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