University of Puget Sound School of Business and Leadership

Business 205 B & C Principles of Financial and Managerial Accounting

Winter, 2005

Course Objectives: This course introduces students to accounting and the language of business. The students are provided with the basic vocabulary needed for entry into upper level business courses. Students are introduced to understanding the uses of information by those outside the organization (financial accounting) and by those inside the organization (managerial accounting). Prerequisites- sophomore standing or instructors permission.

Time: 205C Tuesday and Thursday 12:30 to 1:50 p.m. 205B Tuesday and Thursday 2:00 to 3:20 p.m.

Room: Section B McIntyre 320; Section C McIntyre 107

Text: Survey of Accounting, Warren, 2nd. Ed.

Faculty: L. L. Price, Ph.D.

Office: Library Tower - 318

Office Hours: Tuesday and Thursday: noon to 12:30; 3:20 to 3:30 Monday and Wednesday: by appointment

Contact Information: Office Phone: 253-879-3309; Residence phone: 253-858-3838 Home email: [email protected] Office: [email protected]

Reading assignments and class discussion:

You are expected to read the assigned material and to have analyzed and completed assigned homework problems. You are also expected to be prepared to participate in the class discussion. Note that the appendices are required only if they are assigned. If for some reason you are not prepared to participate, please notify me before class, so that I will not call on you. Grades:

Your grade will be based on 11 quizzes, a short project, and a comprehensive final exam. A breakdown of the quizzes, chapters covered, and points follows:

Quiz Chapters Points 1 1 (LO 1 to 5) & 2 (LO 1 to 6) 50 2 3 (LO 1 to 6) 25 3 Appendix A 25 4 4 (LO 1 to 6) & 6 (LO 4 to 7) 50 5 5 (LO 1 to 5) & 6 ( LO 1 to 3) 50 6 7 (LO 1 to 7) 25 7 8 (LO 1 to 7) 50 8 9 (LO 1 to 5) 25 9 Statement of cash flows (handout) 25 10 10 (LO 1 to 8) 100 11 (LO 1 to7) & 12 (LO 1) 13(LO 1 to 7) Project Financial statement project 15 Final Comprehensive 60 500

Attendance and class participation may be a factor in determining your grade, particularly if you are in a borderline situation. As a general policy, makeup quizzes or exams will not be given. Certain types of scheduling conflicts will be resolved by your taking the quiz early. Sometimes it will be necessary to adjust the grading scale to more appropriately reflect your performance. If I do change the grading scale it would be in your favor. I will not make the grading scale more difficult.

The grading scale will approximate the following:

A range 450-500 points 90%+ B range 400-449 80-89% C range 350-399 70-79% D range 300-349 60-69% F 0-299 0-59%, or any academic dishonesty.

Assignments:

You will be provided with solutions to the homework assignments. If you wish to be successful in this class, it is imperative that you attempt the homework before checking the solution. If you read the problem and then look at the solution it make sense to you, but you will not be actively engaged in the learning process.

The keys to success in this class are simple. Do the work. And, do it on time. Chapter Assignment: 1 Exercises: 3 to 12 2 Exercises: 1, 3, 5, 7, 9, 10*, 11, 13, 17, 18, 19 3 Exercises: 4*, 5*, 8*, 9, 10, 11, 15*, 19, 20, 23, 24 Problems: 1*, 2*, 3 Appx. Exercises: 1, 5, 6, 8, 9 Problems: 1, 2 4 Exercises: 1, 2, 6, 9, 11, 13 to 16, 19, 21, 21* 6 Exercises: 11 to 15, 17, 18 5 Exercises: 1 to 5, 13, 14*, 15*, 17 6 Exercises: 2 to 4, 5*, 6*, 7* 7 Exercises: 1 to 9; 11*, 13*, 14, 16, 19*, 20 8 Exercises: 1, 2*, 5*, 6, 8, 11, 14 to 18, 21, 22 9 Exercises: 1, 3, 4, 5, 7, 9, 11, 12, 17 Problem: 4 Ex: 4-25; 6-21; 6-23; 6-24; 8-25; 8-26. 10 Exercises: 1 to 4; 7, 12, 13, 15, 16, 18, 28 11 Exercises: 1, 2, 5, 6, 7, 8, 9, 10, 11 12 Exercises: 2, 6, 7, 8, 9 13 Exercises: 1, 2, 5, 6, 7, 11, 12, 13, 16, 19

Schedule and Important Dates:

Because of the number of quizzes (eleven) and the fact that they will occur every week, to week and a half, we will not have a detailed schedule of the dates of the quizzes for the entire semester. You will be given ample notice of the dates of the quizzes. It is your responsibility to keep informed of class announcements, changes to assignments and schedules.

Key dates to remember: 1/18 (Tuesday) is the first day of class 3/14-3/18 Spring Break 5/12 (Thursday) noon to 2 p.m. Section C final exam 5/13 (Friday) noon to 2 p.m. Section B final exam

Homework solutions:

The following will be solutions to the assigned homework. Your textbook provides check figures for most of the exercises and problems. You should complete the homework before ever looking at the solution. If you look at the exercise and then look at the solution, it will “make sense”, but no learning has taken place. Also, if you do your work at the last minute, you will have missed out on the class discussions and will find it very difficult to succeed in this course. Exercise 1–3

Toys “R” Us $3,418 Estee Lauder 1,352

Exercise 1–4

a. $1,771 ($4,088 – $2,317) b. $9,571 ($5,323 + $4,248) c. $2,894 ($13,362 – $10,468)

Exercise 1–5

Company W Stockholders’ equity at end of year ($600,000 – $325,000) $275,000 Stockholders’ equity at beginning of year ($375,000 – $150,000)...... 225,000 Net income (increase in stockholders’ equity).... $ 50,000

Company X Increase in stockholders’ equity (as determined for W)...... $ 50,000 Add dividends...... 30,000 Net income...... $ 80,000

Company Y Increase in stockholders’ equity (as determined for W)...... $ 50,000 Deduct additional issuance of capital stock...... 75,000 Net loss...... $ (25,000)

Company Z Increase in stockholders’ equity (as determined for W)...... $ 50,000 Deduct additional issuance of capital stock...... 75,000 $ (25,000) Add dividends...... 30,000 Net income...... $ 5,000

Exercise 1–6

a. (1) $2,225,583 ($3,989,413 – $1,763,830) (2) $1,828,813 ($3,846,076 – $2,017,263)

b. $59,712 ($10,673,671 – $8,097,166 – $2,332,320 – $184,473) c. No dividends were paid in 2001. The change in the retained earnings balance during 2001 is $59,712 ($1,008,021 – $948,309), the same amount as the net income for the year. Thus, no dividends must have been paid during 2001.

Exercise 1–7

a. Balance sheet items: 3, 5, 6, 8, 9, 10 b. Income statement items: 1, 2, 4, 7

Exercise 1–8

1. (d) expense 2. (c) revenue 3. (a) asset 4. (e) dividend 5. (b) liability 6. (a) asset 7. (d) expense 8. (d) expense 9. (a) asset 10. (b) liability

Exercise 1–9 DOUMA COMPANY Retained Earnings Statement For the Month Ended June 30, 2003 Retained earnings, June 1, 2003...... $317,500 Net income for the month...... $91,250 Less dividends...... 15,000 Increase in retained earnings...... 76,250 Retained earnings, June 30, 2003...... $393,750 Exercise 1–10

SURGERY SERVICES Income Statement For the Month Ended April 30, 2003 Fees earned...... $165,800 Operating expenses: Wages expense...... $71,500 Rent expense...... 25,000 Supplies expense...... 3,250 Miscellaneous expense...... 2,250 Total operating expenses...... 102,000 Net income...... $ 63,800

Exercise 1–11

In each case, solve for a single unknown, using the following equation: Stockholders’ Equity (beginning) + Additional Issue of Capital Stock – Dividends + Revenues – Expenses = Stockholders’ Equity (ending)

I. Stockholders’ equity at end of year ($745,000 – $325,000).... $420,000 Stockholders’ equity at beginning of year ($600,000 – $360,000)...... 240,000 Increase in stockholders’ equity...... $180,000 Deduct increase due to net income ($197,750 – $108,000).... 89,750 $ 90,250 Add dividends...... 40,000 Additional issue of capital stock...... (a) $130,250 II. Stockholders’ equity at end of year ($175,000 – $55,000)...... $120,000 Stockholders’ equity at beginning of year ($125,000 – $65,000)...... 60,000 Increase in stockholders’ equity...... $ 60,000 Add dividends...... 8,000 $ 68,000 Deduct additional issue of capital stock...... 25,000 Increase due to net income...... $ 43,000 Add expenses...... 32,000 Revenue...... (b) $ 75,000 Exercise 1–11 (Concluded)

III. Stockholders’ equity at end of year ($90,000 – $80,000)...... $ 10,000 Stockholders’ equity at beginning of year ($100,000 – $76,000)...... 24,000 Decrease in stockholders’ equity...... $ 14,000 ...... Deduct decrease due to net loss ($115,000 – $122,500)...... (7,500) $ (6,500) Deduct additional issue of capital stock...... 10,000 Dividends from the business...... (c) $ (16,500)

IV. Stockholders’ equity at end of year ($310,000 – $170,000).... $140,000 Add decrease due to net loss ($140,000 – $160,000)...... 20,000

$160,000 Add dividends...... 75,000

$235,000 Deduct additional issue of capital stock...... 50,000

$185,000 Add liabilities at beginning of year...... 150,000 Assets at beginning of year...... (d) $335,000

Exercise 1–12 a. REVIVAL INTERIORS Balance Sheet August 31, 2004 Assets Cash...... $15,000 Accounts receivable...... 8,500 Supplies...... 750 Total assets...... $24,250

Liabilities Accounts payable...... $ ...... 3,850

Stockholders’ Equity Capital stock...... $10,000 Retained earnings...... 10,400* 20,400 Total liabilities and stockholders’ equity..... $24,250 *$10,400 = – $3,850 + $8,500 + $15,000 + $750 – $10,000 Exercise 1–12 (Concluded)

REVIVAL INTERIORS Balance Sheet September 30, 2004 Assets Cash...... $25,500 Accounts receivable...... 9,780 Supplies...... 600 Total assets...... $35,880

Liabilities Accounts payable...... $ ...... 4,150

Stockholders’ Equity Capital stock...... $10,000 Retained earnings...... 21,730* ...... 31,730 Total liabilities and stockholders’ equity...... $ ...... 35,880 *$21,730 = – $4,150 + $9,780 + $25,500 + $600 – $10,000 b. Retained earnings, September 30...... $21,730 Retained earnings, August 31...... 10,400 Net income...... $11,330 c. Retained earnings, September 30...... $21,730 Retained earnings, August 31...... 10,400 Increase in stockholder's equity...... $11,330 Add dividends...... 7,500 Net income...... $18,830 Exercise 2–1 a. $80,500 ($30,500 + $50,000) b. $260,000 ($360,000 – $100,000) c. $180,000 ($225,000 – $45,000)

Exercise 2–3 a. $137 ($5,196 – $5,059) b. $384 decrease ($1,115 – $731) c. Total assets = $5,927 ($5,196 + $731) Total liabilities = $6,174 ($5,059 + $1,115) Total stockholders' equity = ($247) ($5,927 – $6,174) (Note: As of July 29, 2001, Campbell Soup Co. reported a deficit of $247 million of stockholders' equity. This deficit was created largely by purchases of its own capital stock of $4,908 million.) d. Yes. [$5,927 (total assets) = $6,174 (total liabilities) + ($247) (total stockholders' equity)]

Exercise 2–5 a. $183,000 ($325,000 – $142,000) b. $230,000 ($183,000 + $84,000 – $37,000) c. $158,000 ($183,000 – $8,000 – $17,000) d. $275,500 ($183,000 + $75,000 + $17,500) e. Net income: $137,000 ($425,000 – $105,000 – $183,000) Exercise 2–7 a. Increases assets and increases stockholders’ equity. b. Increases assets and decreases assets. c. Increases assets and increases liabilities. d. Increases assets and increases stockholders’ equity. e. Decreases assets and decreases stockholders’ equity. Exercise 2–9 1. (a) 2. (a) 3. (b) 4. (b) 5. (b)

Exercise 2–10 1. c 2. b 3. e 4. e 5. c 6. d 7. e 8. a 9. e 10. e

Exercise 2–11 a. (1) Sale of catering services for cash, $36,000. (2) Purchase of land for cash, $15,000. (3) Payment of expenses, $21,250. (4) Payment of cash dividends, $1,500. b. $1,750 ($9,500 – $7,750) c. $13,250 ($18,400 – $5,150) d. $14,750 ($36,000 – $21,250) e. $13,250 ($14,750 – $1,500) f. $14,750 ($36,000 – $21,250); the same as (d) g. – $15,000 for purchase of land h. – $1,500 for payment of dividends

Exercise 2–13 Company A Stockholders’ equity at end of year ($970,000 – $425,000)... $545,000 Stockholders’ equity at beginning of year ($525,000 – $220,000)...... 305,000 Net income (increase in stockholders’ equity)...... 240,000 Company B Increase in stockholders’ equity (as determined for A) $240,000 Add dividends...... 50,000 Net income...... $290,000

Company C Increase in stockholders’ equity (as determined for A) $240,000 Deduct issuance of additional capital stock...... 75,000 Net income …………………………………………… 165,000

Company D Increase in stockholders’ equity (as determined for A) $240,000 Deduct issuance of additional capital stock...... 75,000

$165,000 Add dividends...... 50,000 Net income …………………………………………………………….215,000

Exercise 2–17 MATA HARI REALTY INC. Income Statement For the Year Ending April 30, 2004 Revenues: Sales commissions ...... $24,750

Expenses: Salaries expense...... $4,500 Utilities expense...... 3,750 Rent expense...... 3,000 Interest expense...... 1,000 Miscellaneous expense...... 1,250 Total expenses...... 13,500 Net income 11,250

Exercise 2–18 MATA HARI REALTY INC. Retained Earnings Statement For the Month Ending April 30, 2004 Net income ...... $11,250 Less dividends...... 2,000 Retained earnings, April 30, 2004...... $9,250

Exercise 2–19 MATA HARI REALTY INC. Balance Sheet April 30, 2004 Assets Cash ...... $10,750 Land ...... 18,500 Total assets...... $29,250

Liabilities and Stockholders' Equity Liabilities: Notes payable ...... $15,000

Stockholders' equity: Capital stock ...... $ 5,000 Retained earnings...... 9,250 Total stockholders' equity...... 14,250...... Total liabilities and stockholders' equity...... $29,250

Exercise 3–4

a. $1,234 ($1,475 – $241) b. $2,361 ($418 + $1,943)

Exercise 3–5

a. Insurance Expense, increase, $1,350 Prepaid Insurance, decrease, $1,350 b. Insurance Expense, increase, $1,875 Prepaid Insurance, decrease, $1,875

Exercise 3–8

a. Salary Expense, increase, $5,500 Salaries Payable, increase, $5,500 b. Salary Expense, increase, $8,250 Salaries Payable, increase, $8,250

Exercise 3–9

$85,470 ($87,430 – $1,960) Exercise 3–10

a. Salary expense (or expenses) will be understated. Net income will be overstated. b. Salaries payable (or liabilities) will be understated. Stockholders’ equity (retained earnings) will be overstated.

Exercise 3–11

a. Salary expense (or expenses) will be overstated. Net income will be understated. b. The balance sheet will be correct. This is so because wages payable have been satisfied, and the net income errors have offset each other. Thus, stockholders’ equity (retained earnings) is correct.

Exercise 3–15

a. Accounts Receivable, increase, $7,260 Fees Earned, increase, $7,260 b. No. If the cash basis of accounting is used, revenues are recognized only when the cash is received. Therefore, earned but unbilled revenues would not be recognized in the accounts, and no adjusting entry would be necessary.

Exercise 3–19

a. $2,591 million ($5,029 – $2,438) b. No. Depreciation is an allocation method, not a valuation method. That is, depreciation allocates the cost of a fixed asset over its useful life. Depreciation does not attempt to measure market values, which could vary significantly from year to year.

Exercise 3–20 SHOSHONE CO. Balance Sheet June 30, 2004

Assets Current assets: Cash...... $ 2,150 Accounts receivable...... 18,725 ...... Supplies...... 675 ...... Prepaid insurance...... 3,100 ...... Prepaid rent...... 2,400 Total current assets...... $27,050 ...... Property, plant, and equipment: Equipment...... $90,600 Less accumulated depreciation. 21,100 69,500 ...... Total assets...... $96,550 ......

Liabilities Current liabilities: Accounts payable...... $ 8,750 Salaries payable...... 1,750 Unearned fees...... 1,200 Total liabilities...... $11,700

Stockholders’ Equity Capital stock...... $25,000 Retained earnings...... 59,850 84,850 Total liabilities and stockholders’ equity.... $96,550

Exercise 3–23

d. Depreciation Expense—Buildings e. Dividends g. Fees Earned i. Salaries Expense l. Supplies Expense Exercise 3–24 a.$216,450 ($729,350 – $512,900) b. MATRIX CORPORATION Retained Earnings Statement For Year Ended July 31, 2004 Retained earnings, August 1, 2003...... $405,700 Net income...... $216,450 Less dividends...... 40,000 176,450 Retained earnings, July 31, 2004...... $582,150 PROBLEMS

Problem 3–1 Stockholders’ Assets = Liabilities  Equity Accounts Prepaid Wages Notes Receiv- Insur- Build- Acc. Accounts Unearned Pay- Pay- Capital Cash  able  ance  Supplies  ing  Dep.  Land  Payable  Rent  able  able  Stock Bal. Oct. 1 5,800 7,500 200 310 50,000 4,000 25,000 2,150 20,000 25,000 Oct. 1 4,500 4,500 Balances 10,300 7,500 200 310 50,000 4,000 25,000 2,150 4,500 20,000 25,000 Oct. 1 –2,400 2,400 Balances 7,900 7,500 2,600 310 50,000 4,000 25,000 2,150 4,500 20,000 25,000 Oct. 4 1,200 1,200 Balances 7,900 7,500 2,600 1,510 50,000 4,000 25,000 3,350 4,500 20,000 25,000

Oct. 5 5,100 – 5,100 Balances 13,000 2,400 2,600 1,510 50,000 4,000 25,000 3,350 4,500 20,000 25,000 Oct. 11 –900 –900 Balances 12,100 2,400 2,600 1,510 50,000 4,000 25,000 2,450 4,500 20,000 25,000 Oct. 18 25,000 25,000 Balances 37,100 2,400 2,600 1,510 50,000 4,000 25,000 2,450 4,500 20,000 50,000 Oct. 20 13,600 Balances 37,100 16,000 2,600 1,510 50,000 4,000 25,000 2,450 4,500 20,000 50,000 Oct. 25 3,800 Balances 40,900 16,000 2,600 1,510 50,000 4,000 25,000 2,450 4,500 20,000 50,000 Oct. 29 – 10,925 Balances 29,975 16,000 2,600 1,510 50,000 4,000 25,000 2,450 4,500 20,000 50,000 Oct. 29 –3,000 Balances 26,975 16,000 2,600 1,510 50,000 4,000 25,000 2,450 4,500 20,000 50,000 Problem 3–1 (Concluded)

Insur- Retained Divi- Fees Rent Wages Utilities Rent Supplies Dep. ance Interest Misc.  Earnings  dends  Earned  Revenue  Expense  Expense  Expense  Expense  Expense  Expense  Expense  Exp.

Bal. Oct. 1 37,660 Oct. 1 Balances 37,660 Oct. 1 Balances 37,660 Oct. 4 Balances 37,660 Oct. 5 Balances 37,660 Oct. 11 Balances 37,660 Oct. 18 Balances 37,660 Oct. 20 13,600 Balances 37,660 13,600 Oct. 25 3,800 Balances 37,660 17,400 Oct. 29 7,000 2,000 1,500 125 300 Balances 37,660 17,400 7,000 2,000 1,500 125 300 Oct. 29 3,000 Balances 37,660 3,000 17,400 7,000 2,000 1,500 125 300 Problem 3–2 Stockholders’ Assets = Liabilities  Equity

Ac- Un- Accounts Prepaid Acc. counts earned Notes Wages Capital Cash  Receivable  Insurance  Supplies  Building  Dep.  Land = Payable  Rent  Payable  Payable  Stock

Balances 26,975 16,000 2,600 1,510 50,000 4,000 25,000 2,450 4,500 20,000 50,000 Adjustment 1 –200 Balances 26,975 16,000 2,400 1,510 50,000 4,000 25,000 2,450 4,500 20,000 50,000 Adjustment 2 –1,185 Balances 26,975 16,000 2,400 325 50,000 4,000 25,000 2,450 4,500 20,000 50,000 Adjustment 3 1,000 Balances 26,975 16,000 2,400 325 50,000 5,000 25,000 2,450 4,500 20,000 50,000 Adjustment 4 –750 Balances 26,975 16,000 2,400 325 50,000 5,000 25,000 2,450 3,750 20,000 50,000 Adjustment 5 800 Balances 26,975 16,000 2,400 325 50,000 5,000 25,000 2,450 3,750 20,000 800 50,000 Adjustment 6 2,100 Balances 26,975 18,100 2,400 325 50,000 5,000 25,000 2,450 3,750 20,000 800 50,000

Problem 3–3

1. PAPAW HEALTH CARE INC. Income Statement For the Month Ended October 31, 2004 Fees earned...... $19,500 Operating expenses: Wages expense...... $7,800 Utilities expense...... 2,000 Rent expense...... 1,500 Supplies expense...... 1,185 Depreciation expense...... 1,000 Insurance expense...... 200 Interest expense...... 125 Miscellaneous expense...... 300 Total operating expenses...... 14,110 Operating income...... $ 5,390 Other income: Rental income...... 750 Net income...... $ 6,140

PAPAW HEALTH CARE INC. Retained Earnings Statement For the Month Ended October 31, 2004 Retained earnings, October 1, 2004...... $37,660 Net income for October...... $6,140 Less dividends...... 3,000 3,140 Retained earnings, October 31, 2004...... $40,800 Problem 3–3 (Continued)

PAPAW HEALTH CARE INC. Balance Sheet October 31, 2004 Assets Current assets: Cash...... $26,975 Accounts receivable...... 18,100 Prepaid insurance...... 2,400 Supplies...... 325 Total current assets...... $ 47,800 Property, plant, and equipment: Building...... $50,000 Less accumulated depreciation...... 5,000 $45,000 Land...... 25,000 Total property, plant, and equipment..... 70,000 Total assets...... $117,800

Liabilities Current liabilities: Accounts payable...... $ 2,450 Unearned rent...... 3,750 Wages payable...... 800 Total current liabilities...... $ 7,000 Long-term liabilities: Notes payable (due in 2010)...... 20,000 Total liabilities...... $ 27,000

Stockholders’ Equity Capital stock...... $50,000 Retained earnings...... 40,800 90,800 Total liabilities and stockholders’ equity 117,800

Problem 3–3 (Concluded)

2. Stockholders’ Assets  Liabilities  Equity

Accounts Prepaid Acc. Accounts Unearned Wages Notes Capital Cash  Receivable  Insurance  Supplies  Building  Dep.  Land  Payable  Rent  Payable  Payable  Stock Balances 26,975 18,100 2,400 325 50,000 5,000 25,000 2,450 3,750 800 20,000 50,000 Revenue closing Expense closing Balances 26,975 18,100 2,400 325 50,000 5,000 25,000 2,450 3,750 800 20,000 50,000 Dividends closing Balances 26,975 18,100 2,400 325 50,000 5,000 25,000 2,450 3,750 800 20,000 50,000

Retained Fees Rent Wages Utilities Rent Supplies Deprec. Insurance Interest Misc.  Earnings  Dividends  Earned  Revenue  Expense  Expense  Expense  Expense  Expense  Expense  Expense  Exp. Balances 37,660 – 3,000 19,500 750 – 7,800 – 2,000 – 1,500 – 1,185 – 1,000 – 200 – 125 – 300 Revenue closing 20,250 –19,500 –750 Expense closing –14,110 –7,800 –2,000 –1,500 –1,185 –1,000 –200 –125 –300 Balances 43,800 3,000 0 0 0 0 0 0 0 0 0 0 Dividends closing –3,000 –3,000 Balances 40,800 0 0 0 0 0 0 0 0 0 0 0 APPENDIX A DOUBLE-ENTRY ACCOUNTING SYSTEMS

SOLUTIONS

Exercise 1

a. Debit h...... Credit b. Credit i...... Debit c. Debit j...... Debit d. Credit k...... Credit e. Credit l...... Credit f. Debit m...... Debit g. Debit n...... Debit

Exercise 5

b. Financial a. Financial Statement c. Normal Account Statement Classification Balance Accounts Payable Balance sheet Liability Credit Accounts Receivable Balance sheet Asset Debit Accrued Expenses Payable Balance sheet Liability Credit Capital Stock Balance sheet Stockholders’ equity Credit Cash Balance sheet Asset Debit Cost of Sales Income statement Expense Debit Inventories Balance sheet Asset Debit Investments Balance sheet Asset Debit Long-Term Debt Balance sheet Liability Credit Other Assets Balance sheet Asset Debit Other Income (net) Income statement Revenue Credit Other Liabilities Balance sheet Liability Credit Other Operating Expenses Income statement Expense Debit Property, Plant, and Equipment Balance sheet Asset Debit Retained Earnings, Sept. 30, 2000 Balance sheet Stockholders' equity Credit Sales Income statement Revenue Credit Selling, General, and Admin. Expense Income statement Expense Debit Research and Development Expense Income statement Expense Debit Exercise 6 Apple Computer, Inc. Trial Balance September 29, 2001 Debit Credit Cash 2,310 Accounts Receivable 466 Inventories 11 Property, Plant, and Equipment 564 Investments 2,154 Other Assets 516 Accounts Payable 801 Accrued Expenses Payable 717 Long-Term Debt 317 Other Liabilities 266 Capital Stock 1,660 Retained Earnings, September 30, 2000 2,285 Sales 5,363 Cost of Sales 4,128 Selling, General, and Administrative Expenses 1,138 Research and Development Expenses 430 Other Operating Expenses 11 Other Income (net) __ ___ 319 11,728 11,728

(Note: The order of selling, general, and administrative expenses and research and development expenses could be switched.)

Exercise 8

20— Mar. 1 Rent Expense...... 2,500 Cash...... 2,500 2 Advertising Expense...... 600 Cash...... 600 4 Supplies...... 1,050 Cash...... 1,050 6 Office Equipment...... 4,500 Accounts Payable...... 4,500 8 Cash...... 3,600 Accounts Receivable...... 3,600 12 Accounts Payable...... 2,150 Cash...... 2,150 20 Dividends...... 1,000 Cash...... 1,000 25 Miscellaneous Expense...... 120 Cash...... 120 30 Utilities Expense...... 195 Cash...... 195 31 Accounts Receivable...... 11,150 Fees Earned...... 11,150 31 Utilities Expense...... 280 Cash...... 280

Exercise 9 a.

2004 Nov. 12 Supplies...... 1,720 Accounts Payable...... 1,720 b., c., and d.

Supplies

Nov. 1 390 1,720

Nov. 30 Bal. 2,110

Accounts Payable

Nov. 1 9,681 1,720

Nov. 30 Bal. 11,401 PROBLEMS

Problem 1

1.

(a) Cash...... 7,500 Capital Stock...... 7,500 (b) Rent Expense...... 2,500 Cash...... 2,500 (c) Supplies...... 1,200 Accounts Payable...... 1,200 (d) Accounts Payable...... 900 Cash...... 900 (e) Cash...... 15,750 Sales Commissions...... 15,750 (f) Automobile Expense...... 2,400 Miscellaneous Expense...... 1,250 Cash...... 3,650 (g) Office Salaries Expense...... 4,500 Cash...... 4,500 (h) Supplies Expense...... 875 Supplies...... 875 (i) Dividends...... 2,500 Cash 2,500 Problem 1 (Concluded)

2.

Cash Sales Commissions (a) 7,500 (b) 2,500 (e) 15,750 (e) 15,750 (d) 900 (f) 3,650 Office Salaries Expense (g) 4,500 (g) 4,500 (i) 2,500 23,250 14,050 Balance 9,200 Supplies Rent Expense (c) 1,200 (h) 875 (b) 2,500 Balance 325 Accounts Payable Automobile Expense (d) 900 (c) 1,200 (f) 2,400 Balance 300 Capital Stock Supplies Expense (a) 7,500 (h) 875 Dividends Miscellaneous Expense (i) 2,500 (f) 1,250

3. HOMESTEAD REALTY Trial Balance May 31, 2004 Cash...... 9,200 Supplies...... 325 Accounts Payable...... 300 Capital Stock...... 7,500 Dividends...... 2,500 Sales Commissions...... 15,750 Office Salaries Expense...... 4,500 Rent Expense...... 2,500 Automobile Expense...... 2,400 Supplies Expense...... 875 Miscellaneous Expense...... 1,250 23,550 23,550 Problem 2

2.

Apr. 1 Rent Expense...... 4,000 Cash...... 4,000 2 Office Supplies...... 1,375 Accounts Payable...... 1,375 5 Prepaid Insurance...... 1,650 Cash...... 1,650 8 Cash...... 27,500 Accounts Receivable...... 27,500 15 Land...... 75,000 Cash...... 7,500 Notes Payable...... 67,500 17 Accounts Payable...... 900 Cash...... 900 20 Accounts Payable...... 275 Office Supplies...... 275 24 Advertising Expense...... 1,100 Cash...... 1,100

25 Accounts Receivable ...... 38,400 Fees Earned...... 38,400 27 Salary and Commission Expense...... 11,500 Cash...... 11,500

28 Automobile Expense...... 715 Cash...... 715 29 Miscellaneous Expense...... 215 Cash...... 215 30 Cash...... 5,000 Fees Earned ...... 5,000

30 Dividends...... 2,000 Cash...... 2,000 Problem 2 (Continued)

1. and 3.

GENERAL LEDGER

Cash Land Apr. 1 Bal. 8,150 Apr. 1 4,000 Apr. 15 75,000 7,500 8 27,500 5 1,650 30 5,000 15 7,500 Office Equipment 17 900 Apr. 1 Bal. 8,500 24 1,100 27 11,500 Accumulated Depreciation 28 715 Apr. 1 Bal. 2,400 29 215 30 2,000 40,650 29,580 Apr. 30 Bal. 11,070 Accounts Receivable Accounts Payable Apr. 1 Bal. 28,750 Apr. 8 27,500 Apr. 17 900 Apr. 1 Bal. 900 25 38,400 20 275 2 1,375 67,150 1,175 2,275 Apr. 30 Bal. 39,650 Apr. 30 Bal. 1,100 Prepaid Insurance Unearned Fees Apr. 1 Bal. 1,100 Apr. 1 Bal. 1,500 5 1,650 Apr. 30 Bal. 2,750 Office Supplies Notes Payable Apr. 1 Bal. 1,050 Apr. 20 275 Apr. 15 67,500 2 1,375 Apr. 30 Bal. 2,150 Problem 2 (Continued)

Capital Stock Salary and Commission Expense Apr. 1 Bal. 10,000 Apr. 27 11,500

Retained Earnings Rent Expense Apr. 1 Bal. 32,750 Apr. 1 4,000

Dividends Advertising Expense Apr. 30 2,000 Apr. 24 1,100

Fees Earned Automobile Expense Apr. 25 38,400 Apr. 28 715 30 5,000 Apr. 30 Bal. 43,400 Miscellaneous Expense Apr. 29 215 Exercise 4–1

a. $6,574 ($24,623 – $18,049) b. 26.7% ($6,574/$24,623) c. 5.7% ($1,398/$24,623)

Exercise 4–2

a. $5,691 ($22,241 – $ 16,550) b. 25.6% ($5,691/$22,241) c. 3.5% ($771/$22,241) Exercise 4–6

a. Cost of merchandise sold:

Merchandise inventory, December 1, 2003...... $ 75,750 Purchases...... $625,000 Less: Purchases returns and allowances...... $14,500 Purchases discounts...... 12,950 27,450 Net purchases...... $597,550 Add transportation in...... 6,950 Cost of merchandise purchased...... 604,500 Merchandise available for sale...... $680,250 Less merchandise inventory, November 30, 2004...... 88,200 Cost of merchandise sold...... $592,050

b. $278,575 ($870,625 – $592,050)

Exercise 4–9

a. $10,000 e. $25,000 b. $150,000 f. $465,000 c. $477,000 g. $757,500 d. $192,000 h. $690,000

Exercise 4–11 a. NOBLE COMPANY Income Statement For the Year Ended August 31, 2004 Revenue from sales: Sales...... $775,000 Less: Sales returns and allowances.... $45,000 Sales discounts...... 20,000 65,000 Net sales...... $710,000 Cost of merchandise sold...... 450,000 Gross profit...... $260,000 Operating expenses: Selling expenses...... $ 95,000 Administrative expenses...... 60,000 Total operating expenses...... 155,000 Income from operations...... $105,000 Other expense: Interest expense...... 7,500 Net income...... $ 97,500 b. The major advantage of the multiple-step form of income statement is that it indicates relationships such as gross profit to sales. The major disadvantages are that it is more complex and does not indicate the total revenues and expenses, as is the case in the single-step income statement.

Exercise 4–13

a. $5,390 [$5,500 – $110 ($5,500  0.02)]

b.

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income (a) Cash –5,390 Sales Retns. & Allow. 5,500 –5,500 Sales Discounts –110 110 (b) Merch. Inv. 3,380 Cost of Merch. Sold –3,380 3,380 Net Effect –1,970 –1,970 –5,350 –3,380 –1,970 Retained Earnings (Net Income) Exercise 4–14

a. $15,000 b. $15,625 c. $450 (0.03  $15,000) d. $15,175

Exercise 4–15

a. $2,695 [Purchase of $3,500, less return of $750, less discount of $55 ($2,750  0.02)] b. Merchandise Inventory

Exercise 4–16

a. $2,772 b. $834 c. $9,100 d. $1,956 e. $4,900 Exercise 4–19

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income (a) Merch. Inv. 9,000 Accts Pay. 9,000 Net Effect 9,000 9,000

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income (b) Cash –8,820 Accts Pay. –9,000 Merch. Inv. –180 Net Effect –9,000 –9,000

Balance Sheet Income Statement Trans. Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income (c) Merch. Inv. –1,960 Accts Pay. –1,960 Net Effect –1,960 –1,960

Balance Sheet Income Statement Trans. Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income (d) Merch. Inv. 1,000 Accts Pay. 1,000 Net Effect 1,000 1,000

Balance Sheet Income Statement Trans. Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income (e) Cash 960 Accts Pay. 960 Net Effect 960 960 Note: The decrease of $1,960 to Accounts Payable in entry (c) is the amount of cash refund due from Green Co. It is computed as the amount that was paid for the returned merchandise, $2,000, less the purchase discount of $40 ($2,000  0.02). The increase to Accounts Payable of $1,000 in entry (d) reduces the balance in the Accounts Payable to $960, which is the amount of the cash refund in entry (e). The following alternative entries yield the same final results. Exercise 4–19 (Concluded)

Balance Sheet Income Statement Trans. Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income (c) Accts Rec. 1,960 Merch. Inv. –1,960 Net Effect 0

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income (d) Merch. Inv. 1,000 Accts Pay. 1,000 Net Effect 1,000 1,000

Balance Sheet Income Statement Trans. Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income (e) Cash 960 Accts Pay. –1,000 Accts Rec. –1,960 Net Effect –1,000 –1,000 Exercise 4–20

a. At the time of sale b. $3,000 c. $3,180 d. Sales Taxes Payable

Exercise 4–21

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income (a) Accts Rec. 6,300 Sales Tax Pay. 300 Sales 6,000 6,000 Merch. Inv. –3,600 Cost of Merch. Sold 3,600 –3,600 Net Effect 2,700 300 2,400 6,000 3,600 2,400 Retained Earnings (Net Income)

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income (b) Cash –4,380 Sales Tax Pay. –4,380 Net Effect –4,380 –4,380

Exercise 6–11 a. $1,190 (35 units at $30 plus 5 units at $28) b. $990 (25 units at $24 plus 10 units at $25 plus 5 units at $28) c. $1,096 (40 units at $27.40; $2,740/100 units = $27.40) Cost of merchandise available for sale: 25 units at $24...... $ 600 10 units at $25...... 250 30 units at $28...... 840 35 units at $30...... 1,050 100 units (at average cost of $27.40)...... $2,740

Exercise 6–12 a. $1,800 (30 units at $60) b. $1,450 (25 units at $48 plus 5 units at $50) c. $1,644 (30 units at $54.80; $5,480/100 units = $54.80)

Cost of merchandise available for sale: 25 units at $48...... $1,200 10 units at $50...... 500 30 units at $56...... 1,680 35 units at $60...... 2,100 100 units (at average cost of $54.80)...... $5,480 Exercise 6–13 Cost

Merchandise Merchandise Inventory Method Inventory Sold a. fifo...... $1,254 $3,626 b. lifo...... 1,080 3,800 c. Average cost...... 1,171 3,709

Cost of merchandise available for sale: 21 units at $60...... $1,260 29 units at $65...... 1,885 10 units at $68...... 680 15 units at $70...... 1,050 75 units (at average cost of $65)...... $4,875 a. First-in, first-out:

Merchandise inventory: 15 units at $70...... $1,050 3 units at $68...... 204 18 units...... $1,254

Merchandise sold: $4,875 – $1,254...... $3,621 b. Last-in, first-out:

Merchandise inventory: 18 units at $60...... $1,080

Merchandise sold: $4,875 – $1,080...... $3,795 c. Average cost:

Merchandise inventory: 18 units at $65 ($4,875/75 units)...... $1,170

Merchandise sold: $4,875 – $1,170...... $3,705 Exercise 6–14

Cost

Merchandise Merchandise Inventory Method Inventory Sold a. fifo...... $2,780 $6,970 b. lifo...... 2,400 7,350 c. Average cost...... 2,600 7,150

Cost of merchandise available for sale: 42 units at $60...... $2,520 58 units at $65...... 3,770 20 units at $68...... 1,360 30 units at $70...... 2,100 150 units (at average cost of $65)...... $9,750 a. First-in, first-out:

Merchandise inventory: 30 units at $70...... $2,100 10 units at $68...... 680 40 units...... $2,780

Merchandise sold: $9,750 – $2,780...... $6,970 b. Last-in, first-out:

Merchandise inventory: 40 units at $60...... $2,400

Merchandise sold: $9,750 – $2,400...... $7,350 c. Average cost:

Merchandise inventory: 40 units at $65 ($9,750/150 units)...... $2,600

Merchandise sold: $9,750 – $2,600...... $7,150 Exercise 6–15

1. a. lifo inventory < (less than) fifo inventory b. lifo cost of goods sold > (greater than) fifo cost of goods sold c. lifo net income < (less than) fifo net income d. lifo income tax < (less than) fifo income tax

2. Under the lifo conformity rule, a company selecting lifo for tax purposes must also use lifo for financial reporting purposes. Thus, in periods of rising prices, the reported net income would be lower than would be the case under fifo. However, the lower reported income would also be shown on the corporation’s tax return; thus, there is a tax advantage from using lifo. Firms electing to use lifo believe the tax advantages from using it outweighs any negative impact from reporting a lower earnings number to shareholders. Lifo is supported because the tax impact is a real cash flow benefit; a lower lifo earnings number (compared to fifo) is merely the result of a reporting assumption.

Exercise 6–17

Unit Unit Total Inventory Cost Market Lower Commodity Quantity Price Price Cost (C) Market (M) of C or M X3...... 9 $300 $320 $ 2,700 $ 2,880 $ 2,700 Y10...... 16 110 115 1,760 1,840 1,760 A19...... 12 275 260 3,300 3,120 3,120 J2...... 15 51 45 765 675 675 J8...... 25 96 100 2,400 2,500 2,400 Total...... $10,925 $11,015 $10,655

Exercise 6–18

The merchandise inventory would appear in the Current Assets section, as follows: Merchandise inventory—at lower of cost, fifo, or market...... $10,655

Alternatively, the details of the method of determining cost and the method of valuation could be presented in a footnote. Exercise 5–1

a. Agree. Connie has made one employee responsible for the cash drawer in accordance with the internal control principle of assignment of responsibility. b. Disagree. It is commendable that Connie has given the employee a specific responsibility and is holding that employee accountable for it. However, after the cashier has counted the cash, another employee (or perhaps Connie) should remove the cash register tape and compare the amount on the tape with the cash in the drawer. Also, Connie’s standard of no mistakes could encourage the cashiers to overcharge a few customers to cover any possible shortages in the cash drawer. c. Disagree. Stealing is a serious issue. An employee who can justify taking a box of potato chips can probably justify “borrowing” cash from the cash register.

Exercise 5–2

a. The sales clerks could steal money by writing phony refunds and pocketing the cash supposedly refunded to these fictitious customers. b. 1. Summer Breeze suffers from inadequate separation of responsibilities for related operations since the clerks issue refunds and restock all merchandise. In addition, there is a lack of proofs and security measures since the supervisors authorize returns 2 hours after they are issued. 2. A store credit for any merchandise returned without a receipt would reduce the possibility of theft of cash. In this case, a clerk could only issue a phony store credit rather than taking money from the cash register. A store credit is not as tempting as cash. In addition, sales clerks could only use a few store credits to purchase merchandise for themselves without management getting suspicious. An advantage of issuing a store credit for returns without a receipt is that the possibility of stealing cash is reduced. The store will also lose less revenue if customers must choose other store merchandise instead of getting a cash refund. The overall level of returns/exchanges can be reduced since customers will not return an acceptable gift simply because they need cash more than the gift. The policy will also reduce the “cash drain” during the weeks immediately following the holidays, allowing Summer Breeze to keep more of its money earning interest or use that cash to purchase spring merchandise or pay creditors. Exercise 5–2 (Concluded)

A disadvantage of issuing a store credit for returns without a receipt is that preholiday sales might drop as gift givers realize that the return policy has tightened. After the holidays, customers wishing to return items for cash refunds could be frustrated when they learn the store policy has changed. The ill will could reduce future sales. It could take longer to explain the new policy and fill out the paperwork for a store credit, lengthening lines at the return counter after the holidays. Sales clerks will need to be trained to apply the new policy and write up a store credit. Sales clerks also will need to be trained to handle the redemption of the store credit on future merchandise purchases.

3. The potential for abuse in the cash refund system could be eliminated if clerks were required to get a supervisor’s authorization for a refund before giving the customer the cash. The supervisor should authorize the refund only after seeing both the customer and the merchandise that is being returned. An alternative is to use security measures that would detect a sales clerk attempting to ring up a refund and remove cash when a customer is not present at the sales desk. These security measures could include cameras or additional security personnel discreetly monitoring the sales desk.

Exercise 5–3

As an internal auditor, you would probably disagree with the change in policy. United Savings has some normal business risk associated with default on bank loans. One way to help minimize this is to carefully evaluate loan applications. Large loans present greater risk in the event of default than do smaller loans. Thus, it is reasonable to have more than one person involved in making the decision to grant a large loan. In addition, loans should be granted on their merits, not on the basis of favoritism or mere association with the bank president. Allowing the bank president to have sole authority to grant large loans can lead to the president granting loans to friends and business associates without the required due diligence. This can result in a bank becoming exposed to very poor credit risks. Indeed, this scenario is one of the causes of the savings and loan failures of the 1980s and 90s. Exercise 5–4

The Barings Bank fraud shows how small lapses in internal control can have huge consequences. In this case, the “rogue trader” was able to accumulate and hide huge losses. When the losses became so large that they could no longer be hidden, it was too late. This fraud could have been avoided with a number of internal controls. First, and most obvious, the execution and recording of trades should have been separate duties. The trader makes the trades but should never have access to accounting for them. In this way, the actual performance of the trader could not be disguised by “fixing the books.” Second, the trader should be under managerial oversight. For example, trades that exceed a certain amount of exposure should require management approval. In this way, a trader would be forced to slow down or stop once trades reached a certain limit. This would avoid the trader’s tendency to try to “make up” losses with even larger bets. Third, there should be no possibility for unauthorized accounts. All accounts should require formal approval and be set up by individuals other than the trader. Once the account is set up, the accounting should also be separated from the trader. In this way, the trader would not be able to set up a “private” account that goes undetected.

Exercise 5–5

A primary weakness that contributed to the occurrence and size of the fraud was the easy accessibility of the programmers to the computer and the computer files containing the insurance policies. This allowed several computer programmers to add bogus policies to the real policies. In a strong system of internal control, access to accounting records (such as computer files) and to the computer should be strictly controlled. In this way, a system of checks and balances will exist among the computer programmers, the librarian controlling access to the computer files, and the computer operators. An additional weakness in the Equity Funding system of internal control was the lack of an effective independent review program utilizing internal auditors. This contributed to the failure to discover the fraud until it had grown to a magnitude of billions of dollars.

Exercise 5–13

a. Addition to the balance per bank: (2), (4) b. Deduction from the balance per bank: (1) c. Addition to the balance per depositor’s records: (3), (5) d. Deduction from the balance per depositor’s records: (6), (7)

Exercise 5–14 (3), (5), (6), (7)

Exercise 5–15

1. JUNO CO. Bank Reconciliation July 31, 20— Cash balance according to Cash balance according to bank statement...... $ 3,457.25 depositor’s records...... $8,530.20 Add deposit in transit, not Add error in recording recorded by bank...... 6,780.40 check...... 450.00 $ 10,237.65 $8,980.20 Deduct outstanding checks 1,276.20 Deduct bank service charge 18.75 Adjusted balance...... $ 8,961.45 Adjusted balance...... $8,961.45 Exercise 5–15 (Concluded)

2.

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income July 31 Cash 431.25 Accts Pay. 450.00 Misc. Expense 18.75 –18.75 Net Effect 431.25 450.00 –18.75 18.75 –18.75 Retained Earnings (Net Income) Exercise 5–17 a. NOXIOUS CO. Bank Reconciliation March 31, 2004 Cash balance according to bank statement...... $14,852.12 Add: Deposit in transit on March 31...... 6,150.00 $21,002.12 Deduct: Outstanding checks...... 7,557.12 Adjusted balance...... $13,445.00 Cash balance according to depositor’s records...... $10,100.75 Add: Error in recording Check No. 1621 as $2,510 instead of $2,150...... $ 360.00 Note for $2,500 collected by bank, including interest 3,000.00 3,360.00 $13,460.75 Deduct: Bank service charges...... 15.75 Adjusted balance...... $13,445.00

b. $13,445.00 Exercise 6–2

Due Date Interest a. May 5 $150 b. July 19 100 c. Aug. 31 225 d. Dec. 28 500 e. Nov. 30 250

Exercise 6–3 a. Hotel accounts and notes receivable: $3,256/$75,796 = 4.3% b. Casino accounts receivable: $6,654/$26,334 = 25.3% c. Casino operations experience greater bad debt risk than do hotel operations since it is difficult to control the creditworthiness of customers entering the casino. In addition, individuals who could have adequate creditworthiness can overextend themselves and lose more than they can afford if they get caught up in the excitement of gambling. Exercise 6–4

Estimated Uncollectible Accounts Age Interval Balance Percent Amount Not past due...... $350,000 1% $ 3,500 1–30 days past due...... 90,000 3 2,700 31–60 days past due...... 17,000 6 1,020 61–90 days past due...... 13,000 10 1,300 91–180 days past due...... 9,400 60 5,640 Over 180 days past due...... 3,600 80 2,880 Total...... $483,000 $17,040

Exercise 6–5

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income Dec. 31 Allow for Doubtful Accts 15,149 Uncoll. Accts Exp 15,149 –15,149 Net Effect –15,149 –15,149 15,149 –15,149 Retained Earnings (Net Income)

Exercise 6–6 a. $15,000 c. $30,000 b. $14,600 d. $26,350 Exercise 6–7

a.

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income Accts Rec. –4,800 Allow for Doubtful Accts –4,800 Net Effect 0 Retained Earnings (Net Income)

b.

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income Accts Rec. 4,800 Allow for Doubtful Accts 4,800 Net Effect 0 Retained Earnings (Net Income)

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income Cash 4,800 Accts Rec. –4,800 Net Effect 0 Retained Earnings (Net Income) Exercise 7–1 a. New printing press: 1, 2, 3, 4, 6 b. Secondhand printing press: 7, 8, 10, 12

Exercise 7–2 a. Yes. All expenditures incurred for the purpose of making the land suitable for its intended use should increase the land account. b. No. Land is not depreciated.

Exercise 7–3

Initial cost of land ($25,000 + $100,000)...... $125,000 Plus: Legal fees...... $1,750 Delinquent taxes...... 7,500 Demolition of building...... 5,500 14,750

$139,750 Less: Salvage of materials...... 1,500 Cost of land...... $138,250

Exercise 7–4 a. No. The $575,000 represents the original cost of the equipment. Its replacement cost, which may be more or less than $575,000, is not reported in the financial statements. b. No. The $217,500 is the accumulation of the past depreciation charges on the equipment. The recognition of depreciation expense has no relationship to the cash account or accumulation of cash funds. Exercise 7–6

$11,750 [($112,000 – $18,000)/8]

Exercise 7–7

First Year ...... Second Year a. 10% of $154,000 = $15,40010% of $154,000 = $15,400 b. 20% of $154,000 = $30,80020% of $123,200* = $24,640 *$154,000 – $30,800

Exercise 7–8 a. 12 1/2% of ($70,000 – $5,200) = $8,100 b. First year: 25% of $70,000 = $17,500 Second year: 25% of ($70,000 – $17,500) = $13,125

Exercise 7–9 a. First year: 9/12  [($64,000 – $5,200)/6] = $7,350 Second year: ($64,000 – $5,200)/6 = $9,800 b. First year: 9/12  33 1/3% of $64,000 = $16,000 Second year: 33 1/3% of ($64,000 – $16,000) = $16,000

Exercise 7–11 a. $30,000,000/50,000,000 tons = $0.60 depletion per ton 7,500,000  $0.60 = $4,500,000 depletion expense

Exercise 7–13 a. Cost of equipment...... $117,500 Accumulated depreciation at December 31, 2004 (4 years at $13,750* per year)...... 55,000 Book value at December 31, 2004...... $ 62,500 *($117,500 – $7,500)/8 = $13,750 b.

1. Balance Sheet Income Statement Trans. Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income Acc. Dep.—Equipment 6,875 Dep. Exp. - Equip 6,875 –6,875 Net Effect –6,875 –6,875 6,875 –6,875 Retained Earnings (Net Income)

2.

Balance Sheet Income Statement Trans. Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income Cash 53,500 Loss on Disposal of Equip. 2,125 –2,125 Acc. Dep.—Equip. –61,875 Equipment –117,500 Net Effect –2,125 –2,125 2,125 –2,125 Retained Earnings (Net Income) Exercise 7–14 a. 2002 depreciation expense: $16,750 [($71,500 – $4,500)/4] 2003 depreciation expense: $16,750 2004 depreciation expense: $16,750 b. $21,250 ($71,500 – $50,250) c.

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income Cash 18,000 Loss on Disposal of Equip. 3,250 –3,250 Acc Dep.—Equip –50,250 Equipment 71,500 Net Effect –3,250 –3,250 3,250 –3,250 Retained Earnings (Net Income) d.

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income Cash 23,000 Gain on Disposal of Equip 1,750 1,750 Acc Dep.—Equip –50,250 Equipment 71,500 Net Effect 1,750 1,750 1,750 1,750 Retained Earnings (Net Income)

Exercise 7–16 Capital expenditures: Additional component: 6, 7, 9 Replacement component: 1, 2, 4, 8, 10 Revenue expenditures: 3, 5

Exercise 7–19 a. ($675,000/18) + ($45,000/15) = $40,500 total patent expense b.

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income Patents –40,500 Amort. Exp.—Patents 40,500 –40,500 Net Effect –40,500 –40,500 40,500 –40,500 Retained Earnings (Net Income) Exercise 7–20 a. $8,000,000. The goodwill is not amortized; thus, the book value of goodwill has remained unchanged since originally recognized on January 1, 2002. b.

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income 12/31 Goodwill 5,500,000 Loss from Impaired Goodwill 5,500,000 –5,500,000 Net Effect –5,500,000 –5,500,000 5,500,000 –5,500,000 Retained Earnings (Net Income) Exercise 8–1

Current liabilities: Federal income taxes payable...... $ 56,000* Advances on magazine subscriptions...... 162,000† Total current liabilities...... $218,000

*$160,000  0.35 † 9 4,800  $45  12 = $162,000

The nine months of unfilled subscriptions represent a current liability because Net World received payment prior to providing the magazines. Exercise 8–2 a.

Balance Sheet Income Statement Trans. Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income Notes Payable 20,000 Accts Payable –20,000 Net Effect 0 Retained Earnings (Net Income)

b.

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income Cash –20,300 Notes Payable –20,000 Interest Expense 300 –300

Net Effect –20,300 –20,000 –300 300 –300 Retained Earnings (Net Income)

Interest Computation: $20,000  0.09  60/360 = $300

Exercise 8–5 a. $18,000 (0.03  $600,000) b. Product Warranty Payable and Parts Inventory

Exercise 8–6

Product warranty expense a. = Estimated warranty expense as a percentage of sales Sales $226,000,000 = 0.77% $29,398,000,000 b.

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income Product Warranty Pay. 226,000,000 Product Warranty Exp. 226,000,000 –226,000,000 Net Effect –226,000,000 226,000,000 –226,000,000 Retained Earnings (Net Income) Exercise 8–8

A liability was not recorded for this contingent liability. The note would have clearly identified any liability accruals due to a contingency. The reason no liability was accrued is that eBAY, Inc., believes the claim is without merit. Therefore, the probability of a contingent loss is only “possible” rather than “probable.” Only “probable” contingencies must be estimated (if possible) and recorded. The litigation is disclosed, however, because it apparently represents a significant risk to eBAY’s operations. Exercise 8–11 a. Social security tax ($700,000  0.075)...... $52,500 State unemployment (0.043  $15,000)...... 645 Federal unemployment (0.008  $15,000)...... 120 $53,265 b.

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income FICA Tax Pay. 52,500 Payroll Tax Exp. 53,265 –53,265 FUTA Tax Payable 120 SUTA Tax Payable 645 Net Effect 53,265 –53,265 53,265 –53,265 Retained Earnings (Net Income)

Exercise 8–14

The bonds were selling at a premium. This is indicated by the selling price of 101 1/8, which is stated as a percentage of face amount and is more than par (100%). The market rate of interest for similar quality bonds was lower than 7% on April 5, 2002, and this is why the bonds are selling at a premium.

Exercise 8–15 Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income 4/1 Cash 12,000,000 Bonds Payable 12,000,000 Net Effect 12,000,000 12,000,000 0 Retained Earnings (Net Income)

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income 10/1 Cash –540,000 Interest Exp. 540,000 –540,000 Net Effect –540,000 –540,000 540,000 –540,000 Retained Earnings (Net Income)

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income 4/1 Cash –12,000,000 Bonds Pay. –12,000,000 Net Effect –12,000,000 –12,000,000 0 Retained Earnings (Net Income)

Exercise 8–16 Class 1st Year 2nd Year 3rd Year 4th Year 5th Year Preferred — $2.00 $2.00 $2.00 $2.00 Common — — 0.20* 0.64† 0.80‡ *$50,000/250,000 †$160,000/250,000 ‡$200,000/250,000 Exercise 8–17 Class 1st Year 2nd Year 3rd Year 4th Year 5th Year Preferred — $0.50 $4.00* $1.50 $1.50 Common — — 0.80 3.30 1.20 Total Dividends per Share *Third-year dividends: Dividends Preferred Arrears dividend, preferred...... $25,000 $2.50 Current dividend, preferred...... 15,000 1.50 Total...... $40,000 $4.00 Exercise 8–18 a. Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income 3/10 Cash 900,000 Common Stock 600,000 Paid-In Capital in Excess of Par—Common Stock 300,000 Net Effect 900,000 900,000 Retained Earnings (Net Income)

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income 8/9 Cash 525,000 Preferred Stock 500,000 Paid-In Capital in Excess of Par—Preferred Stock 25,000 Net Effect 525,000 525,000 Retained Earnings (Net Income)

b. $1,425,000 ($900,000 + $525,000) Exercise 8–21 a. 90,000 shares (30,000  3) b. $40 per share ($120/3)

Exercise 8–22

Stockholders’ Assets Liabilities Equity a. Declaring a stock dividend 0 0 0 b. Issuing stock certificates for the stock dividend declared in (a) 0 0 0 c. Declaring a cash dividend 0 + – d. Paying the cash dividend declared in (c) – – 0 e. Authorizing and issuing stock certificates in a stock split 0 0 0

Exercise 9–1 a. MURRY CABINET CO. Comparative Income Statement For the Years Ended December 31, 2004 and 2003 2004 2003 Amount Percent Amount Percent Sales...... $770,000 100%$700,000100% Cost of goods sold...... 415,800 54 350,000 50 Gross profit...... $354,200 46%$350,000 50% Selling expenses...... $138,600 18%$140,000 20% Administrative expenses...... 84,700 11 105,000 15 Total operating expenses...... $223,300 29%$245,000 35% Income from operations...... $130,900 17%$105,000 15% Income tax expense...... 53,900 7 49,000 7 Net income...... $ 77,000 10% $ 56,000 8% b. The vertical analysis indicates that the cost of goods sold as a percentage of sales increased by 4 percentage points (50% – 54%) between 2003 and 2004. However, the selling expenses and administrative expenses improved by 6 percentage points. Thus, the net income as a percent of sales improved by 2 percentage points. Exercise 9–3 a. KEYSTONE PUBLISHING COMPANY Common-Size Income Statement For the Year Ended December 31, 2003 Keystone Publishing Publishing Industry Company Average Amount Percent Sales...... $ 2,450,000 101.0% 101.0% Sales returns and allowances...... 24,500 1 .0 1 .0 Net sales...... $ 2,425,500 100.0% 100.0% Cost of goods sold...... 850,000 35 .0 40 .0 Gross profit...... $ 1,575,500 65 .0% 60 .0% Selling expenses...... $ 970,000 40.0% 39.0% Administrative expenses...... 280,000 11 .5 10 .5 Total operating expenses...... $ 1,250,000 51 .5% 49 .5% Operating income...... $ 325,500 13.5%* 10.5% Other income...... 30,000 1 .2 1 .2 $ 355,500 14.7% 11.7% Other expense...... 40,000 1 .6 1 .7 Income before income tax...... $ 315,500 13.1%* 10.0% Income tax expense...... 97,000 4 .0 4 .0 Net income...... $ 218,500 9 .1%* 6 .0% *Rounded to next highest tenth of a percent. b. The cost of goods sold is 5 percentage points lower than the industry average, but the selling expenses and administrative expenses are 2 percentage points higher than the industry average. The combined impact is for net income as a percentage of sales to be 3 percentage points better than the industry average. Apparently, the company is managing the cost of publishing books better than the industry but has slightly higher selling and administrative expenses relative to the industry. The cause of the higher selling and administrative expenses as a percentage of sales, relative to the industry, can be investigated further. Exercise 9–4 ATLAS FITNESS EQUIPMENT COMPANY Comparative Balance Sheet December 31, 2004 and 2003 2004 2003 Amount Percent Amount Percent

Current assets...... $180,000 32.73%$150,00029.13% Property, plant, and equipment... 340,000 61.82330,000 64.08 Intangible assets...... 30,000 5 .45 35,000 6.79* Total assets...... $550,000 100 .00%$515,000100.00% Current liabilities...... $120,000 21.82%$125,00024.27% Long-term liabilities...... 175,000 31.82150,000 29.13 Common stock...... 50,000 9.0940,000 7.77 Retained earnings...... 205,000 37 .27 200,000 38.83 Total liabilities and stockholders’ equity...... $550,000 100 .00%$515,000100.00% *Rounded to next lowest hundredth of a percent.

Exercise 9–5 a. NEON FLASHLIGHT COMPANY Comparative Income Statement For the Years Ended December 31, 2004 and 2003 2004 2003 Increase (Decrease) Amount Amount Amount Percent Sales...... $ 400,000 $460,000 $(60,000) (13.04)% Cost of goods sold...... 170,000 200,000 (30,000) (15.00)% Gross profit...... $ 230,000 $260,000 $(30,000) (11.54)% Selling expenses...... $ 70,000 $ 60,000 $ 10,000 16.67% Administrative expenses...... 50,000 40,000 10,000 25.00% Total operating expenses...... $ 120,000 $100,000 $ 20,000 20.00% Income before income tax...... $ 110,000 $160,000 $(50,000) (31.25)% Income tax expense...... 28,000 40,000 (12,000) (30.00)% Net income...... $ 82,000 $120,000 $(38,000) (31.67)% b. The net income for Neon Flashlight Company decreased by approximately 32% from 2003 to 2004. This decrease was the combined result of a decrease in sales of 13.04% and higher expenses. The cost of goods sold decreased at a faster rate than the decrease in sales, thus causing gross profit to decrease less than the decrease in sales. In addition, selling and administrative expenses increased between 2003 and 2004.

Exercise 9–7

Current assets a. (1) Current ratio = Current liabilities $4,362 $6,251 Current year: = 0.55 Preceding year: = $7,914 $4,257 1.47 Quick assets (2) Acid-test ratio = Current liabilities $2,847 $5,033 Current year: = 0.36 Preceding year: = $7,914 $4,257 1.18 c. The liquidity of PepsiCo has declined significantly over this time period. Both the current and acid-test ratios have declined by more than half from the preceding year. A review of the current assets and liabilities reveals that cash and marketable securities have dropped significantly while short-term borrowings were made during the current year. The combined effect reduced PepsiCo’s liquidity position. During this time period, PepsiCo was acquiring bottlers. This investment required cash and short-term borrowings, which placed a temporary squeeze on liquidity.

Exercise 9–9

Net sales a. (1) Accounts receivable turnover: Average accounts receivable $1,450,000 $1,300,000 Current year: = 7.0 Preceding year: = 6.0 $207,143 $216,667

(2) Number of days' sales in receivables: Accounts receivable, end of year Average daily sales $222,466 Current year: = 56.0 days $3,973 * $235,068 Preceding year: = 66.0 days $3,562 † *$3,973 = $1,450,000/365 days †$3,562 = $1,300,000/365 days b. The collection of accounts receivable has improved. This can be seen in both the increase in accounts receivable turnover and the reduction in the collection period. The credit terms require payment in 60 days. In the previous period, the collection period exceeded these terms. However, the company apparently became more aggressive in collecting accounts receivable or more restrictive in granting credit to customers. Thus, in the current period the collection period is within the credit terms of the company.

Exercise 9–11

Cost of goods sold a. (1) Inventory turnover: Average inventory $2,010,000 Current year: = 6.0 $310,000 + $360,000/2 $2,400,000 Preceding year: = 8.0 $290,000 + $310,000/2

(2) Number of days' sales in inventory: Inventory, end of year Average daily cost of goods sold $360,000 Current year: = 65.37 days $5,507 * $310,000 Preceding year: = 47.15 days $6,575 † *$5,507 = $2,010,000365 days †6,575 = $2,400,000 ÷ 365 days b. The inventory position of the business has deteriorated. The inventory turnover has decreased while the number of days’ sales in inventory has increased. The sales volume has declined while the inventory levels have increased, thus resulting in the deteriorating inventory position.

Exercise 9–12

Cost of goods sold a. (1) Inventory turnover: Average inventory $25,661 Dell: = 75.7 ($400  $278)/ 2 $5,241 Gateway: = 24.1 ($315  $120)/ 2

(2) Number of days' sales in inventory: Inventory, end of year Average daily cost of goods sold $278 Dell: = 4.0 days $70.3* $120 Gateway: = 8.3 days $14.4 †

*$70.3 = $25,661/365 days †$14.4 = $5,241/365 days b. Dell has a much higher inventory turnover ratio than does Gateway (75.7 vs. 24.1), or a 3:1 ratio. Likewise, Dell has nearly half the number of days’ sales in inventory (4.0 days vs. 8.3), or a 2:1 superiority ratio. However, we can conclude that Gateway’s is making significant advances on Dell since the superiority ratio for the number of day’s sales of inventory using the ending inventory balance is less than for the inventory turnover (using average inventory balances). These significant differences are a result of Dell’s make-to-order operating strategy. Dell has successfully developed a manufacturing process that is able to fill a customer order quickly. As a result, Dell does not need to prebuild computers for inventory. Gateway, in contrast, prebuilds computers to be sold in its retail channel and for some of its telephone and internet sales. In this industry, there is great obsolescence risk in holding computers in inventory. New technology can make an inventory of computers difficult to sell; therefore, inventory is costly and risky. Dell’s operating strategy is considered revolutionary and is now being adopted by many both in and out of the computer industry. Indeed, at the time of this writing, Gateway and Hewlett-Packard are changing their practices to mirror those of Dell. As a side note, Apple Computer employs similar manufacturing techniques as does Dell and, thus, also enjoys excellent inventory efficiency.

Exercise 9–17 a. Number of times bond Income before tax + Interest expense interest charges were earned: Interest expense $800,000 + $360,000 = 3.22 times $360,000

Net income b. Number of times preferred dividends were earned: Preferred dividends

$600,000 = 12 times $50,000

Net income  Preferred dividends c. Earnings per share on common stock: Common shares outstanding

$600,000  $50,000 = $2.20 250,000 shares

Market price per share d. Price-earnings ratio: Earnings per share

$44 = 20 $2.20

Common dividends e. Dividends per share of common stock: Common shares outstanding

$220,000 = $0.88 250,000 shares

Common dividend per share f. Dividend yield: Share price

$0.88 = 2% $44.00

Exercise 4–25

a. 2001: 24.1% ($2,577/$10,674) 2.7% ($289/$10,674)

2000: 24.8% ($2,215/$8,937) 6.0% ($534/$8,937)

b. Gross profit as a percentage of net sales decreased slightly during 2001 from 24.8% in 2000 to 24.1% in 2001. However, operating profit as a percentage of net sales decreased significantly during 2001 from 6.0% in 2000 to 2.7% in 2001. This decrease warrants further investigation to determine its underlying causes.

Exercise 6–21 a. 2001: 7.2 [$9,430,422/[($1,383,550 + $1,237,804)/2]) 2000: 7.8 [$9,407,949/[($1,237,804 + $1,163,915)/2]) b. The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 7.8 to 7.2, an unfavorable trend. Before reaching a more definitive conclusion, both ratios should be compared with those of past years, industry averages, and similar firms.

Exercise 6–23 a. Gateway 2000: 37.0 ($5,921,651,000/$160,227,500) American Greetings: 2.9 ($757,080,000/$261,247,000) b. Lower. Although American Greetings’ business is seasonal in nature, with most of its revenue generated during the major holidays, much of its nonholiday inventory could turn over very slowly. Gateway, on the other hand, turns its inventory over very fast because it maintains a low inventory, which allows it to respond quickly to customer needs. Additionally, Gateway’s computer products can quickly become obsolete, so it cannot risk building large inventories.

Exercise 6–24 a.

Cost of goods sold Inventory turnover = Average inventory $26,336 Albertson’s, = 7.69 ($3,364  $3,481)/2

$35,806 Kroger, = 8.95 ($4,066  $3,938)/2

$22,482 Safeway, = 9.08 ($2,508 $2,445)/2 b. The inventory turnover ratios are consistent. Albertson’s has somewhat more inventory than do Safeway and Kroger. Albertson’s has nearly 1.39 turns less of inventory than does Safeway.

Exercise 8–25 a. Current year: $135,178,000  $130,598,000 Number of times interest charges earned: 2.0 = $130,598,000

Preceding year: $329,079,000  $70,350,000 Number of times interest charges earned: 5.7 = $70,350,000 b. The number of times interest charges earned has declined from 5.7 to 2.0 in the current year. This would potentially cause concern among debtholders.

Exercise 8–26 a. Total liabilties Total liabilities to total assets = Total assets

$45,814 Jan. 28, 2001: = 26.71% $45,814  $83,132  $42,547

$57,203 Jan. 30, 2000: = 54.50% $57,203  $12,928  $34,827 Problem 9–4

1. Working capital: $1,999,000 – $600,000 = $1,399,000

Calculated Ratio Numerator Denominator Value 2. Current ratio...... $1,999,000 $600,000 3.3 3. Acid-test ratio...... $1,473,000 $600,000 2.5 4. Accounts receivable turnover...... $6,100,000 ($350,000 + $365,000)/2 17.1 5. Number of days' sales in receivables...... $350,000 ($6,100,000/365) 20.9 6. Inventory turnover...... $2,800,000 ($500,000 + $480,000)/2 5.7 7. Number of days' sales in inventory...... $500,000 ($2,800,000/365) 65.2 8. Fixed assets to long- term liabilities...... $3,100,000 $1,800,000 1.7 9. Liabilities to stock- holders' equity...... $2,400,000 $3,399,000 0.7 10. Number of times interest charges earned...... $733,000 + $157,000 $157,000 5.7 11. Number of times preferred dividends earned...... $503,000 $48,000 10.5 12. Ratio of net sales to assets...... $6,100,000 ($5,099,000 + $3,864,000)/2 1.4 13. Rate earned on total assets...... $503,000 + $157,000 ($5,799,000 + $4,364,000)/2 13.0% 14. Rate earned on stock- holders' equity...... $503,000 ($3,399,000 + $2,964,000)/2 15.8% 15. Rate earned on common stock- holders' equity...... ($503,000 – $48,000) ($2,799,000 + $2,464,000)/2 17.3% 16. Earnings per share on common stock...... ($503,000 – $48,000) 150,000 $3.03 17. Price-earnings ratio...... $80.00 $3.03 26.4 18. Dividends per share of common stock...... $120,000 150,000 $0.80 19. Dividend yield...... $0.80 $80.00 1.0% Exercise 10–1 a. factory overhead e. direct materials b. factory overhead f. direct labor c. direct materials g. factory overhead d. direct labor h. factory overhead

Exercise 10–2 a. factory overhead b. factory overhead c. direct materials d. direct labor e. direct materials f. factory overhead g. direct materials h. factory overhead i. direct labor j. factory overhead Exercise 10–3 a. Product b. Product c. Period d. Period e. Period f. Product g. Product h. Product i. Product j. Product k. Period l. Period m. Period n. Product o. Product p. Period

Exercise 10–4 a, b, d, h, j Exercise 10–7 a. Cost of goods sold: Sales...... $710,000 Less gross profit...... 220,000 Cost of goods sold...... $490,000 b. Direct materials cost: Materials purchased...... $180,000 Less: Indirect materials...... $ 25,000 Materials inventory...... 20,000 45,000 Direct materials cost...... $135,000 c. Direct labor cost: Total manufacturing costs for the period...... $530,000 Less: Direct materials cost...... $135,000 Factory overhead...... 52,000 187,000 Direct labor cost...... $343,000

Exercise 10–12 a. Factory labor costs transferred to Work in Process: $4,032 Factory labor costs transferred to Factory Overhead: $1,670

b. Factory overhead applied to production ...... $6,336*

*$4,032/$14 per hour = 288 hours 288 hours  $22 per hour = $6,336 c.

Trans. Balance Sheet Income Statement Date Assets Liabilities Stockholders' Equity Revenue Expense Net Income Work in Process 6,336 Factory Overhead –6,336 Net Effect 0 Retained Earnings (Net Income) Exercise 10–13 a. Factory 1: $18.00 per machine hour ($270,000/15,000 machine hours)

b. Factory 2: $25.00 per direct labor hour ($235,000/9,400 direct labor hours)

c. Factory 1: Factory overhead applied to production ($18.00  1,260)...... $22,680

Factory 2: Factory overhead applied to production ($25.00  770) $19,250

d. Factory 1: $(780) overapplied ($21,900 – $22,680) Factory 2: $150 underapplied ($19,400 – $19,250) Exercise 10–16 a. Cost of jobs completed and transferred to Finished Goods: $240,200 b. Cost of unfinished jobs at March 31: Balance in Work in Process at March 1...... $ 19,200 Add: Direct materials...... 121,400 Direct labor ……………………………………….. 52,500 Factory overhead.. 74,600 ...... 267,700 Less: Jobs finished during March...... 240,200 Balance in Work in Process at March 31...... $ 27,500

Exercise 10–18 a. COMET SHOE COMPANY Income Statement For the Month Ended May 31, 2004 Revenues...... $450,000 Cost of goods sold...... 246,500 Gross profit...... $203,500 Selling expenses...... $65,000 Administrative expenses...... 41,400 106,400 Income from operations...... $ 97,100 b. Materials inventory: Purchased materials...... $124,000 Less materials used in production...... 111,300 Materials inventory, May 31...... $ 12,700 Work in process inventory: Materials used in production...... $111,300 Direct labor...... 84,700 Factory overhead (0.80  $84,700)...... 67,760 Additions to work in process...... $263,760 Less transferred to finished goods...... 257,000 Work in process inventory, May 31...... $ 6,760

Finished goods inventory: Transferred to finished goods...... $257,000 Less cost of goods sold...... 246,500 Finished goods inventory, May 31...... $ 10,500 Exercise 10–28 a. Patient M Patient T Patient M Patient T Activity Usage Activity Activity Usage Activity Activity  Activity Rate = Cost  Activity Rate = Cost Room and meals... 7 days  $150/day = $1,050 3 days  $150/day = $ 450 Radiology...... 4 images  $95/image = 380 2 images  $95/image = 190 Pharmacy...... 5 orders  $28/order = 140 1 order  $28/order = 28 Chemistry lab...... 6 tests  $85/test = 510 2 tests  $85/test = 170 Operating room..... 4.5 OR hrs.  $550/hr. = 2,475 1 OR hr.  $550/hr. = 550 Total cost...... $4,555 $1,388 b. Patient M apparently had a more serious condition than did patient T. Patient M required more operating room hours, more tests and images, and more days to recover than did patient T. Thus, the activity cost to patient M is more than three times that of patient T. Exercise 11–1

1. Variable 2. Fixed 3. Variable 4. Variable 5. Mixed 6. Fixed 7. Variable 8. Variable 9. Variable 10. Variable 11. Fixed 12. Mixed 13. Variable 14. Fixed 15. Variable Exercise 11–2

a. Cost Graph One b. Cost Graph Three c. Cost Graph Four d. Cost Graph Three e. Cost Graph Two

Exercise 11–5

a. Fixed b. Variable c. Fixed d. Variable e. Variable f. Fixed g. Fixed h. Variable i. Variable j. Fixed k. Fixed* l. Variable

*The developer salaries are fixed because they are more variable to the number of titles or releases rather than the number of units sold. For example, a title could sell one copy or a million copies, but the salaries of the developers would not be affected. Exercise 11–6

Cassettes produced...... 200,000 300,000 400,000 Total costs: Total variable costs.... $ 1,400,000 (d) $2,100,000(j) $ 2,800,000 Total fixed costs...... 600,000 (e) 600,000 (k) 600,000 Total costs...... $ 2,000,000 (f) $ 2,700,000(l) $ 3,400,000 Cost per unit: Variable cost per unit. (a) $ 7.00 (g) $7.00 (m) $7.00 Fixed cost per unit..... (b) 3.00 (h) 2.00 (n) 1.50 Total cost per unit...... (c) $ 10.00 (i) $ 9.00 (o) $ 8.50 Supporting calculations: a. $7.00 ($1,400,000/200,000 units) b. $3.00 ($600,000/200,000 units) d. $2,100,000 ($7.00  300,000) e. $600,000 (fixed costs do not change with volume) g. $7.00 ($2,100,000/300,000 units; variable costs per unit do not change with changes in volume) h. $2.00 ($600,000/300,000 units) j. $2,800,000 ($7.00  400,000 units) k. $600,000 (fixed costs do not change with volume) m. $7.00 ($2,800,000/400,000 units, variable costs per unit do not change with changes in volume) n. $1.50 ($600,000/400,000 units) Exercise 11–7

Difference in total costs a. Variable cost per unit = Difference in production $557,500 $292,500 Variable cost per unit = 15,000 units 5,000 units $265,000 Variable cost per unit = = $26.50 per unit 10,000 units The fixed cost can be determined by subtracting the estimated total variable cost from the total cost at either the highest or lowest level of production, as follows:

Total cost = (Variable cost per unit × Units of production) + Fixed cost Highest level: $557,500 = ($26.50  15,000 units) + Fixed cost $557,500 = $397,500 + Fixed cost $160,000 = Fixed cost Lowest level: $292,500 = ($26.50  5,000 units) + Fixed cost $292,500 = $132,500 + Fixed cost $160,000 = Fixed cost

b. Total cost = (Variable cost per unit  Units of production) + Fixed cost Total cost for 12,000 units: Variable cost: Units...... 12,000 Variable cost per unit......  $26.50 Total variable cost...... $318,000 Fixed cost...... 160,000 Total cost...... $478,000 Exercise 11–8

Difference in total costs Variable cost per gross-ton mile = Difference in gross-ton miles

Variable cost per gross-ton mile = $2,145,000 $1,632,500 610,000 gross-ton miles 405,000 gross-ton miles

Variable cost per gross-ton mile = $512,500 = $2.50 per gross-ton mile 205,000 gross-ton miles The fixed cost can be determined by subtracting the estimated total variable cost from the total cost at either the highest or lowest level of gross-ton miles, as follows: Total cost = (Variable cost per gross-ton mile  Gross-ton miles) + Fixed cost Highest level: $2,145,000 = ($2.50  610,000 gross-ton miles) + Fixed cost $2,145,000 = $1,525,000 + Fixed cost $620,000 = Fixed cost Lowest level: $1,632,500 = ($2.50  405,000 gross-ton miles) + Fixed cost $1,632,500 = $1,012,500 + Fixed cost $620,000 = Fixed cost Exercise 11–9 a. Sales...... $480,000 Variable costs...... 360,000 Contribution margin...... $120,000 Sales Variable costs Contribution margin ratio = Sales $120,000 Contribution margin ratio = = 25% $480,000 b. Sales...... $850,000 Contribution margin ratio.. .  32% Contribution margin...... $272,000 Less fixed costs...... 190,000 Income from operations...... $ 82,000

Exercise 11–10 a. Sales...... $12,421 Variable costs: Food...... $ 2,997 Payroll...... 2,220 General, selling, and administrative expenses (0.40  $1,720)... 688 Total variable costs...... $ 5,905 Contribution margin...... $ 6,516 b. Sales Variable costs Contribution margin ratio = Sales $6,516 Contribution margin ratio = = 52.46% $12,421 c. Same-store sales increase...... $ 280 Contribution margin ratio (from b)......  0.5246 Increase in income from operations...... $ 147 Note: Part (c) emphasizes “same-store sales” because of the assumption of no change in fixed costs. McDonald’s will also increase sales from opening new stores. However, the impact on income from operations for these additional sales would need to include an increase in fixed costs into the calculation. Exercise 11–11

Fixed costs a. Break-even sales (units) = Unit contribution margin

$437,600 Break-even sales (units) = = 13,675 units $80 $48

Fixed costs + Target profit b. Sales (units) = Unit contribution margin

$437,600 + $67,200 Sales (units) = = 15,775 units $80 $48

Exercise 12–2 a. Proposal to Discontinue Diet Kola January 3, 2006 Differential revenue from annual sales of Diet Kola: Revenue from sales...... $350,000 Differential cost of annual sales of Diet Kola: Variable cost of goods sold...... $180,000* Variable operating expenses...... 105,000† 285,000 Annual differential income from sales of Diet Kola...... $ 65,000 *225,000  0.80 †140,000  0.75 b. Diet Kola should be retained. As indicated by the differential analysis in (a), income would decrease by $65,000 (excess of differential revenue over differential cost) if the product is discontinued.

Exercise 12–6 a. Proposal to Manufacture Carrying Case June 5, 2006 Purchase price of carrying case...... $35.00 Differential cost to manufacture carrying case: Direct materials...... $18.00 Direct labor...... 10.00 Variable factory overhead...... 4 .50 32 .50 Cost savings from manufacturing carrying case...... $ 2 .50 b. It would be advisable to manufacture the carrying cases because the cost savings would be $2.50 per unit. Fixed factory overhead is irrelevant since it will continue whether the carrying cases are purchased or manufactured.

Exercise 12–7 a. Annual variable costs—present equipment...... $150,000 Annual variable costs—new equipment...... 90,000 Annual differential decrease in cost...... $ 60,000 Number of years applicable......  6 Total differential decrease in cost...... $360,000 Proceeds from sale of present equipment...... 120,000 $480,000 Cost of new equipment...... 450,000 Net differential income, 6-year total...... $ 30,000 Annual differential income from new equipment ($30,000/6)...... $ 5,000 b. The sunk cost is the $200,000 book value ($500,000 cost less $300,000 accumulated depreciation) of the present equipment. The original cost and accumulated depreciation were incurred in the past and are irrelevant to the decision to replace the machine. Exercise 12–8 a. Proposal to Replace Machine January 20, 2006 Annual costs and expenses—present machine...... $244,800 Annual costs and expenses—new machine...... 212,800 Annual differential decrease in costs and expenses...... $ 32,000* Number of years applicable......  10 Total differential decrease in costs and expenses...... $320,000 Cost of new equipment...... 350,000 Net differential increase in costs and expenses, 10-year total...... $ 30,000 Annual differential increase in costs and expenses—new machine... $ 3,000

*The annual differential decrease in costs and expenses could be computed alternatively as follows:

Decrease in direct labor costs...... $ 59,800 Less: Increase in power and maintenance...... $25,300 Increase in taxes, insurance, etc...... 2,500 27,800 Annual differential decrease in costs and expenses...... $ 32,000 b. The proposal should not be accepted. c. In addition to the factors given, consideration should be given to factors such as these: Do both present and proposed operations provide the same capacity? What are the opportunity costs associated with alternative uses of the $350,000 outlay required to purchase the automatic machine? Is the product improved by using automatic machinery? Does the federal income tax have an effect on the decision?

Exercise 12–9 a. Proposal to Sell to Barker Company January 18, 2006 Differential revenue from accepting the offer: Revenue from sale of 12,000 additional units at $32...... $384,000 Differential cost of accepting the offer: Variable costs from sale of 12,000 additional units at $29...... 348,000 Differential income from accepting the offer...... $ 36,000 b. The additional units can be sold for $32 each and since unused capacity is available, the only costs that would be added if this additional production were accepted are the variable costs of $29 per unit. The differential revenue is therefore $32 per unit, and the differential cost is $29 per unit. Thus, the net gain is $3 per unit  12,000 units, or $36,000. c. $29.01. Any selling price above $29 (variable costs per unit) will produce a positive contribution margin.

Exercise 13–1

MEDICO MEDICAL SUPPLY Flexible Selling and Administrative Expenses Budget For the Month Ending May 31, 2004 Total sales...... $120,000 $160,000 $200,000 Variable cost: Sales commissions...... $ 6,000 $ 8,000 $ 10,000 Advertising expense...... 14,400 19,200 24,000...... Miscellaneous selling expense 3,600 4,800 6,000 Office supplies expense...... 2,400 3,200 4,000 Miscellaneous administrative expense.... 1,200 1,600 2,000 Total variable cost...... $ 27,600 $ 36,800 $ 46,000 Fixed cost: Miscellaneous selling expense...... $ 2,000 $ 2,000 $ 2,000 Office salaries expense...... 8,000 8,000 8,000 Miscellaneous administrative expense.... 500 500 500 Total fixed cost...... $ 10,500 $ 10,500 $ 10,500 Total selling and administrative expenses.... $ 38,100 $ 47,300 $ 56,500

Exercise 13–2 a. GRAND ELECTRONICS COMPANY Sales Budget For the Month Ending September 30, 2004 Unit Unit Total Product and Area Sales Volume Selling Price Sales Model CR1: East Region...... 4,700$65 $305,500 West Region...... 3,400 65 221,000 Total...... 8,100 $526,500 Model CR2: East Region...... 3,200$80 $256,000 West Region...... 2,400 80 192,000 Total...... 5,600 $448,000 Total revenue from sales...... $974,500

b.

GRAND ELECTRONICS COMPANY Production Budget For the Month Ending September 30, 2004 Units Model CR1 Model CR2 Expected units to be sold...... 8,100 5,600 Plus desired inventory, September 30, 2004...... 410 100 Total...... 8,510 5,700 Less estimated inventory, September 1, 2004...... 350 120 Total units to be produced...... 8,160 5,580 Exercise 13–5

MAMA LEONA’S FROZEN PIZZA INC. Direct Materials Purchases Budget For the Month Ending August 31, 2004 Dough Tomato Cheese Total Units required for production: 12" pizza...... 28,500* 14,250† 19,950‡ 16" pizza...... 62,700§ 33,440** 45,980†† Plus desired inventory, August 31, 2004...... 450 240 350 Total ...... 91,650 47,930 66,280 Less estimated inventory, August 1, 2004...... 500 200 450 Total units to be purchased...... 91,150 47,730 65,830 Unit price......  $1.30  $2.10  $2.40 Total direct materials to be purchased...... $118,495 $100,233 $157,992 $376,720 *28,500  1 pound †28,500  0.50 pound ‡28,500  0.70 pound §41,800  1.50 pounds **41,800  0.80 pound ††41,800  1.10 pounds

Exercise 13–6

COCA-COLA ENTERPRISES—CHATTANOOGA PLANT Direct Materials Purchases Budget For the Month Ending September 30, 2004 (assumed data) Carbonated Concentrate 2-Liter Bottles Water Materials required for production: Coke...... 620* pounds 155,000 bottles 310,000 liters Sprite...... 378* 126,000 252,000 Total materials...... 998 pounds 281,000 bottles 562,000 liters Direct materials unit price....  $90  $0.09  $0.04 Total direct materials to be purchased...... $89,820 $ 25,290 $ 22,480

Coke Sprite *Production in liters (bottles  2)...... 310,000 252,000 Divide by 100...... ÷ 100 ÷ 100 3,100 2,520 Multiply by concentrate pounds per 100 liters......  0.20  0.15 Concentrate pounds required for production...... 620 378

Exercise 13–7

ACE RACKET COMPANY Direct Labor Cost Budget For the Month Ending August 31, 2004 Molding Finishing Department Department Hours required for production: Junior*...... 860 1,290 Pro-Striker†...... 4,380 7,300 Total...... 5,240 8,590 Hourly rate......  $15.00  $18.00 Total direct labor cost...... $ 78,600 $ 154,620 *Junior: 0.20 hour  4,300 = 860 hours 0.30 hour  4,300 = 1,290 hours †Pro-Striker: 0.30 hour  14,600 = 4,380 hours 0.50 hour  14,600 = 7,300 hours Exercise 13–11

TREVOR COMPANY Schedule of Collections from Sales For the Three Months Ending May 31, 2004 March April May Receipts from cash sales: Cash sales (0.10  current month's sales)...... $ 48,000 $ 59,000 $ 50,500 March sales on account: Collected in March ($432,000*  0.60)...... 259,200 Collected in April ($432,000  0.30)...... 129,600 Collected in May ($432,000  0.10)...... 43,200 April sales on account: Collected in April ($531,000†  0.60)...... 318,600 Collected in May ($531,000  0.30)...... 159,300 May sales on account: Collected in May ($454,500‡  0.60)...... 272,700 Total cash collected...... $307,200 $507,200 $525,700

*$480,000  0.90 = $432,000 †$590,000  0.90 = $531,000 ‡$505,000  0.90 = $454,500

Exercise 13–12

TUTOR.COM INC. Schedule of Cash Payments for Selling and Administrative Expenses For the Three Months Ending August 31, 2004 June July August June expenses: Paid in June ($83,400*  0.75)...... $62,550 Paid in July ($83,400  0.25)...... $ 20,850 July expenses: Paid in July ($114,800†  0.75)...... 86,100 Paid in August ($114,800  0.25)...... $ 28,700 August expenses: Paid in August ($144,300‡  0.75)...... 108,225 Total cash payments...... $62,550 $106,950 $136,925

*$95,400 – $12,000 †$126,800 – $12,000 ‡$156,300 – $12,000

(Note: Insurance, property taxes, and depreciation are expenses that do not result in cash payments in June, July, or August.)

Exercise 13–13

THE SEA BREEZE HOTEL Schedule of Cash Payments for Operations For the Three Months Ending December 31, 2004 October November December Payments of prior month’s expense*...... $18,400 $ 27,330 $33,330 Payment of current month’s expense†...... 63,770 77,770 90,650 Total payment...... $82,170$105,100$123,980

*$18,400, given as Accrued Expenses Payable, October 1. $27,330 = ($105,600 – $14,500)  0.30 $33,330 = ($125,600 – $14,500)  0.30 †$63,770 = ($105,600 – $14,500)  0.70 $77,770 = ($125,600 – $14,500)  0.70 $90,650 = ($144,000 – $14,500)  0.70

(Note: Insurance and depreciation are expenses that do not result in cash payments in October, November, and December.)

Exercise 13–16 a. Price variance: Actual price...... $ 1.90 per pound Standard price...... 2 .00 per pound Variance—favorable...... $(0.10) per pound  Actual quantity, 126,800 $(12,680) Quantity variance: Actual quantity...... 126,800 pounds Standard quantity...... 125,000 pounds Variance—unfavorable...... 1,800 pounds  Standard price, $2.00 3,600 Total direct materials cost variance—favorable...... $ (9,080) b. The direct materials price variance should normally be reported to the Purchasing Department, which could or could not be able to control this variance. If materials of the same quality were purchased from another supplier at a price lower than the standard price, the variance was controllable. On the other hand, if the variance resulted from a marketwide price decrease, the variance was not subject to control. The direct materials quantity variance should be reported to the proper level of operating management for possible corrective action. For example, if excessive amounts of direct materials had been used because of the malfunction of equipment that had not been properly maintained or operated, the variance would be reported to the production supervisor. On the other hand, if the excess usage of materials had been caused by the use of inferior raw materials, the Purchasing Department should be held responsible.

The total materials cost variance should be reported to senior plant management, such as the plant manager or materials manager.

Exercise 13–19 a. Rate variance: Actual rate...... $16.40per hour Standard rate...... 16.00per hour Variance—unfavorable. . $ 0.40per hour  Actual time, 8,400 hours $ 3,360 Time variance: Actual time...... 8,400hours Standard time...... 9,000hours Variance—favorable...... (600)hours  Standard rate, $16.00 (9,600) Total direct labor cost variance—favorable...... $(6,240) b. The employees could have been more experienced or better trained, thereby requiring a higher labor rate than planned. The higher level of experience or training could have resulted in more efficient performance. Thus, the actual time required was less than standard. Fortunately, the gained efficiency offset the higher labor rate.

Quiz Preview Section Quiz 1 (chapters 1 & 2)

17 True/False questions Problems, etc.:  ID 8 items as to operating, investing, or financing  Given total assets and liabilities at the beginning and ending of the year, determine the amount of net income for three different assumptions concerning dividends and additional investments by the owners.  Identify 10 items as whether they are Assets, liabilities, Revenues or expenses.  From a list of account titles and dollar amounts, prepare an income statement, a statement of retained earnings, and a balance sheet.  Given a series of transactions, enter the effect of the transactions on the accounting equation.

Quiz # 2 (Chapter 3)

12 True/False questions Problems, etc.:  Given 10 events, indicate the effect on Assets, liabilities, Equity, Revenues, Expenses, and Net Income.  Given a series of transactions and adjustments, enter the effect of the transactions on the accounting equation.  From a list of account titles and dollar amounts, prepare an income statement, a statement of retained earnings, and a balance sheet.

Quiz # 3 (Appendix A)

10 true/false questions Problems, etc. :  Given a list of transactions, identify which accounts would be debited and which would be credited.  From a list of accounts, identify if they are Assets, liabilities, Equity, Revenues, Expenses, or dividends, and if they are increased by a debit or credit.  Given 5 events, prepare the journal entries.  Given 5 events, post the transactions to the appropriate “T” Accounts.

Quiz # 4 (Chapters 4 and 2nd half of 6)

5 true/false Problems:  Given the beginning inventory, a series of purchases, and using the periodic inventory system, compute: the ending inventory; cost of goods sold; and gross profit, using FIFO, LIFO, and weighted average.  Given a list of account titles and dollar amounts, prepare a multiple step income statement.  Given a series of purchases with various terms, compute the amount to be paid within the discount period.

Quiz #5 (Chapters 5 and 1st half of 6)

10 true/false Problems:  Given data, prepare a bank reconciliation (2)  Identify which items in the bank reconciliation would require and adjusting entry.  Determine the due date and amount of interest due at maturity on a series of notes  Given information for two years regarding sales, collections, and write-offs, compute: the uncollectible accounts expense; end of the year account receivables; and end of the year allowance for doubtful accounts.

Quiz # 6 (Chapter 7)

10 true/false Problems:  Compute depreciation for two years using straight line and declining balance.  Compute depreciation for two years (first year a partial year) using straight line and declining balance.  Compute depletion expense and year end book value  Compute amortization expense for two years  Determine the cost basis for an asset acquisition  Compute the book value of an asset after several years of use, and the gain or loss upon sale of the asset.

Quiz on Chapter 8 preview

15 True/False

Problems, etc.

 Compute the warranty expense and year-end warranty liability for 2 years  Compute the amount paid in dividends to both preferred and common stock. This will be on both a total and per share basis, and assuming that the preferred stock is cumulative and that it is non-cumulative.  There will be ten events that deal with a variety of topics, such as stock splits, dividends, warranties, bonds, treasury stock, etc. and you must determine the effect on Assets, Liabilities, Equity, Revenues, Expenses and Net Income.

Quiz on Chapter 9 Preview

20 True/False

Problems:  Horizontal analysis  Vertical analysis  Compute: working capital; current ratio; acid test ratio  Compute: inventory turnover; number of days’ sales in inventory  Compute: accounts receivable turnover; number of day’s sales in receivables  Compute: rate earned on total assets; rate earned on stockholders’ equity; rate earned on common stockholders equity; earnings per share; price earnings ratio; dividend yield. Bus 205 final preview

All questions are multiple choice. Please bring a soft (#2 lead) pencil to the test. If there is an asterisk preceding the topic, the question involves a computation. If the topic is followed by a number, it means that topic occurs more than once, and will indicate the number of times.

Assets-2 Financial statements-2 Retained earnings GAAP Accrual Accounting – 2 Effect of transactions on A=L+OE-2 * Effect of transactions on A=L+OE-2 Oper/Invest/Finan. – 2 Liabilities *AJE’s expense amount *accrued expense depreciation – 2 closing entries Common sized statements Statement of cash flows – 2 *Gross profit *Income from operations Inventory methods *cash discount FOB internal control Allowance for doubtful accounts Accts. Rec. – net realizable value *bad debt expense *inventory valuation(lifo/fifo/w.Avg) *Accts. Rec. turnover. *Asset cost Book value accumulated depreciation *depreciation expense – 2 *asset disposal *amortization warranty expense bond premium/discount *bond selling price stockholders equity preferred stock *preferred dividends dividend dates stock split-2 *stockholders equity treasury stock *working capital indirect costs manufacturing costs *high/low * in volume in income *break even *production/purchase budget Handout A1 Revised exercises and problems for Chapter 2 Exercise 2-10 Required: For each of the 10 listed transactions, prepare journal entries and post to the appropriate “T” accounts.

Problem 2-1 Required: For each of the transactions, a through i, prepare journal entries and post to the appropriate “T” accounts.

Revised exercises and problems for Chapter 3 Exercise 3-4 Required: Make the journal entry for the necessary year-end adjustment using the information given in situation “a”.

Exercise 3-5 Required: Make the journal entry for the necessary year-end adjustment using the information given in situation “a”, and then in situation “b”.

Exercise 3-8 Required: Make the necessary year-end adjusting journal entry to accrue salaries, assuming that the accounting period ends (a) on a Tuesday, and (b) on a Wednesday.

Exercise 3-15 Required: Make the journal entry for the necessary year-end adjustment for fees earned. Problem 3-1 Required: a. Prepare “T” accounts for the listed accounts and enter the appropriate October 1 balances. b. Prepare journal entries for the listed October transactions and enter them into the appropriate “T” accounts.

Problem 3-2 (a continuation of 3-1) Required: Prepare adjusting journal entries based on the given information (items 1 to 6) and post them to the “T” accounts in Problem 3-1. Handout A2 Revised Exercises for Chapter 4 Exercise 4-18 Required: Prepare the journal entries for (a) the purchase, (b) the merchandise return, and (c) the payment.

Exercise 4-21 Required: Prepare the journal entries for (a) the sale of merchandise and (b) for payment of sales tax.

Exercise 4-22 Required: Prepare the journal entries for (a) the sale, (b) the return, and (c) the receipt of the check.

Exercise 4-23 (a continuation of 4-22) Required: Prepare the journal entries for (a) the purchase, (b) the return, and (c) the payment.

Revised Exercises for Chapter 5 Exercise 5-14 (a continuation of 5-13) Required: Prepare journal entries for adjusting the depositors accounts based on the data in 5-12.

Exercise 5-15 Required: Prepare journal entries for adjusting the depositors accounts based on the data given. Revised Exercises for Chapter 6 Exercise 6-5 Required: Prepare journal entry for recording the uncollectable accounts expense.

Exercise 6-6 Required: Prepare journal entries for recording the uncollectable accounts expense under each of the situations a, b, c, and d.

Exercise 6-7 Required: Prepare the journal entry for (a) writing off the account and (b) the subsequent collection of the account. Handout A3 Revised Exercises for Chapter 7 Exercise 7-3 Required: 1. Prepare the journal entries for recording (a) the purchase of the lot, (b) payment of the legal fees, (c) payment of delinquent taxes, (d) demolition costs, (e) sale of the salvaged materials, and (f) construction of the new warehouse. 2. Post the journal entries in part one to the “T” accounts for Land and for the Warehouse.

Exercise 7-7 Required: Prepare the journal entries for the first two years using (a) straight line and (b) declining-balance method.

Exercise 7-8 Required: Prepare the journal entries for the first two years using (a) straight line and (b) declining-balance method.

Exercise 7-11 Required: Prepare the journal entry to record depletion for the year.

Exercise 7-13 Required: a. Prepare the following “T” accounts: Cash; Equipment; Accumulated depreciation; depreciation expense; and gain/loss on sale of equipment. b. Enter $117,500 into the equipment account as a beginning balance. c. Compute the amount of accumulated depreciation that would be in the account as of January 1st, 2005 and enter that amount into the account. d. Prepare and post the journal entry for depreciation (six months) for the year 2006. e. Prepare and post the journal entry for the sale of the equipment for $53,500.

Exercise 7-19 Required: Prepare the journal entries (a) for the acquisition of the patent, (b) for lawsuit costs, and (c) to record the amortization costs for 2004.

Handout A4

Revised Exercises for Chapter 8 Exercise 8-2 Required: Prepare entries for (a) the issuance of the note and (b) the payment of the note at maturity.

Exercise 8-5 Required: Prepare entries for (a) the adjustment estimating the warranty expense for January, and (b) for the warranty work performed in January.

Exercise 8-9 Required: Prepare the journal entry to record the payroll for the week.

Exercise 8-12 Required: Prepare the journal entries for (a) the March 31 payroll, and (b) the March 31 payroll taxes.

Exercise 8-18 Required: Prepare the journal entries for (a) issuing the common stock, and (b) issuing the preferred stock. Handout A1 Revised exercises and problems for Chapter 2 Exercise 2-10 Required: For each of the 10 listed transactions, prepare journal entries and post to the appropriate “T” accounts.

Problem 2-1 Required: For each of the transactions, a through i, prepare journal entries and post to the appropriate “T” accounts.

Revised exercises and problems for Chapter 3 Exercise 3-4 Required: Make the journal entry for the necessary year-end adjustment using the information given in situation “a”.

Exercise 3-5 Required: Make the journal entry for the necessary year-end adjustment using the information given in situation “a”, and then in situation “b”.

Exercise 3-8 Required: Make the necessary year-end adjusting journal entry to accrue salaries, assuming that the accounting period ends (a) on a Tuesday, and (b) on a Wednesday.

Exercise 3-15 Required: Make the journal entry for the necessary year-end adjustment for fees earned. Problem 3-1 Required: c. Prepare “T” accounts for the listed accounts and enter the appropriate October 1 balances. d. Prepare journal entries for the listed October transactions and enter them into the appropriate “T” accounts.

Problem 3-2 (a continuation of 3-1) Required: Prepare adjusting journal entries based on the given information (items 1 to 6) and post them to the “T” accounts in Problem 3-1. Handout A2 Revised Exercises for Chapter 4 Exercise 4-18 Required: Prepare the journal entries for (a) the purchase, (b) the merchandise return, and (c) the payment.

Exercise 4-21 Required: Prepare the journal entries for (a) the sale of merchandise and (b) for payment of sales tax.

Exercise 4-22 Required: Prepare the journal entries for (a) the sale, (b) the return, and (c) the receipt of the check.

Exercise 4-23 (a continuation of 4-22) Required: Prepare the journal entries for (a) the purchase, (b) the return, and (c) the payment.

Revised Exercises for Chapter 5 Exercise 5-14 (a continuation of 5-13) Required: Prepare journal entries for adjusting the depositors accounts based on the data in 5-12.

Exercise 5-15 Required: Prepare journal entries for adjusting the depositors accounts based on the data given. Revised Exercises for Chapter 6 Exercise 6-5 Required: Prepare journal entry for recording the uncollectable accounts expense.

Exercise 6-6 Required: Prepare journal entries for recording the uncollectable accounts expense under each of the situations a, b, c, and d.

Exercise 6-7 Required: Prepare the journal entry for (a) writing off the account and (b) the subsequent collection of the account. Handout A3 Revised Exercises for Chapter 7 Exercise 7-3 Required: 3. Prepare the journal entries for recording (a) the purchase of the lot, (b) payment of the legal fees, (c) payment of delinquent taxes, (d) demolition costs, (e) sale of the salvaged materials, and (f) construction of the new warehouse. 4. Post the journal entries in part one to the “T” accounts for Land and for the Warehouse.

Exercise 7-7 Required: Prepare the journal entries for the first two years using (a) straight line and (b) declining-balance method.

Exercise 7-8 Required: Prepare the journal entries for the first two years using (a) straight line and (b) declining-balance method.

Exercise 7-11 Required: Prepare the journal entry to record depletion for the year.

Exercise 7-13 Required: f. Prepare the following “T” accounts: Cash; Equipment; Accumulated depreciation; depreciation expense; and gain/loss on sale of equipment. g. Enter $117,500 into the equipment account as a beginning balance. h. Compute the amount of accumulated depreciation that would be in the account as of January 1st, 2005 and enter that amount into the account. i. Prepare and post the journal entry for depreciation (six months) for the year 2006. j. Prepare and post the journal entry for the sale of the equipment for $53,500.

Exercise 7-19 Required: Prepare the journal entries (a) for the acquisition of the patent, (b) for lawsuit costs, and (c) to record the amortization costs for 2004.

Handout A4

Revised Exercises for Chapter 8 Exercise 8-2 Required: Prepare entries for (a) the issuance of the note and (b) the payment of the note at maturity.

Exercise 8-5 Required: Prepare entries for (a) the adjustment estimating the warranty expense for January, and (b) for the warranty work performed in January.

Exercise 8-9 Required: Prepare the journal entry to record the payroll for the week.

Exercise 8-12 Required: Prepare the journal entries for (a) the March 31 payroll, and (b) the March 31 payroll taxes.

Exercise 8-18 Required: Prepare the journal entries for (a) issuing the common stock, and (b) issuing the preferred stock. Transparency Master A-1

Solutions for revised exercises

2-10

1 Cash 25,000 Capital Stock 25,000

2 Cash 15,000 Note Payable 15,000

3 Advertising Expense 800 Cash 800

4 Rent Expense 2,500 Cash 2,500

5 Cash 7,250 Delivery Service Revenue 7,250

6 Accounts Payable 600 Cash 600

7 Interest Expense 400 Cash 400

8 Land 20,000 Cash 20,000

9 Delivery Service Revenue 200 Cash 200

10 Cash Dividends 1,000 Cash 1,000

Cash Capital Stock Note Payable 25,000 800 25,000 15,000 15,000 2,500 7,250 500 400 20,000 200 1,000 21,850 Transparency Master A-2

Advertising Expense Rent Expense Delivery Service Rev. 800 2,500 200 7,250 7,050

Interest Expense Land Dividends 400 20,000 1,000

Accounts Payable XXXX* 500

*Note: Beginning balance of Accounts Payable is unknown.

Problem 2-1 a. Cash 30,000 Capital Stock 30,000 b. Cash 10,000 Note Payable 10,000 c. Cash 8,100 Fees Earned 8,100 d. Rent Expense 1,000 Cash 1,000 e. Auto expenses 800 Miscellaneous expenses 250 Cash 1,050 f. Office salaries 1,500 Cash 1,500 g. Interest expense 75 Cash 75 h. Land 15,000 Cash 15,000 i. Dividends 2,000 Cash 2,000

Transparency Master A-3

Cash Capital Stock Note Payable 30,000 30,000 10,000 10,000 8,100 1,000 1,050 1,500 75 15,000 2,000 27,475

Auto Expense Rent Expense Fees Earned 800 1,000 8,100

Office Salary Expense Interest Expense Dividends 1,500 75 2,000

Land Misc. Expense 15,000 250

Exercise 3-4

Supply expense 1,234 Supplies 1,234

Exercise 3-5 a. Insurance expense 4,350 Prepaid Insurance 4,350 b. Insurance expense 1,875 Prepaid Insurance 1,875

Transparency Master A-4

Exercise 3-8 a. Salary Expense 5,500 Salaries Payable 5,500 b. Salary Expense 8,250 Salaries Payable 8,250

Exercise 3-15

Accounts Receivable 7,260 Fees Earned 7,260

Problem 3-1 Cash Accts. Rec. Pre-Paid Insur. 5,800 2,400 7,500 5,100 200 4,500 900 13,600 2,400 5,100 10,925 25,000 3,000 3,800

Supplies Building Accum. Depr. 310 50,000 4,000 1,200

Land Accts. Pay Unearned Rent 25,000 900 2,150 4,500 1,200 Notes Payable Wages Payable Capital Stock 20,000 25,000 25,000

Retained Earnings Dividends Fees Earned 37,660 3,000 13,600 3,800

Rent Revenue Wage Expense Utility Expense 7,000 2,000

Transparency Master A-5

Rent Expense Supply Expense Depreciation Exp. 1,500

Insurance Expense Interest Expense Misc. Expense 125 300

10/1 Cash 4,500 Unearned Rent 4,500

10/1 Prepaid Insurance 2,400 Cash 2,400

10/4 Supplies 1,200 Accounts Payable 1,200

10/5 Cash 5,100 Accounts Receivable 5,100

10/11 Accounts Payable 900 Cash 900

10/18 Cash 25,000 Capital Stock 25,000

10/20 Accounts Receivable 13,600 Fees Earned 13,600

10/25 Cash 3,800 Fees Earned 3,800

10/29 Wage Expense 7,000 Utility Expense 2,000 Rent Expense 1,500 Interest Expense 125 Misc. Expense 300 Cash 10,925

10/29 Dividends 3,000 Cash 3,000

Transparency Master A-6

Problem 3-2 (Adjustments posted in bold) Cash Accts. Rec. Pre-Paid Insur. 5,800 2,400 7,500 5,100 200 200 4,500 900 13,600 2,400 5,100 10,925 2,100 25,000 3,000 3,800

Supplies Building Accum. Depr. 310 50,000 4,000 1,200 1,185 1,000

Land Accts. Pay Unearned Rent 25,000 900 2,150 750 4,500 1,200

Notes Payable Wages Payable Capital Stock 20,000 800 25,000 25,000

Retained Earnings Dividends Fees Earned 37,660 3,000 13,600 3,800 2,100

Rent Revenue Wage Expense Utility Expense 750 7,000 2,000 800 Rent Expense Supply Expense Depreciation Exp. 1,500 1,185 1,000

Insurance Expense Interest Expense Misc. Expense 200 125 300

Adjusting Journal Entries

10/31 Insurance expense 200 Prepaid Insurance 200

10/31 Supply expense 1185 Supplies 1185

Transparency Master A-7

10/31 Depreciation Expense 1,000 Accumulated Depreciation 1,000

10/31 Unearned Rent 750 Rent Revenu 750

10/31 Wages Expense 800 Wages Payable 800

10/31 Accounts Receivable 2,100 Fees Earned 2,100

Exercise 4-18 a. Inventory 12,000 Accounts payable 12,000 b. Accounts payable 3,500 Inventory 3,500 c. Accounts Payable 8,500 Inventory 170 Cash 8,330

Exercise 4-21 a. Accounts Receivable 6,300 Sales 6,000 Sales Tax Payable 300 Cost of Merchandise Sold 3,600 Inventory 3,600 b. Sales Tax Payable 4,380 Cash 4,380

Transparency Master A-8

Exercise 4-22 a. Accounts Receivable 8,000 Sales 8,000

Cost of Merchandise Sold 4,800 Inventory 4,800 b. Sales Returns 500 Accounts Receivable 500

Inventory 300 Cost of Merchandise Sold 300 c. Cash 7,350 Accounts Receivable 7,500 Sales Discounts 150

Exercise 4-23 a. Inventory 8,000 Accounts Payable 8,000 b. Accounts Payable 500 Inventory 500 c. Accounts Payable 7,500 Inventory 150 Cash 7,350 Exercise 5-14 3. Cash 8,000 Note Receivable 8,000

5. Cash 1,800 (Whatever account check was written to) 1,800

6. Accounts Receivable 775 Cash 775

7. Miscellaneous (or Service Charge) Expense 25 Cash 25

Transparency Master A-9

Exercise 5-15 e. Cash 450 (Whatever account check was written to) 450 f. Miscellaneous (or Service Charge) Expense 18.75 Cash 18.75

Exercise 6-5 Uncollectible Accounts Expense 15,149 Allowance for Doubtful Accounts 15,149 Exercise 6-6 a. Uncollectible Accounts Expense 15,000 Allowance for Doubtful Accounts 15,000 b. Uncollectible Accounts Expense 14,600 Allowance for Doubtful Accounts 14,600 c. Uncollectible Accounts Expense 30,000 Allowance for Doubtful Accounts 30,000 d. Uncollectible Accounts Expense 26,350 Allowance for Doubtful Accounts 26,350

Exercise 6-7 a. Allowance for Doubtful Accounts 4,800 Accounts Receivable 4,800 b. Accounts Receivable 4,800 Allowance for Doubtful Accounts 4,800

Cash 4,800 Accounts Receivable 4,800

Transparency Master A-10

Exercise 7-3 (1) a. Land 125,000 Cash 25,000 Note Payable 100,000 b. Land 1,750 Cash 1,750 c. Land 7,500 Cash 7,500 d. Land 5,500 Cash 5,500 e. Cash 1,500 Land 1,500 f. Warehouse 412,500 Cash 412,500

Exercise 7-3 (2) Land Warehouse a)125,000 e)1,500 f)412,500 b)1,750 c)7,500 d)5,500 138,250 Exercise 7-7 a. Depreciation Expense 15,400 Yr1 Accumulated Depreciation 15,400

Depreciation Expense 15,400 Yr2 Accumulated Depreciation 15,400 b. Depreciation Expense 30,800 Yr1 Accumulated Depreciation 30,800

Depreciation Expense 24,640 Yr2 Accumulated Depreciation 24,640

Transparency Master A-11

Exercise 7-8 a. Depreciation Expense 8,100 Yr1 Accumulated Depreciation 8,100

Depreciation Expense 8,100 Yr2 Accumulated Depreciation 8,100 b. Depreciation Expense 17,500 Yr1 Accumulated Depreciation 17,500

Depreciation Expense 13,125 Yr2 Accumulated Depreciation 13,125

Exercise 7-11 Depletion Expense 4,500,000 Accumulated Depletion 4,500,000

Exercise 7-13 a-e. Cash Equipment Accumulated Depr. e)53,500 b)117,500 e)117,500 c)55,000 e)61,875 d)6,875

Depreciation Expense Gain/loss on Sale d)6,875 e)2,125 d. Depreciation Expense 6,875 Accumulated Depreciation 6,875 e. Cash 53,500 Accumulated Depreciation 61,875 Loss on Sale 2,125 Equipment 117,500

Exercise 7-19 a. Patent 675,000 Cash 675,000 b. Patent 45,000 Cash 45,000 c. Amortization Expense 40,500 Patent 40,500 Transparency Master A-12

Exercise 8-2 a. Accounts Payable 20,000 Note Payable 20,000 b. Note Payable 20,000 Interest Expense 300 Cash 20,300

Exercise 8-5 a. Warranty Expense 9,000 Warranty Payable 9,000 b. Warranty Payable 310 Parts Inventory 310

Exercise 8-9 Wage expense 1,430.00 FICA payable 107.25 Income tax payable 333.00 Wages payable 989.75

Exercise 8-12 a. Salary Expense 550,000 FICA payable 41,250 Income tax payable 104,500 Salaries Payable 404,250 b. Payroll tax expense 42,150 FICA payable 41,250 SUTA payable 800 FUTA payable 100

Exercise 8-18 a. Cash 900,000 Common Stock – $20 par 600,000 Paid in capital in excess of par – common 300,000 b. Cash 525,000 Preferred Stock - $100 par 500,000 Paid in capital in excess of par – preferred 25,000