Solutions to Self Study Practice

ACC1701 ACCOUNTING FOR DECISION MAKERS SEMESTER 1 2022 / 2023 SELF STUDY ANSWER SOLUTIONS This document contains solutions only to the textbook questions that have been assigned for self-study. Refer to the “Detailed Module Schedule” on Canvas for the assigned list of self-study questions. CONTENTS: CHAPTER 1 .................................................................................................................... 2 CHAPTER 2 .................................................................................................................... 4 CHAPTER 3 .................................................................................................................... 6 CHAPTER 4 .................................................................................................................. 17 CHAPTER 5 .................................................................................................................. 32 CHAPTER 6 .................................................................................................................. 36 CHAPTER 7 .................................................................................................................. 38 CHAPTER 8 .................................................................................................................. 45 CHAPTER 9 .................................................................................................................. 58 CHAPTER 10 ................................................................................................................ 61 CHAPTER 12 ................................................................................................................ 70 CHAPTER 14 ................................................................................................................ 79 CHAPTER 15 ................................................................................................................ 87 Note: Separate solutions will be provided for tutorial questions. CHAPTER 1 PE 1-5 (LO2) Users of Financial Information These groups or individuals would be interested in a firm’s financial statements for the following reasons: a. Current stockholders have already invested in the firm, and with the financial statements, they can analyze the firm’s performance and evaluate whether their investment has been a good one. b. Creditors are interested in the firm’s performance because they have loaned money to the firm. They need to review the financial statements to see if the firm is performing well enough to repay the loan. c. Management needs to see what areas of the business the firm needs to improve upon. Management can also see if the firm has met operational goals for the last period. d. Prospective stockholders need to review the financial statements to determine whether they want to invest their money in the firm. e. The tax filings made with the Internal Revenue Service are prepared using a different set of rules from those used in preparing the financial statements. However, the IRS may make a comparison between the tax filing and the financial statements to detect unusual or extreme differences suggesting the underpayment of taxes. f. The SEC ensures that financial statements have been evaluated by independent external auditors. The SEC also identifies problematic accounting areas in which the SEC staff may do additional checking. g. The firm’s major labor union would want to make sure that the employees of the firm are being treated fairly and that the company is conducting business in an appropriate manner. PE 1-17 (LO4) Why Do I Need to Know Accounting? Your friend will find that he needs accounting sooner than he thinks. He will need knowledge of accounting to complete his tax returns. He will be required to have a complete financial history should he ever elect to expand his business and need to borrow funds. He will need accounting information to determine if he is covering his costs and providing to himself a fair return. Your friend will certainly need knowledge of revenues and expenses to measure his success. In addition, he will need a record of his obligations and the amounts owed to him. Every business manager finds out rather quickly that accounting information is very valuable. AA 1-6 Nestlé Group Real Company Analysis 1. 75,078 million CHF are financed by creditors, and 52,862 million of CHF are financed by shareholders. 127,940 – 75,078 = 52,862. 2. The two major items of current assets are Trade and other receivables (11,766 million) and Inventories (9,343 million). The two major items of current liabilities are Trade and other payables (18,803 million) and Financial debt (14,032 million). CHAPTER 2 PE 2-5 (LO1) The Accounting Equation Case A $10,000 – $4,000 = $6,000 Equity Case B $8,000 – $3,500 = $4,500 Liabilities Case C $5,500 + $7,000 = $12,500 Assets Case D $13,000 – $15,000 = ($2,000) Equity Note that in this case, total equity is negative because liabilities are greater than assets. PE 2-11 (LO2) Computation of Net Income Computation of net income (or net loss): Service revenue Rent revenue Wages expense Interest expense Net income (loss) E 2-2 (LO1) Case A $100,000 5,000 (60,000) (18,000) $ 27,000 Case B $150,000 1,000 (30,000) (47,000) $ 74,000 Case D $ 200,000 10,000 (110,000) (31,000) $ 69,000 Accounting Equation Johnson Company Best Company $11,500 5,500 48,500 6,000 37,500 22,000 $ 5,800 11,000 20,200 3,500 19,000 14,500 $17,000 11,750 41,000 16,000 32,250 21,500 Cash .................................................................................................... Interest receivable .............................................................................. Accounts receivable .......................................................................... Buildings ............................................................................................. Net increase in assets .................................................................. $ 12,500 (7,500) (11,750) 157,500 $150,750 Cash ................................................................. Accounts receivable ....................................... Land.................................................................. Accounts payable............................................ Mortgage payable ............................................ Equity ............................................................... P 2-6 (LO1, LO2) 1. Case C $ 70,000 12,000 (60,000) (25,000) $ (3,000) Coury Company Expanded Accounting Equation Compute net increase in assets: 2. Compute net increase in liabilities: Accounts payable .............................................................................. Mortgage payable ............................................................................... Wages payable ................................................................................... Net increase in liabilities .............................................................. 3. Figure overall increase in equity from net increases in assets and liabilities: Net increase in assets........................................................................ Less: Net increase in liabilities ......................................................... Net increase in equity ................................................................... 4. $150,750 74,750 $ 76,000 Compute known net increase in equity: Capital stock ....................................................................................... Retained earnings (dividends paid) .................................................. Known net increase in equity ...................................................... 5. $ 22,500 87,500 (35,250) $ 74,750 $ 26,250 (25,000) $ 1,250 Net increase of $76,000 in equity resulted from changes in (1) the known net increase in equity and (2) net income. Thus, net income can be figured by: Overall net increase in equity ........................................................... Less: Known net increase in equity ................................................. Net income for 2022 ...................................................................... $ 76,000 (1,250) $ 74,750 CHAPTER 3 PE 3-16 (LO3) a. b. c. d. e. f. g. h. Journal Entries with Revenues, Expenses, and Dividends Equipment..................................................................... Accounts Payable .................................................... 260,000 Cash .............................................................................. Service Revenue ...................................................... 200,000 Wages Expense ............................................................ Cash .......................................................................... 54,000 Advertising Expense .................................................... Cash .......................................................................... 25,000 Cash .............................................................................. Accounts Receivable ................................................... Service Revenue ...................................................... 50,000 120,000 Cash .............................................................................. Accounts Receivable ............................................... 47,000 Accounts Payable ........................................................ Cash .......................................................................... 110,000 Dividends ...................................................................... Cash .......................................................................... 17,000 PE 3-18 (LO4) Beg. bal. b. e. f. End. bal. Beg. bal. a. 260,000 200,000 54,000 25,000 170,000 47,000 110,000 17,000 Posting with Revenues, Expenses, and Dividends Cash 0 200,000 Accounts Receivable 0 120,000 f. End. bal. 73,000 Beg. bal. e. c. d. 54,000 25,000 g. h. 110,000 17,000 47,000 50,000 47,000 91,000 Equipment 0 260,000 Accounts Payable Beg. bal. a. 0 260,000 End. bal. 260,000 g. 110,000 End. bal. Service Revenue Beg. bal. b. e. End. bal. 0 200,000 170,000 370,000 Beg. bal. c. End. bal. Advertising Expense Beg. bal. 0 d. 25,000 End. bal. 25,000 E 3-3 (LO2) Assets 1 2 3 4 + (Supplies) + (Cash) + (Cash) + (Land) – (Cash) + (Cash) – (Cash) – (Cash) + (Cash) + (Notes Receivable) – (Buildings) – (Cash) – (Cash) 9 10 E 3-4 (LO2) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. A OE—R A OE—E OE L OE—E OE L L OE—R Wages Expense 0 54,000 54,000 Beg. bal. h. End. bal. Dividends 0 17,000 17,000 Expanded Accounting Equation Transaction 5 6 7 8 150,000 = Liabilities + Equity + (Accounts Payable) 0 + (Notes Payable) + (Notes Payable) 0 + (Revenue) 0 0 0 0 – (Accounts Payable) 0 + (Capital Stock) – (Expense) 0 0 0 0 – (Dividends) – (Expense) Classification of Accounts 12. 13. 14. 15. 16. 17. 18. A L A A OE—E L OE—E E 3-12 (LO3) July Journal Entries 2 Cash ...................................................................... Capital Stock ................................................... Issued 80,000 shares of capital stock. 320,000 4 Equipment............................................................. Cash ................................................................. Notes Payable ................................................. Purchased equipment with 75% cash and 25% on a note payable. 100,000 320,000 75,000 25,000 5 Utilities Expense .................................................. Cash ................................................................. Paid utilities. 2,300 13 Supplies ................................................................ Cash ................................................................. Accounts Payable ........................................... Purchased supplies, 30% cash and 70% on account. 250,000 14 Insurance Expense .............................................. Cash ................................................................. Paid insurance premium. 6,000 18 Accounts Receivable ........................................... Service Revenue ............................................. Provided service on account. 81,000 20 Cash ...................................................................... Accounts Receivable ...................................... Collected accounts receivable. 8,500 24 Cash ...................................................................... Service Revenue ............................................. Provided service for cash. 43,000 2,300 75,000 175,000 6,000 81,000 8,500 43,000 27 Property Tax Expense ......................................... Cash ................................................................. Paid property taxes. 1,200 30 Accounts Payable ............................................... Cash ................................................................. Paid accounts payable. 175,000 E 3-21 (LO4) 1,200 175,000 Trial Balance Marshall, Inc. Trial Balance November 30, 2022 Cash ...................................................................................... Short-Term Investments ...................................................... Accounts Receivable ........................................................... Notes Receivable.................................................................. Land....................................................................................... Buildings ............................................................................... Equipment............................................................................. Accounts Payable ................................................................ Salaries Payable ................................................................... Notes Payable ....................................................................... Mortgage Payable................................................................. Capital Stock ........................................................................ Retained Earnings ................................................................ Service Revenue .................................................................. Advertising Expense ............................................................ Other Expenses .................................................................... Property Tax Expense.......................................................... Rent Expense ....................................................................... Salaries Expense .................................................................. Utilities Expense................................................................... Totals ............................................................................... Debit $ 35,000 15,000 125,000 20,000 125,000 150,000 55,000 Credit $ 55,000 2,000 150,000 95,000 173,000* 40,000 187,000 5,000 1,000 1,500 7,500 155,000 7,000 $702,000 $702,000 *Capital Stock is the difference between the total given credits and total debits: Total debits Total given credits Capital Stock P 3-6 (LO3, LO4) $ 702,000 (529,000) $ 173,000 Unifying Concepts: Compound Journal Entries, Posting, Trial Balance 1. (a) Cash ...................................................................... Supplies ................................................................ Land ...................................................................... Buildings ............................................................... Office Equipment ................................................. Notes Payable ................................................. Capital Stock ................................................... 30,000 2,500 20,000 165,000 13,500 (b) Cash ...................................................................... Accounts Receivable ........................................... Service Revenue ............................................. 20,000 32,000 (c) 6,000 225,000 52,000 Notes Payable ....................................................... Interest Expense .................................................. Cash ................................................................. 6,000 500 (d) Supplies ................................................................ Cash ................................................................. Notes Payable ................................................. 1,400 (e) (f) 6,500 600 800 Office Equipment ................................................. Cash ................................................................. Capital Stock ................................................... 12,000 Transportation equipment ................................... Cash ................................................................. Notes Payable ................................................. 25,000 6,000 6,000 5,000 20,000 2. Cash (a) (b) Bal. 30,000 (c) 20,000 (d) (e) (f) 31,900 (a) 20,000 Accounts Receivable 6,500 600 6,000 5,000 (b) Land Bal. Supplies (a) (d) 2,500 1,400 Bal. 3,900 Buildings (a) Office Equipment (a) (e) 32,000 13,500 12,000 165,000 Transportation Equipment (f) 25,000 Notes Payable (c) 6,000 (a) (d) (f) Bal. 25,500 Capital Stock (a) 225,000 Service Revenue (b) 52,000 6,000 800 20,000 20,800 Interest Expense (c) 500 (e) Bal. 3. 6,000 231,000 Shaw Company Trial Balance December 31, 2022 Cash .............................................................................. Accounts Receivable ................................................... Supplies ........................................................................ Land............................................................................... Buildings ....................................................................... Office Equipment ......................................................... Transportation equipment ........................................... Notes Payable ............................................................... Capital Stock ................................................................ Service Revenue .......................................................... Interest Expense .......................................................... Totals ....................................................................... P 3-7 (LO3, LO4) 1. 2022 May Debit $ 31,900 32,000 3,900 20,000 165,000 25,500 25,000 Credit $ 20,800 231,000 52,000 500 $303,800 $303,800 Unifying Concepts: Journal Entries, T-Accounts, Trial Balance 3 Accounts Payable...................................... Cash ...................................................... 3,000 6 Cash............................................................ Accounts Receivable ........................... 2,450 7 Cash............................................................ Accounts Receivable ................................ Service Revenue .................................. 3,000 2,000 15 Notes Payable ............................................ Cash ...................................................... 2,500 21 Cash............................................................ Capital Stock ........................................ 1,000 23 Cash............................................................ Service Revenue .................................. 3,750 25 Salaries Expense ....................................... Cash ...................................................... 1,000 3,000 2,450 5,000 2,500 1,000 3,750 1,000 26 Rent Expense ............................................. Cash ...................................................... 250 29 Office Equipment ....................................... Cash ...................................................... 250 250 250 2. Beg. bal. 5/6 5/7 5/21 5/23 End. bal. Cash 8,050 5/3 2,450 5/15 3,000 5/25 1,000 5/26 3,750 5/29 11,250 Accounts Receivable Beg. bal. 2,450 5/6 5/7 2,000 End. bal. 2,000 3,000 2,500 1,000 250 250 2,450 Beg. bal. 5/29 End. bal. Office Equipment 2,000 250 2,250 5/3 Accounts Payable 3,000 Beg. bal. 6,000 End. bal. 3,000 Retained Earnings Beg. bal. 5/25 3. Salaries Expense 1,000 Beg. bal. Buildings 30,000 End. bal. 30,000 5/15 Notes Payable 2,500 Beg. bal. 12,500 End. bal. 10,000 Capital Stock Beg. bal. 5/21 End. bal. 15,000 1,000 16,000 Service Revenue 5/7 5/23 End. bal. 5,000 3,750 8,750 9,000 5/26 Rent Expense 250 Chris Company Trial Balance May 31, 2022 Cash .............................................................................. Accounts Receivable ................................................... Buildings ....................................................................... Office Equipment ......................................................... Debit $ 11,250 2,000 30,000 2,250 Credit Notes Payable ............................................................... Accounts Payable ........................................................ Capital Stock ................................................................ Retained Earnings ........................................................ Service Revenue .......................................................... Salaries Expense .......................................................... Rent Expense ............................................................... Totals............................................................................. P 3-9 (LO4) $ 10,000 3,000 16,000 9,000 8,750 1,000 250 $46,750 $46,750 Correcting a Trial Balance Jacubs Company, Inc. Trial Balance November 30, 2022 Cash ...................................................................................... Accounts Receivable ........................................................... Notes Receivable.................................................................. Land....................................................................................... Buildings ............................................................................... Equipment............................................................................. Office Equipment.................................................................. Accounts Payable ................................................................ Notes Payable ....................................................................... Wages Payable ..................................................................... Mortgage Payable................................................................. Capital Stock ........................................................................ Retained Earnings ................................................................ Service Revenue .................................................................. Advertising Expense ............................................................ Wages Expense .................................................................... Rent Expense ....................................................................... Other Expenses .................................................................... Property Tax Expense.......................................................... Utilities Expense................................................................... Totals ............................................................................... Debit $ 18,700 60,450 12,000 95,850 210,700 37,900 18,000 Credit $ 23,450 198,350 12,000 75,200 110,000 21,400 125,600 10,400 87,900 8,700 2,000 1,300 2,100 $566,000 $566,000 P 3-13 (LO4) Preparing Correct Trial Balance and Statement of Comprehensive Income and Balance Sheet 1. XKQ Company Trial Balance December 31, 2022 Debit_ $ 1,200 3,000 4,500 300 18,000 Cash .......................................................................................... Accounts Receivable ................................................................ Notes Receivable....................................................................... Supplies ..................................................................................... Land ........................................................................................... Accounts Payable ..................................................................... Notes Payable ............................................................................ Capital Stock ............................................................................. Dividends ................................................................................... Service Revenue ....................................................................... Salaries Expense ....................................................................... Utilities Expense........................................................................ Total ........................................................................................... _Credit_ $ 2,000 3,000 20,000 380 12,760 10,000 380 $37,760 $37,760 2. XKQ Company Statement of Comprehensive Income For the Year Ended December 31, 2022 Service Revenue ....................................................................... Salaries Expense ....................................................................... Utilities Expense........................................................................ Net Income ................................................................................. Other Comprehensive Income ................................................. Comprehensive Income ............................................................ $12,760 $(10,000) (380) (10,380) $ 2,380 0 $2,380 3. XKQ Company Balance Sheet December 31, 2022 Assets Cash ................................... $ 1,200 Accounts Receivable ........ 3,000 Notes Receivable............... 4,500 Supplies ............................. 300 Land.................................... 18,000 Total assets .................... $27,000 Liabilities and Equity Accounts Payable ........... Notes Payable ................. Total liabilities ............. Capital Stock ................... Retained Earnings .......... Total equity.................. Total liabilities and equity Retained earnings = Net income $2,380 – Dividends $380 = $2,000 $ 2,000 3,000 $ 5,000 20,000 2,000 $22,000 $27,000 P 3-13 (LO4) Preparing Correct Trial Balance and Statement of Comprehensive Income and Balance Sheet 1. XKQ Company Trial Balance December 31, 2022 Debit_ $ 1,200 3,000 4,500 300 18,000 Cash .......................................................................................... Accounts Receivable ................................................................ Notes Receivable....................................................................... Supplies ..................................................................................... Land ........................................................................................... Accounts Payable ..................................................................... Notes Payable ............................................................................ Capital Stock ............................................................................. Dividends ................................................................................... Service Revenue ....................................................................... Salaries Expense ....................................................................... Utilities Expense........................................................................ Total ........................................................................................... _Credit_ $ 2,000 3,000 20,000 380 12,760 10,000 380 $37,760 $37,760 2. XKQ Company Statement of Comprehensive Income For the Year Ended December 31, 2022 Service Revenue ....................................................................... Salaries Expense ....................................................................... Utilities Expense........................................................................ Net Income ................................................................................. Other Comprehensive Income ................................................. Comprehensive Income ............................................................ $12,760 $(10,000) (380) (10,380) $ 2,380 0 $2,380 3. XKQ Company Balance Sheet December 31, 2022 Assets Cash ................................... $ 1,200 Accounts Receivable ........ 3,000 Notes Receivable............... 4,500 Liabilities and Equity Accounts Payable ........... Notes Payable ................. Total liabilities ............. $ 2,000 3,000 $ 5,000 Supplies ............................. 300 Land.................................... 18,000 Total assets .................... $27,000 Capital Stock ................... Retained Earnings .......... Total equity.................. Total liabilities and equity 20,000 2,000 $22,000 $27,000 Retained earnings = Net income $2,380 – Dividends $380 = $2,000 AA 3-7 ASUSTek Computer Inc. International 1. Cash (Accounts Receivable) Revenue Cost of sales Inventory *In billions of NTD. 2. Payment Date Cash Dividends Payable Cash † In millions of NTD. 351* 351 298 298 11,141 † 11,141 Note: When ASUS declared cash dividends, the journal entries are: Dividends (or Retained Earnings) Cash Dividends Payable 11,141 11,141 CHAPTER 4 PE 4-10 (LO2) Prepaid Expense: Original Entry Aug. 1 Prepaid Insurance ................................................ Cash ................................................................. PE 4-11 (LO2) 1. Dec. 86,400 86,400 Prepaid Expense: Adjusting Entry 31 Insurance Expense .................................... Prepaid Insurance ................................. 9,000 9,000 $86,400÷ 48 months = $1,800 per month. $1,800  5 months = $9,000 insurance used up; 5 months from August 1 through December 31. 2. PREPAID INSURANCE Debit (+) Beg. bal. Aug. 1 Credit (–) 0 86,400 Dec. 31 End. bal. Adj. 9,000 77,400 The $77,400 ending balance represents another 43 months of insurance coverage (43  $1,800 = $77,400). PE 4-12 (LO2) Apr. 1 Cash ...................................................................... Unearned Security Revenue .......................... PE 4-13 (LO2) 1. Unearned Revenue: Original Entry Dec. 270,000 270,000 Unearned Revenue: Adjusting Entry 31 Unearned Security Revenue ..................... Security Revenue .................................. $270,000 ÷ 36 months = $7,500 per month. $7,500  9 months = $67,500 security revenue earned; 9 months from April 1 through December 31. 2. UNEARNED SECURITY REVENUE Debit (–) Credit (+) 67,500 67,500 Dec. 31 Adj. Beg. bal. Apr. 1 0 270,000 End. bal. 202,500 67,500 The $202,500 ending balance represents another 27 months of revenue not yet earned (27  $7,500 = $202,500). PE 4-16 (LO3) 1. Preparing an Adjusted Trial Balance a. Dec. 31 Interest Receivable ............................................ Interest Revenue .......................................... 9,240 9,240 $144,000  0.11  7/12 = $9,240; 7 months elapse from June 1 through December 31. b. Dec. 31 Unearned Fee Revenue ..................................... Fee Revenue ................................................. 68,750 68,750 $225,000 ÷ 36 months = $6,250 per month. $6,250  11 months = $68,750 fee revenue earned; 11 months from February 1 through December 31. c. Dec. 31 Rent Expense........................................... Prepaid Rent ................................................. 9,600 9,600 $192,000 ÷ 60 months = $3,200 per month. $3,200  3 months = $9,600 prepaid rent used up; 3 months from October 1 through December 31. d. Dec. 31 Wages Expense.................................................. Wages Payable ............................................. 17,000 17,000 2. Cash .............................................................................. Notes Receivable ......................................................... Interest Receivable ...................................................... Prepaid Rent ($192,000 – $9,600) ................................ Land............................................................................... Accounts Payable ........................................................ Wages Payable ............................................................. Unearned Fee Revenue ($225,000 – $68,750) ............ Capital Stock ................................................................ Retained Earnings ........................................................ Dividends ...................................................................... Fee Revenue ($257,000 + $68,750) .............................. Interest Revenue .......................................................... Wages Expense ($229,000 + $17,000) ......................... Debit $ 87,000 144,000 9,240 182,400 210,000 Credit $165,000 17,000 156,250 200,000 90,000 22,000 325,750 9,240 246,000 Utilities Expense .......................................................... Rent Expense ............................................................... Totals ....................................................................... PE 4-17 (LO3) 53,000 9,600 $963,240 Using an Adjusted Trial Balance to Prepare a Statement of Comprehensive Income Fee revenue .......................................................................... Interest revenue ................................................................... Total revenue ........................................................................ Expenses: Wages expense ............................................................... Utilities expense.............................................................. Rent expense................................................................... Net income ............................................................................ Other comprehensive income ............................................. Comprehensive income ....................................................... PE 4-18 (LO3) $963,240 $325,750 9,240 $334,990 $246,000 53,000 9,600 308,600 $ 26,390 0 $ 26,390 Using an Adjusted Trial Balance to Prepare a Balance Sheet Assets Cash ............................................................................................................ Notes receivable ......................................................................................... Interest receivable ...................................................................................... Prepaid rent ................................................................................................ Land............................................................................................................. Total assets ........................................................................................... $ 87,000 144,000 9,240 182,400 210,000 $632,640 Liabilities and Equity Accounts payable....................................................................................... Wages payable ........................................................................................... Unearned fee revenue ................................................................................ Capital stock ............................................................................................... Retained earnings ...................................................................................... Total liabilities and equity .................................................................... $165,000 17,000 156,250 200,000 94,390* $632,640 *Beginning retained earnings $90,000 + Net income $26,390 (see PE 4-17) – Dividends $22,000 = $94,390. E 4-5 (LO2) 1. Adjusting Entries: Prepaid Expenses and Unearned Revenues Original entry Prepaid Insurance.............................................................. Cash............................................................................... 5,400 5,400 Adjusting entry Insurance Expense ............................................................ Prepaid Insurance ........................................................ ($5,400/3 years = $1,800 per year; $1,800 year  1/2 year = $900) 2. Original entry Prepaid Property Taxes ..................................................... Cash............................................................................... Adjusting entry Property Tax Expense ....................................................... Prepaid Property Taxes ............................................... ($2,400/12 months = $200 per month; $200  11 months = $2,200) 3. Original entry Prepaid Subscriptions ....................................................... Cash............................................................................... Adjusting entry Subscription Expense ....................................................... Prepaid Subscriptions ................................................. ($360/36 months = $10 per month; $10  8 months = $80) 4. Original entry Cash .................................................................................... Unearned Consulting Fees Revenue .......................... Adjusting entry Unearned Consulting Fees Revenue ............................... Consulting Fees Revenue ............................................ ($3,600/18 months = $200 per month; $200 per month  3.5 months = $700) 5. Original entry Cash .................................................................................... Unearned Rent Revenue .............................................. Adjusting entry Unearned Rent Revenue ......................................................... Rent Revenue................................................................ ($900/6 months = $150 per month; $150  2 months = $300) 6. Original entry Cash .................................................................................... 900 900 2,400 2,400 2,200 2,200 360 360 80 80 3,600 3,600 700 700 900 900 300 300 14,400 Unearned Interest Revenue ......................................... Adjusting entry Unearned Interest Revenue .............................................. Interest Revenue........................................................... ($14,400/24 months = $600 per month; $600  2 months = $1,200) E 4-6 (LO2) 1. Original entry Mar. 15 Cash ......................................................................... Unearned Consulting Fees ............................... Original entry Apr. 1 Prepaid Subscriptions ............................................ Cash .................................................................... Adjusting entry Dec. 31 Subscription Expense ............................................. Prepaid Subscriptions ....................................... ($285/24 months = $11.88 per month; $11.88  9 months = $107) 3. Original entry May 1 Prepaid Property Taxes .......................................... Cash .................................................................... Adjusting entry Dec. 31 Property Tax Expense ............................................. Prepaid Property Taxes ..................................... ($7,500/12 months = $625 per month; $625  8 months = $5,000) 4. 1,200 1,200 Adjusting Entries: Prepaid Expenses and Unearned Revenues Adjusting entry Dec. 31 Unearned Consulting Fees ..................................... Consulting Fees Revenue ................................. ($54,000/18 months = $3,000 per month; $3,000  9.5 months = $28,500) 2. 14,400 Original entry Aug. 1 Cash ......................................................................... Unearned Rent ................................................... Adjusting entry Dec. 31 Unearned Rent ......................................................... Rent Revenue ..................................................... ($3,350/6 months = $558.33 per month; $558.33  5 months = $2,792) 54,000 54,000 28,500 28,500 285 285 107 107 7,500 7,500 5,000 5,000 3,350 3,350 2,792 2,792 5. Original entry Sept. 1 Prepaid Insurance ................................................... Cash .................................................................... Adjusting entry Dec. 31 Insurance Expense .................................................. Prepaid Insurance .............................................. ($30,000/24 months = $1,250 per month; $1,250  4 months = $5,000) 6. Original entry Oct. 1 Cash ......................................................................... Unearned Interest Revenue .............................. Adjusting entry Dec. 31 Unearned Interest Revenue .................................... Interest Revenue ................................................ ($13,300/12 months = $1,108.33 per month; $1,108.33  3 months = $3,325) 30,000 30,000 5,000 5,000 13,300 13,300 3,325 3,325 E 4-7 (LO2) 1. Adjusting Entries June 1 Cash ......................................................................... Unearned Subscription Revenue ..................... To record receipt of two-year subscription. 4,800 4,800 Dec. 31 Unearned Subscription Revenue ........................... 1,400 Subscription Revenue ....................................... To record seven months of revenue earned. ($4,800/24 months = $200 per month; $200  7 months = $1,400) 2. a. Dec. 31 Salaries Expense ............................................... Salaries Payable ........................................... To record salaries payable for two days. ($180,000  2/5 = $72,000) b. Jan. 1,400 72,000 72,000 3 Salaries Payable ................................................. 72,000 Salaries Expense ............................................... 108,000 Cash............................................................... 180,000 To record payment of salaries for the week. ($180,000 3/5 = $108,000) E 4-9 (LO2) 1. 2. Adjusting Entries Feb. 1 Prepaid Rent ............................................................ Cash .................................................................... To record prepayment of rent for one year. 24,000 Dec. 31 Rent Expense........................................................... Prepaid Rent....................................................... To record rent expense for 11 months. ($24,000  11/12 = $22,000) 22,000 Mar. 31 Cash ......................................................................... Notes Payable .................................................... To record $50,000, 15%, one-year loan. 50,000 Dec. 31 Interest Expense ...................................................... Interest Payable ................................................. To record interest expense for nine months. ($50,000  0.15  9/12 = $5,625) 3. 24,000 22,000 50,000 5,625 Recorded upon receipt ........................................................... Cash ....................................................................... 60,000 Unearned Design Revenue ............................... To record receipt of design fees in advance. 5,625 60,000 4. 5. Dec. 31 Unearned Design Revenue ..................................... Design Revenue ................................................. To record design revenue earned. [$60,000  (1 – 0.40) = $36,000] 36,000 June 15 Supplies ................................................................... Cash .................................................................... To record purchase of supplies. 1,400 Sept. 14 Supplies ................................................................... Cash .................................................................... To record purchase of supplies. 1,100 Dec. 31 Supplies Expense .................................................... Supplies .............................................................. To record supplies used during the period. 1,700 Dec. 31 Programming Expense ........................................... Accounts Payable .............................................. To record programming expense. 800 36,000 1,400 1,100 1,700 E 4-13 (LO2) Identifying Types of Adjustments and Account Relationships Item (a) Type of Adjustment (b) Accounts before Adjustment 1. Accrued Revenues Assets Understated Revenues Understated 2. Prepaid Expenses Assets Overstated Expenses Understated 3. Accrued Expenses Expenses Understated Liabilities Understated 4. Unearned Revenues Liabilities Overstated Revenues Understated 5. Accrued Expenses Expenses Understated Liabilities Understated 6. Prepaid Expenses Assets Overstated Expenses Understated 800 E 4-19 (LO4) Closing Dividends and Preparing a Post-Closing Trial Balance 1. December 31 Retained Earnings ............................................................ Dividends ................................................................. 2. 55,000 55,000 Contemporary Literature Enterprises Post-Closing Trial Balance December 31, 2022 Cash .............................................................................. Accounts Receivable ................................................... Prepaid Insurance ........................................................ Land............................................................................... Accounts Payable ........................................................ Notes Payable ............................................................... Salaries Payable ........................................................... Taxes Payable .............................................................. Unearned Rent .............................................................. Mortgage Payable ........................................................ Capital Stock ................................................................ Retained Earnings ........................................................ Totals ....................................................................... Debit $ 63,710 154,230 10,070 430,800 $658,810 Credit $ 68,540 92,000 27,100 36,990 18,400 190,500 130,000 95,280* $658,810 *$150,280 – $55,000 = $95,280 P 4-2 (LO2) Adjusting Entries a. December 31 Salaries Expense ......................................................................... Salaries Payable ................................................................ b. December 31 Interest Expense.......................................................................... Interest Payable ................................................................. ($190,000  0.11  3/12 year = $5,225) 17,840 17,840 5,225 c. December 31 Rent Expense ............................................................................. 6,000 Prepaid Rent....................................................................... ($36,000/6 months = $6,000; $6,000  1 month = $6,000) 5,225 6,000 d. December 31 Unearned Rent Revenue.............................................................. Rent Revenue ..................................................................... ($76,000 – $42,100 = $33,900) 33,900 33,900 e. December 31 Insurance Expense ...................................................................... Prepaid Insurance.............................................................. 2,400 f. December 31 Interest Receivable ...................................................................... Interest Revenue ................................................................ 400 2,400 400 P 4-3 (LO2) Adjusting Entries a. December 31 Interest Expense .......................................................................... Interest Payable ................................................................. ($320,000  0.09  4/12 = $9,600) b. December 31 Unearned Rent Revenue.............................................................. Rent Revenue ..................................................................... ($93,500 – $42,250 = $51,250) c. December 31 Interest Receivable ...................................................................... Interest Revenue ................................................................ d. December 31 Insurance Expense ...................................................................... Prepaid Insurance.............................................................. e. December 31 Rent Expense ............................................................................... Prepaid Rent....................................................................... ($30,000/6 months = $5,000 per month; $5,000  1 1/2 months = $7,500) f. December 31 Salaries Expense ......................................................................... Salaries Payable ................................................................ 9,600 9,600 51,250 51,250 9,450 9,450 4,960 4,960 7,500 7,500 15,300 15,300 P 4-7 (LO4) Closing Entries 1. December 31 Retained Earnings ............................................................ Service Revenue .......................................................... Salaries Expense .................................................... Interest Expense ..................................................... Office Supplies Expense ........................................ Insurance Expense ................................................. Property Tax Expense ............................................ 2. December 31 Retained Earnings ............................................................ Dividends ................................................................. P 4-10 (LO2, 3) 16,400 178,000 144,000 10,500 7,640 9,860 22,400 36,000 36,000 Unifying Concepts: Adjusting Entries December 31 Rent Expense ....................................................................... Prepaid Rent .................................................................... 15,000 15,000 Insurance Expense............................................................... Prepaid Insurance ........................................................ 4,000 Salaries Expense .................................................................. Salaries Payable ........................................................... 12,000 Income Tax Expense ........................................................... Income Tax Payable ..................................................... 1,200 Interest Expense.................................................................. Interest Payable ............................................................ 800 P 4-11 (LO4) 4,000 12,000 1,200 800 Unifying Concepts: Closing Entries December 31 Service Revenue .................................................................. Salaries Expense .............................................................. Rent Expense ................................................................... Insurance Expense .......................................................... Interest Expense .............................................................. Income Tax Expense ........................................................ Retained Earnings ............................................................ 250,000 192,000 37,000 5,200 1,700 6,000 8,100 P 4-12 (LO2, LO4) Unifying Concepts: Adjusting and Closing Entries 1. 2. Supplies Expense ........................................................ Supplies .................................................................. 1,300 Rent Expense ............................................................... Prepaid Rent ............................................................ 10,000 Insurance Expense ...................................................... Prepaid Insurance ................................................... 885 Wages Expense ............................................................ Wages Payable ........................................................ 5,700 Income Tax Expense .................................................... Income Taxes Payable............................................ 580 Interest Expense .......................................................... Interest Payable ...................................................... 600 Consulting Fees Earned .............................................. Wages Expense....................................................... Rent Expense .......................................................... Interest Expense ..................................................... Insurance Expense ................................................. Supplies Expenses ................................................. Income Tax Expense .............................................. Retained Earnings .................................................. 142,380 P 4-15 (LO5) 1. (a) 1,300 10,000 885 5,700 580 600 98,035 10,000 4,100 1,470 5,665 3,350 19,760 Unifying Concepts: The Accounting Cycle Land ...................................................................... Accounts Payable ........................................... 80,000 (b) Cash ...................................................................... Capital Stock ................................................... 10,000 (c) 80,000 10,000 Cash ...................................................................... Accounts Receivable ........................................... Service Revenue ............................................. 80,000 100,000 (d) Notes Payable ....................................................... Interest Expense .................................................. Cash ................................................................. 35,000 7,000 (e) Cash ...................................................................... Accounts Receivable ...................................... 180,000 42,000 105,000 105,000 (f) 2. Accounts Payable ................................................ Cash ................................................................. 95,000 (g) Salaries Expense .................................................. Cash ................................................................. 30,000 (h) Dividends .............................................................. Cash ................................................................. 10,000 95,000 30,000 10,000 Entries (a) through (h) are derived from the solution to requirement 2. Closing entries (i) and (j) are derived from requirement 4. Cash Beg. bal. (b) (c) (e) Updated bal. 15,000 10,000 80,000 105,000 33,000 Beg. bal. (a) Updated bal. 180,000 80,000 260,000 (d) (f) (g) (h) Accounts Receivable 42,000 95,000 30,000 10,000 Beg. bal. (c) Updated bal. 20,000 (e) 100,000 105,000 15,000 Land Accounts Payable (f) 95,000 Beg. bal. (a) Updated bal. Notes Payable 25,000 80,000 10,000 (d) 125,000 10,000 135,000 (j) 10,000 (i) Capital Stock Beg. bal. (b) Updated bal. 10,000 (j) 0 7,000 (i) 0 10,000 Beg. bal. (i) Updated bal. 30,000 143,000 163,000 Service Revenue Interest Expense (d) Updated bal. 35,000 0 Retained Earnings Dividends (h) Updated bal. 35,000 Beg. bal. Updated bal. 180,000 (c) Updated bal. 180,000 0 Salaries Expense 7,000 (g) Updated bal. 30,000 (i) 0 30,000 3. Anderson Company Statement of Comprehensive Income For the Year Ended December 31, 2022 Service revenue ............................................................ Expenses: Salaries expense ..................................................... Interest expense...................................................... Net income .................................................................... 143,000 Other comprehensive income ..................................... Comprehensive income ............................................... 143,000 $180,000 $30,000 7,000 37,000 $ 0 $ Anderson Company Balance Sheet December 31, 2022 Assets Cash .................................................................................................... Accounts receivable .......................................................................... Land..................................................................................................... Total assets ................................................................................... Liabilities and Equity Liabilities: Accounts payable ......................................................................... Equity: Capital stock ................................................................................. Retained earnings ......................................................................... Total equity .............................................................................. Total liabilities and equity ............................................................ $ 33,000 15,000 260,000 $308,000 $ 10,000 $135,000 163,000* $298,000 $308,000 *See statement of retained earnings. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 30 of 97 Anderson Company Statement of Retained Earnings For the Year Ended December 31, 2022 Retained earnings (January 1) .......................................................... Add: Net income for 2022 .................................................................. Less: Dividends for 2022 ................................................................... Retained earnings (December 31) .................................................... 4. (i) Service Revenue ..................................................... Salaries Expense ............................................ Interest Expense ............................................. Retained Earnings .......................................... 180,000 (j) Retained Earnings .................................................. Dividends......................................................... 10,000 5. $30,000 143,000 $173,000 10,000 $163,000 30,000 7,000 143,000 10,000 Anderson Company Post-Closing Trial Balance December 31, 2022 Cash .............................................................................. Accounts Receivable ................................................... Land............................................................................... Accounts Payable ........................................................ Capital Stock ................................................................ Retained Earnings ........................................................ Totals $308,000 ACC 1701 (AY2223 Sem1) Self Study Solutions Debit $ 33,000 15,000 260,000 Credit $ 10,000 135,000 163,000 $308,000 Page 31 of 97 CHAPTER 5 E 5-1 (LO1) Accounting Errors––Transaction Errors a. The asset account Equipment—Truck is understated by the cost of the truck. Maintenance Expense is overstated by the same amount. In the basic accounting equation, Assets and Equity are each understated. The overstated expense results in an understatement of income. b. Cash is understated and Accounts Receivable is overstated. The accounting equation is not affected because both accounts are assets. Because no revenue or expense accounts are affected, income is not affected. c. Accounts Receivable is overstated by the amount of the fictitious sales. Sales Revenue is also overstated by the same amount. In the accounting equation, Assets and Equity are both overstated. Because the revenue account is overstated, so is income. d. Both Repairs Expense and Accounts Payable are understated by $300. In the accounting equation, Liabilities are understated and Equity is overstated. Income is overstated by $300 because of the expense understatement. e. Unearned Revenue, a liability account, is understated by the amount of the prepayment received on December 31. Rent Revenue is overstated. In the accounting equation, Liabilities are understated and Equity is overstated. Income is overstated because of the revenue overstatement. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 32 of 97 E 5-2 (LO1) Errors in Financial Statements Balance Sheet Assets Cash ............................................................................................................ $ 1,300 Real estate properties (previously listed) ................................................ 6,000,000 Property recorded as sold* ....................................................................... 1,800,000 Total assets ........................................................................................ $ 7,801,300 Liabilities Accounts payable....................................................................................... $ 100,000 Mortgage payable ....................................................................................... 6,000,000 Total liabilities .................................................................................... $ 6,100,000 Equity Capital stock ............................................................................................... $ 10,000 Retained earnings ($5,071,300 – $3,380,000) ........................................... 1,691,300 Total Equity......................................................................................... $ 1,701,300 Total liabilities and Equity ................................................................. $ 7,801,300 *$5,000,000 (sales price) – $3,200,000 (gain on sale) = $1,800,000 (property value) Statement of Comprehensive Income Revenues .................................................................................................... $ 0 Expenses .................................................................................................... 1,200,000 Net loss ....................................................................................................... $(1,200,000) Other comprehensive income ................................................................... 0 Comprehensive loss .................................................................................. $(1,200,000) Note: This is a real case where massive fraud was committed. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 33 of 97 E 5-4 (LO2) Internal Control Procedures a. Authorization. The managers of the stores should follow the authorization policy and review all requests for large amounts of credit. b. Segregation of duties and independent checks on performance. The bank reconciliation should be performed by a second individual, preferably someone not in the accounting department. c. Segregation of duties. Various functions should be assigned to different people. If the record keeping and physical handling of inventory were performed by two separate individuals, the opportunity for theft would be greatly reduced. d. Adequate documents and records. A well-designed document should be formatted so that it can be handled quickly and efficiently. AA 5-3 Income Smoothing and an IPO Discussion Over the past three years, Clark Company has had a more stable, predictable earnings series. As a result, an analyst would typically feel more comfortable making a forecast about sustainable future earnings for Clark Company than for Durfee Company. The earnings series makes Durfee Company appear to be a more volatile and risky investment. Thus, in the absence of any conflicting evidence, an investor would probably be willing to pay more for a share of Clark Company than for a share of Durfee Company. From the chapter, we know that it is possible for a company to time its transactions and use adjustments in accounting estimates to smooth the reported amount of earnings from one year to the next. An analyst would want to look at the reported operating cash flow numbers for these two companies to see if the underlying cash-flow-generating ability of Clark Company is as stable as its apparent earnings-generating ability. An analyst would also want to carefully look at the notes to Clark’s financial statements for the past three years to see if any accounting changes have been made that might have contributed to the smooth earnings stream. Also, an analyst would like to see the quarterly earnings amounts; one would be suspicious of Clark’s reported annual amounts if the quarterly earnings in the first three quarters were widely variable but the fourth quarter results consistently led to steady overall income growth for the year. Finally, an analyst would like to get a sense for the character of the managers of both companies. For example, if the managers of Clark Company are people of high personal integrity, the analyst can place a lot more reliance on the smooth reported earnings series. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 34 of 97 AA 5-8 Philips Real Company Analysis 1. a. Philips’ external auditor is Ernst & Young Accountants LLP (EY), a large international accounting firm. b. EY completed the Philips audit for the fiscal year ended December 31, 2019, on February 25, 2020. Completion of the audit took 56 days. This was possible because all audit firms perform substantial tests on an ongoing basis throughout the year. 2. a. Philips’ management is responsible for Philips’ financial statements. This is an important point. The financial statements are not the responsibility of the external auditor; the external auditor is hired merely to verify the work of Wal-Mart in preparing the financial statements. b. The paragraph on internal control says that Philips’ system of internal control is “a process designed to provide reasonable assurance” that transactions are properly recorded and that assets are safeguarded. As with any other system within a business, the system of internal control must meet a cost/benefit test. The interesting implication is that the appropriate amount of theft and fraud within a business is not zero because it simply costs too much to establish controls that will always safeguard all assets completely. AA 5-9 Philips Real Company Analysis The key audit matters in the 2019 audit report includes (1) Revenue recognition – sales contracts with separately identifiable performance obligations or sales promotions; (2) Valuation of Goodwill; and (3) Valuation and disclosure of accrual estimates for legal claims, litigations and contingencies. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 35 of 97 CHAPTER 6 PE 6-4 (LO3) Petty Cash Fund $10,000 – $4,400 – $1,810 – $2,050 – X = $490 X = $1,250 PE 6-5 (LO4) Bank Reconciliation $268,500 + $38,500 – $40,000 + $8,400 + $550 = $275,950 PE 6-6 (LO4) Bank Reconciliation $268,500 + $38,500 – $40,000 = $267,000 Alternatively, $275,950 – $8,400 –$550 = $267,000 PE 6-7 (LO4) Journalizing Entries from a Bank Reconciliation Bank Charges…………………………………………………. Cash…………………………………………………………… E 6-2 (LO2) 8,950 Internal Control of Cash Procedure a. violates the principle of segregation of duties. The two roles should be served by two individuals. Procedure c. will delay the detection of possible irregularities. It should be prepared at least once a month. Procedure d. exposes the company to the risk of theft. Cash receipts in a day should be deposited to banks on the same day. E 6-10 (LO4) Preparing a Bank Reconciliation Bend Company Bank Reconciliation January 31, 2022 Balance per bank statement ..... $204,008 Additions to bank balance: Check in error ............................ 6,987 Deposits in transit ..................... 33,442 Total ...................................... $244,437 ACC 1701 (AY2223 Sem1) Self Study Solutions Balance per books .................. $228,909 Additions to book balance: Interest earned ........................ 110 Total ................................... $229,019 Page 36 of 97 Deductions from bank balance: Outstanding checks .................. (19,582) Adjusted bank balance .............. $224,855 E 6-11 (LO4) Preparing a Bank Reconciliation 1. Derma Corporation Bank Reconciliation December 31, 2022 Balance per bank statement ..... Additions to bank balance: Deposits in transit ..................... Bank error .................................. Total ...................................... Deductions from bank balance: Outstanding checks .................. $87,450 Adjusted bank balance .............. $84,250 2. Deductions from book balance: Service charges ...................... (64) NSF check ............................... (4,100) Adjusted book balance ........... $224,855 5,000 1,000 $93,450 (9,200) Balance per books .................. $81,200 Additions to book balance: Rent collected ......................... 1,000 Note collected ......................... 2,300 Total ................................... $84,500 Deductions from book balance: NSF check returned ................ (200) Service charges ...................... (50) Adjusted book balance ........... $84,250 Cash ......................................................................................... Accounts Receivable .............................................................. Service Charge Expenses ...................................................... Rent Revenue ..................................................................... Notes Receivable ............................................................... Interest Revenue ................................................................ To record adjustments per the December bank reconciliation. ACC 1701 (AY2223 Sem1) Self Study Solutions 3,050 200 50 1,000 2,000 300 Page 37 of 97 CHAPTER 7 PE 7-5 (LO3) Estimating Uncollectible Accounts Receivable Using Aging Accounts Receivable Estimate of Losses from Uncollectible Accounts Percentage Estimated Age Balances to Be Uncollectible Current $16,450 1.75% 1–30 days past due 8,150 6 31–60 days past due 7,150 15 61–90 days past due 900 35 91–120 day past due 2,000 65 Over 120 days past due 4,000 90 Totals $38,650 1. Amount $ 288 489 1,073 315 1,300 3,600 $7,065 The $7,065 represents the receivables that are likely to be uncollectible. We need to adjust the allowance account to this balance with the following entry: Expected Credit Loss................................................... Loss Allowance ....................................................... 5,065 5,065 To adjust the allowance account to the desired ending balance: $7,065 – $2,000 = $5,065 2. Expected Credit Loss................................................... Loss Allowance ....................................................... 10,665 10,665 To adjust the allowance account to the desired ending balance: $7,065 + $3,600 = $10,665 PE 7-7 (LO4) A/R Turnover = PE 7-8 (LO4) Accounts Receivable Turnover Sales Revenue $520,000 = = 10.40 Average Accounts Receivable [($46,000 + $54,000)/2] Average Collection Period Average Collection Period = 365 365 = = 35.1 days Accounts Receivable Turnover 10.40* *The accounts receivable turnover of 10.40 was calculated in PE 7-7 by dividing sales by the average accounts receivable. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 38 of 97 PE 7-9 (LO5) Recording Notes Receivable May 1 Notes Receivable .................................................................. Sales Revenue ................................................................. PE 7-10 (LO5) E 7-6 (LO3)      8,500 Recording Notes Receivable June 30 Cash ..................................................................................... Notes Receivable ............................................................ Interest Revenue (€8,500  10%  60/360) ..................... 0.5% 3.0% 16.0% 52.5% 92.0% 8,500 8,642 8,500 142 Aging of Accounts Receivable $720,000 $395,000 $105,000 $52,000 $13,000 Balance needed Prior balance Adjustment needed = = = = = $ 3,600 11,850 16,800 27,300 11,960 $71,510 $71,510 42,000 $29,510 Journal Entry Expected Credit Loss ........................................................... Loss Allowance ............................................................... To record the expected credit loss. E 7-8 (LO4) 1. 29,510 29,510 Ratio Analysis Accounts Receivable Turnover Formula Year 3 Year 2 Sales Revenue $3,700 Average Accounts Receivable ($1,400 + $1,800)/2 $3,875 ($1,800 + $1,725)/2 2.3 times 2.2 times $17,825 ($5,525 + $5,800)/2 $16,549 ($5,800 + $6,205)/2 3.1 times 2.8 times Parker Enterprises, Inc. Boulder, Inc. Sales Revenue Average Accounts Receivable ACC 1701 (AY2223 Sem1) Self Study Solutions Page 39 of 97 Average Collection Period 2. Parker Enterprises, Inc. 365 ÷ 2.3 = 159 days 365 ÷ 2.2 = 166 days Boulder, Inc. 365 ÷ 3.1 = 118 days 365 ÷ 2.8 = 130 days Boulder, Inc., appears to have the better credit management policy. Its turnover is higher, and its average collection period is shorter than Parker's. E 7-14 (LO5) Recording Notes Receivable 1. Apr. 1 Notes Receivable ............................................................... 1,000,000 Cash ............................................................................... 1,000,000 2. Oct. 1 3. Oct. 1 Accounts Receivable ........................................................ 1,060,000 Notes Receivable ..................................................... 1,000,000 Interest Revenue...................................................... 60,000 Accounts Receivable ........................................................ 1,060,000 Notes Receivable ..................................................... 1,000,000 Interest Revenue...................................................... 60,000 Oct. 1 Loss Allowance ................................................................. 1,060,000 Accounts Receivable .............................................. 1,060,000 P 7-1 (LO3) Accounting for Accounts Receivable 1. Journal entries for transactions in 2022. Accounts Receivable ......................................................... 4,200,000 Sales Revenue .............................................................. 4,200,000 To record 2022 sales. Cash .................................................................................... 3,680,000 Accounts Receivable .................................................... 3,680,000 To recognize collections of receivables. Loss Allowance .................................................................. Accounts Receivable .................................................... To write off uncollectible accounts receivable. 18,800 18,800 To be complete, the journal entries for the sales transaction should also include: ACC 1701 (AY2223 Sem1) Self Study Solutions Page 40 of 97 Cost of Goods Sold Inventory XXX XXX (For the beginners, this point will be clearer after learning Chapter 8.) 2. Ending balance of accounts receivable on 12/31/2022 is $1,141,200. Accounts Receivable 640,000 Collections in 2022 4,200,000 Write-off in 2022 1/1 Credit sales in 2022 12/31 balance 3,680,000 18,800 1,141,200 Loss Allowance 18,800 1/1 12/31 adjusting Write-off in 2022 12/31 balance (given) 3. Adjusting entries on 12/31/2022. Expected Credit Loss ................................................ 41,800 Loss Allowance……………………………… 20,600 41,800 43,600 41,800 20,600 – 18,800 + X = 43,600 X = 41,800 P 7-5 (LO3) Unifying Concepts: Aging of Accounts Receivable and Uncollectible Accounts 1. Dec.31, 2021 Expected Credit Loss ............................................................... Loss Allowance .................................................................. To adjust the allowance account to desired balance.* *$105,600 $31,400 $14,200 $3,600 $900      0.5% 3% 4.5% 8% 10% = = = = = 1,387 1,387 $ 528.00 942.00 639.00 288.00 90.00 $2,487.00 Total estimated uncollectible receivables (1,100.00) Previous balance $ 1,387.00 Net addition to account 2. Feb. 14, 2022 Loss Allowance .......................................................................... 89 Accounts Receivable ......................................................... To write off the uncollectible account of Shannon Johnson. ACC 1701 (AY2223 Sem1) Self Study Solutions 89 Page 41 of 97 3. Jun.29, 2022 Accounts Receivable ................................................................. Loss Allowance .................................................................. To reinstate account balance previously written off. Cash ......................................................................................... Accounts Receivable ......................................................... Received payment in full from Shannon Johnson of an amount previously written off as uncollectible. 4. Dec. 31, 2021 Expected Credit Loss ............................................................... Loss Allowance .................................................................. To adjust the allowance account to desired balance.* *Balance from aging ................................ Deficit balance in account ..................... Total entry needed ............................. P 7-6 (LO3) 1. 2. 3. 89 89 89 89 3,587 3,587 $2,487 1,100 $3,587 The Aging Method Category Amount Percentage Less than 30 days 31–60 days 61–90 days Over 90 days Total $294,000 66,000 10,000 15,000 1% 5 30 90 Expected Credit Loss .............................................................. Loss Allowance .................................................................. To adjust the loss allowance to the appropriate ending balance [$22,740 + $16,500 (write-offs) – $20,000 (beginning) = $19,240]. Total $ 2,940 3,300 3,000 13,500 $22,740 19,240 19,240 The net accounts receivable balance as of December 31 is $362,260 ($385,000 – $22,740). ACC 1701 (AY2223 Sem1) Self Study Solutions Page 42 of 97 AA 3-6 Samsung There is a typo in the textbook for question AA 3-6. The Korean Won should be in billion of dollars instead of million of won. billions This information has been re-verified against the actual 1997 annual report of Samsung. (see below extract from the actual 1997 Income Statement). The updated solution to this question is as follows: 1. Net sales in billions of Korean won ..................... Exchange rate (end of year) ................................. Net sales in billions of U.S. dollars...................... 1997 1996 91,519 1,695 54.0 74,641 845 88.3 Because of the drastic decline in the value of the won during 1997, Samsung’s sales, in terms of U.S. dollars, actually declined in 1997. A more accurate conversion from won to dollars could be made if the average exchange rate for the year were used instead of the end-of-year exchange rate. 2. 1996 Average collection period 1997 Average collection period ACC 1701 (AY2223 Sem1) Self Study Solutions = = = = = = 365/(Sales/Accounts Receivable) 365/(74,641/6,233) 30.5 days 365/(Sales/Accounts Receivable) 365/(91,519/10,064) 40.1 days Page 43 of 97 3. The lengthening of the average collection period in 1997 is consistent with the belief that Samsung's Asian customers suffered from the economic crisis during that period and were accordingly slower in paying their bills. 4. It is also likely that Samsung's accounts payable balance increased in 1997 as it attempted to manage its cash flow by lengthening its own payment period to its suppliers. And, in fact, Samsung's accounts payable balance increased by 50% in 1997. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 44 of 97 CHAPTER 8 PE 8-5 (LO2) Inventory Purchases (1). and (2). Perpetual Periodic Inventory .......................... 37,500 Purchases ........................ 37,500 Accounts Payable ....... 37,500 Accounts Payable ....... 37,500 PE 8-6 (LO2) Transportation Costs (1). and (2). Perpetual Inventory .......................... Cash ............................. PE 8-7 (LO2) Periodic 920 Freight In .......................... 920 Cash ............................. 920 920 Purchase Returns (1). and (2). Perpetual Accounts Payable ........... Inventory ...................... Periodic 3,000 Accounts Payable ........... 3,000 3,000 Purchase Returns ....... 3,000 Returned 20 tables costing ￡150 each; 20  ￡150 = ￡3,000. PE 8-8 (LO2) Purchase Discounts (1). and (2). Perpetual Periodic Accounts Payable ........... 34,500 Accounts Payable ........... 34,500 Inventory ...................... 690 Purchase Discounts.... 690 Cash ............................. 33,810 Cash ............................. 33,810 Paid for 230 tables [(250 purchased – 20 returned)  ￡150 = $34,500] with a 2% discount (￡34,500  0.02 = ￡690). PE 8-9 (LO2) Sales (1). and (2). Perpetual Periodic Accounts Receivable ...... 14,000 Accounts Receivable ...... 14,000 Sales (70  ￡200) ........ 14,000 Sales............................. 14,000 Cost of Goods Sold ......... 10,570 ACC 1701 (AY2223 Sem1) Self Study Solutions Page 45 of 97 Inventory (70  ￡151) . Cost per table Initial cost Transportation Discount Total PE 8-10 (LO3) 10,570 ￡150 per table ￡920/(250 tables – 20 tables returned) = ￡920/230 tables = ￡4 per table ￡690/230 tables = ￡3 per table ￡150 + ￡4 –￡3 = ￡151 per table Closing Inventory Entries for a Periodic System (1). Inventory ....................................................................... Purchase Returns ......................................................... Purchase Discounts ..................................................... Freight In.................................................................. Purchases ................................................................ 34,730 3,000 690 (2). Cost of Goods Sold ...................................................... Inventory (￡34,730 –￡24,160)............................... 10,570 PE 8-14 (LO3) 920 37,500 10,570 Inventory Errors—Multiple Years 2021 + = – = Beginning inventory Purchases Cost of goods available for sale Ending inventory Cost of goods sold $ XXX XXX $ XXX 2,000 $2,000 (OK) (OK) (OK) (understated) (overstated) Net income $2,000 (understated) Correct net income: $3,000 + $2,000 = $5,000 PE 8-15 (LO3) Inventory Errors—Multiple Years 2022 + = – = Beginning inventory Purchases Cost of goods available for sale Ending inventory Cost of goods sold $2,000 XXX $2,000 450 $2,450 (understated) (OK) (understated) (overstated) (understated) Net income $2,450 (overstated) Correct net income: $3,000 – $2,450 = $550 ACC 1701 (AY2223 Sem1) Self Study Solutions Page 46 of 97 PE 8-16 (LO4) Specific Identification Cost Formula Beginning inventory Net purchases Goods available for sale Ending inventory Cost of goods sold (1) Cameras 8 34 42 16 26 Costs NT$ 800 4,000 NT$4,800 1,755 NT$3,045 Cost of goods sold calculation: 4 cameras from beginning inventory, NT$100 each ........................ 5 cameras purchased October 3, NT$110 each ............................... 3 cameras purchased on October 14, NT$115 each ........................ 14 cameras purchased on October 20, NT$125 each ...................... Total cost of goods sold (26 units) ................................................... (2) Ending inventory calculation: 4 cameras from beginning inventory, NT$100 each ........................ 7 cameras purchased on October 3, NT$110 each .......................... 4 cameras purchased on October 14, NT$115 each ........................ 1 camera purchased on October 20, NT$125 ................................... Total ending inventory (16 units) ...................................................... PE 8-17 (LO4) Cameras 8 34 42 16 26 Costs NT$ 800 4,000 NT$4,800 1,990 NT$2,810 FIFO Cost of goods sold calculation (oldest 26 units): 8 cameras from beginning inventory, NT$100 each ........................ 12 cameras purchased October 3, NT$110 each ............................. 6 cameras purchased on October 14, NT$115 each ........................ 690 Total cost of goods sold (26 units) ................................................... (2) NT$ 400 770 460 125 NT$1,755 FIFO Cost Formula Beginning inventory Net purchases Goods available for sale Ending inventory Cost of goods sold (1) NT$ 400 550 345 1,750 NT$3,045 NT$ 800 1,320 NT$2,810 FIFO Ending inventory calculation (newest 16 units): 1 camera purchased on October 14, NT$115 ................................... 15 cameras purchased on October 20, NT$125 each ...................... Total ending inventory (16 units) ...................................................... ACC 1701 (AY2223 Sem1) Self Study Solutions NT$ 115 1,875 NT$1,990 Page 47 of 97 PE 8-18 (LO4) Weighted Average Cost Formula Beginning inventory Net purchases Goods available for sale Cameras 8 34 42 Costs NT$ 800 4,000 NT$4,800 ($4,800/42 units) = $114.286 per unit (1) Weighted average cost of goods sold: 26 units  NT$114.286 per unit = NT$2,971 (rounded) (2) Weighted average ending inventory: 16 units  NT$114.286 per unit = NT$1,829 (rounded) E 8-2 (LO1) Determine the Correct Inventory Amount ￡594,000Counted + 50,000 1.Title passed to Beta when goods were shipped + 0 2. No effect + 0 3. No effect + 70,000 4. Title remains with Beta until purchaser receives goods + 0 5. No effect ￡714,000 Ending inventory E 8-17(LO5) Compute Lower-of-Cost-or-Net Realizable Value Lower -of-CostCost NRV or-NRV Running shoes Tennis shoes Basketball shoes Total inventory E 8-19 (LO6) € 12,200 € 12,600 € 12,200 20,400 18,000 €50,600 19,200 16,750 €48,550 19,200 16,750 €48,150 Computing Inventory Turnover and Days in Inventory 1. Inventory Turnover 2021: [£450,000/(50,000+165,000)/2]=4.19 2022: [£560,000/(165,000+200,000)/2]=3.07 2023: [£650,000/(200,000+240,000)/2]=2.95 2. Number of days in Inventory 2021: 365/4.19=87.11 days ACC 1701 (AY2223 Sem1) Self Study Solutions Page 48 of 97 2022: 365/3.07=118.89 days 2023: 365/2.95=123.73 days The inventory turnover ratio decreased by approximately 30% from 2021 to 2023 while the days in inventory increased by almost 42% over the same time period. Both of these changes would be considered negative since it’s better to have a higher inventory turnover and lower days in inventory. E 8-20 (LO6) Analysis of the Operating Cycle 1. Inventory Turnover = [€600,000  (1 – 0.37)]/[( €114,000 + $87,000)/2] = 3.8 Number of Days’ Sales in Inventory = 365/3.8 = 96 days 2. Average collection period: 44 days = 365/Accounts Receivable Turnover Accounts Receivable Turnover = 8.3 times Accounts receivable turnover: 8.3 = €600,000/[(€68,000 + Ending Accounts Receivable)/2] Ending Accounts Receivable = €76,578 (rounded) 3. Beginning inventory ........................................................................... Purchases ........................................................................................... Cost of goods available for sale ....................................................... Ending inventory ................................................................................ Cost of goods sold [€600,000  (1 – 0.37)] ....................................... €114,000 ? €465,000 (87,000) €378,000 Purchases = €351,000 Purchases Turnover = €351,000/[(€36,000 + €42,000)/2] = 9.0 times Number of Days’ Purchases in Accounts Payable = 365/9.0 = 41 days 4. Dallen pays its suppliers in 41 days, on average. Dallen collects cash from customers in 140 days (96 days + 44 days). So, on average, 99 days (140 days – 41 days) elapse between the time suppliers are paid and the time cash is received from customers. 5. (1) Inventory Turnover = [€600,000  (1 – 0.37)]/ €87,000 = 4.3 Number of Days’ Sales in Inventory = 365/4.3 = 85 days (2) Average collection period: 44 days = 365/Accounts Receivable Turnover Accounts Receivable Turnover = 8.3 times Accounts receivable turnover: 8.3 = €600,000/Ending Accounts Receivable Ending Accounts Receivable = €72,289 (3) Beginning inventory................................................................... Purchases ................................................................................... ACC 1701 (AY2223 Sem1) Self Study Solutions €114,000 ? Page 49 of 97 Cost of goods available for sale ............................................... Ending inventory ........................................................................ Cost of goods sold ..................................................................... €465,000 (87,000) €378,000 Purchases = €351,000 Purchases Turnover = €351,000/€42,000 = 8.4 Number of Days’ Purchases in Accounts Payable = 365/8.4 = 43 days (4) Dallen pays its suppliers in 43 days, on average. Dallen collects cash from customers in 129 days (85 days + 44 days). So, on average, 86 days (129 days – 43 days) elapse between the time suppliers are paid and the time cash is received from customers. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 50 of 97 P 8-2 (LO2) 1. Perpetual and Periodic Journal Entries Periodic Inventory System owed on truck tires. a. Purchases .............................. 20,000 Accounts Payable .............. Purchased 500 automobile tires on account at HK$40 each. b. Purchases .............................. 24,000 Accounts Payable .............. Purchased 300 truck tires on account at HK$80 each. c. Accounts Payable .................. Purchase Returns .............. Returned 12 automobile tires to supplier. 20,000 24,000 480 d. Accounts Payable .................. 19,520 Cash .................................... Paid for automobile tires. e. Accounts Payable .................. 12,000 Cash .................................... Paid for half of truck tires purchased. f. Accounts Payable .................. 12,000 Cash .................................... Paid remaining amount 480 19,520 12,000 12,000 ACC 1701 (AY2223 Sem1) Self Study Solutions Page 51 of 97 2. Perpetual Inventory System a. Inventory ................................ 20,000 Accounts Payable .............. Purchased 500 automobile tires on account at HK$40 each. b. Inventory ................................ 24,000 Accounts Payable .............. Purchased 300 truck tires on account at HK$80 each. c. Accounts Payable .................. Inventory............................. Returned 12 automobile tires to supplier. 20,000 d. Accounts Payable .................. 19,520 Cash .................................... Paid for automobile tires. 24,000 e. Accounts Payable .................. 12,000 Cash .................................... Paid for half of truck tires purchased. 480 f. Accounts Payable .................. 12,000 Cash .................................... Paid remaining amount owed on truck tires. 480 ACC 1701 (AY2223 Sem1) Self Study Solutions Page 52 of 97 19,520 12,000 12,000 P 8-2 (LO2) (Continued) Periodic Inventory System g. Accounts Receivable ............. 36,000 Sales ................................... Sold 400 automobile tires on account at HK$90 each. h. Accounts Receivable ............. 30,000 Sales ................................... Sold 200 truck tires on account at HK$150 each. Perpetual Inventory System 36,000 g. Accounts Receivable ............. 36,000 Sales.................................... Cost of Goods Sold ............... 16,000 Inventory ............................. Sold 400 automobile tires that cost HK$40 each for HK$90 each, on account. 30,000 ACC 1701 (AY2223 Sem1) Self Study Solutions h. Accounts Receivable ............. 30,000 Sales.................................... Cost of Goods Sold ............... 16,000 Inventory ............................. Sold 200 truck tires that cost HK$80 each for HK$150 each, on account. Page 53 of 97 36,000 16,000 30,000 16,000 P 8-2 (LO2) 3. (Continued) It is helpful to first look at the inventory and related accounts to see what adjustments are needed. PERIODIC PERPETUAL Inventory Auto tires beg. inv. Truck tires beg. inv. (a) (b) Inventory Auto tires beg. inv. Truck tires beg. inv. (a) (b) 4,000 5,600 Purchases 20,000 24,000 Purchase Returns (c) ACC 1701 (AY2223 Sem1) Self Study Solutions 480 4,000 5,600 (c) 20,000 24,000 (g) (h) 21,120 After posting entries (a)–(h), the inventory account has a balance of HK$21,120. Page 54 of 97 480 16,000 16,000 P 8-2 (LO2) (Continued) Periodic Inventory System Perpetual Inventory System We now need to make entries to eliminate the balances in all accounts (except Inventory) and add “net purchases” to inventory. The entry is: Because the physical count of inventory of $20,480 was less than the balance in the inventory account, an adjustment for shrinkage must be made. The entry is: Inventory.................................................. 43,520 Purchase Returns ................................... 480 Purchases .......................................... Closed Net Purchases to Inventory. Closing of temporary inventory accounts. Cost of Goods Sold .............................. 640 Inventory ......................................... Adjusted Inventory for shrinkage (HK$21,120 – HK$20,480). Adjustment of Inventory balance to reflect inventory shrinkage. 44,000 After this entry the inventory account includes the beginning inventory and net purchases, so its total is cost of goods available for sale as follows: The accuracy of this entry can be determined by examining the physical number of tires on hand as follows: Automobile Tires Inventory Auto tires beg. inv. Truck tires beg. inv. Net purchases Goods available for sale 4,000 5,600 43,520 53,120 Now we need to adjust for ending inventory. We know from the physical count that the ending inventory is: Auto tires Truck tires Total 184  HK$40 =HK$ 7,360 164  HK$80 = 13,120 HK$20,480 ACC 1701 (AY2223 Sem1) Self Study Solutions 640 Beg. inv. Transaction (a) Transaction (b) Transaction (c) Transaction (g) Transaction (h) Ending inventory Per count Shrinkage Cost Truck Tires 100 500 70 300 (12) (400) (200) 188 184 4  HK$ 40 HK$160 HK$ 170 164 6  HK$ 80 480 HK$640 Page 55 of 97 P 8-2 (LO2) (Continued) Periodic Inventory System To adjust Inventory to the correct amount, it must be credited for HK$32,640 (HK$53,120 – HK$20,480). The entry is: Cost of Goods Sold .............................................................. 32,640 Inventory .......................................................................... Adjustment of Inventory to appropriate ending balance. 32,640 The inventory account balance is now HK$20,480 as shown below. Inventory Auto tires beg. inv. Truck tires beg. inv. Net purchases End. inv. 4,000 Adjust end. inv. 32,640 5,600 43,520 20,480 The cost of goods sold account will be closed with other closing entries. P 8-5 (LO2) 1. Net Purchases $ 80,800 + 1,800 – 3,000 $ 79,600 The Effect of Inventory Errors Ending Inventory $29,800 + 800 – 300 $30,300 2. Beginning inventory........................................................................... Net purchases .................................................................................... Cost of goods available for sale ....................................................... Ending inventory ................................................................................ Cost of goods sold ............................................................................. $ + $ – $ 3. Beginning inventory........................................................................... Net purchases (before correcting) .................................................... Cost of goods available for sale ....................................................... $ 20,200 + 80,800 $101,000 ACC 1701 (AY2223 Sem1) Self Study Solutions 20,200 79,600 99,800 30,300 69,500 Page 56 of 97 Ending inventory (before correcting) ............................................... Cost of goods sold (overstated) ....................................................... Cost of goods sold (correct) ............................................................. Overstatement .................................................................................... AA 8-6 Shipping Bricks – 29,800 $ 71,200 – 69,500 $ 1,700 Ethics The company would make a journal entry debiting Accounts Receivable and crediting Sales. If the company was using a perpetual inventory system, it would also have to fabricate the purchase of inventory. Then, when the fictitious inventory was sold, an entry would be made debiting Cost of Goods Sold and crediting Inventory. A fraud like this could not go on forever because the receivables would build up on the balance sheet. Without a real customer to pay the bill, the receivables balance would just get larger and larger. Eventually, someone would perform an analysis of the accounts receivable and determine that a large number of accounts were uncollectible. In reviewing the financial statements, users would analyze changes in relationships among accounts. For example, cost of goods sold as a percentage of sales may be decreasing if fictitious inventory is being sold. Also, receivables as a percentage of total assets would be increasing at a faster than expected rate. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 57 of 97 CHAPTER 9 PE 9-19 (LO3) Provisions and Contingent Liabilities The correct answer is E. “Probable” means the future event is likely to occur, and the amount can be measured reliably so that the entity can make an appropriate journal entry. According to IAS 37 paragraph 14, an entity must recognize a provision if, and only if (1) a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event), (2) payment is probable ('more likely than not'), and (3) the amount can be estimated reliably. PE 9-20 (LO3) Provisions Estimating the amount of compensation for contract disputes is an estimation of single obligation. This means that we should take the most possible outcome (50%) as the value of estimation. Provisions = $2,000,000 PE 9-21 (LO3) Provisions Estimating the number of part being changed is estimation of single obligation, so it should take the most possible outcome (possibility excess 60%) as the value of estimation. Provisions = $25,000  2 = $50,000 E 9-9 (LO3) Provisions and Contingent Liabilities The objective of this exercise is to illustrate the difficulty involved in applying the contingency standards. While the accounting standard uses terms such as probable and possible, matching these terms with probabilities is difficult. Studies show that there is little consensus on the probabilities associated with the terms probable, possible, and remote. While there are no exact answers to the scenarios given, students should recognize the judgment involved in making the classification decision. The following are provided as possible (or probable) answers. a. A 40% probability of occurrence would most likely fall between remote and probable. If Rayn Company determined this contingency was reasonably possible, then note disclosure would be appropriate. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 58 of 97 b. If the probability of incurring fines levied by the government is less than 10%, most would classify this event as remote and provide no information (or only a brief mention, with no details) in the notes to the financial statements. c. A probability of 90% is likely to be interpreted as probable. If management determines the likelihood of losing the gender discrimination lawsuit as being probable, the liability (and associated loss) would be formally recognized in the accounting records. P 9-6 (LO3) Provisions and Contingent Items 1. The service of repairing belongs to provisions, and the amount can be reasonably estimated according to past repairing experiences, so the company should recognize the provisions in the year of sales. Estimated product service guarantee liability is $1,500  800  10% = $120,000, so the adjusting journal entries are: Product Warranty Expense ................................................. Product Warranty Provision........................................... 120,000 120,000 The cost of repairing caused by actually fulfilling repairing guarantee contract is $1,500  60 = $90,000, so the adjusting journal entries are: Product Warranty Provision ................................................ Supplies ........................................................................... 90,000 90,000 2. Because this defaulting lawsuit is very likely to lose, the outcome of the affair that the company faces single obligation is just win or lose the lawsuit. So the value of estimation is not available in this situation. The journal entries of the provisions are: Lawsuit loss .......................................................................... Lawsuit Provision ........................................................... 500,000 500,000 3. When contingent loss may happen, but the amount cannot be estimated, there is no need to make a journal entry. But it should be disclosed in the financial statement to explain the nature and the fact that loss amount cannot be reasonably estimated. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 59 of 97 P 9-8 (LO4) Classifying Expenditures to be Capitalized or Expensed a. Capitalize. This is a depreciable asset whose service will help generate future revenues over its useful life. b. Expense. Research and development costs are expensed as incurred. c. Expense. Under IFRS, advertising costs are to be expensed when incurred, including targeted advertising directed at specific past customer. Note that this cost can be capitalized under GAAP. d. Expense. This is advertising pertaining to a new product and not directed at specific past customers. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 60 of 97 CHAPTER 10 PE 10-7 (LO3) Straight-Line Method of Depreciation Depreciation expense = = Cost Salvage value Estimated useful life (years) $1,000,000 $40,000 8 years = $120,000 Depreciation Expense .......................................................... Accumulated Depreciation, Machine ............................ To record depreciation expense on a straightline basis. PE 10-8 (LO3) 120,000 120,000 Units-of-Production Method of Depreciation Depreciation rate = = Cost Salvage value Estimated useful life (units) $1,000,000 $40,000 1,600,000 units = $0.60 per unit Current-year depreciation = Depreciation rate  Units produced = $0.60  180,000 = $108,000 Depreciation Expense .......................................................... Accumulated Depreciation, Machine ............................ To record depreciation expense on units-ofproduction basis. PE 10-9 (LO3) Full-Year Depreciation* $5,000 108,000 108,000 Partial-Year Depreciation Calculations Depreciation First Year (3 months) $1,250 ($5,000  3/12) *Full-year depreciation = Depreciation Second Year (12 months) $5,000 Cost Salvage value Estimated useful life (years) ACC 1701 (AY2223 Sem1) Self Study Solutions Page 61 of 97 = $34,000 $4,000 6 years = $5,000 PE 10-10 (LO3) Depletion rate = Units-of-Production Method with Natural Resources $4,200,000 Cost = = $7.00 per barrel 600,000 barrels Total estimated units First-year depletion = Depletion rate  Barrels extracted and sold = $7.00  70,000 = $490,000 Depletion Expense ............................................................... Accumulated Depletion, Oil Field .................................. To record depletion for the year: 70,000 barrels at $7.00 per barrel. PE 10-11 (LO3) 490,000 490,000 Declining-Balance Method of Depreciation DDB rate = 1/10  2 = 20% Depreciation expense year 1 = $3,000,000  0.20 = $600,000 Depreciation expense year 2 = ($3,000,000 – $600,000)  0.20 = $480,000 PE 10-12 (LO4) Changes in Depreciation Estimates Carrying amount after three years = $1,000,000 – (3  $120,000) = $640,000 Depreciation expense year 4 = ($640,000 – $40,000)/8 years = $75,000 E 10-5 (LO3) 1. a. Depreciation Calculations Straight-line method 2021: $26,000 $1,000  1/2 year = $5,000  1/2 year = $2,500 5 years 2022: $5,000 b. Units-of-production method ACC 1701 (AY2223 Sem1) Self Study Solutions Page 62 of 97 2. 2021: $26,000 $1,000  9,000 miles = $2,045 110,000 miles 2022: $26,000 $1,000  24,000 miles = $5,455 110,000 miles There is no definitive answer to the question of which depreciation method more closely reflects the used-up service potential of the car. If there is no obsolescence factor, then the asset probably would wear out based on use, for which the units-of-production method would appear to be more appropriate. If obsolescence is an important factor in determining the car’s useful life, the car’s service potential would probably decline on an accelerated basis because obsolescence affects a car’s fair market value more when it is newer than when it is older. The decline in service potential would also be affected by the extent to which the maintenance policy assumed in selecting the five-year life is actually followed during the five-year period. E 10-11 (LO2, LO3) Acquisition and Depreciation of Assets 1. 2. 2022 July 1 Drilling Equipment .................................................. Cash .................................................................... Purchased drilling equipment. a. DDB rate=(1/20)*2=0.10 DDB = $140,000  0.10  1/2 year = $14,000  1/2 year = $7,000 b. DDB rate=(1/20)*1.5=0.075 150% DB = $140,000  0.075  1/2 year = $10,500  1/2 year = $5,250 E 10-18 (LO6) 185,000 185,000 Asset Impairment The impaired value of the land and buildings must be recognized. The journal entry on January 1, 2022, would be: Impairment Loss................................................................... Accumulated Impairment Losses, Land ....................... Accumulated Impairment Losses, Buildings ............... To record loss on impairment of land and building. ACC 1701 (AY2223 Sem1) Self Study Solutions 430,000 100,000 330,000 Page 63 of 97 * Land: $150,000 – $50,000 = 100,000; Buildings: $400,000 – $70,000 = 330,000 E 10-21(LO8) 1. 2. 3. 4. Accounting for Disposal of Equipment Cash ........................................................................................ Accumulated Depreciation—Equipment [($100,000 –$16,000) X 3/5] ............................................... Equipment Gain on Sale of Plant Assets ..................................... Depreciation Expense [($100,000 –$16,000) X 1/5 X 4/12]..................................... Accumulated Depreciation—Equipment................... 56,000 50,400 100,000 6,400 5,600 5,600 Cash ........................................................................................ Accumulated Depreciation—Equipment ($50,400 + $5,600)............................................................... Equipment ................................................................... Gain on Sale of Plant Assets ..................................... 56,000 Cash .......................................................................................... Accumulated Depreciation—Equipment ................................ Loss on Sale of Plant Assets .................................................. Equipment ........................................................................ 22,000 50,400 27,600 Depreciation Expense [($100,000 –$16,000) ÷ 5 X 9/12] .......................................... Accumulated Depreciation—Equipment........................ Cash .......................................................................................... Accumulated Depreciation—Equipment ($50,400 + $12,600) ............................................................... Loss on Sale of Plant Assets .................................................. Equipment ........................................................................ ACC 1701 (AY2223 Sem1) Self Study Solutions 56,000 100,000 12,000 100,000 12,600 12,600 22,000 63,000 15,000 100,000 Page 64 of 97 E 10-24 (LO9) 1. 2. 3. Intangible Assets 2022 Jan. 1 Patent ....................................................................... Cash .................................................................... To record purchase of a patent. 2022 Dec. 31 Amortization Expense, Patent ................................ Patent .................................................................. To record amortization expense of patent ($500,000 ÷ 20 years). 500,000 500,000 25,000 25,000 Goodwill is never amortized. Each year, goodwill would be evaluated to ensure that the amount recorded on the books of the company is not overstated. If goodwill is overstated, then it could be written down based on the results of impairment tests. E 10-27 (LO10) Fixed Asset Turnover Land............................................................................. Buildings ..................................................................... Equipment................................................................... Total property, plant, and equipment ....................... 2022 $ 350,000 740,000 140,000 $1,230,000 2021 $ 310,000 680,000 120,000 $1,110,000 Fixed asset turnover = Sales/Average fixed assets = $3,650,000/[($1,230,000 + $1,110,000)/2] = 3.12 P 10-2 (LO2, LO3) Property, Plant, and Equipment Cost; Depreciation Methods 1. Appraised Value Buildings Land Land Improvements Vehicles Total $816,000 578,000 85,000 221,000 $1,700,000 Jan. 1 Buildings ........................................................... Land................................................................. Land Improvements........................................ ACC 1701 (AY2223 Sem1) Self Study Solutions Percent of Total 48% 34 5 13 100% Apportioned Cost $756,000 535,500 78,750 204,750 $1,575,000 756,000 535,500 78,750 Page 65 of 97 Vehicles ........................................................... Cash........................................................ To record asset purchases. 204,750 1,575,000 2. Year 2022 straight-line depreciation on buildings [($756,000 - $51,300) / 15 years] = $46,980 3. Year 2022 double-declining-balance depreciation on land improvements (100% / 5 years) x 2 = 40% rate $78,750 x 40% = $ 31,500 4. Accelerated depreciation does not lower the total amount of taxes paid over the asset's life. Instead, it defers or postpones taxes to the later years of an asset’s useful life. This is because accelerated methods charge a higher portion of asset costs against revenue in earlier years and a lower portion in later years. The result is to reduce taxable income more in earlier years but less in later years. [Note: From a present value perspective, there is a tax savings from use of accelerated depreciation. The company gets to use the tax deferred amounts for investment purposes until they are due.] 10-3 (LO3) Accounting for Natural Resources 1. Oil Well ..................................................................................... 4,000,000 Cash .................................................................................... 4,000,000 Purchased oil well on May 31, 2021. 2. Depletion Expense .................................................................. Accumulated Depletion, Oil Well ...................................... To record depletion expense (at $10 per barrel) on the oil well for 2021. 320,000 Depletion Expense .................................................................. Accumulated Depletion, Oil Well ...................................... To record depletion expense (at $10 per barrel) on the oil well for 2022. 420,000 3. 320,000 420,000 P 10-10 (LO3, LO4, LO5) Changes in Depreciation Estimates and Capitalization of Expenditures 1. a. 2021 Jan. 2 Machine .............................................................. ACC 1701 (AY2223 Sem1) Self Study Solutions 76,600 Page 66 of 97 Cash ................................................................ Purchased a machine for cash. b. 2021 Dec. 31 Depreciation Expense ....................................... Accumulated Depreciation, Machine ........... To record depreciation expense for 2021 [1/8 2 = 0.25] [$76,600  0.25 = $19,150]. 2022 Dec. 31 Depreciation Expense ....................................... Accumulated Depreciation, Machine ........... To record depreciation expense for 2022 [($76,600 - $19,150)  0.25 = $14,363]. 76,600 19,150 19,150 14,363 14,363 c. 2023 Dec. 31 Depreciation Expense ....................................... 21,544 Accumulated Depreciation, Machine ........... To record depreciation expense for 2023 after change in estimates. ACC 1701 (AY2223 Sem1) Self Study Solutions 21,544 Page 67 of 97 Cost of machine ............................................................................ $76,600 Depreciation, 2021 and 2022 .......................................... (33,513) Carrying amount at January 1, 2023 .............................. $43,087 1/4 2 = 0.5 Depreciation = 0.5  $43,087 = $21,544 d. 2024 Jan. 2 Machine .............................................................. 34,000 Cash ................................................................ To record the cost of major repairs that increased machine’s useful life by two years and increased its salvage value to $3,000. e. 2024 Dec. 31 Depreciation Expense ....................................... Accumulated Depreciation, Machine ........... To record depreciation expense for 2024. 34,000 22,217 22,217 Carrying amount at January 1, 2023 .................... $43,087 Depreciation for 2023 ........................................... (21,544) Carrying amount at January 1, 2024 ................... $21,543 Cost of major repairs in 2024 ................................. 34,000 Carrying amount after major repairs ................... $55,543 Remaining estimated life: 3 years (before repairs) + 2 additional years = 5 years 1/5 2 = 0.4 Depreciation = 0.4  $55,543 = $22,217 2. Carrying amount at December 31, 2024: $55,543 – $22,217 = $33,326 P 10-15 (LO2, LO3, LO8) Acquisition, Depreciation, and Sale of an Asset 1. 2. 2021 Jan. 2 Airplane .................................................................... Cash .................................................................... Purchased airplane ($112,000 – $3,000 + $1,000). 110,000 110,000 Units-of-production method ACC 1701 (AY2223 Sem1) Self Study Solutions Page 68 of 97 $90,000 $3,000 = $58 per hour; $58  300 hours = $17,400 1,500 hours 3. 2024 July 1 Depreciation Expense ............................................. 8,500 Accumulated Depreciation, Airplane................ To record depreciation expense for the period from January 1, 2024, to July 1, 2024, bringing depreciation up to date before recording the sale of the airplane ($17,000  1/2 year). 8,500 Note: No depreciation has yet been recorded for 2024, which is now recorded by this entry ($90,000 – $5,000)  1/5  1/2 year = $8,500. July 1 Cash ......................................................................... 40,000 Accumulated Depreciation, Airplane ..................... 59,500 Airplane............................................................... Gain on Sale of Airplane.................................... Sold airplane for $40,000 cash on July 1, 2024. ACC 1701 (AY2223 Sem1) Self Study Solutions 90,000 9,500 Page 69 of 97 CHAPTER 12 PE 12-9 (LO3) Issuance of No-Par Common Stock Cash ...................................................................................... Common Stock................................................................ Issued 25,000 shares of no-par common stock at $45 per share. PE 12-10 (LO3) 1,125,000 Issuance of Common Stock for Cash Cash (3,000 shares  $40).................................................... Common Stock (3,000 shares  $1 par value) .............. Paid-In Capital in Excess of Par, Common Stock (3,000 shares  $39)................................................... Issued 3,000 shares of $1 par-value common stock at $40 per share. PE 12-11 (LO3) 1,125,000 120,000 400,000 100 399,900 Accounting for Stock Repurchases Treasury Stock, Common (1,500 shares  $64) ............................ Cash ............................................................................................ Purchased 1,500 shares of treasury stock at $64 per share. PE 12-13 (LO3) 117,000 Issuance of Common Stock for Other Assets Buildings (10,000 shares  $40) ..................................................... Common Stock (10,000 shares  $0.01 par value) .................. Paid-In Capital in Excess of Par, Common Stock (10,000 shares  $39.99) ....................................................... Issued 10,000 shares of $0.01 par-value common stock for buildings (10,000 shares  $40 per share = $400,000). PE 12-12 (LO3) 3,000 96,000 96,000 Accounting for Sale of Treasury Stock at Price Higher than Cost Cash (400 shares  $80).................................................................. Treasury Stock, Common (400 shares  $64 cost) ................. Paid-In Capital, Treasury Stock [400  ($80 – $64)]................. ACC 1701 (AY2223 Sem1) Self Study Solutions 32,000 25,600 6,400 Page 70 of 97 Reissued 400 shares of treasury stock at $80 per share. PE 12-14 (LO3) Accounting for Sale of Treasury Stock at Price Lower than Cost Cash (300 shares  $56).................................................................. Paid-In Capital, Treasury Stock* .................................................... Treasury Stock, Common (300 shares  $64 cost) ................. Reissued 300 shares of treasury stock at $56 per share. 16,800 2,400 19,200 * According to PE12-13, $6,400 credit balance is in this account. Otherwise, the debit would be to Retained Earnings. PE 12-15 (LO3) Accounting for Sale of Treasury Stock at Price Lower than Cost Cash (800 shares  $60).................................................................. Paid-In Capital, Treasury Stock ..................................................... Retained Earnings ........................................................................... Treasury Stock, Common (800 shares  $64 cost) ................. Reissued 800 shares of treasury stock at $60 per share; original cost was $64 per share. E 12-4 (LO3) 1. 48,000 2,000 1,200 51,200 No-Par Stock Transactions a. Cash ......................................................................... Common Stock ................................................... Issued 31,000 shares of no-par common stock at $24 per share. 744,000 b. Cash ......................................................................... Common Stock ................................................... Issued 3,900 shares of no-par common stock at $28 per share. 109,200 c. Buildings ................................................................. Common Stock ................................................... Issued 3,000 shares of no-par common stock for a building. 90,000 744,000 109,200 d. Dividends ................................................................. 56,850 Dividends Payable .............................................. Declared a $1.50-per-share dividend on common stock. (31,000 + 3,900 + 3,000) × $1.50 = 56,850 ACC 1701 (AY2223 Sem1) Self Study Solutions 90,000 56,850 Page 71 of 97 2. e. Revenues ................................................................. Retained Earnings .............................................. Expenses ............................................................. Closed revenues and expenses for the year to Retained Earnings. 405,000 f. Retained Earnings .................................................. Dividends............................................................. Closed dividends to Retained Earnings. 56,850 187,000 218,000 56,850 Common stock (no par) ............................................................... Retained earnings ........................................................................ Total equity.............................................................................. $ 943,200 130,150* $1,073,350 *$187,000 – $56,850 = $130,150 E 12-13 (LO3, LO4) Stock Issuance, Treasury Stock, and Dividends a. Cash .................................................................................... 1,750,000 Common Stock ............................................................. 700,000 Paid-In Capital in Excess of Par, Common Stock ...... 1,050,000 Issued 70,000 shares of common stock at $25 per share (70,000  $25 = $1,750,000; 70,000  $10 = $700,000). b. Cash .................................................................................... Preferred Stock ............................................................. Paid-In Capital in Excess of Par, Preferred Stock ...... Issued 8,000 shares of preferred stock at $30 per share (8,000  $30 = $240,000; 8,000  $20 = $160,000). 240,000 Treasury Stock ................................................................... Cash ............................................................................... Purchased 5,000 shares of outstanding common stock at $20 per share (5,000  $20 = $100,000). 100,000 c. d. • Cash ...................................................................................... Treasury Stock ................................................................ Paid-In Capital, Treasury Stock ..................................... Reissued 2,000 shares of treasury stock at $23 per share (2,000  $23 = $46,000; 2,000  $20 = $40,000). ACC 1701 (AY2223 Sem1) Self Study Solutions 160,000 80,000 100,000 46,000 40,000 6,000 Page 72 of 97 e. Dividends, Preferred Stock ................................................. Dividends, Common Stock .................................................. Dividends Payable .......................................................... Declared dividends on preferred and common stock (preferred: 8,000  $20  8% = $12,800; common: 70,000 – 5,000 + 2,000 = 67,000 shares outstanding at $1 per share). E 12-6 (LO3) 79,800 Recording and Reporting Treasury Stock Transactions 1.Oct. 11 Treasury Stock (6,000 × $20) ...................................... Cash .................................................................... Purchased treasury stock. 2. 12,800 67,000 120,000 120,000 Nov. 1 Cash (1,000 × $25) ......................................................... Treasury Stock (1,000 × $20) ......................................... Paid-In Capital, Treasury Stock ............................... Reissued treasury stock at a price exceeding cost. 25,000 Nov. 25 Cash (5,000 × $18) ....................................................... Paid-In Capital, Treasury Stock ................................. Retained Earnings ...................................................... Treasury Stock (5,000 × $20) ........................... Reissued treasury stock at a price less than cost. 90,000 5,000 5,000 20,000 5,000 100,000 Changes to the equity section include the following After the purchase, a deduction for the cost of treasury stock is reported immediately before the total line for shareholders’ equity as: Less cost of treasury stock................................................. $(120,000) (v) Total shareholders’ equity will change from $1,800,000 to $1,680,000. E 12-18 (LO3, LO4) Preparing the Equity Section Spring Company Partial Balance Sheet December 31, 2022 Equity Contributed capital: Preferred stock (8%, $50 par value, 50,000 shares authorized, 5,000 shares issued and outstanding) ................................................ ACC 1701 (AY2223 Sem1) Self Study Solutions $ 250,000 Page 73 of 97 Common stock ($1 par value, 100,000 shares authorized, 70,000 shares issued and outstanding) .............................................. Paid-in capital in excess of par, preferred stock ..................................... Paid-in capital in excess of par, common stock ...................................... Total contributed capital ...................................................................... 1,655,000 Retained earnings ...................................................................................... Total equity ............................................................................................ 70,000 5,000 1,330,000 $ 400,000* $2,055,000 *$350,000 (beginning balance) + $125,000 (net income) – $75,000 (dividends) = $400,000 P 12-4 (LO4) 1. In this case, preferred stockholders should receive $15,000 for each year (10,000 shares  0.10  $15) and common stockholders will receive the rest. Thus, the allocations for 2021 and 2022 are as follows: Year 2021 2022 2. Total Dividends $ 8,000 92,000 $100,000 Preferred $ 8,000 15,000 $23,000 Common $ 0 77,000 $77,000 In this case, preferred stockholders should receive $15,000 each year plus dividends in arrears. In 2022, dividends of $7,000 are in arrears from 2021. Common stockholders receive the remainder. Year 2021 2022 3. Dividend Calculations Total Dividends $ 8,000 92,000 $100,000 Preferred $ 8,000 22,000 $30,000 Common $ 0 70,000 $70,000 In this case, preferred stockholders would receive $8,000 in 2021, and common stockholders would get nothing. In 2022, preferred stockholders would get $52,000 ($15,000 for 2022, $7,000 for 2021, $15,000 for 2020, and $15,000 for 2019). Common stockholders would get the remaining $40,000. Year 2021 2022 Total Dividends $ 8,000 92,000 $100,000 Preferred $ 8,000 52,000 $60,000 ACC 1701 (AY2223 Sem1) Self Study Solutions Common $ 0 40,000 $40,000 Page 74 of 97 P 12-10 (LO3, LO4) Stock Transactions and Equity Section 1. a. b. c. Treasury Stock ................................................................ Cash ............................................................................ Purchased 750 shares of treasury stock at $7 each. 5,250 Treasury Stock ................................................................ Accounts Receivable ................................................. Received 150 shares of common stock as payment of a receivable. 1,500 Dividends, Preferred Stock ............................................ Dividends, Common Stock ............................................. Dividends Payable ..................................................... Declared cash dividends on common and preferred stock. 1,250 10,200 Dividends Payable .......................................................... Cash ............................................................................ Paid previously declared cash dividends. 11,450 Preferred Stock 2,500  $0.50 $ 1,250 5,250 1,500 11,450 11,450 Common Stock 15,000 (750) (150) (500) 13,600  $0.75 $10,200 Shares outstanding January 1 Treasury stock purchased in (a) Treasury stock acquired in (b) Treasury stock on hand December 31, 2021 Shares outstanding on declaration date d. Preferred Stock .................................................................. Retained Earnings ............................................................. Common Stock ............................................................. Preferred stockholders converted 500 shares to 1,500 shares of common stock (500 preferred shares  $20 par = $10,000; 1,500 shares of common stock  $10 par = $15,000). ACC 1701 (AY2223 Sem1) Self Study Solutions 10,000 5,000 15,000 Page 75 of 97 e. Cash .................................................................................... Treasury Stock.............................................................. Paid-In Capital, Treasury Stock ................................... Reissued 900 shares of treasury stock at $13 per share (cost of treasury shares = $5,250 + $1,500 = $6,750). 11,700 Machine .............................................................................. Treasury Stock.............................................................. Paid-In Capital, Treasury Stock ................................... Exchanged 500 shares of treasury stock that cost $6,000 for a machine with a fair market value of $6,300. 6,300 6,750 4,950 6,000 300 f. Land .................................................................................... Common Stock ............................................................. Paid-In Capital in Excess of Par, Common Stock ...... Exchanged 3,000 shares of common stock for land with a fair market value of $39,000. 39,000 g. Dividends, Preferred Stock ............................................... Dividends, Common Stock ............................................... Dividends Payable ........................................................ 1,000 14,625 30,000 9,000 15,625 Dividends Payable ............................................................. 15,625 Cash............................................................................... Declared and paid semiannual dividends (preferred: 2,000 shares  $0.50 = $1,000; common: 19,500 shares  $0.75 = $14,625). Preferred Stock 2,500) shares (500) converted to common 2,000) shares outstanding Common Stock 15,000 1,500 3,000 19,500 shares from preferred conversion for land shares outstanding h. Revenues ............................................................................ Retained Earnings ........................................................ Expenses ....................................................................... Closed 2022 net income to Retained Earnings. 135,000 i. Retained Earnings ............................................................. 27,075 ACC 1701 (AY2223 Sem1) Self Study Solutions 15,625 35,000 100,000 Page 76 of 97 Dividends, Preferred Stock .......................................... Dividends, Common Stock .......................................... Closed dividends to Retained Earnings. 2. 2,250 24,825 The equity section is easily prepared by using the following equity Taccounts to analyze the transactions. Preferred Stock (d) Common Stock 10,000 Beg. Bal. 50,000 Beg. Bal. (d) (f) 150,000 15,000 30,000 End. Bal. 40,000 End. Bal. 195,000 Paid-In Capital in Excess of Par, Common Stock Treasury Stock Beg. Bal. (f) 30,000 9,000 Beg. Bal. (a) (b) 6,000 5,250 (e) 1,500 (e) End. Bal. 39,000 End. Bal. 0 Paid-In Capital, Treasury Stock Dividends, Preferred Stock (e) (e) 4,950 300 (c) (g) End. Bal. 5,250 End. Bal. Retained Earnings (d) (i) 6,750 6,000 1,250 1,000 (i) 2,250 0 Dividends, Common Stock 5,000 Beg. Bal. 27,075 (h) 116,000 35,000 (c) (g) End. Bal. 118,925 End. Bal. 10,200 14,625 (i) 24,825 0 Lakeland Corporation Partial Balance Sheet December 31, 2022 Equity ACC 1701 (AY2223 Sem1) Self Study Solutions Page 77 of 97 Contributed Capital: Preferred stock, convertible (5%, $20 par value) ............................... Common stock ($10 par value) ............................................................ Paid-in capital in excess of par, common stock ................................ Paid-in capital, treasury stock ............................................................. Total contributed capital .............................................................. Retained earnings ................................................................................. Total equity.................................................................................... ACC 1701 (AY2223 Sem1) Self Study Solutions $ 40,000 195,000 39,000 5,250 $279,250 118,925 $398,175 Page 78 of 97 CHAPTER 14 PE 14-6 (LO3) Computation of Cash from Operating Activities Cash provided by operating activities is $203, as shown below. Collections on account .............................................................................. Payments for inventory ............................................................................. Payments for miscellaneous expenses.................................................... Payment for interest................................................................................... Payment for taxes ...................................................................................... Net cash flows from operating activities.................................................. $ 4,686 (2,974) (1,131) (143) (235) $ 203 Alternative answers: Under IFRS, payment for interest and payments to stockholders as dividends could be classified as either operating or financing activities. PE 14-11 (LO5) Computing Cash Paid for Property, Plant, and Equipment The amount of cash paid for property, plant, and equipment during the year was $60,000, as shown, using the following T-account: Property, Plant, and Equipment Beg. bal. Cash paid for property, plant, and equipment 235,000 End. bal. 265,000 Historical cost of 60,000 equipment sold 30,000 To reconcile the account, we can only assume that cash paid for property, plant, and equipment was $60,000. PE 14-12 (LO5) Computing Gain on Sale of Property, Plant, and Equipment The gain on the sale of equipment during the year is $12,500. First, we need to compute the book value of the equipment sold during the year. The equipment had a historical cost of $30,000 and accumulated depreciation of $16,500 as computed using the following T-account: Accumulated Depreciation Accumulated depreciation of equipment sold Beg. bal. Depreciation expense 16,500 for the year ACC 1701 (AY2223 Sem1) Self Study Solutions 86,000 14,500 Page 79 of 97 End. bal. 84,000 To reconcile the account, we can only assume that the accumulated depreciation related to equipment sold during the year was $16,500. The carrying amount of the equipment sold was $13,500 ($30,000 – $16,500). So the gain on the sale of equipment during the year was $12,500 ($26,000 sales price – $13,500 carrying amount). PE 14-13 (LO5) Computing Cash Flows from Financing Activities Financing activities Cash paid to purchase treasury stock ................................................ Cash payments for dividends .............................................................. Cash payments to repay long-term debt ............................................ Net cash flows from financing activities .................................................. PE 14-14 (LO6) $(15,000) (5,350) (28,000) $(48,350) Using Information from the Statement of Cash Flows to Make Decisions You probably would feel some apprehension about loaning money to this company. The company has experienced positive earnings over the past three years, but it is having a cash flow problem. Cash from operating activities has declined drastically over the past three years, and cash from financing activities has increased over the same three years. The company is using external funding to fund its operations. Such a strategy might work in the short run, but if operations do not improve and begin generating cash, the company will not be able to repay its long-term borrowing commitments. An important thing to remember as a potential lender is that net income does not repay loans—cash does. PE 14-15 (LO7) Using Accounts Receivable to Compute Cash Collections The company collected $4,557 from its customers, as shown below. Sales on account .................................................................................. Add: Beginning accounts receivable .................................................. Less: Ending accounts receivable ...................................................... (1,481) Collections on account ........................................................................ $5,526 1,512 $5,557 Another way to consider this problem is to make a T-account with the information provided and solve for the unknown, as shown below. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 80 of 97 Accounts Receivable 1,512 5,526 Collections Beg. bal. Sales End. bal. ?? 1,481 To reconcile the Accounts Receivable account, we can only assume that cash collections of $5,557 occurred. PE 14-16 (LO7) for Inventory Using Inventory and Accounts Payable to Compute Cash Paid To solve this problem, consider the following four T-accounts: Inventory Accounts Payable 3,610 37,343 3,076 37,2152 1 37,2152 Cost of Goods Sold 37,3431 37,0733 3,482 3,218 Cash 37,0733 1Cost of inventory sold during the period 2Inventory purchased during the period (solved for based on the beginning and ending Inventory balances and the cost of goods sold) 3Cash paid for inventory during the period (solved for based on the beginning and ending Accounts Payable balances and the inventory purchased during the period) Alternatively, one can compute the amount of cash paid for inventory ($37,073) by analyzing the change in the Inventory and Accounts Payable balances, as follows: Income Statement Cost of goods sold $(37,343) ACC 1701 (AY2223 Sem1) Self Study Solutions Adjustments +128 (decrease in inventory) +142 (increase in accounts payable) Cash Flows from Operations $(37,073) Page 81 of 97 PE 14-17 (LO7) Direct Method Operating activities Collections from customers........................................... Payments for inventory .................................................. Payments for miscellaneous expenses ........................ Payments for interest ..................................................... Payments for taxes ......................................................... Net cash flows from operating activities ............................ E 14-3 (LO3) 1. a. b. c. d. e. f. 2. $ 33,100 $(21,410) (4,640) (486) (455) (26,991) $ 6,109 Transaction Analysis Cash ...................................................................... Common Stock (1,000 shares  $15 par) ...... Paid-In Capital in Excess of Par, Common Stock 40,000 55,000 15,000 Cash ...................................................................... Accounts Receivable ...................................... 220,000 Dividends Payable ............................................... Cash ................................................................. 75,000 Cash ...................................................................... Interest Revenue ............................................. 5,000 Insurance Expense .............................................. Cash ................................................................. 3,500 Depreciation Expense .......................................... Accumulated Depreciation............................. 7,000 220,000 75,000 5,000 3,500 7,000 a. The $55,000 cash inflow would be classified as a financing activity. b. The $220,000 cash inflow would be classified as an operating activity. c. The $75,000 cash outflow would be classified as a financing activity. d. The $5,000 cash inflow would be classified as an operating activity. e. The $3,500 cash outflow would be classified as an operating activity. f. Depreciation is a non-cash item. The $7,000 would be added back as an adjustment to income before income tax under the indirect method and ignored when using the direct method. E 14-6 (LO3) Computing Cash Payments (Direct Method) (a) Cash payments to suppliers ACC 1701 (AY2223 Sem1) Self Study Solutions Page 82 of 97 Cost of goods sold .............................................. Add: Increase in inventory ................................ Cost of purchases Deduct: Increase in accounts payable Cash payments to suppliers............................... (b) Cash payments for operating expenses Operating expenses exclusive of depreciation ($5,258.8 – $560) Add: Increase in prepaid expenses .................. Deduct: Increase in accrued expenses payable .............................. $ 2,263.9 8.55 $2,272.45 69.8 $2,202.65 $4,698.8 $ 32.65) 95.3 Cash payments for operating expenses E 14-7 (LO3) (62.65) $4,636.15 Preparing a Simple Cash Flow Statement Smith Company Statement of Cash Flows For the Year Ended December 31, 2022 Operating activities Collections from customers........................................... Payments for wages and salaries.................................. Payments for inventory .................................................. Payments for other cash operating expenses ............. Payments for income tax ............................................... Net cash flows from operating activities ............................ Investing activities Proceeds from sale of equipment ................................. Proceeds from sale of amortized cost financial assets securities ......................................................................... Net cash flows from investing activities ............................ Financing activities Proceeds from new bank loan ....................................... Payments of dividends ................................................... Net cash flows from financing activities ............................ Net increase in cash............................................................. ACC 1701 (AY2223 Sem1) Self Study Solutions $146,000 (60,000) (63,000) (11,500) (25,000) $(13,500) $ 4,750 17,200 21,950 $ 45,300 (5,000) $ 40,300 48,750 Page 83 of 97 Beginning cash balance ...................................................... Ending cash balance............................................................ E 14-8 (LO2, LO3) $ 29,870 78,620 $ 805,000 30,000 $ 835,000 Net Cash Flows (Direct Method) Luke Corp. Statement of Cash Flows For the Year Ended December 31, 2022 Operating activities Cash receipts from: Customers .................................................................. Interest ....................................................................... Cash payments for: Wages ......................................................................... Net cash flows from operating activities............................ Investing activities Cash receipt from sale of equipment ............................ Cash payment for land ................................................... Net cash flows from investing activities ............................ Financing activities Cash received from issuance of common stock .......... Cash paid to retire bonds ............................................... Cash payments for dividends ........................................ Net cash flows from financing activities ............................ Net increase in cash............................................................. E 14-18 (LO7) (555,000) $ 280,000 $ 45,000 (215,000) (170,000) $ 355,000 (205,000) (85,000) 65,000 $ 175,000 Cash Flows Provided by Operations (Direct Method) Operating activities Cash receipts from: Customers ........................................................... $513,0001 Cash payments for: Inventory .......................................................... Operating expenses ........................................ Interest expense .............................................. Net cash flows from operating activities .................. 1Sales revenue ............................................................ + Beginning accounts receivable ........................... ACC 1701 (AY2223 Sem1) Self Study Solutions $(311,400)2 (36,500)3 (3,500) (351,400) $ 161,600 $ 500,000 43,000 Page 84 of 97 – Ending accounts receivable ................................ Cash collected from customers........................... 2Cost + – + – of goods sold ................................................... Ending inventory................................................... Beginning inventory ............................................. Purchases .............................................................. Beginning accounts payable ............................... Ending accounts payable ..................................... Cash paid for inventory ........................................ 3Sales (30,000) $ 513,000 $ 300,000 50,000 (42,000) $ 308,000 59,400 (56,000) $ 311,400 revenue ............................................................ Cost of goods sold ................................................... Gross margin............................................................. Less expenses .......................................................... Net income ................................................................ $ 500,000 300,000 $ 200,000 110,000 $ 90,000 Expenses ................................................................... Less noncash items: Depreciation .......................................................... Amortization .......................................................... Cash expenses .......................................................... Less interest expense .......................................... Cash operating expenses ........................................ $ 110,000 (60,000) (10,000) $ 40,000 (3,500) $ 36,500 The following spreadsheet may be helpful in explaining the adjustments: Income Adjust Statement ments Sales revenue Cost of goods sold Depreciation expense Amortization expense Interest expense Other expenses Net income $500,000 –300,000 Cash Flows from Operations Cash collected from 13,000 customers –8,000 Cash paid for inventory –3,400 –60,000 60,000 Cash paid for depreciation –10,000 –3,500 10,000 Cash paid for goodwill 0 Cash paid for interest Cash paid for other 0 expenses –36,500 $ 90,000 ACC 1701 (AY2223 Sem1) Self Study Solutions Cash flows from operating activities $513,000 –311,400 0 0 –3,500 –36,500 $161,600 Page 85 of 97 P 14-20 (LO7) 1. Cash Flows from Operations (Direct Method) Sales revenue ............................................................... + Beginning accounts receivable ............................. – Ending accounts receivable .................................. Cash collected from customers .................................. $ 743,000 66,000 (77,000) Interest revenue ........................................................... + Beginning interest receivable ................................ – Ending interest receivable ..................................... Cash collected from interest ....................................... Total cash receipts from operations ..................... $ 24,000 12,000 (9,000) Cost of goods sold ....................................................... + Ending inventory..................................................... – Beginning inventory ............................................... Purchases ..................................................................... + Beginning accounts payable ................................. – Ending accounts payable ....................................... Cash paid for inventory ............................................... $ 383,000 222,000 (213,000) $ 392,000 44,000 (47,000) Wages expense ............................................................ + Beginning wages payable ...................................... – Ending wages payable ........................................... Cash paid for wages .................................................... $ 190,000 35,000 (37,000) $732,000 27,000 $759,000 $389,000 Cash paid for other operating expenses .................... Total cash payments for operations ..................... Net cash flows from operating activities.................... 2. 188,000 71,000 $648,000 $111,000 The $111,000 net cash flows from operations differs from the $81,000 net income ($743,000 + $24,000 – $383,000 – $190,000 – $42,000 – $71,000 = $81,000) because depreciation (a non-cash item) must be added back to net income and because net income must be adjusted from an accrual basis to a cash basis, as shown in part (1). Note that dividends do not enter into the computation of either amount; they are a financing activity. P 14-21 (LO7) Cash Flows from Operations (Direct Methods) Direct method: Cash collected from customers ........................................................ Cash paid for inventory ..................................................................... ACC 1701 (AY2223 Sem1) Self Study Solutions $111,300 (61,400) Page 86 of 97 Cash paid for S & A expenses .......................................................... Cash paid for interest expense ......................................................... Cash paid for income tax................................................................... Cash from operating activities .......................................................... AA 14-6 (20,350) (5,950) (9,060) $ 14,540 Philips Real Company Analysis 1. Yes. Most companies present the cash flow categories in the order of operating, investing, and financing. 2. An increase in receivables from the beginning to the end of the year indicates that less cash was received from customers than was reported as sales on the statement of comprehensive income. Since the statement of cash flows begins with a statement of comprehensive income figure (income from continuing operations) that includes sales, that figure must be reduced—hence the subtraction. 3. In fiscal year 2019, Philips spent €603 million on various investing activities. Cash flows from operations were €2,031 million, which was more than sufficient to pay for these investments. 4. Philips paid cash dividends of €453 million to common stockholders during fiscal year 2019. In addition, Philips made some other large payments to common stockholders during the year. The total cash paid for treasury share transaction during the year was €1,376 million. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 87 of 97 CHAPTER 15 PE 15-4 (LO2) Vertical and Horizontal Analyses of Statement of Comprehensive Income 1. Sales .............................................. Cost of goods sold ....................... Gross profit ............................. Operating expenses ..................... Operating income ......................... Interest expense ........................... Income before income taxes ....... Income tax expense ..................... Net income .................................... 2. Sales .............................................. Cost of goods sold ....................... Gross profit ............................. Operating expenses ..................... Operating income ......................... Interest expense ........................... Income before income taxes ....... Income tax expense ..................... Net income .................................... 3. Year 2 $200,000 100.0% 140,000 70.0 $ 60,000 30.0% 50,000 25.0 $ 10,000 5.0% 4,000 2.0 $ 6,000 3.0% 2,400 1.2 $ 3,600 1.8% Year 2 Year 1 $200,000 140,000 $ 60,000 50,000 $ 10,000 4,000 $ 6,000 2,400 $ 3,600 $160,000 100,000 $60,000 40,000 $20,000 4,000 $ 16,000 4,800 $ 11,200 Year 1 $160,000 100.0% 100,000 62.5 $60,000 37.5% 40,000 25.0 $20,000 12.5% 4,000 2.5 $16,000 10.0% 4,800 3.0 $11,200 7.0% Amount % Change Change $40,000 25 40,000 40 0 0 10,000 25 (10,000) (50) 0 0 (10,000) (62.5) (2,400) (50) (7,600) (67.9) The main reason for the decline in the return on sales from 7.0% in year 1 to 1.8% in year 2 is the decline in the gross profit as a percentage of sales, from 37.5% in year 1 to 30.0% in year 2. Interest expense as a percentage of sales actually declined in year 2; it appears that the company was able to increase its sales (from $160,000 to $200,000) without borrowing any additional money. Income tax expense as a percentage of sales also declined in year 2, but this news is not as good as it first appears. The reason that income tax expense is down is that income before income taxes is down. You may note that the income tax rate (income tax expense divided by income before income taxes) actually increases in year 2—from 30% in year 1 ($4,800/$16,000) to 40% in year 2 ($2,400/$6,000). ACC 1701 (AY2223 Sem1) Self Study Solutions Page 88 of 97 PE 15-5 (LO2) Vertical Analysis of Balance Sheet Assets Current assets: Cash ....................................................................... Accounts receivable ............................................. Inventory ................................................................ Total current assets ........................................ Property, plant, and equipment (net) ........................ Goodwill ...................................................................... Total assets ........................................................... $ 2,400 4,650 3,000 $10,050 16,500 2,850 $29,400 8.2% 15.8 10.2 34.2% 56.1 9.7 100.0% Liabilities and Equity Current liabilities: Accounts payable ................................................. Unearned revenue................................................. Total current liabilities .................................... Non-current liabilities ................................................ Total liabilities ....................................................... Capital stock ............................................................... Retained earnings ...................................................... Total liabilities and equity .................................... $ 3,600 1,900 $5,500 9,000 $14,500 7,500 7,400 $29,400 12.2% 6.5 18.7% 30.6 49.3% 25.5 25.2 100.0% PE 15-6 (LO3) Common-Size Balance Sheet Standardized Using Total Assets Assets Current assets: Cash ....................................................................... Accounts receivable ............................................. Inventory ................................................................ Total current assets ........................................ Property, plant, and equipment (net) ........................ Goodwill ...................................................................... Total assets ........................................................... $ 2,400 4,650 3,000 $10,050 16,500 2,850 $29,400 8.2% 15.8 10.2 34.2% 56.1 9.7 100.0% $ 3,600 1,900 $5,500 9,000 $14,500 12.2% 6.5 18.7% 30.6 49.3% Liabilities and Equity Current liabilities: Accounts payable ................................................. Unearned revenue................................................. Total current liabilities .................................... Non-current liabilities ................................................ Total liabilities ....................................................... ACC 1701 (AY2223 Sem1) Self Study Solutions Page 89 of 97 Capital stock ............................................................... Retained earnings ...................................................... Total liabilities and equity .................................... PE 15-8 (LO3) ............................................ Debt Ratio 7,500 7,400 $29,400 25.5 25.2 100.0% Debt ratio: Total liabilities / Total assets = $85,800 / $182,400 = 47.04% Total liabilities = $7,000 + $11,400 + $3,400 + $64,000 = $85,800 Total assets = $4,200 + $12,000 + $5,000 + $3,200 + $28,000 + $130,000 = $182,400 PE 15-9 (LO3) Current Ratio Current ratio = Current assets / Current liabilities = $24,400 / $21,800 = 1.12 Current assets = $4,200 + $12,000 + $8,200 = $24,400 Current liabilities = $7,000 + $11,400 + $3,400 = $21,800 PE 15-10 (LO3) Return on Sales Return on sales = Net income / Net sales = $20,000 / $210,000 = 9.5% PE 15-11 (LO3) Asset Turnover Asset turnover = Net sales / Average total assets = $210,000 / $211,200 = 0.99 times Average total assets = ($182,400 + $240,000) / 2 = $211,200 PE 15-12 (LO3) Return on Equity Return on equity = (NET INCOME – PREFERENCE DIVIDENDS ) / AVERAGE TOTAL EQUITY = ($20,000 – 0) / $106,000 = 18.9% Average total equity = ($96,600 + $115,400) / 2 = $106,000 PE 15-13 (LO3) Price-Earnings Ratio PE ratio = Market values of shares / Net income = $206,000 / $20,000 = 10.3 ACC 1701 (AY2223 Sem1) Self Study Solutions Page 90 of 97 PE 15-14 (LO3) Acid-Test (Quick) Ratio Acid-test ratio = (Current assets – inventories – prepayments) / Current liabilities = ($24,400 – $5,000 – $3,200) / $21,800 = 0.74 PE 15-15 (LO3) A/R turnover PE 15-16 (LO3) Accounts Receivable Turnover = Sales revenue Average accounts receivable = $1,300,000 = 11.61 times ($104,000 + $120,000)/2 Average Collection Period Average collection period = 365 365 = = 31.4 days Accounts receivable turnover 11.61* *The accounts receivable turnover of 11.61 was calculated in PE 15-15 by dividing sales by the average accounts receivable. PE 15-17 (LO3) Inventory Turnover Inventory turnover = PE 15-18 (LO3) Cost of goods sold $171,000 = = 4.38 times ($37,000 + $41,000)/2 Average inventory Number of Days’ Sales in Inventory Number of days’ sales in inventory = 365 365 = = 83.3 days Inventory turnover 4.38* *For computation of inventory turnover, refer to PE 15-17. PE 15-19 (LO3) Fixed Asset Turnover Fixed asset turnover = = Sales Average fixed assets $1,520,000 = 2.38 times ($680,000 + $600,000)/2 ACC 1701 (AY2223 Sem1) Self Study Solutions Page 91 of 97 PE 15-23 (LO3) Earnings Per Share INCOME – PREFERENCE DIVIDENDS ) / W EIGHTED -AVERAGE COMMON SHARES OUTSTANDING = ($37,500 - $1,500) / 18,000) = $2 EPS = (NET ACC 1701 (AY2223 Sem1) Self Study Solutions Page 92 of 97 PE 15-30 (LO4) DuPont Framework Computations Total equity must be computed using the accounting equation, as follows: Total assets $350,000 – Total liabilities $200,000 = Total equity $150,000 Return on equity = Return on sales  Asset turnover  Assets-to-equity ratio Net income Equity = Net income Sales  Sales Assets  Assets Equity $30,000 $150,000 = $30,000 $500,000  $500,000 $350,000  $350,000 $150,000 20.0% = 6.0%  1.43  2.33 E 15-16 (LO3) Ratio Analysis 1. Inventory turnover = 3.6 = Cost of goods sold  € 200,000 + € 180,000    2 3.6 X €190,000 = Cost of goods sold Cost of goods sold = €684,000. 2. Accounts receivable turnover = 7.8 = Net sales (credit)  €73,000 + € 126,000    2 7.8 X €99,500 = Net sales (credit) = €776,100. 3. Return on ordinary shareholders’ equity = 25% = Net income  € 400,000 + €134,000 + €400,000 + €122,000    2 ACC 1701 (AY2223 Sem1) Self Study Solutions Page 93 of 97 0.25 X €528,000 = Net income = €132,000. 4. Return on assets = 20% = Average assets = € 132,000 [see (c) above] € 132,000 0.20 Average assets = €660,000 [Total assets (Dec. 31, 2022) + €650,000]/2 = €660,000 Total assets (Dec. 31, 2022) = (€660,000 × 2) – €650,000 = €670,00 E 15-27 (LO4) DuPont Framework for Analyzing Financial Statements Profitability  Efficiency  Leverage = Return on equity Profit margin  Asset turnover  Assets-to-equity = Return on equity $87,500 $200,000 $200,000 $335,000 $335,000 $255,000 $87,500 $255,000 43.8% 0.60 1.31 34.3% E 15-28 (LO4) DuPont Framework for Analyzing Financial Statements Profitability  Efficiency  Leverage = Return on equity Profit margin  Asset turnover  Assets-to-equity = Return on equity ($238,000/$640,000)  ($640,000/$900,000)  ($900,000/$750,000) = = 37.2%  0.71  1.2 = ($238,000/$750,000) = 31.7% ACC 1701 (AY2223 Sem1) Self Study Solutions Page 94 of 97 P 15-6 (LO2) Common-Size Financial Statements W. Gretsky Company Statement of Comprehensive Income For the Year Ended December 31, 2022 $360,000 200,000 $160,000 % 100.0% 55.6% 44.4% 60,000 14,000 $ 86,000 0 $ 86,000 16.7% 3.9% 23.9% 0 23.9% Assets Cash Accounts Receivable Inventory Buildings Total Assets $ 66,000 30,000 20,000 300,000 $416,000 % 18.3% 8.3% 5.6% 83.3% 115.6% Liabilities Accounts Payable $ 20,000 5.6% $270,000 126,000 $396,000 75.0% 35.0% 110.0% $416,000 115.6% Sales Less: Cost of Goods Sold Gross Profit Less: Operating Expenses Salaries Expense Advertising Expense Net Income Other comprehensive income Comprehensive income W. Gretsky Company Balance Sheet December 31, 2022 Equity Capital Stock Retained Earnings Total Equity Total Liabilities and Equity Note: Using sales revenue as a denominate. ACC 1701 (AY2223 Sem1) Self Study Solutions Page 95 of 97 P 15-11 (LO3) 1. Ratio Analysis Ratios a. b. c. d. e. Current ratio ............................................................ Debt ratio ................................................................. Asset turnover ........................................................ Return on sales ....................................................... Return on equity ..................................................... 2023 2022 1.36 0.80 38.6% 37.5% 3.15 times 2.67 times 7.4% 6.3% 37.5% 28.0% Calculations a. Current ratio 2023: ($8,000 + $32,000 + $80,000) / $88,000 2022: ($12,000 + $28,000 + $40,000) / $100,000 b. Debt ratio 2023: ($88,000 + $48,000) / $352,000 2022: ($100,000 + $20,000) / $320,000 c. Asset Turnover 2023: $1,060,000 / [($352,000 + $320,000) / 2] 2022: $896,000 / [($320,000 + $350,000) / 2] d. Return on sales 2023: $78,000 / $1,060,000 2022: $56,000 / $896,000 e. Return on equity 2023:$78,000 / {[($120,000 + $96,000) + ($120,000 + $80,000)] / 2} 2022:$56,000 / {[($120,000 + $80,000) + $200,000] / 2} ACC 1701 (AY2223 Sem1) Self Study Solutions Page 96 of 97 2. There is improvement. Many of the ratios have improved from 2022 to 2023. In particular, both profitability and efficiency increased from 2022 to 2023, combining to increase overall return on assets. There may be some concern about the increasing amount of leverage. However, the level of debt still appears to be low. ~ END OF SOLUTIONS ~ ACC 1701 (AY2223 Sem1) Self Study Solutions Page 97 of 97

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