Financial Accounting Tutorial 3:
1.
During 20X3 Hershey Foods Corporation made sales of 4,173 CHF (assume all on
account) and collected cash of 4,136 CHF from customers. Operating expenses totaled
816 CHF, all paid in cash. At year end, 20X3, Hershey customers owed the company
408 CHF. Hershey owed creditors 132 CHF on account. All amounts are in millions.
a. For these facts, show what Hershey reported on the income statement and balance
sheet
b. Suppose Hershey had used the cash basis of accounting. What would Hershey have
reported for these facts?
Solution:
All amounts in millions
1.
Statement
Income statement
Report
Sales revenue
Operating expenses
4,173
816
Balance sheet
Accounts receivable
Accounts payable
408
132
2.
Cash basis would report only the cash collections of 4,136 CHF from customers and the
payment of operating expenses (816 CHF).
2.
Fossil, Inc., the popular watch and leather-goods company, made sales of 781 million
CHF during 20X3. Of this amount, Fossil collected cash for all but 36 million CHF.
The company’s cost of goods sold was 380 million CHF, and all other expenses for
the year totalled 333 million CHF. Also during 20X3, Fossil paid 391 million CHF for
its inventory and 308 million CHF for everything else. Beginning cash was 112
million CHF. Please answer the following questions:
a. How much was Fossil’s net income for 20X3?
b. How much was Fossil’s cash balance at the end of 20X3?
Solution:
Sales revenue…………………………………………….
Cost of goods sold………………………………………
All other expenses………………………………………
Net income………………………………………………..
Millions
781
(380)
(333)
68
Beginning cash…………………………………………..
Collections (781 – 36)………………………………..
Payments for: inventory……………………………….
everything else………………………
Ending cash………………………………………………
112
745
(391)
(308)
158
3.
Suppose The Home Depot, Inc. faced the following situations. Journalize the adjusting
entry needed at December 31 for each situation. Consider each fact separately.
a. The business will pay interest expense of 9,000 CHF early in the next period. Of this
amount, two-thirds is expense of the current year
b. Interest revenue of 900 CHF has been earned but not yet received. The business holds
a 20,000 CHF note receivable that it will collect, along with the interest, next year.
c. On July 1, when we collected 6,000 CHF rent in advance, we debited Cash and
credited Unearned Rent Revenue. The tenant was paying for 2 years’ rent.
d. Salary expense is 1,000 CHF per day—Monday through Friday—and the business
pays employees each Friday. This year, December 31 falls on a Thursday.
e. The unadjusted balance of the Supplies account is 3,100 CHF. The total cost of
supplies on hand is 800 CHF.
f. Equipment was purchased at the beginning of this year at a cost of 60,000 CHF. The
equipment’s useful life is 5 years. Record depreciation for this year and then
determine the equipment’s book value.
g. On September 1, we prepaid 1,200 CHF for a 1-year insurance policy.
Solution:
Adjusting Entries
DATE
ACCOUNT TITLES
a.
b.
c.
d.
e.
f.
DEBIT
Interest Expense (9,000 × 2/3)……………..
Interest Payable…………………………….
6,000
Interest Receivable……………………………
Interest Revenue…………………….……..
900
Unearned Rent Revenue (6,000 / 2 × 6/12)
Rent Revenue……………………………….
1,500
Salary Expense (1,000 × 4)………………....
Salary Payable………………………………
4,000
Supplies Expense……………………………..
Supplies (3,100 – 800)……………….….
2,300
Depreciation Expense (60,000 / 5)………...
Accumulated Depreciation……………….
12,000
CREDIT
6,000
900
1,500
4,000
2,300
12,000
Book value = 48,000 (60,000 – 12,000)
g.
Insurance Expense……………………………
Prepaid Insurance (1,200 × 4/12)……….
400
400
4.
Please use the above data to answer the following questions:
a. Refer to item f above. Show what Home Depot will report on its:
a1) Balance sheet (show all the data items needed to report the asset's book value)
a2) Income Statement
b. Refer to item g above. Show what Home Depot will report on the following financial
statements:
b1) Income statement of the current year
b2) Balance sheet at the end of the current year
b3) Income statement of the following year
b4) Balance sheet at end of the following year
Solution:
f.
g.
5.
a.
b.
c.
d.
Statement
Report
(a1)
Balance sheet
Equipment……………...
Less Accumulated depreciation……
Equipment book value
60,000
(12,000)
48,000
(a2)
Income statement
Depreciation expense..……
12,000
(b1) Income statement, current year
Insurance expense……
400
(b2) Balance sheet, current year
Prepaid insurance
(1,200 – 400)……..
800
(b3) Income statement, next year
Insurance expense……
800
(b4) Balance sheet, next year
Nothing to report
The accounting records of Studio Art Gallery include the following unadjusted
balances at May 31: Accounts Receivable 1,100 CHF; Supplies 900 CHF; Salary
Payable 0 CHF; Unearned Service Revenue 800 CHF; Service Revenue 4,700 CHF;
Salary Expense 1,200; Supplies Expense 0 CHF. Studio Art Gallery's accountant
develops the following data for the May 31 adjusting entries:
Supplies on hand 500 CHF
Salary owed to employee 700 CHF
Service revenue accrued 600 CHF
Unearned service revenue that has been earned 550 CHF
Open the foregoing T-accounts with their beginning balances. Then record the
adjustments directly in the accounts, keying each adjustment amount by letter. Show
each accounts adjusted balance. Journal entries are not required.
Solution:
Accounts Receivable
1,100
(c)
600
Bal.
1,700
Supplies
Bal.
Salary Payable
(b)
Bal.
700
700
(c)
(d)
Bal.
4,700
600
550
5,850
Service Revenue
900
500
(a)
Unearned Service Revenue
(d)
550
Bal.
400
800
250
Salary Expense
1,200
(b)
700
Bal.
1,900
Supplies Expense
(a)
400
Bal.
400
6.
The adjusted trial balance of Upper 10 Cola Company (adapted) follows:
Adjusted Trial Balance
Debit Credit
Cash
900
Accounts Receivable
1,800
Inventories
1,100
Prepaid expenses
1,900
Property, plant, equipment
6,600
Accumulated depreciation
2,400
Other assets
9,900
Account payable
7,700
Income tax payable
600
Other liabilities
2,200
Common stock
4,900
Retained earnings (beginning December 31 200X)
4,500
Dividends
1,700
Sales revenue
20,500
Cost of goods sold
6,200
Selling, administrative and general expense
9,700
Income tax expense
3,000
Total
42,800 42,800
Prepare Upper 10 Cola Company's income statement and statement of retained
earnings for the year ended December 31, 20X6, and its balance sheet on that date.
Show how the three statements are linked.
Solution:
Upper 10 Cola Company
Income Statement
Year Ended December 31, 20X6
Millions
Revenues:
Sales revenue.....................................................
Expenses:
Cost of goods sold......................................................
Selling, administrative, and general expense.............
Total expenses.............................................................
Income before tax........................................................
Income tax expense....................................................
Net income................................................................
20,500
6,200
9,700
15,900
4,600
3,000
1,600
Upper 10 Cola Company
Statement of Retained Earnings
Year Ended December 31, 20X6
Retained earnings, December 31, 20X5...................................................
Add: Net income ..............................................................................
Less: Dividends.....................................................................................
Retained earnings, December 31, 20X6...................................................
Millions
4,500
1,600
6,100
(1,700)
4,400
Upper 10 Cola Company
Balance Sheet
December 31, 20X6
ASSETS
Cash...................................................
Accounts receivable......................
Inventories...................................
Prepaid expenses............................
Prop., plant, equip.
6,600
Less: Accum.
Deprec
(2,400)
Other assets...................................
Total assets...................................
900
1,800
1,100
1,900
4,200
9,900
19,800
LIABILITIES
Accounts payable....................
Income tax payable.................
Other liabilities.........................
Total liabilities........................
STOCKHOLDERS’
EQUITY
Common stock...........................
Retained earnings......................
Total stockholders’ equity..........
Total liabilities and
stockholders’ equity
7,700
600
2,200
10,500
4,900
4,400
9,300
19,800
Link between the statements: Net income is used in the statement of retained earnings.
Retained earnings show up in the balance sheet.
7. The unadjusted trial balance and income statement amounts from the March adjusted
trial balance of Wall street Workout Company follow. Wall Street Workout is a
turnaround specialist.
Wall street work out company
Account title
Cash
Supplies
Prepaid rent
Equipment
Accumulated depreciation
Accounts payable
Salary payable
Unearned service revenue
Income tax payable
Common stock
Retained earnings
Dividends
Service revenue
Salary expense
Rent expense
Depreciation expense
Supplies expense
Income tax expense
Total
Net income
Total
Unadjusted Trial From the adjusted
Balance
trial balance
10,200
2,400
1,100
32,100
6,200
4,600
8,400
8,700
10,300
1,000
12,800
3,000
1,200
51,000
17,900
3,800
1,400
300
400
1,600
51,000
10,400
17,900
17,900
a. Journalize the adjusting and closing entries of Wall Street Workout Company at
March 31. There was only one adjustment to Service Revenue.
b. After solving a., use the data to prepare Wall Street Workout Company's classified
balance sheet at March 31 of the current year. Use the report format.
c. Compute Wall Street Workout's current ratio at March 31. A year ago, the current
ratio was 1,30 and the debt ratio was 0,29. Indicate whether the company's ability to
pay its debts improved or deteriorated during the current year.
Solution:
a.
Journal
DATE
Mar.
31
31
31
31
31
31
31
31
31
ACCOUNT TITLES AND EXPLANATION
Adjusting Entries
Unearned Service Revenue……………….
Service Revenue (17,900 – 12,800)...
CREDI
DEBIT T
5,100
5,100
Salary Expense (3,800 – 3,000)………...
Salary Payable……………………….…...
800
Rent Expense (1,400 – 1,200)…………..
Prepaid Rent………………………………
200
Depreciation Expense (300 – 0)………..
Accumulated Depreciation……………..
300
Supplies Expense (400 – 0)…………….
Supplies……………………………………
400
Income Tax Expense (1,600 – 0)………
Income Tax Payable……………………..
1,600
Closing Entries
Service Revenue…………………………….
Retained Earnings……………………….
800
200
300
400
1,600
17,900
17,900
Retained Earnings…………………………..
Salary Expense…………………………...
Rent Expense……………………………..
Depreciation Expense…………………...
Supplies Expense…………………….….
Income Tax Expense…………………….
7,500
Retained Earnings…………………………..
Dividends…………………………….……
1,000
3,800
1,400
300
400
1,600
1,000
b.
Wall Street Workout Company
Balance Sheet
March 31, 20XX
ASSETS
Current:
Cash………………………………………………….……
Supplies (2,400 – 400)……………………………….
Prepaid rent [1,100 – (1,400 – 1,200)]…………...
Total current assets………………………………….
Plant:
Equipment…………………………………
32,100
Less accumulated depreciation
(6,200 + 300)…………………….…..
(6,500)
Total assets………………………………………………….
LIABILITIES
Current:
Accounts payable……………………………………….
Salary payable (3,800 – 3,000)……………………..
Unearned service revenue
[8,400 – (17,900 – 12,800)]……………………...
Income tax payable……………………………………..
Total current liabilities………………………………
STOCKHOLDERS’ EQUITY
Common stock……………………………………………...
Retained earnings
(10,300 + 17,900 – 3,800 – 1,400 – 300 – 400
– 1,600 – 1,000)…….………………………………….
Total stockholders’ equity………………………………..
Total liabilities and stockholders’ equity………………
10,200
2,000
900
13,100
25,600
38,700
4,600
800
3,300
1,600
10,300
8,700
19,700
28,400
38,700
c.
Current
Year
Current ratio
=
Total current assets
Total current liabilities
=
13,100
10,300
= 1.27
Prior
Year
1.30
The ability to pay current liabilities with current assets deteriorated a little.
Debt ratio
=
Total liabilities
Total assets
=
10,300
38,700
The overall ability to pay total liabilities improved a little.
= 0.27
0.29
8.
a.
b.
c.
d.
e.
Johnson & Johnson, the health-care products company, reported these ratios at
December 31, 20X3 (in million CHF): Current ratio = 23/13 = 1,77; Debt ratio =
21/48 = 0,44. Assume that Johnson & Johnson completed these transactions during
20X4:
Purchased equipment on account, 4 CHF.
Paid long-term debt, 5 CHF.
Collected cash from customers in advance, 2 CHF.
Accrued interest expense, 1 CHF.
Made cash sales, 6 CHF.
Determine whether each transaction improved or hurt Johnson & Johnson’s current
ratio and debt ratio. Round all ratios to two decimal places.
Solution:
a. Current ratio
=
23
13 + 4
= 1.35
Debt ratio
=
21 + 4
48 + 4
= 0.48
=
21 – 5
48 – 5
= 0.37
The purchase of equipment on account hurts both ratios.
b. Current ratio
=
23 – 5
13
= 1.38
Debt ratio
The payment of long-term debit hurts the current ratio and improves the debt ratio.
c. Current ratio
=
23 + 2
13 + 2
= 1.67
Debt ratio
=
21 + 2
48 + 2
= 0.46
Debt ratio
=
21 + 1
48
= 0.46
Debt ratio
=
21
48 + 6
= 0.39
Collecting cash in advance hurts both ratios.
d. Current ratio
=
23
13 + 1
= 1.64
Accruing an expense hurts both ratios.
e. Current ratio
=
23 + 6
13
A cash sales improves both ratios.
= 2.23