ch 2 some end of chapter solutions
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CH02_Solutions_DEP
Chapter 2
Constructing Financial Statements
MINI EXERCISES
M2-14. (10 minutes)
Use the accounting equation.
a.Cash $ 8,000Accounts receivable 23,000Supplies 9,000Equipment 138,000 178,000Accounts payable$ 11,000Common stock 110,000 121,000Retained earnings$ 57,000b.Retained Earnings:December 31, 2013$ 57,000January 1, 2013 30,000Increase 27,000Add: Dividends 12,000Net Income$ 39,000
M2-15. (5 minutes)
a.$200,000 - $85,000 = $115,000 equityb.$32,000 + $28,000 = $60,000 assetsc.$93,000 - $52,000 = $41,000 liabilities
M2-16. (5 minutes)
a.$375,000 - $105,000 = $270,000 equityb.$43,000 + $11,000 = $54,000 assetsc.$878,000 - $422,000 = $456,000 liabilities
M2-17. (5 minutes)
a.$450,000 - $326,000 = $124,000 equity
b.$618,000 - $165,000 = $453,000 liabilities.
c.$400,000 + $200,000 + $185,000 = $785,000 assets.
M2-18. (10 minutes)
a.no effecte.increaseb.decreasef.increasec.decreaseg.increased.no effect
M2-19. (15 minutes)
a.Balance sheet g.Balance sheetb.Income statementh.Balance sheetc.Balance sheeti.Income statementd.Income statementj.Income statemente.Balance sheetk.Balance sheetf.Balance sheetl.Balance sheet
M2-20. (20 minutes)
a.Net income computationService revenue (record when earned) $100,000
Wage expense . (60,000)
Net income $ 40,000
b.Yes, recognizing the wage liability would cause wage expense to increase by $10,000 and income would go down by the same amount (before taxes).
M2-21. (10 minutes)
a. Balance sheetb.Income statement, Statement of stockholders equityc. Balance sheetd. Income statemente. Statement of stockholders equityf. Statement of stockholders equityg. Balance sheeth. Income statementi. Statement of stockholders equity, Balance sheet
M2-22. (10 minutes)
a.Balance sheetb.Balance sheetc.Income statement, Statement of stockholders equityd.Statement of stockholders equity, Balance sheete.Balance sheetf.Income statementg.Balance sheeth.Balance sheet
M2-23. (10 minutes)
a.Balance sheetb.Income statementc.Statement of stockholders equity, Balance sheetd.Income statemente.Statement of stockholders equityf.Balance sheetg.Balance sheeth.Balance sheet
M2-24. (15 minutes)
Ending retained earnings = Beginning retained earnings + Net income Dividends + the effects of other adjustments. And, the ending retained earnings for one period is the beginning retained earnings for the following period.
For the year ended January 29, 2011: $2,037 + Net income 1,488 = $1,354, so Net income = $805
Ending retained earnings for the year ended January 29, 2011 equals $1,354, the beginning retained earnings for the following year.
For the year ended January 28, 2012: $1,354 + $850 Dividends $1,036 = $24 so Dividends = $1,144
Fiscal year endingJanuary 29, 2011January 28, 2012
Beginning retained earnings (deficit) $ 2,037$ 1,354
Net income (loss) 805850
Dividends paid 1,488 1,144
Increases (decreases) from other retained earnings changes - (1,036)
Ending retained earnings (deficit) $ 1,354$ 24
M2-25. (10 minutes)
a.Increase assets (Cash)Increase equity (Service Revenues)b.Increase assets (Office Supplies)Increase liabilities (Accounts Payable)c.Increase assets (Cash)Increase equity (Contributed Capital or Common Stock)d.Decrease liabilities (Accounts Payable)Decrease assets (Cash)e.Increase assets (Cash)Increase liabilities (Notes Payable)f.Increase assets (Accounts Receivable)Increase equity (Service Revenues)g.Increase assets (Office Equipment)Decrease assets (Cash)h.Decrease equity (Interest Expense)Decrease assets (Cash)i.Decrease equity (Utilities Expense)Increase liabilities (Accounts Payable)
M2-26. (10 minutes)
a.Increase assets (Office Equipment)Decrease assets (Cash)b.Increase assets (Accounts Receivable)Increase equity (Service Revenue)c.Decrease assets (Cash)Decrease equity (Rent Expense)d.Increase assets (Cash)Increase equity (Service Revenue)e.Increase assets (Cash)Decrease assets (Accounts Receivable)f.Increase assets (Office Equipment)Increase liabilities (Accounts Payable)g.Decrease assets (Cash)Decrease equity (Salaries Expense)h.Decrease assets (Cash)Decrease liabilities (Accounts Payable)i.Decrease assets (Cash)Decrease equity (Retained Earnings)
M2-27. (10 minutes)
Johnson & JohnsonStatement of Retained EarningsFor Year Ended January 2, 2011Retained earnings, December 30, 2010$77,773
Add: Net income 9,672
Less: Dividends (6,156)
Other retained earnings changes 38
Retained earnings, January 2, 2011$81,251
M2-28. (10 minutes)
20122013
Revenues$350,000$ 0
Expenses 200,000 0
Net income$150,000$ 0
Explanation: All of the revenue is reported in 2012 when it is earnedper the revenue recognition principle. Likewise, the expense is reported in 2012 when it is incurredper application of the matching principle. The receipt or payment of cash does not affect the recording of revenues, expenses, and net income.
EXERCISES
E2-32. (25 minutes)
Use the accounting equation to determine Retained Earnings as of May 31, 2013.
a. and b.
Beaver, Inc. Balance Sheets
May 31, 2013June 1, 2013
Assets
Cash$ 12,200$ 3,200
Accounts receivable18,30018,300
Supplies16,40016,400
Equipment 55,000 70,000
Total assets$101,900$107,900
Liabilities
Notes payable$ 20,000$ 33,000
Accounts payable 5,200 5,200
Total liabilities 25,200 38,200
Stockholders' Equity
Common stock 42,500 42,500
Retained earnings 34,200 27,200
Total stockholders' equity 76,700 69,700
Total liabilities and stockholders' equity$101,900$107,900
c. Net working capital = current assets current liabilities$32,700 = ($3,200 + $18,300 + $16,400) $5,200
E2-33. (30 minutes)
Use the accounting equation and the information on changes in contributed capital and retained earnings.
Beginning retained earnings (= Beginning assets Beginning liabilities)
+ Net income (= Revenues Expenses)
Dividends
Ending retained earnings (= Ending assets Ending liabilities)
a.Equity, Beginning ($28,000 - $18,600) $ 9,400Equity, Ending ($30,000 - $17,300) 12,700Increase 3,300Add: Net Capital Withdrawn ($5,000 - $2,000) 3,000Net Income 6,300Add: Expenses 8,500Revenues$14,800
b.Equity, Beginning ($12,000 - $5,000) $ 7,000Add: Net Capital Contributed ($4,500 - $1,500) 3,000 10,000Add: Net Income ($28,000 - $21,000) 7,000Equity, Ending$17,000
Assets, Ending$26,000Equity, Ending 17,000Liabilities, Ending, $ 9,000
c.Equity, Beginning ($28,000 - $19,000) $ 9,000Add: Net Income ($18,000 - $11,000) 7,000 16,000Less: Dividends 1,000 15,000Equity, Ending ($34,000 - $15,000) 19,000Common Stock Issued $ 4,000
d.Common Stock Issued $ 3,500Net Income ($24,000 - $17,000) 7,000 10,500Cash Dividends 6,500Increase in Equity 4,000Equity, Ending ($40,000 - $19,000) 21,000Equity, Beginning 17,000Add: Liabilities, Beginning 9,000Total Assets, Beginning$26,000
E2-34(30 minutes)
Use the accounting equation to determine stockholders equity balances.
a.LANG SERVICESBalance Sheets
December 31,
20132012
Assets
Cash$10,000$ 8,000
Accounts receivable22,80017,500
Supplies4,7004.200
Equipment 32,000 27,000
Total assets$69,500$56,700
Liabilities
Accounts payable$25,000$25,000
Notes payable 1,800 1,600
Total liabilities26,80026,600
Stockholders equity
Equity 42,70030,100
Total liabilities and stockholders equity$69,500$56,700
b.Equity, December 31, 2013$42,700Equity, December 31, 2012 30,100Increase 12,600Add: Dividends 17,000 29,600Less: Common Stock issued 5,000Net Income for 2013$24,600
c.Current ratio = ($10,000 + $22,800 + $4,700)/$25,000 = 1.5Quick ratio = ($10,000 + $22,800)/$25,000 = 1.31
d. Langs liquidity position is satisfactory as it meets the industry norm, and its quick ratio is also above the industry average. The firm appears to have invested about the right amount in liquid assetsneither too much, nor too little.
E2-35. (30 minutes)
Use the accounting equation to determine Retained Earnings balances.
a.Lynch ServicesBalance Sheets
December 31,
20132012
Assets
Cash$ 23,000$ 20,000
Accounts receivable42,00033,000
Supplies20,000 18,000
Land40,00040,000
Building250,000260,000
Equipment 43,000 45,000
Total assets$418,000$416,000
Liabilities
Accounts payable$ 6,000$ 9,000
Mortgage payable 90,000 100,000
Total liabilities 96,000 109,000
Stockholders equity
Common stock220,000220,000
Retained earnings 102,000 87,000
Total stockholders' equity 322,000307,000
Total liabilities and stockholders equity$418,000$416,000
b.Retained Earnings, December 31, 2013$102,000Retained Earnings, December 31, 2012 87,000Increase during 2013 15,000Add:Dividend for 2013 10,000Net Income for 2013 $ 25,000
E2-38. (15 minutes)
a. Procter & Gamble ($ millions)AmountClassification
Net sales$ 83,680I
Income tax expense3,468I
Retained earnings75,349B
Net earnings10,904I
Property, plant and equipment (net)20,377B
Selling, general and admin expense26,421I
Accounts receivable6,068B
Total liabilities68,209B
Stockholders' equity64,035B
Other non-operating income, net262I
b.Total assets = Total liabilities + stockholders equityTotal assets = $68,209 + $64,035 = $132,244
Total Revenue Total Expenses = Net Income$83,680 Total Expenses = $10,904; Thus, Total Expenses = $72,776
c.Return on equity = Net income/Stockholders equity = $11,797/$68,001 = 0.173 or 17.3%ROE is an estimate because we have only this years equity for the denominator.
Debt-to-equity ratio = Total liabilities/Stockholders equity= $70,383/$68,001 = 1.04
d.Interest, investment income and divestiture gains and losses.
E2-39. (15 minutes)
a.Target Corp ($ millions)AmountClassification
Sales$ 67,390I
Depreciation and amortization expense2,084I
Retained earnings12,698B
Net earnings2,920I
Property, plant & equipment, net25,493B
Selling, general admin. expense & other (net)13,469I
Accounts payable6,625B
Total liabilities and shareholders investment43,705B
Total shareholders investment15,487B
b.Total assets = Total liabilities and shareholders investmentTotal assets = $43,705
Total revenue Total expenses = Net income$67,390 Total expenses = $2,920Thus, Total expenses = $64,470
c.Return on equity = Net income/Stockholders equity= $2,920 / $15,487 = 18.9%ROE is an estimate because we have only this years equity for the denominator.
E2-40. (15 minutes)
a.Briggs & Stratton ($ millions)AmountClassification
Net sales$ 2,110I
Interest expense23I
Retained earnings1,093B
Net income24I
Property, plant & equipment, net329B
Eng. selling, general & admin. expense301I
Accounts receivable, net249B
Total liabilities928B
Shareholders investment738B
continued next page
E2-40. concluded
b.Total assets = Total liabilities + Shareholders investmentTotal assets = $928 + $738 = $1,666
Total revenue Total expenses = Net income$2,110 Total expenses = $24
Thus, Total expenses = $2,086
c.Return on equity = Net income/Stockholders equity = $24 / $738 = 3.25%ROE is an estimate because we have only this years equity for the denominator.
Debt-to-equity ratio = Total liabilities / Stockholders equity= $928 / $738 = 1.26
E2-41. (15 minutes)
a.Kimberly-Clark ($ millions)AmountClassification
Net sales$20,846I
Cost of goods sold14,694I
Retained earnings8,244B
Net income1,684I
Property, plant & equipment, net8,049B
Mktg. res., selling, general expense3,761I
Accounts receivable, net2,602B
Total liabilities13,844B
Total stockholders' equity5,529B
b.Total assets = Total liabilities + Stockholders equityTotal assets = $13,844 + $5,529 = $19,373
Total revenue Total expenses = Net income$20,846 Total expenses = $1,684
Thus, Total expenses = $19,162
c.Debt-to-equity ratio = Total liabilities / Stockholders equity= $13,844 / $5,529 = 2.50
continued next page
E2-41. concluded
d. If these extraordinary losses persist, they are likely to be normal and not unusual or infrequent. Rather they, or similar losses, should be expected in the future. In this case, it would be misleading to report the losses separate from the expenses of normal operations. Managements current reporting is consistent with the assumption that these same or similar types of losses will not reoccur in the foreseeable future.
E2-43. (20 minutes)
a.1.Cash (+A)50,000
Common stock (+SE)50,000
Receive 50,000 in exchange for common stock.
2.Cash (+A)10,000
Notes payable (+L)10,000
Borrow 10,000 from bank.
3.Inventory (+A)2,000
Accounts payable (+L)2,000
Purchase 2,000 supplies inventory on account.
4.Cash (+A)15,000
Revenue (+R, +SE)15,000
Recognize 15,000 revenue for services provided.
5. Accounts payable (-L)2,000
Cash (-A)2,000
Pay supplier 2,000 cash.
6.Cash (+A)3,500
Unearned revenue (+L)3,500
Receive 3,500 advance from customer.
7.Retained earnings (-SE)5,000
Cash (-A)5,000
Pay 5,000 cash dividend to shareholders.
8.Wages expense (+E, -SE)6,000
Cash (-A)6,000
Pay employees 6,000
9.Interest expense (+E, -SE)500
Cash (-A)500
Pay 500 interest on note.
b.
+ Cash (A) - - Accounts Payable (L) +
(1)50,0002,000(5)(5)2,0002,000(3)
(2)10,0005,000(7)0Bal.
(4)15,0006,000(8)
(6)3,500500(9) - Unearned Revenue (L) +
Bal.65,0003,500(6)
3,500Bal.
+ Supplies Inventory (A) - - Notes Payable (L) +
(3)2,00010,000(2)
Bal.2,00010,000Bal.
- Common Stock (SE) +
50,000(1)
50,000Bal.
- Retained Earnings (SE) +
(7)5,000
Bal.5,000
- Revenue (R) +
15,000(4)
15,000Bal.
+ Wages Expense (E) -
(8)6,000
Bal.6,000
+ Interest Expense (E) -
(9)500
Bal.500
E2-44. (20 minutes)
a. and b.Bettis contractorsBalance Sheets
June 30,July 2,
20132013
Assets
Cash$ 14,700$ 2,200
Accounts receivable9,2009,200
Supplies 30,500 30,500
Current assets54,40041,900
Land25,00025,000
Equipment 98,000108,000
Total assets$177,400$174,900
Liabilities
Accounts payable 8,900 8,900
Current liabilities8,9008,900
Notes payable$ 30,000$ 33,000
Total liabilities 38,900 41,900
Stockholders equity
Common stock100,000100,000
Retained earnings 38,500 33,000
Total stockholders' equity 138,500 133,000
Total liabilities and stockholders equity$177,400$174,900
c. CR = $54,400/$8,900 = 6.1QR = ($14,700 +$9,200)/$8,900 = 2.69
d. Bettis current ratio indicates a strong liquidity position. The firm might want to consider investing some of its cash in assets that contribute to the firms earning power. The quick ratio is reasonable as a company does not want to tie up too much of its assets in a nonearning asset (cash). A quick glance at the data indicates that the firm's liquidity position has weakened since June.
E2-45. (15 minutes)
Balance SheetIncome Statement
TransactionCash Asset+Noncash Assets=Liabilities+Contrib. Capital+Earned CapitalRevenues-Expenses=Net Income
1. Receive $20,000 cash in exchange for common stock.+20,000Cash=+20,000Common Stock-=
2. Purchase $2,000 of inventory on credit.+2,000Inventory=+2,000Accounts Payable-=
3. Sell inventory for $3,000 on credit.+3,000Accounts Receivable
=+3,000Retained Earnings
+3,000Sales
-=+3,000
4. Record cost of goods sold in 3.-2,000Inventory=-2,000Retained Earnings
-+ 2,000COGS Expense=- 2,000
5. Collect $3,000 cash from transaction 3.+3,000Cash-3,000Accounts Receivable=-=
6. Acquire $5,000 of equipment by signing a note.+5,000Equipment=+5,000NotesPayable-=
7. Pay wages of $1,000 in cash.-1,000Cash=-1,000Retained Earnings
-+ 1,000Wages Expense=- 1,000
8. Pay $5,000 cash on a note payable.-5,000Cash=-5,000Notes Payable-=
9. Pay $2,000 cash dividend.-2,000Cash=-2,000Retained Earnings
-=
TOTALS15,000+5,000=2,000+20,000+-2,0003,000-3,000=0
E2-46. (20 minutes)
a.1.Cash (+A)20,000
Common stock (+SE)20,000
2.Inventory (+A)2,000
Accounts payable (+L)2,000
3.Accounts receivable (+A)3,000
Sales (+R, +SE)3,000
4.Cost of goods sold (+E, -SE)2,000
Inventory (-A)2,000
5. Cash (+A)3,000
Accounts receivable (-A)3,000
6.Equipment (+A)5,000
Notes payable (+L)5,000
7.Wages expense (+E, -SE)1,000
Cash (-A)1,000
8.Notes payable (-L)5,000
Cash (-A)5,000
9.Retained earnings (-SE)2,000
Cash (-A)2,000
continued next page
E2-46. concluded
b.
+ Cash (A) - - Common Stock (SE) +
(1)20,0001,000(7)20,000(1)
(5)3,0005,000(8)
2,000(9)
- Sales Revenue (R) +
3,000(3)
+ Inventory (A) -+ Cost of Goods Sold (E) -
(2)2,0002,000(4)(4)2,000
+ Wages Expense (E) -
(7) 1,000
+ Accounts Receivable (A) -- Accounts Payable (L) +
(3)3,0003,000(5)2,000(2)
- Retained Earnings (SE) +
(9)2,000
+ Equipment (A) -
(6)5,000
- Notes Payable (L) +
(8)5,0005,000(6)
P2-55. (30 minutes)
a. Balance SheetIncome Statement
TransactionCash Asset+Noncash Assets=Liabil-ities+Contrib. Capital+Earned CapitalRevenues-Expenses=Net Income
1. Issued common stock $7,000.+7,000Cash=+7,000 Common Stock-=
2. Paid rent $750.-750Cash=-750 Retained Earnings-+750 Rent Expense=-750
3. Received $500 invoice for advertising expense.=+500 Accounts Payable-500 Retained Earnings-+500 Advertising Expense=-500
4. Borrowed $15,000 cash from bank.+15,000Cash=+15,000 Notes Payable-=
5. $1,200 Cash received for services.+1,200Cash=+1,200 Retained Earnings+1,200 Counseling Services Revenue-=+1,200
6. Billed clients $6,800 for services.+6,800 Accounts Receivable=+6,800 Retained Earnings+6,800 Services Revenue-=+6,800
7. Paid $2,200 cash for salary.-2,200Cash=-2,200 Retained Earnings-+2,200 SalaryExpense=-2,200
8. Paid $370 cash for utilities.-370Cash=-370 Retained Earnings-+370 Utilities Expense=-370
9. Paid $900 cash dividend.-900Cash=-900 Retained Earnings-=
10. Acquired land for $13,000.-13,000Cash+13,000 Land=-=
11. Paid $100 interest in cash.-100Cash=-100 Retained Earnings-+100 Interest Expense=-100
Totals$5,880+$19,800=$15,500+$7,000+$3,180$8,000-$3,920=$4,080
b.Lambert ServicesIncome StatementFor the Month of December 2013
Counseling services revenue$8,000
Expenses
Rent expense$ 750
Advertising expense 500
Salary expense2,200
Utilities expense 370
Interest expense 100
Total expenses3,920
Net income$4,080
P2-56. (30 minutes)
a.1.Cash (+A)7,000
Common stock (+SE)7,000
2.Rent expense (+E,-SE)750
Cash (-A)750
3.Advertising expense (+E, -SE)500
Accounts payable (+L)500
4.Cash (+A)15,000
Notes payable (+L)15,000
5. Cash (+A)1,200
Counseling services revenue (+R,+SE)1,200
6.Accounts receivable (+A)6,800
Counseling services revenue (+R,+SE)6,800
7.Salary expense (+E,-SE)2,200
Cash (-A)2,200
8.Utilities expense (+E,-SE)370
Cash (-A)370
9.Retained earnings (dividend paid) (-SE)900
Cash (-A)900
10.Land (+A)13,000
Cash (-A)13,000
11.Interest expense (+E,-SE) 100
Cash (-A)100
continued next page
P2-56. concluded
b.+ Cash (A) -- Accounts Payable (L) +
(1)7,000750(2)500(3)
(4)15,0002,200(7)
(5)1,200370(8)
900(9)
13,000(10)
100(11)
- Notes Payable (L) +
15,000(4)
+ Accounts Receivable (A) -- Common Stock (SE) +
(6)6,8007,000(1)
+ Land (A) -- Retained Earnings (SE) +
(10)13,000(9)900
- Counseling Services Rev. (R) +
1,200(5)
6,800(6)
+ Rent Expense (E) - + Advertising Expense (E) -
(2)750(3)500
+ Salary Expense (E) - + Utilities Expense (E) -
(7)2,200(8)370
+ Interest Expense (E) -
(11) 100
Cambridge Business Publishers, 20152-2Financial & Managerial Accounting for Decision Makers, 2nd EditionCambridge Business Publishers, 2015Solutions Manual, Chapter 22-1
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