AFM Text Problem Solutions for Class of 2012 (1)

8/4/2019 AFM Text Problem Solutions for Class of 2012 (1)

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CHAPTER 1THE NATURE AND PURPOSE OF ACCOUNTING

Problems

Problem 1-1

CHARLES COMPANY

BALANCE SHEET AS OF DECEMBER 31, ----.

Assets Liabilities and Owners EquityCash ................................... $ 12,000 Bank loan ................................. $ 40,000

Inventory ........................... 95,000 Owners Equity

Other assets ...................... 13,000 Owners equity ..................... 80,000

Total assets .......................

$120,000

Total liabilities and owners

equity .......................................

$120,000

Problem 1-2

The missing numbers are:

Year 1

Noncurrent assets ........................................ $410,976Noncurrent liabilities .................................. 240,518

Year 2

Current assets .............................................. $ 90,442Total assets .................................................. 288,456Noncurrent liabilities .................................. 78,585

Year 3

Total assets .................................................. $247,135Current liabilities ........................................ 15,583Total liabilities and owners equity............. 247,135

Year 4

Current assets .............................................. $ 69,090Current liabilities ........................................ 17,539

The basic accounting equation is

Assets = Liabilities + Owners equity

Current assets + Noncurrent assets = Total assets

Current liabilities + Noncurrent liabilities = Total liabilities


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Paid-in capital + Retained earnings = Owners equity.

Problem 1-3

The missing numbers are:

Year 1

Gross margin ............................................... $9,000

Tax expense................................................. 1,120

Year 2

Sales ............................................................ $11,968

Profit before taxes ...................................... 2,547

Year 3

Cost of goods sold ....................................... $2,886

Other expenses ........................................... 6,296

Other accounting equations such as the following are also illustrated by this problem:

Gross margin = Sales - Cost of goods sold

Profit before taxes = Gross margin - Other expenses

Net income = Profit before taxes - Tax expense

In order to estimate Year 4, the key ratios to compute are:

Year 1 Year 2 Year 3 AverageSales ..................... 100.0% 100.0% 100.0% 100.0%Gross margin ........ 75.0 75.0 75.0 75.0%Profit beforetaxes .....................

23.3 21.3 20.5 21.7%

Net income ........... 14.0 12.8 12.2 13.0%Tax rate ................ 40.0 40.0 40.0 40.0

Year 4

Sales ............................................................ $10,000

Cost of goods sold ....................................... 2,500

Gross margin (75% of sales) ........................ $ 7,500

Other expenses ........................................... 5,330


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Profit before taxes (21.7% of sales) ............ $ 2,170

Tax expense................................................. 870

Net income (13% of sales) .......................... $ 1,300

The basic accounting equation used is: Net income = Revenues - Expenses

Problem 1-4

The explanation of these 11 transactions is:

1. Owners invest $20,000 of equity capital in Acme Consulting.2. Equipment costing $7,000 is purchased for $5,000 cash and an account payable of $2,000.3. Supplies inventory costing $1,000 is bought for cash.4. Salaries of $4,500 are paid in cash.5. Revenues of $10,000 are earned, of which $5,000 has been recovered in cash. The remaining $5,000

is owed to the company by its customers.

6. Accounts payable of $1,500 are paid in cash.7. Customers pay $1,000 of the $5,000 they owe the company.8. Rent Expense of $750 is paid in cash.9. Utilities of $500 are paid in cash.10.A $200 travel expense has been incurred but not yet paid.11.Supplies inventory costing $200 are consumed.

ACME CONSULTING

BALANCE SHEET AS OF JULY 31, ----.

Assets Liabilities and Owners EquityCash ............................................... $12,750 Accounts payable........................... $ 700Accounts receivable ....................... 4,000Supplies inventory ......................... 800 ______

Current assets .......................... 17,550 Current liabilities ........................... 700Equipment ...................................... 7,000 Owners equity .............................. 23,850

Total assets .....................................

$24,550Total liabilitiesand owners equity ........................

$24,550

ACME CONSULTING

INCOME STATEMENT JULY 1 - 31, ----.

Revenues ........................................................... $10,000Expenses

Salaries ......................................................... 4,500


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Rent .............................................................. 750Utilities ......................................................... 500Travel ........................................................... 200Supplies ........................................................ 200 6,150

Net income .............................................. $ 3,850

ACME CONSULTINGCASH RECEIPTS AND DISBURSEMENTS, JULY 1 - 31, ----.

ReceiptsOwners investment ..................................... $20,000Cash sales ..................................................... 5,000Collection of accounts receivable ................ 1,000

Total receipts ........................................... $26,000Disbursements

Equipment purchase ..................................... $5,000Supplies purchase......................................... 1,000Salaries paid ................................................. 4,500Payments to vendors .................................... 1,500

Rent paid ...................................................... 750Utilities paid ................................................. 500

Total disbursements ................................ $13,250Increase in cash ....................................... $12,750

The change in this cash account includes the owners investment, which is not an income statement item.The income statement includes revenues and expenses that have not yet been received in cash or paid incash. The cash paid to purchase the equipment is not reflected in the income statement.

This problem illustrates several important points that managers should understand. These are:

a. Every transaction involves at least two accounts.b. Net income is not equivalent to the net change in the cash account during an accounting period.c. Cash is influenced by both balance sheet and income statement events.d. The basic accounting equation (Assets = Liabilities + Owners equity) can be used to capture,

illustrate, and explain the accounting consequences of many (but not all) transactions and events thatinvolve a company.

The cash receipts - disbursements display is used since it would be premature to introduce the cash flowstatement display at this point in the course.

Problem 1-5

Cash +

Accounts

Receivable +

Supplies

Inventory + Equipment =

Accounts

Payable +

Owners

Equity

1. + $25,000 + $25,000 Investment2. - 500 - 500 Rent3. + $8,000 + $8,0004. - 500 + $5005. - 750 - 750 Advertising6. - 3,000 - 3,000 Salaries7. + 2,000 + $8,000 + 10,000 Commissions


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8. - 5,000 - 5,0009. - 100 - 100

10. + 1,000 - 1,000 Expenses

BON VOYAGE TRAVEL

BALANCE SHEET AS OF JUNE 30, ----.Assets Liabilities and Owners Equity

Cash ....................................... $17,250 Accounts payable .................. $ 4,000Accounts receivable ............... 8,000 Current liabilities .............. 4,000Supplies inventory ................. 400 Owners equity...................... 29,650

Current assets .................... 25,650Equipment .............................. $ 8,000 ______

Total Assets ..................

$33,650Total liabilitiesand owners equity ......

$33,650

BON VOYAGE TRAVEL

INCOME STATEMENT JUNE 1-30, ----.

Commissions ........................................... $10,000Expenses .................................................

Rent .................................................... $500Advertising ......................................... 750Salaries ............................................... 3,000Supplies .............................................. 100Misc. Expenses .................................. 1,000 5,350

Net Income .................................... $ 4,650

BON VOYAGE TRAVEL

CASH RECEIPTS AND DISBURSEMENTS JUNE 1-30, ----.

ReceiptsOwners investment ..................................................... $25,000Collection of commissions ........................................... 2,000

Total receipts ......................................................... $27,000

DisbursementsPaid rent ....................................................................... $ 500Bought supplies ............................................................ 500Bought advertising ....................................................... 750Paid salaries ................................................................. 3,000Paid vendors ................................................................. 5,000

Total disbursements ............................................... $ 9,750

Increase in cash ......................................................... $17,250

See Problem 1-4 for why change in cash account and the months income are not the same.


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CHAPTER 2BASIC ACCOUNTING CONCEPTS: THE BALANCE SHEET

Problem Solutions

Problem 2-1

1. Owners equity equals $55,000.2. Liabilities equal $25,000.3. Noncurrent assets equal $70,000.4. Owners equity is $73,000.Current assets $33,000 + Noncurrent assets $55,000 = Total assets $88,000.

Current liabilities are $15,000 ($33,000 / 2.2)

Total liabilities and Owners Equity = $88,000.

Owners equity $73,000 = Total liabilities and Owners equity $88,000 - Current liabilities $15,000.

5. Current ratio is 1.4 ($35,000 / $25,000)Current assets $35,000 = Total assets $95,000 - Noncurrent assets $60,000.

Current liabilities $25,000 = Total assets $95,000 - Owners equity $70,000.

Problem 2-2

J.L. GREGORY COMPANYBALANCE SHEET, JUNE 30, ----.

Assets Liabilities

Cash ..................................................... $ 89,000 Accounts payable ......................... $ 241,000

Marketable securities ......................... 379,000 Taxes payable .............................. 125,000

Accounts receivable ............................ 505,000 Accrued expenses ........................ 107,000

Inventories 513,000 Current liabilities ......................... 473,000

Current assets ................................ 1,486,000 Notes payable .............................. 200,000

Land ..................................................... 230,000 Bonds payable .............................. 700,000

Buildings .............................................. 1,120,000 Total liabilities .............................. 1,373,000

Accumulated depreciation .................. (538,000)

Equipment ........................................... 761,000 Owners Equity


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Accumulated depreciation .................. (386,000) Capital stock ................................. 1,000,000

Investments......................................... 320,000 Retained earnings ........................ 620,000

Total assets.....................................

$2,993,000

Total liabilities

and owners equity..................

$2,993,000

J.L. GREGORY COMPANY

BALANCE SHEET, JUNE 30, ----.

Assets Liabilities

Cash ..................................................... $ 89,000 Accounts payable ......................... $ 241,000

Marketable securities ......................... 379,000 Taxes payable .............................. 125,000

Accounts receivable ............................ 505,000 Accrued expenses ........................ 107,000

Inventories 513,000 Current liabilities ......................... 473,000

Current assets ................................ 1,486,000 Notes payable .............................. 200,000

Land ..................................................... 230,000 Bonds payable .............................. 700,000

Buildings .............................................. 1,120,000 Total liabilities .............................. 1,373,000

Accumulated depreciation .................. (538,000)

Equipment ........................................... 761,000 Owners Equity

Accumulated depreciation .................. (386,000) Capital stock ................................. 1,000,000

Investments......................................... 320,000 Retained earnings ........................ 620,000

Total assets.....................................

$2,993,000

Total liabilities

and owners equity..................

$2,993,000

Problem 2-3

Cash + $100,000; Capital stock + $100,000.

Bonds payable - $25,000; Capital stock + $25,000.

Retained earnings (Depreciation expense) - $8,500.

Accumulated depreciation on plant and equipment + $8,500.

Cash - $15,900; Inventory + $15,900.

Inventory + $9,400; Accounts payable + $9,400.

Inventory - $4,500; Accounts receivable + $7,200; Retained earnings + $2,700


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Cash + $3,500; Accounts receivable - $3,500.

Dividends payable + $3,000; Retained earnings - $3,000.

Cash - $3,000; Dividends payable - $3,000.

No effect.

Problem 2-4

CARSON LEGATT PARTNERSHIP

BALANCE SHEET AS OF JUNE 1, ----.

Assets Capital AccountsCash ............................................... $ 50,000 Carson ............................................... $ 50,000Inventory ........................................ 50,000 Legatt ................................................ 50,000

Total assets ................................ $100,000 Total capital .................................. $100,000

CARSON LEGATT PARTNERSHIPBALANCE SHEET AS OF JUNE 30, ----.

Assets LiabilitiesCash ............................................... $ 22,100 Bank loan .......................................... $ 50,000Inventory ........................................ 58,500 Capital - Carson ................................ 51,550Land ............................................... 25,000 Capital - Legatt ................................. 54,050Building ......................................... 50,000 ________

$155,600 $155,600

CARSON LEGATT

PARTNERSHIPACCOUNTS, JUNE 30, ----.

Carson

Capital - June 1 ..................... $50,000Additions .............................. 7,750Withdrawals ......................... ( 6,200 )Capital - June 30 ................... $51,550

Legatt

Capital - June 1 ..................... $50,000Additions .............................. 7,750Withdrawals ......................... ( 3,700 )

Capital - June 30 ................... $54,050

Problem 2-5

Jan. 4: Retained earnings (Sales) + $12,000; Cash + $12,000 Inventory - $7,000 ;Retained earnings(Cost of goods sold) - $7,000

Jan. 6: No effect.Jan. 8: Inventory + $7,000; Accounts Payable + $7,000Jan. 11: Inventory - $1,500; Cash + $2,500; Retained earnings (Sales) + $2,500; Retained earnings


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(Cost of goods sold) - $1,500Jan. 16: Inventory - $2,000; Retained earnings (Cost of goods sold) - $2,000; Accounts receivable +

$3,400; Retained earnings (Sales) + $3,400Jan. 26: Cash - $4,200; Retained earnings (Wages) - $4,200Jan. 29: Cash - $20,000; Land + $20,000Jan. 31: Cash - $2,800; Prepaid insurance + $2,800

MARVIN COMPANY

BALANCE SHEET AS OF JANUARY 31, ----.

Assets LiabilitiesCash .................................................. $12,500 Accounts payable ........................ $ 7,000Accounts receivable .......................... 3,400 Total current liabilities ................ $7,000Inventory ........................................... 46,500Current assets .................................... 62,400 Notes payable .............................. 20,000Land .................................................. 20,000 Total liabilities ............................ 27,000Prepaid insurance .............................. 2,800 Owners Equity

Capital ......................................... 55,000_______ Retained earnings ........................ 3,200Total assets ................................. $85,200 Total liabilities

and owners equity ..............

$85,200

Problem 2-6

BRIAN COMPANY

CURRENT ASSETS AND LIABILITIES AS OF DECEMBER 31, ----.

Current Assets Current LiabilitiesCash .................................................. $ 2,000 Accounts payable ........................ $5,000Marketable securities ........................ 3,500 Wages payable ............................ 1,500

Accounts receivable .......................... 7,000 Bonds duecurrent portion ........ 2,000Current assets .................................... $12,500 Current liabilities ......................... $8,500

Current ratio = ........... $12,500 $8,500 = 1.47

The current ratio is an indication of an entitys ability to meet its current obligations.

CHAPTER 3

BASIC ACCOUNTING CONCEPTS:THE INCOME STATEMENT

Problems

Problem 3-1

Not an expense for June - not incurred.

Expense for June


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Expense for June

Expense for June

Expense for June

Not an expense for June - asset acquired.

Problem 3-2

Revenues$275,000

a. Expenses Cost of goods sold........... $164,000Rent ................................. 3,300Salaries ............................ 27,400Taxes ............................... 1,375Other ............................... 50,240

246,315Net income $28,685

Problem 3-3

Beginning inventory ........ $27,000Purchases ........................ 78,000Available for sale ............Ending inventory ............. ($31,000)Cost of goods sold ........... $74,000

Problem 3-4

a. (1) Sales .............................. $85,000Cost of goods sold ......... 45,000Gross margin ................. $40,000

(2) 47 percent gross margin ($40,000 / $85,000)(3) 11 percent profit margin (9000/85000)

The Woden Corporation had a tax rate of 40 percent ($6,000 / $15,000) on its pretax profit thatrepresented 17.7 percent of its sales ($15,000 / $85,000). The companys operating expenses were 82.3percent ofsales ($70,000 / $85,000) and its cost of goods sold was 53 percent of sales. The companysgross margin was 47 percent of sales ($40,000 / $85,000).

Problem 3-5

Depreciation. Each year for the next 5 years depreciation will be charged to income.

No income statement charge. Land is not depreciated.

Cost of goods sold. $3,500 charged to current years income. $3,500 charged to next years income.

Subscription expense. $36 charged to current year. $36 charged to next year. Alternatively, $72 chargedto current year on grounds $72 is immaterial.


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Problem 3-6

Asset value:October 1, 20X5 $30,000December 31, 20X5 26,250December 31, 20X6 11,250

December 31, 20X7 0

Expenses:20X5 $3,750 ($1,250 x 3 months)20X6 $15,000 ($1,250 x 12 months)20X7 $11,250 ($1,250 x 9 months)

One months insurance charge is $1,250 ($30, 000 / 24 months)

Problem 3-7

QED ELECTRONICS COMPANY

Income Statement for the month of April, ----.

Sales ............................................... $33,400Expenses:

Bad debts ................................... $ 645Parts .......................................... 3,700Interest ...................................... 880Wages ........................................ 10,000Utilities ...................................... 800Depreciation .............................. 2,700Selling ....................................... 1,900Administrative .......................... 4,700 ______

25,325Profit before taxes .......................... 8,075Provision for taxes ......................... 2,800.Net income $5,275

Truck purchase has no income statement effect. It is an asset.

Sales are recorded as earned, not when cash is received. Bad debt provision of 5 percent related to saleson credit ($33,400 - $20,500) must be recognized. Wages expense is recognized as incurred, not whenpaid.

Marchs utility bill is an expense of March when the obligation was incurred.

Income tax provision relates to pretax income. Must be matched with related income.


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Problem 3-8

First calculate sales:Sales ($45,000 / (1 - .45)) ............ $81,818+Beginning inventory ..................... $35,000Purchases ..................................... $40,000

Total available .............................. 75,000Ending inventory .......................... 30,000Cost of goods sold ........................ $45,000Gross margin ................................ $36,818

If the gross margin percentage is 45 percent, the cost of goods sold percentage must be 55 percent.

Once sales are determined, calculate net income:

Net income ($81,818 x .1) $8,182

Next, prepare balance sheet:

Assets LiabilitiesCurrent assets($50,000 x 1.6) ........................

$ 80,000 Current liabilities ....................

$ 50,000

Other assets($218,182 - $50,000) ...............

138,182

Long term debt 40,000

Total liabilities ........................ $ 90,000

Owners equityBeginning balance .................. $120,000Plus net income ....................... 8,182Ending balance........................ $128,182

Total assets .................

$218,182+Total liabilitiesand owners equity..................

$218,182

+Total assets = Total liabilities and Owners equity.

Problem 3-9

Sales LC 26,666,667 [LC 20,000,000 x (200 / 150)]

January cash LC 1,000,000 [LC 500,000 x (200 / 100)]

December cash LC 600,000

At year-end the company was more liquid in terms of nominal currency (LC 600,000 versus LC 500,000)but in terms of the purchasing power of its cash it was worse off (LC 1,000,000 versus LC 600,000).

CHAPTER 4ACCOUNTING RECORDS AND SYSTEMS

Problems


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Problem 4-1

Cash Accounts Payable

Beg. Bal. $900 $3,400 (3) (3) $3,400 $3,600 Beg. Bal.(4) 5,350 950 (5) 2,350 (1)

Bal. $1,900 $2,550 Bal.

Accounts Receivable Notes Payable

Beg. Bal. $3,000 $5,350 (4) (5) $950 $950 Beg. Bal.(2) 6,350

Bal. $4,000

Inventory

Beg. Bal. $5,700 $4,150 (2)(1) 2,350

Bal. $3,900

Problem 4-2

1) dr. Prepaid Rent ............................................................................... $14,340cr. Cash ...................................................................................... $14,340

Prepaid rent is an asset.

2) dr. Sales Discounts and Allowances ................................................ $34,150cr. Provision for Sales Discounts and Allowances .................... $34,150

Sales discounts and allowances is a deduction from gross sales to arrive at net sales. The provision isa liability.

3) dr. Interest Receivable ..................................................................... $35cr. Interest Income ..................................................................... $35

Interest receivable is an asset. Interest income would be listed as other income in this periods incomestatement.

4) dr. Depreciation Expense ................................................................. $13,660cr. Accumulated Depreciation ................................................... $13,660

Depreciation expense is an income statement item. Accumulated depreciation is disclosed as adeduction from the related depreciable asset.

5) dr. Cash ............................................................................................ $2,730cr. Deferred revenue .................................................................. $2,730

Deferred revenue is a liability.

6) dr. Stamp Expense .................................................................. $100Stamp Inventory ..................................................................... $72

cr. Cash ............................................................................. $172Stamps expense is an income statement item. Stamp inventory is an asset.

7) Bad debt expense ............................................................................. $1,350


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Allowance for doubtful accounts ........................................ $1,350Bad debt expense account is an expense account. Allowance for doubtful accounts is a contra assetdisplayed as a deduction from the asset accounts receivable.

Problem 4-3

a.

1) dr. Inventory .............................................................................. $1,300cr. Accounts payable ............................................................ $1,300

2) dr. Wages Expense .................................................................... $730cr. Cash ................................................................................. $730

3) dr. Cash ..................................................................................... $1,940cr. Sales ................................................................................ $1,940

4) dr. Accounts Receivable ........................................................... $1,810cr. Sales ................................................................................ $1,810

5) dr. Overhead and Other Expenses ............................................. $900cr. Cash ................................................................................. $900

6) dr. Cash ..................................................................................... $1,510cr. Accounts Receivable ....................................................... $1,510

7) dr. Accounts Payable ................................................................ $1,720cr. Cash ................................................................................. $1,720

8) dr. Cash ..................................................................................... $650cr. Deferred Revenue ............................................................ $650

9) dr. Cash ..................................................................................... $200cr. Note Payable ................................................................... $200

10) dr. Cost of Goods Sold .............................................................. $1,280cr. Inventory ......................................................................... $1,280

+ Beginning inventory ................. $1,730Additions .................................. 1,300Total available .......................... $3,030Ending inventory ...................... 1,750Cost of goods sold .................... $1,280

11) Dr. Depreciation Expense ......................................................... $300Cr. Accumulated Depreciation ..................................... $300

b.

Accounts Payable Accounts Receivable

(1) $1,720 $3,070 $2,160 1,510 (6)1,300 (1) (4) 1,810


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Accumulated Depreciation Allowance for Doubtful Accounts

$2,800 $70300 (11)

Cash Fixed Assets (cost)$1,440 $ 730 (2) $6,200

(3) 1,940 900 (5)(1) 1,510 1,720 (7)(8) 650(9) 200

Inventories Notes Payable

$1,730 $1,280 (10) $600(1) 1,300 200 (9)

Owners Equity Deferred Revenue

(2) Wages $7308 $4,990 $650 (8)(5) Overhead 900 1,940 Sales (3)

(10) COGS 1,280 1,810 Sales (4)(11) Depreciation 300

See above

d.LUFT CORPORATION

Balance SheetAssets Liabilities

Cash .................................................. $2,390 Accounts payable .................................. $2,650Accounts receivable (net) ................. 2,390 Deferred revenue ................................... 650Inventories ........................................ 1,750 Current liabilities .............................. 3,300

Current assets ............................... $6,530 Notes payable ................................... 800Total liabilities .................................. 4,100

Fixed assets ....................................... $6,200 Owners equityAccumulated depreciation ................ (3,100) Owners equity ...................................... 5,530

Total assets ...................................

$9,630Total liabilitiesand owners equity ...........................

$9,630

e.LUFT CORPORATION

Income Statement

Sales ....................................................... $3,750Cost of goods sold.................................. 1,280Gross margin .......................................... 2,470Wages .................................................... 730Overhead ................................................ 900


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Depreciation ........................................... 300Net income ............................................. $ 540

Problem 4-4

a.

Cash and Equivalents Accounts Receivable$119,115 $162.500$119,115 $162,500

Store Equipment Merchandise Inventory

$215,000 $700,680 $302,990 (1)

$215,000 $397,690

Supplies Inventory Prepaid Insurance

$15,475 $10,265 (3) $38,250 $4,660 (4)$5,210 $33,590

Selling Expense Sales Salaries

$24,900 24,900 (a) $105,750

(6) 3,575 109,325 (b)

Cost of Goods Sold Depreciation Expense

(1) $302,990 $302,990 (h) (2) $12,750 $12,750 (i)

Supplies Expense Insurance Expense

(3) $10,265 $10,265 (j) (4) $4,660 $4,660 (k)

Accrued Interest Accrued Sales Salaries

$3,730 (5) $3,575 (6)

$3,730 $3,575

Interest Receivable Interest Income

(7) 390 (l) 390 390 (7)

390

Miscellaneous General Expenses Sales Discounts

$31,000 31,000 (c) (d) 6,220 $6,220

Interest Expense Social Security Taxes

$9,300 $9, 600 $9,600 (f)

(5) 3,730 $13,030 (e)


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Accumulated Depreciation Accounts Payable

$37,300 $118,18012,750 (2) $118,180

$50,050

Notes Payable Common Stock

$143,000 $300,000$143,000 $300,000

Retained Earnings Sales

$122,375 (g) $716,935 $716,935

192,585 (m)

$314,960

Profit and Loss

(a) 24,900 716, 935 (g)(b) 109,325 390 (l)(c) 31,000(d) 6,220(e) 13,030(f) 9,600(h) 302,990(i) 12,750(j) 10,265(k) 4,660

(m) 192,585

Adjusting entries are:

(1) dr. Cost Of Goods Sold ........................................................... $302,990cr. Merchandise Inventory .................................................. $302,990

(2) dr. Depreciation Expense ........................................................ $12,750cr. Accumulated Depreciation ............................................ $12,750

(3) dr. Supplies Expense ............................................................... $10,265cr. Supplies Inventory ......................................................... $10,265

(4) dr. Insurance Expense.............................................................. $4,660cr. Prepaid Insurance........................................................... $4,660

(5) dr. Interest Expense ................................................................. $3,730cr. Accrued Interest ............................................................. $3,730

(6) dr. Sales Salaries ..................................................................... $3,575cr. Accrued Sales Salaries ................................................... $3,575


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(7) dr. Interest Receivable ............................................................. $390cr. Interest Income .............................................................. $390

Closing entries are:

(a) dr. Profit and Loss ................................................................... $24,900

cr. Selling Expense ............................................................. $24,900

(b) dr. Profit and Loss ................................................................... $109,325cr. Sales Salaries ................................................................. $109,325

(c) dr. Profit and Loss ................................................................... $31,000cr. Miscellaneous General Expenses .................................. $31,000

(d) dr. Profit and Loss ................................................................... $6,220cr. Sales Discounts .............................................................. $6,220

(e) dr. Profit and Loss ................................................................... $13,030

cr. Interest Expense ............................................................. $13,030

(f) dr. Profit and Loss ................................................................... $9,600cr. Social Security Taxes .................................................... $9,600

(g) dr. Sales ................................................................................... $716,935cr. Profit and Loss ............................................................... $716,935

(h) dr. Profit and Loss ................................................................... $302,990cr. Cost of Goods Sold ........................................................ $302,990

(i) dr. Profit and Loss ................................................................... $12,750

cr. Depreciation Expense .................................................... $12,750

(j) dr. Profit and Loss ................................................................... $10,265cr. Supplies Expense ........................................................... $10,265

(k) dr. Profit and Loss ................................................................... $4,660cr. Insurance Expense ......................................................... $4,660

(l) dr. Interest Income ................................................................... $390cr. Profit and Loss ............................................................... $390

(m) dr. Profit and Loss ................................................................... $192,585cr. Retained Earnings .......................................................... $192,585

DINDORF COMPANY

Income Statement for the year ----.

Sales ............................................................................ $716,935Sales discounts ............................................................ (6,220)


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Net sales ...................................................................... 710,715Cost of goods sold ....................................................... 302,990Depreciation ................................................................ 12,750Sales salaries ............................................................... 109,325Selling expense ........................................................... 24,900Supplies expense ......................................................... 10,265

Insurance expense ....................................................... 4,660Social Security taxes ................................................... 9,600Miscellaneous general expenses ................................. 31,000Interest expense ........................................................... 13,030Interest income ............................................................ 390

Net income ..................................................... $192,585

DINDORF COMPANYBalance Sheet as of January 31, ----.

Assets LiabilitiesCash and cash equivalent .................... $119,115 Accounts payable ............................... $118,180Accounts receivable ............................ 162,500 Accrued interest .................................. 3,730Merchandise inventory ........................ 397,690 Accrued sales salaries ......................... 3,575Supplies inventory .............................. 5,210 Current liabilities ................................ 125,485Prepaid insurance ................................ 33,590Interest receivable ............................... 390 Notes payable ..................................... 143,000Current assets ...................................... 718,495 Total liabilities....................... 268,485

Owners EquityStore equipment .................................. 215,000 Common stock .................................... 300,000Accumulated depreciation .................. (50,050) Retained earnings ............................... 314,960

Total assets .....................................

$883,445Total liabilitiesand owners equity .........................

$883,445

CHAPTER 6COST OF SALES AND INVENTORIES

Problems

Problem 6-1

The completed table is shown below. Each deduction involves the basic inventory equation.

Ending inventory = Beginning Inventory + PurchaseShipments (COGS)

as well as the basic relationships inherent in any income statement, that is:,

Income = RevenuesExpenses

Co. W Co. X Co. Y Co. Z

Sales ........................................... $2,250 $1,800 $1,350 $2,100

Cost of goods sold: ....................


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Beginning inventory .............. 300 225 500 300

Plus: Purchases ...................... 975 975 850 1,200

Less: Ending inventory ......... 225 300 300 150

Cost of good sold ............. 1,050 900 1,050 1,350

Gross margin.............................. 1,200 900 300 750

Period expenses ......................... 300 400 150 800Net income (Loss) ..................... $ 900 $ 500 $ 150 $ (50)

Problem 6-2

The required income statement is reproduced below.

The closing entries are:

a. Beginning inventory balance is $50,000

b. dr. Inventory ......................................... 167,000cr. Purchases .................................... 167,000

c. dr. Inventory ......................................... 4,000cr. Freight-in .................................... 4,000

d. dr. Returns (to Suppliers) ..................... 8,000cr. Inventory ..................................... 8,000

e. dr. Cost of Goods Sold ......................... 135,500cr. Inventory ...................................... 135,500

f. dr. Income Summary ............................ 135,500cr. Cost of Goods Sold ..................... 135,500

g. dr. Income Summary ............................ 95,000cr. Other Expenses ........................... 95,000

h. dr. Tax expense .................................... 28,350cr. Taxes Payable ............................. 28,350

i. dr. Sales ................................................ 325,000cr. Income Summary ........................ 325,000

j. dr. Income Summary ............................ 28,350cr. Tax Expense ............................... 28,350

GARDNER PHARMACY

Income Statement for the Year ----.

Sales ................................................... $325,000Cost of goods sold: .............................

Beginning inventory ..................... $ 50,000Plus: Purchase, gross ............ $167,000

Freight-in .................... 4,000171,000

Less: Purchase returns .......... 8,000Net purchases ............................... 163,000Goods available for sale ............... 213,000

Less: Ending inventory......... 77,500


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Cost of goods sold .............. 135,500Gross margin ...................................... 189,500Other expenses ................................... 95,000Income before taxes ........................... 94,500Income tax expense ............................ 28,350Net income ......................................... 66,150

Problem 6-3

a. dr. Inventory ........................................ 85,500cr. Cash (or Payables) ..................... 85,500

dr. Cash (or Receivables) .................... 133,400cr. Sales ........................................... 133,400

dr. Sales Returns .................................. 1,840Inventory ......................................... 1,200cr. Cash (or Receivables) ................ 1,840

Cost of Goods Sold .................... 1,200

b. GOULDS COMPANY

Income Statement

Gross sales ............................... $133,400Less: Sales returns ............ 1,840

Net sales ..................... $131,560Cost of goods sold............. 85,800Gross margin ..................... $ 45,760

c. The perpetual inventory records indicate ending inventory should have been 673 + 5,7005,800+ 80 = 653 units. Inventory shrinkage has therefore been 653610 = 43 units.

dr. Inventory Shrinkage ....................... 645cr. Inventory .................................... 645

The inventory shrinkage entry reduces gross margin by $645 (or shrinkage could be shown below thegross margin line as a general expense).

Problem 6-4

Purchases:50 units @ $14 = $ 70075 units @ $12 = 900

Avg: 125 units @ $12.80 = $1,600Sales: 100 units

Ending inventory: 25 unitsAvg. Cost Fifo Lifo

July 31 inventory.................. $ 320 $ 300 $ 350Cost of goods sold ................ 1,280 1,300 1,250Available for sale ................. 1,600 1,600 1,600

Problem 6-5

Fifo Av. Cost Lifoa. Sales ........................................... $52,125 $52,125 $52,125


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Cost of goods sold ...................... 27,310 27,053 26,960Gross margin .............................. $24,815 $25,072 $25,165

Fifo Av. Cost Lifob. Gross margin percentage............ 47.6% 48.1% 48.3%c. Net cash flow = $21,465 ($52,125 - $30,660)No change in pretax cash flow figure using different inventory methods.

d. Fifo Av. Cost LifoPretax cash flow ......................... $21,465 $21,465 $21,465Tax payment .............................. 7,445 7,522 7,550After-tax cash flow .................... $14,020 $13,943 $13,915

The tax payment in 30 percent of the gross margin dollars. The cash flow using Fifo for tax purposes isthe lowest of the three after tax cash flow amounts because the unit cost of computers is falling,producing the highest taxable gross margin of the three methods.

Problem 6-6

a. Ending inventory balances are:MaterialsInventory

Work inProcess

FinishedGoods

Beginning balance ..................... $ 100,000 $ 370,000 $ 60,000(1) Purchases ................................... 872,000

Delivery charge .......................... 22,000(2) Direct labor ................................ 565,000(3) Materials transfer ....................... (900,000) 900,000(4) Indirect labor .............................. 27,000

Factory supplies ......................... 46,000Depreciationfactory ................. 54,000Factory utilities .......................... 147,000DepreciationMfg ...................... 46,000Property taxes ............................ 14,000

(5) Finished goodstransfers ........... ________ (2,035,000) 2,035,000$ 94,000 134,000 2,095,000

Cost of goods sold ..................... -- -- (2,002,000)Ending balance .......................... $ 94,000 $ 134,000 $ 93,000

b. Gross margin was 23 percent.Sales ........................................... $2,600,000Cost of goods sold ..................... 2,002,000Gross margin .............................. $ 598,000

Problem 6-7

Item UnitsValuationBasis/Unit

HistoricalCost/Unit

Total

Adjustment

A 30 $145 $150 $150B 40 173 183 400


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C 20 131 134 60D 40 113 113 0

Total adjustment $610

CHAPTER 9

SOURCES OF CAPITAL: OWNERS EQUITY

Problems

Problem 91

a. Debt/EquityRatio

Debt/Capitalization

Ratio(1) Including current liabilities ..............

%7.66880,146$

920,97$

Rarely calculatedthis way.

(2) Excluding current liabilities exceptcurrent portion of long-term debt .....

$79,560

$146,88054.2% %1.35

440,226$560,79$

(3) Excluding all current liabilities ........%0.50

880,146$

440,73$ %3.33

320,220$

440,73$

b. These two ratios measure the proportion of funds the company has raised from creditors as opposedto owners. They indicate how much leverage the firm has in its capital structure. The basic trade -offa company makes in determining the right ratio (i.e., capital structure) is between the risks inherentin taking on fixed debt obligations versus the opportunity to increase the shareholders profitability by

having some debt in the capital structure. (A more detailed study of capital structure decisions iscovered in finance courses.)

Problem 92

a. Basic earnings per share = 83.7$shares2,000,000

)$3,900,00000($19,550,0

b. Diluted earnings per share = 45.7$*)000,100000,200(000,000,2

)000,900,3$000,550,19($

*Assume 200,000 optional shares issued less assumed 100,000 shared repurchased with option payments

(200,000 shares x $10 per exercised option) at $20 per share.

Problem 93

Weighted average number of shares outstanding during the fiscal year is

shares250,0004

300,000)300,000300,000(100,000


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Problem 94

Total Johns Schwartz

Salaries .............................. $ 55,000 $15,000 $40,000

Interest on capital .............. 12,000 5,000 7,000

Remainder ......................... 54,000 27,000 27,000

Total .................................. $121,000 $47,000 $74,000

Problem 95

December 31, 2006(a)

No entry (except to show 10,000,000 shares issued and outstanding)

(b)If retired:dr. Preferred Stock ........................................................ 1,200,000

Retained Earnings or Paid-In Capital ....................... 168,000

cr. Cash ...................................................................... 1,368,000Or

If not retired:dr. Treasury Stock ......................................................... 1,368,000

cr. Cash ...................................................................... 1,368,000

January 1, 2007(a)

dr. Dividends on Preferred Stock .................................. 224,000cr. Dividends Payable ................................................ 224,000

(b)dr. Dividends on Common Stock .................................. 1,500,000

cr. Dividends Payable ................................................ 1,500,000

(c)No entry. (When this stock dividend is effective, retained earnings is diluted for the fairvalue of the additional shares issued, paid-in-capital is credited for a like amount, and1,000,000 additional shares are listed as issued and outstanding.)

(d)February 1, 2007

dr. Dividends Payable ................................................... 1,724,000cr. Cash ...................................................................... 1,724,000

Problem 9-6a. 15,000 ( 80,000 - 65,000) common shares issued in 2006.b. 3,000 sh=

($300,000 $150,000)3,000 shares =

$50 per

Change in preferred stock 150,000


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Change in paid in capital 25,000

$175,000$58,33/shares

3,000 shares

c. Book value (2005) = $1,7 80,000

Book value (2006) = $2,354,000

d. dr. Treasury stock ............................... 150,000

cr. Cash ........................................... 150,000

Average price = ..................................share/15$

shares10,000

$150,000

e. Book value (2005) = $1,7 80,000

Book value (2006) = $2,354,000

Problem 97

a. April 15, 2003No entry

b. April 15, 2003dr. Cash ................................ 1,500,000

cr. Common Stock ............ 1,500,000c. December 21, 2003

dr. Retained Earnings ........... 400,000

cr. Paid-In Capital ............. 400,000d. July 1, 2004dr. Cash ................................ 900,000

cr. Common Stock ............ 900,000e. November 15, 2004

dr. Treasury Stock ................ 420,000cr. Cash ............................. 420,000

f. December 15, 2004dr. Cash ................................ 230,000

cr. Treasury Stock.............. 210,000

Paid-In Capital ............... 20,000

g.

February 1, 2005No entryh. September 15, 2005

dr. Cash ................................ 175,000Paid-In Capital ................ 35,000

cr. Treasury Stock ............. 210,000i. December 24, 2005

dr. Retained Earnings ........... 150,000cr. Dividends Payable ....... 150,000


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j. January 24, 2006dr. Dividends Payable .......... 150,000

cr. Cash ............................. 150,000

CHAPTER 10OTHER ITEMS THAT AFFECTNET INCOME AND OWNERS EQUITY

Problems

Problem 10-1

Wages Payable 1,025.00Cash 776.35FICA Taxes Payable 74.65Withholding Taxes Payable 174.00And, to finish, payment to government:FICA Taxes Payable 149.30Unemployment Taxes Payable 40.05Withholding Taxes Payable 174.00Cash 363.35

Problem 10-2

dr. Pension Cost ...................................... 85,000cr. Cash ................................................ 40,100

Pension Liability ............................. 44,900

Problem 10-3

Financial Statements (Accrual Basis)

1999 2000 2001 2002Revenues ................................................. $456,000 $696,000 $840,000 $780,000Expenses ................................................. 270,000 672,000 798,000 618,000Profit before taxes ................................... 186,000 24,000 42,000 162,000Tax provision (30%) ............................... 55,800 7,200 12,600 48,600

Tax Return (Cash Basis)

1999 2000 2001 2002Receipts ................................................... $336,000 $636,000 $894,000 $690,000Disbursements ......................................... 288,000 528,000 750,000 606,000Taxable income ....................................... 48,000 108,000 144,000 84,000Tax payment (30%) ................................. 14,400 32,400 43,200 25,200

1999 2000 2001 2002Tax provision .......................................... $55,800 $ 7,200 $ 12,600 $48,600


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Tax payment............................................ 14,400 32,400 43,200 25,200Difference ............................................... 41,400 (25,200) (30,600) 23,400Cumulative difference ............................. $41,400 $16,200 $(14,400) $ 9,000

Cash basis accounting for tax payment purposes was preferable for the 1999 - 02 period. It resulted in

lower cumulative tax payments.

The difference between the annual tax provision and tax payments would be handled through deferred taxaccounting.

Problem 10-4

Net book value of machinery for financial reporting purposes

Year Cost

Depreciation

Expense

Cumulative

Depreciation

Allowance Net Book Value

1997 $2,750,000 $275,000 $ 275,000 $2,475,0001998 2,750,000 550,000 825,000 1,925,0001999 2,750,000 550,000 1,375,000 1,375,0002000 2,750,000 550,000 1,925,000 825,0002001 2,750,000 550,000 2,475,000 275,0002002 2,750,000 275,000 2,750,000 -0-

Net tax basis of machinery for tax purpose.

Year Tax Basis

Depreciation

Deduction

Cumulative

Depreciation

Deduction Net Tax Basis

1997 $2,750,000 $550,000 $ 550,000 $2,200,0001998 2,750,000 880,000 1,430,000 1,320,0001999 2,750,000 528,000 1,958,000 792,0002000 2,750,000 316,250 2,274,250 475,7502001 2,750,000 316,250 2,590,500 159,5002002 2,750,000 159,500 2,750,000 -0-

Deferred Tax Liability Calculation

Year Net Book Value Net Tax Basis Difference

Deferred Tax

Liability1997 $2,475,000 $2,200,000 $275,000 $110,000

1998 1,925,000 1,320,000 605,000 242,0001999 1,375,000 792,000 583,000 233,2002000 825,000 475,750 349,250 139,7002001 275,000 159,500 115,500 46,2002002 -0- -0- -0- -0-

Income Tax Payments


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Year

Profit Before

Depreciation Depreciation Taxable Income Tax Payment1997 $1,500,000 $550,000 $ 950,000 $380,0001998 1,500,000 880,000 620,000 248,0001999 1,500,000 528,000 972,000 388,8002000 1,500,000 316,250 1,183,750 473,500

2001 1,500,000 316,250 1,183,750 473,5002002 1,500,000 159,500 1,340,500 536,200

Income Tax Provisions

Year

Profit before

Depreciation Depreciation Pretax Income Tax Provision1997 $1,500,000 $275,000 $1,225,000 $490,0001998 1,500,000 550,000 950,000 380,0001999 1,500,000 550,000 950,000 380,0002000 1,500,000 550,000 950,000 380,0002001 1,500,000 550,000 950,000 380,0002002 1,500,000 275,000 1,225,000 490,000

Tax Provision Presentation

Current

Tax Expense

Deferred

Tax Expense

Total Tax

Provision1997 $380,000 $110,000 $490,0001998 248,000 132,000 380,0001999 388,800 (8,800) 380,0002000 473,500 (93,500) 380,0002001 473,500 (93,500) 380,0002002 536,200 (46,200) 490,000

In 1999 the deferred tax liability account reverses.

A T-account tracking of the 1997 - 2002 tax payments, tax provision and deferred tax liability balancescan be constructed from the above schedules. Tax payments reduce cash. The deferred tax portion of thetotal tax provision is initially a credit to the deferred tax liability account (1997 - 98) and thereafter a debitentry.

Problem 10-5

1. APB Opinion No. 30 requires that in order to qualify as an extraordinary item, an event must satisfytwo criteria:

1. The event must be unusual; it should be highly abnormal and unrelated to, or only incidentallyrelated to, the ordinary activities of the entity.2. The event must occur infrequently; it should be of a type that would not reasonably be expected

to recur in the foreseeable future.

Item 5 (loss of $300,000 due to explosion caused by disgruntled ex-husband of an employee) meetsthe two extraordinary-item criteria.

Item 1 is explicitly excluded byAPB No. 30 as an extraordinary item.


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Item 2 is not an extraordinary item. Hurricanes are not an infrequent event in Louisiana.

Item 3 may be considered an extraordinary item if floods in northern New Mexico occurinfrequently.

Item 4 is not an extraordinary item. Selling segments of a business is a frequent business activity.

2. Income beforeextraordinary item ............

$XXX,XXX

Extraordinary item, netof applicable incometaxes ($90,000) .................

210,000Net income $XXX,XXX

Problem 10-6

a. and b. 1. dr. Inventory ......................................... 57,600cr. Note Payable ................................. 57,600

2. dr. Note Receivable .............................. 2,700cr. Sales .............................................. 2,700

3. dr. Accounts Receivable ....................... 720,000cr. Sales .............................................. 720,000

4. dr. Inventory ......................................... 119,600cr. Account Payable ........................... 119,600

c. 1. Note Payable (year end) ....................... $ 60,000Note Payable (transaction date) ............ 57,600

Exchange loss ................................... $ 2,400

2. Note receivable (year end) .................... $ 3,000Note receivable (transaction date) ........ 2,700

Exchange gain .................................. $ 300

3. Account receivable (year end) .............. $692,308Account receivable (transaction date) .. 720,000

Exchange loss ................................... $ 27,692

4. No exchange gain or loss. Exchange rate unchanged.

CHAPTER 11THE STATEMENT OF CASH FLOWS

Problems

Problem 11-1

2003 sales ............................................................................ $8,743,000Less: Change in accounts receivable .................................. (70,000)


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Cash generated from sales during 2003 .............................. $8,673,000

Problem 11-2

a. Issuance of a 12-month note in return for $2 million cash is a financing source of cash. Use of $2million cash to purchase equipment is an investment use of cash.

b. Cash proceeds from the issuance of common stock is a financing source of cash. The use of cash toretire mortgage bonds is a financing use of cash.

c. No cash effect.d. No cash effect.e. Cash proceeds from the sale of machinery is an investment source of cash.

The above responses assume the direct method is used to present its cash flow of statement.

Problem 11-3

Kidsn Caboodle

Statement of Cash FlowsCash received from customers ................................... $155,000Cash used in operations ............................................. (146,900)

Cash from operations .............................................. $8,100

Equipment .................................................................. (10,500)Cash used for investments ...................................... (10,500)

Loan ........................................................................... 21,000Cash from financing ............................................... 21,000

Increase in cash ....................................................... $ 18,600

Problem 11-4

Net loss ...................................................................... $(11,000)Depreciation .............................................................. 26,400

15,400Accounts receivable (reduced) .................................. 17,600Accounts payable (increased) ................................... 8,800Accrued salaries (increased) ..................................... 3,300Other accruals (increased) ......................................... 2,200

Cash flow from operations ........................................ 47,300

Investments ............................................................... 0

Long-term debt (reduced) ......................................... (29,700)

Change in cash ....................................................... 17,600Beginning cash ....................................................... 4,400Ending cash ............................................................ $22,000

Problem 11-5

Operating ActivitiesCash received from customers ............................... $62,100Interest received ..................................................... 345Operating cash payments ....................................... (54,165)


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Interest payment ..................................................... (1,035)Net cash provided by operations ............................ 7,245

Investing ActivitiesSale of old machine ............................................... 3,105Down payment on new truck ................................. (3,450)

Net cash used in investing activities ...................... (345)

Financing ActivitiesPayment of debt ..................................................... (3,450)Net cash used in financing activities ...................... (3,450)

Increase in cash ...................................................... 3,450Beginning cash ....................................................... 3,450Ending cash ............................................................ $ 6,900

CHAPTER 13FINANCIAL STATEMENT ANALYSIS

Problems

Problem 13-1

a. Profit Marginspercent)(5.05

1,080

54

SalesM

incomeNetM

percent)(1001.1,215

122

SalesN

incomeNetN

N has the higher profit margin.

b. Investment Turnover6x

180

1,080

InvestmentM

alesSM

3x405

1,215

nvestmentIN

alesSN

M has the higher investment turnover.

c. Return on InvestmentM Net income M-Sales

.05 x 6 .30 (30 percent)M Sales M-Investment

N Net income N Sales.10 x 3 .30 (30 percent)

N Sales N Investment


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Both firms have similar returns on investments. Based on this investment criterion, the investmentsare equally attractive.

Problem 13-2

Since the division has no control over the financing of its assets employed in its operation, the mostappropriate measure of return on investment to use to judge its performance is

assetstotalAverage

expenseinterestexcludingincomeNet

2$525,000)/($400,000

.7)x($4,200$54,000

500,462$

940,56$

= .123 (12.3 percent).

Problem 13-3

Current Year

)365/408,138,83($

$5,479,296cashDays'

776,227$

296,479,5$

= 24 daysPreceeding Year

)365/943,748,99($

$6,123,704cashDays'

$6,123,704

$273,285

= 22.4 days

The new controller holds more cash relative to the companys cash expenses than did the oldcontroller. The higher level may be safer (i.e. less chance of not meeting payments when due), butwhat is its cost? If the cash balance is excessive, the excess is a low-return use of cash compared toinvesting it in higher return assets.

Problem 13-4

Current Year

)365/085,035,13($

$1,392,790daysreceivableAccounts


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713,35$

790,392,1$

= 39 days

Previous Year

)365/327,597,11($

$1,207,393daysreceivableAccounts

774,31$

3930,207,1$

= 38 days

The new policy has not changed the payment practices of customers in any material way.

Problem 13-5

2

$62,880)($58,160inventoryAverage

= $60,520

)365/000,300($

520,60$inventoryDays'

822$

520,60$

= 74 days

520,60$000,300$turnoverInventory

= 5 times

Ms. Whitneys utilization of her investment in inventory is lower than for similar companies.

Problem 13-6

shares)0000/2,000,0($20,000,0

28$ratioingsPrice/earn

10$

82$

= 8.2 times

82

74.5$yieldDividend

= .07 (7 percent)


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0$20,000,00

shares)2,000,000x($5.74payoutDividend

000,000,20$

000,480,11$

= 57.4 percent

Problem 13-7

00$250,000,0

00,750,000,01$turnovercapitalWorking

= 7 times

000,000,525$

000,000,750,1$intensityCapital

= 3.33 times

,000$1,500,000

,000$1,750,000rnoverEquity tu

= 1.17 times

Documents

AFM Text Problem Solutions for Class of 2012 (1)