is.wbn.is.je.030 Recording journal entries, posting to T-Accounts, and creating income statements (Bryan s Health & Fitness)

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1 Income Statements» What s Behind Income Statements» Exercises SOLUTIONS is.wbn.is.je.030 Recording journal entries, posting to T-Accounts, and creating income statements (Bryan s Health & Fitness) Use the materials provided for this exercise to record the entries, post to T-Accounts and create income statements. Events Bryan s Health and Fitness provides a wide range of health and fitness products and services. Annual membership provides access to BHF s state-of-the-art fitness center. BHF also sells merchandise such as exercise clothes and health food supplements. Record Keeping This exercise helps you learn how to do record keeping and reporting. Events E1-E16 below summarize similar events that occurred during fiscal 2012, which ended December 31, For example, a single entry below summarizes merchandise sales that were recorded throughout the year. All amounts are in dollars. Events E1-E5 are carried forward from a balance-sheet exercise and repeated here for your convenience. E1 E2 E3 E4 E5 E6 E7 E8a Issued common stock to shareholders in exchange for $5,000 cash. Purchased computers for $18,600 cash. Purchased merchandise on account for $11,000. BHF was invoiced upon delivery. Collected $8,900 due from customers for previous sales. Paid $13,200 due to suppliers and other vendors for resources previously provided and invoiced. BHF s policy is to record all invoices to accounts payable when invoices are received. Collected $65,500 of annual membership fees from customers for use of the fitness center during the next twelve months. BHF s policy is to recognize membership revenues evenly over the subsequent twelve months, starting at the end of the month fees are collected. Entry E15 below summarizes the monthly revenue recognition entries (by treating them as a single annual entry). Paid $14,400 for insurance and other resources that will provide future benefits. The cost of these resources will be expensed when the benefits are realized. Sold merchandise to customers for $22,800. $13,600 was collected at the time of the sale and the remainder was fully expected to be collected on or before specified future dates. BHF s policy is to recognize revenue at the time merchandise is sold, providing collection is reasonably assured. E8b The merchandise sold in E8a cost $10,500. Continued on next page... You may customize this work, as long as you credit G. Peter & Carolyn R. Wilson and respect the Creative Commons Attribution-Noncommercial-Share Alike United States license NavAcc LLC.

2 2 NAVIGATING ACCOUNTING E9 Paid $10,200 cash to tax authorities for previously expensed taxes. E10 Paid $21,400 cash to employees and other resource providers for services previously rendered and expensed but not invoiced. BHF s policy is to transfer previously accrued expenses from accrued liabilities to accounts payable when it receives invoices. Accrued expenses that are never invoiced (such as wages) remain in accrued liabilities until they are paid. E11 E12 E13 E14 E15 E16 Received $1,400 of invoices for previously accrued expenses. BHF s policy is to transfer previously accrued expenses from accrued liabilities to accounts payable when it receives invoices. Recognized $2,400 of selling, general, and administrative expense during the year. $1,600 was recognized when the company received invoices from resource providers. The remaining expense was recognized when the company paid resource providers. Recognized $36,000 of selling, general, and administrative expense as and adjusting entry. $12,000 had been prepaid at earlier dates. The remainder was accrued and there was no uncertainty about the timing and amount that would be paid in the future. (This entry and the remaining entries summarize adjusting entries recorded at the end of each month.) Recognized $10,000 of depreciation expense as an adjusting entry. Recognized $64,000 of previously deferred membership revenue as and adjusting entry. BHF s revenue recognition policy for membership fees is explained in E6. Accrued $11,100 of tax expense as and adjusting entry.

3 EXERCISE 3 Required (a) Record the journal entries for events E1-E16 using the chart of accounts and journal-entry template provided with the exercise materials. + Zoom in on the PDF to see the details. Bryan's Health and Fitness 2012 journal entries E1: Issue common stock E2: Purchase PP&E Cash $5,000 Property, plant & equipment at cost $18,600 Contributed capital $5,000 Cash $18,600 E3: Purchase merchandise on account E4: Collect amounts due from customers Inventory $11,000 Cash $8,900 Accounts payable $11,000 Accounts receivable $8,900 E5: Pay invoices due E6: Sell memberships for cash Accounts payable $13,200 Cash $65,500 Cash $13,200 Deferred revenues $65,500 E7: Prepay expenses with cash E8a: Recognize merchandise revenue Prepaid expenses $14,400 Cash $13,600 Cash $14,400 Accounts receivable $9,200 Merchandise revenues $22,800 E8b: Recognize cost of sold merchandise E9: Pay previously accrued taxes Cost of merchandise sold $10,500 Accrued taxes $10,200 Inventory $10,500 Cash $10,200 E10: Pay previous expenses not invoiced E11: Receive invoices previously expensed Other accrued liabilities $21,400 Other accrued liabilities $1,400 Cash $21,400 Accounts payable $1,400 E12: Recognize SG&A expense (period) E13: Recognize SG&A expense (adjusting) Sales, general & administrative $2,400 Sales, general & administrative $36,000 Cash $800 Prepaid expenses $12,000 Accounts payable $1,600 Other accrued liabilities $24,000 E14: Recognize depreciation expense E15: Recognize previously deferred revenue Depreciation expense $10,000 Deferred revenues $64,000 Accumulated depreciation $10,000 Membership revenues $64,000 E16: Accrue tax expense Debit Credit Tax expense $11,100 Accrued taxes $11,100

4 4 NAVIGATING ACCOUNTING (b) Record the effects of journal entries for events E1 E16 to the T-Accounts template provided with the exercise materials. + Zoom in on the PDF to see the details. Bryan's Health and Fitness 2012 T-accounts ASSETS C AR Inven PreEx PP&E AcDep BB $12,300 BB $1,350 BB $3,600 BB $9,500 BB $90,000 BB $10,000 E1 $5,000 E2 $18,600 E2 $18,600 E3 $11,000 E4 $8,900 E4 $8,900 E5 $13,200 E6 $65,500 E7 $14,400 E7 $14,400 E8a $13,600 E8a $9,200 E8b $10,500 E9 $10,200 E10 $21,400 E12 $800 E13 $12,000 E14 $10,000 LIABILITIES AP AcTx OacLb DefRv BB $2,750 BB $2,200 BB $1,600 BB $8,500 E3 $11,000 E5 $13,200 E6 $65,500 E9 $10,200 E10 $21,400 E11 $1,400 E11 $1,400 E12 $1,600 E13 $24,000 E16 $11,100 E15 $64,000 OWNERS' EQUITY CC RE MmRv MrRv Cms SG&A BB $64,450 BB $27,250 BB $0 BB $0 BB $0 BB $0 E1 $5,000 E8a $22,800 E8b $10,500 E12 $2,400 E13 $36,000 E15 $64,000 DepEx TaxEx IncSm BB $0 BB $0 BB $0 E14 $10,000 E16 $11,100

5 EXERCISE 5 (c) Create a comprehensive income statement for Bryan s Health and Fitness using the T-accounts you completed above. Use the blank template provided with the exercise materials. Bryan's Health and Fitness 2012 Income Statement In Dollars, for year ended December 31, 2012 Income from operations Membership revenues $64,000 Merchandise revenues $22,800 Cost of merchandise sold ($10,500) Merchandise gross margin $12,300 Sales, general & administrative ($38,400) Depreciation expense ($10,000) Income from operations $27,900 Non-operating income $0 Income before taxes $27,900 Tax expense ($11,100) Net income $16,800

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