mgt45 fall 2013 hw#2 11am section.docx

Chapter 05 - Accounting for Receivables and Inventory Cost Flow

MGT45 HW2Fall 2013 11AM Section

CHAPTER 5 - Accounting for Receivables and Inventory Cost Flow

ANSWERS TO QUESTIONS

1. Accounts receivable are the expected future receipts that arise when a company permits its customers to buy now and pay later. The amounts are usually small with a short term to maturity. Notes Receivable have longer terms to maturity and are usually for larger amounts. The note specifies the maturity date, interest rate, and other credit terms.

8. Factors for use in estimating uncollectible accounts include:

(1) the percentage of uncollectible accounts from years past.(2) adjustment for new circumstances that are anticipated to be experienced in the future.(3) industry averages or experiences of similar businesses.(4) examination of current accounts and company credit

policies.

15. An aging of accounts receivable schedule classifies all receivables by their due date. When using an aging schedule for estimating uncollectible accounts, accounts receivable is divided into categories based on due dates. Different percentages are then applied to each category. For instance a higher percentage would be applied to the group of accounts that is more than 90 days past due than to the group that is only 30 days past due.

20. The matching concept matches revenue and expenses to the period in which they are earned or incurred. By accruing interest, the interest is recognized in the period it is earned or incurred regardless of when the cash is collected or paid.

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26. The acceptance of major credit cards enables a business to avoid the cost of uncollectible accounts and the clerical costs of maintaining accounts receivable records. In addition, the business avoids the implicit cost of lost opportunities due to delayed cash flows.

SOLUTIONS TO EXERCISES - CHAPTER 5

EXERCISE 5-1a.

Nina’s Accounting ServiceHorizontal Statements Model

Balance Sheet Acct. Titles Event

Assets = Equity for R/E

Cash + Acct. Rec.

Allow. Ret. Ear.

20121. NA 120,000 NA 120,000 Svc. Rev.2. 90,000 (90,000) NA NA3. (24,00

0)NA NA (24,00

0)Sal. Exp.

4. NA NA 1,200 (1,200) Uncoll. Accts. Exp.

Bal. 66,000 + 30,000 1,200 = 94,800

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EXERCISE 5-1 (cont.)b.

Nina’s Accounting ServiceIncome Statement

For the Year Ended December 31, 2012

Service Revenue $120,000

Operating ExpensesSalaries Expense $24,000Uncollectible Accounts

Expense1,200

Total Operating Expenses (25,200)

Net Income $ 94,800

Nina’s Accounting Service Balance Sheet

As of December 31, 2012

AssetsCash $66,000Accounts Receivable $30,000Allowance for Doubtful Accounts (1,200) 28,800

Total Assets $94,800

Liabilities $ -0-

Stockholders’ EquityRetained Earnings $94,800

Total Stockholders’ Equity 94,800

Total Liabilities and Stockholders’ Equity

$94,800

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EXERCISE 5-1 b (cont.)

Nina’s Accounting ServiceStatement of Cash Flows


Cash Flows From Operating Activities:

Inflow from Customers $90,000Outflow for Expenses (24,000)

Net Cash Flow from Operating Activities

$66,000

Cash Flows From Investing Activities

-0-

Cash Flows From Financing Activities

-0-

Net Change in Cash 66,000Plus: Beginning Cash Balance -0-Ending Cash Balance $66,00

0

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EXERCISE 5-8a.

Sales on Account $400,000

Less: Ending Balance of Accounts Receivable

(68,000)

Collections of Accounts Receivable $332,000

b. Sales on Account $400,000 x 1% = $4,000 of Uncollectible Accounts Expense

c.Accounts Receivable Ending Balance $68,000Less: Allowance for Doubtful Accounts (4,000)Net Realizable Value of Accounts

Receivable$64,000

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PROBLEM 5-8 (cont.)d.

Coggins Repair Co. Effect of Events on Financial Statements

Event Assets = Liab. + S. Equity

Rev. Exp. = Net Inc. Cash Flows

Cash + Acct. Rec.

Allow. = NA + Ret. Earn.

1. NA + 400,000 NA = NA + 400,000 400,000

NA = 400,000 NA

2. 332,000 + (332,000)

NA = NA + NA NA NA = NA 332,000 OA

3. NA + NA 4,000 = NA + (4,000) NA 4,000

= (4,000) NA

Totals 332,000 + 68,000 4,000 = -0- + 396,000 400,000

4,000

= 396,000 332,000

EXERCISE 5-11

Babb EnterprisesBalance Sheet Income Statement Statement of

Date Assets = Equity Rev. Exp. = Net Inc. Cash FlowsCash + Note

Rec.+ Int.

Rec.= Ret.

Ear.

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1. 9/1/12 (25,000)

25,000 NA NA NA NA NA (25,000) IA

2. 12/31/121

NA NA 500 500 500 NA 500 NA

3. 9/1/132 NA NA 1,000 1,000 1,000

NA 1,000 NA

9/1/13 26,500 (25,000)

(1,500) NA NA NA NA 25,000 IA1,500 OA

1$25,000 x 6% x 4/12 = $5002$25,000 x 6% x 8/12 = $1,000

EXERCISE 5-14

a.

Royal Carpet CleaningHorizontal Statements Model

Balance Sheet Income Statement Statement of

Assets = Liab.

+ Equity Rev. Exp. = Net Inc.

Cash Flows

Event

Cash + Acc. Rec. = + Ret. Ear

1. NA + 87,300 = NA + 87,300 90,000

2,700* = 87,300

NA

2. 87,300 + (87,300) = NA + NA NA NA = NA 87,300 OA

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*$90,000 x 3% = $2,700

b. (1) Total assets: Cash $ 87,300

(2) Revenue recognized: $ 90,000

(3) Cash Flow from Operating Activities:$ 87,300

(4) By accepting credit cards rather than allowing customers to purchase goods on account, Royal Carpet Cleaning avoids the risk of uncollectible accounts as well as the expense of maintaining and collecting accounts receivable.

EXERCISE 5-17

Mix Co.First Purchase $1,200Second Purchase 1,500Total $2,700

(a) (b) (c)FIFO LIFO W. AVG.

Cost of Goods Sold $1,200 $1,500 $1,350*

Ending Inventory 1,500 1,200 1,350*

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*Average Cost per Unit: $2,700 2 = $1,350

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Chapter 6Questions

2. Tangible assets are those assets that have a physical existence. Some examples include buildings and equipment. Intangible assets are those assets that represent some rights and privileges associated with owning the asset. Some examples include copyrights, leases, and trademarks.

4. Depreciation is the systematic allocation of the cost of property, plant and equipment to the accounting periods over which they are to be used. Some examples of assets that are depreciated include buildings, machinery, and office equipment.

7. Amortization is the systematic allocation of the cost of intangible assets over their estimated useful lives. Examples of intangible assets that are amortized include patents, franchises and copyrights.

13. Recognition of depreciation expense reduces total assets; while the asset account containing the asset that is being depreciated is not changed, the contra asset account, accumulated depreciation, is increased which, in turn, reduces total assets. Total equity is decreased when an expense is recognized.

16. When the total cost of an asset is expensed in the year acquired, total expense will be overstated and net income will be understated. Because all of a plant asset's cost is erroneously expensed, assets will be understated and retained earnings will be understated because net income was understated.

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EXERCISE 6-2

Long-Term Operational Assets:a. Nob. Yesc. Yesd. Noe. No f. Yesg. Noh. Yesi. Yes (If the company is in a business that uses or sells timber)j. Yes (As long as it is not held for investment purposes)k. Yesl. Yes

EXERCISE 6-5

a. Basket Purchase

b. % of* Purchase AllocatedTotal Appraised Value App. Val. Price Cost Land $ 200,000 .20 x $900,000 =$180,000Building 800,000 .80 x 900,000 = 720,000Total $1,000,000 $900,000

*Land: $200,000 $1,000,000 = .20; Building: $800,000 $1,000,000 = .80

c. No, the historical cost concept requires that assets be recorded at the amount paid for them.

d.

Balance Sheet Income Statemt.

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Statement ofAssets =Lia

b.+ Equit

yRev.

Exp.

= Net Inc.

Cash Flows

Cash + Land + Bldg. = +(900,00

0)+ 180,00

0+720,00

0= NA + NA NA NA = NA (900,000)

IA

EXERCISE 6-6

a.Asset Appraised

ValuePercent of Appraised

ValueLand $160,000 20%Building 400,000 50%Equipment

240,000 30%

Total $800,000 100%

Asset % of App. Value

Purchase Price

Allocated Cost

Land 20% x $700,000 = $140,000Building 50% x 700,000 = 350,000Equipment

30% x 700,000 = 210,000

Total $700,000

b.Assets = Equit

yRev

. Exp

.= Net.

Inc.Cash Flow

Cash + Land + Building

+ Equip. =

(700,000)

+140,000

+ 350,000

+ 210,000

= NA NA NA = NA (700,000) IA

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Chapter 05 - Accounting for Receivables and Inventory Cost FlowPROBLEM 6-23

KC CompanyFinancial Statements

Income Statements

2011 2012 2013 2014 2015

Revenue $7,500 $8,000 $8,200 $7,000 $ -0-

Depr. Expense* (6,250) (6,250) (6,250) (6,250) -0-

Operating Income 1,250 1,750 1,950 750 -0-

Loss -0- -0- -0- -0- (500)**

Net Income $1,250 $1,750 $1,950 $ 750 $ (500)

Statements of Changes in Stockholders’ Equity

Beg. Com. Stock $ -0-

$30,000 $30,000 $30,000 $30,000

Plus: Stk. Issued

30,000 -0- -0- -0- -0-

End. Com. Stock 30,000 30,000 30,000 30,000 30,000

Beg. Ret. Earn. -0- 1,250 3,000 4,950 5,700Plus: Net Income 1,250 1,750 1,950 750 (500)End. Ret. Earn. 1,250 3,000 4,950 5,700 5,200

Total Stk. Equity

$31,250 $33,000 $34,950 $35,700 $35,200

*Depreciable Cost: $30,000 $5,000 (salvage value) = $25,000; Depreciation per year: $25,000 4 = $6,250

**Loss on Sale of Equipment: Sales price $4,500 less book value $5,000=$500 loss

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Chapter 05 - Accounting for Receivables and Inventory Cost FlowPROBLEM 6-23 (cont.)

KC CompanyFinancial Statements

Balance Sheets

2011 2012 2013 2014 2015

Assets

Cash $ 7,500 $15,500 $23,700 $30,700 $35,200Equipment 30,000 30,000 30,000 30,000 -0-

Less: Acc. Dep. (6,250) (12,500) (18,750) (25,000) -0-

Total Assets $31,250 $33,000 $34,950 $35,700 $35,200

Stockholders’ Equity

Common Stock $30,000 $30,000 $30,000 $30,000 $30,000

Retained Earnings 1,250 3,000 4,950 5,700 5,200

Total Stk. Equity $31,250 $33,000 $34,950 $35,700 $35,200

Statements of Cash Flows

Operating Act.:Inflow from Cust. $ 7,500 $ 8,000 $ 8,200 $ 7,000 $ -

0-Net Cash Op. Act. 7,500 8,000 8,200 7,000 -0-

Investing Act.:Inflow from Sale -0- -0- -0- -0- 4,500Outflow for

Equip.(30,000) -0- -0- -0- -0-

Net Cash Inv. Act. (30,000) -0- -0- -0- 4,500

Financing Act.Inflow from Stock 30,000 -0- -0- -0- -0-

Net Cash Fin. Act. 30,000 -0- -0- -0- -0-

Net Change in Cash 7,500 8,000 8,200 7,000 4,500Plus: Beg. Cash Bal.

-0- 7,500 15,500 23,700 30,700

Ending Cash Bal. $ 7,500 $15,500 $23,700 $30,700 $35,200

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Chapter 07 - Accounting for Liabilities

Chapter 7Questions

1. Cash payments to creditors is an asset use transaction. This type of transaction will reduce both assets and liabilities.

3. The entry to record accrued interest consists of an increase to Interest Expense and an increase to Interest Payable. The transaction is a claims exchange transaction and reduces equity and increases liabilities.

8. Collection of sales tax is not revenue. The retailer is

merely acting as a collection agency for the state. The retailer collects the sales tax and periodically remits it to the state.

10. The three categories of contingent liabilities are:

1. Probable and reasonably estimated2. Possible but not reasonably estimated3. Remote

19. A line of credit is a preapproved amount of credit that is available to a business to use as needed. It eliminates the need to get loan approval each time the company needs some additional cash. When using a line of credit, money can be borrowed one day and paid back the next or used for some prespecified period. A line of credit is generally used for short-term financing where it is not practical to issue bonds.

27. The issuance of bonds by a company is an asset source transaction. Assets increase and liabilities increase.

33. A classified balance sheet is one that separates assets and

liabilities into current and noncurrent items.

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SOLUTIONS TO EXERCISES - CHAPTER 7

EXERCISE 7-1

a. $-0-. Interest will be paid at maturity of the note, April 30, 2013.

b. $1,200 ($90,000 x 8% = $7,200; $7,200 x 2/12= $1,200)

c. $91,200 ($90,000 Notes Payable +$1,200 Interest Payable)

d. $93,600 [$90,000 principal + $3,600 interest ($90,000 x 8% x 6/12)]

e. $2,400 ($90,000 x 8% = $7,200; $7,200 x 4/12)

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EXERCISE 7-3

a. Book Sales $275,000Miscellaneous Items Sales150,000Total Sales 425,000x Sales Tax Rate 7 % Sales Tax Collected $29,750

b.Total Sales:Event 1. $275,000Event 2 150,000Total $425,000

Total Sales $425,000Less: Cost of Goods Sold (210,000 ) Gross Margin 215,000Less: Operating Expenses (130,000 ) Net Income $ 85,000

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EXERCISE 7-5

a. There are three categories of contingent liabilities:1. Probable and can be reasonably estimated. This category of contingent

liabilities is recognized in the financial statements. 2. Possible but cannot be reasonably estimated. This category of contingent

liabilities is disclosed in the footnotes to the financial statements.3. Remote. This category of contingent liabilities is not recognized in the

financial statements or disclosed in the footnotes.b. 1. This is a contingent liability. The event occurred. The lawsuit has been filed, and the “attorney knows that the company will have to pay…”. Therefore, the liability is probable. The “reasonably certain” amount of $500,000 is deemed “reasonably estimable” and therefore $500,000 should be accrued.

2. This is a contingent liability which can be reasonably estimated. GAAP requires that it be recorded on the books.

3. This is not a contingent liability since the likelihood of damage is not certain. It is not recorded on the books or mentioned in the financial statements.

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EXERCISE 7-8 a.Mabry Equipment Sales Corp. Statements Model

Assets = Liabilities + Equity

No. Cash Inv. =Accts. Pay.

Sales Tax Pay.

Warr. Pay.

Int. Pay

Notes Pay. +

Comm. Stock

Ret. Earn.

1. 50,000 NA NA NA NA NA NA 50,000 NA2. NA 175,000 175,000 NA NA NA NA NA NA3a. 216,000 NA NA 16,000 NA NA NA NA 200,0003b. NA (125,00

0)NA NA NA NA NA NA (125,000)

4. NA NA NA NA 8,000 NA NA NA (8,000)5. (12,000) NA NA (12,000) NA NA NA NA NA6. 20,000 NA NA NA NA NA 20,000 NA NA7. (5,600) NA NA NA (5,600) NA NA NA NA8. (54,000) NA NA NA NA NA NA NA (54,000)9. (125,000) NA (125,000) NA NA NA NA NA NA10.1 NA NA NA NA NA 400 NA NA (400)Bal. 89,400 50,000 = 50,000 4,000 2,400 400 20,000 + 50,000 12,600

1$20,000 x 6% x 4/12 = $400.

Income Statement Statement ofEvent Rev. – Exp. = Net Inc. Cash Flows1. NA NA NA 50,000 FA2. NA NA NA NA3a. 200,000 NA 200,000 216,000 OA3b. NA 125,00

0(125,000) NA

4. NA 8,000 (8,000) NA5. NA NA NA (12,000) OA6. NA NA NA 20,000 FA7. NA NA NA (5,600) OA8. NA 54,000 (54,000) (54,000) OA9. NA NA NA (125,000) OA10 NA 400 (400) NABal. 200,000 – 187,40

0= 12,600 89,400

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EXERCISE 7-8 (cont.)

b.Mabry Equipment Sales Corp.

Income StatementFor the Year Ended December 31, 2012

Sales Revenue $200,000

Cost of Goods Sold (125,000)

Gross Margin 75,000

ExpensesOperating Expenses $54,000Warranty Expense 8,000

Total Operating Expenses (62,000)

Operating Income 13,000Interest Expense (400)

Net Income $12,600

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EXERCISE 7-8 b. (cont.)

Mabry Equipment Sales Corp.Balance Sheet

As of December 31, 2012

AssetsCash $

89,400Merchandise Inventory 50,000


LiabilitiesAccounts Payable $ 50,000Sales Tax Payable 4,000Warranties Payable 2,400Interest Payable 400Notes Payable 20,000

Total Liabilities 76,800

Stockholders’ EquityCommon Stock $50,000Retained Earnings 12,600



$139,400

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EXERCISE 7-8 b. (cont.)

Mabry Equipment Sales Corp.Statement of Cash Flows


Cash Flows From Operating Activities:

Inflow from Customers $200,000

Inflow from Sales Tax 16,000Outflow for Inventory (125,00

0)Outflow for Expenses1 (59,600)Outflow for Sales Tax (12,000)

Net Cash Flow from Operating Activities

$19,400

Cash Flows From Investing Activities

-0-

Cash Flows From Financing Activities:

Inflow from Stock Issue 50,000Inflow from Loan 20,000

Net Cash Flow from Financing Activities

70,000

Net Change in Cash 89,400Plus: Beginning Cash Balance -0-Ending Cash Balance $89,40

0

1. $54,000 + $5,600 = $59,600

c. Current Liabilities:Accounts Payable $50,000Sales Tax Payable 4,000Warranties Payable 2,400Interest Payable 400

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Notes Payable 20,000Total Current Liabilities $76,800

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EXERCISE 7-22

Steller Co.Classified Balance SheetAs of December 31, 2012

Assets

Current AssetsCash $15,260Accounts Receivable 42,500Merchandise Inventory 29,000Prepaid Insurance 3,200

Total Current Assets $ 89,960

Property, Plant and EquipmentOffice Equipment 28,500

Total Property, Plant and Equipment

28,500


Liabilities and Stockholders’ Equity

Current LiabilitiesAccounts Payable $ 8,000

Long-Term LiabilitiesLong-Term Notes Payable 23,000

Total Liabilities 31,000

Stockholders’ EquityCommon Stock $42,000Retained Earnings 45,460



$118,460

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CHAPTER 8 - Proprietorships, Partnerships, and Corporations

ANSWERS TO QUESTIONS

1. The three major forms of business organizations are the sole proprietorship, the partnership, and the corporation.

The sole proprietorship is a business owned by one individual.

The partnership is a business that is owned by two or more persons with the intent to make a profit.

The corporation is a legal entity that is organized according to the laws of the state in which it is formed. The business organization is separate from its owners.

8. The corporate form of business has both advantages and disadvantages.Advantages: (1) Limited liability. Owners are not held personally responsible for the actions of the corporation. Generally, the maximum amount an owner can lose is limited to his/her amount of the investment.(2) Continuity of existence. Corporations do not cease to exist when an owner dies, disposes of his interest, retires, etc.(3) Free transferability of ownership interest. An owner can readily sell or transfer an interest to another party without interfering in the corporation's business.(4) Ease of raising capital. It is generally easier to attract many small investors rather than one or two investors willing to invest large sums of money or assets in a business.

Disadvantages: (1) Regulation. Corporations are subject to considerably more regulation, both state and federal, than are sole proprietorships and partnerships. Corporations are required to file separate income tax returns and public

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corporations are required to comply with SEC regulations.(2) Double taxation. The most important disadvantage of the corporation is double taxation. Since a corporation is a separate legal entity, it must file and pay tax on corporate profits. When these profits are distributed to the owners (shareholders), these distributions are not deductible for the corporation and are taxable income to the shareholders.

11. Contributed capital is the capital that is acquired by the corporation from owners of the corporation. For example, the sale of stock to an investor is a type of contributed capital.Retained earnings is the capital of a corporation that has been generated through the earnings process of a corporation and kept in the corporation (i.e., not distributed to owners).

13. Because corporations can be owned by millions of individuals, they are able to pool the resources of many individuals which permits access to billions of dollars of capital. Proprietorships and partnerships are bound by the financial condition of a few, private investors.

26. The primary reason for declaring a stock split is to reduce the market value of stock by increasing the number of shares outstanding on the market. This makes the stock more affordable and may, therefore, increase demand for the stock.

30. Equity financing refers to capital acquired from owners;

usually the term refers to issuance of stock.

Debt financing refers to borrowing in the form of notes and bonds payable.

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EXERCISE 8-10

Balance Sheet Income Statement Statement

Date Assets = Liab. +Com. Stk. + Ret.

Ear.Rev Exp

.= Net

Inc.

ofCash Flows

10/1 NA =60,000 + NA + (60,000)

NA NA = NA NA

11/20

NA = NA + NA + NA NA NA = NA NA

12/30

(60,000)

= (60,000)

+ NA + NA NA NA = NA (60,000) FA

EXERCISE 8-15

a. The accounting records are not affected by a stock split. A memo would indicate the number of shares had doubled and the par value had been reduced by one-half.

b. 300,000 shares x 2 = 600,000 new shares outstanding

$10 par value 2 = $5 new par value

c. Theoretically, the market value per share would be reduced to $90 ($180 2) after the split. However, if this is perceived as a good move by the company, the price per share may not fall that far, ending at something over $90.

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mgt45 fall 2013 hw#2 11am section.docx

Documents

cash balance

group of accounts

cost of uncollectible

accounts receivable

assets cash

balance of accounts

net cash flow

delayed cash flows