Chapter 01 - Financial Statements and Business Decisions
HANDOUT 1 – 1 SOLUTION
TEAM PROJECT – OVERVIEW OF FINANCIAL STATEMENTS
Complete the following table.
Purpose
Financial Statement
Income Statement
Statement of Stockholders’
Equity
Balance Sheet
Statement of Cash Flows
Equation
Reports the financial
performance of the business
during the current accounting
period.
Explains changes in
stockholders’ equity accounts
(common stock and retained
earnings) for a stated period
of time.
Reports the financial position
of a business at a point in
time.
Revenues
– Expenses
= Net Income
Reports the inflows (receipts)
and outflows (payments) for a
stated period of time.
+/- Cash Flows from
Operating Activities
+/- Cash Flows from
Investing Activities
+/- Cash Flows from
Financing Activities
= Change in Cash
+ Beginning Cash
= Ending Cash
Beginning balance
+ Increases
– Decreases
= Ending balances
Assets = Liabilities +
Stockholders’ Equity
RELATIONSHIPS AMONG FINANCIAL STATEMENTS
Then, answer the following questions:
1. How does the income statement tie to the statement of stockholders’ equity?
Net income, from the income statement, is a component in determining ending retained earnings on
the statement of stockholders’ equity.
2. How does the statement of stockholders’ equity stockholders’ equity tie to the balance sheet?
The amount of ending retained earnings is then reported on the balance sheet.
3. How does the balance sheet tie to the statement of cash flows?
Cash on the balance sheet is equal to the ending cash reported on the statement of cash flows.
1-14
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Chapter 01 - Financial Statements and Business Decisions
HANDOUT 1 – 2 SOLUTION
BASIC BALANCE SHEET ELEMENTS
Match each account to its classification on the balance sheet:
Account
Asset
Liability
a. Notes Payable
b. Cash
X
X
c. Common Stock
X
d. Inventories
X
e. Accounts Receivable
X
f.
Accounts Payable
g. Property, Plant, &
Equipment
X
X
h. Notes Payable
i.
Stockholders’
Equity
X
Retained Earnings
X
1-16
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Chapter 01 - Financial Statements and Business Decisions
HANDOUT 1 – 3 SOLUTION
STATEMENT OF CASH FLOWS
Match each activity to its classification on the statement of cash flows:
Activity
a. Cash paid to suppliers
and employees
Operating
Investing
X
b. Cash paid to purchase
equipment and other
assets
X
c. Cash paid for dividends
d. Cash collected from
customers
X
X
e. Cash received from
selling equipment and
other long-term assets
f.
Financing
X
Cash paid on notes
payable and other
financing
X
1-18
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Education.
Chapter 01 - Financial Statements and Business Decisions
HANDOUT 1 – 4 SOLUTION
COMPONENTS OF FINANCIAL STATEMENTS
Match each account, element, or transaction to the financial statement(s) on which it would be reported.
Account or Element
Income
Statement
Statement of
Stockholders’
Equity
Balance Sheet
a. The amount of cash
paid for equipment
X
b. Cash
X
c. Notes Payable
X
d. Common Stock
X
e. Inventories
f.
Cost of Goods Sold
X
X
X (1)
h. Accounts
Receivable
X
i.
Notes Payable
X
j.
Marketing Expense
X
k. Property, Plant, &
Equipment
X
Dividends paid to
stockholders
m. Net Income
X
X
g. The amount of cash
collected from
customers
l.
Statement of
Cash Flows
X
X
X
X
X (2)
(1) Reported on the statement of cash flows when the direct method is used.
(2) Reported on the statement of cash flows when the indirect method is used.
1-20
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Chapter 01 - Financial Statements and Business Decisions
HANDOUTS 1 – 5 and 1 – 6 SOLUTIONS
ACRONYMS
Professional Organizations
American Accounting Association
American Institute of Certified Public Accountants
Financial Accounting Foundation
Financial Accounting Standards Board
Governmental Accounting Standards Board
Internal Accounting Standards Board
Institute of Management Accountants
National Association of State Boards of Accountancy
Acronyms
AAA
AICPA
FAF
FASB
GASB
IASB
IMA
NASBA
Federal Government Agencies
Federal Communications Commission
Federal Deposit Insurance Corporation
Federal Trade Commission
General Accounting Office
Internal Revenue Service
Public Company Accounting Oversight Board
Small Business Administration
Securities & Exchange Commission
FCC
FDIC
FTC
GAO
IRS
PCAOB
SBA
SEC
Standards
Accounting Principles Board (1959-1973)
Accounting Research Bulletins (1939-1959)
Accounting Series Release (SEC)
Generally Accepted Accounting Principles
Generally Accepted Auditing Standards
International Financial Reporting Standards
Statement on Auditing Standards (AICPA)
Statement of Financial Accounting Concepts (FASB)
Statement of Financial Accounting Standards (FASB)
APB
ARBs
ASR
GAAP
GAAS
IFRS
SAS
SFAC
SFAS
Selected Professional Certifications
Certified Public Accountant
Certified Fraud Examiner
Certified Internal Auditor
Certified Management Accountant
Certified Public Accountant
CPA
CFE
CIA
CMA
CPA
Miscellaneous Terms in Accounting, Business, and Economics
Consumer Price Index
Continuing Professional Education
Earnings Per Share
Federal Insurance Contributions Act
Federal Unemployment Tax Act
Gross National Product
CPI
CPE
EPS
FICA
FUTA
GNP
1-23
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Education.
Chapter 02 - Investing and Financing Decisions and the Accounting System
HANDOUT 2 – 1 SOLUTION
ANALYZING TRANSACTIONS
Analyze each of the following transactions of World Wide Webster by performing each of the following
steps. Then, use the chart on the following page to (1) keep track of the amount in each account and (2)
ensure the accounting equation is in balance.
(a) Stockholder invests $10,000 into the business in exchange for 10,000 shares of $1 par value common
stock.
1. Decide if a transaction took place.
Yes – received cash and gave stock.
2. Identify the accounts affected.
Cash and Common Stock
3. Classify each account affected.
Cash is an Asset (A) and Common Stock is
Stockholders’ Equity (SE)
4. Identify direction and amount.
Cash (A) + $10,000 = Common Stock (SE) + $10,000.
5.
Ensure the accounting equation is in
balance.
Yes – see below.
(b) Borrow $15,000 signing a note payable to the bank that is due in three months.
1. Decide if a transaction took place.
Yes – received cash and gave a short-term note payable.
2. Identify the accounts affected.
Cash and Short-Term Notes Payable
3. Classify each account affected.
4. Identify direction and amount.
5.
Ensure the accounting equation is in
balance.
Cash is an Asset (A) and Short-Term Notes Payable is a
Liability (L)
Cash (A) + $15,000 = Short-Term Notes Payable +
$15,000.
Yes – see below.
(c) Acquire a $15,000 truck and $5,000 worth of equipment.
1.
Decide if a transaction took place. Yes – paid cash and received truck and equipment.
2.
Identify the accounts affected.
Cash and Equipment
3.
Classify each account affected.
Cash is an Asset (A) and Equipment is an Asset (A)
4.
Identify direction and amount.
Cash (A) - $20,000 and Equipment (A) + $20,000
5.
Ensure the accounting equation is
in balance.
Yes – see below.
2-21
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Chapter 02 - Investing and Financing Decisions and the Accounting System
HANDOUT 2 – 1 SOLUTION, continued
(d) Purchase $300 worth of supplies from a vendor on credit. (“On credit,” or “on account,” means that
the company received the supplies now and will pay for them later.)
1.
Decide if a transaction took place.
Yes – received supplies and obligated to pay for them.
2.
Identify the accounts affected.
Supplies and Accounts Payable
3.
Classify each account affected.
Supplies is an Asset (A) and Accounts Payable is a
Liability (L)
4.
Identify direction and amount.
Supplies (A) + $300 and Accounts Payable (L) + $300.
5.
Ensure the accounting equation is in
balance.
Yes – see below.
(e) Sign contract for first website design for $10,000.
1.
Decide if a transaction took place.
No – no exchange took place.
2.
Identify the accounts affected.
3.
Classify each account affected.
4.
Identify direction and amount.
5.
Ensure the accounting equation is in
balance.
Chart
Assets
=
Ref.
Cash
+ Supplies + Equipment
(a)
+10,000
(b)
+15,000
(c)
–20,000
+20,000
(d)
+300
Total
5,000
300
20,000
Assets $25,300
=
=
=
=
=
Liabilities
Accounts
Payable +
ShortTerm
Notes
Payable
+
+
Stockholders’
Equity
Common Stock
+10,000
+15,000
+300
300
15,000
10,000
= Liabilities $15,300 + Stockholders’ Equity
$10,000
$25,300 = $25,300
2-22
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Education.
Chapter 02 - Investing and Financing Decisions and the Accounting System
HANDOUT 2 – 2 SOLUTION
ANALYZING TRANSACTIONS
Analyze each of the following transactions of World Wide Webster by performing each of the following
steps. Then, use the chart on the following page to (1) keep track of the amount in each account and (2)
ensure the accounting equation is in balance.
(f) Company pays $300 on accounts payable to the vendor in (d).
1. Decide if a transaction took place.
Yes – paid cash to reduce accounts payable.
2. Identify the accounts affected.
Cash and Accounts Payable
3. Classify each account affected.
Cash is an Asset (A) and Accounts Payable is a Liability
(L)
4. Identify direction and amount.
Cash (A) – $300 = Liabilities (L) – $300
5.
Ensure the accounting equation is
in balance.
Yes – see below.
(g) Company pays for and receives $600 worth of supplies.
1. Decide if a transaction took place.
Yes – paid cash to purchase supplies.
2. Identify the accounts affected.
Cash and Supplies
3. Classify each account affected.
Cash is an Asset (A) and Supplies is an Asset
4. Identify direction and amount.
Cash (A) – $600 and Supplies (A) + $600.
5.
Ensure the accounting equation is
in balance.
Yes - see below.
(h) Company acquires and receives $1,000 worth of equipment.
1. Decide if a transaction took place.
Yes – paid cash to purchase equipment
2. Identify the accounts affected.
Cash and Equipment
3. Classify each account affected.
Cash is an Asset (A) and Equipment is an Asset (A)
4. Identify direction and amount.
Cash (A) – $1,000 and Equipment (A) + $1,000
5.
Ensure the accounting equation is
in balance.
Yes - see below.
2-25
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Chapter 02 - Investing and Financing Decisions and the Accounting System
HANDOUT 2 – 2 SOLUTION, continued
(i) Order a $900 computer, to be delivered next month.
1. Decide if a transaction took place.
No exchange took place.
2. Identify the accounts affected.
3. Classify each account affected.
4. Identify direction and amount.
5.
Ensure the accounting equation is
in balance.
Chart
Assets
=
Ref.
Cash
+ Supplies + Equipment =
(a)
+10,000
=
(b)
+15,000
=
(c)
–20,000
+20,000 =
(d)
+300
(f)
–300
(g)
–600
(h)
–1,000
Liabilities
Accounts
Payable +
=
+
ShortTerm
Notes
Payable
+
Stockholders’
Equity
Common
Stock
+10,000
+15,000
+300
–300
+600
+1,000
(i)
Total
3,100
900
21,000
0
15,000
10,000
Assets $25,000 = Liabilities $15,000 + Stockholders’ Equity
$10,000
$25,000 = $25,000
2-26
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Chapter 02 - Investing and Financing Decisions and the Accounting System
HANDOUT 2 – 3 SOLUTION
THE DEBIT/CREDIT FRAMEWORK
Analyze each of the following transactions of World Wide Webster and prepare the journal entry required
to record the related transaction.
(a) Stockholder invests $10,000 into the business in exchange for 10,000 shares of $1 par value common
stock.
Debit and credit the accounts affected
(a)
Cash (+A)
Common Stock (+SE)
10,000
10,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Cash
+10,000
+
Stockholders’ Equity
Common
+10,000
Stock
(b) Borrow $15,000 signing a note payable to the bank that is due in three months.
Debit and credit the accounts affected
(b)
Cash (+A)
Short-Term Notes Payable (+L)
15,000
15,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Cash
+15,000
Short-Term
+15,000
Notes
Payable
Stockholders’ Equity
(c) Acquire a $15,000 truck and $5,000 worth of equipment.
Debit and credit the accounts affected
(c)
Equipment (+A)
Cash (–A)
20,000
20,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Cash
–20,000
Equipment
+20,000
+
Stockholders’ Equity
2-29
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Chapter 02 - Investing and Financing Decisions and the Accounting System
HANDOUT 2 – 3 SOLUTION, continued
(d) Purchase $300 worth of supplies from a vendor on credit. (“On credit,” or “on account,” means that
the company received the supplies now and will pay for them later.)
Debit and credit the accounts affected
(d)
Supplies (+A)
Accounts Payable (+A)
300
300
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Supplies
+300
Accounts
Payable
+
Stockholders’ Equity
+300
(e) Sign contract for first website design for $10,000.
No entry – this is not a transaction
2-30
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Education.
Chapter 02 - Investing and Financing Decisions and the Accounting System
HANDOUT 2 – 4 SOLUTION
THE DEBIT/CREDIT FRAMEWORK
Analyze each of the following transactions of World Wide Webster and prepare the journal entry required
to record the related transaction.
(f) Company pays $300 on accounts payable to the vendor in (d).
Debit and credit the accounts affected
(f)
Accounts Payable (–L)
Cash (–A)
300
300
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Cash
–300
Acct. Pay.
+
Stockholders’ Equity
–300
(g) Company pays for and receives $600 worth of supplies.
Debit and credit the accounts affected
(g)
Supplies (+A)
Cash (–A)
600
600
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Supplies
+600
Cash
+
Stockholders’ Equity
–600
(h) Company acquires and receives $1,000 worth of equipment.
Debit and credit the accounts affected
(h)
Equipment (+A)
Cash (–A)
1,000
1,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Equipment
+1,000
Cash
+
Stockholders’ Equity
–1,000
(i) Order a $900 computer, to be delivered in 90 days.
No entry – this is not a transaction.
2-33
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Education.
Chapter 02 - Investing and Financing Decisions and the Accounting System
HANDOUT 2 – 5 SOLUTION
POSTING TO T-ACCOUNTS
Post the transactions from handouts 2-3 and 2-4 and determine the ending balances of each of the
following T-accounts.
Assets
+ Cash –
BegBal
0
(a)
10,000
(b)
15,000 20,000
300
600
1,000
EndBal 3,100
BegBal
(d)
(g)
EndBal
+ Supplies –
0
300
600
900
Liabilities
(c)
(f)
(g)
(h)
- Accounts Payable +
0 BegBal
(f)
300 300
(d)
0 EndBal
Stockholders’ Equity
- Common Stock +
0 BegBal
10,000 (a)
10,000 EndBal
- Short-Term Notes Payable +
0 BegBal
15,000 (b)
15,000 EndBal
- Retained Earnings +
0 BegBal
0 EndBal
+ Equipment –
BegBal
0
(c)
20,000
(h)
1,000
EndBal 21,000
2-35
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Chapter 02 - Investing and Financing Decisions and the Accounting System
HANDOUT 2 – 6 SOLUTION
PREPARING A TRIAL BALANCE
Use the ending balances from the T-accounts on Handout 2-5 to prepare a trial balance for World Wide
Webster as of December 31 of the current year.
World Wide Webster
Trial Balance
At December 31, Current Year
Cash
Supplies
Equipment
Short-Term Notes Payable
Common Stock
Totals
Debit
$ 3,100
900
21,000
$25,000
Credit
$15,000
10,000
$25,000
2-37
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Chapter 02 - Investing and Financing Decisions and the Accounting System
HANDOUT 2 – 7 SOLUTION
PREPARING A BALANCE SHEET
Use the balances from the trial balance on Handout 2-6 to prepare a classified balance sheet for World
Wide Webster as of December 31 of the current year.
World Wide Webster
Balance Sheet
At December 31, Current Year
Assets
Current Assets:
Cash
Supplies
Total Current Assets
Equipment
Total Assets
$ 3,100
900
4,000
21,000
$25,000
Liabilities
Current Liabilities:
Short-Term Notes Payable
Total Current Liabilities
$15,000
15,000
Stockholders’ Equity
Common Stock
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
10,000
0
10,000
$25,000
2-39
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Chapter 02 - Investing and Financing Decisions and the Accounting System
HANDOUT 2 – 8 SOLUTION
CURRENT RATIO
Refer to the classified balance sheet from Handout 2-7 and calculate the current ratio of World Wide
Webster as of December 31 of the current year. Then, interpret the current ratio.
Calculation:
Current Ratio = Current Assets ÷ Current Liabilities
Current ratio = $4,000 ÷ $15,000 = 0.27
Interpretation:
A current ratio of 0.27 indicates that the company has $0.27 of current assets for $1.00 of current
liabilities. It does not appear that the company’s current assets are sufficient to pay its current
liabilities.
2-41
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Education.
Chapter 03 - Operating Decisions and the Accounting System
HANDOUT 3 – 1 SOLUTION
TRANSACTION ANALYSIS
Tabor Hill Designers entered into the following transactions during February of the current year. Analyze
each of the following transactions and prepare the journal entry required to record the related transaction.
(a) Provide website design services for $40,000.
Debit and credit the accounts affected
Cash (+A)
Design Revenue (+R, +SE)
40,000
40,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Cash
+40,000
+
Stockholders’ Equity
Design
+40,000
Revenue
(b) Provide website design services to Acme Company, for $20,000 on account. We expect Acme to pay
in the future.
Debit and credit the accounts affected
Accounts Receivable (+A)
Design Revenue (+R, +SE)
20,000
20,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Accounts
+20,000
Receivable
+
Stockholders’ Equity
Design
+20,000
Revenue
(c) Collect $18,000 from Acme Company on account.
Debit and credit the accounts affected
Cash (+A)
Accounts Receivable (–A)
18,000
18,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Cash
+18,000
Accounts
–18,000
Receivable
+
Stockholders’ Equity
3-19
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Education.
Chapter 03 - Operating Decisions and the Accounting System
HANDOUT 3 – 1 SOLUTION, continued
(d) Sell a $1,000 gift certificate.
Debit and credit the accounts affected
Cash (+A)
Unearned Revenue (+L)
1,000
1,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Cash
+1,000
Unearned
+1,000
Revenue
+
Stockholders’ Equity
(e) Paid $900 principal and $100 interest on the short-term note payable.
Debit and credit the accounts affected
Short-Term Note Payable (-L)
Interest Expense (+E, -SE)
Cash (-A)
900
100
1,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Cash
-1,000
Short-Term
Note Payable
+
-900
Stockholders’ Equity
Interest
-100
Expense
(f) Paid $16,000 wages to employees.
Debit and credit the accounts affected
Wage Expense (+E, –SE)
Cash (–A)
16,000
16,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Cash
–16,000
+
Stockholders’ Equity
Wage
–16,000
Expense
3-20
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Chapter 03 - Operating Decisions and the Accounting System
HANDOUT 3 – 1 SOLUTION, continued
(g) Paid $3,000 insurance for next year in advance.
Debit and credit the accounts affected
Prepaid Expenses (+A)
Cash (–A)
3,000
3,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Prepaid
+3,000
Expenses
Cash
–3,000
+
Stockholders’ Equity
(h) Paid $9,000 rent for next six months in advance.
Debit and credit the accounts affected
Prepaid Expenses (+A)
Cash (–A)
9,000
9,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Prepaid
+9,000
Expenses
Cash
–9,000
+
Stockholders’ Equity
(i) Received $250 telephone bill for previous month, to be paid next month.
Debit and credit the accounts affected
Telephone Expense (+E, –SE)
Accounts Payable (+L)
250
250
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Accounts
Payable
+
+250
Stockholders’ Equity
Telephone
–250
Expense
(j) Paid $500 utility bill for this month.
Debit and credit the accounts affected
Utilities Expense (+E, –SE)
Cash (–A)
500
500
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Cash
–500
+
Stockholders’ Equity
Utilities
–500
Expense
3-21
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Education.
Chapter 03 - Operating Decisions and the Accounting System
HANDOUT 3 – 2 SOLUTION
POSTING TO T-ACCOUNTS
The following T-accounts set forth the ending balances of the accounts of Tabor Hill Designers as of
January 31of the current year. Refer to Handout 3-1. Post each of the February journal entries to the Taccounts.
Assets
+ Cash –
BegBal 4,100
(a)
40,000 1,000 (e)
(c)
18,000 16,000 (f)
(d)
1,000 3,000 (g)
9,000 (h)
500 (j)
EndBal 33,600
+ Accounts Receivable –
BegBal
0
(b)
20,000 18,000 (c)
EndBal 2,000
BegBal
EndBal
Liabilities
Stockholders’ Equity
– Accounts Payable +
0 BegBal
250 (i)
250 EndBal
– Common Stock +
10,000 BegBal
– Unearned Revenue +
0 BegBal
1,000 (d)
1,000 EndBal
– Retained Earnings +
1,000 BegBal
1,000 EndBal
– Short-Term Notes Payable +
15,000 BegBal
(e) 900
14,100 EndBal
+ Supplies –
900
900
10,000 EndBal
– Design Revenue +
0 BegBal
40,000 (a)
20,000 (b)
60,000 EndBal
BegBal
(f)
EndBal
+ Prepaid Expenses –
BegBal
0
(g)
3,000
(h)
9,000
EndBal 12,000
+ Wage Expense –
0
16,000
16,000
+ Utilities Expense –
BegBal
0
(j)
500
EndBal
500
+ Property, Plant & Equipment –
BegBal 21,000
EndBal 21,000
+ Telephone Expense –
BegBal
0
(i)
250
EndBal
250
+ Interest Expense –
BegBal
0
(e)
100
EndBal
100
3-23
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Chapter 03 - Operating Decisions and the Accounting System
HANDOUT 3 – 3
PREPARING A TRIAL BALANCE
Use the ending balances from the T-accounts on Handout 2-5 to prepare a trial balance for World Wide
Webster as of February 28 of the current year.
World Wide Webster
Trial Balance
At February 28, Current Year
Cash
Accounts receivable
Supplies
Prepaid expenses
Property, plant, and equipment
Accounts Payable
Unearned Revenue
Short-Term Notes Payable
Common Stock
Retained Earnings
Design revenue
Wage expense
Utilities expense
Telephone expense
Interest expense
Totals
Debit
33,600
2,000
900
12,000
21,000
Credit
250
1,000
14,100
10,000
1,000
60,000
16,000
500
250
100
86,350
86,350
3-25
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Chapter 03 - Operating Decisions and the Accounting System
HANDOUT 3 – 4 SOLUTION
PREPARING A CLASSIFIED INCOME STATEMENT
Use the ending balances from the T-accounts on Handout 3-2 to prepare a classified income statement for
Tabor Hill as of and for the month ended February 28 of the current year. (Ignore income tax expense.)
Tabor Hill Designers
Income Statement
For the Month Ended February 28, Current Year
Design revenue
Operating expenses:
Wage expense
Utilities expense
Telephone expense
Total operating expenses
Income from operations
Other items:
Interest expense
Income before income taxes
Income tax expense
Net income
$60,000
16,000
500
250
16,750
43,250
(100)
43,150
0
$43,150
3-27
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Chapter 03 - Operating Decisions and the Accounting System
HANDOUT 3 – 5 SOLUTION
NET PROFIT MARGIN RATIO
Refer to the financial statements from Handout 3-3 and calculate the net profit margin ratio of Tabor Hill
Designers for the month ending February 28 of the current year. Then, indicate what this ratio measures
and how you would interpret the results.
Calculation:
Net Profit Margin = Net Income ÷ Net Sales (or Operating Revenues)
Net Profit Margin = $43,150 ÷ $60,000 = 0.719 or 71.9%
What it measures and how to interpret:
The net profit margin ratio measures the profit generated per dollar of sales (operating revenues).
Tabor Hill is generating just under $0.72 of net income per dollar of operating revenues.
The net profit margin ratio would be interpreted by comparison to that of prior periods and to that of
the company’s competitors.
The higher the ratio, the more effective the company is at generating revenues and/or controlling costs.
3-29
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
HANDOUT 4 – 1 SOLUTION
ADJUSTING ENTRIES AND
POSTING TO T-ACCOUNTS
Prepare the required adjusting journal entry for each situation as of December 31 of the current year. See
the last page for the unadjusted account balances shown in T-accounts.
(a) Suppose Deana’s had received a $1,800 shipment of supplies in September of the current year. When
counting the supplies on December 31 of the current year, Deana’s found only $800 worth of supplies
on hand.
Debit and credit the accounts affected.
Dec. 31
Supplies Expense (+E, –SE)
Supplies (–A)
1,000
1,000
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
Supplies
–1,000
(–A)
+
Stockholders’ Equity
Supplies Exp.
–1,000
(+E)
(b) Suppose Deana’s had paid $12,000 for six months’ rent on November 1 of the current year. As of
December, 31 of the current year, two months’ (November & December) prepaid rent has expired.
Debit and credit the accounts affected.
Dec. 31
Rent Expense (+E, –SE)
Prepaid Rent (–A)
4,000
4,000
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
Prepaid
–4,000
Rent
(–A)
+
Stockholders’ Equity
Rent Exp.
–4,000
(+E)
(c) Suppose Deana’s had paid $6,000 for one year’s insurance on June 1 of the current year.
Debit and credit the accounts affected.
Dec. 31
Insurance Expense (+E, –SE)
Prepaid Insurance (–A)
Ensure the equation still balances and debits = credits.
Assets
Prepaid
Insurance
(–A)
=
Liabilities
–3,500
3,500
3,500
+
Stockholders’ Equity
Insurance
–3,500
Exp. (+E)
4-18
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
HANDOUT 4 – 1 SOLUTION, continued
(d) The company had acquired equipment costing $40,000 on January 1 of the current year. Suppose that
the depreciation on this equipment was calculated to be $2,000 for the current year.
Debit and credit the accounts affected.
Dec. 31
Depreciation Expense (+E, –SE)
Accumulated Depreciation (+xA, –A)
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
Accumulated
–2,000
Depreciation
(+xA)
2,000
2,000
+
Stockholders’ Equity
Depreciation
–2,000
Exp. (+E)
(e) On December 1 of the current year, the company had sold $500 in gift certificates for decorating
services to a customer. On December 31 of the current year, the accountant received an envelope
containing $400 worth of redeemed gift certificates, not yet recorded in the company’s books.
Debit and credit the accounts affected.
Dec. 31
Unearned Revenue (–L)
Decorating Revenue (+R, +SE)
400
400
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
Unearned
–400
Revenue
+400
Revenue
(+R)
(–L)
(f) Investments owned by the company earned $1,200 in additional interest revenue for the year; the cash
will be received in January.
Debit and credit the accounts affected.
Dec. 31
Interest Receivable (+A)
Interest Revenue (+R, +SE)
1,200
1,200
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
Interest
+1,200
Receivable
(+A)
+
Stockholders’ Equity
Interest
+1,200
Revenue
(+R)
4-19
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
HANDOUT 4 – 1 SOLUTION, continued
(g) The company borrowed using a note payable from the bank for $30,000 on January 1 of the current
year, due with all interest on June 30 of the following year. The note payable requires 10% interest.
Debit and credit the accounts affected.
Dec. 31
Interest Expense (+E, –SE)
Interest Payable (+L)
Ensure the equation still balances and debits = credits.
Assets
=
3,000
3,000
Liabilities
Interest
Payable
(+L)
+
+3,000
Stockholders’ Equity
Interest
–3,000
Expense (+E)
(h) The company calculated its income taxes as $26,110 for the current year ended December 31.
Debit and credit the accounts affected.
Dec. 31
Income Tax Expense (+E, –SE)
Income Taxes Payable (+L)
26,110
26,110
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
Income
+26,110
Income Tax
–26,110
Taxes
Expense (+E)
Payable
(+L)
(i) On December 15 of the current year, the company declared a $750 dividend, payable January 15 of the
following year.
Debit and credit the accounts affected.
Dec. 31
Retained Earnings (–SE)
Dividend Payable (+L)
ensure the equation still balances and debits = credits.
Assets
=
Liabilities
Dividend
Payable
(+L)
750
750
+
+750
Stockholders’ Equity
Retained
–750
Earnings
(–SE)
i
4-20
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
HANDOUT 4 – 1 SOLUTION, continued
Assets
+ Cash –
43,450
Liabilities
– Accounts Payable +
250 Unadj.
+ Accounts Receivable –
Unadj.
4,000
4,000
– Dividend Payable +
0 Unadj.
750 (i)
750 Adj.
+ Interest Receivable –
Unadj.
0
(f)
1,200
Adj.
1,200
– Unearned Revenue +
500 Unadj.
(e)
400
100 Adj.
+ Supplies –
1,800
1,000 (a)
800
– Short-Term
Note Payable +
30,000 Unadj.
Unadj.
Adj.
Unadj.
Adj.
+ Prepaid Insurance –
Unadj. 6,000
3,500 (c)
Adj.
2,500
+ Prepaid Rent –
Unadj. 12,000
4,000 (b)
Adj.
8,000
+ Equipment –
Unadj. 40,000
Adj.
40,000
– Accumulated Depr. +
0 Unadj.
2,000 (d)
2,000 Adj.
+ Long-Term Investments –
Unadj. 20,000
Adj.
– Interest Payable +
0 Unadj.
3,000 (g)
3,000 Adj.
– Income Taxes Payable +
0 Unadj.
26,110 (h)
26,110 Adj.
Stockholders’ Equity
– Retained Earnings +
0 Unadj.
(i)
750
Adj.
750
– Decorating Revenue +
120,000 Unadj.
400 (e)
120,400 Adj.
– Interest Revenue +
1,200 (f)
Unadj.
+ Wage Expense –
32,000
+ Utilities Expense –
Unadj.
1,000
+ Telephone Expense –
Unadj.
500
(a)
+ Supplies Expense –
1,000
(b)
+ Rent Expense –
4,000
(c)
+ Insurance Expense –
3,500
(d)
+ Depreciation Expense –
2,000
(g)
+ Interest Expense –
3,000
(h)
+ Income Tax Expense –
26,110
Stockholders’ Equity
– Common Stock +
1,000 Unadj.
1,000 Adj.
– Additional Paid-In
Capital +
9,000 Unadj.
9,000 Adj.
20,000
4-21
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
HANDOUT 4 – 2 SOLUTION
PREPARE AN ADJUSTED TRIAL BALANCE
Use the adjusted balances from the T-accounts in Handout 4-1 to prepare an adjusted trial balance for
Deana’s Decorators as of December 31 of the current year.
Deana’s Decorators
Adjusted Trial Balance
December 31, Current Year
Debit
$ 43,450
4,000
1,200
800
2,500
8,000
40,000
Cash
Accounts Receivable
Interest Receivable
Supplies
Prepaid Insurance
Prepaid Rent
Equipment
Accumulated Depreciation
Long-Term Investments
Accounts Payable
Dividend Payable
Unearned Revenue
Short-Term Notes Payable
Interest Payable
Income Taxes Payable
Common Stock ($1 par value)
Additional Paid-in Capital
Retained Earnings
Decorating Revenue
Investment Income
Wage Expense
Utilities Expense
Telephone Expense
Supplies Expense
Rent Expense
Insurance Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Totals
Credit
$ 2,000
20,000
250
750
100
30,000
3,000
26,110
1,000
9,000
750
120,400
1,200
32,000
1,000
500
1,000
4,000
3,500
2,000
3,000
26,110
$193,810
$193,810
4-23
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
HANDOUT 4 – 3 SOLUTION
FINANCIAL STATEMENTS
Use the balances from the trial balance in Handout 4-2 to prepare (1) an income statement for Deana’s
Decorators for the year ended December 31 of the current year and (2) a balance sheet as of December 31
of the current year.
Deana’s Decorators
Income Statement
For the year ended December 31, Current Year
Operating revenues:
Decorating revenue
Operating expenses:
Wage expense
Utilities expense
Telephone expense
Supplies expense
Rent expense
Insurance expense
Depreciation expense
Total operating expenses
Operating income (or Income from operations)
Other items:
Interest expense
Interest revenue
Income before income taxes (or Pretax income)
Income tax expense
Net income
$120,400
32,000
1,000
500
1,000
4,000
3,500
2,000
44,000
76,400
(3,000)
1,200
74,600
26,110
$ 48,490
4-26
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
HANDOUT 4 – 3 SOLUTION, continued
Deana’s Decorators
Balance Sheet
December 31, Current Year
Assets
Current Assets
Cash
Accounts receivable
Interest receivables
Supplies
Prepaid insurance
Prepaid rent
Total Current Assets
Property, Plant & Equipment:
Equipment
Accumulated depreciation
Net Property, Plant, and Equipment
Long-term investments
Total Assets
$ 43,450
4,000
1,200
800
2,500
8,000
59,950
40,000
38,000 2,000
2,000 38,000
20,000
$117,950
Liabilities
Current Liabilities:
Accounts payable
Dividends payable
Unearned revenue
Short-term note payable
Interest payable
Income taxes payable
Total Current Liabilities
$
Stockholders’ Equity
Common stock ($1 per share)
Additional paid-in capital
Retained earnings*
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
250
750
100
30,000
3,000
26 110
60,210
1,000
9,000
47,740
57,740
$117,950
* Beginning balance of $0 + Net income of $48,490 - Dividends of $750 = Ending balance of $47,740
4-27
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
HANDOUT 4 – 4
TOTAL ASSET TURNOVER RATIO
Refer to the financial statements from Handout 3-3 and calculate the net profit margin ratio of Deana’s
Decorators for the year ending December 31of the current year. Assume that assets totaled $110,000 at
January 1 of the current year. Then, indicate what this ratio measures and how you would interpret the
results.
Calculation:
Average Total Assets = (Beginning balance + Ending balance) ÷ 2
Average Total Assets = ($110,000 + $117,950) ÷ 2 = $113,975
Total Asset Turnover Ratio = Net Sales (or Operating Revenues) ÷ Average Total Assets
Total Asset Turnover Ratio = $120,400 ÷ $113,975 = 1.06
What it measures and how to interpret:
The total asset turnover ratio measures the sales generated per dollar of assets. Deana’s Decorators
generated $1.06 of sales per dollar of assets.
The total asset turnover ratio would be interpreted by comparison to that of prior periods and to that of
the company’s competitors.
A high asset turnover ratio signifies efficient management of assets; a low asset turnover ratio signifies
less efficient management. A company’s products or services and business strategy contribute
significantly to its asset turnover ratio. However, when competitors are similar, management’s ability
to control the firm’s assets is vital in determining its success. Stronger financial performance improves
the asset turnover ratio.
4-29
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
HANDOUT 4 – 5 SOLUTION
CLOSING ENTRIES, POSTING TO T-ACCOUNTS,
PREPARATION OF POST-CLOSING TRIAL BALANCE
Refer to the adjusted trial balance in Handout 4-2 for Deana’s Decorators and prepare the required closing
entries as of December 31 of the current year. Post the entries to the T-accounts shown on the next page.
Then, prepare a post-closing trial balance as of December 31 of the current year.
Date
Dec. 31
Accounts
Debit
Decorating Revenue (–R)
Interest Revenue (–R)
Wage Expense (–E)
Utilities Expense (–E)
Telephone Expense (–E)
Supplies Expense (–E)
Rent Expense (–E)
Insurance Expense (–E)
Depreciation Expense (–E)
Interest Expense (–E)
Income Tax Expense (–E)
Retained Earnings (+SE)
Credit
120,400
1,200
32,000
1,000
500
1,000
4,000
3,500
2,000
3,000
26,110
48,490
4-33
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
HANDOUT 4 – 5 SOLUTION, continued
Assets
+ Cash –
43,450
Liabilities
– Accounts Payable +
250 Unadj.
+ Accounts Receivable –
Unadj.
4,000
4,000
– Dividend Payable +
0 Unadj.
750 (i)
750 Adj.
+ Interest Receivable –
Unadj.
0
(f)
1,200
Adj.
1,200
– Unearned Revenue +
500 Unadj.
(e)
400
100 Adj.
Unadj.
Adj.
Unadj.
Adj.
+ Supplies –
1,800
1,000
800
(a)
+ Prepaid Insurance –
Unadj. 6,000
3,500 (c)
Adj.
2,500
+ Prepaid Rent –
Unadj. 12,000
4,000
Adj.
8,000
(b)
+ Equipment –
Unadj. 40,000
Adj.
40,000
– Notes Payable +
30,000 Unadj.
30,000 Adj.
– Interest Payable +
0 Unadj.
3,000 (g)
3,000 Adj.
Unadj.
Bal
+ Wage Expense –
32,000 32,000 Close
0
Unadj.
Bal
+ Utilities Expense –
1,000 1,000 Close
0
+ Telephone Expense –
Unadj.
500 500
Close
Bal
0
(a)
Bal
Stockholders’ Equity
(b)
Bal
– Common Stock +
1,000 Adj.
– Additional Paid-in
Capital +
9,000 Adj.
+ Long-Term Investments –
Unadj. 20,000
– Retained Earnings +
0 Unadj.
(i) 750 48,490 Close
47,740
20,000
– Interest Revenue +
Close
1,200 1,200 (f)
0 Bal
– Income Taxes Payable +
0 Unadj.
26,110 (h)
26,110 Adj.
– Accumulated Depreciation +
0 Unadj.
2,000 (d)
2,000
Adj.
Stockholders’ Equity
– Decorating Revenue +
120,000 Unadj.
400 (e)
Close 120,400 120,400 Adj.
0 Bal
+ Supplies Expense –
1,000 1,000 Close
0
+ Rent Expense –
4,000 4,000
0
Close
(c)
Bal
+ Insurance Expense –
3,500 3,500 Close
0
(d)
Bal
+ Depreciation Expense –
2,000 2,000 Close
0
(g)
Bal
+ Interest Expense –
3,000 3,000 Close
0
+ Income Tax Expense –
(h)
26,110 26,110 Close
Bal
0
4-34
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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
HANDOUT 4 – 5 SOLUTION, continued
Deana’s Decorators
Post-Closing Trial Balance
December 31, Current Year
Account
Cash
Accounts Receivable
Interest Receivable
Supplies
Prepaid Insurance
Prepaid Rent
Equipment
Accumulated Depreciation
Long-Term Investments
Accounts Payable
Dividend Payable
Unearned Revenue
Notes Payable
Interest Payable
Income Taxes Payable
Common Stock ($1 par value)
Additional Paid-in Capital
Retained Earnings
Decorating Revenue
Investment Income
Wage Expense
Utilities Expense
Telephone Expense
Supplies Expense
Rent Expense
Insurance Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Totals
Debit
$ 43,450
4,000
1,200
800
2,500
8,000
40,000
Credit
$ 2,000
20,000
250
750
100
30,000
3,000
26,110
1,000
9,000
47,740
0
0
0
0
0
0
0
0
0
0
0
$119,950
$119,950
Note:
Revenue and expense accounts are listed here for illustrative purposes only. Often, a post-closing trial
balance will list only balance sheet accounts with balances.
4-35
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Education.
Chapter 05 - Communicating and Interpreting Accounting Information
HANDOUT 5 – 1 SOLUTION
CLASSIFYING ACCOUNTS ON FINANCIAL STATEMENTS
The following is a list of financial statement items and amounts from a recent income statement and
balance sheet of Basic Corporation. All accounts have normal balances. The company’s year ended on
December 31 of the current year.
For each financial statement item listed, indicate whether it appears on the income statement or balance
sheet.
Financial Statement Item
Amount
$ 41,000
262,000
37,000
70,000
125,000
100,000
350,000
75,000
32,000
85,000
10,000
167,000
433,000
5,000
89,000
15,000
31,000
184,000
250,000
161,000
943,000
125,000
57,000
Accounts payable
Accounts receivable
Accrued expenses payable
Additional paid-in capital
Cash and cash equivalents
Common stock ($10 par value)
Cost of sales
General and administrative expenses
Income tax expense
Intangible assets, net
Interest and other income, net
Inventory
Long-term notes payable
Other current assets
Other current liabilities
Other noncurrent assets
Prepaid expenses
Property, plant and equipment (net)
Research and development costs
Retained earnings
Sales and service revenues
Selling expenses
Short-term investments
Income
Statement
Balance
Sheet
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
5-17
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Chapter 05 - Communicating and Interpreting Accounting Information
HANDOUT 5 – 2 SOLUTION
PREPARATION OF BALANCE SHEET
Using the information provided in Handout 5-1, prepare in good form a classified balance sheet as of
December 31 of the current year.
Basic Corporation
Balance Sheet
December 31, Current Year
ASSETS
Current Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable
Inventory
Prepaid expenses
Other current assets
Total Current Assets
Noncurrent Assets:
Property, plant and equipment (net)
Intangible assets, net
Other noncurrent assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Accrued expenses payable
Other current liabilities
Total Current Liabilities
Long-Term Liabilities:
Long-term notes payable
Total Liabilities
Stockholders’ Equity:
Common stock ($10 par value)
Additional paid-in capital
Retained earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$125,000
57,000
262,000
167,000
31,000
5,000
647,000
184,000
85,000
15,000
$931,000
$ 41,000
37,000
89,000
$167,000
433,000
600,000
100,000
70,000
161,000
331,000
$931,000
5-19
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Chapter 05 - Communicating and Interpreting Accounting Information
HANDOUT 5 – 3 SOLUTION
PREPARATION OF INCOME STATEMENT
Using the information provided in Handout 5-1, prepare in good form a multistep income statement
including earnings per share information for the year ended December 31 of the current year.
Basic Corporation
Income Statement
for the year ended December 31, Current Year
Sales and service revenues
Cost of sales
Gross profit
Operating expenses:
General and administrative expenses
Selling expenses
Research and development costs
Total operating expenses
Operating income
Nonoperating income and expenses:
Interest and other income, net
Income before income taxes
Income tax expense
Net income
Earnings per share*
$943,000
350,000
593,000
75,000
125,000
250,000
450,000
143,000
10,000
153,000
32,000
$121,000
$1.21
$12.10
* Earnings per share = Net income ÷ Average Number of Shares of Common Stock Outstanding during
the Period
Earnings per share = $121,000 ÷ 100,000 = $1.21
$121,000
---------- = $12.10
100,000/10
5-21
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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
HANDOUT 6 – 1 SOLUTION
ACCOUNTS RECEIVABLE JOURNAL ENTRIES
Prepare journal entries to record the following transactions:
(1) On December 15, Year 1, the company recorded $150,000 sales on credit.
Dec. 15
Accounts Receivable (+A)
Sales (+R, +SE)
150,000
150,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Accounts
+150,000
Receivable
+
Stockholders’ Equity
Sales
+150,000
(2) On December 31, Year 1, the company estimated bad debt expenses of $15,000.
Dec. 31
Bad Debt Expense (+E, –SE)
Allowance for Doubtful Accounts (+xA, –A)
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Allowance
–15,000
for
Doubtful
Accounts
+
15,000
15,000
Stockholders’ Equity
Bad Debt
–15,000
Expense
(3) On January 12, Year 2, the company collected $100,000 worth of accounts receivable.
Jan. 12
Cash (+A)
Accounts Receivable (–A)
100,000
100,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Cash
+100,000
Accounts
–100,000
Receivable
+
Stockholders’ Equity
6-20
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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
HANDOUT 6 – 1 SOLUTION, CONTINUED
(4) After many collection attempts, on June 15, Year 2, the company determined that it would not collect
$10,000 in accounts receivables from Pendant Publishing. It decided to write-off this account.
Jun. 15
Allowance for Doubtful Accounts (–xA, +A)
Accounts Receivable (–A)
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Allowance
+10,000
for
Doubtful
Accounts
Accounts
–10,000
Receivable
10,000
10,000
+
Stockholders’ Equity
(5) On July 16, Year 2, Pendant Publishing called to say that they have had financial problems but can
afford to pay $7,000 to settle their $10,000 debt in full. The company agreed to these terms, and
reversed $7,000 of the prior write-off. It received a $7,000 check from Pendant the next day.
Jul. 16
Jul. 16
Accounts Receivable (+A)
Allowance for Doubtful Accounts (+xA, –A)
7,000
Cash (+A)
Accounts Receivable (–A)
7,000
7,000
7,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Accounts
+7,000
Receivable
Allowance
–7,000
for
Doubtful
Accounts
Cash
+7,000
Accounts
–7,000
Receivable
+
Stockholders’ Equity
Post the above entries to the following T-accounts:
+ Accounts Receivable (A) –
150,000
100,000 Jan. 12
10,000 Jun. 15
Jul. 16
7,000
7,000 Jul. 16
End. Bal.
40,000
– Allowance for Doubtful Accounts (xA) +
15,000 Dec. 31
Jun. 15
10,000
7,000 Jul. 16
12,000 End. Bal.
Dec. 15
6-21
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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
HANDOUT 6 – 2 SOLUTION
ESTIMATION AND RECORDING OF UNCOLLECTIBLE ACCOUNTS –
PERCENTAGE OF CREDIT SALES RECEIVABLE METHOD
Part 1 – Vandalia reported $300,000 in sales during Year 2. The company’s allowance for doubtful
accounts has an unadjusted credit balance of $12,000 at December 31, Year 2. Based on prior experience,
management estimates that 2.5% of sales will result in bad debts. Prepare the required adjusting journal
entry.
Dec. 31
Bad Debt Expense (+E, –SE)
Allowance for Doubtful Accounts (+xA, –A)
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Allowance
–7,500
for
Doubtful
Accounts
+ Bad Debt Expense (E) –
Dec. 31
End. Bal.
+
7,500
7,500
Stockholders’ Equity
Bad Debt
–7,500
Expense
- Allowance for Doubtful Accounts (xA) +
12,000 Beg. Bal.
7,500 Dec. 31
19,500 End. Bal.
7,500
7,500
Part 2 – Assume instead that the company’s allowance for doubtful accounts has an unadjusted debit
balance of $400. Prepare the required adjusting journal entry.
Dec. 31
Bad Debt Expense (+E, –SE)
Allowance for Doubtful Accounts (+xA, –A)
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Allowance
–7,500
for
Doubtful
Accounts
+ Bad Debt Expense (E) –
Dec. 31
End. Bal.
+
7,500
7,500
Stockholders’ Equity
Bad Debt
–7,500
Expense
- Allowance for Doubtful Accounts (xA) +
Beg. Bal.
400
7,500 Dec. 31
7,100 End. Bal.
7,500
7,500
6-23
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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
HANDOUT 6 – 3 SOLUTION
ESTIMATION AND RECORDING OF UNCOLLECTIBLE ACCOUNTS –
AGING OF ACCOUNTS RECEIVABLE METHOD
Part 1 – Vandalia reported $300,000 in sales during Year 2. The company’s allowance for doubtful
accounts has an unadjusted credit balance of $12,000 at December 31, Year 2. At that time, Vandalia’s
accountant prepared the following Aging of Accounts Receivable:
Customer
Alpha Sales
Gamma Manufacturing Co.
Delta Shipping Corp.
Epsilon Industries
Theta Manufacturing
Zeta Industries
Other customers
Totals
x Probable bad debt loss rates
Subtotals by aging category
Estimated ending balance in Allowance for
Doubtful Accounts
Less: Balance in Allowance for Doubtful
Accounts before adjustment
Bad Debt Expense for the year
Number of days unpaid
30-60
60-90 Over 90
$ 700
$ 11,900
$ 2,200
$ 6,000
1,800
600
88,100 26,900
9,800 12,000
$100,000 $30,000 $12,000 $18,000
x 4%
x 10%
x 20%
x 40%
$ 4,000 $ 3,000 $ 2,400 $ 7,200
Total
0-30
$ 700
11,900
2,200
6,000
1,800
600
136,800
$160,000
$ 16,600
12,000
$ 4,600
Based on prior experience, Vandalia’s accountant estimates the probable bad debt loss rates for each
category to be as follows: 0-30 days old, 4%; 30-60 days old, 10%; 60-90 days old, 20%; and over 90
days old, 40%. The company’s Allowance for Doubtful Accounts has an unadjusted credit balance of
$12,000. Prepare the required adjusting journal entry.
Dec. 31
Bad Debt Expense (+E, –SE)
Allowance for Doubtful Accounts (+xA, –A)
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Allowance
–4,600
for
Doubtful
Accounts
+ Bad Debt Expense (E) –
Dec. 31
End. Bal.
+
4,600
4,600
Stockholders’ Equity
Bad Debt
–4,600
Expense
– Allowance for Doubtful Accounts (xA) +
12,000 Beg. Bal.
4,600 Dec. 31
16,600 End. Bal.
4,600
4,600
6-26
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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
HANDOUT 6 – 3 SOLUTION, CONTINUED
Part 2 – Assume instead that the company’s allowance for doubtful accounts has an unadjusted debit
balance of $400. Prepare the required adjusting journal entry.
Calculation:
Estimated ending balance in Allowance for Doubtful Accounts
$ 16,600
Plus debit balance in Allowance for Doubtful Accounts before adjustment
400
Bad Debt Expense for the year
$17,000
Dec. 31
Bad Debt Expense (+E, –SE)
Allowance for Doubtful Accounts (+xA, –A)
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Allowance
–17,000
for
Doubtful
Accounts
+ Bad Debt Expense (E) –
Dec. 31
End. Bal.
+
17,000
17,000
Stockholders’ Equity
Bad Debt
–17,000
Expense
– Allowance for Doubtful Accounts (xA) +
Beg. Bal.
400
17,000 Dec. 31
16,600 End. Bal.
17,000
17,000
6-27
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Education.
Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
HANDOUT 6 – 4 SOLUTION
BANK RECONCILIATION
Information from the records and bank statement and of Matrix, Inc. as of July 31, Year 1, is set forth
below
Cash balance per bank, July 31
Cash balance per general ledger, July 31
Outstanding checks at July 31
Check mailed to the bank for deposit that had not reached the bank by July 31
NSF check (from a customer for a payment on account) returned by bank
July interest earned per bank statement
Check no. 781 for supplies expense cleared the bank for $240, but was erroneously
recorded in the books at $268.
Deposit by Acme Company erroneously credited by the bank to our account
$9,610
7,430
2,417
500
281
30
486
Part A
Prepare the bank reconciliation for Matrix, Inc.
Matrix, Inc.
Bank Reconciliation
July 31
Bank Statement
Ending cash balance per bank statement
Additions:
Deposit in transit
Deductions:
Bank error
Outstanding checks
Up-to-date ending cash balance
$9,610
500
(486)
(2,417)
$7,207
Books
Ending cash balance per books $7,430
Additions:
Interest
30
Recording error check 781
28
Deductions:
NSF check
(281)
Adjusted Balance, July 31
$7,207
Part B
Prepare any journal entries that should be made as a result of the bank reconciliation.
Date
Accounts
July 31
Cash (+A)
Interest Revenue (+R, +SE)
30
Cash (+A)
Accounts Payable (+L)
28
Accounts Receivable (+A)
Cash (–A)
281
July 31
July 31
Debit
Credit
30
28
281
6-30
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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
HANDOUT 6 – 5 SOLUTION
BANK RECONCILIATION
Prepare the bank reconciliation for Donna’s Day Care using the following information:
Cash balance per bank, June 30
Cash balance per general ledger, June 30
Outstanding checks, June 30
Deposit in transit, June 30
NSF check (from a customer for a payment on account) returned by bank
June interest earned per bank statement
Check no. 800 in payment of accounts payable cleared the bank for $1,100, but was
erroneously recorded in the books at $$800
Deposit in amount of $6,000, recorded properly on books, erroneously credited on bank
statement as $5,800.
$5,586
5,055
1,816
750
450
15
Part A
Prepare the bank reconciliation for Donna’s Day Care.
Donna’s Day Care
Bank Reconciliation
June 30
Bank Statement
Ending cash balance per bank statement
Additions:
Deposit in Transit
Deductions:
Bank error
Outstanding checks
Up-to-date ending cash balance
$5,586
750
(200)
(1,816)
$4,320
Books
Ending cash balance per books $5,055
Additions:
Interest
15
Deductions:
Recording error check 800
(300)
NSF check
(450)
Adjusted Balance, July 31
$4,320
Part B
Prepare any journal entries that should be made as a result of the bank reconciliation.
Date
Accounts
June 30
Cash (+A)
Interest Revenue (+R, +SE)
15
Accounts Payable (–L)
Cash (–A)
300
Accounts Receivable (+A)
Cash (–A)
450
June 30
June 30
Debit
Credit
15
300
450
6-33
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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
HANDOUT 6 – 6 SOLUTION
SALES JOURNAL ENTRIES
On March 3, Gooddeal.com sold merchandise for $2,500, terms 2/10 n/30. Prepare the journal entry.
Debit and credit the accounts affected
Mar. 3
Accounts Receivable (+A)
Sales (+R, +SE)
2,500
2,500
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Acct Rec.
+2,500
+
Stockholders’ Equity
Sales
+2,500
The customer paid for the merchandise on March 6, taking advantage of the permitted discount. Prepare
the journal entry.
Debit and credit the accounts affected
Mar. 6
Cash (+A) [2,500 × 98%]
Sales Discounts (+XR, –SE) [2,500 × 2%]
Accounts Receivable (–A)
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Cash
+2,450
Acct Rec.
–2,500
2,450
50
2,500
+
Stockholders’ Equity
Sales Disc.
–50
On March 8, the customer returned $1,250 (or one-half) of the merchandise that was purchased back on
March 3. Prepare the journal entry.
Debit and credit the accounts affected
Mar. 8
Sales Returns and Allowances (+XR, –SE)
Cash (–A) [2,500 × 50%]
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
Cash
–1,250
1,250
1,250
+
Stockholders’ Equity
Sales Returns
–1,250
&Allowances
6-35
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Education.
Chapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventory
HANDOUT 7 – 1 SOLUTION
INVENTORY COSTING METHODS
Quickie Grocery acquired the following five bottles of Corporate-Cola soft drink:
Date
Cost
Jan. 2
$1.00
Jan. 10
$2.00
Jan. 12
$3.00
Jan. 16
$4.00
Jan. 25
$5.00
A January 31 inventory count revealed that two bottles remained on the shelf.
How many bottles were sold in January?
5 – 2 = 3 bottles
Specific Identification
The Quickie Grocery keeps track of each individual bottle. Suppose the Grocery knows that it sold the
bottles acquired on Jan. 2, 12, and 16.
Date
Cost
COGS
Inventory
Jan. 2
$1.00
$1.00
Jan. 10
$2.00
Jan. 12
$3.00
$3.00
Jan. 16
$4.00
$4.00
$2.00
Jan. 25
$5.00
$5.00
$15.00
$ 8.00
$ 7.00
What was the cost of goods sold for January?
$8.00
What was the value of inventory on January 31?
$7.00
First-in, First-out (FIFO)
Date
Cost
COGS
Inventory
Jan. 2
$1.00
$1.00
Jan. 10
$2.00
$2.00
Jan. 12
$3.00
$3.00
Jan. 16
$4.00
Jan. 25
$5.00
$4.00
$5.00
$15.00
$ 6.00
$ 9.00
What was the cost of goods sold for January?
$6.00
What was the value of inventory on January 31?
$9.00
7-18
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Chapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventory
HANDOUT 7 – 1 SOLUTION, CONTINUED
Last-in, First-out (LIFO)
Assume that the last bottles purchased were the first to be sold. First bottles are still here.
Date
Cost
COGS
Inventory
Jan. 2
$1.00
Jan. 10
$2.00
$1.00
$2.00
Jan. 12
$3.00
$3.00
Jan. 16
$4.00
$4.00
Jan. 25
$5.00
$5.00
Jan. 16
$4.00
Jan. 25
$5.00
$15.00
$12.00
$ 3.00
What was the cost of goods sold for January?
$12.00
What was the value of inventory on January 31?
$3.00
Average Cost
Date
Cost
Jan. 2
$1.00
Jan. 10
$2.00
Jan. 12
$3.00
$15.00
What was the cost of goods sold for January?
$15.00 / 5 = $3.00 average cost per unit
$3 × 3 units = $9.00
What was the value of inventory on January 31?
$15.00 / 5 = $3.00 average cost per unit
$3 × 2 units= $6.00
Complete the following table:
Cost of Goods Sold
Inventory
Specific
Identification
$8
$7
FIFO
LIFO
Average Cost
$6
$9
$12
$ 3
$9
$6
7-19
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Education.
Chapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventory
HANDOUT 7 – 2 SOLUTION
LOWER OF COST OR NET REALIZABLE VALUE
Amanda Corporation is preparing its financial statements for the current year ending December 31.
Ending inventory information about the three major items stocked for regular sale follows:
Item
AA
BB
CC
Quantity
100
150
200
Cost per
Item
$ 30
80
100
Net Realizable
Value per Item
$ 26
80
104
Compute the valuation that should be used for the ending inventory using the lower of cost or NRV rule
applied on an item-by-item basis.
Item
AA
BB
CC
Quantity
100
150
200
Cost per
Item
$ 30
80
100
Net Realizable
Value per Item
$ 26
80
104
Lower of
Cost or NRV
per Item
$ 26
80
100
Total Lower of
Cost or NRV
$ 2,600
12,000
20,000
$34,600
Item AA should be recorded in the ending inventory at the current net realizable value ($2,600) because it
is lower than the cost ($3,000 = 100 × $30). The following journal entry would be prepared to record the
write-down:
Date
Dec. 31
Accounts
Debit
Cost of Goods Sold (+E, - SE)
Inventory (–A)
Credit
400
400
Since the market price of Item BB ($80) is the same as its cost ($80), no write-down is necessary.
Since the market price of Item CC ($104) is higher than the original cost ($100), no write-down is
necessary. Item CC remains on the books at its cost of $100 per unit. Recognition of holding gains on
inventory is not permitted by GAAP.
7-21
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Chapter 07 - Reporting and Interpreting Cost of Goods Sold and Inventory
HANDOUT 7 – 3 SOLUTION
PURCHASE TRANSACTIONS
On February 2, Hamm Manufacturing Corp. purchased $40,000 worth of inventory, on credit terms 3/10
n/30. On February 10, Hamm paid for the inventory, taking advantage of all available discounts.
Prepare the required journal entries.
Debit and credit the accounts affected
Feb. 2
Inventory (+A)
Accounts Payable (+L)
40,000
40,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Acct. Rec.
+40,000
Acct Pay.
+40,000
Stockholders’ Equity
Debit and credit the accounts affected
Feb. 10
Accounts Payable (–L)
Cash (–A)
Inventory (–A)
40,000
38,800
1,200
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Cash
–38,800
Acct Pay.
–40,000
Inventory
–1,200
Stockholders’ Equity
7-23
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Education.
Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources
HANDOUT 8 – 1 SOLUTION
DEPRECIATION METHODS AND GAIN (OR LOSS) ON SALE
Joel Harvey Florists ordered a truck at an invoice price of $11,000. On the date of delivery, January 2,
Year 1, the company paid $1,000 on the truck, with the balance on credit at 10 percent interest due in six
months. On January 3, Year 1, the company paid $500 for freight on the truck. On January 4, Year 1, the
company paid $250 to paint the company name on the side of the truck and started using it to make
deliveries. On January 5, the company paid $125 to fix a flat tire on the truck. On July 2, Year 1, the
company paid the balance due on the truck plus the interest.
The estimated useful life of the truck was five years, and the residual value was $1,750. Assume that the
estimated productive life of the machine was 100,000 miles. Actual annual usage was 15,000 miles hours
in Year 1; 25,000 miles in Year 2; 30,000 miles in Year 3; 25,000 miles in Year 4, and 5,000 miles in
Year 5.
On December 31, Year 5, Joel Harvey sold the truck for $3,000 cash.
1. Compute the acquisition cost of the truck.
Acquisition cost = Purchase price + Freight + Painting cost = $11,000 + $500 + $250 = $11,750
The interest cost incurred is not capitalized since the truck was not a self-constructed asset. The cost to
fix the flat tire is an ordinary repair and should be expensed (rather than being included in the
acquisition cost).
2. Compute the annual depreciation expense for each of the years 1 through 5 using each of the following
methods:
•
Straight-line
Depreciation = (Cost – Residual value) × (1 ÷ Useful life)
Depreciation = ($11,750 – $1,750) ÷ 5 = $2,000 per year
•
Unit-of-production
Depreciation rate per unit of production = (Cost – Residual value) ÷ Estimated total production
Depreciation rate per unit of production = ($11,750 – $1,750) ÷ 100,000 = $0.10 per mile
Annual Depreciation:
Year 1: 15,000 miles × $0.10 per mile = $1,500
Year 2: 25,000 miles × $0.10 per mile = $2,500
Year 3: 30,000 miles × $0.10 per mile = $3,000
Year 4: 25,000 miles × $0.10 per mile = $2,500
Year 5: 5,000 miles × $0.10 per mile = $500
8-21
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Chapter 08 - Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources
HANDOUT 8 – 1 SOLUTION
•
Declining-balance
Year
Computation
Acquisition
Year 1
$11,750 × 2/5
Year 2
7,050 × 2/5
Year 3
4,230 × 2/5
Year 4
2,538 × 2/5
2,538 – 1,750
Year 5
1,448 × 2/5
Depreciation
Expense
Accumulated
Depreciation
$4,700
2,820
1,692
788 1,015
$4,700
7,520
9,212
10,000 10,227
Net Book Value
$11,750
7,050
4,230
2,538
1,750 1,448
0 579
0 10,806
1,750 944
3. Compute the gain (or loss) on sale.
Gain (Loss) = Proceeds – Book value at time of sale
Gain (Loss) = $3,000 – $1,750 = $1,250 gain
8-22
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Education.
Chapter 09 - Reporting and Interpreting Liabilities
HANDOUT 9 – 1 SOLUTION
PAYROLL ENTRIES
J&W Buffet Co. employees earned $350,000 in the week ended December 17. Of this, $26,775 was
deducted from employees’ pay for FICA and $62,000 was deducted for income taxes.
Prepare the journal entry to record the employees’ portion of payroll for December 17.
Debit and credit the accounts affected
Dec. 17
Compensation Expense (+E, -SE)
Liability for Income Taxes Withheld (+L)
FICA Payable (+L)
Cash (–A)
350,000
62,000
26,775
261,225
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
–261,225
Liability
+62,000
Compensation
–350,000
for Income
Expense
Taxes W/H
FICA
+26,775
Payable
Prepare the journal entry to record the employer’s share of FICA payroll taxes for December 17.
Debit and credit the accounts affected
Dec. 17
Compensation Expense (+E, –SE)
FICA Payable (+L)
26,775
26,775
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
FICA
+26,775
Compensation
–26,775
Payable
Expense
9-17
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Education.
Chapter 09 - Reporting and Interpreting Liabilities
HANDOUT 9 – 2 SOLUTION
DEFERRED REVENUE
On January 1, Year 1, Charlie Rangel paid $2,000 for a two–year membership to the Beam Gym.
Prepare the journal entry to record the receipt of cash on January 1, Year 1.
Debit and credit the accounts affected
Jan. 1
Cash (+A)
Deferred Revenue (+L)
Ensure the equation still balances and debits = credits
Assets
Cash
=
+2,000
Liabilities
Deferred
+2,000
Revenue
2,000
2,000
+
Stockholders’ Equity
By December 31, Year 1, one half of Rangel’s membership expired. Prepare the adjusting journal entry.
Debit and credit the accounts affected
Dec. 31
Deferred Revenue (–L)
Revenue (+R, +SE)
Ensure the equation still balances and debits = credits
Assets
=
1,000
1,000
Liabilities
+
Stockholders’ Equity
Unearned
–1,000
Revenue
+1,000
Revenue
By December 31, Year 2, the remainder of the membership expired. Prepare the adjusting journal entry.
Debit and credit the accounts affected
Dec. 31
Deferred Revenue (–L)
Revenue (+R, +SE)
Ensure the equation still balances and debits = credits
Assets
=
1,000
1,000
Liabilities
+
Stockholders’ Equity
Unearned
–1,000
Revenue
+1,000
Revenue
Post the entries above to the Unearned Revenue account:
– Deferred Revenue (L) +
2,000
Dec. 31, Year 1
1,000
1,000
Dec. 31, Year 2
1,000
0
Jan. 1, Year 1
End Bal
End Bal
9-19
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Chapter 09 - Reporting and Interpreting Liabilities
HANDOUT 9 – 3 SOLUTION
NOTES PAYABLE
Mumford Co. borrowed a $100,000 note payable on June 1, Year 1, with 6% interest. The note is due on
May 31, Year 2.
Prepare the journal entry to record the issuance of the note and receipt of cash on June 1, Year 1.
June 1
June 1
Cash (+A)
Note Payable (+L)
100,000
100,000
+ Cash (A) –
100,000
– Note Payable (L) +
100,000
June 1
Prepare the adjusting journal entry to record the interest owed at the end of the accounting period on
December 31, Year 1.
Principal × Rate × Time Period = $100,000 × 6% × 7/12 = $3,500
Dec. 31
Interest Expense (+E, –SE)
Interest Payable (+L)
3,500
3,500
– Interest Payable (L) +
3,500
Dec. 31
Dec. 31
+ Interest Expense (E) –
3,500
Prepare the journal entries to record the interest and principal payments to the lender on May 31, Year 2.
May. 31
May 31
Interest Expense (+E, –SE) ($100,000 × 6% × 5/12)
Interest Payable (–L)
Cash (–A) ($100,000 × 6% × 12/12)
100,000
100,000
100,000
+ Interest Expense (E) –
Year 2
May 31
Year 2
6,000 May 31
100,000 May 31
– Interest Payable (L) +
3,500
Year 2
May 31
6,000
Note Payable (–L)
Cash (–A)
+ Cash (A) –
Year 1
June 1
2,500
3,500
2,500
– Note Payable (L) +
Year 1
Dec. 31
Year 1
100,000 June 1
Year 2
May 31
3,500
100,000
9-21
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Chapter 09 - Reporting and Interpreting Liabilities
HANDOUT 9 – 4 SOLUTION
PRESENT AND FUTURE VALUES
1. What is the present value of $3,000 received 5 years from now, assuming 20% interest?
n =5; i = 20%; Single payment = $3,000
Present value factor of $1 from Table E.1 = 0.40188
0.40188 × $3,000 = $1,205.64
2. What is the present value of an annuity of $50,000 received over 20 years, assuming 9% interest?
n =20; i = 9%; Payments = $50,000 each
Present value factor of annuity of $1 from Table E.2 = 9.12855
9.12855 × $50,000 = $456,427.50
3. What is the future value of $12,000, invested now at 10%, at maturity in 3 years?
n =3; i = 10%; Single payment = $12,000
Future value of $1 factor from Table E.3 = 1.33100
1.33100 × $12,000 = $15,972.00
4. What is the future value of an annuity of $7,500, invested at 12%, at maturity in 5 years?
n =5; i = 12%; Payments = $7,500 each
Future value factor of annuity of $1 from Table E.4 = 6.35285
6.35285 × $7,500 = $47,646.38
9-23
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Education.
Chapter 10 - Reporting and Interpreting Bond Securities
HANDOUT 10 – 1 SOLUTION
ISSUING BONDS
On January 1, Year 1, $800,000, 5-year, bonds with a contract rate of 8% payable annually were issued
for cash of $684,627 when the market rate of interest was 12%.
Were these bonds issued at a discount or at a premium? Why?
The bonds were issued at a discount since the stated rate is lower than the market rate.
Prepare the journal entry to record the issuance (sale) of the bonds (assuming the company uses Discount
and Premium accounts):
Cash (+A)
Bond Discount (+XL, –L)
Bonds Payable (+L)
684,627
115,373
800,000
Complete the following interest schedule (assuming effective-interest amortization):
Date
1/1/Year 1
12/31/Year 1
12/31/Year 2
12/31/Year 3
12/31/Year 4
12/31/Year 5
(a)
(b)
Cash Owed
for Interest
Interest
Expense
Beginning
of Period
Book Value
× (12%)
None
$82,155
84,334
86,774
89,507
92,568
$800,000 ×
(8%)
None
$64,000
64,000
64,000
64,000
64,000
(c)
Amortization
of Bond
Discount
(b) – (a)
None
%18,155
20,334
22,774
25,507
28,568
(d)
Bonds
Payable
Book
Value*
Beginning
book value
+ (c)
$684,627
702,782
723,116
745,890
771,397
799,965
Difference
due to
rounding
Prepare the journal entry to record the first payment of interest on December 31, Year 1 (assuming the
company uses Discount and Premium accounts):
Interest Expense (+E, –SE)
Bond Discount (–XL, +L)
Cash (–A)
82,155
18,155
64,000
10-19
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Education.
Chapter 10 - Reporting and Interpreting Bond Securities
HANDOUT 10 – 2 SOLUTION
ISSUING BONDS
On January 1, Year 1, $1,200,000, 5-year, bonds with a stated rate of 10% payable annually were issued
for cash of $1,295,844 when the market rate of interest was 8%.
Were these bonds issued at a discount or at a premium? Why?
The bonds were issued at a premium since the stated rate is higher than the market rate.
Prepare the journal entry to record the issuance (sale) of the bonds (assuming the company uses Discount
and Premium accounts):
Cash (+A)
Bond Premium (+L)
Bonds Payable (+L)
1,295,844
95,844
1,200,000
Complete the following interest schedule (assuming effective-interest amortization):
Date
1/1/Year 1
12/31/Year 1
12/31/Year 2
12/31/Year 3
12/31/Year 4
12/31/Year 5
(a)
(b)
Cash Owed
for Interest
Interest
Expense
Beginning
of Period
Book Value
× (8% )
None
$103,668
102,361
100,950
99,426
97,780
$1,200,000
× (10%)
None
$120,000
120,000
120,000
120,000
120,000
(c)
(d)
Amortization
Bonds
of Bond
Payable
Premium
Book Value
(b) – (a)
None
$(16,332)
(17,639)
(19,050)
(20,574)
(22,220)
Beginning
book value
+ (c)
$1,295,844
1,279,512
1,261,872
1,242,822
1,222,248
1,200,028
Difference
due to
rounding
Prepare the journal entry to record the first payment of interest on December 31, Year 1 (assuming the
company uses Discount and Premium accounts):
Interest Expense (+E, –SE)
Bond Premium (–L)
Cash (–A)
103,668
16,332
120,000
10-21
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Education.
Chapter 10 - Reporting and Interpreting Bond Securities
HANDOUT 10 – 3 SOLUTION
ISSUING BONDS
On January 1, Year 1, $800,000, 5-year, bonds with a contract rate of 8% payable annually were issued
for cash of $684,627 when the market rate of interest was 12%.
Were these bonds issued at a discount or at a premium? Why?
The bonds were issued at a discount since the stated rate is lower than the market rate.
Prepare the journal entry to record the issuance (sale) of the bonds (assuming the company does not use
Discount and Premium accounts):
Cash (+A)
Bonds Payable (+L)
684,627
684,627
Complete the following interest schedule (assuming effective-interest amortization):
Date
(a)
Cash Owed
for Interest
1/1/Year 1
12/31/Year 1
12/31/Year 2
12/31/Year 3
12/31/Year 4
12/31/Year 5
$800,000 ×
(8%)
None
$64,000
64,000
64,000
64,000
64,000
(b)
(c)
Interest
Expense
Beginning
of Period
Book Value
× (12%)
None
$82,155
84,334
86,774
89,507
92,568
Amortization
of Bond
Discount
(b) – (a)
None
$18,155
20,334
22,774
25,507
28,568
(d)
Bonds
Payable
Book
Value*
Beginning
book value
+ (c)
$684,627
702,782
723,116
745,890
771,397
799,965
Difference
due to
rounding
Prepare the journal entry to record the first payment of interest on December 31, Year 1 (assuming the
company does not use Discount and Premium accounts):
Interest Expense (+E, –SE)
Bonds Payable (+L)
Cash (–A)
82,155
18,155
64,000
10-23
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Education.
Chapter 10 - Reporting and Interpreting Bond Securities
HANDOUT 10 – 4 SOLUTION
ISSUING BONDS
On January 1, Year 1, $1,200,000, 5-year, bonds with a stated rate of 10% payable annually were issued
for cash of $1,295,844 when the market rate of interest was 8%.
Were these bonds issued at a discount or at a premium? Why?
The bonds were issued at a premium since the stated rate is higher than the market rate.
Prepare the journal entry to record the issuance (sale) of the bonds (assuming the company does not use
Discount and Premium accounts):
Cash (+A)
Bonds Payable (+L)
1,295,844
1,295,844
Complete the following interest schedule (assuming effective-interest amortization):
Date
1/1/Year 1
12/31/Year 1
12/31/Year 2
12/31/Year 3
12/31/Year 4
12/31/Year 5
(a)
(b)
Cash Owed
for Interest
Interest
Expense
Beginning
of Period
Book Value
× (8%)
None
$103,668
102,361
100,950
99,426
97,780
$1,200,000
× (10%)
None
$120,000
120,000
120,000
120,000
120,000
(c)
Amortization
of Bond
Premium
(b) – (a)
None
$(16,332)
(17,639)
(19,050)
(20,574)
(22,220)
(d)
Bonds
Payable
Book Value
Beginning
book value
+ (c)
$1,295,844
1,279,512
1,261,872
1,242,822
1,222,248
1,200,028
Difference
due to
rounding
Prepare the journal entry to record the first payment of interest on December 31, Year 1 (assuming the
company does not use Discount and Premium accounts):
Interest Expense (+E, –SE)
Bonds Payable (–L)
Cash (–A)
103,668
16,332
120,000
10-25
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Chapter 11 - Reporting and Interpreting Stockholders’ Equity
HANDOUT 11 – 1 SOLUTION
AUTHORIZED, ISSUED, AND OUTSTANDING SHARES
Consider an evening reception at which drink tickets were sold. Typically, the host will have a roll of
authorized tickets and will issue individual tickets as people buy them. These drink tickets will be held by
the people until they are exchanged with the bartender for drinks. The returned drink ticket will then be
either destroyed by the bartender or given back to the host to reissue. At any time during the evening,
there are likely to be some tickets on the roll available for future sale, some still outstanding in people’s
pockets, and some already returned to the host for possible reuse.
Match the tickets in this story to the terms: (1) authorized, (2) issued, and (3) treasury.
Just like the host with the initial roll of drink tickets, a corporation is authorized to issue a specific
number of shares. Shares will be “issued” to stockholders and will remain outstanding until they are
returned to the company’s treasury. This “treasury stock” will either be destroyed or reissued just like
the used drink tickets
11-18
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Chapter 11 - Reporting and Interpreting Stockholders’ Equity
HANDOUT 11 – 2 SOLUTION
STOCK TRANSACTIONS
Prepare the journal entries required to record the following transactions and then post them to the related
T-accounts:
Strait Corp. sold 10,000 shares of $1 par value stock for $25 per share on May 1, Year 1.
May 1
May 1
Cash (+A) (10,000 × $25)
Common Stock (+SE) (10,000 × $1)
Additional Paid-in Capital (+SE)
($250,000 – $10,000)
250,000
10,000
240,000
+ Cash (A) –
250,000
– Common Stock (SE) +
10,000 May 1
– Additional Paid-in Capital (SE) +
240,000 May 1
On December 1, Year 1, Strait Corp. repurchased 1,000 shares of its stock on the market when it was
trading for $16 per share.
Dec. 1
May 1
Treasury Stock (+XSE, –SE) (1,000 × $16)
Cash (–A)
+ Cash (A) –
250,000
16,000 Dec. 1
Dec. 1
16,000
16,000
+ Treasury Stock (XSE) –
16,000
On December 15, Year 1, Strait Corp. sold 500 of the treasury shares for $30 each.
Dec. 15
May 1
Dec. 15
Cash (+A) (500 × $30)
Treasury Stock (–XSE, +SE)
(500 × $16)
Additional Paid-in Capital (+SE)
(500 × [$30 – $16])
+ Cash (A) –
250,000
16,000 Dec. 1
15,000
15,000
8,000
7,000
Dec. 1
+ Treasury Stock (XSE) –
16,000
8,000 Dec. 15
– Additional Paid-in Capital (SE) +
240,000 May 1
7,000 Dec. 15
11-21
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Chapter 11 - Reporting and Interpreting Stockholders’ Equity
HANDOUT 11 – 2 SOLUTION, continued
On December 30, Year 1, Strait Corp. sold 500 of the treasury shares for $15 each.
Dec. 30
May 1
Dec. 15
Dec. 30
Cash (+A) (500 × $15)
Additional Paid-in Capital (–SE)
(500 × [$16 – $15])
Treasury Stock (–XSE, +SE)
(500 × $16)
7,500
500
8,000
+ Cash (A) –
250,000
16,000 Dec. 1
15,000
7,500
Dec. 1
+ Treasury Stock (XSE) –
16,000
8,000 Dec. 15
8,000 Dec. 30
– Additional Paid-in Capital (SE) +
240,000 May 1
7,000 Dec. 15
Dec. 30
500
11-22
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Chapter 11 - Reporting and Interpreting Stockholders’ Equity
HANDOUT 11 – 3 SOLUTION
CASH DIVIDENDS
Jones Corp. has 200,000 shares of stock authorized, 120,000 shares issued, and 100,000 shares
outstanding. On August 1, Year 1, Jones’ Board of Directors declared a cash dividend of $0.50 per share,
with a date of record of September 1, Year 1. The dividend will be paid on October 1, Year 1.
Prepare the journal entries required to record the transactions described above, as needed, and then post
them to the related T-accounts:
Retained earnings (-SE)
Aug. 1
Aug 1
Dividends Declared (+D, –SE)
(100,000 × $0.50)
Dividends Payable (+L)
50,000
50,000
+ Dividends Declared (D) –
50,000
– Dividends Payable (L) +
50,000 May 1
Sept. 1
No Entry
Oct. 1
Dividends Payable (–L)
Cash (–A)
50,000
+ Cash (A) –
50,000
– Dividends Payable (L) +
50,000 May 1
50,000
50,000
Oct. 1
Oct. 1
11-24
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Chapter 11 - Reporting and Interpreting Stockholders’ Equity
HANDOUT 11 – 4 SOLUTION
STOCK DIVIDENDS AND STOCK SPLITS
Jennings Corp. has 1,000,000 shares of $1 par value stock authorized, 200,000 shares issued, and 150,000
shares outstanding. On June 1, Year 1, Jennings’ Board of Directors declared a 10% stock dividend at a
time that the stock carried a market value of $30.
Prepare the journal entry required to record the transaction described above and then post it to the related
T-accounts:
June. 1
June 1,
Year 1
Retained Earnings (–SE)
(150,000 × 10% × $30)
Common Stock (+SE)
(150,000 × 10% × $1)
Additional Paid-in Capital (+SE)
450,000
15,000
435,000
– Retained Earnings (SE) +
450,000
– Common Stock (SE) +
15,000 June 1,
Year 1
– Additional Paid-in Capital (SE) +
435,000 June 1,
Year 1
Compute the number of shares outstanding after the June 1, Year 1 stock dividend.
150,000 + (150,000 × 10%) = 165,000 shares
Jennings Corp. announced a 100% stock dividend on June 1, Year 2.
Prepare the journal entry required to record the transaction described above and then post it to the related
T-accounts:
June 1
June 1,
Year 1
June 1,
Year 2
Retained Earnings (–SE)
(165,000 × $1)
Common Stock (+SE)
165,000
165,000
– Retained Earnings (SE) +
450,000
– Common Stock (SE) +
15,000 June 1,
Year 1
165,000 June 1,
Year 1
165,000
Compute the number of shares outstanding after the June 1, Year 2 stock dividend.
165,000 old shares + 165,000 new shares = 330,000 shares
11-27
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Education.
Chapter 11 - Reporting and Interpreting Stockholders’ Equity
HANDOUT 11 – 5 SOLUTION
STOCK SPLITS AND STOCK DIVIDENDS
A company’s board of directors must choose between a large 100 percent stock dividend and a 2-for-1
stock split.
What should be considered in making this decision?
Whether a company distributes additional shares of stock by declaring a stock dividend or by initiating
a stock split is often determined by state law. Otherwise, the decision may be closely related to how
stock dividends and splits are accounted for in the financial statements.
a. A stock dividend causes a reduction in Retained Earnings; a stock split does not cause a reduction
in Retained Earnings.
b. A company that anticipates future financial difficulties will want to use a 2-for-1 stock split
because it doesn’t reduce Retained earnings or its ability to declare cash dividends in the future.
c. On the other hand, if the company is expecting financial success, it won’t care that Retained
Earnings is reduced by a stock dividend because future earnings will build up Retained Earnings
enough to allow cash dividends to be declared. In fact, it may want to use a stock dividend just to
show confidence that the company is expecting to do well in the near future.
11-30
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Education.
Chapter 11 - Reporting and Interpreting Stockholders’ Equity
HANDOUT 11 – 6 SOLUTION
PREFERRED DIVIDENDS
On January 1, Year 1, Garden State issued 10,000 shares of $10 par preferred stock for $19 per share.
Prepare the journal entry required to record this transaction and post it to the appropriate T-accounts:
January 1
June 1
Cash (+A) (10,000 × $19)
Preferred Stock (+SE)
(10,000 × $10)
Additional Paid-in Capital (+SE)
(10,000 × [$19 - $10])
190,000
100,000
90,000
+ Cash (A) –
190,000
– Preferred Stock (SE) +
100,000 June 1
– Additional Paid-in Capital (SE) +
90,000 June 1
The stock pays a cumulative annual dividend of 7% of par value. What is the total amount of the annual
dividends that would be paid, if declared, to preferred stockholders?
100,000 × 7% = $7,000 to preferred
Complete the following table to explain how dividends would be allocated between preferred and
common stockholders.
Year
1
2
3
4
5
Total Dividend
$100,000
5,000
10,000
None
20,000
To Preferred Stockholders
$7,000
5,000
9,000 (2,000 in arrears + 7,000)
0
14,000
To Common Stockholders
$93,000
0
1,000
0
6,000
11-32
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Education.
Chapter 12 - Statement of Cash Flows
HANDOUT 12 – 1 SOLUTION
CASH FLOW CATEGORIES
Maya Corporation reports the following items in its statement of cash flows prepared using the direct
method. Indicate whether each item is disclosed in the operating, investing, or financing activities section
of the statement.
Operating
Cash paid for salaries and wages
Investing
Financing
X
Cash paid to purchase property, plant, and equipment
X
Cash received from issuing stock to owners
X
Cash paid for income taxes
X
Cash paid to purchase investments in securities
X
Dividends paid to owners
X
Interest paid on liabilities
X
Cash received from sale of property, plant, and equipment
X
Cash used for repaying principal to lenders
X
Cash used to repurchase stock from owners
X
Cash provided by dividends and interest on investments
X
Cash received from customers
X
Cash from sale or maturity of investments in securities
Cash provided by borrowing from a bank
X
X
12-18
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Education.
Chapter 12 - Statement of Cash Flows
HANDOUT 12 – 2 SOLUTION
STATEMENT OF CASH FLOWS (INDIRECT METHOD)
The Group, Inc.
Consolidated Balance Sheets
(in thousands)
Section
Dec. 31,
Year 2
Dec. 31,
Year 1
$92,069
55,947
50,784
12,112
210,912
145,444
(50,515)
$305,841
$72,634 + $19,435
75,492
– 19,545
53,129
– 2,345
13,057
– 945
214,312
134,312 + 11,132
(36,689)
– 13,826
$311,935
$25,466
40,574
66,040
10,422
$34,879
40,722
75,601
10,206
– $9,413
– 148
1,662
227,717
229,379
$305,841
1,284
224,844
226,128
$311,935
+ 378
+ 2,873
Change
ASSETS
O
O
O
I
O
O
O
F
F
O,F
Current assets:
Cash and cash equivalents
Accounts receivables, net
Inventories
Prepaid expenses
Total current assets
Equipment
Less: Accumulated depreciation
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Total current liabilities
Long-term debt
Stockholders’ equity:
Contributed capital
Retained earnings
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
216
Consolidated Statement of Income
(in thousands)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general & administrative expenses
Depreciation expense
Total operating expenses
Operating income
Interest income
Income before income taxes
Income tax expense
Net income
Year 2
$130,896
74,040
56,856
33,211
13,826
47,037
9,819
239
10,058
3,621
$ 6,437
12-21
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Chapter 12 - Statement of Cash Flows
HANDOUT 12 – 2 SOLUTION, continued
The Group, Inc. did not sell any equipment or repay any borrowings during the year ended December 31,
Year 2. The company declared and paid dividends in the amount of $3,564 during the year ended
December 31, Year 2.
Using the information provided above, compute the net cash flow provided by (used in) operating
activities using the indirect method.
Net Income
Adjustments to reconcile net income to cash flow
from operating activities:
Depreciation
Changes in assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses
Accounts payable
Accrued liabilities
Net cash provided by operations
$6,437
13,826
19,545
2,345
945
(9,413)
(148)
$33,537
Compute total net cash flows and their effect on cash at the end of the period.
Net cash provided by operating activities (see above)
Net cash used in investing activities (1)
Net cash used in financing activities (2)
Net increase (decrease) in cash
Cash and cash equivalents, beginning of quarter
Cash and cash equivalents, end of quarter
Year 2
$33,537
(11,132)
(2,970)
19,435
72,634
$92,069
(1) Attributable to purchases of equipment (that is, the increase in the equipment account). There were no
other investing activities.
(2) Financing activities were determined as follows:
Proceeds from issuance of long-term debt
Proceeds from issuance of stock
Payment of dividends
Net cash used in financing activities
$
216
378
(3,564)
$(2,970)
12-22
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Education.
Chapter 12 - Statement of Cash Flows
HANDOUT 12 – 3 SOLUTION
STATEMENT OF CASH FLOWS (DIRECT METHOD)
The Group, Inc.
Consolidated Balance Sheets
(in thousands)
Section
Dec. 31,
Year 2
Dec. 31,
Year 1
$92,069
55,947
50,784
12,112
210,912
145,444
(50,515)
$305,841
$72,634 + $19,435
75,492
– 19,545
53,129
– 2,345
13,057
– 945
214,312
134,312 + 11,132
(36,689)
– 13,826
$311,935
$25,466
40,574
66,040
10,422
$34,879
40,722
75,601
10,206
– $9,413
– 148
1,662
227,717
229,379
$305,841
1,284
224,844
226,128
$311,935
+ 378
+ 2,873
Change
ASSETS
O
O
O
I
O
O
O
F
F
O,F
Current assets:
Cash and cash equivalents
Accounts receivables, net
Inventories
Prepaid expenses
Total current assets
Equipment
Less: Accumulated depreciation
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Total current liabilities
Long-term debt
Stockholders’ equity:
Contributed capital
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
216
Consolidated Statement of Income
(in thousands)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general & administrative expenses
Depreciation expense
Total operating expenses
Operating income
Interest income
Income before income taxes
Income tax expense
Net income
Year 2
$130,896
74,040
56,856
33,211
13,826
47,037
9,819
239
10,058
3,621
$ 6,437
12-25
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Education.
Chapter 12 - Statement of Cash Flows
HANDOUT 12 – 3 SOLUTION, continued
The Group, Inc. did not sell any equipment or repay any borrowings during the year ended December 31,
Year 2. The company declared and paid dividends in the amount of $3,564 during the year ended
December 31, Year 2.
Using the information provided above, compute the net cash provided by (used in) operating activities
using the direct method.
Cash collected from customers (1)
Cash payments to suppliers (2)
Cash payments for operating expenses (3)
Cash received for interest (4)
Cash payments for income tax expense (5)
Net cash provided by operating activities
$150,441
(81,108)
(32,414)
239
(3,621)
$33,537
(1) Sales of $130,896 + decrease in accounts receivable of $19,545.
(2) Cost of sales of $74,040 + decrease in accounts payable of $9,413 – decrease in inventories of
$2,345.
(3) Operating expenses (not including depreciation) of $33,211 + decrease in accrued liabilities of
$148 – decrease in prepaid expenses of $945.
(4) Equals interest income; no change in interest receivable.
(5) Equals income tax expense; no change in taxes payable.
Compute total net cash flows and their effect on cash at the end of the period.
Net cash provided by operating activities (see above)
Net cash used in investing activities (6)
Net cash used in financing activities (7)
Net increase (decrease) in cash
Cash and cash equivalent, beginning of quarter
Cash and cash equivalents, end of quarter
Year 2
$33,537
(11,132)
(2,970)
19,435
72,634
$92,069
(6) Attributable to purchases of equipment (that is, the increase in the equipment account). There were
no other investing activities.
(7) Financing activities were determined as follows:
Proceeds from issuance of long-term debt
Proceeds from issuance of stock
Payment of dividends
Net cash used in financing activities
$
216
378
(3,564)
$(2,970)
12-26
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.