Financial Accounting Tools for Business Decision Making 10th Editionby Paul D Kimmel Solution Manual by TBtutors

Type:

Solution Manual

Resource:

Financial Accounting Tools for Business Decision Making

Edition:

10th Edition

Author(s):

Paul D. Kimmel Jerry J. Weygandt Jill E. Mitchell

Chapter One Challenge Exercise 1 LO: 3 The following items and amounts were taken from Lotte Inc.’s 2022 financial statements. Cash $ 84,700 Retained earnings (1/1/22) 123,192 Cost of goods sold 438,192 Salaries and wages expense 115,131 Prepaid insurance 7,818 Inventory 64,618

Accounts receivable Sales revenue Notes payable Accounts payable Service revenue Interest expense

$ 88,419 584,951 6,499 49,384 4,806 1,882

Instructions (a) Prepare a balance sheet as of December 31, 2022. (b) What percentage of assets were acquired by stockholders’ equity? Challenge Exercise 1 – Solution (a) LOTTE CORPORATION Balance Sheet December 31, 2022 Assets Cash Accounts receivable Inventory Prepaid insurance Total assets

84,700 88,419 64,618 7,818 $ 245,555

Liabilities and Stockholders’ Equity Liabilities Notes payable $ 6,499 Accounts payable 49,384 Total liabilities $ 55,883 Stockholders’ Equity Common stock 31,928*** Retained earnings 157,744* Total stockholders’ equity 189,672** Total liabilities and stockholders’ equity $ 245,555

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Challenge Exercise 1 – Solution (Continued) * $123,192 + ($584,951 + $4,806 - $438,192 - $115,131 - $1,882) = $157,744 ** $245,555 - $55,883 = $189,672 *** $189,672 - $157,744 = $31,928 (b) $189,672 ÷ $245,555 = 77.2% Challenge Exercise 2 LO: 3 This information is for Kidmann Corporation for the year ended December 31, 2022. Cash collected from customers Cash received from issuing common stock Cash paid for new building Cash dividends paid Cash payments to suppliers Cash received from sale of equipment Cash paid for operating expenses Cash paid to retire debt Cash balance 1/1/22

$60,000 40,000 70,000 6,000 15,000 10,000 10,000 14,000 13,000

Instructions Prepare the 2022 statement of cash flows for Kidmann Corporation. Challenge Exercise 2 – Solution (a) KIDMANN CORPORATION Statement of Cash Flows For the Year Ended December 31, 2022 Cash flows from operating activities Cash collected from customers Cash paid to suppliers Cash paid for operating expenses Net cash provided by operating activities Cash flows from investing activities Cash paid for new building Cash received from sale of equipment Net cash used by investing activities Cash flows from financing activities Cash received from issuing common stock Cash paid to retire debt Cash dividends paid Net cash provided by financing activities Net decrease in cash Cash at beginning of period Cash at end of period

$60,000 (15,000) (10,000) $35,000 (70,000) 10,000 (60,000) 40,000 (14,000) (6,000)

Kimmel, Financial Accounting, 10/e, Challenge Exercise Solutions

20,000 (5,000) 13,000 $ 8,000

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Chapter Two Challenge Exercise 1 LO: 1, 2 These items were taken from the financial statements of Bush Company at December 31, 2022: Buildings Accounts receivable Prepaid insurance Cash Equipment Land Insurance expense Depreciation expense Interest expense

$105,800 15,600 11,800 82,720 61,000 700 4,900

Common stock (20,000 shares) $60,000 Retained earnings (1/1/22) 40,000 3,200 Accumulated depreciation-buildings 45,800 Accounts payable 8,500 Notes payable 93,600 Accumulated depreciation-equipment 18,720 Interest payable 3,600 Service revenue 17,700 2,200

Instructions (a) Prepare a classified balance sheet. Assume that $16,300 of the note payable will be paid in 2022. (b) Compute the following: (1) working capital, (2) current ratio, (3) debt to assets ratio, and (4) earnings per share.

Kimmel, Financial Accounting, 10/e, Challenge Exercise Solutions

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Challenge Exercise 1 – Solution (a) BUSH COMPANY Balance Sheet December 31, 2022 Assets Current assets Cash ..................................................... Accounts receivable ........................... Prepaid insurance ............................... Total current assets .................................... Property, plant, and equipment Land ...................................................... Buildings .............................................. Less: Accumulated depreciation— buildings ................................... Equipment ............................................ Less: Accumulated depreciation— equipment ................................ Total assets ..................................

$11,800 15,600 3,200 $ 30,600 61,000 $105,800 45,800 60,000 82,720 18,720 64,000

185,000 $215,600

Liabilities and Stockholders’ Equity Current liabilities Accounts payable ............................... Current maturity of note payable ........ Interest payable ................................... Total current liabilities ................ Long-term liabilities Note payable ($93,600 – $16,300) ....... Total liabilities .............................. Stockholders’ equity Common stock .................................... Retained earnings ($40,000 + $9,900*) ............................ Total stockholders’ equity .......... Total liabilities and stockholders’ equity ............................................

$ 8,500 16,300 3,600 $ 28,400 77,300 105,700 60,000 49,900 109,900 $215,600

* Net income = $17,700 - $700 - $4,900 - $2,200 = $9,900

(b) (1) Working capital: $30,600 - $28,400 = $2,200 (2) Current ratio: $30,600 ÷ $28,400 = 1.08 : 1 (3) Debt to assets ratio: $105,700 ÷ $215,600 = 49% (4) Earnings per share: $9,900 ÷ 20,000 shares = $0.495 per share

Kimmel, Financial Accounting, 10/e, Challenge Exercise Solutions

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Challenge Exercise 2 LO: 3 Mendez Company had three major business transactions during 2022. (a) Security investments with a market value of $10,000 were reported in the financial statements at their original cost $9,300. (b) The death of the company’s Chief Executive Officer was reported as a $1,000,000 loss in the company’s income statement. (c) The annual report did not include any notes to the financial statements. Instructions In each situation, identify the assumption or principle that has been violated, if any, and discuss what the company should have done.

Challenge Exercise 2 – Solution (a) This is a violation of the fair value principle. Security investments should be reported at their fair market value in the financial statements. (b) This is a violation of the monetary unit assumption. Only those transactions that can be measured in dollars and cents are recorded and reported in the financial statements. The death of the CEO should be reported in a news release and possibly in the management discussion and analysis section of the annual report. (c) This is a violation of the full disclosure principle. All information capable of making a difference in financial statement users’ decision-making should be disclosed in the financial statements. The notes to the financial statements are an integral part of the financial statements, and should be included.

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Chapter Three Challenge Exercise 1 LO: 3 Presented below is information related to Shawshank Real Estate Agency. Oct. 1 Pete Shawshank begins business as a real estate agent with a cash investment of $25,000 in exchange for common stock. 2 Hires an administrative assistant. 3 Purchases office furniture for $2,900, by paying $700 cash with the balance on account. 6 Sells a house and lot for N. Kidman, earning a fee of $3,600, with $600 collected in cash and the balance billed to N. Kidman. 27 Pays $900 on the balance related to the transaction of October 3. 30 Pays the administrative assistant $2,300 in salary for October. 31 Collects $1,200 of the balance owed by N. Kidman. Instructions: (a) Journalize the transactions. (You may omit explanations.) (b) What balance would Shawshank Real Estate Agency report for Accounts Payable in its October 31 financial statements? In which category of which financial statements would it be found? (c) What balance would Shawshank Real Estate Agency report for Accounts Receivable in its October 31 financial statements? In which category of which financial statements would it be found?

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Challenge Exercise 1 – Solution 1. Oct. 1

Cash

25,000 Common Stock

25,000

No entry, not a transaction

Equipment Cash Accounts Payable

2,900

Cash Accounts Receivable Service Revenue

600 3,000

Accounts Payable Cash

900

Salaries and Wages Expense Cash

2,300

Cash

1,200

Accounts Receivable

700 2,200

3,600

900

2,300

1,200

2. The October 31 balance of Accounts Payable is $1,300 ($2,200 - $900), and would be reported in the current liabilities section of the balance sheet. 3. The October 31 balance of Accounts Receivable is $1,800 ($3,000 - $1,200), and would be reported in the current assets section of the balance sheet.

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Challenge Exercise 2 LO: 5 The accounts in the ledger of Sun Delivery Service contain the following balances on July 31, 2022. Accounts Receivable Accounts Payable Cash Common Stock Dividends Equipment Gasoline and Oil Expense Insurance Expense Maintenance and Repair Expense Notes Payable

$ 8,000 Prepaid Insurance $ 2,000 7,900 Retained Earnings 5,000 ? Service Revenue 11,000 42,000 Salaries and Wages Expense 900 Salaries and Wages Payable 1,000 50,000 Supplies 3,000 800 Unearned Service Revenue 2,500 600 1,100 19,000

Instructions: Prepare a trial balance with the accounts arranged as illustrated in the chapter and fill in the missing amounts for Cash and Salaries Expense. Assume net income for the period is $3,500.

Kimmel, Financial Accounting, 10/e, Challenge Exercise Solutions

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Challenge Exercise 1 – Solution A. 1. Mar. 31 Depreciation Expense ($600 x 3) 1,800 Accumulated Depreciation—Equipment 2.

Unearned Rent Revenue Rent Revenue ($11,100 x 2/3)

7,400 7,400

Interest Expense ($25,000 x 12% x 3/12) Interest Payable Supplies Expense Supplies ($4,500 – $800) Insurance Expense ($5,400 x 3/24) Prepaid Insurance

1,800

750 750 3,700 3,700 675 675

B. Prepaid Insurance has a balance of $4,725 ($5,400 - $675) and is reported in the balance sheet. Unearned Rent Revenue has a balance of $3,700 ($11,100 - $7,400) and is reported in the balance sheet. Rent Revenue has a balance of $97,400 ($90,000 + $7,400) and is reported in the income statement.

Kimmel, Financial Accounting, 10/e, Challenge Exercise Solutions

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Challenge Exercise 2 LO: 1, 2, 3, 4 The income statement of Annette Co. for the month of July, 2022 shows net income of $3,200 based on Service Revenue $7,700, Salaries and Wages Expense $2,600, Supplies Expense $1,400, and Utilities Expense $500. In reviewing the statement, you discover the following. 1. Insurance expired during July of $500 was omitted. 2. Supplies expense includes $300 of supplies that are still on hand at July 31. 3. Depreciation on equipment of $250 was omitted. 4. Accrued but unpaid salaries and wages at July 31 of $400 were not included. 5. Services provided but unrecorded totaled $700. Instructions: A. Prepare a correct income statement for July 2022. B. What effect do the corrections have on the amount reported as total assets on the balance sheet? C. What effect do the corrections have on the amount reported as total liabilities on the balance sheet?

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(a) ANNETTE CO. Income Statement For the Month Ended July 31, 2022 Revenues Service revenue ($7,700 + $700) ..................................................... Expenses Salaries and wages expense ($2,600 + $400) ................................. Supplies expense ($1,400 – $300) ................................................... Utilities expense ............................................................................... Insurance expense........................................................................... Depreciation expense ...................................................................... Total expenses ....................................................................... Net income ...............................................................................................

$8,400 $3,000 1,100 500 500 250 5,350 $3,050

(b) Decrease in Prepaid Insurance Increase in Supplies Decrease in Equipment due to depreciation Increase in Accounts Receivable Increase in Assets (c) Increase in Salaries and Wages Payable

$ (500) 300 (250) 700 $ 250

$ 400

Note to instructor: Net income decreased by $150, from $3,200 to $3,050. This would decrease stockholders’ equity. You can verify your computations with the accounting equation: Assets + $250

= =

Liabilities +400

Stockholders’ Equity + -$150

Kimmel, Financial Accounting, 10/e, Challenge Exercise Solutions

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Chapter Five Challenge Exercise 1 LO: 2 Information related to Pagnucci Co. is presented below. 1. On April 5, purchased merchandise from Mockingbird Company for $20,000 terms 2/10, net/30, FOB shipping point. 2. On April 6 paid freight costs of $500 on merchandise purchased from Mockingbird. 3. On April 7, purchased equipment on account for $29,000. 4. On April 8, returned damaged merchandise to Mockingbird Company and was granted a $3,000 credit for returned merchandise. 5. On April 15 paid the amount due to Mockingbird Company in full. Instructions: (a) Prepare the journal entries to record these transactions on the books of Pagnucci Co. under a perpetual inventory system. (b) On April 20, Pagnucci sold 60% of the goods purchased from Mockingbird. What amount would they record as cost of goods sold? (c) How would the April 6 entry be different if the $500 was paid to ship goods to a customer (rather than for shipping costs for goods purchased)? (d) Assume that Pagnucci Co. paid the balance due to Mockingbird Company on May 4 instead of April 15. Prepare the journal entry to record this payment. Challenge Exercise 1 – Solution a)

(1)

(2)

(3)

(4)

(5)

April

Inventory ........................................................... Accounts Payable ....................................

20,000

Inventory ........................................................... Cash ........................................................

500

Equipment ......................................................... Accounts Payable ....................................

29,000

Accounts Payable .............................................. Inventory ..................................................

3,000

Accounts Payable .............................................. ($20,000 – $3,000) Inventory .................................................. [($20,000 – $3,000) x 2%] Cash ($17,000 – $340) ............................

17,000

Kimmel, Financial Accounting, 10/e, Challenge Exercise Solutions

20,000

500

29,000

3,000

340 16,660

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Challenge Exercise 1 – Solution (Continued) b) The cost of the goods acquired is $17,160 ($20,000 + $500 - $3,000 - $340). The cost of goods sold would be $10,296 (60% x $17,160). c) If the $500 was paid on April 6 to ship goods to a customer, the account debited in the entry would be Freight-Out or Delivery Expense instead of Inventory. When freight is paid to ship goods to a customer, it is incurred in order to earn revenue in the current period. Therefore, it must be recognized as an expense (Freight-Out or Delivery Expense). On the other hand, when freight is paid to acquire goods, the freight cost should not be expensed until the related goods are sold. Therefore, the freight is debited to Inventory and expensed as part of Cost of Goods Sold when the goods are sold. d)

May 4

Accounts Payable ......................................................... Cash ...................................................................

17,000

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17,000

Challenge Exercise 2 LO: 2, 3, 4 On September 1, Rhea Office Supply had an inventory of 30 calculators at a cost of $20 each. The company uses a perpetual inventory system. During September, the following transactions occurred. Sept.

6 Purchased 70 calculators at $22 each from Danny Co. for cash. 9 Paid freight of $70 on calculators purchased from Danny Co. 10 Returned 2 calculators to Danny Co. for $46 credit (including freight) because they did not meet specifications. 12 Sold 33 calculators (30 costing $20, and 3 costing $23 including freight) for $33 each to Great Big Book Store, terms n/30. 14 Granted credit of $33 to Great Big Book Store for the return of one calculator that was not ordered (Cost $23). 20 Sold 40 calculators costing $23 for $33 each to Bush’s Card Shop, terms n/30.

Instructions: a) Journalize the September transactions. b) What amount would Rhea report as net sales in the September income statement? c) What amount would Rhea report as gross profit in the September income statement? Challenge Exercise 2 – Solution a) Sept.

Inventory (70 x $22) ............................................................. Cash ...........................................................................

1,540

Inventory .............................................................................. Cash ...........................................................................

Accounts Payable ................................................................ Inventory ....................................................................

Accounts Receivable (33 x $33) ........................................... Sales Revenue ........................................................... Cost of Goods Sold [(30 x $20) + (3 x $23)] ......................... Inventory ....................................................................

1,089

Sales Returns and Allowances ............................................. Accounts Receivable .................................................. Inventory .............................................................................. Cost of Goods Sold ....................................................

Kimmel, Financial Accounting, 10/e, Challenge Exercise Solutions

1,540

1,089 669 669

33 23 23

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Challenge Exercise 2 – Solution (Continued) 20

Accounts Receivable (40 x $33) ........................................... Sales .......................................................................... Cost of Goods Sold (40 x $23) ............................................. Inventory ....................................................................

1,320 1,320 920 920

b) ($1,089 + $1,320) - $33 = $2,376 c) $2,376 – ($669 + $920 - 23) = $810

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Challenge Exercise 3 LO: 2, 3 Presented below are transactions related to Stealer’s Company. 1. On December 3, Stealer’s Company sold $400,000 of merchandise to Sharif Co., terms 2/10, n/30, FOB shipping point. The cost of the merchandise sold was $240,000. 2. On December 8, Sharif Co. was granted an allowance of $19,000 for merchandise purchased on December. 3. On December 13, Stealer’s Company received the balance due from Sharif Co. Instructions: (a) Prepare the journal entries to record these transactions on the books of Stealer’s Company using a perpetual inventory system. (b) Assume that Stealer’s Company received the balance due from Sharif Co. on January 2 of the following year instead of December 13. Prepare the journal entry to record the receipt of payment on January 2. (c) 1) What is the difference between a Sales Return and a Sales Allowance? 2) How would the journal entry on December 8 be different if it was a Sales Return instead of a Sales Allowance? Challenge Exercise 3 – Solution (a)

Accounts Receivable ........................................ Sales Revenue ....................................... Cost of Goods Sold .......................................... Inventory .................................................

400,000

Sales Returns and Allowances ......................... Accounts Receivable ..............................

19,000

Cash ($381,000 – $7,620) ................................ Sales Discounts ................................................ [($400,000 – $19,000) x 2%] Accounts Receivable .............................. ($400,000 – $19,000) Cash…............................................................................................. Accounts Receivable ................................................................ ($400,000 – $19,000)

373,380 7,620

(b)

Dec.

Kimmel, Financial Accounting, 10/e, Challenge Exercise Solutions

400,000 240,000 240,000

19,000

381,000 381,000 381,000

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In a sales return, the customer returns merchandise to the seller and receives either a credit on account (if originally a credit sale) or a cash refund (if originally a cash sale). In a sales allowance, the customer keeps the merchandise, but still receives either a credit on account (if originally a credit sale) or a cash refund (if originally a cash sale). The entry prepared on December 8 in part (a) would still be prepared, but there would be an additional entry to debit Inventory and credit Cost of Goods Sold.

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Challenge Exercise 4 LO: 4 Presented below is financial information for two different companies. Viet Namese Company Company Sales revenue $180,000 $ (e) Sales discounts 2,000 2,500 Sales returns (a) 5,000 Net sales 171,000 200,000 Cost of goods sold 103,000 (f) Gross profit (b) 80,000 Operating expenses 45,000 (g) Income from operations (c) 51,000 Other revenues (expenses) 4,000 (h) Net income (d) 49,000 Instructions: (a) Determine the missing amounts above. (b) Determine the gross profit rates. (Round to one decimal place.) Challenge Exercise 4– Solution a)

(*missing amount) a.

Sales revenue ....................................................................................... Sales discounts..................................................................................... *Sales returns ......................................................................................... Net sales ...............................................................................................

$ 180,000) (2,000) (7,000) $ 171,000)

Net sales ............................................................................................... Cost of goods sold................................................................................. *Gross profit............................................................................................

$ 171,000) (103,000) $ 68,000)

Gross profit............................................................................................ Operating expenses .............................................................................. *Income from operations .........................................................................

$ 68,000) (45,000) $ 23,000)

Income from operations ......................................................................... Other revenues ..................................................................................... *Net income ............................................................................................

$ 23,000) 4,000) $ 27,000)

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Challenge Exercise 4 – Solution (Continued) e.

*Sales revenue ....................................................................................... Sales discounts..................................................................................... Sales returns ........................................................................................ Net sales ...............................................................................................

$207,500 (2,500) (5,000) $ 200,000

Net sales ............................................................................................... *Cost of goods sold................................................................................. Gross profit............................................................................................

$200,000) 120,000) $ 80,000)

Gross profit............................................................................................ *Operating expenses .............................................................................. Income from operations .........................................................................

$ 80,000) 29,000) $ 51,000)

Income from operations ......................................................................... *Other expenses ..................................................................................... Net income ...........................................................................................

$ 51,000) (2,000)) $ 49,000)

Commented [D1]: Use parens to be consistent with format above. Commented [AS2R1]: agree

)

(b)

Viet Company Gross profit ÷ Net sales = $68,000 ÷ $171,000 = 39.8% Namese Company Gross profit ÷ Net sales = $80,000 ÷ $200,000 = 40.0%

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Challenge Exercise 5 LO: 5, 6 The trial balance of Alexei Company at the end of its fiscal year, August 31, 2022, includes these accounts: Inventory $20,000; Purchases $169,000; Sales Revenue $220,000; Freight-In $5,000; Sales Discounts $3,200; Sales Returns and Allowances $3,800; Freight-Out $1,500; Purchase Discounts $2,900 and Purchase Returns and Allowances $2,400. The ending Inventory is $27,000. Instructions: (a) Prepare a cost of goods sold section for the year ending August 31 (periodic inventory). (b) Compute Alexei’s gross profit and gross profit rate. Challenge Exercise 5– Solution (a) Inventory, September 1, 2022 ............................................................ Purchases………… ................................................................................. Less: Purchase returns and allowances ................................................. Purchase discounts ...................................................................... Net Purchases ......................................................................................... Add: Freight-in ........................................................................................ Cost of goods purchased ......................................................................... Cost of goods available for sale ............................................................... Less: Inventory, August 31, 2022 ............................................................ Cost of goods sold .........................................................................

$ 20,000 $169,000 2,400 2,900 163,700 5,000 168,700 188,700 27,000 $161,700

(b) Net Sales – Cost of Goods Sold = Gross Profit ($220,000 - $3,200 - $3,800) - $161,700 = $51,300 Gross Profit / Net Sales = Gross Profit Rate $51,300 / ($220,000 - $3,200 - $3,800) = 24.1%

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Challenge Exercise 6 LO: 3, *7 This information relates to Borkowski Co. 1. On April 5 purchased merchandise from D. Munez Company for $30,000, terms 2/10, net/30, FOB shipping point. 2. On April 6 paid freight costs of $1,200 on merchandise purchased from D. Munez Company. 3. On April 7 purchased equipment on account for $44,000. 4. On April 8 returned some of April 5 merchandise to D. Munez Company which cost $3,200. 5. On April 15 paid the amount due to D. Munez Company in full. Instructions: (a) Prepare the journal entries to record these transactions on the books of Borkowski Co. using a periodic inventory system. (b) Assume that Borkowski Co. paid the balance due to D. Munez Company on May 4 instead of April 15. Prepare the journal entry to record this payment. (c) Assume Borkowski sold some of the goods purchased to a customer on account. How would the entries be different if Borkowski used the periodic method or the perpetual method?

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Challenge Exercise 6– Solution (a)

(b)

(c)

April

May

Purchases ....................................................... Accounts Payable .....................................

30,000

Freight-In ......................................................... Cash .........................................................

1,200

Equipment ....................................................... Accounts Payable .....................................

44,000

Accounts Payable ............................................ Purchase Returns and Allowances............................................

3,200

Accounts Payable ............................................ ($30,000 – $3,200) Purchase Discounts.................................. [($20,000 – $3,200) x 2%)] Cash ($26,800 – $536) .............................

26,800

Accounts Payable ............................................ ($30,000 – $3,200) Cash ........................................................

26,800

20,000

1,200

44,000

3,200

536 26,264

26,800

When using the periodic method, the sale of goods to a customer requires only one entry, to record the actual sale. Accounts Receivable is debited and Sales Revenue is credited for the selling price. When using the perpetual method, the same entry discussed for the periodic method is prepared with the same accounts and amount. In addition, another entry is prepared to debit Cost of Goods Sold and credit Inventory for the cost.

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Chapter Six Challenge Exercise 1 LO: 1 Premier Bank and Trust is considering giving Bean Company a loan. Before doing so, they decide that further discussions with Bean’s accountant may be desirable. One area of particular concern is the inventory account, which has a year-end balance of $326,000. Discussions with the accountant reveal the following. 1. Bean received goods costing $49,000 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was supposed to arrive December 31. This purchase was included in the ending inventory of $326,000. 2. Bean sold goods costing $41,000 to Cusa Company, FOB shipping point, on December 28 for $65,000. The goods are not expected to arrive at Cusa until January 12. The goods were not included in the physical inventory because they were not in the warehouse. 3. The physical count of the inventory did not include goods costing $89,000 that were shipped to Bean FOB destination on December 27 and were still in transit at year-end. 4. Bean received goods costing $27,000 on January 2. The goods were shipped FOB shipping point on December 26 by Noble Co. The goods were not included in the physical count. 5. Bean sold, for $55,000 goods costing $38,000 to Limerick Co., FOB destination, on December 30. The goods were received at Limerick on January 8. They were not included in Bean’s physical inventory. Instructions: (a) Determine the correct inventory amount on December 31. (b) What correcting entry would have to be made for item 4?

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Challenge Exercise 1 – Solution (a) Ending inventory—physical count ...................................................................... 1. The goods did not arrive prior to year-end. The goods, therefore, cannot be included in the inventory ........................................... 2. No effect—title passes to purchaser upon shipment when terms are FOB shipping point .......................................................... 3. No effect—title does not transfer to Bean until goods are received ................................................................................... 4. Add to inventory: Title passed to Bean when goods were shipped ............................................................................................ 5. Add to inventory: Title remains with Bean until purchaser receives goods ......................................................................... Correct inventory .................................................................................................... (b)

$326,000 (49,000) 0 0 27,000 38,000 $342,000

Inventory…………………………………………………………………………………27,000 Accounts Payable……………………………………………………………………..

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27,000

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Challenge Exercise 2 LO: 2 Flying Tomato sells a snowboard, WhiteOut, that is popular with snowboard enthusiasts. Presented below is information relating to Flying Tomato’s purchases of WhiteOut snowboards during September. During the same month, 121 WhiteOut snowboards were sold at $170 each. Flying Tomato uses a periodic inventory system. Date Explanation Sept. 1 Inventory Sept. 12 Purchases Sept. 19 Purchases Sept. 26 Purchases Totals

Units Unit Cost 25 $ 100 45 106 24 110 50 112 144

Total Cost $ 2,500 4,770 2,640 5,600 $ 15,510

Instructions: (a) Compute the ending inventory at September 30 and cost of goods sold using the FIFO and LIFO methods. Prove the amount allocated to cost of goods sold under each method. (b) For both FIFO and LIFO, calculate the sum of ending inventory and cost of goods sold. What do you notice about the answers you found for each method? (c) What is gross profit under each method? (d) Which method results in a larger amount reported for assets on the balance sheet? Which results in a larger amount reported for stockholders’ equity on the balance sheet?

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Challenge Exercise 2 – Solution FIFO Beginning inventory (25 x $100) ........................................................................ Purchases Sept. 12 (45 x $106) ................................................................................ Sept. 19 (24 x $110) ................................................................................ Sept. 26 (50 x $112) ................................................................................ Cost of goods available for sale ......................................................................... Less: Ending inventory (23 x $112)................................................................... Cost of goods sold .............................................................................................

$ 2,500 $4,770 2,640 5,600

13,010 15,510 2,576 $12,934

Proof Date

Units

Unit Cost

Total Cost

9/1 9/12 9/19 9/26

25 45 24 27 121

$ 100 106 110 112

$ 2,500 4,770 2,640 3,024 $12,934

LIFO Cost of goods available for sale........................................................................................... Less: Ending inventory (23 x $100) .................................................................................... Cost of goods sold...............................................................................................................

$15,510 2,300 $13,210

Proof Date

Units

Unit Cost

Total Cost

9/26 9/19 9/12 9/1

50 24 45 2 121

$112 110 106 100

$ 5,600 2,640 4,770 200 $13,210

(b) FIFO $2,576 (ending inventory) + $12,934 (COGS) = $15,510 } LIFO $2,300 (ending inventory) + $13,210 (COGS) = $15,510 Cost of goods available for sale Under both methods, the sum of the ending inventory and cost of goods sold equals the same amount, $15,510, which is the cost of goods available for sale.

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Challenge Exercise 2 – Solution (Continued) (c) FIFO: Sales $20,570 (121 x $170) less Cost of goods sold $12,934 = Gross profit $7,636 LIFO: Sales $20,570 (121 x $170) less Cost of goods sold $13,210 = Gross profit $7,360 (d) FIFO reports a larger amount for ending inventory ($2,576 vs. $2,300), so therefore it results in a larger amount reported for assets on the balance sheet. Since FIFO reports a larger gross profit, it will result in a larger amount for retained earnings and stockholders’ equity.

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Challenge Exercise 3 LO: 3 Naughty Dog Disc Golf Shop uses the lower-of-cost-or-net-realizable-value for its inventory. The following data are available at December 31.

Item Baskets: Innova Discraft Disc bags: Lightning Wham-O

Units

Unit Cost

10 20

$190 175

15 14

20 30

NRV $200 160

16 28

Instructions: (a) Determine the amount of the ending inventory by applying the lower-of-cost-or-net-realizable-value. (b) When determining “lower of cost or- net-realizable-value”, what is “net realizable value”? Why is net realizable value defined in this way?

Challenge Exercise 3 – Solution a) Cost

Market

Lowerof-Costor- NRV

Baskets Innova

$1,900

$2,000

$1,900

Discraft Total

3,500 5,400

3,200 5,200

3,200

Disc bags Lightning Wham-O Total Total inventory

300 420 720 $6,120

240 392 632 $5,832

240 392 $5,732

b) Under the LCNRV, net realizable value is defined as estimated selling price in the normal course of business, less estimated costs to complete and sell. When the value of inventory is less than its cost,

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companies must “write down” the inventory to its net realizable value. Net realizable value refers to the net amount a copany expects to realize (receive) fro the sale of inventory. Challenge Exercise 4 LO: 2 Scaggs Hardware reported cost of goods sold as follows. 2021 2022 Beginning inventory $ 30,000 $ 40,000 Cost of goods purchased 170,000 195,000 Cost of goods available for sale 200,000 235,000 Ending inventory 40,000 45,000 Cost of goods sold $160,000 $190,000 Scaggs made two errors: (1) 2021 ending inventory was overstated $4,000, and (2) 2022 ending inventory was understated $7,000. Instructions: Compute the correct cost of goods sold for each year.

Challenge Exercise 4 – Solution (a) Beginning inventory .................................................................... Cost of goods purchased............................................................ Cost of goods available for sale.................................................. Less: Corrected ending inventory ............................................... Cost of goods sold...................................................................... a

$40,000 – $4,000 = $36,000.

2021 $ 30,000 170,000 200,000 a 36,000 $164,000

2022 $ 36,000 195,000 231,000 b 52,000 $179,000

$45,000 + $7,000 = $52,000.

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Chapter Seven Challenge Exercise 1 LO: 1 Stefan Pagnucci is the owner of Pagnucci’s Pizza. Pagnucci’s is operated strictly on a carry-out basis. Customers pick up their orders at a counter where a clerk exchanges the pizza for cash. While at the counter, the customer can see other employees making the pizzas and the large ovens in which the pizzas are baked. Instructions: (a) Identify the six principles of internal control and give an example of each principle that you might observe when picking up your pizza. (Note: It may not be possible to observe all the principles.) (b) What other internal controls would you recommend for Pagnucci’s Pizza? Challenge Exercise 1 – Solution a) 1.

Establishment of responsibility. The counter clerk is responsible for handling cash. Other employees are responsible for making the pizzas.

Segregation of duties. Employees who make the pizzas do not handle cash.

Documentation procedures. The counter clerk uses your order invoice (ticket) in registering the sale on the cash register. The cash register produces a tape of all sales.

Physical controls. A cash register is used to record the sale.

Independent internal verification. The counter clerk, in handling the pizza, compares the size of the pizza with the size indicated on the order.

Human resource controls. No visible application possible.

1. When ordering the ingredients for pizza and other supplies, one employee should order, a second employee receive, and a third employee approve payment. 2. Record-keeping for assets such as inventory and cash should not be the responsibility of those who have physical custody of those assets. 3. Employees should use a time clock to punch in and out. 4. Cash should be stored in a safe until deposited. 5. Bank reconciliations should be prepared monthly by an independent person.

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Challenge Exercise 2 LO 2, *5 Kris Allen Company established a petty cash fund on May 1, cashing a check for $150. The company reimbursed the fund on June 1 and July 1 with the following results. June 1: Cash in fund $4.75. Receipts: freight-out $31.25; postage expense $39.00; and miscellaneous expense $62.00. July 1: Cash in fund $3.25. Receipts: freight-out $31.00; entertainment expense $71.00; and miscellaneous expense $44.75. On July 10, Kris Allen increased the fund from $150 to $200. Instructions: (a) Prepare journal entries for Kris Allen Company for May 1, June 1, July 1, and July 10. (b) What internal control features are present in a petty cash fund? Challenge Exercise 2 – Solution a) May

June

July

Petty Cash ........................................................................... Cash........................................................................

150.00

Freight-out ........................................................................... Postage Expense................................................................. Miscellaneous Expense ....................................................... Cash Over and Short ........................................................... Cash ..........................................................................

31.25 39.00 62.00 13.00

Freight-out ........................................................................... Entertainment Expense........................................................ Miscellaneous Expense ....................................................... Cash ..........................................................................

31.00 71.00 44.75

Petty Cash ........................................................................... Cash ..........................................................................

50.00

150.00

145.25

146.75

50.00

(b) The activities in a petty cash system and the related principles are: (1) Establishing the fund. * Establishment of responsibility for custody of fund. (2) Making payments from the fund. * Documentation procedures because the custodian must use a prenumbered petty cash receipt. (3) Replenishing the fund. * Independent internal verification because the request for replenishment must be approved before the check is written.

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Challenge Exercise 3 LO: 3 The following information pertains to Two Guys Video Company. 1. Cash balance per bank, July 31, $7,363. 2. July bank service charge not recorded by the depositor $22. 3. The bank erroneously charged another company’s $700 check against Two Guys’ account. 4. Cash balance per books, July 31, $8,784. 5. The bank charged Two Guys account $350 for a customer’s NSF check. 6. Deposits in transit, July 31, $2,200. 7. Two Guys recorded a cash receipt from a customer for rent revenue as $32. The bank correctly recorded it at $23. 8. Bank collected $1,266 from a customer’s note receivable for Two Guys in July through electronic funds transfer. The collection has not been recorded by Two Guys. 9. Outstanding checks, July 31, $594. Instructions: (a) Prepare a bank reconciliation for July 31. (b) Journalize the adjusting entries for July 31 on the books of Two Guys Video Company. Challenge Exercise 3 – Solution (a)

TWO GUYS COMPANY Bank Reconciliation July 31 Cash balance per bank statement ................................................................. Add: Deposits in transit ............................................................................... $2,200 Bank error ........................................................................................ 700

$7,363

Less: Outstanding checks ............................................................................. Adjusted cash balance per bank ...................................................................

2,900 10,263 594 $9,669

Cash balance per books ............................................................................... Add: Electric funds transfer received ..................................................................... ..................................................................................................................

$8,784 1,266 $10,050

Less: Bank service charge ............................................................................ NSF check ......................................................................................... Book error .......................................................................................... Adjusted cash balance per books ..................................................................

381 $9,669

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$22 350 9

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Challenge Exercise 3 – Solution (Continued) (b)

July

Cash ....................................................................................... Notes Receivable ............................................................

1,266

Bank Charge Expense............................................................. Cash ..............................................................................

Accounts Receivable ............................................................... Cash ..............................................................................

350

Rent Revenue ......................................................................... Cash ..............................................................................

1,266

350

Challenge Exercise 4

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LO: 4 PorkChop Company has recorded the following items in its financial records. Cash in bank: Checking account Money market fund Payroll account Certificate of deposit (matures in 2 months) Certificate of deposit (matures in 12 months) Cash in plant expansion fund Cash on hand Highly liquid investments Petty cash Receivables from customers Stock investments U.S Treasury bills

$27,000 13,000 3,000 5,000 10,000

$ 58,000 120,000 11,000 30,000 300 99,000 61,000 20,000

The highly liquid investments had maturities of 3 months or less when they were purchased. The stock investments will be sold in the next 6 to 12 months. The plant expansion project will begin in 3 years. Instructions: (a) What amount should PorkChop report as “Cash and cash equivalents” on its balance sheet? (b) Where should the items not included in part (a) be reported on the balance sheet?

Challenge Exercise 4 – Solution (a)

(b)

Cash and cash equivalents should be reported at $109,300. Cash in bank ($58,000 - $10,000) ............................................................... Cash on hand .............................................................................................. Petty cash ................................................................................................... Highly liquid investments ............................................................................. U.S. treasury bills ........................................................................................

$ 48,000 11,000 300 30,000 20,000 $109,300

The certificate of deposit maturing in 12 months should be reported as a current asset separate from “cash and cash equivalents”. “Cash in plant expansion fund” should be reported as part of long-term investments (a noncurrent asset). “Receivables from customers” should be reported as accounts receivable in the current assets. “Stock investments” should also be reported in the current assets.

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Chapter Eight Challenge Exercise 1 LO: 1 Presented below are selected transactions of Heinrich Company. Heinrich sells in large quantities to other companies and also sells its product in a small retail outlet. March

April

1 3 9 15

Sold merchandise on account to Kirk Company for $4,000, terms 2/10, n/30. Kirk Company returned merchandise worth $600 to Heinrich. Heinrich collected the amount due from Kirk Company from the March 1 sale. Heinrich sold merchandise for $8,000 in its retail outlet. The customers used their Heinrich credit card. 31 Heinrich added 1.5% monthly interest to the customers’ credit card balance. 10 Heinrich collected $3,050 from credit card customers.

Instructions: a) Prepare journal entries for the transactions above. Omit cost of goods sold entries. b) What is the balance from Heinrich credit card transactions in Accounts Receivable after the April 10 transaction? Challenge Exercise 1 – Solution a) March

April

Accounts Receivable—Kirk Company ................................ Sales Revenue .........................................................

4,000

Sales Returns and Allowances ........................................... Accounts Receivable—Kirk Company ..........................

600

Cash……. .......................................................................... Sales Discounts ($3,400 x 2%) .......................................... Accounts Receivable—Kirk Company ($4,000 - $600) ...

3,332 68

Accounts Receivable.......................................................... Sales Revenue .........................................................

8,000

Accounts Receivable ($8,000 x 1.5%) ................................ Interest Revenue ......................................................

120

Cash……… ........................................................................ Accounts Receivable ................................................

3,050

4,000

600

3,400

8,000

120

3,050

b) $8,000 + $120 - $3,050 = $5,070.

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Challenge Exercise 2 LO: 2 The ledger of Ruru Company at the end of the current year shows Accounts Receivable $200,000, Sales $1,400,000, and Sales Returns and Allowances $50,000. Instructions: (a) If Ruru uses the direct write-off method to account for uncollectible accounts, journalize the adjusting entry at December 31, assuming Ruru determines that Barking Ghosts Company’s $2,400 balance is uncollectible. (b) If Allowance for Doubtful Accounts has a credit balance of $3,500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be 10% of accounts receivable. (c) If Allowance for Doubtful Accounts has a debit balance of $370 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be 6% of accounts receivable. (d) Why is the allowance method required by GAAP? Challenge Exercise 2 – Solution (a)

(b)

(c)

(d)

Dec.

Bad Debt Expense ............................................. Accounts Receivable—Barking Ghosts .........

2,400

Bad Debt Expense ............................................. Allowance for Doubtful Accounts ................... [($200,000 x 10%) – $3,500]

16,500

Bad Debt Expense ............................................. Allowance for Doubtful Accounts ................... [($200,000 x 6%) + $370]

12,370

2,400

16,500

12,370

The direct write-off method makes no attempt to match bad debt expense to sales revenues or to show the cash realizable value of the receivables in the balance sheet, while the allowance method does both of these.

Challenge Exercise 3 LO: 2 Wilder Company has accounts receivable of $130,000 at March 31. An analysis of the accounts shows the following. Month of Sale March February January Prior to January © 2022 WILEY

Balance, March 31 $80,000 27,600 14,500 7,900 Kimmel, Financial Accounting, 10/e, Challenge Exercise Solutions

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$130,000 Credit terms are 2/10, n/30. At March 31, Allowance for Doubtful Accounts has a credit balance of $1,700 prior to adjustment. The company uses the percentage-of-receivables basis for estimating uncollectible accounts. Wilder estimates that 8% of accounts receivable will become uncollectible. The company is considering using the estimate of bad debts shown below.

Age of Accounts 1–30 days 31–60 days 61–90 days Over 90 days

Estimated Percentage Uncollectible 2.0% 5.0% 30.0% 50.0%

Instructions: (a) Prepare the adjusting entry at March 31 to record bad debt expense, assuming that the 8% estimate is used. (b) Prepare the adjusting entry at March 31 to record bad debt expense, assuming the aging schedule is used. (c) Compare the two approaches used above.

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Challenge Exercise 3 – Solution (a)

Mar.

(b)

Bad Debt Expense ............................................................. Allowance for Doubtful Accounts .............................. (8% x $130,000) – $1,700)

Accounts Receivable 1–30 days 31–60 days 61–90 days Over 90 days

Mar.

8,700 8,700

Amount

Estimated Uncollectible

$80,000 27,600 14,500 7,900

2.0 5.0 30.0 50.0

$ 1,600 1,380 4,350 3,950 $11,280

Bad Debt Expense ............................................................. Allowance for Doubtful Accounts .............................. ($11,280 – $1,700)

9,580 9,580

(c) The two approaches are conceptually the same. In both cases, Wilder estimates the total uncollectibles based on the balance in Accounts Receivable. This amount is compared to the Allowance for Doubtful Accounts existing balance to compute the bad debt expense for the period. The primary difference is that in theory the aging schedule is a more precise computation than a single percentage, and should provide a more accurate amount.

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Challenge Exercise 4 LO: 2 At December 31, 2021, Dallas Company had a balance of $25,000 in the Allowance for Doubtful Accounts. During 2022, Braddock wrote off accounts totaling $22,200. One of those accounts ($3,000) was later collected. At December 31, 2022, an aging schedule indicated that the balance in the Allowance for Doubtful Accounts should be $32,000. Instructions: (a) Prepare journal entries to record the 2022 transactions of Dallas Company. (b) Indicate the effect (increase, decrease, or no effect) that each of the four transactions has on Dallas Company’s assets, liabilities, stockholders’ equity, and net income. Challenge Exercise 4 – Solution (a) 1. Allowance for Doubtful Accounts ............................................................. Accounts Receivable .........................................................................

22,200

2. Accounts Receivable ............................................................................... Allowance for Doubtful Accounts........................................................

3,000

3. Cash ........................................................................................................ Accounts Receivable .........................................................................

3,000

4. Bad Debt Expense ................................................................................... Allowance for Doubtful Accounts........................................................ [$32,000 – ($25,000 – $22,200 + $3,000)]

26,200

(b) Assets Liabilities

Stockholders’ Equity

Net Income

1. NE

2. NE

3. NE

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22,200

3,000

26,200

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Challenge Exercise 5 LO: 3 Ordonez Supply Co. has the following transactions related to notes receivable during the last 2 months of 2022. Nov. 1 Loaned $20,000 cash to Soozie Takham on a 1-year, 10% note. Dec. 11 Sold goods to Joe Trater, Inc., receiving a $9,000, 90-day, 8% note. 16 Received a $6,000, 6-month, 9% note in exchange for Boba Fett’s outstanding accounts receivable. 31 Accrued interest revenue on all notes receivable. Instructions: (a) Journalize the above transactions for Ordonez Supply Co. Omit cost of goods sold. Round interest to the nearest dollar. (b) Record the collection of the Takham note at its maturity in 2023. (c) Assume Takham dishonors its note at its maturity in 2023; Ordonez expects to eventually collect the note. Record the dishonor of the Takham note. (d) Assume Takham dishonors its note at its maturity in 2023; Ordonez does not expect to collect the note. Record the dishonor of the Takham note. Challenge Exercise 5 – Solution (a) Nov.

Dec.

2022 Notes Receivable .................................................................. Cash ............................................................................

20,000

Notes Receivable .................................................................. Sales Revenue ............................................................

9,000

Notes Receivable .................................................................. Accounts Receivable—Fett ..........................................

6,000

Interest Receivable ................................................................ Interest Revenue .........................................................

396

*Calculation of interest revenue: Takham’s note: Trater’s note: Fett’s note: Total accrued interest

20,000

9,000

6,000

396*

$20,000 x 10% x 2/12 = $333 9,000 x 8% x 20/360 = 40 6,000 x 9% x 15/360 = 23 $396

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Challenge Exercise 5 – Solution (Continued)

(b) Nov.

(d) Nov.

2023 Cash...................................................................................... Interest Receivable ...................................................... Interest Revenue ......................................................... Notes Receivable......................................................... *($20,000 x 10% x 10/12) 2023 Accounts Receivable ............................................................. Interest Receivable ...................................................... Interest Revenue ......................................................... Notes Receivable......................................................... *($20,000 x 10% x 10/12)

2023 Allowance for Doubtful Accounts ........................................... Interest Receivable ...................................................... Notes Receivable.........................................................

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22,000 333 1,667* 20,000

20,333 333 20,000

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Chapter Nine Challenge Exercise 1 LO: 1 Fluffer Company incurred the following costs. 1. Sales tax on factory machinery purchased, $7,000. 2. Painting of and lettering on truck immediately upon purchase, $800. 3. Installation and testing of factory machinery, $2,500. 4. Real estate broker’s commission on land purchased $4,500. 5. Insurance premium paid for first year’s insurance on new truck $930. 6. Cost of landscaping on property purchased, $9,200. 7. Cost of paving parking lot for new building, $18,700. 8. Cost of clearing, draining, and filling land, $14,400. 9. Architect’s fees on self-constructed building, $11,000. Instructions: a) Indicate to which account Trudy would debit each of the costs. b) Explain why item 1 is not debited to an expense account. c) Explain why items 7 and 8 are debited to different accounts. Challenge Exercise 1 – Solution a) 1. 2. 3. 4. 5. 6. 7. 8. 9.

Equipment Equipment Equipment Land Prepaid Insurance Land Improvements Land Improvements Land Buildings

b) Sales tax on factory machinery purchased does not help the company earn revenue only in the current year. If it did, debiting an expense account would be appropriate. The sales tax enables the company to acquire machinery, which will help the company earn revenue for a number of years. Therefore, the expense recognition principle requires the company to debit this sales tax to the asset Equipment, and expense it over the years benefitted through depreciation expense. c) The cost of clearing, draining, and filling land is a permanent cost of the land and never has to be repeated. Once it is done it continues to make the land useful as long as it is owned. Depreciation does not apply to land because its usefulness and revenue-producing ability generally remain intact over time. In fact, in many cases, the usefulness of land is greater over time because of the scarcity of good land sites. Thus, land is not a depreciable asset. However, the cost of paving a parking lot for new building is not a permanent cost of the land and will have to be repeated every few years. Land improvements are considered to be depreciable © 2022 WILEY

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Challenge Exercise 1 – Solution (Continued) assets because the usefulness to the company and revenue-producing ability of the asset will decline over the asset’s useful life. The cost of a land improvement must be depreciated over the asset’s useful life. This is the primary difference in items 7 and 8. Item 8 is permanent, and item 7 must be depreciated.

Challenge Exercise 2 LO: 2 Getz Company purchased a new machine on September 1, 2022, at a cost of $120,000.The company estimated that the machine will have a salvage value of $12,000. The machine is expected to be used for 10,000 working hours during its 5-year life. Instructions: Compute the depreciation expense under the following methods for the year indicated. (a) Straight-line for 2022, 2023, and 2024. (b) Units-of-activity for 2022, assuming machine usage was 700 hours. (c) Declining-balance using double the straight-line rate for 2022, 2023, and 2024. (d) Assume the straight-line method is used. What amount of gain or loss would Getz recognize if they sell the asset for $45,000 on 1/1/22? (e) Assume the double-declining balance method is used. What amount of gain or loss would Getz recognize if they sell the asset for $45,000 on 1/1/22?

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Challenge Exercise 2 – Solution (a)

Straight-line method: ($120,000 - $12,000) x 1/5 = $21,600 per year. 2022 depreciation = $21,600 x 4/12 = $7,200. 2023 and 2024 depreciation = $21,600 each year.

(b)

Units-of-activity method: ($120,000 - $12,000) / 10,000 = $10.80 per hour. 2022 depreciation = 700 hours x $10.80 = $7,560.

(c)

Declining-balance method: 2022 depreciation = $120,000 x 40%* x 4/12 = $16,000. Book value January 1, 2023 = $120,000 – $16,000 = $104,000. 2023 depreciation = $104,000 x 40% = $41,600. Book value January 1, 2024 = $120,000 – $57,600** = $62,400. 2024 depreciation = $62,400 x 40% = $24,960. *(1/5 x 2) **($16,000 + $41,600)

(d)

$45,000 – [$120,000 - ($7,200 + $21,600 + $21,600)] = $24,600 loss

(e)

$45,000 – [$120,000 - ($16,000 + $41,600 + $24,960)] = $7,560 gain

Challenge Exercise 3 LO: 2, 5 Paul McCartney, the new controller of Blackbird Company, has reviewed the expected useful lives and salvage values of selected depreciable assets at the beginning of 2025. His findings are as follows. Type of Date Accumulated Useful life (yrs.) Salvage Value Asset Acquired Cost Depr. 1/1/22 Old Proposed Old Proposed Building 1/1/16 $1,200,000 $171,000 40 50 $60,000 $105,000 Warehouse 1/1/17 150,000 28,500 25 20 7,000 13,500 All assets are depreciated by the straight-line method. Blackbird Company uses a calendar year in preparing annual financial statements. After discussion, management has agreed to accept Paul’s proposed changes. Instructions: (a) Compute the revised annual depreciation on each asset in 2022. (Show computations.) (b) Prepare the entry (or entries) to record depreciation on the building in 2022. (c) Show how the building is reported in the 12/31/22 balance sheet.

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Challenge Exercise 3 – Solution (a)

Type of Asset

Building

Book value, 1/1/22 Less: Salvage value Depreciable cost

$1,029,000* 105,000 $ 924,000

$121,500 13,500 $108,000

44**

21,000

$ 7,200

Revised useful life in years Revised annual depreciation

Warehouse

* $1,200,000 - $171,000 = $1,029,000; ** 50 - 6 (b)

(c)

Dec.

Depreciation Expense .................................................. Accumulated Depreciation— Building ..........................................................

Building ............................................................................................. Less: Accumulated Depreciation ($171,000 + $21,000) .........................

21,000 21,000 $1,200,000 (192,000) $1,008,000

Challenge Exercise 4 LO: 3 Grace Company owns equipment that cost $70,000 when purchased on January 1, 2019. It has been depreciated using the straight-line method based on estimated salvage value of $7,000 and an estimated useful life of 5 years. Instructions: Prepare Grace Company’s journal entries to record the sale of the equipment in these four independent situations. Update depreciation on assets disposed of at time of sale. (a) Sold for $40,000 on January 1, 2022. (b) Sold for $40,000 on April 1, 2022. (c) Sold for $15,000 on January 1, 2022. (d) Sold for $15,000 on September 1, 2022. (e) Repeat (a), assuming Grace uses double-declining balance depreciation. (f) Repeat (c), assuming Grace uses double-declining balance depreciation.

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Challenge Exercise 4 – Solution (a)

(b)

(c)

(d)

(e)

(f)

Cash ............................................................................................... Accumulated Depreciation—Equipment .......................................... [($70,000 – $7,000) x 3/5] Equipment ........................................................................... Gain on Disposal of Plant Assets.........................................

40,000 37,800

Depreciation Expense ..................................................................... [($70,000 – $7,000) x 1/5 x 3/12] Accumulated Depreciation—Equipment ..............................

3,150

Cash ............................................................................................... Accumulated Depreciation—Equipment .......................................... ($37,800 + $3,150) Equipment ........................................................................... Gain on Disposal of Plant Assets.........................................

40,000 40,950

Cash…. ............................................................................................. Accumulated Depreciation—Equipment ............................................ Loss on Disposal of Plant Assets ....................................................... Equipment ................................................................................

15,000 37,800 17,200

Depreciation Expense........................................................................ [($70,000 – $7,000) x 1/5 x 8/12] Accumulated Depreciation—Equipment ....................................

8,400

Cash… .............................................................................................. Accumulated Depreciation—Equipment ............................................ ($37,800 + $8,400) Loss on Disposal of Plant Assets ....................................................... Equipment ................................................................................

15,000 46,200

Cash ............................................................................................... Accumulated Depreciation—Equipment .......................................... ($28,000 + $16,800 + $10,080) Equipment ........................................................................... Gain on Disposal of Plant Assets.........................................

40,000 54,880

Cash… .............................................................................................. Accumulated Depreciation—Equipment ............................................ Loss on Disposal of Plant Assets ....................................................... Equipment ................................................................................

15,000 54,880 120

70,000 7,800

3,150

70,000 10,950

70,000

8,400

8,800 70,000

70,000 24,880

70,000

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LO: 4 The following are selected 2022 transactions of Pagnucci Corporation. Jan. 1 Purchased a small company and recorded goodwill of $200,000. Its useful life is indefinite. April 1 Purchased for $120,000 a patent with an estimated useful life of 5 years and a legal life of 20 years. Instructions: a) Prepare necessary adjusting entries at December 31 to record amortization required by the events above. b) Indicate how the intangible assets will appear on Pagnucci’s 12/31/19 balance sheet. c) Stefan Franco, an intern at Pagnucii Company feels the company can solve its cash shortage by selling some of the goodwill it reports on its balance sheet. Evaluate Stefan’s plan. Challenge Exercise 5 – Solution (a) Dec.31 Amortization Expense ..................................................... Patents ($120,000 x 1/5 x 9/12) .....................

18,000 18,000

Note: No entry is made to amortize goodwill because it has an indefinite life. (b) Intangible Assets Goodwill ............................................................................................ Patents (net of accumulated amortization, $18,000) ....................... (c)

$200,000 102,000 $302,000 Goodwill can be identified only with the company as a whole, and therefore cannot be sold as an individual asset.

Challenge Exercise 6 LO: 5 During 2022, Aslan Corporation reported sales revenue of $5,000,000, sales returns of $200,000 and net income of $1,600,000. Aslan’s capital structure at the beginning and end of the year was: 1/1/22 12/31/22 Liabilities $1,500,000 $1,650,000 Stockholders’ equity 2,350,000 2,500,000 Instructions: a) Calculate the asset turnover ratio. b) Calculate return on assets. c) Explain what each ratio should tell you about the company.

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Challenge Exercise 6 – Solution a) Asset turnover is: Net Sales Average Total Assets Net sales is sales revenue less sales returns ($5,000,000 - $200,000 = $4,800,000). Since total assets equals liabilities plus stockholders’ equity, total assets is $3,850,000 ($1,500,000 + $2,350,000) at the beginning of the year and $4,150,000 ($1,650,000 + $2,500,000) at the end of the year. Average total assets is $4,000,000 [($3,850,000 + $4,150,000) / 2]. Therefore, asset turnover is: $4,800,000 = 1.20 times $4,000,000 b) Return on assets is:

Net Income Average Total Assets

$1,600,000

40%

$4,000,000

c) Asset turnover analyzes the productivity of a company’s assets. It indicates how many dollars of sales the company generates for each dollar invested in assets. Return on assets indicates the amount of net income generated by each dollar of assets. It is a profitability ratio that measures the overall profitability of the company.

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Chapter Ten Challenge Exercise 1 LO: 1 Jake Anderson Company had the following transactions involving notes payable. June 1, 2022 Borrows $70,000 from First National Bank by signing a 9-month, 12% note. Dec. 1, 2022 Borrows $90,000 from Sycamore State Bank by signing a 3-month, 10% note. Dec. 31, 2022 Prepares adjusting entries. Mar. 1, 2023 Pays principal and interest to Sycamore State Bank. Mar. 1, 2023 Pays principal and interest to First National Bank. Instructions: (a) Prepare journal entries for each of the transactions shown above. (b) What effect do the 12/31/22 entries have on assets, liabilities, and stockholders’ equity. (c) What amount of interest expense is reported in the 2022 income statement and in the 2023 income statement? Challenge Exercise 1 – Solution (a) June 1, 2022 Cash ............................................................................................ Notes Payable .....................................................................

70,000

December 1, 2022 Cash ............................................................................................ Notes Payable .....................................................................

90,000

December 31, 2022 Interest Expense .......................................................................... ($70,000 X 12% x 7/12) Interest Payable .................................................................. Interest Expense .......................................................................... ($90,000 X 10% x 1/12) Interest Payable .................................................................. March 1, 2023 Notes Payable.............................................................................. Interest Payable ........................................................................... Interest Expense ($90,000 x 10% x 2/12)..................................... Cash....................................................................................

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70,000

90,000

4,900 4,900 750 750

90,000 750 1,500 92,250

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Challenge Exercise 1 – Solution (Continued) March 1, 2023 Notes Payable .......................................................................................... Interest Payable ....................................................................................... Interest Expense ($70,000 x 12% x 2/12) ................................................ Cash……………………………………………………………………………………………………..

70,000 4,900 1,400 76,300

(b) The 12/31/22 entries decrease stockholders’ equity (due to the expense) and increase liabilities (interest payable). (c) The 2022 income statement will include interest expense of $5,650 ($4,900 + $750). The 2023 income statement will include interest expense of $2,900 ($1,500 + $1,400).

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Challenge Exercise 2 LO: 1 Princess Company publishes a monthly fashion magazine, Tiara. Subscriptions to the magazine cost $30 per year. During October 2022, Princess sells 12,000 subscriptions beginning with the November issue. Princess prepares financial statements quarterly and recognizes subscription revenue earned at the end of the quarter. The company uses the accounts Unearned Subscription Revenue and Subscription Revenue. Instructions: (a) Prepare the entry in October for the receipt of the subscriptions. (b) Prepare the adjusting entry at December 31, 2022, to record sales revenue recognized in December 2022. (c) Indicate the effect that the transactions in (a) and (b) have on assets, liabilities, and stockholders’ equity. (d) Prepare the adjusting entry at March 31, 2023, to record sales revenue recognized in the first quarter of 2023. (e) Indicate how the unearned subscription revenue is reported in the 3/31/23 financial statements, including the amount. Challenge Exercise 2 – Solution (a)

(b)

Oct. 1-31

Dec.

Cash ............................................................................ Unearned Subscription Revenue ......................... (12,000 x $30)

360,000

Unearned Subscription Revenue .................................. Subscription Revenue ......................................... ($360,000 x 2/12)

60,000

360,000

60,000

(c)

Transaction (a) increases assets and increases liabilities. Transaction (b) decreases liabilities and increases stockholders’ equity (due to the revenue).

(d)

Mar.

Unearned Subscription Revenue ................................... Subscription Revenue .......................................... ($360,000 x 3/12)

90,000 90,000

(e) Unearned subscription revenue is reported in the current liabilities section of the balance sheet at $210,000 ($360,000 - $60,000 - $90,000; or, $360,000 x 7/12).

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Challenge Exercise 3 LO: 4 The following financial data were reported by XYZ Company for 2021 and 2022 (dollars in millions). XYZ Company Balance Sheets (partial) 2022

2021

$2,000 3,900 2,700 700 $9,300 $7,700

$1,100 3,000 2,300 1,150 $7,550 $5,500

Current assets Cash and cash equivalents Accounts receivable, net Inventories Other current assets Total current assets Current liabilities

Instructions: (a) Calculate the current ratio and working capital for XYZ for 2022 and 2021. (b) Suppose at the end of 2022, XYZ management used $400 million cash to pay off $400 million of accounts payable. How would the current ratio and working capital have changed? (c) Suppose at the end of 2022, XYZ management collected $300 million cash on accounts receivable. How would the current ratio and working capital have changed? (d) Suppose at the end of 2022, XYZ management sold $250 million of inventory for $400 million on account. How would the current ratio and working capital have changed? Challenge Exercise 3 – Solution (a)

2022: Working capital = Current assets – Current liabilities Working capital = $9,300 – $7,700 = $1,600 Current ratio = Current assets/Current liabilities Current ratio = $9,300/$7,700 = 1.21 2021: Working capital = $7,550 – $5,500 = $2,050 Current ratio = $7,550/$5,500 = 1.37

(b)

2022: Working capital = ($9,300 – $400) – ($7,700 – $400) Working capital = $8,900 – $7,300 = $1,600 Current ratio = $8,900/$7,300 = 1.22

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Challenge Exercise 3 – Solution (Continued) (c)

2022: Working capital = ($9,300 + $300 – $300) – $7,700 Working capital = $9,300 – $7,700 = $1,600 Current ratio = $9,300/$7,700 = 1.21

(d)

2022: Working capital = ($9,300 + $400 - $250) – $7,700 Working capital = $9,450 – $7,700 = $1,750 Current ratio = $9,450/$7,700 = 1.23

Challenge Exercise 4 LO: 3 On January 1, Oldur Company issued $700,000, 12%, 10-year bonds at par. Interest is payable annually on January 1. Instructions: (a) Present journal entries to record the following. (1) The issuance of the bonds. (2) The accrual of interest on December 31. (3) The payment of interest on January 1. (b) What effect does each of these transactions have on assets, liabilities, and stockholders’ equity?

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Challenge Exercise 4 – Solution (a)(1) Jan.

(2) Dec.

(3) Jan.

(b)

Cash ....................................................................... Bonds Payable ...............................................

700,000

Interest Expense ...................................................... Interest Payable .............................................

84,000

Interest Payable ....................................................... Cash ..............................................................

84,000

700,000

84,000

The effect of these transactions is: Assets Liabilities Stockholders’ Equity (1) I I NE (2) NE I D (due to expense) (3) D D NE

Challenge Exercise 5 LO: 7 Tea Co. receives $240,000 when it issues a $240,000, 10%, mortgage note payable to finance the construction of a building at December 31, 2022. The terms provide for annual installment payments of $40,000 on December 31. Instructions: (a) Prepare the journal entries to record the mortgage loan and the first two installment payments. (b) Indicate how the remaining balance of the mortgage note payable, on December 31, 2024, is reported in the balance sheet.

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Challenge Exercise 5 – Solution (a) Dec.

Dec.

2022 - Issuance of Note Cash ................................................................................ Mortgage Payable ...................................................

240,000

2023 - First Installment Payment Interest Expense ($240,000 x 10%) .................................. Mortgage Payable ............................................................. Cash ......................................................................

24,000 16,000

2024 – Second Installment Payment Interest Expense [($240,000 - $16,000) x 10%] ................ Mortgage Payable ............................................................. Cash ......................................................................

22,400 17,600

240,000

40,000

(b) The portion of the mortgage payable in the next 12 months would be reported as a current liability: $40,000 – {[$240,000 – ($16,000 + $17,600)] x 10% } ....................... $19,360 The remaining principal [$240,000 – ($16,000 + $17,600 + $19,360) = $187,040] would be reported as a long-term liability.

Challenge Exercise 6 LO: 6 Dave Ramsey Corporation issued $900,000, 9%, 10-year bonds on January 1, 2022, for $843,920. This price resulted in an effective-interest rate of 10% on the bonds. Interest is payable annually on January 1. Dave Ramsey uses the effective-interest method to amortize bond premium or discount. Instructions: Prepare the journal entries to record the following. (Round to the nearest dollar.) (a) The issuance of the bonds. (b) The accrual of interest and the discount amortization on December 31, 2022. (c) What will the total interest expense be over the 10 years the bonds are outstanding? (d) What would the total interest expense be over the 10 years the bonds are outstanding, if the straight-line method was used? Challenge Exercise 6 – Solution (a)

Jan.

Cash ...................................................................... Discount on Bonds Payable .................................... Bonds Payable ..............................................

843,920 56,080

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(b)

Dec.

Interest Expense ($843,920 x 10%) ........................

84,392

Discount on Bonds Payable ........................... Interest Payable ($900,000 x 9%)..................

3,392 81,000

(c)

Principal at maturity ...................................................................... Annual interest payments ($81,000 x 10) ...................................... Cash to be paid to bondholders .................................................... Less: Cash received from bondholders ......................................... Total cost of borrowing (interest expense) ....................................

$ 900,000 810,000 1,710,000 843,920 $ 866,080

(d)

The same as effective interest method: Principal at maturity ...................................................................... Annual interest payments ($81,000 x 10) ...................................... Cash to be paid to bondholders .................................................... Cash received from bondholders .................................................. Total cost of borrowing (interest expense) ....................................

$ 900,000 810,000 1,710,000 843,920 $ 866,080

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Chapter Eleven Challenge Exercise 1 LO: 2 During its first year of operations, Roldan Corporation had the following transactions pertaining to its common stock. Jan. 10 Issued 60,000 shares for cash at $5 per share. July 1 Issued 50,000 shares for cash at $8 per share. Instructions: (a) Journalize the transactions, assuming that the common stock has a par value of $5 per share. (b) Journalize the transactions, assuming that the common stock is no-par with a stated value of $2 per share. (c) Compare the effect the two Jan. 10 transactions would have on Roldan’s assets, liabilities, stockholders’ equity, and net income. (d) Compare the effect the two July 1 transactions would have on Roldan’s assets, liabilities, stockholders’ equity, and net income. Challenge Exercise 1 – Solution (a)

Jan.

July

(b)

Jan. 10

July

Cash (60,000 x $5) .................................................... Common Stock ................................................

300,000

Cash (50,000 x $8) .................................................... Common Stock (50,000 x $5) .......................... Paid-in Capital in Excess of Par Value-Common Stock (50,000 x $3) ......

400,000

Cash (60,000 x $5) .................................................... Common Stock (60,000 x $2) .......................... Paid-in Capital in Excess of Stated Value-Common Stock (60,000 x $3) .

300,000

Cash (50,000 x $8) .................................................... Common Stock (50,000 x $2) .......................... Paid-in Capital in Excess of Stated Value-Common Stock (50,000 x $6) .

400,000

300,000

250,000 150,000

120,000 180,000

100,000 300,000

(c) Both Jan. 10 transactions would increase assets and increase stockholders’ equity by $300,000. There is no effect on net income. (d) Both July 1 transactions would increase assets and increase stockholders’ equity by $400,000. There is no effect on net income. © 2022 Wiley

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Challenge Exercise 2 LO: 2, 3, 4 The stockholders’ equity section of Lumley Corporation at December 31 is as follows: LUMLEY CORPORATION Balance Sheet (partial) Paid-in capital Preferred stock, cumulative, 10,000 shares authorized, 6,000 shares issued and outstanding 600,000 Common stock, $2 par, 750,000 shares authorized, 500,000 shares issued 1,000,000 Paid-in capital in excess of par – common Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock (12,000 common shares) 64,000 Total stockholders’ equity

200,000 1,800,000 1,858,000 3,658,000

$3,594,000

Instructions: From a review of the stockholders’ equity section, as chief accountant, write a memo to the president of the company answering the following questions. (a) How many shares of common stock are outstanding? (b) At what average price per share was the common stock issued? (c) What is the par value of the preferred stock? (d) If the annual dividend on preferred stock is $36,000, what is the dividend rate on preferred stock? (e) Since the inception of the company, what has been the total excess of net income over dividends declared? (f) If dividends of $72,000 were in arrears on preferred stock, what would be the balance in Retained Earnings?

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Challenge Exercise 2 – Solution MEMO To: From: Re:

President Your name, Chief Accountant Questions about Stockholders’ Equity Section

Your memorandum about the stockholders’ equity section was received this morning. I hope the following will answer your questions.

(a)

Common stock outstanding is 488,000 shares. (Issued shares 500,000 less treasury shares 12,000.)

(b)

The common stock was issued at an average price of $2.40 per share. [(Common stock $1,000,000 + Paid-in capital $200,000) ÷ 500,000 shares.]

(c)

The par value of the preferred stock is $100 per share. (Preferred stock $600,000 ÷ 6,000 shares.)

(d)

The dividend rate is 6%, or ($36,000 ÷ $600,000).

(e)

The total excess of net income over dividends declared since the inception of the company is equal to the retained earnings balance of $1,858,000.

(f)

The Retained Earnings balance is still $1,858,000. Cumulative dividends in arrears are only disclosed in the notes to the financial statements.

If I can be of further help, please contact me.

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Challenge Exercise 3 LO: 3, 4 On January 1, Amanda Corporation had 100,000 shares of no-par common stock issued. 5,000 shares are held as treasury stock. The stock has a stated value of $5 per share. During the year, the following occurred. Apr. 1 Issued 12,000 additional shares of common stock for $18 per share. June 15 Declared a cash dividend of $1 per share to stockholders of record on June 30. July 10 Paid the $1 cash dividend. Dec. 1 Purchased 2,000 additional shares of common stock for $17 per share. 15 Declared a cash dividend of $1.20 per share to stockholders of record on December 31. Instructions: (a) Prepare the entries, if any, on each of the three dividend dates. (b) How are dividends and dividends payable reported in the financial statements prepared at December 31? Challenge Exercise 3 – Solution a)

June

Cash Dividends (107,000* x $1) ..................... Dividends Payable .........................................

107,000 107,000

*(100,000 – 5,000 + 12,000)

July

Dec.

Dividends Payable ................................................... Cash ..............................................................

107,000

Cash Dividends (105,000* x $1.20).......................... Dividends Payable ......................................... *(107,000 – 2,000)

126,000

107,000

126,000

(b) In the retained earnings statement, dividends of $233,000 ($107,000 + $126,000) will be deducted. In the balance sheet, Dividends Payable of $126,000 will be reported as a current liability.

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Challenge Exercise 4 LO: 4 Richard Tandy Company reported the following balances at December 31, 2021: common stock $500,000; paid-in capital in excess of par-common stock $200,000; retained earnings $350,000. During 2022, the following transactions affected stockholder’s equity. 1. Issued preferred stock with a par value of $200,000 for $230,000. 2. Purchased treasury stock (common) for $70,000. 3. Earned net income of $240,000. 4. Declared and paid cash dividends of $86,000 ($16,000 preferred). Instructions: (a) Prepare the stockholders’ equity section of Richard Tandy Company’s December 31, 2022, balance sheet. (b) Compute Tandy’s 2022 return on common stockholders’ equity.

Challenge Exercise 4 – Solution (a) RICHARD TANDY COMPANY Balance Sheet (Partial) December 31, 2022 Paid-in capital Capital stock Preferred stock ....................................................................... Common stock ....................................................................... Total capital stock ........................................................... Additional paid-in capital In excess of par—preferred stock ........................................... In excess of par—common stock ............................................ Total additional paid-in capital ........................................ Total paid-in capital ............................................................................... Retained earnings ................................................................................. Total paid-in capital and retained earnings ............................................ Less treasury stock—common............................................................... Total stockholders’ equity ...................................................................... *$350,000 + $240,000 – $86,000

$200,000 500,000 $ 700,000 30,000 200,000 230,000 930,000 504,000* 1,434,000 70,000 $ 1,364,000

(b) The return on common stockholders’ equity ratio shows how many dollars of net income were earned for each dollar invested by the common stockholders. It is computed by dividing net income available to common stockholders (which is net income minus preferred stock dividends) by average common stockholders’ equity. $240,000 - $16,000 ($1,050,000 + $1,364,000) / 2 © 2022 Wiley

18.6%

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Chapter Twelve Challenge Exercise 1 LO: 1 An analysis of comparative balance sheets, the current year’s income statement, and the general ledger accounts of Guillen Corp. uncovered the following items. Assume all items involve cash unless there is information to the contrary. (a) Payment of interest on notes payable. (b) Exchange of land for patent. (c) Sale of building for an amount greater than book value. (d) Payment of dividends. (e) Depreciation. (f) Receipt of dividends on investment in stock. (g) Sales. (h) Issuance of capital stock. (i) Amortization of patent. (j) Issuance of bonds for land. (k) Purchase of land. (l) Conversion of bonds into common stock. (m) Sale of land for an amount less than cost. (n) Retirement of bonds. (o) Cost of goods sold. (p) Purchase of treasury stock. (q) Increase in accounts receivable. Instructions: Indicate where each item should be reported in the statement of cash flows (indirect method), using these categories: (1) operating activity (added to net income), (2) operating activity (deducted from net income), (3) investing activity, (4) financing activity, (5) significant noncash investing and financing activity, or (6) not separately reported in the statement of cash flows. More than one number can be used per item.

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Challenge Exercise 1 – Solution (a) Payment of interest on notes payable. (6) not separately reported in the statement of cash flows. (b) Exchange of land for patent. (5) significant noncash investing and financing activity. (c) Sale of building for an amount greater than (3) investing activity, book value. (2) operating activity (deducted from net income). (d) Payment of dividends. (4) financing activity. (e) Depreciation. (1) operating activity (added to net income). (f) Receipt of dividends on investment in stock. (6) not separately reported in the statement of cash flows. (g) Sales revenue. (6) not separately reported in the statement of cash flows. (h) Issuance of capital stock. (4) financing activity. (i) Amortization of patent. (1) operating activity (added to net income). (j) Issuance of bonds for land. (5) significant noncash investing and financing activity. (k) Purchase of land. (3) investing activity. (l) Conversion of bonds into common stock. (5) significant noncash investing and financing activity. (m) Sale of land for an amount less than cost. (3) investing activity, (2) operating activity (added to net income.) (n) Retirement of bonds. (4) financing activity. (o) Cost of goods sold. (6) not separately reported in the statement of cash flows. (p) Purchase of treasury stock. (4) financing activity. (q) Increase in accounts receivable. (2) operating activity (deducted from net income).

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Challenge Exercise 2 LO: 2 Pancho Company reported net income of $245,000 for 2022. Pancho sold equipment that cost $100,000 and had a book value of $60,000 for $52,000. The comparative balance sheet shows a decrease in accounts receivable of $19,000 for the year, a $13,000 increase in accounts payable, a $4,000 increase in prepaid expenses, and a $17,000 increase in accumulated depreciation. Instructions: Prepare the operating activities section of the statement of cash flows for 2022. Use the indirect method. Challenge Exercise 2 – Solution PANCHO COMPANY Statement of Cash Flows (Partial) For the Year Ended December 31, 2022 Cash flows from operating activities Net income...................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense............................................................ $57,000* Loss on disposal of plant assets ............................................ 8,000 Decrease in accounts receivable ........................................... 19,000 Decrease in prepaid expenses .............................................. (4,000) Increase in accounts payable ................................................ 13,000 Net cash provided by operating activities ................................. *Cost of equipment sold Less: Book value of equipment sold Accumulated depreciation of equipment sold Increase in accumulated depreciation Depreciation expense

$245,000

93,000 $338,000

$100,000 60,000 40,000 17,000 $ 57,000

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Challenge Exercise 3 LO: 2 The current sections of Birmingham Inc.’s balance sheets at December 31, 2021 and 2022, are presented here. Birmingham’s net income for 2022 was $193,000. The income statement included depreciation expense, $25,000, amortization expense, $10,000, and a gain on disposal of equipment, $7,000. The equipment was sold for $47,000. Birmingham also issued bonds for $60,000. 2022 2021 Current assets Cash $417,000 $ 99,000 Accounts receivable 120,000 93,000 Inventory 159,000 176,000 Prepaid expenses 29,000 24,000 Total current assets $725,000 $392,000 Current liabilities Accrued expenses payable $ 17,000 $ 6,000 Accounts payable 88,000 94,000 Total current liabilities $105,000 $100,000 Instructions : Prepare the net cash provided by operating activities section of the company’s statement of cash flows for the year ended December 31, 2022, using the indirect method.

Challenge Exercise 3 – Solution BIRMINGHAM INC. Statement of Cash Flows (Partial) For the Year Ended December 31, 2022 Cash flows from operating activities Net income.................................................................................. Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense........................................................ Amortization expense ........................................................ Gain on disposal of equipment .......................................... Increase in accounts receivable ........................................ Decrease in inventory........................................................ Increase in prepaid expenses ............................................ Increase in accrued expenses payable.............................. Decrease in accounts payable........................................... Net cash provided by operating activities

$193,000

$25,000 10,000 (7,000) (27,000) 17,000 (5,000) 11,000 (6,000)

18,000 $211,000

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LO: 2, 3 Here are comparative balance sheets for Migitsu Company. Prepare a statement of cash flows—indirect method. MIGITSU COMPANY Comparative Balance Sheets December 31 Assets Cash Accounts receivable Inventories Land Equipment Accumulated depreciation Total Liabilities and Stockholders’ Equity Accounts payable Bonds payable Common stock ($1 par) 174,000 Retained earnings Total

2022

2021

$ 73,000 87,000 170,000 72,000 260,000 (66,000) $596,000

$ 22,000 76,000 191,000 100,000 200,000 (32,000) $557,000

$ 37,000 150,000 216,000

$ 47,000 210,000

193,000 $596,000

126,000 $557,000

Additional information: 1. Net income for 2022 was $100,000. 2. Cash dividends of $33,000 were declared and paid. 3. Bonds payable amounting to $60,000 were redeemed for cash $60,000. 4. Common stock was issued for $42,000 cash. 5. Equipment that cost $50,000 and had a book value of $30,000 was sold for $36,000 during 2022; land was sold at cost. Instructions: (a) Prepare a statement of cash flows for 2022 using the indirect method. (b) Compute free cash flow for 2022.

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Challenge Exercise 4 – Solution MIGITSU COMPANY Statement of Cash Flows For the Year Ended December 31, 2022 Cash flows from operating activities Net income ...................................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ............................................ Gain on disposal of equipment .............................. Increase in accounts receivable ............................. Decrease in inventory ............................................ Decrease in accounts payable ............................... Net cash provided by operating activities ............................................................. Cash flows from investing activities Sale of land ..................................................................... Sale of equipment ........................................................... Purchase of equipment ................................................... Net cash used by investing activities ............................................................. Cash flows from financing activities Issuance of common stock .............................................. Payment of cash dividends.............................................. Redemption of bonds ...................................................... Net cash used by financing activities ............................................................. Net increase in cash ................................................................. Cash at beginning of period ...................................................... Cash at end of period ................................................................ (b)

$100,000)

$ 54,000) (6,000) (11,000) 21,000) (10,000)

48,000) 148,000)

28,000) 36,000 (110,000) (46,000) 42,000) (33,000) (60,000) (51,000) 51,000) 22,000) $ 73,000)

$148,000 – $110,000 – $33,000 = $5,000

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Challenge Exercise 5 LO: 4 For 2022, the income statement of George Corporation had sales revenue of $172,000 and operating expenses of $88,000. Accounts receivable and accounts payable at year-end were $60,000 and $23,000, respectively. At the beginning of the year, the balances were $39,000 for accounts receivable and $15,000 for accounts payable. Assume that accounts payable related to operating expenses. Ignore income taxes. Instructions: Compute net cash provided by operating activities using the direct method.

Challenge Exercise 5 – Solution Sales revenue ................................................................................... Deduct: Increase in accounts receivable .......................................... Cash receipts from customers* ................................................ Operating expenses .......................................................................... Deduct: Increase in accounts payable .............................................. Cash payments for operating expenses** ................................ Net cash provided by operating activities ........................................... **

$172,000) (21,000) $151,000 88,000) (8,000) 80,000 $ 71,000

Balance, Beginning of year Sales revenue for the year Balance, End of year

Accounts Receivable 39,000 172,000 Cash receipts for year 60,000

Payments for the year

Accounts Payable Balance, Beginning of year 80,000 Operating expenses for year

15,000 88,000

Balance, End of year

23,000

Kimmel, Financial Accounting, 10/e, Challenge Exercise Solutions

151,000

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Challenge Exercise 6 LO: 4 The following information is taken from the 2022 general ledger of AJ Company. Sales:

CGS:

Rent:

Salaries:

Sales revenue $200,000 Accounts receivable, January 1 36,000 Accounts receivable, December 31 10,000 Cost of goods sold $120,000 Accounts payable, January 1 16,000 Accounts payable, December 31 20,000 Inventory, January 1 26,000 Inventory, December 31 17,000 Rent expense $ 15,000 Prepaid rent, January 1 4,900 Prepaid rent, December 31 6,000 Salaries and wages expense $ 48,000 Salaries and wages payable, January 1 5,000 Salaries and wages payable, December 31 4,000

Instructions: In each case, compute the amount that should be reported in the operating activities section of the statement of cash flows under the direct method.

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Challenge Exercise 6 – Solution Cash receipts from customers Sales revenue ........................................................................... Add: Decrease in accounts receivable ...................................... Cash receipts from customers...................................................

$200,000* 26,000* $226,000*

Cash payments for cost of goods sold Cost of goods sold .................................................................... Deduct: Increase in accounts payable....................................... * Deduct: Decrease in inventory .................................................. Cash payments for cost of goods sold ......................................

$120,000* 4,000 9,000 $107,000*

Cash payments for rentals Rent expense............................................................................ Add: Increase in prepaid rent .................................................... Cash payments for rent .............................................................

$ 15,000* 1,100* $ 16,100*

Cash payments for salaries Salaries and wages expense .................................................... Add: Decrease in salaries and wages payable .......................... Cash payments for salaries and wages.....................................

$ 48,000* 1,000* $ 49,000*

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Chapter Thirteen Challenge Exercise 1 LO: 2 Financial information for Nealon Inc. is presented below.

Current assets Plant assets (net) Current liabilities Long-term liabilities Common stock, $1 par Retained earnings

December 31, 2022 $140,000 440,000 95,000 165,000 180,000 140,000

December 31, 2021 $110,000 360,000 75,000 100,000 120,000 175,000

Instructions: (a) Prepare a schedule showing a horizontal analysis for 2022 using 2021 as the base year. (b) What is the primary use of horizontal analysis? (c) What does the schedule from part (a) tell you about Nealon?

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Challenge Exercise 1 – Solution (a) NEALON INC. Condensed Balance Sheets December 31 Increase or (Decrease) 2022

2021

Amount

Percentage

Current assets Plant assets (net) Total assets Liabilities

$140,000 440,000 $580,000

$110,000 360,000 $470,000

($30,000 ( 80,000 110,000

(27.3%) (22.2%) (23.4%)

Current liabilities Long-term liabilities Total liabilities Stockholders’ Equity

$ 95,000 165,000 260,000

$20,000) 65,000) 85,000)

(26.7%) (65.0%) (48.6%)

Common stock, $1 par Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

180,000 140,000

120,000 175,000

60,000

(50.0%) (20.0%)

320,000

295,000

$580,000

$470,000

(15,000 ) (35,000) ( 25,000

Assets

75,000 100,000 175,000

( ( (

(8.5%) 23.4%

$110,000) () (b) Horizontal analysis is used primarily in intracompany comparisons. Horizontal analysis evaluates a series of financial statement data over a period of time. (c) These changes suggest that the company expanded its asset base during 2022 and financed this expansion primarily by assuming additional long-term debt and issuing stock rather than retaining income. The borrowing and stock issuance also are covering a shortfall in income.

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Challenge Exercise 2 LO: 2 Operating data for Poll Corporation are presented below. 2022 2021 Net sales $900,000 $700,000 Cost of goods sold 570,000 450,000 Selling expenses 140,000 90,000 Administrative expenses 80,000 60,000 Income tax expense 33,000 30,000 Net income 77,000 70,000 Instructions: (a) Prepare a schedule showing a vertical analysis for 2022 and 2021. (b) What is the primary use of vertical analysis? (c) What does the schedule from part (a) tell you about Poll? Challenge Exercise 2 – Solution (a) POLL CORPORATION Condensed Income Statements For the Years Ended December 31 2022

Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income taxes Income tax expense Net income

2021

Amount

Percent

Amount

Percent

$900,000 570,000 330,000 140,000 80,000 220,000 110,000 33,000 $ 77,000

100.0% 63.3% 36.7% 15.6% 8.9% 24.5% 12.2% 3.6% 8.6%

$700,000 450,000 250,000 90,000 60,000 150,000 100,000 30,000 $ 70,000

100.0% 64.3% 35.7% 12.9% 8.5% 21.4% 14.3% 4.3% 10.0%

(b) Vertical analysis is used in both intra- and intercompany comparisons. Because vertical analysis evaluates financial statement data by expressing each item in a financial statement as a percent of a base amount, it can be used to determine trends over time within a company, or to discover relationships that differ from company to company.

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Challenge Exercise 2 – Solution (Continued) (c) Although Poll’s sales have increased substantially, net income as a percentage of sales has decreased to the point where the absolute increase in net income is minimal. The primary reason appears to be an inability to control selling expenses.

Challenge Exercise 3 LO: 3 Robin Incorporated has the following potential transactions involving current assets and current liabilities. 1. Accounts receivable of $20,000 are collected. 2. Equipment is purchased for $37,000 cash. 3. Equipment is purchased by signing a 1-year, $37,000 note. 4. Paid $6,000 for a 3-year insurance policy. 5. Paid $16,000 of accounts payable. 6. Cash dividends of $7,000 are declared. 7. Borrowed $40,000 by signing a short-term note payable. 8. Paid a $50,000 short-term note payable. As of the beginning of the month, current assets were $175,000, and current liabilities were $120,000. Instructions: (a) Compute the current ratio as of the beginning of the month. (b) Compute the current ratio after each transaction. Treat each transaction independently (assume each occurs on the first day of the month, and no other transactions have affected the beginningof-month balances. Challenge Exercise 3 – Solution (a)

Current ratio as of beginning of month = 1.46 ($175,000 ÷ $120,000).

(b)

1. Current ratio: 1.46 (no change since both assets are current). 2. Current ratio: 1.15 [($175,000 – $37,000) ÷ $120,000]. 3. Current ratio: 1.11 [$175,000 ÷ ($120,000 + $37,000)]. 4. Current ratio: 1.46 (no change since both assets are current). 5. Current ratio: 1.53 [($175,000 - $16,000) ÷ ($120,000 - $16,000)].

Kimmel, Financial Accounting,10/e, Challenge Exercise Solutions

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Challenge Exercise 3 – Solution (Continued) 6. Current ratio: 1.38 [$175,000 ÷ ($120,000 + $7,000)]. 7. Current ratio: 1.34 [($175,000 + $40,000) ÷ ($120,000 + $40,000)]. 8. Current ratio: 1.79 [($175,000 - $50,000) ÷ ($120,000 - $50,000)].

Challenge Exercise 4 LO: 3 Selected comparative statement data for Tyrone Company are presented below. All balance sheet data are as of December 31. 2022 2021 Net sales $1,160,000 $1,120,000 Cost of goods sold 700,000 640,000 Interest expense 15,000 10,000 Net income 150,000 140,000 Accounts receivable 140,000 120,000 Inventory 100,000 95,000 Total assets 780,000 700,000 Total stockholders’ equity 430,000 325,000 Instructions: Compute the following ratios for 2025. Round to one decimal place. (a) Profit margin. (b) Asset turnover. (c) Return on assets. (d) Return on common stockholders’ equity

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Challenge Exercise 4 – Solution (a)

Profit margin

$150,000 = 12.9%. $1,160,000

(b)

Asset turnover

$1,160,000 = 1.6 times. ($780,000 + $700,000)/2

(c)

Return on assets

$150,000 $740,000

(d)

Return on common stockholders’ equity

= 20.3%.

$150,000 = 39.7%. ($430,000 + $325,000)/2

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Challenge Exercise 5 LO: 3 Mulder Corporation’s comparative balance sheets are presented below.

Cash Accounts receivable Inventory Land Building Accumulated depreciation Total Accounts payable Common stock ($5 par) Retained earnings Total

MULDER CORPORATION Balance Sheets December 31 2022 $ 10,300 16,200 11,000 32,000 74,000 (15,000) $128,500 $ 17,370

2021 $ 3,900 24,400 8,000 28,000 74,000 (12,000) $126,300 $ 31,100 70,000 70,000 41,130 25,200 $128,500 $126,300

Mulder’s 2022 income statement included net sales of $100,000, cost of goods sold of $60,000, and net income of $20,000. Instructions: Compute the following ratios for 2022. (a) Current ratio. (b) Accounts receivables turnover and average collection period. (c) Inventory turnover and days in inventory. (d) Profit margin. (e) Asset turnover. (f) Return on assets. (g) Return on common stockholders’ equity. (h) Earnings per share. (i) Payout ratio. (j) Debt to total assets ratio.

Kimmel, Financial Accounting,10/e, Challenge Exercise Solutions

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Challenge Exercise 5 – Solution (a)

($10,300 + $16,200 + $11,000) / $17,370 = 2.16

(b)

$100,000 / [($16,200 + $24,400)/2] = 4.93;

(c)

$60,000 / [($11,000 + $8,000)/2] = 6.32;

(d)

$20,000 / $100,000 = 20%

(e)

$100,000 / [($128,500 + $126,300)/2] = .78

(f)

$20,000 / [($128,500 + $126,300)/2] = 16%

(g)

$20,000 / [($111,130 + $95,200)/2] = 19%

(h)

$20,000 / 14,000 = $1.43

(i)

$4,070* / $20,000 = 20%

365/4.93 = 74 days 365/6.32 = 58 days

*($25,200 + $20,000 - $41,130) (j)

$17,370 / $128,500 = 13.5%

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Challenge Exercise 6 LO: 1 For its fiscal year ending October 31, 2022, Antonio Corporation reports the following partial income statement data. Income before income taxes Income tax expense (40% X $600,000) Income from continuing operations Gain from discontinued operations Net income

$600,000 240,000 360,000 100,000 $460,000

The gain from discontinued operations consists of two parts: a $50,000 loss from operations and a $150,000 gain from the disposal of the operation. The income tax rate is 40% on all items. Instructions: (a) Prepare a corrected income statement, beginning with income before income taxes. (b) Explain in memo form why the income statement data, as presented above, are misleading.

Challenge Exercise 6 – Solution (a)

ANTONIO CORPORATION Income Statement (Partial) For the Year Ended October 31, 2022

Income before income taxes ................................................................................ Income tax expense ($600,000 x 40%) ................................................................ Income from continuing operations ...................................................................... Discontinued operations Loss fromoperations, net of $20,000 income tax savings ($50,000 x 40%) ...................................................... $30,000 Gain from disposal of operations, net of $60,000 income taxes ($150,000 x 40%) ........................................................................ 90,000 Net income...........................................................................................................

(b)

To:

Chief Accountant

From:

Your name, Independent Auditor

$600,000 240,000 360,000

60,000 $420,000

After reviewing your income statement for the year ended 10/31/22, we believe it is misleading for the following reasons:

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The gain from discontinued operations consists of two components: a loss ($50,000) on the operations of the discontinued segment and a gain ($150,000) on the disposal of the discontinued segement. Both components must be reduced by their respective income tax effects. As a result, the overall effect of the gain from discontinued operations on net income is only $60,000, not $100,000.

Kimmel, Financial Accounting,10/e, Challenge Exercise Solutions

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E1.23 Classify items as assets, liabilities, and stockholders' equity, and prepare accounting equation. Suppose the following items were taken from the balance sheet of Nike, Inc. (All dollars are in millions.) 1. Cash 2. Accounts receivable 3. Common stock 4. Notes payable 5. Buildings 6. Mortgage payable 7. Inventory 8. Income taxes payable 9. Equipment 10. Retained earnings 11. Accounts payable

2,291.1 2,883.9 2,874.2 342.9 3,759.9 1,311.5 2,357.0 86.3 1,957.7 5,818.9 2,815.8

Instructions a. Classify each of these items as an asset, liability, or stockholders' equity and determine the total dollar amount for each classification. b. Determine Nike's accounting equation by calculating the value of total assets, total liabilities, and total stockholders' equity. c. To what extent does Nike rely on debt versus equity financing? NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

a. Assets (in millions) Cash Accounts receivable Inventory Equipment Buildings Total Assets

Liabilities Notes payable Accounts payable Mortgage payable Income taxes payable Total liabilities Stockholders' equity Common stock Retained earnings Total stockholders' equity

Assets

Liabilities

+ Stockholders' Equity

c. Total liabilities Total assets Percentage of assets financed by debt Total equity Total assets Percentage of assets financed by equity

When you have completed this problems, respond to the additional question, on the E1.23 Add Ques worksheet.

E1.23 SOLUTION. Classify items as assets, liabilities, and stockholders' equity, and prepare accounting equation. Suppose the following items were taken from the balance sheet of Nike, Inc. (All dollars are in millions.) 1. Cash 2. Accounts receivable 3. Common stock 4. Notes payable 5. Buildings 6. Mortgage payable 7. Inventory 8. Income taxes payable 9. Equipment 10. Retained earnings 11. Accounts payable

2,291.1 2,883.9 2,874.2 342.9 3,759.9 1,311.5 2,357.00 86.30 1,957.70 5,818.90 2,815.80

Assets (in millions) Cash Accounts receivable Inventory Equipment Buildings Total Assets

2,291.1 2,883.9 2,357.0 1,957.7 3,759.9 $ 13,249.6

Liabilities Notes payable Accounts payable Mortgage payable Income taxes payable Total liabilities Stockholders' equity Common stock Retained earnings Total stockholders' equity

Assets $13,249.6

$ $

342.9 2,815.8 1,311.5 86.3 4,556.5

2,874.2 5,818.9 8,693.1

Liabilities $4,556.5

Total liabilities Total assets Percentage of assets financed by debt

$ 4,556.5 $ 13,249.6 34.39%

Total equity Total assets Percentage of assets financed by equity

$ 8,693.1 $ 13,249.6 65.61%

+ Stockholders' Equity $8,693.1

Nike has relied more heavily on equity than debt to finance its assets. Debt (liabilities) financed 34% of its assets compared to equity financing of 66%.

When you have completed this problems, respond to the additional question, on the E1.23 Add Ques worksheet.

E1.23 ADDITIONAL QUESTION. Classify items as assets, liabilities, and stockholders' equity, and prepare accounting equation. Suppose the following items were taken from the balance sheet of Nike, Inc. (All dollars are in millions.) 1. Cash 2. Accounts receivable 3. Common stock 4. Notes payable 5. Buildings 6. Mortgage payable 7. Inventory 8. Income taxes payable 9. Equipment 10. Retained earnings 11. Accounts payable

2,291.1 2,883.9 2,874.2 342.9 3,759.9 1,311.5 2,357.00 86.30 1,957.70 5,818.90 2,815.80

a. Assets (in millions) Cash Accounts receivable Inventory Equipment Buildings Total Assets

Additional Question Assume that buildings increased to $4,600 and common stock increased to $3,714.3. Determine the impact these changes have to the percentage of assets financed by debt and equity.

equity. Liabilities Notes payable Accounts payable Mortgage payable Income taxes payable Total liabilities Stockholders' equity Common stock Retained earnings Total stockholders' equity

Assets

c. Total liabilities Total assets Percentage of assets financed by debt Total equity Total assets Percentage of assets financed by equity

Liabilities

+ Stockholders' Equity

E1.23 ADDITIONAL QUESTION SOLUTION. Classify items as assets, liabilities, and stockholders' equity, and prepare accounting equation. Suppose the following items were taken from the balance sheet of Nike, Inc. (All dollars are in millions.) 1. Cash 2. Accounts receivable 3. Common stock 4. Notes payable 5. Buildings 6. Mortgage payable 7. Inventory 8. Income taxes payable 9. Equipment 10. Retained earnings 11. Accounts payable

2,291.1 2,883.9 2,874.2 342.9 3,759.9 1,311.5 2,357.00 86.30 1,957.70 5,818.90 2,815.80

a. Assets (in millions) Cash Accounts receivable Inventory Equipment Buildings Total Assets

2,291.1 2,883.9 2,357.0 1,957.7 4,600.0 $ 14,089.7

Additional Question Assume that buildings increased to $4,600 and common stock increased to $3,714.3. Determine the impact these changes have to the percentage of assets financed by debt and equity.

Liabilities Notes payable Accounts payable Mortgage payable Income taxes payable Total liabilities Stockholders' equity Common stock Retained earnings Total stockholders' equity

Assets $14,089.7

$ $

342.9 2,815.8 1,311.5 86.3 4,556.5

3,714.3 5,818.9 9,533.2

Liabilities $4,556.5

c. Total liabilities Total assets Percentage of assets financed by debt

$ 4,556.5 $ 14,089.7 32.34%

Total equity Total assets Percentage of assets financed by equity

$ 9,533.2 $ 14,089.7 67.66%

+ Stockholders' Equity $9,533.2

Nike has relied more heavily on equity than debt to finance its assets. Debt (liabilities) financed 32% of its assets compared to equity financing of 68%.

P1.3 Prepare an income statement, retained earnings statement and balance sheet; discuss results On June 1, 2025, Elite Service Co. was started with an initial investment in the company of $22,100 cash. Here are the assets, liabilities, and common stock of the company at June 30, 2025, and the revenues and expenses for the month of June, its first month of operations: Cash Accounts receivable Service revenue Supplies Advertising expense Equipment Common Stock Notes payable Accounts payable Supplies expense Maintenance and repairs expense Utilities expense Salaries and wages expense

4,600 4,000 7,500 2,400 400 26,000 22,100 12,000 500 1,000 600 300 1,400

In June, the company issued no additional stock but paid dividends of $1,400. Instructions a. Prepare an income statement and retained earnings statement for the month of June and a balance sheet at June 30, 2022. b. Briefly discuss whether the company's first month of operations was a success. c. Discuss the company's decision to distribute a dividend. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

ELITE SERVICE CO. Income Statement For the Month Ended June 30, 2025 Revenues Service revenue Expenses Salaries and wages expense Supplies expense Maintenance and repairs expense Advertising expense Utilities expense Total expenses Net income

ELITE SERVICE CO. Retained Earnings Statement For the Month Ended June 30, 2025 Retained earnings, June 1 Add: Net income Less: Dividends Retained earnings, June 30

ELITE SERVICE CO. Balance Sheet June 30, 2025 Assets Cash Accounts receivable Supplies Equipment Total assets Liabilities and Stockholders' Equity Liabilities Notes payable Accounts payable Total liabilities Stockholders' equity Common stock Retained earnings Total liabilities and stockholders' equity

When you have completed this problems, respond to the additional question, on the P1.3 Addl Ques worksheet.

P1.3 SOLUTION. Prepare an income statement, retained earnings statement and balance sheet; discuss results On June 1, 2025, Elite Service Co. was started with an initial investment in the company of $22,100 cash. Here are the assets, liabilities, and common stock of the company at June 30, 2025, and the revenues and expenses for the month of June, its first month of operations: Cash Accounts receivable Service revenue Supplies Advertising expense Equipment Common Stock Notes payable Accounts payable Supplies expense Maintenance and repairs expense Utilities expense Salaries and wages expense

4,600 4,000 7,500 2,400 400 26,000 22,100 12,000 500 1,000 600 300 1,400

7,500

3,700 3,800

1,400 1,000 600 400 300

ELITE SERVICE CO. Retained Earnings Statement For the Month Ended June 30, 2025 Retained earnings, June 1 Add: Net income Less: Dividends Retained earnings, June 30

3,800 3,800 1,400 2,400

ELITE SERVICE CO. Balance Sheet June 30, 20225 Assets Cash Accounts receivable Supplies Equipment Total assets

4,600 4,000 2,400 26,000 37,000

12,500

24,500 37,000

Liabilities and Stockholders' Equity Liabilities Notes payable Accounts payable Total liabilities Stockholders' equity Common stock Retained earnings Total liabilities and stockholders' equity

12,000 500

22,100 2,400

Elite had a very successful first month, earning $3,800 or 51% of service revenues ($3,800 ÷ $7,500). Its net income represents a 17% return on the initial investment ($3,800 ÷ $22,100).

Distributing a dividend after only one month of operations is probably unusual. Most new businesses chose to build up a cash balance to provide for future operating and investing activities or pay down debt. Elite distributed 37% ($1,400 ÷ $3,800) of its first month's income but it had adequate cash to do so and still showed a significant increase in retained earnings.

When you have completed this problems, respond to the additional question, on the P1.3 Addl Ques worksheet.

P1.3 ADDITIONAL QUESTION. Prepare an income statement, retained earnings statement and balance sheet; discuss results On June 1, 2025, Elite Service Co. was started with an initial investment in the company of $22,100 cash. Here are the assets, liabilities, and common stock of the company at June 30, 2025, and the revenues and expenses for the month of June, its first month of operations: Cash Accounts receivable Service revenue Supplies Advertising expense Equipment Common Stock Notes payable Accounts payable Supplies expense Maintenance and repairs expense Utilities expense Salaries and wages expense

4,600 4,000 7,500 2,400 400 26,000 22,100 12,000 500 1,000 600 300 1,400

ELITE SERVICE CO. Retained Earnings Statement For the Month Ended June 30, 2025 Retained earnings, June 1 Add: Net income Less: Dividends Retained earnings, June 30

ELITE SERVICE CO. Balance Sheet June 30, 20225 Assets Cash Accounts receivable Supplies Equipment Total assets Liabilities and Stockholders' Equity Liabilities Notes payable Accounts payable Total liabilities Stockholders' equity Common stock Retained earnings Total liabilities and stockholders' equity

Additional question Assume that service revenue changed to $9,000, and the additional amount was all on account. Also assume salaries and wages expense changed to $1,800 with the additional amount paid. Revise the financial statements to reflect these changes.

Impact on financial statements:

P1.3 ADDITIONAL QUESTION SOLUTION. Prepare an income statement, retained earnings statement and balance sheet; discuss results On June 1, 2025, Elite Service Co. was started with an initial investment in the company of $22,100 cash. Here are the assets, liabilities, and common stock of the company at June 30, 2025, and the revenues and expenses for the month of June, its first month of operations: Cash Accounts receivable Service revenue Supplies Advertising expense Equipment Common Stock Notes payable Accounts payable Supplies expense Maintenance and repairs expense Utilities expense Salaries and wages expense

4,600 4,000 7,500 2,400 400 26,000 22,100 12,000 500 1,000 600 300 1,400

9,000

4,100 4,900

1,800 1,000 600 400 300

ELITE SERVICE CO. Retained Earnings Statement For the Month Ended June 30, 2025 Retained earnings, June 1 Add: Net income Less: Dividends Retained earnings, June 30

4,900 4,900 1,400 3,500

ELITE SERVICE CO. Balance Sheet June 30, 20225 Assets Cash Accounts receivable Supplies Equipment Total assets

Liabilities and Stockholders' Equity Liabilities Notes payable $ 12,000 Accounts payable 500 Total liabilities $ Stockholders' equity Common stock 22,100 Retained earnings 3,500 Total liabilities and stockholders' equity $

4,200 5,500 2,400 26,000 38,100

12,500

25,600 38,100

Impact on financial statements: The net impact of the changes on the income resulted in a higher accounts receivable and a higher retained earnings.

E2.4. Prepare asset section of a classified balance sheet. Suppose the following information (in thousands of dollars) is available for H. J. Heinz Company, famous for ketchup and other fine food products, for the year ended April 30, 2025. Prepaid insurance Land Goodwill Trademarks Inventory

$125,765 76,193 3,982,954 757,907 1,237,613

Buildings Cash Accounts receivable Accumulated depreciation buildings

$4,033,369 373,145 1,171,797 2,131,260

Instructions Complete the assets section of a classified balance sheet, listing the account names and assigning section labels and totals in proper sequence. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

H. J. HEINZ COMPANY Partial Balance Sheet April 30, 2025 (in thousands) Assets

Total assets

When you have completed this problem, respond to the additional question, on the E2.4 Addl Ques worksheet.

E2.4 SOLUTION. Prepare asset section of a classified balance sheet. Suppose the following information (in thousands of dollars) is available for H. J. Heinz Company, famous for ketchup and other fine food products, for the year ended April 30, 2025. Prepaid insurance Land Goodwill Trademarks Inventory

$125,765 76,193 3,982,954 757,907 1,237,613

Buildings Cash Accounts receivable Accumulated depreciation buildings

$4,033,369 373,145 1,171,797 2,131,260

H. J. HEINZ COMPANY Partial Balance Sheet April 30, 2025 (in thousands) Assets Current assets Cash Accounts receivable Inventory Prepaid insurance Total current assets Property, plant and equipment Land Buildings Less: Accum. Depr. - buildings Intangible assets Goodwill Trademarks Total assets

373,145 1,171,797 1,237,613 125,765 $ 2,908,320

76,193 $

4,033,369 2,131,260

1,902,109

3,982,954 757,907

1,978,302

4,740,861 $ 9,627,483

When you have completed this problem, respond to the additional question, on the E2.4 Addl Ques worksheet.

E2.4 ADDITIONAL QUESTION. Prepare asset section of a classified balance sheet. Suppose the following information (in thousands of dollars) is available for H. J. Heinz Company, famous for ketchup and other fine food products, for the year ended April 30, 2025. Prepaid insurance Land Goodwill Trademarks Inventory

$125,765 76,193 3,982,954 757,907 1,237,613

Buildings Cash Accounts receivable Accumulated depreciation buildings

$4,033,369 373,145 1,171,797 2,131,260

H. J. HEINZ COMPANY Partial Balance Sheet April 30, 2025 (in thousands) Assets

Total assets

Additional question Assume that accounts receivable and trademarks changed to $1,200,000 and $786,110 respectively. How do these changes impact the asset section of the classified balance sheet?

E2.4 ADDITIONAL QUESTION SOLUTION. Prepare asset section of a classified balance sheet. Suppose the following information (in thousands of dollars) is available for H. J. Heinz Company, famous for ketchup and other fine food products, for the year ended April 30, 2025. Prepaid insurance Land Goodwill Trademarks Inventory

$125,765 76,193 3,982,954 757,907 1,237,613

Buildings Cash Accounts receivable Accumulated depreciation buildings

$4,033,369 373,145 1,171,797 2,131,260

Additional question Assume that accounts receivable and trademarks changed to $1,200,000 and $786,110 respectively. How do these changes impact the asset section of the classified balance sheet?

373,145 1,200,000 1,237,613 125,765 $ 2,936,523

76,193 $

4,033,369 2,131,260

1,902,109

3,982,954 786,110

1,978,302

4,769,064 $ 9,683,889

P3.1. Analyze transactions and compute net income. On April 1, Wonder Travel Agency Inc. was established. These transactions were completed during the month. 1. 2. 3. 4. 5. 6.

Stockholders invested $30,000 cash in the company in exchange for common stock. Paid $900 cash for April office rent. Purchased office equipment for $3,400 cash. Purchased $200 of advertising in the Chicago Tribune , on account. Paid $500 cash for office supplies. Performed services worth $12,000. Cash of $3,000 is received from customers, and the balance of $9,000 is billed to customers on account. 7. Paid $400 cash dividends. 8. Paid Chicago Tribune amount due in transaction (4). 9. Paid employees' salaries $1,800. 10. Received $9,000 in cash from customers billed previously in transaction (6). Instructions a. Prepare a tabular analysis of the transactions using these column headings: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, Common Stock, and Retained Earnings (with separate columns for Revenues, Expenses, and Dividends). Include margin explanations for any changes in Retained Earnings in column S. b. From an analysis of the Retained Earnings columns, compute the net income or net loss for April. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Assets Cash

Accounts Receivable

Supplies

WONDER TRAVEL AGENCY INC. = Liabilities + Accounts Common Equipment = Payable + Stock

Stockholders' Equity +

Revenue

−

Expenses

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Total Assets

Service Revenue Expenses Salaries and Wages Expense Rent Expense Advertising Expense Net Income

Total Liabilities + Stockholders' Equity

− Dividends

When you have completed this problem, respond to the additional question on the P3.1 Add Ques worksheet.

P3.1 SOLUTION. Analyze transactions and compute net income. On April 1, Wonder Travel Agency Inc. was established. These transactions were completed during the month. 1. 2. 3. 4. 5. 6.

Assets

Cash + 30,000

-900

-3,400

Accounts Receivable

Supplies

WONDER TRAVEL AGENCY INC. = Liabilities + Accounts Common Equipment = Payable + Stock + 30,000

Revenue

−

200

-500

3,000

-400

-200

-1,800

10.

9,000 $34,800

Expenses

− Dividends

-900

Rent Expense

-200

Advertising Expense

3,400

4. 500 9,000

12,000

Service Revenue

-400 Dividend -200 -1,800

Salaries and Wages Expense

-9,000 +

$500

$3,400

Total Assets $38,700

Stockholders' Equity

Service Revenue Expenses Salaries and Wages Expense Rent Expense Advertising Expense Net Income

$30,000

$12,000

(2,900) -

Total Liabilities + Stockholders' Equity $38,700

$12,000 $1,800 900 200

2,900 $9,100

When you have completed this problem, respond to the additional question on the P3.1 Add Ques worksheet.

(400)

P3.1 ADDITIONAL QUESTION. Analyze transactions and compute net income. On April 1, Wonder Travel Agency Inc. was established. These transactions were completed during the month. 1. 2. 3. 4. 5. 6.

Additional question Assume that in transaction (6) services performed changed to $15,000 with $5,000 received in cash. Also assume that the amount was paid in full (transaction 10). Show the impact of these changes on the analysis and on net income.

Assets Cash

Accounts Receivable

Supplies

WONDER TRAVEL AGENCY INC. = Liabilities + Accounts Common Equipment = Payable + Stock

Stockholders' Equity +

Revenue

−

Expenses

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Total Assets

Service Revenue Expenses Salaries and Wages Expense Rent Expense Advertising Expense Net Income

Total Liabilities + Stockholders' Equity

− Dividends

P3.1 ADDITIONAL QUESTION SOLUTION. Analyze transactions and compute net income. On April 1, Wonder Travel Agency Inc. was established. These transactions were completed during the month. 1. 2. 3. 4. 5. 6.

Assets

Cash + 30,000

-900

-3,400

Accounts Receivable

Supplies

WONDER TRAVEL AGENCY INC. = Liabilities + Accounts Common Equipment = Payable + Stock + 30,000

Revenue

200

-500

5,000

-400

-200

-1,800

10.

10,000 37,800

−

Expenses

− Dividends

-900

Rent Expense

-200

Advertising Expense

3,400

4. 500 10,000

15,000

Service Revenue

-400 Dividend -200 Salaries and Wages Expense

-1,800 -10,000 +

500 +

3,400 =

Total Assets $41,700

Stockholders' Equity

Service Revenue Expenses Salaries and Wages Expense Rent Expense Advertising Expense Net Income

0 +

30,000 +

15,000

-2,900

Total Liabilities + Stockholders' Equity $41,700

$15,000 $1,800 900 200

2,900 $12,100

-400

P3.3. Analyze transactions and prepare an income statement, retained earnings statement, and balance sheet. Bindy Crawford created a corporation providing legal services, Bindy Crawford Inc., on July 1, 2022. On July 31, the balance sheet showed Cash $4,000; Accounts Receivable $2,500; Supplies $500; Equipment $5,000; Accounts Payable $4,200; Common Stock $6,200; and Retained Earnings $1,600. During August, the following transactions occurred. Aug. 1 Collected $1,100 of accounts receivable due from customers. 4 Paid $2,700 cash for accounts payable due. 9 Performed services worth $5,400 of which $3,600 is collected in cash and the balance is due in September. 15 Purchased additional office equipment for $4,000, paying $700 in cash and the balance on account. 19 Paid salaries $1,400, rent for August $700, and advertising expenses $350. 23 Paid a cash dividend of $700. 26 Borrowed $5,000 from Standard Federal Bank; the money was borrowed on a 4-month note payable. 31 Incurred utility expenses for the month on account $380. Instructions a. Prepare a tabular analysis of the August transactions beginning with July 31 balances. The column headings should be Cash + Accounts Receivable + Supplies + Equipment = Notes Payable + Accounts Payable + Common Stock + Retained Earnings + Revenue − Expenses − Dividends. Include margin explanations for any changes in Retained Earnings in column X. b. Complete the income statement for August, the retained earnings statement for August, and the classified balance sheet at August 31. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Assets

Jul. 31 Bal.

Accounts Cash + Receivable + $4,000 + $2,500 +

Supplies $500

= + +

Equipment = $5,000

BINDY CRAWFORD INC. Liabilities + Notes Accounts Payable + Payable + $4,200 +

Stockholders' Equity Common Stock $6,200

+ +

Retained Earnings $1,600

Revenue −

Aug 1 4 9 15 19

23 26 31 Totals

Total Assets

Total Liabilities + Stockholders' Equity

Expenses −

Dividends

Accounts

BINDY CRAWFORD INC. Income Statement For the Month Ended August 31, 2025 Revenues Service revenue Expenses Salaries and wages expense Rent expense Utilities expense Advertising expense Total expenses Net income

BINDY CRAWFORD INC. Retained Earnings Statement For the Month Ended August 31, 2025 Retained earnings, August 1 Add: Net income Less: Dividends Retained earnings, August 31

BINDY CRAWFORD INC. Balance Sheet August 31, 2025 Assets Current assets Cash Accounts receivable Supplies Total current assets Equipment Total assets Liabilities and Stockholders' Equity Current liabilities Notes payable Account payable Total current liabilities Stockholders' equity Common stock Retained earnings Total liabilities and stockholders' equity

When you have completed this problem, respond to the additional question on the P3.3 Add Ques worksheet.

P3.3 SOLUTION. Analyze transactions and prepare an income statement, retained earnings statement, and balance sheet. Bindy Crawford created a corporation providing legal services, Bindy Crawford Inc., on July 1, 2022. On July 31, the balance sheet showed Cash $4,000; Accounts Receivable $2,500; Supplies $500; Equipment $5,000; Accounts Payable $4,200; Common Stock $6,200; and Retained Earnings $1,600. During August, the following transactions occurred. Aug. 1 Collected $1,100 of accounts receivable due from customers. 4 Paid $2,700 cash for accounts payable due. 9 Performed services worth $5,400 of which $3,600 is collected in cash and the balance is due in September. 15 Purchased additional office equipment for $4,000, paying $700 in cash and the balance on account. 19 Paid salaries $1,400, rent for August $700, and advertising expenses $350. 23 Paid a cash dividend of $700. 26 Borrowed $5,000 from Standard Federal Bank; the money was borrowed on a 4-month note payable. 31 Incurred utility expenses for the month on account $380. Instructions a. Prepare a tabular analysis of the August transactions beginning with July 31 balances. The column headings should be Cash + Accounts Receivable + Supplies + Equipment = Notes Payable + Accounts Payable + Common Stock + Retained Earnings + Revenue − Expenses − Dividends. Include margin explanations for any changes in Retained Earnings in column X. b. Complete the income statement for August, the retained earnings statement for August, and the classified balance sheet at August 31. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Assets

Jul. 31 Bal.

Accounts Cash + Receivable + $4,000 + $2,500 +

Aug 1

1,100

-2,700

3,600

-700

-2,450

-700

5,000

Supplies $500

+ Equipment = + $5,000

BINDY CRAWFORD INC. Liabilities + Notes Accounts Payable + Payable + $4,200 +

7,150 +

Common Stock $6,200

+ +

Retained Earnings $1,600

Revenue −

Expenses −

Dividends

-1,100 -2,700 1,800

5,400 4,000

Service Revenue

3,300 -1,400

Salaries and Wages Expense

-700

Rent Expense

-350

Advertising Expense

-700 Dividends 5,000

31 Totals

Stockholders' Equity

3,200 +

Total Assets $19,850

500 +

9,000 =

5,000 +

+380 5,180

6,200 +

1,600 +

5,400

Total Liabilities + Stockholders' Equity $19,850

-380 2,830

Utilities Expense

700

$5,400 $1,400 700 380 350 2,830 $2,570

BINDY CRAWFORD INC. Retained Earnings Statement For the Month Ended August 31, 2025 Retained earnings, August 1 Add: Net income Less: Dividends Retained earnings, August 31

$1,600 2,570 4,170 700 $3,470

BINDY CRAWFORD INC. Balance Sheet August 31, 2025 Assets Current assets Cash Accounts receivable Supplies Total current assets Equipment Total assets

$7,150 3,200 500 $10,850 9,000 $19,850

Liabilities and Stockholders' Equity Current liabilities Notes payable Account payable Total current liabilities Stockholders' equity Common stock Retained earnings Total liabilities and stockholders' equity

$5,000 5,180 $10,180 6,200 3,470

9,670 $19,850

When you have completed this problem, respond to the additional question on the P3.3 Add Ques worksheet.

P3.3 ADDITIONAL QUESTION. Analyze transactions and prepare an income statement, retained earnings statement, and balance sheet. Bindy Crawford created a corporation providing legal services, Bindy Crawford Inc., on July 1, 2022. On July 31, the balance sheet showed Cash $4,000; Accounts Receivable $2,500; Supplies $500; Equipment $5,000; Accounts Payable $4,200; Common Stock $6,200; and Retained Earnings $1,600. During August, the following transactions occurred. Aug. 1 Collected $1,100 of accounts receivable due from customers. 4 Paid $2,700 cash for accounts payable due. 9 Performed services worth $5,400 of which $3,600 is collected in cash and the balance is due in September. 15 Purchased additional office equipment for $4,000, paying $700 in cash and the balance on account. 19 Paid salaries $1,400, rent for August $700, and advertising expenses $350. 23 Paid a cash dividend of $700. 26 Borrowed $5,000 from Standard Federal Bank; the money was borrowed on a 4-month note payable. 31 Incurred utility expenses for the month on account $380. Instructions a. Prepare a tabular analysis of the August transactions beginning with July 31 balances. The column headings should be Cash + Accounts Receivable + Supplies + Equipment = Notes Payable + Accounts Payable + Common Stock + Retained Earnings + Revenue − Expenses − Dividends. Include margin explanations for any changes in Retained Earnings in column X. b. Complete the income statement for August, the retained earnings statement for August, and the classified balance sheet at August 31. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional question Assume that salaries and wages expense and the amount borrowed from the bank changed to $1,600 and $7,500 respectively.

Jul. 31 Bal.

Assets Accounts Cash + Receivable + Supplies $4,000 + $2,500 + $500

= + Equipment = + $5,000

BINDY CRAWFORD INC. Liabilities + Notes Accounts Payable + Payable + $4,200 +

Stockholders' Equity Common Stock $6,200

+ +

Retained Earnings $1,600

Revenue −

Aug 1 4 9 15 19

23 26 31 Totals

Total Assets

Total Liabilities + Stockholders' Equity

Expenses −

Dividends

BINDY CRAWFORD INC. Retained Earnings Statement For the Month Ended August 31, 2025 Retained earnings, August 1 Add: Net income Less: Dividends Retained earnings, August 31

P3.3 ADDITIONAL QUESTION SOLUTION. Analyze transactions and prepare an income statement, retained earnings statement, and balance sheet. Bindy Crawford created a corporation providing legal services, Bindy Crawford Inc., on July 1, 2022. On July 31, the balance sheet showed Cash $4,000; Accounts Receivable $2,500; Supplies $500; Equipment $5,000; Accounts Payable $4,200; Common Stock $6,200; and Retained Earnings $1,600. During August, the following transactions occurred. Aug. 1 Collected $1,100 of accounts receivable due from customers. 4 Paid $2,700 cash for accounts payable due. 9 Performed services worth $5,400 of which $3,600 is collected in cash and the balance is due in September. 15 Purchased additional office equipment for $4,000, paying $700 in cash and the balance on account. 19 Paid salaries $1,400, rent for August $700, and advertising expenses $350. 23 Paid a cash dividend of $700. 26 Borrowed $5,000 from Standard Federal Bank; the money was borrowed on a 4-month note payable. 31 Incurred utility expenses for the month on account $380. Instructions a. Prepare a tabular analysis of the August transactions beginning with July 31 balances. The column headings should be Cash + Accounts Receivable + Supplies + Equipment = Notes Payable + Accounts Payable + Common Stock + Retained Earnings + Revenue − Expenses − Dividends. Include margin explanations for any changes in Retained Earnings in column X. b. Complete the income statement for August, the retained earnings statement for August, and the classified balance sheet at August 31. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Additional question Assume that salaries and wages expense and the amount borrowed from the bank changed to $1,600 and $7,500 respectively.

Assets

Jul. 31 Bal.

Accounts Cash + Receivable $4,000 + $2,500

Aug 1

1,100

-2,700

3,600

-700

-2,650

-700

7,500

+ +

Supplies $500

+ +

Equipment $5,000

BINDY CRAWFORD INC. Liabilities + Notes Accounts Payable + Payable + $4,200 +

9,450 +

Common Stock $6,200

+ +

Retained Earnings $1,600

Revenue −

Expenses −

Dividends

-1,100 -2,700 1,800

5,400 4,000

Service Revenue

3,300 -1,600

Salaries and Wages Expense

-700

Rent Expense

-350

Advertising Expense

-700 Dividends 7,500

31 Totals

Stockholders' Equity

3,200 +

Total Assets $22,150

500 +

9,000 =

5,000 +

+380 5,180

6,200 +

1,600 +

5,400

Total Liabilities + Stockholders' Equity $19,850

-380 2,830

Utilities Expense

700

$5,400 $1,600 700 380 350 3,030 $2,370

BINDY CRAWFORD INC. Retained Earnings Statement For the Month Ended August 31, 2025 Retained earnings, August 1 Add: Net income Less: Dividends Retained earnings, August 31

$1,600 2,370 3,970 700 $3,270

BINDY CRAWFORD INC. Balance Sheet August 31, 2025 Assets Current assets Cash Accounts receivable Supplies Total current assets Equipment Total assets

$9,450 3,200 500 $13,150 9,000 $22,150

$5,000 5,180 $10,180 6,200 3,270

9,470 $19,650

P3.7 Prepare a correct trial balance. This trial balance of Washburn Co. does not balance. WASHBURN CO. Trial Balance June 30, 2025 Debit Cash Accounts Receivable Supplies Equipment Accounts Payable Unearned Service Revenue Common Stock Dividends Service Revenue Salaries and Wages Expense Utilities Expense

Credit $ 3,090

3,190 800 3,000 3,686 1,200 9,000 800 3,480

3,600 910 13,500

19,256

Each of the listed accounts has a normal balance per the general ledger. An examination of the ledger and journal reveals the following errors: 1. Cash received from a customer on account was debited for $780, and Accounts Receivable was credited for the same amount. The actual collection was for $870. 2. The purchase of a printer on account for $340 was recorded as a debit to Supplies for $340 and a credit to Accounts Payable for $340. 3. Services were performed on account for a client for $900. Accounts Receivable was debited for $90 and Service Revenue was credited for $900. 4. A debit posting to Salaries and Wages Expense of $700 was omitted. 5. A payment on account for $206 was credited to Cash for $206 and credited to Accounts Payable for $260. 6. Payment of a $600 cash dividend to Washburn's stockholders was debited to Salaries and Wages Expense for $600 and credited to Cash for $600. Instructions Prepare the correct trial balance. (Hint: All accounts have normal balances.) NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

WASHBURN CO. Trial Balance June 30, 2025 Debit

Credit

Cash Accounts Receivable Supplies Equipment Accounts Payable Unearned Service Revenue Common Stock Dividends Service Revenue Salaries and Wages Expense Utilities Expense

When you have completed this problem, respond to the additional question on the P3.7 Add Ques worksheet.

P3.7 SOLUTION. Prepare a correct trial balance. This trial balance of Washburn Co. does not balance. WASHBURN CO. Trial Balance June 30, 2025 Debit Cash Accounts Receivable Supplies Equipment Accounts Payable Unearned Service Revenue Common Stock Dividends Service Revenue Salaries and Wages Expense Utilities Expense

Credit $ 3,090

3,190 800 3,000 3,686 1,200 9,000 800 3,480

3,600 910 13,500

19,256

WASHBURN CO. Trial Balance June 30, 2025 Cash Accounts Receivable Supplies Equipment Accounts Payable Unearned Service Revenue Common Stock Dividends Service Revenue Salaries and Wages Expense Utilities Expense

Debit $3,180 3,910 460 3,340

Credit

$3,220 1,200 9,000 1,400 3,480 3,700 910 $16,900

$16,900

When you have completed this problem, respond to the additional question on the P3.7 Add Ques worksheet.

P3.7 ADDITIONAL QUESTION. Prepare a correct trial balance. This trial balance of Washburn Co. does not balance. WASHBURN CO. Trial Balance June 30, 2025 Debit Cash Accounts Receivable Supplies Equipment Accounts Payable Unearned Service Revenue Common Stock Dividends Service Revenue Salaries and Wages Expense Utilities Expense

Credit $ 3,090

3,190 800 3,000 3,686 1,200 9,000 800 3,480

3,600 910 13,500

19,256

WASHBURN CO. Trial Balance June 30, 2025 Debit Cash Accounts Receivable Supplies Equipment Accounts Payable Unearned Service Revenue Common Stock Dividends Service Revenue Salaries and Wages Expense Utilities Expense

Credit

Additional question In addition to the errors noted, assume that 20% of unearned revenue was earned; however, no entry was processed. Show the impact of this error on the trial balance.

P3.7 ADDITIONAL QUESTION SOLUTION. Prepare a correct trial balance. This trial balance of Washburn Co. does not balance. WASHBURN CO. Trial Balance June 30, 2025 Debit Cash Accounts Receivable Supplies Equipment Accounts Payable Unearned Service Revenue Common Stock Dividends Service Revenue Salaries and Wages Expense Utilities Expense

Credit $ 3,090

3,190 800 3,000 3,686 1,200 9,000 800 3,480

3,600 910 13,500

19,256

Debit $3,180 3,910 460 3,340

Credit

$3,220 960 9,000 1,400 3,720 3,700 910 $16,900

$16,900

Additional question In addition to the errors noted, assume that 20% of unearned revenue was earned; however, no entry was processed. Show the impact of this error on the trial balance.

E4.15 Prepare a correct income statement. The income statement of Norski Co. for the month of July shows net income of $2,000 based on Service Revenue $5,500; Salaries and Wages $2,100; Supplies Expense $900; and Utilities Expense $500. In reviewing the statement, you discover the following: 1. Insurance expired during July of $350 was omitted. 2. Supplies expense includes $200 of supplies that are still on hand at July 31. 3. Depreciation on equipment of $150 was omitted. 4. Accrued but unpaid wages at July 31 of $360 were not included, 5. Services performed but unrecorded totaled $700. Instructions Prepare a correct income statement for July 2025. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells. Norski Co. Income Statement For the Month Ended July 31, 2025 Revenues Service revenue Expenses Salaries and wages expense Supplies expense Utilities expense Insurance expense Depreciation expense Total expenses Net income

When you have completed this problem, respond to the following additional question, on the E4.15 Add Ques worksheet.

E4.15 SOLUTION. Prepare a correct income statement. The income statement of Norski Co. for the month of July shows net income of $2,000 based on Service Revenue $5,500; Salaries and Wages $2,100; Supplies Expense $900; and Utilities Expense $500. In reviewing the statement, you discover the following: 1. Insurance expired during July of $350 was omitted. 2. Supplies expense includes $200 of supplies that are still on hand at July 31. 3. Depreciation on equipment of $150 was omitted. 4. Accrued but unpaid wages at July 31 of $360 were not included, 5. Services performed but unrecorded totaled $700. Instructions Prepare a correct income statement for July 2025. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells. Norski Co. Income Statement For the Month Ended July 31, 2025 Revenues Service revenue Expenses Salaries and wages expense Supplies expense Utilities expense Insurance expense Depreciation expense Total expenses Net income

6,200

4,160 2,040

2,460 700 500 350 150

E4.15 ADDITIONAL QUESTION. Prepare a correct income statement. The income statement of Norski Co. for the month of July shows net income of $2,000 based on Service Revenue $5,500; Salaries and Wages $2,100; Supplies Expense $900; and Utilities Expense $500. In reviewing the statement, you discover the following: 1. Insurance expired during July of $350 was omitted. 2. Supplies expense includes $200 of supplies that are still on hand at July 31. 3. Depreciation on equipment of $150 was omitted. 4. Accrued but unpaid wages at July 31 of $360 were not included, 5. Services performed but unrecorded totaled $700. Instructions Prepare a correct income statement for July 2025. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells. Norski Co. Income Statement For the Month Ended July 31, 2025 Revenues Service revenue Expenses Salaries and wages expense Supplies expense Utilities expense Insurance expense Depreciation expense Total expenses Net income

Additional question Assume that instead of the original information given that: services performed but unrecorded was $950; supplies expense included $285 of supplies still on hand; and, insurance expense of $450 was omitted. What impact do these changes have on the income statement?

itional question ume that instead of information services

ecorded was $950; plies expense uded $285 of plies still on hand; , insurance expense 450 was omitted. at impact do these nges have on the me statement?

E4.15 ADDITIONAL QUESTION SOLUTION. Prepare a correct income statement. The income statement of Norski Co. for the month of July shows net income of $2,000 based on Service Revenue $5,500; Salaries and Wages $2,100; Supplies Expense $900; and Utilities Expense $500. In reviewing the statement, you discover the following: 1. Insurance expired during July of $350 was omitted. 2. Supplies expense includes $200 of supplies that are still on hand at July 31. 3. Depreciation on equipment of $150 was omitted. 4. Accrued but unpaid wages at July 31 of $360 were not included, 5. Services performed but unrecorded totaled $700. Instructions Prepare a correct income statement for July 2025. NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells. Norski Co. Income Statement For the Month Ended July 31, 2025 Revenues Service revenue Expenses Salaries and wages expense Supplies expense Utilities expense Insurance expense Depreciation expense Total expenses Net income

6,450

4,175 2,275

2,460 615 500 450 150

itional question ume that instead of information services

ecorded was $950; plies expense uded $285 of plies still on hand; , insurance expense 450 was omitted. at impact do these nges have on the me statement?

E4.17 Analyze adjusted data. This is a partial adjusted trial balance of Ramon Company. RAMON COMPANY Adjusted Trial Balance January 31, 2025 Supplies Prepaid Insurance Salaries and Wages Payable Unearned Service Revenue Supplies Expense Insurance Expense Salaries and Wages Expense Service Revenue

Debit 700 1,560

Credit

1,060 750

950 520 1,800 4,000

Instructions Answer these questions, assuming the year begins January 1. a. If the amount in Supplies Expense is the January 31 adjusting entry, and $300 of supplies was purchased in January, what was the balance in Supplies on January 1? b. If the amount in Insurance Expense is the January 31 adjusting entry, and the original insurance premium was for 1 year, what was the total premium and when was the policy purchased? c. If $2,500 of salaries was paid in January, what was the balance in Salaries and Wages Payable at December 31, 2024? d. If $1,800 was received in January for services performed in January, what was the balance in Unearned Service Revenue at December 31, 2024? NOTE: Enter a formula, a cell reference, or a value (if you are unable to reference a cell), into the yellow shaded input cells.

Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1)

Monthly premium Number of months Total premium Prepaid Insurance, 1/31 Monthly premium Number of months remaining,1/31 Date of Purchase

Cash paid Salaries and wages payable, 1/31/25 Less: Salaries and wages expense Salaries and wages payable, 12/31/24

Service revenue Unearned revenue, 1/31/25 Cash received in January Unearned revenue, 12/31/24

When you have completed this problem, respond to the following additional question, on the E4.17 Add Ques worksheet.

E4.17 SOLUTION. Analyze adjusted data. This is a partial adjusted trial balance of Ramon Company. RAMON COMPANY Adjusted Trial Balance January 31, 2025 Supplies Prepaid Insurance Salaries and Wages Payable Unearned Service Revenue Supplies Expense Insurance Expense Salaries and Wages Expense Service Revenue

Debit 700 1,560

Credit

1,060 750

950 520 1,800 4,000

Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1)

950 700 (300) 1,350

Monthly premium Number of months Total premium

Prepaid Insurance, 1/31 Monthly premium Number of months remaining,1/31 Date of Purchase

$ $

Cash paid Salaries and wages payable, 1/31/25

Less: Salaries and wages expense Salaries and wages payable, 12/31/24

Service revenue Unearned revenue, 1/31/25 Cash received in January Unearned revenue, 12/31/24

520 12 6,240 1,560 520 3

05/01/24

2,500 1,060 3,560 1,800 1,760

4,000 750 4,750 1,800 2,950

E4.17 ADDITIONAL QUESTION. Analyze adjusted data. This is a partial adjusted trial balance of Ramon Company. RAMON COMPANY Adjusted Trial Balance January 31, 2025 Supplies Prepaid Insurance Salaries and Wages Payable Unearned Service Revenue Supplies Expense Insurance Expense Salaries and Wages Expense Service Revenue

Debit 700 1,560

Credit

1,060 750

950 520 1,800 4,000

Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1)

Assume that amounts for purchase of supplies, salaries paid, and cash received in services performed in January changed to $500, $1,800 and $2,800, respectively. How do these changes impact your responses?

impact your responses?

Monthly premium Number of months Total premium Prepaid Insurance, 1/31 Monthly premium Number of months remaining,1/31 Date of Purchase

Cash paid Salaries and wages payable, 1/31/25 Less: Salaries and wages expense Salaries and wages payable, 12/31/24

Service revenue Unearned revenue, 1/31/25 Cash received in January Unearned revenue, 12/31/24

E4.17 ADDITIONAL QUESTION SOLUTION. Analyze adjusted data. This is a partial adjusted trial balance of Ramon Company. RAMON COMPANY Adjusted Trial Balance January 31, 2025 Supplies Prepaid Insurance Salaries and Wages Payable Unearned Service Revenue Supplies Expense Insurance Expense Salaries and Wages Expense Service Revenue

Debit 700 1,560

Credit

1,060 750

950 520 1,800 4,000

Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1)

Monthly premium Number of months Total premium Prepaid Insurance, 1/31 Monthly premium Number of months remaining,1/31 Date of Purchase

$ $ $ $

950 700 (500) 1,150

520 12 6,240 1,560 520 3

05/01/24