Freight In
286
286
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*PROBLEM 5-13A (CONTINUED)
(c)
IN THE PINES GOLF SHOP
Trial Balance
April 30, 2018
Cash ............................................................................
Accounts receivable .....................................................
Inventory ......................................................................
Accounts
payable…………………………………………………
Common shares ...........................................................
Retained earnings ........................................................
Sales ............................................................................
Sales returns and allowances ......................................
Purchases ....................................................................
Freight in ......................................................................
Purchase returns and allowances ................................
Purchase discounts ......................................................
(Total debit account balances = Total credit account balances)
Debit
$ 8,412
12,240
19,500
Credit
$
12,000
11,700
20,850
85
4,500
286
00 000
$45,023
420
53
$45,023
(d)
Apr. 30
Inventory (ending) ....................................................
Cost of Goods Sold ..................................................
Purchase Returns and Allowances ..........................
Purchase Discounts .................................................
Inventory (beginning) ..........................................
Purchases ...........................................................
Freight In.............................................................
11,763
12,050*
420
53
19,500
4,500
286
*Cost of goods sold = Beginning inventory + Purchases  Purchase discounts 
Purchase returns and allowances + Freight in – Ending inventory
Cost of goods sold = $19,500 + $4,500 – $53 – $420 + $286 – $11,763 = $12,050
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*PROBLEM 5-14A
(a)
FEISTY LTD.
Income Statement (Partial)
Year Ended April 30, 2018
Sales revenue
Sales ..................................................................................
Less: Sales returns and allowances..................................
Net sales ............................................................................
Cost of goods sold
Inventory, May 1, 2017 ......................................................
Purchases ...................................................
$5,900,000
Less: Purchase discounts ...........................
40,000
Net purchases .............................................
5,860,000
Add: Freight in ...........................................
120,000
Cost of goods purchased ...................................................
Cost of goods available for sale .........................................
Inventory, April 30, 2018 ....................................................
Cost of goods sold .....................................................
Gross profit ............................................................................
$9,300,000
250,000
9,050,000
$ 600,000
5,980,000
6,580,000
700,000
5,880,000
$3,170,000
(Beginning inventory + Net purchases + Freight-in = Cost of goods purchased)
(b)
Apr. 30
Inventory (ending) ....................................................
Cost of Goods Sold ..................................................
Purchase Discounts .................................................
Inventory (beginning) ..........................................
Purchases ...........................................................
Freight In.............................................................
700,000
5,880,000
40,000
600,000
5,900,000
120,000
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*PROBLEM 5-14A (CONTINUED)
(c) Gross profit margin:
$3,170,000
$9,050,000
= 35.0%
Feisty’s gross profit margin of 35% is better than the industry average of 30%.
This indicates that Feisty is making a higher gross profit from each dollar of
sales than the industry average, due to higher selling prices or lower costs
for its inventory.
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*PROBLEM 5-15A
ACTIVE ATHLETIC WEAR INC.
Income Statement
Year Ended December 31, 2018
Sales revenue
Sales .........................................................................................
Less: Sales discounts ..............................................................
Sales returns and allowances .........................................
Net sales ...................................................................................
Cost of goods sold
Inventory, January 1 ..................................................................
Purchases ..........................................................
$602,400
Less: Purchase discounts ....................................
33,750
Purchase returns and allowances ...............
9,600
Net purchases ......................................................
559,050
Add: Freight in ......................................................
8,400
Cost of goods purchased ..........................................................
Cost of goods available for sale ................................................
Less: Inventory, December 31 ..................................................
Cost of goods sold ..............................................................
Gross profit ......................................................................................
Operating expenses
Administrative expenses ............................................................
Selling expenses........................................................................
Total operating expenses ...................................................
Income from operations ...................................................................
Other revenues and expenses
Interest expense ........................................................................
Income before income tax ...............................................................
Income tax expense ........................................................................
Net Income .....................................................................................
$955,500
$22,500
12,000
34,500
921,000
$ 60,750
567,450
628,200
108,900
519,300
401,700
$271,350
11,250
282,600
119,100
15,600
103,500
24,000
$ 79,500
(Beginning inventory + Net purchases + Freight-in = Cost of goods available for sale)
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*PROBLEM 5-15A (CONTINUED)
ACTIVE ATHLETIC WEAR INC.
Statement of Changes in Equity
Year Ended December 31, 2018
Common
Shares
Balance, January 1
Issued common shares
Net income
Dividends declared
Balance, December 31
$ 75,000
37,500
000 0000
$112,500
Retained
Earnings
$102,900
79,500
(12,000)
$170,400
Total
Equity
$177,900
37,500
79,500
(12,000)
$282,900
(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)
ACTIVE ATHLETIC WEAR INC.
Statement of Financial Position
December 31, 2018
Assets
Current assets
Cash ............................................................................................................
Accounts receivable ...................................................................................
Inventory ......................................................................................................
Prepaid insurance ......................................................................................
Total current assets ............................................................................
Property, plant, and equipment
Land.....................................................................
$112,500
Buildings ..............................................................
$285,000
Less: Accumulated depreciation ..........................
77,700
207,300
Equipment ...........................................................
$165,000
Less: Accumulated depreciation ..........................
64,350
100,650
Total property, plant, and equipment .........
Total assets ...............................................................................................
$ 25,500
66,300
108,900
3,600
204,300
420,450
$624,750
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*PROBLEM 5-15A (CONTINUED)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable .....................................................................
Salaries payable .......................................................................
Property tax payable .................................................................
Unearned revenue ....................................................................
Current portion of mortgage payable ........................................
Total current liabilities .....................................................
Non-current liabilities
Mortgage payable ($187,500 – $18,750) .................................
Total liabilities ..................................................................
Shareholders’ equity
Common shares .................................................... $112,500
Retained earnings .................................................
170,400
Total shareholders’ equity ................................................
Total liabilities and shareholders’ equity ....................................
$ 129,450
5,250
7,200
12,450
18,750
173,100
168,750
341,850
282,900
$624,750
LO 6 BT: AP Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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PROBLEM 5-1B
(a)
A company’s operating cycle is the average time it takes to go from cash to
cash in producing revenues. The operating cycle for a merchandising
company covers the period of time between when you purchase your
inventory, to when you sell it, and to when you eventually collect the
accounts receivable from a sale. The Fashion Palace is having problems
paying its bills because the period of time between sales and collection of
accounts receivable is lengthened because many customers take more
than one month to pay.
The company’s inventory is contributing to the problem because some items
have been in stock for a long period of time, which means a long operating
cycle for those items.
(b)
The Fashion Palace should consider switching to a perpetual inventory
system where detailed records of each inventory purchase and sale are
maintained. This system continuously—perpetually—shows the quantity
and cost of the inventory purchased, sold, and on hand. This system will
help the company see which inventory items are out-of-stock, which items
are taking a long time to sell, and provide management with the total
inventory on hand each month to prepare its monthly financial statements,
eliminating the need for a monthly count. The company will still need to
perform at least one annual inventory count to ensure its accounting records
agree with the physical inventory count.
(c)
For control reasons, a physical inventory count must always be taken at
least one a year, and ideally more often under the perpetual inventory
system. By using a perpetual inventory system, a company knows what
inventory should be on hand. Performing a physical count and checking it
to the perpetual records is necessary to detect any errors in record keeping
and/or shortages in stock.
LO 1 BT: AN Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting
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PROBLEM 5-2B
(a)
(b)
July
Travel Warehouse Ltd. is a wholesaler. Its suppliers are suitcase
manufacturers and its customers are stores.
2
3
6
7
9
11
13
Inventory (75 × $60) ..........................................
Accounts Payable ...................................
4,500
Accounts Payable .............................................
Inventory (4 × $60) .................................
240
Accounts Receivable (55 × $90) .......................
Sales ......................................................
4,950
Cost of Goods Sold (55 × $50)..........................
Inventory.................................................
2,750
Sales Returns and Allowances..........................
Accounts Receivable (3 × $90) ..............
270
Inventory ...........................................................
Cost of Goods Sold (3 × $50) .................
150
Accounts Receivable (3 × $100) .......................
Sales ......................................................
300
Cost of Goods Sold (3 × $60)............................
Inventory.................................................
180
Accounts Payable ($4,500 – $240) ...................
Inventory ($4,260 × 2%) .........................
Cash ($4,260 – $85) ...............................
4,260
Accounts Receivable (25 × $100) .....................
Sales ......................................................
2,500
4,500
240
4,950
2,750
270
150
300
180
85
4,175
2,500
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PROBLEM 5-2B (CONTINUED)
(b) (continued)
July
13
16
17
July
20
27
Cost of Goods Sold (25 × $60)..........................
Inventory.................................................
1,500
Inventory (70 × $62) ..........................................
Accounts Payable ...................................
4,340
Sales Returns and Allowances..........................
Accounts Receivable (5 × $100).............
Cash ($4,980 – $100) .....................................
Sales Discounts ($4,980 × 2%) .........................
Accounts Receivable
($4,950 – $270 + $300) ..........................
500
4,880
100
Cash ($2,000 – $40) .........................................
Sales Discounts ($2,000 × 2%) .........................
Accounts Receivable ($2,500 – $500)....
1,960
40
1,500
4,340
500
4,980
2,000
(c)
July
1*
2
7
16
July 31
*(60 × $50)
(d)
Inventory
3,000
4,500
150
4,340
Bal.
July 3
6
9
11
13
240
2,750
180
85
1,500
7,235
Number of suitcases on hand at July 31
= 60 + 75 – 4 – 55 + 3 – 3 – 25 + 70 = 121
$7,235  121 = $60
LO 1,2,3 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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PROBLEM 5-3B
(a)
Oct.
1
1
2
6
8
9
10
12
15
17
Inventory ...........................................................................
Accounts Payable ...................................................
86,000
Inventory ...........................................................................
Cash .......................................................................
1,400
Accounts Payable .............................................................
Inventory.................................................................
4,000
Supplies ............................................................................
Cash .......................................................................
2,800
Accounts Receivable.........................................................
Sales ......................................................................
140,000
Cost of Goods Sold ...........................................................
Inventory ($86,000 + $1,400 – $4,000) ..................
83,400
Freight Out ........................................................................
Cash .......................................................................
2,300
Equipment .........................................................................
Accounts Payable ...................................................
62,000
Sales Returns and Allowances..........................................
Accounts Receivable ..............................................
3,500
Inventory ...........................................................................
Cash .......................................................................
36,300
Cash ($136,500 – $2,730) ................................................
Sales Discounts [($140,000 – $3,500) × 2%] ....................
Accounts Receivable ($140,000 – $3,500) .............
133,770
2,730
86,000
1,400
4,000
2,800
140,000
83,400
2,300
62,000
3,500
36,300
136,500
PROBLEM 5-3B (CONTINUED)
(a) (continued)
Oct.
28
Accounts Receivable.........................................................
Sales ......................................................................
30,000
Cost of Goods Sold ...........................................................
Inventory.................................................................
18,000
30,000
18,000
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29
30
31
Financial Accounting, Seventh Canadian Edition
No entry necessary.
Accounts Payable ($86,000 – $4,000) ..............................
Cash .......................................................................
82,000
82,000
Sales Returns and Allowances..........................................
Accounts Receivable ..............................................
5,000
Inventory ...........................................................................
Cost of Goods Sold ................................................
3,000
5,000
3,000
(b)
Oct.
14
Accounts Payable ($86,000 – $4,000) ...........................
Inventory ($82,000 × 1%) ....................................
Cash ($82,000 – $820) ........................................
82,000
820
81,180
The cost of missing this purchase discount is the amount recorded as a reduction
to the Inventory account when the payment was made within the discount period
($820). Expressing this in terms of an annual interest rate, it would be the
equivalent of paying 24.6% ($820 ÷ $81,180 × 365/15) for the use of the money
for 15 days.
LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance
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Financial Accounting, Seventh Canadian Edition
PROBLEM 5-4B
(a)
April
2
3
5
9
11
13
16
18
20
Inventory .................................................................
Accounts Payable ...........................................
5,800
Inventory .................................................................
Cash ...............................................................
160
Accounts Payable....................................................
Inventory ........................................................
100
Supplies ..................................................................
Cash ...............................................................
1,130
Accounts Payable ($5,800 – $100) ........................
Inventory ($5,700 × 2%) .................................
Cash ($5,700 – $114) ....................................
5,700
Inventory .................................................................
Cash ...............................................................
1,560
Inventory .................................................................
Cash ...............................................................
115
Cash .......................................................................
Inventory.........................................................
110
Accounts Receivable ...............................................
Sales ..............................................................
11,100
Cost of Goods Sold .................................................
Inventory.........................................................
6,660
5,800
160
100
1,130
114
5,586
1,560
115
110
11,100
6,660
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Financial Accounting, Seventh Canadian Edition
PROBLEM 5-4B (CONTINUED)
(a) (continued)
April
21
23
25
27
28
Sales Returns and Allowances ................................
Accounts Receivable ......................................
1,000
Inventory ..................................................................
Cost of Goods Sold ........................................
600
1,000
600
Equipment ............................................................... 11,700
Accounts Payable ...........................................
Accounts Receivable ...............................................
Sales ...............................................................
9,800
Cost of Goods Sold..................................................
Inventory .........................................................
5,880
Cash ........................................................................
Accounts Receivable ......................................
9,800
Sales Returns and Allowances ...............................
Accounts Receivable ......................................
150
11,700
9,800
5,880
9,800
150
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PROBLEM 5-4B (CONTINUED)
(b)
Apr. 1 Bal.
Apr. 18
Apr. 27
Apr. 30 Bal.
Cash
16,400 Apr. 3
110 Apr. 9
9,800 Apr. 11
Apr. 13
Apr. 16
17,759
Accounts Receivable
Apr. 20
11,100 Apr. 21
Apr. 27
9,800 Apr. 27
Apr. 28
Apr. 30 Bal.
9,950
Inventory
Apr. 1 Bal. 16,200 Apr. 5
Apr. 2
5,800 Apr. 11
Apr. 3
160 Apr. 18
Apr. 13
1,560 Apr. 20
Apr. 16
115 Apr. 25
Apr. 21
600
Apr. 30 Bal. 11,571
Apr. 9
Apr. 30 Bal.
Supplies
1,130
1,130
Equipment
Apr. 23
11,700
Apr. 30 Bal. 11,700
160
1,130
5,586
1,560
115
Apr. 5
Apr. 11
1,000
9,800
150
100
114
110
6,660
5,880
Accounts Payable
100 Apr. 2
5,700 Apr. 23
Apr. 30 Bal.
5,800
11,700
11,700
Common Shares
Apr. 1 Bal.
Apr. 30 Bal.
20,000
20,000
Retained Earnings
Apr. 1 Bal.
Apr. 30 Bal.
12,600
12,600
Sales
Apr. 20
Apr. 25
Apr. 30 Bal.
11,100
9,800
20,900
Sales Returns and Allowances
Apr. 21
1,000
Apr. 28
150
Apr. 30 Bal.
1,150
Apr. 20
Apr. 25
Apr. 30 Bal.
Cost of Goods Sold
6,660 Apr. 21
5,880
11,940
600
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PROBLEM 5-4B (CONTINUED)
(c)
GRAND SLAM TENNIS SHOP
Trial Balance
April 30, 2018
Debit
Cash ................................................................................. $ 17,759
Accounts receivable ..........................................................
9,950
Inventory ...........................................................................
11,571
Supplies ............................................................................
1,130
Equipment.........................................................................
11,700
Accounts payable .............................................................
Common shares ...............................................................
Retained earnings .............................................................
Sales .................................................................................
Sales returns and allowances ...........................................
1,150
Cost of goods sold ............................................................
11,940
$65,200
Credit
$ 11,700
20,000
12,600
20,900
0 0000
$65,200
(Total debit account balances = Total credit account balances)
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PROBLEM 5-5B
(a)
Apr.
2
3
5
9
10
11
Inventory ..................................................................
Accounts Payable ...........................................
8,900
Inventory ..................................................................
Cash ...............................................................
225
8,900
225
Accounts Receivable ............................................... 11,600
Sales ...............................................................
Cost of Goods Sold..................................................
Inventory .........................................................
7,540
Freight Out ...............................................................
Cash ...............................................................
290
Sales Returns and Allowances ................................
Accounts Receivable ......................................
1,600
Inventory ..................................................................
Cost of Goods Sold .........................................
1,030
Inventory ..................................................................
Accounts Payable ...........................................
4,200
7,540
290
1,600
1,030
4,200
12
No entry necessary
13
Accounts Payable ....................................................
Inventory .........................................................
300
Cash ($10,000 – $200) ............................................
Sales Discounts ($10,000 × 2%) .............................
Accounts Receivable ($11,600 – $1,600) ..........
9,800
200
14
11,600
300
10,000
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Financial Accounting, Seventh Canadian Edition
PROBLEM 5-5B (CONTINUED)
(a) (continued)
Apr.
17
20
23
24
27
30
Accounts Payable ....................................................
Inventory ($8,900 × 1%) .................................
Cash ...............................................................
8,900
Accounts Payable ($4,200 – $300)…………
Inventory ($3,900 × 1%) .................................
Cash ($3,900 – $39) .......................................
3,900
Cash ........................................................................
Sales...............................................................
6,400
Cost of Goods Sold..................................................
Inventory .........................................................
5,200
Sales Returns and Allowances ................................
Cash ...............................................................
400
Inventory ..................................................................
Cash ...............................................................
6,100
Cash ........................................................................
Inventory .........................................................
500
89
8,811
39
3,861
6,400
5,200
400
6,100
500
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Financial Accounting, Seventh Canadian Edition
PROBLEM 5-5B (CONTINUED)
(b)
Apr. 1 Bal.
Apr. 14
Apr. 23
Apr. 30
Apr. 30 Bal.
Cash
4,000 Apr. 3
9,800 Apr. 9
6,400 Apr. 17
500 Apr. 20
Apr. 24
Apr. 27
1,013
Accounts Receivable
Apr. 1 Bal.
3,500 Apr. 10
Apr. 5
11,600 Apr. 14
Apr. 30 Bal.
3,500
Apr. 1 Bal.
Apr. 2
Apr. 3
Apr. 10
Apr. 11
Apr. 27
Apr. 30 Bal.
Inventory
2,500 Apr. 5
8,900 Apr. 13
225 Apr. 17
1,030 Apr. 20
4,200 Apr. 23
6,100 Apr. 30
9,287
Common Shares
Apr. 1 Bal.
Apr. 30 Bal.
Apr. 13
Apr. 17
Apr. 20
Accounts Payable
300 Apr. 2
8,900 Apr. 11
3,900
Apr. 30 Bal.
225
290
8,811
3,861
400
6,100
1,600
10,000
7,540
300
89
39
5,200
500
Sales
Apr. 5
Apr. 23
Apr. 30 Bal.
Sales Returns and Allowances
Apr. 10
1,600
Apr. 24
400
Apr. 30 Bal.
2,000
Sales Discounts
Apr. 14
200
Apr. 30 Bal.
200
Apr. 9
Apr. 30 Bal.
Apr. 5
Apr. 23
Apr. 30 Bal.
5,000
5,000
11,600
6,400
18,000
Freight Out
290
290
Cost of Goods Sold
7,540 Apr. 10
5,200
1,030
11,710
Retained Earnings
Apr. 1 Bal.
Apr. 30 Bal.
5,000
5,000
8,900
4,200
0
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PROBLEM 5-5B (CONTINUED)
(c)
NISSON DISTRIBUTING LTD.
Income Statement
Month Ended April 30, 2018
Sales ......................................................................
Less: Sales returns and allowances .....................
Sales discounts ..........................................
Net sales ..................................................................
Cost of goods sold ...................................................
Gross profit ..............................................................
$18,000
$2,000
200
2,200
15,800
11,710
$ 4,090
(d)
NISSON DISTRIBUTING LTD.
Statement of Financial Position (Partial)
April 30, 2018
Assets
Current assets
Cash.....................................................................................
Accounts receivable .............................................................
Inventory ..............................................................................
Total current assets .......................................................
$ 1,013
3,500
9,287
$13,800
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PROBLEM 5-6B
(a)
BRIGUS WHOLESALE LTD.
Income Statement (Single-step)
Year Ended November 30, 2018
Revenues
Sales ........................................................................................
Less: Sales returns and allowances .......................
$12,800
Sales discounts .............................................
11,400
Net sales .................................................................................
Interest revenue ......................................................................
Expenses
Cost of goods sold ..................................................................
Administrative expenses .........................................................
Selling expenses .....................................................................
Interest expense .....................................................................
Income before income tax ..........................................................
Income tax expense ...................................................................
Net income .................................................................................
$2,234,800
24,200
2,210,600
2,800
$1,387,200
366,000
286,000
12,300
$2,213,400
2,051,500
161,900
32,400
$ 129,500
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PROBLEM 5-6B (CONTINUED)
(b)
BRIGUS WHOLESALE LTD.
Income Statement (Multiple-step)
Year Ended November 30, 2018
Sales .....................................................................................
Less: Sales returns and allowances ...............................
Sales discounts.....................................................
Net sales ...........................................................................
Cost of goods sold ..................................................................
Gross profit .............................................................................
Operating expenses
Administrative expenses ..............................................
Selling expenses..........................................................
Total operating expenses........................................
Income from operations ..........................................................
Other revenues and expenses
Interest revenue ...............................................................
Interest expense ................................................................
Income before income tax ......................................................
Income tax expense ...............................................................
Net income .............................................................................
$2,234,800
$12,800
11,400
24,200
2,210,600
1,387,200
823,400
$366,000
286,000
652,000
171,400
($2,800)
12,300
9,500
161,900
32,400
$ 129,500
(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from operations)
(Income from operations + Other revenues – Other expenses = Income before income taxes)
(c)
Both income statements result in the same amount of net income. The
multiple-step income statement provides the user with more information
than the single-step income statement does. The multiple-step income
statement provides information on gross profit and income from operations
which is not included on the single-step income statement.
(d)
Brigus is classifying its expenses by their function. They are reported
according to the activity (business function) for which they were incurred
(for example, cost of goods sold, administrative, selling).
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PROBLEM 5-7B
(a)
Nov. 30
30
30
30
30
30
30
30
Insurance Expense ($1,800 × 4/12) ...................................
Prepaid Insurance ......................................................
600
Supplies Expense ..............................................................
Supplies ($1,650 – $950) ...........................................
700
Depreciation Expense ........................................................
Accumulated Depreciation—Equipment ....................
5,360
Salaries Expense ...............................................................
Salaries Payable ........................................................
1,210
Interest Expense ................................................................
Interest Payable .........................................................
175
Unearned Revenue ............................................................
Sales..........................................................................
2,400
Cost of Goods Sold ............................................................
Inventory ....................................................................
1,560
Income Tax Expense .........................................................
Income Tax Payable ..................................................
1,100
600
700
5,360
1,210
175
2,400
1,560
Cost of Goods Sold ..............................................................
940
Inventory ....................................................................
($27,500 – $1,560 = $25,940; $25,940 – $25,000 = $940 shortage)
1,100
940
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PROBLEM 5-7B (CONTINUED)
(b)
Nov. 30
Nov. 30 Bal.
Cash
22,000
22,000
Accounts Receivable
Nov. 30
30,600
Nov. 30 Bal. 30,600
1,560
940
Nov. 30 Bal.
Inventory
27,500 Nov. 30
Nov. 30
25,000
Nov. 30
Nov. 30 Bal.
Supplies
1,650 Nov. 30
950
700
Nov. 30
Nov. 30
Nov. 30 Bal.
Prepaid Insurance
1,800 Nov. 30
1,200
Equipment
Nov. 30
26,800
Nov. 30 Bal. 26,800
Accumulated Depreciation—
Equipment
Nov. 30
10,720
Nov. 30
5,360
Nov. 30 Bal.
16,080
34,400
34,400
Salaries Payable
Nov. 30
Nov. 30 Bal.
1,210
1,210
Interest Payable
Nov. 30
Nov. 30 Bal.
175
175
Income Tax Payable
Nov. 30
Nov. 30 Bal.
600
Long-term Investments
Nov. 30
37,000
Nov. 30 Bal. 37,000
Accounts Payable
Nov. 30
Nov. 30 Bal.
Nov. 30
1,100
1,100
Unearned Revenue
2,400 Nov. 30
Nov. 30 Bal.
3,000
600
Bank Loan Payable
Nov. 30
Nov. 30 Bal.
35,000
35,000
Common Shares
Nov. 30
Nov. 30 Bal.
16,400
16,400
Retained Earnings
Nov. 30
Nov. 30 Bal.
30,000
30,000
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PROBLEM 5-7B (CONTINUED)
Dividends Declared
Nov. 30
10,000
Nov. 30 Bal. 10,000
Sales
Nov. 30
248,500
Nov. 30
2,400
Nov. 30 Bal. 250,900
Sales Returns and Allowances
Nov. 30
4,600
Nov. 30 Bal.
4,600
Sales Discounts
Nov. 30
4,520
Nov. 30 Bal.
4,520
Cost of Goods Sold
Nov. 30
157,000
Nov. 30
1,560
Nov. 30
940
Nov. 30 Bal. 159,500
Nov. 30
Nov. 30
Nov. 30 Bal.
Salaries Expense
32,600
1,210
33,810
Depreciation Expense
Nov. 30
5,360
Nov.30 Bal.
5,360
Nov. 30
Nov. 30 Bal.
Rent Expense
13,850
13,850
Advertising Expense
Nov. 30
2,100
Nov. 30 Bal.
2,100
Nov. 30
Nov. 30 Bal.
Supplies Expense
700
700
Insurance Expense
Nov. 30
600
Nov. 30 Bal.
600
Interest Expense
Nov. 30
4,000
Nov. 30
175
Nov. 30 Bal.
4,175
Income Tax Expense
Nov. 30
2,000
Nov. 30
1,100
Nov. 30 Bal.
3,100
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PROBLEM 5-7B (CONTINUED)
(c)
FASHION CENTRE LTD.
Adjusted Trial Balance
November 30, 2018
Cash ...........................................................................
Accounts receivable ....................................................
Inventory .....................................................................
Supplies ......................................................................
Prepaid insurance .......................................................
Long-term investments ...............................................
Equipment...................................................................
Accumulated depreciation—equipment ......................
Accounts payable .......................................................
Salaries payable .........................................................
Interest payable ..........................................................
Income tax payable .....................................................
Unearned revenue ......................................................
Bank loan payable ......................................................
Common shares .........................................................
Retained earnings .......................................................
Dividends declared .....................................................
Sales ...........................................................................
Sales discounts...........................................................
Sales returns and allowances .....................................
Cost of goods sold ......................................................
Salaries expense ........................................................
Rent expense..............................................................
Depreciation expense .................................................
Supplies expense .......................................................
Insurance expense .....................................................
Interest expense .........................................................
Advertising expense ...................................................
Income tax expense ....................................................
Totals ...................................................................
Debit
$ 22,000
30,600
25,000
950
1,200
37,000
26,800
Credit
$ 16,080
34,400
1,210
175
1,100
600
35,000
16,400
30,000
10,000
250,900
4,520
4,600
159,500
33,810
13,850
5,360
700
600
4,175
2,100
3,100
$385,865
0000 000
$385,865
(Total debit account balances = Total credit account balances)
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PROBLEM 5-7B (CONTINUED)
(d)
FASHION CENTRE LTD.
Income Statement
Year Ended November 30, 2018
Sales revenue
Sales...........................................................................................
Less: Sales returns and allowances ........................
$4,600
Sales discounts ..............................................
4,520
Net sales.....................................................................................
Cost of goods sold ..............................................................................
Gross profit ..........................................................................................
Operating expenses
Salaries expense .....................................................
$33,810
Rent expense ............................................................
13,850
Depreciation expense ...............................................
5,360
Advertising expense ..................................................
2,100
Supplies expense ......................................................
700
Insurance expense ...................................................
600
Total operating expenses ...................................................
Income from operations .......................................................................
Other revenues and expenses
Interest expense .........................................................................
Income before income tax ...................................................................
Income tax expense ............................................................................
Net income ..........................................................................................
$250,900
9,120
241,780
159,500
82,280
56,420
25,860
4,175
21,685
3,100
$ 18,585
(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from operations)
(Income from operations + Other revenues – Other expenses = Income before income tax)
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PROBLEM 5-7B (CONTINUED)
(d) (continued)
FASHION CENTRE LTD.
Statement of Changes in Equity
Year Ended November 30, 2018
Common
Shares
Balance, December 1, 2017
Issued common shares
Net income
Dividends declared
Balance, November 30, 2018
Retained
Earnings
$ 11,400
5,000
_______
$ 16,400
$30,000
18,585
(10,000)
$ 38,585
Total
Equity
$41,400
5,000
18,585
(10,000)
$ 54,985
FASHION CENTRE LTD.
Statement of Financial Position
November 30, 2018
Assets
Current assets
Cash ..................................................................................
$22,000
Accounts receivable ..........................................................
30,600
Inventory .............................................................................
25,000
Supplies ..............................................................................
950
Prepaid insurance ..............................................................
1,200
Total current assets ...................................................
$ 79,750
Long-term investments ................................................................ .......................... 37,000
Property, plant, and equipment
Equipment ..........................................................................
$26,800
Less: Accumulated depreciation ......................................... 16,080
..........................Total property, plant, and equipment
10,720
Total assets ........................................................................
$127,470
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PROBLEM 5-7B (CONTINUED)
(d) (continued)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ...............................................................
Salaries payable .................................................................
Interest payable ..................................................................
Income tax payable ............................................................
Unearned revenue ..............................................................
Current portion of bank loan payable ..................................
Total current liabilities ...............................................
Non-current liabilities
Bank loan payable* .............................................................
Total liabilities ............................................................
Shareholders’ equity
Common shares ...................................................... ...... $16,400
Retained earnings ................................................... ........... 38,585
Total shareholders’ equity ............................... .......................
Total liabilities and shareholders’ equity .................. .......................
$ 34,400
1,210
175
1,100
600
5,000
42,485
30,000
72,485
54,985
$127,470
*($35,000 – $5,000)
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PROBLEM 5-8B
(a)
Gross profit margin
$823,400 ÷ $2,210,600 = 37.2%
Profit margin
$129,500 ÷ $2,210,600 = 5.9%
(b)
Existing balances
Increase sales ($2,210,600 × 10%)
Increase in gross profit
Net
Sales
Gross
Profit
Net
Income
$2,210,600
$823,400
$129,500
60,000
60,000
221,060
Increase in operating expenses
Increase in income tax expense
Revised amounts
(c)
Revised gross profit margin
Revised profit margin
(32,000)
(4,000)
$2,431,660
$883,400
$883,400 ÷ $2,431,660 =
$153,500 ÷ $2,431,660 =
$153,500
36.3%
6.3%
While the gross profit margin decreases slightly, the profit margin increases
from 5.9% to 6.3%. The plan has increased net income, so it has merit.
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PROBLEM 5-9B
(a)
[1]
[8]
Sales
= $400,000 (given)
Accounts receivable = Sales × 20% = $400,000 × 20% = $80,000
(b)
[2]
Cost of goods sold
[9]
Inventory
[10] Accounts payable
(c)
[3]
Gross profit
[4]
[5]
Operating expenses
Income before income taxes
(d)
[6]
Income tax expense
[7]
Net income
[11] Income tax payable
(e)
Gross profit margin
Profit margin
= 80% × inventory purchased = 80% ×
$200,000 = $160,000
= 20% × inventory purchased = 20% ×
$200,000 = $40,000 or purchases less cost
of goods sold
= $200,000 less $160,000 = $40,000
= 25% × inventory purchased = 25% ×
$200,000 = $50,000
= Sales – Cost of goods sold
= $400,000 – $160,000 = $240,000
= $140,000 (given)
= Gross profit – Operating expenses =
$240,000 – $140,000
= $100,000
= Income before income taxes × 30% =
$100,000 × 30%
= $30,000
= Income before income taxes – Income tax
expense
= $100,000 – $30,000 = $70,000
= given as equal to income tax expense =
$30,000
= $240,000 ÷ $400,000 = 60.0%
= $70,000 ÷ $400,000 = 17.5%
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PROBLEM 5-9B (CONTINUED)
(e)
Although Tsang Inc. may sell its product at the same price as other
companies in the industry, its cost of goods sold percentage may be higher
compared with other companies in the industry. Because the business is
new, it might not yet enjoy the economies of scale and have strong
relationships with suppliers that allow them to buy at competitive prices.
Tsang may be unable to negotiate lower purchase prices for merchandise
and therefore experiences lower gross profit margins compared to its
competitors. Similarly, other competitors are likely larger businesses that
enjoy cost savings through economies of scale. Tsang is a new business
and does not enjoy this advantage and experiences higher operating costs
yielding a lower profit margin.
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PROBLEM 5-10B
(a)
[in SEK (Swedish krona) millions]
2015
Current
ratio
Gross
profit
margin
Profit
margin
(b)
2014
2013
170,687 ÷ 155,860
177,302 ÷ 136,393
163,612 ÷ 140,316
= 1.1:1
= 1.3:1
= 1.2:1
(312,515 – 240,653)
312,515
(282,948 – 220,012)
282,948
(272,622 – 212,504)
272,622
= 23.0%
= 22.2%
= 22.1%
15,099 ÷ 312,515
2,235 ÷ 282,948
3,802 ÷ 272,622
= 4.8%
= 0.8%
= 1.4%
Volvo’s current ratio increased (improved) from 2013 to 2014 but decreased
(deteriorated) in 2015. Volvo’s gross profit margin increased slightly in 2014
and experienced another increase (improvement) in 2015. On the other hand,
the company’s profit margin was very low in 2013 and 2014, but then improved
dramatically in 2015.
(c)
Current ratio
Gross profit margin
Profit margin
2015
Industry Average
1.2:1
16.3%
2.5%
2015
Volvo
1.1:1
23.0%
4.8%
Volvo’s 2015 current ratio is slightly lower (worse) and its gross profit margin
considerably higher (better) than the industry averages, indicating that the
company is performing much better than other companies in the industry. Its
2015 profit margin is also substantially higher (better) than the average company
in the industry.
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*PROBLEM 5-11B
(a)
July
2
3
6
7
9
11
13
16
17
20
27
Purchases (75 × $60) ............................................
Accounts Payable ........................................
4,500
Accounts Payable (4 × $60) ..................................
Purchase Returns and Allowances ...............
240
Accounts Receivable (55 × $90) ...........................
Sales ............................................................
4,950
Sales Returns and Allowances ..............................
Accounts Receivable (3 × $90) ....................
270
Accounts Receivable (3 × $100) ...........................
Sales ............................................................
300
4,500
240
4,950
270
300
Accounts Payable ($4,500 – $240) ........................
Purchase Discounts ($4,260 × 2%) .............
Cash ($4,260 – $85) ....................................
4,260
Accounts Receivable (25 × $100)...........................
Sales ...........................................................
2,500
Purchases (70 × $62) .............................................
Accounts Payable ........................................
4,340
Sales Returns and Allowances ...............................
Accounts Receivable (5 × $100)..................
500
Cash ($4,980 – $100) ..........................................
Sales Discounts $4,980 × 2%) ...............................
Accounts Receivable
($4,950 – $270 + $300) ..............................
4,880
100
Cash ($2,000 – $40) ...............................................
Sales Discounts ($2,000 × 2%) ..............................
Accounts Receivable ($2,500 – $500).........
1,960
40
85
4,175
2,500
4,340
500
4,980
2,000
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*PROBLEM 5-11B (CONTINUED)
(b)
The advantages of the periodic inventory system are that it is simpler and
cheaper (in terms of equipment and systems) compared to a perpetual
inventory system. There are fewer accounting entries and cash registers do
not need to be able to read bar codes to apply the appropriate cost, as is
required in the perpetual inventory system.
However, a perpetual inventory system enables management to monitor
purchases and sales to make the optimum use of the money available for
stocking inventory. Fewer stock-outs are experienced when using the
perpetual system as reductions in inventory levels can be quickly identified
and restocking done, possibly automatically, before the business runs out of
inventory. With the perpetual system, cost of goods sold can be reported at
any time and consequently, timely reporting of results can be achieved.
Perpetual systems allow management to quantify the cost of goods lost to
theft. When customers make inquiries concerning the availability of stock
from a merchant, a quick reply can be obtained and provided when a
perpetual inventory system is used. Finally, fewer inventory counts are
required, saving salary costs and minimizing lost sales from having to close
the business for inventory counts.
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*PROBLEM 5-12B
(a)
Oct.
1
1
2
6
8
9
10
12
15
17
28
Purchases.............................................................................
Accounts Payable ........................................................
86,000
Freight In ..............................................................................
Cash ............................................................................
1,400
Accounts Payable .................................................................
Purchase Returns and Allowances ..............................
4,000
Supplies ................................................................................
Cash ............................................................................
2,800
86,000
1,400
4,000
2,800
Accounts Receivable ............................................................ 140,000
Sales............................................................................
Freight Out............................................................................
Cash ............................................................................
2,300
Equipment ............................................................................
Accounts Payable ........................................................
62,000
Sales Returns and Allowances .............................................
Accounts Receivable ...................................................
3,500
Purchases.............................................................................
Cash ............................................................................
36,300
2,300
62,000
3,500
36,300
Cash ($136,500 – $2,730) .................................................... 133,770
Sales Discounts [($140,000 – $3,500) × 2%] .......................
2,730
Accounts Receivable ($140,000 – $3,500) .................
Accounts Receivable ............................................................
Sales ...........................................................................
140,000
136,500
30,000
30,000
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*PROBLEM 5-12B (CONTINUED)
(a) (continued)
Oct.
29
30
31
(b)
Oct.
14
No entry necessary.
Accounts Payable ($86,000 – $4,000) ..................................
Cash............................................................................
82,000
Sales Returns and Allowances .............................................
Accounts Receivable...................................................
5,000
Accounts Payable ($86,000 – $4,000) ...........................
Purchase Discounts ($82,000 × 1%) ...................
Cash ($82,000 – $820) ........................................
82,000
5,000
82,000
820
81,180
The cost of missing this purchase discount is the amount recorded as a purchase
discount when the payment was made within the discount period ($820).
Expressing this in terms of an annual interest rate, it would be the equivalent of
paying 24.6% ($820 ÷ $81,180 × 365/15) for the use of the money for 15 days.
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*PROBLEM 5-13B
(a)
Apr.
2
3
5
9
11
13
16
18
20
21
Purchases ..................................................................
Accounts Payable ..............................................
5,800
Freight In ....................................................................
Cash ..................................................................
160
Accounts Payable .......................................................
Purchase Returns and Allowances ....................
100
Supplies......................................................................
Cash ..................................................................
1,130
Accounts Payable ($5,800 – $100) ............................
Purchase Discounts ($5,700× 2%) ....................
Cash ($5,700 – $114) ........................................
5,700
Purchases ..................................................................
Cash ..................................................................
1,560
Freight In ....................................................................
Cash ..................................................................
115
Cash ..........................................................................
Purchase Returns and Allowances ....................
110
Accounts Receivable ..................................................
Sales .................................................................
11,100
Sales Returns and Allowances ..................................
Accounts Receivable ........................................
1,000
5,800
160
100
1,130
114
5,586
1,560
115
110
11,100
1,000
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*PROBLEM 5-13B (CONTINUED)
(a) (continued)
Apr. 23
25
27
28
Equipment .................................................................
Accounts Payable .............................................
11,700
Accounts Receivable .................................................
Sales .................................................................
9,800
Cash ..........................................................................
Accounts Receivable
9,800
Sales Returns and Allowances ..................................
Accounts Receivable ........................................
150
11,700
9,800
9,800
150
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PROBLEM 5-13B (CONTINUED)
(b)
Apr. 1 Bal.
Apr. 18
Apr. 27
Apr. 30 Bal.
Cash
16,400 Apr. 3
110 Apr. 9
9,800 Apr. 11
Apr. 13
Apr. 16
17,759
Accounts Receivable
Apr. 20
11,100 Apr. 21
Apr. 25
9,800 Apr. 27
Apr. 28
Apr. 30 Bal.
9,950
160
1,130
5,586
1,560
115
1,000
9,800
150
Inventory
Apr. 1 Bal. 16,200
Apr. 30 Bal. 16,200
Apr. 9
Apr. 30 Bal.
Apr. 2
Apr. 13
Apr. 30 Bal.
Equipment
Apr. 23
11,700
Apr. 30 Bal. 11,700
Apr. 5
Apr. 11
20,000
20,000
Retained Earnings
Apr. 1 Bal.
Apr. 30 Bal.
12,600
12,600
Sales
Apr. 20
Apr. 25
Apr. 30 Bal.
11,100
9,800
20,900
Sales Returns and Allowances
Apr. 21
1,000
Apr. 28
150
Apr. 30 Bal.
1,150
Supplies
1,130
1,130
Accounts Payable
100 Apr. 2
5,700 Apr. 23
Apr. 30 Bal.
Common Shares
Apr. 1 Bal.
Apr. 30 Bal.
5,800
11,700
11,700
Purchases
5,800
1,560
7,360
Purchase Returns and Allowances
Apr. 5
100
Apr. 18
110
Apr. 30 Bal.
210
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*PROBLEM 5-13B (CONTINUED)
(b) (continued)
Purchase Discounts
Apr. 11
Apr. 30 Bal.
Apr. 3
Apr. 16
Apr. 30 Bal.
114
114
Freight In
160
115
275
(c)
GRAND SLAM TENNIS SHOP
Trial Balance
April 30, 2018
Cash.......................................................................................
Accounts receivable ...............................................................
Inventory ................................................................................
Supplies .................................................................................
Equipment ..............................................................................
Accounts payable ...................................................................
Common shares.....................................................................
Retained earnings ..................................................................
Sales ......................................................................................
Sales returns and allowances ................................................
Purchases ..............................................................................
Purchase returns and allowances ..........................................
Purchase discounts ................................................................
Freight in ................................................................................
Debit
$ 17,759
9,950
16,200
1,130
11,700
590
Credit
$11,700
20,000
12,600
20,900
1,150
7,360
275
$65,524
210
114
00 000
$65,524
(Total debit account balances = Total credit account balances)
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*PROBLEM 5-13B (CONTINUED)
(d)
Apr. 30
Inventory (ending) ....................................................
Cost of Goods Sold ..................................................
Purchase Returns and Allowances ..........................
Purchase Discounts .................................................
Inventory (beginning) ..........................................
Purchases ...........................................................
Freight In.............................................................
11,571
11,940*
210
114
16,200
7,360
275
*Cost of goods sold = Beginning inventory + Purchases – Purchase discounts – Purchase
returns and allowances + Freight in – Ending inventory
Cost of goods sold = $16,200 + $7,360 – $114 – $210 + $275 – $11,571 = $11,940
LO 6 BT: AP Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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*PROBLEM 5-14B
(a)
SEVERN LIMITED
Income Statement (Partial)
Year Ended June 30, 2018
Sales revenue
Sales ............................................................................. $7,800,000
Less: Sales discounts ..................................................
100,000
Net sales .......................................................................
Cost of goods sold
Inventory, July 1, 2017 .................................................. $ 520,000
Purchases .................................................. $6,280,000
Less: Purchase returns and allowances .... . 240,000
Net purchases ............................................ .. 6,040,000
Add: Freight in ..........................................
80,000
Cost of goods purchased .............................................. 6,120,000
Cost of goods available for sale .................................... 6,640,000
Inventory, June 30, 2018 ..............................................
600,000
Cost of goods sold ................................................
Gross profit .......................................................................
$7,700,000
6,040,000
$1,660,000
(Beginning inventory + Net purchases + Freight-in = Cost of goods purchased)
(b)
June 30
Inventory (ending) ....................................................
Cost of Goods Sold ..................................................
Purchase Returns and Allowances ..........................
Inventory (beginning) ..........................................
Purchases ...........................................................
Freight In.............................................................
600,000
6,040,000
240,000
520,000
6,280,000
80,000
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*PROBLEM 5-14B (CONTINUED)
(c) Gross profit margin:
$1,660,000
$7,700,000
= 21.6%
Severn’s gross profit margin of 21.6% is less than the industry average of
26%. This indicates that Severn is making less gross profit than the industry
average on its sales.
LO 5,6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance
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*PROBLEM 5-15B
THE GOODY SHOP LTD.
Income Statement
Year Ended November 30, 2018
Sales revenue
Sales .........................................................................................
Less: Sales discounts ..............................................................
Sales returns and allowances .........................................
Net sales ...................................................................................
Cost of goods sold
Inventory, December 1, 2017 ....................................................
Purchases ..........................................................
$684,700
Less: Purchase discounts ....................................
16,000
Purchase returns and allowances ..............
3,315
Net purchases ......................................................
665,385
Add: Freight in ......................................................
5,060
Cost of goods purchased ..........................................................
Cost of goods available for sale ................................................
Inventory, November 30, 2018 ..................................................
Cost of goods sold ..............................................................
Gross profit ......................................................................................
Operating expenses
Administrative expenses ............................................................
Selling expenses.......................................................................
Total operating expenses ...................................................
Income from operations ...................................................................
Other revenues and expenses
Interest expense .......................................................................
Income before income tax ..............................................................
Income tax expense .......................................................................
Net income .....................................................................................
$989,000
$15,000
10,000
25,000
964,000
$ 34,360
670,445
704,805
37,350
667,455
296,545
$230,100
8,200
238,300
58,245
11,315
46,930
10,000
$ 36,930
(Beginning inventory + Net purchases + Freight-in = Cost of goods purchased)
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*PROBLEM 5-15B (CONTINUED)
THE GOODY SHOP LTD.
Statement of Changes in Equity
Year Ended November 30, 2018
Common
Shares
Balance, December 1, 2017
Issued common shares
Net income
Dividends declared
Balance, November 30, 2018
$ 1,000
25,000
000000
$26,000
Retained
Earnings
$ 82,800
36,930
(5,000)
$114,730
Total
Equity
$ 83,800
25,000
36,930
(5,000)
$140,730
(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)
THE GOODY SHOP LTD.
Statement of Financial Position
November 30, 2018
Assets
Current assets
Cash ......................................................................................................
Accounts receivable .............................................................................
Inventory ................................................................................................
Prepaid insurance ..................................................................................
Total current assets ......................................................................
Property, plant, and equipment
Land..................................................................................
$ 85,000
Buildings .....................................................
$175,000
Less: Accumulated depreciation .................
61,200
113,800
Equipment ..................................................
$57,000
Less: Accumulated depreciation .................
19,880 ...... 37,120
Total property, plant, and equipment ...........................................
Total assets ...........................................................................................
$ 8,500
13,770
37,350
4,500
64,120
235,920
$300,040
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*PROBLEM 5-15B (CONTINUED)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ............................................................................
Unearned revenue ...........................................................................
Salaries payable ..............................................................................
Property tax payable ........................................................................
Income tax payable .........................................................................
Current portion of mortgage payable ...............................................
Total current liabilities ............................................................
Non-current liabilities
Mortgage payable ($106,000 – $5,300) .........................................
Total liabilities .........................................................................
Shareholders’ equity
Common shares ........................................................
$ 26,000
Retained earnings .....................................................
114,730
Total shareholders’ equity .......................................................
Total liabilities and shareholders’ equity ..........................................
$ 32,310
3,000
8,500
3,500
6,000
5,300
58,610
100,700
159,310
140,730
$300,040
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ACR5-1
Financial Accounting, Seventh Canadian Edition
ACCOUNTING CYCLE REVIEW
(a)
Date
Account Titles
March 1
2
5
6
7
Debit
Cash ...............................................................
Accounts Receivable ..............................
125,000
Accounts Payable ............................................
Inventory ................................................
Cash ($200,000 – $4,000) ......................
200,000
Inventory..........................................................
Accounts Payable ...................................
300,000
Cash ...............................................................
Sales.......................................................
285,000
Cost of Goods Sold .........................................
Inventory .................................................
200,000
Accounts Payable ............................................
Inventory .................................................
25,000
125,000
4,000
196,000
300,000
285,000
200,000
25,000
8
No entry necessary
9
Accounts Receivable .......................................
Sales.......................................................
200,000
Cost of Goods Sold .........................................
Inventory .................................................
140,000
Freight Out ......................................................
Cash .......................................................
5,000
9
Credit
200,000
140,000
5,000
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ACR5-1 (CONTINUED)
(a) (continued)
Date
Account Titles
March 12
13
14
16
19
20
27
Debit
Cash ...............................................................
Unearned Revenue ................................
12,500
Sales Returns and Allowances ........................
Accounts Receivable ..............................
20,000
Inventory ..........................................................
Cost of Goods Sold.................................
14,000
Accounts Payable ($300,000 – $25,000).........
Inventory ($275,000 × 2%) .....................
Cash ($300,000 – $25,000 – $5,500)
275,000
Salaries Expense.............................................
Cash .......................................................
45,000
Cash ($200,000 – $20,000 – $3,600) .............
Sales Discounts ($180,000 × 2%) ..................
Accounts Receivable
($200,000 – $20,000) ......................
176,400
3,600
Cash ..............................................................
Sales .....................................................
255,000
Cost of Goods Sold ........................................
Inventory ................................................
179,000
Salaries Expense............................................
Cash ......................................................
50,000
Credit
12,500
20,000
14,000
5,500
269,500
45,000
180,000
255,000
179,000
50,000
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ACR5-1 (CONTINUED)
(a) (continued)
Date
Account Titles
March 30
31
31
31
31
31
Debit
Rent Expense .................................................
Cash ......................................................
5,000
Utilities Expense .............................................
Accounts Payable ..................................
10,000
Salaries Expense............................................
Salaries Payable....................................
10,000
Interest Expense.............................................
Interest Payable .....................................
9,000
Depreciation Expense.....................................
Accumulated Depreciation—Equipment
($145,000 ÷ 10 years = $14,500)
14,500
Income Tax Expense ......................................
Income Tax Payable ..............................
50,000
Credit
5,000
10,000
10,000
9,000
14,500
50,000
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ACR5-1 (CONTINUED)
(b), (d), and (g)
CE = Closing entry
Cash
Feb. 28 Bal.
Mar.
Supplies
65,000
Feb. 28 Bal.
7,500
Mar. 31 Bal.
7,500
1
125,000 Mar.
2
196,000
6
285,000
9
5,000
12
12,500
14
269,500
19
176,400
16
45,000
Feb. 28
Bal.
5,000
20
255,000
27
50,000
Mar. 31
Bal.
5,000
30
5,000
Prepaid Rent
Mar. 31 Bal. 348,400
Equipment
Accounts Receivable
Feb. 28 Bal. 350,000
Mar.
9
200,000 Mar.
1
125,000
13
20,000
19
180,000
Feb. 28 Bal.
145,000
Mar. 31 Bal.
145,000
Accumulated Depreciation
—Equipment
Mar. 31 Bal. 225,000
Feb.
28 Bal.
29,000
Mar.
31
14,500
Mar.
31 Bal.
43,500
Accounts Payable
Inventory
Feb.
Feb. 28 Bal. 2,750,000
Mar.
5
13
300,000 Mar.
14,000
Mar. 31 Bal. 2,510,500
Mar.
2
200,000 Mar.
2
4,000
7
25,000
6
200,000
14
275,000
7
25,000
9
140,000
14
5,500
20
179,000
Mar.
28 Bal. 1,550,000
5
300,000
31
10,000
31 Bal. 1,360,000
Salaries Payable
Mar. 31
10,000
Mar. 31 Bal.
10,000
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ACR5-1 (CONTINUED)
(b), (d), and (g) (continued)
Interest Payable
Sales
Mar.
31
9,000
Feb. 28 Bal. 5,479,400
Mar.
31 Bal.
9,000
Mar.
Unearned Revenue
Feb.
28 Bal.
35,000
Mar.
12
12,500
Mar.
31 Bal.
47,500
Mar. 31 CE
Feb. 28 Bal. 107,000
Mar.
31 Bal. 450,000
Mar. 13
255,000
0
20,000
Mar. 31 Bal. 127,000
Mar.
31
50,000
Mar.
31
Bal. 50,000
Mar. 31
Mar. 31 Bal.
Feb.
28 Bal.
200,000
Mar.
31 Bal.
200,000
0
Feb. 28 Bal.
Mar. 19
65,000
3,600
68,600
Mar. 31 CE
Feb. 28 Bal.
550,500
50,000 Mar. 31 CE
570,900
Mar. 31 Bal. 1,071,400
Mar. 31
50,000
50,000
50,000
Bal.
68,600
0
Cost of Goods Sold
Feb. 28 Bal. 3,843,900
Mar.
Dividends Declared
Mar. 31 CE
CE 127,000
Sales Discounts
Retained Earnings
0
20
Sales Returns and Allowances
28 Bal. 450,000
Mar. 31 Bal.
Mar. 31 Bal.
200,000
Mar. 31 Bal.
Common Shares
Mar. 31 Bal.
9
6,219,400
Feb.
Income Tax Payable
Feb. 28 Bal.
285,000
Mar. 31 Bal. 6,219,400
Bank Loan Payable
Mar. 31 CE
6
6
200,000 Mar.
9
140,000
20
179,000
13
14,000
Mar. 31 Bal. 4,348,900
Mar. 31 CE 4,348,900
Mar. 31
Bal.
0
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ACR5-1 (CONTINUED)
(b), (d), and (g) (continued)
Advertising Expense
Feb. 28 Bal.
75,000
Mar. 31 Bal.
75,000
Feb. 28 Bal.
Bal.
75,000
5,000
Mar. 31 Bal.
Mar. 31 CE 60,000
Mar. 31
Bal.
Feb. 28 Bal. 180,000
9
Mar. 31 CE
Bal.
185,000
0
Depreciation Expense
Feb. 28 Bal.
14,500
Mar. 31 Bal.
14,500
Bal. 360,000
Mar. 16
45,000
27
50,000
31
10,000
Mar. 31
Bal. 465,000
Mar. 31 CE 465,000
Mar. 31
Mar. 31 CE
Bal.
Feb. 28
0
Mar. 31
Mar. 31
0
Salaries Expense
5,000
Mar. 31 Bal. 185,000
Mar. 31
60,000
0
Freight Out
Mar.
55,000
Mar. 30
Mar. 31 CE
Mar. 31
Rent Expense
14,500
0
Bal.
0
Travel Expense
Feb. 28
Bal.
12,500
Mar. 31
Bal.
12,500
Interest Expense
Feb. 28 Bal.
Mar. 31
27,000
Mar. 31
Bal.
0
Utilities Expense
36,000
Mar. 31 CE
Bal.
36,000
Feb. 28
Bal.
Mar. 31
0
Mar. 31
20,000
10,000
Bal.
30,000
Office Expense
Feb. 28 Bal.
26,000
Mar. 31 Bal.
26,000
Bal.
Mar. 31 CE
Mar. 31
Mar. 31 CE
Mar. 31
12,500
9,000
Mar. 31 Bal.
Mar. 31
Mar. 31 CE
Bal.
30,000
0
6,000
0
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(b), (d), and (g) (continued)
Income Tax Expense
Feb. 28 Bal.
150,000
Mar. 31 50,000
Mar. 31 Bal.
200,000
Mar. 31 CE
Mar. 31
Bal.
200,000
0
Income Summary
Mar. 31 CE 5,648,500 Mar. 31 CE
CE
Bal.
6,219,400
570,900
0
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(c)
HERITAGE FURNITURE LIMITED
Trial Balance
March 31, 2018
Cash
Accounts receivable
Inventory
Supplies
Prepaid rent
Equipment
Accumulated depreciation—equipment
Accounts payable
Unearned revenue
Bank loan payable—non-current
Common shares
Retained earnings
Dividends declared
Sales
Sales returns and allowances
Sales discounts
Advertising expense
Cost of goods sold
Freight out
Office expense
Rent expense
Salaries expense
Travel expense
Utilities expense
Interest expense
Income tax expense
Debit
$ 348,400
225,000
2,510,500
7,500
5,000
145,000
Credit
$ 29,000
1,350,000
47,500
450,000
200,000
550,500
50,000
6,219,400
127,000
68,600
75,000
4,348,900
185,000
26,000
60,000
455,000
12,500
20,000
27,000
150,000
$8,846,400
000000v 0
$8,846,400
(Total debit account balances = Total credit account balances)
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(e)
HERITAGE FURNITURE LIMITED
Adjusted Trial Balance
March 31, 2018
Debit
Cash
$ 348,400
Accounts receivable
225,000
2,510,500
Inventory
Supplies
7,500
5,000
Prepaid rent
Equipment
145,000
Accumulated depreciation—equipment
Accounts payable
Salaries payable
Interest payable
Unearned revenue
Bank loan payable
Income tax payable
Common shares
Retained earnings
Dividends declared
50,000
Sales
Sales returns and allowances
127,000
68,600
Sales discounts
Cost of goods sold
4,348,900
Advertising expense
75,000
Freight out
185,000
Depreciation expense
14,500
26,000
Office expense
Rent expense
60,000
465,000
Salaries expense
Travel expense
12,500
Utilities expense
30,000
Interest expense
36,000
Income tax expense
200,000
$8,939,900
Credit
$ 43,500
1,360,000
10,000
9,000
47,500
450,000
50,000
200,000
550,500
6,219,400
000000v 0
$8,939,900
(Total debit account balances = Total credit account balances)
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(f)
HERITAGE FURNITURE LIMITED
Income Statement
Year Ended March 31, 2018
Sales revenue
Sales
Less: Sales returns and allowances
Sales discounts
Net sales
Cost of goods sold
Gross profit
Operating expenses
Salaries expense
Freight out
Advertising expense
Rent expense
Utilities expense
Office expense
Depreciation expense
Travel expense
Total operating expenses
Income from operations
Other revenues and expenses
Interest expense
Income before income tax
Income tax expense
Net income
$6,219,400
$127,000
68,600
195,600
6,023,800
4,348,900
1,674,900
$465,000
185,000
75,000
60,000
30,000
26,000
14,500
12,500
868,000
806,900
36,000
770,900
200,000
$ 570,900
(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from operations)
(Income from operations + Other revenues – Other expenses = Income before income taxes)
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(f) (continued)
HERITAGE FURNITURE LIMITED
Statement of Changes in Equity
Year Ended March 31, 2018
Common
Shares
Balance, April 1, 2017
Issued common shares
Net income
Dividends declared
Balance, March 31, 2018
$199,000
1,000
00 00000
$200,000
Retained
Earnings
$ 550,500
570,900
(50,000)
$1,071,400
Total
Equity
$ 749,500
1,000
570,900
(50,000)
$1,271,400
(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)
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(f) (continued)
HERITAGE FURNITURE LIMITED
Statement of Financial Position
March 31, 2018
Assets
Current assets
Cash
Accounts receivable
Inventory
Supplies
Prepaid rent
Property, plant and equipment
Equipment
Less: Accumulated depreciation
Total assets
$ 348,400
225,000
2,510,500
7,500
5,000
$145,000
43,500
$3,096,400
101,500
$3,197,900
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable
Salaries payable
Interest payable
Unearned revenue
Income tax payable
Current portion of bank loan payable
Total current liabilities
Non-current liabilities*
Bank loan payable
Total liabilities
Shareholders’ equity
Common shares
Retained earnings
Total liabilities and shareholders’ equity
*($450,000 - $45,000 current)
$1,360,000
10,000
9,000
47,500
50,000
45,000
1,521,500
405,000
1,926,500
$ 200,000
1,071,400
1,271,400
$3,197,900
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Financial Accounting, Seventh Canadian Edition
ACR5-1 (CONTINUED)
(g)
Date
Account Titles
March 31
Debit
Sales ..............................................................
Income Summary ...................................
6,219,400
31 Income Summary .............................................
Sales Returns and Allowances ................
Sales Discounts .......................................
Advertising Expense ................................
Cost of Goods Sold..................................
Freight out ...............................................
Depreciation Expense ..............................
Interest Expense ......................................
Office Expense ........................................
Rent Expense ..........................................
Salaries Expense .....................................
Travel Expense ........................................
Utilities Expense ......................................
Income Tax Expense ...............................
5,648,500
31 Income Summary .............................................
Retained Earnings ..................................
570,900
31 Retained Earnings ...........................................
Dividends Declared..................................
50,000
Credit
6,219,400
127,000
68,600
75,000
4,348,900
185,000
14,500
36,000
26,000
60,000
465,000
12,500
30,000
200,000
570,900
50,000
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ACR5-1 (CONTINUED)
(h)
HERITAGE FURNITURE LIMITED
Post-Closing Trial Balance
March 31, 2018
Cash
Accounts receivable
Inventory
Supplies
Prepaid rent
Equipment
Accumulated depreciation—equipment
Accounts payable
Salaries payable
Interest payable
Unearned revenue
Bank loan payable
Income tax payable
Common shares
Retained earnings
Debit
$ 348,400
225,000
2,510,500
7,500
5,000
145,000
000000000
$3,241,400
Credit
$ 43,500
1,360,000
10,000
9,000
47,500
450,000
50,000
200,000
1,071,400
$3,241,400
(Total debit account balances = Total credit account balances)
LO 2,3,4 BT: AP Difficulty: M Time: 90 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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CT5-1
Financial Accounting, Seventh Canadian Edition
FINANCIAL REPORTING CASE
(a)
The North West Company is a merchandising company because it buys
products and resells them to the public.
(b)
The North West Company classifies its operating expenses by function
since captions include titles like “selling, operating and administrative
expenses.”
(c)
Other non-operating expenses reported include interest expense totalling
$6,210,000 for the fiscal year ended January 31, 2016.
(d) and (e)
($ in thousands)
2016
2015
Gross profit
margin
$522,614
$1,796,035
= 29.1%
$464,218
$1,624,400
=
28.6%
Profit margin
$69,779
$1,796,035
= 3.9%
$62,883
$1,624,400
=
3.9%
(f)
The company’s profitability has remained relatively constant for the fiscal
year ended January 31, 2016, with a slight increase in gross profit margin.
With an increase in the gross profit margin and an unchanged profit margin,
we can conclude that North West either had increased operating expenses
or interest expenses. In fact, it was the result of increased operating
expenses.
LO 1,4,5 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance
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CT5-2
(a)
1
Percentage
1. .
change in sales
2.
Gross profit margin
Financial Accounting, Seventh Canadian Edition
FINANCIAL REPORTING CASE
The North West Company
(in millions)
Sobeys
(in millions)
($1,796.0 – $1,624.4)
$1,624.4
($24,618.8 – $23,928.8)
$23,928.8
= 10.6%
= 2.9%
($1,796.0 – $1,273.4)
$1,796.0
(24,618.8 - $18,661.2)
$24,618.8
= 29.1%
= 24.2%
(b)
North West had the bigger increase in sales. In fiscal 2015, North West’s
gross profit was 28.6% ($464,218 ÷ $1,624,400). North West was able to
increase its gross profit margin. We can conclude that North West is doing
well managing its purchasing and pricing policies.
(c)
Sobeys experienced an increase in sales but had a decreased gross
margin. Gross margin was $5,962.5 (23,928.8 – 17,966.3) in 2015 and
dropped slightly to $5,957.6 (24,618.8 – 18,661.2) in 2016. This could have
been caused by mismanagement of inventory, lower selling prices, or
purchasing price constraints.
LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance
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CT5-3
Financial Accounting, Seventh Canadian Edition
FINANCIAL REPORTING CASE
(a)
The main difference between these two income statements is that Happy
Coffee presents its expense items by function (such as general and
administrative expenses) while Country Coffee presents its expenses by
nature of the expense item. Under IFRS, Happy Coffee is required to also
disclose the total depreciation expense and salaries and benefits expense
in the notes to the financial statements.
(b)
Under IFRS both formats of expense presentation, by nature or by function,
are acceptable. ASPE does not have a requirement on how to report
expenses. Expenses under ASPE can be classified in any manner that
would be useful to the key stakeholders.
The method that classifies expenses by function can require a higher
degree of judgement since expenses have to be allocated to each of the
functional categories (depending on how many functional categories are
present). In the case of Happy Coffee, there are three categories—cost of
goods sold, selling expenses, and administrative expenses. This method
provides better information to the reader despite the requirement for
increased judgement.
(c)
The difference in format could make it difficult to compare expense items.
For example, expense items as a percentage of sales would not be
comparable. However, Country Coffee can still easily compare the key
profitability measures of gross profit margin and profit margin. These
profitability ratios are not dependent on the expense classifications.
(d)
No, comparability of the gross profit margin and profit margin will not be
impacted. The definitions of gross profit and net income do not change
when preparing the income statements with a different format.
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CT5-3 (CONTINUED)
(e)
Country Coffee can change the presentation of its income statement and
begin classifying its expenses by function. This would be an acceptable
presentation under ASPE.
Under IFRS, if a company chooses to report its expenses by function it must
still disclose total depreciation and salaries and benefit expense in the note
disclosures. Country Coffee could use this additional information from the
notes of Happy Coffee for improved comparability.
LO 4,5 BT: E Difficulty: C Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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CT5-4
Financial Accounting, Seventh Canadian Edition
ETHICS CASE
Note to instructors: All of the material supplementing this group activity, including
a suggested solution, can be found in the Collaborative Learning section of the
Instructor Resource site accompanying this textbook as well as in the Prepare and
Present section of WileyPLUS.
(a)
The CEO asked for three inappropriate adjustments to be made to the
financial statements. By recording a purchase return as an increase in sales
revenue, the sales revenue is now overstated and cost of goods sold is also
overstated. By recording freight-in relating to inventory that has now been
sold as an operating expense, it overstates operating expense while
understating cost of goods sold. Finally by recording a sales return as an
operating expense, it overstates sales and overstates operating expenses.
All of these adjustments were designed to boost gross profit in order to
increase the bonus of the CEO.
If we reverse the adjustments made, we get:
Net sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Income tax expense
Net income
Gross profit margin: $51,000 ÷ $113,000
Gross profit margin: $40,000 ÷ $100,000
2018 Draft Adjustments 2018 Revised
$(7,000)
$113,000
(6,000)
$100,000
5,000
62,000
(7,000)
60,000
51,000
(11,000)
40,000
(6,000)
21,000
(5,000)
10,000
30,000
0
30,000
9,000
0
9,000
$ 21,000
$
0
$ 21,000
45.1%
40.0%
When we calculate the gross profit margin using the revised amounts, we
can see that it has not risen by more than 3% compared to the prior year
of 40% ($32,000 ÷ $80,000) and because of this, the CEO will not eligible
for his bonus.
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CT5-4 (CONTINUED)
(b)
The profit margin in 2018 is 21.0% ($21,000 ÷ $100,000) which is
unchanged from the prior year ($16,800 ÷ $80,000). However, in the first
draft of the income statement, the profit margin was 18.6% ($21,000 ÷
$113,000), which is lower than the 21.0% determined using the correct
amounts. This is because net sales were overstated even though overall
profit was not.
(c)
Harm was done to the users of the financial statements. Assuming no
corrections were made, the income statement would have been adjusted
for the bonus given to the CEO. Many of the elements except for income
tax expense reported in the statement are false and misleading. Users of
the financial statements would not have obtained a true reflection of the
performance trends of Peshawar Inc. and may have made inappropriate
decisions based on misleading financial statements. Furthermore, the CEO
would have been awarded a bonus that he did not deserve, thereby taking
assets away from the company and its shareholders.
LO 2,3,5 BT: E Difficulty: C Time: 40 min. AACSB: Analytic and Ethics CPA: cpa-t001, cpa-e001, cpat005 CM: Reporting, Ethics, and Finance
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CT5-5
Financial Accounting, Seventh Canadian Edition
ETHICS CASE
(a)
Rita Pelzer, as a new employee, is placed in a position of responsibility and
is pressured by her supervisor to continue an unethical practice previously
performed by him. The unethical practice is taking unearned cash
discounts. Her dilemma is either to follow her boss’s unethical instructions
or offend her boss and maybe lose the job she just assumed.
(b)
The stakeholders (affected parties) are:
Rita Pelzer, the assistant controller
Jamie Caterino, the controller (he looks good to superiors because of
increased income)
Zaz Stores Ltd., the company benefited
Creditors of Zaz Stores Ltd. (suppliers harmed)
Canada Post employees (those blamed harmed)
(c)
Ethically Rita should not continue the practice started by Jamie. She has
several choices in that she could:
1.
Tell the controller (her boss) that she will attempt to take every
allowable cash discount by preparing and mailing cheques within the
discount period—the ethical thing to do. This will offend her boss and
may jeopardize her continued employment.
2.
Comply with Jamie’s directions and continue the unethical practice of
taking unearned cash discounts.
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CT5-5 (CONTINUED)
(c) (continued)
3.
Go over her boss’s head and take the chance of receiving just and
reasonable treatment from an officer superior to Jamie. The company
may not condone this practice. Rita definitely has a choice, but
probably not without consequences. To continue the practice is
definitely unethical. If Rita submits to this request, she may be asked
to perform other unethical tasks. If Rita stands her ground and refuses
to participate in this unethical practice, she probably won’t be asked to
do other unethical things—if she isn’t fired. Maybe nobody has ever
challenged Jamie’s unethical behaviour and his reaction may be one
of respect rather than anger and retribution. Being ethically
compromised is no way to start a new job.
LO 2 BT: C Difficulty: M Time: 30 min. AACSB: Ethics CPA: cpa-t001, cpa-e001
CM: Reporting and Ethics
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CT5-6
(a)
June
30
Financial Accounting, Seventh Canadian Edition
SERIAL CASE
Inventory......................................................................
1,750
Cost of Goods Sold ............................................
($18,000 physical count – $16,250 perpetual record = $1,750 overage)
1,750
Note to instructors: June balances were taken from the answer to CT4-6.
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CT5-6 (CONTINUED)
June Bal.
Cash
34,534 (Ch. 4)
Accounts Receivable
June Bal.
12,090 (Ch. 4)
Inventory
June Bal.
16,250 (Ch. 4)
30 AJE 1,750
June Bal.
18,000
June Bal.
Supplies
3,775 (Ch. 4)
June Bal.
Prepaid Insurance
6,000 (Ch. 4)
June
100,000
June
165,000
Land
Bal. (Ch. 4)
Buildings
Bal. (Ch. 4)
(Ch. 4)
Unearned Revenue
June Bal.
1,000
(Ch. 4)
Salaries Payable
June Bal.
1,000
(Ch. 4)
Interest Payable
June Bal.
50
(Ch. 4)
Income Tax Payable
June 30 AJE 5,000
(Ch. 4)
Bank Loan Payable
June Bal.
(Ch. 4)
Mortgage Payable
June Bal.
53,200
(Ch. 4)
Common Shares
June Bal.
300
(Ch. 4)
22,500
Retained Earnings
June Bal. 146,788
Accumulated Depreciation—Buildings
(Ch. 4)
June Bal. 143,000
June
44,520
Equipment
Bal. (Ch. 4)
Accumulated Depreciation—Equipment
(Ch. 4)
Bal.
21,070
June Bal.
Vehicles
52,500 (Ch. 4)
Accumulated Depreciation—Vehicles
(Ch. 4)
June Bal.
4,200
(Ch. 4)
Accounts Payable
June Bal.
7,265
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CT5-6 (CONTINUED)
(a) (continued)
Dividends Declared
June Bal. 30,000 (Ch. 4)
(Ch. 4)
Rent Revenue
June Bal.
(Ch. 4)
Sales
June Bal.
6,000
640,358
Cost of Goods Sold
June Bal.
102,386 (Ch. 4)
June 30 AJE 1,750
June Bal.
100,636
June Bal.
Salaries Expense
391,782 (Ch. 4)
June Bal.
Depreciation Expense
16,770 (Ch. 4)
June Bal.
Office Expense
18,000 (Ch. 4)
June Bal.
Utilities Expense
13,225 (Ch. 4)
June Bal.
Advertising Expense
9,600 (Ch. 4)
Insurance Expense
June Bal.
6,000 (Ch. 4)
June Bal.
Property Tax Expense
5,950 (Ch. 4)
June Bal.
Interest Expense
5,349 (Ch. 4)
June Bal.
Income Tax Expense
18,000
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CT5-6 (CONTINUED)
(b)
ANTHONY BUSINESS COMPANY LTD.
Adjusted Trial Balance
June 30, 2017
Debit
Cash ..............................................................................
Accounts receivable.......................................................
Inventory........................................................................
Supplies.........................................................................
Prepaid insurance..........................................................
Land ..............................................................................
Buildings ........................................................................
Accumulated depreciation—buildings ............................
Equipment .....................................................................
Accumulated depreciation—equipment .........................
Vehicles .........................................................................
Accumulated depreciation—vehicles .............................
Accounts payable ..........................................................
Unearned revenue .........................................................
Salaries payable ............................................................
Interest payable .............................................................
Income tax payable .......................................................
Bank loan payable .........................................................
Mortgage payable ..........................................................
Common shares ............................................................
Retained earnings .........................................................
Dividends declared ........................................................
Rent revenue .................................................................
Sales .............................................................................
Cost of goods sold .........................................................
Salaries expense ...........................................................
Depreciation expense ....................................................
Office expense...............................................................
Utilities expense ............................................................
Advertising expense ......................................................
Insurance expense ........................................................
Property tax expense .....................................................
Interest expense ............................................................
Income tax expense.......................................................
Totals .....................................................................
$
Credit
34,534
12,090
18,000
3,775
6,000
100,000
165,000
$ 143,000
44,520
21,070
52,500
4,200
7,265
1,000
1,000
50
5,000
22,500
53,200
300
146,788
30,000
6,000
640,358
100,636
391,782
16,770
18,000
13,225
9,600
6,000
5,950
5,349
18,000
$1,051,731
000 0000
$1,051,731
(Total debit account balances = Total credit account balances)
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CT5-6 (CONTINUED)
(c)
ANTHONY BUSINESS COMPANY LTD.
Income Statement
Year Ended June 30, 2017
Sales ............................................................................................................
Cost of goods sold .......................................................................................
Gross profit ..................................................................................................
$640,358
100,636
539,722
Operating expenses
Salaries expense ............................................................
$391,782
Depreciation expense ......................................................
16,770
Office expense.................................................................
18,000
Utilities expense ..............................................................
13,225
Advertising expense ........................................................
9,600
Insurance expense ..........................................................
6,000
Property tax expense ......................................................
5,950
Total operating expenses ...........................................................
Income from operations ................................................................................
461,327
78,395
Other revenues and expenses
Rent revenue ...................................................................
$6,000
Interest expense..............................................................
5,349
Income before income tax .............................................................................
Income tax expense ......................................................................................
Net income ...................................................................................................
651
79,046
18,000
$ 61,046
(Income from operations + Other revenues – Other expenses = Income before income taxes)
ANTHONY BUSINESS COMPANY LTD.
Statement of Changes in Equity
Year Ended June 30, 2017
Common
Shares
Balance, July 1, 2016
Net income
Dividends declared
Balance, June 30, 2017
$300
0000
$300
Retained
Earnings
$146,788
61,046
(30,000)
$177,834
Total
Equity
$147,088
61,046
(30,000)
$178,134
Note to instructors: Although ABC would most likely prepare a statement of retained
earnings rather than a statement of changes in equity since it has been assumed that it is
using ASPE, the statement of retained earnings is not explained in detail until Ch. 11,
which is why we chose to require a statement of changes in equity here instead.
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CT5-6 (CONTINUED)
(c) (continued)
ANTHONY BUSINESS COMPANY LTD.
Statement of Financial Position
June 30, 2017
Assets
Current assets
Cash .................................................................................................................
Accounts receivable .........................................................................................
Inventory ...........................................................................................................
Supplies ............................................................................................................
Prepaid insurance .............................................................................................
Total current assets ...............................................................................
$34,534
12,090
18,000
3,775
6,000
74,399
Property, plant, and equipment
Land ........................................................................
$100,000
Buildings .................................................................
$165,000
Less: Accumulated depreciation..............................
143,000
22,000
Equipment ...............................................................
$44,520
Less: Accumulated depreciation..............................
21,070
23,450
Vehicles ..................................................................
$52,500
Less: Accumulated depreciation..............................
4,200
48,300
Total property, plant, and equipment .....................................................
Total assets ...............................................................................................................
193,750
$268,149
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ..............................................................................................
Unearned revenue ............................................................................................
Salaries payable ...............................................................................................
Interest payable ................................................................................................
Income tax payable ...........................................................................................
Current portion of bank loan payable.................................................................
Current portion of mortgage payable .................................................................
Total current liabilities ............................................................................
$
7,265
1,000
1,000
50
5,000
7,500
5,000
26,815
Non-current liabilities
Bank loan payable ($22,500 – $7,500) .............................................................
Mortgage payable ($53,200 – $5,000) ..............................................................
Total liabilities .........................................................................................
15,000
48,200
90,015
Common shares ............................................................................... $
300
Retained earnings ............................................................................ . 177,834
Total shareholders’ equity.......................................................................
Total liabilities and shareholders’ equity .....................................................................
178,134
$268,149
Shareholders’ equity
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CT5-6 (CONTINUED)
(d)
ABC
Competitor
Current
ratio
$74,399
= 2.8:1
$26,815
2.5:1
Gross profit
margin
$539,722
= 84.3%
$640,358
Profit
margin
$61,046
= 9.5%
$640,358
75%
8%
(1)
Compared to its competitor, ABC’s ratios are better in every respect. ABC
has better liquidity and profitability than its competitor.
(2)
We must recall that ABC is a small, family company while its competitor is a
large, publicly-traded company. They likely have different product lines, cost
structures, and other differences affecting its financial results.
LO 4,5 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance
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Legal Notice
Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All
rights reserved.
The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.
The material provided herein may not be downloaded, reproduced, stored in a
retrieval system, modified, made available on a network, used to create derivative
works, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, scanning, or otherwise without the prior written
permission of John Wiley & Sons Canada, Ltd.
(MMXVII vi F2)
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Financial Accounting, Seventh Canadian Edition
CHAPTER 6
REPORTING AND ANALYZING INVENTORY
LEARNING OBJECTIVES
1.
2.
Describe the steps in determining inventory quantities.
Apply the cost formulas using specific identification, FIFO, and average cost under
a perpetual inventory system.
3. Explain the effects on the financial statements of choosing each of the inventory
cost formulas.
4. Identify the effects of inventory errors on the financial statements.
5. Demonstrate the presentation and analysis of inventory.
6.* Apply the FIFO and average cost inventory cost formulas under a periodic inventory
system (Appendix 6A).
Solutions Manual
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Chapter 6
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES
AND BLOOM’S TAXONOMY
Item LO
BT Item LO
BT Item LO BT
Questions
Item LO
BT
Item LO
BT
1.
1
C
6.
2
C
11.
2
C
16.
5
C
21.
2,6
C
2.
1
C
7.
2
K
12.
4
C
17.
5
K
22.
2,6
C
2
C
13.
4
C
18.
5
C
3
C
14.
4
C
19.
2,6
C
C
15.
C
20.
6
C
C
10.
5
AP
13.
6
AP
3.
1
K
8.
4.
1
C
9.
5.
2
C
10.
3
5
Brief Exercises
1.
1
K
4.
2
AN
7.
3
2.
1
AP
5.
2
AN
8.
4
C
11.
5
AP
14.
2,6
AN
3.
2
AP
6.
2
AP
9.
4
AN
12.
5
AN
15.
2,6
AP
AN
13.
3,6
AP
Exercises
1
C
5.
2
AN
9.
4
2.
1
AN
6.
2,3
AN
10.
5
AP
14.
6
AN
3.
2,3
AN
7.
2,3
AN
11.
5
AN
15.
2,6
AP
4.
2,3
AN
8.
4
AN
12.
3,5
AN
16.
2,6
AP
1.
1
AP
5.
2,3
AN
9.
5
AN
13.
6
AP
2.
2
AP
6.
2,5
AP
10.
5
AP
14.
5,6
AP
3.
2,3
AP
7.
4,5
AN
11.
5
AP
15.
2,6
AN
4.
2,4
AN
8.
4,5
AN
12.
5
AN
16.
2,6
AN
2,3
AN
1.
Problems: Set A and B
Accounting Cycle Review
1.
2
AN
1.
3
AN
3.
1,2,3,6
E
5.
2,3
AN
2.
5
AN
4.
4,5
E
6.
1,2
E
Cases
7.
Solutions Manual
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Chapter 6
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
Legend: The following abbreviations will appear throughout the solutions manual
file.
LO
Learning objective
BT
Bloom's Taxonomy
K
Knowledge
C
Comprehension
AP Application
AN Analysis
S
Synthesis
E
Evaluation
Level of difficulty
S
Simple
M
Moderate
C
Complex
Estimated time to prepare in minutes
Difficulty:
Time:
AACSB
CPA CM
cpa-e001
cpa-e002
cpa-e003
cpa-e004
cpa-e005
cpa-t001
cpa-t002
cpa-t003
cpa-t004
cpa-t005
cpa-t006
Association to Advance Collegiate Schools of Business
Communication
Communication
Ethics
Ethics
Analytic
Analytic
Technology
Tech.
Diversity
Diversity
Reflective Thinking
Reflec. Thinking
CPA Canada Competency
Ethics
Professional and Ethical Behaviour
PS and DM
Problem-Solving and Decision-Making
Comm.
Communication
Self-Mgt.
Self-Management
Team & Lead
Teamwork and Leadership
Reporting
Financial Reporting
Stat. & Gov.
Strategy and Governance
Mgt. Accounting
Management Accounting
Audit
Audit and Assurance
Finance
Finance
Tax
Taxation
Solutions Manual
6-3
Chapter 6
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Financial Accounting, Seventh Canadian Edition
ANSWERS TO QUESTIONS
1.
Taking a physical inventory involves actually counting, weighing or
measuring each kind of inventory on hand. Retailers, such as hardware
stores, generally have thousands of different items to count. This is
normally done when the store is closed to minimize errors due to the
movement of merchandise. Tom will probably count items and mark the
quantity, description, and inventory number on pre-numbered inventory
tags (unless the company has more advanced technology that can read
bar codes on inventory products – we will assume that they do not). He
should only include items in the inventory that are in saleable condition.
Ideally, strong internal control should be exerted over the physical
inventory count. For example, Tom should not have responsibility for the
custody or record-keeping for the inventory. He should also count in teams
of two, or there should be a second counter checking the accuracy of the
count.
Adjustments may also have to be made to the physical inventory count for
any goods in transit. For example, inventory purchased FOB shipping point
that is still in transit will have to be included in inventory. Inventory that has
been shipped by Kikujiro to customers FOB destination and not received
by the customer before year-end will also have to be included in the count.
Finally, any of Kikujiro’s inventory held by other retailers on consignment
will have to be included in the count as well.
LO 1 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
2.
In a consignment agreement, the consignor is the business that owns the
goods, and the consignee is the business that will sell the goods, without
having to purchase and own the goods before they are sold. The consignee
will sell the goods for the consignor for a fee or a percentage of the sales
price. Only the owner of goods, the consignor, includes the goods in its
inventory even though the goods are physically located on the consignee’s
premises.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
3.
(a)
The goods will be included in Janine Ltd.’s (the seller’s) inventory if
the terms of sale are FOB destination.
(b)
The goods will be included in Fastrak Corporation’s (the buyer’s)
inventory if the terms of sale are FOB shipping point.
LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual
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Chapter 6
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
4.
Financial Accounting, Seventh Canadian Edition
(a)
Include: the inventory items belong to Kingsway as Kingsway is the
consignor.
(b)
Include: the inventory items belong to Kingsway while in transit
because the terms are FOB shipping point.
(c)
Exclude: the customer has purchased the inventory item and legal
ownership has passed to the customer.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
5.
(a)
The unit cost of an inventory item is needed for the entry to record the
cost of goods sold and remove the cost of the items sold from
inventory. Because units of the same inventory item are typically
purchased at different prices, it is necessary to determine which unit
costs to use in the calculation of the cost of the goods sold.
(b)
When using the perpetual system, an entry to record the cost of goods
sold and remove the cost of the items sold from inventory is recorded
at the same time as the sales transaction. The information from the
perpetual system is updated, using the cost formula adopted by the
business. The cost formula is also used in the detailed perpetual
records for every increase in inventory caused by purchases, freightin, etc. transactions. On the other hand, since a record is not kept of
the individual inventory item transactions under the periodic system,
the entry to record the cost of goods sold and remove the cost of the
items sold from inventory can only be made at the end of a reporting
period, when ending inventory is determined by a physical count.
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual
6-5
Chapter 6
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
6.
(a)
(b)
Financial Accounting, Seventh Canadian Edition
The specific identification formula tracks the physical flow of individual
inventory items, matching the cost of the actual item sold against the
revenue from that item. The FIFO inventory cost formula assumes the
first inventory purchased is the first inventory sold. The most recent
purchases are assumed to remain in ending inventory. The average
cost formula assumes that all goods available for sale are
indistinguishable or homogeneous.
An example of inventory where the specific identification would be
appropriate would be for goods that are not ordinarily
interchangeable, such as automobiles with unique vehicle
identification numbers.
Inventory such as groceries could be accounted for using the FIFO
cost formula as older items are normally sold first.
Inventory such as hardware could be accounted for using an average
cost formula.
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
7.
(a) Average cost or FIFO can be used if the goods available for sale are
identical. Specific identification cannot be used if the goods are not
specifically identifiable.
(b) FIFO assumes that the first goods purchased are the first to be sold.
(c) Specific identification
merchandise.
matches
the
actual
physical
flow
of
LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
8.
A new weighted average unit cost must be calculated after each purchase
because a new cost amount is added to the “cost pool”. This changes the
total dollars in the cost pool and the quantity of units on hand in the cost
pool. A sale withdraws units and total dollars from the cost pool at the
weighted average cost. This does not affect the weighted average cost of
the remaining units. That is, the weighted average cost of the remaining
units is unchanged after a sale.
LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual
6-6
Chapter 6
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
9.
Financial Accounting, Seventh Canadian Edition
A company should consider:
•
Whether the goods are interchangeable or not, or whether they
are produced or segregated for specific projects;
•
Whether the formula corresponds most closely to the physical flow
of goods;
•
Whether the formula reports inventory on the statement of financial
position that is close to the inventory’s most recent cost; and
•
Whether the formula is used for other inventories with a similar nature
and usage.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
10.
Average cost produces the better income statement valuation because the
cost of goods sold is determined using more recent inventory prices. This
better matches current costs with current revenues.
FIFO produces the better valuation on the statement of financial position
because the ending inventory is determined using the most recent prices.
Since the normal intent is to replace the inventory after it is sold, the most
recent prices are more relevant for decision-making.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
11.
Financial Accounting, Seventh Canadian Edition
(a)
No effect – cash is not affected by the choice of inventory cost
formulas.
(b)
In a period of declining prices, FIFO will produce a lower ending
inventory as inventory is determined using the most recent (lower)
prices. Average cost will produce a higher ending inventory as ending
inventory incorporates the higher older prices.
(c)
The cost of goods sold effect is opposite to that of ending inventory.
Hence, cost of goods sold will be higher under FIFO and lower under
the average cost formula.
(d)
Because of the effect on the cost of goods sold as outlined in (c), net
income will be lower under FIFO and higher under average cost.
(e)
The impact on retained earnings will be the same as the impact on
net income and ending inventory—lower in a period of declining prices
using FIFO and higher using average cost.
LO 2 BT: C Difficulty: C Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
12.
The error should be corrected if it will change the figures presented on the
financial statements. While retained earnings may not change, other
financial statement items and comparative figures may change. This
information may impact a user’s decision.
LO 4 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
13.
(a)
(b)
(c)
(d)
(e)
(f)
Financial Accounting, Seventh Canadian Edition
Mila Ltd.’s 2018 income before tax will be understated by $43,000.
This is because an understatement of ending inventory will result in
an overstatement of cost of goods sold. If cost of goods sold is
overstated, then income before tax will be understated.
2018 retained earnings will be understated by $43,000 because net
income is understated (see (1) above).
2018 total shareholders’ equity will be understated by $43,000
because the retained earnings balance is understated (see (b)
above).
2019 net income will be overstated $43,000. This is because
beginning inventory is understated by $43,000, which will result in an
understatement of cost of goods sold (recognizing that 2018 ending
inventory is 2019 beginning inventory). If cost of goods sold is
understated, then income before tax will be overstated.
2019 retained earnings will be correct because the understatement in
net income in 2018 and overstatement in 2019 will cancel each other.
2019 total shareholders’ equity will be correct because the retained
earnings balance is correct.
LO 4 BT: C Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual
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Chapter 6
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
14.
Financial Accounting, Seventh Canadian Edition
(a)
At the end of the fiscal year, before the inventory is adjusted to the
inventory count, Shediac’s assets (Inventory) would be overstated
and its liabilities would be overstated (Accounts Payable). There
would be no effect on shareholders’ equity.
(b)
Since the merchandise is not on hand at the time of the inventory
count, the shipment from Bathurst would not be counted. This in turn
would cause the inventory count to be lower than the perpetual
inventory record. Normally when such a discrepancy arises, the
Inventory account will be adjusted downward with a credit to reflect
the amount of merchandise actually on hand. The corresponding
debit in this adjusting entry would be to Cost of Goods Sold. The
summary effect of the initial error and the count adjustment would be
an overstatement in Cost of Goods Sold and Accounts Payable.
Because Cost of Goods Sold is overstated, gross profit and net
income are understated as well as Retained Earnings. At the end of
Shediac’s current year, after the adjustment is made for the results of
the inventory count, the overall impact on the accounting equation is
no effect on assets, an overstatement of liabilities (Accounts
Payable), and an understatement of shareholders’ equity (Retained
Earnings).
LO 4 BT: C Difficulty: C Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
15.
(a)
Cost refers to the original cost of inventory as determined by using
specific identification, FIFO, or average cost formulas. Net realizable
value is the selling price less any costs required to make the goods
ready for sale.
(b)
The lower of cost and net realizable value rule should be applied at
the end of the accounting period, before financial statements are
prepared.
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual
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Chapter 6
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
16.
Financial Accounting, Seventh Canadian Edition
(a)
Cost of Goods Sold is debited when recording a decline in inventory
value under the lower of cost and net realizable value rule and the
asset account Inventory is credited.
(b)
These declines are usually considered part of the risk associated with
carrying inventory and part of the costs of carrying a variety and
quantity of goods on hand. Since the inventory has specifically been
purchased for resale, the net realizable value becomes the most
relevant measure of the asset on the statement of financial position.
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
17.
An increase in the days in inventory ratio from one year to the next would
be seen as a deterioration in the company’s efficiency in managing
inventory. It means that the inventory is being held for a longer period of
time, which increases the risk of spoilage and obsolescence.
LO 5 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 cpa-t005 CM: Reporting
18.
(a)
An inventory turnover ratio that is too high may indicate that the
company is losing sales opportunities because of inventory
shortages. Inventory shortages may also cause customer ill will and
result in lost future sales.
(b)
If the inventory turnover is too low, it may indicate that the company
is having difficulty selling its inventory, and the inventory may become
obsolete.
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 and cpa-t005. CM: Reporting and
Finance
Solutions Manual
6-11
Chapter 6
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
*19.
Financial Accounting, Seventh Canadian Edition
Periodic and perpetual inventory systems differ in the accounting treatment
for inventories. Under a perpetual inventory system, inventory records are
updated for every purchase and sale transaction. The cost of goods sold
is recorded each time a sale is made. Under a periodic system, the
inventory is only updated at the end of the period when a physical inventory
count is performed. Inventory purchases throughout the year are debited
to a Purchases account in a periodic inventory system rather than an
Inventory account. When a sale is recorded in a periodic inventory system,
no entry is made to record the cost of the sale. Cost of goods sold is
calculated separately, after the physical inventory count is performed.
LO 2,6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
*20.
Ending inventory is known from the physical inventory count. The total
amount of inventory available for sale needs to be determined first in order
to determine what inventory has been sold (goods available for sale –
ending inventory = cost of goods sold). Goods sold are not tracked
separately in a periodic inventory system.
LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
*21.
In both systems, the first (oldest) costs are the costs assigned to the goods
sold. No matter what system is used, the cost of goods sold will always
consist of the oldest units and these units are assumed to be on hand when
using either formula.
LO 2,6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
*22.
In a perpetual system, the average cost per item is recalculated every time
a purchase transaction takes place. In a periodic system, the average cost
is determined based on the total goods available for sale during the period.
If there are cost changes during the period, the average cost per item will
differ in a perpetual and periodic inventory system.
LO 2,6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 6-1
(a)
Ownership of the goods belongs to the consignor (Helgeson). Thus, these
goods should be included in Helgeson’s inventory.
(b)
Goods held on consignment belong to the other company and should not
be included in Helgeson’s inventory.
(c)
The goods in transit belong to Helgeson because ownership does not
transfer until the customer receives the goods. They should be included in
Helgeson’s inventory.
(d)
The goods purchased belong to the buyer, Helgeson as the terms of
shipment are FOB shipping point. Title transferred to Helgeson as soon as
the goods were shipped, so even though they have not been received, they
should be included in Helgeson’s inventory.
(e)
The goods in transit belong to the customer as the terms of shipment are
FOB shipping point. They should not be included in Helgeson’s inventory
because title transferred to the customer as soon as the goods were
shipped.
(f)
The goods in transit should not be included in the inventory count because
ownership by Helgeson does not occur until the goods reach the buyer.
(Legal title determines if an item should be included in inventory)
LO 1 BT: K Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
Solutions Manual
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Chapter 6
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 6-2
$95,000
(7,500)
(1,000)
5,000
Count
Held on consignment
Sold
August 28 shipment plus freight, FOB shipping point
($4,750 + $250)
$91,500 Correct inventory cost
LO 1 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 6-3
(a)
Cost of Goods Available for Sale
3 electric pianos @ $600 = $1,800
2 electric pianos @ $475 =
950
$2,750
Ending Inventory
(a) Specific
Identification
(b)
2 pianos @ $600 =
1 piano @ $475 =
$1,200
475
$1,675
Cost of Goods Sold
$2,750 – $1,675 = $1,075
(Proof: 1 piano @ $600 +
1 piano @ $475 = $1,075)
If management wished higher net income, it could have sold two pianos
from the last shipment, that had a lower cost. If it wished lower net income,
it could have sold two of the first pianos purchased.
LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual
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Chapter 6
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 6-4
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
[11]
[12]
[13]
[14]
[15]
[16]
[17]
[18]
$450  30 = $15
15 (from April 1)
$18 (from April 1)
30 (from April 6)
$15 (from April 6)
(15 @ $18) + (30 @ $15) = $720
$18 (from April 1)
$15 (from April 6)
(15 @ $18) + (10 @ $15) = $420
15 + 30 – 15 – 10 = 20
$15
20 @ $15 = $300
$144 ÷ 12 = $12
20
$15
12
$12
(20 @ $15) + (12 @ $12) = $444
LO 2 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual
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Chapter 6
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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 6-5
[1]
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
[11]
[12]
[13]
$200 ($6,000  30)
45 (15 + 30)
$8,700 ($2,700 + $6,000)
$193.3333 ($8,700 (from [3]) ÷ 45 (from [2]))
$193.33 (from [4])
25 x $193.3333 = $4,833.33
45 (from [2]) – 25 sold = 20
$8,700.00 (from [3]) – $4,833.33 (from [6]) = $3,866.67
$3,866.67 (from [8])  20 (from [7]) = $193.3333 rounded to equal [4].
Notice how the average cost does not change after a sale.
$2,460  $205 = 12
20 (from [7]) + 12 (from [10]) = 32
$3,866.67 (from [8]) + $2,460.00 = $6,326.67
$6,326.67 (from [12])  32 (from [11]) = $197.708 rounded to $197.71
LO 2 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
Solutions Manual
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 6-6
(a)
FIFO cost formula
Date Description
Purchases
Purchase
250 $ 70
Purchase
500
Cost of Goods Sold
Ending Inventory
$ 17,500
250
$ 70
$ 17,500
50,000
250
500
70
100
17,500
50,000
450
450
900
100
100
120
45,000
45,500
108,000
100
120
12,500
108,000
Aug. 2
3
100
10 Sale
15
Purchase
900
120
$70
100
$22,500
325
100
32,500
125
900
$55,000
1,025
108,000
25 Sale
1,650
250
50
$175,500
625
$120,500
Check: $55,000 + $120,500 = $175,500
(b)
Date
Average cost formula
Description
Aug. 2 Purchase
3 Purchase
Purchases
250 $ 70.00 $17,500.00
500 100.00
300 $90.00 $27,000.00
900 120.00 108,000.00
25 Sale
Ending Inventory
250
50,000.00
10 Sale
15 Purchase
Cost of Goods Sold
750
90.00
67,500.00
450
90.00
040,500.00
1,350
325 110.00 35,750.00 1,025
1,650
$175,500.00 625
$ 70.00 $ 17,500.00
$62,750.00 1,025
110.00 5148,500.00
110.00
112,750.00
$112,750.00
Check: $62,750 + $112,750 = $175,500
LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 6-7
(a)
Average cost. The ending inventory is valued at the average of the cost of
the product, including earlier costs. Since this cost formula yields a higher
ending inventory than FIFO when prices are falling, the result will not be
closer to replacement cost. This result is achieved with the FIFO cost
formula.
(b)
FIFO. The cost of goods is valued using the earlier, higher costs. Since
the revenue reflects current lower prices, the FIFO cost formula does not
match current costs against revenue when prices are falling. This result is
better achieved by the average cost formula.
(c)
One of the guidelines that management should consider is choosing an
inventory cost formula that corresponds as closely to the physical flow of
goods as possible. A cost formula that provides an ending inventory cost
close to the inventory’s recent cost is also preferable.
LO 3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 6-8
Total assets in the statement of financial position will be overstated by the amount
that ending inventory is overstated, $25,000. When the purchase of inventory was
recorded, an account payable would have been created, so total liabilities will also
be overstated by $25,000 (assuming the “supplier” was not paid). Shareholders’
equity will not be affected.
LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 6-9
When items are not counted, an adjustment would be made to lower the balance
in the Inventory account to reflect the difference between the amount counted
(which is lower) and the amount recorded in the account. This would be done by
crediting Inventory. The offsetting debit would be to Cost of Goods Sold, thereby
overstating this account and reducing net income.
In the following year, assuming these goods are sold, their cost is zero so cost of
goods sold would be understated and net income overstated. Assuming there are
no errors when counting inventory at the end of next year, this net income
overstatement when combined with the previous year’s net income
understatement, would cancel each other out and make retained earnings
correctly stated at the end of next year.
These effects are summarized below.
Assets
Liabilities
Shareholders’ equity
Current Year
Understated $7,000
No impact
Understated $7,000
Next Year
No impact
No impact
No impact
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 6-10
(a)
Inventory Categories
Desktops
Tablets and readers
Laptops
Accessories and parts
Total valuation
Cost
$347,000
168,700
221,020
97,400
$834,120
NRV
$326,000
224,000
285,000
94,300
$929,300
LCNRV
$326,000
168,700
221,020
94,300
$810,020
The lower of cost and net realizable value is $810,020.
(b)
Cost of Goods Sold ........................................................... 24,100
Inventory ................................................................
$834,120 – $810,020 = $24,100
24,100
LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 6-11
(a) Cost of Goods Sold ........................................................ 2,200
Inventory ..................................................................
$54,700 – $52,500 = $2,200
2,200
(b) $54,700
LO 5 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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Financial Accounting, Seventh Canadian Edition
BRIEF EXERCISE 6-12
(a)
Inventory Turnover
(2015)
Days in Inventory (2015)
Inventory Turnover
(2014)
$7,747.1
= 4.6 times
($1,764.5 + $1,623.8) ÷ 2
365
= 79 days
4.6
$8,033.2
= 5.2 times
($1,623.8 + $1,481.0) ÷ 2
365
Days in Inventory (2014) 5.2 = 70 days
(b)
The inventory management deteriorated in 2015 as evidenced by the
increase in number of days in inventory from 70 days in 2014 to 79 days in
2015. This was corroborated by the declining inventory turnover. This
deterioration signifies that it took longer to sell the inventory in 2015.
LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance
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Financial Accounting, Seventh Canadian Edition
*BRIEF EXERCISE 6-13
Beginning inventory
Purchases
(370 @ $9) + (700 @ $12) + (800 @ $11)
Goods available for sale
Ending inventory
Goods sold
(a)
Units
0
Dollars
$
0
1,870
1,870
(600)
1,270
20,530
$20,530
FIFO
Ending inventory: (600 units @ $11) = $6,600
Cost of goods sold = Goods available for sale – ending inventory
$20,530 – $6,600 = $ 13,930
Proof: Cost of goods sold = (370 × $9) + (700 × $12) + (200 x $11) = $ 13,930
(b)
Average cost
Note: Unrounded numbers have been used in the average cost
calculations, although the numbers have been rounded to the nearest cent
for presentation purposes. Because of this, some amounts may not appear
to multiply exactly because of the rounding in the presentation.
Weighted average cost = $20,530 ÷ 1,870 = $10.98
Ending inventory: 600 × $10.98 = $ 6,587.17
Cost of goods sold = Goods available for sale – ending inventory
$20,530 – $ 6,587.17 = $ 13,942.83
Proof: Cost of goods sold = 1,270 × ($20,530 ÷ 1,870) = $ 13,942.83
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Financial Accounting, Seventh Canadian Edition
*BRIEF EXERCISE 6-14
(a)
Ending Inventory: (1,300 × $45.00) + (200 × $50.00) = $68,500
Cost of goods sold = Goods available for sale – ending inventory
$216,000 – $68,500 = $147,500
Proof: Cost of goods sold = (1,500 × $45.00) + (1,600 × $50.00) = $147,500
(b)
No, the answer under a perpetual system would be the same, since the
first goods purchased are assumed to be the first goods sold.
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Financial Accounting, Seventh Canadian Edition
*BRIEF EXERCISE 6-15
(a)
Jan.
FIFO Perpetual
3
3
9
15
15
Accounts Receivable ............................................
Sales (700 × $12).........................................
8,400
Cost of Goods Sold (700 × $5) .............................
Inventory ......................................................
3,500
Inventory (1,000 × $6) ..........................................
Accounts Payable ........................................
6,000
Cash .....................................................................
Sales (800 x $11) .........................................
8,800
Cost of Goods Sold [(200 × $5) + (600 × $6)] ......
Inventory ......................................................
4,600
8,400
3,500
6,000
8,800
4,600
(b) FIFO Periodic
Jan.
3
9
15
Accounts Receivable .............................................
Sales ............................................................
8,400
Purchases .............................................................
Accounts Payable .........................................
6,000
Cash ......................................................................
Sales .............................................................
8,800
8,400
6,000
8,800
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Financial Accounting, Seventh Canadian Edition
SOLUTIONS TO EXERCISES
EXERCISE 6-1
1.
Do not include – Shippers Ltd. does not own items held on consignment.
These goods will be recorded in the owner’s inventory.
2.
Include in inventory – Shipping terms FOB destination means that Shippers
Ltd. owns the items until they reach the customer.
3.
Include in inventory – Shippers Ltd. still owns the items as they were only
shipped on consignment.
4.
Do not include in inventory. Freight costs on goods shipped to customers
are included in Freight Out or Delivery Expense.
5.
Do not include in inventory – The shipping terms are FOB destination point
so ownership has not transferred to the buyer. Shippers Ltd. should not
record anything until the goods arrive.
6.
Include in inventory – Shipping terms FOB shipping point means that
ownership transferred at the time of shipping and therefore, Shippers Ltd.
owns the goods in transit.
7.
Do not include in inventory. The shipping terms are FOB shipping point, so
Shippers Ltd. no longer owns the goods. They will be part of cost of sales
on the income statement.
(Legal title determines if an item should be included in inventory.)
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Financial Accounting, Seventh Canadian Edition
EXERCISE 6-2
(a) Ending inventoryphysical count ............................................................
1. Add to inventory. Title remains with Novotna until purchaser
receives goods .....................................................................................
2. Add to inventory. Title passed to Novotna when goods were shipped .
3. Add to inventory. Title passed to Novotna when goods were shipped .
4. No effect. Title passes to purchaser upon shipment when terms are
FOB shipping point ..............................................................................
5. Add to inventory. Novotna owns the goods out on consignment .........
6. Deduct from inventory. Obsolete inventory should be written off to
cost of goods sold. ...............................................................................
Correct inventory ......................................................................................
$285,000
35,000
95,000
28,000
0
30,500
(15,000)
$458,500
(Legal title determines if an item should be included in inventory)
(b)
Since inventory is usually the largest current asset on a company’s
statement of financial position, errors can have a significant impact. In
deciding to grant a short-term bank loan, the bank will be looking at
Novotna’s liquidity by calculating the current ratio as well as the inventory
turnover and days sales in inventory. Any error in the inventory count will
affect these ratios. In addition, the errors will also affect Novotna’s
profitability by impacting the cost of goods sold on the income statement.
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Financial Accounting, Seventh Canadian Edition
EXERCISE 6-3
(a)
The company would identify, by serial number, the items remaining in
inventory. The sum of the cost of the items remaining in inventory would
become the ending inventory balance. Then, the company would identify
the cost of the items sold, again by using serial numbers to determine the
cost of each item sold. The total cost of items sold would become the cost
of goods sold.
(b)
It could choose to sell specific units purchased at specific costs if it wished
to impact net income selectively. If it wished to minimize net income it
would choose to sell the units purchased at higher costs–in which case the
cost of goods sold would be $4,300 ($2,400 + $1,900) and gross profit
would be $900 [($2,600 x 2) – $4,300]. If it wished to maximize net income
it would choose to sell the units purchased at lower costs; in which case
the cost of goods sold would be $3,580 ($1,900 + $1,680) and gross profit
would be $1,620 [($2,600 x 2) – $3,580].
(c)
Discount Electronics should consider the nature of the inventory items. The
specific identification system is best suited to inventory items are clearly
identified from each other and that are not ordinarily interchangeable, or to
products that are produced and segregated for specific projects. The
specific identification system produces the most accurate measure of
ending inventory and matching of cost of goods sold to sales. It is however
more time-consuming and expensive to apply. If the inventory items are
interchangeable, Discount Electronics would not be able to use specific
identification and would have to use either the FIFO or average cost flow
formulas.
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Financial Accounting, Seventh Canadian Edition
EXERCISE 6-4
(a)
Date
Description
Purchases
Cost of Goods Sold
Apr. 1 Beg. inventory
50 $210
100 225 $33,000
50 $210
25 225 $ 16,125
3 Sale
10 Purchase
75
75
200
225
225
275
16,875
25
25
300
275
275
290
6,875
93,875
57,625 125
290
36,250
200 $275 $ 55,000
17 Sale
24 Purchase
300
290
500
75
175
225
275
25
175
275
290
65,000
87,000
30 Sale
30 Balance
Ending Inventory
$142,000 525
$138,750 125
71,875
290 $36,250
Check: $138,750 + $36,250 = $175,000 ($33,000 + $142,000)
(b)
Sales
Apr. 3
Units
75
Sales Price/Unit
$400
Total
$ 30,000
17
250
400
100,000
30
200
400
80,000
$210,000
Gross profit = $210,000 – $138,750 = $71,250
Gross profit margin = $71,250  $210,000 = 33.9%
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Financial Accounting, Seventh Canadian Edition
EXERCISE 6-4 (CONTINUED)
(c)
The gross profit is higher than if the average cost formula had been used
in a perpetual inventory system because cost of goods sold is lower under
FIFO in a period of rising prices than it would be using the average cost
formula. Under FIFO, ending inventory is higher, cost of goods sold is lower
and gross profit is higher.
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Financial Accounting, Seventh Canadian Edition
EXERCISE 6-5
(a)
Note: Unrounded numbers have been used in the average cost
calculations, although the numbers have been rounded to the nearest cent
for presentation purposes. Because of this, some amounts may not appear
to multiply exactly because of the rounding in the presentation.
Description
Date
Purchases
Cost of Goods Sold
June 1 Beginning
Ending Inventory
500 $125.00 $ 62,500.00
Purchase
6
1,200 $127.00 $152,400.00
10 Sale
1,000
$126.41 $126,411.76
1,700
126.41
214,900.00
700
126.41
88,488.24
2,500
127.56
318,888.24
900
127.56
114,799.77
1,900
128.31
243,799.77
Purchase
14
1,800
128.00
‘230,400.00
16 Sale
26 Purchase
1,600
1,000
129.00
127.56
204,088.47
129,000.00
Balance
30
4,000
$511,800.00 2,600
$330,500.23 1,900
$243,799.77
Check: $330,500.23 + $243,799.77 = $574,300 ($62,500 + $511,800)
(b)
Sales = (1,000 @ $200) + (1,600 @ $205) = $528,000
Gross profit = $528,000 – $330,500 = $197,500
Gross profit margin = $197,500  $528,000 = 37.4%
(c)
The gross profit is lower than it would be using the FIFO cost formula
because the cost of the product being purchased is rising.
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Financial Accounting, Seventh Canadian Edition
EXERCISE 6-6
(a) (1) FIFO
Date
Purchases
Cost of Goods Sold
June 1 Beginning inventory
12
2,300 @ $6 = $13,800
15
16
23
27
Total
Balance
1,500 @ $5 = $ 7,500
1,500 @ $5
2,300 @ $6 = 21,300
1,500 @ $5
1,000 @ $6 = $13,500 1,300 @ $6 =
7,800
4,500 @ $7 = 31,500
1,300 @ $6
4,500 @ $7 = 39,300
1,500 @ $8 = 12,000
1,300 @ $6
4,500 @ $7
1,500 @ $8 = 51,300
1,300 @ $6
100 @ $7
4,400 @ $7 = 38,600 1,500 @ $8 = 12,700
$57,300
$52,100
$12,700
Check: $52,100 + $12,700 = $64,800 ($7,500 + $57,300)
(a) (2) Average cost
Note: Unrounded numbers have been used in the average cost calculations,
although the numbers have been rounded to the nearest cent for presentation
purposes. Because of this, some amounts may not appear to multiply exactly
because of the rounding in the presentation.
Date
June 1
12
15
16
23
27
Total
Purchases
Beginning inventory
2,300 @ $6 = $13,800.00
Cost of Goods Sold
2,500 @ $5.61 = $14,013.16
4,500 @ $7 = 31,500.00
1,500 @ $8 = 12,000.00
$57,300.00
5,700 @ $6.96 = 39,655.48
$53,668.64
Balance
1,500 @ $5.00 = $ 7,500.00
3,800 @ $5.61 = 21,300.00
1,300 @ $5.61 = 7,286.84
5,800 @ $6.69 = 38,786.84
7,300 @ $6.96 = 50,786.84
1,600 @ $6.96 = 11,131.36
$11,131.36
Check: $53,668.64 + $11,131.36 = $64,800 ($7,500 + $57,300)
(b)
The average cost formula results in a higher cost of goods sold because
the cost of inventory is rising.
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Financial Accounting, Seventh Canadian Edition
EXERCISE 6-6 (CONTINUED)
(c)
The FIFO cost formula results in a higher net income because it produces
the lower cost of goods sold when prices are rising, as the lower costs from
earlier units are assigned to cost of goods sold, while the higher costs are
assigned to ending inventory.
(d)
The FIFO cost formula results in a higher ending inventory because the cost
of inventory is rising and these higher unit prices are used to determine
ending inventory.
(e)
Both cost formulas result in the same pre-tax cash flow. The cost formulas
do not change the pre-tax cash flows of a company.
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EXERCISE 6-7
(a)
Date
Oct. 2
15
FIFO cost formula
Units
9,000
15,000
Purchases
Cost
Total
$12 $108,000
14 210,000
29
Cost of Goods Sold
Units
Cost
Total
9,000
13,000
(b)
Date
Oct. 2
15
29
$12
14
$290,000
Units
9,000
9,000
15,000
2,000
Balance
Cost
Total
$12 $108,000
12
14
318,000
14
28,000
Average cost formula
Units
9,000
15,000
Purchases
Cost
Total
$12 $108,000
14
210,000
Cost of Goods Sold
Units
Cost
Total
22,000
$13.25
$291,500
Units
9,000
24,000
2,000
Balance
Cost
Total
$12.00
$108,000
13.25
318,000
13.25
26,500
(c)
Sales
Cost of goods sold (from above)
Gross profit
Operating expenses
Income before income tax
Income tax expense (30%)
Net income
FIFO
$525,000
290,000
235,000
200,000
35,000
10,500
$ 24,500
Average
Cost
$525,000
291,500
233,500
200,000
33,500
10,050
$ 23,450
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EXERCISE 6-7 (CONTINUED)
(d)
(1)
Currently, as shown in (a) above, FIFO results in a higher net income
than the average cost formula. This is anticipated when costs are
rising, as is the case above.
If instead costs fall, the use of the FIFO cost formula will result in a
lower net income compared to the average cost formula. The cost of
goods sold will then be composed of higher costs than the average
cost formula and this will generate lower net incomes.
(2)
If costs remain stable, the two cost formulas will produce the same
net incomes.
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EXERCISE 6-8
(a)
Corrected inventory
2017 = $30,000 + $4,000 = $34,000
2018 = $37,000 – $2,000 = $35,000
Corrected cost of goods sold
2017 = $154,000 – $4,000 = $150,000
2018 = $168,000 + $2,000 + $4,000 = $174,000
(b)
(1) and (2) Cost of goods sold and income before income tax: The
inventory error for 2017 will cause the cost of goods sold to be
overstated by $4,000, which will cause net income and retained
earnings to be understated by the same amount. Assuming the error
was not corrected, when it reverses in 2018, cost of goods sold will
be understated and net income will be overstated by $4,000. Over the
two years the error will reverse and therefore the retained earnings
balance will be correct at the end of 2018 (with respect to this
particular error, taken alone).
The $2,000 overstatement of inventory in 2018 will cause the cost of
goods sold to be understated and the net income and retained
earnings to be overstated by $2,000.
When the two errors are taken together, in 2018 cost of goods sold
will be understated by $6,000 ($4,000 for 2017 error and $2,000 for
2018 error). Net income will be overstated by $6,000 in 2018.
(3)
The inventory error for 2017 will cause the inventory—an asset
account—to be understated by $4,000.
The inventory error for 2018 will cause the inventory (asset) account
to be overstated by $2,000.
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EXERCISE 6-8 (CONTINUED)
(b) (continued)
(4)
The errors will not affect liabilities.
(5)
As explained above in (1) and (2), retained earnings is understated
by $4,000 in 2017. In 2018, retained earnings is overstated by $2,000.
Because of this, shareholders’ equity will be understated by $4,000 in
2014 and overstated by $2,000 in 2018.
2017
2018
(c)
A
U$4,000
O$2,000
=
=
=
L
NE
NE
+
+
+
SE
U$4,000
O$2,000
Errors should be corrected as soon as they are discovered so that users
have a more accurate account of inventory on hand, gross profit and net
income.
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EXERCISE 6-9
(a)
Sales ...........................................................................
Cost of goods sold (see 1 and 2) ................................
Gross profit ..............................................................
2018
$265,000
213,000
$ 52,000
2017
$250,000
186,000
$ 64,000
(1) $194,000 – $8,000 = $186,000
(2) $205,000 + $8,000 = $213,000
(b)
The cumulative effect on total gross profit for the two years is zero as
shown below:
Incorrect gross profits:
Correct gross profits:
Difference
(c)
Gross profit margin
$56,000 + $60,000 =
$64,000 + $52,000 =
2018
$116,000
116,000
$
0
2017
Before correction
$60,000 ÷ $265,000
= 22.6%
$56,000 ÷ $250,000
= 22.4%
After correction
$52,000 ÷ $265,000
= 19.6%
$64,000 ÷ $250,000
= 25.6%
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EXERCISE 6-10
Units Cost/Unit
Cameras:
Sony
Canon
Light Meters:
Gossen
Sekonic
Total
(b) Dec. 31
(c) Dec. 31
Total Cost
NRV/Unit
Total NRV
(a)
LCNRV
4
8
$175
150
$ 700
1,200
$160
152
$ 640
1,216
$ 640
1,200
12
10
135
115
1,620
1,150
$4,670
139
110
1,668
1,100
$4,624
1,620
1,100
$4,560
Cost of Goods Sold ($4,670 – $4,560) ...............................
Inventory ....................................................................
110
Cost of Goods Sold (2  $150) ...........................................
Inventory ....................................................................
300
110
300
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EXERCISE 6-11
(a)
Inventory Turnover (2016):
$2,229,130
= 2.7 times
($851,033 + $779,407)÷2
Days in Inventory (2016):
365
= 135 days
2.7
Gross Profit Margin (2016):
($2,959,238 - $2,229,130)
= 24.7%
$2,959,238
Inventory Turnover (2015):
$1,701,311
= 2.5 times
(779,407 + $595,794)÷2
Days in Inventory (2015):
365
= 146 days
2.5
Gross Profit Margin (2015):
($2,359,994 - $1,701,311)
= 27.9%
$2,359,994
(b)
In 2016, Gildan Activewear experienced an improvement in liquidity but a
deterioration in profitability. The liquidity has been improved due to the
decrease in time required to turn over its inventory, from 146 days to 135
days. The company has experienced deteriorated profitability due to a
significant drop in its gross profit margin from 27.9% to 24.7%.
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EXERCISE 6-12
(a)
Inventory turnover (FIFO)
$750,000
= 3.4 times
$222,500
Inventory turnover (Average Cost)
$735,000
= 3.2 times
$227,500
(b)
Current ratio (FIFO)
($450,000 + $222,500)
= 1.9 times
$350,000
Current ratio (Average Cost)
($450,000 + $227,500)
= 1.9 times
$350,000
(c)
The FIFO cost formula appears to show a slightly better turnover ratio
because it has a lower ending inventory. The current ratios are the same.
The two cost formulas will generally yield the same overall assessment of
liquidity when combining the inventory turnover ratio and the current ratio.
The trend analysis for the inventory turnover and the current ratio produced
by either formula will be the same since the formulas involve allocating the
same costs. In reality, there is no economic difference between the two
formulas and any differences in ratios are artificial ones caused solely by
the different cost formulas. Consequently, there is no real difference in
liquidity.
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*EXERCISE 6-13
(a),(b)(1)
FIFO
Beginning inventory ($2,000 ×$20) ........................................
Purchases
Oct. 9 (5,000 × $21) ..................................................... $105,000
Oct. 12 (4,000 × $20.50) ..............................................
82,000
Oct. 25 (4,000 × $20.80) ..............................................
83,200
Cost of goods available for sale (15,000 units) .......................
Less: Ending inventory (4,000 × $20.80) ...............................
Cost of goods sold (11,000 units) ...........................................
$ 40,000
270,200
310,200
83,200
$ 227,000
(a),(b)(2)
Average cost
Beginning inventory ($2,000 ×$20) ........................................
Purchases
Oct. 9 (5,000 × $21) ..................................................... $105,000
Oct. 12 (4,000 × $20.50) ..............................................
82,000
Oct. 25 (4,000 × $20.80) ..............................................
83,200
Cost of goods available for sale (15,000 units) .......................
Less: Ending inventory (4,000 × $20.68*) ..............................
Cost of goods sold (11,000 units) ...........................................
$ 40,000
270,200
310,200
82,720
$ 227,480
*$310,200 ÷ 15,000 units = $20.68/unit
(c)
FIFO would result in a slightly higher gross profit, since its cost of goods
sold is lower.
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*EXERCISE
Financial Accounting, Seventh Canadian Edition
6-14
(a)
(1)
FIFO
Beginning inventory (1,500 × $5) .....................................................
Purchases
June 12 (2,300 × $6) .................................................................... $13,800
June 16 (4,500 × $7) .................................................................... 31,500
June 23 (1,500 × $8) ....................................................................
12,000
Cost of goods available for sale (9,800 units) ..................................
Less: Ending inventory [(1,500 × $8) + (100 × $7)] ..........................
Cost of goods sold (8,200 units) ......................................................
(2)
$ 7,500
57,300
64,800
12,700
$52,100
Average cost
Note: Unrounded numbers have been used in the average cost calculation,
although the numbers have been rounded to the nearest cent for presentation
purposes. Because of this, some amounts may not appear to multiply exactly
because of the rounding in the presentation.
Cost of Goods
Available for Sale
$64,800

Total Units
Available for Sale
9,800
=
Weighted Average
Unit Cost
$6.612245
Ending inventory = 1,600 × $6.612245 = $10,579.59
Cost of goods sold = $64,800.00 – $10,579.59 = $54,220.41
Proof: (9,800 – 1,600) × ($64,800 ÷ 9,800) = $54.220.41
(b)
The average unit cost is not $6.50 because the average unit cost is not a
simple straight average but is a weighted average based on the number of
units purchased at each price.
(c)
(1)
FIFO – The perpetual system will give the same ending inventory and
cost of goods sold as the periodic system.
(2)
Average cost – The perpetual system will have a different ending
inventory and cost of goods sold because the cost of goods sold is
calculated based on the weighted average at the time of each sale
under the perpetual system.
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*EXERCISE 6-15
(a)
(1)
Date
FIFO
Purchases
Nov. 1
Sales
Beginning inventory
(30 @ $295) = $8,850
5 25 @ $300 = $7,500
12
(30 @ $295) +
(25 @ $300) = $16,350
(30 @ $295) +
(12 @ $300) = $12,450
19 40 @ $305 = $12,200
22
Balance
(13 @ $300) = $3,900
(13 @ $300) +
(40 @ $305) = $16,100
(13 @ $300) +
(37 @ $305) = $15,185
25 30 @ $310 = $9,300
(3 @ $305) = $915
(3 @ $305) +
(30 @ $310) = $10,215
Cost of Goods Sold: $12,450 + $15,185 = $27,635
Ending Inventory: $10,215
Check: $27,635 + $10,215 = $37,850 ($8,850 + $7,500 + $12,200 + $9,300)
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*EXERCISE 6-15 (CONTINUED)
(a)
(2)
Average cost
Note: Unrounded numbers have been used in the average cost
calculations, although the numbers have been rounded to the nearest cent
for presentation purposes. Because of this, some amounts may not appear
to multiply exactly because of the rounding in the presentation.
Date
Purchases
Nov. 1
Sales
Beginning inventory
30 @ $295 = $8,850.00
5 25 @ $300 = $7,500
12
55 @ $297.27 = $16,350.00
42 @ $297.27 = $12,485.45
19 40 @ $305 = $12,200
22
Balance
13 @ $297.27 = $3,864.55
53 @ $303.10 = $16,064.55
50 @ $303.10 = $15,155.23
25 30 @ $310 = $9,300
3 @ $303.10 = $909.31
33 @ $309.37 = $10,209.31
Cost of Goods Sold: $12,485.45 + $15,155.24 = $27,640.69
Ending Inventory: $10,209.31
Check: $27,640.69 + $10,209.31 = $37,850 ($8,850 + $7,500 + $12,200 + $9,300)
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EXERCISE 6-15 (CONTINUED)
(b)
FIFO
Beginning inventory (30 × $295) ........................................................
Purchases
Nov. 5 (25 × $300) .........................................................................
Nov. 19 (40 × $305) .......................................................................
Nov. 25 (30 × $310) .......................................................................
Cost of goods available for sale (125 units) .......................................
Less: Ending inventory (3 × $305) + (30 × $310) ..............................
Cost of goods sold .............................................................................
$ 8,850
$ 7,500
12,200
9,300
29,000
37,850
10,215
$27,635
AVERAGE COST
Cost of goods available for sale (125 units) ....................................... $37,850.00
Less: Ending inventory (33 × $302.801).............................................
9,992.40
Cost of goods sold ............................................................................. $27,857.60
1
$37,850 ÷ 125 = $302.80
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*EXERCISE 6-16
(a)
Nov. 5 Inventory
Accounts Payable
12 Cash
Sales
12 Cost of Goods Sold
Inventory
19 Inventory
Accounts Payable
22 Cash
Sales
22 Cost of Goods Sold
Inventory
25 Inventory
Accounts Payable
(1) FIFO
Dr.
Cr.
7,500
7,500
19,320
19,320
12,450
12,450
12,200
12,200
23,500
23,500
15,185
15,185
9,300
9,300
(2) Average Cost
Dr.
Cr.
7,500.00
7,500.00
19,320.00
19,320.00
12,485.45
12,485.45
12,200.00
12,200.00
23,500.00
23,500.00
15,155.23
15,155.23
9,300.00
9,300.00
(1) FIFO
Dr.
Cr.
7,500
7,500
19,320
19,320
12,200
12,200
23,500
23,500
9,300
9,300
(2) Average Cost
Dr.
Cr.
7,500
7,500
19,320
19,320
12,200
12,200
23,500
23,500
9,300
9,300
(b)
Nov. 5 Purchases
Accounts Payable
12 Cash
Sales
19 Purchases
Accounts Payable
22 Cash
Sales
25 Purchases
Accounts Payable
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SOLUTIONS TO PROBLEMS
PROBLEM 6-1A
(a)
1.
The unsold consignment inventory should be included in Kananaskis’
inventory. Include $900 ($1,800 – $900) in inventory.
2.
The sale will be recorded on February 19. The goods (cost, $980)
should be excluded from Kananaskis’ inventory at the end of
February.
3.
The inventory has been sold to the customer so the customer has
ownership. Exclude.
4.
Exclude the items from Kananaskis’ inventory. Craft Producers Ltd.
still owns the inventory.
5.
Kananaskis owns the goods once they are shipped on February 26.
Include inventory of $1,445 ($1,350 + $95).
6.
Title of the goods does not transfer to Kananaskis until March 4.
Exclude this amount from the February 28 inventory.
7.
Title to the goods does not transfer to the customer until March 7.
Include the $1,900 in ending inventory. The freight charge is a
delivery expense.
8.
Include $1,950 in inventory.
(Legal title determines if an item should be included in inventory)
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PROBLEM 6-1A (CONTINUED)
(b)
The revised ending inventory is:
Unadjusted inventory
Adjustments
1. February 1
5. February 25
7. February 27
8. February 28
Adjusted inventory
$218,000
$ 900
1,445
1,900
1,950
6,195
$224,195
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PROBLEM 6-2A
(a)
Cost of Goods Sold
Model
Apr. 8
Focus
Mustang
18 Mustang
F-150
Flex
Escape
Ending Inventory
VIN #
Cost/
Unit
$
Sales
price/
Unit
$
C81362
G62313
G71891
F1921
X3892
E21202
24,000
29,000
28,000
29,000
31,000
29,000
26,000
32,000
33,000
32,500
34,000
32,000
Model
Apr.
VIN #
1
F-150
F1883
12 Mustang G71811
Flex
X4214
Flex
X4212
23 Focus C81528
Escape E28268
170,000 189,500
Cost/
Unit
$
25,000
30,000
31,000
30,000
27,000
30,000
173,000
= $189,500 – $170,000
= $19,500
(b)
Gross profit
(c)
The specific identification formula is likely the most appropriate formula for
Dean’s Sales Ltd. because the vehicles are large dollar value items that
are specifically identifiable by vehicle identification number.
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PROBLEM 6-3A
(a)
(1)
FIFO
Date Description
May 1
Purchase
Purchases
120 $100 $12,000
3 Sale
8 Purchase
100
110
11,000
40
40
60
115
Ending Inventory
120
80
13 Sale
15 Purchase
Cost of Goods Sold
6,900
$100 $ 8,000 040
40
100
100
110
8,400 60
60
60
$100 $12,000
100
100
110
4,000
15,000
110
110
115
6,600
13,500
20 Sale
60
110
6,600
60
115
6,900
27 Sale
40
115
4,600
20
115
2,300
$27,600
20
31 Balance
280
$29,900 260
$ 2,300
Check: $27,600 + $2,300 = $29,900
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PROBLEM 6-3A (CONTINUED)
(a)
(2)
Average cost
Note: Unrounded numbers have been used in the average cost calculations,
although the numbers have been rounded to the nearest cent for presentation
purposes. Because of this, some amounts may not appear to multiply exactly
because of the rounding in the presentation.
Date Description
May 1 Purchase
Purchases
Cost of Goods Sold
120 $100.00 $12,000.00
3 Sale
120 $100.00 $12,000.00
80 $100.00 $8,000.00
8 Purchase
100 110.00 11,000.00
13 Sale
60 115.00
40
140
80 107.14
15 Purchase
Ending Inventory
8,571.43
6,900.00
60
120
100.00
4,000.00
107.14 15,000.00
107.14
6,428.57
111.07 13,328.57
20 Sale
60 111.07
6,664.29
60
111.07
6,664.29
27 Sale
40 111.07
4,442.86
20
111.07
2,221.43
$27,678.57
20
31 Balance
280
$29,900.00 260
$2,221.43
Check: $27,678.57 + $2,221.43 = $29,900.00
(b)
Save-Mart should consider the physical flow of its goods, the amount to be
reported on the statement of financial position, and the nature and use of
its goods.
(c)
The FIFO cost formula produces a slightly higher gross profit and net
income as results in cost of goods sold being lower during periods of rising
prices.
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PROBLEM 6-3A (CONTINUED)
(d)
FIFO produces a higher ending inventory during periods of rising prices.
(e)
The pre-tax cash flows are the same no matter which cost formula is used.
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PROBLEM 6-4A
(a)
Date
Description
Purchases
Cost of Goods Sold
Beg.
Apr. 1
inventoInventory
6 Purchase
15
$45 $ 675
30
5
9 Sale
14 Purchase
20
40
10
15
20
30 Total
55
35
$1,725
800
20 Sale
28 Purchase
50
45
45
40
1,050
700
$2,175
60
$2,775
Ending Inventory
30
$50
$1,500
30
15
50
45
2,175
10
10
20
45
45
40
5
5
20
40
40
35
200
25
,
$ 900
450
1,250
900
Check: $2,775 + $900 = $3,675 ($1,500 + $2,175)
(b)
It needs to consider whether the change will result in more relevant and
reliable presentation in the financial statements. This may only occur if the
physical flow, or nature and use, of the inventory changes.
(c)
I would expect the ending inventory under the average cost formula to be
higher when prices are falling as the inventory will be valued at an average
cost. Under FIFO, ending inventory would be lower when prices are falling
as the inventory will be valued at the last (and lowest) price. Cost of goods
sold under the average cost formula would be lower.
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PROBLEM 6-5A
(a)
Date
Note: Unrounded numbers have been used in the average cost
calculations, although the numbers have been rounded to the nearest cent
for presentation purposes. Because of this, some amounts may not appear
to multiply exactly because of the rounding in the presentation.
Description
Purchases
Cost of Goods Sold
Beg.
Apr. 1
inventoInventory
6 Purchase
30 $50.00 $1,500.00
15 $45 $ 675.00
9 Sale
35 $48.33 $1,691.67
14 Purchase
Ending Inventory
20
40
800.00
20 Sale
25
28 Purchase
20
30 Balance
55
35
42.78 1,069.44
700.00
$2,175.00
60
$2,761.11
45
48.33 2,175.00
10
48.33
30
42.78 1,283.33
483.33
5
42.78
213.89
25
36.56
913.89
25
$ 913.89
Check: $2,761.11 + $913.89 = $3,675.00 ($1,500.00 + $2,175.00)
(b)
Cost of Goods Sold ..................................................
Inventory (1 × $36.56) ..................................
36.56
36.56
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PROBLEM 6-5A (CONTINUED)
(c)
Three accounts would be affected—Inventory, Cost of Goods Sold, and
Retained Earnings. The Inventory account would be overstated by $36.56.
This would result in the statement of financial position sub-totals of current
assets and total assets also being overstated. The Cost of Goods Sold
account would be understated by $36.56. This would lead to the income
statement sub-totals of gross profit and net income being overstated by
$36.56. The Retained Earnings account would also be overstated by
$36.56.
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PROBLEM 6-6A
(a)
April
1
No entry
6
Inventory (110 × $90) ............................................
Cash .............................................................
9,900.00
Cash (130 × $120).................................................
Sales .............................................................
15,600.00
Cost of Goods Sold (130 × $86.88*)......................
Inventory .......................................................
11,293.75
Inventory (120 × $70) ...........................................
Cash .............................................................
8,400.00
Cash (120 × $100).................................................
Sales .............................................................
12,000.00
Cost of Goods Sold (120 × $73.38*)......................
Inventory .......................................................
8,805.00
Inventory (20 × $60) ..............................................
Cash .............................................................
1,200.00
8
15
20
27
9,990.00
15,600.00
11,293.75
8,400.00
12,000.00
8,805.00
1,200.00
* These numbers have been rounded to the nearest cent for presentation
purposes, but not for calculation purposes. See detailed calculations in part (b).
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Financial Accounting, Seventh Canadian Edition
PROBLEM 6-6A (CONTINUED)
(b)
Note: Unrounded numbers have been used in the average cost
calculations, although the numbers have been rounded to the nearest cent
for presentation purposes. Because of this, some amounts may not appear
to multiply exactly because of the rounding in the presentation.
Date Description
Purchases
Cost of Goods Sold
Apr. 1 Beginning
6 Purchase
50 $80.00 $ 4,000.00
110 $90 $ 9,900
8 Sale
15 Purchase
30
Balance
160
130 $86.88 $11,293.75
120
70
8,400
20 Sale
27 Purchase
Ending Inventory
150
120
20
250
60
30
73.38
8,805.00
1,200
$19,500 250
$20,098.75
86.88 13,900.00
86.88
2,606.25
73.38 11,006.25
30
73.38
2,201.25
50
68.03
3,401.25
50
$ 3,401.25
Check: $20,098.75 + $3,401.25 = $23,500 ($4,000 + $19,500)
(c)
Ending inventory should be valued at $2,500 (50 x $50) which is the
lower of cost and net realizable value.
Cost = $3,401.25 (50 units @ 68.025)
NRV = $2,500.00 (50 units @ $50)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 6-7A
(a)
(b)
(c)
(d)
(e)
(f)
(g)
2018
Cash
No effect
Cost of goods sold
Overstated
Net income
Understated
Retained earnings
No effect
Ending inventory
No effect
Gross profit margin ratio Understated
Inventory turnover ratio Understated*
2017
No effect
Understated
Overstated
Overstated
Overstated
Overstated
Understated
*Although the cost of goods sold is overstated in 2018, this is not as significant (in
percentage terms) as the overstatement in average inventory, which is the
denominator in the inventory turnover ratio so this ratio remains understated in 2018.
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PROBLEM 6-8A
(a)
(INCORRECT)
Sales
Cost of goods sold
Gross profit
Operating expenses
Income before income tax
Statement of financial position:
Inventory
KMETA INC.
Income Statement
Year Ended July 31
2018
$340,000
233,000
107,000
68,000
$ 39,000
2017
$320,000
220,000
100,000
64,000
$ 36,000
2016
$300,000
209,000
91,000
64,000
$ 27,000
$40,000
$40,000
$24,000
KMETA INC.
Income Statement
Year Ended July 31
2018
$340,000
233,000
107,000
68,000
$ 39,000
2017
$320,000
229,0002
91,000
64,000
$ 27,000
2016
$300,000
200,0001
100,000
64,000
$ 36,000
$40,000
$55,0004
$33,0003
(CORRECT)
Sales
Cost of goods sold
Gross profit
Operating expenses
Income before income tax
Statement of financial position:
Inventory
$209,000 – $9,000 = $200,000
$220,000 + $9,000 (2016 error) + $0* (2017 error) = $229,000
3 $24,000 + $9,000 = $33,000
4 $40,000 + $15,000 = $55,000
* - Purchases understated by $15,000 and inventory understated by $15,000, so
nil effect on cost of goods sold.
1
2
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PROBLEM 6-8A (CONTINUED)
(b)
Retained earnings before correction = $27,000 + $36,000 + $39,000 = $102,000
Retained earnings after correction = $36,000 + $27,000 + $39,000 = $102,000
The retained earnings balance at the end of 2018 is unaffected and remains at
$102,000 because by that time, all errors have been corrected.
(c)
Inventory turnover
(INCORRECT)
Inventory turnover (2018)
$233,000
= 5.8 times
($40,000 + $40,000) ÷ 2
Inventory turnover (2017)
$220,000
= 6.9 times
($40,000 + $24,000) ÷ 2
(CORRECT)
Inventory turnover (2018)
$233,000
= 4.9 times
($40,000 + $55,000) ÷ 2
Inventory turnover (2017)
$229,000
= 5.2 times
($55,000 + $33,000) ÷ 2
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PROBLEM 6-9A
(a)
Type of Bean
Coffea arabica
Coffea robusta
(b)
(c)
Dec. 31
Quantity
13,000 bags
5,000 bags
Unit
Cost
$5.60
3.40
Total Cost
$72,800
17,000
$89,800
NRV
$5.55
3.50
Total NRV
$72,150
17,500
$89,650
Cost of Goods Sold ($89,800 – $89,150)...........
Inventory .....................................................
LCNRV
$72,150
17,000
$89,150
650
650
Tascon’s operations involve the sale of coffee beans. The users of the
financial information are aware of the volatility of the cost of the beans due
to weather conditions in the countries where the beans are grown. Users
expect and appreciate that the lower of cost and net realizable value
(LCNRV) requirement in accounting because they know that inventory and
income are not overstated. Adjustments Tascon would need to make by
applying the item-by-item approach of the LCNRV would not be minor in
amount. The item-by-item is always the more conservative method (that is,
lower inventory amount reported) because net realizable values above cost
are never included in the calculations. Under these circumstances, Tascon
should apply the LCNRV rule on an item-by-item basis for coffee beans.
One argument in support of both types of coffee beans being considered
as part of one inventory grouping is that the accounting values that are
reported under LCNRV on an item-by-item basis are not neutral and
unbiased measures of income and inventory. Recognizing net realizable
values only when they are lower than cost, is an inconsistent treatment that
can lead to distortions in reported net income. Another argument can be
made on the basis of the cost versus benefit constraint of accounting.
Although not appropriate in this case, due to the type of inventory, the costs
incurred in arriving at the net realizable value on an item-by-item basis may
far outweigh the benefit derived by applying LCNRV on an item-by-item
basis.
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PROBLEM 6-10A
(a)
(1) June 30
(2) July 31
(3) August 31
Total Cost
$12,640,0001
14,195,0002
12,632,5003
Total NRV
$13,600,0004
13,610,5005
12,245,0006
LCNRV
$12,640,000
13,610,500
12,245,000
116,000
x $790 = $12,640,000
x $850 = $14,195,000
315,500 x $815 = $12,632,500
416,000 x $850 = $13,600,000
516,700 x $815 = $13,610,500
615,500 x $790 = $12,245,000
216,700
(b)
(1) June 30
No entry
(2) July 31
Cost of Goods Sold ..........................................
Inventory ...........................................
($14,195,000 – $13,610,500 = $584,500)
584,500
Cost of Goods Sold ........................................
Inventory ............................................
($12,632,500– $12,245,000 = $387,500)
387,500
(3) Aug. 31
584,500
387,500
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PROBLEM 6-11A
(a) (in USD millions)
Inventory Turnover
Days In Inventory
Current Ratio
2015
$17,482
= 5.8 times
($2,902 + $3,100)÷2
365
= 63 days
5.8 times
$33,395
= 1.2 : 1
$26,930
2014
$17,889
= 5.6 times
($3,100 + $3,277)÷2
365
= 65 days
5.6 times
$32,986
= 1.0 : 1
$32,374
Coca-Cola’s current ratio improved in 2015 and is slightly below the
industry average of 1.3:1. This ratio indicates that the company has fewer
current assets to cover its current liabilities compared to other companies
in the industry. Coca-Cola’s inventory turnover has improved but continues
to be significantly worse than the rest of the industry.
(b)
Coca-Cola has different types of inventory that likely have different physical
flows of inventory. For example, beverages likely flow on a FIFO basis
(especially for beverages with “best before” dates). Other components of
inventory including raw materials such as sugar may be accounted for on
an average basis.
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PROBLEM 6-12A
(a)
Both companies have current ratios that exceed the industry average and
therefore enjoy greater liquidity. Wendy’s has a lower current ratio and
higher inventory turnover ratio than McDonald’s, so it may be more liquid
than McDonald’s. McDonald’s has a lower inventory turnover than the
industry. Since inventory is a large component of current assets, an
inventory turnover ratio lower than the industry means that more inventory
is kept on hand and therefore increases current assets and the current
ratio. As a result, the higher than average current ratio may not translate
into higher liquidity.
(b)
Both companies’ gross profit margin exceeds the industry average, with
McDonald’s having the better ratio of the two companies. Where the
differences in ratios is more noticeable is in the profit margin. In the case
of Wendy’s, its profit margin is well below the industry average. For
McDonald’s, the profit margin is double that of Wendy’s and well above the
industry average. This indicates that McDonald’s has succeeded in
translating a higher gross profit margin into a higher profit margin by
controlling its expenses.
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*PROBLEM 6-13A
(a)
Cost Of Goods Available For Sale
Date
Jan. 1
Mar. 15
July 20
Sept. 4
Dec. 2
(b)
(1)
Explanation
Beginning inventory
Purchase
Purchase
Purchase
Purchase
Total
Units
250
700
500
450
100
2,000
Unit Cost
$160
150
145
135
125
Total Cost
$ 40,000
105,000
72,500
60,750
12,500
$290,750
FIFO
Step 1: Ending Inventory
Date
Units
Unit Cost
Sept. 4
100
$135
Dec. 2
100
125
200
Step 2: Cost of Goods Sold
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
Total Cost
$13,500
12,500
$26,000
$290,750
26,000
$264,750
Proof: Cost of Goods Sold
Unit
Total
Units
Cost
Cost
250
$160
$ 40,000
700
150
105,000
500
145
72,500
350
135
47,250
1,800
$264,750
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*PROBLEM 6-13A (CONTINUED)
(b)
(2)
Average Cost
Step 1: Ending Inventory
Weighted Average
Units
Unit Cost
200
$145.38*
=
Total
Cost
$29,075.00
*$290,750  2,000 = $145.38 (rounded)
Step 2: Cost of Goods Sold
Cost of goods available for sale
Less: Ending inventory (200 x $145.38 rounding)
Cost of goods sold
$290,750
29,075
$261,675
Proof: Cost of goods sold
1,800 × ($290,750 ÷ 2,000) = $261,675
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Financial Accounting, Seventh Canadian Edition
*PROBLEM 6-14A
(a)
KANE LTD.
Partial Income Statements
FIFO
Sales (1,800 × $200) .......................................
Cost of goods sold
Beginning inventory .................................
Cost of goods purchased ........................
Cost of goods available for sale ..............
Ending inventory .....................................
Cost of goods sold ..................................
Gross profit ......................................................
Average
Cost
$360,000
$360,000
40,000
250,750
290,750
26,000
264,750
95,250
40,000
250,750
290,750
29,075
261,675
98,325
(b)
KANE LTD.
Partial Statement of Financial Position
Assets
Current assets
Inventory ....................................................
(c)
FIFO
Average
Cost
$26,000
$29,075
FIFO uses the most recent inventory prices to value the ending inventory.
Since prices are declining, FIFO results in the lower cost for ending
inventory. FIFO results in the higher cost of goods sold, lower gross profit,
and lower net income because FIFO values the cost of goods sold at the
older, higher prices.
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*PROBLEM 6-15A
(a) (1)Periodic Inventory System
COST OF GOODS AVAILABLE FOR SALE
Date
Aug. 1
4
18
28
Explanation
Beginning inventory
Purchase
Purchase
Purchase
Total
Units
50
180
70
40
340
Unit Cost
$90
92
94
95
Total Cost
$ 4,500
16,560
6,580
3,800
$31,440
Units Sold = 160 + 100 = 260
Units in Ending inventory = 340 – 260 = 80
Step 1: Ending Inventory
Unit
Total
Units
Cost
Cost
40
$95
$3,800
40
94
3,760
80
$7,560
Step 2: Cost of Goods Sold
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
$31,440
7,560
$23,880
Proof: Cost of Goods Sold
Units
50
180
30
260
Unit
Cost
$90
92
94
Total
Cost
$ 4,500
16,560
2,820
$23,880
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*PROBLEM 6-15A (Continued)
(a)
(2)
Perpetual Inventory System
Date Description
Purchases
Cost of Goods Sold
Aug 1 Beginning
inventory
4 Purchase
18 Purchase
50
50
180
180 $92 $16,560
50
110
10 Sale
70 94
70
30
31 Balance
40 95
290
$90
92 $14,620
6,580
25 Sale
28 Purchase
Ending Inventory
92
94
9,260
3,800
$26,940 260
$23,880
$90 $ 4,500
90
92 21,060
70
70
70
92
92
94
40
40
40
94
94
95
80
6,440
13,020
3,760
7,560
, $ 7,560
Check: $23,880 + $7,560 = $31,440 ($4,500 + $26,940)
(b)
Cost of goods sold
Ending inventory
Cost of goods available for sale
Perpetual
$23,880
7,560
$31,440
Periodic
$23,880
7,560
$31,440
The results under FIFO in a perpetual system are the same as in a periodic
system. Under both inventory systems, the first costs in inventory are the
ones assigned to the cost of goods sold.
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*PROBLEM 6-16A
(a)
(1)
Perpetual Inventory System
Note: Unrounded numbers have been used in the average cost
calculations, although the numbers have been rounded to the nearest cent
for presentation purposes. Because of this, some amounts may not appear
to multiply exactly because of the rounding in the presentation.
Date Description
Purchases
Cost of Goods Sold
Nov. 1 Beginning
inventory
4 Purchase
500 $42 $21,000
11 Sale
16 Purchase
450
750
44
33,000
20 Sale
27 Purchase
30 Balance
800
600
1,850
46
$41.67 $18,750.00
43.61
34,888.89
27,600
$81,600 1,250
$53,638.89
Ending Inventory
100 $40.00
$ 4,000.00
600 41.67
25,000.00
150 41.67
6,250.00
900 43.61
39,250.00
100 43.61
4,361.11
700 45.66
31,961.11
700
$31,961.11
Check: $53,638.89 + $31,961.11 = $85,600 ($4,000 + $81,600)
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*PROBLEM 6-16A (CONTINUED)
(a)
(2)
Periodic Inventory System
COST OF GOODS AVAILABLE FOR SALE
Date
Nov 1
4
16
27
Explanation
Beginning inventory
Purchase
Purchase
Purchase
Total
Units
100
500
750
600
1,950
Unit Cost
$40
42
44
46
Total Cost
$ 4,000
21,000
33,000
27,600
$85,600
Average cost per unit = $85,600  1,950 = $43.90
Units Sold = 450 + 800 = 1,250
Units in Ending inventory = 1,950 – 1,250 = 700
Step 1: Ending Inventory
700 units @ $43.90 = $30,728.21
Step 2: Cost of Goods Sold
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
$85,600.00
30,728.21
$54,871.79
Proof: Cost of Goods Sold
1,250 × ($85,600 ÷ 1,950) = $54,871.79
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PROBLEM 6-16A (CONTINUED)
(b)
Average Cost
Periodic
Perpetual
Cost of goods sold
$54,871.79
$53,638.89
Ending inventory
Cost of goods available for sale
30,728.21
$85,600.00
31,961.11
$85,600.00
The results are different because the perpetual system recalculates
(changes) the average unit cost after each purchase where the average
cost is calculated only once, at the end of the period, in the periodic system.
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PROBLEM 6-1B
(a)
1.
The goods on consignment belong to Kananaskis and should not be
included in Banff’s ending inventory.
2.
$2,650 ($2,500 + $150) should be included in inventory as the goods
were shipped FOB shipping point on February 21st.
3.
The goods should not be included in inventory as they were shipped
FOB shipping point and shipped before February 28. Title to the
goods transfers to the customer at shipping. Banff should have
recorded the transaction in the Sales and Accounts Receivable
accounts. Freight charges are paid by the customer.
4.
Include $1,100 ($2,200 ÷ 2) in inventory as Banff has title to this
inventory.
5.
The amount should not be included in inventory as the goods were
shipped FOB destination and not received until March 2. The seller
still owns the inventory. No entry is recorded. The seller is responsible
for the freight costs.
6.
The sale will be recorded on March 3. The goods should be included
in inventory at the end of February at their cost of $1,800. The freight
is a selling expense.
7.
Include $2,100 in inventory as it has not been sold.
8.
Inventory should be decreased by $800 to record these goods at
lower of cost and net realizable value, which is zero.
(Legal title determines if an item should be included in inventory)
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PROBLEM 6-1B (CONTINUED)
(b)
The revised ending inventory is:
Unadjusted inventory
Adjustments
2. February 19
4. February 23
6. February 26
7. February 27
8. February 28
Adjusted inventory
$161,000
$ 2,650
1,100
1,800
2,100
(800)
6,850
$167,850
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PROBLEM 6-2B
(a)
Cost of Goods Sold
Aug. 10
18
Ending Inventory
Supplier
Suzuki
Serial #
SZ5828
Cost/ Sales price/
Unit
Unit
$
$
1,900
3,000
Kawai
KG1268
1,800
Yamaha
YH4418
Steinway ST8411
26
Supplier
Kawai
Serial #
KG1520
Cost/
Unit
$
900
2,100
Suzuki
SZ5716
1,400
1,600
2,400
Steinway
ST0944
2,500
2,900
4,000
Suzuki
SZ6148
1,900
Suzuki
SZ6132
2,100
3,200
Yamaha
YH6318
1,800
2,800
Yamaha
YH5632
1,900
2,900
14,000
20,400
(b)
(c)
Aug.
1
22
6,700
Gross profit = $20,400 – $14,000 = $6,400
The specific identification formula is likely the most appropriate formula for
the Piano Studio Ltd. because the pianos are large dollar value items that
are specifically identifiable by serial number.
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PROBLEM 6-3B
(a)
(1)
FIFO
Date Description
May 1 Purchase
6 Purchase
Purchases
110 $190 $20,900
140
220
110 $190
90 220 $40,700
80
230
18,400
50
50
21 Sale
27 Purchase
31 Balance
50
380
250
Ending Inventory
110
110
140
30,800
11 Sale
14 Purchase
Cost of Goods Sold
220
230 22,500
12,500
$82,600 300
$63,200
$190 $20,900
190
220 51,700
50
50
80
220
220
230
11,000
30
30
50
230
230
250
6,900
80
29,400
19,400
$19,400
Check: $63,200 + $19,400 = $82,600
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Financial Accounting, Seventh Canadian Edition
PROBLEM 6-3B (CONTINUED)
(2) Average Cost
Note: Unrounded numbers have been used in the average cost
calculations, although the numbers have been rounded to the nearest cent
for presentation purposes. Because of this, some amounts may not appear
to multiply exactly because of the rounding in the presentation.
Date Description
Purchases
Cost of Goods Sold
Ending Inventory
May 1 Purchase
110 $190 $20,900
110 $190.00 $20,900.00
6 Purchase
140 220 30,800
250 206.80 51,700.00
11 Sale
14 Purchase
200 $206.80 $41,360.00
80 230 18,400
21 Sale
27 Purchase
50 206.80 10,340.00
130 221.08 28,740.00
100
221.08
22,107.69
50 250 12,500
31 Balance
380
$82,600 300
Check: $63,467.69 + $19,132.31 = $82,600
30 221.08
80 239.15 19,132.31
$63,467.69
80
(b)
Family Appliance Mart should select the formula that:
•
corresponds most closely to the physical flow of goods
•
results in a cost on the statement of financial position that is close to
the inventory’s most recent cost
(c)
Because prices are rising, FIFO produces the higher gross profit and net
income.
(d)
Because the ending inventory is determined using the most recent prices,
the FIFO cost formula produces the higher ending inventory.
(e)
6,632.31
$19,132.31
Pre-tax cash flow will be the same under both cost formulas.
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PROBLEM 6-4B
(a)
FIFO
Date
Description
April 1 Beg. inventory
6 Purchase
Purchases
35 $240 $ 8,400
50 $230
5
240 $12,700
9 Sale
14 Purchase
40
245
9,800
30
20
20 Sale
28 Purchase
30 Balance
Cost of Goods Sold
30
105
250
240
245
12,100
7,500
$25,700 105
$24,800
Ending Inventory
50 $230 $11,500
50 230
35 240
19,900
30
30
40
240
240
245
20
20
30
245
245
250
50
7,200
17,000
4,900
12,400
$12,400
Check: $24,800 + $12,400 = $37,200 ($11,500 + $25,700)
(b)
It needs to consider whether the change will result in more relevant and
reliable presentation in the financial statements. This may only occur if the
physical flow, or nature and use of the inventory changes.
(c)
When prices are rising, I would expect that, under the average cost
formula, the ending inventory would be lower. Under FIFO, the ending
inventory consists of the units purchased recently. Under average cost,
ending inventory includes some lower cost from goods purchased earlier.
I would expect cost of goods sold to be higher under average cost since
the average cost would include the cost of more recently purchased goods.
Notice that average cost will give higher cost of goods sold while having
ending inventory that is lower than under FIFO.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 6-5B
(a)
Date
Note: Unrounded numbers have been used in the average cost
calculations, although the numbers have been rounded to the nearest cent
for presentation purposes. Because of this, some amounts may not appear
to multiply exactly because of the rounding in the presentation.
Description
Purchases
Cost of Goods Sold
April 1 Beg. inventory
6 Purchase
50 $230.00 $11,500.00
35 $240 $ 8,400
9 Sale
14 Purchase
55 $234.12 $12,876.47
40
245
9,800
20 Sale
28 Purchase
30
Ending Inventory
50
30
105
250
240.34
12,016.81
7,500
$25,700 105
$24,893.28
85 234.12
19,900.00
30 234.12
7,023.53
70 240.34
16,823.53
20 240.34
4,806.72
50 246.13
12,306.72
50
$12,306.72
Check: $24,893.28 + $12,306.72 = $37,200 ($11,500 + $25,700)
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PROBLEM 6-5B (CONTINUED)
(b)
It should write-off the rod:
April 30
(c)
Cost of Goods Sold ...............................
Inventory ....................................
246.13
246.13
Three accounts would be affected—Inventory, Cost of Goods Sold, and
Retained Earnings. The Inventory account would be overstated by
$246.13. This would result in the statement of financial position sub-totals
of current assets and total assets also being overstated. The Cost of Goods
Sold account would be understated by $246.13. This would lead to the
income statement sub-totals of gross profit and net income being
overstated by $246.13. The Retained Earnings account would also be
overstated by $246.13.
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Financial Accounting, Seventh Canadian Edition
PROBLEM 6-6B
(a)
Oct.
1
No entry required
5
Inventory (100 × $130) ..........................................
Accounts Payable ........................................
13,000
Accounts Receivable .............................................
Sales (120 × $200)........................................
24,000
Cost of Goods Sold ...............................................
Inventory [(60 × $140) + (60 × $130)] ...........
16,200
Inventory (35 × $120) ............................................
Accounts Payable .........................................
4,200
Accounts Receivable .............................................
Sales (60 × $160)..........................................
9,600
Cost of Goods Sold ...............................................
Inventory [(40 × $130) + (20 × $120)] ...........
7,600
Inventory (15 × $110) ............................................
Accounts Payable ........................................
1,650
8
15
20
26
13,000
24,000
16,200
4,200
9,600
7,600
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1,650
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PROBLEM 6-6B (CONTINUED)
(b)
Date
Oct. 31
Ending Inventory
Unit
Units
Cost
15
@ $110
15
@ $120
30*
Total
Cost
$1,650
1,800
$3,450
*60 + 100 – 120 + 35 – 60 + 15 = 30
(c)
The inventory should be valued at $3,240. This is the lower of cost and net
realizable value.
Cost = $3,450.00 (see (b))
NRV = $3,240.00 (30 @ $108)
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Financial Accounting, Seventh Canadian Edition
PROBLEM 6-7B
2018
2017
(a)
Cash
No effect
No effect
(b)
Cost of goods sold
Understated
Overstated
(c)
Net income
Overstated
Understated
(d)
Retained earnings
No effect
Understated
(e)
Ending inventory
No effect
Understated
(f)
Gross profit margin ratio
Overstated
Understated
(g)
Inventory turnover ratio
Overstated*
Overstated
* Although the cost of goods sold is understated in 2018, this is not as significant (in
percentage terms) as the understatement in average inventory, which is the
denominator in the inventory turnover ratio so this ratio remains overstated in 2018.
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PROBLEM 6-8B
(a)
(INCORRECT)
PELLETIER INC.
Income Statement
Year Ended July 31
Sales
Cost of goods sold
Gross profit
Operating expenses
Income before income tax
Statement of financial position:
Inventory
2018
$320,000
187,000
133,000
52,000
$ 81,000
2017
$312,000
203,000
109,000
52,000
$ 57,000
2016
$300,000
170,000
130,000
50,000
$ 80,000
$37,000
$24,000
$37,000
2017
$312,000
193,0002
119,000
52,000
$ 67,000
2016
$300,000
180,0001
120,000
50,000
$ 70,000
(CORRECT)
PELLETIER INC.
Income Statement
Year Ended July 31
Sales
Cost of goods sold
Gross profit
Operating expenses
Income before income tax
Statement of financial position:
Inventory
2018
$320,000
187,000
133,000
52,000
$ 81,000
$37,000
$29,0004
$27,000
3
1 $170,000
+ $10,000 = $180,000
– $10,000 (2016 error) + $0* (2017 error) = $193,000
3 $37,000 – $10,000 = $27,000
4 $24,000 + $5,000 = $29,000
* Purchases understated by $5,000 and inventory understated by $5,000, so nil
effect on cost of goods sold.
2 $203,000
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PROBLEM 6-8B (CONTINUED)
(b)
Before correction = $81,000 + $57,000 + $80,000 = $218,000
After correction = $81,000 + $67,000 + $70,000 = $218,000
(c)
Inventory turnover
(INCORRECT)
Inventory turnover (2018)
$187,000
= 6.1 times
($37,000 + $24,000)÷2
Inventory turnover (2017)
$203,000
= 6.7 times
($24,000 + $37,000)÷2
(CORRECT)
Inventory turnover (2018)
$187,000
= 5.7 times
($37,000 + $29,000)÷2
Inventory turnover (2017)
$193,000
= 6.9 times
($29,000 + $27,000)÷2
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Financial Accounting, Seventh Canadian Edition
PROBLEM 6-9B
(a)
Product
A
B
C
(b)
Quantity
25
30
60
Unit
Cost
$7
6
11
Total
Cost
$ 175
180
660
$1,015
Net
Realizable
Value
$7
8
10
Total
NRV
$ 175
240
600
$1,015
March 31 Cost of Goods Sold ...................................................
Inventory ......................................................
($1,015 - $955 = $60)
Lower
of Cost
and
NRV
$175
180
600
$955
60
60
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PROBLEM 6-10B
(a)
(1)
(2)
(3)
March
31
April 30
May 31
Tonnes
Total Cost
Total NRV
LCNRV
30,000
$21,750,0001
$22,200,0004
$21,750,000
25,000
28,000
17,875,0002
20,300,0003
17,750,0005
20,300,0006
17,750,000
20,300,000
130,000
x $725 = $21,750,000
x $715 = $17,875,000
328,000 x $725 = $20,300,000
430,000x $740 = $22,200,000
525,000 x $710 = $17,750,000
628,000 x $725 = $20,300,000
225,000
(b)
(1)
March 31 No entry
(2)
April 30
(3)
May 31
Cost of Goods Sold ......................................
Inventory .................................................
($17,875,000 – $17,750,000 = $125,000)
125,000
125,000
No entry
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PROBLEM 6-11B
(a) (in USD millions)
Inventory Turnover
Days In Inventory
Current Ratio
2015
$28,384
= 9.7 times
($2,720 + $3,143)÷2
365
= 38 days
9.7 times
$23,031
= 1.3 : 1
$17,578
2014
$30,884
= 9.4 times
($3,143 + $3,409)÷2
365
= 39 days
9.4 times
$20,663
= 1.1 : 1
$18,092
PepsiCo’s current ratio improved in 2015 and is equal to the industry
average of 1.3:1. This ratio indicates that the company has the same
proportion of current assets to cover its current liabilities as does the
average company in this industry. The increase in the current ratio follows
the trend experienced by the industry and may be due to the same
economic factors as experienced by other companies in the same industry.
PepsiCo’s inventory turnover has improved, and is above the industry
average. This trend is opposite to the industry trend which declined from
2014 to 2015.
(b)
PepsiCo has different types of inventory that likely have different physical
flows. For example, drinks with “best before dates” likely flow first-in, firstout, which make the FIFO inventory cost formula an appropriate choice.
Other components of inventory, including raw materials such as sugar, may
be accounted for on an average cost basis.
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PROBLEM 6-12B
(a)
Magna’s inventory turnover outpaces its industry counterparts by a large
margin while Dana is below the industry standard in this respect. On the
other hand, Dana has a much stronger current ratio compared to its
industry counterparts while Magna is slightly under industry average for
this measure of liquidity.
(b)
While the gross profit margins are similar between Magna and Dana, their
gross profit margins fall well short of the industry average. This could be
due in part to the product mix for each company compared to its industry
peers. As for profit margin, Magna does a better job than Dana controlling
costs as its gross profit is 1.9% less than Dana’s, but its profit margin is
only 0.1% less. Both Magna and Dana are below the industry average for
profit margin.
(c)
Since inventory is a large component of current assets, a higher inventory
turnover as is the case for Magna would normally decrease its current ratio,
which appears to be case. Dana experienced the opposite trend as it has
a lower inventory turnover than Magna. Dana should have a higher current
ratio, which also appears to be the case. One can therefore conclude: other
factors remaining equal, the more inventory kept on hand, the greater the
current assets and the current ratio.
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*PROBLEM 6-13B
(a)
(b)
Cost Of Goods Available For Sale
Date
Jan.
Feb.
May
Aug.
Dec.
1
20
5
12
8
(1)
FIFO
Explanation
Beginning inventory
Purchase
Purchase
Purchase
Purchase
Total
Step 1: Ending Inventory
Date
Units
Unit Cost
Dec. 8
400
22
Step 2: Cost of Goods Sold
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
Units
400
1,200
1,000
1,200
600
4,400
Unit Cost
$18
19
21
20
22
Total Cost
$ 7,200
22,800
21,000
24,000
13,200
$88,200
Total Cost
$ 8,800
$88,200
8,800
$79,400
Proof: Cost of Goods Sold
Units
400
1,200
1,000
1,200
200
4,000
Unit
Cost
$18
19
21
20
22
Total
Cost
$ 7,200
22,800
21,000
24,000
4,400
$79,400
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*PROBLEM 6-13B (CONTINUED)
(b)
(2)
Average Cost
Step1: Ending Inventory
Units
400
Weighted Average
Unit Cost
$20.05*
=
Total
Cost
$8,018.18
*$88,200  4,400 = $20.05
Step 2: Cost of Goods Sold
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
$88,200.00
8,018.18
$80,181.82
Proof: 4,000 × ($88,200 ÷ 4,400) = $80,181.82
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*PROBLEM 6-14B
(a)
STEWARD INC.
Partial Income Statements
FIFO
Sales (4,000 × $40) .........................................
Cost of goods sold
Beginning inventory .................................
Cost of goods purchased ........................
Cost of goods available for sale ..............
Ending inventory .....................................
Cost of goods sold ..................................
Gross profit ......................................................
Average
Cost
$160,000
$160,000
7,200
81,000
88,200
8,800
79,400
80,600
7,200
81,000
88,200
8,018
80,182
79,818
(b)
STEWARD INC.
Partial Statement of Financial Position
FIFO
Average
Cost
$8,800
$8,018
Assets
Current assets
Inventory ..................................................
(c)
FIFO uses the latest inventory prices to determine the cost of the ending
inventory and, therefore, results in the higher amount for ending inventory
in periods of rising prices. FIFO results in the lowest cost of goods sold and
higher net income because FIFO values the cost of goods sold at the
earliest and lowest prices.
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*PROBLEM 6-15B
(a)
(1)
Perpetual
Date Description
Purchases
Cost of Goods Sold
May 1 Beg. inventory
6 Purchase
14 Purchase
50,000 2.40
120,000
21 Sale
27 Purchase
31 Balance
15,000 $2.30 $ 34,500
15,000 2.30
40,000 2.35 128,500
40,000 $2.35 $ 94,000
11 Sale
40,000 2.45
130,000
98,000
Ending Inventory
15,000 $2.30
15,000 2.35 $ 69,750 25,000
25,000
50,000
25,000 2.35
40,000 2.40 154,750 10,000
10,000
40,000
$312,000 95,000‘
$224,500 50,000
2.35
2.35
2.40
2.40
2.40
2.45
58,750
178,750
24,000
122,000
$122,000
Check: $224,500 + $122,000 = $346,500 ($34,500 + $312,000)
(2)
Periodic
Step 1: Ending Inventory
Date
Units
Unit Cost
May 14 10,000
$2.40
May 27 40,000
2.45
50,000
Step 2: Cost of Goods Sold
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
Total Cost
$ 24,000
98,000
$122,000
$346,500
122,000
$224,500
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*PROBLEM 6-15B (CONTINUED)
(a) (continued)
Proof: Cost of Goods Sold
Unit
Total
Units
Cost
Cost
15,000
$2.30
$ 34,500
40,000
2.35
94,000
40,000
2.40
96,000
95,000
$224,500
(b)
Cost of goods sold
Ending inventory
Cost of goods available for sale
Perpetual
$224,500
122,000
$346,500
FIFO
Periodic
$224,500
122,000
$346,500
Both the periodic and perpetual systems result in the same ending
inventory and cost of goods sold under the FIFO cost formula because the
most recently purchased goods remain in inventory.
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*PROBLEM 6-16B
(a)
Note: Unrounded numbers have been used in the average cost
calculations, although the numbers have been rounded to the nearest cent
for presentation purposes. Because of this, some amounts may not appear
to multiply exactly because of the rounding in the presentation.
(1)
Date
Average Cost – Perpetual
Description
Purchases
Cost of Goods Sold
Oct. 1 Beg. inventory
9 Purchase
50 $240.00 $12,000.00
125 $260 $32,500
15 Sale
20 Purchase
175
150 $254.29 $38,142.86
55
195
$51,400 205
265.86
254.29 44,500.00
25
254.29
95
265.86 25,257.14
14,622.56
40
265.86 10,634.59
$52,765.41
40
$10,634.59
70 270 18,900
29 Sale
30 Balance
Ending Inventory
6,357.14
Check: $52,765.41 + $10,634.59 = $63,400 ($12,000 + $51,400)
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Financial Accounting, Seventh Canadian Edition
*PROBLEM 6-16B (CONTINUED)
(a)
(2)
Average Cost – Periodic
Cost of Goods Available for Sale
Date
Oct.
Explanation
Beginning inventory
Purchase
Purchase
1
9
20
Total
Ending Inventory
Date
Oct. 31
*$63,400
Unit
Total
Units
Cost
Cost
40 $258.78* $10,351.02
Units
50
125
70
245
Unit Cost
$240
260
270
Total Cost
$12,000
32,500
18,900
$63,400
Cost of Goods Sold
Cost of goods
available for sale
Less: Ending inventory
Cost of goods sold
$63,400.00
10,351.02
$53,048.98
 245 = $258.78
Proof: Cost of Goods Sold 205 × ($63,400  245) = $53,048.98
(b)
Average Cost
Perpetual
Periodic
Cost of goods sold
$52,765.41
$53,048.98
Ending inventory
Cost of goods available for sale
10,634.59
$63,400.00
10,351.02
$63,400.00
The results for the average cost formula differ depending on whether a
perpetual or periodic system is used. This is because, using a perpetual
system, the average cost is recalculated (changes) after each purchase. In
a periodic system, it is calculated only once, at the end of the period.
LO 2,6 BT: AN Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
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ACR6-1
(a)
Dec.
1
4
6
Financial Accounting, Seventh Canadian Edition
ACCOUNTING CYCLE REVIEW
Cash .................................................................
Accounts Receivable.................................
315,000
Rent Expense....................................................
Cash..........................................................
14,000
Accounts Payable .............................................
Cash..........................................................
375,000
315,000
14,000
375,000
Accounts Receivable......................................... 2,121,000
Sales .........................................................
Cost of Goods Sold (4,200 x $278)*.................. 1,167,600
Inventory ...................................................
*Dec. 1 balance ÷ Dec. 1 units =
$2,780,000 ÷ 10,000 = $278
15
18
21
Inventory (6,000 x $290) ................................... 1,740,000
Accounts Payable .....................................
Salaries Expense ..............................................
Cash..........................................................
27
1,740,000
125,000
Accounts Receivable ........................................ 4,092,000
Sales .........................................................
Advertising Expense .........................................
Cash..........................................................
1,167,600
125,000
Cost of Goods Sold ........................................... 2,250,400
Inventory (5,800* x $278) + (2,200** x $290)
* remaining units (10,000 – 4,200 Dec. 6)
** additional (8,000 – 5,800 = 2,200)
24
2,121,000
4,092,000
2,250,400
32,000
Inventory (5,000 x $300) ................................... 1,500,000
Accounts Payable .....................................
32,000
1,500,000
(b) Part (b) is combined with part (d).
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Financial Accounting, Seventh Canadian Edition
ACR6-1 (CONTINUED)
(c)
RETRO PRODUCTIONS LIMITED
Unadjusted Trial Balance
December 31, 2018
Debit
Cash
Accounts receivable
Inventory
Supplies
Prepaid rent
Equipment
Accumulated depreciation—equipment
Accounts payable
Unearned revenue
Bank loan payable—non-current
Common shares
Retained earnings
Dividends declared
Sales
Sales returns and allowances
Sales discounts
Cost of goods sold
Advertising expense
Freight out
Office expense
Rent expense
Salaries expense
Travel expense
Utilities expense
Interest expense
Income tax expense
Credit
$ 190,100
7,288,000
2,602,000
39,000
14,000
1,350,000
$ 35,625
4,095,000
96,000
1,240,000
600,000
1,239,275
120,000
22,893,000
56,000
166,800
12,592,000
437,000
980,000
78,000
168,000
3,561,000
46,000
61,000
70,000
380,000
$30,198,900
$30,198,900
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Financial Accounting, Seventh Canadian Edition
ACR6-1 (CONTINUED)
(d) Adjusting journal entries (AJE)
Dec.
31
31
31
31
31
31
Utilities Expense................................................
Accounts Payable .....................................
6,000
Salaries Expense ..............................................