Problems: Set C. Problems: Set C 1

Transcription

1 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 year they will need significant funds to expand their operations. (b) Three licensed physical therapists have been working in rehabilitation hospitals for several 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 venture. Although there appears to be a great need for their services, they are concerned about the legal liabilities that their business might confront. (c) Erik, Geoff, and Janna recently graduated with education degrees. They have been friends since childhood. They have decided to start a consulting business focused on assisting home-schooled students over the Internet. (d) Ben Fullerton has been providing routine automotive maintenance and repair services for several years. He performs his work in customers garages out of a cargo van that contains tools, diagnostic equipment, and parts. Customers can continue to work or relax at home while he services their vehicles. His business has been so successful that several regular customers have suggested he expand its operations. Ben is confident that he could find other mechanics to help provide the service but knows 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 considerable liability. Ben has no savings or personal assets. He wants to maintain control over the business. (e) Chad Browne, a college student looking for summer employment, opened a flower stand at a local farmers market. In each case explain what form of organization the business is likely to take sole proprietorship, 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 repay the loan at the end of the fifth year. (d) The president of American Greetings is trying to determine whether the company is generating enough cash to increase the amount of dividends paid to investors in this and future years, and still have enough cash to buy equipment as it is needed. In each situation, state whether the decision maker would be most likely to place primary emphasis on information provided by the income statement, balance sheet, or statement of cash flows. In each case provide a brief justification for your choice. Choose only one financial 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 at August 31, and the revenues and expenses for the month of August, its first month of operations: Cash $ 3,800 Notes payable $6,000 Accounts receivable 1,000 Accounts payable 900 Revenue 11,000 Supplies expense 3,000 Supplies 1,800 Rent expense 1,600 Advertising expense 500 Utilities expense 200 Equipment 12,000 Wage expense 3,400 Determine forms of business organization. (SO 1) Identify users and uses of financial statements. (SO 2, 4, 5) Prepare an income statement, retained earnings statement, and balance sheet, and discuss results. (SO 4, 5)

2 2 CHAPTER 1 Introduction to Financial Statements Marginal check figures (in blue) provide a key number to let you know you re on the right track. (a) Net income $2,300 Ret. earnings $1,700 Tot. assets $18,600 Determine items included in a statement of cash flows, prepare the statement, and comment. (SO 4, 5) (a) Net increase $23,000 Comment on proper accounting treatment and prepare a corrected balance sheet. (SO 4, 5) In August, the company issued no additional stock, but paid dividends of $600. (a) Prepare an income statement and a retained earnings statement for the month of August and a balance sheet at August 31, (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 for December 31, Inventory $ 19,000 Cash paid to purchase equipment $ 8,000 Cash paid to suppliers 76,000 Equipment 40,000 Building 200,000 Revenues 87,000 Common stock 40,000 Cash received from customers 93,000 Cash dividends paid 4,000 Cash received from issuing common stock 18,000 (a) Determine which items should be included in a statement of cash flows and then prepare 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, At December 31, 2007, Dan Jasper, the president and sole stockholder, decided to prepare a balance sheet, which appeared as follows. JULIUS CORPORATION Balance Sheet December 31, 2007 Assets Liabilities and Stockholders Equity Cash $20,000 Accounts payable $40,000 Accounts receivable 39,000 Notes payable 15,000 Motorcycle 17,000 Motorcycle loan 14,000 Truck 20,000 Stockholders equity 27,000 Dan willingly admits that he is not an accountant by training. He is concerned that his balance sheet might not be correct. He has provided you with the following additional information. 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 asset of the company. To be consistent he also listed as a liability of the corporation his personal 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, Included in the accounts receivable balance is $8,000 that Dan expects to collect from a customer for a sale that he anticipates will occur in January. Dan included this in the receivables of Julius Corporation because he has already discussed the potential sale with the customer. Tot. assets $69,000 (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.)

3 Problems: Set C 3 Problems: Set C P2-1C The following items are taken from the 2004 balance sheet of Starbucks Corporation. (All dollars are in thousands.) Intangible assets $ 95,750 Common stock 996,078 Property and equipment, net 1,551,416 Accounts payable 199,346 Other assets 85,561 Long-term investments 306,926 Accounts receivable 140,226 Prepaid expenses and other current assets 134,997 Short-term investments 353,881 Retained earnings 1,478,140 Cash and cash equivalents 299,128 Long-term debt 3,618 Accrued expenses and other current liabilities 425,536 Unearned revenue current 121,377 Other long-term liabilities 166,453 Inventories 422,663 Prepare a classified balance sheet. (SO 1) Prepare a classified balance sheet for Starbucks Corporation as of October 3, P2-2C These items are taken from the financial statements of Graham Corporation for Retained earnings (beginning of year) $26,000 Utilities expense 3,000 Equipment 38,000 Accounts payable 2,400 Cash 20,700 Salaries payable 1,700 Common stock 15,000 Dividends 7,000 Service revenue 77,000 Prepaid insurance 1,950 Repair expense 1,800 Depreciation expense 5,300 Accounts receivable 8,850 Insurance expense 3,900 Salaries expense 44,000 Accumulated depreciation 12,400 Tot. current assets $1,350,895 Tot. assets $3,390,548 Prepare financial statements. (SO 1, 3) Prepare an income statement, a retained earnings statement, and a classified balance sheet as of December 31, P2-3C You are provided with the following information for Barnette Enterprises, effective as of its September 30, 2007, year-end. Net income $19,000 Tot. assets $57,100 Prepare financial statements. (SO 1, 3) Accounts payable $ 6,300 Accounts receivable 2,500 Building, net of accumulated depreciation 37,000 Cash 2,600 Common stock 10,000 Cost of goods sold 22,000 Current portion of long-term debt 5,000 Depreciation expense 2,900 Dividends paid during the year 1,800

4 4 CHAPTER 2 A Further Look at Financial Statements Net income $7,650 Tot. current assets $14,250 Tot. assets $81,250 Equipment, net of accumulated depreciation 14,000 Income tax expense 2,550 Income taxes payable 700 Interest expense 3,400 Inventories 4,800 Land 16,000 Long-term debt 31,000 Prepaid expenses 1,350 Retained earnings, beginning 21,300 Revenues 56,800 Selling expenses 2,700 Short-term investments 3,000 Wages expense 15,600 Wages payable 1,100 (a) Prepare an income statement and a retained earnings statement for Barnette Enterprises for the year ended September 30, (b) Prepare a classified balance sheet for Barnette Enterprises as of September 30, Compute ratios; comment on P2-4C Comparative financial statement data for Batman Corporation and Spiderman Corporation, relative profitability, liquidity, two competitors, appear below. All balance sheet data are as of December 31, and solvency. (SO 2, 4, 5) Batman Corporation Spiderman Corporation Compute liquidity, solvency, and profitability ratios. (SO 2, 4, 5) Net sales $269,000 $504,000 Cost of goods sold 130, ,000 Operating expenses 80, ,000 Interest expense 12,000 6,000 Income tax expense 18,000 44,000 Current assets 146, ,000 Plant assets (net) 105,000 86,000 Current liabilities 44, ,000 Long-term liabilities 87,000 41,000 Additional information: Cash from operating activities $36,000 $43,000 Capital expenditures $15,000 $28,000 Dividends paid $8,000 $10,000 Average number of shares outstanding 30,000 40,000 (a) Comment on the relative profitability of the companies by computing the net income and earnings per share for each company for (b) Comment on the relative liquidity of the companies by computing working capital and the current ratios for each company for (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 P2-5C Here and on the next page are financial statements of Howard Company. HOWARD COMPANY Income Statement For the Year Ended December Net sales $558,200 Cost of goods sold 254,500 Selling and administrative expenses 178,000 Interest expense 24,000 Income tax expense 34,700 Net income $ 67,000

5 Problems: Set C 5 HOWARD COMPANY Balance Sheet December 31 Assets 2007 Current assets Cash $ 15,000 Short-term investments 33,500 Accounts receivable (net) 66,400 Inventory 21,200 Total current assets 136,100 Plant assets (net) 294,600 Total assets $430,700 Liabilities and Stockholders Equity Current liabilities Accounts payable $ 26,800 Income taxes payable 18,300 Total current liabilities 45,100 Bonds payable 220,000 Total liabilities 265,100 Stockholders equity Common stock 80,000 Retained earnings 85,600 Total stockholders equity 165,600 Total liabilities and stockholders equity $430,700 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. Compute the following values and ratios for (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 are presented here. JANZAN CORPORATION Balance Sheets December 31 Compute and interpret liquidity, solvency, and profitability ratios. (SO 2, 4, 5) Assets Cash $ 10,500 $ 9,000 Receivables (net) 18,000 14,000 Other current assets 5,700 4,000 Long-term investments 21,800 20,000 Plant and equipment (net) 46,000 38,000 Total assets $102,000 $85,000 Liabilities and Stockholders Equity Current liabilities $ 25,000 $23,000 Long-term debt 36,000 36,000 Common stock 22,000 20,000 Retained earnings 19,000 6,000 Total liabilities and stockholders equity $102,000 $85,000

6 6 CHAPTER 2 A Further Look at Financial Statements JANZAN CORPORATION Income Statements For the Years Ended December Sales $175,000 $160,000 Cost of goods sold 100,000 92,000 Operating expenses (including income taxes) 57,000 53,000 Net income $ 18,000 $ 15,000 Additional information: Cash from operating activities $20,000 $13,000 Cash used for capital expenditures $11,000 $8,000 Dividends paid $5,000 $3,000 Average number of shares outstanding 22,000 20,000 Compute these values and ratios for 2006 and (a) Earnings per share. (b) Working capital. (c) Current ratio. (d) Debt to total assets ratio. (e) (f) Free cash flow. 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. Compute ratios and compare liquidity, solvency, and profitability for two companies. (SO 2, 4, 5) P2-7C Selected financial data of two competitors, Home Depot and Lowes, are presented here. (All dollars are in millions.) Home Depot Lowes (1/30/05) (1/28/05) Income Statement Data for Year Net sales $73,094 $36,464 Cost of goods sold 48,664 24,165 Selling and administrative expenses 16,504 7,562 Interest expense Other 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 $ 6,974 Noncurrent assets 24,717 14,235 Total assets $38,907 $21,209 Current liabilities $10,529 $ 5,719 Long-term debt 4,220 3,955 Total stockholders equity 24,158 11,535 Total liabilities and stockholders equity $38,907 $21,209 Cash from operating activities $6,904 $3,033 Cash paid for capital expenditures $3,948 $2,927 Dividends paid $719 $116 Average shares outstanding 2,

7 Problems: Set C 7 For 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 in creating an investment club. None have taken any business courses, but all have been working for at least five years and feel they are ready to make their money work for them. Some of the prospective members want to use the fund as part of their retirement assets. Others hope to use their portion of the annual earnings to supplement their current income. The group has discussed various types of companies to invest in. Some members prefer 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 have only a few stockholders. One member has suggested buying into a company started by his best friend from high school who claims that his business has tripled its earnings during its first two years of operations. It has become clear to Meredith that this group of prospective investors has little or no understanding of financial reporting or generally accepted accounting principles (GAAP). Comment on the objectives and qualitative characteristics of financial reporting. (SO 6, 7) (a) Explain what is meant by financial reporting and GAAP. (b) Considering the variety of members goals and suggestions, indicate the type of financial information that should be most useful in addressing investment choices.

8 8 CHAPTER 3 The Accounting Information System Problems: Set C Analyze transactions and compute net income. (SO 1) GLS (a) Cash $6,600 Ret. earnings $600 Analyze transactions and prepare financial statements. (SO 1) GLS (a) Cash $20,830 Ret. earnings $1,380 P3-1C On April 1 Test Prep Inc. was established. These transactions were completed during 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, and the 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, Received $4,000 in cash from customers who have previously been billed in transaction (6). (a) Prepare a tabular analysis of the transactions using these column headings: Cash, Accounts Receivable, Supplies, Office Equipment, Accounts Payable, Common Stock, and Retained Earnings. Include margin explanations for any changes in Retained Earnings. (b) From an analysis of the column Retained Earnings, compute the net income or net loss for April. P3-2C Judy Takahashi started her own consulting firm, Takahashi Consulting Inc., on November 1, The following transactions occurred during the month of November. Nov. 1 Stockholders invested $15,000 cash in the business in exchange for common 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 Received a cash payment of $1,800 for services provided on account on November 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. (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. Stockholders Assets Liabilities Equity Accounts Office Notes Accounts Common Retained Date Cash Supplies Receivable Equipment Payable Payable Stock Earnings (b) Net income $1,480 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, P3-3C Din Liu created a corporation providing legal services, Din Liu Inc., on March 1, On March 31 the balance sheet showed: Cash $6,500; Accounts Receivable $2,000;

9 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 due in May. 4. Purchased additional office equipment for $1,000, paying $200 in cash and the balance on account. 5. Paid salaries $2,700, rent for April $800, and advertising expenses $ Declared and paid a cash dividend of $ 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. (a) Prepare a tabular analysis of the April transactions beginning with March 31 balances. The column heading should be: Cash Accounts Receivable Supplies Office Equipment Notes Payable Accounts Payable Common Stock Retained Earnings. Include margin explanations for any changes in Retained Earnings. (b) Prepare an income statement for April, a retained earnings statement for April, and a classified balance sheet at April 30. P3-4C Skating By, Inc. was opened on May 1 by James Bea. These selected events and transactions occurred during May. May 1 Stockholders invested $80,000 cash in the business in exchange for common 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 single entry.) 5 Advertised the opening of the skate board park, paying advertising expenses 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 not earned until the customers use the coupons.) 25 Declared and paid a $300 cash dividend. 30 Paid salaries of $1, Paid T. Hawks in full for equipment purchased on May 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. Journalize the May transactions, including explanations. P3-5C Castle Architects incorporated as licensed architects on September 1, During the 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 the corporation. 1 Hired a secretary-receptionist at a salary of $410 per week, payable monthly. 2 Paid office rent for the month $1, Purchased architectural supplies on account from Taliesin Company $1, 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, Paid $600 to Taliesin Company for accounts payable due. Analyze transactions and prepare an income statement, retained earnings statement, and balance sheet. (SO 1) GLS (a) Cash $7,720 Ret. earnings $6,200 (b) Net income $3,000 Journalize a series of transactions. (SO 3, 5) GLS Journalize transactions, post, and prepare a trial balance. (SO 3, 5, 6, 7, 8) GLS

10 10 CHAPTER 3 The Accounting Information System The company uses these accounts: Cash, Accounts Receivable, Supplies, Accounts Payable, Unearned Revenue, Common Stock, Service Revenue, Salaries Expense, and Rent Expense. (c) Cash $23,960 Tot. trial balance $29,950 Journalize transactions, post, and prepare a trial balance. (SO 3, 5, 6, 7, 8) GLS (a) Journalize the transactions, including explanations. (b) Post to the ledger T accounts. (c) Prepare a trial balance on September 30, P3-6C This is the trial balance of Dominic Company on April 30. DOMINIC COMPANY Trial Balance April 30, 2007 Debit Credit Cash $ 3,700 Accounts Receivable 3,200 Supplies 900 Equipment 9,300 Accounts Payable $ 3,400 Unearned Revenue 1,700 Common Stock 12,000 $17,100 $17,100 (d) Cash $1,640 Tot. trial balance $20,500 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, Paid employee salaries $1, 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. (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: Dividends, 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, Prepare a correct trial balance. (SO 8) P3-7C This trial balance of Arias Co. does not balance. ARIAS CO. Trial Balance March 31, 2007 Debit Credit Cash $ 3,240 Accounts Receivable $ 3,656 Supplies 800 Equipment 4,360 Accounts Payable 2,720 Unearned Revenue 1,200 Common Stock 7,100 Dividends 800 Service Revenue 5,420 Salaries Expense 3,100 Office Expense 660 $13,360 $19,696

11 Problems: Set C 11 Each of the listed accounts has a normal balance per the general ledger. An examination of the ledger and journal reveals the following errors: 1. Cash received from a customer on account was debited for $340, and Accounts Receivable was credited for $34. The actual collection was for $ The purchase of copy machine paper on account for $160 was recorded as a debit to Equipment for $160 and a credit to Accounts Payable for $ A client paid $900 for services to be performed during April and May. Cash was debited for $900 and Service Revenue was credited for $ 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 $ Payment of a $400 cash dividend to Arias s stockholders was debited to Common Stock for $400 and credited to Cash for $400. Prepare 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 April 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 of April the following events and transactions occurred. Apr. 1 Rented movies to be shown for the first two weeks of April. The film rental was $15,000; $3,000 was paid in cash and $12,000 will be paid on April 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, Paid advertising expenses $ Received $9,800 cash from customers for admissions. 30 Paid salaries of $5, Received statement from R. Daggett showing gross receipts from concessions 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 Received $23,000 cash from customers for admissions. In addition to the accounts identified above, the chart of accounts includes: Accounts Receivable, Admission Revenue, Concession Revenue, Advertising Expense, Film Rental Expense, and Salaries Expense. (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, P3-9C The bookkeeper for Tim Taylor s repair shop made the following errors in journalizing 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 Accounts Receivable. 3. A purchase of equipment on account of $960 was debited to Equipment for $960 and credited to Accounts Payable for $ 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 to Wages Payable. Tot. trial balance $16,660 Journalize transactions, post, and prepare a trial balance. (SO 3, 5, 6, 7, 8) GLS (d) Cash $34,040 Tot. trial balance $220,880 Analyze errors and their effects on the trial balance. (SO 8)

12 12 CHAPTER 3 The Accounting Information System 6. A debit posting for $800 of Dividends was inadvertently posted to Wage Expense instead. 7. A debit posting to Cash and a credit posting to Service Revenue for $600 were inadvertently posted twice. 8. A debit to Accounts Receivable of $400 was debited to Accounts Payable. For each error, indicate (a) whether the trial balance will balance; (b) the amount of the difference if the trial balance will not balance; and (c) the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error 1 is given as an example. (a) (b) (c) Error In Balance Difference Larger Column 1. No $900 Credit

13 Problems: Set C 13 Problems: Set C P4-1C The following selected data are taken from the comparative financial statements of Lake View Bocce Club. The Club prepares its financial statements using the accrual basis of accounting. October Accounts receivable for member dues $ 15,000 $ 19,000 Unearned rent revenue 30,000 38,000 Dues revenue 162, ,000 Record transactions on accrual basis; convert revenue to cash receipts. (SO 2, 4) Dues are billed to members based upon their use of the Club s facilities. Unearned revenues arise from deposits required to reserve club facilities for weddings and parties. (Hint: You will find it helpful to use T accounts to analyze the following data. You must analyze these data sequentially, as missing information must first be deduced before moving on. Post your journal entries as you progress, rather than waiting until the end.) (a) Prepare journal entries for each of the following events that took place during Dues receivable from members from 2006 were all collected during Unearned rent revenue at the end of 2006 was all earned during 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 relates to upcoming events in 2007 and Dues for the 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 during the year ended October 31, P4-2C Troy Verley started his own consulting firm, Do It Now Consulting, on April 1, The trial balance at April 30 is as follows. DO IT NOW CONSULTING Trial Balance April 30, 2007 (b) Cash received $255,000 Prepare adjusting entries, post to ledger accounts, and prepare adjusted trial balance. (SO 4, 5, 6) GLS Debit Credit Cash $ 9,300 Accounts Receivable 5,000 Prepaid Rent 2,700 Supplies 1,000 Office Equipment 20,000 Accounts Payable $ 5,100 Unearned Service Revenue 3,100 Common Stock 25,000 Service Revenue 9,000 Salaries Expense 3,800 Insurance Expense 400 $42,200 $42,200 In addition to those accounts listed on the trial balance, the chart of accounts for Do It Now also 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 $ 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 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 The office equipment has a 5-year life with salvage value of $2,000 and is being depreciated at $300 per month for 60 months. 7. Invoices representing $2,800 of services performed during the month have not been recorded as of April 30. (b) Service rev. $14,000 (c) Tot. trial balance $46,880 Prepare adjusting entries, adjusted trial balance, and financial statements. (SO 4, 5, 6, 7) GLS (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 balance as beginning account balances. Use T accounts. (c) Prepare an adjusted trial balance at April 30, P4-3C The Welcome Inn opened for business on March 1, Here is its trial balance before adjustment on March 31. WELCOME INN Trial Balance March 31, 2007 Debit Credit Cash $ 2,700 Prepaid Insurance 2,400 Supplies 3,300 Land 25,000 Lodge 85,000 Furniture 22,400 Accounts Payable $ 9,200 Unearned Rent Revenue 2,800 Mortgage Payable 50,000 Common Stock 72,000 Rent Revenue 11,000 Salaries Expense 3,000 Utilities Expense 800 Advertising 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 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. (c) Rent revenue $12,300 Tot. trial balance $147,005 (d) Net income $4,295 Prepare adjusting entries and financial statements; identify accounts to be closed. (SO 4, 5, 6, 7) GLS (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, Quarterly financial statements are prepared. The trial balance and adjusted trial balance on June 30 are shown on the next page.

15 Problems: Set C 15 GREEN ACRES GOLF INC. Trial Balance June 30, 2007 Unadjusted Adjusted Dr. Cr. Dr. Cr. Cash $ 7,890 $ 7,890 Accounts Receivable 1,500 1,900 Prepaid Insurance 2,400 1,800 Supplies 2,100 1,410 Equipment 18,000 18,000 Accumulated Depreciation Equipment $ 750 Notes Payable $ 7,500 7,500 Accounts Payable 2,200 2,200 Salaries Payable 900 Interest Payable 100 Unearned Rent Revenue 1, Common Stock 18,000 18,000 Retained Earnings 0 0 Dividends Dues Revenue 14,600 15,000 Rent Revenue 700 1,200 Salaries Expense 10,100 11,000 Insurance Expense 1,200 1,800 Depreciation Expense 750 Supplies Expense 690 Utilities Expense Interest Expense 100 $44,300 $44,300 $46,450 $46,450 (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 these data pertaining to the preparation of annual adjusting entries. (b) Net income $1,200 Tot. assets $30,250 Prepare adjusting entries. (SO 4, 5) 1. Prepaid Insurance $16,400. The company has separate insurance policies on its buildings and its motor vehicles. Policy B4564 on the building was purchased on January 1, 2006, for $11,400. The policy has a term of 3 years. Policy A2958 on the vehicles was purchased on July 1, 2007, for $8,800. This policy has a term of 2 years. 2. Unearned Subscription Revenue $29,040. The company began selling magazine subscriptions on September 1, 2007 on an annual basis. The selling price of a subscription is $24. A review of subscription contracts reveals the following. Subscription Start Date Number of Subscriptions September October November December , Notes Payable, $16,000: This balance consists of a note for 8 months at an annual interest rate of 9%, dated August Salaries Payable $0: There are six salaried employees. Salaries are paid every Friday for the current week. Four employees receive a salary of $480 each per week, and two employees earn $600 each per week. December 31 is a Thursday.

16 16 CHAPTER 4 Accrual Accounting Concepts Employees do not work weekends. All employees worked the last 4 days of December. Prepare the adjusting entries at December 31, Prepare adjusting entries and a corrected income statement. (SO 4, 5) P4-6C A-Plus Test Prep was organized on May 1, 2006, by Denise Fenley. Denise is a good manager but a poor accountant. From the trial balance prepared by a part-time bookkeeper, Denise prepared the following income statement for her fourth quarter, which ended April 30, A-PLUS TEST PREP Income Statement For the Quarter ended April 30, 2007 Revenues Tuition revenues $240,000 Operating expenses Advertising $ 6,400 Wages 92,000 Utilities 1,300 Depreciation 2,400 Repairs 1,700 Total operating expenses 103,800 Net income $136,200 Denise suspected that something was wrong with the statement because net income had never exceeded $40,000 in any one quarter. Knowing that you are an experienced accountant, 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 above in the income statement, the ledger contains the following additional selected balances at April 30, Books and Supplies $ 9,800 Prepaid Insurance 12,000 Note Payable 15,000 You then make inquiries and discover the following. 1. Tuition revenues include advanced tuition payments received for summer classes, in the amount of $70, There were $2,600 of books and supplies on hand at April Prepaid insurance resulted from the payment of a one-year policy on February 1, The mail in May 2007 brought the following bills: advertising for the week of April 24, $80; repairs made April 18, $2,560; and utilities for the month of April, $ 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, Income tax of $15,200 for the quarter is due in May but has not yet been recorded. (b) Net income $33,190 (a) Prepare any adjusting journal entries required as at April 30, (b) Prepare a correct income statement for the quarter ended April 30, (c) Explain to Denise the generally accepted accounting principles that she did not recognize in preparing her income statement and their effect on her results.

17 Problems: Set C 17 P4-7C On August 1, 2007, the following were the account balances of Bob and Norm Repair Services. Debits Credits Cash $ 6,040 Accumulated Depreciation $ 600 Accounts Receivable 2,910 Accounts Payable 2,300 Supplies 1,030 Unearned Service Revenue 1,260 Store Equipment 10,000 Salaries Payable 1,420 Common Stock 10,000 Retained Earnings 4,400 $19,980 $19,980 Journalize transactions and follow through accounting cycle to preparation of financial statements. (SO 4, 5, 6) GLS 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, Purchased supplies on account $ Paid creditors $2,500 of accounts payable due. 22 Paid August rent $ Paid salaries $2, Performed services on account and billed customers for services provided $3, Received $780 from customers for services to be provided in the future. Adjustment data: 1. Supplies on hand are valued at $ Accrued salaries payable are $1, Depreciation for the month is $ Unearned service revenue of $800 is earned. (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, During January 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 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 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 (f) Cash $1,920 Tot. trial balance $27,490 (g) Net loss $1,040 Complete all steps in accounting cycle. (SO 4, 5, 6, 7, 8) GLS

18 18 CHAPTER 4 Accrual Accounting Concepts Depreciation Equipment, Accounts Payable, Salaries Payable, Common Stock, Retained Earnings, Dividends, Income Summary, Service Revenue, Gas & Oil Expense, Cleaning Supplies Expense, Depreciation Expense, Insurance Expense, Salaries Expense. (f) Cash $4,550 (g) Tot. assets $30,030 (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.

19 Problems: Set C 19 Problems: Set C P5-1C Franklin Craft Store completed the following merchandising transactions in the month of October. At the beginning of October, Franklin s ledger showed Cash of $8,000 and 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 of the merchandise sold was $2, Received credit from Michael s Wholesale Supply for merchandise returned $ Received collections in full, less discounts, from customers billed on sales of $3,900 on October Paid Michael s Wholesale Supply in full, less discount. 11 Purchased supplies on account for $ Purchased merchandise for cash $2, 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/ Paid freight on October 17 purchase $ Sold merchandise for cash $6,900. The cost of the merchandise sold was $4, Purchased merchandise on account from Hobbytown Inc. for $1,000, terms 3/10, n/ Paid Handiwork Distributors in full, less discount. 29 Made refunds to cash customers for returned merchandise $190. The returned merchandise had cost $ Sold merchandise on account for $1,460, terms 1/10, n/30. The cost of the merchandise sold was $950. Journalize, post, prepare partial income statement, and calculate ratios. (SO 2, 3, 4, 6) GLS Franklin Craft s chart of accounts includes Cash, Accounts Receivable, Merchandise Inventory, Supplies, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold. (a) Journalize the transactions using a perpetual inventory system. (b) Post the transactions to T accounts. Be sure to enter the beginning cash and common stock balances. (c) Prepare an income statement through gross profit for the month of October (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 onegallon 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) from Healthy 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/ 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 and sale transactions under a perpetual inventory system. (SO 2, 3)

20 20 CHAPTER 5 Merchandising Operations and the Multiple-Step Income Statement Journalize the transactions for the month of April for Crowning Glory Warehouse, using a perpetual inventory system. Assume the cost of each bottle sold was $6. Journalize, post, and prepare trial balance and partial income statement. (SO 2, 3, 4) GLS (c) Tot. trial balance $10,430 (d) Gross profit $610 Prepare financial statements and calculate profitability ratios. (SO 4, 6) P5-3C At the beginning of the current season on November 1, the ledger of Lakeside Ice House showed Cash $3,300; Merchandise Inventory $4,700; and Common Stock $8,000. The following transactions were completed during November 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 $ Sold merchandise on account for $1,100, terms n/30. The merchandise sold had a cost of $ Purchased gloves, socks, and other accessories on account from Orr Sportswear $945, terms 1/10, n/ Paid Gillmore Co. in full. 17 Received credit from Orr Sportswear for merchandise returned $ Made sales on account for $1,330, terms n/30. The cost of the merchandise sold was $ Paid Orr Sportswear in full. 27 Granted an allowance to customers for clothing that did not fit properly $ Received payments on account for $1,900. The chart of accounts for the ice house includes Cash, Accounts Receivable, Merchandise Inventory, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances, and Cost of Goods Sold. (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, (d) Prepare an income statement through gross profit. P5-4C Tobin s China and Collectibles is located in midtown Centralia. During the past several years, net income has been declining because suburban shopping centers have been attracting business away from city areas. At the end of the company s fiscal year on September 30, 2007, these accounts appeared in its adjusted trial balance. Accounts Payable $ 22,800 Accounts Receivable 19,530 Accumulated Depreciation Building 120,000 Accumulated Depreciation Store Equipment 21,000 Advertising Expense 6,000 Building 200,000 Cash 7,800 Common Stock 28,000 Cost of Goods Sold 520,000 Delivery Expense 5,800 Depreciation Expense Building 8,000 Depreciation Expense Store Equipment 4,200 Dividends 15,000 Gain on Sale of Investment 2,300 Insurance Expense 10,300 Interest Expense 5,600 Merchandise Inventory 31,400 Notes Payable 52,000 Prepaid Insurance 2,570 Property Tax Expense 7,600 Property Taxes Payable 7,600 Retained Earnings 18,100 Salaries Expense 194,700

21 Problems: Set C 21 Sales 886,000 Sales Commissions Expense 18,000 Sales Commissions Payable 2,200 Sales Returns and Allowances 26,000 Store Equipment 64,000 Utilities Expense 13,500 Additional data: Notes payable are due in (a) Prepare a multiple-step income statement; a retained earnings statement, and a classified 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 developed a proposal whereby the company would compensate the sales force on a strictly 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 profit will increase by $85,000 and operating expenses by $109,800. Compute the expected 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 on the effect that this plan would have on net income and on the ratios, and evaluate the merit of this proposal. P5-5C An inexperienced accountant prepared this condensed income statement for Xiong Company, a retail firm that has been in business for a number of years. (a) Net income $68,600 Tot. assets $184,300 Prepare a correct multiplestep income statement. (SO 4) XIONG COMPANY Income Statement For the Year Ended December 31, 2007 Revenues Net sales $952,000 Other revenues 17, ,000 Cost of goods sold 548,000 Gross profit 421,000 Operating expenses Selling expenses 161,000 Administrative expenses 104, ,000 Net earnings $156,000 As an experienced, knowledgeable accountant, you review the statement and determine the following facts. 1. Net sales consist of sales $972,000, less delivery expense on merchandise sold $20, Other revenues consist of sales discounts $12,000 and interest revenue $5, Selling expenses consist of salespersons salaries $88,000; depreciation on store equipment $4,000; sales returns and allowances $46,000; advertising $12,000; and sales commissions $11, 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 prepayments totaling $2,000 for the first month of The utilities represent utilities paid. At December 31, utility expense of $3,000 has been incurred but not paid. Prepare a correct detailed multiple-step income statement. Net income $145,000 Journalize, post, and prepare adjusted trial balance and financial statements. (SO 4) P5-6C The trial balance of Wheels and Deals Inc. contained the accounts shown on the following page as of December 31, the end of the company s fiscal year.