1.19
(Classifying financial statement accounts.)
a.
NA.
b.
NI (revenue).
c.
CC.
d.
X.
e.
NA.
f.
CA.
g.
X (a footnote to the balance sheet would probably disclose the lawsuit).
h.
NI (expense).
i.
CA.
j.
CL.
k.
X (not recognized as a gain until the firm sells the land).
l.
RE.
m. CL.
n.
NL.
pg. 1 1.22
(Johnson & Johnson; balance sheet relations.)
a.
The given (boldface) and missing items appear below (amounts in millions).
Year 9
Year 8
Current Assets ............................ $ 11,132 $ 13,200a
Noncurrent Assets ......................
15,079
15,963
Total Assets ................................ $ 26,211 $ 29,163
Current Liabilities ...................... $ 8,162 $ 7,454
Noncurrent Liabilities ................
4,459
5,496
Contributed Capital ....................
34
458
15,755
Retained Earnings ......................
13,556
Total Liabilities and Shareholders' Equity ....................... $ 26,211 $ 29,163
Year 10
Year 11
$ 15,450 $ 18,473
15,871
16,015
$ 31,321 $ 34,488
$ 7,140 $ 8,044c
5,373
2,211
501
1,727
18,307b
22,506d
$ 31,321 $ 34,488
a$7,454 + $5,746 = $13,200.
b$15,755 + $4,276 – $1,724 = $18,307.
c$18,473 – $10,429 = $8,044.
d$18,307 + $6,246 – $2,047 = $22,506.
b.
The proportion of total assets comprising noncurrent assets decreased between
Year 8 and Year 11. The dollar amount of noncurrent assets remained relatively
steady, suggesting that Johnson & Johnson replaced property, plant and
equipment in approximately the same amount as depreciation each year.
c.
Noncurrent liabilities declined and shareholders’ equity increased as proportions
of total financing over the four-year period. Johnson & Johnson reduced the
dollar amount of its long-term liabilities in Year 11. Its net income increased
each year in an amount larger than dividends, resulting in an increase in retained
earnings.
pg. 2 1.29
(Amazon.com; statement of cash flows relations.)
a.
AMAZON.COM
Statement of Cash Flows
(Amounts in Thousands)
Year 10
Operations:
Revenues Providing Cash ...........
Expenses Using Cash .................
Cash Flow from Operations ............
Investing:
Acquisition of Property and
Equipment ..............................
Sale (Purchase) of Marketable Securities (net)................
Acquisition of Investments
in Other Companies ...............
Cash Flow from Investing ...............
Financing:
Increase in Long-term Debt ........
Increase in Common Stock.........
Decrease in Long-term Debt ......
Other Financing Activities .........
Cash Flow from Financing..............
Change in Cash ...............................
Cash, Beginning of Year .................
Cash, End of Year ...........................
Year 11
Year 12
$ 2,753,398 $ 3,143,165 $ 3,892,988
(2,883,840)
(3,262,947)
(3,718,697)
$ (130,442) $
(119,782) $
174,291
$
$
$
$
$
$
(134,758) $
(50,321) $
361,269
(196,775)
(62,533) $
163,978 $
(6,198) $
(253,294) $
681,499
44,697
(33,049)
(37,557)
655,590
689,126
133,309
822,435
10,000
116,456
(19,575)
(15,958)
90,923
(282,153)
822,435
540,282
$
$
$
$
(39,163)
(82,521)
$
$
$
$
0
(121,684)
0
121,689
(14,795)
38,471
145,365
197,972
540,282
738,254
pg. 3 b.
Cash flow from operations was negative during Year 10 and Year 11 as a result of
an apparently rapid growth in revenues. The need to finance inventories likely
reduced operating cash flows. Cash flow from operations turned positive in Year
12, despite another apparent rapid increase in revenues. Perhaps the firm
experienced better control of its inventories or delayed paying its suppliers.
Expenditures on property, plant, and equipment were largest in Year 10 during the
firm’s high growth phase and then declined in Year 11 and Year 12 as the firm
used its available capacity. Amazon.com sold marketable securities and issued
long-term debt and common stock during Year 10 to make up the negative cash
flow from operations and the amounts needed to acquire property, plant and
equipment. It financed the negative cash flow from operations in Year 11 and the
cash needed for acquisitions of property, plant, and equipment by issuing
common stock and reducing the balance in its cash account. The positive cash
flow from operations in Year 12 was more than sufficient to finance the reduced
level of expenditures on property, plant, and equipment. The firm used the excess
cash flow from operations over capital expenditures plus the proceeds from
issuing common stock to purchase marketable securities and to increase the
balance in its cash account.
pg. 4 1.34
(Southwest Airlines; preparing a balance sheet and an income statement.)
a.
SOUTHWEST AIRLINES
Balance Sheet
(Amounts in Thousands)
Dec. 31,
Year 8
Dec. 31,
Year 9
Assets
Cash.......................................................................... $
378,511 $
418,819
Accounts Receivable................................................
88,799
73,448
Inventories................................................................
50,035
65,152
73,586
Other Current Assets ................................................
56,810
Total Current Assets ............................................ $
574,155 $
631,005
Property, Plant and Equipment (Net) .......................
4,137,610
5,008,166
Other Noncurrent Assets ..........................................
4,231
12,942
Total Assets ......................................................... $ 4,715,996 $ 5,652,113
Liabilities and Shareholders' Equity
Accounts Payable ..................................................... $ 157,415
Current Maturities of Long-Term Debt ...................
11,996
Other Current Liabilities ..........................................
681,242
Total Current Liabilities ...................................... $
850,653
Long-Term Debt ......................................................
623,309
Other Noncurrent Liabilities ....................................
844,116
Total Liabilities ................................................... $ 2,318,078
Common Stock......................................................... $
352,943
Retained Earnings ....................................................
2,044,975
Total Shareholders' Equity .................................. $ 2,397,918
Total Liabilities and Shareholders'
Equity .............................................................. $ 4,715,996
$
$
$
$
$
156,755
7,873
795,838
960,466
871,717
984,142
2,816,325
449,934
2,385,854
2,835,788
$ 5,652,113
pg. 5 b.
SOUTHWEST AIRLINES
Income Statement
(Amounts in Thousands)
For the Year Ended:
Sales ...............................................................................$
Interest Revenue...............................................................
Total Revenues..............................................................
Salaries and Benefits Expense .........................................
Fuel Expense ....................................................................
Maintenance Expense ......................................................
Other Operating Expenses ...............................................
Interest Expense ...............................................................
Income Tax Expense ........................................................
Net Income ..........................................................................
Dec. 31,
Year 9
4,735,587
14,918
$ 4,750,505
(1,455,237)
(492,415)
(367,606)
(1,638,753)
(22,883)
(299,233)
$
474,378
c.
Retained Earnings, December 31, Year 8 ...........................
Plus Net Income for Year 9 ................................................
Less Dividends Declared during Year 9 (Plug) ..................
Retained Earnings, December 31, Year 9 ...........................
$ 2,044,975
474,378
(133,499)
$ 2,385,854
d.
Southwest Airlines made substantial investments in property, plant and equipment
during Year 9. It financed these expenditures with additional long-term debt,
additional common stock, and the retention of earnings.
pg. 6 2.17
(Office Depot; asset recognition and valuation.)
a.
Prepaid Rent (current asset), $125,000; Security Deposit (noncurrent asset),
$130,000.
b.
Leasehold Improvements (noncurrent asset), $36,500 (= $10,000 + $6,500 +
$20,000). These expenditures prepare the rented facility for its intended use as a
retail store.
c.
Equipment or Fixtures (noncurrent asset), $31,400 [= .98 X $30,000) + $1,200 +
$800]. The latter two expenditures prepare the display counters for their intended
use.
d.
Accounting does not recognize an asset for the future services of employees.
e.
Accounting does not recognize any portion of expenditures on advertising as
assets because any future benefits of the advertising are too uncertain.
f.
Merchandise Inventory (current asset) $145,600 [= (.98 X $120,000) + $40,000 –
$12,000]. One might argue that Office Depot should reduce the acquisition cost
of the $28,000 (= $40,000 – $12,000) of merchandise that it has not yet paid for
by the 2 percent discount. It is possible, however, that cash discounts are not
available on this merchandise. If Office Depot takes advantage of any discounts
when it pays for this merchandise, it will reduce the acquisition cost at that time.
pg. 7 2.18
(Liability recognition and valuation.)
a.
This arrangement is mutually unexecuted and therefore does not give rise
to a liability under GAAP.
b.
Advances from Customers (current liability), $72.
c.
Advances from Customers (noncurrent liability), $2 million.
d.
Common stock does not meet the definition of a liability because the firm
need not repay the funds in a particular amount at a particular time.
e.
Notes payable (current liability), $100,000.
f.
This arrangement is mutually unexecuted and therefore does not give rise
to a liability under GAAP.
g.
This arrangement is still mutually unexecuted and therefore does not give
rise to a liability.
pg. 8 2.27
(Winkle Grocery Store; journal entries for various transactions.)
(1)
Cash.........................................................................
Common Stock ....................................................
Shareholders'
= Liabilities +
Equity
30,000
30,000
(Class.)
Assets
+30,000
(2)
+30,000
ContriCap
Cash.........................................................................
Notes Payable .....................................................
Shareholders'
= Liabilities +
Equity
5,000
5,000
(Class.)
Assets
+5,000
(3)
+5,000
Prepaid Rent ...........................................................
Cash.....................................................................
Shareholders'
= Liabilities +
Equity
12,000
12,000
(Class.)
Assets
+12,000
–12,000
(4)
Equipment ..............................................................
Cash.....................................................................
= Liabilities +
Shareholders'
Equity
8,000
8,000
(Class.)
Assets
+8,000
–8,000
(5)
Merchandise Inventory ..........................................
Cash.....................................................................
25,000
12,000
pg. 9 Accounts Payable ................................................
Shareholders'
= Liabilities +
Equity
13,000
(Class.)
Assets
+25,000
+13,000
–12,000
(6)
Cash.........................................................................
Advances from Customers ..................................
Shareholders'
= Liabilities +
Equity
4,000
4,000
(Class.)
Assets
+4,000
(7)
+4,000
Prepaid Insurance ..................................................
Cash.....................................................................
Shareholders'
= Liabilities +
Equity
1,200
1,200
(Class.)
Assets
+1,200
–1,200
(8)
Prepaid Advertising ................................................
Cash.....................................................................
Shareholders'
= Liabilities +
Equity
600
600
(Class.)
Assets
+600
–600
(9)
The placing of an order does not give rise to a journal entry
because it represents a mutually unexecuted contract.
pg. 10 2.29
(Moulton Corporation; recording transactions and preparing a balance sheet.)
a.
T-accounts.
Merchandise
Inventory (A)
Cash (A)
(1) 800,000 500,000 (2) (3) 280,000
5,000 (4) (5)
(6) 300,000 245,000 (4)
12,000 (5)
343,000
(2)
275,000
Land (A)
50,000
50,000
12,000
Building (A)
(2) 450,000
450,000
Accounts Payable (L)
(4) 250,000 280,000 (3)
30,000
Prepaid
Insurance (A)
12,000
(7)
Equipment (A)
80,000
80,000
Note Payable (L)
80,000 (7)
80,000
Loan Payable (L)
300,000 (6)
300,000
Common Stock (SE)
800,000 (1)
800,000
pg. 1
2.29 a. continued.
Transactions spreadsheet.
Balance Sheet Accounts
Balance:
Begin- ning
of Period
Issue
Common
Stock for
Cash
1
Transactions, By Number and Description
Acquire
Acquire
Pay for
Prepay
Land and Inventory on
Inventory
Insurance
Building for
Account
Purchases
Cash
2
3
4
5
Balance: End
Borrow
Acquire
of Period
from Bank Equip. and
Issue Note
6
7
ASSETS
Current Assets:
Cash
800,000
-500,000
Inventory
-245,000
280,000
Prepaid Insurance
Total Current Assets
-12,000
300,000
343,000
-5,000
275,000
12,000
12,000
-
630,000
Noncurrent Assets:
Land
Building
50,000
50,000
450,000
450,000
Equipment
80,000
80,000
Total Noncurrent
Assets
Total Assets
-
580,000
1,210,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable
280,000
-250,000
30,000
Note Payable
Total Current Liabilities
80,000
-
80,000
110,000
Noncurrent Liabilities:
Loan Payable
300,000
300,000
Total Noncurrent
Liabilities
Total Liabilities
-
300,000
-
410,000
Shareholders' Equity:
Common Stock
800,000
800,000
Total Shareholders'
pg. 12 Total Liabilities and
Shareholders' Equity
Imbalance, if Any
-
1,210,000
-
-
-
-
-
-
-
-
Income Statement Accounts
pg. 13 2.29 continued.
b.
MOULTON CORPORATION
Balance Sheet
December 31, Year 12
Assets
Current Assets:
Cash .................................................................................
Merchandise Inventories ................................................
Prepaid Insurance ...........................................................
Total Current Assets...................................................
Noncurrent Assets:
Land .................................................................................
Building ...........................................................................
Equipment .......................................................................
Total Noncurrent Assets .............................................
Total Assets .................................................................
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts Payable ............................................................
Note Payable ...................................................................
Total Current Liabilities ............................................
Noncurrent Liabilities:
Loan Payable ...................................................................
Total Liabilities ...........................................................
Shareholders’ Equity:
Common Stock ................................................................
Retained Earnings ..........................................................
Total Shareholders’ Equity .........................................
Total Liabilities and Shareholders’ Equity ................
$
$
343,000
275,000
12,000
630,000
$
50,000
450,000
80,000
$ 580,000
$ 1,210,000
$
$
30,000
80,000
110,000
$
$
300,000
410,000
$
800,000
0
$ 800,000
$ 1,210,000
pg. 14
3.18
(Neiman Marcus; revenue recognition.)
February
a.
--
b.
c.
--
March
--
$
$ 39,200
April
$
800
2,160
--
--
--
--
d.
--
$ 59,400
e.
--
$
9,000
$
9,000
f.
--
$
9,000
$
9,000
pg. 15
3.20
(Sun Microsystems; expense recognition.)
a.
June
--
July
$ 15,000
August
$ 15,000
b.
$ 4,560
--
--
c.
--
d.
$
600
$
5,800
$
6,300
$
600
$
600
e.
--
--
f.
--
--
g.
$ 6,600
--
--
$
4,500
--
pg. 16
3.31
(Miscellaneous transactions and adjusting entries.)
a.
(1)
Accounts Payable.............................................
Notes Payable ..............................................
Shareholders'
= Liabilities +
Equity
6,000
6,000
(Class.)
Assets
+6,000
–6,000
(2)
Interest Expense [$6,000 X .10 X (30/360)] .....
Interest Payable ..........................................
Shareholders'
= Liabilities +
Equity
50
50
(Class.)
Assets
+50
b.
(1)
–50
Cash .................................................................
Advances from Customers ..........................
Shareholders'
= Liabilities +
Equity
Assets
+18,000
(2)
IncSt Æ RE
18,000
18,000
(Class.)
+18,000
Advances from Customers ($18,000 X 4/24) ...
Insurance Revenue ......................................
= Liabilities +
Shareholders'
Equity
(Class.)
–3,000
+3,000
IncSt Æ RE
3,000
3,000
Assets
pg. 17 c.
(1)
Equipment .......................................................
Cash .............................................................
Shareholders'
= Liabilities +
Equity
40,000
40,000
(Class.)
Assets
+40,000
–40,000
(2)
Depreciation Expense [.25($40,000 –
$4,000)/4] .....................................................
Accumulated Depreciation ......................
Shareholders'
= Liabilities +
Equity
Assets
–2,250
d.
(1)
–2,250
Shareholders'
Equity
2,250
(Class.)
IncSt Æ RE
Automobile .......................................................
Cash .............................................................
= Liabilities +
2,250
24,000
24,000
(Class.)
Assets
+24,000
–24,000
(2)
Depreciation Expense [.5 X {($24,000 –
$3,000)/3}] ....................................................
Accumulated Depreciation ......................
Shareholders'
= Liabilities +
Equity
Assets
–3,500
–3,500
3,500
3,500
(Class.)
IncSt Æ RE
pg. 18 e.
(1)
Prepaid Rent ....................................................
Cash .............................................................
Shareholders'
= Liabilities +
Equity
12,000
12,000
(Class.)
Assets
+12,000
–12,000
(2)
Rent Expense ...................................................
Prepaid Rent ................................................
Shareholders'
= Liabilities +
Equity
Assets
–4,000
f.
(1)
–4,000
Assets
+7,000
(1)
7,000
7,000
(Class.)
+7,000
= Liabilities +
(2)
IncSt Æ RE
Accounts Payable.............................................
Cash .............................................................
Assets
–5,000
4,000
(Class.)
Office Supplies Inventory................................
Accounts Payable.........................................
Shareholders'
= Liabilities +
Equity
4,000
Shareholders'
Equity
5,000
5,000
(Class.)
–5,000
Office Supplies Expense ($7,000 – $1,500) .....
Office Supplies Inventory............................
5,500
5,500
pg. 19 = Liabilities +
Assets
–5,500
Shareholders'
Equity
(Class.)
–5,500
IncSt Æ RE
pg. 20 3.33
(Moulton Corporation; analysis of transactions and preparation of income statement
and balance sheet.)
a.
T-accounts.
√
Cash (A)
343,000
1,400,000
950,000
625,000
82,400
85,600
√
(1)
√
Inventory (A)
275,000
1,100,000 1,200,000
175,000
√
(4)
(5)
(6)
(7)
(3)
√
(2)
√
Accounts Receivable (A)
0
2,000,000 1,400,000 (4)
600,000
Prepaid Insurance (A)
12,000
12,000
0
√
√
√
Land (A)
50,000
√
Building (A)
450,000
√
50,000
√
450,000
√
√
(5)
Equipment (A)
80,000
Accumulated Depreciation (XA)
0
√
34,000 (10)
34,000
√
80,000
Accounts Payable (L)
30,000
950,000 1,100,000
180,000
Interest Payable (L)
0
24,000
24,000
(9)
√
(1)
√
√
(8)
√
(7)
Note Payable (L)
80,000
80,000
0
√
√
Income Tax Payable (L)
0
√
41,040 (11)
41,040
√
21
√
Common Stock (SE)
800,000
√
√
800,000
√
Retained Earnings (SE)
0
√
61,560 (12)
61,560
√
Sales Revenue (SE)
2,000,000 2,000,000
(2)
Loan Payable (L)
300,000
300,000
(3)
Cost of Goods Sold (SE)
1,200,000 1,200,000 (12)
(7)
(8)
Interest Expense (SE)
2,400
24,000
26,400 (12)
(10)
Depreciation Expense (SE)
34,000
34,000 (12)
(12)
Selling and
Administrative Expense (SE)
(6)
625,000
625,000 (12)
(9)
Insurance Expense (SE)
12,000
12,000 (12)
Income Tax Expense (SE)
(11)
41,040
41,040 (12)
22
See the following page for the transactions spreadsheet.
b.
MOULTON CORPORATION
Income Statement
For Year 13
Sales Revenue ..................................................................
Expenses:
Cost of Goods Sold .......................................................
Selling and Administrative Expenses ........................
Insurance .....................................................................
Depreciation ................................................................
Interest ($2,400 + $24,000) .........................................
Total Expenses ........................................................
Net Income before Income Taxes ....................................
Income Tax Expense at 40 Percent ................................
Net Income.......................................................................
$ 2,000,000
$ 1,200,000
625,000
12,000
34,000
26,400
$ 1,897,400
$ 102,600
(41,040)
$
61,560
23
3.33 a. continued.
Transactions spreadsheet. Balance Sheet Accounts
Transactions, By Number and Description
Balance:
Beginning
of Period
Acquire
Sell
Inventory
Inventory
on Account on Account
1
2
Recog.
COGS
Collect
Accts. Rec.
Pay
Accts.
Pay.
Pay S&A
Expenses
3
4
5
6
Repay Recog. Recog. Recog.
Note
Int. on
Insur. Depre.
Payable Bank Expired
Loan
7
8
9
10
Recog. Balance:
Inc. Tax End of
Exp. Period
11
ASSETS
Current Assets:
Cash
343,000
1,400,000
Accounts Receivable
Inventory
Prepaid Insurance
Total Current Assets
2,000,000
275,000
12,000
1,100,000
-950,000
-625,000
-82,400
85,600
-1,400,000
600,000
-1,200,000
175,000
-12,000
0
630,000
860,600
50,000
50,000
450,000
450,000
80,000
80,000
Noncurrent Assets:
Land
Building
Equipment
Accumulated
Depreciation
Total Noncurrent Assets
Total Assets
-34,000
(34,000)
580,000
546,000
1,210,000
1,406,600
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable
30,000
Note Payable
80,000
1,100,000
-950,000
180,000
-80,000
Interest Payable
24,000
24,000
Income Tax Payable
Total Current Liabilities
41,040
41,040
110,000
245,040
300,000
300,000
300,000
300,000
410,000
545,040
800,000
800,000
Noncurrent Liabilities:
Loan Payable
Total Noncurrent
Liabilities
Total Liabilities
Shareholders' Equity:
Common Stock
Retained Earnings
2,000,000
-1,200,000
-625,000
-2,400 -24,000 -12,000 -34,000
-41,040
61,560
Total Shareholders'
Equity
Total Liabilities and
800,000
861,560
1,210,000
Shareholders' Equity
Imbalance, if Any
1,406,600
-
-
-
-
-
-
-
-
-
-
-
-
-
Income Statement
Accounts
Sales Rev. COGS
S&A Exp.
Int. Exp. Int. Exp. Insur.
Exp.
Depre.
Exp.
Inc Tax
Exp.
3.33 continued.
c.
MOULTON CORPORATION
Comparative Balance Sheet
December 31,
Year 12
Assets
Cash.............................................................
Accounts Receivable ...................................
Inventories ..................................................
Prepaid Insurance ......................................
Total Current Assets ..............................
Land (at Cost) .............................................
Building .......................................................
Equipment ..................................................
Less Accumulated Depreciation .................
Land, Building, and Equipment (Net) .......
Total Assets.............................................
$
$
$
$
$
December 31,
Year 13
343,000 $
0
275,000
12,000
630,000 $
50,000 $
450,000
80,000
0
580,000 $
1,210,000
85,600
600,000
175,000
0
860,600
50,000
450,000
80,000
(34,000)
546,000
$ 1,406,600
Liabilities and Shareholders' Equity
Accounts Payable ........................................
Notes Payable .............................................
Interest Payable..........................................
Income Tax Payable....................................
Total Current Liabilities ........................
Loan Payable ..............................................
Total Liabilities ......................................
Common Stock ............................................
Retained Earnings ......................................
Total Shareholders' Equity ....................
Total Liabilities and Shareholders'
Equity ..................................................
$
$
30,000
80,000
0
0
110,000
300,000
410,000
800,000
0
800,000
$
1,210,000
$
$
$
$
$
$
$
$
180,000
0
24,000
41,040
245,040
300,000
545,040
800,000
61,560
861,560
$ 1,406,600
2
2.30
(Regaldo Department Stores; recording transactions and preparing a balance sheet.)
a.
T-accounts.
Cash (A)
(1) 500,000 20,000
4,000
60,000
156,800
12,000
Merchandise
Inventory (A)
(2) (5) 200,000
8,000 (6) (4)
(2)
3,200 (7)
(4)
(7)
(8)
247,200
188,800
Prepaid Insurance (A)
(8) 12,000
12,000
(2)
(2)
Patent (A)
20,000
4,000
24,000
Prepaid Rent (A)
60,000
60,000
Accounts Payable (L)
(6)
8,000 200,000 (5)
(7) 160,000
32,000
Common Stock (SE)
500,000 (1)
500,000
28
2.30 a. continued.
Transactions spreadsheet.
29
Balance Sheet Accounts
Transactions, By Number and Description
Balance:
B i
i
Issue
C
Purchase
P t 2t f
1
M
Order
3h
Prepay
R4 t
Receive
M 5h
Return
D f 6 ti
Pay for
M 7h
Prepay
I
8
Balance:
E d f
ASSETS
Current Assets:
Cash
500,000
-24,000
-60,000
Merchandise Inventory
-156,800
200,000
Prepaid Rent
-8,000
-12,000
-3,200
60,000
60,000
Prepaid Insurance
12,000
Total Current Assets
247,200
188,800
-
12,000
508,000
Noncurrent Assets:
Patent
24,000
24,000
Total Noncurrent
Total Assets
-
532,000
LIABILITIES AND SHARECurrent Liabilities:
Accounts Payable
200,000
Total Current Liabilities
-8,000
-160,000
32,000
-
32,000
-
32,000
Noncurrent Liabilities:
Total Noncurrent
Total Liabilities
Shareholders' Equity:
Common Stock
500,000
500,000
Total Shareholders'
Total Liabilities and
Shareholders' Equity
Imbalance, if Any
-
532,000
-
-
-
-
-
-
-
-
-
Income Statement Accounts
30
2.30 continued.
b.
REGALDO DEPARTMENT STORES
Balance Sheet
January 31, Year 8
Assets
Current Assets:
Cash .................................................................................
Merchandise Inventory...................................................
Prepaid Rent ...................................................................
Prepaid Insurance...........................................................
Total Current Assets ..................................................
Patent ..............................................................................
Total Assets .................................................................
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts Payable ............................................................
Total Current Liabilities ............................................
Shareholders’ Equity:
Common Stock ................................................................
Earnings ..............................................................................
Total Shareholders’ Equity.........................................
Total Liabilities and Shareholders’ Equity................
Ps 247,200
188,800
60,000
12,000
Ps 508,000
24,000
Ps 532,000
Ps 32,000
Ps 32,000
Ps 500,000 Retained
0
Ps 500,000
Ps 532,000
31
3.34
(Regaldo Department Stores; analysis of transactions and preparation of income statement
and balance sheet.)
a.
T-accounts.
√
(3a)
(6)
√
Cash (A)
247,200
62,900
32,400
84,600
2,700
205,800
29,000
124,800
√
Inventory (A)
188,800
217,900
162,400
4,200
240,100
√
Prepaid Insurance (A)
12,000
1,000
√
(2)
√
(4)
(5)
(7a)
(7b)
(12)
Accumulated Depreciation (XA)
0
√
1,500 (10)
1,500
√
(7a)
(7b)
√
110,000
√
Prepaid Rent (A)
60,000
(3b)
(7a)
11,000
Accounts Payable (L)
32,000
210,000
217,900
29,000
10,900
Accounts Receivable (A)
√
0
(3a)
194,600
84,600 (6)
30,000 (11)
√
30,000
√
(1)
√
Equipment (A)
0
90,000
90,000
√
Patent (A)
24,000
√
23,600
400 (13)
Note Payable (L)
√
(2)
0
√
√
90,000
90,000
(1)
√
Compensation Payable (L)
0
√
6,700
(8)
6,700
√
Utilities Payable (L)
0
800
800
√
(9)
√
32
Interest Payable (L)
0
900
900
Income Tax Payable (L)
0
√
5,610 (15)
5,610
√
√
(14)
√
Common Stock (SE)
500,000
√
500,000
√
Retained Earnings (SE)
0
√
13,090 (16)
13,090
√
(3a)
Cost of Goods Sold (SE)
(3b)
162,400
162,400 (16)
(4)
(8)
Compensation Expense (SE)
32,400
6,700
39,100 (16)
(5)
(9)
Utilities Expense (SE)
2,700
800
3,500 (16)
(10)
Depreciation Expense (SE)
1,500
1,500 (16)
(11)
(16)
Sales Revenue (SE)
257,500
257,500
(12)
Insurance Expense (SE)
1,000
1,000 (16)
(14)
Interest Expense (SE)
900
900 (16)
Rent Expense (SE)
30,000
30,000 (16)
Patent
Amortization Expense (SE)
(13)
400
400 (16)
(15)
Income Tax Expense (SE)
5,610
5,610 (16)
33
Transactions, By Number and Description
Balance Sheet
Accounts
Balance: Purchase Acquire
Sell
BeginEquip. Merchan. Mer. For
ning of with Loan On Acct. Cash &
Period
on Acct.
1
2
3a
Recog.
COGS
3b
Paid
Paid Collects
Compe Utilitie Accts.
s
Rec.
n. To
Emp.
4
5
6
Recog. Recog. Recog. Recog. Recog. Recog. Recog. Recog. Balance:
Pay
Pay
Int. Inc.
End of
Accts.
Accts. Unpaid Unpaid Depre. Rent Insur. Patent
Exp.
Exp.
Exp. Amort. Exp. Tax
Period
Comp. Util.
Pay.
Pay.
Exp.
Exp.
Exp.
W/O
With
Discount Discount
7a
7b
8
9
10
11
12
13
14
15
ASSETS
Current
Assets:
Cash
247,200
62,900
-32,400 -2,700
194,600
Accounts
Receivable
84,600 -205,800
-29,000
124,800
-84,600
110,000
Merchandise
Inventories
188,800
Prepaid Rent
60,000
Prepaid
Insurance
12,000
Total Current
Assets
217,900
-162,400
-4,200
240,100
-30,000
30,000
-1,000
11,000
508,000
515,900
Noncurrent
Assets:
Equipment
90,000
90,000
Accumulated
Depreciation
Patent
-1,500
24,000
(1,500)
-400
23,600
Total
34
Noncurrent
24,000
112,100
532,000
628,000
Assets
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Liabilities:
Accounts
Payable
32,000
Note Payable
-210,000
-29,000
10,900
90,000
90,000
6,700
Compensation
Payable
Utilities Payable
6,700
800
Interest Payable
800
900
900
5,610
Income Tax
Payable
Total Current
Liabilities
217,900
5,610
32,000
114,910
-
-
32,000
114,910
Noncurrent
Liabilities:
Total
Noncurrent
Liabilities
Total Liabilities
Shareholders'
Equity:
35
Common Stock
500,000
500,000
257,500
Retained
Earnings
-162,400 -32,400 -2,700
-6,700
-800 -1,500 -30,000 -1,000
-400
-900
-5,610
13,090
Total
Shareholders'
500,000
513,090
532,000
628,000
Equity
Total Liabilities
and
Shareholders'
Equity
Imbalance, if
Any
Income
Statement
Accounts
-
-
-
-
-
-
Sales
Rev.
COGS
Comp.
Exp.
-
Utility
Exp.
-
-
-
-
Comp. Utility
Exp.
Exp.
-
-
Depre. Rent
Exp.
Exp.
-
Insur.
Exp.
-
-
Amort. Int.
Exp.
Exp.
-
Income
Tax
Exp.
36
3.34 continued.
b.
REGALDO DEPARTMENT STORES
Income Statement
For the Month of February Year 8
Sales Revenue .....................................................................
Ps 257,500
Expenses:
Cost of Goods Sold ..........................................................
Ps 162,400
Compensation (Ps32,400 + Ps6,700) ..............................
39,100
Utilities (Ps2,700 + Ps800) .............................................
3,500
Depreciation ....................................................................
1,500
Rent .................................................................................
30,000
Insurance ........................................................................
1,000
Patent Amortization .......................................................
400
Interest ............................................................................
900
Total Expenses ............................................................
Ps 238,800
Net Income before Income Taxes .......................................
Ps 18,700
Income Tax Expense at 30 Percent ....................................
(5,610)
Net Income
Ps
13,090
37
4.26
(Southwest Airlines; preparing a statement of cash flows from changes in balance
sheet accounts.)
a.
SOUTHWEST AIRLINES
Statement of Cash Flows
For the Year
(Amounts in Thousands)
Operations:
Net Income ..................................................................
Additions:
Depreciation Expense ..............................................
Decrease in Accounts Receivable ............................
Increase in Other Current Liabilities .....................
Subtractions:
Increase in Inventories ............................................
Increase in Prepayments .........................................
Decrease in Accounts Payable .................................
Cash Flow from Operations.............................................
Investing:
Acquisition of Property, Plant and Equipment .........
Increase in Other Non-operating Assets ...................
Cash Flow from Investing ...............................................
Financing:
Increase in Long-term Debt .......................................
Increase in Common Stock .........................................
Payment of Dividendsa ..............................................
Increase in Non-operating Liabilities ........................
Cash Flow from Financing ..............................................
Net Change in Cash .........................................................
Cash, Beginning of Year ..................................................
Cash, End of Year ............................................................
$
474,378
264,088
15,351
114,596
$
(15,117)
(16,776)
(660)
835,860
$ (1,134,644)
(8,711)
$ (1,143,355)
$
$
$
$
244,285
96,991
(133,499)
140,026
347,803
40,308
378,511
418,819
aNet Income of $474,378 less Increase in Retained Earnings of $340,879 =
Dividends of $133,499.
38
4.26 continued.
b.
Cash flow from operations exceeds net income primarily because of the
addback for depreciation expense and increases in other current liabilities, so
Southwest Airlines relied on long-term debt and common stock to make up
the needed amount.
39
4.28
(Green Mountain Coffee Roasters; preparing a columnar work sheet for a statement of cash flows
from changes in balance sheet accounts.) (Amounts in Thousands.)
a.
Balance
Sheet
Changes Operations Investing Financing
(Increases) Decreases
in Assets
Accounts Receivable .................... $ (2,231)
Inventories....................................
59
Prepayments .................................
475
Property, Plant and Equipment (at Cost) ..........................
(2,129)
Accumulated Depreciation...........
Other Noncurrent Assets ..............
Increases (Decreases) in
Liabilities and Shareholders’ Equity
Accounts Payable .........................
Other Current Liabilities ..............
Bonds Payable..............................
$ (2,231)
59
475
$
1,038
(434)
2,968
(434)
1,574
560
2,827
1,574
560
Common Stock.............................
(5,878)
Retained Earnings ........................
4,213
Increase (Decrease) in
Cash ......................................... $
74
2,468a
(4,597)
(1,930)a
$ 5,567
(2,740)
(5,878)
4,213
$
7,184
$ (4,059) $ (3,051)
aCash proceeds of sale are $538 thousand (= $2,468 – $1,930).
b.
Cash flow from operations approximately equaled net income plus depreciation. Accounts
receivable increased during the year. The firm appeared to increase accounts payable to
finance the buildup in accounts receivable. Cash flow from operations was more than
sufficient to finance capital expenditures. The firm used the excess cash flow and the
proceeds of additional long-term borrowing to repay long-term debt and reacquire common
stock.
4.37
(Flight Training Corporation; preparing and interpreting a statement of cash flows using a
account work sheet.)
a.
T-Account Work Sheet for Year 2
√
Cash
142
Operations
Net Income
(1)
Depreciation Expense
(6)
Increase in Accounts
Payable
(8)
Increase in Other Current Liabilities
(12)
Increase in Other Noncurrent Liabilities
(13)
739
1,425
185
54
950
1,113
412
1,029
(2) Increase in Accounts Receivable
(3) Increase in Inventories
(4) Increase in Prepayments
Investing
Sale of Noncurrent
Assets
(7)
471
6,230
(5) Acquisition of
Property, Plant,
and Equipment
Financing
Increase in Long-Term
Debt
(11)
Increase in Common
Stock
(14)
√
3,751
247
313
881
(9) Decrease in Notes
Payable
4.37 a. continued.
√
(2)
√
Accounts Receivable
2,490
185
2,675
√
(3)
√
√
(4)
√
Prepayments
57
412
469
√
(5)
√
Accumulated Depreciation
4,288
√
1,425
(6)
5,713
√
Accounts Payable
939
54
993
Current Portion—
Long-Term Debt
1,104
685
1,789
(10)
√
(8)
√
√
√
(9)
Inventories
602
950
1,552
Property, Plant and Equipment
17,809
6,230
24,039
Other Noncurrent Assets
1,112
471
641
Notes Payable
1,021
881
140
(7)
√
√
√
(10)
√
Other Current Liabilities
1,310
√
1,113
(12)
2,423
√
√
(11)
√
Other Noncurrent Liabilities
-√
1,029
(13)
1,029
√
Common Stock
20
1
21
√
(14)
√
Additional Paid-In Capital
4,323
√
246
(14)
4,569
√
Retained Earnings
2,469
739
3,208
√
(1)
√
Long-Term Debt
6,738
685 3,751
9,804
4.37 a. continued.
T-Account Work Sheet for Year 3
√
Cash
313
Operations
Net Income
(1)
Depreciation Expense
(6)
Increase in Accounts
Payable
(8)
Increase in Other Current Liabilities
(12)
594
3,130
5,286
9,701
2,199
(2) Increase in Accounts Receivable
962 (3) Increase in Inventories
360 (4) Increase in Prepayments
129 (13) Decrease in Other
Noncurrent
Liabilities
Investing
52,936
24
(5) Acquisition of
Property, Plant,
and Equipment
(7) Acquisition of
Other Noncurrent Assets
Financing
Increase in Notes
Payable
(9)
Increase in Long-Term
Debt
(11)
Increase in Common
Stock
(14)
√
805
36,446
918
583
4.37 a. continued.
√
(2)
√
Accounts Receivable
2,675
2,199
4,874
√
(4)
√
Prepayments
469
360
829
√
(3)
√
Property, Plant and Equipment
√
24,039
(5)
52,936
√
76,975
Accumulated Depreciation
5,713
√
3,130
(6)
8,843
√
Accounts Payable
993
5,286
6,279
Current Portion—
Long-Term Debt
1,789
5,229
7,018
(10)
Long-Term Debt
9,804
5,229 36,446
41,021
Inventories
1,552
962
2,514
√
(8)
√
√
(10)
√
√
(11)
√
Common Stock
21
1
22
√
(14)
√
Retained Earnings
3,208
594
3,802
√
(1)
√
√
(7)
√
Other Noncurrent Assets
641
24
665
Notes Payable
140
805
945
√
(9)
√
Other Current Liabilities
2,423
√
9,701
(12)
12,124
√
Other Noncurrent Liabilities
1,029
(13)
129
900
√
√
Additional Paid-In Capital
4,569
√
917
(14)
5,486
√
4.37 a. continued.
T-Account Work Sheet for Year 4
√
Cash
583
Operations
Decrease in Prepayments
(4)
Depreciation Expense
(6)
Increase in Accounts
Payable
(8)
Increase in Other Current Liabilities
(12)
164
8,388
6,149
779
3,831
1,671
(1) Net Loss
(2) Increase in Accounts Receivable
2,592 (3) Increase in Inventories
900 (13) Decrease in Other
Noncurrent
Liabilities
Investing
Sale of Noncurrent
Assets
(7)
195
29,554
(5) Acquisition of
Property, Plant,
and Equipment
Financing
Increase in Long-Term
Debt
(11)
Increase in Common
Stock
(14)
√
12,551
10,843
159
945
(9) Decrease in Notes
Payable
4.37 a. continued.
Accounts Receivable
4,874
1,671
6,545
√
(2)
√
Prepayments
829
164
665
√
√
√
(3)
√
(4)
Accumulated Depreciation
8,843
√
8,388
(6)
17,231
√
Accounts Payable
6,279
6,149
12,428
Current Portion—
Long-Term Debt
7,018
53,572
60,590
(10)
Long-Term Debt
41,021
53,572 12,551
0
Common Stock
22
12
34
(1)
√
Retained Earnings
3,802
3,831
29
√
(8)
√
√
(10)
√
√
(11)
√
√
(14)
√
√
Inventories
2,514
2,592
5,106
Property, Plant and Equipment
√
76,975
(5)
29,554
√
106,529
√
√
(9)
Other Noncurrent Assets
665
195
470
Notes Payable
945
945
0
(7)
√
√
Other Current Liabilities
12,124
√
779
(12)
12,903
√
Other Noncurrent Liabilities
900
(13)
900
0
√
√
Additional Paid-In Capital
5,486
√
10,831
(14)
16,317
√
4.37 continued.
b.
FLIGHT TRAINING CORPORATION
Statement of Cash Flows
(Amounts in Thousands)
Year Ended December 31
Year 2
Year 3
Year 4
Operations:
Net Income (Loss) ..........................
Depreciation ...................................
Increase (Decrease) in Other Noncurrent Liabilities ......................
(Increase) Decrease in Accounts
Receivable ...................................
(Increase) Decrease in Inventories
(Increase) Decrease in Prepayments ..........................................
Increase (Decrease) in Accounts
Payable .......................................
Increase (Decrease) in Other Current Liabilities............................
Cash Flow from Operations ...............
Investing:
Acquisition of Property, Plant, and
Equipment ..................................
Sale (Acquisition) of Other Noncurrent Assets ............................
Cash Flow from Investing..................
Financing:
Increase (Decrease) in Notes Payable .............................................
Increase (Decrease) in Long-Term
Debt ............................................
Increase in Common Stock ............
Cash Flow from Financing.................
Change in Cash ..................................
Cash, Beginning of Year ....................
Cash, End of Year ..............................
$
739
1,425
$
1,029
594
3,130
$
(3,831)
8,388
(129)
(900)
(185)
(950)
(2,199)
(962)
(1,671)
(2,592)
(412)
(360)
164
54
5,286
6,149
1,113
$ 2,813
9,701
$ 15,061
779
6,486
$
$ (6,230) $ (52,936) $ (29,554)
471
(24)
195
$ (5,759) $ (52,960) $ (29,359)
$
(881) $
3,751
247
$ 3,117
$
171
142
$
313
805
36,446
918
$ 38,169
$
270
313
$
583
$
(945)
12,551
10,843
$ 22,449
$
(424)
583
$
159
4.37 continued.
c.
Cash flow from operations exceeded net income during Year 2 because of the
addbacks for depreciation and other noncurrent liabilities. Changes in current
assets just slightly exceeded changes in current liabilities, suggesting effective
working capital management. Cash flow from operations was insufficient to fund
expenditures on property, plant, and equipment. The firm primarily used longterm debt to finance the shortfall from operating cash flows in acquiring these
fixed assets.
Net income declined between Year 2 and Year 3 but cash flow from operations
increased significantly. The increased cash flow from operations, however, results
primarily from increases in accounts payable and other current liabilities. The
firm had insufficient cash to pay its suppliers and therefore stretched the payment
time. The firm increased substantially its purchase of property, plant, and
equipment during Year 3, financing its purchases with cash flow from operations
and additional long-term debt. The use of operating cash flows to finance
purchases of fixed assets is generally undesirable if it occurs as it does in this case
from stretching short-term suppliers.
Net income turns negative in Year 4, primarily because of a substantial
increase in depreciation expense from purchases of depreciable assets in the
current and prior years. Cash flow from operations is positive because of the
addback for depreciation expense and the continued stretching of accounts payable
suppliers. Flight Training Corporation again spent significant amounts on
property, plant, and equipment, financing the purchases in part with additional
long-term debt and in part with issuances of common stock.
d.
The cash flow problems of Flight Training Corporation trace to expanding fixed
assets too rapidly, relative to increases in sales, and to using cash flow from
operations in part to finance the purchases. Sales increased 76.3 percent [=
($36,597/$20,758) – 1] between Year 2 and Year 3 while fixed assets increased
220.2 percent [= ($76,975/$24,039) – 1] between those years. Sales increased 50.3
percent [= ($54,988/$36,597) – 1] between Year 3 and Year 4 while fixed assets
increased 38.4 percent [= ($106,529/$76,975) – 1]. For the two years as a whole,
sales increased 164.9 percent [= ($54,988/$20,758) – 1] while depreciable assets
increased 343.2 percent [= ($106,529/$24,039) – 1]. Although these sales increases
are substantial, they are significantly less than the increase in fixed assets.
Stretching creditors to purchase these fixed assets could jeopardize the availability
of goods (for example, jet fuel) and services (pilots’ services) needed to remain in
business.
4.34
(Hale Company; preparing and interpreting a statement of cash flows using a Taccount work sheet.)
a.
HALE COMPANY
Statement of Cash Flows
For the Year
Operations:
Net Income
Additions:
Depreciation Expense
Increase in Accounts Payable
Subtractions:
Increase in Accounts Receivable
Increase in Inventory
Decrease in Interest Payable
Cash Flow from Operations
Investing:
Sale of Equipment
Acquisition of Equipment
Cash Flow from Investing
Financing:
Dividends
Retirement of Portion of Mortgage Payable
Cash Flow from Financing
Net Change in Cash
Cash, January 1
Cash, December 31
$ 44,000
54,000
5,000
(13,000)
(11,000)
(2,000)
$
$ 5,000
(55,000)
$ (10,000)
(11,000)
$
$
77,000
(50,000)
(21,000)
6,000
52,000
58,000
4.34 a. continued.
The amounts in the T-account work sheet below are in thousands.
√
Cash
52
Operations
Net Income
Depreciation
Increase in Accounts
Payable
(1)
(3)
44
54
(8)
5
Sale of Equipment
(4)
5
√
Accounts Receivable
√
93
(5)
13
√
106
√
(6)
√
Buildings and
Equipment (Cost)
√
790
(7)
55
15 (4) (4)
√
830
58
13
(5) Increase in Accounts Receivable
11 (6) Increase in
Inventory
2 (9) Decrease in
Interest Payable
Investing
55
(7) Acquisition of
Equipment
Financing
10 (2) Dividends
11 (10) Payment of
Mortgage
Payable
Inventory
151
11
162
Accumulated
Depreciation
460 √
10
54 (3)
504 √
√
Land
30
√
30
Accounts Payable
136 √
5 (8)
141 √
4.34 a. continued.
Interest Payable
Mortgage Payable
10 √
120
√
(9)
2
(10)
11
8 √
109
√
Retained Earnings
140 √
(2)
10
44 (1)
174 √
Common Stock
250
√
250
√
4.34 continued.
b. Deriving Direct Method Cash Flow from Operations Using Data from T-Account Work Sheet (All Dollar
Amounts in Thousands)
1. Copy Income Statement and Cash Flow from Operations; see Column (a) in the display below.
2. Copy Information from T-Account Work Sheet Next to Related Income Statement Item; see Columns (b) and (c) in th
display below.
3. Sum Across Rows to Derive Direct Receipts and Expenditures; see Column (d) in the display below.
Operations
Indirect
Changes in
Direct
Method
Related Balance Sheet Accounts from
Method
T-Account Work Sheet
(a)
Revenues………………
Cost of Goods Sold……
$1,200
(788)
(b)
$ (13)
5
(11)
(c)
= Accounts Receivable Increase
= Accounts Payable Increase
(280)
Depreciation Expense….
(54)
54
(Expense Not Using Cash)
Interest Expense………..
(12)
(2)
= Interest Payable Decrease
Income Tax Expense…..
(22)
$ 44
Receipts less
Expenditures
(d)
$ 1,187
Receipts from Customers
(794)
Payments for Merchandise
(280)
Payments for Wages and Salari
= Merchandise Inventory Increase
Wages and Salaries……
Net Income……………...
From
Operations:
-- = Other Current Liabilities Increase
-- = Income Taxes Payable Increase
$ 44
Totals
-(14)
Payments for Interest
(22)
Payments for Income Taxes
$ 77
= Cash Flow from Operations
Derived via Direct Method
$ 77
= Cash Flow from Operations Derived via
Indirect Method
4.34 continued.
c.
Statement of Cash Flows presenting the direct method and reconciliation
of income to cash flows from operations.
HALE COMPANY
Statement of Cash Flows
For the Year
Operating Activities:
Sources of Cash:
Cash Received from Customers ........................ $ 1,187,000
Uses of Cash:
Payments to Suppliers ......................................
(794,000)
Payments to Employees ....................................
(280,000)
Interest Payments .............................................
(14,000)
Tax Payments ....................................................
(22,000)
Cash Flow from Operations ......................................
$ 77,000
Reconciliation of Net Income to Cash from Operations:
Net Income ............................................................. $
44,000
Depreciation...........................................................
54,000
Changes in Operating Accounts:
Accounts Receivable ..........................................
(13,000)
Inventory............................................................
(11,000)
Accounts Payable...............................................
5,000
Interest Payable ................................................
(2,000)
Cash from Operations ............................................... $
77,000
Investing Activities:
Cash Used for New Acquisition of Equipment ..... $
Cash Received from Disposition of Equipment ....
Net Cash Provided by (Used for) Investing ..............
Financing Activities:
Cash Used for Dividends ....................................... $
Cash Used to Repay Mortgage ..............................
Net Cash Provided by (Used for) Financing .............
Net Change in Cash for Year ....................................
Cash, January 1.........................................................
Cash, December 31 ....................................................
d.
(55,000)
5,000
(50,000)
(10,000)
(11,000)
(21,000)
$ 6,000
52,000
$ 58,000
Cash flow from operations was sufficient to finance acquisitions of
equipment during the year. The firm used the excess cash flow to pay
dividends and retire long-term debt.
6.21
(Heath Company; journal entries for the allowance method.)
a.
Year 6
Bad Debt Expense (.03 X $340,000) ........................
Allowance for Uncollectible Accounts .................
Assets
–10,200
= Liabilities +
Shareholders'
Equity
(Class.)
–10,200
IncSt Æ RE
Allowance for Uncollectible Accounts .....................
Accounts Receivable ............................................
Assets
+1,800
Shareholders'
Equity
= Liabilities +
10,200
10,200
1,800
1,800
(Class.)
–1,800
Year 7
Bad Debt Expense (.03 X $450,000) ........................
Allowance for Uncollectible Accounts .................
Assets
–13,500
= Liabilities +
Shareholders'
Equity
(Class.)
–13,500
IncSt Æ RE
Allowance for Uncollectible Accounts .....................
Accounts Receivable ............................................
Assets
+8,300
Shareholders'
= Liabilities +
Equity
13,500
13,500
8,300
8,300
(Class.)
–8,300
Year 8
Bad Debt Expense (.03 X $580,000) ........................
Allowance for Uncollectible Accounts .................
17,400
17,400
57
Assets
–17,400
Shareholders'
= Liabilities +
Equity
–17,400
(Class.)
IncSt Æ RE
Allowance for Uncollectible Accounts .....................
Accounts Receivable ............................................
Assets
+14,100
Shareholders'
= Liabilities +
Equity
14,100
14,100
(Class.)
–14,100
b.
Yes. Uncollectible accounts arising from sales of Years 6, 7 and 8
total $42,600, which equals 3.1 percent (= $42,600/$1,370,000) of total
sales on account during the three year period.
58
6.33
(General Electric Company; income recognition for nuclear generator manufacturer.)
a.1. Percentage-of-Completion Method
Year
2
3
4
Total.....
Incremental
Percentage
Complete
42/120 (.35)
54/120 (.45)
24/120 (.20)
120/120 (1.00)
Revenue
Recognized
$ 70,000,000
90,000,000
40,000,000
$ 200,000,000
Expenses
Recognized
$ 42,000,000 $
54,000,000
24,000,000
$ 120,000,000 $
Income
28,000,000
36,000,000
16,000,000
80,000,000
2. Completed Contract Method
Year
2
3
4
Total....
Revenue
Recognized
-0-0$ 200,000,000
$ 200,000,000
Expenses
Recognized
-0-0$ 120,000,000
$ 120,000,000
Income
-0-0$ 80,000,000
$ 80,000,000
3. Installment Method
Cash
Collected
Year
(= Revenue)
2
$
20,000,000
3
100,000,000
4
80,000,000
Total...... $ 200,000,000
Fraction
of Cash
Collected
1/10
5/10
4/10
1.00
Expenses
(= Fraction X
Total Cost)
$ 12,000,000 $
60,000,000
48,000,000
$ 120,000,000 $
Income
8,000,000
40,000,000
32,000,000
80,000,000
4. Cost-Recovery-First Method
Year
2
3
4
Total.....
b.
Cash Collected
(= Revenue)
$ 20,000,000
100,000,000
80,000,000
$ 200,000,000
Expenses
Recognized
$ 20,000,000
100,000,000
-0$ 120,000,000
Income
-0-0$ 80,000,000
$ 80,000,000
The percentage-of-completion method probably provides a better measure of performance over
the life of the contract because each period receives a portion of the net income from the
contract. General Electric’s original estimates of the cost of the contract were correct. Also,
the periodic payments from Consolidated Edison suggest that General Electric will probably
collect cash in the amount of the contract price.
7.36
(Best Furniture, Inc.; preparation of journal entries and income statement for a
manufacturing firm.)
a.
(1) Raw Materials Inventory .................................. 667,200
Accounts Payable...........................................
= Liabilities +
Assets
+667,200
Shareholders'
Equity
667,200
(Class.)
+667,200
(2) Work-in-Process Inventory ............................... 689,100
Raw Materials Inventory ..............................
= Liabilities +
Shareholders'
Equity
689,100
(Class.)
Assets
+689,100
–689,100
(3) Work-in-Process Inventory ............................... 432,800
Selling Expenses................................................ 89,700
Administrative Expenses .................................. 22,300
Cash ...............................................................
Shareholders'
Equity
(Class.)
Assets
+432,800
–89,700
IncSt Æ RE
–544,800
–22,300
IncSt Æ RE
= Liabilities +
(4) Work-in-Process Inventory ............................... 182,900
Selling Expenses................................................ 87,400
Administrative Expenses .................................. 12,200
Accumulated Depreciation ............................
Shareholders'
= Liabilities +
Equity
(Class.)
Assets
+182,900
–87,400
IncSt Æ RE
–282,500
–12,200
IncSt Æ RE
544,800
282,500
7.36 a. continued.
(5) Work-in-Process Inventory ...............................
Selling Expenses................................................
Administrative Expenses ..................................
Cash ...............................................................
Shareholders'
= Liabilities +
Equity
218,500
55,100
34,700
308,300
(Class.)
Assets
+218,500
–55,100
IncSt Æ RE
–308,300
–34,700
IncSt Æ RE
(6) Finished Goods Inventory ................................. 1,564,500
Work-in-Process Inventory ...........................
1,564,500
Shareholders'
= Liabilities +
Equity
(Class.)
Assets
+1,564,500
–1,564,500
(7) Accounts Receivable .......................................... 2,400,000
Sales ...............................................................
2,400,000
Shareholders'
= Liabilities +
Equity
Assets
+2,400,000
+2,400,000
(Class.)
IncSt Æ RE
(8) Cost of Goods Sold ............................................. 1,536,600
Finished Goods Inventory .............................
1,536,600
= Liabilities +
Assets
–1,536,600
Shareholders'
Equity
(Class.)
–1,536,600
IncSt Æ RE
$182,700 + $1,564,500 – $210,600 = $1,536,600.
7.36 continued.
b.
BEST FURNITURE, INC.
Income Statement
For the Month of January
Sales ....................................................... .....
Less Expenses:
Cost of Goods Sold ... .................................. $
Selling ....... .................................................
Administrative ..... .....................................
Net Income....... ..............................................
$
2,400,000
1,536,600
232,200
69,200 (1,838,000)
$ 562,000
Note: Instead of using a functional classification of expenses (that is, selling,
administrative), classification by their nature (salary, depreciation, other
operating) is acceptable.