Problems: Set C. Problems: Set C 1

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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.

22 22 CHAPTER 5 Merchandising Operations and the Multiple-Step Income Statement WHEELS AND DEALS INC. Trial Balance December 31, 2007 Debit Credit Cash $ 45,200 Accounts Receivable 31,100 Merchandise Inventory 41,200 Prepaid Insurance 8,000 Land 44,000 Buildings 360,000 Accumulated Depreciation Buildings $ 90,000 Equipment 56,000 Accumulated Depreciation Equipment 40,000 Notes Payable 62,500 Accounts Payable 38,300 Common Stock 180,000 Retained Earnings 87,200 Dividends 14,000 Sales 768,000 Sales Discounts 3,500 Cost of Goods Sold 496,800 Salaries Expense 136,400 Utilities Expense 9,600 Repair Expense 7,800 Gas and Oil Expense 7,600 Interest Expense 4,800 $1,266,000 $1,266,000 Adjustment data: 1. Depreciation is $18,000 on buildings and $8,000 on equipment. (Both are operating expenses.) 2. Insurance expires at a rate of $500 per month. Other data: $12,500 of the notes payable are payable next year. (c) Tot. trial balance $1,292,000 (d) Net income $69,500 Tot. assets $423,500 Determine cost of goods sold and gross profit under periodic approach. (SO 4, 5) Gross profit $118,400 Calculate missing amounts and assess profitability. (SO 4, 5, 6) (a) Journalize the adjusting entries. (b) Create T accounts for all accounts used in part (a). Enter the trial balance amounts into the T accounts and post the adjusting entries. (c) Prepare an adjusted trial balance. (d) Prepare a multiple-step income statement and a retained earnings statement for the year, and a classified balance sheet at December 31, P5-7C At the end of Bill s Dollar Store s fiscal year on January 31, 2007, these accounts appeared in its adjusted trial balance. Freight-in $ 6,900 Merchandise Inventory (beginning) 47,500 Purchases 674,200 Purchase Discounts 5,800 Purchase Returns and Allowances 8,900 Sales 792,000 Sales Returns and Allowances 12,000 Additional facts: 1. Merchandise inventory on January 31, 2007, is $52, Note that Bill s Dollar Store uses a periodic system. Prepare an income statement through gross profit for the year ended January 31, P5-8C All Decked Out Inc. operates a retail operation that purchases and sells lawn and patio products. The company purchases all merchandise inventory on credit and uses a

23 Problems: Set C 23 perpetual inventory system. The accounts payable account is used for recording inventory purchases only; all other current liabilities are accrued in separate accounts. You are provided with the following selected information for the fiscal years 2005 through 2008, inclusive Inventory (ending) $18,420 $ 14,300 $ 15,400 $ 12,680 Sales 292, , ,000 Purchases of merchandise inventory on account 174, , ,000 Cash payments to suppliers 171, , ,000 (a) Calculate cost of goods sold for each of the 2006, 2007, and 2008 fiscal years. (b) Calculate the gross profit for each of the 2006, 2007, and 2008 fiscal years. (c) Calculate the ending balance of accounts payable for each of the 2006, 2007, and 2008 fiscal years. The ending balance of accounts payable for 2005 was $19,000. (d) The vice-presidents of sales, marketing, production, and finance are discussing the company s results with the CEO. They note that sales declined over the 3-year fiscal period, Does that mean that profitability necessarily also declined? Explain, computing the gross profit rate for each fiscal year to help support your answer. *P5-9C 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. These transactions occured 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 Co. purchases $90. 9 Received credit from Gillmore Co. for merchandise returned $ Sold merchandise on account for $1,100, terms n/ 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/ Paid Orr Sportswear in full. 27 Granted credit to customers for clothing that did not fit properly $ Received payments on account for $1,900. (a) 2007 cost of goods sold $177, Ending acct. payable $17,100 Journalize, post, and prepare trial balance and partial income statement using periodic approach. (SO 5, 7) GLS The chart of accounts for the ice house includes Cash, Accounts Receivable, Merchandise Inventory, Accounts Payable, Common Stock, Sales, Sales Returns and Allowances, Purchases, Purchase Returns and Allowances, Purchase Discounts, and Freight-in. (a) Journalize the November transactions using a periodic inventory system. (b) Using T accounts, enter the beginning balances in the ledger accounts and post the November transactions. (c) Prepare a trial balance on November 30, (d) Prepare an income statement through Gross Profit, assuming merchandise inventory on hand at November 30 is $5,196. (c) Tot. trial balance $10,859 Gross profit $610

24 24 CHAPTER 6 Reporting and Analyzing Inventory Problems: Set C Determine items and amounts to be recorded in inventory. (SO 1) P6-1C Farrell Company is trying to determine the value of its ending inventory as of March 31, 2007, the company s year-end. The following transactions occurred, and the accountant asked your help in determining whether they should be recorded or not. (a) On March 30, Farrell shipped to a customer goods costing $800. The goods were shipped FOB destination, and the receiving report indicates that the customer received the goods on April 1. (b) On March 28, Supplier Inc. shipped goods to Farrell FOB shipping point. The invoice price was $400 plus $20 for freight. The receiving report indicates that the goods were received by Farrell on April 2. (c) Farrell had $750 of consigned goods from Joyce Inc. (d) Farrell had $380 of inventory at Zwingle Variety, on consignment from Farrell. (e) On March 29, Farrell ordered goods costing $640. The goods were shipped FOB destination on March 31. Farrell received the goods on April 3. (f) A customer returned goods to Farrell on March 31. Upon inspection, the goods were found to be undamaged and were accepted as returned goods. These goods originally cost $400 and Farrell sold them for $640. For each of the above transactions, specify whether the item in question should be included in ending inventory, and if so, at what amount. For each item that is not included in ending inventory, indicate who owns it and what account, if any, it should have been recorded in. Determine cost of goods sold and ending inventory using FIFO, LIFO, and average cost, with analysis. (SO 2, 3) P6-2C Timeless Distribution markets classic children s books. At the beginning of June, Timeless had in beginning inventory 1,200 books with a unit cost of $3. During June, Timeless made the following purchases of books. June 3 $4 June 29 $6 June 18 $5 During June, 10,500 books were sold. Timeless uses a periodic inventory system. Cost of goods sold: FIFO $47,100 LIFO $56,500 Average $51,578 Determine cost of goods sold and ending inventory using FIFO, LIFO, and average cost in a periodic inventory system, and assess financial statement effect. (SO 2, 3) (a) Determine the cost of goods available for sale. (b) Determine (1) the ending inventory and (2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy of the cost of goods sold under the FIFO and LIFO methods. (Note: For average cost, round cost per unit to three decimal places.) (c) Which cost flow method results in (1) the highest inventory amount for the balance sheet and (2) the highest cost of goods sold for the income statement? P6-3C Byron Company Inc. had a beginning inventory of 200 units of Product ERV at a cost of $6 per unit. During the year, purchases were: Jan units at $7 Aug units at $ 9 Apr units at $8 Nov units at $10 Byron Company uses a periodic inventory system. Sales totalled 1,900 units. Cost of goods sold: FIFO $14,500 LIFO $15,800 Average $15,200 (a) Determine the cost of goods available for sale. (b) Determine the ending inventory and the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy of the cost of goods sold under the FIFO and LIFO methods. (c) Which cost flow method results in the lowest inventory amount for the balance sheet? The lowest cost of goods sold for the income statement?

25 Problems: Set C 25 P6-4C The management of Jorgensen Inc. asks your help in determining the comparative effects of the FIFO and LIFO inventory cost flow methods. For 2007 the accounting records show these data. Inventory, January 1 (4,000 units) $ 16,000 Cost of 105,000 units purchased 470,500 Selling price of 100,000 units sold 870,000 Operating expenses 185,000 Compute ending inventory, prepare income statements, and answer questions using FIFO and LIFO. (SO 2, 3) Units purchased consisted of 35,000 units at $4.20 on March 20; 65,000 units at $4.60 on July 24, and 5,000 units at $4.90 on December 12. Income taxes are 30%. (a) Prepare comparative condensed income statements for 2007 under FIFO and LIFO. (Show computations of ending inventory.) (b) Answer the following questions for management in the form of a business letter. (1) Which inventory cost flow method produces the most meaningful inventory amount for the balance sheet? Why? (2) Which inventory cost flow method produces the most meaningful net income? Why? (3) Which inventory cost flow method is most likely to approximate the actual physical flow of the goods? Why? (4) How much more cash will be available under LIFO than under FIFO? Why? (5) How much of the gross profit under FIFO is illusionary in comparison with the gross profit under LIFO? P6-5C You have the following information for Alsteen Inc. for the month ended May 31, Alsteen uses a periodic method for inventory. Unit Cost or Date Description Units Selling Price May 1 Beginning inventory 40 $20 May 6 Purchase May 7 Sale May 15 Purchase May 18 Sale May 24 Purchase May 30 Sale (a) Calculate (i) ending inventory, (ii) cost of goods sold, (iii) gross profit, and (iv) gross profit rate under each of the following methods. (1) LIFO. (2) FIFO. (3) Average cost. (Round cost per unit to three decimal places.) (b) Compare results for the three cost flow assumptions. P6-6C You have the following information for Tempus Watches. Tempus uses the periodic method of accounting for its inventory transactions. Tempus carries only one brand of hand-crafted jeweled watches all are identical. Each batch of watches purchased is carefully coded and marked with its purchase cost. July 1 Beginning inventory 220 watches at a cost of $400 per watch. July 2 Purchased 200 watches at a cost of $450 each. July 5 Sold 180 watches for $680 each. July 14 Purchased 350 watches at a cost of $480 each. July 28 Sold 480 watches for $720 each. (a) Assume that Tempus uses the specific identification cost flow method. (1) Demonstrate how Tempus could maximize its gross profit for the month by specifically selecting which watches to sell on July 5 and July 28. (2) Demonstrate how Tempus could minimize its gross profit for the month by selecting which watches to sell on July 5 and July 28. Gross profit: FIFO $426,400 LIFO $420,500 Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results. (SO 2, 3) Gross profit: LIFO $2,320 FIFO $2,630 Average $2,472 Compare specific identification, FIFO, and LIFO under periodic method; use cost flow assumption to influence earnings. (SO 2, 3) Gross profit: Maximum $174,800 Minimum $166,000

26 26 CHAPTER 6 Reporting and Analyzing Inventory (b) Assume that Tempus uses the FIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would Tempus report under this cost flow assumption? (c) Assume that Tempus uses the LIFO cost flow assumption. Calculate cost of goods sold. How much gross profit would the company report under this cost flow assumption? (d) Which cost flow method should Tempus Watches select? Explain. Compute inventory turnover ratio and days in inventory; compute current ratio based on LIFO and after adjusting for LIFO reserve. (SO 5, 6) P6-7C This information is available for the Automotive Sector of Ford Motor Company for Ford uses the LIFO inventory method. (in millions) 2004 Beginning inventory $ 9,151 Ending inventory 10,766 LIFO reserve 1,001 Current assets 44,703 Current liabilities 55,027 Cost of goods sold 135,856 Sales 147,134 (a) Calculate the inventory turnover ratio and days in inventory. (b) Calculate the current ratio based on inventory as reported using LIFO. (c) Calculate the current ratio after adjusting for the LIFO reserve. (d) Comment on any difference between parts (b) and (c). Calculate cost of goods sold, ending inventory, and gross profit for LIFO, FIFO, and average cost under the perpetual system; compare results. (SO 3, 7) *P6-8C Brong Inc. is a retailer operating in Centralia. Brong uses the perpetual inventory method. All sales returns from customers result in the goods being returned to inventory. (Assume that the inventory is not damaged.) Assume that there are no credit transactions; all amounts are settled in cash. You are provided with the following information for Brong Inc. for the month of January Unit Cost or Date Description Quantity Selling Price Dec. 31 Ending inventory 140 $14 Jan. 2 Purchase Jan. 6 Sale Jan. 9 Sale return Jan. 9 Purchase Jan. 10 Purchase return Jan. 10 Sale Jan. 23 Purchase Jan. 30 Sale Gross profit: LIFO $5,580 FIFO $6,140 Average $5,932 Determine ending inventory under a perpetual inventory system. (SO 3, 7) (a) For each of the following cost flow assumptions, calculate (i) cost of goods sold, (ii) ending inventory, and (iii) gross profit. (1) LIFO. (Assume sales returns had a cost of $14 and purchase returns had a cost of $17.) (2) FIFO. (Assume sales returns had costs of $14 for 10 units and $15 for 10 units, and purchase returns had a cost of $17.) (3) Moving-average. (Round cost per unit to three decimal places.) (b) Compare results for the three cost flow assumptions. *P6-9C Just Rugs began operations on February 1. It uses a perpetual inventory system. During February the company had the following purchases and sales.

27 Problems: Set C 27 Purchases Date Units Unit Cost Sales Units Feb $150 Feb. 6 9 Feb $168 Feb Feb $172 Feb (a) Determine the ending inventory under a perpetual inventory system using (1) FIFO, (2) average cost (round unit cost to three decimal places), and (3) LIFO. (b) Which costing method produces the highest ending inventory valuation? FIFO $1,368 Average $1,341 LIFO $1,298

28 28 CHAPTER 7 Internal Control and Cash Problems: Set C Identify internal control weaknesses for cash receipts. (SO 1, 2) Identify internal control weaknesses in cash receipts and cash disbursements. (SO 1, 2, 3) P7-1C State University s Accounting Club decided to sell coupon books as a fund-raising activity. The books allow users to enjoy restaurants, entertainment, and services such as oil changes, at substantial discounts. The club bought 100 books for $16 each, and members will sell them for $20. About 20 members attended the last club meeting, and most took one or two books to sell. Since the club had already paid for the books and didn t have other immediate cash needs, members do not have to pay for the books until they sell them. Extra books are stored on a book shelf in the club s on-campus office. The office is in a great location with plenty of student traffic. It is shared with the Marketing and Information Systems clubs. Each club has four sets of keys that are used by its officers and members. As students sell books, they bring the cash or checks to the club s office. Students with unusual class schedules who arrive when the office is locked can put payments under the door. Payments are stored in a desk drawer until the treasurer has time to make a bank deposit. Students can pick up more books to sell as needed. (a) Indicate the weaknesses in internal accounting control in the club s fund-raising plan. (b) Indicate improvements in internal control procedures for the club s fund-raising plan. P7-2C Sam Hill has worked for Dr. Lee Hogan for several years. Sam demonstrates a loyalty that is rare among employees. He is always willing to cover for other employees and hasn t taken a vacation in three years. One of Sam s primary duties at the dental office is to open the mail, list checks received, and prepare the bank deposit form. He also collects cash from patients at the cashier window as patients leave. At times, it is so hectic that Sam doesn t bother to give patients a receipt for the cash paid on their accounts. He assures them he will see to it that they receive the proper credit. He is so well known by most patients that no one has ever complained. When traffic is slow in the office, Sam offers to help another employee, Mary, post the payments to patients accounts receivable. Dr. Hogan installed a computerized accounting program that requires a user ID and password to log in, but Sam and Mary have found that it is more efficient to just leave the computer on and the receivables file open all the time, and minimize the file when it is not in use. Identify the principles of internal control that may be violated in this situation. Prepare a bank reconciliation and adjusting entries. (SO 4) (a) Cash bal. $6,263 Prepare a bank reconciliation and adjusting entries from detailed data. (SO 4) P7-3C On March 31, 2007, Dezelle Company had a cash balance per books of $5, The statement from Riverside Bank on that date showed a balance of $5, A comparison of the bank statement with the cash account revealed the following facts. 1. The bank service charge for March was $ The bank collected a note receivable of $2,000 for Dezelle Company on March 15, plus $115 of interest. The bank made a $20 charge for the collection. Dezelle has not accrued any interest on the note. 3. The March 31 receipts of $1, were not included in the bank deposits for March. These receipts were deposited by the company in a night deposit vault on March Company check No issued to B. Solveson, a creditor, for $672 that cleared the bank in March was incorrectly entered in the cash payments journal on March 8 for $ Checks outstanding on March 31 totaled $1, On March 31 the bank statement showed an NSF charge of $1, for a check received by the company from Z. Fowler, a customer, on account. (a) Prepare the bank reconciliation as of March 31. (b) Prepare the necessary adjusting entries at March 31. P7-4C The bank portion of the bank reconciliation for Vincent Company at July 31, 2007, is shown on the next page.

29 Problems: Set C 29 VINCENT COMPANY Bank Reconciliation July 31, 2007 Cash balance per bank $ 9,596 Add: Deposits in transit 930 $10,526 Less: Outstanding checks Check Number Check Amount 3151 $ , , ,172 5,063 Adjusted cash balance per bank $ 5,463 The adjusted cash balance per bank agreed with the cash balance per books at July 31. The August bank statement showed the following checks and deposits. Bank Statement Checks Deposits Date Number Amount Date Amount $ $ , , , , , , , , , , , Total $11,208 Total $8,841 The cash records per books for August showed the following. Cash Payments Journal Date Number Amount Date Number Amount $ $ , , , ,508 Total $10,924 Cash Receipts Journal Date Amount 8-3 $ 1, , , , , , , , Total $10,578

30 30 CHAPTER 7 Internal Control and Cash The bank statement contained two bank memoranda: 1. A credit of $1,670 for the collection of a $1,600 note for Vincent Company plus interest of $80 and less a collection fee of $10. Vincent Company has not accrued any interest on the note. 2. A debit for the printing of additional company checks $70. At August 31, the cash balance per books was $5,117, and the cash balance per bank statement was $13,563. The bank did not make any errors, but Vincent Company made two errors. (a) Cash bal. $6,780 Prepare a bank reconciliation and adjusting entries. (SO 4) (a) Using the four steps in the reconciliation procedure described on page 330 of the textbook, prepare a bank reconciliation at August 31, (b) Prepare the adjusting entries based on the reconciliation. (Note: The correction of any errors pertaining to recording checks should be made to Accounts Payable. The correction of any errors relating to recording cash receipts should be made to Accounts Receivable.) P7-5C Bug Off Company provides insect extermination services. On October 31, 2007, the company s cash account per its general ledger showed a balance of $4,732. The bank statement from Newton Bank on that date showed the following balance. NEWTON BANK Checks and Debits Deposits and Credits Daily Balance XXX XXX ,070 A comparison of the details on the bank statement with the details in the cash account revealed the following facts. 1. The statement included a debit memo of $50 for the printing of additional company checks. 2. Cash sales of $342 on October 6 were deposited in the bank. The cash receipts journal entry and the deposit slip were incorrectly made for $372. The bank credited Bug Off Company for the correct amount. 3. Outstanding checks at October 31 totaled $1,250, and deposits in transit were $2, On October 13, the company issued check No for $196 to H. Simpson, on account. The check, which cleared the bank in May, was incorrectly journalized and posted by Bug Off Company for $ A $900 note receivable was collected by the bank for Bug Off Company on October 31 plus $50 interest. The bank charged a collection fee of $15. No interest has been accrued on the note. 6. Included with the cancelled checks was a check issued by Big Oaf Company for $120 that was incorrectly charged to Bug Off Company by the bank. 7. On October 31, the bank statement showed an NSF charge of $230 for a check issued by Tom Piper, a customer, to Bug Off Company on account. (a) Cash bal. $5,330 Prepare a cash budget. (SO 7) (a) Prepare the bank reconciliation at October 31, (b) Prepare the necessary adjusting entries for Bug Off Company at October 31, P7-6C You are provided with the following information taken from Keystone Inc. s May 31, 2007, balance sheet. Cash $ 11,000 Accounts receivable 47,600 Inventory 21,000 Property, plant, and equipment, net of depreciation 70,400 Accounts payable 18,200 Common stock 110,000 Retained earnings 21,800

31 Problems: Set C 31 Additional information concerning Keystone Inc. is as follows. 1. Gross profit is 40% of sales. 2. Actual and budgeted sales data: May (actual) $68,000 June (budgeted) 80, Sales are 30% for cash and 70% on credit. There are no sales discounts, and credit sales are collected in the month following the sale. 4. Half of a month s purchases are paid for in the month of purchase and half in the following month. Purchases of inventory totalled $36,400 for the month of May and are anticipated to total $55,000 for the month of June. Ending inventory is expected to be $28,000 at the end of June. 5. Cash operating costs are anticipated to be $21,300 for the month of June. 6. Equipment costing $6,000 will be purchased for cash in June. 7. The company wishes to maintain a minimum cash balance of $11,000. An open line of credit is available at the bank. All borrowing is done at the beginning of the month, and all repayments are made at the end of the month. The interest rate is 9% per year, and interest expense is accrued at the end of the month and paid in the following month. (a) Calculate cash collections in June for May and June sales. (b) Calculate the cash disbursements in June related to May and June purchases. (c) Prepare a cash budget for the month of June. Determine how much cash Keystone Inc. must borrow, or can repay, in June. P7-7C Benes Corporation prepares monthly cash budgets. Here are relevant data from operating budgets for (a) June cash collections $71,600 (c) June borrowings $1,400 Prepare a cash budget. (SO 7) January February Sales $280,000 $318,000 Purchases 112, ,000 Salaries 72,000 78,000 Administrative expenses 58,000 60,000 Selling expenses 30,000 36,000 All sales are on account. Collections are expected to be 50% in the month of sale, 35% in the first month following the sale, and 15% in the second month following the sale. Fifty percent (50%) of purchases are paid in cash in the month of purchase, and the balance due is paid in the month following the purchase. All other expenses are paid in the month incurred except for administrative expenses, which include $2,000 of depreciation per month. Other data: 1. Credit sales November 2006, $250,000; December 2006, $320, Purchases December 2006, $100, Other receipts January: collection of December 31, 2006, interest receivable $7,500; February: proceeds from sale of securities $8, Other disbursements January: pay $35,000 note payable due January 1, 2007; February: pay $6,000 cash dividend 5. The company s cash balance on January 1, 2007 is expected to be $40,000. The company wants to maintain a minimum cash balance of $40,000. An open line of credit is available at the bank. All borrowing is done at the beginning of the month, and all repayments are made at the end of the month. The interest rate is 9% per year, and interest expense is accrued at the end of the month and paid in the following month. The company s cash balance on January 1, 2007, is expected to be $41,000. The company wants to maintain a minimum cash balance of $40,000.

32 32 CHAPTER 7 Internal Control and Cash (a) Jan. customer collections $289,500 (b) Jan. 31 cash bal. $40,000 Prepare a comprehensive bank reconciliation with theft and internal control deficiencies. (SO 1, 2, 3, 4) (a) Prepare schedules for (1) expected collections from customers and (2) expected payments for purchases for January and February. (b) Prepare a cash budget for January and February. P7-8C At Your Service Company is a very profitable small business. It has not, however, given much consideration to internal control. For example, in an attempt to keep clerical and office expenses to a minimum, the company has combined the jobs of cashier and bookkeeper. As a result, Leon Quint handles all cash receipts, keeps the accounting records, and prepares the monthly bank reconciliations. The balance per the bank statement on March 31, 2007, was $5, Outstanding checks were: No. 206 for $358.53, No. 441 for $292, No. 590 for $183.00, No. 781 for $286.00, No. 782 for $319.47, and No. 783 for $ Included with the statement was a credit memorandum of $175 indicating the collection of a note receivable for At Your Service Company by the bank on March 21. This memorandum has not been recorded by At Your Service. The company s ledger showed one cash account with a balance of $6, The balance included undeposited cash on hand. Because of the lack of internal controls, Leon took for personal use all of the undeposited receipts in excess of $1, He then prepared the following bank reconciliation in an effort to conceal his theft of cash. Cash balance per books, March 31 $6, Add: Outstanding checks No. 781 $ No No , Less: Undeposited receipts 1, Unadjusted balance per bank, March 31 6, Less: Bank credit memorandum Cash balance per bank statement, March 31 $5, (a) Cash bal. $5, (a) Prepare a correct bank reconciliation. (Hint: Deduct the amount of the theft from the adjusted balance per books.) (b) Indicate the three ways that Leon attempted to conceal the theft and the dollar amount involved in each method. (c) What principles of internal control were violated in this case?

33 Problems: Set C 33 Problems: Set C P8-1C Happy Daze uses the allowance method to estimate uncollectible accounts receivable. The company produced the following aging of the accounts receivable at year end. Journalize transactions related to bad debts. (SO 2, 3) Number of Days Outstanding Total Over 120 Accounts receivable $435,000 $238,000 $120,000 $44,000 $13,000 $20,000 % uncollectible 1.5% 3% 8% 10% 15% Estimated uncollectible accounts (a) Calculate the total estimated bad debts based on the above information. (b) Prepare the year-end adjusting journal entry to record the bad debts using the aged uncollectible accounts receivable determined in (a). Assume the unadjusted balance in Allowance for Doubtful Accounts is a $5,400 debit. (c) Of the above accounts, $7,500 is determined to be specifically uncollectible. Prepare the journal entry to write off the uncollectible account. (d) The company collects $2,000 subsequently on a specific account that had previously been determined to be uncollectible in (c). Prepare the journal entry(ies) necessary to restore the account and record the cash collection. (e) Comment on how your answers to (a) (d) would change if Happy Daze used 4% of total accounts receivable, rather than aging the accounts receivable. What are the advantages to the company of aging the accounts receivable rather than applying a percentage to total accounts receivable? P8-2C At December 31, 2007, Super Heroes reported this information on its balance sheet. Accounts receivable $96,000 Less: Allowance for doubtful accounts 7,000 During 2008 the company had the following transactions related to receivables. 1. Sales on account $940, Sales returns and allowances 24, Collections of accounts receivable 880, Write-offs of accounts receivable deemed uncollectible 8, Recovery of bad debts previously written off as uncollectible 2,000 (a) Prepare the journal entries to record each of these five transactions. Assume that no cash discounts were taken on the collections of accounts receivable. (b) Enter the January 1, 2008, balances in Accounts Receivable and Allowance for Doubtful Accounts, post the entries to the two accounts (use T accounts), and determine the balances. (c) Prepare the journal entry to record bad debts expense for 2008, assuming that aging the accounts receivable indicates that estimated uncollectible accounts total $9,200. (d) Compute the receivables turnover ratio and average collection period. (a) Tot. est. bad debts $14,990 Prepare journal entries related to bad debt expense, and compute ratios. (SO 2, 3, 8) (b) A/R bal. $124,000

34 34 CHAPTER 8 Reporting and Analyzing Receivables Journalize transactions related to bad debts. (SO 2, 3) P8-3C Presented below is an aging schedule for Hendrix Company. Not Yet Number of Days Past Due Customer Total Due Over 90 Arias $ 18,000 $12,000 $6,000 Beyer 24,000 $24,000 Cappell 40,000 $ 25,000 15,000 Darrah 52,000 $52,000 Others 196,000 97,000 60,000 39,000 $330,000 $122,000 $87,000 $45,000 $24,000 $52,000 Estimated percentage uncollectible 1% 3% 9% 20% 40% Total estimated uncollectible accounts $ 33,480 $ 1,220 $ 2,610 $ 4,050 $ 4,800 $20,800 At December 31, 2007, the unadjusted balance in Allowance for Doubtful Accounts is a credit of $9,600. (c) Bad Debts Exp. $33,400 Compute bad debt amounts. (SO 3) (b) Bad Debts Exp. $11,200 Journalize entries to record transactions related to bad debts. (SO 2, 3) (a) Journalize and post the adjusting entry for bad debts at December 31, (Use T accounts.) (b) Journalize and post to the allowance account these 2008 events and transactions: 1. February 1, a $900 customer balance originating in 2007 is judged uncollectible. 2. July 1, a check for $900 is received from the customer whose account was written off as uncollectible on February 1. (c) Journalize the adjusting entry for bad debts at December 31, 2008, assuming that the unadjusted balance in Allowance for Doubtful Accounts is a debit of $2,800 and the aging schedule indicates that total estimated uncollectible accounts will be $30,600. P8-4C Here is information related to Evergreen Company for Total credit sales $920,000 Accounts receivable at December ,000 Bad debts written off 7,000 (a) What amount of bad debts expense will Evergreen Company report if it uses the direct write-off method of accounting for bad debts? (b) Assume Evergreen Company decides to estimate its bad debts expense based on 4% of accounts receivable. What amount of bad debts expense will the company record if Allowance for Doubtful Accounts has a credit balance of $2,000? (c) Assume the same facts as in part (b), except that there is a $3,000 debit balance in Allowance for Doubtful Accounts. What amount of bad debts expense will Evergreen record? (d) What is a weakness of the direct write-off method of reporting bad debts expense? P8-5C At December 31, 2007, the trial balance of Portia Company contained the following amounts before adjustment. Debits Credits Accounts Receivable $120,000 Allowance for Doubtful Accounts $ 2,800 Sales 680,000 (a) Prepare the adjusting entry at December 31, 2007, to record bad debts expense assuming that the aging schedule indicates that $7,600 of accounts receivable will be uncollectible.

35 Problems: Set C 35 (b) Repeat part (a) assuming that instead of a credit balance there is a $2,800 debit balance in the Allowance for Doubtful Accounts. (c) During the next month, January 2008, a $750 account receivable is written off as uncollectible. Prepare the journal entry to record the write-off. (d) Repeat part (c) assuming that Portia Company uses the direct write-off method instead of the allowance method in accounting for uncollectible accounts receivable. (e) What are the advantages of using an aging schedule and the allowance method in accounting for uncollectible accounts as compared to the direct write-off method? P8-6C On January 1, 2007, Aruba Company had Accounts Receivable of $87,400 and Allowance for Doubtful Accounts of $4,300. Aruba Company prepares financial statements annually and uses a perpetual inventory system. During the year the following selected transactions occurred. Jan. 8 Sold $9,000 of merchandise to Trinidad Company, terms n/30. Cost of the merchandise sold was $6,000. Feb. 6 Accepted a $9,000, 3-month, 8% promissory note from Trinidad Company for balance due. 15 Sold $11,500 of merchandise costing $8,000 to Martinique Company and accepted Martinique s $11,500, 4-month, 9% note for the balance due. Apr. 20 Sold $7,400 of merchandise costing $4,900 to Guadeloupe Co., terms n/ Accepted a $7,400, 2-month, 6% note from Guadeloupe Co. for balance due. May 6 Collected Trinidad Company note in full. June 15 Collected Martinique Company note in full. 20 Sold $4,000 of merchandise costing $2,900 to Puerto Rico Inc. and accepted a $4,000, 6-month, 8% note for the amount due. 28 Collected Guadeloupe Company note in full. (b) Bad Debts Exp. $10,400 Journalize various receivables transactions. (SO 1, 2, 4, 5) Journalize the transactions. P8-7C The president of Hampton Enterprises asks if you could indicate the impact certain transactions have on the following ratios. Explain the impact of transactions on ratios. (SO 8) Average Current Receivables Collection Ratio Turnover Period Transaction (2: 1) (10X) (36.5 days) 1. Recorded $4,300 sales on account. The cost of the goods sold was $2, Recorded bad debts expense of $800 using allowance method. 3. Wrote off a $300 account receivable as uncollectible. 4. Collected a $200 account receivable that had previously been written off. Complete the table, indicating whether each transaction will increase (I), decrease (D), or have no effect (NE) on the specific ratios provided for Hampton Enterprises. P8-8C OldeLine Company closes its books on September 30. On August 31, the Notes Receivable account balance is $20,600. Notes Receivable include the following. Date Maker Face Value Term Maturity Date Interest Rate May 11 Emeril Inc. $5, days Sept. 8 6% June 30 Alton Co. 6, days Sept. 28 8% July 31 Sarah Corp. 9,000 4 months Nov. 30 7% Prepare entries for various credit card and notes receivable transactions. (SO 2, 4, 5, 6, 9) GLS

36 36 CHAPTER 8 Reporting and Analyzing Receivables During September the following transactions were completed. Sept. 2 Made sales of $8,700 on OldeLine credit cards. 8 Received payment in full from Emeril Inc. on the amount due. 12 Made sales of $950 on Discover credit cards. The credit card service charge is 4%. 28 Received payment in full from Alton Co. on the amount due. (b) A/R bal. $8,700 (c) Tot. receivables $17,805 Calculate and interpret various ratios. (SO 7, 8) (a) Journalize the September transactions and the September 30 adjusting entry for accrued interest receivable. (Interest is computed using 360 days.) (b) Enter the balances at September 1 in the receivable accounts and post the entries to all of the receivable accounts. (Use T accounts.) (c) Show the balance sheet presentation of the receivable accounts at September 30. P8-9C Presented here is basic financial information (in millions) from the 2004 annual reports of Columbia Sportswear and The Timberland Company. Columbia Timberland Sales $1,095.3 $1,500.6 Allowance for doubtful accounts, Jan Allowance for doubtful accounts, Dec Accounts receivable balance (gross), Jan Accounts receivable balance (gross), Dec Calculate the receivables turnover ratio and average collection period for both companies. Comment on the difference in their collection experiences.

37 Problems: Set C 37 Problems: Set C P9-1C Owens Company was organized on January 1. During the first year of operations, the following plant asset expenditures and receipts were recorded in random order. Determine acquisition costs of land and building. (SO 1) Debits 1. Cost of real estate purchased as a plant site (land $280,000 and building $40,000) $ 320, Installation cost of fences around property 4, Cost of demolishing building to make land suitable for construction of new building 12, Excavation costs for new building 18, Building permit 1, Cost of parking lots and driveways 34, Architect s fees on building plans 27, Real estate taxes paid for the current year on land 6, Full payment to building contractor 750,000 Credits $1,173, Proceeds from sale of timber on land $6,000 Analyze the transactions using the following table column headings. Enter the number of each transaction in the Item column, and enter the amounts in the appropriate columns. For amounts in the Other Accounts column, also indicate the account title. Item Land Building Other Accounts Land $326,000 P9-2C At December 31, 2007, Goethe Corporation reported the following plant assets. Land $ 2,000,000 Buildings $21,600,000 Less: Accumulated depreciation buildings 7,920,000 13,680,000 Equipment 7,200,000 Less: Accumulated depreciation equipment 2,700,000 4,500,000 Total plant assets $20,180,000 Journalize equipment transactions related to purchase, sale, retirement, and depreciation. (SO 5, 8) During 2008, the following selected cash transactions occurred. Feb. 1 Purchased land for $1,400,000. Apr. 1 Sold equipment that cost $48,000 when purchased on January 1, The equipment was sold for $14,000. June 1 Sold land for $1,300,000. The land cost $900,000. Sept. 1 Purchased equipment for $96,000. Dec. 31 Retired equipment that cost $64,000 when purchased on December 31, No salvage value was received. (a) Journalize the transactions. (Hint: You may wish to set up T accounts, post beginning balances, and then post 2008 transactions.) Goethe uses straight-line depreciation for buildings and equipment. The buildings are estimated to have a 30-year useful life and no salvage value; the equipment is estimated to have an 8-year useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or retirement. (b) Record adjusting entries for depreciation for (c) Prepare the plant assets section of Goethe s balance sheet at December 31, (c) Tot. plant assets $19,140,000

38 38 CHAPTER 9 Reporting and Analyzing Long-Lived Assets Journalize entries for disposal of plant assets. (SO 5) P9-3C Presented here are selected transactions for Dark Arts Company for Jan. 1 Retired a piece of machinery that was purchased on January 1, The machine cost $96,000 on that date and had a useful life of 12 years with no salvage value. Sept. 30 Sold a computer that was purchased on January 1, The computer cost $28,000 and had a useful life of 4 years with no salvage value. The computer was sold for $9,000. Dec. 31 Discarded a delivery truck that was purchased on January 1, The truck cost $28,000 and was depreciated based on an 6-year useful life with a $4,000 salvage value. Journalize all entries required on the above dates, including entries to update depreciation, where applicable, on assets disposed of. Dark Arts Company uses straight-line depreciation. (Assume depreciation is up to date as of December 31, 2006.) Prepare entries to record transactions related to acquisition and amortization of intangibles; prepare the intangible assets section and note. (SO 7, 8) P9-4C The intangible assets section of Ewing Corporation s balance sheet at December 31, 2007, is presented here. Patents ($56,000 cost less $16,000 amortization) $40,000 Copyrights ($42,000 cost less $28,000 amortization) 14,000 Total $54,000 The patent was acquired in January 2006 and has a useful life of 7 years. The copyright was acquired in January 2000 and also has a useful life of 12 years. The following cash transactions may have affected intangible assets during Jan. 2 Paid $25,000 legal costs to successfully defend the patent against infringement by another company. Jan. June Developed a new product, incurring $185,000 in research and development costs. A patent was granted for the product on July 1, and its useful life is equal to its legal life. Legal and other costs for the patent were $7,000. Aug. 1 Acquired a copyright for $150,000. The copyright has a useful life and legal life of 50 years. Sept. 1 Paid $65,000 to a quarterback to appear in commercials advertising the company s products. The commercials will air in September and October. (c) Tot. intangibles $218,075 Prepare entries to correct errors in recording and amortizing intangible assets. (SO 7) (a) Prepare journal entries to record the transactions. (b) Prepare journal entries to record the 2008 amortization expense for intangible assets. (c) Prepare the intangible assets section of the balance sheet at December 31, (d) Prepare the note to the financial statements on Ewing Corporation s intangible assets as of December 31, P9-5C Due to rapid employee turnover in the accounting department, the following transactions involving intangible assets were improperly recorded by Folger Corporation in Folger developed a new manufacturing process, incurring research and development costs of $220,000. The company also purchased a patent for $48,000. In early January Folger capitalized $268,000 as the cost of the patents. Patent amortization expense of $13,400 was recorded based on a 20-year useful life. 2. On July 1, 2007, Folger purchased a small company and as a result acquired goodwill of $40,000. Folger recorded a half-year s amortization in 2007, based on a 10-year life ($2,000 amortization). The goodwill has an indefinite life. Prepare all journal entries necessary to correct any errors made during Assume the books have not yet been closed for 2007.

39 Problems: Set C 39 P9-6C Snow White Corporation and Sleeping Beauty Corporation, two companies of roughly the same size, are both involved in the manufacture of formalwear. Each company depreciates its plant assets using the straight-line approach. An investigation of their financial statements reveals the following information. Calculate and comment on return on assets, profit margin, and asset turnover ratio. (SO 6) Snow White Corp. Sleeping Beauty Corp. Net income $ 250,000 $ 320,000 Sales 1,280,000 1,400,000 Total assets (average) 2,800,000 2,600,000 Plant assets (average) 2,100,000 1,700,000 Intangible assets (goodwill) 250,000 0 (a) For each company, calculate these values: (1) Return on assets ratio. (2) Profit margin. (3) Asset turnover ratio. (b) Based on your calculations in part (a), comment on the relative effectiveness of the two companies in using their assets to generate sales. What factors complicate your ability to compare the two companies? *P9-7C In recent years Singh Company has purchased three machines. Because of frequent employee turnover in the accounting department, a different accountant was in charge of selecting the depreciation method for each machine, and various methods have been used. Information concerning the machines is summarized in the table below. Compute depreciation under different methods. (SO 3, 9) Salvage Useful Life Machine Acquired Cost Value (in years) Depreciation Method 1 July 1, 2004 $68,000 $5,000 7 Straight-line 2 Apr. 1, ,000 6,000 4 Declining-balance 3 Sept. 1, ,000 4,000 8 Units-of-activity For the declining-balance method, Singh Company uses the double-declining rate. For the units-of-activity method, total machine hours are expected to be 40,000. Actual hours of use in the first 3 years were: 2005, 1,200; 2006, 6,400; and 2007, 7,000. (a) Compute the amount of accumulated depreciation on each machine at December 31, (b) If machine 2 was purchased on November 1 instead of April 1, what would be the depreciation expense for this machine in 2005? In 2006? *P9-8C Darius Corporation purchased machinery on January 1, 2007, at a cost of $310,000. The estimated useful life of the machinery is 5 years, with an estimated residual value at the end of that period of $10,000. The company is considering different depreciation methods that could be used for financial reporting purposes. (a) Prepare separate depreciation schedules for the machinery using the straight-line method, and the declining-balance method using double the straight-line rate. Round to the nearest dollar. (b) Which method would result in the higher reported 2007 income? In the highest total reported income over the 5-year period? (c) Which method would result in the lower reported 2007 income? In the lowest total reported income over the 5-year period? (a) Machine 2 $50,625 Compute depreciation under different methods. (SO 3, 9) (a) Double-decliningbalance expense 2009 $44,640

40 40 CHAPTER 10 Reporting and Analyzing Liabilities Problems: Set C Prepare current liability entries, adjusting entries, and current liabilities section. (SO 1, 2, 3, 7) GLS P10-1C On January 1, 2007, the ledger of Edina Company contained these liability accounts. Accounts Payable $36,800 Sales Taxes Payable 5,300 Unearned Service Revenue 12,400 During January the following selected transactions occurred. Jan. 1 Borrowed $16,000 in cash from Shoreline Bank on a 3-month, 9%, $16,000 note. 7 Sold merchandise for cash totaling $19,610, which includes 6% sales taxes. 10 Provided services for customers who had made advance payments of $8,000. (Credit Service Revenue.) 15 Paid state treasurer s department for sales taxes collected in December 2006, $5, Sold 700 units of a new product on credit at $40 per unit, plus 6% sales tax. During January the company s employees earned wages of $56,000. Withholdings related to these wages were $4,284 for Social Security (FICA), $6,000 for federal income tax, and $2,500 for state income tax. The company owed no money related to these earnings for federal or state unemployment tax. Assume that wages earned during January will be paid during February. No entry had been recorded for wages or payroll tax expense as of January 31. (c) Tot. current liabilities $120,394 Journalize and post note transactions; show balance sheet presentation. (SO 2, 7) (b) Interest Payable $1,000 (a) Journalize the January transactions. (b) Journalize the adjusting entries at January 31 for the outstanding note payable and for wages expense and payroll tax expense. (c) Prepare the current liabilities section of the balance sheet at January 31, Assume no change in Accounts Payable. P10-2C On Board Corporation sells skateboard products and also operates an indoor skating facility. During the last part of 2007, On Board had the following transactions related to notes payable. Aug. 1 Issued a $6,000 note to FreeStyle to purchase inventory. The 3-month note payable bears interest of 9% and is due November 1. Aug. 31 Recorded accrued interest for the FreeStyle note. Sept. 1 Issued a $15,000, 8%, 6-month note to Commerce Bank to finance the purchase of a new ramp for advanced boarders. The note is due March 1. Sept. 30 Recorded accrued interest for the FreeStyle note and the Commerce Bank note. Oct. 1 Issued a $30,000 note and paid $10,000 cash to repair and improve its building. This note bears interest of 8% and matures in 12 months. Oct. 31 Recorded accrued interest for the FreeStyle note, the Commerce Bank note, and the improvement note. Nov. 1 Paid principal and interest on the FreeStyle note. Nov. 30 Recorded accrued interest for the Commerce Bank note and the improvement note. Dec. 31 Recorded accrued interest for the Commerce Bank note and the improvement note. (a) Prepare journal entries for the transactions noted above. (b) Post the above entries to the Notes Payable, Interest Payable, and Interest Expense accounts. (Use T accounts.) (c) Show the balance sheet presentation of notes payable and interest payable at December 31. (d) How much interest expense relating to notes payable did On Board incur during the year?

41 Problems: Set C 41 P10-3C The following section is taken from Merlyn s balance sheet at December 31, Current liabilities Bond interest payable $ 36,000 Long-term liabilities Bonds payable, 6%, due January 1, ,000 Interest is payable annually on January 1. The bonds are callable on any annual interest date. Prepare journal entries to record interest payments and redemption of bonds. (SO 5, 6) (a) Journalize the payment of the bond interest on January 1, (b) Assume that on January 1, 2007, after paying interest, Merlyn calls bonds having a face value of $60,000. The call price is 103. Record the redemption of the bonds. (c) Prepare the adjusting entry on December 31, 2007, to accrue the interest on the remaining bonds. P10-4C On November 1, 2006, Angela Corp. issued $300,000, 5%, 10-year bonds at face value. The bonds were dated November 1, 2006, and pay interest annually on November 1. Financial statements are prepared annually on December 31. (a) Prepare the journal entry to record the issuance of the bonds. (b) Prepare the adjusting entry to record the accrual of interest on December 31, (c) Show the balance sheet presentation of bonds payable and bond interest payable on December 31, (d) Prepare the journal entry to record the payment of interest on November 1, (e) Prepare the adjusting entry to record the accrual of interest on December 31, (f) Assume that on January 1, 2008, Angela pays the accrued bond interest and calls the bonds. The call price is 104. Record the payment of interest and redemption of the bonds. P10-5C Dunhill Company sold $800,000, 7%, 15-year bonds on January 1, The bonds were dated January 1, 2007, and pay interest on December 31. The bonds were sold at 97. (a) Prepare the journal entry to record the issuance of the bonds on January 1, (b) At December 31, 2007, $1,600 of the bond discount had been amortized. Show the balance sheet presentation of the bond liability at December 31, (Assume that interest has been paid.) (c) At December 31, 2008, when the carrying value of the bonds was $779,200, the company redeemed the bonds at 101. Record the redemption of the bonds assuming that interest for the year had already been paid. P10-6C You have been presented with the following selected information taken from the financial statements of Kellogg Company. Prepare journal entries to record issuance of bonds, interest, balance sheet presentation, and bond redemption. (SO 5, 6, 7) (f) Loss $12,000 Prepare journal entries to record issuance of bonds, show balance sheet presentation, and record bond redemption. (SO 5, 6, 7) (c) Loss $28,800 Calculate and comment on ratios. (SO 7) KELLOGG COMPANY Balance Sheet (partial) December 31 (in millions) Total current assets $ 2,121.8 $ 1,787.9 Noncurrent assets 8, ,354.8 Total assets $10,790.4 $10,142.7 Current liabilities $ 2,846.0 $ 2,766.0 Long-term liabilities 5, ,933.5 Total liabilities 8, ,699.5 Shareholders equity 2, ,443.2 Total liabilities and shareholders equity $10,790.4 $10,142.7

42 42 CHAPTER 10 Reporting and Analyzing Liabilities Other information: Net income (loss) $ $ Income tax expense Interest expense Cash provided by operations 1, ,171.0 Capital expenditures Cash dividends Note 6. Leases and Other Commitments The Company s leases are generally for equipment and warehouse space. Future minimum annual lease payments under noncancelable operating leases were as follows: 2005, $87.2; 2006, $72.5; 2007, $57.0; 2008, $44.9; 2009, $76.7; after 2009, $65.9. (a) Calculate each of the following ratios for 2004 and (1) Current ratio. (2) Free cash flow. (3) Debt to total assets. (4) Times interest earned ratio. (b) Comment on the trend in ratios. (c) Read the company s note on leases. If the operating leases had instead been accounted for like a purchase, assets and liabilities would increase by approximately $324.2 million. Recalculate the debt to total assets ratio for 2004 in light of this information, and discuss the implictions for analysis. Prepare journal entries to record interest payments, straight-line discount amortization, and redemption of bonds. (SO 5, 6, 8) *P10-7C The information below is taken from Lolly Corp. s balance sheet at December 31, Current liabilities Bond interest payable $ 105,000 Long-term liabilities Bonds payable, 7%, due January 1, 2014 $1,500,000 Plus: Premium on bonds payable 13,500 1,513,500 Interest is payable annually on January 1. The bonds are callable on any annual interest date. Lolly uses straight-line amortization for any bond premium or discount. From December 31, 2007, the bonds will be outstanding for an additional 6 years (72 months). (c) Loss $19,500 Prepare journal entries to record issuance of bonds, interest, and straight-line amortization, and balance sheet presentation. (SO 5, 7, 8) (Round all computations to the nearest dollar.) (a) Journalize the payment of bond interest on January 1, (b) Prepare the entry to amortize bond premium and to accrue the interest on December 31, (c) Assume on January 1, 2009, after paying interest, that Lolly Corp. calls bonds having a face value of $600,000. The call price is 104. Record the redemption of the bonds. (d) Prepare the adjusting entry at December 31, 2009, to amortize bond premium and to accrue interest on the remaining bonds. *P10-8C Nish Corporation sold $2,200,000, 8%, 5-year bonds on January 1, The bonds were dated January 1, 2007, and pay interest on January 1. Nish Corporation uses the straight-line method to amortize bond premium or discount. (a) Prepare all the necessary journal entries to record the issuance of the bonds and bond interest expense for 2007, assuming that the bonds sold at 102. (b) Prepare journal entries as in part (a) assuming that the bonds sold at 99. (c) Show the balance sheet presentation for the bond issue at December 31, 2007, using (1) the 102 selling price, and then (2) the 99 selling price.

43 Problems: Set C 43 *P10-9C Zaidi Co. sold $3,000,000, 7%, 8-year bonds on January 1, The bonds were dated January 1, 2007, and pay interest on January 1. The company uses straight-line amortization on bond premiums and discounts. Financial statements are prepared annually. (a) Prepare the journal entries to record the issuance of the bonds assuming they sold at: (1) 103. (2) 98. (b) Prepare amortization tables for both assumed sales for the first three interest payments. (c) Prepare the journal entries to record interest expense for 2007 under both assumed sales. (d) Show the balance sheet presentation for both assumed sales at December 31, *P10-10C On January 1, 2007, Chiu Corporation issued $800,000 face value, 6%, 15-year bonds at $727,137. This price resulted in an effective-interest rate of 7% on the bonds. Chiu uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest January 1. (Round all computations to the nearest dollar.) (a) Prepare the journal entry to record the issuance of the bonds on January 1, (b) Prepare an amortization table through December 31, 2009 (three interest periods) for this bond issue. (c) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, (d) Prepare the journal entry to record the payment of interest on January 1, (e) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, *P10-11C On January 1, 2007, Lopez Company issued $1,600,000 face value, 7%, 10-year bonds at $1,780,903. This price resulted in a 5.5% effective-interest rate on the bonds. Lopez uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest on each January 1. (a) Prepare the journal entries to record the following transactions. (1) The issuance of the bonds on January 1, (2) Accrual of interest and amortization of the premium on December 31, (3) The payment of interest on January 1, (4) Accrual of interest and amortization of the premium on December 31, (b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2008, balance sheet. (c) Provide the answers to the following questions in narrative form. (1) What amount of interest expense is reported for 2008? (2) Would the bond interest expense reported in 2008 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used? *P10-12C Masood purchased a new piece of equipment to be used in its new facility. The $380,000 piece of equipment was purchased with a $40,000 down payment and with cash received through the issuance of a $340,000, 9%, 5-year mortgage note payable issued on October 1, The terms provide for quarterly installment payments of $21,298 on December 31, March 31, June 30, and September 30. (Round all computations to the nearest dollar.) (a) Prepare an installment payments schedule for the first five payments of the notes payable. (b) Prepare all journal entries related to the notes payable for December 31, (c) Show the balance sheet presentation for this obligation for December 31, (Hint: Be sure to distinguish between the current and long-term portions of the note.) *P10-13C Hakan Paydak has just approached a venture capitalist for financing for a new business venture, the development of a local ski hill. On July 1, 2007, Hakan was loaned Prepare journal entries to record issuance of bonds, interest, and straight-line amortization, and balance sheet presentation. (SO 5, 6, 8) (c) (1) Interest Expense $198,750 Prepare journal entries to record issuance of bonds, payment of interest, and amortization of bond discount using effectiveinterest method. (SO 9) (c) Interest Expense $50,900 Prepare journal entries to record issuance of bonds, payment of interest, and effective-interest amortization, and balance sheet presentation. (SO 5, 7, 9) (a) (4) Interest Expense $97,177 Prepare installment payments schedule, journal entries, and balance sheet presentation for a mortgage note payable. (SO 7, 10) (c) Current portion $57,732 Prepare journal entries to record payments for longterm note payable, and balance sheet presentation. (SO 7, 10)

44 44 CHAPTER 10 Reporting and Analyzing Liabilities $120,000 at an annual interest rate of 8%. The loan is repayable over 5 years in annual installments of $30,055, principal and interest, due each June 30. The first payment is due June 30, Hakan uses the effective-interest method for amortizing debt. The ski hill company s year-end will be June 30. (b) 6/30/08 Interest Expense $9,600 (a) Prepare an amortization schedule for the 5 years, Round all calculations to the nearest dollar. (b) Prepare all journal entries for Hakan Paydak for the first 2 fiscal years ended June 30, 2008, and June 30, Round all calculations to the nearest dollar. (c) Show the balance sheet presentation of the note payable as of June 30, (Hint: Be sure to distinguish between the current and long-term portions of the note.)

45 Problems: Set C 45 Problems: Set C P11-1C Pickwick Corporation was organized on January 1, It is authorized to issue 50,000 shares of 8%, $75 par value preferred stock and 700,000 shares of no-par common stock with a stated value of $2 per share. The following stock transactions were completed during the first year. Jan. 7 Issued 90,000 shares of common stock for cash at $5 per share. Feb. 12 Issued 7,000 shares of preferred stock for cash at $77 per share. June 30 Issued 65,000 shares of common stock for cash at $6 per share. Aug. 24 Issued 25,000 shares of common stock for cash at $6.50 per share. Dec. 1 Issued 2,000 shares of preferred stock for cash at $79 per share. (a) Journalize the transactions. (b) Post to the stockholders equity accounts. (Use T accounts.) (c) Prepare the paid-in capital portion of the stockholders equity section at December 31, P11-2C The stockholders equity accounts of Pareek Corporation on January 1, 2007, were as follows. Preferred Stock (6%, $50 par noncumulative, 8,000 shares authorized) $ 175,000 Common Stock ($1 stated value, 400,000 shares authorized) 250,000 Paid-in Capital in Excess of Par Value Preferred Stock 7,000 Paid-in Capital in Excess of Stated Value Common Stock 4,000,000 Retained Earnings 950,000 Treasury Stock Common (12,000 shares) 66,000 During 2007 the corporation had the following transactions and events pertaining to its stockholders equity. Journalize stock transactions, post, and prepare paid-in capital section. (SO 2, 4, 7) GLS (c) Tot. paid-in capital $1,699,500 Journalize transactions, post, and prepare a stockholders equity section; calculate ratios. (SO 2, 3, 5, 7, 8) GLS Feb. 1 Issued 7,000 shares of common stock for $126,000. July 12 Purchased 2,000 additional shares of common treasury stock at $17 per share. Oct. 1 Declared a 6% cash dividend on preferred stock, payable November 1. Nov. 1 Paid the dividend declared on October 1. Dec. 1 Declared a $2.00 per share cash dividend to common stockholders of record on December 15, payable December 31, Determined that net income for the year was $930,000. Paid the dividend declared on December 1. (a) Journalize the transactions. (Include entries to close net income to Retained Earnings.) (b) Enter the beginning balances in the accounts and post the journal entries to the stockholders equity accounts. (Use T accounts.) (c) Prepare the stockholders equity section of the balance sheet at December 31, (d) Calculate the payout ratio, earnings per share, and return on common stockholders equity ratio. (Note: Use the common shares outstanding on January 1 and December 31 to determine the average shares outstanding.) P11-3C On December 31, 2006, Jochims Company had 820,000 shares of $10 par common stock issued and outstanding. The stockholders equity accounts at December 31, 2006, had the balances listed here. (c) Tot. paid-in capital $4,558,000 Prepare a stockholders equity section. (SO 7) Common Stock $8,200,000 Additional Paid-in Capital 2,460,000 Retained Earnings 1,600,000 Transactions during 2007 and other information related to stockholders equity accounts were as follows. 1. On January 18, 2007, issued at $107 per share 80,000 shares of $100 par value, 7% cumulative preferred stock.

46 46 CHAPTER 11 Reporting and Analyzing Stockholders Equity 2. On March 23, 2007, reacquired 20,000 shares of its common stock for $15 per share. 3. On June 8, 2007, declared a cash dividend of $1.60 per share on the common stock outstanding, payable on July 10, 2007, to stockholders of record on July 1, On December 15, 2007, declared the yearly cash dividend on preferred stock, payable January 12, 2008, to stockholders of record on December 15, Net income for the year was $2,900,000. Tot. stockholders equity $21,580,000 Reproduce retained earnings account, and prepare a stockholders equity section. (SO 5, 6, 7) (b) Tot. paid-in capital $3,510,000 Prepare entries for stock transactions, and prepare a stockholders equity section. (SO 2, 3, 4, 7) (b) Tot. stockholders equity $12,422,000 Prepare a stockholders equity section. (SO 7) Prepare the stockholders equity section of Jochims balance sheet at December 31, P11-4C The ledger of Ninomiya Corporation at December 31, 2007, after the books have been closed, contains the following stockholders equity accounts. Preferred Stock (8,000 shares issued) $ 800,000 Common Stock (430,000 shares issued) 860,000 Paid-in Capital in Excess of Par Value Preferred Stock 100,000 Paid-in Capital in Excess of Stated Value Common Stock 1,750,000 Retained Earnings 2,872,000 A review of the accounting records reveals this information: 1. Preferred stock is 10%, $100 par value, noncumulative. Since January 1, 2006, 8,000 shares have been outstanding; 20,000 shares are authorized. 2. Common stock is no-par with a stated value of $2 per share; 500,000 shares are authorized. 3. The January 1, 2007, balance in Retained Earnings was $2,450, On October 1, 80,000 shares of common stock were sold for cash at $8 per share. 5. A cash dividend of $553,000 was declared and properly allocated to preferred and common stock on November 1. No dividends were paid to preferred stockholders in Net income for the year was $975, On December 31, 2007, the directors authorized disclosure of a $160,000 restriction of retained earnings for plant expansion. (Use Note A.) (a) Reproduce the retained earnings account (T account) for the year. (b) Prepare the stockholders equity section of the balance sheet at December 31. P11-5C Romero Corporation has been authorized to issue 25,000 shares of $100 par value, 8%, noncumulative preferred stock and 1,000,000 shares of no-par common stock. The corporation assigned a $4 stated value to the common stock. At December 31, 2007, the ledger contained the following balances pertaining to stockholders equity. Preferred Stock $ 400,000 Paid-in Capital in Excess of Par Value Preferred Stock 72,000 Common Stock 2,400,000 Paid-in Capital in Excess of Stated Value Common Stock 6,600,000 Treasury Stock Common (40,000 shares) 680,000 Retained Earnings 3,630,000 The preferred stock was issued for $472,000 cash. All common stock issued was for cash. In November 40,000 shares of common stock were purchased for the treasury at a per share cost of $17. No dividends were declared in (a) Prepare the journal entries for the following. (1) Issuance of preferred stock for cash. (2) Issuance of common stock for cash. (3) Purchase of common treasury stock for cash. (b) Prepare the stockholders equity section of the balance sheet at December 31, P11-6C On January 1, 2007, Matusiak Inc. had these stockholders equity balances. Common Stock, $5 par (2,000,000 shares authorized, 600,000 shares issued and outstanding) $3,000,000 Paid-in Capital in Excess of Par Value 1,800,000 Retained Earnings 810,000

47 Problems: Set C 47 During 2007, the following transactions and events occurred. 1. Issued 75,000 shares of $5 par value common stock for $9 per share. 2. Issued 60,000 shares of common stock for cash at $9.50 per share. 3. Purchased 25,000 shares of common stock for the treasury at $10 per share. 4. Declared and paid a cash dividend of $355, Earned net income of $860,000. Prepare the stockholders equity section of the balance sheet at December 31, P11-7C Devang Company manufactures disc golf equipment. During 2007 Devang issued bonds at 8% interest and used the cash proceeds to purchase treasury stock. The following financial information is available for Devang Company for the years 2007 and Tot. stockholders equity $7,110,000 Evaluate a company s profitability and solvency. (SO 8) Sales $ 6,000,000 $ 6,000,000 Net income 1,460,000 1,500,000 Interest expense 280, ,000 Tax expense 630, ,000 Dividends paid 770, ,000 Total assets (year-end) 9,500,000 8,600,000 Average total assets 8,800,000 9,100,000 Total liabilities (year-end) 4,000,000 2,000,000 Average total stockholders equity 5,700,000 7,400,000 (a) Use the information above to calculate the following ratios for both years: (i) return on assets ratio, (ii) return on common stockholders equity ratio, (iii) payout ratio, (iv) debt to total assets ratio, (v) times interest earned ratio. (b) Referring to your findings in part (a), discuss the changes in the company s profitability from 2006 to (c) Referring to your findings in part (a), discuss the changes in the company s solvency from 2006 to (d) Based on your findings in (b), was the decision to issue debt to purchase common stock a wise one? *P11-8C On January 1, 2007, Labovitz Corporation had these stockholders equity accounts. Common Stock ($2 par value, 80,000 shares issued and outstanding) $160,000 Paid-in Capital in Excess of Par Value 400,000 Retained Earnings 580,000 During the year, the following transactions occurred. Jan. 10 Declared a $0.50 cash dividend per share to stockholders of record on January 31, payable February 28. Feb. 28 Paid the dividend declared in January. May 1 Declared a 5% stock dividend to stockholders of record on May 10, distributable June 1. On May 1, the market price of the stock was $9 per share. June 1 Issued the shares for the stock dividend. Dec. 1 Declared a $0.75 per share cash dividend to stockholders of record on December 15, payable January 10, Determined that net income for the year was $320,000. (a) Journalize the transactions. (Include entries to close net income to Retained Earnings.) (b) Enter the beginning balances and post the entries to the stockholders equity T accounts. (Note: Open additional stockholders equity accounts as needed.) (c) Prepare the stockholders equity section of the balance sheet at December 31. (d) Calculate the payout ratio and return on common stockholders equity ratio. Prepare dividend entries, prepare a stockholders equity section, and calculate ratios. (SO 5, 7, 8, 9) GLS (c) Tot. stockholders equity $1,357,000

48 48 CHAPTER 12 Statement of Cash Flows Problems: Set C Distinguish among operating, investing, and financing activities. (SO 6) P12-1C You are provided with the following transactions that took place during a recent fiscal year. Cash Inflow, Where Reported Outflow, or Transaction on Statement No Effect? (a) Purchased shares of common treasury stock. (b) Distributed a stock dividend to common stockholders. (c) Recorded cash sales. (d) Recorded sales on account. (e) Recorded prepayment of insurance expense. (f) Purchased supplies on account. (g) Recorded amortization expense on a patent. (h) Recorded and received interest revenue. (i) Recorded cash proceeds from a sale of plant assets. (j) Acquired land by issuing a note payable. Complete the table indicating whether each item (1) should be reported as an operating (O) activity, investing (I) activity, financing (F) activity, or as a noncash (NC) transaction reported in a separate schedule, and (2) represents a cash inflow or cash outflow or has no cash flow effect. Assume use of the indirect approach. Determine cash flow effects of changes in equity accounts. (SO 4) P12-2C The following account balances relate to the stockholders equity accounts of Bakhtiar Corp. at year-end Common stock, 9,800 and 8,000 shares, respectively, for 2007 and 2006 $200,600 $160,000 Preferred stock, 3,000 shares 225, ,000 Retained earnings 218, ,000 A small stock dividend was declared and issued in The market value of the shares was $17,600. Cash dividends were $18,000 in both 2007 and The common stock has no par or stated value. (a) Net income $44,000 (a) What was the amount of net income reported by Bakhtiar Corp. in 2007? (b) Determine the amounts of any cash inflows or outflows related to the common stock and dividend accounts in (c) Indicate where each of the cash inflows or outflows identified in (b) would be classified on the statement of cash flows. Prepare the operating activities section indirect method. (SO 4) P12-3C The income statement of Von Roenn Company is presented here. VON ROENN COMPANY Income Statement For the Year Ended November 30, 2007 Sales $6,400,000 Cost of goods sold Beginning inventory $1,200,000 Purchases 4,140,000 Goods available for sale 5,340,000

49 Problems: Set C 49 Ending inventory 1,500,000 Cost of goods sold 3,840,000 Gross profit 2,560,000 Operating expenses Selling expenses 540,000 Administrative expenses 900,000 1,440,000 Net income $1,120,000 Additional information: 1. Accounts receivable decreased $180,000 during the year, and inventory increased $300, Prepaid expenses decreased $210,000 during the year. 3. Accounts payable to suppliers of merchandise increased $290,000 during the year. 4. Accrued expenses payable decreased $75,000 during the year. 5. Administrative expenses include depreciation expense of $84,000. Prepare the operating activities section of the statement of cash flows for the year ended November 30, 2007, for Von Roenn Company, using the indirect method. *P12-4C Data for Von Roenn Company are presented in P12-3C. Prepare the operating activities section of the statement of cash flows using the direct method. *P12-5C below. Chamay Company s income statement contained the condensed information CHAMAY COMPANY Income Statement For the Year Ended December 31, 2007 Cash from operations $1,509,000 Prepare the operating activities section direct method. (SO 6) Cash from operations $1,509,000 Prepare the operating activities section indirect method. (SO 4) Revenues $850,000 Operating expenses, excluding depreciation $506,000 Depreciation expense 56,000 Loss on sale of equipment 4, ,000 Income before income taxes 284,000 Income tax expense 80,000 Net income $204,000 Chamay s balance sheet contained the comparative data at December 31, below Accounts receivable $72,000 $65,000 Accounts payable 27,000 31,000 Income taxes payable 23,000 18,000 Accounts payable pertain to operating expenses. Prepare the operating activities section of the statement of cash flows using the indirect method. *P12-6C Data for Chamay Company are presented in P12-5C. Prepare the operating activities section of the statement of cash flows using the direct method. Cash from operations $258,000 Prepare the operating activities section direct method. (SO 6) Cash from operations $258,000

50 50 CHAPTER 12 Statement of Cash Flows Prepare a statement of cash flows indirect method, and compute cash-based ratios. (SO 4, 5) P12-7C Presented below are the financial statements of Shafi Company. SHAFI COMPANY Comparative Balance Sheets December 31 Assets Cash $ 37,000 $ 26,000 Accounts receivable 55,000 43,000 Merchandise inventory 34,000 38,000 Property, plant, and equipment 162, ,000 Accumulated depreciation (36,000) (32,000) Total $252,000 $187,000 Liabilities and Stockholders Equity Accounts payable $ 20,000 $ 27,000 Income taxes payable 19,000 15,000 Bonds payable 60,000 50,000 Common stock 42,000 30,000 Retained earnings 111,000 65,000 Total $252,000 $187,000 SHAFI COMPANY Income Statement For the Year Ended December 31, 2007 Sales $448,000 Cost of goods sold 272,000 Gross profit 176,000 Selling expenses $45,000 Administrative expenses 9,000 54,000 Income from operations 122,000 Interest expense 4,000 Income before income taxes 118,000 Income tax expense 32,000 Net income $ 86,000 Additional data: 1. Dividends declared and paid were $40, During the year equipment was sold for $3,000 cash. This equipment cost $15,000 originally and had a book value of $3,000 at the time of sale. 3. Equipment costing $65,000 was purchased for cash during the year. 4. All depreciation expense is in the selling expense category. 5. All sales and purchases are on account. (a) Cash from operations $91,000 Prepare a statement of cash flows direct method, and compute cash-based ratios. (SO 5, 6) (a) Cash from operations $91,000 (a) Prepare a statement of cash flows using the indirect method. (b) Compute these cash-basis measures: (1) Current cash debt coverage ratio. (2) Cash debt coverage ratio. (3) Free cash flow. *P12-8C Data for Shafi Company are presented in P12-7C. Further analysis reveals the following. 1. Accounts payable pertain to merchandise suppliers. 2. All operating expenses except for depreciation were paid in cash. (a) Prepare a statement of cash flows for Shafi Company using the direct method.

51 Problems: Set C 51 (b) Compute these cash-basis measures: (1) Current cash debt coverage ratio. (2) Cash debt coverage ratio. (3) Free cash flow. P12-9C Condensed financial data of Tomasi Inc. follow. TOMASI INC. Comparative Balance Sheets December 31 Assets Cash $ 27,000 $ 33,000 Accounts receivable 57,000 41,000 Inventories 45,000 48,000 Prepaid expenses 17,000 14,000 Investments 162, ,000 Plant assets 580, ,000 Accumulated depreciation (211,000) (180,000) Total $677,000 $606,000 Liabilities and Stockholders Equity Accounts payable $ 44,000 $ 51,000 Accrued expenses payable 21,000 15,000 Bonds payable 180, ,000 Common stock 175, ,000 Retained earnings 257, ,000 Total $677,000 $606,000 Prepare a statement of cash flows indirect method. (SO 4) TOMASI INC. Income Statement Data For the Year Ended December 31, 2007 Sales $600,000 Less: Cost of goods sold $290,000 Operating expenses, excluding depreciation 65,000 Depreciation expense 50,000 Income taxes 47,000 Interest expense 12,000 Loss on sale of plant assets 9, ,000 Net income $127,000 Additional information: 1. New plant assets costing $90,000 were purchased for cash during the year. 2. Old plant assets having an original cost of $30,000 were sold for $2,000 cash. 3. Bonds matured and were paid off at face value for cash. 4. A cash dividend of $40,000 was declared and paid during the year. Prepare a statement of cash flows using the indirect method. *P12-10C Data for Tomasi Inc. are presented in P12-9C. Further analysis reveals that accounts payable pertain to merchandise creditors. Prepare a statement of cash flows for Tomasi Inc. using the direct method. P12-11C The comparative balance sheets for Borkovec Company as of December 31 are presented on the next page. Cash from operations $169,000 Prepare a statement of cash flows direct method. (SO 6) Cash from operations $169,000 Prepare a statement of cash flows indirect method. (SO 4)

52 52 CHAPTER 12 Statement of Cash Flows BORKOVEC COMPANY Comparative Balance Sheets December 31 Assets Cash $ 91,000 $ 78,000 Accounts receivable 81,000 70,000 Inventory 52,000 55,000 Prepaid expenses 22,000 18,000 Land 110, ,000 Equipment 264, ,000 Accumulated depreciation equipment (90,000) (80,000) Building 300, ,000 Accumulated depreciation building (60,000) (50,000) Total $770,000 $745,000 Liabilities and Stockholders Equity Accounts payable $ 26,000 $ 35,000 Bonds payable 350, ,000 Common stock, $1 par 170, ,000 Retained earnings 224, ,000 Total $770,000 $745,000 Additional information: 1. Operating expenses include depreciation expense of $48, Land was sold for cash at book value. 3. Cash dividends of $12,000 were paid. 4. Net income for 2007 was $46, Equipment was purchased for $88,000 cash. In addition, equipment costing $34,000 with a book value of $6,000 was sold for $9,000 cash. 6. Bonds were converted at face value by issuing 50,000 shares of $1 par value common stock. Cash from operations $70,000 Identify the impact of transactions on ratios. (SO 5) Prepare a statement of cash flows for the year ended December 31, 2007, using the indirect method. P12-12C You are provided with the following transactions that took place during the year. Current Cash Cash Free Debt Debt Cash Coverage Coverage Flow Ratio Ratio Transactions ($80,000) (0.7 times) (0.4 times) (a) Recorded cash sales $4,800. (b) Sold land for $10,000 cash. (c) Declared $6,000 cash dividends. (d) Paid $5,800 cash dividends declared last year. (e) Paid amount owed to suppliers, $9,400. (f) Retired $20,000 convertible bonds payable by issuing common stock. For each transaction listed above, indicate whether it will increase (I), decrease (D), or have no effect (NE) on the ratios.

53 Problems: Set C 53 Problems: Set C P13-1C Here are comparative statement data for Mickey Company and Minnie Company, two competitors. All balance sheet data are as of December 31, 2007, and December 31, Mickey Company Minnie Company Net sales $490,000 $620,000 Cost of goods sold 231, ,000 Operating expenses 29,000 97,000 Interest expense 5,000 3,000 Income tax expense 68,000 75,000 Prepare vertical analysis and comment on profitability. (SO 5, 6) Current assets 110,000 $ 98, ,000 $ 105,000 Plant assets (net) 170, , , ,000 Current liabilities 35,000 40,000 50,000 60,000 Long-term liabilities 55,000 58,000 45,000 40,000 Common stock, $10 par 50,000 50, , ,000 Retained earnings 140, , , ,000 (a) Prepare a vertical analysis of the 2007 income statement data for Mickey Company and Minnie Company. (b) Comment on the relative profitability of the companies by computing the 2007 return on assets and the return on common stockholders equity ratios for both companies. P13-2C The comparative statements of Art Mart Company are presented here. ART MART COMPANY Income Statements For the Years Ended December Net sales $ 545,500 $504,300 Cost of goods sold 273, ,500 Gross profit 271, ,800 Selling and administrative expenses 194, ,900 Income from operations 76,900 93,900 Other expenses and losses Interest expense 4,100 3,900 Income before income taxes 72,800 90,000 Income tax expense 22,000 27,000 Net income $ 50,800 $ 63,000 Compute ratios from balance sheet and income statement. (SO 6) ART MART COMPANY Balance Sheets December 31 Assets Current assets Cash $ 67,500 $ 79,500 Short-term investments 5,400 11,300 Accounts receivable 74,000 62,900 Inventory 122,600 99,100 Total current assets 269, ,800 Plant assets (net) 111,400 54,800 Total assets $380,900 $307,600

54 54 CHAPTER 13 Financial Analysis: The Big Picture Liabilities and Stockholders Equity Current liabilities Accounts payable $ 45,200 $ 27,700 Income taxes payable 17,900 19,900 Total current liabilities 63,100 47,600 Bonds payable 125, ,000 Total liabilities 188, ,600 Stockholders equity Common stock ($2 par) 52,000 50,000 Retained earnings 140, ,000 Total stockholders equity 192, ,000 Total liabilities and stockholders equity $380,900 $307,600 Perform ratio analysis, and discuss change in financial position and operating results. (SO 6) All sales were on account. Net cash provided by operating activities for 2007 was $60,000. Capital expenditures were $55,000, and cash dividends were $20,000. Compute the following ratios for (a) Earnings per share. (h) Days in inventory. (b) Return on common stockholders equity. (i) Times interest earned. (c) Return on assets. (j) Asset turnover. (d) Current ratio. (k) Debt to total assets. (e) Receivables turnover. (l) Current cash debt coverage. (f) Average collection period. (m) Cash debt coverage. (g) Inventory turnover. (n) Free cash flow. P13-3C Condensed balance sheet and income statement data for Rock and Roll Corporation are presented here. ROCK AND ROLL CORPORATION Balance Sheets December Cash $106,000 $ 72,000 $ 61,000 Receivables (net) 27,000 24,000 30,000 Other current assets 92, ,000 90,000 Investments 291, , ,000 Plant and equipment (net) 150, , ,000 $666,000 $584,000 $507,000 Current liabilities $ 63,000 $ 58,000 $ 56,000 Long-term debt 77,000 52,000 49,000 Common stock, $5 par 200, , ,000 Retained earnings 326, , ,000 $666,000 $584,000 $507,000 ROCK AND ROLL CORPORATION Income Statements For the Years Ended December Sales $399,000 $406,000 Less: Sales returns and allowances 6,000 9,000 Net sales 393, ,000 Cost of goods sold 222, ,000 Gross profit 171, ,000 Operating expenses (including income taxes) 105, ,000 Net income $ 66,000 $ 75,000

55 Problems: Set C 55 Additional information: 1. The market price of Rock and Roll s common stock was $7.40, $8.80, and $7.60 for 2005, 2006, and 2007, respectively. 2. You must compute dividends paid. All dividends were paid in cash. (a) Compute the following ratios for 2006 and (1) Profit margin. (2) Gross profit. (3) Asset turnover. (4) Earnings per share. (5) Price-earnings. (6) Payout. (7) Debt to total assets. (b) Based on the ratios calculated, discuss briefly the improvement or lack thereof in the financial position and operating results from 2006 to 2007 of Rock and Roll Corporation. P13-4C The following financial information is for Hertig Company. HERTIG COMPANY Balance Sheets December 31 Assets Cash $ 130,000 $ 104,000 Short-term investments 210, ,000 Receivables 204, ,000 Inventories 134, ,000 Prepaid expenses 38,000 33,000 Land 58,000 58,000 Building and equipment (net) 175, ,000 Total assets $949,000 $784,000 Liabilities and Stockholders Equity Notes payable $120,000 $100,000 Accounts payable 50,000 42,000 Accrued liabilities 35,000 27,000 Bonds payable, due , ,000 Common stock, $10 par 180, ,000 Retained earnings 314, ,000 Total liabilities and stockholders equity $949,000 $784,000 Compute ratios; comment on overall liquidity and profitability. (SO 6) HERTIG COMPANY Income Statements For the Years Ended December Sales $952,000 $816,000 Cost of goods sold 511, ,000 Gross profit 441, ,000 Operating expenses 321, ,000 Net income $120,000 $103,000 Additional information: 1. Inventory at the beginning of 2006 was $121, Receivables (net) at the beginning of 2006 were $184, Total assets at the beginning of 2006 were $790,000.

56 56 CHAPTER 13 Financial Analysis: The Big Picture 4. No common stock transactions occurred during 2006 or All sales were on account. (a) Indicate, by using ratios, the change in liquidity and profitability of Hertig Company from 2006 to (Note: Not all profitability ratios can be computed nor can cashbasis ratios be computed.) (b) Given below are three independent situations and a ratio that may be affected. For each situation, compute the affected ratio (1) as of December 31, 2007, and (2) as of December 31, 2008, after giving effect to the situation. Net income for 2008 was $125,000. Total assets on December 31, 2008, were $960,000. Situation Ratio 1. 2,000 shares of common stock were Return on common stockholders purchased as treasury stock at par on equity July 1, All of the notes payable were paid in Debt to total assets 3. The market price of common stock was Price-earnings $15 and $18 on December 31, 2007 and 2008, respectively. Compute selected ratios, and compare liquidity, profitability, and solvency for two companies. (SO 6) P13-5C Selected financial data of Columbia Sportswear Company and The Timberland Company for 2004 are presented here (in millions). Columbia Timberland Income Statement Data for Year Net sales $1,095.3 $1,500.6 Cost of goods sold Selling and administrative expenses Interest expense Other income (expense) Income tax expense Net income $ $ Balance Sheet Data (End of Year) Current assets $756.0 $649.0 Noncurrent assets Total assets $949.4 $757.5 Current liabilities $146.9 $226.2 Long-term debt Total stockholders equity Total liabilities and stockholders equity $949.4 $757.5 Beginning-of-Year Balances Total assets $783.8 $641.7 Total stockholders equity Current liabilities Total liabilities Other Data Average net receivables $236.8 $140.1 Average inventory Net cash provided by operating activities Capital expenditures Dividends 0 0

57 Problems: Set C 57 (a) For each company, compute the following ratios. (1) Current. (8) Return on assets. (2) Receivables turnover. (9) Return on common stockholders equity. (3) Average collection period. (10) Debt to total assets. (4) Inventory turnover. (11) Times interest earned. (5) Days in inventory. (12) Current cash debt coverage. (6) Profit margin. (13) Cash debt coverage. (7) Asset turnover. (14) Free cash flow. (b) Compare the liquidity, solvency, and profitability of the two companies.