problemset c questions

Problems: Set C 1

Problems: Set C

P1-1C Presented below are five independent situations.(a) Christy Petersen and Joel Dunn each owned separate plastic molding businesses. They

have decided to combine their businesses. They expect that within the coming yearthey will need significant funds to expand their operations.

(b) Three licensed physical therapists have been working in rehabilitation hospitals forseveral years. They have decided to form a business that will provide therapy in clients’homes. Each has contributed an equal amount of cash and knowledge to the ven-ture. Although there appears to be a great need for their services, they are concernedabout the legal liabilities that their business might confront.

(c) Erik, Geoff, and Janna recently graduated with education degrees. They have beenfriends since childhood. They have decided to start a consulting business focused onassisting “home-schooled” students over the Internet.

(d) Ben Fullerton has been providing routine automotive maintenance and repair serv-ices for several years. He performs his work in customers’ garages out of a cargovan that contains tools, diagnostic equipment, and parts. Customers can continueto work or relax at home while he services their vehicles. His business has been sosuccessful that several regular customers have suggested he expand its operations.Ben is confident that he could find other mechanics to help provide the service butknows the business would require a large investment of capital to outfit the vans.He is also aware that working in customers’ homes could expose him to consider-able liability. Ben has no savings or personal assets. He wants to maintain controlover the business.

(e) Chad Browne, a college student looking for summer employment, opened a flowerstand at a local farmers’ market.

InstructionsIn each case explain what form of organization the business is likely to take—sole pro-prietorship, partnership, or corporation. Give reasons for your choice.

P1-2C Financial decisions often place heavier emphasis on one type of financial statement over the others. Consider each of the following hypothetical situations independently.(a) Nordstroms is considering extending credit to a new customer. The terms of the credit

would require the customer to pay within 30 days of receipt of goods.(b) An investor is considering purchasing common stock of Home Depot Company. The

investor plans to hold the investment for at least 5 years.(c) Wells Fargo is considering extending a loan to a small company. The company would

be required to make interest payments at the end of each year for 5 years, and to re-pay the loan at the end of the fifth year.

(d) The president of American Greetings is trying to determine whether the companyis generating enough cash to increase the amount of dividends paid to investorsin this and future years, and still have enough cash to buy equipment as it isneeded.

InstructionsIn each situation, state whether the decision maker would be most likely to place primaryemphasis on information provided by the income statement, balance sheet, or statementof cash flows. In each case provide a brief justification for your choice. Choose only onefinancial statement in each case.

P1-3C On August 1 Copicat Inc. was started with an initial investment in the company of $10,000 cash. Here are the assets and liabilities of the company atAugust 31, and the revenues and expenses for the month of August, its first month of operations:

Cash $ 3,800 Notes payable $6,000Accounts receivable 1,000 Accounts payable 900Revenue 11,000 Supplies expense 3,000Supplies 1,800 Rent expense 1,600Advertising expense 500 Utilities expense 200Equipment 12,000 Wage expense 3,400

Determine forms of businessorganization.(SO 1)

Identify users and uses offinancial statements.(SO 2, 4, 5)

Prepare an incomestatement, retained earningsstatement, and balance sheet,and discuss results.(SO 4, 5)

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In August, the company issued no additional stock, but paid dividends of $600.

Instructions(a) Prepare an income statement and a retained earnings statement for the month of

August and a balance sheet at August 31, 2007.(b) Briefly discuss whether the company’s first month of operations was a success.(c) Discuss the company’s decision to distribute a dividend.

P1-4C Presented below is selected financial information for Showalter Corporation forDecember 31, 2007.

Inventory $ 19,000 Cash paid to purchase equipment $ 8,000Cash paid to suppliers 76,000 Equipment 40,000Building 200,000 Revenues 87,000Common stock 40,000 Cash received from customers 93,000Cash dividends paid 4,000 Cash received from issuing

common stock 18,000

Instructions(a) Determine which items should be included in a statement of cash flows and then pre-

pare the statement for Showalter Corporation.(b) Comment on the adequacy of net cash provided by operating activities to fund the

company’s investing activities and dividend payments.

P1-5C Julius Corporation was formed on January 1, 2007. At December 31, 2007, DanJasper, the president and sole stockholder, decided to prepare a balance sheet, which ap-peared as follows.

JULIUS CORPORATIONBalance Sheet

December 31, 2007

Assets Liabilities and Stockholders’ Equity

Cash $20,000 Accounts payable $40,000Accounts receivable 39,000 Notes payable 15,000Motorcycle 17,000 Motorcycle loan 14,000Truck 20,000 Stockholders’ equity 27,000

Dan willingly admits that he is not an accountant by training. He is concerned that hisbalance sheet might not be correct. He has provided you with the following additionalinformation.1. The motorcycle actually belongs to Jasper, not to Julius Corporation. However, because

he thinks he might use it to visit customers occasionally, he decided to list it as an as-set of the company. To be consistent he also listed as a liability of the corporation hispersonal loan that he took out at the bank to buy the motorcycle.

2. The truck was purchased for only $18,000, even though Dan knows its “sticker price”was $20,000. He thought it would be best to record it at $20,000.

3. Included in the accounts receivable balance is $8,000 that Dan expects to collect froma customer for a sale that he anticipates will occur in January. Dan included this inthe receivables of Julius Corporation because he has already discussed the potentialsale with the customer.

Instructions(a) Comment on the proper accounting treatment of the three items above.(b) Provide a corrected balance sheet for Julius Corporation. (Hint: To get the balance

sheet to balance, adjust stockholders’ equity.)

2 CHAPTER 1 Introduction to Financial Statements

Determine items included ina statement of cash flows,prepare the statement, andcomment.(SO 4, 5)

(a) Net income $2,300Ret. earnings $1,700Tot. assets $18,600

Comment on properaccounting treatment andprepare a corrected balancesheet.(SO 4, 5)

(a) Net increase $23,000

Tot. assets $69,000

Marginal check figures(in blue) provide a keynumber to let you knowyou’re on the right track.


Problems: Set C 3

Problems: Set C

P2-1C The following items are taken from the 2004 balance sheet of Starbucks Corpo-ration. (All dollars are in thousands.)

Intangible assets $ 95,750Common stock 996,078Property and equipment, net 1,551,416Accounts payable 199,346Other assets 85,561Long-term investments 306,926Accounts receivable 140,226Prepaid expenses and other current assets 134,997Short-term investments 353,881Retained earnings 1,478,140Cash and cash equivalents 299,128Long-term debt 3,618Accrued expenses and other current liabilities 425,536Unearned revenue—current 121,377Other long-term liabilities 166,453Inventories 422,663

InstructionsPrepare a classified balance sheet for Starbucks Corporation as of October 3, 2004.

P2-2C These items are taken from the financial statements of Graham Corporation for 2007.

Retained earnings (beginning of year) $26,000Utilities expense 3,000Equipment 38,000Accounts payable 2,400Cash 20,700Salaries payable 1,700Common stock 15,000Dividends 7,000Service revenue 77,000Prepaid insurance 1,950Repair expense 1,800Depreciation expense 5,300Accounts receivable 8,850Insurance expense 3,900Salaries expense 44,000Accumulated depreciation 12,400

InstructionsPrepare an income statement, a retained earnings statement, and a classified balancesheet as of December 31, 2007.

P2-3C You are provided with the following information for Barnette Enterprises, effec-tive as of its September 30, 2007, year-end.

Accounts payable $ 6,300Accounts receivable 2,500Building, net of accumulated depreciation 37,000Cash 2,600Common stock 10,000Cost of goods sold 22,000Current portion of long-term debt 5,000Depreciation expense 2,900Dividends paid during the year 1,800

Prepare a classified balancesheet.(SO 1)

Prepare financial statements.(SO 1, 3)

Tot. current assets $1,350,895Tot. assets $3,390,548

Net income $19,000Tot. assets $57,100

Prepare financial statements.(SO 1, 3)


4 CHAPTER 2 A Further Look at Financial Statements

Equipment, net of accumulated depreciation 14,000Income tax expense 2,550Income taxes payable 700Interest expense 3,400Inventories 4,800Land 16,000Long-term debt 31,000Prepaid expenses 1,350Retained earnings, beginning 21,300Revenues 56,800Selling expenses 2,700Short-term investments 3,000Wages expense 15,600Wages payable 1,100

Instructions(a) Prepare an income statement and a retained earnings statement for Barnette

Enterprises for the year ended September 30, 2007.(b) Prepare a classified balance sheet for Barnette Enterprises as of September 30, 2007.

P2-4C Comparative financial statement data for Batman Corporation and Spiderman Cor-poration, two competitors, appear below. All balance sheet data are as of December 31, 2007.

Net income $7,650Tot. current assets $14,250Tot. assets $81,250

Compute ratios; comment onrelative profitability, liquidity,and solvency.(SO 2, 4, 5) Batman Corporation Spiderman Corporation

2007 2007

Net sales $269,000 $504,000Cost of goods sold 130,000 248,000Operating expenses 80,000 132,000Interest expense 12,000 6,000Income tax expense 18,000 44,000

Current assets 146,000 182,000Plant assets (net) 105,000 86,000Current liabilities 44,000 106,000Long-term liabilities 87,000 41,000

Additional information:

Cash from operating activities $36,000 $43,000Capital expenditures $15,000 $28,000Dividends paid $8,000 $10,000Average number of shares

outstanding 30,000 40,000

Instructions(a) Comment on the relative profitability of the companies by computing the net income

and earnings per share for each company for 2007.(b) Comment on the relative liquidity of the companies by computing working capital

and the current ratios for each company for 2007.(c) Comment on the relative solvency of the companies by computing the debt to total

assets ratio and the free cash flow for each company for 2007.

P2-5C Here and on the next page are financial statements of Howard Company.

HOWARD COMPANYIncome Statement

For the Year Ended December 31

2007

Net sales $558,200Cost of goods sold 254,500Selling and administrative expenses 178,000Interest expense 24,000Income tax expense 34,700

Net income $ 67,000

Compute liquidity, solvency,and profitability ratios.(SO 2, 4, 5)

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Problems: Set C 5

Additional information: The cash provided by operating activities for 2007 was $105,000.The cash used for capital expenditures was $64,000. The cash used for dividends was$18,000. The average number of shares outstanding during the year was 20,000.

InstructionsCompute the following values and ratios for 2007.(a) Working capital.(b) Current ratio.(c) Free cash flow.(d) Debt to total assets ratio.(e) Earnings per share.

P2-6C Condensed balance sheet and income statement data for Janzan Corporation arepresented here.

HOWARD COMPANYBalance SheetDecember 31

Assets 2007

Current assetsCash $ 15,000Short-term investments 33,500Accounts receivable (net) 66,400Inventory 21,200

Total current assets 136,100Plant assets (net) 294,600

Total assets $430,700

Liabilities and Stockholders’ Equity

Current liabilitiesAccounts payable $ 26,800Income taxes payable 18,300

Total current liabilities 45,100Bonds payable 220,000

Total liabilities 265,100Stockholders’ equity

Common stock 80,000Retained earnings 85,600

Total stockholders’ equity 165,600

Total liabilities and stockholders’ equity $430,700

JANZAN CORPORATIONBalance SheetsDecember 31

Assets 2007 2006

Cash $ 10,500 $ 9,000Receivables (net) 18,000 14,000Other current assets 5,700 4,000Long-term investments 21,800 20,000Plant and equipment (net) 46,000 38,000

Total assets $102,000 $85,000

Compute and interpretliquidity, solvency, andprofitability ratios.(SO 2, 4, 5)

Liabilities and Stockholders’ Equity 2007 2006

Current liabilities $ 25,000 $23,000Long-term debt 36,000 36,000Common stock 22,000 20,000Retained earnings 19,000 6,000

Total liabilities and stockholders’ equity $102,000 $85,000


6 CHAPTER 2 A Further Look at Financial Statements


Cash from operating activities $20,000 $13,000Cash used for capital expenditures $11,000 $8,000Dividends paid $5,000 $3,000Average number of shares outstanding 22,000 20,000

InstructionsCompute these values and ratios for 2006 and 2007.(a) Earnings per share.(b) Working capital.(c) Current ratio.(d) Debt to total assets ratio.(e) Free cash flow.(f) Based on the ratios calculated, discuss briefly the improvement or lack thereof in

financial position and operating results from 2006 to 2007 of Janzan Corporation.

P2-7C Selected financial data of two competitors, Home Depot and Lowes, are pre-sented here. (All dollars are in millions.)

JANZAN CORPORATIONIncome Statements

For the Years Ended December 31

2007 2006

Sales $175,000 $160,000Cost of goods sold 100,000 92,000Operating expenses (including income taxes) 57,000 53,000

Net income $ 18,000 $ 15,000

Home Depot Lowes(1/30/05) (1/28/05)

Income Statement Data for Year

Net sales $73,094 $36,464Cost of goods sold 48,664 24,165Selling and administrative expenses 16,504 7,562Interest expense 70 192Other income (loss) 56 (1,001)Income taxes 2,911 1,368

Net income $ 5,001 $ 2,176

Home Depot Lowes

Balance Sheet Data (End of Year)

Current assets $14,190 $ 6,974Noncurrent assets 24,717 14,235

Total assets $38,907 $21,209

Current liabilities $10,529 $ 5,719Long-term debt 4,220 3,955Total stockholders’ equity 24,158 11,535


Cash from operating activities $6,904 $3,033Cash paid for capital expenditures $3,948 $2,927Dividends paid $719 $116Average shares outstanding 2,207 777

Compute ratios and compareliquidity, solvency, andprofitability for twocompanies.(SO 2, 4, 5)


InstructionsFor each company, compute these values and ratios.(a) Working capital.(b) Current ratio.(c) Debt to total assets ratio.(d) Free cash flow.(e) Earnings per share.(f) Compare the liquidity, solvency, and profitability of the two companies.

P2-8C Meredith Norby recently completed an undergraduate degree in accounting.She has been approached by her older brother and five of his friends to assist them increating an investment club. None have taken any business courses, but all have beenworking for at least five years and feel they are ready to make their money work forthem. Some of the prospective members want to use the fund as part of their retire-ment assets. Others hope to use their portion of the annual earnings to supplementtheir current income.

The group has discussed various types of companies to invest in. Some members pre-fer to choose well-established companies that are traded on national stock exchanges.Others want to “get in on the ground floor” by investing in new businesses that may haveonly a few stockholders. One member has suggested buying into a company started byhis best friend from high school who claims that his business has tripled its earnings dur-ing its first two years of operations.

It has become clear to Meredith that this group of prospective investors has little orno understanding of financial reporting or generally accepted accounting principles(GAAP).

Instructions(a) Explain what is meant by financial reporting and GAAP.(b) Considering the variety of members’ goals and suggestions, indicate the type of fi-

nancial information that should be most useful in addressing investment choices.

Problems: Set C 7

Comment on the objectivesand qualitative characteris-tics of financial reporting.(SO 6, 7)


8 CHAPTER 3 The Accounting Information System

Analyze transactions andcompute net income.(SO 1)

(a) Cash $6,600Ret. earnings $600

Problems: Set C

P3-1C On April 1 Test Prep Inc. was established. These transactions were completedduring the month.

1. Stockholders invested $12,000 cash in the company in exchange for common stock.

2. Paid $1,400 cash for April office rent.

3. Purchased office equipment for $4,300 cash.

4. Purchased $500 of advertising in School News, on account.

5. Paid $700 cash for office supplies.

6. Earned $6,000 for services provided: Cash of $1,000 is received from customers, andthe balance of $5,000 is billed to customers on account.

7. Paid $100 cash dividends.

8. Paid School News amount due in transaction (4).

9. Paid employees’ salaries $3,400.

10. Received $4,000 in cash from customers who have previously been billed in trans-action (6).

Instructions(a) Prepare a tabular analysis of the transactions using these column headings: Cash,

Accounts Receivable, Supplies, Office Equipment, Accounts Payable, Common Stock, andRetained Earnings. Include margin explanations for any changes in Retained Earnings.

(b) From an analysis of the column Retained Earnings, compute the net income or netloss for April.

P3-2C Judy Takahashi started her own consulting firm, Takahashi Consulting Inc., onNovember 1, 2007. The following transactions occurred during the month of November.

Nov. 1 Stockholders invested $15,000 cash in the business in exchange forcommon stock.

2 Paid $1,000 for office rent for the month.3 Purchased $750 of supplies on account.5 Paid $400 to advertise in the Small Business Times.9 Received $800 cash for services provided.

12 Paid $100 cash dividend.15 Performed $4,400 of services on account.17 Paid $2,100 for employee salaries.20 Paid for the supplies purchased on account on November 3.23 Received a cash payment of $1,800 for services provided on account on

November 15.26 Borrowed $8,000 from the bank on a note payable.29 Purchased office equipment for $3,500 paying $200 in cash and the

balance on account.30 Paid $220 for utilities.

Instructions(a) Show the effects of the previous transactions on the accounting equation using the

following format. Assume the note payable is to be repaid within the year.

Analyze transactions andprepare financial statements.(SO 1)

GLS

Stockholders’Assets � Liabilities � Equity

Accounts Office Notes Accounts Common RetainedDate Cash �

Receivable� Supplies �

Equipment�

Payable�

Payable�

Stock�

Earnings

(a) Cash $20,830Ret. earnings $1,380

Include margin explanations for any changes in Retained Earnings.(b) Prepare an income statement for the month of November.(c) Prepare a classified balance sheet at November 30, 2007.

P3-3C Din Liu created a corporation providing legal services, Din Liu Inc., on March 1,2007. On March 31 the balance sheet showed: Cash $6,500; Accounts Receivable $2,000;

(b) Net income $1,480

GLS


Problems: Set C 9

Supplies $800; Office Equipment $7,000; Accounts Payable $4,700; Common Stock $8,000;and Retained Earnings $3,600. During April the following transactions occurred.

1. Collected $1,300 of accounts receivable due from customers.

2. Paid $3,200 cash for accounts payable due.

3. Earned revenue of $7,100 of which $4,000 is collected in cash and the balance is duein May.

4. Purchased additional office equipment for $1,000, paying $200 in cash and the bal-ance on account.

5. Paid salaries $2,700, rent for April $800, and advertising expenses $280.

6. Declared and paid a cash dividend of $400.

7. Received $3,500 from Metro Bank; the money was borrowed on a 4-month note payable.

8. Incurred utility expenses for the month on account $320.

Instructions(a) Prepare a tabular analysis of the April transactions beginning with March 31 balances.

The column heading should be: Cash � Accounts Receivable � Supplies � OfficeEquipment � Notes Payable � Accounts Payable � Common Stock � Retained Earn-ings. Include margin explanations for any changes in Retained Earnings.

(b) Prepare an income statement for April, a retained earnings statement for April, anda classified balance sheet at April 30.

P3-4C Skating By, Inc. was opened on May 1 by James Bea. These selected events andtransactions occurred during May.

May 1 Stockholders invested $80,000 cash in the business in exchange for com-mon stock of the corporation.

3 Purchased BoardWorld for $60,000 cash. The price consists of land$20,000, building $30,000, and equipment $10,000. (Record this in a sin-gle entry.)

5 Advertised the opening of the skate board park, paying advertisingexpenses of $500 cash.

6 Paid cash $6,000 for a 1-year insurance policy.10 Purchased equipment for $4,600 from T. Hawks Company, payable in

30 days.18 Received $1,500 in cash from customers for fees earned.19 Sold 150 coupon books for $40 each in cash. Each book contains five

coupons that enable the holder to use the park. (Hint: The revenue is notearned until the customers use the coupons.)

25 Declared and paid a $300 cash dividend.30 Paid salaries of $1,280.30 Paid T. Hawks in full for equipment purchased on May 10.31 Received $1,100 of fees in cash from customers for fees earned.

The company uses these accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment,Accounts Payable, Unearned Revenue, Common Stock, Retained Earnings, Dividends,Revenue, Advertising Expense, and Salaries Expense.

InstructionsJournalize the May transactions, including explanations.

P3-5C Castle Architects incorporated as licensed architects on September 1, 2007. Duringthe first month of the operation of the business, these events and transactions occurred:

Sept. 1 Stockholders invested $22,000 cash in exchange for common stock of thecorporation.

1 Hired a secretary-receptionist at a salary of $410 per week, payable monthly.2 Paid office rent for the month $1,500.3 Purchased architectural supplies on account from Taliesin Company $1,150.

10 Completed blueprints on a carport and billed client $1,700 for services.11 Received $800 cash advance from M. Stewart to design a new home.20 Received $4,900 cash for services completed and delivered to R. Husch.30 Paid secretary-receptionist for the month $1,640.30 Paid $600 to Taliesin Company for accounts payable due.

Analyze transactions andprepare an income statement,retained earnings statement,and balance sheet.(SO 1)

(a) Cash $7,720Ret. earnings $6,200


Journalize a series oftransactions.(SO 3, 5)

GLS

GLS

Journalize transactions, post,and prepare a trial balance.(SO 3, 5, 6, 7, 8)

GLS



The company uses these accounts: Cash, Accounts Receivable, Supplies, AccountsPayable, Unearned Revenue, Common Stock, Service Revenue, Salaries Expense, andRent Expense.

Instructions(a) Journalize the transactions, including explanations.(b) Post to the ledger T accounts.(c) Prepare a trial balance on September 30, 2007.

P3-6C This is the trial balance of Dominic Company on April 30.

(c) Cash $23,960Tot. trial

balance $29,950

Journalize transactions, post,and prepare a trial balance.(SO 3, 5, 6, 7, 8) DOMINIC COMPANY

Trial BalanceApril 30, 2007

Debit Credit

Cash $ 3,700Accounts Receivable 3,200Supplies 900Equipment 9,300Accounts Payable $ 3,400Unearned Revenue 1,700Common Stock 12,000

$17,100 $17,100

GLS

The May transactions were as follows.

May 5 Received $1,600 in cash from customers for accounts receivable due.10 Billed customers for services performed $4,900.15 Paid employee salaries $1,600.17 Performed $400 of services for customers who paid in advance in April.20 Paid $1,500 to creditors for accounts payable due.29 Paid a $200 cash dividend.31 Paid utilities $360.

Instructions(a) Prepare a general ledger using T accounts. Enter the opening balances in the ledger

accounts as of May 1. Provision should be made for these additional accounts: Div-idends, Service Revenue, Salaries Expense, and Utilities Expense.

(b) Journalize the transactions, including explanations.(c) Post to the ledger accounts.(d) Prepare a trial balance on May 31, 2007.

P3-7C This trial balance of Arias Co. does not balance.

ARIAS CO.Trial Balance

March 31, 2007

Debit Credit

Cash $ 3,240Accounts Receivable $ 3,656Supplies 800Equipment 4,360Accounts Payable 2,720Unearned Revenue 1,200Common Stock 7,100Dividends 800Service Revenue 5,420Salaries Expense 3,100Office Expense 660

$13,360 $19,696

(d) Cash $1,640Tot. trial

balance $20,500

Prepare a correct trialbalance.(SO 8)


Problems: Set C 11

Tot. trial balance $16,660

Journalize transactions, post,and prepare a trial balance.(SO 3, 5, 6, 7, 8)

Each of the listed accounts has a normal balance per the general ledger. An examinationof the ledger and journal reveals the following errors:

1. Cash received from a customer on account was debited for $340, and Accounts Re-ceivable was credited for $34. The actual collection was for $340.

2. The purchase of copy machine paper on account for $160 was recorded as a debit toEquipment for $160 and a credit to Accounts Payable for $160.

3. A client paid $900 for services to be performed during April and May. Cash was debitedfor $900 and Service Revenue was credited for $900.

4. A debit posting to Office Expense of $130 was omitted.5. A payment on account was credited to Cash for $240 and debited to Accounts Payable

for $240. The actual payment was $420.6. Payment of a $400 cash dividend to Arias’s stockholders was debited to Common Stock

for $400 and credited to Cash for $400.

InstructionsPrepare the correct trial balance. (Hint: All accounts have normal balances.)

P3-8C Big Sky Drive-In Theater Inc. was recently formed. It began operations in April2007. On April 1, the ledger of Big Sky showed: Cash $31,000; Land $52,000; Buildings(concession stand, projection room, ticket booth, and screen) $64,000; Equipment$35,000; Accounts Payable $22,000; and Common Stock $160,000. During the month ofApril the following events and transactions occurred.

Apr. 1 Rented movies to be shown for the first two weeks of April. The filmrental was $15,000; $3,000 was paid in cash and $12,000 will be paid onApril 13.

2 Ordered movies to be shown the last two weeks of April at a cost of$7,000 per week.

8 Received $11,400 cash from admissions.10 Hired R. Daggett to operate the concession stand. Daggett agrees to pay

Big Sky 20% of gross receipts, payable monthly.13 Paid balance due on movie rentals and $7,400 on April 1 accounts

payable.14 Received the movies ordered April 2 and paid rental fee of $14,000.15 Paid advertising expenses $600.18 Received $9,800 cash from customers for admissions.30 Paid salaries of $5,200.30 Received statement from R. Daggett showing gross receipts from con-

cessions of $10,400 and the balance due to Big Sky of $2,080 for April.Daggett paid half the balance due and will remit the remainder on May 8.

30 Received $23,000 cash from customers for admissions.

In addition to the accounts identified above, the chart of accounts includes: AccountsReceivable, Admission Revenue, Concession Revenue, Advertising Expense, Film RentalExpense, and Salaries Expense.

Instructions(a) Using T accounts, enter the beginning balances to the ledger.(b) Journalize the April transactions, including explanations.(c) Post the April journal entries to the ledger.(d) Prepare a trial balance on April 30, 2007.

P3-9C The bookkeeper for Tim Taylor’s repair shop made the following errors in jour-nalizing and posting.

1. A credit to Accounts Payable of $900 was posted twice.

2. A credit posting of $800 to Unearned Revenue was inadvertently credited to AccountsReceivable.

3. A purchase of equipment on account of $960 was debited to Equipment for $960 andcredited to Accounts Payable for $690.

4. A debit posting of $250 to Wages Expense was omitted.

5. A debit posting to Wages Payable for $250 was inadvertently posted as a credit toWages Payable.

GLS

(d) Cash $34,040Tot. trial

balance $220,880

Analyze errors and theireffects on the trial balance.(SO 8)



6. A debit posting for $800 of Dividends was inadvertently posted to Wage Expenseinstead.

7. A debit posting to Cash and a credit posting to Service Revenue for $600 were inad-vertently posted twice.

8. A debit to Accounts Receivable of $400 was debited to Accounts Payable.

InstructionsFor each error, indicate (a) whether the trial balance will balance; (b) the amount of thedifference if the trial balance will not balance; and (c) the trial balance column that willhave the larger total. Consider each error separately. Use the following form, in whicherror 1 is given as an example.

(a) (b) (c)Error In Balance Difference Larger Column

1. No $900 Credit


Problems: Set C 13

DO IT NOW CONSULTINGTrial BalanceApril 30, 2007

Debit Credit

Cash $ 9,300Accounts Receivable 5,000Prepaid Rent 2,700Supplies 1,000Office Equipment 20,000Accounts Payable $ 5,100Unearned Service Revenue 3,100Common Stock 25,000Service Revenue 9,000Salaries Expense 3,800Insurance Expense 400

$42,200 $42,200

Problems: Set C

P4-1C The following selected data are taken from the comparative financial statementsof Lake View Bocce Club. The Club prepares its financial statements using the accrualbasis of accounting.

October 31 2007 2006

Accounts receivable for member dues $ 15,000 $ 19,000Unearned rent revenue 30,000 38,000Dues revenue 162,000 140,000

Dues are billed to members based upon their use of the Club’s facilities. Unearned revenuesarise from deposits required to reserve club facilities for weddings and parties.

Instructions(Hint: You will find it helpful to use T accounts to analyze the following data. Youmust analyze these data sequentially, as missing information must first be deducedbefore moving on. Post your journal entries as you progress, rather than waiting un-til the end.)(a) Prepare journal entries for each of the following events that took place during 2007.

1. Dues receivable from members from 2006 were all collected during 2007.2. Unearned rent revenue at the end of 2006 was all earned during 2007.3. Additional rent revenue of $89,000 cash was received during 2007; a portion of

these were for events held during the year. The entire balance remaining relatesto upcoming events in 2007 and 2008.

4. Dues for the 2006–2007 fiscal year were billed to members.5. Dues receivable for 2007 (i.e., those billed in item (4) above) were partially collected.

(b) Determine the amount of cash received by the Club from the above transactions dur-ing the year ended October 31, 2007.

P4-2C Troy Verley started his own consulting firm, Do It Now Consulting, on April 1,2007. The trial balance at April 30 is as follows.

Record transactions onaccrual basis; convertrevenue to cash receipts.(SO 2, 4)

Prepare adjusting entries,post to ledger accounts,and prepare adjusted trialbalance.(SO 4, 5, 6)

(b) Cash received $255,000

GLS

In addition to those accounts listed on the trial balance, the chart of accounts for Do It Nowalso contains the following accounts: Accumulated Depreciation—Office Equipment,Phone Payable, Salaries Payable, Depreciation Expense, Rent Expense, Phone Expense,and Supplies Expense.

Other data:

1. Supplies on hand at April 30 total $320.

2. A phone bill for $120 has not been recorded and will not be paid until next month.

3. The prepaid rent covers April, May, and June.


14 CHAPTER 4 Accrual Accounting Concepts

4. $2,200 of unearned service revenue has been earned at the end of the month.

5. Salaries of $1,460 are accrued at April 30.

6. The office equipment has a 5-year life with salvage value of $2,000 and is beingdepreciated at $300 per month for 60 months.

7. Invoices representing $2,800 of services performed during the month have not beenrecorded as of April 30.

Instructions(a) Prepare the adjusting entries for the month of April.(b) Post the adjusting entries to the ledger accounts. Enter the totals from the trial bal-

ance as beginning account balances. Use T accounts.(c) Prepare an adjusted trial balance at April 30, 2007.

P4-3C The Welcome Inn opened for business on March 1, 2007. Here is its trial bal-ance before adjustment on March 31.

(c) Rent revenue $12,300Tot. trial

balance $147,005

Prepare adjusting entries,adjusted trial balance, andfinancial statements.(SO 4, 5, 6, 7)

(b) Service rev. $14,000(c) Tot. trial balance $46,880

GLS

(d) Net income $4,295

Prepare adjusting entries andfinancial statements; identifyaccounts to be closed.(SO 4, 5, 6, 7)

GLS

WELCOME INNTrial Balance

March 31, 2007

Debit Credit

Cash $ 2,700Prepaid Insurance 2,400Supplies 3,300Land 25,000Lodge 85,000Furniture 22,400Accounts Payable $ 9,200Unearned Rent Revenue 2,800Mortgage Payable 50,000Common Stock 72,000Rent Revenue 11,000Salaries Expense 3,000Utilities Expense 800Advertising Expense 400

$145,000 $145,000

Other data:

1. Insurance expires at the rate of $400 per month.

2. An inventory of supplies shows $1,900 of unused supplies on March 31.

3. Annual depreciation is $4,440 on the lodge and $3,600 on furniture.

4. The mortgage interest rate is 9%. (The mortgage was taken out on March 1.)

5. Unearned rent of $1,300 has been earned.

6. Salaries of $960 are accrued and unpaid at March 31.

Instructions(a) Journalize the adjusting entries on March 31.(b) Prepare a ledger using T accounts. Enter the trial balance amounts and post the

adjusting entries.(c) Prepare an adjusted trial balance on March 31.(d) Prepare an income statement and a retained earnings statement for the month of

March and a classified balance sheet at March 31.(e) Identify which accounts should be closed on March 31.

P4-4C Green Acres Golf Inc. was organized on April 1, 2007. Quarterly financial state-ments are prepared. The trial balance and adjusted trial balance on June 30 are shownon the next page.


Problems: Set C 15

GREEN ACRES GOLF INC.Trial BalanceJune 30, 2007

Unadjusted Adjusted

Dr. Cr. Dr. Cr.

Cash $ 7,890 $ 7,890Accounts Receivable 1,500 1,900Prepaid Insurance 2,400 1,800Supplies 2,100 1,410Equipment 18,000 18,000Accumulated Depreciation—Equipment $ 750Notes Payable $ 7,500 7,500Accounts Payable 2,200 2,200Salaries Payable 900Interest Payable 100Unearned Rent Revenue 1,300 800Common Stock 18,000 18,000Retained Earnings 0 0Dividends 450 450Dues Revenue 14,600 15,000Rent Revenue 700 1,200Salaries Expense 10,100 11,000Insurance Expense 1,200 1,800Depreciation Expense 750Supplies Expense 690Utilities Expense 660 660Interest Expense 100

$44,300 $44,300 $46,450 $46,450

Instructions(a) Journalize the adjusting entries that were made.(b) Prepare an income statement and a retained earnings statement for the 3 months

ending June 30 and a classified balance sheet at June 30.(c) Identify which accounts should be closed on June 30.(d) If the note bears interest at 8%, how many months has it been outstanding?

P4-5C A review of the ledger of Phelps Company at December 31, 2007, produces thesedata pertaining to the preparation of annual adjusting entries.

1. Prepaid Insurance $16,400. The company has separate insurance policies on itsbuildings and its motor vehicles. Policy B4564 on the building was purchased onJanuary 1, 2006, for $11,400. The policy has a term of 3 years. Policy A2958 onthe vehicles was purchased on July 1, 2007, for $8,800. This policy has a term of2 years.

2. Unearned Subscription Revenue $29,040. The company began selling magazine sub-scriptions on September 1, 2007 on an annual basis. The selling price of a subscrip-tion is $24. A review of subscription contracts reveals the following.

Subscription Number ofStart Date Subscriptions

September 1 240October 1 260November 1 330December 1 380

1,210

3. Notes Payable, $16,000: This balance consists of a note for 8 months at an annualinterest rate of 9%, dated August 1.

4. Salaries Payable $0: There are six salaried employees. Salaries are paid everyFriday for the current week. Four employees receive a salary of $480 each perweek, and two employees earn $600 each per week. December 31 is a Thursday.

(b) Net income $1,200Tot. assets $30,250

Prepare adjusting entries.(SO 4, 5)



A-PLUS TEST PREPIncome Statement

For the Quarter ended April 30, 2007

RevenuesTuition revenues $240,000

Operating expensesAdvertising $ 6,400Wages 92,000Utilities 1,300Depreciation 2,400Repairs 1,700

Total operating expenses 103,800

Net income $136,200

Denise suspected that something was wrong with the statement because net incomehad never exceeded $40,000 in any one quarter. Knowing that you are an experienced ac-countant, she asks you to review the income statement and other data.

You first look at the trial balance. In addition to the account balances reported abovein the income statement, the ledger contains the following additional selected balancesat April 30, 2007.

Books and Supplies $ 9,800Prepaid Insurance 12,000Note Payable 15,000

You then make inquiries and discover the following.

1. Tuition revenues include advanced tuition payments received for summer classes, inthe amount of $70,000.

2. There were $2,600 of books and supplies on hand at April 30.

3. Prepaid insurance resulted from the payment of a one-year policy on February 1,2007.

4. The mail in May 2007 brought the following bills: advertising for the week of April24, $80; repairs made April 18, $2,560; and utilities for the month of April, $530.

5. There are six employees who receive wages that total $1,380 per day. At April 30,three days’ wages have been incurred but not paid.

6. The note payable is a 8% note dated February 1, 2007, and due on May 31, 2007.

7. Income tax of $15,200 for the quarter is due in May but has not yet been recorded.

Instructions(a) Prepare any adjusting journal entries required as at April 30, 2007.(b) Prepare a correct income statement for the quarter ended April 30, 2007.(c) Explain to Denise the generally accepted accounting principles that she did not rec-

ognize in preparing her income statement and their effect on her results.

Employees do not work weekends. All employees worked the last 4 days ofDecember.

InstructionsPrepare the adjusting entries at December 31, 2007.

P4-6C A-Plus Test Prep was organized on May 1, 2006, by Denise Fenley. Denise is agood manager but a poor accountant. From the trial balance prepared by a part-timebookkeeper, Denise prepared the following income statement for her fourth quarter, whichended April 30, 2007.

Prepare adjusting entries and a corrected incomestatement.(SO 4, 5)



Problems: Set C 17

P4-7C On August 1, 2007, the following were the account balances of Bob and NormRepair Services.

Debits Credits

Cash $ 6,040 Accumulated Depreciation $ 600Accounts Receivable 2,910 Accounts Payable 2,300Supplies 1,030 Unearned Service Revenue 1,260Store Equipment 10,000 Salaries Payable 1,420

Common Stock 10,000Retained Earnings 4,400

$19,980 $19,980

During August the following summary transactions were completed.

Aug. 5 Received $1,200 cash from customers in payment of account.10 Paid $3,120 for salaries due employees, of which $1,700 is for August and

$1,420 is for July salaries payable.12 Received $2,800 cash for services performed in August.15 Purchased store equipment on account $2,000.17 Purchased supplies on account $860.20 Paid creditors $2,500 of accounts payable due.22 Paid August rent $380.25 Paid salaries $2,900.27 Performed services on account and billed customers for services provided

$3,130.29 Received $780 from customers for services to be provided in the future.

Adjustment data:

1. Supplies on hand are valued at $960.

2. Accrued salaries payable are $1,540.

3. Depreciation for the month is $320.

4. Unearned service revenue of $800 is earned.

Instructions(a) Enter the August 1 balances in the ledger accounts. (Use T accounts.)(b) Journalize the August transactions.(c) Post to the ledger accounts. Use Service Revenue, Depreciation Expense, Supplies

Expense, Salaries Expense, and Rent Expense.(d) Prepare a trial balance at August 31.(e) Journalize and post adjusting entries.(f) Prepare an adjusted trial balance.(g) Prepare an income statement and a retained earnings statement for August and a

classified balance sheet at August 31.

P4-8C Laura Young opened Magic Carpet Cleaners Inc. on January 1, 2007. DuringJanuary the following transactions were completed.

Jan. 1 Issued 12,000 shares of common stock for $18,000 cash.1 Purchased used truck for $12,000, paying $4,000 cash and the balance on

account.3 Purchased cleaning supplies for $940 on account.5 Paid $7,200 cash on 1-year insurance policy effective January 1.

12 Billed customers $4,100 for cleaning services.18 Paid $600 cash on amount owed on truck and $300 on amount owed on

cleaning supplies.20 Paid $2,600 cash for employee salaries.21 Collected $2,300 cash from customers billed on January 12.25 Billed customers $2,850 for cleaning services.31 Paid $450 for gas and oil used in the truck during month.31 Declared and paid $600 cash dividend.

The chart of accounts for Magic Carpet Cleaners contains the following accounts: Cash,Accounts Receivable, Cleaning Supplies, Prepaid Insurance, Equipment, Accumulated

GLS

Journalize transactions andfollow through accountingcycle to preparation offinancial statements.(SO 4, 5, 6)

Complete all steps inaccounting cycle.(SO 4, 5, 6, 7, 8)

(f) Cash $1,920Tot. trial balance $27,490

(g) Net loss $1,040

GLS



Depreciation—Equipment, Accounts Payable, Salaries Payable, Common Stock, RetainedEarnings, Dividends, Income Summary, Service Revenue, Gas & Oil Expense, CleaningSupplies Expense, Depreciation Expense, Insurance Expense, Salaries Expense.

Instructions(a) Journalize the January transactions.(b) Post to the ledger accounts. (Use T accounts.)(c) Prepare a trial balance at January 31.(d) Journalize the following adjustments.

(1) Services provided but unbilled and uncollected at January 31 were $2,340.(2) Depreciation on the truck for the month was $320.(3) One-twelfth of the insurance expired.(4) An inventory count shows $210 of cleaning supplies on hand at January 31.(5) Accrued but unpaid employee salaries were $760.

(e) Post adjusting entries to the T accounts.(f ) Prepare an adjusted trial balance.(g) Prepare the income statement and a retained earnings statement for January and a

classified balance sheet at January 31.(h) Journalize and post closing entries and complete the closing process.(i) Prepare a post-closing trial balance at January 31.

(f) Cash $4,550(g) Tot. assets $30,030


Problems: Set C 19

Problems: Set C

P5-1C Franklin Craft Store completed the following merchandising transactions in themonth of October. At the beginning of October, Franklin’s ledger showed Cash of $8,000and Common Stock of $8,000.

Oct. 1 Purchased merchandise on account from Michael’s Wholesale Supply for$4,800, terms 1/10, n/30.

2 Sold merchandise on account for $3,900, terms 2/10, n/30. The cost ofthe merchandise sold was $2,400.

5 Received credit from Michael’s Wholesale Supply for merchandisereturned $600.

9 Received collections in full, less discounts, from customers billed onsales of $3,900 on October 2.

10 Paid Michael’s Wholesale Supply in full, less discount.11 Purchased supplies on account for $750.12 Purchased merchandise for cash $2,100.15 Received $200 refund for return of poor-quality merchandise from

supplier on cash purchase.17 Purchased merchandise on account from Handiwork Distributors for

$2,500, terms 2/10, n/30.19 Paid freight on October 17 purchase $310.24 Sold merchandise for cash $6,900. The cost of the merchandise sold

was $4,510.25 Purchased merchandise on account from Hobbytown Inc. for $1,000,

terms 3/10, n/30.27 Paid Handiwork Distributors in full, less discount.29 Made refunds to cash customers for returned merchandise $190. The

returned merchandise had cost $134.31 Sold merchandise on account for $1,460, terms 1/10, n/30. The cost of

the merchandise sold was $950.

Franklin Craft’s chart of accounts includes Cash, Accounts Receivable, MerchandiseInventory, Supplies, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances,Sales Discounts, and Cost of Goods Sold.

Instructions(a) Journalize the transactions using a perpetual inventory system.(b) Post the transactions to T accounts. Be sure to enter the beginning cash and com-

mon stock balances.(c) Prepare an income statement through gross profit for the month of October 2007.(d) Calculate the profit margin ratio and the gross profit rate. (Assume operating expenses

were $2,100.)

P5-2C Crowning Glory Warehouse distributes commercial hair care products in one-gallon bottles to hair salons and extends credit terms of 3/10, n/30 to all of its customers.During the month of April the following merchandising transactions occurred.

Apr. 1 Purchased 190 bottles on account for $6 each (including freight) fromHealthy Hair, terms 2/10, n/30.

3 Sold 40 bottles on account to the Curl Up and Dye salon for $10 each.6 Received $90 credit for 15 bottles returned to Healthy Hair.9 Paid Healthy Hair in full.

12 Received payment in full from the Curl Up and Dye salon.13 Sold 25 bottles on account to Hairport Salon for $10 each.20 Purchased 200 bottles on account for $6 each from Golden Tresses,

terms 1/15, n/30.24 Received payment in full from Hairport Salon.26 Paid Golden Tresses in full.28 Sold 160 bottles on account to Cheaper Cuts salons for $10 each.30 Granted Cheaper Cuts $120 credit for 12 bottles returned costing $72.

(c) Gross profit $4,266

Journalize purchase andsale transactions under aperpetual inventory system.(SO 2, 3)

Journalize, post, preparepartial income statement,and calculate ratios.(SO 2, 3, 4, 6)

GLS

1700T_web 1/17/06 9:17 PM

20 CHAPTER 5 Merchandising Operations and the Multiple-Step Income Statement

InstructionsJournalize the transactions for the month of April for Crowning Glory Warehouse, usinga perpetual inventory system. Assume the cost of each bottle sold was $6.

P5-3C At the beginning of the current season on November 1, the ledger of LakesideIce House showed Cash $3,300; Merchandise Inventory $4,700; and Common Stock$8,000. The following transactions were completed during November 2007.

Nov. 5 Purchased hockey sticks and pucks on account from Gillmore Co. $1,600,terms 2/10, n/60.

7 Paid freight on Gillmore purchase $90.9 Received credit from Gillmore Co. for merchandise returned $350.

10 Sold merchandise on account for $1,100, terms n/30. The merchandisesold had a cost of $760.

12 Purchased gloves, socks, and other accessories on account from OrrSportswear $945, terms 1/10, n/30.

14 Paid Gillmore Co. in full.17 Received credit from Orr Sportswear for merchandise returned $45.20 Made sales on account for $1,330, terms n/30. The cost of the merchan-

dise sold was $950.21 Paid Orr Sportswear in full.27 Granted an allowance to customers for clothing that did not fit properly

$110.30 Received payments on account for $1,900.

The chart of accounts for the ice house includes Cash, Accounts Receivable, Merchan-dise Inventory, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances,and Cost of Goods Sold.

Instructions(a) Journalize the November transactions using a perpetual inventory system.(b) Using T accounts, enter the beginning balances in the ledger accounts and post the

November transactions.(c) Prepare a trial balance on November 30, 2007.(d) Prepare an income statement through gross profit.

P5-4C Tobin’s China and Collectibles is located in midtown Centralia. During the pastseveral years, net income has been declining because suburban shopping centers havebeen attracting business away from city areas. At the end of the company’s fiscal year onSeptember 30, 2007, these accounts appeared in its adjusted trial balance.

Accounts Payable $ 22,800Accounts Receivable 19,530Accumulated Depreciation—Building 120,000Accumulated Depreciation—Store Equipment 21,000Advertising Expense 6,000Building 200,000Cash 7,800Common Stock 28,000Cost of Goods Sold 520,000Delivery Expense 5,800Depreciation Expense—Building 8,000Depreciation Expense—Store Equipment 4,200Dividends 15,000Gain on Sale of Investment 2,300Insurance Expense 10,300Interest Expense 5,600Merchandise Inventory 31,400Notes Payable 52,000Prepaid Insurance 2,570Property Tax Expense 7,600Property Taxes Payable 7,600Retained Earnings 18,100Salaries Expense 194,700

(c) Tot. trialbalance $10,430

(d) Gross profit $610

Prepare financial statementsand calculate profitabilityratios.(SO 4, 6)

Journalize, post, and preparetrial balance and partialincome statement.(SO 2, 3, 4)

GLS


Problems: Set C 21

Sales 886,000Sales Commissions Expense 18,000Sales Commissions Payable 2,200Sales Returns and Allowances 26,000Store Equipment 64,000Utilities Expense 13,500

Additional data: Notes payable are due in 2013.

Instructions(a) Prepare a multiple-step income statement; a retained earnings statement, and a clas-

sified balance sheet.(b) Calculate the profit margin ratio and the gross profit rate.(c) The vice-president of marketing and the director of human resources have devel-

oped a proposal whereby the company would compensate the sales force on astrictly commission basis using 30% of net sales. Given the increased incentive,they expect net sales to increase by 25%. As a result, they estimate that gross profitwill increase by $85,000 and operating expenses by $109,800. Compute the ex-pected new net income. (Hint: You do not need to prepare an income statement).Then compute the revised profit margin ratio and gross profit rate. Comment onthe effect that this plan would have on net income and on the ratios, and evaluatethe merit of this proposal.

P5-5C An inexperienced accountant prepared this condensed income statement forXiong Company, a retail firm that has been in business for a number of years.

Prepare a correct multiple-step income statement.(SO 4)

Net income $145,000

Journalize, post, and prepareadjusted trial balance andfinancial statements.(SO 4)

XIONG COMPANYIncome Statement

For the Year Ended December 31, 2007

RevenuesNet sales $952,000Other revenues 17,000

969,000Cost of goods sold 548,000

Gross profit 421,000Operating expenses

Selling expenses 161,000Administrative expenses 104,000

265,000

Net earnings $156,000

As an experienced, knowledgeable accountant, you review the statement and determinethe following facts.1. Net sales consist of sales $972,000, less delivery expense on merchandise sold $20,000.2. Other revenues consist of sales discounts $12,000 and interest revenue $5,000.3. Selling expenses consist of salespersons’ salaries $88,000; depreciation on store equip-

ment $4,000; sales returns and allowances $46,000; advertising $12,000; and sales com-missions $11,000.

4. Administrative expenses consist of office salaries $54,000; dividends $14,000; utilities$13,000; interest expense $3,000; and rent expense $20,000, which includes prepay-ments totaling $2,000 for the first month of 2008. The utilities represent utilities paid.At December 31, utility expense of $3,000 has been incurred but not paid.

InstructionsPrepare a correct detailed multiple-step income statement.

P5-6C The trial balance of Wheels and Deals Inc. contained the accounts shown on thefollowing page as of December 31, the end of the company’s fiscal year.

(a) Net income $68,600Tot. assets $184,300


22 CHAPTER 5 Merchandising Operations and the Multiple-Step Income Statement

Adjustment data:1. Depreciation is $18,000 on buildings and $8,000 on equipment. (Both are operating

expenses.)2. Insurance expires at a rate of $500 per month.

Other data: $12,500 of the notes payable are payable next year.

Instructions(a) Journalize the adjusting entries.(b) Create T accounts for all accounts used in part (a). Enter the trial balance amounts

into the T accounts and post the adjusting entries.(c) Prepare an adjusted trial balance.(d) Prepare a multiple-step income statement and a retained earnings statement for the

year, and a classified balance sheet at December 31, 2007.

P5-7C At the end of Bill’s Dollar Store’s fiscal year on January 31, 2007, these accountsappeared in its adjusted trial balance.

Freight-in $ 6,900Merchandise Inventory (beginning) 47,500Purchases 674,200Purchase Discounts 5,800Purchase Returns and Allowances 8,900Sales 792,000Sales Returns and Allowances 12,000

Additional facts:1. Merchandise inventory on January 31, 2007, is $52,300.2. Note that Bill’s Dollar Store uses a periodic system.

InstructionsPrepare an income statement through gross profit for the year ended January 31, 2007.

P5-8C All Decked Out Inc. operates a retail operation that purchases and sells lawn andpatio products. The company purchases all merchandise inventory on credit and uses a

WHEELS AND DEALS INC.Trial Balance

December 31, 2007

Debit Credit

Cash $ 45,200Accounts Receivable 31,100Merchandise Inventory 41,200Prepaid Insurance 8,000Land 44,000Buildings 360,000Accumulated Depreciation—Buildings $ 90,000Equipment 56,000Accumulated Depreciation—Equipment 40,000Notes Payable 62,500Accounts Payable 38,300Common Stock 180,000Retained Earnings 87,200Dividends 14,000Sales 768,000Sales Discounts 3,500Cost of Goods Sold 496,800Salaries Expense 136,400Utilities Expense 9,600Repair Expense 7,800Gas and Oil Expense 7,600Interest Expense 4,800

$1,266,000 $1,266,000

(c) Tot. trial balance$1,292,000

(d) Net income $69,500Tot. assets $423,500

Determine cost of goods soldand gross profit underperiodic approach.(SO 4, 5)

Gross profit $118,400Calculate missing amountsand assess profitability.(SO 4, 5, 6)


Problems: Set C 23

perpetual inventory system. The accounts payable account is used for recording inven-tory purchases only; all other current liabilities are accrued in separate accounts. You areprovided with the following selected information for the fiscal years 2005 through 2008,inclusive.

Instructions(a) Calculate cost of goods sold for each of the 2006, 2007, and 2008 fiscal years.(b) Calculate the gross profit for each of the 2006, 2007, and 2008 fiscal years.(c) Calculate the ending balance of accounts payable for each of the 2006, 2007, and

2008 fiscal years. The ending balance of accounts payable for 2005 was $19,000.(d) The vice-presidents of sales, marketing, production, and finance are discussing the

company’s results with the CEO. They note that sales declined over the 3-year fiscalperiod, 2006-2008. Does that mean that profitability necessarily also declined?Explain, computing the gross profit rate for each fiscal year to help support youranswer.

*P5-9C At the beginning of the current season on November 1, the ledger of LakesideIce House showed Cash $3,300, Merchandise Inventory $4,700, and Common Stock$8,000. These transactions occured during November 2007.

Nov. 5 Purchased hockey sticks and pucks on account from Gillmore Co. $1,600,terms 2/10, n/60.

7 Paid freight on Gillmore Co. purchases $90.9 Received credit from Gillmore Co. for merchandise returned $350.

10 Sold merchandise on account for $1,100, terms n/30.12 Purchased gloves, socks, and other accessories on account from Orr

Sportswear $945, terms 1/10, n/30.14 Paid Gillmore Co. in full.17 Received credit from Orr Sportswear for merchandise returned $45.20 Made sales on account for $1,330, terms n/30.21 Paid Orr Sportswear in full.27 Granted credit to customers for clothing that did not fit properly $110.30 Received payments on account for $1,900.

The chart of accounts for the ice house includes Cash, Accounts Receivable, Merchan-dise Inventory, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances,Purchases, Purchase Returns and Allowances, Purchase Discounts, and Freight-in.

Instructions(a) Journalize the November transactions using a periodic inventory system.(b) Using T accounts, enter the beginning balances in the ledger accounts and post the

November transactions.(c) Prepare a trial balance on November 30, 2007.(d) Prepare an income statement through Gross Profit, assuming merchandise inventory

on hand at November 30 is $5,196.

Journalize, post, and preparetrial balance and partialincome statement usingperiodic approach.(SO 5, 7)

(c) Tot. trialbalance $10,859Gross profit $610

GLS

2005 2006 2007 2008

Inventory (ending) $18,420 $ 14,300 $ 15,400 $ 12,680Sales 292,000 295,000 284,000Purchases of merchandise

inventory on account 174,000 178,100 162,000Cash payments to suppliers 171,000 183,000 167,000

(a) 2007 cost of goods sold $177,000

2007 Ending acct. payable $17,100


24 CHAPTER 6 Reporting and Analyzing Inventory

Problems: Set CP6-1C Farrell Company is trying to determine the value of its ending inventory as ofMarch 31, 2007, the company’s year-end. The following transactions occurred, and the ac-countant asked your help in determining whether they should be recorded or not.(a) On March 30, Farrell shipped to a customer goods costing $800. The goods were

shipped FOB destination, and the receiving report indicates that the customer re-ceived the goods on April 1.

(b) On March 28, Supplier Inc. shipped goods to Farrell FOB shipping point. The invoiceprice was $400 plus $20 for freight. The receiving report indicates that the goodswere received by Farrell on April 2.

(c) Farrell had $750 of consigned goods from Joyce Inc.(d) Farrell had $380 of inventory at Zwingle Variety, on consignment from Farrell.(e) On March 29, Farrell ordered goods costing $640. The goods were shipped FOB des-

tination on March 31. Farrell received the goods on April 3.(f ) A customer returned goods to Farrell on March 31. Upon inspection, the goods were

found to be undamaged and were accepted as returned goods. These goods originallycost $400 and Farrell sold them for $640.

InstructionsFor each of the above transactions, specify whether the item in question should be includedin ending inventory, and if so, at what amount. For each item that is not included in endinginventory, indicate who owns it and what account, if any, it should have been recorded in.

P6-2C Timeless Distribution markets classic children’s books. At the beginning of June,Timeless had in beginning inventory 1,200 books with a unit cost of $3. During June,Timeless made the following purchases of books.

Determine cost of goods soldand ending inventory usingFIFO, LIFO, and averagecost, with analysis.(SO 2, 3)

Determine items andamounts to be recorded ininventory.(SO 1)

Cost of goods sold:FIFO $47,100LIFO $56,500Average $51,578

June 3 3,000 @ $4 June 29 4,000 @ $6June 18 7,800 @ $5

During June, 10,500 books were sold. Timeless uses a periodic inventory system.

Instructions(a) Determine the cost of goods available for sale.(b) Determine (1) the ending inventory and (2) the cost of goods sold under each of the

assumed cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy ofthe cost of goods sold under the FIFO and LIFO methods. (Note: For average cost,round cost per unit to three decimal places.)

(c) Which cost flow method results in (1) the highest inventory amount for the balancesheet and (2) the highest cost of goods sold for the income statement?

P6-3C Byron Company Inc. had a beginning inventory of 200 units of Product ERV ata cost of $6 per unit. During the year, purchases were:

Jan. 24 800 units at $7 Aug. 19 600 units at $ 9Apr. 12 400 units at $8 Nov. 30 300 units at $10

Byron Company uses a periodic inventory system. Sales totalled 1,900 units.

Instructions(a) Determine the cost of goods available for sale.(b) Determine the ending inventory and the cost of goods sold under each of the assumed

cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy of the cost ofgoods sold under the FIFO and LIFO methods.

(c) Which cost flow method results in the lowest inventory amount for the balance sheet?The lowest cost of goods sold for the income statement?

Cost of goods sold:FIFO $14,500LIFO $15,800Average $15,200

Determine cost of goods soldand ending inventory usingFIFO, LIFO, and averagecost in a periodic inventorysystem, and assess financialstatement effect.(SO 2, 3)


Problems: Set C 25

Inventory, January 1 (4,000 units) $ 16,000Cost of 105,000 units purchased 470,500Selling price of 100,000 units sold 870,000Operating expenses 185,000

Units purchased consisted of 35,000 units at $4.20 on March 20; 65,000 units at $4.60 onJuly 24, and 5,000 units at $4.90 on December 12. Income taxes are 30%.

Instructions(a) Prepare comparative condensed income statements for 2007 under FIFO and LIFO.

(Show computations of ending inventory.)(b) Answer the following questions for management in the form of a business letter.

(1) Which inventory cost flow method produces the most meaningful inventoryamount for the balance sheet? Why?

(2) Which inventory cost flow method produces the most meaningful net income? Why?(3) Which inventory cost flow method is most likely to approximate the actual phys-

ical flow of the goods? Why?(4) How much more cash will be available under LIFO than under FIFO? Why?(5) How much of the gross profit under FIFO is illusionary in comparison with the

gross profit under LIFO?

P6-5C You have the following information for Alsteen Inc. for the month ended May31, 2007. Alsteen uses a periodic method for inventory.

Unit Cost orDate Description Units Selling Price

May 1 Beginning inventory 40 $20May 6 Purchase 110 23May 7 Sale 90 32May 15 Purchase 70 24May 18 Sale 40 37May 24 Purchase 60 26May 30 Sale 80 38

Instructions(a) Calculate (i) ending inventory, (ii) cost of goods sold, (iii) gross profit, and (iv) gross

profit rate under each of the following methods.(1) LIFO.(2) FIFO.(3) Average cost. (Round cost per unit to three decimal places.)

(b) Compare results for the three cost flow assumptions.

P6-6C You have the following information for Tempus Watches. Tempus uses theperiodic method of accounting for its inventory transactions. Tempus carries only onebrand of hand-crafted jeweled watches—all are identical. Each batch of watches pur-chased is carefully coded and marked with its purchase cost.

July 1 Beginning inventory 220 watches at a cost of $400 per watch.July 2 Purchased 200 watches at a cost of $450 each.July 5 Sold 180 watches for $680 each.July 14 Purchased 350 watches at a cost of $480 each.July 28 Sold 480 watches for $720 each.

Instructions(a) Assume that Tempus uses the specific identification cost flow method.

(1) Demonstrate how Tempus could maximize its gross profit for the month by specif-ically selecting which watches to sell on July 5 and July 28.

(2) Demonstrate how Tempus could minimize its gross profit for the month byselecting which watches to sell on July 5 and July 28.

Compute ending inventory,prepare income statements,and answer questions usingFIFO and LIFO.(SO 2, 3)

Gross profit:FIFO $426,400LIFO $420,500

Calculate ending inventory,cost of goods sold, grossprofit, and gross profit rateunder periodic method;compare results.(SO 2, 3)

Gross profit:LIFO $2,320FIFO $2,630Average $2,472

P6-4C The management of Jorgensen Inc. asks your help in determining the compar-ative effects of the FIFO and LIFO inventory cost flow methods. For 2007 the account-ing records show these data.

Compare specificidentification, FIFO, andLIFO under periodic method;use cost flow assumption toinfluence earnings.(SO 2, 3)

Gross profit:Maximum $174,800Minimum $166,000


26 CHAPTER 6 Reporting and Analyzing Inventory

(b) Assume that Tempus uses the FIFO cost flow assumption. Calculate cost of goodssold. How much gross profit would Tempus report under this cost flow assumption?

(c) Assume that Tempus uses the LIFO cost flow assumption. Calculate cost of goodssold. How much gross profit would the company report under this cost flowassumption?

(d) Which cost flow method should Tempus Watches select? Explain.

P6-7C This information is available for the Automotive Sector of Ford Motor Companyfor 2004. Ford uses the LIFO inventory method.

(in millions) 2004

Beginning inventory $ 9,151Ending inventory 10,766LIFO reserve 1,001Current assets 44,703Current liabilities 55,027Cost of goods sold 135,856Sales 147,134

Instructions(a) Calculate the inventory turnover ratio and days in inventory.(b) Calculate the current ratio based on inventory as reported using LIFO.(c) Calculate the current ratio after adjusting for the LIFO reserve.(d) Comment on any difference between parts (b) and (c).

*P6-8C Brong Inc. is a retailer operating in Centralia. Brong uses the perpetual inven-tory method. All sales returns from customers result in the goods being returned to in-ventory. (Assume that the inventory is not damaged.) Assume that there are no credittransactions; all amounts are settled in cash. You are provided with the following infor-mation for Brong Inc. for the month of January 2007.

Unit Cost orDate Description Quantity Selling Price

Dec. 31 Ending inventory 140 $14Jan. 2 Purchase 120 15Jan. 6 Sale 150 30Jan. 9 Sale return 20 30Jan. 9 Purchase 85 17Jan. 10 Purchase return 15 17Jan. 10 Sale 70 35Jan. 23 Purchase 100 19Jan. 30 Sale 110 40

Compute inventory turnoverratio and days in inventory;compute current ratio basedon LIFO and after adjustingfor LIFO reserve.(SO 5, 6)

Instructions(a) For each of the following cost flow assumptions, calculate (i) cost of goods sold,

(ii) ending inventory, and (iii) gross profit.(1) LIFO. (Assume sales returns had a cost of $14 and purchase returns had a cost

of $17.)(2) FIFO. (Assume sales returns had costs of $14 for 10 units and $15 for 10 units,

and purchase returns had a cost of $17.)(3) Moving-average. (Round cost per unit to three decimal places.)

(b) Compare results for the three cost flow assumptions.

*P6-9C Just Rugs began operations on February 1. It uses a perpetual inventory system.During February the company had the following purchases and sales.

Calculate cost of goods sold,ending inventory, and grossprofit for LIFO, FIFO, andaverage cost under theperpetual system; compareresults.(SO 3, 7)

Determine ending inventoryunder a perpetual inventorysystem.(SO 3, 7)

Gross profit:LIFO $5,580FIFO $6,140Average $5,932


Problems: Set C 27

Purchases

Date Units Unit Cost Sales Units

Feb. 1 12 $150Feb. 6 9Feb. 11 8 $168Feb. 14 5Feb. 21 6 $172Feb. 27 4

Instructions(a) Determine the ending inventory under a perpetual inventory system using (1) FIFO,

(2) average cost (round unit cost to three decimal places), and (3) LIFO.(b) Which costing method produces the highest ending inventory valuation?

FIFO $1,368Average $1,341LIFO $1,298


28 CHAPTER 7 Internal Control and Cash

Problems: Set C

P7-1C State University’s Accounting Club decided to sell coupon books as a fund-raisingactivity. The books allow users to enjoy restaurants, entertainment, and services such asoil changes, at substantial discounts. The club bought 100 books for $16 each, and mem-bers will sell them for $20. About 20 members attended the last club meeting, and mosttook one or two books to sell. Since the club had already paid for the books and didn’thave other immediate cash needs, members do not have to pay for the books until theysell them.

Extra books are stored on a book shelf in the club’s on-campus office. The office isin a great location with plenty of student traffic. It is shared with the Marketing andInformation Systems clubs. Each club has four sets of keys that are used by its officersand members.

As students sell books, they bring the cash or checks to the club’s office. Studentswith unusual class schedules who arrive when the office is locked can put payments underthe door. Payments are stored in a desk drawer until the treasurer has time to make abank deposit. Students can pick up more books to sell as needed.

Instructions(a) Indicate the weaknesses in internal accounting control in the club’s fund-raising plan.(b) Indicate improvements in internal control procedures for the club’s fund-raising plan.

P7-2C Sam Hill has worked for Dr. Lee Hogan for several years. Sam demonstrates aloyalty that is rare among employees. He is always willing to “cover” for other employeesand hasn’t taken a vacation in three years.

One of Sam’s primary duties at the dental office is to open the mail, list checks re-ceived, and prepare the bank deposit form.

He also collects cash from patients at the cashier window as patients leave. At times,it is so hectic that Sam doesn’t bother to give patients a receipt for the cash paid on theiraccounts. He assures them he will see to it that they receive the proper credit. He is sowell known by most patients that no one has ever complained.

When traffic is slow in the office, Sam offers to help another employee, Mary, postthe payments to patients’ accounts receivable. Dr. Hogan installed a computerized ac-counting program that requires a user ID and password to log in, but Sam and Maryhave found that it is more efficient to just leave the computer on and the receivables fileopen all the time, and minimize the file when it is not in use.

InstructionsIdentify the principles of internal control that may be violated in this situation.

P7-3C On March 31, 2007, Dezelle Company had a cash balance per books of $5,274.20.The statement from Riverside Bank on that date showed a balance of $5,941.40. Acomparison of the bank statement with the cash account revealed the following facts.

1. The bank service charge for March was $28.

2. The bank collected a note receivable of $2,000 for Dezelle Company on March 15, plus$115 of interest. The bank made a $20 charge for the collection. Dezelle has not accruedany interest on the note.

3. The March 31 receipts of $1,681.60 were not included in the bank deposits for March.These receipts were deposited by the company in a night deposit vault on March 31.

4. Company check No. 1245 issued to B. Solveson, a creditor, for $672 that cleared the bankin March was incorrectly entered in the cash payments journal on March 8 for $627.

5. Checks outstanding on March 31 totaled $1,360.00.

6. On March 31 the bank statement showed an NSF charge of $1,033.20 for a checkreceived by the company from Z. Fowler, a customer, on account.

Instructions(a) Prepare the bank reconciliation as of March 31.(b) Prepare the necessary adjusting entries at March 31.

P7-4C The bank portion of the bank reconciliation for Vincent Company at July 31,2007, is shown on the next page.

Identify internal controlweaknesses for cash receipts.(SO 1, 2)

Identify internal controlweaknesses in cash receiptsand cash disbursements.(SO 1, 2, 3)

Prepare a bank reconciliationand adjusting entries.(SO 4)

(a) Cash bal. $6,263Prepare a bank reconciliationand adjusting entries fromdetailed data.(SO 4)


Problems: Set C 29

VINCENT COMPANYBank Reconciliation

July 31, 2007

Cash balance per bank $ 9,596Add: Deposits in transit 930

$10,526

The adjusted cash balance per bank agreed with the cash balance per books at July 31.The August bank statement showed the following checks and deposits.

Less: Outstanding checks

Check Number Check Amount

3151 $ 2903170 8123171 1,5383172 1,2513174 1,172 5,063

Adjusted cash balance per bank $ 5,463

Bank Statement

Checks Deposits

Date Number Amount Date Amount

8-1 3170 $ 812 8-1 $ 9308-2 3171 1,538 8-4 1,3258-5 3174 1,172 8-8 1,1528-4 3175 802 8-13 1,1048-8 3176 132 8-18 1,5878-10 3177 737 8-21 1,1598-15 3179 1,325 8-25 1,0548-18 3180 900 8-28 1,8308-27 3181 596 8-30 1,0678-30 3183 93 Total $11,2088-29 3187 734

Total $8,841

Cash Payments Journal

Date Number Amount Date Number Amount

8-1 3175 $ 802 8-20 3183 $ 938-2 3176 132 8-22 3184 7608-2 3177 737 8-23 3185 1,0388-4 3178 1,598 8-24 3186 4558-8 3179 1,325 8-29 3187 7348-10 3180 900 8-30 3188 2738-15 3181 569 Total $10,9248-18 3182 1,508

Cash Receipts Journal

Date Amount

8-3 $ 1,3258-7 1,1528-12 1,0148-17 1,5878-20 1,1598-24 1,0548-27 1,8308-29 1,0678-30 390

Total $10,578

The cash records per books for August showed the following.



Cash $ 11,000Accounts receivable 47,600Inventory 21,000Property, plant, and equipment, net of depreciation 70,400Accounts payable 18,200Common stock 110,000Retained earnings 21,800

The bank statement contained two bank memoranda:

1. A credit of $1,670 for the collection of a $1,600 note for Vincent Company plus interestof $80 and less a collection fee of $10. Vincent Company has not accrued any intereston the note.

2. A debit for the printing of additional company checks $70.

At August 31, the cash balance per books was $5,117, and the cash balance per bankstatement was $13,563. The bank did not make any errors, but Vincent Company madetwo errors.

Instructions(a) Using the four steps in the reconciliation procedure described on page 330 of the text-

book, prepare a bank reconciliation at August 31, 2007.(b) Prepare the adjusting entries based on the reconciliation. (Note: The correction of

any errors pertaining to recording checks should be made to Accounts Payable. Thecorrection of any errors relating to recording cash receipts should be made toAccounts Receivable.)

P7-5C Bug Off Company provides insect extermination services. On October 31, 2007,the company’s cash account per its general ledger showed a balance of $4,732.

The bank statement from Newton Bank on that date showed the following balance.

NEWTON BANK

Checks and Debits Deposits and Credits Daily Balance

XXX XXX 10-31 4,070

A comparison of the details on the bank statement with the details in the cash accountrevealed the following facts.

1. The statement included a debit memo of $50 for the printing of additional companychecks.

2. Cash sales of $342 on October 6 were deposited in the bank. The cash receipts jour-nal entry and the deposit slip were incorrectly made for $372. The bank credited BugOff Company for the correct amount.

3. Outstanding checks at October 31 totaled $1,250, and deposits in transit were $2,390.

4. On October 13, the company issued check No. 4263 for $196 to H. Simpson, on account.The check, which cleared the bank in May, was incorrectly journalized and posted byBug Off Company for $169.

5. A $900 note receivable was collected by the bank for Bug Off Company on October 31plus $50 interest. The bank charged a collection fee of $15. No interest has been accruedon the note.

6. Included with the cancelled checks was a check issued by Big Oaf Company for $120that was incorrectly charged to Bug Off Company by the bank.

7. On October 31, the bank statement showed an NSF charge of $230 for a check issuedby Tom Piper, a customer, to Bug Off Company on account.

Instructions(a) Prepare the bank reconciliation at October 31, 2007.(b) Prepare the necessary adjusting entries for Bug Off Company at October 31, 2007.

P7-6C You are provided with the following information taken from Keystone Inc.’s May31, 2007, balance sheet.

(a) Cash bal. $6,780

Prepare a bank reconciliationand adjusting entries.(SO 4)

(a) Cash bal. $5,330

Prepare a cash budget.(SO 7)


Problems: Set C 31

Additional information concerning Keystone Inc. is as follows.

1. Gross profit is 40% of sales.

2. Actual and budgeted sales data:

May (actual) $68,000June (budgeted) 80,000

3. Sales are 30% for cash and 70% on credit. There are no sales discounts, and creditsales are collected in the month following the sale.

4. Half of a month’s purchases are paid for in the month of purchase and half in the fol-lowing month. Purchases of inventory totalled $36,400 for the month of May and areanticipated to total $55,000 for the month of June. Ending inventory is expected to be$28,000 at the end of June.

5. Cash operating costs are anticipated to be $21,300 for the month of June.

6. Equipment costing $6,000 will be purchased for cash in June.

7. The company wishes to maintain a minimum cash balance of $11,000. An open lineof credit is available at the bank. All borrowing is done at the beginning of the month,and all repayments are made at the end of the month. The interest rate is 9% per year,and interest expense is accrued at the end of the month and paid in the followingmonth.

Instructions(a) Calculate cash collections in June for May and June sales.(b) Calculate the cash disbursements in June related to May and June purchases.(c) Prepare a cash budget for the month of June. Determine how much cash Keystone

Inc. must borrow, or can repay, in June.

P7-7C Benes Corporation prepares monthly cash budgets. Here are relevant data fromoperating budgets for 2007.

January February

Sales $280,000 $318,000Purchases 112,000 150,000Salaries 72,000 78,000Administrative expenses 58,000 60,000Selling expenses 30,000 36,000

(a) June cashcollections $71,600

(c) Juneborrowings $1,400

Prepare a cash budget.(SO 7)

All sales are on account. Collections are expected to be 50% in the month of sale, 35% inthe first month following the sale, and 15% in the second month following the sale. Fiftypercent (50%) of purchases are paid in cash in the month of purchase, and the balance dueis paid in the month following the purchase. All other expenses are paid in the month in-curred except for administrative expenses, which include $2,000 of depreciation per month.

Other data:

1. Credit sales — November 2006, $250,000; December 2006, $320,000

2. Purchases — December 2006, $100,000

3. Other receipts — January: collection of December 31, 2006, interest receivable $7,500;February: proceeds from sale of securities $8,000

4. Other disbursements—January: pay $35,000 note payable due January 1, 2007;February: pay $6,000 cash dividend

5. The company’s cash balance on January 1, 2007 is expected to be $40,000. The com-pany wants to maintain a minimum cash balance of $40,000. An open line of creditis available at the bank. All borrowing is done at the beginning of the month, and allrepayments are made at the end of the month. The interest rate is 9% per year, andinterest expense is accrued at the end of the month and paid in the following month.

The company’s cash balance on January 1, 2007, is expected to be $41,000. The companywants to maintain a minimum cash balance of $40,000.



Instructions(a) Prepare schedules for (1) expected collections from customers and (2) expected pay-

ments for purchases for January and February.(b) Prepare a cash budget for January and February.

P7-8C At Your Service Company is a very profitable small business. It has not, how-ever, given much consideration to internal control. For example, in an attempt to keepclerical and office expenses to a minimum, the company has combined the jobs of cashierand bookkeeper. As a result, Leon Quint handles all cash receipts, keeps the accountingrecords, and prepares the monthly bank reconciliations.

The balance per the bank statement on March 31, 2007, was $5,931.51. Outstandingchecks were: No. 206 for $358.53, No. 441 for $292, No. 590 for $183.00, No. 781 for$286.00, No. 782 for $319.47, and No. 783 for $303.14. Included with the statement wasa credit memorandum of $175 indicating the collection of a note receivable for At YourService Company by the bank on March 21. This memorandum has not been recordedby At Your Service.

The company’s ledger showed one cash account with a balance of $6,889.53. Thebalance included undeposited cash on hand. Because of the lack of internal controls,Leon took for personal use all of the undeposited receipts in excess of $1,591.63. Hethen prepared the following bank reconciliation in an effort to conceal his theft ofcash.

Prepare a comprehensivebank reconciliation withtheft and internal controldeficiencies.(SO 1, 2, 3, 4)

Cash balance per books, March 31 $6,889.53Add: Outstanding checks

No. 781 $286.00No. 782 319.47No. 783 303.14 808.61

7,698.14Less: Undeposited receipts 1,591.63

Unadjusted balance per bank, March 31 6,106.51Less: Bank credit memorandum 175.00

Cash balance per bank statement, March 31 $5,931.51

Instructions(a) Prepare a correct bank reconciliation. (Hint: Deduct the amount of the theft from the

adjusted balance per books.)(b) Indicate the three ways that Leon attempted to conceal the theft and the dollar amount

involved in each method.(c) What principles of internal control were violated in this case?

(a) Cash bal. $5,781.00

(a) Jan. customercollections $289,500

(b) Jan. 31cash bal. $40,000


Problems: Set C 33

Problems: Set C

P8-1C Happy Daze uses the allowance method to estimate uncollectible accounts re-ceivable. The company produced the following aging of the accounts receivable at yearend.

Instructions(a) Calculate the total estimated bad debts based on the above information.(b) Prepare the year-end adjusting journal entry to record the bad debts using the aged

uncollectible accounts receivable determined in (a). Assume the unadjusted balancein Allowance for Doubtful Accounts is a $5,400 debit.

(c) Of the above accounts, $7,500 is determined to be specifically uncollectible. Preparethe journal entry to write off the uncollectible account.

(d) The company collects $2,000 subsequently on a specific account that had previouslybeen determined to be uncollectible in (c). Prepare the journal entry(ies) necessaryto restore the account and record the cash collection.

(e) Comment on how your answers to (a)–(d) would change if Happy Daze used 4% oftotal accounts receivable, rather than aging the accounts receivable. What are the ad-vantages to the company of aging the accounts receivable rather than applying a per-centage to total accounts receivable?

P8-2C At December 31, 2007, Super Heroes reported this information on its balancesheet.

Accounts receivable $96,000Less: Allowance for doubtful accounts 7,000

During 2008 the company had the following transactions related to receivables.

1. Sales on account $940,000

2. Sales returns and allowances 24,000

3. Collections of accounts receivable 880,000

4. Write-offs of accounts receivable deemed uncollectible 8,000

5. Recovery of bad debts previously written off as uncollectible 2,000

Instructions(a) Prepare the journal entries to record each of these five transactions. Assume that no

cash discounts were taken on the collections of accounts receivable.(b) Enter the January 1, 2008, balances in Accounts Receivable and Allowance for Doubt-

ful Accounts, post the entries to the two accounts (use T accounts), and determinethe balances.

(c) Prepare the journal entry to record bad debts expense for 2008, assuming that agingthe accounts receivable indicates that estimated uncollectible accounts total $9,200.

(d) Compute the receivables turnover ratio and average collection period.

Number of Days Outstanding

Total 0–30 31–60 61–90 91–120 Over 120

Accounts receivable $435,000 $238,000 $120,000 $44,000 $13,000 $20,000

% uncollectible 1.5% 3% 8% 10% 15%

Estimated uncollectibleaccounts

Prepare journal entriesrelated to bad debt expense,and compute ratios.(SO 2, 3, 8)

(a) Tot. est.bad debts $14,990

(b) A/R bal. $124,000

Journalize transactionsrelated to bad debts.(SO 2, 3)


34 CHAPTER 8 Reporting and Analyzing Receivables

P8-3C Presented below is an aging schedule for Hendrix Company.

Not Yet Number of Days Past Due

Customer Total Due 1–30 31–60 61–90 Over 90

Arias $ 18,000 $12,000 $6,000Beyer 24,000 $24,000Cappell 40,000 $ 25,000 15,000Darrah 52,000 $52,000Others 196,000 97,000 60,000 39,000

$330,000 $122,000 $87,000 $45,000 $24,000 $52,000

Estimated percentageuncollectible 1% 3% 9% 20% 40%

Total estimateduncollectible accounts $ 33,480 $ 1,220 $ 2,610 $ 4,050 $ 4,800 $20,800

At December 31, 2007, the unadjusted balance in Allowance for Doubtful Accounts is acredit of $9,600.

Instructions(a) Journalize and post the adjusting entry for bad debts at December 31, 2007. (Use

T accounts.)(b) Journalize and post to the allowance account these 2008 events and transactions:

1. February 1, a $900 customer balance originating in 2007 is judged uncollectible.2. July 1, a check for $900 is received from the customer whose account was writ-

ten off as uncollectible on February 1.

(c) Journalize the adjusting entry for bad debts at December 31, 2008, assuming that theunadjusted balance in Allowance for Doubtful Accounts is a debit of $2,800 and theaging schedule indicates that total estimated uncollectible accounts will be $30,600.

P8-4C Here is information related to Evergreen Company for 2007.

Total credit sales $920,000Accounts receivable at December 31 330,000Bad debts written off 7,000

Instructions(a) What amount of bad debts expense will Evergreen Company report if it uses the di-

rect write-off method of accounting for bad debts?(b) Assume Evergreen Company decides to estimate its bad debts expense based on 4%

of accounts receivable. What amount of bad debts expense will the company recordif Allowance for Doubtful Accounts has a credit balance of $2,000?

(c) Assume the same facts as in part (b), except that there is a $3,000 debit balance inAllowance for Doubtful Accounts. What amount of bad debts expense will Evergreenrecord?

(d) What is a weakness of the direct write-off method of reporting bad debtsexpense?

P8-5C At December 31, 2007, the trial balance of Portia Company contained the fol-lowing amounts before adjustment.

Debits Credits

Accounts Receivable $120,000Allowance for Doubtful Accounts $ 2,800Sales 680,000

Journalize transactionsrelated to bad debts.(SO 2, 3)

Compute bad debt amounts.(SO 3)

Journalize entries to recordtransactions related to baddebts.(SO 2, 3)

(b) Bad Debts Exp. $11,200

(c) Bad Debts Exp. $33,400

Instructions(a) Prepare the adjusting entry at December 31, 2007, to record bad debts expense as-

suming that the aging schedule indicates that $7,600 of accounts receivable will beuncollectible.


Problems: Set C 35

(b) Repeat part (a) assuming that instead of a credit balance there is a $2,800 debit bal-ance in the Allowance for Doubtful Accounts.

(c) During the next month, January 2008, a $750 account receivable is written off as un-collectible. Prepare the journal entry to record the write-off.

(d) Repeat part (c) assuming that Portia Company uses the direct write-off method in-stead of the allowance method in accounting for uncollectible accounts receivable.

(e) What are the advantages of using an aging schedule and the allowance methodin accounting for uncollectible accounts as compared to the direct write-off method?

P8-6C On January 1, 2007, Aruba Company had Accounts Receivable of $87,400 andAllowance for Doubtful Accounts of $4,300. Aruba Company prepares financial state-ments annually and uses a perpetual inventory system. During the year the following se-lected transactions occurred.

Jan. 8 Sold $9,000 of merchandise to Trinidad Company, terms n/30. Cost ofthe merchandise sold was $6,000.

Feb. 6 Accepted a $9,000, 3-month, 8% promissory note from TrinidadCompany for balance due.

15 Sold $11,500 of merchandise costing $8,000 to Martinique Company andaccepted Martinique’s $11,500, 4-month, 9% note for the balance due.

Apr. 20 Sold $7,400 of merchandise costing $4,900 to Guadeloupe Co., terms n/10.28 Accepted a $7,400, 2-month, 6% note from Guadeloupe Co. for balance due.

May 6 Collected Trinidad Company note in full.June 15 Collected Martinique Company note in full.

20 Sold $4,000 of merchandise costing $2,900 to Puerto Rico Inc. and ac-cepted a $4,000, 6-month, 8% note for the amount due.

28 Collected Guadeloupe Company note in full.

InstructionsJournalize the transactions.

P8-7C The president of Hampton Enterprises asks if you could indicate the impact cer-tain transactions have on the following ratios.

AverageCurrent Receivables Collection

Ratio Turnover PeriodTransaction (2: 1) (10X) (36.5 days)

1. Recorded $4,300 sales on account.The cost of the goods sold was$2,000.

2. Recorded bad debts expense of $800using allowance method.

3. Wrote off a $300 account receivable as uncollectible.

4. Collected a $200 accountreceivable that had previouslybeen written off.

InstructionsComplete the table, indicating whether each transaction will increase (I), decrease (D),or have no effect (NE) on the specific ratios provided for Hampton Enterprises.

P8-8C OldeLine Company closes its books on September 30. On August 31, the NotesReceivable account balance is $20,600. Notes Receivable include the following.

Journalize variousreceivables transactions.(SO 1, 2, 4, 5)

Explain the impact oftransactions on ratios.(SO 8)

Prepare entries for variouscredit card and notesreceivable transactions.(SO 2, 4, 5, 6, 9)

Date Maker Face Value Term Maturity Date Interest Rate

May 11 Emeril Inc. $5,000 120 days Sept. 8 6%June 30 Alton Co. 6,600 90 days Sept. 28 8%July 31 Sarah Corp. 9,000 4 months Nov. 30 7%

GLS

(b) Bad Debts Exp. $10,400


36 CHAPTER 8 Reporting and Analyzing Receivables

During September the following transactions were completed.

Sept. 2 Made sales of $8,700 on OldeLine credit cards.8 Received payment in full from Emeril Inc. on the amount due.

12 Made sales of $950 on Discover credit cards. The credit card servicecharge is 4%.

28 Received payment in full from Alton Co. on the amount due.

Instructions(a) Journalize the September transactions and the September 30 adjusting entry for ac-

crued interest receivable. (Interest is computed using 360 days.)(b) Enter the balances at September 1 in the receivable accounts and post the entries to

all of the receivable accounts. (Use T accounts.)(c) Show the balance sheet presentation of the receivable accounts at September 30.

P8-9C Presented here is basic financial information (in millions) from the 2004 annualreports of Columbia Sportswear and The Timberland Company.

Columbia Timberland

Sales $1,095.3 $1,500.6Allowance for doubtful accounts, Jan. 1 8.9 7.7Allowance for doubtful accounts, Dec. 31 7.8 8.9Accounts receivable balance (gross), Jan. 1 214.9 132.8Accounts receivable balance (gross), Dec. 31 275.5 164.0

InstructionsCalculate the receivables turnover ratio and average collection period for both compa-nies. Comment on the difference in their collection experiences.

(b) A/R bal. $8,700(c) Tot.

receivables $17,805

Calculate and interpretvarious ratios.(SO 7, 8)


Problems: Set C 37

Problems: Set CP9-1C Owens Company was organized on January 1. During the first year of operations,the following plant asset expenditures and receipts were recorded in random order.

Determine acquisition costsof land and building.(SO 1)

Debits

1. Cost of real estate purchased as a plant site (land $280,000 andbuilding $40,000) $ 320,000

2. Installation cost of fences around property 4,0003. Cost of demolishing building to make land suitable for

construction of new building 12,0004. Excavation costs for new building 18,0005. Building permit 1,8006. Cost of parking lots and driveways 34,0007. Architect’s fees on building plans 27,0008. Real estate taxes paid for the current year on land 6,2009. Full payment to building contractor 750,000

$1,173,000

Credits

10. Proceeds from sale of timber on land $6,000

InstructionsAnalyze the transactions using the following table column headings. Enter the numberof each transaction in the Item column, and enter the amounts in the appropriate columns.For amounts in the Other Accounts column, also indicate the account title.

Journalize equipmenttransactions related topurchase, sale, retirement,and depreciation.(SO 5, 8)

Land $326,000Item Land Building Other Accounts

P9-2C At December 31, 2007, Goethe Corporation reported the following plant assets.

Land $ 2,000,000Buildings $21,600,000Less: Accumulated depreciation—buildings 7,920,000 13,680,000

Equipment 7,200,000Less: Accumulated depreciation—equipment 2,700,000 4,500,000

Total plant assets $20,180,000

During 2008, the following selected cash transactions occurred.

Feb. 1 Purchased land for $1,400,000.Apr. 1 Sold equipment that cost $48,000 when purchased on January 1, 2003.

The equipment was sold for $14,000.June 1 Sold land for $1,300,000. The land cost $900,000.Sept. 1 Purchased equipment for $96,000.Dec. 31 Retired equipment that cost $64,000 when purchased on December 31,

2000. No salvage value was received.

Instructions(a) Journalize the transactions. (Hint: You may wish to set up T accounts, post begin-

ning balances, and then post 2008 transactions.) Goethe uses straight-line deprecia-tion for buildings and equipment. The buildings are estimated to have a 30-year usefullife and no salvage value; the equipment is estimated to have an 8-year useful life andno salvage value. Update depreciation on assets disposed of at the time of sale orretirement.

(b) Record adjusting entries for depreciation for 2008.(c) Prepare the plant assets section of Goethe’s balance sheet at December 31, 2008.

(c) Tot. plant assets$19,140,000


38 CHAPTER 9 Reporting and Analyzing Long-Lived Assets

P9-3C Presented here are selected transactions for Dark Arts Company for 2007.

Jan. 1 Retired a piece of machinery that was purchased on January 1, 1995. Themachine cost $96,000 on that date and had a useful life of 12 years withno salvage value.

Sept. 30 Sold a computer that was purchased on January 1, 2005. The computercost $28,000 and had a useful life of 4 years with no salvage value. Thecomputer was sold for $9,000.

Dec. 31 Discarded a delivery truck that was purchased on January 1, 2002. Thetruck cost $28,000 and was depreciated based on an 6-year useful lifewith a $4,000 salvage value.

InstructionsJournalize all entries required on the above dates, including entries to update depreciation,where applicable, on assets disposed of. Dark Arts Company uses straight-line depre-ciation. (Assume depreciation is up to date as of December 31, 2006.)

P9-4C The intangible assets section of Ewing Corporation’s balance sheet at December31, 2007, is presented here.

The patent was acquired in January 2006 and has a useful life of 7 years. The copyrightwas acquired in January 2000 and also has a useful life of 12 years. The following cashtransactions may have affected intangible assets during 2008.

Jan. 2 Paid $25,000 legal costs to successfully defend the patent againstinfringement by another company.

Jan.–June Developed a new product, incurring $185,000 in research and develop-ment costs. A patent was granted for the product on July 1, and its use-ful life is equal to its legal life. Legal and other costs for the patentwere $7,000.

Aug. 1 Acquired a copyright for $150,000. The copyright has a useful life andlegal life of 50 years.

Sept. 1 Paid $65,000 to a quarterback to appear in commercials advertisingthe company’s products. The commercials will air in September andOctober.

Instructions(a) Prepare journal entries to record the transactions.(b) Prepare journal entries to record the 2008 amortization expense for intangible

assets.(c) Prepare the intangible assets section of the balance sheet at December 31, 2008.(d) Prepare the note to the financial statements on Ewing Corporation’s intangible assets

as of December 31, 2008.

P9-5C Due to rapid employee turnover in the accounting department, the followingtransactions involving intangible assets were improperly recorded by Folger Corporationin 2007.1. Folger developed a new manufacturing process, incurring research and development

costs of $220,000. The company also purchased a patent for $48,000. In early JanuaryFolger capitalized $268,000 as the cost of the patents. Patent amortization expense of$13,400 was recorded based on a 20-year useful life.

2. On July 1, 2007, Folger purchased a small company and as a result acquired goodwillof $40,000. Folger recorded a half-year’s amortization in 2007, based on a 10-year life($2,000 amortization). The goodwill has an indefinite life.

InstructionsPrepare all journal entries necessary to correct any errors made during 2007. Assume thebooks have not yet been closed for 2007.

Journalize entries fordisposal of plant assets.(SO 5)

Prepare entries to recordtransactions related toacquisition and amortizationof intangibles; prepare theintangible assets section andnote.(SO 7, 8)

Patents ($56,000 cost less $16,000 amortization) $40,000Copyrights ($42,000 cost less $28,000 amortization) 14,000

Total $54,000

(c) Tot. intangibles $218,075

Prepare entries to correcterrors in recording andamortizing intangible assets.(SO 7)


Problems: Set C 39

P9-6C Snow White Corporation and Sleeping Beauty Corporation, two companies ofroughly the same size, are both involved in the manufacture of formalwear. Each com-pany depreciates its plant assets using the straight-line approach. An investigation of theirfinancial statements reveals the following information.

Instructions(a) For each company, calculate these values:

(1) Return on assets ratio.(2) Profit margin.(3) Asset turnover ratio.

(b) Based on your calculations in part (a), comment on the relative effectiveness of thetwo companies in using their assets to generate sales. What factors complicate yourability to compare the two companies?

*P9-7C In recent years Singh Company has purchased three machines. Because of fre-quent employee turnover in the accounting department, a different accountant was incharge of selecting the depreciation method for each machine, and various methods havebeen used. Information concerning the machines is summarized in the table below.

Calculate and comment onreturn on assets, profitmargin, and asset turnoverratio.(SO 6)

Snow White Corp. Sleeping Beauty Corp.

Net income $ 250,000 $ 320,000Sales 1,280,000 1,400,000Total assets (average) 2,800,000 2,600,000Plant assets (average) 2,100,000 1,700,000Intangible assets (goodwill) 250,000 0

Compute depreciation underdifferent methods.(SO 3, 9)

Salvage Useful LifeMachine Acquired Cost Value (in years) Depreciation Method

1 July 1, 2004 $68,000 $5,000 7 Straight-line2 Apr. 1, 2005 60,000 6,000 4 Declining-balance3 Sept. 1, 2005 84,000 4,000 8 Units-of-activity

For the declining-balance method, Singh Company uses the double-declining rate. Forthe units-of-activity method, total machine hours are expected to be 40,000. Actual hoursof use in the first 3 years were: 2005, 1,200; 2006, 6,400; and 2007, 7,000.

Instructions(a) Compute the amount of accumulated depreciation on each machine at December 31,

2007.(b) If machine 2 was purchased on November 1 instead of April 1, what would be the

depreciation expense for this machine in 2005? In 2006?

*P9-8C Darius Corporation purchased machinery on January 1, 2007, at a cost of$310,000. The estimated useful life of the machinery is 5 years, with an estimated resid-ual value at the end of that period of $10,000. The company is considering differentdepreciation methods that could be used for financial reporting purposes.

Instructions(a) Prepare separate depreciation schedules for the machinery using the straight-line

method, and the declining-balance method using double the straight-line rate. Roundto the nearest dollar.

(b) Which method would result in the higher reported 2007 income? In the highest to-tal reported income over the 5-year period?

(c) Which method would result in the lower reported 2007 income? In the lowest totalreported income over the 5-year period?

(a) Machine 2 $50,625

Compute depreciation underdifferent methods.(SO 3, 9)

(a) Double-declining-balance expense 2009

$44,640


40 CHAPTER 10 Reporting and Analyzing Liabilities

Problems: Set C

P10-1C On January 1, 2007, the ledger of Edina Company contained these liabilityaccounts.

Accounts Payable $36,800Sales Taxes Payable 5,300Unearned Service Revenue 12,400

During January the following selected transactions occurred.

Jan. 1 Borrowed $16,000 in cash from Shoreline Bank on a 3-month, 9%,$16,000 note.

7 Sold merchandise for cash totaling $19,610, which includes 6% salestaxes.

10 Provided services for customers who had made advance payments of$8,000. (Credit Service Revenue.)

15 Paid state treasurer’s department for sales taxes collected in December2006, $5,300.

26 Sold 700 units of a new product on credit at $40 per unit, plus 6% sales tax.

During January the company’s employees earned wages of $56,000. Withholdings relatedto these wages were $4,284 for Social Security (FICA), $6,000 for federal income tax, and$2,500 for state income tax. The company owed no money related to these earnings forfederal or state unemployment tax. Assume that wages earned during January will bepaid during February. No entry had been recorded for wages or payroll tax expense as ofJanuary 31.

Instructions(a) Journalize the January transactions.(b) Journalize the adjusting entries at January 31 for the outstanding note payable and

for wages expense and payroll tax expense.(c) Prepare the current liabilities section of the balance sheet at January 31, 2007. As-

sume no change in Accounts Payable.

P10-2C On Board Corporation sells skateboard products and also operates an indoorskating facility. During the last part of 2007, On Board had the following transactionsrelated to notes payable.

Aug. 1 Issued a $6,000 note to FreeStyle to purchase inventory. The 3-monthnote payable bears interest of 9% and is due November 1.

Aug. 31 Recorded accrued interest for the FreeStyle note.Sept. 1 Issued a $15,000, 8%, 6-month note to Commerce Bank to finance the

purchase of a new ramp for advanced boarders. The note is due March 1.Sept. 30 Recorded accrued interest for the FreeStyle note and the Commerce

Bank note.Oct. 1 Issued a $30,000 note and paid $10,000 cash to repair and improve its

building. This note bears interest of 8% and matures in 12 months.Oct. 31 Recorded accrued interest for the FreeStyle note, the Commerce Bank

note, and the improvement note.Nov. 1 Paid principal and interest on the FreeStyle note.Nov. 30 Recorded accrued interest for the Commerce Bank note and the

improvement note.Dec. 31 Recorded accrued interest for the Commerce Bank note and the

improvement note.

Instructions(a) Prepare journal entries for the transactions noted above.(b) Post the above entries to the Notes Payable, Interest Payable, and Interest Expense

accounts. (Use T accounts.)(c) Show the balance sheet presentation of notes payable and interest payable at

December 31.(d) How much interest expense relating to notes payable did On Board incur during the

year?

Prepare current liabilityentries, adjusting entries, andcurrent liabilities section.(SO 1, 2, 3, 7)

(c) Tot. currentliabilities $120,394

GLS

Journalize and post notetransactions; show balancesheet presentation.(SO 2, 7)

(b) InterestPayable $1,000


Problems: Set C 41

P10-3C The following section is taken from Merlyn’s balance sheet at December 31, 2006.

Current liabilitiesBond interest payable $ 36,000

Long-term liabilitiesBonds payable, 6%, due January 1, 2013 600,000

Interest is payable annually on January 1. The bonds are callable on any annual interestdate.

Instructions(a) Journalize the payment of the bond interest on January 1, 2007.(b) Assume that on January 1, 2007, after paying interest, Merlyn calls bonds having a

face value of $60,000. The call price is 103. Record the redemption of the bonds.(c) Prepare the adjusting entry on December 31, 2007, to accrue the interest on the

remaining bonds.

P10-4C On November 1, 2006, Angela Corp. issued $300,000, 5%, 10-year bonds at facevalue. The bonds were dated November 1, 2006, and pay interest annually on November 1.Financial statements are prepared annually on December 31.

Instructions(a) Prepare the journal entry to record the issuance of the bonds.(b) Prepare the adjusting entry to record the accrual of interest on December 31, 2006.(c) Show the balance sheet presentation of bonds payable and bond interest payable on

December 31, 2006.(d) Prepare the journal entry to record the payment of interest on November 1, 2007.(e) Prepare the adjusting entry to record the accrual of interest on December 31, 2007.(f) Assume that on January 1, 2008, Angela pays the accrued bond interest and calls the

bonds. The call price is 104. Record the payment of interest and redemption of thebonds.

P10-5C Dunhill Company sold $800,000, 7%, 15-year bonds on January 1, 2007. Thebonds were dated January 1, 2007, and pay interest on December 31. The bonds weresold at 97.

Instructions(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2007.(b) At December 31, 2007, $1,600 of the bond discount had been amortized. Show the

balance sheet presentation of the bond liability at December 31, 2007. (Assume thatinterest has been paid.)

(c) At December 31, 2008, when the carrying value of the bonds was $779,200, the com-pany redeemed the bonds at 101. Record the redemption of the bonds assuming thatinterest for the year had already been paid.

P10-6C You have been presented with the following selected information taken fromthe financial statements of Kellogg Company.

Prepare journal entries torecord interest payments andredemption of bonds.(SO 5, 6)

Prepare journal entries torecord issuance of bonds,interest, balance sheetpresentation, and bondredemption.(SO 5, 6, 7)

(f) Loss $12,000

Prepare journal entries torecord issuance of bonds,show balance sheetpresentation, and recordbond redemption.(SO 5, 6, 7)

KELLOGG COMPANYBalance Sheet (partial)

December 31(in millions)

2004 2003

Total current assets $ 2,121.8 $ 1,787.9Noncurrent assets 8,668.6 8,354.8

Total assets $10,790.4 $10,142.7

Current liabilities $ 2,846.0 $ 2,766.0Long-term liabilities 5,687.2 5,933.5

Total liabilities 8,533.2 8,699.5Shareholders’ equity 2,257.2 1,443.2

Total liabilities and shareholders’ equity $10,790.4 $10,142.7

(c) Loss $28,800

Calculate and comment onratios.(SO 7)



Note 6. Leases and Other CommitmentsThe Company’s leases are generally for equipment and warehouse space. Future mini-mum annual lease payments under noncancelable operating leases were as follows: 2005,$87.2; 2006, $72.5; 2007, $57.0; 2008, $44.9; 2009, $76.7; after 2009, $65.9.

Instructions(a) Calculate each of the following ratios for 2004 and 2003.

(1) Current ratio.(2) Free cash flow.(3) Debt to total assets.(4) Times interest earned ratio.

(b) Comment on the trend in ratios.(c) Read the company’s note on leases. If the operating leases had instead been accounted

for like a purchase, assets and liabilities would increase by approximately $324.2 mil-lion. Recalculate the debt to total assets ratio for 2004 in light of this information,and discuss the implictions for analysis.

*P10-7C The information below is taken from Lolly Corp.’s balance sheet at December31, 2007.

Other information:

2004 2003

Net income (loss) $ 890.6 $ 787.1Income tax expense 475.3 382.4Interest expense 308.6 371.4Cash provided by operations 1,229.0 1,171.0Capital expenditures 278.6 247.2Cash dividends 417.6 412.4

Prepare journal entries torecord interest payments,straight-line discountamortization, andredemption of bonds.(SO 5, 6, 8)

Current liabilitiesBond interest payable $ 105,000

Long-term liabilitiesBonds payable, 7%, due January 1, 2014 $1,500,000Plus: Premium on bonds payable 13,500 1,513,500

Interest is payable annually on January 1. The bonds are callable on any annual interestdate. Lolly uses straight-line amortization for any bond premium or discount. FromDecember 31, 2007, the bonds will be outstanding for an additional 6 years (72 months).

Instructions(Round all computations to the nearest dollar.)(a) Journalize the payment of bond interest on January 1, 2008.(b) Prepare the entry to amortize bond premium and to accrue the interest on December

31, 2008.(c) Assume on January 1, 2009, after paying interest, that Lolly Corp. calls bonds hav-

ing a face value of $600,000. The call price is 104. Record the redemption of thebonds.

(d) Prepare the adjusting entry at December 31, 2009, to amortize bond premium andto accrue interest on the remaining bonds.

*P10-8C Nish Corporation sold $2,200,000, 8%, 5-year bonds on January 1, 2007. Thebonds were dated January 1, 2007, and pay interest on January 1. Nish Corporation usesthe straight-line method to amortize bond premium or discount.

Instructions(a) Prepare all the necessary journal entries to record the issuance of the bonds and bond

interest expense for 2007, assuming that the bonds sold at 102.(b) Prepare journal entries as in part (a) assuming that the bonds sold at 99.(c) Show the balance sheet presentation for the bond issue at December 31, 2007, using

(1) the 102 selling price, and then (2) the 99 selling price.

(c) Loss $19,500

Prepare journal entries torecord issuance of bonds,interest, and straight-lineamortization, and balancesheet presentation.(SO 5, 7, 8)


Problems: Set C 43

*P10-9C Zaidi Co. sold $3,000,000, 7%, 8-year bonds on January 1, 2007. The bonds weredated January 1, 2007, and pay interest on January 1. The company uses straight-line amor-tization on bond premiums and discounts. Financial statements are prepared annually.

Instructions(a) Prepare the journal entries to record the issuance of the bonds assuming they sold at:

(1) 103.(2) 98.

(b) Prepare amortization tables for both assumed sales for the first three interestpayments.

(c) Prepare the journal entries to record interest expense for 2007 under both assumedsales.

(d) Show the balance sheet presentation for both assumed sales at December 31, 2007.

*P10-10C On January 1, 2007, Chiu Corporation issued $800,000 face value, 6%,15-year bonds at $727,137. This price resulted in an effective-interest rate of 7% onthe bonds. Chiu uses the effective-interest method to amortize bond premium or dis-count. The bonds pay annual interest January 1.

Instructions(Round all computations to the nearest dollar.)(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2007.(b) Prepare an amortization table through December 31, 2009 (three interest periods) for

this bond issue.(c) Prepare the journal entry to record the accrual of interest and the amortization of

the discount on December 31, 2007.(d) Prepare the journal entry to record the payment of interest on January 1, 2008.(e) Prepare the journal entry to record the accrual of interest and the amortization of

the discount on December 31, 2008.

*P10-11C On January 1, 2007, Lopez Company issued $1,600,000 face value, 7%, 10-yearbonds at $1,780,903. This price resulted in a 5.5% effective-interest rate on the bonds.Lopez uses the effective-interest method to amortize bond premium or discount. Thebonds pay annual interest on each January 1.

Instructions(a) Prepare the journal entries to record the following transactions.

(1) The issuance of the bonds on January 1, 2007.(2) Accrual of interest and amortization of the premium on December 31, 2007.(3) The payment of interest on January 1, 2008.(4) Accrual of interest and amortization of the premium on December 31, 2008.

(b) Show the proper balance sheet presentation for the liability for bonds payable on theDecember 31, 2008, balance sheet.

(c) Provide the answers to the following questions in narrative form.(1) What amount of interest expense is reported for 2008?(2) Would the bond interest expense reported in 2008 be the same as, greater than,

or less than the amount that would be reported if the straight-line method ofamortization were used?

*P10-12C Masood purchased a new piece of equipment to be used in its new facility.The $380,000 piece of equipment was purchased with a $40,000 down payment and withcash received through the issuance of a $340,000, 9%, 5-year mortgage note payable is-sued on October 1, 2007. The terms provide for quarterly installment payments of$21,298 on December 31, March 31, June 30, and September 30.

Instructions(Round all computations to the nearest dollar.)(a) Prepare an installment payments schedule for the first five payments of the notes

payable.(b) Prepare all journal entries related to the notes payable for December 31, 2007.(c) Show the balance sheet presentation for this obligation for December 31, 2007. (Hint:

Be sure to distinguish between the current and long-term portions of the note.)

*P10-13C Hakan Paydak has just approached a venture capitalist for financing for a newbusiness venture, the development of a local ski hill. On July 1, 2007, Hakan was loaned

Prepare journal entries torecord issuance of bonds,interest, and straight-lineamortization, and balancesheet presentation.(SO 5, 6, 8)

Prepare journal entries torecord issuance of bonds,payment of interest, andamortization of bonddiscount using effective-interest method.(SO 9)

(c) InterestExpense $50,900

Prepare installment paymentsschedule, journal entries, andbalance sheet presentationfor a mortgage note payable.(SO 7, 10)

Prepare journal entries torecord payments for long-term note payable, andbalance sheet presentation.(SO 7, 10)

Prepare journal entries torecord issuance of bonds,payment of interest, andeffective-interest amortization,and balance sheetpresentation.(SO 5, 7, 9)

(a) (4) InterestExpense $97,177

(c) Current portion $57,732

(c) (1) InterestExpense $198,750



$120,000 at an annual interest rate of 8%. The loan is repayable over 5 years in annualinstallments of $30,055, principal and interest, due each June 30. The first payment isdue June 30, 2008. Hakan uses the effective-interest method for amortizing debt. The skihill company’s year-end will be June 30.

Instructions(a) Prepare an amortization schedule for the 5 years, 2007–2012. Round all calculations

to the nearest dollar.(b) Prepare all journal entries for Hakan Paydak for the first 2 fiscal years ended June

30, 2008, and June 30, 2009. Round all calculations to the nearest dollar.(c) Show the balance sheet presentation of the note payable as of June 30, 2009. (Hint:

Be sure to distinguish between the current and long-term portions of the note.)

(b) 6/30/08 InterestExpense $9,600


Problems: Set C 45

Problems: Set C

P11-1C Pickwick Corporation was organized on January 1, 2007. It is authorized toissue 50,000 shares of 8%, $75 par value preferred stock and 700,000 shares of no-parcommon stock with a stated value of $2 per share. The following stock transactions werecompleted during the first year.

Jan. 7 Issued 90,000 shares of common stock for cash at $5 per share.Feb. 12 Issued 7,000 shares of preferred stock for cash at $77 per share.June 30 Issued 65,000 shares of common stock for cash at $6 per share.Aug. 24 Issued 25,000 shares of common stock for cash at $6.50 per share.Dec. 1 Issued 2,000 shares of preferred stock for cash at $79 per share.

Instructions(a) Journalize the transactions.(b) Post to the stockholders’ equity accounts. (Use T accounts.)(c) Prepare the paid-in capital portion of the stockholders’ equity section at December

31, 2007.

P11-2C The stockholders’ equity accounts of Pareek Corporation on January 1, 2007,were as follows.

Preferred Stock (6%, $50 par noncumulative, 8,000 shares authorized) $ 175,000Common Stock ($1 stated value, 400,000 shares authorized) 250,000Paid-in Capital in Excess of Par Value—Preferred Stock 7,000Paid-in Capital in Excess of Stated Value—Common Stock 4,000,000Retained Earnings 950,000Treasury Stock—Common (12,000 shares) 66,000

During 2007 the corporation had the following transactions and events pertaining to itsstockholders’ equity.

Feb. 1 Issued 7,000 shares of common stock for $126,000.July 12 Purchased 2,000 additional shares of common treasury stock at $17 per

share.Oct. 1 Declared a 6% cash dividend on preferred stock, payable November 1.Nov. 1 Paid the dividend declared on October 1.Dec. 1 Declared a $2.00 per share cash dividend to common stockholders of

record on December 15, payable December 31, 2007.31 Determined that net income for the year was $930,000. Paid the

dividend declared on December 1.

Instructions(a) Journalize the transactions. (Include entries to close net income to Retained Earnings.)(b) Enter the beginning balances in the accounts and post the journal entries to the stock-

holders’ equity accounts. (Use T accounts.)(c) Prepare the stockholders’ equity section of the balance sheet at December 31, 2007.(d) Calculate the payout ratio, earnings per share, and return on common stockholders’

equity ratio. (Note: Use the common shares outstanding on January 1 and December31 to determine the average shares outstanding.)

P11-3C On December 31, 2006, Jochims Company had 820,000 shares of $10 parcommon stock issued and outstanding. The stockholders’ equity accounts at December31, 2006, had the balances listed here.

Common Stock $8,200,000Additional Paid-in Capital 2,460,000Retained Earnings 1,600,000

Transactions during 2007 and other information related to stockholders’ equity accountswere as follows.

1. On January 18, 2007, issued at $107 per share 80,000 shares of $100 par value, 7%cumulative preferred stock.

Journalize stocktransactions, post, andprepare paid-in capitalsection.(SO 2, 4, 7)

(c) Tot. paid-in capital$1,699,500

Journalize transactions, post,and prepare a stockholders’equity section; calculateratios.(SO 2, 3, 5, 7, 8)

(c) Tot. paid-in capital$4,558,000

Prepare a stockholders’equity section.(SO 7)

GLS

GLS


46 CHAPTER 11 Reporting and Analyzing Stockholders’ Equity

2. On March 23, 2007, reacquired 20,000 shares of its common stock for $15 per share.3. On June 8, 2007, declared a cash dividend of $1.60 per share on the common stock

outstanding, payable on July 10, 2007, to stockholders of record on July 1, 2007.4. On December 15, 2007, declared the yearly cash dividend on preferred stock, payable

January 12, 2008, to stockholders of record on December 15, 2007.5. Net income for the year was $2,900,000.

InstructionsPrepare the stockholders’ equity section of Jochims’ balance sheet at December 31, 2007.

P11-4C The ledger of Ninomiya Corporation at December 31, 2007, after the books havebeen closed, contains the following stockholders’ equity accounts.

Preferred Stock (8,000 shares issued) $ 800,000Common Stock (430,000 shares issued) 860,000Paid-in Capital in Excess of Par Value—Preferred Stock 100,000Paid-in Capital in Excess of Stated Value—Common Stock 1,750,000Retained Earnings 2,872,000

A review of the accounting records reveals this information:

1. Preferred stock is 10%, $100 par value, noncumulative. Since January 1, 2006, 8,000shares have been outstanding; 20,000 shares are authorized.

2. Common stock is no-par with a stated value of $2 per share; 500,000 shares are authorized.

3. The January 1, 2007, balance in Retained Earnings was $2,450,000.4. On October 1, 80,000 shares of common stock were sold for cash at $8 per share.5. A cash dividend of $553,000 was declared and properly allocated to preferred and com-

mon stock on November 1. No dividends were paid to preferred stockholders in 2006.6. Net income for the year was $975,000.7. On December 31, 2007, the directors authorized disclosure of a $160,000 restriction

of retained earnings for plant expansion. (Use Note A.)

Instructions(a) Reproduce the retained earnings account (T account) for the year.(b) Prepare the stockholders’ equity section of the balance sheet at December 31.

P11-5C Romero Corporation has been authorized to issue 25,000 shares of $100 parvalue, 8%, noncumulative preferred stock and 1,000,000 shares of no-par common stock.The corporation assigned a $4 stated value to the common stock. At December 31, 2007,the ledger contained the following balances pertaining to stockholders’ equity.

Preferred Stock $ 400,000Paid-in Capital in Excess of Par Value—Preferred Stock 72,000Common Stock 2,400,000Paid-in Capital in Excess of Stated Value—Common Stock 6,600,000Treasury Stock—Common (40,000 shares) 680,000Retained Earnings 3,630,000

The preferred stock was issued for $472,000 cash. All common stock issued was for cash.In November 40,000 shares of common stock were purchased for the treasury at a pershare cost of $17. No dividends were declared in 2007.

Instructions(a) Prepare the journal entries for the following.

(1) Issuance of preferred stock for cash.(2) Issuance of common stock for cash.(3) Purchase of common treasury stock for cash.

(b) Prepare the stockholders’ equity section of the balance sheet at December 31, 2007.

P11-6C On January 1, 2007, Matusiak Inc. had these stockholders’ equity balances.

Common Stock, $5 par (2,000,000 shares authorized, 600,000shares issued and outstanding) $3,000,000

Paid-in Capital in Excess of Par Value 1,800,000Retained Earnings 810,000

Tot. stockholders’ equity$21,580,000

Reproduce retained earningsaccount, and prepare astockholders’ equity section.(SO 5, 6, 7)

(b) Tot. paid-in capital$3,510,000

Prepare entries for stocktransactions, and prepare astockholders’ equity section.(SO 2, 3, 4, 7)

Prepare a stockholders’equity section.(SO 7)

(b) Tot. stockholders’ equity$12,422,000


Problems: Set C 47

During 2007, the following transactions and events occurred.

1. Issued 75,000 shares of $5 par value common stock for $9 per share.2. Issued 60,000 shares of common stock for cash at $9.50 per share.3. Purchased 25,000 shares of common stock for the treasury at $10 per share.4. Declared and paid a cash dividend of $355,000.5. Earned net income of $860,000.

InstructionsPrepare the stockholders’ equity section of the balance sheet at December 31, 2007.

P11-7C Devang Company manufactures disc golf equipment. During 2007 Devangissued bonds at 8% interest and used the cash proceeds to purchase treasury stock.The following financial information is available for Devang Company for the years2007 and 2006.

2007 2006

Sales $ 6,000,000 $ 6,000,000Net income 1,460,000 1,500,000Interest expense 280,000 120,000Tax expense 630,000 660,000Dividends paid 770,000 800,000Total assets (year-end) 9,500,000 8,600,000Average total assets 8,800,000 9,100,000Total liabilities (year-end) 4,000,000 2,000,000Average total stockholders’ equity 5,700,000 7,400,000

Instructions(a) Use the information above to calculate the following ratios for both years: (i) return

on assets ratio, (ii) return on common stockholders’ equity ratio, (iii) payout ratio,(iv) debt to total assets ratio, (v) times interest earned ratio.

(b) Referring to your findings in part (a), discuss the changes in the company’s prof-itability from 2006 to 2007.

(c) Referring to your findings in part (a), discuss the changes in the company’s solvencyfrom 2006 to 2007.

(d) Based on your findings in (b), was the decision to issue debt to purchase commonstock a wise one?

*P11-8C On January 1, 2007, Labovitz Corporation had these stockholders’ equity accounts.

Common Stock ($2 par value, 80,000 shares issued and outstanding) $160,000Paid-in Capital in Excess of Par Value 400,000Retained Earnings 580,000

During the year, the following transactions occurred.

Jan. 10 Declared a $0.50 cash dividend per share to stockholders of record onJanuary 31, payable February 28.

Feb. 28 Paid the dividend declared in January.May 1 Declared a 5% stock dividend to stockholders of record on May 10,

distributable June 1. On May 1, the market price of the stock was $9 per share.

June 1 Issued the shares for the stock dividend.Dec. 1 Declared a $0.75 per share cash dividend to stockholders of record on

December 15, payable January 10, 2008.31 Determined that net income for the year was $320,000.

Instructions(a) Journalize the transactions. (Include entries to close net income to Retained

Earnings.)(b) Enter the beginning balances and post the entries to the stockholders’ equity T

accounts. (Note: Open additional stockholders’ equity accounts as needed.)(c) Prepare the stockholders’ equity section of the balance sheet at December 31.(d) Calculate the payout ratio and return on common stockholders’ equity ratio.

Tot. stockholders’ equity$7,110,000

Evaluate a company’sprofitability and solvency.(SO 8)

Prepare dividend entries,prepare a stockholders’ equitysection, and calculate ratios.(SO 5, 7, 8, 9)

(c) Tot. stockholders’ equity$1,357,000

GLS


48 CHAPTER 12 Statement of Cash Flows

Problems: Set C

P12-1C You are provided with the following transactions that took place during a re-cent fiscal year.

Cash Inflow,Where Reported Outflow, or

Transaction on Statement No Effect?

(a) Purchased shares of common treasurystock.

(b) Distributed a stock dividend to commonstockholders.

(c) Recorded cash sales.(d) Recorded sales on account.(e) Recorded prepayment of insurance expense.(f ) Purchased supplies on account.(g) Recorded amortization expense on

a patent.(h) Recorded and received interest revenue.(i) Recorded cash proceeds from a sale of

plant assets.(j) Acquired land by issuing a note

payable.

InstructionsComplete the table indicating whether each item (1) should be reported as an operating(O) activity, investing (I) activity, financing (F) activity, or as a noncash (NC) transactionreported in a separate schedule, and (2) represents a cash inflow or cash outflow or hasno cash flow effect. Assume use of the indirect approach.

P12-2C The following account balances relate to the stockholders’ equity accounts ofBakhtiar Corp. at year-end.

2007 2006

Common stock, 9,800 and 8,000 shares,respectively, for 2007 and 2006 $200,600 $160,000

Preferred stock, 3,000 shares 225,000 225,000Retained earnings 218,400 210,000

A small stock dividend was declared and issued in 2007. The market value of the shareswas $17,600. Cash dividends were $18,000 in both 2007 and 2006. The common stockhas no par or stated value.

Instructions(a) What was the amount of net income reported by Bakhtiar Corp. in 2007?(b) Determine the amounts of any cash inflows or outflows related to the common stock

and dividend accounts in 2007.(c) Indicate where each of the cash inflows or outflows identified in (b) would be clas-

sified on the statement of cash flows.

P12-3C The income statement of Von Roenn Company is presented here.

Distinguish amongoperating, investing, andfinancing activities.(SO 6)

Determine cash flow effectsof changes in equityaccounts.(SO 4)

VON ROENN COMPANYIncome Statement

For the Year Ended November 30, 2007

Sales $6,400,000Cost of goods sold

Beginning inventory $1,200,000Purchases 4,140,000

Goods available for sale 5,340,000

(a) Net income $44,000

Prepare the operatingactivities section—indirectmethod.(SO 4)


Problems: Set C 49

Ending inventory 1,500,000

Cost of goods sold 3,840,000

Gross profit 2,560,000Operating expenses

Selling expenses 540,000Administrative expenses 900,000 1,440,000

Net income $1,120,000

Additional information:1. Accounts receivable decreased $180,000 during the year, and inventory increased

$300,000.2. Prepaid expenses decreased $210,000 during the year.3. Accounts payable to suppliers of merchandise increased $290,000 during the year.4. Accrued expenses payable decreased $75,000 during the year.5. Administrative expenses include depreciation expense of $84,000.

InstructionsPrepare the operating activities section of the statement of cash flows for the year endedNovember 30, 2007, for Von Roenn Company, using the indirect method.

*P12-4C Data for Von Roenn Company are presented in P12-3C.

InstructionsPrepare the operating activities section of the statement of cash flows using the directmethod.

*P12-5C Chamay Company’s income statement contained the condensed informationbelow.

CHAMAY COMPANYIncome Statement


Revenues $850,000Operating expenses, excluding depreciation $506,000Depreciation expense 56,000Loss on sale of equipment 4,000 566,000

Income before income taxes 284,000Income tax expense 80,000

Net income $204,000

Chamay’s balance sheet contained the comparative data at December 31, below.

Cash from operations$1,509,000

Prepare the operatingactivities section—directmethod.(SO 6)Cash from operations

$1,509,000Prepare the operatingactivities section—indirectmethod.(SO 4)

2007 2006

Accounts receivable $72,000 $65,000Accounts payable 27,000 31,000Income taxes payable 23,000 18,000

Accounts payable pertain to operating expenses.

InstructionsPrepare the operating activities section of the statement of cash flows using the indirectmethod.

*P12-6C Data for Chamay Company are presented in P12-5C.

InstructionsPrepare the operating activities section of the statement of cash flows using the directmethod.

Cash from operations$258,000

Prepare the operating activi-ties section—direct method.(SO 6) Cash from

operations$258,000



SHAFI COMPANYComparative Balance Sheets

December 31

Assets 2007 2006

Cash $ 37,000 $ 26,000Accounts receivable 55,000 43,000Merchandise inventory 34,000 38,000Property, plant, and equipment 162,000 112,000Accumulated depreciation (36,000) (32,000)

Total $252,000 $187,000


Accounts payable $ 20,000 $ 27,000Income taxes payable 19,000 15,000Bonds payable 60,000 50,000Common stock 42,000 30,000Retained earnings 111,000 65,000

Total $252,000 $187,000

SHAFI COMPANYIncome Statement


Sales $448,000Cost of goods sold 272,000

Gross profit 176,000Selling expenses $45,000Administrative expenses 9,000 54,000

Income from operations 122,000Interest expense 4,000

Income before income taxes 118,000Income tax expense 32,000

Net income $ 86,000

Additional data:1. Dividends declared and paid were $40,000.2. During the year equipment was sold for $3,000 cash. This equipment cost $15,000

originally and had a book value of $3,000 at the time of sale.3. Equipment costing $65,000 was purchased for cash during the year.4. All depreciation expense is in the selling expense category.5. All sales and purchases are on account.

Instructions(a) Prepare a statement of cash flows using the indirect method.(b) Compute these cash-basis measures:

(1) Current cash debt coverage ratio.(2) Cash debt coverage ratio.(3) Free cash flow.

*P12-8C Data for Shafi Company are presented in P12-7C. Further analysis reveals thefollowing.

1. Accounts payable pertain to merchandise suppliers.2. All operating expenses except for depreciation were paid in cash.

Instructions(a) Prepare a statement of cash flows for Shafi Company using the direct method.

Prepare a statement of cashflows—indirect method, andcompute cash-based ratios.(SO 4, 5)

P12-7C Presented below are the financial statements of Shafi Company.

(a) Cash from operations$91,000

Prepare a statement of cashflows—direct method, andcompute cash-based ratios.(SO 5, 6)

(a) Cash from operations$91,000


Problems: Set C 51

(b) Compute these cash-basis measures:(1) Current cash debt coverage ratio.(2) Cash debt coverage ratio.(3) Free cash flow.

P12-9C Condensed financial data of Tomasi Inc. follow.

TOMASI INC.Comparative Balance Sheets

December 31

Assets 2007 2006

Cash $ 27,000 $ 33,000Accounts receivable 57,000 41,000Inventories 45,000 48,000Prepaid expenses 17,000 14,000Investments 162,000 130,000Plant assets 580,000 520,000Accumulated depreciation (211,000) (180,000)

Total $677,000 $606,000


Accounts payable $ 44,000 $ 51,000Accrued expenses payable 21,000 15,000Bonds payable 180,000 220,000Common stock 175,000 150,000Retained earnings 257,000 170,000

Total $677,000 $606,000

TOMASI INC.Income Statement Data


Sales $600,000Less:

Cost of goods sold $290,000Operating expenses, excluding

depreciation 65,000Depreciation expense 50,000Income taxes 47,000Interest expense 12,000Loss on sale of plant assets 9,000 473,000

Net income $127,000

Prepare a statement of cashflows—indirect method.(SO 4)


1. New plant assets costing $90,000 were purchased for cash during the year.2. Old plant assets having an original cost of $30,000 were sold for $2,000 cash.3. Bonds matured and were paid off at face value for cash.4. A cash dividend of $40,000 was declared and paid during the year.

InstructionsPrepare a statement of cash flows using the indirect method.

*P12-10C Data for Tomasi Inc. are presented in P12-9C. Further analysis reveals thataccounts payable pertain to merchandise creditors.

InstructionsPrepare a statement of cash flows for Tomasi Inc. using the direct method.

P12-11C The comparative balance sheets for Borkovec Company as of December 31are presented on the next page.


Prepare a statement of cashflows—direct method.(SO 6)Cash from operations

$169,000

Prepare a statement of cashflows—indirect method.(SO 4)



BORKOVEC COMPANYComparative Balance Sheets

December 31

Assets 2007 2006

Cash $ 91,000 $ 78,000Accounts receivable 81,000 70,000Inventory 52,000 55,000Prepaid expenses 22,000 18,000Land 110,000 144,000Equipment 264,000 210,000Accumulated depreciation—equipment (90,000) (80,000)Building 300,000 300,000Accumulated depreciation—building (60,000) (50,000)

Total $770,000 $745,000


Accounts payable $ 26,000 $ 35,000Bonds payable 350,000 400,000Common stock, $1 par 170,000 120,000Retained earnings 224,000 190,000

Total $770,000 $745,000


1. Operating expenses include depreciation expense of $48,000.2. Land was sold for cash at book value.3. Cash dividends of $12,000 were paid.4. Net income for 2007 was $46,000.5. Equipment was purchased for $88,000 cash. In addition, equipment costing $34,000

with a book value of $6,000 was sold for $9,000 cash.6. Bonds were converted at face value by issuing 50,000 shares of $1 par value common

stock.

InstructionsPrepare a statement of cash flows for the year ended December 31, 2007, using the indirect method.

P12-12C You are provided with the following transactions that took place during the year.


InstructionsFor each transaction listed above, indicate whether it will increase (I), decrease (D), orhave no effect (NE) on the ratios.

CurrentCash Cash

Free Debt DebtCash Coverage CoverageFlow Ratio Ratio

Transactions ($80,000) (0.7 times) (0.4 times)

(a) Recorded cash sales $4,800.(b) Sold land for $10,000 cash.(c) Declared $6,000 cash dividends.(d) Paid $5,800 cash dividends declared last year.(e) Paid amount owed to suppliers, $9,400.(f) Retired $20,000 convertible bonds

payable by issuing common stock.

Identify the impact oftransactions on ratios.(SO 5)


Problems: Set C 53

Mickey Company Minnie Company

2007 2006 2007 2006

Net sales $490,000 $620,000Cost of goods sold 231,000 274,000Operating expenses 29,000 97,000Interest expense 5,000 3,000Income tax expense 68,000 75,000

Current assets 110,000 $ 98,000 120,000 $ 105,000Plant assets (net) 170,000 160,000 310,000 290,000Current liabilities 35,000 40,000 50,000 60,000Long-term liabilities 55,000 58,000 45,000 40,000

Common stock, $10 par 50,000 50,000 180,000 180,000Retained earnings 140,000 110,000 155,000 115,000

Problems: Set C

P13-1C Here are comparative statement data for Mickey Company and Minnie Company,two competitors. All balance sheet data are as of December 31, 2007, and December 31, 2006.

ART MART COMPANYIncome Statements


2007 2006

Net sales $ 545,500 $504,300Cost of goods sold 273,700 248,500

Gross profit 271,800 255,800Selling and administrative expenses 194,900 161,900

Income from operations 76,900 93,900Other expenses and losses

Interest expense 4,100 3,900

Income before income taxes 72,800 90,000Income tax expense 22,000 27,000

Net income $ 50,800 $ 63,000

Instructions(a) Prepare a vertical analysis of the 2007 income statement data for Mickey Company

and Minnie Company.(b) Comment on the relative profitability of the companies by computing the 2007 return

on assets and the return on common stockholders’ equity ratios for both companies.

P13-2C The comparative statements of Art Mart Company are presented here.

Prepare vertical analysis andcomment on profitability.(SO 5, 6)

Compute ratios from balancesheet and income statement.(SO 6)

ART MART COMPANYBalance SheetsDecember 31

Assets 2007 2006

Current assetsCash $ 67,500 $ 79,500Short-term investments 5,400 11,300Accounts receivable 74,000 62,900Inventory 122,600 99,100

Total current assets 269,500 252,800

Plant assets (net) 111,400 54,800

Total assets $380,900 $307,600


54 CHAPTER 13 Financial Analysis: The Big Picture

All sales were on account. Net cash provided by operating activities for 2007 was $60,000.Capital expenditures were $55,000, and cash dividends were $20,000.

InstructionsCompute the following ratios for 2007.(a) Earnings per share. (h) Days in inventory.(b) Return on common stockholders’ equity. (i) Times interest earned.(c) Return on assets. (j) Asset turnover.(d) Current ratio. (k) Debt to total assets.(e) Receivables turnover. (l) Current cash debt coverage.(f) Average collection period. (m) Cash debt coverage.(g) Inventory turnover. (n) Free cash flow.

P13-3C Condensed balance sheet and income statement data for Rock and Roll Cor-poration are presented here.


Current liabilitiesAccounts payable $ 45,200 $ 27,700Income taxes payable 17,900 19,900

Total current liabilities 63,100 47,600

Bonds payable 125,000 100,000

Total liabilities 188,100 147,600

Stockholders’ equityCommon stock ($2 par) 52,000 50,000Retained earnings 140,800 110,000

Total stockholders’ equity 192,800 160,000


ROCK AND ROLL CORPORATIONBalance SheetsDecember 31

2007 2006 2005

Cash $106,000 $ 72,000 $ 61,000Receivables (net) 27,000 24,000 30,000Other current assets 92,000 115,000 90,000Investments 291,000 240,000 206,000Plant and equipment (net) 150,000 133,000 120,000

$666,000 $584,000 $507,000

Current liabilities $ 63,000 $ 58,000 $ 56,000Long-term debt 77,000 52,000 49,000Common stock, $5 par 200,000 200,000 180,000Retained earnings 326,000 274,000 222,000

$666,000 $584,000 $507,000

Perform ratio analysis, anddiscuss change in financialposition and operatingresults.(SO 6)

ROCK AND ROLL CORPORATIONIncome Statements


2007 2006

Sales $399,000 $406,000Less: Sales returns and allowances 6,000 9,000

Net sales 393,000 397,000Cost of goods sold 222,000 207,000

Gross profit 171,000 190,000Operating expenses (including income taxes) 105,000 115,000

Net income $ 66,000 $ 75,000


Problems: Set C 55


1. The market price of Rock and Roll’s common stock was $7.40, $8.80, and $7.60 for2005, 2006, and 2007, respectively.

2. You must compute dividends paid. All dividends were paid in cash.

Instructions(a) Compute the following ratios for 2006 and 2007.

(1) Profit margin.(2) Gross profit.(3) Asset turnover.(4) Earnings per share.(5) Price-earnings.(6) Payout.(7) Debt to total assets.

(b) Based on the ratios calculated, discuss briefly the improvement or lack thereof in thefinancial position and operating results from 2006 to 2007 of Rock and RollCorporation.

P13-4C The following financial information is for Hertig Company.

HERTIG COMPANYBalance SheetsDecember 31

Assets 2007 2006

Cash $ 130,000 $ 104,000Short-term investments 210,000 190,000Receivables 204,000 156,000Inventories 134,000 117,000Prepaid expenses 38,000 33,000Land 58,000 58,000Building and equipment (net) 175,000 126,000

Total assets $949,000 $784,000


Notes payable $120,000 $100,000Accounts payable 50,000 42,000Accrued liabilities 35,000 27,000Bonds payable, due 2009 250,000 200,000Common stock, $10 par 180,000 180,000Retained earnings 314,000 235,000


Compute ratios; commenton overall liquidity andprofitability.(SO 6)

HERTIG COMPANYIncome Statements


2007 2006

Sales $952,000 $816,000Cost of goods sold 511,000 438,000

Gross profit 441,000 378,000Operating expenses 321,000 275,000

Net income $120,000 $103,000


1. Inventory at the beginning of 2006 was $121,000.2. Receivables (net) at the beginning of 2006 were $184,000.3. Total assets at the beginning of 2006 were $790,000.


56 CHAPTER 13 Financial Analysis: The Big Picture

4. No common stock transactions occurred during 2006 or 2007.5. All sales were on account.

Instructions(a) Indicate, by using ratios, the change in liquidity and profitability of Hertig Company

from 2006 to 2007. (Note: Not all profitability ratios can be computed nor can cash-basis ratios be computed.)

(b) Given below are three independent situations and a ratio that may be affected. Foreach situation, compute the affected ratio (1) as of December 31, 2007, and (2) as ofDecember 31, 2008, after giving effect to the situation. Net income for 2008 was$125,000. Total assets on December 31, 2008, were $960,000.

Situation Ratio

1. 2,000 shares of common stock were Return on common stockholders’purchased as treasury stock at par on equityJuly 1, 2008.

2. All of the notes payable were paid in 2008. Debt to total assets3. The market price of common stock was Price-earnings

$15 and $18 on December 31, 2007and 2008, respectively.

P13-5C Selected financial data of Columbia Sportswear Company and The TimberlandCompany for 2004 are presented here (in millions).

Columbia TimberlandIncome Statement Data for Year

Net sales $1,095.3 $1,500.6Cost of goods sold 597.4 761.5Selling and administrative expenses 290.5 505.2Interest expense 0.6 0.7Other income (expense) 8.1 3.5Income tax expense 76.3 84.0

Net income $ 138.6 $ 152.7

Balance Sheet Data (End of Year)

Current assets $756.0 $649.0Noncurrent assets 193.4 108.5

Total assets $949.4 $757.5

Current liabilities $146.9 $226.2Long-term debt 22.3 19.8Total stockholders’ equity 780.2 511.5

Total liabilities and stockholders’ equity $949.4 $757.5

Compute selected ratios,and compare liquidity,profitability, and solvencyfor two companies.(SO 6)

Beginning-of-Year Balances

Total assets $783.8 $641.7Total stockholders’ equity 640.8 428.5Current liabilities 119.9 197.0Total liabilities 143.0 213.2

Other Data

Average net receivables $236.8 $140.1Average inventory 146.1 123.9Net cash provided by operating activities 93.7 184.7Capital expenditures 44.5 24.1Dividends –0– –0–


Problems: Set C 57

Instructions(a) For each company, compute the following ratios.

(1) Current. (8) Return on assets.(2) Receivables turnover. (9) Return on common stockholders’ equity.(3) Average collection period. (10) Debt to total assets.(4) Inventory turnover. (11) Times interest earned.(5) Days in inventory. (12) Current cash debt coverage.(6) Profit margin. (13) Cash debt coverage.(7) Asset turnover. (14) Free cash flow.

(b) Compare the liquidity, solvency, and profitability of the two companies.


problemset c questions

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