# Financial Accounting Review of Chapters 9, 10, 11, 12 and Appendix A Answer Key

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1 Supplemental Instruction Handouts Financial Accounting Review of Chapters 9, 10, 11, 12 and Appendix A Answer Key 1. On December 31, 2011, at the end of the current accounting period for Apex Company, the allowance for doubtful accounts had a credit balance of \$750. On the following March 18, 2012, management decided the \$490 account of M. Peters was uncollectible and wrote it off as a bad debt using the allowance method. About three months later, on June 20, 2012, Peters unexpectedly paid the amount previously written off. On December 31, 2012, Apex Company made their yearend adjustment to the allowance account by calculating 5% of all sales. The company s sales were \$55,000 for the year. A. Prepare the necessary general journal entries for March 18, June 20 and December 31, Mar 18 Allowance for Doubtful Accounts 490 Accounts Receivable M. Peters 490 June 20 Accounts Receivable M. Peters 490 Allowance for Doubtful Accounts 490 June 20 Cash 490 Accounts Receivable M. Peters 490 Dec 31 Bad Debts Expense 2,750 Allowance for Doubtful Accounts 2,750 B. Calculate the ending balance in the allowance for doubtful accounts for December 31, \$750 \$490 + \$490 + \$2,750 = \$3,500

2 2. At the end of each year, Store Ur Stuff Self Storage Company uses their ending balance in accounts receivable to estimate their bad debts for the coming year. On December 31, 2011, the company s year end, it has outstanding accounts receivable of \$65,000 and estimates that 6% will be uncollectible. Prepare the necessary general journal entry to record bad debts expense for 2011 under each of the following unrelated assumptions: A. There is a \$967 credit balance in the allowance account before the adjustment. Dec 31 Bad Debts Expense 2,933 Allowance for Doubtful Accounts 2,933 (\$65,000 x 0.06 = \$3,900 \$967 = \$2,933) B. There is a \$1,584 debit balance in the allowance account before the adjustment. Dec 31 Bad Debts Expense 5,484 Allowance for Doubtful Accounts 5,484 (\$65,000 x 0.06 = \$3,900 + \$1,584 = \$5,484)

3 3. The Bettis Company had the following transactions involving notes receivable: 2011: November 1 Accepted a \$4,500, five month, 7% note dated today from S. Smith in granting a time extension on his past due account. December 31 Made an adjusting entry to record the accrued interest on the S. Smith note. 2012: January 25 Accepted a \$2,300, 90 day, 5% note dated today from L. Saunders in granting a time extension on her past due account. April 1 S. Smith dishonored his note when presented for payment. April 24 L. Saunders honored her note when presented for payment. December 31 After exhausting all legal means of collection, wrote off S. Smith s account using the allowance method. Prepare general journal entries for each transaction described above Nov 1 Notes Receivable 4,500 Accounts Receivable S. Smith 4,500 Dec 31 Interest Receivable Interest Revenue (4,500 x 0.07 x 2/12) Jan 25 Notes Receivable 2,300 Accounts Receivable L. Saunders 2,300 April 1 Accounts Receivable S. Smith 4, Interest Receivable Notes Receivable 4,500 Interest Revenue (4,500 x 0.07 x 3/12) April 24 Cash 2, Notes Receivable 2,300 Interest Revenue (2,300 x 0.05 x 90/365) Dec 31 Allowance for Doubtful Accounts 4, Accounts Receivable S. Smith 4,631.25

4 4. The accountant for your company has prepared a schedule of the December 31, 2011, accounts receivable by age and, on the basis of past experience, has estimated the percentage of the receivables in each age category that will become uncollectible. This information is summarized in the following table: December 31, 2011 Accounts Receivable Age of Accounts Receivable Expected Percentage Uncollectible \$112,500 Not Due (under 30 days) 3% \$48,500 1 to 30 days past due 6% \$23, to 60 days past due 12% \$12, to 90 days past due 36% \$4,300 Over 90 days past due 75% Prepare the necessary year end adjusting entry based on the following independent assumptions: A. The allowance account has a credit balance of \$4,350. Dec 31 Bad Debts Expense 12,588 Allowance for Doubtful Accounts 12,588 (\$112,500 x 0.03) + (\$48,500 x 0.06) + (\$23,650 x 0.12) + (\$12,750 x 0.36) + (\$4,300 x 0.75) = \$3,375 + \$2,910 + \$2,838 + \$4,590 + \$3,225 = \$16,938 \$4,350 = \$12,588 B. The allowance account has a debit balance of \$2,250. Dec 31 Bad Debts Expense 19,188 Allowance for Doubtful Accounts 19,188 \$16,938 + \$2,250 = \$19,188

5 5. On January 14, at the end of the first pay period of the year, a company s Payroll Register showed that its employees had earned \$25,000 of sales salaries and \$14,250 of office salaries. Withholdings from the employees salaries were to include \$679 of EI, \$1,943 of CPP, \$7,850 of income taxes, \$1,500 of hospital insurance, and \$650 of union dues. A. Prepare the journal entry to record the January 14 payroll. Jan 14 Sales Salaries Expense 25,000 Office Salaries Expense 14,250 EI Payable 679 CPP Payable 1,943 Income Tax Payable 7,850 Hospital Insurance Payable 1,500 Union Dues Payable 650 Salaries Payable 26,628 B. Prepare a journal entry to record the employer s payroll expenses resulting from the January 14 payroll. Jan 14 EI Expense CPP Expense 1,943 EI Payable (679 x 1.4) CPP Payable 1,943 C. Prepare the journal entry the employer would make to pay the payroll deductions to the government on January 28. Jan 28 EI Payable ( ) 1, CPP Payable ( ) 3,886 Income Tax Payable 7,850 Cash 13,365.60

6 Employee 6. The following information as to earnings and deductions for the pay period ended May 20 was taken from a company s payroll records: Weekly Gross Pay Earnings to End of Previous Week Income Taxes Health Insurance Deductions A. EI (Gross Pay x ) A. CPP (3,500/52) (Gross Pay 67.31) x B. Net Pay M. Cullen \$ 840 \$16,800 \$168 \$24 \$14.53 \$38.25 \$ J. Hanson \$ 920 \$18,400 \$184 \$24 \$15.92 \$42.21 \$ A. Lee \$ 760 \$15,200 \$152 \$36 \$13.15 \$34.29 \$ M. Mann \$1,200 \$24,000 \$240 \$24 \$20.76 \$56.07 \$ Totals \$3,720 \$744 \$108 \$64.36 \$ \$2, A. In the chart above calculate the employees EI and CPP withholdings. B. In the chart above calculate each employees net pay. C. Prepare a general journal entry to record the payroll assuming all employees work in the office. May 20 Office Salaries Expense 3,720 Income Tax Payable 744 Hospital Insurance Payable 108 EI Payable CPP Payable Salaries Payable 2,632.82

7 7. On January 3, 2011, your company purchased a machine for \$23,000 with terms of 2/10, n/60, FOB shipping point. The seller prepaid the shipping charges, \$520, adding this amount to the invoice. The machine required a special steel mounting plate and a new power connection at a cost of \$2,940. Assemble of the machine cost \$750 to get it into operation. While the machine was being moved onto the steel mounting plate it was dropped and damaged. The cost of repairs was \$380 to get it working properly. Later, \$100 of raw materials was consumed in adjusting the machine so that it would produce a satisfactory product. The adjustments were normal for this type of machine and were not the result of the damage. However, the items produced while the adjustments were being made were not sellable. The company always pays within the discount period. A. Prepare a calculation to show the cost of this machine. \$23,000 x (1 0.02) = \$22,540 + \$520 + \$2,940 + \$750 + \$100 = \$26,850 B. Prepare the general journal entry for the purchase of the machine, assuming the company paid cash for the machine. Jan 3 Machine 26,850 Cash 26,850 C. Calculate the depreciation for the machine for 2012 using the double declining balance method. Your company believes this machine will have a useful life of 3 years and a salvage value of \$ \$26,850 x 2/3 = \$17,900 (\$26,850 \$17,900) x 2/3 = \$5, D. Prepare the adjusting journal entry for the end of the year, December 31, Dec 31 Depreciation Expense Machine 5, Accumulated Depreciation Machine 5,966.67

8 E. Calculate the machines book value for the end of \$26,850 \$17,900 \$5, = \$2, On March 20, 2011, Piper Plumbing Company paid \$184,125 for real estate plus \$9,800 in closing costs. The real estate included land appraised at \$83,160; land improvements appraised at \$27,720 and a building appraised at \$87,120. A. Prepare a calculation showing the allocation of the total cost amongst the three items purchased. 184, ,800 = 193,925 Total Paid Land \$83,160/\$198,000 = 0.42 x \$193,925 = \$81, Land Improvements \$27,720/\$198,000 = 0.14 x \$193,925 = \$27, Building +\$87,120/\$198,000 = 0.44 x \$193,925 = \$85, Total \$198,000 \$193, B. Prepare a general journal entry to record the purchase assuming Piper Plumbing Company paid cash. Mar 20 Land 81, Land Improvements 27, Building 85, Cash 193,925 C. Calculate the depreciation for the building for 2011 using the straight line method to the nearest month. Piper Plumbing Company feels that the building can be used for 15 years with a \$5,000 salvage value. (\$85,327 \$5,000) / 15 = \$ x 9/12 = \$4,016.35

9 D. Prepare the adjusting journal entry for the end of the year, December 31, Dec 31 Depreciation Expense Building 4, Accumulated Depreciation Building 4, After planning to build a new manufacturing plant, Jammers Casual Wear purchased a lot on which a small building was located. The negotiated purchase price for this real estate was \$150,000 for the lot plus \$80,000 for the building. The company paid \$23,000 to have the old building torn down and \$34,000 for landscaping the lot. Finally, it paid \$960,000 in construction costs, which included the cost of a new building plus \$57,000 for lighting and paving a parking lot next to the building. A. Calculate the value of the land, land improvements and the building. Land Land Improvements Building \$150,000 \$57,000 \$960,000 \$80,000 -\$57,000 \$23,000 \$903,000 \$34,000 \$287,000 B. Present a single general journal entry to record the costs incurred by Jammers, all of which were paid in cash, on April 15, April 15 Land 287,000 Land Improvements 57,000 Building 903,000 Cash 1,247,000

10 10. Moon Paper Company installed a computerized machine in its factory at a cost \$84,600 on March 3, The machine has a useful life of 5 years or 700,000 units with a salvage value of \$14,600. Moon Paper Company s year end is December 31. Year Units Produced , , , , ,000 Using the space provided: A. Calculate the depreciation expense for each year of the machine s life using the units of production method. (\$84,600 \$14,600) / 700,000 = \$0.10/unit ,000 x \$0.10 = \$7, ,000 x \$0.10 = \$18, ,000 x \$0.10 = \$13, ,000 x \$0.10 = \$19, (700,000 75, , , ,000) x \$0.10 = \$12,000 B. Calculate the depreciation expense for each year of the machine s life using the double declining balance method \$84,600 x 2/5 = \$33,840 x 10/12 = \$28, \$84,600 \$28,200 = \$56,400 x 2/5 = \$22, \$84,600 \$28,200 \$22,560 = \$33,840 x 2/5 = \$13, \$84,600 \$28,200 \$22,560 \$13,536 = \$20,304 \$14,600 = \$5, \$0

11 11. On April 4 th, 2010, Lake Excavating Services purchased a trencher for \$500,000. The machine was expected to have a five year life and a salvage value of \$50,000. In early January of 2012, it was decided that the machine would last a total of 7 years and have a new salvage value of \$14,375. This company uses the straight line method of depreciating to the nearest month. A. Calculate the depreciation for the trencher for (\$500,000 \$50,000) / 5 = \$90,000 x 9/12 = \$67,500 B. Calculate the book value for the trencher at the end of \$500,000 \$67,500 \$90,000 = \$342,500 C. Show how the machine would appear on the 2011 balance sheet. Property, Plant and Equipment Trencher \$500,000 Less: Accumulated Depreciation Trencher 157,500 Net Trencher \$342,500 D. Calculate the depreciation for the trencher for (\$342,500 \$14,375) / (7 1.75) = \$328,125 / 5.25 = \$62,500 E. Present the general journal entry for the depreciation at the end of Dec 31 Depreciation Expense Trencher 62,500 Accumulated Depreciation Trencher 62,500

12 12. Plum Hill Industries purchased and installed a machine on January 3, 2008, at a total cost of \$185,500. Straight line depreciation was taken each year for four years, based on the assumption of a seven year life and no salvage value. The machine was disposed of on July 2, 2012, during its fifth year of operation. Prepare a general journal entry for each of the following unrelated assumptions: A. The machine is sold for \$70,000 cash. July 2 Cash 70,000 Accumulated Depreciation Machine 119,250 Gain on disposal 3,750 Machine 185,500 (\$185,500 / 7 = \$26,500 x 4.5 years = \$119,250) B. The machine is destroyed in a fire and Plum Hill receives an insurance settlement of \$60,000. July 2 Cash 60,000 Accumulated Depreciation Machine 119,250 Loss on disposal 6,250 Machine 185,500 C. The machine and \$100,000 cash were traded for a new machine of like purpose that had a fair value of \$187,000. July 2 Machine 187,000 Accumulate Depreciation Machine 119,250 Gain on exchange 20,750 Machine 185,500 Cash 100,000

13 13. On December 31, 2011, RH Company s year end, RH Company is doing their annual year end reevaluation of its property, plant and equipment assets to see if any of their assets has incurred an impairment loss. Asset: Cost Estimated Useful Life Salvage Value Total Accumulated Depreciation Replacement Value Building \$450, \$50,000 \$180,000 \$240,000 Equipment \$95,000 8 \$5,000 \$45,000 \$55,000 Land \$125,000 N/A N/A N/A \$145,000 Truck \$122,000 6 \$2,000 \$80,000 \$42,000 A. Calculate the book value of each asset listed above. Building: \$450,000 \$180,000 = \$270,000 Equipment: \$95,000 \$45,000 = \$50,000 Land: \$125,000 \$0 = \$125,000 Truck: \$122,000 \$80,000 = \$42,000 B. Calculate impairment loss for each asset that has a book value less than replacement value. Building: \$270,000 \$240,000 = \$30,000 C. Prepare a general journal for December 31, 2011 to record impairment loss. Dec 31 Impairment Loss 30,000 Building 30,000 D. Recalculate the depreciation expense for any asset that has incurred an impairment loss. (All assets are depreciated using the straight line method of amortization.) (\$450,000 - \$50,000) / 10 = \$40,000 Depreciation per year \$180,000 / \$40,000 = 4.5 years (\$240,000 \$50,000) / = \$190,000 / 5.5 = \$34,545.45

14 14. Newberg and Scampi began a partnership by investing \$52,000 and \$78,000, respectively. During its first year, the partnership earned a net income of \$180,000. The partnership has a year end of December 31. In the space provided, prepare calculations that show how the income should be allocated to the partners under each of the following plans for sharing incomes and losses: A. The partners failed to agree on a method of sharing income. 180,000/2 = 90,000 B. The partners agreed to share incomes and losses in their investment ratio. Newton \$52,000 \$130,000 = 0.4 x \$180,000 = \$72,000 Scampi \$78,000 \$130,000 = 0.6 x \$180,000 = \$108,000 Total \$130,000 C. The partners agreed to share income by allowing an \$85,000 per year salary allowance to Newberg, \$65,000 per year salary allowance to Scampi, 10% interest on beginning capital balances, and the remainder equally. Newberg Scampi Total 180,000 Salary 85,000 65, ,000 Interest \$52,000 x ,200 5,200 \$78,000 x ,800 7,800 17,000 \$17,000/2 8,500 8,500 17,000 98,700 81,300 0 D. Prepare the year end closing journal entry based on your answer in part C. Dec 31 Income Summary 180,000 Newberg, Capital 98,700 Scampi, Capital 81,300

15 15. The Harris Bartlett Partnership has total partners equity of \$380,000, which is made up of Harris, Capital, \$300,000, and Bartlett, Capital, \$80,000. The partners share net income and losses in a ratio of 3:1. On July 1, Megan is admitted to the partnership and given a 20% interest in equity and in gains and losses. Prepare the journal entry to record the entry of Megan under each of the following unrelated assumptions: Megan invests cash of: A. \$95,000 July 1 Cash 95,000 Megan, Capital 95,000 (\$380,000 + \$95,000 = \$475,000 x 0.2 = \$95,000) B. \$115,000 July 1 Cash 115,000 Megan, Capital 99,000 Harris, Capital (\$16,000 x ¾) 12,000 Bartlett, Capital (\$16,000 x ¼) 4,000 (\$380,000 + \$115,000 = \$495,000 x 0.2 = \$99,000 \$115,000 \$99,000 = \$16,000) C. \$55,000 July 1 Cash 55,000 Harris, Capital (\$32,000 x ¾) 24,000 Bartlett, Capital (\$32,000 x ¼) 8,000 Megan, Capital 87,000 (\$380,000 + \$55,000 = \$435,000 x 0.2 = \$87,000 \$55,000 \$87,000 = -\$32,000)

16 16. Hollis, Evans, and Bowen have been partners sharing net incomes and losses in a 3:2:5 ratio. On October 31, 2011, the date Bowen retires from the partnership, the equities of the partners are Hollis \$130,000; Evans, \$200,000; and Bowen \$50,000. Present general journal entries to record Bowen s retirement under each of the following unrelated assumption: A. Bowen is paid \$50,000. Oct 31 Bowen, Capital 50,000 Cash 50,000 B. Bowen is paid \$60,000. Oct 31 Bowen, Capital 50,000 Hollis, Capital (\$10,000 x 3/5) 6,000 Evans, Capital (\$10,000 x 2/5) 4,000 Cash 60,000 (\$50,000 \$60,000 = -\$10,000) C. Bowen is paid \$45,000. Oct 31 Bowen, Capital 50,000 Hollis, Capital (\$5,000 x 3/5) 3,000 Evans, Capital (\$5,000 x 2/5) 2,000 Cash 45,000 (\$50,000 \$45,000 = \$5,000)

17 17. Prince, Count, and Earl are partners who share incomes and losses in a ratio in a 1:3:4. After lengthy disagreements among the partners and several unprofitable periods, the partners decided to liquidate the partnership. Before the liquidation, the partnership balance sheet showed: Assets: Liabilities: Cash \$62,000 Accounts Payable \$50,000 Machinery 500,000 Notes Payable 150,000 Less: Accumulated Depreciation Machinery 324,000 Total Liabilities \$200,000 Owner s Equity: Prince, Capital \$8,000 Count, Capital 10,000 Earl, Capital 20,000 38,000 Total Assets \$238,000 Total Liabilities and Owner s Equity \$238,000 Prepare all the necessary general journal entries to liquidate the partnership if the assets were sold for \$180,000. The partnership was liquidated on December 31, Dec 31 Cash 180,000 Accumulated Depreciation Machinery 324,000 Gain on disposal 4,000 Machinery 500,000 Dec 31 Gain on disposal 4,000 Prince, Capital (\$4,000 x 1/8) 500 Count, Capital (\$4,000 x 3/8) 1,500 Earl, Capital (\$4,000 x 4/8) 2,000 Dec 31 Accounts Payable 50,000 Notes Payable 150,000 Cash 200,000 Dec 31 Prince, Capital (\$8,000 + \$500) 8,500 Count, Capital (\$10,000 + \$1,500) 11,500 Earl, Capital (\$20,000 + \$2,000) 22,000 Cash 42,000

18 18. Prince, Count, and Earl are partners who share incomes and losses in a ratio in a 1:3:4. After lengthy disagreements among the partners and several unprofitable periods, the partners decided to liquidate the partnership. Before the liquidation, the partnership balance sheet showed: Assets: Liabilities: Cash \$62,000 Accounts Payable \$50,000 Machinery 500,000 Notes Payable 150,000 Less: Accumulated Depreciation Machinery 324,000 Total Liabilities \$200,000 Owner s Equity: Prince, Capital \$8,000 Count, Capital 10,000 Earl, Capital 20,000 38,000 Total Assets \$238,000 Total Liabilities and Owner s Equity \$238,000 Prepare all the necessary general journal entries to liquidate the partnership if the assets were sold for \$168,000. The partnership was liquidated on December 31, Dec 31 Cash 168,000 Accumulated Depreciation Machinery 324,000 Loss on disposal 8,000 Machinery 500,000 Dec 31 Prince, Capital (\$8,000 x 1/8) 1,000 Count, Capital (\$8,000 x 3/8) 3,000 Earl, Capital (\$8,000 x 4/8) 4,000 Loss on disposal 8,000 Dec 31 Accounts Payable 50,000 Notes Payable 150,000 Cash 200,000 Dec 31 Prince, Capital (\$8,000 1,000) 7,000 Count, Capital (\$10,000 3,000) 7,000 Earl, Capital (\$20,000 4,000) 16,000 Cash 30,000

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