CHAPTER 4 THE MECHANICS OF FINANCIAL ACCOUNTING

Transcription

1 122 Chapter 5 CHAPTER 4 THE MECHANICS OF FINANCIAL ACCOUNTING E4 1 EXERCISES Assets = Liabilities + Stockholders' Equity (1) + 30, ,000 (2) 20, ,000 (3) + 9,000 +9,000 (4) + 8, ,000 (5) 5,500 5,500 (6) Total 41,000 9,000 32,000 Note: Transactions (4), (5), and (6) are initially recorded in temporary accounts and are closed into the Retained Earnings account, which is part of stockholders' equity. E4 2 Assets = Liabilities + Stockholders' Equity Accounts Notes Contributed Retained Cash + Receivable + Land = Payable + Capital + Earnings (1) + 30, ,000 (2) 20, ,000 (3) + 9,000 +9,000 (4) +8, ,000 (5) 5,500 5,500 (6) Total 13,000 8,000 20,000 9,000 30,000 2,000 Note: Transactions (4), (5), and (6) are initially recorded in temporary accounts and are closed into the Retained Earnings account, which is part of stockholders' equity. E4 3 X Company Income Statement For the Year Ended Revenues... $ 8,000 Operating expenses... 5,500 Net income... $ 2,500

2 X Company Statement of Stockholders Equity For the Year Ended Contributed Retained Capital Earnings Beginning balance $ 0 $ 0 Net income 2,500 Dividends (500) Owner contribution 30,000 Ending balance $ 30,000 $ 2,000 Assets X Company Balance Sheet As of Liabilities and Stockholders' Equity Cash... $ 13,000 Notes payable... $ 9,000 Accounts receivable... 8,000 Contributed capital... 30,000 Land... 20,000 Retained earnings... 2,000 Total liabilities and Total assets... $41,000 stockholders' equity... $ 41,000 E4 4 X Company Statement of Cash Flows For the Year Ended Cash flows from operating activities: Cash payments for expenses... $ (5,500) Cash flows from investing activities: Purchase of land... (20,000) Cash flows from financing activities: Cash contributions from owners... $ 30,000 Proceeds from bank loan... 9,000 Payments of cash dividend... (500) Net cash flow from financing activities... 38,500 Net increase in cash... $ 13,000 Beginning cash balance... 0 Ending cash balance... $ 13,000 Assets = Liabilities + Stockholders' Equity (1) +10, ,000 (2) + 8, ,000 (3) 3, ,000 6,000 (4) +12, ,000 2,000 (5) (6) + 7, ,000 6,000 Total 25,600 13,000 12,600

3 Cathedral Enterprises Income Statement For the Year Ended Fees earned... $ 8,000 Expenses... (6,000) Gain on sale of land... 1,000 Net income... $ 3,000 Cathedral Enterprises Statement of Stockholders Equity For the Year Ended Contributed Retained Capital Earnings Beginning balance $ 0 $ 0 Net income 3,000 Dividends (400) Stockholder contribution 10,000 Ending balance $ 10,000 $ 2,600 Assets Cathedral Enterprises Balance Sheet As of Liabilities and Stockholders' Equity Cash... $ 17,600 Misc. payable... $ 3,000 Receivables... 2,000 Long-term note... 10,000 Land... 6,000 Contributed capital... 10,000 Retained earnings... 2,600 Total liabilities and Total assets... $25,600 stockholders' equity... $25,600 Cathedral Enterprises Statement of Cash Flows For the Year Ended Cash flows from operating activities: Cash collected from customers... $ 6,000 Cash paid for expenses... (3,000) Net cash increase from operating activities... $ 3,000 Cash flows from investing activities: Proceeds from sale of land... $ 7,000 Cash paid for land... (2,000) Net cash increase from investing activities... 5,000 Cash flows from financing activities: Contributions from stockholders... $ 10,000 Dividends paid to stockholders... (400) Net cash increase from financing activities... 9,600 Increase in cash... $ 17,600 Beginning cash balance... 0 Ending cash balance... $ 17,600

4 E4 6 Note: Even though $12,000 worth of land was purchased only $2,000 is shown on this statement because the balance ($10,000) was paid for with a promise to pay cash in the future (loan). So only $2,000 of cash was used this year. Account Financial Statement Accounting Equation Flight Equipment Balance Sheet Assets Passenger Revenue Income Statement Owners Equity Retained Earnings Balance Sheet Owners Equity Notes Payable Balance Sheet Liabilities Interest Expense Income Statement Owners Equity Accounts Receivable Balance Sheet Assets Prepaid Expenses Balance Sheet Assets Accounts Payable Balance Sheet Liabilities Common Stock Balance Sheet Owners Equity Fuel Expense Income Statement Owners Equity Other Revenues Income Statement Owners Equity Short-Term Investments Balance Sheet Assets Depreciation Expense Income Statement Owners Equity Landing Fees Income Statement Owners Equity E4 10 a. Assets = Liabilities + Stockholders' Equity Accounts Notes Contributed Retained Cash + Receivable + Land = Payable + Capital + Earnings (1) + 12, ,000 (2) + 5, ,000 (3) 10, ,000 (4) 5,000 5,000 (5) + 10,000 +4, ,000 (6) 4,000 4,000 (7) + 2,800 3, (8) 2,200 2,200 Total 8,600 4,000 7,000 5,000 12,000 2,600 Ed's Lawn Service Income Statement For the Year Ended December 31, 2012 Revenue... $14,000 Rent expense... (5,000) Miscellaneous expense... (4,000) Loss on sale of land... (200) Net income... $ 4,800

5 Ed's Lawn Service Statement of Stockholders Equity For the Year Ended December 31, 2012 Contributed Retained Capital Earnings Beginning balance, January 1, 2012 $ 0 $ 0 Net income 4,800 Dividends (2,200) Stockholder contribution 12,000 Ending balance, December 31, 2012 $ 12,000 $ 2,600 Assets Ed's Lawn Service Balance Sheet As of December 31, 2012 Liabilities and Stockholders' Equity Cash... $ 8,600 Notes payable... $ 5,000 Accounts receivable... 4,000 Contributed capital... 12,000 Land... 7,000 Retained earnings... 2,600 Total liabilities and Total assets... $19,600 stockholders' equity... $ 19,600 Ed's Lawn Service Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from operating activities: Cash collected from customers... $ 10,000 Rent payments on lawn equipment... (5,000) Payment of miscellaneous expenses... (4,000) Net cash increase from operating activities... $ 1,000 Cash flows from investing activities: Proceeds from sale of land... $ 2,800 Cash paid for land... (10,000) Net cash decrease from investing activities... (7,200) Cash flows from financing activities: Stockholder contributions... $ 12,000 Proceeds from bank loan... 5,000 Dividend payments... (2,200) Net cash increase from financing activities... 14,800 Increase in cash... $ 8,600 Beginning cash balance... 0 Ending cash balance... $ 8,600 b. (1) Cash (+A)... 12,000 Contributed Capital (+SE)... 12,000 Collected cash from stockholders. (2) Cash (+A)... 5,000 Notes Payable (+L)... 5,000 Borrowed cash from bank.

6 (3) Land (+A)... 10,000 Cash ( A)... 10,000 Purchased land. (4) Rent Expense (E, SE)... 5,000 Cash ( A)... 5,000 Incurred and paid rent expense. (5) Cash (+A)... 10,000 Accounts Receivable (+A)... 4,000 Fees Earned (R, +SE)... 14,000 Rendered services. (6) Miscellaneous Expenses (E, SE)... 4,000 Cash ( A)... 4,000 Incurred and paid miscellaneous expenses. (7) Cash (+A)... 2,800 Loss on Sale of Land (Lo, SE) Land ( A)... 3,000 Sold land. (8) Dividends ( SE)... 2,200 Cash ( A)... 2,200 Declared and paid cash dividend. Cash Accounts Receivable B. B. 0 B. B. 0 (1) 12,000 (3) 10,000 (5) 4,000 (2) 5,000 (4) 5,000 (5) 10,000 (6) 4,000 E. B. 4,000 (7) 2,800 (8) 2,200 E. B. 8,600 Land Notes Payable B. B. 0 B. B. 0 (3) 10,000 (7) 3,000 (2) 5,000 E. B. 7,000 E. B. 5,000 Contributed Capital Retained Earnings* B. B. 0 B. B. 0 (1) 12,000 E. B. 12,000 E. B. 2,600 Dividends Fees Earned B. B. 0 B. B. 0 (8) 2,200 (5) 14,000 E. B. 2,200 E. B. 14,000

7 Rent Expense Miscellaneous Expenses B. B. 0 B. B. 0 (4) 5,000 (6) 4,000 E. B. 5,000 E. B. 4,000 Loss on Sale of Land B.B. 0 (7) 200 E.B. 200 *The Ending Balance in the Retained Earnings account is derived by the following formula: Beginning Balance + Revenues Expenses Dividends. For a check, refer to the statement of retained earnings. Ed's Lawn Service Income Statement For the Year Ended December 31, 2012 Revenue... $ 14,000 Rent expense... (5,000) Miscellaneous expense... (4,000) Loss on sale of land... (200) Net income... $ 4,800 Ed's Lawn Service Statement of Stockholders Equity For the Year Ended December 31, 2012 Contributed Retained Capital Earnings Beginning balance, January 1, 2012 $ 0 $ 0 Net income 4,800 Dividends (2,200) Stockholder contribution 12,000 Ending balance, December 31, 2012 $ 12,000 $ 2,600 Assets Ed's Lawn Service Balance Sheet As of December 31, 2012 Liabilities and Stockholders' Equity Cash... $ 8,600 Notes payable... $ 5,000 Accounts receivable... 4,000 Contributed capital... 12,000 Land... 7,000 Retained earnings... 2,600 Total liabilities and Total assets... $19,600 stockholders' equity... $19,600

8 E4 12 Ed's Lawn Service Statement of Cash Flows For the Year Ended December 31, 2012 Cash flows from operating activities: Cash collected from customers... $ 10,000 Rent payments on lawn equipment... (5,000) Payment of miscellaneous expenses... (4,000) Net cash increase from operating activities... $ 1,000 Cash flows from investing activities: Proceeds from sale of land... $ 2,800 Cash paid for land... (10,000) Net cash decrease from investing activities... (7,200) Cash flows from financing activities: Stockholder contributions... $ 12,000 Proceeds from bank loan... 5,000 Dividend payments... (2,200) Net cash increase from financing activities... 14,800 Increase in cash... $ 8,600 Beginning cash balance... 0 Ending cash balance... $ 8,600 a. (1) The entry is to record rent incurred but not yet paid. (2) The entry is to record the expiration of a previously purchased insurance policy. (3) The entry is to record the expiration of a portion of a fixed asset cost. (4) The entry is to record interest revenue earned but not yet collected. (5) The entry is to record the earning of a deferred revenue. b. (1) Accrual adjusting entry (2) Cost expiration adjusting entry (3) Cost expiration adjusting entry (4) Accrual adjusting entry (5) Accrual adjusting entry E4 14 a. 12/31/12 Wage Expense (E, SE)... 42,000* Wages Payable (+L)... 42,000 Incurred, but did not pay, wages. * $42,000 = $70,000 (3 days in December 5 days total) b. 1/2/13 Wage Expense (E, SE)... 28,000 Wages Payable ( L)... 42,000 Cash ( A)... 70,000 Paid wages. c Total Wage expense $42,000 $28,000 $70,000 Cash outflow associated with wages 0 70,000 70,000

9 d. The purpose of the adjusting journal entry on December 31, 2012 is to recognize an economic event that has not yet been captured by an exchange transaction. The economic event is that the Hurst Corporation consumed the benefits of its employees' labor, and in doing so, has become obligated to its employees. Hurst Corporation will not fulfill its obligation to its employees until the subsequent period when it actually pays the employees their wages. Consequently, an accrual adjusting entry is required on December 31 to record this economic event in the correct accounting period. E4 15 a. 12/31/09 Depreciation Expense (E, SE) ,000 Accumulated Depreciation ( A) ,000 Depreciated equipment for /31/10 Depreciation Expense (E, SE) ,000 Accumulated Depreciation ( A) ,000 Depreciated equipment for /31/11 Depreciation Expense (E, SE) ,000 Accumulated Depreciation ( A) ,000 Depreciated equipment for Book value, 1/1/09... $450, Depreciation expense... $150,000 Accumulated depreciation, 12/31/ ,000 Book value, 12/31/09... $300, Book value, 1/1/09... $450, Depreciation expense... $150, Depreciation expense ,000 Accumulated depreciation, 12/31/ ,000 Book value, 12/31/10... $150, Book value, 1/1/09... $450, Depreciation expense... $150, Depreciation expense , Depreciation expense ,000 Accumulated depreciation, 12/31/ ,000 Book value, 12/31/11... $ 0 b Total Depreciation expense $ 150,000 $150,000 $150,000 $450,000 Cash outflow associated with the purchase of the equipment 450, ,000 c. The purpose of the adjusting journal entry at the end of each period is to recognize the economic event of the portion of the fixed asset cost that expired during that year. Specifically, the purpose of the adjusting journal entries is to allocate the cost of the equipment to the periods that benefited from the equipment. Since the equipment has a useful life of three years, it is assumed that it will help generate revenues for three years. The cost of a fixed asset should be matched with the periods in which the fixed asset helps generate revenues.

10 Consequently, an adjusting entry is required on December 31, 2009, 2010, and 2011 to allocate the economic event to the correct accounting periods. E4 16 a. With cash-basis accounting, cash inflows and outflows are the critical events. A company will recognize revenue when it has cash inflows, and the company will recognize expenses when it has cash outflows. So in this case, Washington Forest Products would recognize the following expenses under cash-basis accounting. Insurance expense $29,000 Supplies expense 27,000 Rent expense 8,000 With accrual-basis accounting, inflows and outflows of assets and liabilities are the critical events. That is, a company will recognize revenue when it has an inflow of assets or an outflow of liabilities associated with operating activities. Similarly, the company will recognize expenses when it has an outflow of assets or an inflow of liabilities associated with operating activities. Consider the revenues being generated when the company is entitled to cash. The company could collect the cash at the exact same time it becomes entitled to the cash (which is an asset account), the company could expect to collect the cash after it has become entitled to the cash (which would give rise to a receivable, an asset account) or the company could become entitled to cash after it had already collected the cash (which would result in the company reducing its unearned revenue, a liability account). Just as with revenues, a company can consume benefits at three different points in time relative to the cash outflow. The company would consume the benefit at the same time it disburses cash (which is an asset account), the company could intend to disburse the cash after consuming the benefit (which would give rise to a payable, a liability account), or the company could consume a benefit for which it has already disbursed the cash (which would result in the company consuming a prepaid expense, an asset account). Because accrual-basis accounting is not based on the inflow and outflow of one asset (i.e., cash), accrual-basis accounting provides a much broader measure of revenues and expenses than provided by cash-basis accounting. Thus, in the case of Washington Forest Products, the difference between its expenses under cash-basis accounting and under accrual-basis accounting is due to expenses being defined differently under the two approaches. b. Insurance: Ending balance = Beginning balance + Insurance purchased Insurance expense = $ 0 + $29,000 $20,000 = $9,000 Since the company acquired more insurance than it used during 2011, the company expects to receive future benefits from the remaining insurance. Consequently, the company has an asset, and the appropriate account title is Prepaid Insurance. Supplies: Ending balance = Beginning balance + Supplies purchased Supplies expense = $0 + $27,000 $11,000 = $16,000 Since the company acquired more supplies than it used during 2011, the company expects to receive future benefits from the remaining supplies. Consequently, the company has an asset, and the appropriate account title is Supplies Inventory.

11 Rent: Ending balance = Beginning balance + Cash disbursed for rent Rent expense = $0 + $8,000 $14,000 = $(6,000) Since the company incurred more expense than it disbursed in cash for rent, the company expects to fulfill the remaining obligations in the future. Consequently, the company has a liability, and the appropriate account title would be Rent Payable. E4 21 a. Wages Payable Wages Payable Wage Expense Cash Paid for Wages as of 12/31/12 = as of 12/31/11 + on 2012 Inc. St. during 2012 $17,000 = X + $39,000 $35,000 X = $13,000 b. Prepaid Rent Prepaid Rent Cash Paid for Rent Rent Expense on as of 12/31/12 = as of 12/31/11 + during 2012 on 2012 Inc. St. $15,000 = $12,000 + X $21,000 X = $24,000 c. Accounts Rec. Accounts Rec. Sales Revenue Cash Collected as of 12/31/12 = as of 12/31/11 + on 2012 Inc. St. during 2012 X = $14,000 + $45,000 $38,000 X = $21,000 P4 1 PROBLEMS a. (1) Equipment (+A) ,000 Cash ( A) ,000 Purchased equipment. (2) Wage Expense (E, SE)... 30,000 Cash ( A)... 30,000 Incurred and paid wages. (3) Cash (+A)... 15,000 Accounts Receivable ( A)... 15,000 Collected cash from customers. (4) Cash (+A)... 16,000 Accounts Receivable (+A)... 8,000 Fees Earned (R, +SE)... 24,000 Rendered services. (5) Interest Expense (E, SE)... 10,000 Note Payable ( L)... 40,000 Cash ( A)... 50,000

12 P4 2 Made interest and principal payment. (6) Advertising Expense (E, SE)... 5,000 Cash ( A)... 5,000 Purchased advertising. (7) Building (+A) ,000 Cash ( A) ,000 Long-Term Note Payable (+L) ,000 Purchased building. (8) Cash (+A)... 35,000 Investments ( A)... 20,000 Gain on Sale of Investments (Ga, +SE)... 15,000 Sold investments. a. Sold services worth $28,000; received $7,000 cash and an account receivable for the balance of $21,000. Assets Increased by $28,000 and Owners Equity increased by $28,000 via increase in Retained Earnings. b. Purchased $6,000 worth of inventory on credit. Assets would increase and Liabilities would increase by $6,000 each. c. Paid $2,000 cash to suppliers on previously purchased inventory. Assets and liabilities would both decrease by $2,000 each. d. Purchased equipment worth $50,000 by paying $20,000 cash and signing a note payable for the balance of $30,000. Assets and Liabilities would go up by $30,000 each. e. Incurred and paid rent of $1,200 cash. Assets and owners equity would go down by $1,200 each. f. Collected $5,000 cash from the customers on account of previously made credit sales. No effect on the accounting equation as assets would increase and decrease by the same amount. g. Issued common stock for $25,000 cash. Assets and Owners Equity both would go up by $25,000. P4 4 a. (1) Cash (+A)... 7,000 Fees Earned (R, +SE)... 7,000 Rendered services. (2) Cash (+A)... 3,000 Accounts Receivable ( A)... 3,000 Collected cash from customers on account. (3) Liabilities ( L)... 3,000 Cash ( A)... 3,000 Made payment on outstanding liabilities.

13 (4) Long Term Assets (+A)... 6,000 Note Payable (+L)... 6,000 Purchased long lived assets. (5) Miscellaneous Expenses (E, SE)... 4,000 Cash ( A)... 4,000 Incurred and paid miscellaneous expenses. (6) Dividends ( SE) Cash ( A) Declared and paid dividends. b. Current Return Debt/Equity Transaction Ratio on Equity Ratio 1. Increase Increase Decrease 2. No Effect No Effect No Effect 3. Increase a No Effect Decrease 4. No Effect b No Effect Increase 5. Decrease Decrease Increase 6. Decrease Increase c Increase a b c Assuming that liabilities on balance sheet are current. Assuming the note payable is long-term liability in nature. Assuming that return on equity is computed after closing Dividend account to the Retained Earnings account. c. Morrison Home Services Income Statement For the Month Ended January 31, 2012 Revenues... $ 7,000 Miscellaneous expenses... 4,000 Net income... $ 3,000 Morrison Home Services Statement of Stockholders Equity For the Month Ended January 31, 2012 Common Retained Stock Earnings Beginning balance $ 10,000 $ 8,000 Net income 3,000 Dividends declared (800) Ending balance $ 10,000 $ 10,200

14 Assets Morrison Home Services Balance Sheet January 31, 2012 Liabilities and Stockholders' Equity Cash... $ 12,200 Liabilities... $ 3,000* Receivables... 1,000 Notes payable... 6,000 Long-term assets... 16,000 Common stock... 10,000 Retained earnings... 10,200 Total liabilities and Total assets... $ 29,200 stockholders equity... $ 29,200 *Represents nontrade notes payable. Morrison Home Services Statement of Cash Flows For the Month Ended January 31, 2012 Cash flows from operating activities: Cash collections from customers... $ 10,000 Payment of expenses... (4,000) Net cash increase due to operating activities... $ 6,000 Cash flows from investing activities... 0 Cash flows from financing activities: Repayment of liabilities... $ (3,000)* Dividend payment... (800) Net cash decrease due to financing activities... (3,800) Net increase in cash... $ 2,200 Beginning cash balance... 10,000 Ending cash balance... $ 12,200 *Represents nontrade notes payable. d. Morrison Home Services Statement of Cash Flows For the Month Ended January 31, 2012 Cash from operating activities: Net income... $ 3,000 Adjustments: Decrease in accounts receivable... $ 3,000 Total adjustments... 3,000 Net cash due to operating activities... $ 6,000

15 P4-5 (1) Wage Expense (E, -SE)... 5 Cash (-A)... 5 Paid employee wages. (2) Cash (+A) Accounts Receivable ( A) Collected cash from customers on account. (3) Equipment (+A)... 5 Cash ( A)... 5 Purchased Equipment. (4) Supplies (+A)... 2 Cash (-A)... 2 Purchased Supplies. (5) Accounts Payable ( L)... 3 Cash ( A)... 3 Paid Cash to suppliers. (6) Interest Payable ( L)... 3 Cash ( A)... 3 Paid interest accrued in previous period. (7) Cash (+A)... 9 Accounts Receivable (+A)... 9 Sales (R, +SE) Rendered services. (8) Long-term Note Payable (-L) Cash ( A) Reduced long-term debt. (9) Cash (+A)... 5 Common Stock (+SE)... 5 Issued stock. (10)Unearned Revenue (-L)... 3 Sales (R, +SE)... 3 Rendered services. (11)Interest Expenses (E, SE)... 1 Interest Payable (+L)... 1 Accrued interest expense. (12)Depreciation Expense (E, SE)... 4 Accumulated Depreciation ( A)... 4 Depreciated equipment. (13)Supplies Expense (E, -SE)... 5 Supplies (-A)... 5 Physical count of supplies.

16 (14)Dividends (-SE)... 3 Cash ( A)... 3 Declared and paid dividends. (15)Retained Earnings ( SE)... 3 Dividends (+SE)... 3 Closed dividends to Retained Earnings. (16)Sales (-SE) Wage Expense (+SE)... 5 Interest Expense (+SE)... 1 Depreciation Expense (+SE)... 4 Supplies Expense (+SE)... 5 Income Summary (+SE)... 6 Closed sales and expenses to Income Summary. (17)Income Summary ( SE)... 6 Retained Earnings (+SE)... 6 Closed Income Summary to Retained Earnings. Tybee Corporation Income Statement For the Month Ended January 31, 2012 (in millions) Sales... $ 21 Supplies Expense... 5 Depreciation Expense... 4 Interest Expense... 1 Wage Expense... 5 Net income... $ 6 Tybee Corporation Statement of Stockholders Equity For the Month Ended January 31, 2012 (in millions) Common Retained Stock Earnings Beginning balance $ 20 $ 12 Stock issuance 5 Net income 6 Dividends (3) Ending balance $ 25 $ 15

17 (in millions) Assets Tybee Corporation Balance Sheet January 31, 2012 Liabilities and Stockholders' Equity Cash... $ 12 Accounts Payable... $ 1 Accounts Receivable Interest Payable... 1 Supplies... 3 Unearned Revenue... 9 Prepaid Insurance Other short-term payables... 4 Current Assets Current Liabilities 15 Equipment Long-term Note Payable Less: Acc. Dep Land Common stock Retained earnings Total liabilities and Total assets... $ 90 stockholders equity... $ 90 Tybee Corporation Statement of Cash Flows For the Month Ended January 31, 2012 (in millions) Cash flows from operating activities: Cash collections from customers... $ 19 Cash paid to suppliers... (5) Cash paid for interest... (3) Cash paid for expenses... (5) Net cash increase due to operating activities... $ 6 Cash flows from investing activities: Cash paid for equipment... (5) Net cash decrease due to investing activities... (5) Cash flows from financing activities: Repayment of liabilities... $ (15) Stock issuance... 5 Dividend payment... (3) Net cash decrease due to financing activities... (13) Net change in cash... $ (12) Beginning cash balance Ending cash balance... $ 12

18 P4 8 Tybee Corporation Statement of Cash Flows For the Month Ended January 31, 2012 (in millions) Cash from operating activities: Net income... $ 6 Depreciation Expense 4 Adjustments: Decrease in accounts receivable... $ 1 Decrease in supplies... 3 Decrease in accounts payable... (3) Decrease in interest payable... (2) Decrease in unearned revenue... (3) Total adjustments... (4) Net cash increase (decrease) due to operating activities... $ 6 Cash flows from investing activities: Cash paid for equipment... (5) Net cash decrease due to investing activities... (5) Cash flows from financing activities: Repayment of liabilities... $ (15) Stock issuance... 5 Dividend payment... (3) Net cash decrease due to financing activities... (13) Net change in cash... $ (12) Beginning cash balance Ending cash balance... $ 12 a. Supplies Expense (E, SE)... 55,000 Supplies Inventory ( A)... 55,000 Adjusted for supplies used. b. Rent Expense (E, SE)... 2,400 Rent Payable (+L)... 2,400 Incurred, but did not pay, rent. c. Unearned Service Revenues ( L)... 12,000 Fees Earned (R, +SE)... 12,000 Rendered services for cash collected in advance. d. Depreciation Expense (E, SE)... 50,000 Accumulated Depreciation ( A)... 50,000 Depreciated fixed assets for e. Interest Expense (E, SE) Interest Payable (+L) Incurred, but did not pay, interest. f. Advertising Expense (E, SE)... 28,000 Advertising Payable (+L)... 28,000 Incurred, but did not pay, advertising.

19 g. Insurance Expense (E, SE) Prepaid Insurance ( A) Adjusted for expiration of prepaid insurance. P4 9 (1) Rent Expense (E, SE)... 2,700 Prepaid Rent ( A)... 2,700 Adjusted for expiration of prepaid rent. (2) Insurance Expense (E, SE) Prepaid Insurance ( A) Adjusted for expiration of prepaid insurance. (3) Depreciation Expense (E, SE)... 2,400 Accumulated Depreciation ( A)... 2,400 Depreciated fixed assets. (4) Salary Expense (E, SE)... 1,200 Salaries Payable (+L)... 1,200 Incurred, but did not pay, salaries. (5) Unearned Revenues ( L) Fees Earned (R, +SE) Rendered services for cash collected in advance. P4 17 a. All T-accounts for P4 17 appear in this section. Transactions are keyed to numbers in parentheses, adjusting journal entries are keyed to lowercase letters, and closing entries are keyed to upper case letters. Cash Accounts Receivable Merchandise Inventory B. B. 170,000 B. B. 188,000 B. B. 200,000 (1a) 350,000 (3) 400,000 (1a) 1,350,000 (5) 850,000 (2) 820,000 (1b) 700,000 (5) 850,000 (6) 870,000 (10) 72,000 (7) 37,000 (8) 148,000 (9) 120,000 (11) 50,000 (12) 50,000 E. B. 9,000 E. B. 616,000 E. B. 320,000 Interest Receivable Notes Receivable Supplies Inventory B. B. 0 B. B 0 B. B. 40,000 (10) 72,000 (4) 110,000 (f) 1,620 (b) 110,000 E. B. 1,620 E. B. 72,000 E. B. 40,000 Prepaid Insurance Prepaid Advertising Long-Term Investments B. B. 74,000 B. B. 0 B. B. 160,000 (12) 50,000 (7) 30,000 (a) 44,400 (c) 25,000 E. B. 29,600 E. B. 25,000 E. B. 180,000 Equipment Accum. Depr. Equipment Machinery B. B. 480,000 B. B. 98,000 B. B. 950,000 (g) 48,000 E. B. 480,000 E. B. 146,000 E. B. 950,000

20 Accum. Depr. Machinery Patent Accounts Payable B. B. 230,000 B. B. 75,000 B. B. 220,000 (6) 870,000 (2) 820,000 (g) 47,500 (g) 12,500 E. B. 277,500 E. B. 62,500 E. B. 170,000 Wages Payable Op. Exp. Payable Interest Payable B. B. 73,000 B. B. 0 B. B. 0 (3) 73,000 (e) 43,000 (d) 6,000 (h) 3,361 E. B. 43,000 E. B. 6,000 E. B. 3,361 Short-Term Notes Payable Mortgage Payable Bonds Payable B. B. 0 B. B. 300,000 B. B. 500,000 (4) 110,000 E. B. 110,000 E. B. 300,000 E. B. 500,000 Common Stock Retained Earnings Dividends B. B. 500,000 B. B. 416,000 B. B. 0 (9) 120,000 (11) 50,000 (C) 50,000 (B) 243,859 (C) 50,000 E. B. 620,000 E. B. 609,859 E. B. 0 Sales Interest Revenue Gain on Sale of Investment B. B. 0 B. B. 0 B. B. 0 (1a) 1,700,000 (7) 7,000 (f) 1,620 (A) 1,700,000 (A) 1,620 (A) 7,000 E. B. 0 E.B. 0 E. B. 0 Cost of Goods Sold Wage Expense B. B. 0 B. B. 0 (1b) 700,000 (3) 327,000 (e) 43,000 (A) 700,000 (A) 370,000 E. B. 0 E. B. 0 Operating Expense Miscellaneous Op. Expense Insurance Expense B. B. 0 B. B. 0 B. B. 0 (d) 36,000 (8) 148,000 (c) 25,000 (d) 6,000 (d) 36,000 (a) 44,400 (A) 42,000 (A) 87,000 (A) 44,400 E. B. 0 E. B. 0 E. B. 0 Supplies Expense Depr. Expense Equipment Depr. Expense Machinery B. B. 0 B. B. 0 B. B. 0 (b) 110,000 (g) 48,000 (g) 47,500 (A) 110,000 (A) 48,000 (A) 47,500 E. B. 0 E. B. 0 E. B. 0 Amortization Expense Interest Expense Income Summary B. B. 0 B. B. 0 (g) 12,500 (h) 3,361 (A) 12,500 (A) 3,361 (B) 243,859 (A) 243,859 E. B. 0 E. B. 0

21 b. Entries are posted to the T-accounts in Part (a). (1a) Cash (+A) ,000 Accounts Receivable (+A)... 1,350,000 Sales (R, +SE)... 1,700,000 Made sales. (1b) Cost of Goods Sold (E, SE) ,000 Merchandise Inventory ( A) ,000 Recorded cost of inventory sold. (2) Merchandise Inventory (+A) ,000 Accounts Payable (+L) ,000 Purchased inventory on account. (3) Wage Expense (E, SE) ,000 Wages Payable ( L)... 73,000 Cash ( A) ,000 Paid wages. (4) Supplies Inventory (+A) ,000 Short Term Notes Payable (+L) ,000 Purchased supplies by note. (5) Cash (+A) ,000 Accounts Receivable ( A) ,000 Collected cash from customers. (6) Accounts Payable ( L) ,000 Cash ( A) ,000 Made payment to suppliers. (7) Cash (+A)... 37,000 Long Term Investments ( A)... 30,000 Gain on Sale of Investment (Ga, +SE)... 7,000 Sold investment. (8) Miscellaneous Operating Expense (E, SE) ,000 Cash ( A) ,000 Incurred and paid expenses. (9) Cash (+A) ,000 Common Stock (+SE) ,000 Issued common stock. (10) Notes Receivable (+A)... 72,000 Accounts Receivable ( A)... 72,000 Accepted a note in payment of an open account. (11) Dividends ( SE)... 50,000 Cash ( A)... 50,000 Declared and paid a cash dividend. (12) Long Term Investments (+A)... 50,000 Cash ( A)... 50,000 Purchased investments.

22 122 Chapter 5 P4 17 Continued c. Unadjusted Trial Adjusted Trial Final Trial Balance Adjusting Entries Balance Closing Entries Balance Account Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 9,000 9,000 9,000 Accounts Rec. 616, , ,000 Interest Rec. (f) 1,620 1,620 1,620 Merchandise Inv. 320, , ,000 Supplies Inventory 150,000 (b) 110,000 40,000 40,000 Prepaid Insurance 74,000 (a) 44,400 29,600 29,600 Prepaid Advert. (c) 25,000 25,000 25,000 Notes Receivable 72,000 72,000 72,000 L-T Investments 180, , ,000 Equipment 480, , ,000 Accum. Depr. Equip. 98,000 (g) 48, , ,000 Machinery 950, , ,000 Accum. Depr. Mach. 230,000 (g) 47, , ,500 Patent 75,000 (g) 12,500 62,500 62,500 Accounts Payable 170, , ,000 Wages Payable (e) 43,000 43,000 43,000 Interest Payable (h) 3,361 3,361 3,361 Oper. Exp. Payable (d) 6,000 6,000 6,000 S-T Notes Payable 110, , ,000 Mortgage Payable 300, , ,000 Bonds Payable 500, , ,000 Common Stock 620, , ,000 Retained Earnings 416, ,000 (C) 50,000 (B) 243, ,859 Dividends 50,000 50,000 (C) 50,000 Sales 1,700,000 1,700,000 (A)1,700,000 Interest Revenue (f) 1,620 1,620 (A) 1,620 Gain on Investment 7,000 7,000 (A) 7,000 Cost of Goods Sold 700, ,000 (A) 700,000 Wage Expense 327,000 (e) 43, ,000 (A) 370,000 Operating Exp. (d) 42,000 42,000 (A) 42,000 Miscellaneous Op.Exp. 148,000 (c&d) 61,000 87,000 (A) 87,000 Insurance Exp. (a) 44,400 44,400 (A) 44,400 Supplies Exp. (b) 110, ,000 (A) 110,000 Interest Exp. (h) 3,361 3,361 (A) 3,361 Amortization Exp. (g) 12,500 12,500 (A) 12,500 Depr. Exp. Equip. (g) 48,000 48,000 (A) 48,000 Depr. Exp. Mach. (g) 47,500 47,500 (A) 47,500 Income Summary (B) 243,859 (A) 243,859 Total 4,151,000 4,151, , ,381 4,300,481 4,300,481 2,002,479 2,002,479 2,785,720 2,785,720

23 Chapter 5 23 d. Entries are posted to the T accounts in Part (a). (a) Insurance Expense (E, SE)... 44,400 Prepaid Insurance ( A)... 44,400 Adjusted for expiration of prepaid insurance. (b) Supplies Expense (E, SE) ,000 Supplies Inventory ( A) ,000 Adjusted for supplies used. (c) Prepaid Advertising (+A)... 25,000 Miscellaneous Operating Expense (E, SE)... 25,000 Recognized advertising to be used in subsequent periods. (d) Operating Expense (E, SE)... 6,000* Operating Expense (E, SE)... 36,000 Miscellaneous Operating Expense (E, SE)... 36,000* Op. Exp. Payable (+L)... 6,000 Incurred, but did not pay, and reclassify. * $6,000 = ($3,500 per month 12 months) $36,000 misc. exp. payment (e) Wage Expense (E, SE)... 43,000 Wages Payable (+L)... 43,000 Incurred, but did not pay, wages. (f) Interest Receivable (+A)... 1,620* Interest Revenue (R, +SE)... 1,620 Earned, but did not collect, interest. * $1,620 = $72,000 9% 3/12 (g) Depreciation Expense Equipment (E, SE)... 48,000 Depreciation Expense Machinery (E, SE)... 47,500 Amortization Expense (E, SE)... 12,500 Accumulated Depreciation Equipment ( A)... 48,000 Accumulated Depreciation Machinery ( A)... 47,500 Patent ( A)... 12,500 Amortized fixed and intangible assets. (h) Interest Expense (E, SE)... 3,361* Interest Payable (+L)... 3,361 Incurred, but did not pay, interest. * $3,361 = $110,000 10% 110/360

24 e. Closing entries are posted to the T accounts in Part (a). (A) Sales... 1,700,000 Interest Revenue... 1,620 Gain on Sale of Investment... 7,000 Income Summary ,859 Cost of Goods Sold ,000 Wage Expense ,000 Operating Expense... 42,000 Misc. Operating Expense... 87,000 Insurance Expense... 44,400 Supplies Expense ,000 Interest Expense... 3,361 Amortization Expense... 12,500 Depreciation Expense Equipment... 48,000 Depreciation Expense Machinery... 47,500 Closed revenues and expenses into Income Summary. (B) Income Summary ,859 Retained Earnings ,859 Closed Income Summary into Retained Earnings. (C) Retained Earnings... 50,000 Dividends... 50,000 Closed Dividends into Retained Earnings. a. J.D.F. Company Income Statement For the Year Ended December 31, 2012 Revenues: Sales... $ 1,700,000 Interest revenue... 1,620 Gain on sale of investment... 7,000 Total revenues... $1,708,620 Operating expenses: Cost of goods sold... $700,000 Wage expense ,000 Operating expense... 42,000 Miscellaneous operating expense... 87,000 Insurance expense... 44,400 Supplies expense ,000 Amortization expense... 12,500 Depreciation expense Equipment... 48,000 Depreciation expense Machinery... 47,500 Total operating expenses... $ 1,461,400 Interest expense... 3,361 Total expenses... 1,464,761 Net income... $ 243,859

25 J.D.F. Company Statement of Retained Earnings For the Year Ended December 31, 2012 Retained earnings balance, January 1, $ 416,000 Plus: Net income ,859 Less: Dividends declared... (50,000) Retained earnings balance, December 31, $ 609,859 J.D.F. Company Balance Sheet December 31, 2012 Assets Current assets: Cash... $ 9,000 Accounts receivable ,000 Interest receivable... 1,620 Inventory ,000 Supplies inventory... 40,000 Prepaid insurance... 29,600 Prepaid advertising expenses... 25,000 Notes receivable... 72,000 Total current assets... $1,113,220 Long-term investments ,000 Fixed assets: Equipment... $ 480,000 Less: Accumulated depreciation ,000 Net book value of equipment... $ 334,000 Machinery... $ 950,000 Less: Accumulated depreciation ,500 Net book value of machinery ,500 Total fixed assets... 1,006,500 Patent... 62,500 Total assets... $ 2,362,220 Liabilities & Stockholders' Equity Current liabilities: Accounts payable... $ 170,000 Wages payable... 43,000 Interest payable... 3,361 Operating expense payable... 6,000 Short-term notes payable ,000 Total current liabilities... $ 332,361 Long-term liabilities: Mortgage payable... $ 300,000 Bond payable ,000 Total long-term liabilities ,000 Common stock ,000 Retained earnings ,859 Total liabilities & stockholders' equity... $ 2,362,220

26 J.D.F. Company Statement of Cash Flows (Direct Method) For the Year Ended December 31, 2012 Cash flows from operating activities: Collections from customers on cash sales... $ 350,000 Collection from customers on open accounts ,000 Payments for wages... (400,000) Payments to suppliers on open account... (870,000) Payment for misc. oper. exp... (148,000) Net cash increase (decrease) due to operating activities... $ (218,000) Cash flows from investing activities: Proceeds from sale of investment... $ 37,000 Purchase of investment... (50,000) Net cash increase (decrease) due to investing activities... (13,000) Cash flows from financing activities: Proceeds from issuance of common stock... $ 120,000 Payment of dividends... (50,000) Net cash increase (decrease) due to financing activities... 70,000 Decrease in cash balance... $(161,000) Beginning cash balance ,000 Ending cash balance... $ 9,000

27 b. J.D.F. Company Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2012 Cash flows from operating activities: Net income... $ 243,859 Adjustments: Depreciation expense Equipment... $ 48,000 Depreciation expense Machinery... 47,500 Amortization expense... 12,500 Gain on sale of investments... (7,000) Increase in accounts receivable... (428,000) Increase in interest receivable... (1,620) Increase in merchandise inventory... (120,000) Increase in prepaid advertising... (25,000) Increase in notes receivable... (72,000) Decrease in prepaid insurance... 44,400 Decrease in accounts payable... (50,000) Decrease in wages payable... (30,000) Increase in operating exp. payable... 6,000 Increase in short-term notes payable ,000 Increase in interest payable... 3,361 Total adjustments... (461,859) Net cash increase (decrease) due to operating activities... $ (218,000) Cash flows from investing activities: Proceeds from sale of investment... $ 37,000 Purchase of investment... (50,000) Net cash increase (decrease) due to investing activities... (13,000) Cash flows from financing activities: Proceeds from issuance of common stock... $ 120,000 Payment of dividends... (50,000) Net cash increase (decrease) due to financing activities... 70,000 Decrease in cash balance... $ (161,000) Beginning cash balance ,000 Ending cash balance... $ 9,000

28 P4 18 For 2012 the net cash flow from operations is $62,400 which is composed of: (1) cash collections from services rendered, and (2) cash payments due to operating activities. Let us compute the cash collections from services rendered for 2012: Cash Collections Revenue from Services from Services per Income Statement Decrease in Rendered for 2012 = in Accounts Receivable $54,000 = $54,700 + $600 $1,300 Now, we can compute the cash payments due to operating activities: P4 19 Increase in Accounts Receivable + Increase in Unearned Revenue Decrease in Unearned Revenue Net Cash Flow Cash Collections Cash Payment Due from Operations from Services Rendered to Operating Activities during 2012 = during during 2012 $62,400 = $54,000 + X X = $8,400 In order to answer this question, we need to know how much total revenue is generated by Mayberry from each of its 2 sources: (1) advertising display sales; and (2) consulting services. We are given the total revenues as reported on the Income Statement, and selected activity of cash receipts and changes in Accounts Receivable account for the advertising display sales. First, based on the following relationships, we will compute the revenue generated by advertising display sales for 2012 and Cash Collections Advertising Display + Decrease in Acc. Rec. from Advertising = Sales Revenue Increase in Acc. Rec. Display Sales as Reported on during the Year the Income St. For 2011 For 2012 $41,500 = X + $2,800 X = $38,700 $43,500 = X + $2,700 X = $40,800 Based on the above calculations we know that total revenue generated from advertising display sales during 2011 and 2012, respectively, was $38,700 and $40,800.

29 Second, based on the above information and the total revenue as reported in the 2011 and 2012 income statements, we can compute the amount of revenue generated by Mayberry Enterprises from its consulting services. For 2011 For 2012 $76,000 $38,700 = $37,300 $89,500 $40,800 = $48,700 Overall, the revenue from each segment can be broken down as follows. Display Sales Consulting Service Total 2011 $ 38,700 $37,300 $ 76, ,800 48,700 89,500 Total $ 79,500 $ 86,000 $ 165,500 Based on the above, it seems that revenue stream is growing for both product lines. However, the growth is higher in the consulting service product line. P4 20 Cash Account... 23,400 Accumulated Depreciation... 6,600 a Equipment... 24,400 b Gain on Sale of Equipment... 5,600 a $24,300 + $8,700 $26,400 = $6,600 b $84,800 + $37,000 $97,400 = $24,400 It is true that Badger s net income has more than tripled from 2011 to However, this increase is entirely due to selling the equipment with a book value of $17,800 ($24,400 $6,600) for $23,400. This has resulted in a gain of $5,600. Since net income is $5,200, it appears that Badger has lost money from its regular, recurring operations. I am not sure if we should extend any loans to Badger, let alone grant the preferential interest rates.